OLD NATIONAL BANCORP /IN/ 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page Report of Management 69 Report of Independent Registered Public Accounting Firm (PCAOB ID: 173 ) 70 Consolidated Balance Sheets 74 Consolidated Statements of Income 75 Consolidated Statements of Comprehensive Income ( Loss) 76 Consolidated Statements of Changes in Shareholders’ Equity 77 Consolidated Statements of Cash Flows 78 Notes to Consolidated Financial Statements 79 Note 1. Basis of Presentation and Significant Accounting Policies 79 Note 2. Merger , Acquisition , and Divestiture Activity 87 Note 3. Investment Securities 90 Note 4. Loans and Allowance for Credit Losses 93 Note 5 . Premises and Equipment 106 Note 6 . Leases 106 Note 7 . Goodwill and Other Intangible Assets 108 Note 8 . Loan Servicing Rights 109 Note 9 . Qualified Affordable Housing Projects and Other Tax Credit Investments 109 Note 1 0 . Deposits 111 Note 1 1 . Securities Sold Under Agreements to Repurchase 111 Note 1 2 . Federal Home Loan Bank Advances 111 Note 1 3 . Other Borrowings 112 Note 1 4 . Accumulated Other Comprehensive Income (Loss) 114 Note 1 5 . Income Taxes 115 Note 1 6 . Share-Based Compensation and Other Employee Benefit Plans 117 Note 1 7 . Shareholders’ Equity 119 Note 1 8 . Fair Value 120 Note 19 . Derivative Financial Instruments 127 Note 2 0 . Commitments , Contingencies , and Finan cial Guarantees 130 Note 2 1 . Regulatory Restrictions 131 Note 2 2 . Parent Company Financial Statements 134 Note 2 3 . Segment Information 135 68 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, 2022. 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, 2022, 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, 2022 as stated in their report, which follows. 69 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, 2022 and 2021, the related consolidated statements of income, comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, 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, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022 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, 2022, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO. 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 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. 70 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 Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters 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 matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Allowance and Provision for Credit Losses on Loans – Forecasting and Qualitative Factors, and Model Design for Acquired 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. At December 31, 2022, the ACL on the overall loan portfolio was $303.7 million. As part of the Company’s merger with First Midwest Bancorp, Inc. (“FMB”), the Company recorded $96.3 million of provision for credit losses to establish an ACL on acquired non-purchased credit deteriorated (PCD) loans and $89.1 million to establish an ACL for acquired PCD loans. 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 cash flows are created for each loan using reasonable and supportable forecasts and discounted using the loan’s effective yield. The discounted sum of expected cash flows is then compared to the amortized cost and any shortfall is recorded as a component of the ACL. The quantitative allowance is adjusted by qualitative factors, including items such as changes in lending policies or procedures and economic uncertainty in forward-looking forecasts. The same methods and assumptions used to determine the quantitative and qualitative allowance were applied to the FMB acquired loans since the merger date. A significant amount of management judgment is required to determine the reasonable and supportable forecasts and the qualitative factors for the ACL, and the model design for FMB acquired loans at the merger date. 71 We identified auditing the reasonable and supportable forecasts and the qualitative factors for the ACL, and the model design for FMB acquired loans used in developing the ACL at the merger date, as a critical audit matter because of the extent of auditor judgment applied and significant audit effort required to evaluate the especially subjective and complex judgments made by management, including the need for specialized skills. The principal considerations resulting in our determination included the following: • Significant auditor judgment and audit effort required to evaluate the determination of the reasonable and supportable forecast and qualitative factors. • Significant auditor judgment and audit effort required to evaluate the model design for FMB acquired loans, including the evaluation of the method, significant assumptions, and data used in the model design. The primary procedures performed to address the critical audit matter included: • Testing the effectiveness of management’s internal controls over the determination of the reasonable and supportable forecast, the qualitative factors, and model design for FMB acquired loans, including controls addressing: ◦ Management’s review of the appropriateness of the reasonable and supportable forecasts and qualitative factors applied in the estimate of ACL, including the review of relevance and reliability of data used in the estimate ◦ Management’s review of the appropriateness of the models and reasonableness of the significant assumptions used to establish the ACL for FMB acquired loans, including the review of relevance and reliability of data used in the estimate ◦ Management’s review of the results of the model validation related to the ACL for FMB acquired loans • Substantively testing management’s process for the determination of reasonable and supportable forecast, the qualitative factors, and model design for FMB acquired loans, including: ◦ Evaluating management’s judgments in the selection and application of reasonable and supportable forecasts and qualitative factors, including the relevance and reliability of data used in the estimate. ◦ Evaluating the relevance and reliability of data used in the models for the FMB acquired loans ◦ Evaluating, with the assistance of internal valuation specialists, the reasonableness of the conceptual design of the models and the significant assumptions applied in the ACL for FMB acquired loans Merger - Fair Value of Loans Acquired As described in Note 2 to the consolidated financial statements, the Company completed the merger transaction with FMB on February 15, 2022. The merger transaction was accounted for as a business combination and accordingly, the assets acquired and liabilities assumed from FMB were recorded at fair value as of the merger date. The merger date fair value of loans acquired from FMB was approximately $14.6 billion. Accounting for the merger date fair value of loans acquired requires management to make significant judgments about the selection and application of assumptions. We identified auditing the merger date fair value of loans acquired as a critical audit matter because it required especially subjective auditor judgment. The principal considerations resulting in our determination included the significant auditor judgment and effort required to evaluate the reasonableness of management’s assumptions used, including the need for specialized skills. 72 The primary procedures performed to address the critical audit matter included: • Testing the effectiveness of management’s internal controls over the determination of merger date fair value of loans acquired, including controls addressing: ◦ Evaluation of the reasonableness of methods and significant assumptions applied in the estimate of merger date fair value of loans acquired ◦ Evaluation of the relevance and reliability of data used in the valuation of merger date fair value of loans acquired • Substantively testing management’s process for developing the merger date fair value of loans acquired, which included: ◦ Testing the relevance and reliability of data used as a basis for the valuation ◦ Evaluating, with the assistance of our internal valuation specialists, the reasonableness of the methods and significant assumptions applied in the estimate of the fair value of loans acquired, including the application of the significant assumptions used in the valuation 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 22, 2023 73 OLD NATIONAL BANCORP CONSOLIDATED BALANCE SHEETS December 31, (dollars and shares in thousands, except per share data) 2022 2021 Assets Cash and due from banks $ 453,432 $ 172,663 Money market and other interest-earning investments 274,980 649,356 Total cash and cash equivalents 728,412 822,019 Equity securities, at fair value 52,507 13,211 Investment securities - available-for-sale, at fair value (amortized cost $ 7,772,603 and $ 7,384,033 , respectively) 6,773,712 7,382,066 Investment securities - held-to-maturity, at amortized cost (fair value $ 2,643,682 and $ 0 , respectively) 3,089,147 — Federal Home Loan Bank/Federal Reserve Bank stock, at cost 314,168 169,375 Loans held for sale, at fair value 11,926 35,458 Loans: Commercial 9,508,904 3,391,769 Commercial real estate 12,457,070 6,380,674 Residential real estate 6,460,441 2,255,289 Consumer credit, net of unearned income 2,697,226 1,574,114 Total loans, net of unearned income 31,123,641 13,601,846 Allowance for credit losses on loans ( 303,671 ) ( 107,341 ) Net loans 30,819,970 13,494,505 Premises and equipment, net 557,307 476,186 Operating lease right-of-use assets 189,714 69,560 Accrued interest receivable 190,521 84,109 Goodwill 1,998,716 1,036,994 Other intangible assets 126,405 34,678 Company-owned life insurance 768,552 463,324 Other assets 1,142,315 372,079 Total assets $ 46,763,372 $ 24,453,564 Liabilities Deposits: Noninterest-bearing demand $ 11,930,798 $ 6,303,106 Interest-bearing: Checking and NOW 8,340,955 5,338,022 Savings 6,326,158 3,798,494 Money market 5,389,139 2,169,160 Time deposits 3,013,780 960,413 Total deposits 35,000,830 18,569,195 Federal funds purchased and interbank borrowings 581,489 276 Securities sold under agreements to repurchase 432,804 392,275 Federal Home Loan Bank advances 3,829,018 1,886,019 Other borrowings 743,003 296,670 Operating lease liabilities 211,964 76,236 Accrued expenses and other liabilities 835,669 220,875 Total liabilities 41,634,777 21,441,546 Commitments and contingencies (Note 20) Shareholders' Equity Preferred stock, 2,000 shares authorized, 231 and 0 shares issued and outstanding, respectively 230,500 — Common stock, $ 1.00 per share stated value, 600,000 shares authorized, 292,903 and 165,838 shares issued and outstanding, respectively 292,903 165,838 Capital surplus 4,174,265 1,880,545 Retained earnings 1,217,349 968,010 Accumulated other comprehensive income (loss), net of tax ( 786,422 ) ( 2,375 ) Total shareholders' equity 5,128,595 3,012,018 Total liabilities and shareholders' equity $ 46,763,372 $ 24,453,564 The accompanying notes to consolidated financial statements are an integral part of these statements. 74 OLD NATIONAL BANCORP CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, (dollars and shares in thousands, except per share data) 2022 2021 2020 Interest Income Loans including fees: Taxable $ 1,177,816 $ 490,042 $ 515,980 Nontaxable 25,931 12,392 13,908 Investment securities: Taxable 204,004 98,031 98,953 Nontaxable 43,637 37,595 33,899 Money market and other interest-earning investments 2,814 589 568 Total interest income 1,454,202 638,649 663,308 Interest Expense Deposits 49,093 10,954 28,169 Federal funds purchased and interbank borrowings 5,021 — 1,296 Securities sold under agreements to repurchase 843 397 854 Federal Home Loan Bank advances 51,524 21,075 27,274 Other borrowings 19,785 9,823 9,621 Total interest expense 126,266 42,249 67,214 Net interest income 1,327,936 596,400 596,094 Provision for credit losses 144,799 ( 29,622 ) 42,879 Net interest income after provision for credit losses 1,183,137 626,022 553,215 Noninterest Income Wealth management fees 69,102 40,409 36,806 Service charges on deposit accounts 72,501 31,658 32,557 Debit card and ATM fees 40,227 23,766 22,702 Mortgage banking revenue 23,015 42,558 62,775 Investment product fees 31,749 24,639 21,614 Capital markets income 25,986 21,997 22,480 Company-owned life insurance 14,564 10,589 12,031 Debt securities gains (losses), net ( 88 ) 4,327 10,767 Gain on sale of health savings accounts 90,673 — — Other income 32,050 14,276 17,542 Total noninterest income 399,779 214,219 239,274 Noninterest Expense Salaries and employee benefits 575,626 284,098 293,590 Occupancy 100,421 54,834 55,316 Equipment 27,637 16,704 16,690 Marketing 32,264 12,684 10,874 Data processing 84,865 47,047 41,086 Communication 18,846 10,073 9,731 Professional fees 39,046 20,077 15,755 FDIC assessment 19,332 6,059 6,722 Amortization of intangibles 25,857 11,336 14,091 Amortization of tax credit investments 10,961 6,770 18,788 Property optimization 26,818 — 27,050 Other expense 76,510 31,697 27,240 Total noninterest expense 1,038,183 501,379 536,933 Income before income taxes 544,733 338,862 255,556 Income tax expense 116,446 61,324 29,147 Net income 428,287 277,538 226,409 Preferred dividends ( 14,118 ) — — Net income applicable to common shareholders $ 414,169 $ 277,538 $ 226,409 Net income per common share - basic $ 1.51 $ 1.68 $ 1.37 Net income per common share - diluted 1.50 1.67 1.36 Weighted average number of common shares outstanding - basic 275,179 165,178 165,509 Weighted average number of common shares outstanding - diluted 276,688 165,929 166,177 Dividends per common share $ 0.56 $ 0.56 $ 0.56 The accompanying notes to consolidated financial statements are an integral part of these statements. 75 OLD NATIONAL BANCORP CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Years Ended December 31, (dollars in thousands) 2022 2021 2020 Net income $ 428,287 $ 277,538 $ 226,409 Other comprehensive income (loss): Change in debt securities available-for-sale: Unrealized holding gains (losses) for the period ( 1,004,054 ) ( 187,955 ) 125,214 Reclassification for securities transferred to held-to-maturity 165,473 — — Reclassification adjustment for securities (gains) losses realized in income 88 ( 4,327 ) ( 10,767 ) Income tax effect 199,097 43,997 ( 25,243 ) Unrealized gains (losses) on available-for-sale debt securities ( 639,396 ) ( 148,285 ) 89,204 Change in securities held-to-maturity: Adjustment for securities transferred from available-for-sale ( 165,473 ) — — Amortization of unrealized losses on securities transferred from available-for-sale 16,612 — — Income tax effect 36,197 — — Changes from securities held-to-maturity ( 112,664 ) — — Change in cash flow hedges: Net unrealized derivative gains (losses) on cash flow hedges ( 45,132 ) 1,898 8,261 Reclassification adjustment for (gains) losses realized in net income 2,587 ( 4,605 ) ( 5,153 ) Income tax effect 10,453 666 ( 764 ) Changes from cash flow hedges ( 32,092 ) ( 2,041 ) 2,344 Change in defined benefit pension plans: Amortization of net (gains) losses recognized in income 139 239 21 Income tax effect ( 34 ) ( 59 ) ( 5 ) Changes from defined benefit pension plans 105 180 16 Other comprehensive income (loss), net of tax ( 784,047 ) ( 150,146 ) 91,564 Comprehensive income (loss) $ ( 355,760 ) $ 127,392 $ 317,973 The accompanying notes to consolidated financial statements are an integral part of these statements. 76 OLD NATIONAL BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (dollars in thousands, except per share data) Preferred Stock Common Stock Capital Surplus Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Shareholders' Equity Balance, December 31, 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 Net income — — — 428,287 — 428,287 Other comprehensive income (loss) — — — — ( 784,047 ) ( 784,047 ) First Midwest Bancorp, Inc. merger: Issuance of common stock — 129,365 2,316,947 — — 2,446,312 Issuance of preferred stock, net of issuance costs 230,500 — 13,219 — — 243,719 Cash dividends: — Common ($ 0.56 per share) — — — ( 163,505 ) — ( 163,505 ) Preferred dividends — — — ( 14,118 ) — ( 14,118 ) Common stock issued — 52 757 — — 809 Common stock repurchased — ( 3,960 ) ( 67,222 ) — — ( 71,182 ) Share-based compensation expense — — 28,656 — — 28,656 Stock activity under incentive compensation plans — 1,608 1,363 ( 1,325 ) — 1,646 Balance, December 31, 2022 $ 230,500 $ 292,903 $ 4,174,265 $ 1,217,349 $ ( 786,422 ) $ 5,128,595 The accompanying notes to consolidated financial statements are an integral part of these statements. 77 OLD NATIONAL BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, (dollars in thousands) 2022 2021 2020 Cash Flows From Operating Activities Net income $ 428,287 $ 277,538 $ 226,409 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 36,436 27,276 28,911 Amortization of other intangible assets 25,857 11,336 14,091 Amortization of tax credit investments 10,961 6,770 18,788 Net premium amortization on investment securities 18,684 16,305 18,798 Accretion income related to acquired loans ( 72,007 ) ( 16,747 ) ( 23,331 ) Share-based compensation expense 28,656 7,497 7,707 Provision for credit losses 144,799 ( 29,622 ) 42,879 Debt securities (gains) losses, net 88 ( 4,327 ) ( 10,767 ) Gain on sale of health savings accounts business ( 90,673 ) — — Net (gains) losses on sales of loans and other assets 13,114 ( 36,677 ) ( 23,787 ) Increase in cash surrender value of company-owned life insurance ( 14,564 ) ( 10,589 ) ( 12,031 ) Residential real estate loans originated for sale ( 570,111 ) ( 1,215,015 ) ( 1,432,488 ) Proceeds from sales of residential real estate loans 620,958 1,274,812 1,455,067 (Increase) decrease in interest receivable ( 52,911 ) 1,198 ( 183 ) (Increase) decrease in other assets ( 40,518 ) 2,641 ( 105,969 ) Increase (decrease) in accrued expenses and other liabilities 327,369 17,984 15,726 Net cash flows provided by (used in) operating activities 814,425 330,380 219,820 Cash Flows From Investing Activities Cash received (paid) from merger, net 1,912,629 — — Sale of health savings accounts ( 290,857 ) — — Purchases of investment securities available-for-sale ( 1,438,572 ) ( 3,321,653 ) ( 2,803,406 ) Purchases of investment securities held-to-maturity ( 170,675 ) — — Purchases of Federal Home Loan Bank/Federal Reserve Bank stock ( 147,394 ) — ( 10,025 ) Purchases of equity securities ( 6,348 ) ( 11,000 ) — Proceeds from maturities, prepayments, and calls of investment securities available-for-sale 1,284,814 1,511,510 1,990,383 Proceeds from sales of investment securities available-for-sale 20,032 198,886 299,885 Proceeds from maturities, prepayments, and calls of investment securities held-to-maturity 83,962 — — Proceeds from sales of Federal Home Loan Bank/Federal Reserve Bank stock 108,698 58 4,691 Proceeds from sales of equity securities 53,029 544 39,296 Loan originations and payments, net ( 3,071,765 ) 206,145 ( 1,644,119 ) Proceeds from company-owned life insurance death benefits 10,361 3,375 4,888 Proceeds from sale of premises and equipment and other assets 4,480 29,244 7,826 Purchases of premises and equipment and other assets ( 37,901 ) ( 48,692 ) ( 30,871 ) Net cash flows provided by (used in) investing activities ( 1,685,507 ) ( 1,431,583 ) ( 2,141,452 ) Cash Flows From Financing Activities Net increase (decrease) in: Deposits ( 435,717 ) 1,531,742 2,484,056 Federal funds purchased and interbank borrowings 581,213 ( 890 ) ( 349,248 ) Securities sold under agreements to repurchase ( 94,665 ) ( 38,891 ) 103,384 Other borrowings 177,146 36,187 4,171 Payments for maturities of Federal Home Loan Bank advances ( 2,102,506 ) ( 146,505 ) ( 751,505 ) Payments for modification of Federal Home Loan Bank advances — ( 2,156 ) ( 31,124 ) Proceeds from Federal Home Loan Bank advances 2,900,000 50,000 950,000 Cash dividends paid ( 177,623 ) ( 92,829 ) ( 92,946 ) Common stock repurchased ( 71,182 ) ( 3,731 ) ( 82,358 ) Common stock issued 809 583 577 Net cash flows provided by (used in) financing activities 777,475 1,333,510 2,235,007 Net increase (decrease) in cash and cash equivalents ( 93,607 ) 232,307 313,375 Cash and cash equivalents at beginning of period 822,019 589,712 276,337 Cash and cash equivalents at end of period $ 728,412 $ 822,019 $ 589,712 The accompanying notes to consolidated financial statements are an integral part of these statements. 78 OLD NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NATURE OF OPERATIONS Old National Bancorp, a financial holding company headquartered in Evansville, Indiana with commercial and consumer banking operations headquartered in Chicago, Illinois. Its principal subsidiary is Old National Bank. Through its bank and non-bank affiliates, Old National Bancorp provides to its clients a wide range of services throughout the Midwest region, including commercial and consumer loan and depository services, private banking, brokerage, trust, investment advisory, and other traditional banking services. 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 diversified investment securities held in a grantor trust for participants in the Company’s nonqualified deferred compensation plan. Equity securities are recorded at fair value with changes in fair value recognized in other income. Investment Securities Old National classifies debt investment securities as available-for-sale or held-to-maturity on the date of purchase. Debt securities classified as available-for-sale are recorded at fair value with the unrealized gains and losses recorded in other comprehensive income (loss), net of tax. Realized gains and losses affect income and the prior fair value adjustments are reclassified within shareholders’ equity. Debt securities classified as held-to-maturity, which management has the intent and ability to hold to maturity, are reported at amortized cost. Interest income includes amortization of purchase premiums or discounts. Premiums and discounts are amortized on the level-yield method. Anticipated prepayments are 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 securities in unrealized loss positions are evaluated at least quarterly to determine if a decline in fair value should be recorded through income or other comprehensive income (loss). For available-for sale securities in an unrealized loss position, we first assess whether we intend to sell, or it is more likely than not that we will be required to sell the security, before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For available-for-sale securities that do not meet the criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security and the issuer, among other factors. If this assessment indicates that a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Any decline in fair value that has not been recorded through an allowance for credit losses is recognized in other comprehensive income (loss), net of 79 applicable taxes. Accrued interest receivable on the securities portfolio is excluded from the estimate of credit losses. 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. Loans Loans that Old National intends to hold are classified as held for investment. Loans held for investment 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. Evidence of credit deterioration was evaluated using various indicators, such as past due and nonaccrual status, as well as asset quality rating. 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 on Loans Credit quality within the loans held for investment portfolio is continuously monitored by management and is reflected within the allowance for credit losses on loans. The allowance for credit losses is an estimate of expected losses inherent within the Company’s loans held for investment portfolio. Credit quality is assessed and monitored by evaluating various attributes and the results of those evaluations are utilized in underwriting new loans and in our process for estimating expected credit losses. Expected credit loss inherent in non-cancelable off-balance-sheet credit exposures is accounted for as a separate liability included in other liabilities on the balance sheet. The allowance for credit losses on loans held for investment is adjusted by a credit loss expense, which is reported in provision for credit losses, and reduced by the charge-off of loan amounts, net of recoveries within the provision for credit losses. 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 consider the unique characteristics of our loan portfolio segments. These segments are further disaggregated into loan classes based on the level at which credit risk is monitored. When computing the level of expected credit losses, credit loss assumptions are estimated using a model that categorizes loan pools based on loss history, delinquency status, and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Evaluations of the overall loan portfolio in future periods, in light of the factors and 80 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. 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 an allowance. Expected cashflows are created using a combination of contractual payment schedules, calculated PDs, LGD, and prepayment assumptions as well as qualitative factors. For commercial and commercial real estate loans, the PD is forecasted 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 forecasted 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. Further information regarding Old National’s policies and methodology used to estimate the allowance for credit losses on 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 merger or 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 mergers and 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. 81 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 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 agreements that are commonly referred to as TBA (to be announced) 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 (loss) 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 (loss) are amortized or accreted into earnings over the same periods which the hedged transactions will affect earnings. 82 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. 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 loan commitments to provide for the risk of loss inherent in these arrangements. The allowance is computed using a methodology similar to that used to determine the allowance for credit losses on loans, modified to take into account the probability of a drawdown on the commitment. The allowance for credit losses on unfunded loan commitments is classified as a liability account on the balance sheet and is adjusted as a provision for unfunded loan commitments included in the provision for credit losses. 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. 83 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. 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 20 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) 2022 2021 2020 Cash payments: Interest $ 118,165 $ 42,196 $ 70,043 Income taxes, net of refunds 66,109 31,875 24,436 Noncash Investing and Financing Activities: Securities transferred from available-for-sale to held-to-maturity 2,986,736 — — Transfer of premises and equipment to assets held for sale 7,905 9,539 16,661 Operating lease right-of-use assets obtained in exchange for lease obligations 28,265 776 ( 116 ) Finance lease right-of-use assets obtained in exchange for lease obligations ( 966 ) 7,477 5,225 There were 129.4 million shares of Common Stock issued in conjunction with the merger with First Midwest in February of 2022 totaling $ 2.4 billion in shareholders’ equity . In addition, Old National issued 108,000 shares of Old National Series A Preferred Stock and 122,500 shares of Old National Series C Preferred Stock totaling $ 243.7 million in shareholders’ equity. 84 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 merger or 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 a merger or acquisition, depending on the terms of the agreement. The value of Common Stock issued is determined based on the market price of the stock as of the closing of the merger or acquisition. Merger and acquisition costs are expensed when incurred. Revenue From Contracts With Customers Old National’s revenue from contracts with customers in the scope of ASC 606 is recognized within noninterest income. A description of the Company’s significant revenue streams accounted for under ASC 606 follows: 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. Impact of Accounting Changes Accounting Guidance Adopted in 2022 FASB ASC 470 and 815 – In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity , to clarify the accounting for certain financial instruments with characteristics of liabilities and equity. The amendments in this update reduce the number of accounting models for convertible debt instruments and convertible preferred stock by removing the cash conversion model and the beneficial conversion feature model. In addition, this ASU improves disclosure requirements for convertible instruments and earnings-per-share guidance. The amendments in this update are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. The adoption of this guidance on January 1, 2022 did not have a material impact on the consolidated financial statements. FASB ASC 842 – In July 2021, the FASB issued ASU 2021-05, Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments , to amend the lease classification requirements for lessors to align them with practice under ASC Topic 840. The amendments in this update are effective for fiscal years beginning after December 15, 85 2021, and interim periods within those fiscal years. The adoption of this guidance on January 1, 2022 did not have a material impact on the consolidated financial statements. FASB ASC 848 – In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting , which provides temporary, optional guidance to ease the potential burden in accounting for, or recognizing the effects of, the transition away from the LIBOR or other interbank offered rate on financial reporting. The guidance is applicable only to contracts or hedge accounting relationships that reference LIBOR or another reference rate expected to be discontinued. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 , which defers the sunset date of relief provisions within Topic 848 from December 31, 2022 to December 31, 2024. The objective of the guidance in Topic 848 is to provide relief during the transition period. The amendments in this ASU are effective March 12, 2020 through December 31, 2024. Old National believes the adoption of this guidance on activities subsequent to December 31, 2022 will not have a material impact on the consolidated financial statements. Accounting Guidance Pending Adoption FASB ASC 805 – In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities From Contracts With Customers , to address diversity in practice and inconsistency related to the accounting for revenue contracts with customers acquired in a business combination. The amendments require that the acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. The ASU also provides certain practical expedients for acquirers when recognizing and measuring acquired contract assets and liabilities. The amendments in this update are effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Entities should apply the amendments prospectively to business combinations that occur after the effective date. Early adoption is permitted, including in any interim period. The new guidance is not expected to have a material impact on the consolidated financial statements. FASB ASC 815 – In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method , to expand the current single-layer method of electing hedge accounting to allow multiple hedged layers of a single closed portfolio under the method and renames the last-of-layer method the portfolio layer method. The amendments in this update are effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Early adoption is permitted for any entity that has adopted the amendments in ASU No. 2017-12 for the corresponding period. If an entity adopts the amendments in an interim period, the effect of adopting the amendments related to basis adjustments should be reflected as of the beginning of the fiscal year of adoption (i.e., the initial application date). Old National is currently evaluating the impact of adopting the new guidance on the consolidated financial statements. FASB ASC 326 – In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures , to eliminate the TDR recognition and measurement guidance and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. The amendments require that an entity disclose current-period gross charge-offs by year of origination for financing receivables and net investment in leases within the vintage disclosures required by ASC 326. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. These amendments should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, which an entity has the option to apply a modified retrospective transition method resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. Early adoption is permitted if an entity has adopted ASU No. 2016-13, including adoption in an interim period. If an entity elects to early adopt ASU No. 2022-02 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. Old National is currently evaluating the impact of adopting the new guidance on the consolidated financial statements. 86 FASB ASC 820 – In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions , to clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted. Old National is currently evaluating the impact of adopting the new guidance on the consolidated financial statements . NOTE 2 – MERGER, ACQUISITION, AND DIVESTITURE ACTIVITY Merger First Midwest Bancorp, Inc. On February 15, 2022, Old National completed its previously announced merger of equals transaction with First Midwest pursuant to an agreement and plan of merger, dated as of May 30, 2021, to combine in an all-stock transaction. Following the merger, the new organization is operating under the Old National Bancorp and Old National Bank names, with the corporate headquarters and principal office located in Evansville, Indiana and commercial and consumer banking operations headquartered in Chicago, Illinois. Old National believes that it will be able to achieve synergies and cost savings by integrating the operations of the two companies. The combined organization has a presence in additional Midwestern markets, strong commercial banking capabilities, a robust retail footprint, a significant wealth platform, and an enhanced ability to attract talent. The combined organization also creates the scale and profitability to accelerate digital and technological capabilities to drive future investments in consumer and commercial banking, as well as wealth management services. Pursuant to the terms of the merger agreement, each First Midwest common stockholder received 1.1336 shares of Old National common stock for each share of First Midwest common stock such stockholder owned, plus, if applicable, cash in lieu of fractional shares of Old National common stock resulting from the exchange ratio. Each outstanding share of 7.000 % fixed-rate non-cumulative perpetual preferred stock, Series A, no par value, and each outstanding share of 7.000 % fixed-rate non-cumulative perpetual preferred stock, Series C, no par value, of First Midwest was converted into the right to receive one share of an applicable newly created series of Old National preferred stock, no par value “Old National Series A Preferred Stock” and “Old National Series C Preferred Stock,” and collectively, the “Old National Preferred Stock”. In this regard, Old National issued 108,000 shares of Old National Series A Preferred Stock and 122,500 shares of Old National Series C Preferred Stock. Old National entered into two deposit agreements, each dated as of February 15, 2022, by and among Old National, Continental Stock Transfer & Trust Company, as depository, and the holders from time to time of the depositary receipts in connection with the issuance of the Old National Preferred Stock. Pursuant to the deposit agreements, Old National issued 4,320,000 depositary shares, each representing a 1/40th interest in a share of Old National Series A Preferred Stock, and 4,900,000 depositary shares, each representing a 1/40th interest in a share of Old National Series C Preferred Stock. 87 The assets acquired and liabilities assumed, both intangible and tangible, in the merger were recorded at their estimated fair values as of the merger date and have been accounted for under the acquisition method of accounting. Subsequent to the initial valuation, Old National increased goodwill by $ 1.6 million to update the provisional valuation of the fair values of assets acquired and liabilities assumed. These adjustments affected goodwill, loans, premises and equipment, operating lease right-of-use assets, other assets, and accrued expenses and other liabilities. As of December 31, 2022, Old National finalized its valuation of all assets acquired and liabilities assumed. The following table presents a summary of the assets acquired and liabilities assumed, net of the fair value adjustments and the fair value of consideration as of the merger date: (dollars and shares in thousands) February 15, 2022 Assets Cash and cash equivalents $ 1,912,629 Investment securities 3,526,278 FHLB/Federal Reserve Bank stock 106,097 Loans held for sale 13,809 Loans, net of allowance for credit losses 14,298,873 Premises and equipment 111,867 Operating lease right-of-use assets 129,698 Accrued interest receivable 53,502 Goodwill 961,722 Other intangible assets 117,584 Company-owned life insurance 301,025 Other assets 317,258 Total assets $ 21,850,342 Liabilities Deposits $ 17,249,404 Securities sold under agreements to repurchase 135,194 Federal Home Loan Bank advances 1,158,623 Other borrowings 274,569 Accrued expenses and other liabilities 342,369 Total liabilities $ 19,160,159 Fair value of consideration Preferred stock $ 243,870 Common stock ( 129,365 shares issued at $ 18.92 per share) 2,446,312 Total consideration $ 2,690,182 Goodwill related to this merger will not be deductible for tax purposes. Other intangible assets acquired included core deposit intangibles and customer trust relationships. The estimated fair value of the core deposit intangible was $ 77.9 million and is being amortized over an estimated useful life of 10 years. The estimated fair value of customer trust relationships was $ 39.7 million and is being amortized over an estimated useful life of 13 years. The fair value of purchased financial assets with credit deterioration was $ 1.4 billion on the date of the merger. The gross contractual amounts receivable relating to the purchased financial assets with credit deterioration was $ 1.5 billion. Old National estimates, on the date of the merger, that $ 89.1 million of the contractual cash flows specific to the purchased financial assets with credit deterioration will not be collected. Transaction costs totaling $ 120.9 million associated with the merger have been expensed in 2022 and additional transaction and integration costs will be expensed in future periods as incurred. As a result of the merger, Old National assumed sponsorship of First Midwest’s defined benefit pension plan (the “Pension Plan”) under which both plan participation and benefit accruals had been previously frozen. The Pension Plan was terminated in November 2022, which included the settlement of benefit obligations associated with the Pension Plan. At December 31, 2022, the fair value of Pension Plan assets was $ 16.6 million. Pension costs were not material in 2022. 88 Summary of Unaudited Pro-Forma Financial Information The following table presents supplemental unaudited pro-forma financial information as if the First Midwest merger had occurred on January 1, 2021. The pro-forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been effective as of this assumed date. Years Ended December 31, (dollars in thousands) 2022 2021 Total revenues (1) $ 1,812,333 $ 1,564,287 Income before income taxes 749,009 382,102 (1) Includes net interest income and total noninterest income . Supplemental pro-forma earnings for the year ended December 31, 2022 were adjusted to exclude $ 120.9 million of merger-related costs, $ 11.0 million of provision for credit losses on unfunded loan commitments, and $ 96.3 million of provision for credit losses to establish an allowance for credit losses on non-PCD loans acquired in the transaction. Supplemental pro-forma earnings for the year ended December 31, 2021 were adjusted to include these costs. Divestitures On November 18, 2022, Old National completed its previously announced transaction with UMB, pursuant to which UMB acquired Old National’s business of acting as a qualified custodian for, and administering, health savings accounts. Old National served as custodian for health savings accounts comprised of both investment accounts and deposit accounts. At closing, the health savings accounts held in deposit accounts that were transferred totaled approximately $ 382 million and resulted in a $ 90.7 million pre-tax gain. During the fourth quarter of 2022, Old National initiated certain property optimization actions that included the closure and consolidation of certain branches as well as other real estate repositioning across our footprint. These actions resulted in pre-tax charges of $ 26.8 million that are associated with valuation adjustments related to these locations and are recorded in noninterest expense. During 2020, we consolidated 31 banking centers located throughout our footprint, reflecting an ongoing shift among our clients toward digital banking solutions. Many of the facilities consolidated were in smaller markets, several of which were added in recent years through acquisition and partnership activity. These actions resulted in pre-tax charges of $ 27.1 million associated with valuation adjustments related to these locations and were recorded in noninterest expense. 89 NOTE 3 – INVESTMENT SECURITIES The following table summarizes the amortized cost and fair value of the available-for-sale and held-to-maturity investment securities portfolios and the corresponding amounts of gross unrealized gains, unrealized losses, and basis adjustments in AOCI and gross unrecognized gains and losses. The Company held no securities classified as held-to-maturity as of December 31, 2021. (dollars in thousands) Amortized Cost Unrealized Gains Unrealized Losses Basis Adjustments (1) Fair Value December 31, 2022 Available-for-Sale U.S. Treasury $ 253,148 $ 5 $ ( 5,189 ) $ ( 47,037 ) $ 200,927 U.S. government-sponsored entities and agencies 1,451,736 — ( 169,248 ) ( 107,408 ) 1,175,080 Mortgage-backed securities - Agency 4,986,354 976 ( 617,428 ) — 4,369,902 States and political subdivisions 688,159 1,789 ( 26,096 ) — 663,852 Pooled trust preferred securities 13,783 — ( 2,972 ) — 10,811 Other securities 379,423 258 ( 26,541 ) — 353,140 Total available-for-sale securities $ 7,772,603 $ 3,028 $ ( 847,474 ) $ ( 154,445 ) $ 6,773,712 Held-to-Maturity U.S. government-sponsored entities and agencies $ 819,168 $ — $ ( 162,810 ) $ — $ 656,358 Mortgage-backed securities - Agency 1,106,817 — ( 123,854 ) — 982,963 States and political subdivisions 1,163,312 221 ( 159,022 ) — 1,004,511 Allowance for securities held-to-maturity ( 150 ) — — — ( 150 ) Total held-to-maturity securities $ 3,089,147 $ 221 $ ( 445,686 ) $ — $ 2,643,682 December 31, 2021 Available-for-Sale U.S. Treasury $ 234,555 $ 1,233 $ ( 7,751 ) $ 7,547 $ 235,584 U.S. government-sponsored entities and agencies 1,575,994 7,354 ( 37,014 ) ( 3,561 ) 1,542,773 Mortgage-backed securities - Agency 3,737,484 27,421 ( 66,074 ) — 3,698,831 States and political subdivisions 1,587,172 69,696 ( 1,882 ) — 1,654,986 Pooled trust preferred securities 13,756 — ( 4,260 ) — 9,496 Other securities 235,072 6,578 ( 1,254 ) — 240,396 Total available-for-sale securities $ 7,384,033 $ 112,282 $ ( 118,235 ) $ 3,986 $ 7,382,066 (1) Basis adjustments represent the cumulative fair value adjustments included in the carrying amounts of fixed-rate investment securities assets in fair value hedging arrangements . During 2022, U.S government-sponsored entity and agency securities, agency mortgage-backed securities, and state and political subdivision securities with a fair value of $ 3.0 billion were transferred from the available-for-sale portfolio to the held-to-maturity portfolio. The $ 125.2 million unrealized holding loss, net of tax, at the date of transfer will continue to be reported as a separate component of shareholders’ equity and is being amortized over the remaining term of the securities as an adjustment to yield. The corresponding discount on these securities will offset this adjustment to yield as it is amortized. 90 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) 2022 2021 2020 Proceeds from sales of available-for-sale debt securities $ 20,032 $ 198,886 $ 299,885 Proceeds from calls of available-for-sale debt securities 70,808 158,818 465,179 Total $ 90,840 $ 357,704 $ 765,064 Realized gains on sales of available-for-sale debt securities $ 344 $ 4,188 $ 11,172 Realized gains on calls of available-for-sale debt securities 187 317 121 Realized losses on sales of available-for-sale debt securities ( 377 ) ( 145 ) ( 500 ) Realized losses on calls of available-for-sale debt securities ( 242 ) ( 33 ) ( 26 ) Debt securities gains (losses), net $ ( 88 ) $ 4,327 $ 10,767 Investment securities pledged to secure public and other funds had a carrying value of $ 6.1 billion at December 31, 2022 and $ 2.7 billion at December 31, 2021. At December 31, 2022, Old National had a concentration of investment securities issued by Indiana and its political subdivisions. The only aggregate market value of the Company’s investment securities greater than 10% of shareholders’ equity were issued by Indiana and its political subdivisions totaling $ 628.6 million, which represented 12.3 % of shareholders’ equity. Of the bonds issued by Indiana, 99.7 % are rated “BBB+” or better, and the remaining 0.3 % generally represent pre-refunded positions. Substantially all of the mortgage-backed securities in the investment portfolio are residential mortgage-backed securities. The table below shows the amortized cost and fair value of the investment securities portfolio by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Weighted average yield is based on amortized cost. At December 31, 2022 (dollars in thousands) Amortized Cost Fair Value Weighted Average Yield Maturity Available-for-Sale Within one year $ 108,432 $ 106,803 2.67 % One to five years 1,821,584 1,697,506 2.83 % Five to ten years 4,289,711 3,722,857 2.32 % Beyond ten years 1,552,876 1,246,546 2.52 % Total $ 7,772,603 $ 6,773,712 2.48 % Held-to-Maturity One to five years $ 71,144 $ 65,481 3.56 % Five to ten years 1,211,517 1,079,532 2.73 % Beyond ten years 1,806,486 1,498,669 2.83 % Total $ 3,089,147 $ 2,643,682 2.81 % 91 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, 2022 Available-for-Sale U.S. Treasury $ 130,967 $ ( 3,264 ) $ 66,992 $ ( 1,925 ) $ 197,959 $ ( 5,189 ) U.S. government-sponsored entities and agencies 454,854 ( 75,795 ) 720,226 ( 93,453 ) 1,175,080 ( 169,248 ) Mortgage-backed securities - Agency 3,207,319 ( 358,507 ) 1,116,205 ( 258,921 ) 4,323,524 ( 617,428 ) States and political subdivisions 414,813 ( 25,555 ) 2,703 ( 541 ) 417,516 ( 26,096 ) Pooled trust preferred securities — — 10,811 ( 2,972 ) 10,811 ( 2,972 ) Other securities 257,775 ( 17,045 ) 75,309 ( 9,496 ) 333,084 ( 26,541 ) Total available-for-sale $ 4,465,728 $ ( 480,166 ) $ 1,992,246 $ ( 367,308 ) $ 6,457,974 $ ( 847,474 ) December 31, 2021 Available-for-Sale U.S. Treasury $ 91,063 $ ( 7,751 ) $ — $ — $ 91,063 $ ( 7,751 ) U.S. government-sponsored entities and agencies 1,032,566 ( 21,167 ) 312,949 ( 15,847 ) 1,345,515 ( 37,014 ) Mortgage-backed securities - Agency 2,415,923 ( 59,277 ) 163,685 ( 6,797 ) 2,579,608 ( 66,074 ) States and political subdivisions 178,570 ( 1,849 ) 2,729 ( 33 ) 181,299 ( 1,882 ) Pooled trust preferred securities — — 9,496 ( 4,260 ) 9,496 ( 4,260 ) Other securities 56,976 ( 943 ) 21,133 ( 311 ) 78,109 ( 1,254 ) Total available-for-sale $ 3,775,098 $ ( 90,987 ) $ 509,992 $ ( 27,248 ) $ 4,285,090 $ ( 118,235 ) The following table summarizes the held-to-maturity investment securities with unrecognized losses aggregated by major security type and length of time in a continuous loss position: Less than 12 months 12 months or longer Total (dollars in thousands) Fair Value Unrecognized Losses Fair Value Unrecognized Losses Fair Value Unrecognized Losses December 31, 2022 Held-to-Maturity U.S. government-sponsored entities and agencies $ 354,293 $ ( 110,523 ) $ 302,066 $ ( 52,287 ) $ 656,359 $ ( 162,810 ) Mortgage-backed securities - Agency 367,849 ( 42,438 ) 615,114 ( 81,416 ) 982,963 ( 123,854 ) States and political subdivisions 838,689 ( 127,355 ) 135,573 ( 31,667 ) 974,262 ( 159,022 ) Total held-to-maturity $ 1,560,831 $ ( 280,316 ) $ 1,052,753 $ ( 165,370 ) $ 2,613,584 $ ( 445,686 ) The unrecognized losses on held-to-maturity investment securities presented in the table above do not include unrecognized losses on securities that were transferred from available-for-sale to held-for-maturity totaling $ 148.9 million at December 31, 2022 that are included as a separate component of shareholders’ equity and are being amortized over the remaining term of the securities. No allowance for credit losses for available-for-sale debt securities was needed at December 31, 2022 or December 31, 2021. An allowance on held-to-maturity debt securities is maintained for certain municipal bonds to account for expected lifetime credit losses. Substantially all of the U.S. government-sponsored entities and agencies and agency mortgage-backed securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major credit rating agencies, and have a long history of no credit losses. Therefore, for those securities, we do not record expected credit losses. The allowance for credit losses on held-to-maturity debt securities was $ 0.2 million at December 31, 2022. 92 Accrued interest receivable on securities portfolio is excluded from the estimate of credit losses and totaled $ 50.9 million at December 31, 2022 and $ 35.5 million at December 31, 2021. At December 31, 2022, Old National’s securities portfolio consisted of 3,150 securities, 2,803 of which were in an unrealized loss position. The unrealized losses attributable to our U.S. Treasury, U.S. government-sponsored entities and agencies, agency mortgage-backed securities, states and political subdivisions, and other securities are the result of fluctuations in interest rates and temporary market movements. Old National’s pooled trust preferred securities are evaluated using collateral-specific assumptions to estimate the expected future interest and principal cash flows. At December 31, 2022, we had no intent to sell any securities that were in an unrealized loss position nor is it expected that we would be required to sell the securities prior to their anticipated recovery. Old National’s pooled trust preferred securities have experienced credit defaults. However, we believe that the value of the instruments lies in the full and timely interest payments that will be received through maturity, the steady amortization that will be experienced until maturity, and the full return of principal by the final maturity of the collateralized debt obligations. Old National did not recognize any losses on these securities for the years ended December 31, 2022 or December 31, 2021. Equity Securities Old National’s equity securities with readily determinable fair values totaled $ 52.5 million at December 31, 2022 and $ 13.2 million at December 31, 2021. There were losses on equity securities of $ 4.9 million during 2022, gains on equity securities of $ 0.2 million during 2021, and gains on equity securities of $ 1.4 million during 2020. Alternative Investments Old National has alternative investments without readily determinable fair values that are included in other assets totaling $ 396.8 million at December 31, 2022, consisting of $ 240.1 million of illiquid investments of partnerships, limited liability companies, and other ownership interests that support affordable housing and $ 156.8 million of economic development and community revitalization initiatives in low-to-moderate income neighborhoods. These alternative investments totaled $ 186.0 million at December 31, 2021. There were no impairments or adjustments on equity securities without readily determinable fair values, except for amortization of tax credit investments during 2022 and 2021. There were impairments on these securities totaling $ 0.1 million 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 real estate rental and leasing, manufacturing, healthcare, wholesale trade, construction, and agriculture, among others. Most of Old National’s lending activity occurs within our principal geographic markets in the Midwest region. Old National manages concentrations of credit exposure by industry, product, geography, client relationship, and loan size. 93 The loan categories used to monitor and analyze interest income and yields are different than the portfolio segments used to determine the allowance for credit losses on loans. The allowance for credit losses was calculated by pooling loans of similar credit risk characteristics and credit monitoring procedures. The four loan portfolios used to monitor and analyze interest income and yields – commercial, commercial real estate, residential real estate, and consumer – are reclassified into seven segments of loans – commercial, commercial real estate, BBCC, residential real estate, indirect, direct, and home equity for purposes of determining the allowance for credit losses on loans. The commercial and commercial real estate loan categories shown on the balance sheet include the same pool of loans as the commercial, commercial real estate, and BBCC portfolio segments. The consumer loan category shown on the balance sheet is comprised of the same loans in the indirect, direct, and home equity portfolio segments. The portfolio segment reclassifications follow: Statement Balance Portfolio Segment Reclassifications After Reclassifications (dollars in thousands) December 31, 2022 Commercial $ 9,508,904 $ ( 210,280 ) $ 9,298,624 Commercial real estate 12,457,070 ( 158,322 ) 12,298,748 BBCC N/A 368,602 368,602 Residential real estate 6,460,441 — 6,460,441 Consumer 2,697,226 ( 2,697,226 ) N/A Indirect N/A 1,034,257 1,034,257 Direct N/A 629,186 629,186 Home equity N/A 1,033,783 1,033,783 Total $ 31,123,641 $ — $ 31,123,641 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 The composition of loans by portfolio segment follows: December 31, (dollars in thousands) 2022 2021 Commercial (1) (2) $ 9,298,624 $ 3,200,212 Commercial real estate 12,298,748 6,221,484 BBCC 368,602 350,747 Residential real estate 6,460,441 2,255,289 Indirect 1,034,257 873,139 Direct 629,186 140,385 Home equity 1,033,783 560,590 Total loans 31,123,641 13,601,846 Allowance for credit losses on loans ( 303,671 ) ( 107,341 ) Net loans $ 30,819,970 $ 13,494,505 (1) Includes direct finance leases of $ 188.1 million at December 31, 2022 and $ 25.1 million at December 31, 2021. (2) Includes remaining PPP loans of $ 32.5 million at December 31, 2022 and $ 169.0 million December 31, 2021. 94 The risk characteristics of each loan portfolio segment are as follows: Commercial Commercial loans are classified primarily on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its clients. Commercial Real Estate Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. The properties securing Old National’s commercial real estate portfolio are diverse in terms of type and geographic location. Management monitors and evaluates commercial real estate loans based on collateral, geography, and risk grade criteria. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. Included with commercial real estate are construction loans, which are underwritten utilizing independent appraisal reviews, sensitivity analysis of absorption and lease rates, financial analysis of the developers and property owners, and feasibility studies, if available. Construction loans are generally based on estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders (including Old National), sales of developed property, or an interim loan commitment from Old National until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions, and the availability of long-term financing. At 227 %, 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, 2022. BBCC BBCC loans are typically granted to small businesses with gross revenues of less than $5 million and aggregate debt of less than $1 million. Old National has established minimum debt service coverage ratios, minimum FICO scores for owners and guarantors, and the ability to show relatively stable earnings as criteria to help mitigate risk. Repayment of these loans depends on the personal income of the borrowers and the cash flows of the business. These factors can be affected by factors such as changes in economic conditions and unemployment levels. Residential With respect to residential loans that are secured by 1 - 4 family residences and are generally owner occupied, Old National typically establishes a maximum loan-to-value ratio and generally requires private mortgage insurance if that ratio is exceeded. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in residential property values. Portfolio risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers. Indirect Indirect loans are secured by automobile collateral, generally new and used cars and trucks from auto dealers that operate within our footprint. Old National typically mitigates the risk of indirect loans by establishing minimum FICO scores, maximum loan-to-value ratios, and maximum debt-to-income ratios. Repayment of these loans depends largely on the personal income of the borrowers, which can be affected by changes in economic conditions 95 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”). The aggregate amount of loans to related parties was not greater than 5 % of the Company’s shareholders’ equity at December 31, 2022 or 2021. Allowance for Credit Losses Loans Credit quality within the loans held for investment portfolio is continuously monitored by management and is reflected within the allowance for credit losses on loans. The allowance for credit losses is an estimate of expected losses inherent within the Company’s loans held for investment portfolio. Credit quality is assessed and monitored by evaluating various attributes and the results of those evaluations are utilized in underwriting new loans and in our process for estimating expected credit losses. Expected credit loss inherent in non-cancelable off-balance-sheet credit exposures is accounted for as a separate liability included in other liabilities on the balance sheet. The allowance for credit losses on loans held for investment is adjusted by a credit loss expense, which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries. Old National has made a policy election to report accrued interest receivable as a separate line item on the balance sheet. Accrued interest receivable on loans is excluded from the estimate of credit losses and totaled $ 137.7 million at December 31, 2022 and $ 47.6 million at December 31, 2021. The allowance for credit loss estimation process involves procedures to appropriately consider the unique characteristics of our loan portfolio segments. These segments are further disaggregated into loan classes based on the level at which credit risk is monitored. When computing the level of expected credit losses, credit loss assumptions are estimated using a model that categorizes loan pools based on loss history, delinquency status, and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense in those future periods. The allowance level is influenced by loan volumes, loan AQR migration or delinquency status, changes in historical loss experience, and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions. The methodology for estimating the amount of expected credit losses reported in the allowance for credit losses has two basic components: first, an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans; and second, a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics. 96 The base forecast scenario considers unemployment, gross domestic product, and the BBB ratio (BBB spread to the 10-year U.S. Treasury rate). In addition to the quantitative inputs, several qualitative factors are considered. These factors include the risk that unemployment, gross domestic product, housing product index, and the BBB ratio prove to be more severe and/or prolonged than our baseline forecast due to a variety of factors including monetary actions to control inflation, conflict in Ukraine, and global supply chain issues. Old National’s activity in the allowance for credit losses on loans by portfolio segment was as follows: (dollars in thousands) Balance at Beginning of Period Allowance Established for Acquired PCD Loans Impact of Adopting ASC 326 Charge-offs Recoveries Provision for Loan Losses Balance at End of Period Year Ended December 31, 2022 Commercial $ 27,232 $ 38,780 $ — $ ( 6,885 ) $ 4,610 $ 56,875 $ 120,612 Commercial real estate 64,004 49,419 — ( 6,519 ) 1,095 30,245 138,244 BBCC 2,458 — — ( 85 ) 281 ( 223 ) 2,431 Residential real estate 9,347 136 — ( 344 ) 760 12,017 21,916 Indirect 1,743 — — ( 2,525 ) 1,263 1,051 1,532 Direct 528 31 — ( 10,799 ) 2,557 19,799 12,116 Home equity 2,029 723 — ( 124 ) 616 3,576 6,820 Total $ 107,341 $ 89,089 $ — $ ( 27,281 ) $ 11,182 $ 123,340 $ 303,671 Year Ended December 31, 2021 Commercial $ 30,567 $ — $ — $ ( 1,228 ) $ 791 $ ( 2,898 ) $ 27,232 Commercial real estate 75,810 — — ( 264 ) 4,403 ( 15,945 ) 64,004 BBCC 6,120 — — ( 144 ) 105 ( 3,623 ) 2,458 Residential real estate 12,608 — — ( 346 ) 339 ( 3,254 ) 9,347 Indirect 3,580 — — ( 1,087 ) 1,682 ( 2,432 ) 1,743 Direct 855 — — ( 1,159 ) 777 55 528 Home equity 1,848 — — ( 82 ) 978 ( 715 ) 2,029 Total $ 131,388 $ — $ — $ ( 4,310 ) $ 9,075 $ ( 28,812 ) $ 107,341 Year Ended December 31, 2020 Commercial $ 21,359 $ — $ 7,150 $ ( 5,593 ) $ 3,629 $ 4,022 $ 30,567 Commercial real estate 20,535 — 25,548 ( 4,323 ) 4,515 29,535 75,810 BBCC 2,279 — 3,702 ( 95 ) 140 94 6,120 Residential real estate 2,299 — 6,986 ( 824 ) 633 3,514 12,608 Indirect 5,319 — ( 1,669 ) ( 2,754 ) 1,922 762 3,580 Direct 1,863 — ( 1,059 ) ( 1,763 ) 819 995 855 Home equity 965 — 689 ( 201 ) 922 ( 527 ) 1,848 Total $ 54,619 $ — $ 41,347 $ ( 15,553 ) $ 12,580 $ 38,395 $ 131,388 The allowance for credit losses on loans increased for the year ended December 31, 2022 primarily due to $ 89.1 million of allowance for credit losses on acquired PCD loans established through acquisition accounting adjustments on or after the merger date with First Midwest and $ 96.3 million of provision for credit losses to establish an allowance for credit losses on non-PCD loans acquired in the First Midwest merger. 97 Unfunded Loan Commitments Old National maintains an allowance for credit losses on unfunded loan commitments to provide for the risk of loss inherent in these arrangements. The allowance is computed using a methodology similar to that used to determine the allowance for credit losses on loans, modified to take into account the probability of a drawdown on the commitment. The allowance for credit losses on unfunded loan commitments is classified as a liability account on the balance sheet within accrued expenses and other liabilities, while the corresponding provision for unfunded loan commitments is included in the provision for credit losses. Old National’s activity in the allowance for credit losses on unfunded loan commitments was as follows: Years Ended December 31, (dollars in thousands) 2022 2021 2020 Balance at beginning of period $ 10,879 $ 11,689 $ 2,656 Provision for credit losses on unfunded loan commitments acquired during the period 11,013 — — Impact of adopting ASC 326 — — 4,549 Provision for unfunded loan commitments 10,296 ( 810 ) 4,484 Balance at end of period $ 32,188 $ 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. 98 The following table summarizes the amortized cost of term loans by risk category of commercial, commercial real estate, and BBCC loans by loan portfolio segment, class of loan, and origination year: Origination Year Revolving to Term (dollars in thousands) 2022 2021 2020 2019 2018 Prior Revolving Total December 31, 2022 Commercial: Risk Rating: Pass $ 2,388,618 $ 1,754,364 $ 796,340 $ 738,208 $ 362,986 $ 388,617 $ 1,988,763 $ 329,119 $ 8,747,015 Criticized 40,856 30,661 63,557 33,490 9,195 5,312 61,036 4,327 248,434 Classified: Substandard 37,223 47,522 16,540 22,925 4,844 21,204 67,402 25,143 242,803 Nonaccrual 3,627 1,453 566 — — — 1,634 6,623 13,903 Doubtful 2,821 17,604 3,720 8,005 5,968 8,351 — — 46,469 Total $ 2,473,145 $ 1,851,604 $ 880,723 $ 802,628 $ 382,993 $ 423,484 $ 2,118,835 $ 365,212 $ 9,298,624 Commercial real estate: Risk Rating: Pass $ 3,066,960 $ 2,828,758 $ 1,989,000 $ 1,219,025 $ 675,572 $ 1,018,719 $ 57,818 $ 689,553 $ 11,545,405 Criticized 75,306 34,422 22,569 82,637 86,504 56,864 — 23,282 381,584 Classified: Substandard 46,231 16,928 24,319 78,468 57,824 21,591 — 4,108 249,469 Nonaccrual 3,151 9,541 5,014 — 2,312 22,155 — 3,257 45,430 Doubtful 1,934 38,386 10,011 4,605 1,523 20,401 — — 76,860 Total $ 3,193,582 $ 2,928,035 $ 2,050,913 $ 1,384,735 $ 823,735 $ 1,139,730 $ 57,818 $ 720,200 $ 12,298,748 BBCC: Risk Rating: Pass $ 90,341 $ 64,161 $ 52,304 $ 36,868 $ 23,618 $ 11,333 $ 60,016 $ 18,881 $ 357,522 Criticized 1,504 525 368 692 353 — 1,006 1,603 6,051 Classified: Substandard 811 143 — 421 — — 543 682 2,600 Nonaccrual 42 37 118 — 429 284 — 639 1,549 Doubtful 40 107 439 157 64 73 — — 880 Total $ 92,738 $ 64,973 $ 53,229 $ 38,138 $ 24,464 $ 11,690 $ 61,565 $ 21,805 $ 368,602 99 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 $ 350,747 100 For residential real estate and consumer loan classes, Old National evaluates credit quality based on the aging status of the loan and by payment activity. The performing or nonperforming status is updated on an on-going basis dependent upon improvement and deterioration in credit quality. The following table presents the amortized cost of term residential real estate and consumer loans based on payment activity and origination year: Origination Year Revolving to Term (dollars in thousands) 2022 2021 2020 2019 2018 Prior Revolving Total December 31, 2022 Residential real estate: Performing $ 1,327,168 $ 1,945,792 $ 1,825,762 $ 478,529 $ 136,260 $ 712,175 $ 7 $ 88 $ 6,425,781 Nonperforming 59 529 861 873 1,826 30,512 — — 34,660 Total $ 1,327,227 $ 1,946,321 $ 1,826,623 $ 479,402 $ 138,086 $ 742,687 $ 7 $ 88 $ 6,460,441 Indirect: Performing $ 504,410 $ 249,407 $ 144,265 $ 82,304 $ 31,484 $ 19,095 $ — $ 62 $ 1,031,027 Nonperforming 348 1,074 645 531 304 328 — — 3,230 Total $ 504,758 $ 250,481 $ 144,910 $ 82,835 $ 31,788 $ 19,423 $ — $ 62 $ 1,034,257 Direct: Performing $ 132,934 $ 164,126 $ 77,406 $ 57,919 $ 45,299 $ 59,212 $ 87,622 $ 671 $ 625,189 Nonperforming 115 851 614 205 327 1,526 5 354 3,997 Total $ 133,049 $ 164,977 $ 78,020 $ 58,124 $ 45,626 $ 60,738 $ 87,627 $ 1,025 $ 629,186 Home equity: Performing $ 919 $ 896 $ 1,849 $ 1,497 $ 983 $ 11,646 $ 990,001 $ 14,792 $ 1,022,583 Nonperforming 166 160 166 446 794 4,308 1,698 3,462 11,200 Total $ 1,085 $ 1,056 $ 2,015 $ 1,943 $ 1,777 $ 15,954 $ 991,699 $ 18,254 $ 1,033,783 Origination Year Revolving to Term 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 $ 560,590 101 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, 2022 Commercial $ 14,147 $ 4,801 $ 11,080 $ 30,028 $ 9,268,596 $ 9,298,624 Commercial real estate 47,240 1,312 32,892 81,444 12,217,304 12,298,748 BBCC 730 365 603 1,698 366,904 368,602 Residential 24,181 5,033 11,753 40,967 6,419,474 6,460,441 Indirect 6,302 2,118 958 9,378 1,024,879 1,034,257 Direct 5,404 2,118 1,928 9,450 619,736 629,186 Home equity 6,585 1,966 4,707 13,258 1,020,525 1,033,783 Total $ 104,589 $ 17,713 $ 63,921 $ 186,223 $ 30,937,418 $ 31,123,641 December 31, 2021 Commercial $ 2,723 $ 617 $ 1,603 $ 4,943 $ 3,195,269 $ 3,200,212 Commercial real estate 1,402 280 7,042 8,724 6,212,760 6,221,484 BBCC 747 162 109 1,018 349,729 350,747 Residential 8,273 2,364 4,554 15,191 2,240,098 2,255,289 Indirect 3,888 867 554 5,309 867,830 873,139 Direct 687 159 162 1,008 139,377 140,385 Home equity 693 199 777 1,669 558,921 560,590 Total $ 18,413 $ 4,648 $ 14,801 $ 37,862 $ 13,563,984 $ 13,601,846 The following table presents the amortized cost basis of loans on nonaccrual status and loans past due 90 days or more and still accruing by class of loan: December 31, 2022 December 31, 2021 (dollars in thousands) Nonaccrual Amortized Cost Nonaccrual With No Related Allowance Past Due 90 Days or More and Accruing Nonaccrual Amortized Cost Nonaccrual With No Related Allowance Past Due 90 Days or More and Accruing Commercial $ 60,372 $ 7,873 $ 152 $ 25,740 $ 9,574 $ — Commercial real estate 122,290 33,445 — 52,450 25,139 — BBCC 2,429 — — 3,362 — — Residential 34,660 — 1,808 18,360 — — Indirect 3,230 — 28 2,581 — 4 Direct 3,997 — 133 950 — 3 Home equity 11,200 — 529 3,248 — — Total $ 238,178 $ 41,318 $ 2,650 $ 106,691 $ 34,713 $ 7 Interest income recognized on nonaccrual loans was insignificant during the years ended December 31, 2022 and 2021. 102 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, 2022 Commercial $ 8,962 $ 42,754 $ 2,690 $ 1,611 $ 980 Commercial Real Estate 108,871 — 1,718 — 6,411 BBCC 1,939 478 — 12 — Residential 34,660 — — — — Indirect — — — 3,230 — Direct 2,991 13 — 232 23 Home equity 11,200 — — — — Total $ 168,623 $ 43,245 $ 4,408 $ 5,085 $ 7,414 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 Loan Participations Old National has loan participations, which qualify as participating interests, with other financial institutions. At December 31, 2022, these loans totaled $ 2.3 billion, of which $ 1.1 billion had been sold to other financial institutions and $ 1.2 billion was retained by Old National. The loan participations convey proportionate ownership rights with equal priority to each participating interest holder; involve no recourse (other than ordinary representations and warranties) to, or subordination by, any participating interest holder; all cash flows are divided among the participating interest holders in proportion to each holder’s share of ownership; and no holder has the right to pledge the entire financial asset unless all participating interest holders agree. Troubled Debt Restructurings Old National may choose to restructure the contractual terms of certain loans. The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit Old National by increasing the ultimate probability of collection. Any loans that are modified are reviewed by Old National to identify if a TDR has occurred, which is when for economic or legal reasons related to a borrower’s financial difficulties, Old National Bank grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status. The modification of the terms of such loans includes one or a combination of the following: a reduction of the stated interest rate of the loan, an extension of the maturity date at a stated rate of interest lower than the current market rate of new debt with similar risk, or a permanent reduction of the recorded investment of the loan. Loans modified in a TDR are typically placed on nonaccrual status until we determine the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate a period of performance according to the restructured terms for six months . 103 If we are unable to resolve a nonperforming loan issue, the credit will be charged off when it is apparent there will be a loss. For large commercial type loans, each relationship is individually analyzed for evidence of apparent loss based on quantitative benchmarks or subjectively based upon certain events or particular circumstances. For residential and consumer loans, a charge off is recorded at the time foreclosure is initiated or when the loan becomes 120 to 180 days past due, whichever is earlier. For commercial TDRs, an allocation is established within the allowance for credit losses on loans for the difference between the carrying value of the loan and its computed value. To determine the computed value of the loan, one of the following methods is selected: (1) the present value of expected cash flows discounted at the loan’s original effective interest rate, (2) the loan’s observable market price, or (3) the fair value of the collateral, if the loan is collateral dependent. The allocation is established as the difference between the carrying value of the loan and the collectable value. If there are significant changes in the amount or timing of the loan’s expected future cash flows, the allowance allocation is recalculated and adjusted accordingly. When a residential or consumer loan is identified as a TDR, the loan is typically written down to its collateral value less selling costs. The following table presents activity in TDRs: (dollars in thousands) Beginning Balance (Charge-offs)/ Recoveries (Payments)/ Disbursements Additions Ending Balance Year Ended December 31, 2022 Commercial $ 7,456 $ — $ ( 6,880 ) $ 5,194 $ 5,770 Commercial real estate 17,158 4 ( 10,908 ) 21,982 28,236 BBCC 87 3 ( 16 ) — 74 Residential 2,435 — ( 169 ) — 2,266 Indirect — 1 ( 1 ) — — Direct 2,704 — ( 58 ) 194 2,840 Home equity 199 1 ( 84 ) — 116 Total $ 30,039 $ 9 $ ( 18,116 ) $ 27,370 $ 39,302 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 $ 24.0 million at December 31, 2022 and $ 11.7 million at December 31, 2021. Old National has established specific allowances for credit losses for clients whose loan terms have been modified as TDRs totaling $ 4.5 million at December 31, 2022 and $ 0.7 million at December 31, 2021. Old National had no t committed to lend any additional funds to clients with outstanding loans that were classified as TDRs at December 31, 2022 or December 31, 2021. 104 The pre-modification and post-modification outstanding recorded investments of loans modified as TDRs during the years ended December 31, 2022, 2021, and 2020 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, 2022, 2021, and 2020: (dollars in thousands) Total Year Ended December 31, 2022 TDR: Number of loans 8 Pre-modification outstanding recorded investment $ 27,370 Post-modification outstanding recorded investment 27,370 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 The TDRs that occurred during 2022 increased the allowance for credit losses on loans by $ 3.8 million and resulted in nominal charge-offs during 2022. The TDRs that occurred during 2021 decreased the allowance for credit losses on loans by $ 0.9 million and resulted in no charge-offs during 2021. The TDRs that occurred during 2020 increased the allowance for loan losses by $ 0.3 million and resulted in no charge-offs during 2020. 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 2022, 2021, and 2020. The terms of certain other loans were modified during 2022 and 2021 that did not meet the definition of a TDR. It is our process to review all classified and criticized loans that, during the period, have been renewed, have entered into a forbearance agreement, have gone from principal and interest to interest only, or have extended the maturity date. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on its debt in the foreseeable future without the modification. The evaluation is performed under our internal underwriting policy. We also evaluate whether a concession has been granted or if we were adequately compensated through a market interest rate, additional collateral, or a bona fide guarantee. We also consider whether the modification was insignificant relative to the other terms of the agreement or the delay in a payment. In general, once a modified loan is considered a TDR, the loan will always be considered a TDR until it is paid in full, otherwise settled, sold, or charged off. However, guidance also permits for loans to be removed from TDR status when subsequently restructured under these circumstances: (1) at the time of the subsequent restructuring, the borrower is not experiencing financial difficulties, and this is documented by a current credit evaluation at the time of the restructuring, (2) under the terms of the subsequent restructuring agreement, the institution has granted no concession to the borrower; and (3) the subsequent restructuring agreement includes market terms that are no less favorable than those that would be offered for a comparable new loan. For loans subsequently restructured that have cumulative principal forgiveness, the loan should continue to be measured in accordance with ASC 310-10, Receivables – Overall . However, consistent with ASC 310-40-50-2, Troubled Debt Restructurings by Creditors, Creditor Disclosure of Troubled Debt Restructurings , the loan would not be required to be reported in the years following the restructuring if the subsequent restructuring meets both of these criteria: (1) has an interest rate at the time of the subsequent restructuring that is not less than a market interest rate; and (2) is performing in compliance with its modified terms after the subsequent restructuring. 105 Purchased Credit Deteriorated Loans Old National has purchased loans, for which there was, at acquisition, evidence of more than insignificant deterioration of credit quality since origination. The carrying amount of those loans is as follows: (dollars in thousands) First Midwest (1) Purchase price of loans at acquisition $ 1,390,273 Allowance for credit losses at acquisition 89,089 Non-credit discount/(premium) at acquisition 9,003 Par value of acquired loans at acquisition $ 1,488,365 (1) Old National merged with First Midwest effective February 15, 2022. NOTE 5 – PREMISES AND EQUIPMENT The composition of premises and equipment was as follows: December 31, (dollars in thousands) 2022 2021 Land $ 91,568 $ 71,014 Buildings 419,596 394,400 Furniture, fixtures, and equipment 154,719 118,124 Leasehold improvements 69,412 46,330 Total 735,295 629,868 Accumulated depreciation ( 177,988 ) ( 153,682 ) Premises and equipment, net $ 557,307 $ 476,186 During 2022, Old National recorded $ 111.9 million of premises and equipment associated with the merger with First Midwest. See Note 2 to the consolidated financial statements for additional detail regarding this transaction. Depreciation expense was $ 36.4 million in 2022, $ 27.3 million in 2021, and $ 28.9 million in 2020. Finance Leases Old National leases certain banking center buildings and equipment under finance leases that are included in premises and equipment. See Notes 6 and 13 to the consolidated financial statements for detail regarding these leases. NOTE 6 – 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 106 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) 2022 2021 2020 Operating lease cost Occupancy/Equipment expense $ 29,368 $ 12,336 $ 23,548 Finance lease cost: Amortization of right-of-use assets Occupancy expense 2,672 2,356 1,044 Interest on lease liabilities Interest expense 415 431 364 Sub-lease income Occupancy expense ( 448 ) ( 438 ) ( 512 ) Total $ 32,007 $ 14,685 $ 24,444 Supplemental balance sheet information related to leases was as follows: December 31, (dollars in thousands) 2022 2021 Operating Leases Operating lease right-of-use assets $ 189,714 $ 69,560 Operating lease liabilities 211,964 76,236 Finance Leases Premises and equipment, net 10,799 16,451 Other borrowings 13,469 17,233 Weighted-Average Remaining Lease Term (in Years) Operating leases 9.1 10.4 Finance leases 7.2 7.6 Weighted-Average Discount Rate Operating leases 2.88 % 3.34 % Finance leases 3.30 % 3.02 % Supplemental cash flow information related to leases was as follows: Years Ended December 31, (dollars in thousands) 2022 2021 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 30,340 $ 13,823 $ 15,906 Operating cash flows from finance leases 415 431 364 Financing cash flows from finance leases 2,475 2,057 819 107 The following table presents a maturity analysis of the Company’s lease liability by lease classification at December 31, 2022: (dollars in thousands) Operating Leases Finance Leases 2023 $ 30,951 $ 2,600 2024 29,939 2,643 2025 28,635 2,645 2026 27,639 1,400 2027 26,604 1,381 Thereafter 98,539 4,525 Total undiscounted lease payments 242,307 15,194 Amounts representing interest ( 30,343 ) ( 1,725 ) Lease liability $ 211,964 $ 13,469 NOTE 7 – GOODWILL AND OTHER INTANGIBLE ASSETS The following table presents the changes in the carrying amount of goodwill: Years Ended December 31, (dollars in thousands) 2022 2021 2020 Balance at beginning of period $ 1,036,994 $ 1,036,994 $ 1,036,994 Acquisitions and adjustments 961,722 — — Balance at end of period $ 1,998,716 $ 1,036,994 $ 1,036,994 During 2022, Old National recorded $ 961.7 million of goodwill associated with the First Midwest merger. See Note 2 to the consolidated financial statements for additional detail regarding this transaction. Old National performed the required annual goodwill impairment test as of August 31, 2022 and there was no impairment. No events or circumstances since the August 31, 2022 annual impairment test were noted that would indicate it was more likely than not a goodwill impairment exists. The gross carrying amounts and accumulated amortization of other intangible assets were as follows: (dollars in thousands) Gross Carrying Amount Accumulated Amortization and Impairment Net Carrying Amount December 31, 2022 Core deposit $ 170,642 $ ( 80,951 ) $ 89,691 Customer trust relationships 56,243 ( 19,529 ) 36,714 Total intangible assets $ 226,885 $ ( 100,480 ) $ 126,405 December 31, 2021 Core deposit $ 92,754 $ ( 60,036 ) $ 32,718 Customer trust relationships 16,547 ( 14,587 ) 1,960 Total intangible assets $ 109,301 $ ( 74,623 ) $ 34,678 Other intangible assets consist of core deposit intangibles and customer relationship intangibles and are being amortized primarily on an accelerated basis over their estimated useful lives, generally over a period of 5 to 15 years. During 2022, Old National recorded $ 77.9 million of core deposit intangibles and $ 39.7 million of customer trust relationships intangible associated with the First Midwest merger. Old National reviews other intangible assets for possible impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. No impairment charges were recorded in 2022, 2021, or 108 2020. Total amortization expense associated with intangible assets was $ 25.9 million in 2022, $ 11.3 million in 2021, and $ 14.1 million in 2020. Estimated amortization expense for future years is as follows: (dollars in thousands) 2023 $ 24,214 2024 21,298 2025 18,417 2026 15,614 2027 12,926 Thereafter 33,936 Total $ 126,405 NOTE 8 – LOAN SERVICING RIGHTS Loan servicing rights are included in other assets on the balance sheet. At December 31, 2022, loan servicing rights derived from mortgage loans sold with servicing retained totaled $ 37.3 million, compared to $ 30.0 million at December 31, 2021. Loans serviced for others are not reported as assets. The principal balance of mortgage loans serviced for others was $ 4.3 billion at December 31, 2022, compared to $ 3.7 billion at December 31, 2021. Custodial escrow balances maintained in connection with serviced loans were $ 27.0 million at December 31, 2022 and $ 18.2 million at December 31, 2021. The following table summarizes the carrying values and activity related to loan servicing rights and the related valuation allowance: Years Ended December 31, (dollars in thousands) 2022 2021 2020 Balance at beginning of period $ 30,085 $ 28,124 $ 25,399 Additions (1) 13,080 11,759 12,810 Amortization ( 5,898 ) ( 9,798 ) ( 10,085 ) Balance before valuation allowance at end of period 37,267 30,085 28,124 Valuation allowance: Balance at beginning of period ( 46 ) ( 1,407 ) ( 31 ) (Additions)/recoveries 46 1,361 ( 1,376 ) Balance at end of period — ( 46 ) ( 1,407 ) Loan servicing rights, net $ 37,267 $ 30,039 $ 26,717 (1) Additions in 2022 include loan servicing rights of $ 7.7 million acquired in the First Midwest merger on February 15, 2022. At December 31, 2022, the fair value of servicing rights was $ 48.4 million, which was determined using a discount rate of 9 % and a conditional prepayment rate of 9 %. At December 31, 2021, the fair value of servicing rights was $ 33.8 million, which was determined using a discount rate of 9 % and a conditional prepayment rate of 10 %. NOTE 9 – QUALIFIED AFFORDABLE HOUSING PROJECTS AND OTHER TAX CREDIT INVESTMENTS Old National is a limited partner in several tax-advantaged limited partnerships whose purpose is to invest in approved qualified affordable housing, renewable energy, or other renovation or community revitalization projects. These investments are included in other assets on the balance sheet, with any unfunded commitments included with other liabilities. As of December 31, 2022, Old National expects to recover its remaining investments through the use of the tax credits that are generated by the investments. 109 The following table summarizes Old National’s investments in qualified affordable housing projects and other tax credit investments: (dollars in thousands) December 31, 2022 December 31, 2021 Investment Accounting Method Investment Unfunded Commitment (1) Investment Unfunded Commitment LIHTC Proportional amortization $ 84,428 $ 55,754 $ 68,989 $ 41,355 FHTC Equity 19,316 9,588 21,241 15,252 NMTC Consolidation 51,912 — 18,727 — Renewable Energy Equity 1,099 — 1,985 — Total $ 156,755 $ 65,342 $ 110,942 $ 56,607 (1) All commitments will be paid by Old National by December 31, 2027. The following table summarizes the amortization expense and tax benefit recognized for Old National’s qualified affordable housing projects and other tax credit investments: (dollars in thousands) Amortization Expense (1) Tax Expense (Benefit) Recognized (2) Year Ended December 31, 2022 LIHTC $ 4,974 $ ( 6,613 ) FHTC 1,925 ( 2,227 ) NMTC 8,197 ( 10,225 ) Renewable Energy 839 — Total $ 15,935 $ ( 19,065 ) 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 ) (1) The amortization expense for the LIHTC investments is included in our income tax expense. The amortization expense for the FHTC, NMTC, and Renewable Energy tax credits is included in noninterest expense. (2) All of the tax benefits recognized are included in our income tax expense. The tax benefit recognized for the FHTC, NMTC, and Renewable Energy investments primarily reflects the tax credits generated from the investments and excludes the net tax expense (benefit) and deferred tax liability of the investments’ income (loss). 110 NOTE 10 – DEPOSITS At December 31, 2022, the scheduled maturities of total time deposits were as follows: (dollars in thousands) Due in 2023 $ 2,099,157 Due in 2024 684,377 Due in 2025 118,776 Due in 2026 64,207 Due in 2027 41,794 Thereafter 5,469 Total $ 3,013,780 The aggregate amount of time deposits in denominations that met or exceeded the FDIC insurance limit of $250,000 totaled $ 793.4 million at December 31, 2022 and $ 252.8 million at December 31, 2021. NOTE 11 – 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) 2022 2021 Outstanding at year-end $ 432,804 $ 392,275 Average amount outstanding 440,619 392,777 Maximum amount outstanding at any month-end 509,275 405,278 Weighted-average interest rate: During year 0.19 % 0.10 % End of year 1.31 0.10 The following table presents the contractual maturity of our secured borrowings and class of collateral pledged: At December 31, 2022 Remaining Contractual Maturity of the Agreements (dollars in thousands) Overnight and Continuous Up to 30 Days 30-90 Days Greater Than 90 days Total Repurchase Agreements: U.S. Treasury and agency securities $ 432,804 $ — $ — $ — $ 432,804 Total $ 432,804 $ — $ — $ — $ 432,804 The fair value of securities pledged to secure repurchase agreements may decline. Old National has pledged securities valued at 110 % of the gross outstanding balance of repurchase agreements at December 31, 2022 to manage this risk. NOTE 12 – FEDERAL HOME LOAN BANK ADVANCES The following table summarizes Old National Bank’s FHLB advances: December 31, (dollars in thousands) 2022 2021 FHLB advances (fixed rates 0.00 % to 4.96 % and variable rates 3.90 % to 4.17 %) maturing January 2023 to September 2042 $ 3,850,677 $ 1,902,655 Fair value hedge basis adjustments and unamortized prepayment fees ( 21,659 ) ( 16,636 ) Total other borrowings $ 3,829,018 $ 1,886,019 111 FHLB advances had weighted-average rates of 3.15 % at December 31, 2022 and 1.30 % at December 31, 2021. Certain FHLB advances are collateralized with residential real estate loans at 140 %. At December 31, 2022, total unamortized prepayment fees related to all debt modifications completed in prior years totaled $ 20.2 million, compared to $ 26.2 million at December 31, 2021. Contractual maturities of FHLB advances at December 31, 2022 were as follows: (dollars in thousands) Due in 2023 $ 950,149 Due in 2024 25,243 Due in 2025 550,285 Due in 2026 100,000 Thereafter 2,225,000 Fair value hedge basis adjustments and unamortized prepayment fees ( 21,659 ) Total $ 3,829,018 NOTE 13 – OTHER BORROWINGS The following table summarizes Old National’s other borrowings: December 31, (dollars in thousands) 2022 2021 Old National Bancorp: Senior unsecured notes (fixed rate 4.125 %) maturing August 2024 $ 175,000 $ 175,000 Unamortized debt issuance costs related to senior unsecured notes ( 247 ) ( 403 ) Subordinated debentures (fixed rate 5.875 %) maturing September 2026 150,000 — Junior subordinated debentures (variable rates of 5.68 % to 7.99 %) maturing July 2031 to September 2037 136,643 42,000 Other basis adjustments 23,363 ( 3,044 ) Old National Bank: Finance lease liabilities 13,469 17,233 Subordinated debentures (variable rate 8.77 %) maturing October 2025 12,000 12,000 Leveraged loans for NMTC (fixed rates of 1.00 % to 1.43 %) maturing December 2046 to June 2060 143,187 51,045 Other (1) 89,588 2,839 Total other borrowings $ 743,003 $ 296,670 (1) Includes overnight borrowings to collateralize certain derivative positions totaling $ 88.0 million at December 31, 2022. Contractual maturities of other borrowings at December 31, 2022 were as follows: (dollars in thousands) Due in 2023 $ 90,276 Due in 2024 177,335 Due in 2025 14,389 Due in 2026 151,188 Due in 2027 1,209 Thereafter 283,934 Unamortized debt issuance costs and other basis adjustments 24,672 Total $ 743,003 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. 112 Junior Subordinated Debentures Junior subordinated debentures related to trust preferred securities are classified in “other borrowings.” Junior subordinated debentures qualify as Tier 2 capital for regulatory purposes, subject to certain limitations. Through various mergers and acquisitions, Old National assumed junior subordinated debenture obligations related to various trusts that issued trust preferred securities. Old National guarantees the payment of distributions on the trust preferred securities issued by the trusts. Proceeds from the issuance of each of these securities were used to purchase junior subordinated debentures with the same financial terms as the securities issued by the trusts. 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, 2022: (dollars in thousands) Name of Trust Issuance Date Issuance Amount Rate Rate at December 31, 2022 Maturity Date Bridgeview Statutory Trust I July 2001 $ 15,464 3-month LIBOR plus 3.58 % 7.99 % July 31, 2031 Bridgeview Capital Trust II December 2002 15,464 3-month LIBOR plus 3.35 % 7.43 % January 7, 2033 First Midwest Capital Trust I November 2003 37,825 6.95 % fixed 6.95 % December 1, 2033 St. Joseph Capital Trust II March 2005 5,155 3-month LIBOR plus 1.75 % 6.49 % March 17, 2035 Northern States Statutory Trust I September 2005 10,310 3-month LIBOR plus 1.80 % 6.57 % September 15, 2035 Anchor Capital Trust III August 2005 5,000 3-month LIBOR plus 1.55 % 6.30 % September 30, 2035 Great Lakes Statutory Trust II December 2005 6,186 3-month LIBOR plus 1.40 % 6.17 % December 15, 2035 Home Federal Statutory Trust I September 2006 15,464 3-month LIBOR plus 1.65 % 6.42 % September 15, 2036 Monroe Bancorp Capital Trust I July 2006 3,093 3-month LIBOR plus 1.60 % 5.68 % October 7, 2036 Tower Capital Trust 3 December 2006 9,279 3-month LIBOR plus 1.69 % 6.45 % March 1, 2037 Monroe Bancorp Statutory Trust II March 2007 5,155 3-month LIBOR plus 1.60 % 6.37 % June 15, 2037 Great Lakes Statutory Trust III June 2007 8,248 3-month LIBOR plus 1.70 % 6.47 % September 15, 2037 Total $ 136,643 Subordinated Debentures On November 1, 2017, Old National assumed $ 12.0 million of subordinated fixed-to-floating notes related to the acquisition of Anchor Bancorp, Inc. (MN). The subordinated debentures had a 5.75 % fixed rate of interest through October 29, 2020. From October 30, 2020 to the October 30, 2025 maturity date, the debentures have a floating rate of interest equal to the three-month LIBOR rate plus 4.356 %. On February 15, 2022, Old National assumed $ 150.0 million of subordinated fixed rate notes related to the First Midwest merger. The subordinated debentures have a 5.875 % fixed rate of interest through the September 29, 2026 maturity date. Leveraged Loans The leveraged loans are directly related to the NMTC structure. As part of the transaction structure, Old National has the right to sell its interest in the entity that received the leveraged loans at an agreed upon price to the leveraged lender at the end of the NMTC seven-year compliance period. See Note 9 to the consolidated financial statements for additional information on the Company’s NMTC investments. Finance Lease Liabilities Old National has long-term finance lease liabilities for certain banking centers and equipment totaling $ 13.5 million at December 31, 2022. See Note 6 to the consolidated financial statements for a maturity analysis of the Company’s finance lease liabilities. 113 NOTE 14 – 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, 2022 Balance at beginning of period $ ( 2,950 ) $ — $ 543 $ 32 $ ( 2,375 ) Other comprehensive income (loss) before reclassifications ( 639,463 ) ( 125,229 ) ( 34,043 ) — ( 798,735 ) Amounts reclassified from AOCI to income (1) 67 12,565 1,951 105 14,688 Balance at end of period $ ( 642,346 ) $ ( 112,664 ) $ ( 31,549 ) $ 137 $ ( 786,422 ) 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 to income (1) ( 8,392 ) — ( 3,886 ) 16 ( 12,262 ) Balance at end of period $ 145,335 $ — $ 2,584 $ ( 148 ) $ 147,771 (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) 2022 2021 2020 Details about AOCI Components Amount Reclassified from AOCI Affected Line Item in the Statement of Income Unrealized gains and losses on available-for-sale debt securities $ ( 88 ) $ 4,327 $ 10,767 Debt securities gains (losses), net 21 ( 990 ) ( 2,375 ) Income tax (expense) benefit $ ( 67 ) $ 3,337 $ 8,392 Net income Unrealized gains and losses on held-to-maturity securities $ ( 16,612 ) $ — $ — Interest income (expense) 4,047 — — Income tax (expense) benefit $ ( 12,565 ) $ — $ — Net income Gains and losses on cash flow hedges Interest rate contracts $ ( 2,587 ) $ 4,605 $ 5,153 Interest income (expense) 636 ( 1,131 ) ( 1,267 ) Income tax (expense) benefit $ ( 1,951 ) $ 3,474 $ 3,886 Net income Amortization of defined benefit pension items Actuarial gains (losses) $ ( 139 ) $ ( 239 ) $ ( 21 ) Salaries and employee benefits 34 59 5 Income tax (expense) benefit $ ( 105 ) $ ( 180 ) $ ( 16 ) Net income Total reclassifications for the period $ ( 14,688 ) $ 6,631 $ 12,262 Net income 114 NOTE 15 – 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) 2022 2021 2020 Provision at statutory rate of 21% $ 114,394 $ 71,161 $ 53,667 Tax-exempt income: Tax-exempt interest ( 14,588 ) ( 11,066 ) ( 10,776 ) Section 291/265 interest disallowance 363 114 189 Company-owned life insurance income ( 2,891 ) ( 2,138 ) ( 2,290 ) Tax-exempt income ( 17,116 ) ( 13,090 ) ( 12,877 ) State income taxes 20,837 9,308 4,840 Tax credit investments - federal ( 9,140 ) ( 5,212 ) ( 15,159 ) Officer compensation limitation 5,903 564 598 Other, net 1,568 ( 1,407 ) ( 1,922 ) Income tax expense $ 116,446 $ 61,324 $ 29,147 Effective tax rate 21.4 % 18.1 % 11.4 % The higher effective tax rate in 2022 when compared to 2021 reflected the increase in pre-tax book income and higher post-merger estimated state effective tax rates. An increase in non-deductible officer compensation also contributed to the higher tax rate, the majority of which was merger related. 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 provision for income taxes consisted of the following components: Years Ended December 31, (dollars in thousands) 2022 2021 2020 Current expense: Federal $ 106,918 $ 31,943 $ 19,223 State 32,898 8,461 6,498 Deferred expense: Federal ( 16,216 ) 17,514 3,188 State ( 7,154 ) 3,406 238 Deferred income tax expense ( 23,370 ) 20,920 3,426 Income tax expense $ 116,446 $ 61,324 $ 29,147 115 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) 2022 2021 Deferred Tax Assets Allowance for credit losses on loans, net of recapture $ 85,619 $ 28,843 Benefit plan accruals 38,038 18,348 Net operating loss carryforwards 25,135 14,823 Acquired loans 40,723 8,039 Operating lease liabilities 58,288 22,961 Unrealized losses on available-for-sale investment securities 202,101 3,003 Unrealized losses on held-to-maturity investment securities 36,197 — Unrealized losses on hedges 10,277 — Purchase accounting 20,063 — Other, net 4,962 3,430 Total deferred tax assets 521,403 99,447 Deferred Tax Liabilities Deferred loan origination fees ( 3,566 ) — Purchase accounting — ( 18,524 ) Loan servicing rights ( 9,636 ) ( 7,379 ) Premises and equipment ( 14,844 ) ( 16,972 ) Prepaid expenses ( 2,774 ) ( 796 ) Operating lease right-of-use assets ( 51,845 ) ( 21,129 ) Unrealized gains on hedges — ( 177 ) Other, net ( 2,983 ) ( 1,564 ) Total deferred tax liabilities ( 85,648 ) ( 66,541 ) Net deferred tax assets $ 435,755 $ 32,906 The increase in net deferred tax assets was driven by $ 238.3 million of deferred tax assets related to the market value adjustments of certain investments and $ 133.9 million related to the merger with First Midwest. The Company’s retained earnings at December 31, 2022 included an appropriation for acquired thrifts’ tax bad debt allowances totaling $ 58.6 million for which no provision for federal or state income taxes has been made. If, in the future, this portion of retained earnings were distributed as a result of the liquidation of the Company or its subsidiaries, federal and state income taxes would be imposed at the then applicable rates. No valuation allowance was recorded at December 31, 2022 or 2021 because, based on current expectations, Old National believes it will generate sufficient income in future years to realize deferred tax assets. Old National has federal net operating loss carryforwards totaling $ 81.5 million at December 31, 2022 and $ 36.7 million at December 31, 2021. This federal net operating loss was acquired from the acquisition of Anchor BanCorp Wisconsin Inc. in 2016 and First Midwest in 2022. If not used, the federal net operating loss carryforwards will begin expiring in 2030 and later. Old National has recorded state net operating loss carryforwards totaling $ 124.4 million at December 31, 2022 and $ 116.1 million at December 31, 2021. If not used, the state net operating loss carryforwards will expire from 2027 to 2036. The federal and recorded state net operating loss carryforwards are subject to an annual limitation under Internal Revenue Code section 382. Old National believes that all of the federal and recorded state net operating loss carryforwards will be used prior to expiration. 116 Unrecognized Tax Benefits Old National has unrecognized tax benefits at December 31, 2022 due to the merger with First Midwest. The following table presents the changes in the carrying amount of unrecognized tax benefits: Years Ended December 31, (dollars in thousands) 2022 2021 2020 Balance at beginning of period $ — $ — $ — Additions for acquired uncertain tax positions 14,897 — — Reductions for tax positions relating to prior years ( 2,751 ) — — Reductions due to statute of limitations expiring ( 1,139 ) — — Balance at end of period $ 11,007 $ — $ — If recognized, approximately $ 8.8 million of unrecognized tax benefits, net of interest, would favorably affect the effective income tax rate in future periods. Old National expects the $ 8.8 million of unrecognized tax benefits to be reduced to $ 7.9 million in the next twelve months. It is our policy to recognize interest and penalties accrued relative to unrecognized tax benefits in their respective federal or state income tax accounts. Interest and penalties recorded and accrued in 2022 were immaterial. Old National reversed $ 3.9 million in 2022 related to uncertain tax positions accounted for under FASB ASC 740-10 (FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes). The income tax reversal related to the 2018 statute of limitations expiring in the third quarter of 2022 totaled $ 1.1 million. The income tax reversal related to reductions for tax positions in prior years totaled $ 2.8 million. Old National and its subsidiaries file a consolidated U.S. federal income tax return, as well as filing various state returns. The 2019 through 2022 tax years are open and subject to examination. NOTE 16 – 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. An amendment to increase the number of shares authorized for issuance under the ICP by 9.0 million was approved by our Board of Directors and then by our shareholders on May 18, 2022. At December 31, 2022, 9.1 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 $ 28.7 million in 2022, $ 7.5 million in 2021, and $ 7.7 million in 2020. The total income tax benefit was $ 7.1 million in 2022, $ 1.8 million in 2021, and $ 1.9 million in 2020. Restricted Stock Awards Restricted stock awards require certain service requirements and shares generally vest, depending on the award terms, annually over a three-year period, cliff vest in three years from the grant date, or vest 50 % on the second anniversary of the grant date and 50 % on the third anniversary of the grant date. 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. 117 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, 2022 Unvested balance at beginning of period 554 $ 16.16 Granted during the year (1) 1,916 18.12 Vested during the year ( 453 ) 17.29 Forfeited during the year ( 148 ) 17.88 Unvested balance at end of period 1,869 $ 17.76 (1) In connection with the First Midwest merger, each restricted stock award of First Midwest common stock that was outstanding, unvested, and unsettled at the merger date was assumed and converted into a number of Old National restricted stock relating to a number of shares of Old National common stock equal to the number of First Midwest restricted stock multiplied by the exchange ratio (rounded up to the nearest whole number) subject to the same vesting terms and conditions, resulting in an issuance of an aggregate 0.9 million restricted stock awards of Old National common stock. As of December 31, 2022, there was $ 16.1 million of total unrecognized compensation cost related to unvested 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 $ 7.9 million in 2022, $ 4.3 million in 2021, and $ 2.9 million in 2020. Performance-Based Restricted Stock Units Restricted stock units require certain performance requirements and shares vest at the end of a 24 or 36 month period based on the achievement of certain targets. If targets are achieved prior to the end of the 24 month performance period, vesting can be accelerated. Compensation expense is recognized on a straight-line basis over the performance period of the award. For certain awards, the level of performance could increase or decrease the number of shares earned. Shares are subject to certain restrictions and risk of forfeiture by the participants. A summary of changes in our unvested shares for the year follows: (shares in thousands) Shares Weighted Average Grant-Date Fair Value Year Ended December 31, 2022 Unvested balance at beginning of period 886 $ 14.80 Granted during the year (1) 1,935 17.66 Vested during the year ( 720 ) 15.41 Forfeited during the year ( 73 ) 16.73 Dividend equivalents adjustment 53 16.82 Unvested balance at end of period 2,081 $ 17.23 (1) In connection with the First Midwest merger, each performance-based restricted stock unit award of First Midwest that was outstanding, unvested, and unsettled at the merger date was assumed and converted into a time-based restricted stock unit award of Old National common stock subject to the same vesting terms and conditions (other than performance conditions), resulting in an issuance of an aggregate 0.7 million restricted stock units of Old National common stock. The performance components of the First Midwest equity awards were deemed earned at target. As of December 31, 2022, there was $ 13.9 million of total unrecognized compensation cost related to unvested restricted stock units. The cost is expected to be recognized over a weighted-average period of 1.3 years. 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 its prior acquisitions. Old National recorded no incremental expense associated with the conversion of these options and stock appreciation rights. 118 As of December 31, 2022, all options were fully vested and all compensation costs had been expensed. At December 31, 2022, the outstanding shares consisted of stock appreciation rights acquired through prior acquisitions. A summary of the activity in stock appreciation rights in 2022 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, 2022 Outstanding at beginning of period 28 $ 4.30 Exercised ( 22 ) 3.95 Outstanding at end of period 6 $ 5.67 0.18 $ 71.2 Options exercisable at end of year 6 $ 5.67 0.18 $ 71.2 Information related to stock option and appreciation rights follows: Year Ended December 31, (dollars in thousands) 2022 2021 2020 Intrinsic value of options/appreciation rights exercised $ 331 $ 171 $ 213 Tax benefit realized from options/appreciation rights exercises 132 68 85 Non-employee Director Stock Compensation Compensation paid to Old National’s non-employee directors includes a stock component. Compensation shares are earned annually. Any shares awarded to directors are anticipated to be issued from the ICP. In 2022, 19 thousand shares were issued to directors, compared to 25 thousand shares in 2021, and 28 thousand shares in 2020. 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 100 % of employee compensation deferral contributions of the first 5 % 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. There were no designated discretionary profit sharing contributions in 2022, 2021, or 2020. 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 1.2 million at December 31, 2022 and 0.5 million at December 31, 2021. 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 $ 17.9 million in 2022, $ 9.8 million in 2021, and $ 9.5 million in 2020. NOTE 17 – SHAREHOLDERS' EQUITY Stock Purchase and Dividend Reinvestment Plan Old National has a stock purchase and dividend reinvestment 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, 2022, 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. In 2022, 52,000 shares were issued related to this plan with proceeds of approximately $ 809,000 . In 2021, 35,000 shares were issued related to this plan with proceeds of approximately $ 583,000 . 119 Share Repurchase Plan In the first quarter of 2022, the Board of Directors approved a stock repurchase program that authorized the Company to repurchase up to $ 200 million of the Company’s outstanding shares of Common Stock, as conditions warrant, through January 31, 2023. During 2022 and through January 31, 2023, 3.5 million common shares were repurchased under the plan, which reduced equity by $ 63.8 million. Net Income per Common Share Basic and diluted net income per common share are calculated using the two-class method. Net income applicable to common shares is divided by the weighted-average number of common shares outstanding during the period. Adjustments to the weighted-average number of common shares outstanding are made only when such adjustments will dilute net income per common share. Net income applicable to common shares is then divided by the weighted-average number of common shares and common share equivalents during the period. The following table presents the calculation of basic and diluted net income per common share: (dollars and shares in thousands, except per share data) Years Ended December 31, 2022 2021 2020 Net income $ 428,287 $ 277,538 $ 226,409 Preferred dividends ( 14,118 ) — — Net income applicable to common shares $ 414,169 $ 277,538 $ 226,409 Weighted average common shares outstanding: Weighted average common shares outstanding (basic) 275,179 165,178 165,509 Effect of dilutive securities: Restricted stock 1,502 729 632 Stock appreciation rights 7 22 36 Weighted average diluted shares outstanding 276,688 165,929 166,177 Basic Net Income Per Common Share $ 1.51 $ 1.68 $ 1.37 Diluted Net Income Per Common Share $ 1.50 $ 1.67 $ 1.36 NOTE 18 – 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. 120 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). 121 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, 2022 Using (dollars in thousands) Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Financial Assets Equity securities $ 52,507 $ 52,507 $ — $ — Investment securities available-for-sale: U.S. Treasury 200,927 200,927 — — U.S. government-sponsored entities and agencies 1,175,080 — 1,175,080 — Mortgage-backed securities - Agency 4,369,902 — 4,369,902 — States and political subdivisions 663,852 — 663,852 — Pooled trust preferred securities 10,811 — 10,811 — Other securities 353,140 — 353,140 — Residential loans held for sale 11,926 — 11,926 — Derivative assets 169,001 — 169,001 — Financial Liabilities Derivative liabilities 380,704 — 380,704 — 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 — 122 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, 2022 Balance at beginning of period $ 9,496 $ — Accretion (amortization) of discount or premium 12 — Increase (decrease) in fair value of securities 1,593 — Transfers out of Level 3 ( 11,101 ) — Balance at end of period $ — $ — 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 $ — 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 (loss). 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 AOCI, 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 AOCI, which is included in shareholders’ equity, and an increase in other assets related to the tax impact. During 2022, Old National’s pooled trust preferred securities with a fair value of $ 11.1 million were transferred out of Level 3 and into Level 2 because of available observable market data for these investments. The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 of the fair value hierarchy: (dollars in thousands) Fair Value Valuation Techniques Unobservable Input Range (Weighted Average) (4) December 31, 2021 Pooled trust preferred securities $ 9,496 Discounted cash flow Constant prepayment rate (1) 0.0 % Additional asset defaults (2) 5.7 % - 8.5 % ( 6.5 %) Expected asset recoveries (3) 0.0 % - 46.0 % ( 14.1 %) (1) Assuming no prepayments. (2) Each currently performing pool asset is assigned a default probability based on the banking environment, which is adjusted for specific issuer evaluation, of 0 %, 50 %, or 100 %. (3) Each currently defaulted pool asset is assigned a recovery probability based on specific issuer evaluation of 0 %, 25 %, or 100 %. (4) Unobservable inputs are weighted by the estimated number of defaults and current performing collateral of the instruments. 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 123 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, 2022 Using (dollars in thousands) Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Collateral Dependent Loans: Commercial loans $ 22,562 $ — $ — $ 22,562 Commercial real estate loans 48,026 — — 48,026 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 $ 92.0 million, with a valuation allowance of $ 21.5 million at December 31, 2022. Old National recorded provision expense associated with commercial and commercial real estate loans that were deemed collateral dependent totaling $ 20.3 million in 2022. Other real estate owned and other repossessed property is measured at fair value less costs to sell on a non-recurring basis. 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, 2022. There were write-downs of other real estate owned of $ 0.6 million in 2022. Loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the carrying amount. If the carrying amount of an individual tranche exceeds fair value, impairment is recorded on that tranche so that the servicing asset is carried at fair value. Fair value is determined at a tranche level, based on market prices for comparable mortgage servicing contracts when available, or alternatively based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model utilizes a discount rate, weighted average prepayment speed, and other economic factors that market participants would use in estimating future net servicing income and that can be validated against available market data (Level 2). There was no valuation allowance for loan servicing rights with impairments at December 31, 2022. Old National recorded recoveries associated with these loan servicing rights totaling $ 46 thousand in 2022. Assets measured at fair value on a non-recurring basis at December 31, 2021 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 $ 2,364 $ — $ — $ 2,364 Commercial real estate loans 16,308 — — 16,308 Loan servicing rights 140 — 140 — At December 31, 2021, commercial and commercial real estate loans that were deemed collateral dependent had a principal amount of $ 21.0 million, with a valuation allowance of $ 2.1 million. Old National recorded provision recapture associated with these loans totaling $ 0.1 million in 2021. 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. 124 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, 2022 Collateral Dependent Loans Commercial loans $ 22,562 Discounted cash flow Discount for type of property, age of appraisal, and current status 10 % - 47 % ( 28 %) Commercial real estate loans 48,026 Discounted cash flow Discount for type of property, age of appraisal, and current status 1 % - 26 % ( 11 %) December 31, 2021 Collateral Dependent Loans Commercial loans $ 2,364 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 %) (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 $ 1.8 million in 2022, $ 1.5 million in 2021, and $ 2.0 million in 2020. Newly originated conforming fixed-rate and adjustable-rate first mortgage loans are intended for sale and are hedged with derivative instruments. Old National has elected the fair value option to mitigate accounting mismatches in cases where hedge accounting is complex and to achieve operational simplification. The fair value option was not elected for loans held for investment. The difference between the aggregate fair value and the aggregate remaining principal balance for loans for which the fair value option has been elected was as follows: (dollars in thousands) Aggregate Fair Value Difference Contractual Principal December 31, 2022 Residential loans held for sale $ 11,926 $ 221 $ 11,705 December 31, 2021 Residential loans held for sale $ 35,458 $ 1,342 $ 34,116 Accrued interest at period end is included in the fair value of the instruments. 125 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, 2022 Residential loans held for sale $ ( 1,127 ) $ 10 $ ( 4 ) $ ( 1,121 ) Year Ended December 31, 2021 Residential loans held for sale $ ( 2,139 ) $ 2 $ ( 6 ) $ ( 2,143 ) 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, 2022 Using (dollars in thousands) Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Financial Assets Cash, due from banks, money market, and other interest-earning investments $ 728,412 $ 728,412 $ — $ — Investment securities held-to-maturity: U.S. government-sponsored entities and agencies 819,168 — 656,358 — Mortgage-backed securities - Agency 1,106,817 — 982,963 — State and political subdivisions 1,163,162 — 1,004,361 — Loans, net: Commercial 9,386,862 — — 9,066,583 Commercial real estate 12,317,825 — — 11,867,851 Residential real estate 6,438,525 — — 5,372,491 Consumer credit 2,676,758 — — 2,557,115 Accrued interest receivable 190,521 758 52,081 137,682 Financial Liabilities Deposits: Noninterest-bearing demand deposits $ 11,930,798 $ 11,930,798 $ — $ — Checking, NOW, savings, and money market interest-bearing deposits 20,056,252 20,056,252 — — Time deposits 3,013,780 — 2,976,389 — Federal funds purchased and interbank borrowings 581,489 581,489 — — Securities sold under agreements to repurchase 432,804 432,804 — — FHLB advances 3,829,018 — 3,739,780 — Other borrowings 743,003 — 703,156 — Accrued interest payable 19,547 — 19,547 — Standby letters of credit 755 — — 755 Off-Balance Sheet Financial Instruments Commitments to extend credit $ — $ — $ — $ 3,666 126 Fair Value Measurements at December 31, 2021 Using (dollars in thousands) Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Financial Assets Cash, due from banks, money market, and other interest-earning investments $ 822,019 $ 822,019 $ — $ — Loans, net: Commercial 3,363,175 — — 3,335,009 Commercial real estate 6,315,574 — — 6,211,854 Residential real estate 2,245,942 — — 2,216,900 Consumer credit 1,569,814 — — 1,582,600 Accrued interest receivable 84,109 688 35,790 47,631 Financial Liabilities Deposits: Noninterest-bearing demand deposits $ 6,303,106 $ 6,303,106 $ — $ — Checking, NOW, savings, and money market interest-bearing deposits 11,305,676 11,305,676 — — Time deposits 960,413 — 968,658 — Federal funds purchased and interbank borrowings 276 276 — — Securities sold under agreements to repurchase 392,275 392,275 — — FHLB advances 1,886,019 — 1,935,140 — Other borrowings 296,670 — 311,532 — Accrued interest payable 5,496 — 5,496 — Standby letters of credit 454 — — 454 Off-Balance Sheet Financial Instruments Commitments to extend credit $ — $ — $ — $ 4,678 The methods utilized to measure the fair value of financial instruments at December 31, 2022 and 2021 represent an approximation of exit price, however, an actual exit price may differ. NOTE 19 – DERIVATIVE FINANCIAL INSTRUMENTS As part of our overall interest rate risk management, Old National uses derivative instruments, including interest rate swaps, collars, caps, and floors. The notional amount does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual agreements. Derivative instruments are recognized on the balance sheet at their fair value and are not reported on a net basis. Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. Old National’s exposure is limited to the termination value of the contracts rather than the notional, principal, or contract amounts. There are provisions in our agreements with the counterparties that allow for certain unsecured credit exposure up to an agreed threshold. Exposures in excess of the agreed thresholds are collateralized. In addition, we minimize credit risk through credit approvals, limits, and monitoring procedures. Derivatives Designated as Hedges Subsequent changes in fair value for a hedging instrument that has been designated and qualifies as part of a hedging relationship are accounted for in the following manner: Cash flow hedges : changes in fair value are recognized as a component in other comprehensive income (loss). Fair value hedges : changes in fair value are recognized concurrently in earnings. As long as a hedging instrument is designated and the results of the effectiveness testing support that the instrument qualifies for hedge accounting treatment, 100 % of the periodic changes in fair value of the hedging instrument are accounted for as outlined above. This is the case whether or not economic mismatches exist in the hedging relationship. As a result, there is no periodic measurement or recognition of ineffectiveness. Rather, the full impact of hedge gains and losses is recognized in the period in which the hedged transactions impact earnings. 127 The change in fair value of the hedging instrument that is included in the assessment of hedge effectiveness is presented in the same income statement line item that is used to present the earnings effect of the hedged item. Cash Flow Hedges Interest rate swaps of certain borrowings were designated as cash flow hedges totaling $ 150.0 million notional amount at both December 31, 2022 and December 31, 2021. Interest rate collars and floors related to variable-rate commercial loan pools were designated as cash flow hedges totaling $ 1.9 billion notional amount at December 31, 2022 and $ 600.0 million notional amount at December 31, 2021. The hedges were determined to be effective during all periods presented and we expect them to remain effective during the remaining terms. Old National has designated its interest rate collars as cash flow hedges. The structure of these instruments is such that Old National pays the counterparty an incremental amount if the collar index exceeds the cap rate. Conversely, Old National receives an incremental amount if the index falls below the floor rate. No payments are required if the collar index falls between the cap and floor rates. Old National has designated its interest rate floor transactions as cash flow hedges. The structure of these instruments is such that Old National receives an incremental amount if the index falls below the floor strike rate. No payments are required if the index remains above the floor strike rate. Fair Value Hedges Interest rate swaps of certain borrowings were designated as fair value hedges totaling $ 300.0 million notional amount at December 31, 2022 and $ 377.5 million notional amount at December 31, 2021. Interest rate swaps of certain available-for-sale investment securities were designated as fair value hedges totaling $ 910.0 million notional amount at both December 31, 2022 and December 31, 2021. The hedges were determined to be effective during all periods presented and we expect them to remain effective during the remaining terms. The following table summarizes Old National’s derivatives designated as hedges: December 31, 2022 December 31, 2021 Fair Value Fair Value (dollars in thousands) Notional Assets (1) Liabilities (2) Notional Assets (1) Liabilities (2) Cash flow hedges: Interest rate collars and floors on loan pools $ 1,900,000 $ 11,764 $ 47,859 $ 600,000 $ 459 $ 2,173 Interest rate swaps on borrowings (3) 150,000 — — 150,000 4,316 — Fair value hedges: Interest rate swaps on investment securities (3) 909,957 — — 909,957 10,961 14,643 Interest rate swaps on borrowings (3) 300,000 — — 377,500 2,475 96 Total $ 11,764 $ 47,859 $ 18,211 $ 16,912 (1) Derivative assets are included in other assets on the balance sheet. (2) Derivative liabilities are included in other liabilities on the balance sheet. (3) The fair values of certain counterparty interest rate swaps are zero due to the settlement of centrally cleared variation margin rules. 128 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, 2022 Interest rate contracts Interest income/(expense) $ ( 6,245 ) Fixed-rate debt Interest income/(expense) $ 6,585 Interest rate contracts Interest income/(expense) 157,741 Fixed-rate investment securities Interest income/(expense) ( 158,431 ) Total $ 151,496 $ ( 151,846 ) 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 ) 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, 2022 2021 2020 2022 2021 2020 Derivatives in Cash Flow Hedging Relationships Location of Gain or (Loss) Reclassified from AOCI into Income Gain (Loss) Recognized in Other Comprehensive Income on Derivative Gain (Loss) Reclassified from AOCI into Income Interest rate contracts Interest income/(expense) $ ( 45,132 ) $ 1,898 $ 8,261 $ ( 2,587 ) $ 4,605 $ 5,153 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 $ 4.5 million will be reclassified to interest income and $ 24.6 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, 2022, the notional amounts of the interest rate lock commitments were $ 21.4 million and forward commitments were $ 30.3 million. At December 31, 2021, the notional amounts of the interest rate lock commitments were $ 90.7 million and forward commitments were $ 126.1 million. It is our practice to enter into forward commitments for the future delivery of residential mortgage loans to third party investors when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from our commitment to fund the loans. Old National also enters into derivative instruments for the benefit of its clients. The notional amounts of these customer derivative instruments and the offsetting counterparty derivative instruments were $ 5.2 billion at December 31, 2022. The notional amounts of these customer derivative instruments and the offsetting counterparty derivative instruments were $ 2.4 billion at December 31, 2021. These derivative contracts do not qualify for hedge 129 accounting. These instruments include interest rate swaps, caps, and collars. Commonly, Old National will economically hedge significant exposures related to these derivative contracts entered into for the benefit of clients by entering into offsetting contracts with approved, reputable, independent counterparties with substantially matching terms. Old National enters into derivative financial instruments as part of its foreign currency risk management strategies. These derivative instruments consist of foreign currency forward contracts to accommodate the business needs of its clients. Old National does not designate these foreign currency forward contracts for hedge accounting treatment. The following table summarizes Old National’s derivatives not designated as hedges: December 31, 2022 December 31, 2021 Fair Value Fair Value (dollars in thousands) Notional Assets (1) Liabilities (2) Notional Assets (1) Liabilities (2) Interest rate lock commitments $ 21,401 $ 93 $ — $ 90,731 $ 2,352 $ — Forward mortgage loan contracts 30,330 32 — 126,107 242 — Customer interest rate swaps 5,220,363 5,676 326,924 2,433,177 52,439 11,658 Counterparty interest rate swaps (3) 5,220,363 151,111 5,711 2,433,177 583 12,956 Customer foreign currency forward contracts 8,341 253 42 10,292 399 — Counterparty foreign currency forward contracts 8,297 72 168 10,205 — 346 Total $ 157,237 $ 332,845 $ 56,015 $ 24,960 (1) Derivative assets are included in other assets on the balance sheet. (2) Derivative liabilities are included in other liabilities on the balance sheet. (3) The fair values of certain counterparty interest rate swaps are zero due to the settlement of centrally-cleared variation margin rules. The effect of derivatives not designated as hedging instruments on the consolidated statements of income were as follows: Years Ended December 31, (dollars in thousands) 2022 2021 2020 Derivatives Not Designated as Hedging Instruments Location of Gain or (Loss) Recognized in Income on Derivative Gain (Loss) Recognized in Income on Derivative Interest rate contracts (1) Other income/(expense) $ 883 $ 279 $ ( 551 ) Mortgage contracts Mortgage banking revenue ( 2,468 ) ( 4,446 ) 5,692 Foreign currency contracts Other income/(expense) 98 ( 104 ) 13 Total $ ( 1,487 ) $ ( 4,271 ) $ 5,154 (1) Includes the valuation differences between the customer and offsetting swaps. NOTE 20 – COMMITMENTS, CONTINGENCIES, AND FINANCIAL GUARANTEES Litigation In the normal course of business, Old National Bancorp and its subsidiaries are subject to pending and threatened litigation, claims, investigations, and legal and administrative cases and proceedings. Certain of the actual or threatened legal actions may include claims for compensatory damages or claims for indeterminate amounts of damages. Old National contests liability and/or the amount of damages as appropriate in each pending matter. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases where claimants seek indeterminate damages or where investigations and proceedings are in the early stages, Old National cannot predict with certainty the loss or range of loss, if any, related to such matters, how or if such matters will be resolved, when they will ultimately be resolved, or what the eventual settlement, or other relief, if any, might be. Subject to the foregoing, Old National believes, based on current knowledge and after consultation with counsel, that the outcome of such pending matters are not expected to 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 130 flows for a particular future period, depending on, among other things, the level of Old National’s revenues or income for such period. Old National will accrue for a loss contingency if (1) it is probable that a future event will occur and confirm the loss and (2) the amount of the loss can be reasonably estimated. Old National is not currently involved in any material litigation. Credit-Related Financial Instruments Old National holds instruments, in the normal course of business with clients, that are considered financial guarantees and are recorded at fair value. Standby letters of credit guarantees are issued in connection with agreements made by clients to counterparties. Standby letters of credit are contingent upon failure of the client to perform the terms of the underlying contract. Credit risk associated with standby letters of credit is essentially the same as that associated with extending loans to clients and is subject to normal credit policies. The term of these standby letters of credit is typically one year or less. These commitments are not recorded in the consolidated financial statements. The following table summarizes Old National Bank’s unfunded loan commitments and standby letters of credit: December 31, (dollars in thousands) 2022 2021 Unfunded loan commitments $ 8,979,334 $ 4,489,238 Standby letters of credit (1) 174,070 75,726 (1) Notional amount, which represents the maximum amount of future funding requirements. The carrying value was $ 0.8 million at December 31, 2022 and $ 0.5 million at December 31, 2021. At December 31, 2022, approximately 5 % of the unfunded loan commitments had fixed rates, with the remainder having floating rates ranging from 0 % to 21 %. The allowance for unfunded loan commitments totaled $ 32.2 million at December 31, 2022 and $ 10.9 million at December 31, 2021. The increase in the allowance for credit losses on unfunded loan commitments was driven by the merger with First Midwest as well as organic loan growth. Old National is a party in risk participation transactions of interest rate swaps, which had total notional amounts of $ 398.9 million at December 31, 2022 and $ 97.7 million at December 31, 2021. Visa Class B Restricted Shares In 2008, Old National received Visa Class B restricted shares as part of Visa’s initial public offering. These shares are transferable only under limited circumstances until they can be converted into the publicly traded Class A common shares. This conversion will not occur until the final settlement of certain litigation for which Visa is indemnified by the holders of Visa’s Class B shares, including Old National. Visa funded an escrow account from its initial public offering to settle these litigation claims. Increases in litigation claims requiring Visa to fund the escrow account due to insufficient funds will result in a reduction of the conversion ratio of each Visa Class B share to unrestricted Class A shares. As of December 31, 2022, the conversion ratio was 1.5991 . 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, 2022 are carried at a zero cost basis and are included in other assets with our equity securities that have no readily determinable fair value. NOTE 21 – REGULATORY RESTRICTIONS Restrictions on Cash and Due from Banks Prior to March 2020, Old National’s subsidiary 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 effectively eliminated reserve requirements for all depository institutions. Old National had no cash and due from banks which was held as collateral for collateralized swap positions at December 31, 2022 and $ 14.6 million at December 31, 2021. Restrictions on Transfers from Bank Subsidiary Regulations limit the amount of dividends a bank subsidiary can declare in any calendar year without obtaining prior regulatory approval. Prior regulatory approval is required if dividends to be declared in any calendar year would 131 exceed the total of net income of the current year combined with retained net income for the preceding two years . Prior regulatory approval to pay dividends was not required in 2020, 2021, or 2022 and is not currently required. A bank subsidiary is prohibited from paying a dividend, if, after making the dividend, the bank would be considered “undercapitalized” (as defined by reference to the OCC’s capital regulations). 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, 2022, Old National and Old National Bank each exceeded the capital ratios required to be considered “well-capitalized” under applicable regulations. 132 The following table summarizes capital ratios for Old National and Old National Bank: Actual Regulatory Minimum (1) Prompt Corrective Action “Well Capitalized” Guidelines (2) (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio December 31, 2022 Total capital to risk-weighted assets Old National Bancorp $ 4,321,716 12.02 % $ 3,774,845 10.50 % $ 3,595,090 10.00 % Old National Bank 4,063,363 11.35 3,759,671 10.50 3,580,639 10.00 Common equity Tier 1 capital to risk-weighted assets Old National Bancorp 3,605,393 10.03 2,516,563 7.00 N/A N/A Old National Bank 3,817,402 10.66 2,506,448 7.00 2,327,416 6.50 Tier 1 capital to risk-weighted assets Old National Bancorp 3,849,112 10.71 3,055,827 8.50 2,157,054 6.00 Old National Bank 3,817,402 10.66 3,043,544 8.50 2,864,512 8.00 Tier 1 capital to average assets Old National Bancorp 3,849,112 8.52 1,808,108 4.00 N/A N/A Old National Bank 3,817,402 8.47 1,803,426 4.00 2,254,282 5.00 December 31, 2021 Total capital to risk-weighted assets Old National Bancorp $ 2,119,176 12.77 % $ 1,741,789 10.50 % $ 1,658,847 10.00 % 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 8.50 995,308 6.00 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 (1) “Regulatory Minimum” capital ratios include the 2.5% “capital conservation buffer” required under the Basel III Capital Rules. (2) “Well-capitalized” minimum common equity Tier 1 capital to risk-weighted assets and Tier 1 capital to average assets ratios are not formally defined under applicable banking regulations for bank holding companies. During 2020, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC issued final rules to delay the estimated impact on regulatory capital stemming from the implementation of CECL. The final rules provide banking organizations the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). Old National adopted the capital transition relief over the permissible five-year period. 133 NOTE 22 – 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) 2022 2021 Assets Deposits in affiliate bank $ 418,959 $ 102,953 Equity securities 30,717 3,257 Investment securities - available-for-sale 16,814 13,888 Investment in affiliates: Banking subsidiaries 5,000,153 3,053,575 Non-banks 44,938 4,949 Goodwill 59,506 — Other assets 135,025 83,531 Total assets $ 5,706,112 $ 3,262,153 Liabilities and Shareholders' Equity Other liabilities $ 92,758 $ 36,582 Other borrowings 484,759 213,553 Shareholders' equity 5,128,595 3,012,018 Total liabilities and shareholders' equity $ 5,706,112 $ 3,262,153 OLD NATIONAL BANCORP (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF INCOME Years Ended December 31, (dollars in thousands) 2022 2021 2020 Income Dividends from affiliates $ — $ 125,000 $ 230,000 Other income 1,733 3,364 4,196 Other income from affiliates 5 5 5 Total income 1,738 128,369 234,201 Expense Interest on borrowings 16,662 8,285 8,649 Other expenses 37,629 13,951 16,351 Total expense 54,291 22,236 25,000 Income (loss) before income taxes and equity in undistributed earnings of affiliates ( 52,553 ) 106,133 209,201 Income tax expense (benefit) ( 9,901 ) ( 5,113 ) ( 5,317 ) Income (loss) before equity in undistributed earnings of affiliates ( 42,652 ) 111,246 214,518 Equity in undistributed earnings of affiliates 470,939 166,292 11,891 Net income 428,287 277,538 226,409 Preferred dividends ( 14,118 ) — — Net income applicable to common shareholders $ 414,169 $ 277,538 $ 226,409 134 OLD NATIONAL BANCORP (PARENT COMPANY ONLY) CONDENSED STATEMENT OF CASH FLOWS Years Ended December 31, (dollars in thousands) 2022 2021 2020 Cash Flows From Operating Activities Net income $ 428,287 $ 277,538 $ 226,409 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 26 30 46 Share-based compensation expense 28,656 7,497 7,707 (Increase) decrease in other assets ( 40,620 ) 10,213 ( 625 ) Increase (decrease) in other liabilities 10,455 ( 4,918 ) 1,084 Equity in undistributed earnings of affiliates ( 470,939 ) ( 166,292 ) ( 11,891 ) Net cash flows provided by (used in) operating activities ( 44,135 ) 124,068 222,730 Cash Flows From Investing Activities Net cash and cash equivalents of acquisitions 573,099 — — Proceeds from sales of investment securities — 1,000 — Proceeds from sales of equity securities 44,038 540 4,431 Purchases of investment securities ( 9,000 ) ( 15 ) ( 10,073 ) Proceeds from sales of premises and equipment — — 354 Purchases of premises and equipment — ( 3 ) ( 354 ) Net cash flows provided by (used in) investing activities 608,137 1,522 ( 5,642 ) Cash Flows From Financing Activities Payments for maturities/redemptions of other borrowings — — ( 10,310 ) Cash dividends paid ( 177,623 ) ( 92,829 ) ( 92,946 ) Common stock repurchased ( 71,182 ) ( 3,731 ) ( 82,358 ) Common stock issued 809 583 577 Net cash flows provided by (used in) financing activities ( 247,996 ) ( 95,977 ) ( 185,037 ) Net increase (decrease) in cash and cash equivalents 316,006 29,613 32,051 Cash and cash equivalents at beginning of period 102,953 73,340 41,289 Cash and cash equivalents at end of period $ 418,959 $ 102,953 $ 73,340 NOTE 23 – 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; and brokerage, trust, and investment advisory services. The individual banking centers located throughout our Midwest region 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. 135 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable.