ONBPP filing — read by section

Item 7. Management’s Discussion and Analysis

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
 
 Page 
 General Overview 
 31 
 
 Corporate Developments in Fiscal 20 20 
 31 
 
 Business Outlook 
 32 
 
 Financial Highlights 
 34 
 
 Non-GAAP Financial Measures 
 34 
 
 Results of Operations 
 36 
 
 Financial Condition 
 43 
 
 Risk Management 
 49 
 
 Off-Balance Sheet Arrangements 
 62 
 
 Contractual Obligations, Commitments, and Contingent Liabilities 
 62 
 
 Critical Accounting Policies and Estimates 
 63 
 

 The following discussion is an analysis of our results of operations for the fiscal years ended December 31, 2020, 2019, and 2018, and financial condition as of December 31, 2020 and 2019. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes. This discussion contains forward-looking statements concerning our business. Readers are cautioned that, by their nature, forward-looking statements are based on estimates and assumptions and are subject to risks, uncertainties, and other factors. Actual results may differ materially from our expectations that are expressed or implied by any forward-looking statement. The discussion in Item 1A, “Risk Factors,” lists some of the factors that could cause our actual results to vary materially from those expressed or implied by any forward-looking statements, and such discussion is incorporated into this discussion by reference. 
 
 GENERAL OVERVIEW 
 Old National is the largest financial holding company incorporated in the state of Indiana and maintains its principal executive offices in Evansville, Indiana. Old National, through Old National Bank, provides a wide range of services, including commercial and consumer loan and depository services, and other traditional banking services. Old National also provides services to supplement its traditional banking business including fiduciary and wealth management services, investment and brokerage services, investment consulting, and other financial services. Our primary geographic markets are in Indiana, Kentucky, Michigan, Minnesota, and Wisconsin. 
 
 
 
 CORPORATE DEVELOPMENTS IN FISCAL 2020 
 Old National had an outstanding financial year in 2020. Key performance indicators experienced in 2020 included: 
 
 
 • net income of $226.4 million, or $1.36 per diluted share; 
 • record high commercial loan production of $3.5 billion; 
 • record mortgage production of $2.2 billion; 
 • strong credit quality metrics including charge-offs to average loans of 0.02%; 
 • low cost of total deposits at 0.18%; and 
 • efficiency ratio of 62.91% in 2020. 
 Our net interest income decreased slightly to $596.1 million during 2020, compared to $604.3 million in 2019. Noninterest income grew from $199.3 million in 2019 to $239.3 million in 2020 reflecting higher mortgage banking revenue, higher capital markets income, and higher debt securities gains. These increases were partially offset by lower service charges on deposit accounts. Our noninterest expenses remain well controlled, increasing from $508.5 million in 2019 to $541.4 million in 2020 reflecting higher charges related to The ONB Way strategic initiative in 2020. ONB Way charges totaled $42.6 million in 2020 compared to $11.4 million in 2019. 
 This year, Old National implemented The ONB Way, a strategic plan designed to keep the Company’s clients at the center of all we do. The ONB Way includes realigning the geographic organization structure to streamline our operating model through integrated commercial, community banking, and wealth teams. We have successfully executed this transformation, delivered on the run rate expense savings, and are transitioning into the implementation phase of our planned revenue initiatives. These revenue initiatives are underway for our 
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 technology, Commercial, Wealth, and Treasury Management areas; while our Community area initiatives are scheduled to commence throughout the remainder of 2021. 
 On December 27, 2020, President Trump signed into law the CAA. The CAA, among other things, extends the life of the PPP, effectively creating a second round of PPP loans for eligible businesses. Old National is participating in the CAA’s second round of PPP lending. In mid-January we opened our lending portal and have begun processing PPP loan applications. Early indications support our belief that there will be a large volume of smaller sized loans. We anticipate the average loan size to be less than $150,000. Currently, we are focused on helping minority-owned business, women-owned business, not-for-profit entities, and existing first round PPP customers with the lending process. Additionally, section 541 of the CAA extends the relief provided by the CARES Act for financial institutions to suspend the GAAP accounting treatment for troubled debt restructuring to January 1, 2022. 
 
 
 Pandemic Update 
 
 
 As previously disclosed, the novel strain of coronavirus, COVID-19, which was first reported in Wuhan, China had an impact on our operations during 2020. This impact continues to be addressed by Old National as evidenced by our practice of occupying only 50% of our office buildings by rotating team members every 4 weeks for the foreseeable future. We remain committed and focused on the health and safety of our team members, customers, and communities. Our banking centers are still open for business and we continue to lend to qualified businesses for working capital and general business purposes, while our online banking network is continuously available for digital banking transactions. We believe our historically strong underwriting practices, diverse and granular portfolios, and Midwest-based footprint will help to mitigate any adverse impact to Old National. 
 
 
 The impact of the pandemic on the Company’s business, financial condition, results of operations, and its customers has not fully manifested in 2020. The fiscal stimulus and relief programs appear to have delayed any materially adverse financial impact to Old National. Once these stimulus programs have been exhausted, we believe our credit metrics will worsen and loan losses will ultimately materialize. Any potential loan losses will be contingent upon the resurgence of the virus, including any new strains, offset by the potency of the vaccine along with its extensive distribution, and the ability for customers and businesses to return to their pre-pandemic routines. However, economic uncertainty remains high and bouts of elevated volatility are expected to continue, which may have a future adverse financial impact on Old National. 
 
 BUSINESS OUTLOOK 
 
 
 As we emerge from 2020, we have observed signs of an economic recovery in the United States with jobs, consumer spending, manufacturing, and other indicators rebounding from their weakest levels. Additionally, progress toward an effective COVID-19 vaccine has been promising and the availability of that vaccine may drive the re-opening plans of state and local economies in 2021. 
 
 
 In 2020, the U.S. economy contracted approximately 3.5% as measured by the change in GDP due to the COVID-19 pandemic which caused a deep contraction in the first half of 2020, with somewhat of a rebound in the second half of 2020. The U.S economic outlook for 2021 estimates range between 6.4% and 0.8%, with a probable annual GDP expansion of 4.1%, indicating a return to pre-pandemic levels as early as April, 2021 to as late as sometime in 2022. The GDP estimates are heavily influenced by the severity and timing of when COVID-19 peaks coupled with how widespread lockdowns are implemented, length of period for vaccine distribution, resurgence or stabilization of unemployment levels which currently is 6.7% as of December 31, 2020, and the success of the fiscal stimulus package. The Federal Reserve monetary policy is very favorable for economic growth and is anticipated to remain so through 2022 at the earliest. Residential housing coupled with a savings cushion are viewed as tailwinds to assist in U.S. economic growth over the coming quarters. Additional global risks that could trigger a halt to the U.S. economic outlook include: a prolonged shutdown of global economies caused by COVID-19 and a potential resurgence of economic and political tensions with China. 
 
 
 With the execution of The ONB Way transformation, where we have migrated from a generalist relationship management approach based on geography, to a specialist relationship management approach based on business segmentations, we remain a community bank at heart, dedicated to serving and strengthening our communities. Our strategy evolution continues into a commercially-oriented regional bank that consistently delivers top quartile performance. This is accomplished by continuing to focus on the fundamentals of basic banking, which are loan growth, noninterest income growth, prudent capital deployment, and expense management. As the transformation phase finishes, we transition into the implementation phase of our planned revenue initiatives. 
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 Organic loan growth remains a priority. Our loan production and pipeline are at high levels as we enter into 2021, yet we continue to adhere to our disciplined underwriting process. Our practice of recognizing underperforming credits early, along with active engagement with these borrowers ultimately leads to lower credit losses. Despite the challenging economic environment in 2020, overall credit quality remains healthy, and we have not experienced any specific sector credit related weaknesses, yet we are watching a small number of credits and have identified certain industries that deserve extra attention in this current economic environment. 
 In regard to future partnerships, we are growing more confident in our ability to evaluate the fair value of a potential acquisition target’s loan portfolio in the current economic environment. However, our acquisition strategy is consistent as an active looker and a selective buyer. We continue to wait patiently for advantageous opportunities while we remain focused on execution of our strategies. 
 As we look ahead to 2021, we remain committed to generating positive operating leverage. 
 
 
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 FINANCIAL HIGHLIGHTS 
 The following table sets forth certain financial highlights of Old National: 
 
 Three Months Ended Years Ended 
 (dollars and shares in thousands, December 31, September 30, December 31, December 31, 
 except per share data) 2020 2020 2019 2020 2019 
 Income Statement: 
 Net interest income $ 161,079 $ 145,573 $ 148,899 $ 596,094 $ 604,273 
 Taxable equivalent adjustment (1) 3,517 3,379 3,282 13,586 12,940 
 Net interest income - tax equivalent basis 164,596 148,952 152,181 609,680 617,213 
 Provision for loan losses (4) (1,100) — 1,264 38,395 4,747 
 Noninterest income 58,552 64,759 47,726 239,274 199,317 
 Noninterest expense 142,318 120,234 134,743 541,417 508,487 
 Net income 74,120 77,944 49,185 226,409 238,206 
 Per Common Share Data: 
 Weighted average diluted shares 165,631 165,419 170,186 166,177 172,687 
 Net income (diluted) $ 0.44 $ 0.47 $ 0.29 $ 1.36 $ 1.38 
 Cash dividends 0.14 0.14 0.13 $ 0.56 $ 0.52 
 Common dividend payout ratio (2) 31 % 30 % 45 % 41 % 37 % 
 Book value $ 17.98 $ 17.67 $ 16.82 $ 17.98 $ 16.82 
 Stock price 16.56 12.56 18.29 16.56 18.29 
 Tangible common book value (3) 11.43 11.10 10.35 11.43 10.35 
 Performance Ratios: 
 Return on average assets 1.30 % 1.40 % 0.97 % 1.04 % 1.19 % 
 Return on average common equity 10.11 10.79 6.94 7.87 8.57 
 Return on tangible common equity (3) 16.20 17.56 11.89 12.54 14.30 
 Return on average tangible common equity (3) 16.57 17.88 12.03 13.27 14.97 
 Net interest margin (3) 3.26 3.03 3.46 3.18 3.55 
 Efficiency ratio (3) 62.37 55.93 65.57 62.91 60.35 
 Net charge-offs (recoveries) to average loans (0.03) (0.09) 0.12 0.02 0.05 
 Allowance for loan losses to ending loans (4) 0.95 0.95 0.45 0.95 0.45 
 Non-performing loans to ending loans 1.20 1.15 1.19 1.20 1.19 
 Balance Sheet: 
 Total loans, excluding loans held for sale $ 13,786,479 $ 13,892,509 $ 12,117,524 $ 13,786,479 $ 12,117,524 
 Total assets 22,960,622 22,460,476 20,411,667 22,960,622 20,411,667 
 Total deposits 17,037,453 16,506,494 14,553,397 17,037,453 14,553,397 
 Total borrowed funds 2,676,554 2,725,731 2,744,728 2,676,554 2,744,728 
 Total shareholders' equity 2,972,656 2,921,149 2,852,453 2,972,656 2,852,453 
 Capital Ratios: 
 Risk-based capital ratios: 
 Tier 1 common equity 11.75 % 11.84 % 12.13 % 11.75 % 12.13 % 
 Tier 1 11.75 11.84 12.13 11.75 12.13 
 Total 12.69 12.81 12.99 12.69 12.99 
 Leverage ratio (to average assets) 8.20 8.15 8.88 8.20 8.88 
 Total equity to assets (averages) 12.83 12.97 14.01 13.20 13.88 
 Tangible common equity to tangible assets (3) 8.64 8.58 9.09 8.64 9.09 
 Nonfinancial Data: 
 Full-time equivalent employees 2,445 2,484 2,709 2,445 2,709 
 Banking centers 162 162 192 162 192 

 (1) Calculated using the federal statutory tax rate in effect of 21% for all periods. 
 (2) Cash dividends per share divided by net income per share (basic). 
 (3) Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for reconciliations to GAAP financial measures. 
 (4) Beginning January 1, 2020, calculation is based on current expected loss methodology. Prior to January 1, 2020, calculation is based on incurred loss methodology. 
 
 NON-GAAP FINANCIAL MEASURES 
 The non-GAAP financial measures presented below are used by our management and our Board of Directors on a regular basis in addition to our GAAP results to facilitate the assessment of our financial performance. Management believes these non-GAAP financial measures enhance an investor’s understanding of our financial results by 
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 providing a meaningful basis for period-to-period comparisons, assisting in operating results analysis, and predicting future performance. This information supplements our GAAP reported results, and should not be viewed in isolation from, or as a substitute for, our GAAP results. Accordingly, this financial information should be read in conjunction with our consolidated financial statements and notes thereto for the year ended December 31, 2020, included elsewhere in this report. Non-GAAP financial measures exclude certain items that are included in the financial results presented in accordance with GAAP. 
 The following table presents GAAP to non-GAAP reconciliations. 
 
 Three Months Ended Years Ended 
 (dollars and shares in thousands, December 31, December 31, 
 except per share data) 2020 2019 2020 2019 
 Tangible common book value: 
 Shareholders' equity (GAAP) $ 2,972,656 $ 2,852,453 $ 2,972,656 $ 2,852,453 
 Deduct: Goodwill 1,036,994 1,036,994 1,036,994 1,036,994 
 Intangible assets 46,014 60,105 46,014 60,105 
 Tangible shareholders' equity (non-GAAP) $ 1,889,648 $ 1,755,354 $ 1,889,648 $ 1,755,354 
 Period end common shares 165,367 169,616 165,367 169,616 
 Tangible common book value 11.43 10.35 11.43 10.35 
 Return on tangible common equity: 
 Net income (GAAP) $ 74,120 $ 49,185 $ 226,409 $ 238,206 
 Add: Intangible amortization (net of tax) 2,433 2,976 10,585 12,756 
 Tangible net income (non-GAAP) $ 76,553 $ 52,161 $ 236,994 $ 250,962 
 Tangible shareholders' equity (non-GAAP) (see above) $ 1,889,648 $ 1,755,354 $ 1,889,648 $ 1,755,354 
 Return on tangible common equity 16.20 % 11.89 % 12.54 % 14.30 % 
 Return on average tangible common equity: 
 Tangible net income (non-GAAP) (see above) $ 76,553 $ 52,161 $ 236,994 $ 250,962 
 Average shareholders' equity (GAAP) $ 2,932,590 $ 2,832,938 $ 2,875,460 $ 2,781,132 
 Deduct: Average goodwill 1,036,994 1,036,994 1,036,994 1,036,456 
 Average intangible assets 47,536 61,963 52,740 68,244 
 Average tangible shareholders' equity (non-GAAP) $ 1,848,060 $ 1,733,981 $ 1,785,726 $ 1,676,432 
 Return on average tangible common equity 16.57 % 12.03 % 13.27 % 14.97 % 
 Net interest margin: 
 Net interest income (GAAP) $ 161,079 $ 148,899 $ 596,094 $ 604,273 
 Taxable equivalent adjustment 3,517 3,282 13,586 12,940 
 Net interest income - taxable equivalent basis (non-GAAP) $ 164,596 $ 152,181 $ 609,680 $ 617,213 
 Average earning assets $ 20,181,991 $ 17,577,821 $ 19,158,681 $ 17,385,180 
 Net interest margin 3.26 % 3.46 % 3.18 % 3.55 % 
 Efficiency ratio: 
 Noninterest expense (GAAP) $ 142,318 $ 134,743 $ 541,417 $ 508,487 
 Deduct: Intangible amortization expense 3,244 3,946 14,091 16,911 
 Adjusted noninterest expense (non-GAAP) $ 139,074 $ 130,797 $ 527,326 $ 491,576 
 Net interest income - taxable equivalent basis (non-GAAP) 
 (see above) $ 164,596 $ 152,181 $ 609,680 $ 617,213 
 Noninterest income 58,552 47,726 239,274 199,317 
 Deduct: Debt securities gains (losses), net 161 437 10,767 1,923 
 Adjusted total revenue (non-GAAP) $ 222,987 $ 199,470 $ 838,187 $ 814,607 
 Efficiency ratio 62.37 % 65.57 % 62.91 % 60.35 % 
 Tangible common equity to tangible assets: 
 Tangible shareholders' equity (non-GAAP) (see above) $ 1,889,648 $ 1,755,354 $ 1,889,648 $ 1,755,354 
 Assets (GAAP) $ 22,960,622 $ 20,411,667 $ 22,960,622 $ 20,411,667 
 Add: Trust overdrafts 26 31 26 31 
 Deduct: Goodwill 1,036,994 1,036,994 1,036,994 1,036,994 
 Intangible assets 46,014 60,105 46,014 60,105 
 Tangible assets (non-GAAP) $ 21,877,640 $ 19,314,599 $ 21,877,640 $ 19,314,599 
 Tangible common equity to tangible assets 8.64 % 9.09 % 8.64 % 9.09 % 

 Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP. These non-GAAP measures are not necessarily comparable to similar measures that may be represented by other companies. 
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 RESULTS OF OPERATIONS 
 The following table sets forth certain income statement information of Old National: 
 
 Years Ended December 31, 
 (dollars in thousands) 2020 2019 2018 
 Income Statement Summary: 
 Net interest income $ 596,094 $ 604,273 $ 537,602 
 Provision for loan losses (1) 38,395 4,747 6,966 
 Noninterest income 239,274 199,317 195,305 
 Noninterest expense 541,417 508,487 517,261 
 Other Data: 
 Return on average common equity 7.87 % 8.57 % 8.42 % 
 Return on tangible common equity (2) 12.54 % 14.30 % 12.83 % 
 Return on average tangible common equity (2) 13.27 % 14.97 % 14.97 % 
 Efficiency ratio (2) 62.91 % 60.35 % 67.74 % 
 Tier 1 leverage ratio 8.20 % 8.88 % 9.17 % 
 Net charge-offs (recoveries) to average loans 0.02 % 0.05 % 0.02 % 

 (1) Beginning January 1, 2020, calculation is based on current expected loss methodology. Prior to January 1, 2020, calculation is based on incurred loss methodology. 
 (2) Represents a non-GAAP financial measure. Refer to “Non-GAAP Financial Measures” section for reconciliations to GAAP financial measures. 
 Comparison of Fiscal Years 2020 and 2019 
 Net Interest Income 
 
 
 Net interest income is the most significant component of our earnings, comprising 71% of 2020 revenues. Net interest income and net interest margin are influenced by many factors, primarily the volume and mix of earning assets, funding sources, and interest rate fluctuations. Other factors include the level of accretion income on purchased loans, prepayment risk on mortgage and investment-related assets, and the composition and maturity of interest-earning assets and interest-bearing liabilities. We have observed signs of an economic recovery in the United States, with jobs, consumer spending, manufacturing, and other indicators rebounding from their weakest levels. Additionally, progress toward an effective COVID-19 vaccine has been promising and the availability of that vaccine may drive the re-opening plans of state and local economies in 2021. However, economic uncertainty remains high and bouts of elevated volatility are expected to continue. 
 
 
 Interest rates remained at near historic lows during the second half of 2020 after declining dramatically in the first half of 2020 due to the COVID-19 pandemic. The Federal Reserve’s Federal Funds range is currently in a target range of 0.00% to 0.25%, with the Effective Fed Funds Rate in the 0.05% to 0.10% range. If interest rates decline further, our interest rate spread could decline, which may result in a decrease in our net interest income. However, management has taken balance sheet restructuring, derivative, and deposit pricing actions to help mitigate this risk. 
 
 
 Loans typically generate more interest income than investment securities with similar maturities. Funding from client deposits generally costs less than wholesale funding sources. Factors such as general economic activity, Federal Reserve monetary policy, and price volatility of competing alternative investments, can also exert significant influence on our ability to optimize our mix of assets and funding, net interest income, and net interest margin. 
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 Net interest income is the excess of interest received from interest-earning assets over interest paid on interest-bearing liabilities. For analytical purposes, net interest income is presented in the table that follows, adjusted to a taxable equivalent basis to reflect what our tax-exempt assets would need to yield in order to achieve the same after-tax yield as a taxable asset. We used the federal statutory tax rate in effect of 21% for all periods. This analysis portrays the income tax benefits related to tax-exempt assets and helps to facilitate a comparison between taxable and tax-exempt assets. Management believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully taxable equivalent basis. Therefore, management believes these measures provide useful information for both management and investors by allowing them to make better peer comparisons. 
 
 Years Ended December 31, 
 (dollars in thousands) 2020 2019 2018 
 Net interest income $ 596,094 $ 604,273 $ 537,602 
 Conversion to fully taxable equivalent 13,586 12,940 11,394 
 Net interest income - taxable equivalent basis $ 609,680 $ 617,213 $ 548,996 
 
 Average earning assets $ 19,158,681 $ 17,385,180 $ 15,501,053 
 
 Net interest margin 3.11 % 3.48 % 3.47 % 
 Net interest margin - taxable equivalent basis 3.18 % 3.55 % 3.54 % 

 Net interest income was $596.1 million in 2020, an $8.2 million decrease from $604.3 million in 2019. Taxable equivalent net interest income was $609.7 million in 2020, a $7.5 million decrease from $617.2 million in 2019. The net interest margin on a fully taxable equivalent basis was 3.18% in 2020, a 37 basis point decrease compared to 3.55% in 2019. The decrease in net interest income in 2020 when compared to 2019 was primarily due to lower yields on average earning assets and lower accretion income. Partially offsetting these decreases were lower costs of average interest-bearing liabilities and interest and fees related to PPP loans. Net interest income in both 2020 and 2019 included accretion income (interest income in excess of contractual interest income) associated with acquired loans. Accretion income totaled $23.3 million in 2020, compared to $43.6 million in 2019. We expect accretion income on loans to decrease over time, but this may be offset by future acquisitions. Net interest income in 2020 included $38.0 million of interest and net fees combined on PPP loans. 
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 The following table presents a three-year average balance sheet and for each major asset and liability category, its related interest income and yield, or its expense and rate for the years ended December 31. 
 
 2020 2019 2018 
 (Tax equivalent basis,
dollars in thousands) Average
Balance Income (1)/
Expense Yield/
Rate Average
Balance Income (1)/
Expense Yield/
Rate Average
Balance Income (1)/
Expense Yield/
Rate 
 Earning Assets 
 Money market and other interest-
 earning investments $ 174,494 $ 568 0.33 % $ 67,069 $ 1,670 2.49 % $ 48,240 $ 630 1.31 % 
 Investment securities: 
 Treasury and government-
 sponsored agencies 547,054 12,124 2.22 657,233 16,091 2.45 673,171 14,433 2.14 
 Mortgage-backed securities 3,246,520 70,611 2.17 2,866,600 73,835 2.58 1,707,646 41,493 2.43 
 States and political subdivisions 1,347,490 47,034 3.49 1,202,210 44,716 3.72 1,153,315 42,326 3.67 
 Other securities 485,430 11,990 2.47 495,847 16,138 3.25 490,464 15,633 3.19 
 Total investment securities 5,626,494 141,759 2.52 5,221,890 150,780 2.89 4,024,596 113,885 2.83 
 Loans: (2) 
 Commercial 3,843,089 140,473 3.66 3,023,421 141,215 4.67 2,924,878 131,471 4.49 
 Commercial real estate 5,477,562 234,670 4.28 5,044,623 275,853 5.47 4,536,897 235,876 5.20 
 Residential real estate loans 2,352,444 94,202 4.00 2,281,047 96,613 4.24 2,195,078 89,888 4.09 
 Consumer 1,684,598 65,222 3.87 1,747,130 77,196 4.42 1,771,364 71,689 4.05 
 Total loans 13,357,693 534,567 4.00 12,096,221 590,877 4.88 11,428,217 528,924 4.63 
 Total earning assets 19,158,681 $ 676,894 3.53 % 17,385,180 $ 743,327 4.28 % 15,501,053 $ 643,439 4.15 % 
 Less: Allowance for loan losses (3) (115,321) (56,624) (52,316) 
 Non-Earning Assets 
 Cash and due from banks 327,053 251,857 210,716 
 Other assets 2,414,602 2,453,001 2,130,588 
 Total assets $ 21,785,015 $ 20,033,414 $ 17,790,041 
 Interest-Bearing Liabilities 
 Checking and NOW accounts $ 4,464,027 $ 5,449 0.12 % $ 3,902,765 $ 15,598 0.40 % $ 3,146,309 $ 4,973 0.16 % 
 Savings accounts 3,113,435 3,156 0.10 2,878,135 8,142 0.28 2,995,484 7,464 0.25 
 Money market accounts 1,866,196 4,585 0.25 1,789,065 14,130 0.79 1,225,220 4,424 0.36 
 Other time deposits 1,337,269 14,013 1.05 1,748,552 27,400 1.57 1,654,548 21,012 1.27 
 Brokered deposits 85,041 966 1.14 173,439 4,094 2.36 185,426 3,404 1.84 
 Total interest-bearing deposits 10,865,968 28,169 0.26 10,491,956 69,364 0.66 9,206,987 41,277 0.45 
 Federal funds purchased and
 interbank borrowings 138,257 1,296 0.94 241,618 5,656 2.34 238,408 4,793 2.01 
 Securities sold under agreements
 to repurchase 375,961 854 0.23 342,654 2,517 0.73 344,964 1,962 0.57 
 FHLB advances 2,055,155 27,274 1.33 1,775,987 37,452 2.11 1,665,689 34,925 2.10 
 Other borrowings 242,642 9,621 3.96 251,194 11,125 4.43 249,832 11,486 4.60 
 Total borrowed funds 2,812,015 39,045 1.39 2,611,453 56,750 2.17 2,498,893 53,166 2.13 
 Total interest-bearing liabilities $ 13,677,983 $ 67,214 0.49 % $ 13,103,409 $ 126,114 0.96 % $ 11,705,880 $ 94,443 0.81 % 
 Noninterest-Bearing Liabilities
 and Shareholders' Equity 
 Demand deposits 4,945,506 3,887,470 3,657,234 
 Other liabilities 286,066 261,403 159,600 
 Shareholders' equity 2,875,460 2,781,132 2,267,327 
 Total liabilities and shareholders'
 equity $ 21,785,015 $ 20,033,414 $ 17,790,041 
 
 Net interest rate spread 3.04 % 3.32 % 3.34 % 
 Net interest margin (4) 3.18 3.55 3.54 
 Taxable equivalent adjustment $ 13,586 $ 12,940 $ 11,394 

 (1) Interest income is reflected on a fully taxable equivalent basis. 
 (2) Includes loans held for sale. 
 (3) Beginning January 1, 2020, calculation is based on current expected loss methodology. Prior to January 1, 2020, calculation was based on incurred loss model. 
 (4) Net interest margin is defined as net interest income on a tax equivalent basis as a percentage of average earning assets. 
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 The yield on average earning assets decreased 75 basis points from 4.28% in 2019 to 3.53% in 2020 and the cost of interest-bearing liabilities decreased 47 basis points from 0.96% in 2019 to 0.49% in 2020. Average earning assets increased by $1.774 billion, or 10%. The increase in average earning assets consisted of a $404.6 million increase in investment securities, a $1.261 billion increase in loans, and a $107.4 million increase in money market and other interest-earning investments. Average interest-bearing liabilities increased $574.6 million, or 4%. The increase in average interest-bearing liabilities consisted of a $374.0 million increase in interest-bearing deposits, a $33.3 million increase in securities sold under agreements to repurchase, and a $279.2 million increase in FHLB advances, partially offset by a $103.4 million decrease in federal funds purchased and interbank borrowings and an $8.5 million decrease in other borrowings. Average noninterest-bearing deposits increased by $1.058 billion. The continued spread and impact of the COVID-19 pandemic may offset the recent positive economic momentum and government stimulus programs, and could negatively impact net interest margin. Accordingly, there is still much uncertainty regarding the economy. 
 The increase in average earning assets in 2020 compared to 2019 was due to increases in average loans and average investment securities. The loan portfolio, including loans held for sale, which generally has an average yield higher than the investment portfolio, was 70% of average interest earning assets in 2020 and 2019. 
 Average loans including loans held for sale increased $1.261 billion in 2020 compared to 2019 due to increases in average commercial loans, commercial real estate loans, and residential real estate loans, partially offset by lower average consumer loans. The increase in average commercial loans reflected strong PPP loan production, which began in April 2020. Average PPP loans for the year ended December 31, 2020 totaled $957.9 million. 
 
 
 Average investments increased $404.6 million in 2020 compared to 2019 reflecting higher fair values and excess liquidity. 
 Average non-interest-bearing deposits increased $1.058 billion in 2020 compared to 2019 primarily due to PPP funds on deposit. Average interest-bearing deposits increased $374.0 million in 2020 compared to 2019. 
 Average borrowed funds increased $200.6 million in 2020 compared to 2019 primarily due to increases in FHLB advances and securities sold under agreements to repurchase, partially offset by a decrease in federal funds purchased and interbank borrowings. 
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 The following table presents fluctuations in taxable equivalent net interest income attributable to changes in the average balances of assets and liabilities and the yields earned or rates paid for the years ended December 31. 
 
 From 2019 to 2020 From 2018 to 2019 
 Total Attributed to Total Attributed to 
 (dollars in thousands) Change (1) Volume Rate Change (1) Volume Rate 
 Interest Income 
 Money market and other interest-earning
 investments $ (1,102) $ 1,511 $ (2,613) $ 1,040 $ 358 $ 682 
 Investment securities (2) (9,021) 10,938 (19,959) 36,895 34,226 2,669 
 Loans (2) (56,310) 56,052 (112,362) 61,953 31,774 30,179 
 Total interest income (66,433) 68,501 (134,934) 99,888 66,358 33,530 
 Interest Expense 
 Checking and NOW deposits (10,149) 1,464 (11,613) 10,625 2,110 8,515 
 Savings deposits (4,986) 452 (5,438) 678 (312) 990 
 Money market deposits (9,545) 399 (9,944) 9,706 3,245 6,461 
 Other time deposits (13,387) (5,377) (8,010) 6,388 1,309 5,079 
 Brokered deposits (3,128) (1,545) (1,583) 690 (92) 782 
 Federal funds purchased and interbank
 borrowings (4,360) (1,694) (2,666) 863 70 793 
 Securities sold under agreements to
 repurchase (1,663) 160 (1,823) 555 (15) 570 
 Federal Home Loan Bank advances (10,178) 4,796 (14,974) 2,527 2,320 207 
 Other borrowings (1,504) (359) (1,145) (361) 61 (422) 
 Total interest expense (58,900) (1,704) (57,196) 31,671 8,696 22,975 
 Net interest income $ (7,533) $ 70,205 $ (77,738) $ 68,217 $ 57,662 $ 10,555 

 (1) The variance not solely due to rate or volume is allocated equally between the rate and volume variance. 
 (2) Interest on investment securities and loans includes the effect of taxable equivalent adjustments of $8.9 million and $4.7 million, respectively, in 2020; $7.7 million and $5.2 million, respectively, in 2019; and $7.1 million and $4.3 million, respectively, in 2018; using the federal statutory tax rate in effect of 21%. 
 Provision for Loan Losses 
 The provision for loan losses was an expense of $38.4 million in 2020, compared to an expense of $4.7 million in 2019. Net charge-offs totaled $3.0 million in 2020, compared to net charge-offs of $5.6 million in 2019. The higher provision for loan losses was driven by the implementation of ASC 326 and its current expected loss methodology, which uses an economic forecast that now includes the impact of the COVID-19 pandemic. PPP loans were factored in the provision for credit losses in 2020; however due to the SBA guaranty and our borrowers’ adherence to the PPP terms, the provision impact was insignificant. Continued loan growth in future periods, a decline in our current level of recoveries, or an increase in charge-offs could result in an increase in provision expense. Additionally, with the adoption of ASC 326 beginning on January 1, 2020, provision expense may become more volatile due to changes in CECL model assumptions of credit quality, macroeconomic factors and conditions, and loan composition, which drive the allowance for credit losses balance. For additional information about non-performing loans, charge-offs, and additional items impacting the provision, refer to the “Risk Management – Credit Risk” section of Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 
 Noninterest Income 
 We generate revenues in the form of noninterest income through client fees, sales commissions, and other gains and losses from our core banking franchise and other related businesses, such as wealth management, investment consulting, and investment products. This source of revenue as a percentage of total revenue was 29% in 2020 compared to 25% in 2019. 
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 The following table details the components of noninterest income: 
 
 Years Ended December 31, % Change From
Prior Year 
 (dollars in thousands) 2020 2019 2018 2020 2019 
 Wealth management fees $ 36,806 $ 37,072 $ 36,863 (0.7) % 0.6 % 
 Service charges on deposit accounts 35,081 44,915 44,026 (21.9) 2.0 
 Debit card and ATM fees 20,178 21,652 20,216 (6.8) 7.1 
 Mortgage banking revenue 62,775 26,622 17,657 135.8 50.8 
 Investment product fees 21,614 21,785 20,539 (0.8) 6.1 
 Capital markets income 22,480 13,270 4,934 69.4 169.0 
 Company-owned life insurance 12,031 11,539 10,584 4.3 9.0 
 Debt securities gains (losses), net 10,767 1,923 2,060 459.9 (6.7) 
 Net gain on banking center divestitures — — 13,989 N/M (100.0) 
 Other income 17,542 20,539 24,437 (14.6) (16.0) 
 Total noninterest income $ 239,274 $ 199,317 $ 195,305 20.0 % 2.1 % 
 
 Noninterest income to total revenue (1) 28.2 % 24.4 % 26.2 % 

 (1) Total revenue includes the effect of a taxable equivalent adjustment of $13.6 million in 2020, $12.9 million in 2019, and $11.4 million in 2018. 
 The increase in noninterest income in 2020 compared to 2019 was primarily due to higher mortgage banking revenue, higher capital markets income, and higher debt securities gains. These increases were partially offset by lower service charges on deposit accounts. 
 Service charges and overdraft fees decreased $9.8 million in 2020 compared to 2019 reflecting lower overdraft fees due to the impact of the COVID-19 pandemic. 
 Debit card and ATM fees decreased $1.5 million in 2020 compared to 2019 reflecting lower interchange income due to the impact of the COVID-19 pandemic. 
 Mortgage banking revenue increased $36.2 million in 2020 compared to 2019 primarily due to increased mortgage originations, sales, and strong pipeline growth in 2020. 
 Capital markets income is comprised of customer interest rate swap fees, debt placement fees, foreign currency exchange fees, net gains (losses) on foreign currency adjustments, and tax credit fee income. Capital markets income increased $9.2 million in 2020 compared to 2019 primarily due to higher customer interest rate swap fees. 
 Debt securities gains (losses), net had a favorable variance of $8.8 million in 2020 compared to 2019 primarily due to higher realized gains on sales of available-for-sale securities and lower realized losses on sales of available-for-sale debt securities in 2020. 
 Other income decreased $3.0 million in 2020 compared to 2019 primarily due to lower branded card incentives, unfavorable variance in net gains (losses) on derivatives, and lower insurance income. 
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 Noninterest Expense 
 The following table details the components of noninterest expense: 
 
 Years Ended December 31, % Change From
Prior Year 
 (dollars in thousands) 2020 2019 2018 2020 2019 
 Salaries and employee benefits $ 293,590 $ 289,452 $ 281,275 1.4 % 2.9 % 
 Occupancy 55,316 55,255 51,941 0.1 6.4 
 Equipment 16,690 16,903 14,861 (1.3) 13.7 
 Marketing 10,874 15,898 15,847 (31.6) 0.3 
 Data processing 41,086 37,589 36,170 9.3 3.9 
 Communication 9,731 10,702 10,846 (9.1) (1.3) 
 Professional fees 15,755 22,854 14,503 (31.1) 57.6 
 FDIC assessment 6,722 6,030 10,638 11.5 (43.3) 
 Amortization of intangibles 14,091 16,911 14,442 (16.7) 17.1 
 Amortization of tax credit investments 18,788 2,749 22,949 583.4 (88.0) 
 Other expense 58,774 34,144 43,789 72.1 (22.0) 
 Total noninterest expense $ 541,417 $ 508,487 $ 517,261 6.5 % (1.7) % 

 Noninterest expense increased $32.9 million in 2020 compared to 2019 reflecting higher charges related to The ONB Way strategic initiative in 2020. ONB Way charges totaled $42.6 million in 2020 compared to $11.4 million in 2019. 
 Salaries and employee benefits is the largest component of noninterest expense. Salaries and employee benefits increased $4.1 million in 2020 compared to 2019 primarily due to higher commissions, personnel expenses related to The ONB Way, and higher corporate incentives, partially offset by fewer employees at December 31, 2020. 
 
 
 Marketing expenses decreased $5.0 million in 2020 compared to 2019 primarily due to lower advertising expenses, public relations, and business development expenses. 
 
 
 Professional fees decreased $7.1 million in 2020 compared to 2019 reflecting higher consulting fees incurred in 2019 related to The ONB Way. 
 Amortization of intangibles decreased $2.8 million in 2020 compared to 2019 primarily due to lower amortization of core deposit intangibles. 
 Amortization of tax credit investments increased $16.0 million in 2020 compared to 2019. The recognition of tax credit amortization expense is contingent upon the successful completion of the rehabilitation of a historic building or completion of a solar project within the reporting period. Many factors including weather, labor availability, building regulations, inspections, and other unexpected construction delays related to a rehabilitation project can cause a project to exceed its estimated completion date. See Note 9 to the consolidated financial statements for additional information on our tax credit investments. 
 Other expense increased $24.6 million in 2020 compared to 2019 primarily due to lease termination charges and impairments on long-lived assets related to banking center consolidations that were part of the ONB Way strategic initiative totaling $27.1 million in 2020. 
 Provision for Income Taxes 
 We record a provision for income taxes currently payable and for income taxes payable or benefits to be received in the future, which arise due to timing differences in the recognition of certain items for financial statement and income tax purposes. The major difference between the effective tax rate applied to our financial statement income and the federal statutory tax rate is caused by a tax benefit from our tax credit investments and interest on tax-exempt securities and loans. The effective tax rate was 11.4% in 2020 compared to 18.0% in 2019. The lower effective tax rate in 2020 compared to 2019 was primarily the result of an increase in federal tax credits available. See Note 15 to the consolidated financial statements for additional details on Old National’s income tax provision. 
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 Comparison of Fiscal Years 2019 and 2018 
 In 2019, we generated net income of $238.2 million and diluted net income per share of $1.38 compared to $190.8 million and diluted net income per share of $1.22, respectively, in 2018. The 2019 earnings included a $66.7 million increase in net interest income, an $8.8 million decrease in noninterest expense, a $4.0 million increase in noninterest income, and a $2.2 million decrease in provision for loan losses. These favorable variances in net income were partially offset by a $34.3 million increase in income tax expense. Record high commercial loan production, record mortgage production, consistently strong credit quality metrics, and well controlled noninterest expenses all contributed to favorable 2019 performance when compared to 2018. 
 Net interest income was $604.3 million in 2019, a $66.7 million increase from $537.6 million in 2018. Taxable equivalent net interest income was $617.2 million in 2019, a 12% increase from $549.0 million in 2018. Average earning assets increased by $1.884 billion in 2019 and the yield on average earning assets increased 13 basis points from 4.15% in 2018 to 4.28% in 2019. 
 The provision for loan losses was an expense of $4.7 million in 2019, compared to an expense of $7.0 million in 2018. Charge-offs remained low during 2019 and we continued to see positive trends in credit quality. 
 Noninterest income increased $4.0 million in 2019 compared to 2018 primarily due to higher mortgage banking revenue, higher capital markets income, and higher noninterest income attributable to the full year impact of the Klein partnership as compared to 2018, which only reflected two months of Klein operations. These increases were partially offset by a $14.0 million gain on the sale of ten Wisconsin banking centers in the fourth quarter of 2018. 
 Noninterest expense decreased $8.8 million in 2019 compared to 2018 reflecting a decrease in amortization of tax credit investments and lower charitable contributions. These decreases were partially offset by higher professional fees, higher salaries and employee benefits, and higher operating expenses and acquisition and integration costs associated with the full year impact of the Klein partnership. 
 The provision for income taxes was $52.2 million in 2019 compared to $17.9 million in 2018. Old National’s effective tax rate was 18.0% in 2019 compared to 8.6% in 2018. The higher effective tax rate in 2019 compared to 2018 was primarily the result of a decrease in federal tax credits available as well as an increase in pre-tax book income. 
 
 FINANCIAL CONDITION 
 Overview 
 At December 31, 2020, our assets were $22.961 billion, a 12% increase compared to $20.412 billion at December 31, 2019. The increase was primarily due to higher commercial loans driven by strong PPP loan production in the second quarter of 2020. As of December 31, 2020, PPP loans totaled $943.0 million. The increase in assets also reflected higher commercial real estate loans and investment securities. 
 We have observed signs of an economic recovery in the United States with jobs, consumer spending, manufacturing, and other indicators rebounding from their weakest levels. Additionally, progress toward an effective COVID-19 vaccine has been promising and the availability of that vaccine may drive the re-opening plans of state and local economies in 2021. However, economic uncertainty remains high and bouts of elevated volatility are expected to continue. 
 Earning Assets 
 Our earning assets are comprised of investment securities, portfolio loans, loans held for sale, money market investments, interest earning accounts with the Federal Reserve, and equity securities. Earning assets were $20.313 billion at December 31, 2020, an increase of $2.551 billion compared to earning assets of $17.762 billion at December 31, 2019. 
 Investment Securities 
 We classify the majority of our investment securities as available-for-sale to give management the flexibility to sell the securities prior to maturity if needed, based on fluctuating interest rates or changes in our funding requirements. 
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 Equity securities are recorded at fair value and totaled $2.5 million at December 31, 2020 compared to $6.8 million at December 31, 2019. 
 At December 31, 2020, the investment securities portfolio, including equity securities, was $6.142 billion compared to $5.556 billion at December 31, 2019, an increase of $586.1 million, or 11%. Investment securities represented 30% of earning assets at December 31, 2020, compared to 31% at December 31, 2019. Stronger commercial loan demand in the future could result in management’s decision to reduce the securities portfolio. As of December 31, 2020, management does not intend to sell any securities in an unrealized loss position and does not believe we will be required to sell such securities prior to their anticipated recovery. 
 The investment securities available-for-sale portfolio had net unrealized gains of $186.3 million at December 31, 2020, compared to net unrealized gains of $71.9 million at December 31, 2019. Net unrealized gains (losses) increased from December 31, 2019 to December 31, 2020 reflecting higher net unrealized gains on mortgage-backed and tax exempt municipal securities due to a decline in long-term interest rates. 
 The investment portfolio had an effective duration of 4.08 at December 31, 2020, compared to 3.86 at December 31, 2019. Effective duration measures the percentage change in value of the portfolio in response to a change in interest rates. Generally, there is more uncertainty in interest rates over a longer average maturity, resulting in a higher duration percentage. The weighted average yields on investment securities, on a taxable equivalent basis, were 2.52% in 2020 and 2.89% in 2019. 
 At December 31, 2020, Old National had a concentration of investment securities issued by certain states and their political subdivisions with the following aggregate market values: $515.6 million issued by Indiana, which represented 17.3% of shareholders’ equity, and $194.3 million issued by Texas, which represented 6.5% of shareholders’ equity. Of the Indiana municipal bonds, 99% are rated “A” or better, and the remaining 1% generally represent non-rated local interest bonds where Old National has a market presence. All of the Texas municipal bonds are rated “A” or better, and the majority of issues are backed by the “AAA” rated State of Texas Permanent School Fund Guarantee Program. 
 Loan Portfolio 
 We lend primarily to consumers and small to medium-sized commercial and commercial real estate clients in various industries including manufacturing, agribusiness, transportation, mining, wholesaling, and retailing. Our policy is to concentrate our lending activity in the geographic market areas we serve, primarily Indiana, Kentucky, Michigan, Minnesota, and Wisconsin. 
 The following table presents the composition of the loan portfolio at December 31. 
 
 (dollars in thousands) 2020 2019 2018 2017 2016 Four-Year
Growth Rate 
 Commercial $ 3,956,422 $ 2,890,296 $ 3,232,970 $ 2,717,269 $ 1,917,099 19.9 % 
 Commercial real estate 5,946,512 5,166,792 4,958,851 4,354,552 3,130,853 17.4 
 Consumer 1,635,123 1,726,147 1,803,667 1,879,247 1,875,030 (3.4) 
 Total loans excluding residential
 real estate 11,538,057 9,783,235 9,995,488 8,951,068 6,922,982 13.6 
 Residential real estate 2,248,422 2,334,289 2,248,404 2,167,053 2,087,530 1.9 
 Total loans 13,786,479 12,117,524 12,243,892 11,118,121 9,010,512 11.2 % 
 Less: Allowance for loan losses (1) 131,388 54,619 55,461 50,381 49,808 
 Net loans $ 13,655,091 $ 12,062,905 $ 12,188,431 $ 11,067,740 $ 8,960,704 

 (1) Beginning January 1, 2020, calculation is based on current expected loss methodology. Prior to January 1, 2020, calculation was based on incurred loss model. 
 Commercial and Commercial Real Estate Loans 
 Commercial and commercial real estate loans are the largest classification within earning assets, representing 49% at December 31, 2020, compared to 45% at December 31, 2019. At December 31, 2020, commercial and commercial real estate loans were $9.903 billion, an increase of $1.846 billion, or 23%, compared to December 31, 2019. The increase was driven by strong PPP loan production in the second quarter of 2020. As of December 31, 2020, PPP loans totaled $943.0 million. 
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 The following table presents the maturity distribution and rate sensitivity of commercial and commercial real estate loans at December 31, 2020 and an analysis of these loans that have predetermined and floating interest rates. 
 
 (dollars in thousands) Within
1 Year 1 - 5
Years Beyond
5 Years Total % of
Total 
 Commercial 
 Interest rates: 
 Predetermined $ 261,417 $ 1,718,319 $ 668,196 $ 2,647,932 67 % 
 Floating 492,427 426,817 389,246 1,308,490 33 
 Total $ 753,844 $ 2,145,136 $ 1,057,442 $ 3,956,422 100 % 
 
 Commercial Real Estate 
 Interest rates: 
 Predetermined $ 178,478 $ 1,507,302 $ 900,370 $ 2,586,150 43 % 
 Floating 378,941 1,501,491 1,479,930 3,360,362 57 
 Total $ 557,419 $ 3,008,793 $ 2,380,300 $ 5,946,512 100 % 

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 The following table provides detail on commercial loans by industry classification (as defined by the North American Industry Classification System) and by loan size at December 31. 
 
 2020 2019 
 (dollars in thousands) Outstanding Exposure Nonaccrual Outstanding Exposure Nonaccrual 
 By Industry: 
 Manufacturing $ 586,074 $ 1,019,149 $ 11,036 $ 470,922 $ 745,638 $ 13,384 
 Construction 462,140 903,604 1,036 211,007 551,100 2,548 
 Health care and social assistance 412,807 604,493 691 171,682 307,013 872 
 Public administration 299,748 371,846 — 245,849 308,993 — 
 Wholesale trade 241,432 483,253 3,647 194,119 393,282 1,440 
 Educational services 245,896 418,277 1,428 204,334 279,629 1,451 
 Other services 194,822 307,205 2,363 166,254 213,147 2,989 
 Professional, scientific, and
 technical services 182,228 320,983 864 81,227 170,503 3,548 
 Finance and insurance 186,079 246,551 57 154,299 198,706 4,022 
 Retail trade 151,869 329,160 1,788 130,018 274,626 2,646 
 Real estate rental and leasing 169,935 356,169 759 197,487 297,158 48 
 Transportation and warehousing 139,398 216,495 1,397 134,727 188,949 2,076 
 Administrative and support and
 waste management and
 remediation services 119,220 173,538 383 84,517 128,598 724 
 Agriculture, forestry, fishing, 
 and hunting 145,624 192,602 358 152,201 209,886 1,040 
 Accommodation and food services 105,560 118,497 3,239 39,911 50,241 676 
 Utilities 88,607 98,996 — 83,793 94,826 18 
 Arts, entertainment, and recreation 82,305 111,729 2,590 45,469 55,407 715 
 Information 61,883 95,774 2,286 48,472 71,802 839 
 Mining 57,142 77,067 19 48,972 60,260 — 
 Management of companies and
 enterprises 13,605 28,276 — 4,407 9,668 — 
 Other 10,048 10,086 — 20,629 20,697 — 
 Total $ 3,956,422 $ 6,483,750 $ 33,941 $ 2,890,296 $ 4,630,129 $ 39,036 
 
 By Loan Size: 
 Less than $200,000 11 % 8 % 10 % 9 % 8 % 10 % 
 $200,000 to $1,000,000 20 18 40 23 23 42 
 $1,000,000 to $5,000,000 34 32 50 34 34 48 
 $5,000,000 to $10,000,000 15 15 — 15 15 — 
 $10,000,000 to $25,000,000 14 16 — 14 13 — 
 Greater than $25,000,000 6 11 — 5 7 — 
 Total 100 % 100 % 100 % 100 % 100 % 100 % 

 
 
 Residential Real Estate Loans 
 Residential real estate loans held in our portfolio, primarily 1-4 family properties, decreased $85.9 million at December 31, 2020 compared to December 31, 2019. Future increases in interest rates could result in a decline in the level of refinancings and new originations of residential real estate loans. 
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 Consumer Loans 
 Consumer loans, including automobile loans and personal and home equity loans and lines of credit, decreased $91.0 million, at December 31, 2020 compared to December 31, 2019 primarily due to decreases in consumer direct and indirect loans. 
 Allowance for Credit Losses on Loans and Unfunded Commitments 
 Beginning January 1, 2020, we calculated allowance for credit losses using current expected credit losses methodology. As of January 1, 2020, Old National increased the allowance for credit losses for loans by $41.3 million and increased the allowance for credit losses for unfunded loan commitments by $4.5 million, since the ASU covers credit losses over the expected life of a loan as well as considering future changes in macroeconomic conditions. The increase related to the acquired loan portfolio totaled $27.1 million. 
 At December 31, 2020, the allowance for credit losses was $131.4 million. Continued loan growth in future periods, a decline in our current level of recoveries, or an increase in charge-offs could result in an increase in provision expense. Additionally, with the adoption of CECL beginning on January 1, 2020, provision expense may become more volatile due to changes in CECL model assumptions of credit quality, macroeconomic factors and conditions, and loan composition, which drive the allowance for credit losses balance. 
 Prior to January 1, 2020, we calculated allowance for loan losses using incurred losses methodology. At December 31, 2019, the allowance for loan losses was $54.6 million. 
 We maintain an allowance for credit losses on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements. The allowance is computed using a methodology similar to that used to determine the allowance for credit losses for loans, modified to take into account the probability of a drawdown on the commitment. The allowance for credit losses on unfunded loan commitments is classified as a liability account on the balance sheet within accrued expenses and other liabilities, while the corresponding provision for these credit losses is recorded as a component of other expense. The allowance for credit losses on unfunded commitments was $11.7 million at December 31, 2020. 
 Prior to January 1, 2020, we calculated allowance for losses on unfunded loan commitments using incurred losses methodology. At December 31, 2019, the allowance for unfunded commitments was $2.7 million. 
 Additional information about our Allowance for Credit Losses is included in the “Risk Management – Credit Risk” section of Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Notes 1 and 3 to the consolidated financial statements. 
 Loans Held for Sale 
 Mortgage loans held for immediate sale in the secondary market were $63.3 million at December 31, 2020, compared to $46.9 million at December 31, 2019. Certain mortgage loans are committed for sale at or prior to origination at a contracted price to an outside investor. Other mortgage loans held for immediate sale are hedged with TBA forward agreements and committed for sale when they are ready for delivery and remain on the Company’s balance sheet for a short period of time (typically 30 to 60 days). These loans are sold without recourse, beyond customary representations and warranties, and Old National has not experienced material losses arising from these sales. Mortgage originations are subject to volatility due to interest rates and home sales, among other factors. 
 We have elected the fair value option prospectively for residential loans held for sale. The aggregate fair value exceeded the unpaid principal balance by $3.5 million at December 31, 2020 and $1.5 million at December 31, 2019. 
 Other Assets 
 Other assets increased $93.5 million since December 31, 2019 primarily due to an increase in derivative assets. 
 Funding 
 Total funding, comprised of deposits and wholesale borrowings, was $19.714 billion at December 31, 2020, an increase of $2.416 billion from $17.298 billion at December 31, 2019. Total deposits were $17.037 billion, an increase of $2.484 billion compared to December 31, 2019. Noninterest-bearing demand deposits increased 
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 $1.591 billion from December 31, 2019 to December 31, 2020. Interest-bearing checking and NOW deposits increased $727.4 million from December 31, 2019 to December 31, 2020, while savings deposits increased $550.3 million. Money market deposits increased $74.3 million from December 31, 2019 to December 31, 2020. Other time deposits decreased $486.7 million, while brokered deposits increased $27.3 million. 
 We use wholesale funding to augment deposit funding and to help maintain our desired interest rate risk position. At December 31, 2020, wholesale borrowings, including federal funds purchased and interbank borrowings, securities sold under agreements to repurchase, FHLB advances, and other borrowings, totaled $2.677 billion, a decrease of $68.2 million from December 31, 2019. The decrease in wholesale funding from December 31, 2019 to December 31, 2020 was due to a decrease in federal funds purchased and interbank borrowings, partially offset by increases in FHLB advances, securities sold under agreements to repurchase, and other borrowings. Wholesale funding as a percentage of total funding was 14% at December 31, 2020, compared to 16% at December 31, 2019. See Notes 11, 12, and 13 to the consolidated financial statements for additional details on our financing activities. 
 The following table details the average balances of all funding sources for the years ended December 31. 
 
 % Change From
Prior Year 
 (dollars in thousands) 2020 2019 2018 2020 2019 
 Demand deposits $ 4,945,506 $ 3,887,470 $ 3,657,234 27.2 % 6.3 % 
 Interest-bearing checking and NOW deposits 4,464,027 3,902,765 3,146,309 14.4 24.0 
 Savings deposits 3,113,435 2,878,135 2,995,484 8.2 (3.9) 
 Money market deposits 1,866,196 1,789,065 1,225,220 4.3 46.0 
 Other time deposits 1,337,269 1,748,552 1,654,548 (23.5) 5.7 
 Brokered deposits 85,041 173,439 185,426 (51.0) (6.5) 
 Total deposits 15,811,474 14,379,426 12,864,221 10.0 11.8 
 Federal funds purchased and interbank borrowings 138,257 241,618 238,408 (42.8) 1.3 
 Securities sold under agreements to repurchase 375,961 342,654 344,964 9.7 (0.7) 
 Federal Home Loan Bank advances 2,055,155 1,775,987 1,665,689 15.7 6.6 
 Other borrowings 242,642 251,194 249,832 (3.4) 0.5 
 Total funding sources $ 18,623,489 $ 16,990,879 $ 15,363,114 9.6 % 10.6 % 

 The following table presents a maturity distribution for certificates of deposit with denominations of $100,000 or more at December 31. 
 
 Maturity Distribution 
 (dollars in thousands) Year-End
Balance 1-90
Days 91-180
Days 181-365
Days Beyond
1 Year 
 2020 $ 575,055 $ 212,671 $ 129,273 $ 146,453 $ 86,658 
 2019 983,598 445,434 214,412 209,075 114,677 
 2018 1,133,130 397,990 265,232 280,402 189,506 

 Accrued Expenses and Other Liabilities 
 Accrued expenses and other liabilities increased $25.8 million, or 16%, from December 31, 2019 primarily due to increases in accrued incentive payments, allowance for credit losses on unfunded commitments, and derivative liabilities. 
 Capital 
 Shareholders’ equity totaled $2.973 billion, or 13% of total assets, at December 31, 2020 and $2.852 billion, or 14% of total assets, at December 31, 2019. Old National repurchased 4.9 million shares of Common Stock in 2020 under a stock repurchase plan that was approved by the Company’s Board of Directors, which reduced equity by $78.7 million, and 0.2 million shares of Common Stock associated with employee share-based incentive programs reducing equity by $3.6 million. We suspended the stock repurchase plan approved by the Company's Board of Directors in 2020 given the uncertain economic conditions. We also paid cash dividends of $0.56 per share in 2020, 
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 which reduced equity by $92.9 million. The change in unrealized gains (losses) on available-for-sale investment securities increased equity by $89.2 million during 2020. Old National’s Common Stock is traded on the NASDAQ under the symbol “ONB” with 34,880 shareholders of record at December 31, 2020. 
 Capital Adequacy 
 Old National and the banking industry generally are subject to various regulatory capital requirements administered by the federal banking agencies. Management routinely analyzes Old National’s capital to ensure an optimized capital structure. Accordingly, such evaluations may result in Old National taking a capital action. For additional information on capital adequacy see Note 23 to the consolidated financial statements. 
 Management views stress testing as an integral part of the Company’s risk management and strategic planning activities. The primary objective of the stress test is to ensure that Old National has a robust, forward-looking stress testing process and maintains sufficient capital to continue operations throughout times of economic and financial stress. Management also uses the stress testing framework to evaluate decisions relating to pricing, loan concentrations, capital deployment, and mergers and acquisitions to ensure that strategic decisions align with Old National’s risk appetite statement. Old National’s stress testing process incorporates key risks that include strategic, market, liquidity, credit, operational, regulatory, compliance, legal, and reputational risks. Old National’s stress testing policy outlines steps that will be taken if stress test results do not meet internal thresholds under severely adverse economic scenarios. 
 
 RISK MANAGEMENT 
 Overview 
 Old National has adopted a Risk Appetite Statement to enable the Board of Directors, Executive Leadership Group, and Senior Management to better assess, understand, and mitigate the risks of Old National. The Risk Appetite Statement addresses the following major risks: strategic, market, liquidity, credit, operational/technology/cyber, regulatory/compliance/legal, reputational, and human resources. Our Chief Risk Officer is independent of management and reports directly to the Chair of the Board’s Enterprise Risk Management Committee. The following discussion addresses these major risks: credit, market, liquidity, operational/technology/cyber, and regulatory/compliance/legal. 
 During the COVID-19 pandemic, we are committed and focused on the health and safety of our team members, clients, and communities. We will continue to evaluate and adjust our banking center hours, lobby usage, and return to work efforts as necessary depending on the path of the virus across our footprint. We are occupying only 50% of our office buildings by rotating team members every 4 weeks. Our banking centers are still open for business and we continue to lend to qualified businesses for working capital and general business purposes, while our online banking network is continuously available for digital banking transactions. 
 Credit Risk 
 Credit risk represents the risk of loss arising from an obligor’s inability or failure to meet contractual payment or performance terms. Our primary credit risks result from our investment and lending activities. 
 Investment Activities 
 We carry a higher exposure to loss in our pooled trust preferred securities, which are collateralized debt obligations, due to illiquidity in that market and the performance of the underlying collateral. At December 31, 2020, we had pooled trust preferred securities with a fair value of $7.9 million, or less than 1% of the available-for-sale securities portfolio. These securities remained classified as available-for-sale and the unrealized loss on our pooled trust preferred securities was $5.9 million at December 31, 2020. The fair value of these securities should improve as we get closer to maturity, but not in all cases. 
 All of our mortgage-backed securities are backed by U.S. government-sponsored or federal agencies. Municipal bonds, corporate bonds, and other debt securities are evaluated by reviewing the credit-worthiness of the issuer and general market conditions. See Note 2 to the consolidated financial statements for additional details about our investment security portfolio. 
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 Counterparty Exposure 
 Counterparty exposure is the risk that the other party in a financial transaction will not fulfill its obligation. We define counterparty exposure as nonperformance risk in transactions involving federal funds sold and purchased, repurchase agreements, correspondent bank relationships, and derivative contracts with companies in the financial services industry. Old National manages exposure to counterparty risk in connection with its derivatives transactions by generally engaging in transactions with counterparties having ratings of at least “A” by Standard & Poor’s Rating Service or “A2” by Moody’s Investors Service. Total credit exposure is monitored by counterparty and managed within limits that management believes to be prudent. Old National’s net counterparty exposure was an asset of $425.1 million at December 31, 2020. 
 Lending Activities 
 Commercial 
 Commercial and industrial loans are made primarily for the purpose of financing equipment acquisition, expansion, working capital, and other general business purposes. Lease financing consists of direct financing leases and is used by commercial customers to finance capital purchases ranging from computer equipment to transportation equipment. The credit decisions for these transactions are based upon an assessment of the overall financial capacity of the applicant. A determination is made as to the applicant’s ability to repay in accordance with the proposed terms as well as an overall assessment of the risks involved. In addition to an evaluation of the applicant’s financial condition, a determination is made of the probable adequacy of the primary and secondary sources of repayment, such as additional collateral or personal guarantees, to be relied upon in the transaction. Credit agency reports of the applicant’s credit history supplement the analysis of the applicant’s creditworthiness. 
 Commercial mortgages and construction loans are offered to real estate investors, developers, and builders primarily domiciled in the geographic market areas we serve: Indiana, Kentucky, Michigan, Minnesota, and Wisconsin. These loans are secured by first mortgages on real estate at LTV margins deemed appropriate for the property type, quality, location, and sponsorship. Generally, these LTV ratios do not exceed 80%. The commercial properties are predominantly non-residential properties such as retail centers, industrial properties and, to a lesser extent, more specialized properties. Substantially all of our commercial real estate loans are secured by properties located in our primary market area. 
 In the underwriting of our commercial real estate loans, we obtain appraisals for the underlying properties. Decisions to lend are based on the economic viability of the property and the creditworthiness of the borrower. In evaluating a proposed commercial real estate loan, we primarily emphasize the ratio of the property’s projected net cash flows to the loan’s debt service requirement. The debt service coverage ratio normally is not less than 120% and it is computed after deduction for a vacancy factor and property expenses as appropriate. In addition, a personal guarantee of the loan or a portion thereof is often required from the principal(s) of the borrower. In most cases, we require title insurance insuring the priority of our lien, fire and extended coverage casualty insurance, and flood insurance, if appropriate, in order to protect our security interest in the underlying property. In addition, business interruption insurance or other insurance may be required. 
 Construction loans are underwritten against projected cash flows derived from rental income, business income from an owner-occupant, or the sale of the property to an end-user. We may mitigate the risks associated with these types of loans by requiring fixed-price construction contracts, performance and payment bonding, controlled disbursements, and pre-sale contracts or pre-lease agreements. 
 Consumer 
 
 
 We offer a variety of first mortgage and junior lien loans to consumers within our markets, with residential home mortgages comprising our largest consumer loan category. These loans are secured by a primary residence and are underwritten using traditional underwriting systems to assess the credit risks of the consumer. Decisions are primarily based on LTV ratios, DTI ratios, liquidity, and credit scores. A maximum LTV ratio of 80% is generally required, although higher levels are permitted with mortgage insurance or other mitigating factors. We offer fixed rate mortgages and variable rate mortgages with interest rates that are subject to change every year after the first, third, fifth, or seventh year, depending on the product and are based on indexed rates such as prime. We do not offer payment-option facilities, sub-prime loans, or any product with negative amortization. 
 
 
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 Home equity loans are secured primarily by second mortgages on residential property of the borrower. The underwriting terms for the home equity product generally permit borrowing availability, in the aggregate, up to 90% of the appraised value of the collateral property at the time of origination. We offer fixed and variable rate home equity loans, with variable rate loans underwritten at fully-indexed rates. Decisions are primarily based on LTV ratios, DTI ratios, and credit scores. We do not offer home equity loan products with reduced documentation. 
 
 
 Automobile loans include loans and leases secured by new or used automobiles. We originate automobile loans and leases primarily on an indirect basis through selected dealerships. We require borrowers to maintain collision insurance on automobiles securing consumer loans, with us listed as loss payee. Our procedures for underwriting automobile loans include an assessment of an applicant’s overall financial capacity, including credit history and the ability to meet existing obligations and payments on the proposed loan. Although an applicant’s creditworthiness is the primary consideration, the underwriting process also includes a comparison of the value of the collateral security to the proposed loan amount. 
 
 
 Asset Quality 
 
 
 Community-based lending personnel, along with region-based independent underwriting and analytic support staff, extend credit under guidelines established and administered by our Enterprise Risk Committee. This committee, which meets quarterly, is made up of independent outside directors. The committee monitors credit quality through its review of information such as delinquencies, credit exposures, peer comparisons, problem loans, and charge-offs. In addition, the committee reviews and approves recommended loan policy changes to assure our policy remains appropriate for the current lending environment. 
 
 
 We lend to commercial and commercial real estate clients in various industries including manufacturing, agribusiness, transportation, mining, wholesaling, and retailing. Old National manages concentrations of credit exposure by industry, product, geography, customer relationship, and loan size. At December 31, 2020, our average commercial loan size (excluding PPP loans) was under $355,000 and our average commercial real estate loan size was under $820,000. In addition, while loans to lessors of both residential and non-residential real estate exceed 10% of total loans, no individual sub-segment category within those broader categories reaches the 10% threshold. At December 31, 2020, we had minimal exposure to foreign borrowers and no sovereign debt. Our policy is to concentrate our lending activity in the geographic market areas we serve, primarily Indiana, Kentucky, Michigan, Minnesota, and Wisconsin. We have experienced an impact from COVID-19 during 2020; however, the depth of this crisis is ongoing and its effect is anticipated to be very broad-based. Management believes that trends in under-performing, criticized, and classified loans will be highly dependent on both the ability to roll out vaccinations in an efficient and timely manner, as well as the length of time it will take consumers to return to their pre-pandemic spending routines. 
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 The following table presents a summary of under-performing, criticized, and classified assets at December 31: 
 
 (dollars in thousands) 2020 2019 2018 2017 2016 
 Total nonaccrual loans $ 147,339 $ 126,412 $ 157,484 $ 124,927 $ 131,407 
 TDRs still accruing 17,749 18,338 17,356 19,589 14,376 
 Total past due loans (90 days or more and still 
 accruing) 167 570 1,353 894 328 
 Other real estate owned 1,324 2,169 3,232 8,810 18,546 
 Total under-performing assets $ 166,579 $ 147,489 $ 179,425 $ 154,220 $ 164,657 
 Classified loans (includes nonaccrual, TDRs
 still accruing, past due 90 days, and other
 problem loans) $ 304,782 $ 296,671 $ 334,785 $ 226,583 $ 220,429 
 Other classified assets (1) 3,706 2,933 2,820 4,556 7,063 
 Criticized loans 287,192 234,841 238,752 188,085 95,462 
 Total criticized and classified assets $ 595,680 $ 534,445 $ 576,357 $ 419,224 $ 322,954 
 Asset Quality Ratios: 
 Non-performing loans/total loans (2) (3) 1.20 % 1.19 % 1.43 % 1.30 % 1.62 % 
 Under-performing assets/total loans and
 other real estate owned (2) (4) 1.21 1.22 1.47 1.39 1.82 
 Under-performing assets/total assets 0.73 0.72 0.91 0.88 1.11 
 Allowance/under-performing assets (4) (5) 78.87 37.03 30.91 32.67 30.25 
 Allowance/nonaccrual loans (5) 89.17 43.21 35.22 40.33 37.90 

 (1) Includes one pooled trust preferred security and two insurance policies at December 31, 2020. 
 (2) Loans exclude loans held for sale. 
 (3) Non-performing loans include nonaccrual loans and TDRs still accruing. 
 (4) Includes acquired loans that were recorded at fair value at the date of acquisition. As such, the credit risk was incorporated in the fair value recorded and no allowance for loan losses was recorded prior to 2020. 
 (5) Beginning January 1, 2020, the allowance is based on current expected loss methodology. Prior to January 1, 2020, the allowance was based on incurred loss methodology. 
 Under-performing assets totaled $166.6 million at December 31, 2020, compared to $147.5 million at December 31, 2019. Under-performing assets as a percentage of total loans and other real estate owned at December 31, 2020 were 1.21%, a 1 basis point improvement from 1.22% at December 31, 2019. 
 Nonaccrual loans increased $20.9 million from December 31, 2019 to December 31, 2020 primarily due to an increase in commercial real estate nonaccrual loans. As a percentage of nonaccrual loans, the allowance was 89.17% at December 31, 2020, compared to 43.21% at December 31, 2019. Beginning January 1, 2020, the allowance is based on current expected loss methodology. Prior to January 1, 2020, the allowance was based on current expected loss methodology. 
 If nonaccrual and renegotiated loans outstanding at December 31, 2020 and 2019, respectively, had been accruing interest throughout the year in accordance with their original terms, interest income of approximately $5.8 million in 2020 and $4.4 million in 2019 would have been recorded on these loans. The amount of interest income actually recorded on nonaccrual and renegotiated loans was $2.9 million in 2020 and $2.8 million in 2019. 
 Total criticized and classified assets were $595.7 million at December 31, 2020, an increase of $61.2 million from December 31, 2019. Other classified assets include investment securities that fell below investment grade rating totaling $3.7 million at December 31, 2020, compared to $2.9 million at December 31, 2019. 
 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 include one or a combination of the following: a reduction of the stated interest rate of the loan, an extension of the maturity date at a stated rate of interest lower than the current market rate of new debt with similar risk, or a permanent reduction of the recorded investment of the loan. 
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 Loans modified in a TDR are typically placed on nonaccrual status until we determine that the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate a period of performance according to the restructured terms for six months. 
 If we are unable to resolve a nonperforming loan issue, the credit will be charged off when it is apparent there will be a loss. For large commercial type loans, each relationship is individually analyzed for evidence of apparent loss based on quantitative benchmarks or subjectively based upon certain events or particular circumstances. Generally, Old National charges off small commercial loans scored through our small business credit center with contractual balances under $250,000 that are 90 days or more delinquent and do not have adequate collateral support. For residential and consumer loans, a charge off is recorded at the time foreclosure is initiated or when the loan becomes 120 to 180 days past due, whichever is earlier. 
 For commercial TDRs, an allocated reserve is established within the allowance for credit losses for the difference between the carrying value of the loan and its computed value. To determine the computed value of the loan, one of the following methods is selected: (1) the present value of expected cash flows discounted at the loan’s original effective interest rate, (2) the loan’s observable market price, or (3) the fair value of the collateral, if the loan is collateral dependent. The allocated reserve is established as the difference between the carrying value of the loan and the collectable value. If there are significant changes in the amount or timing of the loan’s expected future cash flows, impairment is recalculated and the valuation allowance is adjusted accordingly. 
 When a residential or consumer loan is identified as a TDR, the loan is typically written down to its collateral value less selling costs. 
 At December 31, 2020, TDRs consisted of $11.1 million of commercial loans, $17.6 million of commercial real estate loans, $0.1 million of BBCC loans, $2.8 million of residential real estate loans, $0.8 million of direct consumer loans, and $0.3 million of home equity loans, totaling $32.7 million. TDRs included within nonaccrual loans totaled $14.9 million at December 31, 2020. At December 31, 2019, our TDRs consisted of $12.4 million of commercial loans, $14.2 million of commercial real estate loans, $0.6 million of BBCC loans, $3.1 million of residential real estate loans, $1.0 million of direct consumer loans, and $0.4 million of home equity loans, totaling $31.7 million. TDRs included within nonaccrual loans totaled $13.8 million at December 31, 2019. 
 Old National has allocated specific reserves to customers whose loan terms have been modified in TDRs totaling $1.6 million at December 31, 2020 and $0.9 million at December 31, 2019. At December 31, 2020, Old National had not committed to lend any additional funds to customers with outstanding loans that are classified as TDRs, compared to $2.3 million at December 31, 2019. 
 The terms of certain other loans were modified during 2020 and 2019 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, and therefore impaired, 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. 
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 We have developed relief programs to assist borrowers in financial need due to the effects of the COVID-19 pandemic. The Interagency Statement issued by our banking regulators encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further provides that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act terminates. Section 541 of the CAA extends this relief to the earlier of January 1, 2022 or 60 days after the national emergency termination date. The Interagency Statement was subsequently revised in April 2020 to clarify the interaction of the original guidance with Section 4013 of the CARES Act, as well as setting forth the banking regulators’ views on consumer protection considerations. In accordance with such guidance, we are offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term (180 days or less) modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. The table below presents these loan deferrals by loan category: 
 
 (dollars in thousands) June 30, 2020
Deferrals
Balance September 30, 2020
Deferrals
Balance December 31, 2020
Deferrals
Balance (1) December 31, 2020 Number of Deferrals 
 Commercial and commercial real estate $ 1,170,119 $ 125,603 $ 53,823 101 
 Residential real estate 78,639 1,654 1,855 6 
 Consumer 54,786 10,315 8,224 348 
 Total $ 1,303,544 $ 137,572 $ 63,902 455 

 (1) Includes second deferrals between 90 and 180 days totaling $6.3 million of commercial and commercial real estate loans and $0.6 million of consumer loans. 
 U.S. Small Business Administration Paycheck Protection Program 
 Section 1102 of the CARES Act created the PPP, a program administered by the SBA to provide loans to small businesses for payroll and other basic expenses during the COVID-19 pandemic. Old National has participated in the PPP as a lender. These loans are eligible to be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. Additionally, loan payments will also be deferred for the first six months of the loan term. The PPP commenced on April 3, 2020 and was available to qualified borrowers through August 8, 2020. No collateral or personal guarantees are required. Neither the government nor lenders are permitted to charge the recipients any fees. 
 On December 27, 2020, President Trump signed into law the CAA. The CAA, among other things, extends the life of the PPP, effectively creating a second round of PPP loans for eligible businesses. Old National is participating in the CAA’s second round of PPP lending. In mid-January we opened our lending portal and have begun processing PPP loan applications. Early indications support our belief that there will be a large volume of smaller sized loans. We anticipate the average loan size to be less than $150,000. Currently, we are focused on helping minority-owned business, women-owned business, not-for-profit entities, and existing first round PPP customers with the lending process. Additionally, section 541 of the CAA extends the relief provided by the CARES Act for financial institutions to suspend the GAAP accounting treatment for troubled debt restructuring to January 1, 2022. As of January 31, 2021, we had received 2,740 applications under the CAA round of PPP lending, representing $348.0 million in funding. 
 
 
 As of December 31, 2020, Old National had originated over 9,700 loans with balances in excess of $1.5 billion to new and existing customers through the PPP. To the extent the PPP loans are forgiven, this represents outside funds to our borrowers; and, especially with respect to vulnerable industries, we believe these capital injections are going to be instrumental in assisting our borrowers in navigating through the pandemic. This capital injection, along with the level of capital each borrower had just prior to COVID-19 impacting them, are critical factors in determining the staying power of our borrowers. Upon receipt of interim financial results from our borrowers, we will use that information to update our understanding of the underlying strengths or weaknesses in each individual relationship and take actions, as appropriate. As of January 31, 2021, we have received payment from the SBA on 5,689 of our loans totaling $702.6 million. 
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 Allowance for Credit Losses on Loans and Unfunded Commitments 
 Beginning January 1, 2020, we calculated allowance for credit losses using current expected credit losses methodology. As of January 1, 2020, Old National increased the allowance for credit losses for loans by $41.3 million and increased the allowance for credit losses for unfunded loan commitments by $4.5 million, since the ASU covers credit losses over the expected life of a loan as well as considering future changes in macroeconomic conditions. The increase related to the acquired loan portfolio totaled $27.1 million. 
 Credit quality within the loans held for investment portfolio is continuously monitored by management and is reflected within the allowance for credit losses for loans. The allowance for credit losses is an estimate of expected losses inherent within the Company’s loans held for investment portfolio. Credit quality is assessed and monitored by evaluating various attributes and the results of those evaluations are utilized in underwriting new loans and in our process for estimating expected credit losses. Expected credit loss inherent in non-cancelable off-balance-sheet credit exposures is accounted for as a separate liability included in other liabilities on the balance sheet. The allowance for credit losses for loans held for investment is adjusted by a credit loss expense, which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries. Accrued interest receivable is excluded from the estimate of credit losses. 
 The allowance for credit loss estimation process involves procedures to appropriately consider the unique characteristics of our loan portfolio segments. These segments are further disaggregated into loan classes based on the level at which credit risk of the loan is monitored. When computing the level of expected credit losses, credit loss assumptions are estimated using a model that categorizes loan pools based on loss history, delinquency status, and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods, evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense in those future periods. 
 The allowance level is influenced by loan volumes, loan AQR migration or delinquency status, changes in historical loss experience, and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions. The methodology for estimating the amount of expected credit losses reported in the allowance for credit losses has two basic components: first, an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans; and second, a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics. 
 The loan categories used to monitor and analyze interest income and yields are different than the portfolio segments used to determine the allowance for credit losses for loans. The allowance for credit losses was calculated by pooling loans of similar credit risk characteristics and credit monitoring procedures. The four loan portfolios are classified into seven segments of loans - commercial, commercial real estate, BBCC, residential real estate, indirect, direct, and home equity. The commercial and commercial real estate loan categories shown on the balance sheet include the same pool of loans as the commercial, commercial real estate, and BBCC portfolio segments. The consumer loan category shown on the balance sheet is comprised of the same loans in the indirect, direct, and home equity portfolio segments. The composition of loans by portfolio segment as of December 31, 2020 follows: 
 
 December 31, 2020 Segment December 31, 2020 
 Statement Portfolio After 
 (dollars in thousands) Balance Reclassifications Reclassifications 
 Loans: 
 Commercial $ 3,956,422 $ (198,722) $ 3,757,700 
 Commercial real estate 5,946,512 (171,701) 5,774,811 
 BBCC N/A 370,423 370,423 
 Residential real estate 2,248,422 — 2,248,422 
 Consumer 1,635,123 (1,635,123) N/A 
 Indirect N/A 913,902 913,902 
 Direct N/A 164,807 164,807 
 Home equity N/A 556,414 556,414 
 Total $ 13,786,479 $ — $ 13,786,479 

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 The activity in our allowance for credit losses for loans was as follows: 
 
 (dollars in thousands) 2020 
 Balance at beginning of period $ 54,619 
 Impact of adopting ASC 326 41,347 
 Loans charged-off: 
 Commercial 5,593 
 Commercial real estate 4,323 
 BBCC 95 
 Residential real estate 824 
 Indirect 2,754 
 Direct 1,763 
 Home equity 201 
 Total charge-offs 15,553 
 Recoveries on charged-off loans: 
 Commercial 3,629 
 Commercial real estate 4,515 
 BBCC 140 
 Residential real estate 633 
 Indirect 1,922 
 Direct 819 
 Home equity 922 
 Total recoveries 12,580 
 Net charge-offs (recoveries) 2,973 
 Provision for credit losses 38,395 
 Balance at end of period $ 131,388 
 Average loans for the year (1) $ 13,341,677 
 Asset Quality Ratios: 
 Allowance/year-end loans (1) 0.95 % 
 Allowance/average loans (1) 0.98 
 Net charge-offs (recoveries)/average loans 0.02 

 (1) Loans exclude loans held for sale. 
 At December 31, 2020, the allowance for credit losses was $131.4 million. There were no industry segments representing a significant share of total net charge-offs. Over the last twelve months, net charge-offs have remained low. Continued loan growth in future periods, a decline in our current level of recoveries, or an increase in charge-offs could result in an increase in provision expense. Additionally, with the adoption of CECL beginning on January 1, 2020, provision expense may become more volatile due to changes in CECL model assumptions of credit quality, macroeconomic factors and conditions, and loan composition, which drive the allowance for credit losses balance. 
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 Prior to January 1, 2020, we calculated allowance for loan losses using incurred losses methodology. The activity in our allowance for loan losses was as follows: 
 
 (dollars in thousands) 2019 2018 2017 2016 
 Balance at beginning of period $ 55,461 $ 50,381 $ 49,808 $ 52,233 
 Loans charged-off: 
 Commercial 3,819 3,087 1,108 5,047 
 Commercial real estate 2,846 879 3,700 2,632 
 Residential real estate 661 1,100 985 800 
 Consumer credit 7,463 7,903 6,924 6,131 
 Total charge-offs 14,789 12,969 12,717 14,610 
 Recoveries on charged-off loans: 
 Commercial 1,650 1,519 2,281 3,102 
 Commercial real estate 3,774 2,740 3,777 4,763 
 Residential real estate 146 2,118 255 174 
 Consumer credit 3,630 4,706 3,927 3,186 
 Total recoveries 9,200 11,083 10,240 11,225 
 Net charge-offs (recoveries) 5,589 1,886 2,477 3,385 
 Provision for loan losses 4,747 6,966 3,050 960 
 Balance at end of period $ 54,619 $ 55,461 $ 50,381 $ 49,808 
 Average loans for the year (1) $ 12,087,429 $ 11,422,967 $ 9,525,888 $ 8,265,169 
 Asset Quality Ratios: 
 Allowance/year-end loans (1) 0.45 % 0.45 % 0.45 % 0.55 % 
 Allowance/average loans (1) 0.45 0.49 0.53 0.60 
 Net charge-offs (recoveries)/average loans 0.05 0.02 0.03 0.04 

 (1) Loans exclude loans held for sale. 
 We maintain an allowance for credit losses on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements. The allowance is computed using a methodology similar to that used to determine the allowance for credit losses for loans, modified to take into account the probability of a drawdown on the commitment. The allowance for credit losses on unfunded loan commitments is classified as a liability account on the balance sheet within accrued expenses and other liabilities, while the corresponding provision for these credit losses is recorded as a component of other expense. The allowance for credit losses on unfunded commitments was $11.7 million at December 31, 2020. 
 Prior to January 1, 2020, we calculated allowance for losses on unfunded loan commitments using incurred losses methodology. At December 31, 2019, the allowance for unfunded commitments was $2.7 million. 
 The following table details the allowance for credit losses for loans by loan category and the percent of loans in each category compared to total loans at December 31, 2020. 
 
 2020 
 (dollars in thousands) Allowance
Amount % of
Loans
to Total
Loans 
 Commercial $ 30,567 27.3 % 
 Commercial real estate 75,810 41.9 
 BBCC 6,120 2.7 
 Residential real estate 12,608 16.3 
 Indirect 3,580 6.6 
 Direct 855 1.2 
 Home equity 1,848 4.0 
 Total $ 131,388 100.0 % 

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 The following table details the allowance for loan losses by loan category and the percent of loans in each category compared to total loans at December 31. 
 
 2019 2018 2017 2016 
 (dollars in thousands) Allowance
Amount % of
Loans
to Total
Loans Allowance
Amount % of
Loans
to Total
Loans Allowance
Amount % of
Loans
to Total
Loans Allowance
Amount % of
Loans
to Total
Loans 
 Commercial $ 22,585 23.9 % $ 21,742 26.4 % $ 19,246 24.4 % $ 21,481 21.3 % 
 Commercial real estate 21,588 42.6 23,470 40.5 21,436 39.2 18,173 34.7 
 Residential real estate 2,299 19.3 2,277 18.4 1,763 19.5 1,643 23.2 
 Consumer credit 8,147 14.2 7,972 14.7 7,936 16.9 8,511 20.8 
 Total $ 54,619 100.0 % $ 55,461 100.0 % $ 50,381 100.0 % $ 49,808 100.0 % 

 Market Risk 
 
 
 Market risk is the risk that the estimated fair value of our assets, liabilities, and derivative financial instruments will decline as a result of changes in interest rates or financial market volatility, or that our net income will be significantly reduced by interest rate changes. 
 The objective of our interest rate management process is to maximize net interest income while operating within acceptable limits established for interest rate risk and maintaining adequate levels of funding and liquidity. 
 Potential cash flows, sales, or replacement value of many of our assets and liabilities, especially those that earn or pay interest, are sensitive to changes in the general level of interest rates. This interest rate risk arises primarily from our normal business activities of gathering deposits and extending loans. Many factors affect our exposure to changes in interest rates, such as general economic and financial conditions, customer preferences, historical pricing relationships, and re-pricing characteristics of financial instruments. Our earnings can also be affected by the monetary and fiscal policies of the U.S. Government and its agencies, particularly the Federal Reserve. 
 In managing interest rate risk, we, through our Funds Management Committee, a committee of the Board of Directors, establish guidelines, for asset and liability management, including measurement of short and long-term sensitivities to changes in interest rates. Based on the results of our analysis, we may use different techniques to manage changing trends in interest rates including: 
 • adjusting balance sheet mix or altering interest rate characteristics of assets and liabilities; 
 • changing product pricing strategies; 
 • modifying characteristics of the investment securities portfolio; or 
 • using derivative financial instruments, to a limited degree. 
 
 
 A key element in our ongoing process is to measure and monitor interest rate risk using a model to quantify the likely impact of changing interest rates on Old National’s results of operations. The model quantifies the effects of various possible interest rate scenarios on projected net interest income. The model measures the impact on net interest income relative to a base case scenario. The base case scenario assumes that the balance sheet and interest rates are held at current levels. Interest rates are floored at 0.00% in the down 50 basis points scenario. The model shows our projected net interest income sensitivity based on interest rate changes only and does not consider other forecast assumptions. 
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 The following table illustrates our projected net interest income sensitivity over a two-year cumulative horizon based on the asset/liability model as of December 31, 2020 and 2019: 
 
 Immediate
Rate Decrease Immediate Rate Increase 
 (dollars in thousands) -50
Basis Points Base +100
Basis Points +200
Basis Points +300
Basis Points 
 December 31, 2020 
 Projected interest income: 
 Money market, other interest earning 
 investments, and investment securities 
 $ 262,254 $ 276,027 $ 304,939 $ 325,867 $ 343,376 
 Loans 856,007 886,057 1,018,491 1,152,321 1,283,582 
 Total interest income 1,118,261 1,162,084 1,323,430 1,478,188 1,626,958 
 Projected interest expense: 
 Deposits 17,574 26,598 106,018 185,434 264,847 
 Borrowings 63,262 67,864 103,057 137,662 173,915 
 Total interest expense 80,836 94,462 209,075 323,096 438,762 
 Net interest income $ 1,037,425 $ 1,067,622 $ 1,114,355 $ 1,155,092 $ 1,188,196 
 Change from base $ (30,197) $ 46,733 $ 87,470 $ 120,574 
 % change from base (2.83) % 4.38 % 8.19 % 11.29 % 
 
 December 31, 2019 
 Projected interest income: 
 Money market, other interest earning 
 investments, and investment securities 
 $ 311,737 $ 327,770 $ 348,556 $ 361,001 $ 373,190 
 Loans 966,207 1,023,627 1,142,583 1,259,598 1,373,727 
 Total interest income 1,277,944 1,351,397 1,491,139 1,620,599 1,746,917 
 Projected interest expense: 
 Deposits 82,128 120,402 217,131 313,848 410,565 
 Borrowings 100,057 111,917 140,046 169,277 198,800 
 Total interest expense 182,185 232,319 357,177 483,125 609,365 
 Net interest income $ 1,095,759 $ 1,119,078 $ 1,133,962 $ 1,137,474 $ 1,137,552 
 Change from base $ (23,319) $ 14,884 $ 18,396 $ 18,474 
 % change from base (2.08) % 1.33 % 1.64 % 1.65 % 

 Our asset sensitivity increased year over year primarily due to deposit pricing actions and changes in our hedging strategies, balance sheet mix, investment duration, and prepayment speed behavior. 
 A key element in the measurement and modeling of interest rate risk is the re-pricing assumptions of our transaction deposit accounts, which have no contractual maturity dates. Because the models are driven by expected behavior in various interest rate scenarios and many factors besides market interest rates affect our net interest income, we recognize that model outputs are not guarantees of actual results. For this reason, we model many different combinations of interest rates and balance sheet assumptions to understand our overall sensitivity to market interest rate changes, including shocks, ramps, yield curve flattening, yield curve steepening, as well as forecasts of likely interest rate scenarios tested. At December 31, 2020, our projected net interest income sensitivity based on the asset/liability models we utilize was within the limits of our interest rate risk policy for the scenarios tested. 
 We use cash flow and fair value hedges, primarily interest rate swaps, collars, and floors, to mitigate interest rate risk. Derivatives designated as hedging instruments were in a net asset position with a fair value of $15.2 million at December 31, 2020, compared to a net asset position with a fair value of $6.1 million at December 31, 2019. See Note 19 to the consolidated financial statements for further discussion of derivative financial instruments. 
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 Liquidity Risk 
 
 
 Liquidity risk arises from the possibility that we may not be able to satisfy current or future financial commitments, or may become unduly reliant on alternative funding sources. The Funds Management Committee of the Board of 
 Directors establishes liquidity risk guidelines and, along with the Balance Sheet Management Committee, monitors liquidity risk. The objective of liquidity management is to ensure we have the ability to fund balance sheet growth and meet deposit and debt obligations in a timely and cost-effective manner. Management monitors liquidity through a regular review of asset and liability maturities, funding sources, and loan and deposit forecasts. We maintain strategic and contingency liquidity plans to ensure sufficient available funding to satisfy requirements for balance sheet growth, properly manage capital markets’ funding sources and to address unexpected liquidity requirements. On June 5, 2020, we filed an automatic shelf registration statement with the SEC that permits us to issue an unspecified amount of debt or equity securities. 
 Loan repayments and maturing investment securities are a relatively predictable source of funds. However, deposit flows, calls of investment securities and prepayments of loans and mortgage-related securities are strongly influenced by interest rates, the housing market, general and local economic conditions, and competition in the marketplace. We continually monitor marketplace trends to identify patterns that might improve the predictability of the timing of deposit flows or asset prepayments. 
 At December 31, 2020, brokered deposits consist of $100.0 million of demand deposits and $19.6 million of time deposits. A maturity schedule for Old National Bank’s total time deposits is shown in the following table at December 31, 2020. 
 
 (dollars in thousands) 
 Maturity Bucket Amount Rate 
 2021 $ 825,822 0.54 % 
 2022 139,466 0.83 
 2023 82,288 1.24 
 2024 37,280 1.61 
 2025 30,947 0.72 
 2026 and beyond 7,067 1.50 
 Total $ 1,122,870 0.68 % 

 Our ability to acquire funding at competitive prices is influenced by rating agencies’ views of our credit quality, liquidity, capital, and earnings. Moody’s Investor Service places us in an investment grade that indicates a low risk of default. For both Old National and Old National Bank: 
 • Moody’s Investor Service affirmed the Long-Term Rating of “A3” for Old National’s senior unsecured/issuer rating on February 3, 2020. 
 • Moody’s Investor Service affirmed Old National Bank’s long-term deposit rating of “Aa3” on February 3, 2020. The bank’s short-term deposit rating was affirmed at “P-1” and the bank’s issuer rating was affirmed at “A3.” 
 The rating outlook from Moody’s Investor Service is stable. Moody’s Investor Service concluded a rating review of Old National Bank on February 3, 2020. 
 The credit ratings of Old National and Old National Bank at December 31, 2020 are shown in the following table. 
 
 Moody's Investor Service 
 Long-term Short-term 
 Old National A3 N/A 
 Old National Bank Aa3 P-1 

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 Old National Bank maintains relationships in capital markets with brokers and dealers to issue certificates of deposit and short-term and medium-term bank notes as well. At December 31, 2020, Old National and its subsidiaries had the following availability of liquid funds and borrowings: 
 
 (dollars in thousands) Parent
Company Subsidiaries 
 Available liquid funds: 
 Cash and due from banks $ 78,304 $ 511,408 
 Unencumbered government-issued debt securities — 2,486,674 
 Unencumbered investment grade municipal securities — 881,735 
 Unencumbered corporate securities — 160,143 
 Availability of borrowings: 
 Amount available from Federal Reserve discount window* — 462,435 
 Amount available from Federal Home Loan Bank Indianapolis* — 401,286 
 Total available funds $ 78,304 $ 4,903,681 

 * Based on collateral pledged 
 
 
 Old National Bancorp has routine funding requirements consisting primarily of operating expenses, dividends to shareholders, debt service, net derivative cash flows, and funds used for acquisitions. Old National Bancorp can obtain funding to meet its obligations from dividends and management fees collected from its subsidiaries, operating line of credit, and through the issuance of debt securities. Additionally, Old National Bancorp has a shelf registration in place with the SEC permitting ready access to the public debt and equity markets. At December 31, 2020, Old National Bancorp’s other borrowings outstanding were $213.2 million. Management believes the Company has the ability to generate and obtain adequate amounts of liquidity to meet its requirements in the short-term and the long-term. 
 Federal banking laws regulate the amount of dividends that may be paid by banking subsidiaries without prior approval. Prior regulatory approval is required if dividends to be declared in any year would exceed net earnings of the current year plus retained net profits for the preceding two years. Prior regulatory approval to pay dividends was not required in 2019 or 2020 and is not currently required. At December 31, 2020, Old National Bank could pay dividends of $212.1 million without prior regulatory approval. 
 Operational/Technology/Cyber Risk 
 Operational/technology/cyber risk is the danger that inadequate information systems, operational problems, breaches in internal controls, information security breaches, fraud, or unforeseen catastrophes will result in unexpected losses and other adverse impacts to Old National, such as reputational harm. We maintain frameworks, programs, and internal controls to prevent or minimize financial loss from failure of systems, people, or processes. This includes specific programs and frameworks intended to prevent or limit the effects of cyber risks including cyber-attacks or other information security breaches that might allow unauthorized transactions or unauthorized access to customer, associate, or company sensitive information. Metrics and measurements are used by our management team in the management of day-to-day operations to ensure effective customer service, minimization of service disruptions, and oversight of operational and cyber risk. We continually monitor and report on operational, technology, and cyber risks related to clients, products, and business practices; external and internal fraud; business disruptions and systems failures; cyber-attacks, information security or data breaches; damage to physical assets; and execution, delivery, and process management. 
 The Enterprise Risk Management Committee of the Board of Directors is responsible for the oversight, guidance, and monitoring of risks, including operational/technology/cyber risks, being taken by the Company. The monitoring is accomplished through ongoing review of management reports, data on risks and policy limits, and consistent discussion on enterprise risk management strategies, policies, and risk assessments. 
 Regulatory/Compliance/Legal Risk 
 Regulatory/compliance/legal risk is the risk that the Company violated or was not in compliance with applicable laws, regulations or practices, industry standards, or ethical standards. The legal portion assesses the risk that unenforceable contracts, lawsuits, or adverse judgments can disrupt or otherwise negatively impact the Company. The Board of Directors expects that we will perform business in a manner compliant with applicable 
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 laws and/or regulations and expects issues to be identified, analyzed, and remediated in a timely and complete manner. 
 
 OFF-BALANCE SHEET ARRANGEMENTS 
 Off-balance sheet arrangements include commitments to extend credit and financial guarantees. Commitments to extend credit and financial guarantees are used to meet the financial needs of our customers. Our banking affiliates have entered into various agreements to extend credit, including loan commitments of $3.720 billion and standby letters of credit totaled $86.9 million at December 31, 2020. At December 31, 2020, approximately $3.463 billion of the loan commitments had fixed rates and $257.8 million had floating rates, with the floating interest rates ranging from 0% to 14%. At December 31, 2019, loan commitments were $2.779 billion and standby letters of credit totaled $87.8 million. The term of these off-balance sheet arrangements is typically one year or less. 
 Old National is a party in risk participation transactions of interest rate swaps, which had total notional amount of $54.3 million at December 31, 2020. 
 
 CONTRACTUAL OBLIGATIONS, COMMITMENTS, AND CONTINGENT LIABILITIES 
 The following table presents our significant fixed and determinable contractual obligations and significant commitments at December 31, 2020. Further discussion of each obligation or commitment is included in the referenced note to the consolidated financial statements. 
 
 
 Payments Due In 
 (dollars in thousands) Note
Reference One Year
or Less One to
Three Years Three to
Five Years Over
Five Years Total 
 Deposits without stated maturity $ 15,814,583 $ — $ — $ — $ 15,814,583 
 IRAs, consumer, and brokered
 certificates of deposit 10 825,822 221,754 68,227 7,067 1,122,870 
 Federal funds purchased and
 interbank borrowings 1,166 — — — 1,166 
 Securities sold under agreements
 to repurchase 11 431,166 — — — 431,166 
 Federal Home Loan Bank advances 12 95,000 29,160 625,000 1,242,275 1,991,435 
 Other borrowings 13 1,025 2,205 177,368 72,189 252,787 
 Fixed interest payments (1) 35,103 67,931 54,941 60,375 218,350 
 Operating leases 6 14,245 22,775 16,482 50,462 103,964 
 Other long-term liabilities (2) 27,093 2,963 44 5 30,105 

 (1) Our senior notes, subordinated notes, certain trust preferred securities, and certain FHLB advances have fixed rates ranging from 0.14% to 4.96%. All of our other long-term debt is at LIBOR based variable rates at December 31, 2020 . The projected variable interest assumes no increase in LIBOR rates from December 31, 2020 . 
 (2) Includes unfunded commitments on qualified affordable housing projects and other tax credit investments. 
 We rent certain premises and equipment under operating leases. See Note 6 to the consolidated financial statements for additional information on long-term lease arrangements. 
 We are party to various derivative contracts as a means to manage the balance sheet and our related exposure to changes in interest rates, to manage our residential real estate loan origination and sale activity, and to provide derivative contracts to our clients. Since the derivative liabilities recorded on the balance sheet change frequently and do not represent the amounts that may ultimately be paid under these contracts, these liabilities are not included in the table of contractual obligations presented above. Further discussion of derivative instruments is included in Note 19 to the consolidated financial statements. 
 In the normal course of business, various legal actions and proceedings are pending against us and our affiliates which are incidental to the business in which they are engaged. Further discussion of contingent liabilities is included in Note 20 to the consolidated financial statements. 
 In addition, liabilities recorded under FASB ASC 740-10 (FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 ) are not included in the table because the amount 
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 and timing of any cash payments cannot be reasonably estimated. Further discussion of income taxes and liabilities is included in Note 15 to the consolidated financial statements. 
 
 CRITICAL ACCOUNTING POLICIES AND ESTIMATES 
 Our accounting policies are described in Note 1 to the consolidated financial statements. Certain accounting policies require management to use significant judgment and estimates, which can have a material impact on the carrying value of certain assets and liabilities. We consider these policies to be critical accounting policies. The judgment and assumptions made are based upon historical experience or other factors that management believes to be reasonable under the circumstances. Because of the nature of the judgment and assumptions, actual results could differ from estimates, which could have a material effect on our financial condition and results of operations. 
 The following accounting policies materially affect our reported earnings and financial condition and require significant judgments and estimates. Management has reviewed these critical accounting estimates and related disclosures with our Audit Committee. 
 Goodwill 
 • Description. For acquisitions, we are required to record the assets acquired, including identified intangible assets such as goodwill, and the liabilities assumed at their fair value. These often involve estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques that may include estimates of attrition, inflation, asset growth rates, or other relevant factors. The carrying value of goodwill recorded must be reviewed for impairment on an annual basis, as well as on an interim basis if events or changes indicate that the asset might be impaired. An impairment loss must be recognized for any excess of carrying value over fair value of the goodwill. 
 • Judgments and Uncertainties. The determination of fair values is based on valuations using management’s assumptions of future growth rates, future attrition, discount rates, multiples of earnings or other relevant factors. 
 • Effect if Actual Results Differ From Assumptions. Changes in these factors, as well as downturns in economic or business conditions, could have a significant adverse impact on the carrying value of goodwill and could result in impairment losses affecting our financial statements as a whole and our banking subsidiary in which the goodwill resides. 
 • Pandemic. A prolonged COVID-19 outbreak, or any other epidemic that harms the global economy, U.S. economy, or the economies in which we operate could adversely affect our operations. Based on the required annual impairment test as of August 31, 2020, we have concluded that our goodwill was not impaired. On a quarterly basis, we will continue to evaluate our qualitative assessment assumptions, which are subject to risks and uncertainties, including: (1) forecasted revenues, expenses, and cash flows; (2) current discount rates; (3) our market capitalization; (4) observable market transactions and multiples; (5) changes to the regulatory environment; and (6) the nature and amount of government support that has been and is expected to be provided in the future. A prolonged economic downturn or deterioration in the economic outlook may lead management to conclude that an interim quantitative impairment test of our goodwill is required prior to the annual impairment test conducted on August 31. 
 Allowance for Credit Losses for Loans 
 • Description. The allowance for credit losses for loans represents management’s estimate of all expected credit losses over the expected contractual life of our loan portfolio. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for credit losses in those future periods. 
 The allowance for credit losses for loans, as reported in our consolidated statements of financial condition, is adjusted by an expense for credit losses, which is recognized in earnings, and reduced by the charge-off of loan amounts, net of recoveries. 
 • Judgments and Uncertainties. We utilize a discounted cashflow approach to determine the allowance for credit losses for performing loans and nonperforming loans. Expected cashflows are created for each loan and discounted using the effective yield. The discounted sum of expected cashflows is then compared to the 
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 amortized cost and any shortfall is recorded as reserve. Expected cashflows are created using a combination of contractual payment schedules, calculated PDs, LGD and prepayment assumptions as well as qualitative factors. For the commercial and commercial real estate loans, the PD is forecast using a regression model to determine the likelihood of a loan moving into nonaccrual within the time horizon. For residential and consumer loans, the PD is forecast using a regression model to determine the likelihood of a loan being charged-off within the time horizon. The regression models use combinations of variables to assess systematic and unsystematic risk. Variables used for unsystematic risk are borrower specific and help to gauge the risk of default from an individual borrower. Variables for systematic risk, risk inherent to all borrowers, come from the use of forward-looking economic forecasts and include variables such as unemployment rate, gross domestic product, and house price index. The LGD is defined as credit loss incurred when an obligor of the bank defaults. Qualitative factors include items such as changes in lending policies or procedures and economic uncertainty in forward-looking forecasts. 
 • Effect if Actual Results Differ From Assumptions. The allowance represents management’s best estimate, but significant downturns in circumstances relating to loan quality and economic conditions could result in a requirement for additional allowance. Likewise, an upturn in loan quality and improved economic conditions may allow a reduction in the required allowance. In either instance, unanticipated changes could have a significant impact on results of operations. 
 The expense for credit loss recorded through earnings is the amount necessary to maintain the allowance for credit losses at the amount of expected credit losses inherent within the loans held for investment portfolio. The amount of expense and the corresponding level of allowance for credit losses for loans are based on our evaluation of the collectability of the loan portfolio based on historical loss experience, reasonable and supportable forecasts, and other significant qualitative and quantitative factors. 
 Derivative Financial Instruments 
 • Description. As part of our overall interest rate risk management, we use derivative instruments to reduce exposure to changes in interest rates and market prices for financial instruments. The application of the hedge accounting policy requires judgment in the assessment of hedge effectiveness, identification of similar hedged item groupings and measurement of changes in the fair value of derivative financial instruments and hedged items. To the extent hedging relationships are found to be effective, changes in fair value of the derivatives are offset by changes in the fair value of the related hedged item or recorded to other comprehensive income. Management believes hedge effectiveness is evaluated properly in preparation of the financial statements. All of the derivative financial instruments we use have an active market and indications of fair value can be readily obtained. We are not using the “short-cut” method of accounting for any fair value derivatives. 
 • Judgments and Uncertainties. The application of the hedge accounting policy requires judgment in the assessment of hedge effectiveness, identification of similar hedged item groupings and measurement of changes in the fair value of derivative financial instruments and hedged items. 
 • Effect if Actual Results Differ From Assumptions. To the extent hedging relationships are found to be effective, changes in fair value of the derivatives are offset by changes in the fair value of the related hedged item or recorded to other comprehensive income. However, if in the future the derivative financial instruments used by us no longer qualify for hedge accounting treatment, all changes in fair value of the derivative would flow through the consolidated statements of income in other noninterest income, resulting in greater volatility in our earnings. 
 Income Taxes 
 • Description. We are subject to the income tax laws of the U.S., its states, and the municipalities in which we operate. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant government taxing authorities. We review income tax expense and the carrying value of deferred tax assets quarterly; and as new information becomes available, the balances are adjusted as appropriate. FASB ASC 740-10 (FIN 48) prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. See Note 15 to the consolidated financial statements for a further description of our provision and related income tax assets and liabilities. 
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 • Judgments and Uncertainties. In establishing a provision for income tax expense, we must make judgments and interpretations about the application of these inherently complex tax laws. We must also make estimates about when in the future certain items will affect taxable income in the various tax jurisdictions. Disputes over interpretations of the tax laws may be subject to review/adjudication by the court systems of the various tax jurisdictions or may be settled with the taxing authority upon examination or audit. 
 • Effect if Actual Results Differ From Assumptions. Although management believes that the judgments and estimates used are reasonable, actual results could differ and we may be exposed to losses or gains that could be material. To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our reserves, our effective income tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement would result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement would result in a reduction in our effective income tax rate in the period of resolution. 
 Management has discussed the development and selection of these critical accounting estimates with the Audit Committee and the Audit Committee has reviewed our disclosure relating to it in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 
 
 
 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 
 The information contained under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Market Risk” of this Form 10-K is incorporated herein by reference in response to this item. 
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.
OLD NATIONAL BANCORP /IN/ 10-K

Item 7. Management’s Discussion and Analysis
