Log in
E-mail
Password
Show password
Remember
Forgot password ?
Become a member for free
Sign up
Sign up
New member
Sign up for FREE
New customer
Discover our services
Settings
Settings
Dynamic quotes 
OFFON

OLD NATIONAL BANCORP

(ONB)
  Report
SummaryQuotesChartsNewsRatingsCalendarCompanyFinancialsConsensusRevisions 
SummaryMost relevantAll NewsAnalyst Reco.Other languagesPress ReleasesOfficial PublicationsSector news

OLD NATIONAL BANCORP /IN/ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

10/27/2021 | 09:40am EST
The following discussion is an analysis of our results of operations for the
three and nine months ended September 30, 2021 and 2020, and financial condition
as of September 30, 2021, compared to December 31, 2020. This discussion and
analysis should be read in conjunction with the consolidated financial
statements and related notes.
FORWARD-LOOKING STATEMENTS
In this report, we have made various statements regarding current expectations
or forecasts of future events, which speak only as of the date the statements
are made. These statements are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements are also made from time-to-time in press releases and in oral
statements made by the officers of Old National Bancorp ("Old National" or the
"Company"). Forward-looking statements can be identified by the use of the words
"expect," "may," "could," "will," "intend," "project," "estimate," "believe,"
"anticipate," or the negative of those terms, and other words of similar
meaning. Forward-looking statements also include, but are not limited to,
statements regarding estimated cost savings, plans and objectives for future
operations, the Company's business and growth strategies, including future
acquisitions of banks, regulatory developments, and expectations about
performance as well as economic and market conditions and trends.
                                       56
--------------------------------------------------------------------------------

Such forward-looking statements are based on assumptions and estimates, which
although believed to be reasonable, may turn out to be incorrect. Therefore,
undue reliance should not be placed upon these estimates and statements. We
cannot assure that any of these statements, estimates, or beliefs will be
realized and actual results may differ from those contemplated in these
forward-looking statements. We undertake no obligation to publicly update any
forward-looking statements, whether as a result of new information, future
events, or otherwise. You are advised to consult further disclosures we may make
on related subjects in our filings with the SEC. In addition to other factors
discussed in this report, some of the important factors that could cause actual
results to differ materially from those discussed in the forward-looking
statements include the following:
•the possibility that the merger between Old National and First Midwest will not
close when expected or at all because required regulatory or other approvals are
not received or other conditions to the closing are not satisfied on a timely
basis or at all, or are obtained subject to conditions that are not anticipated
(and the risk that required regulatory approvals may result in the imposition of
conditions that could adversely affect the combined company or the expected
benefits of the proposed transaction);
•the occurrence of any event, change, or other circumstances that could give
rise to the right of one or both of the parties to terminate the definitive
merger agreement between First Midwest and Old National;
•the risk that any announcements relating to the merger could have adverse
effects on the market price of the common stock of either or both parties to the
transaction;
•the possibility that the merger may be more expensive to complete than
anticipated, including as a result of unexpected factors or events;
•the length, severity, magnitude, and duration of the COVID-19 pandemic and the
direct and indirect impact of such pandemic, including its impact on the
Company's financial conditions and business operations;
•changes in the economy, which could materially impact credit quality trends and
the ability to generate loans and gather deposits, including the pace of
recovery following the COVID-19 pandemic;
•market, economic, operational, liquidity, credit, and interest rate risks
associated with our business;
•competition;
•government legislation and policies, including changes to address the impact of
COVID-19 through the CARES Act and other legislative and regulatory responses to
the COVID-19 pandemic;
•our ability to execute our business plan, including the anticipated impact from
the ONB Way strategic plan that may differ from current estimates;
•unanticipated changes in our liquidity position, including but not limited to
changes in our access to sources of liquidity and capital to address our
liquidity needs;
•our ability to successfully manage our credit risk and the sufficiency of our
allowance for credit losses;
•uncertainty about the discontinued use of LIBOR and the transition to an
alternative rate;
•failure or circumvention of our internal controls;
•failure or disruption of our information systems;
•significant changes in accounting, tax, or regulatory practices or
requirements, including the impact of the CECL standard;
•new legal obligations or liabilities or unfavorable resolutions of litigations;
•disruptive technologies in payment systems and other services traditionally
provided by banks; and
•operational risks or risk management failures by us or critical third parties,
including without limitation with respect to data processing, information
systems, cyber-security, technological changes, vendor problems, business
interruption, and fraud risks.
Investors should consider these risks, uncertainties, and other factors in
addition to risk factors included in this filing and our other filings with the
SEC.
                                       57
--------------------------------------------------------------------------------

FINANCIAL HIGHLIGHTS The following table sets forth certain financial highlights of Old National:

                                                       Three Months Ended                                      Nine Months Ended
(dollars and shares in thousands,   September 30,           June 30,            September 30,                    September 30,
except per share data)                  2021                  2021                  2020                  2021                  2020
Income Statement:
Net interest income                $    151,572          $    149,927      

$ 145,573 $ 449,619 $ 435,015 Taxable equivalent adjustment (1) 3,501

                 3,470                 3,379                10,471                10,069
Net interest income - tax
equivalent basis                        155,073               153,397               148,952               460,090               445,084
Provision for credit losses              (4,613)               (4,929)                    -               (26,898)               39,495
Noninterest income                       54,515                51,508                64,759               162,735               180,722
Noninterest expense                     121,274               129,618               120,234               368,632               399,099
Net income                               71,746                62,786                77,944               221,350               152,289
Per Common Share Data:
Weighted average diluted shares         165,939               165,934               165,419               165,862               166,370
Net income (diluted)               $       0.43          $       0.38          $       0.47          $       1.33          $       0.92
Cash dividends                             0.14                  0.14                  0.14                  0.42                  0.42
Common dividend payout ratio (2)             33  %                 37  %                 30  %                 31  %                 46  %
Book value                         $      18.31          $      18.05          $      17.67          $      18.31          $      17.67
Stock price                               16.95                 17.61                 12.56                 16.95                 12.56
Tangible common book value (3)            11.83                 11.55                 11.10                 11.83                 11.10
Performance Ratios:
Return on average assets                   1.20  %               1.06  %               1.40  %               1.25  %               0.95  %
Return on average common equity            9.48                  8.39                 10.79                  9.85                  7.11
Return on tangible common equity
(3)                                       15.05                 13.58                 17.56                 15.49                 11.66
Return on average tangible common
equity (3)                                15.13                 13.58                 17.88                 15.84                 12.12
Net interest margin (3)                    2.92                  2.91                  3.03                  2.92                  3.15
Efficiency ratio (3)                      56.86                 62.05                 55.93                 58.14                 63.11
Net charge-offs (recoveries) to
average loans                             (0.09)                (0.01)                (0.09)                (0.03)                 0.04
Allowance for credit losses to
ending loans                               0.79                  0.79                  0.95                  0.79                  0.95
Non-performing loans to ending
loans                                      0.94                  1.03                  1.15                  0.94                  1.15
Balance Sheet:
Total loans                        $ 13,584,828          $ 13,784,677          $ 13,892,509          $ 13,584,828          $ 13,892,509
Total assets                         24,018,733            23,675,666            22,460,476            24,018,733            22,460,476
Total deposits                       18,196,149            17,868,911            16,506,494            18,196,149            16,506,494
Total borrowed funds                  2,536,303             2,559,113             2,725,731             2,536,303             2,725,731
Total shareholders' equity            3,035,892             2,991,118             2,921,149             3,035,892             2,921,149
Capital Ratios:
Risk-based capital ratios:
Tier 1 common equity                      12.08  %              11.95  %              11.84  %              12.08  %              11.84  %
Tier 1                                    12.08                 11.95                 11.84                 12.08                 11.84
Total                                     12.84                 12.73                 12.81                 12.84                 12.81
Leverage ratio (to average assets)         8.54                  8.38                  8.15                  8.54                  8.15
Total equity to assets (averages)         12.69                 12.61                 12.97                 12.69                 13.33
Tangible common equity to tangible
assets (3)                                 8.55                  8.47                  8.58                  8.55                  8.58
Nonfinancial Data:
Full-time equivalent employees            2,410                 2,465                 2,484                 2,410                 2,484
Banking centers                             162                   162                   162                   162                   162


(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.
                                       58
--------------------------------------------------------------------------------

NON-GAAP FINANCIAL MEASURES
The non-GAAP financial measures presented below are used by our management and
our Board of Directors on a regular basis in addition to our GAAP results to
facilitate the assessment of our financial performance. Management believes
these non-GAAP financial measures enhance an investor's understanding of our
financial results by providing a meaningful basis for period-to-period
comparisons, assisting in operating results analysis, and predicting future
performance. This information supplements our GAAP reported results, and should
not be viewed in isolation from, or as a substitute for, our GAAP results.
Accordingly, this financial information should be read in conjunction with our
consolidated financial statements and notes thereto for the quarter ended
September 30, 2021, included elsewhere in this report, and included in our
Annual Report on Form 10-K for the year ended December 31, 2020. Non-GAAP
financial measures exclude certain items that are included in the financial
results presented in accordance with GAAP.
                                       59
--------------------------------------------------------------------------------

The following table presents GAAP to non-GAAP reconciliations.

            Three Months Ended                     Nine Months Ended
                                                                                           September 30,                         September 30,
(dollars and shares in thousands, except per share data)                               2021            2020                  2021            2020
Tangible common book value:
Shareholders' equity (GAAP)                                                       $  3,035,892    $  2,921,149          $  3,035,892    $  2,921,149
Deduct:                                   Goodwill                                   1,036,994       1,036,994             1,036,994       1,036,994
                                          Intangible assets                             37,251          49,258                37,251          49,258
Tangible shareholders' equity (non-GAAP)                                    

$ 1,961,647 $ 1,834,897 $ 1,961,647 $ 1,834,897 Period end common shares

                                                               165,814         165,333               165,814         165,333
Tangible common book value                                                               11.83           11.10                 11.83           11.10
Return on tangible common equity:
Net income (GAAP)                                                           

$ 71,746 $ 77,944 $ 221,350 $ 152,289 Add: Intangible amortization (net of tax)

                                                2,084           2,595                 6,572           8,152
Tangible net income (non-GAAP)                                              

$ 73,830 $ 80,539 $ 227,922 $ 160,441 Tangible shareholders' equity (non-GAAP) (see above)

$ 1,961,647 $ 1,834,897 $ 1,961,647 $ 1,834,897 Return on tangible common equity

                                                         15.05  %        17.56  %              15.49  %        11.66  %
Return on average tangible common equity:
Tangible net income (non-GAAP) (see above)                                  

$ 73,830 $ 80,539 $ 227,922 $ 160,441 Average shareholders' equity (GAAP)

      $  3,027,935    $  2,889,545          $  2,997,081    $  2,856,277
Deduct:                                   Average goodwill                           1,036,994       1,036,994             1,036,994       1,036,994
                                          Average intangible assets                     38,585          50,926                41,447          54,488
Average tangible shareholders' equity (non-GAAP)                            

$ 1,952,356 $ 1,801,625 $ 1,918,640 $ 1,764,795 Return on average tangible common equity

                                                 15.13  %        17.88  %              15.84  %        12.12  %
Net interest margin:
Net interest income (GAAP)                                                  

$ 151,572 $ 145,573 $ 449,619 $ 435,015 Taxable equivalent adjustment

                                                            3,501           3,379                10,471          10,069
Net interest income - taxable equivalent basis (non-GAAP)                   

$ 155,073 $ 148,952 $ 460,090 $ 445,084 Average earning assets

$ 21,228,590 $ 19,654,292 $ 20,977,471 $ 18,815,088 Net interest margin

                                                                       2.92  %         3.03  %               2.92  %         3.15  %
Efficiency ratio:
Noninterest expense (GAAP)                                                  

$ 121,274 $ 120,234 $ 368,632 $ 399,099 Deduct: Intangible amortization expense

                                                  2,779           3,459                 8,763          10,847
Adjusted noninterest expense (non-GAAP)                                     

$ 118,495 $ 116,775 $ 359,869 $ 388,252 Net interest income - taxable equivalent basis (non-GAAP)

  (see above)                                                               

$ 155,073 $ 148,952 $ 460,090 $ 445,084 Noninterest income

                                                                      54,515          64,759               162,735         180,722
Deduct: Debt securities gains (losses), net                                              1,207           4,921                 3,892          10,606
Adjusted total revenue (non-GAAP)                                           

$ 208,381 $ 208,790 $ 618,933 $ 615,200 Efficiency ratio

                                                                         56.86  %        55.93  %              58.14  %        63.11  %
Tangible common equity to tangible assets:
Tangible shareholders' equity (non-GAAP) (see above)                              $  1,961,647    $  1,834,897          $  1,961,647    $  1,834,897
Assets (GAAP)                                                                     $ 24,018,733    $ 22,460,476          $ 24,018,733    $ 22,460,476
Add:                                      Trust overdrafts                                 116              17                   116              17
Deduct:                                   Goodwill                                   1,036,994       1,036,994             1,036,994       1,036,994
                                          Intangible assets                             37,251          49,258                37,251          49,258
Tangible assets (non-GAAP)                                                  

$ 22,944,604 $ 21,374,241 $ 22,944,604 $ 21,374,241 Tangible common equity to tangible assets

                                                 8.55  %         8.58  %               8.55  %         8.58  %


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.
                                       60
--------------------------------------------------------------------------------

EXECUTIVE SUMMARY
Old National is devoted to the basic banking principles of organic loan growth,
increases in non-interest income, prudent capital deployment, and expense
management. We strive to continuously improve our operating leverage by growing
our revenue faster than our expenses. In addition, we continue to actively seek
new ways to serve our clients better by simplifying processes, offering superior
products and services, and embracing new technologies. As previously disclosed
Old National and First Midwest entered into a merger agreement. We believe this
merger will create powerful synergies, additional market coverage, and create
financial strength that will drive long-term shareholder value.

During the third quarter of 2021, we received approval of the merger from our
shareholders and the OCC. Our Federal Reserve application remains pending with
the board in Washington D.C., along with many other bank holding companies'
merger applications. We stand ready to close quickly once we receive final
Federal Reserve approval.

Old National is being targeted in a lawsuit filed in October 2021 by the Fair
Housing Center of Central Indiana related to certain lending practices in our
Indianapolis market. We strongly and categorically deny these claims. Old
National is committed to engaging in fair and equal lending practices.

During the third quarter of 2021, net income was $71.7 million, or $0.43 per
diluted share. Net income was $77.9 million, or $0.47 per diluted share, for the
third quarter of 2020.

During the third quarter of 2021, we recorded a provision for credit losses
recapture of $4.6 million. This provision recapture was derived from the Moody's
baseline forecast, which included improved unemployment, gross domestic product,
and house price index when compared to the forecast used in the prior quarter.

Despite the challenging operating environment, we achieved strong fundamental
results during the third quarter of 2021.
Loans: Our loan balances, excluding loans held for sale, decreased $199.8
million to $13.585 billion at September 30, 2021 compared to $13.785 billion at
June 30, 2021. This was primarily driven by a decline in PPP loans of $366.1
million, partially offset by growth in other commercial and commercial real
estate loans. We reported strong total commercial loan production of $1.0
billion in the third quarter of 2021 and the commercial loan pipeline totaled
$2.7 billion at September 30, 2021.
Net Interest Income: For the nine months ended September 30, 2021 compared to
the nine months ended September 30, 2020, our net interest income increased
primarily due to higher average loans and investment securities, higher PPP
related interest and net fees combined, and lower costs of interest-bearing
liabilities, partially offset by decreased loan and investment securities
yields. Net interest income increased in the third quarter of 2021 compared to
the second quarter of 2021 primarily due to higher average investment
securities, higher loan yields, higher PPP related interest and net fees
combined, and higher interest collected on nonaccrual loans, partially offset by
lower average loans, lower accretion income, and decreased investment securities
yields.
Noninterest Income: Noninterest income decreased $18.0 million to $162.7 million
in the nine months ended September 30, 2021 compared to the nine months ended
September 30, 2020 primarily due to lower mortgage banking revenue and lower
debt securities gains. The third quarter of 2021 compared to the second quarter
of 2021 increased $3.0 million primarily due to higher mortgage banking revenue.
Expenses: Noninterest expenses decreased $30.5 million in the nine months ended
September 30, 2021 compared to the nine months ended September 30, 2020.  The
decrease was primarily attributable to $39.0 million of charges related to the
ONB Way in the nine months ended September 30, 2020. The third quarter of 2021
compared to the second quarter of 2021 decreased $8.3 million reflecting lower
professional fees, salaries, and occupancy expenses.
Our robust commercial pipeline at September 30, 2021, along with the third
quarter's commercial loan growth, coupled with well controlled expenses and
strong credit quality metrics bolster management's confidence in future
quarters. However, we recognize that the economy has not fully recovered and is
susceptible to the long-term impacts of the pandemic, lingering higher
inflation, labor supply constraints, and supply chain disruptions that could
stall the economy and negate the success achieved during the first three
quarters of 2021.
                                       61
--------------------------------------------------------------------------------

Pandemic Update
As previously disclosed, the COVID-19 pandemic has created economic and
financial disruptions that have adversely affected our operations during 2020
and the nine months ended September 30, 2021. Our historically careful
underwriting practices, diverse and granular portfolios, and Midwest-based
footprint has helped mitigate any adverse impact to Old National. In addition,
the combination of the vaccine rollout, government stimulus payments, and
reduced spending during the pandemic are likely contributing factors mitigating
the impact of the pandemic on the Company's business, financial condition,
results of operations, and its customers as of September 30, 2021. However,
there are some concerns that indicate a slower return to pre-pandemic routines.
Examples of these concerns relate to more people than anticipated who refuse the
vaccines, the emergence of resistant strains, supply chain issues, labor supply
constraints, and inflation, all of which may cause businesses in some parts of
the country to be much slower to reopen. Given the ongoing and dynamic nature of
the circumstances surrounding the pandemic, it is difficult to predict the
future adverse financial impact to Old National.
RESULTS OF OPERATIONS
The following table sets forth certain income statement information of Old
National:
                                      Three Months Ended                                         Nine Months Ended
                                         September 30,                      %                      September 30,                      %
(dollars in thousands)              2021               2020              Change               2021               2020               Change
Income Statement Summary:
Net interest income             $ 151,572          $ 145,573                 4.1    %     $ 449,619          $ 435,015                  3.4        %
Provision for credit losses        (4,613)                 -                    N/M         (26,898)            39,495               (168.1)
Noninterest income                 54,515             64,759               (15.8)           162,735            180,722                (10.0)
Noninterest expense               121,274            120,234                 0.9            368,632            399,099                 (7.6)
Other Data:
Return on average common equity      9.48        %     10.79        %                          9.85        %      7.11        %
Return on tangible common
equity (1)                          15.05              17.56                                  15.49              11.66
Return on average tangible
common
  equity (1)                        15.13              17.88                                  15.84              12.12
Efficiency ratio (1)                56.86              55.93                                  58.14              63.11
Tier 1 leverage ratio                8.54               8.15                                   8.54               8.15

Net charge-offs (recoveries) to

  average loans                     (0.09)             (0.09)                                 (0.03)              0.04


(1)Represents a non-GAAP financial measure. Refer to "Non-GAAP Financial
Measures" section for reconciliations to GAAP financial measures.
Net Interest Income
Net interest income is the most significant component of our earnings,
comprising 73% of revenues for the nine months ended September 30, 2021. Net
interest income and 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. However, there have been concerns about
the emergence of communicable strains of the virus, whether enough people will
agree to be vaccinated, supply chain issues, labor supply constraints, and
inflation. Economic uncertainty remains and bouts of elevated volatility are
expected to continue.

Interest rates remained at near historic lows during the third quarter of 2021
after declining dramatically in the first half of 2020 due to the COVID-19
pandemic. The Federal Reserve's Federal Funds range is currently in a target
range of 0.00% to 0.25%, with the Effective Fed Funds Rate in the 0.05% to 0.10%
range. 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 the
mix of assets and funding, net interest income, and margin.
                                       62
--------------------------------------------------------------------------------

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.
                                                  Three Months Ended                           Nine Months Ended
                                                    September 30,                                September 30,
(dollars in thousands)                       2021                   2020                  2021                   2020
Net interest income                     $    151,572           $    145,573          $    449,619           $    435,015
Conversion to fully taxable equivalent         3,501                  3,379                10,471                 10,069
Net interest income - taxable
equivalent basis                        $    155,073           $    148,952          $    460,090           $    445,084

Average earning assets                  $ 21,228,590           $ 19,654,292          $ 20,977,471           $ 18,815,088

Net interest margin                             2.86         %         2.96

% 2.86 % 3.08 % Net interest margin - taxable equivalent basis

                                2.92         %         3.03 

% 2.92 % 3.15 %



The increase in net interest income for the three and nine months ended
September 30, 2021 when compared to the three and nine months ended September
30, 2020 was primarily due to higher average earning assets, lower costs of
average interest-bearing liabilities, and higher interest and fees related to
PPP loans. Partially offsetting these increases were lower yields on average
earning assets and lower accretion income in the three and nine months ended
September 30, 2021 when compared to the three and nine months ended September
30, 2020. Net interest income for the three and nine months ended September 30,
2021 and 2020 included accretion income (interest income in excess of
contractual interest income) associated with acquired loans. Accretion income
totaled $3.0 million in the three months ended September 30, 2021 and $12.8
million for the nine months ended September 30, 2021, compared to $5.4 million
in the three months ended September 30, 2020 and $17.9 million in the nine
months ended September 30, 2020. We expect accretion income on loans to decrease
over time, but this may be offset by future acquisitions. Net interest income
included interest and net fees combined on PPP loans totaling $12.2 million for
the three months ended September 30, 2021 and $36.7 million for the nine months
ended September 30, 2021, compared to $8.8 million for the three months ended
September 30, 2020 and $15.4 million for the nine months ended September 30,
2020.
                                       63
--------------------------------------------------------------------------------

The following tables present the average balance sheet for each major asset and
liability category, its related interest income and yield, or its expense and
rate.
(Tax equivalent basis,                                    Three Months Ended                                            Three Months Ended
dollars in thousands)                                     September 30, 2021                                            September 30, 2020
                                            Average             Income (1)/           Yield/              Average             Income (1)/           Yield/
Earning Assets                              Balance               Expense              Rate               Balance               Expense              Rate

Money market and other interest-earning

  investments                           $    467,572          $        177              0.15  %       $    137,880          $         59              0.17  %
Investment securities:
Treasury and government sponsored
agencies                                   1,730,553                 6,968              1.61  %            454,005                 2,457              2.17  %
Mortgage-backed securities                 3,313,027                14,509              1.75  %          3,342,284                17,478              2.09  %
States and political subdivisions          1,586,743                12,609              3.18  %          1,383,765                11,860              3.43  %
Other securities                             443,393                 2,638              2.38  %            487,405                 2,922              2.40  %
Total investment securities                7,073,716                36,724              2.08  %          5,667,459                34,717              2.45  %
Loans: (2)
Commercial                                 3,645,197                36,139              3.88  %          4,274,894                33,223              3.04  %
Commercial real estate                     6,200,144                57,820              3.65  %          5,546,486                55,891              3.94  %
Residential real estate loans              2,274,347                20,529              3.61  %          2,355,512                23,604              4.01  %
Consumer                                   1,567,614                14,138              3.58  %          1,672,061                15,971              3.80  %
Total loans                               13,687,302               128,626              3.70  %         13,848,953               128,689              3.66  %
Total earning assets                      21,228,590          $    165,527              3.08  %         19,654,292          $    163,465              3.29  %
Less: Allowance for credit losses           (111,216)                                                     (132,447)
Non-Earning Assets
Cash and due from banks                      272,855                                                       346,343
Other assets                               2,479,079                                                     2,405,517
Total assets                            $ 23,869,308                                                  $ 22,273,705

Interest-Bearing Liabilities
Checking and NOW accounts               $  4,873,914          $        484              0.04  %       $  4,607,427          $        886              0.08  %
Savings accounts                           3,678,944                   500              0.05  %          3,232,375                   634              0.08  %
Money market accounts                      2,110,981                   438              0.08  %          1,902,407                   724              0.15  %
Time deposits                                998,060                 1,156              0.46  %          1,403,603                 3,053              0.87  %
Total interest-bearing deposits           11,661,899                 2,578              0.09  %         11,145,812                 5,297              0.19  %
Federal funds purchased and interbank
  borrowings                                     689                     -                 -  %             18,347                    12              0.25  %
Securities sold under agreements to
repurchase                                   384,724                    90              0.09  %            385,149                   160              0.16  %
FHLB advances                              1,890,916                 5,326              1.12  %          2,021,468                 6,709              1.32  %
Other borrowings                             270,597                 2,460              3.64  %            237,811                 2,335              3.93  %
Total borrowed funds                       2,546,926                 7,876              1.23  %          2,662,775                 9,216              1.38  %
Total interest-bearing liabilities      $ 14,208,825          $     10,454              0.29  %       $ 13,808,587          $     14,513              

0.42 %

Noninterest-Bearing Liabilities and

  Shareholders' Equity
Demand deposits                         $  6,314,100                                                  $  5,291,037
Other liabilities                            318,448                                                       284,536
Shareholders' equity                       3,027,935                                                     2,889,545
Total liabilities and shareholders'
equity                                  $ 23,869,308                                                  $ 22,273,705

Net interest rate spread                                                                2.79  %                                                       2.87  %
Net interest margin (3)                                                                 2.92  %                                                       3.03  %
Taxable equivalent adjustment                                 $      3,501                                                  $      3,379


(1)Interest income is reflected on a fully taxable equivalent basis.
(2)Includes loans held for sale.
(3)Net interest margin is defined as net interest income on a tax equivalent
basis as a percentage of average earning assets.
                                       64
--------------------------------------------------------------------------------
(Tax equivalent basis,                                     Nine Months Ended                                             Nine Months Ended
dollars in thousands)                                     September 30, 2021                                            September 30, 2020
                                            Average             Income (1)/           Yield/              Average             Income (1)/           Yield/
Earning Assets                              Balance               Expense              Rate               Balance               Expense              Rate

Money market and other interest-earning

  investments                           $    357,151          $        313              0.12  %       $     94,149          $        442              0.63  %
Investment securities:
Treasury and government sponsored
agencies                                   1,509,931                17,820              1.57  %            513,055                 9,187              2.39  %
Mortgage-backed securities                 3,304,200                45,408              1.83  %          3,231,439                54,474              2.25  %
States and political subdivisions          1,523,175                37,174              3.25  %          1,317,136                35,026              3.55  %
Other securities                             445,298                 8,071              2.42  %            493,016                 9,361              2.53  %
Total investment securities                6,782,604               108,473              2.13  %          5,554,646               108,048              2.59  %
Loans: (2)
Commercial                                 3,878,630               106,421              3.62  %          3,745,803                94,005              3.30  %
Commercial real estate                     6,109,795               171,221              3.70  %          5,359,254               176,337              4.32  %
Residential real estate loans              2,268,142                63,350              3.72  %          2,365,037                71,732              4.04  %
Consumer                                   1,581,149                42,414              3.59  %          1,696,199                49,564              3.90  %
Total loans                               13,837,716               383,406              3.67  %         13,166,293               391,638              3.93  %
Total earning assets                      20,977,471          $    492,192              3.11  %         18,815,088          $    500,128              3.52  %
Less: Allowance for credit losses           (120,619)                                                     (107,860)
Non-Earning Assets
Cash and due from banks                      266,543                                                       322,318
Other assets                               2,495,512                                                     2,392,893
Total assets                            $ 23,618,907                                                  $ 21,422,439

Interest-Bearing Liabilities
Checking and NOW accounts               $  4,934,367          $      1,622              0.04  %       $  4,381,919          $      4,820              0.15  %
Savings accounts                           3,608,078                 1,479              0.05  %          3,040,889                 2,669              0.12  %
Money market accounts                      2,076,808                 1,300              0.08  %          1,843,902                 4,141              0.30  %
Time deposits                              1,034,390                 4,068              0.53  %          1,498,334                12,763              1.14  %
Total interest-bearing deposits           11,653,643                 8,469              0.10  %         10,765,044                24,393              0.30  %
Federal funds purchased and interbank
  borrowings                                   1,096                     -                 -  %            184,397                 1,296              0.94  %
Securities sold under agreements to
repurchase                                   396,495                   305              0.10  %            355,039                   729              0.27  %
FHLB advances                              1,907,322                15,953              1.12  %          2,043,617                21,321              1.39  %
Other borrowings                             267,650                 7,375              3.67  %            243,255                 7,305              4.00  %
Total borrowed funds                       2,572,563                23,633              1.23  %          2,826,308                30,651              1.45  %
Total interest-bearing liabilities      $ 14,226,206          $     32,102              0.30  %       $ 13,591,352          $     55,044              

0.54 %

Noninterest-Bearing Liabilities and

  Shareholders' Equity
Demand deposits                         $  6,072,310                                                  $  4,710,969
Other liabilities                            323,310                                                       263,841
Shareholders' equity                       2,997,081                                                     2,856,277
Total liabilities and shareholders'
equity                                  $ 23,618,907                                                  $ 21,422,439

Net interest rate spread                                                                2.81  %                                                       2.98  %
Net interest margin (3)                                                                 2.92  %                                                       3.15  %
Taxable equivalent adjustment                                 $     10,471                                                  $     10,069


(1)Interest income is reflected on a fully taxable equivalent basis.
(2)Includes loans held for sale.
(3)Net interest margin is defined as net interest income on a tax equivalent
basis as a percentage of average earning assets.
                                       65
--------------------------------------------------------------------------------

The following table presents the dollar amount of changes in taxable equivalent
net interest income attributable to changes in the average balances of assets
and liabilities and the yields earned or rates paid.
                                                      From Three Months Ended                                     From Nine Months Ended
                                                    September 30, 2020 to Three                                 September 30, 2020 to Nine
                                                  Months Ended September 30, 2021                            Months Ended September 30, 2021
                                             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                            $       118          $   132          $    (14)         $      (129)              $    734          $    (863)
Investment securities (2)                      2,007            7,957            (5,950)                 425                 21,762            (21,337)
Loans (2)                                        (63)          (1,454)            1,391               (8,232)                18,808            (27,040)
Total interest income                          2,062            6,635            (4,573)              (7,936)                41,304            (49,240)
Interest Expense
Checking and NOW deposits                       (402)              34              (436)              (3,198)                   462             (3,660)
Savings deposits                                (134)              74              (208)              (1,190)                   458             (1,648)
Money market deposits                           (286)              66              (352)              (2,841)                   362             (3,203)
Time deposits                                 (1,897)            (676)           (1,221)              (8,695)                (2,903)            (5,792)

Federal funds purchased and interbank

  borrowings                                     (12)              (5)               (7)              (1,296)                  (644)              (652)

Securities sold under agreements to

  repurchase                                     (70)              (1)              (69)                (424)                    58               (482)
FHLB advances                                 (1,383)            (394)             (989)              (5,368)                (1,286)            (4,082)
Other borrowings                                 125              310              (185)                  70                    702               (632)
Total interest expense                        (4,059)            (592)           (3,467)             (22,942)                (2,791)           (20,151)
Net interest income                      $     6,121          $ 7,227          $ (1,106)         $    15,006               $ 44,095          $ (29,089)


(1)The variance not solely due to rate or volume is allocated equally between
the rate and volume variances.
(2)Interest on investment securities and loans includes the effect of taxable
equivalent adjustments of $2.5 million and $1.0 million, respectively, during
the three months ended September 30, 2021; and $7.3 million and $3.2 million,
respectively, during the nine months ended September 30, 2021 using the federal
statutory rate in effect of 21%.
The decrease in the net interest margin on a fully taxable equivalent basis for
the three and nine months ended September 30, 2021 when compared to the three
and nine months ended September 30, 2020 was primarily due to lower yields on
interest earning assets and a change in the mix of average interest earning
assets and interest-bearing liabilities, partially offset by higher average
earning assets and lower costs of interest-bearing liabilities. The yield on
interest earning assets decreased 21 basis points and the cost of
interest-bearing liabilities decreased 13 basis points in the quarterly
year-over-year comparison. The yield on interest earning assets is calculated by
dividing annualized taxable equivalent net interest income by average interest
earning assets while the cost of interest-bearing liabilities is calculated by
dividing annualized interest expense by average interest-bearing
liabilities. The yield on interest earning assets decreased 41 basis points and
the cost of interest-bearing liabilities decreased 24 basis points in the nine
months ended September 30, 2021 when compared to the nine months ended September
30, 2020. Accretion income represented 6 basis points of the net interest margin
in the three months ended September 30, 2021 and 8 basis points in the nine
months ended September 30, 2021, compared to 11 basis points for the three
months ended September 30, 2020 and 12 basis points for the nine months ended
September 30, 2020.
Average earning assets were $21.229 billion for the three months ended September
30, 2021, compared to $19.654 billion for the three months ended September 30,
2020, an increase of $1.575 billion, or 8%. The increase in average earning
assets for the three months ended September 30, 2021 when compared to the three
months ended September 30, 2020 was due to increases in average investment
securities and money market and other interest-earning investments, partially
offset by a decrease in average loans. Average earning assets were $20.977
billion for the nine months ended September 30, 2021, compared to $18.815
billion for the nine months ended September 30, 2020, an increase of $2.162
billion, or 11%. The increase in average earning assets for the nine months
ended September 30, 2021 when compared to the nine months ended September 30,
2020 was primarily due to increases in average investment securities and average
loans. The loan portfolio including loans held for sale, which generally has an
average yield higher than the investment portfolio, was 66% of average interest
earning assets for the nine months ended September 30, 2021, compared to 70% for
the nine months ended September 30, 2020.
                                       66
--------------------------------------------------------------------------------

Average loans including loans held for sale decreased $161.7 million for the
three months ended September 30, 2021 when compared to the three months ended
September 30, 2020 due to lower average commercial loans, residential real
estate loans, and consumer loans, partially offset by higher average commercial
real estate loans. Average loans including loans held for sale increased $671.4
million for the nine months ended September 30, 2021 when compared to the nine
months ended September 30, 2020 due to higher average commercial loans and
commercial real estate loans, partially offset by lower average residential real
estate loans and consumer loans. The increase in average commercial loans for
the nine months ended September 30, 2021 when compared to the nine months ended
September 30, 2020 reflected organic growth, partially offset by a decline in
average PPP loans. Average commercial loans included PPP loans totaling $522.4
million for the three months ended September 30, 2021 and $847.2 million for the
nine months ended September 30, 2021, compared to $1.477 billion for the three
months ended September 30, 2020 and $869.4 million for the nine months ended
September 30, 2020.
Average investments increased $1.406 billion for the three months ended
September 30, 2021 and $1.228 billion for the nine months ended September 30,
2021 when compared to the same periods in 2020 reflecting excess liquidity.
Average noninterest-bearing deposits increased $1.023 billion for the three
months ended September 30, 2021 and $1.361 billion for the nine months ended
September 30, 2021 when compared to the same periods in 2020. Average
interest-bearing deposits increased $516.1 million for the three months ended
September 30, 2021 and $888.6 million for the nine months ended September 30,
2021 when compared to the same periods in 2020. This growth was primarily driven
by the increased business and personal savings rates from various government
stimulus actions.
Average borrowed funds decreased $115.8 million for the three months ended
September 30, 2021 and $253.7 million for the nine months ended September 30,
2021 when compared to the same periods in 2020.
Provision for Credit Losses
Old National recorded a provision for credit losses recapture of $4.6 million
for the three months ended September 30, 2021, compared to zero provision for
credit losses expense for the three months ended September 30, 2020. Net
recoveries on loans totaled $3.0 million during both the three months ended
September 30, 2021 and the three months ended September 30, 2020. The provision
for credit losses was a recapture of $26.9 million for the nine months ended
September 30, 2021, compared to expense of $39.5 million for the nine months
ended September 30, 2020. Net recoveries on loans totaled $3.4 million for the
nine months ended September 30, 2021, compared to net charge-offs of $4.1
million for the nine months ended September 30, 2021. The provision for credit
losses recapture in the three and nine months ended September 30, 2021 reflected
the improved economic forecast. PPP loans were factored in the provision for
credit losses for the three and nine months ended September 30, 2021; 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
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.
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. The following table details the components in
noninterest income:
                                       Three Months Ended                                          Nine Months Ended
                                          September 30,                      %                       September 30,                      %
(dollars in thousands)               2021               2020              Change                2021               2020              Change
Wealth management fees           $   10,134          $  9,239                 9.7    %      $  30,576          $  27,547                11.0    %
Service charges on deposit
accounts                              8,926             8,698                 2.6              25,564             26,357                (3.0)
Debit card and ATM fees               4,942             5,276                (6.3)             15,668             15,106                 3.7
Mortgage banking revenue             10,870            18,110               (40.0)             35,222             46,542               (24.3)
Investment product fees               6,475             5,351                21.0              18,381             16,070                14.4
Capital markets income                6,017             5,428                10.9              15,603             15,935                (2.1)
Company-owned life insurance          2,355             2,830               (16.8)              7,852              8,878               (11.6)
Debt securities gains (losses),
net                                   1,207             4,921               (75.5)              3,892             10,606               (63.3)
Other income                          3,589             4,906               (26.8)              9,977             13,681               (27.1)
Total noninterest income         $   54,515          $ 64,759               (15.8)   %      $ 162,735          $ 180,722               (10.0)   %


                                       67
--------------------------------------------------------------------------------

Noninterest income decreased $10.2 million for the three months ended September
30, 2021 when compared to the three months ended September 30, 2020 primarily
due to lower mortgage banking revenue and lower debt securities gains.
Noninterest income decreased $18.0 million for the nine months ended September
30, 2021 when compared to the nine months ended September 30, 2020 primarily due
to lower mortgage banking revenue and lower debt securities gains.
Wealth management fees increased $0.9 million for the three months ended
September 30, 2021 and $3.0 million for the nine months ended September 30, 2021
when compared to the same periods in 2020 primarily due to higher personal trust
fees, fiduciary account fees, and corporate trust fees.
Mortgage banking revenue decreased $7.2 million for the three months ended
September 30, 2021 and $11.3 million for the nine months ended September 30,
2021 when compared to the same periods in 2020 reflecting lower refinance
transactions related to higher rates in 2021, which caused pipeline levels to
drop and gain on sale margins to partially normalize.
Investment product fees increased $1.1 million for the three months ended
September 30, 2021 and $2.3 million for the nine months ended September 30, 2021
when compared to the same periods in 2020 reflecting higher investment and
advisor fees in 2021.
Capital markets income increased $0.6 million for the three months ended
September 30, 2021 when compared to the three months ended September 30, 2020
primarily due to higher tax credit fee income and customer interest rate swap
fees.
Debt securities gains (losses), net had an unfavorable variance of $3.7 million
for the three months ended September 30, 2021 when compared to the three months
ended September 30, 2020 primarily due to lower realized gains on sales of
available-for-sale securities in 2021. Debt securities gains (losses), net had
an unfavorable variance of $6.7 million for the nine months ended September 30,
2021 when compared to the nine months ended September 30, 2020 primarily due to
lower realized gains on sales of available-for-sale securities in 2021,
partially offset by lower realized losses on sales of available-for-sale
securities in 2021.
Other income decreased $1.3 million for the three months ended September 30,
2021 when compared to the three months ended September 30, 2020 primarily due to
lower branded card incentives. Other income decreased $3.7 million for the nine
months ended September 30, 2021 when compared to the nine months ended September
30, 2020 primarily due to $1.5 million of swap termination fees in the nine
months ended September 30, 2021 and lower branded card incentives.
Noninterest Expense
The following table details the components in noninterest expense:
                                       Three Months Ended                                         Nine Months Ended
                                          September 30,                      %                      September 30,                      %
(dollars in thousands)               2021               2020              Change               2021               2020              Change
Salaries and employee benefits   $  71,005          $  69,860                 1.6    %     $ 211,762          $ 215,589                (1.8)   %
Occupancy                           12,757             13,930                (8.4)            41,683             42,308                (1.5)
Equipment                            3,756              3,754                 0.1             12,231             12,912                (5.3)
Marketing                            3,267              2,140                52.7              7,961              7,632                 4.3
Data processing                     11,508              9,628                19.5             35,558             28,724                23.8
Communication                        2,372              2,241                 5.8              7,661              7,335                 4.4
Professional fees                    3,416              3,083                10.8             14,668             10,921                34.3
FDIC assessment                      1,628              1,319                23.4              4,461              4,942                (9.7)
Amortization of intangibles          2,779              3,459               (19.7)             8,763             10,847               (19.2)
Amortization of tax credit
investments                          1,736              3,115               (44.3)             4,751              8,917               (46.7)
Other expense                        7,050              7,705                (8.5)            19,133             48,972               (60.9)
Total noninterest expense        $ 121,274          $ 120,234                 0.9    %     $ 368,632          $ 399,099                (7.6)   %


Noninterest expense decreased $30.5 million for the nine months ended September
30, 2021 when compared to the nine months ended September 30, 2020 reflecting
$39.0 million of charges in the nine months ended September 30,
                                       68
--------------------------------------------------------------------------------

2020 related to the ONB Way strategic initiative. This decrease was partially
offset by $7.9 million of diligence and merger charges in 2021 associated with
the anticipated First Midwest merger.
Salaries and employee benefits decreased $3.8 million for the nine months ended
September 30, 2021 when compared to the nine months ended September 30, 2020
primarily due to personnel expenses related to the ONB Way totaling $7.6 million
in the nine months ended September 30, 2020. This decrease was partially offset
by higher corporate incentives.
Marketing expenses increased $1.1 million for the three months ended September
30, 2021 when compared to the three months ended September 30, 2020 primarily
due to higher advertising, public relations, and business development expenses.
Data processing expenses increased $1.9 million for the three months ended
September 30, 2021 and $6.8 million for the nine months ended September 30, 2021
when compared to the same periods in 2020 related to the modernization of our
technology infrastructure.
Professional fees increased $0.3 million for the three months ended September
30, 2021 and $3.7 million for the nine months ended September 30, 2021 when
compared to the same periods in 2020 reflecting professional fees incurred in
2021 related to the First Midwest merger, partially offset by consulting fees
incurred in 2020 related to the ONB Way.
Amortization of intangibles decreased $0.7 million for the three months ended
September 30, 2021 and $2.1 million for the nine months ended September 30, 2021
when compared to the same periods in 2020 primarily due to lower amortization of
core deposit intangibles.
Amortization of tax credit investments decreased $1.4 million and for the three
months ended September 30, 2021 and $4.2 million for the nine months ended
September 30, 2021 when compared to the same periods in 2020. The recognition of
tax credit amortization expense is contingent upon the successful completion of
the rehabilitation of a historic building or completion of a solar project
within the reporting period. 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 12 to the consolidated financial statements for
additional information on our tax credit investments.
Other expense decreased $29.8 million for the nine months ended September 30,
2021 when compared to the nine months ended September 30, 2020 primarily due to
lease termination charges and impairments on long-lived assets related to branch
consolidations that were part of the ONB Way strategic initiative totaling $25.8
million in the nine months ended September 30, 2020. The decrease in other
expense also reflected a favorable variance in provision for credit losses on
unfunded loan commitments totaling $5.2 million.
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 provision for income taxes, as a percentage of pre-tax
income, was 19.8% for the three months ended September 30, 2021, compared to
13.5% for the three months ended September 30, 2020. The provision for income
taxes, as a percentage of pre-tax income, was 18.2% for the nine months ended
September 30, 2021, compared to 14.0% for the nine months ended September 30,
2020. In accordance with ASC 740-270, Accounting for Interim Reporting, the
provision for income taxes was recorded at September 30, 2021 based on the
current estimate of the effective annual rate. The higher effective tax rate
during the three and nine months ended September 30, 2021 when compared to the
same periods in 2020 reflected increases in pre-tax book income and lower tax
credits. See Note 18 to the consolidated financial statements for additional
information.
FINANCIAL CONDITION
Overview
At September 30, 2021, our assets were $24.019 billion, a $1.058 billion
increase compared to assets of $22.961 billion at December 31, 2020. The
increase was primarily due to higher investment securities.
                                       69
--------------------------------------------------------------------------------

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. However, there have been concerns about the emergence of
communicable strains of the virus, whether enough people will agree to be
vaccinated, supply chain issues, labor supply constraints, and inflation.
Economic uncertainty remains and bouts of elevated volatility are expected to
continue.
Earning Assets
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 $21.463 billion
at September 30, 2021, a $1.150 billion increase compared to earning assets of
$20.313 billion at December 31, 2020.
Investment Securities
We classify substantially all of our investment securities as available-for-sale
to give management the flexibility to sell the securities prior to maturity if
needed, based on fluctuating interest rates or changes in our funding
requirements.
Equity securities are recorded at fair value and totaled $12.4 million at
September 30, 2021 compared to $2.5 million at December 31, 2020. The increase
in equity securities was primarily due to an increase in mutual funds.
At September 30, 2021, the investment securities portfolio, including equity
securities, was $7.210 billion compared to $6.142 billion at December 31, 2020,
an increase of $1.068 billion. Investment securities represented 34% of earning
assets at September 30, 2021, compared to 30% at December 31, 2020. Stronger
commercial loan demand in the future could result in management's decision to
reduce the securities portfolio. At September 30, 2021, we had no intent to sell
any securities that were in an unrealized loss position nor is it expected that
we would be required to sell the securities prior to their anticipated recovery.
The investment securities available-for-sale portfolio had net unrealized gains
of $69.5 million at September 30, 2021, compared to net unrealized gains of
$186.3 million at December 31, 2020. Net unrealized gains decreased from
December 31, 2020 to September 30, 2021 reflecting lower net unrealized gains on
mortgage-backed, tax exempt municipal securities, and U.S. government-sponsored
entities and agencies due to an increase in long-term interest rates.
The investment portfolio had an effective duration of 4.50 at September 30,
2021, compared to 4.08 at December 31, 2020. 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 annualized
average yields on investment securities, on a taxable equivalent basis, were
2.08% for the three months ended September 30, 2021 and 2.13% for the nine
months ended September 30, 2021, compared to 2.45% for the three months ended
September 30, 2020 and 2.59% for the nine months ended September 30, 2020.
Loans Held for Sale
Mortgage loans held for immediate sale in the secondary market were $51.3
million at September 30, 2021, compared to $63.3 million at December 31,
2020. Certain mortgage loans are committed for sale at or prior to origination
at a contracted price to an outside investor. 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 $1.4
million at September 30, 2021, compared to $3.5 million at December 31, 2020.
Commercial and Commercial Real Estate Loans
Commercial and commercial real estate loans are the largest classification
within earning assets, representing 46% of earning assets at September 30, 2021,
compared to 49% at December 31, 2020. At September 30, 2021, commercial and
commercial real estate loans were $9.796 billion, a decrease of $107.1 million
compared to
                                       70
--------------------------------------------------------------------------------

December 31, 2020 driven by a decline in PPP loans, partially offset by organic
loan growth. As of September 30, 2021, total PPP loans were $354.9 million,
compared to $943.0 million at December 31, 2020.
The following table provides detail on commercial loans by industry
classification (as defined by the North American Industry Classification System)
and by loan size.
                                               September 30, 2021                           December 31, 2020
(dollars in thousands)              Outstanding      Exposure     Nonaccrual    Outstanding      Exposure     Nonaccrual
By Industry:
Manufacturing                      $   621,023    $ 1,129,254    $    7,637    $   586,074    $ 1,019,149    $   11,036
Construction                           363,577        772,199         1,508        462,140        903,604         1,036
Health care and social assistance      377,040        532,465           481        412,807        604,493           691
Public administration                  248,007        363,996             -        299,748        371,846             -
Wholesale trade                        257,210        459,847         1,654        241,432        483,253         3,647
Educational services                   211,458        317,520             -        245,896        418,277         1,428
Other services                         133,575        267,472         2,094        194,822        307,205         2,363
Professional, scientific, and
 technical services                    154,739        280,434           435        182,228        320,983           864
Finance and insurance                  152,774        213,596            50        186,079        246,551            57
Retail trade                           130,408        288,956         1,005        151,869        329,160         1,788
Real estate rental and leasing         200,778        354,618           523        169,935        356,169           759

Transportation and warehousing 130,273 203,110 2,494

        139,398        216,495         1,397
Administrative and support and

waste management and

 remediation services                   95,235        147,075             -        119,220        173,538           383

Agriculture, forestry, fishing,

 and hunting                           102,972        163,571           196        145,624        192,602           358

Accommodation and food services 101,105 121,968 3,444

       105,560        118,497         3,239
Utilities                               32,685         83,347             -         88,607         98,996             -
Arts, entertainment, and
recreation                              79,668        119,335         2,095         82,305        111,729         2,590
Information                             51,219         79,912         1,967         61,883         95,774         2,286
Mining                                  32,381         58,074            10         57,142         77,067            19
Management of companies and
 enterprises                            11,576         32,502             -         13,605         28,276             -
Other                                   17,480         17,533             -         10,048         10,086             -
Total                              $ 3,505,183    $ 6,006,784    $   25,593    $ 3,956,422    $ 6,483,750    $   33,941

By Loan Size:
Less than $200,000                           9  %           7  %          8  %          11  %           8  %         10  %
$200,000 to $1,000,000                      19             17            37             20             18            40
$1,000,000 to $5,000,000                    32             30            55             34             32            50
$5,000,000 to $10,000,000                   14             15             -             15             15             -
$10,000,000 to $25,000,000                  19             18             -             14             16             -
Greater than $25,000,000                     7             13             -              6             11             -
Total                                      100  %         100  %        100  %         100  %         100  %        100  %


                                       71
--------------------------------------------------------------------------------

The following table provides detail on commercial real estate loans classified
by property type.
                                 September 30, 2021                December 31, 2020
(dollars in thousands)         Outstanding           %           Outstanding           %
By Property Type:
Multifamily                $       1,903,007        30  %    $       1,598,614        27  %
Retail                             1,008,541        16               1,041,384        17
Office                             1,030,401        16               1,001,589        17
Warehouse / Industrial               849,049        14                 821,022        14
Single family                        339,081         5                 341,273         6
Other (1)                          1,160,553        19               1,142,630        19
Total                      $       6,290,632       100  %    $       5,946,512       100  %


(1)  Other includes construction and land development properties, senior housing
properties, religion properties, and mixed use properties.
Residential Real Estate Loans
At September 30, 2021, residential real estate loans held in our loan portfolio
were $2.225 billion, a decrease of $23.6 million compared to December 31,
2020. Future increases in interest rates could result in a decline in the level
of refinancings and new originations of residential real estate loans.
Consumer Loans
Consumer loans, including automobile loans and personal and home equity loans
and lines of credit, decreased $70.9 million at September 30, 2021 compared to
December 31, 2020 primarily due to decreases in consumer indirect loans and
consumer direct loans.
Funding
Total funding, comprised of deposits and wholesale borrowings, was $20.732
billion at September 30, 2021, an increase of $1.018 billion from $19.714
billion at December 31, 2020. Included in total funding were deposits of $18.196
billion at September 30, 2021, an increase of $1.159 billion from $17.037
billion at December 31, 2020. Noninterest-bearing deposits increased $806.9
million from December 31, 2020 to September 30, 2021. Interest-bearing checking
and NOW deposits decreased $21.0 million from December 31, 2020 to September 30,
2021, while savings deposits increased $313.1 million. Money market deposits
increased $189.8 million from December 31, 2020 to September 30, 2021. Time
deposits decreased $130.0 million from December 31, 2020 to September 30, 2021.
We use wholesale funding to augment deposit funding and to help maintain our
desired interest rate risk position. At September 30, 2021, wholesale
borrowings, including federal funds purchased and interbank borrowings,
securities sold under agreements to repurchase, FHLB advances, and other
borrowings, totaled $2.536 billion, a decrease of $140.3 million from
December 31, 2020. Wholesale funding as a percentage of total funding was 12% at
September 30, 2021 and 14% at December 31, 2020. The decrease in wholesale
funding from December 31, 2020 to September 30, 2021 was primarily due to
decreases in securities sold under agreements to repurchase and FHLB advances,
partially offset by an increase in other borrowings.
Capital
Shareholders' equity totaled $3.036 billion at September 30, 2021, compared to
$2.973 billion at December 31, 2020. Old National paid cash dividends of $0.42
per share in the nine months ended September 30, 2021, which reduced equity by
$69.6 million. The change in unrealized gains (losses) on available-for-sale
investment securities decreased equity by $90.4 million during the nine months
ended September 30, 2021.
Capital Adequacy
Old National and the banking industry are subject to various regulatory capital
requirements administered by the federal banking agencies. At September 30,
2021, Old National and its bank subsidiary exceeded the regulatory minimums and
Old National Bank met the regulatory definition of "well-capitalized" based on
the most recent regulatory definition.
                                       72
--------------------------------------------------------------------------------

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

                                                Regulatory                       September 30,                        December 31,
                                                Guidelines
                                                 Minimum                  2021                    2020                    2020
Risk-based capital:
Tier 1 capital to total average assets
(leverage ratio)                                    4.00           %       8.54            %        8.15         %         8.20           %
Common equity Tier 1 capital to
risk-adjusted
  total assets                                      7.00                  12.08                    11.84                  11.75
Tier 1 capital to risk-adjusted total
assets                                              8.50                  12.08                    11.84                  11.75
Total capital to risk-adjusted total assets        10.50                  12.84                    12.81                  12.69
Shareholders' equity to assets                             N/A            12.64                    13.01                  12.95


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

                                                                  Prompt
                                                                Corrective                      September 30,                      December 31,
                                         Regulatory            Action "Well
                                         Guidelines            Capitalized"
                                          Minimum               Guidelines               2021                   2020                   2020
Risk-based capital:
Tier 1 capital to total average
assets (leverage
  ratio)                                    4.00           %        5.00           %      8.80            %       8.71        %         8.67           %
Common equity Tier 1 capital to
risk-adjusted
  total assets                              7.00                    6.50                 12.34                   12.49                 12.23
Tier 1 capital to risk-adjusted total
assets                                      8.50                    8.00                 12.34                   12.49                 12.23
Total capital to risk-adjusted total
assets                                     10.50                   10.00                 12.84                   13.19                 12.90


In December 2018, the OCC, the Board of Governors of the Federal Reserve System,
and the FDIC approved a final rule to address changes to credit loss accounting
under GAAP, including banking organizations' implementation of CECL. The final
rule provides banking organizations the option to phase in over a three-year
period the day-one adverse effects on regulatory capital that may result from
the adoption of the new accounting standard. In March 2020, the OCC, the Board
of Governors of the Federal Reserve System, and the FDIC published an interim
final rule to delay the estimated impact on regulatory capital stemming from the
implementation of CECL. The interim final rule maintains the three-year
transition option in the previous rule and provides banks the option to delay
for two years an estimate of CECL's effect on regulatory capital, relative to
the incurred loss methodology's effect on regulatory capital, followed by a
three-year transition period (five-year transition option). Old National is
adopting the capital transition relief over the permissible five-year period.
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
                                       73
--------------------------------------------------------------------------------

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 and lobby usage as necessary
depending on the path of the virus across our footprint. 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 September 30, 2021, we had
pooled trust preferred securities with a fair value of $9.4 million, or less
than 1% of the available-for-sale securities portfolio. These securities
remained classified as available-for-sale and at September 30, 2021, the
unrealized loss on our pooled trust preferred securities was $4.4 million. The
fair value of these securities is expected to improve as we get closer to
maturity, but may be adversely impacted by credit deterioration.
All of our mortgage-backed securities are backed by U.S. 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 5 to the consolidated financial statements for
additional details about our investment security portfolio.
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 $526.0 million at September 30, 2021.
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.
                                       74
--------------------------------------------------------------------------------

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.
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 September 30, 2021,
our average commercial loan size was approximately $295,000 and our average
commercial real estate loan size was approximately $930,000. In addition, while
loans to lessors of residential and non-residential real estate exceed 10% of
total loans, no individual sub-segment category within those broader categories
reaches the 10% threshold. At September 30, 2021, we had minimal exposure to
foreign borrowers and no sovereign debt. Our policy is to concentrate our
lending activity in the geographic market areas we serve, primarily Indiana,
Kentucky, Michigan, Minnesota, and Wisconsin. We have experienced an adverse
impact from COVID-19 during 2020 and 2021; however, the depth of this crisis is
ongoing and its effect is very broad-based. Management believes that trends in
                                       75
--------------------------------------------------------------------------------

under-performing, criticized, and classified loans will be highly dependent on
the distribution of vaccinations, as well as the length of time it will take
consumers to return to their pre-pandemic spending routines.
The following table presents a summary of under-performing, criticized, and
classified assets:
                                                                    September 30,                  December 31,
(dollars in thousands)                                         2021               2020                 2020
Total nonaccrual loans                                     $ 111,586          $ 137,611          $     147,339
TDRs still accruing                                           16,420             22,037                 17,749

Total past due loans (90 days or more and still accruing) 113

          90                    167
Other real estate owned                                        1,943              1,248                  1,324
Total under-performing assets                              $ 130,062          $ 160,986          $     166,579
Classified loans (includes nonaccrual, TDRs still
accruing,
  past due 90 days, and other problem loans)               $ 275,891          $ 327,225          $     304,782
Other classified assets (1)                                    4,300              3,860                  3,706
Criticized loans                                             240,215            272,859                287,192
Total criticized and classified assets                     $ 520,406          $ 603,944          $     595,680
Asset Quality Ratios:
Non-performing loans/total loans (2) (3)                        0.94    %          1.15    %              1.20    %

Under-performing assets/total loans and

  other real estate owned                                       0.96               1.16                   1.21
Under-performing assets/total assets                            0.54               0.72                   0.73
Allowance/under-performing assets                              82.94              81.61                  78.87
Allowance/nonaccrual loans                                     96.67              95.48                  89.17


(1)Includes one pooled trust preferred security and two insurance policies at
September 30, 2021.
(2)Loans exclude loans held for sale.
(3)Non-performing loans include nonaccrual loans and TDRs still accruing.
Under-performing assets totaled $130.1 million at September 30, 2021, compared
to $161.0 million at September 30, 2020 and $166.6 million at December 31,
2020. Under-performing assets as a percentage of total loans and other real
estate owned at September 30, 2021 were 0.96%, a 20 basis point improvement from
1.16% at September 30, 2020 and a 25 basis point improvement from 1.21% at
December 31, 2020.
Nonaccrual loans decreased from December 31, 2020 primarily due to decreases in
commercial, commercial real estate, and residential real estate nonaccrual
loans. As a percentage of nonaccrual loans, the allowance was 96.67% at
September 30, 2021, compared to 95.48% at September 30, 2020 and 89.17% at
December 31, 2020.
Total criticized and classified assets were $520.4 million at September 30,
2021, a decrease of $83.5 million from September 30, 2020, and a decrease of
$75.3 million from December 31, 2020. Other classified assets include investment
securities that fell below investment grade rating totaling $4.3 million at
September 30, 2021, compared to $3.9 million at September 30, 2020 and $3.7
million at December 31, 2020.
Old National may choose to restructure the contractual terms of certain
loans. The decision to restructure a loan, versus aggressively enforcing the
collection of the loan, may benefit Old National by increasing the ultimate
probability of collection.
Any loans that are modified are reviewed by Old National to identify if a TDR
has occurred, which is when, for economic or legal reasons related to a
borrower's financial difficulties, Old National Bank grants a concession to the
borrower that it would not otherwise consider. Terms may be modified to fit the
ability of the borrower to repay in line with its current financial status. The
modification of the terms of such loans includes one or a combination of the
following: a reduction of the stated interest rate of the loan, an extension of
the maturity date at a stated rate of interest lower than the current market
rate of new debt with similar risk, or a permanent reduction of the recorded
investment of the loan.
Loans modified in a TDR are typically placed on nonaccrual status until we
determine 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.
                                       76
--------------------------------------------------------------------------------

If we are unable to resolve a nonperforming loan issue, the credit will be
charged off when it is apparent there will be a loss. For large commercial type
loans, each relationship is individually analyzed for evidence of apparent loss
based on quantitative benchmarks or subjectively based upon certain events or
particular circumstances. For residential and consumer loans, a charge off is
recorded at the time foreclosure is initiated or when the loan becomes 120 to
180 days past due, whichever is earlier.
For commercial TDRs, an allocated reserve is established within the allowance
for credit losses for the difference between the carrying value of the loan and
its computed value. To determine the computed value of the loan, one of the
following methods is selected: (1) the present value of expected cash flows
discounted at the loan's original effective interest rate, (2) the loan's
observable market price, or (3) the fair value of the collateral, if the loan is
collateral dependent. The allocated reserve is established as the difference
between the carrying value of the loan and the collectable value. If there are
significant changes in the amount or timing of the loan's expected future cash
flows, impairment is recalculated and the valuation allowance is adjusted
accordingly.
When a residential or consumer loan is identified as a TDR, the loan is
typically written down to its collateral value less selling costs.
At September 30, 2021, TDRs consisted of $10.2 million of commercial loans,
$15.7 million of commercial real estate loans, $0.1 million of BBCC loans, $2.5
million of residential real estate loans, $0.6 million of direct consumer loans,
and $0.2 million of home equity loans totaling $29.3 million. TDRs included
within nonaccrual loans totaled $12.8 million at September 30, 2021. 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.
Old National has allocated specific reserves to customers whose loan terms have
been modified as TDRs totaling $0.8 million at September 30, 2021 and $1.6
million of December 31, 2020. Old National had not committed to lend any
additional funds to customers with outstanding loans that were classified as
TDRs at September 30, 2021 or December 31, 2020.
The terms of certain other loans were modified during 2021 and 2020 that did not
meet the definition of a TDR. It is our process to review all classified and
criticized loans that, during the period, have been renewed, have entered into a
forbearance agreement, have gone from principal and interest to interest only,
or have extended the maturity date. In order to determine whether a borrower is
experiencing financial difficulty, an evaluation is performed of the probability
that the borrower will be in payment default on its debt in the foreseeable
future without the modification. The evaluation is performed under our internal
underwriting policy. We also evaluate whether a concession has been granted or
if we were adequately compensated through a market interest rate, additional
collateral, or a bona fide guarantee. We also consider whether the modification
was insignificant relative to the other terms of the agreement or the delay in a
payment.
In general, once a modified loan is considered a TDR, the loan will always be
considered a TDR until it is paid in full, otherwise settled, sold, or charged
off. However, guidance also permits for loans to be removed from TDR status when
subsequently restructured under these circumstances: (1) at the time of the
subsequent restructuring, the borrower is not experiencing financial
difficulties, and this is documented by a current credit evaluation at the time
of the restructuring, (2) under the terms of the subsequent restructuring
agreement, the institution has granted no concession to the borrower; and (3)
the subsequent restructuring agreement includes market terms that are no less
favorable than those that would be offered for a comparable new loan. For loans
subsequently restructured that have cumulative principal forgiveness, the loan
should continue to be measured in accordance with ASC 310-10, Receivables -
Overall. However, consistent with ASC 310-40-50-2, Troubled Debt Restructurings
by Creditors, Creditor Disclosure of Troubled Debt Restructurings, the loan
would not be required to be reported in the years following the restructuring if
the subsequent restructuring meets both of these criteria: (1) has an interest
rate at the time of the subsequent restructuring that is not less than a market
interest rate; and (2) is performing in compliance with its modified terms after
the subsequent restructuring.
                                       77
--------------------------------------------------------------------------------

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. The Interagency Statement was subsequently revised in April 2020
to clarify the interaction of the original guidance with Section 4013 of the
CARES Act, as well as setting forth the banking regulators' views on consumer
protection considerations. Additionally, section 541 of the CAA extended the
relief provided by the CARES Act for financial institutions to suspend the GAAP
accounting treatment for troubled debt restructuring to January 1, 2022. 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:
                                                    December 31, 2020                        September 30, 2021
                                                        Deferrals                   Deferrals                   Number of
(dollars in thousands)                                   Balance                   Balance (1)                  Deferrals
Commercial and commercial real estate             $           53,823          $            16,641                       34
Residential real estate                                        1,855                          767                        2
Consumer                                                       8,224                        2,763                      151
Total                                             $           63,902          $            20,171                      187


(1)  Includes second deferrals between 90 and 180 days totaling $4.2 million of
commercial and commercial real estate loans, $0.1 million of residential real
estate loans, and $0.4 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. During 2020, Old
National originated over 9,700 loans with balances in excess of $1.5 billion to
new and existing customers through the PPP. As of September 30, 2021, we have
received payment from the SBA on 9,274, or 95%, of these loans totaling $1.481
billion.
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 has participated in the CAA's
second round of PPP lending. In mid-January we opened our lending portal and
began processing PPP loan applications. During the nine months ended September
30, 2021, Old National originated approximately 6,200 loans totaling $583.7
million through the second round of the PPP. As of September 30, 2021, we have
received payment from the SBA on 3,132, or 51%, of second round PPP loans
totaling $250.4 million.

At September 30, 2021, remaining PPP loans totaled $354.9 million.


To the extent the PPP loans are forgiven, this represents outside equity
contributions 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.
Allowance for Credit Losses on Loans and Unfunded Commitments
Net recoveries on loans totaled $3.0 million during both the three months ended
September 30, 2021 and the three months ended September 30, 2020. Annualized,
net charge-offs (recoveries) to average loans were (0.09)% for both the three
months ended September 30, 2021 and the three months ended September 30, 2020.
Net recoveries on loans totaled $3.4 million for the nine months ended September
30, 2021, compared to $4.1 million of net charge-
                                       78
--------------------------------------------------------------------------------

offs for the nine months ended September 30, 2020. Annualized, net charge-offs
(recoveries) to average loans were (0.03)% for the nine months ended September
30, 2021, compared to 0.04% for the nine months ended September 30, 2020.
Management will continue its efforts to reduce the level of non-performing loans
and may consider the possibility of sales of troubled and non-performing loans,
which could result in additional charge-offs to the allowance for credit losses
on loans.
Credit quality within the loans held for investment portfolio is continuously
monitored by management and is reflected within the allowance for credit losses
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 allowance for credit losses for loans was $107.9 million at September 30,
2021, compared to $131.4 million at December 31, 2020. 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.
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 loan
commitments totaled $10.3 million at September 30, 2021, compared to $11.7
million at December 31, 2020.
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.
                                       79
--------------------------------------------------------------------------------

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.
                                       80
--------------------------------------------------------------------------------

The following table illustrates our projected net interest income sensitivity over a two year cumulative horizon based on the asset/liability model at September 30, 2021 and 2020:

                                    Immediate
                                  Rate Decrease                                             Immediate Rate Increase
                                       -50                                       +100                 +200                 +300
(dollars in thousands)            Basis Points              Base             Basis Points         Basis Points         Basis Points
September 30, 2021
Projected interest income:
Money market, other interest
earning
  investments, and investment
  securities                     $    272,337          $   290,049         

$ 326,179 $ 357,884 $ 387,685 Loans

                                 845,675              875,583            1,015,477            1,157,274            1,296,748
Total interest income               1,118,012            1,165,632            1,341,656            1,515,158            1,684,433
Projected interest expense:
Deposits                               14,597               23,943              104,651              185,529              266,403
Borrowings                             63,711               71,372              103,309              137,039              174,510
Total interest expense                 78,308               95,315              207,960              322,568              440,913
Net interest income              $  1,039,704          $ 1,070,317          $ 1,133,696          $ 1,192,590          $ 1,243,520
Change from base                 $    (30,613)                              $    63,379          $   122,273          $   173,203
% change from base                      (2.86) %                                   5.92  %             11.42  %             16.18  %

September 30, 2020
Projected interest income:
Money market, other interest
earning
  investments, and investment
  securities                     $    246,473          $   260,660          

$ 286,999 $ 302,789 $ 315,236 Loans

                                 875,589              904,055            1,028,043            1,153,281            1,276,757
Total interest income               1,122,062            1,164,715            1,315,042            1,456,070            1,591,993
Projected interest expense:
Deposits                               20,288               29,827              110,549              191,267              271,981
Borrowings                             67,767               71,004              102,471              133,577              168,418
Total interest expense                 88,055              100,831              213,020              324,844              440,399
Net interest income              $  1,034,007          $ 1,063,884          $ 1,102,022          $ 1,131,226          $ 1,151,594
Change from base                 $    (29,877)                              $    38,138          $    67,342          $    87,710
% change from base                      (2.81) %                                   3.58  %              6.33  %              8.24  %


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 September 30, 2021, 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 $16.1 million at
September 30, 2021, compared to a net asset position with a fair value of $15.2
million at December 31, 2020.  See Note 19 to the consolidated financial
statements for further discussion of derivative financial instruments.
                                       81
--------------------------------------------------------------------------------

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.
A maturity schedule for Old National Bank's time deposits is shown in the
following table at September 30, 2021.
(dollars in thousands)
Maturity Bucket              Amount        Rate
2021                       $ 302,154       0.20     %
2022                         432,122       0.37
2023                         128,973       0.84
2024                          75,259       0.94
2025                          30,347       0.70
2026 and beyond               23,982       0.72
Total                      $ 992,837       0.44     %


Our ability to acquire funding at competitive prices is influenced by rating
agencies' views of our credit quality, liquidity, capital, and earnings. Moody's
Investors Service places us in an investment grade that indicates a low risk of
default. For both Old National and Old National Bank:
•Moody's Investors Service affirmed the Long-Term Rating of "A3" for Old
National's senior unsecured/issuer rating on February 17, 2021.
•Moody's Investors Service affirmed Old National Bank's long-term deposit rating
of "Aa3" on February 17, 2021. The bank's short-term deposit rating was affirmed
at "P-1" and the bank's issuer rating was affirmed at "A3."
Moody's Investors Service concluded a rating review of Old National Bank on
February 17, 2021. The rating outlook from Moody's Investors Service was moved
from "Stable" to "Ratings Under Review" on June 2, 2021 due to the merger
announced June 1, 2021.
The credit ratings of Old National and Old National Bank at September 30, 2021
are shown in the following table.
                      Moody's Investors Service
                        Long-term      Short-term
Old National               A3             N/A
Old National Bank          Aa3            P-1


                                       82
--------------------------------------------------------------------------------

Old National Bank maintains relationships in capital markets with brokers and
dealers to issue certificates of deposit and short-term and medium-term bank
notes as well. At September 30, 2021, 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                                             $       113,893          $    683,565
Unencumbered government-issued debt securities                                    -               160,888
Unencumbered investment grade municipal securities                                -             1,025,086
Unencumbered corporate securities                                                 -             2,965,555
Availability of borrowings:
Amount available from Federal Reserve discount window*                            -               440,877
Amount available from Federal Home Loan Bank Indianapolis*                        -               515,089
Total available funds                                               $       

113,893 $ 5,791,060



* Based on collateral pledged
Old National Bancorp has routine funding requirements consisting primarily of
operating expenses, dividends to shareholders, debt service, net derivative cash
flows, and funds used for acquisitions. Old National Bancorp can obtain funding
to meet its obligations from dividends and management fees collected from its
subsidiaries, operating line of credit, and through the issuance of debt
securities. Additionally, Old National Bancorp has a shelf registration in place
with the SEC permitting ready access to the public debt and equity markets. At
September 30, 2021, Old National Bancorp's other borrowings outstanding were
$213.5 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 2020 and is not
currently required.
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 we will perform
business in a manner compliant with applicable laws and/or regulations and
expects issues to be identified, analyzed, and remediated in a timely and
complete manner.
                                       83
--------------------------------------------------------------------------------

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
$4.241 billion and standby letters of credit of $65.8 million at September 30,
2021. At September 30, 2021, approximately $3.900 billion of the loan
commitments had fixed rates and $341.3 million had floating rates, with the
floating rates ranging from 0% to 14%. At December 31, 2020, loan commitments
were $3.720 billion and standby letters of credit were $86.9 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 $99.9 million at September 30, 2021.
CONTRACTUAL OBLIGATIONS
The following table presents our significant fixed and determinable contractual
obligations at September 30, 2021:
                                                                           Payments Due In
                                              One Year               One to               Three to               Over
(dollars in thousands)                       or Less (1)           Three Years           Five Years           Five Years               Total
Deposits without stated maturity           $ 17,203,312          $          

- $ - $ - $ 17,203,312 IRAs, consumer, and brokered certificates

  of deposit                                    302,154               561,095              105,606                23,982               992,837
Federal funds purchased and interbank
borrowings                                           34                     -                    -                     -                    34
Securities sold under agreements to
repurchase                                      375,247                     -                    -                     -               375,247
FHLB advances                                         -                29,155              575,000             1,285,899             1,890,054
Other borrowings                                    533                 4,561              179,803                86,071               270,968
Fixed interest payments (2)                       8,565                65,886               53,985                61,938               190,374
Operating leases                                  3,464                22,275               16,298                49,815                91,852
Other long-term liabilities (3)                   6,569                24,385                  157                    22                31,133


(1)For the remaining three months of fiscal 2021.
(2)Our senior notes, subordinated notes, certain trust preferred securities, and
certain FHLB advances have fixed rates ranging from 0.45% to 4.96%. All of our
other long-term debt is at LIBOR based variable rates at September 30, 2021. The
projected variable interest assumes no increase in LIBOR rates from
September 30, 2021.
(3)Includes unfunded commitments on qualified affordable housing projects and
other tax credit investments.
We rent certain premises and equipment under operating leases. See Note 9 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 and timing
of any cash payments cannot be reasonably estimated. Further discussion of
income taxes and liabilities is included in Note 18 to the consolidated
financial statements.
                                       84
--------------------------------------------------------------------------------

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our accounting policies are described in Note 1 to the consolidated financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 2020. 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, future forecasts, or other factors that management
believes to be reasonable under the circumstances. Because of the nature of the
judgment and assumptions, actual results could differ from estimates, which
could have a material effect on our financial condition and results of
operations.
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, 2021, 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 amortized cost and any shortfall is recorded as reserve. Expected cashflows
are created using a combination
                                       85
--------------------------------------------------------------------------------

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 18 to the
consolidated financial statements for a further description of our provision and
related income tax assets and liabilities.
                                       86

--------------------------------------------------------------------------------


•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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Management's Discussion and Analysis of Financial Condition and Results of
Operations - Market Risk and Liquidity Risk.

© Edgar Online, source Glimpses

All news about OLD NATIONAL BANCORP
11/19OLD NATIONAL BANCORP : Important Notice Regarding Employee Stock Ownership and Savings Pla..
PU
11/19OLD NATIONAL BANCORP /IN/ : Temporary Suspension of Trading Under Registrant's Employee Be..
AQ
11/19OLD NATIONAL BANCORP : Bank ranked the #1 Indiana-based SBA 7a Lender
PU
11/03OLD NATIONAL BANCORP /IN/ : Regulation FD Disclosure, Financial Statements and Exhibits (f..
AQ
10/28Old National Bancorp announces quarterly cash dividend - Form 8-K
PU
10/28OLD NATIONAL BANCORP /IN/ : Other Events, Financial Statements and Exhibits (form 8-K)
AQ
10/28Old National Bancorp announces quarterly cash dividend
AQ
10/28Old National Bancorp Declares Quarterly Cash Dividend, Payable on December 15, 2021
CI
10/27OLD NATIONAL BANCORP /IN/ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ..
AQ
10/19CORRECTION : Old National Bancorp Q3 Earnings, Revenue Drop
MT
More news
Analyst Recommendations on OLD NATIONAL BANCORP
More recommendations