The following discussion is an analysis of our results of operations for the three and six months ended
June 30, 2022and 2021, and financial condition as of June 30, 2022, compared to December 31, 2021. This discussion and analysis should be read in conjunction with the consolidated financial statements and related notes, as well as our 2021 Annual Report on Form 10-K.
This report contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, descriptions of Old National's financial condition, results of operations, asset and credit quality trends, profitability and business plans or opportunities. Forward-looking statements can be identified by the use of the words "anticipate," "believe," "contemplate," "could," "estimate," "expect," "intend," "may," "outlook," "plan," "should," and "will," and other words of similar meaning. These forward-looking statements express management's current expectations or forecasts of future events and, by their nature, are subject to risks and uncertainties. There are a number of factors that could cause actual results or outcomes to differ materially from those in such statements. Factors that might cause such a difference include, but are not limited to: the duration, extent, and severity of the COVID-19 pandemic and related variants and mutations, including the continued effects on our business, operations, and employees as well as the business of our customers; competition; government legislation, regulations and policies; ability of Old National to execute its business plan, including the completion of the integration related to the merger between Old National and First Midwest, and the achievement of the synergies and other benefits from the merger; 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; changes in economic conditions which could materially impact credit quality trends and the ability to generate loans and gather deposits; market, economic, operational, liquidity, credit, and interest rate risks associated with our business; 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; operational risks or risk management failures by us or critical third parties, including without limitation with respect to data processing, information systems, cybersecurity, technological changes, vendor issues, business interruption, and fraud risks; significant changes in accounting, tax or regulatory practices or requirements; new legal obligations or liabilities or unfavorable resolutions of litigation; disruptive technologies in payment systems and other services traditionally provided by banks; failure or disruption of our information systems; computer hacking and other cybersecurity threats; other matters discussed in this report; and other factors identified in our Annual Report on Form 10-K for the year ended
December 31, 2021and other filings with the SEC. These forward-looking statements are made only as of the date of this report and are not guarantees of future results or performance. 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 or outcomes 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 after the date of this report. You are advised to consult further disclosures we may make on related subjects in our filings with the SEC.
Investors should consider these risks, uncertainties, and other factors in
addition to risk factors included in this filing and our other filings with the
The following table sets forth certain financial highlights of Old National:
Three Months Ended Six Months Ended (dollars and shares in thousands, June 30, March 31, June 30, June 30, except per share data) 2022 2022 2021 2022 2021 Income Statement: Net interest income
$ 337,472 $ 222,785
Taxable equivalent adjustment (1) 4,314
3,772 3,470 8,086 6,970 Net interest income - tax equivalent basis 341,786 226,557 153,397 568,343 305,017 Provision for credit losses 9,245 97,569 (4,929) 106,814 (22,285) Noninterest income 89,117 65,240 51,508 154,357 108,220 Noninterest expense 277,395 226,756 129,618 504,151 247,358 Net income (loss) available to common shareholders 110,952 (29,603) 62,786 81,349 149,604 Per Common Share Data: Weighted average diluted shares 291,881 227,002 165,934 260,253 165,821
Net income (loss) (diluted)
0.14 0.14 0.14 0.28 0.28 Common dividend payout ratio (2) 37 % (108) % 37 % 90 % 31 % Book value
$ 16.51 $ 17.03 $ 18.05 $ 16.51 $ 18.05Stock price 14.79 16.38 17.61 14.79 17.61 Tangible common book value (3) 9.23 9.71 11.55 9.23 11.55 Performance Ratios: Return on average assets 1.01 % (0.31) % 1.06 % 0.43 % 1.27 % Return on average common equity 9.08 (2.89) 8.39 3.62 10.04 Return on tangible common equity (3) 17.21 (3.61) 13.58 6.71 16.10 Return on average tangible common equity (3) 16.93 (4.03) 13.58 6.84 16.21 Net interest margin (3) 3.33 2.88 2.91 3.13 2.93 Efficiency ratio (3) 62.70 76.15 62.05 68.13 58.79 Net charge-offs (recoveries) to average loans 0.02 0.05 (0.01) 0.04 - Allowance for credit losses to ending loans 0.97 0.99 0.79 0.97 0.79 Non-performing loans to ending loans 0.78 0.88 1.03 0.78 1.03 Balance Sheet: Total loans $ 29,553,648 $ 28,336,244 $ 13,784,677 $ 29,553,648 $ 13,784,677Total assets 45,748,355 45,834,648 23,675,666 45,748,355 23,675,666 Total deposits 35,538,975 35,607,390 17,868,911 35,538,975 17,868,911 Total borrowed funds 4,384,411 4,347,560 2,559,113 4,384,411 2,559,113 Total shareholders' equity 5,078,783 5,232,114 2,991,118 5,078,783 2,991,118 Capital Ratios: Risk-based capital ratios: Tier 1 common equity 9.90 % 10.04 % 11.95 % 9.90 % 11.95 % Tier 1 10.63 10.79 11.95 10.63 11.95 Total 12.03 12.19 12.73 12.03 12.73 Leverage ratio (to average assets) 8.19 10.58 8.38 8.19 8.38 Total equity to assets (averages) 11.22 12.03 12.61 11.57 12.69 Tangible common equity to tangible assets (3) 6.20 6.51 8.47 6.20 8.47 Nonfinancial Data: Full-time equivalent employees 4,196 4,333 2,465 4,196 2,465 Banking centers 266 267 162 266 162 (1)Calculated using the federal statutory tax rate in effect of 21% for all periods. (2)Cash dividends per common share divided by net income (loss) per common 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 Company's accounting and reporting policies conform to GAAP and general practices within the banking industry. As a supplement to GAAP, the Company provides non-GAAP performance results, which the Company believes are useful because they assist investors in assessing the Company's operating performance. Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure, can be found in the following table. The tax-equivalent adjustment to net interest income and net interest margin recognizes the income tax savings when comparing taxable and tax-exempt assets. Interest income and yields on tax-exempt securities and loans are presented using the current federal income tax rate of 21%. Management believes that it is standard practice in the banking industry to present net interest income and net interest margin on a fully tax-equivalent basis and that it may enhance comparability for peer comparison purposes. In management's view, tangible common equity measures are capital adequacy metrics that may be meaningful to the Company, as well as analysts and investors, in assessing the Company's use of equity and in facilitating comparisons with peers. These non-GAAP measures are valuable indicators of a financial institution's capital strength since they eliminate intangible assets from shareholders' equity and retain the effect of accumulated other comprehensive loss in shareholders' equity. Although intended to enhance investors' understanding of the Company's business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. In addition, these non-GAAP financial measures may differ from those used by other financial institutions to assess their business and performance. See the previously provided tables and the following reconciliations in the "Non-GAAP Reconciliations" section for details on the calculation of these measures to the extent presented herein. 59 --------------------------------------------------------------------------------
The following table presents GAAP to non-GAAP reconciliations.
Three Months Ended Six Months Ended June 30, June 30, (dollars and shares in thousands, except per share data) 2022 2021 2022 2021 Tangible common book value: Shareholders' common equity (GAAP)
$ 4,835,064 $ 2,991,118 $ 4,835,064 $ 2,991,118Deduct: Goodwill 1,991,534 1,036,994 1,991,534 1,036,994 Intangible assets 140,281 40,030 140,281 40,030 Tangible shareholders' common equity (non-GAAP)
Period end common shares
292,893 165,732 292,893 165,732 Tangible common book value (non-GAAP) 9.23 11.55 9.23 11.55 Return on tangible common equity: Net income applicable to common shares (GAAP)
Add: Intangible amortization (net of tax) (1)
5,378 2,182 9,312 4,488 Tangible net income (non-GAAP)
Tangible shareholders’ common equity (non-GAAP) (see above)
Return on tangible common equity (non-GAAP)
17.21 % 13.58 % 6.71 % 16.10 % Return on average tangible common equity: Tangible net income (non-GAAP) (see above)
Average shareholders’ common equity (GAAP)
$ 4,886,181 $ 2,992,693 $ 4,495,862 $ 2,981,398Deduct: Average goodwill 1,992,860 1,036,994 1,736,227 1,036,994 Average intangible assets 144,104 41,410 109,195 42,901 Average tangible shareholders' common equity (non-GAAP)
Return on average tangible common equity (non-GAAP)
16.93 % 13.58 % 6.84 % 16.21 % Net interest margin: Net interest income (GAAP)
Taxable equivalent adjustment
4,314 3,470 8,086 6,970 Net interest income - taxable equivalent basis (non-GAAP)
Average earning assets
Net interest margin (non-GAAP)
3.33 % 2.91 % 3.13 % 2.93 % Efficiency ratio: Noninterest expense (GAAP)
Deduct: Intangible amortization expense
7,170 2,909 11,981 5,984 Adjusted noninterest expense (non-GAAP)
Net interest income – taxable equivalent basis (non-GAAP) (see
89,117 51,508 154,357 108,220 Deduct: Debt securities gains (losses), net (85) 692 257 2,685 Adjusted total revenue (non-GAAP)
Efficiency ratio (non-GAAP)
62.70 % 62.05 % 68.13 % 58.79 % Tangible common equity to tangible assets: Tangible shareholders' common equity (non-GAAP) (see above)
$ 2,703,249 $ 1,914,094 $ 2,703,249 $ 1,914,094Assets (GAAP) $ 45,748,355 $ 23,675,666 $ 45,748,355 $ 23,675,666Add: Trust overdrafts - 24 - 24 Deduct: Goodwill 1,991,534 1,036,994 1,991,534 1,036,994 Intangible assets 140,281 40,030 140,281 40,030 Tangible assets (non-GAAP)
Tangible common equity to tangible assets (non-GAAP)
6.20 % 8.47 % 6.20 % 8.47 %
(1)Calculated using management’s estimate of the annual fully taxable equivalent
rates (federal and state).
Old National is the sixth largest commercial bank headquartered in the Midwest. With approximately
$46 billionof assets and $28 billionof assets under management, Old National ranks among the top 35 banking companies based in the U.S.and has been recognized as a World's Most Ethical Companyby the Ethisphere Institutefor eleven consecutive years. Since its founding in 1834, Old National Bankhas focused on community banking by building long-term, highly valued partnerships with clients and in the communities it serves. In addition to providing extensive services in retail and commercial banking, Old National offers comprehensive wealth management, investment, and capital market services. On February 15, 2022, Old National completed its previously announced merger of equals transaction with First Midwest. At closing, Old National acquired $21.9 billionof assets, including $14.3 billionof loans, and assumed $17.2 billionof deposits. Old National completed branding and the majority of core banking systems conversions in early July of 2022. On June 27, 2022, Old National entered into a Custodial Transfer and Asset Purchase Agreement with UMB, pursuant to which UMB will acquire Old National's business of acting as a qualified custodian for, and administering, health savings accounts. Old National serves as custodian for health savings accounts comprised of both investment accounts and deposit accounts. Upon completion of the sale, UMB will pay Old National a premium on deposit account balances transferred at closing, or approximately $95 millionbased on June 30, 2022balances. Subject to customary closing conditions and regulatory approval, the parties anticipate completing the sale in the fourth quarter of 2022. Net income (loss) applicable to common shareholders for the second quarter of 2022 was $111.0 million, or $0.38per diluted common share, compared to $(29.6) million, or $(0.13)per diluted common share, for the first quarter of 2022 and $62.8 million, or $0.38per diluted common share, for the second quarter of 2021. Results for the first and second quarters of 2022 were impacted by $52.3 millionand $36.6 million, respectively, of merger-related expenses, which included $11.0 millionin the first quarter of 2022 attributable to the provision for credit losses on unfunded loan commitments. In addition, the first quarter of 2022 provision expense of $97.6 millionincluded $96.3 millionof provision for credit losses to establish an allowance for credit losses on non-PCD loans acquired in the First Midwest merger.
We achieved strong fundamental results during the second quarter of 2022.
Loans: Our loan balances, excluding loans held for sale, increased
$1.2 billionto $29.6 billionat June 30, 2022compared to March 31, 2022. This was primarily driven by strong commercial and consumer loan production. Net Interest Income: Net interest income increased $114.7 millioncompared to the first quarter of 2022 driven by the full quarter impact of the merger, loan growth, the higher rate environment, higher accretion, and an additional day in the quarter. Noninterest Income: Noninterest income increased $23.9 millioncompared to the first quarter of 2022 driven by the full quarter impact of the merger. Mortgage banking revenue was impacted by the higher rate environment, lower gain on sale margins, and a higher mix of portfolio production. Noninterest Expenses: Noninterest expenses increased $50.6 millioncompared to the first quarter of 2022 primarily due to the full quarter impact of operating costs associated with the merger, as well as higher incentive accruals reflective of strong performance. Noninterest expenses included $36.6 millionof merger-related expenses, compared to $52.3 millionin the first quarter of 2022.
As previously disclosed, the COVID-19 pandemic has created economic and financial disruptions that continue to adversely affect our operations during the six months ended
June 30, 2022. Our historically careful underwriting practices, diverse and granular portfolios, and Midwest-based footprint have helped minimize the adverse impact to Old National. The pandemic has become less disruptive to the Company's business, financial condition, results of operations, and its clients as of June 30, 2022. 61 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
The following table sets forth certain income statement information of Old National: Three Months Ended Six Months Ended June 30, June 30, (dollars in thousands, except % % per share data) 2022 2021 Change 2022 2021 Change Income Statement Summary: Net interest income
$ 337,472 $ 149,927125.1 % $ 560,257 $ 298,04788.0 % Provision for credit losses 9,245 (4,929) (287.6) 106,814 (22,285) (579.3) Noninterest income 89,117 51,508 73.0 154,357 108,220 42.6 Noninterest expense 277,395 129,618 114.0 504,151 247,358 103.8
Net income applicable to common
shareholders 110,952 62,786 76.7 81,349 149,604 (45.6) Net income per common share - diluted 0.38 0.38 - 0.31 0.90 (65.6) Other Data: Return on average common equity 9.08 % 8.39 % 3.62 % 10.04 % Return on tangible common equity (1) 17.21 13.58 6.71 16.10 Return on average tangible common equity (1) 16.93 13.58 6.84 16.21 Efficiency ratio (1) 62.70 62.05 68.13 58.79 Tier 1 leverage ratio 8.19 8.38 8.19 8.38
Net charge-offs (recoveries) to
average loans 0.02 (0.01) 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 78% of revenues for the six months ended
June 30, 2022. Net interest income and net interest margin are influenced by many factors, primarily the volume and mix of earning assets, funding sources, and interest rate fluctuations. Other factors include the level of accretion income on purchased loans, prepayment risk on mortgage and investment-related assets, and the composition and maturity of interest-earning assets and interest-bearing liabilities. Interest rates increased significantly during the second quarter of 2022 with the rate on the 2-Year U.S. Treasuryincreasing from 2.34% to 2.95%. The Federal Reserve'sFederal Funds Rate increased 125 basis points to a target range of 1.50% to 1.75%, with the Effective Federal Funds Rate at 1.58% at June 30, 2022. The Federal Reserveis expected to continue to increase the Federal Funds Rate throughout 2022 and into 2023. If interest rates increase, our interest rate spread may improve, which may result in an increase in our net interest income. If interest rates decline, 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 Reservemonetary policy, and price volatility of competing alternative investments, can also exert significant influence on our ability to optimize our mix of assets and funding, net interest income, and net interest margin. 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. 62 -------------------------------------------------------------------------------- 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) June 30, 2022 June 30, 2021 Average Income (1)/ Yield/ Average Income (1)/ Yield/ Earning Assets Balance Expense Rate Balance Expense Rate
Money market and other interest-earning
$ 1,088,005 $ 1,8300.67 % $ 232,723$ 48 0.08 % Investment securities: Treasuryand government sponsored agencies 2,487,717 11,818 1.90 % 1,637,396 5,967 1.46 % Mortgage-backed securities 6,008,470 33,534 2.23 % 3,287,254 15,067 1.83 % States and political subdivisions 1,834,189 14,571 3.18 % 1,503,447 12,364 3.29 % Other securities 723,279 5,467 3.02 % 439,197 2,690 2.45 % Total investment securities 11,053,655 65,390 2.37 % 6,867,294 36,088 2.10 % Loans: (2) Commercial 8,692,646 95,743 4.36 % 4,019,553 34,715 3.42 % Commercial real estate 11,547,958 113,545 3.89 % 6,146,057 57,655 3.71 % Residential real estate loans 5,905,151 51,686 3.50 % 2,256,215 21,474 3.81 % Consumer 2,715,923 30,478 4.50 % 1,573,438 13,948 3.56 % Total loans 28,861,678 291,452 4.01 % 13,995,263 127,792 3.62 % Total earning assets 41,003,338 $ 358,6723.48 % 21,095,280 $ 163,9283.09 % Less: Allowance for credit losses (282,943) (117,020) Non-Earning Assets Cash and due from banks 277,283 238,326 Other assets 4,735,701 2,520,937 Total assets $ 45,733,379 $ 23,737,523Interest-Bearing Liabilities Checking and NOW accounts $ 8,445,683 $ 1,7860.08 % $ 4,954,817 $ 5140.04 % Savings accounts 6,835,675 673 0.04 % 3,647,952 492 0.05 % Money market accounts 5,317,300 1,027 0.08 % 2,085,132 433 0.08 % Time deposits 2,499,445 1,701 0.27 % 1,024,777 1,293 0.51 % Total interest-bearing deposits 23,098,103 5,187 0.09 % 11,712,678 2,732 0.09 % Federal funds purchased and interbank borrowings 1,222 2 0.47 % 1,460 - 0.02 % Securities sold under agreements to repurchase 466,885 85 0.07 % 406,251 95 0.09 % FHLB advances 3,053,423 6,925 0.91 % 1,906,078 5,218 1.10 % Other borrowings 611,772 4,687 3.06 % 269,259 2,486 3.69 % Total borrowed funds 4,133,302 11,699 1.14 % 2,583,048 7,799 1.21 % Total interest-bearing liabilities $ 27,231,405 $ 16,8860.25 % $ 14,295,726 $ 10,531
Noninterest-Bearing Liabilities and
Shareholders' Equity Demand deposits
$ 12,714,946 $ 6,140,424Other liabilities 657,128 308,680 Shareholders' equity 5,129,900 2,992,693 Total liabilities and shareholders' equity $ 45,733,379 $ 23,737,523Net interest income - taxable equivalent basis $ 341,7863.33 % $ 153,3972.91 % Taxable equivalent adjustment (4,314) (3,470) Net interest income (GAAP) $ 337,4723.29 % $ 149,9272.84 %
(1)Interest income is reflected on a fully taxable equivalent basis.
(2)Includes loans held for sale.
(Tax equivalent basis, Six Months Ended Six Months Ended dollars in thousands) June 30, 2022 June 30, 2021 Average Income (1)/ Yield/ Average Income (1)/ Yield/ Earning Assets Balance Expense Rate Balance Expense Rate
Money market and other interest-earning
$ 1,211,518 $ 2,1380.36 % $ 301,025 $ 1360.09 % Investment securities: Treasuryand government sponsored agencies 2,342,401 20,038 1.71 % 1,397,791 10,852 1.55 % Mortgage-backed securities 5,441,902 57,910 2.13 % 3,299,713 30,900 1.87 % States and political subdivisions 1,786,684 28,208 3.16 % 1,490,865 24,564 3.30 % Other securities 664,741 9,611 2.89 % 446,266 5,433 2.44 % Total investment securities 10,235,728 115,767 2.26 % 6,634,635 71,749 2.16 % Loans: (2) Commercial 7,301,008 151,026 4.11 % 3,997,281 70,282 3.50 % Commercial real estate 10,156,292 190,952 3.74 % 6,063,872 113,401 3.72 % Residential real estate loans 4,953,222 85,673 3.46 % 2,264,988 42,821 3.78 % Consumer 2,411,976 52,393 4.38 % 1,588,028 28,276 3.59 % Total loans 24,822,498 480,044 3.86 % 13,914,169 254,780 3.65 % Total earning assets 36,269,744 $ 597,9493.29 % 20,849,829 $ 326,6653.13 % Less: Allowance for credit losses (225,876) (125,398) Non-Earning Assets Cash and due from banks 273,083 263,336 Other assets 4,111,637 2,503,865 Total assets $ 40,428,588 $ 23,491,632Interest-Bearing Liabilities Checking and NOW accounts $ 7,619,757 $ 2,3810.06 % $ 4,965,095 $ 1,1390.05 % Savings accounts 6,073,081 1,262 0.04 % 3,572,057 979 0.06 % Money market accounts 4,552,241 1,719 0.08 % 2,059,439 861 0.08 % Time deposits 2,124,382 3,019 0.29 % 1,052,856 2,912 0.56 % Total interest-bearing deposits 20,369,461 8,381 0.08 % 11,649,447 5,891 0.10 % Federal funds purchased and interbank borrowings 1,168 2 0.25 % 1,303 - - % Securities sold under agreements to repurchase 458,459 181 0.08 % 402,478 215 0.11 % FHLB advances 2,822,984 12,888 0.92 % 1,915,661 10,627 1.12 % Other borrowings 522,599 8,154 3.12 % 266,152 4,915 3.69 % Total borrowed funds 3,805,210 21,225 1.12 % 2,585,594 15,757 1.23 % Total interest-bearing liabilities $ 24,174,671 $ 29,6060.25 % $ 14,235,041 $ 21,648
Noninterest-Bearing Liabilities and
Shareholders' Equity Demand deposits
$ 11,014,359 $ 5,949,412Other liabilities 562,882 325,781 Shareholders' equity 4,676,676 2,981,398 Total liabilities and shareholders' equity $ 40,428,588 $ 23,491,632Net interest income - taxable equivalent basis $ 568,3433.13 % $ 305,0172.93 % Taxable equivalent adjustment (8,086) (6,970) Net interest income (GAAP) $ 560,2573.09 % $ 298,0472.86 %
(1)Interest income is reflected on a fully taxable equivalent basis.
(2)Includes loans held for sale.
64 -------------------------------------------------------------------------------- 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 Six Months Ended June 30, 2021 to Three June 30, 2021 to Six Months Ended June 30, 2022 Months Ended June 30, 2022 Total Attributed to Total Attributed to (dollars in thousands) Change (1) Volume Rate Change (1) Volume Rate Interest Income Money market and other interest-earning investments
$ 1,782 $ 805
Investment securities (2)
29,302 23,383 5,919 44,018 39,797 4,221 Loans (2) 163,660 142,491 21,169 225,264 204,866 20,398 Total interest income 194,744 166,679 28,065 271,284 245,666 25,618 Interest Expense Checking and NOW deposits 1,272 563 709 1,242 829 413 Savings deposits 181 335 (154) 283 695 (412) Money market deposits 594 620 (26) 858 927 (69) Time deposits 408 1,451 (1,043) 107 2,264 (2,157)
Federal funds purchased and interbank
borrowings 2 - 2 2 - 2
Securities sold under agreements to
repurchase (10) 12 (22) (34) 28 (62) FHLB advances 1,707 2,883 (1,176) 2,261 4,629 (2,368) Other borrowings 2,201 2,892 (691) 3,239 4,363 (1,124) Total interest expense 6,355 8,756 (2,401) 7,958 13,735 (5,777) Net interest income
$ 188,389 $ 157,923 $ 30,466 $ 263,326 $ 231,931 $ 31,395(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 $2.9 millionand $1.4 million, respectively, during the three months ended June 30, 2022; and $5.6 millionand $2.5 million, respectively, during the six months ended June 30, 2022using the federal statutory rate in effect of 21%. The increase in net interest income for the three and six months ended June 30, 2022when compared to the same periods in 2021 was primarily due to higher average earning assets as a result of the merger, loan growth, higher rates, higher accretion income, and lower costs of average interest-bearing liabilities. Partially offsetting these increases were lower interest and fees related to PPP loans and higher average interest-bearing liabilities as a result of the merger. Accretion income associated with acquired loans and borrowings totaled $35.0 millionand $50.8 millionin the three and six months ended June 30, 2022, respectively, compared to $5.1 millionand $9.8 millionin the three and six months ended June 30, 2021, respectively. Net interest income included interest and net fees on PPP loans totaling $1.7 millionand $5.4 millionin the three and six months ended June 30, 2022, respectively, compared to $11.9 millionand $24.5 millionin the three and six months ended June 30, 2021, respectively. Unamortized fees on remaining PPP loans totaled $1.4 millionat June 30, 2022. The increase in the net interest margin on a fully taxable equivalent basis for the three and six months ended June 30, 2022when compared to the three and six months ended June 30, 2021was primarily due to higher yields on interest earning assets and lower costs of interest-bearing liabilities. The yield on interest earning assets increased 39 basis points and the cost of interest-bearing liabilities decreased 5 basis points in the quarterly year-over-year comparison. The yield on interest earning assets increased 16 basis points and the cost of interest-bearing liabilities decreased 6 basis points in the six months ended June 30, 2022when compared to the six months ended June 30, 2021. Accretion income represented 34 basis points and 28 basis points of the net interest margin in the three and six months ended June 30, 2022, respectively, compared to 10 basis points for both the three and six months ended June 30, 2021. Average earning assets were $41.0 billionand $21.1 billionfor the three months ended June 30, 2022and 2021, respectively, an increase of $19.9 billion, or 94%. Average earning assets were $36.3 billionand $20.8 billionfor the six months ended June 30, 2022and 2021, respectively, an increase of $15.4 billion, or 74%. The increases in average earning assets were primarily due to the merger with First Midwest and strong loan growth. 65 -------------------------------------------------------------------------------- Average loans including loans held for sale increased $14.9 billionand $10.9 billionfor the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021 primarily due to the First Midwest merger and strong loan growth. Average investments increased $4.2 billionand $3.6 billionfor the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021 reflecting the First Midwest merger. Average noninterest-bearing and interest bearing deposits increased $6.6 billionand $11.4 billion, respectively, for the three months ended June 30, 2022when compared to the same period in 2021. Average noninterest-bearing and interest bearing deposits increased $5.1 billionand $8.7 billion, respectively, for the six months ended June 30, 2022when compared to the same period in 2021. This growth was primarily driven by the First Midwest merger. Average borrowed funds increased $1.6 billionand $1.2 billionfor the three and six months ended June 30, 2022when compared to the same periods in 2021, driven by the First Midwest merger. Provision for Credit Losses Old National recorded provision for credit losses of $9.2 millionfor the three months ended June 30, 2022, compared to $4.9 millionprovision for credit losses recapture for the three months ended June 30, 2021. Net charge-offs on loans totaled $1.8 millionduring the three months ended June 30, 2022, compared to net recoveries of $0.3 millionfor the three months ended June 30, 2021. The provision for credit losses totaled $106.8 millionfor the six months ended June 30, 2022, compared to $22.3 millionprovision for credit losses recapture for the six months ended June 30, 2021. Net charge-offs on loans totaled $4.5 millionduring the six months ended June 30, 2022, compared to net recoveries of $0.3 millionduring the six months ended June 30, 2021. The provision for credit losses expense in the six months ended June 30, 2022included $96.3 millionof provision for credit losses to establish an allowance for credit losses on non-PCD loans acquired in the First Midwest merger. 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, provision expense may be 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 generate revenues in the form of noninterest income through client fees, sales commissions, and 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 Six Months Ended June 30, % June 30, % (dollars in thousands) 2022 2021 Change 2022 2021 Change Wealth management fees
$ 19,304 $ 10,73479.8 % $ 33,934 $ 20,44266.0 % Service charges on deposit accounts 21,144 8,514 148.3 35,870 16,638 115.6 Debit card and ATM fees 10,402 5,583 86.3 17,301 10,726 61.3 Mortgage banking revenue 6,522 7,827 (16.7) 13,767 24,352 (43.5) Investment product fees 8,568 6,042 41.8 15,890 11,906 33.5 Capital markets income 7,261 5,871 23.7 11,703 9,586 22.1 Company-owned life insurance 4,571 2,783 64.2 8,095 5,497 47.3 Debt securities gains (losses), net (85) 692 (112.3) 257 2,685 (90.4) Other income 11,430 3,462 230.2 17,540 6,388 174.6 Total noninterest income $ 89,117 $ 51,50873.0 % $ 154,357 $ 108,22042.6 % Noninterest income increased $37.6 millionand $46.1 millionfor the three and six months ended June 30, 2022when compared to the same periods in 2021 primarily due to the First Midwest merger in February of 2022. The increases in noninterest income were partially offset by lower mortgage banking revenue, which was impacted by the higher rate environment, normalizing gain on sale margins, and a higher mix of portfolio production. 66 --------------------------------------------------------------------------------
The following table details the components in noninterest expense:
Three Months Ended Six Months Ended June 30, % June 30, % (dollars in thousands) 2022 2021 Change 2022 2021 Change Salaries and employee benefits
$ 161,817 $ 72,640122.8 % $ 285,964 $ 140,757103.2 % Occupancy 26,496 14,054 88.5 47,515 28,926 64.3 Equipment 7,550 4,506 67.6 12,718 8,475 50.1 Marketing 9,119 2,632 246.5 13,395 4,694 185.4 Data processing 25,883 11,697 121.3 44,645 24,050 85.6 Communication 5,878 2,411 143.8 9,295 5,289 75.7 Professional fees 6,336 8,528 (25.7) 26,127 11,252 132.2 FDIC assessment 4,699 1,226 283.3 7,274 2,833 156.8 Amortization of intangibles 7,170 2,909 146.5 11,981 5,984 100.2 Amortization of tax credit investments 1,525 1,813 (15.9) 3,041 3,015 0.9 Other expense 20,922 7,202 190.5 42,196 12,083 249.2 Total noninterest expense $ 277,395 $ 129,618114.0 % $ 504,151 $ 247,358103.8 %
Noninterest expense increased
operating costs associated with the First Midwest merger, as well as
resulting from strong performance contributed to the increase. Noninterest
expense for the three months ended
Noninterest expense increased
$256.8 millionfor the six months ended June 30, 2022when compared to the same period in 2021 reflective of the additional operating costs associated with the First Midwest merger, as well as $88.9 millionof merger-related expenses, including $11.0 millionof other expenses attributable to the provision for credit losses on unfunded loan commitments. In addition, higher incentive accruals resulting from strong performance contributed to the increase. Noninterest expense for the six months ended June 30, 2021included $6.5 millionof merger-related expenses. Amortization of tax credit investments decreased $0.3 millionfor the three months ended June 30, 2022when compared to the same period in 2021. Amortization of tax credit investments for the six months ended June 30, 2022were consistent with the same period in 2021. 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 11 to the consolidated financial statements for additional information on our tax credit investments.
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 (loss), was 17.8% for the three months ended
June 30, 2022, compared to 18.2% for the same period in 2021. The provision for income taxes, as a percentage of pre-tax income (loss), was 15.7% for the six months ended June 30, 2022, compared to 17.4% for the same period in 2021. In accordance with ASC 740-270, Accounting for Interim Reporting, the provision for income taxes was recorded at June 30, 2022based on the current estimate of the effective annual rate. The lower effective tax rate during the three and six months ended June 30, 2022compared to the same periods in 2021 reflected the recognition of $1.7 millionof previously unrealized tax benefits in the three months ended June 30, 2022, partially offset by higher post-merger estimated state effective tax rates. The six months ended June 30, 2022also reflected additional one-time benefits of $1.2 millionrelated to share-based payments and $0.9 millionrelated to the remeasurement of the Company's deferred taxes post-merger. See Note 17 to the consolidated financial statements for additional information. 67 --------------------------------------------------------------------------------
compared to assets of
driven primarily by the merger with First Midwest in February of 2022.
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. Our historically careful underwriting practices, diverse and granular portfolios, and Midwest-based footprint have helped minimize the adverse impact to Old National. The pandemic has become less disruptive to the Company's business, financial condition, results of operations, and its clients as of June 30, 2022. 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 $40.9 billionat June 30, 2022, a $19.1 billionincrease compared to earning assets of $21.9 billionat December 31, 2021driven primarily by the merger with First Midwest.
We classify the majority of our investment securities as available-for-sale to give management the flexibility to sell the securities prior to maturity if needed, based on fluctuating interest rates or changes in our funding requirements. During the six months ended
June 30, 2022, we transferred $3.0 billionof securities available-for-sale to held-to-maturity in light of the rate environment.
Equity securities are recorded at fair value and totaled
equity securities was driven by the merger with First Midwest.
June 30, 2022, the investment securities portfolio, including equity securities, was $11.0 billioncompared to $7.6 billionat December 31, 2021, an increase of $3.4 billion. Investment securities represented 27% of earning assets at June 30, 2022, compared to 35% at December 31, 2021. Stronger loan demand in the future could result in management's decision to reduce the securities portfolio. At June 30, 2022, we had no intent to sell any securities that were in an unrealized loss position nor is it expected that we would be required to sell the securities prior to their anticipated recovery. The investment securities available-for-sale portfolio had net unrealized losses of $574.7 millionat June 30, 2022, compared to net unrealized losses of $6.0 millionat December 31, 2021. Net unrealized losses increased from December 31, 2021to June 30, 2022primarily due to an increase in rates impacting market values for mortgage-backed, U.S.government-sponsored entities and agencies, and tax exempt municipal securities. The investment securities available-for-sale portfolio including securities hedges had an effective duration of 4.41 at June 30, 2022, compared to 4.26 at December 31, 2021. 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 2.37% and 2.26% for the three and six months ended June 30, 2022, respectively, compared to 2.10% and 2.16% for the three and six months ended June 30, 2021, respectively.
Loans Held for Sale
Mortgage loans held for immediate sale in the secondary market were
$26.2 millionat June 30, 2022, compared to $35.5 millionat December 31, 2021. 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 of residential loans held for sale exceeded the unpaid principal balance by $0.3 millionat June 30, 2022. The 68 --------------------------------------------------------------------------------
aggregate fair value of residential loans held for sale exceeded the unpaid
principal balance by
Commercial and Commercial Real Estate Loans
Commercial and commercial real estate loans are the largest classifications within earning assets, representing 51% of earning assets at
June 30, 2022, compared to 45% at December 31, 2021. At June 30, 2022, commercial and commercial real estate loans were $20.7 billion, an increase of $10.9 billioncompared to December 31, 2021driven by the merger with First Midwest and strong loan production in the first half of 2022.
The following table provides detail on commercial loans by industry
classification (as defined by the North American Industry Classification System)
and by loan size.
June 30, 2022 December 31, 2021 (dollars in thousands) Outstanding Exposure Nonaccrual Outstanding Exposure Nonaccrual By Industry: Manufacturing
$ 1,810,117 $ 2,748,807 $ 5,223 $ 612,873 $ 1,152,774 $ 6,689Construction 681,550 1,378,937 1,627 310,649 744,610 1,429 Health care and social assistance 1,402,311 1,783,160 4,791 376,664 550,400 444 Public administration 235,481 369,807 921 247,770 357,310 - Wholesale trade 912,714 1,387,295 2,677 240,618 438,357 1,598 Educational services 231,914 388,165 5,283 216,384 295,065 - Other services 175,026 366,555 2,343 121,577 260,413 2,542 Professional, scientific, and technical services 475,971 788,843 4,004 141,364 279,185 937 Finance and insurance 351,466 613,321 30 162,920 232,847 44 Retail trade 271,126 462,229 1,246 131,303 289,478 945
Real estate rental and leasing 628,454 978,331 1,647 204,612 347,991
Transportation and warehousing 334,706 491,703 2,380 134,072 243,086 1,594
Administrative and support and
waste management and
remediation services 330,737 502,056 5,434 86,307 149,417 -
Agriculture, forestry, fishing,
and hunting 219,171 374,560 1,017 114,699 164,364 1,521 Accommodation and food services 441,217 542,930 1,059 78,689 108,724 2,399 Utilities 35,875 94,858 - 26,322 75,439 - Arts, entertainment, and recreation 142,966 199,291 314 71,055 110,574 2,189 Information 132,197 175,395 1,943 43,713 78,877 1,809 Mining 37,446 53,281 - 30,161 62,231 5
Management of companies and
enterprises 30,198 56,388 - 15,124 36,046 - Other 43,340 142,912 - 24,893 24,943 - Total
$ 8,923,983 $ 13,898,824 $ 41,939 $ 3,391,769 $ 6,002,131 $ 24,649By Loan Size: Less than $200,0006 % 5 % 5 % 8 % 6 % 7 % $200,000to $1,000,00014 14 36 18 16 42 $1,000,000to $5,000,00027 28 46 31 29 51 $5,000,000to $10,000,00016 17 13 15 16 - $10,000,000to $25,000,00030 26 - 18 18 - Greater than $25,000,0007 10 - 10 15 - Total 100 % 100 % 100 % 100 % 100 % 100 % 69
-------------------------------------------------------------------------------- The following table provides detail on commercial real estate loans classified by property type. June 30, 2022 December 31, 2021 (dollars in thousands) Outstanding % Outstanding % By Property Type: Multifamily
$ 3,596,44930 % $ 1,995,80331 % Retail 1,848,075 16 1,037,034 16 Office 1,738,934 15 1,018,973 16 Warehouse / Industrial 1,718,735 15 851,956 14 Single family 411,811 3 333,221 5 Other (1) 2,482,499 21 1,143,687 18 Total $ 11,796,503100 % $ 6,380,674100 %
(1) Other includes construction and land development, senior housing, religion,
and mixed use properties.
Residential Real Estate Loans
June 30, 2022, residential real estate loans held in our loan portfolio were $6.1 billion, an increase of $3.8 billioncompared to December 31, 2021driven by the merger with First Midwest and loan growth. 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, including automobile loans and personal and home equity loans and lines of credit, increased
$1.2 billionto $2.8 billionat June 30, 2022compared to December 31, 2021driven by the merger with First Midwest and loan growth.
other intangible assets recorded with the First Midwest merger.
Other assets at
June 30, 2022increased $453.1 millionfrom December 31, 2021primarily due to higher net deferred tax assets related to net unrealized losses on investment securities and allowance for credit losses on loans and higher miscellaneous investments associated with the First Midwest merger.
Total funding, comprised of deposits and wholesale borrowings, was
$39.9 billionat June 30, 2022, an increase of $18.8 billionfrom $21.1 billionat December 31, 2021driven by the merger with First Midwest. Included in total funding were deposits of $35.5 billionat June 30, 2022, an increase of $17.0 billionfrom $18.6 billionat December 31, 2021. Compared to December 31, 2021, noninterest-bearing deposits increased $6.1 billion, interest-bearing checking and NOW deposits increased $3.1 billion, savings deposits increased $3.0 billion, money market deposits increased $3.2 billion, and time deposits increased $1.5 billion. We use wholesale funding to augment deposit funding and to help maintain our desired interest rate risk position. At June 30, 2022, wholesale borrowings, including federal funds purchased and interbank borrowings, securities sold under agreements to repurchase, FHLB advances, and other borrowings, totaled $4.4 billion, an increase of $1.8 billionfrom December 31, 2021driven by the merger with First Midwest. Wholesale funding as a percentage of total funding was 11% at June 30, 2022and 12% at December 31, 2021.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities at
accrued expenses and other liabilities associated with the First Midwest merger.
Shareholders' equity totaled
$5.1 billionat June 30, 2022, compared to $3.0 billionat December 31, 2021. In relation to the merger of equals transaction, Old National issued 108,000 shares of Old National Series A Preferred Stock and 122,500 shares of Old National Series C Preferred Stock. Old National entered into two deposit agreements, each dated as of February 15, 2022, by and among Old National, Continental Stock Transfer & Trust Company, as depository, and the holders from time to time of the depositary receipts in connection with the issuance of the Old National Preferred Stock. Pursuant to the deposit agreements, Old National issued 4,320,000 depositary shares, each representing a 1/40th interest in a share of Old National Series A Preferred Stock, and 4,900,000 depositary shares, each representing a 1/40th interest in a share of Old National Series C Preferred Stock. Shareholders' equity at June 30, 2022included $2.4 billionfrom the 129.4 million shares of Common Stock that were issued in conjunction with the merger with First Midwest. The change in unrealized gains (losses) on available-for-sale investment securities decreased equity by $434.1 millionduring the six months ended June 30, 2022. In addition, available-for-sale investment securities with a fair value of $3.0 billionwere transferred from the available-for-sale portfolio to the held-to-maturity portfolio during the six months ended June 30, 2022. The unrealized holding loss, net of tax, is included in shareholders' equity and totals $122.2 millionat June 30, 2022. Old National repurchased 3.5 million shares of Common Stock in the six months ended June 30, 2022under a stock repurchase plan that was approved by the Company's Board of Directors, which reduced equity by $63.8 million. Old National also paid cash dividends of $0.28per common share in the six months ended June 30, 2022, which reduced equity by $81.7 million.
Old National and the banking industry are subject to various regulatory capital requirements administered by the federal banking agencies. At
June 30, 2022, Old National and its bank subsidiary exceeded the regulatory minimums and Old National Bankmet the regulatory definition of "well-capitalized" based on the most recent regulatory definition.
Old National’s consolidated capital position remains strong as evidenced by the
following comparisons of key industry ratios.
Regulatory June 30, December 31, Guidelines Minimum 2022 2021 2021 Risk-based capital: Tier 1 capital to total average assets (leverage ratio) 4.00 % 8.19 % 8.38 % 8.59 % Common equity Tier 1 capital to risk-adjusted total assets 7.00 9.90 11.95 12.04 Tier 1 capital to risk-adjusted total assets 8.50 10.63 11.95 12.04 Total capital to risk-adjusted total assets 10.50 12.03 12.73 12.77 Shareholders' equity to assets N/A 11.10 12.63 12.32
position as evidenced by the following comparisons of key industry ratios.
Prompt Corrective June 30, December 31, Regulatory Action "Well Guidelines Capitalized" Minimum Guidelines 2022 2021 2021 Risk-based capital: Tier 1 capital to total average assets (leverage ratio) 4.00 % 5.00 % 7.81 % 8.65 % 8.81 % Common equity Tier 1 capital to risk-adjusted total assets 7.00 6.50 10.28 12.27 12.34 Tier 1 capital to risk-adjusted total assets 8.50 8.00 10.28 12.27 12.34 Total capital to risk-adjusted total assets 10.50 10.00 10.92 12.79 12.82 71
December 2018, the OCC, the Board of Governorsof the Federal Reserve System, and the FDICapproved 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 Governorsof the Federal Reserve System, and the FDICpublished 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. Old National performs stress testing periodically throughout the year. The primary objective of the stress test is to ensure that Old National has a robust, forward-looking stress testing process and maintains sufficient capital to continue operations throughout times of economic and financial stress. 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 Team, and Senior Management to better assess, understand, monitor, and mitigate the risks of Old National. The Risk Appetite Statement addresses the following major risks: strategic, market, liquidity, credit, operational/technology/cybersecurity, talent management, regulatory/compliance, legal, and reputational. Our Chief Risk Officeris independent of management, reports directly to our Chief Executive Officer, and provides quarterly reports to the Board's Enterprise Risk Committee. The following discussion addresses certain of these major risks including credit, market, liquidity, operational/technology/cybersecurity, and regulatory/compliance/legal. Discussion of strategic, talent management, and reputational risks is provided in the section entitled "Risk Factors" in the Company's 2021 Annual Report on Form 10-K.
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.
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
June 30, 2022, we had pooled trust preferred securities with a fair value of $11.1 million, or less than 1% of the available-for-sale securities portfolio. These securities remained classified as available-for-sale and the unrealized loss on our pooled trust preferred securities was $2.7 millionat June 30, 2022. 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 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 & 72 -------------------------------------------------------------------------------- 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
$449.9 millionat June 30, 2022.
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 clients to finance capital purchases ranging from computer equipment to transportation equipment. The credit decisions for these transactions are based upon an assessment of the overall financial capacity of the applicant. 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:
Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Wisconsin, and Missouri. These loans are secured by first mortgages on real estate at LTV margins deemed appropriate for the property type, quality, location, and sponsorship. Generally, these LTV ratios do not exceed 80%. The commercial properties are predominantly non-residential properties such as retail centers, industrial properties and, to a lesser extent, more specialized properties. Substantially all of our commercial real estate loans are secured by properties located in our primary market area. In the underwriting of our commercial real estate loans, we obtain appraisals for the underlying properties. Decisions to lend are based on the economic viability of the property and the creditworthiness of the borrower. In evaluating a proposed commercial real estate loan, we primarily emphasize the ratio of the property's projected net cash flows to the loan's debt service requirement. The debt service coverage ratio normally is not less than 120% and it is computed after deduction for a vacancy factor and property expenses as appropriate. In addition, a personal guarantee of the loan or a portion thereof is often required from the principal(s) of the borrower. In most cases, we require title insurance insuring the priority of our lien, fire and extended coverage casualty insurance, and flood insurance, if appropriate, in order to protect our security interest in the underlying property. In addition, business interruption insurance or other insurance may be required. Construction loans are underwritten against projected cash flows derived from rental income, business income from an owner-occupant, or the sale of the property to an end-user. We may mitigate the risks associated with these types of loans by requiring fixed-price construction contracts, performance and payment bonding, controlled disbursements, and pre-sale contracts or pre-lease agreements. Consumer We offer a variety of first mortgage and junior lien loans to consumers within our markets, with residential home mortgages comprising our largest consumer loan category. These loans are secured by a primary residence and are underwritten using traditional underwriting systems to assess the credit risks of the consumer. Decisions are primarily based on LTV ratios, DTI ratios, liquidity, and credit scores. A maximum LTV ratio of 80% is generally required, although higher levels are permitted with mortgage insurance or other mitigating factors. We offer fixed rate mortgages and variable rate mortgages with interest rates that are subject to change every year after the first, third, fifth, or seventh year, depending on the product and are based on indexed rates such as prime. We do not offer payment-option facilities, sub-prime loans, or any product with negative amortization. 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 73 -------------------------------------------------------------------------------- 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 management and overseen 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 provides oversight of loan policy changes as recommended by management to assure our policy remains appropriate for the current lending environment. We lend to commercial and commercial real estate clients in many diverse industries including, among others, manufacturing, agribusiness, transportation, mining, wholesaling, and retailing. Old National manages concentrations of credit exposure by industry, product, geography, client relationship, and loan size. At June 30, 2022, our average commercial loan size was approximately $560,000and our average commercial real estate loan size was approximately $1,200,000. 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 June 30, 2022, 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 Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Wisconsin, and Missouri. On February 15, 2022, Old National closed on its merger with First Midwest. As of the closing date of the transaction, First Midwest loans totaled $14.3 billion. Old National reviewed the acquired loans and determined that as of June 30, 2022, $200.3 millionmet the definition of criticized and $459.5 millionwere considered classified (of which $122.4 millionare reported with nonaccrual loans). These loans are included in our summary of under-performing, criticized, and classified assets table below.
The following table presents a summary of under-performing, criticized, and
June 30, December 31, (dollars in thousands) 2022 2021 2021 Total nonaccrual loans
$ 214,924 $ 128,268 $ 106,691TDRs still accruing 15,665 14,222 18,378
Total past due loans (90 days or more and still accruing) 882
9 7 Foreclosed assets 12,618 520 2,030 Total under-performing assets
$ 244,089 $ 143,019 $ 127,106Classified loans (includes nonaccrual, TDRs still accruing, past due 90 days, and other problem loans) $ 706,372 $ 289,272 $ 269,270Other classified assets (1) 25,004 4,305 4,338 Criticized loans 452,835 228,264 235,910 Total criticized and classified assets $ 1,184,211 $ 521,841 $ 509,518Asset Quality Ratios: Nonaccrual loans/total loans (2) 0.73 % 0.93 % 0.78 % Non-performing loans/total loans (2) (3) 0.78 1.03 0.92
Under-performing assets/total loans and
other real estate owned 0.83 1.04 0.93 Under-performing assets/total assets 0.53 0.60 0.52 Allowance/under-performing assets 117.99 76.52 84.45 Allowance/nonaccrual loans 134.00 85.32 100.61
(1)Includes investment securities that fell below investment grade rating.
(2)Loans exclude loans held for sale.
(3)Non-performing loans include nonaccrual loans and TDRs still accruing.
74 -------------------------------------------------------------------------------- Under-performing assets increased to
$244.1 millionat June 30, 2022, compared to $143.0 millionat June 30, 2021and $127.1 millionat December 31, 2021due to the First Midwest merger. Under-performing assets as a percentage of total loans and other real estate owned at June 30, 2022were 0.83%, a 21 basis point decrease from 1.04% at June 30, 2021and a 10 basis point decrease from 0.93% at December 31, 2021. Nonaccrual loans increased from December 31, 2021to June 30, 2022primarily due to nonaccrual loans related to the First Midwest merger totaling $122.4 million. As a percentage of nonaccrual loans, the allowance was 134.00% at June 30, 2022, compared to 85.32% at June 30, 2021and 100.61% at December 31, 2021. Total criticized and classified assets were $1.2 billionat June 30, 2022, an increase of $662.4 millionand $674.7 millionfrom June 30, 2021and December 31, 2021, respectively. Criticized and classified assets related to the First Midwest merger totaled $659.8 millionat June 30, 2022. Other classified assets include investment securities that fell below investment grade rating totaling $25.0 millionat June 30, 2022, compared to $4.3 millionat June 30, 2021and $4.3 millionat December 31, 2021.
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 Bankgrants 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.
If we are unable to resolve a nonperforming loan issue, the credit will be charged off when it is apparent there will be a loss. For large commercial type loans, each relationship is individually analyzed for evidence of apparent loss based on quantitative benchmarks or subjectively based upon certain events or particular circumstances. For residential and consumer loans, a charge off is recorded at the time foreclosure is initiated or when the loan becomes 120 to 180 days past due, whichever is earlier. For commercial TDRs, an allocation is established within the allowance for credit losses for the difference between the carrying value of the loan and its computed value. To determine the computed value of the loan, one of the following methods is selected: (1) the present value of expected cash flows discounted at the loan's original effective interest rate, (2) the loan's observable market price, or (3) the fair value of the collateral, if the loan is collateral dependent. The allocation is established as the difference between the carrying value of the loan and the collectable value. If there are significant changes in the amount or timing of the loan's expected future cash flows, the allowance allocation is recalculated and adjusted accordingly.
When a residential or consumer loan is identified as a TDR, the loan is
typically written down to its collateral value less selling costs.
included within nonaccrual loans. At
Old National has established specific allowances for credit losses for clients whose loan terms have been modified as TDRs totaling
$5.8 millionat June 30, 2022and $0.7 millionof December 31, 2021. Old National had not committed to lend any additional funds to clients with outstanding loans that were classified as TDRs at June 30, 2022or December 31, 2021. The terms of certain other loans were modified during 2022 and 2021 that did not meet the definition of a TDR. It is our process to review all classified and criticized loans that, during the period, have been renewed, have entered into a forbearance agreement, have gone from principal and interest to interest only, or have extended the maturity date. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on its debt in the foreseeable future without the 75 -------------------------------------------------------------------------------- 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.
Allowance for Credit Losses on Loans and Unfunded Commitments
Net charge-offs on loans totaled
$1.8 millionduring the three months ended June 30, 2022, compared to net recoveries of $0.3 millionfor the same period in 2021. Annualized, net charge-offs (recoveries) to average loans were 0.02% for the three months ended June 30, 2022, compared to (0.01)% for the same period in 2021. Net charge-offs on loans totaled $4.5 millionduring the six months ended June 30, 2022, compared to net recoveries of $0.3 millionduring the same period in 2021. Annualized, net charge-offs (recoveries) to average loans were 0.04% for the six months ended June 30, 2022, compared to 0.00% for the same period in 2021. 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
initial allowance for credit losses established for acquired PCD loans
76 -------------------------------------------------------------------------------- totaling
$78.5 millionrelated to the First Midwest merger. In addition, the provision for credit losses expense in the six months ended June 30, 2022included $96.3 millionof provision for credit losses to establish an allowance for credit losses on non-PCD loans acquired in the First Midwest merger. 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, provision expense may be 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 $22.0 millionat June 30, 2022, compared to $10.9 millionat December 31, 2021. The increase in the allowance for credit losses on unfunded loan commitments was primarily driven by the merger with First Midwest.
Market risk is the risk that the estimated fair value of our assets, liabilities, and derivative financial instruments will decline as a result of changes in interest rates or financial market volatility, or that our net income will be significantly reduced by interest rate changes.
The objective of our interest rate management process is to maximize net
interest income while operating within acceptable limits established for
interest rate risk and maintaining adequate levels of funding and liquidity.
Potential cash flows, sales, or replacement value of many of our assets and liabilities, especially those that earn or pay interest, are sensitive to changes in the general level of interest rates. This interest rate risk arises primarily from our normal business activities of gathering deposits and extending loans. Many factors affect our exposure to changes in interest rates, such as general economic and financial conditions, client preferences, historical pricing relationships, and re-pricing characteristics of financial instruments. Our earnings can also be affected by the monetary and fiscal policies of the
U.S. Governmentand its agencies, particularly the Federal Reserve. In managing interest rate risk, we establish guidelines for asset and liability management, including measurement of short and long-term sensitivities to changes in interest rates, which is reviewed with the Enterprise Risk Committee of our Board of Directors. 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. The model shows our projected net interest income sensitivity based on interest rate changes only and does not consider other forecast assumptions. 77 --------------------------------------------------------------------------------
The following table illustrates our projected net interest income sensitivity
over a two year cumulative horizon based on the asset/liability model at
Immediate Rate Decrease Immediate Rate Increase -50 +100 +200 +300 (dollars in thousands) Basis Points Base Basis Points Basis Points Basis Points
June 30, 2022Projected interest income: Money market, other interest earning investments, and investment securities $ 617,680 $ 639,428
2,151,455 2,308,609 2,618,757 2,931,908 3,242,547 Total interest income 2,769,135 2,948,037 3,302,318 3,658,854 4,012,626 Projected interest expense: Deposits 44,713 72,114 274,985 484,116 693,243 Borrowings 210,225 238,638 299,725 360,822 421,923 Total interest expense 254,938 310,752 574,710 844,938 1,115,166 Net interest income
$ 2,514,197 $ 2,637,285 $ 2,727,608 $ 2,813,916 $ 2,897,460Change from base $ (123,088) $ 90,323 $ 176,631 $ 260,175% change from base (4.67) % 3.42 % 6.70 % 9.87 % June 30, 2021 Projected interest income: Money market, other interest earning investments, and investment securities $ 266,770 $ 283,033
838,058 870,225 1,009,602 1,149,951 1,288,437 Total interest income 1,104,828 1,153,258 1,324,374 1,489,888 1,651,366 Projected interest expense: Deposits 15,289 24,627 105,133 185,790 266,444 Borrowings 60,615 68,546 100,943 134,207 170,592 Total interest expense 75,904 93,173 206,076 319,997 437,036 Net interest income
$ 1,028,924 $ 1,060,085 $ 1,118,298 $ 1,169,891 $ 1,214,330Change from base $ (31,161) $ 58,213 $ 109,806 $ 154,245% change from base (2.94) % 5.49 % 10.36 % 14.55 %
Our projected net interest income increased year over year due to the First
Midwest merger, loan growth, and rising interest rates.
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
June 30, 2022, 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 liability position with a fair value loss of $18.4 millionat June 30, 2022, compared to a net asset position with a fair value gain of $1.3 millionat December 31, 2021. See Note 18 to the consolidated financial statements for further discussion of derivative financial instruments. 78 --------------------------------------------------------------------------------
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. We establish liquidity risk guidelines that we review with the Enterprise Risk Committee of our Board of Directors and monitor through our Balance Sheet Management Committee. 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 SECthat 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
following table at
(dollars in thousands) Maturity Bucket Amount Rate 2022
$ 1,397,0920.29 % 2023 715,540 0.51 2024 189,250 0.69 2025 95,089 0.65 2026 70,085 0.49 2027 and beyond 40,560 0.57 Total $ 2,507,6160.41 % 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 Nationaland Old National Bank: •Moody's Investors Service affirmed the Long-Term Rating of "A3" for Old National's senior unsecured/issuer rating on February 16, 2022. •Moody's Investors Service affirmed Old National Bank'slong-term deposit rating of "Aa3" on February 16, 2022. 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
The credit ratings of
shown in the following table.
Moody's Investors Service Long-term Short-term Old National A3 N/A Old National Bank Aa3 P-1 79
Old National Bankmaintains relationships in capital markets with brokers and dealers to issue certificates of deposit and short-term and medium-term bank notes as well. At June 30, 2022, 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 $ 271,788 $ 526,176Unencumbered government-issued debt securities - 2,232,603 Unencumbered investment grade municipal securities - 776,659 Unencumbered corporate securities - 313,602 Availability of borrowings: Amount available from Federal Reserve discount window* - 614,215 Amount available from Federal Home Loan Bank* - 1,113,553 Total available funds $
* Based on collateral pledged
Old National Bancorphas routine funding requirements consisting primarily of operating expenses, dividends to shareholders, debt service, net derivative cash flows, and funds used for acquisitions. Old National Bancorpcan 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 Bancorphas a shelf registration in place with the SECpermitting ready access to the public debt and equity markets. At June 30, 2022, Old National Bancorp'sother borrowings outstanding were $487.3 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 2021 and is not currently required.
Operational/technology/cybersecurity risk is the danger that inadequate information systems, operational issues, 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 cybersecurity risk including, but not limited to, cyber-attacks or other information security breaches that might allow unauthorized transactions or unauthorized access to client, team member, or company sensitive information. Metrics and measurements are used by our management team in the management of day-to-day operations to ensure effective client service, minimization of service disruptions, and oversight of cybersecurity risk. We continually monitor and internally report on operational, technology, and cybersecurity risks related to business disruptions and systems failures; cyber-attacks, information security or data breaches; clients, products, and business practices; damage to physical assets; employee and workplace safety; execution, delivery, and process management; and external and internal fraud.
Management reports on cybersecurity risk to our Enterprise Risk Committee of the
Board of Directors.
Regulatory/Compliance and 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, as well as assesses the issues and risks associated with being a public company. The Board of Directors expects that we will perform business in a manner compliant with applicable laws and/or regulations and expects issues to be identified, analyzed, and remediated in a timely and complete manner. 80 --------------------------------------------------------------------------------
CRITICAL ACCOUNTING ESTIMATES
Our most significant 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, 2021. Certain of these accounting policies require management to use significant judgment and estimates, which can have a material impact on the carrying value of certain assets and liabilities. We consider these policies to be our critical accounting estimates. The judgment and assumptions made are based upon historical experience, future forecasts, or other factors that management believes to be reasonable under the circumstances. Because of the nature of the judgment and assumptions, actual results could differ from estimates, which could have a material effect on our financial condition and results of operations.
Business Combinations and
•Description. For acquisitions, we are required to record the assets acquired, including identified intangible assets such as core deposit and customer trust relationship intangibles, and the liabilities assumed at their fair value. The difference between consideration and the net fair value of assets acquired is recorded as goodwill. Management uses significant estimates and assumptions to value such items, including projected cash flows, repayment rates, default rates and losses assuming default, discount rates, and realizable collateral values. The allowance for credit losses for PCD loans is recognized within acquisition accounting. The allowance for credit losses for non-PCD assets is recognized as provision for credit losses in the same reporting period as the acquisition. Fair value adjustments are amortized or accreted into the income statement over the estimated life of the acquired assets or assumed liabilities. The purchase date valuations and any subsequent adjustments determine the amount of goodwill recognized in connection with the acquisition. The use of different assumptions could produce significantly different valuation results, which could have material positive or negative effects on our results of operations. 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. In addition, we engage third party specialists to assist in the development of fair values. Preliminary estimates of fair values may be adjusted for a period of time subsequent to the acquisition date if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Adjustments recorded during this period are recognized in the current reporting period. Management uses various valuation methodologies to estimate the fair value of these assets and liabilities, and often involves a significant degree of judgment, particularly when liquid markets do not exist for the particular item being valued. Examples of such items include loans, deposits, identifiable intangible assets, and certain other assets and liabilities. •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 assets, including goodwill and liabilities, which 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 pandemic, or any other epidemic that harms the global economy,
U.S.economy, or the economies in which we operate could adversely affect our operations. Goodwillis especially susceptible to risk of impairment during prolonged periods of economic downturn. For additional information regarding critical accounting estimates, see the section titled "Critical Accounting Estimates" included in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no material changes in the Company's application of critical accounting estimates related to allowance for credit losses for loans, derivative financial instruments, or income taxes since December 31, 2021.
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