UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission File Number 1-15817

OLD NATIONAL BANCORP

(Exact name of Registrant as specified in its charter)

Indiana		35-1539838
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
One Main Street		47708
Evansville,	Indiana	(Zip Code)
(Address of principal executive offices)

(800) 731-2265

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, No Par Value	ONB	The	NASDAQ	Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days.    Yes  ☑    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit such files).    Yes   ☑   No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ☐    No  ☑

Indicate the number of shares outstanding of each of the issuer’s classes of common stock.  The registrant has one class of common stock (no par value) with 165,093,000 shares outstanding at June 30, 2020.

OLD NATIONAL BANCORP

FORM 10-Q

TABLE OF CONTENTS

			Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets		4
	Consolidated Statements of Income (unaudited)		5
	Consolidated Statements of Comprehensive Income (unaudited)		6
	Consolidated Statements of Changes in Shareholders’ Equity (unaudited)		7
	Consolidated Statements of Cash Flows (unaudited)		8
	Notes to Consolidated Financial Statements (unaudited)		9
	Note 1.	Basis of Presentation	9
	Note 2.	Recent Accounting Pronouncements	9
	Note 3.	Net Income Per Share	16
	Note 4.	Investment Securities	17
	Note 5.	Loans Held for Sale	20
	Note 6.	Loans and Allowance for Credit Losses	20
	Note 7.	Other Real Estate Owned	34
	Note 8.	Premises and Equipment	34
	Note 9.	Leases	35
	Note 10.	Goodwill and Other Intangible Assets	36
	Note 11.	Loan Servicing Rights	38
	Note 12.	Qualified Affordable Housing Projects and Other Tax Credit Investments	38
	Note 13.	Securities Sold Under Agreements to Repurchase	39
	Note 14.	Federal Home Loan Bank Advances	40
	Note 15.	Other Borrowings	41
	Note 16.	Accumulated Other Comprehensive Income (Loss)	43
	Note 17.	Share-Based Compensation	45
	Note 18.	Income Taxes	46
	Note 19.	Derivative Financial Instruments	47
	Note 20.	Commitments and Contingencies	51
	Note 21.	Financial Guarantees	52
	Note 22.	Segment Information	53
	Note 23.	Fair Value	53
	Note 24.	Revenue from Contracts with Customers	61
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		62
	Financial Highlights		63
	Non-GAAP Financial Measures		64
	Executive Summary		66
	Results of Operations		67
	Financial Condition		74
	Risk Management		77
	Off-Balance Sheet Arrangements		88
	Contractual Obligations		88
	Critical Accounting Policies and Estimates		88
	Forward-Looking Statements		91
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		92
Item 4.	Controls and Procedures		92
PART II.	OTHER INFORMATION		92
Item 1A.	Risk Factors		92
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		93
Item 5.	Other Information		93
Item 6.	Exhibits		94
SIGNATURE			95

2

GLOSSARY OF ABBREVIATIONS AND ACRONYMS

As used in this report, references to “Old National,” “we,” “our,” “us,” and similar terms refer to the consolidated entity consisting of Old National Bancorp and its wholly-owned affiliates. Old National Bancorp refers solely to the parent holding company, and Old National Bank refers to Old National Bancorp’s bank subsidiary.

The acronyms and abbreviations identified below are used in the Notes to Consolidated Financial Statements (Unaudited) as well as in the Management’s Discussion and Analysis of Financial Condition and Results of Operations. You may find it helpful to refer to this page as you read this report.

Anchor (MN):  Anchor Bancorp, Inc.

Anchor (WI):  Anchor BanCorp Wisconsin Inc.

AOCI:  accumulated other comprehensive income (loss)

AQR:  asset quality rating

ASC:  Accounting Standards Codification

ASU:  Accounting Standards Update

ATM:  automated teller machine

BBCC: business banking credit center (small business)

CECL: current expected credit loss

Common Stock:  Old National Bancorp common stock, without par value

COVID-19: Novel coronavirus originating in Wuhan, China in December 2019

CRA: Community Reinvestment Act

DTI:  debt-to-income

FASB:  Financial Accounting Standards Board

FDIC:  Federal Deposit Insurance Corporation

FHLB:  Federal Home Loan Bank

FHTC:  Federal Historic Tax Credit

FICO:  Fair Isaac Corporation

GAAP:  U.S. generally accepted accounting principles

LGD:  loss given default

LIBOR:  London Interbank Offered Rate

LIHTC:  Low Income Housing Tax Credit

LTV:  loan-to-value

N/A:  not applicable

N/M:  not meaningful

NASDAQ:  The NASDAQ Stock Market LLC

NOW:  negotiable order of withdrawal

OCC:  Office of the Comptroller of the Currency

OTTI:  other-than-temporary impairment

PCD: purchased with credit deterioration

PCI:  purchased credit impaired

PD:  probability of default

PPP: Paycheck Protection Program

Renewable Energy:  investment tax credits for solar projects

SBA:  Small Business Administration

SEC:  Securities and Exchange Commission

TBA:  to be announced

TDR:  troubled debt restructuring

3

OLD NATIONAL BANCORP

CONSOLIDATED BALANCE SHEETS

(dollars and shares in thousands, except per share data)	June 30, 2020		December 31, 2019
	(unaudited)
Assets
Cash and due from banks	$	241,054	$	234,766
Money market and other interest-earning investments	69,440		41,571
Total cash and cash equivalents	310,494		276,337
Equity securities, at fair value	40,246		6,842
Investment securities - available-for-sale, at fair value:
U.S. Treasury	35,731		17,682
U.S. government-sponsored entities and agencies	453,501		592,984
Mortgage-backed securities	3,304,054		3,183,861
States and political subdivisions	1,355,959		1,275,643
Other securities	298,026		314,921
Total investment securities - available-for-sale	5,447,271		5,385,091
Federal Home Loan Bank/Federal Reserve Bank stock, at cost	174,103		164,099
Loans held for sale, at fair value	122,507		46,898
Loans:
Commercial	4,307,505		2,890,296
Commercial real estate	5,403,316		5,166,792
Residential real estate	2,229,298		2,334,289
Consumer credit, net of unearned income	1,675,582		1,726,147
Total loans	13,615,701		12,117,524
Allowance for loan losses (1)	(128,394)		(54,619)
Net loans	13,487,307		12,062,905
Premises and equipment, net	462,796		490,925
Operating lease right-of-use assets	80,400		95,477
Accrued interest receivable	84,387		85,123
Goodwill	1,036,994		1,036,994
Other intangible assets	52,717		60,105
Company-owned life insurance	453,116		448,967
Other assets	349,850		251,904
Total assets	$	22,102,188	$	20,411,667
Liabilities
Deposits:
Noninterest-bearing demand	$	5,217,678	$	4,042,286
Interest-bearing:
Checking and NOW	4,567,046		4,149,639
Savings	3,166,680		2,845,423
Money market	1,895,809		1,833,819
Other time deposits	1,321,499		1,589,988
Brokered certificates of deposit	150,734		92,242
Total deposits	16,319,446		14,553,397
Federal funds purchased and interbank borrowings	801		350,414
Securities sold under agreements to repurchase	367,744		327,782
Federal Home Loan Bank advances	2,035,014		1,822,847
Other borrowings	237,877		243,685
Operating lease liabilities	91,845		99,500
Accrued expenses and other liabilities	185,206		161,589
Total liabilities	19,237,933		17,559,214
Shareholders' Equity
Preferred stock, 2,000 shares authorized, no shares issued or outstanding	—		—
Common stock, $1.00 per share stated value, 300,000 shares authorized,    165,093 and 169,616 shares issued and outstanding, respectively	165,093		169,616
Capital surplus	1,871,741		1,944,445
Retained earnings	678,378		682,185
Accumulated other comprehensive income (loss), net of tax	149,043		56,207
Total shareholders' equity	2,864,255		2,852,453
Total liabilities and shareholders' equity	$	22,102,188	$	20,411,667

(1)Beginning January 1, 2020, calculation is based on current expected loss methodology. Prior to January 1, 2020, calculation was based on incurred loss methodology.

The accompanying notes to consolidated financial statements are an integral part of these statements.

4

OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
(dollars and shares in thousands, except per share data)	2020		2019		2020		2019
Interest Income
Loans including fees:
Taxable	$	124,737	$	148,253	$	253,464	$	287,225
Nontaxable	3,453		3,986		7,078		8,209
Investment securities:
Taxable	25,398		29,241		52,754		57,278
Nontaxable	8,352		7,249		16,294		14,657
Money market and other interest-earning investments	34		334		383		612
Total interest income	161,974		189,063		329,973		367,981
Interest Expense
Deposits	6,798		18,519		19,096		34,963
Federal funds purchased and interbank borrowings	44		1,817		1,284		3,735
Securities sold under agreements to repurchase	185		671		569		1,333
Federal Home Loan Bank advances	6,844		10,039		14,612		19,970
Other borrowings	2,432		2,787		4,970		5,702
Total interest expense	16,303		33,833		40,531		65,703
Net interest income	145,671		155,230		289,442		302,278
Provision for loan losses (1)	22,545		1,003		39,495		2,046
Net interest income after provision for loan losses	123,126		154,227		249,947		300,232
Noninterest Income
Wealth management fees	9,424		9,909		18,308		18,444
Service charges on deposit accounts	7,582		11,515		17,659		22,341
Debit card and ATM fees	4,832		5,419		9,830		10,922
Mortgage banking revenue	17,313		7,135		28,432		12,146
Investment product fees	4,845		5,591		10,719		10,862
Capital markets income	6,179		3,150		10,507		5,667
Company-owned life insurance	2,968		2,711		6,048		5,899
Debt securities gains (losses), net	511		1,165		5,685		1,062
Other income	4,807		4,619		8,775		10,287
Total noninterest income	58,461		51,214		115,963		97,630
Noninterest Expense
Salaries and employee benefits	66,556		71,566		145,729		142,749
Occupancy	13,245		14,559		28,378		29,137
Equipment	3,853		4,517		9,158		8,991
Marketing	2,395		4,439		5,492		8,162
Data processing	9,629		10,207		19,096		19,548
Communication	2,296		2,849		5,094		5,903
Professional fees	3,545		4,921		7,838		7,831
FDIC assessment	2,014		1,454		3,623		3,541
Amortization of intangibles	3,612		4,325		7,388		8,797
Amortization of tax credit investments	287		568		5,802		828
Other expense	12,689		8,713		41,267		15,672
Total noninterest expense	120,121		128,118		278,865		251,159
Income before income taxes	61,466		77,323		87,045		146,703
Income tax expense	9,761		14,359		12,700		27,463
Net income	$	51,705	$	62,964	$	74,345	$	119,240
Net income per common share - basic	$	0.32	$	0.37	$	0.45	$	0.69
Net income per common share - diluted	0.32		0.36		0.45		0.68
Weighted average number of common shares outstanding - basic	164,732		172,985		166,240		173,855
Weighted average number of common shares outstanding - diluted	165,302		173,675		166,848		174,531
Dividends per common share	$	0.14	$	0.13	$	0.28	$	0.26

(1)Beginning January 1, 2020, calculation is based on current expected loss methodology. Prior to January 1, 2020, calculation was based on incurred loss methodology.

The accompanying notes to consolidated financial statements are an integral part of these statements.

5

OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2020		2019		2020		2019
Net income	$	51,705	$	62,964	$	74,345	$	119,240
Other comprehensive income (loss):
Change in debt securities available-for-sale:
Unrealized holding gains (losses) for the period	15,728		51,249		119,682		113,514
Reclassification adjustment for securities (gains) losses    realized in income	(511)		(1,165)		(5,685)		(1,062)
Income tax effect	(2,906)		(11,825)		(25,317)		(26,403)
Unrealized gains (losses) on available-for-sale debt securities	12,311		38,259		88,680		86,049
Change in securities held-to-maturity:
Amortization of unrealized losses on securities transferred from available-for-sale	—		564		—		1,021
Income tax effect	—		(129)		—		(235)
Changes from securities held-to-maturity	—		435		—		786
Cash flow hedges:
Net unrealized derivative gains (losses) on cash flow hedges	(246)		944		7,557		552
Reclassification adjustment for (gains) losses realized in net income	(1,670)		(6)		(2,101)		(391)
Income tax effect	470		(231)		(1,341)		(40)
Changes from cash flow hedges	(1,446)		707		4,115		121
Defined benefit pension plans:
Amortization of net loss recognized in income	27		21		54		41
Income tax effect	(6)		(5)		(13)		(10)
Changes from defined benefit pension plans	21		16		41		31
Other comprehensive income (loss), net of tax	10,886		39,417		92,836		86,987
Comprehensive income	$	62,591	$	102,381	$	167,181	$	206,227

The accompanying notes to consolidated financial statements are an integral part of these statements.

6

OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)

(dollars in thousands, except per share data)	Common Stock		Capital Surplus		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Shareholders' Equity
Balance, December 31, 2018	$	175,141	$	2,031,695	$	527,684	$	(44,950)	$	2,689,570
Cumulative effect of change in accounting principles	—		—		6,322		—		6,322
Balance, January 1, 2019	175,141		2,031,695		534,006		(44,950)		2,695,892
Net income	—		—		56,276		—		56,276
Other comprehensive income (loss)	—		—		—		47,570		47,570
Dividends - common stock ($0.13 per share)	—		—		(22,812)		—		(22,812)
Common stock issued	9		121		—		—		130
Common stock repurchased	(1,655)		(25,642)		—		—		(27,297)
Share-based compensation expense	—		1,800		—		—		1,800
Stock activity under incentive compensation plans	484		(12)		(159)		—		313
Balance, March 31, 2019	$	173,979	$	2,007,962	$	567,311	$	2,620	$	2,751,872
Net income	—		—		62,964		—		62,964
Other comprehensive income (loss)	—		—		—		39,417		39,417
Dividends - common stock ($0.13 per share)	—		—		(22,476)		—		(22,476)
Common stock issued	10		138		—		—		148
Common stock repurchased	(1,884)		(28,961)		—		—		(30,845)
Share-based compensation expense	—		1,946		—		—		1,946
Stock activity under incentive compensation plans	126		120		(133)		—		113
Balance, June 30, 2019	$	172,231	$	1,981,205	$	607,666	$	42,037	$	2,803,139
Balance, December 31, 2019	$	169,616	$	1,944,445	$	682,185	$	56,207	$	2,852,453
Cumulative effect of change in accounting    principles (Note 2)	—		—		(31,150)		—		(31,150)
Balance, January 1, 2020	169,616		1,944,445		651,035		56,207		2,821,303
Net income	—		—		22,640		—		22,640
Other comprehensive income (loss)	—		—		—		81,950		81,950
Dividends - common stock ($0.14 per share)	—		—		(23,535)		—		(23,535)
Common stock issued	9		142		—		—		151
Common stock repurchased	(5,076)		(76,746)		—		—		(81,822)
Share-based compensation expense	—		2,748		—		—		2,748
Stock activity under incentive compensation plans	560		(329)		(231)		—		—
Balance, March 31, 2020	$	165,109	$	1,870,260	$	649,909	$	138,157	$	2,823,435
Net income	—		—		51,705		—		51,705
Other comprehensive income (loss)	—		—		—		10,886		10,886
Dividends - common stock ($0.14 per share)	—		—		(23,113)		—		(23,113)
Common stock issued	11		134		—		—		145
Common stock repurchased	(34)		(439)		—		—		(473)
Share-based compensation expense	—		1,480		—		—		1,480
Stock activity under incentive compensation plans	7		306		(123)		—		190
Balance, June 30, 2020	$	165,093	$	1,871,741	$	678,378	$	149,043	$	2,864,255

The accompanying notes to consolidated financial statements are an integral part of these statements.

7

OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

	Six Months Ended June 30,
(dollars in thousands)	2020		2019
Cash Flows From Operating Activities
Net income	$	74,345	$	119,240
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation	15,053		13,171
Amortization of other intangible assets	7,388		8,797
Amortization of tax credit investments	5,802		828
Net premium amortization on investment securities	10,145		6,852
Accretion income related to acquired loans	(12,406)		(20,257)
Share-based compensation expense	4,228		3,746
Excess tax (benefit) expense on share-based compensation	(734)		(1,053)
Provision for loan losses	39,495		2,046
Debt securities (gains) losses, net	(5,685)		(1,062)
Net (gains) losses on sales of loans and other assets	7,760		227
Increase in cash surrender value of company-owned life insurance	(6,048)		(5,899)
Residential real estate loans originated for sale	(672,393)		(282,134)
Proceeds from sales of residential real estate loans	602,671		263,028
(Increase) decrease in interest receivable	737		(1,079)
(Increase) decrease in other assets	(87,642)		12,344
Increase (decrease) in accrued expenses and other liabilities	(19,284)		(45,426)
Net cash flows provided by (used in) operating activities	(36,568)		73,369
Cash Flows From Investing Activities
Purchases of investment securities available-for-sale	(1,154,055)		(1,038,437)
Purchases of Federal Home Loan Bank/Federal Reserve Bank stock	(10,025)		(14,439)
Proceeds from maturities, prepayments, and calls of investment securities available-for-sale	948,093		335,035
Proceeds from sales of investment securities available-for-sale	256,438		267,632
Proceeds from maturities, prepayments, and calls of investment securities held-to-maturity	—		35,958
Proceeds from sales of Federal Home Loan Bank/Federal Reserve Bank stock	21		19
Proceeds from sales of equity securities	956		130
Loan originations and payments, net	(1,488,360)		216,356
Proceeds from company-owned life insurance death benefits	1,899		4,374
Proceeds from sales of premises and equipment and other assets	6,363		2,534
Purchases of premises and equipment and other assets	(18,714)		(24,002)
Net cash flows provided by (used in) investing activities	(1,457,384)		(214,840)
Cash Flows From Financing Activities
Net increase (decrease) in:
Deposits	1,766,049		13,152
Federal funds purchased and interbank borrowings	(349,613)		139,901
Securities sold under agreements to repurchase	39,962		(27,754)
Other borrowings	(5,407)		3,864
Payments for maturities of Federal Home Loan Bank advances	(250,005)		(325,999)
Proceeds from Federal Home Loan Bank advances	455,770		425,000
Cash dividends paid on common stock	(46,648)		(45,288)
Common stock repurchased	(82,295)		(58,142)
Proceeds from exercise of stock options	—		280
Common stock issued	296		278
Net cash flows provided by (used in) financing activities	1,528,109		125,292
Net increase (decrease) in cash and cash equivalents	34,157		(16,179)
Cash and cash equivalents at beginning of period	276,337		317,165
Cash and cash equivalents at end of period	$	310,494	$	300,986
Supplemental cash flow information:
Total interest paid	$	42,278	$	66,419
Total taxes paid (net of refunds)	$	1,999	$	1,204
Investment securities purchased but not settled	$	36,681	$	1,424
Operating lease right-of-use assets obtained in exchange for lease obligations	$	(992)	$	117,751
Finance lease right-of-use assets obtained in exchange for lease obligations	$	5,225	$	7,871

The accompanying notes to consolidated financial statements are an integral part of these statements.

8

OLD NATIONAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements include the accounts of Old National Bancorp and its wholly-owned affiliates (hereinafter collectively referred to as “Old National”) and have been prepared in conformity with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry.  Such principles require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosures of contingent assets and liabilities at the date of the financial statements and amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  In the opinion of management, the consolidated financial statements contain all the normal and recurring adjustments necessary for a fair statement of the financial position of Old National as of June 30, 2020 and December 31, 2019, and the results of its operations for the three and six months ended June 30, 2020 and 2019.  Interim results do not necessarily represent annual results.  These financial statements should be read in conjunction with Old National’s Annual Report on Form 10-K for the year ended December 31, 2019.

All significant intercompany transactions and balances have been eliminated.  Certain prior year amounts have been reclassified to conform to the current presentation.  Such reclassifications had no effect on prior period net income or shareholders’ equity and were insignificant amounts.

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Guidance Adopted in 2020

FASB ASC 326 – In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and all related subsequent amendments thereto (“CECL”). The main objective of this amendment is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments within its scope, including loans held for investment purposes and other commitments to extend credit held by a reporting entity at each reporting date. The amendment requires the measurement of all expected credit losses for the in-scope financial assets at the date of origination or acquisition, and at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to enhance their credit loss estimates. The amendment requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The current expected credit loss measurement will be used to estimate the allowance for credit losses (“ACL”) over the life of the financial assets. The amendments in this update became effective for annual periods and interim periods within those annual periods beginning after December 15, 2019.

As previously disclosed, Old National formed a cross-functional committee to oversee the adoption of the ASU at the effective date. A working group was also formed to develop a project plan focused on understanding the ASU, researching issues, identifying data needs for modeling inputs, technology requirements, modeling considerations, and ensuring overarching governance was achieved for each objective and milestone. The working group identified seven distinct loan portfolios for which a model to estimate credit losses has been developed. For all seven loan portfolios, the data sets have been identified, populated, and internally validated. Old National has completed data and model validation testing. During the last half of 2019, the project plan targeted parallel processing of our existing allowance for loan losses model compared to the CECL model, as well as model sensitivity analysis, determination of qualitative adjustments, supporting analytics, and execution of the governance and approval process. Internal controls related to the CECL process were finalized prior to adoption on January 1, 2020.

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The CECL modeling measurements for estimating the current expected life-time credit losses for loans and debt securities includes the following major items:

•Initial loss forecast – using a forecast period of one year for all allowance portfolio segments and off-balance-sheet credit exposures, using forward-looking economic scenarios of expected losses.

•Historical loss forecast – for a period incorporating the remaining contractual life, adjusted for prepayments, and the changes in various economic variables during representative historical and recessionary periods.

•Reversion period – using two years, which links the initial loss forecast to the historical loss forecast based on economic conditions at the measurement date.

•Discounted cash flow aggregator – using the items above to estimate the life-time credit losses for all portfolios and losses for loans modified as a TDR.

Old National adopted CECL on January 1, 2020 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures. Results for the reporting periods after January 1, 2020 are presented under Topic 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. As of that date, Old National increased the allowance for credit losses for loans by $41.3 million and increased the allowance for credit losses for unfunded loan commitments by $4.5 million, since the ASU covers credit losses over the expected life of a loan as well as considering future changes in macroeconomic conditions. The increase related to the acquired loan portfolio totaled $27.1 million. Under the previously applicable accounting guidance, any remaining unamortized loan discount on an individual loan could be used to offset a charge-off for that loan, so the allowance for loan losses needed for the acquired loans was reduced by the remaining loan discounts. ASU 2016-13 requires an allowance for credit losses to be recognized in addition to the loan discount. The impact of adopting the ASU, and at each subsequent reporting period, is highly dependent on credit quality, macroeconomic forecasts and conditions, composition of our loans and available-for-sale securities portfolio, along with other management judgements. As of January 1, 2020, Old National recorded a cumulative-effect adjustment of $31.2 million to decrease retained earnings.

Old National did not record an allowance for credit losses on its available-for-sale debt securities under the newly codified available-for-sale debt security impairment model, as the majority of these securities are government agency-backed securities for which the risk of loss is minimal.

We adopted CECL using the prospective transition approach for financial assets purchased with credit deterioration (“PCD”) that were previously classified as purchased credit impaired and accounted for under ASC 310-30. In accordance with the standard, we did not reassess whether PCI assets met the definition of PCD assets as of the date of adoption. On January 1, 2020, the amortized cost basis of the PCD assets were adjusted to reflect the addition of $4.5 million to the allowance for credit losses for loans. The remaining noncredit discount in the amount of $11.8 million (based on the adjusted amortized cost basis) will be accreted into interest income at the effective interest rate as of January 1, 2020.

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The loan categories used to monitor and analyze interest income and yields are different than the portfolio segments used to determine the allowance for credit losses for loans. The allowance for credit losses was calculated by pooling loans of similar credit risk characteristics and credit monitoring procedures. The four loan portfolios are classified into seven segments of loans - commercial, commercial real estate, BBCC, residential real estate, indirect, direct, and home equity. The commercial and commercial real estate loan categories shown on the balance sheet include the same pool of loans as the commercial, commercial real estate, and BBCC portfolio segments. The consumer loan category shown on the balance sheet is comprised of the same loans in the indirect, direct, and home equity portfolio segments. The composition of loans by portfolio segment as of December 31, 2019 follows:

(dollars in thousands)	December 31, 2019 Statement Balance		Segment Portfolio Reclassifications		December 31, 2019 After Reclassifications
Loans:
Commercial	$	2,890,296	$	(75,142)	$	2,815,154
Commercial real estate	5,166,792		(277,539)		4,889,253
BBCC	N/A		352,681		352,681
Residential real estate	2,334,289		—		2,334,289
Consumer	1,726,147		(1,726,147)		N/A
Indirect	N/A		935,584		935,584
Direct	N/A		228,524		228,524
Home equity	N/A		562,039		562,039
Total	$	12,117,524	$	—	$	12,117,524
Allowance:
Commercial	$	(22,585)	$	1,226	$	(21,359)
Commercial real estate	(21,588)		1,053		(20,535)
BBCC	N/A		(2,279)		(2,279)
Residential real estate	(2,299)		—		(2,299)
Consumer	(8,147)		8,147		N/A
Indirect	N/A		(5,319)		(5,319)
Direct	N/A		(1,863)		(1,863)
Home equity	N/A		(965)		(965)
Total	$	(54,619)	$	—	$	(54,619)

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The following table illustrates the impact of adoption of the ASU:

(dollars in thousands)	December 31, 2019 After Reclassifications		Impact of ASC 326 Adoption		January 1, 2020 Post-ASC 326 Adoption
Assets:
Loans, net of unearned income:
Commercial	$	2,815,154	$	2,679	$	2,817,833
Commercial real estate	4,889,253		1,637		4,890,890
BBCC	352,681		33		352,714
Residential real estate	2,334,289		105		2,334,394
Indirect	935,584		10		935,594
Direct	228,524		2		228,526
Home equity	562,039		12		562,051
Total	12,117,524		4,478		12,122,002
Allowance:
Commercial	(21,359)		(7,150)		(28,509)
Commercial real estate	(20,535)		(25,548)		(46,083)
BBCC	(2,279)		(3,702)		(5,981)
Residential real estate	(2,299)		(6,986)		(9,285)
Indirect	(5,319)		1,669		(3,650)
Direct	(1,863)		1,059		(804)
Home equity	(965)		(689)		(1,654)
Total allowance for credit losses on loans	(54,619)		(41,347)		(95,966)
Net loans	$	12,062,905	$	(36,869)	$	12,026,036
Net deferred tax assets	$	29,705	$	10,268	$	39,973
Liabilities:
Allowance for credit losses on unfunded loan commitments	$	2,656	$	4,549	$	7,205
Shareholders' equity:
Retained earnings	$	682,185	$	(31,150)	$	651,035

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

FASB ASC 350 – In January 2017, the FASB issued ASU No. 2017-04, Intangibles: Goodwill and Other: Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the amendments eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, the income tax effects of tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendments should be applied on a prospective basis. The nature of and reason for the change in accounting principle should be disclosed upon transition. The amendments in this update became effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and did not have a material impact on the financial statements.

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FASB ASC 820 – In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The updated guidance improves the disclosure requirements on fair value measurements. The ASU removes certain disclosures required by Topic 820 related to transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; the valuation processes for Level 3 fair value measurements; and for nonpublic entities, the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period. The ASU modifies certain disclosures required by Topic 820 related to disclosure of transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities for nonpublic entities; the requirement to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly for investments in certain entities that calculate net asset value; and clarification that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. The ASU adds certain disclosure requirements related to changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The amendments in this update became effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2019 and did not have a material impact on the financial statements.

FASB ASC 350 – In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments in this update became effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years and did not have a material impact on the financial statements.

FASB ASC 842 – In March 2019, the FASB issued ASU No. 2019-01, Leases (Topic 842): Codification Improvements. The amendments in ASU No. 2019-01 align the guidance for fair value of the underlying asset by lessors that are not manufacturers or dealers in Topic 842 with that of existing guidance. As a result, the fair value of the underlying asset at lease commencement is its cost, reflecting any volume or trade discounts that may apply. However, if there has been a significant lapse of time between when the underlying asset is acquired and when the lease commences, the definition of fair value in Topic 820, Fair Value Measurement should be applied. ASU No. 2019-01 also requires lessors within the scope of Topic 942, Financial Services—Depository and Lending, to present all “principal payments received under leases” within investing activities. The amendments in this update became effective for annual periods and interim periods within those annual periods beginning after December 15, 2019 and did not have a material impact on the financial statements.

FASB ASC 326, 815, and 825 – In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The amendments related to Topic 326 address accrued interest, transfers between classifications or categories for loans and debt securities, recoveries, vintage disclosures, and contractual extensions and renewal options and became effective for annual periods and interim periods within those annual periods beginning after December 15, 2019. The improvements and clarifications related to Topic 815 address partial-term fair value hedges of interest-rate risk, amortization, and disclosure of fair value hedge basis adjustments and consideration of hedged contractually specified interest rate under the hypothetical method and became effective for the annual reporting period beginning January 1, 2020. The amendments related to Topic 825 contain various improvements to ASU 2016-01, including scope; held-to-maturity debt securities fair value disclosures; and remeasurement of equity securities at historical exchange rates and became effective for fiscal years and interim periods beginning after December 15, 2019. The amendments in this update did not have a material impact on the financial statements.

FASB ASC 326 – In May 2019, the FASB issued ASU No. 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief. These amendments provide targeted transition relief allowing entities to irrevocably elect the fair value option, on an instrument-by-instrument basis, for certain financial assets (excluding held-to-maturity debt securities) previously measured at amortized cost.

In November 2019, the FASB issued 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, to make improvements to the credit losses standard. Most significantly, the standard clarifies

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guidance around how to report expected recoveries for PCD assets. “Expected recoveries” describes a situation in which an organization recognizes a full or partial writeoff of the amortized cost basis of a financial asset, but then later determines that the amount written off, or a portion of that amount, will in fact be recovered. This ASU permits organizations to record expected recoveries on PCD assets. In addition to other narrow technical improvements, the ASU also reinforces existing guidance that prohibits organizations from recognizing negative allowances for available-for-sale debt securities.

The amendments in these updates became effective for annual periods and interim periods within those annual periods beginning after December 15, 2019 and did not have a material impact on the consolidated financial statements.

FASB ASC 718 – In November 2019, the FASB issued ASU No. 2019-08, Compensation – Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements—Share-Based Consideration Payable to a Customer. This ASU requires companies to measure and classify (on the balance sheet) share-based payments to customers by applying the guidance in Topic 718, Compensation—Stock Compensation. As a result, the amount recorded as a reduction in revenue would be measured based on the grant-date fair value of the share-based payment. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2019 and did not have a material impact on the consolidated financial statements.

FASB ASC 326 and 842 – In February 2020, the FASB issued ASU No. 2020-02, Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842). This ASU inserts a paragraph to address the November 2019 issuance of SEC Staff Accounting Bulletin (“SAB”) 119, Accounting for Loan Losses by Registrants Engaged in Lending Activities Subject to FASB ASC Topic 326. The SAB updates existing staff guidance on developing a systematic methodology for estimating credit losses, and it explains the documentation the staff typically would expect from registrants in support of estimates of current expected credit losses (“CECL”) for lending activities, when material. The amendments in this update became effective upon issuance and did not have a material impact on the consolidated financial statements.

Guidance on Non-TDR Loan Modifications due to COVID-19

On March 22, 2020, a statement was issued by our banking regulators and titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” (the “Interagency Statement”) that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) that passed on March 27, 2020 further provides that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates. The Interagency Statement was subsequently revised in April 2020 to clarify the interaction of the original guidance with Section 4013 of the CARES Act, as well as setting forth the banking regulators’ views on consumer protection considerations. In accordance with such guidance, we are offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. See Note 6 for further information on non-TDR loan modifications.

Accounting Guidance Issued But Not Yet Adopted 

FASB ASC 715 – In August 2018, the FASB issued ASU No. 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans. The amendments in this update modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendments in this update become effective for fiscal years ending after December 15, 2020 and will not have a material impact on the consolidated financial statements.

FASB ASC 740 – In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU removes specific exceptions to the general principles in Topic 740 in GAAP. It eliminates the need for an organization to analyze whether the following apply in a given period: (1)

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exception to the incremental approach for intraperiod tax allocation; (2) exceptions to accounting for basis differences when there are ownership changes in foreign investments; and (3) exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. The ASU also improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for: (1) franchise taxes that are partially based on income; (2) transactions with a government that result in a step up in the tax basis of goodwill; (3) separate financial statements of legal entities that are not subject to tax; and (4) enacted changes in tax laws in interim periods. The amendments in this update become effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. Old National is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

FASB ASC 321, 323, and 815 – In January 2020, the FASB issued ASU No. 2020-01, Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions Between Topic 321, Topic 323, and Topic 815 (a Consensus of the Emerging Issues Task Force). The ASU clarifies the interaction between ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities and the ASU on equity method investments. ASU 2016-01 provides companies with an alternative to measure certain equity securities without a readily determinable fair value at cost, minus impairment, if any, unless an observable transaction for an identical or similar security occurs. ASU 2020-01 clarifies that for purposes of applying the Topic 321 measurement alternative, an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting under Topic 323, immediately before applying or upon discontinuing the equity method. In addition, the new ASU provides direction that a company should not consider whether the underlying securities would be accounted for under the equity method or the fair value option when it is determining the accounting for certain forward contracts and purchased options, upon either settlement or exercise. The amendments in this update become effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted, and the amendments are to be applied prospectively. Old National is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

Codification Improvements to Financial Instruments – In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments. This ASU was issued to clarify and improve various financial instruments Topics. The amendments include the following improvements:

•Issue 1 – Clarifies that all entities are required to provide fair value option disclosures.

•Issue 2 – Clarifies the applicability of the portfolio exception in measuring fair value for nonfinancial items accounted for as derivatives.

•Issue 3 – Clarifies that disclosure requirements in Topic 320 apply to disclosure requirements in Topic 942 for depository and lending institutions.

•Issue 4 – Added cross-reference of line-of-credit or revolving-debt arrangements guidance to guidance in accounting for fees between debtor and creditor and third-party costs directly related to exchanges or modifications of debt instruments.

•Issue 5 – Clarifies that fair value measurement disclosure requirements do not apply to entities using the net asset value per share practical expedient.

•Issue 6 – Aligns the contractual term to measure expected credit losses for a net investment in a lease under the Credit Loss Standard (Topic 326) with the lease term determined under the Leases Standard (Topic 842).

•Issue 7 – Clarifies that when an entity regains control of financial assets sold, an allowance for credit losses should be recorded in accordance with Topic 326.

For Issue 1, Issue 2, Issue 4, and Issue 5, the amendments are effective upon issuance and did not have a material impact on the consolidated financial statements. For Issue 3, the amendments to ASU 2016-01 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years and did not have a material impact on the consolidated financial statements. For Issues 6 and 7, the amendments to ASU 2016-13 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years and did not have a material impact on the consolidated financial statements.

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FASB ASC 848 – In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary, optional guidance to ease the potential burden in accounting for, or recognizing the effects of, the transition away from the LIBOR or other interbank offered rate on financial reporting. To help with the transition to new reference rates, the ASU provides optional expedients and exceptions for applying GAAP to affected contract modifications and hedge accounting relationships. The main provisions include:

•A change in a contract’s reference interest rate would be accounted for as a continuation of that contract rather than as the creation of a new one for contracts, including loans, debt, leases, and other arrangements, that meet specific criteria.

•When updating its hedging strategies in response to reference rate reform, an entity would be allowed to preserve its hedge accounting.

The guidance is applicable only to contracts or hedge accounting relationships that reference LIBOR or another reference rate expected to be discontinued. Because the guidance is meant to help entities through the transition period, it will be in effect for a limited time and will not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, for which an entity has elected certain optional expedients that are retained through the end of the hedging relationship. The amendments in this ASU are effective March 12, 2020 through December 31, 2022. Old National is evaluating the impact of adopting the new guidance on the consolidated financial statements on an ongoing basis with no material expected impact at this time.

Acquisitions and Dispositions of Businesses and Related Pro Forma Information

In May 2020, the SEC issued a final rule that revises the circumstances that require financial statements and related pro forma information for acquisitions and dispositions of businesses. The intent of the rule is to allow for more meaningful conclusions on when an acquired or disposed business is significant as well as to improve the related disclosure requirements. The changes are intended to improve the financial information about acquired or disposed businesses, facilitate more timely access to capital, and reduce the complexity and costs to prepare the disclosure. The final rule is effective January 1, 2021; however, voluntary early compliance is permitted.

NOTE 3 – NET INCOME PER SHARE

Basic and diluted net income per share are calculated using the two-class method.  Net income is divided by the weighted-average number of common shares outstanding during the period.  Adjustments to the weighted average number of common shares outstanding are made only when such adjustments will dilute net income per common share.  Net income is then divided by the weighted-average number of common shares and common share equivalents during the period.

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The following table reconciles basic and diluted net income per share:

	Three Months Ended June 30,				Six Months Ended June 30,
(dollars and shares in thousands, except per share data)	2020		2019		2020		2019
Basic Net Income Per Share
Net income	$	51,705	$	62,964	$	74,345	$	119,240
Weighted average common shares outstanding	164,732		172,985		166,240		173,855
Basic Net Income Per Share	$	0.32	$	0.37	$	0.45	$	0.69
Diluted Net Income Per Share
Net income	$	51,705	$	62,964	$	74,345	$	119,240
Weighted average common shares outstanding	164,732		172,985		166,240		173,855
Effect of dilutive securities:
Restricted stock	535		643		571		626
Stock options (1)	35		47		37		50
Weighted average shares outstanding	165,302		173,675		166,848		174,531
Diluted Net Income Per Share	$	0.32	$	0.36	$	0.45	$	0.68

(1)Options to purchase 14 thousand shares outstanding at June 30, 2020 and 2019 were not included in the computation of net income per diluted share for the three and six months ended June 30, 2020 and 2019 because the exercise price of these options was greater than the average market price of the common shares and, therefore, the effect would be antidilutive.

NOTE 4 – INVESTMENT SECURITIES

The following table summarizes the amortized cost, fair value, and allowance for credit losses of the available-for-sale investment securities portfolio and the corresponding amounts of unrealized gains and losses recognized in accumulated other comprehensive income (loss):

(dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Allowance for Credit Losses for Investments		Fair Value
June 30, 2020
Available-for-Sale
U.S. Treasury	$	35,388	$	343	$	—	$	—	$	35,731
U.S. government-sponsored entities and agencies	449,789		3,906		(194)		—		453,501
Mortgage-backed securities - Agency	3,199,892		105,353		(1,191)		—		3,304,054
States and political subdivisions	1,283,874		72,547		(462)		—		1,355,959
Pooled trust preferred securities	13,785		—		(6,600)		—		7,185
Other securities	278,664		13,642		(1,465)		—		290,841
Total available-for-sale securities	$	5,261,392	$	195,791	$	(9,912)	$	—	$	5,447,271
December 31, 2019
Available-for-Sale
U.S. Treasury	$	17,567	$	117	$	(2)	$	—	$	17,682
U.S. government-sponsored entities and agencies	596,595		1,027		(4,638)		—		592,984
Mortgage-backed securities - Agency	3,151,550		41,363		(9,052)		—		3,183,861
States and political subdivisions	1,232,497		44,193		(1,047)		—		1,275,643
Pooled trust preferred securities	13,811		—		(5,589)		—		8,222
Other securities	301,189		6,842		(1,332)		—		306,699
Total available-for-sale securities	$	5,313,209	$	93,542	$	(21,660)	$	—	$	5,385,091

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Proceeds from sales or calls of available-for-sale investment securities and the resulting realized gains and realized losses were as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2020		2019		2020		2019
Proceeds from sales of available-for-sale debt securities	$	20,028	$	258,951	$	256,438	$	267,632
Proceeds from calls of available-for-sale debt securities	141,964		38,430		305,735		62,115
Total	$	161,992	$	297,381	$	562,173	$	329,747
Realized gains on sales of available-for-sale debt securities	$	545	$	3,032	$	6,140	$	3,103
Realized gains on calls of available-for-sale debt securities	27		—		40		3
Realized losses on sales of available-for-sale debt securities	(61)		(1,867)		(470)		(2,015)
Realized losses on calls of available-for-sale debt securities	—		—		(25)		(29)
Debt securities gains (losses), net	$	511	$	1,165	$	5,685	$	1,062

All of the mortgage-backed securities in the investment portfolio are residential mortgage-backed securities.  The amortized cost and fair value of the investment securities portfolio are shown by contractual maturity.  Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.  Weighted average yield is based on amortized cost.

	June 30, 2020
(dollars in thousands)	Amortized Cost		Fair Value		Weighted Average Yield
Maturity
Available-for-Sale
Within one year	$	445,695	$	452,387	2.38	%
One to five years	2,906,997		3,011,675		2.56
Five to ten years	601,337		625,807		3.00
Beyond ten years	1,307,363		1,357,402		3.23
Total	$	5,261,392	$	5,447,271	2.76	%

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The following table summarizes the available-for-sale investment securities with unrealized losses for which an allowance for credit losses has not been recorded by aggregated major security type and length of time in a continuous unrealized loss position:

	Less than 12 months				12 months or longer				Total
(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
June 30, 2020
Available-for-Sale
U.S. government-sponsored entities    and agencies	$	30,406	$	(194)	$	—	$	—	$	30,406	$	(194)
Mortgage-backed securities - Agency	275,313		(1,068)		7,038		(123)		282,351		(1,191)
States and political subdivisions	14,263		(462)		—		—		14,263		(462)
Pooled trust preferred securities	—		—		7,185		(6,600)		7,185		(6,600)
Other securities	25,511		(282)		22,292		(1,183)		47,803		(1,465)
Total available-for-sale	$	345,493	$	(2,006)	$	36,515	$	(7,906)	$	382,008	$	(9,912)
December 31, 2019
Available-for-Sale
U.S. Treasury	$	999	$	(2)	$	—	$	—	$	999	$	(2)
U.S. government-sponsored entities    and agencies	357,647		(4,638)		—		—		357,647		(4,638)
Mortgage-backed securities - Agency	786,245		(6,122)		212,056		(2,930)		998,301		(9,052)
States and political subdivisions	120,166		(1,016)		7,006		(31)		127,172		(1,047)
Pooled trust preferred securities	—		—		8,222		(5,589)		8,222		(5,589)
Other securities	30,765		(182)		87,066		(1,150)		117,831		(1,332)
Total available-for-sale	$	1,295,822	$	(11,960)	$	314,350	$	(9,700)	$	1,610,172	$	(21,660)

Available-for-sale debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. For available-for sale debt securities in an unrealized loss position, we first assess whether we intend to sell, or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For available-for sale debt securities that do not meet the criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security and the issuer, among other factors. If this assessment indicates that a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. No allowance for credit losses for available-for-sale debt securities was needed at June 30, 2020. Accrued interest receivable on available-for-sale debt securities totaled $26.4 million at June 30, 2020 and is excluded from the estimate of credit losses.

The U.S. government sponsored entities and agencies and mortgage-backed securities – agency are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major credit rating agencies, and have a long history of no credit losses. Therefore, for those securities, we do not record expected credit losses.

Prior to the adoption of ASC 326, there was no OTTI recorded during the six months ended June 30, 2019.

At June 30, 2020, Old National’s securities portfolio consisted of 1,842 securities, 68 of which were in an unrealized loss position.  The unrealized losses attributable to our U.S. government-sponsored entities and agencies, agency mortgage-backed securities, states and political subdivisions, and other securities are the result of fluctuations in interest rates.  Our pooled trust preferred securities are discussed below.  At June 30, 2020, 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.

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Pooled Trust Preferred Securities

At June 30, 2020, our securities portfolio contained two pooled trust preferred securities with a fair value of $7.2 million and unrealized losses of $6.6 million.  These securities are evaluated using collateral-specific assumptions to estimate the expected future interest and principal cash flows.  For the six months ended June 30, 2020 and 2019, we did not recognize any losses on these securities.

The table below summarizes the relevant characteristics of our pooled trust preferred securities as well as our single issuer trust preferred securities that are included in the “other securities” category in this footnote.  Each of the pooled trust preferred securities support a more senior tranche of security holders.  Both pooled trust preferred securities have experienced credit defaults.  However, we believe that the value of the instruments lies in the full and timely interest payments that will be received through maturity, the steady amortization that will be experienced until maturity, and the full return of principal by the final maturity of the collateralized debt obligations.

Trust preferred securities
June 30, 2020
(dollars in thousands)	Class	Lowest Credit Rating (1)	Amortized Cost		Fair Value		Unrealized Gain/ (Loss)		# of Issuers Currently Performing/ Remaining	Actual Deferrals and Defaults as a % of Original Collateral	Expected Defaults as a % of Remaining Performing Collateral	Excess Subordination as a % of Current Performing Collateral
Pooled trust preferred securities:
Pretsl XXVII LTD	B	B	$	4,254	$	2,139	$	(2,115)	32/41	14.4%	10.9%	33.3%
Trapeza Ser 13A	A2A	BBB	9,531		5,046		(4,485)		39/41	4.5%	6.5%	51.8%
			13,785		7,185		(6,600)
Single Issuer trust preferred securities:
JP Morgan Chase & Co		BBB-	4,803		3,937		(866)
Total			$	18,588	$	11,122	$	(7,466)

(1)Lowest rating for the security provided by any nationally recognized credit rating agency.

Equity Securities

Old National's equity securities with readily determinable fair values are primarily comprised of CRA Qualified Investment mutual funds and totaled $40.2 million at June 30, 2020 and $6.8 million at December 31, 2019.  There were gains on equity securities of $0.6 million during the three months ended June 30, 2020 and $0.7 million during the six months ended June 30, 2020, compared to losses of $18 thousand during the three months ended June 30, 2019 and gains of $154 thousand during the six months ended June 30, 2019.  Old National also has equity securities without readily determinable fair values that are included in other assets that totaled $91.9 million at June 30, 2020 and $91.4 million at December 31, 2019.  These are illiquid investments that consist of partnerships, limited liability companies, and other ownership interests that support affordable housing, economic development, and community revitalization initiatives in low-to-moderate income neighborhoods.  There have been no impairments or adjustments on these securities in the six months ended June 30, 2020 or 2019.

NOTE 5 – LOANS HELD FOR SALE

Mortgage loans held for immediate sale in the secondary market were $122.5 million at June 30, 2020, compared to $46.9 million at December 31, 2019.  Residential loans that Old National has originated with the intent to sell are recorded at fair value.  Conventional mortgage production is sold on a servicing retained basis.  Certain loans, such as government guaranteed mortgage loans are sold on servicing released basis.

NOTE 6 – LOANS AND ALLOWANCE FOR CREDIT LOSSES

Loans

Old National’s loans consist primarily of loans made to consumers and commercial clients in various industries, including manufacturing, agribusiness, transportation, mining, wholesaling, and retailing.  Most of Old National’s lending activity occurs within our principal geographic markets of Indiana, Kentucky, Michigan, Wisconsin, and Minnesota.  Old National manages concentrations of credit exposure by industry, product, geography, customer

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relationship, and loan size.  While loans to lessors of both residential and non-residential real estate exceed 10% of total loans, no individual sub-segment category within those broader categories reaches the 10% threshold.

The loan categories used to monitor and analyze interest income and yields are different than the portfolio segments used to determine the allowance for credit losses for loans. The allowance for credit losses was calculated by pooling loans of similar credit risk characteristics and credit monitoring procedures. The four loan portfolios are classified into seven segments of loans - commercial, commercial real estate, BBCC, residential real estate, indirect, direct, and home equity. The commercial and commercial real estate loan categories shown on the balance sheet include the same pool of loans as the commercial, commercial real estate, and BBCC portfolio segments. The consumer loan category shown on the balance sheet is comprised of the same loans in the indirect, direct, and home equity portfolio segments. The composition of loans by portfolio segment as of June 30, 2020 follows:

	June 30, 2020		Segment		June 30, 2020
	Statement		Portfolio		After
(dollars in thousands)	Balance		Reclassifications		Reclassifications
Loans:
Commercial	$	4,307,505	$	(193,861)	$	4,113,644
Commercial real estate	5,403,316		(166,369)		5,236,947
BBCC	N/A		360,230		360,230
Residential real estate	2,229,298		—		2,229,298
Consumer	1,675,582		(1,675,582)		N/A
Indirect	N/A		933,723		933,723
Direct	N/A		194,573		194,573
Home equity	N/A		547,286		547,286
Total	$	13,615,701	$	—	$	13,615,701

The composition of loans by portfolio segment follows:

(dollars in thousands)	June 30, 2020		January 1, 2020
Commercial (1) (2)	$	4,113,644	$	2,817,833
Commercial real estate	5,236,947		4,890,890
BBCC	360,230		352,714
Residential real estate	2,229,298		2,334,394
Indirect	933,723		935,594
Direct	194,573		228,526
Home equity	547,286		562,051
Total loans	13,615,701		12,122,002
Allowance for credit losses	(128,394)		(95,966)
Net loans	$	13,487,307	$	12,026,036

(1)Includes direct finance leases of $42.1 million at June 30, 2020 and $47.2 million at January 1, 2020.

(2)Includes PPP loans of $1.463 billion at June 30, 2020.

The risk characteristics of each loan portfolio segment are as follows:

Commercial

Commercial loans are classified primarily on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower.  The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value.  Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some loans may be made on an unsecured basis.  In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Section 1102 of the CARES Act created the Paycheck Protection Program (“PPP”), a program administered by the Small Business Administration (the “SBA”) to provide loans to small businesses for payroll and other basic expenses during the COVID-19 pandemic. Old National has participated in the PPP as a lender. These loans are eligible to be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. Additionally, loan

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payments will also be deferred for six months of the loan. The PPP commenced on April 3, 2020 and is available to qualified borrowers through August 8, 2020, or as long as the appropriated funding is available. No collateral or personal guarantees are required. Neither the government nor lenders are permitted to charge the recipients any fees.

Old National began accepting applications from qualified borrowers on April 3, 2020 and as of June 30, 2020 over 9,200 applications have been processed and approved, representing $1.538 billion in funding to new and existing clients through the PPP.

Commercial Real Estate

Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate.  Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan.  Commercial real estate loans may be adversely affected by conditions in the real estate markets or in the general economy.  The properties securing Old National’s commercial real estate portfolio are diverse in terms of type and geographic location.  Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

Included with commercial real estate are construction loans, which are underwritten utilizing independent appraisal reviews, sensitivity analysis of absorption and lease rates, financial analysis of the developers and property owners, and feasibility studies, if available.  Construction loans are generally based on estimates of costs and value associated with the complete project.  These estimates may be inaccurate.  Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project.  Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders (including Old National), sales of developed property, or an interim loan commitment from Old National until permanent financing is obtained.  These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions, and the availability of long-term financing.

At 214%, Old National Bank’s commercial real estate loans as a percentage of its risk-based capital remained well below the regulatory guideline limit of 300% at June 30, 2020.

BBCC

BBCC loans are typically granted to small businesses with gross revenues of less than $5 million and aggregate debt of less than $1 million. Old National has established minimum debt service coverage ratios, minimum FICO scores for owner(s) and guarantor(s), and the ability to show relatively stable earnings as criteria to help mitigate risk. Repayment of these loans depends on the personal income of the borrowers and the cash flows of the business. These factors can be affected by changes in economic conditions such as unemployment levels.

Residential

With respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, Old National typically establishes a maximum loan-to-value ratio and generally requires private mortgage insurance if that ratio is exceeded.  Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels.  Repayment can also be impacted by changes in residential property values.  Portfolio risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Indirect

Indirect loans are secured by automobile collateral, generally new and used cars and trucks from auto dealers that operate within our footprint. Old National typically mitigates the risk of indirect loans by establishing minimum FICO scores, maximum loan-to-value ratios, and maximum debt-to-income ratios. Repayment of these loans depends largely on the personal income of the borrowers which can be affected by changes in economic conditions such as unemployment levels. Portfolio risk is mitigated by the fact that the loans are of smaller amounts spread over many borrowers, conservative credit policies, and ongoing reviews of dealer relationships.

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Direct

Direct loans are typically secured by collateral such as auto or real estate or are unsecured. Old National has established conservative underwriting standards such as minimum FICO scores, maximum loan-to-value ratios, and maximum debt-to-income ratios. Repayment of these loans depends largely on the personal income of the borrowers which can be affected by changes in economic conditions such as unemployment levels. Portfolio risk is mitigated by the fact that the loans are of smaller amounts spread over many borrowers along with conservative credit policies.

Home Equity

Home Equity loans are generally secured by 1-4 family residences that are owner occupied. Old National has established conservative underwriting standards such as minimum FICO scores, maximum loan-to-value ratios, and maximum debt-to-income ratios. Repayment of these loans depends largely on the personal income of the borrowers which can be affected by changes in economic conditions such as unemployment levels. Portfolio risk is mitigated by the fact that the loans are of smaller amounts spread over many borrowers, along with conservative credit policies as well as monitoring of updated borrower credit scores.

Allowance for Credit Losses

Loans

Credit quality within the loans held for investment portfolio is continuously monitored by management and is reflected within the allowance for credit losses for loans. The allowance for credit losses is an estimate of expected losses inherent within the Company’s loans held for investment portfolio. Credit quality is assessed and monitored by evaluating various attributes and the results of those evaluations are utilized in underwriting new loans and in our process for estimating expected credit losses. Expected credit loss inherent in non-cancelable off-balance-sheet credit exposures is accounted for as a separate liability included in other liabilities on the balance sheet. The allowance for credit losses for loans held for investment is adjusted by a credit loss expense, which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries. We have made a policy election to report accrued interest receivable as a separate line item on the balance sheet. Accrued interest receivable on loans totaled $56.9 million at June 30, 2020 and is excluded from the estimate of credit losses.

The allowance for credit loss estimation process involves procedures to appropriately consider the unique characteristics of its loan portfolio segments. These segments are further disaggregated into loan classes, the level at which credit risk is monitored. When computing the level of expected credit losses, credit loss assumptions are estimated using a model that categorizes loan pools based on loss history, delinquency status, and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense in those future periods.

The allowance level is influenced by loan volumes, loan AQR migration or delinquency status, changes in historical loss experience, and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions. The methodology for estimating the amount of expected credit losses reported in the allowance for credit losses has two basic components: first, an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans; and second, a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics. See Note 2 for more information about CECL for loans and unfunded loan commitments.

The allowance for credit losses increased for the three and six months ended June 30, 2020 primarily due to macroeconomic factors surrounding the COVID-19 pandemic. The forecast scenario includes elevated unemployment, which is forecasted to increase slightly through the first quarter of 2021. The scenario also shows a decrease in nominal gross domestic product with a return to growth by the second quarter of 2021. In addition to these quantitative inputs, several qualitative factors were considered, including the risk that the economic decline, specifically unemployment and gross domestic product, prove to be more severe and/or prolonged than our baseline forecast. The mitigating impact of the unprecedented fiscal stimulus, including direct payments to individuals, increased unemployment benefits, as well as the various government sponsored loan programs, was also considered.

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Old National’s activity in the allowance for credit losses for loans by portfolio segment for the three and six months ended June 30, 2020 was as follows:

(dollars in thousands)	Balance at Beginning of Period		Impact of Adopting ASC 326		Sub-Total		Charge-offs		Recoveries		Provision for Credit Losses		Balance at End of Period
Three Months Ended June 30, 2020
Commercial	$	31,125	$	—	$	31,125	$	(136)	$	553	$	(1,924)	$	29,618
Commercial real estate	54,103		—		54,103		(1,160)		246		17,880		71,069
BBCC	5,417		—		5,417		(66)		56		925		6,332
Residential real estate	9,637		—		9,637		(16)		42		4,581		14,244
Indirect	3,666		—		3,666		(367)		494		660		4,453
Direct	822		—		822		(405)		231		187		835
Home equity	1,610		—		1,610		(82)		79		236		1,843
Total allowance for credit losses	$	106,380	$	—	$	106,380	$	(2,232)	$	1,701	$	22,545	$	128,394
Six Months Ended June 30, 2020
Commercial	$	21,359	$	7,150	$	28,509	$	(5,178)	$	910	$	5,377	$	29,618
Commercial real estate	20,535		25,548		46,083		(2,452)		915		26,523		71,069
BBCC	2,279		3,702		5,981		(81)		122		310		6,332
Residential real estate	2,299		6,986		9,285		(316)		211		5,064		14,244
Indirect	5,319		(1,669)		3,650		(1,570)		908		1,465		4,453
Direct	1,863		(1,059)		804		(880)		383		528		835
Home equity	965		689		1,654		(200)		161		228		1,843
Total allowance for credit losses	$	54,619	$	41,347	$	95,966	$	(10,677)	$	3,610	$	39,495	$	128,394

The provision recapture for the three months ended June 30, 2020 for the commercial portfolio was the result of several offsetting items. The economic forecast resulted in an increase to the provision for credit losses for the quarter, which was more than offset by a decrease in balances in the commercial portfolio (excluding PPP loans) during the quarter. PPP loans were factored in the provision for credit losses for the three months ended June 30, 2020; however, due to the SBA guaranty and our borrowers’ adherence to the PPP terms, the provision impact was insignificant.

Unfunded Loan Commitments

Old National maintains an allowance for credit losses on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements. The allowance is computed using a methodology similar to that used to determine the allowance for credit losses for loans, modified to take into account the probability of a drawdown on the commitment. The allowance for credit losses on unfunded loan commitments is classified as a liability account on the balance sheet. Old National’s activity in the allowance for credit losses on unfunded loan commitments for the three and six months ended June 30, 2020 was as follows:

(dollars in thousands)	Three Months Ended June 30, 2020		Six Months Ended June 30, 2020
Allowance for credit losses on unfunded loan commitments:
Balance at beginning of period	$	8,950	$	2,656
Impact of adopting ASC 326	—		4,549
Sub-Total	8,950		7,205
Expense (reversal of expense) for credit losses	2,076		3,821
Balance at end of period	$	11,026	$	11,026

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Credit Quality

Old National’s management monitors the credit quality of its loans on an ongoing basis with the AQR for commercial loans reviewed annually or at renewal and the performance of its residential and consumer loans based upon the accrual status refreshed at least quarterly.  Internally, management assigns an AQR to each non-homogeneous commercial, commercial real estate, and BBCC loan in the portfolio.  The primary determinants of the AQR are the reliability of the primary source of repayment and the past, present, and projected financial condition of the borrower.  The AQR will also consider current industry conditions.  Major factors used in determining the AQR can vary based on the nature of the loan, but commonly include factors such as debt service coverage, internal cash flow, liquidity, leverage, operating performance, debt burden, FICO scores, occupancy, interest rate sensitivity, and expense burden.  Old National uses the following definitions for risk ratings:

Criticized.  Special mention loans that have a potential weakness that deserves management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Classified – Substandard.  Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Classified – Nonaccrual.  Loans classified as nonaccrual have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection in full, on the basis of currently existing facts, conditions, and values, in doubt.

Classified – Doubtful.  Loans classified as doubtful have all the weaknesses inherent in those classified as nonaccrual, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Pass rated loans are those loans that are other than criticized, classified – substandard, classified – nonaccrual, or classified – doubtful.

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The following table summarizes the risk category of commercial, commercial real estate, and BBCC loans by loan portfolio segment and class of loan:

	Risk Rating
(dollars in thousands)	Pass		Criticized		Classified - Substandard		Classified - Nonaccrual		Classified - Doubtful		Total
June 30, 2020
Commercial:
Term Loans at Amortized Cost by Origination Year:
Prior to 2016	$	315,486	$	8,196	$	6,818	$	2,474	$	1,746	$	334,720
2016	164,951		4,737		4,641		832		619		175,780
2017	315,876		8,898		16,141		4,139		8,925		353,979
2018	279,110		16,801		11,808		5,219		483		313,421
2019	537,539		8,710		5,960		4,175		—		556,384
2020	1,683,849		2,347		1,133		—		—		1,687,329
Revolving Loans	502,947		19,101		13,462		3,067		—		538,577
Revolving to Term Loans	137,905		2,622		6,821		6,106		—		153,454
Total	$	3,937,663	$	71,412	$	66,784	$	26,012	$	11,773	$	4,113,644
Commercial real estate:
Term Loans at Amortized Cost by Origination Year:
Prior to 2016	$	696,386	$	17,734	$	17,006	$	15,380	$	3,214	$	749,720
2016	568,658		7,647		19,770		2,362		9,965		608,402
2017	769,069		53,841		38,710		3,886		4,267		869,773
2018	851,522		12,341		14,757		4,310		3,256		886,186
2019	1,030,103		39,620		2,754		2,172		1,920		1,076,569
2020	678,684		2,326		1,326		—		—		682,336
Revolving Loans	27,710		—		244		—		—		27,954
Revolving to Term Loans	318,622		6,370		10,647		368		—		336,007
Total	$	4,940,754	$	139,879	$	105,214	$	28,478	$	22,622	$	5,236,947
BBCC:
Term Loans at Amortized Cost by Origination Year:
Prior to 2016	$	12,140	$	—	$	—	$	—	$	91	$	12,231
2016	28,945		765		52		120		—		29,882
2017	42,552		639		196		408		72		43,867
2018	58,668		768		39		380		464		60,319
2019	87,160		1,411		1,199		529		—		90,299
2020	44,309		1,061		232		692		—		46,294
Revolving Loans	48,419		2,685		520		75		—		51,699
Revolving to Term Loans	21,631		1,682		1,110		1,216		—		25,639
Total	$	343,824	$	9,011	$	3,348	$	3,420	$	627	$	360,230

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For residential real estate and consumer loan classes, Old National evaluates credit quality based on the aging status of the loan and by payment activity.  The performing or nonperforming status is updated on an on-going basis dependent upon improvement and deterioration in credit quality. The following table presents the amortized cost in residential real estate and consumer loans based on payment activity:

	Payment Performance
(dollars in thousands)	Performing		Nonperforming		Total
June 30, 2020
Residential real estate:
Term Loans at Amortized Cost by Origination Year:
Prior to 2016	$	783,682	$	20,693	$	804,375
2016	258,164		2,201		260,365
2017	263,238		628		263,866
2018	182,395		611		183,006
2019	532,392		117		532,509
2020	184,982		65		185,047
Revolving Loans	—		—		—
Revolving to Term Loans	130		—		130
Total	$	2,204,983	$	24,315	$	2,229,298
Indirect:
Term Loans at Amortized Cost by Origination Year:
Prior to 2016	$	39,794	$	231	$	40,025
2016	82,247		651		82,898
2017	133,548		1,018		134,566
2018	176,931		629		177,560
2019	317,495		306		317,801
2020	180,779		—		180,779
Revolving Loans	—		—		—
Revolving to Term Loans	94		—		94
Total	$	930,888	$	2,835	$	933,723
Direct:
Term Loans at Amortized Cost by Origination Year:
Prior to 2016	$	25,369	$	521	$	25,890
2016	12,951		278		13,229
2017	24,025		126		24,151
2018	41,987		157		42,144
2019	39,424		53		39,477
2020	21,258		—		21,258
Revolving Loans	26,350		—		26,350
Revolving to Term Loans	2,072		2		2,074
Total	$	193,436	$	1,137	$	194,573
Home equity:
Term Loans at Amortized Cost by Origination Year:
Prior to 2016	$	—	$	—	$	—
2016	436		225		661
2017	1,067		37		1,104
2018	990		—		990
2019	1,116		30		1,146
2020	—		—		—
Revolving Loans	519,472		274		519,746
Revolving to Term Loans	19,878		3,761		23,639
Total	$	542,959	$	4,327	$	547,286

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Nonaccrual and Past Due Loans

Old National does not record interest on nonaccrual loans until principal is recovered. For all loan classes, a loan is generally placed on nonaccrual status when principal or interest becomes 90 days past due unless it is well secured and in the process of collection, or earlier when concern exists as to the ultimate collectability of principal or interest. Interest accrued but not received is reversed against earnings. Cash interest received on these loans is applied to the principal balance until the principal is recovered or until the loan returns to accrual status. Loans may be returned to accrual status when all the principal and interest amounts contractually due are brought current, remain current for a prescribed period, and future payments are reasonably assured.

The following table presents the aging of the amortized cost basis in past due loans as of June 30, 2020 by class of loans:

(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Past Due 90 Days or More		Total Past Due		Current		Total Loans
June 30, 2020
Commercial	$	1,229	$	845	$	5,489	$	7,563	$	4,106,081	$	4,113,644
Commercial Real Estate	312		10,728		14,547		25,587		5,211,360		5,236,947
BBCC	828		416		135		1,379		358,851		360,230
Residential	13,331		4,319		9,696		27,346		2,201,952		2,229,298
Indirect	3,187		580		791		4,558		929,165		933,723
Direct	856		260		435		1,551		193,022		194,573
Home equity	1,234		684		1,758		3,676		543,610		547,286
Total	$	20,977	$	17,832	$	32,851	$	71,660	$	13,544,041	$	13,615,701

The following table presents the amortized cost basis of loans on nonaccrual status and loans past due 90 days or more and still accruing by class of loan:

	January 1, 2020		March 31, 2020		June 30, 2020
(dollars in thousands)	Nonaccrual Amortized Cost		Nonaccrual Amortized Cost		Nonaccrual Amortized Cost		Nonaccrual With No Related Allowance		Past Due 90 Days or More and Accruing
Commercial	$	40,103	$	39,893	$	37,785	$	8,163	$	70
Commercial Real Estate	58,350		51,355		51,100		19,412		330
BBCC	4,530		3,869		4,048		—		—
Residential	20,970		23,567		24,315		—		42
Indirect	3,318		2,885		2,835		—		175
Direct	1,303		1,195		1,137		59		162
Home equity	3,857		4,223		4,326		32		—
Total	$	132,431	$	126,987	$	125,546	$	27,666	$	779

Interest income recognized on nonaccrual loans was insignificant during the three and six months ended June 30, 2020.

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When management determines that foreclosure is probable, expected credit losses for collateral dependent loans are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. A loan is considered collateral dependent when the borrower is experiencing financial difficulty and the loan is expected to be repaid substantially through the operation or sale of the collateral. The class of loan represents the primary collateral type associated with the loan. Significant quarter over quarter changes are reflective of changes in nonaccrual status and not necessarily associated with credit quality indicators like appraisal value. The following table presents the amortized cost basis of collateral dependent loans by class of loan:

	Type of Collateral
(dollars in thousands)	Real Estate		Blanket Lien		Investment Securities/Cash		Auto		Other
June 30, 2020
Commercial	$	9,143	$	19,503	$	7,628	$	456	$	1,107
Commercial Real Estate	38,065		2,251		3,156		—		160
BBCC	1,836		1,936		80		190		—
Residential	24,315		—		—		—		—
Indirect	—		—		—		2,835		—
Direct	862		—		8		255		—
Home equity	4,326		—		—		—		—
Total loans	$	78,547	$	23,690	$	10,872	$	3,736	$	1,267

Loan Participations

Old National has loan participations, which qualify as participating interests, with other financial institutions.  At June 30, 2020, these loans totaled $871.4 million, of which $376.4 million had been sold to other financial institutions and $495.0 million was retained by Old National.  The loan participations convey proportionate ownership rights with equal priority to each participating interest holder; involve no recourse (other than ordinary representations and warranties) to, or subordination by, any participating interest holder; all cash flows are divided among the participating interest holders in proportion to each holder’s share of ownership; and no holder has the right to pledge the entire financial asset unless all participating interest holders agree.

Troubled Debt Restructurings

Old National may choose to restructure the contractual terms of certain loans.  The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit Old National by increasing the ultimate probability of collection.

Any loans that are modified are reviewed by Old National to identify if a TDR has occurred, which is when for economic or legal reasons related to a borrower’s financial difficulties, Old National Bank grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status.  The modification of the terms of such loans include one or a combination of the following:  a reduction of the stated interest rate of the loan, an extension of the maturity date at a stated rate of interest lower than the current market rate of new debt with similar risk, or a permanent reduction of the recorded investment of the loan.

Loans modified in a TDR are typically placed on nonaccrual status until we determine the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate a period of performance according to the restructured terms for 6 months.

If we are unable to resolve a nonperforming loan issue, the credit will be charged off when it is apparent there will be a loss.  For large commercial type loans, each relationship is individually analyzed for evidence of apparent loss based on quantitative benchmarks or subjectively based upon certain events or particular circumstances.  Generally, Old National charges off small commercial loans scored through our small business credit center with contractual balances under $250,000 that are 90 days or more delinquent and do not have adequate collateral support.  For residential and consumer loans, a charge off is recorded at the time foreclosure is initiated or when the loan becomes 120 to 180 days past due, whichever is earlier.

For commercial TDRs, an allocated reserve is established within the allowance for credit losses for the difference between the carrying value of the loan and its computed value.  To determine the computed value of the loan, one of the following methods is selected: (1) the present value of expected cash flows discounted at the loan’s original effective interest rate, (2) the loan’s observable market price, or (3) the fair value of the collateral, if the loan is

29

collateral dependent.  The allocated reserve is established as the difference between the carrying value of the loan and the collectable value.  If there are significant changes in the amount or timing of the loan’s expected future cash flows, impairment is recalculated and the valuation allowance is adjusted accordingly.

When a residential or consumer loan is identified as a TDR, the loan is typically written down to its collateral value less selling costs.

The following table presents activity in TDRs for the three months ended June 30, 2020:

(dollars in thousands)	Beginning Balance		(Charge-offs)/ Recoveries		(Payments)/ Disbursements		Additions		Ending Balance
Three Months Ended June 30, 2020
Commercial	$	10,928	$	—	$	(330)	$	—	$	10,598
Commercial Real Estate	12,848		19		(161)		—		12,706
BBCC	562		31		(446)		—		147
Residential	3,040		—		(28)		—		3,012
Indirect	—		2		(2)		—		—
Direct	922		—		(143)		—		779
Home equity	374		1		(8)		—		367
Total	$	28,674	$	53	$	(1,118)	$	—	$	27,609
Six Months Ended June 30, 2020
Commercial	$	12,412	$	(694)	$	(1,120)	$	—	$	10,598
Commercial Real Estate	14,277		(1,253)		(318)		—		12,706
BBCC	578		31		(462)		—		147
Residential	3,107		—		(95)		—		3,012
Indirect	—		5		(5)		—		—
Direct	983		2		(206)		—		779
Home equity	381		2		(16)		—		367
Total	$	31,738	$	(1,907)	$	(2,222)	$	—	$	27,609

TDRs included within nonaccrual loans totaled $11.3 million at June 30, 2020 and $13.8 million at December 31, 2019.  Old National has allocated specific reserves to customers whose loan terms have been modified in TDRs totaling $1.4 million at June 30, 2020 and $0.9 million at December 31, 2019.  At June 30, 2020, Old National had committed to lend an additional $0.7 million to customers with outstanding loans that are classified as TDRs, compared to $2.3 million at December 31, 2019.

The pre-modification and post-modification outstanding recorded investments of loans modified as TDRs during the six months ended June 30, 2020 and 2019 are the same except for when the loan modifications involve the forgiveness of principal.  The following table presents loans modified as TDRs that occurred during the six months ended June 30, 2020 and 2019:

(dollars in thousands)	Total
Six Months Ended June 30, 2020
TDR:
Number of loans	—
Pre-modification outstanding recorded investment	$	—
Post-modification outstanding recorded investment	—
Six Months Ended June 30, 2019
TDR:
Number of loans	12
Pre-modification outstanding recorded investment	$	20,044
Post-modification outstanding recorded investment	20,044

The TDRs that occurred during the six months ended June 30, 2019 decreased the allowance for loan losses by $0.8 million and resulted in no charge-offs.

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A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

TDRs for which there was a payment default within twelve months following the modification were insignificant during the six months ended June 30, 2020 and 2019.

The terms of certain other loans were modified during 2020 and 2019 that did not meet the definition of a TDR.  It is our process to review all classified and criticized loans that, during the period, have been renewed, have entered into a forbearance agreement, have gone from principal and interest to interest only, or have extended the maturity date.  In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on its debt in the foreseeable future without the modification.  The evaluation is performed under our internal underwriting policy.  We also evaluate whether a concession has been granted or if we were adequately compensated through a market interest rate, additional collateral or a bona fide guarantee.  We also consider whether the modification was insignificant relative to the other terms of the agreement or the delay in a payment.

In general, once a modified loan is considered a TDR, the loan will always be considered a TDR, and therefore impaired, until it is paid in full, otherwise settled, sold, or charged off.  However, guidance also permits for loans to be removed from TDR status when subsequently restructured under these circumstances: (1) at the time of the subsequent restructuring, the borrower is not experiencing financial difficulties, and this is documented by a current credit evaluation at the time of the restructuring, (2) under the terms of the subsequent restructuring agreement, the institution has granted no concession to the borrower; and (3) the subsequent restructuring agreement includes market terms that are no less favorable than those that would be offered for a comparable new loan.  For loans subsequently restructured that have cumulative principal forgiveness, the loan should continue to be measured in accordance with ASC 310-10, Receivables – Overall. However, consistent with ASC 310-40-50-2, Troubled Debt Restructurings by Creditors, Creditor Disclosure of Troubled Debt Restructurings, the loan would not be required to be reported in the years following the restructuring if the subsequent restructuring meets both of these criteria: (1) has an interest rate at the time of the subsequent restructuring that is not less than a market interest rate; and (2) is performing in compliance with its modified terms after the subsequent restructuring.

Non-TDR Loan Modifications due to COVID-19

On March 22, 2020, the Interagency Statement was issued by our banking regulators that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further provides that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates. The Interagency Statement was subsequently revised in April 2020 to clarify the interaction of the original guidance with Section 4013 of the CARES Act, as well as setting forth the banking regulators’ views on consumer protection considerations. In accordance with such guidance, we are offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. The table below presents the volume of loan deferrals through June 30, 2020 by loan category:

(dollars in thousands)	Number	Booked Amount		Booked % of Portfolio
Commercial	1,474	$	713,619	25	%
Commercial real estate	194	456,500		8
Residential real estate	335	78,639		3
Consumer	2,159	54,786		3
Total	4,162	$	1,303,544	11	%

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Allowance for Loan Losses (Prior to January 1, 2020)

Prior to the adoption of ASC 326 on January 1, 2020, Old National calculated allowance for loan losses using incurred losses methodology. The following tables are disclosures related to the allowance for loan losses in prior periods.

Old National's activity in the allowance for loan losses for the three and six months ended June 30, 2019 was as follows:

(dollars in thousands)	Commercial		Commercial Real Estate		Residential		Consumer		Total
Three Months Ended June 30, 2019
Balance at beginning of period	$	20,406	$	25,169	$	2,302	$	7,682	$	55,559
Charge-offs	(604)		(389)		(140)		(1,743)		(2,876)
Recoveries	334		1,205		9		1,058		2,606
Provision	2,412		(2,674)		98		1,167		1,003
Balance at end of period	$	22,548	$	23,311	$	2,269	$	8,164	$	56,292
Six Months Ended June 30, 2019
Balance at beginning of period	$	21,742	$	23,470	$	2,277	$	7,972	$	55,461
Charge-offs	(764)		(624)		(318)		(4,063)		(5,769)
Recoveries	709		1,775		81		1,989		4,554
Provision	861		(1,310)		229		2,266		2,046
Balance at end of period	$	22,548	$	23,311	$	2,269	$	8,164	$	56,292

The following table disaggregates Old National's allowance for credit losses and amortized cost basis in loans by measurement methodology at December 31, 2019:

(dollars in thousands)	Commercial		Commercial Real Estate		Residential		Consumer		Total
December 31, 2019
Allowance for loan losses:
Individually evaluated for impairment	$	7,891	$	1,006	$	—	$	—	$	8,897
Collectively evaluated for impairment	14,692		20,582		2,299		7,954		45,527
Loans acquired with deteriorated credit quality	2		—		—		193		195
Total allowance for loan losses	$	22,585	$	21,588	$	2,299	$	8,147	$	54,619
Loans and leases outstanding:
Individually evaluated for impairment	$	41,479	$	63,288	$	—	$	—	$	104,767
Collectively evaluated for impairment	2,843,536		5,084,737		2,326,907		1,723,715		11,978,895
Loans acquired with deteriorated credit quality	5,281		18,767		7,382		2,432		33,862
Total loans and leases outstanding	$	2,890,296	$	5,166,792	$	2,334,289	$	1,726,147	$	12,117,524

The risk category or commercial and commercial real estate loans by class of loans at December 31, 2019 was as follows:

	December 31, 2019
(dollars in thousands)	Commercial		Commercial Real Estate - Construction		Commercial Real Estate - Other
Corporate Credit Exposure Credit Risk Profile by Internally Assigned Grade
Grade:
Pass	$	2,702,605	$	665,512	$	4,191,455
Criticized	84,676		34,651		115,514
Classified - substandard	63,979		—		101,693
Classified - nonaccrual	22,240		12,929		38,822
Classified - doubtful	16,796		—		6,216
Total	$	2,890,296	$	713,092	$	4,453,700

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The following table presents the recorded investment in residential and consumer loans based on payment activity at December 31, 2019:

			Consumer
(dollars in thousands)	Residential		Home Equity		Auto		Other
December 31, 2019
Performing	$	2,311,670	$	555,025	$	1,013,760	$	147,383
Nonperforming	22,619		3,996		3,527		2,456
Total	$	2,334,289	$	559,021	$	1,017,287	$	149,839

The following table shows Old National's impaired loans at December 31, 2019. Only purchased loans that have experienced subsequent impairment since the date acquired (excluding loans acquired with deteriorated credit quality) are included in the table below.

(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
December 31, 2019
With no related allowance recorded:
Commercial	$	23,227	$	23,665	$	—
Commercial Real Estate - Construction	12,929		12,929		—
Commercial Real Estate - Other	37,674		38,112		—
Residential	1,774		1,794		—
Consumer	403		568		—
With an allowance recorded:
Commercial	18,252		18,305		7,891
Commercial Real Estate - Other	12,685		12,685		1,006
Residential	1,201		1,201		39
Consumer	1,094		1,094		55
Total	$	109,239	$	110,353	$	8,991

The average balance of impaired loans during the three and six months ended June 30, 2019 are included in the table below.

(dollars in thousands)	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
Average Recorded Investment
With no related allowance recorded:
Commercial	$	23,242	$	21,585
Commercial Real Estate - Construction	10,996		5,519
Commercial Real Estate - Other	34,387		35,378
Residential	2,325		2,309
Consumer	1,076		838
With an allowance recorded:
Commercial	13,965		15,997
Commercial Real Estate - Construction	3,160		8,294
Commercial Real Estate - Other	22,493		24,368
Residential	866		874
Consumer	1,358		1,577
Total	$	113,868	$	116,739

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The following table presents activity in TDRs for the three and six months ended June 30, 2019:

(dollars in thousands)	Commercial		Commercial Real Estate		Residential		Consumer		Total
Three Months Ended June 30, 2019
Balance at beginning of period	$	11,646	$	29,137	$	3,247	$	2,313	$	46,343
(Charge-offs)/recoveries	(93)		4		—		4		(85)
(Payments)/disbursements	25		(16,702)		(167)		(117)		(16,961)
Additions	7,294		6,924		—		316		14,534
Balance at end of period	$	18,872	$	19,363	$	3,080	$	2,516	$	43,831
Six Months Ended June 30, 2019
Balance at beginning of period	$	10,275	$	27,671	$	3,390	$	2,374	$	43,710
(Charge-offs)/recoveries	(100)		(71)		—		(1)		(172)
(Payments)/disbursements	(1,004)		(18,264)		(310)		(173)		(19,751)
Additions	9,701		10,027		—		316		20,044
Balance at end of period	$	18,872	$	19,363	$	3,080	$	2,516	$	43,831

NOTE 7 – OTHER REAL ESTATE OWNED

Other real estate owned is included in other assets.  The following table presents activity in other real estate owned:

	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2020		2019		2020		2019
Balance at beginning of period	$	2,163	$	3,279	$	2,169	$	3,232
Additions	57		279		204		673
Sales	(309)		(705)		(423)		(977)
Impairments	(125)		(34)		(164)		(109)
Balance at end of period (1)	$	1,786	$	2,819	$	1,786	$	2,819

(1)Includes repossessed personal property of $0.2 million at June 30, 2020 and June 30, 2019.

Foreclosed residential real estate property recorded as a result of obtaining physical possession of the property included in the table above totaled $0.7 million at June 30, 2020 and $0.5 million at December 31, 2019.  Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $3.9 million at June 30, 2020 and $3.7 million at December 31, 2019.

NOTE 8 – PREMISES AND EQUIPMENT

The composition of premises and equipment was as follows:

(dollars in thousands)	June 30, 2020		December 31, 2019
Land	$	72,182	$	79,569
Buildings	367,658		380,925
Furniture, fixtures, and equipment	113,047		112,654
Leasehold improvements	44,684		44,136
Total	597,571		617,284
Accumulated depreciation	(134,775)		(126,359)
Premises and equipment, net	$	462,796	$	490,925

Depreciation expense was $6.5 million for the three months ended June 30, 2020 and $15.1 million for the six months ended June 30, 2020, compared to $6.7 million for the three months ended June 30, 2019 and $13.2 million for the six months ended June 30, 2019.

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Finance Leases

Old National leases certain branch buildings under finance leases that are included in premises and equipment.  See Notes 9 and 15 to the consolidated financial statements for detail regarding these leases.

NOTE 9 – LEASES

Old National has operating and finance leases for land, office space, banking centers, and equipment.  These leases are generally for periods of 10 to 20 years with various renewal options.  We include certain renewal options in the measurement of our right-of-use assets and lease liabilities if they are reasonably certain to be exercised.  Variable lease payments that are dependent on an index or a rate are initially measured using the index or rate at the commencement date and are included in the measurement of the lease liability. Variable lease payments that are not dependent on an index or a rate are excluded from the measurement of the lease liability and are recognized in profit and loss when incurred.  Variable lease payments are defined as payments made for the right to use an asset that vary because of changes in facts or circumstances occurring after the commencement date, other than the passage of time.

Old National has lease agreements with lease and non-lease components, which are generally accounted for separately.  For real estate leases, non-lease components and other non-components, such as common area maintenance charges, real estate taxes, and insurance are not included in the measurement of the lease liability since they are generally able to be segregated.  For certain equipment leases, Old National accounts for the lease and non-lease components as a single lease component using the practical expedient available for that class of assets.

Old National does not have any material sub-lease agreements.

The components of lease expense were as follows:

	Affected Line Item in the	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	Statement of Income	2020		2019		2020		2019
Operating lease cost	occupancy/equipment expense	$	6,646	$	4,291	$	15,827	$	8,693
Finance lease cost:
Amortization of right-of-use assets	occupancy expense	256		160		423		318
Interest on lease liabilities	interest expense	91		80		169		161
Short-term lease cost	occupancy expense	1		1		1		2
Sub-lease income	occupancy expense	(121)		(181)		(249)		(360)
Total		$	6,873	$	4,351	$	16,171	$	8,814

Supplemental balance sheet information related to leases was as follows:

(dollars in thousands)	June 30, 2020			December 31, 2019
Operating Leases
Operating lease right-of-use assets	$	80,400		$	95,477
Operating lease liabilities	91,845			99,500
Finance Leases
Premises and equipment, net	11,973			7,170
Other borrowings	12,310			7,406
Weighted-Average Remaining Lease Term (in Years)
Operating leases	10.6			10.6
Finance leases	10.7			11.3
Weighted-Average Discount Rate
Operating leases	3.42		%	3.45		%
Finance leases	3.44		%	4.43		%

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Supplemental cash flow information related to leases was as follows:

	Six Months Ended June 30,
(dollars in thousands)	2020		2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	8,283	$	8,843
Operating cash flows from finance leases	169		161
Financing cash flows from finance leases	322		224

The following table presents a maturity analysis of the Company’s lease liability by lease classification at June 30, 2020:

(dollars in thousands)	Operating Leases		Finance Leases
2020	$	7,849	$	692
2021	14,916		1,394
2022	13,712		1,412
2023	9,093		1,438
2024	7,917		1,444
Thereafter	56,991		8,443
Total undiscounted lease payments	110,478		14,823
Amounts representing interest	(18,633)		(2,513)
Lease liability	$	91,845	$	12,310

Old National leases certain office space and buildings to unrelated parties in exchange for consideration.  All of these tenant leases are classified as operating leases.  The following table presents a maturity analysis of the Company’s tenant leases at June 30, 2020:

(dollars in thousands)	Tenant Leases
2020	$	1,248
2021	2,354
2022	1,952
2023	1,536
2024	1,409
Thereafter	2,520
Total undiscounted lease payments	$	11,019

NOTE 10 – GOODWILL AND OTHER INTANGIBLE ASSETS

The following table shows the changes in the carrying amount of goodwill:

	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2020		2019		2020		2019
Balance at beginning of period	$	1,036,994	$	1,036,258	$	1,036,994	$	1,036,258
Acquisitions and adjustments	—		—		—		—
Balance at end of period	$	1,036,994	$	1,036,258	$	1,036,994	$	1,036,258

Old National performed the required annual goodwill impairment test as of August 31, 2019 and there was no impairment.  No events or circumstances since the August 31, 2019 annual impairment test were noted that would indicate it was more likely than not a goodwill impairment exists. However, management did conclude that the current decline in macroeconomic conditions is a triggering event, but other mitigating factors did not warrant an interim quantitative impairment test. We continue to evaluate our qualitative assessment assumptions, which are

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subject to risks and uncertainties, including: (1) forecasted revenues, expenses, and cash flows; (2) current discount rates; (3) our market capitalization; (4) observable market transactions and multiples; (5) changes to the regulatory environment; and (6) the nature and amount of government support that has been and is expected to be provided in the future. Refer to Note 20, Commitments and Contingencies, for additional information on COVID-19 and its potential impact to Old National.

The gross carrying amount and accumulated amortization of other intangible assets were as follows: 

(dollars in thousands)	Gross Carrying Amount		Accumulated Amortization and Impairment		Net Carrying Amount
June 30, 2020
Core deposit	$	116,185	$	(66,935)	$	49,250
Customer trust relationships	16,547		(13,080)		3,467
Total intangible assets	$	132,732	$	(80,015)	$	52,717
December 31, 2019
Core deposit	$	119,051	$	(63,020)	$	56,031
Customer trust relationships	16,547		(12,473)		4,074
Total intangible assets	$	135,598	$	(75,493)	$	60,105

Other intangible assets consist of core deposit intangibles and customer relationship intangibles and are being amortized primarily on an accelerated basis over their estimated useful lives, generally over a period of 5 to 15 years.

Old National reviews other intangible assets for possible impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. No impairment charges were recorded during the six months ended June 30, 2020 or 2019.  Total amortization expense associated with intangible assets was $3.6 million for the three months ended June 30, 2020 and $7.4 million for the six months ended June 30, 2020, compared to $4.3 million for the three months ended June 30, 2019 and $8.8 million for the six months ended June 30, 2019.

Estimated amortization expense for future years is as follows:

(dollars in thousands)
2020 remaining	$	6,703
2021	11,336
2022	9,014
2023	7,053
2024	5,645
Thereafter	12,966
Total	$	52,717

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NOTE 11 – LOAN SERVICING RIGHTS

Loan servicing rights are included in other assets on the balance sheet. At June 30, 2020, loan servicing rights derived from loans sold with servicing retained totaled $24.0 million, compared to $25.4 million at December 31, 2019.  Loans serviced for others are not reported as assets.  The principal balance of loans serviced for others was $3.509 billion at June 30, 2020, compared to $3.445 billion at December 31, 2019.  Approximately 99.8% of the loans serviced for others at June 30, 2020 were residential mortgage loans.  Custodial escrow balances maintained in connection with serviced loans were $41.1 million at June 30, 2020 and $12.7 million at December 31, 2019.

The following table summarizes the carrying values and activity related to loan servicing rights and the related valuation allowance: 

	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2020		2019		2020		2019
Balance at beginning of period	$	25,575	$	24,271	$	25,399	$	24,512
Additions	3,672		1,270		5,403		1,929
Amortization	(2,959)		(1,177)		(4,514)		(2,077)
Balance before valuation allowance at end of period	26,288		24,364		26,288		24,364
Valuation allowance:
Balance at beginning of period	(1,443)		(17)		(31)		(15)
(Additions)/recoveries	(810)		(15)		(2,222)		(17)
Balance at end of period	(2,253)		(32)		(2,253)		(32)
Loan servicing rights, net	$	24,035	$	24,332	$	24,035	$	24,332

At June 30, 2020, the fair value of servicing rights was $24.0 million, which was determined using a discount rate of 9% and a conditional prepayment rate of 16%.  At December 31, 2019, the fair value of servicing rights was $26.5 million, which was determined using a discount rate of 12% and a conditional prepayment rate of 10%.

NOTE 12 – QUALIFIED AFFORDABLE HOUSING PROJECTS AND OTHER TAX CREDIT INVESTMENTS

Old National is a limited partner in several tax-advantaged limited partnerships whose purpose is to invest in approved qualified affordable housing, renewable energy, or other renovation or community revitalization projects.  These investments are included in other assets on the balance sheet, with any unfunded commitments included with other liabilities. As of June 30, 2020, Old National expects to recover its remaining investments through the use of the tax credits that are generated by the investments.

The following table summarizes Old National’s investments in qualified affordable housing projects and other tax credit investments:

(dollars in thousands)		June 30, 2020				December 31, 2019
Investment	Accounting Method	Investment		Unfunded Commitment (1)		Investment		Unfunded Commitment
LIHTC	Proportional amortization	$	28,083	$	2,646	$	29,735	$	3,911
FHTC	Equity	25,760		21,778		22,403		17,886
Renewable Energy	Equity	7,644		3,090		7,523		4,129
Total		$	61,487	$	27,514	$	59,661	$	25,926

(1)All commitments will be paid by Old National by 2027.

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The following table summarizes the amortization expense and tax benefit recognized for Old National’s qualified affordable housing projects and other tax credit investments:

(dollars in thousands)	Amortization Expense (1)		Tax Expense (Benefit) Recognized (2)
Three Months Ended June 30, 2020
LIHTC	$	776	$	(1,019)
FHTC	—		(1,356)
Renewable Energy	287		(307)
Total	$	1,063	$	(2,682)
Three Months Ended June 30, 2019
LIHTC	$	791	$	(1,042)
Renewable Energy	568		(533)
Total	$	1,359	$	(1,575)
Six Months Ended June 30, 2020
LIHTC	$	1,553	$	(2,038)
FHTC	5,143		(2,712)
Renewable Energy	659		(707)
Total	$	7,355	$	(5,457)
Six Months Ended June 30, 2019
LIHTC	$	1,584	$	(2,085)
Renewable Energy	828		(777)
Total	$	2,412	$	(2,862)

(1)The amortization expense for the LIHTC investments is included in our income tax expense. The amortization expense for the FHTC and Renewable Energy tax credits is included in noninterest expense.

(2)All of the tax benefits recognized are included in our income tax expense.  The tax benefit recognized for the FHTC and Renewable Energy investments primarily reflects the tax credits generated from the investments and excludes the net tax expense (benefit) of the investments’ income (loss).

NOTE 13 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities sold under agreements to repurchase are secured borrowings.  Old National pledges investment securities to secure these borrowings. The following table presents securities sold under agreements to repurchase and related weighted-average interest rates:

	At or for the Six Months Ended			At			At or for the Six Months Ended
(dollars in thousands)	June 30, 2020			December 31, 2019			June 30, 2019
Outstanding at period end	$	367,744		$	327,782		$	334,540
Average amount outstanding during the period	339,818			N/A			346,396
Maximum amount outstanding at any month-end during the period	367,744			N/A			367,884
Weighted-average interest rate:
During the period	0.34		%	N/A			0.78		%
At period end	0.21		%	0.53		%	0.86		%

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The following table presents the contractual maturity of our secured borrowings and class of collateral pledged:

	At June 30, 2020
	Remaining Contractual Maturity of the Agreements
(dollars in thousands)	Overnight and Continuous		Up to 30 Days		30-90 Days		Greater Than 90 days		Total
Repurchase Agreements:
U.S. Treasury and agency securities	$	367,744	$	—	$	—	$	—	$	367,744
Total	$	367,744	$	—	$	—	$	—	$	367,744

The fair value of securities pledged to secure repurchase agreements may decline.  Old National has pledged securities valued at 109% of the gross outstanding balance of repurchase agreements at June 30, 2020 to manage this risk.

NOTE 14 – FEDERAL HOME LOAN BANK ADVANCES

The following table summarizes Old National Bank’s FHLB advances:

(dollars in thousands)	June 30, 2020		December 31, 2019
FHLB advances (fixed rates 0.34% to 4.96%    and variable rates 0.16% to 0.18%) maturing   July 2020 to January 2030	$	2,006,430	$	1,800,664
ASC 815 fair value hedge and other basis adjustments	28,584		22,183
Total other borrowings	$	2,035,014	$	1,822,847

FHLB advances had weighted-average rates of 1.81%  at June 30, 2020 and 2.19% at December 31, 2019.  Investment securities and residential real estate loans collateralize these borrowings up to 140%  of outstanding debt.

Contractual maturities of FHLB advances at June 30, 2020 were as follows:

(dollars in thousands)
Due in 2020	$	80,770
Due in 2021	20,000
Due in 2022	130,500
Due in 2023	160
Due in 2024	325,000
Thereafter	1,450,000
ASC 815 fair value hedge and other basis adjustments	28,584
Total	$	2,035,014

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NOTE 15 – OTHER BORROWINGS

The following table summarizes Old National’s other borrowings:

(dollars in thousands)	June 30, 2020		December 31, 2019
Old National Bancorp:
Senior unsecured notes (fixed rate 4.125% maturing August 2024)	$	175,000	$	175,000
Unamortized debt issuance costs related to senior unsecured notes	(637)		(715)
Junior subordinated debentures (variable rates of    1.86% to 2.82%) maturing March 2035 to June 2037	42,000		52,310
Other basis adjustments	(3,268)		(2,833)
Old National Bank:
Finance lease liabilities	12,310		7,406
Subordinated debentures (fixed rate 5.75%)	12,000		12,000
Other	472		517
Total other borrowings	$	237,877	$	243,685

Contractual maturities of other borrowings at June 30, 2020 were as follows:

(dollars in thousands)
Due in 2020	$	497
Due in 2021	1,025
Due in 2022	1,073
Due in 2023	1,132
Due in 2024	176,170
Thereafter	61,412
Unamortized debt issuance costs and other basis adjustments	(3,432)
Total	$	237,877

Senior Notes

In August 2014, Old National issued $175.0 million of senior unsecured notes with a 4.125% interest rate.  These notes pay interest on February 15 and August 15.  The notes mature on August 15, 2024.

Junior Subordinated Debentures

Junior subordinated debentures related to trust preferred securities are classified in “other borrowings.”  On November 1, 2017, Old National acquired Anchor (MN) and exceeded $15 billion in assets.  As a result, these securities can only be treated as Tier 2 capital for regulatory purposes, subject to certain limitations.  Prior to the fourth quarter of 2017, these securities qualified as Tier 1 capital for regulatory purposes.

Through various acquisitions, Old National assumed junior subordinated debenture obligations related to various trusts that issued trust preferred securities.  Old National guarantees the payment of distributions on the trust preferred securities issued by the trusts.  Proceeds from the issuance of each of these securities were used to purchase junior subordinated debentures with the same financial terms as the securities issued by the trusts.

Old National, at any time, may redeem the junior subordinated debentures at par and, thereby cause a redemption of the trust preferred securities in whole or in part. In February 2020, Old National redeemed at par $4.1 million of junior subordinated debentures issued in October 2002 by Anchor (MN) (as successor to VFSC, Inc.), which was acquired by Old National in 2017. This subsequently caused the redemption of all of the common and capital (preferred) securities issued by VFSC Capital Trust II by the same amount in aggregate. At the time of redemption, the rate on this floating rate instrument was 5.36%. In March 2020, Old National redeemed at par $3.1 million of junior subordinated debentures issued in April 2004 by Anchor (MN) (as successor to VFSC, Inc.), which was acquired by Old National in 2017. This subsequently caused the redemption of all of the common and capital (preferred) securities issued by VFSC Capital Trust III by the same amount in aggregate. At the time of redemption, the rate on this floating rate instrument was 4.71%. In April 2020, Old National redeemed at par $3.1 million of junior subordinated debentures issued in April 2002 by Anchor (MN) (as successor to VFSC, Inc.), which was acquired by Old National in 2017. This subsequently caused the redemption of all of the common and capital

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(preferred) securities issued by VFSC Capital Trust I by the same amount in aggregate. At the time of redemption, the rate on this floating rate instrument was 5.62%.

The following table summarizes the terms of our outstanding junior subordinated debentures:

(dollars in thousands)					Rate at
Name of Trust	Issuance Date	Issuance Amount		Rate	June 30, 2020	Maturity Date
St. Joseph Capital Trust II	March 2005	$	5,000	3-month LIBOR plus 1.75%	2.05%	March 17, 2035
Anchor Capital Trust III	August 2005	5,000		3-month LIBOR plus 1.55%	1.86%	September 30, 2035
Home Federal Statutory    Trust I	September 2006	15,000		3-month LIBOR plus 1.65%	1.96%	September 15, 2036
Monroe Bancorp Capital    Trust I	July 2006	3,000		3-month LIBOR plus 1.60%	2.82%	October 7, 2036
Tower Capital Trust 3	December 2006	9,000		3-month LIBOR plus 1.69%	2.04%	March 1, 2037
Monroe Bancorp Statutory    Trust II	March 2007	5,000		3-month LIBOR plus 1.60%	1.91%	June 15, 2037
Total		$	42,000

Subordinated Debentures

On November 1, 2017, Old National assumed $12.0 million of subordinated fixed-to-floating notes related to the acquisition of Anchor (MN).  The subordinated debentures have a 5.75% fixed rate of interest through October 29, 2020.  From October 30, 2020 to the October 30, 2025 maturity date, the debentures have a floating rate of interest equal to the three-month LIBOR rate plus 4.356%.

Finance Lease Liabilities

Old National has long-term finance lease liabilities for certain banking centers totaling $12.3 million.  The economic substance of these leases is that Old National is financing the acquisition of the building through the lease and accordingly, the building is recorded as a right-of-use asset in premises and equipment and the lease is recorded as a liability in other borrowings.  The right-of-use assets and lease liabilities are initially measured at the present value of the lease payments over the lease term using Old National’s incremental borrowing rate based on the information available at the commencement date of the lease.  See Note 9 to the consolidated financial statements for a maturity analysis of the Company’s finance lease liabilities.

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NOTE 16 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table summarizes the changes within each classification of AOCI, net of tax:

(dollars in thousands)	Unrealized Gains and Losses on Available- for-Sale Debt Securities		Unrealized Gains and Losses on Held-to- Maturity Securities		Gains and Losses on Cash Flow Hedges		Defined Benefit Pension Plans		Total
Three Months Ended June 30, 2020
Balance at beginning of period	$	132,500	$	—	$	5,801	$	(144)	$	138,157
Other comprehensive income (loss) before    reclassifications	12,733		—		(186)		—		12,547
Amounts reclassified from AOCI to income (1)	(422)		—		(1,260)		21		(1,661)
Balance at end of period	$	144,811	$	—	$	4,355	$	(123)	$	149,043
Three Months Ended June 30, 2019
Balance at beginning of period	$	10,442	$	(8,164)	$	513	$	(171)	$	2,620
Other comprehensive income (loss) before    reclassifications	39,151		—		711		—		39,862
Amounts reclassified from AOCI to income (1)	(892)		435		(4)		16		(445)
Balance at end of period	$	48,701	$	(7,729)	$	1,220	$	(155)	$	42,037
Six Months Ended June 30, 2020
Balance at beginning of period	$	56,131	$	—	$	240	$	(164)	$	56,207
Other comprehensive income (loss) before    reclassifications	93,102		—		5,700		—		98,802
Amounts reclassified from AOCI to income (1)	(4,422)		—		(1,585)		41		(5,966)
Balance at end of period	$	144,811	$	—	$	4,355	$	(123)	$	149,043
Six Months Ended June 30, 2019
Balance at beginning of period	$	(37,348)	$	(8,515)	$	1,099	$	(186)	$	(44,950)
Other comprehensive income (loss) before    reclassifications	86,862		—		415		—		87,277
Amounts reclassified from AOCI to income (1)	(813)		786		(294)		31		(290)
Balance at end of period	$	48,701	$	(7,729)	$	1,220	$	(155)	$	42,037

(1)See tables below for details about reclassifications to income.

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The following table summarizes the significant amounts reclassified out of each component of AOCI for the three months ended June 30, 2020 and 2019:

Details about AOCI Components	Amount Reclassified from AOCI				Affected Line Item in the Statement of Income
	Three Months Ended June 30,
(dollars in thousands)	2020		2019
Unrealized gains and losses on    available-for-sale debt securities	$	511	$	1,165	Debt securities gains (losses), net
	(89)		(273)		Income tax (expense) benefit
	$	422	$	892	Net income
Unrealized gains and losses on    held-to-maturity securities	$	—	$	(564)	Interest income (expense)
	—		129		Income tax (expense) benefit
	$	—	$	(435)	Net income
Gains and losses on cash flow hedges    Interest rate contracts	$	1,670	$	6	Interest income (expense)
	(410)		(2)		Income tax (expense) benefit
	$	1,260	$	4	Net income
Amortization of defined benefit    pension items
Actuarial gains (losses)	$	(27)	$	(21)	Salaries and employee benefits
	6		5		Income tax (expense) benefit
	$	(21)	$	(16)	Net income
Total reclassifications for the period	$	1,661	$	445	Net income

The following table summarizes the significant amounts reclassified out of each component of AOCI for the six months ended June 30, 2020 and 2019:

Details about AOCI Components	Amount Reclassified from AOCI				Affected Line Item in the Statement of Income
	Six Months Ended June 30,
(dollars in thousands)	2020		2019
Unrealized gains and losses on    available-for-sale debt securities	$	5,685	$	1,062	Debt securities gains (losses), net
	(1,263)		(249)		Income tax (expense) benefit
	$	4,422	$	813	Net income
Unrealized gains and losses on    held-to-maturity securities	$	—	$	(1,021)	Interest income (expense)
	—		235		Income tax (expense) benefit
	$	—	$	(786)	Net income
Gains and losses on cash flow hedges    Interest rate contracts	$	2,101	$	391	Interest income (expense)
	(516)		(97)		Income tax (expense) benefit
	$	1,585	$	294	Net income
Amortization of defined benefit    pension items
Actuarial gains (losses)	$	(54)	$	(41)	Salaries and employee benefits
	13		10		Income tax (expense) benefit
	$	(41)	$	(31)	Net income
Total reclassifications for the period	$	5,966	$	290	Net income

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NOTE 17 – SHARE-BASED COMPENSATION

At June 30, 2020, Old National had 3.2 million shares remaining available for issuance under the Company’s Amended and Restated 2008 Incentive Compensation Plan.  The granting of awards to key employees is typically in the form of restricted stock awards or units.

Restricted Stock Awards

Old National granted 125 thousand time-based restricted stock awards to certain key officers during the six months ended June 30, 2020, with shares vesting generally over a 36 month period.  Compensation expense is recognized on a straight-line basis over the vesting period.  Shares are subject to certain restrictions and risk of forfeiture by the participants.  At June 30, 2020, unrecognized compensation expense was estimated to be $4.6 million for unvested restricted stock awards.  The cost is expected to be recognized over a weighted-average period of 2.1 years.

Old National recorded share-based compensation expense, net of tax, related to restricted stock awards of $0.5 million during the three months ended June 30, 2020 and $1.2 million during the six months ended June 30, 2020, compared to $0.6 million during the three months ended June 30, 2019 and $1.2 million during the six months ended June 30, 2019.

Restricted Stock Units

Old National granted 210 thousand shares of performance based restricted stock units to certain key officers during the six months ended June 30, 2020, with shares vesting at the end of a 36 month period based on the achievement of certain targets.  For certain awards, the level of performance could increase or decrease the number of shares earned.  Compensation expense is recognized on a straight-line basis over the vesting period.  Shares are subject to certain restrictions and risk of forfeiture by the participants.  At June 30, 2020, unrecognized compensation expense was estimated to be $5.1 million.  The cost is expected to be recognized over a weighted-average period of 2.0 years.

Old National recorded share-based compensation expense, net of tax, related to restricted stock units of $0.6 million during the three months ended June 30, 2020 and $2.0 million during the six months ended June 30, 2020, compared to $0.8 million during the three months ended June 30, 2019 and $1.6 million during the six months ended June 30, 2019.

Stock Options

Old National has not granted stock options since 2009. However, Old National did acquire stock options and stock appreciation rights through prior year acquisitions. Old National recorded no incremental expense associated with the conversion of these options and stock appreciation rights. At June 30, 2020, 50 thousand stock appreciation rights remained outstanding.

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NOTE 18 – INCOME TAXES

Following is a summary of the major items comprising the differences in taxes from continuing operations computed at the federal statutory rate and as recorded in the consolidated statements of income:

	Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands)	2020			2019			2020			2019
Provision at statutory rate of 21%	$	12,908		$	16,238		$	18,279		$	30,808
Tax-exempt income:
Tax-exempt interest	(2,671)			(2,604)			(5,303)			(5,135)
Section 291/265 interest disallowance	44			123			116			234
Company-owned life insurance income	(623)			(569)			(1,270)			(1,239)
Tax-exempt income	(3,250)			(3,050)			(6,457)			(6,140)
State income taxes	1,718			1,558			1,711			3,558
Interim period effective rate adjustment	75			353			3,341			1,041
Tax credit investments - federal	(1,819)			(715)			(3,720)			(1,134)
Other, net	129			(25)			(454)			(670)
Income tax expense	$	9,761		$	14,359		$	12,700		$	27,463
Effective tax rate	15.9		%	18.6		%	14.6		%	18.7		%

In accordance with ASC 740-270, Accounting for Interim Reporting, the provision for income taxes was recorded at June 30, 2020 and 2019 based on the current estimate of the effective annual rate.

The lower effective tax rate during the three and six months ended June 30, 2020 when compared to the three and six months ended June 30, 2019 is primarily the result of an increase in federal tax credits available.

Unrecognized Tax Benefits

Old National has an immaterial amount of unrecognized tax benefits.  Old National is currently under audit by the Internal Revenue Service.  Old National expects the total amount of unrecognized tax benefits to be reduced to zero after the audit is finalized.

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Net Deferred Tax Assets

Net deferred tax assets are included in other assets on the balance sheet. Significant components of net deferred tax assets (liabilities) were as follows:

(dollars in thousands)	June 30, 2020		December 31, 2019
Deferred Tax Assets
Allowance for loan losses, net of recapture	$	34,576	$	14,179
Benefit plan accruals	13,507		19,673
Alternative minimum tax credit	—		1,272
Net operating loss carryforwards	19,238		25,336
Deferred gain on securities	3,027		3,754
Acquired loans	13,902		16,784
Operating lease liabilities	25,845		26,503
Tax credit investments and other partnerships	2,567		1,765
Other real estate owned	138		141
Other, net	750		591
Total deferred tax assets	113,550		109,998
Deferred Tax Liabilities
Purchase accounting	(18,309)		(17,564)
Loan servicing rights	(5,964)		(6,289)
Premises and equipment	(8,097)		(12,167)
Prepaid expenses	(973)		(973)
Operating lease right-of-use assets	(22,922)		(25,448)
Unrealized gains on available-for-sale investment securities	(41,068)		(15,751)
Unrealized gains on hedges	(1,418)		(78)
Other, net	(1,752)		(2,023)
Total deferred tax liabilities	(100,503)		(80,293)
Net deferred tax assets	$	13,047	$	29,705

Through the acquisition of Anchor (WI) in the second quarter of 2016 and Lafayette Savings Bank in the fourth quarter of 2014, both former thrifts, Old National Bank’s retained earnings at June 30, 2020 include base-year bad debt reserves, created for tax purposes prior to 1988, totaling $52.8 million.  Of this total, $50.9 million was acquired from Anchor (WI), and $1.9 million was acquired from Lafayette Savings Bank.  Base-year reserves are subject to recapture in the unlikely event that Old National Bank (1) makes distributions in excess of current and accumulated earnings and profits, as calculated for federal income tax purposes, (2) redeems its stock, or (3) liquidates.  Old National Bank has no intention of making such a nondividend distribution.  Accordingly, under current accounting principles, a related deferred income tax liability of $13.0 million has not been recognized.

No valuation allowance was recorded at June 30, 2020 or December 31, 2019 because, based on current expectations, Old National believes it will generate sufficient income in future years to realize deferred tax assets.  Old National has federal net operating loss carryforwards totaling $52.4 million at June 30, 2020 and $78.5 million at December 31, 2019.  This federal net operating loss was acquired from the acquisition of Anchor (WI) in 2016.  If not used, the federal net operating loss carryforwards will expire from 2029 to 2033.  Old National has recorded state net operating loss carryforwards totaling $136.3 million at June 30, 2020 and $148.4 million at December 31, 2019.  If not used, the state net operating loss carryforwards will expire from 2024 to 2035.

The federal and recorded state net operating loss carryforwards are subject to an annual limitation under Internal Revenue Code section 382.  Old National believes that all of the recorded net operating loss carryforwards will be used prior to expiration.

NOTE 19 – DERIVATIVE FINANCIAL INSTRUMENTS

As part of our overall interest rate risk management, Old National uses derivative instruments, including interest rate swaps, collars, caps, and floors.  The notional amount does not represent amounts exchanged by the parties.  The amount exchanged is determined by reference to the notional amount and the other terms of the individual agreements.  The notional amount of these derivative instruments was $1.106 billion at June 30, 2020 and $665.5 million at December 31, 2019.  These derivative financial instruments at June 30, 2020 consisted of $380.5 million notional amount of receive-fixed, pay-variable interest rate swaps on certain of its borrowings, $325.0 million

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notional amount of pay-fixed, receive-variable interest rate swaps on certain of its borrowings, and $400.0 million notional amount interest rate collars and floors related to variable-rate commercial loan pools.  Derivative financial instruments at December 31, 2019 consisted of $130.5 million notional amount of receive-fixed, pay-variable interest rate swaps on certain of its borrowings, $25.0 million notional amount of pay-fixed, receive-variable interest rate swaps on certain of its borrowings, and $510.0 million notional amount interest rate collars and floors related to variable-rate commercial loan pools. These hedges were entered into to manage interest rate risk. Derivative instruments are recognized on the balance sheet at their fair value and are not reported on a net basis.

In accordance with ASC 815-20-35-1, subsequent changes in fair value for a hedging instrument that has been designated and qualifies as part of a hedging relationship should be accounted for in the following manner:

Cash flow hedges: changes in fair value are recognized as a component in other comprehensive income.

Fair value hedges: changes in fair value are recognized concurrently in earnings.

Consistent with this guidance, as long as a hedging instrument is designated and the results of the effectiveness testing support that the instrument qualifies for hedge accounting treatment, 100% of the periodic changes in fair value of the hedging instrument are accounted for as outlined above. This is the case whether or not economic mismatches exist in the hedging relationship. As a result, there is no periodic measurement or recognition of ineffectiveness. Rather, the full impact of hedge gains and losses is recognized in the period in which the hedged transactions impact earnings.

While separate measurement and presentation of ineffectiveness is eliminated, paragraph 815-20-45-1A requires the change in fair value of the hedging instrument that is included in the assessment of hedge effectiveness be presented in the same income statement line item that is used to present the earnings effect of the hedged item.

Commitments to fund certain mortgage loans (interest rate lock commitments) and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives.  These derivative contracts do not qualify for hedge accounting.  At June 30, 2020, the notional amount of the interest rate lock commitments was $388.0 million and forward commitments were $443.2 million.  At December 31, 2019, the notional amount of the interest rate lock commitments was $65.7 million and forward commitments were $101.6 million. It is our practice to enter into forward commitments for the future delivery of residential mortgage loans to third party investors when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from our commitment to fund the loans.

Old National also enters into derivative instruments for the benefit of its customers.  The notional amounts of these customer derivative instruments and the offsetting counterparty derivative instruments were $1.586 billion at June 30, 2020.  The notional amounts of these customer derivative instruments and the offsetting counterparty derivative instruments were $1.298 billion at December 31, 2019.  These derivative contracts do not qualify for hedge accounting.  These instruments include interest rate swaps, caps, and collars.  Commonly, Old National will economically hedge significant exposures related to these derivative contracts entered into for the benefit of customers by entering into offsetting contracts with approved, reputable, independent counterparties with substantially matching terms.

Old National enters into derivative financial instruments as part of its foreign currency risk management strategies.  These derivative instruments consist of foreign currency forward contracts to accommodate the business needs of its customers.  Old National does not designate these foreign currency forward contracts for hedge accounting treatment.  The notional amounts of these foreign currency forward contracts and the offsetting counterparty derivative instruments were $4.9 million at June 30, 2020 and $8.2 million at December 31, 2019.

Credit risk arises from the possible inability of counterparties to meet the terms of their contracts.  Old National’s exposure is limited to the replacement value of the contracts rather than the notional, principal, or contract amounts.  There are provisions in our agreements with the counterparties that allow for certain unsecured credit exposure up to an agreed threshold.  Exposures in excess of the agreed thresholds are collateralized.  In addition, we minimize credit risk through credit approvals, limits, and monitoring procedures.

Amounts reported in AOCI related to cash flow hedges will be reclassified to interest income or interest expense as interest payments are received or paid on Old National’s derivative instruments.  During the next 12 months, we estimate that $7.4 million will be reclassified to interest income and $1.6 million will be reclassified to interest expense.

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The following table summarizes the fair value of derivative financial instruments utilized by Old National:

(dollars in thousands)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
June 30, 2020
Derivatives designated as hedging instruments
Interest rate contracts	Other assets	$	21,831	Other liabilities	$	2,680
Total derivatives designated as hedging instruments		$	21,831		$	2,680
Derivatives not designated as hedging instruments
Interest rate contracts (1)	Other assets	$	127,311	Other liabilities	$	17,009
Mortgage contracts	Other assets	15,899		Other liabilities	2,496
Foreign currency contracts	Other assets	325		Other liabilities	240
Total derivatives not designated as hedging instruments		$	143,535		$	19,745
Total		$	165,366		$	22,425
December 31, 2019
Derivatives designated as hedging instruments
Interest rate contracts	Other assets	$	7,157	Other liabilities	$	1,046
Total derivatives designated as hedging instruments		$	7,157		$	1,046
Derivatives not designated as hedging instruments
Interest rate contracts (1)	Other assets	$	42,224	Other liabilities	$	10,883
Mortgage contracts	Other assets	1,702		Other liabilities	354
Foreign currency contracts	Other assets	218		Other liabilities	110
Total derivatives not designated as hedging instruments		$	44,144		$	11,347
Total		$	51,301		$	12,393

(1)The fair values of counterparty interest rate swaps are zero due to the settlement of centrally-cleared variation margin rules.  The net adjustment was $111.1 million as of June 30, 2020 and $31.6 million as of December 31, 2019.

Summary information about the interest rate swaps designated as fair value hedges is as follows:

(dollars in thousands)	June 30, 2020			December 31, 2019
Notional amounts	$	380,500		$	130,500
Weighted average pay rates	0.20		%	1.82		%
Weighted average receive rates	1.33		%	2.20		%
Weighted average maturity (in years)	2.7			2.8
Fair value of swaps	$	11,527		$	1,555

The effect of derivative instruments in fair value hedging relationships on the consolidated statements of income were as follows:

(dollars in thousands)	Location of Gain or (Loss) Recognized in in Income on Derivative	Gain (Loss) Recognized in Income on Derivative		Hedged Items in Fair Value Hedging Relationships	Location of Gain or (Loss) Recognized in in Income on Related Hedged Item	Gain (Loss) Recognized in Income on Related Hedged Items
Derivatives in Fair Value Hedging Relationships
Three Months Ended June 30, 2020
Interest rate contracts	Interest income/(expense)	$	730	Fixed-rate debt	Interest income/(expense)	$	(789)
Three Months Ended June 30, 2019
Interest rate contracts	Interest income/(expense)	$	6,361	Fixed-rate debt	Interest income/(expense)	$	(6,352)
Six Months Ended June 30, 2020
Interest rate contracts	Interest income/(expense)	$	9,972	Fixed-rate debt	Interest income/(expense)	$	(10,016)
Six Months Ended June 30, 2019
Interest rate contracts	Interest income/(expense)	$	12,914	Fixed-rate debt	Interest income/(expense)	$	(12,900)

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Summary information about the interest rate swaps designated as cash flow hedges is as follows: 

(dollars in thousands)	June 30, 2020			December 31, 2019
Notional amounts	$	325,000		$	25,000
Weighted average pay rates	0.74		%	3.52		%
Weighted average receive rates	0.57		%	1.93		%
Weighted average maturity (in years)	4.0			2.1
Unrealized gains (losses)	$	(2,639)		$	(954)

Old National has designated its interest rate collars as cash flow hedges.  The structure of these instruments is such that Old National pays the counterparty an incremental amount if the collar index exceeds the cap rate.  Conversely, Old National receives an incremental amount if the index falls below the floor rate.  No payments are required if the collar index falls between the cap and floor rates.  Summary information about the collars designated as cash flow hedges is as follows:

(dollars in thousands)	June 30, 2020			December 31, 2019
Notional amounts	$	300,000		$	300,000
Weighted average cap rates	3.21		%	3.21		%
Weighted average floor rates	2.21		%	2.21		%
Weighted average rates	0.18		%	1.70		%
Weighted average maturity (in years)	1.4			1.9
Unrealized gains (losses)	$	8,401		$	3,691

Old National has designated its interest rate floor transactions as cash flow hedges.  The structure of these instruments is such that Old National receives an incremental amount if the index falls below the floor strike rate. No payments are required if the index remains above the floor strike rate. Summary information about the interest rate floor transactions designated as cash flow hedges is as follows:

(dollars in thousands)	June 30, 2020
Notional amounts	$	100,000
Weighted average floor strike rate	0.75		%
Weighted average rates	0.18		%
Weighted average maturity (in years)	2.8
Unrealized gains (losses)	$	1,862

The structure of Old National's interest rate floor spread transactions at December 31, 2019 was such that Old National received an incremental amount if the index fell below the purchased floor strike rate.  Old National paid an incremental amount if the index fell below the sold floor rate.  Floor corridor protection was limited to the spread between the purchased floor strike rate and the sold floor rate.  No payments were required if the index remained above the purchased floor strike rate.  Old National terminated these interest rate floor spread transactions during the first quarter of 2020. Summary information about the floor spread transactions designated as cash flow hedges at December 31, 2019 was as follows:

(dollars in thousands)	December 31, 2019
Notional amounts	$	210,000
Weighted average purchased floor strike rate	2.00		%
Weighted average sold floor rate	1.00		%
Weighted average rate	1.70		%
Weighted average maturity (in years)	2.1
Unrealized gains (losses)	$	1,820

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The effect of derivative instruments in cash flow hedging relationships on the consolidated statements of income were as follows:

		Three Months Ended June 30,				Three Months Ended June 30,
(dollars in thousands)		2020		2019		2020		2019
Derivatives in Cash Flow Hedging Relationships	Location of Gain or (Loss) Reclassified from AOCI into Income	Gain (Loss) Recognized in Other Comprehensive Income on Derivative				Gain (Loss) Reclassified from AOCI into Income
Interest rate contracts	Interest income/(expense)	$	(246)	$	944	$	1,670	$	6
		Six Months Ended June 30,				Six Months Ended June 30,
		2020		2019		2020		2019
Derivatives in Cash Flow Hedging Relationships	Location of Gain or (Loss) Reclassified from AOCI into Income	Gain (Loss) Recognized in Other Comprehensive Income on Derivative				Gain (Loss) Reclassified from AOCI into Income
Interest rate contracts	Interest income/(expense)	$	7,557	$	552	$	2,101	$	391

The effect of derivatives not designated as hedging instruments on the consolidated statements of income were as follows:

		Three Months Ended June 30,
(dollars in thousands)		2020		2019
Derivatives Not Designated as Hedging Instruments	Location of Gain or (Loss) Recognized in Income on Derivative	Gain (Loss) Recognized in Income on Derivative
Interest rate contracts (1)	Other income/(expense)	$	(122)	$	(94)
Mortgage contracts	Mortgage banking revenue	7,236		819
Foreign currency contracts	Other income/(expense)	(5)		(14)
Total		$	7,109	$	711
		Six Months Ended June 30,
		2020		2019
Derivatives Not Designated as Hedging Instruments	Location of Gain or (Loss) Recognized in Income on Derivative	Gain (Loss) Recognized in Income on Derivative
Interest rate contracts (1)	Other income/(expense)	$	(588)	$	(131)
Mortgage contracts	Mortgage banking revenue	12,055		1,841
Foreign currency contracts	Other income/(expense)	(24)		(11)
Total		$	11,443	$	1,699

(1)Includes the valuation differences between the customer and offsetting swaps.

NOTE 20 – COMMITMENTS AND CONTINGENCIES

COVID-19

As previously disclosed, a novel strain of coronavirus, COVID-19, was reported in Wuhan, China and continues to unfold across the U.S. The spread of the COVID-19 virus had an impact on our operations as of June 30, 2020, but it is too early to know by how much the impact will have on the Company's business, financial condition, and results of operations of the Company and its customers. Changes in the behavior of customers, businesses, and their employees as a result of the COVID-19 pandemic, including social distancing practices, additional actions taken by federal, state, and local governments to contain COVID-19 or treat its impact are also unknown. However, if these actions are sustained, it may adversely impact several industries within our geographic footprint and impair the ability of Old National's customers to fulfill their contractual obligations to the Company. This could cause Old National to experience a material adverse effect on our business operations, asset valuations, financial condition, and results of operations. Material adverse impacts may include all or a combination of valuation impairments on Old

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National's intangible assets, investments, loans, loan servicing rights, deferred tax assets, or counter-party risk derivatives.

Litigation

In the normal course of business, Old National Bancorp and its subsidiaries have been named, from time to time, as defendants in various legal actions.  Certain of the actual or threatened legal actions may include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages.

Old National contests liability and/or the amount of damages as appropriate in each pending matter.  In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases where claimants seek substantial or indeterminate damages or where investigations and proceedings are in the early stages, Old National cannot predict with certainty the loss or range of loss, if any, related to such matters, how or if such matters will be resolved, when they will ultimately be resolved, or what the eventual settlement, or other relief, if any, might be. Subject to the foregoing, Old National believes, based on current knowledge and after consultation with counsel, that the outcome of such pending matters will not have a material adverse effect on the consolidated financial condition of Old National, although the outcome of such matters could be material to Old National’s operating results and cash flows for a particular future period, depending on, among other things, the level of Old National’s revenues or income for such period.  Old National will accrue for a loss contingency if (1) it is probable that a future event will occur and confirm the loss and (2) the amount of the loss can be reasonably estimated.

Old National is not currently involved in any material litigation.

Credit-Related Financial Instruments

In the normal course of business, Old National’s banking affiliates have entered into various agreements to extend credit, including loan commitments of $2.999 billion and standby letters of credit of $84.3 million at June 30, 2020.  At June 30, 2020, approximately $2.758 billion of the loan commitments had fixed rates and $240.6 million had floating rates, with the floating interest rates ranging from 0% to 13%.  At December 31, 2019, loan commitments totaled $2.779 billion and standby letters of credit totaled $87.8 million.  These commitments are not reflected in the consolidated financial statements.  The allowance for unfunded loan commitments totaled $11.0 million at June 30, 2020 and $2.7 million at December 31, 2019. The increase in allowance for unfunded loan commitments included a cumulative-effect adjustment of $4.5 million effective January 1, 2020 due to the adoption of ASC 326. See Note 2 for additional information about CECL for unfunded loan commitments.

Old National had credit extensions with various unaffiliated banks related to letter of credit commitments issued on behalf of Old National’s clients totaling $8.3 million at June 30, 2020 and $8.7 million at December 31, 2019.  Old National provided collateral to the unaffiliated banks to secure credit extensions totaling $7.7 million at June 30, 2020 and December 31, 2019.  Old National did not provide collateral for the remaining credit extensions.

Visa Class B Restricted Shares

In 2008, Old National received Visa Class B restricted shares as part of Visa’s initial public offering.  These shares are transferable only under limited circumstances until they can be converted into the publicly traded Class A common shares.  This conversion will not occur until the final settlement of certain litigation for which Visa is indemnified by the holders of Visa’s Class B shares, including Old National.  Visa funded an escrow account from its initial public offering to settle these litigation claims.  Increases in litigation claims requiring Visa to fund the escrow account due to insufficient funds will result in a reduction of the conversion ratio of each Visa Class B share to unrestricted Class A shares.  As of June 30, 2020, the conversion ratio was 1.6228.  Based on the existing transfer restriction and the uncertainty of the outcome of the Visa litigation, the 65,466 Class B shares that Old National owns at June 30, 2020 are carried at a zero cost basis and are included in other assets with our equity securities that have no readily determinable fair value.

NOTE 21 – FINANCIAL GUARANTEES

Old National holds instruments, in the normal course of business with clients, that are considered financial guarantees in accordance with FASB ASC 460-10 (FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others), which requires Old National to record the instruments at fair value.  Standby letters of credit guarantees are issued in connection with agreements made by clients to counterparties.  Standby letters of credit are contingent upon failure of the client to perform the terms of the underlying contract.  Credit risk associated with standby letters of credit is essentially the same as that associated

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with extending loans to clients and is subject to normal credit policies.  The term of these standby letters of credit is typically one year or less.  At June 30, 2020, the notional amount of standby letters of credit was $84.3 million, which represented the maximum amount of future funding requirements, and the carrying value was $0.4 million.  At December 31, 2019, the notional amount of standby letters of credit was $87.8 million, which represented the maximum amount of future funding requirements, and the carrying value was $0.6 million.

Old National is a party in risk participation transactions of interest rate swaps, which had total notional amount of $49.0 million at June 30, 2020.

NOTE 22 – SEGMENT INFORMATION

Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.  Old National Bank, Old National’s bank subsidiary, is the only significant subsidiary upon which management makes decisions regarding how to allocate resources and assess performance.  Each of the branches of Old National Bank provide a group of similar community banking services, including such products and services as commercial, real estate and consumer loans, time deposits, checking and savings accounts, cash management, brokerage, trust, and investment advisory services.  The individual bank branches located throughout our Midwest footprint have similar operating and economic characteristics.  While the chief decision maker monitors the revenue streams of the various products, services, and regional locations, operations are managed and financial performance is evaluated on a Company-wide basis.  Accordingly, all of the community banking services and branch locations are considered by management to be aggregated into one reportable operating segment, community banking.

NOTE 23 – FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  There are three levels of inputs that may be used to measure fair values:

•Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

•Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

•Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Old National used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Investment securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1).  For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2).  For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).  Discounted cash flows are calculated using swap and LIBOR curves plus spreads that adjust for loss severities, volatility, credit risk, and optionality.  During times when trading is more liquid, broker quotes are used (if available) to validate the model.  Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.

Residential loans held for sale: The fair value of loans held for sale is determined using quoted prices for a similar asset, adjusted for specific attributes of that loan (Level 2).

Derivative financial instruments: The fair values of derivative financial instruments are based on derivative valuation models using market data inputs as of the valuation date (Level 2).

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Recurring Basis

Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which we have elected the fair value option, are summarized below: 

			Fair Value Measurements at June 30, 2020 Using
(dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets
Equity securities	$	40,246	$	40,246	$	—	$	—
Investment securities available-for-sale:
U.S. Treasury	35,731		35,731		—		—
U.S. government-sponsored entities and agencies	453,501		—		453,501		—
Mortgage-backed securities - Agency	3,304,054		—		3,304,054		—
States and political subdivisions	1,355,959		—		1,355,959		—
Pooled trust preferred securities	7,185		—		—		7,185
Other securities	290,841		—		290,841		—
Residential loans held for sale	122,507		—		122,507		—
Derivative assets	165,366		—		165,366		—
Financial Liabilities
Derivative liabilities	22,425		—		22,425		—

			Fair Value Measurements at December 31, 2019 Using
(dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets
Equity securities	$	6,842	$	6,842	$	—	$	—
Investment securities available-for-sale:
U.S. Treasury	17,682		17,682		—		—
U.S. government-sponsored entities and agencies	592,984		—		592,984		—
Mortgage-backed securities - Agency	3,183,861		—		3,183,861		—
States and political subdivisions	1,275,643		—		1,275,603		40
Pooled trust preferred securities	8,222		—		—		8,222
Other securities	306,699		31,169		275,530		—
Residential loans held for sale	46,898		—		46,898		—
Derivative assets	51,301		—		51,301		—
Financial Liabilities
Derivative liabilities	12,393		—		12,393		—

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The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

(dollars in thousands)	Pooled Trust Preferred Securities		States and Political Subdivisions
Three Months Ended June 30, 2020
Balance at beginning of period	$	7,422	$	—
Accretion of discount	3		—
Sales/payments received	(16)		—
Decrease in fair value of securities	(224)		—
Balance at end of period	$	7,185	$	—
Three Months Ended June 30, 2019
Balance at beginning of period	$	8,123	$	40
Accretion of discount	3		—
Sales/payments received	(17)		—
Decrease in fair value of securities	(273)		—
Balance at end of period	$	7,836	$	40
Six Months Ended June 30, 2020
Balance at beginning of period	$	8,222	$	40
Accretion of discount	7		—
Sales/payments received	(33)		(40)
Decrease in fair value of securities	(1,011)		—
Balance at end of period	$	7,185	$	—
Six Months Ended June 30, 2019
Balance at beginning of period	$	8,495	$	4,108
Accretion of discount	7		—
Sales/payments received	(32)		(35)
Decrease in fair value of securities	(634)		—
Transfers out of Level 3	—		(4,033)
Balance at end of period	$	7,836	$	40

The accretion of discounts on securities in the table above is included in interest income.  The decrease in the fair value of securities in the table above is included in the unrealized holding gains (losses) for the period in the statement of other comprehensive income. A decrease in fair value is reflected in the balance sheet as a decrease in the fair value of investment securities available-for-sale, a decrease in accumulated other comprehensive income, which is included in shareholders’ equity, and an increase in other assets related to the tax impact.  During the six months ended June 30, 2019, Old National received third party pricing on a $4.0 million state and political subdivisions security and transferred it out of Level 3. 

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The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 of the fair value hierarchy:

(dollars in thousands)	Fair Value		Valuation Techniques	Unobservable Input	Range (Weighted Average) (4)
June 30, 2020
Pooled trust preferred securities	$	7,185	Discounted cash flow	Constant prepayment rate (1)	0.00%
				Additional asset defaults (2)	6.0% - 8.9% (6.9%)
				Expected asset recoveries (3)	0.0% - 18.7% (5.9%)
December 31, 2019
Pooled trust preferred securities	$	8,222	Discounted cash flow	Constant prepayment rate (1)	0.00%
				Additional asset defaults (2)	6.2% - 8.0% (6.8%)
				Expected asset recoveries (3)	0.0% - 19.1% (6.0%)
State and political subdivisions	40		Discounted cash flow	No observable inputs	N/A
				Local municipality issuance
				Old National owns 100%
				Carried at par

(1)Assuming no prepayments.

(2)Each currently performing pool asset is assigned a default probability based on the banking environment, which is adjusted for specific issuer evaluation, of 0%, 50%, or 100%.

(3)Each currently defaulted pool asset is assigned a recovery probability based on specific issuer evaluation of 0%, 25%, or 100%.

(4)Unobservable inputs are weighted by the estimated number of defaults and current performing collateral of the instruments.

Significant changes in any of the unobservable inputs used in the fair value measurement in isolation would have resulted in a significant change to the fair value measurement.  The pooled trust preferred securities Old National owns are subordinate note classes that rely on an ongoing cash flow stream to support their values.  The senior note classes receive the benefit of prepayments to the detriment of subordinate note classes since the ongoing interest cash flow stream is reduced by the early redemption.  Generally, a change in prepayment rates or additional pool asset defaults would have an impact that is directionally opposite from a change in the expected recovery of a defaulted pool asset.

Non-Recurring Basis

Assets measured at fair value on a non-recurring basis are summarized below:

			Fair Value Measurements at June 30, 2020 Using
(dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Collateral Dependent Impaired Loans:
Commercial loans	$	13,676	$	—	$	—	$	13,676
Commercial real estate loans	21,880		—		—		21,880
Foreclosed Assets:
Residential	47		—		—		47
Loan servicing rights	24,034		—		24,034		—

Impaired commercial and commercial real estate loans that are deemed collateral dependent are valued based on the fair value of the underlying collateral.  These estimates are based on the most recently available appraisals with certain adjustments made based on the type of property, age of appraisal, current status of the property, and other related factors to estimate the current value of the collateral.  These impaired commercial and commercial real estate loans had a principal amount of $44.3 million, with a valuation allowance of $8.8 million at June 30, 2020.  Old National recorded provision recoveries associated with these loans totaling $0.3 million for the three months ended June 30, 2020 and provision expense totaling $6.5 million for the six months ended June 30, 2020.  Old National recorded provision expense associated with impaired commercial and commercial real estate loans that were deemed collateral dependent totaling $1.1 million for the three months ended June 30, 2019 and $2.3 million for the six months ended June 30, 2019.

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Other real estate owned and other repossessed property is measured at fair value less costs to sell on a non-recurring basis and had a net carrying amount of $47 thousand at June 30, 2020. There were write-downs of other real estate owned of $87 thousand for the three months ended June 30, 2020 and $98 thousand for the six months ended June 30, 2020. Old National did not record any write-downs for the three or six months ended June 30, 2019.

Loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the carrying amount.  If the carrying amount of an individual tranche exceeds fair value, impairment is recorded on that tranche so that the servicing asset is carried at fair value.  Fair value is determined at a tranche level, based on market prices for comparable mortgage servicing contracts when available, or alternatively based on a valuation model that calculates the present value of estimated future net servicing income.  The valuation model utilizes a discount rate, weighted average prepayment speed, and other economic factors that market participants would use in estimating future net servicing income and that can be validated against available market data (Level 2).  The valuation allowance for loan servicing rights with impairments at June 30, 2020 totaled $2.3 million.  Old National recorded impairments associated with these loan servicing rights totaling $0.8 million during the three months ended June 30, 2020 and $2.2 million during the six months ended June 30, 2020. There were impairments of $15 thousand for the three months ended June 30, 2019 and $17 thousand for the six months ended June 30, 2019.

Assets measured at fair value on a non-recurring basis are summarized below:

			Fair Value Measurements at December 31, 2019 Using
(dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Collateral Dependent Impaired Loans:
Commercial loans	$	10,361	$	—	$	—	$	10,361
Commercial real estate loans	11,610		—		—		11,610
Foreclosed Assets:
Commercial real estate	21		—		—		21
Residential	22		—		—		22
Loan servicing rights	4,662		—		4,662		—

At December 31, 2019, impaired commercial and commercial real estate loans had a principal amount of $30.9 million, with a valuation allowance of $8.9 million.

Other real estate owned and other repossessed property had a net carrying amount of $43 thousand at December 31, 2019.

The valuation allowance for loan servicing rights with impairments at December 31, 2019 totaled $31 thousand.

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The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 of the fair value hierarchy:

(dollars in thousands)	Fair Value		Valuation Techniques	Unobservable Input	Range (Weighted Average) (2)
June 30, 2020
Collateral Dependent Impaired Loans
Commercial loans	$	13,676	Fair value of	Discount for type of property,	0% - 80% (48%)
			collateral	age of appraisal, and current status
Commercial real estate loans	21,880		Fair value of	Discount for type of property,	25% - 35% (30%)
			collateral	age of appraisal, and current status
Foreclosed Assets
Residential	47		Fair value of	Discount for type of property,	47% - 98% (73%)
			collateral	age of appraisal, and current status
December 31, 2019
Collateral Dependent Impaired Loans
Commercial loans	$	10,361	Fair value of	Discount for type of property,	0% - 50% (13%)
			collateral	age of appraisal, and current status
Commercial real estate loans (1)	11,610		Fair value of	Discount for type of property,	45%
			collateral	age of appraisal, and current status
Foreclosed Assets
Commercial real estate (1)	21		Fair value of	Discount for type of property,	43%
			collateral	age of appraisal, and current status
Residential (1)	22		Fair value of	Discount for type of property,	21%
			collateral	age of appraisal, and current status

(1)There was only one collateral dependent impaired commercial real estate loan, one foreclosed commercial real estate asset, and one foreclosed residential asset at December 31, 2019, so no range or weighted average is reported.

(2)Unobservable inputs were weighted by the relative fair value of the instruments.

Fair Value Option

Old National may elect to report most financial instruments and certain other items at fair value on an instrument-by instrument basis with changes in fair value reported in net income.  After the initial adoption, the election is made at the acquisition of an eligible financial asset, financial liability, or firm commitment or when certain specified reconsideration events occur.  The fair value election may not be revoked once an election is made.

Residential Loans Held For Sale

Old National has elected the fair value option for residential loans held for sale.  For these loans, interest income is recorded in the consolidated statements of income based on the contractual amount of interest income earned on the financial assets (except any that are on nonaccrual status).  None of these loans are 90 days or more past due, nor are any on nonaccrual status.  Included in the income statement is interest income for loans held for sale totaling $0.5 million for the three months ended June 30, 2020 and $0.9 million for the six months ended June 30, 2020, compared to $0.3 million for the three months ended June 30, 2019 and $0.5 million for the six months ended June 30, 2019.

Old National has elected the fair value option for newly originated conforming fixed-rate and adjustable-rate first mortgage loans held for sale.  These loans are intended for sale and are hedged with derivative instruments.  Old National has elected the fair value option to mitigate accounting mismatches in cases where hedge accounting is complex and to achieve operational simplification.  The fair value option was not elected for loans held for investment.

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The difference between the aggregate fair value and the aggregate remaining principal balance for loans for which the fair value option has been elected was as follows: 

(dollars in thousands)	Aggregate Fair Value		Difference		Contractual Principal
June 30, 2020
Residential loans held for sale	$	122,507	$	6,547	$	115,960
December 31, 2019
Residential loans held for sale	$	46,898	$	1,529	$	45,369

Accrued interest at period end is included in the fair value of the instruments.

The following table presents the amount of gains and losses from fair value changes included in income before income taxes for financial assets carried at fair value:

(dollars in thousands)	Other Gains and (Losses)		Interest Income		Interest (Expense)		Total Changes in Fair Values Included in Current Period Earnings
Three Months Ended June 30, 2020
Residential loans held for sale	$	3,597	$	—	$	(2)	$	3,595
Three Months Ended June 30, 2019
Residential loans held for sale	$	1,085	$	5	$	—	$	1,090
Six Months Ended June 30, 2020
Residential loans held for sale	$	5,018	$	2	$	(2)	$	5,018
Six Months Ended June 30, 2019
Residential loans held for sale	$	1,175	$	10	$	—	$	1,185

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Financial Instruments Not Carried at Fair Value

The carrying amounts and estimated fair values of financial instruments not carried at fair value were as follows: 

			Fair Value Measurements at June 30, 2020 Using
(dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets
Cash, due from banks, money market,    and other interest-earning investments	$	310,494	$	310,494	$	—	$	—
Loans, net:
Commercial	4,274,472		—		—		4,249,446
Commercial real estate	5,329,330		—		—		5,255,805
Residential real estate	2,215,054		—		—		2,194,379
Consumer credit	1,668,451		—		—		1,668,203
Accrued interest receivable	84,387		20		27,456		56,911
Financial Liabilities
Deposits:
Noninterest-bearing demand deposits	$	5,217,678	$	5,217,678	$	—	$	—
Checking, NOW, savings, and money market    interest-bearing deposits	9,629,535		9,629,535		—		—
Other time deposits	1,321,499		—		1,344,700		—
Brokered certificates of deposit	150,734		—		150,203		—
Federal funds purchased and interbank borrowings	801		801		—		—
Securities sold under agreements to repurchase	367,744		367,744		—		—
FHLB advances	2,035,014		—		2,194,482		—
Other borrowings	237,877		—		256,697		—
Accrued interest payable	6,525		—		6,525		—
Standby letters of credit	420		—		—		420
Off-Balance Sheet Financial Instruments
Commitments to extend credit	$	—	$	—	$	—	$	18,402

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			Fair Value Measurements at December 31, 2019 Using
(dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets
Cash, due from banks, money market,    and other interest-earning investments	$	276,337	$	276,337	$	—	$	—
Loans, net:
Commercial	2,867,711		—		—		2,831,298
Commercial real estate	5,145,204		—		—		5,130,848
Residential real estate	2,331,990		—		—		2,357,341
Consumer credit	1,718,000		—		—		1,676,253
Accrued interest receivable	85,123		15		28,185		56,923
Financial Liabilities
Deposits:
Noninterest-bearing demand deposits	$	4,042,286	$	4,042,286	$	—	$	—
Checking, NOW, savings, and money market    interest-bearing deposits	8,828,881		8,828,881		—		—
Other time deposits	1,589,988		—		1,600,214		—
Brokered certificates of deposit	92,242		—		92,355		—
Federal funds purchased and interbank borrowings	350,414		350,414		—		—
Securities sold under agreements to repurchase	327,782		327,782		—		—
FHLB advances	1,822,847		—		1,875,089		—
Other borrowings	243,685		—		254,519		—
Accrued interest payable	8,272		—		8,272		—
Standby letters of credit	573		—		—		573
Off-Balance Sheet Financial Instruments
Commitments to extend credit	$	—	$	—	$	—	$	4,302

The methods utilized to measure the fair value of financial instruments at June 30, 2020 and December 31, 2019 represent an approximation of exit price, however, an actual exit price may differ.

NOTE 24 – REVENUE FROM CONTRACTS WITH CUSTOMERS

Old National’s revenue from contracts with customers in the scope of Topic 606 is recognized within noninterest income.  The consolidated statements of income include all categories of noninterest income.  The following table reflects only the categories of noninterest income that are within the scope of Topic 606:

	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2020		2019		2020		2019
Wealth management fees	$	9,424	$	9,909	$	18,308	$	18,444
Service charges on deposit accounts	7,582		11,515		17,659		22,341
Debit card and ATM fees	4,832		5,419		9,830		10,922
Investment product fees	4,845		5,591		10,719		10,862
Other income:
Merchant processing fees	707		821		1,511		1,528
Gain (loss) on other real estate owned	34		125		(22)		165
Safe deposit box fees	208		258		518		669
Insurance premiums and commissions	196		175		312		375
Total	$	27,828	$	33,813	$	58,835	$	65,306

Wealth management fees: Old National earns wealth management fees based upon asset custody and investment management services provided to individual and institutional customers.  Most of these customers receive monthly

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or quarterly billings for services rendered based upon the market value of assets in custody.  Fees that are transaction based are recognized at the point in time that the transaction is executed.

Service charges on deposit accounts: Old National earns fees from deposit customers for transaction-based, account maintenance, and overdraft services.  Transaction-based fees and overdraft fees are recognized at a point in time, since the customer generally has a right to cancel the depository arrangement at any time.  The arrangement is considered a day-to-day contract with ongoing renewals and optional purchases, so the duration of the contract does not extend beyond the services already performed.  Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which Old National satisfies its performance obligation.

Debit card and ATM fees: Debit card and ATM fees include ATM usage fees and debit card interchange income.  As with the transaction-based fees on deposit accounts, the ATM fees are recognized at the point in time that Old National fulfills the customer’s request.  Old National earns interchange fees from cardholder transactions processed through card association networks.  Interchange rates are generally set by the card associations based upon purchase volumes and other factors.  Interchange fees represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.

Investment product fees: Investment product fees are the commissions and fees received from a registered broker/dealer and investment adviser that provide those services to Old National customers.  Old National acts as an agent in arranging the relationship between the customer and the third-party service provider.  These fees are recognized monthly from the third-party broker based upon services already performed, net of the processing fees charged to Old National by the broker.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is an analysis of our results of operations for the three and six months ended June 30, 2020 and 2019, and financial condition as of June 30, 2020, compared to December 31, 2019.  This discussion and analysis should be read in conjunction with the consolidated financial statements and related notes.  This discussion contains forward-looking statements concerning our business that are based on estimates and involves certain risks and uncertainties.  Therefore, future results could differ significantly from our current expectations and the related forward-looking statements.

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FINANCIAL HIGHLIGHTS

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)	2020			2020			2019			2020			2019
Income Statement:
Net interest income	$	145,671		$	143,771		$	155,230		$	289,442		$	302,278
Taxable equivalent adjustment (1)	3,367			3,323			3,289			6,690			6,487
Net interest income - tax equivalent basis	149,038			147,094			158,519			296,132			308,765
Provision for loan losses (4)	22,545			16,950			1,003			39,495			2,046
Noninterest income	58,461			57,502			51,214			115,963			97,630
Noninterest expense	120,121			158,744			128,118			278,865			251,159
Net income	51,705			22,640			62,964			74,345			119,240
Per Common Share Data:
Weighted average diluted shares	165,302			168,404			173,675			166,848			174,531
Net income (diluted)	$	0.32		$	0.13		$	0.36		$	0.45		$	0.68
Cash dividends	0.14			0.14			0.13			0.28			0.26
Common dividend payout ratio (2)	44		%	108		%	35		%	62		%	38		%
Book value	$	17.35		$	17.10		$	16.28		$	17.35		$	16.28
Stock price	13.76			13.19			16.59			13.76			16.59
Tangible common book value (3)	10.75			10.48			9.86			10.75			9.86
Performance Ratios:
Return on average assets	0.96		%	0.44		%	1.26		%	0.71		%	1.20		%
Return on average common equity	7.27			3.20			9.13			5.24			8.72
Return on tangible common equity (3)	12.27			5.89			15.59			9.01			14.82
Return on average tangible common equity (3)	12.41			5.86			16.04			9.15			15.47
Net interest margin (3)	3.14			3.31			3.66			3.22			3.59
Efficiency ratio (3)	56.29			77.71			59.35			66.80			59.79
Net charge-offs (recoveries) to average loans	0.02			0.21			0.01			0.11			0.02
Allowance for loan losses to ending loans (4)	0.94			0.86			0.47			0.94			0.47
Non-performing loans to ending loans	1.04			1.16			1.34			1.04			1.34
Balance Sheet:
Total loans	$	13,615,701		$	12,384,612		$	12,046,578		$	13,615,701		$	12,046,578
Total assets	22,102,188			20,741,141			20,145,285			22,102,188			20,145,285
Total deposits	16,319,446			14,305,362			14,363,101			16,319,446			14,363,101
Total borrowed funds	2,641,436			3,245,214			2,726,481			2,641,436			2,726,481
Total shareholders' equity	2,864,255			2,823,435			2,803,139			2,864,255			2,803,139
Capital Ratios:
Risk-based capital ratios:
Tier 1 common equity	11.70		%	11.40		%	11.89		%	11.70		%	11.89		%
Tier 1	11.70			11.40			11.89			11.70			11.89
Total	12.68			12.28			12.82			12.68			12.82
Leverage ratio (to average assets)	8.12			8.46			8.82			8.12			8.82
Total equity to assets (averages)	13.16			13.91			13.82			13.53			13.76
Tangible common equity to tangible assets (3)	8.45			8.81			8.92			8.45			8.92
Nonfinancial Data:
Full-time equivalent employees	2,530			2,736			2,829			2,530			2,829
Banking centers	162			192			192			162			192

(1)Calculated using the federal statutory tax rate in effect of 21% for all periods.

(2)Cash dividends per share divided by net income per share (basic).

(3)Represents a non-GAAP financial measure.  Refer to the “Non-GAAP Financial Measures” section for reconciliations to GAAP financial measures.

(4)Beginning January 1, 2020, calculation is based on current expected loss methodology. Prior to January 1, 2020, calculation is based on incurred loss methodology.

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NON-GAAP FINANCIAL MEASURES

The non-GAAP financial measures presented below are used by our management and our Board of Directors on a regular basis in addition to our GAAP results to facilitate the assessment of our financial performance. Management believes these non-GAAP financial measures enhance an investor’s understanding of our financial results by providing a meaningful basis for period-to-period comparisons, assisting in operating results analysis, and predicting future performance. This information supplements our GAAP reported results, and should not be viewed in isolation from, or as a substitute for, our GAAP results. Accordingly, this financial information should be read in conjunction with our consolidated financial statements, and notes thereto for the quarter ended June 30, 2020, included elsewhere in this report, and included in our Annual Report on Form 10-K for the year ended December 31, 2019. Non-GAAP financial measures exclude certain items that are included in the financial results presented in accordance with GAAP.

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The following table presents GAAP to non-GAAP reconciliations.

		Three Months Ended June 30,						Six Months Ended June 30,
(dollars and shares in thousands, except per share data)		2020			2019			2020			2019
Tangible common book value:
Shareholders' equity (GAAP)		$	2,864,255		$	2,803,139		$	2,864,255		$	2,803,139
Deduct:	Goodwill	1,036,994			1,036,258			1,036,994			1,036,258
	Intangible assets	52,717			68,220			52,717			68,220
Tangible shareholders' equity (non-GAAP)		$	1,774,544		$	1,698,661		$	1,774,544		$	1,698,661
Period end common shares		165,093			172,231			165,093			172,231
Tangible common book value		10.75			9.86			10.75			9.86
Return on tangible common equity:
Net income (GAAP)		$	51,705		$	62,964		$	74,345		$	119,240
Add: Intangible amortization (net of tax)		2,708			3,262			5,557			6,635
Tangible net income (non-GAAP)		$	54,413		$	66,226		$	79,902		$	125,875
Tangible shareholders' equity (non-GAAP) (see above)		$	1,774,544		$	1,698,661		$	1,774,544		$	1,698,661
Return on tangible common equity		12.27		%	15.59		%	9.01		%	14.82		%
Return on average tangible common equity:
Tangible net income (non-GAAP) (see above)		$	54,413		$	66,226		$	79,902		$	125,875
Average shareholders' equity (GAAP)		$	2,845,398		$	2,758,246		$	2,839,460		$	2,736,338
Deduct:	Average goodwill	1,036,994			1,036,258			1,036,994			1,036,258
	Average intangible assets	54,449			70,282			56,288			72,554
Average tangible shareholders' equity (non-GAAP)		$	1,753,955		$	1,651,706		$	1,746,178		$	1,627,526
Return on average tangible common equity		12.41		%	16.04		%	9.15		%	15.47		%
Net interest margin:
Net interest income (GAAP)		$	145,671		$	155,230		$	289,442		$	302,278
Taxable equivalent adjustment		3,367			3,289			6,690			6,487
Net interest income - taxable equivalent basis (non-GAAP)		$	149,038		$	158,519		$	296,132		$	308,765
Average earning assets		$	19,007,719		$	17,302,688		$	18,390,875		$	17,223,571
Net interest margin		3.14		%	3.66		%	3.22		%	3.59		%
Efficiency ratio:
Noninterest expense (GAAP)		$	120,121		$	128,118		$	278,865		$	251,159
Deduct: Intangible amortization expense		3,612			4,325			7,388			8,797
Adjusted noninterest expense (non-GAAP)		$	116,509		$	123,793		$	271,477		$	242,362
Net interest income - taxable equivalent basis (non-GAAP) (see above)		$	149,038		$	158,519		$	296,132		$	308,765
Noninterest income		58,461			51,214			115,963			97,630
Deduct: Debt securities gains (losses), net		511			1,165			5,685			1,062
Adjusted total revenue (non-GAAP)		$	206,988		$	208,568		$	406,410		$	405,333
Efficiency ratio		56.29		%	59.35		%	66.80		%	59.79		%
Tangible common equity to tangible assets:
Tangible shareholders' equity (non-GAAP) (see above)		$	1,774,544		$	1,698,661		$	1,774,544		$	1,698,661
Assets (GAAP)		$	22,102,188		$	20,145,285		$	22,102,188		$	20,145,285
Add:	Trust overdrafts	15			29			15			29
Deduct:	Goodwill	1,036,994			1,036,258			1,036,994			1,036,258
	Intangible assets	52,717			68,220			52,717			68,220
Tangible assets (non-GAAP)		$	21,012,492		$	19,040,836		$	21,012,492		$	19,040,836
Tangible common equity to tangible assets		8.45		%	8.92		%	8.45		%	8.92		%

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited.  Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.  These non-GAAP measures are not necessarily comparable to similar measures that may be represented by other companies.

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EXECUTIVE SUMMARY

As previously disclosed, a novel strain of coronavirus, COVID-19, was reported in Wuhan, China and continues to unfold across the U.S. The spread of the COVID-19 virus had an impact on our operations as of June 30, 2020, but it is too early to know by how much the impact will have on the Company's business, financial condition, results of operations of the Company, and its customers. Changes in the behavior of customers, businesses, and their employees as a result of the COVID-19 pandemic, including social distancing practices, additional actions taken by federal, state, and local governments to contain COVID-19 or treat its impact are also unknown.

The fiscal stimulus and relief programs have been an effective mitigant to credit losses in the near term; however, once these programs have run their course, the Company may experience changes in the value of collateral securing outstanding loans, deterioration in the credit quality of borrowers, and the inability of borrowers to repay loans in accordance with their loan terms causing credit losses. The severity of these potential losses is uncertain and depends on numerous factors, future developments, and cannot be predicted with any confidence.

As previously disclosed, our COVID-19 response continues to be focused on consumers, small business and commercial clients, team members, and communities. Among the many actions we have taken in response to the COVID-19 pandemic, we have participated in the CARES Act stimulus and relief programs and have processed over 9,000 PPP applications, representing approximately $1.5 billion in funding to new and existing clients, as well as provided over 4,000 loan payment deferrals representing approximately $1.3 billion. While a significant amount of uncertainty remains regarding the duration of the pandemic and any future government response to mitigate its effects, we believe our historically strong underwriting practices, diverse and granular portfolios, and Midwest based footprint will help to mitigate any adverse impact to Old National.

We are also committed and focused on the health and safety of our team members, clients, and communities. Accordingly, we continue to evaluate and adjust our branch hours, lobby usage, and return to work efforts as necessary depending on developments across our footprint. During the second quarter of 2020, we began to return to the workplace. This included reopening our lobbies and bringing our team members back to the office, but on a much slower pace than initially planned, and in some instances pausing our return in certain markets due to the increasing number of positive COVID-19 cases across our footprint. We continue to lend to qualified businesses for working capital and general business purposes.

During the second quarter of 2020, we recorded a provision expense for loan losses of $22.5 million. This provision expense was derived from the Moody's baseline forecast, which projects higher unemployment and a sharper gross domestic product decline (driven by COVID-19) than the forecast used in the prior quarter.

As previously disclosed as part of our strategic plan (“The ONB Way”), we have successfully executed the closures of 31 branches in April of 2020 and have entered into a multi-year partnership with Infosys Limited, which will enable us to maximize the benefits from increased investments in technology and talent.

Old National continues to migrate its operational structure from a generalist approach to a specialist approach, based on business segments as part of The ONB Way. This change does not impact the fundamentals of our basic banking model. We are steadfast in our fundamentals of loan growth, non-interest income growth, prudent capital deployment, and expense management.

During the second quarter of 2020, net income was $51.7 million, or $0.32 per diluted share. Net income was $63.0 million, or $0.36 per diluted share, for the second quarter of 2019.

We have continued to re-mix our earning assets towards more productive commercial and commercial real estate loans and out of indirect and other loans.

Loans:  Our loan balances, excluding loans held for sale, increased $1.231 billion to $13.616 billion at June 30, 2020 compared to $12.385 billion at March 31, 2020.  This was primarily driven by growth in commercial and commercial real estate loans.  Commercial loan growth was driven by strong PPP loan production in the second quarter of 2020. As of June 30, 2020, PPP loans totaled $1.463 billion. We reported commercial loan production, excluding PPP loans, of $658.5 million in the second quarter of 2020 and the pipeline totaled $2.7 billion at June 30, 2020. 

Net Interest Income: For the six months ended June 30, 2020 compared to the six months ended June 30, 2019, our net interest income decreased primarily due to decreased loan yields, partially offset by lower

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costs of interest-bearing liabilities and higher average loans.  Net interest income increased in the second quarter of 2020 compared to the first quarter of 2020 primarily due to net PPP loan fees. 

Noninterest Income:  Noninterest income increased to $116.0 million in the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily due to higher mortgage banking revenue, higher capital markets income, and higher debt securities gains.  These increases were partially offset by lower service charges on deposit accounts. The second quarter of 2020 compared to the first quarter of 2020 showed a slight increase of $1.0 million reflecting higher mortgage banking revenue and capital markets income, partially offset by lower service charges on deposit accounts and investment product fees.

Expenses:  Noninterest expenses increased $27.7 million in the six months ended June 30, 2020 compared to the six months ended June 30, 2019.  The increase was primarily attributable to $36.1 million of charges related to The ONB Way strategic initiative and higher amortization of tax credit investments.  The second quarter of 2020 compared to the first quarter of 2020 decreased $38.6 million reflecting lower charges related to The ONB Way strategic initiative recorded in the second quarter of 2020 and lower amortization of tax credit investments. The decrease in noninterest expenses also reflected the successful execution of the 31 branch closures completed in late April.

RESULTS OF OPERATIONS

The following table sets forth certain income statement information of Old National:

	Three Months Ended June 30,						%		Six Months Ended June 30,						%
(dollars in thousands)	2020			2019			Change		2020			2019			Change
Income Statement Summary:
Net interest income	$	145,671		$	155,230		(6.2)	%	$	289,442		$	302,278		(4.2)	%
Provision for loan losses (1)	22,545			1,003			2,147.8		39,495			2,046			1,830.4
Noninterest income	58,461			51,214			14.2		115,963			97,630			18.8
Noninterest expense	120,121			128,118			(6.2)		278,865			251,159			11.0
Other Data:
Return on average common equity	7.27		%	9.13		%			5.24		%	8.72		%
Return on tangible common equity (2)	12.27			15.59					9.01			14.82
Return on average tangible common equity (2)	12.41			16.04					9.15			15.47
Efficiency ratio (2)	56.29			59.35					66.80			59.79
Tier 1 leverage ratio	8.12			8.82					8.12			8.82
Net charge-offs (recoveries) to average loans	0.02			0.01					0.11			0.02

(1)Beginning January 1, 2020, calculation is based on current expected loss methodology. Prior to January 1, 2020, calculation is based on incurred loss methodology.

(2)Represents a non-GAAP financial measure.  Refer to “Non-GAAP Financial Measures” section for reconciliations to GAAP financial measures.

Net Interest Income

Net interest income is the most significant component of our earnings, comprising 71% of revenues for the six months ended June 30, 2020.  Net interest income and margin are influenced by many factors, primarily the volume and mix of earning assets, funding sources, and interest rate fluctuations.  Other factors include the level of accretion income on purchased loans, prepayment risk on mortgage and investment-related assets, and the composition and maturity of earning assets and interest-bearing liabilities. The current uptick in cases of COVID-19 may offset the recent positive economic momentum and government stimulus programs. Accordingly, there is still much uncertainty regarding the economy.

Interest rates stabilized at historic lows during the second quarter of 2020 after declining dramatically in March 2020 due to the COVID-19 pandemic. The Federal Reserve’s Federal Funds range is currently 0.00% to 0.25%, with the Effective Fed Funds Rate in the 0.05% to 0.10% range. If interest rates decline further, our interest rate spread could decline, which may result in a decrease in our net interest income. However, management has taken balance sheet restructuring, derivative, and deposit pricing actions to help mitigate this risk.

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Loans typically generate more interest income than investment securities with similar maturities.  Funding from client deposits generally costs less than wholesale funding sources.  Factors such as general economic activity, Federal Reserve monetary policy, and price volatility of competing alternative investments, can also exert significant influence on our ability to optimize the mix of assets and funding, net interest income, and margin.

Net interest income is the excess of interest received from earning assets over interest paid on interest-bearing liabilities.  For analytical purposes, net interest income is also 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 peer comparisons.

	Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands)	2020			2019			2020			2019
Net interest income	$	145,671		$	155,230		$	289,442		$	302,278
Conversion to fully taxable equivalent	3,367			3,289			6,690			6,487
Net interest income - taxable equivalent basis	$	149,038		$	158,519		$	296,132		$	308,765
Average earning assets	$	19,007,719		$	17,302,688		$	18,390,875		$	17,223,571
Net interest margin	3.07		%	3.59		%	3.15		%	3.51		%
Net interest margin - taxable equivalent basis	3.14		%	3.66		%	3.22		%	3.59		%

The decrease in net interest income for the three and six months ended June 30, 2020 when compared to the three and six months ended June 30, 2019 was primarily due to lower yields on average earning assets, lower accretion income, and higher average interest-bearing liabilities. Partially offsetting these decreases were lower costs of average interest-bearing liabilities and higher average earning assets in the three and six months ended June 30, 2020 when compared to the three and six months ended June 30, 2019. Net interest income for the three and six months ended June 30, 2020 and 2019 included accretion income (interest income in excess of contractual interest income) associated with acquired loans. Accretion income totaled $5.8 million in the three months ended June 30, 2020 and $12.5 million in the six months ended June 30, 2020, compared to $11.8 million in the three months ended June 30, 2019 and $20.7 million in the six months ended June 30, 2019. We expect accretion income on loans to decrease over time, but this may be offset by future acquisitions.

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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, dollars in thousands)	Three Months Ended June 30, 2020						Three Months Ended June 30, 2019
Earning Assets	Average Balance		Income (1)/ Expense		Yield/ Rate		Average Balance		Income (1)/ Expense		Yield/ Rate
Money market and other interest-earning investments	$	85,680	$	34	0.16	%	$	58,321	$	334	2.29	%
Investment securities:
Treasury and government sponsored agencies	501,838		3,033		2.42	%	695,775		4,301		2.47	%
Mortgage-backed securities	3,179,165		17,930		2.26	%	2,767,791		18,799		2.72	%
States and political subdivisions	1,293,756		11,757		3.63	%	1,193,176		11,235		3.77	%
Other securities	497,204		3,224		2.59	%	496,631		4,063		3.27	%
Total investment securities	5,471,963		35,944		2.63	%	5,153,373		38,398		2.98	%
Loans: (2)
Commercial	4,049,403		31,729		3.10	%	3,063,590		37,828		4.88	%
Commercial real estate	5,340,622		58,007		4.30	%	5,019,859		72,214		5.69	%
Residential real estate loans	2,369,407		23,884		4.03	%	2,247,570		23,780		4.23	%
Consumer	1,690,644		15,743		3.75	%	1,759,975		19,798		4.51	%
Total loans	13,450,076		129,363		3.82	%	12,090,994		153,620		5.05	%
Total earning assets	19,007,719		$	165,341	3.46	%	17,302,688		$	192,352	4.43	%
Less: Allowance for loan losses (4)	(107,619)						(56,632)
Non-Earning Assets
Cash and due from banks	332,745						234,337
Other assets	2,384,934						2,473,255
Total assets	$	21,617,779					$	19,953,648
Interest-Bearing Liabilities
Checking and NOW accounts	$	4,431,074	$	1,075	0.10	%	$	3,895,881	$	4,196	0.43	%
Savings accounts	3,060,012		736		0.10	%	2,879,704		2,145		0.30	%
Money market accounts	1,844,488		910		0.20	%	1,789,777		3,729		0.84	%
Other time deposits	1,378,115		3,786		1.10	%	1,779,770		7,181		1.62	%
Brokered certificates of deposit	68,149		291		1.72	%	212,198		1,268		2.40	%
Total interest-bearing deposits	10,781,838		6,798		0.25	%	10,557,330		18,519		0.70	%
Federal funds purchased and interbank borrowings	143,811		44		0.12	%	300,810		1,817		2.42	%
Securities sold under agreements to repurchase	350,545		185		0.21	%	331,695		671		0.81	%
FHLB advances	2,144,497		6,844		1.28	%	1,695,681		10,039		2.37	%
Other borrowings	251,738		2,432		3.87	%	251,577		2,787		4.43	%
Total borrowed funds	2,890,591		9,505		1.32	%	2,579,763		15,314		2.38	%
Total interest-bearing liabilities	$	13,672,429	$	16,303	0.48	%	$	13,137,093	$	33,833	1.03	%
Noninterest-Bearing Liabilities and Shareholders' Equity
Demand deposits	$	4,871,002					$	3,812,175
Other liabilities	228,950						246,134
Shareholders' equity	2,845,398						2,758,246
Total liabilities and shareholders' equity	$	21,617,779					$	19,953,648
Net interest rate spread					2.98	%					3.40	%
Net interest margin (3)					3.14	%					3.66	%
Taxable equivalent adjustment			$	3,367					$	3,289

(1)Interest income is reflected on a fully taxable equivalent basis.

(2)Includes loans held for sale.

(3)Net interest margin is defined as net interest income on a tax equivalent basis as a percentage of average earning assets.

(4)Beginning January 1, 2020, calculation is based on current expected loss methodology. Prior to January 1, 2020, calculation was based on incurred loss model.

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(Tax equivalent basis, dollars in thousands)	Six Months Ended June 30, 2020						Six Months Ended June 30, 2019
Earning Assets	Average Balance		Income (1)/ Expense		Yield/ Rate		Average Balance		Income (1)/ Expense		Yield/ Rate
Money market and other interest-earning investments	$	72,043	$	383	1.07	%	$	58,510	$	612	2.11	%
Investment securities:
Treasury and government sponsored agencies	542,904		6,730		2.48	%	700,569		8,203		2.34	%
Mortgage-backed securities	3,175,408		36,996		2.33	%	2,633,326		36,402		2.76	%
States and political subdivisions	1,283,456		23,165		3.61	%	1,212,658		22,688		3.74	%
Other securities	495,852		6,440		2.60	%	497,115		8,503		3.42	%
Total investment securities	5,497,620		73,331		2.67	%	5,043,668		75,796		3.01	%
Loans: (2)
Commercial	3,478,351		60,782		3.46	%	3,092,833		73,863		4.75	%
Commercial real estate	5,264,610		120,446		4.53	%	5,004,824		137,290		5.46	%
Residential real estate loans	2,369,852		48,128		4.06	%	2,253,375		47,712		4.23	%
Consumer	1,708,399		33,593		3.95	%	1,770,361		39,195		4.46	%
Total loans	12,821,212		262,949		4.07	%	12,121,393		298,060		4.91	%
Total earning assets	18,390,875		$	336,663	3.64	%	17,223,571		$	374,468	4.34	%
Less: Allowance for loan losses (4)	(95,432)						(56,213)
Non-Earning Assets
Cash and due from banks	310,173						232,159
Other assets	2,386,513						2,481,842
Total assets	$	20,992,129					$	19,881,359
Interest-Bearing Liabilities
Checking and NOW accounts	$	4,267,926	$	3,934	0.19	%	$	3,795,441	$	7,338	0.39	%
Savings accounts	2,944,094		2,034		0.14	%	2,907,552		4,428		0.31	%
Money market accounts	1,814,328		3,417		0.38	%	1,746,456		6,555		0.76	%
Other time deposits	1,470,094		8,972		1.23	%	1,809,975		14,283		1.59	%
Brokered certificates of deposit	76,124		739		1.95	%	201,878		2,359		2.36	%
Total interest-bearing deposits	10,572,566		19,096		0.36	%	10,461,302		34,963		0.67	%
Federal funds purchased and interbank borrowings	268,334		1,284		0.96	%	308,860		3,735		2.44	%
Securities sold under agreements to repurchase	339,818		569		0.34	%	346,396		1,333		0.78	%
FHLB advances	2,054,814		14,612		1.43	%	1,684,093		19,970		2.39	%
Other borrowings	246,007		4,970		4.04	%	250,690		5,702		4.55	%
Total borrowed funds	2,908,973		21,435		1.48	%	2,590,039		30,740		2.39	%
Total interest-bearing liabilities	$	13,481,539	$	40,531	0.60	%	$	13,051,341	$	65,703	1.02	%
Noninterest-Bearing Liabilities and Shareholders' Equity
Demand deposits	$	4,417,748					$	3,829,406
Other liabilities	253,382						264,274
Shareholders' equity	2,839,460						2,736,338
Total liabilities and shareholders' equity	$	20,992,129					$	19,881,359
Net interest rate spread					3.04	%					3.32	%
Net interest margin (3)					3.22	%					3.59	%
Taxable equivalent adjustment			$	6,690					$	6,487

(1)Interest income is reflected on a fully taxable equivalent basis.

(2)Includes loans held for sale.

(3)Net interest margin is defined as net interest income on a tax equivalent basis as a percentage of average earning assets.

(4)Beginning January 1, 2020, calculation is based on current expected loss methodology. Prior to January 1, 2020, calculation was based on incurred loss model.

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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, 2019 to Three						June 30, 2019 to Six
	Months Ended June 30, 2020						Months Ended June 30, 2020
	Total Change (1)		Attributed to				Total Change (1)		Attributed to
(dollars in thousands)			Volume		Rate				Volume		Rate
Interest Income
Money market and other interest-earning investments	$	(300)	$	84	$	(384)	$	(229)	$	109	$	(338)
Investment securities (2)	(2,454)		2,233		(4,687)		(2,465)		6,439		(8,904)
Loans (2)	(24,257)		14,982		(39,239)		(35,111)		16,231		(51,342)
Total interest income	(27,011)		17,299		(44,310)		(37,805)		22,779		(60,584)
Interest Expense
Checking and NOW deposits	(3,121)		357		(3,478)		(3,404)		699		(4,103)
Savings deposits	(1,409)		90		(1,499)		(2,394)		90		(2,484)
Money market deposits	(2,819)		73		(2,892)		(3,138)		210		(3,348)
Other time deposits	(3,395)		(1,368)		(2,027)		(5,311)		(2,360)		(2,951)
Brokered certificates of deposit	(977)		(741)		(236)		(1,620)		(1,347)		(273)
Federal funds purchased and interbank borrowings	(1,773)		(497)		(1,276)		(2,451)		(333)		(2,118)
Securities sold under agreements to repurchase	(486)		25		(511)		(764)		(14)		(750)
FHLB advances	(3,195)		2,047		(5,242)		(5,358)		3,584		(8,942)
Other borrowings	(355)		—		(355)		(732)		(101)		(631)
Total interest expense	(17,530)		(14)		(17,516)		(25,172)		428		(25,600)
Net interest income	$	(9,481)	$	17,313	$	(26,794)	$	(12,633)	$	22,351	$	(34,984)

(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 $2.2 million and $1.2 million, respectively, during the three months ended June 30, 2020; and $4.3 million and $2.4 million, respectively, during the six months ended June 30, 2020 using the federal statutory rate in effect of 21%.

The decrease in the net interest margin on a fully taxable equivalent basis for the three and six months ended June 30, 2020 when compared to the same periods in 2019 was primarily due to lower yields on interest earning assets, higher average interest-bearing liabilities, and a change in the mix of average interest earning assets and interest-bearing liabilities, partially offset by lower costs of interest-bearing liabilities and higher average earning assets. The yield on interest earning assets decreased 97 basis points and the cost of interest-bearing liabilities decreased 55 basis points in the quarterly year-over-year comparison.  The yield on interest earning assets is calculated by dividing annualized taxable equivalent net interest income by average interest earning assets while the cost of interest-bearing liabilities is calculated by dividing annualized interest expense by average interest-bearing liabilities.  The yield on interest earning assets decreased 70 basis points and the cost of interest-bearing liabilities decreased 42 basis points in the six months ended June 30, 2020 when compared to the six months ended June 30, 2019. Accretion income represented 12 basis points of the net interest margin for the three months ended June 30, 2020, compared to 27 basis points for the three months ended June 30, 2019. Accretion income represented 14 basis points of the net interest margin for the six months ended June 30, 2020, compared to 24 basis points for the six months ended June 30, 2019. The current uptick in cases of COVID-19 may offset the recent positive economic momentum and government stimulus programs, and could negatively impact net interest margin. Accordingly, there is still much uncertainty regarding the economy.

Average earning assets were $19.008 billion for the three months ended June 30, 2020, compared to $17.303 billion for the three months ended June 30, 2019, an increase of $1.705 billion, or 10%. Average earning assets were $18.391 billion for the six months ended June 30, 2020, compared to $17.224 billion for the six months ended June 30, 2019, an increase of $1.167 billion, or 7%.  The increases in average earning assets were primarily due to increases in average loans and average investment securities. The loan portfolio including loans held for sale, which generally has an average yield higher than the investment portfolio, was 70% of average interest earning assets for the six months ended June 30, 2020 and the six months ended June 30, 2019.

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Average loans including loans held for sale increased $1.359 billion for the three months ended June 30, 2020 and $699.8 million for the six months ended June 30, 2020 when compared to the same periods in 2019 primarily due to increases in average commercial loans, commercial real estate loans, and residential real estate loans, partially offset by lower average consumer loans. The increases in average commercial loans reflected strong PPP loan production, which began in April 2020. As of June 30, 2020, PPP loans totaled $1.463 billion.

Average investments increased $318.6 million for the three months ended June 30, 2020 and $454.0 million for the six months ended June 30, 2020 when compared to the same periods in 2019 reflecting higher fair values and excess liquidity.

Average noninterest-bearing deposits increased $1.059 billion for the three months ended June 30, 2020 and $588.3 million for the six months ended June 30, 2020 when compared to the same periods in 2019 primarily due to PPP funds on deposit.  Average interest-bearing deposits increased $224.5 million for the three months ended June 30, 2020 and $111.3 million for the six months ended June 30, 2020 when compared to the same periods in 2019.

Average borrowed funds increased $310.8 million for the three months ended June 30, 2020 and $318.9 million for the six months ended June 30, 2020 when compared to the same periods in 2019.

Provision for Loan Losses

The provision for loan losses was $22.5 million for the three months ended June 30, 2020, compared to $1.0 million for the three months ended June 30, 2019. Net charge-offs totaled $0.5 million during the three months ended June 30, 2020, compared to net charge-offs of $0.3 million during the three months ended June 30, 2019.  The provision for loan losses was $39.5 million for the six months ended June 30, 2020, compared to $2.0 million for the six months ended June 30, 2019. Net charge-offs totaled $7.1 million during the six months ended June 30, 2020, compared to net charge-offs of $1.2 million during the six months ended June 30, 2019.  The higher provision for loan losses in the three and six months ended June 30, 2020 when compared to the same periods in 2019 was driven by implementation of CECL, which uses an economic forecast that now includes the impact of the coronavirus pandemic. PPP loans were factored in the provision for credit losses for the three months ended June 30, 2020; however, due to the SBA guaranty and our borrowers’ adherence to the PPP terms, the provision impact was insignificant. Continued loan growth in future periods, a decline in our current level of recoveries, or an increase in charge-offs could result in an increase in provision expense. Additionally, with the adoption of CECL beginning on January 1, 2020, provision expense may become more volatile due to changes in CECL model assumptions of credit quality, macroeconomic factors and conditions, and loan composition, which drive the allowance for credit losses balance.

Noninterest Income

We generate revenues in the form of noninterest income through client fees, sales commissions, and other gains and losses from our core banking franchise and other related businesses, such as wealth management, investment consulting, and investment products.  The following table details the components in noninterest income:

	Three Months Ended June 30,				%		Six Months Ended June 30,				%
(dollars in thousands)	2020		2019		Change		2020		2019		Change
Wealth management fees	$	9,424	$	9,909	(4.9)	%	$	18,308	$	18,444	(0.7)	%
Service charges on deposit accounts	7,582		11,515		(34.2)		17,659		22,341		(21.0)
Debit card and ATM fees	4,832		5,419		(10.8)		9,830		10,922		(10.0)
Mortgage banking revenue	17,313		7,135		142.6		28,432		12,146		134.1
Investment product fees	4,845		5,591		(13.3)		10,719		10,862		(1.3)
Capital markets income	6,179		3,150		96.2		10,507		5,667		85.4
Company-owned life insurance	2,968		2,711		9.5		6,048		5,899		2.5
Debt securities gains (losses), net	511		1,165		(56.1)		5,685		1,062		435.3
Other income	4,807		4,619		4.1		8,775		10,287		(14.7)
Total noninterest income	$	58,461	$	51,214	14.2	%	$	115,963	$	97,630	18.8	%

Noninterest income increased $7.2 million for the three months ended June 30, 2020 when compared to the three months ended June 30, 2019 primarily due to higher mortgage banking revenue and higher capital markets income. These increases were partially offset by lower service charges on deposit accounts.

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Noninterest income increased $18.3 million for the six months ended June 30, 2020 when compared to the six months ended June 30, 2019 primarily due to higher mortgage banking revenue, higher capital markets income, and higher debt securities gains. These increases were partially offset by lower service charges on deposit accounts.

Service charges and overdraft fees decreased $3.9 million for the three months ended June 30, 2020 and $4.7 million for the six months ended June 30, 2020 when compared to the same periods in 2019 reflecting lower overdraft fees due to the impact of the COVID-19 pandemic.

Debit card and ATM fees decreased $0.6 million for the three months ended June 30, 2020 and $1.1 million for the six months ended June 30, 2020 when compared to the same periods in 2019 reflecting lower interchange income due to the impact of the COVID-19 pandemic.

Mortgage banking revenue increased $10.2 million for the three months ended June 30, 2020 and $16.3 million for the six months ended June 30, 2020 when compared to the same periods in 2019 reflecting the change in our pipeline valuation, as well as increased mortgage originations and sales in 2020.

Investment product fees decreased $0.7 million for the three months ended June 30, 2020 when compared to the three months ended June 30, 2019 primarily due to lower annuity and mutual fund fees.

Capital markets income is comprised of customer interest rate swap fees, foreign currency exchange fees, net gains (losses) on foreign currency adjustments, and tax credit fee income.  Capital markets income increased $3.0 million for the three months ended June 30, 2020 and $4.8 million for the six months ended June 30, 2020 when compared to the same periods in 2019 primarily due to higher customer interest rate swap fees.

Debt securities gains (losses), net had an unfavorable variance of $0.7 million for the three months ended June 30, 2020 when compared to the three months ended June 30, 2019 primarily due to lower realized gains on sales of available-for-sale securities, partially offset by lower realized losses on sales of available-for-sale debt securities in 2020. Debt securities gains (losses), net had a favorable variance of $4.6 million for the six months ended June 30, 2020 and when compared to the six months ended June 30, 2019 primarily due to higher realized gains on sales of available-for-sale securities and lower realized losses on sales of available-for-sale debt securities in 2020.

Other income decreased $1.5 million for the six months ended June 30, 2020 when compared to the six months ended June 30, 2019 primarily due to unfavorable variances in net gains (losses) on derivatives and equity securities and lower fees on commercial loans.

Noninterest Expense

The following table details the components in noninterest expense:

	Three Months Ended June 30,				%		Six Months Ended June 30,				%
(dollars in thousands)	2020		2019		Change		2020		2019		Change
Salaries and employee benefits	$	66,556	$	71,566	(7.0)	%	$	145,729	$	142,749	2.1	%
Occupancy	13,245		14,559		(9.0)		28,378		29,137		(2.6)
Equipment	3,853		4,517		(14.7)		9,158		8,991		1.9
Marketing	2,395		4,439		(46.0)		5,492		8,162		(32.7)
Data processing	9,629		10,207		(5.7)		19,096		19,548		(2.3)
Communication	2,296		2,849		(19.4)		5,094		5,903		(13.7)
Professional fees	3,545		4,921		(28.0)		7,838		7,831		0.1
FDIC assessment	2,014		1,454		38.5		3,623		3,541		2.3
Amortization of intangibles	3,612		4,325		(16.5)		7,388		8,797		(16.0)
Amortization of tax credit investments	287		568		(49.5)		5,802		828		600.7
Other expense	12,689		8,713		45.6		41,267		15,672		163.3
Total noninterest expense	$	120,121	$	128,118	(6.2)	%	$	278,865	$	251,159	11.0	%

Noninterest expense decreased $8.0 million for the three months ended June 30, 2020 when compared to the three months ended June 30, 2019 reflecting lower salaries and employee benefits.

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Noninterest expense increased $27.7 million for the six months ended June 30, 2020 when compared to the six months ended June 30, 2019 reflecting $36.1 million of charges related to The ONB Way strategic initiative and higher amortization of tax credit investments.

Salaries and employee benefits decreased $5.0 million for the three months ended June 30, 2020 when compared to the three months ended June 30, 2019 primarily due to fewer employees at June 30, 2020. Salaries and employee benefits increased $3.0 million for the six months ended June 30, 2020 when compared to the six months ended June 30, 2019 primarily due to personnel expenses related to The ONB Way totaling $7.0 million and higher commissions, partially offset by fewer employees at June 30, 2020.

Marketing expenses decreased $2.0 million for the three months ended June 30, 2020 and $2.7 million for the six months ended June 30, 2020 when compared to the same periods in 2019 primarily due to lower public relations and advertising expenses.

Professional fees decreased $1.4 million for the three months ended June 30, 2020 when compared to the three months ended June 30, 2019 reflecting $1.4 million in consulting fees incurred in the second quarter of 2019 related to The ONB Way.

Amortization of intangibles decreased $0.7 million for the three months ended June 30, 2020 and $1.4 million for the six months ended June 30, 2020 when compared to the same periods in 2019 primarily due to lower amortization of core deposit intangibles.

Amortization of tax credit investments decreased $0.3 million for the three months ended June 30, 2020 when compared to the three months ended June 30, 2019. Amortization of tax credit investments increased $5.0 million for the six months ended June 30, 2020 when compared to the six months ended June 30, 2019. The recognition of tax credit amortization expense is contingent upon the successful completion of the rehabilitation of a historic building or completion of a solar project within the reporting period. Many factors including weather, labor availability, building regulations, inspections, and other unexpected construction delays related to a rehabilitation project can cause a project to exceed its estimated completion date.  See Note 12 to the consolidated financial statements for additional information on our tax credit investments.

Other expense increased $4.0 million for the three months ended June 30, 2020 and $25.6 million for the six months ended June 30, 2020 when compared to the same periods in 2019 primarily due to lease termination charges and impairments on long-lived assets related to branch consolidations that were part of The ONB Way strategic initiative totaling $3.9 million in the three months ended June 30, 2020 and $24.6 million in the six months ended June 30, 2020.

Provision for Income Taxes

We record a provision for income taxes currently payable and for income taxes payable or benefits to be received in the future, which arise due to timing differences in the recognition of certain items for financial statement and income tax purposes.  The major difference between the effective tax rate applied to our financial statement income and the federal statutory tax rate is caused by a tax benefit from our tax credit investments and interest on tax-exempt securities and loans.  The provision for income taxes, as a percentage of pre-tax income, was 15.9% for the three months ended June 30, 2020, compared to 18.6% for the three months ended June 30, 2019.  The provision for income taxes, as a percentage of pre-tax income, was 14.6% for the six months ended June 30, 2020, compared to 18.7% for the six months ended June 30, 2019.  In accordance with ASC 740-270, Accounting for Interim Reporting, the provision for income taxes was recorded at June 30, 2020 based on the current estimate of the effective annual rate.  The lower effective tax rate during the three and six months ended June 30, 2020 when compared to the same periods in 2019 was primarily the result of an increase in federal tax credits available.  See Note 18 to the consolidated financial statements for additional information.

FINANCIAL CONDITION

Overview

At June 30, 2020, our assets were $22.102 billion, a $1.690 billion increase compared to assets of $20.412 billion at December 31, 2019.  The increase was primarily due to higher commercial loans driven by strong PPP loan production in the second quarter of 2020. As of June 30, 2020, PPP loans totaled $1.463 billion.

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The current uptick in cases of COVID-19 may offset the recent positive economic momentum and government stimulus programs, and could negatively impact our financial condition. Accordingly, there is still much uncertainty regarding the economy.

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 $19.469 billion at June 30, 2020, a $1.707 billion increase compared to earning assets of $17.762 billion at December 31, 2019.

Investment Securities

We classify the majority of our investment securities as available-for-sale to give management the flexibility to sell the securities prior to maturity if needed, based on fluctuating interest rates or changes in our funding requirements.

Equity securities are recorded at fair value and totaled $40.2 million at June 30, 2020 compared to $6.8 million at December 31, 2019.

At June 30, 2020, the investment securities portfolio, including equity securities, was $5.662 billion compared to $5.556 billion at December 31, 2019, an increase of $105.6 million.  Investment securities represented 29% of earning assets at June 30, 2020, compared to 31% at December 31, 2019.  Stronger commercial loan demand in the future could result in management’s decision to reduce the securities portfolio.  At June 30, 2020, management does not intend to sell any securities in an unrealized loss position and does not believe we will be required to sell such securities.

The investment securities available-for-sale portfolio had net unrealized gains of $185.9 million at June 30, 2020, compared to net unrealized gains of $71.9 million at December 31, 2019.  Net unrealized gains (losses) increased from December 31, 2019 to June 30, 2020 reflecting higher net unrealized gains on mortgage-backed and tax exempt municipal securities due to a decline in long-term interest rates.

The investment portfolio had an effective duration of 3.54 at June 30, 2020, compared to 3.86 at December 31, 2019.  Effective duration measures the percentage change in value of the portfolio in response to a change in interest rates.  Generally, there is more uncertainty in interest rates over a longer average maturity, resulting in a higher duration percentage.  The annualized average yields on investment securities, on a taxable equivalent basis, were 2.63% for the three months ended June 30, 2020 and 2.67% for the six months ended June 30, 2020, compared to 2.98% for the three months ended June 30, 2019 and 3.01% for the six months ended June 30, 2019.

Loans Held for Sale

Mortgage loans held for immediate sale in the secondary market were $122.5 million at June 30, 2020, compared to $46.9 million at December 31, 2019.  Certain mortgage loans are committed for sale at or prior to origination at a contracted price to an outside investor. Other mortgage loans held for immediate sale are hedged with TBA forward agreements and committed for sale when they are ready for delivery and remain on the Company’s balance sheet for a short period of time (typically 30 to 60 days). These loans are sold without recourse, beyond customary representations and warranties, and Old National has not experienced material losses arising from these sales. Mortgage originations are subject to volatility due to interest rates and home sales, among other factors. 

We have elected the fair value option prospectively for residential loans held for sale.  The aggregate fair value exceeded the unpaid principal balance by $6.5 million at June 30, 2020, compared to $1.5 million at December 31, 2019.

Commercial and Commercial Real Estate Loans

Commercial and commercial real estate loans are the largest classification within earning assets, representing 50% of earning assets at June 30, 2020, compared to 45% at December 31, 2019.  At June 30, 2020, commercial and commercial real estate loans were $9.711 billion, an increase of $1.654 billion compared to December 31, 2019 driven by strong PPP loan production in the second quarter of 2020. As of June 30, 2020, PPP loans totaled $1.463 billion.

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Residential Real Estate Loans

At June 30, 2020, residential real estate loans held in our loan portfolio were $2.229 billion, a decrease of $105.0 million compared to December 31, 2019.  Future increases in interest rates could result in a decline in the level of refinancings and new originations of residential real estate loans.

Consumer Loans

Consumer loans, including automobile loans and personal and home equity loans and lines of credit, decreased $50.6 million at June 30, 2020 compared to December 31, 2019 primarily due to decreases in consumer direct loans and home equity loans.

Other Assets

Other assets increased $97.9 million, or 39%, compared to December 31, 2019 primarily due to an increase in derivative assets. This increase was partially offset by a decrease in net deferred tax assets which reflected an increase in deferred tax liabilities related to net unrealized gains on available-for-sale investment securities.

Funding

Total funding, comprised of deposits and wholesale borrowings, was $18.961 billion at June 30, 2020, an increase of $1.663 billion from $17.298 billion at December 31, 2019.  Included in total funding were deposits of $16.319 billion at June 30, 2020, an increase of $1.766 billion from $14.553 billion at December 31, 2019.  Noninterest-bearing deposits increased $1.175 billion from December 31, 2019 to June 30, 2020 reflecting PPP funds on deposit.  Interest-bearing checking and NOW deposits increased $417.4 million from December 31, 2019 to June 30, 2020, while savings deposits increased $321.3 million.  Money market deposits increased $62.0 million from December 31, 2019 to June 30, 2020. Other time deposits decreased $268.5 million, while brokered certificates of deposit increased $58.5 million.

We use wholesale funding to augment deposit funding and to help maintain our desired interest rate risk position.  At June 30, 2020, wholesale borrowings, including federal funds purchased and interbank borrowings, securities sold under agreements to repurchase, FHLB advances, and other borrowings, totaled $2.641 billion, a decrease of $103.3 million from December 31, 2019.  Wholesale funding as a percentage of total funding was 14% at June 30, 2020 and 16% at December 31, 2019.  The decrease in wholesale funding from December 31, 2019 to June 30, 2020 was due to decreases in federal funds purchased and interbank borrowings and other borrowings, partially offset by increases in FHLB advances and securities sold under agreements to repurchase.

Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities increased $23.6 million, or 15%, from December 31, 2019 to June 30, 2020 primarily due to investment securities purchased but not settled before June 30, 2020. This increase was partially offset by incentive payments in the six months ended June 30, 2020. 

Capital 

Shareholders’ equity totaled $2.864 billion at June 30, 2020, compared to $2.852 billion at December 31, 2019.  Old National repurchased 4.9 million shares of Common Stock under a stock repurchase program that was approved by the Company’s Board of Directors reducing equity by $78.7 million and 0.2 million shares of Common Stock associated with employee share-based incentive programs reducing equity by $3.6 million in the six months ended June 30, 2020. We have suspended the stock repurchase plan approved by the Company’s Board of Directors in the near term given the uncertain economic conditions. We also paid cash dividends of $0.28 per share in the six months ended June 30, 2020, which reduced equity by $46.6 million. The change in unrealized gains (losses) on available-for-sale investment securities increased equity by $88.7 million during the six months ended June 30, 2020. The Company’s Common Stock is traded on the NASDAQ under the symbol “ONB” with 33,611 shareholders of record at June 30, 2020.

Capital Adequacy

Old National and the banking industry are subject to various regulatory capital requirements administered by the federal banking agencies. At June 30, 2020, Old National and its bank subsidiary exceeded the regulatory minimums and Old National Bank met the regulatory definition of “well-capitalized” based on the most recent regulatory definition.

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

	Regulatory Guidelines Minimum		June 30,				December 31,
			2020		2019		2019
Risk-based capital:
Tier 1 capital to total average assets (leverage ratio)	4.00	%	8.12	%	8.82	%	8.88	%
Common equity Tier 1 capital to risk-adjusted total assets	7.00		11.70		11.89		12.13
Tier 1 capital to risk-adjusted total assets	8.50		11.70		11.89		12.13
Total capital to risk-adjusted total assets	10.50		12.68		12.82		12.99
Shareholders' equity to assets	N/A		12.96		13.91		13.97

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

	Regulatory Guidelines Minimum		Prompt Corrective Action "Well Capitalized" Guidelines		June 30,				December 31,
					2020		2019		2019
Risk-based capital:
Tier 1 capital to total average assets (leverage ratio)	4.00	%	5.00	%	8.73	%	9.48	%	9.62	%
Common equity Tier 1 capital to risk-adjusted total assets	7.00		6.50		12.44		12.76		13.01
Tier 1 capital to risk-adjusted total assets	8.50		8.00		12.44		12.76		13.01
Total capital to risk-adjusted total assets	10.50		10.00		13.14		13.26		13.50

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

RISK MANAGEMENT

Overview

Old National has adopted a Risk Appetite Statement to enable the Board of Directors, Executive Leadership Group, and Senior Management to better assess, understand, and mitigate the risks of Old National. The Risk Appetite Statement addresses the following major risks: strategic, market, liquidity, credit, operational/technology/cyber, regulatory/compliance/legal, reputational, and human resources. Our Chief Risk Officer is independent of management and reports directly to the Chair of the Board’s Enterprise Risk Management Committee. The following discussion addresses these major risks: credit, market, liquidity, operational/technology/cyber, and regulatory/compliance/legal.

During the COVID-19 pandemic, we are committed and focused on the health and safety of our team members, clients, and communities. Accordingly, we continue to evaluate and adjust our branch hours, lobby usage, and return to work efforts as necessary depending on developments across our footprint. During the second quarter of 2020, we began to return to the workplace. This included reopening our lobbies and bringing our team members back to the office, but on a much slower pace than initially planned, and in some instances pausing our return in certain markets due to the increasing number of positive COVID-19 cases across our footprint. Despite this, Old National is

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still open for business. We continue to lend to qualified businesses for working capital and general business purposes.

Credit Risk

Credit risk represents the risk of loss arising from an obligor’s inability or failure to meet contractual payment or performance terms.  Our primary credit risks result from our investment and lending activities

Investment Activities

We carry a higher exposure to loss in our pooled trust preferred securities, which are collateralized debt obligations, due to illiquidity in that market and the performance of the underlying collateral.  At June 30, 2020, we had pooled trust preferred securities with a fair value of $7.2 million, or less than 1% of the available-for-sale securities portfolio.  These securities remained classified as available-for-sale and at June 30, 2020, the unrealized loss on our pooled trust preferred securities was $6.6 million. The fair value of these securities is expected to improve as we get closer to maturity, but not in all cases.

All of our mortgage-backed securities are backed by U.S. government-sponsored or federal agencies.  Municipal bonds, corporate bonds, and other debt securities are evaluated by reviewing the credit-worthiness of the issuer and general market conditions.  See Note 4 to the consolidated financial statements for additional details about our investment security portfolio.

Counterparty Exposure

Counterparty exposure is the risk that the other party in a financial transaction will not fulfill its obligation.  We define counterparty exposure as nonperformance risk in transactions involving federal funds sold and purchased, repurchase agreements, correspondent bank relationships, and derivative contracts with companies in the financial services industry.  Old National manages exposure to counterparty risk in connection with its derivatives transactions by generally engaging in transactions with counterparties having ratings of at least A by Standard & Poor’s Rating Service or A2 by Moody’s Investors Service.  Total credit exposure is monitored by counterparty and managed within limits that management believes to be prudent. Old National’s net counterparty exposure was an asset of $557.5 million at June 30, 2020.

Lending Activities

Commercial

Commercial and industrial loans are made primarily for the purpose of financing equipment acquisition, expansion, working capital, and other general business purposes. Lease financing consists of direct financing leases and are used by commercial customers to finance capital purchases ranging from computer equipment to transportation equipment. The credit decisions for these transactions are based upon an assessment of the overall financial capacity of the applicant. A determination is made as to the applicant’s ability to repay in accordance with the proposed terms as well as an overall assessment of the risks involved. In addition to an evaluation of the applicant’s financial condition, a determination is made of the probable adequacy of the primary and secondary sources of repayment, such as additional collateral or personal guarantees, to be relied upon in the transaction. Credit agency reports of the applicant’s credit history supplement the analysis of the applicant’s creditworthiness.

Commercial mortgages and construction loans are offered to real estate investors, developers, and builders primarily domiciled in the geographic market areas we serve: Indiana, Kentucky, Michigan, Wisconsin, and Minnesota. 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

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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 fully-indexed rates such as LIBOR. We do not offer payment-option facilities, sub-prime loans, or any product with negative amortization.

Home equity loans are secured primarily by second mortgages on residential property of the borrower. The underwriting terms for the home equity product generally permit borrowing availability, in the aggregate, up to 90% of the appraised value of the collateral property at the time of origination. We offer fixed and variable rate home equity loans, with variable rate loans underwritten at fully-indexed rates. Decisions are primarily based on LTV ratios, DTI ratios, and credit scores. We do not offer home equity loan products with reduced documentation.

Automobile loans include loans and leases secured by new or used automobiles. We originate automobile loans and leases primarily on an indirect basis through selected dealerships. We require borrowers to maintain collision insurance on automobiles securing consumer loans, with us listed as loss payee. Our procedures for underwriting automobile loans include an assessment of an applicant’s overall financial capacity, including credit history and the ability to meet existing obligations and payments on the proposed loan. Although an applicant’s creditworthiness is the primary consideration, the underwriting process also includes a comparison of the value of the collateral security to the proposed loan amount.

Asset Quality

Community-based lending personnel, along with region-based independent underwriting and analytic support staff, extend credit under guidelines established and administered by our Enterprise Risk Committee.  This committee, which meets quarterly, is made up of outside directors.  The committee monitors credit quality through its review of information such as delinquencies, credit exposures, peer comparisons, problem loans, and charge-offs.  In addition, the committee reviews and approves recommended loan policy changes to assure it remains appropriate for the current lending environment.

We lend to commercial and commercial real estate clients in various industries including manufacturing, agribusiness, transportation, mining, wholesaling, and retailing. Old National manages concentrations of credit exposure by industry, product, geography, customer relationship, and loan size. At June 30, 2020, our average commercial loan size (excluding PPP loans) was under $315,000 and our average commercial real estate loan size was under $725,000. In addition, while loans to lessors of both residential and non-residential real estate exceed 10% of total loans, no individual sub-segment category within those broader categories reaches the 10% threshold. At June 30, 2020, we had minimal exposure to foreign borrowers and no sovereign debt. Our policy is to concentrate our lending activity in the geographic market areas we serve, primarily Indiana, Kentucky, Michigan, Wisconsin, and Minnesota. We have experienced an impact from COVID-19 as of June 30, 2020; however, the depth of this crisis is ongoing and its effect is anticipated to be very broad-based. Our geographic footprint, the Midwest, has not experienced the same adverse impact as other parts of the country; however, we are seeing a recent uptick in COVID-19 cases. The relief programs we have put in place along governmental stimulus programs, have helped dampen any increases in delinquencies we might have seen absent these programs. It remains to be seen what impact any wind down of these programs will have on delinquency rates going forward. Management believes that trends in under-performing, criticized, and classified loans will be influenced by the degree to which the economy strengthens or weakens, as well as the ongoing impact of the COVID-19 pandemic in the markets in which we operate.

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Summary of under-performing, criticized, and classified assets:

	June 30,						December 31,
(dollars in thousands)	2020			2019			2019
Total nonaccrual loans	$	125,546		$	142,421		$	126,412
TDRs still accruing	16,582			19,031			18,338
Total past due loans (90 days or more and still accruing)	779			423			570
Other real estate owned	1,786			2,819			2,169
Total under-performing assets	$	144,693		$	164,694		$	147,489
Classified loans (includes nonaccrual, TDRs still accruing, past due 90 days, and other problem loans)	$	318,758		$	317,572		$	296,671
Other classified assets (1)	2,565			2,550			2,933
Criticized loans	220,300			220,455			234,841
Total criticized and classified assets	$	541,623		$	540,577		$	534,445
Asset Quality Ratios:
Non-performing loans/total loans (2) (3)	1.04		%	1.34		%	1.19		%
Under-performing assets/total loans and other real estate owned (4)	1.06			1.37			1.22
Under-performing assets/total assets	0.65			0.82			0.72
Allowance/under-performing assets (5)	88.74			34.18			37.03
Allowance/nonaccrual loans (5)	102.27			39.53			43.21

(1)Includes one pooled trust preferred security and one insurance policy at June 30, 2020.

(2)Loans exclude loans held for sale.

(3)Non-performing loans include nonaccrual loans and TDRs still accruing.

(4)Includes acquired loans that were recorded at fair value at the date of acquisition. As such, the credit risk was incorporated in the fair value recorded and no allowance for loan losses was recorded at June 30, 2019 or December 31, 2019.

(5)Beginning January 1, 2020, the allowance is based on current expected loss methodology. Prior to January 1, 2020, the allowance was based on incurred loss methodology.

Under-performing assets totaled $144.7 million at June 30, 2020, compared to $164.7 million at June 30, 2019 and $147.5 million at December 31, 2019.  Under-performing assets as a percentage of total loans and other real estate owned at June 30, 2020 were 1.06%, a 31 basis point improvement from 1.37% at June 30, 2019 and a 16 basis point improvement from 1.22% at December 31, 2019.

Nonaccrual loans decreased from June 30, 2019 primarily due to a decrease in commercial real estate nonaccrual loans.  As a percentage of nonaccrual loans, the allowance was 102.27% at June 30, 2020, compared to 39.53% at June 30, 2019 and 43.21% at December 31, 2019. Beginning January 1, 2020, the allowance is based on current expected loss methodology. Prior to January 1, 2020, the allowance was based on incurred loss methodology.

Total criticized and classified assets were $541.6 million at June 30, 2020, an increase of $1.0 million from June 30, 2019, and an increase of $7.2 million from December 31, 2019. Other classified assets include investment securities that fell below investment grade rating totaling $2.6 million at June 30, 2020, compared to $2.6 million at June 30, 2019 and $2.9 million at December 31, 2019.

Old National may choose to restructure the contractual terms of certain loans.  The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit Old National by increasing the ultimate probability of collection.

Any loans that are modified are reviewed by Old National to identify if a TDR has occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, Old National Bank grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status.  The modification of the terms of such loans include one or a combination of the following:  a reduction of the stated interest rate of the loan, an extension of the maturity date at a stated rate of interest lower than the current market rate of new debt with similar risk, or a permanent reduction of the recorded investment of the loan.

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Loans modified in a TDR are typically placed on nonaccrual status until we determine the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate a period of performance according to the restructured terms for six months.

If we are unable to resolve a nonperforming loan issue, the credit will be charged off when it is apparent there will be a loss.  For large commercial type loans, each relationship is individually analyzed for evidence of apparent loss based on quantitative benchmarks or subjectively based upon certain events or particular circumstances.  Generally, Old National charges off small commercial loans scored through our small business credit center with contractual balances under $250,000 that are 90 days or more delinquent and do not have adequate collateral support.  For residential and consumer loans, a charge off is recorded at the time foreclosure is initiated or when the loan becomes 120 to 180 days past due, whichever is earlier.

For commercial TDRs, an allocated reserve is established within the allowance for credit losses for the difference between the carrying value of the loan and its computed value.  To determine the computed value of the loan, one of the following methods is selected: (1) the present value of expected cash flows discounted at the loan’s original effective interest rate, (2) the loan’s observable market price, or (3) the fair value of the collateral, if the loan is collateral dependent.  The allocated reserve is established as the difference between the carrying value of the loan and the collectable value.  If there are significant changes in the amount or timing of the loan’s expected future cash flows, impairment is recalculated and the valuation allowance is adjusted accordingly.

When a residential or consumer loan is identified as a TDR, the loan is typically written down to its collateral value less selling costs.

At June 30, 2020, TDRs consisted of $10.6 million of commercial loans, $12.7 million of commercial real estate loans, $0.1 million of BBCC loans, $3.0 million of residential real estate loans, $0.8 million of direct consumer loans, and $0.4 million of home equity loans totaling $27.6 million. TDRs included within nonaccrual loans totaled $11.3 million at June 30, 2020. At December 31, 2019, TDRs consisted of $12.4 million of commercial loans, $14.2 million of commercial real estate loans, $0.6 million of BBCC loans, $3.1 million of residential real estate loans, $1.0 million of direct consumer loans, and $0.4 million of home equity loans totaling $31.7 million. TDRs included within nonaccrual loans totaled $13.8 million at December 31, 2019.

Old National has allocated specific reserves to customers whose loan terms have been modified in TDRs totaling $1.4 million at June 30, 2020 and $0.9 million of December 31, 2019.  At June 30, 2020, Old National had committed to lend an additional $0.7 million to customers with outstanding loans that are classified as TDRs, compared to $2.3 million at December 31, 2019.

The terms of certain other loans were modified during 2020 and 2019 that did not meet the definition of a TDR.  It is our process to review all classified and criticized loans that, during the period, have been renewed, have entered into a forbearance agreement, have gone from principal and interest to interest only, or have extended the maturity date.  In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on its debt in the foreseeable future without the modification.  The evaluation is performed under our internal underwriting policy.  We also evaluate whether a concession has been granted or if we were adequately compensated through a market interest rate, additional collateral, or a bona fide guarantee.  We also consider whether the modification was insignificant relative to the other terms of the agreement or the delay in a payment.

In general, once a modified loan is considered a TDR, the loan will always be considered a TDR, and therefore impaired, until it is paid in full, otherwise settled, sold, or charged off.  However, guidance also permits for loans to be removed from TDR status when subsequently restructured under these circumstances: (1) at the time of the subsequent restructuring, the borrower is not experiencing financial difficulties, and this is documented by a current credit evaluation at the time of the restructuring, (2) under the terms of the subsequent restructuring agreement, the institution has granted no concession to the borrower; and (3) the subsequent restructuring agreement includes market terms that are no less favorable than those that would be offered for a comparable new loan.  For loans subsequently restructured that have cumulative principal forgiveness, the loan should continue to be measured in accordance with ASC 310-10, Receivables – Overall.  However, consistent with ASC 310-40-50-2, Troubled Debt Restructurings by Creditors, Creditor Disclosure of Troubled Debt Restructurings, the loan would not be required to be reported in the years following the restructuring if the subsequent restructuring meets both of these criteria: (1) has an interest rate at the time of the subsequent restructuring that is not less than a market interest rate; and (2) is performing in compliance with its modified terms after the subsequent restructuring.

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We have developed relief programs to assist borrowers in financial need due to the effects of the COVID-19 pandemic. The Interagency Statement issued by our banking regulators encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further provides that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates. The Interagency Statement was subsequently revised in April 2020 to clarify the interaction of the original guidance with Section 4013 of the CARES Act, as well as setting forth the banking regulators’ views on consumer protection considerations. In accordance with such guidance, we are offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. First-time deferral requests have slowed and we are beginning to receive requests of extensions from the initial 90-day deferral clients. To the extent that we have borrowers requesting deferral period extensions, we will spend more time analyzing these requests than we did on the first-time request and will compare the most recent financial information to the pre-pandemic baseline financial information on liquidity, capital, debt service ability, and loan structure. The table below presents the volume of loan deferrals through June 30, 2020 by loan category:

(dollars in thousands)	Number	Booked Amount		Booked % of Portfolio
Commercial	1,474	$	713,619	25	%
Commercial real estate	194	456,500		8
Residential real estate	335	78,639		3
Consumer	2,159	54,786		3
Total	4,162	$	1,303,544	11	%

U.S. Small Business Administration Paycheck Protection Program

Section 1102 of the CARES Act created the PPP, a program administered by the SBA to provide loans to small businesses for payroll and other basic expenses during the COVID-19 pandemic. Old National has participated in the PPP as a lender. These loans are eligible to be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. Additionally, loan payments will also be deferred for six months of the loan. The PPP commenced on April 3, 2020 and is available to qualified borrowers through August 8, 2020, or as long as the appropriated funding is available. No collateral or personal guarantees are required. Neither the government nor lenders are permitted to charge the recipients any fees.

Old National began accepting applications from qualified borrowers on April 3, 2020 and as of June 30, 2020 over 9,200 applications have been processed and approved, representing $1.538 billion in funding to new and existing clients through the PPP. To the extent the PPP loans are forgiven, this represents outside equity contributions to our borrowers; and, especially with respect to vulnerable industries, we believe these capital injections are going to be instrumental in assisting our borrowers in navigating through the pandemic. This capital injection, along with the level of capital each borrower had just prior to COVID-19 impacting them, are critical factors in determining the staying power of our borrowers. Old National approved just over $203 million in PPP loans to borrowers in various industry segments identified as vulnerable, which represents just shy of 25% of our total pre-PPP outstanding loan balances to these industries. Upon receipt of interim financial results from our borrowers, we will use that information to update our understanding of the underlying strengths or weaknesses in each individual relationship and take actions, as appropriate.

As of July 27, 2020, 712 borrowers have initiated the PPP loan forgiveness application process totaling $139.4 million in loans.

Allowance for Credit Losses on Loans and Unfunded Commitments

Loan charge-offs, net of recoveries, totaled $0.5 million for the three months ended June 30, 2020, compared to $0.3 million for the three months ended June 30, 2019. Annualized, net charge-offs (recoveries) to average loans were 0.02% for the three months ended June 30, 2020 compared to 0.01% for the three months ended June 30, 2019. Loan charge-offs, net of recoveries, totaled $7.1 million for the six months ended June 30, 2020, compared to $1.2 million for the six months ended June 30, 2019.  Annualized, net charge-offs (recoveries) to average loans were 0.11% for the six months ended June 30, 2020 compared to 0.02% for the six months ended June 30,

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2019.  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.

Beginning January 1, 2020, we calculated allowance for credit losses using current expected credit losses methodology. As of January 1, 2020, Old National increased the allowance for credit losses for loans by $41.3 million and increased the allowance for credit losses for unfunded loan commitments by $4.5 million, since the ASU covers credit losses over the expected life of a loan as well as considering future changes in macroeconomic conditions. The increase related to the acquired loan portfolio totaled $27.1 million.

Credit quality within the loans held for investment portfolio is continuously monitored by management and is reflected within the allowance for credit losses for loans. The allowance for credit losses is an estimate of expected losses inherent within the Company’s loans held for investment portfolio. Credit quality is assessed and monitored by evaluating various attributes and the results of those evaluations are utilized in underwriting new loans and in our process for estimating expected credit losses. Expected credit loss inherent in non-cancelable off-balance-sheet credit exposures is accounted for as a separate liability included in other liabilities on the consolidated statements of financial condition. 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 its loan portfolio segments. These segments are further disaggregated into loan classes, the level at which credit risk is monitored. When computing the level of expected credit losses, credit loss assumptions are estimated using a model that categorizes loan pools based on loss history, delinquency status, and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense in those future periods.

The allowance level is influenced by loan volumes, loan AQR migration or delinquency status, changes in historical loss experience, and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions. The methodology for estimating the amount of expected credit losses reported in the allowance for credit losses has two basic components: first, an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans; and second, a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics.

At June 30, 2020, the allowance for credit losses for loans was $128.4 million. Continued loan growth in future periods, a decline in our current level of recoveries, or an increase in charge-offs could result in an increase in provision expense. Additionally, with the adoption of CECL beginning on January 1, 2020, provision expense may become more volatile due to changes in CECL model assumptions of credit quality, macroeconomic factors and conditions, and loan composition, which drive the allowance for credit losses balance.

Prior to January 1, 2020, we calculated allowance for loan losses using incurred losses methodology. At December 31, 2019, the allowance for loan losses was $54.6 million.

We maintain an allowance for credit losses on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements. The allowance is computed using a methodology similar to that used to determine the allowance for credit losses for loans, modified to take into account the probability of a drawdown on the commitment.  The allowance for credit losses on unfunded loan commitments is classified as a liability account on the balance sheet and totaled $11.0 million at June 30, 2020.

Prior to January 1, 2020, we calculated allowance for losses on unfunded loan commitments using incurred losses methodology. At December 31, 2019, the allowance losses on unfunded commitments was $2.7 million.

Market Risk

Market risk is the risk that the estimated fair value of our assets, liabilities, and derivative financial instruments will decline as a result of changes in interest rates or financial market volatility, or that our net income will be significantly reduced by interest rate changes.

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The objective of our interest rate management process is to maximize net interest income while operating within acceptable limits established for interest rate risk and maintaining adequate levels of funding and liquidity.

Potential cash flows, sales, or replacement value of many of our assets and liabilities, especially those that earn or pay interest, are sensitive to changes in the general level of interest rates. This interest rate risk arises primarily from our normal business activities of gathering deposits and extending loans. Many factors affect our exposure to changes in interest rates, such as general economic and financial conditions, customer preferences, historical pricing relationships, and re-pricing characteristics of financial instruments. Our earnings can also be affected by the monetary and fiscal policies of the U.S. Government and its agencies, particularly the Federal Reserve.

In managing interest rate risk, we, through the Funds Management Committee, a committee of the Board of Directors, establish guidelines, for asset and liability management, including measurement of short and long-term sensitivities to changes in interest rates. Based on the results of our analysis, we may use different techniques to manage changing trends in interest rates including:

•adjusting balance sheet mix or altering interest rate characteristics of assets and liabilities;

•changing product pricing strategies;

•modifying characteristics of the investment securities portfolio; or

•using derivative financial instruments, to a limited degree.

A key element in our ongoing process is to measure and monitor interest rate risk using a model to quantify the impact of changing interest rates on Old National. The model quantifies the effects of various possible interest rate scenarios on projected net interest income. The model measures the impact on net interest income relative to a base case scenario. The base case scenario assumes that the balance sheet and interest rates are held at current levels. Interest rates are floored at 0.00% in the down 50 basis points scenario. The model shows our projected net interest income sensitivity based on interest rate changes only and does not consider other forecast assumptions.

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The following table illustrates our projected net interest income sensitivity over a two year cumulative horizon based on the asset/liability model at June 30, 2020 and 2019:

	Immediate Rate Decrease					Immediate Rate Increase
(dollars in thousands)	-50 Basis Points			Base		+100 Basis Points			+200 Basis Points			+300 Basis Points
June 30, 2020
Projected interest income:
Money market, other interest earning investments, and investment securities	$	263,173		$	274,827	$	306,795		$	325,762		$	339,578
Loans	871,350			899,020		1,017,761			1,138,823			1,258,638
Total interest income	1,134,523			1,173,847		1,324,556			1,464,585			1,598,216
Projected interest expense:
Deposits	29,316			39,521		121,162			202,890			284,608
Borrowings	73,519			75,797		101,468			130,230			163,376
Total interest expense	102,835			115,318		222,630			333,120			447,984
Net interest income	$	1,031,688		$	1,058,529	$	1,101,926		$	1,131,465		$	1,150,232
Change from base	$	(26,841)				$	43,397		$	72,936		$	91,703
% change from base	(2.54)		%			4.10		%	6.89		%	8.66		%
June 30, 2019
Projected interest income:
Money market, other interest earning investments, and investment securities	$	312,978		$	327,496	$	345,783		$	360,405		$	373,426
Loans	1,061,488			1,120,904		1,240,088			1,353,653			1,466,682
Total interest income	1,374,466			1,448,400		1,585,871			1,714,058			1,840,108
Projected interest expense:
Deposits	107,522			148,369		241,198			334,016			426,834
Borrowings	115,103			129,471		162,572			196,010			229,493
Total interest expense	222,625			277,840		403,770			530,026			656,327
Net interest income	$	1,151,841		$	1,170,560	$	1,182,101		$	1,184,032		$	1,183,781
Change from base	$	(18,719)				$	11,541		$	13,472		$	13,221
% change from base	(1.60)		%			0.99		%	1.15		%	1.13		%

Our asset sensitivity increased year over year primarily due to deposit pricing actions and changes in our hedging strategies, balance sheet mix, investment duration, and prepayment speed behavior.

A key element in the measurement and modeling of interest rate risk is the re-pricing assumptions of our transaction deposit accounts, which have no contractual maturity dates. Because the models are driven by expected behavior in various interest rate scenarios and many factors besides market interest rates affect our net interest income, we recognize that model outputs are not guarantees of actual results. For this reason, we model many different combinations of interest rates and balance sheet assumptions to understand our overall sensitivity to market interest rate changes, including shocks, ramps, yield curve flattening, yield curve steepening, as well as forecasts of likely interest rate scenarios tested. At June 30, 2020, our projected net interest income sensitivity based on the asset/liability models we utilize was within the limits of our interest rate risk policy for the scenarios tested.

We use cash flow and fair value hedges, primarily interest rate swaps, collars, and floors, to mitigate interest rate risk. Derivatives designated as hedging instruments were in a net asset position with a fair value of $19.2 million at June 30, 2020, compared to a net asset position with a fair value of $6.1 million at December 31, 2019.  See Note 19 to the consolidated financial statements for further discussion of derivative financial instruments.

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Liquidity Risk

Liquidity risk arises from the possibility that we may not be able to satisfy current or future financial commitments, or may become unduly reliant on alternative funding sources.  The Funds Management Committee of the Board of Directors establishes liquidity risk guidelines and, along with the Balance Sheet Management Committee, monitors liquidity risk.  The objective of liquidity management is to ensure we have the ability to fund balance sheet growth and meet deposit and debt obligations in a timely and cost-effective manner.  Management monitors liquidity through a regular review of asset and liability maturities, funding sources, and loan and deposit forecasts.  We maintain strategic and contingency liquidity plans to ensure sufficient available funding to satisfy requirements for balance sheet growth, properly manage capital markets’ funding sources and to address unexpected liquidity requirements. On June 5, 2020, we filed an automatic shelf registration statement with the SEC that permits us to issue an unspecified amount of debt or equity securities.

Loan repayments and maturing investment securities are a relatively predictable source of funds.  However, deposit flows, calls of investment securities and prepayments of loans and mortgage-related securities are strongly influenced by interest rates, the housing market, general and local economic conditions, and competition in the marketplace.  We continually monitor marketplace trends to identify patterns that might improve the predictability of the timing of deposit flows or asset prepayments.

A time deposit maturity schedule for Old National Bank is shown in the following table at June 30, 2020.

(dollars in thousands)
Maturity Bucket	Amount		Rate
2020	$	794,671	0.86	%
2021	448,957		0.90
2022	99,869		1.12
2023	66,913		1.48
2024	36,536		1.66
2025 and beyond	25,287		1.11
Total	$	1,472,233	0.94	%

Our ability to acquire funding at competitive prices is influenced by rating agencies’ views of our credit quality, liquidity, capital, and earnings.  Moody’s Investor Service places us in an investment grade that indicates a low risk of default.  For both Old National and Old National Bank:

•Moody’s Investor Service affirmed the Long-Term Rating of A3 of Old National’s senior unsecured/issuer rating on February 3, 2020.

•Moody’s Investor Service affirmed Old National Bank’s long-term deposit rating of Aa3 on February 3, 2020.  The bank’s short-term deposit rating was affirmed at P-1 and the bank’s issuer rating was affirmed at A3.

The rating outlook from Moody’s Investor Service is stable.  Moody’s Investor Service concluded a rating review of Old National Bank on February 3, 2020.

The credit ratings of Old National and Old National Bank at June 30, 2020 are shown in the following table.

	Moody's Investor Service
	Long-term	Short-term
Old National	A3	N/A
Old National Bank	Aa3	P-1

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Old National Bank maintains relationships in capital markets with brokers and dealers to issue certificates of deposit and short-term and medium-term bank notes as well.  At June 30, 2020, Old National and its subsidiaries had the following availability of liquid funds and borrowings:

(dollars in thousands)	Parent Company		Subsidiaries
Available liquid funds:
Cash and due from banks	$	50,737	$	259,757
Unencumbered government-issued debt securities	—		2,065,327
Unencumbered investment grade municipal securities	—		712,331
Unencumbered corporate securities	—		155,174
Availability of borrowings:
Amount available from Federal Reserve discount window*	—		469,733
Amount available from Federal Home Loan Bank Indianapolis*	—		552,724
Total available funds	$	50,737	$	4,215,046

* Based on collateral pledged

Old National Bancorp has routine funding requirements consisting primarily of operating expenses, dividends to shareholders, debt service, net derivative cash flows, and funds used for acquisitions.  Old National Bancorp can obtain funding to meet its obligations from dividends and management fees collected from its subsidiaries, operating line of credit, and through the issuance of debt securities.  Additionally, Old National Bancorp has a shelf registration in place with the SEC permitting ready access to the public debt and equity markets.  At June 30, 2020, Old National Bancorp’s other borrowings outstanding were $213.1 million.

Federal banking laws regulate the amount of dividends that may be paid by banking subsidiaries without prior approval.  Prior regulatory approval is required if dividends to be declared in any year would exceed net earnings of the current year plus retained net profits for the preceding two years.  Prior regulatory approval to pay dividends was not required in 2019 and is not currently required.

Operational/Technology/Cyber Risk

Operational/technology/cyber risk is the potential that inadequate information systems, operational problems, breaches in internal controls, information security breaches, fraud, or unforeseen catastrophes will result in unexpected losses.  We maintain frameworks, programs, and internal controls to prevent or minimize financial loss from failure of systems, people, or processes.  This includes specific programs and frameworks intended to prevent or limit the effects of cyber risks including cyber-attacks or other information security breaches that might allow unauthorized transactions or unauthorized access to customer, associate, or company sensitive information.  Metrics and measurements are used by Executive Leaders in the management of day-to-day operations to ensure effective customer service, minimization of service disruptions, and oversight of operational and cyber risk.  We continually monitor and report on operational, technology, and cyber risks related to clients, products, and business practices; external and internal fraud; business disruptions and systems failures; cyber-attacks, information security or data breaches; damage to physical assets; and execution, delivery, and process management.

The Enterprise Risk Management Committee of the Board of Directors is responsible for the oversight, guidance, and monitoring of risks, including operational/technology/cyber risks, being taken by the Company.  The monitoring is accomplished through ongoing review of management reports, data on risks, policy limits and discussion on enterprise risk management strategies, policies, and risk assessments.

Regulatory/Compliance/Legal Risk

Regulatory/compliance/legal risk is the risk that the Company violated or was not in compliance with applicable laws, regulations or practices, industry standards, or ethical standards.  The legal portion assesses the risk that unenforceable contracts, lawsuits, or adverse judgments can disrupt or otherwise negatively impact the Company.  The Board of Directors expects we will perform business in a manner compliant with applicable laws and/or regulations and expects issues to be identified, analyzed, and remediated in a timely and complete manner.

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OFF-BALANCE SHEET ARRANGEMENTS

Off-balance sheet arrangements include commitments to extend credit and financial guarantees.  Commitments to extend credit and financial guarantees are used to meet the financial needs of our customers.  Our banking affiliates have entered into various agreements to extend credit, including loan commitments of $2.999 billion and standby letters of credit of $84.3 million at June 30, 2020.  At June 30, 2020, approximately $2.758 billion of the loan commitments had fixed rates and $240.6 million had floating rates, with the floating rates ranging from 0% to 13%.  At December 31, 2019, loan commitments were $2.779 billion and standby letters of credit were $87.8 million.  The term of these off-balance sheet arrangements is typically one year or less.

Old National is a party in risk participation transactions of interest rate swaps, which had total notional amount of $49.0 million at June 30, 2020.

CONTRACTUAL OBLIGATIONS

The following table presents our significant fixed and determinable contractual obligations at June 30, 2020:

	Payments Due In
(dollars in thousands)	One Year or Less (1)		One to Three Years		Three to Five Years		Over Five Years		Total
Deposits without stated maturity	$	14,847,213	$	—	$	—	$	—	$	14,847,213
IRAs, consumer, and brokered certificates of deposit	794,671		548,826		103,449		25,287		1,472,233
Federal funds purchased and interbank borrowings	801		—		—		—		801
Securities sold under agreements to repurchase	367,744		—		—		—		367,744
FHLB advances	80,770		150,500		325,160		1,478,584		2,035,014
Other borrowings	497		2,098		177,302		57,980		237,877
Fixed interest payments (2)	22,712		87,876		76,214		81,175		267,977
Operating leases	7,849		28,628		17,010		56,991		110,478
Other long-term liabilities (3)	18,478		8,974		36		26		27,514

(1)For the remaining six months of fiscal 2020.

(2)Our senior notes, subordinated notes, certain trust preferred securities, and certain FHLB advances have fixed rates ranging from 0.34% to 4.96%.  All of our other long-term debt is at LIBOR based variable rates at June 30, 2020.  The projected variable interest assumes no increase in LIBOR rates from June 30, 2020.

(3)Includes unfunded commitments on qualified affordable housing projects and other tax credit investments.

We rent certain premises and equipment under operating leases.  See Note 9 to the consolidated financial statements for additional information on long-term lease arrangements.

We are party to various derivative contracts as a means to manage the balance sheet and our related exposure to changes in interest rates, to manage our residential real estate loan origination and sale activity, and to provide derivative contracts to our clients.  Since the derivative liabilities recorded on the balance sheet change frequently and do not represent the amounts that may ultimately be paid under these contracts, these liabilities are not included in the table of contractual obligations presented above.  Further discussion of derivative instruments is included in Note 19 to the consolidated financial statements.

In the normal course of business, various legal actions and proceedings are pending against us and our affiliates which are incidental to the business in which they are engaged.  Further discussion of contingent liabilities is included in Note 20 to the consolidated financial statements.

In addition, liabilities recorded under FASB ASC 740-10 (FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109) are not included in the table because the amount and timing of any cash payments cannot be reasonably estimated.  Further discussion of income taxes and liabilities is included in Note 18 to the consolidated financial statements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our accounting policies are described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019.  Certain accounting policies require management to

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use significant judgment and estimates, which can have a material impact on the carrying value of certain assets and liabilities.  We consider these policies to be critical accounting policies.  The judgment and assumptions made are based upon historical experience or other factors that management believes to be reasonable under the circumstances.  Because of the nature of the judgment and assumptions, actual results could differ from estimates, which could have a material effect on our financial condition and results of operations.

The following accounting policies materially affect our reported earnings and financial condition and require significant judgments and estimates.  Management has reviewed these critical accounting estimates and related disclosures with our Audit Committee.

Goodwill

•Description.  For acquisitions, we are required to record the assets acquired, including identified intangible assets, and the liabilities assumed at their fair value.  These often involve estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques that may include estimates of attrition, inflation, asset growth rates, or other relevant factors.  Goodwill recorded must be reviewed for impairment on an annual basis, as well as on an interim basis if events or changes indicate that the asset might be impaired.  An impairment loss must be recognized for any excess of carrying value over fair value of the goodwill.

•Judgments and Uncertainties.  The determination of fair values is based on valuations using management’s assumptions of future growth rates, future attrition, discount rates, multiples of earnings or other relevant factors.

•Effect if Actual Results Differ From Assumptions.  Changes in these factors, as well as downturns in economic or business conditions, could have a significant adverse impact on the carrying value of goodwill and could result in impairment losses affecting our financial statements as a whole and our banking subsidiary in which the goodwill resides.

•Pandemic. A prolonged COVID-19 outbreak, or any other epidemic that harms the global economy, U.S. economy, or the economies in which we operate could adversely affect our operations. We continue to evaluate our qualitative assessment assumptions, which are subject to risks and uncertainties, including: (1) forecasted revenues, expenses, and cash flows; (2) current discount rates; (3) our market capitalization; (4) observable market transactions and multiples; (5) changes to the regulatory environment; and (6) the nature and amount of government support that has been and is expected to be provided in the future. Based on the interim qualitative assessment, we have determined that our goodwill was not impaired as of June 30, 2020. While the spread of the COVID-19 virus had an impact to our operations, sustained disruption to our operations are likely to negatively impact our financial condition and results of operations. In subsequent reporting periods, this may lead management to conclude that an interim quantitative impairment test of our goodwill is required prior to the annual impairment test conducted on August 31.

Allowance for Credit Losses for Loans

•Description.  The allowance for credit losses for loans represents management’s estimate of all expected credit losses over the expected contractual life of our loan portfolio. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for credit losses in those future periods.

The allowance for credit losses for loans, as reported in our consolidated statements of financial condition, is adjusted by an expense for credit losses, which is recognized in earnings, and reduced by the charge-off of loan amounts, net of recoveries.

•Judgments and Uncertainties.  We utilize a discounted cashflow approach to determine the allowance for credit losses for performing loans and nonperforming loans. Expected cashflows are created for each loan and discounted using the effective yield. The discounted sum of expected cashflows is then compared to the amortized cost and any shortfall is recorded as reserve. Expected cashflows are created using a combination of contractual payment schedules, calculated PDs, LGD and prepayment assumptions as well as qualitative factors. For the commercial and commercial real estate loans, the PD is forecast using a regression model to determine the likelihood of a loan moving into nonaccrual within the time horizon. For residential and

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consumer loans, the PD is forecast using a regression model to determine the likelihood of a loan being charged-off within the time horizon. The regression models use combinations of variables to assess systematic and unsystematic risk. Variables used for unsystematic risk are borrower specific and help to gauge the risk of default from an individual borrower. Variables for systematic risk, risk inherent to all borrowers, come from the use of forward-looking economic forecasts and include variables such as unemployment rate, gross domestic product, and house price index. The LGD is defined as credit loss incurred when an obligor of the bank defaults. Qualitative factors include items such as changes in lending policies or procedures and economic uncertainty in forward-looking forecasts.

•Effect if Actual Results Differ From Assumptions.  The allowance represents management’s best estimate, but significant downturns in circumstances relating to loan quality and economic conditions could result in a requirement for additional allowance. Likewise, an upturn in loan quality and improved economic conditions may allow a reduction in the required allowance. In either instance, unanticipated changes could have a significant impact on results of operations.

The expense for credit loss recorded through earnings is the amount necessary to maintain the allowance for credit losses at the amount of expected credit losses inherent within the loans held for investment portfolio. The amount of expense and the corresponding level of allowance for credit losses for loans are based on our evaluation of the collectability of the loan portfolio based on historical loss experience, reasonable and supportable forecasts, and other significant qualitative and quantitative factors.

Derivative Financial Instruments

•Description.  As part of our overall interest rate risk management, we use derivative instruments to reduce exposure to changes in interest rates and market prices for financial instruments.  The application of the hedge accounting policy requires judgment in the assessment of hedge effectiveness, identification of similar hedged item groupings and measurement of changes in the fair value of derivative financial instruments and hedged items.  To the extent hedging relationships are found to be effective, changes in fair value of the derivatives are offset by changes in the fair value of the related hedged item or recorded to other comprehensive income.  Management believes hedge effectiveness is evaluated properly in preparation of the financial statements.  All of the derivative financial instruments we use have an active market and indications of fair value can be readily obtained.  We are not using the “short-cut” method of accounting for any fair value derivatives.

•Judgments and Uncertainties.  The application of the hedge accounting policy requires judgment in the assessment of hedge effectiveness, identification of similar hedged item groupings and measurement of changes in the fair value of derivative financial instruments and hedged items.

•Effect if Actual Results Differ From Assumptions.  To the extent hedging relationships are found to be effective, changes in fair value of the derivatives are offset by changes in the fair value of the related hedged item or recorded to other comprehensive income.  However, if in the future the derivative financial instruments used by us no longer qualify for hedge accounting treatment, all changes in fair value of the derivative would flow through the consolidated statements of income in other noninterest income, resulting in greater volatility in our earnings.

Income Taxes

•Description.  We are subject to the income tax laws of the U.S., its states, and the municipalities in which we operate.  These tax laws are complex and subject to different interpretations by the taxpayer and the relevant government taxing authorities.  We review income tax expense and the carrying value of deferred tax assets quarterly; and as new information becomes available, the balances are adjusted as appropriate.  FASB ASC 740-10 (FIN 48) prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements.  See Note 18 to the consolidated financial statements for a further description of our provision and related income tax assets and liabilities.

•Judgments and Uncertainties. In establishing a provision for income tax expense, we must make judgments and interpretations about the application of these inherently complex tax laws.  We must also make estimates about when in the future certain items will affect taxable income in the various tax jurisdictions.  Disputes

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over interpretations of the tax laws may be subject to review/adjudication by the court systems of the various tax jurisdictions or may be settled with the taxing authority upon examination or audit.

•Effect if Actual Results Differ From Assumptions.  Although management believes that the judgments and estimates used are reasonable, actual results could differ and we may be exposed to losses or gains that could be material.  To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our reserves, our effective income tax rate in a given financial statement period could be materially affected.  An unfavorable tax settlement would result in an increase in our effective income tax rate in the period of resolution.  A favorable tax settlement would result in a reduction in our effective income tax rate in the period of resolution.

Management has discussed the development and selection of these critical accounting estimates with the Audit Committee and the Audit Committee has reviewed our disclosure relating to it in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

FORWARD-LOOKING STATEMENTS

In this report, we have made various statements regarding current expectations or forecasts of future events, which speak only as of the date the statements are made.  These statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are also made from time-to-time in press releases and in oral statements made by the officers of Old National Bancorp (“Old National” or the “Company”).  Forward-looking statements can be identified by the use of the words “expect,” “may,” “could,” “intend,” “project,” “estimate,” “believe,” “anticipate,” and other words of similar meaning.  Forward-looking statements also include, but are not limited to, statements regarding estimated cost savings, plans and objectives for future operations, the Company’s business and growth strategies, including future acquisitions of banks, regulatory developments, and expectations about performance as well as economic and market conditions and trends.  

Such forward-looking statements are based on assumptions and estimates, which although believed to be reasonable, may turn out to be incorrect.  Therefore, undue reliance should not be placed upon these estimates and statements.  We cannot assure that any of these statements, estimates, or beliefs will be realized and actual results may differ from those contemplated in these “forward-looking statements.”  We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise.  You are advised to consult further disclosures we may make on related subjects in our filings with the SEC.  In addition to other factors discussed in this report, some of the important factors that could cause actual results to differ materially from those discussed in the forward-looking statements include the following:

•the length and severity of the COVID-19 pandemic, including its impact on the Company’s financial conditions and business operations;

•changes in the economy which could materially impact credit quality trends and the ability to generate loans and gather deposits, including the pace of recovery following the COVID-19 pandemic;

•market, economic, operational, liquidity, credit, and interest rate risks associated with our business;

•competition;

•government legislation and policies, including changes to address the impact of COVID-19 through the CARES Act and other legislative and regulatory responses to the COVID-19 pandemic;

•our ability to execute our business plan, including the anticipated impact from the ONB Way strategic plan that may differ from current estimates;

•failure or circumvention of our internal controls;

•failure or disruption of our information systems;

•significant changes in accounting, tax, or regulatory practices or requirements, including the impact of the new CECL standard;

•new legal obligations or liabilities or unfavorable resolutions of litigations;

•disruptive technologies in payment systems and other services traditionally provided by banks; and

•computer hacking and other cybersecurity threats.

Investors should consider these risks, uncertainties, and other factors in addition to risk factors included in this filing and our other filings with the SEC.

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ITEM 3.  QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See Management’s Discussion and Analysis of Financial Condition and Results of Operations – Market Risk and Liquidity Risk.

ITEM 4.  CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Evaluation of disclosure controls and procedures.  Old National’s principal executive officer and principal financial officer have concluded that Old National’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended), based on their evaluation of these controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q, are effective at the reasonable assurance level as discussed below to ensure that information required to be disclosed by Old National in the reports it files under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to Old National’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Limitations on the Effectiveness of Controls.  Management, including the principal executive officer and principal financial officer, does not expect that Old National’s disclosure controls and internal controls will prevent all error and all fraud.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be only reasonable assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Over time, control may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Changes in Internal Control over Financial Reporting.  There were no changes in Old National’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, Old National’s internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 1A.  RISK FACTORS

There have been no material changes from the risk factors previously disclosed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 and updated in the “Risk Factors” section of the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020, except as described below.

Old National Bank’s active participation in the PPP, or in other relief programs, may expose us to credit losses as well as litigation and compliance risk.

To support our customers, businesses, and communities, Old National Bank is an active participant in the PPP. Old National Bank began accepting applications from qualified borrowers on April 3, 2020 and as of June 30, 2020 over 9,200 applications have been processed and approved, representing $1.538 billion in funding to new and existing clients through the PPP. Old National Bank’s participation in the PPP, and participation in any other relief programs now or in the future, including those under the CARES Act, exposes us to certain credit, compliance, and other risks.

Among other regulatory requirements, PPP loans are subject to forbearance of loan payments for a six-month period to the extent that loans are not eligible for forgiveness. If PPP borrowers fail to qualify for loan forgiveness, including by failing to use the funds appropriately in order to qualify for forgiveness under the program, Old

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National Bank has a greater risk of holding these loans at unfavorable interest rates. In addition, because of the short time period between the passing of the CARES Act and the implementation of the PPP, there is ambiguity in the laws, rules, and guidance regarding the operation of the PPP, which exposes us to risks relating to noncompliance with the PPP. There is risk that the SBA or another governmental entity could conclude there is a deficiency in the manner in which Old National Bank originated, funded, or serviced PPP loans, which may or may not be related to the ambiguity in the CARES Act or the rules and guidance promulgated by the SBA and the U.S. Department of the Treasury regarding the operation of the PPP. In the event of such deficiency, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already made payment under the guaranty, seek recovery of any loss related to the deficiency from us.

Since the commencement of the PPP, several other banks have been subject to litigation regarding the process and procedures that such banks followed in accepting and processing applications for the PPP. We may be exposed to the risk of similar litigation, from both customers and non-customers that contacted Old National Bank regarding obtaining PPP loans with respect to the processes and procedures we used in processing applications for the PPP. If any such litigation is filed against us and is not resolved in a manner favorable to us, it may result in significant financial liability to us or adversely affect our reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs, or reputational damage caused by PPP-related litigation could have a material adverse impact on our reputation, business, financial condition, and results of operations.

In addition, we may be subject to regulatory scrutiny regarding Old National Bank’s processing of PPP applications or its origination or servicing of PPP loans. While the SBA has said that in many instances, banks may rely on the certifications of borrowers regarding their eligibility for PPP loans, Old National Bank does have several obligations under the PPP, and if the SBA found that Old National Bank did not meet those obligations, the remedies the SBA may seek against Old National Bank are unknown but may include not guarantying the PPP loans resulting in credit exposure to borrowers who may be unable to repay their loans. The PPP program may also attract significant interest from federal and state enforcement authorities, oversight agencies, regulators, and Congressional committees. State Attorneys General and other federal and state agencies may assert that they are not subject to the provisions of the CARES Act and the PPP regulations entitling Old National Bank to rely on borrower certifications, and take more aggressive action against us for alleged violations of the provisions governing Old National Bank’s participation in the PPP.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(c)ISSUER PURCHASES OF EQUITY SECURITIES

Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
04/01/20 - 04/30/20	369	$	12.55	—	2,099,459
05/01/20 - 05/31/20	34,073	$	13.51	—	2,099,459
06/01/20 - 06/30/20	657	$	13.95	—	2,099,459
Quarter-to-date 06/30/20	35,099	$	13.51	—	2,099,459

In the first quarter of 2020, the Board of Directors approved the repurchase of up to 7.0 million shares of the Company’s stock to be repurchased, as conditions warrant, through January 31, 2021.  During the six months ended June 30, 2020, Old National repurchased a limited number of shares associated with employee share-based incentive programs.

ITEM 5.  OTHER INFORMATION

(a)None

(b)There have been no material changes in the procedure by which security holders recommend nominees to the Company’s board of directors.

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ITEM 6.  EXHIBITS

Exhibit No.	Description
3.1	Fifth Amended and Restated Articles of Incorporation of Old National, amended April 30, 2020 (incorporated by reference to Exhibit 3.1 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 18, 2020).
3.2	Amended and Restated By-Laws of Old National, amended April 30, 2020 (incorporated by reference to Exhibit 3.2 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 18, 2020).
4.1	Senior Indenture between Old National and The Bank of New York Trust Company (as successor to J.P. Morgan Trust Company, National Association (as successor to Bank One, N.A.)), as trustee, dated as of July 23, 1997 (incorporated by reference to Exhibit 4.3 to Old National’s Registration Statement on Form S-3, Registration No. 333-118374, filed with the Securities and Exchange Commission on December 2, 2004).
4.2	Second Indenture Supplement, dated as of August 15, 2014, between Old National and The Bank of New York Mellon Trust Company, N.A., as trustee, providing for the issuance of its 4.125% Senior Notes due 2024 (incorporated by reference to Exhibit 4.1 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 15, 2014).
31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following materials from Old National’s Form 10-Q Report for the quarterly period ended June 30, 2020, formatted in inline XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements.
104	The cover page from Old National’s Form 10-Q Report for the quarterly period ended June 30, 2020, formatted in inline XBRL and contained in Exhibit 101.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	OLD NATIONAL BANCORP
	(Registrant)
By:	/s/  Brendon B. Falconer
	Brendon B. Falconer
	Senior Executive Vice President and Chief Financial Officer
	Duly Authorized Officer and Principal Financial Officer
	Date:  July 29, 2020

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