| Loans and Allowance for Credit Losses | LOANS AND ALLOWANCE FOR CREDIT LOSSES Loans Old National’s loans consist primarily of loans made to consumers and commercial clients in many diverse industries, including manufacturing, agribusiness, transportation, mining, wholesaling, and retailing, among others. Most of Old National’s lending activity occurs within our principal geographic markets of Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Wisconsin, and Missouri. Old National manages concentrations of credit exposure by industry, product, geography, client relationship, and loan size. 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 – commercial, commercial real estate, residential real estate, and consumer – 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 portfolio segment reclassifications follow: Segment Statement Portfolio After (dollars in thousands) Balance Reclassifications Reclassifications June 30, 2022 Loans: Commercial $ 8,923,983 $ (191,996) $ 8,731,987 Commercial real estate 11,796,503 (154,769) 11,641,734 BBCC N/A 346,765 346,765 Residential real estate 6,079,057 — 6,079,057 Consumer 2,754,105 (2,754,105) N/A Indirect N/A 981,741 981,741 Direct N/A 674,512 674,512 Home equity N/A 1,097,852 1,097,852 Total $ 29,553,648 $ — $ 29,553,648 December 31, 2021 Loans: Commercial $ 3,391,769 $ (191,557) $ 3,200,212 Commercial real estate 6,380,674 (159,190) 6,221,484 BBCC N/A 350,747 350,747 Residential real estate 2,255,289 — 2,255,289 Consumer 1,574,114 (1,574,114) N/A Indirect N/A 873,139 873,139 Direct N/A 140,385 140,385 Home equity N/A 560,590 560,590 Total $ 13,601,846 $ — $ 13,601,846 The composition of loans by portfolio segment follows: (dollars in thousands) June 30, December 31, Commercial (1) (2) $ 8,731,987 $ 3,200,212 Commercial real estate 11,641,734 6,221,484 BBCC 346,765 350,747 Residential real estate 6,079,057 2,255,289 Indirect 981,741 873,139 Direct 674,512 140,385 Home equity 1,097,852 560,590 Total loans 29,553,648 13,601,846 Allowance for credit losses (288,003) (107,341) Net loans $ 29,265,645 $ 13,494,505 (1) Includes direct finance leases of $66.5 million at June 30, 2022 and $25.1 million at December 31, 2021. (2) Includes PPP loans of $81.6 million at June 30, 2022 and $169.0 million at December 31, 2021. The risk characteristics of each loan portfolio segment are as follows: Commercial Commercial loans are classified primarily on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its clients. Commercial Real Estate Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. The properties securing Old National’s commercial real estate portfolio are diverse in terms of type and geographic location. Management monitors and evaluates commercial real estate loans based on collateral, geography, and risk grade criteria. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. Included with commercial real estate are construction loans, which are underwritten utilizing independent appraisal reviews, sensitivity analysis of absorption and lease rates, financial analysis of the developers and property owners, and feasibility studies, if available. Construction loans are generally based on estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders (including Old National), sales of developed property, or an interim loan commitment from Old National until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions, and the availability of long-term financing. At 224%, 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, 2022. BBCC BBCC loans are typically granted to small businesses with gross revenues of less than $5 million and aggregate debt of less than $1 million. Old National has established minimum debt service coverage ratios, minimum FICO scores for owners and guarantors, and the ability to show relatively stable earnings as criteria to help mitigate risk. Repayment of these loans depends on the personal income of the borrowers and the cash flows of the business. These factors can be affected by factors such as changes in economic conditions and unemployment levels. Residential With respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, Old National typically establishes a maximum loan-to-value ratio and generally requires private mortgage insurance if that ratio is exceeded. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in residential property values. Portfolio risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers. Indirect Indirect loans are secured by automobile collateral, generally new and used cars and trucks from auto dealers that operate within our footprint. Old National typically mitigates the risk of indirect loans by establishing minimum FICO scores, maximum loan-to-value ratios, and maximum debt-to-income ratios. Repayment of these loans depends largely on the personal income of the borrowers, which can be affected by changes in economic conditions such as unemployment levels. Portfolio risk is mitigated by the fact that the loans are of smaller amounts spread over many borrowers, conservative credit policies, and ongoing reviews of dealer relationships. Direct Direct loans are typically secured by collateral such as auto or real estate or are unsecured. Old National has established conservative underwriting standards such as minimum FICO scores, maximum loan-to-value ratios, and maximum debt-to-income ratios. Repayment of these loans depends largely on the personal income of the borrowers, which can be affected by changes in economic conditions such as unemployment levels. Portfolio risk is mitigated by the fact that the loans are of smaller amounts spread over many borrowers along with conservative credit policies. Home Equity Home equity loans are generally secured by 1-4 family residences that are owner occupied. Old National has established conservative underwriting standards such as minimum FICO scores, maximum loan-to-value ratios, and maximum debt-to-income ratios. Repayment of these loans depends largely on the personal income of the borrowers, which can be affected by changes in economic conditions such as unemployment levels. Portfolio risk is mitigated by the fact that the loans are of smaller amounts spread over many borrowers, along with conservative credit policies as well as monitoring of updated borrower credit scores. 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. Old National has made a policy election to report accrued interest receivable as a separate line item on the balance sheet. Accrued interest receivable on loans is excluded from the estimate of credit losses and totaled $104.6 million at June 30, 2022 and $47.6 million at December 31, 2021. The allowance for credit loss estimation process involves procedures to appropriately consider the unique characteristics of its loan portfolio segments. These segments are further disaggregated into loan classes based on the level at which credit risk is monitored. When computing the level of expected credit losses, credit loss assumptions are estimated using a model that categorizes loan pools based on loss history, delinquency status, and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense in those future periods. The allowance level is influenced by loan volumes, loan AQR migration or delinquency status, changes in historical loss experience, and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions. The methodology for estimating the amount of expected credit losses reported in the allowance for credit losses has two basic components: first, an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans; and second, a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics. The base forecast scenario considers unemployment, gross domestic product, and the BBB ratio (BBB spread to the 10-year U.S. Treasury rate). In addition to the quantitative inputs, several qualitative factors were considered. These factors include the risk that unemployment, gross domestic product, housing product index, and the BBB ratio prove to be more severe and/or prolonged than our baseline forecast due to the conflict in Ukraine, supply chain issues, inflation, and the ongoing impact of the COVID-19 pandemic. Activity in the allowance for credit losses for loans by portfolio segment was as follows: (dollars in thousands) Balance at Allowance Charge-offs Recoveries Provision Balance at Three Months Ended Commercial $ 99,471 $ — $ (1,344) $ 781 $ 3,911 $ 102,819 Commercial real estate 140,490 — (318) 320 1,310 141,802 BBCC 2,069 — (20) 91 (76) 2,064 Residential real estate 17,252 — (137) 130 2,484 19,729 Indirect 1,648 — (528) 320 201 1,641 Direct 14,450 — (1,722) 676 1,008 14,412 Home equity 5,127 — (27) 20 416 5,536 Total $ 280,507 $ — $ (4,096) $ 2,338 $ 9,254 $ 288,003 Three Months Ended Commercial $ 25,130 $ — $ (178) $ 204 $ 575 $ 25,731 Commercial real estate 70,561 — (178) 111 (5,025) 65,469 BBCC 2,537 — (100) 15 346 2,798 Residential real estate 10,265 — (62) 51 165 10,419 Indirect 2,255 — (206) 565 (571) 2,043 Direct 665 — (256) 209 22 640 Home equity 2,624 — — 161 (441) 2,344 Total $ 114,037 $ — $ (980) $ 1,316 $ (4,929) $ 109,444 Six Months Ended Commercial $ 27,232 $ 35,040 $ (3,223) $ 1,013 $ 42,757 $ 102,819 Commercial real estate 64,004 42,601 (824) 502 35,519 141,802 BBCC 2,458 — (48) 148 (494) 2,064 Residential real estate 9,347 136 (324) 570 10,000 19,729 Indirect 1,743 — (1,012) 542 368 1,641 Direct 528 31 (3,251) 1,270 15,834 14,412 Home equity 2,029 723 (78) 183 2,679 5,536 Total $ 107,341 $ 78,531 $ (8,760) $ 4,228 $ 106,663 $ 288,003 Six Months Ended Commercial $ 30,567 $ — $ (586) $ 443 $ (4,693) $ 25,731 Commercial real estate 75,810 — (178) 184 (10,347) 65,469 BBCC 6,120 — (136) 56 (3,242) 2,798 Residential real estate 12,608 — (220) 138 (2,107) 10,419 Indirect 3,580 — (790) 1,101 (1,848) 2,043 Direct 855 — (558) 469 (126) 640 Home equity 1,848 — (82) 500 78 2,344 Total $ 131,388 $ — $ (2,550) $ 2,891 $ (22,285) $ 109,444 The allowance for credit losses increased for the six months ended June 30, 2022 primarily due to $78.5 million of allowance for credit losses on acquired PCD loans established through acquisition accounting adjustments on the merger date and $96.3 million of provision for credit losses to establish an allowance for credit losses on non-PCD loans acquired in the First Midwest merger. Loan growth and qualitative factors contributed to the increase in the allowance for credit losses in the three months ended June 30, 2022. 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 within accrued expenses and other liabilities, while the corresponding provision for these credit losses is recorded as a component of other expense. Old National’s activity in the allowance for credit losses on unfunded loan commitments was as follows: Three Months Ended Six Months Ended (dollars in thousands) 2022 2021 2022 2021 Allowance for credit losses on unfunded loan commitments: Balance at beginning of period $ 22,045 $ 10,365 $ 10,879 $ 11,689 Provision for credit losses on unfunded commitments — — 11,013 — Expense (reversal of expense) for credit losses (79) 64 74 (1,260) Balance at end of period $ 21,966 $ 10,429 $ 21,966 $ 10,429 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. The following table summarizes the amortized cost of term loans by risk category of commercial, commercial real estate, and BBCC loans by loan portfolio segment, class of loan, and origination year: Origination Year Revolving to Term (dollars in thousands) 2022 2021 2020 2019 2018 Prior Revolving Total June 30, 2022 Commercial: Risk Rating: Pass $ 1,085,570 $ 1,982,733 $ 1,016,391 $ 888,392 $ 426,282 $ 467,789 $ 2,313,545 $ 132,149 $ 8,312,851 Criticized 5,285 23,442 17,524 28,488 15,752 10,798 48,442 1,352 151,083 Classified: Substandard 31,062 33,265 16,647 44,642 25,021 15,349 41,626 18,092 225,704 Nonaccrual 347 3,640 1,164 1,071 1 — 2,402 3,479 12,104 Doubtful — 299 930 592 4,679 16,004 7,741 — 30,245 Total $ 1,122,264 $ 2,043,379 $ 1,052,656 $ 963,185 $ 471,735 $ 509,940 $ 2,413,756 $ 155,072 $ 8,731,987 Commercial real estate: Risk Rating: Pass $ 1,552,841 $ 2,787,599 $ 2,234,315 $ 1,472,777 $ 867,430 $ 1,446,189 $ 163,533 $ 443,935 $ 10,968,619 Criticized 43,201 31,765 18,257 51,824 66,566 50,919 — 33,801 296,333 Classified: Substandard 51,283 36,711 22,940 47,348 55,284 35,047 2,291 4,212 255,116 Nonaccrual 918 12,535 3,545 — 2,666 7,285 303 786 28,038 Doubtful — 37,124 12,041 669 1,171 42,623 — — 93,628 Total $ 1,648,243 $ 2,905,734 $ 2,291,098 $ 1,572,618 $ 993,117 $ 1,582,063 $ 166,127 $ 482,734 $ 11,641,734 BBCC: Risk Rating: Pass $ 44,590 $ 73,821 $ 60,244 $ 45,049 $ 28,071 $ 20,216 $ 46,062 $ 19,013 $ 337,066 Criticized 669 1,083 667 744 270 — 451 1,535 5,419 Classified: Substandard 72 274 13 576 — 152 923 313 2,323 Nonaccrual — — 276 — 45 — — 737 1,058 Doubtful — — 25 387 364 123 — — 899 Total $ 45,331 $ 75,178 $ 61,225 $ 46,756 $ 28,750 $ 20,491 $ 47,436 $ 21,598 $ 346,765 Origination Year Revolving to Term (dollars in thousands) 2021 2020 2019 2018 2017 Prior Revolving Total December 31, 2021 Commercial: Risk Rating: Pass $ 918,456 $ 563,869 $ 271,158 $ 98,468 $ 156,136 $ 235,639 $ 667,628 $ 130,470 $ 3,041,824 Criticized 9,998 7,885 6,660 — 7,809 2,658 14,601 10,076 59,687 Classified: Substandard 14,773 14,468 10,200 9,849 5,521 945 6,883 10,322 72,961 Nonaccrual 1,069 3,507 1,276 3,721 1,448 — 845 7,796 19,662 Doubtful — 178 — 288 337 5,275 — — 6,078 Total $ 944,296 $ 589,907 $ 289,294 $ 112,326 $ 171,251 $ 244,517 $ 689,957 $ 158,664 $ 3,200,212 Commercial real estate: Risk Rating: Pass $ 1,555,880 $ 1,474,271 $ 846,921 $ 481,508 $ 462,176 $ 611,680 $ 42,609 $ 451,544 $ 5,926,589 Criticized 27,622 24,790 39,914 — 21,614 22,157 — 34,387 170,484 Classified: Substandard 4,706 12,118 9,933 9,058 18,165 11,351 2,291 4,339 71,961 Nonaccrual 1,620 2,997 — 1,627 3,419 8,905 315 871 19,754 Doubtful 6,653 — 1,970 342 11,218 12,513 — — 32,696 Total $ 1,596,481 $ 1,514,176 $ 898,738 $ 492,535 $ 516,592 $ 666,606 $ 45,215 $ 491,141 $ 6,221,484 BBCC: Risk Rating: Pass $ 81,710 $ 69,749 $ 54,580 $ 34,461 $ 25,113 $ 8,296 $ 47,571 $ 18,778 $ 340,258 Criticized 1,320 1,170 841 160 — — 670 1,578 5,739 Classified: Substandard 284 24 79 7 187 465 103 239 1,388 Nonaccrual — 88 — — 66 162 — 1,136 1,452 Doubtful — 25 284 1,391 — 210 — — 1,910 Total $ 83,314 $ 71,056 $ 55,784 $ 36,019 $ 25,366 $ 9,133 $ 48,344 $ 21,731 $ 350,747 For residential real estate and consumer loan classes, Old National evaluates credit quality based on the aging status of the loan and by payment activity. The performing or nonperforming status is updated on an on-going basis dependent upon improvement and deterioration in credit quality. The following table presents the amortized cost of term residential real estate and consumer loans based on payment activity and origination year: Origination Year Revolving to Term (dollars in thousands) 2022 2021 2020 2019 2018 Prior Revolving Total June 30, 2022 Residential real estate: Risk Rating: Performing $ 1,316,193 $ 1,383,143 $ 1,895,059 $ 507,638 $ 147,478 $ 786,725 $ 10,863 $ 96 $ 6,047,195 Nonperforming — 198 666 587 1,239 29,172 — — 31,862 Total $ 1,316,193 $ 1,383,341 $ 1,895,725 $ 508,225 $ 148,717 $ 815,897 $ 10,863 $ 96 $ 6,079,057 Indirect: Risk Rating: Performing $ 305,501 $ 302,525 $ 180,812 $ 109,194 $ 46,379 $ 35,067 $ — $ 1 $ 979,479 Nonperforming 66 414 519 371 349 543 — — 2,262 Total $ 305,567 $ 302,939 $ 181,331 $ 109,565 $ 46,728 $ 35,610 $ — $ 1 $ 981,741 Direct: Risk Rating: Performing $ 91,675 $ 188,063 $ 100,504 $ 78,199 $ 58,343 $ 50,906 $ 103,998 $ 38 $ 671,726 Nonperforming 22 447 143 289 157 1,516 84 128 2,786 Total $ 91,697 $ 188,510 $ 100,647 $ 78,488 $ 58,500 $ 52,422 $ 104,082 $ 166 $ 674,512 Home equity: Risk Rating: Performing $ 11,875 $ 11,855 $ 8,137 $ 14,518 $ 13,076 $ 36,231 $ 975,416 $ 14,702 $ 1,085,810 Nonperforming — — 34 16 593 8,224 212 2,963 12,042 Total $ 11,875 $ 11,855 $ 8,171 $ 14,534 $ 13,669 $ 44,455 $ 975,628 $ 17,665 $ 1,097,852 Origination Year Revolving to Term 2021 2020 2019 2018 2017 Prior Revolving Total December 31, 2021 Residential real estate: Risk Rating: Performing $ 625,582 $ 632,705 $ 272,600 $ 72,766 $ 103,866 $ 529,293 $ 12 $ 105 $ 2,236,929 Nonperforming 96 165 166 350 855 16,728 — — 18,360 Total $ 625,678 $ 632,870 $ 272,766 $ 73,116 $ 104,721 $ 546,021 $ 12 $ 105 $ 2,255,289 Indirect: Risk Rating: Performing $ 361,485 $ 231,156 $ 146,978 $ 68,513 $ 41,598 $ 20,819 $ — $ 9 $ 870,558 Nonperforming 262 524 614 510 430 241 — — 2,581 Total $ 361,747 $ 231,680 $ 147,592 $ 69,023 $ 42,028 $ 21,060 $ — $ 9 $ 873,139 Direct: Risk Rating: Performing $ 34,058 $ 16,135 $ 14,396 $ 14,579 $ 7,432 $ 15,831 $ 36,812 $ 192 $ 139,435 Nonperforming 13 53 130 133 35 536 42 8 950 Total $ 34,071 $ 16,188 $ 14,526 $ 14,712 $ 7,467 $ 16,367 $ 36,854 $ 200 $ 140,385 Home equity: Risk Rating: Performing $ — $ — $ 633 $ 349 $ 535 $ — $ 539,057 $ 16,768 $ 557,342 Nonperforming — — 16 9 41 1 258 2,923 3,248 Total $ — $ — $ 649 $ 358 $ 576 $ 1 $ 539,315 $ 19,691 $ 560,590 Nonaccrual and Past Due Loans Old National does not record interest on nonaccrual loans until principal is recovered. For all loan classes, a loan is generally placed on nonaccrual status when principal or interest becomes 90 days past due unless it is well secured and in the process of collection, or earlier when concern exists as to the ultimate collectability of principal or interest. Interest accrued but not received is reversed against earnings. Cash interest received on these loans is applied to the principal balance until the principal is recovered or until the loan returns to accrual status. Loans may be returned to accrual status when all the principal and interest amounts contractually due are brought current, remain current for a prescribed period, and future payments are reasonably assured. The following table presents the aging of the amortized cost basis in past due loans by class of loans: (dollars in thousands) 30-59 Days 60-89 Days Past Due Total Current Total June 30, 2022 Commercial $ 3,364 $ 117 $ 15,317 $ 18,798 $ 8,713,189 $ 8,731,987 Commercial real estate 7,061 3,320 59,986 70,367 11,571,367 11,641,734 BBCC 129 167 370 666 346,099 346,765 Residential 37,902 4,304 12,611 54,817 6,024,240 6,079,057 Indirect 4,140 673 362 5,175 976,566 981,741 Direct 6,496 969 2,044 9,509 665,003 674,512 Home equity 4,190 1,030 5,076 10,296 1,087,556 1,097,852 Total $ 63,282 $ 10,580 $ 95,766 $ 169,628 $ 29,384,020 $ 29,553,648 December 31, 2021 Commercial $ 2,723 $ 617 $ 1,603 $ 4,943 $ 3,195,269 $ 3,200,212 Commercial real estate 1,402 280 7,042 8,724 6,212,760 6,221,484 BBCC 747 162 109 1,018 349,729 350,747 Residential 8,273 2,364 4,554 15,191 2,240,098 2,255,289 Indirect 3,888 867 554 5,309 867,830 873,139 Direct 687 159 162 1,008 139,377 140,385 Home equity 693 199 777 1,669 558,921 560,590 Total $ 18,413 $ 4,648 $ 14,801 $ 37,862 $ 13,563,984 $ 13,601,846 The following table presents the amortized cost basis of loans on nonaccrual status and loans past due 90 days or more and still accruing by class of loan: June 30, 2022 December 31, 2021 (dollars in thousands) Nonaccrual Nonaccrual Past Due Nonaccrual Nonaccrual Past Due Commercial $ 42,349 $ 13,762 $ 474 $ 25,740 $ 9,574 $ — Commercial real estate 121,666 9,714 216 52,450 25,139 — BBCC 1,957 — — 3,362 — — Residential 31,862 — — 18,360 — — Indirect 2,262 — — 2,581 — 4 Direct 2,786 — 182 950 — 3 Home equity 12,042 — 10 3,248 — — Total $ 214,924 $ 23,476 $ 882 $ 106,691 $ 34,713 $ 7 Interest income recognized on nonaccrual loans was insignificant during the three and six months ended June 30, 2022 and 2021. 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 Blanket Investment Auto Other June 30, 2022 Commercial $ 11,766 $ 25,147 $ 2,545 $ 57 $ 1,843 Commercial real estate 108,312 — 917 — 6,563 BBCC 1,364 539 26 28 — Residential 31,862 — — — — Indirect — — — 2,262 — Direct 1,810 — 1 272 21 Home equity 11,377 — — — — Total loans $ 166,491 $ 25,686 $ 3,489 $ 2,619 $ 8,427 December 31, 2021 Commercial $ 8,100 $ 13,816 $ 3,394 $ 80 $ 302 Commercial real estate 38,657 — 961 — 6,653 BBCC 1,895 1,331 43 93 — Residential 18,360 — — — — Indirect — — — 2,581 — Direct 724 — 1 152 20 Home equity 3,248 — — — — Total loans $ 70,984 $ 15,147 $ 4,399 $ 2,906 $ 6,975 Loan Participations Old National has loan participations, which qualify as participating interests, with other financial institutions. At June 30, 2022, these loans totaled $2.4 billion, of which $1.2 billion had been sold to other financial institutions and $1.2 billion was retained by Old National. The loan participations convey proportionate ownership rights with equal priority to each participating interest holder; involve no recourse (other than ordinary representations and warranties) to, or subordination by, any participating interest holder; all cash flows are divided among the participating interest holders in proportion to each holder’s share of ownership; and no holder has the right to pledge the entire financial asset unless all participating interest holders agree. Troubled Debt Restructurings Old National may choose to restructure the contractual terms of certain loans. The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit Old National by increasing the ultimate probability of collection. Any loans that are modified are reviewed by Old National to identify if a TDR has occurred, which is when for economic or legal reasons related to a borrower’s financial difficulties, Old National Bank grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status. The modification of the terms of such loans includes one or a combination of the following: a reduction of the stated interest rate of the loan, an extension of the maturity date at a stated rate of interest lower than the current market rate of new debt with similar risk, or a permanent reduction of the recorded investment of the loan. Loans modified in a TDR are typically placed on nonaccrual status until we determine the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate a period of performance according to the restructured terms for six months. If we are unable to resolve a nonperforming loan issue, the credit will be charged off when it is apparent there will be a loss. For large commercial type loans, each relationship is individually analyzed for evidence of apparent loss based on quantitative benchmarks or subjectively based upon certain events or particular circumstances. For residential and consumer loans, a charge off is recorded at the time foreclosure is initiated or when the loan becomes 120 to 180 days past due, whichever is earlier. For commercial TDRs, an allocation is established within the allowance for credit losses for the difference between the carrying value of the loan and its computed value. To determine the computed value of the loan, one of the following methods is selected: (1) the present value of expected cash flows discounted at the loan’s original effective interest rate, (2) the loan’s observable market price, or (3) the fair value of the collateral, if the loan is collateral dependent. The allocation is established as the difference between the carrying value of the loan and the collectable value. If there are significant changes in the amount or timing of the loan’s expected future cash flows, the allowance allocation is recalculated and adjusted accordingly. When a residential or consumer loan is identified as a TDR, the loan is typically written down to its collateral value less selling costs. The following table presents activity in TDRs: (dollars in thousands) Beginning (Charge-offs)/ (Payments)/ (Removals)/ Ending Three Months Ended June 30, 2022 Commercial $ 7,044 $ — $ (2,846) $ 3,018 $ 7,216 Commercial real estate 32,428 — (8,903) 4,006 27,531 BBCC 87 — — — 87 Residential 2,405 — (27) — 2,378 Indirect — — — — — Direct 2,679 — (10) — 2,669 Home equity 180 — (49) — 131 Total $ 44,823 $ — $ (11,835) $ 7,024 $ 40,012 Three Months Ended June 30, 2021 Commercial $ 8,471 $ — $ (207) $ — $ 8,264 Commercial real estate 17,385 5 (1,420) — 15,970 BBCC 105 3 (11) — 97 Residential 2,603 (4) (17) — 2,582 Indirect — 1 (1) — — Direct 726 1 (62) — 665 Home equity 276 1 (60) — 217 Total $ 29,566 $ 7 $ (1,778) $ — $ 27,795 Six Months Ended June 30, 2022 Commercial $ 7,456 $ — $ (4,743) $ 4,503 $ 7,216 Commercial real estate 17,158 4 (9,114) 19,483 27,531 BBCC 87 3 (3) — 87 Residential 2,435 — (57) — 2,378 Indirect — 1 (1) — — Direct 2,704 — (35) — 2,669 Home equity 199 1 (69) — 131 Total $ 30,039 |
