Income Taxes

3 Months Ended

Mar. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

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 March 31,
(dollars in thousands)	2022			2021
Provision at statutory rate of 21%	$	(7,623)		$	21,934
Tax-exempt income:
Tax-exempt interest	(2,992)			(2,779)
Section 291/265 interest disallowance	28			33
Company-owned life insurance income	(718)			(544)
Tax-exempt income	(3,682)			(3,290)
State income taxes	(3,327)			2,974
Interim period effective rate adjustment	7,040			(1,775)
Tax credit investments - federal	(1,270)			(1,092)
Other, net	148			(1,121)
Income tax expense (benefit)	$	(8,714)		$	17,630
Effective tax rate	24.0		%	16.9		%

The provision for income taxes was recorded at March 31, 2022 and 2021 based on the current estimate of the effective annual rate.

Based on the current estimate of the combined entity annual effective rate, the higher effective tax rate during the three months ended March 31, 2022 when compared to the three months ended March 31, 2021 reflected higher post-merger estimated state effective tax rates. An additional benefit of $1.2 million related to share-based payments and a one-time benefit of $0.9 million due to the remeasurement of the Company’s deferred taxes post-merger both increased the effective tax rate for the quarter since the Company reflected a pretax loss, but are expected to reduce the overall full-year tax rate once the Company is in a pretax income position.

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)	March 31, 2022		December 31, 2021
Deferred Tax Assets
Allowance for credit losses, net of recapture	$	75,316	$	28,843
Benefit plan accruals	11,781		18,348
Net operating loss carryforwards	46,649		14,823
Deferred gain on securities	991		1,215
Acquired loans	41,387		8,039
Operating lease liabilities	64,227		22,961
Unrealized losses on available-for-sale investment securities	99,240		3,003
Unrealized losses on held-to-maturity investment securities	5,126		—
Unrealized losses on hedges	2,323		—
Tax credit investments and other partnerships	441		301
Purchase accounting	11,414		—
Other, net	3,424		1,914
Total deferred tax assets	362,319		99,447
Deferred Tax Liabilities
Purchase accounting	—		(18,524)
Loan servicing rights	(9,799)		(7,379)
Premises and equipment	(14,254)		(16,972)
Prepaid expenses	(835)		(796)
Operating lease right-of-use assets	(55,749)		(21,129)
Deferred loan origination fees	(5,423)		—
Unrealized gains on hedges	—		(177)
Other, net	(2,480)		(1,564)
Total deferred tax liabilities	(88,540)		(66,541)
Net deferred tax assets	$	273,779	$	32,906

The Company’s retained earnings at March 31, 2022 included an appropriation for acquired thrifts’ tax bad debt allowances totaling $58.6 million for which no provision for federal or state income taxes has been made.  If, in the future, this portion of retained earnings were distributed as a result of the liquidation of the Company or its subsidiaries, federal and state income taxes would be imposed at the then applicable rates.

No valuation allowance was recorded at March 31, 2022 or December 31, 2021 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 $153.3 million at March 31, 2022 and $36.7 million at December 31, 2021.  This federal net operating loss was acquired from the acquisition of Anchor (WI) in 2016 and First Midwest in 2022.  If not used, the federal net operating loss carryforwards will expire from 2029 to 2039.  Old National has recorded state net operating loss carryforwards totaling $169.5 million at March 31, 2022 and $116.1 million at December 31, 2021.  If not used, the state net operating loss carryforwards will expire from 2027 to 2052.

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 federal and recorded state net operating loss carryforwards will be used prior to expiration.