Income Taxes

3 Months Ended

Mar. 31, 2023

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)	2023			2022
Provision at statutory rate of 21%	$	39,484		$	(7,623)
Tax-exempt income:
Tax-exempt interest	(4,486)			(2,992)
Section 291/265 interest disallowance	386			28
Company-owned life insurance income	(627)			(718)
Tax-exempt income	(4,727)			(3,682)
State income taxes	8,142			(3,327)
Interim period effective rate adjustment	(1,717)			7,040
Tax credit investments - federal	(2,526)			(1,270)
Officer compensation limitation	1,040			—
Other, net	1,725			148
Income tax expense (benefit)	$	41,421		$	(8,714)
Effective tax rate	22.0		%	24.0		%

The provision for income taxes was recorded at March 31, 2023 and 2022 based on the current estimate of the effective annual rate.

The lower effective tax rate during the three months ended March 31, 2023 compared to the same period in 2022 was primarily the result of higher tax-exempt income and tax credits and a decrease in non-deductible merger-related expenses. These benefits were partially offset by increases in non-deductible officer compensation and non-deductible FDIC premiums.

Net Deferred Tax Assets

Net deferred tax assets are included in other assets on the balance sheet. At March 31, 2023, net deferred tax assets totaled $391.4 million, compared to $435.8 million at December 31, 2022. The decrease in net deferred tax assets was driven by $27.4 million of payouts on benefit plans, such as bonus compensation, and a $13.2 million reduction in deferred taxes on the market valuation of certain investments.

The Company’s retained earnings at March 31, 2023 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, 2023 or December 31, 2022 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 $77.1 million at March 31, 2023 and $81.5 million at December 31, 2022.  This federal net operating loss was acquired from the acquisition of Anchor BanCorp Wisconsin Inc. in 2016 and First Midwest in 2022.  If not used, the federal net operating loss carryforwards will begin expiring in 2030 and later.  Old National has recorded state net operating loss carryforwards totaling $121.4 million at March 31, 2023 and $124.4 million at December 31, 2022.  If not used, the state net operating loss carryforwards will expire from 2027 to 2036.

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.