Income Taxes

12 Months Ended

Dec. 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 statement of income:

	Years Ended December 31,
(dollars in thousands)	2023			2022			2021
Provision at statutory rate of 21%	$	157,774		$	114,394		$	71,161
Tax-exempt income:
Tax-exempt interest	(18,582)			(14,588)			(11,066)
Section 291/265 interest disallowance	2,392			363			114
Company-owned life insurance income	(3,125)			(2,891)			(2,138)
Tax-exempt income	(19,315)			(17,116)			(13,090)
State income taxes	31,164			20,837			9,308
Tax credit investments - federal	(12,190)			(9,140)			(5,212)
Officer compensation limitation	4,685			5,903			564
Non-deductible FDIC premiums	7,912			3,805			438
Other, net	(720)			(2,237)			(1,845)
Income tax expense	$	169,310		$	116,446		$	61,324
Effective tax rate	22.5		%	21.4		%	18.1		%

The provision for income taxes consisted of the following components:

	Years Ended December 31,
(dollars in thousands)	2023		2022		2021
Current expense:
Federal	$	121,428	$	106,918	$	31,943
State	37,331		32,898		8,461
Deferred expense:
Federal	7,941		(16,216)		17,514
State	2,610		(7,154)		3,406
Deferred income tax expense	10,551		(23,370)		20,920
Income tax expense	$	169,310	$	116,446	$	61,324

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:

	December 31,
(dollars in thousands)	2023		2022
Deferred Tax Assets
Unrealized losses on available-for-sale investment securities	$	217,018	$	202,101
Allowance for credit losses on loans, net of recapture	86,224		85,619
Operating lease liabilities	57,996		58,288
Unrealized losses on held-to-maturity investment securities	32,150		36,197
Acquired loans	32,011		40,723
Benefit plan accruals	31,679		38,038
Purchase accounting	22,473		20,063
Net operating loss carryforwards	21,004		25,135
FDIC deductible premiums	4,891		—
Unrealized losses on hedges	—		10,277
Other, net	4,860		4,962
Total deferred tax assets	510,306		521,403
Deferred Tax Liabilities
Operating lease right-of-use assets	(52,710)		(51,845)
Premises and equipment	(12,141)		(14,844)
Loan servicing rights	(9,188)		(9,636)
Prepaid expenses	(3,856)		(2,774)
Unrealized gains on hedges	(3,202)		—
Deferred loan origination fees	(2,361)		(3,566)
Other, net	(3,588)		(2,983)
Total deferred tax liabilities	(87,046)		(85,648)
Net deferred tax assets	$	423,260	$	435,755

The Company’s retained earnings at December 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 required on the Company’s deferred tax assets at December 31, 2023 or 2022. Old National has federal net operating loss carryforwards totaling $63.6 million at December 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 $116.9 million at December 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.

Unrecognized Tax Benefits

Old National has unrecognized tax benefits due to the merger with First Midwest. The following table presents the changes in the carrying amount of unrecognized tax benefits:

	Years Ended December 31,
(dollars in thousands)	2023		2022		2021
Balance at beginning of period	$	11,007	$	—	$	—
Additions for acquired uncertain tax positions	—		14,897		—
Additions based on tax positions related to prior years	60		—		—
Reductions for tax positions relating to prior years	—		(2,751)		—
Reductions due to statute of limitations expiring	(1,112)		(1,139)		—
Balance at end of period	$	9,955	$	11,007	$	—

If recognized, approximately $8.0 million of unrecognized tax benefits, net of interest, would favorably affect the effective income tax rate in future periods. Old National expects the $8.0 million of unrecognized tax benefits to be reduced to $5.6 million in the next twelve months.

It is our policy to recognize interest and penalties accrued relative to unrecognized tax benefits in their respective federal or state income tax accounts. Interest and penalties recorded and accrued in 2023 and 2022 were immaterial.

Old National and its subsidiaries file a consolidated U.S. federal income tax return, as well as filing various state returns. The 2020 through 2023 tax years are open and subject to examination.