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Income Taxes | 12 Months Ended
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Dec. 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 statement of income:
| Years Ended December 31,
(dollars in thousands) | 2022 |  | 2021 |  | 2020
Provision at statutory rate of 21% | $ | 114,394 |  |  | $ | 71,161 |  |  | $ | 53,667 |
Tax-exempt income: |  |  |  |  |
Tax-exempt interest | (14,588) |  |  | (11,066) |  |  | (10,776) |
Section 291/265 interest disallowance | 363 |  |  | 114 |  |  | 189 |
Company-owned life insurance income | (2,891) |  |  | (2,138) |  |  | (2,290) |
Tax-exempt income | (17,116) |  |  | (13,090) |  |  | (12,877) |
State income taxes | 20,837 |  |  | 9,308 |  |  | 4,840 |
Tax credit investments - federal | (9,140) |  |  | (5,212) |  |  | (15,159) |
Officer compensation limitation | 5,903 |  |  | 564 |  |  | 598 |
Other, net | 1,568 |  |  | (1,407) |  |  | (1,922) |
Income tax expense | $ | 116,446 |  |  | $ | 61,324 |  |  | $ | 29,147 |
Effective tax rate | 21.4 | % |  | 18.1 | % |  | 11.4 | %
The higher effective tax rate in 2022 when compared to 2021 reflected the increase in pre-tax book income and higher post-merger estimated state effective tax rates. An increase in non-deductible officer compensation also contributed to the higher tax rate, the majority of which was merger related. The higher effective tax rate in 2021 when compared to 2020 was primarily the result of an increase in pre-tax book income and lower tax credits. The provision for income taxes consisted of the following components:
| Years Ended December 31,
(dollars in thousands) | 2022 |  | 2021 |  | 2020
Current expense: |  |  |  |  |
Federal | $ | 106,918 |  |  | $ | 31,943 |  |  | $ | 19,223 |
State | 32,898 |  |  | 8,461 |  |  | 6,498 |
Deferred expense: |  |  |  |  |
Federal | (16,216) |  |  | 17,514 |  |  | 3,188 |
State | (7,154) |  |  | 3,406 |  |  | 238 |
Deferred income tax expense | (23,370) |  |  | 20,920 |  |  | 3,426 |
Income tax expense | $ | 116,446 |  |  | $ | 61,324 |  |  | $ | 29,147 |
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) | 2022 |  | 2021
Deferred Tax Assets |  |  |
Allowance for credit losses on loans, net of recapture | $ | 85,619 |  |  | $ | 28,843 |
Benefit plan accruals | 38,038 |  |  | 18,348 |
Net operating loss carryforwards | 25,135 |  |  | 14,823 |
Acquired loans | 40,723 |  |  | 8,039 |
Operating lease liabilities | 58,288 |  |  | 22,961 |
Unrealized losses on available-for-sale investment securities | 202,101 |  |  | 3,003 |
Unrealized losses on held-to-maturity investment securities | 36,197 |  |  | — |
Unrealized losses on hedges | 10,277 |  |  | — |
Purchase accounting | 20,063 |  |  | — |
Other, net | 4,962 |  |  | 3,430 |
Total deferred tax assets | 521,403 |  |  | 99,447 |
Deferred Tax Liabilities |  |  |
Deferred loan origination fees | (3,566) |  |  | — |
Purchase accounting | — |  |  | (18,524) |
Loan servicing rights | (9,636) |  |  | (7,379) |
Premises and equipment | (14,844) |  |  | (16,972) |
Prepaid expenses | (2,774) |  |  | (796) |
Operating lease right-of-use assets | (51,845) |  |  | (21,129) |
Unrealized gains on hedges | — |  |  | (177) |
Other, net | (2,983) |  |  | (1,564) |
Total deferred tax liabilities | (85,648) |  |  | (66,541) |
Net deferred tax assets | $ | 435,755 |  |  | $ | 32,906 |
The increase in net deferred tax assets was driven by $238.3 million of deferred tax assets related to the market value adjustments of certain investments and $133.9 million related to the merger with First Midwest. The Company’s retained earnings at December 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 December 31, 2022 or 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 $81.5 million at December 31, 2022 and $36.7 million at December 31, 2021. 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 $124.4 million at December 31, 2022 and $116.1 million at December 31, 2021. 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 at December 31, 2022 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) | 2022 |  | 2021 |  | 2020
Balance at beginning of period | $ | — |  |  | $ | — |  |  | $ | — |
Additions for acquired uncertain tax positions | 14,897 |  |  | — |  |  | — |
Reductions for tax positions relating to prior years | (2,751) |  |  | — |  |  | — |
Reductions due to statute of limitations expiring | (1,139) |  |  | — |  |  | — |
Balance at end of period | $ | 11,007 |  |  | $ | — |  |  | $ | — |
If recognized, approximately $8.8 million of unrecognized tax benefits, net of interest, would favorably affect the effective income tax rate in future periods. Old National expects the $8.8 million of unrecognized tax benefits to be reduced to $7.9 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 2022 were immaterial. Old National reversed $3.9 million in 2022 related to uncertain tax positions accounted for under FASB ASC 740-10 (FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes). The income tax reversal related to the 2018 statute of limitations expiring in the third quarter of 2022 totaled $1.1 million. The income tax reversal related to reductions for tax positions in prior years totaled $2.8 million. Old National and its subsidiaries file a consolidated U.S. federal income tax return, as well as filing various state returns. The 2019 through 2022 tax years are open and subject to examination.

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