OLD NATIONAL BANCORP /IN/ - FORM 10-Q

OLD NATIONAL BANCORP /IN/ - FORM 10-Q - August 1, 2014

Attached files

Attached files

file	filename
EX-32.1 - EX-32.1 - OLD NATIONAL BANCORP /IN/	d745404dex321.htm
EX-32.2 - EX-32.2 - OLD NATIONAL BANCORP /IN/	d745404dex322.htm
EX-31.2 - EX-31.2 - OLD NATIONAL BANCORP /IN/	d745404dex312.htm
EXCEL - IDEA: XBRL DOCUMENT - OLD NATIONAL BANCORP /IN/	Financial_Report.xls
EX-31.1 - EX-31.1 - OLD NATIONAL BANCORP /IN/	d745404dex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-15817

OLD NATIONAL BANCORP

(Exact name of Registrant as specified in its charter)


INDIANA		35-1539838
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

One Main Street Evansville, Indiana		47708
(Address of principal executive offices)		(Zip Code)

(812) 464-1294

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (s232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock. The Registrant has one class of common stock (no par value) with 105,851,000 shares outstanding at June 30, 2014.

OLD NATIONAL BANCORP

FORM 10-Q

INDEX


		Page No.
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets June 30, 2014 (unaudited), December 31, 2013 and June 30, 2013 (unaudited)		3

	Consolidated Statements of Income (unaudited) Three and six months ended June 30, 2014 and 2013		4

	Consolidated Statements of Comprehensive Income (Loss) (unaudited) Three and six months ended June 30, 2014 and 2013		5

	Consolidated Statements of Changes in Shareholders’ Equity (unaudited) Six months ended June 30, 2014 and 2013		6

	Consolidated Statements of Cash Flows (unaudited) Six months ended June 30, 2014 and 2013		7

	Notes to Consolidated Financial Statements (unaudited)		8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		66

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		95

Item 4.	Controls and Procedures		96

PART II	OTHER INFORMATION		97

SIGNATURES			103

OLD NATIONAL BANCORP

CONSOLIDATED BALANCE SHEETS


(dollars and shares in thousands, except per share data)	June 30, 2014			December 31, 2013			June 30, 2013
	(unaudited)						(unaudited)
Assets
Cash and due from banks	$	215,806		$	190,606		$	155,135
Money market and other interest-earning investments		20,887			16,117			61,690

Total cash and cash equivalents		236,693			206,723			216,825
Trading securities—at fair value		3,726			3,566			3,331
Investment securities—available-for-sale, at fair value:
U.S. Treasury		11,186			13,113			14,366
U.S. Government-sponsored entities and agencies		623,672			435,588			374,956
Mortgage-backed securities		1,220,293			1,306,670			1,412,869
States and political subdivisions		309,106			268,795			643,887
Other securities		371,800			348,035			213,006

Total investment securities—available-for-sale		2,536,057			2,372,201			2,659,084
Investment securities—held-to-maturity, at amortized cost (fair value $899,007, $780,758 and $419,326, respectively)		852,904			762,734			401,066
Federal Home Loan Bank stock, at cost		42,776			40,584			40,584
Residential loans held for sale, at fair value		11,398			7,705			13,572
Finance leases held for sale		—			—			11,553
Loans:
Commercial		1,498,833			1,373,415			1,397,882
Commercial real estate		1,354,700			1,160,890			1,197,997
Residential real estate		1,425,179			1,359,569			1,399,688
Consumer credit, net of unearned income		1,089,008			971,258			892,078
Covered loans, net of discount		171,148			217,832			288,577

Total loans		5,538,868			5,082,964			5,176,222
Allowance for loan losses		(42,494	)		(41,741	)		(43,890	)
Allowance for loan losses—covered loans		(3,658	)		(5,404	)		(5,428	)

Net loans		5,492,716			5,035,819			5,126,904

FDIC indemnification asset		51,431			88,513			100,391
Premises and equipment, net		118,014			108,306			91,445
Accrued interest receivable		54,630			50,205			48,516
Goodwill		408,474			352,729			339,382
Other intangible assets		30,799			25,957			24,993
Company-owned life insurance		299,509			275,121			273,887
Assets held for sale		9,043			9,056			9,275
Other real estate owned and repossessed personal property		6,729			7,562			7,739
Other real estate owned—covered		11,155			13,670			23,131
Other assets		221,879			221,293			249,393

Total assets	$	10,387,933		$	9,581,744		$	9,641,071

Liabilities
Deposits:
Noninterest-bearing demand	$	2,129,705		$	2,026,490		$	1,881,440
Interest-bearing:
NOW		1,912,183			1,775,938			1,652,816
Savings		2,100,173			1,941,652			1,900,148
Money market		428,013			448,848			283,686
Time		984,929			1,017,975			1,122,003

Total deposits		7,555,003			7,210,903			6,840,093
Short-term borrowings		467,578			462,332			530,381
Other borrowings		902,015			556,388			884,347
Accrued expenses and other liabilities		186,006			189,481			219,272

Total liabilities		9,110,602			8,419,104			8,474,093

Shareholders’ Equity
Preferred stock, series A, 1,000 shares authorized, no shares issued or outstanding		—			—			—
Common stock, $1 stated value, 150,000 shares authorized, 105,851, 99,859 and 100,881 shares issued and outstanding, respectively		105,851			99,859			100,881
Capital surplus		975,354			900,254			912,391
Retained earnings		229,467			206,993			178,727
Accumulated other comprehensive income (loss), net of tax		(33,341	)		(44,466	)		(25,021	)

Total shareholders’ equity		1,277,331			1,162,640			1,166,978

Total liabilities and shareholders’ equity	$	10,387,933		$	9,581,744		$	9,641,071

The accompanying notes to consolidated financial statements are an integral part of these statements.

OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF INCOME (unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
(dollars and shares in thousands, except per share data)	2014			2013			2014			2013
Interest Income
Loans including fees:
Taxable	$	65,892		$	63,223		$	130,849		$	127,441
Nontaxable		2,530			2,380			5,039			4,559
Investment securities:
Taxable		15,447			15,139			31,216			30,281
Nontaxable		5,649			4,933			10,673			9,483
Money market and other interest-earning investments		10			7			16			20

Total interest income		89,528			85,682			177,793			171,784

Interest Expense
Deposits		3,342			5,016			6,625			10,284
Short-term borrowings		83			213			150			480
Other borrowings		1,621			1,262			3,058			2,779

Total interest expense		5,046			6,491			9,833			13,543

Net interest income		84,482			79,191			167,960			158,241
Provision for loan losses		(400	)		(3,693	)		(363	)		(2,848	)

Net interest income after provision for loan losses		84,882			82,884			168,323			161,089

Noninterest Income
Wealth management fees		7,504			6,412			13,296			12,068
Service charges on deposit accounts		11,821			11,766			22,955			22,864
Debit card and ATM fees		6,476			5,942			12,212			11,740
Mortgage banking revenue		1,262			1,593			1,892			2,866
Insurance premiums and commissions		9,811			9,318			21,773			20,261
Investment product fees		4,117			4,074			7,985			7,657
Company-owned life insurance		1,643			1,614			3,110			3,258
Net securities gains		1,689			1,789			2,248			2,808
Total other-than-temporary impairment losses		—			—			(100	)		—
Loss recognized in other comprehensive income		—			—			—			—

Impairment losses recognized in earnings		—			—			(100	)		—
Gain (loss) on derivatives		71			144			250			132
Recognition of deferred gain on sale leaseback transactions		1,523			1,791			3,047			3,375
Gain on branch divestitures—deposit premium		—			—			—			2,244
Change in FDIC indemnification asset		(10,470	)		(1,474	)		(17,813	)		(3,776	)
Other income		4,206			3,275			9,361			7,062

Total noninterest income		39,653			46,244			80,216			92,559

Noninterest Expense
Salaries and employee benefits		55,050			48,723			106,430			99,683
Occupancy		12,712			12,029			23,654			24,113
Equipment		3,176			2,775			6,190			5,673
Marketing		2,434			1,934			4,619			3,139
Data processing		6,479			5,659			12,063			10,891
Communication		2,343			2,703			4,954			5,269
Professional fees		3,643			2,834			7,325			6,503
Loan expense		1,441			1,969			2,758			3,585
Supplies		824			649			1,477			1,218
FDIC assessment		1,445			118			2,886			1,770
Other real estate owned expense		1,255			1,537			2,013			2,551
Amortization of intangibles		2,003			1,840			3,840			4,365
Other expense		5,299			4,146			8,147			8,339

Total noninterest expense		98,104			86,916			186,356			177,099

Income before income taxes		26,431			42,212			62,183			76,549
Income tax expense		7,658			13,734			16,900			24,126

Net income	$	18,773		$	28,478		$	45,283		$	52,423

Net income per common share—basic	$	0.18		$	0.28		$	0.44		$	0.52
Net income per common share—diluted		0.18			0.28			0.44			0.52

Weighted average number of common shares outstanding-basic		103,904			100,981			101,862			101,031
Weighted average number of common shares outstanding-diluted		104,361			101,352			102,363			101,448

Dividends per common share	$	0.11		$	0.10		$	0.22		$	0.20

The accompanying notes to consolidated financial statements are an integral part of these statements.

OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands)	2014			2013			2014			2013
Net income	$	18,773		$	28,478		$	45,283		$	52,423
Other comprehensive income (loss)
Change in securities available-for-sale:
Unrealized holding gains (losses) for the period		11,447			(73,602	)		23,502			(87,385	)
Reclassification adjustment for securities gains realized in income		(1,689	)		(1,789	)		(2,248	)		(2,808	)
Other-than-temporary-impairment on available-for-sale securities associated with credit loss realized in income		—			—			100			—
Income tax effect		(3,627	)		28,957			(8,090	)		34,366

Unrealized gains on available-for-sale securities		6,131			(46,434	)		13,264			(55,827	)
Change in securities held-to-maturity:
Amortization of fair value for securities held-to-maturity previously recognized into accumulated other comprehensive income		225			(177	)		622			(354	)
Income tax effect		(58	)		70			(185	)		141

Changes from securities held-to-maturity		167			(107	)		437			(213	)
Cash flow hedges:
Net unrealized derivative gains (losses) on cash flow hedges		(3,146	)		874			(5,083	)		874
Income tax effect		1,195			(349	)		1,932			(349	)

Changes from cash flow hedges		(1,951	)		525			(3,151	)		525
Defined benefit pension plans:
Amortization of net loss recognized in income		591			842			943			1,702
Income tax effect		(349	)		(665	)		(368	)		(1,009	)

Changes from defined benefit pension plans		242			177			575			693

Other comprehensive income (loss), net of tax		4,589			(45,839	)		11,125			(54,822	)

Comprehensive income (loss)	$	23,362		$	(17,361	)	$	56,408		$	(2,399	)

The accompanying notes to consolidated financial statements are an integral part of these statements.

OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)


(dollars and shares in thousands)	Common Stock			Capital Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
Balance, December 31, 2012	$	101,179		$	916,918		$	146,667		$	29,801		$	1,194,565
Net income		—			—			52,423			—			52,423
Other comprehensive income (loss)		—			—			—			(54,822	)		(54,822	)
Dividends—common stock		—			—			(20,211	)		—			(20,211	)
Common stock issued		11			128			—			—			139
Common stock repurchased		(589	)		(7,097	)		—			—			(7,686	)
Stock based compensation expense		—			2,136			—			—			2,136
Stock activity under incentive comp plans		280			306			(152	)		—			434

Balance, June 30, 2013	$	100,881		$	912,391		$	178,727		$	(25,021	)	$	1,166,978

Balance, December 31, 2013	$	99,859		$	900,254		$	206,993		$	(44,466	)	$	1,162,640
Net income		—			—			45,283			—			45,283
Other comprehensive income (loss)		—			—			—			11,125			11,125
Acquisition—Tower Financial		5,626			73,101			—			—			78,727
Dividends—common stock		—			—			(22,631	)		—			(22,631	)
Common stock issued		11			146			—			—			157
Common stock repurchased		(117	)		(1,480	)		—			—			(1,597	)
Stock based compensation expense		—			2,506			—			—			2,506
Stock activity under incentive comp plans		472			827			(178	)		—			1,121

Balance, June 30, 2014	$	105,851		$	975,354		$	229,467		$	(33,341	)	$	1,277,331

The accompanying notes to consolidated financial statements are an integral part of these statements.

OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)


	Six Months Ended
	June 30,
(dollars in thousands)	2014			2013
Cash Flows From Operating Activities
Net income	$	45,283		$	52,423

Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		5,897			5,092
Amortization and impairment of other intangible assets		3,840			4,365
Net premium amortization on investment securities		6,525			9,007
Amortization of FDIC indemnification asset		17,813			3,776
Stock compensation expense		2,506			2,136
Provision for loan losses		(363	)		(2,848	)
Net securities gains		(2,248	)		(2,808	)
Impairment on available-for-sale securities		100			—
Gain on branch divestitures		—			(2,244	)
Recognition of deferred gain on sale leaseback transactions		(3,047	)		(3,375	)
Gain on derivatives		(250	)		(132	)
Net gains on sales of other assets		(1,204	)		(1,618	)
Loss on retirement of debt		—			993
Increase in cash surrender value of company owned life insurance		(3,107	)		(3,258	)
Proceeds from sale of residential real estate loans		48,540			83,909
Residential real estate loans originated for sale		(50,557	)		(82,586	)
Increase in interest receivable		(2,054	)		(1,537	)
Decrease in other real estate owned		3,821			6,446
Decrease in other assets		4,210			16,543
Decrease in accrued expenses and other liabilities		(4,166	)		(19,322	)

Total adjustments		26,256			12,539

Net cash flows provided by operating activities		71,539			64,962

Cash Flows From Investing Activities
Net cash and cash equivalents of acquired banks and branches		24,701			—
Purchases of investment securities available-for-sale		(257,481	)		(770,879	)
Purchases of investment securities held-to-maturity		(103,299	)		(15,624	)
Proceeds from maturities, prepayments and calls of investment securities available-for-sale		178,156			358,817
Proceeds from sales of investment securities available-for-sale		76,295			159,073
Proceeds from maturities, prepayments and calls of investment securities held-to-maturity		10,438			15,318
Proceeds on branch divestitures		—			(144,236	)
Proceeds from sale of loans		—			4,787
Purchases of Federal Home Loan Bank stock		—			(2,657	)
Reimbursements under FDIC loss share agreements		20,306			13,098
Net principal collected from (loans made to) loan customers		(85,480	)		1,435
Proceeds from sale of premises and equipment and other assets		43			3,036
Purchases of premises and equipment and other assets		(7,442	)		(7,321	)

Net cash flows used in investing activities		(143,763	)		(385,153	)

Cash Flows From Financing Activities
Net decrease in deposits and short-term borrowings:
Deposits		(184,422	)		(288,725	)
Short-term borrowings		(13,652	)		(59,434	)
Payments for maturities on other borrowings		(181,019	)		(469	)
Payments related to retirement of debt		—			(50,993	)
Proceeds from issuance of other borrowings		505,000			700,000
Cash dividends paid on common stock		(22,631	)		(20,211	)
Common stock repurchased		(1,597	)		(7,686	)
Proceeds from exercise of stock options, including tax benefit		358			335
Common stock issued		157			139

Net cash flows provided by financing activities		102,194			272,956

Net increase (decrease) in cash and cash equivalents		29,970			(47,235	)
Cash and cash equivalents at beginning of period		206,723			264,060

Cash and cash equivalents at end of period	$	236,693		$	216,825

Supplemental cash flow information:
Total interest paid	$	10,044		$	13,951
Total taxes paid (net of refunds)	$	9,501		$	11,282

The accompanying notes to consolidated financial statements are an integral part of these statements.

OLD NATIONAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements include the accounts of Old National Bancorp and its wholly-owned affiliates (hereinafter collectively referred to as “Old National”) and have been prepared in conformity with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. Such principles require management to make estimates and assumptions that affect the reported amounts of assets, liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements and amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The allowance for loan losses, valuation of purchased loans, FDIC indemnification asset, valuation and impairment of securities, goodwill and intangibles, derivative financial instruments, and income taxes are particularly subject to change. In the opinion of management, the consolidated financial statements contain all the normal and recurring adjustments necessary for a fair statement of the financial position of Old National as of June 30, 2014 and 2013, and December 31, 2013, and the results of its operations for the three and six months ended June 30, 2014 and 2013. Interim results do not necessarily represent annual results. These financial statements should be read in conjunction with Old National’s Annual Report for the year ended December 31, 2013.

All significant intercompany transactions and balances have been eliminated. Certain prior year amounts have been reclassified to conform with the 2014 presentation. Such reclassifications had no effect on net income or shareholders’ equity and were insignificant amounts.

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

FASB ASC 405 – In February 2013, the FASB issued an update (ASU No. 2013-04, Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date) impacting FASB ASC 405, Liabilities. This update requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date as the sum of (1) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and (2) any additional amount the reporting entity expects to pay on behalf of its co-obligors. This update also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. This update became effective for interim and annual periods beginning after December 15, 2013 and did not have a material impact on the consolidated financial statements.

FASB ASC 323 – In January 2014, the FASB issued an update (ASU No. 2014-01, Accounting for Investments in Qualified Affordable Housing Projects) impacting FASB ASC 323, Investments – Equity Method and Joint Ventures. This update permits reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2014 and should be applied retrospectively. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

FASB ASC 310 – In January 2014, the FASB issued an update (ASU No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure) impacting FASB ASC 310-40. The amendments in this update clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the property in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The amendments also require disclosure of (1) the amount of foreclosed residential real estate property held by the creditor (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2014. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

FASB ASC 205 and 360 – In April 2014, the FASB issued an update (ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity) impacting FASB ASC 205, Presentation of Financial Statements, and FASB ASC 360, Property, Plant, and Equipment. The amendments in this update change the requirements for reporting discontinued operations. A discontinued operation may include a component of an entity or a group of components of an entity, or a business or nonprofit activity. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. An entity will have to present, for each comparative period, the assets and liabilities of a disposal group that includes discontinued operations separately in the asset and liability sections of the statement of financial position. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2014. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

FASB ASC 606 – In May 2014, the FASB issued an update (ASU No. 2014-09, Revenue from Contracts with Customers) creating FASB Topic 606, Revenue from Contracts with Customers. The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

FASB ASC 860 – In June 2014, the FASB issued an update (ASU No. 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures) impacting FASB ASC 860, Transfers and Servicing. The amendments in this update change the accounting for repurchase-to-maturity transactions and linked repurchase financings to secured borrowing accounting, which is consistent with the accounting for other repurchase agreements. The amendments also require new disclosures. An entity is required to disclose information on transfers accounted for as sales in transactions that are economically similar to repurchase agreements. An entity must also provide additional information about the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The amendments in this update become effective for the first interim or annual period beginning after December 15, 2014. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

FASB ASC 718 – In June 2014, the FASB issued an update (ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period) impacting FASB ASC 860, Transfers and Servicing. Generally, an award with a performance target also requires an employee to render service until the performance target is achieved. In some cases, however, the terms of an award may provide that the performance target could be achieved after an employee completes the requisite service period. The amendments in this update require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. An entity should apply guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period for which the service has already been rendered. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

NOTE 3 – ACQUISITION AND DIVESTITURE ACTIVITY

2014 Acquisitions

Tower Financial Corporation

On September 10, 2013, Old National announced that it had entered into an agreement to acquire Tower Financial Corporation (“Tower”) through a stock and cash merger. The acquisition contemplated by this agreement was completed effective April 25, 2014 (the “Closing Date”). Tower was an Indiana bank holding company with Tower Bank & Trust Company as its wholly-owned subsidiary. Headquartered in Fort Wayne, Indiana, Tower operated seven banking centers and had approximately $556 million in trust assets under management on the Closing Date. The merger strengthens Old National’s position as the third largest deposit holder in Indiana and Old National believes that it will be able to achieve cost savings by integrating the two companies and combining accounting, data processing, retail and lending support, and other administrative functions after the merger, which will enable Old National to achieve economies of scale in these areas.

The total purchase price for Tower was $110.4 million, consisting of $31.7 million of cash and the issuance of 5.6 million shares of Old National Common Stock valued at $78.7 million. This acquisition was accounted for under the acquisition method of accounting. Accordingly, the Company recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values, while $5.7 million of transaction and integration costs associated with the acquisition were expensed as incurred.

Based on management’s preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on assumptions that are subject to change, the purchase price for the Tower acquisition is allocated as follows (in thousands):


Cash and cash equivalents	$	56,345
Investment securities		142,759
Loans		371,528
Premises and equipment		8,516
Accrued interest receivable		2,371
Other real estate owned		473
Company-owned life insurance		21,281
Other assets		15,658
Deposits		(527,995	)
Short-term borrowings		(18,898	)
Other borrowings		(21,113	)
Accrued expenses and other liabilities		(4,681	)

Net tangible assets acquired		46,244
Definite-lived intangible assets acquired		8,382
Goodwill		55,745

Total estimated fair value of consideration transferred	$	110,371

Of the total purchase price, $46.2 million has been allocated to net tangible assets acquired and $8.4 million has been allocated to definite-lived intangible assets acquired. The remaining purchase price has been allocated to goodwill. The goodwill will not be deductible for tax purposes and is included in the “Banking” and “Wealth Management” segments, as described in Note 20 of these consolidated financial statement footnotes.

The components of the estimated fair value of the acquired identifiable intangible assets are in the table below. These intangible assets will be amortized on an accelerated basis over their estimated lives and are included in the “Banking” and “Wealth Management” segments, as described in Note 20 of these consolidated financial statement footnotes.


	Estimated Fair Value (in millions)		Estimated Useful Lives (Years)
Core deposit intangible	$	4.6		7
Trust customer relationship intangible	$	3.8		12

United Bancorp, Inc.

On January 8, 2014, Old National announced that it had entered into an agreement to acquire United Bancorp, Inc. (“United”) through a stock and cash merger. The acquisition contemplated by this agreement was completed effective July 31, 2014 (the “Closing Date”). United was a Michigan bank holding company with United Bank & Trust as its wholly-owned subsidiary. Headquartered in Ann Arbor, Michigan, United operated eighteen banking centers and as of June 30, 2014, United had total loans of approximately $665 million, $770 milion of deposits and approximately $688 million in trust assets under management. The merger doubles Old National’s presence in Michigan to 36 total branches and Old National believes that it will be able to achieve cost savings by integrating the two companies and combining accounting, data processing, retail and lending support, and other administrative functions after the merger, which will enable Old National to achieve economies of scale in these areas.

The total purchase price for United was $157.8 million, consisting of $34.0 million of cash, the issuance of 9.1 million shares of Old National Common Stock valued at $122.0 million, and the assumption of United’s options and stock appreciation rights, valued at $1.8 million. This acquisition will be accounted for under the acquisition method of accounting. Accordingly, the Company is in the process of conducting assessments of net assets acquired and determining the fair values of these identifiable assets acquired and liabilities assumed as of the acquisition date. Transaction and integration costs of $2.7 million associated with the acquisition were expensed during the second quarter and remaining integration costs will be expensed in future quarters as incurred.

Summary of Unaudited Pro-forma Information

The unaudited pro-forma information below for the periods ended June 30, 2014 and 2013 gives effect to the Tower and United acquisitions as if the acquisitions had occurred on January 1, 2013. The pro-forma financial information is not necessarily indicative of the results of operations if the acquisitions had been effective as of this date.


	Three Months Ended June 30,				Six Months Ended June 30,
(dollars in thousands)	2014		2013		2014		2013
Revenue (1)	$	139,166	$	146,422	$	288,301	$	292,780
Net income	$	25,623	$	28,009	$	59,635	$	53,886

(1)	Net interest income plus noninterest income.

2014 supplemental pro-forma earnings were adjusted to exclude $6.4 million and $8.6 million of acquisition-related costs incurred during the three and six months ended June 30, 2014, respectively. 2013 supplemental pro-forma earnings were adjusted to include these charges.

Pending Acquisitions

On June 3, 2014, Old National announced that it had entered into an agreement to acquire LSB Financial Corp. (“LSB”) through a stock and cash merger. LSB is a savings and loan holding company with Lafayette Savings Bank as its wholly-owned subsidiary. LSB is the largest bank headquartered in Lafayette and operates five full-service banking centers. At June 3, 2014, LSB had total assets of approximately $369 million and $315 million of deposit liabilities. Pursuant to the merger agreement, shareholders of LSB will receive 2.269 shares of Old National common stock and $10.63 in cash for each share of LSB common stock. As of June 3, 2014, the transaction was valued at approximately $66.7 million. The transaction is subject to approval by regulatory authorities and LSB’s shareholders, as well as the satisfaction of customary closing conditions.

On July 28, 2014, Old National announced that it had entered into an agreement to acquire Grand Rapids, Michigan-based Founders Financial Corporation (“Founders”) through a stock and cash merger. Founders is a bank holding company with Founders Bank & Trust as its wholly-owned subsidiary. Founders Bank & Trust operates four full-service banking centers in Kent County. At June 30, 2014, Founders had total assets of approximately $466 million and $378 million of deposit liabilities. Pursuant to the merger agreement, shareholders of Founders will receive 3.25 shares of Old National common stock and $38.00 in cash for each share of Founders common stock. Based upon the July 25, 2014, closing price of $13.87 per share of Old National common stock, the transaction is valued at approximately $88.2 million. The transaction is subject to approval by regulatory authorities and Founders’ shareholders, as well as the satisfaction of customary closing conditions.

2013 Acquisitions

Bank of America

On January 9, 2013, Old National announced that it had entered into a purchase and assumption agreement to acquire 24 bank branches of Bank of America. Four of the branches are located in northern Indiana and 20 branches are located in southwest Michigan. The Company paid a deposit premium of 2.94%. The acquisition has doubled Old National’s presence in the South Bend/Elkhart area and provided a logical market extension into southwest Michigan. The premium paid for our entrance into a new market drove the goodwill recorded in this transaction. The transaction closed on July 12, 2013.

During the three months ended June 30, 2014, the Company finalized its valuation of all assets and liabilities acquired, resulting in no material change to purchase accounting adjustments. A summary of the final purchase price allocation is as follows (in thousands):


Cash and equivalents	$	562,906
Loans		5,638
Premises and equipment		12,559
Accrued interest receivable		15
Other assets		331
Deposits		(565,106	)
Accrued expenses and other liabilities		(246	)

Net tangible assets acquired		16,097
Definite-lived intangible assets acquired		3,462
Goodwill		13,347

Purchase price	$	32,906

The acquired identifiable intangible asset is core deposit intangible and the estimated fair value is approximately $3.5 million. The core deposit intangible asset will be amortized over an estimated useful life of 7 years and is included in the “Banking” segment, as described in Note 20 of these consolidated financial statement footnotes. The goodwill recorded in the transaction will be deductible for tax purposes and is included in the “Banking” segment.

2013 Divestitures

On August 16, 2012, Old National announced plans to sell the deposits of nine banking centers located in southern Illinois and western Kentucky. As such, these deposits were considered held for sale as of December 31, 2012. During the first quarter of 2013 these deposits were sold. Deposits at the time of sale were approximately $150.0 million and the Company received a deposit premium of $2.2 million.

On September 5, 2013, Old National entered into branch purchase and assumption agreements to sell three banking centers in the fourth quarter of 2013. The banking centers were sold during the fourth quarter and deposits at the time of sale were approximately $28.2 million and we received a deposit premium of $650 thousand.

As part of our efforts to provide an efficient and effective branch banking network, Old National also consolidated 23 banking centers into existing branch locations during 2013.

NOTE 4 – NET INCOME PER SHARE

The following table reconciles basic and diluted net income per share for the three and six months ended June 30:


(dollars and shares in thousands, except per share data)	Three Months Ended June 30, 2014		Three Months Ended June 30, 2013
Basic Earnings Per Share
Net income	$	18,773	$	28,478
Weighted average common shares outstanding		103,904		100,981
Basic Earnings Per Share	$	0.18	$	0.28

Diluted Earnings Per Share
Net income	$	18,773	$	28,478
Weighted average common shares outstanding		103,904		100,981
Effect of dilutive securities:
Restricted stock (1)		424		363
Stock options (2)		33		8

Weighted average shares outstanding		104,361		101,352
Diluted Earnings Per Share	$	0.18	$	0.28


(dollars and shares in thousands, except per share data)	Six Months Ended June 30, 2014		Six Months Ended June 30, 2013
Basic Earnings Per Share
Net income	$	45,283	$	52,423
Weighted average common shares outstanding		101,862		101,031
Basic Earnings Per Share	$	0.44	$	0.52

Diluted Earnings Per Share
Net income	$	45,283	$	52,423
Weighted average common shares outstanding		101,862		101,031
Effect of dilutive securities:
Restricted stock (1)		471		406
Stock options (2)		30		11

Weighted average shares outstanding		102,363		101,448
Diluted Earnings Per Share	$	0.44	$	0.52

(1)

No shares of restricted stock awards or restricted stock units were excluded in the computation of net income per diluted share for the second quarter ended June 30, 2014 and 2013, respectively, because the effect would be antidilutive. No shares of restricted stock and restricted stock units were excluded in the computation of net income per diluted share for the six months ended June 30, 2014 and 2013, respectively, because the effect would be antidilutive.

(2)

Options to purchase 832 shares and 1,294 shares outstanding at June 30, 2014 and 2013, respectively, were excluded in the computation of net income per diluted share for the second quarter ended June 30, 2014 and 2013, respectively, because the exercise price of these options was greater than the average market price of the common shares and, therefore, the effect would be antidilutive. Options to purchase 832 and 1,202 shares outstanding at June 30, 2014 and 2013, respectively, were excluded in the computation of net income per diluted share for the six months ended June 30, 2014 and 2013, respectively, because the exercise price of these options was greater than the average market price of the common shares and, therefore, the effect would be antidilutive.

NOTE 5 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables summarize the changes within each classification of accumulated other comprehensive income (loss) (“AOCI”) net of tax for the three and six months ended June 30, 2014 and summarizes the significant amounts reclassified out of each component of AOCI:


Changes in Accumulated Other Comprehensive Income (Loss) by Component For the Three Months Ended June 30, 2014 (a)
(dollars in thousands)	Unrealized Gains and Losses on Available-for-Sale Securities			Unrealized Gains and Losses on Held-to-Maturity Securities			Gains and Losses on Cash Flow Hedges			Defined Benefit Pension Plans			Total
Balance at April 1, 2014	$	(13,975	)	$	(16,497	)	$	(1,390	)	$	(6,068	)	$	(37,930	)
Other comprehensive income (loss) before reclassifications		7,192			—			(1,951	)		—			5,241
Amounts reclassified from accumulated other comprehensive income (loss) (b)		(1,061	)		167			—			242			(652	)

Net current-period other comprehensive income (loss)		6,131			167			(1,951	)		242			4,589

Balance at June 30, 2014	$	(7,844	)	$	(16,330	)	$	(3,341	)	$	(5,826	)	$	(33,341	)

(a)	All amounts are net of tax. Amounts in parentheses indicate debits.

(b)	See table below for details about reclassifications.


Changes in Accumulated Other Comprehensive Income (Loss) by Component For the Six Months Ended June 30, 2014 (a)
(dollars in thousands)	Unrealized Gains and Losses on Available-for- Sale Securities			Unrealized Gains and Losses on Held-to-Maturity Securities			Gains and Losses on Cash Flow Hedges			Defined Benefit Pension Plans			Total
Balance at January 1, 2014	$	(21,108	)	$	(16,767	)	$	(190	)	$	(6,401	)	$	(44,466	)
Other comprehensive income (loss) before reclassifications		14,607			—			(3,151	)		—			11,456
Amounts reclassified from accumulated other comprehensive income (loss) (b)		(1,343	)		437			—			575			(331	)

Net current-period other comprehensive income (loss)		13,264			437			(3,151	)		575			11,125

Balance at June 30, 2014	$	(7,844	)	$	(16,330	)	$	(3,341	)	$	(5,826	)	$	(33,341	)

(a)	All amounts are net of tax. Amounts in parentheses indicate debits.

(b)	See table below for details about reclassifications.


Reclassifications out of Accumulated Other Comprehensive Income (Loss) For the Three Months Ended June 30, 2014 (a)
Details about Accumulated Other Comprehensive Income (Loss) Components	Amount Reclassified from Accumulated Other Comprehensive Income (Loss)			Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains and losses on available-for-sale securities	$	1,689		Net securities gains
		—		Impairment losses

		1,689		Total before tax
		(628	)	Tax (expense) or benefit

	$	1,061		Net of tax

Unrealized gains and losses onheld-to-maturity securities	$	(225	)	Interest income/(expense)
		58		Tax (expense) or benefit

	$	(167	)	Net of tax

Amortization of defined benefit pension items Acturial gains/(losses)	$	(591	)	(b)
		349		Tax (expense) or benefit

	$	(242	)	Net of tax

Total reclassifications for the period	$	652		Net of tax

(a)	Amounts in parentheses indicate debits to profit/loss.

(b)	This accumulated other comprehensive income (loss) component is included in the computation of net periodic pension cost. See Note 14 for additional details on our pension plans.


Reclassifications out of Accumulated Other Comprehensive Income (Loss) For the Six Months Ended June 30, 2014 (a)
Details about Accumulated Other Comprehensive Income (Loss) Components	Amount Reclassified from Accumulated Other Comprehensive Income (Loss)			Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains and losses on available-for-sale securities	$	2,248		Net securities gains
		(100	)	Impairment losses

		2,148		Total before tax
		(805	)	Tax (expense) or benefit

	$	1,343		Net of tax

Unrealized gains and losses onheld-to-maturity securities	$	(622	)	Interest income/(expense)
		185		Tax (expense) or benefit

	$	(437	)	Net of tax

Amortization of defined benefit pension items Acturial gains/(losses)	$	(943	)	(b)
		368		Tax (expense) or benefit

	$	(575	)	Net of tax

Total reclassifications for the period	$	331		Net of tax

(a)	Amounts in parentheses indicate debits to profit/loss.

(b)	This accumulated other comprehensive income (loss) component is included in the computation of net periodic pension cost. See Note 14 for additional details on our pension plans.

The following tables summarize the changes within each classification of accumulated other comprehensive income (loss) (“AOCI”) net of tax for the three and six months ended June 30, 2013 and summarizes the significant amounts reclassified out of each component of AOCI:


	Changes in Accumulated Other Comprehensive Income (Loss) by Component For the Three Months Ended June 30, 2013 (a)
(dollars in thousands)	Unrealized Gains and Losses on Available-for-Sale Securities			Unrealized Gains and Losses on Held-to-Maturity Securities			Gains and Losses on Cash Flow Hedges		Defined Benefit Pension Plans			Total
Balance at April 1, 2013	$	29,661		$	3,163		$	—	$	(12,006	)	$	20,818
Other comprehensive income (loss) before reclassifications		(45,343	)		—			525		—			(44,818	)
Amounts reclassified from accumulated other comprehensive income (loss) (b)		(1,091	)		(107	)		—		177			(1,021	)

Net current-period other comprehensive income (loss)		(46,434	)		(107	)		525		177			(45,839	)

Balance at June 30, 2013	$	(16,773	)	$	3,056		$	525	$	(11,829	)	$	(25,021	)

(a)	All amounts are net of tax. Amounts in parentheses indicate debits.

(b)	See table below for details about reclassifications.


	Changes in Accumulated Other Comprehensive Income by Component
	For the Six Months Ended June 30, 2013 (a)
	Unrealized Gains			Unrealized Gains			Gains and		Defined
	and Losses on			and Losses on			Losses on		Benefit
	Available-for-Sale			Held-to-Maturity			Cash Flow		Pension
(dollars in thousands)	Securities			Securities			Hedges		Plans			Total
Balance at January 1, 2013	$	39,054		$	3,269		$	—	$	(12,522	)	$	29,801
Other comprehensive income
(loss) before reclassifications		(54,089	)		—			525		—			(53,564	)
Amounts reclassified from accumulated other comprehensive income (loss) (b)		(1,738	)		(213	)		—		693			(1,258	)

Net current-period other comprehensive income (loss)		(55,827	)		(213	)		525		693			(54,822	)

Balance at June 30, 2013	$	(16,773	)	$	3,056		$	525	$	(11,829	)	$	(25,021	)

(a)	All amounts are net of tax. Amounts in parentheses indicate debits.

(b)	See table below for details about reclassifications.


Reclassifications out of Accumulated Other Comprehensive Income (Loss) For the Three Months Ended June 30, 2013
Details about Accumulated Other Comprehensive Income (Loss) Components	Amount Reclassified from Accumulated Other Comprehensive Income (Loss)			Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains and losses on available-for-sale securities	$	1,789		Net securities gains
		—		Impairment losses

		1,789		Total before tax
		(698	)	Tax (expense) or benefit

	$	1,091		Net of tax

Unrealized gains and losses on held-to-maturity securities	$	177		Interest income/(expense)
		(70	)	Tax (expense) or benefit

	$	107		Net of tax

Amortization of defined benefit pension items Acturial gains/(losses)	$	(842	)	(b)
		665		Tax (expense) or benefit

	$	(177	)	Net of tax

Total reclassifications for the period	$	1,021		Net of tax

(a)	Amounts in parentheses indicate debits to profit/loss.

(b)	This accumulated other comprehensive income (loss) component is included in the computation of net periodic pension cost. See Note 14 for additional details on our pension plans.


Reclassifications out of Accumulated Other Comprehensive Income (Loss)
For the Six Months Ended June 30, 2013
Details about Accumulated Other Comprehensive Income (Loss) Components	Amount Reclassified from Accumulated Other Comprehensive Income (Loss)			Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains and losses on available-for-sale securities	$	2,808		Net securities gains
		—		Impairment losses

		2,808		Total before tax
		(1,070	)	Tax (expense) or benefit

	$	1,738		Net of tax

Unrealized gains and losses on held-to-maturity securities	$	354		Interest income/(expense)
		(141	)	Tax (expense) or benefit

	$	213		Net of tax

Amortization of defined benefit pension items Acturial gains/(losses)	$	(1,702	)	(b)
		1,009		Tax (expense) or benefit

	$	(693	)	Net of tax

Total reclassifications for the period	$	1,258		Net of tax

(a)	Amounts in parentheses indicate debits to profit/loss.

(b)	This accumulated other comprehensive income (loss) component is included in the computation of net periodic pension cost. See Note 14 for additional details on our pension plans.

NOTE 6 – INVESTMENT SECURITIES

The following table summarizes the amortized cost and fair value of the available-for-sale and held-to-maturity investment securities portfolio at June 30, 2014 and December 31, 2013 and the corresponding amounts of unrealized gains and losses therein:


	Amortized		Unrealized		Unrealized			Fair
(dollars in thousands)	Cost		Gains		Losses			Value
June 30, 2014
Available-for-sale
U.S. Treasury	$	11,025	$	161	$	—		$	11,186
U.S. Government-sponsored entities and agencies		635,127		952		(12,407	)		623,672
Mortgage-backed securities - Agency		1,209,049		16,813		(21,481	)		1,204,381
Mortgage-backed securities - Non-agency		15,462		450		—			15,912
States and political subdivisions		296,809		13,363		(1,066	)		309,106
Pooled trust preferred securities		18,041		—		(11,619	)		6,422
Other securities		363,273		5,483		(3,378	)		365,378

Total available-for-sale securities	$	2,548,786	$	37,222	$	(49,951	)	$	2,536,057

Held-to-maturity
U.S. Government-sponsored entities and agencies	$	168,936	$	8,181	$	—		$	177,117
Mortgage-backed securities - Agency		28,930		1,334		—			30,264
States and political subdivisions		655,038		37,362		(774	)		691,626

Total held-to-maturity securities	$	852,904	$	46,877	$	(774	)	$	899,007

December 31, 2013
Available-for-sale
U.S. Treasury	$	12,995	$	118	$	—		$	13,113
U.S. Government-sponsored entities and agencies		456,123		464		(20,999	)		435,588
Mortgage-backed securities - Agency		1,300,135		15,690		(26,567	)		1,289,258
Mortgage-backed securities - Non-agency		17,036		376		—			17,412
States and political subdivisions		260,398		10,112		(1,715	)		268,795
Pooled trust preferred securities		19,215		—		(11,178	)		8,037
Other securities		340,381		5,140		(5,523	)		339,998

Total available-for-sale securities	$	2,406,283	$	31,900	$	(65,982	)	$	2,372,201

Held-to-maturity
U.S. Government-sponsored entities and agencies	$	170,621	$	7,749	$	—		$	178,370
Mortgage-backed securities - Agency		35,443		906		(1	)		36,348
States and political subdivisions		556,670		10,949		(1,579	)		566,040

Total held-to-maturity securities	$	762,734	$	19,604	$	(1,580	)	$	780,758

All of the mortgage-backed securities in the investment portfolio are residential mortgage-backed securities. The amortized cost and fair value of the investment securities portfolio are shown by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Weighted average yield is based on amortized cost.

June 30, 2014

Weighted

(dollars in thousands)

Amortized

Fair

Average

Maturity

Cost

Value

Yield

Available-for-sale

Within one year

22,438

22,487

2.41

One to five years

397,946

404,642

2.31

Five to ten years

577,480

572,166

2.31

Beyond ten years

1,550,922

1,536,762

2.40

Total

2,548,786

2,536,057

2.37

Held-to-maturity

Within one year

1,514

1,535

3.13

One to five years

22,585

23,755

3.90

Five to ten years

173,189

179,969

3.25

Beyond ten years

655,616

693,748

5.47

Total

852,904

899,007

4.97

The following table summarizes the investment securities with unrealized losses at June 30, 2014 and December 31, 2013 by aggregated major security type and length of time in a continuous unrealized loss position:


	Less than 12 months					12 months or longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(dollars in thousands)	Value		Losses			Value		Losses			Value		Losses
June 30, 2014
Available-for-Sale
U.S. Government-sponsored entities and agencies	$	117,845	$	(637	)	$	319,330	$	(11,770	)	$	437,175	$	(12,407	)
Mortgage-backed securities - Agency		98,561		(548	)		502,894		(20,933	)		601,455		(21,481	)
States and political subdivisions		44,466		(189	)		19,794		(877	)		64,260		(1,066	)
Pooled trust preferred securities		—		—			6,422		(11,619	)		6,422		(11,619	)
Other securities		129,367		(694	)		44,621		(2,684	)		173,988		(3,378	)

Total available-for-sale	$	390,239	$	(2,068	)	$	893,061	$	(47,883	)	$	1,283,300	$	(49,951	)

Held-to-Maturity
States and political subdivisions	$	61,425	$	(650	)	$	11,611	$	(124	)	$	73,036	$	(774	)

Total held-to-maturity	$	61,425	$	(650	)	$	11,611	$	(124	)	$	73,036	$	(774	)

December 31, 2013
Available-for-Sale
U.S. Treasury	$	1,900	$	—		$	—	$	—		$	1,900	$	—
U.S. Government-sponsored entities and agencies		357,793		(17,547	)		38,988		(3,452	)		396,781		(20,999	)
Mortgage-backed securities - Agency		668,018		(23,455	)		41,200		(3,112	)		709,218		(26,567	)
States and political subdivisions		45,077		(1,620	)		2,812		(95	)		47,889		(1,715	)
Pooled trust preferred securities		—		—			8,037		(11,178	)		8,037		(11,178	)
Other securities		209,915		(2,706	)		24,082		(2,817	)		233,997		(5,523	)

Total available-for-sale	$	1,282,703	$	(45,328	)	$	115,119	$	(20,654	)	$	1,397,822	$	(65,982	)

Held-to-Maturity
Mortgage-backed securities - Agency	$	21,370	$	(1	)	$	—	$	—		$	21,370	$	(1	)
States and political subdivisions		70,162		(1,579	)		—		—			70,162		(1,579	)

Total held-to-maturity	$	91,532	$	(1,580	)	$	—	$	—		$	91,532	$	(1,580	)

Proceeds from sales and calls of securities available for sale were $100.8 million and $307.4 million for the six months ended June 30, 2014 and 2013, respectively. Gains of $2.3 million and $2.5 million were realized on these sales during 2014 and 2013, respectively and offsetting losses of $0.3 million were realized on these sales during 2014. Also included in net securities gains for the first six months of 2014 is $136 thousand of gains associated with the trading securities, $67 thousand of gains from mutual funds and a $100 thousand other-than-temporary impairment charge related to credit loss on one limited partnership investment, described below. Impacting earnings in the first six months of 2013 was $204 thousand of gains associated with the trading securities and $195 thousand of gains from mutual funds. There were no other-than-temporary impairment charges related to credit loss in the first six months of 2013.

Trading securities, which consist of mutual funds held in a trust associated with deferred compensation plans for former Monroe Bancorp directors and executives, are recorded at fair value and totaled $3.7 million at June 30, 2014 and $3.6 million at December 31, 2013.

During the third quarter of 2013, state and political subdivision securities with a fair value of $357.8 million were transferred from the available-for-sale portfolio to the held-to-maturity portfolio. The $31.0 million unrealized holding loss at the date of transfer shall continue to be reported as a separate component of shareholders’ equity and will be amortized over the remaining life of the securities as an adjustment of yield. The corresponding discount on these securities will offset this adjustment to yield as it is amortized. We moved these securities to our held-to-maturity portfolio to better align with the percentage of these securities held by our peers and to protect our tangible common equity against rising interest rates.

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities classified as available-for-sale or held-to-maturity are generally evaluated for OTTI under FASB ASC 320 (SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities). However, certain purchased beneficial interests, including non-agency mortgage-backed securities, asset-backed securities, and collateralized debt obligations, that had credit ratings at the time of purchase of below AA are evaluated using the model outlined in FASB ASC 325-10 (EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests that Continue to be Held by a Transfer in Securitized Financial Assets).

In determining OTTI under the FASB ASC 320 (SFAS No. 115) model, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time. The second segment of the portfolio uses the OTTI guidance provided by FASB ASC 325-10 (EITF 99-20) that is specific to purchased beneficial interests that, on the purchase date, were rated below AA. Under the FASB ASC 325-10 model, we compare the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

When other-than-temporary-impairment occurs under either model, the amount of the other-than-temporary-impairment recognized in earnings depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If an entity intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary-impairment shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. Otherwise, the other-than-temporary-impairment shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total other-than-temporary-impairment related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total other-than-temporary-impairment related to other factors shall be recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the other-than-temporary-impairment recognized in earnings shall become the new amortized cost basis of the investment.

There was $100 thousand of other-than-temporary-impairment recorded in the first six months of 2014. There was no other-than-temporary-impairment recorded in the first six months of 2013.

As of June 30, 2014, Old National’s securities portfolio consisted of 1,563 securities, 279 of which were in an unrealized loss position. The unrealized losses attributable to our U.S government-sponsored entities and agencies and agency mortgage-backed securities are the result of fluctuations in interest rates. Our pooled trust preferred securities are discussed below.

Pooled Trust Preferred Securities

At June 30, 2014, our securities portfolio contained three pooled trust preferred securities with a fair value of $6.4 million and unrealized losses of $11.6 million. One of the pooled trust preferred securities in our portfolio falls within the scope of FASB ASC 325-10 (EITF 99-20) and has a fair value of $0.2 million with an unrealized loss of $3.8 million at June 30, 2014. This security was rated A3 at inception, but at June 30, 2014, this security is rated D. The issuers in this security are primarily banks, but some of the pools do include a limited number of insurance companies. We use the OTTI evaluation model to compare the present value of expected cash flows to the previous estimate to determine whether an adverse change in cash flows has occurred during the quarter. The OTTI model considers the structure and term of the collateralized debt obligation (“CDO”) and the financial condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market information including announcements of interest payment deferrals or defaults of underlying trust preferred securities. Assumptions used in the model include expected future default rates and prepayments. We assume no recoveries on defaults and a limited number of recoveries on current or projected interest payment deferrals. In addition, we use the model to “stress” this CDO, or make assumptions more severe than expected activity, to determine the degree to which assumptions could deteriorate before the CDO could no longer fully support repayment of Old National’s note class. For the six months ended June 30, 2014, our model indicated no other-than-temporary-impairment losses on this security. At June 30, 2014, we have no intent to sell any securities that are in an unrealized loss position nor is it expected that we would be required to sell any securities.

Two of our pooled trust preferred securities with a fair value of $6.2 million and unrealized losses of $7.8 million at June 30, 2014 are not subject to FASB ASC 325-10. These securities are evaluated using collateral-specific assumptions to estimate the expected future interest and principal cash flows. Our analysis indicated no other-than-temporary-impairment on these securities.

For the six months ended June 30, 2013, the three securities subject to FASB ASC 325-10 accounted for $5.6 million of the unrealized losses in the pooled trust preferred securities category. Our analysis indicated no other-than-temporary-impairment losses on these securities. During the first quarter of 2013 one of these securities was sold. We recorded a gain of $224 thousand associated with this sale.

Two of our pooled trust preferred securities with a fair value of $6.0 million and unrealized losses of $8.3 million at June 30, 2013 were not subject to FASB ASC 325-10. These securities were evaluated using collateral-specific assumptions to estimate the expected future interest and principal cash flows. Our analysis indicated no other-than-temporary-impairment on these securities.

The table below summarizes the relevant characteristics of our three pooled trust preferred securities as well as six single issuer trust preferred securities which are included with other securities in Note 6 to the consolidated financial statements. Each of the pooled trust preferred securities support a more senior tranche of security holders.

As depicted in the table below, all three securities have experienced credit defaults. However, two of these securities have excess subordination and are not other-than-temporarily-impaired as a result of their class hierarchy which provides more loss protection.


																Actual			Expected			Excess
																Deferrals and			Defaults as			Subordination
														# of Issuers		Defaults as a			a % of			as a %
Trust preferred securities			Lowest						Unrealized			Realized		Currently		Percent of			Remaining			of Current
June 30, 2014			Credit		Amortized		Fair		Gain/			Losses		Performing/		Original			Performing			Performing
(Dollars in Thousands)	Class		Rating (1)		Cost		Value		(Loss)			2014		Remaining		Collateral			Collateral			Collateral
Pooled trust preferred securities:
Reg Div Funding 2004		B-2		D	$	4,012	$	223	$	(3,789	)	$	—		24/42		37.6	%		8.1	%		0.0	%
Pretsl XXVII LTD		B		Caa3		4,596		1,701		(2,895	)		—		35/47		20.5	%		5.7	%		39.4	%
Trapeza Ser 13A		A2A		B+		9,433		4,498		(4,935	)		—		46/61		22.0	%		0.4	%		54.7	%

						18,041		6,422		(11,619	)		—
Single Issuer trust preferred securities:
First Empire Cap (M&T)				BB+		960		1,018		58			—
First Empire Cap (M&T)				BB+		2,914		3,053		139			—
Fleet Cap Tr V (BOA)				BB+		3,377		2,975		(402	)		—
JP Morgan Chase Cap XIII				BBB		4,739		4,325		(414	)		—
NB-Global				BB+		743		850		107			—
Chase Cap II				BBB		786		860		74			—

						13,519		13,081		(438	)		—
Total					$	31,560	$	19,503	$	(12,057	)	$	—

(1)	Lowest rating for the security provided by any nationally recognized credit rating agency.

On July 19, 2010, financial regulatory reform legislation entitled the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act contains provisions (the Volcker Rule”) prohibiting certain investments which can be held by a bank holding company. A limited partnership held by Old National falls under these restrictions and will have to be divested by July 2015, unless a request of up to two 1-year extensions is approved. The estimated sales proceeds for this security would be less than the amortized cost of the security, and an other-than-temporary-impairment charge of $100 thousand was recorded for this security in the first quarter of 2014.

The following table details all securities with other-than-temporary-impairment, their credit rating at June 30, 2014, and the related life-to-date credit losses recognized in earnings:


							Amount of other-than-temporary
							impairment recognized in earnings
							Six Months
			Lowest				ended
			Credit		Amortized		June 30,		Year ended December 31,										Life-to
(dollars in thousands)	Vintage		Rating (1)		Cost		2014		2013		2012		2011		2010		2009		date
Non-agency mortgage-backed securities:
BAFC Ser 4		2007		CCC	$	8,682	$	—	$	—	$	299	$	—	$	79	$	63	$	441
CWALT Ser 73CB (2)		2005				—		—		—		151		—		207		83		441
CWALT Ser 73CB (2)		2005				—		—		—		35		—		427		182		644
CWHL 2006-10 (2)		2006				—		—		—		—		—		309		762		1,071
CWHL 2005-20 (2)		2005				—		—		—		—		—		39		72		111
FHASI Ser 4 (2)		2007				—		—		—		—		340		629		223		1,192
HALO Ser 1R (2)		2006				—		—		—		133		16		—		—		149
RFMSI Ser S9 (2)		2006				—		—		—		—		—		923		1,880		2,803
RFMSI Ser S10		2006		D		2,268		—		—		178		165		76		249		668
RALI QS2 (2)		2006				—		—		—		—		—		278		739		1,017
RAST A9 (2)		2004				—		—		—		142		—		—		—		142
RFMSI S1(2)		2006				—		—		—		—		—		30		176		206

						10,950		—		—		938		521		2,997		4,429		8,885
Pooled trust preferred securities:
TROPC (2)		2003				—		—		—		—		888		444		3,517		4,849
MM Community Funding IX (2)		2003				—		—		1,000		—		—		165		2,612		3,777
Reg Div Funding		2004		D		4,012		—		—		165		—		321		5,199		5,685
Pretsl XII (2)		2003				—		—		—		—		—		—		1,897		1,897
Pretsl XV (2)		2004				—		—		—		—		—		—		3,374		3,374
Reg Div Funding (3)		2005				—		—		—		311		—		—		3,767		4,078

						4,012		—		1,000		476		888		930		20,366		23,660
Limited partnership						685		100		—		—		—		—		—		100
Total other-than-temporary- impairment recognized in earnings							$	100	$	1,000	$	1,414	$	1,409	$	3,927	$	24,795	$	32,645

(1)	Lowest rating for the security provided by any nationally recognized credit rating agency.

(2)	Securities sold or redeemed.

(3)	Security written down to zero.

NOTE 7 – LOANS HELD FOR SALE

Residential loans that Old National has committed to sell are recorded at fair value in accordance with FASB ASC 825-10 (SFAS No. 159 – The Fair Value Option for Financial Assets and Financial Liabilities). At June 30, 2014 and December 31, 2013, Old National had residential loans held for sale of $11.4 million and $7.7 million, respectively.

There were no commercial or commercial real estate loans held for investment reclassified to loans held for sale during the first six months of 2014.

During the third quarter of 2013, residential real estate loans held for investment of $96.9 million were reclassified to loans held for sale at the lower of cost or fair value and sold for $96.9 million, resulting in no gain or loss. These longer duration loans were sold to reduce interest rate risk in the loan portfolio. At June 30, 2014, there were no loans held for sale under this arrangement.

At June 30, 2013, Old National had taxable finance leases held for sale of $11.6 million. These leases were transferred from the commercial loan category at fair value and a loss of $0.2 million was recognized. The portfolio of leases held for sale had an average maturity of 2.7 years and interest rates ranging from 3.57% to 10.22%. The leases held for sale were to a variety of borrowers, with various types of equipment securing the leases, and all of the leases were current. The leases held for sale were sold in the third quarter of 2013 with no additional loss. As of June 30, 2014, Old National does not intend to sell its nontaxable finance leases.

During the first six months of 2013, commercial and commercial real estate loans held for investment of $3.6 million, including $0.4 million of purchased impaired loans, were reclassified to loans held for sale at the lower of cost or fair value and sold for $4.8 million, resulting in a charge-off of $0.2 million, recoveries of $0.4 million and other noninterest income of $1.0 million. At June 30, 2013, there were no loans held for sale under this arrangement.

NOTE 8 – LOANS AND ALLOWANCE FOR CREDIT LOSSES

Old National’s finance receivables consist primarily of loans made to consumers and commercial clients in various industries including manufacturing, agribusiness, transportation, mining, wholesaling and retailing. Most of Old National’s lending activity occurs within our principal geographic markets of Indiana, southeastern Illinois, western Kentucky and southwestern Michigan. Old National has no concentration of commercial loans in any single industry exceeding 10% of its portfolio.

The composition of loans by lending classification was as follows:


	June 30,			December 31,
(dollars in thousands)	2014			2013
Commercial (1)	$	1,498,833		$	1,373,415
Commercial real estate:
Construction		135,139			88,630
Other		1,219,561			1,072,260
Residential real estate		1,425,179			1,359,569
Consumer credit:
Heloc		281,823			251,102
Auto		696,009			620,473
Other		111,176			99,683
Covered loans		171,148			217,832

Total loans		5,538,868			5,082,964
Allowance for loan losses		(42,494	)		(41,741	)
Allowance for loan losses - covered loans		(3,658	)		(5,404	)

Net loans	$	5,492,716		$	5,035,819

(1)	Includes direct finance leases of $23.4 million at June 30, 2014 and $27.8 million at December 31, 2013.

Portfolio loans, or loans Old National intends to hold for investment purposes, are carried at the principal balance outstanding, net of earned interest, purchase premiums or discounts, deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on the principal balances of loans outstanding.

The risk characteristics of each loan portfolio segment are as follows:

Commercial

Commercial loans are primarily based 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 short-term 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 customers.

Commercial real estate

These 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. As a general rule, Old National avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. 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 feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. 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, 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.

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 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. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Consumer

Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. 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. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Covered Loans

On July 29, 2011, Old National acquired the banking operations of Integra in an FDIC assisted transaction. As part of the purchase and assumption agreement, Old National and the FDIC entered into loss sharing agreements (each, a “loss sharing agreement” and collectively, the “loss sharing agreements”), whereby the FDIC will cover a substantial portion of any future losses on loans (and related unfunded commitments), OREO and up to 90 days of certain accrued interest on loans. The acquired loans and OREO subject to the loss sharing agreements are referred to collectively as “covered assets.” Under the terms of the loss sharing agreements, the FDIC will reimburse Old National for 80% of losses up to $275.0 million, losses in excess of $275.0 million up to $467.2 million at 0% reimbursement, and 80% of losses in excess of $467.2 million. As of June 30, 2014, we do not expect losses to exceed $275.0 million. Old National will reimburse the FDIC for its share of recoveries with respect to losses for which the FDIC has previously reimbursed Old National under the loss sharing agreements. The loss sharing provisions of the agreements for commercial and single family residential mortgage loans are in effect for five and ten years, respectively, from the July 29, 2011 acquisition date and the loss recovery provisions for such loans are in effect for eight years and ten years, respectively, from the acquisition date.

Allowance for loan losses

The allowance for loan losses is maintained at a level believed adequate by management to absorb probable losses incurred in the loan portfolio. Management’s evaluation of the adequacy of the allowance is an estimate based on reviews of individual loans, pools of homogeneous loans, historical loss experience, and assessments of the impact of current economic conditions on the portfolio.

The allowance is increased through a provision charged to operating expense. Loans deemed to be uncollectible are charged to the allowance. Recoveries of loans previously charged-off are added to the allowance.

No allowance was brought forward on any of the acquired loans as any credit deterioration evident in the loans was included in the determination of the fair value of the loans at the acquisition date. Purchased credit impaired (“PCI”) loans are not considered impaired until after the point at which there has been a degradation of cash flows below our expected cash flows at acquisition. Impairment on PCI loans would be recognized in the current period as provision expense.

Old National’s activity in the allowance for loan losses for the three months ended June 30, 2014 and 2013 is as follows:


				Commercial
(dollars in thousands)	Commercial			Real Estate			Consumer			Residential			Unallocated		Total
2014
Allowance for loan losses:
Beginning balance	$	19,506		$	19,310		$	5,378		$	3,359		$	—	$	47,553
Charge-offs		(926	)		(1,039	)		(958	)		(220	)		—		(3,143	)
Recoveries		794			480			841			27			—		2,142
Provision		(548	)		(987	)		728			407			—		(400	)

Ending balance	$	18,826		$	17,764		$	5,989		$	3,573		$	—	$	46,152


				Commercial
(dollars in thousands)	Commercial			Real Estate			Consumer			Residential			Unallocated		Total
2013
Allowance for loan losses:
Beginning balance	$	16,967		$	28,446		$	4,685		$	3,383		$	—	$	53,481
Charge-offs		(859	)		(1,065	)		(1,612	)		(454	)		—		(3,990	)
Recoveries		1,314			849			1,174			183			—		3,520
Provision		(2,338	)		(1,635	)		597			(317	)		—		(3,693	)

Ending balance	$	15,084		$	26,595		$	4,844		$	2,795		$	—	$	49,318

Old National’s activity in the allowance for loan losses for the six months ended June 30, 2014 and 2013 is as follows:


				Commercial
(dollars in thousands)	Commercial			Real Estate			Consumer			Residential			Unallocated		Total
2014
Allowance for loan losses:
Beginning balance	$	16,565		$	22,401		$	4,940		$	3,239		$	—	$	47,145
Charge-offs		(2,073	)		(1,207	)		(2,083	)		(199	)		—		(5,562	)
Recoveries		1,586			1,575			1,662			109			—		4,932
Provision		2,748			(5,005	)		1,470			424			—		(363	)

Ending balance	$	18,826		$	17,764		$	5,989		$	3,573		$	—	$	46,152


				Commercial
(dollars in thousands)	Commercial			Real Estate			Consumer			Residential			Unallocated		Total
2013
Allowance for loan losses:
Beginning balance	$	14,642		$	31,289		$	5,155		$	3,677		$	—	$	54,763
Charge-offs		(1,969	)		(2,801	)		(3,514	)		(711	)		—		(8,995	)
Recoveries		2,029			1,738			2,408			223			—		6,398
Provision		382			(3,631	)		795			(394	)		—		(2,848	)

Ending balance	$	15,084		$	26,595		$	4,844		$	2,795		$	—	$	49,318

The following tables provide Old National’s recorded investment in financing receivables by portfolio segment at June 30, 2014 and December 31, 2013 and other information regarding the allowance:


(dollars in thousands)	Commercial		CRE		Consumer		Residential		Unallocated		Total
June 30, 2014
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	6,320	$	2,697	$	—	$	—	$	—	$	9,017

Ending balance: collectively evaluated for impairment	$	11,555	$	13,292	$	5,509	$	3,533	$	—	$	33,889

Ending balance: noncovered loans acquired with deteriorated credit quality	$	252	$	1,255	$	215	$	40	$	—	$	1,762

Ending balance: covered loans acquired with deteriorated credit quality	$	699	$	520	$	265	$	—	$	—	$	1,484

Total allowance for credit losses	$	18,826	$	17,764	$	5,989	$	3,573	$	—	$	46,152

Loans and leases outstanding:
Ending balance: individually evaluated for impairment	$	37,657	$	40,811	$	—	$	—	$	—	$	78,468

Ending balance: collectively evaluated for impairment	$	1,471,425	$	1,289,817	$	1,138,009	$	1,425,175	$	—	$	5,324,426

Ending balance: loans acquired with deteriorated credit quality	$	2,506	$	27,654	$	9,509	$	156	$	—	$	39,825

Ending balance: covered loans acquired with deteriorated credit quality	$	8,889	$	47,432	$	14,988	$	24,840	$	—	$	96,149

Total loans and leases outstanding	$	1,520,477	$	1,405,714	$	1,162,506	$	1,450,171	$	—	$	5,538,868


(dollars in thousands)	Commercial		CRE		Consumer		Residential		Unallocated		Total
December 31, 2013
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	6,156	$	2,190	$	—	$	—	$	—	$	8,346

Ending balance: collectively evaluated for impairment	$	9,980	$	14,816	$	4,494	$	3,088	$	—	$	32,378

Ending balance: noncovered loans acquired with deteriorated credit quality	$	429	$	2,025	$	80	$	35	$	—	$	2,569

Ending balance: covered loans acquired with deteriorated credit quality	$	—	$	3,370	$	366	$	116	$	—	$	3,852

Total allowance for credit losses	$	16,565	$	22,401	$	4,940	$	3,239	$	—	$	47,145

Loans and leases outstanding:
Ending balance: individually evaluated for impairment	$	34,213	$	34,997	$	—	$	—	$	—	$	69,210

Ending balance: collectively evaluated for impairment	$	1,355,608	$	1,106,971	$	1,019,576	$	1,359,564	$	—	$	4,841,719

Ending balance: loans acquired with deteriorated credit quality	$	648	$	23,618	$	12,725	$	154	$	—	$	37,145

Ending balance: covered loans acquired with deteriorated credit quality	$	12,281	$	77,232	$	17,673	$	27,704	$	—	$	134,890

Total loans and leases outstanding	$	1,402,750	$	1,242,818	$	1,049,974	$	1,387,422	$	—	$	5,082,964

Credit Quality

Old National’s management monitors the credit quality of its financing receivables in an on-going manner. Internally, management assigns a credit quality grade to each non-homogeneous commercial and commercial real estate loan in the portfolio. The primary determinants of the credit quality grade are based upon the reliability of the primary source of repayment and the past, present, and projected financial condition of the borrower. The credit quality rating also reflects current economic and industry conditions. Major factors used in determining the grade 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 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.

As of June 30, 2014 and December 31, 2013, the risk category of loans, excluding covered loans, by class of loans is as follows:


(dollars in thousands)
Corporate Credit					Commercial Real Estate-				Commercial Real Estate-
Exposure	Commercial				Construction				Other
by Internally Assigned Grade	June 30, 2014		December 31, 2013		June 30, 2014		December 31, 2013		June 30, 2014		December 31, 2013
Grade:
Pass	$	1,354,039	$	1,237,983	$	111,252	$	74,815	$	1,092,301	$	943,781
Criticized		63,339		90,545		14,071		9,383		35,504		35,473
Classified - substandard		51,150		16,252		3,495		2,559		47,433		42,516
Classified - nonaccrual		28,309		27,635		6,321		1,873		41,388		49,406
Classified - doubtful		1,996		1,000		—		—		2,935		1,084

Total	$	1,498,833	$	1,373,415	$	135,139	$	88,630	$	1,219,561	$	1,072,260

Old National considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, Old National also evaluates credit quality based on the aging status of the loan and by payment activity. The following table presents the recorded investment in residential and consumer loans based on payment activity as of June 30, 2014 and December 31, 2013, excluding covered loans:

June 30, 2014

Consumer

Residential

(dollars inthousands)

Heloc

Auto

Other

Performing

279,809

694,924

109,917

1,413,778

Nonperforming

2,014

1,085

1,259

11,401

281,823

696,009

111,176

1,425,179


December 31, 2013	Consumer						Residential
(dollars inthousands)	Heloc		Auto		Other
Performing	$	249,152	$	618,911	$	97,877	$	1,349,236
Nonperforming		1,950		1,562		1,806		10,333

	$	251,102	$	620,473	$	99,683	$	1,359,569

Impaired Loans

Large commercial credits are subject to individual evaluation for impairment. Retail credits and other small balance credits that are part of a homogeneous group are not tested for individual impairment unless they are modified as a troubled debt restructuring. A loan is considered impaired when it is probable that contractual interest and principal payments will not be collected either for the amounts or by the dates as scheduled in the loan agreement. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported net, at the present value of estimated cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Old National’s policy, for all but purchased credit impaired loans, is to recognize interest income on impaired loans unless the loan is placed on nonaccrual status. No additional funds are committed to be advanced in connection with these impaired loans.

The following table shows Old National’s impaired loans, excluding covered loans, that are individually evaluated as of June 30, 2014 and December 31, 2013. Of the loans purchased without FDIC loss share coverage, only those that have experienced subsequent impairment since the date acquired are included in the table below.


			Unpaid
	Recorded		Principal		Related
(dollars in thousands)	Investment		Balance		Allowance
June 30, 2014
With no related allowance recorded:
Commercial	$	20,881	$	21,384	$	—
Commercial Real Estate - Construction		1,522		1,630		—
Commercial Real Estate - Other		23,054		27,779		—
Consumer		362		381		—
Residential		98		99		—
With an allowance recorded:
Commercial		10,736		13,742		4,246
Commercial Real Estate - Construction		—		—		—
Commercial Real Estate - Other		16,235		16,940		2,697
Consumer		1,420		1,467		71
Residential		2,375		2,445		119

Total Loans	$	76,683	$	85,867	$	7,133

December 31, 2013
With no related allowance recorded:
Commercial	$	17,066	$	17,417	$	—
Commercial Real Estate - Construction		525		633		—
Commercial Real Estate - Other		15,746		22,550		—
Consumer		324		342		—
Residential		106		106		—
With an allowance recorded:
Commercial		9,282		12,304		4,723
Commercial Real Estate - Construction		—		—		—
Commercial Real Estate - Other		18,726		19,358		2,190
Consumer		835		888		43
Residential		2,239		2,295		112

Total Loans	$	64,849	$	75,893	$	7,068

The average balance of impaired loans, excluding covered loans, and interest income recognized on impaired loans during the three months ended June 30, 2014 and 2013 are included in the tables below.


	Average		Interest
	Recorded		Income
(dollars in thousands)	Investment		Recognized (1)
June 30, 2014
With no related allowance recorded:
Commercial	$	17,040	$	1
Commercial Real Estate - Construction		1,449		15
Commercial Real Estate - Other		19,537		106
Consumer		348		2
Residential		98		—
With an allowance recorded:
Commercial		11,764		54
Commercial Real Estate - Construction		—		—
Commercial Real Estate - Other		18,614		52
Consumer		1,248		14
Residential		2,308		24

Total Loans	$	72,406	$	268

(1)	The Company does not record interest on nonaccrual loans until principal is recovered.


	Average		Interest
	Recorded		Income
(dollars in thousands)	Investment		Recognized (1)
June 30, 2013
With no related allowance recorded:
Commercial	$	10,294	$	58
Commercial Real Estate - Construction		854		—
Commercial Real Estate - Other		14,865		9
Consumer		57		—
Residential		35		—
With an allowance recorded:
Commercial		17,815		21
Commercial Real Estate - Construction		2,684		—
Commercial Real Estate - Other		32,356		(14	)
Consumer		381		6
Residential		532		4

Total Loans	$	79,873	$	84

(1)	The Company does not record interest on nonaccrual loans until principal is recovered.

The average balance of impaired loans, excluding covered loans, and interest income recognized on impaired loans during the six months ended June 30, 2014 and 2013 are included in the tables below.


	Average		Interest
	Recorded		Income
(dollars in thousands)	Investment		Recognized (1)
June 30, 2014
With no related allowance recorded:
Commercial	$	18,975	$	34
Commercial Real Estate - Construction		1,024		15
Commercial Real Estate - Other		19,402		160
Consumer		343		4
Residential		102		—
With an allowance recorded:
Commercial		10,002		108
Commercial Real Estate - Construction		—		—
Commercial Real Estate - Other		17,490		164
Consumer		1,127		26
Residential		2,307		41

Total Loans	$	70,772	$	552

(1)	The Company does not record interest on nonaccrual loans until principal is recovered.


	Average		Interest
	Recorded		Income
(dollars in thousands)	Investment		Recognized (1)
June 30, 2013
With no related allowance recorded:
Commercial	$	9,605	$	58
Commercial Real Estate - Construction		891		—
Commercial Real Estate - Other		15,212		13
Consumer		146		—
Residential		59		—
With an allowance recorded:
Commercial		19,945		31
Commercial Real Estate - Construction		3,036		—
Commercial Real Estate - Other		27,701		95
Consumer		532		6
Residential		1,101		4

Total Loans	$	78,228	$	207

(1)	The Company 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 collectibility of principal or interest. Interest accrued during the current year on such loans is reversed against earnings. Interest accrued in the prior year, if any, is charged to the allowance for loan losses. 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 are returned to accrual status when all the principal and interest amounts contractually due are brought current, remain current for six months and future payments are reasonably assured.

Loans accounted for under FASB ASC Topic 310-30 accrue interest, even though they may be contractually past due, as any nonpayment of contractual principal or interest is considered in the periodic re-estimation of expected cash flows and is included in the resulting recognition of current period covered loan loss provision or prospective yield adjustments. Similar to uncovered loans, covered loans accounted for outside FASB ASC Topic 310-30 are classified as nonaccrual when, in the opinion of management, collection of principal or interest is doubtful. Information for covered loans accounted for both under and outside FASB ASC Topic 310-30 is included in the table below in the row labeled covered loans.

Old National’s past due financing receivables as of June 30, 2014 and December 31, 2013 are as follows:


(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Recorded Investment > 90 Days and Accruing		Nonaccrual		Total Past Due		Current
June 30, 2014
Commercial	$	1,045	$	1,025	$	2	$	30,305	$	32,377	$	1,466,456
Commercial Real Estate:
Construction		80		—		—		6,321		6,401		128,738
Other		229		391		78		44,323		45,021		1,174,540
Consumer:
Heloc		1,136		118		—		2,014		3,268		278,555
Auto		2,958		639		129		1,085		4,811		691,198
Other		960		269		52		1,259		2,540		108,636
Residential		11,987		2,145		26		11,401		25,559		1,399,620
Covered loans		2,459		413		93		21,317		24,282		146,866

Total loans	$	20,854	$	5,000	$	380	$	118,025	$	144,259	$	5,394,609

December 31, 2013
Commercial	$	1,532	$	13	$	—	$	28,635	$	30,180	$	1,343,235
Commercial Real Estate:
Construction		—		139		—		1,873		2,012		86,618
Other		1,017		27		—		50,490		51,534		1,020,726
Consumer:
Heloc		527		119		—		1,950		2,596		248,506
Auto		3,795		716		89		1,562		6,162		614,311
Other		844		317		100		1,806		3,067		96,616
Residential		8,588		2,823		35		10,333		21,779		1,337,790
Covered loans		1,831		730		14		31,793		34,368		183,464

Total loans	$	18,134	$	4,884	$	238	$	128,442	$	151,698	$	4,931,266

Loan Participations

Old National has loan participations, which qualify as participating interests, with other financial institutions. At June 30, 2014, these loans totaled $200.6 million, of which $105.3 million had been sold to other financial institutions and $95.3 million 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 troubled debt restructuring (“TDR”) has occurred, which is when for economic or legal reasons related to a borrower’s financial difficulties, the 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 included 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. It is Old National’s policy to charge off small commercial loans scored through our small business credit center with contractual balances under $250,000 that have been placed on nonaccrual status or became ninety days or more delinquent, without regard to the collateral position. 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 allocated reserve is established within the allowance for loan losses for the difference between the carrying value of the loan and its computed fair value. To determine the fair 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 value, if the loan is collateral dependent. The allocated reserve 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, impairment is recalculated and the valuation allowance is adjusted accordingly.

When a consumer or residential loan is identified as a troubled debt restructuring, the loan is written down to its collateral value less selling costs.

At June 30, 2014, our TDRs consisted of $18.6 million of commercial loans, $20.4 million of commercial real estate loans, $2.0 million of consumer loans and $2.5 million of residential loans, totaling $43.5 million. Approximately $22.2 million of the TDRs at June 30, 2014 were included with nonaccrual loans. At December 31, 2013, our TDRs consisted of $22.5 million of commercial loans, $22.6 million of commercial real estate loans, $1.4 million of consumer loans and $2.4 million of residential loans, totaling $48.9 million. Approximately $33.1 million of the TDRs at December 31, 2013 were included with nonaccrual loans.

As of June 30, 2014 and December 31, 2013, Old National has allocated $4.8 million and $4.1 million of specific reserves to customers whose loan terms have been modified in TDRs, respectively. Old National has not committed to lend any additional amounts as of June 30, 2014 and December 31, 2013, respectively, to customers with outstanding loans that are classified as troubled debt restructurings.

The following table presents loans by class modified as troubled debt restructurings that occurred during the six months ended June 30, 2014:


			Pre-modification		Post-modification
	Number of		Outstanding Recorded		Outstanding Recorded
(dollars in thousands)	Loans		Investment		Investment
Troubled Debt Restructuring:
Commercial		13	$	10,422	$	8,833
Commercial Real Estate - construction		1		937		484
Commercial Real Estate - other		14		1,667		1,338
Residential		2		194		175
Consumer - other		13		886		831

Total		43	$	14,106	$	11,661

The TDRs described above increased the allowance for loan losses by $0.8 million and resulted in immaterial charge-offs during the six months ended June 30, 2014.

The following table presents loans by class modified as troubled debt restructurings that occurred during the twelve months ended December 31, 2013:


			Pre-modification		Post-modification
	Number of		Outstanding Recorded		Outstanding Recorded
(dollars in thousands)	Loans		Investment		Investment
Troubled Debt Restructuring:
Commercial		35	$	16,196	$	15,155
Commercial Real Estate - construction		1		60		60
Commercial Real Estate - other		36		10,585		9,791
Residential		14		1,936		1,901
Consumer - other		49		1,622		1,484

Total		135	$	30,399	$	28,391

The TDRs described above increased the allowance for loan losses by $0.1 million and resulted in charge-offs of $0.2 million during the twelve months ended December 31, 2013.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

The following table presents loans by class modified as TDRs during the first six months of 2014 for which there was a payment default within the last twelve months. The impact of the defaults was immaterial.


(dollars in thousands)	Number of Contracts		Recorded Investment
Troubled Debt Restructuring
That Subsequently Defaulted:
Commercial		3	$	92
Commercial Real Estate		2		142

Total		5	$	234

The TDRs that subsequently defaulted, described above, had no material impact on the allowance for loan losses and resulted in no charge-offs during the six months ended June 30, 2014.

The following table presents loans by class modified as TDRs during 2013 for which there was a payment default within the last twelve months.:


(dollars in thousands)	Number of Contracts		Recorded Investment
Troubled Debt Restructuring
That Subsequently Defaulted:
Commercial		3	$	32
Commercial Real Estate		2		85

Total		5	$	117

The TDRs that subsequently defaulted, described above, resulted in no material impact on the allowance for loan losses and resulted in charge-offs of $0.1 million during the three months ended December 31, 2013.

The terms of certain other loans were modified during the six months ended June 30, 2014 that did not meet the definition of a TDR. It is our process to review all classified and criticized loans that, during the period, have been renewed, have entered into a forbearance agreement, have gone from principal and interest to interest only, or have had the maturity date extended. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on its debt in the foreseeable future without the modification. The evaluation is performed under our internal underwriting policy. We also evaluate whether a concession has been granted or if we were adequately compensated through a market interest rate, additional collateral or a bona fide guarantee. We also consider whether the modification was insignificant relative to the other terms of the agreement or if the delay in a payment was 90 days or less.

Purchased credit impaired (“PCI”) loans are not considered impaired until after the point at which there has been a degradation of cash flows below our expected cash flows at acquisition. If a PCI loan is subsequently modified, and meets the definition of a TDR, it will be removed from PCI accounting and accounted for as a TDR only if the PCI loan was being accounted for individually. If the purchased credit impaired loan is being accounted for as part of a pool, it will not be removed from the pool. As of June 30, 2014, it has not been necessary to remove any loans from PCI accounting.

In general, once a modified loan is considered a TDR, the loan will always be considered a TDR, and therefore impaired, until it is paid in full, otherwise settled, sold or charged off. However, our policy also permits for loans to be removed from TDR status in the years following the restructuring if the following two conditions are met: (1) the restructuring agreement specifies an interest rate equal to or greater than the rate that we were willing to accept at the time of the restructuring for a new loan with comparable risk, and (2) the loan is not impaired based on the terms specified by the restructuring agreement.

The following table presents activity in troubled debt restructurings for the six months ended June 30, 2014 and 2013:


				Commercial
(dollars in thousands)	Commercial			Real Estate			Consumer			Residential			Total
2014
Troubled debt restructuring:
Balance, January 1, 2014	$	22,443		$	22,639		$	1,441		$	2,344		$	48,867
(Charge-offs)/recoveries		(252	)		167			(21	)		1			(105	)
Payments		(12,408	)		(4,220	)		(229	)		(47	)		(16,904	)
Additions		8,833			1,822			831			175			11,661

Balance June 30, 2014	$	18,616		$	20,408		$	2,022		$	2,473		$	43,519


				Commercial
(dollars in thousands)	Commercial			Real Estate			Consumer			Residential			Total
2013
Troubled debt restructuring:
Balance, January 1, 2013	$	12,660		$	18,422		$	473		$	499		$	32,054
(Charge-offs)/recoveries		402			(57	)		(62	)		—			283
Payments		(3,894	)		(2,435	)		(351	)		(40	)		(6,720	)
Additions		2,172			3,307			764			226			6,469

Balance June 30, 2013	$	11,340		$	19,237		$	824		$	685		$	32,086

Purchased Impaired Loans (non-covered loans)

Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date with no carryover of the related allowance for loan and lease losses. In determining the estimated fair value of purchased loans, management considers a number of factors including the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, net present value of cash flows expected to be received, among others. Purchased loans are accounted for in accordance with guidance for certain loans acquired in a transfer (ASC 310-30), when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the acquirer will not collect all contractually required principal and interest payments. The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference. Subsequent decreases to the expected cash flows will generally result in a provision for loan and lease losses. Subsequent increases in expected cash flows will result in a reversal of the provision for loan losses to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest income.

Old National has purchased loans for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. For these noncovered loans that meet the criteria of ASC 310-30 treatment, the carrying amount is as follows:


	June 30,		December 31,
(dollars in thousands)	2014		2013
Commercial	$	2,506	$	648
Commercial real estate		27,654		23,618
Consumer		9,509		12,725
Residential		156		154

Carrying amount	$	39,825	$	37,145

Carrying amount, net of allowance	$	38,063	$	34,576

Allowance for loan losses	$	1,762	$	2,569

The outstanding balance of noncovered loans accounted for under ASC 310-30, including contractual principal, interest, fees and penalties, was $116.9 million and $115.0 million as of June 30, 2014 and December 31, 2013, respectively.

The accretable difference on purchased loans acquired in a business combination is the difference between the expected cash flows and the net present value of expected cash flows with such difference accreted into earnings using the effective yield method over the term of the loans. Accretion of $9.8 million has been recorded as loan interest income through the six months ended June 30, 2014. Accretion of $8.9 million was recorded as loan interest income through the six months ended June 30, 2013. Improvement in cash flow expectations has resulted in a reclassification from nonaccretable difference to accretable yield.

Accretable yield of noncovered loans, or income expected to be collected, is as follows:


				Integra
(dollars in thousands)	Monroe			Noncovered			IBT			Tower			Total
Balance at January 1, 2014	$	6,787		$	2,425		$	19,079		$	—		$	28,291
New loans purchased		—			—			—			4,065			4,065
Accretion of income		(1,792	)		(481	)		(7,252	)		(226	)		(9,751	)
Reclassifications from (to) nonaccretable difference		(1,081	)		(149	)		3,411			—			2,181
Disposals/other adjustments		640			(77	)		—			—			563

Balance at June 30, 2014	$	4,554		$	1,718		$	15,238		$	3,839		$	25,349

Included in Old National’s allowance for loan losses is $1.8 million related to the purchased loans disclosed above for the first six months of 2014. Included in Old National’s allowance for loan losses was $2.6 million related to the purchased loans in 2013. An immaterial amount of allowances for loan losses were reversed during 2013 related to these loans.

At acquisition, purchased loans, both covered and noncovered, for which it was probable at acquisition that all contractually required payments would not be collected are as follows:


	Monroe			Integra
(dollars in thousands)	Bancorp			Bank (1)			IBT			Tower
Contractually required payments	$	94,714		$	921,856		$	118,535		$	22,746
Nonaccretable difference		(45,157	)		(226,426	)		(53,165	)		(5,826	)

Cash flows expected to be collected at acquisition		49,557			695,430			65,370			16,920
Accretable yield		(6,971	)		(98,487	)		(11,945	)		(4,065	)

Fair value of acquired loans at acquisition	$	42,586		$	596,943		$	53,425		$	12,855

(1)	Includes covered and noncovered.

Income is not recognized on certain purchased loans if Old National cannot reasonably estimate cash flows to be collected. Old National had no purchased loans for which it could not reasonably estimate cash flows to be collected.

NOTE 9 – COVERED LOANS

Covered loans represent loans acquired from the FDIC that are subject to loss share agreements. The carrying amount of covered loans was $171.1 million at June 30, 2014. The composition of covered loans by lending classification was as follows:

At June 30, 2014

Loans Accounted for

Loans excluded from

Under ASC 310-30

ASC 310-30 (1)

(Purchased Credit

(Not Purchased

Total Covered

(dollars in thousands)

Impaired)

Credit Impaired)

Purchased Loans

Commercial

8,889

12,755

21,644

Commercial real estate

47,432

3,582

51,014

Residential

24,840

152

24,992

Consumer

14,988

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company