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Table of Contents

 

 

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.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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.

 

 

 


Table of Contents

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   

 

2


Table of Contents

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.

 

 

3


Table of Contents

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.

 

 

4


Table of Contents

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.

 

5


Table of Contents

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.

 

6


Table of Contents

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.

 

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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Table of Contents

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.

 

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Table of Contents

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   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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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 
  

 

 

    

 

 

    

 

 

 

 

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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.

 

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Table of Contents

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.

 

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Table of Contents

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.

 

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                                              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.

 

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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.

 

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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.

 

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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.

 

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Table of Contents

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   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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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   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

(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.

 

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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.

 

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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   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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.

 

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Table of Contents

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.

 

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Table of Contents

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.

 

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Table of Contents

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.

 

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Table of Contents

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.

 

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Table of Contents

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.

 

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Table of Contents

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   
  

 

 

    

 

 

 

 

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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.

 

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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