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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 September 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 113,984,000 shares outstanding at September 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 September 30, 2014 (unaudited), December 31, 2013 and September 30, 2013 (unaudited)      3   
  Consolidated Statements of Income (unaudited) Three and nine months ended September 30, 2014 and 2013      4   
  Consolidated Statements of Comprehensive Income (Loss) (unaudited) Three and nine months ended September 30, 2014 and 2013      5   
  Consolidated Statements of Changes in Shareholders’ Equity (unaudited) Nine months ended September 30, 2014 and 2013      6   
  Consolidated Statements of Cash Flows (unaudited) Nine months ended September 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      69   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      98   

Item 4.

  Controls and Procedures      99   

PART II

  OTHER INFORMATION      100   

SIGNATURES

     106   

 

2


Table of Contents

OLD NATIONAL BANCORP

CONSOLIDATED BALANCE SHEETS

 

     September 30,     December 31,     September 30,  

(dollars and shares in thousands, except per share data)

   2014     2013     2013  
     (unaudited)           (unaudited)  

Assets

      

Cash and due from banks

   $ 205,853      $ 190,606      $ 217,902   

Money market and other interest-earning investments

     25,599        16,117        29,508   
  

 

 

   

 

 

   

 

 

 

Total cash and cash equivalents

     231,452        206,723        247,410   

Trading securities—at fair value

     3,839        3,566        3,331   

Investment securities—available-for-sale, at fair value:

      

U.S. Treasury

     11,140        13,113        28,301   

U.S. Government-sponsored entities and agencies

     628,331        435,588        391,737   

Mortgage-backed securities

     1,226,476        1,306,670        1,409,217   

States and political subdivisions

     273,568        268,795        275,798   

Other securities

     370,946        348,035        269,244   
  

 

 

   

 

 

   

 

 

 

Total investment securities—available-for-sale

     2,510,461        2,372,201        2,374,297   

Investment securities—held-to-maturity, at amortized cost (fair value $901,717, $780,758 and $778,552, respectively)

     848,033        762,734        758,194   

Federal Home Loan Bank stock, at cost

     45,656        40,584        40,584   

Residential loans held for sale, at fair value

     12,875        7,705        7,918   

Loans:

      

Commercial

     1,647,889        1,373,415        1,381,216   

Commercial real estate

     1,614,563        1,160,890        1,165,766   

Residential real estate

     1,546,939        1,359,569        1,344,350   

Consumer credit, net of unearned income

     1,274,699        971,258        930,343   

Covered loans, net of discount

     158,345        217,832        250,801   
  

 

 

   

 

 

   

 

 

 

Total loans

     6,242,435        5,082,964        5,072,476   

Allowance for loan losses

     (44,693     (41,741     (42,306

Allowance for loan losses—covered loans

     (3,586     (5,404     (5,012
  

 

 

   

 

 

   

 

 

 

Net loans

     6,194,156        5,035,819        5,025,158   
  

 

 

   

 

 

   

 

 

 

FDIC indemnification asset

     28,000        88,513        91,558   

Premises and equipment, net

     130,229        108,306        104,643   

Accrued interest receivable

     56,961        50,205        48,375   

Goodwill

     491,407        352,729        352,729   

Other intangible assets

     39,043        25,957        26,596   

Company-owned life insurance

     316,198        275,121        273,638   

Assets held for sale

     8,705        9,056        9,351   

Other real estate owned and repossessed personal property

     8,173        7,562        9,609   

Other real estate owned—covered

     9,454        13,670        18,248   

Other assets

     245,110        221,293        260,440   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 11,179,752      $ 9,581,744      $ 9,652,079   
  

 

 

   

 

 

   

 

 

 

Liabilities

      

Deposits:

      

Noninterest-bearing demand

   $ 2,371,049      $ 2,026,490      $ 1,975,153   

Interest-bearing:

      

NOW

     2,069,507        1,775,938        1,711,252   

Savings

     2,178,094        1,941,652        1,962,407   

Money market

     547,069        448,848        451,378   

Time

     1,041,583        1,017,975        1,108,217   
  

 

 

   

 

 

   

 

 

 

Total deposits

     8,207,302        7,210,903        7,208,407   

Short-term borrowings

     495,262        462,332        418,971   

Other borrowings

     871,716        556,388        633,875   

Accrued expenses and other liabilities

     198,292        189,481        231,570   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     9,772,572        8,419,104        8,492,823   
  

 

 

   

 

 

   

 

 

 

Shareholders’ Equity

      

Preferred stock, 2,000 shares authorized, no shares issued or outstanding

     —          —          —     

Common stock, $1 stated value, 150,000 shares authorized, 113,984, 99,859 and 100,693 shares issued and outstanding, respectively

     113,984        99,859        100,693   

Capital surplus

     1,077,939        900,254        910,964   

Retained earnings

     245,874        206,993        192,529   

Accumulated other comprehensive income (loss), net of tax

     (30,617     (44,466     (44,930
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     1,407,180        1,162,640        1,159,256   
  

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 11,179,752      $ 9,581,744      $ 9,652,079   
  

 

 

   

 

 

   

 

 

 

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     Nine Months Ended  
     September 30,     September 30,  

(dollars and shares in thousands, except per share data)

   2014     2013     2014     2013  

Interest Income

        

Loans including fees:

        

Taxable

   $ 91,080      $ 61,307      $ 221,929      $ 188,748   

Nontaxable

     2,608        2,448        7,647        7,007   

Investment securities:

        

Taxable

     14,923        15,141        46,139        45,422   

Nontaxable

     6,001        4,990        16,674        14,473   

Money market and other interest-earning investments

     6        8        22        28   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     114,618        83,894        292,411        255,678   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest Expense

        

Deposits

     3,321        4,390        9,946        14,674   

Short-term borrowings

     76        95        226        575   

Other borrowings

     2,854        1,413        5,912        4,192   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     6,251        5,898        16,084        19,441   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     108,367        77,996        276,327        236,237   

Provision for loan losses

     2,591        (1,724     2,228        (4,572
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     105,776        79,720        274,099        240,809   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest Income

        

Wealth management fees

     7,190        5,534        20,486        17,602   

Service charges on deposit accounts

     12,481        13,929        35,436        36,793   

Debit card and ATM fees

     6,805        6,246        19,017        17,986   

Mortgage banking revenue

     1,735        957        3,627        3,823   

Insurance premiums and commissions

     9,761        8,853        31,534        29,114   

Investment product fees

     4,684        4,474        12,669        12,131   

Company-owned life insurance

     1,832        2,713        4,942        5,971   

Net securities gains

     2,713        186        4,961        2,994   

Total other-than-temporary impairment losses

     —          —          (100     —     

Loss recognized in other comprehensive income

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Impairment losses recognized in earnings

     —          —          (100     —     

Gain (loss) on derivatives

     41        24        291        156   

Recognition of deferred gain on sale leaseback transactions

     1,524        1,566        4,571        4,941   

Gain on branch divestitures—deposit premium

     —          —          —          2,244   

Change in FDIC indemnification asset

     (19,103     (2,140     (36,916     (5,916

Other income

     4,755        5,413        14,116        12,475   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     34,418        47,755        114,634        140,314   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest Expense

        

Salaries and employee benefits

     54,634        51,777        161,064        151,460   

Occupancy

     12,723        12,584        36,377        36,697   

Equipment

     3,330        3,306        9,520        8,979   

Marketing

     2,382        2,201        7,001        5,340   

Data processing

     6,401        5,704        18,464        16,595   

Communication

     2,615        2,655        7,569        7,924   

Professional fees

     5,332        3,140        12,657        9,643   

Loan expense

     1,653        1,886        4,411        5,471   

Supplies

     793        666        2,270        1,884   

FDIC assessment

     1,671        1,857        4,557        3,627   

Other real estate owned expense

     758        1,465        2,771        4,016   

Amortization of intangibles

     2,519        1,859        6,359        6,224   

Other expense

     5,154        7,558        13,301        15,897   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     99,965        96,658        286,321        273,757   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     40,229        30,817        102,412        107,366   

Income tax expense

     11,095        6,869        27,995        30,995   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 29,134      $ 23,948      $ 74,417      $ 76,371   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share—basic

   $ 0.26      $ 0.24      $ 0.71      $ 0.76   

Net income per common share—diluted

     0.26        0.23        0.70        0.75   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common shares outstanding-basic

     111,428        100,645        105,086        100,901   

Weighted average number of common shares outstanding-diluted

     111,947        101,131        105,559        101,351   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends per common share

   $ 0.11      $ 0.10      $ 0.33      $ 0.30   

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     Nine Months Ended  
     September 30,     September 30,  

(dollars in thousands)

   2014     2013     2014     2013  

Net income

   $ 29,134      $ 23,948      $ 74,417      $ 76,371   

Other comprehensive income (loss):

        

Change in securities available-for-sale:

        

Unrealized holding gains (losses) for the period

     5,772        (29,839     29,274        (117,224

Reclassification for securities transferred to held-to-maturity

     —          31,005        —          31,005   

Reclassification adjustment for securities gains realized in income

     (2,713     (186     (4,961     (2,994

Other-than-temporary-impairment on available-for-sale securities associated with credit loss realized in income

     —          —          100        —     

Income tax effect

     (1,222     272        (9,312     34,638   
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains on available-for-sale securities

     1,837        1,252        15,101        (54,575

Change in securities held-to-maturity:

        

Fair value adjustment for securities transferred from available-for-sale

     —          (31,005     —          (31,005

Amortization of fair value for securities held-to-maturity previously recognized into accumulated other comprehensive income

     395        193        1,017        (161

Income tax effect

     (126     10,725        (311     10,866   
  

 

 

   

 

 

   

 

 

   

 

 

 

Changes from securities held-to-maturity

     269        (20,087     706        (20,300

Cash flow hedges:

        

Net unrealized derivative gains (losses) on cash flow hedges

     1,090        (2,609     (3,993     (1,735

Income tax effect

     (676     1,009        1,256        660   
  

 

 

   

 

 

   

 

 

   

 

 

 

Changes from cash flow hedges

     414        (1,600     (2,737     (1,075

Defined benefit pension plans:

        

Amortization of net loss recognized in income

     329        849        1,272        2,551   

Income tax effect

     (125     (323     (493     (1,332
  

 

 

   

 

 

   

 

 

   

 

 

 

Changes from defined benefit pension plans

     204        526        779        1,219   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     2,724        (19,909     13,849        (74,731
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 31,858      $ 4,039      $ 88,266      $ 1,640   
  

 

 

   

 

 

   

 

 

   

 

 

 

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)

 

                       Accumulated        
                       Other     Total  
(dollars and shares    Common     Capital     Retained     Comprehensive     Shareholders’  

in thousands)

   Stock     Surplus     Earnings     Income (Loss)     Equity  

Balance, December 31, 2012

   $ 101,179      $ 916,918      $ 146,667      $ 29,801      $ 1,194,565   

Net income

     —          —          76,371        —          76,371   

Other comprehensive income (loss)

     —          —          —          (74,731     (74,731

Dividends—common stock

     —          —          (30,275     —          (30,275

Common stock issued

     17        197        —          —          214   

Common stock repurchased

     (839     (10,285     —          —          (11,124

Stock based compensation expense

     —          3,154        —          —          3,154   

Stock activity under incentive comp plans

     336        980        (234     —          1,082   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2013

   $ 100,693      $ 910,964      $ 192,529      $ (44,930   $ 1,159,256   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2013

   $ 99,859      $ 900,254      $ 206,993      $ (44,466   $ 1,162,640   

Net income

     —          —          74,417        —          74,417   

Other comprehensive income (loss)

     —          —          —          13,849        13,849   

Acquisition—Tower Financial

     5,626        73,101        —          —          78,727   

Acquisition—United Bancorp

     9,117        114,689        —          —          123,806   

Dividends—common stock

     —          —          (35,266     —          (35,266

Common stock issued

     17        220        —          —          237   

Common stock repurchased

     (1,147     (14,137     —          —          (15,284

Stock based compensation expense

     —          2,698        —          —          2,698   

Stock activity under incentive comp plans

     512        1,114        (270     —          1,356   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2014

   $ 113,984      $ 1,077,939      $ 245,874      $ (30,617   $ 1,407,180   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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)

 

     Nine Months Ended  
     September 30,  

(dollars in thousands)

   2014     2013  

Cash Flows From Operating Activities

    

Net income

   $ 74,417      $ 76,371   
  

 

 

   

 

 

 

Adjustments to reconcile net income to cash provided by operating activities:

    

Depreciation

     9,023        8,259   

Amortization of other intangible assets

     6,359        6,224   

Net premium amortization on investment securities

     10,872        13,190   

Amortization of FDIC indemnification asset

     36,916        5,916   

Stock compensation expense

     2,698        3,154   

Provision for loan losses

     2,228        (4,572

Net securities gains

     (4,961     (2,994

Impairment on available-for-sale securities

     100        —     

Gain on branch divestitures

     —          (2,244

Recognition of deferred gain on sale leaseback transactions

     (4,571     (4,941

Gain on derivatives

     (291     (156

Net gains on sales of other assets

     (1,935     (1,496

Increase in cash surrender value of company owned life insurance

     (4,939     (3,009

Proceeds from sale of residential real estate loans

     105,257        125,027   

Residential real estate loans originated for sale

     (106,596     (117,074

Increase in interest receivable

     (1,770     (1,382

Decrease in other real estate owned

     5,754        9,459   

Decrease in other assets

     4,675        15,172   

Increase (decrease) in accrued expenses and other liabilities

     1,636        (4,856
  

 

 

   

 

 

 

Total adjustments

     60,455        43,677   
  

 

 

   

 

 

 

Net cash flows provided by operating activities

     134,872        120,048   
  

 

 

   

 

 

 

Cash Flows From Investing Activities

    

Net cash and cash equivalents of acquired banks and branches

     7,198        530,000   

Purchases of investment securities available-for-sale

     (291,692     (1,034,369

Purchases of investment securities held-to-maturity

     (103,299     (21,181

Proceeds from maturities, prepayments and calls of investment securities available-for-sale

     316,532        506,517   

Proceeds from sales of investment securities available-for-sale

     155,876        169,287   

Proceeds from maturities, prepayments and calls of investment securities held-to-maturity

     13,762        20,347   

Proceeds on branch divestitures

     —          (144,236

Proceeds from sale of loans and leases

     —          114,527   

Purchases of Federal Home Loan Bank stock

     —          (2,657

Reimbursements under FDIC loss share agreements

     24,814        19,415   

Net principal collected from (loans made to) loan customers

     (157,764     16,228   

Proceeds from sale of premises and equipment and other assets

     118        3,078   

Purchases of premises and equipment and other assets

     (15,130     (15,222
  

 

 

   

 

 

 

Net cash flows provided by (used in) investing activities

     (49,585     161,734   
  

 

 

   

 

 

 

Cash Flows From Financing Activities

    

Net increase (decrease) in deposits and short-term borrowings:

    

Deposits

     (295,804     (485,517

Short-term borrowings

     3,612        (170,844

Payments for maturities on other borrowings

     (193,600     (837

Payments related to retirement of debt

     —          (50,993

Proceeds from issuance of other borrowings

     475,000        450,000   

Cash dividends paid on common stock

     (35,266     (30,275

Common stock repurchased

     (15,284     (11,124

Proceeds from exercise of stock options, including tax benefit

     547        944   

Common stock issued

     237        214   
  

 

 

   

 

 

 

Net cash flows used in financing activities

     (60,558     (298,432
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     24,729        (16,650

Cash and cash equivalents at beginning of period

     206,723        264,060   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 231,452      $ 247,410   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Total interest paid

   $ 15,425      $ 20,626   

Total taxes paid (net of refunds)

   $ 14,405      $ 11,782   

Securities transferred from available-for-sale to held-to-maturity

   $ —        $ 357,788   

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 September 30, 2014 and 2013, and December 31, 2013, and the results of its operations for the three and nine months ended September 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. 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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FASB ASC 310 – In August 2014, the FASB issued an update (ASU No. 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure) impacting FASB ASC 310-40, Receivables – Troubled Debt Restructuring by Creditors. This update affects creditors that hold government-guaranteed mortgage loans. The amendments in this update require that a mortgage loan be derecognized and that a separate other receivable be recognized if the following conditions are met: (1) The loan has a government guarantee that is not separable from the loan before foreclosure. (2) At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under the claim. (3) At the time of foreclosure, the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2014. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

FASB ASC 205 – In August 2014, the FASB issued an update (ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern) impacting FASB ASC 205-40, Presentation of Financial Statements – Going Concern. This update requires management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date the financial statements are issued. Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that an entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. If the substantial doubt is alleviated as a result of consideration of management’s plans, the entity should disclose information that enables financial statement users to understand the principal conditions or events that raised substantial doubt, management’s evaluation of the conditions and management’s plans to alleviate the substantial doubt. If substantial doubt exists about an entity’s ability to continue as a going concern, and the substantial doubt is not alleviated after consideration of management’s plans, an entity should include a statement in the footnotes indicating that there is substantial doubt about the entity’s ability to continue as a going concern. The amendments in this update become effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

NOTE 3—ACQUISITION AND DIVESTITURE ACTIVITY

2014 Acquisitions

Tower Financial Corporation

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

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

 

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Under the acquisition method of accounting, the total estimated purchase price is allocated to Tower’s net tangible and intangible assets based on their current estimated fair values on the date of acquisition. 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 held for sale

     474   

Loans

     371,054   

Premises and equipment

     8,516   

Accrued interest receivable

     2,371   

Other real estate owned

     473   

Company-owned life insurance

     21,281   

Other assets

     15,200   

Deposits

     (527,995

Short-term borrowings

     (18,898

Other borrowings

     (21,113

Accrued expenses and other liabilities

     (4,681
  

 

 

 

Net tangible assets acquired

     45,786   

Definite-lived intangible assets acquired

     8,382   

Goodwill

     56,203   
  

 

 

 

Total estimated fair value of consideration transferred

   $ 110,371   
  

 

 

 

Prior to the end of the one year measurement period for finalizing the purchase price allocation, if information becomes available which would indicate adjustments are required to the purchase price allocation, such adjustments will be included in the purchase price allocation retrospectively. During the third quarter of 2014, adjustments were made to the purchase price allocations that affected the amounts allocated to goodwill and other assets.

Of the total purchase price, $45.8 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” segment, as described in Note 21 of these consolidated financial statement footnotes.

The components of the estimated fair value of the acquired identifiable intangible assets are in the table below. These intangible assets will be amortized on an accelerated basis over their estimated lives and are included in the “Banking” segment, as described in Note 21 of these consolidated financial statement footnotes.

 

     Estimated         
     Fair Value      Estimated  
     (in millions)      Useful Lives (Years)  

Core deposit intangible

   $ 4.6         7   

Trust customer relationship intangible

   $ 3.8         12   

 

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Acquired loan data for Tower can be found in the table below:

 

     Fair Value      Gross Contractual      Best Estimate at Acquisition  
     of Acquired Loans      Amounts Receivable      Date of Contractual Cash Flows  

(in thousands)

   at Acquisition Date      at Acquisition Date      Not Expected to be Collected  

Acquired receivables subject to ASC 310-30

   $ 12,855       $ 22,746       $ 5,826   

Acquired receivables not subject to ASC 310-30

   $ 358,199       $ 450,865       $ 10,879   

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 had approximately $688 million in trust assets under management as of June 30, 2014. 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 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. To date, transaction and integration costs of $6.5 million associated with the acquisition have been expensed and remaining integration costs will be expensed in future quarters as incurred.

 

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Under the acquisition method of accounting, the total estimated purchase price is allocated to United’s net tangible and intangible assets based on their current estimated fair values on the date of acquisition. 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 United acquisition is allocated as follows (in thousands):

 

Cash and cash equivalents

   $ 16,447   

Investment securities

     157,765   

Loans held for sale

     1,073   

Loans

     631,747   

Premises and equipment

     7,741   

Accrued interest receivable

     2,614   

Other real estate owned

     1,676   

Company-owned life insurance

     14,857   

Other assets

     16,568   

Deposits

     (763,681

Short-term borrowings

     (10,420

Other borrowings

     (12,515

Accrued expenses and other liabilities

     (8,337
  

 

 

 

Net tangible assets acquired

     55,535   

Definite-lived intangible assets acquired

     10,763   

Loan servicing rights

     8,983   

Goodwill

     82,475   
  

 

 

 

Total estimated fair value of consideration transferred

   $ 157,756   
  

 

 

 

Of the total purchase price, $55.5 million has been allocated to net tangible assets acquired, $9.0 million has been allocated to loan servicing rights and $10.8 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” segment, as described in Note 21 of these consolidated financial statement footnotes.

The components of the estimated fair value of the acquired identifiable intangible assets are in the table below. These intangible assets will be amortized on an accelerated basis over their estimated lives and are included in the “Banking” segment, as described in Note 21 of these consolidated financial statement footnotes.

 

     Estimated         
     Fair Value      Estimated  
     (in millions)      Useful Lives (Years)  

Core deposit intangible

   $ 5.9         7   

Trust customer relationship intangible

   $ 4.9         12   

Acquired loan data for United can be found in the table below:

 

     Fair Value      Gross Contractual      Best Estimate at Acquisition  
     of Acquired Loans      Amounts Receivable      Date of Contractual Cash Flows  

(in thousands)

   at Acquisition Date      at Acquisition Date      Not Expected to be Collected  

Acquired receivables subject to ASC 310-30

   $ 8,391       $ 15,483       $ 5,487   

Acquired receivables not subject to ASC 310-30

   $ 623,356       $ 798,967       $ 89,430   

 

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Summary of Unaudited Pro-forma Information

The unaudited pro-forma information below for the periods ended September 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
September 30,
     Nine Months Ended
September 30,
 

(dollars in thousands)

   2014      2013      2014      2013  

Revenue (1)

   $ 147,850       $ 148,471       $ 436,446       $ 444,710   

Net income

   $ 32,083       $ 29,517       $ 94,944       $ 85,379   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Net interest income plus noninterest income.

2014 supplemental pro-forma earnings were adjusted to exclude $3.2 million and $11.8 million of acquisition-related costs incurred during the three and nine months ended September 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 has received regulatory and shareholder approval and is expected to close November 1, 2014, subject to customary closing conditions.

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

 

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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 21 of these consolidated financial statement footnotes. The goodwill recorded in the transaction will be deductible for tax purposes and is included in the “Banking” segment.

2013 Divestitures

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

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

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

 

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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 nine months ended September 30:

 

(dollars and shares in thousands,
except per share data)

   Three Months Ended
September 30, 2014
     Three Months Ended
September 30, 2013
 

Basic Earnings Per Share

     

Net income

   $ 29,134       $ 23,948   

Weighted average common shares outstanding

     111,428         100,645   

Basic Earnings Per Share

   $ 0.26       $ 0.24   
  

 

 

    

 

 

 

Diluted Earnings Per Share

     

Net income

   $ 29,134       $ 23,948   

Weighted average common shares outstanding

     111,428         100,645   

Effect of dilutive securities:

     

Restricted stock (1)

     446         454   

Stock options (2)

     73         32   
  

 

 

    

 

 

 

Weighted average shares outstanding

     111,947         101,131   

Diluted Earnings Per Share

   $ 0.26       $ 0.23   
  

 

 

    

 

 

 

(dollars and shares in thousands,
except per share data)

   Nine Months Ended
September 30, 2014
     Nine Months Ended
September 30, 2013
 

Basic Earnings Per Share

     

Net income

   $ 74,417       $ 76,371   

Weighted average common shares outstanding

     105,086         100,901   

Basic Earnings Per Share

   $ 0.71       $ 0.76   
  

 

 

    

 

 

 

Diluted Earnings Per Share

     

Net income

   $ 74,417       $ 76,371   

Weighted average common shares outstanding

     105,086         100,901   

Effect of dilutive securities:

     

Restricted stock (1)

     428         424   

Stock options (2)

     45         26   
  

 

 

    

 

 

 

Weighted average shares outstanding

     105,559         101,351   

Diluted Earnings Per Share

   $ 0.70       $ 0.75   
  

 

 

    

 

 

 

 

(1) No shares of restricted stock awards or restricted stock units were excluded in the computation of net income per diluted share for the third quarter ended September 30, 2014 and 2013, respectively, because the effect would be antidilutive. 0 and 6 shares of restricted stock and restricted stock units were excluded in the computation of net income per diluted share for the nine months ended September 30, 2014 and 2013, respectively, because the effect would be antidilutive.
(2) Options to purchase 988 shares and 1,013 shares outstanding at September 30, 2014 and 2013, respectively, were excluded in the computation of net income per diluted share for the third quarter ended September 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 976 and 1,025 shares outstanding at September 30, 2014 and 2013, respectively, were excluded in the computation of net income per diluted share for the nine months ended September 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 nine months ended September 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 September 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 July 1, 2014

   $ (7,844   $ (16,330   $ (3,341   $ (5,826   $ (33,341

Other comprehensive income (loss) before reclassifications

     3,466        —          414        —          3,880   

Amounts reclassified from accumulated other comprehensive income (loss) (b)

     (1,629     269        —          204        (1,156
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     1,837        269        414        204        2,724   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

   $ (6,007   $ (16,061   $ (2,927   $ (5,622   $ (30,617
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 Nine Months Ended September 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

     18,117        —          (2,737     —          15,380   

Amounts reclassified from accumulated other comprehensive income (loss) (b)

     (3,016     706        —          779        (1,531
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     15,101        706        (2,737     779        13,849   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

   $ (6,007   $ (16,061   $ (2,927   $ (5,622   $ (30,617
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 September 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

  $ 2,713      Net securities gains
    —        Impairment losses
 

 

 

   
    2,713      Total before tax
    (1,084   Tax (expense) or benefit
 

 

 

   
  $ 1,629      Net of tax
 

 

 

   

Unrealized gains and losses on held-to-maturity securities

  $ (395   Interest income/(expense)
    126      Tax (expense) or benefit
 

 

 

   
  $ (269   Net of tax
 

 

 

   

Amortization of defined benefit pension items

   

Actuarial gains/(losses)

  $ (329   (b)
    125      Tax (expense) or benefit
 

 

 

   
  $ (204   Net of tax
 

 

 

   

Total reclassifications for the period

  $ 1,156      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 15 for additional details on our pension plans.

 

Reclassifications out of Accumulated Other Comprehensive Income (Loss)

For the Nine Months Ended September 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

  $ 4,961      Net securities gains
    (100   Impairment losses
 

 

 

   
    4,861      Total before tax
    (1,845   Tax (expense) or benefit
 

 

 

   
  $ 3,016      Net of tax
 

 

 

   

Unrealized gains and losses on held-to-maturity securities

  $ (1,017   Interest income/(expense)
    311      Tax (expense) or benefit
 

 

 

   
  $ (706   Net of tax
 

 

 

   

Amortization of defined benefit pension items

   

Actuarial gains/(losses)

  $ (1,272   (b)
    493      Tax (expense) or benefit
 

 

 

   
  $ (779   Net of tax
 

 

 

   

Total reclassifications for the period

  $ 1,531      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 15 for additional details on our pension plans.

 

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Table of Contents

The following tables summarize the changes within each classification of accumulated other comprehensive income (loss) (“AOCI”) net of tax for the three and nine months ended September 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 September 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 July 1, 2013

   $ (16,773   $ 3,056      $ 525      $ (11,829   $ (25,021

Other comprehensive income (loss) before reclassifications

     1,500        (20,224     (1,600     —          (20,324

Amounts reclassified from accumulated other comprehensive income (loss) (b)

     (248     137        —          526        415   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     1,252        (20,087     (1,600     526        (19,909
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

   $ (15,521   $ (17,031   $ (1,075   $ (11,303   $ (44,930
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 Nine Months Ended September 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 January 1, 2013

   $ 39,054      $ 3,269      $ —        $ (12,522   $ 29,801   

Other comprehensive income (loss) before reclassifications

     (52,589     (20,224     (1,075     —          (73,888

Amounts reclassified from accumulated other comprehensive income (loss) (b)

     (1,986     (76     —          1,219        (843
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     (54,575     (20,300     (1,075     1,219        (74,731
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

   $ (15,521   $ (17,031   $ (1,075   $ (11,303   $ (44,930
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 September 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

  $ 186      Net securities gains
    —        Impairment losses
 

 

 

   
    186      Total before tax
    62      Tax (expense) or benefit
 

 

 

   
  $ 248      Net of tax
 

 

 

   

Unrealized gains and losses on held-to-maturity securities

  $ (193   Interest income/(expense)
    56      Tax (expense) or benefit
 

 

 

   
  $ (137   Net of tax
 

 

 

   

Amortization of defined benefit pension items

   

Actuarial gains/(losses)

  $ (849   (b)
    323      Tax (expense) or benefit
 

 

 

   
  $ (526   Net of tax
 

 

 

   

Total reclassifications for the period

  $ (415   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 15 for additional details on our pension plans.

 

Reclassifications out of Accumulated Other Comprehensive Income (Loss)

For the Nine Months Ended September 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

  $ 2,994      Net securities gains
    —        Impairment losses
 

 

 

   
    2,994      Total before tax
    (1,008   Tax (expense) or benefit
 

 

 

   
  $ 1,986      Net of tax
 

 

 

   

Unrealized gains and losses on held-to-maturity securities

  $ 161      Interest income/(expense)
    (85   Tax (expense) or benefit
 

 

 

   
  $ 76      Net of tax
 

 

 

   

Amortization of defined benefit pension items

   

Actuarial gains/(losses)

  $ (2,551   (b)
    1,332      Tax (expense) or benefit
 

 

 

   
  $ (1,219   Net of tax
 

 

 

   

Total reclassifications for the period

  $ 843      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 15 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 September 30, 2014 and December 31, 2013 and the corresponding amounts of unrealized gains and losses therein:

 

(dollars in thousands)

   Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
    Fair Value  

September 30, 2014

          

Available-for-sale

          

U.S. Treasury

   $ 10,990       $ 150       $ —        $ 11,140   

U.S. Government-sponsored entities and agencies

     639,376         818         (11,863     628,331   

Mortgage-backed securities—Agency

     1,228,025         16,286         (17,835     1,226,476   

States and political subdivisions

     261,430         12,820         (682     273,568   

Pooled trust preferred securities

     18,025         —           (10,880     7,145   

Other securities

     362,284         4,956         (3,439     363,801   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

   $ 2,520,130       $ 35,030       $ (44,699   $ 2,510,461   
  

 

 

    

 

 

    

 

 

   

 

 

 

Held-to-maturity

          

U.S. Government-sponsored entities and agencies

   $ 168,084       $ 7,166       $ —        $ 175,250   

Mortgage-backed securities—Agency

     26,006         1,091         —          27,097   

States and political subdivisions

     653,943         45,477         (50     699,370   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total held-to-maturity securities

   $ 848,033       $ 53,734       $ (50   $ 901,717   
  

 

 

    

 

 

    

 

 

   

 

 

 

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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Table of Contents

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.

 

     September 30, 2014      Weighted  
(dollars in thousands)    Amortized      Fair      Average  

Maturity

   Cost      Value      Yield  

Available-for-sale

        

Within one year

   $ 32,124       $ 32,793         4.55

One to five years

     368,457         373,509         2.17   

Five to ten years

     594,766         590,070         2.32   

Beyond ten years

     1,524,783         1,514,089         2.30   
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,520,130       $ 2,510,461         2.32
  

 

 

    

 

 

    

 

 

 

Held-to-maturity

        

Within one year

   $ 1,507       $ 1,520         3.13

One to five years

     25,154         26,425         3.91   

Five to ten years

     182,573         189,635         3.37   

Beyond ten years

     638,799         684,137         5.49   
  

 

 

    

 

 

    

 

 

 

Total

   $ 848,033       $ 901,717         4.99
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table summarizes the investment securities with unrealized losses at September 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  

September 30, 2014

               

Available-for-Sale

               

U.S. Government-sponsored entities and agencies

   $ 157,499       $ (797   $ 320,049       $ (11,066   $ 477,548       $ (11,863

Mortgage-backed securities—Agency

     82,856         (393     482,381         (17,442     565,237         (17,835

States and political subdivisions

     7,373         (39     12,528         (643     19,901         (682

Pooled trust preferred securities

     —           —          7,145         (10,880     7,145         (10,880

Other securities

     122,533         (1,018     45,689         (2,421     168,222         (3,439
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available-for-sale

   $ 370,261       $ (2,247   $ 867,792       $ (42,452   $ 1,238,053       $ (44,699
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Held-to-Maturity

               

States and political subdivisions

   $ 16,667       $ (50   $ —         $ —        $ 16,667       $ (50
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total held-to-maturity

   $ 16,667       $ (50   $ —         $ —        $ 16,667       $ (50
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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 $223.7 million and $334.4 million for the nine months ended September 30, 2014 and 2013, respectively. Gains of $5.2 million and $2.9 million were realized on these sales during 2014 and 2013, respectively and offsetting losses of $0.5 million and $0.3 million were realized on these sales during 2014 and 2013, respectively. Also included in net securities gains for the first nine months of 2014 is $238 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 nine months of 2013 was $194 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 nine 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 $3.8 million at September 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 nine months of 2014. There was no other-than-temporary-impairment recorded in the first nine months of 2013.

As of September 30, 2014, Old National’s securities portfolio consisted of 1,614 securities, 178 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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Pooled Trust Preferred Securities

At September 30, 2014, our securities portfolio contained three pooled trust preferred securities with a fair value of $7.1 million and unrealized losses of $10.9 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 September 30, 2014. This security was rated A3 at inception, but at September 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 nine months ended September 30, 2014, our model indicated no other-than-temporary-impairment losses on this security. At September 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 $6.9 million and unrealized losses of $7.1 million at September 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 nine months ended September 30, 2013, the three securities subject to FASB ASC 325-10 accounted for $5.4 million of the unrealized losses in the pooled trust preferred securities category. Our analysis indicated no other-than-temporary-impairment losses on these securities.

Two of our pooled trust preferred securities with a fair value of $6.0 million and unrealized losses of $8.1 million at September 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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Trust preferred securities

September 30, 2014

(Dollars in Thousands)

 

                                                     Actual     Expected     Excess  
                                                     Deferrals and     Defaults as     Subordination  
                                              # of Issuers      Defaults as a     a % of     as a %  
            Lowest                    Unrealized     Realized      Currently      Percent of     Remaining     of Current  
            Credit      Amortized      Fair      Gain/     Losses      Performing/      Original     Performing     Performing  
     Class      Rating (1)      Cost      Value      (Loss)     2014      Remaining      Collateral     Collateral     Collateral  

Pooled trust preferred securities:

  

                 

Reg Div Funding 2004

     B-2         D       $ 4,012       $ 226       $ (3,786   $ —           24/42         37.6     8.1     0.0

Pretsl XXVII LTD

     B         B         4,576         2,470         (2,106     —           33/47         26.6     2.4     37.5

Trapeza Ser 13A

     A2A         B+         9,437         4,449         (4,988     —           48/61         18.3     5.3     49.1
        

 

 

    

 

 

    

 

 

   

 

 

           
           18,025         7,145         (10,880     —               

Single Issuer trust preferred securities:

  

                    

First Empire Cap (M&T)

        BB+         960         1,012         52        —               

First Empire Cap (M&T)

        BB+         2,915         3,037         122        —               

Fleet Cap Tr V (BOA)

        BB         3,379         3,045         (334     —               

JP Morgan Chase Cap XIII

        BBB         4,742         4,350         (392     —               

NB-Global

        BB         747         870         123        —               

Chase Cap II

        BBB         790         880         90        —               
        

 

 

    

 

 

    

 

 

   

 

 

           
           13,533         13,194         (339     —               

Total

         $ 31,558       $ 20,339       $ (11,219   $ —               
        

 

 

    

 

 

    

 

 

   

 

 

           

 

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

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

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

 

                          Amount of other-than-temporary  
                          impairment recognized in earnings  
           

Lowest

Credit

     Amortized      Nine months ended      Nine months ended      Life-to  

(dollars in thousands)

   Vintage      Rating (1)      Cost      September 30, 2014      September 30, 2013      date  

Reg Div Funding

     2004         D       $ 4,012       $ —         $ —         $ 5,685   

Limited partnership

           685         100         —           100   
        

 

 

    

 

 

    

 

 

    

 

 

 

Total

         $ 4,697       $ 100       $ —         $ 5,785   
        

 

 

    

 

 

    

 

 

    

 

 

 

 

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

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 September 30, 2014 and December 31, 2013, Old National had residential loans held for sale of $12.9 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 nine 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 September 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 September 30, 2014, Old National does not intend to sell its nontaxable finance leases.

During the first nine months of 2013, commercial and commercial real estate loans held for investment of $5.9 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 $7.1 million, resulting in a charge-off of $0.2 million, recoveries of $0.4 million and other noninterest income of $1.0 million. At September 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:

 

     September 30,     December 31,  

(dollars in thousands)

   2014     2013  

Commercial (1)

   $ 1,647,889      $ 1,373,415   

Commercial real estate:

    

Construction

     149,346        88,630   

Other

     1,465,217        1,072,260   

Residential real estate

     1,546,939        1,359,569   

Consumer credit:

    

Heloc

     342,879        251,102   

Auto

     782,341        620,473   

Other

     149,479        99,683   

Covered loans

     158,345        217,832   
  

 

 

   

 

 

 

Total loans

     6,242,435        5,082,964   

Allowance for loan losses

     (44,693     (41,741

Allowance for loan losses—covered loans

     (3,586     (5,404
  

 

 

   

 

 

 

Net loans

   $ 6,194,156      $ 5,035,819   
  

 

 

   

 

 

 

 

(1) Includes direct finance leases of $20.4 million at September 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 September 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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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 September 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

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

Charge-offs

     (452     (401     (1,085     (192     —           (2,130

Recoveries

     610        445        570        41        —           1,666   

Provision

     819        776        795        201        —           2,591   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 19,803      $ 18,584      $ 6,269      $ 3,623      $ —         $ 48,279   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
           Commercial                           

(dollars in thousands)

   Commercial     Real Estate     Consumer     Residential     Unallocated      Total  

2013

             

Allowance for loan losses:

             

Beginning balance

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

Charge-offs

     (750     (432     (1,822     (501     —           (3,505

Recoveries

     472        1,571        1,132        54        —           3,229   

Provision

     (286     (2,864     657        769        —           (1,724
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 14,520      $ 24,870      $ 4,811      $ 3,117      $ —         $ 47,318   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

 

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Old National’s activity in the allowance for loan losses for the nine months ended September 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

     (2,525     (1,608     (3,168     (391     —           (7,692

Recoveries

     2,196        2,020        2,232        150        —           6,598   

Provision

     3,567        (4,229     2,265        625        —           2,228   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 19,803      $ 18,584      $ 6,269      $ 3,623      $ —         $ 48,279   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
           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

     (2,719     (3,233     (5,336     (1,212     —           (12,500

Recoveries

     2,501        3,309        3,540        277        —           9,627   

Provision

     96        (6,495     1,452        375        —           (4,572
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 14,520      $ 24,870      $ 4,811      $ 3,117      $ —         $ 47,318   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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

 

(dollars in thousands)

  Commercial     CRE     Consumer     Residential     Unallocated     Total  

September 30, 2014

           

Allowance for loan losses:

           

Ending balance: individually evaluated for impairment

  $ 7,554      $ 3,661      $ —        $ —        $ —        $ 11,215   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

  $ 11,324      $ 13,929      $ 5,848      $ 3,584      $ —        $ 34,685   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: noncovered loans acquired with deteriorated credit quality

  $ 226      $ 994      $ 90      $ 39      $ —        $ 1,349   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: covered loans acquired with deteriorated credit quality

  $ 699      $ —        $ 331      $ —        $ —        $ 1,030   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance for credit losses

  $ 19,803      $ 18,584      $ 6,269      $ 3,623      $ —        $ 48,279   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and leases outstanding:

           

Ending balance: individually evaluated for impairment

  $ 47,429      $ 51,633      $ —        $ —        $ —        $ 99,062   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

  $ 1,607,178      $ 1,535,955      $ 1,323,939      $ 1,546,934      $ —        $ 6,014,006   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

  $ 4,363      $ 30,616      $ 8,117      $ 155      $ —        $ 43,251   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: covered loans acquired with deteriorated credit quality

  $ 8,180      $ 41,361      $ 13,664      $ 22,911      $ —        $ 86,116   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases outstanding

  $ 1,667,150      $ 1,659,565      $ 1,345,720      $ 1,570,000      $ —        $ 6,242,435   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(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 September 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

Exposure

by Internally

Assigned Grade

          Commercial Real Estate-      Commercial Real Estate-  
   Commercial      Construction      Other  
   September 30,      December 31,      September 30,      December 31,      September 30,      December 31,  
   2014      2013      2014      2013      2014      2013  

Grade:

                 

Pass

   $ 1,462,198       $ 1,237,983       $ 131,936       $ 74,815       $ 1,295,490       $ 943,781   

Criticized

     97,021         90,545         3,420         9,383         70,059         35,473   

Classified—substandard

     47,358         16,252         5,140         2,559         43,687         42,516   

Classified—nonaccrual

     40,532         27,635         8,850         1,873         53,796         49,406   

Classified—doubtful

     780         1,000         —           —           2,185         1,084   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,647,889       $ 1,373,415       $ 149,346       $ 88,630       $ 1,465,217       $ 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 September 30, 2014 and December 31, 2013, excluding covered loans:

 

September 30, 2014

(dollars in

thousands)

   Consumer      Residential  
   Heloc      Auto      Other         

Performing

   $ 340,657       $ 781,151       $ 148,113       $ 1,532,422   

Nonperforming

     2,222         1,190         1,366         14,517   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 342,879       $ 782,341       $ 149,479       $ 1,546,939   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

(dollars in

thousands)

   Consumer      Residential  
   Heloc      Auto      Other         

Performing

   $ 249,152       $ 618,911       $ 97,877       $ 1,349,236   

Nonperforming

     1,950         1,562         1,806         10,333   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 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 September 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  

September 30, 2014

        

With no related allowance recorded:

        

Commercial

   $ 28,574       $ 28,955       $ —     

Commercial Real Estate—Construction

     526         634         —     

Commercial Real Estate—Other

     32,807         34,945         —     

Consumer

     336         354         —     

Residential

     98         98         —     

With an allowance recorded:

        

Commercial

     12,843         15,860         5,062   

Commercial Real Estate—Construction

     933         —           338   

Commercial Real Estate—Other

     17,367         18,282         3,323   

Consumer

     1,431         1,477         72   

Residential

     2,054         2,124         103   
  

 

 

    

 

 

    

 

 

 

Total Loans

   $ 96,969       $ 102,729       $ 8,898   
  

 

 

    

 

 

    

 

 

 

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 September 30, 2014 and 2013 are included in the tables below.

 

     Average      Interest  
     Recorded      Income  

(dollars in thousands)

   Investment      Recognized (1)  

September 30, 2014

     

With no related allowance recorded:

     

Commercial

   $ 16,456       $ 227   

Commercial Real Estate—Construction

     914         (15

Commercial Real Estate—Other

     21,212         308   

Consumer

     349         2   

Residential

     98         —     

With an allowance recorded:

     

Commercial

     11,782         152   

Commercial Real Estate—Construction

     467         15   

Commercial Real Estate—Other

     16,313         119   

Consumer

     1,426         16   

Residential

     2,215         6   
  

 

 

    

 

 

 

Total Loans

   $ 71,232       $ 830   
  

 

 

    

 

 

 

 

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

 

     Average      Interest  
     Recorded      Income  

(dollars in thousands)

   Investment      Recognized (1)  

September 30, 2013

     

With no related allowance recorded:

     

Commercial

   $ 14,043       $ 33   

Commercial Real Estate—Construction

     583         —     

Commercial Real Estate—Other

     13,868         44   

Consumer

     89         —     

Residential

     70         —     

With an allowance recorded:

     

Commercial

     12,989         19   

Commercial Real Estate—Construction

     2,989         —     

Commercial Real Estate—Other

     26,556         4   

Consumer

     524         17   

Residential

     1,016         11   
  

 

 

    

 

 

 

Total Loans

   $ 72,727       $ 128   
  

 

 

    

 

 

 

 

(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 nine months ended September 30, 2014 and 2013 are included in the tables below.

 

     Average      Interest  
     Recorded      Income  

(dollars in thousands)

   Investment      Recognized (1)  

September 30, 2014

     

With no related allowance recorded:

     

Commercial

   $ 26,740       $ 261   

Commercial Real Estate—Construction

     526         —     

Commercial Real Estate—Other

     28,037         468   

Consumer

     330         6   

Residential

     102         —     

With an allowance recorded:

     

Commercial

     10,917         260   

Commercial Real Estate—Construction

     467         15   

Commercial Real Estate—Other

     16,501         283   

Consumer

     1,133         42   

Residential

     2,146         47   
  

 

 

    

 

 

 

Total Loans

   $ 86,899       $ 1,382   
  

 

 

    

 

 

 

 

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

 

     Average      Interest  
     Recorded      Income  

(dollars in thousands)

   Investment      Recognized (1)  

September 30, 2013

     

With no related allowance recorded:

     

Commercial

   $ 11,002       $ 91   

Commercial Real Estate—Construction

     871         —     

Commercial Real Estate—Other

     15,600         57   

Consumer

     110         —     

Residential

     49         —     

With an allowance recorded:

     

Commercial

     16,462         50   

Commercial Real Estate—Construction

     3,180         —     

Commercial Real Estate—Other

     24,763         99   

Consumer

     421         23   

Residential

     944         15   
  

 

 

    

 

 

 

Total Loans

   $ 73,402       $ 335   
  

 

 

    

 

 

 

 

(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 September 30, 2014 and December 31, 2013 are as follows:

 

                   Recorded                       

(dollars in thousands)

   30-59 Days
Past Due
     60-89 Days
Past Due
     Investment
> 90 Days and
Accruing
     Nonaccrual      Total
Past Due
     Current  

September 30, 2014

                 

Commercial

   $ 1,145       $ 564       $ —         $ 41,312       $ 43,021       $ 1,604,868   

Commercial Real Estate:

                 

Construction

     107         —           —           8,850         8,957         140,389   

Other

     4,368         61         207         55,981         60,617         1,404,600   

Consumer:

                 

Heloc

     1,495         287         35         2,222         4,039         338,840   

Auto

     3,840         674         151         1,190         5,855         776,486   

Other

     804         295         71         1,366         2,536         146,943   

Residential

     9,112         2,707         12         14,517         26,348         1,520,591   

Covered loans

     1,851         1,503         166         16,886         20,406         137,939   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 22,722       $ 6,091       $ 642       $ 142,324       $ 171,779       $ 6,070,656   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 September 30, 2014, these loans totaled $306.9 million, of which $177.4 million had been sold to other financial institutions and $129.5 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 September 30, 2014, our TDRs consisted of $21.0 million of commercial loans, $19.9 million of commercial real estate loans, $2.0 million of consumer loans and $2.1 million of residential loans, totaling $45.0 million. Approximately $22.8 million of the TDRs at September 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 September 30, 2014 and December 31, 2013, Old National has allocated $5.0 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 September 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 nine months ended September 30, 2014:

 

            Pre-modification      Post-modification  
     Number of      Outstanding Recorded      Outstanding Recorded  

(dollars in thousands)

   Loans      Investment      Investment  

Troubled Debt Restructuring:

        

Commercial

     27       $ 13,310       $ 11,695   

Commercial Real Estate—construction

     1         937         484   

Commercial Real Estate—other

     22         2,659         2,221   

Residential

     2         194         175   

Consumer—other

     21         1,094         1,033   
  

 

 

    

 

 

    

 

 

 

Total

     73       $ 18,194       $ 15,608   
  

 

 

    

 

 

    

 

 

 

The TDRs described above increased the allowance for loan losses by $0.4 million and resulted in immaterial charge-offs during the nine months ended September 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.

There was one commercial real estate loan that was modified as a TDR during the first nine months of 2014 for which there was a payment default within the last twelve months. The impact of the default was immaterial.

The TDR that subsequently defaulted had no material impact on the allowance for loan losses and resulted in no charge-offs during the nine months ended September 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:

 

     Number of      Recorded  

(dollars in thousands)

   Contracts      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 twelve months ended December 31, 2013.

The terms of certain other loans were modified during the nine months ended September 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 September 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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The following table presents activity in troubled debt restructurings for the nine months ended September 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

     (172     (266     (83     3        (518

Payments

     (12,998     (5,200     (390     (370     (18,958

Additions

     11,695        2,704        1,034        175        15,608   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance September 30, 2014

   $ 20,968      $ 19,877      $ 2,002      $ 2,152      $ 44,999   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
           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

     639        474        (61     —          1,052   

Payments

     (5,122     (5,119     (408     (39     (10,688

Additions

     13,238        8,961        836        1,027        24,062   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance September 30, 2013

   $ 21,415      $ 22,738      $ 840      $ 1,487      $ 46,480   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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:

 

     September 30,      December 31,  

(dollars in thousands)

   2014      2013  

Commercial

   $ 4,363       $ 648   

Commercial real estate

     30,616         23,618   

Consumer

     8,117         12,725   

Residential

     155         154   
  

 

 

    

 

 

 

Carrying amount

   $ 43,251       $ 37,145   
  

 

 

    

 

 

 

Carrying amount, net of allowance

   $ 41,902       $ 34,576   
  

 

 

    

 

 

 

Allowance for loan losses

   $ 1,349       $ 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 $125.5 million and $115.0 million as of September 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 $12.3 million has been recorded as loan interest income through the nine months ended September 30, 2014. Accretion of $11.9 million was recorded as loan interest income through the nine months ended September 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     United     Total  

Balance at January 1, 2014

   $ 6,787      $ 2,425      $ 19,079      $ —        $ —        $ 28,291   

New loans purchased

     —          —          —          4,065        1,605        5,670   

Accretion of income

     (2,411     (664     (8,509     (571     (132     (12,287

Reclassifications from (to) nonaccretable difference

     (1,266     (159     3,304        485        —          2,364   

Disposals/other adjustments

     746        (96     —          —          —          650   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

   $ 3,856      $ 1,506      $ 13,874      $ 3,979      $ 1,473      $ 24,688   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Included in Old National’s allowance for loan losses is $1.3 million related to the purchased loans disclosed above for the first nine 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 credit impaired 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     United  

Contractually required payments

   $ 94,714      $ 921,856      $ 118,535      $ 22,746      $ 15,483   

Nonaccretable difference

     (45,157     (226,426     (53,165     (5,826     (5,487
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows expected to be collected at acquisition

     49,557        695,430        65,370        16,920        9,996   

Accretable yield

     (6,971     (98,487     (11,945     (4,065     (1,605
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value of acquired loans at acquisition

   $ 42,586      $ 596,943      $ 53,425      $ 12,855      $ 8,391   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 $158.3 million at September 30, 2014. The composition of covered loans by lending classification was as follows:

 

At September 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

   $ 8,180      $ 11,081      $ 19,261   

Commercial real estate

     41,361        3,641        45,002   

Residential

     22,911        150        23,061   

Consumer

     13,664        57,357        71,021   
  

 

 

   

 

 

   

 

 

 

Covered loans

     86,116        72,229        158,345   

Allowance for loan losses

     (1,030     (2,556     (3,586
  

 

 

   

 

 

   

 

 

 

Covered loans, net

   $ 85,086      $ 69,673      $ 154,759   
  

 

 

   

 

 

   

 

 

 

 

(1) Includes loans with revolving privileges which are scoped out of FASB ASC 310-30 and certain loans which Old National elected to treat under the cost recovery method of accounting.

Loans were recorded at fair value in accordance with FASB ASC 805, Business Combinations. No allowance for loan losses related to the acquired loans is recorded on the acquisition date as the fair value of the loans acquired incorporates assumptions regarding credit risk. Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in FASB ASC 820, exclusive of the loss share agreements with the FDIC. The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows.

The outstanding balance of covered loans accounted for under ASC 310-30, including contractual principal, interest, fees and penalties, was $254.8 million and $406.3 million as of September 30, 2014 and December 31, 2013, respectively.

The following table is a roll-forward of acquired impaired loans accounted for under ASC 310-30 for the nine months ended September 30, 2014:

 

     Contractual     Nonaccretable     Accretable     Carrying  

(dollars in thousands)

   Cash Flows (1)     Difference     Yield     Amount (2)  

Balance at January 1, 2014

   $ 251,042      $ (46,793   $ (73,211   $ 131,038   

Principal reductions and interest payments

     (93,095     (1,931     (940     (95,966

Accretion of loan discount

     —          —          53,424        53,424   

Changes in contractual and expected cash flows due to remeasurement

     (9,112     30,142        (18,223     2,807 &nbs