Attached files

file filename
EX-32.1 - EX-32.1 - OLD NATIONAL BANCORP /IN/d85185dex321.htm
EX-31.2 - EX-31.2 - OLD NATIONAL BANCORP /IN/d85185dex312.htm
EX-32.2 - EX-32.2 - OLD NATIONAL BANCORP /IN/d85185dex322.htm
EX-31.1 - EX-31.1 - OLD NATIONAL BANCORP /IN/d85185dex311.htm
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, 2015

 

¨ 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 114,523,000 shares outstanding at September 30, 2015.

 

 

 


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, 2015 (unaudited), December 31, 2014 and September 30, 2014 (unaudited)
  

 

3

  

  Consolidated Statements of Income (unaudited)
Three and nine months ended September 30, 2015 and 2014
     4   
 

Consolidated Statements of Comprehensive Income (Loss) (unaudited)
Three and nine months ended September 30, 2015 and 2014

     5   
  Consolidated Statements of Changes in Shareholders’ Equity (unaudited)
Nine months ended September 30, 2015 and 2014
     6   
  Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30, 2015 and 2014
     7   
 

Notes to Consolidated Financial Statements (unaudited)

     8   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     67   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     95   

Item 4.

 

Controls and Procedures

     96   

PART II

 

OTHER INFORMATION

     97   

SIGNATURES

     103   

 

2


Table of Contents

OLD NATIONAL BANCORP

CONSOLIDATED BALANCE SHEETS

 

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

   September 30,
2015
    December 31,
2014
    September 30,
2014
 
     (unaudited)           (unaudited)  

Assets

      

Cash and due from banks

   $ 157,919      $ 207,871      $ 205,853   

Money market and other interest-earning investments

     15,491        32,092        25,599   
  

 

 

   

 

 

   

 

 

 

Total cash and cash equivalents

     173,410        239,963        231,452   

Trading securities - at fair value

     3,827        3,881        3,839   

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

      

U.S. Treasury

     12,239        15,166        11,140   

U.S. government-sponsored entities and agencies

     641,780        685,951        628,331   

Mortgage-backed securities

     1,136,352        1,241,662        1,226,476   

States and political subdivisions

     390,103        314,541        273,568   

Other securities

     339,419        370,511        346,071   
  

 

 

   

 

 

   

 

 

 

Total investment securities - available-for-sale

     2,519,893        2,627,831        2,485,586   

Investment securities - held-to-maturity, at amortized cost (fair value $902,176, $903,935 and $901,717, respectively)

     851,051        844,054        848,033   

Federal Home Loan Bank/Federal Reserve Bank stock, at cost

     86,146        71,175        70,531   

Loans held for sale ($18,783, $15,562, and $12,875, respectively at fair value)

     18,783        213,490        12,875   

Loans:

      

Commercial

     1,740,394        1,629,600        1,647,889   

Commercial real estate

     1,845,889        1,711,110        1,614,563   

Residential real estate

     1,640,289        1,519,156        1,546,939   

Consumer credit, net of unearned income

     1,507,287        1,310,627        1,274,699   

Covered loans, net of discount

     114,039        147,708        158,345   
  

 

 

   

 

 

   

 

 

 

Total loans

     6,847,898        6,318,201        6,242,435   

Allowance for loan losses

     (49,515     (44,297     (44,693

Allowance for loan losses - covered loans

     (1,711     (3,552     (3,586
  

 

 

   

 

 

   

 

 

 

Net loans

     6,796,672        6,270,352        6,194,156   
  

 

 

   

 

 

   

 

 

 

FDIC indemnification asset

     8,905        20,603        28,000   

Premises and equipment, net

     130,341        135,892        130,229   

Accrued interest receivable

     65,485        60,966        56,961   

Goodwill

     584,634        530,845        491,407   

Other intangible assets

     38,124        38,694        39,043   

Company-owned life insurance

     339,352        325,617        316,198   

Assets held for sale

     4,744        9,127        8,705   

Other real estate owned and repossessed personal property

     9,282        7,241        8,173   

Other real estate owned - covered

     4,423        9,121        9,454   

Other assets

     280,091        238,699        245,110   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 11,915,163      $ 11,647,551      $ 11,179,752   
  

 

 

   

 

 

   

 

 

 

Liabilities

      

Deposits:

      

Noninterest-bearing demand

   $ 2,388,854      $ 2,427,748      $ 2,371,049   

Interest-bearing:

      

NOW

     2,001,077        2,176,879        2,069,507   

Savings

     2,201,066        2,222,557        2,178,094   

Money market

     1,043,135        574,462        547,069   

Time

     987,193        1,089,018        1,041,583   
  

 

 

   

 

 

   

 

 

 

Total deposits

     8,621,325        8,490,664        8,207,302   

Short-term borrowings

     474,894        551,309        495,262   

Other borrowings

     1,120,326        920,102        871,716   

Accrued expenses and other liabilities

     222,616        219,712        198,292   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     10,439,161        10,181,787        9,772,572   
  

 

 

   

 

 

   

 

 

 

Shareholders’ Equity

      

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

     —          —          —     

Common stock, $1.00 per share stated value, 150,000 shares authorized, 114,523, 116,847 and 113,984 shares issued and outstanding, respectively

     114,523        116,847        113,984   

Capital surplus

     1,090,381        1,118,292        1,077,939   

Retained earnings

     305,478        262,180        245,874   

Accumulated other comprehensive income (loss), net of tax

     (34,380     (31,555     (30,617
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     1,476,002        1,465,764        1,407,180   
  

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 11,915,163      $ 11,647,551      $ 11,179,752   
  

 

 

   

 

 

   

 

 

 

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)

   2015     2014     2015     2014  

Interest Income

        

Loans including fees:

        

Taxable

   $ 81,881      $ 91,080      $ 233,419      $ 221,929   

Nontaxable

     2,832        2,608        8,593        7,647   

Investment securities:

        

Taxable

     14,293        14,923        43,311        46,139   

Nontaxable

     6,661        6,001        18,888        16,674   

Money market and other interest-earning investments

     4        6        18        22   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     105,671        114,618        304,229        292,411   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest Expense

        

Deposits

     3,474        3,321        10,568        9,946   

Short-term borrowings

     141        76        349        226   

Other borrowings

     4,952        2,854        13,118        5,912   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     8,567        6,251        24,035        16,084   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     97,104        108,367        280,194        276,327   

Provision for loan losses

     167        2,591        2,439        2,228   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     96,937        105,776        277,755        274,099   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest Income

        

Wealth management fees

     8,290        7,190        26,253        20,486   

Service charges on deposit accounts

     11,010        12,481        33,333        35,436   

Debit card and ATM fees

     3,887        6,805        17,694        19,017   

Mortgage banking revenue

     3,170        1,735        10,395        3,627   

Insurance premiums and commissions

     9,938        9,761        32,223        31,534   

Investment product fees

     4,427        4,684        13,549        12,669   

Company-owned life insurance

     2,195        1,832        6,540        4,942   

Net securities gains

     861        2,713        4,056        4,961   

Total other-than-temporary impairment losses

     —          —          —          (100

Loss recognized in other comprehensive income

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Impairment losses recognized in earnings

     —          —          —          (100

Recognition of deferred gain on sale leaseback transactions

     1,417        1,524        4,409        4,571   

Net gain on branch divestitures

     15,355        —          15,355        —     

Change in FDIC indemnification asset

     (6,582     (19,103     (9,091     (36,916

Other income

     5,776        4,796        15,302        14,407   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     59,744        34,418        170,018        114,634   
  

 

 

   

 

 

   

 

 

   

 

 

 

Noninterest Expense

        

Salaries and employee benefits

     58,151        54,634        187,093        161,064   

Occupancy

     13,009        12,723        41,443        36,377   

Equipment

     2,977        3,330        10,327        9,520   

Marketing

     2,727        2,382        8,641        7,001   

Data processing

     6,622        6,401        21,289        18,464   

Communication

     2,301        2,615        7,480        7,569   

Professional fees

     2,435        5,332        8,948        12,657   

Loan expense

     1,420        1,653        4,562        4,411   

Supplies

     445        793        1,710        2,270   

FDIC assessment

     1,733        1,671        5,590        4,557   

Other real estate owned expense

     584        758        2,221        2,771   

Amortization of intangibles

     2,872        2,519        8,930        6,359   

Other expense

     7,341        5,154        20,229        13,301   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     102,617        99,965        328,463        286,321   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     54,064        40,229        119,310        102,412   

Income tax expense

     16,395        11,095        34,579        27,995   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 37,669      $ 29,134      $ 84,731      $ 74,417   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share - basic

   $ 0.33      $ 0.26      $ 0.73      $ 0.71   

Net income per common share - diluted

     0.33        0.26        0.73        0.70   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common shares outstanding - basic

     114,590        111,428        116,272        105,086   

Weighted average number of common shares outstanding - diluted

     115,153        111,947        116,800        105,559   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends per common share

   $ 0.12      $ 0.11      $ 0.36      $ 0.33   

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

September 30,

   

Nine Months Ended

September 30,

 

(dollars in thousands)

   2015     2014     2015     2014  

Net income

   $ 37,669      $ 29,134      $ 84,731      $ 74,417   

Other comprehensive income (loss):

        

Change in securities available-for-sale:

        

Unrealized holding gains (losses) for the period

     14,509        5,772        6,581        29,274   

Reclassification adjustment for securities gains realized in income

     (861     (2,713     (4,056     (4,961

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

     —          —          —          100   

Income tax effect

     (5,021     (1,222     (1,101     (9,312
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains on available-for-sale securities

     8,627        1,837        1,424        15,101   

Change in securities held-to-maturity:

        

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

     455        395        1,222        1,017   

Income tax effect

     (155     (126     (236     (311
  

 

 

   

 

 

   

 

 

   

 

 

 

Changes from securities held-to-maturity

     300        269        986        706   

Cash flow hedges:

        

Net unrealized derivative gains (losses) on cash flow hedges

     (10,278     987        (12,349     (4,134

Reclassification adjustment for (gains) losses realized in net income

     902        103        1,527        141   

Income tax effect

     3,563        (676     4,112        1,256   
  

 

 

   

 

 

   

 

 

   

 

 

 

Changes from cash flow hedges

     (5,813     414        (6,710     (2,737

Defined benefit pension plans:

        

Amortization of net loss recognized in income

     917        329        2,380        1,272   

Income tax effect

     (349     (125     (905     (493
  

 

 

   

 

 

   

 

 

   

 

 

 

Changes from defined benefit pension plans

     568        204        1,475        779   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     3,682        2,724        (2,825     13,849   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 41,351      $ 31,858      $ 81,906      $ 88,266   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

5


Table of Contents

OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)

 

(dollars in thousands)

   Common
Stock
    Capital
Surplus
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
Shareholders’
Equity
 

Balance at 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 compensation plans

     512        1,114        (270     —          1,356   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

   $ 116,847      $ 1,118,292      $ 262,180      $ (31,555   $ 1,465,764   

Net income

     —          —          84,731        —          84,731   

Other comprehensive income (loss)

     —          —          —          (2,825     (2,825

Acquisition - Founders Financial Corporation

     3,402        47,224        —          —          50,626   

Dividends - common stock

     —          —          (41,817     —          (41,817

Common stock issued

     21        271        —          —          292   

Common stock repurchased

     (6,080     (78,165     —          —          (84,245

Stock based compensation expense

     —          3,517        —          —          3,517   

Stock activity under incentive compensation plans

     333        (758     384        —          (41
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2015

   $ 114,523      $ 1,090,381      $ 305,478      $ (34,380   $ 1,476,002   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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)

   2015     2014  

Cash Flows From Operating Activities

    

Net income

   $ 84,731      $ 74,417   
  

 

 

   

 

 

 

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

    

Depreciation

     10,865        9,023   

Amortization of other intangible assets

     8,930        6,359   

Net premium amortization on investment securities

     14,023        10,872   

Amortization of FDIC indemnification asset

     9,091        36,916   

Stock compensation expense

     3,517        2,698   

Provision for loan losses

     2,439        2,228   

Net securities gains

     (4,056     (4,961

Impairment on available-for-sale securities

     —          100   

Recognition of deferred gain on sale leaseback transactions

     (4,409     (4,571

Net gain on branch divestitures

     (15,355     —     

Net gains on sales of other assets

     (5,021     (1,935

Increase in cash surrender value of company-owned life insurance

     (5,438     (4,939

Residential real estate loans originated for sale

     (278,850     (106,596

Proceeds from sale of residential real estate loans

     283,971        105,257   

Increase in interest receivable

     (3,910     (1,770

Decrease in other real estate owned

     3,331        5,754   

(Increase) decrease in other assets

     (35,009     4,384   

Increase (decrease) in accrued expenses and other liabilities

     (1,416     1,636   
  

 

 

   

 

 

 

Total adjustments

     (17,297     60,455   
  

 

 

   

 

 

 

Net cash flows provided by operating activities

     67,434        134,872   
  

 

 

   

 

 

 

Cash Flows From Investing Activities

    

Net cash and cash equivalents of acquired banks

     (37,098     7,198   

Payments related to branch divestitures

     (333,095     —     

Purchases of investment securities available-for-sale

     (716,510     (289,757

Purchases of investment securities held-to-maturity

     (44,479     (103,299

Purchases of Federal Home Loan Bank/Federal Reserve Bank stock

     (21,872     (1,935

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

     601,586        316,532   

Proceeds from sales of investment securities available-for-sale

     296,841        155,876   

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

     32,049        13,762   

Proceeds from sales of investment securities held-to-maturity

     855        —     

Proceeds from sales of Federal Home Loan Bank/Federal Reserve Bank stock

     8,711        —     

Reimbursements under FDIC loss share agreements

     3,555        24,814   

Net principal collected from (loans made to) loan customers

     (185,891     (157,764

Proceeds from sale of premises and equipment and other assets

     7,709        118   

Purchases of premises and equipment and other assets

     (14,259     (15,130
  

 

 

   

 

 

 

Net cash flows used in investing activities

     (401,898     (49,585
  

 

 

   

 

 

 

Cash Flows From Financing Activities

    

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

    

Deposits

     309,793        (295,804

Short-term borrowings

     (88,907     3,612   

Payments for maturities on other borrowings

     (227,503     (193,600

Proceeds from issuance of other borrowings

     400,000        475,000   

Cash dividends paid on common stock

     (41,817     (35,266

Common stock repurchased

     (84,245     (15,284

Proceeds from exercise of stock options, including tax benefit

     298        547   

Common stock issued

     292        237   
  

 

 

   

 

 

 

Net cash flows provided by (used in) financing activities

     267,911        (60,558
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (66,553     24,729   

Cash and cash equivalents at beginning of period

     239,963        206,723   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 173,410      $ 231,452   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Total interest paid

   $ 25,470      $ 15,425   

Total taxes paid (net of refunds)

   $ 8,784      $ 14,405   

 

7


Table of Contents

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. 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, 2015 and 2014, and December 31, 2014, and the results of its operations for the three and nine months ended September 30, 2015 and 2014. 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, 2014.

All significant intercompany transactions and balances have been eliminated. Certain prior year amounts have been reclassified to conform to the 2015 presentation. Such reclassifications had no effect on net income or shareholders’ equity and were insignificant amounts.

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

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 became effective for interim and annual periods beginning after December 15, 2014 and did not have a material impact on the consolidated financial statements.

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 and (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 became effective for interim and annual periods beginning after December 15, 2014 and did not have a material impact on the consolidated financial statements.

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 became effective for interim and annual periods beginning after December 15, 2014 and did not have a material impact on the consolidated financial statements.

 

8


Table of Contents

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. In July 2015, the FASB approved the deferral of the amendments in this update for one year. 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 became effective for interim and annual periods beginning after December 15, 2014 and did not have a material impact on the consolidated financial statements.

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.

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 became effective for interim and annual periods beginning after December 15, 2014 and did not have a material impact on the consolidated financial statements.

 

9


Table of Contents

FASB ASC 835 – In April 2015, the FASB issued an update (ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs) impacting FASB ASC 835-30, Interest-Imputation of Interest. This update is part of FASB’s initiative to reduce complexity in accounting standards; otherwise known as the Simplification Initiative. The FASB Board received feedback that having different balance sheet presentation requirements for debt issuance costs and debt discount and premium creates unnecessary complexity. Recognizing debt issuance costs as a deferred charge (that is, an asset) also is different from the guidance in International Financial Reporting Standards, which requires that transaction costs be deducted from the carrying value of the financial liability and not recorded as separate assets. To simplify presentation of debt issuance costs, the amendments in the update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. 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.

The guidance of ASU No. 2015-03 did not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance for debt issuance costs related to line-of-credit arrangements within the update, in August 2015, the SEC staff stated that they would not object to any entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.

FASB ASC 350 – In April 2015, the FASB issued an update (ASU No. 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement) impacting FASB ASC 350-40, Intangibles: Goodwill and Other: Internal- Use Software. This update is part of the FASB’s Simplification Initiative. The amendments in this update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change generally accepted accounting principles for a customer’s accounting for service contracts. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. We can elect to adopt the amendments either prospectively to all arrangements entered into or materially modified after the effective date or 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 944 – In May 2015, the FASB issued an update (ASU No. 2015-09, Disclosures about Short-Duration Contracts). This update applies to all insurance entities that issue short-duration contracts as defined in Topic 944, Financial Services – Insurance. The amendment requires insurance entities to disclose for annual reporting periods information about the liability for unpaid claims and claim adjustment expenses, and information about significant changes in methodologies and assumptions used to calculate the liability for unpaid claims and claim adjustment expenses, including reasons for the change and the effects on the financial statements. Additionally, the amendments require insurance entities to disclose for annual and interim reporting periods a roll-forward of the liability for unpaid claims and claim adjustment expenses. The amendments in this update become effective for annual periods beginning after December 15, 2015, and interim periods within 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 805 – In September 2015, the FASB issued an update (ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments). This update applies to all entities that have reported provisional amounts for items in a business combination for which the accounting is incomplete by the end of the reporting period in which the combination occurs and during the measurement period have an adjustment to provisional amounts recognized. The amendments in this update require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this update require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in

 

10


Table of Contents

this update require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The amendments in this update are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments in this update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this update with earlier application permitted for financial statements that have not been issued. 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

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 strengthened Old National’s position as one of the largest deposit holders 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 $5.6 million of transaction and integration costs associated with the acquisition were expensed as incurred.

As of December 31, 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 cash equivalents

   $ 56,345   

Investment securities

     140,567   

Federal Home Loan Bank stock

     2,192   

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   
  

 

 

 

Purchase price

   $ 110,371   
  

 

 

 

The portion of the purchase price allocated to 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.

 

11


Table of Contents

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
(in millions)
     Estimated
Useful Lives (Years)
 

Core deposit intangible

   $ 4.6         7   

Trust customer relationship intangible

   $ 3.8         12   

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

 

(in thousands)

   Fair Value
of Acquired Loans
at Acquisition Date
     Gross Contractual
Amounts Receivable
at Acquisition Date
     Best Estimate at
Acquisition Date of
Contractual Cash
Flows 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       $ 42,302   

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 doubled 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, while $7.6 million of transaction and integration costs were expensed as incurred.

 

12


Table of Contents

As of July 31, 2015, 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 cash equivalents

   $ 16,447   

Investment securities

     154,885   

Federal Home Loan Bank stock

     2,880   

Loans held for sale

     1,073   

Loans

     632,016   

Premises and equipment

     7,741   

Accrued interest receivable

     2,614   

Other real estate owned

     1,676   

Company-owned life insurance

     14,857   

Other assets

     16,822   

Deposits

     (763,681

Short-term borrowings

     (10,420

Other borrowings

     (12,515

Accrued expenses and other liabilities

     (8,337
  

 

 

 

Net tangible assets acquired

     56,058   

Definite-lived intangible assets acquired

     10,763   

Loan servicing rights

     8,983   

Goodwill

     81,952   
  

 

 

 

Purchase price

   $ 157,756   
  

 

 

 

The portion of the purchase price allocated to 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
(in millions)
     Estimated
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:

 

(in thousands)

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

   $ 623,625       $ 798,967       $ 89,430   

LSB Financial Corp.

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. The acquisition was completed effective November 1, 2014 (the “Closing Date”). LSB was a savings and loan holding company with Lafayette Savings Bank as its wholly-owned subsidiary. LSB was the largest bank headquartered in Lafayette, Indiana and operated five full-service banking centers. The merger strengthened Old National’s position as one of the largest deposit holders in Indiana and Old

 

13


Table of Contents

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 LSB was $69.6 million, consisting of $17.8 million of cash and the issuance of 3.6 million shares of Old National Common Stock valued at $51.8 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, while $3.2 million of transaction and integration costs associated with the acquisition were expensed as incurred.

As of September 30, 2015, 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 cash equivalents

   $ 7,589   

Investment securities

     63,684   

Federal Home Loan Bank stock

     3,185   

Loans held for sale

     1,035   

Loans

     235,377   

Premises and equipment

     6,492   

Accrued interest receivable

     1,044   

Other real estate owned

     30   

Company-owned life insurance

     7,438   

Other assets

     11,490   

Deposits

     (292,068

Other borrowings

     (15,203

Accrued expenses and other liabilities

     (4,582
  

 

 

 

Net tangible assets acquired

     25,511   

Definite-lived intangible assets acquired

     2,618   

Loan servicing rights

     990   

Goodwill

     40,476   
  

 

 

 

Purchase price

   $ 69,595   
  

 

 

 

The portion of the purchase price allocated to 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 acquired identifiable intangible asset is core deposit intangible and the estimated fair value is $2.6 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.

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

 

(in thousands)

   Fair Value
of Acquired Loans
at Acquisition Date
     Gross Contractual
Amounts Receivable
at Acquisition Date
     Best Estimate at
Acquisition Date of
Contractual Cash
Flows Not Expected
to  be Collected
 

Acquired receivables subject to ASC 310-30

   $ 11,986       $ 24,493       $ 9,903   

Acquired receivables not subject to ASC 310-30

   $ 223,391       $ 340,832       $ 57,884   

Founders Financial Corporation

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. The acquisition was

 

14


Table of Contents

completed effective January 1, 2015 (the “Closing Date”). Founders was a bank holding company with Founders Bank & Trust as its wholly-owned subsidiary and operated four full-service banking centers in Kent County. 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 Founders was $91.7 million, consisting of $41.0 million of cash and the issuance of 3.4 million shares of Old National Common Stock valued at $50.6 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 $4.9 million associated with the acquisition have been expensed and remaining integration costs will be expensed in future quarters as incurred.

Under the acquisition method of accounting, the total estimated purchase price is allocated to 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 Founders acquisition is allocated as follows (in thousands):

 

Cash and cash equivalents

   $ 3,978   

Investment securities

     75,383   

Federal Home Loan Bank stock

     1,810   

Loans held for sale

     3,473   

Loans

     339,569   

Premises and equipment

     3,604   

Accrued interest receivable

     1,260   

Other real estate owned

     674   

Company-owned life insurance

     8,297   

Other assets

     8,804   

Deposits

     (376,656

Other borrowings

     (39,380

Accrued expenses and other liabilities

     (1,307
  

 

 

 

Net tangible assets acquired

     29,509   

Definite-lived intangible assets acquired

     5,515   

Loan servicing rights

     664   

Goodwill

     56,014   
  

 

 

 

Purchase price

   $ 91,702   
  

 

 

 

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 second quarter of 2015, immaterial adjustments were made to the purchase price allocations that affected the amounts allocated to goodwill, other assets, and accrued expenses and other liabilities.

The portion of the purchase price allocated to 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
(in millions)
     Estimated
Useful Lives (Years)
 

Core deposit intangible

   $ 2.9         7   

Trust customer relationship intangible

   $ 2.6         12   

 

15


Table of Contents

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

 

(in thousands)

   Fair Value
of Acquired Loans
at Acquisition Date
     Gross Contractual
Amounts Receivable
at Acquisition Date
     Best Estimate at
Acquisition Date of
Contractual Cash
Flows Not Expected
to be Collected
 

Acquired receivables subject to ASC 310-30

   $ 6,607       $ 11,103       $ 2,684   

Acquired receivables not subject to ASC 310-30

   $ 332,962       $ 439,031       $ 61,113   

Insurance Acquisitions

Effective February 1, 2015, Old National acquired certain assets from Mutual Underwriters Insurance (“Mutual Underwriters”). The total purchase price of the assets was $3.7 million, consisting of $2.6 million of customer business relationship intangibles and $1.1 million of goodwill, both of which are included in our “Insurance” segment. The customer business relationship intangibles will be amortized using an accelerated method over an estimated useful life of 10 years.

On May 8, 2015, the Company issued cash consideration of $0.1 million to purchase a book of business. The acquisition terms call for further cash consideration of approximately $0.1 million if certain operating targets are met. The fair value of these payments was booked at acquisition and added $0.2 million of customer business relationships intangibles, which is included in the “Insurance” segment. The customer business relationship intangibles will be amortized using an accelerated method over an estimated useful life of 10 years.

Divestitures

On August 14, 2015, the Company completed its previously announced branch sales. The Company divested of its southern Illinois region (twelve branches) along with four branches in eastern Indiana and one in Ohio. At closing, the purchasers assumed loans of $193.6 million and deposits of $555.8 million. The Company recorded a net pre-tax gain of $15.4 million in connection with the divestitures, which included a deposit premium of $19.3 million, goodwill allocation of $3.8 million, and $0.1 million of transaction expenses. See Note 17 to the consolidated financial statements for discussion on the change to deferred tax assets due to the reduction of our presence in Illinois.

In addition, the Company has consolidated 19 branches throughout the Old National franchise during 2015 based on an ongoing assessment of our service and delivery network and on our goal to continue to move our franchise into stronger growth markets. Four additional branches will be consolidated during the fourth quarter of 2015.

 

16


Table of Contents

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:

 

    

Three Months Ended

September 30,

    

Nine Months Ended

September 30,

 

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

   2015      2014      2015      2014  

Basic Earnings Per Share

           

Net income

   $ 37,669       $ 29,134       $ 84,731       $ 74,417   

Weighted average common shares outstanding

     114,590         111,428         116,272         105,086   

Basic Earnings Per Share

   $ 0.33       $ 0.26       $ 0.73       $ 0.71   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted Earnings Per Share

           

Net income

   $ 37,669       $ 29,134       $ 84,731       $ 74,417   

Weighted average common shares outstanding

     114,590         111,428         116,272         105,086   

Effect of dilutive securities:

           

Restricted stock

     477         446         435         428   

Stock options (1)

     86         73         93         45   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding

     115,153         111,947         116,800         105,559   

Diluted Earnings Per Share

   $ 0.33       $ 0.26       $ 0.73       $ 0.70   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Options to purchase 891 thousand shares and 988 thousand shares outstanding at September 30, 2015 and 2014, respectively, were not included in the computation of net income per diluted share for the three months ended September 30, 2015 and 2014, 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 891 thousand shares and 976 thousand shares outstanding at September 30, 2015 and 2014, respectively, were not included in the computation of net income per diluted share for the nine months ended September 30, 2015 and 2014, 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.

 

17


Table of Contents

NOTE 5 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table summarizes the changes within each classification of accumulated other comprehensive income (loss) (“AOCI”) net of tax:

 

(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  

Three Months Ended September 30, 2015

          

Balance at July 1, 2015

   $ (7,951   $ (15,090   $ (6,832   $ (8,189   $ (38,062

Other comprehensive income (loss) before reclassifications

     9,171        —          (6,373     —          2,798   

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

     (544     300        560        568        884   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

     8,627        300        (5,813     568        3,682   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2015

   $ 676      $ (14,790   $ (12,645   $ (7,621   $ (34,380
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended September 30, 2014

          

Balance at July 1, 2014

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

Other comprehensive income (loss) before reclassifications

     3,466        —          350        —          3,816   

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

     (1,629     269        64        204        (1,092
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net 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
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2015

          

Balance at January 1, 2015

   $ (748   $ (15,776   $ (5,935   $ (9,096   $ (31,555

Other comprehensive income (loss) before reclassifications

     3,982        —          (7,657     —          (3,675

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

     (2,558     986        947        1,475        850   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

     1,424        986        (6,710     1,475        (2,825
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2015

   $ 676      $ (14,790   $ (12,645   $ (7,621   $ (34,380
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2014

          

Balance at January 1, 2014

   $ (21,108   $ (16,767   $ (190   $ (6,401   $ (44,466

Other comprehensive income (loss) before reclassifications

     18,117        —          (2,824     —          15,293   

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

     (3,016     706        87        779        (1,444
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net 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) See tables below for details about reclassifications.

 

18


Table of Contents

The following table summarize the significant amounts reclassified out of each component of AOCI for the three months ended September 30, 2015 and 2014:

 

Details about AOCI Components

   Amount Reclassified
from AOCI
    

Affected Line Item in the Statement

Where Net Income is Presented

    

Three Months Ended

September 30,

      

(dollars in thousands)

   2015      2014       

Unrealized gains and losses on available-for-sale securities

   $ 861       $ 2,713       Net securities gains
         —           —         Impairment losses
  

 

 

    

 

 

    
     861         2,713       Total before tax
     (317      (1,084    Tax (expense) or benefit
  

 

 

    

 

 

    
   $ 544       $ 1,629       Net of tax
  

 

 

    

 

 

    

Unrealized gains and losses on held-to-maturity securities

   $ (455    $ (395    Interest income/(expense)
     155         126       Tax (expense) or benefit
  

 

 

    

 

 

    
   $ (300    $ (269    Net of tax
  

 

 

    

 

 

    

Gains and losses on cash flow hedges

        

Interest rate contracts

   $ (902    $ (103    Interest income/(expense)
     342         39       Tax (expense) or benefit
  

 

 

    

 

 

    
   $ (560    $ (64    Net of tax
  

 

 

    

 

 

    

Amortization of defined benefit pension items

        

Actuarial gains/(losses)

   $ (917    $ (329    Salaries and employee benefits
     349         125       Tax (expense) or benefit
  

 

 

    

 

 

    
   $ (568    $ (204    Net of tax
  

 

 

    

 

 

    

Total reclassifications for the period

   $ (884    $ 1,092       Net of tax
  

 

 

    

 

 

    

 

19


Table of Contents

The following table summarize the significant amounts reclassified out of each component of AOCI for the nine months ended September 30, 2015 and 2014:

 

Details about AOCI Components

   Amount Reclassified
from AOCI
    

Affected Line Item in the Statement

Where Net Income is Presented

     Nine Months Ended
September 30,
      

(dollars in thousands)

   2015      2014       

Unrealized gains and losses on available-for-sale securities

   $ 4,056       $ 4,961       Net securities gains
     —           (100    Impairment losses
  

 

 

    

 

 

    
     4,056         4,861       Total before tax
     (1,498      (1,845    Tax (expense) or benefit
  

 

 

    

 

 

    
   $ 2,558       $ 3,016       Net of tax
  

 

 

    

 

 

    

Unrealized gains and losses on held-to-maturity securities

   $ (1,222    $ (1,017    Interest income/(expense)
     236         311       Tax (expense) or benefit
  

 

 

    

 

 

    
   $ (986    $ (706    Net of tax
  

 

 

    

 

 

    

Gains and losses on cash flow hedges

        

Interest rate contracts

   $ (1,527    $ (141    Interest income/(expense)
     580         54       Tax (expense) or benefit
  

 

 

    

 

 

    
   $ (947    $ (87    Net of tax
  

 

 

    

 

 

    

Amortization of defined benefit pension items

        

Actuarial gains/(losses)

   $ (2,380    $ (1,272    Salaries and employee benefits
     905         493       Tax (expense) or benefit
  

 

 

    

 

 

    
   $ (1,475    $ (779    Net of tax
  

 

 

    

 

 

    

Total reclassifications for the period

   $ (850    $ 1,444       Net of tax
  

 

 

    

 

 

    

 

20


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, 2015 and December 31, 2014 and the corresponding amounts of unrealized gains and losses therein:

 

(dollars in thousands)

   Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
     Fair
Value
 

September 30, 2015

           

Available-for-Sale

           

U.S. Treasury

   $ 11,971       $ 268       $ —         $ 12,239   

U.S. government-sponsored entities and agencies

     642,681         2,350         (3,251      641,780   

Mortgage-backed securities - Agency

     1,127,175         15,617         (6,440      1,136,352   

States and political subdivisions

     383,001         9,133         (2,031      390,103   

Pooled trust preferred securities

     17,443         —           (10,812      6,631   

Other securities

     336,394         1,854         (5,460      332,788   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 2,518,665       $ 29,222       $ (27,994    $ 2,519,893   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held-to-Maturity

           

U.S. government-sponsored entities and agencies

   $ 143,694       $ 4,161       $ —         $ 147,855   

Mortgage-backed securities - Agency

     17,782         724         —           18,506   

States and political subdivisions

     689,575         46,299         (59      735,815   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held-to-maturity securities

   $ 851,051       $ 51,184       $ (59    $ 902,176   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

           

Available-for-Sale

           

U.S. Treasury

   $ 14,978       $ 196       $ (8    $ 15,166   

U.S. government-sponsored entities and agencies

     692,704         1,533         (8,286      685,951   

Mortgage-backed securities - Agency

     1,233,811         18,219         (10,368      1,241,662   

States and political subdivisions

     304,435         11,023         (917      314,541   

Pooled trust preferred securities

     17,965         —           (11,358      6,607   

Other securities

     365,235         2,338         (3,669      363,904   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 2,629,128       $ 33,309       $ (34,606    $ 2,627,831   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held-to-Maturity

           

U.S. government-sponsored entities and agencies

   $ 167,207       $ 6,279       $ —         $ 173,486   

Mortgage-backed securities - Agency

     23,648         926         —           24,574   

States and political subdivisions

     653,199         52,753         (77      705,875   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held-to-maturity securities

   $ 844,054       $ 59,958       $ (77    $ 903,935   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

21


Table of Contents

Proceeds from sales or calls of available-for-sale investment securities, the resulting realized gains and realized losses, and other securities gains or losses were as follows for the three and nine months ended September 30, 2015 and 2014:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(dollars in thousands)

   2015      2014      2015      2014  

Proceeds from sales of available-for-sale securities

   $ 100,257       $ 79,581       $ 296,841       $ 155,876   

Proceeds from calls of available-for-sale securities

     108,790         43,236         321,792         67,776   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 209,047       $ 122,817       $ 618,633       $ 223,652   
  

 

 

    

 

 

    

 

 

    

 

 

 

Realized gains on sales of available-for-sale securities

   $ 1,315       $ 2,666       $ 4,112       $ 5,015   

Realized gains on calls of available-for-sale securities

     99         151         479         151   

Realized losses on sales of available-for-sale securities

     (373      (6      (420      (43

Realized losses on calls of available-for-sale securities

     —           (201      (15      (468

Other securities gains (losses) (1)

     (180      103         (100      306   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net securities gains

   $ 861       $ 2,713       $ 4,056       $ 4,961   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Other securities gains (losses) includes net realized gains or losses associated with trading securities and mutual funds.

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, 2015 and $3.9 million at December 31, 2014.

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, 2015      Weighted  
(dollars in thousands)    Amortized      Fair      Average  

Maturity

   Cost      Value      Yield  

Available-for-Sale

        

Within one year

   $ 38,653       $ 38,826         2.53

One to five years

     491,482         494,542         1.79   

Five to ten years

     475,672         477,916         2.41   

Beyond ten years

     1,512,858         1,508,609         2.54   
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,518,665       $ 2,519,893         2.37
  

 

 

    

 

 

    

 

 

 

Held-to-Maturity

        

Within one year

   $ 10,392       $ 10,743         6.53

One to five years

     29,175         30,530         3.95   

Five to ten years

     200,190         207,483         3.55   

Beyond ten years

     611,294         653,420         5.49   
  

 

 

    

 

 

    

 

 

 

Total

   $ 851,051       $ 902,176         4.99
  

 

 

    

 

 

    

 

 

 

 

22


Table of Contents

The following table summarizes the investment securities with unrealized losses at September 30, 2015 and December 31, 2014 by aggregated major security type and length of time in a continuous unrealized loss position:

 

     Less than 12 months     12 months or longer     Total  

(dollars in thousands)

   Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

September 30, 2015

               

Available-for-Sale

               

U.S. government-sponsored entities and agencies

   $ 98,681       $ (1,203   $ 122,560       $ (2,048   $ 221,241       $ (3,251

Mortgage-backed securities - Agency

     188,275         (1,443     256,905         (4,997     445,180         (6,440

States and political subdivisions

     101,370         (1,756     5,503         (275     106,873         (2,031

Pooled trust preferred securities

     —           —          6,631         (10,812     6,631         (10,812

Other securities

     104,254         (1,317     128,376         (4,143     232,630         (5,460
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available-for-sale

   $ 492,580       $ (5,719   $ 519,975       $ (22,275   $ 1,012,555       $ (27,994
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Held-to-Maturity

               

States and political subdivisions

   $ 15,367       $ (59   $ —         $ —        $ 15,367       $ (59
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total held-to-maturity

   $ 15,367       $ (59   $ —         $ —        $ 15,367       $ (59
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2014

               

Available-for-Sale

               

U.S. Treasury

   $ 9,524       $ (8   $ —         $ —        $ 9,524       $ (8

U.S. government-sponsored entities and agencies

     180,488         (563     257,914         (7,723     438,402         (8,286

Mortgage-backed securities - Agency

     31,304         (122     386,788         (10,246     418,092         (10,368

States and political subdivisions

     41,481         (288     9,534         (629     51,015         (917

Pooled trust preferred securities

     —           —          6,607         (11,358     6,607         (11,358

Other securities

     115,973         (906     95,344         (2,763     211,317         (3,669
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available-for-sale

   $ 378,770       $ (1,887   $ 756,187       $ (32,719   $ 1,134,957       $ (34,606
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Held-to-Maturity

               

States and political subdivisions

   $ 6,171       $ (77   $ —         $ —        $ 6,171       $ (77
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total held-to-maturity

   $ 6,171       $ (77   $ —         $ —        $ 6,171       $ (77
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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.

 

23


Table of Contents

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.

We did not record other-than-temporary-impairments during the nine months ended September 30, 2015. Other-than-temporary-impairments totaled $100 thousand during the nine months ended September 30, 2014.

As of September 30, 2015, Old National’s securities portfolio consisted of 1,742 securities, 216 of which were in an unrealized loss position. The unrealized losses attributable to our U.S. government-sponsored entities and agencies, our agency mortgage-backed securities, and our other securities are the result of fluctuations in interest rates. Our pooled trust preferred securities are discussed below.

Pooled Trust Preferred Securities

At September 30, 2015, our securities portfolio contained three pooled trust preferred securities with a fair value of $6.6 million and unrealized losses of $10.8 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 $3.3 million at September 30, 2015. This security was rated A3 at inception, but is rated D at September 30, 2015. The issuers in this security are banks. 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, 2015 and 2014, our model indicated no other-than-temporary-impairment losses on this security. At September 30, 2015, 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 $6.4 million and unrealized losses of $7.5 million at September 30, 2015 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. For the nine months ended September 30, 2015 and 2014, our analysis indicated no other-than-temporary-impairment on these securities.

 

24


Table of Contents

The table below summarizes the relevant characteristics of our pooled trust preferred securities as well as our single issuer trust preferred securities that are included in the “other securities” category in this footnote. Each of the pooled trust preferred securities support a more senior tranche of security holders. All three pooled trust preferred 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.

 

Trust preferred securities
September 30, 2015
(dollars in thousands)

   Class      Lowest
Credit
Rating (1)
     Amortized
Cost
     Fair
Value
     Unrealized
Gain/
(Loss)
    Realized
Losses
2015
     # of Issuers
Currently
Performing/
Remaining
   Actual
Deferrals
and Defaults
as a % of
Original
Collateral
    Expected
Defaults as
a % of
Remaining
Performing
Collateral
    Excess
Subordination
as a % of
Current
Performing
Collateral
 

Pooled trust preferred securities:

                          

Reg Div Funding 2004

     B-2         D       $ 3,541       $ 223       $ (3,318   $ —         25/41      33.3     7.5     0.0

Pretsl XXVII LTD

     B         B         4,446         2,517         (1,929     —         34/45      20.5     4.2     41.6

Trapeza Ser 13A

     A2A         BB+         9,456         3,891         (5,565     —         50/59      12.1     5.1     52.1
        

 

 

    

 

 

    

 

 

   

 

 

           
           17,443         6,631         (10,812     —               

Single Issuer trust preferred securities:

                          

Fleet Cap Tr V (BOA)

        BB+         3,386         3,238         (148     —               

JP Morgan Chase Cap XIII

        BBB-         4,753         4,275         (478     —               

NB-Global

        BB+         764         925         161        —               

Chase Cap II

        BBB-         804         862         58        —               
        

 

 

    

 

 

    

 

 

   

 

 

           
           9,707         9,300         (407     —               

Total

         $ 27,150       $ 15,931       $ (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. Old National has a limited partnership that falls under these restrictions and has to be divested by July 2017. 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, 2015, and the related life-to-date credit losses recognized in earnings:

 

                          Amount of other-than-temporary
impairment recognized  in earnings
 

(dollars in thousands)

   Vintage      Lowest
Credit
Rating (1)
     Amortized
Cost
     Nine Months Ended
September 30,
     Life-to
date
 
              
            2015      2014     

Reg Div Funding

     2004         D       $ 3,541       $ —         $ —         $ 5,685   

Limited partnership

           765         —           100         100   
        

 

 

    

 

 

    

 

 

    

 

 

 

Total

         $ 4,306       $ —         $ 100       $ 5,785   
        

 

 

    

 

 

    

 

 

    

 

 

 

 

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

NOTE 7 – LOANS HELD FOR SALE

Loans held for sale were $18.8 million at September 30, 2015, compared to $213.5 million at December 31, 2014. Included in loans held for sale at September 30, 2015 were $18.8 million of mortgage loans held for immediate sale in the secondary market, compared to $15.6 million at December 31, 2014. Residential loans that Old National has originated with a commitment 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). Prior to mid-2014, residential loans originated by Old National were primarily sold on a servicing released basis. Beginning with the inception of an in-house servicing unit in the third quarter of 2014, conventional mortgage production is now sold on a servicing retained basis. Certain loans, such as government guaranteed mortgage loans continue to be sold on servicing released basis.

 

25


Table of Contents

The following table summarizes loans held for sale that were reclassified from loans held for investment at September 30, 2015 and December 31, 2014:

 

(dollars in thousands)

   September 30,
2015
     December 31,
2014
 

Commercial

   $ —         $ 45,500   

Commercial real estate

     —           30,690   

Residential real estate

     —           71,680   

Consumer credit

     —           50,058   
  

 

 

    

 

 

 

Total

   $ —         $ 197,928   
  

 

 

    

 

 

 

During the fourth quarter of 2014, $197.9 million of loans were reclassified to loans held for sale at the lower of cost or fair value. In connection with our branch divestitures, these loans were sold during the third quarter of 2015 for $193.6 million, resulting in a gain of $0.1 million. At September 30, 2015, 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, western Kentucky and Louisville, east central Illinois, and central and western 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:

 

(dollars in thousands)

   September 30,
2015
     December 31,
2014
 

Commercial (1)

   $ 1,740,394       $ 1,629,600   

Commercial real estate:

     

Construction

     164,247         134,552   

Other

     1,681,642         1,576,558   

Residential real estate

     1,640,289         1,519,156   

Consumer credit:

     

Heloc

     362,055         360,320   

Auto

     1,004,989         846,969   

Other

     140,243         103,338   

Covered loans

     114,039         147,708   
  

 

 

    

 

 

 

Total loans

     6,847,898         6,318,201   

Allowance for loan losses

     (49,515      (44,297

Allowance for loan losses - covered loans

     (1,711      (3,552
  

 

 

    

 

 

 

Net loans

   $ 6,796,672       $ 6,270,352   
  

 

 

    

 

 

 

 

(1) Includes direct finance leases of $15.5 million at September 30, 2015 and $19.3 million at December 31, 2014.

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.

 

26


Table of Contents

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

Covered loans represent loans acquired from the FDIC that are subject to loss share agreements whereby Old National is indemnified against 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, 2015, we do not expect losses to exceed $275.0 million. See Note 9 to the consolidated financial statements for further details on our covered loans.

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 consolidated loan portfolio. Management’s evaluation of the adequacy of the allowance is an estimate based on reviews of individual loans, pools of homogeneous loans, assessments of the impact of current

 

27


Table of Contents

and anticipated economic conditions on the portfolio, and historical loss experience. 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.

Effective January 1, 2015, we began using a probability of default (“PD”)/loss given default (“LGD”) model as a tool to determine the adequacy of the allowance for loan losses for performing commercial and commercial real estate loans. The PD is forecast using a transition matrix to determine the likelihood of a customer’s asset quality rating (“AQR”) migrating from its current AQR to any other status within the time horizon. Transition rates are measured using Old National’s own historical experience. The model assumes that recent historical transition rates will continue into the future. The LGD is defined as credit loss incurred when an obligor of the bank defaults. The sum of all net charge-offs for a particular portfolio segment are divided by all loans that have defaulted over a given period of time. The expected loss derived from the model considers the PD, LGD, and exposure at default. Additionally, qualitative factors, such as changes in lending policies or procedures, and economic business conditions are also considered.

We adopted the probability of default and loss given default model for commercial loans because we believe this approach has a tendency to react more quickly to credit cycle shifts (both positive and negative). Switching from migration analysis to the probability of default and loss given default model for our performing commercial and commercial real estate loans did not have a material effect on our allowance for loan losses at the date of adoption.

Prior to January 1, 2015, we used migration analysis as a tool to determine the adequacy of the allowance for loan losses for performing commercial and commercial real estate loans. Migration analysis is a statistical technique that attempts to estimate probable losses for existing pools of loans by matching actual losses incurred on loans back to their origination. Judgment is used to select and weight the historical periods which are most representative of the current environment.

We calculated migration analysis using several different scenarios based on varying assumptions to evaluate the widest range of possible outcomes. The migration-derived historical commercial loan loss rates were applied to the current commercial loan pools to arrive at an estimate of probable losses for the loans existing at the time of analysis. The amounts determined by migration analysis were adjusted for management’s best estimate of the effects of current economic conditions, loan quality trends, results from internal and external review examinations, loan volume trends, credit concentrations, and various other factors.

We continue to use historic loss ratios adjusted for economic conditions to determine the appropriate level of allowance for residential real estate and consumer loans.

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.

 

28


Table of Contents

Old National’s activity in the allowance for loan losses for the three and nine months ended September 30, 2015 and 2014 is as follows:

 

(dollars in thousands)

   Commercial     Commercial
Real Estate
    Residential     Consumer     Unallocated      Total  

Three Months Ended September 30, 2015

             

Balance at July 1, 2015

   $ 23,434      $ 16,325      $ 2,581      $ 7,851      $ —         $ 50,191   

Charge-offs

     (251     (665     (313     (1,239     —           (2,468

Recoveries

     1,116        1,354        74        792        —           3,336   

Provision

     1,219        (950     (317     215        —           167   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at September 30, 2015

   $ 25,518      $ 16,064      $ 2,025      $ 7,619      $ —         $ 51,226   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Three Months Ended September 30, 2014

             

Balance at July 1, 2014

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

Charge-offs

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

Recoveries

     610        445        41        570        —           1,666   

Provision

     819        776        201        795        —           2,591   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at September 30, 2014

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Nine Months Ended September 30, 2015

             

Balance at January 1, 2015

   $ 20,670      $ 17,348      $ 2,962      $ 6,869      $ —         $ 47,849   

Charge-offs

     (2,053     (220     (709     (4,337     —           (7,319

Recoveries

     3,061        2,281        161        2,754        —           8,257   

Provision

     3,840        (3,345     (389     2,333        —           2,439   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at September 30, 2015

   $ 25,518      $ 16,064      $ 2,025      $ 7,619      $ —         $ 51,226   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Nine Months Ended September 30, 2014

             

Balance at January 1, 2014

   $ 16,565      $ 22,401      $ 3,239      $ 4,940      $ —         $ 47,145   

Charge-offs

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

Recoveries

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

Provision

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at September 30, 2014

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

29


Table of Contents

The following table provides Old National’s recorded investment in financing receivables by portfolio segment at September 30, 2015 and December 31, 2014 and other information regarding the allowance:

 

(dollars in thousands)

   Commercial      Commercial
Real Estate
     Residential      Consumer      Unallocated      Total  

September 30, 2015

                 

Allowance for loan losses:

                 

Individually evaluated for impairment

   $ 7,978       $ 3,402       $ —         $ —         $ —         $ 11,380   

Collectively evaluated for impairment

     16,817         12,089         2,005         7,350         —           38,261   

Noncovered loans acquired with deteriorated credit quality

     355         573         13         69         —           1,010   

Covered loans acquired with deteriorated credit quality

     368         —           7         200         —           575   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total allowance for loan losses

   $ 25,518       $ 16,064       $ 2,025       $ 7,619       $ —         $ 51,226   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans and leases outstanding:

                 

Individually evaluated for impairment

   $ 61,739       $ 45,268       $ —         $ —         $ —         $ 107,007   

Collectively evaluated for impairment

     1,683,685         1,772,904         1,640,307         1,554,695         —           6,651,591   

Loans acquired with deteriorated credit quality

     1,944         29,587         128         4,337         —           35,996   

Covered loans acquired with deteriorated credit quality

     3,441         22,410         17,805         9,648         —           53,304   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans and leases outstanding

   $ 1,750,809       $ 1,870,169       $ 1,658,240       $ 1,568,680       $ —         $ 6,847,898   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

                 

Allowance for loan losses:

                 

Individually evaluated for impairment

   $ 7,280       $ 2,945       $ —         $ —         $ —         $ 10,225   

Collectively evaluated for impairment

     12,163         13,354         2,945         6,519         —           34,981   

Noncovered loans acquired with deteriorated credit quality

     406         1,049         17         67         —           1,539   

Covered loans acquired with deteriorated credit quality

     821         —           —           283         —           1,104   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total allowance for loan losses

   $ 20,670       $ 17,348       $ 2,962       $ 6,869       $ —         $ 47,849   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans and leases outstanding:

                 

Individually evaluated for impairment

   $ 38,485       $ 45,335       $ —         $ —         $ —         $ 83,820   

Collectively evaluated for impairment

     1,598,352         1,631,794         1,519,171         1,359,537         —           6,108,854   

Loans acquired with deteriorated credit quality

     2,770         37,394         133         7,073         —           47,370   

Covered loans acquired with deteriorated credit quality

     7,160         37,384         21,106         12,507         —           78,157   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans and leases outstanding

   $ 1,646,767       $ 1,751,907       $ 1,540,410       $ 1,379,117       $ —         $ 6,318,201   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

30


Table of Contents

Credit Quality

Old National’s management monitors the credit quality of its financing receivables in an on-going manner. Internally, management assigns a credit quality grade to each non-homogeneous commercial and commercial real estate loan in the portfolio. The primary determinants of the credit quality grade are based upon the reliability of the primary source of repayment and the past, present, and projected financial condition of the borrower. The credit quality rating also reflects current economic and industry conditions. Major factors used in determining the grade can vary based on the nature of the loan, but commonly include factors such as debt service coverage, internal cash flow, liquidity, leverage, operating performance, debt burden, FICO scores, occupancy, interest rate sensitivity, and expense burden. Old National uses the following definitions for risk ratings:

Criticized. Special mention loans that have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Classified – Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Classified – Nonaccrual. Loans classified as nonaccrual have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection in full, on the basis of currently existing facts, conditions, and values, in doubt.

Classified – Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as nonaccrual, with the added characteristic that the weaknesses make collection in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Pass rated loans are those loans that are other than criticized, classified – substandard, classified - nonaccrual or classified – doubtful.

As of September 30, 2015 and December 31, 2014, the risk category of commercial and commercial real estate loans, excluding covered loans, by class of loans is as follows:

 

(dollars in thousands)                  Commercial      Commercial  

Corporate Credit Exposure Credit Risk Profile by
Internally Assigned Grade

   Commercial      Real Estate -
Construction
     Real Estate -
Other
 
   September 30,
2015
     December 31,
2014
     September 30,
2015
     December 31,
2014
     September 30,
2015
     December 31,
2014
 

Grade:

                 

Pass

   $ 1,584,973       $ 1,442,904       $ 155,134       $ 119,958       $ 1,491,759       $ 1,374,191   

Criticized

     51,645         89,775         3,738         2,229         84,082         102,805   

Classified - substandard

     46,273         58,461         2,817         5,866         55,050         38,659   

Classified - nonaccrual

     54,931         38,003         2,558         6,499         49,721         59,771   

Classified - doubtful

     2,572         457         —           —           1,030         1,132   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,740,394       $ 1,629,600       $ 164,247       $ 134,552       $ 1,681,642       $ 1,576,558   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

31


Table of Contents

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, 2015 and December 31, 2014, excluding covered loans:

 

(dollars in thousands)    Residential      Consumer  
            Heloc      Auto      Other  

September 30, 2015

           

Performing

   $ 1,624,740       $ 359,315       $ 1,003,594       $ 138,757   

Nonperforming

     15,549         2,740         1,395         1,486   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,640,289       $ 362,055       $ 1,004,989       $ 140,243   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

           

Performing

   $ 1,505,188       $ 357,205       $ 845,708       $ 101,811   

Nonperforming

     13,968         3,115         1,261         1,527   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,519,156       $ 360,320       $ 846,969       $ 103,338   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

32


Table of Contents

The following table shows Old National’s impaired loans, excluding covered loans, which are individually evaluated as of September 30, 2015 and December 31, 2014, respectively. 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.

 

(dollars in thousands)

   Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 

September 30, 2015

        

With no related allowance recorded:

        

Commercial

   $ 32,592       $ 33,564       $ —     

Commercial Real Estate - Construction

     781         781         —     

Commercial Real Estate - Other

     32,460         35,736         —     

Residential

     1,159         1,180         —     

Consumer

     770         875         —     

With an allowance recorded:

        

Commercial

     24,707         24,724         7,141   

Commercial Real Estate - Construction

     243         243         1   

Commercial Real Estate - Other

     11,785         11,835         3,402   

Residential

     1,053         1,053         53   

Consumer

     2,229         2,229         111   
  

 

 

    

 

 

    

 

 

 

Total Loans

   $ 107,779       $ 112,220       $ 10,708   
  

 

 

    

 

 

    

 

 

 

December 31, 2014

        

With no related allowance recorded:

        

Commercial

   $ 25,483       $ 25,854       $ —     

Commercial Real Estate - Construction

     2,168         1,397         —     

Commercial Real Estate - Other

     28,637         30,723         —     

Residential

     588         658         —     

Consumer

     685         748         —     

With an allowance recorded:

        

Commercial

     7,471         10,488         4,883   

Commercial Real Estate - Construction

     98         98         11   

Commercial Real Estate - Other

     14,432         16,503         2,934   

Residential

     1,476         1,476         74   

Consumer

     1,543         1,543         77   
  

 

 

    

 

 

    

 

 

 

Total Loans

   $ 82,581       $ 89,488       $ 7,979   
  

 

 

    

 

 

    

 

 

 

 

33


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, 2015 and 2014 are included in the table below.

 

(dollars in thousands)

   Average
Recorded
Investment
     Interest
Income
Recognized (1)
 

Three Months Ended September 30, 2015

     

With no related allowance recorded:

     

Commercial

   $ 33,128       $ 105   

Commercial Real Estate - Construction

     1,122         7   

Commercial Real Estate - Other

     33,235         240   

Residential

     999         —     

Consumer

     836         5   

With an allowance recorded:

     

Commercial

     29,978         (39

Commercial Real Estate - Construction

     331         —     

Commercial Real Estate - Other

     12,656         25   

Residential

     1,330         11   

Consumer

     1,775         15   
  

 

 

    

 

 

 

Total Loans

   $ 115,390       $ 369   
  

 

 

    

 

 

 

Three Months Ended 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   

Residential

     98         —     

Consumer

     349         2   

With an allowance recorded:

     

Commercial

     11,782         152   

Commercial Real Estate - Construction

     467         15   

Commercial Real Estate - Other

     16,313         119   

Residential

     2,215         6   

Consumer

     1,426         16   
  

 

 

    

 

 

 

Total Loans

   $ 71,232       $ 830   
  

 

 

    

 

 

 

 

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

 

34


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, 2015 and 2014 are included in the table below.

 

(dollars in thousands)

   Average
Recorded
Investment
     Interest
Income
Recognized (1)
 

Nine Months Ended September 30, 2015

     

With no related allowance recorded:

     

Commercial

   $ 29,878       $ 232   

Commercial Real Estate - Construction

     1,475         10   

Commercial Real Estate - Other

     32,440         514   

Residential

     873         2   

Consumer

     728         7   

With an allowance recorded:

     

Commercial

     16,090         364   

Commercial Real Estate - Construction

     171         1   

Commercial Real Estate - Other

     13,109         147   

Residential

     1,264         37   

Consumer

     1,886         64   
  

 

 

    

 

 

 

Total Loans

   $ 97,914       $ 1,378   
  

 

 

    

 

 

 

Nine Months Ended September 30, 2014

     

With no related allowance recorded:

     

Commercial

   $ 26,740       $ 261   

Commercial Real Estate - Construction

     526         —     

Commercial Real Estate - Other

     28,037         468   

Residential

     102         —     

Consumer

     330         6   

With an allowance recorded:

     

Commercial

     10,917         260   

Commercial Real Estate - Construction

     467         15   

Commercial Real Estate - Other

     16,501         283   

Residential

     2,146         47   

Consumer

     1,133         42   
  

 

 

    

 

 

 

Total Loans

   $ 86,899       $ 1,382   
  

 

 

    

 

 

 

 

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

For all loan classes, a loan is generally placed on nonaccrual status when principal or interest becomes 90 days past due unless it is well secured and in the process of collection, or earlier when concern exists as to the ultimate collectibility of principal or interest. Interest accrued during the current year on such loans is reversed against earnings. Interest accrued in the prior year, if any, is charged to the allowance for loan losses. Cash interest received on these loans is applied to the principal balance until the principal is recovered or until the loan returns to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, remain current for six months and future payments are reasonably assured.

Loans accounted for under FASB ASC Topic 310-30 accrue interest, even though they may be contractually past due, as any nonpayment of contractual principal or interest is considered in the periodic re-estimation of expected cash flows and is included in the resulting recognition of current period covered loan loss provision or prospective yield adjustments. Similar to noncovered 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.

 

35


Table of Contents

Old National’s past due financing receivables as of September 30, 2015 and December 31, 2014 are as follows:

 

(dollars in thousands)

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

September 30, 2015

                 

Commercial

   $ 815       $ 373       $ 114       $ 57,503       $ 58,805       $ 1,681,589   

Commercial Real Estate:

                 

Construction

     531         92         —           2,558         3,181         161,066   

Other

     1,546         3,953         54         50,751         56,304         1,625,338   

Residential

     10,578         1,846         172         15,549         28,145         1,612,144   

Consumer:

                 

Heloc

     735         430         19         2,740         3,924         358,131   

Auto

     3,254         694         197         1,395         5,540         999,449   

Other

     913         167         13         1,486         2,579         137,664   

Covered loans

     855         472         —           8,682         10,009         104,030   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 19,227       $ 8,027       $ 569       $ 140,664       $ 168,487       $ 6,679,411   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

                 

Commercial

   $ 649       $ 813       $ 33       $ 38,460       $ 39,955       $ 1,589,645   

Commercial Real Estate:

                 

Construction

     —           —           —           6,499         6,499         128,053   

Other

     3,834         1,468         138         60,903         66,343         1,510,215   

Residential

     11,606         3,959         1         13,968         29,534         1,489,622   

Consumer:

                 

Heloc

     577         376         —           3,115         4,068         356,252   

Auto

     3,349         695         203         1,261         5,508         841,461   

Other

     969         129         83         1,527         2,708         100,630   

Covered loans

     1,477         584         —           15,124         17,185         130,523   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 22,461       $ 8,024       $ 458       $ 140,857       $ 171,800       $ 6,146,401   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loan Participations

Old National has loan participations, which qualify as participating interests, with other financial institutions. At September 30, 2015, these loans totaled $317.8 million, of which $171.4 million had been sold to other financial institutions and $146.4 million was retained by Old National. The loan participations convey proportionate ownership rights with equal priority to each participating interest holder, involve no recourse (other than ordinary representations and warranties) to, or subordination by, any participating interest holder, all cash flows are divided among the participating interest holders in proportion to each holder’s share of ownership and no holder has the right to pledge the entire financial asset unless all participating interest holders agree.

Troubled Debt Restructurings

Old National may choose to restructure the contractual terms of certain loans. The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit Old National by increasing the ultimate probability of collection.

Any loans that are modified are reviewed by Old National to identify if a troubled debt restructuring (“TDR”) has occurred, which is when for economic or legal reasons related to a borrower’s financial difficulties, the Bank grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status. The modification of the terms of such loans include 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.

 

36


Table of Contents

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

The following table presents activity in TDRs for the nine months ended September 30, 2015 and 2014:

 

(dollars in thousands)

   Commercial     Commercial
Real Estate
    Residential     Consumer     Total  

Nine Months Ended September 30, 2015

          

Balance at January 1, 2015

   $ 15,205      $ 15,226      $ 2,063      $ 2,459      $ 34,953   

(Charge-offs)/recoveries

     89        825        (40     (6     868   

Payments

     (13,064     (4,709     (614     (1,035     (19,422

Additions

     29,956        3,774        792        1,797        36,319   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2015

   $ 32,186      $ 15,116      $ 2,201      $ 3,215      $ 52,718   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2014

          

Balance at January 1, 2014

   $ 22,443      $ 22,639      $ 2,344      $ 1,441      $ 48,867   

(Charge-offs)/recoveries

     (172     (266     3        (83     (518

Payments

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

Additions

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Approximately $38.6 million of the TDRs at September 30, 2015 were included with nonaccrual loans, compared to $22.1 million at December 31, 2014. Old National has allocated specific reserves to customers whose loan terms have been modified in TDRs totaling $3.8 million at September 30, 2015 and $2.8 million at December 31, 2014. As of September 30, 2015, Old National had committed to lend an additional $2.5 million to customers with outstanding loans that are classified as TDRs.

 

37


Table of Contents

The pre-modification and post-modification outstanding recorded investments of loans modified as TDRs during the nine months ended September 30, 2015 and 2014 are the same since the loan modifications did not involve the forgiveness of principal. Old National did not record any charge-offs at the modification date. The following table presents loans by class modified as TDRs that occurred during the nine months ended September 30, 2015:

 

(dollars in thousands)

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

Troubled Debt Restructuring:

        

Commercial

     25       $ 29,956       $ 29,956   

Commercial Real Estate - Construction

     5         1,162         1,162   

Commercial Real Estate - Other

     21         2,612         2,612   

Residential

     8         792         792   

Consumer

     26         1,797         1,797   
  

 

 

    

 

 

    

 

 

 

Total

     85       $ 36,319       $ 36,319   
  

 

 

    

 

 

    

 

 

 

The TDRs described above increased the allowance for loan losses by $0.6 million and resulted in immaterial charge-offs during the nine months ended September 30, 2015.

The following table presents loans by class modified as TDRs that occurred during the nine months ended September 30, 2014:

 

(dollars in thousands)

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

Troubled Debt Restructuring:

        

Commercial

     27       $ 11,695       $ 11,695   

Commercial Real Estate - Construction

     1         484         484   

Commercial Real Estate - Other

     22         2,221         2,221   

Residential

     2         175         175   

Consumer

     21         1,033         1,033   
  

 

 

    

 

 

    

 

 

 

Total

     73       $ 15,608       $ 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.

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

There were three commercial loans and six commercial real estate loans totaling $2.1 million that were modified as TDRs within the preceding twelve months, and for which there was a payment default during the nine months ended September 30, 2015.

There was one commercial real estate loan that was modified as a TDR during the nine months ended September 30, 2014 for which there was a payment default within the last twelve months. The impact of the default was immaterial.

The terms of certain other loans were modified during the nine months ended September 30, 2015 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 extended the maturity date. 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.

 

38


Table of Contents

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, 2015, 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, recent guidance also permits for loans to be removed from TDR status under these circumstances: (1) at the time of the subsequent restructuring, the borrower is not experiencing financial difficulties, and this is documented by a current credit evaluation at the time of the restructuring, (2) under the terms of the subsequent restructuring agreement, the institution has granted no concession to the borrower; and (3) the subsequent restructuring agreement includes market terms that are no less favorable than those that would be offered for a comparable new loan. For loans subsequently restructured that have cumulative principal forgiveness, the loan should continue to be measured in accordance with ASC 310-10, “Receivables – Overall”. However, consistent with ASC 310-40-50-2, “Troubled Debt Restructurings by Creditors, Creditor Disclosure of Troubled Debt Restructurings,” the loan would not be required to be reported in the years following the restructuring if the subsequent restructuring meets both of these criteria: (1) has an interest rate at the time of the subsequent restructuring that is not less than a market interest rate; and (2) is performing in compliance with its modified terms after the subsequent restructuring.

Purchased Impaired Loans (noncovered 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, among others, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, and net present value of cash flows expected to be received. 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:

 

(dollars in thousands)

   September 30,
2015
     December 31,
2014
 

Commercial

   $ 1,944       $ 2,770   

Commercial real estate

     29,587         37,394   

Residential

     128         133   

Consumer

     4,337         7,073   
  

 

 

    

 

 

 

Carrying amount

     35,996         47,370   

Allowance for loan losses

     (1,010      (1,539
  

 

 

    

 

 

 

Carrying amount, net of allowance

   $ 34,986       $ 45,831   
  

 

 

    

 

 

 

The outstanding balance of noncovered loans accounted for under ASC 310-30, including contractual principal, interest, fees and penalties, was $102.3 million at September 30, 2015 and $135.9 million at December 31, 2014.

 

39


Table of Contents

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 recorded as loan interest income totaled $11.0 million during the nine months ended September 30, 2015 and $12.3 million during the nine months ended September 30, 2014. Improvement in cash flow expectations has resulted in a reclassification from nonaccretable difference to accretable yield.

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

 

(dollars in thousands)

   Monroe     Integra
Noncovered
    IBT     Tower     United     LSB     Founders     Total  

Balance at January 1, 2015

   $ 3,564      $ 1,389      $ 13,354      $ 4,559      $ 1,516      $ 2,409      $ —        $ 26,791   

New loans purchased

     —          —          —          —          —          —          1,812        1,812   

Accretion of income

     (1,744     (406     (5,269     (1,442     (716     (952     (458     (10,987

Reclassifications from (to) nonaccretable difference

     (222     135        897        418        1,415        3,545        1,232        7,420   

Disposals/other adjustments

     505        515        969        140        271        —          —          2,400   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2015

   $ 2,103      $ 1,633      $ 9,951      $ 3,675      $ 2,486      $ 5,002      $ 2,586      $ 27,436   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Included in Old National’s allowance for loan losses is $1.0 million related to the purchased loans disclosed above at September 30, 2015, compared to $1.5 million at December 31, 2014.

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

 

(dollars in thousands)

   Monroe     Integra
Bank (1)
    IBT     Tower     United     LSB     Founders  

Contractually required payments

   $ 94,714      $ 921,856      $ 118,535      $ 22,746      $ 15,483      $ 24,493      $ 11,103   

Nonaccretable difference

     (45,157     (226,426     (53,165     (5,826     (5,487     (9,903     (2,684
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows expected to be collected at acquisition

     49,557        695,430        65,370        16,920        9,996        14,590        8,419   

Accretable yield

     (6,971     (98,487     (11,945     (4,065     (1,605     (2,604     (1,812
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value of acquired loans at acquisition

   $ 42,586      $ 596,943      $ 53,425      $ 12,855      $ 8,391      $ 11,986      $ 6,607   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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.

 

40


Table of Contents

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 $114.0 million at September 30, 2015, compared to $147.7 million at December 31, 2014. The composition of covered loans by lending classification was as follows:

 

     At September 30, 2015  

(dollars in thousands)

   Loans Accounted for
Under ASC 310-30
(Purchased Credit
Impaired)
     Loans Excluded from
ASC 310-30 (1)

(Not Purchased
Credit Impaired)
     Total Covered
Purchased Loans
 

Commercial

   $ 3,441       $ 6,974       $ 10,415   

Commercial real estate

     22,410         1,870         24,280   

Residential

     17,805         146         17,951   

Consumer

     9,648         51,745         61,393   
  

 

 

    

 

 

    

 

 

 

Covered loans

     53,304         60,735         114,039   

Allowance for loan losses

     (575      (1,136      (1,711
  

 

 

    

 

 

    

 

 

 

Covered loans, net

   $ 52,729       $ 59,599       $ 112,328   
  

 

 

    

 

 

    

 

 

 

 

(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 $201.7 million at September 30, 2015 and $241.9 million at December 31, 2014.

 

41


Table of Contents

The following table is a roll-forward of acquired impaired loans accounted for under ASC 310-30 for the nine months ended September 30, 2015 and 2014:

 

(dollars in thousands)

   Contractual
Cash Flows (1)
     Nonaccretable
Difference
     Accretable
Yield
     Carrying
Amount (2)
 

Nine Months Ended September 30, 2015

           

Balance at January 1, 2015

   $ 124,809       $ (12,014    $ (35,742    $ 77,053   

Principal reductions and interest payments

     (34,842      (1,430      —           (36,272

Accretion of loan discount

     —           —           17,850         17,850   

Changes in contractual and expected cash flows due to remeasurement

     (4,218      6,821         (2,505      98   

Removals due to foreclosure or sale

     (1,020      376         (182      (826

Loans removed from loss share coverage

     (6,027      236         618         (5,173
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at September 30, 2015

   $ 78,702       $ (6,011    $ (19,961    $ 52,730   
  

 

 

    

 

 

    

 

 

    

 

 

 

Nine Months Ended September 30, 2014

           

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   

Removals due to foreclosure or sale

     (6,949      2,183         (1,451      (6,217
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at September 30, 2014

   $ 141,886       $ (16,399    $ (40,401    $ 85,086   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The balance of contractual cash flows includes future contractual interest and is net of amounts charged off and interest collected on nonaccrual loans.
(2) Carrying amount for this table is net of allowance for loan losses.

Over the life of the acquired loans, we continue to estimate cash flows expected to be collected on individual loans or on pools of loans sharing common risk characteristics which were treated in the aggregate when applying various valuation techniques. We evaluate at each balance sheet date whether the present value of loans determined using the effective interest rates has decreased and if so, recognize a provision for loan losses. For any increases in cash flows expected to be collected, we adjust the amount of accretable yield recognized on a prospective basis over the loan’s or pool’s remaining life. Eighty percent of the prospective yield adjustments are offset as Old National will recognize a corresponding decrease in cash flows expected from the indemnification asset prospectively in a similar manner. The indemnification asset is adjusted over the shorter of the life of the underlying investment or the indemnification agreement.

Accretable yield, or income expected to be collected on the covered loans accounted for under ASC 310-30, is as follows:

 

(dollars in thousands)

   2015      2014  

Balance at January 1,

   $ 35,742       $ 73,211   

Accretion of income

     (17,850      (53,424

Reclassifications from (to) nonaccretable difference

     2,505         18,223   

Loans removed from loss share coverage

     (618      —     

Disposals/other adjustments

     182         2,391   
  

 

 

    

 

 

 

Balance at September 30,

   $ 19,961       $ 40,401   
  

 

 

    

 

 

 

At September 30, 2015, the $8.9 million loss sharing asset is comprised of a $7.5 million FDIC indemnification asset and a $1.4 million FDIC loss share receivable. The loss share receivable represents actual incurred losses where reimbursement has not yet been received from the FDIC. The indemnification asset represents future cash flows we expect to collect from the FDIC under the loss sharing agreements and the amount related to the estimated improvements in cash flow expectations that are being amortized over the same period for which those improved cash flows are being accreted into income. At September 30, 2015, $7.0 million of the FDIC indemnification asset is related to expected indemnification payments and $0.5 million is expected to be amortized and reported in

 

42


Table of Contents

noninterest income as an offset to future accreted interest income. At September 30, 2014, $12.3 million of the FDIC indemnification asset was related to expected indemnification payments and $13.4 million was expected to be amortized and reported in noninterest income as an offset to future accreted interest income.

For covered loans, we remeasure contractual and expected cash flows on a quarterly basis. When the quarterly re-measurement process results in a decrease in expected cash flows due to an increase in expected credit losses, impairment is recorded. As a result of this impairment, the indemnification asset is increased to reflect anticipated future cash flows to be received from the FDIC. Consistent with the loss sharing agreements between Old National and the FDIC, the amount of the increase to the indemnification asset is measured at 80% of the resulting impairment.

Alternatively, when the quarterly re-measurement results in an increase in expected future cash flows due to a decrease in expected credit losses, the nonaccretable difference decreases and the effective yield of the related loan portfolio is increased. As a result of the improved expected cash flows, the indemnification asset would be reduced first by the amount of any impairment previously recorded and, second, by increased amortization over the remaining life of the related loss sharing agreements or the remaining life of the indemnified asset, whichever is shorter.

The following table shows a detailed analysis of the FDIC loss sharing asset for the nine months ended September 30, 2015 and 2014:

 

(dollars in thousands)

   2015      2014  

Balance at January 1,

   $ 20,603       $ 88,513   

Adjustments not reflected in income:

     

Cash received from FDIC

     (3,555      (24,814

Other

     948         1,217   

Adjustments reflected in income:

     

(Amortization) accretion

     (10,587      (35,269

Higher (lower) loan loss expectations

     109         (13

Write-downs/(gain) on sale of other real estate

     1,387         (1,634
  

 

 

    

 

 

 

Balance at September 30,

   $ 8,905       $ 28,000   
  

 

 

    

 

 

 

NOTE 10 – OTHER REAL ESTATE OWNED

The following table presents activity in other real estate owned for the nine months ended September 30, 2015 and 2014:

 

(dollars in thousands)

   Other Real Estate
Owned (1)
     Other Real Estate
Owned, Covered
 

Nine Months Ended September 30, 2015

     

Balance at January 1, 2015

   $ 7,241       $ 9,121   

Additions

     5,665         880   

Sales

     (2,807      (5,291

Gains (losses)/Write-downs

     (817      (287
  

 

 

    

 

 

 

Balance at September 30, 2015

   $ 9,282       $ 4,423   
  

 

 

    

 

 

 

Nine Months Ended September 30, 2014

     

Balance at January 1, 2014

   $ 7,562       $ 13,670   

Additions

     5,651         8,303   

Sales

     (3,804      (10,593

Gains (losses)/Write-downs

     (1,236      (1,926
  

 

 

    

 

 

 

Balance at September 30, 2014

   $ 8,173       $ 9,454   
  

 

 

    

 

 

 

 

(1) Includes repossessed personal property of $0.2 million at September 30, 2015 and $0.3 million at September 30, 2014.

 

43


Table of Contents

At September 30, 2015, foreclosed residential real estate property included in the table above totaled $0.9 million. At September 30, 2015, consumer mortgage loans collateralized by residential real property that were in the process of foreclosure totaled $8.2 million.

Covered OREO expenses and valuation write-downs are recorded in the noninterest expense section of the consolidated statements of income. Under the loss sharing agreements, the FDIC will reimburse us for 80% of expenses and valuation write-downs related to covered assets up to $275.0 million, losses in excess of $275.0 million up to $467.2 million at 0%, and 80% of losses in excess of $467.2 million. As of September 30, 2015, we do not expect losses to exceed $275.0 million. The reimbursable portion of these expenses is recorded in the FDIC indemnification asset. Changes in the FDIC indemnification asset are recorded in the noninterest income section of the consolidated statements of income.

NOTE 11 – GOODWILL AND OTHER INTANGIBLE ASSETS

The following table shows the changes in the carrying amount of goodwill by segment for the nine months ended September 30, 2015 and 2014:

 

(dollars in thousands)

   Banking      Insurance      Total  

Nine Months Ended September 30, 2015

        

Balance at January 1, 2015

   $ 490,972       $ 39,873       $ 530,845   

Acquisitions and divestitures, net

     52,699         1,090         53,789   
  

 

 

    

 

 

    

 

 

 

Balance at September 30, 2015

   $ 543,671       $ 40,963       $ 584,634   
  

 

 

    

 

 

    

 

 

 

Nine Months Ended September 30, 2014

        

Balance at January 1, 2014

   $ 312,856       $ 39,873       $ 352,729   

Acquisitions

     138,678         —           138,678   
  

 

 

    

 

 

    

 

 

 

Balance at September 30, 2014

   $ 451,534       $ 39,873       $ 491,407   
  

 

 

    

 

 

    

 

 

 

Goodwill is reviewed annually for impairment. Old National completed its most recent annual goodwill impairment test as of August 31, 2015 and concluded that, based on current events and circumstances, it is not more likely than not that the carrying value of goodwill exceeds fair value. Additionally, the Company evaluated the impact of the sale of its southern Illinois franchise in August of 2015 and concluded that no impairment charge was necessary. See Note 3 to the consolidated financial statements for detail regarding goodwill associated with this divestiture.

During the first half of 2015, Old National recorded $56.0 million of goodwill associated with the acquisition of Founders that was allocated to the “Banking” segment. Also during the first half of 2015, Old National recorded a $0.5 million increase to goodwill associated with the acquisition of LSB that was allocated to the “Banking” segment and an increase of $1.1 million of goodwill associated with the acquisition of Mutual Underwriters that was allocated to the “Insurance” segment. See Note 3 to the consolidated financial statements for detail regarding goodwill recorded in 2014 associated with acquisitions.

 

44


Table of Contents

The gross carrying amount and accumulated amortization of other intangible assets at September 30, 2015 and December 31, 2014 was as follows:

 

(dollars in thousands)

   Gross
Carrying
Amount
     Accumulated
Amortization
and Impairment
     Net
Carrying
Amount
 

September 30, 2015

        

Amortized intangible assets:

        

Core deposit

   $ 60,103       $ (42,320    $ 17,783   

Customer business relationships

     30,787         (22,872      7,915   

Customer trust relationships

     16,548         (4,835      11,713   

Customer loan relationships

     4,413         (3,700      713   
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 111,851       $ (73,727    $ 38,124   
  

 

 

    

 

 

    

 

 

 

December 31, 2014

        

Amortized intangible assets:

        

Core deposit

   $ 57,149       $ (36,950    $ 20,199   

Customer business relationships

     27,942         (21,438      6,504   

Customer trust relationships

     13,986         (3,232      10,754   

Customer loan relationships

     4,413         (3,176      1,237   
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 103,490       $ (64,796    $ 38,694   
  

 

 

    

 

 

    

 

 

 

Other intangible assets consist of core deposit intangibles and customer relationship intangibles and are being amortized primarily on an accelerated basis over their estimated useful lives, generally over a period of 5 to 15 years. During the first quarter of 2015, Old National increased core deposit intangibles by $2.9 million and customer trust relationships by $2.6 million related to the Founders acquisition that is included in the “Banking” segment. Also during the first quarter of 2015, Old National increased customer business relationships intangibles by $2.6 million related to the Mutual Underwriters acquisition that is included in the “Insurance” segment. During the second quarter of 2015, Old National increased customer business relationships intangibles by $0.2 million related to the purchase of an insurance book of business, which is included in the “Insurance” segment. See Note 21 to the consolidated financial statements for a description of the Company’s operating segments.

Old National reviews other intangible assets for possible impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. No impairment charges were recorded during the nine months ended September 30, 2015 or 2014. Total amortization expense associated with intangible assets was $8.9 million for the nine months ended September 30, 2015 and $6.4 million for the nine months ended September 30, 2014.

Estimated amortization expense for future years is as follows:

 

(dollars in thousands)

      

2015 remaining

   $ 2,816   

2016

     9,913   

2017

     7,635   

2018

     5,844   

2019

     4,353   

Thereafter

     7,563   
  

 

 

 

Total

   $ 38,124   
  

 

 

 

NOTE 12 – LOAN SERVICING RIGHTS

Loan servicing rights were assumed in Old National’s acquisitions of United on July 31, 2014 and Founders on January 1, 2015. See Note 3 to the consolidated financial statements for detail regarding loan servicing rights recorded associated with these acquisitions.

 

45


Table of Contents

At September 30, 2015, loan servicing rights derived from loans sold with servicing retained totaled $10.3 million and were included in other assets in the consolidated balance sheet, compared to $9.5 million at December 31, 2014. Loans serviced for others are not reported as assets. The principal balance of loans serviced for others was $1.240 billion at September 30, 2015, compared to $1.124 billion at December 31, 2014. Approximately 96% of the loans serviced for others at September 30, 2015 were residential mortgage loans. Custodial escrow balances maintained in connection with serviced loans were $4.6 million at September 30, 2015 and $16.5 million at December 31, 2014.

The following table summarizes the activity related to loan servicing rights and the related valuation allowance for the nine months ended September 30, 2015 and 2014:

 

(dollars in thousands)

   2015      2014  

Balance at January 1,

   $ 9,584       $ —     

Additions

     2,553