OLD NATIONAL BANCORP /IN/ - FORM 10-Q

OLD NATIONAL BANCORP /IN/ - FORM 10-Q - October 30, 2015

Attached files

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

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.

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.

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

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.

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.

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.

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.

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

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.

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.

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

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.

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.

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


	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

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 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

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.


	Estimated Fair Value (in millions)		Estimated Useful Lives (Years)
Core deposit intangible	$	2.9		7
Trust customer relationship intangible	$	2.6		12

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.

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.

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.

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

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

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

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

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.

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.

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
							Nine Months Ended September 30,
							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.

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.

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

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.

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

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

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

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.

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

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.

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.

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.

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.

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

29,956

Commercial Real Estate - Construction

1,162

Commercial Real Estate - Other

2,612

Residential

792

Consumer

1,797

Total

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.

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.

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.

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.

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

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.

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.

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.

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	$	—

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