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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2016

 

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

For the transition period from                      to                     

Commission File Number 1-15817

 

 

OLD NATIONAL BANCORP

(Exact name of Registrant as specified in its charter)

 

 

 

INDIANA   35-1539838

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

One Main Street

Evansville, Indiana

  47708
(Address of principal executive offices)   (Zip Code)

(812) 464-1294

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock. The Registrant has one class of common stock (no par value) with 135,005,000 shares outstanding at June 30, 2016.

 

 

 


OLD NATIONAL BANCORP

FORM 10-Q

INDEX

 

         Page No.  

PART I.

 

FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements

  
 

Consolidated Balance Sheets
June 30, 2016 (unaudited), December 31, 2015, and June 30, 2015 (unaudited)

     3   
 

Consolidated Statements of Income (unaudited)
Three and six months ended June 30, 2016 and 2015

     4   
 

Consolidated Statements of Comprehensive Income (unaudited)
Three and six months ended June 30, 2016 and 2015

     5   
 

Consolidated Statements of Changes in Shareholders’ Equity (unaudited)
Three and six months ended June 30, 2016 and 2015

     6   
 

Consolidated Statements of Cash Flows (unaudited)
Three and six months ended June 30, 2016 and 2015

     7   
 

Notes to Consolidated Financial Statements (unaudited)

     8   

Item 2.

 

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

     64   

Item 3.

 

Quantitative and Qualitative Disclosures About
Market Risk

     88   

Item 4.

 

Controls and Procedures

     88   

PART II

 

OTHER INFORMATION

     89   

SIGNATURE

     91   

 

2


OLD NATIONAL BANCORP

CONSOLIDATED BALANCE SHEETS

 

     June 30,     December 31,     June 30,  

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

   2016     2015     2015  
     (unaudited)           (unaudited)  

Assets

      

Cash and due from banks

   $ 205,973      $ 91,311      $ 178,985   

Money market and other interest-earning investments

     61,947        128,507        16,228   
  

 

 

   

 

 

   

 

 

 

Total cash and cash equivalents

     267,920        219,818        195,213   

Trading securities - at fair value

     4,838        3,941        3,995   

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

      

U.S. Treasury

     12,269        12,150        12,171   

U.S. government-sponsored entities and agencies

     540,775        613,550        695,074   

Mortgage-backed securities

     1,336,605        1,066,361        1,104,145   

States and political subdivisions

     417,163        387,296        388,039   

Other securities

     342,089        338,864        373,092   
  

 

 

   

 

 

   

 

 

 

Total investment securities - available-for-sale

     2,648,901        2,418,221        2,572,521   

Investment securities - held-to-maturity, at amortized cost (fair value $939,855; $929,417; and $867,345, respectively)

     865,957        872,111        823,255   

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

     90,742        86,146        71,669   

Loans held for sale ($44,422; $13,810; and $20,287, respectively at fair value)

     44,422        13,810        217,667   

Loans:

      

Commercial

     1,893,700        1,804,615        1,775,954   

Commercial real estate

     2,943,525        1,847,821        1,767,341   

Residential real estate

     2,099,770        1,644,614        1,622,819   

Consumer credit, net of unearned income

     1,893,163        1,543,768        1,464,541   

Covered loans, net of discount

     —          107,587        135,407   
  

 

 

   

 

 

   

 

 

 

Total loans

     8,830,158        6,948,405        6,766,062   

Allowance for loan losses

     (51,804     (51,296     (48,479

Allowance for loan losses - covered loans

     —          (937     (1,712
  

 

 

   

 

 

   

 

 

 

Net loans

     8,778,354        6,896,172        6,715,871   
  

 

 

   

 

 

   

 

 

 

FDIC indemnification asset

     —          9,030        16,475   

Premises and equipment, net

     231,656        196,676        131,336   

Accrued interest receivable

     79,536        69,098        66,605   

Goodwill

     655,523        584,634        588,464   

Other intangible assets

     44,237        35,308        40,996   

Company-owned life insurance

     350,193        341,294        337,802   

Net deferred tax assets

     179,448        109,984        127,622   

Loan servicing rights

     25,756        10,468        10,027   

Assets held for sale

     4,867        5,679        9,886   

Other real estate owned and repossessed personal property

     24,254        7,594        9,388   

Other real estate owned - covered

     —          4,904        4,753   

Other assets

     123,658        106,639        130,859   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 14,420,262      $ 11,991,527      $ 12,074,404   
  

 

 

   

 

 

   

 

 

 

Liabilities

      

Deposits:

      

Noninterest-bearing demand

   $ 2,883,917      $ 2,488,855      $ 2,557,665   

Interest-bearing:

      

NOW

     2,456,963        2,133,536        2,213,862   

Savings

     2,616,365        2,201,352        2,352,916   

Money market

     1,015,336        577,050        602,287   

Time

     1,479,021        1,000,067        1,082,840   
  

 

 

   

 

 

   

 

 

 

Total deposits

     10,451,602        8,400,860        8,809,570   

Short-term borrowings

     567,659        628,499        530,377   

Other borrowings

     1,367,896        1,291,747        1,067,993   

Accrued expenses and other liabilities

     221,988        179,251        209,741   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     12,609,145        10,500,357        10,617,681   
  

 

 

   

 

 

   

 

 

 

Shareholders’ Equity

      

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

     —          —          —     

Common stock, $1.00 per share stated value, 300,000 shares authorized, 135,005; 114,297; and 115,205 shares issued and outstanding, respectively

     135,005        114,297        115,205   

Capital surplus

     1,342,393        1,087,911        1,098,384   

Retained earnings

     357,336        323,759        281,196   

Accumulated other comprehensive income (loss), net of tax

     (23,617     (34,797     (38,062
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     1,811,117        1,491,170        1,456,723   
  

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 14,420,262      $ 11,991,527      $ 12,074,404   
  

 

 

   

 

 

   

 

 

 

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

 

3


OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  

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

   2016      2015     2016      2015  

Interest Income

          

Loans including fees:

          

Taxable

   $ 86,527       $ 76,579      $ 158,099       $ 151,538   

Nontaxable

     2,991         2,818        5,995         5,761   

Investment securities:

          

Taxable

     13,585         14,292        27,307         29,018   

Nontaxable

     7,119         6,267        14,101         12,227   

Money market and other interest-earning investments

     21         8        70         14   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest income

     110,243         99,964        205,572         198,558   
  

 

 

    

 

 

   

 

 

    

 

 

 

Interest Expense

          

Deposits

     4,254         3,531        7,747         7,094   

Short-term borrowings

     410         112        592         208   

Other borrowings

     6,239         4,224        12,250         8,166   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest expense

     10,903         7,867        20,589         15,468   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income

     99,340         92,097        184,983         183,090   

Provision for loan losses

     1,319         2,271        1,410         2,272   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income after provision for loan losses

     98,021         89,826        183,573         180,818   
  

 

 

    

 

 

   

 

 

    

 

 

 

Noninterest Income

          

Wealth management fees

     9,355         9,443        17,476         17,963   

Service charges on deposit accounts

     10,437         11,278        20,076         22,323   

Debit card and ATM fees

     4,471         7,075        8,256         13,807   

Mortgage banking revenue

     5,203         4,262        8,123         7,225   

Insurance premiums and commissions

     7,122         10,172        20,243         22,285   

Investment product fees

     4,724         4,719        8,629         9,122   

Company-owned life insurance

     2,080         2,193        4,118         4,345   

Net securities gains

     1,856         512        2,962         3,195   

Recognition of deferred gain on sale leaseback transactions

     1,038         1,468        2,090         2,992   

Gain on sale of ONB Insurance Group, Inc.

     41,864         —          41,864         —     

Change in FDIC indemnification asset

     888         (1,541     233         (2,509

Other income

     4,347         5,398        8,766         9,526   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total noninterest income

     93,385         54,979        142,836         110,274   
  

 

 

    

 

 

   

 

 

    

 

 

 

Noninterest Expense

          

Salaries and employee benefits

     62,715         59,248        119,687         128,942   

Occupancy

     13,568         14,141        26,412         28,434   

Equipment

     3,316         3,446        6,209         7,350   

Marketing

     5,111         3,678        7,597         5,914   

Data processing

     8,676         8,077        15,799         14,667   

Communication

     2,535         2,435        4,399         5,179   

Professional fees

     5,181         3,381        8,549         6,513   

Loan expense

     2,123         1,816        3,456         3,142   

Supplies

     598         581        1,181         1,265   

FDIC assessment

     2,030         1,972        3,949         3,857   

Other real estate owned expense

     2,099         476        2,523         1,637   

Amortization of intangibles

     3,365         2,977        6,012         6,058   

Other expense

     10,155         7,462        14,054         12,888   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total noninterest expense

     121,472         109,690        219,827         225,846   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income before income taxes

     69,934         35,115        106,582         65,246   

Income tax expense

     30,812         8,959        40,483         18,184   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income

   $ 39,122       $ 26,156      $ 66,099       $ 47,062   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income per common share - basic

   $ 0.31       $ 0.22      $ 0.55       $ 0.40   

Net income per common share - diluted

     0.31         0.22        0.55         0.40   
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted average number of common shares outstanding - basic

     127,508         115,732        120,753         117,128   

Weighted average number of common shares outstanding - diluted

     127,973         116,223        121,273         117,634   
  

 

 

    

 

 

   

 

 

    

 

 

 

Dividends per common share

   $ 0.13       $ 0.12      $ 0.26       $ 0.24   

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

 

4


OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

 

    

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 

(dollars in thousands)

   2016     2015     2016     2015  

Net income

   $ 39,122      $ 26,156      $ 66,099      $ 47,062   

Other comprehensive income (loss):

        

Change in securities available-for-sale:

        

Unrealized holding gains (losses) for the period

     12,671        (26,234     30,528        (7,928

Reclassification adjustment for securities gains realized in income

     (1,856     (512     (2,962     (3,195

Income tax effect

     (3,809     9,716        (9,977     3,920   
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains (losses) on available-for-sale securities

     7,006        (17,030     17,589        (7,203

Change in securities held-to-maturity:

        

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

     466        430        931        767   

Income tax effect

     (159     (147     (318     (81
  

 

 

   

 

 

   

 

 

   

 

 

 

Changes from securities held-to-maturity

     307        283        613        686   

Cash flow hedges:

        

Net unrealized derivative gains (losses) on cash flow hedges

     (4,483     3,557        (15,613     (2,071

Reclassification adjustment for losses realized in net income

     1,585        439        2,858        625   

Income tax effect

     1,101        (1,519     4,847        549   
  

 

 

   

 

 

   

 

 

   

 

 

 

Changes from cash flow hedges

     (1,797     2,477        (7,908     (897

Defined benefit pension plans:

        

Amortization of net loss recognized in income

     730        725        1,430        1,463   

Income tax effect

     (278     (275     (544     (556
  

 

 

   

 

 

   

 

 

   

 

 

 

Changes from defined benefit pension plans

     452        450        886        907   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     5,968        (13,820     11,180        (6,507
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 45,090      $ 12,336      $ 77,279      $ 40,555   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

5


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, 2014

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

Net income

     —          —          47,062        —          47,062   

Other comprehensive loss

     —          —          —          (6,507     (6,507

Acquisition - Founders Financial Corporation

     3,402        47,224        —          —          50,626   

Dividends - common stock

     —          —          (28,065     —          (28,065

Common stock issued

     14        178        —          —          192   

Common stock repurchased

     (5,385     (69,209     —          —          (74,594

Stock based compensation expense

     —          2,236        —          —          2,236   

Stock activity under incentive compensation plans

     327        (337     19        —          9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2015

   $ 115,205      $ 1,098,384      $ 281,196      $ (38,062   $ 1,456,723   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

   $ 114,297      $ 1,087,911      $ 323,759      $ (34,797   $ 1,491,170   

Net income

     —          —          66,099        —          66,099   

Other comprehensive income

     —          —          —          11,180        11,180   

Acquisition - Anchor BanCorp Wisconsin, Inc.

     20,415        253,150        —          —          273,565   

Dividends - common stock

     —          —          (32,391     —          (32,391

Common stock issued

     17        185        —          —          202   

Common stock repurchased

     (120     (1,426     —          —          (1,546

Stock based compensation expense

     —          3,391        —          —          3,391   

Stock activity under incentive compensation plans

     396        (818     (131     —          (553
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2016

   $ 135,005      $ 1,342,393      $ 357,336      $ (23,617   $ 1,811,117   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

6


OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

 

     Six Months Ended
June 30,
 

(dollars in thousands)

   2016     2015  

Cash Flows From Operating Activities

    

Net income

   $ 66,099      $ 47,062   
  

 

 

   

 

 

 

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

    

Depreciation

     7,462        7,790   

Amortization of other intangible assets

     6,012        6,058   

Net premium amortization on investment securities

     9,198        9,481   

Amortization of and net gains on termination of FDIC indemnification asset

     (458     2,509   

Stock compensation expense

     3,391        2,236   

Provision for loan losses

     1,410        2,272   

Net securities gains

     (2,962     (3,195

Recognition of deferred gain on sale leaseback transactions

     (2,090     (2,992

Gain on sale of ONB Insurance Group, Inc.

     (41,864     —     

Net gains on sales of other assets

     (2,689     (4,009

Increase in cash surrender value of company-owned life insurance

     (1,621     (3,888

Residential real estate loans originated for sale

     (238,184     (178,612

Proceeds from sale of residential real estate loans

     219,854        180,336   

Increase in interest receivable

     (3,130     (4,379

Decrease in other real estate owned

     6,487        2,895   

(Increase) decrease in other assets

     22,266        (17,320

Increase (decrease) in accrued expenses and other liabilities

     6,345        (9,408
  

 

 

   

 

 

 

Total adjustments

     (10,573     (10,226
  

 

 

   

 

 

 

Net cash flows provided by operating activities

     55,526        36,836   
  

 

 

   

 

 

 

Cash Flows From Investing Activities

    

Cash portion of bank purchase price, net of cash acquired

     (62,532     (37,098

Proceeds from sale of ONB Insurance Group, Inc.

     91,771        —     

Purchases of investment securities available-for-sale

     (799,597     (481,038

Purchases of investment securities held-to-maturity

     —          (13,406

Purchases of Federal Home Loan Bank/Federal Reserve Bank stock

     —          (7,394

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

     721,414        401,579   

Proceeds from sales of investment securities available-for-sale

     107,451        196,584   

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

     2,842        30,285   

Proceeds from sales of investment securities held-to-maturity

     —          855   

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

     —          8,710   

Reimbursements under FDIC loss share agreements

     10,000        2,231   

Net principal collected from (loans made to) loan customers

     (246,987     (108,498

Proceeds from sale of premises and equipment and other assets

     5,707        7,093   

Purchases of premises and equipment and other assets

     (12,317     (10,713
  

 

 

   

 

 

 

Net cash flows used in investing activities

     (182,248     (10,810
  

 

 

   

 

 

 

Cash Flows From Financing Activities

    

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

    

Deposits

     198,029        (57,750

Short-term borrowings

     (63,972     (33,424

Payments for maturities on other borrowings

     (575,588     (227,433

Proceeds from issuance of other borrowings

     650,000        350,000   

Cash dividends paid on common stock

     (32,391     (28,065

Common stock repurchased

     (1,546     (74,594

Proceeds from exercise of stock options, including tax benefit

     90        298   

Common stock issued

     202        192   
  

 

 

   

 

 

 

Net cash flows provided by (used in) financing activities

     174,824        (70,776
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     48,102        (44,750

Cash and cash equivalents at beginning of period

     219,818        239,963   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 267,920      $ 195,213   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Total interest paid

   $ 19,824      $ 15,384   

Total taxes paid (net of refunds)

   $ 8,800      $ 3,784   

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

 

7


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 June 30, 2016 and 2015, and December 31, 2015, and the results of its operations for the three and six months ended June 30, 2016 and 2015. 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, 2015.

All significant intercompany transactions and balances have been eliminated. Certain prior year amounts have been reclassified to conform to the 2016 presentation. Such reclassifications had no effect on net income or shareholders’ equity and were insignificant amounts.

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

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, 2017. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

FASB ASC 718 – In June 2014, the FASB issued an update (ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period). 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 became effective for interim and annual periods beginning after December 15, 2015 and did not have a material impact on the consolidated financial statements.

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

 

8


contract. The guidance will not change generally accepted accounting principles for a customer’s accounting for service contracts. The amendments in this update became effective for interim and annual periods beginning after December 15, 2015 and did not have a material impact on the consolidated financial statements.

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 became effective for interim and annual periods beginning after December 15, 2015 and did not have a material impact on the consolidated financial statements.

FASB ASC 825 – In January 2016, the FASB issued an update (ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities). The amendments in this update impact public business entities as follows: 1) Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. 2) Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. 3) Eliminate the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. 4) Require entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. 5) Require an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. 6) Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. 7) Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. 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 842 – In February 2016, the FASB issued its new lease accounting guidance in ASU No. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new

 

9


guidance, lessor accounting is largely unchanged. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, which is expected to have a material impact.

FASB ASC 405 – In March 2016, the FASB issued ASU No. 2016-04, Liabilities – Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products. The amendments of this ASU narrowly address breakage, which is the monetary amount of the card that ultimately is not redeemed by the cardholder for prepaid stored-value products that are redeemable for monetary values of goods or services but may also be redeemable for cash. Examples of prepaid stored-value products included in this amendment are prepaid gift cards issued by specific payment networks and redeemable at network-accepting merchant locations, prepaid telecommunication cards, and traveler’s checks. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. 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 815 – In March 2016, the FASB issued ASU No. 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. The amendments apply to all reporting entities for which there is a change in the counterparty to a derivative instrument that has been designated as a hedging instrument. The amendments clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

In March 2016, the FASB issued ASU No. 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. The amendments apply to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options. Topic 815, Derivatives and Hedging, requires that embedded derivatives be separated from the host contract and accounted for separately as derivatives if certain criteria are met. One of those criteria is that the economic characteristics and risks of the embedded derivatives are not clearly and closely related to the economic characteristics and risks of the host contract. The amendments clarify what steps are required when assessing “clearly and closely related”. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

FASB ASC 323 – In March 2016, the FASB issued ASU No. 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. The amendments affect all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. The amendments eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments also require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

FASB ASC 606 – In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments relate

 

10


to when another party, along with the entity, is involved in providing a good or service to a customer. Topic 606, Revenue from Contracts with Customers, requires an entity to determine whether the nature of its promise is to provide that good or service to the customer (that is, the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (that is, the entity is an agent). This determination is based upon whether the entity controls the good or the service before it is transferred to the customer. Topic 606 includes indicators to assist in this evaluation. The amendments in this update affect the guidance in ASU No. 2014-09 above, which is not yet effective. The effective date will be the same as the effective date of ASU No. 2014-09. 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.

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments clarify the following two aspects of Topic 606: identifying performance obligations, and the licensing implementation guidance. Before an entity can identify its performance obligations in a contract with a customer, the entity first identifies the promised goods or services in the contract. The amendments in this update are expected to reduce the cost and complexity of applying the guidance on identifying promised goods or services. To identify performance obligations in a contract, an entity evaluates whether promised goods and services are distinct. Topic 606 includes two criteria for assessing whether promises to transfer goods or services are distinct. One of those criteria is that the promises are separately identifiable. This update will improve the guidance on assessing that criterion. Topic 606 also includes implementation guidance on determining whether as entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property, which is satisfied at a point in time, or a right to access the entity’s intellectual property, which is satisfied over time. The amendments in this update are intended to improve the operability and understandability of the licensing implementation guidance. The amendments in this update affect the guidance in ASU No. 2014-09 above, which is not yet effective. The effective date will be the same as the effective date of ASU No. 2014-09. 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.

In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The amendments do not change the core revenue recognition principle in Topic 606. The amendments provide clarifying guidance in certain narrow areas and add some practical expedients.

FASB ASC 718 – In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Shared-Based Payment Accounting. The amendments are intended to improve the accounting for employee shared-based payments and affects all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including the income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

FASB ASC 326 – In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The main objective of this amendment is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendment requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to enhance their credit loss estimates. The amendment requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2019. Early adoption will be permitted beginning after December 15, 2018. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

 

11


NOTE 3 – ACQUISITION AND DIVESTITURE ACTIVITY

Acquisitions

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. Through December 31, 2015, transaction and integration costs of $4.9 million associated with the acquisition had been expensed.

As of December 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

   $ 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   
  

 

 

 

The portion of the purchase price allocated to goodwill will not be deductible for tax purposes.

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.

 

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

Core deposit intangible

   $ 2.9         7   

Trust customer relationship intangible

   $ 2.6         12   

 

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   

Anchor BanCorp Wisconsin Inc.

On January 12, 2016, Old National announced that it had entered into an agreement to acquire Madison, Wisconsin-based Anchor BanCorp Wisconsin Inc. (“Anchor”) through a stock and cash merger. The acquisition was completed effective May 1, 2016 (the “Closing Date”). Anchor was a savings and loan holding company with AnchorBank, fsb (“AnchorBank”) as its wholly-owned subsidiary. AnchorBank operated 46 banking centers, including 32 banking centers in the Madison, Milwaukee and Fox Valley triangle. 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.

Pursuant to the merger agreement, shareholders of Anchor could elect to receive either 3.5505 shares of Old National common stock or $48.50 in cash for each share of Anchor they held, subject to a maximum of 40% of the purchase price in cash. The total purchase price for Anchor was $459.8 million, consisting of $186.2 million of cash and the issuance of 20.4 million shares of Old National Common Stock valued at $273.6 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. Through June 30, 2016, transaction and integration costs of $8.6 million associated with the acquisition have been expensed and remaining integration costs will be expensed in future periods 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 Anchor acquisition is allocated as follows (in thousands):

 

Cash and cash equivalents

   $ 123,657   

Investment securities

     235,240   

Federal Home Loan Bank stock

     4,596   

Loans held for sale

     9,334   

Loans

     1,636,605   

Premises and equipment

     35,721   

Accrued interest receivable

     7,308   

Other real estate owned

     18,243   

Company-owned life insurance

     7,278   

Other assets

     126,013   

Deposits

     (1,852,713

Other borrowings

     (3,255

Accrued expenses and other liabilities

     (36,958
  

 

 

 

Net tangible assets acquired

     311,069   

Definite-lived intangible assets acquired

     21,559   

Loan servicing rights

     15,274   

Goodwill

     111,852   
  

 

 

 

Purchase price

   $ 459,754   
  

 

 

 

 

13


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 in the reporting period in which the adjustment amounts are determined.

The portion of the purchase price allocated to goodwill will not be deductible for tax purposes.

The estimated fair value of the core deposit intangible is $21.6 million and will be amortized over an estimated useful life of 7 years.

Acquired loan data for Anchor 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

  $ 20,174      $ 29,544      $ 6,153   

Acquired receivables not subject to ASC 310-30

  $ 1,616,431      $ 2,143,532      $ 274,155   

Summary of Unaudited Pro-forma Information

The unaudited pro-forma information below for the periods ended June 30, 2016 and 2015 gives effect to the Anchor acquisition as if it had occurred on January 1, 2015. The pro-forma financial information is not necessarily indicative of the results of operations if the acquisition had been effective as of this date.

 

    

Three Months Ended

June 30,

    

Six Months Ended

June 30,

 

(dollars in thousands)

   2016      2015      2016      2015  

Revenue (1)

   $ 203,355       $ 174,238       $ 370,352       $ 346,322   

Income before income taxes

   $ 82,343       $ 32,437       $ 135,958       $ 67,354   

 

(1) Net interest income plus noninterest income.

2016 supplemental pro-forma earnings were adjusted to exclude $7.2 million and $8.6 million of acquisition-related costs incurred during the three and six months ended June 30, 2016, respectively. 2015 supplemental pro-forma earnings were adjusted to include these charges.

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. The customer business relationship intangibles were originally scheduled to 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. The customer business relationship intangibles were originally scheduled to be amortized using an accelerated method over an estimated useful life of 10 years.

 

14


Divestitures

On August 14, 2015, the Company completed its previously announced branch sales. The Company divested 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 $15.6 million in connection with the divestitures, which included a deposit premium of $19.3 million, goodwill allocation of $3.8 million, and $0.9 million of other transaction expenses.

In addition, the Company consolidated 23 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.

On May 31, 2016 the Company completed its previously announced sale of its insurance operations, ONB Insurance Group, Inc. (“ONI”). The Company received approximately $91.8 million in cash resulting in a pre-tax gain of $41.9 million and an after-tax gain of $17.6 million. See Note 17 to the consolidated financial statements for further details on the income tax impact of this sale. Goodwill and intangible assets of approximately $47.5 million were eliminated as part of this transaction. ONI was an ancillary business and did not meet the criteria to be treated as a discontinued operation as defined in Accounting Standards Update 2014-08 “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”.

 

15


NOTE 4 - NET INCOME PER SHARE

The following table reconciles basic and diluted net income per share for the three and six months ended June 30, 2016 and 2015:

 

    

Three Months Ended

June 30,

    

Six Months Ended

June 30,

 

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

   2016      2015      2016      2015  

Basic Earnings Per Share

           

Net income

   $ 39,122       $ 26,156       $ 66,099       $ 47,062   

Weighted average common shares outstanding

     127,508         115,732         120,753         117,128   

Basic Earnings Per Share

   $ 0.31       $ 0.22       $ 0.55       $ 0.40   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted Earnings Per Share

           

Net income

   $ 39,122       $ 26,156       $ 66,099       $ 47,062   

Weighted average common shares outstanding

     127,508         115,732         120,753         117,128   

Effect of dilutive securities:

           

Restricted stock (1)

     425         397         480         409   

Stock options (2)

     40         94         40         97   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding

     127,973         116,223         121,273         117,634   

Diluted Earnings Per Share

   $ 0.31       $ 0.22       $ 0.55       $ 0.40   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 0.1 million shares of restricted stock and restricted stock units at June 30, 2016 were not included in the computation of net income per diluted share for the three months ended June 30, 2016 because the effect would be antidilutive. 0.2 million shares of restricted stock and restricted stock units at June 30, 2016 were not included in the computation of net income per diluted share for the six months ended June 30, 2016 because the effect would be antidilutive. There were no antidilutive shares excluded from the computation of net income for the three or six months ended June 30, 2015.
(2) Options to purchase 0.8 million shares and 0.9 million shares outstanding at June 30, 2016 and 2015, respectively, were not included in the computation of net income per diluted share for the three months ended June 30, 2016 and 2015, 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 0.8 million shares and 0.9 million shares outstanding at June 30, 2016 and 2015, respectively, were not included in the computation of net income per diluted share for the six months ended June 30, 2016 and 2015, 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.

 

16


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 for the three and six months ended June 30, 2016 and 2015:

 

(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 June 30, 2016

          

Balance at April 1, 2016

   $ 6,777      $ (14,174   $ (15,387   $ (6,801   $ (29,585

Other comprehensive income (loss) before reclassifications

     8,208        —          (2,780     —          5,428   

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

     (1,202     307        983        452        540   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

     7,006        307        (1,797     452        5,968   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2016

   $ 13,783      $ (13,867   $ (17,184   $ (6,349   $ (23,617
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended June 30, 2015

          

Balance at April 1, 2015

   $ 9,079      $ (15,373   $ (9,309   $ (8,639   $ (24,242

Other comprehensive income (loss) before reclassifications

     (16,704     —          2,205        —          (14,499

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

     (326     283        272        450        679   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

     (17,030     283        2,477        450        (13,820
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2015

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2016

          

Balance at January 1, 2016

   $ (3,806   $ (14,480   $ (9,276   $ (7,235   $ (34,797

Other comprehensive income (loss) before reclassifications

     19,490        —          (9,680     —          9,810   

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

     (1,901     613        1,772        886        1,370   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

     17,589        613        (7,908     886        11,180   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2016

   $ 13,783      $ (13,867   $ (17,184   $ (6,349   $ (23,617
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2015

          

Balance at January 1, 2015

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

Other comprehensive income (loss) before reclassifications

     (5,189     —          (1,284     —          (6,473

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

     (2,014     686        387        907        (34
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

     (7,203     686        (897     907        (6,507
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2015

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) See table below for details about reclassifications.

 

17


The following table summarize the significant amounts reclassified out of each component of AOCI for the three months ended June 30, 2016 and 2015:

 

Details about AOCI Components

   Amount Reclassified
from AOCI
    

Affected Line Item in the

Statement of Income

     Three Months Ended
June 30,
      

(dollars in thousands)

   2016      2015       

Unrealized gains and losses on available-for-sale securities

   $ 1,856       $ 512       Net securities gains
     (654      (186    Income tax (expense) benefit
  

 

 

    

 

 

    
   $ 1,202       $ 326       Net income
  

 

 

    

 

 

    

Unrealized gains and losses on held-to-maturity securities

   $ (466    $ (430    Interest income/(expense)
     159         147       Income tax (expense) benefit
  

 

 

    

 

 

    
   $ (307    $ (283    Net income
  

 

 

    

 

 

    

Gains and losses on cash flow hedges Interest rate contracts

   $ (1,585    $ (439    Interest income/(expense)
     602         167       Income tax (expense) benefit
  

 

 

    

 

 

    
   $ (983    $ (272    Net income
  

 

 

    

 

 

    

Amortization of defined benefit pension items

        

Actuarial gains/(losses)

   $ (730    $ (725    Salaries and employee benefits
     278         275       Income tax (expense) benefit
  

 

 

    

 

 

    
   $ (452    $ (450    Net income
  

 

 

    

 

 

    

Total reclassifications for the period

   $ (540    $ (679    Net income
  

 

 

    

 

 

    

 

18


The following table summarize the significant amounts reclassified out of each component of AOCI for the six months ended June 30, 2016 and 2015:

 

Details about AOCI Components

   Amount Reclassified
from AOCI
    

Affected Line Item in the

Statement of Income

    

Six Months Ended

June 30,

      

(dollars in thousands)

   2016      2015       

Unrealized gains and losses on available-for-sale securities

   $ 2,962       $ 3,195       Net securities gains
     (1,061      (1,181    Income tax (expense) benefit
  

 

 

    

 

 

    
   $ 1,901       $ 2,014       Net income
  

 

 

    

 

 

    

Unrealized gains and losses on held-to-maturity securities

   $ (931    $ (767    Interest income/(expense)
     318         81       Income tax (expense) benefit
  

 

 

    

 

 

    
   $ (613    $ (686    Net income
  

 

 

    

 

 

    

Gains and losses on cash flow hedges Interest rate contracts

   $ (2,858    $ (625    Interest income/(expense)
     1,086         238       Income tax (expense) benefit
  

 

 

    

 

 

    
   $ (1,772    $ (387    Net income
  

 

 

    

 

 

    

Amortization of defined benefit pension items

        

Actuarial gains/(losses)

   $ (1,430    $ (1,463    Salaries and employee benefits
     544         556       Income tax (expense) benefit
  

 

 

    

 

 

    
   $ (886    $ (907    Net income
  

 

 

    

 

 

    

Total reclassifications for the period

   $ (1,370    $ 34       Net income
  

 

 

    

 

 

    

 

19


NOTE 6 - INVESTMENT SECURITIES

The following table summarizes the amortized cost and fair value of the available-for-sale and held-to-maturity investment securities portfolio at June 30, 2016 and December 31, 2015 and the corresponding amounts of unrealized gains and losses therein:

 

     Amortized      Unrealized      Unrealized      Fair  

(dollars in thousands)

   Cost      Gains      Losses      Value  

June 30, 2016

           

Available-for-Sale

           

U.S. Treasury

   $ 11,963       $ 306       $ —         $ 12,269   

U.S. government-sponsored entities and agencies

     537,728         3,264         (217      540,775   

Mortgage-backed securities - Agency

     1,323,606         15,180         (2,181      1,336,605   

States and political subdivisions

     398,727         18,579         (143      417,163   

Pooled trust preferred securities

     17,059         —           (10,339      6,720   

Other securities

     338,094         3,559         (6,284      335,369   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 2,627,177       $ 40,888       $ (19,164    $ 2,648,901   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held-to-Maturity

           

U.S. government-sponsored entities and agencies

   $ 141,220       $ 1,928       $ —         $ 143,148   

Mortgage-backed securities - Agency

     13,200         523         —           13,723   

States and political subdivisions

     711,537         71,447         —           782,984   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held-to-maturity securities

   $ 865,957       $ 73,898       $ —         $ 939,855   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

           

Available-for-Sale

           

U.S. Treasury

   $ 11,968       $ 190       $ (8    $ 12,150   

U.S. government-sponsored entities and agencies

     615,578         1,495         (3,523      613,550   

Mortgage-backed securities - Agency

     1,065,936         10,970         (10,545      1,066,361   

States and political subdivisions

     375,671         11,960         (335      387,296   

Pooled trust preferred securities

     17,320         —           (9,420      7,900   

Other securities

     337,590         1,151         (7,777      330,964   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 2,424,063       $ 25,766       $ (31,608    $ 2,418,221   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held-to-Maturity

           

U.S. government-sponsored entities and agencies

   $ 142,864       $ 2,899       $ —         $ 145,763   

Mortgage-backed securities - Agency

     16,042         562         —           16,604   

States and political subdivisions

     713,205         53,848         (3      767,050   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held-to-maturity securities

   $ 872,111       $ 57,309       $ (3    $ 929,417   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

20


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 six months ended June 30, 2016 and 2015:

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  

(dollars in thousands)

   2016      2015      2016      2015  

Proceeds from sales of available-for-sale securities

   $ 30,801       $ 26,319       $ 107,451       $ 196,584   

Proceeds from calls of available-for-sale securities

     239,998         161,408         364,309         213,002   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 270,799       $ 187,727       $ 471,760       $ 409,586   
  

 

 

    

 

 

    

 

 

    

 

 

 

Realized gains on sales of available-for-sale securities

   $ 1,491       $ 316       $ 3,151       $ 2,797   

Realized gains on calls of available-for-sale securities

     126         212         370         380   

Realized losses on sales of available-for-sale securities

     (1      (22      (447      (47

Realized losses on calls of available-for-sale securities

     (1      (12      (88      (15

Other securities gains (losses) (1)

     241         18         (24      80   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net securities gains

   $ 1,856       $ 512       $ 2,962       $ 3,195   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

During the six months ended June 30, 2015, the Company sold a municipal bond that was classified as held-to-maturity due to credit deterioration. Proceeds from the sale were $0.8 million and resulted in a gain of $52 thousand.

Trading securities, which consist of mutual funds held in trusts associated with deferred compensation plans for former directors and executives, are recorded at fair value and totaled $4.8 million at June 30, 2016 and $3.9 million at December 31, 2015.

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.

 

     At June 30, 2016  
(dollars in thousands)                  Weighted  
   Amortized      Fair      Average  

Maturity

   Cost      Value      Yield  

Available-for-Sale

        

Within one year

   $ 36,566       $ 36,649         1.54

One to five years

     400,424         405,665         2.00   

Five to ten years

     339,108         344,653         2.68   

Beyond ten years

     1,851,079         1,861,934         2.34   
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,627,177       $ 2,648,901         2.32 % 
  

 

 

    

 

 

    

 

 

 

Held-to-Maturity

        

Within one year

   $ 15,011       $ 15,075         5.57 % 

One to five years

     49,934         52,935         4.53   

Five to ten years

     220,589         231,585         3.79   

Beyond ten years

     580,423         640,260         5.49   
  

 

 

    

 

 

    

 

 

 

Total

   $ 865,957       $ 939,855         5.00 % 
  

 

 

    

 

 

    

 

 

 

 

21


The following table summarizes the investment securities with unrealized losses at June 30, 2016 and December 31, 2015 by aggregated major security type and length of time in a continuous unrealized loss position:

 

     Less than 12 months     12 months or longer     Total  
     Fair      Unrealized     Fair      Unrealized     Fair      Unrealized  

(dollars in thousands)

   Value      Losses     Value      Losses     Value      Losses  

June 30, 2016

               

Available-for-Sale

               

U.S. government-sponsored entities and agencies

   $ 91,640       $ (217   $ —         $ —        $ 91,640       $ (217

Mortgage-backed securities - Agency

     156,600         (281     104,843         (1,900     261,443         (2,181

States and political subdivisions

     1,064         (3     5,692         (140     6,756         (143

Pooled trust preferred securities

     —           —          6,720         (10,339     6,720         (10,339

Other securities

     54,406         (877     118,291         (5,407     172,697         (6,284
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available-for-sale

   $ 303,710       $ (1,378   $ 235,546       $ (17,786   $ 539,256       $ (19,164
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2015

               

Available-for-Sale

               

U.S. Treasury

   $ 6,505       $ (8   $ —         $ —        $ 6,505       $ (8

U.S. government-sponsored entities and agencies

     160,751         (1,492     122,581         (2,031     283,332         (3,523

Mortgage-backed securities - Agency

     256,359         (3,444     239,047         (7,101     495,406         (10,545

States and political subdivisions

     38,373         (161     5,137         (174     43,510         (335

Pooled trust preferred securities

     —           —          7,900         (9,420     7,900         (9,420

Other securities

     156,604         (2,717     126,661         (5,060     283,265         (7,777
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available-for-sale

   $ 618,592       $ (7,822   $ 501,326       $ (23,786   $ 1,119,918       $ (31,608
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Held-to-Maturity

               

States and political subdivisions

   $ 2,026       $ (3   $ —         $ —        $ 2,026       $ (3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total held-to-maturity

   $ 2,026       $ (3   $ —         $ —        $ 2,026       $ (3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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.

 

22


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 six months ended June 30, 2016 or 2015.

As of June 30, 2016, Old National’s securities portfolio consisted of 1,758 securities, 94 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 June 30, 2016, our securities portfolio contained three pooled trust preferred securities with a fair value of $6.7 million and unrealized losses of $10.3 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 $3.0 million at June 30, 2016. This security was rated A3 at inception, but is rated D at June 30, 2016. 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 six months ended June 30, 2016 and 2015, our model indicated no other-than-temporary-impairment losses on this security. At June 30, 2016, we had no intent to sell any securities that were 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 $6.5 million and unrealized losses of $7.4 million at June 30, 2016 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 six months ended June 30, 2016 and 2015, our analysis indicated no OTTI on these securities.

 

23


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.

 

                                    Actual     Expected     Excess  
                                              Deferrals     Defaults as     Subordination  
                                        # of Issuers     and Defaults     a % of     as a % of  
Trust preferred securities         Lowest                 Unrealized     Realized     Currently     as a % of     Remaining     Current  
June 30, 2016         Credit     Amortized     Fair     Gain/     Losses     Performing/     Original     Performing     Performing  

(dollars in thousands)

  Class     Rating (1)     Cost     Value     (Loss)     2016     Remaining     Collateral     Collateral     Collateral  

Pooled trust preferred securities:

  

Reg Div Funding 2004

    B-2        D      $ 3,168      $ 204      $ (2,964   $ —          23/39        33.3     7.4     0.0

Pretsl XXVII LTD

    B        B        4,422        2,017        (2,405     —          33/43        18.9     4.2     49.4

Trapeza Ser 13A

    A2A        BBB        9,469        4,499        (4,970     —          50/57        8.9     4.9     43.1
     

 

 

   

 

 

   

 

 

   

 

 

         
        17,059        6,720        (10,339     —             

Single Issuer trust preferred securities:

  

Fleet Cap Tr V (BOA)

      BB+        3,393        2,835        (558     —             

JP Morgan Chase Cap XIII

      BBB-        4,762        4,000        (762     —             

NB-Global

      BB+        777        810        33        —             

Chase Cap II

      BBB-        815        840        25        —             
     

 

 

   

 

 

   

 

 

   

 

 

         
        9,747        8,485        (1,262     —             

Total

      $ 26,806      $ 15,205      $ (11,601   $ —             
     

 

 

   

 

 

   

 

 

   

 

 

         

 

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

NOTE 7 - LOANS HELD FOR SALE

Mortgage loans held for immediate sale in the secondary market were $44.4 million at June 30, 2016, compared to $13.8 million at December 31, 2015. Residential loans that Old National has originated with the intent 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). Beginning with the inception of an in-house servicing unit in the third quarter of 2014, conventional mortgage production is sold on a servicing retained basis. Certain loans, such as government guaranteed mortgage loans are sold on servicing released basis.

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. When the branch divestitures closed during the third quarter of 2015, these loans were valued at $193.6 million, resulting in a gain of $0.1 million. At June 30, 2016, 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, Kentucky, Michigan, and Wisconsin. Old National has no concentration of commercial or commercial real estate loans in any single industry exceeding 10% of its portfolio.

 

24


The composition of loans by lending classification was as follows:

 

     June 30,      December 31,  

(dollars in thousands)

   2016      2015  

Commercial (1)

   $ 1,893,700       $ 1,804,615   

Commercial real estate:

     

Construction

     263,496         185,449   

Other

     2,680,029         1,662,372   

Residential real estate

     2,099,770         1,644,614   

Consumer credit:

     

Heloc

     473,550         359,954   

Auto

     1,145,198         1,050,336   

Other

     274,415         133,478   

Covered loans

     —           107,587   
  

 

 

    

 

 

 

Total loans

     8,830,158         6,948,405   

Allowance for loan losses

     (51,804      (51,296

Allowance for loan losses - covered loans

     —           (937
  

 

 

    

 

 

 

Net loans

   $ 8,778,354       $ 6,896,172   
  

 

 

    

 

 

 

 

(1) Includes direct finance leases of $12.7 million at June 30, 2016 and $14.4 million at December 31, 2015.

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. 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 independent appraisal reviews, sensitivity analysis of absorption and lease rates, financial analysis of the developers and property owners, and feasibility studies, if available. 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.

 

25


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. We assumed student loans in the acquisition of Anchor in May 2016. As of June 30, 2016, student loans totaled $83.3 million and are guaranteed by the government on average from 97% to 100%. 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 or other collateral 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

Old National entered into an agreement with the FDIC on June 22, 2016 to terminate its loss share agreements. As a result of the termination of the loss share agreements, the remaining loans that were covered by the loss share arrangements were reclassified to noncovered loans effective June 22, 2016. All future gains and losses associated with covered loans will be recognized entirely by Old National.

Prior to the termination of the loss share agreements, certain loans acquired from the FDIC were classified as covered loans. Covered loans were subject to loss share agreements whereby Old National was 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. 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.

We utilize a probability of default (“PD”) and 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 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. An allowance for loan losses will be established for any subsequent credit deterioration or adverse changes in expected cash flows.

 

26


Old National’s activity in the allowance for loan losses for the three and six months ended June 30, 2016 and 2015 is as follows:

 

           Commercial                           

(dollars in thousands)

   Commercial     Real Estate     Residential     Consumer     Unallocated      Total  

Three Months Ended June 30, 2016

             

Balance at April 1, 2016

   $ 25,121      $ 15,771      $ 1,749      $ 8,059      $ —         $ 50,700   

Charge-offs

     (432     (783     (80     (1,382     —           (2,677

Recoveries

     876        547        187        852        —           2,462   

Provision

     (1,409     2,673        (397     452        —           1,319   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at June 30, 2016

   $ 24,156      $ 18,208      $ 1,459      $ 7,981      $ —         $ 51,804   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Three Months Ended June 30, 2015

             

Balance at April 1, 2015

   $ 24,703      $ 13,807      $ 2,919      $ 7,449      $ —         $ 48,878   

Charge-offs

     (1,872     (514     (22     (1,494     —           (3,902

Recoveries

     789        1,009        59        1,087        —           2,944   

Provision

     (186     2,023        (375     809        —           2,271   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at June 30, 2015

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Six Months Ended June 30, 2016

             

Balance at January 1, 2016

   $ 26,347      $ 15,993      $ 2,051      $ 7,842      $ —         $ 52,233   

Charge-offs

     (1,959     (1,062     (220     (3,378     —           (6,619

Recoveries

     1,694        1,387        213        1,486        —           4,780   

Provision

     (1,926     1,890        (585     2,031        —           1,410   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at June 30, 2016

   $ 24,156      $ 18,208      $ 1,459      $ 7,981      $ —         $ 51,804   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Six Months Ended June 30, 2015

             

Balance at January 1, 2015

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

Charge-offs

     (2,421     (101     (396     (3,098     —           (6,016

Recoveries

     2,564        1,473        87        1,962        —           6,086   

Provision

     2,621        (2,395     (72     2,118        —           2,272   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at June 30, 2015

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

27


The following table provides Old National’s recorded investment in financing receivables by portfolio segment at June 30, 2016 and December 31, 2015 and other information regarding the allowance:

 

          Commercial                          

(dollars in thousands)

  Commercial     Real Estate     Residential     Consumer     Unallocated     Total  

June 30, 2016

           

Allowance for loan losses:

           

Individually evaluated for impairment

  $ 7,489      $ 3,949      $ —        $ —        $ —        $ 11,438   

Collectively evaluated for impairment

    16,374        14,082        1,446        7,781        —          39,683   

Loans acquired with deteriorated credit quality

    293        177        13        200        —          683   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance for loan losses

  $ 24,156      $ 18,208      $ 1,459      $ 7,981      $ —        $ 51,804   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and leases outstanding:

           

Individually evaluated for impairment

  $ 52,132      $ 60,359      $ —        $ —        $ —        $ 112,491   

Collectively evaluated for impairment

    1,839,760        2,830,350        2,084,652        1,882,832        —          8,637,594   

Loans acquired with deteriorated credit quality

    1,808        52,816        15,118        10,331        —          80,073   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases outstanding

  $ 1,893,700      $ 2,943,525      $ 2,099,770      $ 1,893,163      $ —        $ 8,830,158   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2015

           

Allowance for loan losses:

           

Individually evaluated for impairment

  $ 7,467      $ 4,021      $ —        $ —        $ —        $ 11,488   

Collectively evaluated for impairment

    18,295        11,439        2,038        7,614        —          39,386   

Loans acquired with deteriorated credit quality

    247        533        13        70        —          863   

Covered loans acquired with deteriorated credit quality

    338        —          —          158        —          496   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowance for loan losses

  $ 26,347      $ 15,993      $ 2,051      $ 7,842      $ —        $ 52,233   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and leases outstanding:

           

Individually evaluated for impairment

  $ 60,959      $ 41,987      $ —        $ —        $ —        $ 102,946   

Collectively evaluated for impairment

    1,750,397        1,779,062        1,644,631        1,590,288        —          6,764,378   

Loans acquired with deteriorated credit quality

    691        28,499        127        3,925        —          33,242   

Covered loans acquired with deteriorated credit quality

    2,893        19,424        16,577        8,945        —          47,839   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans and leases outstanding

  $ 1,814,940      $ 1,868,972      $ 1,661,335      $ 1,603,158      $ —        $ 6,948,405   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Credit Quality

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

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

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

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

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

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

As of June 30, 2016 and December 31, 2015, the risk category of commercial and commercial real estate loans by class of loans is as follows:

 

(dollars in thousands)                  Commercial      Commercial  
                   Real Estate -      Real Estate -  
Corporate Credit Exposure    Commercial      Construction      Other  
Credit Risk Profile by    June 30,      December 31,      June 30,      December 31,      June 30,      December 31,  
Internally Assigned Grade    2016      2015 (1)      2016      2015 (1)      2016      2015 (1)  

Grade:

                 

Pass

   $ 1,774,857       $ 1,672,672       $ 256,427       $ 182,701       $ 2,484,795       $ 1,508,309   

Criticized

     38,867         55,570         4,014         3,300         64,005         75,477   

Classified - substandard

     25,422         24,723         1,572         1,857         56,982         49,091   

Classified - nonaccrual

     52,226         58,469         1,483         830         64,338         39,521   

Classified - doubtful

     2,328         3,506         —           —           9,909         7,886   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,893,700       $ 1,814,940       $ 263,496       $ 188,688       $ 2,680,029       $ 1,680,284   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes loans previously covered by loss share agreements with the FDIC.

Other commercial real estate as of June 30, 2016 in the table above includes loans attributable to the acquisition of Anchor totaling $9.4 million in the criticized category, $3.6 million in the classified – substandard category, and $24.8 million in the classified – nonaccrual category.

 

29


Old National considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, Old National also evaluates credit quality based on the aging status of the loan and by payment activity. The following table presents the recorded investment in residential and consumer loans based on payment activity as of June 30, 2016 and December 31, 2015:

 

     Residential      Consumer  

(dollars in thousands)

          Heloc      Auto      Other  

June 30, 2016

           

Performing

   $ 2,082,585       $ 469,711       $ 1,143,932       $ 266,649   

Nonperforming

     17,185         3,839         1,266         7,766   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,099,770       $ 473,550       $ 1,145,198       $ 274,415   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015 (1)

           

Performing

   $ 1,645,293       $ 410,243       $ 1,048,763       $ 138,031   

Nonperforming

     16,042         3,051         1,573         1,497   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,661,335       $ 413,294       $ 1,050,336       $ 139,528   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes loans previously covered by loss share agreements with the FDIC.

Other consumer loans as of June 30, 2016 in the table above includes loans attributable to the acquisition of Anchor totaling $6.1 million in the nonperforming category, the majority of which are student loans that are guaranteed by the government on average from 97% to 100%.

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.

 

30


The following table shows Old National’s impaired loans as of June 30, 2016 and December 31, 2015, respectively. Only purchased loans 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
 

June 30, 2016

        

With no related allowance recorded:

        

Commercial

   $ 36,975       $ 34,584       $ —     

Commercial Real Estate - Other

     41,334         45,139         —     

Residential

     1,353         1,374         —     

Consumer

     904         1,041         —     

With an allowance recorded:

        

Commercial

     18,903         18,905         7,489   

Commercial Real Estate - Other

     15,279         15,353         3,949   

Residential

     1,105         1,105         55   

Consumer

     2,785         2,785         139   
  

 

 

    

 

 

    

 

 

 

Total

   $ 118,638       $ 120,286       $ 11,632   
  

 

 

    

 

 

    

 

 

 

December 31, 2015 (1)

        

With no related allowance recorded:

        

Commercial

   $ 40,414       $ 41,212       $ —     

Commercial Real Estate - Other

     26,998         30,264         —     

Residential

     1,383         1,422         —     

Consumer

     1,201         1,305         —     

With an allowance recorded:

        

Commercial

     16,377         16,483         7,111   

Commercial Real Estate - Construction

     237         237         6   

Commercial Real Estate - Other

     14,752         14,802         4,015   

Residential

     985         985         49   

Consumer

     2,525         2,525         126   
  

 

 

    

 

 

    

 

 

 

Total

   $ 104,872       $ 109,235       $ 11,307   
  

 

 

    

 

 

    

 

 

 

 

(1) Does not include $4.2 million of loans that were previously covered by loss share agreements with the FDIC.

 

31


The average balance of impaired loans and interest income recognized on impaired loans during the three months ended June 30, 2016 and 2015 are included in the table below.

 

(dollars in thousands)

   Average
Recorded
Investment
     Interest
Income
Recognized (1)
 

Three Months Ended June 30, 2016

     

With no related allowance recorded:

     

Commercial

   $ 32,951       $ 33   

Commercial Real Estate - Other

     34,344         162   

Residential

     1,348         2   

Consumer

     871         1   

With an allowance recorded:

     

Commercial

     19,546         79   

Commercial Real Estate - Construction

     116         —     

Commercial Real Estate - Other

     12,230         134   

Residential

     1,060         —     

Consumer

     2,781         —     
  

 

 

    

 

 

 

Total

   $ 105,247       $ 411   
  

 

 

    

 

 

 

Three Months Ended June 30, 2015 (2)

     

With no related allowance recorded:

     

Commercial

   $ 30,769       $ 85   

Commercial Real Estate - Construction

     2,107         1   

Commercial Real Estate - Other

     38,758         189   

Residential

     920         1   

Consumer

     869         1   

With an allowance recorded:

     

Commercial

     25,069         355   

Commercial Real Estate - Construction

     117         —     

Commercial Real Estate - Other

     10,274         121   

Residential

     1,469         2   

Consumer

     1,518         29   
  

 

 

    

 

 

 

Total

   $ 111,870       $ 784   
  

 

 

    

 

 

 

 

(1) The Company does not record interest on nonaccrual loans until principal is recovered.
(2) Does not include $4.7 million of loans that were previously covered by loss share agreements with the FDIC.

 

32


The average balance of impaired loans and interest income recognized on impaired loans during the six months ended June 30, 2016 and 2015 are included in the table below.

 

(dollars in thousands)

   Average
Recorded
Investment
     Interest
Income
Recognized (1)
 

Six Months Ended June 30, 2016

     

With no related allowance recorded:

     

Commercial

   $ 38,029       $ 61   

Commercial Real Estate - Other

     38,197         257   

Residential

     1,359         2   

Consumer

     981         2   

With an allowance recorded:

     

Commercial

     17,641         92   

Commercial Real Estate - Construction

     119         —     

Commercial Real Estate - Other

     15,016         182   

Residential

     1,035         38   

Consumer

     2,695         37   
  

 

 

    

 

 

 

Total

   $ 115,072       $ 671   
  

 

 

    

 

 

 

Six Months Ended June 30, 2015 (2)

     

With no related allowance recorded:

     

Commercial

   $ 31,505       $ 127   

Commercial Real Estate - Construction

     2,025         4   

Commercial Real Estate - Other

     32,402         274   

Residential

     761         1   

Consumer

     824         2   

With an allowance recorded:

     

Commercial

     21,359         403   

Commercial Real Estate - Construction

     49         —     

Commercial Real Estate - Other

     13,980         122   

Residential

     1,469         64   

Consumer

     1,568         49   
  

 

 

    

 

 

 

Total

   $ 105,942       $ 1,046   
  

 

 

    

 

 

 

 

(1) The Company does not record interest on nonaccrual loans until principal is recovered.
(2) Does not include $4.7 million of loans that were previously covered by loss share agreements with the FDIC.

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 may be returned to accrual status when all the principal and interest amounts contractually due are brought current, remain current for a prescribed period, 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 loan loss provision or prospective yield adjustments.

 

33


Old National’s past due financing receivables as of June 30, 2016 and December 31, 2015 are as follows:

 

(dollars in thousands)

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

June 30, 2016

                 

Commercial

   $ 496       $ 227       $ 175       $ 54,554       $ 55,452       $ 1,838,248   

Commercial Real Estate:

                 

Construction

     —           —           —           1,483         1,483         262,013   

Other

     1,779         —           —           74,247         76,026         2,604,003   

Residential

     14,221         1,726         101         17,185         33,233         2,066,537   

Consumer:

                 

Heloc

     1,286         220         240         3,839         5,585         467,965   

Auto

     2,962         684         104         1,266         5,016         1,140,182   

Other

     7,251         3,119         50         7,766         18,186         256,229   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 27,995       $ 5,976       $ 670       $ 160,340       $ 194,981       $ 8,635,177   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

                 

Commercial

   $ 802       $ 100       $ 565       $ 57,536       $ 59,003       $ 1,745,612   

Commercial Real Estate:

                 

Construction

     —           —           —           749         749         184,700   

Other

     438         135         —           46,601         47,174         1,615,198   

Residential

     9,300         2,246         114         14,953         26,613         1,618,001   

Consumer:

                 

Heloc

     283         402         —           2,369         3,054         356,900   

Auto

     3,804         730         202         1,573         6,309         1,044,027   

Other

     830         165         25         1,256         2,276         131,202   

Covered loans

     809         312         10         7,336         8,467         99,120   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 16,266       $ 4,090       $ 916       $ 132,373       $ 153,645       $ 6,794,760   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loan Participations

Old National has loan participations, which qualify as participating interests, with other financial institutions. At June 30, 2016, these loans totaled $392.2 million, of which $209.6 million had been sold to other financial institutions and $182.6 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.

 

34


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. Old National charges 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 typically written down to its collateral value less selling costs.

The following table presents activity in TDRs for the six months ended June 30, 2016 and 2015:

 

(dollars in thousands)

   Commercial     Commercial
Real Estate
    Residential     Consumer     Total  

Six Months Ended June 30, 2016

          

Balance at January 1, 2016

   $ 23,354      $ 14,602      $ 2,693      $ 3,602      $ 44,251   

(Charge-offs)/recoveries

     (742     108        42        (23     (615

Payments

     (10,819     (4,035     (462     (425     (15,741

Additions

     11,233        10,581        335        385        22,534   

Other

     1,251        173        —          —          1,424   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2016

   $ 24,277      $ 21,429      $ 2,608      $ 3,539      $ 51,853   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2015

          

Balance at January 1, 2015

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

(Charge-offs)/recoveries

     574        648        (15     (27     1,180   

Payments

     (3,505     (3,135     (85     (320     (7,045

Additions

     5,573        3,321        419        681        9,994   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2015

   $ 17,847      $ 16,060      $ 2,382      $ 2,793      $ 39,082   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Approximately $38.1 million of the TDRs at June 30, 2016 were included with nonaccrual loans, compared to $30.0 million at December 31, 2015. Old National has allocated specific reserves to customers whose loan terms have been modified in TDRs totaling $5.6 million at June 30, 2016 and $2.3 million at December 31, 2015. As of June 30, 2016, Old National had committed to lend an additional $4.2 million to customers with outstanding loans that are classified as TDRs.

 

35


The pre-modification and post-modification outstanding recorded investments of loans modified as TDRs during the six months ended June 30, 2016 and 2015 are the same except for when the loan modifications involve the forgiveness of principal. The following table presents loans by class modified as TDRs that occurred during the six months ended June 30, 2016 and 2015:

 

(dollars in thousands)

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

Six Months Ended June 30, 2016

        

Troubled Debt Restructuring:

        

Commercial

     16       $ 11,233       $ 10,681   

Commercial Real Estate - Other

     9         10,581         10,581   

Residential

     3         335         335   

Consumer

     8         385         385   
  

 

 

    

 

 

    

 

 

 

Total

     36       $ 22,534       $ 21,982   
  

 

 

    

 

 

    

 

 

 

Six Months Ended June 30, 2015

        

Troubled Debt Restructuring:

        

Commercial

     18       $ 5,573       $ 5,573   

Commercial Real Estate - Construction

     5         1,162         1,162   

Commercial Real Estate - Other

     14         2,159         2,159   

Residential

     3         419         419   

Consumer

     18         681         681   
  

 

 

    

 

 

    

 

 

 

Total

     58       $ 9,994       $ 9,994   
  

 

 

    

 

 

    

 

 

 

The TDRs that occurred during the six months ended June 30, 2016 decreased the allowance for loan losses by $1.2 million due to an improvement in specific reserves on a large commercial loan and resulted in $0.6 million of charge-offs during the six months ended June 30, 2016. The TDRs that occurred during the six months ended June 30, 2015 resulted in immaterial changes in the allowance for loan losses and charge-offs during the six months ended June 30, 2015.

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

There were 10 commercial loans and 3 commercial real estate loans totaling $0.8 million that were modified as TDRs within the preceding twelve months, and for which there was a payment default during the six months ended June 30, 2016.

There were three commercial loans and four commercial real estate loans totaling $0.5 million that were modified as TDRs within the preceding twelve months, and for which there was a payment default during the six months ended June 30, 2015.

The terms of certain other loans were modified during the six months ended June 30, 2016 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 the delay in a payment.

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

 

36


for individually. If the purchased credit impaired loan is being accounted for as part of a pool, it will not be removed from the pool. As of June 30, 2016, 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, guidance also permits for loans to be removed from TDR status when subsequently restructured 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 Credit Impaired Loans (“PCI”)

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 loans that meet the criteria of ASC 310-30 treatment, the carrying amount is as follows:

 

(dollars in thousands)

   June 30,
2016
     December 31,
2015 (1)
 

Commercial

   $ 1,808       $ 3,584   

Commercial real estate

     52,816         47,923   

Residential

     15,118         16,704   

Consumer

     10,331         12,870   
  

 

 

    

 

 

 

Carrying amount

     80,073         81,081   

Allowance for loan losses

     (683      (1,359
  

 

 

    

 

 

 

Carrying amount, net of allowance

   $ 79,390       $ 79,722   
  

 

 

    

 

 

 

 

(1) Includes loans previously covered by loss share agreements with the FDIC.

The outstanding balance of loans accounted for under ASC 310-30, including contractual principal, interest, fees and penalties, was $323.4 million at June 30, 2016 and $321.5 million at December 31, 2015.

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 $13.0 million during the six months ended June 30, 2016 and $15.5 million during the six months ended June 30, 2015. Improvement in cash flow expectations has resulted in a reclassification from nonaccretable difference to accretable yield as shown in the table below.

 

37


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

 

(dollars in thousands)

   Acquisitions
Prior to
2015 (1)
     Founders (2)      Anchor (2)      Total  

Balance at January 1, 2016

   $ 42,498       $ 2,812       $ —         $ 45,310   

New loans purchased

     —           —           3,217         3,217   

Accretion of income

     (12,137      (505      (348      (12,990

Reclassifications from (to) nonaccretable difference

     5,191         428         —           5,619   

Disposals/other adjustments

     487         —           43         530   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at June 30, 2016

   $ 36,039       $ 2,735       $ 2,912       $ 41,686   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes loans previously covered by loss share agreements with the FDIC.
(2) Old National acquired Founders effective January 1, 2015 and Anchor effective May 1, 2016.

Included in Old National’s allowance for loan losses is $0.7 million related to the purchased loans disclosed above at June 30, 2016, compared to $1.4 million at December 31, 2015.

PCI loans purchased during the six months ended June 30, 2016 and 2015 for which it was probable at acquisition that all contractually required payments would not be collected were as follows:

 

(dollars in thousands)

   Founders      Anchor  

Contractually required payments

   $ 11,103       $ 29,544   

Nonaccretable difference

     (2,684      (6,153
  

 

 

    

 

 

 

Cash flows expected to be collected at acquisition

     8,419         23,391   

Accretable yield

     (1,812      (3,217
  

 

 

    

 

 

 

Fair value of acquired loans at acquisition

   $ 6,607       $ 20,174   
  

 

 

    

 

 

 

Income would not be recognized on certain purchased loans if Old National could not 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

Old National entered into an agreement with the FDIC on June 22, 2016 to terminate its loss share agreements. As a result of the termination of the loss share agreements, the remaining loans that were covered by the loss share arrangements were reclassified to noncovered loans effective June 22, 2016. All future gains and losses associated with covered loans will be recognized entirely by Old National.

Prior to the termination of the loss share agreements, certain loans acquired from the FDIC were classified as covered loans. Covered loans were subject to loss share agreements. Under the early termination agreement, the FDIC made a final payment of $8.7 million to Old National as consideration for the early termination. After the elimination of the remaining FDIC indemnification asset and the payment of settlement charges, Old National realized a pre-tax gain of $0.2 million during the three months ended June 30, 2016. The carrying amount of covered loans was $95.4 million at March 31, 2016.

 

38


The following table is a roll-forward of covered acquired impaired loans accounted for under ASC 310-30 for the six months ended June 30, 2016 and 2015. As a result of the termination of the loss share agreements, the remaining loans that were covered by the loss share arrangements were reclassified to noncovered loans effective June 22, 2016.

 

(dollars in thousands)

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

Six Months Ended June 30, 2016

           

Balance at January 1, 2016

   $ 69,857       $ (4,729    $ (17,785    $ 47,343   

Principal reductions and interest payments

     (18,195      (347      —           (18,542

Accretion of loan discount

     —           —           7,196         7,196   

Changes in contractual and expected cash flows due to remeasurement

     4,431         631         (4,927      135   

Removals due to foreclosure or sale

     (1,948      136         263         (1,549

Loans removed from loss share coverage

     (54,145      4,309         15,253         (34,583
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at June 30, 2016

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Six Months Ended June 30, 2015

           

Balance at January 1, 2015

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

Principal reductions and interest payments

     (18,178      (814      —           (18,992

Accretion of loan discount

     —           —           7,259         7,259   

Changes in contractual and expected cash flows due to remeasurement

     (3,633      4,412         (733      46   

Removals due to foreclosure or sale

     (506      162         (143      (487
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at June 30, 2015

   $ 102,492       $ (8,254    $ (29,359    $ 64,879   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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.

Prior to the termination of the loss share agreements, we estimated the 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 evaluated at each balance sheet date whether the present value of loans determined using the effective interest rates had decreased and if so, recognized a provision for loan losses. For any increases in cash flows expected to be collected, we adjusted 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 were offset as Old National would recognize a corresponding change in cash flows expected from the indemnification asset prospectively in a similar manner. The indemnification asset was adjusted over the shorter of the life of the underlying investment or the indemnification agreement.

The loss share receivable represented actual incurred losses where reimbursement had not yet been received from the FDIC. The indemnification asset represented future cash flows we expected to collect from the FDIC under the loss sharing agreements and the amount related to the estimated improvements in cash flow expectations that were being amortized over the same period for which those improved cash flows were being accreted into income.

 

39


The following table shows a detailed analysis of the FDIC loss sharing asset for the six months ended June 30, 2016 and 2015. As a result of the termination of the loss share agreements on June 22, 2016, the table below reflects the write-off of the remaining FDIC loss sharing asset.

 

(dollars in thousands)

   2016      2015  

Balance at January 1,

   $ 9,030       $ 20,603   

Adjustments not reflected in income:

     

Cash received from the FDIC

     (10,000      (2,231

Other

     512         612   

Adjustments reflected in income:

     

(Amortization) accretion

     (816      (3,830

Higher (lower) loan loss expectations

     (13      109   

Impairment/(recovery) of value and net (gain)/loss on sales of other real estate

     1,062         1,212   

Gain as a result of the early termination agreement with the FDIC, effective June 22, 2016

     225         —     
  

 

 

    

 

 

 

Balance at June 30,

   $ —         $ 16,475   
  

 

 

    

 

 

 

As a result of the termination of the loss share agreements, all future gains and losses associated with covered assets will be recognized entirely by Old National since the FDIC will no longer be sharing in these gains and losses.

NOTE 10 – OTHER REAL ESTATE OWNED

The following table presents activity in other real estate owned for the six months ended June 30, 2016 and 2015:

 

    Other Real Estate     Other Real Estate  

(dollars in thousands)

  Owned (1)     Owned, Covered  

Six Months Ended June 30, 2016

   

Balance at January 1, 2016

  $ 7,594      $ 4,904   

Additions (2)

    20,251        2,093   

Sales

    (7,060     (1,454

(Impairment)/recovery of value

    (202     (1,872

Reclassification due to termination of the loss share agreements, effective June 22, 2016

    3,671        (3,671
 

 

 

   

 

 

 

Balance at June 30, 2016

  $ 24,254      $ —     
 

 

 

   

 

 

 

Six Months Ended June 30, 2015

   

Balance at January 1, 2015

  $ 7,241      $ 9,121   

Additions

    4,579        429   

Sales

    (2,153     (4,580

(Impairment)/recovery of value

    (279     (217
 

 

 

   

 

 

 

Balance at June 30, 2015

  $ 9,388      $ 4,753   
 

 

 

   

 

 

 

 

(1) Includes repossessed personal property of $0.2 million at June 30, 2016 and $0.3 million at June 30, 2015.
(2) Includes other real estate owned of $18.2 million acquired from Anchor in May 2016.

At June 30, 2016, foreclosed residential real estate property included in the table above totaled $1.0 million. At June 30, 2016, consumer mortgage loans collateralized by residential real property that were in the process of foreclosure totaled $4.0 million.

Old National entered into an agreement with the FDIC on June 22, 2016 to terminate its loss share agreements. As a result of the termination of the loss share agreements, the remaining other real estate owned that was covered by the loss share arrangements were reclassified to noncovered other real estate owned effective June 22, 2016.

 

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Prior to the termination of the loss share agreements, covered OREO expenses and valuation write-downs were recorded in the noninterest expense section of the consolidated statements of income. Under the loss sharing agreements, the FDIC reimbursed 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. The reimbursable portion of these expenses was recorded in the FDIC indemnification asset. Changes in the FDIC indemnification asset were recorded in the noninterest income section of the consolidated statements of income. As a result of the termination of the loss share agreements, all future gains and losses associated with covered assets will be recognized entirely by Old National since the FDIC will no longer be sharing in these gains and losses.

NOTE 11 - GOODWILL AND OTHER INTANGIBLE ASSETS

The following table shows the changes in the carrying amount of goodwill for the six months ended June 30, 2016 and 2015:

 

(dollars in thousands)

   2016      2015  

Balance at January 1,

   $ 584,634       $ 530,845   

Acquisitions

     111,852         57,619   

Divestitures

     (40,963      —     
  

 

 

    

 

 

 

Balance at June 30,

   $ 655,523       $ 588,464   
  

 

 

    

 

 

 

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 six months ended June 30, 2016, Old National recorded $111.9 million of goodwill associated with the acquisition of Anchor. Also during the six months ended June 30, 2016, Old National eliminated $41.0 million of goodwill associated with the sale of its insurance operations. See Note 3 to the consolidated financial statements for detail regarding goodwill recorded in 2015 associated with prior acquisitions.

The gross carrying amount and accumulated amortization of other intangible assets at June 30, 2016 and December 31, 2015 were as follows:

 

     Gross      Accumulated      Net  
     Carrying      Amortization      Carrying  

(dollars in thousands)

   Amount      and Impairment      Amount  

June 30, 2016

        

Amortized intangible assets:

        

Core deposit

   $ 81,663       $ (47,839    $ 33,824   

Customer trust relationships

     16,547         (6,769      9,778   

Customer loan relationships

     4,413         (3,778      635   
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 102,623       $ (58,386    $ 44,237   
  

 

 

    

 

 

    

 

 

 

December 31, 2015

        

Amortized intangible assets:

        

Core deposit

   $ 60,103       $ (43,982    $ 16,121   

Customer business relationships

     30,787         (23,341      7,446   

Customer trust relationships

     16,547         (5,286      11,261   

Customer loan relationships

     4,413         (3,933      480   
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 111,850       $ (76,542    $ 35,308   
  

 

 

    

 

 

    

 

 

 

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.

 

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During the first quarter of 2016, Old National decreased customer business relationships by $0.2 million. These adjustments related to final contingency payments on acquired insurance books of business that occurred in prior years. During the second quarter of 2016, Old National increased core deposit intangibles by $21.6 million related to the Anchor acquisition. Also during the second quarter of 2016, Old National eliminated $6.5 million of customer business relationships intangibles associated with the sale of its insurance operations.

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 six months ended June 30, 2016 or 2015. Total amortization expense associated with intangible assets was $6.0 million for the six months ended June 30, 2016 and $6.1 million for the six months ended June 30, 2015.

Estimated amortization expense for future years is as follows:

 

(dollars in thousands)

      

2016 remaining

   $ 6,560   

2017

     11,015   

2018

     8,687   

2019

     6,737   

2020

     4,883   

Thereafter

     6,355   
  

 

 

 

Total

   $ 44,237   
  

 

 

 

NOTE 12 – LOAN SERVICING RIGHTS

Loan servicing rights were assumed in Old National’s acquisitions of United and LSB in 2014, Founders in 2015, and Anchor in May, 2016.

At June 30, 2016, loan servicing rights derived from loans sold with servicing retained totaled $25.8 million and were included in other assets in the consolidated balance sheet, compared to $10.5 million at December 31, 2015. Loans serviced for others are not reported as assets. The principal balance of loans serviced for others was $3.483 billion at June 30, 2016, compared to $1.263 billion at December 31, 2015. Approximately 99% of the loans serviced for others at June 30, 2016 were residential mortgage loans. Custodial escrow balances maintained in connection with serviced loans were $32.7 million at June 30, 2016 and $3.0 million at December 31, 2015.

The following table summarizes the carrying values and activity related to loan servicing rights and the related valuation allowance for the six months ended June 30, 2016 and 2015:

 

(dollars in thousands)

   2016      2015  

Balance at January 1,

   $ 10,502       $ 9,584   

Additions (1)

     17,126         1,754   

Amortization

     (1,866      (1,271
  

 

 

    

 

 

 

Balance before valuation allowance at June 30,

     25,762         10,067   
  

 

 

    

 

 

 

Valuation allowance:

     

Balance at January 1,

     (34      (50

(Additions)/recoveries

     28         10   
  

 

 

    

 

 

 

Balance at June 30,

     (6      (40
  

 

 

    

 

 

 

Loan servicing rights, net

   $ 25,756       $ 10,027   
  

 

 

    

 

 

 

 

(1) In May 2016, the Company assumed $15.3 million of loan servicing rights related to the Anchor acquisition.

At June 30, 2016, the fair value of servicing rights was $28.4 million, which was determined using a discount rate of 8.07% and a weighted average prepayment speed of 210% PSA. At December 31, 2015, the fair value of servicing rights was $11.3 million, which was determined using a discount rate of 11% and a weighted average prepayment speed of 166% PSA.

 

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NOTE 13 – SHORT-TERM BORROWINGS

The following table presents the distribution of Old National’s short-term borrowings and related weighted-average interest rates as of June 30, 2016:

 

     Federal     Repurchase     Financial              
     Funds     Agreements /     Exchange     Revolving        

(dollars in thousands)

   Purchased     Sweeps     Borrowings (1)     Loan     Total  

2016

          

Outstanding at June 30, 2016

   $ 263,536      $ 304,123      $ —        $ —        $ 567,659   

Average amount outstanding

     141,664        332,441        5,083        8,242        487,430   

Maximum amount outstanding at any month-end

     263,536        346,695        25,000        50,000     

Weighted average interest rate:

          

During the six months ended June 30, 2016

     0.46     0.08     0.71     3.00     0.24

At June 30, 2016

     0.42        0.07        —