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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2017

 

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  ☒    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  ☒    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      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  ☒

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 135,435,000 shares outstanding at March 31, 2017.

 

 

 


Table of Contents

OLD NATIONAL BANCORP

FORM 10-Q

TABLE OF CONTENTS

 

         Page  
PART I. FINANCIAL INFORMATION      3  

Item 1.

 

Financial Statements

     3  
 

Consolidated Balance Sheets

     3  
 

Consolidated Statements of Income (unaudited)

     4  
 

Consolidated Statements of Comprehensive Income (unaudited)

     5  
 

Consolidated Statements of Changes in Shareholders’ Equity (unaudited)

     6  
 

Consolidated Statements of Cash Flows (unaudited)

     7  
 

Notes to Consolidated Financial Statements (unaudited)

     8  
 

Note 1. Basis of Presentation

     8  
 

Note 2. Recent Accounting Pronouncements

     8  
 

Note 3. Acquisition and Divestiture Activity

     13  
 

Note 4. Net Income Per Share

     14  
 

Note 5. Accumulated Other Comprehensive Income (Loss)

     16  
 

Note 6. Investment Securities

     18  
 

Note 7. Loans Held for Sale

     22  
 

Note 8. Loans and Allowance for Loan Losses

     22  
 

Note 9. Other Real Estate Owned

     34  
 

Note 10. Premises and Equipment

     35  
 

Note 11. Goodwill and Other Intangible Assets

     35  
 

Note 12. Loan Servicing Rights

     36  
 

Note 13. Qualified Affordable Housing Projects and Other Tax Credit Investments

     37  
 

Note 14. Securities Sold Under Agreements to Repurchase

     38  
 

Note 15. Federal Home Loan Bank Advances

     39  
 

Note 16. Other Borrowings

     39  
 

Note 17. Employee Benefit Plans

     41  
 

Note 18. Stock-Based Compensation

     42  
 

Note 19. Income Taxes

     43  
 

Note 20. Derivative Financial Instruments

     45  
 

Note 21. Commitments and Contingencies

     47  
 

Note 22. Financial Guarantees

     47  
 

Note 23. Segment Information

     48  
 

Note 24. Fair Value

     48  

Item 2.

 

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

     57  
 

Executive Summary

     57  
 

Results of Operations

     58  
 

Financial Condition

     61  
 

Risk Management

     65  
 

Off-Balance Sheet Arrangements

     74  
 

Contractual Obligations

     75  
 

Critical Accounting Policies and Estimates

     75  
 

Forward-Looking Statements

     79  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     79  

Item 4.

 

Controls and Procedures

     79  
PART II. OTHER INFORMATION      80  

Item 1A.

 

Risk Factors

     80  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     80  

Item 5.

 

Other Information

     81  

Item 6.

 

Exhibits

     81  
SIGNATURE      83  

 

2


Table of Contents

OLD NATIONAL BANCORP

CONSOLIDATED BALANCE SHEETS

 

     March 31,     December 31,     March 31,  

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

   2017     2016     2016  
     (unaudited)           (unaudited)  

Assets

      

Cash and due from banks

   $ 184,974     $ 209,381     $ 153,259  

Money market and other interest-earning investments

     32,061       46,138       22,299  
  

 

 

   

 

 

   

 

 

 

Total cash and cash equivalents

     217,035       255,519       175,558  

Trading securities, at fair value

     5,083       4,982       3,699  

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

      

U.S. Treasury

     12,117       7,103       12,243  

U.S. government-sponsored entities and agencies

     543,034       493,956       603,457  

Mortgage-backed securities

     1,474,995       1,525,019       990,984  

States and political subdivisions

     452,551       436,684       400,236  

Other securities

     334,246       334,412       341,523  
  

 

 

   

 

 

   

 

 

 

Total investment securities - available-for-sale

     2,816,943       2,797,174       2,348,443  

Investment securities - held-to-maturity, at amortized cost
(fair value $784,906; $784,172; and $932,590, respectively)

     741,448       745,090       869,012  

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

     107,501       101,716       86,146  

Loans held for sale, at fair value

     17,373       90,682       22,546  

Loans:

      

Commercial

     1,910,536       1,917,099       1,792,988  

Commercial real estate

     3,222,865       3,130,853       1,922,754  

Residential real estate

     2,112,262       2,087,530       1,649,996  

Consumer credit, net of unearned income

     1,886,110       1,875,030       1,641,336  
  

 

 

   

 

 

   

 

 

 

Total loans

     9,131,773       9,010,512       7,007,074  

Allowance for loan losses

     (49,834     (49,808     (50,700
  

 

 

   

 

 

   

 

 

 

Net loans

     9,081,939       8,960,704       6,956,374  
  

 

 

   

 

 

   

 

 

 

FDIC indemnification asset

     —         —         7,703  

Premises and equipment, net

     420,866       429,622       198,065  

Accrued interest receivable

     76,674       81,381       68,641  

Goodwill

     655,018       655,018       584,634  

Other intangible assets

     34,657       37,677       32,443  

Company-owned life insurance

     353,786       352,956       342,292  

Net deferred tax assets

     165,376       181,863       98,712  

Loan servicing rights

     25,446       25,561       10,534  

Assets held for sale

     14,604       5,970       2,038  

Other real estate owned and repossessed personal property

     12,547       18,546       13,522  

Other assets

     123,349       115,776       111,964  
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 14,869,645     $ 14,860,237     $ 11,932,326  
  

 

 

   

 

 

   

 

 

 

Liabilities

      

Deposits:

      

Noninterest-bearing demand

   $ 3,024,111     $ 3,016,093     $ 2,491,767  

Interest-bearing:

      

NOW

     2,635,317       2,596,595       2,178,690  

Savings

     2,997,919       2,954,709       2,271,341  

Money market

     697,287       707,748       561,250  

Time

     1,466,718       1,468,108       1,085,847  
  

 

 

   

 

 

   

 

 

 

Total deposits

     10,821,352       10,743,253       8,588,895  

Federal funds purchased and interbank borrowings

     61,016       213,003       165,320  

Securities sold under agreements to repurchase

     345,550       367,052       379,060  

Federal Home Loan Bank advances

     1,441,030       1,353,092       899,418  

Other borrowings

     219,021       218,939       218,393  

Accrued expenses and other liabilities

     135,317       150,481       172,597  
  

 

 

   

 

 

   

 

 

 

Total liabilities

     13,023,286       13,045,820       10,423,683  
  

 

 

   

 

 

   

 

 

 

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,
135,435; 135,159; and 114,352 shares issued and outstanding, respectively

     135,435       135,159       114,352  

Capital surplus

     1,350,866       1,348,338       1,088,037  

Retained earnings

     408,623       390,292       335,839  

Accumulated other comprehensive income (loss), net of tax

     (48,565     (59,372     (29,585
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     1,846,359       1,814,417       1,508,643  
  

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 14,869,645     $ 14,860,237     $ 11,932,326  
  

 

 

   

 

 

   

 

 

 

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

 

3


Table of Contents

OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

 

     Three Months Ended  
     March 31,  

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

   2017      2016  

Interest Income

     

Loans including fees:

     

Taxable

   $ 92,201      $ 71,572  

Nontaxable

     3,179        3,004  

Investment securities:

     

Taxable

     15,685        13,722  

Nontaxable

     7,372        6,982  

Money market and other interest-earning investments

     31        49  
  

 

 

    

 

 

 

Total interest income

     118,468        95,329  
  

 

 

    

 

 

 

Interest Expense

     

Deposits

     4,383        3,493  

Federal funds purchased and interbank borrowings

     356        123  

Securities sold under agreements to repurchase

     256        373  

Federal Home Loan Bank advances

     5,312        3,417  

Other borrowings

     2,360        2,280  
  

 

 

    

 

 

 

Total interest expense

     12,667        9,686  
  

 

 

    

 

 

 

Net interest income

     105,801        85,643  

Provision for loan losses

     347        91  
  

 

 

    

 

 

 

Net interest income after provision for loan losses

     105,454        85,552  
  

 

 

    

 

 

 

Noninterest Income

     

Wealth management fees

     8,999        8,121  

Service charges on deposit accounts

     9,843        9,639  

Debit card and ATM fees

     4,236        3,785  

Mortgage banking revenue

     4,226        2,920  

Insurance premiums and commissions

     107        13,121  

Investment product fees

     4,989        3,905  

Company-owned life insurance

     2,149        2,038  

Net securities gains (losses)

     1,500        1,106  

Recognition of deferred gain on sale leaseback transactions

     537        1,052  

Change in FDIC indemnification asset

     —          (655

Other income

     6,334        4,419  
  

 

 

    

 

 

 

Total noninterest income

     42,920        49,451  
  

 

 

    

 

 

 

Noninterest Expense

     

Salaries and employee benefits

     56,564        56,972  

Occupancy

     12,134        12,844  

Equipment

     3,227        2,893  

Marketing

     3,050        2,486  

Data processing

     7,608        7,123  

Communication

     2,414        1,864  

Professional fees

     2,651        3,368  

Loan expense

     1,631        1,333  

Supplies

     579        583  

FDIC assessment

     2,487        1,919  

Other real estate owned expense

     1,115        424  

Amortization of intangibles

     3,020        2,647  

Other expense

     5,411        3,899  
  

 

 

    

 

 

 

Total noninterest expense

     101,891        98,355  
  

 

 

    

 

 

 

Income before income taxes

     46,483        36,648  

Income tax expense

     10,491        9,671  
  

 

 

    

 

 

 

Net income

   $ 35,992      $ 26,977  
  

 

 

    

 

 

 

Net income per common share - basic

   $ 0.27      $ 0.24  

Net income per common share - diluted

     0.27        0.24  
  

 

 

    

 

 

 

Weighted average number of common shares outstanding - basic

     134,912        113,998  

Weighted average number of common shares outstanding - diluted

     135,431        114,563  
  

 

 

    

 

 

 

Dividends per common share

   $ 0.13      $ 0.13  

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

 

4


Table of Contents

OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

 

     Three Months Ended  
     March 31,  

(dollars in thousands)

   2017     2016  

Net income

   $ 35,992     $ 26,977  

Other comprehensive income (loss):

    

Change in securities available-for-sale:

    

Unrealized holding gains (losses) for the period

     15,780       17,857  

Reclassification adjustment for securities gains realized in income

     (1,500     (1,106

Income tax effect

     (5,260     (6,168
  

 

 

   

 

 

 

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

     9,020       10,583  

Change in securities held-to-maturity:

    

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

     449       465  

Income tax effect

     (154     (159
  

 

 

   

 

 

 

Changes from securities held-to-maturity

     295       306  

Cash flow hedges:

    

Net unrealized derivative gains (losses) on cash flow hedges

     580       (11,130

Reclassification adjustment for losses realized in net income

     1,799       1,273  

Income tax effect

     (904     3,746  
  

 

 

   

 

 

 

Changes from cash flow hedges

     1,475       (6,111

Defined benefit pension plans:

    

Amortization of net loss recognized in income

     27       700  

Income tax effect

     (10     (266
  

 

 

   

 

 

 

Changes from defined benefit pension plans

     17       434  
  

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     10,807       5,212  
  

 

 

   

 

 

 

Comprehensive income

   $ 46,799     $ 32,189  
  

 

 

   

 

 

 

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

 

5


Table of Contents

OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)

 

                       Accumulated        
                       Other     Total  
     Common     Capital     Retained     Comprehensive     Shareholders’  

(dollars in thousands)

   Stock     Surplus     Earnings     Income (Loss)     Equity  

Balance at December 31, 2015

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

Net income

     —         —         26,977       —         26,977  

Other comprehensive income

     —         —         —         5,212       5,212  

Dividends - common stock

     —         —         (14,865     —         (14,865

Common stock issued

     8       96       —         —         104  

Common stock repurchased

     (41     (451     —         —         (492

Stock-based compensation expense

     —         1,268       —         —         1,268  

Stock activity under incentive compensation plans

     88       (787     (32     —         (731
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2016

   $ 114,352     $ 1,088,037     $ 335,839     $ (29,585   $ 1,508,643  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2016

   $ 135,159     $ 1,348,338     $ 390,292     $ (59,372   $ 1,814,417  

Net income

     —         —         35,992       —         35,992  

Other comprehensive income

     —         —         —         10,807       10,807  

Dividends - common stock

     —         —         (17,602     —         (17,602

Common stock issued

     5       86       —         —         91  

Common stock repurchased

     (70     (1,197     —         —         (1,267

Stock-based compensation expense

     —         1,331       —         —         1,331  

Stock activity under incentive compensation plans

     341       2,308       (59     —         2,590  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2017

   $ 135,435     $ 1,350,866     $ 408,623     $ (48,565   $ 1,846,359  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

6


Table of Contents

OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

 

     Three Months Ended  
     March 31,  

(dollars in thousands)

   2017     2016  

Cash Flows From Operating Activities

    

Net income

   $ 35,992     $ 26,977  
  

 

 

   

 

 

 

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

    

Depreciation

     5,211       3,527  

Amortization of other intangible assets

     3,020       2,647  

Net premium amortization on investment securities

     3,846       4,412  

Amortization of FDIC indemnification asset

     —         655  

Stock-based compensation expense

     1,331       1,268  

Excess tax (benefit) expense on stock-based compensation

     288       —    

Provision for loan losses

     347       91  

Net securities (gains) losses

     (1,500     (1,106

Recognition of deferred gain on sale leaseback transactions

     (537     (1,052

Net gains on sales of loans and other assets

     (2,520     (792

Increase in cash surrender value of company-owned life insurance

     (2,149     (2,038

Residential real estate loans originated for sale

     (51,823     (70,754

Proceeds from sale of residential real estate loans

     127,656       62,795  

(Increase) decrease in interest receivable

     4,706       457  

(Increase) decrease in other real estate owned

     5,999       (1,024

(Increase) decrease in other assets

     2,548       3,460  

Increase (decrease) in accrued expenses and other liabilities

     (12,451     (14,802
  

 

 

   

 

 

 

Total adjustments

     83,972       (12,256
  

 

 

   

 

 

 

Net cash flows provided by (used in) operating activities

     119,964       14,721  
  

 

 

   

 

 

 

Cash Flows From Investing Activities

    

Purchases of investment securities available-for-sale

     (133,288     (289,184

Purchases of Federal Home Loan Bank/Federal Reserve Bank stock

     (5,794     —    

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

     93,040       298,147  

Proceeds from sales of investment securities available-for-sale

     33,588       76,650  

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

     2,714       1,439  

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

     9       —    

Proceeds from sales of trading securities

     127       —    

Reimbursements under FDIC loss share agreements

     —         877  

Net principal collected from (loans made to) loan customers

     (121,582     (60,293

Proceeds from settlements on company-owned life insurance

     1,319       1,040  

Proceeds from sale of premises and equipment and other assets

     —         3,656  

Purchases of premises and equipment and other assets

     (5,093     (4,928
  

 

 

   

 

 

 

Net cash flows provided by (used in) investing activities

     (134,960     27,404  
  

 

 

   

 

 

 

Cash Flows From Financing Activities

    

Net increase (decrease) in:

    

Deposits

     78,099       188,035  

Federal funds purchased and interbank borrowings

     (151,987     (125,770

Securities sold under agreements to repurchase

     (21,502     (8,349

Payments for maturities on Federal Home Loan Bank advances

     (641,830     (475,121

Payments for maturities on other borrowings

     (80     (17

Proceeds from Federal Home Loan Bank advances

     730,000       350,000  

Cash dividends paid on common stock

     (17,602     (14,865

Common stock repurchased

     (1,267     (492

Proceeds from exercise of stock options

     2,590       90  

Common stock issued

     91       104  
  

 

 

   

 

 

 

Net cash flows provided by (used in) financing activities

     (23,488     (86,385
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (38,484     (44,260

Cash and cash equivalents at beginning of period

     255,519       219,818  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 217,035     $ 175,558  
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Total interest paid

   $ 14,642     $ 11,265  

Total taxes paid (net of refunds)

   $ —       $ 2,000  

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

 

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OLD NATIONAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements include the accounts of Old National Bancorp and its wholly-owned affiliates (hereinafter collectively referred to as “Old National”) and have been prepared in conformity with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. Such principles require management to make estimates and assumptions that affect the reported amounts of assets, liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements and amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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 March 31, 2017 and 2016, and December 31, 2016, and the results of its operations for the three months ended March 31, 2017 and 2016. 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, 2016.

All significant intercompany transactions and balances have been eliminated. Certain prior year amounts have been reclassified to conform to the 2017 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 Financial Accounting Standards Board (“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 do not expect the new standard, or any of the amendments detailed below, to result in a material change from our current accounting for revenue because the majority of the Company’s financial instruments are not within the scope of Topic 606, but it will result in new disclosure requirements.

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 to when another party, along with the entity, is involved in providing a good or service to a customer. Topic 606 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.

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

 

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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.

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.

In December 2016, the FASB issued ASU No. 2016-20, Revenue from Contracts with Customers (Topic 606): Technical Corrections and Improvements. The FASB board decided to issue a separate update for technical corrections and improvements to Topic 606 and other Topics amended by ASU No. 2014-09 to increase awareness of the proposals and to expedite improvements to ASU No. 2014-09. The amendment affects narrow aspects of the guidance issued in ASU No. 2014-09.

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 became effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016, 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: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) 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 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. Based on leases

 

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outstanding at March 31, 2017, we do not expect the new standard to have a material impact on our income statement, but anticipate an $80 million to $100 million increase in our assets and liabilities. Decisions to repurchase, modify or renew leases prior to the implementation date will impact this level of materiality.

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 became effective for annual periods and interim periods within those annual periods beginning after December 15, 2016, and did not have a material impact on the consolidated financial statements.

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 became effective for annual periods and interim periods within those annual periods beginning after December 15, 2016, and did not have a material impact on the consolidated financial statements.

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 became effective for annual periods and interim periods within those annual periods beginning after December 15, 2016, and did not have a material impact on the consolidated financial statements.

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 became effective on January 1, 2017 and resulted in a $0.3 million expense during the three months ended March 31, 2017.

 

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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 have formed a cross functional committee that is assessing our data and system needs and are evaluating the impact of adopting the new guidance. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

FASB ASC 740 – In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. Current guidance prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. This prohibition on recognition is an exception to the principle of comprehensive recognition of current and deferred income taxes in generally accepted accounting principles. The exception has led to diversity in practice and is a source of complexity in financial reporting. FASB decided that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Consequently, the amendments in this update eliminate the exception for an intra-entity transfer of an asset other than inventory. The amendments in this update do not include new disclosure requirements; however, existing disclosure requirements might be applicable when accounting for the current and deferred income taxes for an intra-entity transfer of an asset other than inventory. For public business entities, the amendments in this update are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The amendments in this update should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. 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 810 – In October 2016, the FASB issued ASU No. 2016-17, Consolidation (Topic 810): Interests Held through Related Parties that are under Common Control. This update amends the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity (VIE) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The primary beneficiary of a VIE is the reporting entity that has a controlling financial interest in a VIE and, therefore, consolidates the VIE. A reporting entity has an indirect interest in a VIE if it has a direct interest in a related party that, in turn, has a direct interest in the VIE. The amendments in this update became effective for annual periods and interim periods within those annual periods beginning after December 15, 2016, and did not have a material impact on the consolidated financial statements.

FASB ASC 805 – In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this update provide a more robust framework to use in determining when a set of assets and activities is a business. Because the current definition of a business is interpreted broadly and can be difficult to apply, stakeholders indicated that analyzing transactions is inefficient and costly and that the definition does not permit the use of reasonable judgment. The amendments provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable. 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.

 

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FASB ASC 350 – In January 2017, the FASB issued ASU No. 2017-04, Intangibles: Goodwill and Other: Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the amendments eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, the income tax effects of tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the qualitative impairment test is necessary. The amendments should be applied on a prospective basis. The nature of and reason for the change in accounting principle should be disclosed upon transition. The amendments in this update should be adopted for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted on testing dates after January 1, 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 610 – In February 2017, the FASB issued ASU No. 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Topic 610): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. Subtopic 610-20 was originally issued as part of ASU No. 2014-09 to provide guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. This update was issued to help clarify uncertainties and complexities of ASU 2014-09. The amendments in this update define the term in substance nonfinancial asset, in part, as a financial asset promised to a counterparty in a contract if substantially all of its fair value of the assets (recognized and unrecognized) that are promised to the counterparty in the contract is concentrated in nonfinancial assets. If substantially all of the fair value of the assets that are promised to the counterparty in a contract is concentrated in nonfinancial assets, then all of the financial assets promised to the counterparty are in substance nonfinancial assets. The amendments in this update also clarify that nonfinancial assets within the scope of Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty. The amendment in this update require an entity to derecognize a distinct nonfinancial asset or distinct in substance nonfinancial asset in a partial sale transaction when it (1) does not have (or ceases to have) a controlling financial interest in the legal entity that holds the asset in accordance with Topic 810 and (2) transfers control of the asset in accordance with Topic 606. Once an entity transfers control of a distinct nonfinancial asset or distinct in substance nonfinancial asset, it is required to measure any noncontrolling interest it receives (or retains) at fair value. The amendments are effective at the same time as the amendments in ASU 2014-09. Therefore, the amendments are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. 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 715 - In March 2017, the FASB issued ASU No. 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The amendments in this update require that an employer disaggregate the service cost component from the other components of net benefit cost. The amendments also provide explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization. The amendments in this update improve the consistency, transparency, and usefulness of financial information to users that have communicated that the service cost component generally is analyzed differently from the other components of net benefit cost. 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 310 - In March 2017, the FASB issued ASU No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This update amends the amortization period for certain purchased callable debt securities held at a premium. FASB is shortening the amortization period for the premium to the earliest call date. Under current generally accepted accounting principles (“GAAP”), entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. Concerns were raised that current GAAP excludes certain callable debt securities from consideration of early repayment of principal even if the holder is certain that the call will be exercised. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in

 

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earnings. There is diversity in practice (1) in the amortization period for premiums of callable debt securities and (2) in how the potential for exercise of a call is factored into current impairment assessments. 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, but it is not expected to have a material impact.

NOTE 3 – ACQUISITION AND DIVESTITURE ACTIVITY

Acquisitions

Anchor BanCorp Wisconsin Inc.

Effective May 1, 2016 (the “Closing Date”), Old National completed the acquisition of Madison, Wisconsin-based Anchor BanCorp Wisconsin Inc. (“Anchor”) through a stock and cash merger. 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 fair value of consideration paid 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 March 31, 2017, transaction and integration costs of $15.9 million associated with the acquisition have been expensed as incurred.

Under the acquisition method of accounting, the consideration paid 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 consideration paid 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

     1,637,806  

Premises and equipment

     35,721  

Accrued interest receivable

     7,308  

Other real estate owned

     17,349  

Company-owned life insurance

     7,278  

Other assets

     126,210  

Deposits

     (1,852,713

Securities sold under agreements to repurchase

     (3,132

Other borrowings

     (123

Accrued expenses and other liabilities

     (36,957
  

 

 

 

Net tangible assets acquired

     311,574  

Definite-lived intangible assets acquired

     21,559  

Loan servicing rights

     15,274  

Goodwill

     111,347  
  

 

 

 

Total consideration paid

   $ 459,754  
  

 

 

 

 

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Prior to the end of the one year measurement period for finalizing the consideration paid allocation, if information becomes available which would indicate adjustments are required to the allocation, such adjustments will be included in the allocation in the reporting period in which the adjustment amounts are determined.

The portion of the consideration paid 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:

 

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

(in thousands)

  at Acquisition Date     at Acquisition Date     to be Collected  

Acquired receivables subject to ASC 310-30

  $ 20,174     $ 29,544     $ 6,153  

Acquired receivables not subject to ASC 310-30

  $ 1,617,632     $ 2,143,532     $ 274,155  

Divestitures

On May 31, 2016, the Company sold 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. 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”.

Based on an ongoing assessment of our service and delivery network, the Company consolidated five branches during 2016 and an additional fifteen in January 2017.

NOTE 4 - NET INCOME PER SHARE

Basic and diluted net income per share are calculated using the two-class method. Net income is divided by the weighted-average number of common shares outstanding during the period. Adjustments to the weighted average number of common shares outstanding are made only when such adjustments will dilute net income per common share. Net income is then divided by the weighted-average number of common shares and common share equivalents during the period.

 

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The following table reconciles basic and diluted net income per share for the three months ended March 31, 2017 and 2016:

 

     Three Months Ended  
(dollars and shares in thousands,    March 31,  

except per share data)

   2017      2016  

Basic Earnings Per Share

     

Net income

   $ 35,992      $ 26,977  

Weighted average common shares outstanding

     134,912        113,998  

Basic Net Income Per Share

   $ 0.27      $ 0.24  
  

 

 

    

 

 

 

Diluted Earnings Per Share

     

Net income

   $ 35,992      $ 26,977  

Weighted average common shares outstanding

     134,912        113,998  

Effect of dilutive securities:

     

Restricted stock (1)

     445        526  

Stock options (2)

     74        39  
  

 

 

    

 

 

 

Weighted average shares outstanding

     135,431        114,563  

Diluted Net Income Per Share

   $ 0.27      $ 0.24  
  

 

 

    

 

 

 

 

(1) 22 thousand shares and 4 thousand shares of restricted stock at March 31, 2017 and 2016, respectively, were not included in the computation of net income per diluted share because the effect would be antidilutive.
(2) Options to purchase 55 thousand shares and 0.8 million shares outstanding at March 31, 2017 and 2016, respectively, were not included in the computation of net income per diluted share because the exercise price of these options was greater than the average market price of the common shares and, therefore, the effect would be antidilutive.

 

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NOTE 5 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table summarizes the changes within each classification of accumulated other comprehensive income (loss) (“AOCI”) net of tax for the three months ended March 31, 2017 and 2016:

 

(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 March 31, 2017

          

Balance at January 1, 2017

   $ (39,012   $ (13,310   $ (6,715   $ (335   $ (59,372

Other comprehensive income (loss) before reclassifications

     9,967       —         360       —         10,327  

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

     (947     295       1,115       17       480  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

     9,020       295       1,475       17       10,807  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2017

   $ (29,992   $ (13,015   $ (5,240   $ (318   $ (48,565
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended March 31, 2016

          

Balance at January 1, 2016

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

Other comprehensive income (loss) before reclassifications

     11,282       —         (6,900     —         4,382  

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

     (699     306       789       434       830  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

     10,583       306       (6,111     434       5,212  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2016

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) See table below for details about reclassifications.

 

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The following table summarizes the significant amounts reclassified out of each component of AOCI for the three months ended March 31, 2017 and 2016:

 

    Amount
Reclassified
    Affected Line Item in the

Details about AOCI Components

  from AOCI    

Statement of Income

    Three Months Ended      
    March 31,      

(dollars in thousands)

  2017     2016      

Unrealized gains and losses on available-for-sale securities

  $ 1,500     $ 1,106     Net securities gains
    (553     (407   Income tax (expense) benefit
 

 

 

   

 

 

   
  $ 947     $ 699     Net income
 

 

 

   

 

 

   

Unrealized gains and losses on held-to-maturity securities

  $ (449   $ (465   Interest income (expense)
    154       159     Income tax (expense) benefit
 

 

 

   

 

 

   
  $ (295   $ (306   Net income
 

 

 

   

 

 

   

Gains and losses on cash flow hedges
Interest rate contracts

  $ (1,799   $ (1,273   Interest income (expense)
    684       484     Income tax (expense) benefit
 

 

 

   

 

 

   
  $ (1,115   $ (789   Net income
 

 

 

   

 

 

   

Amortization of defined benefit pension items
Actuarial gains (losses)

  $ (27   $ (700   Salaries and employee benefits
    10       266     Income tax (expense) benefit
 

 

 

   

 

 

   
  $ (17   $ (434   Net income
 

 

 

   

 

 

   

Total reclassifications for the period

  $ (480   $ (830  

Net income

 

 

 

   

 

 

   

 

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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 March 31, 2017 and December 31, 2016 and the corresponding amounts of unrealized gains and losses therein:

 

     Amortized      Unrealized      Unrealized      Fair  

(dollars in thousands)

   Cost      Gains      Losses      Value  

March 31, 2017

           

Available-for-Sale

           

U.S. Treasury

   $ 11,966      $ 152      $ (1    $ 12,117  

U.S. government-sponsored entities and agencies

     553,203        110        (10,279      543,034  

Mortgage-backed securities - Agency

     1,496,620        5,866        (27,491      1,474,995  

States and political subdivisions

     457,358        4,948        (9,755      452,551  

Pooled trust preferred securities

     16,852        —          (8,564      8,288  

Other securities

     328,167        1,407        (3,616      325,958  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 2,864,166      $ 12,483      $ (59,706    $ 2,816,943  
  

 

 

    

 

 

    

 

 

    

 

 

 

Held-to-Maturity

           

U.S. government-sponsored entities and agencies

   $ 40,021      $ 89      $ —        $ 40,110  

Mortgage-backed securities - Agency

     9,566        288        —          9,854  

States and political subdivisions

     691,861        43,210        (129      734,942  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held-to-maturity securities

   $ 741,448      $ 43,587      $ (129    $ 784,906  
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2016

           

Available-for-Sale

           

U.S. Treasury

   $ 6,963      $ 140      $ —        $ 7,103  

U.S. government-sponsored entities and agencies

     506,234        113        (12,391      493,956  

Mortgage-backed securities - Agency

     1,551,465        6,923        (33,369      1,525,019  

States and political subdivisions

     446,003        4,183        (13,502      436,684  

Pooled trust preferred securities

     17,011        —          (8,892      8,119  

Other securities

     331,001        1,074        (5,782      326,293  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 2,858,677      $ 12,433      $ (73,936    $ 2,797,174  
  

 

 

    

 

 

    

 

 

    

 

 

 

Held-to-Maturity

           

U.S. government-sponsored entities and agencies

   $ 40,131      $ 427      $ —        $ 40,558  

Mortgage-backed securities - Agency

     10,640        300        —          10,940  

States and political subdivisions

     694,319        38,915        (560      732,674  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held-to-maturity securities

   $ 745,090      $ 39,642      $ (560    $ 784,172  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 months ended March 31, 2017 and 2016:

 

     Three Months Ended  
     March 31,  

(dollars in thousands)

   2017      2016  

Proceeds from sales of available-for-sale securities

   $ 33,588      $ 76,650  

Proceeds from calls of available-for-sale securities

     10,520        124,311  
  

 

 

    

 

 

 

Total

   $ 44,108      $ 200,961  
  

 

 

    

 

 

 

Realized gains on sales of available-for-sale securities

   $ 1,329      $ 1,660  

Realized gains on calls of available-for-sale securities

     —          244  

Realized losses on sales of available-for-sale securities

     (30      (446

Realized losses on calls of available-for-sale securities

     (1      (87

Other securities gains (losses) (1)

     202        (265
  

 

 

    

 

 

 

Net securities gains (losses)

   $ 1,500      $ 1,106  
  

 

 

    

 

 

 

 

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

Trading securities, which consist of mutual funds held in trusts associated with deferred compensation plans for former directors and executives, are recorded at fair value and totaled $5.1 million at March 31, 2017 and $5.0 million at December 31, 2016.

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 March 31, 2017  
(dollars in thousands)                  Weighted  
     Amortized      Fair      Average  

Maturity

   Cost      Value      Yield  

Available-for-Sale

        

Within one year

   $ 38,790      $ 38,870        1.78 % 

One to five years

     311,574        311,107        2.19  

Five to ten years

     386,471        388,129        2.78  

Beyond ten years

     2,127,331        2,078,837        2.45  
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,864,166      $ 2,816,943        2.46 % 
  

 

 

    

 

 

    

 

 

 

Held-to-Maturity

        

Within one year

   $ 22,670      $ 23,140        5.87 % 

One to five years

     68,261        70,943        4.37  

Five to ten years

     147,381        154,829        4.83  

Beyond ten years

     503,136        535,994        5.61  
  

 

 

    

 

 

    

 

 

 

Total

   $ 741,448      $ 784,906        5.35 % 
  

 

 

    

 

 

    

 

 

 

 

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The following table summarizes the investment securities with unrealized losses at March 31, 2017 and December 31, 2016 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  

March 31, 2017

               

Available-for-Sale

               

U.S. Treasury

   $ 6,499      $ (1   $ —        $ —       $ 6,499      $ (1

U.S. government-sponsored entities and agencies

     455,813        (10,279     —          —         455,813        (10,279

Mortgage-backed securities - Agency

     1,176,954        (24,778     55,246        (2,713     1,232,200        (27,491

States and political subdivisions

     227,130        (9,557     5,702        (198     232,832        (9,755

Pooled trust preferred securities

     —          —         8,288        (8,564     8,288        (8,564

Other securities

     100,136        (1,973     102,143        (1,643     202,279        (3,616
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available-for-sale

   $ 1,966,532      $ (46,588   $ 171,379      $ (13,118   $ 2,137,911      $ (59,706
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Held-to-Maturity

               

States and political subdivisions

   $ 30,153      $ (129   $ —        $ —       $ 30,153      $ (129
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total held-to-maturity

   $ 30,153      $ (129   $ —        $ —       $ 30,153      $ (129
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2016

               

Available-for-Sale

               

U.S. government-sponsored entities and agencies

   $ 432,192      $ (12,391   $ —        $ —       $ 432,192      $ (12,391

Mortgage-backed securities - Agency

     1,177,093        (30,295     57,636        (3,074     1,234,729        (33,369

States and political subdivisions

     286,351        (13,247     4,919        (255     291,270        (13,502

Pooled trust preferred securities

     —          —         8,119        (8,892     8,119        (8,892

Other securities

     121,498        (2,734     126,539        (3,048     248,037        (5,782
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available-for-sale

   $ 2,017,134      $ (58,667   $ 197,213      $ (15,269   $ 2,214,347      $ (73,936
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Held-to-Maturity

               

States and political subdivisions

   $ 59,481      $ (560   $ —        $ —       $ 59,481      $ (560
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total held-to-maturity

   $ 59,481      $ (560   $ —        $ —       $ 59,481      $ (560
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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.

 

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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 three months ended March 31, 2017 or 2016.

At March 31, 2017, Old National’s securities portfolio consisted of 1,660 securities, 408 of which were in an unrealized loss position. The unrealized losses attributable to our U.S. government-sponsored entities and agencies, agency mortgage-backed securities, states and political subdivisions, and other securities are the result of fluctuations in interest rates. Our pooled trust preferred securities are discussed below.

Pooled Trust Preferred Securities

At March 31, 2017, our securities portfolio contained three pooled trust preferred securities with a fair value of $8.3 million and unrealized losses of $8.6 million. One of the pooled trust preferred securities in our portfolio falls within the scope of FASB ASC 325-10 (EITF 99-20) and has a fair value of $0.3 million with an unrealized loss of $2.7 million at March 31, 2017. This security was rated A3 at inception, but is rated D at March 31, 2017. 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 three months ended March 31, 2017 and 2016, our model indicated no other-than-temporary-impairment losses on this security. At March 31, 2017, 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 $8.0 million and unrealized losses of $5.9 million at March 31, 2017 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 three months ended March 31, 2017 and 2016, our analysis indicated no OTTI on these securities.

 

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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  
March 31, 2017       Credit   Amortized     Fair     Gain/     Losses     Performing/     Original     Performing     Performing  

(dollars in thousands)

 

Class

 

Rating (1)

  Cost     Value     (Loss)     2017     Remaining     Collateral     Collateral     Collateral  

Pooled trust preferred securities:

               

Reg Div Funding 2004

  B-2   D   $ 2,948     $ 263     $ (2,685   $ —         22/37       32.1     7.5     0.0

Pretsl XXVII LTD

  B   B     4,422       2,381       (2,041     —         35/44       16.7     4.3     46.5

Trapeza Ser 13A

  A2A   BBB     9,482       5,644       (3,838     —         50/55       4.5     4.8     45.8
     

 

 

   

 

 

   

 

 

   

 

 

         
        16,852       8,288       (8,564     —            

Single Issuer trust preferred securities:

 

             

Fleet Cap Tr V (BOA)

    BB+     3,399       3,211       (188     —            

JP Morgan Chase Cap XIII

    BBB-     4,770       4,513       (257     —            

NB-Global

    BB+     790       915       125       —            

Chase Cap II

    BBB-     826       908       82       —            
     

 

 

   

 

 

   

 

 

   

 

 

         
        9,785       9,547       (238     —            

Total

      $ 26,637     $ 17,835     $ (8,802   $ —            
     

 

 

   

 

 

   

 

 

   

 

 

         

 

(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 $17.4 million at March 31, 2017, compared to $90.7 million at December 31, 2016. 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.

NOTE 8 – LOANS AND ALLOWANCE FOR LOAN 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 manages concentrations of credit exposure by industry, product, geography, customer relationship, and loan size, with no concentration of loans exceeding 10% of its portfolio.

 

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The composition of loans by lending classification was as follows:

 

     March 31,      December 31,  

(dollars in thousands)

   2017      2016  

Commercial (1)

   $ 1,910,536      $ 1,917,099  

Commercial real estate:

     

Construction (2)

     357,055        357,802  

Other (2)

     2,865,810        2,773,051  

Residential real estate

     2,112,262        2,087,530  

Consumer credit:

     

Home equity

     464,911        476,439  

Auto

     1,199,580        1,167,737  

Other

     221,619        230,854  
  

 

 

    

 

 

 

Total loans

     9,131,773        9,010,512  

Allowance for loan losses

     (49,834      (49,808
  

 

 

    

 

 

 

Net loans

   $ 9,081,939      $ 8,960,704  
  

 

 

    

 

 

 

 

(1) Includes direct finance leases of $9.9 million at March 31, 2017 and $10.8 million at December 31, 2016.
(2) Certain commercial real estate construction loans were reclassified from commercial real estate - other due to a misclassification at December 31, 2016.

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 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 (including Old National), 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.

 

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The acquisition of Anchor on May 1, 2016 added $926.2 million of commercial real estate loans to our portfolio. At 189%, Old National Bank’s commercial real estate loans as a percentage of its risk-based capital remained well below the regulatory guideline limit of 300% at March 31, 2017.

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 generally 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. At March 31, 2017, student loans totaled $74.6 million and are guaranteed by the government 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

Covered loans totaled $95.4 million at March 31, 2016 and were reclassified to the appropriate loan portfolio segments on the balance sheet for that period. Covered loans were subject to loss share agreements. Old National entered into an agreement with the FDIC on June 22, 2016 to terminate its 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. All future gains and losses associated with covered loans will be recognized entirely by Old National.

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.

 

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Old National’s activity in the allowance for loan losses for the three months ended March 31, 2017 and 2016 was as follows:

 

           Commercial                           

(dollars in thousands)

   Commercial     Real Estate     Residential     Consumer     Unallocated      Total  

Three Months Ended March 31, 2017

             

Balance at January 1, 2017

   $ 21,481     $ 18,173     $ 1,643     $ 8,511     $ —        $ 49,808  

Charge-offs

     (470     (568     (414     (1,787     —          (3,239

Recoveries

     603       1,225       79       1,011       —          2,918  

Provision

     494       (877     428       302       —          347  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at March 31, 2017

   $ 22,108     $ 17,953     $ 1,736     $ 8,037     $ —        $ 49,834  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Three Months Ended March 31, 2016

             

Balance at January 1, 2016

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

Charge-offs

     (1,527     (279     (140     (1,996     —          (3,942

Recoveries

     818       840       26       634       —          2,318  

Provision

     (517     (783     (188     1,579       —          91  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at March 31, 2016

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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The following table provides Old National’s recorded investment in financing receivables by portfolio segment at March 31, 2017 and December 31, 2016 and other information regarding the allowance:

 

            Commercial                              

(dollars in thousands)

   Commercial      Real Estate      Residential      Consumer      Unallocated      Total  

March 31, 2017

                 

Allowance for loan losses:

                 

Individually evaluated for impairment

   $ 4,980      $ 3,793      $ —        $ —        $ —        $ 8,773  

Collectively evaluated for impairment

     17,050        14,141        1,736        7,704        —          40,631  

Loans acquired with deteriorated credit quality

     78        19        —          333        —          430  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total allowance for loan losses

   $ 22,108      $ 17,953      $ 1,736      $ 8,037      $ —        $ 49,834  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans and leases outstanding:

                 

Individually evaluated for impairment

   $ 37,754      $ 49,409      $ —        $ —        $ —        $ 87,163  

Collectively evaluated for impairment

     1,872,067        3,147,808        2,099,114        1,878,769        —          8,997,758  

Loans acquired with deteriorated credit quality

     715        25,648        13,148        7,341        —          46,852  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans and leases outstanding

   $ 1,910,536      $ 3,222,865      $ 2,112,262      $ 1,886,110      $ —        $ 9,131,773  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2016

                 

Allowance for loan losses:

                 

Individually evaluated for impairment

   $ 4,561      $ 3,437      $ —        $ —        $ —        $ 7,998  

Collectively evaluated for impairment

     16,838        14,717        1,643        8,334        —          41,532  

Loans acquired with deteriorated credit quality

     82        19        —          177        —          278  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total allowance for loan losses

   $ 21,481      $ 18,173      $ 1,643      $ 8,511      $ —        $ 49,808  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans and leases outstanding:

                 

Individually evaluated for impairment

   $ 45,960      $ 57,230      $ —        $ —        $ —        $ 103,190  

Collectively evaluated for impairment

     1,870,289        3,040,849        2,073,950        1,866,815        —          8,851,903  

Loans acquired with deteriorated credit quality

     850        32,774        13,580        8,215        —          55,419  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans and leases outstanding

   $ 1,917,099      $ 3,130,853      $ 2,087,530      $ 1,875,030      $ —        $ 9,010,512  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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, with the exception of certain FICO-scored small business loans. 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.

The risk category of commercial and commercial real estate loans by class of loans at March 31, 2017 and December 31, 2016 was as follows:

 

(dollars in thousands)                  Commercial      Commercial  
            Real Estate -      Real Estate -  
Corporate Credit Exposure    Commercial      Construction      Other  
Credit Risk Profile by    March 31,      December 31,      March 31,      December 31,      March 31,      December 31,  
Internally Assigned Grade    2017      2016      2017      2016      2017      2016  

Grade:

                 

Pass

   $ 1,796,685      $ 1,750,923      $ 357,055      $ 347,325      $ 2,699,177      $ 2,669,890  

Criticized

     40,599        45,614        —          9,258        55,282        40,590  

Classified - substandard

     36,566        63,978        —          49        62,960        19,715  

Classified - nonaccrual

     33,533        53,062        —          1,170        38,560        33,833  

Classified - doubtful

     3,153        3,522        —          —          9,831        9,023  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,910,536      $ 1,917,099      $ 357,055      $ 357,802      $ 2,865,810      $ 2,773,051  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 at March 31, 2017 and December 31, 2016:

 

(dollars in thousands)           Consumer  
            Home                
     Residential      Equity      Auto      Other  

March 31, 2017

           

Performing

   $ 2,094,446      $ 460,295      $ 1,197,713      $ 215,618  

Nonperforming

     17,816        4,616        1,867        6,001  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,112,262      $ 464,911      $ 1,199,580      $ 221,619  
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2016

           

Performing

   $ 2,069,856      $ 472,008      $ 1,166,114      $ 223,786  

Nonperforming

     17,674        4,431        1,623        7,068  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,087,530      $ 476,439      $ 1,167,737      $ 230,854  
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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The following table shows Old National’s impaired loans at March 31, 2017 and December 31, 2016, respectively. Only purchased loans that have experienced subsequent impairment since the date acquired are included in the table below.

 

            Unpaid         
     Recorded      Principal      Related  

(dollars in thousands)

   Investment      Balance      Allowance  

March 31, 2017

        

With no related allowance recorded:

        

Commercial

   $ 28,559      $ 29,659      $ —    

Commercial Real Estate - Other

     34,755        36,272        —    

Residential

     2,253        2,274        —    

Consumer

     1,847        2,089        —    

With an allowance recorded:

        

Commercial

     9,195        9,214        4,980  

Commercial Real Estate - Other

     14,654        15,200        3,793  

Residential

     1,154        1,154        58  

Consumer

     2,081        2,081        104  
  

 

 

    

 

 

    

 

 

 

Total

   $ 94,498      $ 97,943      $ 8,935  
  

 

 

    

 

 

    

 

 

 

December 31, 2016

        

With no related allowance recorded:

        

Commercial

   $ 29,001      $ 29,634      $ —    

Commercial Real Estate - Other

     30,585        32,413        —    

Residential

     1,610        1,631        —    

Consumer

     827        946        —    

With an allowance recorded:

        

Commercial

     16,959        17,283        4,561  

Commercial Real Estate - Other

     26,645        27,177        3,437  

Residential

     1,081        1,081        54  

Consumer

     1,924        1,924        96  
  

 

 

    

 

 

    

 

 

 

Total

   $ 108,632      $ 112,089      $ 8,148  
  

 

 

    

 

 

    

 

 

 

The average balance of impaired loans during the three months ended March 31, 2017 and 2016 are included in the table below.

 

     Three Months Ended  
     March 31,  

(dollars in thousands)

   2017      2016  

Average Recorded Investment

     

With no related allowance recorded:

     

Commercial

   $ 28,780      $ 34,085  

Commercial Real Estate - Other

     32,671        27,149  

Residential

     1,931        1,362  

Consumer

     1,377        1,019  

With an allowance recorded:

     

Commercial

     8,743        18,283  

Commercial Real Estate - Construction

     —          234  

Commercial Real Estate - Other

     20,650        14,097  

Residential

     1,118        1,001  

Consumer

     2,003        2,651  
  

 

 

    

 

 

 

Total

   $ 97,273      $ 99,881  
  

 

 

    

 

 

 

 

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The Company does not record interest on nonaccrual loans until principal is recovered. Interest income recognized on impaired loans during the three months ended March 31, 2017 and 2016 was immaterial.

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.

Old National’s past due financing receivables at March 31, 2017 and December 31, 2016 were as follows:

 

                   Recorded                       
                   Investment >                       
     30-59 Days      60-89 Days      90 Days and             Total         

(dollars in thousands)

   Past Due      Past Due      Accruing      Nonaccrual      Past Due      Current  

March 31, 2017

                 

Commercial

   $ 512      $ —        $ —        $ 36,686      $ 37,198      $ 1,873,338  

Commercial Real Estate:

                 

Construction

     —          —          —          —          —          357,055  

Other

     899        —          80        48,391        49,370        2,816,440  

Residential

     16,351        472        2        17,816        34,641        2,077,621  

Consumer:

                 

Home equity

     1,185        544        —          4,616        6,345        458,566  

Auto

     3,379        643        185        1,867        6,074        1,193,506  

Other

     2,538        2,141        114        6,001        10,794        210,825  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 24,864      $ 3,800      $ 381      $ 115,377      $ 144,422      $ 8,987,351  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2016

                 

Commercial

   $ 847      $ 279      $ 23      $ 56,585      $ 57,734      $ 1,859,365  

Commercial Real Estate:

                 

Construction

     —          —          —          1,170        1,170        356,632  

Other

     1,652        150        —          42,856        44,658        2,728,393  

Residential

     17,786        3,770        2        17,674        39,232        2,048,298  

Consumer:

                 

Home equity

     1,511        423        —          4,431        6,365        470,074  

Auto

     5,903        1,037        242        1,623        8,805        1,158,932  

Other

     3,561        1,919        61        7,068        12,609        218,245  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 31,260      $ 7,578      $ 328      $ 131,407      $ 170,573      $ 8,839,939  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loan Participations

Old National has loan participations, which qualify as participating interests, with other financial institutions. At March 31, 2017, these loans totaled $464.6 million, of which $237.5 million had been sold to other financial institutions and $227.1 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.

 

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Troubled Debt Restructurings

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

Any loans that are modified are reviewed by Old National to identify if a troubled debt restructuring (“TDR”) has occurred, which is when for economic or legal reasons related to a borrower’s financial difficulties, the Bank grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status. The modification of the terms of such loans include one or a combination of the following: a reduction of the stated interest rate of the loan, an extension of the maturity date at a stated rate of interest lower than the current market rate of new debt with similar risk, or a permanent reduction of the recorded investment of the loan.

Loans modified in a TDR are typically placed on nonaccrual status until we determine the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate a period of performance according to the restructured terms for six months.

If we are unable to resolve a nonperforming loan issue, the credit will be charged off when it is apparent there will be a loss. For large commercial type loans, each relationship is individually analyzed for evidence of apparent loss based on quantitative benchmarks or subjectively based upon certain events or particular circumstances. Generally, 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 three months ended March 31, 2017 and 2016:

 

           Commercial                    

(dollars in thousands)

   Commercial     Real Estate     Residential     Consumer     Total  

Three Months Ended March 31, 2017

          

Balance at January 1, 2017

   $ 16,802     $ 18,327     $ 2,985     $ 2,602     $ 40,716  

(Charge-offs)/recoveries

     35       355       —         (100     290  

Payments

     (3,827     (1,751     (142     (508     (6,228

Additions

     9,442       —         564       1,924       11,930  

Interest collected on nonaccrual loans

     2,170       358       —         11       2,539  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2017

   $ 24,622     $ 17,289     $ 3,407     $ 3,929     $ 49,247  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended March 31, 2016

          

Balance at January 1, 2016

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

(Charge-offs)/recoveries

     (826     62       32       (18     (750

Payments

     (3,565     (1,106     (348     (309     (5,328

Additions

     1,542       9,476       133       385       11,536  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2016

   $ 20,505     $ 23,034     $ 2,510     $ 3,660     $ 49,709  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Approximately $34.2 million of the TDRs at March 31, 2017 were included with nonaccrual loans, compared to $26.3 million at December 31, 2016. Old National has allocated specific reserves to customers whose loan terms have been modified in TDRs totaling $5.0 million at March 31, 2017 and $4.0 million at December 31, 2016. At March 31, 2017, Old National had committed to lend an additional $5.5 million to customers with outstanding loans that are classified as TDRs.

The pre-modification and post-modification outstanding recorded investments of loans modified as TDRs during the three months ended March 31, 2017 and 2016 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 three months ended March 31, 2017 and 2016:

 

            Pre-modification      Post-modification  
     Number      Outstanding Recorded      Outstanding Recorded  

(dollars in thousands)

   of Loans      Investment      Investment  

Three Months Ended March 31, 2017

        

Troubled Debt Restructuring:

        

Commercial

     6      $ 9,442      $ 9,442  

Residential

     3        564        564  

Consumer

     5        1,924        1,924  
  

 

 

    

 

 

    

 

 

 

Total

     14      $ 11,930      $ 11,930  
  

 

 

    

 

 

    

 

 

 

Three Months Ended March 31, 2016

        

Troubled Debt Restructuring:

        

Commercial

     10      $ 1,542      $ 1,542  

Commercial Real Estate - Other

     7        9,476        9,476  

Residential

     1        133        133  

Consumer

     8        385        385  
  

 

 

    

 

 

    

 

 

 

Total

     26      $ 11,536      $ 11,536  
  

 

 

    

 

 

    

 

 

 

The TDRs that occurred during the three months ended March 31, 2017 decreased the allowance for loan losses by $0.1 million due to a change in collateral position and resulted in no charge-offs during the three months ended March 31, 2017. The TDRs that occurred during the three months ended March 31, 2016 increased the allowance for loan losses by $0.2 million and resulted in $0.6 million of charge-offs.

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

There were no loans that were modified as TDRs within the preceding twelve months, and for which there was a payment default during the three months ended March 31, 2017.

There were 4 commercial loans and 3 commercial real estate loans totaling $0.6 million that were modified as TDRs within the preceding twelve months, and for which there was a payment default during the three months ended March 31, 2016.

The terms of certain other loans were modified during the three months ended March 31, 2017 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.

 

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Purchased credit impaired (“PCI”) loans are not considered impaired until after the point at which there has been a degradation of cash flows below our expected cash flows at acquisition. If a PCI loan is subsequently modified, and meets the definition of a TDR, it will be removed from PCI accounting and accounted for as a TDR only if the PCI loan was being accounted for individually. If the purchased credit impaired loan is being accounted for as part of a pool, it will not be removed from the pool. As of March 31, 2017, 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 was as follows:

 

     March 31,      December 31,  

(dollars in thousands)

   2017      2016  

Commercial

   $ 715      $ 850  

Commercial real estate

     25,648        32,774  

Residential

     13,148        13,580  

Consumer

     7,341        8,215  
  

 

 

    

 

 

 

Carrying amount

     46,852        55,419  

Allowance for loan losses

     (430      (278
  

 

 

    

 

 

 

Carrying amount, net of allowance

   $ 46,422      $ 55,141  
  

 

 

    

 

 

 

The outstanding balance of loans accounted for under ASC 310-30, including contractual principal, interest, fees and penalties, was $255.8 million at March 31, 2017 and $268.0 million at December 31, 2016.

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 $4.7 million

 

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during the three months ended March 31, 2017 and $8.7 million during the three months ended March 31, 2016. Improvement in cash flow expectations has resulted in a reclassification from nonaccretable difference to accretable yield as shown in the table below.

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

 

(dollars in thousands)

   2017      2016  

Balance at January 1,

   $ 33,603      $ 45,310  

Accretion of income

     (4,685      (8,661

Reclassifications from (to) nonaccretable difference

     610        2,870  

Disposals/other adjustments

     6        367  
  

 

 

    

 

 

 

Balance at March 31,

   $ 29,534      $ 39,886  
  

 

 

    

 

 

 

Included in Old National’s allowance for loan losses is $0.4 million related to the purchased loans disclosed above at March 31, 2017, compared to $0.3 million at December 31, 2016.

PCI loans purchased during 2016 for which it was probable at acquisition that all contractually required payments would not be collected were as follows:

 

(dollars in thousands)

   Anchor (1)  

Contractually required payments

   $ 29,544  

Nonaccretable difference

     (6,153
  

 

 

 

Cash flows expected to be collected at acquisition

     23,391  

Accretable yield

     (3,217
  

 

 

 

Fair value of acquired loans at acquisition

   $ 20,174  
  

 

 

 

 

(1) Old National acquired Anchor effective May 1, 2016.

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 – OTHER REAL ESTATE OWNED

The following table presents activity in other real estate owned for the three months ended March 31, 2017 and 2016:

 

(dollars in thousands)

   2017      2016  

Balance at January 1,

   $ 18,546      $ 12,498  

Additions

     291        2,566  

Sales

     (5,420      (1,206

Impairment

     (870      (336
  

 

 

    

 

 

 

Balance (1) at March 31,

   $ 12,547      $ 13,522  
  

 

 

    

 

 

 

 

(1) Includes repossessed personal property of $0.3 million at March 31, 2017 and 2016.

At March 31, 2017, foreclosed residential real estate property included in the table above totaled $1.1 million. At March 31, 2017, consumer mortgage loans collateralized by residential real property that were in the process of foreclosure totaled $3.7 million.

Other real estate owned that was covered by loss share arrangements totaled $6.5 million at March 31, 2016 and was included in other real estate owned in the table above and on the balance sheet for that period. Old National entered into an agreement with the FDIC on June 22, 2016 to terminate its loss share agreements.

 

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NOTE 10 – PREMISES AND EQUIPMENT

The composition of premises and equipment at March 31, 2017 and December 31, 2016 was as follows:

 

     March 31,      December 31,  

(dollars in thousands)

   2017      2016  

Land

   $ 69,484      $ 71,769  

Buildings

     317,582        322,165  

Furniture, fixtures, and equipment

     100,489        102,631  

Leasehold improvements

     27,894        28,555  
  

 

 

    

 

 

 

Total

     515,449        525,120  

Accumulated depreciation

     (94,583      (95,498
  

 

 

    

 

 

 

Premises and equipment, net

   $ 420,866      $ 429,622  
  

 

 

    

 

 

 

Depreciation expense was $5.2 million for the three months ended March 31, 2017, compared to $3.5 million for the three months ended March 31, 2016.

Operating Leases

Old National rents certain premises and equipment under operating leases, which expire at various dates. Many of these leases require the payment of property taxes, insurance premiums, maintenance, and other costs. In some cases, rentals are subject to increase in relation to a cost-of-living index. The leases have original terms ranging from less than one year to twenty-four years, and Old National has the right, at its option, to extend the terms of certain leases for four additional successive terms of five years. Old National does not have any material sub-lease agreements. Rent expense was $3.9 million for the three months ended March 31, 2017, compared to $6.3 million for the three months ended March 31, 2016.

Old National had deferred gains remaining associated with prior sale leaseback transactions totaling $9.7 million at March 31, 2017 and $10.3 million at December 31, 2016. The gains will be recognized over the remaining term of the leases. The leases had original terms ranging from five to twenty-four years.

Capital Leases

Old National leases a branch building and certain equipment under capital leases. See Note 16 to the consolidated financial statements for detail regarding these leases.

NOTE 11 - GOODWILL AND OTHER INTANGIBLE ASSETS

The following table shows the changes in the carrying amount of goodwill for the three months ended March 31, 2017 and 2016:

 

(dollars in thousands)

   2017      2016  

Balance at January 1,

   $ 655,018      $ 584,634  

Acquisitions

     —          —    
  

 

 

    

 

 

 

Balance at March 31,

   $ 655,018      $ 584,634  
  

 

 

    

 

 

 

Goodwill is reviewed annually for impairment. Old National completed its most recent annual goodwill impairment test as of August 31, 2016 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.

 

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The gross carrying amount and accumulated amortization of other intangible assets at March 31, 2017 and December 31, 2016 were as follows:

 

     Gross      Accumulated      Net  
     Carrying      Amortization      Carrying  

(dollars in thousands)

   Amount      and Impairment      Amount  

March 31, 2017

        

Amortized intangible assets:

        

Core deposit

   $ 81,663      $ (55,671    $ 25,992  

Customer trust relationships

     16,547        (8,216      8,331  

Customer loan relationships

     4,413        (4,079      334  
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 102,623      $ (67,966    $ 34,657  
  

 

 

    

 

 

    

 

 

 

December 31, 2016

        

Amortized intangible assets:

        

Core deposit

   $ 81,663      $ (53,214    $ 28,449  

Customer trust relationships

     16,547        (7,753      8,794  

Customer loan relationships

     4,413        (3,979      434  
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 102,623      $ (64,946    $ 37,677  
  

 

 

    

 

 

    

 

 

 

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.

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 three months ended March 31, 2017 or 2016. Total amortization expense associated with intangible assets was $3.0 million for the three months ended March 31, 2017 and $2.6 million for the three months ended March 31, 2016.

Estimated amortization expense for future years is as follows:

 

(dollars in thousands)

      

2017 remaining

   $ 7,995  

2018

     8,687  

2019

     6,737  

2020

     4,883  

2021

     3,111  

Thereafter

     3,244  
  

 

 

 

Total

   $ 34,657  
  

 

 

 

NOTE 12 – LOAN SERVICING RIGHTS

At March 31, 2017, loan servicing rights derived from loans sold with servicing retained totaled $25.4 million, compared to $25.6 million at December 31, 2016. Loans serviced for others are not reported as assets. The principal balance of loans serviced for others was $3.375 billion at March 31, 2017, compared to $3.385 billion at December 31, 2016. Approximately 99% of the loans serviced for others at March 31, 2017 were residential mortgage loans. Custodial escrow balances maintained in connection with serviced loans were $20.8 million at March 31, 2017 and $5.3 million at December 31, 2016.

 

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The following table summarizes the carrying values and activity related to loan servicing rights and the related valuation allowance for the three months ended March 31, 2017 and 2016:

 

(dollars in thousands)

   2017      2016  

Balance at January 1,

   $ 25,629      $ 10,502  

Additions

     1,041        481  

Amortization

     (1,174      (447
  

 

 

    

 

 

 

Balance before valuation allowance at March 31,

     25,496        10,536  
  

 

 

    

 

 

 

Valuation allowance:

     

Balance at January 1,

     (68      (34

(Additions)/recoveries

     18        32  
  

 

 

    

 

 

 

Balance at March 31,

     (50      (2
  

 

 

    

 

 

 

Loan servicing rights, net

   $ 25,446      $ 10,534  
  

 

 

    

 

 

 

At March 31, 2017, the fair value of servicing rights was $26.8 million, which was determined using a discount rate of 13% and a weighted average prepayment speed of 133% PSA. At December 31, 2016, the fair value of servicing rights was $26.8 million, which was determined using a discount rate of 13% and a weighted average prepayment speed of 136% PSA.

NOTE 13 – QUALIFIED AFFORDABLE HOUSING PROJECTS AND OTHER TAX CREDIT INVESTMENTS

The Company is a limited partner in several tax-advantaged limited partnerships whose purpose is to invest in approved qualified affordable housing or other renovation or community revitalization projects. These investments are included in other assets on the balance sheet, with any unfunded commitments included with other liabilities. Certain of these assets qualify for the proportional amortization method and are amortized over the period that the Company expects to receive the tax credits, with the expense included within income tax expense on the consolidated statements of income. The other investments are accounted for under the equity method, with the expense included within pre-tax income on the consolidated statements of income. All of the Company’s tax credit investments are evaluated for impairment at the end of each reporting period. As of March 31, 2017, the Company expects to recover its remaining investments through the use of the tax credits that were generated by the investments.

The following table summarizes Old National’s investments in Low Income Housing Tax Credits (“LIHTC”), Federal Historic Tax Credits (“FHTC”), and Indiana Community Revitalization Enhancement District Tax Credits (“CReED”) at March 31, 2017:

 

(dollars in thousands)                       Three Months Ended      Three Months Ended  
                        March 31,      March 31,  
          At March 31, 2017      2017      2016      2017     2016  
     Accounting           Unfunded      Amortization      Tax Benefit  

Investment

   Method    Investment      Commitment (1)      Expense (2)      Recognized (2)  

LIHTC and other qualifying investments

   Proportional
amortization
   $ 27,988      $ 14,875      $ 941      $ 201      $ (1,297   $ (281

FHTC

   Equity      9,835        7,425        —          —          (1,520     —    

CReED

   Equity      1,504        1,502        —          —          —         —    
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

      $ 39,327      $ 23,802      $ 941      $ 201      $ (2,817   $ (281
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) All commitments will be paid by the Company by 2027.
(2) Tax credit investments are included in the Company’s estimate of the effective annual tax rate.

 

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The following table summarizes the Company’s qualified affordable housing projects and other tax credit investments at December 31, 2016:

 

(dollars in thousands)         At December 31, 2016  
     Accounting           Unfunded  

Investment

   Method    Investment      Commitment  

LIHTC and other qualifying investments

   Proportional
amortization
   $ 29,110      $ 16,210  

FHTC

   Equity      4,434        3,104  

CReED

   Equity      1,504        1,502  
     

 

 

    

 

 

 

Total

      $ 35,048      $ 20,816  
     

 

 

    

 

 

 

NOTE 14 – SECURITES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities sold under agreements to repurchase are secured borrowings. The Company pledges investment securities to secure these borrowings. The following table presents securities sold under agreements to repurchase and related weighted-average interest rates at or for the three months ended March 31:

 

(dollars in thousands)

   2017     2016  

Outstanding at March 31,

   $ 345,550     $ 379,060  

Average amount outstanding

     331,400       386,044  

Maximum amount outstanding at any month-end

     345,550       396,695  

Weighted average interest rate:

    

During the three months ended March 31,

     0.31     0.39

At March 31,

     0.35       0.39  

The following table presents the contractual maturity of our secured borrowings and class of collateral pledged:

 

     At March 31, 2017  
     Remaining Contractual Maturity of the Agreements  
     Overnight and      Up to             Greater Than         

(dollars in thousands)

   Continuous      30 Days      30-90 Days      90 days      Total  

Repurchase Agreements:

              

U.S. Treasury and agency securities

   $ 320,550      $ —        $ —        $ 25,000      $ 345,550  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 320,550      $ —        $ —        $ 25,000      $ 345,550  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The fair value of securities pledged to secure repurchase agreements may decline. The Company has pledged securities valued at 106% of the gross outstanding balance of repurchase agreements at March 31, 2017 to manage this risk.

 

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NOTE 15 – FEDERAL HOME LOAN BANK ADVANCES

The following table summarizes Old National Bank’s Federal Home Loan Bank (“FHLB”) advances at March 31, 2017 and December 31, 2016:

 

     March 31,      December 31,  

(dollars in thousands)

   2017      2016  

Federal Home Loan Bank advances (fixed rates 0.66% to 6.08% and variable rates 0.95% to 1.32%) maturing April 2017 to January 2025

   $ 1,441,395      $ 1,353,225  

ASC 815 fair value hedge and other basis adjustments

     (365      (133
  

 

 

    

 

 

 

Total other borrowings

   $ 1,441,030      $ 1,353,092  
  

 

 

    

 

 

 

FHLB advances had weighted-average rates of 1.07% at March 31, 2017 and 0.94% at December 31, 2016. These borrowings are collateralized by investment securities and residential real estate loans up to 143% of outstanding debt.

Contractual maturities of FHLB advances at March 31, 2017 were as follows:

 

(dollars in thousands)

      

Due in 2017

   $ 753,818  

Due in 2018

     200,046  

Due in 2019

     202,358  

Due in 2020

     50,000  

Due in 2021

     —    

Thereafter

     235,173  

ASC 815 fair value hedge and other basis adjustments

     (365
  

 

 

 

Total

   $ 1,441,030  
  

 

 

 

NOTE 16 – OTHER BORROWINGS

The following table summarizes Old National and its subsidiaries’ other borrowings at March 31, 2017 and December 31, 2016:

 

     March 31,      December 31,  

(dollars in thousands)

   2017      2016  

Old National Bancorp:

     

Senior unsecured bank notes (fixed rate 4.125%) maturing August 2024

   $ 175,000      $ 175,000  

Unamortized debt issuance costs related to Senior unsecured bank notes

     (1,143      (1,182

Junior subordinated debentures (variable rates of 2.49% to 2.90%) maturing March 2035 to September 2037

     45,000        45,000  

Other basis adjustments

     (3,849      (3,971

Old National Bank:

     

Capital lease obligation

     4,013        4,092  
  

 

 

    

 

 

 

Total other borrowings

   $ 219,021      $ 218,939  
  

 

 

    

 

 

 

 

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Contractual maturities of other borrowings at March 31, 2017 were as follows:

 

(dollars in thousands)

      

Due in 2017

   $ 117  

Due in 2018

     79  

Due in 2019

     85  

Due in 2020

     91  

Due in 2021

     99  

Thereafter

     223,542  

Unamortized debt issuance costs and other basis adjustments

     (4,992
  

 

 

 

Total

   $ 219,021  
  

 

 

 

Senior Notes

In August 2014, Old National issued $175.0 million of senior unsecured notes with a 4.125% interest rate. These notes pay interest on February 15 and August 15. The notes mature on August 15, 2024.

Junior Subordinated Debentures

Junior subordinated debentures related to trust preferred securities are classified in “other borrowings”. These securities qualify as Tier 1 capital for regulatory purposes, subject to certain limitations.

In 2007, Old National acquired St. Joseph Capital Trust II in conjunction with its acquisition of St. Joseph Capital Corporation. Old National guarantees the payment of distributions on the trust preferred securities issued by St. Joseph Capital Trust II. St. Joseph Capital Trust II issued $5.0 million in preferred securities in March 2005. The preferred securities have a variable rate of interest priced at the three-month London Interbank Offered Rate (“LIBOR”) plus 175 basis points, payable quarterly and maturing on March 17, 2035. Proceeds from the issuance of these securities were used to purchase junior subordinated debentures with the same financial terms as the securities issued by St. Joseph Capital Trust II.

In 2011, Old National acquired Monroe Bancorp Capital Trust I and Monroe Bancorp Statutory Trust II in conjunction with its acquisition of Monroe Bancorp. Old National guarantees the payment of distributions on the trust preferred securities issued by Monroe Bancorp Capital Trust I and Monroe Bancorp Statutory Trust II. Monroe Bancorp Capital Trust I issued $3.0 million in preferred securities in July 2006. The preferred securities have a variable rate of interest priced at the three-month LIBOR plus 160 basis points. Proceeds from the issuance of these securities were used to purchase junior subordinated debentures with the same financial terms as the securities issued by Monroe Bancorp Capital Trust I. Monroe Bancorp Statutory Trust II issued $5.0 million in preferred securities in March 2007. The preferred securities have a variable rate of interest priced at the three-month LIBOR plus 160 basis points. Proceeds from the issuance of these securities were used to purchase junior subordinated debentures with the same financial terms as the securities issued by Monroe Bancorp Statutory Trust II.

In 2012, Old National acquired Home Federal Statutory Trust I in conjunction with its acquisition of Indiana Community Bancorp. Old National guarantees the payment of distributions on the trust preferred securities issued by Home Federal Statutory Trust I. Home Federal Statutory Trust I issued $15.0 million in preferred securities in September 2006. The preferred securities carry a variable rate of interest priced at the three-month LIBOR plus 165 basis points. Proceeds from the issuance of these securities were used to purchase junior subordinated debentures with the same financial terms as the securities issued by Home Federal Statutory Trust I.

On April 25, 2014, Old National acquired Tower Capital Trust 2 and Tower Capital Trust 3 in conjunction with its acquisition of Tower Financial Corporation. Old National guarantees the payment of distributions on the trust preferred securities issued by Tower Capital Trust 2 and Tower Capital Trust 3. Tower Capital Trust 2 issued $8.0 million in preferred securities in December 2005. The preferred securities carry a variable rate of interest priced at the three-month LIBOR plus 134 basis points. Proceeds from the issuance of these securities were used to purchase junior subordinated debentures with the same financial terms as the securities issued by Tower Capital Trust 2.

 

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Tower Capital Trust 3 issued $9.0 million in preferred securities in December 2006. The preferred securities carry a variable rate of interest priced at the three-month LIBOR plus 169 basis points. Proceeds from the issuance of these securities were used to purchase junior subordinated debentures with the same financial terms as the securities issued by Tower Capital Trust 3.

Old National, at any time, may redeem the junior subordinated debentures at par and thereby cause a redemption of the trust preferred securities in whole or in part.

Capital Lease Obligation

On January 1, 2004, Old National entered into a long-term capital lease obligation for a branch office building in Owensboro, Kentucky, which extends for 25 years with one renewal option for 10 years. The economic substance of this lease is that Old National is financing the acquisition of the building through the lease and accordingly, the building is recorded as an asset and the lease is recorded as a liability. The fair value of the capital lease obligation was estimated using a discounted cash flow analysis based on Old National’s current incremental borrowing rate for similar types of borrowing arrangements.

On May 1, 2016, Old National acquired Anchor, assuming a five year capital lease obligation for equipment.

At March 31, 2017, the future minimum lease payments under the capital lease arrangements were as follows:

 

(dollars in thousands)

      

2017 remaining

   $ 369  

2018

     410  

2019

     430  

2020

     430  

2021

     430  

Thereafter

     7,976  
  

 

 

 

Total minimum lease payments

     10,045  

Less amounts representing interest

     (6,032
  

 

 

 

Present value of net minimum lease payments

   $ 4,013  
  

 

 

 

NOTE 17 - EMPLOYEE BENEFIT PLANS

Retirement Plan

Old National had a funded noncontributory defined benefit plan (the “Retirement Plan”) that had been frozen since December 31, 2005. During the first quarter of 2016, the Company notified plan participants of its intent to terminate the Retirement Plan effective May 15, 2016. During October 2016, the Retirement Plan settled plan liabilities through either lump sum distributions to plan participants or annuity contracts purchased from a third-party insurance company that provided for the payment of vested benefits to those participants that did not elect the lump sum option. At March 31, 2017, there were no remaining plan assets.

Restoration Plan

Old National maintains an unfunded pension restoration plan (the “Restoration Plan”) which provides benefits for eligible employees that are in excess of the limits under Section 415 of the Internal Revenue Code of 1986, as amended, that apply to the Retirement Plan. The Restoration Plan is designed to comply with the requirements of ERISA. The entire cost of the plan, which was also frozen as of December 31, 2005, is supported by contributions from the Company. The Restoration Plan is unfunded.

Old National contributed $0.2 million to cover benefit payments from the Restoration Plan during the three months ended March 31, 2017. Old National expects to contribute an additional $18 thousand to cover benefit payments from the Restoration Plan during the remainder of 2017.

 

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The net periodic benefit cost and its components were as follows:

 

     Three Months Ended  
     March 31,  

(dollars in thousands)

   2017      2016  

Interest cost

   $ 10      $ 13  

Recognized actuarial loss

     27        27  
  

 

 

    

 

 

 

Net periodic benefit cost

   $ 37      $ 40  
  

 

 

    

 

 

 

NOTE 18 - STOCK-BASED COMPENSATION

At March 31, 2017, Old National had 4.9 million shares remaining available for issuance under the Company’s Amended and Restated 2008 Incentive Compensation Plan. The granting of awards to key employees is typically in the form of restricted stock awards or units.

Restricted Stock Awards

The Company granted 95 thousand time-based restricted stock awards to certain key officers during the three months ended March 31, 2017, with shares vesting over a thirty-six month period. Compensation expense is recognized on a straight-line basis over the vesting period. Shares are subject to certain restrictions and risk of forfeiture by the participants. At March 31, 2017, unrecognized compensation expense was estimated to be $4.4 million for unvested restricted stock awards.

Old National recorded expense of $0.4 million, net of tax, during the three months ended March 31, 2017, compared to $0.3 million, net of tax, during the three months ended March 31, 2016 related to the vesting of restricted stock awards.

Restricted Stock Units

The Company granted 277 thousand shares of performance based restricted stock units to certain key officers during the three months ended March 31, 2017, with shares vesting at the end of a thirty-six month period based on the achievement of certain targets. For certain awards, the level of performance could increase or decrease the percentage of shares earned. Compensation expense is recognized on a straight-line basis over the vesting period. Shares are subject to certain restrictions and risk of forfeiture by the participants. At March 31, 2017, unrecognized compensation expense was estimated to be $6.4 million.

Old National recorded stock based compensation expense, net of tax, related to restricted stock units of $0.4 million during the three months ended March 31, 2017, compared to $0.5 million during the three months ended March 31, 2016.

Stock Options

Old National has not granted stock options since 2009. However, Old National did acquire stock options through prior year acquisitions. Old National did not record any stock based compensation expense related to these stock options during the three months ended March 31, 2017 or 2016.

Stock Appreciation Rights

Old National has never granted stock appreciation rights. However, Old National did acquire stock appreciation rights through a prior year acquisition. Old National did not record any incremental expense associated with the conversion of these stock appreciation rights during the three months ended March 31, 2017 or 2016. At March 31, 2017, 0.1 million stock appreciation rights remained outstanding.

 

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NOTE 19 - INCOME TAXES

Following is a summary of the major items comprising the differences in taxes from continuing operations computed at the federal statutory rate and as recorded in the consolidated statements of income:

 

     Three Months Ended  
     March 31,  

(dollars in thousands)

   2017     2016  

Provision at statutory rate of 35%

   $ 16,269     $ 12,827  

Tax-exempt income

     (4,397 )      (4,168

State income taxes

     851       583  

Interim period effective rate adjustment

     (455 )      (148

Tax credit investments

     (1,876 )      (80

Other, net

     99       657  
  

 

 

   

 

 

 

Income tax expense

   $ 10,491     $ 9,671  
  

 

 

   

 

 

 

Effective tax rate

     22.6 %      26.4
  

 

 

   

 

 

 

In accordance with ASC 740-270, Accounting for Interim Reporting, the provision for income taxes was recorded at March 31, 2017 and 2016 based on the current estimate of the effective annual rate.

Tax credit investments are included in the Company’s estimate of the effective annual tax rate. The lower effective tax rate during the three months ended March 31, 2017 when compared to the three months ended March 31, 2016 is the result of an increase in federal tax credits available.

Unrecognized Tax Benefits

The Company and its subsidiaries file a consolidated U.S. federal income tax return, as well as filing various state returns. Unrecognized state income tax benefits are reported net of their related deferred federal income tax benefit.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:

 

(dollars in thousands)

   2017      2016  

Balance at January 1,

   $ 777      $ 124  

Additions based on tax positions related to the current year

     32        14  
  

 

 

    

 

 

 

Balance at March 31,

   $ 809      $ 138  
  

 

 

    

 

 

 

If recognized, approximately $0.8 million of unrecognized tax benefits, net of interest, would favorably affect the effective income tax rate in future periods.

 

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Net Deferred Tax Assets

Significant components of net deferred tax assets (liabilities) were as follows at March 31, 2017 and December 31, 2016:

 

     March 31,      December 31,  

(dollars in thousands)

   2017      2016  

Deferred Tax Assets

     

Allowance for loan losses, net of recapture

   $ 19,730      $ 19,773  

Benefit plan accruals

     15,603        23,846  

Alternative minimum tax credit

     19,783        19,523  

Unrealized losses on benefit plans

     194        205  

Net operating loss carryforwards

     65,690        66,917  

Federal tax credits

     3,448        35  

Other-than-temporary impairment

     3,606        3,606  

Acquired loans

     37,331        40,522  

Lease exit obligation

     2,440        2,060  

Unrealized losses on available-for-sale investment securities

     18,088        23,365  

Unrealized losses on held-to-maturity investment securities

     6,964        7,118  

Unrealized losses on hedges

     3,212        4,116  

Other real estate owned

     2,288        3,310  

Other, net

     2,405        2,675  
  

 

 

    

 

 

 

Total deferred tax assets

     200,782        217,071  
  

 

 

    

 

 

 

Deferred Tax Liabilities

     

Accretion on investment securities

     (657      (700

Purchase accounting

     (16,994      (17,552

Loan servicing rights

     (9,584      (9,627

Premises and equipment

     (4,937      (4,800

Other, net

     (3,234      (2,529
  

 

 

    

 

 

 

Total deferred tax liabilities

     (35,406      (35,208
  

 

 

    

 

 

 

Net deferred tax assets

   $ 165,376      $ 181,863  
  

 

 

    

 

 

 

Through the acquisition of Anchor in the second quarter of 2016 and Lafayette Savings Bank in the fourth quarter of 2014, both former thrifts, Old National Bank’s retained earnings at March 31, 2017 include base-year bad debt reserves, created for tax purposes prior to 1988, totaling $52.8 million. Of this total, $50.9 million was acquired from Anchor, and $1.9 million was acquired from Lafayette Savings Bank. Base-year reserves are subject to recapture in the unlikely event that Old National Bank (1) makes distributions in excess of current and accumulated earnings and profits, as calculated for federal income tax purposes, (2) redeems its stock, or (3) liquidates. Old National Bank has no intention of making such a nondividend distribution. Accordingly, under current accounting principles, a related deferred income tax liability of $19.8 million has not been recognized.

No valuation allowance was recorded at March 31, 2017 or December 31, 2016 because, based on current expectations, Old National believes it will generate sufficient income in future years to realize deferred tax assets. Old National has federal net operating loss carryforwards totaling $158.8 million at March 31, 2017 and $162.9 million at December 31, 2016. This federal net operating loss was acquired from the acquisitions of Indiana Community Bancorp in 2012 and Anchor in 2016. If not used, the federal net operating loss carryforwards will begin to expire in 2027. Old National has alternative minimum tax credit carryforwards totaling $19.8 million at March 31, 2017 and $19.5 million at December 31, 2016. The alternative minimum tax credit carryforward does not expire. Old National has federal tax credit carryforwards of $3.4 million at March 31, 2017 and $35 thousand at December 31, 2016. The federal tax credits consist mainly of low income housing credits, research and development credits, and federal historic credits that, if not used, will expire from 2027 to 2037. Old National has state net operating loss carryforwards totaling $211.1 million at March 31, 2017 and $206.3 million at December 31, 2016. If not used, the state net operating loss carryforwards will expire from 2023 to 2037.

 

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NOTE 20 - DERIVATIVE FINANCIAL INSTRUMENTS

As part of our overall interest rate risk management, Old National uses derivative instruments, including interest rate swaps, caps and floors. The notional amount of these derivative instruments was $810.0 million at March 31, 2017 and $660.0 million at December 31, 2016. These derivative financial instruments at March 31, 2017 consist of $35.0 million notional amount of receive-fixed, pay-variable interest rate swaps on certain of its FHLB advances and $775.0 million notional amount of pay-fixed, receive-variable interest rate swaps on certain of its FHLB advances. Derivative financial instruments at December 31, 2016 consist of $35.0 million notional amount of receive-fixed, pay-variable interest rate swaps on certain of its FHLB advances and $625.0 million notional amount of pay-fixed, receive-variable interest rate swaps on certain of its FHLB advances. These hedges were entered into to manage interest rate risk. Derivative instruments are recognized on the balance sheet at their fair value and are not reported on a net basis.

In addition, commitments to fund certain mortgage loans (interest rate lock commitments) and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives. At March 31, 2017, the notional amount of the interest rate lock commitments was $58.3 million and forward commitments were $60.8 million. At December 31, 2016, the notional amount of the interest rate lock commitments was $40.3 million and forward commitments were $86.1 million. It is our practice to enter into forward commitments for the future delivery of residential mortgage loans to third party investors when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from our commitment to fund the loans.

Old National also enters into derivative instruments for the benefit of its customers. The notional amounts of these customer derivative instruments and the offsetting counterparty derivative instruments were $642.7 million at March 31, 2017. The notional amounts of these customer derivative instruments and the offsetting counterparty derivative instruments were $582.7 million at December 31, 2016. These derivative contracts do not qualify for hedge accounting. These instruments include interest rate swaps, caps and collars. Commonly, Old National will economically hedge significant exposures related to these derivative contracts entered into for the benefit of customers by entering into offsetting contracts with approved, reputable, independent counterparties with substantially matching terms.

Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. Old National’s exposure is limited to the replacement value of the contracts rather than the notional, principal or contract amounts. There are provisions in our agreements with the counterparties that allow for certain unsecured credit exposure up to an agreed threshold. Exposures in excess of the agreed thresholds are collateralized. In addition, we minimize credit risk through credit approvals, limits, and monitoring procedures.

Amounts reported in AOCI related to cash flow hedges will be reclassified to interest income or interest expense as interest payments are received or paid on the Company’s derivative instruments. During the next 12 months, the Company estimates that $0.3 million will be reclassified to interest income and $5.2 million will be reclassified to interest expense.

 

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On the balance sheet, asset derivatives are included in other assets, and liability derivatives are included in other liabilities. The following table summarizes the fair value of derivative financial instruments utilized by Old National:

 

     March 31, 2017      December 31, 2016  

(dollars in thousands)

   Asset
Derivatives
     Liability
Derivatives
     Asset
Derivatives
     Liability
Derivatives
 

Derivatives designated as hedging instruments

           

Interest rate contracts

   $ 3,113      $ 9,433      $ 3,056      $ 11,582  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives designated as hedging instruments

   $ 3,113      $ 9,433      $ 3,056      $ 11,582  
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives not designated as hedging instruments

           

Interest rate contracts

   $ 11,913      $ 11,994      $ 11,903      $ 11,992  

Mortgage contracts

     1,571        322        2,742        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives not designated as hedging instruments

   $ 13,484      $ 12,316      $ 14,645      $ 11,992  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 16,597      $ 21,749      $ 17,701      $ 23,574  
  

 

 

    

 

 

    

 

 

    

 

 

 

The effect of derivative instruments on the consolidated statements of income for the three months ended March 31, 2017 and 2016 are as follows:

 

          Three Months Ended  
          March 31,  

(dollars in thousands)

        2017      2016  
Derivatives in    Location of Gain or (Loss)    Amount of Gain or (Loss)  
Fair Value Hedging    Recognized in Income on    Recognized in Income on  

Relationships

  

Derivative

   Derivative  

Interest rate contracts (1)

   Interest income / (expense)    $ (1,663    $ (1,043

Interest rate contracts (2)

   Other income / (expense)      35        50  
     

 

 

    

 

 

 

Total

      $ (1,628    $ (993
     

 

 

    

 

 

 
Derivatives in    Location of Gain or (Loss)    Amount of Gain or (Loss)  
Cash Flow Hedging    Recognized in Income on    Recognized in Income on  

Relationships

  

Derivative

   Derivative  

Interest rate contracts (1)

   Interest income / (expense)    $ 81      $ 86  
     

 

 

    

 

 

 

Total

      $ 81      $ 86  
     

 

 

    

 

 

 
     Location of Gain or (Loss)    Amount of Gain or (Loss)  
Derivatives Not Designated as    Recognized in Income on    Recognized in Income on  

Hedging Instruments

  

Derivative

   Derivative  

Interest rate contracts (3)

   Other income / (expense)    $ 10      $ (3

Mortgage contracts

   Mortgage banking revenue      (1,494      461  
     

 

 

    

 

 

 

Total

      $ (1,484    $ 458  
     

 

 

    

 

 

 

 

(1) Amounts represent the net interest payments as stated in the contractual agreements.
(2) Amounts represent ineffectiveness on derivatives designated as fair value hedges.
(3) Includes the valuation differences between the customer and offsetting counterparty swaps.

 

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NOTE 21 - COMMITMENTS AND CONTINGENCIES

Litigation

In the normal course of business, Old National Bancorp and its subsidiaries have been named, from time to time, as defendants in various legal actions. Certain of the actual or threatened legal actions may include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages.

Old National contests liability and/or the amount of damages as appropriate in each pending matter. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases where claimants seek substantial or indeterminate damages or where investigations and proceedings are in the early stages, Old National cannot predict with certainty the loss or range of loss, if any, related to such matters, how or if such matters will be resolved, when they will ultimately be resolved, or what the eventual settlement, or other relief, if any, might be. Subject to the foregoing, Old National believes, based on current knowledge and after consultation with counsel, that the outcome of such pending matters will not have a material adverse effect on the consolidated financial condition of Old National, although the outcome of such matters could be material to Old National’s operating results and cash flows for a particular future period, depending on, among other things, the level of Old National’s revenues or income for such period. Old National will accrue for a loss contingency if (1) it is probable that a future event will occur and confirm the loss and (2) the amount of the loss can be reasonably estimated.

Old National is not currently involved in any material litigation.

Credit-Related Financial Instruments

In the normal course of business, Old National’s banking affiliates have entered into various agreements to extend credit, including loan commitments of $2.417 billion and standby letters of credit of $54.0 million at March 31, 2017. At March 31, 2017, approximately $2.277 billion of the loan commitments had fixed rates and $140.2 million had floating rates, with the floating interest rates ranging from 0% to 21%. At December 31, 2016, loan commitments totaled $2.354 billion and standby letters of credit totaled $51.7 million. These commitments are not reflected in the consolidated financial statements. The allowance for unfunded loan commitments totaled $3.0 million at March 31, 2017 and $3.2 million at December 31, 2016.

Old National had credit extensions with various unaffiliated banks related to letter of credit commitments issued on behalf of Old National’s clients totaling $13.3 million at March 31, 2017 and December 31, 2016. Old National provided collateral to the unaffil