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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 June 30, 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

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 135,516,000 shares outstanding at June 30, 2017.

 

 

 


Table of Contents

OLD NATIONAL BANCORP

FORM 10-Q

TABLE OF CONTENTS

 

     Page  

PART I. FINANCIAL INFORMATION

     4  

Item 1. Financial Statements

     4  

Consolidated Balance Sheets

     4  

Consolidated Statements of Income (unaudited)

     5  

Consolidated Statements of Comprehensive Income (unaudited)

     6  

Consolidated Statements of Changes in Shareholders’ Equity (unaudited)

     7  

Consolidated Statements of Cash Flows (unaudited)

     8  

Notes to Consolidated Financial Statements (unaudited)

     9  

Note 1. Basis of Presentation

     9  

Note 2. Recent Accounting Pronouncements

     9  

Note 3. Acquisition and Divestiture Activity

     14  

Note 4. Net Income Per Share

     16  

Note 5. Accumulated Other Comprehensive Income (Loss)

     17  

Note 6. Investment Securities

     20  

Note 7. Loans Held for Sale

     24  

Note 8. Loans and Allowance for Loan Losses

     24  

Note 9. Other Real Estate Owned

     37  

Note 10. Premises and Equipment

     37  

Note 11. Goodwill and Other Intangible Assets

     38  

Note 12. Loan Servicing Rights

     39  

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

     39  

Note 14. Securities Sold Under Agreements to Repurchase

     40  

Note 15. Federal Home Loan Bank Advances

     41  

Note 16. Other Borrowings

     42  

Note 17. Employee Benefit Plans

     44  

Note 18. Stock-Based Compensation

     44  

Note 19. Income Taxes

     45  

Note 20. Derivative Financial Instruments

     47  

Note 21. Commitments and Contingencies

     50  

Note 22. Financial Guarantees

     50  

Note 23. Segment Information

     51  

Note 24. Fair Value

     51  

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     60  

Executive Summary

     61  

Results of Operations

     62  

Financial Condition

     67  

Risk Management

     70  

Off-Balance Sheet Arrangements

     79  

Contractual Obligations

     80  

Critical Accounting Policies and Estimates

     80  

Forward-Looking Statements

     84  

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     84  

Item 4. Controls and Procedures

     84  

PART II. OTHER INFORMATION

     85  

Item 1A. Risk Factors

     85  

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     85  

Item 5. Other Information

     85  

Item 6. Exhibits

     86  

SIGNATURE

     87  

 

2


Table of Contents

GLOSSARY OF ABBREVIATIONS AND ACRONYMS

As used in this report, references to “Old National,” “we,” “our,” “us,” and similar terms refer to the consolidated entity consisting of Old National Bancorp and its wholly-owned affiliates. Old National Bancorp refers solely to the parent holding company, and Old National Bank refers to Old National’s bank subsidiary.

The acronyms and abbreviations identified below are used in the Notes to Consolidated Financial Statements (Unaudited) as well as in the Management’s Discussion and Analysis of Financial Condition and Results of Operations. You may find it helpful to refer to this page as you read this report.

Anchor: Anchor BanCorp Wisconsin Inc.

AnchorBank: AnchorBank, fsb

AOCI: accumulated other comprehensive income (loss)

AQR: asset quality rating

ASC: Accounting Standards Codification

ASU: Accounting Standards Update

ATM: automated teller machine

CDO: collateralized debt obligation

Common Stock: Old National Bancorp common stock, $1 per share stated value

CReED: Indiana Community Revitalization Enhancement District Tax Credit

DTI: debt-to-income

EITF: Emerging Issues Task Force

FASB: Financial Accounting Standards Board

FDIC: Federal Deposit Insurance Corporation

FHLB: Federal Home Loan Bank

FHTC: Federal Historic Tax Credit

FICO: Fair Isaac Corporation

GAAP: generally accepted accounting principles

LGD: loss given default

LIBOR: London Interbank Offered Rate

LIHTC: Low Income Housing Tax Credit

LTV: loan-to-value

N/A: not applicable

N/M: not meaningful

NASDAQ: The NASDAQ Stock Market LLC

NOW: negotiable order of withdrawal

ONI: ONB Insurance Group, Inc.

OTTI: other-than-temporary impairment

PCI: purchased credit impaired

PD: probability of default

TBA: to be announced

TDR: troubled debt restructuring

 

3


Table of Contents

OLD NATIONAL BANCORP

CONSOLIDATED BALANCE SHEETS

 

     June 30,     December 31,     June 30,  

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

   2017     2016     2016  
     (unaudited)           (unaudited)  

Assets

      

Cash and due from banks

   $ 230,809     $ 209,381     $ 205,973  

Money market and other interest-earning investments

     31,932       46,138       61,947  
  

 

 

   

 

 

   

 

 

 

Total cash and cash equivalents

     262,741       255,519       267,920  

Trading securities, at fair value

     5,235       4,982       4,838  

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

      

U.S. Treasury

     5,634       7,103       12,269  

U.S. government-sponsored entities and agencies

     580,624       493,956       540,775  

Mortgage-backed securities

     1,462,111       1,525,019       1,336,605  

States and political subdivisions

     431,874       436,684       417,163  

Other securities

     334,095       334,412       342,089  
  

 

 

   

 

 

   

 

 

 

Total investment securities - available-for-sale

     2,814,338       2,797,174       2,648,901  

Investment securities - held-to-maturity, at amortized cost
(fair value $749,363; $784,172; and $939,855, respectively)

     695,139       745,090       865,957  

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

     109,715       101,716       90,742  

Loans held for sale, at fair value

     27,425       90,682       44,422  

Loans:

      

Commercial

     2,001,621       1,917,099       1,893,700  

Commercial real estate

     3,259,998       3,130,853       2,943,525  

Residential real estate

     2,099,374       2,087,530       2,099,770  

Consumer credit, net of unearned income

     1,871,047       1,875,030       1,893,163  
  

 

 

   

 

 

   

 

 

 

Total loans

     9,232,040       9,010,512       8,830,158  

Allowance for loan losses

     (50,986 )      (49,808     (51,804
  

 

 

   

 

 

   

 

 

 

Net loans

     9,181,054       8,960,704       8,778,354  
  

 

 

   

 

 

   

 

 

 

Premises and equipment, net

     413,933       429,622       231,656  

Accrued interest receivable

     79,830       81,381       79,536  

Goodwill

     655,018       655,018       655,523  

Other intangible assets

     31,876       37,677       44,237  

Company-owned life insurance

     354,875       352,956       350,193  

Net deferred tax assets

     146,780       181,863       179,448  

Loan servicing rights

     25,023       25,561       25,756  

Assets held for sale

     11,725       5,970       4,867  

Other real estate owned and repossessed personal property

     11,071       18,546       24,254  

Other assets

     131,503       115,776       123,658  
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 14,957,281     $ 14,860,237     $ 14,420,262  
  

 

 

   

 

 

   

 

 

 

Liabilities

      

Deposits:

      

Noninterest-bearing demand

   $ 3,011,156     $ 3,016,093     $ 2,883,917  

Interest-bearing:

      

NOW

     2,639,813       2,596,595       2,456,963  

Savings

     2,924,689       2,954,709       2,616,365  

Money market

     672,391       707,748       1,015,336  

Time

     1,435,665       1,468,108       1,479,021  
  

 

 

   

 

 

   

 

 

 

Total deposits

     10,683,714       10,743,253       10,451,602  

Federal funds purchased and interbank borrowings

     227,029       213,003       263,536  

Securities sold under agreements to repurchase

     298,094       367,052       354,123  

Federal Home Loan Bank advances

     1,515,628       1,353,092       1,099,240  

Other borrowings

     219,167       218,939       218,656  

Accrued expenses and other liabilities

     127,055       150,481       221,988  
  

 

 

   

 

 

   

 

 

 

Total liabilities

     13,070,687       13,045,820       12,609,145  
  

 

 

   

 

 

   

 

 

 

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, 135,516; 135,159; and 135,005 shares issued and outstanding, respectively

     135,516       135,159       135,005  

Capital surplus

     1,352,411       1,348,338       1,342,393  

Retained earnings

     429,787       390,292       357,336  

Accumulated other comprehensive income (loss), net of tax

     (31,120 )      (59,372     (23,617
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     1,886,594       1,814,417       1,811,117  
  

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 14,957,281     $ 14,860,237     $ 14,420,262  
  

 

 

   

 

 

   

 

 

 

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

 

4


Table of Contents

OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

 

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

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

   2017      2016      2017      2016  

Interest Income

           

Loans including fees:

           

Taxable

   $ 92,189      $ 86,527      $ 184,390      $ 158,099  

Nontaxable

     3,236        2,991        6,415        5,995  

Investment securities:

           

Taxable

     15,501        13,585        31,186        27,307  

Nontaxable

     7,228        7,119        14,600        14,101  

Money market and other interest-earning investments

     55        21        86        70  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     118,209        110,243        236,677        205,572  
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest Expense

           

Deposits

     4,724        4,254        9,107        7,747  

Federal funds purchased and interbank borrowings

     422        217        778        340  

Securities sold under agreements to repurchase

     334        391        590        764  

Federal Home Loan Bank advances

     6,017        3,610        11,329        7,027  

Other borrowings

     2,379        2,431        4,739        4,711  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     13,876        10,903        26,543        20,589  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     104,333        99,340        210,134        184,983  

Provision for loan losses

     1,355        1,319        1,702        1,410  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     102,978        98,021        208,432        183,573  
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest Income

           

Wealth management fees

     9,679        9,355        18,678        17,476  

Service charges on deposit accounts

     10,040        10,437        19,883        20,076  

Debit card and ATM fees

     4,436        4,471        8,672        8,256  

Mortgage banking revenue

     5,186        5,203        9,412        8,123  

Insurance premiums and commissions

     160        7,122        267        20,243  

Investment product fees

     5,004        4,724        9,993        8,629  

Capital markets income

     2,747        794        3,778        1,413  

Company-owned life insurance

     2,117        2,080        4,266        4,118  

Net securities gains (losses)

     3,075        1,856        4,575        2,962  

Recognition of deferred gain on sale leaseback transactions

     538        1,038        1,075        2,090  

Gain on sale of ONB Insurance Group, Inc.

     —          41,864        —          41,864  

Change in FDIC indemnification asset

     —          888        —          233  

Other income

     6,289        3,553        11,592        7,353  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

     49,271        93,385        92,191        142,836  
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest Expense

           

Salaries and employee benefits

     57,606        62,715        114,170        119,687  

Occupancy

     10,539        13,568        22,673        26,412  

Equipment

     3,350        3,316        6,577        6,209  

Marketing

     3,673        5,111        6,723        7,597  

Data processing

     8,226        8,676        15,834        15,799  

Communication

     2,288        2,535        4,702        4,399  

Professional fees

     4,077        5,181        6,728        8,549  

Loan expense

     1,693        2,123        3,324        3,456  

Supplies

     594        598        1,173        1,181  

FDIC assessment

     2,130        2,030        4,617        3,949  

Other real estate owned expense

     1,009        2,099        2,124        2,523  

Amortization of intangibles

     2,781        3,365        5,801        6,012  

Other expense

     4,845        10,155        10,256        14,054  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expense

     102,811        121,472        204,702        219,827  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     49,438        69,934        95,921        106,582  

Income tax expense

     10,584        30,812        21,075        40,483  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 38,854      $ 39,122      $ 74,846      $ 66,099  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per common share—basic

   $ 0.28      $ 0.31      $ 0.55      $ 0.55  

Net income per common share—diluted

     0.28        0.31        0.55        0.55  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common shares outstanding—basic

     135,085        127,508        134,999        120,753  

Weighted average number of common shares outstanding—diluted

     135,697        127,973        135,641        121,273  
  

 

 

    

 

 

    

 

 

    

 

 

 

Dividends per common share

   $ 0.13      $ 0.13      $ 0.26      $ 0.26  

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

 

5


Table of Contents

OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

 

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

(dollars in thousands)

   2017     2016     2017     2016  

Net income

   $ 38,854     $ 39,122     $ 74,846     $ 66,099  

Other comprehensive income (loss):

        

Change in securities available-for-sale:

        

Unrealized holding gains (losses) for the period

     30,627       12,671       46,407       30,528  

Reclassification adjustment for securities gains realized in income

     (3,075     (1,856     (4,575     (2,962

Income tax effect

     (10,017     (3,809     (15,277     (9,977
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     17,535       7,006       26,555       17,589  

Change in securities held-to-maturity:

        

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

     453       466       902       931  

Income tax effect

     (155     (159     (309     (318
  

 

 

   

 

 

   

 

 

   

 

 

 

Changes from securities held-to-maturity

     298       307       593       613  

Cash flow hedges:

        

Net unrealized derivative gains (losses) on cash flow hedges

     (2,387     (4,483     (1,807     (15,613

Reclassification adjustment for losses realized in net income

     1,734       1,585       3,533       2,858  

Income tax effect

     248       1,101       (656     4,847  
  

 

 

   

 

 

   

 

 

   

 

 

 

Changes from cash flow hedges

     (405     (1,797     1,070       (7,908

Defined benefit pension plans:

        

Amortization of net loss recognized in income

     27       730       54       1,430  

Income tax effect

     (10     (278     (20     (544
  

 

 

   

 

 

   

 

 

   

 

 

 

Changes from defined benefit pension plans

     17       452       34       886  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     17,445       5,968       28,252       11,180  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 56,299     $ 45,090     $ 103,098     $ 77,279  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

6


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

     —         —         66,099       —         66,099  

Other comprehensive income

     —         —         —         11,180       11,180  

Acquisition—Anchor BanCorp Wisconsin Inc.

     20,415       253,150       —         —         273,565  

Dividends—common stock ($0.26 per share)

     —         —         (32,391     —         (32,391

Common stock issued

     17       185       —         —         202  

Common stock repurchased

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

Stock-based compensation expense

     —         3,391       —         —         3,391  

Stock activity under incentive compensation plans

     396       (818     (131     —         (553
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2016

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2016

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

Net income

     —         —         74,846       —         74,846  

Other comprehensive income

     —         —         —         28,252       28,252  

Dividends—common stock ($0.26 per share)

     —         —         (35,219     —         (35,219

Common stock issued

     11       177       —         —         188  

Common stock repurchased

     (104     (1,748     —         —         (1,852

Stock-based compensation expense

     —         3,184       —         —         3,184  

Stock activity under incentive compensation plans

     450       2,460       (132     —         2,778  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2017

   $ 135,516     $ 1,352,411     $ 429,787     $ (31,120   $ 1,886,594  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

 

     Six Months Ended  
     June 30,  

(dollars in thousands)

   2017     2016  

Cash Flows From Operating Activities

    

Net income

   $ 74,846     $ 66,099  
  

 

 

   

 

 

 

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

    

Depreciation

     10,406       7,462  

Amortization of other intangible assets

     5,801       6,012  

Net premium amortization on investment securities

     7,529       9,198  

Amortization of FDIC indemnification asset

     —         (458

Stock-based compensation expense

     3,184       3,391  

Excess tax (benefit) expense on stock-based compensation

     160       —    

Provision for loan losses

     1,702       1,410  

Net securities (gains) losses

     (4,575     (2,962

Recognition of deferred gain on sale leaseback transactions

     (1,075     (2,090

Gain on sale of ONB Insurance Group, Inc.

     —         (41,864

Net gains on sales of loans and other assets

     (5,398     (2,689

Increase in cash surrender value of company-owned life insurance

     (4,266     (4,118

Residential real estate loans originated for sale

     (179,025     (238,184

Proceeds from sale of residential real estate loans

     246,549       219,854  

(Increase) decrease in interest receivable

     1,551       (3,130

(Increase) decrease in other real estate owned

     7,475       6,487  

(Increase) decrease in other assets

     3,707       22,266  

Increase (decrease) in accrued expenses and other liabilities

     (20,504     6,345  
  

 

 

   

 

 

 

Total adjustments

     73,221       (13,070
  

 

 

   

 

 

 

Net cash flows provided by (used in) operating activities

     148,067       53,029  
  

 

 

   

 

 

 

Cash Flows From Investing Activities

    

Cash portion of bank purchase price, net of cash acquired

     —         (62,532

Proceeds from sale of ONB Insurance Group, Inc.

     —         91,771  

Purchases of investment securities available-for-sale

     (414,742     (799,597

Purchases of Federal Home Loan Bank/Federal Reserve Bank stock

     (8,008     —    

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

     252,486       721,414  

Proceeds from sales of investment securities available-for-sale

     186,277       107,451  

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

     48,204       2,842  

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

     —         10,000  

Net principal collected from (loans made to) loan customers

     (222,052     (246,987

Proceeds from settlements on company-owned life insurance

     2,347       2,497  

Proceeds from sale of premises and equipment and other assets

     10,120       5,707  

Purchases of premises and equipment and other assets

     (9,461     (12,317
  

 

 

   

 

 

 

Net cash flows provided by (used in) investing activities

     (154,693     (179,751
  

 

 

   

 

 

 

Cash Flows From Financing Activities

    

Net increase (decrease) in:

    

Deposits

     (59,539     198,029  

Federal funds purchased and interbank borrowings

     14,026       (27,555

Securities sold under agreements to repurchase

     (68,958     (36,417

Payments for maturities of Federal Home Loan Bank advances

     (892,298     (575,554

Payments for maturities of other borrowings

     (97     (34

Proceeds from Federal Home Loan Bank advances

     1,055,000       650,000  

Cash dividends paid on common stock

     (35,219     (32,391

Common stock repurchased

     (1,852     (1,546

Proceeds from exercise of stock options

     2,597       90  

Common stock issued

     188       202  
  

 

 

   

 

 

 

Net cash flows provided by (used in) financing activities

     13,848       174,824  
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     7,222       48,102  

Cash and cash equivalents at beginning of period

     255,519       219,818  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 262,741     $ 267,920  
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Total interest paid

   $ 26,534     $ 19,824  

Total taxes paid (net of refunds)

   $ 3,000     $ 8,800  

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 June 30, 2017 and 2016, and December 31, 2016, and the results of its operations for the three and six months ended June 30, 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 FASB issued an update (ASU No. 2014-09, Revenue from Contracts with Customers) creating FASB Topic 606, Revenue from Contracts with Customers. The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. We are finalizing our in-depth assessment and have identified the revenue line items within the scope of this new guidance. 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. We have elected to implement using the modified retrospective application, with the cumulative effect recorded as an adjustment to opening retained earnings at January 1, 2018. While certain implementation issues relevant to our industry are still pending resolution, such as the applicability of interchange revenues, our preliminary conclusions reached as to the application of this new guidance are not expected to be significantly affected. We will continue to evaluate any impact, including changes to related disclosures, as additional guidance is issued and as our internal assessment progresses.

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.

 

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

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.

 

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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 outstanding at June 30, 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.

 

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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 $0.2 million expense during the six months ended June 30, 2017.

In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. The amendments in this update provide guidance about which changes to the terms and conditions of a shared-based payment award require an entity to apply modification accounting. An entity should account for the effect of a modification unless all the following are met: (1) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. 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 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.

 

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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.

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.

 

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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 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 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. through a stock and cash merger. Anchor was a savings and loan holding company with 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 achieved cost savings by integrating the two companies and combining accounting, data processing, retail and lending support, and other administrative functions after the merger, which enabled 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, while $15.9 million of transaction and integration costs were expensed as incurred.

 

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As of April 30, 2017, the Company finalized its valuation of all assets acquired and liabilities assumed, resulting in no material change to acquisition accounting adjustments. A summary of the consideration paid was 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  
  

 

 

 

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 is being 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, 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.

 

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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.

The following table reconciles basic and diluted net income per share for the three and six months ended June 30, 2017 and 2016:

 

     Three Months Ended      Six Months Ended  
(dollars and shares in thousands,    June 30,      June 30,  
except per share data)                    2017      2016      2017      2016  

Basic Earnings Per Share

           

Net income

   $ 38,854      $ 39,122      $ 74,846      $ 66,099  

Weighted average common shares outstanding

     135,085        127,508        134,999        120,753  

Basic Net Income Per Share

   $ 0.28      $ 0.31      $ 0.55      $ 0.55  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted Earnings Per Share

           

Net income

   $ 38,854      $ 39,122      $ 74,846      $ 66,099  

Weighted average common shares outstanding

     135,085        127,508        134,999        120,753  

Effect of dilutive securities:

           

Restricted stock (1)

     523        425        543        480  

Stock options (2)

     89        40        99        40  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding

     135,697        127,973        135,641        121,273  

Diluted Net Income Per Share

   $ 0.28      $ 0.31      $ 0.55      $ 0.55  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 17 thousand shares and 0.1 million shares of restricted stock at June 30, 2017 and 2016, respectively, were not included in the computation of net income per diluted share for the three months ended June 30, 2017 and 2016, respectively, because the effect would be antidilutive. 17 thousand shares and 0.2 million shares of restricted stock at June 30, 2017 and 2016, respectively, were not included in the computation of net income per diluted share for the six months ended June 30, 2017 and 2016, respectively, because the effect would be antidilutive.
(2) Options to purchase 0.1 million shares and 0.8 million shares outstanding at June 30, 2017 and 2016, respectively, were not included in the computation of net income per diluted share for the three months ended June 30, 2017 and 2016 because the exercise price of these options was greater than the average market price of the common shares and, therefore, the effect would be antidilutive. Options to purchase 0.1 million shares and 0.8 million shares outstanding at June 30, 2017 and 2016, respectively, were not included in the computation of net income per diluted share for the six months ended June 30, 2017 and 2016, respectively, because the exercise price of these options was greater than the average market price of the common shares and, therefore, the effect would be antidilutive.

 

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NOTE 5 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table summarizes the changes within each classification of AOCI, net of tax, for the three and six months ended June 30, 2017 and 2016:

 

     Unrealized Gains     Unrealized Gains     Gains and     Defined        
     and Losses on     and Losses on     Losses on     Benefit        
     Available-for-Sale     Held-to-Maturity     Cash Flow     Pension        

(dollars in thousands)

   Securities     Securities     Hedges     Plans     Total  

Three Months Ended June 30, 2017

          

Balance at April 1, 2017

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

Other comprehensive income (loss) before reclassifications

     19,492       —         (1,480     —         18,012  

Amounts reclassified from AOCI (a)

     (1,957     298       1,075       17       (567
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

     17,535       298       (405     17       17,445  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2017

   $ (12,457   $ (12,717   $ (5,645   $ (301   $ (31,120
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended June 30, 2016

          

Balance at April 1, 2016

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

Other comprehensive income (loss) before reclassifications

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

Amounts reclassified from AOCI (a)

     (1,202     307       983       452       540  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2016

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2017

          

Balance at January 1, 2017

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

Other comprehensive income (loss) before reclassifications

     29,459       —         (1,120     —         28,339  

Amounts reclassified from AOCI (a)

     (2,904     593       2,190       34       (87
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

     26,555       593       1,070       34       28,252  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2017

   $ (12,457   $ (12,717   $ (5,645   $ (301   $ (31,120
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2016

          

Balance at January 1, 2016

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

Other comprehensive income (loss) before reclassifications

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

Amounts reclassified from AOCI (a)

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2016

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 June 30, 2017 and 2016:

 

     Amount Reclassified      Affected Line Item in the

Details about AOCI Components

   from AOCI     

Statement of Income

     Three Months Ended       
     June 30,       

(dollars in thousands)

   2017      2016       

Unrealized gains and losses on available-for-sale securities

   $ 3,075      $ 1,856      Net securities gains
     (1,118      (654   

Income tax (expense) benefit

  

 

 

    

 

 

    
   $ 1,957      $ 1,202     

Net income

  

 

 

    

 

 

    

Unrealized gains and losses on held-to-maturity securities

   $ (453    $ (466    Interest income (expense)
     155        159     

Income tax (expense) benefit

  

 

 

    

 

 

    
   $ (298    $ (307   

Net income

  

 

 

    

 

 

    

Gains and losses on cash flow hedges Interest rate contracts

   $ (1,734    $ (1,585    Interest income (expense)
     659        602     

Income tax (expense) benefit

  

 

 

    

 

 

    
   $ (1,075    $ (983   

Net income

  

 

 

    

 

 

    

Amortization of defined benefit pension items

        

Actuarial gains (losses)

   $ (27 )     $ (730    Salaries and employee benefits
     10        278     

Income tax (expense) benefit

  

 

 

    

 

 

    
   $ (17    $ (452   

Net income

  

 

 

    

 

 

    

Total reclassifications for the period

   $ 567      $ (540   

Net income

  

 

 

    

 

 

    

 

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The following table summarizes the significant amounts reclassified out of each component of AOCI for the six months ended June 30, 2017 and 2016:

 

     Amount Reclassified      Affected Line Item in the

Details about AOCI Components

   from AOCI     

Statement of Income

     Six Months Ended       
     June 30,       

(dollars in thousands)

   2017      2016       

Unrealized gains and losses on available-for-sale securities

   $ 4,575      $ 2,962      Net securities gains
     (1,671      (1,061   

Income tax (expense) benefit

  

 

 

    

 

 

    
   $ 2,904      $ 1,901     

Net income

  

 

 

    

 

 

    

Unrealized gains and losses on held-to-maturity securities

   $ (902    $ (931    Interest income/(expense)
     309        318     

Income tax (expense) benefit

  

 

 

    

 

 

    
   $ (593    $ (613   

Net income

  

 

 

    

 

 

    

Gains and losses on cash flow hedges Interest rate contracts

   $ (3,533    $ (2,858    Interest income/(expense)
     1,343        1,086     

Income tax (expense) benefit

  

 

 

    

 

 

    
   $ (2,190    $ (1,772   

Net income

  

 

 

    

 

 

    

Amortization of defined benefit pension items

        

Actuarial gains/(losses)

   $ (54 )     $ (1,430    Salaries and employee benefits
     20        544     

Income tax (expense) benefit

  

 

 

    

 

 

    
   $ (34    $ (886   

Net income

  

 

 

    

 

 

    

Total reclassifications for the period

   $ 87      $ (1,370    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 June 30, 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  

June 30, 2017

           

Available-for-Sale

           

U.S. Treasury

   $ 5,470      $ 164      $ —        $ 5,634  

U.S. government-sponsored entities and agencies

     586,175        211        (5,762      580,624  

Mortgage-backed securities—Agency

     1,473,369        6,204        (17,462      1,462,111  

States and political subdivisions

     426,400        8,027        (2,553      431,874  

Pooled trust preferred securities

     16,807        —          (8,710      8,097  

Other securities

     325,788        2,444        (2,234      325,998  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 2,834,009      $ 17,050      $ (36,721    $ 2,814,338  
  

 

 

    

 

 

    

 

 

    

 

 

 

Held-to-Maturity

           

Mortgage-backed securities—Agency

   $ 8,576      $ 308      $ —        $ 8,884  

States and political subdivisions

     686,563        53,916        —          740,479  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held-to-maturity securities

   $ 695,139      $ 54,224      $ —        $ 749,363  
  

 

 

    

 

 

    

 

 

    

 

 

 

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 and six months ended June 30, 2017 and 2016:

 

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

(dollars in thousands)

   2017      2016      2017      2016  

Proceeds from sales of available-for-sale securities

   $ 152,689      $ 30,801      $ 186,277      $ 107,451  

Proceeds from calls of available-for-sale securities

     60,600        239,998        71,120        364,309  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 213,289      $ 270,799      $ 257,397      $ 471,760  
  

 

 

    

 

 

    

 

 

    

 

 

 

Realized gains on sales of available-for-sale securities

   $ 2,954      $ 1,491      $ 4,283      $ 3,151  

Realized gains on calls of available-for-sale securities

     —          126        —          370  

Realized losses on sales of available-for-sale securities

     (13      (1      (43      (447

Realized losses on calls of available-for-sale securities

     (7      (1      (8      (88

Other securities gains (losses) (1)

     141        241        343        (24
  

 

 

    

 

 

    

 

 

    

 

 

 

Net securities gains (losses)

   $ 3,075      $ 1,856      $ 4,575      $ 2,962  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 $5.2 million at June 30, 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 June 30, 2017     

 

 
(dollars in thousands)             Weighted  
     Amortized      Fair      Average  

Maturity

   Cost      Value      Yield  

Available-for-Sale

        

Within one year

   $ 27,593      $ 27,663        2.04

One to five years

     355,595        356,174        2.14  

Five to ten years

     326,554        330,878        2.85  

Beyond ten years

     2,124,267        2,099,623        2.42  
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,834,009      $ 2,814,338        2.43
  

 

 

    

 

 

    

 

 

 

Held-to-Maturity

        

Within one year

   $ 23,108      $ 23,473        6.12

One to five years

     73,901        77,005        4.46  

Five to ten years

     153,039        163,208        4.85  

Beyond ten years

     445,091        485,677        5.74  
  

 

 

    

 

 

    

 

 

 

Total

   $ 695,139      $ 749,363        5.42
  

 

 

    

 

 

    

 

 

 

 

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The following table summarizes the investment securities with unrealized losses at June 30, 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  

June 30, 2017

               

Available-for-Sale

               

U.S. government-sponsored entities and agencies

   $ 491,338      $ (5,762   $ —        $ —       $ 491,338      $ (5,762

Mortgage-backed securities—Agency

     928,155        (15,231     55,937        (2,231     984,092        (17,462

States and political subdivisions

     116,598        (2,461     5,087        (92     121,685        (2,553

Pooled trust preferred securities

     —          —         8,097        (8,710     8,097        (8,710

Other securities

     97,380        (969     101,203        (1,265     198,583        (2,234
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available-for-sale

   $ 1,633,471      $ (24,423   $ 170,324      $ (12,298   $ 1,803,795      $ (36,721
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Held-to-Maturity

               

States and political subdivisions

   $ 466      $ —       $ —        $ —       $ 466      $ —    
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total held-to-maturity

   $ 466      $ —       $ —        $ —       $ 466      $ —    
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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 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, Investments – 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 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 OTTI occurs under either model, the amount of the OTTI 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 OTTI 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 OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI 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 OTTI related to other factors shall be recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings shall become the new amortized cost basis of the investment.

There was no OTTI recorded during the six months ended June 30, 2017 or 2016.

At June 30, 2017, Old National’s securities portfolio consisted of 1,615 securities, 296 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. At June 30, 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.

Pooled Trust Preferred Securities

At June 30, 2017, our securities portfolio contained three pooled trust preferred securities with a fair value of $8.1 million and unrealized losses of $8.7 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 $2.6 million at June 30, 2017. This security was rated A3 at inception, but is rated D at June 30, 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 CDO and the financial condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market information including announcements of interest payment deferrals or defaults of underlying trust preferred securities. Assumptions used in the model include expected future default rates and prepayments. We assume no recoveries on defaults and a limited number of recoveries on current or projected interest payment deferrals. In addition, we use the model to “stress” this CDO, or make assumptions more severe than expected activity, to determine the degree to which assumptions could deteriorate before the CDO could no longer fully support repayment of Old National’s note class. For the six months ended June 30, 2017 and 2016, our model indicated no OTTI losses on this security.

Two of our pooled trust preferred securities with a fair value of $7.8 million and unrealized losses of $6.1 million at June 30, 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 six months ended June 30, 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.

 

Trust preferred securities June 30, 2017

(dollars in thousands)

  Class     Lowest
Credit
Rating (1)
    Amortized
Cost
    Fair
Value
    Unrealized
Gain/
(Loss)
    Realized
Losses
2017
    # of
Issuers
Currently
Performing/
Remaining
    Actual
Deferrals
and Defaults
as a % of
Original
Collateral
    Expected
Defaults as
a % of
Remaining
Performing
Collateral
    Excess
Subordination
as a % of
Current
Performing
Collateral
 

Pooled trust preferred securities:

 

               

Reg Div Funding 2004

    B-2       D     $ 2,899     $ 264     $ (2,635   $ —         22/37       32.1     7.4     0.0

Pretsl XXVII LTD

    B       B       4,422       2,395       (2,027     —         35/44       16.7     3.9     46.5

Trapeza Ser 13A

    A2A       BBB       9,486       5,438       (4,048     —         50/55       4.5     4.7     45.4
     

 

 

   

 

 

   

 

 

           
        16,807       8,097       (8,710     —            

Single Issuer trust preferred securities:

 

           

Fleet Cap Tr V (BOA)

      BB+       3,401       3,308       (93     —            

JP Morgan Chase Cap XIII

      BBB-       4,772       4,663       (109     —            

NB-Global

      BB+       794       946       152       —            

Chase Cap II

      BBB-       830       944       114       —            
     

 

 

   

 

 

   

 

 

   

 

 

         
        9,797       9,861       64       —            

Total

      $ 26,604     $ 17,958     $ (8,646   $ —            
     

 

 

   

 

 

   

 

 

   

 

 

         

 

(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 $27.4 million at June 30, 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, Financial Instruments. 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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Table of Contents

The composition of loans by lending classification was as follows:

 

(dollars in thousands)

   June 30,
2017
     December 31,
2016
 

Commercial (1)

   $ 2,001,621      $ 1,917,099  

Commercial real estate:

     

Construction (2)

     367,425        357,802  

Other (2)

     2,892,573        2,773,051  

Residential real estate

     2,099,374        2,087,530  

Consumer credit:

     

Home equity

     472,198        476,439  

Auto

     1,181,270        1,167,737  

Other

     217,579        230,854  
  

 

 

    

 

 

 

Total loans

     9,232,040        9,010,512  

Allowance for loan losses

     (50,986      (49,808
  

 

 

    

 

 

 

Net loans

   $ 9,181,054      $ 8,960,704  
  

 

 

    

 

 

 

 

(1) Includes direct finance leases of $9.4 million at June 30, 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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Table of Contents

The acquisition of Anchor on May 1, 2016 added $926.2 million of commercial real estate loans to our portfolio. At 188%, 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 June 30, 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 June 30, 2017, student loans totaled $72.2 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.

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 PD and 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 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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Table of Contents

Old National’s activity in the allowance for loan losses for the three and six months ended June 30, 2017 and 2016 was as follows:

 

           Commercial                           

(dollars in thousands)

   Commercial     Real Estate     Residential     Consumer     Unallocated      Total  

Three Months Ended June 30, 2017

             

Balance at April 1, 2017

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

Charge-offs

     (411     (1,068     (313     (1,588     —          (3,380

Recoveries

     789       1,522       28       838       —          3,177  

Provision

     (2,121     2,247       360       869       —          1,355  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at June 30, 2017

   $ 20,365     $ 20,654     $ 1,811     $ 8,156     $ —        $ 50,986  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Three Months Ended June 30, 2016

             

Balance at April 1, 2016

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

Charge-offs

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

Recoveries

     876       547       187       852       —          2,462  

Provision

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at June 30, 2016

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Six Months Ended June 30, 2017

             

Balance at January 1, 2017

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

Charge-offs

     (881     (1,636     (727     (3,375     —          (6,619

Recoveries

     1,392       2,747       107       1,849       —          6,095  

Provision

     (1,627     1,370       788       1,171       —          1,702  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at June 30, 2017

   $ 20,365     $ 20,654     $ 1,811     $ 8,156     $ —        $ 50,986  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Six Months Ended June 30, 2016

             

Balance at January 1, 2016

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

Charge-offs

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

Recoveries

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

Provision

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at June 30, 2016

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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Table of Contents

The following table provides Old National’s recorded investment in financing receivables by portfolio segment at June 30, 2017 and December 31, 2016 and other information regarding the allowance:

 

            Commercial                              

(dollars in thousands)

   Commercial      Real Estate      Residential      Consumer      Unallocated      Total  

June 30, 2017

                 

Allowance for loan losses:

                 

Individually evaluated for impairment

   $ 4,423      $ 7,656      $ —        $ —        $ —        $ 12,079  

Collectively evaluated for impairment

     15,863        12,979        1,811        7,826        —          38,479  

Loans acquired with deteriorated credit quality

     79        19        —          330        —          428  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total allowance for loan losses

   $ 20,365      $ 20,654      $ 1,811      $ 8,156      $ —        $ 50,986  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans and leases outstanding:

                 

Individually evaluated for impairment

   $ 30,776      $ 65,785      $ —        $ —        $ —        $ 96,561  

Collectively evaluated for impairment

     1,970,223        3,171,926        2,086,796        1,864,502        —          9,093,447  

Loans acquired with deteriorated credit quality

     622        22,287        12,578        6,545        —          42,032  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans and leases outstanding

   $ 2,001,621      $ 3,259,998      $ 2,099,374      $ 1,871,047      $ —        $ 9,232,040  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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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Table of Contents

Credit Quality

Old National’s management monitors the credit quality of its financing receivables in an on-going manner. Internally, management assigns an 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 June 30, 2017 and December 31, 2016 was as follows:

 

(dollars in thousands)

 

Corporate Credit Exposure

   Commercial      Commercial
Real
Estate - Construction
     Commercial
Real
Estate - Other
 
Credit Risk Profile by    June 30,      December 31,      June 30,      December 31,      June 30,      December 31,  
Internally Assigned Grade    2017      2016      2017      2016      2017      2016  

Grade:

                 

Pass

   $ 1,896,781      $ 1,750,923      $ 356,426      $ 347,325      $ 2,708,533      $ 2,669,890  

Criticized

     32,873        45,614        10,999        9,258        55,630        40,590  

Classified—substandard

     42,111        63,978        —          49        65,359        19,715  

Classified—nonaccrual

     27,768        53,062        —          1,170        34,704        33,833  

Classified—doubtful

     2,088        3,522        —          —          28,347        9,023  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,001,621      $ 1,917,099      $ 367,425      $ 357,802      $ 2,892,573      $ 2,773,051  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Old National considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, Old National also evaluates credit quality based on the aging status of the loan and by payment activity. The following table presents the recorded investment in residential and consumer loans based on payment activity at June 30, 2017 and December 31, 2016:

 

(dollars in thousands)           Consumer  
     Residential      Home
Equity
     Auto      Other  

June 30, 2017

           

Performing

   $ 2,080,345      $ 466,421      $ 1,178,937      $ 212,106  

Nonperforming

     19,029        5,777        2,333        5,473  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,099,374      $ 472,198      $ 1,181,270      $ 217,579  
  

 

 

    

 

 

    

 

 

    

 

 

 

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 TDR. 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 PCI 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 June 30, 2017 and December 31, 2016, respectively. Only purchased loans that have experienced subsequent impairment since the date acquired are included in the table below.

 

(dollars in thousands)

   Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 

June 30, 2017

        

With no related allowance recorded:

        

Commercial

   $ 23,075      $ 23,420      $ —    

Commercial Real Estate—Other

     34,608        35,913        —    

Residential

     2,499        2,520        —    

Consumer

     1,586        1,823        —    

With an allowance recorded:

        

Commercial

     7,701        8,191        4,423  

Commercial Real Estate—Other

     31,177        31,256        7,656  

Residential

     1,140        1,140        57  

Consumer

     2,058        2,058        103  
  

 

 

    

 

 

    

 

 

 

Total

   $ 103,844      $ 106,321      $ 12,239  
  

 

 

    

 

 

    

 

 

 

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 and six months ended June 30, 2017 and 2016 are included in the table below.

 

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

(dollars in thousands)

   2017      2016      2017      2016  

Average Recorded Investment

           

With no related allowance recorded:

           

Commercial

   $ 25,817      $ 32,951      $ 26,038      $ 38,029  

Commercial Real Estate—Other

     34,682        34,344        32,598        38,197  

Residential

     2,376        1,348        2,121        1,359  

Consumer

     1,717        871        1,420        981  

With an allowance recorded:

           

Commercial

     8,448        19,546        7,996        17,641  

Commercial Real Estate—Construction

     —          116        —          119  

Commercial Real Estate—Other

     22,916        12,230        28,911        15,016  

Residential

     1,147        1,060        1,125        1,035  

Consumer

     2,069        2,781        2,021        2,695  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 99,172      $ 105,247      $ 102,230      $ 115,072  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 and six months ended June 30, 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 June 30, 2017 and December 31, 2016 were as follows:

 

(dollars in thousands)

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

June 30, 2017

                 

Commercial

   $ 525      $ 4      $ 2      $ 29,856      $ 30,387      $ 1,971,234  

Commercial Real Estate:

                 

Construction

     —          —          —          —          —          367,425  

Other

     138        47        —          63,051        63,236        2,829,337  

Residential

     15,386        2,846        74        19,029        37,335        2,062,039  

Consumer:

                 

Home equity

     1,070        329        —          5,777        7,176        465,022  

Auto

     3,660        597        75        2,333        6,665        1,174,605  

Other

     3,169        1,603        50        5,473        10,295        207,284  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 23,948      $ 5,426      $ 201      $ 125,519      $ 155,094      $ 9,076,946  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 June 30, 2017, these loans totaled $512.8 million, of which $265.5 million had been sold to other financial institutions and $247.3 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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Table of Contents

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 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 TDR, the loan is typically written down to its collateral value less selling costs.

 

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The following table presents activity in TDRs for the six months ended June 30, 2017 and 2016:

 

(dollars in thousands)

   Commercial     Commercial
Real Estate
    Residential     Consumer     Total  

Six Months Ended June 30, 2017

          

Balance at January 1, 2017

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

(Charge-offs)/recoveries

     (64     360       —         (97     199  

Payments

     (8,526     (3,423     (283     (801     (13,033

Additions

     9,442       17,429       938       1,924       29,733  

Interest collected on nonaccrual loans

     2,410       366       —         16       2,792  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2017

   $ 20,064     $ 33,059     $ 3,640     $ 3,644     $ 60,407  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2016

          

Balance at January 1, 2016

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

(Charge-offs)/recoveries

     (742     108       42       (23     (615

Payments

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

Additions

     11,233       10,581       335       385       22,534  

Interest collected on nonaccrual loans

     1,251       173       —         —         1,424  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2016

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Approximately $46.2 million of the TDRs at June 30, 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 $7.3 million at June 30, 2017 and $4.0 million at December 31, 2016. At June 30, 2017, Old National had committed to lend an additional $1.0 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 six months ended June 30, 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 six months ended June 30, 2017 and 2016:

 

(dollars in thousands)

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

Six Months Ended June 30, 2017

        

TDR:

        

Commercial

     6      $ 9,442      $ 9,442  

Commercial Real Estate—Other

     10        17,429        17,429  

Residential

     6        938        938  

Consumer

     5        1,924        1,924  
  

 

 

    

 

 

    

 

 

 

Total

     27      $ 29,733      $ 29,733  
  

 

 

    

 

 

    

 

 

 

Six Months Ended June 30, 2016

        

TDR:

        

Commercial

     16      $ 11,233      $ 11,233  

Commercial Real Estate—Other

     9        10,581        10,581  

Residential

     3        335        335  

Consumer

     8        385        385  
  

 

 

    

 

 

    

 

 

 

Total

     36      $ 22,534      $ 22,534  
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The TDRs that occurred during the six months ended June 30, 2017 increased the allowance for loan losses by $3.4 million and resulted in no charge-offs during the six months ended June 30, 2017. The TDRs that occurred during the six months ended June 30, 2016 decreased the allowance for loan losses by $1.2 million due to an improvement in specific reserves on a large commercial loan and resulted in $0.6 million of charge-offs.

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 six months ended June 30, 2017.

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

The terms of certain other loans were modified during the six months ended June 30, 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.

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 PCI loan is being accounted for as part of a pool, it will not be removed from the pool. As of June 30, 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

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.

 

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Table of Contents

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:

 

(dollars in thousands)

   June 30,
2017
     December 31,
2016
 

Commercial

   $ 622      $ 850  

Commercial real estate

     22,287        32,774  

Residential

     12,578        13,580  

Consumer

     6,545        8,215  
  

 

 

    

 

 

 

Carrying amount

     42,032        55,419  

Allowance for loan losses

     (428      (278
  

 

 

    

 

 

 

Carrying amount, net of allowance

   $ 41,604      $ 55,141  
  

 

 

    

 

 

 

The outstanding balance of loans accounted for under ASC 310-30, including contractual principal, interest, fees and penalties, was $249.4 million at June 30, 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 $7.3 million during the six months ended June 30, 2017 and $13.0 million during the six months ended June 30, 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 PCI loans, or income expected to be collected, is as follows:

 

(dollars in thousands)

   2017      2016  

Balance at January 1,

   $ 33,603      $ 45,310  

New loans purchased (1)

     —          3,217  

Accretion of income

     (7,330      (12,990

Reclassifications from (to) nonaccretable difference

     594        5,619  

Disposals/other adjustments

     183        530  
  

 

 

    

 

 

 

Balance at June 30,

   $ 27,050      $ 41,686  
  

 

 

    

 

 

 

 

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

Included in Old National’s allowance for loan losses is $0.4 million related to the purchased loans disclosed above at June 30, 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.    

 

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Table of Contents

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.

NO TE 9 – OTHER REAL ESTATE OWNED

The following table presents activity in other real estate owned for the six months ended June 30, 2017 and 2016:

 

(dollars in thousands)

   2017      2016  

Balance at January 1,

   $ 18,546      $ 12,498  

Additions (1)

     950        22,344  

Sales

     (6,552      (8,514

Impairment

     (1,873      (2,074
  

 

 

    

 

 

 

Balance (2) at June 30,

   $ 11,071      $ 24,254  
  

 

 

    

 

 

 

 

(1) Additions for the six months ended June 30, 2016 include other real estate owned of $18.2 million acquired from Anchor in May 2016.    
(2) Includes repossessed personal property of $0.2 million at June 30, 2017 and $0.2 million at June 30, 2016.    

At June 30, 2017, foreclosed residential real estate property included in the table above totaled $0.9 million. At June 30, 2017, consumer mortgage loans collateralized by residential real property that were in the process of foreclosure totaled $3.9 million.

NOTE 10 – PREMISES AND EQUIPMENT

The composition of premises and equipment at June 30, 2017 and December 31, 2016 was as follows:

 

(dollars in thousands)

   June 30,
2017
     December 31,
2016
 

Land

   $ 67,989      $ 71,769  

Buildings

     314,273        322,165  

Furniture, fixtures, and equipment

     102,431        102,631  

Leasehold improvements

     28,391        28,555  
  

 

 

    

 

 

 

Total

     513,084        525,120  

Accumulated depreciation

     (99,151      (95,498
  

 

 

    

 

 

 

Premises and equipment, net

   $ 413,933      $ 429,622  
  

 

 

    

 

 

 

Depreciation expense was $5.2 for the three months ended June 30, 2017 and $10.4 million for the six months ended June 30, 2017, compared to $3.9 million for the three months ended June 30, 2016 and $7.5 million for the six months ended June 30, 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 $3.8 for the three months ended June 30, 2017 and $7.7 million for the six months ended June 30, 2017, compared to $7.4 million for the three months ended June 30, 2016 and $13.7 million for the six months ended June 30, 2016.

Old National had deferred gains remaining associated with prior sale leaseback transactions totaling $9.2 million at June 30, 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.

 

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Table of Contents

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 six months ended June 30, 2017 and 2016:

 

(dollars in thousands)

   2017      2016  

Balance at January 1,

   $ 655,018      $ 584,634  

Acquisitions

     —          111,852  

Divestitures

     —          (40,963
  

 

 

    

 

 

 

Balance at June 30,

   $ 655,018      $ 655,523  
  

 

 

    

 

 

 

Goodwill is reviewed annually for impairment. No events or circumstances since the August 31, 2016 annual impairment test were noted that would indicate it was more likely than not a goodwill impairment exists.

The gross carrying amount and accumulated amortization of other intangible assets at June 30, 2017 and December 31, 2016 were as follows:

 

(dollars in thousands)

   Gross
Carrying
Amount
     Accumulated
Amortization
and Impairment
     Net
Carrying
Amount
 

June 30, 2017

        

Amortized intangible assets:

        

Core deposit

   $ 81,663      $ (57,906    $ 23,757  

Customer trust relationships

     16,547        (8,662      7,885  

Customer loan relationships

     4,413        (4,179      234  
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 102,623      $ (70,747    $ 31,876  
  

 

 

    

 

 

    

 

 

 

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 six months ended June 30, 2017 or 2016. Total amortization expense associated with intangible assets was $5.8 million for the six months ended June 30, 2017 and $6.0 million for the six months ended June 30, 2016.

Estimated amortization expense for future years is as follows:

 

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(dollars in thousands)

      

2017 remaining

   $ 5,214  

2018

     8,687  

2019

     6,737  

2020

     4,883  

2021

     3,111  

Thereafter

     3,244  
  

 

 

 

Total

   $ 31,876  
  

 

 

 

NOTE 12 – LOAN SERVICING RIGHTS

At June 30, 2017, loan servicing rights derived from loans sold with servicing retained totaled $25.0 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 $3.339 billion at June 30, 2017, compared to $3.385 billion at December 31, 2016. Approximately 99% of the loans serviced for others at June 30, 2017 were residential mortgage loans. Custodial escrow balances maintained in connection with serviced loans were $35.2 million at June 30, 2017 and $5.3 million at December 31, 2016.

The following table summarizes the carrying values and activity related to loan servicing rights and the related valuation allowance for the six months ended June 30, 2017 and 2016:

 

(dollars in thousands)

   2017      2016  

Balance at January 1,

   $ 25,629      $ 10,502  

Additions (1)

     1,976        17,126  

Amortization

     (2,507      (1,866
  

 

 

    

 

 

 

Balance before valuation allowance at June 30,

     25,098        25,762  
  

 

 

    

 

 

 

Valuation allowance:

     

Balance at January 1,

     (68      (34

(Additions)/recoveries

     (7      28  
  

 

 

    

 

 

 

Balance at June 30,

     (75      (6
  

 

 

    

 

 

 

Loan servicing rights, net

   $ 25,023      $ 25,756  
  

 

 

    

 

 

 

 

(1) Additions for the six months ended June 30, 2016 include loan servicing rights of $15.3 million acquired from Anchor in May 2016.

At June 30, 2017, the fair value of servicing rights was $26.1 million, which was determined using a discount rate of 13% and a weighted average prepayment speed of 139% 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 June 30, 2017, the Company expects to recover its remaining investments through the use of the tax credits that were generated by the investments.

 

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The following table summarizes Old National’s investments in LIHTCs, FHTCs, and CReEDs at June 30, 2017 and December 31, 2016:

 

(dollars in thousands)         June 30, 2017      December 31, 2016  

Investment

  

Accounting
Method

   Investment      Unfunded
Commitment (1)
     Investment      Unfunded
Commitment
 

LIHTC and other qualifying investments

   Proportional amortization    $ 26,828      $ 14,692      $ 29,110      $ 16,210  

FHTC

   Equity      17,411        11,591        4,434        3,104  

CReED

   Equity      1,504        1,502        1,504        1,502  
     

 

 

    

 

 

    

 

 

    

 

 

 

Total

      $ 45,743      $ 27,785      $ 35,048      $ 20,816  
     

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) All commitments will be paid by the Company by 2027.    

The following table summarizes the amortization expense and tax benefit recognized for Old National’s qualified affordable housing projects and other tax credit investments for the three and six months ended June 30, 2017 and 2016:

 

(dollars in thousands)    Three Months Ended      Three Months Ended     Six Months Ended      Six Months Ended  
     June 30,      June 30,     June 30,      June 30,  
     2017      2016      2017     2016     2017      2016      2017     2016  
     Amortization      Tax Benefit     Amortization      Tax Benefit  

Investment

   Expense (1)      Recognized (1)     Expense (1)      Recognized (1)  

LIHTC and other qualifying investments

   $ 940      $ 201      $ (1,298   $ (281   $ 1,881      $ 402      $ (2,595   $ (562

FHTC

     —          —          (1,519     —         —          —          (3,039     —    

CReED (2)

     —          —          (606     —         —          —          (606     —    
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 940      $ 201      $ (3,423   $ (281   $ 1,881      $ 402      $ (6,240   $ (562
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

(1) Tax credit investments are included in the Company’s estimate of the effective annual tax rate.    

(2) The CReED tax credit investment qualifies for an Indiana state tax credit.    

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 six months ended June 30:

 

(dollars in thousands)    2017     2016  

Outstanding at June 30,

   $ 298,094     $ 354,123  

Average amount outstanding

     330,285       382,441  

Maximum amount outstanding at any month-end

     351,897       396,695  

Weighted average interest rate:

    

During the six months ended June 30,

     0.36     0.40

At June 30,

     0.41       0.43  

 

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

 

     At June 30, 2017  
     Remaining Contractual Maturity of the Agreements  

(dollars in thousands)

   Overnight and
Continuous
     Up to
30 Days
     30-90 Days      Greater Than
90 days
     Total  

Repurchase Agreements:

              

U.S. Treasury and agency securities

   $ 273,094      $ —        $ —        $ 25,000      $ 298,094  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 273,094      $ —        $ —        $ 25,000      $ 298,094  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The fair value of securities pledged to secure repurchase agreements may decline. The Company has pledged securities valued at 125% of the gross outstanding balance of repurchase agreements at June 30, 2017 to manage this risk.

NOTE 15 – FEDERAL HOME LOAN BANK ADVANCES

The following table summarizes Old National Bank’s FHLB advances at June 30, 2017 and December 31, 2016:

 

(dollars in thousands)

   June 30,
2017
     December 31,
2016
 

Federal Home Loan Bank advances (fixed rates 0.96% to 6.08% and variable rates 1.09% to 1.33%) maturing July 2017 to April 2027

   $ 1,515,927      $ 1,353,225  

ASC 815 fair value hedge and other basis adjustments

     (299      (133
  

 

 

    

 

 

 

Total other borrowings

   $ 1,515,628      $ 1,353,092