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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 September 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 135,523,000 shares outstanding at September 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

     15  
 

Note 4. Net Income Per Share

     16  
 

Note 5. Investment Securities

     18  
 

Note 6. Loans Held for Sale

     22  
 

Note 7. Loans and Allowance for Loan Losses

     22  
 

Note 8. Other Real Estate Owned

     35  
 

Note 9. Premises and Equipment

     35  
 

Note 10. Goodwill and Other Intangible Assets

     36  
 

Note 11. Loan Servicing Rights

     37  
 

Note 12. Qualified Affordable Housing Projects and Other Tax Credit Investments

     37  
 

Note 13. Securities Sold Under Agreements to Repurchase

     38  
 

Note 14. Federal Home Loan Bank Advances

     39  
 

Note 15. Other Borrowings

     40  
 

Note 16. Accumulated Other Comprehensive Income (Loss)

     42  
 

Note 17. Employee Benefit Plans

     45  
 

Note 18. Stock-Based Compensation

     45  
 

Note 19. Income Taxes

     46  
 

Note 20. Derivative Financial Instruments

     48  
 

Note 21. Commitments and Contingencies

     51  
 

Note 22. Financial Guarantees

     51  
 

Note 23. Segment Information

     52  
 

Note 24. Fair Value

     52  

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

     61  
 

Executive Summary

     62  
 

Results of Operations

     63  
 

Financial Condition

     72  
 

Risk Management

     75  
 

Off-Balance Sheet Arrangements

     84  
 

Contractual Obligations

     85  
 

Critical Accounting Policies and Estimates

     85  
 

Forward-Looking Statements

     89  

Item 3.         Quantitative and Qualitative Disclosures About Market Risk

     89  

Item 4.         Controls and Procedures

     89  

PART II. OTHER INFORMATION

     90  

Item 1A.     Risk Factors

     90  

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

     90  

Item 5.         Other Information

     91  

Item 6.         Exhibits

     91  

SIGNATURE

     92  

 

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 (MN): Anchor Bancorp, Inc.

Anchor Bank (MN): Anchor Bank, N.A.

Anchor (WI): Anchor BanCorp Wisconsin Inc.

AnchorBank (WI): 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

 

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

   September 30,
2017
    December 31,
2016
    September 30,
2016
 
     (unaudited)           (unaudited)  

Assets

      

Cash and due from banks

   $ 202,652     $ 209,381     $ 224,893  

Money market and other interest-earning investments

     49,715       46,138       36,147  
  

 

 

   

 

 

   

 

 

 

Total cash and cash equivalents

     252,367       255,519       261,040  

Trading securities, at fair value

     5,351       4,982       4,973  

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

      

U.S. Treasury

     5,615       7,103       9,265  

U.S. government-sponsored entities and agencies

     576,436       493,956       473,070  

Mortgage-backed securities

     1,450,736       1,525,019       1,483,840  

States and political subdivisions

     414,673       436,684       449,578  

Other securities

     328,377       334,412       342,925  
  

 

 

   

 

 

   

 

 

 

Total investment securities—available-for-sale

     2,775,837       2,797,174       2,758,678  

Investment securities—held-to-maturity, at amortized cost (fair value $740,564; $784,172; and $922,311, respectively)

     688,951       745,090       850,803  

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

     117,354       101,716       101,716  

Loans held for sale, at fair value

     30,221       90,682       60,465  

Loans:

      

Commercial

     2,049,054       1,917,099       1,836,380  

Commercial real estate

     3,370,211       3,130,853       3,092,575  

Residential real estate

     2,119,120       2,087,530       2,105,232  

Consumer credit, net of unearned income

     1,859,739       1,875,030       1,870,798  
  

 

 

   

 

 

   

 

 

 

Total loans

     9,398,124       9,010,512       8,904,985  

Allowance for loan losses

     (50,169     (49,808     (51,547
  

 

 

   

 

 

   

 

 

 

Net loans

     9,347,955       8,960,704       8,853,438  
  

 

 

   

 

 

   

 

 

 

Premises and equipment, net

     412,488       429,622       333,266  

Accrued interest receivable

     75,342       81,381       77,689  

Goodwill

     655,018       655,018       655,210  

Other intangible assets

     29,235       37,677       40,918  

Company-owned life insurance

     356,897       352,956       351,431  

Net deferred tax assets

     137,951       181,863       169,466  

Loan servicing rights

     24,900       25,561       25,920  

Assets held for sale

     8,196       5,970       4,217  

Other real estate owned and repossessed personal property

     10,259       18,546       23,719  

Other assets

     137,478       115,776       130,122  
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 15,065,800     $ 14,860,237     $ 14,703,071  
  

 

 

   

 

 

   

 

 

 

Liabilities

      

Deposits:

      

Noninterest-bearing demand

   $ 3,034,696     $ 3,016,093     $ 2,944,331  

Interest-bearing:

      

NOW

     2,539,233       2,596,595       2,486,190  

Savings

     2,932,488       2,954,709       2,963,637  

Money market

     648,378       707,748       687,895  

Time

     1,451,989       1,468,108       1,564,655  
  

 

 

   

 

 

   

 

 

 

Total deposits

     10,606,784       10,743,253       10,646,708  

Federal funds purchased and interbank borrowings

     317,021       213,003       125,121  

Securities sold under agreements to repurchase

     285,409       367,052       347,804  

Federal Home Loan Bank advances

     1,589,367       1,353,092       1,331,379  

Other borrowings

     219,314       218,939       218,795  

Accrued expenses and other liabilities

     141,082       150,481       198,807  
  

 

 

   

 

 

   

 

 

 

Total liabilities

     13,158,977       13,045,820       12,868,614  
  

 

 

   

 

 

   

 

 

 

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, 135,523; 135,159; and 134,985 shares issued and outstanding, respectively

     135,523       135,159       134,985  

Capital surplus

     1,354,036       1,348,338       1,343,740  

Retained earnings

     451,461       390,292       374,561  

Accumulated other comprehensive income (loss), net of tax

     (34,197     (59,372     (18,829
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     1,906,823       1,814,417       1,834,457  
  

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 15,065,800     $ 14,860,237     $ 14,703,071  
  

 

 

   

 

 

   

 

 

 

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
September 30,
     Nine Months Ended
September 30,
 

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

   2017      2016      2017      2016  

Interest Income

           

Loans including fees:

           

Taxable

   $ 97,685      $ 94,866      $ 282,075      $ 252,965  

Nontaxable

     3,373        3,004        9,788        8,999  

Investment securities:

           

Taxable

     15,330        14,612        46,516        41,919  

Nontaxable

     7,052        7,208        21,652        21,309  

Money market and other interest-earning investments

     85        23        171        93  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     123,525        119,713        360,202        325,285  
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest Expense

           

Deposits

     5,125        4,819        14,232        12,566  

Federal funds purchased and interbank borrowings

     655        226        1,433        566  

Securities sold under agreements to repurchase

     280        375        870        1,139  

Federal Home Loan Bank advances

     6,618        4,137        17,947        11,164  

Other borrowings

     2,369        2,353        7,108        7,064  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     15,047        11,910        41,590        32,499  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     108,478        107,803        318,612        292,786  

Provision for loan losses

     311        1,306        2,013        2,716  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     108,167        106,497        316,599        290,070  
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest Income

           

Wealth management fees

     8,837        8,572        27,515        26,048  

Service charges on deposit accounts

     10,535        11,054        30,418        31,130  

Debit card and ATM fees

     4,248        4,330        12,920        12,586  

Mortgage banking revenue

     5,104        7,718        14,516        15,841  

Insurance premiums and commissions

     170        132        437        20,375  

Investment product fees

     5,193        5,038        15,186        13,667  

Capital markets income

     1,843        849        5,621        2,262  

Company-owned life insurance

     2,022        2,163        6,288        6,281  

Net securities gains (losses)

     2,972        1,647        7,547        4,609  

Recognition of deferred gain on sale leaseback transactions

     537        235        1,612        2,325  

Gain on sale of ONB Insurance Group, Inc.

     —          —          —          41,864  

Change in FDIC indemnification asset

     —          —          —          233  

Other income

     4,905        5,505        16,497        12,858  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

     46,366        47,243        138,557        190,079  
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest Expense

           

Salaries and employee benefits

     57,783        60,861        171,953        180,548  

Occupancy

     11,670        12,944        34,343        39,356  

Equipment

     3,485        3,564        10,062        9,773  

Marketing

     2,646        3,528        9,369        11,125  

Data processing

     7,696        8,242        23,530        24,041  

Communication

     2,163        2,755        6,865        7,154  

Professional fees

     4,589        3,252        11,317        11,801  

Loan expense

     1,542        2,213        4,866        5,669  

Supplies

     547        799        1,720        1,980  

FDIC assessment

     2,197        2,149        6,814        6,098  

Other real estate owned expense

     511        728        2,635        3,251  

Amortization of intangibles

     2,641        3,233        8,442        9,245  

Other expense

     6,232        3,794        16,488        17,848  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expense

     103,702        108,062        308,404        327,889  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     50,831        45,678        146,752        152,260  

Income tax expense

     11,459        10,969        32,534        51,452  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 39,372      $ 34,709      $ 114,218      $ 100,808  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per common share—basic

   $ 0.30      $ 0.25      $ 0.85      $ 0.80  

Net income per common share—diluted

     0.29        0.25        0.84        0.80  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common shares outstanding—basic

     135,120        134,492        135,040        125,366  

Weighted average number of common shares outstanding—diluted

     135,796        135,011        135,693        125,839  
  

 

 

    

 

 

    

 

 

    

 

 

 

Dividends per common share

   $ 0.13      $ 0.13      $ 0.39      $ 0.39  

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
September 30,
    Nine Months Ended
September 30,
 

(dollars in thousands)

   2017     2016     2017     2016  

Net income

   $ 39,372     $ 34,709     $ 114,218     $ 100,808  

Other comprehensive income (loss):

        

Change in securities available-for-sale:

        

Unrealized holding gains (losses) for the period

     (3,955     3,428       42,452       33,956  

Reclassification adjustment for securities gains realized in income

     (2,972     (1,647     (7,547     (4,609

Income tax effect

     2,513       (693     (12,764     (10,670
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     (4,414     1,088       22,141       18,677  

Change in securities held-to-maturity:

        

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

     456       439       1,358       1,370  

Income tax effect

     (156     (150     (465     (468
  

 

 

   

 

 

   

 

 

   

 

 

 

Changes from securities held-to-maturity

     300       289       893       902  

Cash flow hedges:

        

Net unrealized derivative gains (losses) on cash flow hedges

     217       3,133       (1,590     (12,480

Reclassification adjustment for losses realized in net income

     1,429       1,865       4,962       4,723  

Income tax effect

     (625     (1,899     (1,281     2,948  
  

 

 

   

 

 

   

 

 

   

 

 

 

Changes from cash flow hedges

     1,021       3,099       2,091       (4,809

Defined benefit pension plans:

        

Amortization of net loss recognized in income

     27       503       81       1,933  

Income tax effect

     (11     (191     (31     (735
  

 

 

   

 

 

   

 

 

   

 

 

 

Changes from defined benefit pension plans

     16       312       50       1,198  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (3,077     4,788       25,175       15,968  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 36,295     $ 39,497     $ 139,393     $ 116,776  
  

 

 

   

 

 

   

 

 

   

 

 

 

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)

 

(dollars in thousands)

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

Balance at December 31, 2015

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

Net income

     —         —         100,808       —         100,808  

Other comprehensive income

     —         —         —         15,968       15,968  

Acquisition of Anchor BanCorp Wisconsin Inc.

     20,415       253,150       —         —         273,565  

Dividends—common stock ($0.39 per share)

     —         —         (49,962     —         (49,962

Common stock issued

     24       272       —         —         296  

Common stock repurchased

     (146     (1,759     —         —         (1,905

Stock-based compensation expense

     —         5,070       —         —         5,070  

Stock activity under incentive compensation plans

     395       (904     (44     —         (553
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2016

   $ 134,985     $ 1,343,740     $ 374,561     $ (18,829   $ 1,834,457  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2016

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

Net income

     —         —         114,218       —         114,218  

Other comprehensive income

     —         —         —         25,175       25,175  

Dividends—common stock ($0.39 per share)

     —         —         (52,841 )      —         (52,841 ) 

Common stock issued

     18       285       —         —         303  

Common stock repurchased

     (108 )      (1,809 )      —         —         (1,917 ) 

Stock-based compensation expense

     —         4,684       —         —         4,684  

Stock activity under incentive compensation plans

     454       2,538       (208 )      —         2,784  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2017

   $ 135,523     $ 1,354,036     $ 451,461     $ (34,197 )    $ 1,906,823  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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)

 

     Nine Months Ended
September 30,
 

(dollars in thousands)

   2017     2016  

Cash Flows From Operating Activities

    

Net income

   $ 114,218     $ 100,808  
  

 

 

   

 

 

 

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

    

Depreciation

     16,178       11,399  

Amortization of other intangible assets

     8,442       9,245  

Net premium amortization on investment securities

     11,263       14,331  

Amortization of and net gains on termination of FDIC indemnification asset

     —         (458

Stock-based compensation expense

     4,684       5,070  

Excess tax (benefit) expense on stock-based compensation

     126       —    

Provision for loan losses

     2,013       2,716  

Net securities (gains) losses

     (7,547     (4,609

Recognition of deferred gain on sale leaseback transactions

     (1,612     (2,325

Gain on sale of ONB Insurance Group, Inc.

     —         (41,864

Net gains on sales of loans and other assets

     (5,082     (6,019

Increase in cash surrender value of company-owned life insurance

     (6,288     (6,281

Residential real estate loans originated for sale

     (336,238     (447,191

Proceeds from sale of residential real estate loans

     403,128       416,208  

(Increase) decrease in interest receivable

     6,039       (1,283

(Increase) decrease in other real estate owned

     8,287       7,022  

(Increase) decrease in other assets

     8,498       22,153  

Increase (decrease) in accrued expenses and other liabilities

     (4,370     (11,059
  

 

 

   

 

 

 

Total adjustments

     107,521       (32,945
  

 

 

   

 

 

 

Net cash flows provided by (used in) operating activities

     221,739       67,863  
  

 

 

   

 

 

 

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

     (566,089     (1,281,062

Purchases of Federal Home Loan Bank/Federal Reserve Bank stock

     (15,647     (10,974

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

     337,766       1,043,014  

Proceeds from sales of investment securities available-for-sale

     284,315       157,819  

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

     53,586       16,324  

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

     (389,264     (322,876

Proceeds from settlements on company-owned life insurance

     2,347       3,422  

Proceeds from sale of premises and equipment and other assets

     15,058       6,332  

Purchases of premises and equipment and other assets

     (17,675     (117,899
  

 

 

   

 

 

 

Net cash flows provided by (used in) investing activities

     (295,467     (466,661
  

 

 

   

 

 

 

Cash Flows From Financing Activities

    

Net increase (decrease) in:

    

Deposits

     (136,469     393,135  

Federal funds purchased and interbank borrowings

     104,018       (165,970

Securities sold under agreements to repurchase

     (81,643     (42,737

Payments for maturities of Federal Home Loan Bank advances

     (893,363     (592,877

Payments for maturities of other borrowings

     (116     (50

Proceeds from Federal Home Loan Bank advances

     1,130,000       900,000  

Cash dividends paid on common stock

     (52,841     (49,962

Common stock repurchased

     (1,917     (1,905

Proceeds from exercise of stock options

     2,604       90  

Common stock issued

     303       296  
  

 

 

   

 

 

 

Net cash flows provided by (used in) financing activities

     70,576       440,020  
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (3,152     41,222  

Cash and cash equivalents at beginning of period

     255,519       219,818  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 252,367     $ 261,040  
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Total interest paid

   $ 43,205     $ 33,394  

Total taxes paid (net of refunds)

   $ 2,958     $ 25,900  

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 September 30, 2017 and 2016, and December 31, 2016, and the results of its operations for the three and nine months ended September 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 have finalized our in-depth assessment and 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. We will continue to evaluate any impact, including changes to related disclosures, as additional guidance is issued.

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments relate to when another party, along with the entity, is involved in providing a good or service to a customer. Topic 606 requires an entity to determine whether the nature of its promise is to provide that good or service to the customer (that is, the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (that is, the entity is an agent). This determination is based upon whether the entity controls the good or the service before it is transferred to the customer. Topic 606 includes indicators to assist in this evaluation. The amendments in this update affect the guidance in ASU No. 2014-09 above, which is not yet effective. The effective date will be the same as the effective date of ASU No. 2014-09.

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments clarify the following two aspects of Topic 606: identifying performance obligations, and the licensing implementation guidance. Before an entity can identify its performance obligations in a contract with a customer, the entity first identifies the promised goods or services in the contract. The amendments in this update are expected to reduce the cost and complexity of applying the guidance on identifying promised goods or services. To identify performance obligations in a contract, an entity

 

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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 our equity investments to determine which will be impacted by the adoption of the new guidance.

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

 

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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 September 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.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments in the update make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The amendments in this update better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. This update addresses several limitations that current GAAP places on the risk components, how an entity can designate the hedged item in a fair value hedge of interest rate risk, and how an entity can measure changes in fair value of the hedged item attributable to interest rate risk. In addition to the amendments to the designation and measurement guidance for qualifying hedging relationships, the amendments in this update also align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements to increase the understandability of the results of an entity’s intended hedging strategies. The amendments in this update require an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. Current GAAP provides special hedge accounting only for the portion of the hedge deemed to be “highly effective” and requires an entity to separately reflect the amount by which the hedging instrument does not offset the hedged item, which is referred to as the “ineffective” amount. However, the concept and reporting of hedge ineffectiveness were difficult for financial statement users to understand and, at times, for preparers to explain. The FASB board decided on an

 

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approach that no longer separately measures and reports hedge ineffectiveness. This update also includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. Current GAAP contains specific requirements for initial and ongoing quantitative hedge effectiveness testing and strict requirements for specialized effectiveness testing methods that allow an entity to forgo quantitative hedge effectiveness assessments for qualifying relationships. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. Early adoption is permitted in any interim period.

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

FASB ASC 718 —In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Shared-Based Payment Accounting. The amendments are intended to improve the accounting for employee shared-based payments and affects all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including the income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. The amendments in this update became effective on January 1, 2017 and resulted in a $0.1 million expense during the nine months ended September 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-

 

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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 has overseen the enhancement of existing technology required to source and model data for the purposes of meeting this standard. The committee has also selected a vendor to assist in generating loan level cash flows and disclosures. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

FASB ASC 740 —In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. Current guidance prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. This prohibition on recognition is an exception to the principle of comprehensive recognition of current and deferred income taxes in generally accepted accounting principles. The exception has led to diversity in practice and is a source of complexity in financial reporting. FASB decided that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Consequently, the amendments in this update eliminate the exception for an intra-entity transfer of an asset other than inventory. The amendments in this update do not include new disclosure requirements; however, existing disclosure requirements might be applicable when accounting for the current and deferred income taxes for an intra-entity transfer of an asset other than inventory. For public business entities, the amendments in this update are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The amendments in this update should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

FASB ASC 810—In October 2016, the FASB issued ASU No. 2016-17, Consolidation (Topic 810): Interests Held through Related Parties that are under Common Control. This update amends the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity (VIE) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The primary beneficiary of a VIE is the reporting entity that has a controlling financial interest in a VIE and, therefore, consolidates the VIE. A reporting entity has an indirect interest in a VIE if it has a direct interest in a related party that, in turn, has a direct interest in the VIE. The amendments in this update became effective for annual periods and interim periods within those annual periods beginning after December 15, 2016, and did not have a material impact on the consolidated financial statements.

FASB ASC 805—In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this update provide a more robust framework to use in determining when a set of assets and activities is a business. Because the current definition of a business is interpreted broadly and can be difficult to apply, stakeholders indicated that analyzing transactions is inefficient and costly and that the definition does not permit the use of reasonable judgment. The amendments provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

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

 

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impairment test is necessary. The amendments should be applied on a prospective basis. The nature of and reason for the change in accounting principle should be disclosed upon transition. The amendments in this update should be adopted for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted on testing dates after January 1, 2017. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

FASB ASC 610 —In February 2017, the FASB issued ASU No. 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Topic 610): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. Subtopic 610-20 was originally issued as part of ASU No. 2014-09 to provide guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. This update was issued to help clarify uncertainties and complexities of ASU 2014-09. The amendments in this update define the term in substance nonfinancial asset, in part, as a financial asset promised to a counterparty in a contract if substantially all of its fair value of the assets (recognized and unrecognized) that are promised to the counterparty in the contract is concentrated in nonfinancial assets. If substantially all of the fair value of the assets that are promised to the counterparty in a contract is concentrated in nonfinancial assets, then all of the financial assets promised to the counterparty are in substance nonfinancial assets. The amendments in this update also clarify that nonfinancial assets within the scope of Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty. The amendment in this update require an entity to derecognize a distinct nonfinancial asset or distinct in substance nonfinancial asset in a partial sale transaction when it (1) does not have (or ceases to have) a controlling financial interest in the legal entity that holds the asset in accordance with Topic 810 and (2) transfers control of the asset in accordance with Topic 606. Once an entity transfers control of a distinct nonfinancial asset or distinct in substance nonfinancial asset, it is required to measure any noncontrolling interest it receives (or retains) at fair value. The amendments are effective at the same time as the amendments in ASU 2014-09. Therefore, the amendments are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

FASB ASC 715—In March 2017, the FASB issued ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The amendments in this update require that an employer disaggregate the service cost component from the other components of net benefit cost. The amendments also provide explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization. The amendments in this update improve the consistency, transparency, and usefulness of financial information to users that have communicated that the service cost component generally is analyzed differently from the other components of net benefit cost. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

FASB ASC 310—In March 2017, the FASB issued ASU No. 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This update amends the amortization period for certain purchased callable debt securities held at a premium. FASB is shortening the amortization period for the premium to the earliest call date. Under current 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.

 

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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 (WI) through a stock and cash merger. Anchor (WI) was a savings and loan holding company with AnchorBank (WI) as its wholly-owned subsidiary. AnchorBank (WI) 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 (WI) could elect to receive either 3.5505 shares of Old National common stock or $48.50 in cash for each share of Anchor (WI) they held, subject to a maximum of 40% of the purchase price in cash. The total fair value of consideration paid for Anchor (WI) 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.

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.

 

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Acquired loan data for Anchor (WI) can be found in the table below:

 

(in thousands)

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

Acquired receivables subject to ASC 310-30

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

Acquired receivables not subject to ASC 310-30

   $ 1,617,632      $ 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. The Company plans to consolidate another fourteen branches in the fourth quarter of 2017.

Pending Acquisition

On August 7, 2017, Old National entered into an agreement to acquire St. Paul, Minnesota-based Anchor (MN) through a stock and cash merger. Anchor (MN) is a bank holding company with Anchor Bank (MN) as its wholly-owned subsidiary. Founded in 1967 and with 18 total branches, Anchor Bank (MN) is one of the largest community banks headquartered in the Twin Cities, and also serves Mankato, Minnesota. Anchor Bank (MN) has no affiliation with the former AnchorBank (WI) in Madison, Wisconsin, which Old National acquired in 2016. At June 30, 2017, Anchor Bank (MN) had total assets of $2.1 billion and $1.7 billion of deposit liabilities. Pursuant to the merger agreement, each holder of Anchor (MN) common stock will receive $2.625 in cash and 1.350 shares of Old National common stock per share of Anchor (MN) common stock such holder owns. Based on Old National’s September 29, 2017 closing price of $18.30 per share, this represents a total transaction value of approximately $334.2 million. The transaction value is likely to change up to the closing date, due to fluctuations in the price of Old National common stock and is also subject to adjustment under certain circumstances as provided in the merger agreement. The transaction has received regulatory and shareholder approval and closed on November 1, 2017.

NOTE 4—NET INCOME PER SHARE

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

 

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

 

(dollars and shares in thousands,

except per share data)

   Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
   2017      2016      2017      2016  

Basic Earnings Per Share

           

Net income

   $ 39,372      $ 34,709      $ 114,218      $ 100,808  

Weighted average common shares outstanding

     135,120        134,492        135,040        125,366  

Basic Net Income Per Share

   $ 0.30      $ 0.25      $ 0.85      $ 0.80  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted Earnings Per Share

           

Net income

   $ 39,372      $ 34,709      $ 114,218      $ 100,808  

Weighted average common shares outstanding

     135,120        134,492        135,040        125,366  

Effect of dilutive securities:

           

Restricted stock

     589        465        558        432  

Stock options (1)

     87        54        95        41  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding

     135,796        135,011        135,693        125,839  

Diluted Net Income Per Share

   $ 0.29      $ 0.25      $ 0.84      $ 0.80  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Options to purchase 0.1 million shares and 0.9 million shares outstanding at September 30, 2017 and 2016, respectively, were not included in the computation of net income per diluted share for the three months ended September 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 September 30, 2017 and 2016, respectively, were not included in the computation of net income per diluted share for the nine months ended September 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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Table of Contents

NOTE 5—INVESTMENT SECURITIES

The following table summarizes the amortized cost and fair value of the available-for-sale and held-to-maturity investment securities portfolio at September 30, 2017 and December 31, 2016 and the corresponding amounts of unrealized gains and losses therein:

 

(dollars in thousands)

   Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
     Fair
Value
 

September 30, 2017

           

Available-for-Sale

           

U.S. Treasury

   $ 5,472      $ 143      $ —        $ 5,615  

U.S. government-sponsored entities and agencies

     583,151        86        (6,801      576,436  

Mortgage-backed securities—Agency

     1,466,636        3,862        (19,762      1,450,736  

States and political subdivisions

     410,856        6,569        (2,752      414,673  

Pooled trust preferred securities

     16,651        —          (8,381      8,270  

Other securities

     319,669        2,086        (1,648      320,107  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 2,802,435      $ 12,746      $ (39,344    $ 2,775,837  
  

 

 

    

 

 

    

 

 

    

 

 

 

Held-to-Maturity

           

Mortgage-backed securities—Agency

   $ 7,649      $ 254      $ —        $ 7,903  

States and political subdivisions

     681,302        51,359        —          732,661  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held-to-maturity securities

   $ 688,951      $ 51,613      $ —        $ 740,564  
  

 

 

    

 

 

    

 

 

    

 

 

 

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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Table of Contents

Proceeds from sales or calls of available-for-sale investment securities, the resulting realized gains and realized losses, and other securities gains or losses were as follows for the three and nine months ended September 30, 2017 and 2016:

 

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

(dollars in thousands)

   2017      2016      2017      2016  

Proceeds from sales of available-for-sale securities

   $ 98,038      $ 50,368      $ 284,315      $ 157,819  

Proceeds from calls of available-for-sale securities

     2,303        160,805        73,423        525,114  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 100,341      $ 211,173      $ 357,738      $ 682,933  
  

 

 

    

 

 

    

 

 

    

 

 

 

Realized gains on sales of available-for-sale securities

   $ 2,891      $ 1,062      $ 7,174      $ 4,213  

Realized gains on calls of available-for-sale securities

     13        477        13        848  

Realized losses on sales of available-for-sale securities

     (36      (2      (79      (450

Realized losses on calls of available-for-sale securities

     —          (15      (8      (103

Other securities gains (losses) (1)

     104        125        447        101  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net securities gains (losses)

   $ 2,972      $ 1,647      $ 7,547      $ 4,609  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 $5.4 million at September 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 September 30, 2017  
(dollars in thousands)           Weighted
Average
Yield
 

Maturity

   Amortized
Cost
     Fair
Value
    

Available-for-Sale

        

Within one year

   $ 34,563      $ 34,686        2.36

One to five years

     338,424        339,100        2.11  

Five to ten years

     302,515        305,146        2.85  

Beyond ten years

     2,126,933        2,096,905        2.43  
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,802,435      $ 2,775,837        2.44
  

 

 

    

 

 

    

 

 

 

Held-to-Maturity

        

Within one year

   $ 23,751      $ 24,064        6.15

One to five years

     89,739        94,617        4.88  

Five to ten years

     172,648        183,505        4.88  

Beyond ten years

     402,813        438,378        5.75  
  

 

 

    

 

 

    

 

 

 

Total

   $ 688,951      $ 740,564        5.43
  

 

 

    

 

 

    

 

 

 

 

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The following table summarizes the investment securities with unrealized losses at September 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  

(dollars in thousands)

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

September 30, 2017

               

Available-for-Sale

               

U.S. government-sponsored entities and agencies

   $ 406,906      $ (3,708   $ 89,907      $ (3,093   $ 496,813      $ (6,801

Mortgage-backed securities—Agency

     985,209        (12,903     190,224        (6,859     1,175,433        (19,762

States and political subdivisions

     104,214        (1,612     35,715        (1,140     139,929        (2,752

Pooled trust preferred securities

     —          —         8,270        (8,381     8,270        (8,381

Other securities

     80,290        (848     85,583        (800     165,873        (1,648
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available-for-sale

   $ 1,576,619      $ (19,071   $ 409,699      $ (20,273   $ 1,986,318      $ (39,344
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Held-to-Maturity

               

States and political subdivisions

   $ 465      $ —       $ —        $ —       $ 465      $ —    
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total held-to-maturity

   $ 465      $ —       $ —        $ —       $ 465      $ —    
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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 nine months ended September 30, 2017 or 2016.

At September 30, 2017, Old National’s securities portfolio consisted of 1,495 securities, 317 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 September 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 September 30, 2017, our securities portfolio contained three pooled trust preferred securities with a fair value of $8.3 million and unrealized losses of $8.4 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 $2.5 million at September 30, 2017. This security was rated A3 at inception, but is rated D at September 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 nine months ended September 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 $8.0 million and unrealized losses of $5.9 million at September 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 nine months ended September 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
September 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      $ 2,738      $ 262      $ (2,476   $     —          21/36        32.1%       7.5%       0.0%  

Pretsl XXVII LTD

     B        B        4,422        2,451        (1,971     —          35/44        16.7%       3.8%       47.9%  

Trapeza Ser 13A

     A2A        BBB        9,491        5,557        (3,934     —          50/55        4.5%       4.6%       45.2%  
        

 

 

    

 

 

    

 

 

   

 

 

           
           16,651        8,270        (8,381     —              

Single Issuer trust preferred securities:

 

                    

Fleet Cap Tr V (BOA)

        BB+        3,403        3,325        (78     —              

JP Morgan Chase Cap XIII

        BBB-        4,775        4,609        (166     —              

NB-Global

        BB+        799        949        150       —              

Chase Cap II

        BBB-        833        935        102       —              
        

 

 

    

 

 

    

 

 

   

 

 

           
           9,810        9,818        8       —              

Total

         $ 26,461      $ 18,088      $ (8,373   $     —              
        

 

 

    

 

 

    

 

 

   

 

 

           

 

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

NOTE 6—LOANS HELD FOR SALE

Mortgage loans held for immediate sale in the secondary market were $30.2 million at September 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. 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 7—LOANS AND ALLOWANCE FOR LOAN LOSSES

Old National’s finance receivables consist primarily of loans made to consumers and commercial clients in various industries including manufacturing, agribusiness, transportation, mining, wholesaling, and retailing. Most of Old National’s lending activity occurs within our principal geographic markets of Indiana, Kentucky, Michigan, and Wisconsin. Old National manages concentrations of credit exposure by industry, product, geography, customer relationship, and loan size, with no concentration of loans exceeding 10% of its portfolio.

 

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The composition of loans by lending classification was as follows:

 

(dollars in thousands)

   September 30,
2017
     December 31,
2016
 

Commercial (1)

   $ 2,049,054      $ 1,917,099  

Commercial real estate:

     

Construction (2)

     276,226        357,802  

Other (2)

     3,093,985        2,773,051  

Residential real estate

     2,119,120        2,087,530  

Consumer credit:

     

Home equity

     477,100        476,439  

Auto

     1,165,289        1,167,737  

Other

     217,350        230,854  
  

 

 

    

 

 

 

Total loans

     9,398,124        9,010,512  

Allowance for loan losses

     (50,169      (49,808
  

 

 

    

 

 

 

Net loans

   $ 9,347,955      $ 8,960,704  
  

 

 

    

 

 

 

 

(1) Includes direct finance leases of $8.7 million at September 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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The acquisition of Anchor (WI) 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 September 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 (WI) in May 2016. At September 30, 2017, student loans totaled $70.2 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 nine months ended September 30, 2017 and 2016 was as follows:

 

(dollars in thousands)

   Commercial     Commercial
Real Estate
    Residential     Consumer     Total  

Three Months Ended September 30, 2017

          

Balance at beginning of period

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

Charge-offs

     (70     (1,148     (227     (1,376     (2,821

Recoveries

     255       339       89       1,010       1,693  

Provision

     (23     180       236       (82     311  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 20,527     $ 20,025     $ 1,909     $ 7,708     $ 50,169  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended September 30, 2016

          

Balance at beginning of period

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

Charge-offs

     (1,681     (1,378     (140     (1,320     (4,519

Recoveries

     594       1,548       2,174       (1,360     2,956  

Provision

     1,461       (1,033     (1,963     2,841       1,306  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 24,530     $ 17,345     $ 1,530     $ 8,142     $ 51,547  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2017

          

Balance at beginning of period

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

Charge-offs

     (951     (2,784     (954     (4,751     (9,440

Recoveries

     1,647       3,086       196       2,859       7,788  

Provision

     (1,650     1,550       1,024       1,089       2,013  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 20,527     $ 20,025     $ 1,909     $ 7,708     $ 50,169  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2016

          

Balance at beginning of period

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

Charge-offs

     (3,640     (2,440     (360     (4,698     (11,138

Recoveries

     2,288       2,935       2,387       126       7,736  

Provision

     (465     857       (2,548     4,872       2,716  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 24,530     $ 17,345     $ 1,530     $ 8,142     $ 51,547  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

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

 

(dollars in thousands)

   Commercial      Commercial
Real Estate
     Residential      Consumer      Total  

September 30, 2017

              

Allowance for loan losses:

              

Individually evaluated for impairment

   $ 4,456      $ 6,486      $ —        $ —        $ 10,942  

Collectively evaluated for impairment

     16,048        13,520        1,909        7,552        39,029  

Loans acquired with deteriorated credit quality

     23        19        —          156        198  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total allowance for loan losses

   $ 20,527      $ 20,025      $ 1,909      $ 7,708      $ 50,169  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans and leases outstanding:

              

Individually evaluated for impairment

   $ 33,275      $ 62,442      $ —        $ —        $ 95,717  

Collectively evaluated for impairment

     2,015,185        3,287,914        2,107,253        1,853,875        9,264,227  

Loans acquired with deteriorated credit quality

     594        19,855        11,867        5,864        38,180  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans and leases outstanding

   $ 2,049,054      $ 3,370,211      $ 2,119,120      $ 1,859,739      $ 9,398,124  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 September 30, 2017 and December 31, 2016 was as follows:

 

(dollars in thousands)                  Commercial      Commercial  
Corporate Credit Exposure    Commercial      Real Estate—
Construction
     Real Estate—
Other
 

Credit Risk Profile by

Internally Assigned Grade

   September 30,
2017
     December 31,
2016
     September 30,
2017
     December 31,
2016
     September 30,
2017
     December 31,
2016
 

Grade:

                 

Pass

   $ 1,944,997      $ 1,750,923      $ 261,500      $ 347,325      $ 2,911,548      $ 2,669,890  

Criticized

     41,004        45,614        14,726        9,258        74,467        40,590  

Classified—substandard

     33,524        63,978        —          49        50,842        19,715  

Classified—nonaccrual

     26,981        53,062        —          1,170        30,693        33,833  

Classified—doubtful

     2,548        3,522        —          —          26,435        9,023  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,049,054      $ 1,917,099      $ 276,226      $ 357,802      $ 3,093,985      $ 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 September 30, 2017 and December 31, 2016:

 

            Consumer  

(dollars in thousands)

   Residential      Home
Equity
     Auto      Other  

September 30, 2017

           

Performing

   $ 2,099,585      $ 471,827      $ 1,162,634      $ 212,214  

Nonperforming

     19,535        5,273        2,655        5,136  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,119,120      $ 477,100      $ 1,165,289      $ 217,350  
  

 

 

    

 

 

    

 

 

    

 

 

 

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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Table of Contents

The following table shows Old National’s impaired loans at September 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
 

September 30, 2017

        

With no related allowance recorded:

        

Commercial

   $ 25,393      $ 26,374      $ —    

Commercial Real Estate—Other

     31,928        33,687        —    

Residential

     2,464        2,485        —    

Consumer

     1,924        2,140        —    

With an allowance recorded:

        

Commercial

     7,882        7,882        4,456  

Commercial Real Estate—Other

     30,514        30,770        6,486  

Residential

     882        882        44  

Consumer

     2,269        2,269        112  
  

 

 

    

 

 

    

 

 

 

Total

   $ 103,256      $ 106,489      $ 11,098  
  

 

 

    

 

 

    

 

 

 

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 nine months ended September 30, 2017 and 2016 are included in the table below.

 

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

(dollars in thousands)

   2017      2016      2017      2016  

Average Recorded Investment

           

With no related allowance recorded:

           

Commercial

   $ 24,234      $ 35,513      $ 27,197      $ 37,581  

Commercial Real Estate—Other

     33,268        40,971        31,258        37,937  

Residential

     2,482        1,233        2,405        1,270  

Consumer

     1,755        878        1,786        865  

With an allowance recorded:

           

Commercial

     7,792        17,334        8,086        16,072  

Commercial Real Estate—Construction

     —          —          —          119  

Commercial Real Estate—Other

     30,846        15,119        28,580        15,977  

Residential

     1,011        1,099        1,059        1,072  

Consumer

     2,163        2,385        2,136        2,515  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 103,551      $ 114,532      $ 102,507      $ 113,408  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 nine months ended September 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 September 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  

September 30, 2017

                 

Commercial

   $ 296      $ 100      $ 251      $ 29,529      $ 30,176      $ 2,018,878  

Commercial Real Estate:

                 

Construction

     —          —          —          —          —          276,226  

Other

     150        —          —          57,128        57,278        3,036,707  

Residential

     16,091        3,235        232        19,535        39,093        2,080,027  

Consumer:

                 

Home equity

     939        314        88        5,273        6,614        470,486  

Auto

     5,535        977        282        2,655        9,449        1,155,840  

Other

     2,864        1,159        26        5,136        9,185        208,165  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 25,875      $ 5,785      $ 879      $ 119,256      $ 151,795      $ 9,246,329  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 September 30, 2017, these loans totaled $541.6 million, of which $271.7 million had been sold to other financial institutions and $269.9 million was retained by Old National. The loan participations convey proportionate ownership rights with equal priority to each participating interest holder; involve no recourse (other than ordinary representations and warranties) to, or subordination by, any participating interest holder; all cash flows are divided among the participating interest holders in proportion to each holder’s share of ownership; and no holder has the right to pledge the entire financial asset unless all participating interest holders agree.

 

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Troubled Debt Restructurings

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

Any loans that are modified are reviewed by Old National to identify if a 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 nine months ended September 30, 2017 and 2016:

 

(dollars in thousands)

   Commercial     Commercial
Real Estate
    Residential     Consumer     Total  

Nine Months Ended September 30, 2017

          

Balance at beginning of period

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

(Charge-offs)/recoveries

     (5     366       —         (58     303  

Payments

     (10,024     (3,849     (589     (970     (15,432

Additions

     12,599       17,429       937       2,568       33,533  

Interest collected on nonaccrual loans

     2,420       431       13       51       2,915  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 21,792     $ 32,704     $ 3,346     $ 4,193     $ 62,035  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2016

          

Balance at beginning of period

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

(Charge-offs)/recoveries

     (1,098     148       42       (27     (935

Payments

     (17,517     (6,050     (482     (1,273     (25,322

Additions

     12,367       10,581       335       385       23,668  

Interest collected on nonaccrual loans

     1,569       523       —         —         2,092  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 18,675     $ 19,804     $ 2,588     $ 2,687     $ 43,754  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Approximately $43.7 million of the TDRs at September 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 $6.5 million at September 30, 2017 and $4.0 million at December 31, 2016. At September 30, 2017, Old National had committed to lend an additional $3.9 million to customers with outstanding loans that are classified as TDRs.

The pre-modification and post-modification outstanding recorded investments of loans modified as TDRs during the nine months ended September 30, 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 nine months ended September 30, 2017 and 2016:

 

(dollars in thousands)

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

Nine Months Ended September 30, 2017

        

TDR:

        

Commercial

     9      $ 12,599      $ 12,599  

Commercial Real Estate—Other

     10        17,429        17,429  

Residential

     6        937        937  

Consumer

     7        2,568        2,568  
  

 

 

    

 

 

    

 

 

 

Total

     32      $ 33,533      $ 33,533  
  

 

 

    

 

 

    

 

 

 

Nine Months Ended September 30, 2016

        

TDR:

        

Commercial

     17      $ 12,367      $ 12,367  

Commercial Real Estate—Other

     9        10,581        10,581  

Residential

     3        335        335  

Consumer

     8        385        385  
  

 

 

    

 

 

    

 

 

 

Total

     37      $ 23,668      $ 23,668  
  

 

 

    

 

 

    

 

 

 

The TDRs that occurred during the nine months ended September 30, 2017 increased the allowance for loan losses by $3.2 million and resulted in no charge-offs during the nine months ended September 30, 2017. The TDRs that occurred during the nine months ended September 30, 2016 decreased the allowance for loan losses by $0.3 million due to a change in collateral position on a large commercial loan and resulted in $0.8 million of charge-offs during the nine months ended September 30, 2016.

 

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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 nine months ended September 30, 2017.

There were 6 commercial loans and 1 commercial real estate loan totaling $0.6 million that were modified as TDRs within the preceding twelve months, and for which there was a payment default during the nine months ended September 30, 2016.

The terms of certain other loans were modified during the nine months ended September 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 September 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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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)

   September 30,
2017
     December 31,
2016
 

Commercial

   $ 594      $ 850  

Commercial real estate

     19,855        32,774  

Residential

     11,867        13,580  

Consumer

     5,864        8,215  
  

 

 

    

 

 

 

Carrying amount

     38,180        55,419  

Allowance for loan losses

     (198      (278
  

 

 

    

 

 

 

Carrying amount, net of allowance

   $ 37,982      $ 55,141  
  

 

 

    

 

 

 

The outstanding balance of loans accounted for under ASC 310-30, including contractual principal, interest, fees and penalties, was $241.1 million at September 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 $12.8 million during the nine months ended September 30, 2017 and $18.2 million during the nine months ended September 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:

 

     Nine Months Ended
September 30,
 

(dollars in thousands)

   2017      2016  

Balance at beginning of period

   $ 33,603      $ 45,310  

New loans purchased (1)

     —          3,217  

Accretion of income

     (12,775      (18,202

Reclassifications from (to) nonaccretable difference

     6,567        7,538  

Disposals/other adjustments

     277        961  
  

 

 

    

 

 

 

Balance at end of period

   $ 27,672      $ 38,824  
  

 

 

    

 

 

 

 

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

Included in Old National’s allowance for loan losses is $0.2 million related to the purchased loans disclosed above at September 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 (WI) (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 (WI) effective May 1, 2016.

Income would not be recognized on certain purchased loans if Old National could not reasonably estimate cash flows to be collected. Old National had no purchased loans for which it could not reasonably estimate cash flows to be collected.

 

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Table of Contents

NOTE 8—OTHER REAL ESTATE OWNED

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

 

     Nine Months Ended
September 30,
 

(dollars in thousands)

   2017      2016  

Balance at beginning of period

   $ 18,546      $ 12,498  

Additions (1)

     2,695        24,337  

Sales

     (8,695      (10,503

Impairment

     (2,287      (2,613
  

 

 

    

 

 

 

Balance at end of period (2)

   $ 10,259      $ 23,719  
  

 

 

    

 

 

 

 

(1) Additions for the nine months ended September 30, 2016 include other real estate owned of $17.3 million acquired from Anchor (WI) in May 2016.
(2) Includes repossessed personal property of $0.1 million at September 30, 2017 and $0.2 million at September 30, 2016.

At September 30, 2017, foreclosed residential real estate property included in the table above totaled $0.7 million. At September 30, 2017, consumer mortgage loans collateralized by residential real property that were in the process of foreclosure totaled $3.9 million.

NOTE 9—PREMISES AND EQUIPMENT

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

 

     September 30,      December 31,  

(dollars in thousands)

   2017      2016  

Land

   $ 66,806      $ 71,769  

Buildings

     319,371        322,165  

Furniture, fixtures, and equipment

     100,756        102,631  

Leasehold improvements

     29,270        28,555  
  

 

 

    

 

 

 

Total

     516,203        525,120  

Accumulated depreciation

     (103,715      (95,498
  

 

 

    

 

 

 

Premises and equipment, net

   $ 412,488      $ 429,622  
  

 

 

    

 

 

 

Depreciation expense was $5.8 million for the three months ended September 30, 2017 and $16.2 million for the nine months ended September 30, 2017, compared to $3.9 million for the three months ended September 30, 2016 and $11.4 million for the nine months ended September 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 $3.9 million for the three months ended September 30, 2017 and $11.6 million for the nine months ended September 30, 2017, compared to $6.4 million for the three months ended September 30, 2016 and $20.1 million for the nine months ended September 30, 2016.

Old National had deferred gains remaining associated with prior sale leaseback transactions totaling $8.6 million at September 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 15 to the consolidated financial statements for detail regarding these leases.

NOTE 10—GOODWILL AND OTHER INTANGIBLE ASSETS

The following table shows the changes in the carrying amount of goodwill for the nine months ended September 30, 2017 and 2016:

 

     Nine Months Ended
September 30,
 

(dollars in thousands)

   2017      2016  

Balance at beginning of period

   $ 655,018      $ 584,634  

Acquisitions

     —          111,539  

Divestitures

     —          (40,963
  

 

 

    

 

 

 

Balance at end of period

   $ 655,018      $ 655,210  
  

 

 

    

 

 

 

Goodwill is reviewed annually for impairment. No events or circumstances since the August 31, 2017 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 September 30, 2017 and December 31, 2016 were as follows:

 

(dollars in thousands)

   Gross
Carrying
Amount
     Accumulated
Amortization
and Impairment
     Net
Carrying
Amount
 

September 30, 2017

        

Core deposit

   $ 81,663      $ (60,002    $ 21,661  

Customer trust relationships

     16,547        (9,106      7,441  

Customer loan relationships

     4,413        (4,280      133  
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 102,623      $ (73,388    $ 29,235  
  

 

 

    

 

 

    

 

 

 

December 31, 2016

        

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 nine months ended September 30, 2017 or 2016. Total amortization expense associated with intangible assets was $8.4 million for the nine months ended September 30, 2017 and $9.2 million for the nine months ended September 30, 2016.

 

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Estimated amortization expense for future years is as follows:

 

(dollars in thousands)

      

2017 remaining

   $ 2,573  

2018

     8,687  

2019

     6,737  

2020

     4,883  

2021

     3,111  

Thereafter

     3,244  
  

 

 

 

Total

   $ 29,235  
  

 

 

 

NOTE 11—LOAN SERVICING RIGHTS

At September 30, 2017, loan servicing rights derived from loans sold with servicing retained totaled $24.9 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 $3.334 billion at September 30, 2017, compared to $3.385 billion at December 31, 2016. Approximately 99% of the loans serviced for others at September 30, 2017 were residential mortgage loans. Custodial escrow balances maintained in connection with serviced loans were $42.5 million at September 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 nine months ended September 30, 2017 and 2016:

 

     Nine Months Ended
September 30,
 

(dollars in thousands)

   2017      2016  

Balance at beginning of period

   $ 25,629      $ 10,502  

Additions (1)

     3,180        18,965  

Amortization

     (3,855      (3,537
  

 

 

    

 

 

 

Balance before valuation allowance at end of period

     24,954        25,930  
  

 

 

    

 

 

 

Valuation allowance:

     

Balance at beginning of period

     (68      (34

(Additions)/recoveries

     14        24  
  

 

 

    

 

 

 

Balance at end of period

     (54      (10
  

 

 

    

 

 

 

Loan servicing rights, net

   $ 24,900      $ 25,920  
  

 

 

    

 

 

 

 

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

At September 30, 2017, the fair value of servicing rights was $26.0 million, which was determined using a discount rate of 13% and a weighted average prepayment speed of 138% 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 12—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 September 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 September 30, 2017 and December 31, 2016:

 

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

Investment

   Accounting
Method
     Investment      Unfunded
Commitment (1)
     Investment      Unfunded
Commitment
 

LIHTC and other qualifying investments

    
Proportional
amortization
 
 
   $ 32,649      $ 19,607      $ 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

      $ 51,564      $ 32,700      $ 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 nine months ended September 30, 2017 and 2016:

 

(dollars in thousands)    Three Months Ended
September 30,
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2017      2016      2017     2016     2017      2016      2017     2016  

Investment

   Amortization
Expense (1)
     Tax Benefit
Recognized (1)
    Amortization
Expense (1)
     Tax Benefit
Recognized (1)
 

LIHTC and other qualifying investments

   $ 940      $ 201      $ (1,297   $ (281   $ 2,822      $ 603      $ (3,892   $ (843

FHTC

     —          —          (1,520     —         —          —          (4,559     —    

CReED (2)

     —          —          (303     —         —          —          (909     —    
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 940      $ 201      $ (3,120   $ (281   $ 2,822      $ 603      $ (9,360   $ (843
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

(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 13—SECURITIES 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 nine months ended September 30:

 

(dollars in thousands)

   2017     2016  

Outstanding at September 30,

   $ 285,409     $ 347,804  

Average amount outstanding

     325,230       373,474  

Maximum amount outstanding at any month-end

     351,897       396,695  

Weighted average interest rate:

    

During the nine months ended September 30,

     0.36     0.41

At September 30,

     0.34       0.42  

 

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

 

     At September 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

   $ 260,409      $ —        $ —        $ 25,000      $ 285,409  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 260,409      $ —        $ —        $ 25,000      $ 285,409  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The fair value of securities pledged to secure repurchase agreements may decline. The Company has pledged securities valued at 126% of the gross outstanding balance of repurchase agreements at September 30, 2017 to manage this risk.

NOTE 14—FEDERAL HOME LOAN BANK ADVANCES

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

 

(dollars in thousands)

   September 30,
2017
     December 31,
2016
 

Federal Home Loan Bank advances (fixed rates 1.01% to 6.08% and variable rates 1.22% to 1.47%) maturing October 2017 to August 2027

   $ 1,589,862      $ 1,353,225  

ASC 815 fair value hedge and other basis adjustments

     (495      (133
  

 

 

    

 

 

 

Total other borrowings

   $ 1,589,367      $ 1,353,092  
  

 

 

    

 

 

 

FHLB advances had weighted-average rates of 1.40% at September 30, 2017 and 0.94% at December 31, 2016. These borrowings are collateralized by investment securities and residential real estate loans up to 143% of outstanding debt.

Contractual maturities of FHLB advances at September 30, 2017 were as follows:

 

(dollars in thousands)

      

Due in 2017

   $ 752,752  

Due in 2018

     274,956  

Due in 2019

     201,981  

Due in 2020

     50,000  

Due in 2021

     —    

Thereafter

     310,173  

ASC 815 fair value hedge and other basis adjustments

     (495
  

 

 

 

Total

   $ 1,589,367  
  

 

 

 

 

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NOTE 15—OTHER BORROWINGS

The following table summarizes Old National and its subsidiaries’ other borrowings at September 30, 2017 and December 31, 2016:

 

(dollars in thousands)

   September 30,
2017
     December 31,
2016
 

Old National Bancorp:

     

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

   $ 175,000      $ 175,000  

Unamortized debt issuance costs related to Senior unsecured bank notes

     (1,066      (1,182

Junior subordinated debentures (variable rates of 2.68% to 3.07%) maturing March 2035 to September 2037

     45,000        45,000  

Other basis adjustments

     (3,597      (3,971

Old National Bank:

     

Capital lease obligation

     3,977        4,092  
  

 

 

    

 

 

 

Total other borrowings

   $ 219,314      $ 218,939  
  

 

 

    

 

 

 

Contractual maturities of other borrowings at September 30, 2017 were as follows:

 

(dollars in thousands)

      

Due in 2017

   $ 19  

Due in 2018

     141  

Due in 2019

     85  

Due in 2020

     91  

Due in 2021

     99  

Thereafter

     223,542  

Unamortized debt issuance costs and other basis adjustments

     (4,663
  

 

 

 

Total

   $ 219,314  
  

 

 

 

Senior Notes

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

Junior Subordinated Debentures

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

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

In 2011, Old National acquired Monroe Bancorp Capital Trust I and Monroe Bancorp Statutory Trust II in conjunction with its acquisition of Monroe Bancorp. Old National guarantees the payment of distributions on the trust preferred securities issued by Monroe Bancorp Capital Trust I and Monroe Bancorp Statutory Trust II. Monroe

 

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Bancorp Capital Trust I issued $3.0 million in preferred securities in July 2006. The preferred securities have a variable rate of interest priced at the three-month LIBOR plus 160 basis points. Proceeds from the issuance of these securities were used to purchase junior subordinated debentures with the same financial terms as the securities issued by Monroe Bancorp Capital Trust I. Monroe Bancorp Statutory Trust II issued $5.0 million in preferred securities in March 2007. The preferred securities have a variable rate of interest priced at the three-month LIBOR plus 160 basis points. Proceeds from the issuance of these securities were used to purchase junior subordinated debentures with the same financial terms as the securities issued by Monroe Bancorp Statutory Trust II.

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

In 2014, Old National acquired Tower Capital Trust 2 and Tower Capital Trust 3 in conjunction with its acquisition of Tower Financial Corporation. Old National guarantees the payment of distributions on the trust preferred securities issued by Tower Capital Trust 2 and Tower Capital Trust 3. Tower Capital Trust 2 issued $8.0 million in preferred securities in December 2005. The preferred securities carry a variable rate of interest priced at the three-month LIBOR plus 134 basis points. Proceeds from the issuance of these securities were used to purchase junior subordinated debentures with the same financial terms as the securities issued by Tower Capital Trust 2. Tower Capital Trust 3 issued $9.0 million in preferred securities in December 2006. The preferred securities carry a variable rate of interest priced at the three-month LIBOR plus 169 basis points. Proceeds from the issuance of these securities were used to purchase junior subordinated debentures with the same financial terms as the securities issued by Tower Capital Trust 3.

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

Capital Lease Obligation

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

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

At September 30, 2017, the future minimum lease payments under the capital lease arrangements were as follows:

 

(dollars in thousands)

      

2017 remaining

   $ 102  

2018

     472  

2019

     430  

2020

     430  

2021

     430  

Thereafter

     7,977  
  

 

 

 

Total minimum lease payments

     9,841  

Less amounts representing interest

     (5,864
  

 

 

 

Present value of net minimum lease payments

   $ 3,977  
  

 

 

 

 

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NOTE 16—ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

 

(dollars in thousands)

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

Three Months Ended September 30, 2017

 

     

Balance at beginning of period

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

Other comprehensive income (loss) before reclassifications

     (2,531     —         134       —         (2,397

Amounts reclassified from AOCI (a)

     (1,883     300       887       16       (680
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

     (4,414     300       1,021       16       (3,077
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ (16,871   $ (12,417   $ (4,624   $ (285   $ (34,197
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended September 30, 2016

          

Balance at beginning of period

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

Other comprehensive income (loss) before reclassifications

     2,094       —         1,943       —         4,037  

Amounts reclassified from AOCI (a)

     (1,006     289       1,156       312       751  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

     1,088       289       3,099       312       4,788  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 14,871     $ (13,578   $ (14,085   $ (6,037   $ (18,829
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2017

          

Balance at beginning of period

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

Other comprehensive income (loss) before reclassifications

     26,928       —         (986     —         25,942  

Amounts reclassified from AOCI (a)

     (4,787     893       3,077       50       (767
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

     22,141       893       2,091       50       25,175  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ (16,871   $ (12,417   $ (4,624   $ (285   $ (34,197
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2016

          

Balance at beginning of period

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

Other comprehensive income (loss) before reclassifications

     21,584       —         (8,446     —         13,138  

Amounts reclassified from AOCI (a)

     (2,907     902       3,637       1,198       2,830  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

     18,677       902       (4,809     1,198       15,968  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 14,871     $ (13,578   $ (14,085   $ (6,037   $ (18,829
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 September 30, 2017 and 2016:

 

Details about AOCI Components

   Amount Reclassified
from AOCI
   

Affected Line Item in the
Statement of Income

     Three Months Ended
September 30,
     

(dollars in thousands)

   2017     2016      

Unrealized gains and losses on available-for-sale securities

   $ 2,972     $ 1,647     Net securities gains
     (1,089     (641   Income tax (expense) benefit
  

 

 

   

 

 

   
   $ 1,883     $ 1,006     Net income
  

 

 

   

 

 

   

Unrealized gains and losses on held-to-maturity securities

   $ (456   $ (439   Interest income (expense)
     156       150     Income tax (expense) benefit
  

 

 

   

 

 

   
   $ (300   $ (289   Net income
  

 

 

   

 

 

   

Gains and losses on cash flow hedges Interest rate contracts

   $ (1,429   $ (1,865   Interest income (expense)
     542       709     Income tax (expense) benefit
  

 

 

   

 

 

   
   $ (887   $ (1,156   Net income
  

 

 

   

 

 

   

Amortization of defined benefit pension items Actuarial gains (losses)

   $ (27   $ (503   Salaries and employee benefits
     11       191     Income tax (expense) benefit
  

 

 

   

 

 

   
   $ (16   $ (312   Net income
  

 

 

   

 

 

   

Total reclassifications for the period

   $ 680     $ (751   Net income
  

 

 

   

 

 

   

 

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

 

Details about AOCI Components

   Amount Reclassified
from AOCI
   

Affected Line Item in the
Statement of Income

     Nine Months Ended
September 30,
     

(dollars in thousands)

   2017     2016      

Unrealized gains and losses on available-for-sale securities

   $ 7,547     $ 4,609     Net securities gains
     (2,760     (1,702   Income tax (expense) benefit
  

 

 

   

 

 

   
   $ 4,787     $ 2,907     Net income
  

 

 

   

 

 

   

Unrealized gains and losses on held-to-maturity securities

   $ (1,358   $ (1,370   Interest income/(expense)
     465       468     Income tax (expense) benefit
  

 

 

   

 

 

   
   $ (893   $ (902   Net income
  

 

 

   

 

 

   

Gains and losses on cash flow hedges Interest rate contracts

   $ (4,962   $ (4,723   Interest income/(expense)
     1,885       1,086     Income tax (expense) benefit
  

 

 

   

 

 

   
   $ (3,077   $ (3,637   Net income
  

 

 

   

 

 

   

Amortization of defined benefit pension items Actuarial gains/(losses)

   $ (81   $ (1,933   Salaries and employee benefits
     31       735     Income tax (expense) benefit
  

 

 

   

 

 

   
   $ (50