Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2018

 

☐	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)

(800) 731-2265

(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 152,172,000 shares outstanding at March 31, 2018.

 

 

 

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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.		Revenue Recognition		9
		Note 3.		Recent Accounting Pronouncements		11
		Note 4.		Acquisition and Divestiture Activity		15
		Note 5.		Net Income Per Share		16
		Note 6.		Investment Securities		18
		Note 7.		Loans Held for Sale		22
		Note 8.		Loans and Allowance for Loan Losses		22
		Note 9.		Other Real Estate Owned		33
		Note 10.		Premises and Equipment		34
		Note 11.		Goodwill and Other Intangible Assets		34
		Note 12.		Loan Servicing Rights		35
		Note 13.		Qualified Affordable Housing Projects and Other Tax Credit Investments		36
		Note 14.		Securities Sold Under Agreements to Repurchase		37
		Note 15.		Federal Home Loan Bank Advances		38
		Note 16.		Other Borrowings		38
		Note 17.		Accumulated Other Comprehensive Income (Loss)		41
		Note 18.		Employee Benefit Plans		42
		Note 19.		Stock-Based Compensation		42
		Note 20.		Income Taxes		43
		Note 21.		Derivative Financial Instruments		46
		Note 22.		Commitments and Contingencies		49
		Note 23.		Financial Guarantees		50
		Note 24.		Segment Information		50
		Note 25.		Fair Value		51
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations				60
		Financial Highlights				61
		Non-GAAP Financial Measures				62
		Executive Summary				63
		Results of Operations				64
		Financial Condition				70
		Risk Management				74
		Off-Balance Sheet Arrangements				84
		Contractual Obligations				84
		Critical Accounting Policies and Estimates				85
		Forward-Looking Statements				88
Item 3.		Quantitative and Qualitative Disclosures About Market Risk				89
Item 4.		Controls and Procedures				89
PART II. OTHER INFORMATION						89
Item 1A.		Risk Factors				89
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds				90
Item 5.		Other Information				90
Item 6.		Exhibits				90
SIGNATURE						91

 

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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

Common Stock: Old National Bancorp common stock, without par value

CReED: Indiana Community Revitalization Enhancement District Tax Credit

DTI: debt-to-income

Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act

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 in the United States

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

OTTI: other-than-temporary impairment

PCI: purchased credit impaired

PD: probability of default

Renewable Energy: investment tax credits for solar projects

SAB: Staff Accounting Bulletin

SEC: Securities and Exchange Commission

TBA: to be announced

TDR: troubled debt restructuring

 

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OLD NATIONAL BANCORP

CONSOLIDATED BALANCE SHEETS

 

		March 31,				December 31,				March 31,
(dollars and shares in thousands, except per share data)		2018				2017				2017
		(unaudited)								(unaudited)
Assets
Cash and due from banks		$	192,022			$	222,753			$	184,974
Money market and other interest-earning investments			86,219				67,679				32,061
Total cash and cash equivalents			278,241				290,432				217,035
Trading securities, at fair value			5,569				5,584				5,083
Investment securities - available-for-sale, at fair value:
U.S. Treasury			9,295				5,551				12,117
U.S. government-sponsored entities and agencies			572,689				664,286				543,034
Mortgage-backed securities			1,477,896				1,667,682				1,474,995
States and political subdivisions			843,488				530,193				452,551
Other securities			316,495				328,495				334,246
Total investment securities - available-for-sale			3,219,863				3,196,207				2,816,943
Investment securities - held-to-maturity, at amortized cost (fair value $536,143; $727,703; and $784,906, respectively)			535,153				684,063				741,448
Federal Home Loan Bank/Federal Reserve Bank stock, at cost			136,206				119,686				107,501
Loans held for sale, at fair value			17,635				17,930				17,373
Loans:
Commercial			2,811,629				2,717,269				1,910,536
Commercial real estate			4,449,980				4,354,552				3,222,865
Residential real estate			2,158,532				2,167,053				2,112,262
Consumer credit, net of unearned income			1,818,541				1,879,247				1,886,110
Total loans			11,238,682				11,118,121				9,131,773
Allowance for loan losses			(50,381	)			(50,381	)			(49,834	)
Net loans			11,188,301				11,067,740				9,081,939
Premises and equipment, net			453,603				458,074				420,866
Accrued interest receivable			81,621				87,102				76,674
Goodwill			828,804				828,051				655,018
Other intangible assets			48,833				53,096				34,657
Company-owned life insurance			404,561				403,753				353,786
Net deferred tax assets			88,773				110,857				165,376
Loan servicing rights			24,380				24,661				25,446
Assets held for sale			6,331				7,180				14,604
Other real estate owned and repossessed personal property			6,735				8,810				12,547
Other assets			171,678				155,066				123,349
Total assets		$	17,496,287			$	17,518,292			$	14,869,645
Liabilities
Deposits:
Noninterest-bearing demand		$	3,655,732			$	3,680,807			$	3,024,111
Interest-bearing:
NOW			3,135,778				3,115,822				2,635,317
Savings			3,091,101				3,035,622				2,997,919
Money market			1,130,258				1,139,077				697,287
Time			1,775,731				1,634,436				1,466,718
Total deposits			12,788,600				12,605,764				10,821,352
Federal funds purchased and interbank borrowings			150,026				335,033				61,016
Securities sold under agreements to repurchase			308,189				384,810				345,550
Federal Home Loan Bank advances			1,664,179				1,609,579				1,441,030
Other borrowings			248,898				248,782				219,021
Accrued expenses and other liabilities			157,277				179,927				135,317
Total liabilities			15,317,169				15,363,895				13,023,286
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, 152,172; 152,040; and 135,435 shares issued and outstanding, respectively			152,172				152,040				135,435
Capital surplus			1,640,776				1,639,499				1,350,866
Retained earnings			447,696				413,130				408,623
Accumulated other comprehensive income (loss), net of tax			(61,526	)			(50,272	)			(48,565	)
Total shareholders’ equity			2,179,118				2,154,397				1,846,359
Total liabilities and shareholders’ equity		$	17,496,287			$	17,518,292			$	14,869,645

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

 

 

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OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

 

		Three Months Ended
		March 31,
(dollars and shares in thousands, except per share data)		2018				2017
Interest Income
Loans including fees:
Taxable		$	118,389			$	92,201
Nontaxable			3,874				3,179
Investment securities:
Taxable			18,804				15,685
Nontaxable			6,549				7,372
Money market and other interest-earning investments			90				31
Total interest income			147,706				118,468
Interest Expense
Deposits			7,255				4,383
Federal funds purchased and interbank borrowings			1,017				356
Securities sold under agreements to repurchase			359				256
Federal Home Loan Bank advances			7,780				5,312
Other borrowings			2,723				2,360
Total interest expense			19,134				12,667
Net interest income			128,572				105,801
Provision for loan losses			380				347
Net interest income after provision for loan losses			128,192				105,454
Noninterest Income
Wealth management fees			9,026				8,999
Service charges on deposit accounts			10,759				9,843
Debit card and ATM fees			4,865				4,236
Mortgage banking revenue			4,192				4,226
Investment product fees			5,515				4,989
Capital markets income			498				1,031
Company-owned life insurance			2,605				2,149
Net securities gains (losses)			788				1,500
Recognition of deferred gain on sale leaseback transactions			395				537
Other income			3,746				5,410
Total noninterest income			42,389				42,920
Noninterest Expense
Salaries and employee benefits			64,179				56,564
Occupancy			13,280				12,134
Equipment			3,565				3,227
Marketing			3,697				3,050
Data processing			8,884				7,608
Communication			3,064				2,414
Professional fees			2,730				2,651
Loan expense			1,744				1,631
Supplies			722				579
FDIC assessment			2,645				2,487
Other real estate owned expense			349				1,115
Amortization of intangibles			3,609				3,020
Amortization of tax credit investments			716				—
Other expense			8,457				5,411
Total noninterest expense			117,641				101,891
Income before income taxes			52,940				46,483
Income tax expense			4,957				10,491
Net income		$	47,983			$	35,992
Net income per common share - basic		$	0.32			$	0.27
Net income per common share - diluted			0.31				0.27
Weighted average number of common shares outstanding - basic			151,721				134,912
Weighted average number of common shares outstanding - diluted			152,370				135,431
Dividends per common share		$	0.13			$	0.13

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

 

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OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

 

		Three Months Ended
		March 31,
(dollars in thousands)		2018				2017
Net income		$	47,983			$	35,992
Other comprehensive income (loss):
Change in securities available-for-sale:
Unrealized holding gains (losses) for the period			(25,794	)			15,780
Reclassification for securities transferred to held-to-maturity			14,007				—
Reclassification adjustment for securities gains realized in income			(788	)			(1,500	)
Income tax effect			3,110				(5,260	)
Unrealized gains (losses) on available-for-sale securities			(9,465	)			9,020
Change in securities held-to-maturity:
Adjustment for securities transferred to available-for-sale			19,412				—
Adjustment for securities transferred from available-for-sale			(14,007	)			—
Amortization of fair value for securities held-to-maturity previously recognized into accumulated other comprehensive income			591				449
Income tax effect			(1,026	)			(154	)
Changes from securities held-to-maturity			4,970				295
Cash flow hedges:
Net unrealized derivative gains (losses) on cash flow hedges			4,563				580
Reclassification adjustment for losses realized in net income			769				1,799
Income tax effect			(1,308	)			(904	)
Changes from cash flow hedges			4,024				1,475
Defined benefit pension plans:
Amortization of net loss recognized in income			51				27
Income tax effect			(31	)			(10	)
Changes from defined benefit pension plans			20				17
Other comprehensive income (loss), net of tax			(451	)			10,807
Comprehensive income		$	47,532			$	46,799

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

 

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OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)

 

														Accumulated
														Other				Total
		Common				Capital				Retained				Comprehensive				Shareholders’
(dollars in thousands)		Stock				Surplus				Earnings				Income (Loss)				Equity
Balance at December 31, 2016		$	135,159			$	1,348,338			$	390,292			$	(59,372	)		$	1,814,417
Net income			—				—				35,992				—				35,992
Other comprehensive income (loss)			—				—				—				10,807				10,807
Dividends - common stock ($0.13 per share)			—				—				(17,602	)			—				(17,602	)
Common stock issued			5				86				—				—				91
Common stock repurchased			(70	)			(1,197	)			—				—				(1,267	)
Stock-based compensation expense			—				1,331				—				—				1,331
Stock activity under incentive compensation plans			341				2,308				(59	)			—				2,590
Balance at March 31, 2017		$	135,435			$	1,350,866			$	408,623			$	(48,565	)		$	1,846,359
Balance at December 31, 2017		$	152,040			$	1,639,499			$	413,130			$	(50,272	)		$	2,154,397
Cumulative effect of change in accounting principles (Note 3)			—				—				(4,127	)			(52	)			(4,179	)
Reclassification of certain tax effects related to the Tax Cuts and Jobs Act of 2017 (Note 3)			—				—				10,751				(10,751	)			—
Net income			—				—				47,983				—				47,983
Other comprehensive income (loss)			—				—				—				(451	)			(451	)
Dividends - common stock ($0.13 per share)			—				—				(19,782	)			—				(19,782	)
Common stock issued			6				99				—				—				105
Common stock repurchased			(64	)			(1,051	)			—				—				(1,115	)
Stock-based compensation expense			—				1,931				—				—				1,931
Stock activity under incentive compensation plans			190				298				(259	)			—				229
Balance at March 31, 2018		$	152,172			$	1,640,776			$	447,696			$	(61,526	)		$	2,179,118

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)

 

		Three Months Ended
		March 31,
(dollars in thousands)		2018				2017
Cash Flows From Operating Activities
Net income		$	47,983			$	35,992
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation			5,833				5,211
Amortization of other intangible assets			3,609				3,020
Amortization of tax credit investments			716				—
Net premium amortization on investment securities			3,845				3,846
Stock-based compensation expense			1,931				1,331
Excess tax (benefit) expense on stock-based compensation			536				288
Provision for loan losses			380				347
Net securities (gains) losses			(788	)			(1,500	)
Recognition of deferred gain on sale leaseback transactions			(395	)			(537	)
Net (gains) losses on sales of loans and other assets			5,365				(2,520	)
Increase in cash surrender value of company-owned life insurance			(2,605	)			(2,149	)
Residential real estate loans originated for sale			(92,377	)			(51,823	)
Proceeds from sales of residential real estate loans			93,686				127,656
(Increase) decrease in interest receivable			5,481				4,706
(Increase) decrease in other real estate owned			2,075				5,999
(Increase) decrease in other assets			9,211				2,548
Increase (decrease) in accrued expenses and other liabilities			(22,172	)			(12,451	)
Total adjustments			14,331				83,972
Net cash flows provided by (used in) operating activities			62,314				119,964
Cash Flows From Investing Activities
Purchases of investment securities available-for-sale			(113,525	)			(133,288	)
Purchases of Federal Home Loan Bank/Federal Reserve Bank stock			(16,520	)			(5,794	)
Proceeds from maturities, prepayments, and calls of investment securities available-for-sale			118,694				93,040
Proceeds from sales of investment securities available-for-sale			84,257				33,588
Proceeds from maturities, prepayments, and calls of investment securities held-to-maturity			26,117				2,714
Proceeds from sales of Federal Home Loan Bank/Federal Reserve Bank stock			—				9
Proceeds from sales of trading securities			128				127
Net principal collected from (loans made to) loan customers			(120,941	)			(121,582	)
Proceeds from settlements on company-owned life insurance			1,797				1,319
Proceeds from sales of premises and equipment and other assets			2,578				—
Purchases of premises and equipment and other assets			(9,593	)			(5,093	)
Net cash flows provided by (used in) investing activities			(27,008	)			(134,960	)
Cash Flows From Financing Activities
Net increase (decrease) in:
Deposits			182,697				78,099
Federal funds purchased and interbank borrowings			(185,007	)			(151,987	)
Securities sold under agreements to repurchase			(76,621	)			(21,502	)
Payments for maturities of Federal Home Loan Bank advances			(772,928	)			(641,830	)
Payments for maturities of other borrowings			(32	)			(80	)
Proceeds from Federal Home Loan Bank advances			825,000				730,000
Cash dividends paid on common stock			(19,782	)			(17,602	)
Common stock repurchased			(1,115	)			(1,267	)
Proceeds from exercise of stock options			186				2,590
Common stock issued			105				91
Net cash flows provided by (used in) financing activities			(47,497	)			(23,488	)
Net increase (decrease) in cash and cash equivalents			(12,191	)			(38,484	)
Cash and cash equivalents at beginning of period			290,432				255,519
Cash and cash equivalents at end of period		$	278,241			$	217,035
Supplemental cash flow information:
Total interest paid		$	20,775			$	14,642
Total taxes paid (net of refunds)		$	(183	)		$	—
Securities transferred from held-to-maturity to available-for-sale		$	447,026			$	—
Securities transferred from available-for-sale to held-to-maturity		$	323,990			$	—

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

 

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OLD NATIONAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements include the accounts of Old National Bancorp and its wholly-owned affiliates (hereinafter collectively referred to as “Old National”) and have been prepared in conformity with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. Such principles require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosures of contingent assets and liabilities at the date of the financial statements and amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, the consolidated financial statements contain all the normal and recurring adjustments necessary for a fair statement of the financial position of Old National as of March 31, 2018 and 2017, and December 31, 2017, and the results of its operations for the three months ended March 31, 2018 and 2017. 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, 2017.

All significant intercompany transactions and balances have been eliminated. Certain prior year amounts have been reclassified to conform to the 2018 presentation. Such reclassifications had no effect on net income or shareholders’ equity and were insignificant amounts.

NOTE 2 – REVENUE RECOGNITION

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 finalized our in-depth assessment and identified the revenue line items within the scope of this new guidance. Neither the new standard, nor any of the amendments detailed below, resulted in a material change from our current accounting for revenue because the majority of Old National’s financial instruments are not within the scope of Topic 606, and those that are require no change in the accounting.

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. The effective date is the same as the effective date of ASU No. 2014-09.

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments clarify the following two aspects of Topic 606: identifying performance obligations, and the licensing implementation guidance. Before an entity can identify its performance obligations in a contract with a customer, the entity first identifies the promised goods or services in the contract. The amendments in this update are expected to reduce the cost and complexity of applying the guidance on identifying promised goods or services. To identify performance obligations in a contract, an entity evaluates whether promised goods and services are distinct. Topic 606 includes two criteria for assessing whether promises to transfer goods or services are distinct. One of those criteria is that the promises are separately identifiable. This update will improve the guidance on assessing that criterion. Topic 606 also includes

 

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implementation guidance on determining whether as entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property, which is satisfied at a point in time, or a right to access the entity’s intellectual property, which is satisfied over time. The amendments in this update are intended to improve the operability and understandability of the licensing implementation guidance. The amendments in this update affect the guidance in ASU No. 2014-09 above. The effective date is 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.

On January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers and all subsequent amendments to the ASU (collectively, “Topic 606”). We elected to implement using the modified retrospective application, with the cumulative effect recorded as an adjustment to opening retained earnings at January 1, 2018. Due to immateriality, we had no cumulative effect to record. Since interest income on loans and securities are both excluded from this topic, a significant majority of our revenues are not subject to the new guidance. Our services that fall within the scope of Topic 606 are presented within noninterest income and are recognized as revenue as we satisfy our obligation to the customer. Services within the scope of Topic 606 include wealth management fees, service charges on deposit accounts, debit card and ATM fees, and investment product fees.

Wealth management fees: We earn wealth management fees based upon asset custody and investment management services provided to individual and institutional customers. Most of these customers receive monthly or quarterly billings for services rendered based upon the market value of assets in custody. Fees that are transaction based are recognized at the point in time that the transaction is executed.

Service charges on deposit accounts: We earn fees from our deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees and overdraft fees are recognized at a point in time, since the customer generally has a right to cancel the depository arrangement at any time. The arrangement is considered a day-to-day contract with ongoing renewals and optional purchases, so the duration of the contract does not extend beyond the services already performed. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which we satisfy our performance obligation.

Debit card and ATM fees: Debit card and ATM fees include ATM usage fees and debit card interchange income. As with the transaction-based fees on deposit accounts, the ATM fees are recognized at the point in time that we fulfill the customer’s request. We earn interchange fees from cardholder transactions processed through card association networks. Interchange rates are generally set by the card associations based upon purchase volumes and other factors. Interchange fees represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.

Investment product fees: Investment product fees are the commissions and fees received from a registered broker/dealer and investment adviser that provide those services to our customers. We act as an agent in arranging the relationship between the customer and the third-party service provider. These fees are recognized monthly from the third-party broker based upon services already performed.

 

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The consolidated statements of income include all categories of noninterest income. The following table reflects only the categories of noninterest income that are within the scope of Topic 606:

 

		Three Months Ended
		March 31,
(dollars in thousands)		2018				2017
Wealth management fees		$	9,026			$	8,999
Service charges on deposit accounts			10,759				9,843
Debit card and ATM fees			4,865				4,236
Investment product fees			5,515				4,989
Other income:
Gain (loss) on other real estate owned			135				658
Merchant processing fees			641				597
Safe deposit box fees			404				307
Insurance premiums and commissions			104				107
Total		$	31,449			$	29,736

The adoption of Topic 606 did not have a material impact on our consolidated financial position, results of operations, equity, or cash flows as of the adoption date or for the three months ended March 31, 2018.

NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS

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 became effective for annual periods and interim periods within those annual periods beginning after December 15, 2017 and did not have a material impact on the consolidated financial statements.

FASB ASC 842 – In February 2016, the FASB issued its new lease accounting guidance in ASU No. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. Based on leases outstanding at March 31, 2018, we do not expect the new standard to have a material impact on our income statement, but anticipate a $115 million to $135 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 815 – 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

 

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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. Prior to the issuance of this update, GAAP provided special hedge accounting only for the portion of the hedge deemed to be “highly effective” and required an entity to separately reflect the amount by which the hedging instrument did 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 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. Prior to the issuance of this update, GAAP contained specific requirements for initial and ongoing quantitative hedge effectiveness testing and strict requirements for specialized effectiveness testing methods that allowed 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. Management has elected to early adopt this update effective January 1, 2018 using the modified retrospective method. The impact of the adoption resulted in a reduction to Old National’s opening retained earnings of $3.2 million. In addition, as permitted by the amendments in the update, Old National reclassified $447.0 million in state and political subdivision securities with unrealized holding gains of $26.1 million from the held-to-maturity portfolio to the available-for-sale portfolio.

FASB ASC 718 – 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 became effective for annual periods and interim periods within those annual periods beginning after December 15, 2017 and did not have a material impact on the consolidated financial statements.

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

 

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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. The amendments in this update became effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The amendments in this update were applied on a modified retrospective basis through a cumulative-effect reduction of $1.0 million directly to retained earnings as of the beginning of 2018.

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 became effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. We have completed our evaluation of adopting the new guidance on the consolidated financial statements and there is no impact to record.

FASB ASC 350 – In January 2017, the FASB issued ASU No. 2017-04, Intangibles: Goodwill and Other: Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the amendments eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, the income tax effects of tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the qualitative impairment test is necessary. The amendments should be applied on a prospective basis. The nature of and reason for the change in accounting principle should be disclosed upon transition. The amendments in this update should be adopted for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted on testing dates after January 1, 2017. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

FASB ASC 610 – In February 2017, the FASB issued ASU No. 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Topic 610): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. Subtopic 610-20 was originally issued as part of ASU No. 2014-09 to provide guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. This update was issued to help clarify uncertainties and complexities of ASU 2014-09. The amendments in this update define the term in substance nonfinancial asset, in part, as a financial asset promised to a counterparty in a contract if substantially all of its fair value of the assets (recognized and unrecognized) that are promised to the counterparty in the contract is concentrated in nonfinancial assets. If substantially all of the fair value of the assets that are promised to the counterparty in a contract is concentrated in nonfinancial assets, then all of the financial assets promised to the counterparty are in substance nonfinancial assets. The amendments in this

 

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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 amendments 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 were effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period and did not have a material impact on the consolidated financial statements.

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 became effective for annual periods and interim periods within those annual periods beginning after December 15, 2017 and did not have a material impact on the consolidated financial statements.

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.

FASB ASC 220 – In February 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this ASU help organizations address certain stranded income tax effects in AOCI resulting from the Tax Cuts and Jobs Act. The ASU provides financial statement preparers with an option to reclassify stranded tax effects within AOCI to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. The amendments are effective for all organizations for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. Management has elected to early adopt this update effective January 1, 2018, which resulted in a reclassification that decreased beginning accumulated other comprehensive income and increased beginning retained earnings by $10.8 million.

FASB ASC 825 – In February 2018, the FASB issued an update (ASU No. 2018-03, Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities). The amendments in this update clarified the guidance in ASU No. 2016-01 specifically for equity securities without a readily determinable fair value and financial liabilities for which the fair value option is elected. The amendments in this update become effective for annual periods beginning after December 15, 2017 and interim periods within those fiscal years beginning after June 15, 2018. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

 

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NOTE 4 – ACQUISITION AND DIVESTITURE ACTIVITY

Acquisitions

Anchor Bancorp, Inc.

Effective November 1, 2017, Old National completed the acquisition of St. Paul, Minnesota-based Anchor (MN) through a stock and cash merger. Anchor (MN) was a bank holding company with Anchor Bank (MN) as its wholly-owned subsidiary. Founded in 1967 and with 17 total branches, Anchor Bank (MN) was one of the largest community banks headquartered in the Twin Cities, and also served Mankato, Minnesota. Anchor Bank (MN) has no affiliation with the former AnchorBank (WI) in Madison, Wisconsin, which Old National acquired in 2016. Old National believes that it will be able to achieve cost savings by integrating the two companies and combining accounting, data processing, retail and lending support, and other administrative functions, which will enable Old National to achieve economies of scale in these areas.

Pursuant to the merger agreement, each holder of Anchor (MN) common stock received $2.625 in cash and 1.350 shares of Old National Common Stock per share of Anchor (MN) common stock such holder owned. The total fair value of consideration for Anchor (MN) was $332.8 million, consisting of $31.9 million of cash and the issuance of 16.5 million shares of Old National Common Stock valued at $300.8 million. This acquisition was accounted for under the acquisition method of accounting. Accordingly, Old National recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values. Through March 31, 2018, transaction and integration costs of $14.6 million associated with this acquisition have been expensed and remaining integration costs will be expensed in future periods as incurred.

The following table reflects management’s preliminary valuation of the assets acquired and liabilities assumed (in thousands):

 

Cash and cash equivalents		$	34,501
Investment securities			302,195
FHLB/Federal Reserve Bank stock			6,585
Loans held for sale			1,407
Loans			1,593,991
Premises and equipment			33,433
Accrued interest receivable			5,872
Other real estate owned			1,058
Company-owned life insurance			44,490
Other assets			30,036
Deposits			(1,777,588	)
Federal funds purchased and interbank borrowings			(45,600	)
Securities sold under agreements to repurchase			(22,965	)
Other borrowings			(49,257	)
Accrued expenses and other liabilities			(25,784	)
Net tangible assets acquired			132,374
Definite-lived intangible assets acquired			26,606
Goodwill			173,785
Total consideration		$	332,765

Prior to the end of the one-year measurement period for finalizing acquisition-date fair values, if information becomes available which would indicate adjustments are required to the allocation, such adjustments will be included in the allocation in the reporting period in which the adjustment amounts are determined. During the first quarter of 2018, immaterial adjustments were made to the preliminary valuation of the assets acquired and liabilities assumed. These adjustments affected goodwill, definite lived intangible assets, premises and equipment, other assets, and deposits.

Goodwill related to this acquisition will not be deductible for tax purposes.

 

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The estimated fair value of the core deposit intangible was $26.6 million and is being amortized over an estimated useful life of 10 years.

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

 

										Best Estimate at
										Acquisition Date of
		Fair Value				Gross Contractual				Contractual Cash
		of Acquired Loans				Cash Flows at				Flows Not Expected
(in thousands)		at Acquisition Date				Acquisition Date				to be Collected
Acquired receivables subject to ASC 310-30		$	10,555			$	16,898			$	4,787
Acquired receivables not subject to ASC 310-30		$	1,583,436			$	1,879,449			$	87,767

Divestitures

Based on an ongoing assessment of our service and delivery network, Old National consolidated 29 branches during 2017. There are ten branches located throughout the footprint scheduled to be consolidated; nine in the second quarter and one in the third quarter of this year.

In addition, Old National entered into a branch purchase and assumption agreement for the sale of ten Old National branches in Wisconsin to Marine Credit Union of La Crosse, Wisconsin. The branch sale includes the assumption of approximately $274 million in deposits and no loans. Subject to regulatory approval and other terms and conditions, the sale is expected to close in the third quarter of 2018.

NOTE 5 – NET INCOME PER SHARE

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

 

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The following table reconciles basic and diluted net income per share for the three months ended March 31, 2018 and 2017:

 

		Three Months Ended
(dollars and shares in thousands,		March 31,
except per share data)		2018				2017
Basic Earnings Per Share
Net income		$	47,983			$	35,992
Weighted average common shares outstanding			151,721				134,912
Basic Net Income Per Share		$	0.32			$	0.27
Diluted Earnings Per Share
Net income		$	47,983			$	35,992
Weighted average common shares outstanding			151,721				134,912
Effect of dilutive securities:
Restricted stock			569				445
Stock options (1)			80				74
Weighted average shares outstanding			152,370				135,431
Diluted Net Income Per Share		$	0.31			$	0.27

 

(1)

Options to purchase 15 thousand shares and 55 thousand shares outstanding at March 31, 2018 and 2017, respectively, were not included in the computation of net income per diluted share because the exercise price of these options was greater than the average market price of the common shares and, therefore, the effect would be antidilutive.

 

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NOTE 6 – INVESTMENT SECURITIES

The following table summarizes the amortized cost and fair value of the available-for-sale and held-to-maturity investment securities portfolio at March 31, 2018 and December 31, 2017 and the corresponding amounts of unrealized gains and losses therein:

 

		Amortized				Unrealized				Unrealized				Fair
(dollars in thousands)		Cost				Gains				Losses				Value
March 31, 2018
Available-for-Sale
U.S. Treasury		$	9,292			$	32			$	(29	)		$	9,295
U.S. government-sponsored entities and agencies			587,140				1				(14,452	)			572,689
Mortgage-backed securities - Agency			1,527,777				648				(50,529	)			1,477,896
States and political subdivisions			837,946				9,930				(4,388	)			843,488
Pooled trust preferred securities			13,899				—				(5,704	)			8,195
Other securities			312,763				594				(5,057	)			308,300
Total available-for-sale securities		$	3,288,817			$	11,205			$	(80,159	)		$	3,219,863
Held-to-Maturity
U.S. government-sponsored entities and agencies		$	73,369			$	—			$	(1,925	)		$	71,444
Mortgage-backed securities - Agency			145,658				75				(2,966	)			142,767
States and political subdivisions			316,126				8,278				(2,472	)			321,932
Total held-to-maturity securities		$	535,153			$	8,353			$	(7,363	)		$	536,143
December 31, 2017
Available-for-Sale
U.S. Treasury		$	5,473			$	83			$	(5	)		$	5,551
U.S. government-sponsored entities and agencies			675,643				3				(11,360	)			664,286
Mortgage-backed securities - Agency			1,704,014				1,600				(37,932	)			1,667,682
States and political subdivisions			529,835				5,085				(4,727	)			530,193
Pooled trust preferred securities			16,605				—				(8,157	)			8,448
Other securities			321,016				1,172				(2,141	)			320,047
Total available-for-sale securities		$	3,252,586			$	7,943			$	(64,322	)		$	3,196,207
Held-to-Maturity
Mortgage-backed securities - Agency		$	6,903			$	153			$	—			$	7,056
States and political subdivisions			677,160				43,495				(8	)			720,647
Total held-to-maturity securities		$	684,063			$	43,648			$	(8	)		$	727,703

As previously disclosed in Note 3, upon the early adoption of ASU No. 2017-12 on January 1, 2018, Old National reclassified $447.0 million in state and political subdivision securities from the held-to-maturity portfolio to the available-for-sale portfolio. Separately, on January 1, 2018, U.S. government-sponsored entities and agencies, agency mortgage-backed securities, and state and political subdivision securities with a fair value of $324.0 million were transferred from the available-for-sale portfolio to the held-to-maturity portfolio. The $10.8 million unrealized holding loss, net of tax, at the date of transfer shall continue to be reported as a separate component of shareholders’ equity and will be amortized over the remaining life of the securities as an adjustment to yield. The corresponding discount on these securities will offset this adjustment to yield as it is amortized.

 

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Proceeds from sales or calls of available-for-sale investment securities, the resulting realized gains and realized losses, and other securities gains or losses were as follows for the three months ended March 31, 2018 and 2017:

 

		Three Months Ended
		March 31,
(dollars in thousands)		2018				2017
Proceeds from sales of available-for-sale securities		$	84,257			$	33,588
Proceeds from calls of available-for-sale securities			17,436				10,520
Total		$	101,693			$	44,108
Realized gains on sales of available-for-sale securities		$	2,008			$	1,329
Realized gains on calls of available-for-sale securities			1				—
Realized losses on sales of available-for-sale securities			(1,257	)			(30	)
Realized losses on calls of available-for-sale securities			(49	)			(1	)
Other securities gains (losses) (1)			85				202
Net securities gains (losses)		$	788			$	1,500

 

(1)	Other securities gains (losses) includes net realized and unrealized 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 $5.6 million at March 31, 2018 and December 31, 2017.

All the mortgage-backed securities in the investment portfolio are residential mortgage-backed securities. The amortized cost and fair value of the investment securities portfolio are shown by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Weighted average yield is based on amortized cost.

 

		At March 31, 2018
(dollars in thousands)										Weighted
		Amortized				Fair				Average
Maturity		Cost				Value				Yield
Available-for-Sale
Within one year		$	60,568			$	60,503				2.16	%
One to five years			495,123				490,729				2.28
Five to ten years			377,525				374,850				2.83
Beyond ten years			2,355,601				2,293,781				2.61
Total		$	3,288,817			$	3,219,863				2.58	%
Held-to-Maturity
Within one year		$	22,368			$	22,563				3.74	%
One to five years			36,340				37,201				4.04
Five to ten years			80,260				82,779				4.35
Beyond ten years			396,185				393,600				4.59
Total		$	535,153			$	536,143				3.74	%

 

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The following table summarizes the investment securities with unrealized losses at March 31, 2018 and December 31, 2017 by aggregated major security type and length of time in a continuous unrealized loss position:

 

		Less than 12 months								12 months or longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
(dollars in thousands)		Value				Losses				Value				Losses				Value				Losses
March 31, 2018
Available-for-Sale
U.S. Treasury		$	5,273			$	(29	)		$	—			$	—			$	5,273			$	(29	)
U.S. government-sponsored entities and agencies			240,181				(4,428	)			331,504				(10,024	)			571,685				(14,452	)
Mortgage-backed securities - Agency			753,315				(19,422	)			630,193				(31,107	)			1,383,508				(50,529	)
States and political subdivisions			294,601				(4,065	)			7,782				(323	)			302,383				(4,388	)
Pooled trust preferred securities			—				—				8,195				(5,704	)			8,195				(5,704	)
Other securities			110,546				(2,522	)			122,440				(2,535	)			232,986				(5,057	)
Total available-for-sale		$	1,403,916			$	(30,466	)		$	1,100,114			$	(49,693	)		$	2,504,030			$	(80,159	)
Held-to-Maturity
U.S. government-sponsored entities and agencies		$	—			$	—			$	71,444			$	(1,925	)		$	71,444			$	(1,925	)
Mortgage-backed securities - Agency			37,880				(664	)			103,727				(2,302	)			141,607				(2,966	)
States and political subdivisions			38,606				(860	)			67,909				(1,612	)			106,515				(2,472	)
Total held-to-maturity		$	76,486			$	(1,524	)		$	243,080			$	(5,839	)		$	319,566			$	(7,363	)
December 31, 2017
Available-for-Sale
U.S. Treasury		$	1,480			$	(5	)		$	—			$	—			$	1,480			$	(5	)
U.S. government-sponsored entities and agencies			201,773				(1,333	)			408,493				(10,027	)			610,266				(11,360	)
Mortgage-backed securities - Agency			789,804				(8,692	)			774,825				(29,240	)			1,564,629				(37,932	)
States and political subdivisions			196,024				(1,899	)			90,637				(2,828	)			286,661				(4,727	)
Pooled trust preferred securities			—				—				8,448				(8,157	)			8,448				(8,157	)
Other securities			61,260				(429	)			125,517				(1,712	)			186,777				(2,141	)
Total available-for-sale		$	1,250,341			$	(12,358	)		$	1,407,920			$	(51,964	)		$	2,658,261			$	(64,322	)
Held-to-Maturity
States and political subdivisions		$	2,309			$	(8	)		$	—			$	—			$	2,309			$	(8	)
Total held-to-maturity		$	2,309			$	(8	)		$	—			$	—			$	2,309			$	(8	)

In addition to the unrealized losses at March 31, 2018 presented above, there is an additional $14.0 million of unrealized losses on securities that exist due to securities previously transferred from available-for-sale to held-to-maturity.

Management evaluates securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. 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. In determining OTTI under FASB ASC 320, 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.

When OTTI occurs, 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

 

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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 three months ended March 31, 2018 or 2017.

At March 31, 2018, Old National’s securities portfolio consisted of 1,690 securities, 850 of which were in an unrealized loss position. The unrealized losses attributable to our U.S. Treasury, 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 March 31, 2018, 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 March 31, 2018, our securities portfolio contained two pooled trust preferred securities with a fair value of $8.2 million and unrealized losses of $5.7 million. These securities are not subject to FASB ASC 325-10 and are evaluated using collateral-specific assumptions to estimate the expected future interest and principal cash flows. For the three months ended March 31, 2018 and 2017, our analysis indicated no OTTI on these securities.

During the first quarter of 2018, Old National sold a pooled trust security that fell within the scope of FASB ASC 325-10 (EITF 99-20). Proceeds from the sale were $1.8 million, which resulted in a loss of $0.9 million. Although Old National typically does not sell securities in an unrealized loss position, this security was sold because the final liquidation value was significantly higher than our assessment of value for this position.

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. Both pooled trust preferred securities have experienced credit defaults. However, 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																														Actual				Expected				Excess
March 31, 2018																														Deferrals				Defaults as				Subordination
(dollars in																										# of Issuers				and Defaults				a % of				as a % of
thousands)						Lowest												Unrealized				Realized				Currently				as a % of				Remaining				Current
						Credit				Amortized				Fair				Gain/				Losses				Performing/				Original				Performing				Performing
		Class				Rating (1)				Cost				Value				(Loss)				2018				Remaining				Collateral				Collateral				Collateral
Pooled trust preferred securities:
Pretsl XXVII LTD			B				B			$	4,399			$	2,442			$	(1,957	)		$	—				35/44				16.7	%			4.2	%			46.7	%
Trapeza Ser 13A			A2A				BBB				9,500				5,753				(3,747	)			—				48/53				4.5	%			4.5	%			46.2	%
											13,899				8,195				(5,704	)			—
Single Issuer trust preferred securities:
Fleet Cap Tr V (BOA)							BBB-				3,409				3,325				(84	)			—
JP Morgan Chase Cap XIII							BBB-				4,780				4,650				(130	)			—
NB-Global							BBB-				808				941				133				—
											8,997				8,916				(81	)			—
Total										$	22,896			$	17,111			$	(5,785	)		$	—

 

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

 

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NOTE 7 – LOANS HELD FOR SALE

Mortgage loans held for immediate sale in the secondary market were $17.6 million at March 31, 2018, compared to $17.9 million at December 31, 2017. 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 8 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Old National’s loans 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, Wisconsin, and Minnesota. Old National manages concentrations of credit exposure by industry, product, geography, customer relationship, and loan size. While loans to lessors of both residential and non-residential real estate exceed 10% of total loans, no individual sub-segment category within those broader categories reach the 10% threshold.

The composition of loans by lending classification was as follows:

 

		March 31,				December 31,
(dollars in thousands)		2018				2017
Commercial (1)		$	2,811,629			$	2,717,269
Commercial real estate:
Construction			351,448				374,306
Other			4,098,532				3,980,246
Residential real estate			2,158,532				2,167,053
Consumer credit:
Home equity			487,237				507,507
Auto			1,117,027				1,148,672
Other			214,277				223,068
Total loans			11,238,682				11,118,121
Allowance for loan losses			(50,381	)			(50,381	)
Net loans		$	11,188,301			$	11,067,740

 

(1)	Includes direct finance leases of $27.4 million at March 31, 2018 and $29.5 million at December 31, 2017.

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.

 

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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.

The acquisition of Anchor (MN) on November 1, 2017 added $864.4 million of commercial real estate loans to our portfolio. At 208%, Old National Bank’s commercial real estate loans as a percentage of its risk-based capital remained well below the regulatory guideline limit of 300% at March 31, 2018.

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. Student loans are guaranteed by the government from 97% to 100% and totaled $66.0 million at March 31, 2018, compared to $68.2 million at December 31, 2017. 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.

 

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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.

Old National’s activity in the allowance for loan losses for the three months ended March 31, 2018 and 2017 was as follows:

 

						Commercial
(dollars in thousands)		Commercial				Real Estate				Residential				Consumer				Total
Three Months Ended March 31, 2018
Balance at beginning of period		$	19,246			$	21,436			$	1,763			$	7,936			$	50,381
Charge-offs			(245	)			(3	)			(362	)			(2,075	)			(2,685	)
Recoveries			511				484				148				1,162				2,305
Provision			79				(1,121	)			214				1,208				380
Balance at end of period		$	19,591			$	20,796			$	1,763			$	8,231			$	50,381
Three Months Ended March 31, 2017
Balance at beginning of period		$	21,481			$	18,173			$	1,643			$	8,511			$	49,808
Charge-offs			(470	)			(568	)			(414	)			(1,787	)			(3,239	)
Recoveries			603				1,225				79				1,011				2,918
Provision			494				(877	)			428				302				347
Balance at end of period		$	22,108			$	17,953			$	1,736			$	8,037			$	49,834

 

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The following table provides Old National’s recorded investment in loans by portfolio segment at March 31, 2018 and December 31, 2017 and other information regarding the allowance:

 

						Commercial
(dollars in thousands)		Commercial				Real Estate				Residential				Consumer				Total
March 31, 2018
Allowance for loan losses:
Individually evaluated for impairment		$	4,024			$	6,054			$	—			$	—			$	10,078
Collectively evaluated for impairment			15,557				14,742				1,763				8,069				40,131
Loans acquired with deteriorated credit quality			10				—				—				162				172
Total allowance for loan losses		$	19,591			$	20,796			$	1,763			$	8,231			$	50,381
Loans and leases outstanding:
Individually evaluated for impairment		$	30,092			$	64,693			$	—			$	—			$	94,785
Collectively evaluated for impairment			2,776,738				4,364,309				2,147,693				1,813,910				11,102,650
Loans acquired with deteriorated credit quality			4,799				20,978				10,839				4,631				41,247
Total loans and leases outstanding		$	2,811,629			$	4,449,980			$	2,158,532			$	1,818,541			$	11,238,682
December 31, 2017
Allowance for loan losses:
Individually evaluated for impairment		$	3,424			$	6,654			$	—			$	—			$	10,078
Collectively evaluated for impairment			15,790				14,782				1,763				7,802				40,137
Loans acquired with deteriorated credit quality			32				—				—				134				166
Total allowance for loan losses		$	19,246			$	21,436			$	1,763			$	7,936			$	50,381
Loans and leases outstanding:
Individually evaluated for impairment		$	26,270			$	66,061			$	—			$	—			$	92,331
Collectively evaluated for impairment			2,685,847				4,266,665				2,155,750				1,874,002				10,982,264
Loans acquired with deteriorated credit quality			5,152				21,826				11,303				5,245				43,526
Total loans and leases outstanding		$	2,717,269			$	4,354,552			$	2,167,053			$	1,879,247			$	11,118,121

Credit Quality

Old National’s management monitors the credit quality of its loans 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.

 

 

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

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

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

The risk category of commercial and commercial real estate loans by class of loans at March 31, 2018 and December 31, 2017 was as follows:

 

(dollars in thousands)										Commercial								Commercial
										Real Estate -								Real Estate -
Corporate Credit Exposure		Commercial								Construction								Other
Credit Risk Profile by		March 31,				December 31,				March 31,				December 31,				March 31,				December 31,
Internally Assigned Grade		2018				2017				2018				2017				2018				2017
Grade:
Pass		$	2,657,943			$	2,577,824			$	335,761			$	357,438			$	3,886,508			$	3,762,896
Criticized			78,612				74,876				14,782				14,758				81,479				98,451
Classified - substandard			41,899				37,367				—				—				71,047				58,584
Classified - nonaccrual			30,823				24,798				905				2,110				31,364				30,108
Classified - doubtful			2,352				2,404				—				—				28,134				30,207
Total		$	2,811,629			$	2,717,269			$	351,448			$	374,306			$	4,098,532			$	3,980,246

Old National considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, Old National also evaluates credit quality based on the aging status of the loan and by payment activity. The following table presents the recorded investment in residential and consumer loans based on payment activity at March 31, 2018 and December 31, 2017:

 

						Consumer
(dollars in thousands)		Residential				Home Equity				Auto				Other
March 31, 2018
Performing		$	2,137,395			$	482,214			$	1,114,511			$	209,235
Nonperforming			21,137				5,023				2,515				5,043
Total		$	2,158,532			$	487,237			$	1,117,026			$	214,278
December 31, 2017
Performing		$	2,144,882			$	502,322			$	1,145,977			$	217,819
Nonperforming			22,171				5,185				2,695				5,249
Total		$	2,167,053			$	507,507			$	1,148,672			$	223,068

Impaired Loans

Large commercial credits are subject to individual evaluation for impairment. Retail credits and other small balance credits that are part of a homogeneous group are not tested for individual impairment unless they are modified as a TDR. A loan is considered impaired when it is probable that contractual interest and principal payments will not be collected either for the amounts or by the dates as scheduled in the loan agreement. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported net, at the present value of estimated cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Old National’s policy, for all but PCI loans, is to recognize interest income on impaired loans unless the loan is placed on nonaccrual status.

 

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The following table shows Old National’s impaired loans at March 31, 2018 and December 31, 2017, respectively. Only purchased loans that have experienced subsequent impairment since the date acquired are included in the table below.

 

						Unpaid
		Recorded				Principal				Related
(dollars in thousands)		Investment				Balance				Allowance
March 31, 2018
With no related allowance recorded:
Commercial		$	20,869			$	21,656			$	—
Commercial Real Estate - Other			42,923				44,688				—
Residential			2,107				2,128				—
Consumer			2,000				2,436				—
With an allowance recorded:
Commercial			9,223				9,276				4,024
Commercial Real Estate - Construction			905				1,371				401
Commercial Real Estate - Other			20,865				21,081				5,653
Residential			950				950				48
Consumer			2,022				2,022				101
Total		$	101,864			$	105,608			$	10,227
December 31, 2017
With no related allowance recorded:
Commercial		$	20,557			$	21,483			$	—
Commercial Real Estate - Other			38,678				44,564				—
Residential			2,443				2,464				—
Consumer			1,685				2,105				—
With an allowance recorded:
Commercial			5,713				5,713				3,424
Commercial Real Estate - Construction			905				1,371				401
Commercial Real Estate - Other			26,478				26,902				6,253
Residential			870				870				44
Consumer			2,211				2,228				110
Total		$	99,540			$	107,700			$	10,232

 

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The average balance of impaired loans during the three months ended March 31, 2018 and 2017 are included in the table below.

 

		Three Months Ended
		March 31,
(dollars in thousands)		2018				2017
Average Recorded Investment
With no related allowance recorded:
Commercial		$	20,714			$	28,780
Commercial Real Estate - Other			40,801				32,671
Residential			2,275				1,931
Consumer			1,842				1,377
With an allowance recorded:
Commercial			7,468				8,743
Commercial Real Estate - Construction			905				—
Commercial Real Estate - Other			23,672				20,650
Residential			910				1,118
Consumer			2,117				2,003
Total		$	100,704			$	97,273

Old National does not record interest on nonaccrual loans until principal is recovered. Interest income recognized on impaired loans during the three months ended March 31, 2018 and 2017 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.

 

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Old National’s past due financing receivables at March 31, 2018 and December 31, 2017 were as follows:

 

(dollars in thousands)		30-59 Days Past Due				60-89 Days Past Due				Past Due 90 Days or More and Accruing				Nonaccrual				Total Past Due				Current
March 31, 2018
Commercial		$	1,068			$	195			$	10			$	33,175			$	34,448			$	2,777,181
Commercial Real Estate:
Construction			—				—				—				905				905				350,543
Other			1,779				932				—				59,498				62,209				4,036,323
Residential			21,071				909				16				21,137				43,133				2,115,399
Consumer:
Home equity			1,965				183				16				5,023				7,187				480,050
Auto			4,904				1,139				214				2,515				8,772				1,108,255
Other			2,121				1,014				71				5,043				8,249				206,028
Total loans		$	32,908			$	4,372			$	327			$	127,296			$	164,903			$	11,073,779
December 31, 2017
Commercial		$	986			$	360			$	144			$	27,202			$	28,692			$	2,688,577
Commercial Real Estate:
Construction			—				—				—				2,110				2,110				372,196
Other			2,247				89				—				60,315				62,651				3,917,595
Residential			18,948				3,416				—				22,171				44,535				2,122,518
Consumer:
Home equity			1,467				230				68				5,185				6,950				500,557
Auto			6,487				1,402				532				2,695				11,116				1,137,556
Other			3,967				1,514				150				5,249				10,880				212,188
Total loans		$	34,102			$	7,011			$	894			$	124,927			$	166,934			$	10,951,187

Loan Participations

Old National has loan participations, which qualify as participating interests, with other financial institutions. At March 31, 2018, these loans totaled $580.2 million, of which $301.4 million had been sold to other financial institutions and $278.8 million was retained by Old National. The loan participations convey proportionate ownership rights with equal priority to each participating interest holder; involve no recourse (other than ordinary representations and warranties) to, or subordination by, any participating interest holder; all cash flows are divided among the participating interest holders in proportion to each holder’s share of ownership; and no holder has the right to pledge the entire financial asset unless all participating interest holders agree.

Troubled Debt Restructurings

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

Any loans that are modified are reviewed by Old National to identify if a TDR has occurred, which is when for economic or legal reasons related to a borrower’s financial difficulties, Old National 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.

 

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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 are 90 days or more delinquent and do not have adequate collateral support. 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.

The following table presents activity in TDRs for the three months ended March 31, 2018 and 2017:

 

						Commercial
(dollars in thousands)		Commercial				Real Estate				Residential				Consumer				Total
Three Months Ended March 31, 2018
Balance at beginning of period		$	12,088			$	34,705			$	3,315			$	3,895			$	54,003
(Charge-offs)/recoveries			(129	)			(10	)			23				298				182
Payments			(476	)			(495	)			(276	)			(537	)			(1,784	)
Additions			539				566				—				432				1,537
Interest collected on nonaccrual loans			(104	)			(278	)			(4	)			(68	)			(454	)
Balance at end of period		$	11,918			$	34,488			$	3,058			$	4,020			$	53,484
Three Months Ended March 31, 2017
Balance at beginning of period		$	16,802			$	18,327			$	2,985			$	2,602			$	40,716
(Charge-offs)/recoveries			35				355				—				(100	)			290
Payments			(3,827	)			(1,751	)			(142	)			(508	)			(6,228	)
Additions			9,442				—				564				1,924				11,930
Interest collected on nonaccrual loans			2,170				358				—				11				2,539
Balance at end of period		$	24,622			$	17,289			$	3,407			$	3,929			$	49,247

Approximately $36.9 million of the TDRs at March 31, 2018 were included with nonaccrual loans, compared to $34.0 million of the TDRs at December 31, 2017. Old National has allocated specific reserves to customers whose loan terms have been modified in TDRs totaling $5.9 million at March 31, 2018 and $5.7 million at December 31, 2017. At March 31, 2018, Old National had committed to lend an additional $4.6 million to customers with outstanding loans that are classified as TDRs.

 

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The pre-modification and post-modification outstanding recorded investments of loans modified as TDRs during the three months ended March 31, 2018 and 2017 are the same except for when the loan modifications involve the forgiveness of principal. The following table presents loans by class modified as TDRs that occurred during the three months ended March 31, 2018 and 2017:

 

						Pre-modification				Post-modification
		Number				Outstanding Recorded				Outstanding Recorded
(dollars in thousands)		of Loans				Investment				Investment
Three Months Ended March 31, 2018
TDR:
Commercial			1			$	539			$	539
Commercial Real Estate - Other			1				566				566
Consumer			1				432				432
Total			3			$	1,537			$	1,537
Three Months Ended March 31, 2017
TDR:
Commercial			6			$	9,442			$	9,442
Residential			3				564				564
Consumer			5				1,924				1,924
Total			14			$	11,930			$	11,930

The TDRs that occurred during the three months ended March 31, 2018 did not change the allowance for loan losses and resulted in no charge-offs during the three months ended March 31, 2018. The TDRs that occurred during the three months ended March 31, 2017 decreased the allowance for loan losses by $0.1 million due to a change in collateral position on a large commercial loan and resulted in no charge-offs.

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

TDRs for which there was a payment default within twelve months following the modification were insignificant during the three months ended March 31, 2018 and 2017.

The terms of certain other loans were modified during the three months ended March 31, 2018 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 March 31, 2018, 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

 

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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.

Old National has purchased loans for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. For these loans that meet the criteria of ASC 310-30 treatment, the carrying amount was as follows:

 

		March 31,				December 31,
(dollars in thousands)		2018				2017
Commercial		$	4,799			$	5,152
Commercial real estate			20,978				21,826
Residential			10,839				11,303
Consumer			4,631				5,245
Carrying amount			41,247				43,526
Allowance for loan losses			(172	)			(166	)
Carrying amount, net of allowance		$	41,075			$	43,360

The outstanding balance of loans accounted for under ASC 310-30, including contractual principal, interest, fees and penalties, was $230.5 million at March 31, 2018 and $235.9 million at December 31, 2017.

The accretable difference on PCI loans is the difference between the expected cash flows and the net present value of expected cash flows with such difference accreted into earnings using the effective yield method over the term of the loans. Accretion recorded as loan interest income totaled $4.5 million during the three months ended March 31, 2018 and $4.7 million during the three months ended March 31, 2017. Improvement in cash flow expectations has resulted in a reclassification from nonaccretable difference to accretable yield as shown in the table below.

 

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Accretable yield of PCI loans, or income expected to be collected, is as follows:

 

		Three Months Ended
		March 31,
(dollars in thousands)		2018				2017
Balance at beginning of period		$	27,835			$	33,603
Accretion of income			(4,526	)			(4,685	)
Reclassifications from (to) nonaccretable difference			1,379				610
Disposals/other adjustments			4				6
Balance at end of period		$	24,692			$	29,534

Included in Old National’s allowance for loan losses is $0.2 million related to the purchased loans disclosed above at March 31, 2018 and December 31, 2017.

PCI loans purchased during 2017 for which it was probable at acquisition that all contractually required payments would not be collected were as follows:

 

(dollars in thousands)		Anchor (MN) (1)
Contractually required payments		$	16,898
Nonaccretable difference			(4,787	)
Cash flows expected to be collected at acquisition			12,111
Accretable yield			(1,556	)
Fair value of acquired loans at acquisition		$	10,555

 

(1)	Old National acquired Anchor (MN) effective November 1, 2017.

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

NOTE 9 – OTHER REAL ESTATE OWNED

The following table presents activity in other real estate owned for the three months ended March 31, 2018 and 2017:

 

		Three Months Ended
		March 31,
(dollars in thousands)		2018				2017
Balance at beginning of period		$	8,810			$	18,546
Additions			550				291
Sales			(2,351	)			(5,420	)
Impairment			(274	)			(870	)
Balance at end of period (1)		$	6,735			$	12,547

 

(1)	Includes repossessed personal property of $0.3 million at March 31, 2018 and 2017.

At March 31, 2018, foreclosed residential real estate property included in the table above totaled $1.0 million. At March 31, 2018, consumer mortgage loans collateralized by residential real property that were in the process of foreclosure totaled $6.2 million.

 

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NOTE 10 – PREMISES AND EQUIPMENT

The composition of premises and equipment at March 31, 2018 and December 31, 2017 was as follows:

 

		March 31,				December 31,
(dollars in thousands)		2018				2017
Land		$	71,618			$	73,046
Buildings			342,757				343,833
Furniture, fixtures, and equipment			95,729				94,254
Leasehold improvements			39,715				38,918
Total			549,819				550,051
Accumulated depreciation			(96,216	)			(91,977	)
Premises and equipment, net		$	453,603			$	458,074

Depreciation expense was $5.8 million for the three months ended March 31, 2018, compared to $5.2 million for the three months ended March 31, 2017.

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 two years and six months to twenty-five 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 $4.4 million for the three months ended March 31, 2018, compared to $3.9 million for the three months ended March 31, 2017.

Old National had deferred gains remaining associated with prior sale leaseback transactions totaling $7.7 million at March 31, 2018 and $8.2 million at December 31, 2017. The gains will be recognized over the remaining term of the leases. The leases had original terms ranging from five to twenty-four years.

Capital Leases

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

NOTE 11 – GOODWILL AND OTHER INTANGIBLE ASSETS

The following table shows the changes in the carrying amount of goodwill for the three months ended March 31, 2018 and 2017:

 

		Three Months Ended
		March 31,
(dollars in thousands)		2018				2017
Balance at beginning of period		$	828,051			$	655,018
Acquisition adjustments			753				—
Balance at end of period		$	828,804			$	655,018

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. During the first quarter of 2018, Old National recorded a $0.8 million increase to goodwill associated with the acquisition of Anchor (MN).

 

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The gross carrying amount and accumulated amortization of other intangible assets at March 31, 2018 and December 31, 2017 were as follows:

 

		Gross				Accumulated				Net
		Carrying				Amortization				Carrying
(dollars in thousands)		Amount				and Impairment				Amount
March 31, 2018
Core deposit		$	108,268			$	(66,037	)		$	42,231
Customer trust relationships			16,547				(9,945	)			6,602
Total intangible assets		$	124,815			$	(75,982	)		$	48,833
December 31, 2017
Core deposit		$	108,923			$	(62,874	)		$	46,049
Customer trust relationships			16,547				(9,533	)			7,014
Customer loan relationships			4,413				(4,380	)			33
Total intangible assets		$	129,883			$	(76,787	)		$	53,096

Other intangible assets consist of core deposit intangibles and customer relationship intangibles and are being amortized primarily on an accelerated basis over their estimated useful lives, generally over a period of 5 to 15 years. During the first quarter of 2018, Old National recorded a $0.7 million decrease to core deposit intangibles related to the updated valuation associated with the acquisition of Anchor (MN).

Old National reviews other intangible assets for possible impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. No impairment charges were recorded during the three months ended March 31, 2018 or 2017. Total amortization expense associated with intangible assets was $3.6 million for the three months ended March 31, 2018 and $3.0 million for the three months ended March 31, 2017.

Estimated amortization expense for future years is as follows:

 

(dollars in thousands)
2018 remaining		$	9,815
2019			11,010
2020			8,672
2021			6,417
2022			4,595
Thereafter			8,324
Total		$	48,833

NOTE 12 – LOAN SERVICING RIGHTS

At March 31, 2018, loan servicing rights derived from loans sold with servicing retained totaled $24.4 million, compared to $24.7 million at December 31, 2017. Loans serviced for others are not reported as assets. The principal balance of loans serviced for others was $3.305 billion at March 31, 2018, compared to $3.321 billion at December 31, 2017. Approximately 99.6% of the loans serviced for others at March 31, 2018 were residential mortgage loans. Custodial escrow balances maintained in connection with serviced loans were $23.9 million at March 31, 2018 and $8.9 million at December 31, 2017.

 

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The following table summarizes the carrying values and activity related to loan servicing rights and the related valuation allowance for the three months ended March 31, 2018 and 2017:

 

		Three Months Ended
		March 31,
(dollars in thousands)		2018				2017
Balance at beginning of period		$	24,690			$	25,629
Additions			770				1,041
Amortization			(1,060	)			(1,174	)
Balance before valuation allowance at end of period			24,400				25,496
Valuation allowance:
Balance at beginning of period			(29	)			(68	)
(Additions)/recoveries			9				18
Balance at end of period			(20	)			(50	)
Loan servicing rights, net		$	24,380			$	25,446

At March 31, 2018, the fair value of servicing rights was $26.6 million, which was determined using a discount rate of 13% and a weighted average prepayment speed of 121% PSA. At December 31, 2017, the fair value of servicing rights was $25.8 million, which was determined using a discount rate of 13% and a weighted average prepayment speed of 140% PSA.

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

Old National 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. As of March 31, 2018, Old National expects to recover its remaining investments using the tax credits that are generated by the investments.

The following table summarizes Old National’s investments in qualified affordable housing projects and other tax credit investments at March 31, 2018 and December 31, 2017:

 

(dollars in thousands)						March 31, 2018								December 31, 2017
										Unfunded								Unfunded
Investment		Accounting Method				Investment				Commitment (1)				Investment				Commitment
LIHTC			Proportional amortization			$	30,495			$	11,966			$	31,183			$	15,553
FHTC			Equity				10,645				12,040				10,645				12,040
CReED			Equity				704				1,502				704				1,502
Renewable Energy			Equity				21,633				19,279				22,364				19,771
Total						$	63,477			$	44,787			$	64,896			$	48,866

 

(1)	All commitments will be paid by Old National by 2027.

 

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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 months ended March 31, 2018 and 2017:

 

						Tax Expense
		Amortization				(Benefit)
(dollars in thousands)		Expense (1)				Recognized (2)
Three Months Ended March 31, 2018
LIHTC		$	639			$	(831	)
FHTC			—				(1,948	)
Renewable Energy			716				(3,415	)
Total		$	1,355			$	(6,194	)
Three Months Ended March 31, 2017
LIHTC		$	941			$	(1,297	)
FHTC			—				(1,520	)
Total		$	941			$	(2,817	)

 

(1)	The amortization expense for the LIHTC investments is included in our income tax expense. The amortization expense for the FHTC and Renewable Energy tax credits is included in noninterest expense.

(2)	All of the tax benefits recognized are included in our income tax expense. The tax benefit recognized for the FHTC and Renewable Energy investments primarily reflects the tax credits generated from the investments, and excludes the net tax expense/benefit of the investments’ income/loss.

NOTE 14 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

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

 

(dollars in thousands)		2018				2017
Outstanding at March 31,		$	308,189			$	345,550
Average amount outstanding			342,682				331,400
Maximum amount outstanding at any month-end			336,319				345,550
Weighted average interest rate:
During the three months ended March 31,			0.42	%			0.31	%
At March 31,			0.48				0.35

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

 

		At March 31, 2018
		Remaining Contractual Maturity of the Agreements
		Overnight and				Up to								Greater Than
(dollars in thousands)		Continuous				30 Days				30-90 Days				90 days				Total
Repurchase Agreements:
U.S. Treasury and agency securities		$	308,189			$	—			$	—			$	—			$	308,189
Total		$	308,189			$	—			$	—			$	—			$	308,189

The fair value of securities pledged to secure repurchase agreements may decline. Old National has pledged securities valued at 130% of the gross outstanding balance of repurchase agreements at March 31, 2018 to manage this risk.

 

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NOTE 15 – FEDERAL HOME LOAN BANK ADVANCES

The following table summarizes Old National Bank’s FHLB advances at March 31, 2018 and December 31, 2017:

 

		March 31,				December 31,
(dollars in thousands)		2018				2017
FHLB advances (fixed rates 1.49% to 6.08% and variable rates 1.80% to 1.99%) maturing April 2018 to February 2028		$	1,662,603			$	1,610,531
ASC 815 fair value hedge and other basis adjustments			1,576				(952	)
Total other borrowings		$	1,664,179			$	1,609,579

FHLB advances had weighted-average rates of 1.89% at March 31, 2018 and 1.55% at December 31, 2017. Investment securities and residential real estate loans collateralize these borrowings up to 140% of outstanding debt.

Contractual maturities of FHLB advances at March 31, 2018 were as follows:

 

(dollars in thousands)
Due in 2018		$	902,032
Due in 2019			201,902
Due in 2020			100,000
Due in 2021			—
Due in 2022			58,500
Thereafter			400,169
ASC 815 fair value hedge and other basis adjustments			1,576
Total		$	1,664,179

NOTE 16 – OTHER BORROWINGS

The following table summarizes Old National’s other borrowings at March 31, 2018 and December 31, 2017:

 

		March 31,				December 31,
(dollars in thousands)		2018				2017
Old National Bancorp:
Senior unsecured notes (fixed rate 4.125%) maturing August 2024		$	175,000			$	175,000
Unamortized debt issuance costs related to senior unsecured notes			(988	)			(1,026	)
Junior subordinated debentures (variable rates of 3.30% to 5.29%) maturing April 2032 to September 2037			60,310				60,310
Other basis adjustments			(3,454	)			(3,585	)
Old National Bank:
Capital lease obligations			5,358				5,389
Subordinated debentures (fixed rate 5.75%)			12,000				12,000
Premium on subordinated debentures			672				694
Total other borrowings		$	248,898			$	248,782

 

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Contractual maturities of other borrowings at March 31, 2018 were as follows:

 

(dollars in thousands)
Due in 2018		$	96
Due in 2019			137
Due in 2020			147
Due in 2021			160
Due in 2022			172
Thereafter			251,956
Unamortized debt issuance costs and other basis adjustments			(3,770	)
Total		$	248,898

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.” With the addition of Anchor (MN) assets, these securities now qualify as Tier 2 capital for regulatory purposes, subject to certain limitations. Prior to the fourth quarter of 2017, these securities qualified as Tier 1 capital for regulatory purposes.

Through various acquisitions, Old National assumed junior subordinated debenture obligations related to various trusts that issued trust preferred securities. Old National guarantees the payment of distributions on the trust preferred securities issued by the trusts. Proceeds from the issuance of each of these securities were used to purchase junior subordinated debentures with the same financial terms as the securities issued by the trusts.

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.

 

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The following table summarizes the terms of our outstanding junior subordinated debentures at March 31, 2018:

 

(dollars in thousands)												Rate at
						Issuance						March 31,
Name of Trust		Issuance Date				Amount				Rate		2018				Maturity Date
VFSC Capital Trust I			April 2002			$	3,093			3-month LIBOR plus 3.70%			5.06	%			April 22, 2032
VFSC Capital Trust II			October 2002				4,124			3-month LIBOR plus 3.45%			5.29	%			November 7, 2032
VFSC Capital Trust III			April 2004				3,093			3-month LIBOR plus 2.80%			4.81	%			September 8, 2034
St. Joseph Capital Trust II			March 2005				5,000			3-month LIBOR plus 1.75%			3.93	%			March 20, 2035
Anchor Capital Trust III			August 2005				5,000			3-month LIBOR plus 1.55%			3.86	%			August 23, 2035
Tower Capital Trust 2			December 2005				8,000			3-month LIBOR plus 1.34%			3.65	%			December 4, 2035
Home Federal Statutory Trust I			September 2006				15,000			3-month LIBOR plus 1.65%			3.77	%			September 15, 2036
Monroe Bancorp Capital Trust I			July 2006				3,000			3-month LIBOR plus 1.60%			3.30	%			October 7, 2036
Monroe Bancorp Statutory Trust II			March 2007				5,000			3-month LIBOR plus 1.60%			3.72	%			June 15, 2037
Tower Capital Trust 3			December 2006				9,000			3-month LIBOR plus 1.69%			3.70	%			September 15, 2037
Total						$	60,310

Subordinated Debentures

On November 1, 2017, Old National assumed $12.0 million of subordinated fixed-to-floating notes related to the acquisition of Anchor (MN). The subordinated debentures have a 5.75% fixed rate of interest through October 29, 2020. From October 30, 2020 to the October 30, 2025 maturity date, the debentures have a floating rate of interest equal to the three-month LIBOR rate plus 4.356%.

Capital Lease Obligations

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.

On November 1, 2017, Old National assumed a capital lease obligation for a banking center in Arden Hills, Minnesota related to the acquisition of Anchor (MN). The remaining base term of the lease is five years with one renewal option of ten years. For purposes of measuring the lease obligation, we determined that we would be “reasonably assured” to exercise the renewal option. The fair value of the capital lease obligation was estimated using a discounted cash flow analysis based on a market rate for similar types of borrowing arrangements. Based on the above assumptions, Old National measured the capital lease obligation at $1.5 million as of the date of acquisition.

 

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At March 31, 2018, the future minimum lease payments under the capital lease arrangements were as follows:

 

(dollars in thousands)
2018		$	426
2019			589
2020			589
2021			589
2022			589
Thereafter			9,275
Total minimum lease payments			12,057
Less amounts representing interest			(6,699	)
Present value of net minimum lease payments		$	5,358

NOTE 17 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table summarizes the changes within each classification of AOCI, net of tax, for the three months ended March 31, 2018 and 2017:

 

		Unrealized Gains				Unrealized Gains				Gains and				Defined
		and Losses on				and Losses on				Losses on				Benefit
		Available-for-Sale				Held-to-Maturity				Cash Flow				Pension
(dollars in thousands)		Securities				Securities				Hedges				Plans				Total
Three Months Ended March 31, 2018
Balance at beginning of period		$	(35,557	)		$	(12,107	)		$	(2,337	)		$	(271	)		$	(50,272	)
Other comprehensive income (loss) before reclassifications			(8,872	)			4,514				3,444				—				(914	)
Amounts reclassified from AOCI to income (a)			(593	)			456				580				20				463
Amount reclassified from AOCI to retained earnings for cumulative effect of change in accounting principle (b)			—				—				(52	)			—				(52	)
Amounts reclassified from AOCI to retained earnings related to the Tax Cuts and Jobs Act of 2017 (c)			(7,583	)			(2,600	)			(509	)			(59	)			(10,751	)
Balance at end of period		$	(52,605	)		$	(9,737	)		$	1,126			$	(310	)		$	(61,526	)
Three Months Ended March 31, 2017
Balance at beginning of period		$	(39,012	)		$	(13,310	)		$	(6,715	)		$	(335	)		$	(59,372	)
Other comprehensive income (loss) before reclassifications			9,967				—				360				—				10,327
Amounts reclassified from AOCI to income (a)			(947	)			295				1,115				17				480
Balance at end of period		$	(29,992	)		$	(13,015	)		$	(5,240	)		$	(318	)		$	(48,565	)

 

(a)	See table below for details about reclassifications to income.

(b)	See Note 3 for details about reclassification from AOCI to beginning retained earnings resulting from the adoption of ASU 2017-12.

(c)	See Note 3 for details about reclassification from AOCI to beginning retained earnings resulting from the adoption of ASU 2018-02.

 

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The following table summarizes the significant amounts reclassified out of each component of AOCI for the three months ended March 31, 2018 and 2017:

 

		Amount Reclassified								Affected Line Item in the
Details about AOCI Components		from AOCI								Statement of Income
		Three Months Ended
		March 31,
(dollars in thousands)		2018				2017
Unrealized gains and losses on available-for-sale securities		$	788			$	1,500			Net securities gains
			(195	)			(553	)		Income tax (expense) benefit
		$	593			$	947			Net income
Unrealized gains and losses on held-to-maturity securities		$	(591	)		$	(449	)		Interest income (expense)
			135				154			Income tax (expense) benefit
		$	(456	)		$	(295	)		Net income
Gains and losses on cash flow hedges Interest rate contracts		$	(769	)		$	(1,799	)		Interest income (expense)
			189				684			Income tax (expense) benefit
		$	(580	)		$	(1,115	)		Net income
Amortization of defined benefit pension items
Actuarial gains (losses)		$	(51	)		$	(27	)		Salaries and employee benefits
			31				10			Income tax (expense) benefit
		$	(20	)		$	(17	)		Net income
Total reclassifications for the period		$	(463	)		$	(480	)		Net income

NOTE 18 – EMPLOYEE BENEFIT PLANS

Old National had a funded noncontributory defined benefit plan (the “Retirement Plan”) that had been frozen since December 31, 2005. During the first quarter of 2016, we notified plan participants of our intent to terminate the Retirement Plan effective May 15, 2016. During October 2016, the Retirement Plan settled plan liabilities through either lump sum distributions to plan participants or annuity contracts purchased from a third-party insurance company that provided for the payment of vested benefits to those participants that did not elect the lump sum option. At March 31, 2018, there were no remaining plan assets.

NOTE 19 – STOCK-BASED COMPENSATION

At March 31, 2018, Old National had 4.6 million shares remaining available for issuance under the Company’s Amended and Restated 2008 Incentive Compensation Plan. The granting of awards to key employees is typically in the form of restricted stock awards or units.

Restricted Stock Awards

Old National granted 73 thousand time-based restricted stock awards to certain key officers during the three months ended March 31, 2018, with shares vesting generally over a thirty-six month period. Compensation expense is recognized on a straight-line basis over the vesting period. Shares are subject to certain restrictions and risk of forfeiture by the participants. At March 31, 2018, unrecognized compensation expense was estimated to be $4.5 million for unvested restricted stock awards. The cost is expected to be recognized over a weighted-average period of 2.1 years.

Old National recorded stock-based compensation expense, net of tax, related to restricted stock awards of $0.5 million, net of tax, during the three months ended March 31, 2018, compared to $0.4 million, net of tax, during the three months ended March 31, 2017.

 

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Restricted Stock Units

Old National granted 288 thousand shares of performance based restricted stock units to certain key officers during the three months ended March 31, 2018, with shares vesting at the end of a thirty-six month period based on the achievement of certain targets. For certain awards, the level of performance could increase or decrease the percentage of shares earned. Compensation expense is recognized on a straight-line basis over the vesting period. Shares are subject to certain restrictions and risk of forfeiture by the participants. At March 31, 2018, unrecognized compensation expense was estimated to be $7.3 million. The cost is expected to be recognized over a weighted-average period of 2.3 years.

Old National recorded stock-based compensation expense, net of tax, related to restricted stock units of $0.9 million during the three months ended March 31, 2018, compared to $0.4 million during the three months ended March 31, 2017.

Stock Options

Old National has not granted stock options since 2009. However, Old National did acquire stock options through prior year acquisitions. Old National did not record any stock-based compensation expense related to these stock options during the three months ended March 31, 2018 or 2017.

Stock Appreciation Rights

Old National has never granted stock appreciation rights. However, Old National did acquire stock appreciation rights through a prior year acquisition. Old National did not record any incremental expense associated with the conversion of these stock appreciation rights during the three months ended March 31, 2018 or 2017. At March 31, 2018, 62  thousand stock appreciation rights remained outstanding.

NOTE 20 – INCOME TAXES

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

 

		Three Months Ended
		March 31,
(dollars in thousands)		2018				2017
Provision at statutory rate (1)		$	11,117			$	16,269
Tax-exempt income:
Tax-exempt interest			(2,191	)			(3,702	)
Section 291/265 interest disallowance			62				57
Company-owned life insurance income			(547	)			(752	)
Tax-exempt income			(2,676	)			(4,397	)
State income taxes			1,188				851
Interim period effective rate adjustment			92				(455	)
Tax credit investments - federal			(5,769	)			(1,876	)
Other, net			1,005				99
Income tax expense		$	4,957			$	10,491
Effective tax rate			9.4	%			22.6	%

 

(1)	The statutory rate was 21% for the three months ended March 31, 2018, compared to 35% for the three months ended March 31, 2017.

In accordance with ASC 740-270, Accounting for Interim Reporting, the provision for income taxes was recorded at March 31, 2018 and 2017 based on the current estimate of the effective annual rate.

The lower effective tax rate during the three months ended March 31, 2018 when compared to the three months ended March 31, 2017 is primarily the result of the lowering of the federal corporate tax rate to 21% and an increase in federal tax credits available. On December 22, 2017, the Tax Cuts and Jobs Act (“H.R. 1”) was enacted into legislation. Under ASC 740, the effects of changes in tax rates and laws are recognized in the period in which the new legislation is enacted. Accordingly, Old National recorded an estimated $39.3 million for the revaluation of Old National’s deferred tax assets in December 2017.

 

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Shortly after the enactment date, the SEC issued SAB 118, which addresses the situations where the accounting for changes in tax laws is complete, incomplete but can be reasonably estimated, and incomplete and cannot be reasonably estimated. SAB 118 also permits a measurement period of up to one year from the date of enactment to refine the provisional accounting. During the three months ended March 31, 2018, the immaterial adjustments made to the preliminary valuation of assets acquired and liabilities assumed in the acquisition of Anchor (MN) impacted our estimated revaluation of Old National’s deferred tax assets. Old National continues to analyze H.R. 1, including the impact on alternative minimum tax credits disclosed further below, as well as the acquisition accounting of Anchor (MN), and expects any refinements to the provisional accounting to be complete in 2018.

Unrecognized Tax Benefits

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

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

 

		Three Months Ended
		March 31,
(dollars in thousands)		2018				2017
Balance at beginning of period		$	874			$	777
Additions based on tax positions related to the current year			39				32
Balance at end of period		$	913			$	809

If recognized, approximately $0.9 million of unrecognized tax benefits, net of interest, would favorably affect the effective income tax rate in future periods. Old National expects the total amount of unrecognized tax benefits to decrease by approximately $0.3 million in the next twelve months.

 

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Net Deferred Tax Assets

Significant components of net deferred tax assets (liabilities) were as follows at March 31, 2018 and December 31, 2017:

 

		March 31,				December 31,
(dollars in thousands)		2018				2017
Deferred Tax Assets
Allowance for loan losses, net of recapture		$	13,062			$	12,958
Benefit plan accruals			11,173				11,080
Alternative minimum tax credit			2,545				25,084
Unrealized losses on benefit plans			101				108
Net operating loss carryforwards			33,463				39,631
Federal tax credits			11,089				5,516
Other-than-temporary impairment			36				1,424
Deferred gain on securities			2,118				—
Acquired loans			27,207				29,669
Lease exit obligation			1,270				1,337
Unrealized losses on available-for-sale investment securities			16,661				14,011
Unrealized losses on held-to-maturity investment securities			2,865				3,630
Unrealized losses on hedges			—				923
Other real estate owned			379				369
Other, net			3,214				829
Total deferred tax assets			125,183				146,569
Deferred Tax Liabilities
Accretion on investment securities			(499	)			(493	)
Purchase accounting			(16,314	)			(16,718	)
Loan servicing rights			(5,989	)			(6,058	)
Premises and equipment			(9,277	)			(10,052	)
Prepaid expenses			(1,277	)			(1,277	)
Tax credit investments			(1,036	)			(168	)
Unrealized gains on hedges			(367	)			—
Other, net			(1,651	)			(946	)
Total deferred tax liabilities			(36,410	)			(35,712	)
Net deferred tax assets		$	88,773			$	110,857

Through the acquisition of Anchor (WI) in the second quarter of 2016 and Lafayette Savings Bank in the fourth quarter of 2014, both former thrifts, Old National Bank’s retained earnings at March 31, 2018 include base-year bad debt reserves, created for tax purposes prior to 1988, totaling $52.8 million. Of this total, $50.9 million was acquired from Anchor (WI), and $1.9 million was acquired from Lafayette Savings Bank. Base-year reserves are subject to recapture in the unlikely event that Old National Bank (1) makes distributions in excess of current and accumulated earnings and profits, as calculated for federal income tax purposes, (2) redeems its stock, or (3) liquidates. Old National Bank has no intention of making such a nondividend distribution. Accordingly, under current accounting principles, a related deferred income tax liability of $13.0 million has not been recognized.

No valuation allowance was recorded at March 31, 2018 or December 31, 2017 because, based on current expectations, Old National believes it will generate sufficient income in future years to realize deferred tax assets. Old National has federal net operating loss carryforwards totaling $104.5 million at March 31, 2018 and $130.7 million at December 31, 2017. This federal net operating loss was acquired from the acquisition of Anchor (WI) in 2016. If not used, the federal net operating loss carryforwards will expire from 2028 to 2033. Old National has alternative minimum tax (“AMT”) credit carryforwards totaling $25.1 million at March 31, 2018 and December 31, 2017. The enactment of H.R.1 eliminates the parallel tax system known as the AMT and allows any existing AMT credits to be used to reduce regular tax or be refunded from 2018 to 2021. ASC 740 allows for the reclassification of the AMT credit from a deferred tax asset to a current tax asset, except for the amount limited by section 382. Old National has $2.5 million of AMT credit carryforward subject to section 382 limitations. The $2.5 million is maintained in deferred tax assets and the remaining $22.6 million has been reclassified to a current tax asset. Old

 

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National has federal tax credit carryforwards of $11.0 million at March 31, 2018 and $5.5 million at December 31, 2017. The federal tax credits consist mainly of federal historic credits, energy efficient home credits, low income housing credits, and research and development credits that, if not used, will expire from 2025 to 2038. Old National has recorded state net operating loss carryforwards totaling $191.2 million at March 31, 2018 and $203.6 million at December 31, 2017. If not used, the state net operating loss carryforwards will expire from 2024 to 2033. Old National has state tax credit carryforwards totaling $1.3 million at March 31, 2018 and $1.3 million at December 31, 2017. The state tax credits will not expire.

The federal and recorded state net operating loss carryforwards are subject to an annual limitation under Internal Revenue Code section 382. Old National believes that all of the recorded net operating loss carryforwards will be used prior to expiration.

NOTE 21 - DERIVATIVE FINANCIAL INSTRUMENTS

As discussed in Note 3, Old National adopted ASU 2017-12 in the first quarter of 2018. This adoption primarily impacted our existing cash flow and fair value hedges related to certain FHLB advances. For cash flow hedges as of the date of adoption, the transition guidance in paragraph 815-20-65-3(d) eliminated the separate measurement of ineffectiveness by means of a cumulative-effect adjustment to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings. For fair value hedges of interest rate risk, the provisions of paragraph 815-25-35-13 permit Old National to elect to modify the measurement methodology to be based on the benchmark rate component of the contractual coupon cash flows without dedesignation of the hedging relationship. The measurement methodology modification shall be applied as of the hedging relationship’s original inception date. The cumulative effect of applying this election shall be recognized as an adjustment to the basis adjustment of the hedged item recognized on the balance sheet with a corresponding adjustment to the opening balance of retained earnings as of the initial application date.

As part of our overall interest rate risk management, Old National uses derivative instruments, including interest rate swaps, caps, and floors. The notional amount of these derivative instruments was $758.5 million at March 31, 2018 and $708.5 million at December 31, 2017. These derivative financial instruments at March 31, 2018 consisted of $133.5 million notional amount of receive-fixed, pay-variable interest rate swaps on certain of its FHLB advances and $625.0 million notional amount of pay-fixed, receive-variable interest rate swaps on certain of its FHLB advances. Derivative financial instruments at December 31, 2017 consisted of $33.5 million notional amount of receive-fixed, pay-variable interest rate swaps on certain of its FHLB advances and $675.0 million notional amount of pay-fixed, receive-variable interest rate swaps on certain of its FHLB advances. These hedges were entered into to manage interest rate risk. Derivative instruments are recognized on the balance sheet at their fair value and are not reported on a net basis.

In accordance with ASC 815-20-35-1, subsequent changes in fair value for a hedging instrument that has been designated and qualifies as part of a hedging relationship should be accounted for in the following manner:

Cash flow hedges: changes in fair value will be recognized as a component in other comprehensive income.

Fair value hedges: changes in fair value will be recognized concurrently in earnings.

Consistent with this guidance, as long as a hedging instrument is designated and the results of the effectiveness testing support that the instrument qualifies for hedge accounting treatment, 100% of the periodic changes in fair value of the hedging instrument will be accounted for as outlined above. This is the case whether or not economic mismatches exist in the hedging relationship. As a result, there will be no periodic measurement or recognition of ineffectiveness. Rather, the full impact of hedge gains and losses will be recognized in the period in which the hedged transactions impact earnings.

While separate measurement and presentation of ineffectiveness is being eliminated, paragraph 815-20-45-1A requires the change in fair value of the hedging instrument that is included in the assessment of hedge effectiveness be presented in the same income statement line item that is used to present the earnings effect of the hedged item.

Commitments to fund certain mortgage loans (interest rate lock commitments) and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives. These derivative contracts do not qualify for hedge accounting. At March 31, 2018, the notional amount of the interest rate lock commitments

 

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was $61.0 million and forward commitments were $68.3 million. At December 31, 2017, the notional amount of the interest rate lock commitments was $29.9 million and forward commitments were $41.2 million. It is our practice to enter into forward commitments for the future delivery of residential mortgage loans to third party investors when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from our commitment to fund the loans.

Old National also enters into derivative instruments for the benefit of its customers. The notional amounts of these customer derivative instruments and the offsetting counterparty derivative instruments were $839.3 million at March 31, 2018. The notional amounts of these customer derivative instruments and the offsetting counterparty derivative instruments were $826.6 million at December 31, 2017. These derivative contracts do not qualify for hedge accounting. These instruments include interest rate swaps, caps, and collars. Commonly, Old National will economically hedge significant exposures related to these derivative contracts entered into for the benefit of customers by entering into offsetting contracts with approved, reputable, independent counterparties with substantially matching terms.

Old National enters into derivative financial instruments as part of its foreign currency risk management strategies. These derivative instruments consist of foreign currency forward contracts to accommodate the business needs of its customers. Old National does not designate these foreign currency forward contracts for hedge accounting treatment. The notional amounts of these foreign currency forward contracts and the offsetting counterparty derivative instruments were $1.2 million at March 31, 2018 and $0.8 million at December 31, 2017.

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

Amounts reported in AOCI related to cash flow hedges will be reclassified to interest income or interest expense as interest payments are received or paid on Old National’s derivative instruments. During the next 12 months, we estimate that $2.0 million will be reclassified to interest income and $1.3 million will be reclassified to interest expense.

 

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The following table summarizes the fair value of derivative financial instruments utilized by Old National:

 

(dollars in thousands)		Balance Sheet Location				Fair Value				Balance Sheet Location				Fair Value
March 31, 2018
Derivatives designated as hedging instruments
Interest rate contracts			Other assets			$	4,720				Other liabilities			$	3,382
Total derivatives designated as hedging instruments						$	4,720							$	3,382
Derivatives not designated as hedging instruments
Interest rate contracts			Other assets			$	8,113				Other liabilities			$	16,256
Mortgage contracts			Other assets				1,475				Other liabilities				90
Foreign currency contracts			Other assets				13				Other liabilities				2
Total derivatives not designated as hedging instruments						$	9,601							$	16,348
Total						$	14,321							$	19,730
December 31, 2017
Derivatives designated as hedging instruments
Interest rate contracts			Other assets			$	3,351				Other liabilities			$	5,351
Total derivatives designated as hedging instruments						$	3,351