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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 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 152,351,000 shares outstanding at June 30, 2018.

 

 

 


Table of Contents

OLD NATIONAL BANCORP

FORM 10-Q

TABLE OF CONTENTS

 

         Page  

PART I. FINANCIAL INFORMATION

     4  

Item 1.

 

Financial Statements

     4  
 

Consolidated Balance Sheets

     4  
 

Consolidated Statements of Income (unaudited)

     5  
 

Consolidated Statements of Comprehensive Income (unaudited)

     6  
 

Consolidated Statements of Changes in Shareholders’ Equity (unaudited)

     7  
 

Consolidated Statements of Cash Flows (unaudited)

     8  
 

Notes to Consolidated Financial Statements (unaudited)

     9  
 

Note 1. Basis of Presentation

     9  
 

Note 2. Revenue Recognition

     9  
 

Note 3. Recent Accounting Pronouncements

     11  
 

Note 4. Acquisition and Divestiture Activity

     16  
 

Note 5. Net Income Per Share

     17  
 

Note 6. Investment Securities

     19  
 

Note 7. Loans Held for Sale

     23  
 

Note 8. Loans and Allowance for Loan Losses

     23  
 

Note 9. Other Real Estate Owned

     35  
 

Note 10. Premises and Equipment

     36  
 

Note 11. Goodwill and Other Intangible Assets

     36  
 

Note 12. Loan Servicing Rights

     37  
 

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

     38  
 

Note 14. Securities Sold Under Agreements to Repurchase

     39  
 

Note 15. Federal Home Loan Bank Advances

     40  
 

Note 16. Other Borrowings

     41  
 

Note 17. Accumulated Other Comprehensive Income (Loss)

     44  
 

Note 18. Employee Benefit Plans

     46  
 

Note 19. Share-Based Compensation

     47  
 

Note 20. Income Taxes

     48  
 

Note 21. Derivative Financial Instruments

     50  
 

Note 22. Commitments and Contingencies

     54  
 

Note 23. Financial Guarantees

     54  
 

Note 24. Segment Information

     55  
 

Note 25. Fair Value

     55  

Item 2.

 

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

     64  
 

Financial Highlights

     65  
 

Non-GAAP Financial Measures

     66  
 

Executive Summary

     67  
 

Results of Operations

     68  
 

Financial Condition

     77  
 

Risk Management

     80  
 

Off-Balance Sheet Arrangements

     90  
 

Contractual Obligations

     90  
 

Critical Accounting Policies and Estimates

     91  
 

Forward-Looking Statements

     93  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     94  

Item 4.

 

Controls and Procedures

     94  

PART II. OTHER INFORMATION

     95  

Item 1A.

 

Risk Factors

     95  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     95  

Item 5.

 

Other Information

     95  

Item 6.

 

Exhibits

     96  

SIGNATURE

     97  

 

2


Table of Contents

GLOSSARY OF ABBREVIATIONS AND ACRONYMS

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

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

Anchor (MN): Anchor Bancorp, Inc.

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

Anchor (WI): Anchor BanCorp Wisconsin Inc.

AnchorBank (WI): AnchorBank, fsb

AOCI: accumulated other comprehensive income (loss)

AQR: asset quality rating

ASC: Accounting Standards Codification

ASU: Accounting Standards Update

ATM: automated teller machine

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

Klein: Klein Financial, Inc.

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

 

3


Table of Contents

OLD NATIONAL BANCORP    

CONSOLIDATED BALANCE SHEETS    

 

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

   June 30,
2018
    December 31,
2017
    June 30,
2017
 
     (unaudited)           (unaudited)  

Assets

      

Cash and due from banks

   $ 219,626     $ 222,753     $ 230,809  

Money market and other interest-earning investments

     54,248       67,679       31,932  
  

 

 

   

 

 

   

 

 

 

Total cash and cash equivalents

     273,874       290,432       262,741  

Trading securities, at fair value

     5,596       5,584       5,235  

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

      

U.S. Treasury

     5,257       5,551       5,634  

U.S. government-sponsored entities and agencies

     568,231       664,286       580,624  

Mortgage-backed securities

     1,448,526       1,667,682       1,462,111  

States and political subdivisions

     797,533       530,193       431,874  

Other securities

     362,118       328,495       334,095  
  

 

 

   

 

 

   

 

 

 

Total investment securities - available-for-sale

     3,181,665       3,196,207       2,814,338  

Investment securities - held-to-maturity, at amortized cost (fair value $524,597; $727,703; and $749,363, respectively)

     525,718       684,063       695,139  

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

     136,206       119,686       109,715  

Loans held for sale, at fair value

     26,198       17,930       27,425  

Loans:

      

Commercial

     2,962,895       2,717,269       2,001,621  

Commercial real estate

     4,451,772       4,354,552       3,259,998  

Residential real estate

     2,153,973       2,167,053       2,099,374  

Consumer credit, net of unearned income

     1,726,989       1,879,247       1,871,047  
  

 

 

   

 

 

   

 

 

 

Total loans

     11,295,629       11,118,121       9,232,040  

Allowance for loan losses

     (53,660     (50,381     (50,986
  

 

 

   

 

 

   

 

 

 

Net loans

     11,241,969       11,067,740       9,181,054  
  

 

 

   

 

 

   

 

 

 

Premises and equipment, net

     449,304       458,074       413,933  

Accrued interest receivable

     81,290       87,102       79,830  

Goodwill

     828,804       828,051       655,018  

Other intangible assets

     45,417       53,096       31,876  

Company-owned life insurance

     405,492       403,753       354,875  

Net deferred tax assets

     90,187       110,857       146,780  

Loan servicing rights

     24,303       24,661       25,023  

Assets held for sale

     10,222       7,180       11,725  

Other real estate owned and repossessed personal property

     3,729       8,810       11,071  

Other assets

     153,016       155,066       131,503  
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 17,482,990     $ 17,518,292     $ 14,957,281  
  

 

 

   

 

 

   

 

 

 

Liabilities

      

Deposits:

      

Noninterest-bearing demand

   $ 3,600,793     $ 3,680,807     $ 3,011,156  

Interest-bearing:

      

Checking and NOW

     3,054,302       3,115,822       2,639,813  

Savings

     3,026,110       3,035,622       2,924,689  

Money market

     1,090,621       1,139,077       672,391  

Time

     1,824,550       1,634,436       1,435,665  
  

 

 

   

 

 

   

 

 

 

Total deposits

     12,596,376       12,605,764       10,683,714  

Federal funds purchased and interbank borrowings

     175,044       335,033       227,029  

Securities sold under agreements to repurchase

     347,511       384,810       298,094  

Federal Home Loan Bank advances

     1,757,308       1,609,579       1,515,628  

Other borrowings

     250,241       248,782       219,167  

Accrued expenses and other liabilities

     156,295       179,927       127,055  
  

 

 

   

 

 

   

 

 

 

Total liabilities

     15,282,775       15,363,895       13,070,687  
  

 

 

   

 

 

   

 

 

 

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, 152,351; 152,040; and 135,516 shares issued and outstanding, respectively

     152,351       152,040       135,516  

Capital surplus

     1,642,790       1,639,499       1,352,411  

Retained earnings

     471,777       413,130       429,787  

Accumulated other comprehensive income (loss), net of tax

     (66,703     (50,272     (31,120
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     2,200,215       2,154,397       1,886,594  
  

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 17,482,990     $ 17,518,292     $ 14,957,281  
  

 

 

   

 

 

   

 

 

 

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

 

4


Table of Contents

OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

 

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

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

   2018      2017      2018      2017  

Interest Income

           

Loans including fees:

           

Taxable

   $ 124,610      $ 92,189      $ 242,999      $ 184,390  

Nontaxable

     3,984        3,236        7,858        6,415  

Investment securities:

           

Taxable

     18,367        15,501        37,171        31,186  

Nontaxable

     6,658        7,228        13,207        14,600  

Money market and other interest-earning investments

     117        55        207        86  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     153,736        118,209        301,442        236,677  
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest Expense

           

Deposits

     9,139        4,724        16,394        9,107  

Federal funds purchased and interbank borrowings

     647        422        1,664        778  

Securities sold under agreements to repurchase

     434        334        793        590  

Federal Home Loan Bank advances

     8,824        6,017        16,604        11,329  

Other borrowings

     2,729        2,379        5,452        4,739  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     21,773        13,876        40,907        26,543  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     131,963        104,333        260,535        210,134  

Provision for loan losses

     2,446        1,355        2,826        1,702  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     129,517        102,978        257,709        208,432  
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest Income

           

Wealth management fees

     9,746        9,679        18,772        18,678  

Service charges on deposit accounts

     10,765        10,040        21,524        19,883  

Debit card and ATM fees

     5,080        4,436        9,945        8,672  

Mortgage banking revenue

     5,189        5,186        9,381        9,412  

Investment product fees

     5,066        5,004        10,097        9,993  

Capital markets income

     896        2,747        1,394        3,778  

Company-owned life insurance

     2,430        2,117        5,035        4,266  

Net securities gains (losses)

     1,494        3,075        2,282        4,575  

Recognition of deferred gain on sale leaseback transactions

     394        538        789        1,075  

Other income

     8,229        6,449        11,975        11,859  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

     49,289        49,271        91,194        92,191  
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest Expense

           

Salaries and employee benefits

     66,592        57,606        130,771        114,170  

Occupancy

     12,873        10,539        26,153        22,673  

Equipment

     3,728        3,350        7,293        6,577  

Marketing

     3,962        3,673        7,659        6,723  

Data processing

     9,724        8,226        18,124        15,834  

Communication

     2,772        2,288        5,836        4,702  

Professional fees

     2,923        4,077        5,653        6,728  

Loan expenses

     1,843        1,693        3,587        3,324  

Supplies

     903        594        1,625        1,173  

FDIC assessment

     3,161        2,130        5,806        4,617  

Other real estate owned expense

     196        1,009        545        2,124  

Amortization of intangibles

     3,416        2,781        7,025        5,801  

Amortization of tax credit investments

     11,858        —          12,574        —    

Other expense

     6,509        4,845        14,966        10,256  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expense

     130,460        102,811        247,617        204,702  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     48,346        49,438        101,286        95,921  

Income tax expense

     4,345        10,584        9,302        21,075  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 44,001      $ 38,854      $ 91,984      $ 74,846  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per common share - basic

   $ 0.29      $ 0.28      $ 0.61      $ 0.55  

Net income per common share - diluted

     0.29        0.28        0.60        0.55  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common shares outstanding - basic

     151,878        135,085        151,800        134,999  

Weighted average number of common shares outstanding - diluted

     152,568        135,697        152,483        135,641  
  

 

 

    

 

 

    

 

 

    

 

 

 

Dividends per common share

   $ 0.13      $ 0.13      $ 0.26      $ 0.26  

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

 

5


Table of Contents

OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

 

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

(dollars in thousands)

   2018     2017     2018     2017  

Net income

   $ 44,001     $ 38,854     $ 91,984     $ 74,846  

Other comprehensive income (loss):

        

Change in securities available-for-sale:

        

Unrealized holding gains (losses) for the period

     (7,327     30,627       (33,121     46,407  

Reclassification for securities transferred to held-to-maturity

     —         —         14,007       —    

Reclassification adjustment for securities gains realized in income

     (1,494     (3,075     (2,282     (4,575

Income tax effect

     2,070       (10,017     5,180       (15,277
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     (6,751     17,535       (16,216     26,555  

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 unrealized losses on securities transferred from available-for-sale

     521       453       1,112       902  

Income tax effect

     (119     (155     (1,145     (309
  

 

 

   

 

 

   

 

 

   

 

 

 

Changes from securities held-to-maturity

     402       298       5,372       593  

Cash flow hedges:

        

Net unrealized derivative gains (losses) on cash flow hedges

     1,516       (2,387     6,079       (1,807

Reclassification adjustment for losses realized in net income

     10       1,734       779       3,533  

Income tax effect

     (375     248       (1,683     (656
  

 

 

   

 

 

   

 

 

   

 

 

 

Changes from cash flow hedges

     1,151       (405     5,175       1,070  

Defined benefit pension plans:

        

Amortization of net loss recognized in income

     27       27       54       54  

Income tax effect

     (6     (10     (13     (20
  

 

 

   

 

 

   

 

 

   

 

 

 

Changes from defined benefit pension plans

     21       17       41       34  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (5,177     17,445       (5,628     28,252  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 38,824     $ 56,299     $ 86,356     $ 103,098  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

6


Table of Contents

OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)

 

(dollars in thousands)

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

Balance at December 31, 2016

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

Net income

     —         —         74,846       —         74,846  

Other comprehensive income (loss)

     —         —         —         28,252       28,252  

Dividends - common stock ($0.26 per share)

     —         —         (35,219     —         (35,219

Common stock issued

     11       177       —         —         188  

Common stock repurchased

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

Share-based compensation expense

     —         3,184       —         —         3,184  

Stock activity under incentive compensation plans

     450       2,460       (132     —         2,778  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2017

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     —         —         91,984       —         91,984  

Other comprehensive income (loss)

     —         —         —         (5,628     (5,628

Dividends - common stock ($0.26 per share)

     —         —         (39,588     —         (39,588

Common stock issued

     14       208       —         —         222  

Common stock repurchased

     (100     (1,649     —         —         (1,749

Share-based compensation expense

     —         3,606       —         —         3,606  

Stock activity under incentive compensation plans

     397       1,126       (373     —         1,150  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2018

   $ 152,351     $ 1,642,790     $ 471,777     $ (66,703   $ 2,200,215  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

 

    

Six Months Ended

June 30,

 

(dollars in thousands)

   2018     2017  

Cash Flows From Operating Activities

    

Net income

   $ 91,984     $ 74,846  
  

 

 

   

 

 

 

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

    

Depreciation

     11,772       10,406  

Amortization of other intangible assets

     7,025       5,801  

Amortization of tax credit investments

     12,574       —    

Net premium amortization on investment securities

     7,538       7,529  

Accretion income related to acquired loans

     (22,312     (22,157

Share-based compensation expense

     3,606       3,184  

Excess tax (benefit) expense on share-based compensation

     432       160  

Provision for loan losses

     2,826       1,702  

Net securities (gains) losses

     (2,282     (4,575

Recognition of deferred gain on sale leaseback transactions

     (789     (1,075

Net (gains) losses on sales of loans and other assets

     1,078       (5,398

Increase in cash surrender value of company-owned life insurance

     (5,035     (4,266

Residential real estate loans originated for sale

     (240,201     (179,025

Proceeds from sales of residential real estate loans

     234,736       246,549  

(Increase) decrease in interest receivable

     2,316       1,551  

(Increase) decrease in other real estate owned

     5,081       7,475  

(Increase) decrease in other assets

     16,127       3,707  

Increase (decrease) in accrued expenses and other liabilities

     (21,669     (20,504
  

 

 

   

 

 

 

Total adjustments

     12,823       51,064  
  

 

 

   

 

 

 

Net cash flows provided by (used in) operating activities

     104,807       125,910  
  

 

 

   

 

 

 

Cash Flows From Investing Activities

    

Purchases of investment securities available-for-sale

     (235,161     (414,742

Purchases of Federal Home Loan Bank/Federal Reserve Bank stock

     (16,520     (8,008

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

     220,753       252,486  

Proceeds from sales of investment securities available-for-sale

     131,321       186,277  

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

     35,750       48,204  

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

     —         9  

Proceeds from sales of trading securities

     128       127  

Proceeds from sale of student loan portfolio

     70,674       —    

Net principal collected from (loans made to) loan customers

     (219,685     (199,895

Proceeds from settlements on company-owned life insurance

     3,296       2,347  

Proceeds from sales of premises and equipment and other assets

     4,708       10,120  

Purchases of premises and equipment and other assets

     (17,005     (9,461
  

 

 

   

 

 

 

Net cash flows provided by (used in) investing activities

     (21,741     (132,536
  

 

 

   

 

 

 

Cash Flows From Financing Activities

    

Net increase (decrease) in:

    

Deposits

     (9,527     (59,539

Federal funds purchased and interbank borrowings

     (159,989     14,026  

Securities sold under agreements to repurchase

     (37,299     (68,958

Other borrowings

     1,159       (97

Payments for maturities of Federal Home Loan Bank advances

     (898,801     (892,298

Proceeds from Federal Home Loan Bank advances

     1,045,000       1,055,000  

Cash dividends paid on common stock

     (39,588     (35,219

Common stock repurchased

     (1,749     (1,852

Proceeds from exercise of stock options

     948       2,597  

Common stock issued

     222       188  
  

 

 

   

 

 

 

Net cash flows provided by (used in) financing activities

     (99,624     13,848  
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (16,558     7,222  

Cash and cash equivalents at beginning of period

     290,432       255,519  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 273,874     $ 262,741  
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Total interest paid

   $ 40,426     $ 26,534  

Total taxes paid (net of refunds)

   $ (819   $ 3,000  

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 June 30, 2018 and 2017, and December 31, 2017, and the results of its operations for the three and six months ended June 30, 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 scope of this update explicitly excludes net interest income, as well as other revenues from transactions involving financial instruments, such as loans and securities. 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 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. Old National finalized the in-depth assessment and identified the revenue line items within the scope of this new guidance. For Old National, the revenue streams that are affected by this update are presented within noninterest income.

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

 

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identifiable. This update will improve the guidance on assessing that criterion. Topic 606 also includes implementation guidance on determining whether as entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property, which is satisfied at a point in time, or a right to access the entity’s intellectual property, which is satisfied over time. The amendments in this update are intended to improve the operability and understandability of the licensing implementation guidance. The amendments in this update affect the guidance in ASU No. 2014-09 above. 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 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, Old National adopted ASU 2014-09, Revenue from Contracts with Customers and all subsequent amendments to the ASU (collectively, “Topic 606”) utilizing the modified retrospective application. A significant majority of Old National’s revenues are not subject to the new guidance. 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. Old National enters into various contracts with customers to provide these traditional banking services on a routine basis. Old National’s performance obligations are generally service-related and provided on a daily, monthly, or quarterly basis. The performance obligations are generally satisfied as services are rendered and the fees are collected at such time, or shortly thereafter. It is not typical for contracts to require significant judgment to determine the transaction price. The implementation of this update did not have a material impact on the measurement, timing, or recognition of revenue. Accordingly, no cumulative effect adjustment to opening retained earnings was deemed necessary. Results for reporting periods beginning after adoption are presented under Topic 606. As allowed under the update, results for prior periods continue to be reported under the accounting standards in effect for those periods.

Wealth management fees: Old National earns 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: Old National earns fees from 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 Old National satisfies its 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 Old National fulfills the customer’s request. Old National earns 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 Old National customers. Old National acts 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, net of the processing fees charged to Old National by the broker.

 

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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

June 30,

    

Six Months Ended

June 30,

 

(dollars in thousands)

   2018      2017      2018      2017  

Wealth management fees

   $ 9,746      $ 9,679      $ 18,772      $ 18,678  

Service charges on deposit accounts

     10,765        10,040        21,524        19,883  

Debit card and ATM fees

     5,080        4,436        9,945        8,672  

Investment product fees

     5,066        5,004        10,097        9,993  

Other income:

           

Merchant processing fees

     778        633        1,419        1,230  

Gain (loss) on other real estate owned

     586        (41      721        617  

Safe deposit box fees

     224        207        628        514  

Insurance premiums and commissions

     78        160        182        267  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 32,323      $ 30,118      $ 63,288      $ 59,854  
  

 

 

    

 

 

    

 

 

    

 

 

 

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 or six months ended June 30, 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; and 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; and (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. Old National has formed a cross functional team to plan and execute the adoption of this standard. The implementation efforts are ongoing, including the review of our leases and related accounting policies, review of contracts for embedded leases, and the implementation of a new lease software solution. Based on leases outstanding at June 30, 2018, Old

 

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National does not expect the new standard to have a material impact on the income statement, but anticipates a $125 million to $140 million increase in assets and liabilities. Decisions to repurchase, modify, or renew leases prior to the implementation date will impact this level of materiality.

In July 2018, the FASB issued an update (ASU No. 2018-10, Codification Improvements to Topic 842, Leases). The FASB decided to issue a separate update for the improvements related to ASU No. 2016-02 to increase stakeholders’ awareness of the amendments and to expedite the improvements. The amendments affect narrow aspects of the guidance issued in ASU No. 2016-02.

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 GAAP. The amendments in this update better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. This update addresses several limitations that GAAP placed 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 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 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 share-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 (“CECL”). The main objective of this amendment is to provide financial statement users with more decision-useful information about the expected credit losses on

 

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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.

As previously disclosed, Old National formed a cross functional committee to oversee the adoption of the ASU at the effective date. A working group was also formed and has developed a project plan focused on understanding the ASU, researching issues, identifying data needs for modeling inputs, technology requirements, modeling considerations, and ensuring overarching governance has been achieved for each objective and milestone. The project plan is targeting data and model validation completion in early 2019, with parallel processing of our existing allowance for loan losses model with the CECL for 2 – 4 quarters prior to implementation, depending on how model completion and validation occurs over the remainder of 2018. Currently, the working group has identified seven distinct loan portfolios for which a model has been or is in the process of being developed. For two of the loan portfolios, the data sets have been identified, populated, and internally validated. Additionally, models have been built, tested, and internally validated. During the remainder of 2018, Old National is focused on the completion of its remaining models, refining assumptions, and continued review and challenge of its models. Concurrent with this, Old National is also focused on researching and resolving interpretive accounting issues in the ASU, contemplating various related accounting policies, developing processes and related controls, and considering various reporting disclosures.

As of the beginning of the first reporting period in which the new standard is effective, Old National expects to recognize a one-time cumulative effect adjustment increasing the allowance for loan losses, since the ASU covers credit losses over the expected life of a loan as well as considering future changes in macroeconomic conditions. The magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements cannot yet be reasonably estimated.

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. Old National has completed its evaluation of adopting the new guidance on the consolidated financial statements and there is no impact to record.

 

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

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

 

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and interim periods within those annual periods beginning after December 15, 2018. Old National is 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. Old National is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

FASB ASC 718 – In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The amendments in this update expand the scope of Topic 718, Compensation—Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The ASU supersedes Subtopic 505-50, Equity—Equity-Based Payments to Non-Employees. The amendments in this update become effective for annual periods beginning after December 15, 2018, including interim periods within that fiscal year and will not have a material impact on the consolidated financial statements.

FASB ASC 958 – In June 2018, the FASB issued ASU No. 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. The amendments in this update clarify and improve the scope and accounting guidance around contributions of cash and other assets received and made by not-for-profit organizations and business enterprises. The ASU clarifies and improves current guidance about whether a transfer of assets, or the reduction, settlement, or cancellation of liabilities, is a contribution or an exchange transaction. It provides criteria for determining whether the resource provider is receiving commensurate value in return for the resources transferred which, depending on the outcome, determines whether the organization follows contribution guidance or exchange transaction guidance in the revenue recognition and other applicable standards. It also provides a more robust framework for determining whether a contribution is conditional or unconditional, and for distinguishing a donor-imposed condition from a donor-imposed restriction. This is important because such classification affects the timing of contribution revenue and expense recognition. The new ASU does not apply to transfers of assets from governments to businesses. The amendments in this update become effective for a public business entity for transactions in which the entity serves as a resource recipient to annual periods beginning after June 15, 2018, including interim periods within those annual periods. The amendments in this update become effective for a public business entity for a public business for transactions in which the entity serves as a resource provider to annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted. Old National is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

In July 2018, the FASB issued an update (ASU No. 2018-09, Codification Improvements). The amendments in this update affect a wide variety of topics in the Codification and are intended to clarify the Codification or correct the unintended application of guidance that is not expected to have a significant effect on current accounting practice. The transition and effective date guidance is based on the facts and circumstances of each amendment. Old National is currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

 

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NOTE 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 June 30, 2018, transaction and integration costs of $17.0 million associated with this acquisition have been expensed and remaining integration costs will be expensed in future periods as incurred.

During the six months ended June 30, 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. As of June 30, 2018, Old National finalized its valuation of all assets acquired and liabilities assumed, resulting in no material change to acquisition accounting adjustments. A summary of the fair values of the acquired assets, liabilities assumed, and resulting goodwill follows (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  
  

 

 

 

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

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.

 

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

 

(in thousands)

   Fair Value
of Acquired Loans
at Acquisition Date
     Gross Contractual
Cash Flows at
Acquisition Date
     Best Estimate at
Acquisition Date of
Contractual Cash
Flows Not Expected
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 and 9 branches during the six months ended June 30, 2018. In addition, there is one branch scheduled to be consolidated in the third quarter of this year.

Old National has 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. Assets associated with this divestiture are included in assets held for sale on the balance sheet. The branch sale includes the assumption of approximately $261 million in deposits and no loans. Subject to regulatory approval and other terms and conditions, the sale is expected to close in the fourth quarter of 2018.

Pending Acquisition

On June 20, 2018, Old National entered into an agreement to acquire Minnesota-based Klein through a 100% stock merger. Klein is a bank holding company with KleinBank as its wholly-owned subsidiary. Founded in 1907 and headquartered in Chaska, Minnesota with 18 full-service branches, KleinBank is the largest family-owned community bank serving the Twin Cities and its western communities. At March 31, 2018, Klein had total assets of $2.0 billion and $1.7 billion of deposit liabilities. Pursuant to the merger agreement, each holder of Klein common stock will receive 7.92 shares of Old National common stock per share of Klein common stock such holder owns. Based on Old National’s June 20, 2018 closing price of $19.05 per share, this represents a total transaction value of approximately $433.8 million. The transaction value is likely to change until closing due to fluctuations in the price of Old National common stock and is also subject to adjustment under certain circumstances as provided in the merger agreement. The transaction remains subject to regulatory approval and the vote of Klein shareholders. The transaction is anticipated to close in the fourth quarter of 2018.

NOTE 5NET INCOME PER SHARE

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

 

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The following table reconciles basic and diluted net income per share for the three and six months ended June 30, 2018 and 2017:

 

(dollars and shares in thousands,

except per share data)                

   Three Months Ended
June 30,
     Six Months Ended
June 30,
 
   2018      2017      2018      2017  

Basic Earnings Per Share

           

Net income

   $ 44,001      $ 38,854      $ 91,984      $ 74,846  

Weighted average common shares outstanding

     151,878        135,085        151,800        134,999  

Basic Net Income Per Share

   $ 0.29      $ 0.28      $ 0.61      $ 0.55  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted Earnings Per Share

           

Net income

   $ 44,001      $ 38,854      $ 91,984      $ 74,846  

Weighted average common shares outstanding

     151,878        135,085        151,800        134,999  

Effect of dilutive securities:

           

Restricted stock

     623        523        610        543  

Stock options (1)

     67        89        73        99  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding

     152,568        135,697        152,483        135,641  

Diluted Net Income Per Share

   $ 0.29      $ 0.28      $ 0.60      $ 0.55  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Options to purchase 14 thousand shares and 55 thousand shares outstanding at June 30, 2018 and 2017, respectively, were not included in the computation of net income per diluted share for the three and six months ended June 30, 2018 and 2017 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 June 30, 2018 and December 31, 2017 and the corresponding amounts of unrealized gains and losses therein:

 

(dollars in thousands)

   Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
     Fair
Value
 

June 30, 2018

           

Available-for-Sale

           

U.S. Treasury

   $ 5,312      $ —        $ (55    $ 5,257  

U.S. government-sponsored entities and agencies

     583,644        —          (15,413      568,231  

Mortgage-backed securities - Agency

     1,503,636        501        (55,611      1,448,526  

States and political subdivisions

     793,141        8,406        (4,014      797,533  

Pooled trust preferred securities

     13,887        —          (5,682      8,205  

Other securities

     359,820        345        (6,252      353,913  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 3,259,440      $ 9,252      $ (87,027    $ 3,181,665  
  

 

 

    

 

 

    

 

 

    

 

 

 

Held-to-Maturity

           

U.S. government-sponsored entities and agencies

   $ 73,570      $ —        $ (2,286    $ 71,284  

Mortgage-backed securities - Agency

     139,594        58        (3,868      135,784  

States and political subdivisions

     312,554        7,209        (2,234      317,529  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held-to-maturity securities

   $ 525,718      $ 7,267      $ (8,388    $ 524,597  
  

 

 

    

 

 

    

 

 

    

 

 

 

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 and six months ended June 30, 2018 and 2017:

 

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

(dollars in thousands)

   2018      2017      2018      2017  

Proceeds from sales of available-for-sale securities

   $ 47,064      $ 152,689      $ 131,321      $ 186,277  

Proceeds from calls of available-for-sale securities

     11,211        60,600        28,647        71,120  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 58,275      $ 213,289      $ 159,968      $ 257,397  
  

 

 

    

 

 

    

 

 

    

 

 

 

Realized gains on sales of available-for-sale securities

   $ 1,251      $ 2,954      $ 3,259      $ 4,283  

Realized gains on calls of available-for-sale securities

     283        —          284        —    

Realized losses on sales of available-for-sale securities

     (48      (13      (1,305      (43

Realized losses on calls of available-for-sale securities

     (4      (7      (53      (8

Other securities gains (losses) (1)

     12        141        97        343  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net securities gains (losses)

   $ 1,494      $ 3,075      $ 2,282      $ 4,575  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 June 30, 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 June 30, 2018  
(dollars in thousands)           Weighted  
     Amortized      Fair      Average  

Maturity

   Cost      Value      Yield  

Available-for-Sale

        

Within one year

   $ 60,410      $ 60,376        2.22

One to five years

     511,930        505,586        2.29  

Five to ten years

     383,847        380,192        3.03  

Beyond ten years

     2,303,253        2,235,511        2.64  
  

 

 

    

 

 

    

 

 

 

Total

   $ 3,259,440      $ 3,181,665        2.62
  

 

 

    

 

 

    

 

 

 

Held-to-Maturity

        

Within one year

   $ 27,128      $ 27,341        3.75

One to five years

     33,736        34,432        4.06  

Five to ten years

     75,966        77,962        4.38  

Beyond ten years

     388,888        384,862        3.59  
  

 

 

    

 

 

    

 

 

 

Total

   $ 525,718      $ 524,597        3.74
  

 

 

    

 

 

    

 

 

 

 

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The following table summarizes the available-for-sale investment securities with unrealized losses at June 30, 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  

(dollars in thousands)

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

June 30, 2018

               

Available-for-Sale

               

U.S. Treasury

   $ 5,257      $ (55   $ —        $ —       $ 5,257      $ (55

U.S. government-sponsored entities and agencies

     178,133        (3,476     390,097        (11,937     568,230        (15,413

Mortgage-backed securities - Agency

     728,486        (20,942     657,333        (34,669     1,385,819        (55,611

States and political subdivisions

     278,063        (3,761     8,239        (253     286,302        (4,014

Pooled trust preferred securities

     —          —         8,205        (5,682     8,205        (5,682

Other securities

     186,479        (3,599     110,953        (2,653     297,432        (6,252
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available-for-sale

   $ 1,376,418      $ (31,833   $ 1,174,827      $ (55,194   $ 2,551,245      $ (87,027
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The following table summarizes the held-to-maturity investment securities with unrecognized losses at June 30, 2018 and December 31, 2017 by aggregated major security type and length of time in a continuous unrecognized loss position:

 

     Less than 12 months     12 months or longer     Total  

(dollars in thousands)

   Fair
Value
     Unrecognized
Losses
    Fair
Value
     Unrecognized
Losses
    Fair
Value
     Unrecognized
Losses
 
               

June 30, 2018

               

Held-to-Maturity

               

U.S. government-sponsored entities and agencies

   $ —        $ —       $ 71,284      $ (5,716   $ 71,284      $ (5,716

Mortgage-backed securities - Agency

     35,489        (992     99,239        (9,029     134,728        (10,021

States and political subdivisions

     36,231        (1,466     70,130        (3,692     106,361        (5,158
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total held-to-maturity

   $ 71,720      $ (2,458   $ 240,653      $ (18,437   $ 312,373      $ (20,895
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2017

               

Held-to-Maturity

               

States and political subdivisions

   $ 2,309      $ (8   $ —        $ —       $ 2,309      $ (8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total held-to-maturity

   $ 2,309      $ (8   $ —        $ —       $ 2,309      $ (8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The unrecognized losses on held-to-maturity investment securities presented in the table above include unrecognized losses on securities that were transferred from available-for-sale to held-to-maturity totaling $12.5 million at June 30, 2018. There were no unrecognized losses on securities that were transferred from available-for-sale to held-to-maturity at December 31, 2017.

 

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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 before recovery of its amortized cost basis less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. Otherwise, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors shall be recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings shall become the new amortized cost basis of the investment.

There was no OTTI recorded during the six months ended June 30, 2018 or 2017.

At June 30, 2018, Old National’s securities portfolio consisted of 1,628 securities, 844 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 June 30, 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 June 30, 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 six months ended June 30, 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.

 

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The table below summarizes the relevant characteristics of our pooled trust preferred securities as well as our single issuer trust preferred securities that are included in the “other securities” category in this footnote. Each of the pooled trust preferred securities support a more senior tranche of security holders. 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

June 30, 2018

(dollars in thousands)      

  Class     Lowest
Credit
Rating (1)
    Amortized
Cost
    Fair
Value
    Unrealized
Gain/
(Loss)
    Realized
Losses
2018
    # of Issuers
Currently
Performing/
Remaining
    Actual
Deferrals
and Defaults
as a % of
Original
Collateral
    Expected
Defaults as
a % of
Remaining
Performing
Collateral
    Excess
Subordination
as a % of
Current
Performing
Collateral
 

Pooled trust preferred securities:

                   

Pretsl XXVII LTD

    B       B     $ 4,382     $ 2,602     $ (1,780   $ —         35/44       16.7     4.2     46.1

Trapeza Ser 13A

    A2A       BBB       9,505       5,603       (3,902     —         48/53       4.5     4.7     45.5
     

 

 

   

 

 

   

 

 

   

 

 

         
        13,887       8,205       (5,682     —            

Single Issuer trust preferred securities:

                   

JP Morgan Chase Cap XIII

      BBB-       4,783       4,550       (233     —            
     

 

 

   

 

 

   

 

 

   

 

 

         

Total

      $ 18,670     $ 12,755     $ (5,915   $ —            
     

 

 

   

 

 

   

 

 

   

 

 

         

 

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

NOTE 7 – LOANS HELD FOR SALE

Mortgage loans held for immediate sale in the secondary market were $26.2 million at June 30, 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 reaches the 10% threshold.

 

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The composition of loans by lending classification was as follows:

 

(dollars in thousands)

   June 30,
2018
     December 31,
2017
 

Commercial (1)

   $ 2,962,895      $ 2,717,269  

Commercial real estate:

     

Construction

     490,990        374,306  

Other

     3,960,782        3,980,246  

Residential real estate

     2,153,973        2,167,053  

Consumer credit:

     

Home equity

     488,038        507,507  

Auto

     1,099,745        1,148,672  

Other

     139,206        223,068  
  

 

 

    

 

 

 

Total loans

     11,295,629        11,118,121  

Allowance for loan losses

     (53,660      (50,381
  

 

 

    

 

 

 

Net loans

   $ 11,241,969      $ 11,067,740  
  

 

 

    

 

 

 

 

(1) Includes direct finance leases of $24.8 million at June 30, 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.

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 June 30, 2018.

 

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Table of Contents

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. 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. Old National 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 $68.2 million at December 31, 2017. Old National sold the remaining student loan portfolio totaling $64.9 million during the second quarter of 2018, resulting in a $2.2 million gain that is included in other income on the income statement.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level believed adequate by management to absorb probable losses incurred in the consolidated loan portfolio. Management’s evaluation of the adequacy of the allowance is an estimate based on reviews of individual loans, pools of homogeneous loans, assessments of the impact of current and anticipated economic conditions on the portfolio, and historical loss experience. The allowance is increased through a provision charged to operating expense. Loans deemed to be uncollectible are charged to the allowance. Recoveries of loans previously charged-off are added to the allowance.

We utilize a PD and LGD model as a tool to determine the adequacy of the allowance for loan losses for performing commercial and commercial real estate loans. The PD is forecast using a transition matrix to determine the likelihood of a customer’s AQR migrating from its current AQR to any other status within the time horizon. Transition rates are measured using Old National’s own historical experience. The model assumes that recent historical transition rates will continue into the future. The LGD is defined as credit loss incurred when an obligor of the bank defaults. The sum of all net charge-offs for a particular portfolio segment are divided by all loans that have defaulted over a given period of time. The expected loss derived from the model considers the PD, LGD, and exposure at default. Additionally, qualitative factors, such as changes in lending policies or procedures, and economic business conditions are also considered.

We use historic loss ratios adjusted for economic conditions to determine the appropriate level of allowance for residential real estate and consumer loans.

No allowance was brought forward on any of the acquired loans as any credit deterioration evident in the loans was included in the determination of the fair value of the loans at the acquisition date. An allowance for loan losses will be established for any subsequent credit deterioration or adverse changes in expected cash flows.

 

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Table of Contents

Old National’s activity in the allowance for loan losses for the three and six months ended June 30, 2018 and 2017 was as follows:

 

(dollars in thousands)

   Commercial     Commercial
Real Estate
    Residential     Consumer     Total  
          

Three Months Ended June 30, 2018

          

Balance at beginning of period

   $ 19,591     $ 20,796     $ 1,763     $ 8,231     $ 50,381  

Charge-offs

     (472     (430     (295     (1,857     (3,054

Recoveries

     249       583       1,697       1,358       3,887  

Provision

     2,019       1,549       (1,298     176       2,446  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 21,387     $ 22,498     $ 1,867     $ 7,908     $ 53,660  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended June 30, 2017

          

Balance at beginning of period

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

Charge-offs

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

Recoveries

     789       1,522       28       838       3,177  

Provision

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2018

          

Balance at beginning of period

   $ 19,246     $ 21,436     $ 1,763     $ 7,936     $ 50,381  

Charge-offs

     (717     (433     (657     (3,932     (5,739

Recoveries

     760       1,067       1,845       2,520       6,192  

Provision

     2,098       428       (1,084     1,384       2,826  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 21,387     $ 22,498     $ 1,867     $ 7,908     $ 53,660  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2017

          

Balance at beginning of period

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

Charge-offs

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

Recoveries

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

Provision

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The following table provides Old National’s recorded investment in loans by portfolio segment at June 30, 2018 and December 31, 2017 and other information regarding the allowance:

 

(dollars in thousands)

   Commercial      Commercial
Real Estate
     Residential      Consumer      Total  

June 30, 2018

              

Allowance for loan losses:

              

Individually evaluated for impairment

   $ 5,871      $ 8,162      $ —        $ —        $ 14,033  

Collectively evaluated for impairment

     15,409        14,267        1,865        7,760        39,301  

Loans acquired with deteriorated credit quality

     107        69        2        148        326  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total allowance for loan losses

   $ 21,387      $ 22,498      $ 1,867      $ 7,908      $ 53,660  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans and leases outstanding:

              

Individually evaluated for impairment

   $ 34,055      $ 75,320      $ —        $ —        $ 109,375  

Collectively evaluated for impairment

     2,924,481        4,355,891        2,143,658        1,722,747        11,146,777  

Loans acquired with deteriorated credit quality

     4,359        20,561        10,315        4,242        39,477  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans and leases outstanding

   $ 2,962,895      $ 4,451,772      $ 2,153,973      $ 1,726,989      $ 11,295,629  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

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.

 

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Table of Contents

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

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

The risk category of commercial and commercial real estate loans by class of loans at June 30, 2018 and December 31, 2017 was as follows:

 

(dollars in thousands)    Commercial      Commercial
Real Estate -
Construction
     Commercial
Real Estate -
Other
 

Corporate Credit Exposure

Credit Risk Profile by

Internally Assigned Grade

   June 30,
2018
     December 31,
2017
     June 30,
2018
     December 31,
2017
     June 30,
2018
     December 31,
2017
 
                 

Grade:

                 

Pass

   $ 2,815,085      $ 2,577,824      $ 467,663      $ 357,438      $ 3,765,884      $ 3,762,896  

Criticized

     70,168        74,876        14,882        14,758        69,841        98,451  

Classified - substandard

     41,382        37,367        —          —          62,595        58,584  

Classified - nonaccrual

     29,390        24,798        8,445        2,110        28,376        30,108  

Classified - doubtful

     6,870        2,404        —          —          34,086        30,207  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,962,895      $ 2,717,269      $ 490,990      $ 374,306      $ 3,960,782      $ 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 June 30, 2018 and December 31, 2017:

 

            Consumer  

(dollars in thousands)

   Residential      Home
Equity
     Auto      Other  

June 30, 2018

           

Performing

   $ 2,130,775      $ 483,350      $ 1,097,256      $ 137,666  

Nonperforming

     23,198        4,688        2,489        1,540  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,153,973      $ 488,038      $ 1,099,745      $ 139,206  
  

 

 

    

 

 

    

 

 

    

 

 

 

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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Table of Contents

The following table shows Old National’s impaired loans at June 30, 2018 and December 31, 2017, respectively. Only purchased loans that have experienced subsequent impairment since the date acquired (excluding loans acquired with deteriorated credit quality) are included in the table below.

 

(dollars in thousands)

   Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 

June 30, 2018

        

With no related allowance recorded:

        

Commercial

   $ 19,587      $ 20,337      $ —    

Commercial Real Estate - Other

     44,862        48,214        —    

Residential

     2,271        2,292        —    

Consumer

     1,483        1,601        —    

With an allowance recorded:

        

Commercial

     14,468        14,520        5,871  

Commercial Real Estate - Construction

     8,445        9,249        2,680  

Commercial Real Estate - Other

     22,013        22,065        5,482  

Residential

     935        935        47  

Consumer

     1,917        1,917        96  
  

 

 

    

 

 

    

 

 

 

Total

   $ 115,981      $ 121,130      $ 14,176  
  

 

 

    

 

 

    

 

 

 

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 and six months ended June 30, 2018 and 2017 are included in the table below.

 

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

(dollars in thousands)

   2018      2017      2018      2017  

Average Recorded Investment

           

With no related allowance recorded:

           

Commercial

   $ 20,228      $ 25,817      $ 20,073      $ 26,038  

Commercial Real Estate - Other

     43,893        34,682        41,771        32,598  

Residential

     2,189        2,376        2,274        2,121  

Consumer

     1,741        1,717        1,722        1,420  

With an allowance recorded:

           

Commercial

     11,846        8,448        10,091        7,996  

Commercial Real Estate - Construction

     4,675        —          4,675        —    

Commercial Real Estate - Other

     21,439        22,916        24,246        28,911  

Residential

     942        1,147        918        1,125  

Consumer

     1,970        2,069        2,050        2,021  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 108,923      $ 99,172      $ 107,820      $ 102,230  
  

 

 

    

 

 

    

 

 

    

 

 

 

Old National does not record interest on nonaccrual loans until principal is recovered. Interest income recognized on impaired loans during the three and six months ended June 30, 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 June 30, 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 (1)      Total
Past Due
     Current  

June 30, 2018

                 

Commercial

   $ 1,118      $ 3      $ 85      $ 36,260      $ 37,466      $ 2,925,429  

Commercial Real Estate:

                 

Construction

     —          —          —          8,445        8,445        482,545  

Other

     378        953        —          62,462        63,793        3,896,989  

Residential

     21,871        4,563        389        23,198        50,021        2,103,952  

Consumer:

                 

Home equity

     780        1,043        627        4,688        7,138        480,900  

Auto

     5,584        1,259        319        2,489        9,651        1,090,094  

Other

     330        379        155        1,540        2,404        136,802  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 30,061      $ 8,200      $ 1,575      $ 139,082      $ 178,918      $ 11,116,711  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes purchased credit impaired loans of $11.3 million at June 30, 2018 and $12.6 million at December 31, 2017 that are categorized as nonaccrual for credit analysis purposes because the collection of principal or interest is doubtful. However, these loans are accounted for under FASB ASC 310-30 and accordingly treated as performing assets.

Loan Participations

Old National has loan participations, which qualify as participating interests, with other financial institutions. At June 30, 2018, these loans totaled $820.2 million, of which $412.8 million had been sold to other financial institutions and $407.4 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 six months ended June 30, 2018 and 2017:

 

(dollars in thousands)

   Commercial     Commercial
Real Estate
    Residential     Consumer     Total  

Six Months Ended June 30, 2018

          

Balance at beginning of period

   $ 12,088     $ 34,705     $ 3,315     $ 3,895     $ 54,003  

(Charge-offs)/recoveries

     (151     (22     23       (22     (172

Payments

     (3,978     (969     (69     (907     (5,923

Additions

     1,084       1,213       502       432       3,231  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 9,043     $ 34,927     $ 3,771     $ 3,398     $ 51,139  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2017

          

Balance at beginning of period

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

(Charge-offs)/recoveries

     (64     360       —         (97     199  

Payments

     (6,116     (3,057     (283     (785     (10,241

Additions

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TDRs included with nonaccrual loans totaled $34.0 million at June 30, 2018 and December 31, 2017. Old National has allocated specific reserves to customers whose loan terms have been modified in TDRs totaling $4.8 million at June 30, 2018 and $5.7 million at December 31, 2017. At June 30, 2018, Old National had committed to lend an additional $4.0 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 six months ended June 30, 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 six months ended June 30, 2018 and 2017:

 

(dollars in thousands)

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

Six Months Ended June 30, 2018

        

TDR:

        

Commercial

     2      $ 1,084      $ 1,084  

Commercial Real Estate - Other

     2        1,213        1,213  

Residential

     1        502        502  

Consumer

     1        432        432  
  

 

 

    

 

 

    

 

 

 

Total

     6      $ 3,231      $ 3,231  
  

 

 

    

 

 

    

 

 

 

Six Months Ended June 30, 2017

        

TDR:

        

Commercial

     6      $ 9,442      $ 9,442  

Commercial Real Estate - Other

     10        17,429        17,429  

Residential

     6        938        938  

Consumer

     5        1,924        1,924  
  

 

 

    

 

 

    

 

 

 

Total

     27      $ 29,733      $ 29,733  
  

 

 

    

 

 

    

 

 

 

The TDRs that occurred during the six months ended June 30, 2018 did not have a material impact on the allowance for loan losses and resulted in no charge-offs during the six months ended June 30, 2018. The TDRs that occurred during the six months ended June 30, 2017 increased the allowance for loan losses by $3.4 million and resulted in no charge-offs.

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 six months ended June 30, 2018 and 2017.

The terms of certain other loans were modified during 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 June 30, 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

 

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credit evaluation at the time of the restructuring, (2) under the terms of the subsequent restructuring agreement, the institution has granted no concession to the borrower; and (3) the subsequent restructuring agreement includes market terms that are no less favorable than those that would be offered for a comparable new loan. For loans subsequently restructured that have cumulative principal forgiveness, the loan should continue to be measured in accordance with ASC 310-10, Receivables – Overall. However, consistent with ASC 310-40-50-2, Troubled Debt Restructurings by Creditors, Creditor Disclosure of Troubled Debt Restructurings, the loan would not be required to be reported in the years following the restructuring if the subsequent restructuring meets both of these criteria: (1) has an interest rate at the time of the subsequent restructuring that is not less than a market interest rate; and (2) is performing in compliance with its modified terms after the subsequent restructuring.

Purchased Credit Impaired Loans

Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date with no carryover of the related allowance for loan and lease losses. In determining the estimated fair value of purchased loans, management considers a number of factors including, among others, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, and net present value of cash flows expected to be received. Purchased loans are accounted for in accordance with guidance for certain loans acquired in a transfer (ASC 310-30), when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that the acquirer will not collect all contractually required principal and interest payments. The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference. Subsequent decreases to the expected cash flows will generally result in a provision for loan and lease losses. Subsequent increases in expected cash flows will result in a reversal of the provision for loan losses to the extent of prior charges and then an adjustment to accretable yield, which would have a positive impact on interest income prospectively.

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

 

(dollars in thousands)

   June 30,
2018
     December 31,
2017
 
     

Commercial

   $ 4,359      $ 5,152  

Commercial real estate

     20,561        21,826  

Residential

     4,242        11,303  

Consumer

     10,315        5,245  
  

 

 

    

 

 

 

Carrying amount

     39,477        43,526  

Allowance for loan losses

     (326      (166
  

 

 

    

 

 

 

Carrying amount, net of allowance

   $ 39,151      $ 43,360  
  

 

 

    

 

 

 

The outstanding balance of loans accounted for under ASC 310-30, including contractual principal, interest, fees and penalties, was $240.9 million at June 30, 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 $7.1 million during the six months ended June 30, 2018 and $7.3 million during the six months ended June 30, 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:

 

     Six Months Ended
June 30,
 

(dollars in thousands)

   2018      2017  

Balance at beginning of period

   $ 27,835      $ 33,603  

Accretion of income

     (7,073      (7,330

Reclassifications from (to) nonaccretable difference

     3,466        594  

Disposals/other adjustments

     21        183  
  

 

 

    

 

 

 

Balance at end of period

   $ 24,249      $ 27,050  
  

 

 

    

 

 

 

Included in Old National’s allowance for loan losses is $0.3 million related to the purchased loans disclosed above at June 30, 2018 and $0.2 million at 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 six months ended June 30, 2018 and 2017:

 

     Six Months Ended
June 30,
 

(dollars in thousands)

   2018      2017  

Balance at beginning of period

   $ 8,810      $ 18,546  

Additions

     1,175        950  

Sales

     (5,625      (6,552

Impairment

     (631      (1,873
  

 

 

    

 

 

 

Balance at end of period (1)

   $ 3,729      $ 11,071  
  

 

 

    

 

 

 

 

(1) Includes repossessed personal property of $0.3 million at June 30, 2018 and $0.2 million at June 30, 2017.

At June 30, 2018, foreclosed residential real estate property included in the table above totaled $1.3 million. At June 30, 2018, consumer mortgage loans collateralized by residential real property that were in the process of foreclosure totaled $6.3 million.

 

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Table of Contents

NOTE 10 – PREMISES AND EQUIPMENT

The composition of premises and equipment at June 30, 2018 and December 31, 2017 was as follows:

 

(dollars in thousands)

   June 30,
2018
     December 31,
2017
 

Land

   $ 70,628      $ 73,046  

Buildings

     339,378        343,833  

Furniture, fixtures, and equipment

     98,793        94,254  

Leasehold improvements

     40,165        38,918  
  

 

 

    

 

 

 

Total

     548,964        550,051  

Accumulated depreciation

     (99,660      (91,977
  

 

 

    

 

 

 

Premises and equipment, net

   $ 449,304      $ 458,074  
  

 

 

    

 

 

 

Depreciation expense was $5.9 million for the three months ended June 30, 2018 and $11.8 million for the six months ended June 30, 2018, compared to $5.2 million for the three months ended June 30, 2017 and $10.4 million for the six months ended June 30, 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 $4.5 million for the three months ended June 30, 2018 and $8.9 million for the six months ended June 30, 2018, compared to $3.8 million for the three months ended June 30, 2017 and $7.7 million for the six months ended June 30, 2017.

Old National had deferred gains remaining associated with prior sale leaseback transactions totaling $7.3 million at June 30, 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 six months ended June 30, 2018 and 2017:

 

     Six Months Ended
June 30,
 

(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 six months ended June 30, 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 June 30, 2018 and December 31, 2017 were as follows:

 

(dollars in thousands)

  

 

     Gross
Carrying
Amount
     Accumulated
Amortization
and Impairment
     Net
Carrying
Amount
 

June 30, 2018

           

Core deposit

      $ 108,268      $ (69,065    $ 39,203  

Customer trust relationships

 

     16,547        (10,333      6,214  
  

 

 

    

 

 

    

 

 

 

Total intangible assets

 

   $ 124,815      $ (79,398    $ 45,417  
  

 

 

    

 

 

    

 

 

 

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 six months ended June 30, 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 six months ended June 30, 2018 or 2017. Total amortization expense associated with intangible assets was $7.0 million for the six months ended June 30, 2018 and $5.8 million for the six months ended June 30, 2017.

Estimated amortization expense for future years is as follows:

 

(dollars in thousands)

      

2018 remaining

   $ 6,399  

2019

     11,010  

2020

     8,672  

2021

     6,417  

2022

     4,595  

Thereafter

     8,324  
  

 

 

 

Total

   $ 45,417  
  

 

 

 

NOTE 12 – LOAN SERVICING RIGHTS

At June 30, 2018, loan servicing rights derived from loans sold with servicing retained totaled $24.3 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 $3.306 billion at June 30, 2018, compared to $3.321 billion at December 31, 2017. Approximately 99.7% of the loans serviced for others at June 30, 2018 were residential mortgage loans. Custodial escrow balances maintained in connection with serviced loans were $37.8 million at June 30, 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 six months ended June 30, 2018 and 2017:

 

    

Six Months Ended

June 30,

 

(dollars in thousands)

   2018      2017  

Balance at beginning of period

   $ 24,690      $ 25,629  

Additions

     1,951        1,976  

Amortization

     (2,323      (2,507
  

 

 

    

 

 

 

Balance before valuation allowance at end of period

     24,318        25,098  
  

 

 

    

 

 

 

Valuation allowance:

     

Balance at beginning of period

     (29      (68

(Additions)/recoveries

     14        (7
  

 

 

    

 

 

 

Balance at end of period

     (15      (75
  

 

 

    

 

 

 

Loan servicing rights, net

   $ 24,303      $ 25,023  
  

 

 

    

 

 

 

At June 30, 2018, the fair value of servicing rights was $27.0 million, which was determined using a discount rate of 13% and a weighted average prepayment speed of 115% 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, renewable energy, or other renovation or community revitalization projects. As of June 30, 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 June 30, 2018 and December 31, 2017:

 

(dollars in thousands)         June 30, 2018      December 31, 2017  

Investment

  

Accounting Method

   Investment      Unfunded
Commitment (1)
     Investment      Unfunded
Commitment
 

LIHTC

   Proportional amortization    $ 29,802      $ 6,719      $ 31,183      $ 15,553  

FHTC

   Equity      5,201        10,710        10,645        12,040  

CReED

   Equity      704        1,502        704        1,502  

Renewable Energy

   Equity      15,136        18,588        22,364        19,771  
     

 

 

    

 

 

    

 

 

    

 

 

 

Total

      $ 50,843      $ 37,519      $ 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 and six months ended June 30, 2018 and 2017:

 

(dollars in thousands)

   Amortization
Expense (1)
     Tax Expense
(Benefit)
Recognized (2)
 

Three Months Ended June 30, 2018

     

LIHTC

   $ 643      $ (831

FHTC

     5,444        (1,948

Renewable Energy

     6,414        (2,882
  

 

 

    

 

 

 

Total

   $ 12,501      $ (5,661
  

 

 

    

 

 

 

Three Months Ended June 30, 2017

     

LIHTC

   $ 940      $ (1,298

FHTC

     —          (1,519

CReED (3)

     —          (606
  

 

 

    

 

 

 

Total

   $ 940      $ (3,423
  

 

 

    

 

 

 

Six Months Ended June 30, 2018

     

LIHTC

   $ 1,282      $ (1,662

FHTC

     5,444        (3,896

Renewable Energy

     7,129        (6,296
  

 

 

    

 

 

 

Total

   $ 13,855      $ (11,854
  

 

 

    

 

 

 

Six Months Ended June 30, 2017

     

LIHTC

   $ 1,881      $ (2,595

FHTC

     —          (3,039

CReED (3)

     —          (606
  

 

 

    

 

 

 

Total

   $ 1,881      $ (6,240
  

 

 

    

 

 

 

 

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

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 six months ended June 30:

 

(dollars in thousands)

   2018     2017  

Outstanding at June 30,

   $ 347,511     $ 298,094  

Average amount outstanding

     337,612       330,285  

Maximum amount outstanding at any month-end

     347,511       351,897  

Weighted average interest rate:

    

During the six months ended June 30,

     0.47     0.36

At June 30,

     0.59       0.41  

 

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

 

     At June 30, 2018  
     Remaining Contractual Maturity of the Agreements  

(dollars in thousands)

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

Repurchase Agreements:

              

U.S. Treasury and agency securities

   $ 347,511      $ —        $ —        $ —        $ 347,511  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 347,511      $ —        $ —        $ —        $ 347,511  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The fair value of securities pledged to secure repurchase agreements may decline. Old National has pledged securities valued at 109% of the gross outstanding balance of repurchase agreements at June 30, 2018 to manage this risk.

NOTE 15 – FEDERAL HOME LOAN BANK ADVANCES

The following table summarizes Old National Bank’s FHLB advances at June 30, 2018 and December 31, 2017:

 

     June 30,      December 31,  

(dollars in thousands)

   2018      2017  

FHLB advances (fixed rates 1.50% to 6.08% and variable rates 2.23% to 2.50%) maturing July 2018 to June 2028

   $ 1,756,730      $ 1,610,531  

ASC 815 fair value hedge and other basis adjustments

     578        (952
  

 

 

    

 

 

 

Total other borrowings

   $ 1,757,308      $ 1,609,579  
  

 

 

    

 

 

 

FHLB advances had weighted-average rates of 2.29% at June 30, 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 June 30, 2018 were as follows:

 

(dollars in thousands)

      

Due in 2018

   $ 626,567  

Due in 2019

     201,494  

Due in 2020

     100,000  

Due in 2021

     20,000  

Due in 2022

     58,500  

Thereafter

     750,169  

ASC 815 fair value hedge and other basis adjustments

     578  
  

 

 

 

Total

   $ 1,757,308  
  

 

 

 

 

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NOTE 16 – OTHER BORROWINGS

The following table summarizes Old National’s other borrowings at June 30, 2018 and December 31, 2017:

 

     June 30,      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

     (949      (1,026

Junior subordinated debentures (variable rates of 3.68% to 6.22%) maturing April 2032 to September 2037

     60,310        60,310  

Other basis adjustments

     (3,318      (3,585

Old National Bank:

     

Capital lease obligations

     5,326        5,389  

Subordinated debentures (fixed rate 5.75%)

     12,000        12,000  

Other

     1,872        694  
  

 

 

    

 

 

 

Total other borrowings

   $ 250,241      $ 248,782  
  

 

 

    

 

 

 

Contractual maturities of other borrowings at June 30, 2018 were as follows:

 

(dollars in thousands)

      

Due in 2018

   $ 1,286  

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

     (3,617
  

 

 

 

Total

   $ 250,241  
  

 

 

 

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 June 30, 2018:

 

(dollars in thousands)                     Rate at      
          Issuance           June 30,      

Name of Trust

  

Issuance Date

   Amount     

Rate

   2018    

Maturity Date

VFSC Capital Trust I

   April 2002    $ 3,093      3-month LIBOR plus 3.70%      6.22   April 22, 2032

VFSC Capital Trust II

   October 2002      4,124      3-month LIBOR plus 3.45%      5.79   November 7, 2032

VFSC Capital Trust III

   April 2004      3,093      3-month LIBOR plus 2.80%      5.12   September 8, 2034

St. Joseph Capital Trust II

   March 2005      5,000      3-month LIBOR plus 1.75%      4.08   March 20, 2035

Anchor Capital Trust III

   August 2005      5,000      3-month LIBOR plus 1.55%      3.89   September 30, 2035

Tower Capital Trust 2

   December 2005      8,000      3-month LIBOR plus 1.34%      3.68   December 4, 2035

Home Federal Statutory Trust I

   September 2006      15,000      3-month LIBOR plus 1.65%      3.99   September 15, 2036

Monroe Bancorp Capital Trust I

   July 2006      3,000      3-month LIBOR plus 1.60%      3.95   October 7, 2036

Monroe Bancorp Statutory Trust II

   March 2007      5,000      3-month LIBOR plus 1.60%      3.94   June 15, 2037

Tower Capital Trust 3

   December 2006      9,000      3-month LIBOR plus 1.69%      3.99   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 June 30, 2018, the future minimum lease payments under the capital lease arrangements were as follows:

 

(dollars in thousands)

      

2018

   $ 284  

2019

     589  

2020

     589  

2021

     589  

2022

     589  

Thereafter

     9,275  
  

 

 

 

Total minimum lease payments

     11,915  

Less amounts representing interest

     (6,589
  

 

 

 

Present value of net minimum lease payments

   $ 5,326  
  

 

 

 

 

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NOTE 17 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table summarizes the changes within each classification of AOCI, net of tax, for the three and six months ended June 30, 2018 and 2017:

 

(dollars in thousands)

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

Three Months Ended June 30, 2018

          

Balance at beginning of period

   $ (52,605   $ (9,737   $ 1,126     $ (310   $ (61,526

Other comprehensive income (loss) before reclassifications

     (5,615     —         1,143       —         (4,472

Amounts reclassified from AOCI to income (1)

     (1,136     402       8       21       (705
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ (59,356   $ (9,335   $ 2,277     $ (289   $ (66,703
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended June 30, 2017

          

Balance at beginning of period

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

Other comprehensive income (loss) before reclassifications

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

Amounts reclassified from AOCI to income (1)

     (1,957     298       1,075       17       (567
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2018

          

Balance at beginning of period

   $ (35,557   $ (12,107   $ (2,337   $ (271   $ (50,272

Other comprehensive income (loss) before reclassifications

     (14,486     4,514       4,587       —         (5,385

Amounts reclassified from AOCI to income (1)

     (1,730     858       588       41       (243

Amount reclassified from AOCI to retained earnings for cumulative effect of change in accounting principle (2)

     —         —         (52     —         (52

Amounts reclassified from AOCI to retained earnings related to the Tax Cuts and Jobs Act of 2017 (3)

     (7,583     (2,600     (509     (59     (10,751
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ (59,356   $ (9,335   $ 2,277     $ (289   $ (66,703
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2017

          

Balance at beginning of period

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

Other comprehensive income (loss) before reclassifications

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

Amounts reclassified from AOCI to income (1)

     (2,904     593       2,190       34       (87
  

 

 

   

 

 </