XNYS:ONB Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2012

 

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

For the transition period from                     to                     

Commission File Number 1-15817

 

 

OLD NATIONAL BANCORP

(Exact name of Registrant as specified in its charter)

 

 

 

INDIANA   35-1539838

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

One Main Street

Evansville, Indiana

  47708
(Address of principal executive offices)   (Zip Code)

(812) 464-1294

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days.    Yes  x    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  x    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

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 94,674,000 shares outstanding at March 31, 2012.

 

 

 


OLD NATIONAL BANCORP

FORM 10-Q

INDEX

 

         Page No.  

PART I.

  FINANCIAL INFORMATION   

Item 1.

  Financial Statements   
 

Consolidated Balance Sheets

March 31, 2012 (unaudited), December 31, 2011 and March 31, 2011 (unaudited)

     3   
 

Consolidated Statements of Income (unaudited)

Three months ended March 31, 2012 and 2011

     4   
 

Consolidated Statements of Comprehensive Income (unaudited)

Three months ended March 31, 2012 and 2011

     5   
 

Consolidated Statements of Changes in Shareholders’ Equity (unaudited)

Three months ended March 31, 2012 and 2011

     6   
 

Consolidated Statements of Cash Flows (unaudited)

Three months ended March 31, 2012 and 2011

     7   
  Notes to Consolidated Financial Statements (unaudited)      8   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      55   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      80   

Item 4.

  Controls and Procedures      80   

PART II

  OTHER INFORMATION      81   

SIGNATURES

     87   

 

2


OLD NATIONAL BANCORP

CONSOLIDATED BALANCE SHEETS

 

     March 31,     December 31,     March 31,  

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

   2012     2011     2011  
   (unaudited)           (unaudited)  

Assets

      

Cash and due from banks

   $ 143,584      $ 191,626      $ 127,948   

Money market and other interest-earning investments

     16,857        31,246        285,030   
  

 

 

   

 

 

   

 

 

 

Total cash and cash equivalents

     160,441        222,872        412,978   

Trading securities—at fair value

     2,972        2,816        3,861   

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

      

U.S. Treasury

     65,496        65,769        62,754   

U.S. Government-sponsored entities and agencies

     276,002        173,185        373,546   

Mortgage-backed securities

     1,295,776        1,268,155        1,101,875   

States and political subdivisions

     449,083        402,844        342,179   

Other securities

     165,825        161,323        170,942   
  

 

 

   

 

 

   

 

 

 

Total investment securities—available-for-sale

     2,252,182        2,071,276        2,051,296   

Investment securities—held-to-maturity, at amortized cost (fair value $496,356, $507,699 and $599,936 respectively)

     472,377        484,590        607,272   

Federal Home Loan Bank stock, at cost

     30,835        30,835        34,260   

Residential loans held for sale, at fair value

     3,883        4,528        3,144   

Loans:

      

Commercial

     1,180,535        1,216,654        1,274,312   

Commercial real estate

     1,026,899        1,067,370        1,218,415   

Residential real estate

     1,059,977        995,458        779,764   

Consumer credit, net of unearned income

     847,274        861,361        918,265   

Covered loans, net of discount

     548,552        626,360        —     
  

 

 

   

 

 

   

 

 

 

Total loans

     4,663,237        4,767,203        4,190,756   

Allowance for loan losses

     (54,726     (57,117     (72,749

Allowance for loan losses—covered loans

     (1,190     (943     —     
  

 

 

   

 

 

   

 

 

 

Net loans

     4,607,321        4,709,143        4,118,007   
  

 

 

   

 

 

   

 

 

 

FDIC indemnification asset

     136,919        147,566        —     

Premises and equipment, net

     73,089        71,870        66,729   

Accrued interest receivable

     42,281        44,801        42,311   

Goodwill

     253,177        253,177        236,309   

Other intangible assets

     31,603        33,624        34,738   

Company-owned life insurance

     250,164        248,693        244,543   

Assets held for sale

     16,816        16,861        —     

Other real estate owned and repossessed personal property

     6,474        7,119        14,124   

Other real estate owned—covered

     24,705        30,443        —     

Other assets

     215,819        229,469        215,738   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 8,581,058      $ 8,609,683      $ 8,085,310   
  

 

 

   

 

 

   

 

 

 

Liabilities

      

Deposits:

      

Noninterest-bearing demand

   $ 1,767,972      $ 1,728,546      $ 1,421,424   

Interest-bearing:

      

NOW

     1,558,007        1,569,084        1,448,002   

Savings

     1,672,196        1,570,422        1,192,046   

Money market

     295,347        295,847        353,950   

Time

     1,374,255        1,447,664        1,644,507   
  

 

 

   

 

 

   

 

 

 

Total deposits

     6,667,777        6,611,563        6,059,929   

Short-term borrowings

     352,758        424,849        374,259   

Other borrowings

     289,477        290,774        439,566   

Accrued expenses and other liabilities

     220,635        248,941        227,541   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     7,530,647        7,576,127        7,101,295   
  

 

 

   

 

 

   

 

 

 

Shareholders’ Equity

      

Preferred stock, series A, 1,000 shares authorized, no shares issued or outstanding

     —          —          —     

Common stock, $1 stated value, 150,000 shares authorized, 94,674, 94,654 and 94,734 shares issued and outstanding, respectively

     94,674        94,654        94,734   

Capital surplus

     833,976        834,033        831,990   

Retained earnings

     103,034        89,865        53,821   

Accumulated other comprehensive income, net of tax

     18,727        15,004        3,470   
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     1,050,411        1,033,556        984,015   
  

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 8,581,058      $ 8,609,683      $ 8,085,310   
  

 

 

   

 

 

   

 

 

 

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

 

3


OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

 

     Three Months Ended  
     March 31,  

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

   2012     2011  

Interest Income

    

Loans including fees:

    

Taxable

   $ 62,130      $ 50,305   

Nontaxable

     2,219        2,322   

Investment securities, available-for-sale:

    

Taxable

     11,344        13,658   

Nontaxable

     3,580        3,521   

Investment securities, held-to-maturity, taxable

     4,975        6,412   

Money market and other interest-earning investments

     15        99   
  

 

 

   

 

 

 

Total interest income

     84,263        76,317   
  

 

 

   

 

 

 

Interest Expense

    

Deposits

     7,682        10,003   

Short-term borrowings

     127        144   

Other borrowings

     2,181        4,803   
  

 

 

   

 

 

 

Total interest expense

     9,990        14,950   
  

 

 

   

 

 

 

Net interest income

     74,273        61,367   

Provision for loan losses

     2,056        3,312   
  

 

 

   

 

 

 

Net interest income after provision for loan losses

     72,217        58,055   
  

 

 

   

 

 

 

Noninterest Income

    

Wealth management fees

     5,096        5,100   

Service charges on deposit accounts

     12,862        11,550   

ATM fees

     6,333        5,891   

Mortgage banking revenue

     559        952   

Insurance premiums and commissions

     9,614        10,570   

Investment product fees

     2,931        2,594   

Company-owned life insurance

     1,495        1,172   

Net securities gains

     619        1,499   

Total other-than-temporary impairment losses

     (96     (299

Loss recognized in other comprehensive income

     —          —     
  

 

 

   

 

 

 

Impairment losses recognized in earnings

     (96     (299

Gain on derivatives

     182        332   

Gain on sale leaseback transactions

     1,607        1,636   

Change in FDIC indemnification asset

     4,764        —     

Other income

     3,167        1,824   
  

 

 

   

 

 

 

Total noninterest income

     49,133        42,821   
  

 

 

   

 

 

 

Noninterest Expense

    

Salaries and employee benefits

     46,046        44,521   

Occupancy

     12,460        12,302   

Equipment

     2,856        2,997   

Marketing

     1,442        1,317   

Data processing

     5,469        6,065   

Communication

     2,824        2,334   

Professional fees

     2,724        2,423   

Loan expense

     1,608        1,087   

Supplies

     758        613   

FDIC assessment

     1,395        2,191   

Other real estate owned expense

     9,807        338   

Amortization of intangibles

     2,021        1,924   

Other expense

     1,877        1,813   
  

 

 

   

 

 

 

Total noninterest expense

     91,287        79,925   
  

 

 

   

 

 

 

Income before income taxes

     30,063        20,951   

Income tax expense

     8,340        4,518   
  

 

 

   

 

 

 

Net income

     21,723      $ 16,433   
  

 

 

   

 

 

 

Net income per common share—basic

   $ 0.23      $ 0.17   

Net income per common share—diluted

     0.23        0.17   
  

 

 

   

 

 

 

Weighted average number of common shares outstanding-basic

     94,445        94,433   

Weighted average number of common shares outstanding-diluted

     94,833        94,670   
  

 

 

   

 

 

 

Dividends per common share

   $ 0.09      $ 0.07   

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

 

4


OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

 

     Three Months Ended  
     March 31,  

(dollars in thousands)

   2012     2011  

Net income

   $ 21,723      $ 16,433   

Other comprehensive income

    

Change in securities available-for-sale:

    

Unrealized holding gains for the period

     6,240        8,523   

Reclassification adjustment for securities gains realized in income

     (619     (1,499

Other-than-temporary-impairment on available-for-sale securities associated with credit loss realized in income

     96        299   

Income tax effect

     (2,316     (2,682
  

 

 

   

 

 

 

Unrealized gains on available-for-sale securities

     3,401        4,641   

Change in securities held-to-maturity:

    

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

     (230     (493

Income tax effect

     92        197   
  

 

 

   

 

 

 

Changes from securities held-to-maturity

     (138     (296

Cash flow hedges:

    

Net unrealized derivative gains (losses) on cash flow hedges

     (240     (318

Reclassification adjustment on cash flow hedges

     —          72   

Income tax effect

     96        99   
  

 

 

   

 

 

 

Changes from cash flow hedges

     (144     (147

Defined benefit pension plans:

    

Amortization of net loss recognized in income

     1,007        903   

Income tax effect

     (403     (362
  

 

 

   

 

 

 

Changes from defined benefit pension plans

     604        541   
  

 

 

   

 

 

 

Other comprehensive income, net of tax

     3,723        4,739   
  

 

 

   

 

 

 

Comprehensive income

   $ 25,446      $ 21,172   
  

 

 

   

 

 

 

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

 

 

5


OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)

 

                      Accumulated        
                      Other     Total  
(dollars and shares   Common     Capital     Retained     Comprehensive     Shareholders’  

in thousands)            

  Stock     Surplus     Earnings     Income (Loss)     Equity  

Balance, December 31, 2010

  $ 87,183      $ 748,873      $ 44,018      $ (1,269   $ 878,805   

Comprehensive income

         

Net income

    —          —          16,433        —          16,433   

Other comprehensive income

         

Change in unrealized gain (loss) on securities available for sale, net of reclassification and tax

    —          —          —          4,641        4,641   

Transferred securities, net of tax

    —          —          —          (296     (296

Reclassification adjustment on cash flows hedges, net of tax

    —          —          —          (147     (147

Net loss, settlement cost and amortization of net (gain) loss on defined benefit pension plans, net of tax

    —          —          —          541        541   

Acquisition—Monroe Bancorp

    7,575        82,495        —          —          90,070   

Dividends—common stock

    —          —          (6,630     —          (6,630

Common stock issued

    5        51        —          —          56   

Common stock repurchased

    (32     (299     —          —          (331

Stock based compensation expense

    —          777        —          —          777   

Stock activity under incentive comp plans

    3        93        —          —          96   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2011

  $ 94,734      $ 831,990      $ 53,821      $ 3,470      $ 984,015   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

  $ 94,654      $ 834,033      $ 89,865      $ 15,004      $ 1,033,556   

Comprehensive income

         

Net income

    —          —          21,723        —          21,723   

Other comprehensive income

         

Change in unrealized gain (loss) on securities available for sale, net of reclassification and tax

    —          —          —          3,401        3,401   

Transferred securities, net of tax

    —          —          —          (138     (138

Reclassification adjustment on cash flows hedges, net of tax

    —          —          —          (144     (144

Net loss, settlement cost and amortization of net (gain) loss on defined benefit pension plans, net of tax

    —          —          —          604        604   

Dividends—common stock

    —          —          (8,510     —          (8,510

Common stock issued

    5        55        —          —          60   

Common stock repurchased

    (55     (631     —          —          (686

Stock based compensation expense

    —          499        —          —          499   

Stock activity under incentive comp plans

    70        20        (44     —          46   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2012

  $ 94,674      $ 833,976      $ 103,034      $ 18,727      $ 1,050,411   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

6


OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

 

     Three Months Ended  
     March 31,  

(dollars in thousands)

   2012     2011  

Cash Flows From Operating Activities

    

Net income

   $ 21,723      $ 16,433   
  

 

 

   

 

 

 

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

    

Depreciation

     2,295        2,555   

Amortization and impairment of other intangible assets

     2,021        1,924   

Net premium amortization on investment securities

     3,728        2,006   

Accretion of FDIC indemnification asset

     (4,764     —     

Stock compensation expense

     499        777   

Provision for loan losses

     2,056        3,312   

Net securities gains

     (619     (1,499

Impairment on available-for-sale securities

     96        299   

Gain on sale leasebacks

     (1,607     (1,636

Gain on derivatives

     (182     (332

Net gains on sales of loans

     (374     (576

Increase in cash surrender value of company owned life insurance

     (1,471     (1,145

Residential real estate loans originated for sale

     (12,003     (21,757

Proceeds from sale of residential real estate loans

     13,022        29,336   

Decrease in interest receivable

     2,520        2,563   

Decrease in other real estate owned

     6,383        539   

Decrease in other assets

     5,911        2,212   

Increase (decrease) in accrued expenses and other liabilities

     (25,691     21,988   
  

 

 

   

 

 

 

Total adjustments

     (8,180     40,566   
  

 

 

   

 

 

 

Net cash flows provided by operating activities

     13,543        56,999   
  

 

 

   

 

 

 

Cash Flows From Investing Activities

    

Cash and cash equivalents of acquired banks

     —          83,604   

Purchases of investment securities available-for-sale

     (290,983     (141,503

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

     100,032        144,367   

Proceeds from sales of investment securities available-for-sale

     13,423        54,356   

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

     11,157        36,108   

Proceeds from sale of loans

     782        4,624   

Reimbursements under FDIC loss share agreements

     19,221        —     

Net principal collected from (loans made to) customers

     98,983        (7,780

Proceeds from sale of premises and equipment and other assets

     3        168   

Purchases of premises and equipment and other assets

     (3,475     (712
  

 

 

   

 

 

 

Net cash flows provided by (used in) investing activities

     (50,857     173,232   
  

 

 

   

 

 

 

Cash Flows From Financing Activities

    

Net increase (decrease) in deposits and short-term borrowings:

    

Deposits

     56,214        (57,057

Short-term borrowings

     (72,091     13,498   

Payments for maturities on other borrowings

     (104     (98

Payments related to retirement of debt

     —          (18,333

Cash dividends paid on common stock

     (8,510     (6,630

Common stock repurchased

     (686     (331

Proceeds from exercise of stock options, including tax benefit

     —          90   

Common stock issued

     60        56   
  

 

 

   

 

 

 

Net cash flows used in financing activities

     (25,117     (68,805
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (62,431     161,426   

Cash and cash equivalents at beginning of period

     222,872        251,552   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 160,441      $ 412,978   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Total interest paid

   $ 10,608      $ 12,724   

Total taxes paid (net of refunds)

   $ 2,600      $ —     

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

 

 

7


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. The allowance for loan losses, acquired impaired loans, valuation and impairment of securities, goodwill and intangibles, derivative financial instruments, and income taxes are particularly subject to change. In the opinion of management, the consolidated financial statements contain all the normal and recurring adjustments necessary for a fair statement of the financial position of Old National as of March 31, 2012 and 2011, and December 31, 2011, and the results of its operations for the three months ended March 31, 2012 and 2011. 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, 2011.

All significant intercompany transactions and balances have been eliminated. Certain prior year amounts have been reclassified to conform with the 2012 presentation. Such reclassifications had no effect on net income or shareholders’ equity.

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

FASB ASC 820 – In May 2011, the FASB issued an update (ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs) impacting FASB ASC 820, Fair Value Measurement. The amendments in this update will improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards (“IFRSs”). Among the many areas affected by this update are the concept of highest and best use, the fair value of an instrument included in shareholders’ equity and disclosures about fair value measurement, especially disclosures about fair value measurements categorized within Level 3 of the fair value hierarchy. This update became effective for the Company for interim and annual reporting periods beginning after December 15, 2011 and did not have a material impact on the consolidated financial statements.

FASB ASC 220 – In June 2011, the FASB issued an update (ASU No. 2011-05, Presentation of Comprehensive Income) impacting FASB ASC 220, Comprehensive Income. The amendments in this update eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. An entity will have the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. An entity will be required to present on the face of financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income. This update and ASC No. 2011-12, which defers a portion of this guidance, became effective for the Company for interim and annual reporting periods beginning after December 15, 2011 and did not have a material impact on the consolidated financial statements.

FASB ASC 350 – In September 2011, the FASB issued an update (ASU No. 2011-08, Testing Goodwill for Impairment) impacting FASB ASC 350-20, Intangibles – Goodwill and Other. The amendments in this update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than the carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The more likely than not threshold is defined as having a likelihood of more than 50 percent. If after assessing the totality of events or circumstances, it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. If an entity concludes that it is more likely than not that the fair value of the reporting unit is less than the carrying amount, the entity is required to perform the first step of the two-step impairment. If the carrying amount of a reporting unit exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss. This update is effective for the Company for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The Company does not expect this guidance to have a material impact on the consolidated financial statements.

 

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FASB ASC 360 – In December 2011, the FASB issued an update (ASU No. 2011-10, Derecognition of in Substance Real Estate – a Scope Clarification) impacting FASB ASC 360-20, Property, Plant, and Equipment – Real Estate Sales. Under the amendments in this update, when a parent (reporting entity) ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance in Subtopic 360-20 to determine whether it should derecognize the in substance real estate. Generally, a reporting entity would not satisfy the requirements to derecognize the in substance real estate before the legal transfer of the real estate to the lender and the extinguishment of the related nonrecourse debt. This update becomes effective for the Company for interim and annual reporting periods beginning on or after June 15, 2012. The Company 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 210 – In December 2011, the FASB issued an update (ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities) impacting FASB ASC 210-20, Balance Sheet—Offsetting. The amendments in this update require disclosure of both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The disclosure requirements are irrespective of whether they are offset in the financial statements. This update becomes effective for the Company for interim and annual reporting periods beginning on or after January 1, 2013. The Company 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 December 2011, the FASB issued an update (ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05) impacting FASB ASC 220, Comprehensive Income. This update defers the requirement to present items that are reclassified from accumulated other comprehensive income to net income in both the statement where net income is presented and the statement where other comprehensive income is presented. An entity should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU No. 2011-05. This update became effective for the Company for interim and annual reporting periods beginning after December 15, 2011 and did not have a material impact on the consolidated financial statements.

NOTE 3 – ACQUISITION AND DIVESTITURE ACTIVITY

Integra Bank N.A.

On July 29, 2011, Old National acquired the banking operations of Integra Bank N.A. in an FDIC assisted transaction. As part of the purchase and assumption agreement, the Company and the FDIC entered into loss sharing agreements whereby the FDIC will cover a substantial portion of any future losses on loans (and related unfunded commitments), other real estate owned and up to 90 days of certain accrued interest on loans. The acquired loans and OREO subject to the loss sharing agreements are referred to collectively as “covered assets.” Under the terms of the loss sharing agreements, the FDIC will reimburse Old National for 80% of losses up to $275.0 million, losses in excess of $275.0 million up to $467.2 million at 0% reimbursement, and 80% of losses in excess of $467.2 million. Old National will reimburse the FDIC for its share of recoveries with respect to losses for which the FDIC has reimbursed the Bank under the loss sharing agreements. The loss sharing provisions of the agreements for commercial and single family residential mortgage loans are in effect for five and ten years, respectively, from the July 29, 2011 acquisition date and the loss recovery provisions for such loans are in effect for eight years and ten years, respectively, from the acquisition date.

Integra was a full service community bank headquartered in Evansville, Indiana that operated 52 branch locations. We entered into this transaction due to the attractiveness in the pricing of the acquired loan portfolio, including the indemnification assets, and the attractiveness of immediate low cost core deposits. We also believed there were opportunities to enhance income and improve efficiencies. We believe participating with the FDIC in this assisted transaction was advantageous to the Company.

 

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The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the July 29, 2011 acquisition date. The application of the acquisition method of accounting resulted in the recognition of $16.9 million of goodwill and $4.3 million of core deposit intangible, after tax. The goodwill represents the excess of the estimated fair value of the liabilities assumed over the estimated fair value of the assets acquired and is influenced significantly by the FDIC-assisted transaction process. Goodwill of $29.0 million is deductible for income tax purposes.

Due primarily to the significant amount of fair value adjustments and the FDIC loss sharing agreements put in place, historical results for Integra are not meaningful to the Company’s results and thus no pro forma information is presented.

Under the acquisition method of accounting, the total purchase price is allocated to Integra’s net tangible and intangible assets based on their current estimated fair values on the date of acquisition. The purchase price of $170.8 million was allocated as follows:

 

(dollars in thousands)

      

Assets Acquired

  

Cash and cash equivalents

   $ 314,954   

Investment securities—available for sale

     453,700   

Federal Home Loan Bank stock, at cost

     15,226   

Residential loans held for sale

     1,690   

Loans—covered

     727,330   

Loans—non-covered

     56,828   

Premises and equipment

     19,713   

Other real estate owned

     34,055   

Accrued interest receivable

     4,751   

Goodwill

     16,864   

Other intangible assets

     4,291   

FDIC indemnification asset

     167,949   

Other assets

     9,999   
  

 

 

 

Assets acquired

   $ 1,827,350   
  

 

 

 

Liabilities Assumed

  

Deposits

   $ 1,443,209   

Short-term borrowings

     7,654   

Other borrowings

     192,895   

FDIC settlement payable

     170,759   

Other liabilities

     12,833   
  

 

 

 

Liabilities assumed

   $ 1,827,350   
  

 

 

 

Divestiture

On December 2, 2011, Old National sold $106.9 million of deposits from four of the former Integra Bank branches located in the Chicago area to First Midwest Bank. Old National recorded a net gain of $0.5 million after recording the $0.4 million deposit premium plus $0.8 million related to the time deposit mark less $0.7 million of accelerated amortization associated with the core deposit intangible. Old National retained all of the loans.

Trust Business of Integra Bank

On June 1, 2011, Old National Bancorp’s wholly owned trust subsidiary, American National Trust and Investment Management Company d/b/a Old National Trust Company (“ONTC”), acquired the trust business of Integra Bank, N.A. in a transaction unrelated to the previously noted FDIC transaction. As of the closing, the trust business had approximately $328 million in assets under management. This transaction brings the total assets under management by Old National’s Wealth Management division to approximately $4.4 billion. Old National paid Integra $1.3 million in an all cash transaction and recorded acquisition-related costs of $126 thousand. Old National recorded $1.3 million of customer relationship intangible assets which will be amortized on an accelerated basis over 12 years and is included in the “Other” segment, as described in Note 20 of the consolidated financial statement footnotes.

 

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Monroe Bancorp

On January 1, 2011, Old National acquired 100 % of Monroe Bancorp (“Monroe”) in an all stock transaction. Monroe was headquartered in Bloomington, Indiana and had 15 banking centers. The acquisition increases Old National’s market position to number 1 in Bloomington and strengthens its position as the third largest branch network in Indiana. Pursuant to the merger agreement, the shareholders of Monroe received approximately 7.6 million shares of Old National Bancorp stock valued at approximately $90.1 million.

Under the acquisition method of accounting, the total purchase price is allocated to Monroe’s net tangible and intangible assets based on their current fair values on the date of the acquisition. The purchase price for the Monroe acquisition is allocated as follows (in thousands):

 

Cash and cash equivalents

   $ 83,604   

Trading securities

     3,877   

Investment securities—available for sale

     140,422   

Investment securities—held to maturity

     6,972   

Federal Home Loan Bank stock, at cost

     2,323   

Loans held for sale

     6,328   

Loans

     447,038   

Premises and equipment

     19,738   

Accrued interest receivable

     1,804   

Company-owned life insurance

     17,206   

Other assets

     41,538   

Deposits

     (653,813

Short-term borrowings

     (62,529

Other borrowings

     (37,352

Accrued expenses and other liabilities

     (6,000
  

 

 

 

Net tangible assets acquired

     11,156   

Definite-lived intangible assets acquired

     10,485   

Goodwill

     68,429   
  

 

 

 

Purchase price

   $ 90,070   
  

 

 

 

Of the total purchase price, $11.2 million has been allocated to net tangible assets acquired and $10.5 million has been allocated to definite-lived intangible assets acquired. The remaining purchase price has been allocated to goodwill. The goodwill will not be deductible for tax purposes and is included in the “Community Banking” and “Other” segments, as described in Note 20 of these consolidated financial statement footnotes.

The components of the estimated fair value of the acquired identifiable intangible assets are in the table below. These intangible assets will be amortized on an accelerated basis over their estimated lives and are included in the “Community Banking” and “Other” segments, as described in Note 20 of these consolidated financial statement footnotes.

 

     Estimated         
     Fair Value      Estimated  
     (in millions)      Useful Lives (Years)  

Core deposit intangible

   $ 8.2         10   

Trust customer relationship intangible

   $ 2.3         12   

 

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Indiana Community Bancorp

On January 25, 2012, Old National announced its agreement to acquire Indiana Community Bancorp in an all stock transaction. Indiana Community Bancorp is an Indiana bank holding company with Indiana Bank and Trust Company (“IBTC”) as its wholly owned subsidiary. Headquartered in Columbus, Indiana, IBTC has 17 full-service banking centers serving the South Central Indiana area and approximately $985 million in assets. The acquisition increases Old National’s position as the third largest branch network in Indiana. Pursuant to the merger agreement, the shareholders of Indiana Community Bancorp will receive 1.90 shares of Old National Bancorp common stock for each share of Indiana Community Bancorp common stock, subject to certain adjustments. The transaction is valued at approximately $79.2 million and is expected to close in the third quarter of 2012 subject to approval by federal and state regulatory authorities.

NOTE 4 – NET INCOME PER SHARE

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

 

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

except per share data)                

   March 31, 2012      March 31, 2011  

Basic Earnings Per Share

     

Net income

   $ 21,723       $ 16,433   

Weighted average common shares outstanding

     94,445         94,433   

Basic Earnings Per Share

   $ 0.23       $ 0.17   
  

 

 

    

 

 

 

Diluted Earnings Per Share

     

Net income

   $ 21,723       $ 16,433   

Weighted average common shares outstanding

     94,445         94,433   

Effect of dilutive securities:

     

Restricted stock (1)

     369         208   

Stock options (2)

     19         29   
  

 

 

    

 

 

 

Weighted average shares outstanding

     94,833         94,670   

Diluted Earnings Per Share

   $ 0.23       $ 0.17   
  

 

 

    

 

 

 

 

(1) 0 and 88 shares of restricted stock and restricted stock units were not included in the computation of net income per diluted share at March 31, 2012 and 2011, respectively, because the effect would be antidilutive.
(2) Options to purchase 3,106 shares and 6,246 shares outstanding at March 31, 2012 and 2011, respectively, were not included in the computation of net income per diluted share because the exercise price of these options was greater than the average market price of the common shares and, therefore, the effect would be antidilutive.

 

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NOTE 5 – ACCUMULATED OTHER COMPREHENSIVE INCOME

The following tables summarize the changes within each classification of accumulated other comprehensive income (“AOCI”) net of tax for the three months ended March 31, 2012 and 2011:

 

     AOCI at     Other     AOCI at  
     December 31,     Comprehensive     March 31,  

(dollars in thousands)

   2011     Income     2012  

Unrealized gains on available-for-sale securities

   $ 53,911      $ 3,401      $ 57,312   

Unrealized losses on securities for which other-than-temporary-impairment has been recognized

     (29,299     —          (29,299

Unrealized gains (losses) on held-to-maturity securities

     4,745        (138     4,607   

Unrecognized gain (loss) on cash flow hedges

     145        (144     1   

Defined benefit pension plans

     (14,498     604        (13,894
  

 

 

   

 

 

   

 

 

 

Accumulated other comprehensive income (loss)

   $ 15,004      $ 3,723      $ 18,727   
  

 

 

   

 

 

   

 

 

 

 

     AOCI at     Other     AOCI at  
     December 31,     Comprehensive     March 31,  

(dollars in thousands)

   2010     Income     2011  

Unrealized gains on available-for-sale securities

   $ 31,962      $ 4,641      $ 36,603   

Unrealized losses on securities for which other-than-temporary-impairment has been recognized

     (28,173     —          (28,173

Unrealized gains (losses) on held-to-maturity securities

     5,667        (296     5,371   

Unrecognized gain on cash flow hedges

     846        (147     699   

Defined benefit pension plans

     (11,571     541        (11,030
  

 

 

   

 

 

   

 

 

 

Accumulated other comprehensive income (loss)

   $ (1,269   $ 4,739      $ 3,470   
  

 

 

   

 

 

   

 

 

 

 

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NOTE 6 – INVESTMENT SECURITIES

The following table summarizes the amortized cost and fair value of the available-for-sale and held-to-maturity investment securities portfolio at March 31, 2012 and December 31, 2011 and the corresponding amounts of unrealized gains and losses therein:

 

     Amortized      Unrealized      Unrealized     Fair  

(dollars in thousands)

   Cost      Gains      Losses     Value  

March 31, 2012

          

Available-for-sale

          

U.S. Treasury

   $ 65,182       $ 314       $ —        $ 65,496   

U.S. Government-sponsored entities and agencies

     276,642         1,269         (1,909     276,002   

Mortgage-backed securities—Agency

     1,181,418         31,806         (113     1,213,111   

Mortgage-backed securities—Non-agency

     84,163         617         (2,115     82,665   

States and political subdivisions

     422,497         28,162         (1,576     449,083   

Pooled trust preferrred securities

     25,465         —           (17,668     7,797   

Other securities

     150,622         9,241         (1,835     158,028   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

   $ 2,205,989       $ 71,409       $ (25,216   $ 2,252,182   
  

 

 

    

 

 

    

 

 

   

 

 

 

Held-to-maturity

          

U.S. Government-sponsored entities and agencies

   $ 176,366       $ 9,848       $ —        $ 186,214   

Mortgage-backed securities—Agency

     76,925         3,031         —          79,956   

States and political subdivisions

     216,089         11,163         (63     227,189   

Other securities

     2,997         —           —          2,997   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total held-to-maturity securities

   $ 472,377       $ 24,042       $ (63   $ 496,356   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2011

          

Available-for-sale

          

U.S. Treasury

   $ 65,221       $ 548       $ —        $ 65,769   

U.S. Government-sponsored entities and agencies

     171,629         1,621         (65     173,185   

Mortgage-backed securities—Agency

     1,153,629         28,687         (61     1,182,255   

Mortgage-backed securities—Non-agency

     90,355         418         (4,873     85,900   

States and political subdivisions

     376,609         26,428         (193     402,844   

Pooled trust preferrred securities

     25,461         —           (18,134     7,327   

Other securities

     147,897         8,365         (2,266     153,996   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

   $ 2,030,801       $ 66,067       $ (25,592   $ 2,071,276   
  

 

 

    

 

 

    

 

 

   

 

 

 

Held-to-maturity

          

U.S. Government-sponsored entities and agencies

   $ 177,159       $ 11,434       $ —        $ 188,593   

Mortgage-backed securities—Agency

     84,075         3,305         —          87,380   

States and political subdivisions

     216,345         8,548         (176     224,717   

Other securities

     7,011         —           (2     7,009   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total held-to-maturity securities

   $ 484,590       $ 23,287       $ (178   $ 507,699   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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

 

     March 31, 2012      Weighted  
(dollars in thousands)    Amortized      Fair      Average  

Maturity                

   Cost      Value      Yield  

Available-for-sale

        

Within one year

   $ 83,163       $ 83,581         1.82

One to five years

     114,548         119,593         3.35   

Five to ten years

     348,768         360,675         3.34   

Beyond ten years

     1,659,510         1,688,333         3.36   
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,205,989       $ 2,252,182         3.30
  

 

 

    

 

 

    

 

 

 

Held-to-maturity

        

Within one year

   $ 3,049       $ 3,049         2.27

One to five years

     2,350         2,410         3.29   

Five to ten years

     148,411         154,819         2.95   

Beyond ten years

     318,567         336,078         4.48   
  

 

 

    

 

 

    

 

 

 

Total

   $ 472,377       $ 496,356         3.98
  

 

 

    

 

 

    

 

 

 

 

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The following table summarizes the investment securities with unrealized losses at March 31, 2012 and December 31, 2011 by aggregated major security type and length of time in a continuous unrealized loss position:

 

     Less than 12 months     12 months or longer     Total  
     Fair      Unrealized     Fair      Unrealized     Fair      Unrealized  

(dollars in thousands)

   Value      Losses     Value      Losses     Value      Losses  

March 31, 2012

               

Available-for-Sale

               

U.S. Government-sponsored entities and agencies

   $ 155,753       $ (1,909   $ —         $ 0      $ 155,753       $ (1,909

Mortgage-backed securities—Agency

     63,492         (113     —           —          63,492         (113

Mortgage-backed securities—Non-agency

     26,983         (1,714     23,867         (401     50,850         (2,115

States and political subdivisions

     41,115         (1,541     1,349         (35     42,464         (1,576

Pooled trust preferrred securities

     —           —          7,797         (17,668     7,797         (17,668

Other securities

     4,082         (32     6,273         (1,803     10,355         (1,835
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available-for-sale

   $ 291,425       $ (5,309   $ 39,286       $ (19,907   $ 330,711       $ (25,216
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Held-to-Maturity

               

States and political subdivisions

   $ 3,618       $ (63   $ 52       $ —        $ 3,670       $ (63
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total held-to-maturity

   $ 3,618       $ (63   $ 52       $ —        $ 3,670       $ (63
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2011

               

Available-for-Sale

               

U.S. Government-sponsored entities and agencies

   $ 24,935       $ (65   $ —         $ —        $ 24,935       $ (65

Mortgage-backed securities—Agency

     49,016         (61     3         —          49,019         (61

Mortgage-backed securities—Non-agency

     10,053         (353     59,203         (4,520     69,256         (4,873

States and political subdivisions

     9,281         (114     1,345         (79     10,626         (193

Pooled trust preferrred securities

     —           —          7,327         (18,134     7,327         (18,134

Other securities

     4,516         (141     6,218         (2,125     10,734         (2,266
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total available-for-sale

   $ 97,801       $ (734   $ 74,096       $ (24,858   $ 171,897       $ (25,592
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Held-to-Maturity

               

States and political subdivisions

   $ 1,613       $ (1   $ 13,180       $ (175   $ 14,793       $ (176

Other securities

     22         (2     —           —          22         (2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total held-to-maturity

   $ 1,635       $ (3   $ 13,180       $ (175   $ 14,815       $ (178
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Proceeds from sales and calls of securities available for sale were $33.0 million and $149.2 million for the three months ended March 31, 2012 and 2011, respectively. Gains of $0.5 million and $2.4 million were realized on these sales during 2012 and 2011, respectively, and offsetting losses of $1.0 million were realized on these sales during 2011. Also included in net securities gains for the first quarter of 2012 is $101 thousand of gains associated with the trading securities and other-than-temporary impairment charges related to credit loss on three non-agency mortgage-backed securities in the amount of $96 thousand, described below. Impacting earnings in the first quarter of 2011 was $49 thousand of gains associated with the trading securities and other-than-temporary impairment charges related to credit loss on two non-agency mortgage-backed securities in the amount of $0.3 million.

Trading securities, which consist of mutual funds held in a trust associated with deferred compensation plans for former Monroe Bancorp directors and executives, are recorded at fair value and totaled $3.0 million at March 31, 2012 and $2.8 million at December 31, 2011.

 

16


Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities classified as available-for-sale or held-to-maturity are generally evaluated for OTTI under FASB ASC 320 (SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities). However, certain purchased beneficial interests, including non-agency mortgage-backed securities, asset-backed securities, and collateralized debt obligations, that had credit ratings at the time of purchase of below AA are evaluated using the model outlined in FASB ASC 325-10 (EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests that Continue to be Held by a Transfer in Securitized Financial Assets).

In determining OTTI under the FASB ASC 320 (SFAS No. 115) model, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time. The second segment of the portfolio uses the OTTI guidance provided by FASB ASC 325-10 (EITF 99-20) that is specific to purchased beneficial interests that, on the purchase date, were rated below AA. Under the FASB ASC 325-10 model, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

When other-than-temporary-impairment occurs under either model, the amount of the other-than-temporary-impairment recognized in earnings depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If an entity intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary-impairment shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. Otherwise, the other-than-temporary-impairment shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total other-than-temporary-impairment related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total other-than-temporary-impairment related to other factors shall be recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the other-than-temporary-impairment recognized in earnings shall become the new amortized cost basis of the investment.

As of March 31, 2012, Old National’s security portfolio consisted of 1,067 securities, 69 of which were in an unrealized loss position. The majority of unrealized losses are related to the Company’s non-agency mortgage-backed and pooled trust preferred securities, as discussed below:

Non-agency Mortgage-backed Securities

At March 31, 2012, the Company’s securities portfolio contained 11 non-agency collateralized mortgage obligations with a fair value of $82.7 million which had net unrealized losses of approximately $1.5 million. All of these securities are residential mortgage-backed securities. These non-agency mortgage-backed securities were rated AAA at purchase and are not within the scope of FASB ASC 325-10 (EITF 99-20). As of March 31, 2012, nine of these securities were rated below investment grade with grades ranging from B to D. One of the nine securities is rated B and has a fair value of $15.6 million, two of the securities are rated CCC with a fair value of $23.9 million, four of the securities are rated CC with a fair value of $11.5 million, one of the securities is rated C with a fair value of $17.3 million and one of the securities is rated D with a fair value of $3.5 million. These securities were evaluated to determine if the underlying collateral is expected to experience loss, resulting in a principal loss of the notes. As part of the evaluation, a detailed analysis of deal-specific data was obtained from remittance reports provided by the trustee and data from the servicer. The collateral was broken down into several distinct buckets based on loan performance characteristics in order to apply different assumptions to each bucket. The most significant drivers affecting loan performance were examined including original loan-to-value (“LTV”), underlying property location and the loan status. The loans in the current status bucket were further divided based on their original LTV: a high-LTV and a low-LTV group to which different default curves and severity percentages were applied. The high-LTV group was further bifurcated into loans originated in high-risk states and all other states with a higher default-curve and severity percentages being applied to loans originated in the high-risk states. Different default curves and severity rates were applied to the remaining non-current collateral buckets. Using these collateral-specific assumptions, a model was built to project the future performance of the instrument. Based on this analysis of the underlying collateral, Old National recorded $96 thousand of credit losses on three of these securities for the three months ended March 31, 2012. The fair value of these below investment grade non-agency mortgage-backed securities remaining at March 31, 2012 was $71.8 million.

 

17


Based on an analysis of the underlying collateral, Old National recorded $0.3 million of credit losses on two non-agency mortgage-backed securities for the three months ended March 31, 2011. The fair value of these non-agency mortgage-backed securities was $61.2 million at March 31, 2011.

Pooled Trust Preferred Securities

At March 31, 2012, the Company’s securities portfolio contained eight pooled trust preferred securities with a fair value of $7.8 million and unrealized losses of $17.7 million. Six of the pooled trust preferred securities in our portfolio fall within the scope of FASB ASC 325-10 (EITF 99-20) and have a fair value of $4.4 million with unrealized losses of $6.8 million at March 31, 2012. These securities were rated A2 and A3 at inception, but at March 31, 2012, four securities were rated C and two securities D. The issuers in these securities are primarily banks, but some of the pools do include a limited number of insurance companies. The Company uses the OTTI evaluation model to compare the present value of expected cash flows to the previous estimate to determine whether an adverse change in cash flows has occurred during the quarter. The OTTI model considers the structure and term of the collateralized debt obligation (“CDO”) and the financial condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market information including announcements of interest payment deferrals or defaults of underlying trust preferred securities. Assumptions used in the model include expected future default rates and prepayments. We assume no recoveries on defaults and a limited number of recoveries on current or projected interest payment deferrals. In addition, we use the model to “stress” each CDO, or make assumptions more severe than expected activity, to determine the degree to which assumptions could deteriorate before the CDO could no longer fully support repayment of Old National’s note class. For the three months ended March 31, 2012, our model indicated no other-than-temporary-impairment losses on these securities.

Two of our pooled trust preferred securities with a fair value of $3.4 million and unrealized losses of $10.9 million at March 31, 2012 are not subject to FASB ASC 325-10. These securities are evaluated using collateral-specific assumptions to estimate the expected future interest and principal cash flows. Our analysis indicated no other-than-temporary-impairment on these securities.

For the three months ended March 31, 2011, the seven securities subject to FASB ASC 325-10 accounted for $8.1 million of the unrealized losses in the pooled trust preferred securities category. Our analysis indicated no other-than-temporary-impairment on these securities.

Two of our pooled trust preferred securities with a fair value of $4.2 million and unrealized losses of $10.0 million at March 31, 2011 were not subject to FASB ASC 325-10. These securities were evaluated using collateral-specific assumptions to estimate the expected future interest and principal cash flows. Our analysis indicated no other-than-temporary-impairment on these securities.

The table below summarizes the relevant characteristics of our eight pooled trust preferred securities as well as four single issuer trust preferred securities which are included with other securities in Note 6 to the consolidated financial statements. Each of the pooled trust preferred securities support a more senior tranche of security holders except for the MM Community Funding II security which, due to payoffs, Old National is now in the most senior class.

 

18


As depicted in the table below, all eight securities have experienced credit defaults. However, three of these securities have excess subordination and are not other-than-temporarily-impaired as a result of their class hierarchy which provides more loss protection.

 

Trust preferred securities                                             Actual     Expected     Excess  
March 31, 2012                                             Deferrals and     Defaults as     Subordination  
(Dollars in Thousands)                                       # of Issuers     Defaults as a     a % of     as a %  
          Lowest                 Unrealized     Realized     Currently     Percent of     Remaining     of Current  
          Credit     Amortized     Fair     Gain/     Losses     Performing/     Original     Performing     Performing  
    Class     Rating (1)     Cost     Value     (Loss)     2012     Remaining     Collateral     Collateral     Collateral  

Pooled trust preferred securities:

                   

TROPC 2003-1A

    A4L        C      $ 87      $ 35      $ (52   $ —          15/36        41.7     23.7     0.0

MM Community Funding IX

    B-2        D        2,067        906        (1,161     —          16/31        41.1     8.4     0.0

Reg Div Funding 2004

    B-2        D        4,177        781        (3,396     —          25/45        44.9     6.5     0.0

Pretsl XII

    B-1        C        2,871        1,586        (1,285     —          50/76        28.3     6.8     0.0

Pretsl XV

    B-1        C        1,695        1,094        (601     —          49/72        36.0     6.4     0.0

Reg Div Funding 2005

    B-1        C        311        22        (289     —          18/48        55.9     31.6     0.0

Pretsl XXVII LTD

    B        CC        4,863        1,229        (3,634     —          33/49        28.1     1.3     35.8

Trapeza Ser 13A

    A2A        CCC-        9,394        2,144        (7,250     —          44/54        28.4     4.4     40.7
     

 

 

   

 

 

   

 

 

   

 

 

         
        25,465        7,797        (17,668     —             

Single Issuer trust preferred securities:

                   

First Empire Cap (M&T)

      BB+        956        991        35        —             

First Empire Cap (M&T)

      BB+        2,906        2,974        68        —             

Fleet Cap Tr V (BOA)

      BB        3,360        2,486        (874     —             

JP Morgan Chase Cap XIII

      BBB        4,716        3,787        (929     —             
     

 

 

   

 

 

   

 

 

   

 

 

         
        11,938        10,238        (1,700     —             

Total

      $ 37,403      $ 18,035      $ (19,368   $ —             
     

 

 

   

 

 

   

 

 

   

 

 

         

 

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

The following table details all securities with other-than-temporary-impairment, their credit rating at March 31, 2012 and the related credit losses recognized in earnings:

 

     Vintage      Lowest
Credit
Rating (1)
     Amortized
Cost
     Amount of other-than-
temporary-impairment
recognized in earnings
for the three months
ended March 31, 2012
 

Non-agency mortgage-backed securities:

           

BAFC Ser 4

     2007         CCC       $ 13,754       $ 76   

HALO Ser 1R

     2006         B         15,636         4   

RFMSI Ser S10

     2006         D         3,762         16   
        

 

 

    

 

 

 
         $ 33,152         96   

Total other-than-temporary-impairment recognized in earnings

            $ 96   
           

 

 

 

 

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

 

19


The following table details all securities with other-than-temporary-impairment, their credit rating at March 31, 2011 and the related credit losses recognized in earnings:

 

                          Amount of other-than-  
                          temporary-impairment  
            Lowest             recognized in earnings  
            Credit      Amortized      for the three months  
     Vintage      Rating (1)      Cost      ended March 31, 2011  

Non-agency mortgage-backed securities:

           

FHASI Ser 4

     2007         CC       $ 21,415       $ 202   

RFMSI Ser S10

     2006         CC         4,263         97   
        

 

 

    

 

 

 
         $ 25,678         299   

Total other-than-temporary-impairment recognized in earnings

            $ 299   
           

 

 

 

 

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

The following table details all securities with other-than-temporary-impairment, their credit rating at March 31, 2012, and the related credit losses recognized in earnings:

 

                      Amount of other-than-temporary  
                      impairment recognized in earnings  
          Lowest
Credit
Rating (1)
          Three Months                          
            Amortized
Cost
    March 31,     Year ended December 31,     Life-to
date
 
    Vintage         2012     2011     2010     2009    

Non-agency mortgage-backed securities:

               

BAFC Ser 4

    2007        CCC      $ 13,754      $ 76      $ —        $ 79      $ 63      $ 218   

CWALT Ser 73CB

    2005        CC        2,963        —          —          207        83        290   

CWALT Ser 73CB

    2005        CC        4,087        —          —          427        182        609   

CWHL 2006-10 (3)

    2006        —          —          —          —          309        762        1,071   

CWHL 2005-20

    2005        CC        3,168        —          —          39        72        111   

FHASI Ser 4

    2007        C        17,885        —          340        629        223        1,192   

HALO Ser 1R

    2006        B        15,636        4        16        —          —          20   

RFMSI Ser S9 (2)

    2006        —          —          —          —          923        1,880        2,803   

RFMSI Ser S10

    2006        D        3,762        16        165        76        249        506   

RALI QS2 (2)

    2006        —          —          —          —          278        739        1,017   

RFMSI S1

    2006        CC        1,896        —          —          30        176        206   
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
        63,151        96        521        2,997        4,429        8,043   

Pooled trust preferred securities:

               

TROPC

    2003        C        87        —          888        444        3,517        4,849   

MM Community Funding IX

    2003        D        2,067        —          —          165        2,612        2,777   

Reg Div Funding

    2004        D        4,177        —          —          321        5,199        5,520   

Pretsl XII

    2003        C        2,871        —          —          —          1,897        1,897   

Pretsl XV

    2004        C        1,695        —          —          —          3,374        3,374   

Reg Div Funding

    2005        C        311        —          —          —          3,767        3,767   
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
        11,208        —          888        930        20,366        22,184   

Total other-than-temporary-impairment recognized in earnings

        $ 96      $ 1,409      $ 3,927      $ 24,795      $ 30,227   
       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Lowest rating for the security provided by any nationally recognized credit rating agency.
(2) Sold during fourth quarter 2010.
(3) Sold during first quarter 2011.

 

20


NOTE 7 – LOANS HELD FOR SALE

Residential loans that Old National has committed to sell are recorded at fair value in accordance with FASB ASC 825-10 (SFAS No. 159 – The Fair Value Option for Financial Assets and Financial Liabilities). At March 31, 2012 and December 31, 2011, Old National had residential loans held for sale of $3.9 million and $4.5 million, respectively.

During the first three months of 2012, commercial and commercial real estate loans held for investment of $0.6 million, including $0.5 million of purchased impaired loans, were reclassified to loans held for sale at the lower of cost or fair value and sold for $0.8 million, resulting in a charge-off of $0.1 million and a recovery of $0.3 million. At March 31, 2012, there were no loans held for sale under this arrangement.

During the first three months of 2011, commercial and commercial real estate loans held for investment of $4.6 million were reclassified to loans held for sale at the lower of cost or fair value and sold for $4.6 million, resulting in no charge-off on the loans transferred. At March 31, 2011, there were no loans held for sale under this arrangement.

NOTE 8 – FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES

Old National’s finance receivables consist primarily of loans made to consumers and commercial clients in various industries including manufacturing, agribusiness, transportation, mining, wholesaling and retailing. Most of Old National’s lending activity occurs within the Company’s principal geographic markets of Indiana, Illinois and Kentucky. Old National has no concentration of commercial loans in any single industry exceeding 10% of its portfolio.

The composition of loans by lending classification was as follows:

 

     March 31,     December 31,  

(dollars in thousands)

   2012     2011  

Commercial (1)

   $ 1,180,535      $ 1,216,654   

Commercial real estate:

    

Construction

     48,321        46,141   

Other

     978,578        1,021,229   

Residential real estate

     1,059,977        995,458   

Consumer credit:

    

Heloc

     224,625        235,603   

Auto

     493,087        483,575   

Other

     129,562        142,183   

Covered loans

     548,552        626,360   
  

 

 

   

 

 

 

Total loans

     4,663,237        4,767,203   

Allowance for loan losses

     (54,726     (57,117

Allowance for loan losses—covered loans

     (1,190     (943
  

 

 

   

 

 

 

Net loans

   $ 4,607,321      $ 4,709,143   
  

 

 

   

 

 

 

 

(1) Includes direct finance leases of $73.5 million at March 31, 2012 and $79.6 million at December 31, 2011.

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 short-term 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.

 

21


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 more 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. As a general rule, Old National avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

Included with commercial real estate, construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. 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, 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.

Residential

With respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, Old National generally establishes a maximum loan-to-value ratio and 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.

Portfolio loans, or loans Old National intends to hold for investment purposes, are carried at the principal balance outstanding, net of earned interest, purchase premiums or discounts, deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on the principal balances of loans outstanding.

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 values. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Portfolio loans, or loans Old National intends to hold for investment purposes, are carried at the principal balance outstanding, net of earned interest, purchase premiums or discounts, deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on the principal balances of loans outstanding.

 

22


Covered Loans

On July 29, 2011, Old National acquired the banking operations of Integra Bank N.A. (“Integra”) in an FDIC assisted transaction. As part of the purchase and assumption agreement, the Company and the FDIC entered into loss sharing agreements (each, a “loss sharing agreement” and collectively, the “loss sharing agreements”), whereby the FDIC will cover a substantial portion of any future losses on loans (and related unfunded commitments), other real estate owned (“OREO”) and up to 90 days of certain accrued interest on loans. The acquired loans and OREO subject to the loss sharing agreements are referred to collectively as “covered assets.” Under the terms of the loss sharing agreements, the FDIC will reimburse Old National for 80% of losses up to $275.0 million, losses in excess of $275.0 million up to $467.2 million at 0% reimbursement, and 80% of losses in excess of $467.2 million. Old National will reimburse the FDIC for its share of recoveries with respect to losses for which the FDIC has reimbursed the Bank under the loss sharing agreements. The loss sharing provisions of the agreements for commercial and single family residential mortgage loans are in effect for five and ten years, respectively, from the July 29, 2011 acquisition date and the loss recovery provisions for such loans are in effect for eight years and ten years, respectively, from the acquisition date.

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 loan portfolio. Management’s evaluation of the adequacy of the allowance is an estimate based on reviews of individual loans, pools of homogeneous loans, historical loss experience, and assessments of the impact of current economic conditions on the portfolio.

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.

No allowance is 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. Purchased credit impaired (“PCI”) loans would not be considered impaired until after the point at which there has been a degradation of cash flows below our expected cash flows at acquisition. Impairment on PCI loans would be recognized in the current period as provision expense.

Old National’s activity in the allowance for loan losses for the three months ended March 31, 2012 and 2011 is as follows:

 

           Commercial                           

(dollars in thousands)

   Commercial     Real Estate     Consumer     Residential     Unallocated      Total  

2012

             

Allowance for loan losses:

             

Beginning balance

   $ 19,964      $ 26,993      $ 6,954      $ 4,149        —         $ 58,060   

Charge-offs

     (1,268     (3,375     (2,425     (560     —           (7,628

Recoveries

     1,444        568        1,337        79        —           3,428   

Provision

     (2,046     3,632        (220     690        —           2,056   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 18,094      $ 27,818      $ 5,646      $ 4,358        —         $ 55,916   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

           Commercial                           

(dollars in thousands)

   Commercial     Real Estate     Consumer     Residential     Unallocated      Total  

2011

             

Allowance for loan losses:

             

Beginning balance

   $ 26,204      $ 32,654      $ 11,142      $ 2,309        —         $ 72,309   

Charge-offs

     (1,331     (707     (3,388     (848     —           (6,274

Recoveries

     833        668        1,858        43        —           3,402   

Provision

     1,484        (65     668        1,225        —           3,312   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 27,190      $ 32,550      $ 10,280      $ 2,729        —         $ 72,749   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

23


The following tables provide Old National’s recorded investment in financing receivables by portfolio segment at March 31, 2012 and December 31, 2011 and other information regarding the allowance:

 

            Commercial                              

(dollars in thousands)

   Commercial      Real Estate      Consumer      Residential      Unallocated      Total  

March 31, 2012

                 

Allowance for loan losses:

                 

Ending balance: individually evaluated for impairment

   $ 6,726       $ 5,447       $ 9       $ 5         —         $ 12,187   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 10,881       $ 19,661       $ 5,488       $ 4,201         —         $ 40,231   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: loans acquired with deteriorated credit quality

   $ 132       $ 2,024         —         $ 152         —         $ 2,308   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: covered loans acquired with deteriorated credit quality

   $ 355       $ 686       $ 149         —           —         $ 1,190   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total allowance for credit losses

   $ 18,094       $ 27,818       $ 5,646       $ 4,358         —         $ 55,916   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans and leases outstanding:

                 

Ending balance: individually evaluated for impairment

   $ 29,034       $ 45,392         —           —           —         $ 74,426   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 1,150,459       $ 960,380       $ 923,531       $ 983,720         —         $ 4,018,090   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: loans acquired with deteriorated credit quality

   $ 1,042       $ 21,127         —           —           —         $ 22,169   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: covered loans acquired with deteriorated credit quality

   $ 95,591       $ 290,102       $ 43,301       $ 119,558         —         $ 548,552   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans and leases outstanding

   $ 1,276,126       $ 1,317,001       $ 966,832       $ 1,103,278         —         $ 4,663,237   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

24


            Commercial                              

(dollars in thousands)

   Commercial      Real Estate      Consumer      Residential      Unallocated      Total  

December 31, 2011

                 

Allowance for loan losses:

                 

Ending balance: individually evaluated for impairment

   $ 7,015       $ 4,177         —           —           —         $ 11,192   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 12,816       $ 21,397       $ 6,335       $ 2,752         —         $ 43,300   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: loans acquired with deteriorated credit quality

   $ 128       $ 1,288       $ 445       $ 764         —         $ 2,625   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: covered loans acquired with deteriorated credit quality

   $ 5       $ 131       $ 174       $ 633         —         $ 943   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total allowance for credit losses

   $ 19,964       $ 26,993       $ 6,954       $ 4,149         —         $ 58,060   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans and leases outstanding:

                 

Ending balance: individually evaluated for impairment

   $ 31,838       $ 43,225         —           —           —         $ 75,063   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: collectively evaluated for impairment

   $ 1,183,675       $ 1,002,105       $ 861,361       $ 995,458         —         $ 4,042,599   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: loans acquired with deteriorated credit quality

   $ 1,141       $ 22,040         —           —           —         $ 23,181   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance: covered loans acquired with deteriorated credit quality

   $ 124,755       $ 325,934       $ 128,700       $ 46,971         —         $ 626,360   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans and leases outstanding

   $ 1,341,409       $ 1,393,304       $ 990,061       $ 1,042,429         —         $ 4,767,203   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Credit Quality

Old National’s management monitors the credit quality of its financing receivables in an on-going manner. Internally, management assigns a credit quality grade to each non-homogeneous commercial and commercial real estate loan in the portfolio. The primary determinants of the credit quality grade are based upon the reliability of the primary source of repayment and the past, present, and projected financial condition of the borrower. The credit quality rating also reflects current economic and industry conditions. Major factors used in determining the grade 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 – Doubtful. Loans classified as doubtful 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, highly questionable and improbable.

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

 

25


As of March 31, 2012 and December 31, 2011, the risk category of loans, excluding covered loans, by class of loans is as follows:

 

(dollars in thousands)                                          
Corporate Credit                  Commercial Real Estate-      Commercial Real Estate-  
Exposure    Commercial      Construction      Other  
by Internally    March 31,      December 31,      March 31,      December 31,      March 31,      December 31,  
Assigned Grade    2012      2011      2012      2011      2012      2011  

Grade:

                 

Pass

   $ 1,079,763       $ 1,103,556       $ 18,270       $ 16,841       $ 863,151       $ 895,543   

Criticized

     33,501         36,212         13,701         13,605         29,879         30,331   

Classified—substandard

     34,642         41,695         11,482         10,147         22,906         34,478   

Classified—doubtful

     32,629         35,191         4,868         5,548         62,642         60,877   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,180,535       $ 1,216,654       $ 48,321       $ 46,141       $ 978,578       $ 1,021,229   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 as of March 31, 2012 and December 31, 2011, excluding covered loans:

 

March 31, 2012

   Consumer      Residential  

(dollars in thousands)

   Heloc      Auto      Other         

Performing

   $ 223,661       $ 491,426       $ 128,092       $ 1,050,144   

Nonperforming

     964         1,661         1,470         9,833   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 224,625       $ 493,087       $ 129,562       $ 1,059,977   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

   Consumer      Residential  

(dollars in thousands)

   Heloc      Auto      Other         

Performing

   $ 234,334       $ 481,632       $ 140,605       $ 985,211   

Nonperforming

     1,269         1,943         1,578         10,247   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 235,603       $ 483,575       $ 142,183       $ 995,458   
  

 

 

    

 

 

    

 

 

    

 

 

 

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. A loan is considered impaired when it is probable that contractual interest and principal payments will not be collected either for the amounts or by the dates as scheduled in the loan agreement. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported net, at the present value of estimated cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Old National’s policy, for all but purchased credit impaired loans, is to recognize interest income on impaired loans unless the loan is placed on nonaccrual status. For the three months ended March 31, 2012 and 2011, the average balance of impaired loans was $89.2 million and $64.5 million, respectively, for which no interest income was recorded. No additional funds are committed to be advanced in connection with these impaired loans.

 

26


The following table shows Old National’s impaired loans, excluding covered loans, that are individually evaluated as of March 31, 2012 and December 31, 2011. Of the loans purchased during 2011 without FDIC loss share coverage, only those that have experienced subsequent impairment since the date acquired are included in the table below. Purchased loans of $0.7 million migrated to classified-doubtful during the first quarter of 2012. Purchased loans of $24.0 million migrated to classified-doubtful during the year ended December 31, 2011.

 

            Unpaid         
     Recorded      Principal      Related  

(dollars in thousands)

   Investment      Balance      Allowance  

March 31, 2012

        

With no related allowance recorded:

        

Commercial

   $ 8,358       $ 11,195       $ —     

Commercial Real Estate—Construction

     311         610         —     

Commercial Real Estate—Other

     15,157         23,639         —     

With an allowance recorded:

        

Commercial

     20,676         23,810         6,738   

Commercial Real Estate—Construction

     2,378         3,449         222   

Commercial Real Estate—Other

     27,546         30,847         6,933   
  

 

 

    

 

 

    

 

 

 

Total Commercial

   $ 74,426       $ 93,550       $ 13,893   
  

 

 

    

 

 

    

 

 

 

December 31, 2011

        

With no related allowance recorded:

        

Commercial

   $ 10,094       $ 13,047       $ —     

Commercial Real Estate—Construction

     610         610         —     

Commercial Real Estate—Other

     18,136         27,372         —     

With an allowance recorded:

        

Commercial

     21,744         24,928         7,143   

Commercial Real Estate—Construction

     2,256         3,327         12   

Commercial Real Estate—Other

     22,223         24,792         5,453   
  

 

 

    

 

 

    

 

 

 

Total Commercial

   $ 75,063       $ 94,076       $ 12,608   
  

 

 

    

 

 

    

 

 

 

The average balance of impaired loans, excluding covered loans, and interest income recognized on impaired loans during the three months ended March 31, 2012 and 2011 are included in the tables below.

 

     Average      Interest  
     Recorded      Income  

(dollars in thousands)

   Investment      Recognized (1)  

March 31, 2012

     

With no related allowance recorded:

     

Commercial

   $ 8,696       $ 114   

Commercial Real Estate—Construction

     1,551         2   

Commercial Real Estate—Other

     28,130         186   

With an allowance recorded:

     

Commercial

     22,502         274   

Commercial Real Estate—Construction

     1,190         22   

Commercial Real Estate—Other

     27,160         283   
  

 

 

    

 

 

 

Total Commercial

   $ 89,229       $ 881   
  

 

 

    

 

 

 

 

(1) The Company does not record interest on nonaccrual loans until principal is recovered.

 

27


     Average      Interest  
     Recorded      Income  

(dollars in thousands)

   Investment      Recognized (1)  

March 31, 2011

     

With no related allowance recorded:

     

Commercial

   $ 6,035       $ —     

Commercial Real Estate—Construction

     —           —     

Commercial Real Estate—Other

     14,583         —     

With an allowance recorded:

     

Commercial

     21,078         89   

Commercial Real Estate—Construction

     —           —     

Commercial Real Estate—Other

     22,798         187   
  

 

 

    

 

 

 

Total Commercial

   $ 64,494       $ 276   
  

 

 

    

 

 

 

 

(1) The Company does not record interest on nonaccrual loans until principal is recovered.

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 are returned to accrual status when all the principal and interest amounts contractually due are brought current, remain current for six months and future payments are reasonably assured.

Covered 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 covered loan loss provision or prospective yield adjustments. Similar to uncovered loans, covered loans accounted for outside FASB ASC Topic 310-30 are classified as nonaccrual when, in the opinion of management, collection of principal or interest is doubtful. Information for covered loans accounted for both under and outside FASB ASC Topic 310-30 is included in the table below in the row labeled covered loans.

 

28


Old National’s past due financing receivables as of March 31, 2012 and December 31, 2011 are as follows:

 

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

(dollars in thousands)

   Past Due      Past Due      Accruing      Nonaccrual      Past Due      Current  

March 31, 2012

                 

Commercial

   $ 1,791       $ 84       $ 40       $ 31,717       $ 33,632       $ 1,146,903   

Commercial Real Estate:

                 

Construction

     —           —           —           4,745         4,745         43,576   

Other

     1,838         404         312         62,622         65,176         913,402   

Consumer:

                 

Heloc

     338         140         —           964         1,442         223,183   

Auto

     3,957         398         40         1,661         6,056         487,031   

Other

     1,404         355         44         1,470         3,273         126,289   

Residential

     7,308         248         —           9,833         17,389         1,042,588   

Covered loans

     2,915         443         820         158,523         162,701         385,851   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 19,551       $ 2,072       $ 1,256