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ONB Old National Bancorp


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
 
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)
 
INDIANA35-1539838
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
  
One Main Street47708
Evansville,Indiana(Zip Code)
(Address of principal executive offices)
(800) 731-2265
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class Trading
Symbol(s)
 Name of each exchange on which registered
Common Stock, No Par Value ONB The  NASDAQStock Market LLC  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days.    Yes      No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer   Accelerated filer 
Non-accelerated filer   Smaller reporting company 
Emerging growth company     
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No  
Indicate the number of shares outstanding of each of the issuer’s classes of common stock.  The registrant has one class of common stock (no par value) with 165,109,000 shares outstanding at March 31, 2020.



OLD NATIONAL BANCORP
FORM 10-Q
TABLE OF CONTENTS
  Page
PART I. 
Item 1. 
 
 
 
 
 
 
 Note 1.
 Note 2.
 Note 3.
 Note 4.
 Note 5.
 Note 6.
 Note 7.
 Note 8.
 Note 9.
 Note 10.
 Note 11.
 Note 12.
 Note 13.
 Note 14.
 Note 15.
 Note 16.
 Note 17.
 Note 18.
 Note 19.
 Note 20.
 Note 21.
 Note 22.
 Note 23.
 Note 24.
Item 2.
 
 
 
 
 
 
 
 
 
 
Item 3.
Item 4.
PART II.
Item 1A.
Item 2.
Item 5.
Item 6.

2


GLOSSARY OF ABBREVIATIONS AND ACRONYMS
As used in this report, references to “Old National,” “we,” “our,” “us,” and similar terms refer to the consolidated entity consisting of Old National Bancorp and its wholly-owned affiliates. Old National Bancorp refers solely to the parent holding company, and Old National Bank refers to Old National’s bank subsidiary.
The acronyms and abbreviations identified below are used in the Notes to Consolidated Financial Statements (Unaudited) as well as in the Management’s Discussion and Analysis of Financial Condition and Results of Operations. You may find it helpful to refer to this page as you read this report.
Anchor (MN):  Anchor Bancorp, Inc.
Anchor (WI):  Anchor BanCorp Wisconsin Inc.
AOCI:  accumulated other comprehensive income (loss)
AQR:  asset quality rating
ASC:  Accounting Standards Codification
ASU:  Accounting Standards Update
ATM:  automated teller machine
BBCC: business banking credit center (small business)
CECL: current expected credit loss
Common Stock:  Old National Bancorp common stock, without par value
COVID-19: Novel coronavirus originating in Wuhan, China in December 2019
DTI:  debt-to-income
FASB:  Financial Accounting Standards Board
FDIC:  Federal Deposit Insurance Corporation
FHLB:  Federal Home Loan Bank
FHTC:  Federal Historic Tax Credit
FICO:  Fair Isaac Corporation
GAAP:  U.S. generally accepted accounting principles
Klein:  Klein Financial, Inc.
LGD:  loss given default
LIBOR:  London Interbank Offered Rate
LIHTC:  Low Income Housing Tax Credit
LTV:  loan-to-value
N/A:  not applicable
N/M:  not meaningful
NASDAQ:  The NASDAQ Stock Market LLC
NOW:  negotiable order of withdrawal
OCC:  Office of the Comptroller of the Currency
OTTI:  other-than-temporary impairment
PCD: purchased with credit deterioration
PCI:  purchased credit impaired
PD:  probability of default
PSA:  prepayment speed assumptions
Renewable Energy:  investment tax credits for solar projects
SBA:  Small Business Administration
SEC:  Securities and Exchange Commission
SOFR: Secured Overnight Financing Rate
TBA:  to be announced
TDR:  troubled debt restructuring


3


OLD NATIONAL BANCORP
CONSOLIDATED BALANCE SHEETS
(dollars and shares in thousands, except per share data)March 31,
2020
December 31,
2019
 (unaudited) 
Assets  
Cash and due from banks$203,533  $234,766  
Money market and other interest-earning investments139,644  41,571  
Total cash and cash equivalents343,177  276,337  
Equity securities6,870  6,842  
Investment securities - available-for-sale, at fair value:
U.S. Treasury11,733  17,682  
U.S. government-sponsored entities and agencies519,171  592,984  
Mortgage-backed securities3,210,000  3,183,861  
States and political subdivisions1,302,395  1,275,643  
Other securities316,726  314,921  
Total investment securities - available-for-sale5,360,025  5,385,091  
Federal Home Loan Bank/Federal Reserve Bank stock, at cost174,113  164,099  
Loans held for sale, at fair value54,209  46,898  
Loans:
Commercial3,046,579  2,890,296  
Commercial real estate5,283,464  5,166,792  
Residential real estate2,327,851  2,334,289  
Consumer credit, net of unearned income1,726,718  1,726,147  
Total loans12,384,612  12,117,524  
Allowance for loan losses (1)(106,380) (54,619) 
Net loans12,278,232  12,062,905  
Premises and equipment, net462,364  490,925  
Operating lease right-of-use assets86,819  95,477  
Accrued interest receivable77,810  85,123  
Goodwill1,036,994  1,036,994  
Other intangible assets56,329  60,105  
Company-owned life insurance450,148  448,967  
Net deferred tax assets17,576  29,705  
Loan servicing rights24,132  25,368  
Other assets312,343  196,831  
Total assets$20,741,141  $20,411,667  
Liabilities
Deposits:
Noninterest-bearing demand$4,058,559  $4,042,286  
Interest-bearing:
Checking and NOW4,105,006  4,149,639  
Savings2,853,305  2,845,423  
Money market1,746,798  1,833,819  
Time1,541,694  1,682,230  
Total deposits14,305,362  14,553,397  
Federal funds purchased and interbank borrowings560,770  350,414  
Securities sold under agreements to repurchase318,067  327,782  
Federal Home Loan Bank advances2,130,263  1,822,847  
Other borrowings236,114  243,685  
Operating lease liabilities95,830  99,500  
Accrued expenses and other liabilities271,300  161,589  
Total liabilities17,917,706  17,559,214  
Shareholders' Equity
Preferred stock, 2,000 shares authorized, 0 shares issued or outstanding—  —  
Common stock, $1.00 per share stated value, 300,000 shares authorized,
   165,109 and 169,616 shares issued and outstanding, respectively
165,109  169,616  
Capital surplus1,870,260  1,944,445  
Retained earnings649,909  682,185  
Accumulated other comprehensive income (loss), net of tax138,157  56,207  
Total shareholders' equity2,823,435  2,852,453  
Total liabilities and shareholders' equity$20,741,141  $20,411,667  
(1)Beginning January 1, 2020, calculation is based on current expected loss methodology. Prior to January 1, 2020, calculation was based on incurred loss methodology.
The accompanying notes to consolidated financial statements are an integral part of these statements.
4


OLD NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months Ended March 31,
(dollars and shares in thousands, except per share data)20202019
Interest Income  
Loans including fees:  
Taxable$128,727  $138,972  
Nontaxable3,625  4,223  
Investment securities:
Taxable27,356  28,037  
Nontaxable7,942  7,408  
Money market and other interest-earning investments349  278  
Total interest income167,999  178,918  
Interest Expense
Deposits12,298  16,444  
Federal funds purchased and interbank borrowings1,240  1,918  
Securities sold under agreements to repurchase384  662  
Federal Home Loan Bank advances7,768  9,931  
Other borrowings2,538  2,915  
Total interest expense24,228  31,870  
Net interest income143,771  147,048  
Provision for loan losses (1)16,950  1,043  
Net interest income after provision for loan losses126,821  146,005  
Noninterest Income
Wealth management fees8,884  8,535  
Service charges on deposit accounts10,077  10,826  
Debit card and ATM fees4,998  5,503  
Mortgage banking revenue11,119  5,011  
Investment product fees5,874  5,271  
Capital markets income4,328  2,517  
Company-owned life insurance3,080  3,188  
Debt securities gains (losses), net5,174  (103) 
Other income3,968  5,668  
Total noninterest income57,502  46,416  
Noninterest Expense
Salaries and employee benefits79,173  71,183  
Occupancy15,133  14,578  
Equipment5,305  4,474  
Marketing3,097  3,723  
Data processing9,467  9,341  
Communication2,798  3,054  
Professional fees4,293  2,910  
Loan expenses1,771  1,912  
FDIC assessment1,609  2,087  
Amortization of intangibles3,776  4,472  
Amortization of tax credit investments5,515  260  
Other expense26,807  5,047  
Total noninterest expense158,744  123,041  
Income before income taxes25,579  69,380  
Income tax expense2,939  13,104  
Net income$22,640  $56,276  
Net income per common share - basic$0.13  $0.32  
Net income per common share - diluted0.13  0.32  
Weighted average number of common shares outstanding - basic167,748  174,734  
Weighted average number of common shares outstanding - diluted168,404  175,368  
Dividends per common share$0.14  $0.13  
(1)Beginning January 1, 2020, calculation is based on current expected loss methodology. Prior to January 1, 2020, calculation was based on incurred loss methodology.
The accompanying notes to consolidated financial statements are an integral part of these statements.
5


OLD NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
Three Months Ended
March 31,
(dollars in thousands)20202019
Net income$22,640  $56,276  
Other comprehensive income (loss):
Change in debt securities available-for-sale:
Unrealized holding gains (losses) for the period103,954  62,265  
Reclassification adjustment for securities (gains) losses realized in income(5,174) 103  
Income tax effect(22,411) (14,578) 
Unrealized gains (losses) on available-for-sale debt securities76,369  47,790  
Change in securities held-to-maturity:
Amortization of unrealized losses on securities transferred from available-for-sale—  457  
Income tax effect—  (106) 
Changes from securities held-to-maturity—  351  
Cash flow hedges:
Net unrealized derivative gains (losses) on cash flow hedges7,803  (392) 
Reclassification adjustment for (gains) losses realized in net income(431) (385) 
Income tax effect(1,811) 191  
Changes from cash flow hedges5,561  (586) 
Defined benefit pension plans:
Amortization of net loss recognized in income27  20  
Income tax effect(7) (5) 
Changes from defined benefit pension plans20  15  
Other comprehensive income (loss), net of tax81,950  47,570  
Comprehensive income$104,590  $103,846  
The accompanying notes to consolidated financial statements are an integral part of these statements.
6


OLD NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)
(dollars in thousands, except per share data)Common StockCapital SurplusRetained EarningsAccumulated
Other
Comprehensive Income (Loss)
Total
Shareholders' Equity
Balance, December 31, 2018$175,141  $2,031,695  $527,684  $(44,950) $2,689,570  
Cumulative effect of change in accounting principles—  —  6,322  —  6,322  
Balance, January 1, 2019175,141  2,031,695  534,006  (44,950) 2,695,892  
Net income—  —  56,276  —  56,276  
Other comprehensive income (loss)—  —  —  47,570  47,570  
Dividends - common stock ($0.13 per share)—  —  (22,812) —  (22,812) 
Common stock issued 121  —  —  130  
Common stock repurchased(1,655) (25,642) —  —  (27,297) 
Share-based compensation expense—  1,800  —  —  1,800  
Stock activity under incentive compensation plans484  (12) (159) —  313  
Balance, March 31, 2019$173,979  $2,007,962  $567,311  $2,620  $2,751,872  
Balance, December 31, 2019$169,616  $1,944,445  $682,185  $56,207  $2,852,453  
Cumulative effect of change in accounting
   principles (Note 2)
—  —  (31,150) —  (31,150) 
Balance, January 1, 2020169,616  1,944,445  651,035  56,207  2,821,303  
Net income—  —  22,640  —  22,640  
Other comprehensive income (loss)—  —  —  81,950  81,950  
Dividends - common stock ($0.14 per share)—  —  (23,535) —  (23,535) 
Common stock issued 142  —  —  151  
Common stock repurchased(5,076) (76,746) —  —  (81,822) 
Share-based compensation expense—  2,748  —  —  2,748  
Stock activity under incentive compensation plans560  (329) (231) —  —  
Balance, March 31, 2020$165,109  $1,870,260  $649,909  $138,157  $2,823,435  
The accompanying notes to consolidated financial statements are an integral part of these statements.
7


OLD NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three Months Ended
March 31,
(dollars in thousands)20202019
Cash Flows From Operating Activities  
Net income$22,640  $56,276  
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation8,594  6,443  
Amortization of other intangible assets3,776  4,472  
Amortization of tax credit investments5,515  260  
Net premium amortization on investment securities5,146  3,154  
Accretion income related to acquired loans(6,649) (8,668) 
Share-based compensation expense2,748  1,800  
Excess tax (benefit) expense on share-based compensation(818) (1,013) 
Provision for loan losses16,950  1,043  
Debt securities (gains) losses, net(5,174) 103  
Net (gains) losses on sales of loans and other assets11,826  (1,564) 
Increase in cash surrender value of company-owned life insurance(3,080) (3,188) 
Residential real estate loans originated for sale(223,961) (94,632) 
Proceeds from sales of residential real estate loans219,626  97,010  
(Increase) decrease in interest receivable7,313  3,184  
(Increase) decrease in other assets(87,826) 13,618  
Increase (decrease) in accrued expenses and other liabilities2,242  (45,288) 
Net cash flows provided by (used in) operating activities(21,132) 33,010  
Cash Flows From Investing Activities
Purchases of investment securities available-for-sale(446,819) (530,677) 
Purchases of Federal Home Loan Bank/Federal Reserve Bank stock(10,025) (14,439) 
Proceeds from maturities, prepayments, and calls of investment securities available-for-sale436,742  145,356  
Proceeds from sales of investment securities available-for-sale236,410  8,681  
Proceeds from maturities, prepayments, and calls of investment securities held-to-maturity—  21,689  
Proceeds from sales of Federal Home Loan Bank/Federal Reserve Bank stock11  19  
Proceeds from sales of equity securities133  130  
Loan originations and payments, net(262,497) 182,638  
Proceeds from company-owned life insurance death benefits1,899  2,861  
Proceeds from sales of premises and equipment and other assets—  84  
Purchases of premises and equipment and other assets(7,938) (11,684) 
Net cash flows provided by (used in) investing activities(52,084) (195,342) 
Cash Flows From Financing Activities
Net increase (decrease) in:
Deposits(248,035) 79,321  
Federal funds purchased and interbank borrowings210,356  54,895  
Securities sold under agreements to repurchase(9,715) (19,814) 
Other borrowings(7,339) 3,650  
Payments for maturities of Federal Home Loan Bank advances(200,005) (325,070) 
Proceeds from Federal Home Loan Bank advances500,000  425,000  
Cash dividends paid on common stock(23,535) (22,812) 
Common stock repurchased(81,822) (27,297) 
Proceeds from exercise of stock options—  280  
Common stock issued151  130  
Net cash flows provided by (used in) financing activities140,056  168,283  
Net increase (decrease) in cash and cash equivalents66,840  5,951  
Cash and cash equivalents at beginning of period276,337  317,165  
Cash and cash equivalents at end of period$343,177  $323,116  
Supplemental cash flow information:
Total interest paid$26,387  $33,779  
Total taxes paid (net of refunds)$1,212  $150  
Investment securities purchased but not settled$102,459  $10,912  
Operating lease right-of-use assets obtained in exchange for lease obligations$(310) $117,739  
Finance lease right-of-use assets obtained in exchange for lease obligations$—  $7,542  
The accompanying notes to consolidated financial statements are an integral part of these statements.
8



OLD NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the accounts of Old National Bancorp and its wholly-owned affiliates (hereinafter collectively referred to as “Old National”) and have been prepared in conformity with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry.  Such principles require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosures of contingent assets and liabilities at the date of the financial statements and amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  In the opinion of management, the consolidated financial statements contain all the normal and recurring adjustments necessary for a fair statement of the financial position of Old National as of March 31, 2020 and December 31, 2019, and the results of its operations for the three months ended March 31, 2020 and 2019.  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, 2019.
All significant intercompany transactions and balances have been eliminated.  Certain prior year amounts have been reclassified to conform to the current presentation.  Such reclassifications had no effect on prior period net income or shareholders’ equity and were insignificant amounts.
NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Guidance Adopted in 2020
FASB ASC 326 – In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and all related subsequent amendments thereto (“CECL”). The main objective of this amendment is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments within its scope, including loans held for investment purposes and other commitments to extend credit held by a reporting entity at each reporting date. The amendment requires the measurement of all expected credit losses for the in-scope financial assets at the date of origination or acquisition, and at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to enhance their credit loss estimates. The amendment requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The current expected credit loss measurement will be used to estimate the allowance for credit losses (“ACL”) over the life of the financial assets. The amendments in this update became effective for annual periods and interim periods within those annual periods beginning after December 15, 2019.

As previously disclosed, Old National formed a cross-functional committee to oversee the adoption of the ASU at the effective date. A working group was also formed to develop a project plan focused on understanding the ASU, researching issues, identifying data needs for modeling inputs, technology requirements, modeling considerations, and ensuring overarching governance was achieved for each objective and milestone. The working group identified 7 distinct loan portfolios for which a model to estimate credit losses has been developed. For all 7 loan portfolios, the data sets have been identified, populated, and internally validated. Old National has completed data and model validation testing. During the last half of 2019, the project plan targeted parallel processing of our existing allowance for loan losses model compared to the CECL model, as well as model sensitivity analysis, determination of qualitative adjustments, supporting analytics, and execution of the governance and approval process. Internal controls related to the CECL process were finalized prior to adoption on January 1, 2020.

9


The CECL modeling measurements for estimating the current expected life-time credit losses for loans and debt securities includes the following major items:
Initial loss forecast – using a forecast period of one year for all allowance portfolio segments and off-balance-sheet credit exposures, using forward-looking economic scenarios of expected losses.
Historical loss forecast – for a period incorporating the remaining contractual life, adjusted for prepayments, and the changes in various economic variables during representative historical and recessionary periods.
Reversion period – using two years, which links the initial loss forecast to the historical loss forecast based on economic conditions at the measurement date.
Discounted cash flow aggregator – using the items above to estimate the life-time credit losses for all portfolios and losses for loans modified as a TDR.

Old National adopted CECL on January 1, 2020 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures. Results for the reporting periods after January 1, 2020 are presented under Topic 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. As of that date, Old National increased the allowance for credit losses for loans by $41.3 million and increased the allowance for credit losses for unfunded loan commitments by $4.5 million, since the ASU covers credit losses over the expected life of a loan as well as considering future changes in macroeconomic conditions. The increase related to the acquired loan portfolio totaled $27.1 million. Under the previously applicable accounting guidance, any remaining unamortized loan discount on an individual loan could be used to offset a charge-off for that loan, so the allowance for loan losses needed for the acquired loans was reduced by the remaining loan discounts. The new ASU removes the ability to offset a charge-off against the remaining loan discount and requires an allowance for credit losses to be recognized in addition to the loan discount. The impact of adopting the ASU, and at each subsequent reporting period, is highly dependent on credit quality, macroeconomic forecasts and conditions, composition of our loans and available-for-sale securities portfolio, along with other management judgements. As of January 1, 2020, Old National recorded a cumulative-effect adjustment of $31.2 million to decrease retained earnings.

Old National did not record an allowance for credit losses on its available-for-sale debt securities under the newly codified available-for-sale debt security impairment model, as the majority of these securities are government agency-backed securities for which the risk of loss is minimal.

We adopted CECL using the prospective transition approach for financial assets purchased with credit deterioration (“PCD”) that were previously classified as purchased credit impaired and accounted for under ASC 310-30. In accordance with the standard, we did not reassess whether PCI assets met the definition of PCD assets as of the date of adoption. On January 1, 2020, the amortized cost basis of the PCD assets were adjusted to reflect the addition of $4.5 million to the allowance for credit losses for loans. The remaining noncredit discount in the amount of $11.8 million (based on the adjusted amortized cost basis) will be accreted into interest income at the effective interest rate as of January 1, 2020.

10


The loan categories used to monitor and analyze interest income and yields are different than the portfolio segments used to determine the allowance for credit losses for loans. The allowance for credit losses was calculated by pooling loans of similar credit risk characteristics and credit monitoring procedures. The 4 loan portfolios are classified into 7 segments of loans - commercial, commercial real estate, business banking credit center ("BBCC"), residential real estate, indirect, direct, and home equity. The commercial and commercial real estate loan categories shown on the balance sheet include the same pool of loans as the commercial, commercial real estate, and BBCC portfolio segments. The consumer loan category shown on the balance sheet is comprised of the same loans in the indirect, direct, and home equity portfolio segments. The composition of loans by portfolio segment as of December 31, 2019 follows:

(dollars in thousands)December 31, 2019
Statement
Balance
Segment
Portfolio
Reclassifications
December 31, 2019
After
Reclassifications
Loans:
Commercial$2,890,296  $(75,142) $2,815,154  
Commercial real estate5,166,792  (277,539) 4,889,253  
BBCCN/A  352,681  352,681  
Residential real estate2,334,289  —  2,334,289  
Consumer1,726,147  (1,726,147) N/A  
IndirectN/A  935,584  935,584  
DirectN/A  228,524  228,524  
Home equityN/A  562,039  562,039  
Total$12,117,524  $—  $12,117,524  
Allowance:
Commercial$(22,585) $1,226  $(21,359) 
Commercial real estate(21,588) 1,053  (20,535) 
BBCCN/A  (2,279) (2,279) 
Residential real estate(2,299) —  (2,299) 
Consumer(8,147) 8,147  N/A  
IndirectN/A  (5,319) (5,319) 
DirectN/A  (1,863) (1,863) 
Home equityN/A  (965) (965) 
Total$(54,619) $—  $(54,619) 

11


The following table illustrates the impact of adoption of the ASU:
(dollars in thousands)December 31, 2019 After ReclassificationsImpact of
ASC 326
Adoption
January 1, 2020
Post-ASC 326
Adoption
Assets:
Loans, net of unearned income:
Commercial$2,815,154  $2,679  $2,817,833  
Commercial real estate4,889,253  1,637  4,890,890  
BBCC352,681  33  352,714  
Residential real estate2,334,289  105  2,334,394  
Indirect935,584  10  935,594  
Direct228,524   228,526  
Home equity562,039  12  562,051  
Total12,117,524  4,478  12,122,002  
Allowance:
Commercial(21,359) (7,150) (28,509) 
Commercial real estate(20,535) (25,548) (46,083) 
BBCC(2,279) (3,702) (5,981) 
Residential real estate(2,299) (6,986) (9,285) 
Indirect(5,319) 1,669  (3,650) 
Direct(1,863) 1,059  (804) 
Home equity(965) (689) (1,654) 
Total allowance for credit losses on loans(54,619) (41,347) (95,966) 
Net loans$12,062,905  $(36,869) $12,026,036  
Net deferred tax assets$29,705  $10,268  $39,973  
Liabilities:
Allowance for credit losses on unfunded loan commitments$2,656  $4,549  $7,205  
Shareholders' equity:
Retained earnings$682,185  $(31,150) $651,035  
In December 2018, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard. In March 2020, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC announced an interim final rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL. The interim final rule maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). Old National is adopting the capital transition relief over the permissible five-year period.

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

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FASB ASC 820 – In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The updated guidance improves the disclosure requirements on fair value measurements. The ASU removes certain disclosures required by Topic 820 related to transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; the valuation processes for Level 3 fair value measurements; and for nonpublic entities, the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period. The ASU modifies certain disclosures required by Topic 820 related to disclosure of transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities for nonpublic entities; the requirement to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly for investments in certain entities that calculate net asset value; and clarification that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. The ASU adds certain disclosure requirements related to changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The amendments in this update became effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2019 and did not have a material impact on the financial statements.

FASB ASC 350 – In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments in this update became effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years and did not have a material impact on the financial statements.

FASB ASC 842 – In March 2019, the FASB issued ASU No. 2019-01, Leases (Topic 842): Codification Improvements. The amendments in ASU No. 2019-01 align the guidance for fair value of the underlying asset by lessors that are not manufacturers or dealers in Topic 842 with that of existing guidance. As a result, the fair value of the underlying asset at lease commencement is its cost, reflecting any volume or trade discounts that may apply. However, if there has been a significant lapse of time between when the underlying asset is acquired and when the lease commences, the definition of fair value in Topic 820, Fair Value Measurement should be applied. ASU No. 2019-01 also requires lessors within the scope of Topic 942, Financial Services—Depository and Lending, to present all “principal payments received under leases” within investing activities. The amendments in this update became effective for annual periods and interim periods within those annual periods beginning after December 15, 2019 and did not have a material impact on the financial statements.

FASB ASC 326, 815, and 825 – In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The amendments related to Topic 326 address accrued interest, transfers between classifications or categories for loans and debt securities, recoveries, vintage disclosures, and contractual extensions and renewal options and became effective for annual periods and interim periods within those annual periods beginning after December 15, 2019. The improvements and clarifications related to Topic 815 address partial-term fair value hedges of interest-rate risk, amortization, and disclosure of fair value hedge basis adjustments and consideration of hedged contractually specified interest rate under the hypothetical method and became effective for the annual reporting period beginning January 1, 2020. The amendments related to Topic 825 contain various improvements to ASU 2016-01, including scope; held-to-maturity debt securities fair value disclosures; and remeasurement of equity securities at historical exchange rates and became effective for fiscal years and interim periods beginning after December 15, 2019. The amendments in this update did not have a material impact on the financial statements.

FASB ASC 326 – In May 2019, the FASB issued ASU No. 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief. These amendments provide targeted transition relief allowing entities to irrevocably elect the fair value option, on an instrument-by-instrument basis, for certain financial assets (excluding held-to-maturity debt securities) previously measured at amortized cost.

In November 2019, the FASB issued 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, to make improvements to the credit losses standard. Most significantly, the standard clarifies
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guidance around how to report expected recoveries for PCD assets. “Expected recoveries” describes a situation in which an organization recognizes a full or partial writeoff of the amortized cost basis of a financial asset, but then later determines that the amount written off, or a portion of that amount, will in fact be recovered. This ASU permits organizations to record expected recoveries on PCD assets. In addition to other narrow technical improvements, the ASU also reinforces existing guidance that prohibits organizations from recognizing negative allowances for available-for-sale debt securities.

The amendments in these updates became effective for annual periods and interim periods within those annual periods beginning after December 15, 2019 and did not have a material impact on the consolidated financial statements.

FASB ASC 718 – In November 2019, the FASB issued ASU No. 2019-08, Compensation – Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements—Share-Based Consideration Payable to a Customer. This ASU requires companies to measure and classify (on the balance sheet) share-based payments to customers by applying the guidance in Topic 718, Compensation—Stock Compensation. As a result, the amount recorded as a reduction in revenue would be measured based on the grant-date fair value of the share-based payment. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2019 and did not have a material impact on the consolidated financial statements.

FASB ASC 326 and 842 – In February 2020, the FASB issued ASU No. 2020-02, Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842). This ASU inserts a paragraph to address the November 2019 issuance of SEC Staff Accounting Bulletin ("SAB") 119, Accounting for Loan Losses by Registrants Engaged in Lending Activities Subject to FASB ASC Topic 326. The SAB updates existing staff guidance on developing a systematic methodology for estimating credit losses, and it explains the documentation the staff typically would expect from registrants in support of estimates of current expected credit losses ("CECL") for lending activities, when material. The amendments in this update became effective upon issuance and did not have a material impact on the consolidated financial statements.

Guidance on Non-TDR Loan Modifications due to COVID-19
On March 22, 2020, a statement was issued by our banking regulators and titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") that passed on March 27, 2020 further provides that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates. Accordingly, we are offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. The modifications completed in the three months ended March 31, 2020 were immaterial.
Accounting Guidance Issued But Not Yet Adopted 
FASB ASC 715 – In August 2018, the FASB issued ASU No. 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans. The amendments in this update modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The amendments in this update become effective for fiscal years ending after December 15, 2020 and will not have a material impact on the consolidated financial statements.

FASB ASC 740 – In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU removes specific exceptions to the general principles in Topic 740 in GAAP. It eliminates the need for an organization to analyze whether the following apply in a given period: (1) exception to the incremental approach for intraperiod tax allocation; (2) exceptions to accounting for basis differences when there are ownership changes in foreign investments; and (3) exception in interim period income tax
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accounting for year-to-date losses that exceed anticipated losses. The ASU also improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for: (1) franchise taxes that are partially based on income; (2) transactions with a government that result in a step up in the tax basis of goodwill; (3) separate financial statements of legal entities that are not subject to tax; and (4) enacted changes in tax laws in interim periods. The amendments in this update become effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. Old National is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

FASB ASC 321, 323, and 815 – In January 2020, the FASB issued ASU No. 2020-01, Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions Between Topic 321, Topic 323, and Topic 815 (a Consensus of the Emerging Issues Task Force). The ASU clarifies the interaction between ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities and the ASU on equity method investments. ASU 2016-01 provides companies with an alternative to measure certain equity securities without a readily determinable fair value at cost, minus impairment, if any, unless an observable transaction for an identical or similar security occurs. ASU 2020-01 clarifies that for purposes of applying the Topic 321 measurement alternative, an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting under Topic 323, immediately before applying or upon discontinuing the equity method. In addition, the new ASU provides direction that a company should not consider whether the underlying securities would be accounted for under the equity method or the fair value option when it is determining the accounting for certain forward contracts and purchased options, upon either settlement or exercise. The amendments in this update become effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted, and the amendments are to be applied prospectively. Old National is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

Codification Improvements to Financial Instruments – In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments. This ASU was issued to clarify and improve various financial instruments Topics. The amendments include the following improvements:
Issue 1 – Clarifies that all entities are required to provide fair value option disclosures.
Issue 2 – Clarifies the applicability of the portfolio exception in measuring fair value for nonfinancial items accounted for as derivatives.
Issue 3 – Clarifies that disclosure requirements in Topic 320 apply to disclosure requirements in Topic 942 for depository and lending institutions.
Issue 4 – Added cross-reference of line-of-credit or revolving-debt arrangements guidance to guidance in accounting for fees between debtor and creditor and third-party costs directly related to exchanges or modifications of debt instruments.
Issue 5 – Clarifies that fair value measurement disclosure requirements do not apply to entities using the net asset value per share practical expedient.
Issue 6 – Aligns the contractual term to measure expected credit losses for a net investment in a lease under the Credit Loss Standard (Topic 326) with the lease term determined under the Leases Standard (Topic 842).
Issue 7 – Clarifies that when an entity regains control of financial assets sold, an allowance for credit losses should be recorded in accordance with Topic 326.
For Issue 1, Issue 2, Issue 4, and Issue 5, the amendments are effective upon issuance and did not have a material impact on the consolidated financial statements. For Issue 3, the amendments to ASU 2016-01 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years and did not have a material impact on the consolidated financial statements. For Issues 6 and 7, the amendments to ASU 2016-13 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years and did not have a material impact on the consolidated financial statements.
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FASB ASC 848 – In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary, optional guidance to ease the potential burden in accounting for, or recognizing the effects of, the transition away from the LIBOR or other interbank offered rate on financial reporting. To help with the transition to new reference rates, the ASU provides optional expedients and exceptions for applying GAAP to affected contract modifications and hedge accounting relationships. The main provisions include:
A change in a contract’s reference interest rate would be accounted for as a continuation of that contract rather than as the creation of a new one for contracts, including loans, debt, leases, and other arrangements, that meet specific criteria.
When updating its hedging strategies in response to reference rate reform, an entity would be allowed to preserve its hedge accounting.
The guidance is applicable only to contracts or hedge accounting relationships that reference LIBOR or another reference rate expected to be discontinued. Because the guidance is meant to help entities through the transition period, it will be in effect for a limited time and will not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, for which an entity has elected certain optional expedients that are retained through the end of the hedging relationship. The amendments in this ASU are effective March 12, 2020 through December 31, 2022. Old National is evaluating the impact of adopting the new guidance on the consolidated financial statements on an ongoing basis with no material expected impact at this time.
NOTE 3 – NET INCOME PER SHARE
Basic and diluted net income per share are calculated using the two-class method.  Net income is divided by the weighted-average number of common shares outstanding during the period.  Adjustments to the weighted average number of common shares outstanding are made only when such adjustments will dilute net income per common share.  Net income is then divided by the weighted-average number of common shares and common share equivalents during the period.
The following table reconciles basic and diluted net income per share:
Three Months Ended
March 31,
(dollars and shares in thousands, except per share data)20202019
Basic Net Income Per Share  
Net income$22,640  $56,276  
Weighted average common shares outstanding167,748  174,734  
Basic Net Income Per Share$0.13  $0.32  
Diluted Net Income Per Share
Net income$22,640  $56,276  
Weighted average common shares outstanding167,748  174,734  
Effect of dilutive securities:
Restricted stock616  582  
Stock options (1)40  52  
Weighted average shares outstanding168,404  175,368  
Diluted Net Income Per Share$0.13  $0.32  
(1)Options to purchase 14 thousand shares outstanding at March 31, 2020 and 2019 were not included in the computation of net income per diluted share for the three months ended March 31, 2020 and 2019 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 4 – INVESTMENT SECURITIES
The following table summarizes the amortized cost, fair value, and allowance for credit losses of the available-for-sale investment securities portfolio and the corresponding amounts of unrealized gains and losses recognized in accumulated other comprehensive income (loss):
(dollars in thousands)Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Allowance for
Credit Losses
for Investments
Fair
Value
March 31, 2020    
Available-for-Sale    
U.S. Treasury$11,379  $354  $—  $—  $11,733  
U.S. government-sponsored entities and agencies515,217  3,954  —  —  519,171  
Mortgage-backed securities - Agency3,089,212  121,282  (494) —  3,210,000  
States and political subdivisions1,251,515  51,841  (961) —  1,302,395  
Pooled trust preferred securities13,798  ��  (6,376) —  7,422  
Other securities308,242  5,929  (4,867) —  309,304  
Total available-for-sale securities$5,189,363  $183,360  $(12,698) $—  $5,360,025  
December 31, 2019
Available-for-Sale
U.S. Treasury$17,567  $117  $(2) $—  $17,682  
U.S. government-sponsored entities and agencies596,595  1,027  (4,638) —  592,984  
Mortgage-backed securities - Agency3,151,550  41,363  (9,052) —  3,183,861  
States and political subdivisions1,232,497  44,193  (1,047) —  1,275,643  
Pooled trust preferred securities13,811  —  (5,589) —  8,222  
Other securities301,189  6,842  (1,332) —  306,699  
Total available-for-sale securities$5,313,209  $93,542  $(21,660) $—  $5,385,091  
Proceeds from sales or calls of available-for-sale investment securities and the resulting realized gains and realized losses were as follows:
Three Months Ended
March 31,
(dollars in thousands)20202019
Proceeds from sales of available-for-sale debt securities$236,410  $8,681  
Proceeds from calls of available-for-sale debt securities163,771  23,685  
Total$400,181  $32,366  
Realized gains on sales of available-for-sale debt securities$5,595  $71  
Realized gains on calls of available-for-sale debt securities13   
Realized losses on sales of available-for-sale debt securities(409) (148) 
Realized losses on calls of available-for-sale debt securities(25) (29) 
Debt securities gains (losses), net$5,174  $(103) 
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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 contractual 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, 2020
(dollars in thousands)Amortized
Cost
Fair
Value
Weighted
Average
Yield
Maturity
Available-for-Sale   
Within one year$741,828  $762,452  1.82 %
One to five years2,591,483  2,691,307  2.73  
Five to ten years592,020  609,108  3.41  
Beyond ten years1,264,032  1,297,158  3.24  
Total$5,189,363  $5,360,025  2.80 %
The following table summarizes the available-for-sale investment securities with unrealized losses for which an allowance for credit losses has not been recorded by aggregated major security type and length of time in a continuous unrealized loss position:
 Less than 12 months12 months or longerTotal
(dollars in thousands)Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized Losses
March 31, 2020      
Available-for-Sale      
Mortgage-backed securities - Agency$66,182  $(295) $13,308  $(199) $79,490  $(494) 
States and political subdivisions75,669  (961) 465  —  76,134  (961) 
Pooled trust preferred securities—  —  7,422  (6,376) 7,422  (6,376) 
Other securities101,144  (2,907) 24,690  (1,960) 125,834  (4,867) 
Total available-for-sale$242,995  $(4,163) $45,885  $(8,535) $288,880  $(12,698) 
December 31, 2019
Available-for-Sale
U.S. Treasury$999  $(2) $—  $—  $999  $(2) 
U.S. government-sponsored entities
   and agencies
357,647  (4,638) —  —  357,647  (4,638) 
Mortgage-backed securities - Agency786,245  (6,122) 212,056  (2,930) 998,301  (9,052) 
States and political subdivisions120,166  (1,016) 7,006  (31) 127,172  (1,047) 
Pooled trust preferred securities—  —  8,222  (5,589) 8,222  (5,589) 
Other securities30,765  (182) 87,066  (1,150) 117,831  (1,332) 
Total available-for-sale$1,295,822  $(11,960) $314,350  $(9,700) $1,610,172  $(21,660) 
Available-for-sale debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. For available-for sale debt securities in an unrealized loss position, we first assess whether we intend to sell, or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For available-for sale debt securities that do not meet the criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security and the issuer, among other factors. If this assessment indicates that a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. No allowance for credit losses for available-for-
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sale debt securities was needed at March 31, 2020. Accrued interest receivable on available-for-sale debt securities totaled $22.6 million at March 31, 2020 and is excluded from the estimate of credit losses.
The U.S. government sponsored entities and agencies and mortgage-backed securities – agency are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major credit rating agencies, and have a long history of no credit losses. Therefore, for those securities, we do not record expected credit losses.
Prior to the adoption of ASC 326, there was 0 OTTI recorded during the three months ended March 31, 2019.
At March 31, 2020, Old National’s securities portfolio consisted of 1,867 securities, 186 of which were in an unrealized loss position.  The unrealized losses attributable to our agency mortgage-backed securities, states and political subdivisions, and other securities are the result of fluctuations in interest rates.  Our pooled trust preferred securities are discussed below.  At March 31, 2020, we had no intent to sell any securities that were in an unrealized loss position nor is it expected that we would be required to sell the securities prior to their anticipated recovery.
Pooled Trust Preferred Securities
At March 31, 2020, our securities portfolio contained 2 pooled trust preferred securities with a fair value of $7.4 million and unrealized losses of $6.4 million.  These securities are evaluated using collateral-specific assumptions to estimate the expected future interest and principal cash flows.  For the three months ended March 31, 2020 and 2019, we did 0t recognize any losses on these securities.
The table below summarizes the relevant characteristics of our pooled trust preferred securities as well as our single issuer trust preferred securities that are included in the “other securities” category in this footnote.  Each of the pooled trust preferred securities support a more senior tranche of security holders.  Both pooled trust preferred securities have experienced credit defaults.  However, these securities have excess subordination and are not other-than-temporarily impaired as a result of their class hierarchy, which provides more loss protection.
Trust preferred securities 
March 31, 2020
(dollars in thousands)ClassLowest
Credit
Rating (1)
Amortized
Cost
 Fair
Value
 Unrealized
Gain/
(Loss)
 # of Issuers
Currently
Performing/
Remaining
Actual
Deferrals
and Defaults
as a % of
Original
Collateral
Expected
Defaults as
a % of
Remaining
Performing
Collateral
Excess
Subordination
as a % of
Current
Performing
Collateral
Pooled trust preferred securities:            
Pretsl XXVII LTDBB$4,270  $2,192  $(2,078) 32/4114.4%11.2%33.5%
Trapeza Ser 13AA2ABBB9,528  5,230  (4,298) 39/414.5%6.6%51.6%
 13,798  7,422  (6,376) 
Single Issuer trust preferred securities:
JP Morgan Chase & CoBBB-4,800  3,600  (1,200) 
Total$18,598  $11,022  $(7,576) 
(1)Lowest rating for the security provided by any nationally recognized credit rating agency.
Equity Securities
Equity securities are recorded at fair value and totaled $6.9 million at March 31, 2020 and $6.8 million at December 31, 2019.  There were gains on equity securities of $0.1 million during the three months ended March 31, 2020, compared to gains of $0.2 million during the three months ended March 31, 2019.  Old National also has equity securities without readily determinable fair values that are included in other assets that totaled $93.1 million at March 31, 2020 and $91.4 million at December 31, 2019.  These are illiquid investments that consist of partnerships, limited liability companies, and other ownership interests that support affordable housing, economic development, and community revitalization initiatives in low-to-moderate income neighborhoods.  There have been 0 impairments or adjustments on these securities in the three months ended March 31, 2020 or 2019.
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NOTE 5 – LOANS HELD FOR SALE
Mortgage loans held for immediate sale in the secondary market were $54.2 million at March 31, 2020, compared to $46.9 million at December 31, 2019.  Residential loans that Old National has originated with the intent to sell are recorded at fair value.  Conventional mortgage production is sold on a servicing retained basis.  Certain loans, such as government guaranteed mortgage loans are sold on servicing released basis.
NOTE 6 – LOANS AND ALLOWANCE FOR CREDIT LOSSES
Old National’s loans consist primarily of loans made to consumers and commercial clients in various industries, including manufacturing, agribusiness, transportation, mining, wholesaling, and retailing.  Most of Old National’s lending activity occurs within our principal geographic markets of Indiana, Kentucky, Michigan, Wisconsin, and Minnesota.  Old National manages concentrations of credit exposure by industry, product, geography, customer relationship, and loan size.  While loans to lessors of both residential and non-residential real estate exceed 10% of total loans, no individual sub-segment category within those broader categories reaches the 10% threshold.
The loan categories used to monitor and analyze interest income and yields are different than the portfolio segments used to determine the allowance for credit losses for loans. The allowance for credit losses was calculated by pooling loans of similar credit risk characteristics and credit monitoring procedures. The 4 loan portfolios are classified into 7 segments of loans - commercial, commercial real estate, BBCC, residential real estate, indirect, direct, and home equity. The commercial and commercial real estate loan categories shown on the balance sheet include the same pool of loans as the commercial, commercial real estate, and BBCC portfolio segments. The consumer loan category shown on the balance sheet is comprised of the same loans in the indirect, direct, and home equity portfolio segments. The composition of loans by portfolio segment as of December 31, 2019 and January 1, 2020 follows:
December 31, 2019CreditDecember 31, 2019Impact ofJanuary 1, 2020
StatementRiskAfterASC 326Post-ASC 326
(dollars in thousands)BalanceReclassificationsReclassificationsAdoptionAdoption
Loans:
Commercial$2,890,296  $(75,142) $2,815,154  $2,679  $2,817,833  
Commercial real estate5,166,792  (277,539) 4,889,253  1,637  4,890,890  
BBCCN/A  352,681  352,681  33  352,714  
Residential real estate2,334,289  —  2,334,289  105  2,334,394  
Consumer1,726,147  (1,726,147) N/A  N/A  N/A  
IndirectN/A  935,584  935,584  10  935,594  
DirectN/A  228,524  228,524   228,526  
Home equityN/A  562,039  562,039  12  562,051  
Total$12,117,524  $—  $12,117,524  $4,478  $12,122,002  
Allowance:
Commercial$(22,585) $1,226  $(21,359) $(7,150) $(28,509) 
Commercial real estate(21,588) 1,053  (20,535) (25,548) (46,083) 
BBCCN/A  (2,279) (2,279) (3,702) (5,981) 
Residential real estate(2,299) —  (2,299) (6,986) (9,285) 
Consumer(8,147) 8,147  N/A  N/A  N/A  
IndirectN/A  (5,319) (5,319) 1,669  (3,650) 
DirectN/A  (1,863) (1,863) 1,059  (804) 
Home equityN/A  (965) (965) (689) (1,654) 
Total$(54,619) $—  $(54,619) $(41,347) $(95,966) 
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The composition of loans by portfolio segment follows:
(dollars in thousands)March 31,
2020
January 1,
2020
Commercial (1)$2,844,465  $2,817,833  
Commercial real estate5,118,439  4,890,890  
BBCC367,139  352,714  
Residential real estate2,327,851  2,334,394  
Indirect953,136  935,594  
Direct211,793  228,526  
Home equity561,789  562,051  
Total loans12,384,612  12,122,002  
Allowance for credit losses(106,380) (95,966) 
Net loans$12,278,232  $12,026,036  
(1)Includes direct finance leases of $44.4 million at March 31, 2020 and $47.2 million at December 31, 2019.
The risk characteristics of each loan portfolio segment are as follows:
Commercial
Commercial loans are classified primarily on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower.  The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value.  Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some loans may be made on an unsecured basis.  In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.
Commercial Real Estate
Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate.  Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan.  Commercial real estate loans may be adversely affected by conditions in the real estate markets or in the general economy.  The properties securing Old National’s commercial real estate portfolio are diverse in terms of type and geographic location.  Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.
Included with commercial real estate are construction loans, which are underwritten utilizing independent appraisal reviews, sensitivity analysis of absorption and lease rates, financial analysis of the developers and property owners, and feasibility studies, if available.  Construction loans are generally based on estimates of costs and value associated with the complete project.  These estimates may be inaccurate.  Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project.  Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders (including Old National), sales of developed property, or an interim loan commitment from Old National until permanent financing is obtained.  These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions, and the availability of long-term financing.
At 206%, Old National Bank’s commercial real estate loans as a percentage of its risk-based capital remained well below the regulatory guideline limit of 300% at March 31, 2020.
BBCC

BBCC loans are typically granted to small businesses with gross revenues of less than $5 million and aggregate debt of less than $1 million. Old National has established minimum debt service coverage ratios, minimum FICO scores for owner(s) and guarantor(s), and the ability to show relatively stable earnings as criteria to help mitigate risk.
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Repayment of these loans depends on the personal income of the borrowers and the cash flows of the business. These factors can be affected by changes in economic conditions such as unemployment levels.
Residential
With respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, Old National typically establishes a maximum loan-to-value ratio and generally requires private mortgage insurance if that ratio is exceeded.  Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels.  Repayment can also be impacted by changes in residential property values.  Portfolio risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.
Indirect
Indirect loans are secured by automobile collateral, generally new and used cars and trucks from auto dealers that operate within our footprint. Old National typically mitigates the risk of Indirect loans by establishing minimum FICO scores, maximum loan-to-value ratios, and maximum debt-to-income ratios. Repayment of these loans depends largely on the personal income of the borrowers which can be affected by changes in economic conditions such as unemployment levels. Portfolio risk is mitigated by the fact that the loans are of smaller amounts spread over many borrowers, conservative credit policies, and ongoing reviews of dealer relationships.

Direct

Direct loans are typically secured by collateral such as auto or real estate or are unsecured. Old National has established conservative underwriting standards such as minimum FICO scores, maximum loan-to-value ratios, and maximum debt-to-income ratios. Repayment of these loans depends largely on the personal income of the borrowers which can be affected by changes in economic conditions such as unemployment levels. Portfolio risk is mitigated by the fact that the loans are of smaller amounts spread over many borrowers along with conservative credit policies.
Home Equity
Home Equity loans are generally secured by 1-4 family residences that are owner occupied. Old National has established conservative underwriting standards such as minimum FICO scores, maximum loan-to-value ratios, and maximum debt-to-income ratios. Repayment of these loans depends largely on the personal income of the borrowers which can be affected by changes in economic conditions such as unemployment levels. Portfolio risk is mitigated by the fact that the loans are of smaller amounts spread over many borrowers along with conservative credit policies as well as monitoring of updated borrower credit scores. Risk is further mitigated in that Old National retains the right to unconditionally cancel unfunded lines of credit due to deterioration of borrower credit history.
Allowance for Credit Losses for Loans
Credit quality within the loans held for investment portfolio is continuously monitored by management and is reflected within the allowance for credit losses for loans. The allowance for credit losses is an estimate of expected losses inherent within the Company’s loans held for investment portfolio. Credit quality is assessed and monitored by evaluating various attributes and the results of those evaluations are utilized in underwriting new loans and in our process for estimating expected credit losses. Expected credit loss inherent in non-cancelable off-balance-sheet credit exposures is accounted for as a separate liability included in other liabilities on the balance sheet. The allowance for credit losses for loans held for investment is adjusted by a credit loss expense, which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries. We have made a policy election to report accrued interest receivable as a separate line item on the balance sheet. Accrued interest receivable on loans totaled $54.0 million at March 31, 2020 and is excluded from the estimate of credit losses.
The allowance for credit loss estimation process involves procedures to appropriately consider the unique characteristics of its loan portfolio segments. These segments are further disaggregated into loan classes, the level at which credit risk is monitored. When computing the level of expected credit losses, credit loss assumptions are estimated using a model that categorizes loan pools based on loss history, delinquency status, and other credit trends
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and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense in those future periods.

The allowance level is influenced by loan volumes, loan AQR migration or delinquency status, changes in historical loss experience, and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions. The methodology for estimating the amount of expected credit losses reported in the allowance for credit losses has two basic components: first, an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans; and second, a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics. See Note 2 for more information about CECL for loans and unfunded loan commitments.
For the three months ended March 31, 2020 the allowance for credit losses increased primarily due to macroeconomic factors surrounding the COVID-19 pandemic. The forecast scenario includes a sharp decline in gross domestic product in the second quarter of 2020 with a return to growth by year end. The immediate increase in unemployment remains elevated through 2023. In addition to these quantitative inputs, several qualitative factors were considered, including the risk that the economic decline, specifically unemployment and gross domestic product, prove to be more severe and/or prolonged than our baseline forecast. The mitigating impact of the unprecedented fiscal stimulus, including direct payments to individuals, increased unemployment benefits, as well as the various government sponsored loan programs, was also considered. Old National’s activity in the allowance for credit losses for loans by portfolio segment for the three months ended March 31, 2020 was as follows:
(dollars in thousands)Balance at
Beginning of
Period
Impact of
Adopting
ASC 326
Sub-TotalCharge-offsRecoveriesProvision
for Credit
Losses
Balance at End of Period
Three Months Ended
March 31, 2020
     
Commercial$21,359  $7,150  $28,509  $(5,042) $357  $7,301  $31,125  
Commercial real estate20,535  25,548  46,083  (1,292) 669  8,643  54,103  
BBCC2,279  3,702  5,981  (15) 66  (615) 5,417  
Residential real estate2,299  6,986  9,285  (300) 169  483  9,637  
Indirect5,319  (1,669) 3,650  (1,203) 414  805  3,666  
Direct1,863  (1,059) 804  (475) 152  341  822  
Home equity965  689  1,654  (118) 82  (8) 1,610  
Total allowance for credit losses$54,619  $41,347  $95,966  $(8,445) $1,909  $16,950  $106,380  
The provision recapture for the BBCC portfolio was the result of several offsetting items. The economic forecast resulted in an increase to the provision for credit losses for the quarter, which was more than offset by a decrease related to the payoffs of several nonaccrual loans during the quarter. In addition, the BBCC portfolio has a lower weighted average life quarter over quarter, which resulted in a decrease to the allowance for credit losses that was needed at March 31, 2020.
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Allowance for Credit Losses on Unfunded Loan Commitments
Old National maintains an allowance for credit losses on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements. The allowance is computed using a methodology similar to that used to determine the allowance for credit losses for loans, modified to take into account the probability of a drawdown on the commitment. The allowance for credit losses on unfunded loan commitments is classified as a liability account on the balance sheet. Old National’s activity in the allowance for credit losses on unfunded loan commitments for the three months ended March 31, 2020 was as follows:
(dollars in thousands)Total
Three months ended March 31, 2020 
Allowance for credit losses on unfunded loan commitments: 
Balance at beginning of period$2,656  
Impact of adopting ASC 3264,549  
Sub-Total7,205  
Expense (reversal of expense) for credit losses1,745  
Balance at end of period$8,950  
Credit Quality
Old National’s management monitors the credit quality of its loans on an ongoing basis with the AQR for commercial loans reviewed annually or at renewal and the performance of its residential and consumer loans based upon the accrual status refreshed at least quarterly.  Internally, management assigns an AQR to each non-homogeneous commercial, commercial real estate, and BBCC loan in the portfolio.  The primary determinants of the AQR are the reliability of the primary source of repayment and the past, present, and projected financial condition of the borrower.  The AQR will also consider current industry conditions.  Major factors used in determining the AQR can vary based on the nature of the loan, but commonly include factors such as debt service coverage, internal cash flow, liquidity, leverage, operating performance, debt burden, FICO scores, occupancy, interest rate sensitivity, and expense burden.  Old National uses the following definitions for risk ratings:
Criticized.  Special mention loans that have a potential weakness that deserves management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Classified – Substandard.  Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Classified – Nonaccrual.  Loans classified as nonaccrual have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection in full, on the basis of currently existing facts, conditions, and values, in doubt.
Classified – Doubtful.  Loans classified as doubtful have all the weaknesses inherent in those classified as nonaccrual, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Pass rated loans are those loans that are other than criticized, classified – substandard, classified – nonaccrual, or classified – doubtful.
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The following table summarizes the risk category of commercial, commercial real estate, and BBCC loans by loan portfolio segment and class of loan:
Risk Rating
(dollars in thousands)PassCriticizedClassified -
substandard
Classified -
nonaccrual
Classified -
doubtful
Total
March 31, 2020
Commercial:
Term Loans at Amortized Cost by Origination Year:
Prior to 2016$339,465  $9,386  $9,935  $816  $3,051  $362,653  
2016177,397  6,799  4,268  784  803  190,051  
2017342,542  12,704  13,345  2,324  9,838  380,753  
2018312,229  12,995  7,893  5,905  157  339,179  
2019546,484  4,707  5,421  3,274  2,254  562,140  
2020213,893  1,708  751  —  —  216,352  
Revolving Loans581,830  39,157  18,326  3,905  —  643,218  
Revolving to Term Loans138,584  1,356  3,397  6,782  —  150,119  
Total$2,652,424  $88,812  $63,336  $23,790  $16,103  $2,844,465  
Commercial real estate:
Term Loans at Amortized Cost by Origination Year:
Prior to 2016$793,743  $22,910  $12,944  $15,352  $3,881  $848,830  
2016596,312  12,915  17,519  14,368  212  641,326  
2017838,575  69,842  27,025  1,830  4,356  941,628  
2018864,477  7,933  23,741  3,525  3,300  902,976  
20191,149,445  20,007  2,878  2,177  1,965  1,176,472  
2020280,341  —  39  —  —  280,380  
Revolving Loans25,474  500  212  —  —  26,186  
Revolving to Term Loans282,936  6,522  10,792  391  —  300,641  
Total$4,831,303  $140,629  $95,150  $37,643  $13,714  $5,118,439  
BBCC:
Term Loans at Amortized Cost by Origination Year:
Prior to 2016$17,943  $—  $—  $—  $187  $18,130  
201630,762  1,024  551  538  53  32,928  
201745,700  522  1,028  575  —  47,825  
201861,865  512  —  1,070  61  63,508  
201990,970  877  1,443  438  —  93,728  
202026,069  172  —  46  —  26,287  
Revolving Loans58,040  4,044  644  76  —  62,804  
Revolving to Term Loans18,679  1,419  1,008  823  —  21,929  
Total$350,028  $8,570  $4,674  $3,566  $301  $367,139  
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For residential real estate and consumer loan classes, Old National evaluates credit quality based on the aging status of the loan and by payment activity.  The performing or nonperforming status is updated on an on-going basis dependent upon improvement and deterioration in credit quality. The following table presents the amortized cost in residential real estate and consumer loans based on payment activity:
Payment Performance
(dollars in thousands)PerformingNonperformingTotal
March 31, 2020
Residential real estate:
Term Loans at Amortized Cost by Origination Year:
Prior to 2016$826,831  $20,629  $847,460  
2016292,199  1,755  293,954  
2017303,763  661  304,424  
2018219,650  425  220,075  
2019561,322  97  561,419  
2020100,385  —  100,385  
Revolving Loans—  —  —  
Revolving to Term Loans134  —  134  
Total$2,304,284  $23,567  $2,327,851  
Indirect:
Term Loans at Amortized Cost by Origination Year:
Prior to 2016$53,056  $277  $53,333  
201699,915  685  100,600  
2017152,882  1,113  153,995  
2018199,211  568  199,779  
2019348,865  242  349,107  
202096,230  —  96,230  
Revolving Loans—  —  —  
Revolving to Term Loans92  —  92  
Total$950,251  $2,885  $953,136  
Direct:
Term Loans at Amortized Cost by Origination Year:
Prior to 2016$29,807  $535  $30,342  
201615,445  249  15,694  
201728,370  145  28,515  
201848,587  214  48,801  
201946,602  51  46,653  
202012,485  —  12,485  
Revolving Loans27,834  —  27,834  
Revolving to Term Loans1,468   1,469  
Total$210,598  $1,195  $211,793  
Home equity:
Term Loans at Amortized Cost by Origination Year:
Prior to 2016$—  $—  $—  
2016240  326  566  
20171,002  37  1,039  
2018719  —  719  
20191,085  31  1,116  
2020—  —  —  
Revolving Loans535,095  189  535,284  
Revolving to Term Loans19,425  3,640  23,065  
Total$557,566  $4,223  $561,789  
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Nonaccrual and Past Due Loans
Old National 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 collectability of principal or interest. Interest accrued but not received is reversed against earnings. Cash interest received on these loans is applied to the principal balance until the principal is recovered or until the loan returns to accrual status. Loans may be returned to accrual status when all the principal and interest amounts contractually due are brought current, remain current for a prescribed period, and future payments are reasonably assured.
The following table presents the aging of the amortized cost basis in past due loans as of March 31, 2020 by class of loans:
(dollars in thousands)30-59 Days
Past Due
60-89 Days
Past Due
Past Due
90 Days or
More
Total
Past Due
CurrentTotal
Loans
March 31, 2020
Commercial$3,578  $1,707  $9,156  $14,441  $2,830,024  $2,844,465  
Commercial Real Estate6,114  2,200  13,412  21,726  5,096,713  5,118,439  
BBCC419  156  234  809  366,330  367,139  
Residential13,895  4,603  9,255  27,753  2,300,098  2,327,851  
Indirect6,358  963  339  7,660  945,476  953,136  
Direct1,513  183  325  2,021  209,772  211,793  
Home equity1,755  474  1,761  3,990  557,799  561,789  
Total$33,632  $10,286  $34,482  $78,400  $12,306,212  $12,384,612  
The following table presents the amortized cost basis of loans on nonaccrual status and loans past due 90 days or more and still accruing by class of loan:
(dollars in thousands)Beginning
of Period
Nonaccrual
Amortized
Cost
End
of Period
Nonaccrual
Amortized
Cost
Nonaccrual
With No
Related
Allowance
Past Due
90 Days or
More and
Accruing
Interest
Income
Recognized
on Nonaccrual
At or for the Three Months Ended March 31, 2020
Commercial$40,103  $39,893  $7,040  $ $—  
Commercial Real Estate58,350  51,355  13,281  165  —  
BBCC4,530  3,869  —  —  —  
Residential20,970  23,567  —  112  —  
Indirect3,318  2,885  —  81  —  
Direct1,303  1,195  —  102  —  
Home equity3,857  4,223  34  195  —  
Total$132,431  $126,987  $20,355  $658  $—  
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When management determines that foreclosure is probable, expected credit losses for collateral-dependent loans are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. The class of loan represents the primary collateral type associated with the loan. Significant quarter over quarter changes are reflective of changes in nonaccrual status and not necessarily associated with credit quality indicators like appraisal value. The following table presents the amortized cost basis of collateral-dependent loans by class of loan:
Type of Collateral
(dollars in thousands)Real
Estate
Blanket
Lien
Investment
Securities/Cash
AutoOther
March 31, 2020
Commercial$6,802  $23,175  $8,209  $396  $1,522  
Commercial Real Estate40,361  150  3,199  —  179  
BBCC1,930  1,614  59  246  —  
Residential23,567  —  —  —  —  
Indirect—  —  —  2,885  —  
Direct863  —   265  —  
Home equity4,223  —  —  —  —  
Total loans$77,746  $24,939  $11,475  $3,792  $1,701  
Loan Participations
Old National has loan participations, which qualify as participating interests, with other financial institutions.  At March 31, 2020, these loans totaled $849.4 million, of which $401.6 million had been sold to other financial institutions and $447.8 million was retained by Old National.  The loan participations convey proportionate ownership rights with equal priority to each participating interest holder; involve no recourse (other than ordinary representations and warranties) to, or subordination by, any participating interest holder; all cash flows are divided among the participating interest holders in proportion to each holder’s share of ownership; and no holder has the right to pledge the entire financial asset unless all participating interest holders agree.
Troubled Debt Restructurings
Old National may choose to restructure the contractual terms of certain loans.  The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit Old National by increasing the ultimate probability of collection.
Any loans that are modified are reviewed by Old National to identify if a TDR has occurred, which is when for economic or legal reasons related to a borrower’s financial difficulties, Old National Bank grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status.  The modification of the terms of such loans include one or a combination of the following:  a reduction of the stated interest rate of the loan, an extension of the maturity date at a stated rate of interest lower than the current market rate of new debt with similar risk, or a permanent reduction of the recorded investment of the loan.
Loans modified in a TDR are typically placed on nonaccrual status until we determine the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate a period of performance according to the restructured terms for 6 months.
If we are unable to resolve a nonperforming loan issue, the credit will be charged off when it is apparent there will be a loss.  For large commercial type loans, each relationship is individually analyzed for evidence of apparent loss based on quantitative benchmarks or subjectively based upon certain events or particular circumstances.  Generally, Old National charges off small commercial loans scored through our small business credit center with contractual balances under $250,000 that are 90 days or more delinquent and do not have adequate collateral support.  For residential and consumer loans, a charge off is recorded at the time foreclosure is initiated or when the loan becomes 120 to 180 days past due, whichever is earlier.
For commercial TDRs, an allocated reserve is established within the allowance for credit losses for the difference between the carrying value of the loan and its computed value.  To determine the computed value of the loan, one of the following methods is selected: (1) the present value of expected cash flows discounted at the loan’s original effective interest rate, (2) the loan’s observable market price, or (3) the fair value of the collateral value, if the loan is collateral dependent.  The allocated reserve is established as the difference between the carrying value of the loan
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and the collectable value.  If there are significant changes in the amount or timing of the loan’s expected future cash flows, impairment is recalculated and the valuation allowance is adjusted accordingly.
When a residential or consumer loan is identified as a TDR, the loan is typically written down to its collateral value less selling costs.
The following table presents activity in TDRs for the three months ended March 31, 2020:
(dollars in thousands)Beginning
Balance
(Charge-offs)/
Recoveries
(Payments)/
Disbursements
AdditionsEnding
Balance
Three months ended March 31, 2020
Commercial$12,412  $(695) $(789) $—  $10,928  
Commercial Real Estate14,277  (1,272) (157) —  12,848  
BBCC578  —  (16) —  562  
Residential3,107  —  (67) —  3,040  
Indirect—   (3) —  —  
Direct983   (63) —  922  
Home equity381   (8) —  374  
Total$31,738  $(1,961) $(1,103) $—  $28,674  
TDRs included within nonaccrual loans totaled $11.8 million at March 31, 2020 and $13.8 million at December 31, 2019.  Old National has allocated specific reserves to customers whose loan terms have been modified in TDRs totaling $1.4 million at March 31, 2020 and $0.9 million at December 31, 2019.  At March 31, 2020, Old National had committed to lend an additional $0.9 million to customers with outstanding loans that are classified as TDRs, compared to $2.3 million at December 31, 2019.
The pre-modification and post-modification outstanding recorded investments of loans modified as TDRs during the three months ended March 31, 2020 and 2019 are the same except for when the loan modifications involve the forgiveness of principal.  The following table presents loans modified as TDRs that occurred during the three months ended March 31, 2020 and 2019:
(dollars in thousands)Total
Three Months Ended March 31, 2020
TDR:
Number of loans—  
Pre-modification outstanding recorded investment—  
Post-modification outstanding recorded investment—  
Three Months Ended March 31, 2019
TDR:
Number of loans 
Pre-modification outstanding recorded investment5,510  
Post-modification outstanding recorded investment5,510  
The TDRs that occurred during the three months ended March 31, 2020 and 2019 did not have a material impact on the allowance for loan losses and resulted in no charge-offs during the three months ended March 31, 2020, or 2019.
A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.
TDRs for which there was a payment default within twelve months following the modification were insignificant during the three months ended March 31, 2020 and 2019.
The terms of certain other loans were modified during 2020 and 2019 that did not meet the definition of a TDR.  It is our process to review all classified and criticized loans that, during the period, have been renewed, have entered into a forbearance agreement, have gone from principal and interest to interest only, or have extended the maturity date.  In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on its debt in the foreseeable future without the modification.  The evaluation is performed under our internal underwriting policy.  We also evaluate whether a concession has been granted or if we were adequately compensated through a market interest rate, additional
29


collateral or a bona fide guarantee.  We also consider whether the modification was insignificant relative to the other terms of the agreement or the delay in a payment.
In general, once a modified loan is considered a TDR, the loan will always be considered a TDR, and therefore impaired, until it is paid in full, otherwise settled, sold, or charged off.  However, guidance also permits for loans to be removed from TDR status when subsequently restructured under these circumstances: (1) at the time of the subsequent restructuring, the borrower is not experiencing financial difficulties, and this is documented by a current credit evaluation at the time of the restructuring, (2) under the terms of the subsequent restructuring agreement, the institution has granted no concession to the borrower; and (3) the subsequent restructuring agreement includes market terms that are no less favorable than those that would be offered for a comparable new loan.  For loans subsequently restructured that have cumulative principal forgiveness, the loan should continue to be measured in accordance with ASC 310-10, Receivables – Overall. However, consistent with ASC 310-40-50-2, Troubled Debt Restructurings by Creditors, Creditor Disclosure of Troubled Debt Restructurings, the loan would not be required to be reported in the years following the restructuring if the subsequent restructuring meets both of these criteria: (1) has an interest rate at the time of the subsequent restructuring that is not less than a market interest rate; and (2) is performing in compliance with its modified terms after the subsequent restructuring.
Non-TDR Loan Modifications due to COVID-19
On March 22, 2020, a statement was issued by our banking regulators and titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further provides that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates. Accordingly, we are offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term, 180 days or less, modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. The modifications completed in the three months ended March 31, 2020 were immaterial.
Allowance for Loan Losses
Prior to the adoption of ASC 326 on January 1, 2020, Old National calculated allowance for loan losses using incurred losses methodology. The following tables are disclosures related to the allowance for loan losses in prior periods.
Old National's activity in the allowance for loan losses for the three months ended March 31, 2019 was as follows:
(dollars in thousands)CommercialCommercial Real EstateResidentialConsumerTotal
Three Months Ended March 31, 2019
Balance at beginning of period$21,742  $23,470  $2,277  $7,972  $55,461  
Charge-offs(160) (235) (178) (2,319) (2,892) 
Recoveries375  570  72  930  1,947  
Provision(1,551) 1,364  131  1,099  1,043  
Balance at end of period$20,406  $25,169  $2,302  $7,682  $55,559  
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The following table disaggregates Old National's allowance for credit losses and amortized cost basis in loans by measurement methodology at December 31, 2019:
(dollars in thousands)CommercialCommercial Real EstateResidentialConsumerTotal
December 31, 2019
Allowance for loan losses:
Individually evaluated for impairment$7,891  $1,006  $—  $—  $8,897  
Collectively evaluated for impairment14,692  20,582  2,299  7,954  45,527  
Loans acquired with deteriorated credit quality —  —  193  195  
Total allowance for loan losses$22,585  $21,588  $2,299  $8,147  $54,619  
Loans and leases outstanding:
Individually evaluated for impairment$41,479  $63,288  $—  $—  $104,767  
Collectively evaluated for impairment2,843,536  5,084,737  2,326,907  1,723,715  11,978,895  
Loans acquired with deteriorated credit quality5,281  18,767  7,382  2,432  33,862  
Total loans and leases outstanding$2,890,296  $5,166,792  $2,334,289  $1,726,147  $12,117,524  
The risk category or commercial and commercial real estate loans by class of loans at December 31, 2019 was as follows:
(dollars in thousands)CommercialCommercial
Real Estate -
Construction
Commercial
Real Estate -
Other
Corporate Credit Exposure Credit Risk Profile by
Internally Assigned Grade
December 31,
2019
December 31,
2019
December 31,
2019
Grade:
Pass$2,702,605  $665,512  $4,191,455  
Criticized84,676  34,651  115,514  
Classified - substandard63,979  —  101,693  
Classified - nonaccrual22,240  12,929  38,822  
Classified - doubtful16,796  —  6,216  
Total$2,890,296  $713,092  $4,453,700  
The following table presents the recorded investment in residential and consumer loans based on payment activity at December 31, 2019:
Consumer
(dollars in thousands)ResidentialHome EquityAutoOther
December 31, 2019
Performing$2,311,670  $555,025  $1,013,760  $147,383  
Nonperforming22,619  3,996  3,527  2,456  
Total$2,334,289  $559,021  $1,017,287  $149,839  
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The following table shows Old National's impaired loans at December 31, 2019. Only purchased loans that have experienced subsequent impairment since the date acquired (excluding loans acquired with deteriorated credit quality) are included in the table below.
(dollars in thousands)Recorded
Investment
Unpaid Principal
Balance
Related
Allowance
December 31, 2019
With no related allowance recorded:
Commercial$23,227  $23,665  $—  
Commercial Real Estate - Construction12,929  12,929  —  
Commercial Real Estate - Other37,674  38,112  —  
Residential1,774  1,794  —  
Consumer403  568  —  
With an allowance recorded:
Commercial18,252  18,305  7,891  
Commercial Real Estate - Other12,685  12,685  1,006  
Residential1,201  1,201  39  
Consumer1,094  1,094  55  
Total$109,239  $110,353  $8,991  
The average balance of impaired loans during the three months ended March 31, 2019 are included in the table below.
(dollars in thousands)Three Months Ended
March 31, 2019
Average Recorded Investment
With no related allowance recorded:
Commercial$23,688  
Commercial Real Estate - Construction5,477  
Commercial Real Estate - Other40,135  
Residential2,289  
Consumer660  
With an allowance recorded:
Commercial11,347  
Commercial Real Estate - Construction8,690  
Commercial Real Estate - Other26,279  
Residential881  
Consumer1,693  
Total$121,139  

The following table presents activity in TDRs for the three months ended March 31, 2019:
(dollars in thousands)Beginning
Balance
(Charge-offs)/
Recoveries
(Payments)/
Disbursements
AdditionsEnding
Balance
Commercial$10,275  $(7) $(1,029) $2,407  $11,646  
Commercial Real Estate27,671  (75) (1,562) 3,103  29,137  
Residential3,390  —  (143) —  3,247  
Consumer2,374  (3) (58) —  2,313  
Total$43,710  $(85) $(2,792) $5,510  $46,343  

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NOTE 7 – OTHER REAL ESTATE OWNED
Other real estate owned is included in other assets.  The following table presents activity in other real estate owned:
Three Months Ended
March 31,
(dollars in thousands)20202019
Balance at beginning of period$2,169  $3,232  
Additions146  394  
Sales(113) (272) 
Impairments(39) (75) 
Balance at end of period (1)$2,163  $3,279  
(1)Includes repossessed personal property of $0.4 million at March 31, 2020 and $0.4 million at March 31, 2019.
Foreclosed residential real estate property recorded as a result of obtaining physical possession of the property included in the table above totaled $0.5 million at March 31, 2020 and $0.5 million at December 31, 2019.  Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $5.1 million at March 31, 2020 and $3.7 million at December 31, 2019.
NOTE 8 – PREMISES AND EQUIPMENT
The composition of premises and equipment was as follows:
(dollars in thousands)March 31,
2020
December 31, 2019
Land$71,451  $79,569  
Buildings360,462  380,925  
Furniture, fixtures, and equipment117,566  112,654  
Leasehold improvements44,371  44,136  
Total593,850  617,284  
Accumulated depreciation(131,486) (126,359) 
Premises and equipment, net$462,364  $490,925  
Depreciation expense was $8.6 million for the three months ended March 31, 2020, compared to $6.4 million for the three months ended March 31, 2019.
Finance Leases
Old National leases certain branch buildings under finance leases that are included in premises and equipment.  See Notes 9 and 15 to the consolidated financial statements for detail regarding these leases.
NOTE 9 – LEASES
Old National has operating and finance leases for land, office space, banking centers, and equipment.  These leases are generally for periods of 10 to 20 years with various renewal options.  We include certain renewal options in the measurement of our right-of-use assets and lease liabilities if they are reasonably certain to be exercised.  Variable lease payments that are dependent on an index or a rate are initially measured using the index or rate at the commencement date and are included in the measurement of the lease liability. Variable lease payments that are not dependent on an index or a rate are excluded from the measurement of the lease liability and are recognized in profit and loss when incurred.  Variable lease payments are defined as payments made for the right to use an asset that vary because of changes in facts or circumstances occurring after the commencement date, other than the passage of time.
Old National has lease agreements with lease and non-lease components, which are generally accounted for separately.  For real estate leases, non-lease components and other non-components, such as common area maintenance charges, real estate taxes, and insurance are not included in the measurement of the lease liability since they are generally able to be segregated.  For certain equipment leases, Old National accounts for the lease and non-lease components as a single lease component using the practical expedient available for that class of assets.
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Old National does not have any material sub-lease agreements.
The components of lease expense were as follows:
Affected Line
Item in the
Three Months Ended
March 31,
(dollars in thousands)Statement of Income20202019
Operating lease costoccupancy/equipment expense$9,181  $4,402  
Finance lease cost: 
Amortization of right-of-use assetsoccupancy expense166  158  
Interest on lease liabilitiesinterest expense78  81  
Short-term lease costoccupancy expense  
Sub-lease incomeoccupancy expense(128) (179) 
Total $9,298  $4,463  
Supplemental balance sheet information related to leases was as follows:
(dollars in thousands)March 31,
2020
December 31, 2019
Operating Leases 
Operating lease right-of-use assets$86,819  $95,477  
Operating lease liabilities95,830  99,500  
 
Finance Leases
Premises and equipment, net7,004  7,170  
Other borrowings7,284  7,406  
 
Weighted-Average Remaining Lease Term (in Years)
Operating leases10.510.6
Finance leases11.011.3
 
Weighted-Average Discount Rate
Operating leases3.43 %3.45 %
Finance leases4.44 %4.43 %
Supplemental cash flow information related to leases was as follows:
Three Months Ended
March 31,
(dollars in thousands)20202019
Cash paid for amounts included in the measurement of lease liabilities: 
Operating cash flows from operating leases$4,193  $4,436  
Operating cash flows from finance leases78  $81  
Financing cash flows from finance leases122  $111  
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The following table presents a maturity analysis of the Company’s lease liability by lease classification at March 31, 2020:
(dollars in thousands)Operating
Leases
Finance
Leases
2020$12,306  $603  
202115,492  809  
202213,695  815  
20239,078  830  
20247,840  858  
Thereafter56,858  5,374  
Total undiscounted lease payments115,269  9,289  
Amounts representing interest(19,439) (2,005) 
Lease liability$95,830  $7,284  
Old National leases certain office space and buildings to unrelated parties in exchange for consideration.  All of these tenant leases are classified as operating leases.  The following table presents a maturity analysis of the Company’s tenant leases at March 31, 2020:
(dollars in thousands)Tenant Leases
2020$1,832  
20212,295  
20221,941  
20231,536  
20241,409  
Thereafter2,520  
Total undiscounted lease payments$11,533  

NOTE 10 – GOODWILL AND OTHER INTANGIBLE ASSETS
The following table shows the changes in the carrying amount of goodwill:
Three Months Ended
March 31,
(dollars in thousands)20202019
Balance at beginning of period$1,036,994  $1,036,258  
Acquisitions and adjustments—  —  
Balance at end of period$1,036,994  $1,036,258  
Old National performed the required annual goodwill impairment test as of August 31, 2019 and there was 0 impairment.  No events or circumstances since the August 31, 2019 annual impairment test were noted that would indicate it was more likely than not a goodwill impairment exists. Refer to Note 20, Commitments and Contingencies, for additional information on COVID-19 and its potential impact to Old National.
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The gross carrying amount and accumulated amortization of other intangible assets were as follows: 
(dollars in thousands)Gross
Carrying
Amount
Accumulated
Amortization
and Impairment
Net
Carrying
Amount
March 31, 2020   
Core deposit$119,051  $(66,488) $52,563  
Customer trust relationships16,547  (12,781) 3,766  
Total intangible assets$135,598  $(79,269) $56,329  
December 31, 2019
Core deposit$119,051  $(63,020) $56,031  
Customer trust relationships16,547  (12,473) 4,074  
Total intangible assets$135,598  $(75,493) $60,105  
Other intangible assets consist of core deposit intangibles and customer relationship intangibles and are being amortized primarily on an accelerated basis over their estimated useful lives, generally over a period of 5 to 15 years.
Old National reviews other intangible assets for possible impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. NaN impairment charges were recorded during the three months ended March 31, 2020 or 2019.  Total amortization expense associated with intangible assets was $3.8 million for the three months ended March 31, 2020, compared to $4.5 million for the three months ended March 31, 2019.
Estimated amortization expense for future years is as follows:
(dollars in thousands) 
2020 remaining$10,315  
202111,336  
20229,014  
20237,053  
20245,645  
Thereafter12,966  
Total$56,329  

NOTE 11 – LOAN SERVICING RIGHTS
At March 31, 2020, loan servicing rights derived from loans sold with servicing retained totaled $24.1 million, compared to $25.4 million at December 31, 2019.  Loans serviced for others are not reported as assets.  The principal balance of loans serviced for others was $3.467 billion at March 31, 2020, compared to $3.445 billion at December 31, 2019.  Approximately 99.8% of the loans serviced for others at March 31, 2020 were residential mortgage loans.  Custodial escrow balances maintained in connection with serviced loans were $28.4 million at March 31, 2020 and $12.7 million at December 31, 2019.
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The following table summarizes the carrying values and activity related to loan servicing rights and the related valuation allowance: 
Three Months Ended
March 31,
(dollars in thousands)20202019
Balance at beginning of period$25,399  $24,512  
Additions1,731  659  
Amortization(1,555) (900) 
Balance before valuation allowance at end of period25,575  24,271  
Valuation allowance:
Balance at beginning of period(31) (15) 
(Additions)/recoveries(1,412) (2) 
Balance at end of period(1,443) (17) 
Loan servicing rights, net$24,132  $24,254  
At March 31, 2020, the fair value of servicing rights was $24.1 million, which was determined using a discount rate of 9% and a conditional prepayment rate of 16%.  At December 31, 2019, the fair value of servicing rights was $26.5 million, which was determined using a discount rate of 12% and a conditional prepayment rate of 10%.
NOTE 12 – QUALIFIED AFFORDABLE HOUSING PROJECTS AND OTHER TAX CREDIT INVESTMENTS
Old National is a limited partner in several tax-advantaged limited partnerships whose purpose is to invest in approved qualified affordable housing, renewable energy, or other renovation or community revitalization projects.  These investments are included in other assets on the balance sheet, with any unfunded commitments included with other liabilities. As of March 31, 2020, Old National expects to recover its remaining investments through the use of the tax credits that are generated by the investments.
The following table summarizes Old National’s investments in qualified affordable housing projects and other tax credit investments:
(dollars in thousands) March 31, 2020December 31, 2019
InvestmentAccounting MethodInvestmentUnfunded Commitment (1)InvestmentUnfunded Commitment
LIHTCProportional amortization$28,909  $3,907  $29,735  $3,911  
FHTCEquity25,760  22,896  22,403  17,886  
Renewable EnergyEquity7,151  3,669  7,523  4,129  
Total $61,820  $30,472  $59,661  $25,926  
(1)All commitments will be paid by Old National by 2027.
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The following table summarizes the amortization expense and tax benefit recognized for Old National’s qualified affordable housing projects and other tax credit investments:
(dollars in thousands)Amortization Expense (1)Tax Expense
(Benefit) Recognized (2)
Three Months Ended March 31, 2020  
LIHTC$776  $(1,019) 
FHTC5,143  (1,356) 
Renewable Energy372  (400) 
Total$6,291  $(2,775) 
Three Months Ended March 31, 2019
LIHTC$792  $(1,042) 
Renewable Energy260  (244) 
Total$1,052  $(1,286) 
(1)The amortization expense for the LIHTC investments is included in our income tax expense. The amortization expense for the FHTC and Renewable Energy tax credits is included in noninterest expense.
(2)All of the tax benefits recognized are included in our income tax expense.  The tax benefit recognized for the FHTC and Renewable Energy investments primarily reflects the tax credits generated from the investments and excludes the net tax expense (benefit) of the investments’ income (loss).
NOTE 13 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are secured borrowings.  Old National pledges investment securities to secure these borrowings. The following table presents securities sold under agreements to repurchase and related weighted-average interest rates:
At or for the Three Months Ended
(dollars in thousands)March 31,
2020
December 31,
2019
March 31,
2019
Outstanding at period end$318,067  $327,782  $342,480  
Average amount outstanding during the period329,091  337,786  361,261  
Maximum amount outstanding at any month-end during the period
318,067  337,185  367,884  
Weighted-average interest rate:
During the period0.47 %0.55 %0.74 %
At period end0.22 %0.53 %0.79 %
The following table presents the contractual maturity of our secured borrowings and class of collateral pledged:
 At March 31, 2020
 Remaining Contractual Maturity of the Agreements
(dollars in thousands)Overnight and ContinuousUp to
30 Days
 30-90 DaysGreater Than 90 daysTotal
Repurchase Agreements:     
U.S. Treasury and agency securities$318,067  $—  $—  $—  $318,067  
Total$318,067  $—  $—  $—  $318,067  
The fair value of securities pledged to secure repurchase agreements may decline.  Old National has pledged securities valued at 121% of the gross outstanding balance of repurchase agreements at March 31, 2020 to manage this risk.
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NOTE 14 – FEDERAL HOME LOAN BANK ADVANCES
The following table summarizes Old National Bank’s FHLB advances:
(dollars in thousands)March 31,
2020
December 31,
2019
FHLB advances (fixed rates 0.31% to 4.96%
   and variable rates 0.09% to 1.82%) maturing
  April 2020 to January 2030
$2,100,660  $1,800,664  
ASC 815 fair value hedge and other basis adjustments29,603  22,183  
Total other borrowings$2,130,263  $1,822,847  
FHLB advances had weighted-average rates of 1.79%  at March 31, 2020 and 2.19% at December 31, 2019.  Investment securities and residential real estate loans collateralize these borrowings up to 140%  of outstanding debt.
Contractual maturities of FHLB advances at March 31, 2020 were as follows:
(dollars in thousands) 
Due in 2020$125,000  
Due in 202120,000  
Due in 2022130,500  
Due in 2023160  
Due in 2024375,000  
Thereafter1,450,000  
ASC 815 fair value hedge and other basis adjustments29,603  
Total$2,130,263  

NOTE 15 – OTHER BORROWINGS
The following table summarizes Old National’s other borrowings:
(dollars in thousands)March 31,
2020
December 31,
2019
Old National Bancorp:  
Senior unsecured notes (fixed rate 4.125% maturing August 2024)$175,000  $175,000  
Unamortized debt issuance costs related to senior unsecured notes(676) (715) 
Junior subordinated debentures (variable rates of
   2.34% to 5.62%) maturing April 2032 to June 2037
45,093  52,310  
Other basis adjustments(3,082) (2,833) 
Old National Bank:
Finance lease liabilities7,284  7,406  
Subordinated debentures (fixed rate 5.75%)12,000  12,000  
Other495  517  
Total other borrowings$236,114  $243,685  
Contractual maturities of other borrowings at March 31, 2020 were as follows:
(dollars in thousands) 
Due in 2020$376  
Due in 2021524  
Due in 2022553  
Due in 2023591  
Due in 2024175,643  
Thereafter61,690  
Unamortized debt issuance costs and other basis adjustments(3,263) 
Total$236,114  
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Senior Notes
In August 2014, Old National issued $175.0 million of senior unsecured notes with a 4.125% interest rate.  These notes pay interest on February 15 and August 15.  The notes mature on August 15, 2024.
Junior Subordinated Debentures
Junior subordinated debentures related to trust preferred securities are classified in “other borrowings.”  On November 1, 2017, Old National acquired Anchor (MN) and exceeded $15 billion in assets.  As a result, these securities can only be treated as Tier 2 capital for regulatory purposes, subject to certain limitations.  Prior to the fourth quarter of 2017, these securities qualified as Tier 1 capital for regulatory purposes.
Through various acquisitions, Old National assumed junior subordinated debenture obligations related to various trusts that issued trust preferred securities.  Old National guarantees the payment of distributions on the trust preferred securities issued by the trusts.  Proceeds from the issuance of each of these securities were used to purchase junior subordinated debentures with the same financial terms as the securities issued by the trusts.
Old National, at any time, may redeem the junior subordinated debentures at par and, thereby cause a redemption of the trust preferred securities in whole or in part. In February 2020, Old National redeemed at par $4.1 million of junior subordinated debentures issued in October 2002 by Anchor Bancorp, Inc. (as successor to VFSC, Inc.), which was acquired by Old National in 2017. This subsequently caused the redemption of all of the common and capital (preferred) securities issued by VFSC Capital Trust II by the same amount in aggregate. At the time of redemption, the rate on this floating rate instrument was 5.36%. In March 2020, Old National redeemed at par $3.1 million of junior subordinated debentures issued in April 2004 by Anchor Bancorp, Inc. (as successor to VFSC, Inc.), which was acquired by Old National in 2017. This subsequently caused the redemption of all of the common and capital (preferred) securities issued by VFSC Capital Trust III by the same amount in aggregate. At the time of redemption, the rate on this floating rate instrument was 4.71%.
The following table summarizes the terms of our outstanding junior subordinated debentures:
(dollars in thousands)   Rate at 
Name of TrustIssuance DateIssuance AmountRateMarch 31, 2020Maturity Date
VFSC Capital Trust IApril 2002$3,093  6-month LIBOR plus 3.70%5.62%April 22, 2032
St. Joseph Capital Trust IIMarch 20055,000  3-month LIBOR plus 1.75%2.59%March 17, 2035
Anchor Capital Trust IIIAugust 20055,000  3-month LIBOR plus 1.55%3.00%September 30, 2035
Home Federal Statutory
   Trust I
September 200615,000  3-month LIBOR plus 1.65%2.39%September 15, 2036
Monroe Bancorp Capital
   Trust I
July 20063,000  3-month LIBOR plus 1.60%3.47%October 7, 2036
Tower Capital Trust 3December 20069,000  3-month LIBOR plus 1.69%3.27%March 1, 2037
Monroe Bancorp Statutory
   Trust II
March 20075,000  3-month LIBOR plus 1.60%2.34%June 15, 2037
Total$45,093  
Subordinated Debentures
On November 1, 2017, Old National assumed $12.0 million of subordinated fixed-to-floating notes related to the acquisition of Anchor (MN).  The subordinated debentures have a 5.75% fixed rate of interest through October 29, 2020.  From October 30, 2020 to the October 30, 2025 maturity date, the debentures have a floating rate of interest equal to the three-month LIBOR rate plus 4.356%.
Finance Lease Liabilities
Old National has long-term finance lease liabilities for certain banking centers totaling $7.3 million.  The economic substance of these leases is that Old National is financing the acquisition of the building through the lease and accordingly, the building is recorded as a right-of-use asset in premises and equipment and the lease is recorded as a liability in other borrowings.  The right-of-use assets and lease liabilities are initially measured at the present value of the lease payments over the lease term using Old National’s incremental borrowing rate based on the information available at the commencement date of the lease.  See Note 9 to the consolidated financial statements for a maturity analysis of the Company’s finance lease liabilities.
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NOTE 16 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes the changes within each classification of AOCI, net of tax:
(dollars in thousands)Unrealized
Gains and
Losses on
Available-
for-Sale
Debt
Securities
Unrealized
Gains and
Losses on
Held-to-
Maturity
Securities
Gains and
Losses on
Cash Flow
Hedges
Defined
Benefit
Pension
Plans
Total
Three Months Ended March 31, 2020     
Balance at beginning of period$56,131  $—  $240  $(164) $56,207  
Other comprehensive income (loss) before
   reclassifications
80,369  —  5,886  —  86,255  
Amounts reclassified from AOCI to income (1)(4,000) —  (325) 20  (4,305) 
Balance at end of period$132,500  $—  $5,801  $(144) $138,157  
Three Months Ended March 31, 2019
Balance at beginning of period$(37,348) $(8,515) $1,099  $(186) $(44,950) 
Other comprehensive income (loss) before
   reclassifications
47,711  —  (296) —  47,415  
Amounts reclassified from AOCI to income (1)79  351  (290) 15  155  
Balance at end of period$10,442  $(8,164) $513  $(171) $2,620  
(1)See tables below for details about reclassifications to income.
The following table summarizes the significant amounts reclassified out of each component of AOCI:
Details about AOCI ComponentsAmount Reclassified
from AOCI
Affected Line Item in the
Statement of Income
 Three Months Ended
March 31,
 
(dollars in thousands)20202019 
Unrealized gains and losses on
   available-for-sale debt securities
$5,174  $(103) Debt securities gains (losses), net
 (1,174) 24  Income tax (expense) benefit
 $4,000  $(79) Net income
Unrealized gains and losses on
   held-to-maturity securities
$—  $(457) Interest income (expense)
 —  106  Income tax (expense) benefit
 $—  $(351) Net income
Gains and losses on cash flow hedges
   Interest rate contracts
$431  $385  Interest income (expense)
 (106) (95) Income tax (expense) benefit
 $325  $290  Net income
Amortization of defined benefit
   pension items
 
Actuarial gains (losses)$(27) $(20) Salaries and employee benefits
   Income tax (expense) benefit
 $(20) $(15) Net income
Total reclassifications for the period$4,305  $(155) Net income

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NOTE 17 – SHARE-BASED COMPENSATION
At March 31, 2020, Old National had 3.2 million shares remaining available for issuance under the Company’s Amended and Restated 2008 Incentive Compensation Plan.  The granting of awards to key employees is typically in the form of restricted stock awards or units.
Restricted Stock Awards
Old National granted 121 thousand time-based restricted stock awards to certain key officers during the three months ended March 31, 2020, with shares vesting generally over a 36 month period.  Compensation expense is recognized on a straight-line basis over the vesting period.  Shares are subject to certain restrictions and risk of forfeiture by the participants.  At March 31, 2020, unrecognized compensation expense was estimated to be $5.4 million for unvested restricted stock awards.  The cost is expected to be recognized over a weighted-average period of 2.2 years.
Old National recorded share-based compensation expense, net of tax, related to restricted stock awards of $0.7 million during the three months ended March 31, 2020, compared to $0.6 million during the three months ended March 31, 2019.
Restricted Stock Units
Old National granted 210 thousand shares of performance based restricted stock units to certain key officers during the three months ended March 31, 2020, with shares vesting at the end of a 36 month period based on the achievement of certain targets.  For certain awards, the level of performance could increase or decrease the number of shares earned.  Compensation expense is recognized on a straight-line basis over the vesting period.  Shares are subject to certain restrictions and risk of forfeiture by the participants.  At March 31, 2020, unrecognized compensation expense was estimated to be $5.9 million.  The cost is expected to be recognized over a weighted-average period of 2.2 years.
Old National recorded share-based compensation expense, net of tax, related to restricted stock units of $1.4 million during the three months ended March 31, 2020, compared to $0.8 million during the three months ended March 31, 2019.
Stock Options
Old National has not granted stock options since 2009. However, Old National did acquire stock options and stock appreciation rights through prior year acquisitions. Old National recorded 0 incremental expense associated with the conversion of these options and stock appreciation rights. At March 31, 2020, 50 thousand stock appreciation rights remained outstanding.
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NOTE 18 – INCOME TAXES
Following is a summary of the major items comprising the differences in taxes from continuing operations computed at the federal statutory rate and as recorded in the consolidated statements of income:
Three Months Ended
March 31,
(dollars in thousands)20202019
Provision at statutory rate of 21%$5,372  $14,570  
Tax-exempt income:
Tax-exempt interest(2,632) (2,531) 
Section 291/265 interest disallowance73  111  
Company-owned life insurance income(647) (669) 
Tax-exempt income(3,206) (3,089) 
State income taxes(8) 1,999  
Interim period effective rate adjustment3,267  688  
Tax credit investments - federal(1,902) (420) 
Other, net(584) (644) 
Income tax expense$2,939  $13,104  
Effective tax rate11.5 %18.9 %
In accordance with ASC 740-270, Accounting for Interim Reporting, the provision for income taxes was recorded at March 31, 2020 and 2019 based on the current estimate of the effective annual rate.
The lower effective tax rate during the three months ended March 31, 2020 when compared to the three months ended March 31, 2019 is primarily the result of an increase in federal tax credits available.
Unrecognized Tax Benefits
Old National has an immaterial amount of unrecognized tax benefits.  Old National is currently under audit by the Internal Revenue Service.  Old National expects the total amount of unrecognized tax benefits to be reduced to 0 after the audit is finalized.
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Net Deferred Tax Assets
Significant components of net deferred tax assets (liabilities) were as follows:
(dollars in thousands)March 31,
2020
December 31, 2019
Deferred Tax Assets  
Allowance for loan losses, net of recapture$28,603  $14,179  
Benefit plan accruals13,268  19,673  
Alternative minimum tax credit1,272  1,272  
Net operating loss carryforwards21,575  25,336  
Federal tax credits3,238  —  
Deferred gain on securities3,339  3,754  
Acquired loans15,341  16,784  
Operating lease liabilities25,591  26,503  
Tax credit investments and other partnerships2,808  1,765  
Other real estate owned143  141  
Other, net790  591  
Total deferred tax assets115,968  109,998  
Deferred Tax Liabilities
Purchase accounting(18,187) (17,564) 
Loan servicing rights(5,989) (6,289) 
Premises and equipment(8,139) (12,167) 
Prepaid expenses(973) (973) 
Operating lease right-of-use assets(23,285) (25,448) 
Unrealized gains on available-for-sale investment securities(38,162) (15,751) 
Unrealized gains on hedges(1,889) (78) 
Other, net(1,768) (2,023) 
Total deferred tax liabilities(98,392) (80,293) 
Net deferred tax assets$17,576  $29,705  
Through the acquisition of Anchor (WI) in the second quarter of 2016 and Lafayette Savings Bank in the fourth quarter of 2014, both former thrifts, Old National Bank’s retained earnings at March 31, 2020 include base-year bad debt reserves, created for tax purposes prior to 1988, totaling $52.8 million.  Of this total, $50.9 million was acquired from Anchor (WI), and $1.9 million was acquired from Lafayette Savings Bank.  Base-year reserves are subject to recapture in the unlikely event that Old National Bank (1) makes distributions in excess of current and accumulated earnings and profits, as calculated for federal income tax purposes, (2) redeems its stock, or (3) liquidates.  Old National Bank has no intention of making such a nondividend distribution.  Accordingly, under current accounting principles, a related deferred income tax liability of $13.0 million has not been recognized.
NaN valuation allowance was recorded at March 31, 2020 or December 31, 2019 because, based on current expectations, Old National believes it will generate sufficient income in future years to realize deferred tax assets.  Old National has federal net operating loss carryforwards totaling $60.1 million at March 31, 2020 and $78.5 million at December 31, 2019.  This federal net operating loss was acquired from the acquisition of Anchor (WI) in 2016.  If not used, the federal net operating loss carryforwards will expire from 2029 to 2033.  Old National has alternative minimum tax credit carryforwards subject to section 382 limitations and included in net deferred tax assets totaling $1.3 million at March 31, 2020 and $1.3 million at December 31, 2019.  The enactment of H.R. 1 eliminated the parallel tax system known as the alternative minimum tax and allowed any existing alternative minimum tax credits to be used to reduce regular tax or be refunded from 2018 to 2021. Old National has recorded state net operating loss carryforwards totaling $150.3 million at March 31, 2020 and $148.4 million at December 31, 2019.  If not used, the state net operating loss carryforwards will expire from 2024 to 2035.  Old National had federal tax credit carryforwards of $3.2 million at March 31, 2020.
The federal and recorded state net operating loss carryforwards are subject to an annual limitation under Internal Revenue Code section 382.  Old National believes that all of the recorded net operating loss carryforwards will be used prior to expiration.
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NOTE 19 – DERIVATIVE FINANCIAL INSTRUMENTS
As part of our overall interest rate risk management, Old National uses derivative instruments, including interest rate swaps, collars, caps, and floors.  The notional amount does not represent amounts exchanged by the parties.  The amount exchanged is determined by reference to the notional amount and the other terms of the individual agreements.  The notional amount of these derivative instruments was $905.5 million at March 31, 2020 and $665.5 million at December 31, 2019.  These derivative financial instruments at March 31, 2020 consisted of $380.5 million notional amount of receive-fixed, pay-variable interest rate swaps on certain of its FHLB advances, $125.0 million notional amount of pay-fixed, receive-variable interest rate swaps on certain of its FHLB advances, and $400.0 million notional amount interest rate collars and floors related to variable-rate commercial loan pools.  Derivative financial instruments at December 31, 2019 consisted of $130.5 million notional amount of receive-fixed, pay-variable interest rate swaps on certain of its FHLB advances, $25.0 million notional amount of pay-fixed, receive-variable interest rate swaps on certain of its FHLB advances, and $510.0 million notional amount interest rate collars and floors related to variable-rate commercial loan pools. These hedges were entered into to manage interest rate risk. Derivative instruments are recognized on the balance sheet at their fair value and are not reported on a net basis.
In accordance with ASC 815-20-35-1, subsequent changes in fair value for a hedging instrument that has been designated and qualifies as part of a hedging relationship should be accounted for in the following manner:
Cash flow hedges: changes in fair value are recognized as a component in other comprehensive income.
Fair value hedges: changes in fair value are recognized concurrently in earnings.
Consistent with this guidance, as long as a hedging instrument is designated and the results of the effectiveness testing support that the instrument qualifies for hedge accounting treatment, 100% of the periodic changes in fair value of the hedging instrument are accounted for as outlined above. This is the case whether or not economic mismatches exist in the hedging relationship. As a result, there is no periodic measurement or recognition of ineffectiveness. Rather, the full impact of hedge gains and losses is recognized in the period in which the hedged transactions impact earnings.
While separate measurement and presentation of ineffectiveness is eliminated, paragraph 815-20-45-1A requires the change in fair value of the hedging instrument that is included in the assessment of hedge effectiveness be presented in the same income statement line item that is used to present the earnings effect of the hedged item.
Commitments to fund certain mortgage loans (interest rate lock commitments) and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives.  These derivative contracts do not qualify for hedge accounting.  At March 31, 2020, the notional amount of the interest rate lock commitments was $371.6 million and forward commitments were $388.8 million.  At December 31, 2019, the notional amount of the interest rate lock commitments was $65.7 million and forward commitments were $101.6 million. It is our practice to enter into forward commitments for the future delivery of residential mortgage loans to third party investors when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from our commitment to fund the loans.
Old National also enters into derivative instruments for the benefit of its customers.  The notional amounts of these customer derivative instruments and the offsetting counterparty derivative instruments were $1.380 billion at March 31, 2020.  The notional amounts of these customer derivative instruments and the offsetting counterparty derivative instruments were $1.298 billion at December 31, 2019.  These derivative contracts do not qualify for hedge accounting.  These instruments include interest rate swaps, caps, and collars.  Commonly, Old National will economically hedge significant exposures related to these derivative contracts entered into for the benefit of customers by entering into offsetting contracts with approved, reputable, independent counterparties with substantially matching terms.
Old National enters into derivative financial instruments as part of its foreign currency risk management strategies.  These derivative instruments consist of foreign currency forward contracts to accommodate the business needs of its customers.  Old National does not designate these foreign currency forward contracts for hedge accounting treatment.  The notional amounts of these foreign currency forward contracts and the offsetting counterparty derivative instruments were $5.3 million at March 31, 2020 and $8.2 million at December 31, 2019.
Credit risk arises from the possible inability of counterparties to meet the terms of their contracts.  Old National’s exposure is limited to the replacement value of the contracts rather than the notional, principal, or contract
45


amounts.  There are provisions in our agreements with the counterparties that allow for certain unsecured credit exposure up to an agreed threshold.  Exposures in excess of the agreed thresholds are collateralized.  In addition, we minimize credit risk through credit approvals, limits, and monitoring procedures.
Amounts reported in AOCI related to cash flow hedges will be reclassified to interest income or interest expense as interest payments are received or paid on Old National’s derivative instruments.  During the next 12 months, we estimate that $6.7 million will be reclassified to interest income and $0.9 million will be reclassified to interest expense.
The following table summarizes the fair value of derivative financial instruments utilized by Old National:
(dollars in thousands)Balance
Sheet
Location
Fair
Value
Balance
Sheet
Location
Fair
Value
March 31, 2020    
Derivatives designated as hedging instruments    
Interest rate contractsOther assets$21,630  Other liabilities$1,443  
Total derivatives designated as hedging instruments $21,630   $1,443  
Derivatives not designated as hedging instruments  
Interest rate contracts (1)Other assets$114,839  Other liabilities$26,630  
Mortgage contractsOther assets13,081  Other liabilities6,913  
Foreign currency contractsOther assets323  Other liabilities233  
Total derivatives not designated as hedging instruments $128,243   $33,776  
Total $149,873   $35,219  
December 31, 2019  
Derivatives designated as hedging instruments  
Interest rate contractsOther assets$7,157  Other liabilities$1,046  
Total derivatives designated as hedging instruments $7,157   $1,046  
Derivatives not designated as hedging instruments  
Interest rate contracts (1)Other assets$42,224  Other liabilities$10,883  
Mortgage contractsOther assets1,702  Other liabilities354  
Foreign currency contractsOther assets218  Other liabilities110  
Total derivatives not designated as hedging instruments $44,144   $11,347  
Total $51,301   $12,393  
(1)The fair values of counterparty interest rate swaps are 0 due to the settlement of centrally-cleared variation margin rules.  The net adjustment was $88.9 million as of March 31, 2020 and $31.6 million as of December 31, 2019.
Summary information about the interest rate swaps designated as fair value hedges is as follows:
(dollars in thousands)March 31,
2020
December 31,
2019
Notional amounts$380,500  $130,500  
Weighted average pay rates0.33 %1.82 %
Weighted average receive rates1.33 %2.20 %
Weighted average maturity (in years)2.92.8
Fair value of swaps$10,797  $1,555  
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The effect of derivative instruments in fair value hedging relationships on the consolidated statements of income were as follows:
(dollars in thousands)Location of Gain or
(Loss) Recognized in
in Income on
Derivative
Gain (Loss) Recognized in Income on DerivativeHedged Items
in Fair Value Hedging Relationships
Location of Gain or
(Loss) Recognized in
in Income on Related
Hedged Item
Gain (Loss) Recognized in Income on Related Hedged Items
Derivatives in
Fair Value Hedging Relationships
Three Months Ended March 31, 2020     
Interest rate contractsInterest income/(expense)$9,241  Fixed-rate debtInterest income/(expense)$(9,228) 
Three Months Ended March 31, 2019   
Interest rate contractsInterest income/(expense)$6,552  Fixed-rate debtInterest income/(expense)$(6,548) 
Summary information about the interest rate swaps designated as cash flow hedges is as follows: 
(dollars in thousands)March 31,
2020
December 31,
2019
Notional amounts$125,000  $25,000  
Weighted average pay rates1.11 %3.52 %
Weighted average receive rates1.46 %1.93 %
Weighted average maturity (in years)1.82.1
Unrealized gains (losses)$(1,443) $(954) 
Old National has designated its interest rate collars as cash flow hedges.  The structure of these instruments is such that Old National pays the counterparty an incremental amount if the collar index exceeds the cap rate.  Conversely, Old National receives an incremental amount if the index falls below the floor rate.  No payments are required if the collar index falls between the cap and floor rates.  Summary information about the collars designated as cash flow hedges is as follows:
(dollars in thousands)March 31,
2020
December 31,
2019
Notional amounts$300,000  $300,000  
Weighted average cap rates3.21 %3.21 %
Weighted average floor rates2.21 %2.21 %
Weighted average rates1.25 %1.70 %
Weighted average maturity (in years)1.61.9
Unrealized gains (losses)$9,214  $3,691  
Old National has designated its interest rate floor transactions as cash flow hedges.  The structure of these instruments is such that Old National receives an incremental amount if the index falls below the floor strike rate. No payments are required if the index remains above the floor strike rate. Summary information about the interest rate floor transactions designated as cash flow hedges is as follows:
(dollars in thousands)March 31,
2020
Notional amounts$100,000  
Weighted average floor strike rate0.75 %
Weighted average rates0.99 %
Weighted average maturity (in years)3.0
Unrealized gains (losses)$1,619  
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The structure of Old National's interest rate floor spread transactions at December 31, 2019 was such that Old National received an incremental amount if the index fell below the purchased floor strike rate.  Old National paid an incremental amount if the index fell below the sold floor rate.  Floor corridor protection was limited to the spread between the purchased floor strike rate and the sold floor rate.  No payments were required if the index remained above the purchased floor strike rate.  Old National terminated these interest rate floor spread transactions during the first quarter of 2020. Summary information about the floor spread transactions designated as cash flow hedges at December 31, 2019 was as follows:
(dollars in thousands)December 31,
2019
Notional amounts$210,000  
Weighted average purchased floor strike rate2.00 %
Weighted average sold floor rate1.00 %
Weighted average rate1.70 %
Weighted average maturity (in years)2.1
Unrealized gains (losses)$1,820  
The effect of derivative instruments in cash flow hedging relationships on the consolidated statements of income were as follows:
Three Months Ended
March 31,
Three Months Ended
March 31,
(dollars in thousands) 2020201920202019
Derivatives in
Cash Flow Hedging
Relationships
Location of Gain or
(Loss) Reclassified
from AOCI into Income
Gain (Loss)
Recognized in Other
Comprehensive
Income on Derivative
Gain (Loss)
Reclassified from
AOCI into
Income
Interest rate contractsInterest income/(expense)$7,803  $(392) $431  $385  
The effect of derivatives not designated as hedging instruments on the consolidated statements of income were as follows:
Three Months Ended
March 31,
(dollars in thousands) 20202019
Derivatives Not Designated as
Hedging Instruments
Location of Gain or (Loss)
Recognized in Income on
Derivative
Gain (Loss)
Recognized in Income on
Derivative
Interest rate contracts (1)Other income/(expense)$(466) $(37) 
Mortgage contractsMortgage banking revenue4,820  1,022  
Foreign currency contractsOther income/(expense)(19)  
Total $4,335  $988  
(1)Includes the valuation differences between the customer and offsetting swaps.
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NOTE 20 – COMMITMENTS AND CONTINGENCIES
COVID-19
In December 2019, a novel strain of coronavirus, COVID-19, was reported in Wuhan, China. The COVID-19 virus continues to aggressively spread globally and has spread to over 185 countries, including all 50 states in the United States. A prolonged COVID-19 outbreak, or any other epidemic that harms the global economy, U.S. economy, or the economies in which we operate could adversely affect our operations. While the spread of the COVID-19 virus has minimally impacted our operations as of March 31, 2020, it has caused significant economic disruption throughout the United States as state and local governments issued “shelter at home” orders along with the closing of non-essential businesses. The potential financial impact is unknown at this time. However, if these actions are sustained, it may adversely impact several industries within our geographic footprint and impair the ability of Old National's customers to fulfill their contractual obligations to the Company. This could cause Old National to experience a material adverse effect on our business operations, asset valuations, financial condition, and results of operations. Material adverse impacts may include all or a combination of valuation impairments on Old National's intangible assets, investments, loans, loan servicing rights, deferred tax assets, or counter-party risk derivatives.

Litigation
In the normal course of business, Old National Bancorp and its subsidiaries have been named, from time to time, as defendants in various legal actions.  Certain of the actual or threatened legal actions may include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages.
Old National contests liability and/or the amount of damages as appropriate in each pending matter.  In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases where claimants seek substantial or indeterminate damages or where investigations and proceedings are in the early stages, Old National cannot predict with certainty the loss or range of loss, if any, related to such matters, how or if such matters will be resolved, when they will ultimately be resolved, or what the eventual settlement, or other relief, if any, might be. Subject to the foregoing, Old National believes, based on current knowledge and after consultation with counsel, that the outcome of such pending matters will not have a material adverse effect on the consolidated financial condition of Old National, although the outcome of such matters could be material to Old National’s operating results and cash flows for a particular future period, depending on, among other things, the level of Old National’s revenues or income for such period.  Old National will accrue for a loss contingency if (1) it is probable that a future event will occur and confirm the loss and (2) the amount of the loss can be reasonably estimated.
Old National is not currently involved in any material litigation.
Credit-Related Financial Instruments
In the normal course of business, Old National’s banking affiliates have entered into various agreements to extend credit, including loan commitments of $2.898 billion and standby letters of credit of $82.4 million at March 31, 2020.  At March 31, 2020, approximately $2.621 billion of the loan commitments had fixed rates and $277.0 million had floating rates, with the floating interest rates ranging from 0% to 13%.  At December 31, 2019, loan commitments totaled $2.779 billion and standby letters of credit totaled $87.8 million.  These commitments are not reflected in the consolidated financial statements.  The allowance for unfunded loan commitments totaled $9.0 million at March 31, 2020 and $2.7 million at December 31, 2019. The increase in allowance for unfunded loan commitments at March 31, 2020 included a cumulative-effect adjustment of $4.5 million due to the adoption of ASC 326. See Note 2 for additional information about CECL for unfunded loan commitments.
Old National had credit extensions with various unaffiliated banks related to letter of credit commitments issued on behalf of Old National’s clients totaling $8.7 million at March 31, 2020 and December 31, 2019.  Old National provided collateral to the unaffiliated banks to secure credit extensions totaling $7.7 million at March 31, 2020 and December 31, 2019.  Old National did not provide collateral for the remaining credit extensions.
Visa Class B Restricted Shares
In 2008, Old National received Visa Class B restricted shares as part of Visa’s initial public offering.  These shares are transferable only under limited circumstances until they can be converted into the publicly traded Class A common shares.  This conversion will not occur until the final settlement of certain litigation for which Visa is indemnified by the holders of Visa’s Class B shares, including Old National.  Visa funded an escrow account from its initial public offering to settle these litigation claims.  Increases in litigation claims requiring Visa to fund the escrow account due to insufficient funds will result in a reduction of the conversion ratio of each Visa Class B share
49


to unrestricted Class A shares.  As of March 31, 2020, the conversion ratio was 1.6228.  Based on the existing transfer restriction and the uncertainty of the outcome of the Visa litigation, the 65,466 Class B shares that Old National owns at March 31, 2020 are carried at a 0 cost basis and are included in other assets with our equity securities that have no readily determinable fair value.
NOTE 21 – FINANCIAL GUARANTEES
Old National holds instruments, in the normal course of business with clients, that are considered financial guarantees in accordance with FASB ASC 460-10 (FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others), which requires Old National to record the instruments at fair value.  Standby letters of credit guarantees are issued in connection with agreements made by clients to counterparties.  Standby letters of credit are contingent upon failure of the client to perform the terms of the underlying contract.  Credit risk associated with standby letters of credit is essentially the same as that associated with extending loans to clients and is subject to normal credit policies.  The term of these standby letters of credit is typically one year or less.  At March 31, 2020, the notional amount of standby letters of credit was $82.4 million, which represented the maximum amount of future funding requirements, and the carrying value was $0.5 million.  At December 31, 2019, the notional amount of standby letters of credit was $87.8 million, which represented the maximum amount of future funding requirements, and the carrying value was $0.6 million.
Old National is a party in risk participation transactions of interest rate swaps, which had total notional amount of $50.1 million at March 31, 2020.
NOTE 22 – SEGMENT INFORMATION
Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.  Old National Bank, Old National’s bank subsidiary, is the only significant subsidiary upon which management makes decisions regarding how to allocate resources and assess performance.  Each of the branches of Old National Bank provide a group of similar community banking services, including such products and services as commercial, real estate and consumer loans, time deposits, checking and savings accounts, cash management, brokerage, trust, and investment advisory services.  The individual bank branches located throughout our Midwest footprint have similar operating and economic characteristics.  While the chief decision maker monitors the revenue streams of the various products, services, and regional locations, operations are managed and financial performance is evaluated on a Company-wide basis.  Accordingly, all of the community banking services and branch locations are considered by management to be aggregated into 1 reportable operating segment, community banking.
NOTE 23 – FAIR VALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  There are three levels of inputs that may be used to measure fair values:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
50


Old National used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:
Investment securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1).  For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2).  For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).  Discounted cash flows are calculated using swap and LIBOR curves plus spreads that adjust for loss severities, volatility, credit risk, and optionality.  During times when trading is more liquid, broker quotes are used (if available) to validate the model.  Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.
Residential loans held for sale: The fair value of loans held for sale is determined using quoted prices for a similar asset, adjusted for specific attributes of that loan (Level 2).
Derivative financial instruments: The fair values of derivative financial instruments are based on derivative valuation models using market data inputs as of the valuation date (Level 2).
Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which we have elected the fair value option, are summarized below: 
Fair Value Measurements at March 31, 2020 Using
(dollars in thousands)Carrying ValueQuoted Prices in
Active Markets for
Identical Assets (Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Financial Assets    
Equity securities$6,870  $6,870  $—  $—  
Investment securities available-for-sale:
U.S. Treasury11,733  11,733  —  —  
U.S. government-sponsored entities and agencies519,171  —  519,171  —  
Mortgage-backed securities - Agency3,210,000  —  3,210,000  —  
States and political subdivisions1,302,395  —  1,302,395  —  
Pooled trust preferred securities7,422  —  —  7,422  
Other securities309,304  31,670  277,634  —  
Residential loans held for sale54,209  —  54,209  —  
Derivative assets149,873  —  149,873  —  
Financial Liabilities
Derivative liabilities35,219  —  35,219  —  

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  Fair Value Measurements at December 31, 2019 Using
(dollars in thousands)Carrying ValueQuoted Prices in
Active Markets for
Identical Assets (Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Financial Assets    
Equity securities$6,842  $6,842  $—  $—  
Investment securities available-for-sale:
U.S. Treasury17,682  17,682  —  —  
U.S. government-sponsored entities and agencies592,984  —  592,984  —  
Mortgage-backed securities - Agency3,183,861  —  3,183,861  —  
States and political subdivisions1,275,643  —  1,275,603  40  
Pooled trust preferred securities8,222  —  —  8,222  
Other securities306,699  31,169  275,530  —  
Residential loans held for sale46,898  —  46,898  —  
Derivative assets51,301  —  51,301  —  
Financial Liabilities
Derivative liabilities12,393  —  12,393  —  
The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
(dollars in thousands)Pooled Trust
Preferred Securities
States and
Political Subdivisions
Three Months Ended March 31, 2020  
Balance at beginning of period$8,222  $40  
Accretion of discount —  
Sales/payments received(17) (40) 
Decrease in fair value of securities(787) —  
Balance at end of period$7,422  $—  
Three Months Ended March 31, 2019
Balance at beginning of period$8,495  $4,108  
Accretion of discount —  
Sales/payments received(15) (35) 
Decrease in fair value of securities(361) —  
Transfers out of Level 3—  (4,033) 
Balance at end of period$8,123  $40  
The accretion of discounts on securities in the table above is included in interest income.  The decrease in the fair value of securities in the table above is included in the unrealized holding gains (losses) for the period in the statement of other comprehensive income. A decrease in fair value is reflected in the balance sheet as a decrease in the fair value of investment securities available-for-sale, a decrease in accumulated other comprehensive income, which is included in shareholders’ equity, and an increase in other assets related to the tax impact.  During the three months ended March 31, 2019, Old National received third party pricing on a $4.0 million state and political subdivisions security and transferred it out of Level 3. 
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The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 of the fair value hierarchy:
(dollars in thousands)Fair Value Valuation Techniques Unobservable Input Range (Weighted Average) (4)
March 31, 2020       
Pooled trust preferred securities$7,422   Discounted cash flow Constant prepayment rate (1) 0.00%
    Additional asset defaults (2) 6.1% - 9.1% (7.1%)
    Expected asset recoveries (3) 0.0% - 18.6% (5.8%)
December 31, 2019      
Pooled trust preferred securities$8,222   Discounted cash flow Constant prepayment rate (1) 0.00%
    Additional asset defaults (2) 6.2% - 8.0% (6.8%)
    Expected asset recoveries (3) 0.0% - 19.1% (6.0%)
State and political subdivisions40   Discounted cash flow No observable inputs N/A
     Local municipality issuance  
     Old National owns 100%  
     Carried at par  
(1)Assuming no prepayments.
(2)Each currently performing pool asset is assigned a default probability based on the banking environment, which is adjusted for specific issuer evaluation, of 0%, 50%, or 100%.
(3)Each currently defaulted pool asset is assigned a recovery probability based on specific issuer evaluation of 0%, 25%, or 100%.
(4)Unobservable inputs are weighted by the estimated number of defaults and current performing collateral of the instruments.
Significant changes in any of the unobservable inputs used in the fair value measurement in isolation would have resulted in a significant change to the fair value measurement.  The pooled trust preferred securities Old National owns are subordinate note classes that rely on an ongoing cash flow stream to support their values.  The senior note classes receive the benefit of prepayments to the detriment of subordinate note classes since the ongoing interest cash flow stream is reduced by the early redemption.  Generally, a change in prepayment rates or additional pool asset defaults would have an impact that is directionally opposite from a change in the expected recovery of a defaulted pool asset.
Assets measured at fair value on a non-recurring basis are summarized below:
  Fair Value Measurements at March 31, 2020 Using
(dollars in thousands)Carrying ValueQuoted Prices in
Active Markets for
Identical Assets (Level 1)
Significant
Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Collateral Dependent Impaired Loans:    
Commercial loans$11,374  $—  $—  $11,374  
Commercial real estate loans27,570  —  —  27,570  
Foreclosed Assets:
Commercial214  —  —  214  
Loan servicing rights23,927  —  23,927  —  
Impaired commercial and commercial real estate loans that are deemed collateral dependent are valued based on the fair value of the underlying collateral.  These estimates are based on the most recently available appraisals with certain adjustments made based on the type of property, age of appraisal, current status of the property, and other related factors to estimate the current value of the collateral.  These impaired commercial and commercial real estate loans had a principal amount of $49.5 million, with a valuation allowance of $10.6 million at March 31, 2020.  Old National recorded provision expense associated with these loans totaling $6.8 million for the three months ended March 31, 2020.  Old National recorded provision expense associated with impaired commercial and commercial real estate loans that were deemed collateral dependent totaling $1.2 million for the three months ended March 31, 2019.
Other real estate owned and other repossessed property is measured at fair value less costs to sell on a non-recurring basis and had a net carrying amount of $0.2 million at March 31, 2020. There were write-downs of other real estate owned of $11 thousand for the three months ended March 31, 2020. Old National did not record any write-downs for the three months ended March 31, 2019.
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Loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the carrying amount.  If the carrying amount of an individual tranche exceeds fair value, impairment is recorded on that tranche so that the servicing asset is carried at fair value.  Fair value is determined at a tranche level, based on market prices for comparable mortgage servicing contracts when available, or alternatively based on a valuation model that calculates the present value of estimated future net servicing income.  The valuation model utilizes a discount rate, weighted average prepayment speed, and other economic factors that market participants would use in estimating future net servicing income and that can be validated against available market data (Level 2).  The valuation allowance for loan servicing rights with impairments at March 31, 2020 totaled $1.4 million.  Old National recorded impairments associated with these loan servicing rights totaling $1.4 million during the three months ended March 31, 2020 and impairments of $2 thousand for the three months ended March 31, 2019.
Assets measured at fair value on a non-recurring basis are summarized below:
  Fair Value Measurements at December 31, 2019 Using
(dollars in thousands)Carrying ValueQuoted Prices in
Active Markets for
Identical Assets (Level 1)
Significant
Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Collateral Dependent Impaired Loans:    
Commercial loans$10,361  $—  $—  $10,361  
Commercial real estate loans11,610  —  —  11,610  
Foreclosed Assets:
Commercial real estate21  —  —  21  
Residential22  —  —  22  
Loan servicing rights4,662  —  4,662  —  
At December 31, 2019, impaired commercial and commercial real estate loans had a principal amount of $30.9 million, with a valuation allowance of $8.9 million.
Other real estate owned and other repossessed property had a net carrying amount of $43 thousand at December 31, 2019.
The valuation allowance for loan servicing rights with impairments at December 31, 2019 totaled $31 thousand.
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The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 of the fair value hierarchy:
(dollars in thousands)Fair ValueValuation TechniquesUnobservable InputRange (Weighted Average) (3)
March 31, 2020    
Collateral Dependent Impaired Loans    
Commercial loans$11,374  Fair value ofDiscount for type of property,0% - 80% (42%)
 collateralage of appraisal, and current status
Commercial real estate loans (1)27,570  Fair value ofDiscount for type of property,0%
 collateralage of appraisal, and current status
Foreclosed Assets
Commercial real estate (1)214  Fair value ofDiscount for type of property,5%
collateralage of appraisal, and current status
December 31, 2019  
Collateral Dependent Impaired Loans  
Commercial loans$10,361  Fair value ofDiscount for type of property,0% - 50% (13%)
 collateralage of appraisal, and current status
Commercial real estate loans (2)11,610  Fair value ofDiscount for type of property,45%
 collateralage of appraisal, and current status
Foreclosed Assets  
Commercial real estate (2)21  Fair value ofDiscount for type of property,43%
collateralage of appraisal, and current status
Residential (2)22  Fair value ofDiscount for type of property,21%
  collateralage of appraisal, and current status 
(1)There were no commercial real estate loans large enough to require a discount and there was only one foreclosed commercial real estate asset at March 31, 2020, so no range or weighted average is reported.
(2)There was only one collateral dependent impaired commercial real estate loan, one foreclosed commercial real estate asset, and one foreclosed residential asset at December 31, 2019, so no range or weighted average is reported.
(3)Unobservable inputs were weighted by the relative fair value of the instruments.
Financial instruments recorded using fair value option
Old National may elect to report most financial instruments and certain other items at fair value on an instrument-by instrument basis with changes in fair value reported in net income.  After the initial adoption, the election is made at the acquisition of an eligible financial asset, financial liability, or firm commitment or when certain specified reconsideration events occur.  The fair value election may not be revoked once an election is made.
Residential loans held for sale
Old National has elected the fair value option for residential loans held for sale.  For these loans, interest income is recorded in the consolidated statements of income based on the contractual amount of interest income earned on the financial assets (except any that are on nonaccrual status).  None of these loans are 90 days or more past due, nor are any on nonaccrual status.  Included in the income statement is interest income for loans held for sale totaling $0.4 million for the three months ended March 31, 2020 and $0.2 million for the three months ended March 31, 2019.
Old National has elected the fair value option for newly originated conforming fixed-rate and adjustable-rate first mortgage loans held for sale.  These loans are intended for sale and are hedged with derivative instruments.  Old National has elected the fair value option to mitigate accounting mismatches in cases where hedge accounting is complex and to achieve operational simplification.  The fair value option was not elected for loans held for investment.
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The difference between the aggregate fair value and the aggregate remaining principal balance for loans for which the fair value option has been elected was as follows: 
(dollars in thousands)Aggregate Fair ValueDifference Contractual Principal
March 31, 2020   
Residential loans held for sale$54,209  $2,952  $51,257  
December 31, 2019
Residential loans held for sale$46,898  $1,529  $45,369  
Accrued interest at period end is included in the fair value of the instruments.
The following table presents the amount of gains and losses from fair value changes included in income before income taxes for financial assets carried at fair value:
(dollars in thousands)Other
Gains and (Losses)
Interest IncomeInterest (Expense)Total Changes
in Fair Values
Included in
Current Period Earnings
Three Months Ended March 31, 2020    
Residential loans held for sale$1,421  $ $—  $1,423  
Three Months Ended March 31, 2019
Residential loans held for sale$90  $ $—  $95  
The carrying amounts and estimated fair values of financial instruments not carried at fair value were as follows: 
  Fair Value Measurements at March 31, 2020 Using
(dollars in thousands)Carrying ValueQuoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Financial Assets    
Cash, due from banks, money market,
   and other interest-earning investments
$343,177  $343,177  $—  $—  
Loans, net:
Commercial3,012,704  —  —  2,984,123  
Commercial real estate5,226,694  —  —  5,184,989  
Residential real estate2,318,214  —  —  2,334,673  
Consumer credit1,720,620  —  —  1,718,474  
Accrued interest receivable77,810  41  23,744  54,025  
Financial Liabilities
Deposits:
Noninterest-bearing demand deposits$4,058,559  $4,058,559  $—  $—  
Checking, NOW, savings, and money market
   interest-bearing deposits
8,705,109  8,705,109  —  —  
Time deposits1,541,694  —  1,563,286  —  
Federal funds purchased and interbank borrowings560,770  560,770  —  —  
Securities sold under agreements to repurchase318,067  318,067  —  —  
FHLB advances2,130,263  —  2,279,323  —  
Other borrowings236,114  —  242,995  —  
Accrued interest payable6,113  —  6,113  —  
Standby letters of credit459  —  —  459  
Off-Balance Sheet Financial Instruments
Commitments to extend credit$—  $—  $—  $15,647  

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  Fair Value Measurements at December 31, 2019 Using
(dollars in thousands)Carrying ValueQuoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Financial Assets    
Cash, due from banks, money market,
   and other interest-earning investments
$276,337  $276,337  $—  $—  
Loans, net:
Commercial2,867,711  —  —  2,831,298  
Commercial real estate5,145,204  —  —  5,130,848  
Residential real estate2,331,990  —  —  2,357,341  
Consumer credit1,718,000  —  —  1,676,253  
Accrued interest receivable85,123  15  28,185  56,923  
Financial Liabilities
Deposits:
Noninterest-bearing demand deposits$4,042,286  $4,042,286  $—  $—  
Checking, NOW, savings, and money market
   interest-bearing deposits
8,828,881  8,828,881  —  —  
Time deposits1,682,230  —  1,692,569  —  
Federal funds purchased and interbank borrowings350,414  350,414  —  —  
Securities sold under agreements to repurchase327,782  327,782  —  —  
FHLB advances1,822,847  —  1,875,089  —  
Other borrowings243,685  —  254,519  —  
Accrued interest payable8,272  —  8,272  —  
Standby letters of credit573  —  —  573  
Off-Balance Sheet Financial Instruments
Commitments to extend credit$—  $—  $—  $4,302  
The methods utilized to measure the fair value of financial instruments at March 31, 2020 and December 31, 2019 represent an approximation of exit price, however, an actual exit price may differ.
NOTE 24 – REVENUE FROM CONTRACTS WITH CUSTOMERS
Old National’s revenue from contracts with customers in the scope of Topic 606 is recognized within noninterest income.  The consolidated statements of income include all categories of noninterest income.  The following table reflects only the categories of noninterest income that are within the scope of Topic 606:
Three Months Ended
March 31,
(dollars in thousands)20202019
Wealth management fees$8,884  $8,535  
Service charges on deposit accounts10,077  10,826  
Debit card and ATM fees4,998  5,503  
Investment product fees5,874  5,271  
Other income:
Merchant processing fees804  707  
Gain (loss) on other real estate owned(56) 40  
Safe deposit box fees310  411  
Insurance premiums and commissions116  200  
Total$31,007  $31,493  
Wealth management fees: Old National earns wealth management fees based upon asset custody and investment management services provided to individual and institutional customers.  Most of these customers receive monthly
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or quarterly billings for services rendered based upon the market value of assets in custody.  Fees that are transaction based are recognized at the point in time that the transaction is executed.
Service charges on deposit accounts: Old National earns fees from deposit customers for transaction-based, account maintenance, and overdraft services.  Transaction-based fees and overdraft fees are recognized at a point in time, since the customer generally has a right to cancel the depository arrangement at any time.  The arrangement is considered a day-to-day contract with ongoing renewals and optional purchases, so the duration of the contract does not extend beyond the services already performed.  Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which Old National satisfies its performance obligation.
Debit card and ATM fees: Debit card and ATM fees include ATM usage fees and debit card interchange income.  As with the transaction-based fees on deposit accounts, the ATM fees are recognized at the point in time that Old National fulfills the customer’s request.  Old National earns interchange fees from cardholder transactions processed through card association networks.  Interchange rates are generally set by the card associations based upon purchase volumes and other factors.  Interchange fees represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.
Investment product fees: Investment product fees are the commissions and fees received from a registered broker/dealer and investment adviser that provide those services to Old National customers.  Old National acts as an agent in arranging the relationship between the customer and the third-party service provider.  These fees are recognized monthly from the third-party broker based upon services already performed, net of the processing fees charged to Old National by the broker.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is an analysis of our results of operations for the three months ended March 31, 2020 and 2019, and financial condition as of March 31, 2020, compared to December 31, 2019.  This discussion and analysis should be read in conjunction with the consolidated financial statements and related notes.  This discussion contains forward-looking statements concerning our business that are based on estimates and involves certain risks and uncertainties.  Therefore, future results could differ significantly from our current expectations and the related forward-looking statements.
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FINANCIAL HIGHLIGHTS
The following table sets forth certain financial highlights of Old National:
Three Months Ended
(dollars and shares in thousands,
except per share data)
March 31, 2020December 31, 2019March 31, 2019
Income Statement:
Net interest income$143,771  $148,899  $147,048  
Taxable equivalent adjustment (1)3,323  3,282  3,198  
Net interest income - tax equivalent basis147,094  152,181  150,246  
Provision for loan losses (4)16,950  1,264  1,043  
Noninterest income57,502  47,726  46,416  
Noninterest expense158,744  134,743  123,041  
Net income22,640  49,185  56,276  
Common Share Data:
Weighted average diluted shares168,404  170,186  175,368  
Net income (diluted)$0.13  $0.29  $0.32  
Cash dividends0.14  0.13  0.13  
Common dividend payout ratio (2)108   45   41   
Book value$17.10  $16.82  $15.82  
Stock price13.19  18.29  16.40  
Tangible common book value (3)10.48  10.35  9.44  
Performance Ratios:
Return on average assets0.44   0.97   1.14   
Return on average common equity3.20  6.94  8.29  
Return on tangible common equity (3)5.89  11.89  14.52  
Return on average tangible common
equity (3)
5.86  12.03  14.88  
Net interest margin (3)3.31  3.46  3.51  
Efficiency ratio (3)77.71  65.57  60.26  
Net charge-offs (recoveries) to
average loans
0.21  0.12  0.03  
Allowance for loan losses to ending loans (4)0.86  0.45  0.46  
Non-performing loans to ending loans1.16  1.19  1.41  
Balance Sheet:
Total loans$12,384,612  $12,117,524  $12,068,977  
Total assets20,741,141  20,411,667  20,084,420  
Total deposits14,305,362  14,553,397  14,429,270  
Total borrowed funds3,245,214  2,744,728  2,639,038  
Total shareholders' equity2,823,435  2,852,453  2,751,872  
Nonfinancial Data:
Full-time equivalent employees2,736  2,709  2,908  
Banking centers192  192  193  
(1)Calculated using the federal statutory tax rate in effect of 21% for all periods.
(2)Cash dividends per share divided by net income per share (basic).
(3)Represents a non-GAAP financial measure.  Refer to the "Non-GAAP Financial Measures" section for reconciliations to GAAP financial measures.
(4)Beginning January 1, 2020, calculation is based on current expected loss methodology. Prior to January 1, 2020, calculation is based on incurred loss methodology.
NON-GAAP FINANCIAL MEASURES
Non-GAAP financial measures exclude certain items that are included in the financial results presented in accordance with GAAP.  Management believes these non-GAAP financial measures enhance an investor’s understanding of the financial results of Old National by providing a meaningful basis for period-to-period comparisons, assisting in operating results analysis, and predicting future performance.
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The following table presents GAAP to non-GAAP reconciliations.
(dollars and shares in thousands,Three Months Ended
March 31,
except per share data)20202019
Tangible common book value:
Shareholders' equity (GAAP)$2,823,435  $2,751,872  
Deduct:Goodwill1,036,994  1,036,258  
Intangible assets56,329  72,544  
Tangible shareholders' equity (non-GAAP)$1,730,112  $1,643,070  
Period end common shares165,109