Edgar Filing: OLD NATIONAL BANCORP /IN/

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2014

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

For the transition period from to

Commission File Number 1-15817

OLD NATIONAL BANCORP

(Exact name of Registrant as specified in its charter)

INDIANA

35-1539838

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

One Main Street

Evansville, Indiana

47708

(Address of principal executive offices)

(Zip Code)

(812) 464-1294

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (s232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). Yes x No ¨

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock. The Registrant has one class of common stock (no par value) with 100,084,000 shares outstanding at March 31, 2014.

OLD NATIONAL BANCORP

FORM 10-Q

INDEX


		Page No.
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets March 31, 2014 (unaudited), December 31, 2013 and March 31, 2013 (unaudited)		3

	Consolidated Statements of Income (unaudited) Three months ended March 31, 2014 and 2013		4

	Consolidated Statements of Comprehensive Income (Loss) (unaudited) Three months ended March 31, 2014 and 2013		5

	Consolidated Statements of Changes in Shareholders’ Equity (unaudited) Three months ended March 31, 2014 and 2013		6

	Consolidated Statements of Cash Flows (unaudited) Three months ended March 31, 2014 and 2013		7

	Notes to Consolidated Financial Statements (unaudited)		8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		58

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		86

Item 4.	Controls and Procedures		87

PART II	OTHER INFORMATION		88

SIGNATURES			94

OLD NATIONAL BANCORP

CONSOLIDATED BALANCE SHEETS


	March 31,			December 31,			March 31,
(dollars and shares in thousands, except per share data)	2014			2013			2013
	(unaudited)						(unaudited)
Assets
Cash and due from banks	$	197,446		$	190,606		$	133,939
Money market and other interest-earning investments		17,078			16,117			19,964

Total cash and cash equivalents		214,524			206,723			153,903
Trading securities - at fair value		3,681			3,566			3,217
Investment securities - available-for-sale, at fair value
U.S. Treasury		15,697			13,113			11,582
U.S. Government-sponsored entities and agencies		490,080			435,588			404,740
Mortgage-backed securities		1,246,408			1,306,670			1,548,011
States and political subdivisions		251,839			268,795			665,339
Other securities		365,040			348,035			218,738

Total investment securities - available-for-sale		2,369,064			2,372,201			2,848,410
Investment securities - held-to-maturity, at amortized cost (fair value $812,914, $780,758 and $423,325 respectively)		779,294			762,734			392,379
Federal Home Loan Bank stock, at cost		40,584			40,584			37,927
Residential loans held for sale, at fair value		6,169			7,705			14,583
Loans:
Commercial		1,367,486			1,373,415			1,315,136
Commercial real estate		1,156,593			1,160,890			1,230,310
Residential real estate		1,356,233			1,359,569			1,352,679
Consumer credit, net of unearned income		997,808			971,258			887,520
Covered loans, net of discount		194,161			217,832			326,397

Total loans		5,072,281			5,082,964			5,112,042
Allowance for loan losses		(41,539	)		(41,741	)		(47,313	)
Allowance for loan losses - covered loans		(6,014	)		(5,404	)		(6,168	)

Net loans		5,024,728			5,035,819			5,058,561

FDIC indemnification asset		65,699			88,513			109,861
Premises and equipment, net		108,866			108,306			89,847
Accrued interest receivable		48,764			50,205			46,575
Goodwill		352,729			352,729			338,820
Other intangible assets		24,120			25,957			26,695
Company-owned life insurance		276,956			275,121			272,273
Assets held for sale		9,043			9,056			10,353
Other real estate owned and repossessed personal property		7,629			7,562			9,103
Other real estate owned - covered		12,918			13,670			26,114
Other assets		200,012			221,293			235,070

Total assets	$	9,544,780		$	9,581,744		$	9,673,691

Liabilities
Deposits:
Noninterest-bearing demand	$	2,047,664		$	2,026,490		$	1,973,265
Interest-bearing:
NOW		1,789,167			1,775,938			1,691,231
Savings		2,014,574			1,941,652			1,916,880
Money market		445,953			448,848			294,744
Time		960,804			1,017,975			1,190,199

Total deposits		7,258,162			7,210,903			7,066,319
Short-term borrowings		410,128			462,332			644,021
Other borrowings		506,782			556,388			536,798
Accrued expenses and other liabilities		184,471			189,481			226,888

Total liabilities		8,359,543			8,419,104			8,474,026

Shareholders’ Equity
Preferred stock, series A, 1,000 shares authorized, no shares issued or outstanding		0			0			0
Common stock, $1 stated value, 150,000 shares authorized, 100,084, 99,859 and 101,367 shares issued and outstanding, respectively		100,084			99,859			101,367
Capital surplus		900,665			900,254			917,064
Retained earnings		222,418			206,993			160,416
Accumulated other comprehensive income (loss), net of tax		(37,930	)		(44,466	)		20,818

Total shareholders’ equity		1,185,237			1,162,640			1,199,665

Total liabilities and shareholders’ equity	$	9,544,780		$	9,581,744		$	9,673,691

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

OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF INCOME (unaudited)


	Three Months Ended
	March 31,
(dollars and shares in thousands, except per share data)	2014			2013
Interest Income
Loans including fees:
Taxable	$	64,957		$	64,218
Nontaxable		2,509			2,179
Investment securities
Taxable		15,769			15,142
Nontaxable		5,024			4,550
Money market and other interest-earning investments		6			13

Total interest income		88,265			86,102

Interest Expense
Deposits		3,283			5,268
Short-term borrowings		67			267
Other borrowings		1,437			1,517

Total interest expense		4,787			7,052

Net interest income		83,478			79,050
Provision for loan losses		37			845

Net interest income after provision for loan losses		83,441			78,205

Noninterest Income
Wealth management fees		5,792			5,656
Service charges on deposit accounts		11,134			11,098
Debit card and ATM fees		5,736			5,798
Mortgage banking revenue		630			1,273
Insurance premiums and commissions		11,962			10,943
Investment product fees		3,868			3,583
Company-owned life insurance		1,467			1,644
Net securities gains		559			1,019
Total other-than-temporary impairment losses		(100	)		0
Loss recognized in other comprehensive income		0			0

Impairment losses recognized in earnings		(100	)		0
Gain (loss) on derivatives		179			(12	)
Recognition of deferred gain on sale leaseback transactions		1,524			1,584
Gain on branch divestitures - deposit premium		0			2,244
Change in FDIC indemnification asset		(7,343	)		(2,302	)
Other income		5,155			3,787

Total noninterest income		40,563			46,315

Noninterest Expense
Salaries and employee benefits		51,380			50,960
Occupancy		10,942			12,084
Equipment		3,014			2,898
Marketing		2,185			1,205
Data processing		5,584			5,232
Communication		2,611			2,566
Professional fees		3,682			3,669
Loan expense		1,317			1,616
Supplies		653			569
FDIC assessment		1,441			1,652
Other real estate owned expense		758			1,014
Amortization of intangibles		1,837			2,525
Other expense		2,848			4,193

Total noninterest expense		88,252			90,183

Income before income taxes		35,752			34,337
Income tax expense		9,242			10,392

Net income	$	26,510		$	23,945

Net income per common share - basic	$	0.27		$	0.24
Net income per common share - diluted		0.26			0.24

Weighted average number of common shares outstanding-basic		99,797			101,081
Weighted average number of common shares outstanding-diluted		100,325			101,547

Dividends per common share	$	0.11		$	0.10

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

OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)


	Three Months Ended
	March 31,
(dollars in thousands)	2014			2013
Net income	$	26,510		$	23,945
Other comprehensive income (loss)
Change in securities available-for-sale:
Unrealized holding gains (losses) for the period		12,055			(13,783	)
Reclassification adjustment for securities gains realized in income		(559	)		(1,019	)
Other-than-temporary-impairment on available-for-sale securities associated with credit loss realized in income		100			0
Income tax effect		(4,463	)		5,409

Unrealized gains on available-for-sale securities		7,133			(9,393	)
Change in securities held-to-maturity:
Amortization of fair value for securities held-to-maturity previously recognized into accumulated other comprehensive income		397			(177	)
Income tax effect		(127	)		71

Changes from securities held-to-maturity		270			(106	)
Cash flow hedges:
Net unrealized derivative gains (losses) on cash flow hedges		(1,937	)		0
Income tax effect		737			0

Changes from cash flow hedges		(1,200	)		0
Defined benefit pension plans:
Amortization of net loss recognized in income		352			860
Income tax effect		(19	)		(344	)

Changes from defined benefit pension plans		333			516

Other comprehensive income (loss), net of tax		6,536			(8,983	)

Comprehensive income (loss)	$	33,046		$	14,962

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

OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)


										Accumulated
										Other			Total
	Common			Capital			Retained			Comprehensive			Shareholders’
(dollars and shares in thousands)	Stock			Surplus			Earnings			Income (Loss)			Equity
Balance, December 31, 2012	$	101,179		$	916,918		$	146,667		$	29,801		$	1,194,565
Net income		0			0			23,945			0			23,945
Other comprehensive income (loss)		0			0			0			(8,983	)		(8,983	)
Dividends - common stock		0			0			(10,124	)		0			(10,124	)
Common stock issued		6			61			0			0			67
Common stock repurchased		(87	)		(1,088	)		0			0			(1,175	)
Stock based compensation expense		0			1,023			0			0			1,023
Stock activity under incentive comp plans		269			150			(72	)		0			347

Balance, March 31, 2013	$	101,367		$	917,064		$	160,416		$	20,818		$	1,199,665

Balance, December 31, 2013	$	99,859		$	900,254		$	206,993		$	(44,466	)	$	1,162,640
Net income		0			0			26,510			0			26,510
Other comprehensive income (loss)		0			0			0			6,536			6,536
Dividends - common stock		0			0			(10,997	)		0			(10,997	)
Common stock issued		5			73			0			0			78
Common stock repurchased		(116	)		(1,460	)		0			0			(1,576	)
Stock based compensation expense		0			1,028			0			0			1,028
Stock activity under incentive comp plans		336			770			(88	)		0			1,018

Balance, March 31, 2014	$	100,084		$	900,665		$	222,418		$	(37,930	)	$	1,185,237

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

OLD NATIONAL BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)


	Three Months Ended
	March 3 1,
(dollars in thousands)	2014			2013
Cash Flows From Operating Activities
Net income	$	26,510		$	23,945

Adjustments to reconcile net income to cash provided by operating activities:
Depreciation		2,943			2,501
Amortization and impairment of other intangible assets		1,837			2,525
Net premium amortization on investment securities		2,998			4,387
Amortization of FDIC indemnification asset		7,343			2,302
Stock compensation expense		1,028			1,023
Provision expense for loan losses		37			845
Net securities gains		(559	)		(1,019	)
Impairment on available-for-sale securities		100			0
Gain on branch divestitures		0			(2,244	)
Recognition of deferred gain on sale leaseback transactions		(1,524	)		(1,584	)
(Gain) loss on derivatives		(179	)		12
Net gains on sales of other assets		(466	)		(1,147	)
Loss on retirement of debt		0			706
Increase in cash surrender value of company owned life insurance		(1,835	)		(1,644	)
Residential real estate loans originated for sale		(17,747	)		(33,836	)
Proceeds from sale of residential real estate loans		19,743			32,701
Decrease in interest receivable		1,441			403
Decrease in other real estate owned		685			2,099
Decrease in other assets		16,318			4,658
Decrease in accrued expenses and other liabilities		(3,134	)		(13,402	)

Total adjustments		29,029			(714	)

Net cash flows provided by operating activities		55,539			23,231

Cash Flows From Investing Activities
Purchases of investment securities available-for-sale		(93,992	)		(598,663	)
Purchases of investment securities held-to-maturity		(25,185	)		0
Proceeds from maturities, prepayments and calls of investment securities available-for-sale		91,335			221,741
Proceeds from sales of investment securities available-for-sale		16,523			11,970
Proceeds from maturities, prepayments and calls of investment securities held-to-maturity		7,350			9,420
Proceeds on branch divestitures		0			(144,236	)
Proceeds from sale of loans		0			3,187
Reimbursements under FDIC loss share agreements		15,989			3,923
Net principal collected from loan customers		11,054			79,238
Proceeds from sale of premises and equipment and other assets		6			2,904
Purchases of premises and equipment and other assets		(3,515	)		(2,851	)

Net cash flows provided by (used in) investing activities		19,565			(413,367	)

Cash Flows From Financing Activities
Net increase (decrease) in deposits and short-term borrowings:
Deposits		47,259			(62,499	)
Short-term borrowings		(52,204	)		54,206
Payments for maturities on other borrowings		(175,120	)		(112	)
Payments related to retirement of debt		0			(25,706	)
Proceeds from issuance of other borrowings		125,000			325,000
Cash dividends paid on common stock		(10,997	)		(10,124	)
Common stock repurchased		(1,576	)		(1,175	)
Proceeds from exercise of stock options, including tax benefit		257			322
Common stock issued		78			67

Net cash flows provided by (used in) financing activities		(67,303	)		279,979

Net increase (decrease) in cash and cash equivalents		7,801			(110,157	)
Cash and cash equivalents at beginning of period		206,723			264,060

Cash and cash equivalents at end of period	$	214,524		$	153,903

Supplemental cash flow information:
Total interest paid	$	4,935		$	7,308
Total taxes paid (net of refunds)	$	3,001		$	4,079

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

OLD NATIONAL BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1—BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements include the accounts of Old National Bancorp and its wholly-owned affiliates (hereinafter collectively referred to as “Old National”) and have been prepared in conformity with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. Such principles require management to make estimates and assumptions that affect the reported amounts of assets, liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements and amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The allowance for loan losses, valuation of purchased loans, FDIC indemnification asset, valuation and impairment of securities, goodwill and intangibles, derivative financial instruments, and income taxes are particularly subject to change. In the opinion of management, the consolidated financial statements contain all the normal and recurring adjustments necessary for a fair statement of the financial position of Old National as of March 31, 2014 and 2013, and December 31, 2013, and the results of its operations for the three months ended March 31, 2014 and 2013. 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, 2013.

All significant intercompany transactions and balances have been eliminated. Certain prior year amounts have been reclassified to conform with the 2014 presentation. Such reclassifications had no effect on net income or shareholders’ equity and were insignificant amounts.

NOTE 2—RECENT ACCOUNTING PRONOUNCEMENTS

FASB ASC 405 – In February 2013, the FASB issued an update (ASU No. 2013-04, Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date) impacting FASB ASC 405, Liabilities. This update requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date as the sum of (1) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and (2) any additional amount the reporting entity expects to pay on behalf of its co-obligors. This update also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. This update became effective for interim and annual periods beginning after December 15, 2013 and did not have a material impact on the consolidated financial statements.

FASB ASC 323 – In January 2014, the FASB issued an update (ASU No. 2014-01, Accounting for Investments in Qualified Affordable Housing Projects) impacting FASB ASC 323, Investments – Equity Method and Joint Ventures. This update permits reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2014 and should be applied retrospectively. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

FASB ASC 310 – In January 2014, the FASB issued an update (ASU No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure) impacting FASB ASC 310-40. The amendments in this update clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the property in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The amendments also require disclosure of (1) the amount of foreclosed residential real estate property held by the creditor (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2014. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

FASB ASC 205 and 360 – In April 2014, the FASB issued an update (ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity) impacting FASB ASC 205, Presentation of Fianacial Statements, and FASB ASC 360, Property, Plant, and Equipment. The amendments in this update change the requirements for reporting discontinued operations. A discontinued operation may include a component of an entity or a group of components of an entity, or a business or nonprofit activity. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. An entity will have to present, for each comparative period, the assets and liabilities of a disposal group that includes discontinued operations separately in the asset and liability sections of the statement of financial position. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2014. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

NOTE 3—ACQUISITION AND DIVESTITURE ACTIVITY

Acquisitions

Bank of America

On January 9, 2013, Old National announced that it had entered into a purchase and assumption agreement to acquire 24 bank branches of Bank of America. Four of the branches are located in northern Indiana and 20 branches are located in southwest Michigan. The Company paid a deposit premium of 2.94%. The acquisition has doubled Old National’s presence in the South Bend/Elkhart area and provided a logical market extension into southwest Michigan. The premium paid for our entrance into a new market drove the goodwill recorded in this transaction. The transaction closed on July 12, 2013.

Under the acquisition method of accounting, the total estimated purchase price is allocated to the net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on management’s preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on assumptions that are subject to change, the purchase price for the Bank of America branch acquisition is allocated as follows (in thousands):


Cash and equivalents	$	562,906
Loans		5,638
Premises and equipment		12,559
Accrued interest receivable		15
Other assets		331
Deposits		(565,106	)
Accrued expenses and other liabilities		(246	)

Net tangible assets acquired		16,097
Definite-lived intangible assets acquired		3,462
Goodwill		13,347

Purchase price	$	32,906

The acquired identifiable intangible asset is core deposit intangible and the estimated fair value is approximately $3.5 million. The core deposit intangible asset will be amortized over an estimated useful life of 7 years and is included in the “Banking” segment, as described in Note 20 of these consolidated financial statement footnotes. The goodwill recorded in the transaction will be deductible for tax purposes and is included in the “Banking” segment.

Pending Acquisitions

On September 10, 2013, Old National announced that it had entered into an agreement to acquire Tower Financial Corporation (“Tower”) through a stock and cash merger. Tower is an Indiana bank holding company with Tower Bank & Trust Company as its wholly-owned subsidiary. Headquartered in Fort Wayne, Indiana, Tower has seven banking centers with approximately $671 million in assets and an additional $750 million in trust assets under management at March 31, 2014. The merger strengthens Old National’s position as the third largest deposit holder in Indiana. Pursuant to the merger agreement, Tower’s shareholders will receive 1.20 shares of Old National common stock and $6.75 in cash for each share of Tower common stock. The transaction received regulatory approval from the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency and closed on April 25, 2014, subsequent to quarter-end. At April 25, 2014, the transaction had an estimated value of $110.3 million.

On January 8, 2014, Old National announced that it had entered into an agreement to acquire United Bancorp, Inc. (“United”) through a stock and cash merger. United is a Michigan bank holding company with United Bank & Trust as its wholly-owned subsidiary. Headquartered in Ann Arbor, Michigan, United has eighteen banking centers with approximately $922 million in assets and an additional $685 million in trust assets under management at March 31, 2014. Pursuant to the merger agreement, shareholders of United will receive 0.70 shares of Old National common stock and $2.66 in cash for each share of United common stock. As of January 6, 2014, the transaction was valued at approximately $173.1 million. The transaction is subject to approval by regulatory authorities and United’s shareholders, as well as the satisfaction of customary closing conditions.

Divestitures

On August 16, 2012, Old National announced plans to sell the deposits of nine banking centers located in southern Illinois and western Kentucky. As such, these deposits were considered held for sale as of December 31, 2012. During the first quarter of 2013 these deposits were sold. Deposits at the time of sale were approximately $150.0 million and the Company received a deposit premium of $2.2 million.

On September 5, 2013, Old National entered into branch purchase and assumption agreements to sell three banking centers in the fourth quarter of 2013. The banking centers were sold during the fourth quarter and deposits at the time of sale were approximately $28.2 million and we received a deposit premium of $650 thousand.

As part of our efforts to provide an efficient and effective branch banking network, Old National also consolidated 23 banking centers into existing branch locations during 2013.

NOTE 4—NET INCOME PER SHARE

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


(dollars and shares in thousands, except per share data)	Three Months Ended March 31, 2014		Three Months Ended March 31, 2013
Basic Earnings Per Share
Net income	$	26,510	$	23,945
Weighted average common shares outstanding		99,797		101,081
Basic Earnings Per Share	$	0.27	$	0.24

Diluted Earnings Per Share
Net income	$	26,510	$	23,945
Weighted average common shares outstanding		99,797		101,081
Effect of dilutive securities:
Restricted stock		501		439
Stock options (1)		27		27

Weighted average shares outstanding		100,325		101,547
Diluted Earnings Per Share	$	0.26	$	0.24

(1)

Options to purchase 832 shares and 1,025 shares outstanding at March 31, 2014 and 2013, respectively, were excluded in the computation of net income per diluted share because the exercise price of these options was greater than the average market price of the common shares and, therefore, the effect would be antidilutive.

NOTE 5—ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables summarize the changes within each classification of accumulated other comprehensive income (loss) (“AOCI”) net of tax for the three months ended March 31, 2014 and summarizes the significant amounts reclassified out of each component of AOCI:


	Changes in Accumulated Other Comprehensive Income (Loss) by Component
	For the Three Months Ended March 31, 2014 (a)
	Unrealized Gains and Losses on Available-for-Sale Securities			Unrealized Gains and Losses on Held-to-Maturity Securities			Gains and Losses on Cash Flow Hedges			Defined Benefit Pension Plans			Total
Balance at January 1, 2014	$	(21,108	)	$	(16,767	)	$	(190	)	$	(6,401	)	$	(44,466	)
Other comprehensive income (loss) before reclassifications		7,415			0			(1,200	)		0			6,215
Amounts reclassified from accumulated other comprehensive income (loss) (b)		(282	)		270			0			333			321

Net current-period other comprehensive income (loss)		7,133			270			(1,200	)		333			6,536

Balance at March 31, 2014	$	(13,975	)	$	(16,497	)	$	(1,390	)	$	(6,068	)	$	(37,930	)

(a)	All amounts are net of tax. Amounts in parentheses indicate debits.

(b)	See table below for details about reclassifications.


Reclassifications out of Accumulated Other Comprehensive Income (Loss)
For the Three Months Ended March 31, 2014 (a)
Details about Accumulated Other Comprehensive Income (Loss) Components	Amount Reclassified from Accumulated Other Comprehensive Income (Loss)			Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains and losses on available-for-sale securities	$	559		Net securities gains
		(100	)	Impairment losses

		459		Total before tax
		(177	)	Tax (expense) or benefit

	$	282		Net of tax

Unrealized gains and losses on held-to-maturity securities	$	(397	)	Interest income/(expense)
		127		Tax (expense) or benefit

	$	(270	)	Net of tax

Amortization of defined benefit pension items Acturial gains/(losses)	$	(352	)	(b)
		19		Tax (expense) or benefit

	$	(333	)	Net of tax

Total reclassifications for the period	$	(321	)	Net of tax

(a)	Amounts in parentheses indicate debits to profit/loss.

(b)	This accumulated other comprehensive income (loss) component is included in the computation of net periodic pension cost. See Note 14 for additional details on our pension plans.

The following tables summarize the changes within each classification of accumulated other comprehensive income (loss) (“AOCI”) net of tax for the three months ended March 31, 2013 and summarizes the significant amounts reclassified out of each component of AOCI:


	Changes in Accumulated Other Comprehensive Income (Loss) by Component
	For the Three Months Ended March 31, 2013 (a)
	Unrealized Gains and Losses on Available-for-Sale Securities			Unrealized Gains and Losses on Held-to-Maturity Securities			Gains and Losses on Cash Flow Hedges		Defined Benefit Pension Plans			Total
Balance at January 1, 2013	$	39,054		$	3,269		$	0	$	(12,522	)	$	29,801
Other comprehensive income (loss) before reclassifications		(8,746	)		0			0		0			(8,746	)
Amounts reclassified from accumulated other comprehensive income (loss) (b)		(647	)		(106	)		0		516			(237	)

Net current-period other comprehensive income (loss)		(9,393	)		(106	)		0		516			(8,983	)

Balance at March 31, 2013	$	29,661		$	3,163		$	0	$	(12,006	)	$	20,818

(a)	All amounts are net of tax. Amounts in parentheses indicate debits.

(b)	See table below for details about reclassifications.


Reclassifications out of Accumulated Other Comprehensive Income (Loss)
For the Three Months Ended March 31, 2013
Details about Accumulated Other Comprehensive Income (Loss) Components	Amount Reclassified from Accumulated Other Comprehensive Income (Loss)			Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains and losses on available-for-sale securities	$	1,019		Net securities gains
		0		Impairment losses

		1,019		Total before tax
		(372	)	Tax (expense) or benefit

	$	647		Net of tax

Unrealized gains and losses on held-to-maturity securities	$	177		Interest income/(expense)
		(71	)	Tax (expense) or benefit

	$	106		Net of tax

Amortization of defined benefit pension items Acturial gains/(losses)	$	(860	)	(b)
		344		Tax (expense) or benefit

	$	(516	)	Net of tax

Total reclassifications for the period	$	237		Net of tax

(a)	Amounts in parentheses indicate debits to profit/loss.

(b)	This accumulated other comprehensive income (loss) component is included in the computation of net periodic pension cost. See Note 14 for additional details on our pension plans.

NOTE 6—INVESTMENT SECURITIES

The following table summarizes the amortized cost and fair value of the available-for-sale and held-to-maturity investment securities portfolio at March 31, 2014 and December 31, 2013 and the corresponding amounts of unrealized gains and losses therein:


(dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
March 31, 2014
Available-for-sale
U.S. Treasury	$	15,560	$	137	$	0		$	15,697
U.S. Government-sponsored entities and agencies		504,928		619		(15,467	)		490,080
Mortgage-backed securities—Agency		1,237,308		16,156		(23,706	)		1,229,758
Mortgage-backed securities—Non-agency		16,092		558		0			16,650
States and political subdivisions		241,556		11,386		(1,103	)		251,839
Pooled trust preferred securities		18,107		0		(11,328	)		6,779
Other securities		357,998		5,143		(4,880	)		358,261

Total available-for-sale securities	$	2,391,549	$	33,999	$	(56,484	)	$	2,369,064

Held-to-maturity
U.S. Government-sponsored entities and agencies	$	169,781	$	8,203	$	0		$	177,984
Mortgage-backed securities—Agency		32,020		1,385		0			33,405
States and political subdivisions		577,493		24,562		(530	)		601,525

Total held-to-maturity securities	$	779,294	$	34,150	$	(530	)	$	812,914

December 31, 2013
Available-for-sale
U.S. Treasury	$	12,995	$	118	$	0		$	13,113
U.S. Government-sponsored entities and agencies		456,123		464		(20,999	)		435,588
Mortgage-backed securities—Agency		1,300,135		15,690		(26,567	)		1,289,258
Mortgage-backed securities—Non-agency		17,036		376		0			17,412
States and political subdivisions		260,398		10,112		(1,715	)		268,795
Pooled trust preferred securities		19,215		0		(11,178	)		8,037
Other securities		340,381		5,140		(5,523	)		339,998

Total available-for-sale securities	$	2,406,283	$	31,900	$	(65,982	)	$	2,372,201

Held-to-maturity
U.S. Government-sponsored entities and agencies	$	170,621	$	7,749	$	0		$	178,370
Mortgage-backed securities—Agency		35,443		906		(1	)		36,348
States and political subdivisions		556,670		10,949		(1,579	)		566,040

Total held-to-maturity securities	$	762,734	$	19,604	$	(1,580	)	$	780,758

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

March 31, 2014

Weighted

(dollars in thousands)

Maturity

Amortized
Cost

Fair Value

Average
Yield

Available-for-sale

Within one year

24,903

25,081

2.58

One to five years

270,845

277,262

2.67

Five to ten years

538,191

528,863

2.29

Beyond ten years

1,557,610

1,537,858

2.41

Total

2,391,549

2,369,064

2.42

Held-to-maturity

Within one year

1,521

1,552

3.13

One to five years

12,484

13,136

4.10

Five to ten years

168,265

174,321

3.20

Beyond ten years

597,024

623,905

5.52

Total

779,294

812,914

4.99

The following table summarizes the investment securities with unrealized losses at March 31, 2014 and December 31, 2013 by aggregated major security type and length of time in a continuous unrealized loss position:


	Less than 12 months					12 months or longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(dollars in thousands)	Value		Losses			Value		Losses			Value		Losses
March 31, 2014
Available-for-Sale
U.S. Treasury	$	4,500	$	0		$	0	$	0		$	4,500	$	0
U.S. Government-sponsored entities and agencies		347,320		(12,761	)		39,738		(2,706	)		387,058		(15,467	)
Mortgage-backed securities—Agency		427,282		(13,488	)		208,802		(10,218	)		636,084		(23,706	)
States and political subdivisions		34,127		(1,031	)		2,559		(72	)		36,686		(1,103	)
Pooled trust preferred securities		0		0			6,779		(11,328	)		6,779		(11,328	)
Other securities		162,839		(1,304	)		39,986		(3,576	)		202,825		(4,880	)

Total available-for-sale	$	976,068	$	(28,584	)	$	297,864	$	(27,900	)	$	1,273,932	$	(56,484	)

Held-to-Maturity
States and political subdivisions	$	38,973	$	(530	)	$	0	$	0		$	38,973	$	(530	)

Total held-to-maturity	$	38,973	$	(530	)	$	0	$	0		$	38,973	$	(530	)

December 31, 2013
Available-for-Sale
U.S. Treasury	$	1,900	$	0		$	0	$	0		$	1,900	$	0
U.S. Government-sponsored entities and agencies		357,793		(17,547	)		38,988		(3,452	)		396,781		(20,999	)
Mortgage-backed securities—Agency		668,018		(23,455	)		41,200		(3,112	)		709,218		(26,567	)
States and political subdivisions		45,077		(1,620	)		2,812		(95	)		47,889		(1,715	)
Pooled trust preferred securities		0		0			8,037		(11,178	)		8,037		(11,178	)
Other securities		209,915		(2,706	)		24,082		(2,817	)		233,997		(5,523	)

Total available-for-sale	$	1,282,703	$	(45,328	)	$	115,119	$	(20,654	)	$	1,397,822	$	(65,982	)

Held-to-Maturity
Mortgage-backed securities—Agency	$	21,370	$	(1	)	$	0	$	0		$	21,370	$	(1	)
States and political subdivisions		70,162		(1,579	)		0		0			70,162		(1,579	)

Total held-to-maturity	$	91,532	$	(1,580	)	$	0	$	0		$	91,532	$	(1,580	)

Proceeds from sales and calls of securities available for sale were $39.9 million and $133.4 million for the three months ended March 31, 2014 and 2013, respectively. Gains of $0.5 million and $0.7 million were realized on these sales during 2014 and 2013, respectively and offsetting losses of $0.1 million were realized on these sales during 2014. Also included in net securities gains for the first three months of 2014 is $101 thousand of gains associated with the trading securities, $67 thousand of gains from mutual funds and a $100 thousand other-than-temporary impairment charge related to credit loss on one limited partnership investment, described below. Impacting earnings in the first three months of 2013 was $101 thousand of gains associated with the trading securities and $195 thousand of gains from mutual funds. There were no other-than-temporary impairment charges related to credit loss in the first three months of 2013.

Trading securities, which consist of mutual funds held in a trust associated with deferred compensation plans for former Monroe Bancorp directors and executives, are recorded at fair value and totaled $3.7 million at March 31, 2014 and $3.6 million at December 31, 2013.

During the third quarter of 2013, state and political subdivision securities with a fair value of $357.8 million were transferred from the available-for-sale portfolio to the held-to-maturity portfolio. The $31.0 million unrealized holding loss at the date of transfer shall continue to be reported as a separate component of shareholders’ equity and will be amortized over the remaining life of the securities as an adjustment of yield. The corresponding discount on these securities will offset this adjustment to yield as it is amortized. We moved these securities to our held-to-maturity portfolio to better align with the percentage of these securities held by our peers and to protect our tangible common equity against rising interest rates.

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

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

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

There was $100 thousand of other-than-temporary-impairment recorded in the first quarter of 2014. There was no other-than-temporary-impairment recorded in the first quarter of 2013.

As of March 31, 2014, Old National’s securities portfolio consisted of 1,316 securities, 239 of which were in an unrealized loss position. Our non-agency mortgage-backed and pooled trust preferred securities are discussed below.

Non-agency Mortgage-backed Securities

No other-than-temporary-impairment was recorded in the first three months of 2014 on the Company’s non-agency mortgage-backed securities. These securities had $0.6 million of net unrealized gains at March 31, 2014.

Pooled Trust Preferred Securities

At March 31, 2014, our securities portfolio contained three pooled trust preferred securities with a fair value of $6.8 million and unrealized losses of $11.3 million. One of the pooled trust preferred securities in our portfolio falls within the scope of FASB ASC 325-10 (EITF 99-20) and has a fair value of $0.3 million with an unrealized loss of $3.8 million at March 31, 2014. This security was rated A3 at inception, but at March 31, 2014, this security is rated D. The issuers in these securities are primarily banks, but some of the pools do include a limited number of insurance companies. We use the OTTI evaluation model to compare the present value of expected cash flows to the previous estimate to determine whether an adverse change in cash flows has occurred during the quarter. The OTTI model considers the structure and term of the collateralized debt obligation (“CDO”) and the financial condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market information including announcements of interest payment deferrals or defaults of underlying trust preferred securities. Assumptions used in the model include expected future default rates and prepayments. We assume no recoveries on defaults and a limited number of recoveries on current or projected interest payment deferrals. In addition, we use the model to “stress” each CDO, or make assumptions more severe than expected activity, to determine the degree to which assumptions could deteriorate before the CDO could no longer fully support repayment of Old National’s note class. For the three months ended March 31, 2014, our model indicated no other-than-temporary-impairment losses on this security. At March 31, 2014, we have no intent to sell any of these securities that are in an unrealized loss position nor is it expected that we would be required to sell these securities.

Two of our pooled trust preferred securities with a fair value of $6.5 million and unrealized losses of $7.6 million at March 31, 2014 are not subject to FASB ASC 325-10. These securities are evaluated using collateral-specific assumptions to estimate the expected future interest and principal cash flows. Our analysis indicated no other-than-temporary-impairment on these securities.

For the three months ended March 31, 2013, the three securities subject to FASB ASC 325-10 accounted for $6.2 million of the unrealized losses in the pooled trust preferred securities category. Our analysis indicated no other-than-temporary-impairment losses on these securities. During the first quarter of 2013 one of these securities was sold. We recorded a gain of $224 thousand associated with this sale.

Two of our pooled trust preferred securities with a fair value of $6.0 million and unrealized losses of $8.3 million at March 31, 2013 were not subject to FASB ASC 325-10. These securities were evaluated using collateral-specific assumptions to estimate the expected future interest and principal cash flows. Our analysis indicated no other-than-temporary-impairment on these securities.

The table below summarizes the relevant characteristics of our three pooled trust preferred securities as well as six single issuer trust preferred securities which are included with other securities in Note 6 to the consolidated financial statements. Each of the pooled trust preferred securities support a more senior tranche of security holders.

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

Trust preferred securities

March 31, 2014

(Dollars in Thousands)


	Class		Lowest Credit Rating (1)		Amortized Cost		Fair Value		Unrealized Gain/ (Loss)			Realized Losses 2014		# of Issuers Currently Performing/ Remaining		Actual Deferrals and Defaults as a Percent of Original Collateral			Expected Defaults as a % of Remaining Performing Collateral			Excess Subordination as a % of Current Performing Collateral
Pooled trust preferred securities:
Reg Div Funding 2004		B-2		D	$	4,012	$	251	$	(3,761	)		0		23/42		39.9	%		5.4	%		0.0	%
Prets l XXVII LTD		B		CCC		4,667		1,819		(2,848	)		0		34/47		22.6	%		5.5	%		39.2	%
Trapeza Ser 13A		A2A		B+		9,428		4,709		(4,719	)		0		44/61		24.0	%		4.3	%		48.8	%

						18,107		6,779		(11,328	)		0
Single Issuer trust preferred securities:
First Empire Cap (M&T)				BB+		959		1,017		58			0
First Empire Cap (M&T)				BB+		2,913		3,052		139			0
Fleet Cap Tr V (BOA)				BB+		3,375		2,800		(575	)		0
J P Morgan Chase Cap XIII				BBB		4,737		4,100		(637	)		0
NB-Global				BB+		739		800		61			0
Chase Cap II				BBB		782		840		58			0

						13,505		12,609		(896	)		0
Total					$	31,612	$	19,388	$	(12,224	)	$	0

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

On July 19, 2010, financial regulatory reform legislation entitled the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act contains provisions (the Volcker Rule”) prohibiting what investments can be held by a bank holding company. A limited partnership held by Old National falls under these restrictions and will have to be divested by July 2015, unless a request of up to two 1-year extensions is approved. The estimated sales proceeds for this security would be less than the amortized cost of the security, and an other-than-temporary-impairment charge of $100 thousand was recorded for this security in the first quarter of 2014.

The following table details all securities with other-than-temporary-impairment, their credit rating at March 31, 2014, and the related life-to-date credit losses recognized in earnings:


							Amount of other-than-temporary
							impairment recognized in earnings
							Three Months
			Lowest				ended
			Credit		Amortized		March 31,		Year ended December 31,										Life-to
	Vintage		Rating (1)		Cost		2014		2013		2012		2011		2010		2009		date
Non-agency mortgage-backed securities:
BAFC Ser 4		2007		CCC	$	9,023	$	0	$	0	$	299	$	0	$	79	$	63	$	441
CWALT Ser 73CB (2)		2005				0		0		0		151		0		207		83		441
CWALT Ser 73CB (2)		2005				0		0		0		35		0		427		182		644
CWHL 2006-10 (2)		2006				0		0		0		0		0		309		762		1,071
CWHL 2005-20		2005				0		0		0		0		0		39		72		111
FHASI Ser 4 (2)		2007				0		0		0		0		340		629		223		1,192
HALO Ser 1R (2)		2006				0		0		0		133		16		0		0		149
RFMSI Ser S9 (2)		2006				0		0		0		0		0		923		1,880		2,803
RFMSI Ser S10		2006		D		2,373		0		0		178		165		76		249		668
RALI QS2 (2)		2006				0		0		0		0		0		278		739		1,017
RAST A9		2004				0		0		0		142		0		0		0		142
RFMSI S1(2)		2006				0		0		0		0		0		30		176		206

						11,396		0		0		938		521		2,997		4,429		8,885
Pooled trust preferred securities:
TROPC (2)		2003				0		0		0		0		888		444		3,517		4,849
MM Community Funding IX		2003				0		0		1,000		0		0		165		2,612		3,777
Reg Div Funding		2004		D		4,012		0		0		165		0		321		5,199		5,685
Pretsl XII (2)		2003				0		0		0		0		0		0		1,897		1,897
Pretsl XV (2)		2004				0		0		0		0		0		0		3,374		3,374
Reg Div Funding (3)		2005				0		0		0		311		0		0		3,767		4,078

						4,012		0		1,000		476		888		930		20,366		23,660
Limited partnership						685		100		0		0		0		0		0		100
Total other-than-temporary-impairment recognized in earnings							$	100	$	1,000	$	1,414	$	1,409	$	3,927	$	24,795	$	32,645

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

(2)	Securities sold.

(3)	Security written down to zero.

NOTE 7—LOANS HELD FOR SALE

Residential loans that Old National has committed to sell are recorded at fair value in accordance with FASB ASC 825-10 (SFAS No. 159 – The Fair Value Option for Financial Assets and Financial Liabilities). At March 31, 2014 and December 31, 2013, Old National had residential loans held for sale of $6.2 million and $7.7 million, respectively.

There were no commercial or commercial real estate loans held for investment reclassified to loans held for sale during the first three months of 2014.

During the third quarter of 2013, residential real estate loans held for investment of $96.9 million were reclassified to loans held for sale at the lower of cost or fair value and sold for $96.9 million, resulting in no gain or loss. These longer duration loans were sold to reduce interest rate risk in the loan portfolio. At March 31, 2014, there were no loans held for sale under this arrangement.

At June 30, 2013, Old National had taxable finance leases held for sale of $11.6 million. These leases were transferred from the commercial loan category at fair value and a loss of $0.2 million was recognized. The portfolio of leases held for sale had an average maturity of 2.7 years and interest rates ranging from 3.57% to 10.22%. The leases held for sale were to a variety of borrowers, with various types of equipment securing the leases, and all of the leases were current. The leases held for sale were sold in the third quarter of 2013 with no additional loss. As of March 31, 2014, Old National does not intend to sell its nontaxable finance leases.

During the first three months of 2013, commercial and commercial real estate loans held for investment of $2.5 million, including $0.4 million of purchased impaired loans, were reclassified to loans held for sale at the lower of cost or fair value and sold for $3.2 million, resulting in a charge-off of $0.3 million and other noninterest income of $1.0 million. At March 31, 2013, there were no loans held for sale under this arrangement.

NOTE 8—LOANS AND ALLOWANCE FOR CREDIT LOSSES

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

The composition of loans by lending classification was as follows:


	March 31,			December 31,
(dollars in thousands)	2014			2013
Commercial (1)	$	1,367,486		$	1,373,415
Commercial real estate:
Construction		92,536			88,630
Other		1,064,057			1,072,260
Residential real estate		1,356,233			1,359,569
Consumer credit:
Heloc		251,300			251,102
Auto		649,680			620,473
Other		96,828			99,683
Covered loans		194,161			217,832

Total loans		5,072,281			5,082,964
Allowance for loan losses		(41,539	)		(41,741	)
Allowance for loan losses - covered loans		(6,014	)		(5,404	)

Net loans	$	5,024,728		$	5,035,819

(1)	Includes direct finance leases of $24.7 million at March 31, 2014 and $27.8 million at December 31, 2013.

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

The risk characteristics of each loan portfolio segment are as follows:

Commercial

Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial real estate

These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. The properties securing Old National’s commercial real estate portfolio are diverse in terms of type and geographic location. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, Old National avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

Included with commercial real estate are construction loans, which are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from Old National until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

Residential

With respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, Old National typically establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in residential property values. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Consumer

Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in residential property values. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Covered Loans

On July 29, 2011, Old National acquired the banking operations of Integra in an FDIC assisted transaction. As part of the purchase and assumption agreement, Old National and the FDIC entered into loss sharing agreements (each, a “loss sharing agreement” and collectively, the “loss sharing agreements”), whereby the FDIC will cover a substantial portion of any future losses on loans (and related unfunded commitments), OREO and up to 90 days of certain accrued interest on loans. The acquired loans and OREO subject to the loss sharing agreements are referred to collectively as “covered assets.” Under the terms of the loss sharing agreements, the FDIC will reimburse Old National for 80% of losses up to $275.0 million, losses in excess of $275.0 million up to $467.2 million at 0% reimbursement, and 80% of losses in excess of $467.2 million. As of March 31, 2014, we do not expect losses to exceed $275.0 million. Old National will reimburse the FDIC for its share of recoveries with respect to losses for which the FDIC has previously reimbursed Old National under the loss sharing agreements. The loss sharing provisions of the agreements for commercial and single family residential mortgage loans are in effect for five and ten years, respectively, from the July 29, 2011 acquisition date and the loss recovery provisions for such loans are in effect for eight years and ten years, respectively, from the acquisition date.

Allowance for loan losses

The allowance for loan losses is maintained at a level believed adequate by management to absorb probable losses incurred in the loan portfolio. Management’s evaluation of the adequacy of the allowance is an estimate based on reviews of individual loans, pools of homogeneous loans, historical loss experience, and assessments of the impact of current economic conditions on the portfolio.

The allowance is increased through a provision charged to operating expense. Loans deemed to be uncollectible are charged to the allowance. Recoveries of loans previously charged-off are added to the allowance.

No allowance was brought forward on any of the acquired loans as any credit deterioration evident in the loans was included in the determination of the fair value of the loans at the acquisition date. Purchased credit impaired (“PCI”) loans are not considered impaired until after the point at which there has been a degradation of cash flows below our expected cash flows at acquisition. Impairment on PCI loans would be recognized in the current period as provision expense.

Old National’s activity in the allowance for loan losses for the three months ended March 31, 2014 and 2013 is as follows:


				Commercial
(dollars in thousands)	Commercial			Real Estate			Consumer			Residential			Unallocated		Total
2014
Allowance for loan losses:
Beginning balance	$	16,565		$	22,401		$	4,940		$	3,239			0	$	47,145
Charge-offs		(1,147	)		(168	)		(1,125	)		21			0		(2,419	)
Recoveries		792			1,095			821			82			0		2,790
Provision		3,296			(4,018	)		742			17			0		37

Ending balance	$	19,506		$	19,310		$	5,378		$	3,359			0	$	47,553


				Commercial
(dollars in thousands)	Commercial			Real Estate			Consumer			Residential			Unallocated		Total
2013
Allowance for loan losses:
Beginning balance	$	14,642		$	31,289		$	5,155		$	3,677			0	$	54,763
Charge-offs		(1,110	)		(1,736	)		(1,902	)		(257	)		0		(5,005	)
Recoveries		715			889			1,234			40			0		2,878
Provision		2,720			(1,996	)		198			(77	)		0		845

Ending balance	$	16,967		$	28,446		$	4,685		$	3,383			0	$	53,481

The following tables provide Old National’s recorded investment in financing receivables by portfolio segment at March 31, 2014 and December 31, 2013 and other information regarding the allowance:


(dollars in thousands)	Commercial		CRE		Consumer		Residential		Unallocated		Total
March 31, 2014
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	9,727	$	2,818		0		0		0	$	12,545

Ending balance: collectively evaluated for impairment	$	9,527	$	13,108	$	4,871	$	3,319		0	$	30,825

Ending balance: noncovered loans acquired with deteriorated credit quality	$	252	$	1,442	$	148	$	40		0	$	1,882

Ending balance: covered loans acquired with deteriorated credit quality		0	$	1,942	$	359		0		0	$	2,301

Total allowance for credit losses	$	19,506	$	19,310	$	5,378	$	3,359		0	$	47,553

Loans and leases outstanding:
Ending balance: individually evaluated for impairment	$	36,611	$	41,795		0		0		0	$	78,406

Ending balance: collectively evaluated for impairment	$	1,343,470	$	1,100,350	$	1,046,482	$	1,356,226		0	$	4,846,528

Ending balance: loans acquired with deteriorated credit quality	$	610	$	18,534	$	11,243	$	159		0	$	30,546

Ending balance: covered loans acquired with deteriorated credit quality	$	9,430	$	64,714	$	16,412	$	26,245		0	$	116,801

Total loans and leases outstanding	$	1,390,121	$	1,225,393	$	1,074,137	$	1,382,630		0	$	5,072,281


(dollars in thousands)	Commercial		CRE		Consumer		Residential		Unallocated		Total
December 31, 2013
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	6,156	$	2,190		0		0		0	$	8,346

Ending balance: collectively evaluated for impairment	$	9,980	$	14,816	$	4,494	$	3,088		0	$	32,378

Ending balance: non covered loans acquired with deteriorated credit quality	$	429	$	2,025	$	80	$	35		0	$	2,569

Ending balance: covered loans acquired with deteriorated credit quality		0	$	3,370	$	366	$	116		0	$	3,852

Total allowance for credit losses	$	16,565	$	22,401	$	4,940	$	3,239		0	$	47,145

Loans and leases outstanding:
Ending balance: individually evaluated for impairment	$	34,213	$	34,997		0		0		0	$	69,210

Ending balance: collectively evaluated for impairment	$	1,355,608	$	1,106,971	$	1,019,576	$	1,359,564		0	$	4,841,719

Ending balance: loans acquired with deteriorated credit quality	$	648	$	23,618	$	12,725	$	154		0	$	37,145

Ending balance: covered loans acquired with deteriorated credit quality	$	12,281	$	77,232	$	17,673	$	27,704		0	$	134,890

Total loans and leases outstanding	$	1,402,750	$	1,242,818	$	1,049,974	$	1,387,422		0	$	5,082,964

Credit Quality

Old National’s management monitors the credit quality of its financing receivables in an on-going manner. Internally, management assigns a credit quality grade to each non-homogeneous commercial and commercial real estate loan in the portfolio. The primary determinants of the credit quality grade are based upon the reliability of the primary source of repayment and the past, present, and projected financial condition of the borrower. The credit quality rating also reflects current economic and industry conditions. Major factors used in determining the grade can vary based on the nature of the loan, but commonly include factors such as debt service coverage, internal cash flow, liquidity, leverage, operating performance, debt burden, FICO scores, occupancy, interest rate sensitivity, and expense burden. Old National uses the following definitions for risk ratings:

Criticized. Special mention loans that have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Classified – Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

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

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

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

As of March 31, 2014 and December 31, 2013, the risk category of loans, excluding covered loans, by class of loans is as follows:


(dollars in thousands)
Corporate Credit					Commercial Real Estate-				Commercial Real Estate-
Exposure	Commercial				Construction				Other
by Internally	March 31,		December 31,		March 31,		December 31,		March 31,		December 31,
Assigned Grade	2014		2013		2014		2013		2014		2013
Grade:
Pass	$	1,234,435	$	1,237,983	$	77,690	$	74,815	$	948,964	$	943,781
Criticized		72,311		90,545		10,656		9,383		29,340		35,473
Classified—substandard		33,260		16,252		1,675		2,559		46,623		42,516
Classified—nonaccrual		27,480		27,635		2,515		1,873		39,130		49,406
Classified—doubtful		0		1,000		0		0		0		1,084

Total	$	1,367,486	$	1,373,415	$	92,536	$	88,630	$	1,064,057	$	1,072,260

Old National considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, Old National also evaluates credit quality based on the aging status of the loan and by payment activity. The following table presents the recorded investment in residential and consumer loans based on payment activity as of March 31, 2014 and December 31, 2013, excluding covered loans:


March 31, 2014	Consumer
(dollars in thousands)	Heloc		Auto		Other		Residential
Performing	$	249,156	$	648,274	$	95,250	$	1,345,672
Nonperforming		2,144		1,406		1,578		10,561

	$	251,300	$	649,680	$	96,828	$	1,356,233


December 31, 2013	Consumer
(dollars in thousands)	Heloc		Auto		Other		Residential
Performing	$	249,152	$	618,911	$	97,877	$	1,349,236
Nonperforming		1,950		1,562		1,806		10,333

	$	251,102	$	620,473	$	99,683	$	1,359,569

Impaired Loans

Large commercial credits are subject to individual evaluation for impairment. Retail credits and other small balance credits that are part of a homogeneous group are not tested for individual impairment unless they are modified as a troubled debt restructuring. A loan is considered impaired when it is probable that contractual interest and principal payments will not be collected either for the amounts or by the dates as scheduled in the loan agreement. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported net, at the present value of estimated cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Old National’s policy, for all but purchased credit impaired loans, is to recognize interest income on impaired loans unless the loan is placed on nonaccrual status. No additional funds are committed to be advanced in connection with these impaired loans.

The following table shows Old National’s impaired loans, excluding covered loans, that are individually evaluated as of March 31, 2014 and December 31, 2013. Of the loans purchased during 2012 and 2011 without FDIC loss share coverage, only those that have experienced subsequent impairment since the date acquired are included in the table below.


			Unpaid
	Recorded		Principal		Related
(dollars in thousands)	Investment		Balance		Allowance
March 31, 2014
With no related allowance recorded:
Commercial	$	17,235	$	17,542	$	0
Commercial Real Estate - Construction		1,488		1,596		0
Commercial Real Estate - Other		19,334		24,295		0
Consumer		335		353		0
Residential		98		99		0
With an allowance recorded:
Commercial		12,807		15,831		6,105
Commercial Real Estate - Construction		0		0		0
Commercial Real Estate - Other		20,973		21,744		2,818
Consumer		1,077		1,124		57
Residential		2,241		2,311		113

Total Loans	$	75,588	$	84,895	$	9,093

December 31, 2013
With no related allowance recorded:
Commercial	$	17,066	$	17,417	$	0
Commercial Real Estate - Construction		525		633		0
Commercial Real Estate - Other		15,746		22,550		0
Consumer		324		342		0
Residential		106		106		0
With an allowance recorded:
Commercial		9,282		12,304		4,723
Commercial Real Estate - Construction		0		0		0
Commercial Real Estate - Other		18,726		19,358		2,190
Consumer		835		888		43
Residential		2,239		2,295		112

Total Loans	$	64,849	$	75,893	$	7,068

The average balance of impaired loans, excluding covered loans, and interest income recognized on impaired loans during the three months ended March 31, 2014 and 2013 are included in the tables below.


	Average		Interest
	Recorded		Income
(dollars in thousands)	Investment		Recognized (1)
March 31, 2014
With no related allowance recorded:
Commercial	$	17,151	$	33
Commercial Real Estate - Construction		1,007		0
Commercial Real Estate - Other		17,542		54
Consumer		394		2
Residential		116		0
With an allowance recorded:
Commercial		11,045		54
Commercial Real Estate - Construction		0		0
Commercial Real Estate - Other		19,851		112
Consumer		975		12
Residential		2,185		17

Total Loans	$	70,266	$	284

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


	Average		Interest
	Recorded		Income
(dollars in thousands)	Investment		Recognized (1)
March 31, 2013
With no related allowance recorded:
Commercial	$	7,252	$	0
Commercial Real Estate - Construction		1,142		0
Commercial Real Estate - Other		16,598		4
Consumer		192		1
Residential		49		0
With an allowance recorded:
Commercial		21,289		10
Commercial Real Estate - Construction		2,875		0
Commercial Real Estate - Other		30,562		109
Consumer		648		2
Residential		1,345		5

Total Loans	$	81,952	$	131

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

For all loan classes, a loan is generally placed on nonaccrual status when principal or interest becomes 90 days past due unless it is well secured and in the process of collection, or earlier when concern exists as to the ultimate collectibility of principal or interest. Interest accrued during the current year on such loans is reversed against earnings. Interest accrued in the prior year, if any, is charged to the allowance for loan losses. Cash interest received on these loans is applied to the principal balance until the principal is recovered or until the loan returns to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, remain current for six months and future payments are reasonably assured.

Covered loans accounted for under FASB ASC Topic 310-30 accrue interest, even though they may be contractually past due, as any nonpayment of contractual principal or interest is considered in the periodic re-estimation of expected cash flows and is included in the resulting recognition of current period covered loan loss provision or prospective yield adjustments. Similar to uncovered loans, covered loans accounted for outside FASB ASC Topic 310-30 are classified as nonaccrual when, in the opinion of management, collection of principal or interest is doubtful. Information for covered loans accounted for both under and outside FASB ASC Topic 310-30 is included in the table below in the row labeled covered loans.

Old National’s past due financing receivables as of March 31, 2014 and December 31, 2013 are as follows:


					Recorded
					Investment
	30-59 Days		60-89 Days		> 90 Days and				Total
(dollars in thousands)	Past Due		Past Due		Accruing		Nonaccrual		Past Due		Current
March 31, 2014
Commercial	$	673	$	12	$	0	$	27,480	$	28,165	$	1,339,321
Commercial Real Estate:
Construction		763		0		0		2,515		3,278		89,258
Other		1,377		687		79		39,130		41,273		1,022,784
Consumer:
Heloc		517		366		0		2,144		3,027		248,273
Auto		2,688		369		53		1,406		4,516		645,164
Other		834		97		19		1,578		2,528		94,300
Residential		7,106		1,004		42		10,561		18,713		1,337,520
Covered loans		1,619		303		0		27,289		29,211		164,950

Total loans	$	15,577	$	2,838	$	193	$	112,103	$	130,711	$	4,941,570

December 31, 2013
Commercial	$	1,532	$	13	$	0	$	28,635	$	30,180	$	1,343,235
Commercial Real Estate:
Construction		0		139		0		1,873		2,012		86,618
Other		1,017		27		0		50,490		51,534		1,020,726
Consumer:
Heloc		527		119		0		1,950		2,596		248,506
Auto		3,795		716		89		1,562		6,162		614,311
Other		844		317		100		1,806		3,067		96,616
Residential		8,588		2,823		35		10,333		21,779		1,337,790
Covered loans		1,831		730		14		31,793		34,368		183,464

Total loans	$	18,134	$	4,884	$	238	$	128,442	$	151,698	$	4,931,266

Loan Participations

Old National has loan participations, which qualify as participating interests, with other financial institutions. At March 31, 2014, these loans totaled $152.3 million, of which $92.0 million had been sold to other financial institutions and $60.3 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 troubled debt restructuring (“TDR”) has occurred, which is when for economic or legal reasons related to a borrower’s financial difficulties, the Bank grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status. During the three months ended March 31, 2014, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan, an extension of the maturity date at a stated rate of interest lower than the current market rate of new debt with similar risk, or a permanent reduction of the recorded investment of the loan.

Loans modified in a TDR are typically placed on nonaccrual status until we determine the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate a period of performance according to the restructured terms for six months.

If we are unable to resolve a nonperforming loan issue, the credit will be charged off when it is apparent there will be a loss. For large commercial type loans, each relationship is individually analyzed for evidence of apparent loss based on quantitative benchmarks or subjectively based upon certain events or particular circumstances. It is Old National’s policy to charge off small commercial loans scored through our small business credit center with contractual balances under $250,000 that have been placed on nonaccrual status or became ninety days or more delinquent, without regard to the collateral position. For residential and consumer loans, a charge off is recorded at the time foreclosure is initiated or when the loan becomes 120 to 180 days past due, whichever is earlier.

For commercial TDRs, an allocated reserve is established within the allowance for loan losses for the difference between the carrying value of the loan and its computed fair value. To determine the fair value of the loan, one of the following methods is selected: (1) the present value of expected cash flows discounted at the loans original effective interest rate, (2) the loan’s observable market price, or (3) the fair value of the collateral value, if the loan is collateral dependent. The allocated reserve is established as the difference between the carrying value of the loan and the collectable value. If there are significant changes in the amount or timing of the loan’s expected future cash flows, impairment is recalculated and the valuation allowance is adjusted accordingly.

For consumer and residential TDRs, an additional amount is added to the loan loss reserve that represents the difference in the present value of the cash flows between the original terms and the new terms of the modified loan, using the original effective interest rate of the loan as a discount rate.

At March 31, 2014, our TDRs consisted of $21.6 million of commercial loans, $21.0 million of commercial real estate loans, $1.7 million of consumer loans and $2.3 million of residential loans, totaling $46.6 million. Approximately $26.2 million of the TDRs at March 31, 2014 were included with nonaccrual loans. At December 31, 2013, our TDRs consisted of $22.5 million of commercial loans, $22.6 million of commercial real estate loans, $1.4 million of consumer loans and $2.4 million of residential loans, totaling $48.9 million. Approximately $33.1 million of the TDRs at December 31, 2013 were included with nonaccrual loans.

As of March 31, 2014 and December 31, 2013, Old National has allocated $6.2 million and $4.1 million of specific reserves to customers whose loan terms have been modified in TDRs, respectively. Old National has not committed to lend any additional amounts as of March 31, 2014 and December 31, 2012, respectively, to customers with outstanding loans that are classified as troubled debt restructurings.

The following table presents loans by class modified as troubled debt restructurings that occurred during the three months ended March 31, 2014:


			Pre-modification		Post-modification
	Number of		Outstanding Recorded		Outstanding Recorded
(dollars in thousands)	Loans		Investment		Investment
Troubled Debt Restructuring:
Commercial		7	$	193	$	188
Commercial Real Estate—construction		1		525		484
Commercial Real Estate—other		3		253		246
Residential		1		22		22
Consumer—other		9		303		294

Total		21	$	1,296	$	1,234

The TDRs described above resulted in immaterial changes in the allowance for loan losses and charge-offs during the three months ended March 31, 2014.

The following table presents loans by class modified as troubled debt restructurings that occurred during the twelve months ended December 31, 2013:


			Pre-modification		Post-modification
	Number of		Outstanding Recorded		Outstanding Recorded
(dollars in thousands)	Loans		Investment		Investment
Troubled Debt Restructuring:
Commercial		35	$	16,196	$	15,155
Commercial Real Estate—construction		1		60		60
Commercial Real Estate—other		36		10,585		9,791
Residential		14		1,936		1,901
Consumer—other		49		1,622		1,484

Total		135	$	30,399	$	28,391

The TDRs described above increased the allowance for loan losses by $0.1 million and resulted in charge-offs of $0.2 million during the twelve months ended December 31, 2013.

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

The following table presents loans by class modified as TDRs during the first quarter of 2014 for which there was a payment default within the last twelve months. The impact of the defaults was immaterial.


	Number of		Recorded
(dollars in thousands)	Contracts		Investment
Troubled Debt Restructuring
That Subsequently Defaulted:
Commercial		4	$	1,323
Commercial Real Estate		2		122

Total		6	$	1,445

The TDRs that subsequently defaulted, described above, had no material impact on the allowance for loan losses and resulted in no charge-offs during the three months ended March 31, 2014.

The following table presents loans by class modified as TDRs during 2013 for which there was a payment default within the last twelve months.:


	Number of		Recorded
(dollars in thousands)	Contracts		Investment
Troubled Debt Restructuring
That Subsequently Defaulted:
Commercial		3	$	32
Commercial Real Estate		2		85

Total		5	$	117

The TDRs that subsequently defaulted, described above, resulted in no material impact on the allowance for loan losses and resulted in charge-offs of $0.1 million during the three months ended December 31, 2013.

The terms of certain other loans were modified during the three months ended March 31, 2014 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 had the maturity date extended. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on its debt in the foreseeable future without the modification. The evaluation is performed under our internal underwriting policy. We also evaluate whether a concession has been granted or if we were adequately compensated through a market interest rate, additional collateral or a bona fide guarantee. We also consider whether the modification was insignificant relative to the other terms of the agreement or if the delay in a payment was 90 days or less.

Purchased credit impaired (“PCI”) loans are not considered impaired until after the point at which there has been a degradation of cash flows below our expected cash flows at acquisition. If a PCI loan is subsequently modified, and meets the definition of a TDR, it will be removed from PCI accounting and accounted for as a TDR only if the PCI loan was being accounted for individually. If the purchased credit impaired loan is being accounted for as part of a pool, it will not be removed from the pool. As of March 31, 2014, it has not been necessary to remove any loans from PCI accounting.

In general, once a modified loan is considered a TDR, the loan will always be considered a TDR, and therefore impaired, until it is paid in full, otherwise settled, sold or charged off. However, our policy also permits for loans to be removed from TDR status in the years following the restructuring if the following two conditions are met: (1) the restructuring agreement specifies an interest rate equal to or greater than the rate that we were willing to accept at the time of the restructuring for a new loan with comparable risk, and (2) the loan is not impaired based on the terms specified by the restructuring agreement.

The following table presents activity in troubled debt restructurings for the three months ended March 31, 2014 and 2013:


				Commercial
(dollars in thousands)	Commercial			Real Estate			Consumer			Residential			Total
2014
Troubled debt restructuring:
Balance, January 1, 2014	$	22,443		$	22,639		$	1,441		$	2,344		$	48,867
(Charge-offs)/recoveries		123			121			(30	)		1			215
Payments		(1,133	)		(2,531	)		(49	)		(28	)		(3,741	)
Additions		188			730			294			22			1,234

Balance March 31, 2014	$	21,621		$	20,959		$	1,656		$	2,339		$	46,575


				Commercial
(dollars in thousands)	Commercial			Real Estate			Consumer			Residential			Total
2013
Troubled debt restructuring:
Balance, January 1, 2013	$	12,660		$	18,422		$	473		$	499		$	32,054
(Charge-offs)/recoveries		(27	)		(2	)		(87	)		0			(116	)
Payments		(1,286	)		(1,722	)		(12	)		(34	)		(3,054	)
Additions		668			949			472			5			2,094

Balance March 31, 2013	$	12,015		$	17,647		$	846		$	470		$	30,978

Purchased Impaired Loans (non-covered loans)

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

Old National has purchased loans for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. Of these acquired credit impaired loans, $4.0 million in carrying balances did not meet the criteria to be accounted for under the guidance of ASC 310-30 as they were revolving lines of credit, thus these lines have not been included in the following table. For these noncovered loans that meet the criteria of ASC 310-30 treatment, the carrying amount is as follows:


	March 31,		December 31,
(dollars in thousands)	2014		2013
Commercial	$	610	$	648
Commercial real estate		18,534		23,618
Consumer		11,243		12,725
Residential		159		154

Carrying amount	$	30,546	$	37,145

Carrying amount, net of allowance	$	28,664	$	34,576

Allowance for loan losses	$	1,882	$	2,569

The outstanding balance of noncovered loans accounted for under ASC 310-30, including contractual principal, interest, fees and penalties, was $101.5 million and $115.0 million as of March 31, 2014 and December 31, 2013, respectively.

The accretable difference on purchased loans acquired in a business combination is the difference between the expected cash flows and the net present value of expected cash flows with such difference accreted into earnings using the effective yield method over the term of the loans. Accretion of $6.4 million has been recorded as loan interest income through the three months ended March 31, 2014. Accretion of $4.0 million was recorded as loan interest income through the three months ended March 31, 2013. Improvement in cash flow expectations has resulted in a reclassification from nonaccretable difference to accretable yield.

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


				Integra
(dollars in thousands)	Monroe			Noncovered			IBT			Total
Balance at January 1, 2014	$	6,787		$	2,425		$	19,079		$	28,291
Accretion of income		(1,253	)		(258	)		(4,879	)		(6,390	)
Reclassifications from (to) nonaccretable difference		(1,383	)		(82	)		3,504			2,039
Disposals/other adjustments		633			0			0			633

Balance at March 31, 2014	$	4,784		$	2,085		$	17,704		$	24,573

Included in Old National’s allowance for loan losses is $1.9 million related to the purchased loans disclosed above for the first three months of 2014. Included in Old National’s allowance for loan losses was $2.6 million related to the purchased loans in 2013. An immaterial amount of allowances for loan losses were reversed during 2013 related to these loans.

At acquisition, purchased loans, both covered and noncovered, for which it was probable at acquisition that all contractually required payments would not be collected are as follows:


	Monroe			Integra
(dollars in thousands)	Bancorp			Bank (1)			IBT
Contractually required payments	$	94,714		$	921,856		$	118,535
Nonaccretable difference		(45,157	)		(226,426	)		(53,165	)

Cash flows expected to be collected at acquisition		49,557			695,430			65,370
Accretable yield		(6,971	)		(98,487	)		(11,945	)

Fair value of acquired loans at acquisition	$	42,586		$	596,943		$	53,425

(1)	Includes covered and noncovered.

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

NOTE 9—COVERED LOANS

Covered loans represent loans acquired from the FDIC that are subject to loss share agreements. The carrying amount of covered loans was $194.2 million at March 31, 2014. The composition of covered loans by lending classification was as follows:


	At March 31, 2014
	Loans Accounted for			Loans excluded from
	Under ASC 310-30			ASC 310-30 (1)
	(Purchased Credit			(Not Purchased			Total Covered
(dollars in thousands)	Impaired)			Credit Impaired)			Purchased Loans
Commercial	$	9,430		$	13,205		$	22,635
Commercial real estate		64,714			4,086			68,800
Residential		26,245			152			26,397
Consumer		16,412			59,917			76,329

Covered loans		116,801			77,360			194,161
Allowance for loan losses		(2,301	)		(3,713	)		(6,014	)

Covered loans, net	$	114,500		$	73,647		$	188,147

(1)	Includes loans with revolving privileges which are scoped out of FASB ASC 310-30 and certain loans which Old National elected to treat under the cost recovery method of accounting.

Loans were recorded at fair value in accordance with FASB ASC 805, Business Combinations. No allowance for loan losses related to the acquired loans is recorded on the acquisition date as the fair value of the loans acquired incorporates assumptions regarding credit risk. Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in FASB ASC 820, exclusive of the loss share agreements with the FDIC. The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows.

The outstanding balance of covered loans accounted for under ASC 310-30, including contractual principal, interest, fees and penalties, was $383.2 million and $406.3 million as of March 31, 2014 and December 31, 2013, respectively.

The following table is a roll-forward of acquired impaired loans accounted for under ASC 310-30 for the three months ended March 31, 2014:


	Contractual			Nonaccretable			Accretable			Carrying
(dollars in thousands)	Cash Flows (1)			Difference			Yield			Amount (2)
Balance at January 1, 2014	$	251,042		$	(46,793	)	$	(73,211	)	$	131,038
Principal reductions and interest payments		(25,353	)		(221	)		0			(25,574	)
Accretion of loan discount		0			0			11,339			11,339
Changes in contractual and expected cash flows due to remeasurement		(3,159	)		18,105			(13,412	)		1,534
Removals due to foreclosure or sale		(3,133	)		1,302			(2,006	)		(3,837	)

Balance at March 31, 2014	$	219,397		$	(27,607	)	$	(77,290	)	$	114,500

(1)	The balance of contractual cash flows includes future contractual interest and is net of amounts charged off and interest collected on nonaccrual loans.

(2)	Carrying amount for this table is net of allowance for loan losses.

The following table is a roll-forward of acquired impaired loans accounted for under ASC 310-30 for the three months ended March 31, 2013:


	Contractual			Nonaccretable			Accretable			Carrying
(dollars in thousands)	Cash Flows (1)			Difference			Yield			Amount (2)
Balance at January 1, 2013	$	424,527		$	(90,996	)	$	(85,779	)	$	247,752
Principal reductions and interest payments		(44,452	)		(768	)		0			(45,220	)
Accretion of loan discount		0			0			10,343			10,343
Changes in contractual and expected cash flows due to remeasurement		(11,948	)		19,039			(7,553	)		(462	)
Removals due to foreclosure or sale		(2,412	)		975			(438	)		(1,875	)

Balance at March 31, 2013	$	365,715		$	(71,750	)	$	(83,427	)	$	210,538

(1)	The balance of contractual cash flows includes future contractual interest and is net of amounts charged off and interest collected on nonaccrual loans.

(2)	Carrying amount for this table is net of allowance for loan losses.

Over the life of the acquired loans, we continue to estimate cash flows expected to be collected on individual loans or on pools of loans sharing common risk characteristics which were treated in the aggregate when applying various valuation techniques. We evaluate at each balance sheet date whether the present value of its loans determined using the effective interest rates has decreased and if so, recognizes a provision for loan losses. For any increases in cash flows expected to be collected, we adjust the amount of accretable yield recognized on a prospective basis over the loan’s or pool’s remaining life. Eighty percent of the prospective yield adjustments are offset as Old National will recognize a corresponding decrease in cash flows expected from the indemnification asset prospectively in a similar manner. The indemnification asset is adjusted over the shorter of the life of the underlying investment or the indemnification agreement.

Accretable yield, or income expected to be collected on the covered loans accounted for under ASC 310-30, is as follows:


(dollars in thousands)	2014			2013
Balance at January 1,	$	73,211		$	85,779
New loans purchased		0			0
Accretion of income		(11,339	)		(10,343	)
Reclassifications from (to) nonaccretable difference		13,412			7,554
Disposals/other adjustments		2,006			437

Balance at March 31,	$	77,290		$	83,427

At March 31, 2014, the $65.7 million loss sharing asset is comprised of a $60.6 million FDIC indemnification asset and a $5.1 million FDIC loss share receivable. The loss share receivable represents actual incurred losses where reimbursement has not yet been received from the FDIC. The indemnification asset represents future cash flows we expect to collect from the FDIC under the loss sharing agreements and the amount related to the estimated improvements in cash flow expectations that are being amortized over the same period for which those improved cash flows are being accreted into income. At March 31, 2014, $22.4 million of the FDIC indemnification asset is related to expected indemnification payments and $38.2 million is expected to be amortized and reported in noninterest income as an offset to future accreted interest income. At March 31, 2013, $84.3 million of the FDIC indemnification asset was related to expected indemnification payments and $12.9 million was expected to be amortized and reported in noninterest income as an offset to future accreted interest income.

For covered loans, we remeasure contractual and expected cash flows on a quarterly basis. When the quarterly re-measurement process results in a decrease in expected cash flows due to an increase in expected credit losses, impairment is recorded. As a result of this impairment, the indemnification asset is increased to reflect anticipated future cash flows to be received from the FDIC. Consistent with the loss sharing agreements between Old National and the FDIC, the amount of the increase to the indemnification asset is measured at 80% of the resulting impairment.

Alternatively, when the quarterly re-measurement results in an increase in expected future cash flows due to a decrease in expected credit losses, the nonaccretable difference decreases and the effective yield of the related loan portfolio is increased. As a result of the improved expected cash flows, the indemnification asset would be reduced first by the amount of any impairment previously recorded and, second, by increased amortization over the remaining life of the related loss sharing agreements or the remaining life of the indemnification asset, whichever is shorter.

The following table shows a detailed analysis of the FDIC loss sharing asset for the three months ended March 31, 2014 and 2013:


(dollars in thousands)	2014			2013
Balance at January 1,	$	88,513		$	116,624
Adjustments not reflected in income:
Cash received from FDIC		(15,989	)		(3,923	)
Loan expenses to be reimbursed		598			380
Other		(80	)		(918	)
Adjustments reflected in income:
(Amortization) accretion		(5,203	)		(1,612	)
Higher (lower) loan loss expectations		(412	)		120
Write-downs/(gain) on sale of other real estate		(1,728	)		372
Recovery amounts due to FDIC		0			(1,243	)
Other		0			61

Balance at March 31,	$	65,699		$	109,861

NOTE 10—OTHER REAL ESTATE OWNED

The following table shows the carrying amount for other real estate owned at March 31, 2014 and 2013:


	Other Real Estate			Other Real Estate
(dollars in thousands)	Owned (1)			Owned, Covered
Balance, January 1, 2014	$	7,562		$	13,670
Additions		1,341			4,443
Sales		(938	)		(4,688	)
Write-downs/other adjustments		(336	)		(507	)

Balance, March 31, 2014	$	7,629		$	12,918

(1)	Includes $0.3 million of repossessed personal property at March 31, 2014.


	Other Real Estate			Other Real Estate
(dollars in thousands)	Owned (1)			Owned, Covered
Balance, January 1, 2013	$	11,179		$	26,137
Additions		1,141			2,035
Sales		(2,613	)		(1,356	)
Write-downs/other adjustments		(604	)		(702	)

Balance, March 31, 2013	$	9,103		$	26,114

(1)	Includes $0.4 million of repossessed personal property at March 31, 2013.

Covered OREO expenses and valuation write-downs are recorded in the noninterest expense section of the consolidated statements of income. Under the loss sharing agreements, the FDIC will reimburse us for 80% of expenses and valuation write-downs related to covered assets up to $275.0 million, losses in excess of $275.0 million up to $467.2 million at 0%, and 80% of losses in excess of $467.2 million. As of March 31, 2014, we do not expect losses to exceed $275.0 million. The reimbursable portion of these expenses is recorded in the FDIC indemnification asset. Changes in the FDIC indemnification asset are recorded in the noninterest income section of the consolidated statements of income.

NOTE 11—GOODWILL AND OTHER INTANGIBLE ASSETS

The following table shows the changes in the carrying amount of goodwill by segment for the three months ended March 31, 2014 and 2013:


					Wealth
(dollars in thousands)	Banking		Insurance		Management		Other		Total
Balance, January 1, 2014	$	310,964	$	39,873	$	1,892	$	0	$	352,729
Goodwill acquired during the period		0		0		0		0		0

Balance, March 31, 2014	$	310,964	$	39,873	$	1,892	$	0	$	352,729

Balance, January 1, 2013	$	297,055	$	39,873	$	1,892	$	0	$	338,820
Goodwill acquired during the period		0		0		0		0		0

Balance, March 31, 2013	$	297,055	$	39,873	$	1,892	$	0	$	338,820

Goodwill is reviewed annually for impairment. Old National completed its most recent annual goodwill impairment test as of August 31, 2013 and concluded that, based on current events and circumstances, it is not more likely than not that the carry value of goodwill exceeds fair value. During the third quarter of 2013, Old National recorded $13.3 million of goodwill associated with the acquisition of 24 retail bank branches from Bank of America. This was allocated to the “Banking” segment. During the second quarter of 2013, Old National recorded $0.6 million of goodwill primarily related to the final pension settlement associated with the IBT acquisition. This was allocated to the “Banking” segment. The final purchase price allocation resulted in goodwill of $86.2 million associated with the IBT acquisition.

The gross carrying amount and accumulated amortization of other intangible assets at March 31, 2014 and December 31, 2013 was as follows:


			Accumulated
	Gross Carrying		Amortization			Net Carrying
(dollars in thousands)	Amount		and Impairment			Amount
March 31, 2014
Amortized intangible assets:
Core deposit	$	44,021	$	(32,426	)	$	11,595
Customer business relationships		27,848		(20,233	)		7,615
Customer trust relationships		5,352		(1,980	)		3,372
Customer loan relationships		4,413		(2,875	)		1,538

Total intangible assets	$	81,634	$	(57,514	)	$	24,120

December 31, 2013
Amortized intangible assets:
Core deposit	$	44,021	$	(31,266	)	$	12,755
Customer business relationships		27,848		(19,826	)		8,022
Customer trust relationships		5,352		(1,810	)		3,542
Customer loan relationships		4,413		(2,775	)		1,638

Total intangible assets	$	81,634	$	(55,677	)	$	25,957

Other intangible assets consist of core deposit intangibles and customer relationship intangibles and are being amortized primarily on an accelerated basis over their estimated useful lives, generally over a period of 5 to 15 years. During the fourth quarter of 2013, Old National increased customer business relationships by $1.3 million related to the purchase of an insurance book of business, which is included in the “Insurance” segment. During the third quarter of 2013, Old National increased core deposit intangibles by $3.5 million related to the acquisition of 24 retail bank branches from Bank of America, which is included in the “Banking” segment. During the second quarter of 2013, Old National increased customer business relationships by $0.1 million related to the purchase of an insurance book of business, which is included in the “Insurance” segment. Also during the second quarter of 2013, Old National decreased customer business relationships by $0.1 million related to the sale of an insurance book of business, which is included in the “Insurance” segment. See Note 20 to the consolidated financial statements for a description of the Company’s operating segments.

Old National reviews other intangible assets for possible impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. No impairment charges were recorded in 2014 or 2013. Total amortization expense associated with other intangible assets for the three months ended March 31 was $1.8 million in 2014 and $2.5 million in 2013. Included in expense for the first quarter of 2013 is $0.6 million related to the branch sales that occurred in the first quarter.

Estimated amortization expense for future years is as follows:


(dollars in thousands)
2014 remaining	$	5,035
2015		5,610
2016		4,539
2017		3,145
2018		2,178
Thereafter		3,613

Total	$	24,120

NOTE 12—SHORT-TERM BORROWINGS

The following table presents the distribution of Old National’s short-term borrowings and related weighted-average interest rates as of March 31, 2014:

Federal Funds

Repurchase

(dollars in thousands)

Purchased

Agreements

Total

2014

Outstanding at March 31, 2014

108,666

301,462

410,128

Average amount outstanding

63,888

316,302

380,190

Maximum amount outstanding at any month-end

108,666

317,261

Weighted average interest rate:

During three months ended

March 31, 2014

0.16

0.05

0.07

At March 31, 2014

0.17

0.05

0.08

NOTE 13—FINANCING ACTIVITIES

The following table summarizes Old National’s and its subsidiaries’ other borrowings at March 31, 2014 and December 31, 2013:


	March 31,			December 31,
(dollars in thousands)	2014			2013
Old National Bancorp:
Junior subordinated debenture (variable rates of 1.84% to 1.99%) maturing March 2035 to June 2037	$	28,000		$	28,000
ASC 815 fair value hedge and other basis adjustments		(3,242	)		(3,262	)
Old National Bank:
Securities sold under agreements to repurchase (fixed rates 2.47% to 2.50%) maturing January 2017 to January 2018		50,000			50,000
Federal Home Loan Bank advances (fixed rates 0.21% to 8.34% and variable rates 0.32% to 0.36%) maturing April 2014 to January 2023		427,750			477,856
Capital lease obligation		4,143			4,157
ASC 815 fair value hedge and other basis adjustments		131			(363	)

Total other borrowings	$	506,782		$	556,388

Contractual maturities of other borrowings at March 31, 2014, were as follows:


(dollars in thousands)
Due in 2014	$	125,743
Due in 2015		63
Due in 2016		117,395
Due in 2017		46,020
Due in 2018		145,635
Thereafter		75,037
ASC 815 fair value hedge and other basis adjustments		(3,111	)

Total	$	506,782

FEDERAL HOME LOAN BANK

Federal Home Loan Bank (“FHLB”) advances had weighted-average rates of 1.04% and 0.94% at March 31, 2014, and December 31, 2013, respectively. These borrowings are collateralized by investment securities and residential real estate loans up to 145% of outstanding debt.

During 2013, Old National terminated $50.0 million of FHLB advances, resulting in a loss on extinguishment of debt of $1.0 million. Old National also restructured $33.4 million pertaining to two FHLB advances in the first quarter of 2013, which lowered their effective interest rates from 3.27% and 3.29% to 2.04% and 2.49%, respectively.

JUNIOR SUBORDINATED DEBENTURES

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

In 2007, Old National acquired St. Joseph Capital Trust II in conjunction with its acquisition of St. Joseph Capital Corporation. Old National guarantees the payment of distributions on the trust preferred securities issued by St. Joseph Capital Trust II. St. Joseph Capital Trust II issued $5.0 million in preferred securities in March 2005. The preferred securities had a cumulative annual distribution rate of 6.27% until March 2010 and now carry a variable rate of interest priced at the three-month LIBOR plus 175 basis points, payable quarterly and maturing on March 17, 2035. Proceeds from the issuance of these securities were used to purchase junior subordinated debentures with the same financial terms as the securities issued by St. Joseph Capital Trust II. Old National, at any time, may redeem the junior subordinated debentures at par and thereby cause a redemption of the trust preferred securities.

In 2011, Old National acquired Monroe Bancorp Capital Trust I and Monroe Bancorp Statutory Trust II in conjunction with its acquisition of Monroe Bancorp. Old National guarantees the payment of distributions on the trust preferred securities issued by Monroe Bancorp Capital Trust I and Monroe Bancorp Statutory Trust II. Monroe Bancorp Capital Trust I issued $3.0 million in preferred securities in July 2006. The preferred securities carried a fixed rate of interest of 7.15% until October 7, 2011 and thereafter a variable rate of interest priced at the three-month LIBOR plus 160 basis points. Proceeds from the issuance of these securities were used to purchase junior subordinated debentures with the same financial terms as the securities issued by Monroe Bancorp Capital Trust I. Monroe Bancorp Statutory Trust II issued $5.0 million in preferred securities in March 2007. The preferred securities carried a fixed rate of interest of 6.52% until June 15, 2012 and thereafter a variable rate of interest priced at the three-month LIBOR plus 160 basis points. Proceeds from the issuance of these securities were used to purchase junior subordinated debentures with the same financial terms as the securities issued by Monroe Bancorp Statutory Trust II. 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 2012, Old National acquired Home Federal Statutory Trust I in conjunction with its acquisition of Indiana Community Bancorp. Old National guarantees the payment of distributions on the trust preferred securities issued by Home Federal Statutory Trust I. Home Federal Statutory Trust I issued $15.0 million in preferred securities in September 2006. The preferred securities carry a variable rate of interest priced at the three-month LIBOR plus 165 basis points. Proceeds from the issuance of these securities were used to purchase junior subordinated debentures with the same financial terms as the securities issued by Home Federal Statutory Trust I. Old National, at any time, may redeem the junior subordinated debentures at par and thereby cause a redemption of the trust preferred securities in whole or in part.

CAPITAL LEASE OBLIGATION

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

At March 31, 2014, the future minimum lease payments under the capital lease were as follows:


(dollars in thousands)
2014 remaining	$	307
2015		410
2016		410
2017		410
2018		410
Thereafter		9,265

Total minimum lease payments		11,212
Less amounts representing interest		7,069

Present value of net minimum lease payments	$	4,143

NOTE 14—EMPLOYEE BENEFIT PLANS

RETIREMENT PLAN

Old National maintains a funded noncontributory defined benefit plan (the “Retirement Plan”) that was frozen as of December 31, 2005. Retirement benefits are based on years of service and compensation during the highest paid five years of employment. The freezing of the plan provides that future salary increases will not be considered. Old National’s policy is to contribute at least the minimum funding requirement determined by the plan’s actuary. Old National expects to contribute approximately $320 thousand to the Retirement Plan in 2014.

Old National also maintains an unfunded pension restoration plan (the “Restoration Plan”) which provides benefits for eligible employees that are in excess of the limits under Section 415 of the Internal Revenue Code of 1986, as amended, that apply to the Retirement Plan. The Restoration Plan is designed to comply with the requirements of ERISA. The entire cost of the plan, which was also frozen as of December 31, 2005, is supported by contributions from the Company.

Old National contributed $30 thousand to cover benefit payments from the Restoration Plan during the first three months of 2014. Old National expects to contribute an additional $90 thousand to cover benefit payments from the Restoration Plan during the remainder of 2014.

The net periodic benefit cost and its components were as follows for the three months ended March 31:


	Three Months Ended March 31,
(dollars in thousands)	2014			2013
Interest cost	$	439		$	435
Expected return on plan assets		(560	)		(551	)
Recognized actuarial loss		329			580
Settlement		0			279

Net periodic benefit cost	$	208		$	743

On September 15, 2012, Old National assumed Indiana Bank and Trust’s Pentegra Defined Benefit Plan for Financial Institutions. This defined benefit pension plan has been frozen since April 1, 2008. The trustees of the Financial Institutions Retirement Fund administer the Pentegra Plan, employer identification number 13-5645888 and plan number 333. The Pentegra Plan operates as a multi-employer plan for accounting purposes and as a multiple-employer plan under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code.

During the second quarter of 2013, Old National withdrew from the plan, contributing $14.0 million to satisfy the final termination liability. Funding the termination liability had no impact on earnings as it was considered in the fair value of Indiana Bank and Trust’s purchase accounting entries.

NOTE 15—STOCK-BASED COMPENSATION

At March 31, 2014, Old National had 4.8 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

The Company granted 66 thousand time-based restricted stock awards to certain key officers during the first quarter of 2014, with shares vesting over a thirty-six month period. Compensation expense is recognized on a straight-line basis over the vesting period. Shares are subject to certain restrictions and risk of forfeiture by the participants. As of March 31, 2014, unrecognized compensation expense was estimated to be $1.8 million for unvested restricted share awards.

Old National recorded expense of $0.2 million, net of tax, during the first three months of 2014, compared to expense of $0.2 million during the first three months of 2013 related to the vesting of restricted share awards.

Restricted Stock Units

The Company granted 253 thousand shares of performance based restricted stock units to certain key officers during the first quarter of 2014, with shares vesting at the end of a thirty-six month period based on the achievement of certain targets. For certain awards, the level of performance could increase or decrease the percentage of shares earned. Compensation expense is recognized on a straight-line basis over the vesting period. Shares are subject to certain restrictions and risk of forfeiture by the participants.

Old National recorded $0.5 million of stock based compensation expense, net of tax, during the first three months of 2014. Old National recorded $0.4 million of stock based compensation expense, net of tax, during the first three months of 2013.

Stock Options

Old National has not granted stock options since 2009. Old National did not record any stock based compensation expense related to stock options during the first three months of 2014 or 2013, respectively.

NOTE 16—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 statement of income for the three months ended March 31:


	Three Months Ended March 31,
(dollars in thousands)	2014			2013
Provision at statutory rate of 35%	$	12,513		$	12,018
Tax-exempt income		(3,137	)		(2,897	)
State income taxes		643			1,216
State statutory rate change		1,122			0
Interim period effective rate adjustment		(2,025	)		135
Other, net		126			(80	)

Income tax expense	$	9,242		$	10,392

Effective tax rate		25.9	%		30.3	%

In accordance with ASC 740-270, Accounting for Interim Reporting, the provision for income taxes was recorded at March 31, 2014 and 2013 based on the current estimate of the effective annual rate.

For the three months ended March 31, 2014, the effective tax rate was lower than the three months ended March 31, 2013. The lower tax rate in the first three months of 2014 is the result of lower projected pre-tax book income for 2014, as well as lower projected state taxes.

No valuation allowance was recorded at March 31, 2014 and 2013 because, based on our current expectations, Old National believes that it will generate sufficient income in the future years to realize deferred tax assets.

Unrecognized Tax Benefits

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

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:


(dollars in thousands)	2014		2013
Balance at January 1	$	3,847	$	3,953
Additions (reductions) based on tax positions related to the current year		12		0

Balance at March 31	$	3,859	$	3,953

Approximately $.06 million of unrecognized tax benefits, net of interest, if recognized, would favorably affect the effective income tax rate in future periods. The Company expects the total amount of unrecognized tax benefits to decrease by approximately $3.8 million in the next nine months.

NOTE 17—DERIVATIVE FINANCIAL INSTRUMENTS

As part of our overall interest rate risk management, Old National uses derivative instruments, including interest rate swaps, caps and floors. The notional amount of these derivative instruments was $464.5 million and $464.5 million at March 31, 2014 and December 31, 2013, respectively. The March 31, 2014 balances consist of $39.5 million notional amount of receive-fixed pay variable interest rate swaps and $425.0 million notional amount of pay-fixed, receive variable interest rate swaps on certain of its FHLB advances. The December 31, 2013 balances consist of $39.5 million notional amount of receive-fixed pay variable interest rate swaps and $425.0 million notional amount of pay-fixed, receive variable interest rate swaps on certain of its FHLB advances. These hedges were entered into to manage interest rate risk. These derivative instruments are recognized on the balance sheet at their fair value and are not reported on a net basis.

In addition, 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. At March 31, 2014, the notional amount of the interest rate lock commitments and forward commitments were $13.6 million and $18.6 million, respectively. At December 31, 2013, the notional amount of the interest rate lock commitments and forward commitments were $10.5 million and $17.2 million, respectively. 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. All derivative instruments are recognized on the balance sheet at their fair value.

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 $431.8 million and $431.8 million, respectively, at March 31, 2014. At December 31, 2013, the notional amounts of the customer derivative instruments and the offsetting counterparty derivative instruments were $436.8 million and $436.8 million, respectively. 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.

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

The following tables summarize the fair value of derivative financial instruments utilized by Old National:

Asset Derivatives

March 31, 2014

December 31, 2013

(dollars in thousands)

Balance

Sheet

Location

Fair
Value

Balance

Sheet

Location

Fair
Value

Derivatives designated as hedging instruments

Interest rate contracts

Other assets

3,355

Other assets

3,545

Total derivatives designated as hedging instruments

3,355

3,545

Derivatives not designated as hedging instruments

Interest rate contracts

Other assets

16,580

Other assets

18,279

Mortgage contracts

Other assets

342

Other assets

263

Total derivatives not designated as hedging instruments

16,922

18,542

Total derivative assets

20,277

22,087

Liability Derivatives

March 31, 2014

December 31, 2013

(dollars in thousands)

Balance

Sheet

Location

Fair
Value

Balance

Sheet

Location

Fair
Value

Derivatives designated as hedging instruments

Interest rate contracts

Other liabilities

2,444

Other liabilities

1,218

Total derivatives designated as hedging instruments

2,444

1,218

Derivatives not designated as hedging instruments

Interest rate contracts

Other liabilities

16,732

Other liabilities

18,505

Total derivatives not designated as hedging instruments

16,732

18,505

Total derivative liabilities

19,176

19,723

The effect of derivative instruments on the Consolidated Statement of Income for the three months ended March 31, 2014 and 2013 are as follows:


(dollars in thousands)		Three months ended March 31, 2014		Three months ended March 31, 2013
Derivatives in Fair Value Hedging Relationships	Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss) Recognized in Income on Derivative
Interest rate contracts (1)	Interest income / (expense)	$	359	$	477
Interest rate contracts (2)	Other income / (expense)		106		27

Total		$	465	$	504


Derivatives Not Designated as Hedging Instruments	Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss) Recognized in Income on Derivative
Interest rate contracts (3)	Other income / (expense)	$	73	$	(39	)
Mortgage contracts	Mortgage banking revenue		80		147

Total		$	153	$	108

(1)	Amounts represent the net interest payments as stated in the contractual agreements.

(2)	Amounts represent ineffectiveness on derivatives designated as fair value hedges.

(3)	Includes the valuation differences between the customer and offsetting counterparty swaps.

NOTE 18—COMMITMENTS AND CONTINGENCIES

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 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.

In November 2010, Old National was named in a class action lawsuit in Vanderburgh Circuit Court challenging our checking account practices associated with the assessment of overdraft fees. The theory set forth by plaintiffs in this case is similar to other class action complaints filed against other financial institutions in recent years and settled for substantial amounts. On May 1, 2012, the plaintiff was granted permission to file a First Amended Complaint which named additional plaintiffs and amended certain claims. The plaintiffs seek damages and other relief, including restitution. On June 13, 2012, Old National filed a motion to dismiss the First Amended Complaint, which was subsequently denied by the Court. On September 7, 2012, the plaintiffs filed a motion for class certification, which was granted on March 20, 2013, and provides for a class of “All Old National Bank customers in the State of Indiana who had one or more consumer accounts and who, within the applicable statutes of limitation through August 15, 2010, incurred an overdraft fee as a result of Old National Bank’s practice of sequencing debit card and ATM transactions from highest to lowest.” Old National sought an interlocutory appeal on the issue of class certification on April 2, 2013, which was subsequently denied. Old National does not believe there is a cause of action under Indiana law to support the plaintiffs’ claims. Accordingly, on June 11, 2013, Old National moved for summary judgment. On September 16, 2013, a hearing was held on the summary judgment motion and on September 27, 2013, the Court ordered the parties to mediation and informed the parties that “Court will be denying the motion for summary judgment upon receiving the report of the mediator.”

The parties subsequently met twice with the mediator and were unable to reach an agreement to resolve the dispute. On March 10, 2014, Old National filed a Trial Rule 53.1 “Praecipe to Withdraw Cause for Delayed Decision on June 13, 2012, Motion to Dismiss Plaintiff’s Amended Complaint.” This Praecipe was denied on April 11, 2014. Old National’s pending Motion for Summary Judgment filed June 11, 2013, was denied on April 14, 2014, and on April 23, 2014, Old National filed a “Motion to Certify Denial of Summary Judgment for Interlocutory Appeal and to Stay Proceedings Pending Certification, Acceptance, and Disposition of Appeal.” This Motion has not been ruled on. The case is not currently set for trial. Old National believes it has meritorious defenses to the claims brought by the plaintiffs. At this phase of the litigation, it is not possible for management of Old National to determine the probability of a material adverse outcome or reasonably estimate the amount of any loss.

LEASES

Old National rents certain premises and equipment under operating leases, which expire at various dates. Many of these leases require the payment of property taxes, insurance premiums, maintenance and other costs. In some cases, rentals are subject to increase in relation to a cost-of-living index. The leases have original terms ranging from less than one year to twenty-four years, and Old National has the right, at its option, to extend the terms of certain leases for four additional successive terms of five years. We do not have any material sub-lease agreements.

As of March 31, 2014 and 2013, Old National had $72.9 million and $81.7 million, respectively, of deferred gains remaining associated with prior sale leaseback transactions. The leases had original terms ranging from five to twenty-four years. These gains will be recognized over the remaining term of the leases.

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 $1.328 billion and standby letters of credit of $61.6 million at March 31, 2014. At March 31, 2014, approximately $1.266 billion of the loan commitments had fixed rates and $62 million had floating rates, with the floating interest rates ranging from 0% to 21%. At December 31, 2013, loan commitments were $1.271 billion and standby letters of credit were $62.0 million. These commitments are not reflected in the consolidated financial statements. At March 31, 2014 and December 31, 2013, the balance of the allowance for unfunded loan commitments was $2.6 million and $2.7 million, respectively.

At March 31, 2014 and December 31, 2013, Old National had credit extensions of $15.6 million and $15.6 million, respectively, with various unaffiliated banks related to letter of credit commitments issued on behalf of Old National’s clients. At March 31, 2014 and December 31, 2013, Old National provided collateral to the unaffiliated banks to secure credit extensions totaling $12.4 million and $12.4 million, respectively. Old National did not provide collateral for the remaining credit extensions.

NOTE 19—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 the Company 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, 2014, the notional amount of standby letters of credit was $61.6 million, which represents the maximum amount of future funding requirements, and the carrying value was $0.4 million. At December 31, 2013, the notional amount of standby letters of credit was $62.0 million, which represents the maximum amount of future funding requirements, and the carrying value was $0.4 million.

During the second quarter of 2007, Old National entered into a risk participation in an interest rate swap. The interest rate swap had a notional amount of $8.0 million at March 31, 2014.

NOTE 20—SEGMENT INFORMATION

Our business segments are defined as Banking, Insurance, Wealth Management, and Other and are described below:

Banking

The banking segment provides a wide range of financial products and services to consumers and businesses. Loan products include commercial, commercial real estate, mortgage and other consumer loans. Deposit products include checking, savings, and time deposit accounts. This segment also provides cash management, private banking, brokerage, and investment services. Products and services are delivered to customers in the states of Indiana, Kentucky, Illinois and Michigan through our branch locations, ATMs, on-line banking services, 24-hour telephone banking, client care call center, and a mobile banking service.

Insurance

The insurance segment offers full-service insurance brokerage services including commercial property and casualty, surety, loss control services, employee benefits consulting and administration, and personal insurance. Our agencies offer products that are issued and underwritten by various insurance companies not affiliated with us. In addition, we have two affiliated third party claims management companies that do fee for service claims handling for self-insured clients.

Wealth Management

The wealth management segment includes trust services and investment advisory services. A significant portion of this segment’s income is derived from fees, which are generally based on the market values of assets under management. This segment is focused on assisting high-net-worth individuals and families in building and preserving their wealth.

Other

Other Corporate Administrative units such as Human Resources or Finance, provide a wide-range of support to our other income earning segments. Expenses incurred by these support units are charged to the business segments through an internal cost allocation process, which may not be comparative to that of other companies. The other segment includes the unallocated portion of other corporate support functions, the elimination of intercompany transactions and our Corporate Treasury unit. Corporate Treasury activities consist of corporate asset and liability management. This unit’s assets and liabilities (and related interest income and expense) consist of investment securities, corporate-owned life insurance, and certain borrowings.

As of December 31, 2013, Old National changed the composition of its reportable segments to those described above and restated all prior period information. Selected business segment financial information is shown in the following table for the three months ended March 31:


(dollars in thousands)	Banking		Insurance		Wealth Management		Other			Total
Three months ended March 31, 2014
Net interest income	$	83,544	$	3	$	10	$	(79	)	$	83,478
Noninterest income		22,301		11,976		5,959		327			40,563
Noncash items:
Depreciation and software amortization		3,231		35		5		121			3,392
Provision for loan losses		37		0		0		0			37
Amortization of intangibles		1,260		407		170		0			1,837
Income tax expense (benefit)		10,859		803		365		(2,785	)		9,242
Segment profit		22,835		1,873		666		1,136			26,510
Segment assets		9,399,025		63,180		13,720		68,855			9,544,780
Three months ended March 31, 2013
Net interest income	$	79,200	$	5	$	12	$	(167	)	$	79,050
Noninterest income		29,140		10,864		5,827		484			46,315
Noncash items:
Depreciation and software amortization		2,643		35		7		62			2,747
Provision for loan losses		845		0		0		0			845
Amortization of intangibles		1,889		450		186		0			2,525
Income tax expense (benefit)		10,415		687		317		(1,027	)		10,392
Segment profit		23,735		1,051		491		(1,332	)		23,945
Segment assets		9,524,064		62,009		13,821		73,797			9,673,691

NOTE 21—FAIR VALUE

FASB ASC 820-10 defines fair value as 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. FASB ASC 820-10 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes 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.

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, 2014 Using

(dollars in thousands)

Carrying
Value

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Financial Assets

Trading securities

3,681

Investment securities available-for-sale:

U.S. Treasury

15,697

U.S. Government-sponsored entities and agencies

490,080

Mortgage-backed securities - Agency

1,229,758

Mortgage-backed securities - Non-agency

16,650

States and political subdivisions

251,839

251,495

344

Pooled trust preferred securities

6,779

—

6,779

Other securities

358,261

31,087

327,174

Residential loans held for sale

6,169

Derivative assets

20,277

Financial Liabilities

Derivative liabilities

19,176

Fair Value Measurements at December 31, 2013 Using

(dollars in thousands)

Carrying
Value

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Financial Assets

Trading securities

3,566

Investment securities available-for-sale:

U.S. Treasury

13,113

U.S. Government-sponsored entities and agencies

435,588

Mortgage-backed securities - Agency

1,289,258

Mortgage-backed securities - Non-agency

17,412

States and political subdivisions

268,795

268,126

669

Pooled trust preferred securities

8,037

Other securities

339,988

31,254

308,734

Residential loans held for sale

7,705

Derivative assets

22,087

Financial Liabilities

Derivative liabilities

19,723

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2014:


	Fair Value Measurements using Significant Unobservable Inputs (Level 3)
(dollars in thousands)	Pooled Trust Preferred Securities Available- for-Sale			State and Political Subdivisions
Beginning balance, January 1, 2014	$	8,037		$	669
Accretion/(amortization) of discount or premium		4			1
Sales/payments received		(963	)		0
Matured securities		0			(326	)
Increase/(decrease) in fair value of securities		(299	)		0

Ending balance, March 31, 2014	$	6,779		$	344

Included in the income statement is $5 thousand of income included in interest income from the accretion of discounts on securities. The decrease in fair value is reflected in the balance sheet as an 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.

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2013:


	Fair Value Measurements using Significant Unobservable Inputs (Level 3)
(dollars in thousands)	Pooled Trust Preferred Securities Available- for-Sale			State and Political Subdivisions
Beginning balance, January 1, 2013	$	9,359		$	984
Accretion/(amortization) of discount or premium		4			1
Payments received		(1,323	)		0
Matured securities		0			(310	)
Increase/(decrease) in fair value of securities		514			0

Ending balance, March 31, 2013	$	8,554		$	675

Included in the income statement is $5 thousand of income included in interest income from the accretion of discounts on securities. The increase in fair value is reflected in the balance sheet as an increase in the fair value of investment securities available-for sale, an increase in accumulated other comprehensive income, which is included in shareholders’ equity, and a decrease in other assets related to the tax impact.

The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 of the fair value hierarchy:


	Quantitative Information about Level 3 Fair Value Measurements
(dollars in thousands)	Fair Value at March 31, 2014		Valuation Techniques	Unobservable Input	Range (Weighted Average)
Pooled trust preferred securities	$	6,779	Discounted cash flow	Constant prepayment rate (a) Additional asset defaults (b) Expected asset recoveries (c)	0.00% 4.3% - 5.5% (4.8%) 3.1% - 12.3% (5.0%)
State and political subdivision securities		344	Discounted cash flow	No unobservable inputs Illiquid local municipality issuance Old National owns 100% Carried at par	NA

(a)	Assuming no prepayments.

(b)	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%.

(c)	Each currently defaulted pool asset is assigned a recovery probability based on specific issuer evaluation of 0%, 25% or 100%.

The significant unobservable inputs used in the fair value measurement for pooled trust preferred securities are prepayment rates, assumed additional pool asset defaults and expected return to performing status of defaulted pool assets. Significant changes in any of the inputs in isolation would result in a significant change to the fair value measurement. Three of the four 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 has 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, 2014 Using

(dollars in thousands)

Carrying
Value

Quoted 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

13,390

Commercial real estate loans

20,986

Foreclosed Assets

Commercial real estate

5,385

Residential

487

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 $47.0 million, with a valuation allowance of $12.5 million at March 31, 2014. Old National recorded $4.2 million of provision expense associated with these loans for the three months ended March 31, 2014.

Other real estate owned and other repossessed property is measured at fair value less costs to sell and had a net carrying amount of $5.9 million. The estimates of fair value 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. There were write-downs of other real estate owned of $0.7 million and net gains on sale of other real estate owned of $2.2 million in the first three months of 2014.

Fair Value Measurements at December 31, 2013 Using

(dollars in thousands)

Carrying
Value

Quoted 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

9,224

Commercial real estate loans

7,851

Foreclosed Assets

Commercial real estate

9,069

Residential

283

As of December 31, 2013, impaired commercial and commercial real estate loans had a principal amount of $25.4 million, with a valuation allowance of $8.3 million. Old National recorded $6.9 million of provision expense associated with these loans in 2013.

Other real estate owned and other repossessed property is measured at fair value less costs to sell and had a net carrying amount of $9.4 million at December 31, 2013. There were write-downs of other real estate owned of $2.4 million in 2013.

During the second quarter of 2013, finance leases of $11.6 million were transferred from the commercial loan category at fair value, which is the offer price, and a loss of $0.2 million was recognized. The finance leases were sold during the third quarter of 2013.

The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 of the fair value hierarchy:


	Quantitative Information about Level 3 Fair Value Measurements
(dollars in thousands)	Fair Value at March 31, 2014		Valuation Techniques	Unobservable Input	Range (Weighted Average)
Collateral Dependent Impaired Loans
Commercial loans	$	13,390	Fair value of collateral	Discount for type of property, age of appraisal and current status	0% - 69% (29%)
Commercial real estate loans		20,986	Fair value of collateral	Discount for type of property, age of appraisal and current status	0% - 50% (29%)
Foreclosed Assets
Commercial real estate		5,385	Fair value of collateral	Discount for type of property, age of appraisal and current status	2% - 85% (30%)
Residential		487	Fair value of collateral	Discount for type of property, age of appraisal and current status	18% - 77% (40%)

	Quantitative Information about Level 3 Fair Value Measurements
(dollars in thousands)	Fair Value at Dec. 31, 2013		Valuation Techniques	Unobservable Input	Range (Weighted Average)
Collateral Dependent Impaired Loans
Commercial loans	$	9,224	Fair value of collateral	Discount for type of property, age of appraisal and current status	0% - 75% (24%)
Commercial real estate loans		7,851	Fair value of collateral	Discount for type of property, age of appraisal and current status	10% - 54% (30%)
Foreclosed Assets
Commercial real estate		9,069	Fair value of collateral	Discount for type of property, age of appraisal and current status	10% - 40% (25%)
Residential		283	Fair value of collateral	Discount for type of property, age of appraisal and current status	10% - 45% (25%)

Collateral dependent loans, other real estate owned and other repossessed property are valued 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 appraisals are discounted depending on the type of property and the type of appraisal (market value vs. liquidation value).

Financial instruments recorded using fair value option

Under FASB ASC 825-10, we 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.

We have elected the fair value option for residential mortgage 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 are $43 thousand and $101 thousand of interest income for residential loans held for sale for the three months ended March 31, 2014 and 2013, respectively.

Residential mortgage loans held for sale

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.

As of March 31, 2014, the difference between the aggregate fair value and the aggregate remaining principal balance for loans for which the fair value option has been elected is as follows. Accrued interest at period end is included in the fair value of the instruments.

(dollars in thousands)

Aggregate
Fair Value

Difference

Contractual
Principal

Residential loans held for sale

6,169

115

6,054

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 for the three months ended March 31, 2014:


	Changes in Fair Value for the Three Months ended March 31, 2014, for Items Measured at Fair Value Pursuant to Election of the Fair Value Option
(dollars in thousands)	Other Gains and (Losses)			Interest Income		Interest (Expense)		Total Changes in Fair Values Included in Current Period Earnings
Residential loans held for sale	$	(13	)	$	0	$	0	$	(13	)

As of March 31, 2013, 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. Accrued interest at period end is included in the fair value of the instruments.

(dollars in thousands)

Aggregate
Fair Value

Difference

Contractual
Principal

Residential loans held for sale

14,583

411

14,172


	Changes in Fair Value for the Three Months ended March 31, 2013, for Items Measured at Fair Value Pursuant to Election of the Fair Value Option
(dollars in thousands)	Other Gains and (Losses)		Interest Income		Interest (Expense)		Total Changes in Fair Values Included in Current Period Earnings
Residential loans held for sale	$	54	$	3	$	0	$	57

The carrying amounts and estimated fair values of financial instruments, not previously presented in this note, at March 31, 2014 and December 31, 2013 are as follows:


			Fair Value Measurements at March 31, 2014 Using
(dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2014
Financial Assets
Cash, due from banks, federal funds sold and money market investments	$	214,524	$	214,524	$	0	$	0
Investment securities held-to-maturity:
U.S. Government-sponsored entities and agencies		169,781		0		177,984		0
Mortgage-backed securities—Agency		32,020		0		33,405		0
State and political subdivisions		577,493		0		601,525		0
Federal Home Loan Bank stock		40,584		0		40,584		0
Loans, net (including covered loans):
Commercial		1,370,615		0		0		1,404,085
Commercial real estate		1,206,083		0		0		1,257,451
Residential real estate		1,379,271		0		0		1,474,262
Consumer credit		1,068,759		0		0		1,078,436
FDIC indemnification asset		65,699		0		0		26,239
Accrued interest receivable		48,764		110		19,288		29,366
Financial Liabilities
Deposits:
Noninterest-bearing demand deposits	$	2,047,664	$	2,047,664	$	0	$	0
NOW, savings and money market deposits		4,249,694		4,249,694		0		0
Time deposits		960,804		0		968,980		0
Short-term borrowings:
Federal funds purchased		108,666		108,666		0		0
Repurchase agreements		301,462		301,461		0		0
Other borrowings:
Junior subordinated debenture		28,000		0		17,636		0
Repurchase agreements		50,000		0		52,476		0
Federal Home Loan Bank advances		427,750		0		0		436,519
Capital lease obligation		4,143		0		5,384		0
Accrued interest payable		1,730		0		1,730		0
Standby letters of credit		358		0		0		358
Off-Balance Sheet Financial Instruments
Commitments to extend credit	$	0	$	0	$	0	$	1,747


			Fair Value Measurements at December 31, 2013 Using
(dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2013
Financial Assets
Cash, due from banks, federal funds sold and money market investments	$	206,723	$	206,723	$	0	$	0
Investment securities held-to-maturity:
U.S. Government-sponsored entities and agencies		170,621		0		178,370		0
Mortgage-backed securities—Agency		35,443		0		36,348		0
State and political subdivisions		556,670		0		566,040		0
Federal Home Loan Bank stock		40,584		0		40,584		0
Loans, net (including covered loans):
Commercial		1,386,185		0		0		1,414,184
Commercial real estate		1,220,417		0		0		1,273,070
Residential real estate		1,384,183		0		0		1,475,710
Consumer credit		1,045,034		0		0		1,058,021
FDIC indemnification asset		88,513		0		0		55,368
Accrued interest receivable		50,205		42		20,708		29,455
Financial Liabilities
Deposits:
Noninterest-bearing demand deposits	$	2,026,490	$	2,026,490	$	0	$	0
NOW, savings and money market deposits		4,166,438		4,166,438		0		0
Time deposits		1,017,975		0		1,028,043		0
Short-term borrowings:
Federal funds purchased		115,103		115,103		0		0
Repurchase agreements		347,229		347,226		0		0
Other borrowings:
Junior subordinated debenture		28,000		0		17,605		0
Repurchase agreements		50,000		0		52,633		0
Federal Home Loan Bank advances		447,856		0		0		485,759
Capital lease obligation		4,157		0		5,245		0
Accrued interest payable		1,877		0		1,877		0
Standby letters of credit		380		0		0		380
Off-Balance Sheet Financial Instruments
Commitments to extend credit	$	0	$	0	$	0	$	1,648

The following methods and assumptions were used to estimate the fair value of each type of financial instrument.

Cash, due from banks, federal funds sold and resell agreements and money market investments: For these instruments, the carrying amounts approximate fair value (Level 1).

Investment securities: Fair values for investment securities held-to-maturity are based on quoted market prices, if available. For securities where quoted prices are not available, fair values are estimated based on market prices of similar securities (Level 2).

Federal Home Loan Bank Stock: Old National Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost and periodically evaluated for impairment based on ultimate recovery of par value. The carrying value of FHLB stock approximates fair value based on the redemption provisions of the FHLB (Level 2).

Loans: The fair value of loans is estimated by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities (Level 3).

Covered loans: Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting current market rates for new originations of comparable loans adjusted for the risk inherent in the cash flow estimates. Loans were grouped together according to similar characteristics and were treated in the aggregate when applying various valuation techniques (Level 3).

FDIC indemnification asset: The loss sharing asset was measured separately from the related covered assets as it is not contractually embedded in the assets and is not transferable with the assets should we choose to dispose of the assets. Fair value was originally estimated using projected cash flows related to the loss sharing agreement based on the expected reimbursements for losses and the applicable loss sharing percentage and these projected cash flows are updated with the cash flow estimates on covered assets. These cash flows were discounted to reflect the uncertainty of the timing and receipt of the loss sharing reimbursement from the FDIC (Level 3).

Accrued interest receivable and payable: The carrying amount approximates fair value and is aligned with the underlying assets or liabilities (Level 1, Level 2 or Level 3).

Deposits: The fair value of noninterest-bearing demand deposits and savings, NOW and money market deposits is the amount payable as of the reporting date (Level 1). The fair value of fixed-maturity certificates of deposit is estimated using rates currently offered for deposits with similar remaining maturities (Level 2).

Short-term borrowings: Federal funds purchased and other short-term borrowings generally have an original term to maturity of 30 days or less and, therefore, their carrying amount is a reasonable estimate of fair value (Level 1). The fair value of securities sold under agreements to repurchase is determined using end of day market prices (Level 1).

Other borrowings: The fair value of medium-term notes, subordinated debt and senior bank notes is determined using market quotes (Level 2). The fair value of FHLB advances is determined using calculated prices for new FHLB advances with similar risk characteristics (Level 3). The fair value of other debt is determined using comparable security market prices or dealer quotes (Level 2).

Standby letters of credit: Fair values for standby letters of credit are based on fees currently charged to enter into similar agreements. The fair value for standby letters of credit was recorded in “Accrued expenses and other liabilities” on the consolidated balance sheet in accordance with FASB ASC 460-10 (FIN 45) (Level 3).

Off-balance sheet financial instruments: Fair values for off-balance sheet credit-related financial instruments are based on fees currently charged to enter into similar agreements. For further information regarding the amounts of these financial instruments, see Notes 18 and 19.

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, 2014 and 2013, and financial condition as of March 31, 2014, compared to March 31, 2013, and December 31, 2013. 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.

EXECUTIVE SUMMARY

During the first quarter of 2014, net income was $26.5 million, or $0.26 per share. This compares to the $23.9 million, or $0.24 per share reported in the first quarter of 2013. The improvement is primarily the result of lower non-interest expenses. Total revenue remained relatively flat as the improvement in interest income and insurance contingency fees were offset by higher amortization expense associated with our FDIC indemnification asset.

Loan growth is our top focus and our new chief banking officer has this at the top of his agenda. He encourages a culture of cooperation and teamwork and considers both the originators and underwriters to be critical members of the lending team. Loan growth in our new higher-growth markets was encouraging during the quarter but our strong work out efforts of purchased credit impaired loans continue to keep loan balances relatively constant as these loans, subject to FDIC loss-sharing agreements, purposely decline.

Credit quality remained strong. Nonaccrual loan balances were $112.1 million at March 31, 2014, a decrease of $98.4 million since March 31, 2013, and a decrease of $16.3 million since December 31, 2013. Criticized loans have also improved to $119.8 million at March 31, 2014, compared to $141.5 million and $143.8 million at March 31, 2013 and December 31, 2013, respectively. We had net recoveries of $0.4 million and recorded $37 thousand of provision expense in the first quarter of 2014.

Management continues to focus on expanding our distribution network and transitioning the franchise to higher growth markets. Subsequent to quarter-end, Old National received regulatory approval of the previously announced agreement and plan of merger with Tower Financial Corporation (“Tower”). This transaction expands our presence in the attractive Fort Wayne market and helps to solidify our standing as Indiana’s bank. Tower operates six full-service banking centers in Fort Wayne and one in Warsaw, Indiana with loans of approximately $408 million, deposits of $577 million, and a $750 million wealth management portfolio at March 31, 2014. The transaction closed on April 25, 2014.

The previously announced agreement and plan of merger with Ann Arbor-based United Bancorp, Inc. (“United”) remains pending and is currently expected to close early in the third quarter, subject to approval by United’s shareholders and regulatory authorities, as well as the satisfaction of other customary closing conditions. This acquisition is expected to add an additional 18 branch offices in Southern Michigan, approximately $657 million in loans, $813 million in deposits, and a $685 million wealth management portfolio at March 31, 2014. This transaction will double Old National’s presence in Michigan to thirty-six banking centers.

RESULTS OF OPERATIONS

The following table sets forth certain income statement information of Old National for the three months ended March 31, 2014 and 2013:


	Three Months Ended
	March 31,						% Change
(dollars in thousands)	2014			2013			% Change
Income Statement Summary:
Net interest income	$	83,478		$	79,050			5.6	%
Provision for loan losses		37			845			(95.6	)
Noninterest income		40,563			46,315			(12.4	)
Noninterest expense		88,252			90,183			(2.1	)
Other Data:
Return on average common equity		9.03	%		8.00	%
Efficiency ratio (1)		67.77			68.34
Tier 1 leverage ratio		9.32			8.71
Net charge-offs to average loans		(0.03	)		0.17

(1)

Efficiency ratio is defined as noninterest expense before amortization of intangibles as a percent of fully taxable net interest income and noninterest income, excluding net gains from securities transactions. This presentation excludes intangible amortization and net securities gains, as is common in other company disclosures, and better aligns with true operating performance. This is a non-GAAP financial measure that management believes to be helpful in understanding Old National’s results of operations.

Net Interest Income

Net interest income is our most significant component of earnings, comprising over 67% of revenues at March 31, 2014. Net interest income and margin are influenced by many factors, primarily the volume and mix of earning assets, funding sources and interest rate fluctuations. Other factors include level of accretion income on purchased loans, prepayment risk on mortgage and investment-related assets and the composition and maturity of earning assets and interest-bearing liabilities. Loans typically generate more interest income than investment securities with similar maturities. Funding from client deposits generally cost less than wholesale funding sources. Factors such as general economic activity, Federal Reserve Board monetary policy and price volatility of competing alternative investments, can also exert significant influence on our ability to optimize the mix of assets and funding and the net interest income and margin.

Net interest income is the excess of interest received from earning assets over interest paid on interest-bearing liabilities. For analytical purposes, net interest income is also presented in the table that follows, adjusted to a taxable equivalent basis to reflect what our tax-exempt assets would need to yield in order to achieve the same after-tax yield as a taxable asset. We used the federal statutory tax rate in effect of 35% for all periods adjusted for the TEFRA interest disallowance applicable to certain tax-exempt obligations. This analysis portrays the income tax benefits associated in tax-exempt assets and helps to facilitate a comparison between taxable and tax-exempt assets. Management believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully taxable equivalent basis. Therefore, management believes these measures provide useful information for both management and investors by allowing them to make peer comparisons.


	Three Months Ended March 31,
(dollars in thousands)	2014			2013
Net interest income	$	83,478		$	79,050
Taxable equivalent adjustment		3,931			3,912

Net interest income—taxable equivalent	$	87,409		$	82,962

Average earning assets	$	8,276,267		$	8,210,526
Net interest margin		4.03	%		3.85	%
Net interest margin—fully taxable equivalent		4.22	%		4.04	%

Net interest income was $83.5 million for the three months ended March 31, 2014, up from the $79.1 million reported for the three months ended March 31, 2013. Taxable equivalent net interest income was $87.4 million for the three months ended March 31, 2014, up from the $83.0 million reported for the three months ended March 31, 2013. The net interest margin on a fully taxable equivalent basis was 4.22% for the three months ended March 31, 2014, compared to 4.04% for the three months ended March 31, 2013. Both the three months ended March 31, 2014 and 2013 include accretion income (interest income in excess of contractual interest income) associated with purchased credit impaired loans. Excluding this accretion income in both periods, net interest income on a fully taxable equivalent basis would have been $69.5 million for the three months ended March 31, 2014, compared to $68.0 million for the three months ended March 31, 2013; and the net interest margin on a fully taxable equivalent basis would have been 3.36% in 2014 and 3.31% in 2013.

The increase in net interest income is primarily due to the increase in accretion income recorded in the first three months of 2014 compared to the first three months of 2013, combined with a change in the mix of interest earning assets and interest-bearing liabilities. We expect this accretion income to decline over time.

The increase in the net interest margin is primarily due to the yield on average earning assets increasing while the cost of interest-bearing liabilities decreased. The yield on interest earning assets increased 7 basis points while the cost of interest-bearing liabilities decreased 15 basis points in the quarterly year-over-year comparison. The yield on interest earning asset is calculated by dividing annualized taxable equivalent net interest income by average interest assets while the cost of interest-bearing liabilities is calculated by dividing annualized interest expense by average interest-bearing liabilities.

Average earning assets were $8.276 billion for the three months ended March 31, 2014, compared to $8.211 billion for the three months ended March 31, 2013, an increase of 0.8%, or $65.7 million. Affecting average earning assets at March 31, 2014 compared to March 31, 2013, was the increase in the size of the investment portfolio combined with a decrease in the size of the loan portfolio. Despite the sale of $96.9 million of residential real estate loans during the third quarter of 2013, our residential mortgage loan portfolio grew $19.7 million over the past twelve months. In addition, we experienced growth of $43.8 million in our commercial loan portfolio and $85.9 million in our consumer loan portfolio over the past twelve months. These increases were more than offset by the $69.8 million decrease in our commercial real estate loan portfolio and the $150.5 million decrease in our covered loan portfolio. The loan portfolio, which generally has an average yield higher than the investment portfolio, was approximately 61% of average interest earning assets at March 31, 2014.

The $143.6 million increase in the average balance of the investment portfolio from March 31, 2013 to March 31, 2014 can be attributed to the reinvestment of excess cash acquired as part of the Bank of America branch acquisition.

Positively affecting margin were increases in noninterest-bearing demand deposits, NOW and savings accounts, money market accounts combined with a decrease in time deposits and borrowed funds. Average time deposits, which have an average interest rate higher than other types of deposits, decreased $243.7 million since March 31, 2013. In addition, average borrowed funds declined $17.6 million year over year.

Provision for Loan Losses

The provision for loan losses was $37 thousand for the three months ended March 31, 2014, compared to $845 thousand for the three months ended March 31, 2013. Impacting the provision over the past twelve months are the following factors: (1) the loss factors applied to our performing loan portfolio have decreased over time as charge-offs were substantially lower, (2) improvement associated with our purchased credit impaired loans accounted for under ASC310-30, (3) the continuing trend in improved credit quality, and (4) a decrease in our commercial real estate loan balances (which carry higher loss rates than other loan categories) in conjunction with improving average asset quality ratings on the remaining commercial real estate loans in our portfolio.

Noninterest Income

We generate revenues in the form of noninterest income through client fees and sales commissions from our core banking franchise and other related businesses, such as wealth management, investment consulting, investment products and insurance. Noninterest income for the three months ended March 31, 2014 was $40.6 million, a decrease of $5.7 million, or 12.4%, from the $46.3 million reported for the three months ended March 31, 2013. The decrease is primarily the result of adjustments to the FDIC indemnification asset and the gain on branch divestitures that was recorded in the first quarter of 2013. There was no corresponding branch divestiture transaction in the first quarter of 2014. Partially offsetting these decreases were increases in insurance revenue, insurance contingency fees and gains on the sale of foreclosed properties.

Net securities gains were $0.5 million for the three months ended March 31, 2014, compared to net securities gains of $1.0 million for the three months ended March 31, 2013. Included in the first three months of 2014 is a $100 thousand other-than-temporary-impairment charge on one limited partnership investment.

Service charges and overdraft fees on deposit accounts, our largest source of noninterest income, continued to be challenged. Service charges and overdraft fees were $11.1 million for both the three months ended March 31, 2014 and the three months ended March 31, 2013, respectively. Included in the first quarter of 2014 is $1.0 million from the newly acquired Bank of America branches.

Debit card and ATM fees decreased $0.1 million to $5.7 million for the three months ended March 31, 2014, as compared to $5.8 million for the three months ended March 31, 2013. The newly acquired Bank of America branches contributed $0.5 million during the first quarter of 2014.

Mortgage banking revenue was $0.6 million for the three months ended March 31, 2014, compared to $1.3 million for the three months ended March 31, 2013. Mortgage production slowed in the first quarter of 2014 as higher interest rates stymied refinance activity and bad weather led to low levels of mortgage production, among other factors. As a result, mortgage banking revenue decreased as we sold less production to the secondary market in 2014.

Insurance premiums and commissions increased $1.1 million to $12.0 million for the three months ended March 31, 2014, as compared to $10.9 million for the three months ended March 31, 2013, primarily as a result of higher contingency income and commissions on property and casualty insurance.

During the third quarter of 2012, Old National announced plans to sell the deposits of nine banking centers in southern Illinois and western Kentucky. The sales closed during the first quarter of 2013. Deposits at the time of sale were approximately $150.1 million and we received a deposit premium of $2.2 million on the sales.

Other income increased $1.4 million for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013. The increase is primarily a result of a $1.7 million increase in gain on sales of foreclosed properties.

Noninterest Income Related to Covered Assets

The indemnification asset, on the acquisition date, reflects the reimbursements expected to be received from the FDIC. Deterioration in our expectation of credit quality of the OREO would immediately increase the basis of the indemnification asset while deterioration in the expected credit quality of the loans would increase the basis of the indemnification asset prospectively. The offset for both OREO and loans is recorded through the consolidated statement of income. Increases in the credit quality or cash flows of loans (reflected as an adjustment to yield and accreted into income over the remaining life of the loans) decrease the basis of the indemnification asset, with the decrease being amortized into income over the same period or the life of the loss share agreements, whichever is shorter.

For the first quarter of 2014, adjustments to the FDIC indemnification asset resulted in noninterest expense of $7.3 million. This compares to noninterest expense of $2.3 million during the first quarter of 2013. The increase in expense is primarily the result of lower levels of expected loss claims on covered loans and other real estate in 2014.

At March 31, 2014, $38.2 million of the remaining indemnification asset is expected to be amortized and reported in noninterest income over the next 30 months.

Noninterest Expense

Noninterest expense for the three months ended March 31, 2014, totaled $88.3 million, a decrease of $1.9 million, or 2.1%, from the $90.2 million recorded for the three months ended March 31, 2013. Included in the three months ended March 31, 2014 is approximately $2.8 million of operating costs related to 24 branches acquired from Bank of America during the third quarter of 2013. Also included in the three months ended March 31, 2014 is approximately $2.5 million of expense related to the upcoming acquisitions of Tower and United. Offsetting these increases were decreases in occupancy expense, amortization of intangibles and other expense.

Salaries and benefits is the largest component of noninterest expense. For the three months ended March 31, 2014, salaries and benefits were $51.4 million compared to $51.0 million for the three months ended March 31, 2013. Included in the first quarter of 2014 is $1.8 million of salaries and benefits expense associated with the newly acquired Bank of America bank branches. Also included in the first quarter of 2014 is a $0.6 million decrease in performance-based incentive compensation and a $0.7 million decrease in pension expense.

Occupancy expense was $10.9 million for the three months ended March 31, 2014, compared to $12.1 million for the three months ended March 31, 2013. A decrease in real estate tax expense combined with a decrease in rent expense associated with our recent branch closures and consolidations were the primary reasons for the decrease in occupancy expense.

Marketing expense increased $1.0 million for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013. Marketing expense increased primarily as a result of our entry into the new Michigan market.

Amortization of intangibles was $1.8 million for the three months ended March 31, 2014, compared to $2.5 million for the three months ended March 31, 2013. Included in 2013 was a $0.6 million adjustment to core deposit intangible amortization expense related to the sale of the nine branches.

Other expense for the three months ended March 31, 2014, totaled $2.8 million, a decrease of $1.3 million compared to the three months ended March 31, 2013. Included in expense for the three months ended March 31, 2013 was approximately $0.7 million for loss on extinguishment of debt related to the termination of a $25.0 million FHLB advance. Included in the first three months of 2014 is a reduction of $0.5 million in the provision for unfunded commitments compared to the first three months of 2013.

Noninterest Expense Related to Covered Assets

Noninterest expense related to covered assets are included in OREO expense, legal and professional expense and other covered asset-related expenses, and may be subject to FDIC reimbursement. Expenses must meet certain FDIC criteria in order for the expense amounts to be reimbursed. Certain amounts reflected in these balances may not be reimbursed by the FDIC if they do not meet the criteria.

Approximately $129 thousand, or twenty percent of the expense associated with holding and maintaining covered assets assumed in the Integra acquisition, are not reimbursable by the FDIC and were recorded as noninterest expense during the first quarter of 2014. The remaining eighty percent was recorded as a receivable from the FDIC. The reversal of additional non-reimbursable expenses of $13 thousand associated with holding and maintaining covered assets assumed in the Integra acquisition were also recorded in noninterest expense during the first quarter of 2014.

Approximately $123 thousand, or twenty percent of the expense associated with holding and maintaining covered assets assumed in the Integra acquisition, are not reimbursable by the FDIC and were recorded as noninterest expense during the first quarter of 2013. The remaining eighty percent was recorded as a receivable from the FDIC. Additional non-reimbursable expenses of $122 thousand associated with holding and maintaining covered assets assumed in the Integra acquisition were also recorded in noninterest expense during the first quarter of 2013.

Provision for Income Taxes

We record a provision for income taxes currently payable and for income taxes payable or benefits to be received in the future, which arise due to timing differences in the recognition of certain items for financial statement and income tax purposes. The major difference between the effective tax rate applied to our financial statement income and the federal statutory tax rate is caused by interest on tax-exempt securities and loans. The provision for income taxes, as a percentage of pre-tax income, was 25.9% for the three months ended March 31, 2014, compared to 30.3% for the three months ended March 31, 2013. In accordance with ASC 740-270, Accounting for Interim Reporting, the provision for income taxes was recorded at March 31, 2014 based on the current estimate of the effective annual rate. The lower tax rate in the first three months of 2014 is the result of lower projected pre-tax book income for 2014, as well as lower projected state taxes. See Note 16 to the consolidated financial statements for additional information.

FINANCIAL CONDITION

Overview

At March 31, 2014, our assets were $9.545 billion, a 1.3% decrease compared to March 31, 2013 assets of $9.674 billion, and a decrease of 0.4% compared to December 31, 2013 assets of $9.582 billion. The decrease in assets is primarily the result of decreases in the investment portfolio, the covered loan segment of the loan portfolio, and the FDIC indemnification asset.

Earning Assets

Our earning assets are comprised of investment securities, portfolio loans, loans held for sale, money market investments, interest earning accounts with the Federal Reserve and trading securities. Earning assets were $8.288 billion at March 31, 2014, a decrease of 1.7% from March 31, 2013.

Investment Securities

We classify the majority of our investment securities as available-for-sale to give management the flexibility to sell the securities prior to maturity if needed, based on fluctuating interest rates or changes in our funding requirements. However, we do have $32.0 million of 15- and 20-year fixed-rate mortgage-backed securities, $169.8 million of U.S. government-sponsored entity and agency securities and $577.5 million of state and political subdivision securities in our held-to-maturity investment portfolio at March 31, 2014. During the third quarter of 2013, state and political subdivision securities with a fair value of $357.8 million were transferred from the available-for-sale portfolio to the held-to-maturity portfolio. We moved these securities to our held-to-maturity portfolio to better align with the percentage of these securities held by our peers and to protect our tangible common equity against rising interest rates.

At March 31, 2014, the total investment securities portfolio was $3.193 billion compared to $3.282 billion at March 31, 2013, a decrease of $89.3 million or 2.7%. Investment securities increased $13.5 million compared to December 31, 2013, an increase of 0.4%. Investment securities represented 38.5% of earning assets at March 31, 2014, compared to 38.9% at March 31, 2013, and 38.4% at December 31, 2013. A decrease in agency mortgage-backed securities from March 31, 2013 was the primary reason for the decrease in the investment portfolio. Stronger commercial loan demand in the future and management’s decision to deleverage the balance sheet could result in a further reduction in the securities portfolio. As of March 31, 2014, management does not intend to sell any securities with an unrealized loss position and does not believe we will be required to sell such securities.

The investment securities available-for-sale portfolio had net unrealized losses of $22.5 million at March 31, 2014, an increase of $71.7 million compared to net unrealized gains of $49.2 million at March 31, 2013, and a decrease of $11.6 million compared to net unrealized losses of $34.1 million at December 31, 2013. The decline in value from March 31, 2013 is a result of the increase in interest rates that began during the second quarter of 2013. Included in the first quarter of 2014 is a $100 thousand other-than-temporary-impairment charge on one limited partnership investment. See the consolidated statements of comprehensive income for the impact of other-than-temporary-impairment in other comprehensive income and Note 6 to the consolidated financial statements for details on management’s evaluation of securities for other-than-temporary-impairment.

The investment portfolio had an average duration of 4.52 at March 31, 2014, compared to 4.06 at March 31, 2013, and 4.84 at December 31, 2013. Effective duration measures the percentage change in value of the portfolio in response to a change in interest rates. Generally, there is more uncertainty in interest rates over a longer average maturity, resulting in a higher duration percentage. The annualized average yields on investment securities, on a taxable equivalent basis, were 2.94% for the three months ended March 31, 2014, compared to 2.96% for the three months ended March 31, 2013, and 2.87% for the three months ended December 31, 2013.

Residential Loans Held for Sale

Residential loans held for sale were $6.2 million at March 31, 2014, compared to $14.6 million at March 31, 2013, and $7.7 million at December 31, 2013. At March 31, 2014, loans held for sale was made up entirely of mortgage loans held for immediate sale in the secondary market with servicing released. These loans are sold at or prior to origination at a contracted price to an outside investor on a best efforts basis and remain on the Company’s balance sheet for a short period of time (typically 30 to 60 days). These loans are sold without recourse and Old National has experienced no material losses. Mortgage originations are subject to volatility due to interest rates and home sales.

We have elected the fair value option under FASB ASC 825-10 (SFAS No. 159) prospectively for residential loans held for sale. The aggregate fair value exceeded the unpaid principal balance by $0.1 million and $0.4 million as of March 31, 2014 and March 31, 2013, respectively. At December 31, 2013, the aggregate fair value exceeded the unpaid principal balances by $0.1 million.

Finance Leases Held for Sale

At June 30, 2013, Old National had taxable finance leases held for sale of $11.6 million. These leases were transferred from the commercial loan category at fair value and a loss of $0.2 million was recognized. The portfolio of leases held for sale had an average maturity of 2.7 years and interest rates ranging from 3.57% to 10.22%. The leases held for sale were to a variety of borrowers, with various types of equipment securing the leases, and all of the leases were current. The leases held for sale were sold in the third quarter of 2013. As of March 31, 2014, Old National does not intend to sell its nontaxable leases.

Commercial and Commercial Real Estate Loans

Commercial and commercial real estate loans, including covered loans, are the second largest classification within earning assets, representing 31.6% of earning assets at March 31, 2014, a decrease from 32.6% at March 31, 2013, and a decrease from 31.9% at December 31, 2013. At March 31, 2014, commercial and commercial real estate loans, including covered loans, were $2.616 billion, a decrease of $129.9 million since March 31, 2013, and a decrease of $30.1 million since December 31, 2013. At June 30, 2013, we had taxable finance leases held for sale of $11.6 million. These leases were transferred from the commercial loan category at fair value and a loss of $0.2 million was recognized. These leases were sold in the third quarter of 2013 with no additional loss. Excluding covered loans and commercial leases, commercial and commercial real estate loans increased $6.3 million from March 2013.

Consumer Loans

At March 31, 2014, consumer loans, including automobile loans, personal and home equity loans and lines of credit, increased $94.4 million or 9.6% compared to March 31, 2013, and increased $24.2 million or 2.3% since December 31, 2013.

Residential Real Estate Loans

At March 31, 2014, residential real estate loans, including covered loans, held in our loan portfolio were $1.383 billion, a decrease of $4.8 million, or 0.3%, from December 31, 2013 and a decrease of $4.2 million, or 0.3%, from March 31, 2013.

During the third quarter of 2013, Old National sold approximately $96.9 million of residential real estate loans as part of its effort to reduce interest rate risk in the loan portfolio. All of the loans sold were FNMA conforming loans.

Covered Assets

On July 29, 2011, Old National acquired the banking operations of Integra Bank N.A. (“Integra”) in an FDIC assisted transaction. We entered into separate loss sharing agreements with the FDIC providing for specified credit loss protection for substantially all acquired single family residential loans, commercial loans, and other real estate owned (“OREO”). Loans comprise the majority of the assets acquired and are subject to loss share agreements with the FDIC whereby Old National is indemnified against 80% of losses up to $275.0 million, losses in excess of $275.0 million up to $467.2 million at 0% reimbursement, and 80% of losses in excess of $467.2 million with respect to covered assets. As of March 31, 2014, we do not expect losses to exceed $275.0 million.

A summary of covered assets is presented below:


	March 31,		December 31,
(dollars in thousands)	2014		2013
Loans, net of discount & allowance	$	188,147	$	212,428
Other real estate owned		12,918		13,670

Total covered assets	$	201,065	$	226,098

FDIC Indemnification Asset

Because the FDIC will reimburse Old National for losses incurred on certain acquired loans, an indemnification asset is recorded at fair value at the acquisition date. The indemnification asset is recognized at the same time as the indemnified loans, and measured on the same basis, subject to collectibility or contractual limitations. The indemnification asset, on the acquisition date, reflects the reimbursements expected to be received from the FDIC, using an appropriate discount rate, which reflects counterparty credit risk and other uncertainties. Reimbursement claims are submitted to the FDIC and the receivable is reduced when the FDIC pays the claim. At March 31, 2014, the FDIC loss sharing asset was $65.7 million and was comprised of a $60.6 million FDIC indemnification asset and a $5.1 million FDIC loss share receivable. The loss share receivable represents actual incurred losses where reimbursement has not yet been received from the FDIC. The indemnification asset represents future cash flows we expect to collect from the FDIC under the loss sharing agreements and the amount related to the estimated improvements in cash flow expectations that are being amortized over the same period for which those improved cash flows are being accreted into income. At March 31, 2014, $22.4 million of the FDIC indemnification asset is related to expected indemnification payments and $38.2 million is expected to be amortized and reported in noninterest income as an offset to future accreted interest income.

A summary of activity for the indemnification asset and loss share receivable is presented below:


(dollars in thousands)	2014			2013
Balance at January 1,	$	88,513		$	116,624
Adjustments not reflected in income:
Cash received from FDIC		(15,989	)		(3,923	)
Loan expenses to be reimbursed		598			380
Other		(80	)		(918	)
Adjustments reflected in income:
(Amortization) accretion		(5,203	)		(1,612	)
Higher (lower) loan loss expectations		(412	)		120
Write-downs/(gain) on sale of other real estate		(1,728	)		372
Recovery amounts due to FDIC		—			(1,243	)
Other		—			61

Balance at March 31,	$	65,699		$	109,861

Goodwill and Other Intangible Assets

Goodwill and other intangible assets at March 31, 2014, totaled $376.8 million, an increase of $11.3 million compared to $365.5 million at March 31, 2013, and a decrease of $1.9 million compared to $378.7 million at December 31, 2013. During the third quarter of 2013, we recorded $16.8 million of goodwill and other intangible assets associated with the acquisition of 24 retail bank branches from Bank of America, all of which is included in the “Banking” column for segment reporting. During the second quarter of 2013, Old National recorded $0.6 million of goodwill primarily related to the final pension settlement associated with Indiana Community Bancorp. This was allocated to the “Banking” segment. During the fourth quarter of 2013, we increased customer business relationships by $1.3 million related to the purchase of an insurance book of business, which is included in the “Insurance” segment. The decrease in other intangible assets from December 31, 2013 is primarily attributable to amortization expense associated with other intangible assets.

Assets Held for Sale

Assets held for sale were $9.0 million at March 31, 2014 compared to $9.1 million at December 31, 2013. Included in assets held for sale are four facilities associated with the Monroe Bancorp acquisition.

Other Assets

Other assets have decreased $35.1 million, or 14.9%, since December 31, 2013 primarily a result of decreases in deferred tax assets, prepaid FDIC assessment expense and the fair value of derivative financial instruments.

Funding

Total funding, comprised of deposits and wholesale borrowings, was $8.175 billion at March 31, 2014, a decrease of 0.9% from $8.247 billion at March 31, 2013, and a decrease of 0.7% from $8.230 billion at December 31, 2013. Included in total funding were deposits of $7.258 billion at March 31, 2014, an increase of $191.8 million, or 2.7%, compared to March 31, 2013, and an increase of $47.3 million, or 0.7%, compared to December 31, 2013. The increase from March 31, 2013 is primarily attributable to the $482.1 million of deposits from the Bank of America acquisition. Partially offsetting this increase is the $178.3 million of deposits that were sold in conjunction with our branch sales in the first and fourth quarter of 2013 along with a decrease in higher cost certificates of deposit that reached maturity. Noninterest-bearing deposits increased 3.8%, or $74.4 million, compared to March 31, 2013. Money market deposits increased 51.3%, or $151.2 million. NOW deposits increased 5.8% or $97.9 million, while savings deposits increased 5.1%, or $97.7 million, compared to March 31, 2013. Time deposits decreased 19.3% or $229.4 million compared to March 31, 2013. Year over year we experienced an increase in noninterest-bearing demand deposits.

We use wholesale funding to augment deposit funding and to help maintain our desired interest rate risk position. At March 31, 2014, wholesale borrowings, including short-term borrowings and other borrowings, decreased $263.9 million, or 22.3%, from March 31, 2013 and decreased $101.8 million, or 10.0%, from December 31, 2013, respectively. Wholesale funding as a percentage of total funding was 11.2% at March 31, 2014, compared to 14.3% at March 31, 2013, and 12.4% at December 31, 2013. Wholesale funding increased early in 2013 in anticipation of the pending branch acquisition from Bank of America. The deposit funding assumed in the July 2013 transaction replaced the majority of the increase in short-term and other borrowings that had occurred earlier in 2013. Over the past year, we have reduced the cost of other borrowings by changing the composition of other borrowings. During 2013, we terminated $50.0 million of FHLB advances and restructured $33.4 million of FHLB advances.

Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities decreased $42.4 million, or 18.7%, since March 31, 2013 primarily as a result of decreases in accrued pension expense and tax liabilities combined with fluctuations in the fair value of derivative financial instruments.

Capital

Shareholders’ equity totaled $1.185 billion at March 31, 2014, compared to $1.200 billion at March 31, 2013, and $1.163 billion at December 31, 2013.

We paid cash dividends of $0.11 per share for the three months ended March 31, 2014, which reduced equity by $11.0 million. We paid cash dividends of $0.10 per share for the three months ended March 31, 2013, which reduced equity by $10.1 million. We repurchased shares of our stock, reducing shareholders’ equity by $1.6 million during the three months ended March 31, 2014, and $1.2 million during the three months ended March 31, 2013. The repurchases related primarily to our employee stock based compensation plans. The change in unrealized losses on investment securities increased equity by $7.4 million during the three months ended March 31, 2014, and decreased equity by $9.5 million during the three months ended March 31, 2013. Shares issued for reinvested dividends, stock options, restricted stock and stock compensation plans increased shareholders’ equity by $2.1 million during the three months ended March 31, 2014, compared to $1.4 million during the three months ended March 31, 2013.

Capital Adequacy

Old National and the banking industry are subject to various regulatory capital requirements administered by the federal banking agencies. At March 31, 2014, Old National and its bank subsidiary exceeded the regulatory minimums and Old National Bank met the regulatory definition of well-capitalized based on the most recent regulatory definition. To be categorized as well-capitalized, the bank subsidiary must maintain at least a total risk-based capital ratio of 10.0%, a Tier 1 risk-based capital ratio of 6.0% and a Tier 1 leverage ratio of 5.0%. Impacting regulatory capital ratios at March 31, 2014 is $13.3 million of goodwill and $3.5 million of core deposit intangibles recorded in conjunction with the Bank of America retail bank branch acquisition on July 12, 2013.

As of March 31, 2014, Old National’s consolidated capital position remains strong as evidenced by the following comparisons of key industry ratios.


	Regulatory
	Guidelines			March 31,						December 31,
	Minimum			2014			2013			2013
Risk-based capital:
Tier 1 capital to total avg assets (leverage ratio)		4.00	%		9.32	%		8.71	%		8.92	%
Tier 1 capital to risk-adjusted total assets		4.00			14.79			14.10			14.32
Total capital to risk-adjusted total assets		8.00			15.66			15.14			15.19
Shareholders’ equity to assets		N/A			12.42			12.40			12.13

As of March 31, 2014, Old National Bank, Old National’s bank subsidiary, maintained a strong capital position as evidenced by the following comparisons of key industry ratios.


	Regulatory			Well
	Guidelines			Capitalized			March 31,						December 31,
	Minimum			Guidelines			2014			2013			2013
Risk-based capital:
Tier 1 capital to total avg assets (leverage ratio)		4.00	%		5.00	%		7.87	%		8.00	%		7.35	%
Tier 1 capital to risk-adjusted total assets		4.00			6.00			12.46			12.91			11.80
Total capital to risk-adjusted total assets		8.00			10.00			13.34			13.96			12.67

RISK MANAGEMENT

Overview

Management, with the oversight of the Board of Directors, has in place company-wide structures, processes, and controls for managing and mitigating risk. Our Chief Risk Officer is independent of management and reports directly to the Chair of the Board’s Enterprise Rick Management committee. The following discussion addresses the three major risks we face: credit, market, and liquidity.

Credit Risk

Credit risk represents the risk of loss arising from an obligor’s inability or failure to meet contractual payment or performance terms. Our primary credit risks result from our investment and lending activities.

Investment Activities

While the overall residential real estate market has stabilized, we carry a higher exposure to loss with certain of our non-agency collateralized mortgage obligations. Of the four non-agency collateralized mortgage obligations we carried at March 31, 2014, three were rated below investment grade. The total market value of these four securities was $16.7 million at March 31, 2014 and represents less than 1% of our available-for-sale securities portfolio. The unrealized gain on these securities at March 31, 2014 was approximately $0.6 million. Deterioration in the performance of the underlying loan collateral could result in deterioration in the performance of our asset-backed securities. During 2013, one non-agency mortgage-backed security that was below investment grade paid down and two non-agency mortgage-backed securities were sold. There was no other-than-temporary-impairment recorded in either the first quarter of 2014 or 2013 on these securities.

We also carry a higher exposure to loss in our pooled trust preferred securities, which are collateralized debt obligations, due to illiquidity in that market and the performance of the underlying collateral. At March 31, 2014, we had pooled trust preferred securities with a fair value of approximately $6.8 million, or 0.3% of the available-for-sale securities portfolio. These securities remained classified as available-for-sale and at March 31, 2014, the unrealized loss on our pooled trust preferred securities was approximately $11.3 million. There was no other-than-temporary-impairment recorded in either the first quarter of 2014 or 2013 on these securities.

The remaining mortgage-backed securities are backed by U.S. government-sponsored or federal agencies. Municipal bonds, corporate bonds and other debt securities are evaluated by reviewing the credit-worthiness of the issuer and general market conditions. We do not have the intent to sell these securities and it is likely that we will not be required to sell these securities before their anticipated maturity or redemption.

Included in the held-to-maturity category at March 31, 2014 are approximately $32.0 million of agency mortgage-backed securities and $577.5 million of municipal securities at amortized cost. During the third quarter of 2013, state and political subdivision securities with a fair value of $357.8 million were transferred from the available-for-sale portfolio to the held-to-maturity portfolio to better align with the percentage of these securities held by our peers and to protect our tangible common equity against rising interest rates.

Counterparty Exposure

Counterparty exposure is the risk that the other party in a financial transaction will not fulfill its obligation. We define counterparty exposure as nonperformance risk in transactions involving federal funds sold and purchased, repurchase agreements, correspondent bank relationships, and derivative contracts with companies in the financial services industry. Old National’s net counterparty exposure was an asset of $698.3 million at March 31, 2014.

Lending Activities

Commercial

Commercial and industrial loans are made primarily for the purpose of financing equipment acquisition, expansion, working capital, and other general business purposes. Lease financing consists of direct financing leases and are used by commercial customers to finance capital purchases ranging from computer equipment to transportation equipment. The credit decisions for these transactions are based upon an assessment of the overall financial capacity of the applicant. A determination is made as to the applicant’s ability to repay in accordance with the proposed terms as well as an overall assessment of the risks involved. In addition to an evaluation of the applicant’s financial condition, a determination is made of the probable adequacy of the primary and secondary sources of repayment, such as additional collateral or personal guarantees, to be relied upon in the transaction. Credit agency reports of the applicant’s credit history supplement the analysis of the applicant’s creditworthiness.

Commercial mortgages and construction loans are offered to real estate investors, developers, and builders primarily domiciled in the geographic market areas we serve, primarily Indiana, southeast Illinois, western Kentucky and southwestern Michigan. These loans are secured by first mortgages on real estate at loan-to-value (“LTV”) margins deemed appropriate for the property type, quality, location and sponsorship. Generally, these LTV ratios do not exceed 80%. The commercial properties are predominantly non-residential properties such as retail centers, apartments, industrial properties and, to a lesser extent, more specialized properties. Substantially all of our commercial real estate loans are secured by properties located in our primary market area.

In the underwriting of our commercial real estate loans, we obtain appraisals for the underlying properties. Decisions to lend are based on the economic viability of the property and the creditworthiness of the borrower. In evaluating a proposed commercial real estate loan, we primarily emphasize the ratio of the property’s projected net cash flows to the loan’s debt service requirement. The debt service coverage ratio normally is not less than 120% and it is computed after deduction for a vacancy factor and property expenses as appropriate. In addition, a personal guarantee of the loan or a portion thereof is often required from the principal(s) of the borrower. We require title insurance insuring the priority of our lien, fire, and extended coverage casualty insurance, and flood insurance, if appropriate, in order to protect our security interest in the underlying property. In addition, business interruption insurance or other insurance may be required.

Construction loans are underwritten against projected cash flows derived from rental income, business income from an owner-occupant or the sale of the property to an end-user. We may mitigate the risks associated with these types of loans by requiring fixed-price construction contracts, performance and payment bonding, controlled disbursements, and pre-sale contracts or pre-lease agreements.

Consumer

We offer a variety of first mortgage and junior lien loans to consumers within our markets, with residential home mortgages comprising our largest consumer loan category. These loans are secured by a primary residence and are underwritten using traditional underwriting systems to assess the credit risks of the consumer. Decisions are primarily based on LTV ratios, debt-to-income (“DTI”) ratios, liquidity and credit scores. A maximum LTV ratio of 80% is generally required, although higher levels are permitted with mortgage insurance or other mitigating factors. We offer fixed rate mortgages and variable rate mortgages with interest rates that are subject to change every year after the first, third, fifth, or seventh year, depending on the product and are based on fully-indexed rates such as the London Interbank Offered Rate (“LIBOR”). We do not offer interest-only loans, payment-option facilities, sub-prime loans, or any product with negative amortization.

Home equity loans are secured primarily by second mortgages on residential property of the borrower. The underwriting terms for the home equity product generally permits borrowing availability, in the aggregate, up to 90% of the appraised value of the collateral property at the time of origination. We offer fixed and variable rate home equity loans, with variable rate loans underwritten at fully-indexed rates. Decisions are primarily based on LTV ratios, DTI ratios, liquidity, and credit scores. We do not offer home equity loan products with reduced documentation.

Automobile loans include loans and leases secured by new or used automobiles. We originate automobile loans and leases primarily on an indirect basis through selected dealerships. We require borrowers to maintain collision insurance on automobiles securing consumer loans, with us listed as loss payee. Our procedures for underwriting automobile loans include an assessment of an applicant’s overall financial capacity, including credit history and the ability to meet existing obligations and payments on the proposed loan. Although an applicant’s creditworthiness is the primary consideration, the underwriting process also includes a comparison of the value of the collateral security to the proposed loan amount.

Asset Quality

Community-based lending personnel, along with region-based independent underwriting and analytic support staff, extend credit under guidelines established and administered by our Enterprise Risk Committee. This committee, which meets quarterly, is made up of outside directors. The committee monitors credit quality through its review of information such as delinquencies, credit exposures, peer comparisons, problem loans and charge-offs. In addition, the committee reviews and approves recommended loan policy changes to assure it remains appropriate for the current lending environment.

We lend primarily to small- and medium-sized commercial and commercial real estate clients in various industries including manufacturing, agribusiness, transportation, mining, wholesaling and retailing. At March 31, 2014, we had no concentration of loans in any single industry exceeding 10% of our portfolio and had no exposure to foreign borrowers or sovereign debt. Our policy is to concentrate our lending activity in the geographic market areas we serve, primarily Indiana, southeast Illinois, western Kentucky and southwest Michigan. We are experiencing a slow and gradual improvement in the economy of our principal markets. Management expects that trends in under-performing, criticized and classified loans will be influenced by the degree to which the economy strengthens or weakens.

During the third quarter of 2011, Old National acquired the banking operations of Integra Bank in an FDIC assisted transaction. As of March 31, 2014, acquired loans totaled $235.0 million and there was $12.9 million of other real estate owned. The Company entered into separate loss sharing agreements with the FDIC providing for specified credit loss protection for substantially all acquired single family residential loans, commercial loans, and other real estate owned. In accordance with accounting for business combinations, there was no allowance brought forward on any of the acquired loans, as the credit losses evident in the loans were included in the determination of the fair value of the loans at the acquisition date. At March 31, 2014, approximately $188.1 million of loans, net of discount and allowance, and $12.9 million of other real estate owned are covered by the loss sharing agreements. Under the terms of the loss sharing agreements, the FDIC will reimburse Old National for 80% of losses up to $275.0 million. These covered assets are included in our summary of under-performing, criticized and classified assets found below.

Summary of under-performing, criticized and classified assets:


	March 31,						December 31,
(dollars in thousands)	2014			2013			2013
Nonaccrual loans
Commercial	$	27,480		$	34,354		$	28,635
Commercial real estate		41,645			95,794			52,363
Residential real estate		10,561			9,764			10,333
Consumer		5,128			5,389			5,318
Covered loans (5)		27,289			65,171			31,793

Total nonaccrual loans (6)		112,103			210,472			128,442
Renegotiated loans not on nonaccrual
Noncovered loans		20,224			9,101			15,596
Covered loans (5)		165			35			148
Past due loans (90 days or more and still accruing)
Commercial		—			384			—
Commercial real estate		79			256			—
Residential real estate		42			1,075			35
Consumer		72			243			189
Covered loans (5)		—			30			14

Total past due loans		193			1,988			238
Other real estate owned		7,629			9,103			7,562
Other real estate owned, covered (5)		12,918			26,114			13,670

Total under-performing assets	$	153,232		$	256,813		$	165,656

Classified loans (includes nonaccrual, renegotiated, past due 90 days and other problem loans)	$	170,498		$	221,742		$	159,783
Classified loans, covered (5)		30,385			81,399			35,500
Other classified assets (3)		42,021			57,017			43,861
Criticized loans		112,307			127,252			135,401
Criticized loans, covered (5)		7,512			14,240			8,421

Total criticized and classified assets	$	362,723		$	501,650		$	382,966

Asset Quality Ratios including covered assets:
Non-performing loans/total loans (1) (2)		2.61	%		4.30	%		2.84	%
Under-performing assets/total loans and other real estate owned (1)		3.01			4.99			3.25
Under-performing assets/total assets		1.61			2.65			1.73
Allowance for loan losses/under-performing assets (4)		31.03			20.82			28.46
Allowance for loan losses/nonaccrual loans (6)		42.42			25.41			36.71
Asset Quality Ratios excluding covered assets:
Non-performing loans/total loans (1) (2)		2.15			3.23			2.31
Under-performing assets/total loans and other real estate owned (1)		2.31			3.45			2.46
Under-performing assets/total assets		1.18			1.71			1.25
Allowance for loan losses/under-performing assets (4)		36.81			28.59			34.78
Allowance for loan losses/nonaccrual loans (6)		48.98			32.56			43.19

(1)	Loans exclude residential loans held for sale and leases held for sale.

(2)	Non-performing loans include nonaccrual and renegotiated loans.

(3)	Includes 3 pooled trust preferred securities, 3 non-agency mortgage-backed securities and 4 corporate securities at March 31, 2014.

(4)	Because the acquired loans from Monroe, Integra and Indiana Community were recorded at fair value in accordance with ASC 805 at the date of acquisition, the credit risk is incorporated in the fair value recorded. No allowance for loan losses is recorded on the acquisition date.

(5)

The Company entered into separate loss sharing agreements with the FDIC providing for specified credit loss protection for substantially all acquired single family residential loans, commercial loans and other real estate owned. At March 31, 2014, we expect eighty percent of any losses incurred on these covered assets to be reimbursed to Old National by the FDIC.

(6)	Includes approximately $ 30.4 million of purchased credit impaired loans that are categorized as nonaccrual because the collection of principal or interest is doubtful. These loans are accounted for under FASB ASC 310-30 and accordingly treated as performing assets.

Under-performing assets totaled $153.2 million at March 31, 2014, a decrease of $103.6 million compared to $256.8 million at March 31, 2013, and a decrease of $12.5 million compared to $165.7 million at March 31, 2013. As a percent of total loans and other real estate owned, under-performing assets, at March 31, 2014, were 3.01%, a decrease from the March 31, 2013 ratio of 4.99% and a decrease from the December 31, 2013 ratio of 3.25%. At March 31, 2014, under-performing assets related to covered assets acquired in the Integra Bank acquisition were approximately $40.4 million, which included approximately $27.3 million of nonaccrual loans, $0.2 million of past due loans and renegotiated loans and $12.9 million of other real estate owned. The nonaccrual covered loans are categorized in this manner because the collection of principal or interest is doubtful. However, they are accounted for under FASB ASC 310-30 and accordingly treated as performing assets.

Nonaccrual loans were $112.1 million at March 31, 2014, compared to $210.5 million at March 31, 2013, and $128.4 million at December 31, 2013. Nonaccrual loans decreased primarily as a result of decreases in our acquired covered nonaccrual loans and our commercial real estate loan portfolio. Nonaccrual loans, however, have remained at elevated levels since the acquisition of MonroeBancorp and the FDIC-assisted acquisition of Integra in 2011. Because the acquired loans from Monroe Bancorp, Integra Bank, Indiana Community Bancorp and the Bank of America branches were recorded at fair value in accordance with ASC 805 at the date of acquisition, the credit risk is incorporated in the fair value recorded. No allowance for loan losses is recorded on the acquisition date. As a percent of nonaccrual loans (excluding covered loans), the allowance for loan losses was 48.98% at March 31, 2014, compared to 32.56% at March 31, 2013 and 43.19% at December 31, 2013. Included in nonaccrual loans at March 31, 2014 and December 31, 2013 were $30.4 million and $38.3 million, respectively, of purchased credit impaired loans that were included in the nonaccrual category because the collection of principal or interest is doubtful. However, they are accounted for under FASB ASC 310-30 and accordingly treated as performing assets. We would expect our nonaccrual loans to remain at elevated levels until management can work through and resolve these purchased credit impaired loans.

Total classified and criticized assets were $362.7 million at March 31, 2014, a decrease of $138.9 million from March 31, 2013, and a decrease of $20.2 million from December 31, 2013. Other classified assets include $42.0 million, $57.0 million and $43.9 million of investment securities that fell below investment grade rating at March 31, 2014, March 31, 2013 and December 31, 2013, respectively.

Loans modified in a troubled debt restructuring are typically placed on nonaccrual status until the Company determines the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate a period of performance according to the restructured terms for six months.

If we are unable to resolve a nonperforming loan issue the credit will be charged off when it is apparent there will be a loss. For large commercial type loans, each relationship is individually analyzed for evidence of apparent loss based on quantitative benchmarks or subjectively based upon certain events or particular circumstances. It is our policy to charge off small commercial loans scored through our small business credit center with contractual balances under $250,000 that have been placed on nonaccrual status or became ninety days or more delinquent, without regard to the collateral position. For residential and consumer loans, a charge off is recorded at the time foreclosure is initiated or when the loan becomes 120 to 180 days past due, whichever is earlier.

For commercial and industrial troubled debt restructurings, an allocated reserve is established within the allowance for loan losses for the difference between the carrying value of the loan and its computed fair value. To determine the fair value of the loan, one of the following methods is selected: (1) the present value of expected cash flows discounted at the loan’s original effective interest rate, (2) the loan’s observable market price, or (3) the fair value of the collateral value, if the loan is collateral dependent. The allocated reserve is established as the difference between the carrying value of the loan and the collectable value. If there are significant changes in the amount or timing of the loan’s expected future cash flows, impairment is recalculated and the valuation allowance is adjusted accordingly.

For consumer and residential troubled debt restructurings, an additional amount is added to the loan loss reserve that represents the difference in the present value of the cash flows between the original terms and the new terms of the modified loan, using the original effective interest rate of the loan as a discount rate.

At March 31, 2014, our troubled debt restructurings consisted of $21.6 million of commercial loans, $21.0 million of commercial real estate loans, $1.7 million of consumer loans and $2.3 million of residential loans, totaling $46.6 million. Approximately $26.2 million of the troubled debt restructuring at March 31, 2014 were included with nonaccrual loans. As of March 31, 2014, Old National had allocated specific reserves of $4.4 million to commercial loans and $1.8 million to commercial real estate loans for loans that have been modified in troubled debt restructurings. At December 31, 2013, our troubled debt restructurings consisted of $22.5 million of commercial loans, $22.6 million of commercial real estate loans, $1.4 million of consumer loans and $2.4 million of residential loans, totaling $48.9 million. Approximately $33.1 million of the troubled debt restructuring at December 31, 2013 were included with nonaccrual loans. As of December 31, 2013, Old National had allocated specific reserves of $2.1 million to commercial loans and $2.0 million to commercial real estate loans for loans that have been modified in troubled debt restructurings.

The terms of certain other loans were modified during the three months ended March 31, 2014 that did not meet the definition of a troubled debt restructuring. It is our process to review all classified and criticized loans that, during the period, have been renewed, have entered into a forbearance agreement, have gone from principal and interest to interest only, or have extended the maturity date. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on its debt in the foreseeable future without the modification. The evaluation is performed under our internal underwriting policy. We also evaluate whether a concession has been granted or if we were adequately compensated through a market interest rate, additional collateral or a bona fide guarantee. We also consider whether the modification was insignificant relative to the other terms of the agreement or if the delay in a payment was 90 days or less.

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, our policy also permits for loans to be removed from troubled debt restructuring status in the years following the restructuring if the following two conditions are met: (1) The restructuring agreement specifies an interest rate equal to or greater than the rate that the Company was willing to accept at the time of the restructuring for a new loan with comparable risk, and (2) the loan is not impaired based on the terms specified by the restructuring agreement.

Allowance for Loan Losses and Reserve for Unfunded Commitments

Loan charge-offs, net of recoveries, totaled $(0.4) million for the three months ended March 31, 2014, as compared to $2.1 million of net for the three months ended March 31, 2013. Annualized, net charge-offs to average loans were (0.03)% for the three months ended March 31, 2014, as compared to 0.17% for the three months ended March 30, 2013. Management will continue its efforts to reduce the level of non-performing loans and may consider the possibility of sales of troubled and non-performing loans, which could result in additional charge-offs to the allowance for loan losses.

To provide for the risk of loss inherent in extending credit, we maintain an allowance for loan losses. The determination of the allowance is based upon the size and current risk characteristics of the loan portfolio and includes an assessment of individual problem loans, actual loss experience, current economic events and regulatory guidance. At March 31, 2014, the allowance for loan losses was $47.6 million, a decrease of $5.9 million compared to $53.5 million at March 31, 2013, and an increase of $0.5 million compared to $47.1 million at December 31, 2013. Impacting the allowance for loan losses and provision expense over the past twelve months are the following factors: (1) the loss factors applied to our performing loan portfolio have decreased over time as charge-offs were substantially lower, (2) improvement associated with our purchased credit impaired loans accounted for under ASC310-30, (3) the continuing trend in improved credit quality, and (4) a decrease in our commercial real estate loan balances (which carry higher loss rates than other loan categories) in conjunction with improving average asset quality ratings on the remaining commercial real estate loans in our portfolio. As a percentage of total loans excluding loans held for sale, the allowance was 0.94% at March 31, 2014, compared to 1.05% at March 31, 2013, and 0.93% at December 31, 2013. The decrease from March 31, 2013 is primarily a result of the $5.4 million of provision expense recapture during the second and third quarters of 2013. The provision for loan losses for the three months ended March 31, 2014, was $37 thousand compared to $845 thousand for the three months ended March 31, 2013.

Because the acquired loans from Monroe Bancorp, Integra Bank, Indiana Community Bancorp and the Bank of America branches were recorded at fair value in accordance with ASC 805 at the date of acquisition, the credit risk is incorporated in the fair value recorded. No allowance for loan losses is recorded on the acquisition date. We would expect that as the fair value mark is accreted into income over future periods, a reserve will be established to absorb credit deterioration or adverse changes in expected cash flows. Through March 31, 2014, $1.7 million and $6.2 million had been reserved for these purchased credits from Monroe Bancorp and Integra Bank, respectively.

The following table provides additional details of the following components of the allowance for loan losses, including FAS 5/ASC 450 (Accounting for Contingencies), FAS 114/ASC 310-40 (Accounting by Creditors for Impairment of a Loan) and SOP 03-3/ASC 310-30 (Accounting for Certain Loans or Debt Securities Acquired in a Transfer):


							Purchased Loans
	Legacy						Covered								Non-covered
(dollars in thousands)	FAS 5			FAS 114			FAS 5			FAS 114		SOP 03-3			FAS 5			FAS 114			SOP 03-3
Loan balance	$	4,463,929		$	60,453		$	70,662		$	6,698	$	116,801		$	311,937		$	11,255		$	30,546
Remaining purchase discount		—			—			5,088			—		79,487			19,070			2,427			21,141
Allowance, January 1, 2014		30,826			8,346			1,552			—		3,852			—			—			2,569
Charge-offs		(799	)		(1,315	)		(40	)		—		171			(167	)		(23	)		(246	)
Recoveries		113			1,887			3			1		49			61			402			274
Provision expense		(540	)		1,097			(290	)		2,487		(1,771	)		106			(337	)		(715	)

Allowance, March 31, 2014	$	29,600		$	10,015		$	1,225		$	2,488	$	2,301		$	—		$	42		$	1,882

We maintain an allowance for 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 loan losses, modified to take into account the probability of a drawdown on the commitment. The $2.6 million reserve for unfunded loan commitments at March 31, 2014 is classified as a liability account on the balance sheet. The reserve for unfunded loan commitments was $2.7 million at December 31, 2013. The reserve for unfunded loan commitments remainded relatively constant from December 31, 2013 to March 31, 2014.

Market Risk

Market risk is the risk that the estimated fair value of our assets, liabilities, and derivative financial instruments will decline as a result of changes in interest rates or financial market volatility, or that our net income will be significantly reduced by interest rate changes.

The objective of our interest rate management process is to maximize net interest income while operating within acceptable limits established for interest rate risk and maintaining adequate levels of funding and liquidity.

Potential cash flows, sales, or replacement value of many of our assets and liabilities, especially those that earn or pay interest, are sensitive to changes in the general level of interest rates. This interest rate risk arises primarily from our normal business activities of gathering deposits and extending loans. Many factors affect our exposure to changes in interest rates, such as general economic and financial conditions, customer preferences, historical pricing relationships, and re-pricing characteristics of financial instruments. Our earnings can also be affected by the monetary and fiscal policies of the U.S. Government and its agencies, particularly the Federal Reserve Board. In managing interest rate risk, we, through the Funds Management Committee, a committee of the Board of Directors, establish guidelines, for asset and liability management, including measurement of short and long-term sensitivities to changes in interest rates. Based on the results of our analysis, we may use different techniques to manage changing trends in interest rates including:

•

adjusting balance sheet mix or altering interest rate characteristics of assets and liabilities;

•

changing product pricing strategies;

•

modifying characteristics of the investment securities portfolio; or

•

using derivative financial instruments, to a limited degree.

A key element in our ongoing process is to measure and monitor interest rate risk using a Net Interest Income at Risk simulation to model the interest rate sensitivity of the balance sheet and to quantify the impact of changing interest rates on the Company. The model quantifies the effects of various possible interest rate scenarios on projected net interest income over a one-year and a two-year cumulative horizon. The model assumes a semi-static balance sheet and measures the impact on net interest income relative to a base case scenario of hypothetical changes in interest rates over 24 months. The scenarios include prepayment assumptions, changes in the level of interest rates, the shape of the yield curve, and spreads between market interest rates in order to capture the impact from re-pricing, yield curve, option, and basis risks.

Our simulation scenarios assume the following market interest rates with an instantaneous shift from current interest rates.


	Hypothetical LIBOR/Swap Yield Curves, March 31, 2014
	3-Month			6-Month			1-Year			2-Year			3-Year			5-Year			10-Year			20-Year			30-Year
+ 3.00%		3.23	%		3.33	%		3.56	%		3.55	%		3.99	%		4.80	%		5.84	%		6.43	%		6.54	%
+ 2.00%		2.23	%		2.33	%		2.56	%		2.55	%		2.99	%		3.80	%		4.84	%		5.43	%		5.54	%
+ 1.00%		1.23	%		1.33	%		1.56	%		1.55	%		1.99	%		2.80	%		3.84	%		4.43	%		4.54	%
Yield Curve at 6/30		23.00	%		0.33	%		0.56	%		0.55	%		0.99	%		1.80	%		2.84	%		3.43	%		3.54	%
- 1.00%		NA			NA			NA			NA			NA			NA			NA			NA			NA
100 bp flattening of curve
Short end		1.23	%		1.33	%		1.56	%		1.55	%		0.99	%		1.80	%		2.84	%		3.43	%		3.54	%
Long end		0.23	%		0.33	%		0.56	%		0.55	%		0.99	%		1.80	%		1.84	%		2.43	%		2.54	%
100 bp steepening of curve
Short end		0.00	%		0.00	%		0.00	%		0.00	%		0.99	%		1.80	%		2.84	%		3.43	%		3.54	%
Long end		0.23	%		0.33	%		0.56	%		0.55	%		0.99	%		1.80	%		3.84	%		4.43	%		4.54	%

A key element in the measurement and modeling of interest rate risk are the re-pricing assumptions of our transaction deposit accounts, which have no contractual maturity dates. We assume this deposit base is comprised of both core and more volatile balances and consists of both non-interest bearing and interest bearing accounts. Core deposit balances are assumed to be less interest rate sensitive and provide longer term funding. Volatile balances are assumed to be more interest rate sensitive and shorter in term. As part of our semi-static balance sheet modeling, we assume interest rates paid on the volatile deposits move in conjunction with changes in interest rates, in order to retain these deposits. This may include current non-interest bearing accounts.

During the quarter we implemented numerous modeling input and assumption changes that were based upon our deposit experience as well as a recent deposit study. These are reflected in the Net Interest Income and Economic Value of Equity data presented for 3/31/2014 only.

Results of our simulation modeling project that our net interest income could change as follows over one-year and two-year horizons, relative to our base case scenarios at March 31^st.


	Changes in Net Interest Income
	One Year Horizon
	3/31/2014								3/31/2013
Immediate Change in the Level of Interest Rates	Net Interest Income (000s)		$ Change (000s)			% Change			Net Interest Income (000s)		$ Change (000s)			% Change
+ 3.00%		255,740		(3,043	)		-1.18	%		232,498		(32,965	)		-12.42	%
+ 2.00%		257,653		(1,130	)		-0.44	%		246,182		(19,281	)		-7.26	%
+ 1.00%		258,428		(355	)		-0.14	%		259,813		(5,651	)		-2.13	%
Yield Curve		258,783		—			0.00	%		265,463		—			0.00	%
- 1.00%		NA		NA			NA			NA		NA			NA
100 bp flattening of curve
Short end		257,178		(1,605	)		-0.62	%		256,313		(9,150	)		-3.45	%
Long end		257,217		(1,566	)		-0.61	%		261,419		(4,044	)		-1.52	%
100 bp steepening of curve
Short end		256,626		(2,157	)		-0.83	%		264,508		(955	)		-0.36	%
Long end		259,961		1,178			0.46	%		268,881		3,418			1.29	%


	Changes in Net Interest Income
	Two Year Cumulative Horizon
	3/31/2014								3/31/2013
Immediate Change in the Level of Interest Rates	Net Interest Income (000s)		$ Change (000s)			% Change			Net Interest Income (000s)		$ Change (000s)			% Change
+ 3.00%		536,859		23,171			4.51	%		481,846		(41,071	)		-7.85	%
+ 2.00%		531,215		17,527			3.41	%		505,331		(17,586	)		-3.36	%
+ 1.00%		523,226		9,538			1.86	%		524,207		1,290			0.25	%
Yield Curve		513,688		—			0.00	%		522,917		—			0.00	%
- 1.00%		NA		NA			NA			NA		NA			NA
100 bp flattening of curve
Short end		518,584		4,897			0.95	%		511,366		(11,551	)		-2.21	%
Long end		508,230		(5,457	)		-1.06	%		510,611		(12,306	)		-2.35	%
100 bp steepening of curve
Short end		505,886		(7,801	)		-1.52	%		519,489		(3,428	)		-0.66	%
Long end		517,895		4,207			0.82	%		533,974		11,057			2.11	%

At March 31, 2014, our simulated exposure to an increase in interest rates shows that an immediate increase in rates of 1.00% will decrease our net interest income by $0.35 million (-0.14%) over a one year horizon compared to our base case scenario. Rate increases of 2.00% and 3.00% would cause net interest income to decline by $1.13 million (-0.44%) and $3.04 million (-1.18%), respectively. Over a two-year horizon, an immediate increase in rates of 1.00% will increase our net interest income by 9.5 million (+1.86%). For the up 2.00% scenario, net interest income increases by $17.5 million (+3.41%) and, in an up 3.00% scenario, net interest income increases $23.2 million (+4.51%) compared to our base case scenario. As a result of the already low interest rate environment, we did not include a 1.00% falling scenario.

From March 31, 2013 to March 31, 2014, our NII results were primarily impacted by two items: 1) a repositioning of the investment portfolio prior to closing on the Bank of America deposit purchase and, 2) modeling changes arising from our recent deposit study that revealed lower sensitivity to rising rates in the future. Throughout the time period, the liability mix reflected a migration to lower cost deposit products and floating rate liabilities.

In addition to reporting our interest rate sensitivity assuming an instantaneous shift in rates of 1.00%, 2.00% and 3.00% across the interest rate curve, we have included the following modeling scenarios; short-end flattening, long-end flattening, short-end steepening, and long-end steepening. The shape of the yield curve can have a significant impact on our net interest income as the above table illustrates. A long-end flattening of the yield curve means that rates on the short-end of the curve remain stationary while long-end rates decline by 1.00%. Our modeling projects in this scenario that our net interest income would decline by $5.4 million (-1.06%) over a two year horizon. This is caused by longer term assets re-pricing at lower rates, while pricing on deposits, which are more closely tied to short-term rates, remains static. By contrast, in a long-end steepening scenario, short-term rates remain constant while rates on the long-end increase by 1.00%. In this scenario, our net interest income is projected to increase by $4.2 million (+0.82%) over a two year horizon, since assets re-price at higher rates while rates on our deposits remain constant. This long-end steepening scenario most closely resembles the recent movement in interest rates since early May 2013.

Old National also has longer term interest rate risk exposure, which may not be appropriately measured by Net Interest Income at Risk modeling. We use Economic Value of Equity (EVE) sensitivity analysis to evaluate the impact of long term cash flows on earnings and capital. EVE modeling involves discounting present values of all cash flows under different interest rate scenarios. The discounted present value of all cash flows represents our economic value of equity. The amount of base case economic value and its sensitivity to shifts in interest rates provide a measure of the longer term re-pricing and option risk in the balance sheet. EVE simulation results are shown below, relative to base case.


	Economic Value of Equity
	3/31/2014								3/31/2013
Immediate Change in the Level of Interest Rates	Economic Value of Equity (millions)		$ Change (millions)			% Change			Economic Value of Equity (millions)		$ Change (millions)			% Change
+ 3.00%		1,030		(120	)		-10.43	%		685		(58	)		-7.82	%
+ 2.00%		1,077		(73	)		-6.35	%		738		(5	)		-0.67	%
+ 1.00%		1,125		(25	)		-2.17	%		789		47			6.33	%
Yield Curve		1,150		—			—			742		—			—
- 1.00%		NA		NA			NA			NA		NA			NA

At March 31, 2014, Old National’s Economic Value of Equity (“EVE”) scenarios indicate negative changes to EVE in the up 1.00%, 2.00%, and 3.00% scenarios. The various outcomes in EVE modeling results were driven primarily by the following four factors: 1) slightly increased asset sensitivity to higher interest rates including mortgages as prepay speeds slow, 2) the absolute higher level of interest rates year over year, 3) modifications to the sensitivity of deposit products, and 4) changes in mix of the balance sheet noted earlier. Modeling results at March 31, 2014, indicate that we remain within our Company’s acceptable risk tolerance levels.

Because the models are driven by expected behavior in various interest rate scenarios and many factors besides market interest rates affect our net interest income and the economic value of equity, we recognize that model outputs are not guarantees of actual results. For this reason, we model many different combinations of interest rates and balance sheet assumptions to understand its overall sensitivity to market interest rate changes.

During the comparable periods, Old National took several actions in anticipation of further increases in interest rates. We entered in to $425 million Notional forward starting pay-fixed interest rate swaps against variable-rate debt. We also sold approximately $97 million in longer term, fixed rate residential real estate mortgages. Finally, $370 million of longer duration bonds were transferred from the available for sale portfolio to the held to maturity portfolio, lessening the impact to our tangible equity capital in a rising rate environment.

We use derivatives, primarily interest rate swaps, as one method to manage interest rate risk in the ordinary course of business. We also provide derivatives to our commercial customers in connection with managing interest rate risk. Our derivatives had an estimated fair value gain of $1.1 million at March 31, 2014, compared to an estimated fair value gain of $6.8 million at March 31, 2013. See Note 17 to the consolidated financial statements for further discussion of derivative financial instruments.

Liquidity Risk

Liquidity risk arises from the possibility that we may not be able to satisfy current or future financial commitments, or may become unduly reliant on alternative funding sources. The Funds Management Committee of the Board of Directors establishes liquidity risk guidelines and, along with the Balance Sheet Management Committee, monitors liquidity risk. The objective of liquidity management is to ensure we have the ability to fund balance sheet growth and meet deposit and debt obligations in a timely and cost-effective manner. Management monitors liquidity through a regular review of asset and liability maturities, funding sources, and loan and deposit forecasts. We maintain strategic and contingency liquidity plans to ensure sufficient available funding to satisfy requirements for balance sheet growth, properly manage capital markets’ funding sources and to address unexpected liquidity requirements.

Loan repayments and maturing investment securities are a relatively predictable source of funds. However, deposit flows, calls of investment securities and prepayments of loans and mortgage-related securities are strongly influenced by interest rates, the housing market, general and local economic conditions, and competition in the marketplace. We continually monitor marketplace trends to identify patterns that might improve the predictability of the timing of deposit flows or asset prepayments.

A time deposit maturity schedule for Old National Bank is shown in the following table for March 31, 2014.


Time Deposit Maturity Schedule, March 31, 2014
Maturity Bucket	Amount (000s)		Rate
2014	$	456,146		0.53	%
2015		236,085		1.28	%
2016		152,724		2.90	%
2017		42,000		0.92	%
2018		36,494		1.20	%
2019 and beyond		37,355		1.53	%

Our ability to acquire funding at competitive prices is influenced by rating agencies’ views of our credit quality, liquidity, capital and earnings. All of the rating agencies place us in an investment grade that indicates a low risk of default. For both Old National and Old National Bank:

•

Moody’s Investor Service maintains Old National Bank’s Long Term Rating at A2 with a stable outlook and stable Short Term ratings of P-1.

•

Dominion Bond Rating Services (DBRS) confirmed our ratings (A, R-1) and stable outlook on November 11, 2013. Subsequent to the confirmation, DBRS withdrew the ratings at its own discretion.

The senior debt ratings of Old National and Old National Bank at March 31, 2014, are shown in the following table.


SENIOR DEBT RATINGS
	Moody’s Investor Service
	Long		Short
	term		term
Old National Bancorp		N/A		N/A
Old National Bank		A2		P-1

N/A = not applicable

Old National Bank maintains relationships in capital markets with brokers and dealers to issue certificates of deposit and short-term and medium-term bank notes as well. As of March 31, 2014, Old National Bancorp and its subsidiaries had the following availability of liquid funds and borrowings.


	Parent
(dollars in thousands)	Company		Subsidiaries
Available liquid funds:
Cash and due from banks	$	75,634	$	138,890
Unencumbered government-issued debt securities		—		1,116,756
Unencumbered investment grade municipal securities		—		711,143
Unencumbered corporate securities		—		127,962
Unencumbered other securities		—		251
Availability of borrowings:
Amount available from Federal Reserve discount window*		—		468,844
Amount available from Federal Home Loan Bank Indianapolis*		—		733,129
Amount available under other credit facilities		—		—

Total available funds	$	75,634	$	3,296,975

*	Based on collateral pledged

The Parent Company (Old National Bancorp) has routine funding requirements consisting primarily of operating expenses, dividends to shareholders, debt service, net derivative cash flows and funds used for acquisitions. The Parent Company can obtain funding to meet its obligations from dividends and management fees collected from its subsidiaries, operating line of credit and through the issuance of debt securities. Additionally, the Parent Company has a shelf registration in place with the Securities and Exchange Commission permitting ready access to the public debt and equity markets. At March 31, 2014, the Parent Company’s other borrowings outstanding were $28.0 million.

Federal banking laws regulate the amount of dividends that may be paid by banking subsidiaries without prior approval. Prior regulatory approval is required if dividends to be declared in any year would exceed net earnings of the current year plus retained net profits for the preceding two years. Prior regulatory approval to pay dividends was not required in 2013 or 2014 and is not currently required.

OFF-BALANCE SHEET ARRANGEMENTS

Off-balance sheet arrangements include commitments to extend credit and financial guarantees. Commitments to extend credit and financial guarantees are used to meet the financial needs of our customers. Our banking affiliates have entered into various agreements to extend credit, including loan commitments of $1.328 billion and standby letters of credit of $61.6 million at March 31, 2014. At March 31, 2014, approximately $1.266 billion of the loan commitments had fixed rates and $62 million had floating rates, with the floating rates ranging from 0% to 21%. At December 31, 2013, loan commitments were $1.271 billion and standby letters of credit were $62.0 million. The term of these off-balance sheet arrangements is typically one year or less.

During the second quarter of 2007, we entered into a risk participation in an interest rate swap. The interest rate swap had a notional amount of $8.0 million at March 31, 2014.

CONTRACTUAL OBLIGATIONS

The following table presents our significant fixed and determinable contractual obligations at March 31, 2014:


CONTRACTUAL OBLIGATIONS
	Payments Due In
(dollars in thousands )	One Year or Less (1)		One to Three Years		Three to Five Years		Over Five Years		Total
Deposits without stated maturity	$	6,297,358	$	—	$	—	$	—	$	6,297,358
IRAs, consumer and brokered certificates of deposit		456,146		388,809		78,494		37,355		960,804
Short-term borrowings		410,128		—		—		—		410,128
Other borrowings		125,743		117,458		191,655		71,926		506,782
Fixed interest payments (2)		4,817		11,964		7,710		19,209		43,700
Operating leases		23,524		61,642		60,233		234,255		379,654
Other long-term liabilities (3)		410		—		—		—		410

(1)	For the remaining nine months of fiscal 2014.

(2)

Our subordinated notes, certain trust preferred securities and certain Federal Home Loan Bank advances have fixed rates ranging from 0.21% to 8.34%. All of our other long-term debt is at Libor based variable rates at March 31, 2014. The projected variable interest assumes no increase in Libor rates from March 31, 2014.

(3)	Amount expected to be contributed to the pension plans in 2014. Amounts for 2015 and beyond are unknown at this time.

We rent certain premises and equipment under operating leases. See Note 18 to the consolidated financial statements for additional information on long-term lease arrangements.

We are party to various derivative contracts as a means to manage the balance sheet and our related exposure to changes in interest rates, to manage our residential real estate loan origination and sale activity, and to provide derivative contracts to our clients. Since the derivative liabilities recorded on the balance sheet change frequently and do not represent the amounts that may ultimately be paid under these contracts, these liabilities are not included in the table of contractual obligations presented above. Further discussion of derivative instruments is included in Note 17 to the consolidated financial statements.

In the normal course of business, various legal actions and proceedings are pending against us and our affiliates which are incidental to the business in which they are engaged. Further discussion of contingent liabilities is included in Note 18 to the consolidated financial statements.

In addition, liabilities recorded under FASB ASC 740-10 (FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109) are not included in the table because the amount and timing of any cash payments cannot be reasonably estimated. Further discussion of income taxes and liabilities recorded under FASB ASC 740-10 is included in Note 16 to the consolidated financial statements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our accounting policies are described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013. Certain accounting policies require management to use significant judgment and estimates, which can have a material impact on the carrying value of certain assets and liabilities. We consider these policies to be critical accounting policies. The judgment and assumptions made are based upon historical experience or other factors that management believes to be reasonable under the circumstances. Because of the nature of the judgment and assumptions, actual results could differ from estimates, which could have a material affect on our financial condition and results of operations.

The following accounting policies materially affect our reported earnings and financial condition and require significant judgments and estimates. Management has reviewed these critical accounting estimates and related disclosures with our Audit Committee.

Goodwill and Intangibles

•

Description. For acquisitions, we are required to record the assets acquired, including identified intangible assets, and the liabilities assumed at their fair value. These often involve estimates based on third-party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques that may include estimates of attrition, inflation, asset growth rates or other relevant factors. In addition, the determination of the useful lives over which an intangible asset will be amortized is subjective. Under FASB ASC 350 (SFAS No. 142 Goodwill and Other Intangible Assets), goodwill and indefinite-lived assets recorded must be reviewed for impairment on an annual basis, as well as on an interim basis if events or changes indicate that the asset might be impaired. An impairment loss must be recognized for any excess of carrying value over fair value of the goodwill or the indefinite-lived intangible asset.

•

Judgments and Uncertainties. The determination of fair values is based on valuations using management’s assumptions of future growth rates, future attrition, discount rates, multiples of earnings or other relevant factors.

•

Effect if Actual Results Differ From Assumptions. Changes in these factors, as well as downturns in economic or business conditions, could have a significant adverse impact on the carrying values of goodwill or intangible assets and could result in impairment losses affecting our financials as a whole and the individual lines of business in which the goodwill or intangibles reside.

Acquired Impaired Loans

•

Description. Loans acquired with evidence of credit deterioration since inception and for which it is probable that all contractual payments will not be received are accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”). These loans are recorded at fair value at the time of acquisition, with no carryover of the related allowance for loan losses. Fair value of acquired loans is determined using a discounted cash flow methodology based on assumptions about the amount and timing of principal and interest payments, principal prepayments and principal defaults and losses, and current market rates. In recording the acquisition date fair values of acquired impaired loans, management calculates a non-accretable difference (the credit component of the purchased loans) and an accretable difference (the yield component of the purchased loans).

Over the life of the acquired loans, we continue to estimate cash flows expected to be collected on pools of loans sharing common risk characteristics, which are treated in the aggregate when applying various valuation techniques. We evaluate at each balance sheet date whether the present value of our pools of loans determined using the effective interest rates has decreased significantly and if so, recognize a provision for loan loss in our consolidated statement of income. For any significant increases in cash flows expected to be collected, we adjust the amount of accretable yield recognized on a prospective basis over the pool’s remaining life.

•

Judgments and Uncertainties. These cash flow evaluations are inherently subjective as they require management to make estimates about expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change.

•

Effect if Actual Results Differ From Assumptions. Changes in these factors, as well as changing economic conditions will likely impact the carrying value of these acquired loans as well as the carrying value of any associated indemnification assets, as the FDIC will reimburse us for losses incurred on certain acquired loans, but the shared-loss agreements may not fully offset the financial effects of such a situation.

FDIC Indemnification Asset

•

Description. The FDIC Indemnification Asset results from the loss share agreement associated with our FDIC-assisted acquisition of Integra in 2011. This asset is measured separately from the related covered assets (loans and OREO) as it is not contractually embedded in those assets and is not transferable should we choose to dispose of the covered assets. The FDIC indemnification asset represents the discounted amount of estimated reimbursable losses from the FDIC for losses on covered assets. Pursuant to the terms of the loss sharing agreements, covered assets are subject to stated loss thresholds whereby the FDIC will reimburse Old National for 80% of losses up to $275.0 million, losses in excess of $275.0 million up to $467.2 million at 0%, and 80% of losses in excess of $467.2 million. The loss sharing agreements provide for five years of coverage on non-single family loans and ten years of coverage on single family loans. Recoveries associated with non-single family loans are shared with the FDIC for three years beyond the loss share coverage period. The FDIC indemnification asset was recorded at its estimated fair value at the time of the FDIC-assisted transaction. The fair value was estimated using the projected cash flows related to the loss sharing agreements based on the expected reimbursements for losses and the applicable loss sharing percentages. These cash flows are discounted to reflect the uncertainty of the timing of the loss sharing reimbursement from the FDIC.

Accounting for the FDIC indemnification asset is closely related to the accounting for the underlying indemnified assets. We re-estimate the expected indemnification asset cash flows in conjunction with the periodic re-estimation of cash flows on covered loans accounted for under ASC Topic 310-30 and ASC Topic 310-20. Improvements in the credit quality or cash flow expectations of covered loans (reflected as an adjustment to yield and accreted into income over the remaining life of the loans) decrease the basis of the indemnification asset, with such decreases being amortized into income over (1) the remaining life of the loans or (2) the life of the loss share agreements, whichever is shorter. Declines in cash flow expectations on covered loans generally result in an increase in expected indemnification cash flows and are reflected as both FDIC loss sharing income and an increase to the indemnification asset.

•

Judgments and Uncertainties. The cash flow evaluations are inherently subjective as they require management to make estimates about the amount and timing of expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change.

•

Effect if Actual Results Differ From Assumptions. Changes in these factors, as well as changing economic conditions will likely impact the carrying value of the indemnification asset. The estimated timing of our expected losses may be wrong and fall outside our coverage period resulting in impairment of our indemnification asset.

Allowance for Loan Losses

•

Description. The allowance for loan losses is maintained at a level believed adequate by management to absorb probable incurred losses in the consolidated loan portfolio. Management’s evaluation of the adequacy of the allowance is an estimate based on reviews of individual loans, pools of homogeneous loans, assessments of the impact of current and anticipated economic conditions on the portfolio and historical loss experience. The allowance represents management’s best estimate, but significant downturns in circumstances relating to loan quality and economic conditions could result in a requirement for additional allowance. Likewise, an upturn in loan quality and improved economic conditions may allow a reduction in the required allowance. In either instance, unanticipated changes could have a significant impact on results of operations.

The allowance is increased through a provision charged to operating expense. Uncollectible loans are charged-off through the allowance. Recoveries of loans previously charged-off are added to the allowance. A loan is considered impaired when it is probable that contractual interest and principal payments will not be collected either for the amounts or by the dates as scheduled in the loan agreement. Our policy for recognizing income on impaired loans is to accrue interest unless a loan is placed on nonaccrual status. A loan is generally placed on nonaccrual status when principal or interest becomes 90 days past due unless it is well secured and in the process of collection, or earlier when concern exists as to the ultimate collectibility of principal or interest. We monitor the quality of our loan portfolio on an on-going basis and use a combination of detailed credit assessments by relationship managers and credit officers, historic loss trends, and economic and business environment factors in determining the allowance for loan losses. We record provisions for loan losses based on current loans outstanding, grade changes, mix of loans and expected losses. A detailed loan loss evaluation on an individual loan basis for our highest risk loans is performed quarterly. Management follows the progress of the economy and how it might affect our borrowers in both the near and the intermediate term. We have a formalized and disciplined independent loan review program to evaluate loan administration, credit quality and compliance with corporate loan standards. This program includes periodic reviews and regular reviews of problem loan reports, delinquencies and charge-offs.

•

Judgments and Uncertainties. We use migration analysis as a tool to determine the adequacy of the allowance for loan losses for performing commercial loans. Migration analysis is a statistical technique that attempts to estimate probable losses for existing pools of loans by matching actual losses incurred on loans back to their origination. Judgment is used to select and weight the historical periods which are most representative of the current environment.

We calculate migration analysis using several different scenarios based on varying assumptions to evaluate the widest range of possible outcomes. The migration-derived historical commercial loan loss rates are applied to the current commercial loan pools to arrive at an estimate of probable losses for the loans existing at the time of analysis. The amounts determined by migration analysis are adjusted for management’s best estimate of the effects of current economic conditions, loan quality trends, results from internal and external review examinations, loan volume trends, credit concentrations and various other factors.

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

•

Effect if Actual Results Differ From Assumptions. The allowance represents management’s best estimate, but significant downturns in circumstances relating to loan quality and economic conditions could result in a requirement for additional allowance. Likewise, an upturn in loan quality and improved economic conditions may allow a reduction in the required allowance. In either instance, unanticipated changes could have a significant impact on results of operations.

Management’s analysis of probable losses in the portfolio at March 31, 2014, resulted in a range for allowance for loan losses of $13.1 million. The range pertains to general (FASB ASC 310, Receivables/SFAS 5) reserves for both retail and performing commercial loans. Specific (FASB ASC 310, Receivables/SFAS 114) reserves do not have a range of probable loss. Due to the risks and uncertainty associated with the economy, our projection of FAS 5 loss rates inherent in the portfolio, and our selection of representative historical periods, we establish a range of probable outcomes (a high-end estimate and a low-end estimate) and evaluate our position within this range. The potential effect to net income based on our position in the range relative to the high and low endpoints is a decrease of $2.1 million and an increase of $6.4 million, respectively, after taking into account the tax effects. These sensitivities are hypothetical and are not intended to represent actual results.

Derivative Financial Instruments

•

Description. As part of our overall interest rate risk management, we use derivative instruments to reduce exposure to changes in interest rates and market prices for financial instruments. The application of the hedge accounting policy requires judgment in the assessment of hedge effectiveness, identification of similar hedged item groupings and measurement of changes in the fair value of derivative financial instruments and hedged items. To the extent hedging relationships are found to be effective, as determined by FASB ASC 815 (SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities) (“ASC Topic 815”), changes in fair value of the derivatives are offset by changes in the fair value of the related hedged item or recorded to other comprehensive income. Management believes hedge effectiveness is evaluated properly in preparation of the financial statements. All of the derivative financial instruments we use have an active market and indications of fair value can be readily obtained. We are not using the “short-cut” method of accounting for any fair value derivatives.

•

Judgments and Uncertainties. The application of the hedge accounting policy requires judgment in the assessment of hedge effectiveness, identification of similar hedged item groupings and measurement of changes in the fair value of derivative financial instruments and hedged items.

•

Effect if Actual Results Differ From Assumptions. To the extent hedging relationships are found to be effective, as determined by ASC Topic 815, changes in fair value of the derivatives are offset by changes in the fair value of the related hedged item or recorded to other comprehensive income. However, if in the future the derivative financial instruments used by us no longer qualify for hedge accounting treatment, all changes in fair value of the derivative would flow through the consolidated statements of income in other noninterest income, resulting in greater volatility in our earnings.

Income Taxes

•

Description. We are subject to the income tax laws of the U.S., its states and the municipalities in which we operate. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant government taxing authorities. We review income tax expense and the carrying value of deferred tax assets quarterly; and as new information becomes available, the balances are adjusted as appropriate. FASB ASC 740-10 (FIN 48) prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. See Note 13 to the Consolidated Financial Statements for a further description of our provision and related income tax assets and liabilities.

•

Judgments and Uncertainties. In establishing a provision for income tax expense, we must make judgments and interpretations about the application of these inherently complex tax laws. We must also make estimates about when in the future certain items will affect taxable income in the various tax jurisdictions. Disputes over interpretations of the tax laws may be subject to review/adjudication by the court systems of the various tax jurisdictions or may be settled with the taxing authority upon examination or audit.

•

Effect if Actual Results Differ From Assumptions. Although management believes that the judgments and estimates used are reasonable, actual results could differ and we may be exposed to losses or gains that could be material. To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our reserves, our effective income tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement would result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement would result in a reduction in our effective income tax rate in the period of resolution.

Valuation of Securities

•

Description. The fair value of our securities is determined with reference to price estimates. In the absence of observable market inputs related to items such as cash flow assumptions or adjustments to market rates, management judgment is used. Different judgments and assumptions used in pricing could result in different estimates of value.

When the fair value of a security is less than its amortized cost for an extended period, we consider whether there is an other-than-temporary-impairment in the value of the security. If, in management’s judgment, an other-than-temporary-impairment exists, the portion of the loss in value attributable to credit quality is transferred from accumulated other comprehensive loss as an immediate reduction of current earnings and the cost basis of the security is written down by this amount.

We consider the following factors when determining an other-than-temporary-impairment for a security or investment:

•

The length of time and the extent to which the fair value has been less than amortized cost;

•

The financial condition and near-term prospects of the issuer;

•

The underlying fundamentals of the relevant market and the outlook for such market for the near future;

•

Our intent to sell the debt security or whether it is more likely than not that we will be required to sell the debt security before its anticipated recovery; and

•

When applicable for purchased beneficial interests, the estimated cash flows of the securities are assessed for adverse changes.

Quarterly, securities are evaluated for other-than-temporary-impairment in accordance with FASB ASC 320 (SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities), and FASB ASC 325-10 (Emerging Issues Task Force No. 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interest in Securitized Financial Assets) and FASB ASC 320-10 (FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments). An impairment that is an “other-than-temporary-impairment” is a decline in the fair value of an investment below its amortized cost attributable to factors that indicate the decline will not be recovered over the anticipated holding period of the investment. Other-than-temporary-impairments result in reducing the security’s carrying value by the amount of credit loss. The credit component of the other-than-temporary-impairment loss is realized through the statement of income and the remainder of the loss remains in other comprehensive income.

•

Judgments and Uncertainties. The determination of other-than-temporary-impairment is a subjective process, and different judgments and assumptions could affect the timing and amount of loss realization. In addition, significant judgments are required in determining valuation and impairment, which include making assumptions regarding the estimated prepayments, loss assumptions and interest cash flows.

•

Effect if Actual Results Differ From Assumptions. Actual credit deterioration could be more or less severe than estimated. Upon subsequent review, if cash flows have significantly improved, the discount would be amortized into earnings over the remaining life of the debt security in a prospective manner based on the amount and timing of future cash flows. Additional credit deterioration resulting in an adverse change in cash flows would result in additional other-than-temporary impairment loss recorded in the income statement.

FORWARD-LOOKING STATEMENTS

In this report, we have made various statements regarding current expectations or forecasts of future events, which speak only as of the date the statements are made. These statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are also made from time-to-time in press releases and in oral statements made by the officers of Old National Bancorp (“Old National,” or the “Company”). Forward-looking statements are identified by the words “expect,” “may,” “could,” “intend,” “project,” “estimate,” “believe”, “anticipate” and similar expressions. Forward-looking statements also include, but are not limited to, statements regarding estimated cost savings, plans and objectives for future operations, the Company’s business and growth strategies, including future acquisitions of banks, regulatory developments, and expectations about performance as well as economic and market conditions and trends.

Such forward-looking statements are based on assumptions and estimates, which although believed to be reasonable, may turn out to be incorrect. Therefore, undue reliance should not be placed upon these estimates and statements. We can not assure that any of these statements, estimates, or beliefs will be realized and actual results may differ from those contemplated in these “forward-looking statements.” We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise. You are advised to consult further disclosures we may make on related subjects in our filings with the SEC. In addition to other factors discussed in this report, some of the important factors that could cause actual results to differ materially from those discussed in the forward-looking statements include the following:

•

economic, market, operational, liquidity, credit and interest rate risks associated with our business;

•

economic conditions generally and in the financial services industry;

•

expected cost savings in connection with the consolidation of recent acquisitions may not be fully realized or realized within the expected time frames, and deposit attrition, customer loss and revenue loss following completed acquisitions may be greater than expected;

•

unexpected difficulties and losses related to FDIC-assisted acquisitions, including those resulting from our loss-sharing arrangements with the FDIC;

•

failure to properly understand risk characteristics of newly entered markets;

•

increased competition in the financial services industry either nationally or regionally, resulting in, among other things, credit quality deterioration;

•

our ability to achieve loan and deposit growth;

•

volatility and direction of market interest rates;

•

governmental legislation and regulation, including changes in accounting regulation or standards;

•

our ability to execute our business plan;

•

a weakening of the economy which could materially impact credit quality trends and the ability to generate loans;

•

changes in the securities markets; and

•

changes in fiscal, monetary and tax policies.

Investors should consider these risks, uncertainties and other factors in addition to risk factors included in our other filings with the SEC.

ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See Management’s Discussion and Analysis of Financial Condition and Results of Operations-Market Risk and Liquidity Risk.

ITEM 4. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Evaluation of disclosure controls and procedures. Old National’s principal executive officer and principal financial officer have concluded that Old National’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended), based on their evaluation of these controls and procedures as of the end of the period covered by this Form 10-Q, are effective at the reasonable assurance level as discussed below to ensure that information required to be disclosed by Old National in the reports it files under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to Old National’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Limitations on the Effectiveness of Controls. Management, including the principal executive officer and principal financial officer, does not expect that Old National’s disclosure controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be only reasonable assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Changes in Internal Control over Financial Reporting. There were no changes in Old National’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, Old National’s internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors previously disclosed in the “Risk Factors” section of the Company’s annual report on Form 10-K for the year ended December 31, 2013.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(c)	ISSUER PURCHASES OF EQUITY SECURITIES


Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publically Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
01/01/14 - 01/31/14		—	$	—		—		2,000,000
02/01/14 - 02/28/14		115,691		13.63		115,691		1,884,309
03/01/14 - 03/31/14		—		—		—		1,884,309

Quarter-to-date 03/31/14		115,691	$	13.63		115,691		1,884,309

On January 23, 2014, the Board of Directors approved the repurchase of up to 2.0 million shares of stock over a twelve month period beginning January 23, 2014 and ending January 31, 2015. During the first three months of 2014, Old National repurchased a limited number of shares associated with employee share-based incentive programs but did not repurchase any shares on the open market.

ITEM 5. OTHER INFORMATION

(a)

None

(b)	There have been no material changes in the procedure by which security holders recommend nominees to the Company’s board of directors.

ITEM 6. EXHIBITS


Exhibit No.		Description

2.1		Purchase and Assumption Agreement Whole Bank All Deposits, among Federal Deposit Insurance Corporation, receiver of Integra Bank National Association, Evansville, Indiana, the Federal Deposit Insurance Corporation and Old National Bank, dated July 29, 2011 (incorporated by reference to Exhibit 2.1 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 4, 2011).

2.2		Purchase and Assumption Agreement dated as of January 8, 2013 by and between Old National Bancorp and Bank of America, National Association (the schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K) (incorporated by reference to Exhibit 2.1 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 9, 2013).

2.3		Agreement and Plan of Merger dated as of September 9, 2013 by and between Old National Bancorp and Tower Financial Corporation (the schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K) (incorporated by reference to Exhibit 2.1 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 10, 2013).



2.4		Agreement and Plan of Merger dated as of January 7, 2014 by and between Old National Bancorp and United Bancorp, Inc. (the schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K) (incorporated by reference to Exhibit 2.1 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 8, 2014).

3.1		Third Amended and Restated Articles of Incorporation of Old National, amended October 25, 2013 (incorporated by reference to Exhibit 3.1 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 28, 2013).

3.2		By-Laws of Old National, amended July 23, 2009 (incorporated by reference to Exhibit 3.1 of Old National’s Current Report on Form 8-K file with the Securities and Exchange Commission on July 23, 2009).

4.1		Senior Indenture between Old National and The Bank of New York Trust Company (as successor to J.P. Morgan Trust Company, National Association (as successor to Bank One, NA)), as trustee, dated as of July 23, 1997 (incorporated by reference to Exhibit 4.3 to Old National’s Registration Statement on Form S-3, Registration No. 333-118374, filed with the Securities and Exchange Commission on December 2, 2004).

4.2		Form of Indenture between Old National and J.P. Morgan Trust Company, National Association (as successor to Bank One, NA), as trustee (incorporated by reference to Exhibit 4.1 to Old National’s Registration Statement on Form S-3, Registration No. 333-87573, filed with the Securities and Exchange Commission on September 22, 1999).

4.3		First Indenture Supplement dated as of May 20, 2005, between Old National and J.P. Morgan Trust Company, as trustee, providing for the issuance of its 5.00% Senior Notes due 2010 (incorporated by reference to Exhibit 4.1 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 20, 2005).

4.4		Form of 5.00% Senior Notes due 2010 (incorporated by reference to Exhibit 4.2 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 20, 2005).

10.1		Deferred Compensation Plan for Directors of Old National Bancorp and Subsidiaries (As Amended and Restated Effective as of January 1, 2003) (incorporated by reference to Exhibit 10(a) of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 15, 2004).*

10.2		Second Amendment to the Deferred Compensation Plan for Directors of Old National Bancorp and Subsidiaries (As Amended and Restated Effective as of January 1, 2003) (incorporated by reference to Exhibit 10(b) of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 15, 2004).*

10.3		2005 Directors Deferred Compensation Plan (Effective as of January 1, 2005) (incorporated by reference to Exhibit 10(c) of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 15, 2004).*

10.4		Supplemental Deferred Compensation Plan for Select Executive Employees of Old National Bancorp and Subsidiaries (As Amended and Restated Effective as of January 1, 2003) (incorporated by reference to Exhibit 10(d) of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 15, 2004).*

10.5		Second Amendment to the Supplemental Deferred Compensation Plan for Select Executive Employees of Old National Bancorp and Subsidiaries (As Amended and Restated Effective as of January 1, 2003) (incorporated by reference to Exhibit 10(e) of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 15, 2004).*



10.6		Third Amendment to the Supplemental Deferred Compensation Plan for Select Executive Employees of Old National Bancorp and Subsidiaries (As Amended and Restated Effective as of January 1, 2003) (incorporated by reference to Exhibit 10(f) of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 15, 2004).*

10.7		2005 Executive Deferred Compensation Plan (Effective as of January 1, 2005) (incorporated by reference to Exhibit 10(g) of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 15, 2004).*

10.8		Summary of Old National Bancorp’s Outside Director Compensation Program (incorporated by reference to Old National’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003).*

10.9		Form of Executive Stock Option Award Agreement between Old National and certain key associates (incorporated by reference to Exhibit 10(h) of Old National’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004).*

10.10		Form of 2006 Non-qualified Stock Option Agreement (incorporated by reference to Exhibit 99.3 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 2, 2006).*

10.11		Form of 2007 Non-qualified Stock Option Agreement between Old National and certain key associates (incorporated by reference to Exhibit 10(y) of Old National’s Annual Report on Form 10-K for the year ended December 31, 2006).*

10.12		Lease Agreement, dated December 20, 2006 between ONB One Main Landlord, LLC and Old National Bank (incorporated by reference to Exhibit 10(aa) of Old National’s Annual Report on Form 10-K for the year ended December 31, 2006).

10.13		Lease Agreement, dated December 20, 2006 between ONB 123 Main Landlord, LLC and Old National Bank (incorporated by reference to Exhibit 10(ab) of Old National’s Annual Report on Form 10-K for the year ended December 31, 2006).

10.14		Lease Agreement, dated December 20, 2006 between ONB 4^th Street Landlord, LLC and Old National Bank (incorporated by reference to Exhibit 10(ac) of Old National’s Annual Report on Form 10-K for the year ended December 31, 2006).

10.15		Master Lease Agreement dated September 19, 2007, by and between ONB CTL Portfolio Landlord #1, LLC, and Old National Bank (incorporated by reference to Exhibit 99.2 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 25, 2007).

10.16		Lease Supplement No. 1 dated September 19, 2007, by and between ONB CTL Portfolio Landlord #1, LLC, Old National Bank and ONB Insurance Group, Inc. (incorporated by reference to Exhibit 99.3 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 25, 2007).

10.17		Master Lease Agreement dated September 19, 2007, by and between ONB CTL Portfolio Landlord #2, LLC, and Old National Bank (incorporated by reference to Exhibit 99.4 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 25, 2007).

10.18		Master Lease Agreement dated September 19, 2007, by and between ONB CTL Portfolio Landlord #3, LLC, and Old National Bank (incorporated by reference to Exhibit 99.5 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 25, 2007).



10.19		Master Lease Agreement dated September 19, 2007, by and between ONB CTL Portfolio Landlord #4, LLC, and Old National Bank (incorporated by reference to Exhibit 99.6 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 25, 2007).

10.20		Master Lease Agreement dated September 19, 2007, by and between ONB CTL Portfolio Landlord #5, LLC, and Old National Bank (incorporated by reference to Exhibit 99.7 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 25, 2007).

10.21		Form of Lease Agreement dated October 19, 2007 entered into by affiliates of Old National Bancorp and affiliates of SunTrust Equity Funding, LLC (incorporated by reference to Exhibit 99.2 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 25, 2007).

10.22		Form of Lease Agreement dated December 27, 2007 entered into by affiliates of Old National Bancorp and affiliates of SunTrust Equity Funding, LLC (as incorporated by reference to Exhibit 99.2 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 31, 2007).

10.23		Form of 2008 Non-qualified Stock Option Award Agreement (incorporated by reference to Exhibit 99.1 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 30, 2008).*

10.24		Old National Bancorp Code of Conduct (incorporated by reference to Exhibit 14.1 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 29, 2008).

10.25		Form of 2009 Executive Stock Option Agreement between Old National and certain key associates (incorporated by reference to Old National’s Current Report on Form 8-K/A filed with the Securities and Exchange Commission on February 13, 2009).*

10.26		Stock Purchase and Dividend Reinvestment Plan (incorporated by reference to Old National’s Registration Statement on Form S-3, Registration No. 333-161394 filed with the Securities and Exchange Commission on August 17, 2009).

10.27		Form of Employment Agreement for Robert G. Jones (incorporated by reference to Exhibit 10.1 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 27, 2011).*

10.28		Form of Employment Agreement for Barbara A Murphy, Christopher A. Wolking, Allen R. Mounts and Daryl D. Moore (incorporated by reference to Exhibit 10.2 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 27, 2011).*

10.29		Employment Agreement for James A. Sandgren (incorporated by reference to Exhibit 10.1 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 18, 2014).*

10.30		Form of 2011 Performance Share Award Agreement – Internal Performance Measures between Old National and certain key associates (incorporated by reference to Exhibit 10(av) of Old National’s Annual Report on Form 10-K for the year ended December 31, 2010).*

10.31		Form of 2011 Performance Share Award Agreement – Relative Performance Measures between Old National and certain key associates (incorporated by reference to Exhibit 10(aw) of Old National’s Annual Report on Form 10-K for the year ended December 31, 2010).*

10.32		Form of 2011 “Service Based” Restricted Stock Award Agreement between Old National and certain key associates (incorporated by reference to Exhibit 10(ax) of Old National’s Annual Report on Form 10-K for the year ended December 31, 2010).*



10.33		Form of Amended Severance/Change of Control Agreement for Jeffrey L. Knight (incorporated by reference to Exhibit 10(bb) of Old National’s Annual Report on Form 10-K for the year ended December 31, 2011).*

10.34		Form of 2012 Performance Share Award Agreement – Internal Performance Measures between Old National and certain key associates (incorporated by reference to Exhibit 10(bc) of Old National’s Annual Report on Form 10-K for the year ended December 31, 2011).*

10.35		Form of 2012 Performance Share Award Agreement – Relative Performance Measures between Old National and certain key associates (incorporated by reference to Exhibit 10(bd) of Old National’s Annual Report on Form 10-K for the year ended December 31, 2011).*

10.36		Form of 2012 “Service Based” Restricted Stock Award Agreement between Old National and certain key associates (incorporated by reference to Exhibit 10(be) of Old National’s Annual Report on Form 10-K for the year ended December 31, 2011).*

10.37		Old National Bancorp Amended and Restated 2008 Incentive Compensation Plan (incorporated by reference to Appendix I of Old National’s Definitive Proxy Statement filed with the Securities and Exchange Commission on March 14, 2012).*

10.38		Stock Purchase and Dividend Reinvestment Plan (incorporated by reference to Old National’s Registration Statement on Form S-3, Registration No. 333-183344 filed with the Securities and Exchange Commission on August 16, 2012).

10.39		Form of 2013 Restricted Stock Award Agreement between Old National and certain key associates (incorporated by reference to Exhibit 10(bg) of Old National’s Annual Report on Form 10-K for the year ended December 31, 2012).*

10.40		Form of 2013 Performance Share Award Agreement between Old National and certain key associates (incorporated by reference to Exhibit 10(bh) of Old National’s Annual Report on Form 10-K for the year ended December 31, 2012).*

10.41		Voting Agreement by and among directors of Tower Financial Corporation (incorporated by reference to Exhibit 10.1 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 10, 2013).

10.42		Voting Agreement by and among directors of United Bancorp, Inc. (incorporated by reference to Exhibit 10.1 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 8, 2014).

10.43		Form of 2014 Performance Units Award Agreement between Old National and certain key associates (incorporated by reference to Exhibit 10(ap) of Old National’s Annual Report on Form 10-K for the year ended December 31, 2013).*

10.44		Form of 2014 Restricted Stock Award Agreement between Old National and certain key associates (incorporated by reference to Exhibit 10(aq) of Old National’s Annual Report on Form 10-K for the year ended December 31, 2013).*

31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



101		The following materials from Old National Bancorp’s Form 10-Q Report for the quarterly period ended March 31, 2014, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements.**

*	Management contract or compensatory plan or arrangement

**	Furnished, not filed

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

OLD NATIONAL BANCORP

(Registrant)


By:		/s/ Christopher A. Wolking
		Christopher A. Wolking Senior Executive Vice President and Chief Financial Officer Duly Authorized Officer and Principal Financial Officer

Date: May 2, 2014