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

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒☑

Indicate the number of shares outstanding of each of the issuer’s classes of common stock. The registrant has one class of common stock (no par value) with ~~152,172,000~~173,979,000 shares outstanding at March 31, ~~2018.~~2019.

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

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

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

CONSOLIDATED STATEMENTS OF ~~COMPREHENSIVE INCOME~~CHANGES IN SHAREHOLDERS' EQUITY (unaudited)

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

CONSOLIDATED STATEMENTS OF ~~CHANGES IN SHAREHOLDERS’ EQUITY~~CASH FLOWS (unaudited)

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

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

The accompanying unaudited consolidated financial statements include the accounts of Old National Bancorp and its wholly-owned affiliates (hereinafter collectively referred to as “Old National”) and have been prepared in conformity with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. Such principles require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosures of contingent assets and liabilities at the date of the financial statements and amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, the consolidated financial statements contain all the normal and recurring adjustments necessary for a fair statement of the financial position of Old National as of March 31, ~~2018~~2019 and ~~2017,~~2018, and December 31, ~~2017,~~2018, and the results of its operations for the three months ended March 31, ~~2018~~2019 and ~~2017.~~2018. Interim results do not necessarily represent annual results. These financial statements should be read in conjunction with Old National’s Annual Report for the year ended December 31, ~~2017.~~2018.

All significant intercompany transactions and balances have been eliminated. Certain prior year amounts have been reclassified to conform to the ~~2018~~2019 presentation. Such reclassifications had no effect on net income or shareholders’ equity and were insignificant amounts.

~~In May 2014, the FASB issued an update (ASU No. 2014-09,~~~~Revenue from Contracts with Customers~~~~) creating FASB Topic 606,~~~~Revenue from Contracts with Customers~~. The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. We finalized our in-depth assessment and identified the revenue line items within the scope of this new guidance. Neither the new standard, nor any of the amendments detailed below, resulted in a material change from our current accounting for revenue because the majority of Old National’s financial instruments are not within the scope of Topic 606, and those that are require no change in the accounting.

~~In March 2016, the FASB issued ASU No. 2016-08,~~~~Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)~~. The amendments relate to when another party, along with the entity, is involved in providing a good or service to a customer. Topic 606 requires an entity to determine whether the nature of its promise is to provide that good or service to the customer (that is, the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (that is, the entity is an agent). This determination is based upon whether the entity controls the good or the service before it is transferred to the customer. Topic 606 includes indicators to assist in this evaluation. The amendments in this update affect the guidance in ASU No. 2014-09 above. The effective date is the same as the effective date of ASU No. 2014-09.

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

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

~~In May 2016, the FASB issued ASU No. 2016-12,~~~~Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients~~~~. The amendments do not change the core revenue recognition principle in Topic 606. The amendments provide clarifying guidance in certain narrow areas and add some practical expedients.~~

~~In December 2016, the FASB issued ASU No. 2016-20,~~~~Revenue from Contracts with Customers (Topic 606): Technical Corrections and Improvements~~. The FASB board decided to issue a separate update for technical corrections and improvements to Topic 606 and other Topics amended by ASU No. 2014-09 to increase awareness of the proposals and to expedite improvements to ASU No. 2014-09. The amendment affects narrow aspects of the guidance issued in ASU No. 2014-09.

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

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

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

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

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

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

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

~~FASB ASC 825~~ ~~– In January 2016, the FASB issued an update (ASU No. 2016-01,~~~~Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities)~~~~. The amendments~~Accounting Guidance Adopted in this update impact public business entities as follows: (1) Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. (2) Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. (3) Eliminate the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. (4) Require entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. (5) Require an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. (6) Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. (7) Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this update became effective for annual periods and interim periods within those annual periods beginning after December 15, 2017 and did not have a material impact on the consolidated financial statements.2019

FASB ASC 842 – In February 2016, the FASB issued its new lease accounting guidance in ASU No. 2016-02,Leases (Topic 842). Under the new guidance, lessees will be required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged.

In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. ASU No. 2018-10 provides improvements related to ASU No. 2016-02 to increase stakeholders’ awareness of the amendments and to expedite the improvements. The amendments affect narrow aspects of the guidance issued in ASU No. 2016-02. ASU No. 2018-11 allows entities adopting ASU No. 2016-02 to choose an additional (and optional) transition method, under which an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. ASU No. 2018-11 also allows lessors to not separate non-lease components from the associated lease component if certain conditions are met. The amendments in ~~this update become~~these updates became effective for annual periods and interim periods within those annual periods beginning after December 15, 2018.

Old National elected the optional transition method permitted by ASU No. 2018-11. Under this method, an entity shall recognize and measure leases that exist at the application date and prior comparative periods are not adjusted. In addition, Old National elected the package of practical expedients to leases that commenced before the effective date:

Old National also elected the practical expedient, which must be applied consistently to all leases, to use hindsight in determining the lease term and in assessing impairment of our right-of-use assets. We also elected a practical expedient to not assess whether existing or expired land easements that were not previously accounted for as leases under Topic 840 contain a lease under this Topic. Both of these practical expedients may be elected separately or in conjunction with each other or the package noted above.

Based on both operating and finance leases outstanding at ~~March~~December 31, 2018, ~~we do not expect~~ the ~~new standard to have~~impact of adoption on January 1, 2019 was recording a ~~material impact on our income statement, but anticipate~~lease liability of $122.9 million, a ~~$115~~right-of-use asset of $118.7 million, and a cumulative-effect adjustment of $6.3 million to ~~$135 million~~ increase ~~in our assets and liabilities. Decisions to repurchase, modify, or renew leases prior to the implementation date will impact this level of materiality.~~retained earnings.

FASB ASC ~~815~~310 – In ~~August~~March 2017, the FASB issued ASU No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This update amends the amortization period for certain purchased callable debt securities held at a premium. FASB is shortening the amortization period for the premium to the earliest call date. Under current GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. Concerns were raised that current GAAP excludes certain callable debt securities from consideration of early repayment of principal even if the holder is certain that the call will be exercised. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings. There is diversity in practice (1) in the amortization period for premiums of callable debt securities and (2) in how the potential for exercise of a call is factored into current impairment assessments. The amendments in this update became effective for annual reporting periods beginning after December 15, 2018, including interim reporting periods within those annual reporting periods and did not have a material impact on the consolidated financial statements.

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

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

FASB ASC 815 – In October 2018, the FASB issued ASU No. 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting. In the United States, eligible benchmark interest rates under Topic 815 are interest rates on direct Treasury obligations of the U.S. government (“UST”), the London Interbank Offered Rate (“LIBOR”) swap rate, and the Overnight Index Swap (“OIS”) Rate based on the Fed Funds Effective Rate. When the FASB issued ASU No. 2017-12,Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging ~~Activities.~~Activities, in August 2017, it introduced the Securities Industry and Financial Markets Association (“SIFMA”) Municipal Swap Rate as the fourth permissible U.S. benchmark rate.

The ~~amendments in~~new ASU adds the ~~update make certain targeted improvements~~OIS rate based on SOFR as a U.S. benchmark interest rate to ~~simplify~~facilitate the ~~application of the hedge accounting guidance in current GAAP. The amendments in~~

~~this update better align an entity’s risk management activities~~LIBOR to SOFR transition and ~~financial reporting~~provide sufficient lead time for ~~hedging relationships through~~entities to prepare for changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. This update addresses several limitations that current GAAP places on the risk components, how an entity can designate the hedged item in a fair value hedge of interest rate risk ~~and how an entity can measure changes in fair value of the hedged item attributable to interest rate risk. In addition to the amendments to the designation and measurement guidance~~hedging strategies for ~~qualifying hedging relationships, the amendments in this update also align the recognition~~both risk management and presentation of the effects of the hedging instrument and the hedged item in the financial statements to increase the understandability of the results of an entity’s intended hedging strategies. The amendments in this update require an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. Prior to the issuance of this update, GAAP provided special hedge accounting only for the portion of the hedge deemed to be “highly effective” and required an entity to separately reflect the amount by which the hedging instrument did not offset the hedged item, which is referred to as the “ineffective” amount. However, the concept and reporting of hedge ineffectiveness were difficult for financial statement users to understand and, at times, for preparers to explain. The FASB board decided on an approach that no longer separately measures and reports hedge ineffectiveness. This update also includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. Prior to the issuance of this update, GAAP contained specific requirements for initial and ongoing quantitative hedge effectiveness testing and strict requirements for specialized effectiveness testing methods that allowed an entity to forgo quantitative hedge effectiveness assessments for qualifying relationships. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. Early adoption is permitted in any interim period. Management has elected to early adopt this update effective January 1, 2018 using the modified retrospective method. The impact of the adoption resulted in a reduction to Old National’s opening retained earnings of $3.2 million. In addition, as permitted by the amendments in the update, Old National reclassified $447.0 million in state and political subdivision securities with unrealized holding gains of $26.1 million from the held-to-maturity portfolio to the available-for-sale portfolio.

~~FASB ASC 718~~ – ~~In May 2017, the FASB issued ASU No. 2017-09,~~~~Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.~~The amendments in this update provide guidance about which changes to the terms and conditions of a shared-based payment award require an entity to apply modification accounting. An entity should account for the effect of a modification unless all the following are met: (1) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified.purposes. The amendments in this update became effective for ~~annual periods~~fiscal years beginning after December 15, 2018, and interim periods within those ~~annual periods beginning after December 15, 2017~~fiscal years and ~~did not have~~the financial statement impact immediately upon adoption was immaterial. The future financial statement impact will depend on

any new contracts entered into using new benchmark rates, as well as any existing contracts that get migrated from LIBOR to new benchmark interest rates. The Company has formed a ~~material impact on~~working group who is developing a transition plan for all exposed contracts migrating from LIBOR to SOFR. Additionally, the ~~consolidated financial statements.~~working group is monitoring industry specific transition guidance around a LIBOR contract’s “fallback” language with the industry goal to minimize or eliminate value transfers resulting from the transition.

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

As previously disclosed, Old National formed a cross functional committee ~~that~~to oversee the adoption of the ASU at the effective date. A working group was also formed and has ~~overseen~~developed a project plan focused on understanding the ~~enhancement of existing~~ASU, researching issues, identifying data needs for modeling inputs, technology ~~required to source~~requirements, modeling considerations, and ensuring overarching governance has been achieved for each objective and milestone. The project plan is targeting data and model ~~data for~~validation completion during the

~~purposes~~ first half of ~~meeting this standard. The committee has also selected a vendor to assist in generating loan level cash flows and disclosures. We expect to recognize a one-time cumulative effect adjustment to the~~2019, with parallel processing of our existing allowance for loan losses model with the CECL prior to implementation. Currently, the working group has identified seven distinct loan portfolios for which a model has been developed. For all seven loan portfolios, the data sets have been identified, populated, and internally validated.

Currently, our measurements for estimating the current expected life-time credit losses for loans and debt securities (as well as certain beneficial interests classified as held-to-maturity) includes the following major items:

During 2019, Old National is focused on refining assumptions and evaluation/analysis of the parallel processing results. Concurrent with this, Old National is also focused on researching and resolving interpretive accounting issues in the ASU contemplating various related accounting policies, developing processes and related controls, and considering various reporting disclosures.

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

~~FASB ASC 740~~ ~~– In October 2016, the FASB issued ASU No. 2016-16,~~~~Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory~~~~. Current guidance prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold~~statements cannot yet be reasonably estimated, however, we expect to ~~an outside party. This prohibition~~identify a range in our Quarterly Report on recognition is an exception to the principle of comprehensive recognition of current and deferred income taxes in generally accepted accounting principles. The exception has led to diversity in practice and is a source of complexity in financial reporting. FASB decided that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Consequently, the amendments in this update eliminate the exception for an intra-entity transfer of an asset other than inventory. The amendments in this update do not include new disclosure requirements; however, existing disclosure requirements might be applicable when accountingForm 10-Q for the ~~current and deferred income taxes for an intra-entity transfer~~quarterly period ended September 30, 2019.

In December 2018, the OCC, the Board of an asset other than inventory. The amendments in this update became effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The amendments in this update were applied on a modified retrospective basis through a cumulative-effect reduction of $1.0 million directly to retained earnings asGovernors of the ~~beginning~~Federal Reserve System, and the FDIC approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of ~~2018.~~

~~FASB ASC 805~~ ~~– In January 2017,~~CECL. The final rule provides banking organizations the ~~FASB issued ASU No. 2017-01,~~~~Business Combinations (Topic 805): Clarifying~~option to phase in over a three-year period the ~~Definition~~day-one adverse effects on regulatory capital that may result from the adoption of ~~a Business~~. The amendments in this update provide a more robust framework to use in determining when a set of assets and activities is a business. Because the current definition of a business is interpreted broadly and can be difficult to apply, stakeholders indicated that analyzing transactions is inefficient and costly and that the definition does not permit the use of reasonable judgment. The amendments provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable. The amendments in this update became effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. We have completed our evaluation of adopting the new ~~guidance on the consolidated financial statements and there is no impact to record.~~accounting standard.

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

FASB ASC ~~610~~820 – In ~~February 2017,~~August 2018, the FASB issued ASU No. ~~2017-05,~~~~Other Income~~2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – ~~Gains and Losses from~~Changes to the ~~Derecognition of Nonfinancial Assets (Topic 610): Clarifying~~Disclosure Requirements for Fair Value Measurement. The updated guidance improves the ~~Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets~~. Subtopic 610-20 was originally issued as part of ASU No. 2014-09 to provide guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. This update was issued to help clarify uncertainties and complexities of ASU 2014-09. The amendments in this update define the term in substance nonfinancial asset, in part, as a financial asset promised to a counterparty in a contract if substantially all of itsdisclosure requirements on fair value ~~of the assets (recognized~~measurements. The ASU removes certain disclosures required by Topic 820 related to transfers between Level 1 and ~~unrecognized) that are promised to the counterparty in the contract is concentrated in nonfinancial assets. If substantially all~~Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; the valuation processes for Level 3 fair value measurements; and for nonpublic entities, the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period. The ASU modifies certain disclosures required by Topic 820 related to disclosure of transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets ~~that are promised~~and liabilities for nonpublic entities; the requirement to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the ~~counterparty~~entity or announced the timing publicly for investments in ~~a contract~~certain entities that calculate net asset value; and clarification that the measurement uncertainty disclosure is ~~concentrated~~to communicate information about the uncertainty in ~~nonfinancial assets, then all~~measurement as of the ~~financial assets promised~~reporting date. The ASU adds certain disclosure requirements related to changes in unrealized gains and losses for the ~~counterparty are~~period included in ~~substance nonfinancial assets. The amendments in this~~

~~update also clarify that nonfinancial assets within~~other comprehensive income for recurring Level 3 fair value measurements held at the scope of Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty. The amendments in this update require an entity to derecognize a distinct nonfinancial asset or distinct in substance nonfinancial asset in a partial sale transaction when it (1) does not have (or ceases to have) a controlling financial interest in the legal entity that holds the asset in accordance with Topic 810 and (2) transfers controlend of the asset in accordance with Topic 606. Once an entity transfers control of a distinct nonfinancial asset or distinct in substance nonfinancial asset, it is required to measure any noncontrolling interest it receives (or retains) at fair value. The amendments were effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period and ~~did not have a material impact on~~ the ~~consolidated financial statements.~~

~~FASB ASC 715~~ ~~– In March 2017, the FASB issued ASU No. 2017-07,~~~~Compensation – Retirement Benefits (Topic 715): Improving the Presentation~~range and weighted average of ~~Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost~~~~. The amendments~~significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information in this update require that an employer disaggregate the service cost component from the other components of net benefit cost. The amendments also provide explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization. The amendments in this update improve the consistency, transparency, and usefulness of financial information to users that have communicated that the service cost component generally is analyzed differently from the other components of net benefit cost. The amendments in this update became effective for annual periods and interim periods within those annual periods beginning after December 15, 2017 and did not have a material impact on the consolidated financial statements.

~~FASB ASC 310~~ ~~– In March 2017, the FASB issued ASU No. 2017-08,~~~~Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities~~. This update amends the amortization period for certain purchased callable debt securities held at a premium. FASB is shortening the amortization period for the premium to the earliest call date. Under current GAAP, entities generally amortize the premium as an adjustment of yield over the contractual lifelieu of the ~~instrument. Concerns were raised that current GAAP excludes certain callable debt securities from consideration of early repayment of principal even~~weighted average if the ~~holder is certain~~entity determines that other quantitative information would be a more reasonable and rational method to reflect the ~~call will be exercised. As a result, upon the exercise~~distribution of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings. There is diversity in practice (1) in the amortization period for premiums of callable debt securities and (2) in how the potential for exercise of a call is factored into current impairment assessments.unobservable inputs used to develop Level 3 fair value measurements. The amendments in this update become effective for ~~annual periods~~fiscal years, and interim periods within those ~~annual periods~~fiscal years beginning after December 15, ~~2018. We are~~2019. Early adoption is permitted. Old National is currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

FASB ASC ~~220~~715 – In ~~February~~August 2018, the FASB issued ASU No. ~~2018-02,~~~~Income Statement~~2018-14, Compensation – ~~Reporting Comprehensive Income (Topic 220)~~Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): ~~Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this ASU help organizations address certain stranded income tax effects in AOCI resulting from~~Disclosure Framework – Changes to the Tax Cuts and Jobs Act. The ASU provides financial statement preparers with an option to reclassify stranded tax effects within AOCI to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. The amendments are effectiveDisclosure Requirements for all organizations for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. Management has elected to early adopt this update effective January 1, 2018, which resulted in a reclassification that decreased beginning accumulated other comprehensive income and increased beginning retained earnings by $10.8 million.

~~FASB ASC 825~~ ~~– In February 2018, the FASB issued an update (ASU No. 2018-03,~~~~Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities)~~Defined Benefit Plans. The amendments in this update ~~clarified~~modify the ~~guidance in ASU No. 2016-01 specifically~~disclosure requirements for ~~equity securities without a readily determinable fair value and financial liabilities for which the fair value option is elected.~~employers that sponsor defined benefit pension or other postretirement plans. The amendments in this update become effective for ~~annual periods~~fiscal years ending after December 15, 2020 and will not have a material impact on the consolidated financial statements.

FASB ASC 350 – In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments in this update become effective for fiscal years beginning after December 15, ~~2017~~2019, and interim periods within those fiscal ~~years beginning after June 15, 2018. We are~~

years. Early adoption is permitted. Old National is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

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

Effective November 1, ~~2017,~~2018, Old National completed the acquisition of ~~St. Paul,~~ Minnesota-based ~~Anchor (MN)~~Klein through a 100% stock ~~and cash~~ merger. ~~Anchor (MN)~~Klein was a bank holding company with ~~Anchor Bank (MN)~~KleinBank as its wholly-owned subsidiary. Founded in ~~1967~~1907 and headquartered in Chaska, Minnesota with ~~17 total~~18 full-service branches, ~~Anchor Bank (MN)~~KleinBank was ~~one of~~ the largest family-owned community ~~banks headquartered in~~bank serving the Twin Cities and ~~also served Mankato, Minnesota. Anchor Bank (MN) has no affiliation with the former AnchorBank (WI) in Madison, Wisconsin, which Old National acquired in 2016.~~its western communities. Old National believes that it will be able to achieve cost savings by integrating the two companies and combining accounting, data processing, retail and lending support, and other administrative functions, which will enable Old National to achieve economies of scale in these areas.

Pursuant to the merger agreement, each holder of ~~Anchor (MN)~~Klein common stock received ~~$2.625 in cash and 1.350~~7.92 shares of Old National Common Stock per share of ~~Anchor (MN)~~Klein common stock such holder owned. The total fair value of consideration for ~~Anchor (MN)~~Klein was ~~$332.8~~$406.5 million, consisting of ~~$31.9 million of cash and the issuance of 16.5~~22.8 million shares of Old National Common Stock valued at ~~$300.8~~$406.5 million. This acquisition was accounted for under the acquisition method of accounting. Accordingly, Old National recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values. Through March 31, ~~2018,~~2019, transaction and integration costs of ~~$14.6~~$15.5 million associated with this acquisition have been expensed and remaining integration costs will be expensed ~~in future periods~~ as incurred.

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

Certain loans and premises and equipment measurements have not been finalized and are subject to change. As Old National receives the ~~end~~information related to facts and circumstances that existed as of the ~~one-year measurement period for finalizing acquisition-date fair values, if information becomes available which would indicate adjustments are required to~~acquisition date, we will finalize the ~~allocation, such~~provisional measurements recorded as of March 31, 2019. Such adjustments will be included in the allocation in the reporting period in which the ~~adjustment~~final amounts are ~~determined. During~~determined, not to exceed one year from the first quarter of 2018, immaterial adjustments were made to the preliminary valuation of the assets acquired and liabilities assumed. These adjustments affected goodwill, definite lived intangible assets, premises and equipment, other assets, and deposits.acquisition date.

The estimated fair value of the core deposit intangible was ~~$26.6~~$39.0 million and is being amortized over an estimated useful life of 1012 years.

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

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

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

The following table reconciles basic and diluted net income per share for the three months ended March 31, ~~2018~~2019 and ~~2017:~~2018:

The following table summarizes the amortized cost and fair value of the available-for-sale and held-to-maturity investment securities portfolio at March 31, ~~2018~~2019 and December 31, ~~2017~~2018 and the corresponding amounts of unrealized gains and losses therein:

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

Proceeds from sales or calls of available-for-sale investment securities and the resulting realized gains and realized ~~losses, and other securities gains or~~ losses were as follows for the three months ended March 31, ~~2018~~2019 and ~~2017:~~2018:

~~(1)~~

~~Other~~

(1)

For the three months ended March 31, 2018, other securities gains (losses) ~~includes net~~included realized gains and ~~unrealized~~losses of equity securities previously classified as trading securities. For the three months ended March 31, 2019, gains ~~or losses associated with trading~~(losses) on equity securities ~~and mutual funds.~~are included in other income.

Trading securities, which consist of mutual funds held in trusts associated with deferred compensation plans for former directors and executives, are recorded at fair value and totaled $5.6 million at March 31, 2018 and December 31, 2017.(1

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.


	At March 31, 2018							At March 31, 2019
(dollars in thousands)					Weighted							Weighted
	Amortized		Fair		Average			Amortized		Fair		Average
Maturity	Cost		Value		Yield			Cost		Value		Yield
Available-for-Sale
Within one year	$	60,568	$	60,503		2.16	%	$	105,019	$	105,091		2.49	%
One to five years		495,123		490,729		2.28			518,087		518,110		2.46
Five to ten years		377,525		374,850		2.83			583,312		590,229		3.28
Beyond ten years		2,355,601		2,293,781		2.61			3,350,187		3,356,342		2.97

Total	$	3,288,817	$	3,219,863		2.58	%	$	4,556,605	$	4,569,772		2.94	%

Held-to-Maturity
Within one year	$	22,368	$	22,563		3.74	%	$	18,069	$	18,179		4.32	%
One to five years		36,340		37,201		4.04			34,127		35,080		3.95
Five to ten years		80,260		82,779		4.35			76,905		79,823		4.49
Beyond ten years		396,185		393,600		4.59			355,733		360,795		3.58

Total	$	535,153	$	536,143		3.74	%	$	484,834	$	493,877		3.78	%

The following table summarizes the available-for-sale investment securities with unrealized losses at March 31, ~~2018~~2019 and December 31, ~~2017~~2018 by aggregated major security type and length of time in a continuous unrealized loss position:


	Less than 12 months					12 months or longer					Total						Less than 12 months					12 months or longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair			Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(dollars in thousands)	Value		Losses			Value		Losses			Value			Losses			Value		Losses			Value		Losses			Value		Losses
March 31, 2018
March 31, 2019
Available-for-Sale
U.S. Treasury	$	5,273	$	(29	)	$	—	$	—		$	5,273		$	(29	)	$	4,395	$	(2	)	$	1,481	$	(11	)	$	5,876	$	(13	)
U.S. government-sponsored entities and agencies		240,181		(4,428	)		331,504		(10,024	)		571,685			(14,452	)		—		—			536,114		(5,056	)		536,114		(5,056	)
Mortgage-backed securities - Agency		753,315		(19,422	)		630,193		(31,107	)		1,383,508			(50,529	)		37,689		(179	)		1,130,333		(22,036	)		1,168,022		(22,215	)
States and political subdivisions		294,601		(4,065	)		7,782		(323	)		302,383	��		(4,388	)		544		—			109,859		(596	)		110,403		(596	)
Pooled trust preferred securities		—		—			8,195		(5,704	)		8,195			(5,704	)		—		—			8,123		(5,727	)		8,123		(5,727	)
Other securities		110,546		(2,522	)		122,440		(2,535	)		232,986			(5,057	)		27,648		(128	)		155,906		(2,847	)		183,554		(2,975	)

Total available-for-sale	$	1,403,916	$	(30,466	)	$	1,100,114	$	(49,693	)	$	2,504,030		$	(80,159	)	$	70,276	$	(309	)	$	1,941,816	$	(36,273	)	$	2,012,092	$	(36,582	)

Held-to-Maturity
U.S. government-sponsored entities and agencies	$	—	$	—		$	71,444	$	(1,925	)	$	71,444		$	(1,925	)
Mortgage-backed securities - Agency		37,880		(664	)		103,727		(2,302	)		141,607			(2,966	)
States and political subdivisions		38,606		(860	)		67,909		(1,612	)		106,515			(2,472	)

Total held-to-maturity	$	76,486	$	(1,524	)	$	243,080	$	(5,839	)	$	319,566		$	(7,363	)

December 31, 2017
December 31, 2018
Available-for-Sale
U.S. Treasury	$	1,480	$	(5	)	$	—	$	—		$	1,480		$	(5	)	$	3,829	$	(12	)	$	1,472	$	(19	)	$	5,301	$	(31	)
U.S. government-sponsored entities and agencies		201,773		(1,333	)		408,493		(10,027	)		610,266			(11,360	)		54,701		(594	)		519,911		(10,748	)		574,612		(11,342	)
Mortgage-backed securities - Agency		789,804		(8,692	)		774,825		(29,240	)		1,564,629			(37,932	)		82,289		(742	)		1,172,984		(43,475	)		1,255,273		(44,217	)
States and political subdivisions		196,024		(1,899	)		90,637		(2,828	)		286,661			(4,727	)		99,162		(1,340	)		151,097		(2,101	)		250,259		(3,441	)
Pooled trust preferred securities		—		—			8,448		(8,157	)		8,448			(8,157	)		—		—			8,495		(5,366	)		8,495		(5,366	)
Other securities		61,260		(429	)		125,517		(1,712	)		186,777			(2,141	)		94,607		(1,965	)		143,842		(4,211	)		238,449		(6,176	)

Total available-for-sale	$	1,250,341	$	(12,358	)	$	1,407,920	$	(51,964	)	$	2,658,261		$	(64,322	)	$	334,588	$	(4,653	)	$	1,997,801	$	(65,920	)	$	2,332,389	$	(70,573	)

Held-to-Maturity
States and political subdivisions	$	2,309	$	(8	)	$	—	$	—		$	2,309		$	(8	)

Total held-to-maturity	$	2,309	$	(8	)	$	—	$	—		$	2,309		$	(8	)

~~In addition to~~

The following table summarizes the ~~unrealized~~held-to-maturity investment securities with unrecognized losses at March 31, 2019 and December 31, 2018 by aggregated major security type and length of time in a continuous unrecognized loss position:

	Less than 12 months					12 months or longer					Total
	Fair		Unrecognized			Fair		Unrecognized			Fair		Unrecognized
(dollars in thousands)	Value		Losses			Value		Losses			Value		Losses
March 31, 2019
Held-to-Maturity
U.S. government-sponsored entities and agencies	$	—	$	—		$	41,036	$	(964	)	$	41,036	$	(964	)
Mortgage-backed securities - Agency		—		—			44,719		(2,190	)		44,719		(2,190	)
States and political subdivisions		—		—			7,433		(214	)		7,433		(214	)
Total held-to-maturity	$	—	$	—		$	93,188	$	(3,368	)	$	93,188	$	(3,368	)

December 31, 2018
Held-to-Maturity
U.S. government-sponsored entities and agencies	$	—	$	—		$	72,359	$	(4,642	)	$	72,359	$	(4,642	)
Mortgage-backed securities - Agency		4,335		(24	)		119,207		(8,006	)		123,542		(8,030	)
States and political subdivisions		24,533		(983	)		70,022		(3,556	)		94,555		(4,539	)
Total held-to-maturity	$	28,868	$	(1,007	)	$	261,588	$	(16,204	)	$	290,456	$	(17,211	)

The unrecognized losses on held-to-maturity investment securities presented in the table above ~~there is an additional $14.0 million of unrealized~~include unrecognized losses on securities that ~~exist due to securities previously~~were transferred from available-for-sale to ~~held-to-maturity.~~held-to-maturity totaling $3.1 million at March 31, 2019 and $10.7 million at December 31, 2018.

Management evaluates debt securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Investment securities classified as available-for-sale or held-to-maturity are generally evaluated for OTTI under FASB ASC 320, Investments – Debt and Equity Securities. In determining OTTI under FASB ASC 320, managementManagement 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.~~time.

When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If an entity intends to sell or more likely than not will be required to sell the security

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

There was no OTTI recorded during the three months ended March 31, ~~2018~~2019 or ~~2017.~~2018.

At March 31, ~~2018,~~2019, Old National’s securities portfolio consisted of ~~1,690~~2,057 securities, ~~850~~532 of which were in an unrealized loss position. The unrealized losses attributable to our U.S. Treasury, U.S. government-sponsored entities and agencies, agency mortgage-backed securities, states and political subdivisions, and other securities are the result of fluctuations in interest rates. Our pooled trust preferred securities are discussed below. At March 31, ~~2018,~~2019, we had no intent to sell any securities that were in an unrealized loss position nor is it expected that we would be required to sell any securities.

Pooled Trust Preferred Securities

At March 31, ~~2018,~~2019, our securities portfolio contained two pooled trust preferred securities with a fair value of ~~$8.2~~$8.1 million and unrealized losses of $5.7 million. These securities are not subject to FASB ASC 325-10 and are evaluated using collateral-specific assumptions to estimate the expected future interest and principal cash flows. For the three months ended March 31, ~~2018~~2019 and ~~2017,~~2018, our analysis indicated no OTTI on these securities.

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

The table below summarizes the relevant characteristics of our pooled trust preferred securities as well as our single issuer trust preferred securities that are included in the “other securities” category in this footnote. Each of the pooled trust preferred securities support a more senior tranche of security holders. Both pooled trust preferred securities have experienced credit defaults. However, these securities have excess subordination and are not other-than-temporarily impaired as a result of their class hierarchy, which provides more loss protection.

Trust preferred
securities
                     Actual Expected Excess
March 31, 2018                      Deferrals Defaults as Subordination
(dollars in                   # of Issuers    and Defaults a % of as a % of
thousands)       Lowest          Unrealized Realized    Currently    as a % of Remaining Current
      Credit    Amortized    Fair    Gain/ Losses    Performing/    Original Performing Performing
   Class    Rating (1)    Cost    Value    (Loss) 2018    Remaining    Collateral Collateral Collateral
Pooled trust preferred securities:


Pretsl XXVII LTD
   B    B    $ 4,399    $ 2,442    $ (1,957 ) $ —      35/44    16.7 % 4.2 % 46.7 %
Trapeza Ser 13A
   A2A    BBB    9,500    5,753    (3,747 ) —      48/53    4.5 % 4.5 % 46.2 %







         13,899    8,195    (5,704 ) —
Single Issuer trust preferred securities:


Fleet Cap Tr V (BOA)
      BBB-    3,409    3,325    (84 ) —
JP Morgan Chase Cap XIII
      BBB-    4,780    4,650    (130 ) —
NB-Global
      BBB-    808    941    133 —







         8,997    8,916    (81 ) —
Total
         $ 22,896    $ 17,111    $ (5,785 ) $ —

Trust preferred securities													Actual	Expected	Excess
March 31, 2019													Deferrals	Defaults as	Subordination
(dollars in thousands)												# of Issuers	and Defaults	a % of	as a % of
		Lowest					Unrealized			Realized		Currently	as a % of	Remaining	Current
		Credit	Amortized		Fair		Gain/			Losses		Performing/	Original	Performing	Performing
	Class	Rating (1)	Cost		Value		(Loss)			2019		Remaining	Collateral	Collateral	Collateral
Pooled trust preferred securities:
Pretsl XXVII LTD	B	B	$	4,334	$	2,298	$	(2,036	)	$	—	33/43	17.2%	4.5%	36.2%
Trapeza Ser 13A	A2A	BBB		9,516		5,825		(3,691	)		—	44/49	4.5%	4.5%	55.7%
				13,850		8,123		(5,727	)		—
Single Issuer trust preferred securities:
JP Morgan Chase & Co		BBB-		4,790		4,375		(415	)		—

Total			$	18,640	$	12,498	$	(6,142	)	$	—

~~(1)~~

~~Lowest rating for the security provided by any nationally recognized credit rating agency.~~

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

Equity securities are recorded at fair value and totaled $6.2 million at March 31, 2019 and $5.6 million at December 31, 2018. There were gains on equity securities of $0.2 million during the three months ended March 31, 2019 and $0.1 million during the three months ended March 31, 2018. Old National also has equity securities without readily determinable fair values that are included in other assets that totaled $76.6 million at March 31, 2019 and $79.2 million at December 31, 2018. These are illiquid investments that consist of partnerships, limited liability companies, and other ownership interests that support affordable housing, economic development, and community

revitalization initiatives in low-to-moderate income neighborhoods. There have been no impairments or downward adjustments on these securities in the three months ended March 31, 2019 or 2018.

NOTE 76 – LOANS HELD FOR SALE

Mortgage loans held for immediate sale in the secondary market were ~~$17.6~~$14.1 million at March 31, ~~2018,~~2019, compared to ~~$17.9~~$14.9 million at December 31, ~~2017.~~2018. Residential loans that Old National has originated with the intent to sell are recorded at fair value in accordance with FASB ASC 825-10,Financial Instruments. Conventional mortgage production is sold on a servicing retained basis. Certain loans, such as government guaranteed mortgage loans are sold on servicing released basis.

NOTE 87 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Old National’s loans consist primarily of loans made to consumers and commercial clients in various industries including manufacturing, agribusiness, transportation, mining, wholesaling, and retailing. Most of Old National’s lending activity occurs within our principal geographic markets of Indiana, Kentucky, Michigan, Wisconsin, and Minnesota. Old National manages concentrations of credit exposure by industry, product, geography, customer relationship, and loan size. While loans to lessors of both residential and non-residential real estate exceed 10% of total loans, no individual sub-segment category within those broader categories ~~reach~~reaches the 10% threshold.

The composition of loans by lending classification was as follows:


	March 31,			December 31,			March 31,			December 31,
(dollars in thousands)	2018			2017			2019			2018
Commercial (1)	$	2,811,629		$	2,717,269		$	3,042,790		$	3,232,970
Commercial real estate:
Construction		351,448			374,306			552,825			504,625
Other		4,098,532			3,980,246			4,470,795			4,454,226
Residential real estate		2,158,532			2,167,053			2,243,885			2,248,404
Consumer credit:
Home equity		487,237			507,507			553,264			589,322
Auto		1,117,027			1,148,672			1,034,347			1,059,633
Other		214,277			223,068			171,071			154,712

Total loans		11,238,682			11,118,121			12,068,977			12,243,892
Allowance for loan losses		(50,381	)		(50,381	)		(55,559	)		(55,461	)

Net loans	$	11,188,301		$	11,067,740		$	12,013,418		$	12,188,431

~~(1)~~

(1)

Includes direct finance leases of ~~$27.4~~$57.6 million at March 31, ~~2018~~2019 and ~~$29.5~~$60.0 million at December 31, ~~2017.~~2018.

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

Commercial

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

Commercial Real Estate

These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. The properties securing Old National’s commercial real estate portfolio are diverse in terms of type and geographic location. Management monitors and evaluates commercial real estate loans based on

collateral, geography and risk grade criteria. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

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

~~The acquisition of Anchor (MN) on November 1, 2017 added $864.4 million of commercial real estate loans to our portfolio.~~ At ~~208%~~194%, Old National Bank’s commercial real estate loans as a percentage of its risk-based capital remained well below the regulatory guideline limit of 300% at March 31, ~~2018.~~2019.

Residential

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

Consumer

Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. We assumed student loans in the acquisition of Anchor (WI) in May 2016. Student loans are guaranteed by the government from 97% to 100% and totaled $66.0 million at March 31, 2018, compared to $68.2 million at December 31, 2017. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in residential property or other collateral values. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Allowance for Loan Losses

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

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

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

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

Old National’s activity in the allowance for loan losses for the three months ended March 31, ~~2018~~2019 and ~~2017~~2018 was as follows:


				Commercial															Commercial
(dollars in thousands)	Commercial			Real Estate			Residential			Consumer			Total			Commercial			Real Estate			Residential			Consumer			Total
Three Months Ended March 31, 2019
Balance at beginning of period																$	21,742		$	23,470		$	2,277		$	7,972		$	55,461
Charge-offs																	(160	)		(235	)		(178	)		(2,319	)		(2,892	)
Recoveries																	375			570			72			930			1,947
Provision																	(1,551	)		1,364			131			1,099			1,043
Balance at end of period																$	20,406		$	25,169		$	2,302		$	7,682		$	55,559

Three Months Ended March 31, 2018
Balance at beginning of period	$	19,246		$	21,436		$	1,763		$	7,936		$	50,381		$	19,246		$	21,436		$	1,763		$	7,936		$	50,381
Charge-offs		(245	)		(3	)		(362	)		(2,075	)		(2,685	)		(245	)		(3	)		(362	)		(2,075	)		(2,685	)
Recoveries		511			484			148			1,162			2,305			511			484			148			1,162			2,305
Provision		79			(1,121	)		214			1,208			380			79			(1,121	)		214			1,208			380

Balance at end of period	$	19,591		$	20,796		$	1,763		$	8,231		$	50,381		$	19,591		$	20,796		$	1,763		$	8,231		$	50,381

Three Months Ended March 31, 2017
Balance at beginning of period	$	21,481		$	18,173		$	1,643		$	8,511		$	49,808
Charge-offs		(470	)		(568	)		(414	)		(1,787	)		(3,239	)
Recoveries		603			1,225			79			1,011			2,918
Provision		494			(877	)		428			302			347

Balance at end of period	$	22,108		$	17,953		$	1,736		$	8,037		$	49,834

The following table provides Old National’s recorded investment in loans by portfolio segment at March 31, ~~2018~~2019 and December 31, ~~2017~~2018 and other information regarding the allowance:


			Commercial										Commercial
(dollars in thousands)	Commercial		Real Estate		Residential		Consumer		Total		Commercial		Real Estate		Residential		Consumer		Total
March 31, 2018
March 31, 2019
Allowance for loan losses:
Individually evaluated for impairment	$	4,024	$	6,054	$	—	$	—	$	10,078	$	4,534	$	6,336	$	—	$	—	$	10,870
Collectively evaluated for impairment		15,557		14,742		1,763		8,069		40,131		15,867		18,680		2,301		7,528		44,376
Loans acquired with deteriorated credit quality		10		—		—		162		172		5		153		1		154		313

Total allowance for loan losses	$	19,591	$	20,796	$	1,763	$	8,231	$	50,381	$	20,406	$	25,169	$	2,302	$	7,682	$	55,559

Loans and leases outstanding:
Individually evaluated for impairment	$	30,092	$	64,693	$	—	$	—	$	94,785	$	34,660	$	78,055	$	—	$	—	$	112,715
Collectively evaluated for impairment		2,776,738		4,364,309		2,147,693		1,813,910		11,102,650		3,002,256		4,921,352		2,234,966		1,755,393		11,913,967
Loans acquired with deteriorated credit quality		4,799		20,978		10,839		4,631		41,247		5,874		24,213		8,919		3,289		42,295

Total loans and leases outstanding	$	2,811,629	$	4,449,980	$	2,158,532	$	1,818,541	$	11,238,682	$	3,042,790	$	5,023,620	$	2,243,885	$	1,758,682	$	12,068,977

December 31, 2017
December 31, 2018
Allowance for loan losses:
Individually evaluated for impairment	$	3,424	$	6,654	$	—	$	—	$	10,078	$	6,035	$	8,306	$	—	$	—	$	14,341
Collectively evaluated for impairment		15,790		14,782		1,763		7,802		40,137		15,700		14,845		2,276		7,821		40,642
Loans acquired with deteriorated credit quality		32		—		—		134		166		7		319		1		151		478

Total allowance for loan losses	$	19,246	$	21,436	$	1,763	$	7,936	$	50,381	$	21,742	$	23,470	$	2,277	$	7,972	$	55,461

Loans and leases outstanding:
Individually evaluated for impairment	$	26,270	$	66,061	$	—	$	—	$	92,331	$	35,410	$	83,104	$	—	$	—	$	118,514
Collectively evaluated for impairment		2,685,847		4,266,665		2,155,750		1,874,002		10,982,264		3,191,367		4,850,356		2,239,147		1,800,115		12,080,985
Loans acquired with deteriorated credit quality		5,152		21,826		11,303		5,245		43,526		6,193		25,391		9,257		3,552		44,393

Total loans and leases outstanding	$	2,717,269	$	4,354,552	$	2,167,053	$	1,879,247	$	11,118,121	$	3,232,970	$	4,958,851	$	2,248,404	$	1,803,667	$	12,243,892

Credit Quality

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

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

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

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

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

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

The risk category of commercial and commercial real estate loans by class of loans at March 31, ~~2018~~2019 and December 31, ~~2017~~2018 was as follows:


(dollars in thousands)					Commercial				Commercial								Commercial				Commercial
					Real Estate -				Real Estate -								Real Estate -				Real Estate -
Corporate Credit Exposure	Commercial				Construction				Other				Commercial				Construction				Other
Credit Risk Profile by	March 31,		December 31,		March 31,		December 31,		March 31,		December 31,		March 31,		December 31,		March 31,		December 31,		March 31,		December 31,
Internally Assigned Grade	2018		2017		2018		2017		2018		2017		2019		2018		2019		2018		2019		2018
Grade:
Pass	$	2,657,943	$	2,577,824	$	335,761	$	357,438	$	3,886,508	$	3,762,896	$	2,837,646	$	3,029,130	$	494,410	$	460,158	$	4,140,815	$	4,167,902
Criticized		78,612		74,876		14,782		14,758		81,479		98,451		106,501		98,798		43,161		29,368		119,173		110,586
Classified - substandard		41,899		37,367		—		—		71,047		58,584		64,597		66,394		746		1,275		141,357		102,961
Classified - nonaccrual		30,823		24,798		905		2,110		31,364		30,108		22,982		29,003		14,508		13,824		33,870		37,441
Classified - doubtful		2,352		2,404		—		—		28,134		30,207		11,064		9,645		—		—		35,580		35,336

Total	$	2,811,629	$	2,717,269	$	351,448	$	374,306	$	4,098,532	$	3,980,246	$	3,042,790	$	3,232,970	$	552,825	$	504,625	$	4,470,795	$	4,454,226

Old National considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, Old National also evaluates credit quality based on the aging status of the loan and by payment activity. The following table presents the recorded investment in residential and consumer loans based on payment activity at March 31, ~~2018~~2019 and December 31, ~~2017:~~2018:

											Consumer
			Consumer								Home
(dollars in thousands)	Residential		Home Equity		Auto		Other		Residential		Equity		Auto		Other
March 31, 2018
March 31, 2019
Performing	$	2,137,395	$	482,214	$	1,114,511	$	209,235	$	2,218,094	$	548,501	$	1,031,049	$	170,046
Nonperforming		21,137		5,023		2,515		5,043		25,791		4,763		3,298		1,025

Total	$	2,158,532	$	487,237	$	1,117,026	$	214,278	$	2,243,885	$	553,264	$	1,034,347	$	171,071

December 31, 2017
December 31, 2018
Performing	$	2,144,882	$	502,322	$	1,145,977	$	217,819	$	2,223,450	$	586,235	$	1,057,038	$	153,113
Nonperforming		22,171		5,185		2,695		5,249		24,954		3,087		2,595		1,599

Total	$	2,167,053	$	507,507	$	1,148,672	$	223,068	$	2,248,404	$	589,322	$	1,059,633	$	154,712

Impaired Loans

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

The following table shows Old National’s impaired loans at March 31, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. Only purchased loans that have experienced subsequent impairment since the date acquired (excluding loans acquired with deteriorated credit quality) are included in the table below.


			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
(dollars in thousands)	Investment		Balance		Allowance		Investment		Balance		Allowance
March 31, 2018
March 31, 2019
With no related allowance recorded:
Commercial							$	25,345	$	25,552	$	—
Commercial Real Estate - Construction								10,953		10,953		—
Commercial Real Estate - Other								39,143		40,043		—
Residential								2,302		2,323		—
Consumer								958		1,130		—
With an allowance recorded:
Commercial								9,315		9,368		4,534
Commercial Real Estate - Construction								3,555		3,555		1,634
Commercial Real Estate - Other								24,404		24,404		4,702
Residential								873		873		44
Consumer								1,373		1,373		69
Total							$	118,221	$	119,574	$	10,983

December 31, 2018
With no related allowance recorded:
Commercial	$	20,869	$	21,656	$	—	$	22,031	$	22,292	$	—
Commercial Real Estate - Other		42,923		44,688		—		41,126		41,914		—
Residential		2,107		2,128		—		2,276		2,296		—
Consumer		2,000		2,436		—		362		535		—
With an allowance recorded:
Commercial		9,223		9,276		4,024		13,379		13,432		6,035
Commercial Real Estate - Construction		905		1,371		401		13,824		13,824		1,830
Commercial Real Estate - Other		20,865		21,081		5,653		28,154		28,154		6,476
Residential		950		950		48		889		889		44
Consumer		2,022		2,022		101		2,013		2,013		101

Total	$	101,864	$	105,608	$	10,227	$	124,054	$	125,349	$	14,486

December 31, 2017
With no related allowance recorded:
Commercial	$	20,557	$	21,483	$	—
Commercial Real Estate - Other		38,678		44,564		—
Residential		2,443		2,464		—
Consumer		1,685		2,105		—
With an allowance recorded:
Commercial		5,713		5,713		3,424
Commercial Real Estate - Construction		905		1,371		401
Commercial Real Estate - Other		26,478		26,902		6,253
Residential		870		870		44
Consumer		2,211		2,228		110

Total	$	99,540	$	107,700	$	10,232

The average balance of impaired loans during the three months ended March 31, ~~2018~~2019 and ~~2017~~2018 are included in the table below.


	Three Months Ended				Three Months Ended
	March 31,				March 31,
(dollars in thousands)	2018		2017			2019		2018
Average Recorded Investment
With no related allowance recorded:
Commercial	$	20,714	$	28,780	$	23,688	$	20,714
Commercial Real Estate - Construction						5,477		—
Commercial Real Estate - Other		40,801		32,671		40,135		40,801
Residential		2,275		1,931		2,289		2,275
Consumer		1,842		1,377		660		1,842
With an allowance recorded:
Commercial		7,468		8,743		11,347		7,468
Commercial Real Estate - Construction		905		—		8,690		905
Commercial Real Estate - Other		23,672		20,650		26,279		23,672
Residential		910		1,118		881		910
Consumer		2,117		2,003		1,693		2,117

Total	$	100,704	$	97,273	$	121,139	$	100,704

Old National does not record interest on nonaccrual loans until principal is recovered. Interest income recognized on impaired loans during the three months ended March 31, ~~2018~~2019 and ~~2017~~2018 was immaterial.

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

Loans accounted for under FASB ASC Topic 310-30 accrue interest, even though they may be contractually past due, as any nonpayment of contractual principal or interest is considered in the periodic re-estimation of expected cash flows and is included in the resulting recognition of current period loan loss provision or prospective yield adjustments.

Old National’s past due ~~financing receivables~~loans at March 31, ~~2018~~2019 and December 31, ~~2017~~2018 were as follows:

																	Past Due
																	90 Days or
													30-59 Days		60-89 Days		More and				Total
(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Past Due 90 Days or More and Accruing		Nonaccrual		Total Past Due		Current		Past Due		Past Due		Accruing		Nonaccrual (1)		Past Due		Current
March 31, 2018
March 31, 2019
Commercial	$	1,068	$	195	$	10	$	33,175	$	34,448	$	2,777,181	$	1,308	$	888	$	98	$	34,046	$	36,340	$	3,006,450
Commercial Real Estate:
Construction		—		—		—		905		905		350,543		—		—		—		14,508		14,508		538,317
Other		1,779		932		—		59,498		62,209		4,036,323		1,656		1,858		140		69,450		73,104		4,397,691
Residential		21,071		909		16		21,137		43,133		2,115,399		25,297		855		49		25,791		51,992		2,191,893
Consumer:
Home equity		1,965		183		16		5,023		7,187		480,050		786		310		158		4,763		6,017		547,247
Auto		4,904		1,139		214		2,515		8,772		1,108,255		4,667		790		89		3,298		8,844		1,025,503
Other		2,121		1,014		71		5,043		8,249		206,028		494		110		26		1,025		1,655		169,416

Total loans	$	32,908	$	4,372	$	327	$	127,296	$	164,903	$	11,073,779	$	34,208	$	4,811	$	560	$	152,881	$	192,460	$	11,876,517

December 31, 2017
December 31, 2018
Commercial	$	986	$	360	$	144	$	27,202	$	28,692	$	2,688,577	$	3,627	$	279	$	52	$	38,648	$	42,606	$	3,190,364
Commercial Real Estate:
Construction		—		—		—		2,110		2,110		372,196		—		—		—		13,824		13,824		490,801
Other		2,247		89		—		60,315		62,651		3,917,595		1,633		500		40		72,777		74,950		4,379,276
Residential		18,948		3,416		—		22,171		44,535		2,122,518		25,947		3,437		258		24,954		54,596		2,193,808
Consumer:
Home equity		1,467		230		68		5,185		6,950		500,557		1,434		960		456		3,087		5,937		583,385
Auto		6,487		1,402		532		2,695		11,116		1,137,556		7,091		1,903		377		2,595		11,966		1,047,667
Other		3,967		1,514		150		5,249		10,880		212,188		711		210		170		1,599		2,690		152,022

Total loans	$	34,102	$	7,011	$	894	$	124,927	$	166,934	$	10,951,187	$	40,443	$	7,289	$	1,353	$	157,484	$	206,569	$	12,037,323

(1)

Includes purchased credit impaired loans of $19.6 million at March 31, 2019 and $20.5 million at December 31, 2018 that are categorized as nonaccrual for credit analysis purposes because the collection of principal or interest is doubtful. However, these loans are accounted for under FASB ASC 310-30 and accordingly treated as performing assets.

Loan Participations

Old National has loan participations, which qualify as participating interests, with other financial institutions. At March 31, ~~2018,~~2019, these loans totaled ~~$580.2~~$952.5 million, of which ~~$301.4~~$471.6 million had been sold to other financial institutions and ~~$278.8~~$480.9 million was retained by Old National. The loan participations convey proportionate ownership rights with equal priority to each participating interest holder; involve no recourse (other than ordinary representations and warranties) to, or subordination by, any participating interest holder; all cash flows are divided among the participating interest holders in proportion to each holder’s share of ownership; and no holder has the right to pledge the entire financial asset unless all participating interest holders agree.

Troubled Debt Restructurings

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

Any loans that are modified are reviewed by Old National to identify if a TDR has occurred, which is when for economic or legal reasons related to a borrower’s financial difficulties, Old National Bank grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status. The modification of the terms of such loans include one or a combination of the following: a reduction of the stated interest rate of the loan, an extension of the maturity date at a stated rate of interest lower than the current market rate of new debt with similar risk, or a permanent reduction of the recorded investment of the loan.

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

If we are unable to resolve a nonperforming loan issue, the credit will be charged off when it is apparent there will be a loss. For large commercial type loans, each relationship is individually analyzed for evidence of apparent loss based on quantitative benchmarks or subjectively based upon certain events or particular circumstances. Generally, Old National charges off small commercial loans scored through our small business credit center with contractual balances under ~~$250,000~~$250,000 that are 90 days or more delinquent and do not have adequate collateral support. For residential and consumer loans, a charge off is recorded at the time foreclosure is initiated or when the loan becomes 120 to 180 days past due, whichever is earlier.

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

When a residential or consumer loan is identified as a TDR, the loan is typically written down to its collateral value less selling costs.

The following table presents activity in TDRs for the three months ended March 31, ~~2018~~2019 and ~~2017:~~2018:


				Commercial															Commercial
(dollars in thousands)	Commercial			Real Estate			Residential			Consumer			Total			Commercial			Real Estate			Residential			Consumer			Total
Three Months Ended March 31, 2019
Balance at beginning of period																$	10,275		$	27,671		$	3,390		$	2,374		$	43,710
(Charge-offs)/recoveries																	(7	)		(75	)		—			(3	)		(85	)
(Payments)/disbursements																	(1,029	)		(1,562	)		(143	)		(58	)		(2,792	)
Additions																	2,407			3,103			—			—			5,510
Balance at end of period																$	11,646		$	29,137		$	3,247		$	2,313		$	46,343

Three Months Ended March 31, 2018
Balance at beginning of period	$	12,088		$	34,705		$	3,315		$	3,895		$	54,003		$	12,088		$	34,705		$	3,315		$	3,895		$	54,003
(Charge-offs)/recoveries		(129	)		(10	)		23			298			182			(129	)		(10	)		23			298			182
Payments		(476	)		(495	)		(276	)		(537	)		(1,784	)
(Payments)/disbursements																	(580	)		(773	)		(280	)		(605	)		(2,238	)
Additions		539			566			—			432			1,537			539			566			—			432			1,537
Interest collected on nonaccrual loans		(104	)		(278	)		(4	)		(68	)		(454	)

Balance at end of period	$	11,918		$	34,488		$	3,058		$	4,020		$	53,484		$	11,918		$	34,488		$	3,058		$	4,020		$	53,484

Three Months Ended March 31, 2017
Balance at beginning of period	$	16,802		$	18,327		$	2,985		$	2,602		$	40,716
(Charge-offs)/recoveries		35			355			—			(100	)		290
Payments		(3,827	)		(1,751	)		(142	)		(508	)		(6,228	)
Additions		9,442			—			564			1,924			11,930
Interest collected on nonaccrual loans		2,170			358			—			11			2,539

Balance at end of period	$	24,622		$	17,289		$	3,407		$	3,929		$	49,247

~~Approximately $36.9 million of the~~

TDRs ~~at March 31, 2018 were~~ included with nonaccrual loans ~~compared to $34.0~~totaled $27.0 million ~~of the TDRs~~at March 31, 2019 and $26.3 million at December 31, ~~2017.~~2018. Old National has allocated specific reserves to customers whose loan terms have been modified in TDRs totaling ~~$5.9~~$3.8 million at March 31, ~~2018~~2019 and ~~$5.7~~$3.0 million at December 31, ~~2017.~~2018. At March 31, ~~2018,~~2019, Old National had committed to lend an additional ~~$4.6~~$5.0 million to customers with outstanding loans that are classified as TDRs.

The pre-modification and post-modification outstanding recorded investments of loans modified as TDRs during the three months ended March 31, ~~2018~~2019 and ~~2017~~2018 are the same except for when the loan modifications involve the forgiveness of principal. The following table presents loans by class modified as TDRs that occurred during the three months ended March 31, ~~2018~~2019 and ~~2017:~~2018:

								Pre-modification		Post-modification
			Pre-modification		Post-modification			Outstanding		Outstanding
	Number		Outstanding Recorded		Outstanding Recorded		Number	Recorded		Recorded
(dollars in thousands)	of Loans		Investment		Investment		of Loans	Investment		Investment
Three Months Ended March 31, 2019
TDR:
Commercial							3	$	2,407	$	2,407
Commercial Real Estate - Other							1		3,103		3,103
Total							4	$	5,510	$	5,510

Three Months Ended March 31, 2018
TDR:
Commercial		1	$	539	$	539	1	$	539	$	539
Commercial Real Estate - Other		1		566		566	1		566		566
Consumer		1		432		432	1		432		432

Total		3	$	1,537	$	1,537	3	$	1,537	$	1,537

Three Months Ended March 31, 2017
TDR:
Commercial		6	$	9,442	$	9,442
Residential		3		564		564
Consumer		5		1,924		1,924

Total		14	$	11,930	$	11,930

The TDRs that occurred during the three months ended March 31, 2019 and 2018 did not ~~change~~have a material impact on the allowance for loan losses and resulted in no charge-offs during the three months ended March 31, 2019 or 2018. The TDRs that occurred during the three months ended March 31, 2017 decreased the allowance for loan losses by $0.1 million due to a change in collateral position on a large commercial loan and resulted in no charge-offs.

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

TDRs for which there was a payment default within twelve months following the modification were insignificant during the three months ended March 31, ~~2018~~2019 and ~~2017.~~2018.

modification. The evaluation is performed under our internal underwriting policy. We also evaluate whether a concession has been granted or if we were adequately compensated through a market interest rate, additional collateral or a bona fide guarantee. We also consider whether the modification was insignificant relative to the other terms of the agreement or the delay in a payment.

PCI loans are not considered impaired until after the point at which there has been a degradation of cash flows below our expected cash flows at acquisition. If a PCI loan is subsequently modified, and meets the definition of a TDR, it will be removed from PCI accounting and accounted for as a TDR only if the PCI loan was being accounted for individually. If the PCI loan is being accounted for as part of a pool, it will not be removed from the pool. As of March 31, ~~2018,~~2019, it has not been necessary to remove any loans from PCI accounting.

In general, once a modified loan is considered a TDR, the loan will always be considered a TDR, and therefore impaired, until it is paid in full, otherwise settled, sold or charged off. However, guidance also permits for loans to be removed from TDR status when subsequently restructured under these circumstances: (1) at the time of the subsequent restructuring, the borrower is not experiencing financial difficulties, and this is documented by a current credit evaluation at the time of the restructuring, (2) under the terms of the subsequent restructuring agreement, the institution has granted no concession to the borrower; and (3) the subsequent restructuring agreement includes market terms that are no less favorable than those that would be offered for a comparable new loan. For loans

subsequently restructured that have cumulative principal forgiveness, the loan should continue to be measured in accordance with ASC 310-10,Receivables – Overall. However, consistent with ASC 310-40-50-2,Troubled Debt Restructurings by Creditors, Creditor Disclosure of Troubled Debt Restructurings, the loan would not be required to be reported in the years following the restructuring if the subsequent restructuring meets both of these criteria: (1) has an interest rate at the time of the subsequent restructuring that is not less than a market interest rate; and (2) is performing in compliance with its modified terms after the subsequent restructuring.

Purchased Credit Impaired Loans

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

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


	March 31,			December 31,			March 31,			December 31,
(dollars in thousands)	2018			2017			2019			2018
Commercial	$	4,799		$	5,152		$	5,874		$	6,193
Commercial real estate		20,978			21,826			24,213			25,391
Residential		10,839			11,303			8,919			9,257
Consumer		4,631			5,245			3,289			3,552

Carrying amount		41,247			43,526			42,295			44,393
Allowance for loan losses		(172	)		(166	)		(313	)		(478	)

Carrying amount, net of allowance	$	41,075		$	43,360		$	41,982		$	43,915

The outstanding balance of loans accounted for under ASC 310-30, including contractual principal, interest, fees and penalties, was ~~$230.5~~$243.7 million at March 31, ~~2018~~2019 and ~~$235.9~~$246.9 million at December 31, ~~2017.~~2018.

The accretable difference on PCI loans is the difference between the expected cash flows and the net present value of expected cash flows with such difference accreted into earnings using the effective yield method over the term of the loans. Accretion recorded as loan interest income totaled $2.0 million during the three months ended March 31, 2019 and $4.5 million during the three months ended March 31, ~~2018 and $4.7 million during the three months ended March 31, 2017.~~2018. Improvement in cash flow expectations has resulted in a reclassification from nonaccretable difference to accretable yield as shown in the table below.

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


	Three Months Ended						Three Months Ended
	March 31,						March 31,
(dollars in thousands)	2018			2017			2019			2018
Balance at beginning of period	$	27,835		$	33,603		$	25,051		$	27,835
Accretion of income		(4,526	)		(4,685	)		(1,968	)		(4,526	)
Reclassifications from (to) nonaccretable difference		1,379			610			1,306			1,379
Disposals/other adjustments		4			6			—			4

Balance at end of period	$	24,692		$	29,534		$	24,389		$	24,692

Included in Old National’s allowance for loan losses is ~~$0.2~~$0.3 million related to the purchased loans disclosed above at March 31, ~~2018~~2019 and $0.5 million at December 31, ~~2017.~~2018.

PCI loans purchased during ~~2017~~2018 for which it was probable at acquisition that all contractually required payments would not be collected were as follows:


(dollars in thousands)	Anchor (MN) (1)			Klein (1)
Contractually required payments	$	16,898		$	18,568
Nonaccretable difference		(4,787	)		(4,521	)

Cash flows expected to be collected at acquisition		12,111			14,047
Accretable yield		(1,556	)		(2,384	)

Fair value of acquired loans at acquisition	$	10,555		$	11,663

~~(1)~~

(1)

Old National acquired ~~Anchor (MN)~~Klein effective November 1, ~~2017.~~2018.

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

NOTE 98 – OTHER REAL ESTATE OWNED

The following table presents activity in other real estate owned for the three months ended March 31, ~~2018~~2019 and ~~2017:~~2018:


	Three Months Ended						Three Months Ended
	March 31,						March 31,
(dollars in thousands)	2018			2017			2019			2018
Balance at beginning of period	$	8,810		$	18,546		$	3,232		$	8,810
Additions		550			291			394			550
Sales		(2,351	)		(5,420	)		(272	)		(2,351	)
Impairment		(274	)		(870	)

Impairments								(75	)		(274	)
Balance at end of period (1)	$	6,735		$	12,547		$	3,279		$	6,735

~~(1)~~

(1)

Includes repossessed personal property of $0.4million at March 31, 2019 and $0.3 million at March 31, ~~2018 and 2017.~~2018.

~~At March 31, 2018, foreclosed~~Foreclosed residential real estate property included in the table above totaled ~~$1.0 million. At~~$1.2million at March 31, ~~2018, consumer~~2019 and $1.3 million at December 31, 2018. Consumer mortgage loans collateralized by residential real property that were in the process of foreclosure totaled ~~$6.2 million.~~$3.7 million at March 31, 2019 and $4.9 million at December 31, 2018.

NOTE 109 – PREMISES AND EQUIPMENT

The composition of premises and equipment at March 31, ~~2018~~2019 and December 31, ~~2017~~2018 was as follows:


	March 31,			December 31,			March 31,			December 31,
(dollars in thousands)	2018			2017			2019			2018
Land	$	71,618		$	73,046		$	79,314		$	79,231
Buildings		342,757			343,833			372,231			365,102
Furniture, fixtures, and equipment		95,729			94,254			108,457			107,862
Leasehold improvements		39,715			38,918			43,153			42,288

Total		549,819			550,051			603,155			594,483
Accumulated depreciation		(96,216	)		(91,977	)		(112,939	)		(108,571	)

Premises and equipment, net	$	453,603		$	458,074		$	490,216		$	485,912

Depreciation expense was $6.4 million for the three months ended March 31, 2019, compared to $5.8 million for the three months ended March 31, ~~2018, compared to $5.2 million for the three months ended March 31, 2017.~~2018.

~~Operating Leases~~

Old National rents certain premises and equipment under operating leases, which expire at various dates. Many of these leases require the payment of property taxes, insurance premiums, maintenance, and other costs. In some cases, rentals are subject to increase in relation to a cost-of-living index. The leases have original terms ranging from two years and six months to twenty-five years, and Old National has the right, at its option, to extend the terms of certain leases for four additional successive terms of five years. Old National does not have any material sub-lease agreements. Rent expense was $4.4 million for the three months ended March 31, 2018, compared to $3.9 million for the three months ended March 31, 2017.

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

~~Capital~~Finance Leases

Old National leases ~~two~~three branch buildings and certain equipment under ~~capital leases.~~finance leases that are included in premises and equipment. See ~~Note~~Notes 10 and 16 to the consolidated financial statements for detail regarding these leases.

NOTE 10 – LEASES

Old National adopted FASB Topic 842 as of January 1, 2019. See Note 2 to the consolidated financial statements regarding transition guidance related to the new standard.

Old National determines if an arrangement is or contains a lease at contract inception. Operating leases are included in operating lease right-of-use assets and operating lease liabilities in our consolidated balance sheet at March 31, 2019. Finance leases are included in premises and equipment and other borrowings in our consolidated balance sheets at March 31, 2019 and 2018, and December 31, 2018.

Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. In determining the present value of lease payments, we use the implicit lease rate when readily determinable. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date. The incremental borrowing rate is the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment.

Old National has operating and finance leases for land, office space, banking centers, and equipment. These leases are generally for periods of 10 to 20 years with various renewal options. We include certain renewal options in the measurement of our right-of-use assets and lease liabilities if they are reasonably certain to be exercised. Variable lease payments that are dependent on an index or a rate are initially measured using the index or rate at the commencement date and are included in the measurement of the lease liability. Variable lease payments that are not dependent on an index or a rate are excluded from the measurement of the lease liability and are recognized in profit and loss in accordance with Topic 842. Variable lease payments are defined as payments made for the right to use an asset that vary because of changes in facts or circumstances occurring after the commencement date, other than the passage of time.

We have made a policy election to exclude the recognition requirements of Topic 842 to all classes of leases with original terms of 12 months or less. Instead, the short-term lease payments are recognized in profit or loss on a straight-line basis over the lease term.

Old National has lease agreements with lease and non-lease components, which are generally accounted for separately. For real estate leases, non-lease components and other non-components, such as common area maintenance charges, real estate taxes, and insurance are not included in the measurement of the lease liability since

they are generally able to be segregated. For certain equipment leases, Old National accounts for the lease and non-lease components as a single lease component using the practical expedient available for that class of assets. Additionally, for certain equipment leases, Old National applies a portfolio approach to effectively account for the operating lease right-of-use assets and liabilities.

Old National does not have any material sub-lease agreements.

The components of lease expense were as follows:

	Three Months Ended
(dollars in thousands)	March 31, 2019
Operating lease cost	$	4,402
Finance lease cost:
Amortization of right-of-use assets		158
Interest on lease liabilities		81
Short-term lease cost		1
Sub-lease income		(179	)
Total	$	4,463

Lease expense for operating leases for the three months ended March 31, 2018 was $4.4 million.

Supplemental balance sheet information related to leases was as follows:

(dollars in thousands)	March 31, 2019
Operating Leases
Operating lease right-of-use assets	$	109,916
Operating lease liabilities		114,040

Finance Leases
Premises and equipment, net		7,335
Other borrowings		7,432

Weighted-Average Remaining Lease Term
Operating leases	11.0 years
Finance leases	12.1 years

Weighted-Average Discount Rate
Operating leases		3.45	%
Finance leases		4.48	%

Supplemental cash flow information related to leases was as follows:

	Three Months Ended
(dollars in thousands)	March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	4,436
Operating cash flows from finance leases		81
Financing cash flows from finance leases		111

Right-of-use assets obtained in exchange for lease obligations:
Operating leases		117,739
Finance leases		7,542

The following table presents a maturity analysis of the Company’s lease liability by lease classification at March 31, 2019:

	Operating			Finance
(dollars in thousands)	Leases			Leases
2019	$	13,094		$	573
2020		16,764			768
2021		15,690			772
2022		14,131			778
2023		9,674			791
Thereafter		68,974			6,030
Total undiscounted lease payments		138,327			9,712
Less amounts representing interest		(24,287	)		(2,280	)
Lease liability	$	114,040		$	7,432

Old National leases certain office space and buildings to unrelated parties in exchange for consideration. All of these tenant leases are classified as operating leases. The following table presents a maturity analysis of the Company’s tenant leases at March 31, 2019:

	Tenant
(dollars in thousands)	Leases
2019	$	1,457
2020		1,473
2021		1,200
2022		831
2023		690
Thereafter		2,538
Total undiscounted lease payments	$	8,189

NOTE 11 – GOODWILL AND OTHER INTANGIBLE ASSETS

The following table shows the changes in the carrying amount of goodwill for the three months ended March 31, ~~2018~~2019 and ~~2017:~~2018:


	Three Months Ended				Three Months Ended
	March 31,				March 31,
(dollars in thousands)	2018		2017		2019		2018
Balance at beginning of period	$	828,051	$	655,018	$	1,036,258	$	828,051
Acquisition adjustments		753		—		—		753

Balance at end of period	$	828,804	$	655,018	$	1,036,258	$	828,804

Goodwill is reviewed annually for impairment. No events or circumstances since the August 31, ~~2017~~2018 annual impairment test were noted that would indicate it was more likely than not a goodwill impairment exists. ~~During~~See Note 3 to the ~~first quarter of~~consolidated financial statements for detail regarding changes in goodwill recorded in 2018 ~~Old National recorded a $0.8 million increase to goodwill~~ associated with ~~the acquisition of Anchor (MN).~~

acquisitions.

The gross carrying amount and accumulated amortization of other intangible assets at March 31, ~~2018~~2019 and December 31, ~~2017~~2018 were as follows:


	Gross		Accumulated			Net		Gross		Accumulated			Net
	Carrying		Amortization			Carrying		Carrying		Amortization			Carrying
(dollars in thousands)	Amount		and Impairment			Amount		Amount		and Impairment			Amount
March 31, 2018
March 31, 2019
Core deposit	$	108,268	$	(66,037	)	$	42,231	$	119,051	$	(51,588	)	$	67,463
Customer trust relationships		16,547		(9,945	)		6,602		16,547		(11,466	)		5,081

Total intangible assets	$	124,815	$	(75,982	)	$	48,833	$	135,598	$	(63,054	)	$	72,544

December 31, 2017
December 31, 2018
Core deposit	$	108,923	$	(62,874	)	$	46,049	$	129,100	$	(57,524	)	$	71,576
Customer trust relationships		16,547		(9,533	)		7,014		16,547		(11,107	)		5,440
Customer loan relationships		4,413		(4,380	)		33

Total intangible assets	$	129,883	$	(76,787	)	$	53,096	$	145,647	$	(68,631	)	$	77,016

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

Old National reviews other intangible assets for possible impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. No impairment charges were recorded during the three months ended March 31, ~~2018~~2019 or ~~2017.~~2018. Total amortization expense associated with intangible assets was $4.5 million for the three months ended March 31, 2019, compared to $3.6 million for the three months ended March 31, ~~2018 and $3.0 million for the three months ended March 31, 2017.~~2018.

Estimated amortization expense for future years is as follows:


(dollars in thousands)
2018 remaining	$	9,815
2019		11,010
2019 remaining			$	12,439
2020		8,672		14,091
2021		6,417		11,336
2022		4,595		9,014
2023				7,053
Thereafter		8,324		18,611

Total	$	48,833	$	72,544

NOTE 12 – LOAN SERVICING RIGHTS

At March 31, ~~2018,~~2019, loan servicing rights derived from loans sold with servicing retained totaled ~~$24.4~~$24.3 million, compared to ~~$24.7~~$24.5 million at December 31, ~~2017.~~2018. Loans serviced for others are not reported as assets. The principal balance of loans serviced for others was ~~$3.305~~$3.290 billion at March 31, ~~2018,~~2019, compared to ~~$3.321~~$3.306 billion at December 31, ~~2017.~~2018. Approximately ~~99.6%~~99.7% of the loans serviced for others at March 31, ~~2018~~2019 were residential mortgage loans. Custodial escrow balances maintained in connection with serviced loans were ~~$23.9~~$25.7 million at March 31, ~~2018~~2019 and ~~$8.9~~$10.7 million at December 31, ~~2017.~~

2018.

The following table summarizes the carrying values and activity related to loan servicing rights and the related valuation allowance for the three months ended March 31, ~~2018~~2019 and ~~2017:~~2018:


	Three Months Ended						Three Months Ended
	March 31,						March 31,
(dollars in thousands)	2018			2017			2019			2018
Balance at beginning of period	$	24,690		$	25,629		$	24,512		$	24,690
Additions		770			1,041			659			770
Amortization		(1,060	)		(1,174	)		(900	)		(1,060	)

Balance before valuation allowance at end of period		24,400			25,496			24,271			24,400

Valuation allowance:
Balance at beginning of period		(29	)		(68	)		(15	)		(29	)
(Additions)/recoveries		9			18			(2	)		9

Balance at end of period		(20	)		(50	)		(17	)		(20	)

Loan servicing rights, net	$	24,380		$	25,446		$	24,254		$	24,380

At March 31, 2019, the fair value of servicing rights was $26.2 million, which was determined using a discount rate of 12% and a weighted average prepayment speed of 137% PSA. At December 31, 2018, the fair value of servicing rights was ~~$26.6~~$27.4 million, which was determined using a discount rate of ~~13%~~12% and a weighted average prepayment speed of ~~121%~~119% PSA. ~~At December 31, 2017, the fair value of servicing rights was $25.8 million, which was determined using a discount rate of 13% and a weighted average prepayment speed of 140% PSA.~~

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

Old National is a limited partner in several tax-advantaged limited partnerships whose purpose is to invest in approved qualified affordable housing, renewable energy, or other renovation or community revitalization projects. As of March 31, ~~2018,~~2019, Old National expects to recover its remaining investments ~~using~~through the use of the tax credits that are generated by the investments.

The following table summarizes Old National’s investments in qualified affordable housing projects and other tax credit investments at March 31, ~~2018~~2019 and December 31, ~~2017:~~2018:


(dollars in thousands)			March 31, 2018				December 31, 2017					March 31, 2019				December 31, 2018
					Unfunded				Unfunded					Unfunded				Unfunded
Investment	Accounting Method		Investment		Commitment (1)		Investment		Commitment		Accounting Method	Investment		Commitment (1)		Investment		Commitment
LIHTC		Proportional amortization	$	30,495	$	11,966	$	31,183	$	15,553	Proportional amortization	$	27,554	$	1,365	$	28,396	$	2,238
FHTC		Equity		10,645		12,040		10,645		12,040	Equity		16,815		17,027		16,815		17,945
CReED		Equity		704		1,502		704		1,502	Equity		13		—		17		538
Renewable Energy		Equity		21,633		19,279		22,364		19,771	Equity		8,907		9,536		9,176		17,827

Total			$	63,477	$	44,787	$	64,896	$	48,866		$	53,289	$	27,928	$	54,404	$	38,548

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

The following table summarizes the amortization expense and tax benefit recognized for Old National’s qualified affordable housing projects and other tax credit investments for the three months ended March 31, ~~2018~~2019 and ~~2017:~~2018:


			Tax Expense					Tax Expense
	Amortization		(Benefit)			Amortization		(Benefit)
(dollars in thousands)	Expense (1)		Recognized (2)			Expense (1)		Recognized (2)
Three Months Ended March 31, 2019
LIHTC						$	792	$	(1,042	)
FHTC							—		—
Renewable Energy							260		(244	)
Total						$	1,052	$	(1,286	)

Three Months Ended March 31, 2018
LIHTC	$	639	$	(831	)	$	639	$	(831	)
FHTC		—		(1,948	)		—		(1,948	)
Renewable Energy		716		(3,415	)		716		(3,415	)

Total	$	1,355	$	(6,194	)	$	1,355	$	(6,194	)

Three Months Ended March 31, 2017
LIHTC	$	941	$	(1,297	)
FHTC		—		(1,520	)

Total	$	941	$	(2,817	)

~~(1)~~

(1)

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

~~(2)~~

(2)

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

NOTE 14 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

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


(dollars in thousands)	2018			2017			2019			2018
Outstanding at March 31,	$	308,189		$	345,550		$	342,480		$	308,189
Average amount outstanding		342,682			331,400			361,261			342,682
Maximum amount outstanding at any month-end		336,319			345,550			367,884			336,319
Weighted average interest rate:
Weighted-average interest rate:
During the three months ended March 31,		0.42	%		0.31	%		0.74	%		0.42	%
At March 31,		0.48			0.35			0.79			0.48

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


	At March 31, 2018										At March 31, 2019
	Remaining Contractual Maturity of the Agreements										Remaining Contractual Maturity of the Agreements
	Overnight and		Up to				Greater Than				Overnight and		Up to				Greater Than
(dollars in thousands)	Continuous		30 Days		30-90 Days		90 days		Total		Continuous		30 Days		30-90 Days		90 days		Total
Repurchase Agreements:
U.S. Treasury and agency securities	$	308,189	$	—	$	—	$	—	$	308,189	$	342,480	$	—	$	—	$	—	$	342,480

Total	$	308,189	$	—	$	—	$	—	$	308,189	$	342,480	$	—	$	—	$	—	$	342,480

The fair value of securities pledged to secure repurchase agreements may decline. Old National has pledged securities valued at ~~130%~~119% of the gross outstanding balance of repurchase agreements at March 31, ~~2018~~2019 to manage this risk.

NOTE 15 – FEDERAL HOME LOAN BANK ADVANCES

The following table summarizes Old National Bank’s FHLB advances at March 31, ~~2018~~2019 and December 31, ~~2017:~~2018:


	March 31,		December 31,			March 31,		December 31,
(dollars in thousands)	2018		2017			2019		2018
FHLB advances (fixed rates 1.49% to 6.08% and variable rates 1.80% to 1.99%) maturing April 2018 to February 2028	$	1,662,603	$	1,610,531
FHLB advances (fixed rates 1.50% to 6.08% and variable rates 2.81% to 2.94%) maturing April 2019 to October 2028						$	1,703,573	$	1,603,643
ASC 815 fair value hedge and other basis adjustments		1,576		(952	)		16,371		9,838

Total other borrowings	$	1,664,179	$	1,609,579		$	1,719,944	$	1,613,481

FHLB advances had weighted-average rates of ~~1.89%~~2.49% at March 31, ~~2018~~2019 and ~~1.55%~~2.56% at December 31, ~~2017.~~2018. Investment securities and residential real estate loans collateralize these borrowings up to 140% of outstanding debt.

Contractual maturities of FHLB advances at March 31, ~~2018~~2019 were as follows:


(dollars in thousands)
Due in 2018	$	902,032
Due in 2019		201,902	$	126,408
Due in 2020		100,000		100,000
Due in 2021		—		20,000
Due in 2022		58,500		57,000
Due in 2023				164
Thereafter		400,169		1,400,001
ASC 815 fair value hedge and other basis adjustments		1,576		16,371

Total	$	1,664,179	$	1,719,944

NOTE 16 – OTHER BORROWINGS

The following table summarizes Old National’s other borrowings at March 31, ~~2018~~2019 and December 31, ~~2017:~~2018:


	March 31,			December 31,			March 31,			December 31,
(dollars in thousands)	2018			2017			2019			2018
Old National Bancorp:
Senior unsecured notes (fixed rate 4.125%) maturing August 2024	$	175,000		$	175,000		$	175,000		$	175,000
Unamortized debt issuance costs related to senior unsecured notes		(988	)		(1,026	)		(831	)		(870	)
Junior subordinated debentures (variable rates of 3.30% to 5.29%) maturing April 2032 to September 2037		60,310			60,310
Junior subordinated debentures (variable rates of 3.93% to 6.39%) maturing April 2032 to June 2037								60,310			60,310
Other basis adjustments		(3,454	)		(3,585	)		(2,910	)		(3,046	)
Old National Bank:
Capital lease obligations		5,358			5,389
Finance lease liabilities								7,432			5,262
Subordinated debentures (fixed rate 5.75%)		12,000			12,000			12,000			12,000
Premium on subordinated debentures		672			694

Other								583			(773	)
Total other borrowings	$	248,898		$	248,782		$	251,584		$	247,883

Contractual maturities of other borrowings at March 31, ~~2018~~2019 were as follows:


(dollars in thousands)
Due in 2018	$	96
Due in 2019		137		$	338
Due in 2020		147			471
Due in 2021		160			494
Due in 2022		172			521
Due in 2023					557
Thereafter		251,956			252,361
Unamortized debt issuance costs and other basis adjustments		(3,770	)		(3,158	)

Total	$	248,898		$	251,584

��

Senior Notes

In August 2014, Old National issued $175.0 million of senior unsecured notes with a 4.125% interest rate. These notes pay interest on February 15 and August 15. The notes mature on August 15, 2024.

Junior Subordinated Debentures

Junior subordinated debentures related to trust preferred securities are classified in “other borrowings.” ~~With the addition of~~On November 1, 2017, Old National acquired Anchor (MN) ~~assets,~~and exceeded $15 billion in assets. As a result, these securities ~~now qualify~~can only be treated as Tier 2 capital for regulatory purposes, subject to certain limitations. Prior to the fourth quarter of 2017, these securities qualified as Tier 1 capital for regulatory purposes.

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

Old National, at any time, may redeem the junior subordinated debentures at par and, thereby cause a redemption of the trust preferred securities in whole or in part.

The following table summarizes the terms of our outstanding junior subordinated debentures at March 31, ~~2018:~~2019:

(dollars in thousands)

Rate at

Issuance

March 31,

Issuance

March 31,

Name of Trust

Issuance Date

Amount

Rate

2018

Maturity Date

Issuance Date

Amount

Rate

2019

Maturity Date

VFSC Capital Trust I

April 2002

3,093

3-month LIBOR plus 3.70%

5.06

April 22, 2032

April 2002

3,093

6-month LIBOR plus 3.70%

6.39%

April 22, 2032

VFSC Capital Trust II

October 2002

4,124

3-month LIBOR plus 3.45%

5.29

November 7, 2032

October 2002

4,124

3-month LIBOR plus 3.45%

6.14%

November 7, 2032

VFSC Capital Trust III

April 2004

3,093

3-month LIBOR plus 2.80%

4.81

September 8, 2034

April 2004

3,093

3-month LIBOR plus 2.80%

5.39%

September 8, 2034

St. Joseph Capital Trust II

March 2005

5,000

3-month LIBOR plus 1.75%

3.93

March 20, 2035

March 2005

5,000

3-month LIBOR plus 1.75%

4.36%

March 17, 2035

Anchor Capital Trust III

August 2005

5,000

3-month LIBOR plus 1.55%

3.86

August 23, 2035

August 2005

5,000

3-month LIBOR plus 1.55%

4.14%

September 30, 2035

Tower Capital Trust 2

December 2005

8,000

3-month LIBOR plus 1.34%

3.65

December 4, 2035

December 2005

8,000

3-month LIBOR plus 1.34%

3.93%

December 30, 2035

Home Federal Statutory Trust I

September 2006

15,000

3-month LIBOR plus 1.65%

3.77

September 15, 2036

September 2006

15,000

3-month LIBOR plus 1.65%

4.26%

September 15, 2036

Monroe Bancorp Capital Trust I

July 2006

3,000

3-month LIBOR plus 1.60%

3.30

October 7, 2036

July 2006

3,000

3-month LIBOR plus 1.60%

4.39%

October 7, 2036

Tower Capital Trust 3

December 2006

9,000

3-month LIBOR plus 1.69%

4.32%

March 1, 2037

Monroe Bancorp Statutory Trust II

March 2007

5,000

3-month LIBOR plus 1.60%

3.72

June 15, 2037

March 2007

5,000

3-month LIBOR plus 1.60%

4.21%

June 15, 2037

Tower Capital Trust 3

December 2006

9,000

3-month LIBOR plus 1.69%

3.70

September 15, 2037

Total

60,310

Subordinated Debentures

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

~~Capital~~37

Finance Lease ~~Obligations~~Liabilities

~~On January 1, 2004,~~

Old National ~~entered into a~~has long-term ~~capital~~finance lease ~~obligation~~liabilities for ~~a branch office building in Owensboro, Kentucky, which extends for 25 years with one renewal option for 10 years.~~certain banking centers totaling $7.4 million. The economic substance of ~~this lease~~these leases is that Old National is financing the acquisition of the building through the lease and accordingly, the building is recorded as ana right-of-use asset in premises and equipment and the lease is recorded as a ~~liability.~~liability in other borrowings. The ~~fair~~right-of-use assets and lease liabilities are initially measured at the present value of the ~~capital~~ lease ~~obligation was estimated~~payments over the lease term using ~~a discounted cash flow analysis based on~~ Old National’s ~~current~~ incremental borrowing rate ~~for similar types~~based on the information available at the commencement date of ~~borrowing arrangements.~~

~~On May 1, 2016, Old National acquired Anchor (WI), assuming a five-year capital lease obligation for equipment.~~

~~On November 1, 2017, Old National assumed a capital lease obligation~~the lease. See Note 10 to the consolidated financial statements for a ~~banking center in Arden Hills, Minnesota related to the acquisition of Anchor (MN). The remaining base term~~maturity analysis of the Company’s finance lease is five years with one renewal option of ten years. For purposes of measuring the lease obligation, we determined that we would be “reasonably assured” to exercise the renewal option. The fair value of the capital lease obligation was estimated using a discounted cash flow analysis based on a market rate for similar types of borrowing arrangements. Based on the above assumptions, Old National measured the capital lease obligation at $1.5 million as of the date of acquisition.

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

(dollars in thousands)

2018
   $ 426
2019
   589
2020
   589
2021
   589
2022
   589
Thereafter
   9,275


Total minimum lease payments
   12,057
Less amounts representing interest
   (6,699 )


Present value of net minimum lease payments
   $ 5,358

NOTE 17 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table summarizes the changes within each classification of AOCI, net of tax, for the three months ended March 31, ~~2018~~2019 and ~~2017:~~2018:

   Unrealized Gains Unrealized Gains Gains and Defined
   and Losses on and Losses on Losses on Benefit
   Available-for-Sale Held-to-Maturity Cash Flow Pension
(dollars in thousands)
   Securities Securities Hedges Plans Total
Three Months Ended March 31, 2018

Balance at beginning of period
   $ (35,557 ) $ (12,107 ) $ (2,337 ) $ (271 ) $ (50,272 )
Other comprehensive income (loss) before reclassifications
   (8,872 ) 4,514 3,444 —   (914 )
Amounts reclassified from AOCI to income (a)
   (593 ) 456 580 20 463
Amount reclassified from AOCI to retained earnings for cumulative effect of change in accounting principle (b)
   —   —   (52 ) —   (52 )
Amounts reclassified from AOCI to retained earnings related to the Tax Cuts and Jobs Act of 2017 (c)
   (7,583 ) (2,600 ) (509 ) (59 ) (10,751 )


Balance at end of period
   $ (52,605 ) $ (9,737 ) $ 1,126 $ (310 ) $ (61,526 )


Three Months Ended March 31, 2017

Balance at beginning of period
   $ (39,012 ) $ (13,310 ) $ (6,715 ) $ (335 ) $ (59,372 )
Other comprehensive income (loss) before reclassifications
   9,967 —   360 —   10,327
Amounts reclassified from AOCI to income (a)
   (947 ) 295 1,115 17 480


Balance at end of period
   $ (29,992 ) $ (13,015 ) $ (5,240 ) $ (318 ) $ (48,565 )

(dollars in thousands)	Unrealized Gains and Losses on Available- for-Sale Debt Securities			Unrealized Gains and Losses on Held-to- Maturity Securities			Gains and Losses on Cash Flow Hedges			Defined Benefit Pension Plans			Total
Three Months Ended March 31, 2019
Balance at beginning of period	$	(37,348	)	$	(8,515	)	$	1,099		$	(186	)	$	(44,950	)
Other comprehensive income (loss) before reclassifications		47,711			—			(296	)		—			47,415
Amounts reclassified from AOCI to income (1)		79			351			(290	)		15			155
Balance at end of period	$	10,442		$	(8,164	)	$	513		$	(171	)	$	2,620

Three Months Ended March 31, 2018
Balance at beginning of period	$	(35,557	)	$	(12,107	)	$	(2,337	)	$	(271	)	$	(50,272	)
Amount reclassified from AOCI to retained earnings for cumulative effect of change in accounting principle		—			—			(52	)		—			(52	)
Amounts reclassified from AOCI to retained earnings related to the Tax Cuts and Jobs Act of 2017		(7,583	)		(2,600	)		(509	)		(59	)		(10,751	)
Other comprehensive income (loss) before reclassifications		(8,872	)		4,514			3,444			—			(914	)
Amounts reclassified from AOCI to income (1)		(593	)		456			580			20			463
Balance at end of period	$	(52,605	)	$	(9,737	)	$	1,126		$	(310	)	$	(61,526	)

~~(a)~~

(1)

See table below for details about reclassifications to income.

~~(b)~~

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

~~(c)~~

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

The following table summarizes the significant amounts reclassified out of each component of AOCI for the three months ended March 31, ~~2018~~2019 and ~~2017:~~2018:


	Amount Reclassified						Affected Line Item in the	Amount Reclassified						Affected Line Item in the
Details about AOCI Components	from AOCI						Statement of Income	from AOCI						Statement of Income
	Three Months Ended							Three Months Ended
	March 31,							March 31,
(dollars in thousands)	2018			2017				2019			2018
Unrealized gains and losses on available-for-sale securities	$	788		$	1,500		Net securities gains
		(195	)		(553	)	Income tax (expense) benefit

Unrealized gains and losses on available-for-sale debt securities								$	(103	)	$	788		Net debt securities gains (losses)
	$	593		$	947		Net income		24			(195	)	Income tax (expense) benefit
								$	(79	)	$	593		Net income
Unrealized gains and losses on held-to-maturity securities	$	(591	)	$	(449	)	Interest income (expense)	$	(457	)	$	(591	)	Interest income (expense)
		135			154		Income tax (expense) benefit		106			135		Income tax (expense) benefit
								$	(351	)	$	(456	)	Net income
	$	(456	)	$	(295	)	Net income

Gains and losses on cash flow hedges Interest rate contracts	$	(769	)	$	(1,799	)	Interest income (expense)	$	385		$	(769	)	Interest income (expense)
		189			684		Income tax (expense) benefit

	$	(580	)	$	(1,115	)	Net income		(95	)		189		Income tax (expense) benefit
								$	290		$	(580	)	Net income
Amortization of defined benefit pension items
Actuarial gains (losses)	$	(51	)	$	(27	)	Salaries and employee benefits	$	(20	)	$	(51	)	Salaries and employee benefits
		31			10		Income tax (expense) benefit		5			31		Income tax (expense) benefit
								$	(15	)	$	(20	)	Net income
	$	(20	)	$	(17	)	Net income

Total reclassifications for the period	$	(463	)	$	(480	)	Net income	$	(155	)	$	(463	)	Net income

NOTE 18 – EMPLOYEE BENEFIT PLANS

Employee Stock Ownership Plan

The Employee Stock Ownership and Savings Plan (the “401(k) Plan”) permits employees to participate the first month following one month of service. During the second quarter of 2018, Old National ~~had a funded noncontributory defined benefit plan (the “Retirement Plan”) that had been frozen since December 31, 2005. During~~increased its match to 75% of employee compensation deferral contributions of the first ~~quarter~~4% of ~~2016, we notified plan participants~~compensation, and 50% of ~~our intent to terminate~~ the ~~Retirement~~next 4% of compensation. The change was retroactive for all of 2018. Contribution expense under the 401(k) Plan ~~effective May 15, 2016. During October 2016,~~was $2.8 million in the Retirement Plan settled plan liabilities through either lump sum distributions to plan participants or annuity contracts purchased from a third-party insurance company that provided for the payment of vested benefits to those participants that did not elect the lump sum option. Atthree months ended March 31, ~~2018, there were no remaining plan assets.~~2019, compared to $1.5 million in the three months ended March 31, 2018.

NOTE 19 – ~~STOCK-BASED~~SHARE-BASED COMPENSATION

At March 31, ~~2018,~~2019, Old National had ~~4.6~~3.9 million shares remaining available for issuance under the Company’s Amended and Restated 2008 Incentive Compensation Plan. The granting of awards to key employees is typically in the form of restricted stock awards or units.

Restricted Stock Awards

Old National granted 7382 thousand time-based restricted stock awards to certain key officers during the three months ended March 31, ~~2018,~~2019, with shares vesting generally over a thirty-six month period. Compensation expense is recognized on a straight-line basis over the vesting period. Shares are subject to certain restrictions and risk of forfeiture by the participants. At March 31, ~~2018,~~2019, unrecognized compensation expense was estimated to be ~~$4.5~~$4.9 million for unvested restricted stock awards. The cost is expected to be recognized over a weighted-average period of ~~2.1~~2.0 years.

Old National recorded ~~stock-based~~share-based compensation expense ~~net of tax,~~ related to restricted stock awards of $0.6 million, net of tax, during the three months ended March 31, 2019, compared to $0.5 million, net of tax, during the three months ended March 31, ~~2018, compared to $0.4 million, net of tax, during the three months ended March 31, 2017.~~

2018.

Restricted Stock Units

Old National granted ~~288~~326 thousand shares of performance based restricted stock units to certain key officers during the three months ended March 31, ~~2018,~~2019, with shares vesting at the end of a thirty-six month period based on the achievement of certain targets. For certain awards, the level of performance could increase or decrease the percentage of shares earned. Compensation expense is recognized on a straight-line basis over the vesting period. Shares are subject to certain restrictions and risk of forfeiture by the participants. At March 31, ~~2018,~~2019, unrecognized compensation expense was estimated to be ~~$7.3~~$7.8 million. The cost is expected to be recognized over a weighted-average period of ~~2.3~~2.2 years.

Old National recorded ~~stock-based~~share-based compensation expense ~~net of tax,~~ related to restricted stock units of ~~$0.9~~$0.8 million, net of tax, during the three months ended March 31, ~~2018,~~2019, compared to ~~$0.4~~$0.9 million, net of tax, during the three months ended March 31, ~~2017.~~2018.

Stock Options

Old National has not granted stock options since 2009. However, Old National did acquire stock options through prior year acquisitions. Old National did not record any ~~stock-based~~share-based compensation expense related to these stock options during the three months ended March 31, ~~2018~~2019 or ~~2017.~~2018.

Stock Appreciation Rights

Old National has never granted stock appreciation rights. However, Old National did acquire stock appreciation rights through a prior year acquisition. Old National did not record any incremental expense associated with the conversion of these stock appreciation rights during the three months ended March 31, ~~2018~~2019 or ~~2017.~~2018. At March 31, ~~2018, 62~~2019, 61 thousand stock appreciation rights remained outstanding.

NOTE 20 – INCOME TAXES

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


	Three Months Ended						Three Months Ended
	March 31,						March 31,
(dollars in thousands)	2018			2017				2019				2018
Provision at statutory rate (1)	$	11,117		$	16,269
Provision at statutory rate of 21%							$	14,570			$	11,117
Tax-exempt income:
Tax-exempt interest		(2,191	)		(3,702	)		(2,531	)			(2,191	)
Section 291/265 interest disallowance		62			57			111				62
Company-owned life insurance income		(547	)		(752	)		(669	)			(547	)

Tax-exempt income		(2,676	)		(4,397	)		(3,089	)			(2,676	)

State income taxes		1,188			851			1,999				1,188
Interim period effective rate adjustment		92			(455	)		688				92
Tax credit investments - federal		(5,769	)		(1,876	)		(420	)			(5,769	)
Other, net		1,005			99			(644	)			1,005

Income tax expense	$	4,957		$	10,491		$	13,104			$	4,957

Effective tax rate		9.4	%		22.6	%		18.9		%		9.4		%

~~(1)~~

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

In accordance with ASC 740-270,Accounting for Interim Reporting, the provision for income taxes was recorded at March 31, ~~2018~~2019 and ~~2017~~2018 based on the current estimate of the effective annual rate.

The ~~lower~~higher effective tax rate during the three months ended March ~~31, 2018~~30, 2019 when compared to the three months ended March 31, ~~2017~~2018 is primarily the result of ~~the lowering of the federal corporate tax rate to 21% and an increase~~a decrease in federal tax credits available. On December 22, 2017, the Tax Cuts and Jobs Act (“H.R. 1”) was enacted into legislation. Under ASC 740, the effects of changes in tax rates and laws are recognized in the period in which the new legislation is enacted. Accordingly, Old National recorded an estimated $39.3 million for the revaluation of Old National’s deferred tax assets in December 2017.

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

Unrecognized Tax Benefits

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

~~A reconciliation of the beginning and ending amounts~~has an immaterial amount of unrecognized tax ~~benefits was as follows:~~

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




Balance at end of period
   $ 913    $ 809

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

third quarter of 2019.

Net Deferred Tax Assets

Significant components of net deferred tax assets (liabilities) were as follows at March 31, ~~2018~~2019 and December 31, ~~2017:~~2018:


	March 31,			December 31,			March 31,			December 31,
(dollars in thousands)	2018			2017			2019			2018
Deferred Tax Assets
Allowance for loan losses, net of recapture	$	13,062		$	12,958		$	14,458		$	14,514
Benefit plan accruals		11,173			11,080			14,624			21,754
Alternative minimum tax credit		2,545			25,084			2,545			2,545
Unrealized losses on benefit plans		101			108
Net operating loss carryforwards		33,463			39,631			30,168			31,765
Federal tax credits		11,089			5,516			3,116			1,779
Other-than-temporary impairment		36			1,424
Deferred gain on securities		2,118			—			1,844			1,976
Acquired loans		27,207			29,669			24,857			26,956
Operating lease liabilities								30,451			—
Lease exit obligation		1,270			1,337			—			1,025
Unrealized losses on available-for-sale investment securities		16,661			14,011			—			11,853
Unrealized losses on held-to-maturity investment securities		2,865			3,630			2,391			2,497
Unrealized losses on hedges		—			923
Tax credit investments and other partnerships								3,196			3,004
Other real estate owned		379			369			144			144
Other, net		3,214			829			2,691			3,167

Total deferred tax assets		125,183			146,569			130,485			122,979

Deferred Tax Liabilities
Accretion on investment securities		(499	)		(493	)		(795	)		(595	)
Purchase accounting		(16,314	)		(16,718	)		(17,873	)		(18,100	)
Loan servicing rights		(5,989	)		(6,058	)		(6,080	)		(6,141	)
Premises and equipment		(9,277	)		(10,052	)		(11,019	)		(8,507	)
Prepaid expenses		(1,277	)		(1,277	)		(716	)		(681	)
Tax credit investments		(1,036	)		(168	)
Operating lease right-of-use assets								(29,393	)		—
Unrealized gains on available-for-sale investment securities								(2,725	)		—
Unrealized gains on hedges		(367	)		—			(167	)		(358	)
Other, net		(1,651	)		(946	)		(2,287	)		(1,549	)

Total deferred tax liabilities		(36,410	)		(35,712	)		(71,055	)		(35,931	)

Net deferred tax assets	$	88,773		$	110,857		$	59,430		$	87,048

Through the acquisition of Anchor (WI) in the second quarter of 2016 and Lafayette Savings Bank in the fourth quarter of 2014, both former thrifts, Old National Bank’s retained earnings at March 31, ~~2018~~2019 include base-year bad debt reserves, created for tax purposes prior to 1988, totaling $52.8 million. Of this total, $50.9 million was acquired from Anchor (WI), and $1.9 million was acquired from Lafayette Savings Bank. Base-year reserves are subject to recapture in the unlikely event that Old National Bank (1) makes distributions in excess of current and accumulated earnings and profits, as calculated for federal income tax purposes, (2) redeems its stock, or (3) liquidates. Old National Bank has no intention of making such a nondividend distribution. Accordingly, under current accounting principles, a related deferred income tax liability of $13.0 million has not been recognized.

No valuation allowance was recorded at March 31, ~~2018~~2019 or December 31, ~~2017~~2018 because, based on current expectations, Old National believes it will generate sufficient income in future years to realize deferred tax assets. Old National has federal net operating loss carryforwards totaling ~~$104.5~~$97.1 million at March 31, ~~2018~~2019 and ~~$130.7~~$104.5 million at December 31, ~~2017.~~2018. This federal net operating loss was acquired from the acquisition of Anchor (WI) in 2016. If not used, the federal net operating loss carryforwards will expire from 2028 to 2033. Old National has alternative minimum tax (“AMT”) credit carryforwards totaling ~~$25.1~~$6.3 million at March 31, ~~2018~~2019 and $10.1 million at December 31, ~~2017.~~2018. The enactment of ~~H.R.1~~H.R. 1 eliminates the parallel tax system known as the AMT and allows any existing AMT credits to be used to reduce regular tax or be refunded from 2018 to 2021. ASC 740 allows for the reclassification of the AMT credit from a deferred tax asset to a current tax asset, except for the amount limited by section 382. Old National has $2.5 million of AMT credit carryforward subject to section 382 limitations. The $2.5 million is maintained in deferred tax assets and the remaining ~~$22.6~~$3.8 million has been reclassified to a current tax asset. Old

National has federal tax credit carryforwards of ~~$11.0~~$3.1 million at March 31, ~~2018~~2019 and ~~$5.5~~$1.8 million at December 31, ~~2017.~~2018. The federal tax credits consist mainly of ~~federal historic credits,~~ energy efficient home credits, low income housing

credits, and research and development credits that, if not used, will expire from 2025 to ~~2038.~~2039. Old National has recorded state net operating loss carryforwards totaling ~~$191.2~~$165.0 million at March 31, ~~2018~~2019 and ~~$203.6~~$165.6 million at December 31, ~~2017.~~2018. If not used, the state net operating loss carryforwards will expire from 2024 to 2033. ~~Old National has state tax credit carryforwards totaling $1.3 million at March 31, 2018 and $1.3 million at December 31, 2017. The state tax credits will not expire.~~

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

NOTE 21 -– DERIVATIVE FINANCIAL INSTRUMENTS

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

As part of our overall interest rate risk management, Old National uses derivative instruments, including interest rate swaps, collars, caps, and floors. The notional amount of these derivative instruments was ~~$758.5 million~~$1.332 billion at March 31, ~~2018~~2019 and ~~$708.5 million~~$1.482 billion at December 31, ~~2017.~~2018. These derivative financial instruments at March 31, ~~2018~~2019 consisted of ~~$133.5~~$857.0 million notional amount of receive-fixed, pay-variable interest rate swaps on certain of its FHLB advances, ~~and $625.0~~$175.0 million notional amount of pay-fixed, receive-variable interest rate swaps on certain of its FHLB ~~advances.~~advances, and $300.0 million notional amount interest rate collars related to a variable-rate commercial loan pool. Derivative financial instruments at December 31, ~~2017~~2018 consisted of ~~$33.5~~$757.0 million notional amount of receive-fixed, pay-variable interest rate swaps on certain of its FHLB advances, ~~and $675.0~~$525.0 million notional amount of pay-fixed, receive-variable interest rate swaps on certain of its FHLB ~~advances.~~advances, and $200.0 million notional amount interest rate collars related to a variable-rate commercial loan pool. These hedges were entered into to manage interest rate risk. Derivative instruments are recognized on the balance sheet at their fair value and are not reported on a net basis.

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

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

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

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

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

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

~~was $61.0 million and forward commitments were $68.3 million. At December 31, 2017,~~2019, the notional amount of the interest rate lock commitments was ~~$29.9~~$68.9 million and forward commitments were ~~$41.2~~$73.5 million. At December 31, 2018, the notional amount of the interest rate lock commitments was $27.6 million and forward commitments were $34.5 million. It is our practice to enter into forward commitments for the future delivery of residential mortgage loans to third party investors when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from our commitment to fund the loans.

Old National also enters into derivative instruments for the benefit of its customers. The notional amounts of these customer derivative instruments and the offsetting counterparty derivative instruments were ~~$839.3~~ $877.1 million at March 31, ~~2018.~~2019. The notional amounts of these customer derivative instruments and the offsetting counterparty derivative instruments were ~~$826.6~~$793.4 million at December 31 ~~2017.~~, 2018. These derivative contracts do not qualify for hedge accounting. These instruments include interest rate swaps, caps, and collars.Commonly, Old National will economically hedge significant exposures related to these derivative contracts entered into for the benefit of customers by entering into offsetting contracts with approved, reputable, independent counterparties with substantially matching terms.

Old National enters into derivative financial instruments as part of its foreign currency risk management strategies. These derivative instruments consist of foreign currency forward contracts to accommodate the business needs of its customers. Old National does not designate these foreign currency forward contracts for hedge accounting treatment. The notional amounts of these foreign currency forward contracts and the offsetting counterparty derivative instruments were ~~$1.2~~$3.8 million at March 31, ~~2018~~2019 and ~~$0.8~~$3.6 million at December 31, ~~2017.~~2018.

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

Amounts reported in AOCI related to cash flow hedges will be reclassified to interest income or interest expense as interest payments are received or paid on Old National’s derivative instruments. During the next 12 months, we estimate that ~~$2.0~~$0.7 million will be reclassified to interest income and ~~$1.3~~$0.6 million will be reclassified to interest expense.

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

									Balance			Balance
									Sheet	Fair		Sheet	Fair
(dollars in thousands)	Balance Sheet Location		Fair Value		Balance Sheet Location		Fair Value		Location	Value		Location	Value
March 31, 2018
March 31, 2019
Derivatives designated as hedging instruments
Interest rate contracts		Other assets	$	4,720		Other liabilities	$	3,382	Other assets	$	18,231	Other liabilities	$	2,351

Total derivatives designated as hedging instruments			$	4,720			$	3,382		$	18,231		$	2,351

Derivatives not designated as hedging instruments
Interest rate contracts		Other assets	$	8,113		Other liabilities	$	16,256	Other assets	$	19,749	Other liabilities	$	8,849
Mortgage contracts		Other assets		1,475		Other liabilities		90	Other assets		1,872	Other liabilities		292
Foreign currency contracts		Other assets		13		Other liabilities		2	Other assets		100	Other liabilities		54

Total derivatives not designated as hedging instruments			$	9,601			$	16,348		$	21,721		$	9,195

Total			$	14,321			$	19,730		$	39,952		$	11,546

December 31, 2017
December 31, 2018
Derivatives designated as hedging instruments
Interest rate contracts		Other assets	$	3,351		Other liabilities	$	5,351	Other assets	$	12,741	Other liabilities	$	1,603

Total derivatives designated as hedging instruments			$	3,351			$	5,351		$	12,741		$	1,603

Derivatives not designated as hedging instruments
Interest rate contracts		Other assets	$	10,012		Other liabilities	$	10,933	Other assets	$	15,278	Other liabilities	$	10,562
Mortgage contracts		Other assets		747		Other liabilities		—	Other assets		874	Other liabilities		316
Foreign currency contracts		Other assets		8		Other liabilities		8	Other assets		112	Other liabilities		69

Total derivatives not designated as hedging instruments			$	10,767			$	10,941		$	16,264		$	10,947

Total			$	14,118			$	16,292		$	29,005		$	12,550

Summary information about the interest rate swaps designated as fair value hedges is as follows:

	March 31,			December 31,
(dollars in thousands)	2019			2018
Notional amounts	$	857,000		$	757,000
Weighted average pay rates		2.49	%		2.48	%
Weighted average receive rates		2.65	%		2.70	%
Weighted average maturity	3.6 years			3.9 years
Fair value of swaps	$	16,227		$	9,683

The effect of derivative instruments in fair value hedging relationships on the consolidated statements of income for the three months ended March 31, ~~2018~~2019 and ~~2017~~2018 were as follows:

(dollars in thousands)

Gain (Loss)

Recognized

(dollars in thousands)

Gain (Loss)

Derivatives in

Fair Value Hedging

Relationships

Location of Gain or

(Loss) Recognized in

in Income on Derivative

Gain (Loss)
Recognized
in Income on
Derivative

Hedged Items in
Fair Value
Hedging
Relationships

Location of Gain or

(Loss) Recognized in
in Income on Related

Hedged Item

Recognized
in Income on
Related
Hedged
Items

Three Months Ended March 31, 2018

Location of Gain or

Gain (Loss)

Hedged Items

Location of Gain or

in Income on

Derivatives in

(Loss) Recognized in

Recognized

in Fair Value

(Loss) Recognized in

Fair Value Hedging

in Income on

Hedging

in Income on Related

Hedged

Relationships

Derivative

Relationships

Hedged Item

Items

Three Months Ended

March 31, 2019

Interest rate contracts

Interest income/(expense)

(720

)

Fixed-rate debt

Interest income/(expense)

722

Interest income/(expense)

6,552

Fixed-rate debt

Interest income/(expense)

(6,548

)

Three Months Ended March 31, 2017

Three Months Ended

March 31, 2018

Interest rate contracts

Interest income/(expense)

(254

)

Fixed-rate debt

Interest income/(expense)

290

Interest income/(expense)

(720

)

Fixed-rate debt

Interest income/(expense)

722

Summary information about the interest rate swaps designated as cash flow hedges is as follows:

	March 31,				December 31,
(dollars in thousands)	2019				2018
Notional amounts	$	175,000			$	525,000
Weighted average pay rates		3.01		%		2.21	%
Weighted average receive rates		2.65		%		2.63	%
Weighted average maturity	1.9 years				1.4 years
Unrealized gains (losses)	$	(2,351	)		$	146

Old National has designated its interest rate collars as cash flow hedges. The ~~difference~~structure of these instruments is such that Old National pays the counterparty an incremental amount if the collar index exceeds the cap rate. Conversely, Old National receives an incremental amount if it falls below the floor rate. No payments are required if the collar index falls between the ~~gain (loss) recognized in income on derivatives~~cap and floor rates. Summary information about the ~~gain (loss) recognized in income on the related hedged items represents hedge ineffectiveness. In addition, the net swap settlements that accrue each period are also reported in interest expense.~~

collars designated as cash flow hedges is as follows:

	March 31,			December 31,
(dollars in thousands)	2019			2018
Notional amounts	$	300,000		$	200,000
Weighted average cap rates		3.21	%		3.44	%
Weighted average floor rates		2.21	%		2.38	%
Weighted average rates		2.49	%		2.35	%
Weighted average maturity	2.6 years			2.8 years
Unrealized gains (losses)	$	2,004		$	1,309

The effect of derivative instruments in cash flow hedging relationships on the consolidated statements of income for the three months ended March 31, ~~2018~~2019 and ~~2017~~2018 were as follows:

														Three Months Ended					Three Months Ended
														March 31,					March 31,
(dollars in thousands)		Three Months Ended				Three Months Ended								2019			2018		2019		2018
		March 31,				March 31,								Gain (Loss)					Gain (Loss)
		2018		2017		2018			2017
Derivatives in Cash Flow Hedging Relationships	Location of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion)	Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion)				Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
Derivatives in												��	Location of Gain or	Recognized in Other					Reclassified from
Cash Flow Hedging													(Loss) Reclassified	Comprehensive					AOCI into
Relationships													from AOCI into Income	Income on Derivative					Income
Interest rate contracts	Interest income/(expense)	$	4,563	$	580	$	(769	)	$	(1,799	)		Interest income/(expense)	$	(392	)	$	4,563	$	385	$	(769	)

~~The ineffective portion and amount excluded from effectiveness testing related to derivatives in cash flow hedging relationships was immaterial for the three months ended March 31, 2018 and 2017.~~

The effect of derivatives not designated as hedging instruments on the consolidated statements of income for the three months ended March 31, ~~2018~~2019 and ~~2017~~2018 were as follows:

								Three Months Ended
								March 31,
(dollars in thousands)		Three Months Ended						2019			2018
		March 31,					Location of Gain or (Loss)	Gain (Loss)
		2018		2017
Derivatives Not Designated as Hedging Instruments	Location of Gain or (Loss) Recognized in Income on Derivative	Gain (Loss) Recognized in Income on Derivative
Derivatives Not Designated as							Recognized in Income on	Recognized in Income on
Hedging Instruments							Derivative	Derivative
Interest rate contracts (1)	Other income/(expense)	$	—	$	10		Other income/(expense)	$	(37	)	$	—
Mortgage contracts	Mortgage banking revenue		638		(1,494	)	Mortgage banking revenue		1,022			638
Foreign currency contracts	Other income/(expense)		17		—		Other income/(expense)		3			17

Total		$	655	$	(1,484	)		$	988		$	655

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

~~(1)~~

~~Includes the valuation differences between the customer and offsetting swaps.~~

NOTE 22 – 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 may include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages.

Old National contests liability and/or the amount of damages as appropriate in each pending matter. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases where claimants seek substantial or indeterminate damages or where investigations and proceedings are in the early stages, Old National cannot predict with certainty the loss or range of loss, if any, related to such matters, how or if such matters will be resolved, when they will ultimately be resolved, or what the eventual settlement, or other relief, if any, might be. Subject to the foregoing, Old National believes, based on current knowledge and after consultation with counsel, that the outcome of such pending matters will not have a material adverse effect on the consolidated financial condition of Old National, although the outcome of such matters could be material to Old National’s operating results and cash flows for a particular future period, depending on, among other things, the level of Old National’s revenues or income for such period. Old National will accrue for a loss contingency if (1) it is probable that a future event will occur and confirm the loss and (2) the amount of the loss can be reasonably estimated.

Old National is not currently involved in any material litigation.

Credit-Related Financial Instruments

In the normal course of business, Old National’s banking affiliates have entered into various agreements to extend credit, including loan commitments of ~~$3.181~~$3.743 billion and standby letters of credit of ~~$71.9~~$100.2 million at March 31, ~~2018.~~2019. At March 31, ~~2018,~~2019, approximately ~~$2.945~~$3.478 billion of the loan commitments had fixed rates and ~~$236.0~~$265.3 million had floating rates, with the floating interest rates ranging from 0%1% to ~~25%~~16%. At December 31, ~~2017,~~2018, loan commitments totaled ~~$3.144~~$3.566 billion and standby letters of credit totaled ~~$68.7~~$319.0 million. These commitments are not reflected in the consolidated financial statements. The allowance for unfunded loan commitments totaled ~~$3.4~~$2.2 million at March 31, ~~2018~~2019 and ~~$3.1~~$2.5 million at December 31, ~~2017.~~2018.

Old National had credit extensions with various unaffiliated banks related to letter of credit commitments issued on behalf of Old National’s clients totaling ~~$12.3~~$2.2 million at March 31, ~~2018~~2019 and ~~$12.4~~$15.5 million at December 31, ~~2017.~~2018. Old National provided collateral to the unaffiliated banks to secure credit extensions totaling ~~$11.5~~$7.8 million at March 31, ~~2018~~2019 and December 31, ~~2017.~~2018. Old National did not provide collateral for the remaining credit extensions.

Visa Class B Restricted Shares

In 2008, Old National received Visa Class B restricted shares as part of Visa’s initial public offering. These shares are transferable only under limited circumstances until they can be converted into the publicly traded Class A common shares. This conversion will not occur until the final settlement of certain litigation for which Visa is

indemnified by the holders of Visa’s Class B shares, including Old National. Visa funded an escrow account from its initial public offering to settle these litigation claims. Increases in litigation claims requiring Visa to fund the escrow account due to insufficient funds will result in a reduction of the conversion ratio of each Visa Class B share to unrestricted Class A shares. As of March 31, 2019, the conversion ratio was 1.6298. Based on the existing transfer restriction and the uncertainty of the outcome of the Visa litigation, the 56,210 Class B shares that Old National owns at March 31, 2019 are carried at a zero cost basis and are included in other assets with our equity securities that have no readily determinable fair value.

NOTE 23 – FINANCIAL GUARANTEES

Old National holds instruments, in the normal course of business with clients, that are considered financial guarantees in accordance with FASB ASC 460-10 (FIN 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others),which requires Old National to record the instruments at fair value. Standby letters of credit guarantees are issued in connection with agreements made by clients to counterparties. Standby letters of credit are contingent upon failure of the client to perform the terms of the underlying contract. Credit risk associated with standby letters of credit is essentially the same as that associated with extending loans to clients and is subject to normal credit policies. The term of these standby letters of credit is typically one year or less. At March 31, ~~2018,~~2019, the notional amount of standby letters of credit was ~~$71.9~~$100.2 million, which represented the maximum amount of future funding requirements, and the carrying value was ~~$0.4~~$$0.5 million. At December 31, ~~2017,~~2018, the notional amount of standby letters of credit was ~~$68.7~~$319.0 million, which represented the maximum amount of future funding requirements, and the carrying value was ~~$0.4~~$0.5 million.

Old National is a party in ~~three separate~~ risk participation transactions of interest rate swaps, which had total notional amount of ~~$17.3~~$38.3 million at March 31, ~~2018.~~2019.

NOTE 24 – SEGMENT INFORMATION

Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Old National Bank, Old National’s bank subsidiary, is the only significant subsidiary upon which management makes decisions regarding how to allocate resources and assess performance. Each of the branches of Old National Bank provide a group of similar community banking services, including such products and services as commercial, real estate and consumer loans, time deposits, checking and savings accounts, cash management, brokerage, trust, and investment advisory services. The individual bank branches located throughout our Midwest footprint have similar operating and economic characteristics. While the chief decision maker monitors the revenue streams of the various products, services, and regional locations, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the community banking services and branch locations are considered by management to be aggregated into one reportable operating segment, community banking.

NOTE 25 – FAIR VALUE

~~FASB ASC 820-10 defines fair~~Fair value asis 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 describesThere are three levels of inputs that may be used to measure fair values:

•

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

•

Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

•

Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

~~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, 2019 Using
													Significant
											Quoted Prices in		Other		Significant
											Active Markets for		Observable		Unobservable
			Fair Value Measurements at March 31, 2018 Using						Carrying		Identical Assets		Inputs		Inputs
(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)		Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets
Trading securities	$	5,569	$	5,569	$	—	$	—
Equity securities									$	6,235	$	6,235	$	—	$	—
Investment securities available-for-sale:
U.S. Treasury		9,295		9,295		—		—		9,777		9,777		—		—
U.S. government-sponsored entities and agencies		572,689		—		572,689		—		698,514		—		698,514		—
Mortgage-backed securities - Agency		1,477,896		—		1,477,896		—		2,560,703		—		2,560,703		—
States and political subdivisions		843,488		—		839,427		4,061		965,436		—		965,396		40
Pooled trust preferred securities		8,195		—		—		8,195		8,123		—		—		8,123
Other securities		308,300		30,435		277,865		—		327,219		30,640		296,579		—
Residential loans held for sale		17,635		—		17,635		—		14,082		—		14,082		—
Derivative assets		14,321		—		14,321		—		39,952		—		39,952		—
Financial Liabilities
Derivative liabilities		19,730		—		19,730		—		11,546		—		11,546		—


			Fair Value Measurements at December 31, 2017 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	$	5,584	$	5,584	$	—	$	—
Investment securities available-for-sale:
U.S. Treasury		5,551		5,551		—		—
U.S. government-sponsored entities and agencies		664,286		—		664,286		—
Mortgage-backed securities - Agency		1,667,682		—		1,667,682		—
States and political subdivisions		530,193		—		530,193
Pooled trust preferred securities		8,448		—		—		8,448
Other securities		320,047		30,965		289,082		—
Residential loans held for sale		17,930		—		17,930		—
Derivative assets		14,118		—		14,118		—
Financial Liabilities
Derivative liabilities		16,292		—		16,292		—

			Fair Value Measurements at December 31, 2018 Using
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
(dollars in thousands)	Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets
Equity securities	$	5,582	$	5,582	$	—	$	—
Investment securities available-for-sale:
U.S. Treasury		5,301		5,301		—		—
U.S. government-sponsored entities and agencies		628,151		—		628,151		—
Mortgage-backed securities - Agency		2,209,295		—		2,209,295		—
States and political subdivisions		940,429		—		936,321		4,108
Pooled trust preferred securities		8,495		—		—		8,495
Other securities		331,745		30,259		301,486		—
Residential loans held for sale		14,911		—		14,911		—
Derivative assets		29,005		—		29,005		—
Financial Liabilities
Derivative liabilities		12,550		—		12,550		—

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3):


	Pooled Trust			States and		Pooled Trust			States and
	Preferred			Political		Preferred			Political
(dollars in thousands)	Securities			Subdivisions		Securities			Subdivisions
Three Months Ended March 31, 2019
Balance at beginning of period						$	8,495		$	4,108
Accretion (amortization) of discount							4			—
Sales/payments received							(15	)		(35	)
Increase (decrease) in fair value of securities							(361	)		—
Transfers out of Level 3							—			(4,033	)
Balance at end of period						$	8,123		$	40

Three Months Ended March 31, 2018
Balance at beginning of period	$	8,448		$	—	$	8,448		$	—
Accretion of discount		5			—		5			—
Sales/payments received		(288	)		—		(288	)		—
Increase (decrease) in fair value of securities		30			—		30			—
Transfers into Level 3		—			4,061		—			4,061

Balance at end of period	$	8,195		$	4,061	$	8,195		$	4,061

Three Months Ended March 31, 2017
Balance at beginning of period	$	8,119		$	—
Accretion of discount		4			—
Sales/payments received		(163	)		—
Increase (decrease) in fair value of securities		328			—

Balance at end of period	$	8,288		$	—

The accretion or amortization of discounts on securities in the table above is included in interest income. An 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. A decrease in fair value is reflected in the balance sheet as a decrease in the fair value of investment securities available-for-sale, a decrease in accumulated other comprehensive income, which is included in shareholders’ equity, and an increase in other assets related to the tax impact. During the three months ended March 31, 2019, Old National received third party pricing on a $4.0 million state and political subdivisions security and transferred it out of Level 3. Old National transferred a $4.1 million state and political subdivisions security to Level 3 during the three months ended March 31, 2018 because Old National could no longer obtain evidence of observable inputs.

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

Valuation

Unobservable

Range (Weighted

Valuation

Unobservable

Range (Weighted

(dollars in thousands)

Fair Value

Techniques

Input

Average)

Fair Value

Techniques

Input

Average)

March 31, 2018

March 31, 2019

Pooled trust preferred securities

8,195

Discounted cash flow

Constant prepayment rate (a)

0.00%

8,123

Discounted cash flow

Constant prepayment rate (a)

0.00%

Additional asset defaults (b)

3.4% - 4.3% (4.0%)

Additional asset defaults (b)

3.6% - 4.2% (4.0%)

Expected asset recoveries (c)

0.00%

Expected asset recoveries (c)

0.00%

State and political subdivisions

4,061

Discounted cash flow

No unobservable inputs

N/A

Discounted cash flow

No observable inputs

N/A

Local municipality issuance

Old National owns 100%

Carried at par

December 31, 2017

December 31, 2018

Pooled trust preferred securities

8,448

Discounted cash flow

Constant prepayment rate (a)

0.00%

8,495

Discounted cash flow

Constant prepayment rate (a)

0.00%

Additional asset defaults (b)

4.2% - 9.6% (7.5%)

Additional asset defaults (b)

6.8% - 8.5% (7.3%)

Expected asset recoveries (c)

0.0% - 4.1% (0.6%)

Expected asset recoveries (c)

��

0.00%

State and political subdivisions

4,108

Discounted cash flow

No observable inputs

N/A

Local municipality issuance

Old National owns 100%

Carried at par

(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%.

Significant changes in any of the unobservable inputs used in the fair value measurement in isolation would result in a significant change to the fair value measurement. The pooled trust preferred securities Old National owns are subordinate note classes that rely on an ongoing cash flow stream to support their values. The senior note classes receive the benefit of prepayments to the detriment of subordinate note classes since the ongoing interest cash flow stream is reduced by the early redemption. Generally, a change in prepayment rates or additional pool asset defaults 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 at March 31, ~~2018~~2019 are summarized below:

											Fair Value Measurements at March 31, 2019 Using
													Significant
											Quoted Prices in		Other		Significant
											Active Markets for		Observable		Unobservable
			Fair Value Measurements at March 31, 2018 Using						Carrying		Identical Assets		Inputs		Inputs
(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)		Value		(Level 1)		(Level 2)		(Level 3)
Collateral Dependent Impaired Loans:
Commercial loans	$	2,453	$	—	$	—	$	2,453	$	4,781	$	—	$	—	$	4,781
Commercial real estate loans		15,267		—		—		15,267		17,146		—		—		17,146
Foreclosed Assets:
Commercial real estate		671		—		—		671
Residential		228		—		—		228
Commercial										225		—		—		225
Loan servicing rights		187		—		187		—		93		—		93		—

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 ~~$27.2~~$31.4 million, with a valuation allowance of ~~$9.4~~$9.5 million at March 31, ~~2018.~~2019. Old National recorded provision ~~recapture~~expense associated with these loans totaling ~~$1.6~~$1.2 million for the three months ended March 31, ~~2018.~~2019. Old National recorded provision ~~expense~~recapture associated with impaired commercial and commercial real estate loans that were deemed collateral dependent totaling ~~$1.1~~$1.6 million for the three months ended March 31, ~~2017.~~2018.

Other real estate owned and other repossessed property is measured at fair value less costs to sell and had a net carrying amount of ~~$0.9~~$0.2 million at March 31, ~~2018.~~2019. 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 no write-downs of other real estate owned ofduring the three months ended March 31, 2019 and $0.3 million during the three months ended March 31, ~~2018 and $0.8 million for the three months ended March 31, 2017.~~2018.

Loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the carrying amount. If the carrying amount of an individual tranche exceeds fair value, impairment is recorded on that tranche so that the servicing asset is carried at fair value. Fair value is determined at a tranche level, based on market prices for comparable mortgage servicing contracts when available, or alternatively based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model utilizes a discount rate, weighted average prepayment speed, and other economic factors that market participants would use in estimating future net servicing income and that can be validated against available market data (Level 2). The valuation allowance for loan servicing rights with impairments at March 31, ~~2018~~2019 totaled ~~$20~~$17 thousand. Old National recorded ~~recoveries~~impairments associated with these loan servicing rights totaling $2 thousand during the three months ended March 31, 2019 and recoveries of $9 thousand for the three months ended March 31, ~~2018 and $18 thousand for the three months ended March 31, 2017.~~

2018.

Assets measured at fair value on a non-recurring basis at December 31, ~~2017~~2018 are summarized below:

											Fair Value Measurements at December 31, 2018 Using
													Significant
											Quoted Prices in		Other		Significant
											Active Markets for		Observable		Unobservable
			Fair Value Measurements at December 31, 2017 Using						Carrying		Identical Assets		Inputs		Inputs
(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)		Value		(Level 1)		(Level 2)		(Level 3)
Collateral Dependent Impaired Loans:
Commercial loans	$	2,217	$	—	$	—	$	2,217	$	7,242	$	—	$	—	$	7,242
Commercial real estate loans		26,319		—		—		26,319		29,125		—		—		29,125
Foreclosed Assets:
Commercial real estate		1,726		—		—		1,726
Residential		55		—		—		55		68		—		—		68
Loan servicing rights		2,964		—		2,964		—		104		—		104		—

At December 31, ~~2017,~~2018, impaired commercial and commercial real estate loans had a principal amount of ~~$38.6~~$49.3 million, with a valuation allowance of ~~$10.1~~$12.9 million.

Other real estate owned and other repossessed property had a net carrying amount of ~~$1.8 million~~$68 thousand at December 31, ~~2017.~~2018.

The valuation allowance for loan servicing rights with impairments at December 31, ~~2017~~2018 totaled ~~$29~~$15 thousand.

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

Valuation

Unobservable

Range (Weighted

(dollars in thousands)

Fair Value

Techniques

Input

Average)

March 31, 2019

Collateral Dependent Impaired

Loans

Commercial loans

4,781

Fair value of

Discount for type of property,

0% - 90% (41%)

collateral

age of appraisal, and current

Valuation

Unobservable

Range (Weighted

status

(dollars in thousands)

Fair Value

Techniques

Input

Average)

March 31, 2018

Commercial real estate loans

17,146

Fair value of

Discount for type of property,

0% - 50% (35%)

collateral

age of appraisal and current

status

Foreclosed Assets

Commercial

225

Fair value of

Discount for type of property,

collateral

age of appraisal, and current status

December 31, 2018

Collateral Dependent Impaired Loans

Commercial loans

2,453

Fair value of collateral

Discount for type of property, age of appraisal, and current status

25% - 35% (30%)

7,242

Fair value of

Discount for type of property,

0% - 90% (35%)

collateral

age of appraisal, and current

status

Commercial real estate loans

15,267

Fair value of collateral

Discount for type of property, age of appraisal and current status

0% - 20% (10%)

29,125

Fair value of

Discount for type of property,

0% - 50% (35%)

collateral

age of appraisal and current

status

Foreclosed Assets

Commercial real estate

671

Fair value of collateral

Discount for type of property, age of appraisal, and current status

14% - 43% (25%)

Residential

228

Fair value of collateral

Discount for type of property, age of appraisal, and current status

18% - 19% (18%)

Fair value of

Discount for type of property,

15% - 16% (15%)

December 31, 2017

Collateral Dependent Impaired Loans

Commercial loans

2,217

Fair value of collateral

Discount for type of property, age of appraisal, and current status

0% - 98% (49%)

Commercial real estate loans

26,319

Fair value of collateral

Discount for type of property, age of appraisal and current status

10% - 78% (32%)

Foreclosed Assets

Commercial real estate

1,726

Fair value of collateral

Discount for type of property, age of appraisal, and current status

7% - 25% (18%)

Residential (1)

Fair value of collateral

Discount for type of property, age of appraisal, and current status

39%

collateral

age of appraisal, and current status

~~(1)~~

~~There was only one foreclosed residential asset at December 31, 2017, so no range or weighted average rate is reported.~~

Financial instruments recorded using fair value option

~~Under FASB ASC 825-10, we~~Old National may elect to report most financial instruments and certain other items at fair value on an instrument-by instrument basis with changes in fair value reported in net income. After the initial adoption, the election is made at the acquisition of an eligible financial asset, financial liability or firm commitment or when certain specified reconsideration events occur. The fair value election may not be revoked once an election is made.

~~We have~~50

Residential loans held for sale

Old National has elected the fair value option for residential loans held for sale. For these loans, interest income is recorded in the consolidated statements of income based on the contractual amount of interest income earned on the financial assets (except any that are on nonaccrual status). None of these loans are 90 days or more past due, nor are any on nonaccrual status. Included in the income statement is interest income for loans held for sale totaling $188 thousand for the three months ended March 31, 2019 and $22 thousand for the three months ended March 31, ~~2018 and $28 thousand for the three months ended March 31, 2017.~~

~~Residential loans held for sale~~2018.

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.

The difference between the aggregate fair value and the aggregate remaining principal balance for loans for which the fair value option has been elected at March 31, ~~2018~~2019 and December 31, ~~2017~~2018 was as follows:


	Aggregate				Contractual		Aggregate				Contractual
(dollars in thousands)	Fair Value		Difference		Principal		Fair Value		Difference		Principal
March 31, 2018
March 31, 2019
Residential loans held for sale	$	17,635	$	577	$	17,058	$	14,082	$	570	$	13,512

December 31, 2017
December 31, 2018
Residential loans held for sale	$	17,930	$	546	$	17,384	$	14,911	$	475	$	14,436

Accrued interest at period end is included in the fair value of the instruments.

The following table presents the amount of gains and losses from fair value changes included in income before income taxes for financial assets carried at fair value:


								Total Changes									Total Changes
								in Fair Values									in Fair Values
	Other							Included in		Other							Included in
	Gains and		Interest		Interest			Current Period		Gains and		Interest		Interest			Current Period
(dollars in thousands)	(Losses)		Income		(Expense)			Earnings		(Losses)		Income		(Expense)			Earnings
Three months ended March 31, 2018
Three Months Ended March 31, 2019
Residential loans held for sale	$	35	$	—	$	(4	)	$	31	$	90	$	5	$	—		$	95

Three months ended March 31, 2017
Three Months Ended March 31, 2018
Residential loans held for sale	$	418	$	1	$	—		$	419	$	35	$	—	$	(4	)	$	31

The carrying amounts and estimated fair values of financial instruments not carried at fair value ~~on the balance sheet~~ at March 31, ~~2018~~2019 and December 31, ~~2017~~2018 were as follows:


			Fair Value Measurements at March 31, 2018 Using								Fair Value Measurements at March 31, 2019 Using
			Quoted Prices in		Significant						Quoted Prices in		Significant
			Active Markets		Other		Significant				Active Markets		Other		Significant
			for Identical		Observable		Unobservable				for Identical		Observable		Unobservable
	Carrying		Assets		Inputs		Inputs		Carrying		Assets		Inputs		Inputs
(dollars in thousands)	Value		(Level 1)		(Level 2)		(Level 3)		Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets
Cash, due from banks, money market, and other interest-earning investments	$	278,241	$	278,241	$	—	$	—	$	323,116	$	323,116	$	—	$	—
Investment securities held-to-maturity:				—				—
U.S. government-sponsored entities and agencies		73,369		—		71,444		—		74,195		—		74,186		—
Mortgage-backed securities - Agency		145,658		—		142,767		—		123,627		—		123,858		—
State and political subdivisions		316,126		—		321,932		—		287,012		—		295,833		—
FHLB/Federal Reserve Bank stock		136,206		N/A		N/A		N/A
Loans, net:
Commercial		2,792,038		—		—		2,727,325		3,022,384		—		—		2,961,284
Commercial real estate		4,429,184		—		—		4,313,955		4,998,451		—		—		4,915,521
Residential real estate		2,156,769		—		—		2,135,119		2,241,583		—		—		2,205,698
Consumer credit		1,810,310		—		—		1,777,935		1,751,000		—		—		1,715,516
Accrued interest receivable		81,621		74		20,502		61,045		86,279		34		25,225		61,020

Financial Liabilities
Deposits:
Noninterest-bearing demand deposits	$	3,655,732	$	3,655,732	$	—	$	—	$	3,903,314	$	3,903,314	$	—	$	—
NOW, savings, and money market deposits		7,357,137		7,357,137		—		—
Checking, NOW, savings, and money market interest-bearing deposits										8,464,358		8,464,358		—		—
Time deposits		1,775,731		—		1,771,277		—		2,061,598		—		2,046,438		—
Federal funds purchased and interbank borrowings		150,026		150,026		—		—		325,030		325,030		—		—
Securities sold under agreements to repurchase		308,189		308,189		—		—		342,480		342,480		—		—
FHLB advances		1,664,179		—		—		1,658,911		1,719,944		—		—		1,731,524
Other borrowings		248,898		—		251,538		—		251,584		—		254,441		—
Accrued interest payable		5,388		—		5,388		—		7,961		—		7,961		—
Standby letters of credit		408		—		—		408		482		—		—		482

Off-Balance Sheet Financial Instruments
Commitments to extend credit	$	—	$	—	$	—	$	3,225	$	—	$	—	$	—	$	4,105

			Fair Value Measurements at December 31, 2018 Using
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
	Carrying		Assets		Inputs		Inputs
(dollars in thousands)	Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets
Cash, due from banks, money market, and other interest-earning investments	$	317,165	$	317,165	$	—	$	—
Investment securities held-to-maturity:
U.S. government-sponsored entities and agencies		73,986		—		72,359
Mortgage-backed securities - Agency		127,120		—		124,409		—
State and political subdivisions		305,228		—		309,335		—
Loans, net:
Commercial		3,211,228		—		—		3,161,132
Commercial real estate		4,935,381		—		—		4,781,294
Residential real estate		2,246,127		—		—		2,225,853
Consumer credit		1,795,695		—		—		1,773,352
Accrued interest receivable		89,464		13		27,580		61,871

Financial Liabilities
Deposits:
Noninterest-bearing demand deposits	$	3,965,380	$	3,965,380	$	—	$	—
Checking, NOW, savings, and money market interest-bearing deposits		8,360,313		8,360,313		—		—
Time deposits		2,024,256		—		2,002,187		—
Federal funds purchased and interbank borrowings		270,135		270,135		—		—
Securities sold under agreements to repurchase		362,294		362,294		—		—
FHLB advances		1,613,481		—		—		1,611,103
Other borrowings		247,883		—		248,065		—
Accrued interest payable		9,871		—		9,871		—
Standby letters of credit		525		—		—		525

Off-Balance Sheet Financial Instruments
Commitments to extend credit	$	—	$	—	$	—	$	3,115

~~N/A = not applicable~~

      Fair Value Measurements at December 31, 2017 Using
      Quoted Prices in    Significant
      Active Markets    Other    Significant
      for Identical    Observable    Unobservable
   Carrying    Assets    Inputs    Inputs
(dollars in thousands)
   Value    (Level 1)    (Level 2)    (Level 3)
Financial Assets

Cash, due from banks, money market, and other interest-earning investments
   $ 290,432    $ 290,432    $ —      $ —
Investment securities held-to-maturity:

Mortgage-backed securities - Agency
   6,903    —      7,056    —
State and political subdivisions
   677,160    —      720,647    —
FHLB/Federal Reserve Bank stock
   119,686    N/A    N/A    N/A
Loans, net:

Commercial
   2,698,023    —      —      2,707,385
Commercial real estate
   4,333,116    —      —      4,347,949
Residential real estate
   2,165,290    —      —      2,210,951
Consumer credit
   1,871,311    —      —      1,998,194
Accrued interest receivable
   87,102    16    24,001    63,085
Financial Liabilities

Deposits:

Noninterest-bearing demand deposits
   $ 3,680,807    $ 3,680,807    $ —      $ —
NOW, savings, and money market deposits
   7,290,521    7,290,521    —      —
Time deposits
   1,634,436    —      1,620,685    —
Federal funds purchased and interbank borrowings
   335,033    335,033    —      —
Securities sold under agreements to repurchase
   384,810    359,810    25,133    —
FHLB advances
   1,609,579    —      —      1,607,189
Other borrowings
   248,782    —      250,443    —
Accrued interest payable
   7,029    —      7,029    —
Standby letters of credit
   351    —      —      351
Off-Balance Sheet Financial Instruments

Commitments to extend credit
   $ —      $ —      $ —      $ 2,449

~~N/A = not applicable~~

The ~~methods utilized to estimate the fair value of financial instruments at December 31, 2017 did not necessarily represent an exit price. In accordance with our adoption of ASU 2016-01 in 2018, the~~ methods utilized to measure the fair value of financial instruments at March 31, 2019 and December 31, 2018 represent an approximation of exit price, however, an actual exit price may differ.

NOTE 26 – REVENUE FROM CONTRACTS WITH CUSTOMERS

Old National’s revenue from contracts with customers in the scope of Topic 606 is recognized within noninterest income. The consolidated statements of income include all categories of noninterest income. The following table reflects only the categories of noninterest income that are within the scope of Topic 606:

	Three Months Ended
	March 31,
(dollars in thousands)	2019		2018
Wealth management fees	$	8,535	$	9,026
Service charges on deposit accounts		10,826		10,759
Debit card and ATM fees		5,503		4,865
Investment product fees		5,271		5,031
Other income:
Merchant processing fees		707		641
Gain (loss) on other real estate owned		40		135
Safe deposit box fees		411		404
Insurance premiums and commissions		200		104
Total	$	31,493	$	30,965

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

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

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

Investment product fees: Investment product fees are the commissions and fees received from a registered broker/dealer and investment adviser that provide those services to Old National customers. Old National acts as an agent in arranging the relationship between the customer and the third-party service provider. These fees are recognized monthly from the third-party broker based upon services already performed, net of the processing fees charged to Old National by the broker.

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, ~~2018~~2019 and ~~2017,~~2018, and financial condition as of March 31, ~~2018,~~2019, compared to March 31, ~~2017~~2018 and December 31, ~~2017.~~2018. 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.

FINANCIAL HIGHLIGHTS

The following table sets forth certain financial highlights of Old National:

   Three Months Ended
(dollars and shares in thousands,    March 31, December 31, March 31,
except per share data)
   2018 2017 2017
Income Statement:

Net interest income
   $ 128,572 $ 118,556 $ 105,801
Taxable equivalent adjustment (1)
   2,767 6,139 5,688
Provision for loan losses
   380 1,037 347
Noninterest income
   42,389 44,825 42,920
Noninterest expense
   117,641 140,432 101,891
Net income
   47,983 (18,493 ) 35,992
Common Share Data:

Weighted average diluted shares
   152,370 146,875 135,431
Net income (diluted)
   $ 0.31 $ (0.13 ) $ 0.27
Cash dividends
   0.13 0.13 0.13
Common dividend payout ratio (2)
   41 % N/M 48 %
Book value
   $ 14.32 $ 14.17 $ 13.63
Stock price
   16.90 17.45 17.35
Tangible common book value (3)
   8.55 8.37 8.54
Performance Ratios:

Return on average assets
   1.10 % (0.45 )% 0.98 %
Return on average common equity
   8.86 (3.51 ) 7.89
Return on tangible common equity (3)
   15.62 (5.12 ) 13.13
Return on average tangible common equity (3)
   15.80 (5.05 ) 13.38
Net interest margin (3)
   3.45 3.47 3.50
Efficiency ratio (3)
   65.94 81.60 64.66
Net charge-offs (recoveries) to average loans
   0.01 0.03 0.01
Allowance for loan losses to ending loans
   0.45 0.45 0.55
Non-performing loans to ending loans
   1.28 1.30 1.43
Balance Sheet:

Total loans
   $ 11,238,682 $ 11,118,121 $ 9,131,773
Total assets
   17,496,287 17,518,292 14,869,645
Total deposits
   12,788,600 12,605,764 10,821,352
Total borrowed funds
   2,371,292 2,578,204 2,066,617
Total shareholders’ equity
   2,179,118 2,154,397 1,846,359
Nonfinancial Data:

Full-time equivalent employees
   2,721 2,801 2,659
Banking centers
   191 191 188

~~N/M = Not meaningful~~

	Three Months Ended
(dollars and shares in thousands,	March 31,			December 31,			March 31,
except per share data)	2019			2018			2018
Income Statement:
Net interest income	$	147,048		$	146,225		$	128,572
Taxable equivalent adjustment (1)		3,198			3,049			2,767
Provision for loan losses		1,043			3,390			380
Noninterest income		46,416			58,154			41,905
Noninterest expense		123,041			150,268			117,157
Net income		56,276			47,498			47,983
Common Share Data:
Weighted average diluted shares		175,368			167,992			152,370
Net income (diluted)	$	0.32		$	0.28		$	0.31
Cash dividends		0.13			0.13			0.13
Common dividend payout ratio (2)		41	%		46	%		41	%
Book value	$	15.82		$	15.36		$	14.32
Stock price		16.40			15.40			16.90
Tangible common book value (3)		9.44			9.00			8.55
Performance Ratios:
Return on average assets		1.14	%		1.01	%		1.10	%
Return on average common equity		8.29			7.59			8.86
Return on tangible common equity (3)		14.52			12.88			15.62
Return on average tangible common equity (3)		14.88			13.84			15.80
Net interest margin (3)		3.51			3.64			3.45
Efficiency ratio (3)		60.26			70.33			65.84
Net charge-offs (recoveries) to average loans		0.03			0.02			0.01
Allowance for loan losses to ending loans		0.46			0.45			0.45
Non-performing loans to ending loans		1.41			1.43			1.28
Balance Sheet:
Total loans	$	12,068,977		$	12,243,892		$	11,238,682
Total assets		20,084,420			19,728,435			17,496,287
Total deposits		14,429,270			14,349,949			12,788,600
Total borrowed funds		2,639,038			2,493,793			2,371,292
Total shareholders' equity		2,751,872			2,689,570			2,179,118
Nonfinancial Data:
Full-time equivalent employees		2,908			2,892			2,721
Banking centers		193			191			191

(1)	Calculated using the federal statutory tax rate in effect of 21% for ~~the three months ended March 31, 2018 and 35% for the three months ended December 31, 2017 and March 31, 2017.~~all periods.

(2)	Cash dividends per share divided by net income per share (basic).

(3)	Represents a non-GAAP financial measure. Refer to the ~~“Non-GAAP~~"Non-GAAP Financial ~~Measures”~~Measures" section for reconciliations to GAAP financial measures.

NON-GAAP FINANCIAL MEASURES

Non-GAAP financial measures exclude certain items that are included in the financial results presented in accordance with GAAP. Management believes these non-GAAP financial measures enhance an investor’s understanding of the financial results of Old National by providing a meaningful basis for period-to-period comparisons, assisting in operating results analysis, and predicting future performance.

The following table presents GAAP to non-GAAP reconciliations.


	Three Months Ended							Three Months Ended
(dollars and shares in thousands,	March 31,						(dollars and shares in thousands,	March 31,
except per share data)	2018			2017			except per share data)	2019				2018
Tangible common book value:							Tangible common book value:
Shareholders’ equity (GAAP)	$	2,179,118		$	1,846,359
Deduct: Goodwill		828,804			655,018
Intangible assets		48,833			34,657
Shareholders' equity (GAAP)							Shareholders' equity (GAAP)	$	2,751,872			$	2,179,118
Deduct:							Goodwill		1,036,258				828,804
							Intangible assets		72,544				48,833
Tangible shareholders’ equity (non-GAAP)	$	1,301,481		$	1,156,684

Tangible shareholders' equity (non-GAAP)							Tangible shareholders' equity (non-GAAP)	$	1,643,070			$	1,301,481
Period end common shares		152,172			135,435		Period end common shares		173,979				152,172
Tangible common book value		8.55			8.54		Tangible common book value		9.44				8.55

Return on tangible common equity:							Return on tangible common equity:
Net income (GAAP)	$	47,983		$	35,992		Net income (GAAP)	$	56,276			$	47,983
Add: Intangible amortization (net of tax)		2,851			1,963		Add: Intangible amortization (net of tax)		3,373				2,851

Tangible net income (non-GAAP)	$	50,834		$	37,955		Tangible net income (non-GAAP)	$	59,649			$	50,834

Tangible shareholders’ equity (non-GAAP) (see above)	$	1,301,481		$	1,156,684
Tangible shareholders' equity (non-GAAP) (see above)							Tangible shareholders' equity (non-GAAP) (see above)	$	1,643,070			$	1,301,481
Return on tangible common equity		15.62	%		13.13	%	Return on tangible common equity		14.52		%		15.62	%

Return on average tangible common equity:							Return on average tangible common equity:
Tangible net income (non-GAAP) (see above)	$	50,834		$	37,955		Tangible net income (non-GAAP) (see above)	$	59,649			$	50,834
Average shareholders’ equity (GAAP)	$	2,166,055		$	1,825,659
Deduct: Average goodwill		828,141			655,018
Average intangible assets		51,092			36,097
Average shareholders' equity (GAAP)							Average shareholders' equity (GAAP)	$	2,714,186			$	2,166,055
Deduct:							Average goodwill		1,036,258				828,141
							Average intangible assets		74,849				51,092
Average tangible shareholders’ equity (non-GAAP)	$	1,286,822		$	1,134,544
Average tangible shareholders' equity (non-GAAP)							Average tangible shareholders' equity (non-GAAP)	$	1,603,079			$	1,286,822
Return on average tangible common equity							Return on average tangible common equity		14.88		%		15.80	%

Return on average tangible common equity		15.80	%		13.38	%
Net interest margin:							Net interest margin:
Net interest income (GAAP)	$	128,572		$	105,801		Net interest income (GAAP)	$	147,048			$	128,572
Taxable equivalent adjustment		2,767			5,688		Taxable equivalent adjustment		3,198				2,767

Net interest income - taxable equivalent basis (non-GAAP)	$	131,339		$	111,489		Net interest income - taxable equivalent basis (non-GAAP)	$	150,246			$	131,339

Average earning assets	$	15,205,891		$	12,742,858		Average earning assets	$	17,143,574			$	15,205,891
Net interest margin		3.45	%		3.50	%	Net interest margin		3.51		%		3.45	%

Efficiency ratio:							Efficiency ratio:
Noninterest expense (GAAP)	$	117,641		$	101,891		Noninterest expense (GAAP)	$	123,041			$	117,157
Deduct: Intangible amortization expense		3,609			3,020		Deduct: Intangible amortization expense		4,472				3,609

Adjusted noninterest expense (non-GAAP)	$	114,032		$	98,871		Adjusted noninterest expense (non-GAAP)	$	118,569			$	113,548

Net interest income - taxable equivalent basis (non-GAAP) (see above)	$	131,339		$	111,489		Net interest income - taxable equivalent basis (non-GAAP) (see above)	$	150,246			$	131,339
Noninterest income		42,389			42,920		Noninterest income		46,416				41,905
Deduct: Net securities gains (losses)		788			1,500

Deduct:							Net debt securities gains (losses)		(103	)			788
Adjusted total revenue (non-GAAP)	$	172,940		$	152,909		Adjusted total revenue (non-GAAP)	$	196,765			$	172,456

Efficiency ratio		65.94	%		64.66	%	Efficiency ratio		60.26		%		65.84	%

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although these non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP. These non-GAAP measures are not necessarily comparable to similar measures that may be represented by other companies.

EXECUTIVE SUMMARY

During the first quarter of ~~2018,~~2019, net income was $56.3 million, or $0.32 per diluted share. Net income was $48.0 million, or $0.31 per diluted ~~share. Net income was $36.0 million, or $0.27 per diluted~~ share, for the first quarter of ~~2017.~~2018.

~~Management’s strategy is~~

We will continue to focus on our core strategic principles of basic banking –in 2019, which are loan growth, ~~fee~~fee-based income, and expense ~~management: This is accomplished by executing~~management. We use our ~~plan of revenue growth driven by strong commercial loan growth, anchored by excellent credit, fueled by~~ low-cost core deposits to fund our commercial loan growth. That loan growth is filtered through our reliable credit process. We have a disciplined expense culture that permeates into all areas and ~~reducing our operating expenses. In addition, we~~processes. We are seeing the results of our efforts to re-mix our earning assets by replacing lower yielding assets, like indirect auto loans, with higher yielding assets, like commercial loans. Our actions demonstrate our commitmentcommitted to driving and sustaining positive operating leverage.

We have continued to re-mix our earning assets towards more productive commercial and commercial real estate loans and out of indirect and other loans.

Loan Growth: Our loan balances, excluding loans held for sale, ~~grew $120.6~~declined $174.9 million to ~~$11.239~~$12.069 billion at March 31, ~~2018~~2019 compared to ~~$11.118~~$12.244 billion at December 31, ~~2017.~~2018. This ~~growth~~ was ~~attributable~~primarily driven by a decline in commercial and industrial outstandings which was influenced by seasonal factors, lower line utilization, and elevated levels of prepayments due to sales of businesses.

Net Interest Income: For the three months ended March 31, 2019 compared to the three months ended March 31, 2018, our ~~commercial~~net interest income increased primarily due to the acquisition of Klein in November 2018 and increased loan ~~portfolios, as we continue~~yields. This was partially offset by higher costs of interest-bearing liabilities. Net interest income increased slightly in the first quarter of 2019 compared to ~~focus on organic loan growth coupled~~the fourth quarter of 2018 with ~~strong credit performance. Commercial loan demand continues to be steady as we execute~~a full quarter of positive impact from our ~~strategy~~recent Klein partnership, substantially offset by fewer days and a change in in the mix of ~~building new relationships throughout our entire footprint.~~average interest earning assets and interest-bearing liabilities.

Fee Income: ~~Revenue growth in our~~Noninterest income increased to $46.4 million from $41.9 million for the first quarter of 2019 when compared to the first quarter of 2018 substantially due to higher fee income ~~components~~associated with the Klein partnership.

Expenses: Noninterest expenses increased $5.9 million for the three months ended March 31, ~~2018~~2019 when compared to the three months ended March 31, ~~2017 was driven by the acquisition of Anchor (MN) in November 2017, partially offset by lower capital markets income.~~

~~Expenses~~~~: Noninterest expenses increased $15.8 million, or 16%, for the three months ended March 31, 2018 when compared to the three months ended March 31, 2017.~~2018. The increase was primarily attributable to higher expenses associated with the ~~Anchor (MN)~~Klein partnership. We are adapting to changing customer behaviors by continually investing in and improving the client experience by enhancing technology and processes. However, as previously disclosed, we have consolidated 148 branches since the beginning of 2011. Additionally, there are ten branches located throughout the footprint scheduled to be consolidated; nine in the second quarter and one in the thirdThe first quarter of ~~this year. In addition, Old National entered into a branch purchase and assumption agreement for~~2019 compared to the sale of ten Old National branches in Wisconsin to Marine Credit Union of La Crosse, Wisconsin. The branch sale includes the assumption of approximately $274 million in deposits and no loans. Subject to regulatory approval and other terms and conditions, the sale is expected to close in the thirdfourth quarter of ~~2018. For the remainder of~~ 2018 ~~we are relentlessly evaluating the Old National franchise for additional consolidation opportunities.~~decreased $27.2 million reflecting lower merger and integration charges associated with Klein and continued discipline with respect to expense management.

~~Our thoughts regarding~~

In regard to future partnerships, ~~is such that~~ we remain an active looker in our target markets and a highly selective, disciplined buyer. We continue to believe in our ability to bring ~~an enhanced product set and~~ a larger balance sheet with better capital ~~allows~~and an enhanced product set to a ~~potential new market~~ partner that will allow them to better serve their ~~clients. However, given the quality Old National franchise that exists today, we do not feel compelled to enter into a partnership.~~

clients.

RESULTS OF OPERATIONS

The following table sets forth certain income statement information of Old National for the three months ended March 31, ~~2018~~2019 and ~~2017:~~2018:

   Three Months Ended
   March 31, %
(dollars in thousands)
   2018 2017 Change
Income Statement Summary:

Net interest income
   $ 128,572 $ 105,801 21.5 %
Provision for loan losses
   380 347 9.5
Noninterest income
   42,389 42,920 (1.2 )
Noninterest expense
   117,641 101,891 15.5
Other Data:

Return on average common equity
   8.86 % 7.89 %
Return on tangible common equity (1)
   15.62 13.13
Return on average tangible common equity (1)
   15.80 13.38
Efficiency ratio (1)
   65.94 64.66
Tier 1 leverage ratio
   8.11 8.49
Net charge-offs (recoveries) to average loans
   0.01 0.01

	Three Months Ended
	March 31,						%
(dollars in thousands)	2019			2018			Change
Income Statement Summary:
Net interest income	$	147,048		$	128,572			14.4	%
Provision for loan losses		1,043			380			174.5
Noninterest income		46,416			41,905			10.8
Noninterest expense		123,041			117,157			5.0
Other Data:
Return on average common equity		8.29	%		8.86	%
Return on tangible common equity (1)		14.52			15.62
Return on average tangible common equity (1)		14.88			15.80
Efficiency ratio (1)		60.26			65.84
Tier 1 leverage ratio		8.80			8.11
Net charge-offs (recoveries) to average loans		0.03			0.01

(1)	Represents a non-GAAP financial measure. Refer to ~~“Non-GAAP~~"Non-GAAP Financial ~~Measures”~~Measures" section for reconciliations to GAAP financial measures.

Net Interest Income

Net interest income is the most significant component of our earnings, comprising ~~75%~~76% of revenues for the three months ended March 31, ~~2018.~~ 2019. 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 the 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.

The Federal Reserve ~~increased~~did not change the discount rate ~~25 basis points~~ at their March ~~2018~~2019 meeting. ~~The rate increase was driven by the Federal Reserve’s inflation and wage pressure expectations in conjunction with a moderately expanding economy.~~ The Treasury yield curve flattened as ~~short-term~~long-term rates ~~rose while long-term~~declined and short-term interest rates remained ~~flat. Collectively, these factors marginally improved~~flat during the ~~outlook for~~quarter. This could cause our interest rate spread to decline, which may result in a decrease in our net interest ~~income and margin.~~income.

Loans typically generate more interest income than investment securities with similar maturities. Funding from client deposits generally costs less than wholesale funding sources. Factors such as general economic activity, Federal Reserve 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 21% for ~~the three months ended March 31, 2018, compared to 35% for the three months ended March 31, 2017.~~all periods. This analysis portrays the income tax benefits ~~associated in~~related to 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						Three Months Ended
	March 31,						March 31,
(dollars in thousands)	2018			2017			2019			2018
Net interest income	$	128,572		$	105,801		$	147,048		$	128,572
Conversion to fully taxable equivalent		2,767			5,688			3,198			2,767

Net interest income - taxable equivalent basis	$	131,339		$	111,489		$	150,246		$	131,339

Average earning assets	$	15,205,891		$	12,742,858		$	17,143,574		$	15,205,891

Net interest margin		3.38	%		3.32	%		3.43	%		3.38	%
Net interest margin - taxable equivalent basis		3.45	%		3.50	%		3.51	%		3.45	%

The increase in net interest income for the three months ended March 31, ~~2018~~2019 when compared to the three months ended March 31, ~~2017~~2018 was primarily due to higher average earning assets of ~~$2.463~~$1.938 billion. Partially offsetting the higher average earning assets were higher average interest-bearing liabilities of ~~$1.672~~$1.420 billion in the three months ended March 31, ~~2018~~2019 when compared to the three months ended March 31, ~~2017 and lower fully taxable equivalent interest income resulting from the income tax rate decrease to 21% in~~ 2018. Net interest income for the three months ended March 31, ~~2018~~2019 and ~~2017~~2018 included accretion income (interest income in excess of contractual interest income) associated with acquired loans. Accretion income totaled $8.9 million in the three months ended March 31, 2019, compared to $11.0 million in the three months ended March 31, ~~2018, compared to $12.6 million in the three months ended March 31, 2017.~~2018. We expect accretion income on our PCI loans to decrease over time, but this may be offset by future acquisitions.

The following tables present the average balance sheet for each major asset and liability category, its related interest income and yield, or its expense and rate for the three months ended March 31, ~~2018~~2019 and ~~2017.~~2018.

   Three Months Ended Three Months Ended
(dollars in thousands)
   March 31, 2018 March 31, 2017
   Average Income (1)/    Yield/ Average Income (1)/    Yield/
   Balance Expense    Rate Balance Expense    Rate
Earning Assets

Money market and other interest-earning investments
   $ 66,536 $ 90    0.55 % $ 27,482 $ 31    0.46 %
Investment securities:

Treasury and government sponsored agencies
   663,096 3,424    2.07 % 540,422 2,780    2.06 %
Mortgage-backed securities
   1,632,610 9,520    2.33 % 1,511,388 7,818    2.07 %
States and political subdivisions
   1,204,855 10,478    3.48 % 1,133,373 13,607    4.80 %
Other securities
   459,458 3,669    3.19 % 445,235 2,828    2.54 %






Total investment securities
   3,960,019 27,091    2.74 % 3,630,418 27,033    2.98 %






Loans: (2)

Commercial
   2,759,688 28,205    4.09 % 1,887,929 19,088    4.04 %
Commercial real estate
   4,394,002 55,787    5.08 % 3,171,005 40,324    5.09 %
Residential real estate loans
   2,176,413 21,472    3.95 % 2,141,571 21,254    3.97 %
Consumer
   1,849,233 17,828    3.91 % 1,884,453 16,426    3.54 %






Total loans
   11,179,336 123,292    4.42 % 9,084,958 97,092    4.29 %






Total earning assets
   15,205,891 $ 150,473    3.97 % 12,742,858 $ 124,156    3.91 %






Less: Allowance for loan losses
   (50,953 )    (50,710 )
Non-earning Assets

Cash and due from banks
   199,132    195,620
Other assets
   2,089,790    1,877,849





Total assets
   $ 17,443,860    $ 14,765,617





Interest-Bearing Liabilities

NOW accounts
   $ 3,067,437 $ 819    0.11 % $ 2,585,814 $ 456    0.07 %
Savings accounts
   3,052,646 1,343    0.18 % 2,969,866 1,157    0.16 %
Money market accounts
   1,159,010 546    0.19 % 706,990 149    0.09 %
Time deposits
   1,736,984 4,547    1.06 % 1,440,431 2,621    0.74 %






Total interest-bearing deposits
   9,016,077 7,255    0.33 % 7,703,101 4,383    0.23 %






Federal funds purchased and interbank borrowings
   261,353 1,017    1.58 % 189,070 356    0.76 %
Securities sold under agreements to repurchase
   342,682 359    0.42 % 331,400 256    0.31 %
FHLB advances
   1,675,700 7,780    1.88 % 1,429,977 5,312    1.51 %
Other borrowings
   248,828 2,723    4.38 % 218,965 2,360    4.31 %






Total borrowed funds
   2,528,563 11,879    1.91 % 2,169,412 8,284    1.55 %






Total interest-bearing liabilities
   $ 11,544,640 $ 19,134    0.67 % $ 9,872,513 $ 12,667    0.52 %






Noninterest-Bearing Liabilities

Demand deposits
   $ 3,563,104    $ 2,917,053
Other liabilities
   170,061    150,392
Shareholders’ equity
   2,166,055    1,825,659





Total liabilities and shareholders’ equity
   $ 17,443,860    $ 14,765,617





Net interest rate spread
      3.30 %    3.39 %
Net interest margin (3)
      3.45 %    3.50 %
Taxable equivalent adjustment
   $ 2,767    $ 5,688

(tax equivalent basis,	Three Months Ended								Three Months Ended
dollars in thousands)	March 31, 2019								March 31, 2018
	Average			Income (1)/		Yield/			Average			Income (1)/		Yield/
Earning Assets	Balance			Expense		Rate			Balance			Expense		Rate
Money market and other interest-earning investments	$	58,701		$	278		1.92	%	$	66,536		$	90		0.55	%
Investment securities:
Treasury and government sponsored agencies		705,417			3,902		2.21	%		663,096			3,424		2.07	%
Mortgage-backed securities		2,497,368			17,603		2.82	%		1,632,610			9,520		2.33	%
States and political subdivisions		1,232,355			11,453		3.72	%		1,204,855			10,478		3.48	%
Other securities		497,604			4,440		3.57	%		459,458			3,669		3.19	%
Total investment securities		4,932,744			37,398		3.03	%		3,960,019			27,091		2.74	%
Loans: (2)
Commercial		3,122,402			36,035		4.62	%		2,759,688			28,205		4.09	%
Commercial real estate		4,989,622			65,076		5.22	%		4,394,002			55,787		5.08	%
Residential real estate loans		2,259,243			23,931		4.24	%		2,176,413			21,472		3.95	%
Consumer		1,780,862			19,398		4.42	%		1,849,233			17,828		3.91	%
Total loans		12,152,129			144,440		4.76	%		11,179,336			123,292		4.42	%
Total earning assets		17,143,574		$	182,116		4.26	%		15,205,891		$	150,473		3.97	%
Less: Allowance for loan losses		(55,789	)							(50,953	)
Non-Earning Assets
Cash and due from banks		229,957								199,132
Other assets		2,490,524								2,089,790
Total assets	$	19,808,266							$	17,443,860

Interest-Bearing Liabilities
Checking and NOW accounts	$	3,693,886		$	3,142		0.34	%	$	3,067,437		$	819		0.11	%
Savings accounts		2,935,710			2,283		0.32	%		3,052,646			1,343		0.18	%
Money market accounts		1,702,655			2,826		0.67	%		1,159,010			546		0.19	%
Time deposits		2,031,957			8,193		1.64	%		1,736,984			4,547		1.06	%
Total interest-bearing deposits		10,364,208			16,444		0.64	%		9,016,077			7,255		0.33	%
Federal funds purchased and interbank borrowings		316,998			1,918		2.45	%		261,353			1,017		1.58	%
Securities sold under agreements to repurchase		361,261			662		0.74	%		342,682			359		0.42	%
FHLB advances		1,672,376			9,931		2.41	%		1,675,700			7,780		1.88	%
Other borrowings		249,794			2,915		4.67	%		248,828			2,723		4.38	%
Total borrowed funds		2,600,429			15,426		2.41	%		2,528,563			11,879		1.91	%
Total interest-bearing liabilities	$	12,964,637		$	31,870		1.00	%	$	11,544,640		$	19,134		0.67	%

Noninterest-Bearing Liabilities and Shareholders' Equity
Demand deposits	$	3,846,828							$	3,563,104
Other liabilities		282,615								170,061
Shareholders' equity		2,714,186								2,166,055
Total liabilities and shareholders' equity	$	19,808,266							$	17,443,860

Net interest rate spread							3.26	%							3.30	%
Net interest margin (3)							3.51	%							3.45	%
Taxable equivalent adjustment				$	3,198							$	2,767

(1)	Interest income is reflected on a fully taxable equivalent basis.

(2)	Includes loans held for sale.

(3)	Net interest margin is defined as net interest income on a tax equivalent basis as a percentage of average earning assets.

The following table presents the dollar amount of changes in taxable equivalent net interest income attributable to changes in the average balances of assets and liabilities and the yields earned or rates paid for the three months ended March 31, ~~2018~~2019 and ~~2017.~~2018.


	From Three Months Ended							From Three Months Ended
	March 31, 2017 to Three							March 31, 2018 to Three
	Months Ended March 31, 2018							Months Ended March 31, 2019
	Total		Attributed to					Total		Attributed to
(dollars in thousands)	Change		Volume		Rate			Change		Volume			Rate
Interest Income
Money market and other interest-earning investments	$	59	$	49	$	10		$	188	$	(26	)	$	214
Investment securities (1)		58		2,355		(2,297	)		10,307		7,015			3,292
Loans (1)		26,200		22,797		3,403			21,148		11,164			9,984

Total interest income		26,317		25,201		1,116			31,643		18,153			13,490

Interest Expense
NOW deposits		363		105		258
Checking and NOW deposits									2,323		339			1,984
Savings deposits		186		34		152			940		(79	)		1,019
Money market deposits		397		153		244			2,280		571			1,709
Time deposits		1,926		653		1,273			3,646		969			2,677
Federal funds purchased and interbank borrowings		661		206		455			901		274			627
Securities sold under agreements to repurchase		103		10		93			303		25			278
FHLB advances		2,468		1,023		1,445			2,151		(33	)		2,184
Other borrowings		363		324		39			192		11			181

Total interest expense		6,467		2,508		3,959			12,736		2,077			10,659

Net interest income	$	19,850	$	22,693	$	(2,843	)	$	18,907	$	16,076		$	2,831

The variance not solely due to rate or volume is allocated equally between the rate and volume variances.

(1)	Interest on investment securities and loans includes the effect of taxable equivalent adjustments of ~~$1.7~~$2.0 million and ~~$1.0~~$1.2 million, respectively, during the three months ended March 31, ~~2018~~2019 using the federal statutory rate in effect of 21%.

The ~~decrease~~increase in the net interest margin on a fully taxable equivalent basis for the three months ended March 31, ~~2018~~2019 when compared to the three months ended March 31, ~~2017~~2018 was primarily due to ~~lower yields associated with accretion income~~higher yield on ~~acquired loans,~~interest earning assets, partially offset by higher costs of interest-bearing liabilities and a change in the mix of average interest earning assets and interest-bearing liabilities. ~~The decrease~~Also offsetting the increase in the net interest margin ~~also reflected~~for the ~~change in the federal tax rate and the resulting decrease in our fully taxable equivalent interest~~three months ended March 31, 2019 were lower yields associated with accretion income ~~adjustments.~~on acquired loans. Accretion income represented 2821 basis points of the net interest margin for the three months ended March 31, ~~2018,~~2019, compared to 4028 basis points ~~of the net interest margin~~ for the three months ended March 31, ~~2017.~~2018. The yield on interest earning assets increased 629 basis points and the cost of interest-bearing liabilities increased 1533 basis points in the quarterly year-over-year comparison. The yield on interest earning assets is calculated by dividing annualized taxable equivalent net interest income by average interest earning assets while the cost of interest-bearing liabilities is calculated by dividing annualized interest expense by average interest-bearing liabilities.

Average earning assets were $17.144 billion for the three months ended March 31, 2019, compared to $15.206 billion for the three months ended March 31, 2018, ~~compared to $12.743 billion for the three months ended March 31, 2017,~~ an increase of ~~$2.463~~$1.938 billion, or ~~19%~~13%. The increase in average earning assets was primarily due to our acquisition of ~~Anchor (MN)~~Klein in November ~~2017.~~2018. The loan portfolio including loans held for sale, which generally has an average yield higher than the investment portfolio, was approximately ~~74%~~71% of average interest earning assets for the three months ended March 31, ~~2018,~~2019, compared to ~~71%~~74% for the three months ended March 31, ~~2017.~~2018.

Average loans including loans held for sale increased ~~$2.094 billion~~$972.8 million for the three months ended March 31, ~~2018~~2019 when compared to the three months ended March 31, ~~2017 reflecting organic loan growth, as well as an increase attributable~~2018 primarily due to loans acquired from ~~Anchor (MN)~~Klein in November ~~2017.~~2018. Loansincluding loans held for sale attributable to the ~~Anchor (MN)~~Klein acquisition totaled ~~$1.595~~$1.052 billion as of the closing date of the acquisition, which was November 1, ~~2017.~~

2018.

Average investments increased ~~$329.6~~$972.7 million for the three months ended March 31, ~~2018~~2019 when compared to the three months ended March 31, ~~2017~~2018 reflecting the ~~Anchor (MN)~~Klein acquisition.

Average noninterest-bearing deposits increased ~~$646.1~~$283.7 million for the three months ended March 31, ~~2018~~2019 when compared to the three months ended March 31, ~~2017.~~2018. Average interest-bearing deposits increased ~~$1.313~~$1.348 billion for

the three months ended March 31, ~~2018~~2019 when compared to the three months ended March 31, ~~2017.~~2018. The increases in average deposits also reflected the ~~Anchor (MN)~~Klein acquisition.

Average borrowed funds increased ~~$359.2~~$71.9 million, or 3%, for the three months ended March 31, ~~2018~~2019 when compared to the three months ended March 31, ~~2017 primarily due to increased funding needed as a result of growth in our loan portfolio that outpaced deposit growth.~~2018.

Provision for Loan Losses

The provision for loan losses was $1.0 million for the three months ended March 31, 2019, compared to $0.4 million for the three months ended March 31, 2018. Net charge-offs totaled $0.9 million during the three months ended March 31, 2019, compared to net charge-offs of $0.4 million during the three months ended March 31, 2018 ~~compared to $0.3 million~~ . The higher provision for loan losses for the three months ended March 31, ~~2017. Net charge-offs totaled $0.4 million during~~2019 when compared to the three months ended March 31, 2018 ~~compared to net charge-offs of $0.3 million during the three months ended March 31, 2017. The higher provision for loan losses~~ is the result of an increase in net charge-offs and loan ~~growth, offset by lower incurred loss rate expectations.~~ growth. Continued loan growth in future periods, a decline in our current level of recoveries, or an increase in charge-offs could result in an increase in provision expense.

Noninterest Income

We generate revenues in the form of noninterest income through client fees, sales commissions, and other gains and losses from our core banking franchise and other related businesses, such as wealth management, investment consulting, and investment products. The following table details the components in noninterest income for the three months ended March 31, ~~2018~~2019 and ~~2017:~~2018:


	Three Months Ended							Three Months Ended
	March 31,				%			March 31,					%
(dollars in thousands)	2018		2017		Change				2019			2018	Change
Wealth management fees	$	9,026	$	8,999		0.3	%	$	8,535		$	9,026		(5.4	)	%
Service charges on deposit accounts		10,759		9,843		9.3			10,826			10,759		0.6
Debit card and ATM fees		4,865		4,236		14.8			5,503			4,865		13.1
Mortgage banking revenue		4,192		4,226		(0.8	)		5,011			4,192		19.5
Investment product fees		5,515		4,989		10.5			5,271			5,031		4.8
Capital markets income		498		1,031		(51.7	)		2,517			498		405.4
Company-owned life insurance		2,605		2,149		21.2			3,188			2,605		22.4
Net securities gains (losses)		788		1,500		(47.5	)
Recognition of deferred gain on sale leaseback transactions		395		537		(26.4	)
Net debt securities gains (losses)									(103	)		788		(113.1	)
Other income		3,746		5,410		(30.8	)		5,668			4,141		36.9

Total noninterest income	$	42,389	$	42,920		(1.2	)%	$	46,416		$	41,905		10.8		%

~~N/M = Not meaningful~~

The ~~decrease~~increase in noninterest income for the three months ended March 31, ~~2018~~2019 when compared to the three months ended March 31, ~~2017~~2018 was primarily due to lower other income resulting from first quarter 2017 recoveries on loans originated by AnchorBank (WI) that had been fully charged-off prior to the acquisition totaling $1.5 million and lower net securities gains. These decreases were substantially offset by higher noninterest income attributable to the ~~Anchor (MN) acquisition.~~Klein partnership. Also contributing to the increase in noninterest income was higher capital markets income.

~~Service charges and overdraft~~

Wealth management fees ~~increased $0.9~~decreased $0.5 million for the three months ended March 31, ~~2018~~2019 when compared to the three months ended March 31, ~~2017~~2018 primarily due to ~~higher~~lower personal trust fees.

Service charges and overdraft fees increased $0.1 million for the three months ended March 31, 2019 when compared to the three months ended March 31, 2018 primarily due to service charges and overdraft fees attributable to the ~~Anchor (MN) acquisition.~~

Klein partnership.

Debit card and ATM fees increased $0.6 million for the three months ended March 31, ~~2018~~2019 when compared to the three months ended March 31, ~~2017~~2018 primarily due to higher interchange income attributable to the ~~Anchor (MN) acquisition.~~Klein partnership.

~~Investment product fees~~

Mortgage banking revenue increased ~~$0.5~~$0.8 million for the three months ended March 31, ~~2018~~2019 when compared to the three months ended March 31, ~~2017~~2018 primarily due to strong pipeline growth in the ~~Anchor (MN) acquisition.~~three months ended March 31, 2019.

Capital markets income is comprised of customer interest rate swap fees, foreign currency exchange fees, ~~and~~ net gains (losses) on foreign currency ~~adjustments.~~adjustments, and tax credit fee income. Capital markets income ~~decreased $0.5~~increased $2.0 million

for the three months ended March 31, ~~2018~~2019 when compared to the three months ended March 31, ~~2017~~2018 primarily due to ~~lower~~higher customer interest rate swap ~~fees.~~fees and higher tax credit fee income.

Net debt securities gains (losses) decreased ~~$0.7~~$0.9 million for the three months ended March 31, ~~2018~~2019 when compared to the three months ended March 31, ~~2017~~2018 primarily due to ~~higher realized losses on available-for-sale securities in 2018, partially offset by higher~~lower realized gains on sales of available-for-sale securities in ~~2018.~~2019, partially offset by lower realized losses on sales of available-for-sale securities in 2019.

Other income ~~decreased $1.7~~increased $1.5 million for the three months ended March 31, ~~2018~~2019 when compared to the three months ended March 31, ~~2017~~2018 primarily due to ~~lower~~higher other income ~~resulting from first quarter 2017 recoveries on loans originated by AnchorBank (WI) that had been fully charged-off prior~~attributable to the ~~acquisition totaling $1.5 million and lower gains on sales of other real estate owned totaling $0.5 million.~~Klein acquisition.

Noninterest Expense

The following table details the components in noninterest expense for the three months ended March 31, ~~2018~~2019 and ~~2017:~~2018:


	Three Months Ended							Three Months Ended
	March 31,				%			March 31,				%
(dollars in thousands)	2018		2017		Change			2019		2018		Change
Salaries and employee benefits	$	64,179	$	56,564		13.5	%	$	71,183	$	64,179		10.9		%
Occupancy		13,280		12,134		9.4			14,578		13,280		9.8
Equipment		3,565		3,227		10.5			4,474		3,565		25.5
Marketing		3,697		3,050		21.2			3,723		3,697		0.7
Data processing		8,884		7,608		16.8			9,341		8,400		11.2
Communication		3,064		2,414		26.9			3,054		3,064		(0.3	)
Professional fees		2,730		2,651		3.0			2,910		2,730		6.6
Loan expense		1,744		1,631		6.9
Loan expenses									1,912		1,744		9.6
Supplies		722		579		24.7			755		722		4.6
FDIC assessment		2,645		2,487		6.4			2,087		2,645		(21.1	)
Other real estate owned expense		349		1,115		(68.7	)		36		349		(89.7	)
Amortization of intangibles		3,609		3,020		19.5			4,472		3,609		23.9
Amortization of tax credit investments		716		—		N/M			260		716		(63.7	)
Other expense		8,457		5,411		56.3			4,256		8,457		(49.7	)

Total noninterest expense	$	117,641	$	101,891		15.5	%	$	123,041	$	117,157		5.0		%

~~N/M = Not meaningful~~

Noninterest expense increased ~~$15.8~~$5.9 million for the three months ended March 31, ~~2018~~2019 when compared to the three months ended March 31, ~~2017~~2018 primarily due to ~~$11.6 million of~~higher operating expenses and ~~$2.3 million of~~ acquisition and integration costs associated with ~~Anchor (MN). Also contributing to the~~Klein. This increase ~~in noninterest expense were higher~~was partially offset by impairments of long-lived assets of $2.8 million in the three months ended March 31, 2018 related to branch consolidations.

Salaries and employee benefits ~~is the largest component of noninterest expense. Salaries and benefits~~ increased ~~$7.6~~$7.0 million for the three months ended March 31, ~~2018~~2019 when compared to the three months ended March 31, ~~2017~~2018 primarily due to ~~$7.1 million of~~higher salaries and employee benefits ~~associated with~~attributable to the ~~Anchor (MN) acquisition.~~Klein partnership. Also contributing to the increase in salaries and benefits ~~was~~were higher ~~stock-based compensation expense of $0.6 million in the three months ended March 31, 2018.~~

profit sharing expenses and hospitalization expenses.

Occupancy expenses increased $1.1 million for the three months ended March 31, 2018 when compared to the three months ended March 31, 2017 primarily due to higher occupancy expenses attributable to the Anchor (MN) acquisition.

~~Marketing expense increased $0.6 million for the three months ended March 31, 2018 when compared to the three months ended March 31, 2017 primarily due to higher public relations expense.~~

~~Data processing~~ expenses increased $1.3 million for the three months ended March 31, ~~2018~~2019 when compared to the three months ended March 31, ~~2017~~2018 primarily due to ~~integration~~higher occupancy expenses ~~associated with~~attributable to the ~~Anchor (MN) acquisition.~~Klein partnership and higher lease expense.

~~Amortization of intangibles~~

Equipment expenses increased ~~$0.6~~$0.9 million for the three months ended March 31, ~~2018~~2019 when compared to the three months ended March 31, ~~2017~~2018 primarily due to higher equipment expenses attributable to the Klein partnership and an increase in small equipment expenses.

Data processing expenses increased $0.9 million for the three months ended March 31, 2019 when compared to the three months ended March 31, 2018 primarily due to integration expenses associated with the Klein partnership.

Amortization of intangibles increased $0.9 million for the three months ended March 31, 2019 when compared to the three months ended March 31, 2018 primarily due to amortization of core deposit intangibles related to the ~~Anchor (MN) acquisition.~~Klein acquisition.

Amortization of tax credit investments was $0.3 million for the three months ended March 31, 2019 and $0.7 million for the three months ended March 31, 2018 reflecting the completion of an investment tax credit project during the first quarter of 2018. There was no amortization related to tax credit investments recorded in noninterest expense for the three months ended March 31, 2017. We anticipate amortization of tax credit investments of approximately $15 million to $18 million in the second quarter of 2018. The recognition of tax credit amortization expense is contingent upon the successful rehabilitation of ~~the~~a historic building or completion of a solar project within the reporting period. Many factors including weather, labor availability, building regulations, inspections, and other unexpected construction delays related to a rehabilitation project can cause a project to exceed its estimated completion date. Amortization of tax credit investments is expected to be insignificant in 2019. See Note 13 to the consolidated financial statements for additional information on our tax credit investments.

Other expense ~~increased $3.0~~decreased $4.2 million for the three months ended March 31, ~~2018~~2019 when compared to the three months ended March 31, ~~2017~~ 2018 primarily due to ~~higher~~ impairments of long-lived assets ~~totaling~~of $2.8 million in the three months ended March 31, 2018 related to branch ~~consolidations.~~consolidations and integration expenses associated with the Anchor (MN) partnership totaling $1.3 million in the three months ended March 31, 2018.

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 a tax benefit from our tax credit investments and interest on tax-exempt securities and loans. The provision for income taxes, as a percentage of pre-tax income, was 18.9% for the three months ended March 31, 2019, compared to 9.4% for the three months ended March 31, ~~2018, compared to 22.6% for the three months ended March 31, 2017.~~2018. In accordance with ASC 740-270,Accounting for Interim Reporting, the provision for income taxes was recorded at March 31, ~~2018~~2019 based on the current estimate of the effective annual rate. The ~~lower~~higher effective tax rate during the three months ended March 31, ~~2018~~2019 when compared to the three months ended March 31, ~~2017~~2018 was primarily the result of ~~the lowering of the federal corporate tax rate to 21% and an increase~~a decrease in federal tax credits available. See Note 20 to the consolidated financial statements for additional information.

FINANCIAL CONDITION

Overview

At March 31, ~~2018,~~2019, our assets were ~~$17.496~~$20.084 billion, a ~~$2.626~~$2.588 billion increase compared to assets of ~~$14.870~~$17.496 billion at March 31, ~~2017,~~2018, and a ~~$22.0~~$356.0 million ~~decrease~~increase compared to assets of ~~$17.518~~$19.728 billion at December 31, ~~2017.~~2018. The increase from ~~March 31, 2017 to~~ March 31, 2018to March 31, 2019 was primarily due to the acquisition of ~~Anchor (MN)~~Klein in November ~~2017,~~2018, which had ~~$2.222~~$2.157 billion in assets as of the closing date of the ~~acquisition. Organic growth~~acquisition, including goodwill of $208.0 million. An increase in ~~our commercial loan portfolios~~investment securities also contributed to the ~~March 31, 2017 to~~ March 31, 2018 to March 31, 2019 increase in assets.

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~~equity securities. Earning assets were ~~$15.239~~$17.413 billion at March 31, ~~2018,~~2019, a ~~$2.387~~$2.174 billion increase compared to earning assets of ~~$12.852~~$15.239 billion at March 31, ~~2017,~~2018, and a ~~$30.1~~$343.0 million increase compared to earning assets of ~~$15.209~~$17.070 billion at December 31, ~~2017.~~2018.

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 also have ~~$73.4~~$74.2 million of U.S. government-sponsored entities and agencies securities, ~~$145.7~~$123.6 million of fixed-rate mortgage-backed securities, and ~~$316.1~~$287.0 million of state and political subdivision securities in our held-to-maturity investment portfolio at March 31, ~~2018.~~2019.

~~Trading~~

Equity securities ~~which consist of mutual funds held in trusts associated with deferred compensation plans for former directors and executives,~~ are recorded at fair value and totaled $6.2 million at March 31, 2019 compared to $5.6 million at March 31, ~~2018 compared to $5.1 million at~~ 2018.

At March 31, ~~2017.~~

~~At March 31, 2018,~~2019, the investment securities portfolio, including ~~trading~~equity securities, was ~~$3.897~~$5.218 billion compared to ~~$3.671~~$3.897 billion at March 31, ~~2017,~~2018, an increase of ~~$225.8 million.~~$1.321 billion. Investment securities attributable to the ~~Anchor (MN)~~ Klein

acquisition totaled ~~$308.8~~$700.6 million as of the closing date of the acquisition. Investment securities represented ~~26%~~30% of earning assets at March 31, 2019, compared to 26% at March 31, 2018 ~~compared to 29% at March 31, 2017~~ and ~~26%~~28% at December 31, ~~2017. Investment securities decreased as~~2018. Excess liquidity generated this quarter resulted in a higher percentage of ~~total earning assets at March 31, 2018 when~~investment securities compared to ~~March~~December 31, ~~2017 due to a proportionately larger increase in loan balances.~~ 2018. Stronger commercial loan demand in the future and management’s decision to deleverage the balance sheet could result in a reduction in the securities portfolio. At March 31, ~~2018,~~2019, management does not intend to sell any securities in 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~~gains of ~~$69.0~~$13.2 million at March 31, ~~2018,~~2019, compared to net unrealized losses of ~~$47.2~~$69.0 million at March 31, ~~2017,~~2018, and net unrealized losses of ~~$56.4~~$49.2 million at December 31, ~~2017.~~2018. Net unrealized ~~losses~~gains (losses) increased from December 31, ~~2017~~2018 to March 31, ~~2018~~ 2019 reflecting higher net unrealized ~~losses~~gains on mortgage-backed securities ~~primarily~~and state and political subdivision securities due to ~~the effect of an increase~~a decline in long-term interest rates.

The investment portfolio had an effective duration of 3.65 at March 31, 2019, compared to 4.30 at March 31, 2018, ~~compared to 4.53 at March 31, 2017,~~ and ~~4.15~~4.00 at December 31, ~~2017.~~2018. 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.~~ percentage. The annualized average yields on investment securities, on a taxable equivalent basis, were 3.03% for the three months ended March 31, 2019, compared to 2.74% for the three months ended March 31, ~~2018, compared to 2.98% for the three months ended March 31, 2017.~~2018.

Loans Held for Sale

Mortgage loans held for immediate sale in the secondary market were ~~$17.6~~$14.1 million at March 31, ~~2018,~~2019, compared to ~~$17.9~~$14.9 million at December 31, ~~2017.~~2018. Certain mortgage loans are committed for sale at or prior to origination at a contracted price to an outside investor. Other mortgage loans held for immediate sale are hedged with TBA forward agreements and committed for sale when they are ready for delivery 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, beyond customary representations and warranties, and Old National has not experienced material losses arising from these sales. Mortgage originations are subject to volatility due to interest rates and home sales, among other factors.

We have elected the fair value option under FASB ASC 825-10 prospectively for residential loans held for sale. The aggregate fair value exceeded the unpaid principal balance by $0.6 million at March 31, ~~2018,~~2019, compared to $0.5 million at December 31, ~~2017.~~

2018.

Commercial and Commercial Real Estate Loans

Commercial and commercial real estate loans are the largest classification within earning assets, representing ~~48%~~46% of earning assets at March 31, 2019, compared to 48% at March 31, 2018 ~~compared to 40% at March 31, 2017~~ and ~~47%~~48% at December 31, ~~2017.~~2018. At March 31, ~~2018,~~2019, commercial and commercial real estate loans were ~~$7.262~~$8.066 billion, an increase of ~~$2.128 billion,~~$804.8 million, or ~~42%~~11%, compared to March 31, ~~2017,~~2018, and ~~an increase~~a decrease of ~~$189.8~~$125.4 million, or 3%2%, compared to December 31, ~~2017.~~2018. Commercial and commercial real estate loans attributable to the ~~Anchor (MN)~~Klein acquisition totaled ~~$1.516 billion~~$836.8 million as of the closing date of the acquisition.

Residential Real Estate Loans

At March 31, ~~2018,~~2019, residential real estate loans held in our loan portfolio were ~~$2.159~~$2.244 billion, an increase of ~~$46.3~~$85.4 million compared to March 31, ~~2017,~~2018, and a decrease of ~~$8.5~~$4.5 million compared to December 31, ~~2017.~~2018. Residential real estate loans attributable to the ~~Anchor (MN)~~Klein acquisition totaled ~~$34.0~~$77.7 million as of the closing date of the acquisition. Future increases in interest rates could result in a decline in the level of refinancings and new originations of residential real estate loans.

Consumer Loans

Consumer loans, including automobile loans and personal and home equity loans and lines of credit, ~~and student loans,~~ decreased ~~$67.6~~$59.9 million at March 31, 2019 compared to March 31, 2018 ~~compared to March 31, 2017,~~, and decreased ~~$60.7~~$45.0 million from December 31, ~~2017.~~ 2018. Old National assumed student loans in the acquisition of Anchor (WI) in May 2016. Old National sold the remaining student loan portfolio totaling $64.9 million during the second quarter of 2018, resulting in a $2.2 million

gain that is included in other income on the income statement. Consumer loans attributable to the ~~Anchor (MN)~~Klein acquisition totaled ~~$43.9~~$134.6 million as of the closing date of the acquisition. We continue to see runoff in our less profitable indirect consumer loan portfolio.

Operating Lease Right-of-Use Assets

Old National adopted ASU No. 2016-02, Leases (Topic 842) on January 1, 2019, which required the recognition of operating lease right-of-use assets. Operating lease right-of-use assets represent the lessee’s right to use, or control the use of, specified assets for the lease term. Operating lease right-of-use assets are recognized based on the present value of lease payments over the lease term. Operating lease right-of-use assets totaled $109.9 million at March 31, 2019.

Goodwill and Other Intangible Assets

Goodwill and other intangible assets at March 31, ~~2018~~2019 totaled ~~$877.6 million,~~$1.109 billion, an increase of ~~$187.9~~$231.2 million compared to ~~$689.7~~$877.6 million at March 31, ~~2017. As of March 31,~~2018. During 2018, we ~~have~~ recorded ~~$200.4~~$247.1 million of goodwill and other intangible assets associated with the acquisition of ~~Anchor (MN).~~Klein.

Net Deferred Tax Assets

Net deferred tax assets decreased ~~$76.6~~$29.3 million compared to March 31, ~~2017~~2018 primarily due to ~~a revaluation of our~~decreases in net deferred tax assets related to net unrealized gains or losses on available-for-sale investment securities and federal tax credits. Net deferred tax assets decreased $27.6 million compared to December 31, 2018 primarily due to the enactment of the Tax Cuts and Jobs Act (“H.R. 1”), which lowered the federal corporate tax rate to 21%. Shortly after the enactment date, the SEC issued SAB 118, which addresses the situations where the accounting for changesdecreases in tax laws is complete, incomplete but can be reasonably estimated, and incomplete and cannot be reasonably estimated. SAB 118 also permits a measurement period of up to one year from the date of enactment to refine the provisional accounting. During the three months ended March 31, 2018, the immaterial adjustments made to the preliminary valuation of assets acquired and liabilities assumed in the acquisition of Anchor (MN) impacted our estimated revaluation of Old National’snet deferred tax ~~assets. Old National continues~~assets related to ~~analyze H.R. 1, including the impact~~net unrealized gains or losses on ~~alternative minimum tax credits, as well as the acquisition accounting of Anchor (MN),~~available-for-sale investment securities and ~~expects any refinements to the provisional accounting to be complete in 2018.~~benefit plan accruals. Future changes in the corporate tax rate could result in a change in value of Old National’s deferred tax assets and future income tax expense. See Note 20 to the consolidated financial statements for additional information.

~~Other Assets~~

Other assets increased $48.3 million, or 39%, since March 31, 2017 primarily due to higher accrued income taxes and an increase in various tax credit investments. Other assets increased $16.6 million, or 11%, since December 31, 2017 primarily due to higher accrued income taxes. Old National reclassified $22.6 million from deferred tax assets related to alternative minimum tax credits to accrued income taxes in the first quarter of 2018 as a result of the enactment of H.R. 1. See Note 20 to the consolidated financial statements for additional information.

Funding

~~Funding~~

Total funding, comprised of deposits and wholesale borrowings, was $17.068 billion at March 31, 2019, an increase of $1.908 billion from $15.160 billion at March 31, 2018, and an increase of ~~$2.272 billion from $12.888 billion at March 31, 2017, and a decrease of $24.1~~$224.6 million from ~~$15.184~~$16.844 billion at December 31, ~~2017.~~2018. Included in total funding were deposits of $14.429 billion at March 31, 2019, an increase of $1.640 billion from $12.789 billion at March 31, 2018, ~~an increase of $1.968 billion from $10.821 billion at March 31, 2017,~~ and an increase of ~~$182.8~~$79.3 million from ~~$12.606~~$14.350 billion at December 31, ~~2017.~~2018. Deposits attributable to the ~~Anchor (MN)~~Klein acquisition totaled ~~$1.777~~$1.713 billion as of the closing date of the acquisition. Noninterest-bearing deposits increased ~~$631.6~~$247.6 million from March 31, ~~2017~~2018 to March 31, ~~2018.~~2019. Interest-bearing checking and NOW deposits increased ~~$500.5~~$606.5 million from March 31, ~~2017~~2018 to March 31, ~~2018,~~2019, while savings deposits ~~increased $93.2~~decreased $149.7 million. Money market deposits increased ~~$433.0~~$650.5 million from March 31, ~~2017~~2018 to March 31, ~~2018,~~2019, while time deposits increased ~~$309.0~~$285.9 million.

We use wholesale funding to augment deposit funding and to help maintain our desired interest rate risk position. At March 31, ~~2018, wholesale~~2019, wholesale borrowings, including federal funds purchased and interbank borrowings, securities sold under agreements to repurchase, FHLB advances, and other borrowings, totaled ~~$2.371~~$2.639 billion, an increase of ~~$304.7~~$267.7 million, or ~~15%~~11%, from March 31, ~~2017,~~2018, and ~~a decrease~~an increase of ~~$206.9~~$145.2 million ~~or 8%,~~ from December 31, ~~2017.~~2018. Wholesale funding as a percentage of total funding was 15% at March 31, 2019, 16% at March 31, 2018 ~~16% at March 31, 2017,~~, and ~~17%~~15% at December 31, ~~2017.~~2018. The increase in wholesale funding from March 31, ~~2017~~2018 to March 31, ~~2018~~ 2019 was due to increases in ~~FHLB advances,~~ federal funds purchased and interbank borrowings, ~~and other borrowings, partially offset by a decrease in~~ securities sold under agreements to ~~repurchase.~~repurchase, FHLB advances, and other borrowings.

Operating Lease Liabilities

The adoption of ASU No. 2016-02, Leases (Topic 842) on January 1, 2019 also required the recognition of operating lease liabilities. Operating lease liabilities represent a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis. Operating lease liabilities totaled $114.0 million at March 31, 2019.

Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities ~~increased $22.0~~decreased $44.9 million, or ~~16%~~23%, from ~~March~~December 31, ~~2017~~2018 primarily due to ~~an increase~~incentive payments in the first quarter of 2019 and decreases in unfunded commitments on various tax credit ~~investments. Accrued expenses and other liabilities decreased $22.7 million, or 13%, from December 31, 2017 primarily due to incentive and severance payments in the first quarter of 2018.~~investments.

Capital

Shareholders’ equity totaled $2.752 billion at March 31, 2019, compared to $2.179 billion at March 31, 2018 ~~compared to $1.846 billion at March 31, 2017~~ and ~~$2.154~~$2.690 billion at December 31, ~~2017.~~2018. Shareholders’ equity at ~~December~~March 31, ~~2017~~2019 included ~~$300.8~~$406.5 million from the ~~16.5~~22.8 million shares of Common Stock that were issued in conjunction with the acquisition of ~~Anchor (MN).~~ Klein. Old National repurchased 1.5 million shares of Common Stock in the three months ended March 31, 2019 under a stock repurchase plan that was approved by the Company’s Board of Directors, which reduced equity by $24.7 million. We also paid cash dividends of $0.13 per share ~~for~~in the three months ended March 31, ~~2018,~~2019, which reduced equity by ~~$19.8~~$22.8 million. The change in unrealized gains (losses) on available-for-sale investment securities increased equity by $48.1 million during the three months ended March 31, 2019. The Company’s Common Stock is traded on the NASDAQ under the symbol “ONB” with ~~34,547~~34,729 shareholders of record at March 31, ~~2018.~~2019.

Capital Adequacy

Old National and the banking industry are subject to various regulatory capital requirements administered by the federal banking agencies. At March 31, ~~2018,~~2019, 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.

At March 31, ~~2018,~~2019, Old National’s consolidated capital position remains strong as evidenced by the following comparisons of key industry ratios.


	Fully Phased-In Regulatory Guidelines			March 31,						December 31,			Regulatory Guidelines			March 31,						December 31,
	Minimum			2018			2017			2017			Minimum			2019			2018			2018
Risk-based capital:
Tier 1 capital to total average assets (leverage ratio)		4.00	%		8.11	%		8.49	%		8.28	%		4.00	%		8.80	%		8.11	%		9.17	%
Common equity Tier 1 capital to risk-adjusted total assets		7.00			10.71			11.43			10.39			7.00			11.77			10.71			11.36
Tier 1 capital to risk-adjusted total assets		8.50			10.71			11.72			10.39			8.50			11.77			10.71			11.36
Total capital to risk-adjusted total assets		10.50			11.72			12.24			11.40			10.50			12.70			11.72			12.27
Shareholders’ equity to assets		N/A			12.45			12.42			12.30

Shareholders' equity to assets													N/A				13.70			12.45			13.63

~~N/A = not applicable~~

At March 31, ~~2018,~~2019, Old National Bank, Old National’s bank subsidiary, maintained a strong capital position as evidenced by the following comparisons of key industry ratios.


	Fully Phased-In
	Regulatory Guidelines			Well Capitalized			March 31,						December 31,			Regulatory Guidelines			Well Capitalized			March 31,						December 31,
	Minimum			Guidelines			2018			2017			2017			Minimum			Guidelines			2019			2018			2018
Risk-based capital:
Tier 1 capital to total average assets (leverage ratio)		4.00	%		5.00	%		8.78	%		8.73	%		8.93	%		4.00	%		5.00	%		9.30	%		8.78	%		9.58	%
Common equity Tier 1 capital to risk-adjusted total assets		7.00			6.50			11.60			12.03			11.21
Common equity Tier 1 capital to risk-adjusted
total assets																	7.00			6.50			12.48			11.60			11.98
Tier 1 capital to risk-adjusted total assets		8.50			8.00			11.60			12.03			11.21			8.50			8.00			12.48			11.60			11.98
Total capital to risk-adjusted total assets		10.50			10.00			12.13			12.55			11.73			10.50			10.00			12.98			12.13			12.47

The Dodd-Frank Act requires bank holding companies and any subsidiary banks with consolidated assets of more than $10 billion and less than $50 billion, including Old National, to complete and publicly disclose annual stress tests. The objective of the stress test is to ensure that the financial institution has capital planning processes that account for its unique risks, and to help ensure that the institution has sufficient capital to continue operations throughout times of economic and financial stress. The stress tests are conducted with baseline, adverse, and severely adverse economic scenarios. Old National completed its annual stress test that covered a nine-quarter planning horizon beginning January 1, 2017 and ending on March 31, 2019 and publicly disclosed a summary of the stress test results on October 24, 2017. The stress test showed that Old National would maintain capital levels well above the regulatory guideline minimum levels for all periods and under all stress test scenarios.

RISK MANAGEMENT

Overview

Old National has adopted a Risk Appetite Statement to enable the Board of Directors, Executive Leadership Group, and Senior Management to better assess, understand, and mitigate the risks of Old National. The Risk Appetite Statement addresses the following major risks: strategic, market, liquidity, credit, operational/technology/cyber, regulatory/compliance/legal, reputational, and human resources. Our Chief Risk Officer is independent of management and reports directly to the Chair of the Board’s Enterprise Risk Management Committee. The following discussion addresses these major risks: credit, market, liquidity, operational/technology/cyber, and regulatory/compliance/legal.

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

We 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, ~~2018,~~2019, we had pooled trust preferred securities with a fair value of ~~$8.2~~$8.1 million, or less than 1% of the available-for-sale securities portfolio. These securities remained classified as available-for-sale and at March 31, ~~2018,~~2019, the unrealized loss on our pooled trust preferred securities was ~~approximately~~ $5.7 million. The fair value of these securities should improve as we get closer to maturity, but not in all cases. ~~During the first quarter of 2018, Old National sold a pooled trust security for proceeds of $1.8 million, which resulted in a loss of $0.9 million.~~ There was no OTTI recorded during the three months ended March 31, ~~2018~~2019 or ~~2017.~~2018.

All of our 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. See Note 65 to the consolidated financial statements for additional details about our investment security portfolio.

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 manages exposure to counterparty risk in connection with its derivatives transactions by generally engaging in transactions with counterparties having ratings of at least A by Standard & Poor’s Rating Service or A2 by Moody’s Investors Service. Total credit exposure is monitored by counterparty and managed within limits that management believes to be prudent. Old National’s net counterparty exposure was an asset of ~~$458.7~~$341.2 million at March 31, ~~2018.~~2019.

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: Indiana, Kentucky, Michigan, Wisconsin, and Minnesota. These loans are secured by first mortgages on real estate at 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. In most cases, 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, 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 LIBOR. We do not offer 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, 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.

We assumed student loans in the acquisition of Anchor (WI) in May 2016. Student loans are guaranteed by the government from 97% to 100% and totaled $66.0 million at March 31, 2018, compared to $68.2 million at December 31, 2017.

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 to commercial and commercial real estate clients in various industries including manufacturing, agribusiness, transportation, mining, wholesaling, and retailing. Old National manages concentrations of credit exposure by industry, product, geography, customer relationship, and loan size. ~~While~~At March 31, 2019, our average commercial loan size was under $350,000 and our average commercial real estate loan size was under $650,000. In addition, while loans to lessors of both residential and non-residential real estate exceed 10% of total loans, no individual sub-segment category within those broader categories ~~reach~~reaches the 10% threshold. At March 31, ~~2018,~~2019, we had minimal exposure to foreign borrowers and no sovereign debt. Our policy is to concentrate our lending activity in the geographic market areas we serve, primarily Indiana, Kentucky, Michigan, Wisconsin, and Minnesota. 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.

On November 1, ~~2017,~~2018, Old National closed on its acquisition of ~~Anchor (MN).~~Klein. As of the closing date of the acquisition, loans totaled ~~$1.594~~$1.049 billion and other real estate owned totaled ~~$1.1~~$1.0 million. 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. Old National reviewed the acquired loans and determined that as of March 31, ~~2018, $51.3~~2019, $47.8 million met the definition of criticized and ~~$34.3~~$59.8 million were considered classified (of which ~~$18.4~~$16.3 million are reported with nonaccrual loans). Our current preference would be to work these loans and avoid foreclosure actions unless additional credit deterioration becomes apparent. These acquired impaired loans ~~along with $0.8 million of other real estate owned,~~ are included in our summary of under-performing, criticized, and classified assets found ~~below.~~

below.

Summary of under-performing, criticized, and classified assets:

   March 31, December 31,
(dollars in thousands)
   2018 2017 2017
Nonaccrual loans:

Commercial
   $ 33,175 $ 36,686 $ 27,202
Commercial real estate
   60,403 48,391 62,425
Residential real estate
   21,137 17,816 22,171
Consumer
   12,581 12,484 13,129


Total nonaccrual loans (1)
   127,296 115,377 124,927
Renegotiated loans not on nonaccrual
   16,802 14,969 19,589
Past due loans (90 days or more and still accruing):

Commercial
   10 —   144
Commercial real estate
   —   80 —
Residential real estate
   16 2 —
Consumer
   301 299 750


Total past due loans
   327 381 894
Other real estate owned
   6,735 12,547 8,810


Total under-performing assets
   $ 151,160 $ 143,274 $ 154,220


Classified loans (includes nonaccrual, renegotiated, past due 90 days, and other problem loans)
   $ 245,746 $ 219,929 $ 226,583
Other classified assets (2)
   2,987 7,306 4,556
Criticized loans
   174,873 95,881 188,085


Total criticized and classified assets
   $ 423,606 $ 323,116 $ 419,224


Asset Quality Ratios:

Non-performing loans/total loans (3) (4)
   1.28 % 1.43 % 1.30
Under-performing assets/total loans and other real estate owned (3)
   1.34 1.57 1.39
Under-performing assets/total assets
   0.86 0.96 0.88
Allowance for loan losses/under-performing assets (5)
   33.33 34.78 32.67
Allowance for loan losses/nonaccrual loans (1)
   39.58 43.19 40.33

	March 31,						December 31,
(dollars in thousands)	2019			2018			2018
Nonaccrual loans:
Commercial	$	34,046		$	33,175		$	38,648
Commercial real estate		83,958			60,403			86,601
Residential real estate		25,791			21,137			24,954
Consumer		9,086			12,581			7,281
Total nonaccrual loans (1)		152,881			127,296			157,484
Renegotiated loans not on nonaccrual		17,123			16,802			17,356
Past due loans (90 days or more and still accruing):
Commercial		98			10			52
Commercial real estate		140			—			40
Residential real estate		49			16			258
Consumer		273			301			1,003
Total past due loans		560			327			1,353
Other real estate owned		3,279			6,735			3,232
Total under-performing assets	$	173,843		$	151,160		$	179,425
Classified loans (includes nonaccrual, renegotiated, past due 90 days, and other problem loans)	$	364,121		$	245,746		$	334,785
Other classified assets (2)		2,715			2,987			2,820
Criticized loans		268,836			174,873			238,752
Total criticized and classified assets	$	635,672		$	423,606		$	576,357
Asset Quality Ratios:
Non-performing loans/total loans (3) (4)		1.41	%		1.28	%		1.43	%
Under-performing assets/total loans and other real estate owned (3)		1.44			1.34			1.47
Under-performing assets/total assets		0.87			0.86			0.91
Allowance for loan losses/under-performing assets (5)		31.96			33.33			30.91
Allowance for loan losses/nonaccrual loans (1)		36.34			39.58			35.22

(1)

Includes purchased credit impaired loans of ~~approximately~~$19.6 million at March 31, 2019, $11.5 million at March 31, 2018, ~~$9.9 million at March 31, 2017,~~ and ~~$12.6~~$20.5 million at December 31, ~~2017~~2018 that are categorized as nonaccrual for credit analysis purposes because the collection of principal or interest is doubtful. However, these loans are accounted for under FASB ASC 310-30 and accordingly treated as performing assets.

(2)	Includes 1one pooled trust preferred security and 1one insurance policy at March 31, ~~2018.~~2019.

(3)	Loans exclude loans held for sale.

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

(5)	Because the acquired loans 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.

Under-performing assets totaled $173.8 million at March 31, 2019, compared to $151.2 million at March 31, 2018 ~~compared to $143.3 million at March 31, 2017~~ and ~~$154.2~~$179.4 million at December 31, ~~2017.~~2018. Under-performing assets as a percentage of total loans and other real estate owned at March 31, ~~2018~~2019 were ~~1.34%~~1.44%, ~~a decrease~~an increase of 2310 basis points from ~~1.57%~~1.34% at March 31, ~~2017~~2018 and a decrease of 53 basis points from ~~1.39%~~1.47% at December 31, ~~2017.~~2018.

Nonaccrual loans increased from March 31, ~~2017~~2018 primarily due to an increase in nonaccrual commercial real estate loans. Nonaccrual loans at March 31, ~~2018~~2019 include ~~$18.4~~$16.3 million of loans related to the ~~Anchor (MN)~~Klein acquisition. As a percentage of nonaccrual loans, the allowance for loan losses was 36.34% at March 31, 2019, compared to 39.58% at March 31, 2018 ~~compared to 43.19% at March 31, 2017~~ and ~~40.33%~~35.22% at December 31, ~~2017.~~2018. PCI loans that were included in the nonaccrual category for credit analysis purposes because the collection of principal or interest is doubtful totaled $19.6 million at March 31, 2019, compared to $11.5 million at March 31, 2018 ~~compared to $9.9 million at March 31, 2017~~ and ~~$12.6~~$20.5 million at December 31, ~~2017.~~2018. However, they are accounted for under FASB ASC 310-30 and accordingly treated as performing assets.

Total criticized and classified assets were ~~$423.6~~$635.7 million at March 31, ~~2018,~~2019, an increase of ~~$100.5~~$212.1 million from March 31, ~~2017,~~2018, and an increase of ~~$4.4~~$59.3 million from December 31, ~~2017.~~ 2018.Other classified assets include investment securities that fell below investment grade rating totaling $2.7 million at March 31, 2019, compared to $3.0 million at March 31, 2018 ~~compared to $7.3~~and $2.8 million at ~~March 31, 2017 and $4.6 million at~~ December 31, ~~2017.~~

2018.

Any loans that are modified are reviewed by Old National to identify if a TDR has occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, Old National Bank grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status. The modification of the terms of such loans include one or a combination of the following: a reduction of the stated interest rate of the loan, an extension of the maturity date at a stated rate of interest lower than the current market rate of new debt with similar risk, or a permanent reduction of the recorded investment of the loan.

If we are unable to resolve a nonperforming loan issue, the credit will be charged off when it is apparent there will be a loss. For large commercial type loans, each relationship is individually analyzed for evidence of apparent loss based on quantitative benchmarks or subjectively based upon certain events or particular circumstances. Generally, Old National charges off small commercial loans scored through our small business credit center with contractual balances under $250,000 that are 90 days or more delinquent and do not have adequate collateral support. For residential and consumer loans, a charge off is recorded at the time foreclosure is initiated or when the loan becomes 120 to 180 days past due, whichever is earlier.

When a residential or consumer loan is identified as a TDR, the loan is typically written down to its collateral value less selling costs.

At March 31, ~~2018,~~2019, our TDRs consisted of ~~$11.9~~$11.6 million of commercial loans, $34.5 million of commercial real estate loans, $3.1 million of residential loans, and $4.0 million of consumer loans totaling $53.5 million. Approximately $36.9 million of the TDRs at March 31, 2018 were included with nonaccrual loans. At December 31, 2017, our TDRs consisted of $12.1 million of commercial loans, $34.7$29.1 million of commercial real estate loans, $3.3 million of residential loans, and ~~$3.9~~$2.3 million of consumer loans totaling ~~$54.0~~$46.3 million. Approximately ~~$34.0~~$27.0 million of the TDRs at March 31, 2019 were included with nonaccrual loans. At December 31, 2018, our TDRs consisted of $10.3 million of commercial loans, $27.6 million of commercial real estate loans, $3.4 million of residential loans, and $2.4 million of consumer loans totaling $43.7 million. Approximately $26.3 million of the TDRs at December 31, ~~2017~~2018 were included with nonaccrual loans.

Old National has allocated specific reserves to customers whose loan terms have been modified in TDRs totaling ~~$5.9~~$3.8 million at March 31, ~~2018~~2019 and ~~$5.7~~$3.0 million of December 31, ~~2017.~~2018. At March 31, ~~2018,~~2019, Old National had committed to lend an additional ~~$4.6~~$5.0 million to customers with outstanding loans that are classified as TDRs.

The terms of certain other loans were modified during ~~the three months ended March 31,~~2019 and 2018 that did not meet the definition of a TDR. It is our process to review all classified and criticized loans that, during the period, have been renewed, have entered into a forbearance agreement, have gone from principal and interest to interest only, or have extended the maturity date. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on its debt in the foreseeable future without the modification. The evaluation is performed under our internal underwriting policy. We also evaluate whether a concession has been granted or if we were adequately compensated through a market interest rate, additional collateral, or a bona fide guarantee. We also consider whether the modification was insignificant relative to the other terms of the agreement or the delay in a payment.

PCI loans are not considered impaired until after the point at which there has been a degradation of cash flows below our expected cash flows at acquisition. If a PCI loan is subsequently modified, and meets the definition of a TDR, it will be removed from PCI accounting and accounted for as a TDR only if the PCI loan was being accounted for individually. If the PCI loan is being accounted for as part of a pool, it will not be removed from the pool. At March 31, ~~2018,~~2019, it has not been necessary to remove any loans from PCI accounting.

In general, once a modified loan is considered a TDR, the loan will always be considered a TDR, and therefore impaired, until it is paid in full, otherwise settled, sold, or charged off. However, guidance also permits for loans to be removed from TDR status when subsequently restructured under these circumstances: (1) at the time of the subsequent restructuring, the borrower is not experiencing financial difficulties, and this is documented by a current credit evaluation at the time of the restructuring, (2) under the terms of the subsequent restructuring agreement, the institution has granted no concession to the borrower; and (3) the subsequent restructuring agreement includes market terms that are no less favorable than those that would be offered for a comparable new loan. For loans subsequently restructured that have cumulative principal forgiveness, the loan should continue to be measured in accordance with ASC 310-10,Receivables – Overall. However, consistent with ASC 310-40-50-2,Troubled Debt Restructurings by Creditors, Creditor Disclosure of Troubled Debt Restructurings, the loan would not be required to be reported in the years following the restructuring if the subsequent restructuring meets both of these criteria: (1) has an interest rate at the time of the subsequent restructuring that is not less than a market interest rate; and (2) is performing in compliance with its modified terms after the subsequent restructuring.

Allowance for Loan Losses and Reserve for Unfunded Commitments

Loan charge-offs, net of recoveries, totaled $0.9 million for the three months ended March 31, 2019, compared to $0.4 million for the three months ended March 31, ~~2018, compared~~2018. Annualized, net charge-offs (recoveries) to ~~$0.3 million~~average loans were 0.03% for the three months ended March 31, ~~2017. Annualized, net charge-offs (recoveries)~~2019 compared to ~~average loans remained the same at~~ 0.01% for the three months ended March 31, ~~2018 and 2017.~~2018. 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 allowance for loan losses is maintained at a level believed adequate by management to absorb probable losses incurred in the consolidated loan portfolio. Management’s evaluation of the adequacy of the allowance is an estimate based on reviews of individual loans, pools of homogeneous loans, assessments of the impact of current and anticipated economic conditions on the portfolio, and historical loss ~~experience.~~experience.

At March 31, ~~2018,~~2019, the allowance for loan losses was ~~$50.4~~$55.6 million, an increase of ~~$0.6~~$5.2 million compared to ~~$49.8~~$50.4 million at March 31, ~~2017,~~2018, and ~~unchanged from~~an increase of $0.1 million compared to $55.5 million at December 31, ~~2017.~~2018. Continued loan growth in future periods, a decline in our current level of recoveries, or an increase in charge-offs could result in an increase in provision expense.

As a percentage of total loans excluding loans held for sale, the allowance was 0.46% at March 31, 2019, compared to 0.45% at March 31, 2018 ~~compared to 0.55% at March 31, 2017~~ and 0.45% at December 31, ~~2017.~~

2018.

The following table provides additional details of the components of the allowance for loan losses, including ASC 450,Contingencies, for loans collectively evaluated for impairment, ASC 310-10,Receivables, for loans individually evaluated for impairment, and ASC 310-30,Loans and Debt Securities Acquired with Deteriorated Credit Quality, for loans acquired with deteriorated credit quality:

													Collectively			Individually			Acquired with
													Evaluated for			Evaluated for			Deteriorated
(dollars in thousands)	Collectively Evaluated for Impairment			Individually Evaluated for Impairment			Acquired with Deteriorated Credit Quality			Total			Impairment			Impairment			Credit Quality			Total
Loan balance	$	11,200,945		$	98,050		$	65,263		$	11,364,258
Originated loans													$	8,786,867		$	83,971		$	—		$	8,870,838
Acquired loans														3,213,192			32,068			65,387			3,310,647
Total loans													$	12,000,059		$	116,039		$	65,387		$	12,181,485
Remaining purchase discount		(98,295	)		(3,265	)		(24,016	)		(125,576	)		(86,092	)		(3,324	)		(23,092	)		(112,508	)

Loans, net of discount	$	11,102,650		$	94,785		$	41,247		$	11,238,682		$	11,913,967		$	112,715		$	42,295		$	12,068,977

Allowance, January 1, 2018	$	40,137		$	10,078		$	166		$	50,381
Allowance, January 1, 2019													$	40,642		$	14,341		$	478		$	55,461
Charge-offs		(2,431	)		(240	)		(14	)		(2,685	)		(2,507	)		(364	)		(21	)		(2,892	)
Recoveries		1,260			984			61			2,305			992			908			47			1,947
Provision expense		1,165			(744	)		(41	)		380			5,249			(4,015	)		(191	)		1,043

Allowance, March 31, 2018	$	40,131		$	10,078		$	172		$	50,381

Allowance, March 31, 2019													$	44,376		$	10,870		$	313		$	55,559

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 reserve for unfunded loan commitments is classified as a liability account on the balance sheet and totaled ~~$3.4~~$2.2 million at March 31, ~~2018,~~2019, compared to ~~$3.1~~$2.5 million at December 31, ~~2017.~~2018.

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.

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.

~~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 model to quantify the impact of changing interest rates on Old National. The model quantifies the effects of various possible interest rate scenarios on projected net interest income. The model measures the impact on net interest income relative to a base case scenario. The base case scenario assumes that the balance sheet and interest rates are held at current levels.

The model shows our projected net interest income sensitivity based on interest rate changes only and does not consider other forecast assumptions.

The following table illustrates our projected net interest income sensitivity over a two year cumulative horizon based on the asset/liability model at March 31, ~~2018~~2019 and ~~2017:~~2018:

															Immediate
	Immediate Rate Decrease					Immediate Rate Increase									Rate Decrease					Immediate Rate Increase
	-50					+100			+200			+300			-50					+100			+200			+300
(dollars in thousands)	Basis Points			Base		Basis Points			Basis Points			Basis Points			Basis Points			Base		Basis Points			Basis Points			Basis Points
March 31, 2019
Projected interest income:
Money market, other interest earning investments, and investment securities															$	323,632		$	335,556	$	352,559		$	368,113		$	382,116
Loans																1,067,651			1,125,848		1,242,294			1,354,498			1,466,586
Total interest income																1,391,283			1,461,404		1,594,853			1,722,611			1,848,702
Projected interest expense:
Deposits																97,668			139,307		229,789			320,256			410,715
Borrowings																119,915			140,240		180,901			221,569			262,270
Total interest expense																217,583			279,547		410,690			541,825			672,985
Net interest income															$	1,173,700		$	1,181,857	$	1,184,163		$	1,180,786		$	1,175,717
Change from base															$	(8,157	)			$	2,306		$	(1,071	)	$	(6,140	)
% change from base																-0.69	%				0.20	%		-0.09	%		-0.52	%

March 31, 2018
Projected interest income:
Money market, other interest earning investments, and investment securities	$	228,367		$	234,331	$	247,550		$	260,121		$	272,410		$	228,367		$	234,331	$	247,550		$	260,121		$	272,410
Loans		901,486			958,043		1,069,783			1,180,736			1,291,192			901,486			958,043		1,069,783			1,180,736			1,291,192

Total interest income		1,129,853			1,192,374		1,317,333			1,440,857			1,563,602			1,129,853			1,192,374		1,317,333			1,440,857			1,563,602

Projected interest expense:
Deposits		45,434			73,864		150,906			227,942			304,974			45,434			73,864		150,906			227,942			304,974
Borrowings		94,407			109,648		140,103			170,531			200,953			94,407			109,648		140,103			170,531			200,953

Total interest expense		139,841			183,512		291,009			398,473			505,927			139,841			183,512		291,009			398,473			505,927

Net interest income	$	990,012		$	1,008,862	$	1,026,324		$	1,042,384		$	1,057,675		$	990,012		$	1,008,862	$	1,026,324		$	1,042,384		$	1,057,675

Change from base	$	(18,850	)			$	17,462		$	33,522		$	48,813		$	(18,850	)			$	17,462		$	33,522		$	48,813
% change from base		-1.87	%				1.73	%		3.32	%		4.84	%		-1.87	%				1.73	%		3.32	%		4.84	%

March 31, 2017
Projected interest income:
Money market, other interest earning investments, and investment securities	$	226,433		$	234,507	$	247,095		$	257,031		$	267,559
Loans	��	650,985			697,478		789,583			880,714			971,491

Total interest income		877,418			931,985		1,036,678			1,137,745			1,239,050

Projected interest expense:
Deposits		19,980			41,174		104,284			167,389			230,487
Borrowings		62,746			72,912		95,090			117,242			139,342

Total interest expense		82,726			114,086		199,374			284,631			369,829

Net interest income	$	794,692		$	817,899	$	837,304		$	853,114		$	869,221

Change from base	$	(23,207	)			$	19,405		$	35,215		$	51,322
% change from base		-2.84	%				2.37	%		4.31	%		6.27	%

Our asset sensitivity decreased ~~slightly~~ year over year primarily due to changes in our hedging strategies, balance sheet mix, investment duration, and prepayment speed behavior.

A key element in the measurement and modeling of interest rate risk is 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 noninterest-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 noninterest-bearing accounts.

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, 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 our overall sensitivity to market interest rate changes, including shocks, yield curve flattening, yield curve steepening, as well as forecasts of likely interest rate scenarios. At ~~December~~March 31, ~~2017,~~2019, our projected net interest income sensitivity based on the asset/liability models we utilize was within the limits of our interest rate risk policy for the scenarios tested.

We use derivative instruments, primarily interest rate swaps, to mitigate interest rate risk, including certain cash flow hedges on variable-rate debt with a notional amount of ~~$625~~$475 million at March 31, ~~2018.~~ 2019. Our derivatives had an estimated fair value ~~loss~~gain of ~~$5.4~~$28.4 million at March 31, ~~2018,~~2019, compared to an estimated fair value ~~loss~~gain of ~~$2.2~~$16.5 million at December 31, ~~2017.~~2018. See Note 21 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 at March 31, ~~2018.~~2019.


(dollars in thousands) Maturity Bucket	Amount		Rate
2018	$	963,001		1.11	%
(dollars in thousands)
Maturity Bucket						Amount		Rate
2019		474,050		1.35		$	1,315,351		1.78	%
2020		162,231		1.39			469,375		1.67
2021		77,876		1.46			123,320		1.40
2022		46,149		1.42			58,648		1.46
2023 and beyond		52,424		1.74

2023							55,408		1.73
2024 and beyond							39,496		1.59
Total	$	1,775,731		1.24	%	$	2,061,598		1.72	%

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

•

Moody’s Investor Service affirmed the Long-Term Rating of A3 of Old National’s senior unsecured/issuer rating on February 2, 2018.

•

Moody’s Investor Service affirmed Old National Bank’s long-term deposit rating of Aa3 on February 2, 2018. The bank’s short-term deposit rating was affirmed at P-1 and the bank’s issuer rating was affirmed at A3.

The rating outlook from Moody’s Investor Service is negative. Moody’s Investor Service concluded a rating review of Old National Bank on February 2, 2018.

The credit ratings of Old National and Old National Bank at March 31, ~~2018~~2019 are shown in the following table.

					Moody's Investor Service
	~~Moody’s Investor Service~~ Long-term
	~~Long-term~~		Short-term
Old National	A3	A3		N/A
Old National Bank		Aa3		~~P-1~~
		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. At March 31, ~~2018,~~2019, Old National and its subsidiaries had the following availability of liquid funds and borrowings:

					Parent
(dollars in thousands)	Parent Company		Subsidiaries		Company		Subsidiaries
Available liquid funds:
Cash and due from banks	$	54,612	$	223,629	$	61,046	$	262,070
Unencumbered government-issued debt securities		—		1,075,809		—		1,954,533
Unencumbered investment grade municipal securities		—		508,155		—		556,700
Unencumbered corporate securities		—		139,369		—		142,946
Availability of borrowings:
Amount available from Federal Reserve discount window*		—		519,013		—		474,222
Amount available from Federal Home Loan Bank Indianapolis*		—		590,385		—		671,468

Total available funds	$	54,612	$	3,056,360	$	61,046	$	4,061,939

Based on collateral pledged

~~The Parent Company (Old~~

Old National ~~Bancorp)~~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~~Old National Bancorp 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~~Old National Bancorp has a shelf registration in place with the SEC permitting ready access to the public debt and equity markets. At March 31, ~~2018, the Parent Company’s~~2019, Old National Bancorp’s other borrowings outstanding were ~~$230.9~~$231.6 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 ~~2017~~2018 and is not currently required.

Operational/Technology/Cyber Risk

Operational/technology/cyber risk is the potential that inadequate information systems, operational problems, breaches in internal controls, information security breaches, fraud, or unforeseen catastrophes will result in unexpected losses. We maintain frameworks, programs, and internal controls to prevent or minimize financial loss from failure of systems, people, or processes. This includes specific programs and frameworks intended to prevent or limit the effects of cyber risks including cyber-attacks or other information security breaches that might allow unauthorized transactions or unauthorized access to customer, associate, or company sensitive information. Metrics and measurements are used by Executive Leaders in the management of day-to-day operations to ensure effective customer service, minimization of service disruptions, and oversight of operational and cyber risk. We continually monitor and report on operational, technology, and cyber risks related to clients, products, and business practices; external and internal fraud; business disruptions and systems failures; cyber-attacks, information security or data breaches; damage to physical assets; and execution, delivery, and process management.

The Enterprise Risk Management Committee of the Board of Directors is responsible for the oversight, guidance, and monitoring of risks, including operational/technology/cyber risks, being taken by the Company. The monitoring is accomplished through on-going review of management reports, data on risks, policy limits and discussion on enterprise risk management strategies, policies, and risk assessments.

Regulatory/Compliance/Legal Risk

Regulatory/compliance/legal risk is the risk that the Company violated or was not in compliance with applicable laws, regulations or practices, industry standards, or ethical standards. The legal portion assesses the risk that unenforceable contracts, lawsuits, or adverse judgments can disrupt or otherwise negatively impact the Company. The Board of Directors expects we will perform business in a manner compliant with applicable laws and/or regulations and expects issues to be identified, analyzed, and remediated in a timely and complete manner.

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 ~~$3.181~~$3.743 billion and standby letters of credit of ~~$71.9~~$100.2 million at March 31, ~~2018.~~2019. At March 31, ~~2018,~~2019, approximately ~~$2.945~~$3.478 billion of the loan commitments had fixed rates and ~~$236.0~~$265.3 million had floating rates, with the floating rates ranging from 0%1% to ~~25%~~16%. At December 31, ~~2017,~~2018, loan commitments were ~~$3.144~~$3.566 billion and standby letters of credit were ~~$68.7~~$319.0 million. The term of these off-balance sheet arrangements is typically one year or less.

Old National is a party in ~~three separate~~ risk participation transactions of interest rate swaps, which had total notional amount of ~~$17.3~~$38.3 million at March 31, ~~2018.~~2019.

CONTRACTUAL OBLIGATIONS

The following table presents our significant fixed and determinable contractual obligations at March 31, ~~2018:~~2019:

   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
   $ 11,012,869    $ —      $ —      $ —      $ 11,012,869
IRAs, consumer, and brokered certificates of deposit
   963,001    636,281    124,025    52,424    1,775,731
Federal funds purchased and interbank borrowings
   150,026    —      —      —      150,026
Securities sold under agreements to repurchase
   308,189    —      —      —      308,189
FHLB advances
   902,032    301,902    58,500    401,745    1,664,179
Other borrowings
   96    284    332    248,186    248,898
Fixed interest payments (2)
   21,029    44,431    40,484    73,015    178,959
Operating leases
   14,516    35,207    30,432    68,476    148,631
Other long-term liabilities (3)
   41,954    2,737    33    63    44,787

	Payments Due In
	One Year		One to		Three to		Over
(dollars in thousands)	or Less (1)		Three Years		Five Years		Five Years		Total
Deposits without stated maturity	$	12,367,672	$	—	$	—	$	—	$	12,367,672
IRAs, consumer, and brokered certificates of deposit		1,315,351		592,695		114,056		39,496		2,061,598
Federal funds purchased and interbank borrowings		325,030		—		—		—		325,030
Securities sold under agreements to repurchase		342,480		—		—		—		342,480
FHLB advances		126,408		120,000		57,164		1,416,372		1,719,944
Other borrowings		338		965		1,078		249,203		251,584
Fixed interest payments (2)		37,992		94,852		90,242		124,099		347,185
Operating leases		13,094		32,454		23,805		44,687		114,040
Other long-term liabilities (3)		16,399		11,312		169		48		27,928

(1)	For the remaining nine months of fiscal ~~2018.~~2019.

(2)

Our senior notes, subordinated notes, certain trust preferred securities, and certain FHLB advances have fixed rates ranging from ~~1.49%~~1.50% to 6.08%. All of our other long-term debt is at LIBOR based variable rates at March 31, ~~2018.~~2019. The projected variable interest assumes no increase in LIBOR rates from March 31, ~~2018.~~2019.

(3)	Includes unfunded commitments on qualified affordable housing projects and other tax credit investments.

We rent certain premises and equipment under operating leases. See Note 10 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 21 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 22 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 20 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, ~~2017.~~2018. 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 effect 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,Intangibles – Goodwill and Other, 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~~goodwill.

•

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 ~~the indefinite-lived intangible asset.~~other relevant factors.

~~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.~~

•

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 our banking subsidiary in which the goodwill or intangibles resides.~~

~~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~~goodwill and could result in impairment losses affecting our financials as a ~~discounted cash flow methodology based on assumptions about~~whole and our banking subsidiary in which 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).goodwill resides.

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.~~

Allowance for Loan Losses

~~Description.~~

•

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, regular reviews of problem loan reports, delinquencies and ~~charge-offs.~~

charge-offs.

~~Judgments and Uncertainties.~~

•

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

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

~~Effect if Actual Results Differ From Assumptions.~~

•

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, ~~2018~~2019 resulted in a range for allowance for loan losses of ~~$15.2~~$16.9 million. The range pertains to general (FASB ASC 450,Contingencies) reserves for both retail and performing commercial loans. Specific (FASB ASC 310,Receivables) reserves do not have a range of probable loss. Due to the risks and uncertainty associated with the economy and our projection of loss rates inherent in the portfolio, 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 ~~$1.7~~$1.8 million and an increase of ~~$9.8~~$10.9 million, respectively, after taking into account the tax effects. These sensitivities are hypothetical and may not 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,Derivatives and Hedging (“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.~~

•

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.

~~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.~~

•

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 20 to the consolidated financial statements for a further description of our provision and related income tax assets and liabilities.

~~Judgments and Uncertainties.~~

•

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.~~

•

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.

Management has discussed the development and selection of these critical accounting estimates with the Audit Committee and the Audit Committee has reviewed our disclosure relating to it in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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 can be identified by the use of the words “expect,” “may,” “could,” “intend,” “project,” “estimate,” “believe,” “anticipate,” and other words of similar meaning. 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 cannot 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;

•

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.

~~economic conditions generally and in the financial services industry;~~

~~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 this filing and 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 quarterly report on 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~~

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, ~~2017.~~

2018.

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 Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs

01/01/19 - 01/31/19		—	$	—		—		7,000,000
02/01/19 - 02/28/19		145,617		16.92		—		7,000,000
03/01/19 - 03/31/19		1,504,823		16.47		1,500,000		5,500,000
Quarter-to-date 03/31/19		1,650,440	$	16.51		1,500,000		5,500,000

Period
   Total
Number
of Shares
Purchased    Average
Price
Paid Per
Share    Total Number
of Shares
Purchased as
Part of Publicly
Announced Plans
or Programs    Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans or Programs
01/01/18 - 01/31/18
   714    $ 17.45    —      —
02/01/18 - 02/28/18
   57,025    17.47    —      —
03/01/18 - 03/31/18
   6,285    16.96    —      —








Quarter-to-date 3/31/18
   64,024    $ 17.42    —      —

~~The~~In the first quarter of 2019, the Board of Directors ~~did not authorize a~~approved the repurchase of up to 7.0 million shares of the Company’s stock ~~repurchase plan for 2018.~~to be repurchased, as conditions warrant, through January 31, 2020. During the three months ended March 31, ~~2018,~~2019, Old National also repurchased a limited number of shares associated with employee share-based incentive programs.

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		Agreement and Plan of Merger dated as of ~~August 7, 2017~~June 20, 2018 by and between Old National Bancorp and ~~Anchor Bancorp,~~Klein Financial, 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 ~~August 8, 2017)~~June 21, 2018).

3.1		Fourth Amended and Restated Articles of Incorporation of Old National, amended May 13, 2016 (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 May 16, 2016).

3.2		Amended and Restated By-Laws of Old National, amended July 28, 2016 (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 August 1, 2016).

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, N.A.)), 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		Second Indenture Supplement, dated as of August 15, 2014, between Old National and The Bank of New York Mellon Trust Company, N.A., as trustee, providing for the issuance of its 4.125% Senior Notes due 2024 (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 August 15, 2014).

~~31.1~~ 10.1		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).*

10.2		Amended Employment Agreement for Robert G. Jones (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 April 25, 2019).*

10.3		Employment Agreement dated as of May 2, 2019 between Old National Bancorp and James C. Ryan, III is filed herewith.*

10.4		Employment Agreement dated as of May 2, 2019 between Old National Bancorp and Brendon B. Falconer is filed herewith.*

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’s Form 10-Q Report for the quarterly period ended March 31, ~~2018,~~2019, formatted in ~~XBRL:~~iXBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (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

SIGNATURE

~~SIGNATURE~~

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/ ~~James C. Ryan, III~~Brendon B. Falconer
	~~James C. Ryan, III~~	Brendon B. Falconer
	Senior Executive Vice President and Chief Financial Officer
	Duly Authorized Officer and Principal Financial Officer

	Date: May 2, ~~2018~~2019

9186

INDIANA
~~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)


			Page
PART I.	FINANCIAL INFORMATION				4
Item 1.	Financial Statements				4
	Consolidated Balance Sheets				4
	Consolidated Statements of Income (unaudited)				5
	Consolidated Statements of Comprehensive Income (unaudited)				6
	Consolidated Statements of Changes in Shareholders’ Equity (unaudited)				7
	Consolidated Statements of Cash Flows (unaudited)				8
	Notes to Consolidated Financial Statements (unaudited)				9
		Note 1.	Basis of Presentation	9
		Note 2.	~~Revenue Recognition~~Recent Accounting Pronouncements	9
		Note 3.	~~Recent Accounting Pronouncements~~Acquisition and Divestiture Activity	11 13
		Note 4.	~~Acquisition and Divestiture Activity~~Net Income Per Share	15 14
		Note 5.	~~Net Income Per Share~~Investment Securities	16 15
		Note 6.	~~Investment Securities~~Loans Held for Sale	18 19
		Note 7.	~~Loans Held for Sale~~	22
	~~Note 8.~~	Loans and Allowance for Loan Losses	22 19
		Note 8.	Other Real Estate Owned	29
		Note 9.	~~Other Real Estate Owned~~Premises and Equipment	33 30
		Note 10.	~~Premises and Equipment~~Leases	34 30
		Note 11.	Goodwill and Other Intangible Assets	34 32
		Note 12.	Loan Servicing Rights	35 33
		Note 13.	Qualified Affordable Housing Projects and Other Tax Credit Investments	36 34
		Note 14.	Securities Sold Under Agreements to Repurchase	37 35
		Note 15.	Federal Home Loan Bank Advances	38 36
		Note 16.	Other Borrowings	38 36
		Note 17.	Accumulated Other Comprehensive Income (Loss)	41 38
		Note 18.	Employee Benefit Plans	42 39
		Note 19.	~~Stock-Based~~Share-Based Compensation	42 39
		Note 20.	Income Taxes	43 40
		Note 21.	Derivative Financial Instruments	46 42
		Note 22.	Commitments and Contingencies	49 45
		Note 23.	Financial Guarantees	50 46
		Note 24.	Segment Information	50 46
		Note 25.	Fair Value	51 46
		Note 26.	Revenue from Contracts with Customers	53
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			60 55
		Financial Highlights		61 55
		Non-GAAP Financial Measures		62 56
		Executive Summary		63 57
		Results of Operations		64 58
		Financial Condition		70 64
		Risk Management		74 68
		Off-Balance Sheet Arrangements		84 78
		Contractual Obligations		84 78
		Critical Accounting Policies and Estimates		85 79
		Forward-Looking Statements		88 81
Item 3.	Quantitative and Qualitative Disclosures About Market Risk			89 83
Item 4.	Controls and Procedures			89 83
PART II.	OTHER INFORMATION			89 83
Item 1A.	Risk Factors			89 83
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			90 84
Item 5.	Other Information			90 84
Item 6.	Exhibits					90 85
SIGNATURE						91 86

	Three Months Ended
	March 31,
(dollars in thousands)		2019			2018
Net income	$	56,276		$	47,983

Other comprehensive income (loss):

Change in debt securities available-for-sale:
Unrealized holding gains (losses) for the period		62,265			(25,794	)
Reclassification for securities transferred to held-to-maturity		—			14,007
Reclassification adjustment for securities (gains) losses realized in income		103			(788	)
Income tax effect		(14,578	)		3,110
Unrealized gains (losses) on available-for-sale debt securities		47,790			(9,465	)

Change in securities held-to-maturity:
Adjustment for securities transferred to available-for-sale		—			19,412
Adjustment for securities transferred from available-for-sale		—			(14,007	)
Amortization of unrealized losses on securities transferred from available-for-sale		457			591
Income tax effect		(106	)		(1,026	)
Changes from securities held-to-maturity		351			4,970

Cash flow hedges:
Net unrealized derivative gains (losses) on cash flow hedges		(392	)		4,563
Reclassification adjustment for (gains) losses realized in net income		(385	)		769
Income tax effect		191			(1,308	)
Changes from cash flow hedges		(586	)		4,024

Defined benefit pension plans:
Amortization of net loss recognized in income		20			51
Income tax effect		(5	)		(31	)
Changes from defined benefit pension plans		15			20
Other comprehensive income (loss), net of tax		47,570			(451	)
Comprehensive income	$	103,846		$	47,532


	Three Months Ended
	March 31,
(dollars in thousands)	2018			2017
Net income	$	47,983		$	35,992
Other comprehensive income (loss):
Change in securities available-for-sale:
Unrealized holding gains (losses) for the period		(25,794	)		15,780
Reclassification for securities transferred to held-to-maturity		14,007			—
Reclassification adjustment for securities gains realized in income		(788	)		(1,500	)
Income tax effect		3,110			(5,260	)

Unrealized gains (losses) on available-for-sale securities		(9,465	)		9,020
Change in securities held-to-maturity:
Adjustment for securities transferred to available-for-sale		19,412			—
Adjustment for securities transferred from available-for-sale		(14,007	)		—
Amortization of fair value for securities held-to-maturity previously recognized into accumulated other comprehensive income		591			449
Income tax effect		(1,026	)		(154	)

Changes from securities held-to-maturity		4,970			295
Cash flow hedges:
Net unrealized derivative gains (losses) on cash flow hedges		4,563			580
Reclassification adjustment for losses realized in net income		769			1,799
Income tax effect		(1,308	)		(904	)

Changes from cash flow hedges		4,024			1,475
Defined benefit pension plans:
Amortization of net loss recognized in income		51			27
Income tax effect		(31	)		(10	)

Changes from defined benefit pension plans		20			17

Other comprehensive income (loss), net of tax		(451	)		10,807

Comprehensive income	$	47,532		$	46,799

	Three Months Ended
	March 31,
(dollars and shares in thousands, except per share data)		2019			2018
Interest Income
Loans including fees:
Taxable	$	138,972		$	118,389
Nontaxable		4,223			3,874
Investment securities:
Taxable		28,037			18,804
Nontaxable		7,408			6,549
Money market and other interest-earning investments		278			90
Total interest income		178,918			147,706
Interest Expense
Deposits		16,444			7,255
Federal funds purchased and interbank borrowings		1,918			1,017
Securities sold under agreements to repurchase		662			359
Federal Home Loan Bank advances		9,931			7,780
Other borrowings		2,915			2,723
Total interest expense		31,870			19,134
Net interest income		147,048			128,572
Provision for loan losses		1,043			380
Net interest income after provision for loan losses		146,005			128,192
Noninterest Income
Wealth management fees		8,535			9,026
Service charges on deposit accounts		10,826			10,759
Debit card and ATM fees		5,503			4,865
Mortgage banking revenue		5,011			4,192
Investment product fees		5,271			5,031
Capital markets income		2,517			498
Company-owned life insurance		3,188			2,605
Net debt securities gains (losses)		(103	)		788
Other income		5,668			4,141
Total noninterest income		46,416			41,905
Noninterest Expense
Salaries and employee benefits		71,183			64,179
Occupancy		14,578			13,280
Equipment		4,474			3,565
Marketing		3,723			3,697
Data processing		9,341			8,400
Communication		3,054			3,064
Professional fees		2,910			2,730
Loan expenses		1,912			1,744
Supplies		755			722
FDIC assessment		2,087			2,645
Other real estate owned expense		36			349
Amortization of intangibles		4,472			3,609
Amortization of tax credit investments		260			716
Other expense		4,256			8,457
Total noninterest expense		123,041			117,157
Income before income taxes		69,380			52,940
Income tax expense		13,104			4,957
Net income	$	56,276		$	47,983
Net income per common share - basic	$	0.32		$	0.32
Net income per common share - diluted		0.32			0.31
Weighted average number of common shares outstanding - basic		174,734			151,721
Weighted average number of common shares outstanding - diluted		175,368			152,370
Dividends per common share	$	0.13		$	0.13


Cash and cash equivalents	$	34,501		$	60,759
Investment securities		302,195			697,951
FHLB/Federal Reserve Bank stock		6,585			2,637
Loans held for sale		1,407			3,371
Loans		1,593,991			1,049,073
Premises and equipment		33,433			33,391
Accrued interest receivable		5,872			7,896
Company-owned life insurance					36,380
Net deferred tax assets					6,500
Other real estate owned		1,058			954
Company-owned life insurance		44,490
Other assets		30,036			10,299
Deposits		(1,777,588	)		(1,713,086	)
Federal funds purchased and interbank borrowings		(45,600	)
Securities sold under agreements to repurchase		(22,965	)		(19,481	)
Other borrowings		(49,257	)
Accrued expenses and other liabilities		(25,784	)		(17,506	)

Net tangible assets acquired		132,374			159,138
Definite-lived intangible assets acquired		26,606			39,017
Loan servicing rights					285
Goodwill		173,785			208,034

Total consideration	$	332,765		$	406,474


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

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