NOTE 2 – ACQUISITION AND DIVESTITURE ACTIVITY

Acquisitions

Tower Financial Corporation

On September 10, 2013, Old National announced that it had entered into an agreement to acquire Tower Financial Corporation (“Tower”) through a stock and cash merger. The acquisition contemplated by this agreement was completed effective April 25, 2014 (the “Closing Date”). Tower was an Indiana bank holding company with Tower Bank & Trust Company as its wholly-owned subsidiary. Headquartered in Fort Wayne, Indiana, Tower operated seven banking centers and had approximately $556 million in trust assets under management on the Closing Date. The merger strengthened Old National’s position as one of the largest deposit holders in Indiana and Old National achieved cost savings by integrating the two companies and combining accounting, data processing, retail and lending support, and other administrative functions after the merger, which enabled Old National to achieve economies of scale in these areas.

The total purchase price for Tower was $110.4 million, consisting of $31.7 million of cash and the issuance of 5.6 million shares of Old National Common Stock valued at $78.7 million. This acquisition was accounted for under the acquisition method of accounting. Accordingly, the Company recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values, while $5.6 million of transaction and integration costs associated with the acquisition were expensed as incurred.

As of December 31, 2014, the Company finalized its valuation of all assets and liabilities acquired, resulting in no material change to purchase accounting adjustments. A summary of the final purchase price allocation is as follows (in thousands):


Cash and cash equivalents	$	56,345
Investment securities		140,567
Federal Home Loan Bank stock		2,192
Loans held for sale		474
Loans		371,054
Premises and equipment		8,516
Accrued interest receivable		2,371
Other real estate owned		473
Company-owned life insurance		21,281
Other assets		15,200
Deposits		(527,995	)
Securities sold under agreements to repurchase		(18,898	)
Federal Home Loan Bank advances		(5,500	)
Other borrowings		(15,613	)
Accrued expenses and other liabilities		(4,681	)

Net tangible assets acquired		45,786
Definite-lived intangible assets acquired		8,382
Goodwill		56,203

Purchase price	$	110,371

The portion of the purchase price allocated to goodwill will not be deductible for tax purposes.

The components of the estimated fair value of the acquired identifiable intangible assets are in the table below. These intangible assets will be amortized on an accelerated basis over their estimated lives.


	Estimated Fair Value (in millions)		Estimated Useful Lives (Years)
Core deposit intangible	$	4.6		7
Trust customer relationship intangible	$	3.8		12

Acquired loan data for Tower can be found in the table below:


(in thousands)	Fair Value of Acquired Loans at Acquisition Date		Gross Contractual Amounts Receivable at Acquisition Date		Best Estimate at Acquisition Date of Contractual Cash Flows Not Expected to be Collected
Acquired receivables subject to ASC 310-30	$	12,855	$	22,746	$	5,826
Acquired receivables not subject to ASC 310-30	$	358,199	$	450,865	$	42,302

United Bancorp, Inc.

On January 8, 2014, Old National announced that it had entered into an agreement to acquire United Bancorp, Inc. (“United”) through a stock and cash merger. The acquisition contemplated by this agreement was completed effective July 31, 2014 (the “Closing Date”). United was a Michigan bank holding company with United Bank & Trust as its wholly-owned subsidiary. Headquartered in Ann Arbor, Michigan, United operated eighteen banking centers and had approximately $688 million in trust assets under management as of June 30, 2014. The merger doubled Old National’s presence in Michigan to 36 total branches and Old National achieved cost savings by integrating the two companies and combining accounting, data processing, retail and lending support, and other administrative functions after the merger, which enabled Old National to achieve economies of scale in these areas.

The total purchase price for United was $157.8 million, consisting of $34.0 million of cash, the issuance of 9.1 million shares of Old National Common Stock valued at $122.0 million, and the assumption of United’s options and stock appreciation rights, valued at $1.8 million. This acquisition was accounted for under the acquisition method of accounting. Accordingly, the Company recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values, while $7.6 million of transaction and integration costs were expensed as incurred.

As of July 31, 2015, the Company finalized its valuation of all assets and liabilities acquired, resulting in no material change to purchase accounting adjustments. A summary of the final purchase price allocation is as follows (in thousands):


Cash and cash equivalents	$	16,447
Investment securities		154,885
Federal Home Loan Bank stock		2,880
Loans held for sale		1,073
Loans		632,016
Premises and equipment		7,741
Accrued interest receivable		2,614
Other real estate owned		1,676
Company-owned life insurance		14,857
Other assets		16,822
Deposits		(763,681	)
Federal funds purchased		(10,420	)
Federal Home Loan Bank advances		(12,515	)
Accrued expenses and other liabilities		(8,337	)

Net tangible assets acquired		56,058
Definite-lived intangible assets acquired		10,763
Loan servicing rights		8,983
Goodwill		81,952

Purchase price	$	157,756

The portion of the purchase price allocated to goodwill will not be deductible for tax purposes.


	Estimated Fair Value (in millions)		Estimated Useful Lives (Years)
Core deposit intangible	$	5.9		7
Trust customer relationship intangible	$	4.9		12

Acquired loan data for United can be found in the table below:


(in thousands)	Fair Value of Acquired Loans at Acquisition Date		Gross Contractual Amounts Receivable at Acquisition Date		Best Estimate at Acquisition Date of Contractual Cash Flows Not Expected to be Collected
Acquired receivables subject to ASC 310-30	$	8,391	$	15,483	$	5,487
Acquired receivables not subject to ASC 310-30	$	623,625	$	798,967	$	89,430

LSB Financial Corp.

On June 3, 2014, Old National announced that it had entered into an agreement to acquire LSB Financial Corp. (“LSB”) through a stock and cash merger. The acquisition was completed effective November 1, 2014 (the “Closing Date”). LSB was a savings and loan holding company with Lafayette Savings Bank as its wholly-owned subsidiary. LSB was the largest bank headquartered in Lafayette, Indiana and operated five full-service banking centers. The merger strengthened Old National’s position as one of the largest deposit holders in Indiana and Old National achieved cost savings by integrating the two companies and combining accounting, data processing, retail and lending support, and other administrative functions after the merger, which enabled Old National to achieve economies of scale in these areas.

The total purchase price for LSB was $69.6 million, consisting of $17.8 million of cash and the issuance of 3.6 million shares of Old National Common Stock valued at $51.8 million. This acquisition was accounted for under the acquisition method of accounting. Accordingly, the Company recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values, while $3.2 million of transaction and integration costs associated with the acquisition were expensed as incurred.

As of September 30, 2015, the Company finalized its valuation of all assets and liabilities acquired, resulting in no material change to purchase accounting adjustments. A summary of the final purchase price allocation is as follows (in thousands):


Cash and cash equivalents	$	7,589
Investment securities		63,684
Federal Home Loan Bank stock		3,185
Loans held for sale		1,035
Loans		235,377
Premises and equipment		6,492
Accrued interest receivable		1,044
Other real estate owned		30
Company-owned life insurance		7,438
Other assets		11,490
Deposits		(292,068	)
Federal Home Loan Bank advances		(15,203	)
Accrued expenses and other liabilities		(4,582	)

Net tangible assets acquired		25,511
Definite-lived intangible assets acquired		2,618
Loan servicing rights		990
Goodwill		40,476

Purchase price	$	69,595

The portion of the purchase price allocated to goodwill will not be deductible for tax purposes.

The estimated fair value of the core deposit intangible is $2.6 million and will be amortized over an estimated useful life of 7 years.

Acquired loan data for LSB can be found in the table below:


(in thousands)	Fair Value of Acquired Loans at Acquisition Date		Gross Contractual Amounts Receivable at Acquisition Date		Best Estimate at Acquisition Date of Contractual Cash Flows Not Expected to be Collected
Acquired receivables subject to ASC 310-30	$	11,986	$	24,493	$	9,903
Acquired receivables not subject to ASC 310-30	$	223,391	$	340,832	$	57,884

Founders Financial Corporation

On July 28, 2014, Old National announced that it had entered into an agreement to acquire Grand Rapids, Michigan-based Founders Financial Corporation (“Founders”) through a stock and cash merger. The acquisition was completed effective January 1, 2015 (the “Closing Date”). Founders was a bank holding company with Founders Bank & Trust as its wholly-owned subsidiary and operated four full-service banking centers in Kent County. Old National achieved cost savings by integrating the two companies and combining accounting, data processing, retail and lending support, and other administrative functions after the merger, which enabled Old National to achieve economies of scale in these areas.

The total purchase price for Founders was $91.7 million, consisting of $41.0 million of cash and the issuance of 3.4 million shares of Old National Common Stock valued at $50.6 million. This acquisition was accounted for under the acquisition method of accounting. Accordingly, the Company recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values. Through December 31, 2015, transaction and integration costs of $4.9 million associated with the acquisition had been expensed.

As of December 31, 2015, the Company finalized its valuation of all assets and liabilities acquired, resulting in no material change to purchase accounting adjustments. A summary of the final purchase price allocation is as follows (in thousands):


Cash and cash equivalents	$	3,978
Investment securities		75,383
Federal Home Loan Bank stock		1,810
Loans held for sale		3,473
Loans		339,569
Premises and equipment		3,604
Accrued interest receivable		1,260
Other real estate owned		674
Company-owned life insurance		8,297
Other assets		8,804
Deposits		(376,656	)
Securities sold under agreements to repurchase		(12,492	)
Federal Home Loan Bank advances		(26,888	)
Accrued expenses and other liabilities		(1,307	)

Net tangible assets acquired		29,509
Definite-lived intangible assets acquired		5,515
Loan servicing rights		664
Goodwill		56,014

Purchase price	$	91,702

The portion of the purchase price allocated to goodwill will not be deductible for tax purposes.


	Estimated Fair Value (in millions)		Estimated Useful Lives (Years)
Core deposit intangible	$	2.9		7
Trust customer relationship intangible	$	2.6		12

Acquired loan data for Founders can be found in the table below:


(in thousands)	Fair Value of Acquired Loans at Acquisition Date		Gross Contractual Amounts Receivable at Acquisition Date		Best Estimate at Acquisition Date of Contractual Cash Flows Not Expected to be Collected
Acquired receivables subject to ASC 310-30	$	6,607	$	11,103	$	2,684
Acquired receivables not subject to ASC 310-30	$	332,962	$	439,031	$	61,113

Anchor BanCorp Wisconsin Inc.

On January 12, 2016, Old National announced that it had entered into an agreement to acquire Madison, Wisconsin-based Anchor BanCorp Wisconsin Inc. (“Anchor”) through a stock and cash merger. The acquisition was completed effective May 1, 2016 (the “Closing Date”). Anchor was a savings and loan holding company with AnchorBank, fsb (“AnchorBank”) as its wholly-owned subsidiary. AnchorBank operated 46 banking centers, including 32 banking centers in the Madison, Milwaukee and Fox Valley triangle. 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 after the merger, which will enable Old National to achieve economies of scale in these areas.

Pursuant to the merger agreement, shareholders of Anchor could elect to receive either 3.5505 shares of Old National common stock or $48.50 in cash for each share of Anchor they held, subject to a maximum of 40% of the purchase price in cash. The total purchase price for Anchor was $459.8 million, consisting of $186.2 million of cash and the issuance of 20.4 million shares of Old National Common Stock valued at $273.6 million. This acquisition was accounted for under the acquisition method of accounting. Accordingly, the Company recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values. Through December 31, 2016, transaction and integration costs of $15.9 million associated with the acquisition have been expensed and remaining integration costs will be expensed in future periods as incurred.

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


Cash and cash equivalents	$	123,657
Investment securities		235,240
Federal Home Loan Bank stock		4,596
Loans held for sale		9,334
Loans		1,637,806
Premises and equipment		35,721
Accrued interest receivable		7,308
Other real estate owned		17,349
Company-owned life insurance		7,278
Other assets		126,210
Deposits		(1,852,713	)
Securities sold under agreements to repurchase		(3,132	)
Other borrowings		(123	)
Accrued expenses and other liabilities		(36,957	)

Net tangible assets acquired		311,574
Definite-lived intangible assets acquired		21,559
Loan servicing rights		15,274
Goodwill		111,347

Purchase price	$	459,754

Prior to the end of the one year measurement period for finalizing the purchase price allocation, if information becomes available which would indicate adjustments are required to the purchase price allocation, such adjustments will be included in the purchase price allocation in the reporting period in which the adjustment amounts are determined.

The portion of the purchase price allocated to goodwill will not be deductible for tax purposes.

The estimated fair value of the core deposit intangible is $21.6 million and will be amortized over an estimated useful life of 7 years.

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


(in thousands)	Fair Value of Acquired Loans at Acquisition Date		Gross Contractual Amounts Receivable at Acquisition Date		Best Estimate at Acquisition Date of Contractual Cash Flows Not Expected to be Collected
Acquired receivables subject to ASC 310-30	$	20,174	$	29,544	$	6,153
Acquired receivables not subject to ASC 310-30	$	1,617,632	$	2,143,532	$	274,155

Summary of Unaudited Pro-Forma Information

The unaudited pro-forma information below for 2016 and 2015 gives effect to the Anchor acquisition as if it had occurred on January 1, 2015. The pro-forma financial information is not necessarily indicative of the results of operations if the acquisition had been effective as of this date.


(dollars in thousands)	2016		2015
Revenue (1)	$	701,303	$	700,500
Income before income taxes	$	241,068	$	195,347

(1)	Net interest income plus noninterest income.

Supplemental pro-forma earnings for 2016 were adjusted to exclude $15.9 million of acquisition-related costs incurred during 2016. Supplemental pro-forma earnings for 2015 were adjusted to include these charges.

Insurance Acquisitions

Effective February 1, 2015, Old National acquired certain assets from Mutual Underwriters Insurance (“Mutual Underwriters”). The total purchase price of the assets was $3.7 million, consisting of $2.6 million of customer business relationship intangibles and $1.1 million of goodwill. The customer business relationship intangibles were originally scheduled to be amortized using an accelerated method over an estimated useful life of 10 years.

On May 8, 2015, the Company issued cash consideration of $0.1 million to purchase a book of business. The acquisition terms called for further cash consideration of approximately $0.1 million if certain operating targets were met. The fair value of these payments was booked at acquisition and added $0.2 million of customer business relationships intangibles. The customer business relationship intangibles were originally scheduled to be amortized using an accelerated method over an estimated useful life of 10 years.

Divestitures

On August 14, 2015, the Company divested its southern Illinois region (twelve branches) along with four branches in eastern Indiana and one in Ohio. At closing, the purchasers assumed loans of $193.6 million and deposits of $555.8 million. The Company recorded a net pre-tax gain of $15.6 million in connection with the divestitures, which included a deposit premium of $19.3 million, goodwill allocation of $3.8 million, and $0.9 million of other transaction expenses.

In addition, the Company consolidated 23 branches throughout the Old National franchise during 2015 based on an ongoing assessment of our service and delivery network and on our goal to continue to move our franchise into stronger growth markets.

On May 31, 2016 the Company sold its insurance operations, ONB Insurance Group, Inc. (“ONI”). The Company received approximately $91.8 million in cash resulting in a pre-tax gain of $41.9 million and an after-tax gain of $17.6 million. See Note 17 to the consolidated financial statements for further details on the income tax impact of this sale. Goodwill and intangible assets of approximately $47.5 million were eliminated as part of this transaction. ONI was an ancillary business and did not meet the criteria to be treated as a discontinued operation as defined in Accounting Standards Update 2014-08 “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”.

Based on an ongoing assessment of our service and delivery network, the Company consolidated five branches during 2016 and an additional fifteen in January 2017.