Loans and Allowance for Credit Losses | LOANS AND ALLOWANCE FOR CREDIT LOSSES Old National’s loans consist primarily of loans made to consumers and commercial clients in various industries, including manufacturing, agribusiness, transportation, mining, wholesaling, and retailing. Most of Old National’s lending activity occurs within our principal geographic markets of Indiana, Kentucky, Michigan, Wisconsin, and Minnesota. Old National manages concentrations of credit exposure by industry, product, geography, customer relationship, and loan size. While loans to lessors of both residential and non-residential real estate exceed 10% of total loans, no individual sub-segment category within those broader categories reaches the 10% threshold. The loan categories used to monitor and analyze interest income and yields are different than the portfolio segments used to determine the allowance for credit losses for loans. The allowance for credit losses was calculated by pooling loans of similar credit risk characteristics and credit monitoring procedures. The four loan portfolios are classified into seven segments of loans - commercial, commercial real estate, BBCC, residential real estate, indirect, direct, and home equity. The commercial and commercial real estate loan categories shown on the balance sheet include the same pool of loans as the commercial, commercial real estate, and BBCC portfolio segments. The consumer loan category shown on the balance sheet is comprised of the same loans in the indirect, direct, and home equity portfolio segments. The composition of loans by portfolio segment as of December 31, 2019 and January 1, 2020 follows: December 31, 2019 Credit December 31, 2019 Impact of January 1, 2020 Statement Risk After ASC 326 Post-ASC 326 (dollars in thousands) Balance Reclassifications Reclassifications Adoption Adoption Loans: Commercial $ 2,890,296 $ (75,142) $ 2,815,154 $ 2,679 $ 2,817,833 Commercial real estate 5,166,792 (277,539) 4,889,253 1,637 4,890,890 BBCC N/A 352,681 352,681 33 352,714 Residential real estate 2,334,289 — 2,334,289 105 2,334,394 Consumer 1,726,147 (1,726,147) N/A N/A N/A Indirect N/A 935,584 935,584 10 935,594 Direct N/A 228,524 228,524 2 228,526 Home equity N/A 562,039 562,039 12 562,051 Total $ 12,117,524 $ — $ 12,117,524 $ 4,478 $ 12,122,002 Allowance: Commercial $ (22,585) $ 1,226 $ (21,359) $ (7,150) $ (28,509) Commercial real estate (21,588) 1,053 (20,535) (25,548) (46,083) BBCC N/A (2,279) (2,279) (3,702) (5,981) Residential real estate (2,299) — (2,299) (6,986) (9,285) Consumer (8,147) 8,147 N/A N/A N/A Indirect N/A (5,319) (5,319) 1,669 (3,650) Direct N/A (1,863) (1,863) 1,059 (804) Home equity N/A (965) (965) (689) (1,654) Total $ (54,619) $ — $ (54,619) $ (41,347) $ (95,966) The composition of loans by portfolio segment follows: (dollars in thousands) March 31, January 1, Commercial (1) $ 2,844,465 $ 2,817,833 Commercial real estate 5,118,439 4,890,890 BBCC 367,139 352,714 Residential real estate 2,327,851 2,334,394 Indirect 953,136 935,594 Direct 211,793 228,526 Home equity 561,789 562,051 Total loans 12,384,612 12,122,002 Allowance for credit losses (106,380) (95,966) Net loans $ 12,278,232 $ 12,026,036 (1) Includes direct finance leases of $44.4 million at March 31, 2020 and $47.2 million at December 31, 2019. The risk characteristics of each loan portfolio segment are as follows: Commercial Commercial loans are classified primarily on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Commercial Real Estate Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. The properties securing Old National’s commercial real estate portfolio are diverse in terms of type and geographic location. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. Included with commercial real estate are construction loans, which are underwritten utilizing independent appraisal reviews, sensitivity analysis of absorption and lease rates, financial analysis of the developers and property owners, and feasibility studies, if available. Construction loans are generally based on estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders (including Old National), sales of developed property, or an interim loan commitment from Old National until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions, and the availability of long-term financing. At 206%, Old National Bank’s commercial real estate loans as a percentage of its risk-based capital remained well below the regulatory guideline limit of 300% at March 31, 2020. BBCC BBCC loans are typically granted to small businesses with gross revenues of less than $5 million and aggregate debt of less than $1 million. Old National has established minimum debt service coverage ratios, minimum FICO scores for owner(s) and guarantor(s), and the ability to show relatively stable earnings as criteria to help mitigate risk. Repayment of these loans depends on the personal income of the borrowers and the cash flows of the business. These factors can be affected by changes in economic conditions such as unemployment levels. Residential With respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, Old National typically establishes a maximum loan-to-value ratio and generally requires private mortgage insurance if that ratio is exceeded. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in residential property values. Portfolio risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers. Indirect Indirect loans are secured by automobile collateral, generally new and used cars and trucks from auto dealers that operate within our footprint. Old National typically mitigates the risk of Indirect loans by establishing minimum FICO scores, maximum loan-to-value ratios, and maximum debt-to-income ratios. Repayment of these loans depends largely on the personal income of the borrowers which can be affected by changes in economic conditions such as unemployment levels. Portfolio risk is mitigated by the fact that the loans are of smaller amounts spread over many borrowers, conservative credit policies, and ongoing reviews of dealer relationships. Direct Direct loans are typically secured by collateral such as auto or real estate or are unsecured. Old National has established conservative underwriting standards such as minimum FICO scores, maximum loan-to-value ratios, and maximum debt-to-income ratios. Repayment of these loans depends largely on the personal income of the borrowers which can be affected by changes in economic conditions such as unemployment levels. Portfolio risk is mitigated by the fact that the loans are of smaller amounts spread over many borrowers along with conservative credit policies. Home Equity Home Equity loans are generally secured by 1-4 family residences that are owner occupied. Old National has established conservative underwriting standards such as minimum FICO scores, maximum loan-to-value ratios, and maximum debt-to-income ratios. Repayment of these loans depends largely on the personal income of the borrowers which can be affected by changes in economic conditions such as unemployment levels. Portfolio risk is mitigated by the fact that the loans are of smaller amounts spread over many borrowers along with conservative credit policies as well as monitoring of updated borrower credit scores. Risk is further mitigated in that Old National retains the right to unconditionally cancel unfunded lines of credit due to deterioration of borrower credit history. Allowance for Credit Losses for Loans Credit quality within the loans held for investment portfolio is continuously monitored by management and is reflected within the allowance for credit losses for loans. The allowance for credit losses is an estimate of expected losses inherent within the Company’s loans held for investment portfolio. Credit quality is assessed and monitored by evaluating various attributes and the results of those evaluations are utilized in underwriting new loans and in our process for estimating expected credit losses. Expected credit loss inherent in non-cancelable off-balance-sheet credit exposures is accounted for as a separate liability included in other liabilities on the balance sheet. The allowance for credit losses for loans held for investment is adjusted by a credit loss expense, which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries. We have made a policy election to report accrued interest receivable as a separate line item on the balance sheet. Accrued interest receivable on loans totaled $54.0 million at March 31, 2020 and is excluded from the estimate of credit losses. The allowance for credit loss estimation process involves procedures to appropriately consider the unique characteristics of its loan portfolio segments. These segments are further disaggregated into loan classes, the level at which credit risk is monitored. When computing the level of expected credit losses, credit loss assumptions are estimated using a model that categorizes loan pools based on loss history, delinquency status, and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense in those future periods. The allowance level is influenced by loan volumes, loan AQR migration or delinquency status, changes in historical loss experience, and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions. The methodology for estimating the amount of expected credit losses reported in the allowance for credit losses has two basic components: first, an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans; and second, a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics. See Note 2 for more information about CECL for loans and unfunded loan commitments. For the three months ended March 31, 2020 the allowance for credit losses increased primarily due to macroeconomic factors surrounding the COVID-19 pandemic. The forecast scenario includes a sharp decline in gross domestic product in the second quarter of 2020 with a return to growth by year end. The immediate increase in unemployment remains elevated through 2023. In addition to these quantitative inputs, several qualitative factors were considered, including the risk that the economic decline, specifically unemployment and gross domestic product, prove to be more severe and/or prolonged than our baseline forecast. The mitigating impact of the unprecedented fiscal stimulus, including direct payments to individuals, increased unemployment benefits, as well as the various government sponsored loan programs, was also considered. Old National’s activity in the allowance for credit losses for loans by portfolio segment for the three months ended March 31, 2020 was as follows: (dollars in thousands) Balance at Impact of Sub-Total Charge-offs Recoveries Provision Balance at End of Period Three Months Ended Commercial $ 21,359 $ 7,150 $ 28,509 $ (5,042) $ 357 $ 7,301 $ 31,125 Commercial real estate 20,535 25,548 46,083 (1,292) 669 8,643 54,103 BBCC 2,279 3,702 5,981 (15) 66 (615) 5,417 Residential real estate 2,299 6,986 9,285 (300) 169 483 9,637 Indirect 5,319 (1,669) 3,650 (1,203) 414 805 3,666 Direct 1,863 (1,059) 804 (475) 152 341 822 Home equity 965 689 1,654 (118) 82 (8) 1,610 Total allowance for credit losses $ 54,619 $ 41,347 $ 95,966 $ (8,445) $ 1,909 $ 16,950 $ 106,380 The provision recapture for the BBCC portfolio was the result of several offsetting items. The economic forecast resulted in an increase to the provision for credit losses for the quarter, which was more than offset by a decrease related to the payoffs of several nonaccrual loans during the quarter. In addition, the BBCC portfolio has a lower weighted average life quarter over quarter, which resulted in a decrease to the allowance for credit losses that was needed at March 31, 2020. Allowance for Credit Losses on Unfunded Loan Commitments Old National maintains an allowance for credit losses on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements. The allowance is computed using a methodology similar to that used to determine the allowance for credit losses for loans, modified to take into account the probability of a drawdown on the commitment. The allowance for credit losses on unfunded loan commitments is classified as a liability account on the balance sheet. Old National’s activity in the allowance for credit losses on unfunded loan commitments for the three months ended March 31, 2020 was as follows: (dollars in thousands) Total Three months ended March 31, 2020 Allowance for credit losses on unfunded loan commitments: Balance at beginning of period $ 2,656 Impact of adopting ASC 326 4,549 Sub-Total 7,205 Expense (reversal of expense) for credit losses 1,745 Balance at end of period $ 8,950 Credit Quality Old National’s management monitors the credit quality of its loans on an ongoing basis with the AQR for commercial loans reviewed annually or at renewal and the performance of its residential and consumer loans based upon the accrual status refreshed at least quarterly. Internally, management assigns an AQR to each non-homogeneous commercial, commercial real estate, and BBCC loan in the portfolio. The primary determinants of the AQR are the reliability of the primary source of repayment and the past, present, and projected financial condition of the borrower. The AQR will also consider current industry conditions. Major factors used in determining the AQR can vary based on the nature of the loan, but commonly include factors such as debt service coverage, internal cash flow, liquidity, leverage, operating performance, debt burden, FICO scores, occupancy, interest rate sensitivity, and expense burden. Old National uses the following definitions for risk ratings: Criticized . Special mention loans that have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Classified – Substandard . Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Classified – Nonaccrual . Loans classified as nonaccrual have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection in full, on the basis of currently existing facts, conditions, and values, in doubt. Classified – Doubtful . Loans classified as doubtful have all the weaknesses inherent in those classified as nonaccrual, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Pass rated loans are those loans that are other than criticized, classified – substandard, classified – nonaccrual, or classified – doubtful. The following table summarizes the risk category of commercial, commercial real estate, and BBCC loans by loan portfolio segment and class of loan: Risk Rating (dollars in thousands) Pass Criticized Classified - Classified - Classified - Total March 31, 2020 Commercial: Term Loans at Amortized Cost by Origination Year: Prior to 2016 $ 339,465 $ 9,386 $ 9,935 $ 816 $ 3,051 $ 362,653 2016 177,397 6,799 4,268 784 803 190,051 2017 342,542 12,704 13,345 2,324 9,838 380,753 2018 312,229 12,995 7,893 5,905 157 339,179 2019 546,484 4,707 5,421 3,274 2,254 562,140 2020 213,893 1,708 751 — — 216,352 Revolving Loans 581,830 39,157 18,326 3,905 — 643,218 Revolving to Term Loans 138,584 1,356 3,397 6,782 — 150,119 Total $ 2,652,424 $ 88,812 $ 63,336 $ 23,790 $ 16,103 $ 2,844,465 Commercial real estate: Term Loans at Amortized Cost by Origination Year: Prior to 2016 $ 793,743 $ 22,910 $ 12,944 $ 15,352 $ 3,881 $ 848,830 2016 596,312 12,915 17,519 14,368 212 641,326 2017 838,575 69,842 27,025 1,830 4,356 941,628 2018 864,477 7,933 23,741 3,525 3,300 902,976 2019 1,149,445 20,007 2,878 2,177 1,965 1,176,472 2020 280,341 — 39 — — 280,380 Revolving Loans 25,474 500 212 — — 26,186 Revolving to Term Loans 282,936 6,522 10,792 391 — 300,641 Total $ 4,831,303 $ 140,629 $ 95,150 $ 37,643 $ 13,714 $ 5,118,439 BBCC: Term Loans at Amortized Cost by Origination Year: Prior to 2016 $ 17,943 $ — $ — $ — $ 187 $ 18,130 2016 30,762 1,024 551 538 53 32,928 2017 45,700 522 1,028 575 — 47,825 2018 61,865 512 — 1,070 61 63,508 2019 90,970 877 1,443 438 — 93,728 2020 26,069 172 — 46 — 26,287 Revolving Loans 58,040 4,044 644 76 — 62,804 Revolving to Term Loans 18,679 1,419 1,008 823 — 21,929 Total $ 350,028 $ 8,570 $ 4,674 $ 3,566 $ 301 $ 367,139 For residential real estate and consumer loan classes, Old National evaluates credit quality based on the aging status of the loan and by payment activity. The performing or nonperforming status is updated on an on-going basis dependent upon improvement and deterioration in credit quality. The following table presents the amortized cost in residential real estate and consumer loans based on payment activity: Payment Performance (dollars in thousands) Performing Nonperforming Total March 31, 2020 Residential real estate: Term Loans at Amortized Cost by Origination Year: Prior to 2016 $ 826,831 $ 20,629 $ 847,460 2016 292,199 1,755 293,954 2017 303,763 661 304,424 2018 219,650 425 220,075 2019 561,322 97 561,419 2020 100,385 — 100,385 Revolving Loans — — — Revolving to Term Loans 134 — 134 Total $ 2,304,284 $ 23,567 $ 2,327,851 Indirect: Term Loans at Amortized Cost by Origination Year: Prior to 2016 $ 53,056 $ 277 $ 53,333 2016 99,915 685 100,600 2017 152,882 1,113 153,995 2018 199,211 568 199,779 2019 348,865 242 349,107 2020 96,230 — 96,230 Revolving Loans — — — Revolving to Term Loans 92 — 92 Total $ 950,251 $ 2,885 $ 953,136 Direct: Term Loans at Amortized Cost by Origination Year: Prior to 2016 $ 29,807 $ 535 $ 30,342 2016 15,445 249 15,694 2017 28,370 145 28,515 2018 48,587 214 48,801 2019 46,602 51 46,653 2020 12,485 — 12,485 Revolving Loans 27,834 — 27,834 Revolving to Term Loans 1,468 1 1,469 Total $ 210,598 $ 1,195 $ 211,793 Home equity: Term Loans at Amortized Cost by Origination Year: Prior to 2016 $ — $ — $ — 2016 240 326 566 2017 1,002 37 1,039 2018 719 — 719 2019 1,085 31 1,116 2020 — — — Revolving Loans 535,095 189 535,284 Revolving to Term Loans 19,425 3,640 23,065 Total $ 557,566 $ 4,223 $ 561,789 Nonaccrual and Past Due Loans Old National does not record interest on nonaccrual loans until principal is recovered. For all loan classes, a loan is generally placed on nonaccrual status when principal or interest becomes 90 days past due unless it is well secured and in the process of collection, or earlier when concern exists as to the ultimate collectability of principal or interest. Interest accrued but not received is reversed against earnings. Cash interest received on these loans is applied to the principal balance until the principal is recovered or until the loan returns to accrual status. Loans may be returned to accrual status when all the principal and interest amounts contractually due are brought current, remain current for a prescribed period, and future payments are reasonably assured. The following table presents the aging of the amortized cost basis in past due loans as of March 31, 2020 by class of loans: (dollars in thousands) 30-59 Days 60-89 Days Past Due Total Current Total March 31, 2020 Commercial $ 3,578 $ 1,707 $ 9,156 $ 14,441 $ 2,830,024 $ 2,844,465 Commercial Real Estate 6,114 2,200 13,412 21,726 5,096,713 5,118,439 BBCC 419 156 234 809 366,330 367,139 Residential 13,895 4,603 9,255 27,753 2,300,098 2,327,851 Indirect 6,358 963 339 7,660 945,476 953,136 Direct 1,513 183 325 2,021 209,772 211,793 Home equity 1,755 474 1,761 3,990 557,799 561,789 Total $ 33,632 $ 10,286 $ 34,482 $ 78,400 $ 12,306,212 $ 12,384,612 The following table presents the amortized cost basis of loans on nonaccrual status and loans past due 90 days or more and still accruing by class of loan: (dollars in thousands) Beginning End Nonaccrual Past Due Interest At or for the Three Months Ended March 31, 2020 Commercial $ 40,103 $ 39,893 $ 7,040 $ 3 $ — Commercial Real Estate 58,350 51,355 13,281 165 — BBCC 4,530 3,869 — — — Residential 20,970 23,567 — 112 — Indirect 3,318 2,885 — 81 — Direct 1,303 1,195 — 102 — Home equity 3,857 4,223 34 195 — Total $ 132,431 $ 126,987 $ 20,355 $ 658 $ — When management determines that foreclosure is probable, expected credit losses for collateral-dependent loans are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. The class of loan represents the primary collateral type associated with the loan. Significant quarter over quarter changes are reflective of changes in nonaccrual status and not necessarily associated with credit quality indicators like appraisal value. The following table presents the amortized cost basis of collateral-dependent loans by class of loan: Type of Collateral (dollars in thousands) Real Blanket Investment Auto Other March 31, 2020 Commercial $ 6,802 $ 23,175 $ 8,209 $ 396 $ 1,522 Commercial Real Estate 40,361 150 3,199 — 179 BBCC 1,930 1,614 59 246 — Residential 23,567 — — — — Indirect — — — 2,885 — Direct 863 — 8 265 — Home equity 4,223 — — — — Total loans $ 77,746 $ 24,939 $ 11,475 $ 3,792 $ 1,701 Loan Participations Old National has loan participations, which qualify as participating interests, with other financial institutions. At March 31, 2020, these loans totaled $849.4 million, of which $401.6 million had been sold to other financial institutions and $447.8 million was retained by Old National. The loan participations convey proportionate ownership rights with equal priority to each participating interest holder; involve no recourse (other than ordinary representations and warranties) to, or subordination by, any participating interest holder; all cash flows are divided among the participating interest holders in proportion to each holder’s share of ownership; and no holder has the right to pledge the entire financial asset unless all participating interest holders agree. Troubled Debt Restructurings Old National may choose to restructure the contractual terms of certain loans. The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit Old National by increasing the ultimate probability of collection. Any loans that are modified are reviewed by Old National to identify if a TDR has occurred, which is when for economic or legal reasons related to a borrower’s financial difficulties, Old National Bank grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status. The modification of the terms of such loans include one or a combination of the following: a reduction of the stated interest rate of the loan, an extension of the maturity date at a stated rate of interest lower than the current market rate of new debt with similar risk, or a permanent reduction of the recorded investment of the loan. Loans modified in a TDR are typically placed on nonaccrual status until we determine the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate a period of performance according to the restructured terms for 6 months. If we are unable to resolve a nonperforming loan issue, the credit will be charged off when it is apparent there will be a loss. For large commercial type loans, each relationship is individually analyzed for evidence of apparent loss based on quantitative benchmarks or subjectively based upon certain events or particular circumstances. Generally, Old National charges off small commercial loans scored through our small business credit center with contractual balances under $250,000 that are 90 days or more delinquent and do not have adequate collateral support. For residential and consumer loans, a charge off is recorded at the time foreclosure is initiated or when the loan becomes 120 to 180 days past due, whichever is earlier. For commercial TDRs, an allocated reserve is established within the allowance for credit losses for the difference between the carrying value of the loan and its computed value. To determine the computed value of the loan, one of the following methods is selected: (1) the present value of expected cash flows discounted at the loan’s original effective interest rate, (2) the loan’s observable market price, or (3) the fair value of the collateral value, if the loan is collateral dependent. The allocated reserve is established as the difference between the carrying value of the loan and the collectable value. If there are significant changes in the amount or timing of the loan’s expected future cash flows, impairment is recalculated and the valuation allowance is adjusted accordingly. When a residential or consumer loan is identified as a TDR, the loan is typically written down to its collateral value less selling costs. The following table presents activity in TDRs for the three months ended March 31, 2020: (dollars in thousands) Beginning (Charge-offs)/ (Payments)/ Additions Ending Three months ended March 31, 2020 Commercial $ 12,412 $ (695) $ (789) $ — $ 10,928 Commercial Real Estate 14,277 (1,272) (157) — 12,848 BBCC 578 — (16) — 562 Residential 3,107 — (67) — 3,040 Indirect — 3 (3) — — Direct 983 2 (63) — 922 Home equity 381 1 (8) — 374 Total $ 31,738 $ (1,961) $ (1,103) $ — $ 28,674 TDRs included within nonaccrual loans totaled $11.8 million at March 31, 2020 and $13.8 million at December 31, 2019. Old National has allocated specific reserves to customers whose loan terms have been modified in TDRs totaling $1.4 million at March 31, 2020 and $0.9 million at December 31, 2019. At March 31, 2020, Old National had committed to lend an additional $0.9 million to customers with outstanding loans that are classified as TDRs, compared to $2.3 million at December 31, 2019. The pre-modification and post-modification outstanding recorded investments of loans modified as TDRs during the three months ended March 31, 2020 and 2019 are the same except for when the loan modifications involve the forgiveness of principal. The following table presents loans modified as TDRs that occurred during the three months ended March 31, 2020 and 2019: (dollars in thousands) Total Three Months Ended March 31, 2020 TDR: Number of loans — Pre-modification outstanding recorded investment — Post-modification outstanding recorded investment — Three Months Ended March 31, 2019 TDR: Number of loans 4 Pre-modification outstanding recorded investment 5,510 Post-modification outstanding recorded investment 5,510 The TDRs that occurred during the three months ended March 31, 2020 and 2019 did not have a material impact on the allowance for loan losses and resulted in no charge-offs during the three months ended March 31, 2020, or 2019. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. TDRs for which there was a payment default within twelve months following the modification were insignificant during the three months ended March 31, 2020 and 2019. The terms of certain other loans were modified during 2020 and 2019 that did not meet the definition of a TDR. It is our process to review all classified and criticized loans that, during the period, have been renewed, have entered into a forbearance agreement, have gone from principal and interest to interest only, or have extended the maturity date. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on its debt in the foreseeable future without the modification. The evaluation is performed under our internal underwriting policy. We also evaluate whether a concession has been granted or if we were adequately compensated through a market interest rate, additional collateral or a bona fide guarantee. We also consider whether the modification was insignificant relative to the other terms of the agreement or the delay in a payment. In general, once a modified loan is considered a TDR, the loan will always be considered a TDR, and therefore impaired, until it is paid in full, otherwise settled, sold, or charged off. However, guidance also permits for loans to be removed from TDR status when subsequently restructured under these circumstances: (1) at the time of the subsequent restructuring, the borrower is not experiencing financial difficulties, and this is documented by a current credit evaluation at the time of the restructuring, (2) under the terms of the subsequent restructuring agreement, the institution has granted no concession to the borrower; and (3) the subsequent restructuring agreement includes market terms that are no less favorable than those that would be offered for a comparable new loan. For loans subsequently restructured that have cumulative principal forgiveness, the loan should continue to be measured in accordance with ASC 310-10, Receivables – Overall . However, consistent with ASC 310-40-50-2, Troubled Debt Restructurings by Creditors, Creditor Disclosure of Troubled Debt Restructurings , the loan would not be required to be reported in the years following the restructuring if the subsequent restructuring meets both of these criteria: (1) has an interest rate at the time of the subsequent restructuring that is not less than a market interest rate; and (2) is performing in compliance with its modified terms after |