| Loans and Allowance for Credit Losses | LOANS AND ALLOWANCE FOR CREDIT LOSSES Loans 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 June 30, 2020 follows: June 30, 2020 Segment June 30, 2020 Statement Portfolio After (dollars in thousands) Balance Reclassifications Reclassifications Loans: Commercial $ 4,307,505 $ (193,861) $ 4,113,644 Commercial real estate 5,403,316 (166,369) 5,236,947 BBCC N/A 360,230 360,230 Residential real estate 2,229,298 — 2,229,298 Consumer 1,675,582 (1,675,582) N/A Indirect N/A 933,723 933,723 Direct N/A 194,573 194,573 Home equity N/A 547,286 547,286 Total $ 13,615,701 $ — $ 13,615,701 The composition of loans by portfolio segment follows: (dollars in thousands) June 30, January 1, Commercial (1) (2) $ 4,113,644 $ 2,817,833 Commercial real estate 5,236,947 4,890,890 BBCC 360,230 352,714 Residential real estate 2,229,298 2,334,394 Indirect 933,723 935,594 Direct 194,573 228,526 Home equity 547,286 562,051 Total loans 13,615,701 12,122,002 Allowance for credit losses (128,394) (95,966) Net loans $ 13,487,307 $ 12,026,036 (1) Includes direct finance leases of $42.1 million at June 30, 2020 and $47.2 million at January 1, 2020. (2) Includes PPP loans of $1.463 billion at June 30, 2020. 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. Section 1102 of the CARES Act created the Paycheck Protection Program (“PPP”), a program administered by the Small Business Administration (the “SBA”) to provide loans to small businesses for payroll and other basic expenses during the COVID-19 pandemic. Old National has participated in the PPP as a lender. These loans are eligible to be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. Additionally, loan payments will also be deferred for six months of the loan. The PPP commenced on April 3, 2020 and is available to qualified borrowers through August 8, 2020, or as long as the appropriated funding is available. No collateral or personal guarantees are required. Neither the government nor lenders are permitted to charge the recipients any fees. Old National began accepting applications from qualified borrowers on April 3, 2020 and as of June 30, 2020 over 9,200 applications have been processed and approved, representing $1.538 billion in funding to new and existing clients through the PPP. 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 214%, 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 June 30, 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. Allowance for Credit Losses 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 $56.9 million at June 30, 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. The allowance for credit losses increased for the three and six months ended June 30, 2020 primarily due to macroeconomic factors surrounding the COVID-19 pandemic. The forecast scenario includes elevated unemployment, which is forecasted to increase slightly through the first quarter of 2021. The scenario also shows a decrease in nominal gross domestic product with a return to growth by the second quarter of 2021. 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 and six months ended June 30, 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 $ 31,125 $ — $ 31,125 $ (136) $ 553 $ (1,924) $ 29,618 Commercial real estate 54,103 — 54,103 (1,160) 246 17,880 71,069 BBCC 5,417 — 5,417 (66) 56 925 6,332 Residential real estate 9,637 — 9,637 (16) 42 4,581 14,244 Indirect 3,666 — 3,666 (367) 494 660 4,453 Direct 822 — 822 (405) 231 187 835 Home equity 1,610 — 1,610 (82) 79 236 1,843 Total allowance for credit losses $ 106,380 $ — $ 106,380 $ (2,232) $ 1,701 $ 22,545 $ 128,394 Six Months Ended Commercial $ 21,359 $ 7,150 $ 28,509 $ (5,178) $ 910 $ 5,377 $ 29,618 Commercial real estate 20,535 25,548 46,083 (2,452) 915 26,523 71,069 BBCC 2,279 3,702 5,981 (81) 122 310 6,332 Residential real estate 2,299 6,986 9,285 (316) 211 5,064 14,244 Indirect 5,319 (1,669) 3,650 (1,570) 908 1,465 4,453 Direct 1,863 (1,059) 804 (880) 383 528 835 Home equity 965 689 1,654 (200) 161 228 1,843 Total allowance for credit losses $ 54,619 $ 41,347 $ 95,966 $ (10,677) $ 3,610 $ 39,495 $ 128,394 The provision recapture for the three months ended June 30, 2020 for the commercial 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 in balances in the commercial portfolio (excluding PPP loans) during the quarter. PPP loans were factored in the provision for credit losses for the three months ended June 30, 2020; however, due to the SBA guaranty and our borrowers’ adherence to the PPP terms, the provision impact was insignificant. 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 and six months ended June 30, 2020 was as follows: (dollars in thousands) Three Months Ended Six Months Ended Allowance for credit losses on unfunded loan commitments: Balance at beginning of period $ 8,950 $ 2,656 Impact of adopting ASC 326 — 4,549 Sub-Total 8,950 7,205 Expense (reversal of expense) for credit losses 2,076 3,821 Balance at end of period $ 11,026 $ 11,026 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 June 30, 2020 Commercial: Term Loans at Amortized Cost by Origination Year: Prior to 2016 $ 315,486 $ 8,196 $ 6,818 $ 2,474 $ 1,746 $ 334,720 2016 164,951 4,737 4,641 832 619 175,780 2017 315,876 8,898 16,141 4,139 8,925 353,979 2018 279,110 16,801 11,808 5,219 483 313,421 2019 537,539 8,710 5,960 4,175 — 556,384 2020 1,683,849 2,347 1,133 — — 1,687,329 Revolving Loans 502,947 19,101 13,462 3,067 — 538,577 Revolving to Term Loans 137,905 2,622 6,821 6,106 — 153,454 Total $ 3,937,663 $ 71,412 $ 66,784 $ 26,012 $ 11,773 $ 4,113,644 Commercial real estate: Term Loans at Amortized Cost by Origination Year: Prior to 2016 $ 696,386 $ 17,734 $ 17,006 $ 15,380 $ 3,214 $ 749,720 2016 568,658 7,647 19,770 2,362 9,965 608,402 2017 769,069 53,841 38,710 3,886 4,267 869,773 2018 851,522 12,341 14,757 4,310 3,256 886,186 2019 1,030,103 39,620 2,754 2,172 1,920 1,076,569 2020 678,684 2,326 1,326 — — 682,336 Revolving Loans 27,710 — 244 — — 27,954 Revolving to Term Loans 318,622 6,370 10,647 368 — 336,007 Total $ 4,940,754 $ 139,879 $ 105,214 $ 28,478 $ 22,622 $ 5,236,947 BBCC: Term Loans at Amortized Cost by Origination Year: Prior to 2016 $ 12,140 $ — $ — $ — $ 91 $ 12,231 2016 28,945 765 52 120 — 29,882 2017 42,552 639 196 408 72 43,867 2018 58,668 768 39 380 464 60,319 2019 87,160 1,411 1,199 529 — 90,299 2020 44,309 1,061 232 692 — 46,294 Revolving Loans 48,419 2,685 520 75 — 51,699 Revolving to Term Loans 21,631 1,682 1,110 1,216 — 25,639 Total $ 343,824 $ 9,011 $ 3,348 $ 3,420 $ 627 $ 360,230 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 June 30, 2020 Residential real estate: Term Loans at Amortized Cost by Origination Year: Prior to 2016 $ 783,682 $ 20,693 $ 804,375 2016 258,164 2,201 260,365 2017 263,238 628 263,866 2018 182,395 611 183,006 2019 532,392 117 532,509 2020 184,982 65 185,047 Revolving Loans — — — Revolving to Term Loans 130 — 130 Total $ 2,204,983 $ 24,315 $ 2,229,298 Indirect: Term Loans at Amortized Cost by Origination Year: Prior to 2016 $ 39,794 $ 231 $ 40,025 2016 82,247 651 82,898 2017 133,548 1,018 134,566 2018 176,931 629 177,560 2019 317,495 306 317,801 2020 180,779 — 180,779 Revolving Loans — — — Revolving to Term Loans 94 — 94 Total $ 930,888 $ 2,835 $ 933,723 Direct: Term Loans at Amortized Cost by Origination Year: Prior to 2016 $ 25,369 $ 521 $ 25,890 2016 12,951 278 13,229 2017 24,025 126 24,151 2018 41,987 157 42,144 2019 39,424 53 39,477 2020 21,258 — 21,258 Revolving Loans 26,350 — 26,350 Revolving to Term Loans 2,072 2 2,074 Total $ 193,436 $ 1,137 $ 194,573 Home equity: Term Loans at Amortized Cost by Origination Year: Prior to 2016 $ — $ — $ — 2016 436 225 661 2017 1,067 37 1,104 2018 990 — 990 2019 1,116 30 1,146 2020 — — — Revolving Loans 519,472 274 519,746 Revolving to Term Loans 19,878 3,761 23,639 Total $ 542,959 $ 4,327 $ 547,286 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 June 30, 2020 by class of loans: (dollars in thousands) 30-59 Days 60-89 Days Past Due Total Current Total June 30, 2020 Commercial $ 1,229 $ 845 $ 5,489 $ 7,563 $ 4,106,081 $ 4,113,644 Commercial Real Estate 312 10,728 14,547 25,587 5,211,360 5,236,947 BBCC 828 416 135 1,379 358,851 360,230 Residential 13,331 4,319 9,696 27,346 2,201,952 2,229,298 Indirect 3,187 580 791 4,558 929,165 933,723 Direct 856 260 435 1,551 193,022 194,573 Home equity 1,234 684 1,758 3,676 543,610 547,286 Total $ 20,977 $ 17,832 $ 32,851 $ 71,660 $ 13,544,041 $ 13,615,701 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: January 1, March 31, June 30, 2020 (dollars in thousands) Nonaccrual Nonaccrual Nonaccrual Nonaccrual Past Due Commercial $ 40,103 $ 39,893 $ 37,785 $ 8,163 $ 70 Commercial Real Estate 58,350 51,355 51,100 19,412 330 BBCC 4,530 3,869 4,048 — — Residential 20,970 23,567 24,315 — 42 Indirect 3,318 2,885 2,835 — 175 Direct 1,303 1,195 1,137 59 162 Home equity 3,857 4,223 4,326 32 — Total $ 132,431 $ 126,987 $ 125,546 $ 27,666 $ 779 Interest income recognized on nonaccrual loans was insignificant during the three and six months ended June 30, 2020. 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. A loan is considered collateral dependent when the borrower is experiencing financial difficulty and the loan is expected to be repaid substantially through the operation or sale of the collateral. 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 June 30, 2020 Commercial $ 9,143 $ 19,503 $ 7,628 $ 456 $ 1,107 Commercial Real Estate 38,065 2,251 3,156 — 160 BBCC 1,836 1,936 80 190 — Residential 24,315 — — — — Indirect — — — 2,835 — Direct 862 — 8 255 — Home equity 4,326 — — — — Total loans $ 78,547 $ 23,690 $ 10,872 $ 3,736 $ 1,267 Loan Participations Old National has loan participations, which qualify as participating interests, with other financial institutions. At June 30, 2020, these loans totaled $871.4 million, of which $376.4 million had been sold to other financial institutions and $495.0 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, 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 June 30, 2020: (dollars in thousands) Beginning (Charge-offs)/ (Payments)/ Additions Ending Three Months Ended June 30, 2020 Commercial $ 10,928 $ — $ (330) $ — $ 10,598 Commercial Real Estate 12,848 19 (161) — 12,706 BBCC 562 31 (446) — 147 Residential 3,040 — (28) — 3,012 Indirect — 2 (2) — — Direct 922 — (143) — 779 Home equity 374 1 (8) — 367 Total $ 28,674 $ 53 $ (1,118) $ — $ 27,609 Six Months Ended June 30, 2020 Commercial $ 12,412 $ (694) $ (1,120) $ — $ 10,598 Commercial Real Estate 14,277 (1,253) (318) — 12,706 BBCC 578 31 (462) — 147 Residential 3,107 — (95) — 3,012 Indirect — 5 (5) — — Direct 983 2 (206) — 779 Home equity 381 2 (16) — 367 Total $ 31,738 $ (1,907) $ (2,222) $ — $ 27,609 TDRs included within nonaccrual loans totaled $11.3 million at June 30, 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 June 30, 2020 and $0.9 million at December 31, 2019. At June 30, 2020, Old National had committed to lend an additional $0.7 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 six months ended June 30, 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 six months ended June 30, 2020 and 2019: (dollars in thousands) Total Six Months Ended June 30, 2020 TDR: Number of loans — Pre-modification outstanding recorded investment $ — Post-modification outstanding recorded investment — Six Months Ended June 30, 2019 TDR: Number of loans 12 Pre-modification outstanding recorded investment $ 20,044 Post-modification outstanding recorded investment 20,044 The TDRs that occurred during the six months ended June 30, 2019 decreased the allowance for loan losses by $0.8 million 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 six months ended June 30, 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 agreeme |
