| Loans and Allowance for Credit Losses | NOTE 8 – LOANS AND ALLOWANCE FOR CREDIT LOSSES
Old National’s finance receivables consist primarily of loans
made to consumers and commercial clients in various industries
including manufacturing, agribusiness, transportation, mining,
wholesaling, and retailing. Most of Old National’s lending
activity occurs within our principal geographic markets of Indiana,
western Kentucky and Louisville, east central Illinois, and central
and western Michigan. Old National has no concentration of
commercial loans in any single industry exceeding 10% of its
portfolio.
The composition of loans by lending classification was as
follows:
(dollars in thousands) September 30, December 31,
Commercial (1) $ 1,740,394 $ 1,629,600
Commercial real estate:
Construction 164,247 134,552
Other 1,681,642 1,576,558
Residential real estate 1,640,289 1,519,156
Consumer credit:
Heloc 362,055 360,320
Auto 1,004,989 846,969
Other 140,243 103,338
Covered loans 114,039 147,708
Total loans 6,847,898 6,318,201
Allowance for loan losses (49,515 ) (44,297 )
Allowance for loan losses - covered loans (1,711 ) (3,552 )
Net loans $ 6,796,672 $ 6,270,352
(1) Includes direct finance leases of
$15.5 million at September 30, 2015 and $19.3 million at
December 31, 2014.
The risk characteristics of each loan portfolio segment are as
follows:
Commercial
Commercial loans are primarily based on the identified cash flows
of the borrower and secondarily on the underlying collateral
provided by the borrower. The cash flows of borrowers, however, may
not be as expected and the collateral securing these loans may
fluctuate in value. Most commercial loans are secured by the assets
being financed or other business assets such as accounts receivable
or inventory and may incorporate a personal guarantee; however,
some short-term loans may be made on an unsecured basis. In the
case of loans secured by accounts receivable, the availability of
funds for the repayment of these loans may be substantially
dependent on the ability of the borrower to collect amounts due
from its customers.
Commercial real estate
These loans are viewed primarily as cash flow loans and secondarily
as loans secured by real estate. Commercial real estate lending
typically involves higher loan principal amounts, and the repayment
of these loans is generally dependent on the successful operation
of the property securing the loan or the business conducted on the
property securing the loan. Commercial real estate loans may be
adversely affected by conditions in the real estate markets or in
the general economy. The properties securing Old National’s
commercial real estate portfolio are diverse in terms of type and
geographic location. Management monitors and evaluates commercial
real estate loans based on collateral, geography and risk grade
criteria. As a general rule, Old National avoids financing single
purpose projects unless other underwriting factors are present to
help mitigate risk. In addition, management tracks the level of
owner-occupied commercial real estate loans versus non-owner
occupied loans.
Included with commercial real estate are construction loans, which
are underwritten utilizing feasibility studies, independent
appraisal reviews, sensitivity analysis of absorption and lease
rates, and financial analysis of the developers and property
owners. Construction loans are generally based on estimates of
costs and value associated with the complete project. These
estimates may be inaccurate. Construction loans often involve the
disbursement of substantial funds with repayment substantially
dependent on the success of the ultimate project. Sources of
repayment for these types of loans may be pre-committed permanent
loans from approved long-term lenders, sales of developed property
or an interim loan commitment from Old National until permanent
financing is obtained. These loans are closely monitored by on-site
inspections and are considered to have higher risks than other real
estate loans due to their ultimate repayment being sensitive to
interest rate changes, governmental regulation of real property,
general economic conditions, and the availability of long-term
financing.
Residential
With respect to residential loans that are secured by 1-4 family
residences and are generally owner occupied, Old National typically
establishes a maximum loan-to-value ratio and requires private
mortgage insurance if that ratio is exceeded. Repayment of these
loans is primarily dependent on the personal income of the
borrowers, which can be impacted by economic conditions in their
market areas such as unemployment levels. Repayment can also be
impacted by changes in residential property values. Risk is
mitigated by the fact that the loans are of smaller individual
amounts and spread over a large number of borrowers.
Consumer
Home equity loans are typically secured by a subordinate interest
in 1-4 family residences, and consumer loans are secured by
consumer assets such as automobiles or recreational vehicles. Some
consumer loans are unsecured such as small installment loans and
certain lines of credit. Repayment of these loans is primarily
dependent on the personal income of the borrowers, which can be
impacted by economic conditions in their market areas such as
unemployment levels. Repayment can also be impacted by changes in
residential property values. Risk is mitigated by the fact that the
loans are of smaller individual amounts and spread over a large
number of borrowers.
Covered loans
Covered loans represent loans acquired from the FDIC that are
subject to loss share agreements whereby Old National is
indemnified against 80% of losses up to $275.0 million, losses in
excess of $275.0 million up to $467.2 million at 0% reimbursement,
and 80% of losses in excess of $467.2 million. As of
September 30, 2015, we do not expect losses to exceed $275.0
million. See Note 9 to the consolidated financial statements for
further details on our covered loans.
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.
Effective January 1, 2015, we began using a probability of
default (“PD”)/loss given default (“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 asset quality rating
(“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 adopted the probability of default and loss given default model
for commercial loans because we believe this approach has a
tendency to react more quickly to credit cycle shifts (both
positive and negative). Switching from migration analysis to the
probability of default and loss given default model for our
performing commercial and commercial real estate loans did not have
a material effect on our allowance for loan losses at the date of
adoption.
Prior to January 1, 2015, we used migration analysis as a tool
to determine the adequacy of the allowance for loan losses for
performing commercial and commercial real estate loans. Migration
analysis is a statistical technique that attempts to estimate
probable losses for existing pools of loans by matching actual
losses incurred on loans back to their origination. Judgment is
used to select and weight the historical periods which are most
representative of the current environment.
We calculated migration analysis using several different scenarios
based on varying assumptions to evaluate the widest range of
possible outcomes. The migration-derived historical commercial loan
loss rates were applied to the current commercial loan pools to
arrive at an estimate of probable losses for the loans existing at
the time of analysis. The amounts determined by migration analysis
were adjusted for management’s best estimate of the effects
of current economic conditions, loan quality trends, results from
internal and external review examinations, loan volume trends,
credit concentrations, and various other factors.
We continue to use 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. Purchased credit impaired (“PCI”) loans are not
considered impaired until after the point at which there has been a
degradation of cash flows below our expected cash flows at
acquisition. Impairment on PCI loans would be recognized in the
current period as provision expense.
Old National’s activity in the allowance for loan losses for
the three and nine months ended September 30, 2015 and 2014 is
as follows:
(dollars in thousands) Commercial Commercial Residential Consumer Unallocated Total
Three Months Ended September 30, 2015
Balance at July 1, 2015 $ 23,434 $ 16,325 $ 2,581 $ 7,851 $
— $ 50,191
Charge-offs (251 ) (665 ) (313 ) (1,239 )
— (2,468 )
Recoveries 1,116 1,354 74 792
— 3,336
Provision 1,219 (950 ) (317 ) 215
— 167
Balance at September 30, 2015 $ 25,518 $ 16,064 $ 2,025 $ 7,619 $
— $ 51,226
Three Months Ended September 30, 2014
Balance at July 1, 2014 $ 18,826 $ 17,764 $ 3,573 $ 5,989 $
— $ 46,152
Charge-offs (452 ) (401 ) (192 ) (1,085 )
— (2,130 )
Recoveries 610 445 41 570
— 1,666
Provision 819 776 201 795
— 2,591
Balance at September 30, 2014 $ 19,803 $ 18,584 $ 3,623 $ 6,269 $
— $ 48,279
Nine Months Ended September 30, 2015
Balance at January 1, 2015 $ 20,670 $ 17,348 $ 2,962 $ 6,869 $
— $ 47,849
Charge-offs (2,053 ) (220 ) (709 ) (4,337 )
— (7,319 )
Recoveries 3,061 2,281 161 2,754
— 8,257
Provision 3,840 (3,345 ) (389 ) 2,333
— 2,439
Balance at September 30, 2015 $ 25,518 $ 16,064 $ 2,025 $ 7,619 $
— $ 51,226
Nine Months Ended September 30, 2014
Balance at January 1, 2014 $ 16,565 $ 22,401 $ 3,239 $ 4,940 $
— $ 47,145
Charge-offs (2,525 ) (1,608 ) (391 ) (3,168 )
— (7,692 )
Recoveries 2,196 2,020 150 2,232
— 6,598
Provision 3,567 (4,229 ) 625 2,265
— 2,228
Balance at September 30, 2014 $ 19,803 $ 18,584 $ 3,623 $ 6,269 $
— $ 48,279
The following table provides Old National’s recorded
investment in financing receivables by portfolio segment at
September 30, 2015 and December 31, 2014 and other
information regarding the allowance:
(dollars in thousands) Commercial Commercial Residential Consumer Unallocated Total
September 30, 2015
Allowance for loan losses:
Individually evaluated for impairment $ 7,978 $ 3,402 $
— $
— $
— $ 11,380
Collectively evaluated for impairment 16,817 12,089 2,005 7,350
— 38,261
Noncovered loans acquired with deteriorated credit quality 355 573 13 69
— 1,010
Covered loans acquired with deteriorated credit quality 368
— 7 200
— 575
Total allowance for loan losses $ 25,518 $ 16,064 $ 2,025 $ 7,619 $
— $ 51,226
Loans and leases outstanding:
Individually evaluated for impairment $ 61,739 $ 45,268 $
— $
— $
— $ 107,007
Collectively evaluated for impairment 1,683,685 1,772,904 1,640,307 1,554,695
— 6,651,591
Loans acquired with deteriorated credit quality 1,944 29,587 128 4,337
— 35,996
Covered loans acquired with deteriorated credit quality 3,441 22,410 17,805 9,648
— 53,304
Total loans and leases outstanding $ 1,750,809 $ 1,870,169 $ 1,658,240 $ 1,568,680 $
— $ 6,847,898
December 31, 2014
Allowance for loan losses:
Individually evaluated for impairment $ 7,280 $ 2,945 $
— $
— $
— $ 10,225
Collectively evaluated for impairment 12,163 13,354 2,945 6,519
— 34,981
Noncovered loans acquired with deteriorated credit quality 406 1,049 17 67
— 1,539
Covered loans acquired with deteriorated credit quality 821
—
— 283
— 1,104
Total allowance for loan losses $ 20,670 $ 17,348 $ 2,962 $ 6,869 $
— $ 47,849
Loans and leases outstanding:
Individually evaluated for impairment $ 38,485 $ 45,335 $
— $
— $
— $ 83,820
Collectively evaluated for impairment 1,598,352 1,631,794 1,519,171 1,359,537
— 6,108,854
Loans acquired with deteriorated credit quality 2,770 37,394 133 7,073
— 47,370
Covered loans acquired with deteriorated credit quality 7,160 37,384 21,106 12,507
— 78,157
Total loans and leases outstanding $ 1,646,767 $ 1,751,907 $ 1,540,410 $ 1,379,117 $
— $ 6,318,201
Credit Quality
Old National’s management monitors the credit quality of its
financing receivables in an on-going manner. Internally, management
assigns a credit quality grade to each non-homogeneous commercial
and commercial real estate loan in the portfolio. The primary
determinants of the credit quality grade are based upon the
reliability of the primary source of repayment and the past,
present, and projected financial condition of the borrower. The
credit quality rating also reflects current economic and industry
conditions. Major factors used in determining the grade can vary
based on the nature of the loan, but commonly include factors such
as debt service coverage, internal cash flow, liquidity, leverage,
operating performance, debt burden, FICO scores, occupancy,
interest rate sensitivity, and expense burden. Old National uses
the following definitions for risk ratings:
Criticized
Classified – Substandard
Classified – Nonaccrual
Classified – Doubtful
Pass rated loans are those loans that are other than criticized,
classified – substandard, classified - nonaccrual or
classified – doubtful.
As of September 30, 2015 and December 31, 2014, the risk
category of commercial and commercial real estate loans, excluding
covered loans, by class of loans is as follows:
(dollars in thousands)
Commercial
Commercial
Corporate Credit Exposure Credit Risk Profile by Commercial Real Estate - Construction Real Estate - Other
September 30, December 31, September 30, December 31, September 30, December 31,
Grade:
Pass $ 1,584,973 $ 1,442,904 $ 155,134 $ 119,958 $ 1,491,759 $ 1,374,191
Criticized 51,645 89,775 3,738 2,229 84,082 102,805
Classified - substandard 46,273 58,461 2,817 5,866 55,050 38,659
Classified - nonaccrual 54,931 38,003 2,558 6,499 49,721 59,771
Classified - doubtful 2,572 457
—
— 1,030 1,132
Total $ 1,740,394 $ 1,629,600 $ 164,247 $ 134,552 $ 1,681,642 $ 1,576,558
Old National considers the performance of the loan portfolio and
its impact on the allowance for loan losses. For residential and
consumer loan classes, Old National also evaluates credit quality
based on the aging status of the loan and by payment activity. The
following table presents the recorded investment in residential and
consumer loans based on payment activity as of September 30,
2015 and December 31, 2014, excluding covered loans:
(dollars in thousands) Residential Consumer
Heloc Auto Other
September 30, 2015
Performing $ 1,624,740 $ 359,315 $ 1,003,594 $ 138,757
Nonperforming 15,549 2,740 1,395 1,486
Total $ 1,640,289 $ 362,055 $ 1,004,989 $ 140,243
December 31, 2014
Performing $ 1,505,188 $ 357,205 $ 845,708 $ 101,811
Nonperforming 13,968 3,115 1,261 1,527
Total $ 1,519,156 $ 360,320 $ 846,969 $ 103,338
Impaired Loans
Large commercial credits are subject to individual evaluation for
impairment. Retail credits and other small balance credits that are
part of a homogeneous group are not tested for individual
impairment unless they are modified as a troubled debt
restructuring. A loan is considered impaired when it is probable
that contractual interest and principal payments will not be
collected either for the amounts or by the dates as scheduled in
the loan agreement. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported net, at the
present value of estimated cash flows using the loan’s
existing rate or at the fair value of collateral if repayment is
expected solely from the collateral. Old National’s policy,
for all but purchased credit impaired loans, is to recognize
interest income on impaired loans unless the loan is placed on
nonaccrual status.
The following table shows Old National’s impaired loans,
excluding covered loans, which are individually evaluated as of
September 30, 2015 and December 31, 2014, respectively.
Of the loans purchased without FDIC loss share coverage, only those
that have experienced subsequent impairment since the date acquired
are included in the table below.
(dollars in thousands) Recorded Unpaid Related
September 30, 2015
With no related allowance recorded:
Commercial $ 32,592 $ 33,564 $
—
Commercial Real Estate - Construction 781 781
—
Commercial Real Estate - Other 32,460 35,736
—
Residential 1,159 1,180
—
Consumer 770 875
—
With an allowance recorded:
Commercial 24,707 24,724 7,141
Commercial Real Estate - Construction 243 243 1
Commercial Real Estate - Other 11,785 11,835 3,402
Residential 1,053 1,053 53
Consumer 2,229 2,229 111
Total Loans $ 107,779 $ 112,220 $ 10,708
December 31, 2014
With no related allowance recorded:
Commercial $ 25,483 $ 25,854 $
—
Commercial Real Estate - Construction 2,168 1,397
—
Commercial Real Estate - Other 28,637 30,723
—
Residential 588 658
—
Consumer 685 748
—
With an allowance recorded:
Commercial 7,471 10,488 4,883
Commercial Real Estate - Construction 98 98 11
Commercial Real Estate - Other 14,432 16,503 2,934
Residential 1,476 1,476 74
Consumer 1,543 1,543 77
Total Loans $ 82,581 $ 89,488 $ 7,979
The average balance of impaired loans, excluding covered loans, and
interest income recognized on impaired loans during the three
months ended September 30, 2015 and 2014 are included in the
table below.
(dollars in thousands) Average Interest
Three Months Ended September 30, 2015
With no related allowance recorded:
Commercial $ 33,128 $ 105
Commercial Real Estate - Construction 1,122 7
Commercial Real Estate - Other 33,235 240
Residential 999
—
Consumer 836 5
With an allowance recorded:
Commercial 29,978 (39 )
Commercial Real Estate - Construction 331
—
Commercial Real Estate - Other 12,656 25
Residential 1,330 11
Consumer 1,775 15
Total Loans $ 115,390 $ 369
Three Months Ended September 30, 2014
With no related allowance recorded:
Commercial $ 16,456 $ 227
Commercial Real Estate - Construction 914 (15 )
Commercial Real Estate - Other 21,212 308
Residential 98
—
Consumer 349 2
With an allowance recorded:
Commercial 11,782 152
Commercial Real Estate - Construction 467 15
Commercial Real Estate - Other 16,313 119
Residential 2,215 6
Consumer 1,426 16
Total Loans $ 71,232 $ 830
(1) The Company does not record interest
on nonaccrual loans until principal is recovered.
The average balance of impaired loans, excluding covered loans, and
interest income recognized on impaired loans during the nine months
ended September 30, 2015 and 2014 are included in the table
below.
(dollars in thousands) Average Interest
Nine Months Ended September 30, 2015
With no related allowance recorded:
Commercial $ 29,878 $ 232
Commercial Real Estate - Construction 1,475 10
Commercial Real Estate - Other 32,440 514
Residential 873 2
Consumer 728 7
With an allowance recorded:
Commercial 16,090 364
Commercial Real Estate - Construction 171 1
Commercial Real Estate - Other 13,109 147
Residential 1,264 37
Consumer 1,886 64
Total Loans $ 97,914 $ 1,378
Nine Months Ended September 30, 2014
With no related allowance recorded:
Commercial $ 26,740 $ 261
Commercial Real Estate - Construction 526
—
Commercial Real Estate - Other 28,037 468
Residential 102
—
Consumer 330 6
With an allowance recorded:
Commercial 10,917 260
Commercial Real Estate - Construction 467 15
Commercial Real Estate - Other 16,501 283
Residential 2,146 47
Consumer 1,133 42
Total Loans $ 86,899 $ 1,382
(1) The Company does not record interest
on nonaccrual loans until principal is recovered.
For all loan classes, a loan is generally placed on nonaccrual
status when principal or interest becomes 90 days past due unless
it is well secured and in the process of collection, or earlier
when concern exists as to the ultimate collectibility of principal
or interest. Interest accrued during the current year on such loans
is reversed against earnings. Interest accrued in the prior year,
if any, is charged to the allowance for loan losses. Cash interest
received on these loans is applied to the principal balance until
the principal is recovered or until the loan returns to accrual
status. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current, remain
current for six months and future payments are reasonably
assured.
Loans accounted for under FASB ASC Topic 310-30 accrue interest,
even though they may be contractually past due, as any nonpayment
of contractual principal or interest is considered in the periodic
re-estimation of expected cash flows and is included in the
resulting recognition of current period covered loan loss provision
or prospective yield adjustments. Similar to noncovered loans,
covered loans accounted for outside FASB ASC Topic 310-30 are
classified as nonaccrual when, in the opinion of management,
collection of principal or interest is doubtful. Information for
covered loans accounted for both under and outside FASB ASC Topic
310-30 is included in the table below in the row labeled covered
loans.
Old National’s past due financing receivables as of
September 30, 2015 and December 31, 2014 are as
follows:
(dollars in thousands) 30-59 Days 60-89 Days Recorded Nonaccrual Total Current
September 30, 2015
Commercial $ 815 $ 373 $ 114 $ 57,503 $ 58,805 $ 1,681,589
Commercial Real Estate:
Construction 531 92
— 2,558 3,181 161,066
Other 1,546 3,953 54 50,751 56,304 1,625,338
Residential 10,578 1,846 172 15,549 28,145 1,612,144
Consumer:
Heloc 735 430 19 2,740 3,924 358,131
Auto 3,254 694 197 1,395 5,540 999,449
Other 913 167 13 1,486 2,579 137,664
Covered loans 855 472
— 8,682 10,009 104,030
Total loans $ 19,227 $ 8,027 $ 569 $ 140,664 $ 168,487 $ 6,679,411
December 31, 2014
Commercial $ 649 $ 813 $ 33 $ 38,460 $ 39,955 $ 1,589,645
Commercial Real Estate:
Construction
—
—
— 6,499 6,499 128,053
Other 3,834 1,468 138 60,903 66,343 1,510,215
Residential 11,606 3,959 1 13,968 29,534 1,489,622
Consumer:
Heloc 577 376
— 3,115 4,068 356,252
Auto 3,349 695 203 1,261 5,508 841,461
Other 969 129 83 1,527 2,708 100,630
Covered loans 1,477 584
— 15,124 17,185 130,523
Total loans $ 22,461 $ 8,024 $ 458 $ 140,857 $ 171,800 $ 6,146,401
Loan Participations
Old National has loan participations, which qualify as
participating interests, with other financial institutions. At
September 30, 2015, these loans totaled $317.8 million, of
which $171.4 million had been sold to other financial institutions
and $146.4 million was retained by Old National. The loan
participations convey proportionate ownership rights with equal
priority to each participating interest holder, involve no recourse
(other than ordinary representations and warranties) to, or
subordination by, any participating interest holder, all cash flows
are divided among the participating interest holders in proportion
to each holder’s share of ownership and no holder has the
right to pledge the entire financial asset unless all participating
interest holders agree.
Troubled Debt Restructurings
Old National may choose to restructure the contractual terms of
certain loans. The decision to restructure a loan, versus
aggressively enforcing the collection of the loan, may benefit Old
National by increasing the ultimate probability of collection.
Any loans that are modified are reviewed by Old National to
identify if a troubled debt restructuring (“TDR”) has
occurred, which is when for economic or legal reasons related to a
borrower’s financial difficulties, the Bank grants a
concession to the borrower that it would not otherwise consider.
Terms may be modified to fit the ability of the borrower to repay
in line with its current financial status. 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. It is Old National’s policy to charge off
small commercial loans scored through our small business credit
center with contractual balances under $250,000 that have been
placed on nonaccrual status or became 90 days or more delinquent,
without regard to the collateral position. For residential and
consumer loans, a charge off is recorded at the time foreclosure is
initiated or when the loan becomes 120 to 180 days past due,
whichever is earlier.
For commercial TDRs, an allocated reserve is established within the
allowance for loan losses for the difference between the carrying
value of the loan and its computed 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 troubled
debt restructuring, the loan is written down to its collateral
value less selling costs.
The following table presents activity in TDRs for the nine months
ended September 30, 2015 and 2014:
(dollars in thousands) Commercial Commercial Residential Consumer Total
Nine Months Ended September 30, 2015
Balance at January 1, 2015 $ 15,205 $ 15,226 $ 2,063 $ 2,459 $ 34,953
(Charge-offs)/recoveries 89 825 (40 ) (6 ) 868
Payments (13,064 ) (4,709 ) (614 ) (1,035 ) (19,422 )
Additions 29,956 3,774 792 1,797 36,319
Balance at September 30, 2015 $ 32,186 $ 15,116 $ 2,201 $ 3,215 $ 52,718
Nine Months Ended September 30, 2014
Balance at January 1, 2014 $ 22,443 $ 22,639 $ 2,344 $ 1,441 $ 48,867
(Charge-offs)/recoveries (172 ) (266 ) 3 (83 ) (518 )
Payments (12,998 ) (5,200 ) (370 ) (390 ) (18,958 )
Additions 11,695 2,704 175 1,034 15,608
Balance at September 30, 2014 $ 20,968 $ 19,877 $ 2,152 $ 2,002 $ 44,999
Approximately $38.6 million of the TDRs at September 30, 2015
were included with nonaccrual loans, compared to $22.1 million at
December 31, 2014. Old National has allocated specific
reserves to customers whose loan terms have been modified in TDRs
totaling $3.8 million at September 30, 2015 and $2.8 million
at December 31, 2014. As of September 30, 2015, Old
National had committed to lend an additional $2.5 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 nine months ended
September 30, 2015 and 2014 are the same since the loan
modifications did not involve the forgiveness of principal. Old
National did not record any charge-offs at the modification date.
The following table presents loans by class modified as TDRs that
occurred during the nine months ended September 30, 2015:
(dollars in thousands) Number Pre-modification Post-modification
Troubled Debt Restructuring:
Commercial 25 $ 29,956 $ 29,956
Commercial Real Estate - Construction 5 1,162 1,162
Commercial Real Estate - Other 21 2,612 2,612
Residential 8 792 792
Consumer 26 1,797 1,797
Total 85 $ 36,319 $ 36,319
The TDRs described above increased the allowance for loan losses by
$0.6 million and resulted in immaterial charge-offs during the nine
months ended September 30, 2015.
The following table presents loans by class modified as TDRs that
occurred during the nine months ended September 30, 2014:
(dollars in thousands) Number Pre-modification Post-modification
Troubled Debt Restructuring:
Commercial 27 $ 11,695 $ 11,695
Commercial Real Estate - Construction 1 484 484
Commercial Real Estate - Other 22 2,221 2,221
Residential 2 175 175
Consumer 21 1,033 1,033
Total 73 $ 15,608 $ 15,608
The TDRs described above increased the allowance for loan losses by
$0.4 million and resulted in immaterial charge-offs during the nine
months ended September 30, 2014.
A loan is considered to be in payment default once it is 90 days
contractually past due under the modified terms.
There were three commercial loans and six commercial real estate
loans totaling $2.1 million that were modified as TDRs within the
preceding twelve months, and for which there was a payment default
during the nine months ended September 30, 2015.
There was one commercial real estate loan that was modified as a
TDR during the nine months ended September 30, 2014 for which
there was a payment default within the last twelve months. The
impact of the default was immaterial.
The terms of certain other loans were modified during the nine
months ended September 30, 2015 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 if
the delay in a payment was 90 days or less.
PCI loans are not considered impaired until after the point at
which there has been a degradation of cash flows below our expected
cash flows at acquisition. If a PCI loan is subsequently modified,
and meets the definition of a TDR, it will be removed from PCI
accounting and accounted for as a TDR only if the PCI loan was
being accounted for individually. If the purchased credit impaired
loan is being accounted for as part of a pool, it will not be
removed from the pool. As of September 30, 2015, 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,
recent guidance also permits for loans to be removed from TDR
status 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
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