| 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,
Kentucky, and 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:
March
31,
December 31,
(dollars in thousands) 2016 2015
Commercial (1) $ 1,784,970 $ 1,804,615
Commercial real estate:
Construction 202,278 185,449
Other 1,705,556 1,662,372
Residential real estate 1,634,132 1,644,614
Consumer credit:
Heloc 347,776 359,954
Auto 1,109,883 1,050,336
Other 127,076 133,478
Covered loans 95,403 107,587
Total loans 7,007,074 6,948,405
Allowance for loan losses (49,856 ) (51,296 )
Allowance for loan losses - covered loans (844 ) (937 )
Net loans $ 6,956,374 $ 6,896,172
(1) Includes direct finance leases of
$13.4 million at March 31, 2016 and $14.4 million at December 31,
2015.
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 or other collateral
values. Risk is mitigated by the fact that the loans are of
smaller individual amounts and spread over a large number of
borrowers.
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. Our losses will
not 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.
We utilize a probability of default (“PD”) and 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 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 months ended March 31, 2016 and 2015 is as follows:
Commercial
(dollars in thousands) Commercial Real Estate Residential Consumer Unallocated Total
Three Months Ended March 31, 2016
Balance at January 1, 2016 $ 26,347 $ 15,993 $ 2,051 $ 7,842 $
— $ 52,233
Charge-offs (1,527 ) (279 ) (140 ) (1,996 )
— (3,942 )
Recoveries 818 840 26 634
— 2,318
Provision (517 ) (783 ) (188 ) 1,579
— 91
Balance at March 31, 2016 $ 25,121 $ 15,771 $ 1,749 $ 8,059 $
— $ 50,700
Three Months Ended March 31, 2015
Balance at January 1, 2015 $ 20,670 $ 17,348 $ 2,962 $ 6,869 $
— $ 47,849
Charge-offs (548 ) 413 (374 ) (1,604 )
— (2,113 )
Recoveries 1,774 464 28 875
— 3,141
Provision 2,807 (4,418 ) 303 1,309
— 1
Balance at March 31, 2015 $ 24,703 $ 13,807 $ 2,919 $ 7,449 $
— $ 48,878
The following table provides Old National’s recorded
investment in financing receivables by portfolio segment at March
31, 2016 and December 31, 2015 and other information regarding the
allowance:
Commercial
(dollars in thousands) Commercial Real Estate Residential Consumer Unallocated Total
March 31, 2016
Allowance for loan losses:
Individually evaluated for impairment $ 7,016 $ 3,468 $
— $
— $
— $ 10,484
Collectively evaluated for impairment 17,523 12,110 1,729 7,846
— 39,208
Noncovered loans acquired with deteriorated credit quality 192 193 13 77
— 475
Covered loans acquired with deteriorated credit quality 390
— 7 136
— 533
Total allowance for loan losses $ 25,121 $ 15,771 $ 1,749 $ 8,059 $
— $ 50,700
Loans and leases outstanding:
Individually evaluated for impairment $ 53,022 $ 41,022 $
— $
— $
— $ 94,044
Collectively evaluated for impairment 1,737,377 1,843,821 1,634,184 1,629,730
— 6,845,112
Loans acquired with deteriorated credit quality 674 24,431 86 3,564
— 28,755
Covered loans acquired with deteriorated credit quality 1,915 13,480 15,726 8,042
— 39,163
Total loans and leases outstanding $ 1,792,988 $ 1,922,754 $ 1,649,996 $ 1,641,336 $
— $ 7,007,074
December 31, 2015
Allowance for loan losses:
Individually evaluated for impairment $ 7,467 $ 4,021 $
— $
— $
— $ 11,488
Collectively evaluated for impairment 18,295 11,439 2,038 7,614
— 39,386
Noncovered loans acquired with deteriorated credit quality 247 533 13 70
— 863
Covered loans acquired with deteriorated credit quality 338
—
— 158
— 496
Total allowance for loan losses $ 26,347 $ 15,993 $ 2,051 $ 7,842 $
— $ 52,233
Loans and leases outstanding:
Individually evaluated for impairment $ 60,959 $ 41,987 $
— $
— $
— $ 102,946
Collectively evaluated for impairment 1,750,397 1,779,062 1,644,631 1,590,288
— 6,764,378
Loans acquired with deteriorated credit quality 691 28,499 127 3,925
— 33,242
Covered loans acquired with deteriorated credit quality 2,893 19,424 16,577 8,945
— 47,839
Total loans and leases outstanding $ 1,814,940 $ 1,868,972 $ 1,661,335 $ 1,603,158 $
— $ 6,948,405
Credit Quality
Old National’s management monitors the credit quality of its
financing receivables in an on-going manner. Internally, management
assigns an asset quality rating (“AQR”) to each
non-homogeneous commercial and commercial real estate loan in the
portfolio. The primary determinants of the AQR are based upon the
reliability of the primary source of repayment and the past,
present, and projected financial condition of the borrower. The AQR
also reflects current economic and 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
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 March 31, 2016 and December 31, 2015, 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
Real Estate
- Real Estate
-
Corporate Credit
Exposure Commercial Construction Other
Credit Risk Profile
by March
31,
December 31, March
31,
December 31, March
31,
December 31,
Internally Assigned
Grade 2016 2015 2016 2015 2016 2015
Grade:
Pass $ 1,656,554 $ 1,668,667 $ 196,052 $ 179,543 $ 1,540,250 $ 1,491,750
Criticized 54,746 54,606 3,251 3,300 72,951 74,992
Classified - substandard 24,004 23,806 2,293 1,857 49,347 49,029
Classified - nonaccrual 47,774 55,067 682 749 34,044 39,164
Classified - doubtful 1,892 2,469
—
— 8,964 7,437
Total $ 1,784,970 $ 1,804,615 $ 202,278 $ 185,449 $ 1,705,556 $ 1,662,372
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
March 31, 2016 and December 31, 2015, excluding covered loans:
(dollars in thousands) Residential Consumer
Heloc Auto Other
March 31, 2016
Performing $ 1,619,917 $ 345,630 $ 1,108,568 $ 126,106
Nonperforming 14,215 2,146 1,315 970
Total $ 1,634,132 $ 347,776 $ 1,109,883 $ 127,076
December 31, 2015
Performing $ 1,629,661 $ 357,585 $ 1,048,763 $ 132,222
Nonperforming 14,953 2,369 1,573 1,256
Total $ 1,644,614 $ 359,954 $ 1,050,336 $ 133,478
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, as of March 31, 2016 and December 31,
2015, 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.
Unpaid
Recorded
Principal Related
(dollars in thousands) Investment Balance Allowance
March 31, 2016
With no related allowance recorded:
Commercial $ 28,921 $ 30,140 $
—
Commercial Real Estate - Construction
—
—
—
Commercial Real Estate - Other 27,351 30,593
—
Residential 1,342 1,363
—
Consumer 838 998
—
With an allowance recorded:
Commercial 20,188 20,198 6,784
Commercial Real Estate - Construction 231 231 1
Commercial Real Estate - Other 13,441 13,523 3,467
Residential 1,016 1,016 51
Consumer 2,776 2,776 139
Total $ 96,104 $ 100,838 $ 10,442
December 31, 2015
With no related allowance recorded:
Commercial $ 40,414 $ 41,212 $
—
Commercial Real Estate - Construction
—
—
—
Commercial Real Estate - Other 26,998 30,264
—
Residential 1,383 1,422
—
Consumer 1,201 1,305
—
With an allowance recorded:
Commercial 16,377 16,483 7,111
Commercial Real Estate - Construction 237 237 6
Commercial Real Estate - Other 14,752 14,802 4,015
Residential 985 985 49
Consumer 2,525 2,525 126
Total $ 104,872 $ 109,235 $ 11,307
The average balance of impaired loans, excluding covered loans, and
interest income recognized on impaired loans during the three
months ended March 31, 2016 and 2015 are included in the table
below.
Average Interest
Recorded Income
(dollars in thousands) Investment Recognized (1)
Three Months Ended March 31, 2016
With no related allowance recorded:
Commercial $ 34,085 $ 28
Commercial Real Estate - Construction
—
—
Commercial Real Estate - Other 27,149 95
Residential 1,362
—
Consumer 1,019 2
With an allowance recorded:
Commercial 18,283 13
Commercial Real Estate - Construction 234
—
Commercial Real Estate - Other 14,097 48
Residential 1,001 38
Consumer 2,651 38
Total $ 99,881 $ 262
Three Months Ended March 31, 2015
With no related allowance recorded:
Commercial $ 26,849 $ 42
Commercial Real Estate - Construction 2,250 3
Commercial Real Estate - Other 38,801 85
Residential 747
—
Consumer 731 1
With an allowance recorded:
Commercial 11,516 48
Commercial Real Estate - Construction 166
—
Commercial Real Estate - Other 10,728 1
Residential 1,475 61
Consumer 1,492 20
Total $ 94,755 $ 261
(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 may be 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 March 31,
2016 and December 31, 2015 are as follows:
Recorded
Investment >
30-59 Days
60-89 Days 90
Days and
Total
(dollars in thousands) Past Due Past Due Accruing Nonaccrual Past Due Current
March 31, 2016
Commercial $ 1,625 $ 58 $
— $ 49,666 $ 51,349 $ 1,733,621
Commercial Real Estate:
Construction 693
—
— 682 1,375 200,903
Other 4,231 27 80 43,008 47,346 1,658,210
Residential 8,608 40 150 14,215 23,013 1,611,119
Consumer:
Heloc 1,093 75
— 2,146 3,314 344,462
Auto 2,792 372 100 1,315 4,579 1,105,304
Other 495 99 27 970 1,591 125,485
Covered loans 734
—
— 5,864 6,598 88,805
Total loans $ 20,271 $ 671 $ 357 $ 117,866 $ 139,165 $ 6,867,909
December 31, 2015
Commercial $ 802 $ 100 $ 565 $ 57,536 $ 59,003 $ 1,745,612
Commercial Real Estate:
Construction
—
—
— 749 749 184,700
Other 438 135
— 46,601 47,174 1,615,198
Residential 9,300 2,246 114 14,953 26,613 1,618,001
Consumer:
Heloc 283 402
— 2,369 3,054 356,900
Auto 3,804 730 202 1,573 6,309 1,044,027
Other 830 165 25 1,256 2,276 131,202
Covered loans 809 312 10 7,336 8,467 99,120
Total loans $ 16,266 $ 4,090 $ 916 $ 132,373 $ 153,645 $ 6,794,760
Loan Participations
Old National has loan participations, which qualify as
participating interests, with other financial institutions. At
March 31, 2016, these loans totaled $314.5 million, of which $173.8
million had been sold to other financial institutions and $140.7
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. Old National charges 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 three months
ended March 31, 2016 and 2015:
Commercial
(dollars in thousands) Commercial Real Estate Residential Consumer Total
Three Months Ended March 31, 2016
Balance at January 1, 2016 $ 23,354 $ 14,602 $ 2,693 $ 3,602 $ 44,251
(Charge-offs)/recoveries (826 ) 62 32 (18 ) (750 )
Payments (3,565 ) (1,106 ) (348 ) (309 ) (5,328 )
Additions 1,542 9,476 133 385 11,536
Balance at March 31, 2016 $ 20,505 $ 23,034 $ 2,510 $ 3,660 $ 49,709
Three Months Ended March 31, 2015
Balance at January 1, 2015 $ 15,205 $ 15,226 $ 2,063 $ 2,459 $ 34,953
(Charge-offs)/recoveries 586 248 (15 ) (11 ) 808
Payments (2,198 ) (1,608 ) (33 ) (164 ) (4,003 )
Additions 1,741 1,573 352 174 3,840
Balance at March 31, 2015 $ 15,334 $ 15,439 $ 2,367 $ 2,458 $ 35,598
Approximately $35.7 million of the TDRs at March 31, 2016 were
included with nonaccrual loans, compared to $30.0 million at
December 31, 2015. Old National has allocated specific
reserves to customers whose loan terms have been modified in TDRs
totaling $4.4 million at March 31, 2016 and $2.3 million at
December 31, 2015. As of March 31, 2016, Old National had
committed to lend an additional $2.8 million to customers with
outstanding loans that are classified as TDRs.
The pre-modification and post-modification outstanding recorded
investments of loans modified as TDRs during the three months ended
March 31, 2016 and 2015 are the same except for when the loan
modifications involve the forgiveness of principal. The
following table presents loans by class modified as TDRs that
occurred during the three months ended March 31, 2016:
Pre-modification Post-modification
Number
Outstanding Recorded
Outstanding Recorded
(dollars in thousands) of Loans Investment Investment
Troubled Debt Restructuring:
Commercial 10 $ 1,542 $ 990
Commercial Real Estate - Other 7 9,476 9,476
Residential 1 133 133
Consumer 8 385 385
Total 26 $ 11,536 $ 10,984
The TDRs described above increased the allowance for loan losses by
$0.2 million and resulted in $0.6 million of charge-offs during the
three months ended March 31, 2016.
The following table presents loans by class modified as TDRs that
occurred during the three months ended March 31, 2015:
Pre-modification Post-modification
Number
Outstanding Recorded
Outstanding Recorded
(dollars in thousands) of Loans Investment Investment
Troubled Debt Restructuring:
Commercial 11 $ 1,741 $ 1,741
Commercial Real Estate - Construction 5 1,187 1,187
Commercial Real Estate - Other 5 385 385
Residential 2 366 366
Consumer 6 161 161
Total 29 $ 3,840 $ 3,840
The TDRs described above resulted in immaterial changes in the
allowance for loan losses and charge-offs during the three months
ended March 31, 2015.
A loan is considered to be in payment default once it is 90 days
contractually past due under the modified terms.
There were four commercial loans and three commercial real estate
loans totaling $0.6 million that were modified as TDRs within the
preceding twelve months, and for which there was a payment default
during the three months ended March 31, 2016.
There were three commercial loans and one commercial real estate
loan totaling $0.3 million that were modified as TDRs within the
preceding twelve months, and for which there was a payment default
during the three months ended March 31, 2015.
The terms of certain other loans were modified during the three
months ended March 31, 2016 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 March 31, 2016, 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 when subsequently restructured under these circumstances:
(1) at the time of the subsequent restructuring, the borrower is
not experiencing financial difficulties, and this is documented by
a current credit evaluation at the time of the restructuring, (2)
under the terms of the subsequent restructuring agreement, the
institution has granted no concession to the borrower; and (3) the
subsequent restructuring agreement includes market terms that are
no less favorable than those that would be offered for a comparable
new loan. For loans subsequently restructured that have cumulative
principal forgiveness, the loan should continue to be measured in
accordance with ASC 310-10, “Receivables –
Overall”. However, consistent with ASC 310-40-50-2,
“Troubled Debt Restructurings by Creditors, Creditor
Disclosure of Troubled Debt Restructurings,” the loan would
not be required to be reported in the years following the
restructuring if the subsequent restructuring meets both of these
criteria: (1) has an interest rate at the time of the subsequent
restructuring that is not less than a market interest rate; and (2)
is performing in compliance with its modified terms after the
subsequent restructuring.
Purchased Impaired Loans (noncovered loans)
Purchased loans acquired in a business combination are recorded at
estimated fair value on their purchase date with no carryover of
the related allowance for loan and lease losses. In
determining the estimated fair value of purchased loans, management
considers a number of factors including, among others, the
remaining life of the acquired loans, estimated prepayments,
estimated loss ratios, estimated value of the underlying
collateral, and net present value of cash flows expected to be
received. Purchased loans are accounted for in accordance with
guidance for certain loans acquired in a transfer (ASC 310-30),
when the loans have evidence of credit deterioration since
origination and it is probable at the date of acquisition that the
acquirer will not collect all contractually required principal and
interest payments. The difference between contractually
required payments and the cash flows expected to be collected at
acquisition is referred to as the non-accretable
difference. Subsequent decreases to the expected cash flows
will generally result in a provision for loan and lease
losses. Subsequent increases in expected cash flows will
result in a reversal of the provision for loan losses to the extent
of prior charges and then an adjustment to accretable yield, which
would have a positive impact on interest income.
Old National has purchased loans for which there was, at
acquisition, evidence of deterioration of credit quality since
origination and it was probable, at acquisition, that all
contractually required payments would not be collected. For
these noncovered loans that meet the criteria of ASC 310-30
treatment, the carrying amount is as follows:
March 31,
December 31,
(dollars in thousands) 2016 2015
Commercial $ 674 $ 691
Commercial real estate 24,431 28,499
Residential 86 127
Consumer 3,564 3,925
Carrying amount 28,755 33,242
Allowance for loan losses (475 ) (863 )
Carrying amount, net of allowance $ 28,280 $ 32,379
The outstanding balance of noncovered loans accounted for under ASC
310-30, including contractual principal, interest, fees and
penalties, was $105.0 million at March 31, 2016 and $107.1 million
at December 31, 2015.
The accretable difference on purchased loans acquired in a business
combination is the difference between the expected cash flows and
the net present value of expected cash flows with such difference
accreted into earnings using the effective yield method over the
term of the loans. Accretion recorded as loan interest income
totaled $2.5 million during the three months ended March 31, 2016
and $2.9 million dur |
