| 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, Michigan, and Wisconsin. Old National has no
concentration of commercial or commercial real estate loans in any
single industry exceeding 10% of its portfolio.
The composition of loans by lending classification was as
follows:
June 30,
December 31,
(dollars in thousands) 2016 2015
Commercial (1) $ 1,893,700 $ 1,804,615
Commercial real estate:
Construction 263,496 185,449
Other 2,680,029 1,662,372
Residential real estate 2,099,770 1,644,614
Consumer credit:
Heloc 473,550 359,954
Auto 1,145,198 1,050,336
Other 274,415 133,478
Covered loans
— 107,587
Total loans 8,830,158 6,948,405
Allowance for loan losses (51,804 ) (51,296 )
Allowance for loan losses - covered loans
— (937 )
Net loans $ 8,778,354 $ 6,896,172
(1) Includes direct finance leases of
$12.7 million at June 30, 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. 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, 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. We
assumed student loans in the acquisition of Anchor in May 2016. As
of June 30, 2016, student loans totaled $83.3 million and are
guaranteed by the government on average from 97% to 100%. 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
Old National entered into an agreement with the FDIC on
June 22, 2016 to terminate its loss share agreements. As a
result of the termination of the loss share agreements, the
remaining loans that were covered by the loss share arrangements
were reclassified to noncovered loans effective June 22, 2016.
All future gains and losses associated with covered loans will be
recognized entirely by Old National.
Prior to the termination of the loss share agreements, certain
loans acquired from the FDIC were classified as covered loans.
Covered loans were subject to loss share agreements whereby Old
National was 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.
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. An allowance for loan losses will be established for any
subsequent credit deterioration or adverse changes in expected cash
flows.
Old National’s activity in the allowance for loan losses for
the three and six months ended June 30, 2016 and 2015 is as
follows:
Commercial
(dollars in thousands) Commercial Real Estate Residential Consumer Unallocated Total
Three Months Ended June 30, 2016
Balance at April 1, 2016 $ 25,121 $ 15,771 $ 1,749 $ 8,059 $
— $ 50,700
Charge-offs (432 ) (783 ) (80 ) (1,382 )
— (2,677 )
Recoveries 876 547 187 852
— 2,462
Provision (1,409 ) 2,673 (397 ) 452
— 1,319
Balance at June 30, 2016 $ 24,156 $ 18,208 $ 1,459 $ 7,981 $
— $ 51,804
Three Months Ended June 30, 2015
Balance at April 1, 2015 $ 24,703 $ 13,807 $ 2,919 $ 7,449 $
— $ 48,878
Charge-offs (1,872 ) (514 ) (22 ) (1,494 )
— (3,902 )
Recoveries 789 1,009 59 1,087
— 2,944
Provision (186 ) 2,023 (375 ) 809
— 2,271
Balance at June 30, 2015 $ 23,434 $ 16,325 $ 2,581 $ 7,851 $
— $ 50,191
Six Months Ended June 30, 2016
Balance at January 1, 2016 $ 26,347 $ 15,993 $ 2,051 $ 7,842 $
— $ 52,233
Charge-offs (1,959 ) (1,062 ) (220 ) (3,378 )
— (6,619 )
Recoveries 1,694 1,387 213 1,486
— 4,780
Provision (1,926 ) 1,890 (585 ) 2,031
— 1,410
Balance at June 30, 2016 $ 24,156 $ 18,208 $ 1,459 $ 7,981 $
— $ 51,804
Six Months Ended June 30, 2015
Balance at January 1, 2015 $ 20,670 $ 17,348 $ 2,962 $ 6,869 $
— $ 47,849
Charge-offs (2,421 ) (101 ) (396 ) (3,098 )
— (6,016 )
Recoveries 2,564 1,473 87 1,962
— 6,086
Provision 2,621 (2,395 ) (72 ) 2,118
— 2,272
Balance at June 30, 2015 $ 23,434 $ 16,325 $ 2,581 $ 7,851 $
— $ 50,191
The following table provides Old National’s recorded
investment in financing receivables by portfolio segment at
June 30, 2016 and December 31, 2015 and other information
regarding the allowance:
Commercial
(dollars in thousands) Commercial Real Estate Residential Consumer Unallocated Total
June 30, 2016
Allowance for loan losses:
Individually evaluated for impairment $ 7,489 $ 3,949 $
— $
— $
— $ 11,438
Collectively evaluated for impairment 16,374 14,082 1,446 7,781
— 39,683
Loans acquired with deteriorated credit quality 293 177 13 200
— 683
Total allowance for loan losses $ 24,156 $ 18,208 $ 1,459 $ 7,981 $
— $ 51,804
Loans and leases outstanding:
Individually evaluated for impairment $ 52,132 $ 60,359 $
— $
— $
— $ 112,491
Collectively evaluated for impairment 1,839,760 2,830,350 2,084,652 1,882,832
— 8,637,594
Loans acquired with deteriorated credit quality 1,808 52,816 15,118 10,331
— 80,073
Total loans and leases outstanding $ 1,893,700 $ 2,943,525 $ 2,099,770 $ 1,893,163 $
— $ 8,830,158
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
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
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
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 June 30, 2016 and December 31, 2015, the risk
category of commercial and commercial real estate 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
June 30,
December 31,
June 30,
December 31,
June 30,
December 31,
Internally Assigned
Grade 2016 2015 (1) 2016 2015 (1) 2016 2015 (1)
Grade:
Pass $ 1,774,857 $ 1,672,672 $ 256,427 $ 182,701 $ 2,484,795 $ 1,508,309
Criticized 38,867 55,570 4,014 3,300 64,005 75,477
Classified - substandard 25,422 24,723 1,572 1,857 56,982 49,091
Classified - nonaccrual 52,226 58,469 1,483 830 64,338 39,521
Classified - doubtful 2,328 3,506
—
— 9,909 7,886
Total $ 1,893,700 $ 1,814,940 $ 263,496 $ 188,688 $ 2,680,029 $ 1,680,284
(1) Includes loans previously covered by
loss share agreements with the FDIC.
Other commercial real estate as of June 30, 2016 in the table
above includes loans attributable to the acquisition of Anchor
totaling $9.4 million in the criticized category, $3.6 million in
the classified – substandard category, and $24.8 million in
the classified – nonaccrual category.
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 June 30, 2016
and December 31, 2015:
Residential Consumer
(dollars in thousands) Heloc Auto Other
June 30, 2016
Performing $ 2,082,585 $ 469,711 $ 1,143,932 $ 266,649
Nonperforming 17,185 3,839 1,266 7,766
Total $ 2,099,770 $ 473,550 $ 1,145,198 $ 274,415
December 31, 2015 (1)
Performing $ 1,645,293 $ 410,243 $ 1,048,763 $ 138,031
Nonperforming 16,042 3,051 1,573 1,497
Total $ 1,661,335 $ 413,294 $ 1,050,336 $ 139,528
(1) Includes loans previously covered by
loss share agreements with the FDIC.
Other consumer loans as of June 30, 2016 in the table above
includes loans attributable to the acquisition of Anchor totaling
$6.1 million in the nonperforming category, the majority of which
are student loans that are guaranteed by the government on average
from 97% to 100%.
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 as of
June 30, 2016 and December 31, 2015, respectively. Only
purchased loans that have experienced subsequent impairment since
the date acquired are included in the table below.
(dollars in thousands) Recorded Unpaid Related
June 30, 2016
With no related allowance recorded:
Commercial $ 36,975 $ 34,584 $
—
Commercial Real Estate - Other 41,334 45,139
—
Residential 1,353 1,374
—
Consumer 904 1,041
—
With an allowance recorded:
Commercial 18,903 18,905 7,489
Commercial Real Estate - Other 15,279 15,353 3,949
Residential 1,105 1,105 55
Consumer 2,785 2,785 139
Total $ 118,638 $ 120,286 $ 11,632
December 31, 2015 (1)
With no related allowance recorded:
Commercial $ 40,414 $ 41,212 $
—
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
(1) Does not include $4.2 million of
loans that were previously covered by loss share agreements with
the FDIC.
The average balance of impaired loans and interest income
recognized on impaired loans during the three months ended
June 30, 2016 and 2015 are included in the table below.
(dollars in thousands) Average Interest
Three Months Ended June 30, 2016
With no related allowance recorded:
Commercial $ 32,951 $ 33
Commercial Real Estate - Other 34,344 162
Residential 1,348 2
Consumer 871 1
With an allowance recorded:
Commercial 19,546 79
Commercial Real Estate - Construction 116
—
Commercial Real Estate - Other 12,230 134
Residential 1,060
—
Consumer 2,781
—
Total $ 105,247 $ 411
Three Months Ended June 30, 2015 (2)
With no related allowance recorded:
Commercial $ 30,769 $ 85
Commercial Real Estate - Construction 2,107 1
Commercial Real Estate - Other 38,758 189
Residential 920 1
Consumer 869 1
With an allowance recorded:
Commercial 25,069 355
Commercial Real Estate - Construction 117
—
Commercial Real Estate - Other 10,274 121
Residential 1,469 2
Consumer 1,518 29
Total $ 111,870 $ 784
(1) The Company does not record interest
on nonaccrual loans until principal is recovered.
(2) Does not include $4.7 million of
loans that were previously covered by loss share agreements with
the FDIC.
The average balance of impaired loans and interest income
recognized on impaired loans during the six months ended
June 30, 2016 and 2015 are included in the table below.
(dollars in thousands) Average Interest
Six Months Ended June 30, 2016
With no related allowance recorded:
Commercial $ 38,029 $ 61
Commercial Real Estate - Other 38,197 257
Residential 1,359 2
Consumer 981 2
With an allowance recorded:
Commercial 17,641 92
Commercial Real Estate - Construction 119
—
Commercial Real Estate - Other 15,016 182
Residential 1,035 38
Consumer 2,695 37
Total $ 115,072 $ 671
Six Months Ended June 30, 2015 (2)
With no related allowance recorded:
Commercial $ 31,505 $ 127
Commercial Real Estate - Construction 2,025 4
Commercial Real Estate - Other 32,402 274
Residential 761 1
Consumer 824 2
With an allowance recorded:
Commercial 21,359 403
Commercial Real Estate - Construction 49
—
Commercial Real Estate - Other 13,980 122
Residential 1,469 64
Consumer 1,568 49
Total $ 105,942 $ 1,046
(1) The Company does not record interest
on nonaccrual loans until principal is recovered.
(2) Does not include $4.7 million of
loans that were previously covered by loss share agreements with
the FDIC.
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 a prescribed period, 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 loan loss provision or
prospective yield adjustments.
Old National’s past due financing receivables as of
June 30, 2016 and December 31, 2015 are as follows:
(dollars in thousands) 30-59 Days 60-89 Days Recorded Nonaccrual Total Past Current
June 30, 2016
Commercial $ 496 $ 227 $ 175 $ 54,554 $ 55,452 $ 1,838,248
Commercial Real Estate:
Construction
—
—
— 1,483 1,483 262,013
Other 1,779
—
— 74,247 76,026 2,604,003
Residential 14,221 1,726 101 17,185 33,233 2,066,537
Consumer:
Heloc 1,286 220 240 3,839 5,585 467,965
Auto 2,962 684 104 1,266 5,016 1,140,182
Other 7,251 3,119 50 7,766 18,186 256,229
Total loans $ 27,995 $ 5,976 $ 670 $ 160,340 $ 194,981 $ 8,635,177
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
June 30, 2016, these loans totaled $392.2 million, of which
$209.6 million had been sold to other financial institutions and
$182.6 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 typically written down to its
collateral value less selling costs.
The following table presents activity in TDRs for the six months
ended June 30, 2016 and 2015:
(dollars in thousands) Commercial Commercial Residential Consumer Total
Six Months Ended June 30, 2016
Balance at January 1, 2016 $ 23,354 $ 14,602 $ 2,693 $ 3,602 $ 44,251
(Charge-offs)/recoveries (742 ) 108 42 (23 ) (615 )
Payments (10,819 ) (4,035 ) (462 ) (425 ) (15,741 )
Additions 11,233 10,581 335 385 22,534
Other 1,251 173
—
— 1,424
Balance at June 30, 2016 $ 24,277 $ 21,429 $ 2,608 $ 3,539 $ 51,853
Six Months Ended June 30, 2015
Balance at January 1, 2015 $ 15,205 $ 15,226 $ 2,063 $ 2,459 $ 34,953
(Charge-offs)/recoveries 574 648 (15 ) (27 ) 1,180
Payments (3,505 ) (3,135 ) (85 ) (320 ) (7,045 )
Additions 5,573 3,321 419 681 9,994
Balance at June 30, 2015 $ 17,847 $ 16,060 $ 2,382 $ 2,793 $ 39,082
Approximately $38.1 million of the TDRs at June 30, 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 $5.6 million at June 30, 2016 and $2.3 million at
December 31, 2015. As of June 30, 2016, Old National had
committed to lend an additional $4.2 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 six months ended
June 30, 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 six months ended June 30, 2016 and 2015:
(dollars in thousands) Number of Loans
Pre-modification
Post-modification
Six Months Ended June 30, 2016
Troubled Debt Restructuring:
Commercial 16 $ 11,233 $ 10,681
Commercial Real Estate - Other 9 10,581 10,581
Residential 3 335 335
Consumer 8 385 385
Total 36 $ 22,534 $ 21,982
Six Months Ended June 30, 2015
Troubled Debt Restructuring:
Commercial 18 $ 5,573 $ 5,573
Commercial Real Estate - Construction 5 1,162 1,162
Commercial Real Estate - Other 14 2,159 2,159
Residential 3 419 419
Consumer 18 681 681
Total 58 $ 9,994 $ 9,994
The TDRs that occurred during the six months ended June 30,
2016 decreased the allowance for loan losses by $1.2 million due to
an improvement in specific reserves on a large commercial loan and
resulted in $0.6 million of charge-offs during the six months ended
June 30, 2016. The TDRs that occurred during the six months
ended June 30, 2015 resulted in immaterial changes in the
allowance for loan losses and charge-offs during the six months
ended June 30, 2015.
A loan is considered to be in payment default once it is 90 days
contractually past due under the modified terms.
There were 10 commercial loans and 3 commercial real estate loans
totaling $0.8 million that were modified as TDRs within the
preceding twelve months, and for which there was a payment default
during the six months ended June 30, 2016.
There were three commercial loans and four commercial real estate
loans totaling $0.5 million that were modified as TDRs within the
preceding twelve months, and for which there was a payment default
during the six months ended June 30, 2015.
The terms of certain other loans were modified during the six
months ended June 30, 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 the
delay in a payment.
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 June 30, 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,
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 Credit Impaired Loans (“PCI”)
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 guid |
