| 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:
September 30,
December 31,
(dollars in thousands) 2016 2015
Commercial (1) $ 1,836,380 $ 1,804,615
Commercial real estate:
Construction 574,476 185,449
Other 2,518,099 1,662,372
Residential real estate 2,105,232 1,644,614
Consumer credit:
Home equity 481,995 359,954
Auto 1,146,594 1,050,336
Other 242,209 133,478
Covered loans
— 107,587
Total loans 8,904,985 6,948,405
Allowance for loan losses (51,547 ) (51,296 )
Allowance for loan losses - covered loans
— (937 )
Net loans $ 8,853,438 $ 6,896,172
(1) Includes direct finance leases of
$11.7 million at September 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.
The acquisition of Anchor on May 1, 2016 added $926.2 million of
commercial real estate loans to our portfolio. At 178%, Old
National Bank’s commercial real estate loans as a percentage
of its risk-based capital remained well below the regulatory
guideline limit of 300% at September 30, 2016.
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 September 30, 2016, student loans totaled $80.5 million and are
guaranteed by the government 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, an amount which we never reached. 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 nine months ended September 30, 2016 and 2015 is as
follows:
(dollars in thousands) Commercial Commercial Residential Consumer Unallocated Total
Three Months Ended September 30, 2016
Balance at July 1, 2016 $ 24,156 $ 18,208 $ 1,459 $ 7,981 $
— $ 51,804
Charge-offs (1,681 ) (1,378 ) (140 ) (1,320 )
— (4,519 )
Recoveries 594 1,548 2,174 (1,360 )
— 2,956
Provision 1,461 (1,033 ) (1,963 ) 2,841
— 1,306
Balance at September 30, 2016 $ 24,530 $ 17,345 $ 1,530 $ 8,142 $
— $ 51,547
Three Months Ended September 30, 2015
Balance at July 1, 2015 $ 23,434 $ 16,325 $ 2,581 $ 7,851 $
— $ 50,191
Charge-offs (223 ) (733 ) (313 ) (1,239 )
— (2,508 )
Recoveries 1,088 1,422 74 792
— 3,376
Provision 1,219 (950 ) (317 ) 215
— 167
Balance at September 30, 2015 $ 25,518 $ 16,064 $ 2,025 $ 7,619 $
— $ 51,226
Nine Months Ended September 30, 2016
Balance at January 1, 2016 $ 26,347 $ 15,993 $ 2,051 $ 7,842 $
— $ 52,233
Charge-offs (3,640 ) (2,440 ) (360 ) (4,698 )
— (11,138 )
Recoveries 2,288 2,935 2,387 126
— 7,736
Provision (465 ) 857 (2,548 ) 4,872
— 2,716
Balance at September 30, 2016 $ 24,530 $ 17,345 $ 1,530 $ 8,142 $
— $ 51,547
Nine Months Ended September 30, 2015
Balance at January 1, 2015 $ 20,670 $ 17,348 $ 2,962 $ 6,869 $
— $ 47,849
Charge-offs (2,644 ) (834 ) (709 ) (4,337 )
— (8,524 )
Recoveries 3,652 2,895 161 2,754
— 9,462
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
The following table provides Old National’s recorded
investment in financing receivables by portfolio segment at
September 30, 2016 and December 31, 2015 and other information
regarding the allowance:
(dollars in thousands) Commercial Commercial Residential Consumer Unallocated Total
September 30, 2016
Allowance for loan losses:
Individually evaluated for impairment $ 6,979 $ 4,459 $
— $
— $
— $ 11,438
Collectively evaluated for impairment 17,422 12,712 1,517 7,886
— 39,537
Loans acquired with deteriorated credit quality 129 174 13 256
— 572
Total allowance for loan losses $ 24,530 $ 17,345 $ 1,530 $ 8,142 $
— $ 51,547
Loans and leases outstanding:
Individually evaluated for impairment $ 49,815 $ 57,801 $
— $
— $
— $ 107,616
Collectively evaluated for impairment 1,785,010 2,987,280 2,091,020 1,861,647
— 8,724,957
Loans acquired with deteriorated credit quality 1,555 47,494 14,212 9,151
— 72,412
Total loans and leases outstanding $ 1,836,380 $ 3,092,575 $ 2,105,232 $ 1,870,798 $
— $ 8,904,985
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 September 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
-
Commercial Construction Other
Corporate Credit Exposure
Credit Risk Profile by September 30, December 31, September 30, December 31, September 30, December 31,
Grade:
Pass $ 1,703,363 $ 1,672,672 $ 560,891 $ 182,701 $ 2,338,786 $ 1,508,309
Criticized 53,092 55,570 10,949 3,300 61,799 75,477
Classified - substandard 30,573 24,723 1,258 1,857 45,089 49,091
Classified - nonaccrual 45,716 58,469 1,378 830 62,513 39,521
Classified - doubtful 3,636 3,506
—
— 9,912 7,886
Total $ 1,836,380 $ 1,814,940 $ 574,476 $ 188,688 $ 2,518,099 $ 1,680,284
(1) Includes loans previously covered by
loss share agreements with the FDIC.
Commercial loans as of September 30, 2016 in the table above
include loans attributable to the acquisition of Anchor totaling
$0.2 million in the classified – substandard category and
$0.7 million in the classified – nonaccrual category. There
were no construction commercial real estate loans in the criticized
or classified categories attributable to the acquisition of Anchor
as of September 30, 2016. Other commercial real estate as of
September 30, 2016 in the table above includes loans attributable
to the acquisition of Anchor totaling $16.6 million in the
criticized category, $4.2 million in the classified –
substandard category, and $25.4 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
September 30, 2016 and December 31, 2015:
(dollars in thousands) Residential Consumer
Home Auto Other
September 30, 2016
Performing $ 2,088,694 $ 478,810 $ 1,145,140 $ 235,057
Nonperforming 16,538 3,185 1,454 7,152
Total $ 2,105,232 $ 481,995 $ 1,146,594 $ 242,209
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 September 30, 2016 in the table above
includes loans attributable to the acquisition of Anchor totaling
$5.7 million in the nonperforming category, the majority of which
are student loans that are guaranteed by the government 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
September 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
September 30, 2016
With no related allowance recorded:
Commercial $ 34,050 $ 34,803 $
—
Commercial Real Estate - Other 40,601 43,981
—
Residential 1,113 1,134
—
Consumer 852 983
—
With an allowance recorded:
Commercial 15,765 16,573 6,979
Commercial Real Estate - Other 17,200 17,717 4,459
Residential 1,094 1,094 55
Consumer 1,984 1,984 99
Total $ 112,659 $ 118,269 $ 11,592
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 during the three and nine
months ended September 30, 2016 and 2015 are included in the table
below.
Three Months
Ended Nine Months
Ended
September
30, September
30,
(dollars in thousands) 2016 2015 (1) 2016 2015 (1)
Average Recorded Investment
With no related allowance recorded:
Commercial $ 35,513 $ 33,128 $ 37,581 $ 29,878
Commercial Real Estate - Construction
— 1,122
— 1,475
Commercial Real Estate - Other 40,971 33,235 37,937 32,440
Residential 1,233 999 1,270 873
Consumer 878 836 865 728
With an allowance recorded:
Commercial 17,334 29,978 16,072 16,090
Commercial Real Estate - Construction
— 331 119 171
Commercial Real Estate - Other 15,119 12,656 15,977 13,109
Residential 1,099 1,330 1,072 1,264
Consumer 2,385 1,775 2,515 1,886
Total $ 114,532 $ 115,390 $ 113,408 $ 97,914
(1) Does not include $4.4 million of
loans that were previously covered by loss share agreements with
the FDIC.
The Company does not record interest on nonaccrual loans until
principal is recovered. Interest income recognized on impaired
loans during the three and nine months ended September 30, 2016 and
2015 was immaterial.
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 September
30, 2016 and December 31, 2015 are as follows:
(dollars in thousands) 30-59 Days 60-89 Days Recorded Nonaccrual Total Current
September 30, 2016
Commercial $ 577 $ 262 $
— $ 49,352 $ 50,191 $ 1,786,189
Commercial Real Estate:
Construction
—
—
— 1,378 1,378 573,098
Other 835 445
— 72,425 73,705 2,444,394
Residential 14,228 1,911 152 16,538 32,829 2,072,403
Consumer:
Home equity 1,741 1,749 46 3,185 6,721 475,274
Auto 3,931 915 154 1,454 6,454 1,140,140
Other 3,090 2,118 91 7,152 12,451 229,758
Total loans $ 24,402 $ 7,400 $ 443 $ 151,484 $ 183,729 $ 8,721,256
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:
Home equity 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
September 30, 2016, these loans totaled $473.0 million, of which
$259.1 million had been sold to other financial institutions and
$213.9 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 nine months
ended September 30, 2016 and 2015:
(dollars in thousands) Commercial Commercial Residential Consumer Total
Nine Months Ended September 30, 2016
Balance at January 1, 2016 $ 23,354 $ 14,602 $ 2,693 $ 3,602 $ 44,251
(Charge-offs)/recoveries (1,098 ) 148 42 (27 ) (935 )
Payments (17,517 ) (6,050 ) (482 ) (1,273 ) (25,322 )
Additions 12,367 10,581 335 385 23,668
Other 1,569 523
—
— 2,092
Balance at September 30, 2016 $ 18,675 $ 19,804 $ 2,588 $ 2,687 $ 43,754
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
Approximately $29.9 million of the TDRs at September 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 $6.2 million at September 30, 2016 and $2.3 million at
December 31, 2015. As of September 30, 2016, Old National had
committed to lend an additional $4.5 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, 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 nine months ended September 30, 2016 and
2015:
(dollars in thousands) Number Pre-modification Post-modification
Nine Months Ended September 30, 2016
Troubled Debt Restructuring:
Commercial 17 $ 12,367 $ 11,815
Commercial Real Estate - Other 9 10,581 10,581
Residential 3 335 335
Consumer 8 385 385
Total 37 $ 23,668 $ 23,116
Nine Months Ended September 30, 2015
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 that occurred during the nine months ended September 30,
2016 decreased the allowance for loan losses by $0.3 million due to
a change in collateral position on a large commercial loan and
resulted in $0.8 million of charge-offs during the nine months
ended September 30, 2016. The TDRs that occurred during the
nine months ended September 30, 2015 increased the allowance for
loan losses by $0.6 million and resulted in immaterial charge-offs
during the nine months ended September 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 6 commercial loans and 1 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 nine months ended September 30, 2016.
There were 3 commercial loans and 6 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.
The terms of certain other loans were modified during the nine
months ended September 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 September 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
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 decreas |
