| Loans and Allowance for Loan Losses | NOTE 7—LOANS AND ALLOWANCE FOR LOAN 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 manages
concentrations of credit exposure by industry, product, geography,
customer relationship, and loan size, with no concentration of
loans exceeding 10% of its portfolio.
The composition of loans by lending classification was as
follows:
(dollars in thousands) September 30, December 31,
Commercial (1) $ 2,049,054 $ 1,917,099
Commercial real estate:
Construction (2) 276,226 357,802
Other (2) 3,093,985 2,773,051
Residential real estate 2,119,120 2,087,530
Consumer credit:
Home equity 477,100 476,439
Auto 1,165,289 1,167,737
Other 217,350 230,854
Total loans 9,398,124 9,010,512
Allowance for loan losses (50,169 ) (49,808 )
Net loans $ 9,347,955 $ 8,960,704
(1) Includes direct finance leases of
$8.7 million at September 30, 2017 and $10.8 million at
December 31, 2016.
(2) Certain commercial real estate
construction loans were reclassified from commercial real
estate—other due to a misclassification at December 31,
2016.
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 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 (including Old National),
sales of developed property, or an interim loan commitment from Old
National until permanent financing is obtained. These loans are
closely monitored by on-site inspections and are considered to have
higher risks than other real estate loans due to their ultimate
repayment being sensitive to interest rate changes, governmental
regulation of real property, general economic conditions, and the
availability of long-term financing.
The acquisition of Anchor (WI) on May 1, 2016 added $926.2
million of commercial real estate loans to our portfolio. At 188%,
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, 2017.
Residential
With respect to residential loans that are secured by 1-4 family
residences and are generally owner occupied, Old National typically
establishes a maximum loan-to-value ratio and generally requires
private mortgage insurance if that ratio is exceeded. Repayment of
these loans is primarily dependent on the personal income of the
borrowers, which can be impacted by economic conditions in their
market areas such as unemployment levels. Repayment can also be
impacted by changes in residential property values. 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 (WI) in May
2016. At September 30, 2017, student loans totaled $70.2
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.
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 PD and 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 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, 2017 and 2016
was as follows:
(dollars in thousands) Commercial Commercial Residential Consumer Total
Three Months Ended September 30, 2017
Balance at beginning of period $ 20,365 $ 20,654 $ 1,811 $ 8,156 $ 50,986
Charge-offs (70 ) (1,148 ) (227 ) (1,376 ) (2,821 )
Recoveries 255 339 89 1,010 1,693
Provision (23 ) 180 236 (82 ) 311
Balance at end of period $ 20,527 $ 20,025 $ 1,909 $ 7,708 $ 50,169
Three Months Ended September 30, 2016
Balance at beginning of period $ 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 end of period $ 24,530 $ 17,345 $ 1,530 $ 8,142 $ 51,547
Nine Months Ended September 30, 2017
Balance at beginning of period $ 21,481 $ 18,173 $ 1,643 $ 8,511 $ 49,808
Charge-offs (951 ) (2,784 ) (954 ) (4,751 ) (9,440 )
Recoveries 1,647 3,086 196 2,859 7,788
Provision (1,650 ) 1,550 1,024 1,089 2,013
Balance at end of period $ 20,527 $ 20,025 $ 1,909 $ 7,708 $ 50,169
Nine Months Ended September 30, 2016
Balance at beginning of period $ 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 end of period $ 24,530 $ 17,345 $ 1,530 $ 8,142 $ 51,547
The following table provides Old National’s recorded
investment in financing receivables by portfolio segment at
September 30, 2017 and December 31, 2016 and other
information regarding the allowance:
(dollars in thousands) Commercial Commercial Residential Consumer Total
September 30, 2017
Allowance for loan losses:
Individually evaluated for impairment $ 4,456 $ 6,486 $
— $
— $ 10,942
Collectively evaluated for impairment 16,048 13,520 1,909 7,552 39,029
Loans acquired with deteriorated credit quality 23 19
— 156 198
Total allowance for loan losses $ 20,527 $ 20,025 $ 1,909 $ 7,708 $ 50,169
Loans and leases outstanding:
Individually evaluated for impairment $ 33,275 $ 62,442 $
— $
— $ 95,717
Collectively evaluated for impairment 2,015,185 3,287,914 2,107,253 1,853,875 9,264,227
Loans acquired with deteriorated credit quality 594 19,855 11,867 5,864 38,180
Total loans and leases outstanding $ 2,049,054 $ 3,370,211 $ 2,119,120 $ 1,859,739 $ 9,398,124
December 31, 2016
Allowance for loan losses:
Individually evaluated for impairment $ 4,561 $ 3,437 $
— $
— $ 7,998
Collectively evaluated for impairment 16,838 14,717 1,643 8,334 41,532
Loans acquired with deteriorated credit quality 82 19
— 177 278
Total allowance for loan losses $ 21,481 $ 18,173 $ 1,643 $ 8,511 $ 49,808
Loans and leases outstanding:
Individually evaluated for impairment $ 45,960 $ 57,230 $
— $
— $ 103,190
Collectively evaluated for impairment 1,870,289 3,040,849 2,073,950 1,866,815 8,851,903
Loans acquired with deteriorated credit quality 850 32,774 13,580 8,215 55,419
Total loans and leases outstanding $ 1,917,099 $ 3,130,853 $ 2,087,530 $ 1,875,030 $ 9,010,512
Credit Quality
Old National’s management monitors the credit quality of its
financing receivables in an on-going manner. Internally, management
assigns an AQR to each non-homogeneous commercial and commercial
real estate loan in the portfolio, with the exception of certain
FICO-scored small business loans. 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.
The risk category of commercial and commercial real estate loans by
class of loans at September 30, 2017 and December 31,
2016 was as follows:
(dollars in thousands)
Commercial
Commercial
Corporate Credit Exposure Commercial Real Estate— Construction Real Estate— Other
Credit Risk Profile by
Internally Assigned Grade September 30, December 31, September 30, December 31, September 30, December 31,
Grade:
Pass $ 1,944,997 $ 1,750,923 $ 261,500 $ 347,325 $ 2,911,548 $ 2,669,890
Criticized 41,004 45,614 14,726 9,258 74,467 40,590
Classified—substandard 33,524 63,978
— 49 50,842 19,715
Classified—nonaccrual 26,981 53,062
— 1,170 30,693 33,833
Classified—doubtful 2,548 3,522
—
— 26,435 9,023
Total $ 2,049,054 $ 1,917,099 $ 276,226 $ 357,802 $ 3,093,985 $ 2,773,051
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 at September 30, 2017
and December 31, 2016:
Consumer
(dollars in thousands) Residential Home Auto Other
September 30, 2017
Performing $ 2,099,585 $ 471,827 $ 1,162,634 $ 212,214
Nonperforming 19,535 5,273 2,655 5,136
Total $ 2,119,120 $ 477,100 $ 1,165,289 $ 217,350
December 31, 2016
Performing $ 2,069,856 $ 472,008 $ 1,166,114 $ 223,786
Nonperforming 17,674 4,431 1,623 7,068
Total $ 2,087,530 $ 476,439 $ 1,167,737 $ 230,854
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 TDR. 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 PCI 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 at
September 30, 2017 and December 31, 2016, 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, 2017
With no related allowance recorded:
Commercial $ 25,393 $ 26,374 $
—
Commercial Real Estate—Other 31,928 33,687
—
Residential 2,464 2,485
—
Consumer 1,924 2,140
—
With an allowance recorded:
Commercial 7,882 7,882 4,456
Commercial Real Estate—Other 30,514 30,770 6,486
Residential 882 882 44
Consumer 2,269 2,269 112
Total $ 103,256 $ 106,489 $ 11,098
December 31, 2016
With no related allowance recorded:
Commercial $ 29,001 $ 29,634 $
—
Commercial Real Estate—Other 30,585 32,413
—
Residential 1,610 1,631
—
Consumer 827 946
—
With an allowance recorded:
Commercial 16,959 17,283 4,561
Commercial Real Estate—Other 26,645 27,177 3,437
Residential 1,081 1,081 54
Consumer 1,924 1,924 96
Total $ 108,632 $ 112,089 $ 8,148
The average balance of impaired loans during the three and nine
months ended September 30, 2017 and 2016 are included in the
table below.
Three Months
Ended Nine Months
Ended
(dollars in thousands) 2017 2016 2017 2016
Average Recorded Investment
With no related allowance recorded:
Commercial $ 24,234 $ 35,513 $ 27,197 $ 37,581
Commercial Real Estate—Other 33,268 40,971 31,258 37,937
Residential 2,482 1,233 2,405 1,270
Consumer 1,755 878 1,786 865
With an allowance recorded:
Commercial 7,792 17,334 8,086 16,072
Commercial Real Estate—Construction
—
—
— 119
Commercial Real Estate—Other 30,846 15,119 28,580 15,977
Residential 1,011 1,099 1,059 1,072
Consumer 2,163 2,385 2,136 2,515
Total $ 103,551 $ 114,532 $ 102,507 $ 113,408
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,
2017 and 2016 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 at
September 30, 2017 and December 31, 2016 were as
follows:
(dollars in thousands) 30-59 Days 60-89 Days Recorded Nonaccrual Total Current
September 30, 2017
Commercial $ 296 $ 100 $ 251 $ 29,529 $ 30,176 $ 2,018,878
Commercial Real Estate:
Construction
—
—
—
—
— 276,226
Other 150
—
— 57,128 57,278 3,036,707
Residential 16,091 3,235 232 19,535 39,093 2,080,027
Consumer:
Home equity 939 314 88 5,273 6,614 470,486
Auto 5,535 977 282 2,655 9,449 1,155,840
Other 2,864 1,159 26 5,136 9,185 208,165
Total loans $ 25,875 $ 5,785 $ 879 $ 119,256 $ 151,795 $ 9,246,329
December 31, 2016
Commercial $ 847 $ 279 $ 23 $ 56,585 $ 57,734 $ 1,859,365
Commercial Real Estate:
Construction
—
—
— 1,170 1,170 356,632
Other 1,652 150
— 42,856 44,658 2,728,393
Residential 17,786 3,770 2 17,674 39,232 2,048,298
Consumer:
Home equity 1,511 423
— 4,431 6,365 470,074
Auto 5,903 1,037 242 1,623 8,805 1,158,932
Other 3,561 1,919 61 7,068 12,609 218,245
Total loans $ 31,260 $ 7,578 $ 328 $ 131,407 $ 170,573 $ 8,839,939
Loan Participations
Old National has loan participations, which qualify as
participating interests, with other financial institutions. At
September 30, 2017, these loans totaled $541.6 million, of
which $271.7 million had been sold to other financial institutions
and $269.9 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 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. Generally, 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 TDR, 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, 2017 and 2016:
(dollars in thousands) Commercial Commercial Residential Consumer Total
Nine Months Ended September 30, 2017
Balance at beginning of period $ 16,802 $ 18,327 $ 2,985 $ 2,602 $ 40,716
(Charge-offs)/recoveries (5 ) 366
— (58 ) 303
Payments (10,024 ) (3,849 ) (589 ) (970 ) (15,432 )
Additions 12,599 17,429 937 2,568 33,533
Interest collected on nonaccrual loans 2,420 431 13 51 2,915
Balance at end of period $ 21,792 $ 32,704 $ 3,346 $ 4,193 $ 62,035
Nine Months Ended September 30, 2016
Balance at beginning of period $ 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
Interest collected on nonaccrual loans 1,569 523
—
— 2,092
Balance at end of period $ 18,675 $ 19,804 $ 2,588 $ 2,687 $ 43,754
Approximately $43.7 million of the TDRs at September 30, 2017
were included with nonaccrual loans, compared to $26.3 million at
December 31, 2016. Old National has allocated specific
reserves to customers whose loan terms have been modified in TDRs
totaling $6.5 million at September 30, 2017 and $4.0 million
at December 31, 2016. At September 30, 2017, Old National
had committed to lend an additional $3.9 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, 2017 and 2016 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, 2017 and
2016:
(dollars in thousands) Number Pre-modification Post-modification
Nine Months Ended September 30, 2017
TDR:
Commercial 9 $ 12,599 $ 12,599
Commercial Real Estate—Other 10 17,429 17,429
Residential 6 937 937
Consumer 7 2,568 2,568
Total 32 $ 33,533 $ 33,533
Nine Months Ended September 30, 2016
TDR:
Commercial 17 $ 12,367 $ 12,367
Commercial Real Estate—Other 9 10,581 10,581
Residential 3 335 335
Consumer 8 385 385
Total 37 $ 23,668 $ 23,668
The TDRs that occurred during the nine months ended
September 30, 2017 increased the allowance for loan losses by
$3.2 million and resulted in no charge-offs during the nine months
ended September 30, 2017. 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.
A loan is considered to be in payment default once it is 90 days
contractually past due under the modified terms.
There were no loans 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, 2017.
There were 6 commercial loans and 1 commercial real estate loan
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.
The terms of certain other loans were modified during the nine
months ended September 30, 2017 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 PCI loan is being
accounted for as part of a pool, it will not be removed from the
pool. As of September 30, 2017, 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 Troubled Debt Restructurings by Creditors, Creditor
Disclosure of Troubled Debt Restructurings
Purchased Credit Impaired 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
loans that meet the criteria of ASC 310-30 treatment, the carrying
amount was as follows:
(dollars in thousands) September 30, December 31,
Commercial $ 594 $ 850
Commercial real estate 19,855 32,774
Residential 11,867 13,580
Consumer 5,864 8,215
Carrying amount 38,180 55,419
Allowance for loan losses (198 ) (278 )
Carrying amount, net of allowance $ 37,982 $ 55,141
The outstanding balance of loans accounted for under ASC 310-30,
including contractual principal, interest, fees and penalties, was
$241.1 million at September 30, 2017 and $268.0 million
at December 31, 2016.
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 $12.8 million during the nine months ended
September 30, 2017 and $18.2 million during the nine months
ended September 30, 2016. Improvement in cash flow
expectations has resulted in a reclassification from nonaccretable
difference to accretable yield as shown in the table below.
Accretable yield of PCI loans, or income expected to be collected,
is as follows:
Nine Months
Ended
(dollars in thousands) 2017 2016
Balance at beginning of period $ 33,603 $ 45,310
New loans purchased (1)
— 3,217
Accretion of income (12,775 ) (18,202 )
Reclassifications from (to) nonaccretable difference 6,567 7,538
Disposals/other adjustments 277 961
Balance at end of period $ 27,672 $ 38,824
(1) Old National acquired Anchor (WI)
effective May 1, 2016.
Included in Old National’s allowance for loan losses is $0.2
million related to the purchased loans disclosed above at
September 30, 2017, compared to $0.3 million at
December 31, 2016.
PCI loans purchased during 2016 for which it was probable at
acquisition that all contractually required payments would not be
collected were as follows:
(dollars in thousands) Anchor (WI) (1)
Contractually required payments $ 29,544
Nonaccretable difference (6,153 )
Cash flows expected to be collected at acquisition 23,391
Accretable yield (3,217 )
Fair value of acquired loans at acquisition $ 20,174
(1) Old National acquired Anchor (WI)
effective May 1, 2016.
Income would not be recognized on certain purchased loans if Old
National could not reasonably estimate cash flows to be collected.
Old National had no purchased loans for which it could not
reasonably estimate cash flows to be collected. |
