Loans and Allowance for Loan Losses | NOTE 5 – LOANS AND ALLOWANCE FOR LOAN LOSSES Old National’s loans 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, Wisconsin, and Minnesota. 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 at December 31 by lending classification was as follows: December 31, (dollars in thousands) 2017 2016 Commercial (1) $ 2,717,269 $ 1,917,099 Commercial real estate: Construction (2) 374,306 357,802 Other (2) 3,980,246 2,773,051 Residential real estate 2,167,053 2,087,530 Consumer credit: Home equity 507,507 476,439 Auto 1,148,672 1,167,737 Other 223,068 230,854 Total loans 11,118,121 9,010,512 Allowance for loan losses (50,381 ) (49,808 ) Net loans $ 11,067,740 $ 8,960,704 (1) Includes direct finance leases of $29.5 million at December 31, 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 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 on-site The acquisition of Anchor (MN) on November 1, 2017 added $864.4 million of commercial real estate loans to our portfolio. At 206%, 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 December 31, 2017. Residential With respect to residential loans that are secured by 1-4 loan-to-value Consumer Home equity loans are typically secured by a subordinate interest in 1-4 Related Party Loans In the ordinary course of business, Old National grants loans to certain executive officers, directors, and significant subsidiaries (collectively referred to as “related parties”). Activity in related party loans during 2017 is presented in the following table: Year Ended (dollars in thousands) December 31, 2017 Balance at beginning of period $ 8,494 New loans 6,041 Repayments (4,885 ) Officer and director changes (169 ) Balance at end of period $ 9,481 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 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 years ended December 31, 2017, 2016, and 2015 was as follows: Commercial (dollars in thousands) Commercial Real Estate Residential Consumer Total 2017 Allowance for loan losses: Balance at beginning of period $ 21,481 $ 18,173 $ 1,643 $ 8,511 $ 49,808 Charge-offs (1,108 ) (3,700 ) (985 ) (6,924 ) (12,717 ) Recoveries 2,281 3,777 255 3,927 10,240 Provision (3,408 ) 3,186 850 2,422 3,050 Balance at end of period $ 19,246 $ 21,436 $ 1,763 $ 7,936 $ 50,381 2016 Allowance for loan losses: Balance at beginning of period $ 26,347 $ 15,993 $ 2,051 $ 7,842 $ 52,233 Charge-offs (5,047 ) (2,632 ) (800 ) (6,131 ) (14,610 ) Recoveries 3,102 4,763 174 3,186 11,225 Provision (2,921 ) 49 218 3,614 960 Balance at end of period $ 21,481 $ 18,173 $ 1,643 $ 8,511 $ 49,808 2015 Allowance for loan losses: Balance at beginning of period $ 20,670 $ 17,348 $ 2,962 $ 6,869 $ 47,849 Charge-offs (3,513 ) (1,921 ) (1,039 ) (6,404 ) (12,877 ) Recoveries 5,218 4,685 354 4,081 14,338 Provision 3,972 (4,119 ) (226 ) 3,296 2,923 Balance at end of period $ 26,347 $ 15,993 $ 2,051 $ 7,842 $ 52,233 The following table provides Old National’s recorded investment in loans by portfolio segment at December 31, 2017 and 2016 and other information regarding the allowance: Commercial (dollars in thousands) Commercial Real Estate Residential Consumer Total December 31, 2017 Allowance for loan losses: Individually evaluated for impairment $ 3,424 $ 6,654 $ — $ — $ 10,078 Collectively evaluated for impairment 15,790 14,782 1,763 7,802 40,137 Loans acquired with deteriorated credit quality 32 — — 134 166 Total allowance for loan losses $ 19,246 $ 21,436 $ 1,763 $ 7,936 $ 50,381 Loans and leases outstanding: Individually evaluated for impairment $ 26,270 $ 66,061 $ — $ — $ 92,331 Collectively evaluated for impairment 2,685,847 4,266,665 2,155,750 1,874,002 10,982,264 Loans acquired with deteriorated credit quality 5,152 21,826 11,303 5,245 43,526 Total loans and leases outstanding $ 2,717,269 $ 4,354,552 $ 2,167,053 $ 1,879,247 $ 11,118,121 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 loans in an on-going non-homogeneous 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 December 31, 2017 and 2016 was as follows: (dollars in thousands) Commercial Commercial Corporate Credit Exposure Real Estate - Real Estate - Credit Risk Profile by Commercial Construction Other Internally Assigned Grade 2017 2016 2017 2016 2017 2016 Grade: Pass $ 2,577,824 $ 1,750,922 $ 357,438 $ 347,325 $ 3,762,896 $ 2,669,890 Criticized 74,876 45,614 14,758 9,258 98,451 40,590 Classified - substandard 37,367 63,978 — 49 58,584 19,715 Classified - nonaccrual 24,798 53,063 2,110 1,170 30,108 33,833 Classified - doubtful 2,404 3,522 — — 30,207 9,023 Total $ 2,717,269 $ 1,917,099 $ 374,306 $ 357,802 $ 3,980,246 $ 2,773,051 Commercial loans as of December 31, 2017 in the table above include loans attributable to the acquisition of Anchor (MN) totaling $26.5 million in the criticized category, $7.3 million in the classified – substandard category, and $7.3 million in the classified – nonaccrual category. Construction commercial real estate loans as of December 31, 2017 in the table above include loans attributable to the acquisition of Anchor (MN) totaling $1.2 million in the classified – nonaccrual category. Other commercial real estate as of December 31, 2017 in the table above includes loans attributable to the acquisition of Anchor (MN) totaling $20.4 million in the criticized category, $3.6 million in the classified – substandard category, and $6.9 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 December 31, 2017 and 2016: (dollars in thousands) Consumer Home Residential Equity Auto Other December 31, 2017 Performing $ 2,144,882 $ 502,322 $ 1,145,977 $ 217,819 Nonperforming 22,171 5,185 2,695 5,249 Total $ 2,167,053 $ 507,507 $ 1,148,672 $ 223,068 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 as of December 31, 2017 and 2016, respectively. Only purchased loans that have experienced subsequent impairment since the date acquired are included in the table below. Unpaid Recorded Principal Related (dollars in thousands) Investment Balance Allowance December 31, 2017 With no related allowance recorded: Commercial $ 20,557 $ 21,483 $ — Commercial Real Estate—Other 38,678 44,564 — Residential 2,443 2,464 — Consumer 1,685 2,105 — With an allowance recorded: Commercial 5,713 5,713 3,424 Commercial Real Estate—Construction 905 1,371 401 Commercial Real Estate—Other 26,478 26,902 6,253 Residential 870 870 44 Consumer 2,211 2,228 110 Total $ 99,540 $ 107,700 $ 10,232 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—Construction 467 467 107 Commercial Real Estate—Other 26,178 26,710 3,330 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 for the years ended December 31, 2017 and 2016 are included in the table below. Years Ended December 31, (dollars in thousands) 2017 2016 Average Recorded Investment With no related allowance recorded: Commercial $ 24,780 $ 34,708 Commercial Real Estate—Other 34,632 28,793 Residential 2,415 1,355 Consumer 1,761 855 With an allowance recorded: Commercial 7,002 16,669 Commercial Real Estate—Construction 453 352 Commercial Real Estate—Other 26,562 20,465 Residential 1,012 1,074 Consumer 2,155 2,367 Total $ 100,772 $ 106,638 Old National does not record interest on nonaccrual loans until principal is recovered. Interest income recognized on impaired loans during 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 re-estimation Old National’s past due loans as of December 31 were as follows: Recorded Investment > 30-59 Days 60-89 Days 90 Days and Total (dollars in thousands) Past Due Past Due Accruing Nonaccrual Past Due Current December 31, 2017 Commercial $ 986 $ 360 $ 144 $ 27,202 $ 28,692 $ 2,688,577 Commercial Real Estate: Construction — — — 2,110 2,110 372,196 Other 2,247 89 — 60,315 62,651 3,917,595 Residential 18,948 3,416 — 22,171 44,535 2,122,518 Consumer: Home equity 1,467 230 68 5,185 6,950 500,557 Auto 6,487 1,402 532 2,695 11,116 1,137,556 Other 3,967 1,514 150 5,249 10,880 212,188 Total $ 34,102 $ 7,011 $ 894 $ 124,927 $ 166,934 $ 10,951,187 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 $ 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 December 31, 2017, these loans totaled $581.0 million, of which $290.4 million had been sold to other financial institutions and $290.6 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 TDR has occurred, which is when for economic or legal reasons related to a borrower’s financial difficulties, Old National 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 are 90 days or more delinquent and do not have adequate collateral support. 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 years ended December 31, 2017, 2016, and 2015: (dollars in thousands) Commercial Commercial Residential Consumer Total 2017 Balance at beginning of period $ 16,802 $ 18,327 $ 2,985 $ 2,602 $ 40,716 (Charge-offs)/recoveries 417 381 — (294 ) 504 Payments (22,340 ) (12,183 ) (623 ) (1,038 ) (36,184 ) Additions 13,388 27,749 938 2,568 44,643 Interest collected on nonaccrual loans 3,821 431 15 57 4,324 Balance at end of period $ 12,088 $ 34,705 $ 3,315 $ 3,895 $ 54,003 2016 Balance at beginning of period $ 23,354 $ 14,602 $ 2,693 $ 3,602 $ 44,251 (Charge-offs)/recoveries (1,982 ) 953 42 (6 ) (993 ) Payments (21,956 ) (10,157 ) (513 ) (1,381 ) (34,007 ) Additions 14,996 11,130 761 385 27,272 Interest collected on nonaccrual loans 2,390 1,799 2 2 4,193 Balance at end of period $ 16,802 $ 18,327 $ 2,985 $ 2,602 $ 40,716 2015 Balance at beginning of period $ 15,205 $ 15,226 $ 2,063 $ 2,459 $ 34,953 (Charge-offs)/recoveries 872 1,064 (64 ) 3 1,875 Payments (29,913 ) (6,273 ) (658 ) (1,168 ) (38,012 ) Additions 37,190 4,585 1,352 2,308 45,435 Balance at end of period $ 23,354 $ 14,602 $ 2,693 $ 3,602 $ 44,251 Approximately $34.0 million of the TDRs at December 31, 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 $5.7 million at December 31, 2017 and $4.0 million at December 31, 2016. As of December 31, 2017, Old National had committed to lend an additional $4.1 million to customers with outstanding loans that are classified as TDRs. The pre-modification (dollars in thousands) Number Pre-modification Post-modification 2017 Troubled Debt Restructuring: Commercial 11 $ 13,388 $ 13,388 Commercial Real Estate—Other 12 27,749 27,749 Residential 6 938 938 Consumer 7 2,568 2,568 Total 36 $ 44,643 $ 44,643 2016 Troubled Debt Restructuring: Commercial 20 $ 14,996 $ 14,996 Commercial Real Estate—Other 10 11,130 11,130 Residential 6 761 761 Consumer 8 385 385 Total 44 $ 27,272 $ 27,272 2015 Troubled Debt Restructuring: Commercial 42 $ 37,190 $ 37,190 Commercial Real Estate—Construction 5 1,162 1,162 Commercial Real Estate—Other 27 3,423 3,423 Residential 13 1,352 1,352 Consumer 32 2,308 2,308 Total 119 $ 45,435 $ 45,435 The TDRs that occurred during 2017 increased the allowance for loan losses by $2.7 million and resulted in $0.2 million of charge-offs during 2017. The TDRs that occurred during 2016 decreased the allowance for loan losses by $2.3 million due to a change in collateral position on a large commercial loan and resulted in $0.8 million of charge-offs during 2016. The TDRs that occurred during 2015 decreased the allowance for loan losses by $0.8 million and resulted in charge-offs of $0.2 million during 2015. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. TDRs for which there was a payment default within twelve months following the modification during the year were insignificant in 2017, 2016, and 2015. The terms of certain other loans were modified during 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 December 31, 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 310-40-50-2, 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), non-accretable 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 December 31, (dollars in thousands) 2017 2016 Commercial $ 5,152 $ 850 Commercial real estate 21,826 32,774 Residential 11,303 13,580 Consumer 5,245 8,215 Carrying amount 43,526 55,419 Allowance for loan losses (166 ) (278 ) Carrying amount, net of allowance $ 43,360 $ 55,141 The outstanding balance of loans accounted for under ASC 310-30, The accretable difference on PCI loans 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 $15.2 million during 2017 and $23.4 million during 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, was as follows: Years Ended December 31, (dollars in thousands) 2017 2016 2015 Balance at beginning of period $ 33,603 $ 45,310 $ 62,533 New loans purchased 1,556 3,217 1,812 Accretion of income (15,217 ) (23,447 ) (35,526 ) Reclassifications from (to) nonaccretable difference 7,614 10,589 14,189 Disposals/other adjustments 279 (2,066 ) 2,302 Balance at end of period $ 27,835 $ 33,603 $ 45,310 Included in Old National’s allowance for loan losses is $0.2 million related to the purchased loans disclosed above at December 31, 2017, compared to $0.3 million at December 31, 2016. PCI loans purchased during 2017 and 2016 for which it was probable at acquisition that all contractually required payments would not be collected were as follows: (dollars in thousands) Anchor (MN) (1) Anchor (WI) (2) Contractually required payments $ 16,898 $ 29,544 Nonaccretable difference (4,787 ) (6,153 ) Cash flows expected to be collected at acquisition 12,111 23,391 Accretable yield (1,556 ) (3,217 ) Fair value of acquired loans at acquisition $ 10,555 $ 20,174 (1) Old National acquired Anchor (MN) effective November 1, 2017. (2) 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. |