| Loans and Allowance for Loan Losses | NOTE 8 – 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. While loans to lessors of
both residential and non-residential real estate exceed 10% of
total loans, no individual sub-segment category within those
broader categories reach the 10% threshold.
The composition of loans by lending classification was as
follows:
March 31,
December 31,
(dollars in thousands) 2018 2017
Commercial (1) $ 2,811,629 $ 2,717,269
Commercial real estate:
Construction 351,448 374,306
Other 4,098,532 3,980,246
Residential real estate 2,158,532 2,167,053
Consumer credit:
Home equity 487,237 507,507
Auto 1,117,027 1,148,672
Other 214,277 223,068
Total loans 11,238,682 11,118,121
Allowance for loan losses (50,381 ) (50,381 )
Net loans $ 11,188,301 $ 11,067,740
(1) Includes direct finance leases of
$27.4 million at March 31, 2018 and $29.5 million at
December 31, 2017.
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 (MN) on November 1, 2017 added
$864.4 million of commercial real estate loans to our portfolio. At
208%, 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 March 31, 2018.
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. Student loans are guaranteed by the government from 97% to
100% and totaled $66.0 million at March 31, 2018, compared to
$68.2 million at December 31, 2017. 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 months ended March 31, 2018 and 2017 was as
follows:
Commercial
(dollars in thousands) Commercial Real Estate Residential Consumer Total
Three Months Ended March 31, 2018
Balance at beginning of period $ 19,246 $ 21,436 $ 1,763 $ 7,936 $ 50,381
Charge-offs (245 ) (3 ) (362 ) (2,075 ) (2,685 )
Recoveries 511 484 148 1,162 2,305
Provision 79 (1,121 ) 214 1,208 380
Balance at end of period $ 19,591 $ 20,796 $ 1,763 $ 8,231 $ 50,381
Three Months Ended March 31, 2017
Balance at beginning of period $ 21,481 $ 18,173 $ 1,643 $ 8,511 $ 49,808
Charge-offs (470 ) (568 ) (414 ) (1,787 ) (3,239 )
Recoveries 603 1,225 79 1,011 2,918
Provision 494 (877 ) 428 302 347
Balance at end of period $ 22,108 $ 17,953 $ 1,736 $ 8,037 $ 49,834
The following table provides Old National’s recorded
investment in loans by portfolio segment at March 31, 2018 and
December 31, 2017 and other information regarding the
allowance:
Commercial
(dollars in thousands) Commercial Real Estate Residential Consumer Total
March 31, 2018
Allowance for loan losses:
Individually evaluated for impairment $ 4,024 $ 6,054 $
— $
— $ 10,078
Collectively evaluated for impairment 15,557 14,742 1,763 8,069 40,131
Loans acquired with deteriorated credit quality 10
—
— 162 172
Total allowance for loan losses $ 19,591 $ 20,796 $ 1,763 $ 8,231 $ 50,381
Loans and leases outstanding:
Individually evaluated for impairment $ 30,092 $ 64,693 $
— $
— $ 94,785
Collectively evaluated for impairment 2,776,738 4,364,309 2,147,693 1,813,910 11,102,650
Loans acquired with deteriorated credit quality 4,799 20,978 10,839 4,631 41,247
Total loans and leases outstanding $ 2,811,629 $ 4,449,980 $ 2,158,532 $ 1,818,541 $ 11,238,682
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
Credit Quality
Old National’s management monitors the credit quality of its
loans 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 March 31, 2018 and December 31, 2017
was as follows:
(dollars in thousands)
Commercial
Commercial
Real Estate
- Real Estate
-
Corporate Credit Exposure Commercial Construction Other
Credit Risk Profile by
March 31,
December 31,
March 31,
December 31,
March 31,
December 31,
Internally Assigned Grade 2018 2017 2018 2017 2018 2017
Grade:
Pass $ 2,657,943 $ 2,577,824 $ 335,761 $ 357,438 $ 3,886,508 $ 3,762,896
Criticized 78,612 74,876 14,782 14,758 81,479 98,451
Classified - substandard 41,899 37,367
—
— 71,047 58,584
Classified - nonaccrual 30,823 24,798 905 2,110 31,364 30,108
Classified - doubtful 2,352 2,404
—
— 28,134 30,207
Total $ 2,811,629 $ 2,717,269 $ 351,448 $ 374,306 $ 4,098,532 $ 3,980,246
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 March 31, 2018 and
December 31, 2017:
Consumer
(dollars in thousands) Residential Home Auto Other
March 31, 2018
Performing $ 2,137,395 $ 482,214 $ 1,114,511 $ 209,235
Nonperforming 21,137 5,023 2,515 5,043
Total $ 2,158,532 $ 487,237 $ 1,117,026 $ 214,278
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
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
March 31, 2018 and December 31, 2017, 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
March 31, 2018
With no related allowance recorded:
Commercial $ 20,869 $ 21,656 $
—
Commercial Real Estate - Other 42,923 44,688
—
Residential 2,107 2,128
—
Consumer 2,000 2,436
—
With an allowance recorded:
Commercial 9,223 9,276 4,024
Commercial Real Estate - Construction 905 1,371 401
Commercial Real Estate - Other 20,865 21,081 5,653
Residential 950 950 48
Consumer 2,022 2,022 101
Total $ 101,864 $ 105,608 $ 10,227
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
The average balance of impaired loans during the three months ended
March 31, 2018 and 2017 are included in the table below.
Three Months
Ended
March 31,
(dollars in thousands) 2018 2017
Average Recorded Investment
With no related allowance recorded:
Commercial $ 20,714 $ 28,780
Commercial Real Estate - Other 40,801 32,671
Residential 2,275 1,931
Consumer 1,842 1,377
With an allowance recorded:
Commercial 7,468 8,743
Commercial Real Estate - Construction 905
—
Commercial Real Estate - Other 23,672 20,650
Residential 910 1,118
Consumer 2,117 2,003
Total $ 100,704 $ 97,273
Old National does not record interest on nonaccrual loans until
principal is recovered. Interest income recognized on impaired
loans during the three months ended March 31, 2018 and 2017
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
March 31, 2018 and December 31, 2017 were as follows:
(dollars in thousands) 30-59 Days 60-89 Days Past Due Nonaccrual Total Current
March 31, 2018
Commercial $ 1,068 $ 195 $ 10 $ 33,175 $ 34,448 $ 2,777,181
Commercial Real Estate:
Construction
—
—
— 905 905 350,543
Other 1,779 932
— 59,498 62,209 4,036,323
Residential 21,071 909 16 21,137 43,133 2,115,399
Consumer:
Home equity 1,965 183 16 5,023 7,187 480,050
Auto 4,904 1,139 214 2,515 8,772 1,108,255
Other 2,121 1,014 71 5,043 8,249 206,028
Total loans $ 32,908 $ 4,372 $ 327 $ 127,296 $ 164,903 $ 11,073,779
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 loans $ 34,102 $ 7,011 $ 894 $ 124,927 $ 166,934 $ 10,951,187
Loan Participations
Old National has loan participations, which qualify as
participating interests, with other financial institutions. At
March 31, 2018, these loans totaled $580.2 million, of which
$301.4 million had been sold to other financial institutions and
$278.8 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 three months
ended March 31, 2018 and 2017:
Commercial
(dollars in thousands) Commercial Real Estate Residential Consumer Total
Three Months Ended March 31, 2018
Balance at beginning of period $ 12,088 $ 34,705 $ 3,315 $ 3,895 $ 54,003
(Charge-offs)/recoveries (129 ) (10 ) 23 298 182
Payments (476 ) (495 ) (276 ) (537 ) (1,784 )
Additions 539 566
— 432 1,537
Interest collected on nonaccrual loans (104 ) (278 ) (4 ) (68 ) (454 )
Balance at end of period $ 11,918 $ 34,488 $ 3,058 $ 4,020 $ 53,484
Three Months Ended March 31, 2017
Balance at beginning of period $ 16,802 $ 18,327 $ 2,985 $ 2,602 $ 40,716
(Charge-offs)/recoveries 35 355
— (100 ) 290
Payments (3,827 ) (1,751 ) (142 ) (508 ) (6,228 )
Additions 9,442
— 564 1,924 11,930
Interest collected on nonaccrual loans 2,170 358
— 11 2,539
Balance at end of period $ 24,622 $ 17,289 $ 3,407 $ 3,929 $ 49,247
Approximately $36.9 million of the TDRs at March 31, 2018 were
included with nonaccrual loans, compared to $34.0 million of the
TDRs at December 31, 2017. Old National has allocated specific
reserves to customers whose loan terms have been modified in TDRs
totaling $5.9 million at March 31, 2018 and $5.7 million at
December 31, 2017. At March 31, 2018, Old National had
committed to lend an additional $4.6 million to customers with
outstanding loans that are classified as TDRs.
The pre-modification and post-modification outstanding recorded
investments of loans modified as TDRs during the three months ended
March 31, 2018 and 2017 are the same except for when the loan
modifications involve the forgiveness of principal. The following
table presents loans by class modified as TDRs that occurred during
the three months ended March 31, 2018 and 2017:
Pre-modification
Post-modification
Number
Outstanding Recorded
Outstanding Recorded
(dollars in thousands) of Loans Investment Investment
Three Months Ended March 31, 2018
TDR:
Commercial 1 $ 539 $ 539
Commercial Real Estate - Other 1 566 566
Consumer 1 432 432
Total 3 $ 1,537 $ 1,537
Three Months Ended March 31, 2017
TDR:
Commercial 6 $ 9,442 $ 9,442
Residential 3 564 564
Consumer 5 1,924 1,924
Total 14 $ 11,930 $ 11,930
The TDRs that occurred during the three months ended March 31,
2018 did not change the allowance for loan losses and resulted in
no charge-offs during the three months ended March 31, 2018.
The TDRs that occurred during the three months ended March 31,
2017 decreased the allowance for loan losses by $0.1 million due to
a change in collateral position on a large commercial loan and
resulted in no charge-offs.
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 were insignificant during the three
months ended March 31, 2018 and 2017.
The terms of certain other loans were modified during the three
months ended March 31, 2018 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 March 31, 2018, 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:
March 31,
December 31,
(dollars in thousands) 2018 2017
Commercial $ 4,799 $ 5,152
Commercial real estate 20,978 21,826
Residential 10,839 11,303
Consumer 4,631 5,245
Carrying amount 41,247 43,526
Allowance for loan losses (172 ) (166 )
Carrying amount, net of allowance $ 41,075 $ 43,360
The outstanding balance of loans accounted for under ASC 310-30,
including contractual principal, interest, fees and penalties, was
$230.5 million at March 31, 2018 and $235.9 million at
December 31, 2017.
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 $4.5 million during the
three months ended March 31, 2018 and $4.7 million during the
three months ended March 31, 2017. 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:
Three Months
Ended
March 31,
(dollars in thousands) 2018 2017
Balance at beginning of period $ 27,835 $ 33,603
Accretion of income (4,526 ) (4,685 )
Reclassifications from (to) nonaccretable difference 1,379 610
Disposals/other adjustments 4 6
Balance at end of period $ 24,692 $ 29,534
Included in Old National’s allowance for loan losses is $0.2
million related to the purchased loans disclosed above at
March 31, 2018 and December 31, 2017.
PCI loans purchased during 2017 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)
Contractually required payments $ 16,898
Nonaccretable difference (4,787 )
Cash flows expected to be collected at acquisition 12,111
Accretable yield (1,556 )
Fair value of acquired loans at acquisition $ 10,555
(1) Old National acquired Anchor (MN)
effective November 1, 2017.
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. |
