| 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% The composition of loans by lending classification was as follows:
September 30,
December 31,
(dollars in thousands)
2018
2017
Commercial (1)
$
2,949,277
$
2,717,269
Commercial real estate:
Construction
542,228
374,306
Other
3,939,326
3,980,246
Residential real estate
2,166,203
2,167,053
Consumer credit:
Home equity
498,325
507,507
Auto
1,058,977
1,148,672
Other
138,323
223,068
Total loans
11,292,659
11,118,121
Allowance for loan losses
(52,713
)
(50,381
)
Net loans
$
11,239,946
$
11,067,740
(1)
Includes direct finance leases of $22.1 million at September 30, 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 c onstruction 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. Thes e 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 211%, 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, 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. 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. Old National 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 $68.2 million at December 31, 2017. Old National sold the remaining student loan portfolio totaling $64.9 million during the second quarter of 2018, resulting in a $2.2 million gain that is included in other income on the income statement. 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 h istoric 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, 2018 and 2017 was as follows:
Commercial
(dollars in thousands)
Commercial
Real Estate
Residential
Consumer
Total
Three Months Ended September 30, 2018
Balance at beginning of period
$
21,387
$
22,498
$
1,867
$
7,908
$
53,660
Charge-offs
(1,662
)
(241
)
(284
)
(2,074
)
(4,261
)
Recoveries
467
944
45
1,108
2,564
Provision
(473
)
(309
)
292
1,240
750
Balance at end of period
$
19,719
$
22,892
$
1,920
$
8,182
$
52,713
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
Nine Months Ended September 30, 2018
Balance at beginning of period
$
19,246
$
21,436
$
1,763
$
7,936
$
50,381
Charge-offs
(2,378
)
(675
)
(941
)
(6,006
)
(10,000
)
Recoveries
1,227
2,011
1,890
3,628
8,756
Provision
1,624
120
(792
)
2,624
3,576
Balance at end of period
$
19,719
$
22,892
$
1,920
$
8,182
$
52,713
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
The following table provides Old National’s recorded investment in loans by portfolio segment at September 30, 2018 and December 31, 2017 and other information regarding the allowance:
Commercial
(dollars in thousands)
Commercial
Real Estate
Residential
Consumer
Total
September 30, 2018
Allowance for loan losses:
Individually evaluated for impairment
$
4,881
$
7,270
$
-
$
-
$
12,151
Collectively evaluated for impairment
14,831
15,478
1,919
8,031
40,259
Loans acquired with deteriorated credit quality
7
144
1
151
303
Total allowance for loan losses
$
19,719
$
22,892
$
1,920
$
8,182
$
52,713
Loans and leases outstanding:
Individually evaluated for impairment
$
35,404
$
86,503
$
-
$
-
$
121,907
Collectively evaluated for impairment
2,909,643
4,377,382
2,156,492
1,691,777
11,135,294
Loans acquired with deteriorated credit quality
4,230
17,669
9,711
3,848
35,458
Total loans and leases outstanding
$
2,949,277
$
4,481,554
$
2,166,203
$
1,695,625
$
11,292,659
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 . Special mention loans that have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Classified – Substandard . Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Classified – Nonaccrual . Loans classified as nonaccrual have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection in full, on the basis of currently existing facts, conditions, and values, in doubt. Classif i ed – Doubtful . Loans classified as doubtful have all the weaknesses inherent in those classified as nonaccrual , with the added characteristic that the weaknesses make collection in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. 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, 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
September 30,
December 31,
September 30,
December 31,
September 30,
December 31,
Internally Assigned Grade
2018
2017
2018
2017
2018
2017
Grade:
Pass
$
2,789,061
$
2,577,824
$
505,930
$
357,438
$
3,734,727
$
3,762,896
Criticized
79,866
74,876
22,130
14,758
79,170
98,451
Classified - substandard
43,835
37,367
-
-
58,364
58,584
Classified - nonaccrual
28,151
24,798
14,168
2,110
30,624
30,108
Classified - doubtful
8,364
2,404
-
-
36,441
30,207
Total
$
2,949,277
$
2,717,269
$
542,228
$
374,306
$
3,939,326
$
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 September 30, 2018 and December 31, 2017:
Consumer
Home
(dollars in thousands)
Residential
Equity
Auto
Other
September 30, 2018
Performing
$
2,142,768
$
494,510
$
1,056,681
$
136,801
Nonperforming
23,435
3,815
2,296
1,522
Total
$
2,166,203
$
498,325
$
1,058,977
$
138,323
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 September 30, 2018 and December 31, 2017, respectively. Only purchased loans that have experienced subsequent impairment since the date acquired (excluding loans acquired with deteriorated credit quality) are included in the table below.
Unpaid
Recorded
Principal
Related
(dollars in thousands)
Investment
Balance
Allowance
September 30, 2018
With no related allowance recorded:
Commercial
$
20,332
$
21,083
$
-
Commercial Real Estate - Other
45,740
47,168
-
Residential
2,335
2,355
-
Consumer
1,301
1,425
-
With an allowance recorded:
Commercial
15,072
15,125
4,881
Commercial Real Estate - Construction
14,168
14,973
2,474
Commercial Real Estate - Other
26,595
26,727
4,796
Residential
792
792
40
Consumer
1,901
1,901
95
Total
$
128,236
$
131,549
$
12,286
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 and nine months ended September 30, 2018 and 2017 are included in the table below.
Three Months Ended
Nine Months Ended
September 30,
September 30,
(dollars in thousands)
2018
2017
2018
2017
Average Recorded Investment
With no related allowance recorded:
Commercial
$
19,960
$
24,234
$
20,445
$
27,197
Commercial Real Estate - Other
45,302
33,268
42,209
31,258
Residential
2,303
2,482
2,289
2,405
Consumer
1,392
1,755
1,617
1,786
With an allowance recorded:
Commercial
14,771
7,792
10,393
8,086
Commercial Real Estate - Construction
11,307
-
7,537
-
Commercial Real Estate - Other
24,305
30,846
26,537
28,580
Residential
863
1,011
887
1,059
Consumer
1,909
2,163
2,013
2,136
Total
$
122,112
$
103,551
$
113,927
$
102,507
Old National 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 , 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 September 30, 2018 and December 31, 2017 were as follows:
Past Due
90 Days or
30-59 Days
60-89 Days
More and
Total
(dollars in thousands)
Past Due
Past Due
Accruing
Nonaccrual (1)
Past Due
Current
September 30, 2018
Commercial
$
588
$
72
$
1
$
36,515
$
37,176
$
2,912,101
Commercial Real Estate:
Construction
354
-
-
14,168
14,522
527,706
Other
1,858
25
-
67,065
68,948
3,870,378
Residential
23,977
3,352
190
23,435
50,954
2,115,249
Consumer:
Home equity
1,449
190
271
3,815
5,725
492,600
Auto
5,319
1,224
441
2,296
9,280
1,049,697
Other
663
561
77
1,522
2,823
135,500
Total loans
$
34,208
$
5,424
$
980
$
148,816
$
189,428
$
11,103,231
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
(1)
Includes purchased credit impaired loans of $9.9 million at September 30, 2018 and $12.6 million at December 31, 2017 that are categorized as nonaccrual for credit analysis purposes because the collection of principal or interest is doubtful. However, these loans are accounted for under FASB ASC 310-30 and accordingly treated as performing assets. Loan Participations Old National has loan participations, which qualify as participating interests, with other financial institutions. At September 30, 2018, these loans totaled $752.3 million, of which $371.2 million had been sold to other financial institutions and $381.1 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 and nine months ended September 30, 2018 and 2017:
Commercial
(dollars in thousands)
Commercial
Real Estate
Residential
Consumer
Total
Three Months Ended September 30, 2018
Balance at beginning of period
$
9,043
$
34,927
$
3,771
$
3,398
$
51,139
(Charge-offs)/recoveries
(7
)
753
-
3
749
(Payments)/disbursements
453
(6,601
)
(75
)
(200
)
(6,423
)
Additions
1,954
-
-
-
1,954
Balance at end of period
$
11,443
$
29,079
$
3,696
$
3,201
$
47,419
Three Months Ended September 30, 2017
Balance at beginning of period
$
20,064
$
33,059
$
3,640
$
3,644
$
60,407
(Charge-offs)/recoveries
59
6
-
39
104
(Payments)/disbursements
(1,488
)
(361
)
(294
)
(134
)
(2,277
)
Additions
3,157
-
-
644
3,801
Balance at end of period
$
21,792
$
32,704
$
3,346
$
4,193
$
62,035
Nine Months Ended September 30, 2018
Balance at beginning of period
$
12,088
$
34,705
$
3,315
$
3,895
$
54,003
(Charge-offs)/recoveries
(158
)
731
23
(19
)
577
(Payments)/disbursements
(3,525
)
(7,570
)
(144
)
(1,107
)
(12,346
)
Additions
3,038
1,213
502
432
5,185
Balance at end of period
$
11,443
$
29,079
$
3,696
$
3,201
$
47,419
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)/disbursements
(7,604
)
(3,418
)
(576
)
(919
)
(12,517
)
Additions
12,599
17,429
937
2,568
33,533
Balance at end of period
$
21,792
$
32,704
$
3,346
$
4,193
$
62,035
TDRs included with nonaccrual loans totaled $29.9 million at September 30, 2018 and $34.0 million at December 31, 2017. Old National has allocated specific reserves to customers whose loan terms have been modified in TDRs totaling $3.0 million at September 30, 2018 and $5.7 million at December 31, 2017. At September 30, 2018, Old National had not committed to lend additional funds 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 , 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 nine months ended September 30 , 2018 and 2017 :
Pre-modification
Post-modification
Number
Outstanding Recorded
Outstanding Recorded
(dollars in thousands)
of Loans
Investment
Investment
Nine Months Ended September 30, 2018
TDR:
Commercial
5
$
3,038
$
3,038
Commercial Real Estate - Other
2
1,213
1,213
Residential
1
502
502
Consumer
1
432
432
Total
9
$
5,185
$
5,185
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
The TDRs that occurred during the nine months ended September 30, 2018 did not have a material impact on the allowance for loan losses and resulted in no charge-offs during the nine months ended September 30, 2018. 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. 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 nine months ended September 30, 2018 and 2017. The terms of certain other loans were modified during 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 September 30, 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 – Overal l . However, consistent with ASC 310-40-50-2, Troubled Debt Restructurings by Creditors, Creditor Disclosure of Troubled Debt Restructurings , the loan would not be required to be reported in the years following the restructuring if the subsequent restructuring meets both of these criteria: (1) has an interest rate at the time of the subsequent restructuring that is not less than a market interest rate ; and (2) is performing in compliance with its modified terms after the subsequent restructuring . Purchased Credit Impaired Loans 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 prospectively. 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 |
