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Loans and Allowance for Credit Losses

3 Months Ended

Mar. 31, 2022

LOANS AND ALLOWANCE FOR CREDIT LOSSES

Loans

Old National’s loans consist primarily of loans made to consumers and commercial clients in many diverse industries, including manufacturing, agribusiness, transportation, mining, wholesaling, and retailing. Most of Old National’s lending activity occurs within our principal geographic markets of Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, and Wisconsin. Old National manages concentrations of credit exposure by industry, product, geography, client relationship, and loan size.

The loan categories used to monitor and analyze interest income and yields are different than the portfolio segments used to determine the allowance for credit losses for loans. The allowance for credit losses was calculated by pooling loans of similar credit risk characteristics and credit monitoring procedures. The four loan portfolios – commercial, commercial real estate, residential real estate, and consumer – are classified into seven segments of loans – commercial, commercial real estate, BBCC, residential real estate, indirect, direct, and home equity. The commercial and commercial real estate loan categories shown on the balance sheet include the same pool of loans as the commercial, commercial real estate, and BBCC portfolio segments. The consumer loan category shown on the balance sheet is comprised of the same loans in the indirect, direct, and home equity portfolio segments. The portfolio segment reclassifications follow:


			Segment
	Statement		Portfolio		After
(dollars in thousands)	Balance		Reclassifications		Reclassifications
March 31, 2022
Loans:
Commercial	$	8,624,253	$	(189,580)	$	8,434,673
Commercial real estate	11,337,735		(154,733)		11,183,002
BBCC	N/A		344,313		344,313
Residential real estate	5,706,155		—		5,706,155
Consumer	2,668,101		(2,668,101)		N/A
Indirect	N/A		906,526		906,526
Direct	N/A		680,690		680,690
Home equity	N/A		1,080,885		1,080,885
Total	$	28,336,244	$	—	$	28,336,244

December 31, 2021
Loans:
Commercial	$	3,391,769	$	(191,557)	$	3,200,212
Commercial real estate	6,380,674		(159,190)		6,221,484
BBCC	N/A		350,747		350,747
Residential real estate	2,255,289		—		2,255,289
Consumer	1,574,114		(1,574,114)		N/A
Indirect	N/A		873,139		873,139
Direct	N/A		140,385		140,385
Home equity	N/A		560,590		560,590
Total	$	13,601,846	$	—	$	13,601,846

The composition of loans by portfolio segment follows:


(dollars in thousands)	March 31, 2022		December 31, 2021
Commercial (1) (2)	$	8,434,673	$	3,200,212
Commercial real estate	11,183,002		6,221,484
BBCC	344,313		350,747
Residential real estate	5,706,155		2,255,289
Indirect	906,526		873,139
Direct	680,690		140,385
Home equity	1,080,885		560,590
Total loans	28,336,244		13,601,846
Allowance for credit losses	(280,507)		(107,341)
Net loans	$	28,055,737	$	13,494,505

(1)Includes direct finance leases of $71.1 million at March 31, 2022 and $25.1 million at December 31, 2021.

(2)Includes PPP loans of $205.3 million at March 31, 2022 and $169.0 million at December 31, 2021.

The risk characteristics of each loan portfolio segment are as follows:

Commercial

Commercial loans are classified primarily 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 clients.

Commercial Real Estate

Commercial real estate 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.

At 236%, 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, 2022.

BBCC

BBCC loans are typically granted to small businesses with gross revenues of less than $5 million and aggregate debt of less than $1 million. Old National has established minimum debt service coverage ratios, minimum FICO scores for owners and guarantors, and the ability to show relatively stable earnings as criteria to help mitigate risk. Repayment of these loans depends on the personal income of the borrowers and the cash flows of the business. These factors can be affected by changes in economic conditions such as unemployment levels.

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. Portfolio risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Indirect

Indirect loans are secured by automobile collateral, generally new and used cars and trucks from auto dealers that operate within our footprint. Old National typically mitigates the risk of indirect loans by establishing minimum FICO scores, maximum loan-to-value ratios, and maximum debt-to-income ratios. Repayment of these loans depends largely on the personal income of the borrowers, which can be affected by changes in economic conditions

such as unemployment levels. Portfolio risk is mitigated by the fact that the loans are of smaller amounts spread over many borrowers, conservative credit policies, and ongoing reviews of dealer relationships.

Direct

Direct loans are typically secured by collateral such as auto or real estate or are unsecured. Old National has established conservative underwriting standards such as minimum FICO scores, maximum loan-to-value ratios, and maximum debt-to-income ratios. Repayment of these loans depends largely on the personal income of the borrowers, which can be affected by changes in economic conditions such as unemployment levels. Portfolio risk is mitigated by the fact that the loans are of smaller amounts spread over many borrowers along with conservative credit policies.

Home Equity

Home equity loans are generally secured by 1-4 family residences that are owner occupied. Old National has established conservative underwriting standards such as minimum FICO scores, maximum loan-to-value ratios, and maximum debt-to-income ratios. Repayment of these loans depends largely on the personal income of the borrowers, which can be affected by changes in economic conditions such as unemployment levels. Portfolio risk is mitigated by the fact that the loans are of smaller amounts spread over many borrowers, along with conservative credit policies as well as monitoring of updated borrower credit scores.

Allowance for Credit Losses

Loans

Credit quality within the loans held for investment portfolio is continuously monitored by management and is reflected within the allowance for credit losses for loans. The allowance for credit losses is an estimate of expected losses inherent within the Company’s loans held for investment portfolio. Credit quality is assessed and monitored by evaluating various attributes and the results of those evaluations are utilized in underwriting new loans and in our process for estimating expected credit losses. Expected credit loss inherent in non-cancelable off-balance-sheet credit exposures is accounted for as a separate liability included in other liabilities on the balance sheet. The allowance for credit losses for loans held for investment is adjusted by a credit loss expense, which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries. Old National has made a policy election to report accrued interest receivable as a separate line item on the balance sheet. Accrued interest receivable on loans is excluded from the estimate of credit losses and totaled $96.2 million at March 31, 2022 and $47.6 million at December 31, 2021.

The allowance for credit loss estimation process involves procedures to appropriately consider the unique characteristics of its loan portfolio segments. These segments are further disaggregated into loan classes based on the level at which credit risk is monitored. When computing the level of expected credit losses, credit loss assumptions are estimated using a model that categorizes loan pools based on loss history, delinquency status, and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense in those future periods.

The allowance level is influenced by loan volumes, loan AQR migration or delinquency status, changes in historical loss experience, and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions. The methodology for estimating the amount of expected credit losses reported in the allowance for credit losses has two basic components: first, an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans; and second, a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics.

The allowance for credit losses increased for the three months ended March 31, 2022 primarily due to $78.5 million of allowance for credit losses on acquired PCD loans established through acquisition accounting adjustments on the merger date. In addition, $96.3 million of provision for credit losses to establish an allowance for credit losses on non-PCD loans acquired in the First Midwest merger contributed to the increase. The forecast scenario includes improved unemployment and house price index. In addition to the quantitative inputs, several qualitative factors were considered. These factors include the risk that unemployment and gross domestic product prove to be more severe and/or prolonged than our baseline forecast, the consumption of the vaccine is less than anticipated, the presence of communicable strains of the virus, supply chain issues, and inflation. The mitigating impact of the economy remaining open was also considered. Old National’s activity in the allowance for credit losses for loans by portfolio segment was as follows:


(dollars in thousands)	Balance at Beginning of Period		Allowance Established for Acquired PCD Loans		Charge-offs		Recoveries		Provision for Credit Losses		Balance at End of Period
Three Months Ended March 31, 2022
Commercial	$	27,232	$	35,040	$	(1,880)	$	325	$	38,754	$	99,471
Commercial real estate	64,004		42,601		(507)		182		34,210		140,490
BBCC	2,458		—		(28)		57		(418)		2,069
Residential real estate	9,347		136		(185)		440		7,514		17,252
Indirect	1,743		—		(483)		222		166		1,648
Direct	528		31		(1,530)		582		14,839		14,450
Home equity	2,029		723		(51)		82		2,344		5,127
Total	$	107,341	$	78,531	$	(4,664)	$	1,890	$	97,409	$	280,507

Three Months Ended March 31, 2021
Commercial	$	30,567	$	—	$	(407)	$	238	$	(5,268)	$	25,130
Commercial real estate	75,810		—		(1)		73		(5,321)		70,561
BBCC	6,120		—		(36)		41		(3,588)		2,537
Residential real estate	12,608		—		(158)		87		(2,272)		10,265
Indirect	3,580		—		(584)		537		(1,278)		2,255
Direct	855		—		(302)		260		(148)		665
Home equity	1,848		—		(82)		339		519		2,624
Total	$	131,388	$	—	$	(1,570)	$	1,575	$	(17,356)	$	114,037

Unfunded Loan Commitments

Old National maintains an allowance for credit losses on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements. The allowance is computed using a methodology similar to that used to determine the allowance for credit losses for loans, modified to take into account the probability of a drawdown on the commitment. The allowance for credit losses on unfunded loan commitments is classified as a liability account on the balance sheet within accrued expenses and other liabilities, while the corresponding provision for these credit losses is recorded as a component of other expense. Old National’s activity in the allowance for credit losses on unfunded loan commitments was as follows:


	Three Months Ended March 31,
(dollars in thousands)	2022		2021
Allowance for credit losses on unfunded loan commitments:
Balance at beginning of period	$	10,879	$	11,689
Provision for credit losses on unfunded commitments for loans acquired during the period	11,013		—
Expense (reversal of expense) for credit losses	154		(1,324)
Balance at end of period	$	22,046	$	10,365

Credit Quality

Old National’s management monitors the credit quality of its loans on an ongoing basis with the AQR for commercial loans reviewed annually or at renewal and the performance of its residential and consumer loans based upon the accrual status refreshed at least quarterly. Internally, management assigns an AQR to each non-homogeneous commercial, commercial real estate, and BBCC loan in the portfolio. The primary determinants of the AQR are 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.

Classified – Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as nonaccrual, with the added characteristic that the weaknesses make collection or liquidation 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 following table summarizes the amortized cost of term loans by risk category of commercial, commercial real estate, and BBCC loans by loan portfolio segment, class of loan, and origination year:


	Origination Year														Revolving to Term
(dollars in thousands)	2022		2021		2020		2019		2018		Prior		Revolving				Total
March 31, 2022
Commercial:
Risk Rating:
Pass	$	529,094	$	2,006,908	$	1,118,822	$	1,010,657	$	464,275	$	653,504	$	2,047,370	$	140,617	$	7,971,247
Criticized	4,190		26,183		17,198		32,638		18,458		20,190		68,124		1,955		188,936
Classified:
Substandard	25,856		43,839		22,160		48,825		28,063		12,127		28,989		19,315		229,174
Nonaccrual	—		2,416		4,280		3,039		1,244		9,599		3,233		6,375		30,186
Doubtful	—		1,738		2,128		878		2,958		3,765		3,663		—		15,130
Total	$	559,140	$	2,081,084	$	1,164,588	$	1,096,037	$	514,998	$	699,185	$	2,151,379	$	168,262	$	8,434,673

Commercial real estate:
Risk Rating:
Pass	$	650,646	$	2,778,302	$	2,236,175	$	1,553,009	$	958,205	$	1,672,138	$	117,993	$	483,920	$	10,450,388
Criticized	36,934		49,341		35,471		56,892		59,254		40,428		—		34,058		312,378
Classified:
Substandard	6,497		67,687		28,372		50,652		62,504		65,373		2,291		4,258		287,634
Nonaccrual	—		8,197		4,842		(1)		1,393		10,661		309		809		26,210
Doubtful	—		41,379		4,818		1,541		7,794		50,860		—		—		106,392
Total	$	694,077	$	2,944,906	$	2,309,678	$	1,662,093	$	1,089,150	$	1,839,460	$	120,593	$	523,045	$	11,183,002

BBCC:
Risk Rating:
Pass	$	21,151	$	77,808	$	64,413	$	49,309	$	30,895	$	26,428	$	45,160	$	19,025	$	334,189
Criticized	343		1,493		1,315		777		207		—		488		1,752		6,375
Classified:
Substandard	25		280		—		546		16		161		236		270		1,534
Nonaccrual	—		20		203		—		71		—		—		849		1,143
Doubtful	—		—		25		395		364		288		—		—		1,072
Total	$	21,519	$	79,601	$	65,956	$	51,027	$	31,553	$	26,877	$	45,884	$	21,896	$	344,313


	Origination Year														Revolving to Term
(dollars in thousands)	2021		2020		2019		2018		2017		Prior		Revolving				Total
December 31, 2021
Commercial:
Risk Rating:
Pass	$	918,456	$	563,869	$	271,158	$	98,468	$	156,136	$	235,639	$	667,628	$	130,470	$	3,041,824
Criticized	9,998		7,885		6,660		—		7,809		2,658		14,601		10,076		59,687
Classified:
Substandard	14,773		14,468		10,200		9,849		5,521		945		6,883		10,322		72,961
Nonaccrual	1,069		3,507		1,276		3,721		1,448		—		845		7,796		19,662
Doubtful	—		178		—		288		337		5,275		—		—		6,078
Total	$	944,296	$	589,907	$	289,294	$	112,326	$	171,251	$	244,517	$	689,957	$	158,664	$	3,200,212

Commercial real estate:
Risk Rating:
Pass	$	1,555,880	$	1,474,271	$	846,921	$	481,508	$	462,176	$	611,680	$	42,609	$	451,544	$	5,926,589
Criticized	27,622		24,790		39,914		—		21,614		22,157		—		34,387		170,484
Classified:
Substandard	4,706		12,118		9,933		9,058		18,165		11,351		2,291		4,339		71,961
Nonaccrual	1,620		2,997		—		1,627		3,419		8,905		315		871		19,754
Doubtful	6,653		—		1,970		342		11,218		12,513		—		—		32,696
Total	$	1,596,481	$	1,514,176	$	898,738	$	492,535	$	516,592	$	666,606	$	45,215	$	491,141	$	6,221,484

BBCC:
Risk Rating:
Pass	$	81,710	$	69,749	$	54,580	$	34,461	$	25,113	$	8,296	$	47,571	$	18,778	$	340,258
Criticized	1,320		1,170		841		160		—		—		670		1,578		5,739
Classified:
Substandard	284		24		79		7		187		465		103		239		1,388
Nonaccrual	—		88		—		—		66		162		—		1,136		1,452
Doubtful	—		25		284		1,391		—		210		—		—		1,910
Total	$	83,314	$	71,056	$	55,784	$	36,019	$	25,366	$	9,133	$	48,344	$	21,731	$	350,747

For residential real estate and consumer loan classes, Old National evaluates credit quality based on the aging status of the loan and by payment activity. The performing or nonperforming status is updated on an on-going basis dependent upon improvement and deterioration in credit quality. The following table presents the amortized cost of term residential real estate and consumer loans based on payment activity and origination year:


	Origination Year														Revolving to Term
(dollars in thousands)	2022		2021		2020		2019		2018		Prior		Revolving				Total
March 31, 2022
Residential real estate:
Risk Rating:
Performing	$	261,002	$	1,923,614	$	1,943,517	$	536,379	$	153,889	$	848,879	$	7,338	$	101	$	5,674,719
Nonperforming	—		276		567		630		1,383		28,580		—		—		31,436
Total	$	261,002	$	1,923,890	$	1,944,084	$	537,009	$	155,272	$	877,459	$	7,338	$	101	$	5,706,155

Indirect:
Risk Rating:
Performing	$	132,303	$	336,662	$	205,006	$	126,786	$	56,493	$	46,887	$	—	$	2	$	904,139
Nonperforming	—		339		521		492		399		636		—		—		2,387
Total	$	132,303	$	337,001	$	205,527	$	127,278	$	56,892	$	47,523	$	—	$	2	$	906,526

Direct:
Risk Rating:
Performing	$	51,785	$	208,885	$	110,180	$	91,848	$	67,637	$	57,716	$	91,394	$	42	$	679,487
Nonperforming	—		189		84		256		197		433		40		4		1,203
Total	$	51,785	$	209,074	$	110,264	$	92,104	$	67,834	$	58,149	$	91,434	$	46	$	680,690

Home equity:
Risk Rating:
Performing	$	4,106	$	12,367	$	8,145	$	17,441	$	14,323	$	47,692	$	947,382	$	16,663	$	1,068,119
Nonperforming	213		341		341		666		1,354		6,483		361		3,007		12,766
Total	$	4,319	$	12,708	$	8,486	$	18,107	$	15,677	$	54,175	$	947,743	$	19,670	$	1,080,885

	Origination Year														Revolving to Term
	2021		2020		2019		2018		2017		Prior		Revolving				Total
December 31, 2021
Residential real estate:
Risk Rating:
Performing	$	625,582	$	632,705	$	272,600	$	72,766	$	103,866	$	529,293	$	12	$	105	$	2,236,929
Nonperforming	96		165		166		350		855		16,728		—		—		18,360
Total	$	625,678	$	632,870	$	272,766	$	73,116	$	104,721	$	546,021	$	12	$	105	$	2,255,289

Indirect:
Risk Rating:
Performing	$	361,485	$	231,156	$	146,978	$	68,513	$	41,598	$	20,819	$	—	$	9	$	870,558
Nonperforming	262		524		614		510		430		241		—		—		2,581
Total	$	361,747	$	231,680	$	147,592	$	69,023	$	42,028	$	21,060	$	—	$	9	$	873,139

Direct:
Risk Rating:
Performing	$	34,058	$	16,135	$	14,396	$	14,579	$	7,432	$	15,831	$	36,812	$	192	$	139,435
Nonperforming	13		53		130		133		35		536		42		8		950
Total	$	34,071	$	16,188	$	14,526	$	14,712	$	7,467	$	16,367	$	36,854	$	200	$	140,385

Home equity:
Risk Rating:
Performing	$	—	$	—	$	633	$	349	$	535	$	—	$	539,057	$	16,768	$	557,342
Nonperforming	—		—		16		9		41		1		258		2,923		3,248
Total	$	—	$	—	$	649	$	358	$	576	$	1	$	539,315	$	19,691	$	560,590

Nonaccrual and Past Due Loans

Old National does not record interest on nonaccrual loans until principal is recovered. 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 collectability of principal or interest. Interest accrued but not received is reversed against earnings. 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.

The following table presents the aging of the amortized cost basis in past due loans by class of loans:


(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Past Due 90 Days or More		Total Past Due		Current		Total Loans
March 31, 2022
Commercial	$	27,863	$	6,831	$	6,921	$	41,615	$	8,393,058	$	8,434,673
Commercial real estate	49,697		14,086		72,794		136,577		11,046,425		11,183,002
BBCC	1,044		20		164		1,228		343,085		344,313
Residential	17,624		1,591		10,733		29,948		5,676,207		5,706,155
Indirect	3,277		598		469		4,344		902,182		906,526
Direct	4,778		897		1,519		7,194		673,496		680,690
Home equity	2,079		529		3,678		6,286		1,074,599		1,080,885
Total	$	106,362	$	24,552	$	96,278	$	227,192	$	28,109,052	$	28,336,244

December 31, 2021
Commercial	$	2,723	$	617	$	1,603	$	4,943	$	3,195,269	$	3,200,212
Commercial real estate	1,402		280		7,042		8,724		6,212,760		6,221,484
BBCC	747		162		109		1,018		349,729		350,747
Residential	8,273		2,364		4,554		15,191		2,240,098		2,255,289
Indirect	3,888		867		554		5,309		867,830		873,139
Direct	687		159		162		1,008		139,377		140,385
Home equity	693		199		777		1,669		558,921		560,590
Total	$	18,413	$	4,648	$	14,801	$	37,862	$	13,563,984	$	13,601,846

The following table presents the amortized cost basis of loans on nonaccrual status and loans past due 90 days or more and still accruing by class of loan:


	March 31, 2022						December 31, 2021
(dollars in thousands)	Nonaccrual Amortized Cost		Nonaccrual With No Related Allowance		Past Due 90 Days or More and Accruing		Nonaccrual Amortized Cost		Nonaccrual With No Related Allowance		Past Due 90 Days or More and Accruing
Commercial	$	45,316	$	13,579	$	396	$	25,740	$	9,574	$	—
Commercial real estate	132,602		31,865		985		52,450		25,139		—
BBCC	2,215		—		—		3,362		—		—
Residential	31,436		—		165		18,360		—		—
Indirect	2,387		—		—		2,581		—		4
Direct	1,203		—		100		950		—		3
Home equity	12,766		—		—		3,248		—		—
Total	$	227,925	$	45,444	$	1,646	$	106,691	$	34,713	$	7

Interest income recognized on nonaccrual loans was insignificant during the three months ended March 31, 2022 and 2021.

When management determines that foreclosure is probable, expected credit losses for collateral dependent loans are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. A loan is considered collateral dependent when the borrower is experiencing financial difficulty and the loan is expected to be repaid substantially through the operation or sale of the collateral. The class of loan represents the primary collateral type associated with the loan. Significant quarter over quarter changes are reflective of changes in nonaccrual status and not necessarily associated with credit quality indicators like appraisal value. The following table presents the amortized cost basis of collateral dependent loans by class of loan:


	Type of Collateral
(dollars in thousands)	Real Estate		Blanket Lien		Investment Securities/Cash		Auto		Other
March 31, 2022
Commercial	$	13,539	$	23,217	$	3,052	$	805	$	3,716
Commercial real estate	119,136		—		939		—		6,638
BBCC	1,509		587		26		93		—
Residential	31,436		—		—		—		—
Indirect	—		—		—		2,387		—
Direct	560		—		—		215		34
Home equity	12,766		—		—		—		—
Total loans	$	178,946	$	23,804	$	4,017	$	3,500	$	10,388

December 31, 2021
Commercial	$	8,100	$	13,816	$	3,394	$	80	$	302
Commercial real estate	38,657		—		961		—		6,653
BBCC	1,895		1,331		43		93		—
Residential	18,360		—		—		—		—
Indirect	—		—		—		2,581		—
Direct	724		—		1		152		20
Home equity	3,248		—		—		—		—
Total loans	$	70,984	$	15,147	$	4,399	$	2,906	$	6,975

Loan Participations

Old National has loan participations, which qualify as participating interests, with other financial institutions. At March 31, 2022, these loans totaled $2.520 billion, of which $1.328 billion had been sold to other financial institutions and $1.192 billion 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 includes 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. 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 allocation is established within the allowance for credit losses for the difference between the carrying value of the loan and its computed value. To determine the computed 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, if the loan is collateral dependent. The allocation 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, the allowance allocation is recalculated and 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:


(dollars in thousands)	Beginning Balance		(Charge-offs)/ Recoveries		(Payments)/ Disbursements		(Removals)/ Additions		Ending Balance
Three Months Ended March 31, 2022
Commercial	$	7,456	$	—	$	(1,897)	$	1,485	$	7,044
Commercial real estate	17,158		4		(211)		15,477		32,428
BBCC	87		3		(3)		—		87
Residential	2,435		—		(30)		—		2,405
Indirect	—		1		(1)		—		—
Direct	2,704		—		(25)		—		2,679
Home equity	199		1		(20)		—		180
Total	$	30,039	$	9	$	(2,187)	$	16,962	$	44,823

Three Months Ended March 31, 2021
Commercial	$	11,090	$	—	$	(1,448)	$	(1,171)	$	8,471
Commercial real estate	17,606		8		(229)		—		17,385
BBCC	112		3		(10)		—		105
Residential	2,824		—		(221)		—		2,603
Indirect	—		2		(2)		—		—
Direct	739		1		(14)		—		726
Home equity	282		1		(7)		—		276
Total	$	32,653	$	15	$	(1,931)	$	(1,171)	$	29,566

TDRs included within nonaccrual loans totaled $23.8 million at March 31, 2022 and $11.7 million at December 31, 2021. Old National has established specific allowances for credit losses for clients whose loan terms have been modified as TDRs totaling $6.2 million at March 31, 2022 and $0.7 million at December 31, 2021. Old National had not committed to lend any additional funds to clients with outstanding loans that were classified as TDRs at March 31, 2022 or December 31, 2021.

The pre-modification and post-modification outstanding recorded investments of loans modified as TDRs during the three months ended March 31, 2022 and 2021 are the same except for when the loan modifications involve the forgiveness of principal. One loan met the qualifications to be removed from TDR status for the three months ended March 31, 2021.

The TDRs that occurred during the three months ended March 31, 2022 increased the allowance for credit losses by $5.5 million and resulted in no charge-offs. The TDRs that occurred during the three months ended March 31, 2021 did not have a material impact on the allowance for credit losses 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, 2022 and 2021.

The terms of certain other loans were modified during 2022 and 2021 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.

In general, once a modified loan is considered a TDR, the loan will always be considered a TDR until it is paid in full, otherwise settled, sold, or charged off. However, guidance also permits for loans to be removed from TDR status when subsequently restructured under these circumstances: (1) at the time of the subsequent restructuring, the borrower is not experiencing financial difficulties, and this is documented by a current credit evaluation at the time of the restructuring, (2) under the terms of the subsequent restructuring agreement, the institution has granted no concession to the borrower; and (3) the subsequent restructuring agreement includes market terms that are no less favorable than those that would be offered for a comparable new loan. For loans subsequently restructured that have cumulative principal forgiveness, the loan should continue to be measured in accordance with ASC 310-10, Receivables – Overall. However, consistent with ASC 310-40-50-2, Troubled Debt Restructurings by Creditors, Creditor Disclosure of Troubled Debt Restructurings, the loan would not be required to be reported in the years following the restructuring if the subsequent restructuring meets both of these criteria: (1) has an interest rate at the time of the subsequent restructuring that is not less than a market interest rate; and (2) is performing in compliance with its modified terms after the subsequent restructuring.

Purchased Credit Deteriorated Loans

Old National has purchased loans, for which there was, at acquisition, evidence of more than insignificant deterioration of credit quality since origination. The carrying amount of those loans is as follows:


(dollars in thousands)	First Midwest (1)
Purchase price of loans at acquisition	$	1,400,831
Allowance for credit losses at acquisition	78,531
Non-credit discount/(premium) at acquisition	9,003
Par value of acquired loans at acquisition	$	1,488,365

(1)Old National merged with First Midwest effective February 15, 2022.