NOTE 6 – FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES

Old National’s finance receivables consist primarily of loans made to consumers and commercial clients in various industries including manufacturing, agribusiness, transportation, mining, wholesaling, and retailing. Most of Old National’s lending activity occurs within our principal geographic markets of Indiana, Kentucky, Michigan, and Wisconsin. Old National has no concentration of commercial or commercial real estate loans in any single industry exceeding 10% of its portfolio.

The composition of loans at December 31 by lending classification was as follows:


(dollars in thousands)	2016			2015
Commercial (1)	$	1,917,099		$	1,804,615
Commercial real estate:
Construction		199,509			185,449
Other		2,931,344			1,662,372
Residential real estate		2,087,530			1,644,614
Consumer credit:
Home equity		476,439			359,954
Auto		1,167,737			1,050,336
Other		230,854			133,478
Covered loans		—			107,587

Total loans		9,010,512			6,948,405
Allowance for loan losses		(49,808	)		(51,296	)
Allowance for loan losses - covered loans		—			(937	)

Net loans	$	8,960,704		$	6,896,172

(1)	Includes direct finance leases of $10.8 million at December 31, 2016 and $14.4 million at December 31, 2015.

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 short-term 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, 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 on May 1, 2016 added $926.2 million of commercial real estate loans to our portfolio. At 189%, Old National Bank’s commercial real estate loans as a percentage of its risk-based capital remained well below the regulatory guideline limit of 300% at December 31, 2016.

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 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 in May 2016. As of December 31, 2016, student loans totaled $77.1 million and are guaranteed by the government from 97% to 100%. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in residential property or other collateral values. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Covered loans

Old National entered into an agreement with the FDIC on June 22, 2016 to terminate its loss share agreements. As a result of the termination of the loss share agreements, the remaining loans that were covered by the loss share arrangements were reclassified to noncovered loans effective June 22, 2016. All future gains and losses associated with covered loans will be recognized entirely by Old National.

Prior to the termination of the loss share agreements, certain loans acquired from the FDIC were classified as covered loans. Covered loans were subject to loss share agreements whereby Old National was indemnified against 80% of losses up to $275.0 million, an amount which we never reached. See Notes 1 and 7 to the consolidated financial statements for further details on our covered loans.

Related Party Loans

In the ordinary course of business, Old National grants loans to certain executive officers, directors, and significant subsidiaries (collectively referred to as “related parties”).

Activity in related party loans during 2016 is presented in the following table:


(dollars in thousands)	2016
Balance at January 1,	$	8,145
New loans		5,813
Repayments		(5,464	)

Balance at December 31,	$	8,494

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 probability of default (“PD”) and loss given default (“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 asset quality rating (“AQR”) migrating from its current AQR to any other status within the time horizon. Transition rates are measured using Old National’s own historical experience. The model assumes that recent historical transition rates will continue into the future. The LGD is defined as credit loss incurred when an obligor of the bank defaults. The sum of all net charge-offs for a particular portfolio segment are divided by all loans that have defaulted over a given period of time. The expected loss derived from the model considers the PD, LGD, and exposure at default. Additionally, qualitative factors, such as changes in lending policies or procedures, and economic business conditions are also considered.

We use historic loss ratios adjusted for economic conditions to determine the appropriate level of allowance for residential real estate and consumer loans.

No allowance was brought forward on any of the acquired loans as any credit deterioration evident in the loans was included in the determination of the fair value of the loans at the acquisition date. An allowance for loan losses will be established for any subsequent credit deterioration or adverse changes in expected cash flows.

Old National’s activity in the allowance for loan losses for the years ended December 31, 2016, 2015, and 2014 was as follows:


(dollars in thousands)	Commercial			Commercial Real Estate			Residential			Consumer			Unallocated		Total
2016
Allowance for loan losses:
Beginning balance	$	26,347		$	15,993		$	2,051		$	7,842		$	—	$	52,233
Charge-offs		(5,047	)		(2,632	)		(800	)		(6,131	)		—		(14,610	)
Recoveries		3,102			4,763			174			3,186			—		11,225
Provision		(2,921	)		49			218			3,614			—		960

Ending balance	$	21,481		$	18,173		$	1,643		$	8,511		$	—	$	49,808

2015
Allowance for loan losses:
Beginning balance	$	20,670		$	17,348		$	2,962		$	6,869		$	—	$	47,849
Charge-offs		(3,513	)		(1,921	)		(1,039	)		(6,404	)		—		(12,877	)
Recoveries		5,218			4,685			354			4,081			—		14,338
Provision		3,972			(4,119	)		(226	)		3,296			—		2,923

Ending balance	$	26,347		$	15,993		$	2,051		$	7,842		$	—	$	52,233

2014
Allowance for loan losses:
Beginning balance	$	16,565		$	22,401		$	3,239		$	4,940		$	—	$	47,145
Charge-offs		(3,535	)		(3,647	)		(793	)		(4,675	)		—		(12,650	)
Recoveries		3,125			3,871			205			3,056			—		10,257
Provision		4,515			(5,277	)		311			3,548			—		3,097

Ending balance	$	20,670		$	17,348		$	2,962		$	6,869		$	—	$	47,849

The following table provides Old National’s recorded investment in financing receivables by portfolio segment at December 31, 2016 and 2015 and other information regarding the allowance:


(dollars in thousands)	Commercial		Commercial Real Estate		Residential		Consumer		Unallocated		Total
December 31, 2016
Allowance for loan losses:
Individually evaluated for impairment	$	4,561	$	3,437	$	—	$	—	$	—	$	7,998
Collectively evaluated for impairment		16,838		14,717		1,643		8,334		—		41,532
Loans acquired with deteriorated credit quality		82		19		—		177		—		278

Total allowance for loan losses	$	21,481	$	18,173	$	1,643	$	8,511	$	—	$	49,808

Loans and leases outstanding:
Individually evaluated for impairment	$	45,960	$	57,230	$	—	$	—	$	—	$	103,190
Collectively evaluated for impairment		1,870,289		3,040,849		2,073,950		1,866,815		—		8,851,903
Loans acquired with deteriorated credit quality		850		32,774		13,580		8,215		—		55,419

Total loans and leases outstanding	$	1,917,099	$	3,130,853	$	2,087,530	$	1,875,030	$	—	$	9,010,512

December 31, 2015
Allowance for loan losses:
Individually evaluated for impairment	$	7,467	$	4,021	$	—	$	—	$	—	$	11,488
Collectively evaluated for impairment		18,295		11,439		2,038		7,614		—		39,386
Loans acquired with deteriorated credit quality		247		533		13		70		—		863
Covered loans acquired with deteriorated credit quality		338		—		—		158		—		496

Total allowance for loan losses	$	26,347	$	15,993	$	2,051	$	7,842	$	—	$	52,233

Loans and leases outstanding:
Individually evaluated for impairment	$	60,959	$	41,987	$	—	$	—	$	—	$	102,946
Collectively evaluated for impairment		1,750,397		1,779,062		1,644,631		1,590,288		—		6,764,378
Loans acquired with deteriorated credit quality		691		28,499		127		3,925		—		33,242
Covered loans acquired with deteriorated credit quality		2,893		19,424		16,577		8,945		—		47,839

Total loans and leases outstanding	$	1,814,940	$	1,868,972	$	1,661,335	$	1,603,158	$	—	$	6,948,405

Credit Quality

Old National’s management monitors the credit quality of its financing receivables in an on-going manner. Internally, management assigns an asset quality rating (“AQR”) to each non-homogeneous commercial and commercial real estate loan in the portfolio. 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.

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 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.

As of December 31, 2016 and 2015, the risk category of commercial and commercial real estate loans by class of loans was as follows:


(dollars in thousands) Corporate Credit Exposure Credit Risk Profile by Internally Assigned Grade	Commercial				Commercial Real Estate - Construction				Commercial Real Estate - Other
	2016		2015 (1)		2016		2015 (1)		2016		2015 (1)
Grade:
Pass	$	1,750,923	$	1,672,672	$	194,875	$	182,701	$	2,822,340	$	1,508,309
Criticized		45,614		55,570		229		3,300		49,619		75,477
Classified - substandard		63,978		24,723		1,636		1,857		18,128		49,091
Classified - nonaccrual		53,062		58,469		2,769		830		32,234		39,521
Classified - doubtful		3,522		3,506		—		—		9,023		7,886

Total	$	1,917,099	$	1,814,940	$	199,509	$	188,688	$	2,931,344	$	1,680,284

(1)	Includes loans previously covered by loss share agreements with the FDIC.

Commercial loans as of December 31, 2016 in the table above include loans attributable to the acquisition of Anchor totaling $0.3 million in the criticized category and $0.7 million in the classified – nonaccrual category. There were no construction commercial real estate loans in the criticized or classified categories attributable to the acquisition of Anchor as of December 31, 2016. Other commercial real estate as of December 31, 2016 in the table above includes loans attributable to the acquisition of Anchor totaling $8.0 million in the criticized category, $3.6 million in the classified – substandard category, $19.9 million in the classified – nonaccrual category, and $0.7 million in the classified – doubtful category.

Old National considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, Old National also evaluates credit quality based on the aging status of the loan and by payment activity. The following table presents the recorded investment in residential and consumer loans based on payment activity as of December 31, 2016 and 2015:


(dollars in thousands)			Consumer
(dollars in thousands)	Residential		Home Equity		Auto		Other
2016
Performing	$	2,069,856	$	472,008	$	1,166,114	$	223,786
Nonperforming		17,674		4,431		1,623		7,068

Total	$	2,087,530	$	476,439	$	1,167,737	$	230,854

2015 (1)
Performing	$	1,645,293	$	410,243	$	1,048,763	$	138,031
Nonperforming		16,042		3,051		1,573		1,497

Total	$	1,661,335	$	413,294	$	1,050,336	$	139,528

(1)	Includes loans previously covered by loss share agreements with the FDIC.

Other consumer loans as of December 31, 2016 in the table above includes loans attributable to the acquisition of Anchor totaling $5.8 million in the nonperforming category, the majority of which are student loans that are guaranteed by the government from 97% to 100%.

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 troubled debt restructuring. 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 purchased credit impaired loans, is to recognize interest income on impaired loans unless the loan is placed on nonaccrual status.

The following table shows Old National’s impaired loans as of December 31, 2016 and 2015, respectively. Only purchased loans that have experienced subsequent impairment since the date acquired are included in the table below.


(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
December 31, 2016
With no related allowance recorded:
Commercial	$	29,001	$	29,634	$	—
Commercial Real Estate - Other		30,585		32,413		—
Residential		1,610		1,631		—
Consumer		827		946		—
With an allowance recorded:
Commercial		16,959		17,283		4,561
Commercial Real Estate - Construction		467		467		107
Commercial Real Estate - Other		26,178		26,710		3,330
Residential		1,081		1,081		54
Consumer		1,924		1,924		96

Total	$	108,632	$	112,089	$	8,148

December 31, 2015 (1)
With no related allowance recorded:
Commercial	$	40,414	$	41,212	$	—
Commercial Real Estate - Other		26,998		30,264		—
Residential		1,383		1,422		—
Consumer		1,201		1,305		—
With an allowance recorded:
Commercial		16,377		16,483		7,111
Commercial Real Estate - Construction		237		237		6
Commercial Real Estate - Other		14,752		14,802		4,015
Residential		985		985		49
Consumer		2,525		2,525		126

Total	$	104,872	$	109,235	$	11,307

(1)	Does not include $4.2 million of loans that were previously covered by loss share agreements with the FDIC.

The average balance of impaired loans for the years ended December 31, 2016 and 2015 are included in the table below.


(dollars in thousands)	2016		2015 (1)
Average Recorded Investment
With no related allowance recorded:
Commercial	$	34,708	$	33,678
Commercial Real Estate - Construction		—		1,085
Commercial Real Estate - Other		28,793		28,637
Residential		1,355		985
Consumer		855		943
With an allowance recorded:
Commercial		16,669		11,924
Commercial Real Estate - Construction		352		168
Commercial Real Estate - Other		20,465		14,593
Residential		1,074		1,230
Consumer		2,367		2,034

Total	$	106,638	$	95,277

(1)	Does not include $4.2 million of loans that were previously covered by loss share agreements with the FDIC.

The Company does not record interest on nonaccrual loans until principal is recovered. Interest income recognized on impaired loans during 2016 and 2015 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 as of December 31 were as follows:


(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Recorded Investment > 90 Days and Accruing		Nonaccrual		Total Past Due		Current
December 31, 2016
Commercial	$	847	$	279	$	23	$	56,585	$	57,734	$	1,859,365
Commercial Real Estate:
Construction		—		—		—		2,769		2,769		196,740
Other		1,652		150		—		41,257		43,059		2,888,285
Residential		17,786		3,770		2		17,674		39,232		2,048,298
Consumer:
Home equity		1,511		423		—		4,431		6,365		470,074
Auto		5,903		1,037		242		1,623		8,805		1,158,932
Other		3,561		1,919		61		7,068		12,609		218,245

Total	$	31,260	$	7,578	$	328	$	131,407	$	170,573	$	8,839,939

December 31, 2015
Commercial	$	802	$	100	$	565	$	57,536	$	59,003	$	1,745,612
Commercial Real Estate:
Construction		—		—		—		749		749		184,700
Other		438		135		—		46,601		47,174		1,615,198
Residential		9,300		2,246		114		14,953		26,613		1,618,001
Consumer:
Home equity		283		402		—		2,369		3,054		356,900
Auto		3,804		730		202		1,573		6,309		1,044,027
Other		830		165		25		1,256		2,276		131,202
Covered loans		809		312		10		7,336		8,467		99,120

Total	$	16,266	$	4,090	$	916	$	132,373	$	153,645	$	6,794,760

Loan Participations

Old National has loan participations, which qualify as participating interests, with other financial institutions. At December 31, 2016, these loans totaled $424.7 million, of which $227.5 million had been sold to other financial institutions and $197.2 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 troubled debt restructuring (“TDR”) has occurred, which is when for economic or legal reasons related to a borrower’s financial difficulties, the Bank grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status. The modification of the terms of such loans include one or a combination of the following: a reduction of the stated interest rate of the loan, an extension of the maturity date at a stated rate of interest lower than the current market rate of new debt with similar risk, or a permanent reduction of the recorded investment of the loan.

Loans modified in a TDR are typically placed on nonaccrual status until we determine the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate a period of performance according to the restructured terms for six months.

If we are unable to resolve a nonperforming loan issue, the credit will be charged off when it is apparent there will be a loss. For large commercial type loans, each relationship is individually analyzed for evidence of apparent loss based on quantitative benchmarks or subjectively based upon certain events or particular circumstances. Old National charges off small commercial loans scored through our small business credit center with contractual balances under $250,000 that have been placed on nonaccrual status or became 90 days or more delinquent, without regard to the collateral position. For residential and consumer loans, a charge off is recorded at the time foreclosure is initiated or when the loan becomes 120 to 180 days past due, whichever is earlier.

For commercial TDRs, an allocated reserve is established within the allowance for loan losses for the difference between the carrying value of the loan and its computed value. To determine the value of the loan, one of the following methods is selected: (1) the present value of expected cash flows discounted at the loan’s original effective interest rate, (2) the loan’s observable market price, or (3) the fair value of the collateral value, if the loan is collateral dependent. The allocated reserve is established as the difference between the carrying value of the loan and the collectable value. If there are significant changes in the amount or timing of the loan’s expected future cash flows, impairment is recalculated and the valuation allowance is adjusted accordingly.

When a residential or consumer loan is identified as a troubled debt restructuring, the loan is typically written down to its collateral value less selling costs.

The following table presents activity in TDRs for the years ended December 31, 2016, 2015, and 2014:


(dollars in thousands)	Commercial			Commercial Real Estate			Residential			Consumer			Total
2016
Balance at January 1, 2016	$	23,354		$	14,602		$	2,693		$	3,602		$	44,251
(Charge-offs)/recoveries		(1,982	)		953			42			(6	)		(993	)
Payments		(21,956	)		(10,157	)		(513	)		(1,381	)		(34,007	)
Additions		14,996			11,130			761			385			27,272
Interest collected on nonaccrual loans		2,390			1,799			2			2			4,193

Balance at December 31, 2016	$	16,802		$	18,327		$	2,985		$	2,602		$	40,716

2015
Balance at January 1, 2015	$	15,205		$	15,226		$	2,063		$	2,459		$	34,953
(Charge-offs)/recoveries		872			1,064			(64	)		3			1,875
Payments		(29,913	)		(6,273	)		(658	)		(1,168	)		(38,012	)
Additions		37,190			4,585			1,352			2,308			45,435

Balance at December 31, 2015	$	23,354		$	14,602		$	2,693		$	3,602		$	44,251

2014
Balance at January 1, 2014	$	22,443		$	22,639		$	2,344		$	1,441		$	48,867
(Charge-offs)/recoveries		126			795			10			(102	)		829
Payments		(18,281	)		(9,722	)		(466	)		(466	)		(28,935	)
Additions		13,696			3,554			175			1,586			19,011
Removals - subsequent restructuring		(2,779	)		(2,040	)		—			—			(4,819	)

Balance at December 31, 2014	$	15,205		$	15,226		$	2,063		$	2,459		$	34,953

Approximately $26.3 million of the TDRs at December 31, 2016 were included with nonaccrual loans, compared to $30.0 million at December 31, 2015. Old National has allocated specific reserves to customers whose loan terms have been modified in TDRs totaling $4.0 million at December 31, 2016 and $2.3 million at December 31, 2015. As of December 31, 2016, Old National had committed to lend an additional $6.0 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 years ended December 31, 2016, 2015, and 2014 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 years ended December 31, 2016, 2015, and 2014:


(dollars in thousands)	Number of Loans		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
2016
Troubled Debt Restructuring:
Commercial		20	$	14,996	$	14,996
Commercial Real Estate - Other		10		11,130		11,130
Residential		6		761		761
Consumer		8		385		385

Total		44	$	27,272	$	27,272

2015
Troubled Debt Restructuring:
Commercial		42	$	37,190	$	37,190
Commercial Real Estate - Construction		5		1,162		1,162
Commercial Real Estate - Other		27		3,423		3,423
Residential		13		1,352		1,352
Consumer		32		2,308		2,308

Total		119	$	45,435	$	45,435

2014
Troubled Debt Restructuring:
Commercial		32	$	13,696	$	13,696
Commercial Real Estate - Construction		1		484		484
Commercial Real Estate - Other		34		3,070		3,070
Residential		2		175		175
Consumer		28		1,586		1,586

Total		97	$	19,011	$	19,011

The TDRs that occurred during 2016 decreased the allowance for loan losses by $2.3 million due to a change in collateral position on a large commercial loan and resulted in $0.8 million of charge-offs during 2016. The TDRs that occurred during 2015 decreased the allowance for loan losses by $0.8 million and resulted in charge-offs of $0.2 million during 2015. The TDRs that occurred during 2014 increased the allowance for loan losses by $0.5 million and resulted in charge-offs of $0.1 million during 2014.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.

There were 7 commercial loans and 1 commercial real estate loan totaling $0.3 million that were modified as TDRs within the preceding twelve months, and for which there was a payment default during 2016.

There were 5 commercial loans and 5 commercial real estate loans totaling $1.4 million that were modified as TDRs within the preceding twelve months, and for which there was a payment default during 2015.

There were no loans that were modified as TDRs during 2014 for which there was a payment default within the preceding twelve months.

The terms of certain other loans were modified during 2016 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 purchased credit impaired loan is being accounted for as part of a pool, it will not be removed from the pool. As of December 31, 2016, 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”. 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 (“PCI”)

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:


	December 31,
(dollars in thousands)	2016			2015 (1)
Commercial	$	850		$	3,584
Commercial real estate		32,774			47,923
Residential		13,580			16,704
Consumer		8,215			12,870

Carrying amount		55,419			81,081
Allowance for loan losses		(278	)		(1,359	)

Carrying amount, net of allowance	$	55,141		$	79,722

(1)	Includes loans previously covered by loss share agreements with the FDIC.

The outstanding balance of loans accounted for under ASC 310-30, including contractual principal, interest, fees and penalties, was $268.0 million at December 31, 2016 and $321.5 million at December 31, 2015.

The accretable difference on purchased loans acquired in a business combination is the difference between the expected cash flows and the net present value of expected cash flows with such difference accreted into earnings using the effective yield method over the term of the loans. Accretion recorded as loan interest income totaled $23.4 million during 2016 and $35.5 million during 2015. 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 purchased credit impaired loans, or income expected to be collected, was as follows:


(dollars in thousands)	2016			2015			2014
Balance at January 1,	$	45,310		$	62,533		$	101,502
New loans purchased		3,217			1,812			8,274
Accretion of income		(23,447	)		(35,526	)		(77,929	)
Reclassifications from (to) nonaccretable difference		10,589			14,189			27,536
Disposals/other adjustments		(2,066	)		2,302			3,150

Balance at December 31,	$	33,603		$	45,310		$	62,533

Included in Old National’s allowance for loan losses is $0.3 million related to the purchased loans disclosed above at December 31, 2016, compared to $1.4 million at December 31, 2015.

PCI loans purchased during 2016 and 2015 for which it was probable at acquisition that all contractually required payments would not be collected were as follows:


(dollars in thousands)	Anchor (1)			Founders (2)
Contractually required payments	$	29,544		$	11,103
Nonaccretable difference		(6,153	)		(2,684	)

Cash flows expected to be collected at acquisition		23,391			8,419
Accretable yield		(3,217	)		(1,812	)

Fair value of acquired loans at acquisition	$	20,174		$	6,607

(1)	Old National acquired Anchor effective May 1, 2016.

(2)	Old National acquired Founders effective January 1, 2015.

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.