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Loans and Allowance for Credit Losses | 9 Months Ended
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Sep. 30, 2021
Receivables [Abstract] |
Loans and Allowance for Credit Losses | LOANS AND ALLOWANCE FOR CREDIT LOSSES Loans 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, Minnesota, and Wisconsin. Old National manages concentrations of credit exposure by industry, product, geography, customer relationship, and loan size. While loans to lessors of residential and non-residential real estate exceed 10% of total loans, no individual sub-segment category within those broader categories reaches the 10% threshold. 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 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 composition of loans by portfolio segment as of September 30, 2021 follows:
| September 30, 2021 |  | Segment |  | September 30, 2021
| Statement |  | Portfolio |  | After
(dollars in thousands) | Balance |  | Reclassifications |  | Reclassifications
Loans: |  |  |  |  |
Commercial | $ | 3,505,183 |  |  | $ | (192,390) |  |  | $ | 3,312,793 |
Commercial real estate | 6,290,632 |  |  | (158,297) |  |  | 6,132,335 |
BBCC | N/A |  | 350,687 |  |  | 350,687 |
Residential real estate | 2,224,782 |  |  | — |  |  | 2,224,782 |
Consumer | 1,564,231 |  |  | (1,564,231) |  |  | N/A
Indirect | N/A |  | 860,785 |  |  | 860,785 |
Direct | N/A |  | 149,124 |  |  | 149,124 |
Home equity | N/A |  | 554,322 |  |  | 554,322 |
Total | $ | 13,584,828 |  |  | $ | — |  |  | $ | 13,584,828 |
The composition of loans by portfolio segment follows:
(dollars in thousands) | September 30, 2021 |  | December 31, 2020
Commercial (1) (2) | $ | 3,312,793 |  |  | $ | 3,757,700 |
Commercial real estate | 6,132,335 |  |  | 5,774,811 |
BBCC | 350,687 |  |  | 370,423 |
Residential real estate | 2,224,782 |  |  | 2,248,422 |
Indirect | 860,785 |  |  | 913,902 |
Direct | 149,124 |  |  | 164,807 |
Home equity | 554,322 |  |  | 556,414 |
Total loans | 13,584,828 |  |  | 13,786,479 |
Allowance for credit losses | (107,868) |  |  | (131,388) |
Net loans | $ | 13,476,960 |  |  | $ | 13,655,091 |
(1)Includes direct finance leases of $26.0 million at September 30, 2021 and $32.3 million at December 31, 2020. (2)Includes PPP loans of $354.9 million at September 30, 2021 and $943.0 million at December 31, 2020. 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 customers. Section 1102 of the CARES Act created the PPP, a program administered by the SBA to provide loans to small businesses for payroll and other basic expenses during the COVID-19 pandemic. Old National has participated in the PPP as a lender. These loans are eligible to be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. Additionally, loan payments will also be deferred for the first six months of the loan term. The PPP commenced on April 3, 2020 and was available to qualified borrowers through August 8, 2020. No collateral or personal guarantees were required. Neither the government nor lenders are permitted to charge the recipients any fees. During 2020, Old National originated over 9,700 loans with balances in excess of $1.5 billion to new and existing customers through the PPP. On December 27, 2020, President Trump signed into law the CAA. The CAA, among other things, extends the life of the PPP, effectively creating a second round of PPP loans for eligible businesses. Old National has participated in the CAA’s second round of PPP lending. In mid-January Old National opened its lending portal and began processing PPP loan applications. Old National initially focused on helping minority-owned business, women-owned business, not-for-profit entities, and existing first round PPP customers with the lending process. During the nine months ended September 30, 2021, Old National originated approximately 6,200 loans totaling $583.7 million through the second round of the PPP. Additionally, section 541 of the CAA extended the relief provided by the CARES Act for financial institutions to suspend the GAAP accounting treatment for troubled debt restructuring to January 1, 2022. At September 30, 2021, remaining PPP loans totaled $354.9 million. 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 233%, 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, 2021. 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 $47.2 million at September 30, 2021 and $57.3 million at December 31, 2020. 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 decreased for the nine months ended September 30, 2021 primarily due to changes in the economic forecast. The forecast scenario includes improved unemployment, gross domestic product, 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, and the slow return to full employment. The mitigating impacts of the reopening of the economy and distribution of child tax credits were 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 |  | Impact of Adopting ASC 326 |  | Sub-Total |  | Charge-offs |  | Recoveries |  | Provision for Credit Losses |  | Balance at End of Period
Three Months Ended September 30, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial | $ | 25,731 |  |  | $ | — |  |  | $ | 25,731 |  |  | $ | (354) |  |  | $ | 106 |  |  | $ | 677 |  |  | $ | 26,160 |
Commercial real estate | 65,469 |  |  | — |  |  | 65,469 |  |  | (86) |  |  | 3,371 |  |  | (3,657) |  |  | 65,097 |
BBCC | 2,798 |  |  | — |  |  | 2,798 |  |  | (8) |  |  | 31 |  |  | (259) |  |  | 2,562 |
Residential real estate | 10,419 |  |  | — |  |  | 10,419 |  |  | (85) |  |  | 79 |  |  | (887) |  |  | 9,526 |
Indirect | 2,043 |  |  | — |  |  | 2,043 |  |  | (113) |  |  | 294 |  |  | (363) |  |  | 1,861 |
Direct | 640 |  |  | — |  |  | 640 |  |  | (355) |  |  | 153 |  |  | 148 |  |  | 586 |
Home equity | 2,344 |  |  | — |  |  | 2,344 |  |  | (214) |  |  | 218 |  |  | (272) |  |  | 2,076 |
Total | $ | 109,444 |  |  | $ | — |  |  | $ | 109,444 |  |  | $ | (1,215) |  |  | $ | 4,252 |  |  | $ | (4,613) |  |  | $ | 107,868 |
Three Months Ended September 30, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial | $ | 29,618 |  |  | $ | — |  |  | $ | 29,618 |  |  | $ | (128) |  |  | $ | 2,192 |  |  | $ | (3,289) |  |  | $ | 28,393 |
Commercial real estate | 71,069 |  |  | — |  |  | 71,069 |  |  | (2,709) |  |  | 3,379 |  |  | 4,173 |  |  | 75,912 |
BBCC | 6,332 |  |  | — |  |  | 6,332 |  |  | (10) |  |  | — |  |  | 15 |  |  | 6,337 |
Residential real estate | 14,244 |  |  | — |  |  | 14,244 |  |  | (321) |  |  | 220 |  |  | (219) |  |  | 13,924 |
Indirect | 4,453 |  |  | — |  |  | 4,453 |  |  | (556) |  |  | 587 |  |  | (394) |  |  | 4,090 |
Direct | 835 |  |  | — |  |  | 835 |  |  | (445) |  |  | 187 |  |  | 248 |  |  | 825 |
Home equity | 1,843 |  |  | — |  |  | 1,843 |  |  | — |  |  | 598 |  |  | (534) |  |  | 1,907 |
Total | $ | 128,394 |  |  | $ | — |  |  | $ | 128,394 |  |  | $ | (4,169) |  |  | $ | 7,163 |  |  | $ | — |  |  | $ | 131,388 |
Nine Months Ended September 30, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial | $ | 30,567 |  |  | $ | — |  |  | $ | 30,567 |  |  | $ | (940) |  |  | $ | 549 |  |  | $ | (4,016) |  |  | $ | 26,160 |
Commercial real estate | 75,810 |  |  | — |  |  | 75,810 |  |  | (264) |  |  | 3,555 |  |  | (14,004) |  |  | 65,097 |
BBCC | 6,120 |  |  | — |  |  | 6,120 |  |  | (144) |  |  | 87 |  |  | (3,501) |  |  | 2,562 |
Residential real estate | 12,608 |  |  | — |  |  | 12,608 |  |  | (305) |  |  | 217 |  |  | (2,994) |  |  | 9,526 |
Indirect | 3,580 |  |  | — |  |  | 3,580 |  |  | (903) |  |  | 1,395 |  |  | (2,211) |  |  | 1,861 |
Direct | 855 |  |  | — |  |  | 855 |  |  | (913) |  |  | 622 |  |  | 22 |  |  | 586 |
Home equity | 1,848 |  |  | — |  |  | 1,848 |  |  | (296) |  |  | 718 |  |  | (194) |  |  | 2,076 |
Total | $ | 131,388 |  |  | $ | — |  |  | $ | 131,388 |  |  | $ | (3,765) |  |  | $ | 7,143 |  |  | $ | (26,898) |  |  | $ | 107,868 |
Nine Months Ended September 30, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial | $ | 21,359 |  |  | $ | 7,150 |  |  | $ | 28,509 |  |  | $ | (5,303) |  |  | $ | 3,100 |  |  | $ | 2,087 |  |  | $ | 28,393 |
Commercial real estate | 20,535 |  |  | 25,548 |  |  | 46,083 |  |  | (5,164) |  |  | 4,297 |  |  | 30,696 |  |  | 75,912 |
BBCC | 2,279 |  |  | 3,702 |  |  | 5,981 |  |  | (92) |  |  | 122 |  |  | 326 |  |  | 6,337 |
Residential real estate | 2,299 |  |  | 6,986 |  |  | 9,285 |  |  | (637) |  |  | 431 |  |  | 4,845 |  |  | 13,924 |
Indirect | 5,319 |  |  | (1,669) |  |  | 3,650 |  |  | (2,125) |  |  | 1,494 |  |  | 1,071 |  |  | 4,090 |
Direct | 1,863 |  |  | (1,059) |  |  | 804 |  |  | (1,326) |  |  | 571 |  |  | 776 |  |  | 825 |
Home equity | 965 |  |  | 689 |  |  | 1,654 |  |  | (199) |  |  | 758 |  |  | (306) |  |  | 1,907 |
Total | $ | 54,619 |  |  | $ | 41,347 |  |  | $ | 95,966 |  |  | $ | (14,846) |  |  | $ | 10,773 |  |  | $ | 39,495 |  |  | $ | 131,388 |
PPP loans were factored in the provision for credit losses for the three and nine months ended September 30, 2021; however, due to the SBA guaranty and our borrowers’ adherence to the PPP terms, the provision impact was insignificant. 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. Old National’s activity in the allowance for credit losses on unfunded loan commitments was as follows:
| Three Months Ended September 30, |  | Nine Months Ended September 30,
(dollars in thousands) | 2021 |  | 2020 |  | 2021 |  | 2020
Allowance for credit losses on unfunded loan commitments: |  |  |  |  |  |  |
Balance at beginning of period | $ | 10,429 |  |  | $ | 11,026 |  |  | $ | 11,689 |  |  | $ | 2,656 |
Impact of adopting ASC 326 | — |  |  | — |  |  | — |  |  | 4,549 |
Sub-Total | 10,429 |  |  | 11,026 |  |  | 11,689 |  |  | 7,205 |
Expense (reversal of expense) for credit losses | (132) |  |  | — |  |  | (1,392) |  |  | 3,821 |
Balance at end of period | $ | 10,297 |  |  | $ | 11,026 |  |  | $ | 10,297 |  |  | $ | 11,026 |
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 and class of loan:
| Origination Year |  |  |  | Revolving to Term |  |
(dollars in thousands) | 2021 |  | 2020 |  | 2019 |  | 2018 |  | 2017 |  | Prior |  | Revolving |  |  | Total
September 30, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 897,040 |  |  | $ | 638,945 |  |  | $ | 317,026 |  |  | $ | 125,230 |  |  | $ | 165,228 |  |  | $ | 245,618 |  |  | $ | 608,212 |  |  | $ | 164,020 |  |  | $ | 3,161,319 |
Criticized | 11,262 |  |  | 8,747 |  |  | 2,473 |  |  | — |  |  | 7,964 |  |  | 2,901 |  |  | 7,784 |  |  | 11,533 |  |  | 52,664 |
Classified: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Substandard | 8,024 |  |  | 16,399 |  |  | 12,056 |  |  | 11,253 |  |  | 6,874 |  |  | 5,171 |  |  | 7,642 |  |  | 4,857 |  |  | 72,276 |
Nonaccrual | 1,096 |  |  | 3,710 |  |  | 1,031 |  |  | 2,407 |  |  | 4,019 |  |  | — |  |  | 188 |  |  | 7,994 |  |  | 20,445 |
Doubtful | — |  |  | 148 |  |  | 653 |  |  | 1,296 |  |  | 181 |  |  | 3,811 |  |  | — |  |  | — |  |  | 6,089 |
Total | $ | 917,422 |  |  | $ | 667,949 |  |  | $ | 333,239 |  |  | $ | 140,186 |  |  | $ | 184,266 |  |  | $ | 257,501 |  |  | $ | 623,826 |  |  | $ | 188,404 |  |  | $ | 3,312,793 |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 1,058,090 |  |  | $ | 1,561,584 |  |  | $ | 902,806 |  |  | $ | 580,718 |  |  | $ | 558,072 |  |  | $ | 711,425 |  |  | $ | 22,791 |  |  | $ | 430,064 |  |  | $ | 5,825,550 |
Criticized | 28,606 |  |  | 5,243 |  |  | 53,705 |  |  | 34,005 |  |  | 18,706 |  |  | 23,259 |  |  | 152 |  |  | 17,012 |  |  | 180,688 |
Classified: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Substandard | 4,878 |  |  | 10,254 |  |  | 7,168 |  |  | 7,201 |  |  | 21,423 |  |  | 13,290 |  |  | 2,291 |  |  | 4,382 |  |  | 70,887 |
Nonaccrual | 306 |  |  | 2,509 |  |  | — |  |  | 1,472 |  |  | 6,229 |  |  | 10,089 |  |  | 321 |  |  | 147 |  |  | 21,073 |
Doubtful | — |  |  | — |  |  | 2,021 |  |  | 1,146 |  |  | 18,201 |  |  | 12,769 |  |  | — |  |  | — |  |  | 34,137 |
Total | $ | 1,091,880 |  |  | $ | 1,579,590 |  |  | $ | 965,700 |  |  | $ | 624,542 |  |  | $ | 622,631 |  |  | $ | 770,832 |  |  | $ | 25,555 |  |  | $ | 451,605 |  |  | $ | 6,132,335 |
BBCC: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 59,605 |  |  | $ | 77,065 |  |  | $ | 57,928 |  |  | $ | 38,168 |  |  | $ | 27,380 |  |  | $ | 12,867 |  |  | $ | 44,982 |  |  | $ | 18,622 |  |  | $ | 336,617 |
Criticized | 1,189 |  |  | 1,381 |  |  | 1,063 |  |  | 306 |  |  | — |  |  | — |  |  | 1,449 |  |  | 1,475 |  |  | 6,863 |
Classified: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Substandard | 287 |  |  | 61 |  |  | 1,113 |  |  | 209 |  |  | 912 |  |  | 139 |  |  | 289 |  |  | 576 |  |  | 3,586 |
Nonaccrual | — |  |  | 135 |  |  | — |  |  | — |  |  | 230 |  |  | — |  |  | — |  |  | 1,335 |  |  | 1,700 |
Doubtful | — |  |  | — |  |  | 289 |  |  | 1,418 |  |  | — |  |  | 214 |  |  | — |  |  | — |  |  | 1,921 |
Total | $ | 61,081 |  |  | $ | 78,642 |  |  | $ | 60,393 |  |  | $ | 40,101 |  |  | $ | 28,522 |  |  | $ | 13,220 |  |  | $ | 46,720 |  |  | $ | 22,008 |  |  | $ | 350,687 |
| Origination Year |  |  |  | Revolving to Term |  |
(dollars in thousands) | 2020 |  | 2019 |  | 2018 |  | 2017 |  | 2016 |  | Prior |  | Revolving |  |  | Total
December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 1,675,964 |  |  | $ | 420,736 |  |  | $ | 171,228 |  |  | $ | 227,710 |  |  | $ | 124,041 |  |  | $ | 262,538 |  |  | $ | 549,849 |  |  | $ | 148,508 |  |  | $ | 3,580,574 |
Criticized | 23,982 |  |  | 9,603 |  |  | 15,003 |  |  | 9,508 |  |  | 3,383 |  |  | 5,369 |  |  | 10,307 |  |  | 2,685 |  |  | 79,840 |
Classified: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Substandard | 6,501 |  |  | 6,369 |  |  | 10,077 |  |  | 9,836 |  |  | 2,774 |  |  | 8,441 |  |  | 15,344 |  |  | 3,049 |  |  | 62,391 |
Nonaccrual | 2,600 |  |  | 3,754 |  |  | 4,701 |  |  | 6,951 |  |  | 49 |  |  | 4,379 |  |  | 778 |  |  | 7,013 |  |  | 30,225 |
Doubtful | — |  |  | — |  |  | 1,016 |  |  | 2,748 |  |  | 296 |  |  | 610 |  |  | — |  |  | — |  |  | 4,670 |
Total | $ | 1,709,047 |  |  | $ | 440,462 |  |  | $ | 202,025 |  |  | $ | 256,753 |  |  | $ | 130,543 |  |  | $ | 281,337 |  |  | $ | 576,278 |  |  | $ | 161,255 |  |  | $ | 3,757,700 |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 1,537,226 |  |  | $ | 1,041,305 |  |  | $ | 749,102 |  |  | $ | 677,119 |  |  | $ | 496,086 |  |  | $ | 513,658 |  |  | $ | 28,122 |  |  | $ | 382,219 |  |  | $ | 5,424,837 |
Criticized | 6,874 |  |  | 49,271 |  |  | 26,464 |  |  | 46,994 |  |  | 17,648 |  |  | 33,490 |  |  | — |  |  | 19,804 |  |  | 200,545 |
Classified: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Substandard | 11,451 |  |  | 4,700 |  |  | 13,565 |  |  | 26,691 |  |  | 5,308 |  |  | 8,665 |  |  | — |  |  | 2,911 |  |  | 73,291 |
Nonaccrual | 1,408 |  |  | 2,054 |  |  | 5,393 |  |  | 9,456 |  |  | 1,635 |  |  | 12,564 |  |  | — |  |  | 313 |  |  | 32,823 |
Doubtful | — |  |  | 1,832 |  |  | — |  |  | 18,926 |  |  | 19,283 |  |  | 3,274 |  |  | — |  |  | — |  |  | 43,315 |
Total | $ | 1,556,959 |  |  | $ | 1,099,162 |  |  | $ | 794,524 |  |  | $ | 779,186 |  |  | $ | 539,960 |  |  | $ | 571,651 |  |  | $ | 28,122 |  |  | $ | 405,247 |  |  | $ | 5,774,811 |
BBCC: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 94,828 |  |  | $ | 73,913 |  |  | $ | 49,875 |  |  | $ | 36,288 |  |  | $ | 24,946 |  |  | $ | 5,327 |  |  | $ | 52,393 |  |  | $ | 19,353 |  |  | $ | 356,923 |
Criticized | 1,599 |  |  | 1,403 |  |  | 621 |  |  | 414 |  |  | 643 |  |  | — |  |  | 868 |  |  | 1,259 |  |  | 6,807 |
Classified: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Substandard | 233 |  |  | 1,417 |  |  | 195 |  |  | 246 |  |  | 33 |  |  | — |  |  | 317 |  |  | 701 |  |  | 3,142 |
Nonaccrual | 161 |  |  | 551 |  |  | 134 |  |  | 200 |  |  | — |  |  | — |  |  | 89 |  |  | 1,466 |  |  | 2,601 |
Doubtful | — |  |  | 3 |  |  | 847 |  |  | 70 |  |  | — |  |  | 30 |  |  | — |  |  | — |  |  | 950 |
Total | $ | 96,821 |  |  | $ | 77,287 |  |  | $ | 51,672 |  |  | $ | 37,218 |  |  | $ | 25,622 |  |  | $ | 5,357 |  |  | $ | 53,667 |  |  | $ | 22,779 |  |  | $ | 370,423 |
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:
| Origination Year |  |  |  | Revolving to Term |  |
(dollars in thousands) | 2021 |  | 2020 |  | 2019 |  | 2018 |  | 2017 |  | Prior |  | Revolving |  |  | Total
September 30, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Performing | $ | 476,235 |  |  | $ | 659,413 |  |  | $ | 304,715 |  |  | $ | 81,974 |  |  | $ | 119,596 |  |  | $ | 563,796 |  |  | $ | — |  |  | $ | 110 |  |  | $ | 2,205,839 |
Nonperforming | — |  |  | 314 |  |  | 168 |  |  | 294 |  |  | 1,030 |  |  | 17,137 |  |  | — |  |  | — |  |  | 18,943 |
Total | $ | 476,235 |  |  | $ | 659,727 |  |  | $ | 304,883 |  |  | $ | 82,268 |  |  | $ | 120,626 |  |  | $ | 580,933 |  |  | $ | — |  |  | $ | 110 |  |  | $ | 2,224,782 |
Indirect: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Performing | $ | 265,815 |  |  | $ | 260,763 |  |  | $ | 169,061 |  |  | $ | 81,733 |  |  | $ | 52,028 |  |  | $ | 28,918 |  |  | $ | — |  |  | $ | 22 |  |  | $ | 858,340 |
Nonperforming | 195 |  |  | 356 |  |  | 500 |  |  | 560 |  |  | 489 |  |  | 345 |  |  | — |  |  | — |  |  | 2,445 |
Total | $ | 266,010 |  |  | $ | 261,119 |  |  | $ | 169,561 |  |  | $ | 82,293 |  |  | $ | 52,517 |  |  | $ | 29,263 |  |  | $ | — |  |  | $ | 22 |  |  | $ | 860,785 |
Direct: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Performing | $ | 28,564 |  |  | $ | 19,025 |  |  | $ | 16,984 |  |  | $ | 17,674 |  |  | $ | 8,926 |  |  | $ | 18,004 |  |  | $ | 38,211 |  |  | $ | 541 |  |  | $ | 147,929 |
Nonperforming | 4 |  |  | 61 |  |  | 129 |  |  | 166 |  |  | 137 |  |  | 691 |  |  | 3 |  |  | 4 |  |  | 1,195 |
Total | $ | 28,568 |  |  | $ | 19,086 |  |  | $ | 17,113 |  |  | $ | 17,840 |  |  | $ | 9,063 |  |  | $ | 18,695 |  |  | $ | 38,214 |  |  | $ | 545 |  |  | $ | 149,124 |
Home equity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Performing | $ | — |  |  | $ | — |  |  | $ | 628 |  |  | $ | 390 |  |  | $ | 568 |  |  | $ | 436 |  |  | $ | 529,967 |  |  | $ | 18,695 |  |  | $ | 550,684 |
Nonperforming | — |  |  | — |  |  | — |  |  | 59 |  |  | 96 |  |  | 62 |  |  | 193 |  |  | 3,228 |  |  | 3,638 |
Total | $ | — |  |  | $ | — |  |  | $ | 628 |  |  | $ | 449 |  |  | $ | 664 |  |  | $ | 498 |  |  | $ | 530,160 |  |  | $ | 21,923 |  |  | $ | 554,322 |
| Origination Year |  |  |  | Revolving to Term |  |
| 2020 |  | 2019 |  | 2018 |  | 2017 |  | 2016 |  | Prior |  | Revolving |  |  | Total
December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Performing | $ | 624,435 |  |  | $ | 453,132 |  |  | $ | 132,107 |  |  | $ | 190,376 |  |  | $ | 202,457 |  |  | $ | 620,999 |  |  | $ | — |  |  | $ | 122 |  |  | $ | 2,223,628 |
Nonperforming | 65 |  |  | 251 |  |  | 680 |  |  | 892 |  |  | 2,131 |  |  | 20,775 |  |  | — |  |  | — |  |  | 24,794 |
Total | $ | 624,500 |  |  | $ | 453,383 |  |  | $ | 132,787 |  |  | $ | 191,268 |  |  | $ | 204,588 |  |  | $ | 641,774 |  |  | $ | — |  |  | $ | 122 |  |  | $ | 2,248,422 |
Indirect: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Performing | $ | 352,989 |  |  | $ | 253,514 |  |  | $ | 134,893 |  |  | $ | 96,587 |  |  | $ | 52,225 |  |  | $ | 21,088 |  |  | $ | — |  |  | $ | 77 |  |  | $ | 911,373 |
Nonperforming | 22 |  |  | 443 |  |  | 777 |  |  | 666 |  |  | 429 |  |  | 192 |  |  | — |  |  | — |  |  | 2,529 |
Total | $ | 353,011 |  |  | $ | 253,957 |  |  | $ | 135,670 |  |  | $ | 97,253 |  |  | $ | 52,654 |  |  | $ | 21,280 |  |  | $ | — |  |  | $ | 77 |  |  | $ | 913,902 |
Direct: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Performing | $ | 32,499 |  |  | $ | 29,189 |  |  | $ | 30,510 |  |  | $ | 16,182 |  |  | $ | 8,527 |  |  | $ | 19,465 |  |  | $ | 26,028 |  |  | $ | 1,229 |  |  | $ | 163,629 |
Nonperforming | 22 |  |  | 141 |  |  | 171 |  |  | 64 |  |  | 247 |  |  | 526 |  |  | 4 |  |  | 3 |  |  | 1,178 |
Total | $ | 32,521 |  |  | $ | 29,330 |  |  | $ | 30,681 |  |  | $ | 16,246 |  |  | $ | 8,774 |  |  | $ | 19,991 |  |  | $ | 26,032 |  |  | $ | 1,232 |  |  | $ | 164,807 |
Home equity: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk Rating: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Performing | $ | 1 |  |  | $ | 997 |  |  | $ | 444 |  |  | $ | 891 |  |  | $ | 238 |  |  | $ | — |  |  | $ | 529,275 |  |  | $ | 20,314 |  |  | $ | 552,160 |
Nonperforming | — |  |  | 37 |  |  | — |  |  | — |  |  | 11 |  |  | 116 |  |  | 94 |  |  | 3,996 |  |  | 4,254 |
Total | $ | 1 |  |  | $ | 1,034 |  |  | $ | 444 |  |  | $ | 891 |  |  | $ | 249 |  |  | $ | 116 |  |  | $ | 529,369 |  |  | $ | 24,310 |  |  | $ | 556,414 |
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
September 30, 2021 |  |  |  |  |  |  |  |  |  |  |
Commercial | $ | 509 |  |  | $ | 663 |  |  | $ | 750 |  |  | $ | 1,922 |  |  | $ | 3,310,871 |  |  | $ | 3,312,793 |
Commercial real estate | 1,401 |  |  | 83 |  |  | 14,869 |  |  | 16,353 |  |  | 6,115,982 |  |  | 6,132,335 |
BBCC | — |  |  | 38 |  |  | 300 |  |  | 338 |  |  | 350,349 |  |  | 350,687 |
Residential | 7,592 |  |  | 2,140 |  |  | 5,615 |  |  | 15,347 |  |  | 2,209,435 |  |  | 2,224,782 |
Indirect | 3,160 |  |  | 552 |  |  | 462 |  |  | 4,174 |  |  | 856,611 |  |  | 860,785 |
Direct | 391 |  |  | 175 |  |  | 217 |  |  | 783 |  |  | 148,341 |  |  | 149,124 |
Home equity | 324 |  |  | 586 |  |  | 912 |  |  | 1,822 |  |  | 552,500 |  |  | 554,322 |
Total | $ | 13,377 |  |  | $ | 4,237 |  |  | $ | 23,125 |  |  | $ | 40,739 |  |  | $ | 13,544,089 |  |  | $ | 13,584,828 |
December 31, 2020 |  |  |  |  |  |  |  |  |  |  |
Commercial | $ | 2,977 |  |  | $ | 664 |  |  | $ | 2,100 |  |  | $ | 5,741 |  |  | $ | 3,751,959 |  |  | $ | 3,757,700 |
Commercial real estate | 887 |  |  | 128 |  |  | 27,272 |  |  | 28,287 |  |  | 5,746,524 |  |  | 5,774,811 |
BBCC | 894 |  |  | 882 |  |  | 61 |  |  | 1,837 |  |  | 368,586 |  |  | 370,423 |
Residential | 11,639 |  |  | 3,296 |  |  | 7,666 |  |  | 22,601 |  |  | 2,225,821 |  |  | 2,248,422 |
Indirect | 5,222 |  |  | 960 |  |  | 492 |  |  | 6,674 |  |  | 907,228 |  |  | 913,902 |
Direct | 753 |  |  | 533 |  |  | 426 |  |  | 1,712 |  |  | 163,095 |  |  | 164,807 |
Home equity | 1,075 |  |  | 377 |  |  | 1,663 |  |  | 3,115 |  |  | 553,299 |  |  | 556,414 |
Total | $ | 23,447 |  |  | $ | 6,840 |  |  | $ | 39,680 |  |  | $ | 69,967 |  |  | $ | 13,716,512 |  |  | $ | 13,786,479 |
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:
| September 30, 2021 |  | December 31, 2020 |  |
(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 | $ | 26,534 |  |  | $ | 2,617 |  |  | $ | 96 |  |  | $ | 34,895 |  |  | $ | 3,394 |  |  | $ | 122 |  |  |
Commercial real estate | 55,210 |  |  | 27,756 |  |  | — |  |  | 76,138 |  |  | 22,152 |  |  | 20 |  |  |
BBCC | 3,621 |  |  | — |  |  | — |  |  | 3,551 |  |  | — |  |  | — |  |  |
Residential | 18,943 |  |  | — |  |  | — |  |  | 24,794 |  |  | — |  |  | — |  |  |
Indirect | 2,445 |  |  | — |  |  | — |  |  | 2,529 |  |  | — |  |  | 12 |  |  |
Direct | 1,195 |  |  | — |  |  | 17 |  |  | 1,178 |  |  | 27 |  |  | 13 |  |  |
Home equity | 3,638 |  |  | — |  |  | — |  |  | 4,254 |  |  | 45 |  |  | — |  |  |
Total | $ | 111,586 |  |  | $ | 30,373 |  |  | $ | 113 |  |  | $ | 147,339 |  |  | $ | 25,618 |  |  | $ | 167 |  |  |
Interest income recognized on nonaccrual loans was insignificant during the three and nine months ended September 30, 2021 and 2020. 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
September 30, 2021 |  |  |  |  |  |  |  |  |
Commercial | $ | 6,762 |  |  | $ | 16,299 |  |  | $ | 2,984 |  |  | $ | 95 |  |  | $ | 394 |
Commercial real estate | 41,170 |  |  | 364 |  |  | 1,003 |  |  | — |  |  | 12,673 |
BBCC | 1,884 |  |  | 1,579 |  |  | 45 |  |  | 113 |  |  | — |
Residential | 18,943 |  |  | — |  |  | — |  |  | — |  |  | — |
Indirect | — |  |  | — |  |  | — |  |  | 2,445 |  |  | — |
Direct | 998 |  |  | — |  |  | 5 |  |  | 149 |  |  | 41 |
Home equity | 3,638 |  |  | — |  |  | — |  |  | — |  |  | — |
Total loans | $ | 73,395 |  |  | $ | 18,242 |  |  | $ | 4,037 |  |  | $ | 2,802 |  |  | $ | 13,108 |
December 31, 2020 |  |  |  |  |  |  |  |  |
Commercial | $ | 8,976 |  |  | $ | 19,253 |  |  | $ | 5,379 |  |  | $ | 394 |  |  | $ | 893 |
Commercial real estate | 60,844 |  |  | 472 |  |  | 1,137 |  |  | — |  |  | 13,685 |
BBCC | 1,425 |  |  | 1,929 |  |  | 63 |  |  | 134 |  |  | — |
Residential | 24,794 |  |  | — |  |  | — |  |  | — |  |  | — |
Indirect | — |  |  | — |  |  | — |  |  | 2,529 |  |  | — |
Direct | 901 |  |  | — |  |  | 2 |  |  | 235 |  |  | 29 |
Home equity | 4,254 |  |  | — |  |  | — |  |  | — |  |  | — |
Total loans | $ | 101,194 |  |  | $ | 21,654 |  |  | $ | 6,581 |  |  | $ | 3,292 |  |  | $ | 14,607 |
Loan Participations Old National has loan participations, which qualify as participating interests, with other financial institutions. At September 30, 2021, these loans totaled $1.124 billion, of which $529.7 million had been sold to other financial institutions and $594.3 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 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 allocated reserve 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 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:
(dollars in thousands) | Beginning Balance |  | (Charge-offs)/ Recoveries |  | (Payments)/ Disbursements |  | (Removals)/ Additions |  | Ending Balance
Three Months Ended September 30, 2021 |  |  |  |  |  |  |  |  |
Commercial | $ | 8,264 |  |  | $ | 1 |  |  | $ | (156) |  |  | $ | 2,073 |  |  | $ | 10,182 |
Commercial real estate | 15,970 |  |  | 58 |  |  | (369) |  |  | — |  |  | 15,659 |
BBCC | 97 |  |  | 2 |  |  | (10) |  |  | — |  |  | 89 |
Residential | 2,582 |  |  | (7) |  |  | (108) |  |  | — |  |  | 2,467 |
Indirect | — |  |  | 1 |  |  | (1) |  |  | — |  |  | — |
Direct | 665 |  |  | — |  |  | (15) |  |  | — |  |  | 650 |
Home equity | 217 |  |  | 1 |  |  | (10) |  |  | — |  |  | 208 |
Total | $ | 27,795 |  |  | $ | 56 |  |  | $ | (669) |  |  | $ | 2,073 |  |  | $ | 29,255 |
Three Months Ended September 30, 2020 |  |  |  |  |  |  |  |  |
Commercial | $ | 10,598 |  |  | $ | 1,326 |  |  | $ | (3,168) |  |  | $ | — |  |  | $ | 8,756 |
Commercial real estate | 12,706 |  |  | 1,993 |  |  | (3,950) |  |  | 5,907 |  |  | 16,656 |
BBCC | 147 |  |  | (52) |  |  | 43 |  |  | — |  |  | 138 |
Residential | 3,012 |  |  | — |  |  | (171) |  |  | — |  |  | 2,841 |
Indirect | — |  |  | 2 |  |  | (2) |  |  | — |  |  | — |
Direct | 779 |  |  | (11) |  |  | (18) |  |  | — |  |  | 750 |
Home equity | 367 |  |  | 1 |  |  | (77) |  |  | — |  |  | 291 |
Total | $ | 27,609 |  |  | $ | 3,259 |  |  | $ | (7,343) |  |  | $ | 5,907 |  |  | $ | 29,432 |
Nine Months Ended September 30, 2021 |  |  |  |  |  |  |  |  |
Commercial | $ | 11,090 |  |  | $ | 1 |  |  | $ | (1,810) |  |  | $ | 901 |  |  | $ | 10,182 |
Commercial real estate | 17,606 |  |  | 72 |  |  | (2,019) |  |  | — |  |  | 15,659 |
BBCC | 112 |  |  | 8 |  |  | (31) |  |  | — |  |  | 89 |
Residential | 2,824 |  |  | (11) |  |  | (346) |  |  | — |  |  | 2,467 |
Indirect | — |  |  | 4 |  |  | (4) |  |  | — |  |  | — |
Direct | 739 |  |  | 3 |  |  | (92) |  |  | — |  |  | 650 |
Home equity | 282 |  |  | 2 |  |  | (76) |  |  | — |  |  | 208 |
Total | $ | 32,653 |  |  | $ | 79 |  |  | $ | (4,378) |  |  | $ | 901 |  |  | $ | 29,255 |
Nine Months Ended September 30, 2020 |  |  |  |  |  |  |  |  |
Commercial | $ | 12,412 |  |  | $ | 632 |  |  | $ | (4,288) |  |  | $ | — |  |  | $ | 8,756 |
Commercial real estate | 14,277 |  |  | 741 |  |  | (4,269) |  |  | 5,907 |  |  | 16,656 |
BBCC | 578 |  |  | (22) |  |  | (418) |  |  | — |  |  | 138 |
Residential | 3,107 |  |  | — |  |  | (266) |  |  | — |  |  | 2,841 |
Indirect | — |  |  | 7 |  |  | (7) |  |  | — |  |  | — |
Direct | 983 |  |  | (9) |  |  | (224) |  |  | — |  |  | 750 |
Home equity | 381 |  |  | 2 |  |  | (92) |  |  | — |  |  | 291 |
Total | $ | 31,738 |  |  | $ | 1,351 |  |  | $ | (9,564) |  |  | $ | 5,907 |  |  | $ | 29,432 |
TDRs included within nonaccrual loans totaled $12.8 million at September 30, 2021 and $14.9 million at December 31, 2020. Old National has allocated specific reserves to customers whose loan terms have been modified as TDRs totaling $0.8 million at September 30, 2021 and $1.6 million at December 31, 2020. Old National had not committed to lend any additional funds to customers with outstanding loans that were classified as TDRs at September 30, 2021 or December 31, 2020. The pre-modification and post-modification outstanding recorded investments of loans modified as TDRs during the nine months ended September 30, 2021 and 2020 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 nine months ended September 30, 2021. The TDRs that occurred during the nine months ended September 30, 2021 and 2020 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 nine months ended September 30, 2021 and 2020. The terms of certain other loans were modified during 2021 and 2020 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. Non-TDR Loan Modifications due to COVID-19 On March 22, 2020, the Interagency Statement was issued by our banking regulators that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further provides that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act terminates. The Interagency Statement was subsequently revised in April 2020 to clarify the interaction of the original guidance with Section 4013 of the CARES Act, as well as setting forth the banking regulators’ views on consumer protection considerations. Additionally, section 541 of the CAA extends the relief provided by the CARES Act for financial institutions to suspend the GAAP accounting treatment for troubled debt restructuring to January 1, 2022. In accordance with such guidance, we are offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. These include short-term (180 days or less) modifications in the form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. The table below presents these loan deferrals by loan category:
|  |  | December 31, 2020 |  | September 30, 2021
(dollars in thousands) |  |  | Deferrals Balance |  | Deferrals Balance (1) |  | Number of Deferrals
Commercial and commercial real estate |  |  | $ | 53,823 |  |  | $ | 16,641 |  |  | 34 |
Residential real estate |  |  | 1,855 |  |  | 767 |  |  | 2 |
Consumer |  |  | 8,224 |  |  | 2,763 |  |  | 151 |
Total |  |  | $ | 63,902 |  |  | $ | 20,171 |  |  | 187 |
(1) Includes second deferrals between 90 and 180 days totaling $4.2 million of commercial and commercial real estate loans, $0.1 million of residential real estate loans, and $0.4 million of consumer loans.

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