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Loans and Allowance for Credit Losses
 9 Months Ended
Sep. 30, 2022
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 many diverse industries, including manufacturing, agribusiness, transportation, mining, wholesaling, and retailing, among others.  Most of Old National’s lending activity occurs within our principal geographic markets of Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Wisconsin, and Missouri.  Old National manages concentrations of credit exposure by industry, product, geography, client relationship, and loan size.
The loan categories used to monitor and analyze interest income and yields are different than the portfolio segments used to determine the allowance for credit losses for loans. The allowance for credit losses was calculated by pooling loans of similar credit risk characteristics and credit monitoring procedures. The four loan portfolios – commercial, commercial real estate, residential real estate, and consumer – are classified into seven segments of loans – commercial, commercial real estate, BBCC, residential real estate, indirect, direct, and home equity. The commercial and commercial real estate loan categories shown on the balance sheet include the same pool of loans as the commercial, commercial real estate, and BBCC portfolio segments. The consumer loan category shown on the balance sheet is comprised of the same loans in the indirect, direct, and home equity portfolio segments. The portfolio segment reclassifications follow:
Segment
StatementPortfolioAfter
(dollars in thousands)BalanceReclassificationsReclassifications
September 30, 2022
Loans:
Commercial$9,311,148 $(197,169)$9,113,979 
Commercial real estate12,227,888 (153,784)12,074,104 
BBCCN/A350,953 350,953 
Residential real estate6,267,306 — 6,267,306 
Consumer2,722,591 (2,722,591)N/A
IndirectN/A1,004,054 1,004,054 
DirectN/A674,943 674,943 
Home equityN/A1,043,594 1,043,594 
Total$30,528,933 $— $30,528,933 
December 31, 2021
Loans:
Commercial$3,391,769 $(191,557)$3,200,212 
Commercial real estate6,380,674 (159,190)6,221,484 
BBCCN/A350,747 350,747 
Residential real estate2,255,289 — 2,255,289 
Consumer1,574,114 (1,574,114)N/A
IndirectN/A873,139 873,139 
DirectN/A140,385 140,385 
Home equityN/A560,590 560,590 
Total$13,601,846 $— $13,601,846 
The composition of loans by portfolio segment follows:
(dollars in thousands)September 30,
2022		December 31,
2021
Commercial (1) (2)
$9,113,979 $3,200,212 
Commercial real estate12,074,104 6,221,484 
BBCC350,953 350,747 
Residential real estate6,267,306 2,255,289 
Indirect1,004,054 873,139 
Direct674,943 140,385 
Home equity1,043,594 560,590 
Total loans30,528,933 13,601,846 
Allowance for credit losses(302,254)(107,341)
Net loans$30,226,679 $13,494,505 
(1)Includes direct finance leases of $196.7 million at September 30, 2022 and $25.1 million at December 31, 2021.
(2)Includes PPP loans of $43.5 million at September 30, 2022 and $169.0 million at December 31, 2021.
The risk characteristics of each loan portfolio segment are as follows:
Commercial
Commercial loans are classified primarily on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower.  The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value.  Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some loans may be made on an unsecured basis.  In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its clients.
Commercial Real Estate
Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate.  Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan.  Commercial real estate loans may be adversely affected by conditions in the real estate markets or in the general economy.  The properties securing Old National’s commercial real estate portfolio are diverse in terms of type and geographic location.  Management monitors and evaluates commercial real estate loans based on collateral, geography, and risk grade criteria. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.
Included with commercial real estate are construction loans, which are underwritten utilizing independent appraisal reviews, sensitivity analysis of absorption and lease rates, financial analysis of the developers and property owners, and feasibility studies, if available.  Construction loans are generally based on estimates of costs and value associated with the complete project.  These estimates may be inaccurate.  Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project.  Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders (including Old National), sales of developed property, or an interim loan commitment from Old National until permanent financing is obtained.  These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions, and the availability of long-term financing.
At 223%, Old National Bank’s commercial real estate loans as a percentage of its risk-based capital remained below the regulatory guideline limit of 300% at September 30, 2022.
BBCC
BBCC loans are typically granted to small businesses with gross revenues of less than $5 million and aggregate debt of less than $1 million. Old National has established minimum debt service coverage ratios, minimum FICO scores for owners and guarantors, and the ability to show relatively stable earnings as criteria to help mitigate risk. Repayment of these loans depends on the personal income of the borrowers and the cash flows of the business. These factors can be affected by factors such as changes in economic conditions and 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 $123.6 million at September 30, 2022 and $47.6 million at December 31, 2021.
The allowance for credit loss estimation process involves procedures to appropriately consider the unique characteristics of our 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 base forecast scenario considers unemployment, gross domestic product, and the BBB ratio (BBB spread to the 10-year U.S. Treasury rate). In addition to the quantitative inputs, several qualitative factors were considered. These factors include the risk that unemployment, gross domestic product, housing product index, and the BBB ratio prove to be more severe and/or prolonged than our baseline forecast due to monetary actions to control inflation, conflict in Ukraine, and global supply chain issues. Activity in the allowance for credit losses for loans by portfolio segment was as follows:
(dollars in thousands)Balance at
Beginning of
Period
Allowance
Established
for Acquired
PCD Loans (1)
Charge-offsRecoveriesProvision
for Credit
Losses		Balance at
End of
Period
Three Months Ended
September 30, 2022		   
Commercial$102,819 $3,740 $(2,696)$2,206 $6,344 $112,413 
Commercial real estate141,802 6,818 (4,772)287 (45)144,090 
BBCC2,064 — — 108 (4)2,168 
Residential real estate19,729 — (20)66 1,481 21,256 
Indirect1,641 — (624)379 189 1,585 
Direct14,412 — (3,299)442 4,541 16,096 
Home equity5,536 — (29)357 (1,218)4,646 
Total$288,003 $10,558 $(11,440)$3,845 $11,288 $302,254 
Three Months Ended
September 30, 2021
Commercial$25,731 $— $(354)$106 $677 $26,160 
Commercial real estate65,469 — (86)3,371 (3,657)65,097 
BBCC2,798 — (8)31 (259)2,562 
Residential real estate10,419 — (85)79 (887)9,526 
Indirect2,043 — (113)294 (363)1,861 
Direct640 — (355)153 148 586 
Home equity2,344 — (214)218 (272)2,076 
Total$109,444 $— $(1,215)$4,252 $(4,613)$107,868 
Nine Months Ended
September 30, 2022
Commercial$27,232 $38,780 $(5,919)$3,219 $49,101 $112,413 
Commercial real estate64,004 49,419 (5,596)789 35,474 144,090 
BBCC2,458 — (48)256 (498)2,168 
Residential real estate9,347 136 (344)636 11,481 21,256 
Indirect1,743 — (1,636)921 557 1,585 
Direct528 31 (6,550)1,712 20,375 16,096 
Home equity2,029 723 (107)540 1,461 4,646 
Total$107,341 $89,089 $(20,200)$8,073 $117,951 $302,254 
Nine Months Ended
September 30, 2021
Commercial$30,567 $— $(940)$549 $(4,016)$26,160 
Commercial real estate75,810 — (264)3,555 (14,004)65,097 
BBCC6,120 — (144)87 (3,501)2,562 
Residential real estate12,608 — (305)217 (2,994)9,526 
Indirect3,580 — (903)1,395 (2,211)1,861 
Direct855 — (913)622 22 586 
Home equity1,848 — (296)718 (194)2,076 
Total$131,388 $— $(3,765)$7,143 $(26,898)$107,868 
(1)During the three months ended September 30, 2022, a measurement period adjustment was made on the allowance for credit losses for acquired PCD loans totaling $10.6 million.
The allowance for credit losses increased for the nine months ended September 30, 2022 primarily due to $89.1 million of allowance for credit losses on acquired PCD loans established through acquisition accounting
adjustments on or after the merger date and $96.3 million of provision for credit losses to establish an allowance for credit losses on non-PCD loans acquired in the First Midwest merger. Loan growth and measurement period adjustments for PCD loans contributed to the increase in the allowance for credit losses in the three months ended September 30, 2022.
Unfunded Loan Commitments
Old National maintains an allowance for credit losses on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements. The allowance is computed using a methodology similar to that used to determine the allowance for credit losses for loans, modified to take into account the probability of a drawdown on the commitment. The allowance for credit losses on unfunded loan commitments is classified as a liability account on the balance sheet within accrued expenses and other liabilities, while the corresponding provision for these credit losses is recorded as a component of other expense. Old National’s activity in the allowance for credit losses on unfunded loan commitments was as follows:
Three Months Ended
September 30,		Nine Months Ended
September 30,
(dollars in thousands)2022202120222021
Allowance for credit losses on unfunded loan commitments: 
Balance at beginning of period$21,966 $10,429 $10,879 $11,689 
Provision for credit losses on unfunded commitments
   for loans acquired during the period		— — 11,013 — 
Expense (reversal of expense) for credit losses4,203 (132)4,277 (1,392)
Balance at end of period$26,169 $10,297 $26,169 $10,297 
Credit Quality
Old National’s management monitors the credit quality of its loans on an ongoing basis with the AQR for commercial loans reviewed annually or at renewal and the performance of its residential and consumer loans based upon the accrual status refreshed at least quarterly.  Internally, management assigns an AQR to each non-homogeneous commercial, commercial real estate, and BBCC loan in the portfolio.  The primary determinants of the AQR are the reliability of the primary source of repayment and the past, present, and projected financial condition of the borrower.  The AQR will also consider current industry conditions.  Major factors used in determining the AQR can vary based on the nature of the loan, but commonly include factors such as debt service coverage, internal cash flow, liquidity, leverage, operating performance, debt burden, FICO scores, occupancy, interest rate sensitivity, and expense burden.  Old National uses the following definitions for risk ratings:
Criticized.  Special mention loans that have a potential weakness that deserves management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Classified – Substandard.  Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Classified – Nonaccrual.  Loans classified as nonaccrual have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection in full, on the basis of currently existing facts, conditions, and values, in doubt.
Classified – Doubtful.  Loans classified as doubtful have all the weaknesses inherent in those classified as nonaccrual, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Pass rated loans are those loans that are other than criticized, classified – substandard, classified – nonaccrual, or classified – doubtful.
The following table summarizes the amortized cost of term loans by risk category of commercial, commercial real estate, and BBCC loans by loan portfolio segment, class of loan, and origination year:
Origination YearRevolving to Term
(dollars in thousands)20222021202020192018PriorRevolvingTotal
September 30, 2022
Commercial:
Risk Rating:
Pass$1,788,480 $1,953,811 $928,908 $858,442 $386,870 $444,404 $1,981,798 $277,119 $8,619,832 
Criticized42,688 27,736 41,026 44,508 10,165 6,293 61,764 4,397 238,577 
Classified:
Substandard40,035 35,516 20,640 13,877 8,661 21,806 31,913 26,566 199,014 
Nonaccrual— 2,158 1,356 1,127 — — 7,892 7,645 20,178 
Doubtful4,151 6,658 3,280 7,158 5,851 9,280 — — 36,378 
Total$1,875,354 $2,025,879 $995,210 $925,112 $411,547 $481,783 $2,083,367 $315,727 $9,113,979 
Commercial real estate:
Risk Rating:
Pass$2,375,092 $2,864,028 $2,141,691 $1,322,839 $803,056 $1,209,592 $54,548 $597,665 $11,368,511 
Criticized61,754 28,671 21,462 60,599 68,301 44,349 — 20,431 305,567 
Classified:
Substandard54,427 24,635 26,280 78,029 56,499 31,336 — 4,153 275,359 
Nonaccrual2,358 13,949 5,640 1,162 2,188 26,480 297 3,037 55,111 
Doubtful— 35,581 9,752 218 1,783 22,222 — — 69,556 
Total$2,493,631 $2,966,864 $2,204,825 $1,462,847 $931,827 $1,333,979 $54,845 $625,286 $12,074,104 
BBCC:
Risk Rating:
Pass$63,023 $70,355 $56,446 $40,627 $26,382 $14,995 $50,146 $18,477 $340,451 
Criticized1,330 633 611 697 263 164 975 1,177 5,850 
Classified:
Substandard342 324 3 343 — — 837 502 2,351 
Nonaccrual61 — 340 294 283 336 — 723 2,037 
Doubtful— 28 16 93 127 — — — 264 
Total$64,756 $71,340 $57,416 $42,054 $27,055 $15,495 $51,958 $20,879 $350,953 
Origination YearRevolving to Term
(dollars in thousands)20212020201920182017PriorRevolvingTotal
December 31, 2021
Commercial:
Risk Rating:
Pass$918,456 $563,869 $271,158 $98,468 $156,136 $235,639 $667,628 $130,470 $3,041,824 
Criticized9,998 7,885 6,660 — 7,809 2,658 14,601 10,076 59,687 
Classified:
Substandard14,773 14,468 10,200 9,849 5,521 945 6,883 10,322 72,961 
Nonaccrual1,069 3,507 1,276 3,721 1,448 — 845 7,796 19,662 
Doubtful— 178 — 288 337 5,275 — — 6,078 
Total$944,296 $589,907 $289,294 $112,326 $171,251 $244,517 $689,957 $158,664 $3,200,212 
Commercial real estate:
Risk Rating:
Pass$1,555,880 $1,474,271 $846,921 $481,508 $462,176 $611,680 $42,609 $451,544 $5,926,589 
Criticized27,622 24,790 39,914 — 21,614 22,157 — 34,387 170,484 
Classified:
Substandard4,706 12,118 9,933 9,058 18,165 11,351 2,291 4,339 71,961 
Nonaccrual1,620 2,997 — 1,627 3,419 8,905 315 871 19,754 
Doubtful6,653 — 1,970 342 11,218 12,513 — — 32,696 
Total$1,596,481 $1,514,176 $898,738 $492,535 $516,592 $666,606 $45,215 $491,141 $6,221,484 
BBCC:
Risk Rating:
Pass$81,710 $69,749 $54,580 $34,461 $25,113 $8,296 $47,571 $18,778 $340,258 
Criticized1,320 1,170 841 160 — — 670 1,578 5,739 
Classified:
Substandard284 24 79 7 187 465 103 239 1,388 
Nonaccrual— 88 — — 66 162 — 1,136 1,452 
Doubtful— 25 284 1,391 — 210 — — 1,910 
Total$83,314 $71,056 $55,784 $36,019 $25,366 $9,133 $48,344 $21,731 $350,747 
For residential real estate and consumer loan classes, Old National evaluates credit quality based on the aging status of the loan and by payment activity.  The performing or nonperforming status is updated on an on-going basis dependent upon improvement and deterioration in credit quality. The following table presents the amortized cost of term residential real estate and consumer loans based on payment activity and origination year:
Origination YearRevolving to Term
(dollars in thousands)20222021202020192018PriorRevolvingTotal
September 30, 2022
Residential real estate:
Risk Rating:
Performing$1,070,939 $1,920,008 $1,861,893 $496,062 $144,400 $742,078 $8 $92 $6,235,480 
Nonperforming— 423 765 584 717 29,337 — — 31,826 
Total$1,070,939 $1,920,431 $1,862,658 $496,646 $145,117 $771,415 $8 $92 $6,267,306 
Indirect:
Risk Rating:
Performing$404,054 $274,254 $162,221 $95,443 $39,202 $25,995 $— $45 $1,001,214 
Nonperforming203 756 548 531 360 442 — — 2,840 
Total$404,257 $275,010 $162,769 $95,974 $39,562 $26,437 $— $45 $1,004,054 
Direct:
Risk Rating:
Performing$120,960 $185,466 $86,802 $67,478 $52,671 $65,437 $89,675 $1,530 $670,019 
Nonperforming161 620 647 388 301 2,635 40 132 4,924 
Total$121,121 $186,086 $87,449 $67,866 $52,972 $68,072 $89,715 $1,662 $674,943 
Home equity:
Risk Rating:
Performing$741 $992 $1,863 $2,035 $1,008 $11,171 $999,869 $15,370 $1,033,049 
Nonperforming224 96 231 728 824 4,335 868 3,239 10,545 
Total$965 $1,088 $2,094 $2,763 $1,832 $15,506 $1,000,737 $18,609 $1,043,594 
Origination YearRevolving to Term
20212020201920182017PriorRevolvingTotal
December 31, 2021
Residential real estate:
Risk Rating:
Performing$625,582 $632,705 $272,600 $72,766 $103,866 $529,293 $12 $105 $2,236,929 
Nonperforming96 165 166 350 855 16,728 — — 18,360 
Total$625,678 $632,870 $272,766 $73,116 $104,721 $546,021 $12 $105 $2,255,289 
Indirect:
Risk Rating:
Performing$361,485 $231,156 $146,978 $68,513 $41,598 $20,819 $— $9 $870,558 
Nonperforming262 524 614 510 430 241 — — 2,581 
Total$361,747 $231,680 $147,592 $69,023 $42,028 $21,060 $— $9 $873,139 
Direct:
Risk Rating:
Performing$34,058 $16,135 $14,396 $14,579 $7,432 $15,831 $36,812 $192 $139,435 
Nonperforming13 53 130 133 35 536 42 8 950 
Total$34,071 $16,188 $14,526 $14,712 $7,467 $16,367 $36,854 $200 $140,385 
Home equity:
Risk Rating:
Performing$— $— $633 $349 $535 $— $539,057 $16,768 $557,342 
Nonperforming— — 16 9 41 1 258 2,923 3,248 
Total$— $— $649 $358 $576 $1 $539,315 $19,691 $560,590 
Nonaccrual and Past Due Loans
Old National does not record interest on nonaccrual loans until principal is recovered. For all loan classes, a loan is generally placed on nonaccrual status when principal or interest becomes 90 days past due unless it is well secured and in the process of collection, or earlier when concern exists as to the ultimate collectability of principal or interest. Interest accrued but not received is reversed against earnings. Cash interest received on these loans is applied to the principal balance until the principal is recovered or until the loan returns to accrual status. Loans may be returned to accrual status when all the principal and interest amounts contractually due are brought current, remain current for a prescribed period, and future payments are reasonably assured.
The following table presents the aging of the amortized cost basis in past due loans by class of loans:
(dollars in thousands)30-59 Days
Past Due		60-89 Days
Past Due		Past Due
90 Days or
More		Total
Past Due		CurrentTotal
Loans
September 30, 2022
Commercial$8,575 $758 $11,885 $21,218 $9,092,761 $9,113,979 
Commercial real estate23,786 7,235 27,286 58,307 12,015,797 12,074,104 
BBCC78 92 84 254 350,699 350,953 
Residential29,394 7,382 8,851 45,627 6,221,679 6,267,306 
Indirect4,929 1,735 850 7,514 996,540 1,004,054 
Direct4,459 2,926 2,503 9,888 665,055 674,943 
Home equity4,995 1,078 4,589 10,662 1,032,932 1,043,594 
Total$76,216 $21,206 $56,048 $153,470 $30,375,463 $30,528,933 
December 31, 2021
Commercial$2,723 $617 $1,603 $4,943 $3,195,269 $3,200,212 
Commercial real estate1,402 280 7,042 8,724 6,212,760 6,221,484 
BBCC747 162 109 1,018 349,729 350,747 
Residential8,273 2,364 4,554 15,191 2,240,098 2,255,289 
Indirect3,888 867 554 5,309 867,830 873,139 
Direct687 159 162 1,008 139,377 140,385 
Home equity693 199 777 1,669 558,921 560,590 
Total$18,413 $4,648 $14,801 $37,862 $13,563,984 $13,601,846 
The following table presents the amortized cost basis of loans on nonaccrual status and loans past due 90 days or more and still accruing by class of loan:
September 30, 2022December 31, 2021
(dollars in thousands)Nonaccrual
Amortized
Cost		Nonaccrual
With No
Related
Allowance		Past Due
90 Days or
More and
Accruing		Nonaccrual
Amortized
Cost		Nonaccrual
With No
Related
Allowance		Past Due
90 Days or
More and
Accruing
Commercial$56,556 $3,836 $— $25,740 $9,574 $— 
Commercial real estate124,667 35,989 — 52,450 25,139 — 
BBCC2,301 — — 3,362 — — 
Residential31,826 — — 18,360 — — 
Indirect2,840 — — 2,581 — 4 
Direct4,924 — 767 950 — 3 
Home equity10,545 — — 3,248 — — 
Total$233,659 $39,825 $767 $106,691 $34,713 $7 
Interest income recognized on nonaccrual loans was insignificant during the three and nine months ended September 30, 2022 and 2021.
When management determines that foreclosure is probable, expected credit losses for collateral dependent loans are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. A loan is considered collateral dependent when the borrower is experiencing financial difficulty and the loan is expected to be repaid substantially through the operation or sale of the collateral. The class of loan represents the primary collateral type associated with the loan. Significant quarter over quarter changes are reflective of changes in nonaccrual status and not necessarily associated with credit quality indicators like appraisal value. The following table presents the amortized cost basis of collateral dependent loans by class of loan:
Type of Collateral
(dollars in thousands)Real
Estate		Blanket
Lien		Investment
Securities/Cash		AutoOther
September 30, 2022
Commercial$7,417 $43,620 $2,301 $134 $987 
Commercial real estate112,275 — 590 — 6,487 
BBCC1,649 560 64 28 — 
Residential31,826 — — — — 
Indirect— — — 2,840 — 
Direct3,861 2 — 198 16 
Home equity10,545 — — — — 
Total loans$167,573 $44,182 $2,955 $3,200 $7,490 
December 31, 2021
Commercial$8,100 $13,816 $3,394 $80 $302 
Commercial real estate38,657 — 961 — 6,653 
BBCC1,895 1,331 43 93 — 
Residential18,360 — — — — 
Indirect— — — 2,581 — 
Direct724 — 1 152 20 
Home equity3,248 — — — — 
Total loans$70,984 $15,147 $4,399 $2,906 $6,975 
Loan Participations
Old National has loan participations, which qualify as participating interests, with other financial institutions.  At September 30, 2022, these loans totaled $2.3 billion, of which $1.1 billion had been sold to other financial institutions and $1.2 billion was retained by Old National.  The loan participations convey proportionate ownership rights with equal priority to each participating interest holder; involve no recourse (other than ordinary representations and warranties) to, or subordination by, any participating interest holder; all cash flows are divided among the participating interest holders in proportion to each holder’s share of ownership; and no holder has the right to pledge the entire financial asset unless all participating interest holders agree.
Troubled Debt Restructurings
Old National may choose to restructure the contractual terms of certain loans.  The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit Old National by increasing the ultimate probability of collection.
Any loans that are modified are reviewed by Old National to identify if a TDR has occurred, which is when for economic or legal reasons related to a borrower’s financial difficulties, Old National Bank grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status.  The modification of the terms of such loans includes one or a combination of the following:  a reduction of the stated interest rate of the loan, an extension of the maturity date at a stated rate of interest lower than the current market rate of new debt with similar risk, or a permanent reduction of the recorded investment of the loan.
Loans modified in a TDR are typically placed on nonaccrual status until we determine the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrate a period of performance according to the restructured terms for six months.
If we are unable to resolve a nonperforming loan issue, the credit will be charged off when it is apparent there will be a loss.  For large commercial type loans, each relationship is individually analyzed for evidence of apparent loss based on quantitative benchmarks or subjectively based upon certain events or particular circumstances.  For residential and consumer loans, a charge off is recorded at the time foreclosure is initiated or when the loan becomes 120 to 180 days past due, whichever is earlier.
For commercial TDRs, an allocation is established within the allowance for credit losses for the difference between the carrying value of the loan and its computed value.  To determine the computed value of the loan, one of the following methods is selected: (1) the present value of expected cash flows discounted at the loan’s original effective interest rate, (2) the loan’s observable market price, or (3) the fair value of the collateral, if the loan is collateral dependent.  The allocation is established as the difference between the carrying value of the loan and the collectable value.  If there are significant changes in the amount or timing of the loan’s expected future cash flows, the allowance allocation is recalculated and adjusted accordingly.
When a residential or consumer loan is identified as a TDR, the loan is typically written down to its collateral value less selling costs.
The following table presents activity in TDRs:
(dollars in thousands)Beginning
Balance		(Charge-offs)/
Recoveries		(Payments)/
Disbursements		(Removals)/
Additions		Ending
Balance
Three Months Ended September 30, 2022
Commercial$7,216 $— $(1,620)$— $5,596 
Commercial real estate27,531 — (891)— 26,640 
BBCC87 — (13)— 74 
Residential2,378 — (37)— 2,341 
Direct2,669 — (12)— 2,657 
Home equity131 — (8)— 123 
Total$40,012 $— $(2,581)$— $37,431 
Three Months Ended September 30, 2021
Commercial$8,264 $1 $(156)$2,073 $10,182 
Commercial real estate15,970 58 (369)— 15,659 
BBCC97 2 (10)— 89 
Residential2,582 (7)(108)— 2,467 
Indirect— 1 (1)— — 
Direct665 — (15)— 650 
Home equity217 1 (10)— 208 
Total$27,795 $56 $(669)$2,073 $29,255 
Nine Months Ended September 30, 2022
Commercial$7,456 $— $(6,363)$4,503 $5,596 
Commercial real estate17,158 4 (10,005)19,483 26,640 
BBCC87 3 (16)— 74 
Residential2,435 — (94)— 2,341 
Indirect— 1 (1)— — 
Direct2,704 — (47)— 2,657 
Home equity199 1 (77)— 123 
Total$30,039 $9 $(16,603)$23,986 $37,431 
Nine Months Ended September 30, 2021
Commercial$11,090 $1 $(1,810)$901 $10,182 
Commercial real estate17,606 72 (2,019)— 15,659 
BBCC112 8 (31)— 89 
Residential2,824 (11)(346)— 2,467 
Indirect— 4 (4)— — 
Direct739 3 (92)— 650 
Home equity282 2 (76)— 208 
Total$32,653 $79 $(4,378)$901 $29,255 
TDRs included within nonaccrual loans totaled $23.8 million at September 30, 2022 and $11.7 million at December 31, 2021.  Old National has established specific allowances for credit losses for clients whose loan terms have been modified as TDRs totaling $5.2 million at September 30, 2022 and $0.7 million at December 31, 2021.  At September 30, 2022, Old National had committed to lend an additional $3.0 million to clients with outstanding loans that were classified as TDRs. At December 31, 2021, Old National had not committed to lend any additional funds to clients with outstanding loans that were classified as TDRs.
The pre-modification and post-modification outstanding recorded investments of loans modified as TDRs during the nine months ended September 30, 2022 and 2021 are the same except for when the loan modifications involve the forgiveness of principal.  One loan met the qualifications to be removed from TDR status for the nine months ended September 30, 2021.
The TDRs that occurred during the nine months ended September 30, 2022 increased the allowance for credit losses by $5.5 million and resulted in no charge-offs. The TDRs that occurred during the nine months ended September 30, 2021 did not have a material impact on the allowance for credit losses and resulted in no charge-offs.
A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.
TDRs for which there was a payment default within twelve months following the modification were insignificant during the nine months ended September 30, 2022 and 2021.
The terms of certain other loans were modified during 2022 and 2021 that did not meet the definition of a TDR.  It is our process to review all classified and criticized loans that, during the period, have been renewed, have entered into a forbearance agreement, have gone from principal and interest to interest only, or have extended the maturity date.  In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on its debt in the foreseeable future without the modification.  The evaluation is performed under our internal underwriting policy.  We also evaluate whether a concession has been granted or if we were adequately compensated through a market interest rate, additional collateral, or a bona fide guarantee.  We also consider whether the modification was insignificant relative to the other terms of the agreement or the delay in a payment.
In general, once a modified loan is considered a TDR, the loan will always be considered a TDR until it is paid in full, otherwise settled, sold, or charged off.  However, guidance also permits for loans to be removed from TDR status when subsequently restructured under these circumstances: (1) at the time of the subsequent restructuring, the borrower is not experiencing financial difficulties, and this is documented by a current credit evaluation at the time of the restructuring, (2) under the terms of the subsequent restructuring agreement, the institution has granted no concession to the borrower; and (3) the subsequent restructuring agreement includes market terms that are no less favorable than those that would be offered for a comparable new loan.  For loans subsequently restructured that have cumulative principal forgiveness, the loan should continue to be measured in accordance with ASC 310-10, Receivables – Overall. However, consistent with ASC 310-40-50-2, Troubled Debt Restructurings by Creditors, Creditor Disclosure of Troubled Debt Restructurings, the loan would not be required to be reported in the years following the restructuring if the subsequent restructuring meets both of these criteria: (1) has an interest rate at the time of the subsequent restructuring that is not less than a market interest rate; and (2) is performing in compliance with its modified terms after the subsequent restructuring.
Purchased Credit Deteriorated Loans
Old National has purchased loans, for which there was, at acquisition, evidence of more than insignificant deterioration of credit quality since origination. The carrying amount of those loans is as follows:
(dollars in thousands)
First Midwest (1)
Purchase price of loans at acquisition$1,390,273 
Allowance for credit losses at acquisition89,089 
Non-credit discount/(premium) at acquisition9,003 
Par value of acquired loans at acquisition$1,488,365 
(1)Old National merged with First Midwest effective February 15, 2022.