NOTE 8 – LOANS 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, southeastern Illinois, western Kentucky and southwestern Michigan. Old National has no concentration of commercial loans in any single industry exceeding 10% of its portfolio.

The composition of loans by lending classification was as follows:


	March 31,			December 31,
(dollars in thousands)	2015			2014
Commercial (1)	$	1,668,275		$	1,629,600
Commercial real estate:
Construction		150,711			134,552
Other		1,662,868			1,576,558
Residential real estate		1,625,354			1,519,156
Consumer credit:
Heloc		374,079			360,320
Auto		897,190			846,969
Other		137,222			103,338
Covered loans		136,840			147,708

Total loans		6,652,539			6,318,201
Allowance for loan losses		(46,675	)		(44,297	)
Allowance for loan losses - covered loans		(2,203	)		(3,552	)

Net loans	$	6,603,661		$	6,270,352

(1)	Includes direct finance leases of $18.9 million at March 31, 2015 and $19.3 million at December 31, 2014.

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. As a general rule, Old National avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. 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 feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. 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.

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. 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 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

Covered loans represent loans acquired from the FDIC that are subject to loss share agreements whereby Old National is indemnified against 80% of losses up to $275.0 million, losses in excess of $275.0 million up to $467.2 million at 0% reimbursement, and 80% of losses in excess of $467.2 million. As of March 31, 2015, we do not expect losses to exceed $275.0 million. See Note 9 to the consolidated financial statements for further details on our covered loans.

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.

Effective January 1, 2015, we began using a probability of default (“PD”)/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 adopted the probability of default and loss given default model for commercial loans because we believe this approach has a tendency to react more quickly to credit cycle shifts (both positive and negative). The overall results of switching from migration analysis to the probability of default and loss given default model for our performing commercial and commercial real estate loans in the first quarter of 2015 were not material.

Prior to January 1, 2015, we used migration analysis as a tool to determine the adequacy of the allowance for loan losses for performing commercial and commercial real estate loans. Migration analysis is a statistical technique that attempts to estimate probable losses for existing pools of loans by matching actual losses incurred on loans back to their origination. Judgment is used to select and weight the historical periods which are most representative of the current environment.

We calculated migration analysis using several different scenarios based on varying assumptions to evaluate the widest range of possible outcomes. The migration-derived historical commercial loan loss rates were applied to the current commercial loan pools to arrive at an estimate of probable losses for the loans existing at the time of analysis. The amounts determined by migration analysis were adjusted for management’s best estimate of the effects of current economic conditions, loan quality trends, results from internal and external review examinations, loan volume trends, credit concentrations and various other factors.

We continue to use historic loss ratios adjusted for expectations of future economic conditions to determine the appropriate level of allowance for consumer and residential real estate 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. Purchased credit impaired (“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. Impairment on PCI loans would be recognized in the current period as provision expense.

Old National’s activity in the allowance for loan losses for the three months ended March 31, 2015 and 2014 is as follows:


(dollars in thousands)	Commercial			Commercial Real Estate			Consumer			Residential			Unallocated		Total
2015
Allowance for loan losses:
Balance at January 1, 2015	$	20,670		$	17,348		$	6,869		$	2,962		$	—	$	47,849
Charge-offs		44			710			(1,604	)		(374	)		—		(1,224	)
Recoveries		1,182			167			875			28			—		2,252
Provision		2,807			(4,418	)		1,309			303			—		1

Balance at March 31, 2015	$	24,703		$	13,807		$	7,449		$	2,919		$	—	$	48,878


2014
Allowance for loan losses:
Balance at January 1, 2014	$	16,565		$	22,401		$	4,940		$	3,239		$	—	$	47,145
Charge-offs		(1,147	)		(168	)		(1,125	)		21			—		(2,419	)
Recoveries		792			1,095			821			82			—		2,790
Provision		3,296			(4,018	)		742			17			—		37

Balance at March 31, 2014	$	19,506		$	19,310		$	5,378		$	3,359		$	—	$	47,553

The following table provides Old National’s recorded investment in financing receivables by portfolio segment at March 31, 2015 and December 31, 2014 and other information regarding the allowance:


(dollars in thousands)	Commercial		Commercial Real Estate		Consumer		Residential		Unallocated		Total
March 31, 2015
Allowance for loan losses:
Individually evaluated for impairment	$	9,986	$	1,838	$	—	$	—	$	—	$	11,824
Collectively evaluated for impairment		13,635		10,830		7,180		2,905		—		34,550
Noncovered loans acquired with deteriorated credit quality		486		1,139		63		14		—		1,702
Covered loans acquired with deteriorated credit quality		596		—		206		—		—		802

Total allowance for loan losses	$	24,703	$	13,807	$	7,449	$	2,919	$	—	$	48,878

Loans and leases outstanding:
Individually evaluated for impairment	$	48,295	$	53,094	$	—	$	—	$	—	$	101,389
Collectively evaluated for impairment		1,625,819		1,728,376		1,456,851		1,625,370		—		6,436,416
Loans acquired with deteriorated credit quality		2,735		35,068		6,233		131		—		44,167
Covered loans acquired with deteriorated credit quality		5,255		33,540		11,671		20,101		—		70,567

Total loans and leases outstanding	$	1,682,104	$	1,850,078	$	1,474,755	$	1,645,602	$	—	$	6,652,539


December 31, 2014
Allowance for loan losses:
Individually evaluated for impairment	$	7,280	$	2,945	$	—	$	—	$	—	$	10,225
Collectively evaluated for impairment		12,163		13,354		6,519		2,945		—		34,981
Noncovered loans acquired with deteriorated credit quality		406		1,049		67		17		—		1,539
Covered loans acquired with deteriorated credit quality		821		—		283		—		—		1,104

Total allowance for loan losses	$	20,670	$	17,348	$	6,869	$	2,962	$	—	$	47,849

Loans and leases outstanding:
Individually evaluated for impairment	$	38,485	$	45,335	$	—	$	—	$	—	$	83,820
Collectively evaluated for impairment		1,598,352		1,631,794		1,359,537		1,519,171		—		6,108,854
Loans acquired with deteriorated credit quality		2,770		37,394		7,073		133		—		47,370
Covered loans acquired with deteriorated credit quality		7,160		37,384		12,507		21,106		—		78,157

Total loans and leases outstanding	$	1,646,767	$	1,751,907	$	1,379,117	$	1,540,410	$	—	$	6,318,201

Credit Quality

Old National’s management monitors the credit quality of its financing receivables in an on-going manner. Internally, management assigns a credit quality grade to each non-homogeneous commercial and commercial real estate loan in the portfolio. The primary determinants of the credit quality grade are based upon the reliability of the primary source of repayment and the past, present, and projected financial condition of the borrower. The credit quality rating also reflects current economic and industry conditions. Major factors used in determining the grade 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 March 31, 2015 and December 31, 2014, the risk category of loans, excluding covered loans, by class of loans is as follows:


(dollars in thousands)
					Commercial Real Estate-				Commercial Real Estate-
Corporate Credit Exposure	Commercial				Construction				Other
Credit Risk Profile by	March 31,		December 31,		March 31,		December 31,		March 31,		December 31,
Internally Assigned Grade	2015		2014		2015		2014		2015		2014
Grade:
Pass	$	1,490,032	$	1,442,904	$	137,433	$	119,958	$	1,456,118	$	1,374,191
Criticized		77,490		89,775		3,495		2,229		102,945		102,805
Classified - substandard		49,070		58,461		3,588		5,866		38,602		38,659
Classified - nonaccrual		50,641		38,003		6,195		6,499		63,031		59,771
Classified - doubtful		1,042		457		—		—		2,172		1,132

Total	$	1,668,275	$	1,629,600	$	150,711	$	134,552	$	1,662,868	$	1,576,558

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 March 31, 2015 and December 31, 2014, excluding covered loans:


(dollars in thousands)	Consumer						Residential
	Heloc		Auto		Other
March 31, 2015
Performing	$	370,047	$	895,946	$	136,653	$	1,610,932
Nonperforming		3,073		1,262		1,510		14,422

Total	$	373,120	$	897,208	$	138,163	$	1,625,354


December 31, 2014
Performing	$	357,205	$	845,708	$	101,811	$	1,505,188
Nonperforming		3,115		1,261		1,527		13,968

Total	$	360,320	$	846,969	$	103,338	$	1,519,156

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. No additional funds are committed to be advanced in connection with these impaired loans.

The following table shows Old National’s impaired loans, excluding covered loans, which are individually evaluated as of March 31, 2015 and December 31, 2014, respectively. Of the loans purchased without FDIC loss share coverage, only those 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
March 31, 2015
With no related allowance recorded:
Commercial	$	27,873	$	28,194	$	—
Commercial Real Estate - Construction		2,330		2,333		—
Commercial Real Estate - Other		43,508		45,594		—
Consumer		776		851		—
Residential		906		1,012		—
With an allowance recorded:
Commercial		15,559		15,567		8,715
Commercial Real Estate - Construction		234		234		10
Commercial Real Estate - Other		7,022		9,263		1,828
Consumer		1,441		1,441		72
Residential		1,475		1,475		74

Total Loans	$	101,124	$	105,964	$	10,699


December 31, 2014
With no related allowance recorded:
Commercial	$	25,483	$	25,854	$	—
Commercial Real Estate - Construction		2,168		1,397		—
Commercial Real Estate - Other		28,637		30,723		—
Consumer		685		748		—
Residential		588		658		—
With an allowance recorded:
Commercial		7,471		10,488		4,883
Commercial Real Estate - Construction		98		98		11
Commercial Real Estate - Other		14,432		16,503		2,934
Consumer		1,543		1,543		77
Residential		1,476		1,476		74

Total Loans	$	82,581	$	89,488	$	7,979

The average balance of impaired loans, excluding covered loans, and interest income recognized on impaired loans during the three months ended March 31, 2015 and 2014 are included in the table below.


(dollars in thousands)	Average Recorded Investment		Interest Income Recognized (1)
Three Months Ended March 31, 2015
With no related allowance recorded:
Commercial	$	26,849	$	42
Commercial Real Estate - Construction		2,250		3
Commercial Real Estate - Other		38,801		85
Consumer		731		1
Residential		747		—
With an allowance recorded:
Commercial		11,516		48
Commercial Real Estate - Construction		166		—
Commercial Real Estate - Other		10,728		1
Consumer		1,492		20
Residential		1,475		61

Total Loans	$	94,755	$	261


Three Months Ended March 31, 2014
With no related allowance recorded:
Commercial	$	17,151	$	33
Commercial Real Estate - Construction		1,007		—
Commercial Real Estate - Other		17,542		54
Consumer		394		2
Residential		116		—
With an allowance recorded:
Commercial		11,045		54
Commercial Real Estate - Construction		—		—
Commercial Real Estate - Other		19,851		112
Consumer		975		12
Residential		2,185		17

Total Loans	$	70,266	$	284

(1)	The Company 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 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 are returned to accrual status when all the principal and interest amounts contractually due are brought current, remain current for six months 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 covered loan loss provision or prospective yield adjustments. Similar to noncovered loans, covered loans accounted for outside FASB ASC Topic 310-30 are classified as nonaccrual when, in the opinion of management, collection of principal or interest is doubtful. Information for covered loans accounted for both under and outside FASB ASC Topic 310-30 is included in the table below in the row labeled covered loans.

Old National’s past due financing receivables as of March 31, 2015 and December 31, 2014 are 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
March 31, 2015
Commercial	$	2,486	$	1,774	$	—	$	51,683	$	55,943	$	1,612,332
Commercial Real Estate:
Construction		927		—		—		6,195		7,122		143,589
Other		2,271		2,096		—		65,203		69,570		1,593,298
Consumer:
Heloc		839		140		—		3,073		4,052		370,027
Auto		2,441		490		83		1,263		4,277		892,913
Other		727		223		44		1,510		2,504		134,718
Residential		10,191		847		—		14,422		25,460		1,599,894
Covered loans		1,089		524		15		12,543		14,171		122,669

Total loans	$	20,971	$	6,094	$	142	$	155,892	$	183,099	$	6,469,440


December 31, 2014
Commercial	$	649	$	813	$	33	$	38,460	$	39,955	$	1,589,645
Commercial Real Estate:
Construction		—		—		—		6,499		6,499		128,053
Other		3,834		1,468		138		60,903		66,343		1,510,215
Consumer:
Heloc		577		376		—		3,115		4,068		356,252
Auto		3,349		695		203		1,261		5,508		841,461
Other		969		129		83		1,527		2,708		100,630
Residential		11,606		3,959		1		13,968		29,534		1,489,622
Covered loans		1,477		584		—		15,124		17,185		130,523

Total loans	$	22,461	$	8,024	$	458	$	140,857	$	171,800	$	6,146,401

Loan Participations

Old National has loan participations, which qualify as participating interests, with other financial institutions. At March 31, 2015, these loans totaled $309.3 million, of which $170.5 million had been sold to other financial institutions and $138.8 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 included 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. It is Old National’s policy to charge 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 consumer or residential loan is identified as a troubled debt restructuring, the loan is written down to its collateral value less selling costs.

At March 31, 2015, our TDRs consisted of $15.3 million of commercial loans, $15.4 million of commercial real estate loans, $2.5 million of consumer loans and $2.4 million of residential loans, totaling $35.6 million. Approximately $23.1 million of the TDRs at March 31, 2015 were included with nonaccrual loans. At December 31, 2014, our TDRs consisted of $15.2 million of commercial loans, $15.2 million of commercial real estate loans, $2.5 million of consumer loans and $2.1 million of residential loans, totaling $35.0 million. Approximately $22.1 million of the TDRs at December 31, 2014 were included with nonaccrual loans.

As of March 31, 2015 and December 31, 2014, Old National has allocated $1.6 million and $2.8 million of specific reserves to customers whose loan terms have been modified in TDRs, respectively. As of March 31, 2015, Old National had committed to lend an additional $1.6 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 three months ended March 31, 2015 and 2014 are the same since the loan modifications did not involve the forgiveness of principal. Old National did not record any charge-offs at the modification date. The following table presents loans by class modified as TDRs that occurred during the three months ended March 31, 2015:

(dollars in thousands)

Number of
Loans

Pre-modification
Outstanding Recorded
Investment

Post-modification
Outstanding Recorded
Investment

Troubled Debt Restructuring:

Commercial

1,741

Commercial Real Estate - construction

1,187

Commercial Real Estate - other

385

Residential

366

Consumer - other

161

Total

3,840

The TDRs described above resulted in immaterial changes in the allowance for loan losses and charge-offs during the three months ended March 31, 2015.

The following table presents loans by class modified as TDRs that occurred during the three months ended March 31, 2014:


(dollars in thousands)	Number of Loans		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
Troubled Debt Restructuring:
Commercial		7	$	188	$	188
Commercial Real Estate - construction		1		484		484
Commercial Real Estate - other		3		246		246
Residential		1		22		22
Consumer - other		9		294		294

Total		21	$	1,234	$	1,234

The TDRs described above resulted in immaterial changes in the allowance for loan losses and charge-offs during the three months ended March 31, 2014.

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

There were three commercial loans and one 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 the three months ended March 31, 2015.

There were four commercial loans and two 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 the three months ended March 31, 2014.

The terms of certain other loans were modified during the three months ended March 31, 2015 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 if the delay in a payment was 90 days or less.

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 March 31, 2015, 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, recent guidance also permits for loans to be removed from TDR status 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.

The following table presents activity in TDRs for the three months ended March 31, 2015 and 2014:


(dollars in thousands)	Commercial			Commercial Real Estate			Consumer			Residential			Total
2015
Troubled debt restructuring:
Balance at January 1, 2015	$	15,205		$	15,226		$	2,459		$	2,063		$	34,953
(Charge-offs)/recoveries		586			248			(11	)		(15	)		808
Payments		(2,198	)		(1,608	)		(164	)		(33	)		(4,003	)
Additions		1,741			1,573			174			352			3,840

Balance at March 31, 2015	$	15,334		$	15,439		$	2,458		$	2,367		$	35,598


2014
Troubled debt restructuring:
Balance at January 1, 2014	$	22,443		$	22,639		$	1,441		$	2,344		$	48,867
(Charge-offs)/recoveries		123			121			(30	)		1			215
Payments		(1,133	)		(2,531	)		(49	)		(28	)		(3,741	)
Additions		188			730			294			22			1,234

Balance at March 31, 2014	$	21,621		$	20,959		$	1,656		$	2,339		$	46,575

Purchased Impaired Loans (noncovered loans)

Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date with no carryover of the related allowance for loan and lease losses. In determining the estimated fair value of purchased loans, management considers a number of factors including the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, net present value of cash flows expected to be received, among others. 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 noncovered loans that meet the criteria of ASC 310-30 treatment, the carrying amount is as follows:


(dollars in thousands)	March 31, 2015		December 31, 2014
Commercial	$	2,735	$	2,770
Commercial real estate		35,068		37,394
Consumer		6,233		7,073
Residential		131		133

Carrying amount	$	44,167	$	47,370

Carrying amount, net of allowance	$	42,465	$	45,831

Allowance for loan losses	$	1,702	$	1,539

The outstanding balance of noncovered loans accounted for under ASC 310-30, including contractual principal, interest, fees and penalties, was $132.7 million at March 31, 2015 and $135.9 million at December 31, 2014.

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 $2.9 million during the three months ended March 31, 2015 and $6.4 million during the three months ended March 31, 2014. Improvement in cash flow expectations has resulted in a reclassification from nonaccretable difference to accretable yield.

Accretable yield of noncovered loans, or income expected to be collected, is as follows:


(dollars in thousands)	Monroe			Integra Noncovered			IBT			Tower			United			LSB			Founders			Total
Balance at January 1, 2015	$	3,564		$	1,389		$	13,354		$	4,559		$	1,516		$	2,409		$	—		$	26,791
New loans purchased		—			—			—			—			—			—			1,812			1,812
Accretion of income		(362	)		(147	)		(1,403	)		(322	)		(225	)		(293	)		(128	)		(2,880	)
Reclassifications from (to) nonaccretable difference		9			71			519			(163	)		466			755			—			1,657
Disposals/other adjustments		—			—			—			32			40			—			—			72

Balance at March 31, 2015	$	3,211		$	1,313		$	12,470		$	4,106		$	1,797		$	2,871		$	1,684		$	27,452

Included in Old National’s allowance for loan losses is $1.7 million related to the purchased loans disclosed above at March 31, 2015, compared to $1.5 million at December 31, 2014. An immaterial amount of allowance for loan losses were reversed during 2014 related to these loans.

At acquisition, purchased loans, both covered and noncovered, for which it was probable at acquisition that all contractually required payments would not be collected were as follows:


(dollars in thousands)	Monroe			Integra Bank (1)			IBT			Tower			United			LSB			Founders
Contractually required payments	$	94,714		$	921,856		$	118,535		$	22,746		$	15,483		$	24,493		$	11,103
Nonaccretable difference		(45,157	)		(226,426	)		(53,165	)		(5,826	)		(5,487	)		(9,903	)		(2,684	)

Cash flows expected to be collected at acquisition		49,557			695,430			65,370			16,920			9,996			14,590			8,419
Accretable yield		(6,971	)		(98,487	)		(11,945	)		(4,065	)		(1,605	)		(2,604	)		(1,812	)

Fair value of acquired loans at acquisition	$	42,586		$	596,943		$	53,425		$	12,855		$	8,391		$	11,986		$	6,607

(1)	Includes covered and noncovered.

Income is not recognized on certain purchased loans if Old National cannot 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.