NOTE 6 – COVERED LOANS

Covered loans represent loans acquired from the FDIC that are subject to loss share agreements. Covered loans were $626.4 million at December 31, 2011. The composition of covered loans by lending classification was as follows:


	At December 31, 2011
	Loans Accounted for Under ASC 310-30 (Purchased Credit Impaired)			Loans excluded from ASC 310-30 (1) (Not Purchased Credit Impaired)		Total Covered Purchased Loans


(dollars in thousands)
Commercial	$	65,688		$	59,067	$	124,755
Commercial real estate		304,220			21,714		325,934
Residential		46,868			103		46,971
Consumer		40,012			88,688		128,700
Covered loans		456,788			169,572		626,360
Allowance for loan losses		(943	)		0		(943	)
Covered loans, net	$	455,845		$	169,572	$	625,417

(1) Includes loans with revolving privileges which are scoped out of FASB ASC Topic 310-30 and certain loans which Old National elected to treat under the cost recovery method of accounting.

Loans were recorded at fair value in accordance with FASB ASC 805, Business Combinations. No allowance for loan losses related to the acquired loans is recorded on the acquisition date as the fair value of the loans acquired incorporates assumptions regarding credit risk. Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in FASB ASC 820, exclusive of the loss share agreements with the Federal Deposit Insurance Corporation ("FDIC"). The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows.

Over the life of the acquired loans, the Company continues to estimate cash flows expected to be collected on individual loans or on pools of loans sharing common risk characteristics and were treated in the aggregate when applying various valuation techniques. The Company evaluates at each balance sheet date whether the present value of its loans determined using the effective interest rates has decreased and if so, recognizes a provision for loan losses. For any increases in cash flows expected to be collected, the Company adjusts the amount of accretable yield recognized on a prospective basis over the loan's or pool's remaining life.

Accretable yield, or income expected to be collected on the covered loans accounted for under ASC 310-30, is as follows:


(dollars in thousands)
Balance at January 1, 2011	$	0
New loans purchased		92,123
Accretion of income		(19,428	)
Reclassifications from (to) nonaccretable difference		19,051
Disposals/other adjustments		307
Balance at December 31, 2011	$	92,053

A summary of activity for the indemnification asset and loss share receivable is presented below:


(dollars in thousands)
Indemnification Asset
Balance at January 1, 2011	$	-
Adjustments not reflected in income
Established through acquisitions		167,949
Reclass to loss claims receivable		(20,808	)
Other		(1	)
Adjustments reflected in income
(Amortization) accretion		1,459
Other		(1,033	)
Balance at December 31, 2011	$	147,566

(dollars in thousands)
Loss Share Receivable
Balance at January 1, 2011	$	-
Established through acquisitions		-
Reclass from indemnification asset		20,808
Cash received from FDIC		(660	)
Balance at December 31, 2011	$	20,148