NOTE 9 – COVERED LOANS

Covered loans represent loans acquired from the FDIC that are subject to loss share agreements. The carrying amount of covered loans was $489.3 million at June 30, 2012. The composition of covered loans by lending classification was as follows:


	At June 30, 2012
		Loans Accounted for			Loans excluded from
		Under ASC 310-30			ASC 310-30 (1)
		(Purchased Credit			(Not Purchased		Total Covered
(dollars in thousands)		Impaired)			Credit Impaired)		Purchased Loans
Commercial	$	40,674		$	35,251	$	75,925
Commercial real estate		242,551			19,169		261,720
Residential		39,773			628		40,401
Consumer		31,621			79,664		111,285
Covered loans		354,619			134,712		489,331
Allowance for loan losses		(4,336	)		0		(4,336	)
Covered loans, net	$	350,283		$	134,712	$	484,995

(1) Includes loans with revolving privileges which are scoped out of FASB ASC 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.

The outstanding balance of covered loans accounted for under ASC 310-30, including contractual principal, interest, fees and penalties, was $641.2 million and $726.8 million as of June 30, 2012 and December 31, 2011, respectively.

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 which 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. These prospective yield adjustments are partially offset as Old National will recognize a corresponding decrease in cash flows expected from the indemnification asset prospectively in a similar manner. The indemnification asset is adjusted over the shorter of the life of the underlying investment or the indemnification agreement.

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, 2012	$	92,053
New loans purchased		0
Accretion of income		(26,102	)
Reclassifications from (to) nonaccretable difference		35,678
Disposals/other adjustments		(1,326)
Balance at June 30, 2012	$	100,303

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


(dollars in thousands)
Indemnification Asset
Balance at January 1, 2012	$	147,566
Adjustments not reflected in income:
Established through acquisitions		0
Reclass to loss claims receivable		(20,608	)
Other		0
Adjustments reflected in income:
(Amortization) accretion		(7,270	)
Other adjustments in loss expectations		8,029
Balance at June 30, 2012	$	127,717


(dollars in thousands)
Loss Share Receivable
Balance at January 1, 2012	$	20,148
Established through acquisitions		0
Reclass from indemnification asset		20,608
Cash received from FDIC		(32,433	)
Balance at June 30, 2012	$	8,323