NOTE 6 – COVERED LOANS

Covered loans represent loans acquired from the FDIC that are subject to loss share agreements. Covered loans were $372.3 million at December 31, 2012. The composition of covered loans by lending classification was as follows:


					At December 31, 2012
		Loans Accounted for			Loans excluded from
		Under ASC 310-30			ASC 310-30 (1)
		(Purchased Credit			(Not Purchased Credit		Total Covered
(dollars in thousands)		Impaired)			Impaired)		Purchased Loans
Commercial	$	23,707		$	31,932	$	55,639
Commercial real estate		162,641			20,185		182,826
Residential		35,741			155		35,896
Consumer		25,663			72,309		97,972
Covered loans		247,752			124,581		372,333
Allowance for loan losses		(5,716	)		0		(5,716	)
Covered loans, net	$	242,036		$	124,581	$	366,617

(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.

The outstanding balance of covered loans accounted for under ASC 310-30, including contractual principal, interest, fees and penalties, was $534.3 million and $726.8 million as of December 31, 2012 and 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 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. Eighty percent of the prospective yield adjustments are 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)		2012			2011
Balance at January 1,	$	92,053		$	0
New loans purchased		0			92,123
Accretion of income		(52,173	)		(19,428	)
Reclassifications from (to) nonaccretable difference		45,539			19,051
Disposals/other adjustments		360			307
Balance at December 31,	$	85,779		$	92,053

At December 31, 2012, the loss sharing asset is comprised of a $107.4 million FDIC indemnification asset and a $8.3 million FDIC loss share receivable. The loss share receivable represents the current reimbursable amounts from the FDIC that have not yet been received. The indemnification asset represents the cash flows the Company expects to collect from the FDIC under the loss sharing agreements and the amount related to the estimated improvements in cash flow expectations that are being amortized over the same period for which those improved cash flows are being accreted into income. At December 31, 2012, $99.5 million of the FDIC indemnification asset is related to expected indemnification payments and $7.9 million is expected to be amortized and reported in noninterest income as an offset to future accreted interest income.

For covered loans, the Company remeasures contractual and expected cash flows on a quarterly basis. When the quarterly re-measurement process results in a decrease in expected cash flows due to an increase in expected credit losses, impairment is recorded. As a result of this impairment, the indemnification asset is increased to reflect anticipated future cash flows to be received from the FDIC. Consistent with the loss sharing agreements between the Company and the FDIC, the amount of the increase to the indemnification asset is measured at 80% of the resulting impairment.

Alternatively, when the quarterly re-measurement results in an increase in expected future cash flows due to a decrease in expected credit losses, the nonaccretable difference decreases and the effective yield of the related loan portfolio is increased. As a result of the improved expected cash flows, the indemnification asset would be reduced first by the amount of any impairment previously recorded and, second, by increased amortization over the remaining life of the related loss sharing agreements.

The following table shows a detailed analysis of the FDIC loss sharing asset for the twelve months ended December 31, 2012 and 2011:


(dollars in thousands)		2012			2011
Balance at January 1,	$	167,714		$	0
Adjustments not reflected in income
Established through acquisitions		0			167,949
Cash received from the FDIC		(48,223	)		(660	)
Other		(378	)		(1	)
Adjustments reflected in income
(Amortization) accretion		(13,128	)		1,459
Impairment		1,069			(1,288	)
Write-downs/sale of other real estate		12,637			255
Recovery amounts due to FDIC		(3,223	)		0
Other		(730	)		0
Balance at December 31,	$	115,738		$	167,714

Also included in Other Assets at December 31, 2012 and 2011, respectively, are an $886 thousand receivable and a $1.2 million receivable related to noninterest loan expenses that are reimbursable by the FDIC. Included in Accrued Expenses and Other Liabilities at December 31, 2012 and 2011, respectively, are a $521 thousand payable and a $20.9 million payable related to noninterest expenses that are payable to the FDIC.