NOTE 9 – COVERED LOANS

Old National entered into an agreement with the FDIC on June 22, 2016 to terminate its loss share agreements. As a result of the termination of the loss share agreements, the remaining loans that were covered by the loss share arrangements were reclassified to noncovered loans effective June 22, 2016. All future gains and losses associated with covered loans will be recognized entirely by Old National.

Prior to the termination of the loss share agreements, certain loans acquired from the FDIC were classified as covered loans. Covered loans were subject to loss share agreements. Under the early termination agreement, the FDIC made a final payment of $8.7 million to Old National as consideration for the early termination. After the elimination of the remaining FDIC indemnification asset and the payment of settlement charges, Old National realized a pre-tax gain of $0.2 million during the three months ended June 30, 2016. The carrying amount of covered loans was $95.4 million at March 31, 2016.

The following table is a roll-forward of covered acquired impaired loans accounted for under ASC 310-30 for the six months ended June 30, 2016 and 2015. As a result of the termination of the loss share agreements, the remaining loans that were covered by the loss share arrangements were reclassified to noncovered loans effective June 22, 2016.


(dollars in thousands)	Contractual Cash Flows (1)			Nonaccretable Difference			Accretable Yield			Carrying Amount (2)
Six Months Ended June 30, 2016
Balance at January 1, 2016	$	69,857		$	(4,729	)	$	(17,785	)	$	47,343
Principal reductions and interest payments		(18,195	)		(347	)		—			(18,542	)
Accretion of loan discount		—			—			7,196			7,196
Changes in contractual and expected cash flows due to remeasurement		4,431			631			(4,927	)		135
Removals due to foreclosure or sale		(1,948	)		136			263			(1,549	)
Loans removed from loss share coverage		(54,145	)		4,309			15,253			(34,583	)

Balance at June 30, 2016	$	—		$	—		$	—		$	—

Six Months Ended June 30, 2015
Balance at January 1, 2015	$	124,809		$	(12,014	)	$	(35,742	)	$	77,053
Principal reductions and interest payments		(18,178	)		(814	)		—			(18,992	)
Accretion of loan discount		—			—			7,259			7,259
Changes in contractual and expected cash flows due to remeasurement		(3,633	)		4,412			(733	)		46
Removals due to foreclosure or sale		(506	)		162			(143	)		(487	)

Balance at June 30, 2015	$	102,492		$	(8,254	)	$	(29,359	)	$	64,879

(1)	The balance of contractual cash flows includes future contractual interest and is net of amounts charged off and interest collected on nonaccrual loans.

(2)	Carrying amount for this table is net of allowance for loan losses.

Prior to the termination of the loss share agreements, we estimated the 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. We evaluated at each balance sheet date whether the present value of loans determined using the effective interest rates had decreased and if so, recognized a provision for loan losses. For any increases in cash flows expected to be collected, we adjusted 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 were offset as Old National would recognize a corresponding change in cash flows expected from the indemnification asset prospectively in a similar manner. The indemnification asset was adjusted over the shorter of the life of the underlying investment or the indemnification agreement.

The loss share receivable represented actual incurred losses where reimbursement had not yet been received from the FDIC. The indemnification asset represented future cash flows we expected to collect from the FDIC under the loss sharing agreements and the amount related to the estimated improvements in cash flow expectations that were being amortized over the same period for which those improved cash flows were being accreted into income.

The following table shows a detailed analysis of the FDIC loss sharing asset for the six months ended June 30, 2016 and 2015. As a result of the termination of the loss share agreements on June 22, 2016, the table below reflects the write-off of the remaining FDIC loss sharing asset.


(dollars in thousands)	2016			2015
Balance at January 1,	$	9,030		$	20,603
Adjustments not reflected in income:
Cash received from the FDIC		(10,000	)		(2,231	)
Other		512			612
Adjustments reflected in income:
(Amortization) accretion		(816	)		(3,830	)
Higher (lower) loan loss expectations		(13	)		109
Impairment/(recovery) of value and net (gain)/loss on sales of other real estate		1,062			1,212
Gain as a result of the early termination agreement with the FDIC, effective June 22, 2016		225			—

Balance at June 30,	$	—		$	16,475

As a result of the termination of the loss share agreements, all future gains and losses associated with covered assets will be recognized entirely by Old National since the FDIC will no longer be sharing in these gains and losses.