NOTE 19 – FAIR VALUE

FASB ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820-10 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair values:

· Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

· Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

· Level 3 – Significant unobservable inputs that reflect a company's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Old National used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Trading securities: The fair value for trading securities is determined by quoted market prices (Level 1).

Investment securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Discounted cash flows are calculated using swap and libor curves plus spreads that adjust for loss severities, volatility, credit risk and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.

Residential loans held for sale: The fair value of loans held for sale is determined using quoted prices for a similar asset, adjusted for specific attributes of that loan (Level 2).

Derivative financial instruments: The fair values of derivative financial instruments are based on derivative valuation models using market data inputs as of the valuation date (Level 2).

Deposits: The fair value of retail certificates of deposit is estimated by discounting future cash flows using rates currently offered for deposits with similar remaining maturities (Level 2).

Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which the Company has elected the fair value option, are summarized below:


				Fair Value Measurements at June 30, 2011 Using
					Significant
				Quoted Prices in	Other		Significant
				Active Markets for	Observable		Unobservable
		Carrying		Identical Assets	Inputs		Inputs
(dollars in thousands)		Value		(Level 1)	(Level 2)		(Level 3)

Financial Assets
Trading securities	$	2,916	$	2,916	$	0	$	0
Investment securities available-for-sale:
U.S. Treasury		62,746		62,746		0		0
U.S. Government-sponsored entities and agencies		387,211		0		387,211		0
Mortgage-backed securities - Agency		1,104,089		0		1,104,089		0
Mortgage-backed securities - Non-agency		103,535		0		103,535		0
States and political subdivisions		368,421		0		368,421		0
Pooled trust preferred securities		9,738		0		-		9,738
Other securities		167,115		0		167,115		0
Residential loans held for sale		6,104		0		6,104		0
Derivative assets		30,969		0		30,969		0
Financial Liabilities
Derivative liabilities		26,692		0		26,692		0

There were no significant transfers into or out of Level 1, Level 2 or Level 3 assets or liabilities during the six months ended June 30, 2011.


				Fair Value Measurements at December 31, 2010 Using
					Significant
				Quoted Prices in	Other		Significant
				Active Markets for	Observable		Unobservable
		Carrying		Identical Assets	Inputs		Inputs
(dollars in thousands)		Value		(Level 1)	(Level 2)		(Level 3)

Financial Assets
Investment securities available-for-sale:
U.S. Treasury	$	62,550	$	62,550	$	0	$	0
U.S. Government-sponsored entities and agencies		315,133		0		315,133		0
Mortgage-backed securities - Agency		944,446		0		944,446		0
Mortgage-backed securities - Non-agency		126,806		0		126,806		0
States and political subdivisions		348,924		0		348,924		0
Pooled trust preferred securities		8,400		0		-		8,400
Other securities		153,963		0		153,963		0
Residential loans held for sale		3,819		0		3,819		0
Derivative assets		34,082		0		34,082		0
Financial Liabilities
Derivative liabilities		29,721		0		29,721		0

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30, 2011:


Fair Value Measurements
		using Significant
Unobservable Inputs
		(Level 3)
Pooled Trust Preferred
Securities Available-
(dollars in thousands)		for-Sale
Beginning balance, January 1, 2011	$	8,400
Accretion/(amortization) of discount or premium		(35	)
Payments received		(13	)
Credit loss write-downs		0
Increase/(decrease) in fair value of securities		1,386
Ending balance, June 30, 2011	$	9,738

Included in the income statement is $35 thousand of expense included in interest income from the amortization of premiums on securities. The increase in fair value is reflected in the balance sheet as an increase in the fair value of investment securities available-for sale, an increase in accumulated other comprehensive income, which is included in shareholders' equity, and a decrease in other assets related to the tax impact.

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30, 2010:


Fair Value Measurements
		using Significant
Unobservable Inputs
		(Level 3)
Pooled Trust Preferred
Securities Available-
(dollars in thousands)		for-Sale
Beginning balance, January 1, 2010	$	12,398
Accretion/(amortization) of discount or premium		(33	)
Payments received		(10	)
Credit loss write-downs		(311	)
Increase/(decrease) in fair value of securities		(1,504	)
Ending balance, June 30, 2010	$	10,540

Included in the income statement are $33 thousand of expense included in interest income from the amortization of premiums on securities and $311 thousand of credit losses included in noninterest income. The decrease in fair value is reflected in the balance sheet as a decrease in the fair value of investment securities available-for sale, a decrease in accumulated other comprehensive income, which is included in shareholders' equity, and an increase in other assets related to the tax impact.


Assets measured at fair value on a non-recurring basis are summarized below:

		Fair Value Measurements at June 30, 2011 Using
			Significant
		Quoted Prices in	Other		Significant
		Active Markets for	Observable	Unobservable
	Carrying	Identical Assets	Inputs		Inputs
(dollars in thousands)	Value	(Level 1)	(Level 2)		(Level 3)
Financial Assets
Commercial loans	$	23,233	0	0	$	23,233
Commercial real estate loans	$	14,962	0	0	$	14,962

Impaired commercial and commercial real estate loans, which are measured for impairment using the fair value of the collateral, had a principal amount of $55.5 million, with a valuation allowance of $17.3 million at June 30, 2011. Old National recorded $10.0 million of provision expense associated with these loans for the six months ended June 30, 2011.


			Fair Value Measurements at December 31, 2010 Using
				Significant
			Quoted Prices in	Other			Significant
			Active Markets for	Observable			Unobservable
		Carrying	Identical Assets	Inputs			Inputs
(dollars in thousands)		Value	(Level 1)	(Level 2)			(Level 3)
Financial Assets
Commercial loans	$	14,721		0	0	$	14,721
Commercial real estate loans		$	8,112	0	0	$	8,112

Impaired commercial and commercial real estate loans, which are measured for impairment using the fair value of the collateral, had a principal amount of $36.4 million, with a valuation allowance of $13.6 million at December 31, 2010. Old National recorded $7.1 million of provision expense associated with these loans in 2010.

Financial instruments recorded using fair value option

Under FASB ASC 825-10, the Company may elect to report most financial instruments and certain other items at fair value on an instrument-by instrument basis with changes in fair value reported in net income. After the initial adoption, the election is made at the acquisition of an eligible financial asset, financial liability or firm commitment or when certain specified reconsideration events occur. The fair value election may not be revoked once an election is made.

The Company has elected the fair value option for residential mortgage loans held for sale. For these loans, interest income is recorded in the consolidated statements of income based on the contractual amount of interest income earned on the financial assets (except any that are on nonaccrual status). None of these loans are 90 days or more past due, nor are any on nonaccrual status. Included in the income statement are $51 thousand and $100 thousand of interest income for residential loans held for sale for the three and six months ended June 30, 2011, respectively. Included in the income statement are $40 thousand and $123 thousand of interest income for residential loans held for sale for the three and six months ended June 30, 2010, respectively.

Residential mortgage loans held for sale

Old National has elected the fair value option for newly originated conforming fixed-rate and adjustable-rate first mortgage loans held for sale. These loans are intended for sale and are hedged with derivative instruments. Old National has elected the fair value option to mitigate accounting mismatches in cases where hedge accounting is complex and to achieve operational simplification. The fair value option was not elected for loans held for investment.

As of June 30 2011, the difference between the aggregate fair value and the aggregate remaining principal balance for loans for which the fair value option has been elected is as follows. Accrued interest at period end is included in the fair value of the instruments.


		Aggregate				Contractual
(dollars in thousands)		Fair Value		Difference		Principal
Residential loans held for sale	$	6,104	$	165	$	5,939

The following table presents the amount of gains and losses from fair value changes included in income before income taxes for financial assets carried at fair value for the three and six months ended June 30, 2011:

Changes in Fair Value for the Three Months ended June 30, 2011, for Items Measured at Fair Value Pursuant to Election of the Fair Value Option

Total Changes


								in Fair Values
		Other						Included in
		Gains and		Interest		Interest		Current Period
(dollars in thousands)		(Losses)		Income		(Expense)		Earnings
Residential loans held for sale	$	92	$	0	$	0	$	92

Changes in Fair Value for the Six Months ended June 30, 2011, for Items Measured at Fair Value Pursuant to Election of the Fair Value Option

Total Changes


									in Fair Values
		Other							Included in
		Gains and		Interest		Interest			Current Period
(dollars in thousands)		(Losses)		Income		(Expense)			Earnings
Residential loans held for sale	$	186	$	0	$	(1	)	$	185

As of June 30, 2010, the difference between the aggregate fair value and the aggregate remaining principal balance for loans for which the fair value option has been elected was as follows. Accrued interest at period end is included in the fair value of the instruments.


		Aggregate				Contractual
(dollars in thousands)		Fair Value		Difference		Principal
Residential loans held for sale	$	5,836	$	215	$	5,621

Changes in Fair Value for the Three Months ended June 30, 2010, for Items Measured at Fair Value Pursuant to Election of the Fair Value Option

Total Changes


								in Fair Values
		Other						Included in
		Gains and		Interest		Interest		Current Period
(dollars in thousands)		(Losses)		Income		(Expense)		Earnings
Residential loans held for sale	$	153	$	1	$	0	$	154

Changes in Fair Value for the Six Months ended June 30, 2010, for Items Measured at Fair Value Pursuant to Election of the Fair Value Option

Total Changes


									in Fair Values
		Other							Included in
		Gains and			Interest		Interest		Current Period
(dollars in thousands)		(Losses)			Income		(Expense)		Earnings
Residential loans held for sale	$	(70	)	$	1	$	0	$	(69	)

The carrying amounts and estimated fair values of financial instruments, not previously presented in this note, at June 30, 2011 and December 31, 2010 are as follows:


		Carrying		Fair
(dollars in thousands)		Value		Value
June 30, 2011
Financial Assets
Cash, due from banks, federal funds sold
and money market investments	$	335,617	$	335,617
Investment securities held-to-maturity:
U.S. Government-sponsored entities and agencies		245,301		250,308
Mortgage-backed securities - Agency		98,374		101,798
State and political subdivisions		216,894		214,944
Other securities		7,139		7,124
Federal Home Loan Bank stock		19,673		19,673
Loans, net (including impaired loans):
Commercial		1,243,578		1,278,698
Commercial real estate		1,137,911		1,188,934
Residential real estate		792,330		856,152
Consumer credit		873,333		921,174
Accrued interest receivable		42,600		42,600
Financial Liabilities
Deposits:
Noninterest-bearing demand deposits	$	1,504,632	$	1,504,632
NOW, savings and money market deposits		2,952,477		2,952,477
Time deposits		1,557,978		1,597,991
Short-term borrowings:
Federal funds purchased		1,385		1,385
Repurchase agreements		294,709		294,710
Other short-term borrowings		9,111		9,111
Other borrowings:
Junior subordinated debenture		16,000		13,173
Subordinated notes		13,000		13,325
Repurchase agreements		50,000		54,246
Federal Home Loan Bank advances		211,316		222,816
Subordinated bank notes		150,000		152,057
Capital lease obligation		4,284		5,218
Accrued interest payable		7,914		7,914
Standby letters of credit		533		533
Off-Balance Sheet Financial Instruments
Commitments to extend credit	$	0	$	1,463


		Carrying		Fair
(dollars in thousands)		Value		Value
December 31, 2010
Financial Assets
Cash, due from banks, federal funds sold
and money market investments	$	251,552	$	251,552
Investment securities held-to-maturity:
U.S. Government-sponsored entities and agencies		303,265		301,809
Mortgage-backed securities - Agency		117,013		119,080
State and political subdivisions		217,381		204,379
Other securities		551		375
Federal Home Loan Bank stock		31,937		31,937
Loans, net (including impaired loans):
Commercial		1,185,194		1,220,464
Commercial real estate		909,742		952,885
Residential real estate		662,396		710,865
Consumer credit		913,810		969,263
Accrued interest receivable		42,971		42,971
Financial Liabilities
Deposits:
Noninterest-bearing demand deposits	$	1,276,024	$	1,276,024
NOW, savings and money market deposits		2,711,644		2,711,644
Time deposits		1,475,257		1,520,093
Short-term borrowings:
Federal funds purchased		1,663		1,663
Repurchase agreements		287,414		287,416
Other short-term borrowings		9,155		9,155
Other borrowings:
Junior subordinated debenture		8,000		7,998
Repurchase agreements		50,000		54,104
Federal Home Loan Bank advances		211,696		220,531
Subordinated bank notes		150,000		154,420
Capital lease obligation		4,307		5,138
Accrued interest payable		7,860		7,860
Standby letters of credit		518		518
Off-Balance Sheet Financial Instruments
Commitments to extend credit	$	0	$	1,311

The following methods and assumptions were used to estimate the fair value of each type of financial instrument.

Cash, due from banks, federal funds sold and resell agreements and money market investments: For these instruments, the carrying amounts approximate fair value.

Investment securities: Fair values for investment securities held-to-maturity are based on quoted market prices, if available. For securities where quoted prices are not available, fair values are estimated based on market prices of similar securities.

Federal Home Loan Bank Stock: Old National Bank is a member of the Federal Home Loan Bank system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost and periodically evaluated for impairment based on ultimate recovery of par value. The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank.

Finance leases held for sale: The fair value of leases held for sale is estimated using discounted future cash flows.

Loans: The fair value of loans is estimated by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Accrued interest receivable: The carrying amount approximates fair value.

Deposits: The fair value of noninterest-bearing demand deposits and savings, NOW and money market deposits is the amount payable as of the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using rates currently offered for deposits with similar remaining maturities.

Short-term borrowings: Federal funds purchased and other short-term borrowings generally have an original term to maturity of 30 days or less and, therefore, their carrying amount is a reasonable estimate of fair value. The fair value of securities sold under agreements to repurchase is estimated by discounting future cash flows using current interest rates.

Other borrowings: The fair value of medium-term notes, subordinated debt and senior bank notes is determined using market quotes. The fair value of FHLB advances is determined using quoted prices for new FHLB advances with similar risk characteristics. The fair value of other debt is determined using comparable security market prices or dealer quotes.

Standby letters of credit: Fair values for standby letters of credit are based on fees currently charged to enter into similar agreements. The fair value for standby letters of credit was recorded in "Accrued expenses and other liabilities" on the consolidated balance sheet in accordance with FASB ASC 460-10 (FIN 45).

Off-balance sheet financial instruments: Fair values for off-balance sheet credit-related financial instruments are based on fees currently charged to enter into similar agreements. For further information regarding the amounts of these financial instruments, see Notes 16 and 17.