NOTE 3 - INVESTMENT SECURITIES

The following tables summarize the amortized cost and fair value of the available-for-sale and held-to-maturity investment securities portfolio at December 31 and the corresponding amounts of unrealized gains and losses therein:


		Amortized		Unrealized		Unrealized			Fair
(dollars in thousands)		Cost		Gains		Losses			Value
2012
Available-for-Sale
U.S. Treasury	$	11,437	$	404	$	0		$	11,841
U.S. Government-sponsored entities and agencies		515,469		2,794		(938	)		517,325
Mortgage-backed securities - Agency		1,130,991		33,244		(447	)		1,163,788
Mortgage-backed securities - Non-agency		29,359		1,175		(338	)		30,196
States and political subdivisions		542,559		35,805		(1,040	)		577,324
Pooled trust prefered securities		24,884		0		(15,525	)		9,359
Other securities		182,070		10,473		(1,592	)		190,951
Total available-for-sale securities	$	2,436,769	$	83,895	$	(19,880	)	$	2,500,784

Held-to-Maturity
U.S. Government-sponsored entities and agencies	$	173,936	$	14,327	$	0		$	188,263
Mortgage-backed securities - Agency		56,612		2,307		0			58,919
States and political subdivisions		169,282		13,739		0			183,021
Other securities		2,998		0		0			2,998
Total held-to-maturity securities	$	402,828	$	30,373	$	0		$	433,201

2011
Available-for-Sale
U.S. Treasury	$	65,221	$	548	$	0		$	65,769
U.S. Government-sponsored entities and agencies		171,629		1,621		(65	)		173,185
Mortgage-backed securities - Agency		1,153,629		28,687		(61	)		1,182,255
Mortgage-backed securities - Non-agency		90,355		418		(4,873	)		85,900
States and political subdivisions		376,609		26,428		(193	)		402,844
Pooled trust preferred securities		25,461		0		(18,134	)		7,327
Other securities		147,897		8,365		(2,266	)		153,996
Total available-for-sale securities	$	2,030,801	$	66,067	$	(25,592	)	$	2,071,276

Held-to-Maturity
U.S. Government-sponsored entities and agencies	$	177,159	$	11,434	$	0		$	188,593
Mortgage-backed securities - Agency		84,075		3,305		0			87,380
States and political subdivisions		216,345		8,548		(176	)		224,717
Other securities		7,011		0		(2	)		7,009
Total held-to-maturity securities	$	484,590	$	23,287	$	(178	)	$	507,699

Proceeds from sales of investment securities available-for-sale were $227.6 million in 2012, $546.0 million in 2011 and $481.5 million in 2010. In 2012, realized gains were $14.9 million. Included in the realized gains is $0.8 million of gains that resulted from approximately $148.6 million of investment securities which were called by the issuers. Also impacting earnings in 2012 are $165 thousand of gains associated with the trading securities and $1.4 million of other-than-temporary impairment charges related to credit losses on six non-agency mortgage-backed securities and two trust preferred securities, described below. In 2011, realized gains were $9.6 million and losses were $1.1 million. Included in the realized gains is $0.9 million of gains that resulted from approximately $362.4 million of investment securities which were called by the issuers. Also impacting earnings in 2011 are $21 thousand of gains associated with the trading securities, $158 thousand of gains from mutual funds and $1.4 million of other-than-temporary impairment charges related to credit losses on three non-agency mortgage-backed securities and one

trust preferred security, described below. In 2010, realized gains were $21.7 million and losses were $4.6 million. Included in the realized gains is $0.8 million of gains that resulted from approximately $836.1 million of investment securities which were called by the issuers. Also impacting earnings in 2010 are $3.9 million of other-than-temporary impairment charges related to credit losses on three pooled trust preferred securities and ten non-agency mortgage-backed securities, described below. At December 31, investment securities were pledged to secure public and other funds with a carrying value of $834 million in 2012 and $835 million in 2011.

Trading securities, which consist of mutual funds held in a trust associated with deferred compensation plans for former Monroe Bancorp directors and executives, are recorded at fair value and totaled $3.1 million at December 31, 2012 and $2.8 million at December 31, 2011.

At December 31, 2012 and 2011, Old National had a concentration of investment securities issued by Indiana and its political subdivisions totaling $273.8 million and $268.4 million, which represented 22.9% and 26.0% of shareholders' equity, respectively

All of the mortgage-backed securities in the investment portfolio are residential mortgage-backed securities. The amortized cost and fair value of the investment securities portfolio are shown by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Weighted average yield is based on amortized cost.


		2012			Weighted			2011			Weighted
(dollars in thousands)		Amortized		Fair	Average			Amortized		Fair	Average
Maturity		Cost		Value	Yield			Cost		Value	Yield
Available-for-sale
Within one year	$	30,284	$	30,544	3.19	%	$	79,212	$	79,668	1.61	%
One to five years		111,294		116,982	3.33			123,174		127,761	3.38
Five to ten years		651,094		665,199	2.48			240,215		252,434	3.86
Beyond ten years		1,644,097		1,688,059	3.17			1,588,200		1,611,413	3.32
Total	$	2,436,769	$	2,500,784	2.99	%	$	2,030,801	$	2,071,276	3.32	%

Held-to-maturity
Within one year	$	3,066	$	3,066	2.25	%	$	4,075	$	4,073	1.48	%
One to five years		2,355		2,427	3.35			4,819		4,861	2.60
Five to ten years		144,701		153,882	2.94			151,395		158,366	2.97
Beyond ten years		252,706		273,826	4.48			324,301		340,399	4.47
Total	$	402,828	$	433,201	3.90	%	$	484,590	$	507,699	3.96	%

The following table summarizes the investment securities with unrealized losses at December 31 by aggregated major security type and length of time in a continuous unrealized loss position:


		Less than 12 months					12 months or longer				Total
		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(dollars in thousands)		Value		Losses			Value		Losses			Value		Losses
2012
Available-for-Sale
U.S. Government-sponsored entities
and agencies	$	201,151	$	(938	)	$	0	$	0		$	201,151	$	(938	)
Mortgage-backed securities - Agency		64,213		(447	)		0		0			64,213		(447	)
Mortgage-backed securities - Non-agency		0		0			5,696		(338	)		5,696		(338	)
States and political subdivisions		63,311		(1,040	)		0		0			63,311		(1,040	)
Pooled trust preferrred securities		0		0			9,359		(15,525	)		9,359		(15,525	)
Other securities		23,617		(162	)		6,658		(1,430	)		30,275		(1,592	)
Total available-for-sale	$	352,292	$	(2,587	)	$	21,713	$	(17,293	)	$	374,005	$	(19,880	)

2011
Available-for-Sale
U.S. Government-sponsored entities
and agencies	$	24,935	$	(65	)	$	0	$	0		$	24,935	$	(65	)
Mortgage-backed securities - Agency		49,016		(61	)		3		0			49,019		(61	)
Mortgage-backed securities - Non-agency		10,053		(353	)		59,203		(4,520	)		69,256		(4,873	)
States and political subdivisions		9,281		(114	)		1,345		(79	)		10,626		(193	)
Pooled trust preferrred securities		0		0			7,327		(18,134	)		7,327		(18,134	)
Other securities		4,516		(141	)		6,218		(2,125	)		10,734		(2,266	)
Total available-for-sale	$	97,801	$	(734	)	$	74,096	$	(24,858	)	$	171,897	$	(25,592	)

Held-to-Maturity
States and political subdivisions	$	1,613	$	(1	)	$	13,180	$	(175	)	$	14,793	$	(176	)
Other securities		22		(2	)		0		0			22		(2	)
Total held-to-maturity	$	1,635	$	(3	)	$	13,180	$	(175	)	$	14,815	$	(178	)

During the third quarter of 2012, approximately $46.1 million of state and political subdivision securities were transferred from the held-to-maturity portfolio to the available-for-sale portfolio due to changes in circumstances associated with the Office of Management and Budget's report outlining sequestration and the implications for taxable Build America Bonds. The $1.0 million, net of tax, unrealized holding gain was reclassified out of other comprehensive income on the date of transfer.

During the second quarter of 2010, approximately $143.8 million of state and political subdivision securities were transferred from the available-for-sale portfolio to the held-to-maturity portfolio at fair value. The $9.4 million unrealized holding gain at the date of transfer shall continue to be reported as a separate component of shareholders' equity and will be amortized over the remaining life of the securities as an adjustment of yield.

Management evaluates securities for other-than-temporary impairment ("OTTI") at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities classified as available-for-sale or held-to-maturity are generally evaluated for OTTI under FASB ASC 320 (SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities). However, certain purchased beneficial interests, including non-agency mortgage-backed securities, asset-backed securities, and collateralized debt obligations, that had credit ratings at the time of purchase of below AA are evaluated using the model outlined in FASB ASC 325-10 (EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests that Continue to be Held by a Transfer in Securitized Financial Assets).

In determining OTTI under the FASB ASC 320 (SFAS No. 115) model, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial

condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time. The second segment of the portfolio uses the OTTI guidance provided by FASB ASC 325-10 (EITF 99-20) that is specific to purchased beneficial interests that, on the purchase date, were rated below AA. Under the FASB ASC 325-10 model, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

When other-than-temporary-impairment occurs under either model, the amount of the other-than-temporary-impairment recognized in earnings depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If an entity intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary-impairment shall be recognized in earnings equal to the entire difference between the investment's amortized cost basis and its fair value at the balance sheet date. Otherwise, the other-than-temporary-impairment shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total other-than-temporary-impairment related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total other-than-temporary-impairment related to other factors shall be recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the other-than-temporary-impairment recognized in earnings shall become the new amortized cost basis of the investment.

As of December 31, 2012, Old National's security portfolio consisted of 1,297 securities, 103 of which were in an unrealized loss position. The Company's non-agency mortgage-backed and pooled trust preferred securities are discussed below. The majority of unrealized losses are related to the Company's pooled trust preferred securities.

Non-agency Mortgage-backed Securities

At December 31, 2012, the Company's securities portfolio contained 7 non-agency collateralized mortgage obligations with a fair value of $30.2 million which had net unrealized gains of approximately $0.8 million. All of these securities are residential mortgage-backed securities. These non-agency mortgage-backed securities were rated AAA at purchase and are not within the scope of FASB ASC 325-10 (EITF 99-20). As of December 31, 2012, six of these securities were rated below investment grade with grades ranging from BB to D. One of the six securities is rated BB and has a fair value of $5.0 million, one of the securities is rated CCC and has a fair value of $12.6 million, one of the securities is rated C with a fair value of $0.4 million and three of the securities are rated D with a fair value of $9.0 million. These securities were evaluated to determine if the underlying collateral is expected to experience loss, resulting in a principal loss of the notes. As part of the evaluation, a detailed analysis of deal-specific data was obtained from remittance reports provided by the trustee and data from the servicer. The collateral was broken down into several distinct buckets based on loan performance characteristics in order to apply different assumptions to each bucket. The most significant drivers affecting loan performance were examined including original loan-to-value ("LTV"), underlying property location and the loan status. The loans in the current status bucket were further divided based on their original LTV: a high-LTV and a low-LTV group to which different default curves and severity percentages were applied. The high-LTV group was further bifurcated into loans originated in high-risk states and all other states with a higher default-curve and severity percentages being applied to loans originated in the high-risk states. Different default curves and severity rates were applied to the remaining non-current collateral buckets. Using these collateral-specific assumptions, a model was built to project the future performance of the instrument. Based on this analysis of the underlying collateral, Old National recorded $0.9 million of credit losses on six of these securities for the twelve months ended December 31, 2012. The fair value of these non-agency mortgage-backed securities remaining at December 31, 2012 was $27.1 million.

At December 31, 2011, the Company's securities portfolio contained 13 non-agency collateralized mortgage obligations with a fair value of $85.9 million which had net unrealized losses of approximately $4.5 million. All of these securities are residential mortgage-backed securities. These non-agency mortgage-backed securities were rated AAA at purchase and are not within the scope of FASB ASC 325-10 (EITF 99-20). As of December 31, 2011, nine of these securities were rated below investment grade with grades ranging from B to D. One of the nine

securities was rated B and had a fair value of $13.8 million, two of the securities were rated CCC with a fair value of $24.2 million, four of the securities were rated CC with a fair value of $14.0 million, one of the securities was rated C with a fair value of $17.6 million and one of the securities was rated D with a fair value of $3.6 million. These securities were evaluated to determine if the underlying collateral is expected to experience loss, resulting in a principal loss of the notes. As part of the evaluation, a detailed analysis of deal-specific data was obtained from remittance reports provided by the trustee and data from the servicer. The collateral was broken down into several distinct buckets based on loan performance characteristics in order to apply different assumptions to each bucket. The most significant drivers affecting loan performance were examined including original loan-to-value ("LTV"), underlying property location and the loan status. The loans in the current status bucket were further divided based on their original LTV: a high-LTV and a low-LTV group to which different default curves and severity percentages were applied. The high-LTV group was further bifurcated into loans originated in high-risk states and all other states with a higher default-curve and severity percentages being applied to loans originated in the high-risk states. Different default curves and severity rates were applied to the remaining non-current collateral buckets. Using these collateral-specific assumptions, a model was built to project the future performance of the instrument. Based on this analysis of the underlying collateral, Old National recorded $0.5 million of credit losses on three of these securities for the twelve months ended December 31, 2011. The fair value of these non-agency mortgage-backed securities remaining at December 31, 2011 was $73.2 million. Due to stabilization in the investment markets, the Company was able to sell six of these securities during 2012 for a small gain.

Pooled Trust Preferred Securities

At December 31, 2012, the Company's securities portfolio contained six pooled trust preferred securities with a fair value of $9.4 million and unrealized losses of $15.5 million. Four of the pooled trust preferred securities in our portfolio fall within the scope of FASB ASC 325-10 (EITF 99-20) and have a fair value of $3.9 million with unrealized losses of $6.7 million at December 31, 2012. These securities were rated A2 and A3 at inception, but at December 31, 2012, one security was rated CC, two securities were rated C and one security D. The issuers in these securities are primarily banks, but some of the pools do include a limited number of insurance companies. The Company uses the OTTI evaluation model to compare the present value of expected cash flows to the previous estimate to determine whether an adverse change in cash flows has occurred during the quarter. The OTTI model considers the structure and term of the collateralized debt obligation ("CDO") and the financial condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market information including announcements of interest payment deferrals or defaults of underlying trust preferred securities. Assumptions used in the model include expected future default rates and prepayments. We assume no recoveries on defaults and a limited number of recoveries on current or projected interest payment deferrals. In addition, we use the model to "stress" each CDO, or make assumptions more severe than expected activity, to determine the degree to which assumptions could deteriorate before the CDO could no longer fully support repayment of Old National's note class. For the twelve months ended December 31, 2012, our model indicated other-than-temporary-impairment losses on two securities of $476 thousand, all of which was recorded as a credit loss in earnings. During the fourth quarter of 2012 one of these securities was sold. At December 31, 2012, the fair value of the remaining security was $501 thousand and it was classified as available for sale. At December 31, 2012, the Company has no intent to sell any of these securities that are in an unrealized loss position.

Two of our pooled trust preferred securities with a fair value of $5.5 million and unrealized losses of $8.8 million at December 31, 2012 are not subject to FASB ASC 325-10. These securities are evaluated using collateral-specific assumptions to estimate the expected future interest and principal cash flows. Our analysis indicated no other-than-temporary-impairment on these securities.

At December 31, 2011, the Company's securities portfolio contained eight pooled trust preferred securities with a fair value of $7.3 million and unrealized losses of $18.1 million. Six of the pooled trust preferred securities in our portfolio fell within the scope of FASB ASC 325-10 (EITF 99-20) and had a fair value of $4.2 million with unrealized losses of $7.0 million at December 31, 2011. These securities were rated A2 and A3 at inception, but at December 31, 2011, four securities were rated C and two securities D. The issuers in these securities were primarily banks, but some of the pools did include a limited number of insurance companies. The Company uses the OTTI evaluation model to compare the present value of expected cash flows to the previous estimate to determine whether an adverse change in cash flows has occurred during the quarter. The OTTI model considers the structure and term

of the collateralized debt obligation ("CDO") and the financial condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market information including announcements of interest payment deferrals or defaults of underlying trust preferred securities. Assumptions used in the model include expected future default rates and prepayments. We assume no recoveries on defaults and a limited number of recoveries on current or projected interest payment deferrals. In addition, we use the model to "stress" each CDO, or make assumptions more severe than expected activity, to determine the degree to which assumptions could deteriorate before the CDO could no longer fully support repayment of Old National's note class. For the twelve months ended December 31, 2011, our model indicated other-than-temporary-impairment losses on one security of $0.9 million, all of which was recorded as a credit loss in earnings. At December 31, 2011, the fair value of this security was $9 thousand.

Two of our pooled trust preferred securities with a fair value of $3.1 million and unrealized losses of $11.1 million at December 31, 2011, are not subject to FASB ASC 325-10. These securities are evaluated using collateral-specific assumptions to estimate the expected future interest and principal cash flows. Our analysis indicated no other-than-temporary-impairment on these securities.

The table below summarizes the relevant characteristics of our six pooled trust preferred securities as well as five single issuer trust preferred securities which are included with other securities in this Note 3 to the consolidated financial statements. Each of the pooled trust preferred securities support a more senior tranche of security holders except for the MM Community Funding II security which, due to payoffs, Old National is now in the most senior class.

As depicted in the table below, all six securities have experienced credit defaults. However, two of these securities have excess subordination and are not other-than-temporarily-impaired as a result of their class hierarchy which provides more loss protection.


Old National Bancorp
Trust preferred securities															Actual		Expected		Excess
December 31, 2012															Deferrals and		Defaults as		Subordination
(Dollars in Thousands)														# of Issuers	Defaults as a		a % of		as a %
				Lowest						Unrealized			Realized	Currently	Percent of		Remaining		of Current
				Credit		Amortized		Fair		Gain/			Losses	Performing/	Original		Performing		Performing
	Class			Rating (1)		Cost		Value		(Loss)			2012	Remaining	Collateral		Collateral		Collateral
Pooled trust preferred securities:
MM Community Funding IX	B	-2		CC	$	2,067	$	796	$	(1,271	)	$	0	17/29	31.0	%	7.1	%	0.0	%
Reg Div Funding 2004	B	-2		D		4,012		501		(3,511	)		165	24/44	42.8	%	6.2	%	0.0	%
Pretsl XII	B	-1		C		2,799		1,308		(1,491	)		0	46/72	28.3	%	8.1	%	0.0	%
Pretsl XV	B	-1		C		1,695		1,256		(439	)		0	49/69	30.3	%	6.1	%	0.0	%
Pretsl XXVII LTD		B		CC		4,904		1,110		(3,794	)		0	33/48	26.6	%	22.3	%	29.3	%
Trapeza Ser 13A		A2	A	B		9,407		4,388		(5,019	)		0	43/53	27.7	%	17.7	%	38.4	%
						24,884		9,359		(15,525	)		165

Single Issuer trust preferred securities:
First Empire Cap (M&T)				BB+		957		1,002		45			0
First Empire Cap (M&T)				BB+		2,909		3,006		97			0
Fleet Cap Tr V (BOA)				BB		3,366		2,660		(706	)		0
JP Morgan Chase Cap XIII				BBB		4,723		3,999		(724	)		0
NB-Global				BB		719		760		41			0
						12,674		11,427		(1,247	)		0

Total					$	37,558	$	20,786	$	(16,772	)	$	165

(1) Lowest rating for the security provided by any nationally recognized credit rating agency.

The following table details all securities with other-than-temporary-impairment, their credit rating at December 31, 2012 and the related credit losses recognized in earnings:


								Amount of other-than-temporary
		Lowest						impairment recognized in earnings
		Credit		Amortized		Twelve Months ended December 31,								Life-to
	Vintage	Rating (1)		Cost		2012		2011		2010		2009		date
Non-agency mortgage-backed securities:
BAFC Ser 4	2007	CCC	$	11,985	$	299	$	0	$	79	$	63	$	441
CWALT Ser 73CB	2005	D		2,473		151		0		207		83		441
CWALT Ser 73CB	2005	D		3,561		35		0		427		182		644
CWHL 2006-10 (2)	2006					0		0		309		762		1,071
CWHL 2005-20	2005	C		333		0		0		39		72		111
FHASI Ser 4 (2)	2007					0		340		629		223		1,192
HALO Ser 1R (2)	2006					133		16		0		0		149
RFMSI Ser S9 (2)	2006					0		0		923		1,880		2,803
RFMSI Ser S10	2006	D		3,148		178		165		76		249		668
RALI QS2 (2)	2006					0		0		278		739		1,017
RAST A9	2004					142		0		0		0		142
RFMSI S1 (2)	2006					0		0		30		176		206
				21,500		938		521		2,997		4,429		8,885
Pooled trust preferred securities:
TROPC (2)	2003					311		888		444		3,517		5,160
MM Community Funding IX	2003	CC		2,067		0		0		165		2,612		2,777
Reg Div Funding	2004	D		4,012		165		0		321		5,199		5,685
Pretsl XII	2003	C		2,799		0		0		0		1,897		1,897
Pretsl XV	2004	C		1,695		0		0		0		3,374		3,374
Reg Div Funding (3)	2005			-		0		0		0		3,767		3,767
				10,573		476		888		930		20,366		22,660
Total other-than-temporary-
impairment recognized in earnings					$	1,414	$	1,409	$	3,927	$	24,795	$	31,545

(1) Lowest rating for the security provided by any nationally recognized credit rating agency. (2) Securities sold.

(3) Security written down to zero.