NOTE 6—INVESTMENT SECURITIES

The following table summarizes the amortized cost and fair value of the available-for-sale and held-to-maturity investment securities portfolio at September 30, 2014 and December 31, 2013 and the corresponding amounts of unrealized gains and losses therein:


(dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
September 30, 2014
Available-for-sale
U.S. Treasury	$	10,990	$	150	$	—		$	11,140
U.S. Government-sponsored entities and agencies		639,376		818		(11,863	)		628,331
Mortgage-backed securities—Agency		1,228,025		16,286		(17,835	)		1,226,476
States and political subdivisions		261,430		12,820		(682	)		273,568
Pooled trust preferred securities		18,025		—		(10,880	)		7,145
Other securities		362,284		4,956		(3,439	)		363,801

Total available-for-sale securities	$	2,520,130	$	35,030	$	(44,699	)	$	2,510,461

Held-to-maturity
U.S. Government-sponsored entities and agencies	$	168,084	$	7,166	$	—		$	175,250
Mortgage-backed securities—Agency		26,006		1,091		—			27,097
States and political subdivisions		653,943		45,477		(50	)		699,370

Total held-to-maturity securities	$	848,033	$	53,734	$	(50	)	$	901,717

December 31, 2013
Available-for-sale
U.S. Treasury	$	12,995	$	118	$	—		$	13,113
U.S. Government-sponsored entities and agencies		456,123		464		(20,999	)		435,588
Mortgage-backed securities—Agency		1,300,135		15,690		(26,567	)		1,289,258
Mortgage-backed securities—Non-agency		17,036		376		—			17,412
States and political subdivisions		260,398		10,112		(1,715	)		268,795
Pooled trust preferred securities		19,215		—		(11,178	)		8,037
Other securities		340,381		5,140		(5,523	)		339,998

Total available-for-sale securities	$	2,406,283	$	31,900	$	(65,982	)	$	2,372,201

Held-to-maturity
U.S. Government-sponsored entities and agencies	$	170,621	$	7,749	$	—		$	178,370
Mortgage-backed securities—Agency		35,443		906		(1	)		36,348
States and political subdivisions		556,670		10,949		(1,579	)		566,040

Total held-to-maturity securities	$	762,734	$	19,604	$	(1,580	)	$	780,758

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.

September 30, 2014

Weighted

(dollars in thousands)

Amortized

Fair

Average

Maturity

Cost

Value

Yield

Available-for-sale

Within one year

32,124

32,793

4.55

One to five years

368,457

373,509

2.17

Five to ten years

594,766

590,070

2.32

Beyond ten years

1,524,783

1,514,089

2.30

Total

2,520,130

2,510,461

2.32

Held-to-maturity

Within one year

1,507

1,520

3.13

One to five years

25,154

26,425

3.91

Five to ten years

182,573

189,635

3.37

Beyond ten years

638,799

684,137

5.49

Total

848,033

901,717

4.99

The following table summarizes the investment securities with unrealized losses at September 30, 2014 and December 31, 2013 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
September 30, 2014
Available-for-Sale
U.S. Government-sponsored entities and agencies	$	157,499	$	(797	)	$	320,049	$	(11,066	)	$	477,548	$	(11,863	)
Mortgage-backed securities—Agency		82,856		(393	)		482,381		(17,442	)		565,237		(17,835	)
States and political subdivisions		7,373		(39	)		12,528		(643	)		19,901		(682	)
Pooled trust preferred securities		—		—			7,145		(10,880	)		7,145		(10,880	)
Other securities		122,533		(1,018	)		45,689		(2,421	)		168,222		(3,439	)

Total available-for-sale	$	370,261	$	(2,247	)	$	867,792	$	(42,452	)	$	1,238,053	$	(44,699	)

Held-to-Maturity
States and political subdivisions	$	16,667	$	(50	)	$	—	$	—		$	16,667	$	(50	)

Total held-to-maturity	$	16,667	$	(50	)	$	—	$	—		$	16,667	$	(50	)

December 31, 2013
Available-for-Sale
U.S. Treasury	$	1,900	$	—		$	—	$	—		$	1,900	$	—
U.S. Government-sponsored entities and agencies		357,793		(17,547	)		38,988		(3,452	)		396,781		(20,999	)
Mortgage-backed securities—Agency		668,018		(23,455	)		41,200		(3,112	)		709,218		(26,567	)
States and political subdivisions		45,077		(1,620	)		2,812		(95	)		47,889		(1,715	)
Pooled trust preferred securities		—		—			8,037		(11,178	)		8,037		(11,178	)
Other securities		209,915		(2,706	)		24,082		(2,817	)		233,997		(5,523	)

Total available-for-sale	$	1,282,703	$	(45,328	)	$	115,119	$	(20,654	)	$	1,397,822	$	(65,982	)

Held-to-Maturity
Mortgage-backed securities—Agency	$	21,370	$	(1	)	$	—	$	—		$	21,370	$	(1	)
States and political subdivisions		70,162		(1,579	)		—		—			70,162		(1,579	)

Total held-to-maturity	$	91,532	$	(1,580	)	$	—	$	—		$	91,532	$	(1,580	)

Proceeds from sales and calls of securities available for sale were $223.7 million and $334.4 million for the nine months ended September 30, 2014 and 2013, respectively. Gains of $5.2 million and $2.9 million were realized on these sales during 2014 and 2013, respectively and offsetting losses of $0.5 million and $0.3 million were realized on these sales during 2014 and 2013, respectively. Also included in net securities gains for the first nine months of 2014 is $238 thousand of gains associated with the trading securities, $67 thousand of gains from mutual funds and a $100 thousand other-than-temporary impairment charge related to credit loss on one limited partnership investment, described below. Impacting earnings in the first nine months of 2013 was $194 thousand of gains associated with the trading securities and $195 thousand of gains from mutual funds. There were no other-than-temporary impairment charges related to credit loss in the first nine months of 2013.

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 $3.8 million at September 30, 2014 and $3.6 million at December 31, 2013.

During the third quarter of 2013, state and political subdivision securities with a fair value of $357.8 million were transferred from the available-for-sale portfolio to the held-to-maturity portfolio. The $31.0 million unrealized holding loss 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. The corresponding discount on these securities will offset this adjustment to yield as it is amortized. We moved these securities to our held-to-maturity portfolio to better align with the percentage of these securities held by our peers and to protect our tangible common equity against rising interest rates.

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, we compare 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.

There was $100 thousand of other-than-temporary-impairment recorded in the first nine months of 2014. There was no other-than-temporary-impairment recorded in the first nine months of 2013.

As of September 30, 2014, Old National’s securities portfolio consisted of 1,614 securities, 178 of which were in an unrealized loss position. The unrealized losses attributable to our U.S government-sponsored entities and agencies and agency mortgage-backed securities are the result of fluctuations in interest rates. Our pooled trust preferred securities are discussed below.

Pooled Trust Preferred Securities

At September 30, 2014, our securities portfolio contained three pooled trust preferred securities with a fair value of $7.1 million and unrealized losses of $10.9 million. One of the pooled trust preferred securities in our portfolio falls within the scope of FASB ASC 325-10 (EITF 99-20) and has a fair value of $0.2 million with an unrealized loss of $3.8 million at September 30, 2014. This security was rated A3 at inception, but at September 30, 2014, this security is rated D. The issuers in this security are primarily banks, but some of the pools do include a limited number of insurance companies. We use 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” this 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 nine months ended September 30, 2014, our model indicated no other-than-temporary-impairment losses on this security. At September 30, 2014, we have no intent to sell any securities that are in an unrealized loss position nor is it expected that we would be required to sell any securities.

Two of our pooled trust preferred securities with a fair value of $6.9 million and unrealized losses of $7.1 million at September 30, 2014 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.

For the nine months ended September 30, 2013, the three securities subject to FASB ASC 325-10 accounted for $5.4 million of the unrealized losses in the pooled trust preferred securities category. Our analysis indicated no other-than-temporary-impairment losses on these securities.

Two of our pooled trust preferred securities with a fair value of $6.0 million and unrealized losses of $8.1 million at September 30, 2013 were not subject to FASB ASC 325-10. These securities were 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 three pooled trust preferred securities as well as six single issuer trust preferred securities which are included with other securities in Note 6 to the consolidated financial statements. Each of the pooled trust preferred securities support a more senior tranche of security holders.

As depicted in the table below, all three 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.

Trust preferred securities

September 30, 2014

(Dollars in Thousands)


																Actual			Expected			Excess
																Deferrals and			Defaults as			Subordination
														# 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)			2014		Remaining		Collateral			Collateral			Collateral
Pooled trust preferred securities:
Reg Div Funding 2004		B-2		D	$	4,012	$	226	$	(3,786	)	$	—		24/42		37.6	%		8.1	%		0.0	%
Pretsl XXVII LTD		B		B		4,576		2,470		(2,106	)		—		33/47		26.6	%		2.4	%		37.5	%
Trapeza Ser 13A		A2A		B+		9,437		4,449		(4,988	)		—		48/61		18.3	%		5.3	%		49.1	%

						18,025		7,145		(10,880	)		—
Single Issuer trust preferred securities:
First Empire Cap (M&T)				BB+		960		1,012		52			—
First Empire Cap (M&T)				BB+		2,915		3,037		122			—
Fleet Cap Tr V (BOA)				BB		3,379		3,045		(334	)		—
JP Morgan Chase Cap XIII				BBB		4,742		4,350		(392	)		—
NB-Global				BB		747		870		123			—
Chase Cap II				BBB		790		880		90			—

						13,533		13,194		(339	)		—
Total					$	31,558	$	20,339	$	(11,219	)	$	—

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

On July 19, 2010, financial regulatory reform legislation entitled the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act contains provisions (the “Volcker Rule”) prohibiting certain investments which can be held by a bank holding company. A limited partnership held by Old National falls under these restrictions and will have to be divested by July 2015, unless a request of up to two 1-year extensions is approved. The estimated sales proceeds for this security would be less than the amortized cost of the security, and an other-than-temporary-impairment charge of $100 thousand was recorded for this security in the first quarter of 2014.

The following table details the remaining securities with other-than-temporary-impairment, their credit rating at September 30, 2014, and the related life-to-date credit losses recognized in earnings:


							Amount of other-than-temporary
							impairment recognized in earnings
			Lowest Credit		Amortized		Nine months ended		Nine months ended		Life-to
(dollars in thousands)	Vintage		Rating (1)		Cost		September 30, 2014		September 30, 2013		date
Reg Div Funding		2004		D	$	4,012	$	—	$	—	$	5,685
Limited partnership						685		100		—		100

Total					$	4,697	$	100	$	—	$	5,785

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