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 March 31, 2015 and December 31, 2014 and the corresponding amounts of unrealized gains and losses therein:


(dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
March 31, 2015
Available-for-Sale
U.S. Treasury	$	24,876	$	302	$	—		$	25,178
U.S. government-sponsored entities and agencies		707,414		4,082		(2,117	)		709,379
Mortgage-backed securities - Agency		1,078,115		19,086		(6,470	)		1,090,731
States and political subdivisions		330,357		11,201		(928	)		340,630
Pooled trust preferred securities		17,706		—		(11,153	)		6,553
Other securities		372,676		3,799		(3,476	)		372,999

Total available-for-sale securities	$	2,531,144	$	38,470	$	(24,144	)	$	2,545,470


Held-to-Maturity
U.S. government-sponsored entities and agencies	$	166,343	$	6,293	$	—		$	172,636
Mortgage-backed securities - Agency		21,548		922		—			22,470
States and political subdivisions		648,147		56,404		(4	)		704,547

Total held-to-maturity securities	$	836,038	$	63,619	$	(4	)	$	899,653


December 31, 2014
Available-for-Sale
U.S. Treasury	$	14,978	$	196	$	(8	)	$	15,166
U.S. government-sponsored entities and agencies		692,704		1,533		(8,286	)		685,951
Mortgage-backed securities - Agency		1,233,811		18,219		(10,368	)		1,241,662
States and political subdivisions		304,435		11,023		(917	)		314,541
Pooled trust preferred securities		17,965		—		(11,358	)		6,607
Other securities		365,235		2,338		(3,669	)		363,904

Total available-for-sale securities	$	2,629,128	$	33,309	$	(34,606	)	$	2,627,831


Held-to-Maturity
U.S. government-sponsored entities and agencies	$	167,207	$	6,279	$	—		$	173,486
Mortgage-backed securities - Agency		23,648		926		—			24,574
States and political subdivisions		653,199		52,753		(77	)		705,875

Total held-to-maturity securities	$	844,054	$	59,958	$	(77	)	$	903,935

Proceeds from sales or calls of available-for-sale investment securities, the resulting realized gains and realized losses, and other securities gains or losses were as follows for the three months ended March 31:


	Three Months Ended
	March 31,
(dollars in thousands)	2015			2014

Proceeds from sales of available-for-sale securities	$	170,265		$	16,523
Proceeds from calls of available-for-sale securities		51,594			23,375

Total	$	221,859		$	39,898


Realized gains on sales of available-for-sale securities	$	2,481		$	658
Realized gains on calls of available-for-sale securities		168			—
Realized losses on sales of available-for-sale securities		(25	)		—
Realized losses on calls of available-for-sale securities		(3	)		(267	)
Other securities gains (1)		62			168

Net securities gains	$	2,683		$	559

(1)	Other securities gains includes net realized gains or losses associated with trading securities and mutual funds.

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 $4.0 million at March 31, 2015 and $3.9 million at December 31, 2014.

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.

March 31, 2015

Weighted

(dollars in thousands)

Amortized

Fair

Average

Maturity

Cost

Value

Yield

Available-for-Sale

Within one year

41,201

41,405

1.50

One to five years

449,141

453,090

1.72

Five to ten years

609,521

616,780

2.24

Beyond ten years

1,431,281

1,434,195

2.39

Total

2,531,144

2,545,470

2.22

Held-to-Maturity

Within one year

3.64

One to five years

29,107

30,597

4.15

Five to ten years

187,953

196,645

3.43

Beyond ten years

618,901

672,333

5.52

Total

836,038

899,653

5.00

The following table summarizes the investment securities with unrealized losses at March 31, 2015 and December 31, 2014 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
March 31, 2015
Available-for-Sale
U.S. Treasury	$	12,900	$	—		$	—	$	—		$	12,900	$	—
U.S. government-sponsored entities and agencies		15,895		(22	)		204,953		(2,095	)		220,848		(2,117	)
Mortgage-backed securities - Agency		58,455		(401	)		294,928		(6,069	)		353,383		(6,470	)
States and political subdivisions		35,751		(350	)		6,561		(578	)		42,312		(928	)
Pooled trust preferred securities		—		—			6,553		(11,153	)		6,553		(11,153	)
Other securities		77,851		(830	)		91,760		(2,646	)		169,611		(3,476	)

Total available-for-sale	$	200,852	$	(1,603	)	$	604,755	$	(22,541	)	$	805,607	$	(24,144	)


Held-to-Maturity
States and political subdivisions	$	2,134	$	(4	)	$	—	$	—		$	2,134	$	(4	)

Total held-to-maturity	$	2,134	$	(4	)	$	—	$	—		$	2,134	$	(4	)


December 31, 2014
Available-for-Sale
U.S. Treasury	$	9,524	$	(8	)	$	—	$	—		$	9,524	$	(8	)
U.S. government-sponsored entities and agencies		180,488		(563	)		257,914		(7,723	)		438,402		(8,286	)
Mortgage-backed securities - Agency		31,304		(122	)		386,788		(10,246	)		418,092		(10,368	)
States and political subdivisions		41,481		(288	)		9,534		(629	)		51,015		(917	)
Pooled trust preferred securities		—		—			6,607		(11,358	)		6,607		(11,358	)
Other securities		115,973		(906	)		95,344		(2,763	)		211,317		(3,669	)

Total available-for-sale	$	378,770	$	(1,887	)	$	756,187	$	(32,719	)	$	1,134,957	$	(34,606	)


Held-to-Maturity
States and political subdivisions	$	6,171	$	(77	)	$	—	$	—		$	6,171	$	(77	)

Total held-to-maturity	$	6,171	$	(77	)	$	—	$	—		$	6,171	$	(77	)

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.

We did not record other-than-temporary-impairments during the three months ended March 31, 2015. Other-than-temporary-impairments totaled $100 thousand during the three months ended March 31, 2014.

As of March 31, 2015, Old National’s securities portfolio consisted of 1,788 securities, 120 of which were in an unrealized loss position. The unrealized losses attributable to our U.S. government-sponsored entities and agencies, our agency mortgage-backed securities, and our other securities are the result of fluctuations in interest rates. Our pooled trust preferred securities are discussed below.

Pooled Trust Preferred Securities

At March 31, 2015, our securities portfolio contained three pooled trust preferred securities with a fair value of $6.6 million and unrealized losses of $11.2 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 $3.5 million at March 31, 2015. This security was rated A3 at inception, but at March 31, 2015, this security is rated D. The issuers in this security are banks. 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 three months ended March 31, 2015 and 2014, our model indicated no other-than-temporary-impairment losses on this security. At March 31, 2015, 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 $6.4 million and unrealized losses of $7.6 million at March 31, 2015 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. For the three months ended March 31, 2015 and 2014, our analysis indicated no other-than-temporary-impairment on these securities.

The table below summarizes the relevant characteristics of our pooled trust preferred securities as well as our single issuer trust preferred securities that are included in the “other securities” category in this footnote. 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 March 31, 2015 (dollars in thousands)	Class		Lowest Credit Rating (1)		Amortized Cost		Fair Value		Unrealized Gain/ (Loss)			Realized Losses 2015		# of Issuers Currently Performing/ Remaining	Actual Deferrals and Defaults as a Percent of Original Collateral			Expected Defaults as a % of Remaining Performing Collateral			Excess Subordination as a % of Current Performing Collateral
Pooled trust preferred securities:
Reg Div Funding 2004		B-2		D	$	3,769	$	221	$	(3,548	)	$	—	24/42		34.2	%		8.9	%		0.0	%
Pretsl XXVII LTD		B		B		4,491		2,520		(1,971	)		—	34/46		22.7	%		5.2	%		41.1	%
Trapeza Ser 13A		A2A		B+		9,446		3,812		(5,634	)		—	48/59		15.0	%		2.7	%		51.9	%

						17,706		6,553		(11,153	)		—
Single Issuer trust preferred securities:
First Empire Cap (M&T)				BB+		961		1,009		48			—
First Empire Cap (M&T)				BB+		2,917		3,027		110			—
Fleet Cap Tr V (BOA)				BB		3,383		2,888		(495	)		—
JP Morgan Chase Cap XIII				BBB-		4,748		4,175		(573	)		—
NB-Global				BB		755		825		70			—
Chase Cap II				BBB-		797		850		53			—

						13,561		12,774		(787	)		—

Total					$	31,267	$	19,327	$	(11,940	)	$	—

(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. In December 2014, the Federal Reserve granted a one year extension on divestiture to July 2016. An additional one year extension is expected to be approved, which would extend the conformance period to July 2017. A limited partnership held by Old National falls under these restrictions and has to be divested by July 2015. 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 March 31, 2015, and the related life-to-date credit losses recognized in earnings:


							Amount of other-than-temporary impairment recognized in earnings
			Lowest				Three Months Ended
			Credit		Amortized		March 31,				Life-to
(dollars in thousands)	Vintage		Rating (1)		Cost		2015		2014		date
Reg Div Funding		2004		D	$	3,769	$	—	$	—	$	5,685
Limited partnership						730		—		100		100

Total					$	4,499	$	—	$	100	$	5,785

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