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, 2011 and December 31, 2010 and the corresponding amounts of unrealized gains and losses therein:


		Amortized Unrealized				Unrealized			Fair
(dollars in thousands)		Cost		Gains		Losses			Value
September 30, 2011
Available-for-sale
U.S. Treasury	$	65,260	$	691	$	0		$	65,951
U.S. Government-sponsored entities and agencies		178,387		2,547		0			180,934
Mortgage-backed securities - Agency		1,312,193		34,705		(364	)		1,346,534
Mortgage-backed securities - Non-agency		98,570		532		(4,051	)		95,051
States and political subdivisions		365,305		26,051		(154	)		391,202
Pooled trust preferrred securities		27,346		0		(19,816	)		7,530
Other securities		158,224		9,684		(2,021	)		165,887
Total available-for-sale securities	$	2,205,285	$	74,210	$	(26,406	)	$	2,253,089
Held-to-maturity
U.S. Government-sponsored entities and agencies	$	177,963	$	11,654	$	0		$	189,617
Mortgage-backed securities - Agency		91,622		3,750		0			95,372
States and political subdivisions		216,643		8,848		(107	)		225,384
Other securities		7,054		0		0			7,054
Total held-to-maturity securities	$	493,282	$	24,252	$	(107	)	$	517,427
December 31, 2010
Available-for-sale
U.S. Treasury	$	62,206	$	371	$	(27	)	$	62,550
U.S. Government-sponsored entities and agencies		315,922		1,612		(2,401	)		315,133
Mortgage-backed securities - Agency		922,005		22,926		(485	)		944,446
Mortgage-backed securities - Non-agency		134,168		1,018		(8,380	)		126,806
States and political subdivisions		343,970		7,503		(2,549	)		348,924
Pooled trust preferrred securities		27,368		0		(18,968	)		8,400
Other securities		148,203		7,816		(2,056	)		153,963
Total available-for-sale securities	$	1,953,842	$	41,246	$	(34,866	)	$	1,960,222
Held-to-maturity
U.S. Government-sponsored entities and agencies	$	303,265	$	2,247	$	(3,703	)	$	301,809
Mortgage-backed securities - Agency		117,013		2,577		(510	)		119,080
States and political subdivisions		217,381		1		(13,003	)		204,379
Other securities		551		0		(176	)		375
Total held-to-maturity securities	$	638,210	$	4,825	$	(17,392	)	$	625,643

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, 2011			Weighted
(dollars in thousands)		Amortized		Fair	Average
Maturity		Cost		Value	Yield
Available-for-sale
Within one year	$	172,177	$	175,012	3.02	%
One to five years		1,343,097		1,373,701	2.62
Five to ten years		219,497		231,257	4.11
Beyond ten years		470,514		473,119	4.92
Total	$	2,205,285	$	2,253,089	3.29	%

Held-to-maturity
Within one year	$	4,113	$	4,112	1.49	%
One to five years		96,402		100,192	3.58
Five to ten years		12,505		13,259	4.05
Beyond ten years		380,262		399,864	4.08
Total	$	493,282	$	517,427	3.96	%

The following table summarizes the investment securities with unrealized losses at September 30, 2011 and December 31, 2010 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, 2011
Available-for-Sale
Mortgage-backed securities - Agency	$	130,244	$	(364	)	$		3		0		$	130,247	$	(364	)
Mortgage-backed securities - Non-agency		9,685		(439	)			62,079		(3,612	)		71,764		(4,051	)
States and political subdivisions		2,780		(154	)			0		0			2,780		(154	)
Pooled trust preferrred securities		0		0				7,531		(19,816	)		7,531		(19,816	)
Other securities		8,222		(127	)			6,173		(1,894	)		14,395		(2,021	)
Total available-for-sale	$	150,931	$	(1,084	)	$		75,786	$	(25,322	)	$	226,717	$	(26,406	)

Held-to-Maturity
States and political subdivisions	$	0	$	0		$		13,324	$	(107	)	$	13,324	$	(107	)
Total held-to-maturity	$	0	$	0		$		13,324	$	(107	)	$	13,324	$	(107	)

December 31, 2010
Available-for-Sale
U.S. Treasury	$	10,944	$	(27	)		$	0	$	0		$	10,944	$	(27	)
U.S. Government-sponsored entities
and agencies		120,404		(2,401	)			0		0			120,404		(2,401	)
Mortgage-backed securities - Agency		160,784		(485	)			483		0			161,267		(485	)
Mortgage-backed securities - Non-agency		13,265		(1,696	)			79,327		(6,684	)		92,592		(8,380	)
States and political subdivisions		94,448		(2,549	)			0		0			94,448		(2,549	)
Pooled trust preferrred securities		0		0				8,400		(18,968	)		8,400		(18,968	)
Other securities		12,283		(206	)			6,204		(1,850	)		18,487		(2,056	)
Total available-for-sale	$	412,128	$	(7,364	)	$		94,414	$	(27,502	)	$	506,542	$	(34,866	)

Held-to-Maturity
U.S. Government-sponsored entities
and agencies	$	111,975	$	(3,703	)		$	0	$	0		$	111,975	$	(3,703	)
Mortgage-backed securities - Agency		67,837		(510	)			0		0			67,837		(510	)
States and political subdivisions		203,093		(13,003	)			0		0			203,093		(13,003	)
Other securities		0		0				375		(176	)		375		(176	)
Total held-to-maturity	$	382,905	$	(17,216	)		$	375	$	(176	)	$	383,280	$	(17,392	)

Proceeds from sales and calls of securities available for sale were $763.5 million and $882.0 million for the nine months ended September 30, 2011 and 2010, respectively. Gains of $6.0 million and $13.1 million were realized on these sales during 2011 and 2010, respectively, and offsetting losses of $1.0 million and $0.3 million were realized on these sales during 2011 and 2010. Also included in net securities gains for the first nine months of 2011 is $1 thousand of gains associated with the trading securities and other-than-temporary impairment charges related to credit loss on three non-agency mortgage-backed securities in the amount of $0.5 million, described below. Impacting earnings in the first nine months of 2010 were other-than-temporary impairment charges related to credit loss on two pooled trust preferred securities and ten non-agency mortgage-backed securities in the amount of $3.3 million.

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 $2.8 million at September 30, 2011.

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 September 30, 2011, Old National's security portfolio consisted of 1,060 securities, 64 of which were in an unrealized loss position. The majority of unrealized losses are related to the Company's non-agency mortgage-backed and pooled trust preferred securities, as discussed below:

Non-agency Mortgage-backed Securities

At September 30, 2011, the Company's securities portfolio contained 14 non-agency collateralized mortgage obligations with a fair value of $95.1 million which had net unrealized losses of approximately $3.5 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 September 30, 2011, nine of these securities were rated below investment grade with grades ranging from B to CC. One of the nine securities is rated B and has a fair value of $14.3 million, three of the securities are rated CCC with a fair value of $27.8 million and five of the securities are rated CC with a fair value of $36.4 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 nine months ended September 30, 2011. The fair value of these non-agency mortgage-backed securities remaining at September 30, 2011 was $78.5 million.

Based on an analysis of the underlying collateral, Old National recorded $3.0 million of credit losses on ten nonagency mortgage-backed securities for the nine months ended September 30, 2010. The fair value of these nonagency mortgage-backed securities was $97.7 million at September 30, 2010.

Pooled Trust Preferred Securities

At September 30, 2011, the Company's securities portfolio contained nine pooled trust preferred securities with a fair value of $7.5 million and unrealized losses of $19.8 million. Seven 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 $4.8 million with unrealized losses of $8.3 million at September 30, 2011. These securities were rated A2 and A3 at inception, but at September 30, 2011, one security was rated BB, four securities were rated C and two securities 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 nine months ended September 30, 2011, our model indicated no other-than-temporary-impairment losses on these securities.

Two of our pooled trust preferred securities with a fair value of $2.7 million and unrealized losses of $11.5 million at September 30, 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.

For the nine months ended September 30, 2010, our model indicated other-than-temporary-impairment losses on two securities of $0.3 million, which was recorded as a credit loss in earnings. At September 30, 2010, the fair value of these two securities was $1.1 million and they remained classified as available for sale.

The two pooled trust preferred securities which were not subject to FASB ASC 325-10 had a fair value of $3.6 million and unrealized losses of $10.5 million at September 30, 2010. 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 nine pooled trust preferred securities as well as four single issuer trust preferred securities. 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 nine securities have experienced credit defaults. However, three 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															Actual		Expected		Excess
September 30, 2011															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)			2011	Remaining	Collateral		Collateral		Collateral
Pooled trust preferred securities:
TROPC 2003-1A		A4	L	C	$	977	$	198	$	(779	)	$	0	18/39	41.7	%	17.5	%	0.0	%
MM Community Funding IX	B	-2		D		2,076		859		(1,217	)		0	16/31	41.1	%	8.5	%	0.0	%
Reg Div Funding 2004	B	-2		D		4,194		690		(3,504	)		0	24/45	46.0	%	6.8	%	0.0	%
Pretsl XII	B	-1		C		2,886		1,508		(1,378	)		0	50/77	30.4	%	6.7	%	0.0	%
Pretsl XV	B	-1		C		1,695		568		(1,127	)		0	49/72	36.4	%	10.0	%	0.0	%
Reg Div Funding 2005	B	-1		C		311		58		(253	)		0	23/49	49.3	%	29.0	%	0.0	%
MM Community Funding II		B		BB		987		959		(28	)		0	5/8	4.7	%	0.0	%	26.9	%
Pretsl XXVII LTD		B		CC		4,835		655		(4,180	)		0	33/49	28.1	%	23.7	%	35.6	%
Trapeza Ser 13A		A2	A	CCC-		9,385		2,035		(7,350	)		0	36/56	29.2	%	4.2	%	39.8	%
						27,346		7,530		(19,816	)		0
Single Issuer trust preferred securities:
First Empire Cap (M&T)				BBB-		955		1,004		49			0
First Empire Cap (M&T)				BBB-		2,904		3,013		109			0
Fleet Cap Tr V (BOA)				BB+		3,357		2,295		(1,062	)		0
JP Morgan Chase Cap XIII				BBB+		4,710		3,878		(832	)		0
						11,926		10,190		(1,736	)		0

Total					$	39,272	$	17,720	$	(21,552	)	$	0

(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 September 30, 2011 and the related credit losses recognized in earnings:

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


						Amount of other-than-temporary
						impairment recognized in earnings
		Lowest				Three months		Nine months
		Credit		Amortized		ended		ended
	Vintage	Rating (1)		Cost		September 30, 2011		September 30, 2011
Non-agency mortgage-backed securities:
FHASI Ser 4	2007	CC	$	20,003	$	0	$	340
HALO Ser 1R	2006	B		15,640		0		16
RFMSI Ser S10	2006	CC		4,217		0		143
			$	39,860		0		499
Total other-than-temporary-
impairment recognized in earnings					$	0	$	499

The following table details all securities with other-than-temporary-impairment, their credit rating at September 30, 2010 and the related credit losses recognized in earnings:

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


						Amount of other-than-temporary
						impairment recognized in earnings
		Lowest				Three months		Nine months
		Credit		Amortized		ended		ended
	Vintage	Rating (1)		Cost		September 30, 2010		September 30, 2010
Non-agency mortgage-backed securities:
BAFC Ser 4	2007	CCC	$	14,026	$	0	$	79
CWALT Ser 73CB	2005	CCC		6,606		0		207
CWALT Ser 73CB	2005	CCC		6,923		0		427
CWHL 2006-10	2006	C		10,030		0		309
CWHL 2005-20	2005	B-		9,734		0		39
FHASI Ser 4	2007	CCC		21,617		37		629
RFMSI Ser S9	2006	CC		32,070		0		923
RFMSI Ser S10	2006	CC		4,360		2		76
RALI QS2	2006	C		6,565		0		278
RFMSI S1	2006	CCC		5,127		0		30
				117,058		39		2,997
Pooled trust preferred securities:
TROPC	2003	C		1,283		0		146
MM Community Funding IX	2003	C		2,107		0		165
				3,390		0		311
Total other-than-temporary-
impairment recognized in earnings					$	39	$	3,308

The following table details all securities with other-than-temporary-impairment, their credit rating at September 30, 2011, and the related credit losses recognized in earnings:

(1) Lowest rating for the security provided by any nationally recognized credit rating agency. (2) Sold during fourth quarter 2010.

(3) Sold during first quarter 2011.


						Amount of other-than-temporary
						impairment recognized in earnings
		Lowest				Nine months		Twelve months ended
		Credit		Amortized September 30,				December 31,			Life	-to
	Vintage Rating (1)			Cost		2011		2010		2009		date
Non-agency mortgage-backed securities:
BAFC Ser 4	2007	CCC	$	14,026	$	0	$	79	$	63	$	142
CWALT Ser 73CB	2005	CC		3,842		0		207		83		290
CWALT Ser 73CB	2005	CC		4,791		0		427		182		609
CWHL 2006-10 (3)	2006					0		309		762		1,071
CWHL 2005-20	2005	CC		5,332		0		39		72		111
FHASI Ser 4	2007	CC		20,003		340		629		223		1,192
HALO Ser 1R	2006	B		15,640		16		0		0		16
RFMSI Ser S9 (2)	2006					0		923		1,880		2,803
RFMSI Ser S10	2006	CC		4,217		143		76		249		468
RALI QS2 (2)	2006					0		278		739		1,017
RFMSI S1	2006	CCC		2,802		0		30		176		206
				70,653		499		2,997		4,429		7,925
Pooled trust preferred securities:
TROPC	2003	C		977		0		444		3,517		3,961
MM Community Funding IX	2003	D		2,076		0		165		2,612		2,777
Reg Div Funding	2004	D		4,194		0		321		5,199		5,520
Pretsl XII	2003	C		2,886		0		0		1,897		1,897
Pretsl XV	2004	C		1,695		0		0		3,374		3,374
Reg Div Funding	2005	C		311		0		0		3,767		3,767
				12,139		0		930		20,366		21,296
Total other-than-temporary-
impairment recognized in earnings					$	499	$	3,927	$	24,795	$	29,221