NOTE 5—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, 2017 and December 31, 2016 and the corresponding amounts of unrealized gains and losses therein:


(dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
September 30, 2017
Available-for-Sale
U.S. Treasury	$	5,472	$	143	$	—		$	5,615
U.S. government-sponsored entities and agencies		583,151		86		(6,801	)		576,436
Mortgage-backed securities—Agency		1,466,636		3,862		(19,762	)		1,450,736
States and political subdivisions		410,856		6,569		(2,752	)		414,673
Pooled trust preferred securities		16,651		—		(8,381	)		8,270
Other securities		319,669		2,086		(1,648	)		320,107

Total available-for-sale securities	$	2,802,435	$	12,746	$	(39,344	)	$	2,775,837

Held-to-Maturity
Mortgage-backed securities—Agency	$	7,649	$	254	$	—		$	7,903
States and political subdivisions		681,302		51,359		—			732,661

Total held-to-maturity securities	$	688,951	$	51,613	$	—		$	740,564

December 31, 2016
Available-for-Sale
U.S. Treasury	$	6,963	$	140	$	—		$	7,103
U.S. government-sponsored entities and agencies		506,234		113		(12,391	)		493,956
Mortgage-backed securities—Agency		1,551,465		6,923		(33,369	)		1,525,019
States and political subdivisions		446,003		4,183		(13,502	)		436,684
Pooled trust preferred securities		17,011		—		(8,892	)		8,119
Other securities		331,001		1,074		(5,782	)		326,293

Total available-for-sale securities	$	2,858,677	$	12,433	$	(73,936	)	$	2,797,174

Held-to-Maturity
U.S. government-sponsored entities and agencies	$	40,131	$	427	$	—		$	40,558
Mortgage-backed securities—Agency		10,640		300		—			10,940
States and political subdivisions		694,319		38,915		(560	)		732,674

Total held-to-maturity securities	$	745,090	$	39,642	$	(560	)	$	784,172

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 and nine months ended September 30, 2017 and 2016:


	Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in thousands)	2017			2016			2017			2016
Proceeds from sales of available-for-sale securities	$	98,038		$	50,368		$	284,315		$	157,819
Proceeds from calls of available-for-sale securities		2,303			160,805			73,423			525,114

Total	$	100,341		$	211,173		$	357,738		$	682,933

Realized gains on sales of available-for-sale securities	$	2,891		$	1,062		$	7,174		$	4,213
Realized gains on calls of available-for-sale securities		13			477			13			848
Realized losses on sales of available-for-sale securities		(36	)		(2	)		(79	)		(450	)
Realized losses on calls of available-for-sale securities		—			(15	)		(8	)		(103	)
Other securities gains (losses) (1)		104			125			447			101

Net securities gains (losses)	$	2,972		$	1,647		$	7,547		$	4,609

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

Trading securities, which consist of mutual funds held in trusts associated with deferred compensation plans for former directors and executives, are recorded at fair value and totaled $5.4 million at September 30, 2017 and $5.0 million at December 31, 2016.

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.

At September 30, 2017

(dollars in thousands)

Weighted
Average
Yield

Maturity

Amortized
Cost

Fair
Value

Available-for-Sale

Within one year

34,563

34,686

2.36

One to five years

338,424

339,100

2.11

Five to ten years

302,515

305,146

2.85

Beyond ten years

2,126,933

2,096,905

2.43

Total

2,802,435

2,775,837

2.44

Held-to-Maturity

Within one year

23,751

24,064

6.15

One to five years

89,739

94,617

4.88

Five to ten years

172,648

183,505

4.88

Beyond ten years

402,813

438,378

5.75

Total

688,951

740,564

5.43

The following table summarizes the investment securities with unrealized losses at September 30, 2017 and December 31, 2016 by aggregated major security type and length of time in a continuous unrealized loss position:


	Less than 12 months					12 months or longer					Total
(dollars in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
September 30, 2017
Available-for-Sale
U.S. government-sponsored entities and agencies	$	406,906	$	(3,708	)	$	89,907	$	(3,093	)	$	496,813	$	(6,801	)
Mortgage-backed securities—Agency		985,209		(12,903	)		190,224		(6,859	)		1,175,433		(19,762	)
States and political subdivisions		104,214		(1,612	)		35,715		(1,140	)		139,929		(2,752	)
Pooled trust preferred securities		—		—			8,270		(8,381	)		8,270		(8,381	)
Other securities		80,290		(848	)		85,583		(800	)		165,873		(1,648	)

Total available-for-sale	$	1,576,619	$	(19,071	)	$	409,699	$	(20,273	)	$	1,986,318	$	(39,344	)

Held-to-Maturity
States and political subdivisions	$	465	$	—		$	—	$	—		$	465	$	—

Total held-to-maturity	$	465	$	—		$	—	$	—		$	465	$	—

December 31, 2016
Available-for-Sale
U.S. government-sponsored entities and agencies	$	432,192	$	(12,391	)	$	—	$	—		$	432,192	$	(12,391	)
Mortgage-backed securities—Agency		1,177,093		(30,295	)		57,636		(3,074	)		1,234,729		(33,369	)
States and political subdivisions		286,351		(13,247	)		4,919		(255	)		291,270		(13,502	)
Pooled trust preferred securities		—		—			8,119		(8,892	)		8,119		(8,892	)
Other securities		121,498		(2,734	)		126,539		(3,048	)		248,037		(5,782	)

Total available-for-sale	$	2,017,134	$	(58,667	)	$	197,213	$	(15,269	)	$	2,214,347	$	(73,936	)

Held-to-Maturity
States and political subdivisions	$	59,481	$	(560	)	$	—	$	—		$	59,481	$	(560	)

Total held-to-maturity	$	59,481	$	(560	)	$	—	$	—		$	59,481	$	(560	)

Management evaluates securities for 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, Investments—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 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 OTTI occurs under either model, the amount of the OTTI 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 OTTI 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 OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI 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 OTTI related to other factors shall be recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings shall become the new amortized cost basis of the investment.

There was no OTTI recorded during the nine months ended September 30, 2017 or 2016.

At September 30, 2017, Old National’s securities portfolio consisted of 1,495 securities, 317 of which were in an unrealized loss position. The unrealized losses attributable to our U.S. government-sponsored entities and agencies, agency mortgage-backed securities, states and political subdivisions, and other securities are the result of fluctuations in interest rates. Our pooled trust preferred securities are discussed below. At September 30, 2017, we had no intent to sell any securities that were in an unrealized loss position nor is it expected that we would be required to sell any securities.

Pooled Trust Preferred Securities

At September 30, 2017, our securities portfolio contained three pooled trust preferred securities with a fair value of $8.3 million and unrealized losses of $8.4 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 $0.3 million with an unrealized loss of $2.5 million at September 30, 2017. This security was rated A3 at inception, but is rated D at September 30, 2017. 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 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, 2017 and 2016, our model indicated no OTTI losses on this security.

Two of our pooled trust preferred securities with a fair value of $8.0 million and unrealized losses of $5.9 million at September 30, 2017 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 nine months ended September 30, 2017 and 2016, our analysis indicated no OTTI 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. All three pooled trust preferred 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, 2017 (dollars in thousands)	Class		Lowest Credit Rating (1)		Amortized Cost		Fair Value		Unrealized Gain/ (Loss)			Realized Losses 2017		# of Issuers Currently Performing/ Remaining		Actual Deferrals and Defaults as a % 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	$	2,738	$	262	$	(2,476	)	$	—		21/36		32.1%		7.5%		0.0%
Pretsl XXVII LTD		B		B		4,422		2,451		(1,971	)		—		35/44		16.7%		3.8%		47.9%
Trapeza Ser 13A		A2A		BBB		9,491		5,557		(3,934	)		—		50/55		4.5%		4.6%		45.2%

						16,651		8,270		(8,381	)		—
Single Issuer trust preferred securities:
Fleet Cap Tr V (BOA)				BB+		3,403		3,325		(78	)		—
JP Morgan Chase Cap XIII				BBB-		4,775		4,609		(166	)		—
NB-Global				BB+		799		949		150			—
Chase Cap II				BBB-		833		935		102			—

						9,810		9,818		8			—

Total					$	26,461	$	18,088	$	(8,373	)	$	—

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