UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 1-15817

OLD NATIONAL BANCORP

(Exact name of Registrant as specified in its charter)

INDIANA		35-1539838
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
1 Main Street		47708
Evansville, Indiana		(Zip Code)
(Address of principal executive offices)

(812) 464-1294
(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to the filing requirements for at least the past 90 days. Yes þ No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Act.

Large accelerated filer þ          Accelerated filer o          Non-accelerated filer o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock. The Registrant has one class of common stock (no par value) with 66,406,000 shares outstanding at October 31, 2006.

 

 

OLD NATIONAL BANCORP

FORM 10-Q

INDEX

 

		Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet September 30, 2006 (unaudited), December 31, 2005 and September 30, 2005 (unaudited)			3
Consolidated Statement of Income Three and nine months ended September 30, 2006 and 2005 (unaudited)			4
Consolidated Statement of Changes in Shareholders’ Equity Nine months ended September 30, 2006 and 2005 (unaudited)			5
Consolidated Statement of Cash Flows Nine months ended September 30, 2006 and 2005 (unaudited)			6
Notes to Consolidated Financial Statements (unaudited)			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures About Market Risk			32
Item 4. Controls and Procedures			32
PART II OTHER INFORMATION			33
SIGNATURES			37
Certification of Principal Executive Officer
Certification of Principal Financial Officer
Certification of Principal Executive Officer
Certification of Principal Financial Officer

OLD NATIONAL BANCORP

		September 30,				December 31,				September 30,
(dollars and shares in thousands, except per share data)		2006				2005				2005
		(unaudited)								(unaudited)
Assets
Cash and due from banks		$	176,632			$	245,364			$	199,210
Federal funds sold			78,800				123,943				2,464
Money market investments			7,525				33,109				18,245
Total cash and cash equivalents			262,957				402,416				219,919
Investment securities — available-for-sale, at fair value
U.S. Government-sponsored agencies			546,692				509,744				435,130
Mortgage-backed securities			1,060,914				1,105,257				1,175,112
States and political subdivisions			297,171				488,369				485,165
Other securities			184,844				196,696				204,627
Investment securities — available-for-sale			2,089,621				2,300,066				2,300,034
Investment securities — held-to-maturity, at amortized cost (fair value $138,691, $161,252 and $172,616 respectively)			144,016				166,799				176,021
Federal Home Loan Bank stock, at cost			42,266				49,608				49,589
Residential loans held for sale			15,856				43,804				49,523
Loans:
Commercial			1,598,071				1,553,742				1,650,628
Commercial real estate			1,406,883				1,534,385				1,612,956
Residential real estate			492,099				543,903				547,703
Consumer credit, net of unearned income			1,219,268				1,261,797				1,297,660
Total loans			4,716,321				4,893,827				5,108,947
Allowance for loan losses			(71,632	)			(78,847	)			(81,356	)
Net loans			4,644,689				4,814,980				5,027,591
Premises and equipment, net			123,062				199,878				211,951
Accrued interest receivable			54,260				55,658				57,169
Goodwill			113,350				113,275				113,275
Other intangible assets			21,372				23,060				23,694
Assets held for sale			69,895				—				—
Other assets			338,544				322,478				306,525
Total assets		$	7,919,888			$	8,492,022			$	8,535,291
Liabilities
Deposits:
Noninterest-bearing demand		$	844,913			$	891,541			$	872,499
Interest-bearing:
NOW			1,328,923				1,640,750				1,614,526
Savings			411,412				480,358				483,928
Money market			868,794				869,039				809,568
Time			2,629,834				2,583,948				2,592,859
Total deposits			6,083,876				6,465,636				6,373,380
Short-term borrowings			301,535				302,765				350,999
Other borrowings			772,215				954,925				1,033,963
Accrued expenses and other liabilities			119,499				118,798				107,884
Total liabilities			7,277,125				7,842,124				7,866,226
Shareholders’ Equity
Preferred stock, 2,000 shares authorized, no shares issued or outstanding			—				—				—
Common stock, $1 stated value, 150,000 shares authorized, 66,406, 67,649 and 68,010 shares issued and outstanding, respectively			66,406				67,649				68,010
Capital surplus			564,691				591,930				600,294
Retained earnings			32,187				12,074				5,399
Accumulated other comprehensive loss, net of tax			(20,521	)			(21,755	)			(4,638	)
Total shareholders’ equity			642,763				649,898				669,065
Total liabilities and shareholders’ equity		$	7,919,888			$	8,492,022			$	8,535,291

The accompanying notes to consolidated financial statements are an integral part of this statement.

OLD NATIONAL BANCORP

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(dollars in thousands, except per share data)		2006				2005				2006				2005
Interest Income
Loans including fees:
Taxable		$	80,578			$	75,770			$	234,627			$	215,995
Nontaxable			5,065				4,476				14,510				12,846
Investment securities, available-for-sale:
Taxable			22,230				19,753				66,468				61,850
Nontaxable			4,349				5,699				15,195				18,776
Investment securities, held-to-maturity, taxable			1,618				1,953				5,107				5,576
Money market investments			161				260				1,404				642
Total interest income			114,001				107,911				337,311				315,685
Interest Expense
Deposits			44,406				35,848				125,460				99,944
Short-term borrowings			4,953				2,657				12,878				7,340
Other borrowings			12,334				13,740				37,928				42,857
Total interest expense			61,693				52,245				176,266				150,141
Net interest income			52,308				55,666				161,045				165,544
Provision for loan losses			—				6,000				7,000				17,100
Net interest income after provision for loan losses			52,308				49,666				154,045				148,444
Noninterest Income
Wealth management fees			4,710				5,041				14,859				15,551
Service charges on deposit accounts			10,596				12,529				31,188				35,692
ATM fees			3,043				2,872				8,906				8,329
Mortgage banking revenue			1,045				1,756				2,835				4,400
Insurance premiums and commissions			8,761				8,466				29,205				26,611
Investment product fees			2,041				2,246				6,323				7,145
Bank-owned life insurance			2,161				1,922				6,397				5,417
Net securities gains			789				652				697				1,175
Gain (loss) on derivatives			(67	)			(4,632	)			1,953				645
Gain on branch divestiture			—				—				3,036				—
Other income			3,484				3,608				10,840				9,271
Total noninterest income			36,563				34,460				116,239				114,236
Noninterest Expense
Salaries and employee benefits			36,789				35,866				115,817				113,637
Occupancy			5,059				4,591				15,171				14,746
Equipment			3,052				3,587				9,676				10,981
Marketing			2,738				1,912				7,572				6,050
Data processing			4,404				5,107				13,520				15,844
Communication			2,151				2,336				6,850				7,399
Professional fees			1,845				2,291				5,681				6,440
Loan expense			1,454				1,570				4,338				3,889
Supplies			852				908				2,550				2,854
Other expense			4,528				3,834				13,874				10,419
Total noninterest expense			62,872				62,002				195,049				192,259
Income before income taxes and discontinued operations			25,999				22,124				75,235				70,421
Income tax expense			4,985				3,248				13,365				11,292
Income from continuing operations			21,014				18,876				61,870				59,129
Loss from discontinued operations, net of tax expense of $6,302 and $6,603, respectively			—				(14,383	)			—				(14,825	)
Net income		$	21,014			$	4,493			$	61,870			$	44,304
Basic net income per share from continuing operations		$	0.32			$	0.28			$	0.93			$	0.87
Basic net loss per share from discontinued operations			—				(0.21	)			—				(0.22	)
Basic net income per share			0.32				0.07				0.93				0.65
Diluted net income per share from continuing operations		$	0.32			$	0.28			$	0.93			$	0.87
Diluted net loss per share from discontinued operations			—				(0.21	)			—				(0.22	)
Diluted net income per share			0.32				0.07				0.93				0.65
Dividends per common share		$	0.21			$	0.19			$	0.63			$	0.57

The accompanying notes to consolidated financial statements are an integral part of this statement.

OLD NATIONAL BANCORP

																		Accumulated
																		Other				Total
(dollars and shares		Common Stock								Capital				Retained				Comprehensive				Shareholders’					Comprehensive
in thousands)		Shares				Amount				Surplus				Earnings				Income (Loss)				Equity					Income
Balance, December 31, 2004			69,287			$	69,287			$	630,461			$	—			$	4,344			$	704,092
Net income			—				—				—				44,304				—				44,304				$	44,304
Unrealized net securities losses, net of $(5,882) tax			—				—				—				—				(8,761	)			(8,761	)				(8,761	)
Reclassification adjustment for securities gains included in net income, net of $(472) tax			—				—				—				—				(703	)			(703	)				(703	)
Net unrealized derivative gains on cash flow hedges, net of $331 tax			—				—				—				—				512				512					512
Reclassification adjustment on cash flow hedges, net of $(19) tax			—				—				—				—				(30	)			(30	)				(30	)
Stock issued for acquisition			971				971				17,569				—				—				18,540
Cash dividends			—				—				—				(38,905	)			—				(38,905	)
Stock repurchased			(2,571	)			(2,571	)			(52,284	)			—				—				(54,855	)
Stock issued under stock option, restricted stock and stock purchase plans			323				323				4,548				—				—				4,871
Balance, September 30, 2005			68,010			$	68,010			$	600,294			$	5,399			$	(4,638	)		$	669,065				$	35,322
Balance, December 31, 2005			67,649			$	67,649			$	591,930			$	12,074			$	(21,755	)		$	649,898
Net income			—				—				—				61,870				—				61,870				$	61,870
Unrealized net securities gains, net of $1,482 tax			—				—				—				—				1,344				1,344					1,344
Reclassification adjustment for securities gains included in net income, net of $(284) tax			—				—				—				—				(413	)			(413	)				(413	)
Reclassification adjustment on cash flow hedges, net of $196 tax			—				—				—				—				303				303					303
Adjustment to stock issued for prior acquisitions			(1	)			(1	)			(15	)			—				—				(16	)
Cash dividends			—				—				—				(41,757	)			—				(41,757	)
Stock repurchased			(1,445	)			(1,445	)			(27,982	)			—				—				(29,427	)
Stock issued under stock option, restricted stock and stock purchase plans			203				203				758				—				—				961
Balance, September 30, 2006			66,406			$	66,406			$	564,691			$	32,187			$	(20,521	)		$	642,763				$	63,104

Comprehensive income for the three months ended September 30, 2006 and 2005 was $45.3 million and $0.3 million, respectively.

The accompanying notes to consolidated financial statements are an integral part of this statement.

OLD NATIONAL BANCORP

		Nine Months Ended
		September 30,
(dollars in thousands)		2006				2005
Cash Flows From Operating Activities
Net income		$	61,870			$	44,304
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation			10,173				11,352
Amortization of other intangible assets and goodwill impairment			1,831				5,378
Net premium (discount) amortization on investment securities			(1,605	)			2,449
Restricted stock expense (benefit)			(437	)			2,228
Stock option expense			688				—
Provision for loan losses			7,000				17,100
Net securities gains			(697	)			(1,175	)
Gain on branch divestiture			(3,036	)			—
Gain on derivatives			(1,953	)			(645	)
Net (gains) losses on sales and write-downs of loans and other assets			(1,453	)			8,346
Residential real estate loans originated for sale			(186,012	)			(300,309	)
Proceeds from sale of residential real estate loans			216,436				257,921
Increase in accrued interest and other assets			(16,224	)			(8,501	)
Increase (decrease) in accrued expenses and other liabilities			(470	)			10,456
Total adjustments			24,241				4,600
Net cash flows provided by operating activities			86,111				48,904
Cash Flows From Investing Activities
Cash and cash equivalents of subsidiaries acquired, net			—				2,699
Purchases of investment securities available-for-sale			(471,047	)			(417,964	)
Purchases of investment securities held-to-maturity			—				(25,000	)
Proceeds from maturities, prepayments and calls of investment securities available-for-sale			394,832				277,372
Proceeds from sales of investment securities available-for-sale			298,715				609,466
Proceeds from maturities, prepayments and calls of investment securities held-to-maturity			22,212				26,264
Proceeds from branch divestiture			10,511				—
Proceeds from sale of loans			26,062				21,355
Net principal collected from (loans made to) customers			109,318				(170,490	)
Proceeds from sale of premises and equipment and other assets			1,932				1,169
Purchase of premises and equipment			(7,882	)			(11,296	)
Proceeds from sale of other assets			—				40,805
Net cash flows provided by investing activities			384,653				354,380
Cash Flows From Financing Activities
Net increase (decrease) in deposits and short-term borrowings:
Noninterest-bearing demand deposits			(46,026	)			21,281
Savings, NOW and money market deposits			(366,334	)			(66,205	)
Time deposits			53,473				(405	)
Short-term borrowings			(1,230	)			3,646
Payments for maturities on other borrowings			(179,632	)			(317,563	)
Proceeds from issuance of other borrowings			—				50,000
Cash dividends paid			(41,757	)			(38,905	)
Common stock repurchased			(29,427	)			(54,855	)
Common stock issued under stock option, restricted stock and stock purchase plans			710				2,643
Net cash flows used in financing activities			(610,223	)			(400,363	)
Net increase (decrease) in cash and cash equivalents			(139,459	)			2,921
Cash and cash equivalents at beginning of period			402,416				216,998
Cash and cash equivalents at end of period		$	262,957			$	219,919
Total interest paid		$	171,424			$	138,906
Total taxes paid		$	8,243			$	7,756

The accompanying notes to consolidated financial statements are an integral part of this statement.

OLD NATIONAL BANCORP

NOTE 1 — BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements include the accounts of Old National Bancorp and its wholly-owned affiliates (“Old National”) and have been prepared in conformity with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. Such principles require management to make estimates and assumptions that affect the reported amounts of assets, liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements and amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. All significant intercompany transactions and balances have been eliminated. Certain prior year amounts have been reclassified to conform with the 2006 presentation. Such reclassifications had no effect on net income. In the opinion of management, the consolidated financial statements contain all the normal and recurring adjustments necessary for a fair statement of the financial position of Old National as of September 30, 2006 and 2005, and December 31, 2005, and the results of its operations for the three and nine months ended September 30, 2006 and 2005. Interim results do not necessarily represent annual results. These financial statements should be read in conjunction with Old National’s Annual Report for the year ended December 31, 2005.

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

FASB Interpretation No. 48 – In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”), which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of adopting FIN 48 on the consolidated financial statements.

SFAS No. 157 – In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The new standard is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of adopting SFAS No. 157 on the consolidated financial statements.

SFAS No. 158 – In September 2006, the FASB issued Statement No. 158 – Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R). This Statement requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability, with any unrecognized prior service costs, transition obligations or actuarial gains/losses reported as component of other comprehensive in shareholders’ equity. The new standard is effective for fiscal years ending after December 15, 2006.

Based on the Company’s funded status of plan obligations disclosed in Note 14 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, the estimated impact of adopting SFAS 158 would have been a reduction to December 31, 2005 comprehensive income of approximately $9.6 million, with no impact to the Company’s consolidated statements of income or cash flows. As the actual impact of adopting SFAS 158 will be dependent upon the fair value of plan assets and the amount of projected benefit obligations measured as of December 31, 2006, the above estimated amount may not be reflective of the actual impact of the adoption at December 31, 2006.

SAB 108 – In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 (SAB 108). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a potential current year misstatement. Prior to SAB 108, companies might evaluate the materiality of financial statement misstatements using either the income statement or balance sheet approach, with the income statement approach focusing on new misstatements added in the current year, and the balance sheet approach focusing on the cumulative amount of misstatement present in a company’s balance sheet. Misstatements that would be material under one approach could be viewed as immaterial under another approach, and not be corrected. SAB 108 now requires that companies view financial statement

misstatements as material if they are material according to either the income statement or balance sheet approach. This statement is effective as of the end of the fiscal year ending after December 15, 2006. The Company is currently evaluating the impact of adopting SAB 108 on the consolidated financial statements.

NOTE 3 – ACQUISITION

On May 1, 2005, Old National acquired J. W. F. Insurance Companies, an Indianapolis, Indiana-based insurance agency that did business as J.W. Flynn Company and J.W.F. Specialty Company, Inc., for $19.0 million, including acquisition costs. Common shares of 970,912 were issued as part of the transaction with a stock value of $18.5 million. Goodwill of $12.0 million was recorded of which $3.5 million is expected to be deductible for tax purposes. In addition, intangible assets totaling $8.4 million related to customer business relationships were recorded and are being amortized over 12 to 22 years. These acquisitions are included in the “other” column of Note 19 – Segment Information. In accordance with the purchase agreement, future contingent payments may be paid in relation to this acquisition. These payments, which are not expected to be material, would result in a change to the purchase price and goodwill when paid. On the date of acquisition, unaudited financial statements of the companies showed assets of $5.0 million with year-to-date revenues of $4.7 million and net loss of $0.2 million.

NOTE 4 — DIVESTITURES

During the first quarter of 2006, Old National sold its financial center located in O’Fallon, Illinois, selling approximately $27.9 million in loans and assigning $22.2 million in deposits. The financial center was in a market no longer considered consistent with the Company’s strategy. The sale resulted in a pre-tax gain of $3.0 million which was included in income from continuing operations during the first quarter.

In February, 2005, Old National committed to a plan to sell J.W. Terrill Insurance Agency (“Terrill”) in St. Louis, Missouri, and the Fund Evaluation Group (“FEG”) in Cincinnati, Ohio, to better align its operations with its market and product focus. The operating activities of these companies were reclassified to discontinued operations for all periods in the consolidated statement of income. During the quarter ended June 30, 2005, Old National recorded an impairment charge of $1.1 million, net of tax, related to J.W. Terrill Insurance Agency. This impairment charge was included in income (loss) from discontinued operations. During the third quarter of 2005, Old National completed the sale of both Terrill and FEG. Old National sold Terrill for $22.2 million of cash. Terrill had been acquired in a tax-free reorganization under Internal Revenue Code section 368, and as a result of the taxable sale, Old National recorded a loss of $8.7 million, including $8.6 million of tax expense. Old National completed the sale of FEG for $15.1 million of cash and a $0.5 million note receivable. The sale resulted in an after tax loss of $5.9 million.

NOTE 5 — NET INCOME PER SHARE

Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding during each period, adjusted to reflect all stock dividends. Diluted net income per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued. Restricted stock shares were excluded from the denominator in the computation of diluted net income per share for the nine months ended September 30, 2005 because their inclusion would have been anti-dilutive.

The following table reconciles basic and diluted net income per share for the three and nine months ended September 30:

(dollars and shares		Three Months Ended												Three Months Ended
in thousands,		September 30, 2006												September 30, 2005
except per share data)		Income				Shares				Amount				Income				Shares				Amount
Basic Net Income Per Share
Income from continuing operations		$	21,014				65,823			$	0.32			$	18,876				68,011			$	0.28
Income from discontinued operations			—				65,823				—				(14,383	)			68,011				(0.21	)
Net income		$	21,014							$	0.32			$	4,493							$	0.07
Effect of dilutive securities:
Restricted stock							6												10
Stock options							5												310
Diluted Net Income Per Share
Income from continuing operations and assumed conversions		$	21,014				65,834			$	0.32			$	18,876				68,331			$	0.28
Loss from discontinued operations			—				65,834				—				(14,383	)			68,331				(0.21	)
Net income and assumed conversions		$	21,014							$	0.32			$	4,493							$	0.07

(dollars and shares		Nine Months Ended												Nine Months Ended
in thousands,		September 30, 2006												September 30, 2005
except per share data)		Income				Shares				Amount				Income				Shares				Amount
Basic Net Income Per Share
Income from continuing operations		$	61,870				66,370			$	0.93			$	59,129				68,355			$	0.87
Loss from discontinued operations			—				66,370				—				(14,825	)			68,355				(0.22	)
Net income		$	61,870							$	0.93			$	44,304							$	0.65
Effect of dilutive securities:
Restricted stock							2												—
Stock options							7												127
Diluted Net Income Per Share
Income from continuing operations and assumed conversions		$	61,870				66,379			$	0.93			$	59,129				68,482			$	0.87
Loss from discontinued operations			—				66,379				—				(14,825	)			68,482				(0.22	)
Net income and assumed conversions		$	61,870							$	0.93			$	44,304							$	0.65

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, 2006 and December 31, 2005 and the corresponding amounts of unrealized gains and losses therein:

		Amortized				Unrealized				Unrealized				Fair
(dollars in thousands)		Cost				Gains				Losses				Value
September 30, 2006
Available-for-sale
U.S. Government-sponsored agencies		$	554,356			$	1,309			$	(8,973	)		$	546,692
Mortgage-backed securities			1,094,204				1,711				(35,001	)			1,060,914
States and political subdivisions			287,486				9,874				(189	)			297,171
Other securities			186,453				1,734				(3,343	)			184,844
Total available-for-sale securities		$	2,122,499			$	14,628			$	(47,506	)		$	2,089,621
Held-to-maturity
Mortgage-backed securities		$	131,661			$	—			$	(5,111	)		$	126,550
Other securities			12,355				—				(214	)			12,141
Total held-to-maturity securities		$	144,016			$	—			$	(5,325	)		$	138,691
December 31, 2005
Available-for-sale
U.S. Government-sponsored agencies		$	522,351			$	122			$	(12,729	)		$	509,744
Mortgage-backed securities			1,141,581				1,898				(38,222	)			1,105,257
States and political subdivisions			473,231				15,685				(547	)			488,369
Other securities			197,910				2,420				(3,634	)			196,696
Total available-for-sale securities		$	2,335,073			$	20,125			$	(55,132	)		$	2,300,066
Held-to-maturity
Mortgage-backed securities		$	148,035			$	—			$	(5,274	)		$	142,761
Other securities			18,764				—				(273	)			18,491
Total held-to-maturity securities		$	166,799			$	—			$	(5,547	)		$	161,252

During the third quarter of 2006, proceeds from the sales of investment securities available-for-sale were $273.9 million, resulting in a gain of $0.8 million. Year-to-date proceeds from sales of investment securities available-for-sale were $298.7 million in 2006 and $609.5 million in 2005. For the nine months ended September 30, 2006, realized gains were $4.4 million and losses were $3.7 million. For the nine months ended September 30, 2005, realized gains were $8.3 million and losses were $7.1 million.

At September 30, 2006, Old National does not believe any individual unrealized loss represents other-than-temporary impairment. The unrealized losses are primarily attributable to changes in interest rates. Factors considered in evaluating the securities included whether the securities were backed by U.S. Government-sponsored agencies and credit quality concerns surrounding the recovery of the full principal balance. Old National has both the intent and ability to hold securities with any individual unrealized loss for a time necessary to recover the amortized cost.

NOTE 7 — LOANS HELD FOR SALE

Residential loans held for sale are recorded at lower of cost or market value determined as of the balance sheet date. A portion of Old National’s residential loans held for sale have been hedged using fair value hedge accounting in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. The loans’ carrying basis reflects the effects of the SFAS No. 133 adjustments. At September 30, 2006 and December 31, 2005, Old National had residential loans held for sale of $15.9 million and $43.8 million, respectively. As of September 30, 2006 and December 31, 2005, ineffectiveness related to the hedge of a portion of the residential loans held for sale was immaterial.

During the third quarter of 2006, commercial real estate loans held for investment of $27.4 million and commercial loans of $1.4 million were reclassified to loans held for sale and sold for $26.1 million resulting in a write-down on loans transferred to held for sale of $2.8 million, which was recorded as a reduction to the allowance for loan losses.

NOTE 8 — ALLOWANCE FOR LOAN LOSSES

The following summarizes the changes in the allowance for loan losses:

		Nine months ended
		September 30,
(dollars in thousands)		2006				2005
Balance, January 1		$	78,847			$	85,749
Additions:
Provision charged to expense			7,000				17,100
Deductions:
Write-downs from loans transferred to held for sale			2,770				5,348
Loans charged-off			18,391				24,516
Recoveries			(6,946	)			(8,371	)
Net charge-offs			14,215				21,493
Balance, September 30		$	71,632			$	81,356

The following presents information regarding the period-end balances of impaired loans:

		September 30,				December 31,
(dollars in thousands)		2006				2005
Impaired loans without a valuation allowance		$	11,801			$	13,780
Impaired loans with a valuation allowance			24,516				25,681
Total impaired loans		$	36,317			$	39,461
Valuation allowance related to impaired loans		$	10,936			$	12,472

For the nine months ended September 30, 2006 and 2005, the average balance of impaired loans was $38.9 million and $43.1 million, respectively, for which no interest income was recorded. No additional funds are committed to be advanced in connection with impaired loans. Loans deemed impaired are evaluated primarily using the fair value of the underlying collateral.

NOTE 9 — GOODWILL AND OTHER INTANGIBLE ASSETS

SFAS No. 142, Goodwill and Other Intangible Assets, issued in June 2001, discontinued the practice of amortizing goodwill and initiated an annual review for impairment. Impairment is to be examined more frequently if certain indicators are encountered. Old National completed its most recent annual goodwill impairment test required by this Statement as of August 31, 2006 and determined that no impairment existed as of this date.

The changes in the carrying amount of goodwill by segment for the nine months ended September 30, 2006 and 2005, were as follows:

		Community
(dollars in thousands)		Banking				Other				Total
Balance, January 1, 2006		$	73,477			$	39,798			$	113,275
Adjustments to goodwill acquired in prior year			—				75				75
Balance, September 30, 2006		$	73,477			$	39,873			$	113,350
Balance, January 1, 2005		$	70,944			$	59,003			$	129,947
Goodwill acquired during the year			—				12,038				12,038
Adjustments to goodwill acquired in prior year			—				272				272
Goodwill transferred to held for sale			—				(26,082	)			(26,082	)
Goodwill impairment			—				(2,900	)			(2,900	)
Balance, September 30, 2005		$	70,944			$	42,331			$	113,275

Intangibles, including core deposits and customer business relationships, are amortized on a straight-line or accelerated basis over their estimated useful lives, generally over a period of 10 to 25 years. Old National reviews intangible assets for possible impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable.

The following table shows the gross carrying amounts and accumulated amortization for other intangible assets as of September 30, 2006 and December 31, 2005:

		Gross Carrying				Accumulated				Net Carrying
(dollars in thousands)		Amount				Amortization				Amount
September 30, 2006
Amortized intangible assets:
Core deposit		$	5,574			$	(4,545	)		$	1,029
Customer business relationships			25,553				(5,210	)			20,343
Total intangible assets		$	31,127			$	(9,755	)		$	21,372
December 31, 2005
Amortized intangible assets:
Core deposit		$	5,574			$	(4,175	)		$	1,399
Customer business relationships			25,411				(3,750	)			21,661
Total intangible assets		$	30,985			$	(7,925	)		$	23,060

Total amortization expense associated with other intangible assets for the three months ended September 30 was $0.6 million in 2006 and $0.6 million in 2005. Amortization expense for the nine months ended September 30, 2006 and 2005, was $1.8 million and $1.9 million, respectively.

Estimated amortization expense for the future years is as follows:

(dollars in thousands)
2006 remaining		$	559
2007			2,023
2008			1,892
2009			1,767
2010			1,620
Thereafter			13,511
Total		$	21,372

NOTE 10 — MORTGAGE SERVICING RIGHTS

During the third quarter of 2005, Old National sold its mortgage servicing rights relating to $1.917 billion of mortgage loans serviced for other investors for a total sales price of $17.7 million. The sale resulted in a pre-tax net gain of $0.4 million which was included in Other Income during the third quarter of 2005.

The activity for mortgage servicing rights and the related valuation allowance for the period ended September 30, 2005 is summarized below:

(dollars in thousands)		2005
Balance before valuation allowance, January 1		$	15,829
Rights capitalized			2,505
Amortization			(4,126	)
Sale of mortgage servicing rights			(14,208	)
Balance before valuation allowance, September 30			—
Valuation allowance:
Balance, January 1			—
Additions to valuation allowance			—
Reductions to valuation allowance			—
Balance, September 30			—
Mortgage servicing rights, net		$	—

NOTE 11 –ASSETS HELD FOR SALE

In September, 2006, Old National committed to a plan to sell and lease back its three main buildings in downtown Evansville, Indiana. A letter of intent was executed in September and the transaction is expected to close during the fourth quarter of 2006. These assets are reported as held for sale at historical cost as the sales price less costs to sell is expected to exceed the carrying value. These assets are reported in the “other” column for segment reporting.

The carrying amounts of the classes of assets included as held for sale were as follows at September 30, 2006:

(dollars in thousands)
Assets held for sale:
Land		$	5,591
Building and improvements			73,424
Total			79,015
Accumulated depreciation			(9,120	)
Assets held for sale — net		$	69,895

NOTE 12 — FINANCING ACTIVITIES

The following table summarizes Old National’s other borrowings at September 30, 2006, and December 31, 2005:

		September 30,				December 31,
(dollars in thousands)		2006				2005
Old National Bancorp:
Medium-term notes, Series 1997 (fixed rates 3.50% to 7.03%) maturing August 2007 to June 2008		$	110,000			$	110,000
Senior unsecured bank note (fixed rate 5.00%) maturing May 2010			50,000				50,000
Junior subordinated debenture (fixed rate 8.00%) maturing April 2032			100,000				100,000
SFAS 133 fair value hedge and other basis adjustments			(6,297	)			(5,125	)
Old National Bank:
Securities sold under agreements to repurchase (fixed rates 2.75% to 5.17% and variable rate 5.64%) maturing May 2008 to November 2009			98,000				148,000
Federal Home Loan Bank advances (fixed rates 4.84% to 8.34%) maturing February 2008 to January 2023			222,094				301,703
Senior unsecured bank notes (fixed rate 3.95%) maturing February 2008			50,000				100,000
Subordinated bank note (fixed rate 6.75%) maturing October 2011			150,000				150,000
Capital lease obligation			4,470				4,493
SFAS 133 fair value hedge and other basis adjustments			(6,052	)			(4,146	)
Total other borrowings		$	772,215			$	954,925

Contractual maturities of other borrowings at September 30, 2006, were as follows:

(dollars in thousands)
Due in 2006		$	8
Due in 2007			10,034
Due in 2008			317,037
Due in 2009			26,040
Due in 2010			75,043
Thereafter			356,402
SFAS 133 fair value hedge and other basis adjustments			(12,349	)
Total		$	772,215

FEDERAL HOME LOAN BANK

Federal Home Loan Bank advances had weighted-average rates of 5.37% and 5.22% at September 30, 2006, and December 31, 2005, respectively. These borrowings are collateralized by investment securities and residential real estate loans up to 145% of outstanding debt.

SUBORDINATED BANK NOTES

Subordinated bank notes qualify as Tier 2 Capital for regulatory purposes and are in accordance with the senior and subordinated global bank note program in which Old National Bank may issue and sell up to a maximum of $1 billion. Notes issued by Old National Bank under the global note program are not obligations of, or guaranteed by, Old National Bancorp.

JUNIOR SUBORDINATED DEBENTURES

Junior subordinated debentures related to trust preferred securities are classified in “other borrowings”. These securities qualify as Tier 1 capital for regulatory purposes, subject to certain limitations.

Old National guarantees the payment of distributions on the trust preferred securities issued by ONB Capital Trust II. ONB Capital Trust II issued $100 million in preferred securities in April 2002. The preferred securities have a liquidation amount of $25 per share with a cumulative annual distribution rate of 8.0% or $2.00 per share payable quarterly and maturing on April 15, 2032. Proceeds from the issuance of these securities were used to purchase junior subordinated debentures with the same financial terms as the securities issued by ONB Capital Trust II. Old National may redeem the junior subordinated debentures and thereby cause a redemption of the trust preferred securities in whole (or in part from time to time) on or after April 12, 2007, and in whole (but not in part) following the occurrence and continuance of certain adverse federal income tax or capital treatment events. Costs associated with the issuance of these trust preferred securities totaling $3.3 million in 2002 were capitalized and are being amortized through the maturity dates of the securities. The unamortized balance is included in other assets in the consolidated balance sheet.

CAPITAL LEASE OBLIGATION

On January 1, 2004, Old National entered into a long-term capital lease obligation for a new branch office building in Owensboro, Kentucky, which extends for 25 years with one renewal option for 10 years. The economic substance of this lease is that Old National is financing the acquisition of the building through the lease and accordingly, the building is recorded as an asset and the lease is recorded as a liability. The fair value of the capital lease obligation was estimated using a discounted cash flow analysis based on Old National’s current incremental borrowing rate for similar types of borrowing arrangements.

At September 30, 2006, the future minimum lease payments under the capital lease were as follows:

(dollars in thousands)
2006 remaining		$	93
2007			371
2008			371
2009			390
2010			390
Thereafter			12,484
Total minimum lease payments			14,099
Less amounts representing interest			9,629
Present value of net minimum lease payments		$	4,470

NOTE 13 — EMPLOYEE BENEFIT PLANS

RETIREMENT PLAN

The following table sets forth the components of the net periodic benefit cost for Old National’s noncontributory defined benefit retirement plan for the nine months ended September 30:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(dollars in thousands)		2006				2005				2006				2005
Service cost		$	—			$	360			$	—			$	1,238
Interest cost			689				891				2,086				2,675
Expected return on plan assets			(1,034	)			(1,012	)			(2,928	)			(2,932	)
Amortization of prior service cost			—				(86	)			—				(164	)
Recognized actuarial loss			218				378				735				1,164
Settlement			360				—				1,080				—
Net periodic benefit cost		$	233			$	531			$	973			$	1,981

Old National has qualified and nonqualified noncontributory defined benefit pension plans. During 2001, Old National amended the plans freezing the benefits accrued for all participants except active participants who had completed at least 20 years of service or who had attained age 50 with at least five years of vesting service. In addition, the amendment discontinued new enrollments under the plans after December 31, 2001. During 2005, Old National amended the plan by redefining the pay definition, resulting in a reduction to the Projected Benefit Obligation of $2.8 million. During the third quarter of 2005, Old National further amended the plan to grant two years additional benefits to plan participants age 55 or older with 15 years of benefit service resulting in an increase in the Projected Benefit Obligation of $0.8 million and to freeze benefit accruals for all remaining participants effective December 31, 2005. The curtailment resulted in a $10.1 million reduction in Projected Benefit Obligation and a one-time curtailment gain of $1.5 million. Lump sum cash payments of $5.2 million paid to participants during 2005 reduced the Projected Benefit Obligation by the same amount. The Company presently anticipates contributing an additional $0.6 million to fund its pension plans in 2006.

NOTE 14 — STOCK-BASED COMPENSATION

Under the 1999 Equity Incentive Plan, Old National is authorized to grant up to 7.6 million shares of common stock. At September 30, 2006, 6.4 million shares were outstanding under the plan, including 5.8 million stock options and 0.6 million shares of restricted stock, 0.5 million shares have been exercised, and 0.7 million shares were available for issuance. In addition, Old National assumed 0.1 million stock options outstanding through various mergers. Effective January 1, 2006, the Company began recording compensation expense associated with the stock options in accordance with SFAS No. 123-R, Share-Based Payment. Prior to January 1, 2006, the Company accounted for its stock-based compensation plans in accordance with APB Opinion No. 25 and related Interpretations, under which no compensation cost had been recognized, except with respect to the restricted stock plans. Old National adopted the fair value recognition provisions of SFAS No. 123-R using the modified prospective transition method, and, consequently, has not retroactively adjusted results from prior periods.

The following table reflects the effect on net income and net income per share as if the fair value based method had been applied to all outstanding and unvested stock options during the three and nine months ended September 30, 2005.

		Three Months Ended				Nine Months Ended
(dollars in thousands, except per share data)		September 30, 2005				September 30, 2005
Net income as reported		$	4,493			$	44,304
Restricted Stock:
Add: restricted stock compensation expense included in reported net income, net of related tax effects			511				1,448
Deduct: restricted stock compensation expense determined under fair value based method for all awards, net of related tax effects			(551	)			(1,621	)
Stock Options:
Deduct: stock option compensation expense determined under fair value based method for all awards, net of related tax effects			(506	)			(2,377	)
Proforma net income		$	3,947			$	41,754
Basic net income per share:
As reported		$	0.07			$	0.65
Proforma			0.06				0.61
Diluted net income per share:
As reported		$	0.07			$	0.65
Proforma			0.06				0.61

Stock Options

Old National recorded $0.4 million of stock based compensation expense, net of tax, during the first nine months of 2006. This cost is primarily related to the modification of certain options during the second quarter and the pro-rata vesting of options during the year.

The Company granted 141,700 stock options during 2006. Using the Black-Scholes option pricing model, the Company estimated the fair value of the stock options granted during 2006 to be $0.5 million. The Company will expense this amount ratably over the three-year vesting period. The assumptions used in the option pricing model and the determination of stock option expense were an expected volatility of 19.5%; a risk free interest rate of 4.7%; an expected option term of six years; a 3.6% dividend yield; and a forfeiture rate of 0%. These options expire in ten years. No options were granted in 2005.

Restricted Stock

Old National recorded income of $0.3 million, net of tax benefit, during the first nine months of 2006, related to the reversal of expense associated with certain performance-based restricted stock grants. This reversal of expense was partially offset by the pro-rata vesting of restricted stock awards during the year.

The Company granted 132 thousand shares of performance based restricted stock awards to certain key officers during 2006, with shares vesting at the end of a thirty-six month period based on the achievement of certain targets. In addition, the Company granted 60 thousand time-based restricted stock awards to certain key officers during 2006, with vesting periods ranging from 12 to 36 months. On January 27, 2005, Old National’s Board of Directors approved a restricted stock award to grant 0.2 million shares to certain key officers with shares vesting at the end of a thirty-eight month period based on the achievement of certain targets. Compensation expense is recognized on a straight-line basis over the performance period. Shares are subject to certain restrictions and risk of forfeiture by the participants. As of September 30, 2006, unrecorded compensation expense was estimated to be $3.9 million for unvested restricted stock awards.

NOTE 15 — INCOME TAXES

The following is a summary of the major items comprising the differences in taxes from continuing operations computed at the federal statutory rate and as recorded in the consolidated statement of income for the three and nine months ended September 30:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(dollars in thousands)		2006				2005				2006				2005
Provision at statutory rate of 35%		$	9,100			$	7,743			$	26,332			$	24,647
Tax-exempt income			(3,870	)			(4,132	)			(12,150	)			(12,804	)
Other, net			(245	)			(363	)			(817	)			(551	)
Income tax expense		$	4,985			$	3,248			$	13,365			$	11,292
Effective tax rate			19.2	%			14.7	%			17.8	%			16.0	%

For the three months and nine months ended September 30, 2006, the effective tax rate on income from continuing operations was higher than for the three months and nine months ended September 30, 2005. The increased effective tax rate in the three months and nine months ended September 30, 2006 resulted from a lower percentage of tax-exempt income to total income compared to the three months and nine months ended September 30, 2005.

NOTE 16 — DERIVATIVE FINANCIAL INSTRUMENTS

Old National designates its derivatives based upon criteria established by SFAS No. 133, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment to FASB Statement No. 133, and SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities.

The following table summarizes the derivative financial instruments utilized by Old National:

		September 30, 2006												December 31, 2005
		Notional				Estimated Fair Value								Notional				Estimated Fair Value
(dollars in thousands)		Amount				Gain				Loss				Amount				Gain				Loss
Fair Value Hedges
Receive fixed interest rate swaps		$	824,609			$	—			$	(22,822	)			717,346			$	—			$	(21,487	)
Pay fixed interest rate swaps			—				—				—				20,000				245				—
Forward mortgage loan contracts			14,977				—				(71	)			42,650				—				(357	)
Stand Alone Derivatives
Receive fixed interest rate swaps			—				—				—				445,071				678				(10,774	)
Interest rate lock commitments			31,259				222				—				26,012				47				—
Forward mortgage loan contracts			31,093				—				(172	)			10,833				326				—
Matched Customer Hedges
Customer interest rate swaps			421,934				4,550				(1,890	)			251,383				1,018				(1,766	)
Customer interest rate swaps with counterparty			421,934				1,890				(4,550	)			251,383				1,766				(1,018	)
Customer interest rate cap & collars			5,459				24				(13	)			11,089				83				(15	)
Customer interest rate cap & collars with counterparty			5,459				13				(24	)			11,089				15				(83	)
Customer commodity swaps (72,000 barrels)			5,224				309				—				—				—				—
Customer commodity swaps with counterparty (72,000 barrels)			5,224				—				(309	)			—				—				—
Option for customer commodity swap (120,000 barrels)			8,202				29				—				—				—				—
Option for customer commodity swap with counterparty (120,000 barrels)			8,202				—				(29	)			—				—				—
Customer foreign exchange forward contract			38				—				—				—				—				—
Customer foreign exchange forward contract with counterparty			38				—				—				—				—				—
Total		$	1,783,652			$	7,037			$	(29,880	)		$	1,786,856			$	4,178			$	(35,500	)