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 March 31, 2007

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

For the transition period from                      to                     

OLD NATIONAL BANCORP

(Exact name of Registrant as specified in its charter)

		INDIANA		35-1539838
		(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
		1 Main Street Evansville, Indiana		47708 (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 66,423,000 shares outstanding at April 30, 2007.

 

 

OLD NATIONAL BANCORP

FORM 10-Q

INDEX

				Page No.
PART I.		FINANCIAL INFORMATION
Item 1.		Financial Statements
		Consolidated Balance Sheet
		March 31, 2007 (unaudited), December 31, 2006 and March 31, 2006 (unaudited)			3
		Consolidated Statement of Income
		Three months ended March 31, 2007 and 2006 (unaudited)			4
		Consolidated Statement of Changes in Shareholders’ Equity
		Three months ended March 31, 2007 and 2006 (unaudited)			5
		Consolidated Statement of Cash Flows
		Three months ended March 31, 2007 and 2006 (unaudited)			6
		Notes to Consolidated Financial Statements (unaudited)			7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			32
Item 4.		Controls and Procedures			32
PART II		OTHER INFORMATION			33
SIGNATURES					37
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

OLD NATIONAL BANCORP

		March 31,				December 31,				March 31,
(dollars and shares in thousands, except per share data)		2007				2006				2006
		(unaudited)								(unaudited)
Assets
Cash and due from banks		$	177,585			$	210,303			$	164,993
Federal funds sold and resell agreements			330,000				283,524				3,146
Money market investments			30,105				4,078				27,189
Total cash and cash equivalents			537,690				497,905				195,328
Investment securities – available-for-sale, at fair value
U.S. Government-sponsored agencies			582,901				680,149				581,504
Mortgage-backed securities			1,029,772				1,020,178				1,100,752
States and political subdivisions			267,030				273,325				486,588
Other securities			196,458				201,511				195,670
Investment securities – available-for-sale			2,076,161				2,175,163				2,364,514
Investment securities – held-to-maturity, at amortized cost (fair value $149,184, $157,720 and $153,102 respectively)			153,232				162,138				159,522
Federal Home Loan Bank stock, at cost			41,170				38,809				49,628
Residential loans held for sale			18,976				16,634				21,965
Loans:
Commercial			1,667,194				1,629,885				1,549,950
Commercial real estate			1,454,150				1,386,367				1,500,134
Residential real estate			560,780				484,896				512,342
Consumer credit, net of unearned income			1,199,108				1,198,855				1,247,077
Total loans			4,881,232				4,700,003				4,809,503
Allowance for loan losses			(71,330	)			(67,790	)			(76,809	)
Net loans			4,809,902				4,632,213				4,732,694
Premises and equipment, net			54,123				122,865				195,148
Accrued interest receivable			49,908				53,344				55,787
Goodwill			159,850				113,350				113,350
Other intangible assets			34,533				20,813				22,449
Assets held for sale			70,322				—				—
Other assets			325,777				316,281				334,536
Total assets		$	8,331,644			$	8,149,515			$	8,244,921
Liabilities
Deposits:
Noninterest-bearing demand		$	859,402			$	877,870			$	820,107
Interest-bearing:
NOW			1,635,796				1,449,202				1,458,384
Savings			581,675				437,702				486,527
Money market			851,049				925,296				901,639
Time			2,681,814				2,631,424				2,551,431
Total deposits			6,609,736				6,321,494				6,218,088
Short-term borrowings			380,966				312,911				359,331
Other borrowings			592,473				747,545				895,776
Accrued expenses and other liabilities			107,798				125,196				129,353
Total liabilities			7,690,973				7,507,146				7,602,548
Shareholders’ Equity
Preferred stock, 2,000 shares authorized, no shares issued or outstanding			—				—				—
Common stock, $1 stated value, 150,000 shares authorized, 66,416, 66,503 and 67,409 shares issued and outstanding, respectively			66,416				66,503				67,409
Capital surplus			565,827				565,106				583,938
Retained earnings			28,699				35,873				18,674
Accumulated other comprehensive loss, net of tax			(20,271	)			(25,113	)			(27,648	)
Total shareholders’ equity			640,671				642,369				642,373
Total liabilities and shareholders’ equity		$	8,331,644			$	8,149,515			$	8,244,921

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

OLD NATIONAL BANCORP

		Three Months Ended
		March 31,
(dollars in thousands, except per share data)		2007				2006
Interest Income
Loans including fees:
Taxable		$	79,663			$	75,603
Nontaxable			5,252				4,593
Investment securities, available-for-sale:
Taxable			23,122				21,249
Nontaxable			3,103				5,461
Investment securities, held-to-maturity, taxable			1,831				1,787
Money market investments			3,341				906
Total interest income			116,312				109,599
Interest Expense
Deposits			50,321				39,950
Short-term borrowings			3,796				2,393
Other borrowings			10,393				12,917
Total interest expense			64,510				55,260
Net interest income			51,802				54,339
Provision for loan losses			2,445				3,500
Net interest income after provision for loan losses			49,357				50,839
Noninterest Income
Wealth management fees			4,892				5,179
Service charges on deposit accounts			10,233				9,903
ATM fees			3,176				2,846
Mortgage banking revenue			956				1,208
Insurance premiums and commissions			10,639				10,964
Investment product fees			2,856				2,257
Bank-owned life insurance			2,221				2,101
Net securities losses			(2,667	)			(147	)
Gain on derivatives			14				1,615
Gain on branch divestiture			—				3,036
Loss on extinguishment of debt			(1,234	)			—
Other income			2,437				3,907
Total noninterest income			33,523				42,869
Noninterest Expense
Salaries and employee benefits			41,348				41,322
Occupancy			6,360				5,214
Equipment			3,056				3,378
Marketing			2,349				2,297
Data processing			5,054				4,605
Communication			2,383				2,317
Professional fees			1,956				1,967
Loan expense			1,187				1,350
Supplies			1,027				842
Other losses			2,420				613
Other expense			4,659				4,582
Total noninterest expense			71,799				68,487
Income before income taxes			11,081				25,221
Income tax expense			291				4,552
Net income		$	10,790			$	20,669
Net income per common share
Basic net income per share		$	0.16			$	0.31
Diluted net income per share			0.16				0.31
Weighted average number of common shares outstanding
Basic			65,806				67,016
Diluted			65,863				67,317
Dividends per common share		$	0.22			$	0.21

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

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, 2005			67,649			$	67,649			$	591,930			$	12,074			$	(21,755	)		$	649,898
Net income			—				—				—				20,669				—				20,669				$	20,669
Unrealized net securities losses, net of $(4,420) tax			—				—				—				—				(6,075	)			(6,075	)				(6,075	)
Reclassification adjustment for securities losses included in net income, net of $62 tax			—				—				—				—				85				85					85
Reclassification adjustment on cash flow hedges, net of $63 tax			—				—				—				—				97				97					97
Cash dividends			—				—				—				(14,069	)			—				(14,069	)
Stock repurchased			(449	)			(449	)			(9,044	)			—				—				(9,493	)
Stock issued under stock option, restricted stock and stock purchase plans			209				209				1,052				—				—				1,261
Balance, March 31, 2006			67,409			$	67,409			$	583,938			$	18,674			$	(27,648	)		$	642,373				$	14,776
Balance, December 31, 2006			66,503			$	66,503			$	565,106			$	35,873			$	(25,113	)		$	642,369
Net income			—				—				—				10,790				—				10,790				$	10,790
Unrealized net securities gains, net of $2,124 tax			—				—				—				—				3,144				3,144					3,144
Reclassification adjustment for securities losses included in net income, net of $1,076 tax			—				—				—				—				1,591				1,591					1,591
Reclassification adjustment on cash flow hedges, net of $69 tax			—				—				—				—				107				107					107
Adjustment to initially apply FASB interpretation No. 48			—				—				—				(3,368	)			—				(3,368	)
Adjustment for adoption of EITF No. 06-5			—				—				—				(118	)			—				(118	)
Cash dividends			—				—				—				(14,478	)			—				(14,478	)
Stock issued (forfeited) under stock option, restricted stock and stock purchase plans			(87	)			(87	)			169				—				—				82
Adjustment for St. Joseph Capital Corp. stock options			—				—				552				—				—				552
Balance, March 31, 2007			66,416			$	66,416			$	565,827			$	28,699			$	(20,271	)		$	640,671				$	15,632

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

OLD NATIONAL BANCORP

		Three Months Ended
		March 31,
(dollars in thousands)		2007				2006
Cash Flows From Operating Activities
Net income		$	10,790			$	20,669
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation			2,687				3,483
Amortization of other intangible assets and goodwill impairment			743				611
Net discount accretion on investment securities			(597	)			(305	)
Restricted stock expense			165				616
Stock option expense			66				21
Provision for loan losses			2,445				3,500
Net securities losses			2,667				147
Gain on branch divestiture			—				(3,036	)
Gain on derivatives			(14	)			(1,615	)
Net (gains) losses on sales and write-downs of loans and other assets			711				(124	)
Loss on retirement of debt			1,234				—
FHLB stock dividend			—				(19	)
Earnings on company owned life insurance			(2,221	)			(2,101	)
Residential real estate loans originated for sale			(70,885	)			(45,911	)
Proceeds from sale of residential real estate loans			69,374				68,554
(Increase) decrease in interest receivable			5,659				(218	)
(Increase) decrease in other assets			8,510				(21,435	)
Increase (decrease) in accrued expenses and other liabilities			(27,506	)			15,210
Total adjustments			(6,962	)			17,378
Net cash flows provided by operating activities			3,828				38,047
Cash Flows From Investing Activities
Cash and cash equivalents of acquired subsidiaries			17,429				—
Purchase of subsidiaries			(78,109	)			—
Purchases of investment securities available-for-sale			(268,730	)			(148,652	)
Proceeds from maturities, prepayments and calls of investment securities available-for-sale			306,612				70,154
Proceeds from sales of investment securities available-for-sale			145,470				3,960
Proceeds from maturities, prepayments and calls of investment securities held-to-maturity			8,645				7,056
Proceeds from redemption of FHLB stock			758				—
Proceeds from branch divestiture			—				10,511
Proceeds from sale of loans			3,876				—
Net principal collected from loan customers			139,290				50,875
Proceeds from sale of premises and equipment and other assets			328				515
Purchase of premises and equipment			(2,568	)			(1,787	)
Net cash flows provided by (used in) investing activities			273,001				(7,368	)
Cash Flows From Financing Activities
Net increase (decrease) in deposits and short-term borrowings:
Noninterest-bearing demand deposits			(57,767	)			(70,831	)
Savings, NOW and money market deposits			(4,042	)			(128,913	)
Time deposits			(11,936	)			(20,414	)
Short-term borrowings			54,736				56,566
Payments for maturities on other borrowings			(16,072	)			(51,237	)
Payments related to retirement of debt			(187,485	)			—
Cash dividends paid			(14,478	)			(14,069	)
Common stock repurchased			—				(9,493	)
Common stock issued under stock option, restricted stock and stock purchase plans			—				624
Net cash flows used in financing activities			(237,044	)			(237,767	)
Net increase (decrease) in cash and cash equivalents			39,785				(207,088	)
Cash and cash equivalents at beginning of period			497,905				402,416
Cash and cash equivalents at end of period		$	537,690			$	195,328
Total interest paid		$	62,153			$	52,247
Total taxes paid (net of refunds)		$	5,633			$	(359	)

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

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. The allowance for loan losses, goodwill and intangibles, derivative financial instruments and unrecognized tax positions are particularly subject to change. 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 March 31, 2007 and 2006, and December 31, 2006, and the results of its operations for the three months ended March 31, 2007 and 2006. 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, 2006.

All significant intercompany transactions and balances have been eliminated. Certain prior year amounts have been reclassified to conform with the 2007 presentation. Such reclassifications had no effect on net income.

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 became effective for the Company on January 1, 2007. The impact of adopting FIN 48 is discussed in Note 14 to the consolidated financial statements.

SFAS No. 159 – In February 2007, the FASB issued Statement No. 159 – The Fair Value Option for Financial Assets and Financial Liabilities. The standard provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The new standard is effective for the Company on January 1, 2008. The Company is currently evaluating the impact of adopting SFAS No. 159 on the consolidated financial statements.

EITF 06-5 – In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-5, Accounting for Purchases of Life Insurance – Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for Purchases of Life Insurance). This Issue requires that a policyholder consider contractual terms of a life insurance policy in determining the amount that could be realized under the insurance contract. It also requires that if the contract provides for a greater surrender value if all individual policies in a group are surrendered at the same time, that the surrender value be determined based on the assumption that policies will be surrendered on an individual basis. Lastly, the Issue discusses whether the cash surrender value should be discounted when the policyholder is contractually limited in its ability to surrender a policy. EITF 06-5 became effective for the Company on January 1, 2007 and resulted in a $0.1 million reduction to retained earnings.

NOTE 3 – ACQUISITION

On February 1, 2007, Old National acquired St. Joseph Capital Corporation (''St. Joseph’’), a banking franchise headquartered in Mishawaka, Indiana, for $78.1 million, including acquisition costs. Pursuant to the merger agreement, the shareholders of St. Joseph received $40.00 in cash for each share of St. Joseph stock in an all-cash transaction. The purchase price was funded with the proceeds of a dividend of $76.0 million paid by Old National Bank to the parent company in January 2007. Goodwill of $46.5 million was recorded, of which none is deductible for tax purposes. In addition, intangible assets totaling $14.5 million related to core deposits and customer relationships were recorded and are being amortized over 10 to 11 years. See Note 9 to the consolidated financial statements for additional information. On the date of acquisition, unaudited financial statements of St. Joseph showed assets of $452.9 million, which included $336.6 million of loans and $78.6 million of securities, $357.3 million of deposits and year-to-date net interest income and other income of $0.8 million and net loss of $3.3 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.

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.

The following table reconciles basic and diluted net income per share for the three months ended March 31:

(dollars and shares		Three Months Ended												Three Months Ended
in thousands,		March 31, 2007												March 31, 2006
except per share data)		Income				Shares				Amount				Income				Shares				Amount
Basic Net Income Per Share
Income from operations		$	10,790				65,806			$	0.16			$	20,669				67,016			$	0.31
Effect of dilutive securities:
Restricted stock							27												172
Stock options							30												129
Diluted Net Income Per Share
Income from operations and assumed conversions		$	10,790				65,863			$	0.16			$	20,669				67,317			$	0.31

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, 2007 and December 31, 2006 and the corresponding amounts of unrealized gains and losses therein:

		Amortized				Unrealized				Unrealized				Fair
(dollars in thousands)		Cost				Gains				Losses				Value
March 31, 2007
Available-for-sale
U.S. Government-sponsored agencies		$	584,635			$	2,274			$	(4,008	)		$	582,901
Mortgage-backed securities			1,054,809				2,222				(27,258	)			1,029,773
States and political subdivisions			258,823				8,316				(110	)			267,029
Other securities			197,605				1,150				(2,297	)			196,458
Total available-for-sale securities		$	2,095,872			$	13,962			$	(33,673	)		$	2,076,161
Held-to-maturity
Mortgage-backed securities		$	122,310			$	—			$	(3,793	)		$	118,517
Other securities			30,922				—				(255	)			30,667
Total held-to-maturity securities		$	153,232			$	—			$	(4,048	)		$	149,184
December 31, 2006
Available-for-sale
U.S. Government-sponsored agencies		$	685,809			$	1,881			$	(7,541	)		$	680,149
Mortgage-backed securities			1,049,712				1,733				(31,267	)			1,020,178
States and political subdivisions			264,343				9,095				(113	)			273,325
Other securities			202,945				1,384				(2,818	)			201,511
Total available-for-sale securities		$	2,202,809			$	14,093			$	(41,739	)		$	2,175,163
Held-to-maturity
Mortgage-backed securities		$	126,800			$	—			$	(4,312	)		$	122,488
Other securities			35,338				—				(106	)			35,232
Total held-to-maturity securities		$	162,138			$	—			$	(4,418	)		$	157,720

During the first quarter of 2007, proceeds from the sales of investment securities available-for-sale were $145.5 million, resulting in a loss of $2.7 million.

At March 31, 2007, 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 March 31, 2007 and December 31, 2006, Old National had residential loans held for sale of $19.0 million and $16.6 million, respectively. As of March 31, 2007 and December 31, 2006, ineffectiveness related to the hedge of a portion of the residential loans held for sale was immaterial.

NOTE 8 — ALLOWANCE FOR LOAN LOSSES

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

		Three months ended
		March 31,
(dollars in thousands)		2007				2006
Balance, January 1		$	67,790			$	78,847
Additions:
Provision charged to expense			2,445				3,500
Allowance of acquired bank			5,699				—
Deductions:
Loans charged-off			7,704				7,395
Recoveries			(3,100	)			(1,857	)
Net charge-offs			4,604				5,538
Balance, March 31		$	71,330			$	76,809

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

		March 31,				December 31,
(dollars in thousands)		2007				2006
Impaired loans without a valuation allowance		$	13,705			$	11,833
Impaired loans with a valuation allowance			38,237				20,476
Total impaired loans		$	51,942			$	32,309
Allowance for loan losses related to impaired loans		$	15,760			$	7,080

For the three months ended March 31, 2007 and 2006, the average balance of impaired loans was $42.1 million and $38.9 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

The following table shows the changes in the carrying amount of goodwill by segment for the three months ended March 31, 2007 and 2006:

		Community
(dollars in thousands)		Banking				Other				Total
Balance, January 1, 2007		$	73,477			$	39,873			$	113,350
Goodwill acquired during the period			46,500				—				46,500
Balance, March 31, 2007		$	119,977			$	39,873			$	159,850
Balance, January 1, 2006		$	73,477			$	39,798			$	113,275
Adjustments to goodwill acquired in prior period			—				75				75
Balance, March 31, 2006		$	73,477			$	39,873			$	113,350

Goodwill is reviewed annually for impairment. Old National completed its most recent annual goodwill impairment test as of August 31, 2006 and determined that no impairment existed as of this date. Old National recorded $46.5 million of goodwill associated with the acquisition of St. Joseph Capital Corporation during the first quarter of 2007.

The gross carrying amount and accumulated amortization of other intangible assets at March 31, 2007 and December 31, 2006 was as follows:

		Gross Carrying				Accumulated				Net Carrying
(dollars in thousands)		Amount				Amortization				Amount
March 31, 2007
Amortized intangible assets:
Core deposit		$	15,623			$	(4,831	)		$	10,792
Customer business relationships			25,553				(6,161	)			19,392
Customer loan relationships			4,416				(67	)			4,349
Total intangible assets		$	45,592			$	(11,059	)		$	34,533
December 31, 2006
Amortized intangible assets:
Core deposit		$	5,574			$	(4,615	)		$	959
Customer business relationships			25,553				(5,699	)			19,854
Total intangible assets		$	31,127			$	(10,314	)		$	20,813

Other intangible assets consist primarily of core deposit intangibles and customer relationship intangibles and are being 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. Old National recorded $14.5 million of other intangibles associated with the acquisition of St. Joseph Capital Corporation during the first quarter of 2007. Total amortization expense associated with other intangible assets for the three months ended March 31 was $0.7 million in 2007 and $0.6 million in 2006.

Estimated amortization expense for the future years is as follows:

(dollars in thousands)
2007 remaining		$	2,568
2008			3,298
2009			3,174
2010			3,026
2011			2,919
Thereafter			19,548
Total		$	34,533

NOTE 10 – ASSETS HELD FOR SALE

In March, 2007, Old National committed to a plan to sell eighty-four bank branch properties to an unrelated party for $198.7 million and to lease them back pursuant to individual ten, fifteen, and twenty-three year triple-net leases. The letter of intent will be executed in May 2007, and the transaction is expected to close during the third quarter. These assets are reported as held for sale at historical cost of $68.0 million. The $130.7 million gain will be deferred and amortized over the terms of the individual leases.

Also included in assets held for sale were four branch buildings associated with locations that were closed and consolidated into more profitable financial centers during the quarter.

The carrying amounts of the classes of assets included as held for sale were as follows at March 31, 2007:

(dollars in thousands)
Assets held for sale:
Land		$	21,637
Building and improvements			101,284
Total			122,921
Accumulated depreciation			(52,599	)
Assets held for sale — net		$	70,322

NOTE 11 — FINANCING ACTIVITIES

The following table summarizes Old National’s other borrowings at March 31, 2007, and December 31, 2006:

		March 31,				December 31,
(dollars in thousands)		2007				2006
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 rates 6.27% to 8.00% and variable rate 8.40%) maturing April 2032 to March 2035			108,000				100,000
SFAS 133 fair value hedge and other basis adjustments			(3,902	)			(4,549	)
Old National Bank:
Securities sold under agreements to repurchase			—				74,000
Federal Home Loan Bank advances (fixed rates 4.84% to 8.34%) maturing May 2008 to January 2023			129,430				219,493
Senior unsecured bank notes (fixed rate 3.95%) maturing February 2008			50,000				50,000
Subordinated bank notes (fixed rate 6.75%) maturing October 2011			150,000				150,000
Capital lease obligation			4,453				4,461
SFAS 133 fair value hedge and other basis adjustments			(5,508	)			(5,860	)
Total other borrowings		$	592,473			$	747,545

Contractual maturities of other borrowings at March 31, 2007, were as follows:

(dollars in thousands)
Due in 2007		$	10,026
Due in 2008			153,037
Due in 2009			2,040
Due in 2010			75,043
Due in 2011			150,046
Thereafter			211,691
SFAS 133 fair value hedge and other basis adjustments			(9,410	)
Total		$	592,473

FEDERAL HOME LOAN BANK
Federal Home Loan Bank advances had weighted-average rates of 5.20% and 5.37% at March 31, 2007, and December 31, 2006, 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, subject to certain limitations, 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.

During February 2007, Old National acquired St. Joseph Capital Trust I and St. Joseph Capital Trust II in conjunction with its acquisition of St. Joseph Capital Corporation. Old National guarantees the payment of distributions on the trust preferred securities issued by St. Joseph Capital Trust I and St. Joseph Capital Trust II. St. Joseph Capital Trust I issued $3.0 million in preferred securities in July 2003. The preferred securities carry a variable rate of interest priced at the three-month LIBOR plus 305 basis points, payable quarterly and maturing on July 11, 2033. Proceeds from the issuance of these securities were used to purchase junior subordinated debentures with the same financial terms as the securities issued by St. Joseph Capital Trust I. St. Joseph Capital Trust II issued $5.0 million in preferred securities in March 2005. The preferred securities have a cumulative annual distribution rate of 6.27% until March 2010 when it will carry a variable rate of interest priced at the three-month LIBOR plus 175 basis points, payable quarterly and maturing on March 17, 2035. Proceeds from the issuance of these securities were used to purchase junior subordinated debentures with the same financial terms as the securities issued by St. Joseph 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 September 30, 2008 (for debentures owned by St. Joseph Capital Trust I) and on or after March 31, 2010 (for debentures owned by St. Joseph Capital Trust II), and in whole (but not in part) following the occurrence and continuance of certain adverse federal income tax or capital treatment events.

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 March 31, 2007, the future minimum lease payments under the capital lease were as follows:

(dollars in thousands)
2007 remaining		$	278
2008			371
2009			390
2010			390
2011			390
Thereafter			12,094
Total minimum lease payments			13,913
Less amounts representing interest			9,460
Present value of net minimum lease payments		$	4,453

NOTE 12 — EMPLOYEE BENEFIT PLANS

RETIREMENT PLAN
Old National maintains a funded noncontributory defined benefit plan (the “Retirement Plan”) that was frozen as of December 31, 2005. Retirement benefits are based on years of service and compensation during the highest paid five years of employment. The freezing of the plan provides that future salary increases will not be considered. Old National’s policy is to contribute at least the minimum funding requirement determined by the plan’s actuary.

Old National also maintains an unfunded pension restoration plan (the “Restoration Plan”) which provides benefits for eligible employees that are in excess of the limits under Section 415 of the Internal Revenue Code of 1986, as amended, that apply to the Retirement Plan. The Restoration Plan is designed to comply with the requirements of ERISA. The entire cost of the plan, which was also frozen as of December 31, 2005, is supported by contributions from the Corporation.

Old National does not expect to contribute any cash to these pension plans in 2007, except $0.7 million to cover future benefit payments from the Restoration Plan.

The net periodic benefit cost and its components were as follows for the three months ended March 31:

		Three Months Ended
		March 31,
(dollars in thousands)		2007				2006
Service cost		$	—			$	—
Interest cost			593				708
Expected return on plan assets			(822	)			(860	)
Amortization of prior service cost			—				—
Recognized actuarial loss			219				299
Settlement			300				360
Net periodic benefit cost		$	290			$	507

NOTE 13 — 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 March 31, 2007, 6.5 million shares were outstanding under the plan, including 5.9 million stock options and 0.6 million shares of restricted stock, 0.5 million shares have been exercised or released, and 0.6 million shares were available for issuance. In addition, Old National assumed 0.1 million stock options outstanding through various mergers.

Stock Options
Old National recorded $0.1 million of stock based compensation expense, net of tax, during the first three months of 2007 as compared to $0.1 million for the first three months of 2006. The Company granted 218,100 stock options during 2007 and substituted 47,604 St. Joseph stock options for Old National stock options in connection with its acquisition of St. Joseph. Using the Black-Scholes option pricing model, the Company estimated the fair value of the stock options granted during 2007 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 15.3%; a risk free interest rate of 4.85%; an expected option term of six years; a 4.23% dividend yield; and a forfeiture rate of 7%. These options expire in ten years.

Restricted Stock
Old National recorded expense of $0.1 million, net of tax benefit, during the first three months of 2007, compared to expense of $0.4 million during the first three months of 2006 related to the vesting of restricted share awards. Included in the first three months of 2007 is the reversal of $0.7 million of expense associated with certain performance-based restricted stock grants.

The Company granted 122 thousand shares of performance based restricted stock awards to certain key officers during 2007, with shares vesting at the end of a thirty-six month period based on the achievement of certain targets. In addition, the Company granted 50 thousand time-based restricted stock awards to certain key officers during 2007, with shares vesting at the end of a thirty-six month period. Compensation expense is recognized on a straight-line basis over the vesting period. Shares are subject to certain restrictions and risk of forfeiture by the participants. As of March 31, 2007, unrecognized compensation expense was estimated to be $7.1 million for unvested restricted share awards.

NOTE 14 — INCOME TAXES

The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), on January 1, 2007 and, as the cumulative effect of applying its provisions, recognized a $3.4 million reduction to the balance of retained earnings on that date with a corresponding decrease in deferred tax assets which are reported as other assets on the balance sheet. The amount of unrecognized tax benefits as of January 1, 2007 totaled $10.3 million, all of which, if recognized, would affect the effective tax rate. Unrecognized state income tax benefits are reported net of their related deferred federal income tax benefit.

It is the Company’s policy to recognize interest and penalties accrued relative to unrecognized tax benefits in their respective federal or state income tax accounts. As of January 1, 2007, $2.7 million in interest, and no penalties, had been accrued on the Company’s balance sheet .

The Company and its subsidiaries file a consolidated U.S. federal income tax return, as well as filing various state returns. The company is currently under audit by the Internal Revenue Service for the years 2003 and 2004. The federal statute of limitations has been extended on 2002 as a part of this audit and remains open currently. It is likely that the examination phase of this audit will conclude in 2007. It is possible that a reduction in unrecognized tax benefits will occur upon completion of the audit, however, the amount of any possible reduction can not be estimated at this time.

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 months ended March 31:

		Three Months Ended
		March 31,
(dollars in thousands)		2007				2006
Provision at statutory rate of 35%		$	3,878			$	8,827
Tax-exempt income			(3,516	)			(4,129	)
Other, net			(71	)			(146	)
Income tax expense		$	291			$	4,552
Effective tax rate			2.6	%			18.0	%

For the three months ended March 31, 2007, the effective tax rate on income from continuing operations was lower than for the three months ended March 31, 2006. The lower effective tax rate resulted from a higher percentage of tax-exempt income to income before income taxes compared to the three months ended March 31, 2006.

NOTE 15 — 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:

		March 31, 2007												December 31, 2006
		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		$	384,888			$	—			$	(7,271	)		$	724,609			$	—			$	(20,430	)
Forward mortgage loan contracts			18,800				—				(6	)			16,266				43				—
Stand Alone Derivatives
Receive fixed interest rate swaps			16,620				—				(55	)			—				—				—
Interest rate lock commitments			21,826				40				—				17,750				7				—
Forward mortgage loan contracts			20,365				7				—				17,682				22				—
Matched Customer Hedges
Customer interest rate swaps			434,798				4,992				(1,284	)			417,132				4,269				(1,866	)
Counterparty interest rate swaps			434,798				1,284				(4,992	)			417,132				1,866				(4,269	)
Customer interest rate cap & collars			4,164				18				(7	)			5,459				20				(11	)
Counterparty interest rate cap & collars			4,164				7				(18	)			5,459				11				(20	)
Customer commodity swaps			13,426				176				(106	)			13,426				587				—
Counterparty commodity swaps			13,426				106				(176	)			13,426				—				(587	)
Total		$	1,367,275			$	6,630			$	(13,915	)		$	1,648,341			$	6,825			$	(27,183	)

As of December 31, 2006, Old National had receive-fixed interest rate swaps on certain of its retail certificates of deposit and subordinated debt. Certain of these derivative instruments, having a notional amount of $323.1 million, were terminated in the first quarter of 2007 and a notional amount of $16.6 million were dedesignated and included as stand-alone derivatives on March 1, 2007.

Old National enters into certain matched customer hedges to accommodate the business needs of its customers. Upon the origination of a customer hedge, Old National simultaneously enters into an offsetting contract with a third party to mitigate its exposure.

NOTE 16 — COMMITMENTS AND CONTINGENCIES

LITIGATION
In the normal course of business, various legal actions and proceedings, which are being vigorously defended, are pending against Old National and its affiliates. Management does not believe any of these claims will have a material impact on Old National’s results of operations.

CREDIT-RELATED FINANCIAL INSTRUMENTS
In the normal course of business, Old National’s banking affiliates have entered into various agreements to extend credit, including loan commitments of $1.244 billion, commercial letters of credit of $75 thousand and standby letters of credit of $122.9 million at March 31, 2007. At December 31, 2006, loan commitments were $1.165 billion, commercial letters of credit were $40 thousand and standby letters of credit were $121.7 million. These commitments are not reflected in the consolidated financial statements. Management believes the reserve for unfunded commitments is adequate as of March 31, 2007.

At March 31, 2007 and December 31, 2006, Old National had credit extensions of $69.4 million and $75.4 million, respectively, with various unaffiliated banks related to letter of credit commitments issued on behalf of Old National’s clients. At March 31, 2007 and December 31, 2006, Old National provided collateral to the unaffiliated banks to secure credit extensions totaling $51.1 million and $54.5 million, respectively. Old National did not provide collateral for the remaining credit extensions.

NOTE 17 — FINANCIAL GUARANTEES

Old National holds instruments, in the normal course of business with clients, that are considered financial guarantees in accordance with FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which requires the Company to record the instruments at fair value. Standby letters of credit guarantees are issued in connection with agreements made by clients to counterparties. Standby letters of credit are contingent upon failure of the client to perform the terms of the underlying contract. Credit risk associated with standby letters of credit is essentially the same as that associated with extending loans to clients and is subject to normal credit policies. The term of these standby letters of credit is typically one year or less. At March 31, 2007, the notional amount of standby letters of credit was $122.9 million, which represents the maximum amount of future funding requirements, and the carrying value was $0.4 million.

NOTE 18 — SEGMENT INFORMATION

Old National operates in two operating segments: community banking and treasury. The community banking segment serves customers in both urban and rural markets providing a wide range of financial services including commercial, real estate and consumer loans; lease financing; checking, savings, time deposits and other depository accounts; cash management services; and debit cards and other electronically accessed banking services and Internet banking. Treasury manages investments, wholesale funding, interest rate risk, liquidity and leverage for Old National. Additionally, treasury provides other miscellaneous capital markets products for its corporate banking clients.

In order to measure performance for each segment, Old National allocates capital, corporate overhead and income tax provision to each segment. Capital and corporate overhead are allocated to each segment using various methodologies, which are subject to periodic changes by management. Income taxes are allocated using the effective tax rate. Intersegment sales and transfers are not significant.

Old National uses a funds transfer pricing (“FTP”) system to eliminate the effect of interest rate risk from net interest income in the community banking segment and from companies included in the “other” column. The FTP system is used to credit or charge each segment for the funds the segments create or use. The net FTP credit or charge is reflected in segment net interest income.

The financial information for each operating segment is reported on the basis used internally by Old National’s management to evaluate performance and is not necessarily comparable with similar information for any other financial institution. Summarized financial information concerning segments is shown in the following table for the three months ended March 31:

		Community
(dollars in thousands)		Banking				Treasury				Other				Total
Three months ended March 31, 2007
Net interest income		$	55,066			$	(2,637	)		$	(627	)		$	51,802
Provision for loan losses			1,979				466				—				2,445
Noninterest income			17,417				(1,953	)			18,059				33,523
Noninterest expense			54,101				342				17,356				71,799
Income (loss) before income taxes			16,403				(5,398	)			76				11,081
Income tax expense (benefit)			3,000				(2,731	)			22				291
Segment profit (loss)			13,403				(2,667	)			54				10,790
Total assets			5,152,032				3,052,898				126,714				8,331,644
Three months ended March 31, 2006
Net interest income		$	61,923			$	(4,713	)		$	(2,871	)		$	54,339
Provision for loan losses			3,298				202				—				3,500
Noninterest income			17,446				3,483				21,940				42,869
Noninterest expense			50,559				607				17,321				68,487
Income (loss) before income taxes			25,512				(2,039	)			1,748				25,221
Income tax expense (benefit)			6,579				(2,585	)			558				4,552
Segment profit (loss)			18,933				546				1,190				20,669
Total assets			5,005,827				3,031,667				207,427				8,244,921