Old National Bank - 10-Q quarterly report FY

 

(Exact name of Registrant as specified in its charter)

(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.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes oNo 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 67,113,000 shares outstanding at April 30, 2006.

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

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

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

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

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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 March 31, 2006 and 2005, and December 31, 2005, and the results of its operations for the three months ended March 31, 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.

SFAS No. 156 -In March 2006, the Financial Accounting Standards Board issued Statement No. 156,Accounting for Servicing of Financial Assets-an amendment of FASB Statement No. 140. This Statement requires that an entity recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a service contract under certain situations. The new standard is effective for fiscal years beginning after September 15, 2006. Management does not expect the adoption of this statement to have a material impact on its consolidated financial position or results of operations.

SFAS No. 155 -In February 2006, the Financial Accounting Standards Board issued Statement No. 155,Accounting for Certain Hybrid Financial Instruments-an amendment to FASB Statements No. 133 and 140. This Statement permits fair value remeasurement for any hybrid financial instrument, clarifies which instruments are subject to the requirements, establishes a requirement to evaluate interest in securitized financial assets and other items. The new standard is effective for financial assets acquired or issued after the beginning of the entity’s first fiscal year that begins after September 15, 2006. Management does not expect the adoption of this statement to have a material impact on its consolidated financial position or results of operations.

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.

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 three months ended March 31, 2005 because their inclusion would have been anti-dilutive. The following table reconciles basic and diluted net income per share for the three months ended March 31:

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 and the corresponding amounts of unrealized gains and losses therein:

At March 31, 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.

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, 2006 and 2005, Old

National had residential loans held for sale of $22.0 million and $31.7 million, respectively. As of March 31, 2006 and 2005, ineffectiveness related to the hedge of a portion of the residential loans held for sale was immaterial.

Activity in the allowance for loan losses was as follows:

The following is a summary of information pertaining to impaired loans at March 31:

For the three months ended March 31, 2006, the average balance of impaired loans was $38.9 million for which no interest was recorded. For the three months ended March 31, 2005, the average balance of impaired loans was $44.7 million for which no interest 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.

At March 31, 2006 and 2005, Old National had goodwill in the amount of $113.4 million and $101.0 million, respectively. During the first quarter of 2005, Old National reclassified the assets and liabilities of specific non-strategic companies as held for sale, including $26.1 million of goodwill. Concurrent with this classification, these discontinued operations were evaluated for impairment using estimated fair values in the current market, resulting in goodwill impairment of $2.9 million. In the third quarter of 2005, Old National sold these assets classified as held for sale.

The change in the carrying amount of goodwill by segment for the three months ended March 31 was as follows:

At March 31, 2006 and 2005, Old National had $22.4 million and $16.5 million, respectively, in unamortized intangible assets. During the quarter ended March 31, 2005, Old National reclassified definite-lived intangible

assets of $18.9 million and indefinite-lived assets of $2.8 million to assets held for sale and discontinued the related amortization. In the third quarter of 2005, Old National sold these assets classified as held for sale. Old National continues to amortize definite-lived intangible assets in continuing operations over the estimated remaining life of each respective asset.

The following table shows the gross carrying amounts and accumulated amortization for other intangible assets as of March 31:

Total amortization expense associated with other intangible assets for the three months ended March 31 was $0.6 million in 2006 and $0.7 million in 2005.

The following is the estimated amortization expense for the future years ending:

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 March 31, 2005 is summarized below:

Mortgage servicing rights from loans sold with servicing retained were $15.1 million at March 31, 2005. Loans serviced for others were not included in the consolidated balance sheet of Old National. The unpaid principal balance of mortgage loans serviced for others at March 31, 2005 was $1.949 billion, and the fair value of capitalized mortgage servicing rights was $20.4 million. Old National’s key economic assumptions used in determining the fair value of mortgage servicing rights were a weighted average prepayment rate of 13.9% and a discount rate of 9.1% at March 31, 2005.

The following table summarizes Old National’s other borrowings at March 31:

Contractual maturities of other borrowings at March 31, 2006, were as follows:

Federal Home Loan Bank advances had weighted-average rates of 5.32% and 5.71% at March 31, 2006 and 2005, respectively. These borrowings are collateralized by investment securities and residential real estate loans up to 145% of outstanding debt.

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 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.

In March 2000, ONB Capital Trust I issued $50 million in preferred securities guaranteed by Old National. 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 I. In May 2005, Old National redeemed the $50 million of junior subordinated debentures issued in March 2000, thereby causing a redemption of all of the ONB Capital Trust, 9.5% trust preferred securities. In connection with the redemption, Old National expensed the remaining $1.7 million of unamortized debt issuance costs related to this debt.

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 borrowings rate for similar types of borrowing arrangements.

At March 31, 2006, the future minimum lease payments under the capital lease were as follows:

The following table sets forth the components of the net periodic benefit cost for Old National’s noncontributory defined benefit retirement plan for the three months ended March 31:

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 $0.6 million to fund its pension plans in 2006.

Under the 1999 Equity Incentive Plan, Old National is authorized to grant up to 7.6 million shares of common stock. At March 31, 2006, 6.5 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 period ended March 31, 2005.

Included in Old National’s stock based compensation during the first quarter of 2006 is the cost related to the unvested stock options granted during the first quarter of 2006. Stock options granted prior to fiscal 2006 were fully vested as of the beginning of 2006. The fair value of the stock options granted during the first quarter of 2006 was estimated at $0.6 million on the date of grant using the Black-Scholes option pricing model. The assumptions used in the option pricing model were an expected volatility of 19.5%; a risk free interest rate of 4.7%; an expected option term of ten years,a 3.6% dividend yield, and a forfeiture rate of 0%. The expense recognized during the three months ended March 31, 2006, related to the vesting of these awards was $14 thousand, net of an income tax benefit of $7 thousand. The remaining $0.6 million of the estimated value will be expensed ratably over the three year vesting period. These options expire in ten years. There were no stock options granted in 2005.

Stock option activity under the 1999 Equity Incentive Plan for the period ended March 31, 2006 is summarized as follows:

At March 31, 2006, 5,895 stock options were outstanding with a weighted average exercise price of $20.94, an aggregate intrinsic value of $4.1 million, and a weighted average remaining term of 6.2 years. Of the stock options outstanding, 5,753 were exercisable at March 31, 2006 with a weighted average exercise price of $20.92, an aggregate intrinsic value of $4.1 million, and a weighted average remaining term of 6.1 years. The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of our

common stock as of the reporting date. No shares vested during the period ended March 31, 2006 and the intrinsic value of options exercised was $28 thousand.

During the first quarter of 2006, Old National’s Board of Directors approved performance based restricted stock awards to grant 132 thousand shares to certain key officers with shares vesting at the end of a thirty-six month period based on the achievement of certain targets. In addition, the Board of Directors approved time-based restricted stock awards to grant 58 thousand shares to certain key officers 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.

Restricted stock activity under the 1999 Equity Incentive Plan for the period ended March 31, 2006 is summarized as follows:

Expense recognized during the first quarter of 2006 related to the vesting of all restricted stock awards was $0.4 million, net of an income tax benefit of $0.2 million. The remaining $7.2 million of deferred compensation is included as a component of capital surplus.

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:

For the three months ended March 31, 2006, the effective tax rate on income from continuing operations was higher than for the three months ended March 31, 2005. The increased effective tax rate resulted from a lower percentage of tax-exempt income to total income compared to the three months ended March 31, 2005.

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 at March 31:

Old National has receive-fixed interest rate swaps on certain of its brokered certificates of deposit and junior subordinated debt which were included with stand-alone hedges as of December 31, 2005. Certain of these derivative instruments, having a notional amount of $162.8 million, were terminated during the quarter with the remainder re-designated as fair value hedges on January 24, 2006.

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.

In the normal course of business, Old National’s banking affiliates have entered into various agreements to extend credit, including loan commitments of $1.361 billion, commercial letters of credit of $132 thousand and standby letters of credit of $152.2 million at March 31, 2006. At March 31, 2005, loan commitments were $1.235 billion, commercial letters of credit were $6.4 million and standby letters of credit were $136.7 million. These commitments are not reflected in the consolidated financial statements. Management believes the reserve for unfunded commitments is adequate as of March 31, 2006.

At March 31, 2006 and 2005, Old National had credit extensions of $90.8 million and $93.4 million, respectively, with various unaffiliated banks related to letter of credit commitments issued on behalf of Old National’s clients. At March 31, 2006 and 2005, Old National provided collateral to the unaffiliated banks to secure credit extensions totaling $54.9 million and $62.7 million, respectively. Old National did not provide collateral for the remaining credit extensions.

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, 2006, the notional amount of standby letters of credit was $152.2 million, which represents the maximum amount of future funding requirements, and the carrying value was $0.5 million.

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. Beginning January 1, 2005, Old National disaggregated internal reporting for its non-bank operations, including wealth management, investment consulting, insurance, brokerage and investment and annuity sales. These lines of business are now included in the “Other” column for all periods reported.

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. Tax-exempt income is primarily within the treasury segment, creating a tax benefit for this segment. 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:

PART I.   FINANCIAL INFORMATION

The following discussion is an analysis of Old National’s results of operations for the three months ended March 31, 2006 and 2005, and financial condition as of March 31, 2006, compared to March 31, 2005, and December 31, 2005. This discussion and analysis should be read in conjunction with Old National’s consolidated financial statements and related notes. This discussion contains forward-looking statements concerning Old National’s business that are based on estimates and involves certain risks and uncertainties. Therefore, future results could differ significantly from management’s current expectations and the related forward-looking statements.

Old National continues to focus on its key strategic initiatives: (1) strengthen the risk profile; (2) enhance management discipline; and (3) achieve consistent quality earnings.

Old National’s asset quality steadily improves. Non-performing loans at March 31, 2006, were $51.4 million compared to $55.2 million at March 31, 2005. Criticized and classified loans were $221.4 million at March 31, 2006, compared to $311.6 million at March 31, 2005.

In following its disciplined approach to capital allocation, Old National exited the O’Fallon, Illinois market during the first quarter of 2006, recording a pre-tax gain of $3.0 million on the sale of this financial center which was included in income from continuing operations. The sale of the O’Fallon financial center furthered the Company’s efforts begun in 2005 to realign the balance sheet and position the Company for growth.

The key to the Company’s success in 2006 will be loan and deposit growth along with increased non-interest revenue. Five areas of heightened focus include: (1) improving net interest margin, (2) optimizing non-interest revenue, including deposit service charges, (3) continually improving support and core business processes, (4) product innovation, and (5) developing a cohesive small business strategy.

Old National reported net income of $20.7 million for the three months ended March 31, 2006, an increase of $6.1 million, or 41.8% from the $14.6 million recorded for the three months ended March 31, 2005. On a diluted per share basis, net income was $0.31 for the three months ended March 31, 2006, compared to $0.21 for the three months ended March 31, 2005. Included in net income during the first quarter of 2005 is $3.8 million of expense associated with the restatement of financial statements due to an error in the Company’s interpretation of SFAS No. 133 resulting in the disallowance of hedge accounting treatment for certain derivatives and a loss from discontinued operations of $1.0 million, net of tax. See Old National’s Form 8-K filed January 31, 2006, for additional information related to the restatement.

Calculated based on income from continuing operations, Old National’s return on average assets for the first quarter of 2006 was 1.00% and return on shareholders’ equity was 12.68%, compared to 0.71% and 8.83%, respectively, for the three months ended March 31, 2005. Calculated based on net income, Old National’s return on average assets for the first quarter of 2006 was 1.00% and return on shareholders’ equity was 12.68%, compared to 0.66% and 8.27%, respectively, for the three months ended March 31, 2005.

The following table sets forth certain income statement information of Old National for the three months ended March 31, 2006 and 2005:

Net interest income is Old National’s most significant component of earnings, comprising over 55% of revenues at March 31, 2006. Net interest income and margin are influenced by many factors, primarily the volume and mix of earning assets, funding sources and interest rate fluctuations. Other factors include prepayment risk on mortgage and investment-related assets and the composition and maturity of earning assets and interest-bearing liabilities. Loans typically generate more interest income than investment securities with similar maturities. Funding from client deposits generally cost less than wholesale funding sources. Factors, such as general economic activity, Federal Reserve Board monetary policy and price volatility of competing alternative investments, can also exert significant influence on Old National’s ability to optimize its mix of assets and funding and its net interest income and margin.

Net interest income and net interest margin in the following discussion are presented on a fully taxable equivalent basis, which adjusts tax-exempt or nontaxable interest income to an amount that would be comparable to interest subject to income taxes using the federal statutory tax rate of 35% in effect for all periods. Net income is unaffected by these taxable equivalent adjustments as the offsetting increase of the same amount is made to income tax expense. Net interest income includes taxable equivalent adjustments of $5.1 million and $5.6 million for the three months ended March 31, 2006 and 2005, respectively.

Taxable equivalent net interest income was $59.5 million for the three months ended March 31, 2006, down from the $60.8 million reported for the three months ended March 31, 2005. The reduction in net interest income is primarily a result of the lower average earning assets. The net interest margin was 3.18% for the three months ended March 31, 2006, compared to 3.05% reported for the three months ended March 31, 2005. The increase in net interest margin is primarily due to the disallowance of hedge accounting treatment for certain derivatives in the fourth quarter of 2005 along with the increase in the net interest spread combined with the change in the mix of interest earning assets and interest-bearing liabilities.

Average earning assets were $7.488 billion for the three months ended March 31, 2006, compared to $7.961 billion for the three months ended March 31, 2005, a decrease of 5.9%, or $472.4 million. Significantly affecting average earning assets at March 31, 2006 compared to March 31, 2005, was Management’s decision to reduce the investment portfolio and the sale of $142.1 million of loans associated with the divestitures of the Clarksville, Tennessee and O’Fallon, Illinois financial centers. In addition, Old National experienced a large amount of line pay-downs in the fourth quarter of 2005 and sold $26.7 million of nonaccrual and substandard commercial and commercial real estate loans during the quarter ended June 30, 2005. Year over year, loans, which have an average yield higher than the investment portfolio, have increased as a percent of interest earning assets while the investment portfolio has decreased as a percent of interest earning assets.

Also affecting margin were decreases in borrowed funding due to the early termination of a high cost, $50 million Federal Home Loan Bank advance in December of 2005, the exercise of a call option on $20 million of high cost brokerage certificates of deposit and the maturity of a $25 million federal home loan bank advance in the first quarter of 2006. Year over year, deposits, which have an average interest rate lower than borrowed funds, have increased as a percent of interest-bearing liabilities as short-term and long-term borrowings have decreased as a percent of interest-bearing liabilities.

The provision for loan losses was $3.5 million for the three months ended March 31, 2006, compared to $5.1 million for the three months ended March 31, 2005. The lower provision in 2006 is attributable to a decrease in nonaccrual loans and the improvement in total criticized and classified loans over the past twelve months and enhanced credit administration and underwriting functions that began in 2004. Refer to “Allowance for Loan Losses and Asset Quality” section for further discussion of non-performing loans, charge-offs and additional items impacting the provision.

Old National generates revenues in the form of noninterest income through client fees and sales commissions from its core banking franchise and other related businesses, such as wealth management, investment products and insurance. Noninterest income for the three months ended March 31, 2006, was $42.9 million, an increase of $9.6 million, or 28.9% from the $33.3 million reported for the three months ended March 31, 2005. The increase is primarily due to the $3.0 million gain from the sale of the O’Fallon, Illinois financial center and a $4.5 million fluctuation in the market value of derivatives resulting from the restatement of financial statements in 2005 due to an error in the Company’s interpretation of SFAS No. 133 resulting in the disallowance of hedge accounting treatment for certain derivatives. See Old National’s Form 8-K filed January 31, 2006, for additional information related to the restatement.

Also increasing noninterest income were insurance premiums and commissions which increased to $11.0 million for the three months ended March 31, 2006, compared to $9.1 million for the three months ended March 31, 2005. This increase is primarily a result of the acquisition of J.W.F. Insurance Companies in the second quarter of 2005.

Partially offsetting these increases were service charges on deposit accounts which decreased to $9.9 million for the three months ended March 31, 2006, compared to $11.1 million for the three months ended March 31, 2005, primarily as the result of a decrease in the volume of overdraft service charges and the sale of the Clarksville, Tennessee and O’Fallon, Illinois financial centers.

Noninterest expense for the three months ended March 31, 2006, totaled $68.5 million, an increase of $2.1 million or 3.2%, from the $66.4 million recorded for the three months ended March 31, 2005.

Salaries and benefits is the largest component of noninterest expense. For the three months ended March 31, 2006, salaries and benefits were $41.3 million compared to $39.0 million for the three months ended March 31, 2005. The increase in salaries and benefits from 2006 is primarily a result of the personnel expense associated with the acquisition of J.W.F. Insurance Companies. Also included in the three months ended March 31, 2006, were severance costs of $1.0 million relating to senior executives and mortgage employees.

Marketing expense totaled $2.3 million for the three months ended March 31, 2006, compared to $1.9 million for the three months ended March 31, 2005. The increase in marketing expense was primarily attributable to expenses incurred in connection with the “Unbeatable Checking” advertising campaign.

Old National records a provision for income taxes currently payable and for income taxes payable or benefits to be received in the future, which arise due to timing differences in the recognition of certain items for financial statement and income tax purposes. The major difference between the effective tax rate applied to Old National’s financial statement income and the federal statutory tax rate is caused by interest on tax-exempt securities and loans. The provision for income taxes on continuing operations, as a percentage of pre-tax income, was 18.0% for the three

Old National’s assets at March 31, 2006, were $8.245 billion, a 6.2% decrease compared to March 31, 2005 assets of $8.793 billion, and an annualized decrease of 11.6% compared to December 31, 2005 assets of $8.492 billion. Federal funds sold decreased $6.9 million since March 31, 2005, and decreased $120.8 million since December 31, 2005. Investments decreased $364.0 million since March 31, 2005, and increased $57.2 million since December 31, 2005. Loans decreased $130.8 million since March 31, 2005, and decreased $84.3 million since December 31, 2005. Total liabilities decreased $522.9 million compared to March 31, 2005, primarily from a reduction in borrowings, and decreased $239.6 million since December 31, 2005, primarily from a reduction in interest-bearing deposits. Total shareholders’ equity decreased $25.2 million from March 31, 2005, and decreased $7.5 million from December 31, 2005. The decrease in shareholders’ equity from March 31, 2005 is primarily attributable to the $45.5 million in stock repurchases between March 31, 2005 and December 31, 2005, fluctuations in the market value of investment securities in the amount of $15.3 million, and the issuance of $18.5 million in stock for the acquisition of J. W. F. Insurance Companies. At March 31, 2006, accumulated other comprehensive income, of which the largest component is unrealized gains (losses) on securities, was a net loss of $27.6 million compared to a net loss of $17.5 million at March 31, 2005.

Old National’s earning assets are comprised of loans and loans held for sale, investment securities and money market investments. Earning assets were $7.435 billion at March 31, 2006, a decrease of 6.5% from March 31, 2005, and an annualized decrease of 9.2% since December 31, 2005. Much of the decrease is attributable to decreases in investment securities as Old National has reduced its investment portfolio in response to the flattening of the yield curve and the desire to reduce its sensitivity to rising interest rates. At March 31, 2006, total loans, including loans held for sale, decreased $140.6 million compared to March 31, 2005, and decreased $106.2 million compared to December 31, 2005. In the fourth quarter of 2005, the Clarksville, Tennessee financial centers were sold, which included $114.3 million of loans. In the first quarter of 2006, the O’Fallon, Illinois financial center was sold, which included $27.9 million of loans.

Old National classifies investment securities primarily as available-for-sale to give management the flexibility to sell the securities prior to maturity if needed, based on fluctuating interest rates or changes in the Company’s funding requirements. At March 31, 2006, Old National does not believe any individual unrealized loss on available-for-sale securities represents other-than-temporary impairment. The unrealized losses are primarily attributable to changes in interest rates. Old National has both the intent and ability to hold the securities for a time necessary to recover the amortized cost.

At March 31, 2006, the investment securities portfolio was $2.573 billion compared to $2.938 billion at March 31, 2005, a decrease of $364.0 million or 12.4%. Investment securities increased $57.2 million at March 31, 2006, compared to December 31, 2005, an annualized increase of 9.1%. Investment securities represented 34.6% of earning assets at March 31, 2006, compared to 37.0% at March 31, 2005, and 33.1% at December 31, 2005. Old National has reduced the size of the investment portfolio during the past twelve months to reduce its sensitivity to rising interest rates.

The investment securities available-for-sale portfolio had net unrealized losses of $45.4 million at March 31, 2006, an increase of $15.4 million compared to net unrealized losses of $30.0 million at March 31, 2005, and an increase of $10.3 million compared to net unrealized losses of $35.0 million at December 31, 2005. These changes were primarily the result of higher market interest rates and the change in the portfolio of securities available-for-sale at March 31, 2006.

The investment portfolio had an average duration of 3.43 years at March 31, 2006, compared to 3.80 years at March 31, 2005, and 3.42 years at December 31, 2005. The average yields on investment securities, on a taxable

equivalent basis, were 4.93% for the three months ended March 31, 2006, compared to 4.46% for the three months ended March 31, 2005, and 4.79% for the three months ended December 31, 2005.

Residential loans held for sale were $22.0 million at March 31, 2006, compared to $31.7 million at March 31, 2005, and compared to $43.8 million at December 31, 2005. Residential loans held for sale are loans that are closed, but not yet purchased by investors. The decrease in residential loans held for sale is primarily attributable to the bulk sale of approximately $12.1 million of loans during the first quarter of 2006. The amount of residential loans held for sale on the balance sheet can vary depending on the timing of originations and loan sales to the secondary market. Prior to September 30, 2005, these loans were sold with loan servicing retained. In the fourth quarter of 2005, in an effort to reduce the overall volatility in the Company’s earnings stream, Old National started selling loans with servicing released.

Old National has implemented certain credit approval disciplines in order to continue to focus on the reduction of problem and non-performing loans in the portfolio, including a restructuring of the manner in which commercial loans are analyzed and approved. Community-based lending personnel, along with region-based independent underwriting and analytic support staff, extend credit under guidelines established and administered by Old National’s Risk and Credit Policy Committee. This committee, which meets quarterly, includes members from both the holding company and the bank, as well as outside directors. The committee monitors credit quality through its review of information such as delinquencies, problem loans and charge-offs and reviews and approves recommended loan policy changes to assure it remains appropriate for the current lending environment.

Old National lends primarily to small- and medium-sized commercial and commercial real estate clients in various industries including manufacturing, agribusiness, transportation, mining, wholesaling and retailing. As measured by Old National at March 31, 2006, the Company had no concentration of loans in any single industry exceeding 10% of its total loan portfolio and had no exposure to foreign borrowers or lesser-developed countries. Four measured industry categories, Lessors of Residential Buildings and Dwellings, Lessors of Nonresidential Buildings, Crop Farming and Durable Goods Wholesale Trade did exceed internal guidelines which set out recommended maximum limits of loan commitments as a percent of capital. Old National’s policy is to concentrate its lending activity in the geographic market areas it serves, primarily Indiana, Illinois and Kentucky. Old National continues to be affected by weakness in the economy of its principal markets, particularly in its home state of Indiana.

Commercial and consumer loans are the largest classification within the earning assets of Old National representing 57.8% of earning assets at March 31, 2006, an increase from 55.1% at March 31, 2005, and an increase from 57.2% at December 31, 2005. At March 31, 2006, commercial and commercial real estate loans were $3.050 billion, a decrease of $112.4 million since March 31, 2005, and a decrease of $38.0 million since December 31, 2005. These changes include commercial and commercial real estate loan sales of $26.7 million during the three months ended June 30, 2005. In the fourth quarter of 2005, the Clarksville, Tennessee financial centers were sold, which included $105.7 million of commercial and consumer loans. In the first quarter of 2006, the O’Fallon, Illinois financial center was sold, which included $27.7 million of commercial and consumer loans.

At March 31, 2006, consumer loans, including automobile loans, personal and home equity loans and lines of credit, and student loans, increased $27.4 million or 2.2% compared to March 31, 2005, and decreased $14.7 million or, annualized, 4.7% since December 31, 2005.

Residential real estate loans, primarily 1-4 family properties, have decreased in significance to the loan portfolio over the past five years due to higher levels of loan sales into the secondary market, primarily to Federal Home Loan Mortgage Corporation and other private investors. Old National sells the majority of residential real estate loans originated as a strategy to better manage interest rate risk and liquidity. Old National sells almost all residential real estate loans without recourse.

At March 31, 2006, residential real estate loans were $512.3 million, a decrease of $45.9 million or 8.2% from March 31, 2005. The sale of the Clarksville, Tennessee financial centers in the fourth quarter of 2005 included $8.5

million of residential real estate loans while the sale of the O’Fallon, Illinois financial center during the first quarter of 2006 included $0.2 million of residential real estate loans.

Old National monitors the quality of its loan portfolio on an on-going basis and uses a combination of detailed credit assessments by relationship managers and credit officers, historic loss trends, and economic and business environment factors in determining its allowance for loan losses. Old National records provisions for loan losses based on current loans outstanding, loan risk grades, mix of loans and expected losses. A detailed loan loss evaluation on an individual loan basis for the Company’s highest risk loans is performed quarterly. Management follows the progress of the economy and how it might affect Old National’s borrowers in both the near and the intermediate term. Old National has a formalized and disciplined independent loan review program to evaluate loan administration, credit quality and compliance with corporate loan standards. This program includes periodic reviews conducted at selected bank locations as well as regular reviews of problem loan reports, delinquencies and charge-offs.

Each month, problem loan reports are prepared and reviewed, which include borrowers that show indications of being unable to meet debt obligations in the normal course of business, and loans which have other characteristics deemed by bank management to warrant special attention or have been criticized by regulators in the examination process. Classified loans include non-performing loans, past due 90 days or more and other loans deemed to have well-defined weaknesses while criticized loans, also known as special mention loans, are loans that are deemed to have potential weaknesses that deserve management’s close attention and also require specific monthly reviews by the bank.

Assets determined by the various evaluation processes to be under-performing are closely monitored by Old National management. Under-performing assets consist of: 1) nonaccrual loans where the ultimate collectibility of interest or principal is uncertain; 2) loans renegotiated in some manner, primarily to provide for a reduction or deferral of interest or principal payments because the borrower’s financial condition deteriorated; 3) loans with principal or interest past due ninety (90) days or more; and 4) foreclosed properties.

A loan is generally placed on nonaccrual status when principal or interest become 90 days past due unless it is well secured and in the process of collection, or earlier when concern exists as to the ultimate collectibility of principal or interest. When loans are classified as nonaccrual, interest accrued during the current year is reversed against earnings; interest accrued in the prior year, if any, is charged to the allowance for loan losses. Cash received while a loan is classified as nonaccrual is recorded to principal.

Adjustments to the allowance for loan losses are made as deemed necessary for probable losses inherent in the portfolio. While an estimate of probable losses is, by its very nature, difficult to precisely predict, management of Old National believes the methodology that it uses in determining an appropriate reserve for probable losses is reasonable. Old National monitors differences between estimated and actual loan losses. This process includes quarterly assessments by senior management of the loan portfolio and the models used to estimate losses in the portfolio.

Loan officers and credit underwriters jointly grade the larger commercial and commercial real estate loans in the portfolio periodically as determined by loan policy requirements or determined by specific guidelines based on loan characteristics as set by management and banking regulation. Periodically, these loan grades are reviewed independently by the loan review department. For impaired loans, an assessment is conducted as to whether there is likely loss in the event of default. If such a loss is determined to be likely, the loss is quantified and a specific reserve is assigned to the loan. For the balance of the commercial and commercial real estate loan portfolio, loan grade migration analysis coupled with historic loss experience within the respective grades is used to develop reserve requirement ranges.

A loan is considered impaired under SFAS No. 114, “Accounting by Creditors for Impairment of a Loan, an amendment of FASB Statement No. 5 and 15” when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. An impaired loan does not include larger groups of smaller-balance homogeneous loans that are collectively evaluated for impairment, loans that are measured at fair value or at the lower of cost or fair value, leases and debt securities.

Old National uses migration analysis as a tool to determine the adequacy of the allowance for loan losses for non-retail loans that are not impaired. Migration analysis is a statistical technique that attempts to estimate probable losses for existing pools of loans based on the historic loss experience of the subject pools. The migration-derived historical commercial loan loss rates are applied to the current commercial loan pools to arrive at an estimate of probable losses for the loans existing at the time of analysis.

Old National calculates migration analysis using several different scenarios based on varying assumptions to evaluate the widest range of possible outcomes. The amounts determined by migration analysis are adjusted for management’s best estimate of the effects of current economic conditions, loan quality trends, results from internal and external review examinations, loan volume trends, credit concentrations and various other factors. Historic loss ratios adjusted for expectations of future economic conditions are used in determining the appropriate level of reserves for consumer and residential real estate loans.

At March 31, 2006, the allowance for loan losses was $76.8 million, a decrease of $9.5 million compared to $86.3 million at March 31, 2005, and a decrease of $2.0 million compared to $78.8 million at December 31, 2005. As a percentage of total loans, including loans held for sale, the allowance decreased to 1.59% at March 31, 2006, from 1.74% at March 31, 2005, and decreased from 1.60% at December 31, 2005. For the three months ended March 31, 2006, the provision for loan losses amounted to $3.5 million, a decrease of $1.6 million from the three months ended March 31, 2005. Reductions in nonperforming loans during 2005 and the first three months of 2006 were significant factors in the decrease of the allowance for loan losses. Other factors include reductions in criticized and classified loans during the periods due in part from the sales of $26.7 million in substandard commercial real estate loans during 2005. Changes to separate the loan production functions from the underwriting functions and significant strengthening of the commercial underwriting processes including the elevation of the Credit Policy Committee to a board level committee to improve credit quality were contributing factors to the reduction in criticized and classified loans during the period.

In accordance with generally accepted accounting principles, the amount of the allowance for unfunded loan commitments is classified as a liability account on the balance sheet during 2006 and 2005. The allowance for unfunded loan commitments was unchanged during the first three months of 2006.

Charge-offs, net of recoveries, totaled $5.5 million for the three months ended March 31, 2006, an increase of $1.0 million from the three months ended March 31, 2005. Net charge-offs to average loans were 0.46% for the three months ended March 31, 2006, as compared to 0.37% for the three months ended March 31, 2005.

Under-performing assets totaled $55.1 million at March 31, 2006, a decrease of $6.9 million compared to $62.0 million at March 31, 2005, and a decrease of $5.9 million compared to $61.0 million at December 31, 2005. As a percent of total loans and foreclosed properties, under-performing assets at March 31, 2006, were 1.14%, a reduction from the March 31, 2005, ratio of 1.25% and the December 31, 2005 ratio of 1.24%. Nonaccrual loans were $51.4 million at March 31, 2006, compared to $55.2 million at March 31, 2005, and $55.6 million at December 31, 2005. Management will continue its efforts to reduce the level of under-performing loans and may consider the possibility of additional sales of troubled and non-performing loans, which could result in additional write-downs to the allowance for loan losses.

Total classified and criticized loans were $221.4 million at March 31, 2006, a decrease of $90.2 million from March 31, 2005, and an increase of $1.5 million from December 31, 2005.

Management believes it has taken a prudent approach to the evaluation of under-performing, criticized and classified loans, and the loan portfolio in general both in acknowledging the portfolio’s general condition and in establishing the allowance for loan losses. Old National has been affected by weakness in the economy of its markets, which has resulted in minimal growth of commercial loans and tighter credit underwriting standards. Management expects that trends in under-performing, criticized and classified loans will be influenced by the degree to which the economy strengthens. Old National operates in the Midwest, primarily in the state of Indiana, which has been particularly negatively affected by the weakness in the manufacturing segment of the economy. The longer this softness in manufacturing continues the more stress it puts on Old National’s borrowers, increasing the potential for additional nonaccrual loans and loan losses.

The table below shows the various components of under-performing assets:

Goodwill and other intangible assets at March 31, 2006, totaled $135.8 million, an increase of $18.3 million compared to $117.5 million at March 31, 2005, and a decrease of $0.5 million compared to $136.3 million at December 31, 2005. The increase from March 31, 2005 is primarily the result of $20.4 million in goodwill and intangible assets related to the May 1, 2005 acquisition of J.W.F. Insurance Companies.

Total funding, comprised of deposits and wholesale borrowings, was $7.473 billion at March 31, 2006, a decrease of 6.8% from $8.015 billion at March 31, 2005, and an annualized decrease of 13.0% from $7.723 billion at December 31, 2005. Included in total funding were deposits of $6.218 billion at March 31, 2006, a decrease of $151.8 million, or 2.4% compared to March 31, 2005, and an annualized decrease of 15.3% compared to December 31, 2005. Included in the decrease in deposits are the assignment of $172.7 million of deposits associated with the divestiture of the Clarksville, Tennessee financial centers in the fourth quarter of 2005 and $22.2 million of deposits associated with the divestiture of the O’Fallon, Illinois financial center in the first quarter of 2006. During the first quarter of 2006, Old National experienced a decrease of approximately $126.3 million in public funds deposits, which are generally among the most expensive sources of funding. Year over year, Old National experienced a shift from NOW deposits into money market deposits due to the rising interest rate environment.

Old National uses wholesale funding to augment deposit funding and to help maintain its desired interest rate risk position. At March 31, 2006, wholesale borrowings, including short-term borrowings and other borrowings, decreased 23.7% and 0.8%, annualized, from March 31, 2005, and December 31, 2005, respectively. Wholesale borrowings as a percentage of total funding was 16.8% at March 31, 2006, compared to 20.5% at March 31, 2005, and 16.3% at December 31, 2005. The lower level of earning assets and a planned reduction of the investment portfolio during 2005 reduced the Company’s reliance on wholesale funding.

Shareholders’ equity totaled $642.3 million at March 31, 2006, compared to $667.6 million at March 31, 2005, and $649.9 million at December 31, 2005.

Old National paid cash dividends of $0.21 per share for the three months ended March 31, 2006, which decreased equity by $14.1 million, compared to cash dividends of $0.19 per share for the three months ended March

31, 2005, which decreased equity by $13.0 million. Old National purchased shares of its stock in the open market under an ongoing repurchase program, reducing shareholders’ equity by $9.5 million during the three months ended March 31, 2006, and $18.4 million during the three months ended March 31, 2005. Between March 31, 2005 and December 31, 2005, Old National reduced shareholders’ equity by purchasing $45.5 million of its stock in the open market. The change in unrealized losses on investment securities decreased equity by $6.1 million during the three months ended March 31, 2006, and decreased equity by $23.8 million during the three months ended March 31, 2005. Shares issued for stock options, restricted stock and stock purchase plans increased shareholders’ equity by $1.3 million during the three months ended March 31, 2006, compared to $2.1 million during the three months ended March 31, 2005.

Old National filed an S-3 Registration Statement with the Securities and Exchange Commission for the purpose of amending the Old National Bancorp Stock Purchase and Dividend Reinvestment Plan, which became effective on January 6, 2005. The plan has two main purposes. First, the plan allows investors and shareholders a convenient, low-cost way to buy shares and reinvest cash dividends in additional shares of Old National common stock. Secondly, the plan gives Old National the ability to raise capital by selling newly issued shares of common stock. A key feature is the ability for Old National to sell newly issued shares at a discount from the market price. Common stock totaling 3.5 million shares can be issued under this plan.

Old National and the banking industry are subject to various regulatory capital requirements administered by the federal banking agencies. Old National’s consolidated capital position remains strong as evidenced by the following comparisons of key industry ratios.

Old National’s critical accounting policies involving the more significant judgments, estimates and assumptions used in the preparation of the consolidated financial statements as of March 31, 2006 remain unchanged from December 31, 2005. These policies relate to the accounting for the allowance for loan losses, goodwill and other intangible assets, and derivative financial instruments. Disclosure on these critical accounting policies is incorporated by reference under Item 7-“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

The following is a cautionary note about forward-looking statements. In its oral and written communications, Old National from time to time includes forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements can include statements about estimated cost savings, plans and objectives for future operations, and expectations about performance as well as economic and market conditions and trends. These statements often can be identified by the use of words like “expect,” “may,” “could,” “intend,” “project,” “estimate,” “believe” or “anticipate.” Old National may include forward-looking statements in filings with the Securities and Exchange Commission, such as this Form 10-Q, in other written materials and in oral statements made by senior management to analysts, investors, representatives of the media and others. It is intended that these forward-looking statements speak only as of the date they are made, and Old National undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the forward-looking statement is made or to reflect the occurrence of unanticipated events. By their nature, forward-looking statements are based on assumptions and are subject to risks, uncertainties and other factors. Actual results may differ materially from those contained in the forward-looking statement. Uncertainties which could affect Old National’s future performance include, but are not limited to: (1) economic, market, operational, liquidity, credit and interest rate risks associated with Old National’s business; (2) economic conditions generally and in the financial services industry; (3) increased competition in the financial services industry either nationally or regionally, resulting in, among other things, credit quality deterioration; (4) volatility and direction of market interest rates; (5) governmental legislation and regulation, including changes in accounting regulation or

standards; (6) the ability of Old National to execute its business plan; (7) a weakening of the economy which could materially impact credit quality trends and the ability to generate loans; (8) changes in the securities markets; and (9) changes in fiscal, monetary and tax policies. Investors should consider these risks, uncertainties and other factors in addition to those mentioned by Old National in this and its other filings from time to time when considering any forward-looking statement.

Inherent in Old National’s balance sheet is market risk, defined as the sensitivity of income, fair market values and capital to changes in interest rates, foreign currency exchange rates, commodity prices and other relevant market rates or prices. The primary market risk to which Old National has exposure is interest rate risk. Interest rate risk arises because assets and liabilities may reprice, mature or prepay at different times or based upon different market instruments as market interest rates change. Changes in the slope of the yield curve and the pace of interest rate changes may also impact net interest income and the fair value of the balance sheet.

Old National manages interest rate risk within an overall asset and liability management framework that includes attention to credit risk, liquidity risk and capitalization. A principal objective of asset/liability management is to manage the sensitivity of net interest income to changing interest rates. Asset and liability management activity is governed by a policy reviewed and approved annually by the Board of Directors. The Board of Directors has delegated the administration of this policy to the Funds Management Committee, a committee of the Board of Directors, and the Executive Balance Sheet Management Committee, a committee comprised of senior executive management. The Funds Management Committee meets quarterly and oversees adherence to policy and recommends policy changes to the Board. The Executive Balance Sheet Management Committee meets quarterly. This committee determines balance sheet management strategies and initiatives for the Company. A group comprised of corporate and line management meets monthly to implement strategies and initiatives determined by the Executive Balance Sheet Management Committee.

Old National uses two modeling techniques to quantify the impact of changing interest rates on the Company, Net Interest Income at Risk and Economic Value of Equity. Net Interest Income at Risk is used by management and the Board of Directors to evaluate the impact of changing rates over a two-year horizon. Economic Value of Equity is used to evaluate long-term interest rate risk. These models simulate the likely behavior of the Company’s net interest income and the likely change in the Company’s economic value due to changes in interest rates under various possible interest rate scenarios. Because the models are driven by expected behavior in various interest rate scenarios and many factors besides market interest rates affect the Company’s net interest income and value, Old National recognizes that model outputs are not guarantees of actual results. For this reason, Old National models many different combinations of interest rates and balance sheet assumptions to best understand its overall sensitivity to market interest rate changes.

Old National’s Board of Directors, through its Funds Management Committee, monitors the Company’s interest rate risk. Policy guidelines, in addition to March 31, 2006 and 2005 results, are as follows: