UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d)
Of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2006

Commission File Number 1-15817

OLD NATIONAL BANCORP

(Exact name of the Registrant as specified in its charter)

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

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

Securities registered pursuant to Section 12(b) of the Act

Title of Each Class		Name of each exchange on which registered
Common Stock, No Par Value
Preferred Stock Purchase Rights		New York Stock Exchange
8% Trust Preferred Securities of ONB Capital Trust II
(and Registrant’s guaranty with respect thereto)		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the Registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act). Yes þ No o

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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

The aggregate market value of the Registrant’s voting common stock held by non-affiliates on June 30, 2006, was $1,279,336,071 (based on the closing price on that date of $19.97). In calculating the market value of securities held by non-affiliates of the Registrant, the Registrant has treated as securities held by affiliates as of June 30, 2006, voting stock owned of record by its directors and principal executive officers, and voting stock held by the Registrant’s trust department in a fiduciary capacity for benefit of its directors and principal executive officers. This calculation does not reflect a determination that persons are affiliates for any other purposes.

The number of shares outstanding of the Registrant’s common stock, as of January 31, 2007, was 66,503,000.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held May 17, 2007, are incorporated by reference into Part III of this Form 10-K.

 

 

OLD NATIONAL BANCORP
2006 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS

		PAGE
PART I
Item 1. Business			4
Item 1A. Risk Factors			8
Item 1B. Unresolved Staff Comments			12
Item 2. Properties			12
Item 3. Legal Proceedings			12
Item 4. Submission of Matters to a Vote of Security Holders			12
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			13
Item 6. Selected Financial Data			15
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			36
Item 8. Financial Statements and Supplementary Data			36
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			78
Item 9A. Controls and Procedures			78
Item 9B. Other Information			78
PART III
Item 10. Directors and Executive Officers of the Registrant			79
Item 11. Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related			79
Item 12. Stockholder Matters			79
Item 13. Certain Relationships and Related Transactions			79
Item 14. Principal Accounting Fees and Services			79
PART IV
Item 15. Exhibits and Financial Statement Schedules			80
SIGNATURES			84
Form of 2007 "Performance-Based" Restricted Stock Award Agreement
Form of 2007 "Service-Based" Restriced Stock Award Agreement
Form of 2007 Non-qualified Stock Option Agreement
Purchase and Sale Agreement
Lease Agreement - ONB One Main Landlord, LLC
Lease Agreement - ONB 123 Main Landlord, LLC
Lease Agreement - ONB 4th Street Landlord, LLC
Subsidiaries
Consent of PricewaterhouseCoopers LLP
Consent of Crowe Chizek and Company LLC
Certification of Principal Executive Officer Purusant to Section 302
Certification of Principal Financial Officer Purusant to Section 302
Certification of Principal Executive Officer Purusant to Section 906
Certification of Principal Financial Officer Purusant to Section 906

OLD NATIONAL BANCORP
2006 ANNUAL REPORT ON FORM 10-K

FORWARD-LOOKING STATEMENTS

The following is a cautionary note about forward-looking statements. In its oral and written communications, Old National Bancorp (“Old National” or “the Company”) 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-K, 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 any forward-looking statement. Uncertainties which could affect Old National’s future performance include those that are discussed in Item 1A, “Risk Factors”. 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.

PART I

ITEM 1. BUSINESS

GENERAL

Old National is a financial holding company incorporated in the State of Indiana and maintains its principal executive office in Evansville, Indiana. Old National, through its wholly owned banking subsidiary, provides a wide range of services, including commercial and consumer loan and depository services, investment and brokerage services, lease financing and other traditional banking services. Through its non-bank affiliates, Old National provides services to supplement the banking business including fiduciary and wealth management services, insurance and other financial services. As of December 31, 2006, Old National employed 2,568 full-time equivalent associates.

COMPANY PROFILE

Old National Bank, Old National Bancorp’s wholly owned banking subsidiary, was founded in 1834 and is the oldest company in Evansville, Indiana. In 1982, Old National Bancorp was formed, in 2001 became a financial holding company and is currently the largest financial holding company headquartered in the state of Indiana. Also in 2001, Old National completed the consolidation of 21 bank charters enabling Old National to operate under a common name with consistent product offerings throughout the financial center locations, consolidating back-office operations and allowing Old National to provide more convenient service to clients. Old National provides financial services primarily in Indiana, eastern and southeastern Illinois, and central and western Kentucky.

OPERATING SEGMENTS

Old National operates in two segments: community banking and treasury. A description of each segment follows.

Community Banking Segment

The community banking segment, operating under the name of Old National Bank, has traditionally been the most significant contributor to Old National. The primary goal of the community banking segment is to provide products and services that address clients’ needs and help clients reach their financial goals by providing a broad array of quality services. Old National’s financial centers focus on convenience factors such as location, space for private consultations and quick client access to routine transactions.

As of December 31, 2006, Old National Bank operated 120 banking financial centers located primarily in Indiana, Illinois, and Kentucky. The community banking segment primarily consists of lending and depository activities along with merchant cash management, internet banking and other services relating to the general banking business. In addition, the community banking segment includes the Indiana Old National Insurance Company (“IONIC”) and Central Life Insurance Company, which reinsure credit life insurance. IONIC also provides property and casualty insurance for Old National and reinsures most of the coverage with non-affiliated carriers.

Lending Activities

Old National earns interest income on loans as well as fee income from the origination of loans. Lending activities include loans to individuals which primarily consist of home equity lines of credit, residential real estate loans and consumer loans, and loans to commercial clients, which include commercial loans, commercial real estate loans, letters of credit and lease financing. Typically, residential real estate loans are sold to secondary investors, with gains or losses from the sales being recognized.

Depository Activities

Old National strives to serve individuals and commercial clients by providing depository services that fit their needs at competitive rates. Old National pays interest on the interest-bearing deposits and receives service fee revenue on various accounts. Deposit accounts include products such as noninterest-bearing demand, NOW, savings and money market, and time deposits. Debit and ATM cards provide access to the clients’ accounts 24 hours a day at any ATM location. Old National also provides 24-hour telephone access and online banking as well as other electronic banking services.

Investment and Brokerage Services

Old National, through a registered third party broker-dealer, provides clients with convenient and professional investment services and a variety of brokerage products. This line of business offers a full array of investment options and investment advice to its clients.

Treasury Segment

Treasury manages investments, wholesale funding, interest rate risk, liquidity and leverage for Old National. Treasury also provides capital markets products, including interest rate derivatives, foreign exchange and industrial revenue bond financing for Old National’s commercial clients.

Other

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

Wealth Management

Fiduciary and trust services targeted at high net worth individuals are offered through an affiliate trust company under the business name of Old National Trust Company. Signal Capital Management, Inc., an affiliate of Old National Trust Company, provides fee-based asset management and manages mutual funds.

Insurance Agency Services

Through its insurance agency subsidiaries, Old National offers full-service insurance brokerage services including commercial property and casualty, surety, loss control services, employee benefits consulting and administration, and personal insurance. These subsidiaries are insurance agencies that offer products that are issued and underwritten by various insurance companies not affiliated with Old National.

Substantially all of the Company’s revenues are derived from customers located in, and substantially all of its assets are located in, the United States.

Additional information about Old National’s business segments is included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 22 to the consolidated financial statements.

MARKET AREA

Old National Bancorp owns the largest Indiana-based bank and one of the largest independent insurance agencies headquartered in Indiana. Operating from a home base in Evansville, Indiana, the company has continued to grow its footprint in Indiana and Kentucky with continued expansion in the attractive Louisville, Indianapolis and Lafayette markets. In February 2007, Old National expanded into Northern Indiana by acquiring St. Joseph Capital Corporation, which had banking offices in Mishawaka and Elkhart, Indiana.

The following table reflects the market locations where Old National has a significant share of the deposit market.

Old National Deposit Market Share and Number of Branch Locations
Deposits as of June 30, 2006

		Number of				Deposit Market
Market Location		Branches				Share Rank
Evansville, Indiana			15			1st
Muncie, Indiana			7			3rd
Bloomington, Indiana			4			3rd
Terre Haute, Indiana			6			2nd
Danville, Illinois			3			1st
Mishawaka, Indiana *			1			2nd

Source: FDIC

*

The Mishawaka branch as of June 30, 2006 was owned and operated by St. Joseph Capital Bank, which Old National acquired in February 2007.

ACQUISITION AND DIVESTITURE STRATEGY

Since the formation of Old National Bancorp in 1982, Old National has acquired more than 40 financial institutions and financial services companies. Acquisitions and divestitures will be driven by a disciplined financial process and will be consistent with the existing focus on community banking, client relationships and consistent quality earnings. Targeted geographic markets for acquisitions include mid-size markets within or near Old National’s existing franchise with average to above average growth rates.

As with previous acquisitions, the consideration paid by Old National will be in the form of cash, debt or Old National Bancorp stock. The amount and structure of such consideration is based on reasonable growth and cost savings assumptions and a thorough analysis of the impact on both long- and short-term financial results.

COMPETITION

The banking industry and related financial service providers operate in a highly competitive market. Old National competes with financial service providers such as local, regional and national banking institutions, savings and loan associations, credit unions, finance companies, investment brokers, and mortgage banking companies. In addition, Old National’s non-bank services face competition with asset managers and advisory services, money market and mutual fund companies and insurance agencies.

SUPERVISION AND REGULATION

Old National is registered as a bank holding company and has elected to be a financial holding company. It is subject to the supervision of, and regulation by, the Board of Governors of the Federal Reserve System (“Federal Reserve”) under the Bank Holding Company Act of 1956, as amended (“BHC Act”). The Federal Reserve has issued regulations under the BHC Act requiring a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. It is the policy of the Federal Reserve that, pursuant to this requirement, a bank holding company should stand ready to use its resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity.

The BHC Act requires the prior approval of the Federal Reserve to acquire more than a 5% voting interest of any bank or bank holding company. Additionally, the BHC Act restricts Old National’s non-banking activities to those which are determined by the Federal Reserve to be closely related to banking and a proper incident thereto.

On July 30, 2002, the Senate and the House of Representatives of the United States (“Congress”) enacted the Sarbanes-Oxley Act of 2002, a law that addresses, among other issues, corporate governance, auditing and accounting, executive compensation and enhanced and timely disclosures of corporate information. In response, the New York Stock Exchange also adopted new corporate governance rules that are intended to allow shareholders to more easily and efficiently monitor the performance of companies and directors.

Effective August 29, 2002, as directed by Section 302(a) of the Sarbanes-Oxley Act, Old National’s principal executive officer and principal financial officer are required to certify that Old National’s quarterly and annual reports do not contain any untrue statements of a material fact. The rules also require that these officers certify that they are responsible for establishing, maintaining and regularly evaluating the effectiveness of Old National’s internal controls; they have made certain disclosures to auditors and the Audit Committee of the Board of Directors about internal controls; and they have included information in Old National’s quarterly and annual reports about their evaluation and whether there have been significant changes in Old National’s internal controls or in other factors that could significantly affect internal controls subject to the evaluation. Old National filed the Section 302(a) certifications with the SEC and the Listed Company Manual Section 303A.12(a) CEO certification with the New York Stock Exchange for the prior year. Old National’s current year’s Sarbanes-Oxley Section 302 certification is filed as an exhibit to this Form 10-K.

On October 26, 2001, the USA Patriot Act of 2001 was signed into law. Enacted in response to the terrorist attacks in New York, Pennsylvania and Washington, D.C. on September 11, 2001, the Patriot Act is intended to strengthen U.S. law enforcement’s and the intelligence community’s ability to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Patriot Act on financial institutions of all kinds is significant and wide-ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and requires various regulations, including: (a) due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or correspondent accounts for non-U.S. persons; (b) standards for verifying customer

identification at account opening; (c) rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering; (d) reports by non-financial trades and businesses filed with the Treasury Department’s Financial Crimes Enforcement Network for transactions exceeding $10,000; and (e) filing of suspicious activities reports by brokers and dealers if they believe a customer may be violating U.S. laws and regulations.

Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), a bank holding company is required to guarantee the compliance of any insured depository institution subsidiary that may become “undercapitalized” (as defined in FDICIA) with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal bank regulatory agency.

Bank holding companies are required to comply with the Federal Reserve’s risk-based capital guidelines. The Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Comptroller of the Currency (“OCC”) have adopted risk-based capital ratio guidelines to which depository institutions under their respective supervision are subject. The guidelines establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations. Risk-based capital ratios are determined by allocating assets and specified off-balance sheet commitments to four risk-weighted categories, with higher levels of capital being required for the categories perceived as representing greater risk. Old National’s affiliate bank met all risk-based capital requirements of the FDIC and OCC as of December 31, 2006. For Old National’s regulatory capital ratios and regulatory requirements as of December 31, 2006, see Note 20 to the consolidated financial statements.

Old National’s affiliate bank is subject to the provisions of the National Bank Act, is supervised, regulated and examined by the OCC, and is subject to the rules and regulations of the OCC, Federal Reserve and the FDIC.

A substantial portion of Old National’s cash revenue is derived from dividends paid to it by its affiliate bank. These dividends are subject to various legal and regulatory restrictions as summarized in Note 20 to the consolidated financial statements.

Both federal and state law extensively regulate various aspects of the banking business, such as reserve requirements, truth-in-lending and truth-in-savings disclosures, equal credit opportunity, fair credit reporting, trading in securities and other aspects of banking operations. Branching by Old National’s affiliate bank is subject to the jurisdiction and requires notice to or the prior approval of the OCC.

Old National and its affiliate bank are subject to the Federal Reserve Act, which restricts financial transactions between banks and affiliated companies. The statute limits credit transactions between banks, affiliated companies and its executive officers and its affiliates. The statute prescribes terms and conditions for bank affiliate transactions deemed to be consistent with safe and sound banking practices, and restricts the types of collateral security permitted in connection with a bank’s extension of credit to an affiliate. Additionally, all transactions with an affiliate must be on terms substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions with nonaffiliated parties.

FDICIA accomplished a number of sweeping changes in the regulation of depository institutions, including Old National’s affiliate bank. FDICIA requires, among other things, federal bank regulatory authorities to take “prompt corrective action” with respect to banks which do not meet minimum capital requirements. FDICIA further directs that each federal banking agency prescribe standards for depository institutions and depository institution holding companies relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, management compensation, a maximum ratio of classified assets to capital, minimum earnings sufficient to absorb losses, a minimum ratio of market value to book value of publicly traded shares and such other standards as the agency deems appropriate.

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 allows for interstate banking and interstate branching without regard to whether such activity is permissible under state law. Bank holding companies may now acquire banks anywhere in the United States subject to certain state restrictions.

The Gramm-Leach-Bliley Act (“GLBA”) permits bank holding companies which have elected to become financial holding companies to engage in a substantially broader range of non-banking activities, including securities, investment advice and insurance activities, than is permissible for bank holding companies that have not elected to become financial holding companies. Old National has elected to be a financial holding company. As a result, Old National may underwrite and sell securities and insurance. It may acquire, or be acquired by, brokerage firms and insurance underwriters.

GLBA established new requirements for financial institutions to provide enhanced privacy protections to customers. In June of 2000, the Federal banking agencies jointly adopted a final regulation providing for the implementation of these protections. Financial institutions are required to provide notice to consumers which details its privacy policies and practices, describes under what conditions a financial institution may disclose nonpublic personal information about consumers to nonaffiliated third parties and provides an “opt-out” method which enables consumers to prevent the financial institution from disclosing customer information to nonaffiliated third parties. Financial institutions were required to be in compliance with the final regulation by July 1, 2001, and Old National was in compliance at such date and continues to be in compliance.

In addition to the matters discussed above, Old National’s affiliate bank is subject to additional regulation of its activities, including a variety of consumer protection regulations affecting its lending, deposit and collection activities and regulations affecting secondary mortgage market activities. The earnings of financial institutions are also affected by general economic conditions and prevailing interest rates, both domestic and foreign and by the monetary and fiscal policies of the United States government and its various agencies, particularly the Federal Reserve.

Additional legislative and administrative actions affecting the banking industry may be considered by Congress, state legislatures and various regulatory agencies, including those referred to above. It cannot be predicted with certainty whether such legislative or administrative action will be enacted or the extent to which the banking industry in general or Old National and its affiliate bank in particular would be affected.

AVAILABLE INFORMATION

All reports filed electronically by Old National Bancorp with the Securities and Exchange Commission (“SEC”), including the annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and information statements, other information and amendments to those reports filed (if applicable), are accessible at no cost on Old National’s web site at www.oldnational.com. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, and Old National’s filings are accessible on the SEC’s web site at www.sec.gov. The public may read and copy any materials filed by Old National with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

ITEM 1A. RISK FACTORS

Old National’s business could be harmed by any of the risks noted below. In analyzing whether to make or to continue an investment in Old National, investors should consider, among other factors, the following:

Risks Related to Old National’s Business

Old National operates in an extremely competitive market, and Old National’s business will suffer if Old National is unable to compete effectively.

In Old National’s market area, the Company encounters significant competition from other commercial banks, savings and loan associations, credit unions, mortgage banking firms, consumer finance companies securities brokerage firms, insurance companies, money market mutual funds and other financial intermediaries. The Company’s competitors may have substantially greater resources and lending limits than Old National does and may offer services that Old National does not or cannot provide. Old National’s profitability depends upon Old National’s continued ability to compete successfully in Old National’s market area.

We face risks with respect to future expansion.

We may acquire other financial institutions or parts of those institutions in the future and we may engage in de novo branch expansion. We may also consider and enter into new lines of business or offer new products or services. Acquisitions and mergers involve a number of expenses and risks, including:

     • the time and costs associated with identifying potential new markets, as well as acquisition and merger targets;

     • the estimates and judgments used to evaluate credit, operations, management and market risks with respect to the target institution may not be accurate;

     • the time and costs of evaluating new markets, hiring experienced local management and opening new offices, and the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion;

     • our ability to finance an acquisition and possible dilution to our existing shareholders;

     • the diversion of our management’s attention to the negotiation of a transaction, and the integration of the operations and personnel of the combined businesses;

     • entry into new markets where we lack experience;

     • the introduction of new products and services into our business;

     • the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on our results of operations; and

     • the risk of loss of key employees and customers.

We may incur substantial costs to expand, and we can give no assurance such expansion will result in the levels of profits we seek. There can be no assurance integration efforts for any future mergers or acquisitions will be successful. Also, we may issue equity securities in connection with future acquisitions, which could cause ownership and economic dilution to our current shareholders. There is no assurance that, following any future mergers or acquisitions, our integration efforts will be successful or that, after giving effect to the acquisition, we will achieve profits comparable to or better than our historical experience.

The loss of key members of Old National’s senior management team could adversely affect Old National’s business.

Old National believes that Old National’s success depends largely on the efforts and abilities of Old National’s senior management. Their experience and industry contacts significantly benefit Old National. The competition for qualified personnel in the financial services industry is intense, and the loss of any of Old National’s key personnel or an inability to continue to attract, retain and motivate key personnel could adversely affect Old National’s business.

Old National’s loan portfolio includes loans with a higher risk of loss.

The Bank originates commercial real estate loans, commercial loans, agricultural real estate loans, agricultural loans, consumer loans, and residential real estate loans primarily within Old National’s market areas. Commercial real estate, commercial, consumer, and agricultural loans may expose a lender to greater credit risk than loans secured by residential real estate because the collateral securing these loans may not be sold as easily as residential real estate. These loans also have greater credit risk than residential real estate for the following reasons:

     • Commercial Real Estate Loans. Repayment is dependent upon income being generated in amounts sufficient to cover operating expenses and debt service.

     • Commercial Loans. Repayment is dependent upon the successful operation of the borrower’s business.

     • Consumer Loans. Consumer loans (such as personal lines of credit) are collateralized, if at all, with assets that may not provide an adequate source of payment of the loan due to depreciation, damage, or loss.

     • Agricultural Loans. Repayment is dependent upon the successful operation of the business, which is greatly dependent on many things outside the control of either the Bank or the borrowers. These factors include weather, commodity prices, and interest rates.

If Old National’s actual loan losses exceed Old National’s allowance for loan losses, Old National’s net income will decrease.

Old National makes various assumptions and judgments about the collectibility of Old National’s loan portfolio, including the creditworthiness of Old National’s borrowers and the value of the real estate and other assets serving as collateral for the repayment of Old National’s loans. Despite Old National’s underwriting and monitoring practices, Old National’s borrowers may not repay their loans according to their terms, and the collateral securing the payment of these loans may be insufficient to pay any remaining loan balance. As a result, Old National may experience significant loan losses that could have a material adverse effect on Old National’s operating results. Since Old National must use assumptions regarding individual loans and the economy, Old National’s current allowance for loan losses may not be sufficient to cover actual loan losses. Old National may need to significantly increase Old National’s provision for losses on loans if one or more of Old National’s larger loans or credit relationships becomes delinquent or if Old National expands its commercial real estate and commercial lending. In addition, federal and state regulators periodically review Old National’s allowance for loan losses and may require Old National to increase the provision for loan losses or recognize loan charge-offs. Material additions to Old National’s allowance would materially decrease Old National’s net income. There can be no assurance that Old National’s monitoring procedures and policies will reduce certain lending risks or that Old National’s allowance for loan losses will be adequate to cover actual losses.

If Old National forecloses on collateral property, Old National may be subject to the increased costs associated with the ownership of real property, resulting in reduced revenues.

Old National may have to foreclose on collateral property to protect Old National’s investment and may thereafter own and operate such property, in which case Old National will be exposed to the risks inherent in the ownership of real estate. The amount that Old National, as a mortgagee, may realize after a default is dependent upon factors outside of Old National’s control, including, but not limited to: (i) general or local economic conditions; (ii) neighborhood values; (iii) interest rates; (iv) real estate tax rates; (v) operating expenses of the mortgaged properties; (vi) environmental remediation liabilities; (vii) ability to obtain and maintain adequate occupancy of the properties; (viii) zoning laws; (ix) governmental rules, regulations and fiscal policies; and (x) acts of God. Certain expenditures associated with the ownership of real estate, principally real estate taxes, insurance, and maintenance costs, may adversely affect the income from the real estate. Therefore, the cost of operating real property may exceed the income earned from such property, and Old National may have to advance funds in order to protect Old National’s investment, or Old National may be required to dispose of the real property at a loss. The foregoing expenditures and costs could adversely affect Old National’s ability to generate revenues, resulting in reduced levels of profitability.

A breach of information security or compliance breach by one of our agents or vendors could negatively affect Old National’s reputation and business.

Old National relies upon a variety of computing platforms and networks over the internet for the purposes of data processing, communication and information exchange. Despite the safeguards instituted by Old National, such systems are susceptible to a breach of security. In addition, Old National relies on the services of a variety of third-party vendors to meet Old National’s data processing and communication needs. If confidential information is compromised, financial losses, costs and/or other damages could occur. Such costs and/or losses could materially affect Old National’s earnings.

Fiduciary Activity Risk Factor

Old National Is Subject To Claims and Litigation Pertaining To Fiduciary Responsibility

From time to time, customers make claims and take legal action pertaining to Old National’s performance of its fiduciary responsibilities. If such claims and legal actions are not resolved in a manner favorable to Old National they may result in significant financial liability and/or adversely affect the market perception of Old National and its products and services as well as impact customer demand for those products and services. Any financial liability or reputation damage could have a material adverse effect on the Old National’s business, which, in turn, could have a material adverse effect on the Old National’s financial condition and results of operations.

Risks Related to the Banking Industry

Changes in economic and political conditions could adversely affect Old National’s earnings, as Old National’s borrowers’ ability to repay loans and the value of the collateral securing Old National’s loans decline.

Old National’s success depends, to a certain extent, upon economic and political conditions, local and national, as well as governmental monetary policies. Conditions such as inflation, recession, unemployment, changes in interest rates, money supply and other factors beyond Old National’s control may adversely affect its asset quality, deposit levels and loan demand and, therefore, the Old National’s earnings. Because Old National has a significant amount of real estate loans, decreases in real estate values could adversely affect the value of property used as collateral. Adverse changes in the economy may also have a negative effect on the ability of Old National’s borrowers to make timely repayments of their loans, which would have an adverse impact on Old National’s earnings. In addition, substantially all of Old National’s loans are to individuals and businesses in Old National’s market area. Consequently, any economic decline in Old National’s primary market areas which include Indiana, Kentucky and Illinois could have an adverse impact on Old National’s earnings.

Changes in interest rates could adversely affect Old National’s results of operations and financial condition.

Old National’s earnings depend substantially on Old National’s interest rate spread, which is the difference between (i) the rates Old National earns on loans, securities and other earning assets and (ii) the interest rates Old National pays on deposits and other borrowings. These rates are highly sensitive to many factors beyond Old National’s control, including general economic conditions and the policies of various governmental and regulatory authorities. If market interest rates rise, Old National will have competitive pressures to increase the rates Old National pays on deposits, which could result in a decrease of Old National’s net interest income.

Old National operates in a highly regulated environment, and changes in laws and regulations to which Old National is subject may adversely affect Old National’s results of operations.

Old National operates in a highly regulated environment and is subject to extensive regulation, supervision and examination by the Office of Comptroller of the Currency (“OCC”), the Federal Deposit Insurance Corporation (“FDIC”), the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and the State of Indiana. See “Business — Supervision and Regulation” herein. Applicable laws and regulations may change, and such changes may adversely affect Old National’s business. Such regulation and supervision of the activities in which an institution may engage is primarily intended for the protection of the depositors and federal deposit insurance funds. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including but not limited to the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution’s allowance for loan losses. Any change in such regulation and oversight, whether in the form of restrictions on activities, regulatory policy, regulations, or legislation, including but not limited to changes in the regulations governing institutions, could have a material impact on Old National and its operations.

Changes in technology could be costly.

The banking industry is undergoing technological innovation at a fast pace. To keep up with its competition, Old National needs to stay abreast of innovations and evaluate those technologies that will enable it to compete on a cost-effective basis. The cost of such technology, including personnel, can be high in both absolute and relative terms. There can be no assurance, given the fast pace of change and innovation, that Old National’s technology, either purchased or developed internally, will meet or continue to meet the needs of Old National.

Risks Related to Old National’s Stock

Old National’s charter documents and federal regulations may inhibit a takeover, prevent a transaction that may favor or otherwise limit Old National’s growth opportunities, which could cause the market price of Old National’s common stock to decline.

Certain provisions of Old National’s charter documents and federal regulations could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of Old National. In addition, Old National must obtain approval from regulatory authorities before acquiring control of any other company.

The price of Old National’s common stock may be volatile, which may result in losses for investors.

General market price declines or market volatility in the future could adversely affect the price of Old National’s common stock. The following factors may cause the market price for shares of Old National’s common stock to fluctuate:

	•		announcements of developments related to Old National’s business;
	•		fluctuations in Old National’s results of operations;
	•		sales or purchases of substantial amounts of Old National’s securities in the marketplace;
	•		general conditions in Old National’s banking niche or the worldwide economy;
	•		a shortfall or excess in revenues or earnings compared to securities analysts’ expectations;
	•		changes in analysts’ recommendations or projections; and
	•		Old National’s announcement of new acquisitions or other projects.

We may not be able to pay dividends in the future in accordance with past practice.

Old National has traditionally paid a quarterly dividend to stockholders. The payment of dividends is subject to legal and regulatory restrictions. Any payment of dividends in the future will depend, in large part, on Old National’s earnings, capital requirements, financial condition and other factors considered relevant by Old National’s Board of Directors.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

The executive offices of Old National are located at 1 Main Street, Evansville, Indiana. This building, which houses Old National’s general corporate functions, is leased from an unaffiliated third party landlord. The lease term expires December 31, 2031, and provides for the tenant’s option to extend the term of the lease for four five-year periods. In addition to the executive offices, three other office buildings are located in Evansville, Indiana, of which two are leased from unaffiliated third party landlords with similar terms to those of the executive office building lease and one is owned. The unaffiliated third party landlords bought these three Evansville buildings from the Company and its subsidiaries in December 2006. See Note 18 to the consolidated financial statements.

As of December 31, 2006, Old National and its affiliates operated a total of 120 banking centers, loan production or other financial services offices, primarily in the States of Indiana, Illinois and Kentucky. Of these facilities, 93 were owned and 27 were leased from unaffiliated third parties.

ITEM 3. LEGAL PROCEEDINGS

Old National has no material pending legal proceedings required to be disclosed under Item 3.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders of Old National during the fourth quarter of 2006.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Old National’s common stock is traded on the New York Stock Exchange (“NYSE”) under the ticker symbol ONB. The following table lists the high and low sales prices as reported by the NYSE, share volume and dividend data for 2006 and 2005:

		Price Per Share								Share			Dividend
		High			Low				Volume				Declared
2006
First Quarter		$	21.90			$	20.18				10,425,500			$	0.21
Second Quarter			21.38				18.79				13,102,200				0.21
Third Quarter			19.78				18.38				12,598,300				0.21
Fourth Quarter			19.45				18.27				10,703,400				0.21
2005
First Quarter		$	25.10			$	19.73				8,622,900			$	0.19
Second Quarter			21.73				18.55				7,248,100				0.19
Third Quarter			22.94				20.74				7,118,800				0.19
Fourth Quarter			23.24				19.50				8,543,800				0.19

There were 25,672 shareholders of record as of December 31, 2006. Old National declared cash dividends of $0.84 per share during the year ended December 31, 2006, and $0.76 per share during the year ended December 31, 2005. Old National’s ability to pay cash dividends depends primarily on cash dividends received from Old National Bank. Dividend payments from Old National Bank are subject to various regulatory restrictions. See Note 20 to the consolidated financial statements for additional information.

The following table summarizes the purchases of equity securities made by Old National during the fourth quarter of 2006:

										Total Number
										of Shares
		Total				Average				Purchased as				Maximum Number of
		Number				Price				Part of Publicly				Shares that May Yet
		of Shares				Paid Per				Announced Plans				Be Purchased Under
Period		Purchased				Share				or Programs				the Plans or Programs
10/01/06 - 10/31/06			—				—				—				4,554,821
11/01/06 - 11/30/06			—				—				—				4,554,821
12/01/06 - 12/31/06			—				—				—				4,554,821
Total			—				—				—				4,554,821

In December 2005, the Board of Directors approved the repurchase of up to 6.0 million shares of stock over a three-year period beginning January 1, 2006 and ending December 31, 2008. The Company repurchased 1.4 million shares during 2006, and although authorized, management does not currently intend to repurchase any additional shares in 2007.

EQUITY COMPENSATION PLAN INFORMATION

The following table contains information concerning the 1999 Equity Incentive Plan approved by security holders in 1999 as of December 31, 2006.

1999 EQUITY COMPENSATION PLAN

Number of securities to

Weighted-average

Number of securities

be issued upon exercise

exercise price of

remaining available for

of outstanding options,

outstanding options,

future issuance under

warrants and rights

warrants and rights

equity compensation plan

Plan Category

(a)

(b)

(c)

Equity compensation plans approved by security holders

5,747,181

$

20.99

725,117

Equity compensation plans not approved by security holders

—

—

—

Total

5,747,181

$

20.99

725,117

Old National has assumed a number of stock options through various mergers. The number of stock options outstanding related to acquisitions at December 31, 2006 was 24,944 with a weighted-average exercise price or $13.01.

The following table compares cumulative five-year total shareholder returns, assuming reinvestment of dividends, for the Company’s common stock to cumulative total returns of a broad-based equity market index and two published industry indices.

The comparison of shareholder returns (change in December year end stock price plus reinvested dividends) for each of the periods assumes that $100 was invested on December 31, 2001, in common stock of each of the Company, the Russell 2000 Index, the NYSE Financial Index and the SNL Bank and Thrift Index with investment weighted on the basis of market capitalization.

ITEM 6. SELECTED FINANCIAL DATA

																										Five-Year
(dollars in thousands,																										Growth
except per share data)		2006			2005				2004				2003				2002				2001				Rate
Results of Operations
Net interest income (1)		$	232,243			$	240,670			$	255,652			$	280,414			$	304,697			$	312,620				(5.8)	%
Fee and service charge income			147,902				147,836				149,162				140,512				122,972				108,197				6.5
Net securities gains (losses)			1,471				901				2,936				23,556				12,444				4,770				(21.0	)
Gain on branch divestitures			3,036				14,597				—				—				12,473				—				N/M
Gain (loss) on derivatives			1,511				(3,436	)			10,790				8,874				25,959				—				N/M
Loss on extinguishment of debt			(129	)			—				—				—				—				—				N/M
Total revenue (1)			386,034				400,568				418,540				453,356				478,545				425,587				(1.9	)
Provision for loan losses			7,000				23,100				22,400				85,000				33,500				28,700				(24.6	)
Salaries and other operating expenses			264,561				262,107				309,403				275,801				252,317				245,109				1.5
Merger and restructuring costs			—				—				—				—				—				9,703				N/M
Income taxes (1)			35,100				36,772				26,424				29,504				65,230				49,031				(6.5	)
Income from continuing operations			79,373				78,589				60,313				63,051				127,498				93,044				(3.1	)
Discontinued operations (after-tax)			—				(14,825	)			2,751				2,471				632				—				N/M
Net income		$	$79,373			$	$63,764			$	63,064			$	65,522			$	$128,130			$	$93,044				(3.1	)%
Per Share Data (2)
Income from continuing operations (diluted)		$	1.20			$	1.15			$	0.86			$	0.90			$	1.80			$	1.29				(1.4)	%
Net income (diluted)			1.20				0.93				0.90				0.93				1.81				1.29				(1.4	)
Cash dividends paid			0.84				0.76				0.72				0.69				0.63				0.56				8.4
Book value at year-end			9.66				9.61				10.16				10.31				10.67				9.03				1.4
Stock price at year-end			18.92				21.64				24.63				20.72				20.99				20.77				(1.8	)
Balance Sheet Data (at December 31)
Total assets		$	8,149,515			$	8,492,022			$	8,898,304			$	9,363,232			$	9,612,556			$	9,080,473				(2.1)	%
Loans (3)			4,716,637				4,937,631				4,987,326				5,586,455				5,769,635				6,132,854				(5.1	)
Deposits			6,321,494				6,465,636				6,418,709				6,494,839				6,436,935				6,616,440				(0.9	)
Other borrowings			747,545				954,925				1,306,953				1,613,942				1,220,171				1,083,046				(7.1	)
Shareholders’ equity			642,369				649,898				704,092				720,880				750,991				639,235				0.1
Performance Ratios
Return on average assets			0.97	%			0.74	%			0.69	%			0.69	%			1.38	%			1.05	%
Return on average shareholders’ equity			12.43				9.31				8.83				8.72				18.43				14.45
Dividend payout			70.02				81.06				79.72				73.82				34.28				43.13
Average equity to average assets			7.81				7.94				7.83				7.86				7.50				7.27
Net interest margin (1)			3.15				3.09				3.08				3.18				3.54				3.77
Efficiency ratio (noninterest expense/revenue) (1)			68.53				65.43				73.92				60.84				52.73				59.87
Net charge-offs to average loans (3)			0.37				0.60				0.61				1.21				0.34				0.45
Allowance for loan losses to ending loans (3)			1.44				1.60				1.72				1.70				1.52				1.21
Other Data
Number of full-time equivalent employees			2,568				2,572
Number of shareholders			25,672				26,446
Number of shares traded (in thousands) (2)			46,829				31,534

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is an analysis of Old National’s results of operations for the fiscal years ended December 31, 2006, 2005 and 2004, and financial condition as of December 31, 2006 and 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. Readers are cautioned that, by their nature, forward-looking statements are based on estimates and assumptions and are subject to risks, uncertainties, and other factors. Actual results may differ materially from the expectations of the Company that are expressed or implied by any forward-looking statement. The discussion in Item 1A, “Risk Factors,” lists some of the factors that could cause the Company’s actual results to vary materially from those expressed or implied by any forward-looking statements, and such discussion is incorporated into this discussion by reference.

GENERAL OVERVIEW

Old National Bancorp is a financial holding company incorporated in the State of Indiana and maintains its principal executive offices in Evansville, Indiana. Old National, through its wholly owned banking subsidiary, provides a wide range of services, including commercial and consumer loan and depository services, lease financing and other traditional banking services. Through its non-bank affiliates, Old National provides services to supplement the banking business including fiduciary and wealth management services, investment and brokerage services, investment consulting, insurance and other financial services.

The Company’s basic mission is to be THE community bank in the cities and towns it serves. The Company focuses on establishing and maintaining long-term relationships with customers, and is committed to serving the financial needs of the communities in its market area. Old National provides financial services primarily in Indiana, eastern and southeastern Illinois, and central and western Kentucky.

CORPORATE DEVELOPMENTS IN FISCAL 2006

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.

Credit quality trends remained favorable in 2006. Nonperforming loans decreased approximately $14 million during the year. Nonperforming loans were 0.88% of total loans at December 31, 2006, down from 1.13% at December 31, 2005. The allowance for loan losses equaled 163% of nonperforming loans at December 31, 2006 compared to 142% at December 31, 2005. Net charge-offs were 0.37% of average loans in 2006 compared to 0.60% in 2005.

The commercial and consumer loan portfolio declined 3.1% year-over-year due to the challenging midwest market environment and the Company’s desire to lower future potential credit risk. Commercial loans increased almost 5% year-over-year, but were offset by declines in commercial and residential real estate. Contributing to this decrease in 2006 was Old National’s sale of its financial center located in O’Fallon, Illinois, selling approximately $27.7 million of commercial and consumer loans and the Company’s bulk sale of primarily commercial real estate loans in the amount of $28.8 million. Core deposit growth was also challenged, decreasing slightly year-over-year. The sale of O’Fallon included the assignment of $22.2 million in deposits.

During the fourth quarter of 2006, Old National sold its three main office buildings in downtown Evansville, but plans to continue operating out of these offices under long-term operating leases. The sale of these non-earning assets has allowed Old National to reduce its long-term borrowings which will positively impact the Company’s margin going forward. Occupancy expense will increase in 2007 and future years as a result of leasing these buildings, negatively effecting the efficiency ratio; however, the overall transaction should be slightly accretive to earnings.

Subsequent to year end, the Company closed on its purchase of St. Joseph Capital Corporation. Management believes this acquisition will serve as a platform for future expansion in northern Indiana. In addition, Old National continues to expand in Indianapolis, Indiana, and Louisville, Kentucky, markets which have stronger economic growth than other markets in which the Company operates.

BUSINESS OUTLOOK

The Company’s near-term challenges include improving its net interest rate margin, increasing loan and deposit growth, and containing expenses. The Company will focus on balance sheet restructuring early in 2007 in an effort to successfully integrate St. Joseph and to improve the margin by eliminating lower-spread business. In addition, the Company has identified seven branches with low growth potential and plans to consolidate these branches during the first quarter of 2007, servicing these assets from other Old National financial centers within close proximity.

RESULTS OF OPERATIONS

The following table sets forth certain income statement information of Old National for the years ended December 31, 2006, 2005, and 2004:

(dollars in thousands)		2006				2005				2004
Income Statement Summary:
Net interest income		$	212,717			$	219,152			$	231,757
Provision for loan losses			7,000				23,100				22,400
Noninterest income			153,791				159,898				162,888
Noninterest expense			264,561				262,107				309,403
Other Data:
Return on average equity			12.43	%			9.31	%			8.83	%
Efficiency ratio			68.53	%			65.43	%			73.92	%
Tier 1 leverage ratio			8.01	%			7.67	%			7.69	%
Net charge-offs to average loans			0.37	%			0.60	%			0.61	%

Comparison of Fiscal Years 2006 and 2005

Net Interest Income

Net interest income was the most significant component of Old National’s earnings, comprising over 60% of 2006 revenues. Net interest income and net interest margin in the following discussion are presented on a fully taxable equivalent basis, which adjusts tax-exempt interest income to an amount that would be comparable to interest subject to income taxes. Net income is unaffected by these taxable equivalent adjustments as an offsetting increase of the same amount is made in the income tax section. Net interest income included taxable equivalent adjustments of $19.5 million for 2006 and $21.5 million for 2005.

Net interest income and margin are influenced by many factors, primarily the volume and mix of earning assets and funding sources and interest rate fluctuations. Other factors include accelerated prepayments of mortgage-related assets and the 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.

Taxable equivalent net interest income was $232.2 million in 2006, a 3.5% decrease from the $240.7 million reported in 2005. The net interest margin was 3.15% for 2006, a six basis point increase compared to the 3.09% reported in 2005. Average earning assets declined by $410.5 million, which consisted of decreased investment securities of $269.5 million and decreased loans of $191.5 million partially offset by an increase in federal funds sold and money market investments of $50.5 million. The yield on average earning assets increased 65 basis points from 5.74% to 6.39%. Average interest-bearing liabilities declined by $385.2 million or 5.5%, which included decreased borrowings of $245.0 million and decreased interest-bearing deposits of $140.2 million. The cost of interest-bearing liabilities increased 66 basis points from 2.95% to 3.61%. Noninterest-bearing deposits declined by $36.9 million.

The increase in interest rates which began during the second half of 2004 and has continued through 2006 has had a notable effect on the volume, mix and yield of average earning assets. The target Federal funds rate, the rate that dictates national prime rate and determines many other short-term loan and liability rates, began to rise in June 2004

from 1.00% to 5.25% by December 2006. Market-driven interest rates, as evidenced by the five-year United States Treasury Note, increased from 3.36% on January 2, 2004 to 4.70% on December 29, 2006.

Significantly affecting average earning assets during 2005 and 2006 was the sale of $142.1 million of loans associated with the divestitures of the Clarksville, Tennessee financial centers in the fourth quarter of 2005 and the O’Fallon, Illinois financial center in the first quarter of 2006. In addition, commercial and commercial real estate loans have been affected by continued weak loan demand in Old National’s markets, more stringent loan underwriting standards, and the sale of $43.1 million of nonaccrual and substandard commercial and commercial real estate loans during the fourth quarter of 2004, $26.7 million during the second quarter of 2005 and $28.8 million in the third quarter of 2006. In addition, Old National experienced a large amount of line pay-downs in the fourth quarter of 2005. During the fourth quarter of 2006, Old National began to experience growth in commercial loans. During 2005 and 2006, the Company continued its strategy to reduce the size of the investment portfolio to reduce leverage and sensitivity to rising interest rates, selling $273.1 million of investment securities during the third quarter of 2006.

Affecting interest-bearing liabilities 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 brokered certificates of deposit and the maturity of a $25 million Federal Home Loan Bank advance in the first quarter of 2006, and the maturity of $50 million of senior unsecured bank notes in the second quarter of 2006. Deposits, which have an average interest rate lower than borrowed funds, have increased as a percent of interest-bearing liabilities as long-term borrowings have decreased as a percent of interest-bearing liabilities.

The following table presents a three-year average balance sheet and for each major asset and liability category, its related interest income and yield or its expense and rate for the years ended December 31.

THREE-YEAR AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS

		2006												2005												2004
(tax equivalent basis,		Average				Interest				Yield/				Average				Interest				Yield/				Average				Interest				Yield/
dollars in thousands)		Balance				& Fees				Rate				Balance				& Fees				Rate				Balance				& Fees				Rate
Earning Assets
Federal funds sold and money market investments		$	87,594			$	4,557				5.20	%		$	37,102			$	1,513				4.08	%		$	95,094			$	1,241				1.31	%
Investment securities: (5)
U.S. Treasury & Government- sponsored agencies (1)			1,799,289				81,894				4.55				1,921,042				76,851				4.00				2,062,855				79,777				3.87
States and political subdivisions (3)			408,469				28,306				6.93				536,928				36,965				6.88				638,413				44,164				6.92
Other securities			254,644				13,101				5.14				273,911				12,450				4.55				153,329				6,354				4.14
Total investment securities			2,462,402				123,301				5.01				2,731,881				126,266				4.62				2,854,597				130,295				4.56
Loans: (2)
Commercial (3)			1,592,286				116,571				7.32				1,578,247				100,900				6.39				1,611,132				87,191				5.41
Commercial real estate			1,466,155				106,569				7.27				1,604,202				101,979				6.36				1,767,528				100,674				5.70
Residential real estate (4)			527,876				29,219				5.54				584,724				31,964				5.47				765,537				42,896				5.60
Consumer, net of unearned income			1,236,823				91,022				7.36				1,247,487				84,135				6.74				1,196,490				78,718				6.58
Total loans (4)			4,823,140				343,381				7.12				5,014,660				318,978				6.36				5,340,687				309,479				5.79
Total earning assets			7,373,136			$	471,239				6.39	%			7,783,643			$	446,757				5.74	%			8,290,378			$	441,015				5.32	%
Less: Allowance for loan losses			(76,455	)											(82,929	)											(97,779	)
Non-Earning Assets
Cash and due from banks			165,670												183,995												191,494
Other assets			711,072												741,793												739,403
Total assets		$	8,173,423											$	8,626,502											$	9,123,496
Interest-Bearing Liabilities
NOW deposits		$	1,429,757			$	27,397				1.92	%		$	1,754,908			$	25,235				1.44	%		$	1,735,613			$	16,306				0.94	%
Savings deposits			441,305				5,655				1.28				485,323				4,200				0.87				471,339				2,226				0.47
Money market deposits			886,151				29,437				3.32				694,988				18,836				2.71				586,957				6,428				1.10
Time deposits			2,616,339				110,095				4.21				2,578,535				90,591				3.51				2,824,558				97,304				3.44
Total interest-bearing deposits			5,373,552				172,584				3.21				5,513,754				138,862				2.52				5,618,467				122,264				2.18
Short-term borrowings			402,240				15,995				3.98				388,161				9,629				2.48				406,121				3,890				0.96
Other borrowings			835,583				50,417				6.03				1,094,612				57,596				5.26				1,463,488				59,209				4.05
Total interest-bearing liabilities			6,611,375			$	238,996				3.61	%			6,996,527			$	206,087				2.95	%			7,488,076			$	185,363				2.48	%
Noninterest-Bearing Liabilities
Demand deposits			800,682												837,579												803,074
Other liabilities			123,007												107,139												117,781
Shareholders’ equity			638,359												685,257												714,565
Total liabilities and shareholders’ equity		$	8,173,423											$	8,626,502											$	9,123,496
Interest Margin Recap
Interest income/average earning assets						$	471,239				6.39	%						$	446,757				5.74	%						$	441,015				5.32	%
Interest expense/average earning assets							238,996				3.24								206,087				2.65								185,363				2.24
Net interest income and margin						$	232,243				3.15	%						$	240,670				3.09	%						$	255,652				3.08	%

(1)		Includes U.S. Government-sponsored agency mortgage-backed securities.
(2)		Includes principal balances of nonaccrual loans. Interest income relating to nonaccrual loans is included only if received. Includes loan fees of $5.4 million in 2006, $7.5 million in 2005 and $7.1 million in 2004.
(3)		Interest on state and political subdivision investment securities and commercial loans includes the effect of taxable equivalent adjustments of $9.6 million and $9.9 million, respectively, in 2006; $12.6 million and $8.9 million, respectively, in 2005; and $15.1 million and $8.8 million, respectively, in 2004; using the federal statutory tax rate in effect of 35% for all periods.
(4)		Includes residential loans held for sale.
(5)		Yield information does not give effect to changes in fair value that are reflected as a component of shareholders’ equity.

The following table shows fluctuations in net interest income attributable to changes in the average balances of assets and liabilities and the yields earned or rates paid for the years ended December 31.

NET INTEREST INCOME — RATE/VOLUME ANALYSIS

		2006 vs. 2005												2005 vs. 2004
(tax equivalent basis,		Total				Attributed to								Total				Attributed to
dollars in thousands)		Change				Volume				Rate				Change				Volume				Rate
Interest Income
Federal funds sold and money market investments		$	3,044			$	2,342			$	702			$	272			$	(1,560	)		$	1,832
Investment securities (1)			(2,965	)			(12,974	)			10,009				(4,029	)			(5,636	)			1,607
Loans (1)			24,403				(12,908	)			37,311				9,499				(19,815	)			29,314
Total interest income			24,482				(23,540	)			48,022				5,742				(27,011	)			32,753
Interest Expense
NOW deposits			2,162				(5,452	)			7,614				8,929				229				8,700
Savings deposits			1,455				(472	)			1,927				1,974				93				1,881
Money market deposits			10,601				5,765				4,836				12,408				2,055				10,353
Time deposits			19,504				1,459				18,045				(6,713	)			(8,559	)			1,846
Short-term borrowings			6,366				454				5,912				5,739				(308	)			6,047
Other borrowings			(7,179	)			(14,629	)			7,450				(1,613	)			(17,166	)			15,553
Total interest expense			32,909				(12,875	)			45,784				20,724				(23,656	)			44,380
Net interest income		$	(8,427	)		$	(10,665	)		$	2,238			$	(14,982	)		$	(3,355	)		$	(11,627	)

The variance not solely due to rate or volume is allocated equally between the rate and volume variances.

(1)

Interest on investment securities and loans includes the effect of taxable equivalent adjustments of $9.6 million and $9.9 million, respectively, in 2006; $12.6 million and $8.9 million, respectively, in 2005; and $15.1 million and $8.8 million, respectively, in 2004; using the federal statutory rate in effect of 35% for all periods.

Provision for Loan Losses

The provision for loan losses was $7.0 million in 2006, a significant reduction from the $23.1 million recorded in 2005. The lower provision in 2006 is attributable to a decrease in net charge-offs combined with a decrease in nonaccrual loans and enhanced credit administration and underwriting functions that began in 2004. For additional information about non-performing loans, charge-offs and additional items impacting the provision, refer to the “Risk Management — Credit Risk” section of Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

Noninterest Income

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 consulting, investment products and insurance. This source of revenue has remained relatively constant as a percentage of total revenue at 39.8% in 2006 compared to 39.9% in 2005.

Noninterest income for 2006 was $153.8 million, a decrease of $6.1 million, or 3.8% compared to $159.9 million reported for 2005. This decrease is primarily the result of an $11.6 million decrease in gains on branch divestitures and a $4.9 million decrease in service charges on deposit accounts. These decreases were partially offset by a $6.2 million increase in insurance premiums and commissions and a $4.9 million increase in gain (loss) on derivatives. In 2006, Old National realized $1.5 million of gains on sales of securities in comparison to $0.9 million for 2005.

Service charges on deposit accounts were $42.3 million during 2006 compared to $47.2 million during 2005. The decrease in the volume of overdraft service charges is partly attributable to the sale of the Clarksville, Tennessee and O’Fallon, Illinois financial centers.

Insurance premiums and commissions increased to $41.5 million in 2006 compared to $35.2 million during 2005. The increase was primarily a result of increases in commissions on property and casualty insurance and contingency income. Insurance premiums and commissions related to J.W. Terrill Insurance Agency are not included in these amounts. See Note 2 to the consolidated financial statements for a discussion of discontinued operations and divestitures.

Old National recorded a $3.0 million gain from the sale of the O’Fallon, Illinois financial center in the first quarter of 2006. In the fourth quarter of 2005 Old National recorded a $14.6 million gain from the sale of the Clarksville, Tennessee financial centers.

The following table presents changes in the components of noninterest income for the years ended December 31.

NONINTEREST INCOME

														% Change From
														Prior Year
(dollars in thousands)		2006				2005				2004				2006				2005
Wealth management fees		$	19,519			$	20,269			$	20,390				(3.7)	%			(0.6)	%
Service charges on deposit accounts			42,291				47,154				48,466				(10.3	)			(2.7	)
ATM fees			12,077				11,145				9,547				8.4				16.7
Mortgage banking revenue			4,143				4,918				8,491				(15.8	)			(42.1	)
Insurance premiums and commissions			41,490				35,242				32,766				17.7				7.6
Investment product fees			8,699				8,975				12,025				(3.1	)			(25.4	)
Bank-owned life insurance			8,558				7,460				7,477				14.7				(0.2	)
Other income			11,125				12,673				10,000				(12.2	)			26.7
Total fee and service charge income			147,902				147,836				149,162				—				(0.9	)
Net securities gains			1,471				901				2,936				63.3				(69.3	)
Gain on branch divestitures			3,036				14,597				—				(79.2	)			N/M
Gain (loss) on derivatives			1,511				(3,436	)			10,790				144.0				(131.8	)
Loss on extinguishment of debt			(129	)			—				—				N/M				N/M
Total noninterest income		$	153,791			$	159,898			$	162,888				(3.8)	%			(1.8)	%
Noninterest income to total revenue (1)			39.8	%			39.9	%			38.9	%

(1) Total revenue includes the effect of a taxable equivalent adjustment of $19.5 million in 2006, $21.5 million in 2005 and $23.9 million in
     2004.

Noninterest Expense

Noninterest expense for 2006 totaled $264.6 million, an increase of $2.5 million, or 0.9% from the $262.1 million recorded in 2005. The $9.8 million increase in salaries and employee benefits in 2006 was offset by a $3.2 million decrease in data processing expense and a $5.3 million decrease in donations expense.

Salaries and benefits, the largest component of noninterest expense, totaled $157.6 million in 2006, compared to $147.8 million in 2005, an increase of $9.8 million, or 6.7%. The increase is primarily attributable to $3.3 million of performance based incentive compensation accrued during 2006, compared to no performance based incentive compensation in 2005. Also contributing to the increase is $1.9 million of severance and related benefits expense recorded during 2006. The severance costs relate to senior executives, mortgage employees and consolidated financial centers. Included in salaries and benefits for 2006 is expense related to 26 new employees for branches opened during the year.

Occupancy expense will increase in 2007 and future years compared to 2006 and prior years as a result of the sale by the Company of three office buildings in Evansville, Indiana in December, 2006 and the lease of those buildings back to the Company. Old National Bank is obligated to pay (on a monthly basis) base rent in the aggregate annual amount of $6.6 million to lease those buildings from the landlords through December 31, 2029; no rent is payable for the final two years of the initial 25-year term. For financial reporting purposes, the rent will be expensed ratably over the 25-year term at an annual rate of $6.0 million.

Data processing expense totaled $18.0 million for 2006 compared to $21.2 million for 2005, a decrease of $3.2 million. The decrease in data processing expense was primarily attributable to a decrease in outside mortgage servicing fees, as mortgages are currently being sold with servicing released.

Donations totaled $0.3 million in 2006, a decrease of $5.3 million compared to $5.6 million for 2005. This decrease was primarily attributable to the $5.0 million contribution in 2005 to fund the formation of the Old National Bank Foundation.

The remaining components of noninterest expense totaled $88.7 million for 2006 compared to $87.5 million for 2005. Included in 2006 was a $0.4 million provision for the reserve for unfunded commitments compared to a $5.6 million reduction in the reserve for unfunded commitments in 2005.

The following table presents changes in the components of noninterest expense for the years ended December 31.

NONINTEREST EXPENSE

														% Change From
														Prior Year
(dollars in thousands)		2006				2005				2004				2006				2005
Salaries and employee benefits		$	157,622			$	147,782			$	171,879				6.7	%			(14.0	)%
Occupancy			19,927				20,352				19,298				(2.1	)			5.5
Equipment			12,728				14,415				14,211				(11.7	)			1.4
Marketing			10,400				8,323				9,801				25.0				(15.1	)
Data processing			17,963				21,209				21,605				(15.3	)			(1.8	)
Communications			9,156				9,863				10,736				(7.2	)			(8.1	)
Professional fees			7,602				9,297				25,895				(18.2	)			(64.1	)
Loan expense			5,696				5,250				6,509				8.5				(19.3	)
Supplies			3,413				3,812				3,809				(10.5	)			0.1
Other losses			3,703				6,346				6,209				(41.6	)			2.2
Donations			319				5,648				742				(94.4	)		NM
Other expense			16,032				9,810				18,709				63.4				(47.6	)
Total noninterest expense		$	264,561			$	262,107			$	309,403				0.9	%			(15.3	)%

Provision for Income Taxes

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 percent of pre-tax income, was 16.4% in 2006 compared to 16.3% in 2005. The slight increase in effective tax rate in 2006 resulted from a lower percentage of tax-exempt income to income before income taxes. See Note 11 to the consolidated financial statements for additional details on Old National’s income tax provision.

Comparison of Fiscal Years 2005 and 2004

In 2005, Old National generated net income of $63.8 million and diluted net income per share of $0.93 compared to $63.1 million and $0.90, respectively in 2004. The 2005 earnings included a $14.6 million gain from the sale of the Clarksville, Tennessee branches and a $14.8 million loss from discontinued operations related to the sale of J.W. Terrill Insurance Agency and Fund Evaluation Group. Other factors which positively affected 2005 net income included a $24.1 million decrease in salaries and benefits expense compared to 2004 and a $16.6 million decrease in professional fees expense. Offsetting these increases to net income in 2005 was a $14.2 million decrease in the fair value of derivatives compared to 2004 and a $12.8 million increase in 2005 tax expense compared to 2004.

Taxable equivalent net interest income was $240.7 million in 2005, a 5.9% decrease from the $255.7 million reported in 2004. The net interest margin was 3.09% for 2005, compared to 3.08% reported for 2004. The decline in net interest income was primarily a result of average earning assets declining more than average interest-bearing liabilities during 2005. Average earning assets decreased by $506.7 million in 2005 while average interest-bearing liabilities decreased by $491.5 million in 2005.

The provision for loan losses remained relatively constant for the twelve-month period ended December 31, 2005 compared to the twelve-month period ended December 31, 2004. During 2005, the provision for loan losses amounted to $23.1 million compared to $22.4 million during 2004.

Noninterest income for 2005 was $159.9 million, a decrease of $3.0 million, or 1.8% from the $162.9 million reported for 2004. A $14.6 million gain from the sale of the Clarksville, Tennessee branches during the fourth quarter of 2005 was almost entirely offset by a $14.2 million decrease in gain (loss) on derivatives.

Noninterest expense for 2005 totaled $262.1 million, a decrease of $47.3 million, or 15.3% from the $309.4 million recorded in 2004. This decrease was primarily related to $25.5 million of expense in 2004 associated with the company-wide improvement initiative (“Ascend”), as well as severance expense resulting from management reorganization that were included in expense in 2004. Included in 2005 was a $6.9 million reduction in the reserve for unfunded commitments. Old National’s efficiency ratio decreased to 65.43% in 2005 compared to 73.92% in 2004.

The provision for income taxes on continuing operations was $15.3 million in 2005 compared to $2.5 million in 2004. Old National’s effective tax rate was 16.3% in 2005 and 4.0% in 2004. The increased tax rate in 2005 resulted primarily from a lower percentage of tax-exempt income to income before income taxes.

Old National operates in two operating segments: community banking and treasury. The community banking segment profit was $81.3 million in 2005 compared to $59.8 million in 2004. Included in the 2004 community banking segment is $20.5 million of expense associated with the “Ascend” project and severance benefits related to the reorganization of management. The 2005 treasury segment profit decreased $9.9 million from 2004, primarily as a result of fluctuations in the fair market value of derivative instruments. The “other” segment profit, which aggregates wealth management, investment consulting, insurance, brokerage and investment and annuity sales, included in 2005 a loss from discontinued operations of $14.8 million related to the sales of J.W. Terrill Insurance Agency and the Fund Evaluation Group.

BUSINESS LINE RESULTS

Old National is managed in two primary business segments. The following table summarizes Old National’s business line results for the years ended December 31.

BUSINESS LINE RESULTS

(dollars in thousands)		2006				2005				2004
Community banking		$	79,490			$	81,316			$	59,794
Treasury			945				(6,682	)			3,173
Other			(1,062	)			(10,870	)			97
Consolidated net income		$	79,373			$	63,764			$	63,064

The 2006 community banking segment profit decreased $1.8 million from 2005, primarily as a result of the decrease in earning assets and higher deposit costs in the community banking segment during 2006.

The 2006 treasury segment profit increased $7.6 million from 2005 primarily as a result of fluctuations in the fair market value of derivative instruments.

The 2005 “other” segment profit includes a loss from discontinued operations of $14.8 million related to the sales of J.W. Terrill Insurance Agency (“Terrill”) in St. Louis, Missouri, and the Fund Evaluation Group (“FEG”) in Cincinnati, Ohio.

FINANCIAL CONDITION

Overview

Old National’s total assets at December 31, 2006, were $8.150 billion, a 4.0% decrease from $8.492 billion at December 31, 2005. Earning assets, comprised of investment securities including money market investments, loans, and loans held for sale, were $7.380 billion at December 31, 2006, a decrease of 3.0% from $7.611 billion at December 31, 2005. This reduction in earning assets is primarily due to the Company’s planned reduction of the investment portfolio, resulting in reduced reliance on wholesale funding. Year over year, deposits, which have an average interest rate lower than borrowed funds, have increased as a percent of interest-bearing liabilities as long-term borrowings have decreased as a percent of interest-bearing liabilities.

Investment Securities

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. However, Old National also has some 15- and 20-year fixed-rate mortgage pass-through securities in its held-to-maturity investment portfolio. At December 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 December 31, 2006, the investment securities portfolio was $2.376 billion compared to $2.516 billion at December 31, 2005, a decrease of 5.6%. Investment securities represented 32.2% of earning assets at December 31, 2006, compared to 33.1% at December 31, 2005. During 2004 and continuing through 2006, Old National decreased the size of the investment portfolio and used the cash flows generated by the declining investment portfolio to reduce borrowed funds. Stronger commercial loan demand would likely result in increased investments in loans and a continued reduction in the investment securities portfolio.

Investment securities available-for-sale portfolio had net unrealized losses of $27.6 million at December 31, 2006, compared to net unrealized losses of $35.0 million at December 31, 2005. These unrealized losses are driven by interest rate conditions. The decrease was primarily the result of the smaller portfolio of securities available-for-sale and the shorter duration at December 31, 2006, compared to December 31, 2005. Also, Old National realized pre-tax net gains on sales of securities from the available-for-sale portfolio of $1.5 million during 2006 and $0.9 million during 2005.

As a result of a planned reduction, the investment portfolio had an effective duration of 2.90 years at December 31, 2006, compared to 3.42 years at December 31, 2005. The weighted average yields on available-for-sale investment securities were 5.01% in 2006 and 4.96% in 2005. The average yields on the held-to-maturity portfolio were 4.50% in 2006 and 4.42% in 2005.

At December 31, 2006, Old National had a concentration of investment securities issued by certain states and their political subdivisions with the following aggregate market values: $79.7 million by Indiana, which represented 12.4% of shareholders’ equity. At December 31, 2005, the aggregate market values of the concentration of certain states and their political subdivisions were $134.9 million by Indiana, which represented 20.7% of shareholders’ equity, and $83.0 million by Illinois, which represented 12.8% of shareholders’ equity. There were no other concentrations of investment securities issued by an individual state and its political subdivisions that were greater than 10% of shareholders’ equity.

Loan Portfolio

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. Old National’s policy is to concentrate its lending activity in the geographic market areas it serves, primarily Indiana, Illinois and Kentucky. The following table presents the composition of the loan portfolio at December 31.

LOAN PORTFOLIO AT YEAR-END

																						Four-Year
(dollars in thousands)		2006				2005				2004				2003				2002				Growth Rate
Commercial		$	1,629,885			$	1,553,742			$	1,550,640			$	1,618,095			$	1,696,347				(1.0)	%
Commercial real estate			1,386,367				1,534,385				1,653,122				1,849,275				1,883,303				(7.4	)
Consumer credit			1,198,855				1,261,797				1,205,657				1,163,325				1,053,571				3.3
Total loans excluding residential real estate			4,215,107				4,349,924				4,409,419				4,630,695				4,633,221				(2.3	)
Residential real estate			484,896				543,903				555,423				939,422				1,043,816				(17.4	)
Total loans			4,700,003				4,893,827				4,964,842				5,570,117				5,677,037				(4.6)	%
Less: Allowance for loan losses			67,790				78,847				85,749				95,235				87,742
Net loans		$	4,632,213			$	4,814,980			$	4,879,093			$	5,474,882			$	5,589,295

Commercial and Commercial Real Estate Loans

At December 31, 2006, commercial loans increased $76.1 million while commercial real estate loans decreased $148.0 million, respectively, from December 31, 2005. These changes include a sale of commercial loans of $1.4 million and commercial real estate loan of $27.4 million in the third quarter of 2006. A write-down of $2.8 million was recorded against the allowance for loan losses related to these sales. In the first quarter of 2006, the O’Fallon, Illinois financial center was sold, which included $14.3 million of commercial loans and $11.0 million of commercial real estate loans. Weak loan demand in Old National’s markets continues to affect loan growth. Old National also has continued to tighten its underwriting standards in 2005 and 2006, which has slowed potential loan growth.

The following table presents the maturity distribution and rate sensitivity of commercial loans and an analysis of these loans that have predetermined and floating interest rates. A significant percentage of commercial loans are due within one year, reflecting the short-term nature of a large portion of these loans.

DISTRIBUTION OF COMMERCIAL LOAN MATURITIES AT DECEMBER 31, 2006

		Within				1 - 5				Beyond
(dollars in thousands)		1 Year				Years				5 Years				Total
Interest rates:
Predetermined		$	191,541			$	347,643			$	211,451			$	750,635
Floating			601,330				218,573				59,347				879,250
Total		$	792,871			$	566,216			$	270,798			$	1,629,885

Consumer Loans

Consumer loans, including automobile loans, personal and home equity loans and lines of credit, and student loans, decreased $62.9 million or 5.0% at December 31, 2006, compared to December 31, 2005, due to weak loan demand in Old National’s markets.

Residential Real Estate Loans

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 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.

Residential real estate loans were $484.9 million at December 31, 2006, a decrease of $59.0 million or 10.8% from December 31, 2005. Mortgage loan production has declined as the level of interest rates has increased.

Allowance for Loan Losses

To provide for the risk of loss inherent in extending credit, Old National maintains an allowance for loan losses. The determination of the allowance is based upon the size and current risk characteristics of the loan portfolio and includes an assessment of individual problem loans, actual loss experience, current economic events and regulatory guidance. Additional information about Old National’s Allowance for Loan Losses is included in the “Risk Management — Credit Risk” section of Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 1 to the consolidated financial statements.

At December 31, 2006, the allowance for loan losses was $67.8 million, a decrease of $11.1 million compared to $78.8 million at December 31, 2005. As a percentage of total loans, the allowance decreased to 1.44% at December 31, 2006, from 1.60% at December 31, 2005. During 2006, the provision for loan losses amounted to $7.0 million, a decrease of $16.1 million from the amount recorded in 2005. The lower provision in 2006 is attributable to a decrease in net charge-offs combined with a decrease in nonaccrual loans over the last twelve months. Also considered is the Company’s migration loss rates which are declining as credits issued under the Company’s enhanced credit administration and underwriting functions, begun in 2004, become more representative of the existing portfolio.

For commercial and commercial real estate loans, the reserve decreased by $3.7 million at December 31, 2006, compared to December 31, 2005. The reserve as a percentage of that portfolio decreased to 1.85% at December 31, 2006, from 1.93% at December 31, 2005. Nonaccrual loans decreased $14.1 million, or 25.3%, since December 31,

2005. Net charge-offs as a percent of average loans were 0.37% for the year ended December 31, 2006, the lowest level since 2002.

The reserve for residential real estate loans as a percentage of that portfolio decreased to 0.35% at December 31, 2006, from 0.71% at December 31, 2005. This decrease was reflective of a lower residential real estate loan loss rate used to calculate reserve need for December 31, 2006 compared to the same period for 2005. The reserve for consumer loans decreased to 0.86% at December 31, 2006, from 1.23% at December 31, 2005. The higher rate in 2005 was reflective of the increased losses experienced in this portfolio due, in part, to the change in consumer bankruptcy laws in late 2005.

Allowance for Losses on Unfunded Commitments

Old National maintains an allowance for losses on unfunded commercial lending commitments and letters of credit to provide for the risk of loss inherent in these arrangements. The allowance is computed using a methodology similar to that used to determine the allowance for loan losses, modified to take into account the probability of a drawdown on the commitment. This allowance is reported as a liability on the balance sheet within accrued expenses and other liabilities, while the corresponding provision for these loan losses is recorded as a component of other expense. As of December 31, 2006 and 2005, the allowance for losses on unfunded commitments was $4.8 million and $4.4 million, respectively.

Residential Loans Held for Sale

Residential loans held for sale were $16.6 million at December 31, 2006, 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 amount of residential loans held for sale on the balance sheet varies depending on the amount of originations and timing of loan sales to the secondary market. The decrease in residential loans held for sale from December 31, 2005, is primarily attributable to the bulk sale of approximately $12.1 million of loans during the first quarter of 2006, lower loan production in 2006 and the timing of 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.

Premises and Equipment

Premises and equipment, a large component of the Company’s non-earning assets, totaled $122.9 million at December 31, 2006, a decrease of $77.0 million or 38.5% since December 31, 2005. The primary reason for this decrease was the sale and leaseback of Old National’s three main buildings in downtown Evansville, Indiana in the fourth quarter of 2006. The assets involved in the sale and leaseback had a carrying value of approximately $69.9 million. During 2005, premises and equipment decreased $12.9 million. This decrease is primarily attributable to the sale of five financial centers in Clarksville, Tennessee in 2005.

Funding

Total average funding, comprised of deposits and wholesale borrowings, was $7.412 billion at December 31, 2006, a decrease of 5.4% from $7.834 billion at December 31, 2005. Average deposits decreased 2.8% in 2006 compared to a decrease of 1.1% in 2005. Total deposits were $6.321 billion, including $3.690 billion in transaction accounts and $2.631 billion in time deposits at December 31, 2006. Total deposits decreased 2.2% or $144.1 million compared to December 31, 2005, which includes the sale of $22.2 million in deposits associated with the O’Fallon, Illinois financial center. Transaction accounts decreased 4.9% or $191.6 million compared to December 31, 2005. Time deposits increased 1.8% or $47.5 million compared to December 31, 2005. Old National experienced a shift from NOW deposits into money market deposits during 2006 and 2005 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. Average wholesale borrowings, including short-term borrowings and other borrowings, decreased 16.5% in 2006, compared with a decrease of 20.7% in 2005. Wholesale borrowings as a percentage of total funding was 14.4% at December 31, 2006, compared to 16.3% at December 31, 2005. The lower level of earning assets, primarily due to weak loan demand in Old National’s markets, loan sales of $28.8 million during 2006 and $26.7 million during 2005, and a planned reduction of the investment portfolio during 2006 and 2005, reduced the Company’s reliance on wholesale funding. See Notes 9 and 10 to the consolidated financial statements for additional details on Old National’s financing activities. Refer to the “Risk Management- Liquidity Risk” section of

Item 7, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations “ regarding information pertaining to a shelf registration filed with the Securities and Exchange Commission during 2004.

The following table presents changes in the average balances of all funding sources for the years ended December 31.

FUNDING SOURCES — AVERAGE BALANCES

														% Change From
														Prior Year
(dollars in thousands)		2006				2005				2004				2006				2005
Demand deposits		$	800,682			$	837,579			$	803,074				(4.4)	%			4.3	%
NOW deposits			1,429,757				1,754,908				1,735,613				(18.5	)			1.1
Savings deposits			441,305				485,323				471,339				(9.1	)			3.0
Money market deposits			886,151				694,988				586,957				27.5				18.4
Time deposits			2,616,339				2,578,535				2,824,558				1.5				(8.7	)
Total deposits			6,174,234				6,351,333				6,421,541				(2.8	)			(1.1	)
Short-term borrowings			402,240				388,161				406,121				3.6				(4.4	)
Other borrowings			835,583				1,094,612				1,463,488				(23.7	)			(25.2	)
Total funding sources		$	7,412,057			$	7,834,106			$	8,291,150				(5.4)	%			(5.5	)%

The following table presents a maturity distribution for certificates of deposit with denominations of $100,000 or more at December 31.

CERTIFICATES OF DEPOSIT, $100,000 AND OVER

						Maturity Distribution
		Year-End				1-90				91-180				181-365				Beyond
(dollars in thousands)		Balance				Days				Days				Days				1 Year
2006		$	932,569			$	303,074			$	195,222			$	228,209			$	206,064
2005			840,861				253,417				103,819				204,251				279,374
2004			675,811				205,440				83,877				68,155				318,339

Capital

Shareholders’ equity totaled $642.4 million or 7.88% of total assets at December 31, 2006, and $649.9 million or 7.7% of total assets at December 31, 2005. Contributing to the decrease in shareholders’ equity at December 31, 2006, compared to December 31, 2005, was the adjustment to initially apply Statement of Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 123(R)”, resulting in a net reduction to accumulated other comprehensive income of $7.8 million, which was partially offset by fluctuations in the fair value of securities.

Old National paid cash dividends of $0.84 per share in 2006, which decreased equity by $55.6 million, compared to cash dividends of $0.76 per share in 2005, which decreased equity by $51.7 million. Old National purchased shares of its stock in the open market under an ongoing repurchase program, reducing shareholders’ equity by $29.4 million in 2006, and $63.9 million in 2005. Shares issued for stock options, restricted stock and stock purchase plans increased shareholders’ equity by $1.5 million in 2006, compared to $5.2 million in 2005. Additionally, stock issued for acquisitions increased shareholders’ equity by $18.5 million in 2005.

Capital Adequacy

Old National and the banking industry are subject to various regulatory capital requirements administered by the federal banking agencies. For additional information on capital adequacy see Note 20 to the consolidated financial statements.

RISK MANAGEMENT

Overview

Old National management, with the oversight of the Board of Directors, has in place company-wide structures, processes, and controls for managing and mitigating risk. The following discussion addresses the three major risks facing Old National: credit, market, and liquidity.

Credit Risk

Credit risk represents the risk of loss arising from an obligor’s inability or failure to meet contractual payment or performance terms. Old National’s primary credit risk results from the Company’s lending activities.

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, credit exposures, peer comparisons, 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 December 31, 2006, the Company had no concentration of loans in any single industry exceeding 10% of its portfolio and has 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 did exceed internal guidelines which set out recommended maximum limits of loan commitments as a percent of capital. Management will continue to monitor these industry categories. 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. Management expects that trends in under-performing, criticized and classified loans will be influenced by the degree to which the economy strengthens.

The following table presents the components of under-performing assets for the years ended December 31.

ASSET QUALITY

(dollars in thousands)		2006				2005				2004				2003				2002
Nonaccrual loans		$	41,518			$	55,589			$	54,890			$	104,627			$	100,287
Renegotiated loans			52				—				—				—				—
Past due loans still accruing (90 days or more):
Commercial and commercial real estate			1,227				183				870				4,127				8,567
Residential real estate			127				479				270				67				322
Consumer			787				1,173				1,274				926				627
Total past due loans			2,141				1,835				2,414				5,120				9,516
Foreclosed properties			3,313				3,605				8,331				8,763				7,916
Total under-performing assets		$	47,024			$	61,029			$	65,635			$	118,510			$	117,719
Classified loans (includes nonaccrual, renegotiated, past due 90 days and other problem loans)		$	153,215			$	136,597			$	192,214			$	343,943			$	455,723
Criticized loans			119,757				83,213				148,118				215,700				257,059
Total criticized and classified loans		$	272,972			$	219,810			$	340,332			$	559,643			$	712,782
Asset Quality Ratios:
Non-performing loans/total loans (1) (2)			0.88	%			1.13	%			1.10	%			1.87	%			1.74	%
Under-performing assets/total loans and foreclosed properties (1)			1.00				1.24				1.31				2.12				2.04
Under-performing assets/total assets			0.58				0.72				0.74				1.27				1.22
Allowance for loan losses/ under-performing assets			144.16				129.20				130.65				80.36				74.54