UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

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

For the quarterly period ended September 30, 2007

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

For the transition period from                      to                     

Commission File Number 1-15817

OLD NATIONAL BANCORP

(Exact name of Registrant as specified in its charter)

INDIANA		35-1539838
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

1 Main Street		47708
Evansville, Indiana		(Zip Code)
(Address of principal executive offices)

 

 

(812) 464-1294

(Registrant’s telephone number, including area code)

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock. The Registrant has one class of common stock (no par value) with 66,202,000 shares outstanding at October 31, 2007.

 

 

OLD NATIONAL BANCORP

FORM 10-Q

INDEX

		Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet September 30, 2007 (unaudited), December 31, 2006 and September 30, 2006 (unaudited)			3
Consolidated Statement of Income Three and nine months ended September 30, 2007 and 2006 (unaudited)			4
Consolidated Statement of Changes in Shareholders’ Equity Nine months ended September 30, 2007 and 2006 (unaudited)			5
Consolidated Statement of Cash Flows Nine months ended September 30, 2007 and 2006 (unaudited)			6
Notes to Consolidated Financial Statements (unaudited)			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3. Quantitative and Qualitative Disclosures About Market Risk			33
Item 4. Controls and Procedures			34
PART II OTHER INFORMATION			35
SIGNATURES			40
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

OLD NATIONAL BANCORP

		September 30,				December 31,				September 30,
(dollars and shares in thousands, except per share data)		2007				2006				2006
		(unaudited)								(unaudited)
Assets
Cash and due from banks		$	192,921			$	210,303			$	176,632
Federal funds sold and resell agreements			179				283,524				78,800
Money market investments			4,074				4,078				7,525
Total cash and cash equivalents			197,174				497,905				262,957
Investment securities — available-for-sale, at fair value
U.S. Government-sponsored agencies			661,221				680,149				546,692
Mortgage-backed securities			960,462				1,020,178				1,060,914
States and political subdivisions			259,581				273,325				297,171
Other securities			205,096				201,511				184,844
Investment securities — available-for-sale			2,086,360				2,175,163				2,089,621
Investment securities — held-to-maturity, at amortized cost (fair value $130,053, $157,720 and $138,691 respectively)			134,444				162,138				144,016
Federal Home Loan Bank stock, at cost			41,170				38,809				42,266
Residential loans held for sale			13,313				16,634				15,856
Loans:
Commercial			1,692,521				1,629,885				1,598,071
Commercial real estate			1,308,287				1,386,367				1,406,883
Residential real estate			539,297				484,896				492,099
Consumer credit, net of unearned income			1,210,260				1,198,855				1,219,268
Total loans			4,750,365				4,700,003				4,716,321
Allowance for loan losses			(64,138	)			(67,790	)			(71,632	)
Net loans			4,686,227				4,632,213				4,644,689
Premises and equipment, net			47,277				122,865				123,062
Accrued interest receivable			50,427				53,344				54,260
Goodwill			159,198				113,350				113,350
Other intangible assets			32,679				20,813				21,372
Company-owned life insurance			211,853				198,038				198,338
Assets held for sale			31,065				—				69,895
Other assets			141,298				118,243				140,206
Total assets		$	7,832,485			$	8,149,515			$	7,919,888
Liabilities
Deposits:
Noninterest-bearing demand		$	840,501			$	877,870			$	844,913
Interest-bearing:
NOW			1,427,485				1,449,202				1,328,923
Savings			653,448				437,702				411,412
Money market			690,391				925,296				868,794
Time			2,262,717				2,631,424				2,629,834
Total deposits			5,874,542				6,321,494				6,083,876
Short-term borrowings			527,033				312,911				301,535
Other borrowings			612,129				747,545				772,215
Accrued expenses and other liabilities			171,362				125,196				119,499
Total liabilities			7,185,066				7,507,146				7,277,125
Shareholders’ Equity
Preferred stock, 2,000 shares authorized, no shares issued or outstanding			—				—				—
Common stock, $1 stated value, 150,000 shares authorized, 66,200, 66,503 and 66,406 shares issued and outstanding, respectively			66,200				66,503				66,406
Capital surplus			562,959				565,106				564,691
Retained earnings			41,885				35,873				32,187
Accumulated other comprehensive loss, net of tax			(23,625	)			(25,113	)			(20,521	)
Total shareholders’ equity			647,419				642,369				642,763
Total liabilities and shareholders’ equity		$	7,832,485			$	8,149,515			$	7,919,888

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

OLD NATIONAL BANCORP

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(dollars in thousands, except per share data)		2007				2006				2007				2006
Interest Income
Loans including fees:
Taxable		$	82,561			$	80,578			$	245,055			$	234,627
Nontaxable			5,502				5,065				16,118				14,510
Investment securities, available-for-sale:
Taxable			23,054				22,230				68,591				66,468
Nontaxable			3,005				4,349				9,141				15,195
Investment securities, held-to-maturity, taxable			1,611				1,618				5,140				5,107
Money market investments			215				161				6,133				1,404
Total interest income			115,948				114,001				350,178				337,311
Interest Expense
Deposits			45,064				44,406				145,188				125,460
Short-term borrowings			5,447				4,953				13,011				12,878
Other borrowings			10,219				12,334				30,618				37,928
Total interest expense			60,730				61,693				188,817				176,266
Net interest income			55,218				52,308				161,361				161,045
Provision for loan losses			—				—				2,445				7,000
Net interest income after provision for loan losses			55,218				52,308				158,916				154,045
Noninterest Income
Wealth management fees			4,554				4,710				14,267				14,859
Service charges on deposit accounts			11,496				10,596				32,965				31,188
ATM fees			3,771				3,043				10,487				8,906
Mortgage banking revenue			1,208				1,045				3,298				2,835
Insurance premiums and commissions			8,889				8,761				29,682				29,205
Investment product fees			2,675				2,041				8,285				6,323
Company-owned life insurance			2,419				2,284				7,184				6,766
Net securities gains (losses)			(472	)			789				(3,163	)			697
Gain (loss) on derivatives			170				(67	)			(22	)			1,953
Gain on branch divestiture			—				—				—				3,036
Gain on sale leaseback			774				—				947				—
Other income			2,087				3,361				7,137				10,471
Total noninterest income			37,571				36,563				111,067				116,239
Noninterest Expense
Salaries and employee benefits			39,638				36,789				122,534				115,817
Occupancy			5,898				5,059				17,787				15,171
Equipment			2,683				3,052				8,580				9,676
Marketing			1,738				2,738				6,291				7,572
Data processing			4,656				4,404				14,537				13,520
Communication			2,337				2,151				7,069				6,850
Professional fees			1,740				1,845				5,548				5,681
Loan expense			1,541				1,454				4,585				4,338
Supplies			795				852				2,584				2,550
Loss on extinguishment of debt			66				—				1,300				—
Impairment of long-lived assets			—				218				1,163				433
Other expense			4,403				4,310				14,984				13,441
Total noninterest expense			65,495				62,872				206,962				195,049
Income before income taxes			27,294				25,999				63,021				75,235
Income tax expense			4,730				4,985				10,116				13,365
Net income		$	22,564			$	21,014			$	52,905			$	61,870
Net income per common share
Basic net income per share		$	0.35			$	0.32			$	0.81			$	0.93
Diluted net income per share			0.34				0.32				0.80				0.93
Weighted average number of common shares outstanding
Basic			65,601				65,823				65,709				66,370
Diluted			65,658				65,853				65,766				66,395
Dividends per common share		$	0.22			$	0.21			$	0.66			$	0.63

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

OLD NATIONAL BANCORP

																		Accumulated
																		Other				Total
(dollars and shares		Common Stock								Capital				Retained				Comprehensive				Shareholders’					Comprehensive
in thousands)		Shares				Amount				Surplus				Earnings				Income (Loss)				Equity					Income
Balance, December 31, 2005			67,649			$	67,649			$	591,930			$	12,074			$	(21,755	)		$	649,898
Net income			—				—				—				61,870				—				61,870				$	61,870
Unrealized net securities gains, net of $1,482 tax			—				—				—				—				1,344				1,344					1,344
Reclassification adjustment for securities gains included in net income, net of $(284) tax			—				—				—				—				(413	)			(413	)				(413	)
Reclassification adjustment on cash flow hedges, net of $196 tax			—				—				—				—				303				303					303
Adjustment to stock issued for prior acquisitions			(1	)			(1	)			(15	)			—				—				(16	)
Cash dividends			—				—				—				(41,757	)			—				(41,757	)
Stock repurchased			(1,447	)			(1,447	)			(28,012	)			—				—				(29,459	)
Exercise of stock options, including tax benefits			36				36				655				—				—				691
Stock based compensation expense			—				—				251				—				—				251
Stock issued (forfeited) under restricted stock and stock compensation plans			169				169				(118	)			—				—				51
Balance, September 30, 2006			66,406			$	66,406			$	564,691			$	32,187			$	(20,521	)		$	642,763				$	63,104
Balance, December 31, 2006			66,503			$	66,503			$	565,106			$	35,873			$	(25,113	)		$	642,369
Net income			—				—				—				52,905				—				52,905				$	52,905
Unrealized net securities losses, net of $(1,115) tax			—				—				—				—				(1,957	)			(1,957	)				(1,957	)
Reclassification adjustment for securities losses included in net income, net of $1,271 tax			—				—				—				—				1,892				1,892					1,892
Reclassification adjustment on cash flow hedges, net of $193 tax			—				—				—				—				299				299					299
Amortization of additional pension liability recognized under FAS 158, net of $837 tax			—				—				—				—				1,254				1,254					1,254
Adjustment to initially apply
FASB interpretation No. 48			—				—				—				(3,368	)			—				(3,368	)
Adjustment for adoption of EITF No. 06-5			—				—				—				(118	)			—				(118	)
Cash dividends			—				—				—				(43,407	)			—				(43,407	)
Stock repurchased			(228	)			(228	)			(3,850	)			—				—				(4,078	)
Exercise of stock options, including tax benefits			7				7				68				—				—				75
Stock based compensation expense			—				—				949				—				—				949
Stock issued (forfeited) under restricted stock and stock compensation plans			(82	)			(82	)			134				—				—				52
Adjustment for St. Joseph Capital Corp. stock options			—				—				552				—				—				552
Balance, September 30, 2007			66,200			$	66,200			$	562,959			$	41,885			$	(23,625	)		$	647,419				$	54,393

Comprehensive income for the quarters ended September 30, 2007 and 2006 was $36.3 million and $45.3 million, respectively.
The accompanying notes to consolidated financial statements are an integral part of these statements.

OLD NATIONAL BANCORP

		Nine Months Ended
		September 30,
(dollars in thousands)		2007				2006
Cash Flows From Operating Activities
Net income		$	52,905			$	61,870
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation			6,276				10,173
Amortization of other intangible assets and goodwill impairment			2,596				1,831
Net discount accretion on investment securities			(1,881	)			(1,605	)
Restricted stock expense (benefit)			728				(437	)
Stock option expense			221				688
Provision for loan losses			2,445				7,000
Net securities (gains) losses			3,163				(697	)
Gain on branch divestiture			—				(3,036	)
Gain on sale leaseback			(947	)			—
(Gain) loss on derivatives			22				(1,953	)
Net gains on sales and write-downs of loans and other assets			(1,021	)			(1,453	)
Loss on retirement of debt			1,300				—
FHLB stock dividend			—				(45	)
Increase in cash surrender value of company owned life insurance			(5,123	)			(4,874	)
Residential real estate loans originated for sale			(195,879	)			(186,012	)
Proceeds from sale of residential real estate loans			202,000				216,436
Decrease in interest receivable			5,140				1,309
Increase in other assets			(9,058	)			(12,659	)
Decrease in accrued expenses and other liabilities			(19,491	)			(470	)
Total adjustments			(9,509	)			24,196
Net cash flows provided by operating activities			43,396				86,066
Cash Flows From Investing Activities
Cash and cash equivalents of acquired subsidiaries			17,429				—
Purchase of subsidiaries			(78,109	)			—
Purchases of investment securities available-for-sale			(644,936	)			(471,002	)
Proceeds from maturities, prepayments and calls of investment securities available-for-sale			630,865				394,832
Proceeds from sales of investment securities available-for-sale			180,257				298,124
Proceeds from maturities, prepayments and calls of investment securities held-to-maturity			27,018				22,212
Proceeds from redemption of FHLB stock			758				591
Proceeds from branch divestiture			—				10,511
Proceeds from sale of loans			11,712				26,062
Net principal collected from loan customers			256,056				109,318
Proceeds from sale of premises and equipment and other assets			102,935				1,932
Purchase of premises and equipment			(5,826	)			(7,882	)
Net cash flows provided by investing activities			498,159				384,698
Cash Flows From Financing Activities
Net increase (decrease) in deposits and short-term borrowings:
Noninterest-bearing demand deposits			(76,669	)			(46,026	)
Savings, NOW and money market deposits			(301,237	)			(366,334	)
Time deposits			(431,733	)			53,473
Short-term borrowings			200,803				(1,230	)
Payments for maturities on other borrowings			(21,541	)			(179,632	)
Proceeds from issuance of other borrowings			25,000				—
Payments related to retirement of debt			(189,551	)			—
Cash dividends paid			(43,407	)			(41,757	)
Common stock repurchased			(4,078	)			(29,459	)
Proceeds from exercise of stock options, including tax benefit			75				691
Common stock issued under restricted stock and stock compensation plans			52				51
Net cash flows used in financing activities			(842,286	)			(610,223	)
Net decrease in cash and cash equivalents			(300,731	)			(139,459	)
Cash and cash equivalents at beginning of period			497,905				402,416
Cash and cash equivalents at end of period		$	197,174			$	262,957
Total interest paid		$	189,803			$	171,424
Total taxes paid (net of refunds)		$	9,787			$	8,243

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

OLD NATIONAL BANCORP

NOTE 1 — BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements include the accounts of Old National Bancorp and its wholly-owned affiliates (“Old National”) and have been prepared in conformity with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. Such principles require management to make estimates and assumptions that affect the reported amounts of assets, liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements and amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The allowance for loan losses, goodwill and intangibles, derivative financial instruments and income taxes are particularly subject to change. In the opinion of management, the consolidated financial statements contain all the normal and recurring adjustments necessary for a fair statement of the financial position of Old National as of September 30, 2007 and 2006, and December 31, 2006, and the results of its operations for the three and nine months ended September 30, 2007 and 2006. Interim results do not necessarily represent annual results. These financial statements should be read in conjunction with Old National’s Annual Report for the year ended December 31, 2006.

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

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

FASB Interpretation No. 48 – In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”), which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 became effective for the Company on January 1, 2007. The impact of adopting FIN 48 is discussed in Note 14 to the consolidated financial statements.

SFAS No. 157 – In September 2006, the FASB issued Statement No. 157 – Fair Value Measurements. The standard defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The standard establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The new standard is effective for the Company on January 1, 2008. The Company is currently evaluating the impact of adopting SFAS No. 157 on the consolidated financial statements.

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

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

NOTE 3 — ACQUISITION

On February 1, 2007, Old National acquired St. Joseph Capital Corporation (''St. Joseph’’), a banking franchise headquartered in Mishawaka, Indiana, for $78.1 million, including acquisition costs. Pursuant to the merger agreement, the shareholders of St. Joseph received $40.00 in cash for each share of St. Joseph stock in an all-cash transaction. Goodwill of $45.8 million was recorded, of which none is deductible for tax purposes. In addition, intangible assets totaling $14.5 million related to core deposits and customer relationships were recorded and are being amortized over 10 to 11 years. See Note 9 to the consolidated financial statements for additional information. On the date of acquisition, unaudited financial statements of St. Joseph showed assets of $452.9 million, which included $336.6 million of loans and $78.6 million of securities, $357.3 million of deposits and year-to-date net interest income and other income of $0.8 million and net loss of $3.3 million.

NOTE 4 — DIVESTITURES

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

NOTE 5 — NET INCOME PER SHARE

Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding during each period. Diluted net income per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued. At September 30, 2007 and 2006, stock options to purchase approximately 5.8 million and 5.9 million shares, respectively, and restricted stock of 0.4 million shares were excluded from the computation of diluted net income per share because their inclusion would have been anti-dilutive.

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

(dollars and shares		Three Months Ended												Three Months Ended
in thousands,		September 30, 2007												September 30, 2006
except per share data)		Income				Shares				Amount				Income				Shares				Amount
Basic Net Income Per Share
Income from operations		$	22,564				65,601			$	0.35			$	21,014				65,823			$	0.32
Effect of dilutive securities:
Restricted stock							34												25
Stock options							23												5
Diluted Net Income Per Share
Income from operations and assumed conversions		$	22,564				65,658			$	0.34			$	21,014				65,853			$	0.32

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

(dollars and shares		Nine Months Ended												Nine Months Ended
in thousands,		September 30, 2007												September 30, 2006
except per share data)		Income				Shares				Amount				Income				Shares				Amount
Basic Net Income Per Share
Income from continuing operations		$	52,905				65,709			$	0.81			$	61,870				66,370			$	0.93
Effect of dilutive securities:
Restricted stock							30												17
Stock options							27												8
Diluted Net Income Per Share
Income from operations and assumed conversions		$	52,905				65,766			$	0.80			$	61,870				66,395			$	0.93

NOTE 6 — INVESTMENT SECURITIES

The following table summarizes the amortized cost and fair value of the available-for-sale and held-to-maturity investment securities portfolio at September 30, 2007 and December 31, 2006 and the corresponding amounts of unrealized gains and losses therein:

		Amortized				Unrealized				Unrealized				Fair
(dollars in thousands)		Cost				Gains				Losses				Value
September 30, 2007
Available-for-sale
U.S. Government-sponsored agencies		$	660,311			$	3,404			$	(2,494	)		$	661,221
Mortgage-backed securities			991,217				1,137				(31,892	)			960,462
States and political subdivisions			253,497				6,469				(385	)			259,581
Other securities			208,890				472				(4,266	)			205,096
Total available-for-sale securities		$	2,113,915			$	11,482			$	(39,037	)		$	2,086,360
Held-to-maturity
Mortgage-backed securities		$	112,047			$	—			$	(4,232	)		$	107,815
Other securities			22,397				—				(159	)			22,238
Total held-to-maturity securities		$	134,444			$	—			$	(4,391	)		$	130,053
December 31, 2006
Available-for-sale
U.S. Government-sponsored agencies		$	685,809			$	1,881			$	(7,541	)		$	680,149
Mortgage-backed securities			1,049,712				1,733				(31,267	)			1,020,178
States and political subdivisions			264,343				9,095				(113	)			273,325
Other securities			202,945				1,384				(2,818	)			201,511
Total available-for-sale securities		$	2,202,809			$	14,093			$	(41,739	)		$	2,175,163
Held-to-maturity
Mortgage-backed securities		$	126,800			$	—			$	(4,312	)		$	122,488
Other securities			35,338				—				(106	)			35,232
Total held-to-maturity securities		$	162,138			$	—			$	(4,418	)		$	157,720

Year-to-date proceeds from the sales of investment securities available-for-sale were $180.3 million in 2007 and $298.7 million in 2006. For the nine months ended September 30, 2007, realized gains were $0.9 million and losses were $4.1 million. For the nine months ended September 30, 2006, realized gains were $4.4 million and losses were $3.7 million.

At September 30, 2007, Old National does not believe any individual unrealized loss represents other-than-temporary impairment. The unrealized losses are primarily attributable to changes in interest rates. Factors considered in evaluating the securities included whether the securities were backed by U.S. Government-sponsored agencies and credit quality concerns surrounding the recovery of the full principal balance. Old National has both the intent and ability to hold securities with any individual unrealized loss for a time necessary to recover the amortized cost.

NOTE 7 — LOANS HELD FOR SALE

Residential loans held for sale are recorded at lower of cost or market value determined as of the balance sheet date. A portion of Old National’s residential loans held for sale have been hedged using fair value hedge accounting in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. The loans’ carrying basis reflects the effects of the SFAS No. 133 adjustments. At September 30, 2007 and December 31, 2006, Old National had residential loans held for sale of $13.3 million and $16.6 million, respectively. As of September 30, 2007 and December 31, 2006, ineffectiveness related to the hedge of a portion of the residential loans held for sale was immaterial.

During the first nine months of 2007, commercial real estate loans held for investment of $10.2 million and commercial loans of $4.0 million were transferred to loans held for sale at the lower of cost or market, resulting in a $2.5 million reduction to the allowance for loan losses.

NOTE 8 — ALLOWANCE FOR LOAN LOSSES

Activity in the allowance for loan losses was as follows:

		Nine Months Ended
		September 30,
(dollars in thousands)		2007				2006
Balance, January 1		$	67,790			$	78,847
Additions:
Provision charged to expense			2,445				7,000
Allowance of acquired bank			5,699				—
Deductions:
Write-downs from loans transferred to held for sale			2,527				2,770
Loans charged-off			17,963				18,391
Recoveries			(8,694	)			(6,946	)
Net charge-offs			11,796				14,215
Balance, September 30		$	64,138			$	71,632

Individually impaired loans were as follows:

		September 30,				December 31,
(dollars in thousands)		2007				2006
Impaired loans without a valuation allowance		$	5,648			$	11,833
Impaired loans with a valuation allowance			33,757				20,476
Total impaired loans		$	39,405			$	32,309
Allowance for loan losses related to impaired loans		$	12,729			$	7,080

For the nine months ended September 30, 2007 and 2006, the average balance of impaired loans was $43.3 million and $38.9 million, respectively, for which no interest income was recorded. No additional funds are committed to be advanced in connection with impaired loans. Loans deemed impaired are evaluated primarily using the fair value of the underlying collateral.

Nonperforming loans were as follows:

		September 30,				December 31,
(dollars in thousands)		2007				2006
Nonaccrual loans		$	49,312			$	41,518
Renegotiated loans			—				52
Total nonperforming loans		$	49,312			$	41,570
Past due loans (90 days or more and still accruing)		$	2,173			$	2,141

Nonperforming loans includes both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. Nonaccrual loans related to the St. Joseph acquisition amounted to $13.1 million.

NOTE 9 — GOODWILL AND OTHER INTANGIBLE ASSETS

The following table shows the changes in the carrying amount of goodwill by segment for the nine months ended September 30, 2007 and 2006:

		Community
(dollars in thousands)		Banking				Other				Total
Balance, January 1, 2007		$	73,477			$	39,873			$	113,350
Goodwill acquired during the period			45,848				—				45,848
Balance, September 30, 2007		$	119,325			$	39,873			$	159,198
Balance, January 1, 2006		$	73,477			$	39,798			$	113,275
Adjustments to goodwill acquired in prior period			—				75				75
Balance, September 30, 2006		$	73,477			$	39,873			$	113,350

Goodwill is reviewed annually for impairment. Old National completed its most recent annual goodwill impairment test as of August 31, 2007 and determined that no impairment existed as of this date. Old National recorded $45.8 million of goodwill in 2007 associated with the acquisition of St. Joseph Capital Corporation.

The gross carrying amount and accumulated amortization of other intangible assets at September 30, 2007 and December 31, 2006 was as follows:

		Gross Carrying				Accumulated				Net Carrying
(dollars in thousands)		Amount				Amortization				Amount
September 30, 2007
Amortized intangible assets:
Core deposit		$	15,623			$	(5,559	)		$	10,064
Customer business relationships			25,553				(7,084	)			18,469
Customer loan relationships			4,413				(267	)			4,146
Total intangible assets		$	45,589			$	(12,910	)		$	32,679
December 31, 2006
Amortized intangible assets:
Core deposit		$	5,574			$	(4,615	)		$	959
Customer business relationships			25,553				(5,699	)			19,854
Total intangible assets		$	31,127			$	(10,314	)		$	20,813

Other intangible assets consist primarily of core deposit intangibles and customer relationship intangibles and are being amortized on a straight-line or accelerated basis over their estimated useful lives, generally over a period of 10 to 25 years. Old National reviews intangible assets for possible impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. Old National recorded $14.5 million of other intangibles associated with the acquisition of St. Joseph Capital Corporation in 2007. Total amortization expense associated with other intangible assets for the nine months ended September 30 was $2.6 million in 2007 and $1.8 million in 2006.

Estimated amortization expense for the future years is as follows:

(dollars in thousands)
2007 remaining		$	900
2008			3,465
2009			3,302
2010			3,118
2011			2,972
Thereafter			18,922
Total		$	32,679

NOTE 10 – ASSETS HELD FOR SALE

In March 2007, Old National committed to sell certain bank branch properties. A letter of intent was executed in May 2007 to sell eighty-five properties to an unrelated party for approximately $205 million and to lease them back pursuant to individual ten, fifteen, and twenty-four year triple-net leases. The properties are to be sold in a series of transactions.

The first transaction closed September 19, 2007, and included 25 banking and one insurance property. Old National received cash proceeds of $98.2 million, net of selling costs. The properties sold had a carrying value of $41.9 million, resulting in a gain of $56.3 million. The majority of the gain will be deferred and amortized over the term of the leases; $0.6 million is included in current earnings.

Old National has agreed to lease each of these 26 properties back from the buyers for terms expiring September 30, 2031. Under each of the lease agreements, Old National has the right at its option to extend the term of the lease for four additional successive terms of five years each, upon specified terms and conditions. Old National is obligated to pay base rents for the properties in an aggregate annual amount of $9.0 million through September 30, 2027; no rent is payable for the final four years of the initial 24-year term. For financial reporting purposes, the rents will be expensed ratably over the 24-year term at an annual rate of $7.5 million.

The carrying amounts of the remaining assets included as held for sale were as follows at September 30, 2007:

(dollars in thousands)
Assets held for sale:
Land		$	9,794
Building and improvements			69,209
Total			79,003
Accumulated depreciation			(47,938	)
Assets held for sale — net		$	31,065

The second transaction closed October 19, 2007, subsequent to the quarter ended September 30, 2007. This transaction included 40 banking properties. Old National received cash proceeds of $67.0 million, net of selling costs. The properties sold had a carrying value of $19.8 million, resulting in a gain of $47.2 million. The majority of the gain will be deferred and amortized over the term of the leases; $3.8 million will be recognized during the fourth quarter.

Old National has agreed to lease each of these 40 properties back from the buyers for terms expiring either October 31, 2017 or October 31, 2022. Under each of the lease agreements, Old National has the right at its option to extend the term of the lease for four additional successive terms of five years each, upon specified terms and conditions. Old National is obligated to pay base rents for the properties in an aggregate amount of $5.5 million during the first year.

The Company continues to market the remaining assets classified as held for sale and anticipates that the majority will be sold during the next 60 to 90 days.

NOTE 11 — FINANCING ACTIVITIES

The following table summarizes Old National’s other borrowings at September 30, 2007, and December 31, 2006:

		September 30,				December 31,
(dollars in thousands)		2007				2006
Old National Bancorp:
Medium-term notes, Series 1997 (fixed rates 3.50% to 6.80%) maturing November 2007 to June 2008		$	105,000			$	110,000
Senior unsecured note (fixed rate 5.00%) maturing May 2010			50,000				50,000
Junior subordinated debenture (fixed rates 6.27% to 8.00% and variable rate 8.28%) maturing April 2032 to March 2035			108,000				100,000
SFAS 133 fair value hedge and other basis adjustments			(2,533	)			(4,549	)
Old National Bank:
Securities sold under agreements to repurchase (fixed rate 4.06%) maturing September 2012			25,000				74,000
Federal Home Loan Bank advances (fixed rates 4.84% to 8.34%) maturing July 2008 to January 2023			126,978				219,493
Senior unsecured bank notes (fixed rate 3.95%) maturing February 2008			50,000				50,000
Subordinated bank notes (fixed rate 6.75%) maturing October 2011			150,000				150,000
Capital lease obligation			4,436				4,461
SFAS 133 fair value hedge and other basis adjustments			(4,752	)			(5,860	)
Total other borrowings		$	612,129			$	747,545

Contractual maturities of other borrowings at September 30, 2007, were as follows:

(dollars in thousands)
Due in 2007		$	5,009
Due in 2008			151,037
Due in 2009			2,040
Due in 2010			75,043
Due in 2011			150,046
Thereafter			236,239
SFAS 133 fair value hedge and other basis adjustments			(7,285	)
Total		$	612,129