The accompanying notes are an integral part of this statement.

The accompanying unaudited consolidated financial statements include the accounts of Old National Bancorp and its wholly-owned affiliate entities ("Old National"). All significant intercompany transactions and balances have been eliminated. In addition, certain prior year amounts have been reclassified to conform with the 2003 presentation. Such reclassifications had no effect on net income. In the opinion of management, the consolidated financial statements contain all the normal and recurring adjustments necessary for a fair statement of the financial position of Old National as of September 30, 2003 and 2002, and December 31, 2002, and the results of its operations for the three and nine months ended September 30, 2003 and 2002 and its cash flows for the nine months ended September 30, 2003 and 2002. Interim results do not necessarily represent annual results.

In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS 150 establishes standards for classification and measurement in the statement of financial position of certain financial instruments with characteristics of both liabilities and equity. Old National has determined that it has no such instruments.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This statement clarifies reporting of contracts as either derivatives or hybrid instruments. Old National has determined that all derivatives or hybrid instruments covered under this statement have been properly reported under SFAS No. 149.

In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." FIN 46 provides guidance with respect to variable interest entities and when the assets, liabilities, noncontrolling interest, and results of operations of a variable interest entity need to be included in a company's consolidated financial statements. FIN 46 was expected to be effective for Old National on July 1, 2003; however, the release of the FASB Staff Position FIN 46-6 deferred the date of FIN 46 implementation until December 31, 2003. The effect is not expected to have a material impact on the results of operations or financial position.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-based Compensation - Transition and Disclosure," which provides guidance for transition from the intrinsic value method of accounting for stock-based compensation under Accounting Principles Board ("APB") Opinion No. 25 to SFAS No. 123's fair value method of accounting, if a company so elects. Old National applies APB Opinion No. 25 and related Interpretations in accounting for the stock option plan. Accordingly, no compensation costs have been recognized, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. Had compensation cost for Old National's stock option plan been recorded based on the fair value at the grant dates for awards under the plan consistent with the method prescribed by SFAS No. 123, net income and net income per share would have been adjusted to the proforma amounts indicated below:

In November 2002, FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" was issued. FIN 45 elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. Old National has determined that its standby letters of credit obligations under this FIN are not material for disclosure.

Old National acquired several companies in the non-bank services segment during 2002 and 2003. All acquisitions were accounted for as purchases in accordance with SFAS No. 141, "Business Combinations."

⁽¹⁾ Includes an indefinite-lived intangible asset of $2,800.

Intangible assets related to customer business relationships from these purchases are being amortized over 4 to 40 years. Unaudited financial statements of aggregate companies acquired during 2003 showed assets of $12.2 million on the acquisition dates, revenues from the beginning of the year to acquisition dates were $10.9 million, and net income from the beginning of the year to acquisition dates was $1.5 million. Unaudited financial statements of aggregate companies acquired during 2002 showed assets of $12.5 million on the acquisition dates, revenues from the beginning of the year to acquisition dates were $19.9 million, and net income from the beginning of the year to acquisition dates was $0.6 million. Contingent payments are often made as a result of these acquisitions. These payments, which are not deemed to be material, result in a change to the purchase price and goodwill.

During the third quarter of 2002, Old National finalized the sales of eight branches resulting in a pre-tax gain totaling $12.5 million. The branch sales resulted in a decrease in total loans of $107.3 million and total deposits of $202.9 million.

Net income per common share computations are based on the weighted average number of common shares outstanding during the periods presented. A 5% stock dividend was paid on January 27, 2003, to shareholders of record on January 6, 2003. All share and per share data presented herein have been restated for the effects of the stock dividend. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance.

Earnings Per Share Reconciliation
($ and shares in thousands except per share data)

5.  Investment Securities

Old National has classified all investment securities as available-for-sale or held-to-maturity on the date of purchase. Securities classified as available-for-sale are recorded at fair value with the unrealized gains and losses, net of tax effect, recorded as a separate component of shareholder's equity. Securities classified as held-to-maturity, which management has the intent and ability to hold to maturity, are reported at amortized cost.

The following tables summarize the amortized cost and fair value of the available-for-sale and held-to-maturity investment securities as of September 30, 2003 and 2002.

($ in thousands)

The amortized cost and fair value of the investment securities portfolio at September 30, 2003 and 2002 are shown below by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

Residential loans held for sale are recorded at lower of cost or market value determined as of the balance sheet date. 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, 2003 and 2002, Old National had mortgage loans held for sale of $16.9 million and $129.7 million, respectively. As of September 30, 2003, ineffectiveness was immaterial.

During the third quarter of 2003, residential mortgage loans of $3.4 million and commercial loans of $48.2 million were transferred to loans held for sale. As a result of these transfers, write-downs of $1.2 million and $11.3 million, respectively, were recorded against the allowance for loan losses. These loans, which were classified as nonaccrual, were sold in the third quarter for $2.2 million and $36.9 million, respectively, net of expenses incurred with the sale. In addition, during the second quarter of 2003, residential mortgage loans of $11.1 million were transferred to loans held for sale. As a result of this transfer, a write-down of $2.2 million was recorded against the allowance for loan losses. These loans, which were classified as nonaccrual, were sold in the second quarter for $8.9 million, net of expenses incurred with the sale.

7. Allowance for Loan Losses

Activity in the allowance for loan losses for the nine months ended September 30, 2003 and 2002 was as follows:

The following is a summary of loans deemed by management to be impaired in accordance with accounting requirements:

For the period ended September 30, 2003, the average balance of impaired loans was $235.5 million for which no interest was recorded. For the period ended September 30, 2002, the average balance of impaired loans was $246.0 million for which $14.6 million of interest was recorded. During the third quarter of 2003, Old National revised its interpretation of impaired loans to include only commercial and commercial real estate nonaccrual loans, which is in accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan, an amendment of FASB Statement No. 5 and 15." Previous to this change, Old National's interpretation of impaired loans was to include all problem credits with a potential collateral deficiency in the event of default. Had Old National made the interpretation to include only commercial and commercial real estate nonaccrual loans in the prior year, impaired loans would have totaled $47.4 million rather than $277.4 million as reported at September 30,2002. No additional funds a re committed to be advanced in connection with impaired loans. Loans deemed impaired are evaluated using the fair value of the underlying collateral.

At September 30, 2003 and 2002, Old National had goodwill in the amount of $129.5 million and $95.2 million, respectively. Old National performs impairment testing of goodwill annually. The changes in the carrying amount of goodwill by segment for the nine-month period ended September 30, 2003, are as follows:

Old National continues to amortize definite-lived intangible assets over the estimated remaining life of each respective asset. At September 30, 2003, Old National had $42.7 million in unamortized identifiable intangible assets, which included $2.8 million of indefinite-lived assets. At September 30, 2002, unamortized identifiable intangible assets were $16.2 million, which included $2.8 million of indefinite-lived assets.

The following table shows the gross carrying amounts and accumulated amortization for intangible assets as of September 30, 2003 and 2002.

Total amortization expense associated with intangible assets in the third quarter of 2003 and 2002 was $729 thousand and $350 thousand, respectively. Year-to-date amortization expense as of September 30, 2003 and 2002 was $1,810 thousand and $823 thousand, respectively. Below is the estimated amortization expense for the future years:

For the years ended:
($ in thousands)

Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balance of mortgage loans serviced for others at September 30 was $1.706 billion in 2003 and $1.372 billion in 2002.

Impairment of the mortgage servicing rights exists if the book value of the mortgage servicing rights exceeds its estimated fair value. Adjustments to value, if any, are recognized through a valuation allowance by charges against mortgage servicing income. The use of a valuation allowance enables the recovery of this value as market conditions become more favorable. For purposes of determining impairment, mortgage servicing rights are stratified based on one or more of the predominant risk characteristics of the underlying mortgage loans. Old National utilizes the risk characteristic of interest rate for this purpose.

The fair value of mortgage servicing rights is estimated by calculating the present value of estimated future net servicing income derived from related cash flows. Critical assumptions used in determining estimated net servicing income include expected mortgage loan prepayment rates, discount rates and other economic factors, which are determined based on current market conditions. The expected rates of mortgage loan prepayments are the most significant factors driving the value of mortgage servicing rights. Increases in mortgage loan prepayments reduce estimated future net servicing cash flows because the life of the underlying loan is reduced. In determining the fair value of the mortgage servicing rights, prepayment rates and discount rates are held constant over the estimated life of the portfolio. Expected mortgage loan prepayment rates are derived from a third party statistical model.

At September 30, 2003, Old National's key economic assumptions used in determining the fair value of mortgage servicing rights were a weighted average prepayment rate of 305 PSA and a discount rate of 8.5%. The fair value of capitalized mortgage servicing rights, net of valuation allowance, at September 30 was $14.8 million in 2003 and $10.9 million in 2002.

The following summarizes the activities related to mortgage servicing rights and the related valuation allowance:

During March 2000, Old National issued $50 million of trust preferred securities through a subsidiary, ONB Capital Trust I. The trust preferred securities have a liquidation amount of $25 per share with a cumulative annual distribution rate of 9.5%, or $2.375 per share, payable quarterly, and maturing on March 15, 2030.

Old National may redeem the subordinated debentures and thereby cause a redemption of the trust preferred securities in whole (or in part from time to time) on or after March 15, 2005 (for debentures owned by ONB Capital Trust I) and on or after April 12, 2007 (for debentures owned by ONB Capital Trust II), and in whole (but not in part) following the occurrence and continuance of certain adverse federal income tax or capital treatment events. These securities qualify as Tier 1 capital for regulatory purposes and the SEC registration related to these securities has remaining funding capacity of $50 million.

Costs associated with the issuance of the trust preferred securities totaling $3.3 million in 2002 and $1.8 million in 2000, were capitalized and are being amortized through the maturity date of the securities. The unamortized balance is included in other assets in the consolidated balance sheet.

Old National utilizes fair value hedge interest rate swaps to convert the interest rates on the trust preferred securities from fixed to variable, which ranged from 2.34% to 3.71% at September 30, 2003. The fair value of the swaps was $13.2 million at September 30, 2003 and $11.1 million at September 30, 2002, and is included in the guaranteed preferred beneficial interests in subordinated debentures on the balance sheet. Refer to the "Derivative Financial Instruments" for further information regarding these derivatives.

    Other borrowings consisted of the following:

Federal Home Loan Bank advances had weighted average rates of 5.39% and 5.46% at September 30, 2003 and 2002, respectively. These borrowings are secured by investment securities and mortgage loans up to 150% of outstanding debt.

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

The contractual maturities of long-term debt as of September 30, 2003 are as follows:
($ in thousands)

At September 30, 2003 and 2002, Old National had fair value hedge interest rate swaps with a notional value of $1.101 billion and $535.0 million, respectively. The fair value of the swaps was $15.4 million as of September 30, 2003 and $25.2 million as of September 30, 2002. Old National pays the counterparty a variable rate based on LIBOR and receives fixed rates ranging from 2.00% to 9.50%. The contracts terminate in or before April 2032. The fair value hedge interest rate swaps meet all criteria required to qualify for shortcut method accounting, therefore, no ineffectiveness was recognized and therefore no income statement impact was recorded as of September 30, 2003.

At September 30, 2003, Old National had cash flow hedges with a total notional value of $150.0 million. Old National pays the counterparty a variable rate based on prime and receives a fixed rate ranging from 5.36% to 6.15%. The contracts terminate in or before September 2007. The fair value of the cash flow hedges at September 30, 2003, was $2.3 million as a component of accumulated other comprehensive income (loss). Upon termination of the derivative, the gain or loss will be reclassified into earnings as a yield adjustment. As of September 30, 2003, ineffectiveness was immaterial.

During 2001, Old National entered into an interest rate swap with a notional value of $75 million for a forecasted issuance of debt. The transaction was designated as a cash flow hedge with the effective portion of the derivative's loss initially reported as a component of accumulated other comprehensive income (loss). Upon termination of the derivative, the loss on the interest rate swap of approximately $1.5 million is being reclassified into earnings as a yield adjustment over the 10-year term of the $150 million 6.75% fixed-rate subordinated bank notes issued on October 5, 2001.

In accordance with SFAS No. 149, loan commitments that relate to the origination of mortgage loan commitments with customers that will be held for sale shall be accounted for as derivative instruments by the issuer of the loan commitment. At September 30, 2003, Old National has a notional value of $44.7 million with a fair value of $821 thousand.

Old National uses derivatives, primarily mortgage-backed whole loan cash forward sale agreements, to hedge exposure to changes in interest rates in its mortgage loan origination and sale activity. The notional value of these forward sale agreements at September 30, 2003, was $49.0 million with a fair value of negative $812 thousand. In addition, beginning in February 2003, Old National began fair value hedge accounting for the closed loans held for sale warehouse. The notional value at September 30, 2003, of the closed loans held for sale warehouse was $16.8 million with a fair value of $142 thousand. As of September 30, 2003, no ineffectiveness was recognized, therefore no income statement impact was recorded as a result of these mortgage-banking derivatives.

In 2003, Old National began entering into various derivative contracts with its customers, which include interest rate swaps and caps. Old National hedges the exposure of these derivatives by entering into an offsetting third-party contract with reputable counterparties with matching terms. These derivative contracts are not linked to specific assets and liabilities in the balance sheet or to a forecasted transaction in an accounting hedge relationship and, therefore, do not qualify for hedge accounting. Contracts are carried at fair value with changes recorded as a component of other noninterest income. At September 30, 2003, the notional amount of contracts with customers was $46.8 million with a fair value of $161 thousand. Contracts with counterparties also had a notional amount of $46.8 million with a fair value of negative $161 thousand.

Old National is exposed to losses if a counterparty fails to make its payments under a contract in which Old National is in the net receiving position. Old National minimizes its credit risk by monitoring the credit standing of the counterparties and anticipates that the counterparties will be able to fully satisfy their obligation under the agreements. In addition, Old National obtains collateral up to certain thresholds of the fair value of its hedges for each counterparty based upon their credit standing.

13. Income Taxes

Following is a summary of the major items comprising the differences in taxes computed at the federal statutory rate and as recorded in the consolidated statement of income for the three months and nine months ended September 30, 2003 and 2002:

For the three and nine months ended September 30, 2003, the effective tax rate was significantly lower than for the three and nine months ended September 30, 2002. The main factor for the significant decrease on the effective tax rate is the tax-exempt income as a percentage of total income. The reduction in total income was due to the provision for loan losses, which increased from September 30, 2003 over September 30, 2002 by $16.5 million for the three months ended and $33.0 million for the nine months ended.

Old National operates in three reportable segments: community banking, non-bank services and treasury. The community banking segment serves customers in both urban and rural markets providing a wide range of financial services including commercial, real estate, and consumer loans; lease financing; checking, savings, time deposits and other depository accounts; cash management services; and debit cards and other electronically accessed banking services and Internet banking. The non-bank services segment combines the management and operations of trust, asset management, insurance brokerage and investment and annuity sales. Treasury manages investments, wholesale funding, interest rate risk, liquidity, and leverage for Old National. Additionally, treasury provides other miscellaneous capital markets products for its corporate banking customers.

In order to measure performance for each segment, Old National allocates capital, corporate overhead and income tax provision to each segment. Capital and corporate overhead are allocated to each segment using various methodologies, which are subject to periodic management changes. Income taxes are allocated using the effective tax rate. Also, to provide a basis for employee incentives, revenues and expenses related to the non-bank services segment are allocated to the community banking segment and reflected in both the community banking segment and the non-bank services segment. This allocation of revenue and expense is eliminated in the "Other" column. The "Other" column for 2002 also includes noninterest income of $12.5 million pre-tax gain and segment profit of $8.3 million after-tax gain related to the branch divestitures. Intersegment sales and transfers are not significant.

Old National uses a funds transfer pricing ("FTP") system to eliminate the effect of interest rate risk from the community banking and non-bank services segments net interest income. The FTP system is used to credit or charge each segment for the funds the segments create or use. The net FTP credit or charge is reflected in segment net interest income.

The financial information for each operating segment is reported on the basis used internally by Old National's management to evaluate performance and is not necessarily comparable with similar information for any other financial institution.

Summarized financial information concerning segments is shown in the following table: