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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File Number 0-10888
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OLD NATIONAL BANCORP
(Exact name of the Registrant as specified in its charter)
INDIANA 35-1539838
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
420 Main Street Evansville, Indiana 47708
(Address of principal executive offices) (Zip Code)
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(812) 464-1434
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value Preferred Stock Purchase Rights
-------------------------- -------------------------------
The Registrant 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 has been subject to such filing requirements for the past 90 days.
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.
The aggregate market value (average bid price) of the Registrant's voting common
stock held by non-affiliates of the Registrant as of January 31, 2000, was
approximately $1,271 million. The total number of shares of Registrant's common
stock outstanding as of that date was 46,851,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held April 20, 2000, is incorporated by reference into Part
III of this Form 10-K.
OLD NATIONAL BANCORP
1999 ANNUAL REPORT ON FORM 10-K
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Table of Contents
PART I PAGE
Item 1. Business 3
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
PART II
Item 5. Market for The Registrant's Common Stock and Related
Stockholder Matters 6
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 8
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 44
PART III
Item 10. Directors and Executive Officers of the Registrant 45
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial Owners and Management 45
Item 13. Certain Relationships and Related Transactions 45
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 45
SIGNATURES 46
INDEX OF EXHIBITS 47
2
OLD NATIONAL BANCORP
1999 ANNUAL REPORT ON FORM 10-K
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PART I
Item 1. BUSINESS
Old National Bancorp (the "Registrant") is a bank holding company
incorporated in the State of Indiana and maintains its principal executive
office in Evansville, Indiana. Through its nonbank affiliates, the Registrant
provides services incidental to the business of banking. Since its formation,
the Registrant has acquired seventeen banks and two thrifts located in Indiana;
six banks and one thrift located in Kentucky; and eleven banks and one thrift
located in Illinois. As of December 31,1999, the registrant employed 2,451
full-time equivalent employees. For further discussion of the business of the
registrant see management's discussion and analysis in Part II, Item 7.
Banking Affiliates
As of December 31, 1999, the Registrant's affiliate banks operated 119
banking offices throughout Indiana, Illinois, and Kentucky.
The Registrant's affiliate banks are engaged in a wide range of commercial
and consumer banking activities, including accepting demand, savings, and time
deposits; making commercial, consumer, and real estate loans; money management
services; and providing other services relating to the general banking business.
Certain of the Registrant's affiliated entities also offer electronic data
processing, brokerage, and correspondent banking services; issue credit cards;
originate, market, and service mortgage loans; and rent safe deposit facilities.
Nonbank Affiliates
Indiana Old National Insurance Company reinsures credit life, accident, and
health insurance. Fiduciary and trust services are offered through three trust
companies in Indiana, Kentucky, and Illinois. Old National Realty owns certain
properties in Evansville, Indiana, leased by affiliates. Various subsidiaries of
an affiliate bank sell insurance products including property and casualty, life,
and disability.
Supervision and Regulation
The Registrant is registered as a bank holding company and 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 the Registrant's nonbanking activities to
those which are determined by the Federal Reserve to be closely related to
banking and a proper incident thereto.
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. All of
the Registrant's affiliate banks exceeded the risk-based capital requirements of
the FDIC and OCC as of December 31, 1999. For the Registrant's regulatory
capital ratios and regulatory requirements as of December 31, 1999, see the
information in Part II, Item 7.
3
The Registrant's affiliate banks are subject to the provisions of the
National Bank Act or the banking laws of their respective states of charter, are
supervised, regulated, and examined by the OCC or their respective state banking
agency, and are subject to the rules and regulations of the OCC, Federal
Reserve, and the FDIC.
A substantial portion of the Registrant's cash revenue is derived from
dividends paid to it by its affiliate banks. These dividends are subject to
various legal and regulatory restrictions as summarized in Note 13 of the
financial statements referenced in Item 8.
Both federal and state law extensively regulates 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.
Insured state-chartered banks are prohibited under FDICIA from engaging as
principal in activities that are not permitted for national banks, unless (i)
the FDIC determines that the activity would pose no significant risk to the
appropriate deposit insurance fund, and (ii) the bank is, and continues to be,
in compliance with all applicable capital standards.
Branching by the Registrant's affiliate banks in Indiana, Kentucky, and
Illinois is subject to the jurisdiction and requires notice to or the prior
approval of the bank's primary federal regulatory authority and, if the
branching bank is a state bank, the respective state's banking agency.
The Registrant and its affiliate banks are subject to the Federal Reserve
Act, which restricts financial transactions between banks and affiliated
companies. The statute limits credit transactions between banks and affiliated
companies. The statute limits credit transactions between a bank and its
executive officers and its affiliates, 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.
FDICIA accomplished a number of sweeping changes in the regulation of
depository institutions, including the Registrant's affiliate banks. 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 publicity traded shares, and such other standards as the
agency deems appropriate.
The deposits of Registrant's affiliate banks are insured up to $100,000 per
insured account by the Bank Insurance Fund ("BIF"), which is administered by the
FDIC, except for deposits acquired in connection with affiliations with savings
associations, which deposits are insured by the Savings Association Insurance
Fund ("SAIF"). Accordingly, the Registrant's affiliated banks pay deposit
insurance premiums to both BIF and SAIF.
The Riegle-Neal Community Development and Regulatory Improvement Act of
1994 ("Act") contains seven titles pertaining to community development and home
ownership protection, small business capital formation, paperwork reduction and
regulatory improvement, money laundering, and flood insurance. The applicable
federal supervisory agencies continue to promulgate regulations implementing the
Act which apply to Registrant's affiliate banks.
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.
On November 12, 1999, the President signed into law comprehensive
legislation that modernizes the financial services industry for the first time
in decades. The legislation permits bank holding companies to conduct
essentially unlimited securities and insurance activities, in addition to other
activities determined by the Federal Reserve to be related to financial
services. As a result, the Registrant would be able to underwrite and sell
securities and insurance. It would also be able to acquire, or be acquired by,
brokerage firms and insurance underwriters. The Registrant has not had an
opportunity to assess the impact of the legislation on its operations but at the
present time does not anticipate significant changes in its products or
services.
4
In addition to the matters discussed above, the Registrant's affiliate
banks are subject to additional regulation of their activities, including a
variety of consumer protection regulations affecting their 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 the United States 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 the
Registrant and its affiliate banks in particular would be affected.
Item 2. PROPERTIES
The principal office of the Registrant is located in leased space in the
multi-story Old National Bank Building located at 420 Main Street, Evansville,
Indiana. The building is owned by a non-affiliated third party.
The Registrant's affiliate banks conduct business primarily from facilities
owned by the respective affiliate banks. Of the 119 banking offices operated by
the Registrant's affiliate banks, 97 are owned by the respective banks and 22
are leased from non-affiliated third parties.
Old National Realty Company, Inc., a wholly-owned non-banking subsidiary of
the Registrant, owns certain real properties in downtown Evansville, Indiana,
which generally are incidental to the Registrant's banking operations. It does
not engage in real estate brokerage services.
Item 3. LEGAL PROCEEDINGS
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Registrant
during the fourth quarter of 1999.
5
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Annual Meeting
The Annual Meeting of Shareholders will be held Thursday, April 20, 2000,
at 10:30 a.m. Central Daylight Time, at The Centre, 715 Locust Street,
Evansville, Indiana.
Corporate Office
420 Main Street
Evansville, Indiana 47708
812-464-1434
Website: www.oldnational.com
Stock Information
The stock of the company is traded over-the-counter on the NASDAQ National
Market System under Ticker Symbol OLDB. The Stock Transfer Agent is:
Old National Bancorp
Post Office Box 929
Evansville, Indiana 47706-0929
In December 1999, a 5% stock dividend was declared to shareholders of
record on January 7, 2000. There were 14,478 shareholders of record as of
December 31, 1999.
Market Makers
The following firms make a market in Old National Bancorp's stock:
ABN AMRO
Bear, Stearns
Credit Suisse First Boston Corporation
Hilliard, Lyons Keefe,
Bruyette & Woods, Inc.
McDonald & Company Sec., Inc.
NatCity Investments, Inc.
Salomon, Smith Barney
Stock Purchase and Discounted Dividend Reinvestment Plan
The company offers a direct stock purchase and discounted dividend
reinvestment plan to all interested investors. For information concerning this
convenient method of purchasing shares of stock contact:
Shareholder Services Department
Old National Bancorp
Post Office Box 929
Evansville, Indiana 47706-0929
812-464-1296
Additional Information
Shareholders and interested investors may obtain information about the
company upon written request or by calling:
John C. Claybon, CFA
Assistant Vice President - Investor Relations
Old National Bancorp
Post Office Box 718
Evansville, Indiana 47705-0718
812-464-1442
Equal Opportunity Employer
The company maintains its commitment to equal opportunity and affirmative
action in employment and promotion policies and pledges to recruit, hire, train,
and promote persons in all job classifications without regard to race, color,
religion, sex, age, or handicap.
The table below lists the NASDAQ price quotes, share volume and dividend data
for Old National Bancorp stock over the last two years.*
Price Per Share
-------------------- Share Dividend
High Low Volume Declared
- ------------------------------------------------------------
1999
- ------------------------------------------------------------
First Quarter $35 5/64 $28 13/32 2,067,800 $ .15
Second Quarter 34 39/64 28 37/64 2,746,400 .16
Third Quarter 30 27/64 25 53/64 5,423,700 .16
Fourth Quarter 32 9/64 27 7/16 3,219,900 .16
- ------------------------------------------------------------
- ------------------------------------------------------------
1998
- ------------------------------------------------------------
First Quarter $28 7/8 $27 13/64 1,346,700 $ .14
Second Quarter 29 3/4 28 51/64 1,345,700 .14
Third Quarter 33 23/32 28 7/8 1,885,400 .14
Fourth Quarter 36 23/64 30 25/64 1,791,300 .14
- ------------------------------------------------------------
* Data adjusted for all stock dividends, including a 5% stock dividend paid to
shareholders on January 28, 2000.
6
ITEM 6. SELECTED FINANCIAL DATA
($ in thousands except per share data)
Five
Year
Growth
1999 1998 1997 1996 1995 1994 Rate
- ------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
(Taxable equivalent basis)
Interest income $ 505,761 $ 470,921 $ 448,895 $ 419,585 $ 402,793 $ 353,983
Interest expense 250,536 231,613 216,873 196,298 191,835 149,809
- ------------------------------------------------------------------------------------------------------------------
Net interest income 255,225 239,308 232,022 223,287 210,958 204,174 4.6%
Provision for loan losses 11,489 12,160 13,562 11,082 7,491 7,886 7.8
- ------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 243,736 227,148 218,460 212,205 203,467 196,288 4.4
Noninterest income 67,508 58,443 51,104 48,680 42,044 36,680 13.0
Noninterest expense 185,564 167,496 158,644 158,091 153,345 152,093 4.0
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes 125,680 118,095 110,920 102,794 92,166 80,875 9.2
Income taxes 42,986 43,960 42,837 40,107 35,222 29,550 7.8
- ------------------------------------------------------------------------------------------------------------------
Net income from
continuing operations 82,694 74,135 68,083 62,687 56,944 51,325 10.0
Discontinued operations 4,101 (9,854) (5,005) 494 0 0 N/M
- ------------------------------------------------------------------------------------------------------------------
Net Income $ 86,795 $ 64,281 $ 63,078 $ 63,181 $ 56,944 $ 51,325 11.1%
==================================================================================================================
YEAR-END BALANCES
Total assets $6,982,932 $6,416,611 $5,933,321 $5,602,460 $5,281,387 $5,081,088 6.6%
Loans, net of unearned income 4,837,934 4,354,305 3,915,901 3,627,662 3,375,915 3,205,097 8.6
Deposits 5,071,298 4,668,858 4,521,010 4,479,357 4,336,406 4,028,932 4.7
Shareholders' equity 492,744 519,645 500,609 480,405 481,511 457,971 1.5
PER SHARE DATA
(on continuing operations) (1)
Net income-basic $ 1.72 $ 1.54 $ 1.40 $ 1.25 $ 1.10 $ 0.97 12.1
Net income-diluted (2) 1.67 1.49 1.36 1.22 1.07 0.95 11.9
Cash dividends paid 0.63 0.56 0.53 0.50 0.48 0.46 6.5
Book value at year-end 10.42 10.86 10.38 9.77 9.43 8.72 3.6
SELECTED PERFORMANCE
RATIOS (on continuing operations)
Return on assets 1.22% 1.21% 1.19% 1.17% 1.11% 1.04%
Return on equity (3) 15.70 14.95 14.28 13.23 12.20 11.07
Equity to assets 7.75 8.38 8.46 8.95 9.02 9.36
Dividend payout 36.95 35.15 36.74 40.37 43.69 47.18
Primary capital to assets 8.57 9.22 9.27 9.77 9.88 10.26
Net charge-offs to average loans 0.16 0.23 0.21 0.30 0.25 0.27
Allowance for loan losses
to average loans 1.23 1.26 1.31 1.25 1.30 1.44
==================================================================================================================
(1) Restated for all stock dividends, including a 5% stock dividend paid to
shareholders on January 28, 2000.
(2) Assumes the conversion of subordinated debentures.
(3) Excludes unrealized gains (losses) on investment securities.
N/M = Not meaningful
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Introduction
Old National Bancorp ("Old National") is a bank holding company
headquartered in Evansville, Indiana. Located in Indiana, Illinois, and
Kentucky, its 119 community banking locations serve customers in both urban and
rural markets. These community banking centers provide a wide range of financial
services, such as making commercial and consumer loans; originating and
servicing mortgage loans; issuing and servicing credit cards; leasing; offering
various deposit products; issuing letters of credit; issuing credit life,
accident, and health insurance; providing safe deposit facilities; and providing
alternative investments and brokerage services.
Old National's nonbank affiliates provide additional financial or support
services incidental to Old National's operations, including issuance and
reinsurance of credit life, accident, health, life, property, and casualty
insurance; investment services; fiduciary and trust services; and property
ownership.
Financial Basis
The following discussion is an analysis of Old National's operating results
for the years 1997 through 1999 and financial condition as of December 31, 1999
and 1998, and will assist readers of the accompanying consolidated financial
statements and related notes beginning on page 25. Management's forward-looking
statements are intended to benefit the reader but are subject to various risks
and uncertainties which may cause actual results to differ materially, including
but not limited to: (1) economic conditions generally and in the market areas of
the company; (2) increased competition in the financial services industry; (3)
actions by the Federal Reserve Board and changes in interest rates; and (4)
governmental legislation and regulation.
The financial information has been restated to reflect mergers accounted
for as pooling-of-interests as if they had occurred at the beginning of the
first year presented. Purchases have been included in reported results from the
date of the transaction.
During 1998, Old National sold the operations and related auto loans of its
consumer finance subsidiary headquartered in Indianapolis. The sale and the
operations prior to the sale resulted in a $9.9 million loss on discontinued
operations, net of tax, in 1998. In 1999 certain contingencies related to this
sale were successfully resolved and resulted in a $4.1 million gain on
discontinued operations. The financial results of the discontinued operations in
prior periods are similarly broken out from Old National's continuing
operations. The net assets of the subsidiary are included in other assets on the
consolidated balance sheet for periods prior to the sale. The following
discussion and analysis of Old National's financial condition and results of
operations relate to its continuing operations. For further details regarding
the discontinued operations, see the consolidated financial statements and Note
2.
Tax-exempt interest income in the following information has been increased
to an amount comparable to interest subject to income taxes using the federal
statutory rate in effect of 35% for all periods. An offsetting increase of the
same amount is made in the income tax section of the Selected Financial Data.
Net income is unaffected by these taxable equivalent adjustments.
Competition and Economic Conditions
The banking industry and related financial service providers are highly
competitive. Old National competes not only against other local and regional
banking institutions, thrifts, finance companies, and credit unions, but also
money market mutual funds, investment brokers, and insurance companies. This
competition takes place in terms of interest rates on loans and deposits,
convenient locations and hours, types of services, and quality of service. In
most of its markets, Old National ranks first or second in volume of loans and
deposits.
The economy in the United States and the Midwest has continued their
relatively low inflation and unemployment and steady growth. While there have
been some conflicting signs of weakness in certain sectors of the economy, Old
National's major markets have generally demonstrated economic expansion and a
growing financial base with additions such as the new and expanding Toyota and
AK Steel manufacturing complexes.
8
Short-and long-term interest rates increased during the second half of
1999, reversing the declines of 1998. The Federal funds rate target established
by the Federal Reserve Open Market Committee was increased from 4.75% in June of
1999 to 5.5% by December 1999. The national prime lending rate moved in tandem
with the Federal funds target rate, increasing from 7.75% to 8.5% during 1999.
Long-term U.S. Treasury rates increased throughout 1999. The 30 year U.S.
Treasury bond yield finished the year at 6.60%, approximately 150 basis points
higher than in January 1999. The yield curve, as measured by the difference
between rates on 6 month U.S. Treasury bills and 30 year Treasury bonds,
steepened during 1999 from a fairly flat curve in 1998, reflecting continuing
concern within the financial markets that interest rates would increase further.
During 1997, the fixed-income market began requiring from corporate
customers higher spreads to U.S. Treasury rates. In 1997 and 1998, declining
rates muted some of this impact on the banking industry's and Old National's
cost of funds. With the rising rate environment in 1999, this additional spread
put pressure on the marginal cost of funds. This trend combined with competitive
issues on loan pricing continued to compress net interest margin in 1999 within
the banking industry and at Old National.
Merger and Consolidation Activity
During 1999, Old National merged with Southern Bancshares Ltd.
("Southern"), Carbondale, Illinois, and Dulaney Bancorp, Inc. ("Dulaney"),
Marshall, Illinois. As of December 31, 1998, Southern had total assets of $255
million, and Dulaney's total assets were $39 million. Both mergers were
consummated in the first quarter of 1999 and accounted for as
pooling-of-interests. These financial statements have been restated to reflect
the Southern merger. The Dulaney merger was not considered material.
In 1999 Old National announced merger agreements with ANB Corporation
("ANB"), Muncie, Indiana, Heritage Financial Services, Inc. ("Heritage"),
Clarksville, Tennessee, and Permanent Bancorp, Inc. ("Permanent"), Evansville,
Indiana. As of December 31, 1999, total assets for these entities were $880
million for ANB, $246 million for Heritage, and $497 million for Permanent. ANB
and Heritage mergers are anticipated to close in the first quarter of 2000 and
will be accounted for as pooling-of-interests. The Permanent transaction is
expected to close in the third quarter of 2000 and will be accounted for as a
purchase. These mergers are subject to shareholder and regulatory approvals.
In 1999 Old National implemented its charter consolidation project named
One Bank. In the third and fourth quarters Old National consolidated its banking
charters down to three banks with the ultimate plan to have one banking charter.
The goals of One Bank included a single brand image, common products offered
throughout the banking locations, and improved back-office efficiency.
Year 2000
Old National and its computer systems and software successfully made the
transition into the year 2000. The media devoted much coverage to the Year 2000
("Y2K") issue, also know as the "Millennium Bug." This refers to the possibility
that some computers may be unable to recognize the date change at the turn of
the century. With the high volume of transactions and electronic data, the
banking industry requires extensive computer capabilities to service its
customers. The change to the new year did not create any significant problems at
Old National or with its major customers.
RESULTS OF OPERATIONS
Net Income
Old National's earnings rose 11.5% to reach $82.7 million in 1999, an $8.6
million increase, despite nearly $2.0 million of charter consolidation expenses,
net of security gains and taxes. Shareholders' basic income per share for 1999
was $1.72, up 11.7% over 1998, and diluted earnings per share totaled $1.67, a
12.1% increase over 1998. Strong revenue growth (tax equivalized net interest
income plus noninterest income) of $25.0 million, an 8.4% increase, generated
the earnings growth in 1999. The specific effects of each of these factors are
discussed in the following paragraphs.
Old National's 1998 net income was $74.1 million, up $6.0 million above
1997 earnings. Revenue growth of $14.6 million combined with reduced provision
for loan loss created the 8.9% increase in earnings.
9
Net Interest Income
As a financial intermediary, Old National pays interest on deposits and
other liabilities and receives interest and fee income on earning assets, such
as loans and investments. The difference between the income earned and the
interest paid is net interest income which provides nearly 80% of Old National's
revenues. Net interest margin is net interest income, on a taxable equivalent
basis, expressed as a percentage of average earning assets. Incorporating the
tax savings on certain assets permits effective yield comparability.
The net interest margin is influenced by a number of factors, such as the
volume and mix of earning assets and funding sources, the interest rate
environment, income tax rates, and the level of earning assets funded by
interest-free funding sources (primarily noninterest-bearing demand deposits and
equity capital). Old National can influence the effect of these factors through
its management of credit extension and interest rate sensitivity, both of which
are discussed in detail later in this report. External factors, such as the
overall condition of the economy, credit demand strength, Federal Reserve Board
monetary policy, and changes in tax laws, can also have significant effects on
changes in net interest income from one period to another.
On a taxable equivalent basis, net interest income grew 6.7%, a $15.9
million increase over 1998. Average earning assets grew 11.3% or $649.2 million
during 1999. Nonearning assets rose $7.7 million, in part due to increased cash
in late 1999 as a precaution for Y2K. Included in other assets is cash surrender
value of bank owned life insurance ("BOLI") discussed in the Noninterest Income
section of this report. Much of the asset growth was funded by interest-bearing
liabilities which increased $607.8 million or 12.0%. Noninterest-bearing
deposits increased $29.8 million or 6.0%, and other liabilities and equity
provided an additional $14.8 million of funding.
Several factors combined to lower Old National's net interest margin to
4.00%. Earning asset yield declined 29 basis points to 7.92%. The full year
impact of declining interest rates in 1998 and competitive market pressures
resulted in a 43 basis point decrease in loan yields, despite the Federal
Reserve Bank raising interest rates throughout the last half of 1999. Loans,
however, comprised a higher percentage of assets, increasing to 72.6% of earning
assets and 68.3% of total assets. The cost of interest-bearing liabilities
declined 16 basis points to 4.44%. Growth in higher-rate certificate of deposits
and borrowings contributed to the net interest margin compression, particularly
during the last half of 1999.
In 1998 net interest income grew 3.1% or $7.3 million and totaled $239.3
million. Average earning assets grew 6.6%, a $355.5 million increase.
Interest-bearing liabilities rose $340.6 million or 7.2%. The yield on earning
assets declined 13 basis points as all asset categories experienced similar
declines. The cost of interest-bearing liabilities decreased 2 basis points due
to growth in the higher-rate liabilities. Net interest margin declined from
4.31% to 4.17% due to these trends. Additionally, approximately 7 basis points
of the decrease was due to the purchase of BOLI which generates tax-free
noninterest income that is not included in net interest income.
Table 1 on page 11 details the changes in the components of net interest
income. Table 2 on page 11 attributes those fluctuations to the impact of
changes in the average balances of assets and liabilities and the yields earned
or rates paid. Table 3 on page 12 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.
10
Net Interest Income Changes (Table 1)
(Taxable equivalent basis, $ in thousands)
- ----------------------------------------------------------------------------------------
% Change From
Prior Year
--------------
1999 1998 1997 1999 1998
- ----------------------------------------------------------------------------------------
INTEREST INCOME:
Loans $387,508 $360,493 $334,204 7.5% 7.9%
Investment securities 117,117 109,209 113,776 7.2 (4.0)
Money market investments 1,136 1,219 915 (6.8) 33.2
- ----------------------------------------------------------------------------------------
Total interest income 505,761 470,921 448,895 7.4 4.9
- ----------------------------------------------------------------------------------------
INTEREST EXPENSE:
NOW deposits 9,220 10,125 11,182 (8.9) (9.5)
Savings deposits 10,420 10,855 11,983 (4.0) (9.4)
Money market deposits 22,498 23,783 24,893 (5.4) (4.5)
Certificates of deposit $100,000 and over 20,345 23,417 19,927 (13.1) 17.5
Other time deposits 120,126 112,543 108,805 6.7 3.4
Short-term borrowings 28,237 18,879 20,379 49.6 (7.4)
Other borrowings 39,690 32,011 19,704 24.0 62.5
- ----------------------------------------------------------------------------------------
Total interest expense 250,536 231,613 216,873 8.2 6.8
- ----------------------------------------------------------------------------------------
NET INTEREST INCOME $255,225 $239,308 $232,022 6.7% 3.1%
========================================================================================
NET INTEREST MARGIN 4.00% 4.17% 4.31%
============================================================================
Net Interest Income--Rate/Volume Analysis (Table 2)
(Taxable equivalent basis, $ in thousands)
- --------------------------------------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
- --------------------------------------------------------------------------------------------------------
Attributed to Attributed to
Total ------------------ Total -----------------
Change Volume Rate Change Volume Rate
- --------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans $27,015 $45,926 $(18,911) $26,289 $31,719 $(5,430)
Investment securities 7,908 7,869 39 (4,567) (647) (3,920)
Money market investments (83) (144) 61 304 382 (78)
- --------------------------------------------------------------------------------------------------------
Total interest income 34,840 53,651 (18,811) 22,026 31,454 (9,428)
- --------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
NOW deposits (905) 526 (1,431) (1,057) 21 (1,078)
Savings deposits (435) 611 (1,046) (1,128) (434) (694)
Money market deposits (1,285) (31) (1,254) (1,110) (48) (1,062)
Certificates of deposit $100,000 and over (3,072) (1,153) (1,919) 3,490 3,962 (472)
Other time deposits 7,583 12,583 (5,000) 3,738 3,608 130
Short-term borrowings 9,358 8,186 1,172 (1,500) (408) (1,092)
Other borrowings 7,679 9,554 (1,875) 12,307 14,120 (1,813)
- --------------------------------------------------------------------------------------------------------
Total interest expense 18,923 30,276 (11,353) 14,740 20,821 (6,081)
- --------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $15,917 $23,375 $ (7,458) $ 7,286 $10,633 $(3,347)
========================================================================================================
The variance not solely due to rate or volume is allocated equally between the
rate and volume variances.
11
Three Year Average Balance Sheet and Net Interest Analysis (Table 3)
(Tax equivalent basis, $ in thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Average Interest Yield/ Average Interest Yield/ Average Interest Yield/
Balance & Fees Rate Balance & Fees Rate Balance & Fees Rate
- -----------------------------------------------------------------------------------------------------------------------------------
EARNING ASSETS:
Money market investments $ 20,571 $ 1,136 5.52% $ 23,257 $ 1,219 5.24% $ 16,245 $ 915 5.63%
Investment securities:
U.S. Treasury and
Government agencies (1) 1,157,028 74,772 6.46 1,094,709 70,418 6.43 1,124,725 74,923 6.66
State and political subdivisions 513,785 38,248 7.44 467,562 35,236 7.54 454,544 35,821 7.88
Other securities 60,725 4,097 6.75 52,910 3,555 6.72 45,300 3,032 6.69
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities 1,731,538 117,117 6.76 1,615,181 109,209 6.76 1,624,569 113,776 7.00
- -----------------------------------------------------------------------------------------------------------------------------------
Loans: (2) (3)
Commercial 1,121,242 96,915 8.64 976,248 88,339 9.05 852,652 80,067 9.39
Commercial real estate 1,032,784 87,124 8.44 831,015 73,959 8.90 705,889 62,869 8.91
Residential real estate 1,762,102 134,661 7.64 1,584,180 127,824 8.07 1,440,237 118,195 8.21
Consumer, net of
unearned income 691,665 64,466 9.32 680,291 65,947 9.69 714,410 68,314 9.56
Credit card 27,769 4,342 15.64 28,303 4,424 15.63 28,932 4,759 16.45
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans 4,635,562 387,508 8.36 4,100,037 360,493 8.79 3,742,120 334,204 8.93
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 6,387,671 $505,761 7.92% 5,738,475 $470,921 8.21% 5,382,934 $448,895 8.34%
Less: Allowance for loan losses (56,111) ================ (51,482) ================ (46,284) ================
NON-EARNING ASSETS:
Cash and due from banks 142,334 132,484 131,857
Other assets 312,084 314,195 266,256
---------- ---------- ----------
TOTAL ASSETS $6,785,978 $6,133,672 $5,734,763
========== ========== ==========
INTEREST-BEARING
LIABILITIES:
NOW deposits $ 697,477 $ 9,220 1.32% $ 660,609 $ 10,125 1.53% $ 659,308 $ 11,182 1.70%
Savings deposits 441,679 10,420 2.36 417,050 10,855 2.60 433,211 11,983 2.77
Money market deposits 580,707 22,498 3.87 581,480 23,783 4.09 582,607 24,893 4.27
Certificates of deposit
$100,000 and over 388,252 20,345 5.24 409,282 23,417 5.72 340,787 19,927 5.85
Other time deposits 2,255,739 120,126 5.33 2,024,513 112,543 5.56 1,959,560 108,805 5.55
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-
bearing deposits 4,363,854 182,609 4.18 4,092,934 180,723 4.42 3,975,473 176,790 4.45
Short-term borrowings 573,080 28,237 4.93 402,796 18,879 4.69 411,233 20,379 4.96
Other borrowings 710,383 39,690 5.59 543,830 32,011 5.89 312,270 19,704 6.31
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $5,647,317 $250,536 4.44% $5,039,560 $231,613 4.60% $4,698,976 $216,873 4.62%
NONINTEREST-BEARING ================ ================ ================
LIABILITIES:
Demand deposits 522,219 492,435 475,868
Other liabilities 90,827 87,648 74,795
Shareholders' equity 525,615 514,029 485,124
---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $6,785,978 $6,133,672 $5,734,763
========== ========== ==========
INTEREST MARGIN RECAP:
Interest income/earning assets $505,761 7.92% $470,921 8.21% $448,895 8.34%
Interest expense/earning assets 250,536 3.92 231,613 4.04 216,873 4.03
---------------- ---------------- ----------------
Net interest margin $255,225 4.00% $239,308 4.17% $232,022 4.31%
================ ================ ================
(1) Includes Government agency mortgage-backed securities.
(2) Includes principal balances of nonaccrual loans. Interest income relating
to nonaccrual loans is included only if received.
(3) The amount of loan fees is not material in any of the years presented.
12
Asset/Liability Management--Interest Rate Sensitivity and Liquidity
Customer preferences for loans and deposits generate certain levels of
interest rate risk, which is the impact changing interest rates have on net
interest income. Asset/liability management's goal is to maximize and maintain
adequate growth of net interest income within certain interest rate sensitivity
and liquidity guidelines established by Old National's Balance Sheet Management
Committee. This committee, comprised of Old National senior managers, monitors
asset/liability issues and guidelines.
Old National uses both static gap and income simulation methods to measure
the impact of interest rate changes on its net interest income. Static gap,
measured at a point in time, measures interest rate risk as the difference
between interest rate-sensitive assets and interest rate-sensitive liabilities
within a given repricing period and is expressed as a ratio and as a dollar
amount known as the "gap." A ratio of 100% suggests a balanced position between
rate-sensitive assets and liabilities within a given repricing period. While the
measurement process and related assessment of risk are somewhat imprecise, Old
National believes its asset/liability management program allows adequate
reaction time for trends in the market place as they occur, thereby minimizing
the potential negative effect of its gap position against the event of interest
rate changes.
Table 4 below reflects Old National's interest rate sensitivity position
within specified time periods and cumulatively over various time horizons. In
the table, assets and liabilities are placed in categories based on their actual
or expected repricing date. In the 365 day cumulative time frame, the assets to
liabilities ratio was 63%, down from 83% in 1998. Asset growth was primarily in
time horizons greater than one year while liability growth was slightly more in
periods under one year.
Net interest income simulation modeling is used to better quantify the
impact of potential interest rate fluctuations on net interest income. With this
understanding, management can best determine possible balance sheet changes,
pricing strategies, and appropriate levels of capital and liquidity which allow
Old National to generate strong net interest income while controlling and
monitoring interest rate risk. Old National simulates both an immediate interest
rate shock up and down 200 basis points and a gradual change in rates of 200
basis points up or down over 12 months and sustained for additional 12 months.
Key model assumptions include asset prepayment speeds; changes in market
conditions, loan volumes, and pricing; deposit sensitivity; and customer
preferences and are inherently uncertain. The model cannot precisely estimate
net interest income or the impact of interest rate changes. Actual results will
differ from the simulated results due to timing, magnitude, and frequency of
interest rate changes, changes in market conditions, management strategies,
among other factors. Old National's policy limit using the gradual rate change
for the maximum negative impact on net interest income over 12 months is 10%. At
December 31, 1999, Old National was well within that limit as the model's
fluctuation was 2% for the first 12 months and less than 5% for the total 24
month period.
Analysis of Interest Rate Sensitivity at December 31, 1999 (Table 4)
($ in thousands)
- ------------------------------------------------------------------------------------------------------------
1-180 181-365 1-5 Beyond
Days Days Years 5 years Total
- ------------------------------------------------------------------------------------------------------------
RATE-SENSITIVE ASSETS:
Money market investments $ 16,431 $ -- $ -- $ -- $ 16,431
Investment securities 79,309 51,743 362,057 1,185,542 1,678,651
Loans, net of unearned income 1,390,933 501,693 1,677,980 1,267,328 4,837,934
- ------------------------------------------------------------------------------------------------------------
Total rate sensitive assets $1,486,673 $ 553,436 $2,040,037 $2,452,870 $6,533,016
- -------------------------------------------------------------------------------------------------===========
RATE-SENSITIVE LIABILITIES:
Deposits 1,632,556 525,310 973,089 1,394,917 4,525,872
Other borrowed funds 1,034,278 43,244 222,423 36,958 1,336,903
- ------------------------------------------------------------------------------------------------------------
Total rate-sensitive liabilities $2,666,834 $ 568,554 $1,195,512 $1,431,875 $5,862,775
- -------------------------------------------------------------------------------------------------===========
Interest sensitivity gap per period (1,180,161) (15,118) 844,525 1,020,995
=================================================================================================
Cumulative gap $(1,180,161) $(1,195,279) $ (350,754) $ 670,241
Cumulative ratio at December 31, 1999 (1) 56% 63% 92% 111%
Cumulative ratio at December 31, 1998 (1) 78% 83% 116% 114%
=================================================================================================
(1) Rate-sensitive assets/rate-sensitive liabilities.
13
Liquidity Management
In addition to the interest rate sensitivity the Balance Sheet Management
Committee monitors the company's liquidity position. The objective is to ensure
the ability to meet cash flow needs of customers, such as new loan demand and
deposit withdrawals, while at the same time maximizing lending and investment
opportunities.
Failure to properly manage liquidity requirements may result in the need to
satisfy customer withdrawals and other obligations with expensive funding
sources. Too much liquidity on the balance sheet is similarly undesirable as
earnings will suffer due to underutilized resources. Old National's banking
operations maintain adequate liquidity with sufficient levels of liquid assets,
unpledged securities, deposit growth, and other alternative funding sources,
such as the Federal Home Loan Bank ("FHLB") and the Federal Reserve Bank. At
December 31, 1999, the bank's debt rating was rated A3 by Moody's and A- by
Standard and Poor's.
The parent company's sources of liquidity include: bank lines of credit,
capital markets, and affiliate banks' dividends which are subject to regulatory
limits and in some cases require regulatory approval. Notes 10 and 13 of the
consolidated financial statements address this further. At year-end 1999 Old
National had $75 million in available lines of credit from unaffiliated banks.
Old National has capacity to issue up to $85.7 million of a $150 million medium
term note program available for future liquidity needs. At December 31, 1999,
these securities were rated Baa1 by Moody's and BBB+ by Standard and Poor's.
Noninterest Income
Besides net interest income, Old National generates additional revenue,
noninterest income, through fees and sales commissions from its core banking
franchise and other related businesses, such as investment products and
insurance. Noninterest income, excluding securities transactions, grew 12.0% in
1999 compared to 14.5% in 1998.
The trust fee income grew 7.5% in 1999 and 11.5% in 1998. Trust fees
benefited from a strong equity market in both years which was partially offset
by a poor bond market in 1999. Service charges on deposit accounts rose
dramatically in 1999 with a 23.4% increase compared to a 2.3% in 1998. As part
of One Bank, Worry-Free Checking was introduced which produced higher levels of
collectible overdraft fees. Loan servicing fees were relatively unchanged in
1999, up 0.2%, after a 4.3% decline in 1998. Lower mortgage banking and
commercial loan fees in 1999 negated higher consumer loan fees. Bank-owned life
insurance revenue, a new initiative in 1998, represented income on officers'
life insurance coverage, and in 1999 Old National had a full year of the
revenue. Insurance sales hit $6.1 million, up 11.5% in 1999 after 8.4% growth in
1998. The Sycamore Agency purchased on December 31, 1999, is not included but
will contribute additional revenue in 2000. Investment and brokerage business
increased 22.7% in 1999 with revenue exceeding $6.1 million, compared to 6.1%
growth in 1998. The coordination of trust and brokerage services contributed to
this growth. The remaining other income category was down $0.3 million from 1998
which included loan sale gains.
In 1999 Old National realized $2.5 million in net securities gains as
management restructured the investment portfolio and used these one-time gains
to partially offset the one-time charter consolidation expenses. During 1998 and
1997, Old National had minimal security sales.
Table 5 below presents changes in the components of noninterest income for
the years 1997 through 1999.
Noninterest Income (Table 5)
($ in thousands)
- ------------------------------------------------------------------------------
% Change From
Prior Year
----------------
1999 1998 1997 1999 1998
- ------------------------------------------------------------------------------
Trust fees $14,405 $13,404 $12,024 7.5% 11.5%
Service charges on deposit accounts 21,514 17,441 17,044 23.4 2.3
Loan servicing fees 4,827 4,816 5,031 0.2 (4.3)
Insurance premiums and commissions 6,114 5,481 5,058 11.5 8.4
Investment product fees 6,104 4,976 4,689 22.7 6.1
Bank-owned life insurance 4,260 3,860 -- 10.4 N/M
Other income 7,826 8,125 6,879 (3.7) 18.1
- ------------------------------------------------------------------------------
Subtotal 65,050 58,103 50,725 12.0 14.5
Net securities gains 2,458 340 379 622.9 (10.3)
- ------------------------------------------------------------------------------
Total noninterest income $67,508 $58,443 $51,104 15.5% 14.4%
==============================================================================
N/M = Not meaningful
14
Noninterest Expense
The banking industry continues to improve its efficiency through mergers
and technology advancements. The challenge for Old National and the industry is
to achieve cost efficiencies while still providing quality customer service. One
key ratio used to evaluate performance is the efficiency ratio, with lower
percentages representing positive trends. Old National's efficiency ratio (net
interest income, tax equivalized, plus noninterest income, excluding securities
gains, divided by noninterest expense), was 57.94% in 1999, 56.32% in 1998, and
56.11% in 1997. In 1999 consolidation expenses of $5.5 million negatively
impacted this ratio. If these are removed, the ratio for 1999 would have been
56.23%.
Salaries and benefits, which comprised over 50% of total noninterest
expense, grew 13.1% in 1999 and 4.6% in 1998. As a part of charter restructuring
in 1999, Old National had duplicate expenses as centralized operations were
staffed up to take over certain functions but did not fully take over these
operations until late in the year. Old National's strong earnings results and
retirements, severance, and incentives linked to charter reduction which totaled
$2.0 million in 1999, combined to increase incentives by $2.9 million over 1998
levels. Equipment expense declined 1.0% in 1999 after a 7.6% increase in 1998
partially due to accelerated depreciation on equipment to be upgraded. Marketing
expense increased 16.3% in 1999 compared to a 4.8% in 1998. In 1999 Old National
had several corporate-wide promotions, such as Worry-Free Checking, Y2K
advertising, and charter consolidation marketing efforts. Data processing
expense rose over 11% in both 1999 and 1998. In 1998 Old National outsourced
credit card processing which increased this particular expense. In 1999 Old
National had a full year of this outsource expense and additional costs and
higher expenses related to Y2K. Communications and transportation expense
increased 9.3% in 1999 and 2.1% in 1998. Higher postage in 1999 influenced by
Y2K and restructuring represented over half of the overall increase.
Professional fees increased 54.9% in 1999 and 45.4% in 1998, a big portion of
which related to consolidation consulting services. Other expense declined 3.0%
in 1999 after a 5.4% increase in 1998.
Table 6 below presents changes in the components of noninterest expense for
the years 1997 through 1999.
Noninterest Expense (Table 6)
($ in thousands)
- -------------------------------------------------------------------------------------
% Change From
Prior Year
---------------
1999 1998 1997 1999 1998
- -------------------------------------------------------------------------------------
Salaries and employee benefits $108,555 $ 95,997 $ 91,791 13.1% 4.6%
Occupancy expense 10,932 9,898 10,051 10.4 (1.5)
Equipment expense 13,279 13,412 12,466 (1.0) 7.6
Marketing expense 6,856 5,895 5,623 16.3 4.8
FDIC insurance premiums 690 578 707 19.4 (18.2)
Data processing expense 9,996 8,933 7,860 11.9 13.7
Communications and transportation expense 7,777 7,115 6,968 9.3 2.1
Professional fees 6,934 4,477 3,079 54.9 45.4
Other expense 20,545 21,191 20,099 (3.0) 5.4
- -------------------------------------------------------------------------------------
Total noninterest expense $185,564 $167,496 $158,644 10.8% 5.6%
=====================================================================================
Provision for Income Taxes
Old National records a provision for income taxes currently payable and for
income taxes payable in the future which arise due to timing differences in the
recognition of certain items for financial statement and income tax purposes.
The major differences between the effective tax rate applied to Old National's
financial statement income and the federal statutory rate are caused by interest
on tax-exempt securities and loans and state income taxes. Old National's
effective tax rate was 24.0% in 1999, 28.5% in 1998, and 29.9% in 1997. The drop
in rate in 1999 was due to a change in state tax laws and the implementation of
certain tax saving strategies. See Note 7 to the consolidated financial
statements for additional details on Old National's income tax provision.
15
Interim Financial Data
Table 7 below provides a detailed summary of quarterly results of
operations for the years ended December 31, 1999 and 1998. These results contain
all normal and recurring adjustments of a material nature necessary for a fair
and consistent presentation.
Interim Financial Data (Table 7)
(Unaudited, $ and shares in thousands except per share data)
- -----------------------------------------------------------------------------------------
Quarter Ended
- -----------------------------------------------------------------------------------------
December September June March
31 30 30 31
- -----------------------------------------------------------------------------------------
1999:
Interest income $126,348 $125,398 $120,721 $116,456
Interest expense 66,813 64,523 60,808 58,392
- -----------------------------------------------------------------------------------------
Net interest income 59,535 60,875 59,913 58,064
Provision for loan losses 3,052 2,740 2,894 2,803
Noninterest income 17,323 16,925 17,180 16,080
Noninterest expense 50,869 45,756 45,301 43,638
- -----------------------------------------------------------------------------------------
Income before income taxes 22,937 29,304 28,898 27,703
Income taxes 3,091 7,718 7,646 7,693
- -----------------------------------------------------------------------------------------
Net income from continuing operations 19,846 21,586 21,252 20,010
Discontinued operations 618 -- 3,483 --
- -----------------------------------------------------------------------------------------
Net income $ 20,464 $ 21,586 $ 24,735 $ 20,010
=========================================================================================
Net income from continuing operations per share:
Basic $0.42 $0.45 $0.44 $0.41
Diluted $0.41 $0.43 $0.43 $0.40
=========================================================================================
Net income per share:
Basic $0.43 $0.45 $0.51 $0.41
Diluted $0.43 $0.43 $0.50 $0.40
=========================================================================================
Weighted average shares:
Basic 47,493 48,318 48,485 48,378
Diluted 48,810 50,066 50,358 50,275
=========================================================================================
1998:
Interest income $115,708 $116,451 $113,060 $111,315
Interest expense 58,683 60,154 57,298 55,478
- -----------------------------------------------------------------------------------------
Net interest income 57,025 56,297 55,762 55,837
Provision for loan losses 2,971 2,936 3,174 3,079
Noninterest income 15,563 15,020 14,229 13,631
Noninterest expense 45,054 41,326 40,630 40,486
- -----------------------------------------------------------------------------------------
Income before income taxes 24,563 27,055 26,187 25,903
Income taxes 6,570 7,064 8,011 7,928
- -----------------------------------------------------------------------------------------
Net income from continuing operations 17,993 19,991 18,176 17,975
Discontinued operations -- -- (9,193) (661)
- -----------------------------------------------------------------------------------------
Net income $ 17,993 $ 19,991 $ 8,983 $ 17,314
=========================================================================================
Net income from continuing operations per share:
Basic $0.38 $0.41 $0.38 $0.37
Diluted $0.37 $0.40 $0.36 $0.36
=========================================================================================
Net income per share:
Basic $0.38 $0.41 $0.18 $0.36
Diluted $0.37 $0.40 $0.18 $0.35
=========================================================================================
Weighted average shares:
Basic 47,971 48,255 48,529 48,062
Diluted 49,878 50,266 50,571 50,724
=========================================================================================
16
FINANCIAL CONDITION
Overview
Total assets reached $7.0 billion at December 31, 1999, 8.8% higher than
the prior year-end. Loans increased $483.6 million or 11.1%. Total liabilities
grew $593.2 million or 10.0% over 1998. Deposits rose 8.6% or $402.4 million
while other sources funded the remainder of the asset growth.
Investment Securities
Investment securities at December 31, 1999, comprised 24% of total assets,
down from 26% at year-end 1998. Investment securities increased $42.0 million,
2.6% over 1998, as the focal point for asset growth was loans rather than
investments.
While it does not actively trade its investment securities, Old National
has classified all securities as available-for-sale to maximize flexibility to
adapt to interest rate changes. The principal and interest payments along with
the ability to pledge or liquidate, if necessary, available-for-sale securities
provide funding to help meet unforeseen liquidity needs. The entire portfolio
has an effective duration of 4.1 years.
At December 31, 1999, Old National held investment securities issued by the
certain states and their political subdivisions with the following aggregate
market value: $103.8 million by Illinois, $82.2 million by Indiana. There were
no other concentrations of investment securities issued by an individual state
and its political subdivisions which were greater than 10% of shareholders'
equity.
Average yields on the investment securities portfolio are calculated on a
taxable equivalent basis. Yields are based on the amortized cost and are
weighted for the scheduled maturity of each investment. At year-end, average
yields for the entire portfolio were 6.97% in 1999, 6.94% in 1998, and 7.18% in
1997. The portfolio yield rose slightly in 1999 as the reinvestment rates
increased after the lower rate environment in 1998.
Table 8 below presents the maturity distribution of the investment
portfolio, along with weighted average yields thereon.
Maturity Distribution of Investment Securities (Table 8)
($ in thousands)
- -------------------------------------------------------------------------------------------------------------
December 31, 1999
- --------------------------------------------------------------------------------------
Within 1 - 5 5 - 10 Beyond
1 Year Years Years 10 Years Total 1998 1997
- -------------------------------------------------------------------------------------------------------------
FAIR VALUE:
U.S. Treasury $ 15,489 $ 17,491 $ -- $ 3,746 $ 36,726 $ 92,704 $ 119,158
U.S. Government agencies
and corporations 107,986 183,918 28,338 -- 320,242 276,070 257,610
Mortgage-backed securities 36,332 88,125 421,549 189,768 735,774 719,422 727,434
States and political subdivisions 25,366 206,562 239,233 42,888 514,049 491,140 456,019
Other securities 424 2,455 781 68,200 71,860 57,301 46,653
- -------------------------------------------------------------------------------------------------------------
Total $185,597 $498,551 $689,901 $304,602 $1,678,651 $1,636,637 $1,606,874
=============================================================================================================
AMORTIZED COST:
U.S. Treasury $ 15,479 $ 17,765 $ -- $ 4,035 $ 37,279 $ 91,029 $ 118,109
U.S. Government agencies
and corporations 111,251 190,043 29,683 -- 330,977 270,749 254,282
Mortgage-backed securities 36,537 88,720 441,610 199,489 766,356 713,468 718,955
States and political subdivisions 25,209 204,592 243,608 44,478 517,887 472,461 441,031
Other securities 415 2,446 781 68,400 72,042 57,418 46,723
- -------------------------------------------------------------------------------------------------------------
Total $188,891 $503,566 $715,682 $316,402 $1,724,541 $1,605,125 $1,579,100
Weighted average yield,
based on amortized cost
(taxable equivalent basis) 6.88% 7.15% 6.92% 6.85% 6.97% 6.94% 7.18%
=============================================================================================================
17
Lending and Loan Administration
The key to Old National's success has long been its credit culture which
features decision-making near the customer with corporate oversight. Community
loan personnel have the authority to extend credit under guidelines established
and administered by Old National's Credit Policy Committee. This committee,
which meets quarterly, includes members of Old National's executive and
community bank management. The committee monitors credit quality through its
review of information such as delinquencies, problem loans, and charge-offs. The
committee regularly reviews the loan policy to assure it remains appropriate for
the current lending environment. Executive and credit committees at the local
level provide additional knowledge, judgment, and experience to Old National's
lending administration.
Old National maintains an independent corporate loan review program. Its
loan review system evaluates loan administration, credit quality, compliance
with corporate loan standards, and the adequacy of the allowance for loan
losses. This program includes periodic on-site visits as well as regular
off-site reviews of problem loan reports, delinquencies, and charge-offs.
Old National lends to commercial customers 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. Old National
has no concentration of loans in any single industry exceeding 10% of its
portfolio nor does its portfolio contain any loans to finance speculative
transactions, such as large, highly leveraged buyouts or loans to foreign
countries.
The 11.1% loan growth in 1999 was spread among all major categories but was
strongest in the commercial sector. Commercial real estate led all loan types
with a 16.1% increase in 1999 following 23.9% growth in 1998. Commercial loans
grew consistently with 14.3% in 1999 compared to 13.8% in 1998. The $60.7
million commercial loan made in 1998 to finance the sale of Old National's
consumer finance subsidiary paid off in 1999. Residential real estate loan
growth reached 7.3% in 1999, down from 10.8% in 1998. Higher interest rates in
the last half of 1999 impacted new originations. Consumer credit increased 7.9%
in 1999 after a 5.2% decrease in 1998. This growth included direct loans with
consumers, loans acquired from dealers and direct home equity loans. In 1999 as
part of the common product drive, a corporate-wide promotion for home equity
loans contributed to this growth. The portfolio is well diversified with 24% of
the portfolio in commercial loans, 23% in commercial real estate, 37% in
residential real estate, and 16% in consumer credit. Over the past five years,
commercial and commercial real estate loans have grown faster relative to the
other categories.
Old National's commercial lending is primarily to small to medium-sized
businesses in various industries in its region. Commercial real estate loans are
generally made to similar companies in Old National's geographical area. These
industries have been stable in Old National's market area and provide
opportunities for growth. A significant percentage of commercial loans are due
within one year, reflecting the short-term nature of a large portion of these
loans. Table 9 on page 19 presents the maturity distribution and rate
sensitivity of commercial loans and an analysis of these loans which have
predetermined and floating interest rates.
Residential real estate loans, primarily 1-4 family properties, represent
the most significant portion of the loan portfolio. This sector's percentage of
our total loan portfolio has remained fairly constant over the last several
years. Old National's portfolio includes both adjustable rate and fixed rate
loans.
Consumer loans include automobile loans, personal and home equity loans and
lines of credit, student loans, and credit card loans.
Loans in most categories have grown steadily over the past four years.
Commercial loans increased an average of 10.8% per year between 1995 and 1999.
Commercial real estate grew 17.6%, and residential real estate loans grew 8.4%
over the same period. Consumer loans remained relatively unchanged. Table 10 on
page 19 presents the composition of the loan portfolio for each of the last five
years.
18
Distribution of Commercial Loan Maturities at December 31, 1999 (Table 9)
($ in thousands)
Within 1-5 Beyond
1 Year Years 5 years Total
- -------------------------------------------------------------------------
Predetermined interest rates $169,936 $236,735 $142,507 $ 549,178
Floating interest rates 374,696 147,277 103,547 625,520
- -------------------------------------------------------------------------
Total $544,632 $384,012 $246,054 $1,174,698
=========================================================================
Loan Portfolio at Year-End (Table 10)
($ in thousands)
- --------------------------------------------------------------------------------------------------------------
Four Year
1999 1998 1997 1996 1995 Growth Rate
- --------------------------------------------------------------------------------------------------------------
Commercial $1,174,698 $1,027,990 $ 903,271 $ 818,964 $ 780,542 10.8%
Commercial real estate 1,096,850 944,615 762,344 668,496 573,829 17.6
Residential real estate 1,811,768 1,688,621 1,523,485 1,385,183 1,311,271 8.4
Consumer credit 757,952 702,294 740,666 776,082 737,362 0.7
- --------------------------------------------------------------------------------------------------------------
Total loans 4,841,268 4,363,520 3,929,766 3,648,725 3,403,004 9.2%
Less: Unearned income 3,334 9,215 13,865 21,063 27,089
- -----------------------------------------------------------------------------------------------------=========
Subtotal 4,837,934 4,354,305 3,915,901 3,627,662 3,375,915
Less: Allowance for loan losses 57,046 51,847 49,053 43,527 42,857
- ----------------------------------------------------------------------------------------------------
Net loans $4,780,888 $4,302,458 $3,866,848 $3,584,135 $3,333,058
====================================================================================================
COMPOSITION OF LOAN
PORTFOLIO BY TYPE
Commercial 24.3% 23.6% 23.1% 22.6% 23.1%
Commercial real estate 22.7 21.7 19.5 18.4 17.0
Residential real estate 37.4 38.8 38.9 38.2 38.8
Consumer credit 15.6 15.9 18.5 20.8 21.1
====================================================================================================
The adequacy of the allowance for loan losses is evaluated on a quarterly
basis. This evaluation is based on reviews of specific loans, changes in the
loan type and volume of the portfolios given current and anticipated economic
conditions, and historical loss experience. Loans are charged off when they are
deemed uncollectible.
Charge-offs, net of recoveries, totaled $7.3 million in 1999, compared to
$9.4 million in 1998 and $8.0 million in 1997. The most significant improvement
in net charge-offs occurred within the consumer portfolio. In 1997 management
revised its underwriting policies to address the changing nature and risk of
consumer lending. Charge-off levels for consumer loans have declined in both
1998 and 1999. Net charge-offs to average loans have consistently ranged from
0.16% to 0.30% for the last five years.
Old National makes monthly provisions at levels deemed necessary to provide
assurance that the allowance for loan losses is sufficient to absorb estimated
losses in the loan portfolio. For homogeneous loans, such as residential
mortgage, consumer, and credit card, provision levels are determined using
historic loss factors. For non-homogeneous loans, management allocates specific
losses to loans in the highest risk categories with provisions for the remainder
of the portfolio using historic loss factors. In addition, provisions reflect
other risks affecting the loan portfolio, such as economic conditions in the
geographic area, specific industry financial conditions, experience of lending
staff, and borrower risk associated with Year 2000. The provision for loan
losses was $11.5 million in 1999, slightly lower than $12.2 million in 1998 and
$13.6 million in 1997. The lower provision levels reflect the loan portfolio's
performance as a result of the strong economy in Old National's markets.
19
Table 11 below summarizes activity in the allowance for loan losses for the
years 1995 through 1999, along with an allocation of the year-end balances and
related statistics for the allowance and net charge-offs.
Allowance for Loan Losses (Table 11)
($ in thousands)
- ----------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
ANALYSIS:
Allowance for loan losses, January 1 $51,847 $49,053 $43,527 $42,857 $43,513
Loans charged off:
Commercial 6,018 3,802 2,979 4,362 4,918
Commercial and residential real estate 1,308 1,249 639 675 993
Consumer credit 6,766 7,887 8,976 9,829 5,386
- ----------------------------------------------------------------------------------------------------
Total charge-offs 14,092 12,938 12,594 14,866 11,297
- ----------------------------------------------------------------------------------------------------
Recoveries on charged-off loans:
Commercial 2,852 1,330 1,561 2,281 1,647
Commercial and residential real estate 390 323 1,156 330 320
Consumer credit 3,560 1,919 1,841 1,843 1,183
- ----------------------------------------------------------------------------------------------------
Total recoveries 6,802 3,572 4,558 4,454 3,150
- ----------------------------------------------------------------------------------------------------
Net charge-offs 7,290 9,366 8,036 10,412 8,147
Provision charged to expense 11,489 12,160 13,562 11,082 7,491
Acquired from acquisition 1,000 -- -- -- --
- ----------------------------------------------------------------------------------------------------
Allowance for loan losses, December 31 $57,046 $51,847 $49,053 $43,527 $42,857
====================================================================================================
Average loans for the year $4,635,562 $4,100,037 $3,742,120 $3,481,036 $3,299,737
Allowance/year-end loans 1.18% 1.19% 1.25% 1.20% 1.27%
Allowance/average loans 1.23 1.26 1.31 1.25 1.30
Net charge-offs/average loans 0.16 0.23 0.21 0.30 0.25
ALLOCATION AT DECEMBER 31:
Commercial $24,527 $23,500 $23,607 $20,195 $22,547
Commercial and residential real estate 24,049 12,399 12,695 12,660 12,562
Consumer credit 8,470 15,948 12,751 10,672 7,748
- ----------------------------------------------------------------------------------------------------
Total $57,046 $51,847 $49,053 $43,527 $42,857
====================================================================================================
Assets determined by the various evaluation processes to be
under-performing receive special attention by Old National management.
Under-performing assets consist of: 1) nonaccrual loans where the ultimate
collectibility of interest is uncertain, but the principal is considered
collectible; 2) loans which have been renegotiated to provide for a reduction or
deferral of interest or principal because the borrower's financial condition
deteriorated; 3) loans with principal or interest past due ninety (90) days or
more; and 4) foreclosed properties. Each month, problem loan reports are
prepared and reviewed at both the community and holding company levels. These
reports include loans which show signs of being unable to meet debt obligations
in the normal course of business, carry other characteristics deemed by bank
management to warrant special attention, or have been criticized by regulators
in the examination process. Besides the loans classified as under-performing,
management closely monitors loans totaling $122.5 million at December 31, 1999,
for the borrowers' ability to comply with present repayment terms. For these
loans the existing conditions do not warrant either a partial charge-off or
classification as nonaccrual. Management believes it has taken a conservative
approach in its evaluation of under-performing credits and the loan portfolio in
general, both in acknowledging the portfolio's general condition and in
establishing the allowance for loan losses.
Under-performing assets as of year-end totalled $24.2 million in 1999 and
$25.1 million in 1998. As a percent of total loans and foreclosed properties,
under-performing assets at December 31 were fairly consistent with 0.50% in
1999, 0.58% in 1998, and 0.51% in 1997. The growth in nonaccruals in 1998
reflected a conservative nonaccrual policy and not a general deterioration of
the portfolio. At December 31, 1999, the allowance for loan loss to
under-performing assets ratio improved to 236.05% from 206.72% in 1998 and
244.47% in 1997. Said in another way, at December 31, 1999, Old National had set
aside $2.36 for every dollar of under-performing assets.
20
Table 12 below presents the components of under-performing assets as of December
31 for the last five years.
Under-Performing Assets (Table 12)
($ in thousands)
- -------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------
Nonaccrual loans $16,863 $17,034 $11,985 $13,162 $ 6,972
Renegotiated loans 169 116 248 746 1,120
Past due loans (90 days or more):
Commercial 1,751 1,025 1,394 1,227 1,499
Commercial and residential real estate 2,038 3,346 2,289 1,458 2,611
Consumer 824 1,018 945 868 1,084
- -------------------------------------------------------------------------------------
Total 4,613 5,389 4,628 3,553 5,194
- -------------------------------------------------------------------------------------
Foreclosed properties 2,522 2,542 3,204 2,742 1,792
- -------------------------------------------------------------------------------------
Total under-performing assets $24,167 $25,081 $20,065 $20,203 $15,078
=====================================================================================
Under-performing assets as % of
total loans and foreclosed properties 0.50% 0.58% 0.51% 0.56% 0.45%
Allowance for loan loss/
under-performing assets 236.05 206.72 244.47 215.45 284.24
=====================================================================================
Interest income of approximately $1.5 million would have been recorded in
1999 on nonaccrual and restructured loans if such loans had been accruing
interest throughout the year in accordance with their original terms. The amount
of interest income actually recorded in 1999 on nonaccrual and restructured
loans was $1.0 million.
Deposits and Other Funding
Customer deposits provide the core funding needs and include
noninterest-bearing demand, regular savings and NOW accounts, money market
accounts, and small denomination certificates of deposit. Average core deposits
increased 7.7% in 1999 compared to 1.6% in 1998. Growth in 1999 was strong in
most core deposit categories. Other time deposits increased 11.4% in 1999 and
included brokerage certificate of deposits of $466.7 million in 1999, $222.2
million in 1998, and $105.1 million in 1997.
Table 13 below presents changes in the average balances of all funding
sources for the years 1997 through 1999.
Funding Sources--Average Balances (Table 13)
($ in thousands)
- ------------------------------------------------------------------------------------------------
% Change From
Prior Year
----------------
1999 1998 1997 1999 1998
- ------------------------------------------------------------------------------------------------
Demand deposits $ 522,219 $ 492,435 $ 475,868 6.0% 3.5%
NOW deposits 697,477 660,609 659,308 5.6 0.2
Savings deposits 441,679 417,050 433,211 5.9 (3.7)
Money market deposits 580,707 581,480 582,607 (0.1) (0.2)
Other time deposits 2,255,739 2,024,513 1,959,560 11.4 3.3
- ------------------------------------------------------------------------------------------------
Total core deposits 4,497,821 4,176,087 4,110,554 7.7 1.6
- ------------------------------------------------------------------------------------------------
Certificates of deposit $100,000 and over 388,252 409,282 340,787 (5.1) 20.1
Short-term borrowings 573,080 402,796 411,233 42.3 (2.1)
Other borrowings 710,383 543,830 312,270 30.6 74.2
- ------------------------------------------------------------------------------------------------
Total funding sources $6,169,536 $5,531,995 $5,174,844 11.5% 6.9%
================================================================================================
21
The average balance of large certificates declined $21.0 million or 5.1% in
1999 compared to the prior year. Other borrowings increased $166.6 million and
primarily included FHLB advances. Table 14 below presents a maturity
distribution for certificates of deposit with denominations of $100,000 or more.
Certificates of Deposit, $100,000 and Over (Table 14)
($ in thousands)
- -------------------------------------------------------------------------
Maturity Distribution
----------------------------------
Year-End 1-90 91-180 181-365 Beyond Interest Average
Balance Days Days Days 1 Year Expense Rate
- -------------------------------------------------------------------------
1999 $207,925 $109,784 $34,308 $42,209 $21,624 $20,345 5.24%
1998 390,123 154,455 91,566 77,611 66,491 23,417 5.72
1997 380,254 170,178 74,268 58,229 77,579 19,927 5.85
- -------------------------------------------------------------------------
Borrowings
Other short-term sources of funds include overnight borrowings from other
financial institutions, securities sold under agreements to repurchase which
generally mature within 30 days, and borrowings under U.S. Treasury demand
notes. Collectively, the average short-term borrowings rose $170.3 million in
1999. The steeper yield curve of 1999 and the uncertainty surrounding Y2K in the
fixed income markets made short-term borrowings an attractive funding
alternative in 1999. Additionally, the consolidation of Old National's banking
charters increased its ability to consistently access the overnight Federal
funds purchased market.
Table 15 below presents the distribution of Old National's short-term
borrowings and related weighted average interest rates for each of the last
three years.
Short-Term Borrowings (Table 15)
($ in thousands)
- -----------------------------------------------------------------------------
Other
Funds Repurchase Short-term
Purchased Agreements Borrowings
- -----------------------------------------------------------------------------
1999:
Outstanding at year-end $391,861 $225,532 $ 56,537
Average amount outstanding 171,666 297,201 104,213
Maximum amount outstanding at any month-end 391,861 326,630 230,330
Weighted average interest rate:
During year 5.24% 4.65% 5.20%
End of year 4.88 5.64 4.23
1998:
Outstanding at year-end $294,575 $192,868 $ 18,877
Average amount outstanding 82,061 213,535 107,200
Maximum amount outstanding at any month-end 294,575 233,308 175,751
Weighted average interest rate:
During year 5.58% 4.90% 5.81%
End of year 5.35 4.53 5.10
1997:
Outstanding at year-end $170,675 $215,878 $ 56,132
Average amount outstanding 73,733 220,074 117,426
Maximum amount outstanding at any month-end 170,675 244,722 192,048
Weighted average interest rate:
During year 5.57% 4.98% 4.53%
End of year 6.34 5.18 5.87
- -----------------------------------------------------------------------------
22
Other borrowings generally provide longer term funding and include debt
from the FHLB comprised of both short- and long-term maturities, medium term
notes, and convertible subordinated debentures.
In 1997 Old National registered a $150 million medium term note program and
issued $10 million in 1998 and $54.3 million in 1997. These borrowings, combined
with prior issuances, totaled $96.3 million at December 31, 1999, and have a
weighted average effective interest rate of 6.81% with maturities between 2000
and 2007. The funds were used to reduce Old National's lines of credit.
Holders of Old National's 8% convertible debentures converted principal
amounts of $9.3 million in 1999 and $8.4 million in 1998. These conversions
resulted in the issuance of common stock shares totaling 711,000 in 1999 and
415,000 in 1998 with a corresponding increase in shareholders' equity.
Capital Resources
Shareholders' equity was $492.7 million or 7.1% of total assets at December
31, 1999, and $519.6 million or 8.1% at December 31, 1998. Old National paid
$0.63 cash dividends per share in 1999 which totaled $30.6 million (restated for
the stock split paid in May 1999 and the 5% stock dividend paid in January
2000).
Treasury shares were repurchased to provide shares for reissuance under Old
National's dividend reinvestment and stock purchase plan and for stock
dividends. Treasury shares repurchased reduced shareholders' equity by $78.5
million in 1999 and $46.7 million in 1998. Shares reissued pursuant to the above
programs and in connection with conversions of Old National's subordinated
debentures added to shareholders' equity $24.1 million in 1999 and $25.1 million
in 1998.
The accumulated other comprehensive income component of equity is primarily
comprised of unrealized security gains (losses), net of tax. In the rising rate
environment during late 1999, this shifted from a positive or gain of $19.1
million to a negative or loss of $27.6 million. This basically represents the
estimated unrealized loss, net of tax, on Old National's available-for-sale
investment security portfolio at year-end.
Old National and the banking industry are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can elicit certain mandatory actions by
regulators that, if undertaken, could have a direct material effect on Old
National's financial statements. Capital adequacy in the banking industry is
evaluated primarily by the use of ratios which measure capital against assets
and certain off-balance-sheet items. Certain ratios weight these assets based on
risk characteristics according to regulatory accounting practices. At December
31, 1999, Old National and its bank subsidiaries exceeded the regulatory
minimums and met the regulatory definition of well-capitalized. Capital ratios
for Old National and its significant bank subsidiary and the regulatory
guidelines are presented in Table 16 on page 24.
23
Capital Structure and Regulatory Guidelines (Table 16)
($ in thousands)
- -------------------------------------------------------------------------------------------------------
Regulatory Guidelines December 31,
- -------------------------------------------------------------------------------------------------------
Minimum Well-Capitalized 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
Old National Bancorp (Consolidated)
TIER 1 CAPITAL:
Shareholders' equity (1) $520,297 $500,546 $483,940
Less intangibles (22,711) (15,234) (17,049)
- -------------------------------------------------------------------------------------------------------
Tier 1 capital 497,586 485,312 466,891
TIER 2 CAPITAL:
Subordinated debentures 12,782 21,963 30,407
Qualifying allowance for loan losses 57,046 51,847 47,943
- -------------------------------------------------------------------------------------------------------
Total capital $567,414 $559,122 $545,241
=======================================================================================================
Risk adjusted assets $4,636,088 $4,258,612 $3,835,456
Tier 1 capital to risk-adjusted assets 4.00% 6.00% 10.73% 11.40% 12.17%
Total capital to risk-adjusted assets 8.00 10.00 12.24 13.13 14.22
Tier 1 capital to quarterly average assets
(leverage ratio) 4.00 5.00 7.16 7.72 7.95
=======================================================================================================
Old National Bank
TIER 1 CAPITAL:
Shareholders' equity (1) $501,390 $487,653 $496,136
Less intangibles (3,801) (4,849) (5,919)
- -------------------------------------------------------------------------------------------------------
Tier 1 capital 497,589 482,804 490,217
TIER 2 CAPITAL:
Qualifying allowance for loan losses 52,125 47,885 44,390
- -------------------------------------------------------------------------------------------------------
Total capital $549,714 $530,689 $534,607
=======================================================================================================
Risk adjusted assets $4,322,406 $3,959,096 $3,551,167
=======================================================================================================
Tier 1 capital to risk-adjusted assets 4.00% 6.00% 11.51% 12.19% 13.80%
Total capital to risk-adjusted assets 8.00 10.00 12.72 13.40 15.05
Tier 1 capital to quarterly average assets
(leverage ratio) 3.00 5.00 7.63 8.13 8.78
=======================================================================================================
(1) Excludes unrealized gains (losses) on investment securities.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
Management's Responsibility for the Financial Statements
Management is responsible for the preparation of the financial statements
and related financial information appearing in this annual report. The financial
statements and notes have been prepared in conformity with generally accepted
accounting principles and include some amounts which are estimates based upon
currently available information and management's judgment of current conditions
and circumstances. Financial information throughout this annual report is
consistent with that in the financial statements.
System of Internal Accounting Controls
Management maintains a system of internal accounting controls which is
believed to provide, in all material respects, reasonable assurance that assets
are safeguarded against loss from unauthorized use or disposition, transactions
are properly authorized and recorded, and the financial records are reliable for
preparing financial statements and maintaining accountability for assets. In
addition, Old National has a corporate code of conduct under which employees are
to maintain high levels of ethical business standards. All systems of internal
accounting controls are based on management's judgment that the cost of controls
should not exceed the benefits to be achieved and that no system can provide
absolute assurance that control objectives are achieved. Management believes its
system provides the appropriate balance between costs of controls and the
related benefits.
In order to monitor compliance with this system of controls, Old National
maintains an extensive internal audit program. Internal audit reports are issued
to appropriate officers and significant audit exceptions, if any, are reviewed
with management and the Audit Committee of the Board of Directors.
Audit Committee of the Board
The Board of Directors, through an Audit Committee comprised solely of
outside directors, oversees management's discharge of its financial reporting
responsibilities. The Audit Committee meets regularly with the Company's
independent public accountants, PricewaterhouseCoopers LLP, and the managers of
internal auditing and loan review. During these meetings, the committee has the
opportunity to meet privately with the independent public accountants as well as
with internal audit and loan review personnel to review accounting, auditing,
loan, and financial reporting matters. The appointment of the independent public
accountants is made by the Board of Directors upon the recommendation of the
Audit Committee.
Independent Accountants
The financial statements in this annual report have been audited by
PricewaterhouseCoopers LLP, for the purpose of determining that the financial
statements are presented fairly in all material respects. PricewaterhouseCoopers
LLP's report on the financial statements appears on page 26. Their audit
included a consideration of Old National's system of internal accounting
controls, for the purpose of setting the scope and timing of their auditing
procedures.
25
REPORT OF INDEPENDENT ACCOUNTANTS
To The Shareholders and The Board of Directors of Old National Bancorp:
In our opinion, the accompanying consolidated balance sheet as of December
31, 1999 and the related consolidated statements of income, changes in
shareholders' equity and cash flows present fairly, in all material respects,
the financial position of Old National Bancorp and affiliates (the "Company") at
December 31, 1999, and the results of their operations and their cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
/s/ PricewaterhouseCoopers LLP
Chicago, IL
January 26, 2000
To The Shareholders and The Board of Directors of Old National Bancorp:
We have audited the accompanying consolidated balance sheet of Old National
Bancorp (an Indiana corporation) and affiliates as of December 31, 1998, and the
related consolidated statements of income, changes in shareholder's equity and
cash flows for each of the two years in the period ended December 31, 1998.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Old National
Bancorp and affiliates as of December 31, 1998, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
/s/ Arthur Andersen LLP
Indianapolis, Indiana
January 27, 1999
(except with respect to the business combination discussed in Note 2 as to which
the date is January 29, 1999).
26
Old National Bancorp Consolidated Balance Sheet
($ and shares in thousands)
- ----------------------------------------------------------------------------------------------------
December 31,
- ----------------------------------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 169,184 $ 160,162
Money market investments:
Interest-bearing deposits in other banks 3,644 5,287
Federal funds sold and securities purchased under agreements to resell 12,787 16,345
- ----------------------------------------------------------------------------------------------------
Total money market investments 16,431 21,632
- ----------------------------------------------------------------------------------------------------
TOTAL CASH AND CASH EQUIVALENTS 185,615 181,794
- ----------------------------------------------------------------------------------------------------
Investment securities--available-for-sale, at fair value 1,678,651 1,636,637
- ----------------------------------------------------------------------------------------------------
Loans, net of unearned income 4,837,934 4,354,305
Allowance for loan losses (57,046) (51,847)
- ----------------------------------------------------------------------------------------------------
NET LOANS 4,780,888 4,302,458
- ----------------------------------------------------------------------------------------------------
Premises and equipment, net 93,256 84,584
Accrued interest receivable 54,007 50,307
Other assets 190,515 160,831
- ----------------------------------------------------------------------------------------------------
TOTAL ASSETS $6,982,932 $6,416,611
====================================================================================================
LIABILITIES
Deposits:
Noninterest-bearing demand $ 545,426 $ 553,656
Interest-bearing:
NOW accounts 717,334 710,260
Savings accounts 455,457 420,296
Money market accounts 542,456 588,876
Certificates of deposit $100,000 and over 207,925 390,123
Other time 2,602,700 2,005,647
- ----------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 5,071,298 4,668,858
- ----------------------------------------------------------------------------------------------------
Short-term borrowings 673,930 506,320
Accrued expenses and other liabilities 81,987 91,920
Other borrowings 662,973 629,868
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 6,490,188 5,896,966
- ----------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 12)
SHAREHOLDERS' EQUITY
Preferred stock, 2,000 shares authorized, no shares issued or outstanding --
-- Common stock, $1 stated value, 75,000 shares authorized,
47,289 and 30,388 shares issued and outstanding, respectively 47,289 30,388
Capital surplus 376,598 350,255
Retained earnings 96,410 119,903
Accumulated other comprehensive income, net of tax (27,553) 19,099
- ----------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 492,744 519,645
- -----------------------------------------------------------