UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from ________________ to ________________
Commission file Number 0-10888
OLD NATIONAL BANCORP
(Exact name of the Registrant as specified in its charter)
INDIANA 35-1539838
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
420 Main Street,
Evansville, Indiana 47708
(Address of principal executive offices) (Zip Code)
The Registrant's telephone number, including area code: (812) 464-1434
Securities registered pursuant to Section 12(b) of the Act: None
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. [x]
The aggregate market value (average bid price) of the Registrant's voting
common stock held by non-affiliates of the Registrant as of February 28, 1998
was approximately $1,278 million. The total number of shares of Registrant's
common stock outstanding as of that date was 27,341,736.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's annual report to shareholders for the year
ended December 31, 1997 is incorporated by reference into Part II of this
Form 10-K.
The Registrant's Proxy Statement for the Annual Meeting of Shareholders
to be held April 16, 1998 is incorporated by reference into Part III of this
Form 10-K.
OLD NATIONAL BANCORP
1997 ANNUAL REPORT ON FORM 10-K
Table of Contents
PART I. PAGE
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 8
Item 4. Submission of Matters to a Vote of Security Holders. . . . . 9
PART II.
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . 9
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . 9
Item 8. Financial Statements and Supplementary Data. . . . . . . . . 9
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . 9
PART III.
Item 10. Directors and Executive Officers of the Registrant . . . . . 9
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . .10
Item 12. Security Ownership of Certain Beneficial Owners and
Management. . . . . . . . . . . . . . . . . . . . . . . .10
Item 13. Certain Relationships and Related Transactions . . . . . . .10
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . . .10
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
INDEX OF EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . . . . .15
2
OLD NATIONAL BANCORP
1997 ANNUAL REPORT ON FORM 10-K
PART I
Item 1. BUSINESS
Old National Bancorp (the "Registrant") is a multibank
holding company incorporated in the State of Indiana and
maintains its principal executive office in Evansville, Indiana.
As a bank holding company, the Registrant engages in banking and
related activities authorized under the federal Bank Holding
Company Act of 1956, as amended. 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
located in Kentucky; and ten banks and one thrift located in
Illinois.
Banking Affiliates
As of December 31, 1997, the Registrant's affiliate banks
operated 112 banking offices throughout Indiana, Illinois, and
Kentucky. The following chart lists the affiliate banks by
state:
<TABLE>
<CAPTION>
Indiana Kentucky Illinois
- ------------------------------ ---------------------------- ------------------------
<S> <C> <C>
Old National Bank (Evansville) First State Bank(Greenville) First National Bank
Bank of Western Indiana (Covington) City National Bank (Fulton) (Harrisburg)
First Citizens Bank & Farmers Bank & Trust Co. Peoples National Bank
Trust Company (Greencastle) (Madisonville) (Lawrenceville)
Merchants National Bank (Terre Haute) Morganfield National Bank Security Bank & Trust Co.
Security Bank & Trust Co. (Vincennes) Farmers Bank & Trust Co. (Mt. Carmel)
United Southwest Bank (Washington) (Henderson) Palmer-American National Bank
Dubois County Bank (Jasper) (Danville)
Orange County Bank (Paoli) First National Bank (Oblong)
Citizens National Bank (Tell City) The National Bank of Carmi
Workingmens/ONB Bank (Bloomington)
</TABLE>
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.
3
Nonbank Affiliates
Old National Service Corporation provides data processing
services primarily to our 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, IN, leased
by affiliates. Consumer Acceptance Corporation operates consumer
finance offices primarily in Indiana. Various subsidiaries of
affiliate banks 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 had 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 banking 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
4
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 guidelines of the FDIC and
OCC as of December 31, 1997. For the Registrant's regulatory
capital ratios and regulatory requirements as of December 31,
1997 see the information incorporated by reference in Part II,
Item 7.
The Federal Reserve and FDIC have issued regulations
requiring that any bank holding company or bank which has
significant exposure to market risk must measure such risk using
its own internal model, subject to the requirements contained in
the regulations, and must maintain adequate capital to support
that exposure.
The regulations apply to any bank holding company or bank
whose trading activity equals 10% or more of its total assets, or
whose trading activity equals $1 billion or more. Examiners may
require a bank holding company or bank that does not meet the
applicability criteria to comply with the capital requirements if
necessary for safety and soundness purposes. The regulations
contain supplemental rules to determine qualifying and excess
capital, calculate risk-weighted assets, calculate market risk
equivalent assets and calculate risk-based capital ratios
adjusted for market risk.
The Registrant's affiliate banks are subject to the
provisions of the National Bank Act or the banking laws of their
respective states and are supervised, regulated and examined by
the OCC or the 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 12.
Both federal and state law extensively regulate various
aspects of the banking business, such as reserve requirements,
truth-in-lending and truth-in-savings disclosure, equal credit
5
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 the prior approval of, the bank's primary federal
regulatory authority and, if the branching bank is a state bank,
of 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
affiliated 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
6
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 continues 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.
Safety and soundness guidance on the risks posed to financial
institutions by the Year 2000 problem has been issued by the
Federal Institutions Examination Council, whose members include
the FDIC and the Federal Reserve Board. The guidance underscores
that Year 2000 preparation is not only an information systems
issue, but also an enterprise-wide challenge that must be
addressed at the highest level of a financial institution.
The guidance sets out the responsibilities of senior
management and boards of directors in managing their Year 2000
projects. Among the responsibilities of institution managers and
directors is the management of internal and external risks
presented by providers of data-processing products and services,
business partners, counterparties and major loan customers.
Under the guidance, senior management must provide the board
of directors with status reports, at least quarterly, on efforts
to reach Year 2000 goals both internally and by the institution's
major vendors. Senior managers and directors must allocate
sufficient resources to ensure that high priority is given to
seeing that remediation plans are fulfilled, and that the project
receives the quality personnel and timely support it requires.
The guidance does not require financial institutions to
obtain Year 2000 certification from their vendors. Rather, an
institution must implement its own internal testing or
7
verification processes for vendor products and services to ensure
that its different computer systems function properly together.
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 legislation 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 legislation 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 thereby.
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 112
banking offices operated by the Registrant's affiliate banks, 90
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
Registrant's banking operations. It does not engage in real
estate brokerage services.
Item 3. LEGAL PROCEEDINGS
None.
8
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 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Page 53 of the Registrant's Annual Report to Shareholders for the
year ended December 31, 1997 is expressly incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
Page 14 of the Registrant's Annual Report to Shareholders for the
year ended December 31, 1997 is expressly incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Pages 13 through 29 of the Registrant's Annual Report to
Shareholders for the year ended December 31, 1997 are
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 30 through 47 of the Registrant's Annual Report to
Shareholders for the year ended December 31, 1997 are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information is omitted from this report pursuant to General
Instruction G.(1) of Form 10-K as the Registrant has filed with
the Commission its definitive Proxy Statement pursuant to
Regulation 14-A of the Securities Exchange Act of 1934, as
amended, not later than 120 days after December 31, 1997.
9
ITEM 11. EXECUTIVE COMPENSATION
This information is omitted from this report pursuant to General
Instruction G.(1) of Form 10-K as the Registrant has filed with
the Commission its definitive Proxy Statement pursuant to
Regulation 14-A of the Securities Exchange Act of 1934, as
amended, not later than 120 days after December 31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
This information is omitted from this report pursuant to General
Instruction G.(1) of Form 10-K as the Registrant has filed with
the Commission its definitive Proxy Statement pursuant to
Regulation 14-A of the Securities Exchange Act of 1934, as
amended, not later than 120 days after December 31, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is omitted from this report pursuant to General
Instruction G.(1) of Form 10-K as the Registrant has filed with
the Commission its definitive Proxy Statement pursuant to
Regulation 14-A of the Securities Exchange Act of 1934, as
amended, not later than 120 days after December 31, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Financial Statements:
Report of Independent Public Accountants
Consolidated Balance Sheet - December 31, 1997 and 1996
Consolidated Statement of Income -
Years Ended December 31, 1997, 1996 and 1995
Consolidated Statement of Changes in Shareholders' Equity -
Years Ended December 31, 1997, 1996 and 1995
Consolidated Statement of Cash Flows -
Years Ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
(b) No reports on Form 8-K were filed with the Commission during
the fourth quarter of 1997.
10
(c) Exhibits - The following exhibits are filed herewith:
Exhibit 10 - Material Contracts
Exhibit 11 - Statement re Computation of Per Share Earnings
Exhibit 13 - Portions of Annual Report to Shareholders for the
year ended December 31, 1997
Exhibit 21 - Subsidiaries of the Registrant
Exhibit 23 - Consent of Independent Public Accountants
Exhibit 27 - Financial Data Schedule
(d) Financial Statement Schedules - This information is omitted
since the required information is not applicable to the
Registrant.
11
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
OLD NATIONAL BANCORP
By:s/s Ronald B. Lankford
Ronald B. Lankford, President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
By:
David L. Barning, Director Date
By:
Richard J. Bond, Director Date
By:s/s Alan W. Braun 3/25/98
Alan W. Braun, Director Date
By:s/s Wayne A. Davidson 3/25/98
Wayne A. Davidson, Director Date
By:s/s Larry E. Dunigan 3/25/98
Larry E. Dunigan, Director Date
By:s/s David E. Eckerle 3/25/98
David E. Eckerle, Director Date
By:s/s Thomas B. Florida 3/25/98
Thomas B. Florida, Director Date
12
By:s/s Phelps L. Lambert 3/25/98
Phelps L. Lambert, Director Date
By:s/s Ronald B. Lankford 3/25/98
Ronald B. Lankford, Date
President and Director
(Chief Operating Officer)
By:s/s Lucien H. Meis 3/25/98
Lucien H. Meis, Director Date
By:
Louis L. Mervis, Director Date
By:
Lawrence D. Prybil, Director Date
By:s/s James A. Risinger 3/25/98
James A. Risinger, Chairman Date
of the Board of Directors
(Chief Executive Officer)
By:s/s John N. Royse 3/25/98
John N. Royse, Director Date
By:s/s Marjorie Soyugenc 3/25/98
Marjorie Soyugenc, Director Date
By:
Charles D. Storms, Director Date
By:s/s Steve H. Parker 3/27/98
Steve H. Parker, Date
Senior Vice President
(Chief Financial Officer)
13
By:s/s Ronald W. Seib 3/25/98
Ronald W. Seib, Date
Vice President-
Corporate Controller
(Principal Accounting Officer)
14
INDEX OF EXHIBITS
Regulation S-K
Reference
(Item 601)
3(i) Articles of Incorporation of the Registrant
(incorporated by reference to Exhibit 3(i) of the
Registrant's Registration Statement on Form S-4, File
No. 333-09967, dated August 12, 1996)
3(ii) By-Laws of the Registrant (incorporated by reference to
Exhibit 3(ii) of Registrant's Registration Statement on
Form S-4, File No. 33-80670, dated June 23, 1994)
10 Material contracts
(a) Severance agreement is incorporated by reference
to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991.
(b) Distribution Agreement is incorporated by
reference to Exhibit 1.1 of amendment no. 2 of the
Registrant's Registration Statement on Form S-3,
File No. 333-29433, dated July 23, 1997.
(c) Old National Bancorp Employees' Retirement Plan is
incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997.
(d) Employees' Savings and Profit Sharing Plan of Old
National Bancorp is incorporated by reference to
the Registrant's Quarterly report on Form 10-Q for
the quarter ended June 30, 1997.
11 Statement re Computation of Per Share Earnings
13 Portions of Annual Report to Shareholders for the year
ended December 31, 1997
21 Subsidiaries of the Registrant
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
15
EXHIBIT 11
PAGE 1 OF 3
OLD NATIONAL BANCORP
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
($ AND SHARES IN THOUSANDS EXCEPT PER SHARE)
1997
Basic Diluted
Net income $ 60,660 $ 60,660
Interest expense foregone on assumed
conversion of 8% convertible subordinated
debentures, net of tax -- 1,469
Adjusted net income $ 60,660 $ 62,129
-------- --------
Weighted average common shares outstanding 27,699 27,699
Additional shares outstanding upon assumed
conversion of 8% convertible subordinated
debentures -- 1,497
Additional shares outstanding upon assumed
exercise of stock options -- 95
-------- --------
Adjusted weighted average
shares outstanding 27,699 29,291
======== ========
Earnings per share $ 2.19 $ 2.12
======== ========
EXHIBIT 11
PAGE 2 OF 3
OLD NATIONAL BANCORP
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
($ AND SHARES IN THOUSANDS EXCEPT PER SHARE)
1996
Basic Diluted
Net income $ 60,179 $60,179
Interest expense foregone on assumed
conversion of 8% convertible subordinated
debentures, net of tax -- 1,477
--------- -------
Adjusted net income $ 60,179 $61,656
Weighted average common shares outstanding 28,695 28,695
Additional shares outstanding upon assumed
conversion of 8% convertible subordinated
debentures -- 1,504
Additional shares outstanding upon assumed
exercise of stock options -- 91
--------- --------
Adjusted weighted average
shares outstanding 28,695 30,290
========== ========
Earnings per share $ 2.10 $ 2.04
========== ========
EXHIBIT 11
PAGE 3 OF 3
OLD NATIONAL BANCORP
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
($ AND SHARES IN THOUSANDS EXCEPT PER SHARE)
1995
Basic Diluted
Net income $ 53,939 $53,939
Interest expense foregone on assumed
conversion of 8% convertible subordinated
debentures, net of tax -- 1,523
-------- -------
Adjusted net income $ 53,939 $55,462
Weighted average common shares outstanding 29,631 29,631
Additional shares outstanding upon assumed
conversion of 8% convertible subordinated
debentures -- 1,551
Additional shares outstanding upon assumed
exercise of stock options -- 88
------- -------
Adjusted weighted average
shares outstanding 29,631 31,270
======= =======
Earnings per share $ 1.82 $ 1.77
======== =======
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Old National Bancorp ("ONB") is a multi-bank holding company
headquartered in Evansville, Indiana. Located in southwestern
Indiana, southeastern Illinois, and western Kentucky, its 21
affiliate banks serve customers with 112 office locations in both
urban and rural markets. A complete listing of ONB's affiliate
banks is presented on page 10. These banks 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.
ONB also has eight non-bank affiliates which provide additional
financial or support services incidental to ONB's operations,
including data processing; issuance and reinsurance of credit
life, accident, health, property, life and casualty insurance;
investment services; fiduciary and trust services; property
ownership; and consumer financing. During 1996, ONB opened a
consumer finance subsidiary headquartered in Indianapolis, with
the primary objective of originating traditional consumer finance
and non-prime auto loans in the Midwest. Current offices are
located only in Indiana.
FINANCIAL BASIS
The following discussion is an analysis of ONB's operating
results for the years 1995 through 1997 and financial condition
as of December 31, 1997 and 1996, and will assist readers of the
accompanying consolidated financial statements and related
footnotes beginning on page 32. 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.
Tax-exempt interest income in the following information has been
increased to an amount comparable to interest subject to income
taxes using federal statutory rates in effect of 34% in 1992 and
35% in 1993 through 1997. 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. ONB 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 rate on loans and deposits, convenient
locations and hours, types of services, and quality of service.
In most of its markets, ONB and its affiliates rank first
or second in volume of loans and deposits.
The economy in the United States and in the Midwest has been
characterized by relatively low inflation and unemployment.
There have been some signs of weakness with a rise in consumer
delinquency levels and bankruptcies. While ONB's numerous
markets vary, its major markets have demonstrated economic
expansion and a growing financial base with additions such as new
Toyota and AK Steel manufacturing complexes.
US Government long-term interest rates declined in 1997 while
short-term rates changed less dramatically. Despite this trend,
certificates of deposit rates generally increased during 1997.
Prime rate stayed constant during 1997, except for a slight
increase in February.
MERGER ACTIVITY
In 1997 ONB did not complete any banking acquisitions, but in
1996 ONB acquired two banks with combined total assets of nearly
$300 million. The National Bank of Carmi in Illinois will become
part of Old National Bank of Evansville in 1998. Workingmens
Capital Holdings, Inc. in Bloomington, Indiana, was merged with
our affiliate, ONB of Bloomington. Both acquisitions were
accounted for as pooling-of-interests.
YEAR 2000
With the new millenium drawing near, some computers and software
throughout the world may be unable to properly handle dates after
December 31, 1999. ONB has developed a plan to address its risk,
and has identified and assessed its critical software and
hardware. During 1998 and 1999, ONB will test these systems and
any noncompliant item will be replaced. At this time the
estimated cost of Year 2000 compliance is not expected to be
material to ONB.
13
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
($ in thousands except per share data) Five Year
Growth
1997 1996 1995 1994 1993 1992 Rate
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
(Taxable equivalent basis)
Interest income $443,151 $408,070 $389,131 $343,852 $336,890 $351,404
Interest expense 210,208 190,631 186,500 146,152 144,427 166,991
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 232,943 217,439 202,631 197,700 192,463 184,413 4.8 %
Provision for loan losses 26,965 11,012 7,135 7,754 10,359 11,919 17.7
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 205,978 206,427 195,496 189,946 182,104 172,494 3.6
Noninterest income 47,090 44,801 39,594 34,876 33,993 29,485 9.8
Noninterest expense 154,364 152,320 147,315 147,295 135,259 123,451 4.6
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 98,704 98,908 87,775 77,527 80,838 78,528 4.7
Income taxes 38,044 38,729 33,836 28,524 30,268 29,913 4.9
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $60,660 60,179 53,939 49,003 $50,570 $48,615 4.5 %
===================================================================================================================================
YEAR-END BALANCES
Total assets $5,686,398 $5,366,591 $5,103,195 $4,909,804 $4,748,112 $4,434,160 5.1 %
Total loans, net of
unearned income 3,804,691 3,523,300 3,261,746 3,098,820 2,810,453 2,606,563 7.9
Total deposits 4,298,730 4,268,024 4,183,082 3,875,752 3,898,967 3,723,039 2.9
Shareholders' equity 477,203 458,526 461,424 440,671 435,406 406,137 3.3
- -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA(1)
Net income - basic $2.19 $2.10 $1.82 $1.61 $1.66 $1.59 6.6
Net income - diluted (2) 2.12 2.04 1.77 1.57 1.62 1.55 6.5
Cash dividends paid 0.88 0.84 0.80 0.76 0.66 0.63 7.0
Book value at year-end 17.38 16.31 15.82 14.62 14.25 13.29 5.5
- -----------------------------------------------------------------------------------------------------------------------------------
SELECTED PERFORMANCE RATIOS
Return on assets 1.11 % 1.17 % 1.09 % 1.03 % 1.09 % 1.11 %
Return on equity (3) 13.36 13.29 12.01 10.92 11.38 12.45
Equity to assets 8.43 8.90 8.99 9.35 9.58 8.89
Dividend payout 39.96 39.31 41.60 45.08 37.77 37.64
Primary capital to assets 9.29 9.72 9.85 10.25 10.43 9.72
Net charge-offs to
average loans 0.70 0.33 0.26 0.28 0.25 0.31
Allowance for loan losses
to average loans 1.34 1.31 1.28 1.43 1.57 1.47
(1) Restated for all stock dividends and stock splits.
(2) Assumes the conversion of ONB's subordinated debentures.
(3) Excludes unrealized gains (losses) on investment securities.
</TABLE>
14
RESULTS OF OPERATIONS
NET INCOME
ONB earnings rose slightly to reach $60.7 million in 1997, an
0.8% increase over 1996. Net income in 1997 was adversely
impacted by losses associated with the consumer finance
subsidiary's purchase of a pool of sub-prime auto loans. During
1997, the finance subsidiary made additional provision for loan
losses to cover the higher-than-expected losses in its portfolio.
ONB's total provision for loan loss increased $16.0 million over
1996, of which $14.9 million related to the finance company.
Basic income per share for 1997 was $2.19, up 4.3% over the $2.10
in 1996. Strong net interest income growth and minimal
noninterest expense growth allowed ONB to absorb the loan loss
provision increase and exceed net income in 1996. The specific
effects of each of these factors are discussed in the following
paragraphs.
ONB's 1996 net income was $60.2 million, up 11.6% or $6.2 million
above 1995 earnings. Strong net interest income growth of $14.8
million and $5.2 million noninterest income growth combined to
generate the earnings growth. The loan loss provision rose due
to increased consumer losses and general loan growth.
NET INTEREST INCOME
As a financial intermediary, ONB 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 over 80% of ONB's net revenues (net interest
income plus noninterest income). 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 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 and income tax rates. The level of
earning assets funded by interest-free funding sources (primarily
noninterest-bearing demand deposits and equity capital) also
impacts net interest margin. ONB can control the effect of some
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 effect on changes in net interest income from one
period to another.
On a taxable equivalent basis, net interest income in 1997 grew
$15.5 million or 7.1% over 1996. Average earning asset growth,
$348.3 million or 7.1%, during 1997 out-paced interest-bearing
liability growth $323.5 million or 7.8% with lower levels of
nonearning assets, cash and due from banks, and higher
noninterest-bearing liabilities and equity providing the funding
differential. ONB was able to accomplish the earning asset
growth while maintaining its net interest margin at 4.46%. The
yield on earning assets increased 12 basis points to 8.49% while
the cost of interest-bearing liabilities rose 10 basis points to
4.67%. ONB's mix of earning assets continued the shift to higher
yielding loans which rose $266.0 million (7.9%) and comprised
nearly 70% of our total earning assets. Overall, loan yields
reached 9.13%, a 7 basis point increase, primarily due to the
higher yields on consumer loans at ONB's consumer finance
company. Investment securities grew 9.0% or $130.1 million and
yields rose 11 basis points to 7.02%, mostly in the federal
government and agency sector. Lower yielding money market
investments decreased $47.8 million as ONB more efficiently
deployed funds in higher yielding assets. ONB's interest-bearing deposits grew
$90.0 million or 2.4%. Money market deposits declined 2.0% in 1997 after
marketing and new products resulted in a 11.9% increase in 1996. Certificates
of deposit over $100,000 grew 14.4% as higher deposit rates attracted new
funds. Borrowed funds played a significant role in the funding
of asset growth as they rose $233.5 million.
During 1996, net interest income rose 7.3% or $14.8 million and
totaled $217.4 million. Average earning assets grew 4.1%, a
$194.0 million increase. Interest-bearing liabilities rose
$159.4 million or 4.0%. Fewer non-earning assets, such as cash
and due from banks, and higher levels noninterest-bearing
liabilities and equity improved the deployment of funds into
earning assets. Net interest margin rose from 4.33% to 4.46%.
The yield on earning assets increased 5 basis points to 8.37% due
to loan growth and rate improvement. The cost of interest-bearing liabilities
decreased 8 basis points to 4.57% due to market influences and management's
efforts to seek cost-effective funding sources for ONB's asset growth.
Table 1 on page 16 details the changes in the components of net
interest income. Table 2 on page 16 attributes those
fluctuations to the impact of changes in the average balances of
assets and liabilities and the yields earned or rate paid. Table
3 on page 17 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.
15
<TABLE>
<CAPTION>
NET INTEREST INCOME CHANGES (TABLE 1) % Change From
(Taxable equivalent basis, $ in thousands) Prior Year
1997 1996 1995 1997 1996
<S> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans $331,794 $304,940 $286,523 8.8 % 6.4 %
Investment securities 110,669 99,903 98,700 10.8 1.2
Money market investments 688 3,227 3,908 (78.7) (17.4)
- ---------------------------------------------------------------------------------------------------------------
Total interest income 443,151 408,070 389,131 8.6 4.9
- ---------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
NOW deposits 6,710 8,254 11,201 (18.7) (26.3)
Savings deposits 14,267 14,403 13,714 (0.9) 5.0
Money market deposits 24,179 23,843 22,208 1.4 7.4
Certificates of deposit
$100,000 and over 18,916 14,666 14,472 29.0 1.3
Other time deposits 104,051 102,255 98,409 1.8 3.9
Short-term borrowings 22,281 14,806 16,736 50.5 (11.5)
Other borrowings 19,804 12,404 9,760 59.7 27.1
- ---------------------------------------------------------------------------------------------------------------
Total interest expense 210,208 190,631 186,500 10.3 2.2
- ---------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $232,943 $217,439 $202,631 7.1 % 7.3 %
===============================================================================================================
NET INTEREST MARGIN 4.46 % 4.46 % 4.33 %
===================================================================================
</TABLE>
<TABLE>
<CAPTION>
NET INTEREST INCOME - RATE/VOLUME ANALYSIS (TABLE 2)
(Taxable equivalent basis, $ in thousands)
1997 vs. 1996 1996 vs. 1995
Total Attributed to Total Attributed to
Change Volume Rate Change Volume Rate
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans $26,854 $24,190 $2,664 $18,417 $16,281 $2,136
Investment securities 10,766 9,063 1,703 1,203 1,322 (119)
Money market investments (2,539) (2,659) 120 (681) (313) (368)
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income 35,081 30,594 4,487 18,939 17,290 1,649
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
NOW deposits (1,544) 73 (1,617) (2,947) 171 (3,118)
Savings deposits (136) (11) (125) 689 261 428
Money market deposits 336 (497) 833 1,635 2,589 (954)
Certificates of deposit
$100,000 and over 4,250 2,246 2,004 194 1,452 (1,258)
Other time deposits 1,796 3,294 (1,498) 3,846 219 3,627
Short-term borrowings 7,475 6,118 1,357 (1,930) (2,192) 262
Other borrowings 7,400 7,497 (97) 2,644 3,463 (819)
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense 19,577 18,720 857 4,131 5,963 (1,832)
- ---------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $15,504 $11,874 $3,630 $14,808 $11,327 $3,481
===========================================================================================================================
The variance not solely due to rate or volume is allocated equally between the rate and volume variances.
</TABLE>
16
<TABLE>
<CAPTION>
THREE-YEAR AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS (TABLE 3)
(Taxable equivalent basis, $ in thousands)
1997 1996 1995
Average Interest Yield/ Average Interest Yield/ Average Interest Yield/
Balance & Fees Rate Balance & Fees Rate Balance & Fees Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
Money market investments $11,997 $688 5.73 % $59,767 $3,227 5.40 % $65,274 $3,908 5.99 %
Investment securities:
U.S. Treasury and Government
agencies (1) 1,081,957 72,224 6.68 958,417 59,737 6.23 962,872 59,698 6.20
State and political
subdivisions 450,222 35,519 7.89 444,127 36,052 8.12 426,281 36,121 8.47
Other securities 43,851 2,926 6.67 43,379 4,114 9.48 37,640 2,881 7.65
- ----------------------------------------------------------------------------------------------------------------------------------
Total investment securities 1,576,030 110,669 7.02 1,445,923 99,903 6.91 1,426,793 98,700 6.92
- ----------------------------------------------------------------------------------------------------------------------------------
Loans: (2) (3)
Commercial and financial 826,995 77,876 9.42 769,629 72,512 9.42 727,593 71,422 9.82
Commercial real estate 706,057 62,885 8.91 619,079 54,766 8.85 547,241 47,935 8.76
Residential real estate 1,346,793 110,422 8.20 1,257,141 104,775 8.33 1,244,331 102,067 8.20
Consumer, net of unearned
income 725,205 75,949 10.47 692,864 68,174 9.84 640,706 60,502 9.44
Credit card 28,101 4,662 16.59 28,441 4,713 16.57 26,860 4,597 17.11
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans 3,633,151 331,794 9.13 3,367,154 304,940 9.06 3,186,731 286,523 8.99
- ----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 5,221,178 $443,151 8.49 % 4,872,844 $408,070 8.37 % 4,678,798 $389,131 8.32 %
================== ==================== ===================
Less: Allowance for loan losses (47,158) (42,547) (42,497)
NON-EARNING ASSETS:
Cash and due from banks 124,443 134,427 161,103
Other assets 187,801 181,461 173,017
- ------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $5,486,264 $5,146,185 $4,970,421
============================================================================================================
INTEREST-BEARING LIABILITIES:
NOW deposits $448,831 $6,710 1.49 % $444,427 $8,254 1.86 % $436,705 $11,201 2.56 %
Savings deposits 479,465 14,267 2.98 479,863 14,403 3.00 471,008 13,714 2.91
Money market deposits 652,796 24,179 3.70 666,462 23,843 3.58 595,583 22,208 3.73
Certificates of deposit
$100,000 and over 324,109 18,916 5.84 283,323 14,666 5.18 256,480 14,472 5.64
Other time deposits 1,872,047 104,051 5.56 1,813,209 102,255 5.64 1,809,240 98,409 5.44
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
deposits 3,777,248 168,123 4.45 3,687,284 163,421 4.43 3,569,016 160,004 4.48
- ----------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 409,705 22,281 5.44 293,052 14,806 5.05 303,789 16,736 5.51
Other borrowings 309,671 19,804 6.40 192,795 12,404 6.43 140,937 9,760 6.93
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 4,496,624 $210,208 4.67 % $4,173,131 $190,631 4.57 % 4,013,742 $186,500 4.65 %
================== ==================== ===================
NONINTEREST-BEARING LIABILITIES:
Demand deposits 453,616 450,005 455,991
Other liabilities 73,749 65,176 53,673
Shareholders' equity 462,275 457,873 447,015
- ------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $5,486,264 $5,146,185 $4,970,421
============================================================================================================
INTEREST MARGIN RECAP:
Interest income/earning assets $443,151 8.49 % $408,070 8.37 % $389,131 8.32 %
Interest expense/earning assets 210,208 4.03 190,631 3.91 186,500 3.99
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest margin $232,943 4.46 % $217,439 4.46 % $202,631 4.33 %
==================================================================================================================================
(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.
</TABLE>
17
ASSET/LIABILITY MANAGEMENT-
INTEREST RATE SENSITIVITY AND LIQUIDITY
Customers' preferences for loans and deposits generate certain
levels of net interest income and 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 ONB's
Funds Management Committee. This committee and similar
committees at the affiliate banks monitor these guidelines
monthly on a consolidated basis and at the bank level.
ONB 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, ONB 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 ONB's interest rate sensitivity position
both individually 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. A significant percentage of ONB's assets and
liabilities reprice within 180 days. In the 365 day cumulative
time frame, assets and liabilities are closely matched at 89%.
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 ONB to generate strong net interest income while
controlling and monitoring interest rate risk. ONB simulates a
gradual change in rates of 200 basis points up or down over 12
months and sustained for an additional 12 months. The policy limit
for the maximum negative impact on net interest income in over 12
months is 10%. At December 31, 1997, ONB is well within that
limit as the model's fluctuation is under 2% for the first 12
months and the total 24 months.
<TABLE>
<CAPTION>
ANALYSIS OF INTEREST RATE SENSITIVITY AT DECEMBER 31, 1997 (TABLE 4)
($ in thousands)
1-180 181-365 1-5 Beyond
Days Days Years 5 years Total
<S> <C> <C> <C> <C> <C>
RATE-SENSITIVE ASSETS:
Money market investments $ 7,769 $ -- $ 99 $ -- $ 7,868
Investment securities 292,113 102,254 807,655 364,954 1,566,976
Loans, net of unearned income 1,364,273 541,337 1,230,146 668,935 3,804,691
- ------------------------------------------------------------------------------------------------------------
Total rate sensitive assets 1,664,155 643,591 2,037,900 1,033,889 $5,379,535
- -------------------------------------------------------------------------------------------------===========
RATE-SENSITIVE LIABILITIES:
Deposits 1,550,198 448,215 645,331 1,152,710 3,796,454
Other borrowed funds 551,534 54,908 96,796 128,280 831,518
- ------------------------------------------------------------------------------------------------------------
Total rate-sensitive liabilities 2,101,732 503,123 742,127 1,280,990 $4,627,972
- --------------------------------------------------------------------------------------------------==========
Interest sensitivity gap
per period ($437,577) $140,468 $1,295,773 ($247,101)
Cumulative gap ($437,577) ($297,109) $998,664 $751,563
Cumulative ratio at
December 31, 1997 (1) 79 % 89 % 130 % 116 %
===============================================================================================
Cumulative ratio at
December 31, 1996 (1) 84 % 94 % 129 % 117 %
================================================================================================
(1) Rate-sensitive assets/rate-sensitive liabilities.
</TABLE>
18
LIQUIDITY MANAGEMENT
In addition to the interest rate sensitivity the Funds Management
Committee monitors the company's liquidity position. The
objective of liquidity management is to ensure the ability to
meet cash flow needs of affiliates' 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 can result in
the need to satisfy customer withdrawals and other obligations
with expensive funding sources. Too much liquidity on the
balance sheet can also be undesirable as earnings will suffer due
to underutilized resources. ONB's affiliates 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").
The parent company's sources of liquidity include: lines of
credit, affiliate banks' dividends, and capital markets.
Affiliate banks' dividends are subject to regulatory limits and
in some cases require regulatory approval. Footnote 12 of the
consolidated financial statements discusses this further. At
year-end 1997 ONB had $63 million in available lines of credit
from unaffiliated banks. In addition, ONB issued during 1997
$54.3 million of a $150 million medium term note with the
remainder available for future liquidity needs. At December 31,
1997, these securities were rated Baa1 by Moody's and BBB+ by
Standard and Poor's.
The Funds Management Committee also monitors the quality of the
investment portfolio by establishing guidelines for the types and
quality of securities acceptable for purchase. ONB has a
consistent, conservative investment strategy. Any exceptions to
these guidelines must be approved by the committee. The
committee reviews the quality of the portfolios on a regular
basis, especially the obligations of corporations and state and
political subdivisions.
NONINTEREST INCOME
Besides net interest income, ONB's earnings are enhanced by its
ability to generate noninterest income from both core business
and newer initiatives, such as brokerage/alternative investments
and insurance. ONB continuously strives to improve its
noninterest income performance. In 1997 noninterest income,
excluding securities transactions, grew 6.9%. The trust
company's fee income grew 15.9% and benefited from an expanding
revenue base of managed customer assets and strong financial
markets. Service charges on deposit accounts, the largest
individual noninterest category, grew 4.3% as new pricing
structures have been fully implemented over the past several
years. These fees are regularly reviewed and compared against
competition in each separate market and among affiliate banks.
Loan servicing fees were comparable to 1996. Other income
increased 6.2% as ONB's alternative investments and brokerage
business increased 9.8%,and insurance sales grew 8.0%.
During 1996, noninterest income grew 11.3%. Trust fees and
deposit service charges rose 10.1% and 10.2%, respectively. The
base of accounts for both areas rose and the fees charged were
reviewed and adjusted where necessary. Loan servicing fees
declined slightly. Other income increased 20.3% over 1995 as
insurance and alternative investment sales each increased $0.9
million.
ONB realized net securities gains of $0.1, $0.8, and $0.1 million
in 1997, 1996, and 1995, respectively. Generally, ONB has had
minimal sales of securities. During 1996, ONB sold a portion of
its Student Loan Marketing Association stock, resulting in a
gain.
Table 5 below presents changes in the components of noninterest
income for the years 1995 through 1997.
<TABLE>
<CAPTION>
NONINTEREST INCOME (TABLE 5)
($ in thousands) % Change From
Prior Year
1997 1996 1995 1997 1996
<S> <C> <C> <C> <C> <C>
Trust fees $11,766 $10,149 $9,216 15.9 % 10.1 %
Service charges on deposit
accounts 16,298 15,624 14,177 4.3 10.2
Loan servicing fees 5,623 5,668 5,691 (0.8) (0.4)
Other income 13,353 12,579 10,458 6.2 20.3
- -----------------------------------------------------------------------------------------------------------------
Subtotal 47,040 44,020 39,542 6.9 11.3
Net securities gains 50 781 52 N/M N/M
- -----------------------------------------------------------------------------------------------------------------
Total noninterest income $47,090 $44,801 $39,594 5.1 % 13.2 %
=================================================================================================================
N/M = Not meaningful
</TABLE>
19
NONINTEREST EXPENSE
The industry faces the continual challenge of controlling
operating costs and improve efficiencies while still providing
higher levels of customer service. Several ratios are used to
evaluate performance. ONB's efficiency ratio, net interest
income tax equivalized plus noninterest income divided by
noninterest expense, was 55.13% in 1997, down from 58.26% in
1996. The net overhead ratio, noninterest expense less
noninterest income divided by average assets, also improved from
2.09% to 1.96%.
In 1997 noninterest expense increased 1.3% compared to 1996.
Salaries and benefits, which comprised over 50% of total
noninterest expense, grew 5.4% in 1997. The relatively new
consumer finance subsidiary added $1.7 million of personnel
expense, plus expansion of our brokerage, insurance, trust and
internal data processing operations added new compensation
dollars. FDIC insurance premiums dropped $2.4 million. In 1996
the FDIC assessed a one-time recapitalization charge for all
SAIF-insured deposits which was $2.5 million for ONB affiliate
banks.
During 1996, total noninterest expense increased 3.4% over 1995.
Salaries and benefits increased 9.2% which included $2.5 million
of increased incentive compensation and additional personnel in
consumer finance, insurance, trust and data processing areas.
Occupancy expense rose 13.7% primarily due to a duplicate branch
writedown to fair value after a merger. Data processing expense
dropped 15.8% our affiliate banks converted to our internal data
operations. Communication and transportation expense increased
13.8% as computer networking capabilities were upgraded. Despite
the $2.5 million one-time recapitalization charge, FDIC insurance
premiums declined $2.3 million as the FDIC continued to adjust
premiums on deposit insurance.
Table 6 below presents changes in the components of noninterest
expense for the years 1995 through 1997.
<TABLE>
<CAPTION>
NONINTEREST EXPENSE (TABLE 6)
($ in thousands) % Change From
Prior Year
1997 1996 1995 1997 1996
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $89,223 $84,618 $77,479 5.4 % 9.2 %
Occupancy expense 9,450 10,236 9,006 (7.7) 13.7
Equipment expense 12,144 11,446 11,119 6.1 2.9
Marketing expense 5,257 5,288 5,334 (0.6) (0.9)
FDIC insurance premiums 682 3,041 5,324 (77.6) (42.9)
Data processing expense 5,395 5,076 6,028 6.3 (15.8)
Supplies expense 4,025 4,396 4,559 (8.4) (3.6)
Communication and transportation expense 6,899 6,673 5,863 3.4 13.8
Other expense 21,289 21,546 22,603 (1.2) (4.7)
- ----------------------------------------------------------------------------------------------------------------
Total noninterest expense $154,364 $152,320 $147,315 1.3 % 3.4 %
===============================================================================================================
</TABLE>
PROVISION FOR INCOME TAXES
ONB 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 ONB's financial statement
income and the federal statutory rate are caused by interest on
tax-exempt securities and loans and state income taxes. ONB's
effective tax rate was 28.6%, 29.4%, and 27.5% in 1997, 1996, and
1995, respectively, and has remained generally consistent between
these periods. See Note 7 to the consolidated financial
statements for additional details of ONB's income tax provision.
20
INTERIM FINANCIAL DATA
Table 7 below provides a detailed summary of quarterly results of
operations for the years ended December 31, 1997 and 1996. These
results contain all normal and recurring adjustments of a
material nature necessary for a fair and consistent presentation.
<TABLE>
<CAPTION>
INTERIM FINANCIAL DATA (TABLE 7)
(Unaudited, $ and shares in thousands except per share data)
Quarter Ended
December September June March
31 30 30 31
<S> <C> <C> <C> <C>
1997:
Interest income $110,058 $110,082 $106,584 $102,722
Interest expense 54,940 54,452 51,672 49,144
- ------------------------------------------------------------------------------------------------
Net interest income 55,118 55,630 54,912 53,578
Provision for loan losses 13,552 5,901 3,756 3,756
Noninterest income 12,650 11,717 11,290 11,433
Noninterest expense 38,658 38,444 39,107 38,155
- ------------------------------------------------------------------------------------------------
Income before income taxes 15,558 23,002 23,339 23,100
Income taxes 3,908 6,322 7,067 7,042
- ------------------------------------------------------------------------------------------------
Net income $11,650 $16,680 $16,272 $16,058
================================================================================================
Net income per share:
Basic $0.42 $0.61 $0.59 $0.57
Diluted $0.41 $0.58 $0.57 $0.56
================================================================================================
Weighted average shares:
Basic 27,453 27,568 27,784 27,996
Diluted 29,041 29,161 29,380 29,590
================================================================================================
1996:
Interest income $101,583 $100,002 $96,879 $95,949
Interest expense 49,048 47,866 46,402 47,315
- ------------------------------------------------------------------------------------------------
Net interest income 52,535 52,136 50,477 48,634
Provision for loan losses 3,678 3,229 2,103 2,002
Noninterest income 12,230 11,114 11,195 10,262
Noninterest expense 39,981 39,038 37,460 35,841
- ------------------------------------------------------------------------------------------------
Income before income taxes 21,106 20,983 22,109 21,053
Income taxes 5,652 6,200 6,839 6,381
- ------------------------------------------------------------------------------------------------
Net income $15,454 $14,783 $15,270 $14,672
================================================================================================
Net income per share:
Basic $0.55 $0.52 $0.53 $0.50
Diluted 0.53 0.50 0.52 0.49
================================================================================================
Weighted average shares:
Basic 28,243 28,590 28,802 29,153
Diluted 29,841 30,186 30,399 30,747
================================================================================================
</TABLE>
21
FINANCIAL CONDITION
OVERVIEW
Fueled by loan growth, total assets reached $5.7 billion at
December 31, 1997, 6.0% higher than the prior year-end. Loans
grew $281.4 million or 8.0%. Total liabilities grew $301.1
million or 6.1% over 1996. Deposits remained constant while
other funding sources provided the resources for the asset
growth.
INVESTMENT SECURITIES
Investment securities at December 31, 1997, increased $52.3
million, 3.4% over 1996. The growth occurred chiefly in
mortgage-backed securities where better yield opportunities
existed during the year.
Investment securities comprised nearly 30% of ONB's earning
assets at December 31, 1997. While it does not actively trade
its investment securities, ONB 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 liquidate, if necessary, available-for-sale securities
provide funding to help meet unforeseen liquidity needs. The
entire portfolio has an approximate weighted average maturity of
4.2 years.
At December 31, 1997, ONB held investment securities issued by
the states of Indiana, Illinois, and Pennsylvania and their
political subdivisions that had an aggregate market value of
$74.8 million, $72.1 million, and $48.0 million, respectively.
There were no other concentrations of investment securities
issued by an individual state and its political subdivisions
which were greater than 10% of shareholders' equity.
Average yields of the investment securities portfolio are
calculated on a taxable equivalent basis. Yields are based on
the amortized cost and are weighted for the scheduled maturity of
each investment. Average yields for the entire portfolio were
7.21%, 7.13%, and 6.95% for 1997, 1996, and 1995, respectively.
The portfolio yield increased during the year as the purchases
during 1997 were early in the year when higher yields were
available.
Table 8 below presents the maturity distribution of the
investment portfolio, along with weighted average yields thereon.
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES (TABLE 8)
($ in thousands)
December 31, 1997
Within 1 - 5 5 - 10 Beyond
FAIR VALUE: 1 Year Years Years 10 Years Total 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $35,487 $76,280 $5,421 -- $117,188 $154,524 $191,790
U.S. Government agencies
and corporations 81,090 144,915 -- -- 226,005 222,993 203,330
Mortgage-backed securities 47,119 476,327 186,986 15,007 725,439 633,270 564,865
States and political
subdivisions 27,569 222,244 179,430 23,690 452,933 462,378 442,302
Other securities -- 49 16 45,346 45,411 41,484 27,821
- ----------------------------------------------------------------------------------------------------------------------------
Total $191,265 $919,815 $371,853 $84,043 $1,566,976 $1,514,649 $1,430,108
============================================================================================================================
AMORTIZED COST:
U.S. Treasury $35,418 $75,452 $5,265 -- $116,135 $153,630 $189,506
U.S. Government agencies
and corporations 81,066 141,820 -- -- 222,886 222,244 202,767
Mortgage-backed securities 46,913 470,936 184,212 14,900 716,961 632,065 562,685
States and political
subdivisions 27,320 215,077 173,195 22,428 438,020 452,720 431,218
Other securities -- 49 16 45,346 45,411 40,856 27,025
- ----------------------------------------------------------------------------------------------------------------------------
Total $190,717 $903,334 $362,688 $82,674 $1,539,413 $1,501,515 $1,413,201
============================================================================================================================
Weighted average yield,
based on amortized cost
(taxable equivalent basis) 6.89 % 7.18 % 7.45 % 7.33 % 7.21 % 7.13 % 6.95 %
=============================================================================================================================
</TABLE>
22
LENDING AND LOAN ADMINISTRATION
The key to ONB's success has long been its credit culture which
features decision-making near the customer with corporate
oversight. Affiliate loan personnel have the authority to extend
credit under guidelines established by ONB's Board of Directors
and administered by the Credit Policy Committee. This committee,
which meets quarterly, includes members of ONB's executive
management and, on a rotating basis, outside members of the Board
of Directors and affiliate bank management. The committee
monitors credit quality through its review of information such as
delinquencies and other problem loans and charge-offs. The
committee regularly reviews its loan policy to assure it remains
appropriate for the current lending environment. Executive and
credit committees at the banks provide additional knowledge,
judgment and experience to ONB's lending administration.
ONB maintains an independent corporate loan review program. Its
loan review system evaluates loan administration, credit quality,
loan documentation, 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.
ONB's affiliates lend to commercial customers in various
industries including manufacturing, agribusiness, transportation,
mining, wholesaling, and retailing. ONB's policy is to
concentrate its lending activity in the geographic market areas
it serves, primarily southwestern Indiana, southeastern Illinois,
and western Kentucky. ONB 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.
Strong, balanced growth occurred in 1997 in most major
categories, led by commercial real estate which was up 14.0%.
Commercial and residential real estate rose 11.2%, and 8.7%,
respectively. Consumer credit decreased less than 2% between
years. The portfolio is well diversified with 23% of the
portfolio in commercial loans, 20% in commercial real estate, 37%
in residential real estate, and 20% in consumer credit. In 1996
loans similarly grew 8.0% as commercial real estate increased
16.5% while commercial and consumer loans both rose over 7.0%.
ONB's commercial lending is primarily to small to medium-sized
businesses in various industries in its region. Commercial real
estate loans are generally to similar companies in ONB's
geographical area. These industries have been stable in ONB's
market area and provide opportunities for growth. A significant
percentage of commercial and financial loans are due within one
year, reflecting the short-term nature of a large portion of
these loans. Table 9 on page 24 presents the maturity
distribution and rate sensitivity of loans and an analysis of
loans with predetermined and floating interest rates.
Residential real estate loans, primarily 1-4 family properties,
represent the most significant portion of the loan portfolio.
ONB portfolio includes both adjustable rate and higher yielding
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. Commercial loans
increased an average of 6.1% per year between 1993 and 1997.
Commercial and residential real estate loans and consumer loans
increased 11.9%, 7.4%, and 7.6%, respectively, during this
period. Table 10 on page 24 presents the composition of the loan
portfolio for each of the last five years.
23
<TABLE>
<CAPTION>
DISTRIBUTION OF LOAN MATURITIES AT DECEMBER 31, 1997 (TABLE 9)
($ in thousands)
Within 1-5 Beyond
1 Year Years 5 years Total
<S> <C> <C> <C> <C>
Commercial and financial $466,342 $257,102 $132,293 $855,737
Economic development bonds 3,416 8,955 10,582 22,953
- ------------------------------------------------------------------------------------------------
Total $469,758 $266,057 $142,875 $878,690
================================================================================================
Predetermined interest rates $119,743 $114,020 $40,127 $273,890
Floating interest rates 350,015 152,037 102,748 604,800
- ------------------------------------------------------------------------------------------------
Total $469,758 $266,057 $142,875 $878,690
================================================================================================
</TABLE>
<TABLE>
<CAPTION>
LOAN PORTFOLIO AT YEAR-END (TABLE 10)
($ in thousands) Four Year
1997 1996 1995 1994 1993 Growth Rate
<S> <C> <C> <C> <C> <C> <C>
Commercial $855,737 $769,889 $718,288 $761,627 $675,748 6.1 %
Financial -- -- 5,167 2,546 10,000 (100.0)
Economic development bonds 22,953 26,424 27,675 30,928 35,094 (10.1)
Commercial real estate 762,505 668,671 573,829 536,620 487,039 11.9
Residential real estate 1,416,963 1,303,283 1,238,772 1,131,805 1,064,158 7.4
Consumer credit 761,144 776,614 724,305 665,055 567,841 7.6
- -----------------------------------------------------------------------------------------------------------------------------
Total loans 3,819,302 3,544,881 3,288,036 3,128,581 2,839,880 7.7 %
Less: Unearned income 14,611 21,581 26,290 29,761 29,427 =========
- -------------------------------------------------------------------------------------------------------------
Subtotal 3,804,691 3,523,300 3,261,746 3,098,820 2,810,453
Less: Allowance for
loan losses 48,655 44,053 40,917 41,943 42,425
- -------------------------------------------------------------------------------------------------------------
Net loans $3,756,036 $3,479,247 $3,220,829 $3,056,877 $2,768,028
=============================================================================================================
COMPOSITION OF LOAN PORTFOLIO BY TYPE:
Commercial/financial/development 23.1 % 22.6 % 23.0 % 25.8 % 25.6 %
Commercial real estate 20.0 19.0 17.6 17.3 17.3
Residential real estate 37.2 37.0 38.0 36.5 38.0
Consumer credit 19.7 21.4 21.4 20.4 19.1
</TABLE>
24
The adequacy of the allowance for loan losses is formally
evaluated on a quarterly basis at both the affiliate and holding
company levels. 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 $25.3 million in 1997,
$18.0 million at which came from ONB's consumer finance
subsidiary. The finance subsidiary's losses stemmed from a pool
of loans funded in 1996 and early 1997. The activities leading
to these losses have been suspended. Net charge-offs were $11.0
million in 1996 and $8.2 million in 1995. The 1996 increase in
charge-offs was concentrated in the consumer lending area, a
trend experienced throughout the banking industry.
ONB's affiliates make monthly provisions for possible loan losses
in amounts estimated to be sufficient to maintain the allowance
for loan losses at a level considered necessary by management to
absorb estimated losses in the loan portfolios. The consolidated
provision for loan losses was $27.0 million in 1997, up from
$11.0 million in 1996, and $7.1 million in 1995. The consumer
finance affiliate accounted for $14.9 million of the 1997
provision. The remainder of the provision increase resulted from
srong loan growth.
Table 11 below summarizes activity in the allowance for loan
losses for the years 1993 through 1997, along with an allocation
of the year-end balances and related statistics for the allowance
and net charge-offs.
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES (TABLE 11)
($ in thousands)
ANALYSIS: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Allowance for loan losses,
January 1 $44,053 $40,917 $41,943 $42,425 $37,911
- --------------------------------------------------------------------------------------------------------------
Loans charged off:
Commercial 2,955 4,211 4,912 4,594 6,085
Commercial/residential real estate 609 670 973 697 2,701
Consumer credit 26,114 10,497 5,335 5,465 2,816
- --------------------------------------------------------------------------------------------------------------
Total charge-offs 29,678 15,378 11,220 10,756 11,602
- --------------------------------------------------------------------------------------------------------------
Recoveries on charged-off loans:
Commercial 1,530 2,274 1,632 1,191 3,580
Commercial/residential real estate 1,148 320 301 186 318
Consumer credit 1,727 1,775 1,126 1,143 912
- --------------------------------------------------------------------------------------------------------------
Total recoveries 4,405 4,369 3,059 2,520 4,810
- --------------------------------------------------------------------------------------------------------------
Net charge-offs 25,273 11,009 8,161 8,236 6,792
Provision charged to expense 26,965 11,012 7,135 7,754 10,359
Acquisitions under
purchase accounting -- -- -- -- 947
Nonrefundable dealer discounts 2,910 3,133 -- -- --
- --------------------------------------------------------------------------------------------------------------
Allowance for loan losses,
December 31 $48,655 $44,053 $40,917 $41,943 $42,425
==============================================================================================================
Average loans for the year $3,633,151 $3,367,154 $3,186,731 $2,928,347 $2,700,408
Allowance/year-end loans 1.28 % 1.25 % 1.25 % 1.35 % 1.51 %
Allowance/average loans 1.34 1.31 1.28 1.43 1.57
Net charge-offs/average loans 0.70 0.33 0.26 0.28 0.25
- --------------------------------------------------------------------------------------------------------------
ALLOCATION AT DECEMBER 31:
Commercial $23,337 $19,657 $22,207 $23,160 $22,276
Commercial/residential real estate 11,828 11,533 11,633 11,219 12,991
Consumer credit 13,490 12,863 7,077 7,564 7,158
- --------------------------------------------------------------------------------------------------------------
Total $48,655 $44,053 $40,917 $41,943 $42,425
==============================================================================================================
</TABLE>
25
Assets determined by the various evaluation processes to be
under-performing receive special attention by ONB and its
affiliates. 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 affiliate 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 $111.1 million as of December 31,
1997, 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 general condition of the portfolio and in establishing the
allowance for loan losses.
Under-performing assets rose $2.2 million in 1997 and $6.0
million in 1996. As a percent of total loans and foreclosed
properties, under-performing assets were 0.61%, 0.59%, and 0.46%
at year-end 1997, 1996 and 1995, respectively. The growth in
nonaccrual loans in 1997 and foreclosed properties in 1996 was
primarily consumer loans related. At December 31, 1997, the
allowance for loan loss to under-performing assets ratio was
210.99%, comparable to 210.83% in 1996 and 274.02% in 1995. Said
in another way, in 1997 ONB has set aside $2.11 for every dollar
of under-performing assets.
Table 12 below presents the components of under-performing assets
as of December 31, for the last five years.
<TABLE>
<CAPTION>
UNDER-PERFORMING ASSETS (TABLE 12)
($ in thousands)
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $14,283 $12,501 $6,919 $9,330 $6,871
Renegotiated loans 248 746 1,120 1,280 833
Past due loans (90 days or more):
Commercial 1,394 980 1,499 1,169 1,882
Commercial/residential real estate 2,167 1,265 2,602 2,102 2,692
Consumer 844 700 1,059 1,257 893
- --------------------------------------------------------------------------------------------------------------
Total 4,405 2,945 5,160 4,528 5,467
- --------------------------------------------------------------------------------------------------------------
Foreclosed properties 4,124 4,703 1,733 1,702 1,596
- --------------------------------------------------------------------------------------------------------------
Total under-performing assets $23,060 $20,895 $14,932 $16,840 $14,767
==============================================================================================================
Under-performing assets as a %
of total loans and
foreclosed properties 0.61 % 0.59 % 0.46 % 0.54 % 0.53 %
Allowance for loan loss/
under-performing assets 210.99 % 210.83 % 274.02 % 249.07 % 287.30 %
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
26
Interest income of approximately $2.1 million would have been
recorded in 1997 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 1997 on nonaccrual and restructured
loans was $0.4 million.
DEPOSITS
ONB's primary funding source for its assets is the base of core
customer deposits which consist of noninterest-bearing demand,
regular savings and NOW accounts, money market accounts, and
small denomination certificates of deposit. Average core deposits
increased 1.4% in 1997 compared to the 2.3% increase in 1996.
Money market deposits, which grew 11.9% in 1996 as a result of
marketing new products, decreased 2.1% in 1997. Other time
deposits rose 3.2% in 1997 as brokered certificate of deposits
were used to supplement local deposits.
Table 13 below presents changes between years in the average
balances of all funding sources.
<TABLE>
<CAPTION>
FUNDING SOURCES - AVERAGE BALANCE (TABLE 13)
($ in thousands) % Change From
Prior Year
Core Deposits: 1997 1996 1995 1997 1996
<S> <C> <C> <C> <C> <C>
Demand deposits $453,616 $450,005 $455,991 0.8 % (1.3)%
NOW deposits 448,831 444,427 436,705 1.0 1.8
Savings deposits 479,465 479,863 471,008 (0.1) 1.9
Money market deposits 652,796 666,462 595,583 (2.1) 11.9
Other time deposits 1,872,047 1,813,209 1,809,240 3.2 0.2
- ----------------------------------------------------------------------------------------------------------------
Total core deposits 3,906,755 3,853,966 3,768,527 1.4 2.3
- ----------------------------------------------------------------------------------------------------------------
Certificates of deposit
$100,000 and over 324,109 283,323 256,480 14.4 10.5
Short-term borrowings 409,705 293,052 303,789 139.8 (3.5)
Other borrowings 309,671 192,795 140,937 160.6 36.8
- ----------------------------------------------------------------------------------------------------------------
Total funding sources $4,950,240 $4,623,136 $4,469,733 7.1 % 3.4 %
================================================================================================================
</TABLE>
The average balance of large certificates grew $40.8 million or
14.4% in 1997 compared to the prior year. Table 14 below
presents a maturity distribution for certificates of deposit with
denominations of $100,000 and over.
<TABLE>
<CAPTION>
CERTIFICATES OF DEPOSIT OF $100,000 AND OVER (TABLE 14)
($ in thousands)
Maturity Distribution
Year-End 1-90 91-180 181-365 Beyond Interest Average
Balance Days Days Days 1 Year Expense Rate
<S> <C> <C> <C> <C> <C> <C> <C>
1997 $359,695 $158,266 $72,299 $53,954 $75,176 $18,916 5.84 %
1996 257,988 98,035 44,632 65,271 50,050 14,666 5.18
1995 285,461 125,971 56,128 39,648 63,714 14,472 5.64
</TABLE>
27
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. Borrowings from
FHLB include both short and long-term maturities. Medium term
notes and convertible subordinated debentures provide longer term
funds.
Collectively, the average short-term borrowings rose $116.7
million or 39.8% in 1997. ONB used these alternative funding
sources to supplement deposit growth.
Table 15 below presents the distribution of ONB's short-term
borrowings and the weighted average interest rates thereon for
each of the last three years.
<TABLE>
<CAPTION>
SHORT-TERM BORROWINGS (TABLE 15)
($ in thousands)
Other
Funds Repurchase Short-term
Purchased Agreements Borrowings
1997:
<S> <C> <C> <C>
Outstanding at year-end $170,675 $215,878 $56,133
Average amount outstanding 73,767 220,074 115,864
Maximum amount outstanding at
any month-end 170,675 244,722 192,048
Weighted average interest rate:
During year 5.57 % 4.98 % 6.23 %
End of year 6.34 5.18 5.87
1996:
Outstanding at year-end $57,175 $177,463 $101,347
Average amount outstanding 35,056 204,837 53,159
Maximum amount outstanding at
any month-end 90,875 217,337 116,965
Weighted average interest rate:
During year 5.47 % 4.72 % 6.05 %
End of year 6.25 4.89 6.14
1995:
Outstanding at year-end $11,775 $164,906 $86,661
Average amount outstanding 36,988 195,336 71,465
Maximum amount outstanding at
any month-end 98,215 200,961 94,827
Weighted average interest rate:
During year 5.98 % 5.13 % 6.41 %
End of year 5.71 5.08 5.95
</TABLE>
28
In 1997 ONB registered a $150 million medium term note program
and issued $54.3 million. These borrowings, combined with prior
issuances totaled $98.3 million at December 31, 1997. The notes
have a weighted average effective interest rate of 6.68% and
mature between 1998 and 2007. The funds were used to reduce
ONB's lines of credit.
During 1997, holders of ONB's 8% convertible debentures converted
principal amounts of $0.2 million. These conversions resulted in
the issuance of 7,727 shares of common stock and an offsetting
increase in shareholders' equity.
CAPITAL RESOURCES
Shareholders' equity was $477.2 million or 8.4% of total assets
at December 31, 1997, and $458.5 million or 8.5% at December 31,
1996. ONB paid cash dividends in 1997 totaling $24.2 million or
$0.88 per share (restated for the 5% stock dividend paid in
January 1998).
Treasury shares are repurchased throughout the year as part of an
ongoing program to provide shares for reissuance under ONB's
dividend reinvestment and stock purchase plan and for future
stock dividends. Treasury shares repurchased during 1997 reduced
shareholders' equity by $36.1 million. Shares reissued pursuant
to the above programs and in connection with conversions of ONB's
subordinated debentures added $9.7 million to shareholders'
equity in 1997.
ONB and the banking industry are subject to various regulatory
capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can
elicit certain mandatory actions by regulators that if
undertaken, could have a direct material effect on ONB's
financial statements. Capital adequacy in the banking industry
is evaluated primarily by the use of ratios which measure capital
against assets and certain off-balance-sheet items. Certain
ratios weight these assets based on risk characteristics
according to regulatory accounting practices. At December 31,
1997, ONB and it affiliate banks exceeded the regulatory minimums
and met the regulatory definition of well-capitalized. ONB's
capital ratios and the regulatory guidelines are presented in
Table 16 below.
<TABLE>
<CAPTION>
CAPITAL STRUCTURE AND REGULATORY GUIDELINES (TABLE 16)
($ in thousands)
Regulatory Guidelines December 31,
Minimum Well-Capitalized 1997 1996 1995
<S> <C> <C> <C> <C> <C>
TIER 1 CAPITAL:
Shareholders' equity (1) $460,663 $450,646 $451,174
Less intangibles (13,759) (13,750) (15,185)
- --------------------------------------------------------------------------------------------------------------------
Tier 1 capital 446,904 436,896 435,989
TIER 2 CAPITAL:
Subordinated debentures 30,407 30,564 31,515
Qualifying allowance for loan losses 45,935 42,203 39,609
- --------------------------------------------------------------------------------------------------------------------
Total capital $523,246 $509,663 $507,113
====================================================================================================================
Risk adjusted assets $3,674,769 $3,376,237 $3,172,014
====================================================================================================================
Tier 1 capital to risk-adjusted assets 4.00 % 6.00 % 12.16 % 12.94 % 13.74 %
Total capital to risk-adjusted assets 8.00 10.00 14.24 15.10 15.99
Tier 1 capital to quarterly average assets
(leverage ratio) 3.00 5.00 7.95 8.29 8.61
(1) Excludes unrealized gains (losses) on investment securities.
</TABLE>
29
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, ONB 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 ONB's system provides the
appropriate balance between costs of controls and the related
benefits.
In order to monitor compliance with this system of controls, ONB
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, Arthur Andersen 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 PUBLIC ACCOUNTANTS
The financial statements in this annual report have been audited
by Arthur Andersen LLP, for the purpose of determining that the
financial statements are presented fairly in all material
respects. Arthur Andersen's report on the financial statements
appears on page 31. Their audit included a consideration of
ONB's system of internal accounting controls, for the purpose of
setting the scope and timing of their auditing procedures.
30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
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, 1997 and 1996, and the related consolidated
statements of income, changes in shareholders' equity, and cash
flows for each of the three years in the period ended December
31, 1997. 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, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted
accounting principles.
s/s Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Indianapolis, Indiana,
January 20, 1998.
31
<TABLE>
<CAPTION>
OLD NATIONAL BANCORP
CONSOLIDATED BALANCE SHEET
($ and shares in thousands)
December 31,
1997 1996
<S> <C> <C>
ASSETS
Cash and due from banks $160,813 $180,405
Money market investments:
Interest-bearing deposits in other banks 624 3,140
Federal funds sold and securities purchased under agreements to resell 7,244 3,558
- -------------------------------------------------------------------------------------------------------
Total money market investments 7,868 6,698
- -------------------------------------------------------------------------------------------------------
TOTAL CASH AND CASH EQUIVALENTS 168,681 187,103
- -------------------------------------------------------------------------------------------------------
Investment securities - Available-for-sale, at fair value 1,566,976 1,514,649
- -------------------------------------------------------------------------------------------------------
Loans, net of unearned income 3,804,691 3,523,300
Allowance for loan losses (48,655) (44,053)
- -------------------------------------------------------------------------------------------------------
NET LOANS 3,756,036 3,479,247
- -------------------------------------------------------------------------------------------------------
Premises and equipment, net 78,332 78,184
Accrued income receivable 49,562 47,058
Other assets 66,811 60,350
- -------------------------------------------------------------------------------------------------------
TOTAL ASSETS $5,686,398 $5,366,591
=======================================================================================================
LIABILITIES
Deposits:
Noninterest-bearing demand $502,276 $512,281
Interest-bearing:
NOW accounts 450,381 449,486
Savings accounts 469,589 480,303
Money market accounts 660,240 714,261
Certificates of deposit $100,000 and over 359,695 257,988
Other time 1,856,549 1,853,705
- -------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 4,298,730 4,268,024
- -------------------------------------------------------------------------------------------------------
Short-term borrowings 442,686 335,985
Accrued expenses and other liabilities 78,947 65,811
Other borrowings 388,832 238,245
- -------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 5,209,195 4,908,065
- -------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 11)
SHAREHOLDERS' EQUITY
Preferred stock, 2,000 shares authorized, no shares issued or outstanding -- --
Common stock, $1 stated value, 50,000 shares authorized,
27,457 and 26,778 shares issued and outstanding, respectively 27,457 26,778
Capital surplus 299,988 265,584
Retained earnings 133,218 158,284
Net unrealized gain on available-for-sale investment securities 16,540 7,880
- -------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 477,203 458,526
- -------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,686,398 $5,366,591
=======================================================================================================
The accompanying notes to consolidated financial statements are an integral part of this statement.
</TABLE>
32
<TABLE>
<CAPTION>
OLD NATIONAL BANCORP
CONSOLIDATED STATEMENT OF INCOME
($ and shares in thousands except per share data)
Years Ended December 31,
1997 1996 1995
INTEREST INCOME
<S> <C> <C> <C>
Loans including fees:
Taxable $325,449 $299,130 $281,111
Nontaxable 4,250 3,897 3,578
Investment securities:
Taxable 75,507 64,465 63,554
Nontaxable 23,552 23,694 23,585
Money market investments 688 3,227 3,908
- ------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 429,446 394,413 375,736
- ------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Savings, NOW and money market deposits 45,156 46,500 47,123
Certificates of deposit $100,000 and over 18,916 14,666 14,472
Other time deposits 104,051 102,255 98,409
Short-term borrowings 22,281 14,806 16,736
Other borrowings 19,804 12,404 9,760
- ------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 210,208 190,631 186,500
- ------------------------------------------------------------------------------------------------
NET INTEREST INCOME 219,238 203,782 189,236
Provision for loan losses 26,965 11,012 7,135
- ------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 192,273 192,770 182,101
- ------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trust fees 11,766 10,149 9,216
Service charges on deposit accounts 16,298 15,624 14,177
Loan servicing fees 5,623 5,668 5,691
Net securities gains 50 781 52
Other income 13,353 12,579 10,458
- ------------------------------------------------------------------------------------------------
TOTAL NONINTEREST INCOME 47,090 44,801 39,594
- ------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 89,223 84,618 77,479
Occupancy expense 9,450 10,236 9,006
Equipment expense 12,144 11,446 11,119
Marketing expense 5,257 5,288 5,334
FDIC insurance premiums 682 3,041 5,324
Data processing expense 5,395 5,076 6,028
Supplies expense 4,025 4,396 4,559
Communication and transportation expense 6,899 6,673 5,863
Other expense 21,289 21,546 22,603
- ------------------------------------------------------------------------------------------------
TOTAL NONINTEREST EXPENSE 154,364 152,320 147,315
- ------------------------------------------------------------------------------------------------
Income before income taxes 84,999 85,251 74,380
Income taxes 24,339 25,072 20,441
- ------------------------------------------------------------------------------------------------
NET INCOME $60,660 $60,179 $53,939
================================================================================================
NET INCOME PER COMMON SHARE:
Basic $2.19 $2.10 $1.82
Diluted 2.12 2.04 1.77
================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic 27,699 28,695 29,631
Diluted 29,291 30,290 31,270
================================================================================================
The accompanying notes to consolidated financial statements are an integral part of this statement.
</TABLE>
33
<TABLE>
<CAPTION>
OLD NATIONAL BANCORP
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
($ and shares in thousands)
Net Unrealized
Gain (Loss) on Total
Common Stock Capital Retained Investment Shareholders'
Shares Amount Surplus Earnings Securities Equity
<S> <C> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1994 26,041 $26,041 $240,787 $182,822 ($8,979) $440,671
Net income -- -- -- 53,939 -- 53,939
Cash dividends -- -- -- (22,441) -- (22,441)
5% stock dividend 1,184 1,184 42,401 (43,585) -- --
Stock repurchased (1,238) (1,238) (41,572) -- -- (42,810)
Stock reissued under dividend reinvestment
and stock purchase plan 188 188 6,114 -- -- 6,302
Stock reissued due to conversion of
subordinated debentures 278 278 6,256 -- 6,534
Net unrealized loss on investment securities -- -- -- -- 19,229 19,229
- -----------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1995 26,453 26,453 253,986 170,735 10,250 461,424
Net income -- -- -- 60,179 -- 60,179
Cash dividends -- -- -- (23,655) -- (23,655)
5% stock dividend 1,277 1,277 47,698 (48,975) -- --
Stock repurchased (1,255) (1,255) (43,606) -- -- (44,861)
Stock reissued under dividend reinvestment
and stock purchase plan 262 262 6,596 -- -- 6,858
Stock reissued due to conversion of
subordinated debentures 41 41 910 -- -- 951
Net unrealized gain on investment securities -- -- -- -- (2,370) (2,370)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1996 26,778 26,778 265,584 158,284 7,880 458,526
Net income -- -- -- 60,660 -- 60,660
Cash dividends -- -- -- (24,240) -- (24,240)
5% stock dividend 1,307 1,307 60,179 (61,486) -- --
Stock repurchased (877) (877) (35,257) -- (36,134)
Stock reissued under dividend reinvestment
and stock purchase plan 241 241 9,333 -- 9,574
Stock reissued due to conversion of
subordinated debentures 8 8 149 -- -- 157
Net unrealized loss on investment securities -- -- -- -- 8,660 8,660
- -----------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1997 27,457 $27,457 $299,988 $133,218 $16,540 $477,203
=============================================================================================================================
The accompanying notes to consolidated financial statements are an integral part of this statement.
</TABLE>
34
<TABLE>
<CAPTION>
OLD NATIONAL BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $60,660 $60,179 $53,939
- -----------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation 9,208 8,298 7,902
Amortization of intangible assets 1,277 1,435 1,773
Net premium amortization on investment securities 1,658 2,200 1,722
Provision for loan losses 26,965 11,012 7,135
Net securities gains (50) (781) (52)
(Gain) loss on sale of other assets (223) 254 (291)
(Increase) decrease in interest receivable (2,504) 152 (6,031)
(Increase) decrease in other assets (7,738) (1,615) 1,797
Increase in accrued expenses and other liabilities 7,367 5,172 8,576
- -----------------------------------------------------------------------------------------------------------------------------
Total adjustments 35,960 26,127 22,531
- -----------------------------------------------------------------------------------------------------------------------------
Net cash flows provided by operating activities 96,620 86,306 76,470
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities held-to-maturity -- -- (62,585)
Purchase of investment securities available-for-sale (401,094) (453,068) (268,399)
Proceeds from maturities of investment securities held-to-maturity -- -- 113,673
Proceeds from maturities of investment securities available-for-sale 301,722 333,963 189,170
Proceeds from sales of investments securities available-for-sale 59,866 29,372 35,210
Net principal collected from (loans made to) customers:
Commercial and financial (83,802) (47,120) 40,691
Commercial/residential real estate, net of loans originated for sale (206,975) (159,703) (144,848)
Consumer (12,977) (62,607) (66,930)
Residential real estate loans originated for sale (26,775) (44,400) (36,322)
Proceeds from sale of mortgage loans 26,979 44,734 36,541
Proceeds from sale of premises and equipment 976 1,059 1,258
Purchase of premises and equipment (10,313) (13,228) (12,041)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash flows used in investing activities (352,393) (370,998) (174,582)
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits, short-term and other borrowings:
Noninterest-bearing demand deposits (10,005) 36,562 27,161
Savings, NOW and money market deposits (63,840) 35,530 96,534
Certificates of deposit $100,000 and over 101,707 (27,473) 64,497
Other time deposits 2,844 40,323 119,139
Short-term borrowings 106,701 87,085 (187,374)
Other borrowings 96,444 97,449 20,880
Net (payments on) proceeds from medium term notes 54,300 (6,000) 18,000
Cash dividends paid (24,240) (23,655) (22,441)
Common stock repurchased (36,134) (44,861) (42,810)
Common stock reissued, net of shares used to convert subordinated debentures 9,574 6,858 6,302
- -----------------------------------------------------------------------------------------------------------------------------
Net cash flows provided by financing activities 237,351 201,818 99,888
- -----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (18,422) (82,874) 1,776
Cash and cash equivalents at beginning of period 187,103 269,977 268,201
- -----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $168,681 $187,103 $269,977
=============================================================================================================================
The accompanying notes to consolidated financial statements are an integral part of this statement
</TABLE>
35
OLD NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the
accounts of Old National Bancorp ("ONB") and its wholly-owned
affiliates and have been prepared in conformity with generally
accepted accounting principles and prevailing practices within
the banking industry. Such principles require management to make
estimates and assumptions that affect the reported amounts of
assets, liabilities, and the disclosures of contingent assets and
liabilities at the date of the financial statements and amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
All significant intercompany transactions and balances have been
eliminated. The statements have been restated to reflect mergers
accounted for by the pooling-of-interests method of accounting.
A summary of the more significant accounting and reporting
policies used in preparing the statements is presented below.
NATURE OF OPERATIONS
ONB, a multi-bank holding company headquartered in Evansville,
Indiana, operates in Indiana, Illinois, and Kentucky. Through
its bank and non-bank affiliates, ONB provides to its customers
an array of financial services including loan, deposit, trust,
investment, and insurance products.
INVESTMENT SECURITIES
ONB has classified all investments as available-for-sale.
Accordingly, these securities are recorded at fair value with the
unrealized gains and losses, net of tax effect, recorded as a
separate component of shareholders' equity. Realized gains and
losses affect income and the prior fair value adjustments are
reversed.
Premiums and discounts are recognized in interest income using
the interest method over the period to maturity. Gains and
losses on the sale of available-for-sale securities are
determined using the specific-identification method.
LOANS
Loans are stated at the principal amount outstanding. Interest
income on nondiscounted loans is accrued on the principal
balances of loans outstanding. Interest income on discounted
loans is recognized using other methods that generally
approximate the interest method. A loan is generally placed on
nonaccrual status when principal or interest becomes 90 days past
due unless it is well secured and in the process of collection,
or earlier when concern exists as to the ultimate collection of
principal or interest. Interest accrued during the current year
on such loans is reversed against earnings. Interest accrued in
the prior year, if any, is charged to the allowance for loan
losses.
As an element of managing interest rate risk exposure, certain
ONB affiliate banks pre-sell fixed rate mortgage loans to third
parties. At December 31, 1997, approximately $1.2 million of
such mortgage loans were held and carried at cost which
approximated market value.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level believed
adequate by management to absorb potential losses in the
consolidated loan portfolio. Management's evaluation of the
adequacy of the allowance is an estimate based on reviews of
individual loans, the risk characteristics of the various
categories of loans given current economic conditions and other
factors such as historical loss experience, the financial
condition of the borrower, the fair market value of the
collateral and the growth of the loan portfolio. The allowance is
increased through a provision charged to operating expense.
Loans deemed to be uncollectible are charged to the allowance.
Recoveries of loans previously charged off are added to the
allowance.
A loan is considered impaired when it is probable that
contractual interest and principal payments will not be collected
either for the amounts or by the dates as scheduled in the loan
agreement. ONB's policy for recognizing income on impaired loans
is to accrue interest unless a loan is placed on nonaccrual
status.
To appropriately reflect credit risks generally associated with
ONB's non-prime automobile finance business, ONB purchases
installment contracts from dealers at a discount from their
principal amount. ONB negotiates the discount amount with
dealers based upon various criteria, one of which is the credit
risk associated with the contracts being purchased. The
nonrefundable discount is allocated to the allowance for loan
losses to further protect ONB from losses associated with such
contracts.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is charged to operating expense over
the useful life of the assets, principally on the straight-line
method. Maintenance and repairs are expensed as incurred while
major additions and improvements are capitalized.
36
OTHER ASSETS
Real estate properties acquired as a result of foreclosure are
valued at the lower of the recorded investment in the related
loan or fair value of the property less estimated cost to sell.
The recorded investment is the sum of the outstanding principal
loan balance, any accrued interest which has not been received,
and acquisition cost associated with the loan. Any excess
recorded investment over the fair value of the property received
is charged to the allowance for loan losses. Any subsequent
write-downs are charged to expense, as are the costs of operating
the properties. Such costs are not material to ONB's results of
operation.
Identifiable intangible assets and the excess of total
acquisition costs over the fair value of net assets acquired
($0.9 million and $12.8 million, respectively, at December 31,
1997) are being amortized on the straight-line basis over periods
ranging from 8 to 25 years. Such assets are periodically
evaluated as to the recoverability of their carrying value.
NET INCOME PER SHARE
Basic net income per share is computed by dividing net income by
the weighted average number of common shares outstanding during
each year, adjusted to reflect all stock dividends (Note 9) and
all mergers accounted for as pooling-of-interests as if they had
occurred at the beginning of the earliest year presented. Net
income per share, assuming dilution, is computed as above and
assumes the conversion of outstanding subordinated debentures
(Note 10). Below is a table reconciling basic and diluted
earnings per share ("EPS").
<TABLE>
<CAPTION>
NOTE 1 - EARNINGS PER SHARE RECONCILIATION
($ and shares in thousands except per share data):
For the Year Ended For the Year Ended For the Year Ended
December 31, 1997 December 31, 1996 December 31, 1995
Per-Share Per-Share Per-Share
Income Shares Amount Income Shares Amount Income Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income available to
common stockholders $60,660 27,699 $2.19 $60,179 28,695 $2.10 $53,939 29,631 $1.82
EFFECT OF DILUTIVE SECURITIES
Stock options -- 95 -- 91 -- 88
8% convertible debentures 1,469 1,497 1,477 1,504 1,523 1,551
- -------------------------------------------------- ------------------- ----------------
DILUTED EPS
Income available to
common stockholders
+ assumed conversions $62,129 29,291 $2.12 $61,656 30,290 $2.04 $55,462 31,270 $1.77
=====================================================================================================================
</TABLE>
37
INCOME TAXES
Deferred tax assets and liabilities are recorded based on
differences between the financial statement and tax bases of
assets and liabilities at income tax rates currently in effect.
For ONB, this results in a net deferred tax asset which relates
principally to differences in the recognition of loan losses for
book and tax purposes.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business, ONB's affiliate banks have
entered into off-balance-sheet financial instruments consisting
of commitments to extend credit, commitments under credit card
arrangements, commercial letters of credit, and standby letters
of credit. Such financial instruments are recorded in the
financial statements when they become payable.
STATEMENT OF CASH FLOWS DATA
For the purpose of presentation in the accompanying Statement of
Cash Flows, cash and cash equivalents are defined as cash, due
from banks, and money market investments. Cash paid during the
years ended December 31, 1997, 1996, and 1995, for interest was
$205.1 million, $190.2 million, and $180.6 million, respectively.
Total income tax payments during 1997, 1996, and 1995, were $25.1
million, $24.1 million, and $17.1 million, respectively.
IMPACT OF ACCOUNTING CHANGES
Effective January 1, 1997, ONB adopted the provisions of SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." This statement provides
accounting standards for sales, securitization, and servicing of
receivables, and other financial assets, secured borrowing and
collateral transactions, and the extinguishment of liabilities.
Certain other provisions of this statement are not effective
until January 1, 1998.
Effective December 31, 1997, ONB adopted the provisions of SFAS
No. 128, "Earnings per Share". This statement established
standards for computing and presenting EPS.
The adoption of both above statements did not have a material
impact on ONB's financial condition, results of operations, or
EPS calculation.
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income" which establishes standards for reporting
and display of comprehensive income and its components. The FASB
also issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which establishes standards
for reporting information on operating segments. These
statements are effective for fiscal years beginning after
December 15, 1997. ONB does not expect the impact of these
statements to be material to its disclosures.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with
the 1997 presentation. Such reclassifications had no effect on
net income.
NOTE 2 - BUSINESS COMBINATIONS
MERGERS - PENDING
During January 1998, ONB signed a non-binding letter of intent to
merge with Edgar County Bank of Paris, Illinois, which had $148.2
million in total assets at December 31, 1997. The merger is
subject to the execution of a definitive agreement and
shareholder and regulatory approvals.
<TABLE>
<CAPTION>
NOTE 3 - INVESTMENT SECURITIES
The following tables summarize the amortized cost and fair value
of the investment securities portfolio at December 31, 1997 and
1996, and the corresponding amounts of unrealized gains and
losses therein ($ in thousands):
Available-for-Sale
Amortized Unrealized Unrealized Fair
December 31, 1997: Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury $116,135 $1,130 ($77) $117,188
U.S. Government agencies
and corporations 222,886 3,466 (347) $226,005
Mortgage-backed securities 716,961 9,291 (813) $725,439
State and political subdivisions 438,020 15,059 (146) $452,933
Other securities 45,411 -- $45,411
- ------------------------------------------------------------------------------------------------
Total $1,539,413 $28,946 ($1,383) $1,566,976
================================================================================================
December 31, 1996:
U.S. Treasury $153,630 $1,272 ($378) $154,524
U.S. Government agencies
and corporations 222,244 1,565 (816) $222,993
Mortgage-backed securities 632,065 4,214 (3,009) $633,270
State and political subdivisions 452,720 11,218 (1,560) $462,378
Other securities 40,856 716 (88) $41,484
- ------------------------------------------------------------------------------------------------
Total $1,501,515 $18,985 ($5,851) $1,514,649
================================================================================================
</TABLE>
The amortized cost and fair value of the investment securities
portfolio at December 31, 1997 and 1996, are shown below by
expected maturity. Expected maturities may differ from
contractual maturities if borrowers have the right to call or
prepay obligations with or without call or prepayment penalties.
Proceeds from sales of investment securities available-for-sale
during 1997 and 1996 were $59.9 million and $29.4 million,
respectively. In 1997 realized gains and losses were $0.3
million and $0.2 million, respectively. In 1996 realized gains
and losses were $0.8 million and $0.1 million.
Investment securities with a carrying value of $564 million and
$463 million at December 31, 1997 and 1996, respectively, were
pledged to secure public and other funds as required.
<TABLE>
<CAPTION>
($ in thousands)
1997 1996
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
MATURITY
Within one year $190,717 $191,265 $192,906 $193,439
One to five years 903,334 919,815 694,576 701,232
Five to ten years 362,688 371,853 513,060 517,682
Beyond ten years 82,674 84,043 100,973 102,296
- ---------------------------------------------------------------------------------
Total $1,539,413 $1,566,976 $1,501,515 $1,514,649
=================================================================================
</TABLE>
39
NOTE 4 - LOANS
The composition of loans at December 31, 1997 and 1996, by
lending classification was as follows ($ in thousands):
December 31,
1997 1996
Commercial $855,737 $769,889
Economic development bonds 22,953 26,424
Commercial real estate 762,505 668,671
Residential real estate 1,416,963 1,303,283
Consumer credit, net 746,533 755,033
- -------------------------------------------------------------------
Total loans $3,804,691 $3,523,300
===================================================================
Through its affiliates, ONB makes loans to customers in various
industries including manufacturing, agribusiness, transportation,
mining, wholesaling, and retailing, predominately in its tri-state region.
The loan portfolio is diversified with no single industry exceeding 10% of
the total.
Executive officers and directors of ONB and significant
subsidiaries and their related interests are loan customers of
ONB's affiliate banks in the normal course of business. These
loans are made on substantially the same terms, including
interest rates and collateral, as those prevailing at the same
time for comparable transactions with unrelated parties and
involve no unusual risk of collectibility. An analysis of the
1997 activity of these loans is as follows ($ in thousands):
Balance, January 1, 1997 $107,065
New loans 199,923
Repayments (176,548)
Officer and director changes 1,016
- --------------------------------------------------------------------
Balance, December 31, 1997 $131,456
====================================================================
<TABLE>
<CAPTION>
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses during the years 1997,
1996, and 1995 was as follows ($ in thousands):
December 31,
1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of year $44,053 $40,917 $41,943
Additions:
Provision charged to expense 26,965 11,012 7,135
Nonrefundable dealer discounts 2,910 3,133 --
Deductions:
Loans charged off 29,678 15,378 11,220
Recoveries (4,405) (4,369) (3,059)
- ----------------------------------------------------------------------------------
Net charge-offs 25,273 11,009 8,161
- ----------------------------------------------------------------------------------
Balance at end of year $48,655 $44,053 $40,917
==================================================================================
</TABLE>
40
At December 31, 1997, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS Nos. 114
and 118 was $6.8 million with no related allowance and $45.0
million with $11.2 million of related allowance. At December 31,
1996, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS Nos. 114 and 118 was $3.9
million with no related allowance and $51.5 million with $12.6
million of related allowance.
For the year ended December 31, 1997, the average balance of
impaired loans was $54.1 million, for which $3.6 million of
interest was recorded. For the year ended December 31, 1996, the
average balance of impaired loans was $54.8 million, for which
$3.8 million of interest was recorded.
NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments," requires entities to disclose the fair value of
financial instruments, both assets and liabilities recognized and
not recognized in the consolidated balance sheet, for which it is
practicable to estimate fair value. The following methods and
assumptions were used to estimate the fair value of each type of
financial instrument.
CASH, DUE FROM BANKS AND MONEY MARKET INVESTMENTS
For these instruments, the carrying amount is a reasonable
estimate of fair value.
INVESTMENT SECURITIES
For investment securities, fair values are based on quoted market
prices, if available. For securities where quoted prices are not
available, fair value is estimated based on market prices of
similar securities.
LOANS
The fair value of loans is estimated by discounting future cash
flows using current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities.
DEPOSITS
The fair value of noninterest-bearing demand deposits and
savings, NOW, and money market deposits is the amount payable as
of the reporting date. The fair value of fixed-maturity
certificates of deposit is estimated using rates currently
offered for deposits with similar remaining maturities.
SHORT-TERM BORROWINGS
Federal funds purchased and securities sold under agreements to
repurchase generally have an original term to maturity of 30 days
or less and, therefore, their carrying amount is a reasonable
estimate of fair value.
MEDIUM TERM NOTES AND SUBORDINATED DEBENTURES
The fair value of medium term notes is estimated using rates
currently offered for obligations with similar remaining
maturities. The fair value of subordinated debentures is
estimated using rates currently available to ONB for debt with
similar terms and remaining maturities.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
Loan commitments and standby letters of credit are generally
short-term and therefore, their carrying amount is a reasonable
estimate of their fair value.
The estimated carrying and fair values of ONB's financial
instruments at December 31, 1997, are as follows ($ in
thousands):
Carrying Fair
Value Value
Financial Assets:
Cash, due from banks and
money market investments $ 168,681 $ 168,681
Investment securities 1,566,976 1,566,976
Loans, net 3,756,036 3,801,107
Financial Liabilities:
Deposits 4,298,730 4,290,546
Short-term borrowings 442,686 442,686
Other borrowings 388,832 424,872
Off-Balance-Sheet Financial Instruments:
Commitments to extend credit 690,065 690,065
Letters of credit 29,145 29,145
41
NOTE 7 - INCOME TAXES
Following is a summary of the major items comprising the
difference in taxes computed at the federal statutory rate and as
recorded in the consolidated statement of income:
1997 1996 1995
Provision at statutory rate 35.0% 35.0% 35.0%
Tax exempt income (9.7) (9.6) (10.9)
State income taxes 4.0 3.6 3.2
Other, net (0.7) 0.4 0.2
- --------------------------------------------------------------------------
Actual tax rate 28.6% 29.4% 27.5%
==========================================================================
<TABLE>
<CAPTION>
The provision for income taxes consists of the following
components ($ in thousands):
1997 1996 1995
<S> <C> <C> <C>
Income taxes currently payable - federal $20,382 $19,801 $16,048
Income taxes currently payable - state 5,187 4,786 3,790
Deferred income taxes related to:
Provision for loan losses (2,519) (996) (117)
Other, net 1,289 1,481 720
- ------------------------------------------------------------------------------------------
Deferred income tax expense (benefit) (1,230) 485 603
- ------------------------------------------------------------------------------------------
Provision for income taxes $24,339 $25,072 $20,441
==========================================================================================
</TABLE>
Significant components of ONB's net deferred tax assets at
December 31 are as follows ($ in thousands):
1997 1996
Deferred Tax Assets:
Allowance for loan losses,
net of recapture $17,296 $15,006
Benefit plan accruals 4,110 3,309
Net operating loss carryforwards 613 1,484
Purchase accounting adjustments 579 579
- ---------------------------------------------------------------------------
Total deferred tax assets 22,598 20,378
- ---------------------------------------------------------------------------
Deferred Tax Liabilities:
Premises and equipment (2,389) (2,702)
Accretion on investment securities (957) (763)
Unrealized gain on available-
for-sale investment securities (11,023) (5,254)
Lease receivable, net (2,078) (1,352)
Other, net (1,018) (635)
- ---------------------------------------------------------------------------
Total deferred tax liabilities (17,465) (10,706)
- ---------------------------------------------------------------------------
Net deferred tax assets $5,133 $9,672
===========================================================================
At December 31, 1997, ONB had $1.5 million federal net operating
loss carryforwards which expire between 2002 and 2009. These net
operating loss carryforwards are attributable to several of ONB's
affiliate banks. Tax law imposes a limitation on the utilization
of net operating loss carryforwards generated by an acquired
entity. ONB expects to utilize all of the federal net operating
loss carryforwards in 1998.
42
NOTE 8 - EMPLOYEE BENEFIT PLANS
RETIREMENT PLAN
ONB has a noncontributory defined benefit retirement plan covering
substantially all full-time employees. Retirement benefits are
based on years of service and compensation during the highest paid
five years of employment. ONB's policy is to contribute at least
the minimum funding requirement determined by the plan's actuary.
The table below sets forth the plan's funded status and the amount
recognized in the consolidated balance sheet at December 31, 1997,
1996, and 1995.
<TABLE>
<CAPTION>
($ in thousands)
1997 1996 1995
<S> <C> <C> <C>
Acturial present value of the accumulated
benefit obligation, including vested
benefits of $17,823 in 1997, $16,099 in
1996, and $14,086 in 1995 $19,674 $17,576 $15,233
=====================================================================================
Actuarial present value of the
projected benefit obligation,
for service rendered to date 26,730 23,647 21,091
Plan assets, primarily common stocks,
bonds, and guaranteed investment
contracts 24,138 21,859 19,943
- -------------------------------------------------------------------------------------
Plan assets less than projected
benefit obligation (2,592) (1,788) (1,148)
Unrecognized net loss during the year 94 990 784
Unrecognized prior service cost 12 421 473
Remaining unrecognized overfunding
at date of adoption of SFAS
No. 87, being recognized over
18.5 years (2,488) (2,850) (3,058)
- --------------------------------------------------------------------------------------
Accrued pension cost included in
other liabilities $(4,974) $(3,227) $(2,949)
======================================================================================
</TABLE>
<TABLE>
<CAPTION>
The net pension expense and its components were as follows ($ in thousands):
1997 1996 1995
<S> <C> <C> <C>
Service cost - benefits earned
during period $ 2,134 $ 1,867 $1,667
Interest cost on projected benefit
obligation 1,831 1,681 1,562
Actual return on plan assets (4,122) (1,707) (2,785)
Net amortization and deferral 2,092 (293) 1,020
- --------------------------------------------------------------------------------------
Net pension expense $ 1,935 $ 1,548 $1,464
======================================================================================
</TABLE>
Each year, ONB consults with its actuary to assess the
appropriateness of assumptions used in the determination of
retirement plan expense and funded status information for the
discount rate, the long-term rate of return on assets, and the
rate of salary progression. The assumptions reflected in the
table above include a discount rate at December 31 of 8.00% in
1997 and 7.75% in 1996 and 1995, a long-term rate of return of
8.00% in 1995-1997, and a rate of salary progression of 5.00% in
1995-1997. The total retirement plan expense for all plans was
$2.2 million in 1997, $1.6 million in 1996, and $1.6 million in
1995.
PROFIT SHARING PLAN
ONB has a profit sharing plan for all employees who have
completed one year of service. Contributions to the plan are
made when certain consolidated profit conditions are met.
Additionally, employees may participate by contributing a
percentage of their salary, a portion of which is matched by ONB.
ONB's profit sharing expense for the years 1997, 1996, and 1995
was $4.5 million, $4.0 million, and $3.8 million, respectively.
RESTRICTED STOCK PLAN
ONB has a restricted stock plan which covers certain officers of
ONB and its affiliates. Shares are earned each year based on the
achievement of net income targets. Shares vest over a four year
period. Unvested shares are subject to certain restrictions and
risk of forfeiture by the participants. In accordance with the
plan, shares vesting were 26,817 in 1997, 21,747 in 1996, and
25,131 in 1995. Expense recorded in 1997, 1996, and 1995 was
$1.2 million, $0.8 million, and $0.7 million, respectively.
43
NOTE 9 - SHAREHOLDERS' EQUITY
STOCK DIVIDEND
A 5% stock dividend was declared on December 11, 1997, and
distributed on January 29, 1998. All average share and per share
amounts have been retroactively adjusted to reflect this stock
dividend.
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
ONB has a dividend reinvestment and stock purchase plan under
which common shares issued may be either repurchased shares or
authorized and previously unissued shares. As of December 31,
1997, 2.0 million authorized and unissued common shares were
reserved for issuance under the plan.
SHAREHOLDER RIGHTS PLAN
ONB has adopted a Shareholder Rights Plan whereby one right was
distributed for each outstanding share of ONB's common stock.
The rights become exercisable on the tenth day following a public
announcement that a person has acquired or intends to acquire
beneficial ownership of 20% or more of ONB's outstanding common
stock. Upon exercising the rights, the holder is entitled to buy
1/100 of a share of Junior Preferred Stock at $60 for every right
held. Upon the occurrence of certain events, the rights may be
redeemed by ONB at a price of $.01 per right.
In the event an acquiring party becomes the beneficial owner of
20% or more of ONB's outstanding shares, rights holders (other
than the acquiring person) may purchase two shares of ONB common
stock for the price of one share at the then market price. If
ONB is acquired and is not the surviving corporation, or if ONB
survives a merger but has all or part of its common stock
exchanged, each rights holder will be entitled to acquire shares
of the acquiring company with a value of two times the then
exercise price of the rights for each right held.
NOTE 10 - FINANCING ACTIVITIES
LINES OF CREDIT
At December 31, 1997, ONB had $80.0 million in unsecured lines of
credit with unaffiliated banks with $63.0 million unused. The
lines bear interest at the bank's federal funds rate plus 60 to
80 basis points. During the years 1997, 1996, and 1995, the
average interest rates on the lines were 6.26%, 6.17%, and 6.71%,
respectively. The lines of credit include various arrangements
to maintain compensating balances or pay fees to maintain the
line.
FEDERAL HOME LOAN BANK
At December 31, 1997, ONB had $260.1 million borrowed from
various Federal Home Loan Banks (FHLB). Floating-rate borrowings
totaled $103.3 million and will mature between 1998 and 1999.
The remaining borrowings have a fixed interest rate and mature
between 1998 and 2017. The weighted average rates of the FHLB
borrowings were 5.96% and 5.84% at December 31, 1997 and 1996,
respectively. A portion of these borrowings is secured by
specific mortgage loans which have a current book value of
approximately $191.8 million. FHLB requires collateral values up
to 167% of the amount borrowed.
MEDIUM TERM NOTES
ONB has registered Series A Medium Term Notes in the principal
amount of $50 million. The series has been fully issued. At
December 31, 1997, a total of $44 million of the notes were
outstanding with maturities ranging from one to six years and
fixed interest rates ranging from 6.04% to 7.10%.
ONB also has registered Medium Term Notes in the principal amount
of $150 million. These notes may be issued with maturities of
nine months or more and rates may either be fixed or variable.
At December 31, 1997, a total of $54.3 million of the notes were
outstanding, with maturities ranging from five to ten years and
fixed interest rates from 6.40% to 7.03%
SUBORDINATED DEBENTURES
ONB has outstanding $30.4 million of 8% convertible subordinated
debentures which are due September 15, 2012, unless previously
converted or redeemed. The debentures are convertible into
shares of ONB common stock at a conversion rate of 49.218 shares
per $1,000 principal amount of debentures. During 1997, $0.2
million principal amount of debentures was converted into 7,727
shares of ONB common stock.
Interest on the debentures is payable on March 15 and September
15 of each year. The debentures are redeemable, in whole or in
part, at the option of ONB at a premium to par value. Debenture
holders are entitled to an annual sinking fund beginning
September 15, 1998, of $2.5 million less conversions and
redemptions. The debentures are subordinated in right of payment
to all senior indebtedness of ONB. At December 31, 1997, 1.5
million authorized and unissued common shares were reserved for
conversion of the remaining debentures.
44
NOTE 11 - COMMITMENTS AND CONTINGENCIES
LEASES
ONB rents certain premises and equipment under operating leases
which expire at various dates. Many of these leases provide for
payment by ONB of property taxes, insurance premiums,
maintenance, and other costs. In some cases, rentals are subject
to increase in relation to a cost-of-living index. Total rental
expense was $4.0 million in 1997, $3.9 million in 1996, and $3.9
million in 1995.
Following is a summary of future minimum lease commitments ($ in
thousands):
1998 $5,747 2001 $2,002
1999 2,713 2002 1,854
2000 2,050 2003 and after 1,597
LETTERS AND LINES OF CREDIT
In the normal course of business, ONB's banking affiliates have
entered into various agreements to extend credit, such as loan
commitments of $690.1 million, including $246.5 million of short-term
commitments with fixed-rates, and letters of credit of $29.1
million at December 31, 1997. These commitments are not
reflected in the consolidated financial statements. No material
losses are expected to result from these transactions.
LITIGATION
At December 31, 1997, various legal actions and proceedings were
pending against ONB and its affiliates. These actions and
proceedings are incidental to the banking business and are not
expected to have a material adverse effect upon the consolidated
financial position or results of operations of ONB or its
affiliates.
NOTE 12 - REGULATORY RESTRICTIONS
RESTRICTIONS ON CASH AND DUE FROM BANKS
ONB's affiliate banks are required to maintain reserve balances
on hand and with the Federal Reserve Bank which are non-interest
bearing and unavailable for investment purposes. The reserve
balances at December 31, 1997 and 1996, were $24.1 million and
$32.4 million, respectively.
RESTRICTIONS ON TRANSFERS FROM AFFILIATE BANKS
Regulations limit the amount of dividends an affiliate bank can
declare in any year without obtaining prior regulatory approval.
At December 31, 1997, affiliate banks could pay aggregate
dividends to ONB of approximately $15.1 million without prior
regulatory approval.
CAPITAL ADEQUACY
For additional information on capital adequacy see Table 16 in
Management's Discussion and Analysis on page 29.
45
NOTE 13 - PARENT COMPANY FINANCIAL STATEMENTS
The following are the condensed parent company only financial
statements of Old National Bancorp ($ in thousands):
<TABLE>
<CAPTION>
OLD NATIONAL BANCORP (PARENT COMPANY ONLY) CONDENSED BALANCE SHEET
December 31,
ASSETS 1997 1996
<S> <C> <C>
Deposits in affiliate banks $427 $1,686
Investment in affiliates:
Banks, including purchase accounting intangible assets of
$7,927 in 1997 and $8,613 in 1996 523,262 528,747
Non-banks 18,778 10,703
Advances to affiliates 76,888 58,492
Other assets 13,029 6,682
- -----------------------------------------------------------------------------------------------
TOTAL ASSETS $632,384 $606,310
===============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings $17,008 $67,206
Other liabilities 9,466 6,014
8% convertible subordinated debentures, due 2012 30,407 30,564
Medium term notes 98,300 44,000
Shareholders' equity 477,203 458,526
- -----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $632,384 $606,310
===============================================================================================
</TABLE>
<TABLE>
<CAPTION>
OLD NATIONAL BANCORP (PARENT COMPANY ONLY) CONDENSED STATEMENT OF INCOME
Years Ended December 31,
1997 1996 1995
INCOME
<S> <C> <C> <C>
Dividends from affiliates $82,746 $49,570 $87,646
Income on other investments 307 2,320 1,202
Other income from affiliates 12,631 5,918 5,090
- ------------------------------------------------------------------------------------------------
TOTAL INCOME 95,684 57,808 93,938
- ------------------------------------------------------------------------------------------------
EXPENSE
Interest on borrowings 10,283 7,014 7,023
Amortization of intangibles 686 707 1,231
Other expenses 10,187 9,378 7,816
- ------------------------------------------------------------------------------------------------
TOTAL EXPENSE 21,156 17,099 16,070
- ------------------------------------------------------------------------------------------------
Income before income taxes and equity in
undistributed earnings of affiliates 74,528 40,709 77,868
Income tax benefit (3,415) (3,541) (3,464)
- ------------------------------------------------------------------------------------------------
Income before equity in
undistributed earnings of affiliates 77,943 44,250 81,332
Equity in undistributed earnings of affiliates (17,283) 15,929 (27,393)
- ------------------------------------------------------------------------------------------------
NET INCOME $60,660 $60,179 $53,939
================================================================================================
</TABLE>
46
<TABLE>
<CAPTION>
OLD NATIONAL BANCORP (PARENT COMPANY ONLY) CONDENSED STATEMENT OF CASH FLOWS
Years Ended December 31,
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $60,660 $60,179 $53,939
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation 275 201 204
Amortization of intangible assets 686 707 1,231
(Increase) decrease in other assets (4,635) 34,857 (37,601)
Increase (decrease) in other liabilities 3,452 (330) (163)
Equity in undistributed earnings of affiliates 17,283 (15,929) 27,393
- ------------------------------------------------------------------------------------------------
Total adjustments 17,061 19,506 (8,936)
- ------------------------------------------------------------------------------------------------
Net cash flows provided by operating activities 77,721 79,685 45,003
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net advances to affiliates (30,295) (59,908) (6,451)
Purchase of premises and equipment (1,987) (283) (198)
- ------------------------------------------------------------------------------------------------
Net cash flows used in investing activities (32,282) (60,191) (6,649)
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short-term borrowings (50,198) 48,652 1,559
Net (payments on) proceeds from medium term notes 54,300 (6,000) 18,000
Cash dividends paid (24,240) (23,655) (22,441)
Common stock repurchased (36,134) (44,861) (42,810)
Common stock reissued, net of shares used to
convert subordinated debentures 9,574 6,858 6,302
- ------------------------------------------------------------------------------------------------
Net cash flows used in financing activities (46,698) (19,006) (39,390)
- ------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,259) 488 (1,036)
Cash and cash equivalents at beginning of period 1,686 1,198 2,234
- ------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $427 $1,686 $1,198
================================================================================================
</TABLE>
47
ANNUAL MEETING
The Annual Meeting of Shareholders will be held Thursday, April 16, 1998, at
10:30 a.m. Central Daylight Time, at Roberts Municipal Stadium, 2600 Division
St., 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 718
Evansville, Indiana 47705-0718
In December 1997, a 5% stock dividend was declared to shareholders of record on
January 8, 1998. There were 13,781 shareholders of record as of December 31,
1997.
MARKET MAKERS
The following firms make a market in Old National Bancorp's stock:
Herzog, Heine, Geduld, Inc.
J.J.B. Hilliard, W.L. Lyons
Keefe, Bruyette & Woods, Inc.
McDonald & Company Sec., Inc.
NatCity Investments, Inc.
Smith Barney, Inc.
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 718
Evansville, Indiana 47705-0718
ADDITIONAL INFORMATION
Shareholders and interested investors may obtain information about the company
upon written request or by calling:
John Claybon, CFA
Investor Relations Officer
Old National Bancorp
Post Office Box 718
Evansville, Indiana 47705-0718
812-464-1442
FORM 10-K
The Annual Report on Form 10-K, as required to be filed with the Securities and
Exchange Commission, is available without charge upon written request or by
calling:
Ronald W. Seib, CPA
Vice President-Corporate Controller
Old National Bancorp
Post Office Box 718
Evansville, Indiana 47705-0718
812-464-1530
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 and dividend data for Old National
Bancorp stock over the last two years.*
Price Per Share Share Dividend
High Low Volume Declared
1997
First Quarter $35 61/64 $34 17/32 1,140,400 $.22
Second Quarter 42 3/8 35 23/32 875,400 .22
Third Quarter 43 21/64 41 43/64 1,075,300 .22
Fourth Quarter 47 31/32 42 17/64 579,200 .22
1996
First Quarter $30 25/64 $29 19/32 923,400 $.21
Second Quarter 34 1/64 30 5/32 1,604,700 .21
Third Quarter 34 1/8 32 7/8 1,134,500 .21
Fourth Quarter 35 19/32 32 49/64 1,629,800 .21
*Data adjusted for all stock dividends, including a 5% stock dividend to
shareholders of record on January 8, 1998, distributed on January 29, 1998.
53
<TABLE>
<CAPTION>
EXHIBIT 21
OLD NATIONAL BANCORP
SUBSIDIARIES OF THE REGISTRANT
AS OF DECEMBER 31, 1997
Jurisdiction of Business Name
Name of Subsidiary Incorporation of Subsidiary
- ------------------------------ --------------------------- -----------------
<S> <C> <C>
Old National Bank in Evansville United States of America Old National Bank
(Evansville, Indiana)
Merchants National Bank United States of America Merchants National Bank
of Terre Haute
(Terre Haute, Indiana)
First Citizens Bank and Indiana First Citizens Bank and
Trust Company Trust Company
(Greencastle, Indiana)
Security Bank & Trust Co. Indiana Security Bank & Trust Co.
(Vincennes, Indiana)
Farmers Bank & Trust Co. Kentucky Farmers Bank & Trust Co.
(Madisonville, Kentucky)
The Peoples National Bank United States of America The Peoples National Bank
of Lawrenceville of Lawrenceville
(Lawrenceville, Illinois)
First State Bank of Kentucky First State Bank
Greenville Kentucky
(Greenville, Kentucky)
Morganfield National Bank United States of America Morganfield National Bank
(Morganfield, Kentucky)
The First National Bank of United States of America First National Bank
Harrisburg
(Harrisburg, Illinois)
Security Bank & Trust Co. Illinois Security Bank & Trust Co.
(Mt. Carmel, Illinois)
Farmers Bank & Trust Company Kentucky Farmers Bank & Trust
(Henderson, Kentucky) Company
United Southwest Bank Indiana United Southwest Bank
(Washington, Indiana)
Palmer-American National Bank United States of America Palmer-American National
(Danville, Illinois) Bank
Old National Realty Company, Inc. Indiana Old National Realty
(Evansville, Indiana) Company, Inc.
Indiana Old National Insurance Arizona IONIC
Company
(Evansville, Indiana)
Old National Service Corporation Indiana Old National Service
(Evansville, Indiana) Corporation
Jurisdiction of Business Name
Name of Subsidiary Incorporation of Subsidiary
- ----------------------- ---------------------- --------------------
Dubois County Bank Indiana Dubois County Bank
(Jasper, Indiana)
Bank of Western Indiana Indiana Bank of Western Indiana
(Covington, Indiana)
Orange County Bank Indiana Orange County Bank
(Paoli, Indiana)
First National Bank United States of America First National Bank
(Oblong, Illinois)
Citizens National Bank United States of America Citizens National Bank
(Tell City, Indiana)
Workingmens/ONB Bank United States of America Workingmens/ONB Bank
(Bloomington, Indiana)
City National Bank United States of America City National Bank
(Fulton, Kentucky)
The National Bank of Carmi United States of America The National Bank of Carmi
(Carmi, Illinois)
Old National Trust Company United States of America Old National Trust Company
(Evansville, Indiana)
Old National Trust Company United States of America Old National Trust Company-
-Kentucky Kentucky
(Morganfield, Kentucky)
Old National Trust Company United States of America Old National Trust Company-
-Illinois Illinois
(Mt. Carmel, Illinois)
Consumer Acceptance Corporation Indiana Consumer Acceptance
(Indianapolis, Indiana) Corporation
</TABLE>
exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report incorporated by reference in this Form 10-K into the Registrant's
previously filed Registration Statement File No. 333-29433.
ARTHUR ANDERSEN LLP
s/s Arthur Andersen LLP
Indianapolis, Indiana,
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM OLD NATIONAL
BANCORP'S DECEMBER 31, 1997 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 160,813
<INT-BEARING-DEPOSITS> 624
<FED-FUNDS-SOLD> 7,244
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,566,976
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 3,804,691
<ALLOWANCE> 48,655
<TOTAL-ASSETS> 5,686,398
<DEPOSITS> 4,298,730
<SHORT-TERM> 442,686
<LIABILITIES-OTHER> 78,947
<LONG-TERM> 388,832
0
0
<COMMON> 27,457
<OTHER-SE> 449,746
<TOTAL-LIABILITIES-AND-EQUITY> 5,686,398
<INTEREST-LOAN> 329,699
<INTEREST-INVEST> 99,059
<INTEREST-OTHER> 688
<INTEREST-TOTAL> 429,446
<INTEREST-DEPOSIT> 168,123
<INTEREST-EXPENSE> 210,208
<INTEREST-INCOME-NET> 219,238
<LOAN-LOSSES> 26,965
<SECURITIES-GAINS> 50
<EXPENSE-OTHER> 21,289
<INCOME-PRETAX> 84,999
<INCOME-PRE-EXTRAORDINARY> 60,660
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 60,660
<EPS-PRIMARY> 2.19
<EPS-DILUTED> 2.12
<YIELD-ACTUAL> 4.46
<LOANS-NON> 14,283
<LOANS-PAST> 4,405
<LOANS-TROUBLED> 248
<LOANS-PROBLEM> 111,123
<ALLOWANCE-OPEN> 44,053
<CHARGE-OFFS> 29,678
<RECOVERIES> 4,405
<ALLOWANCE-CLOSE> 48,655
<ALLOWANCE-DOMESTIC> 48,655
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
