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, 1998
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, 1999 was approximately $1,425 million. The total number of
shares of Registrant's common stock outstanding as of that date was
30,720,580.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's annual report to shareholders for the
year ended December 31, 1998 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 15, 1999 is incorporated by reference into
Part III of this Form 10-K.
OLD NATIONAL BANCORP
1998 ANNUAL REPORT ON FORM 10-K
Table of Contents
PART I. PAGE
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 9
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. . . . . . . . . . . . . . . . . . . . . . . . . . .14
2
OLD NATIONAL BANCORP
1998 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 and
one thrift located in Kentucky; and nine banks and one thrift
located in Illinois. As of December 31,1998, the registrant
employed 2,174 full-time equivalent employees. For further
discussion of the business of the registrant see management's
discussion and analysis referenced in Part II, Item 7.
Banking Affiliates
As of December 31, 1998, the Registrant's affiliate banks
operated 111 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 Palmer-American National Bank
Security Bank & Trust Co. (Vincennes) (Danville)
United Southwest Bank (Washington) First National Bank (Oblong)
Dubois County Bank (Jasper)
Orange County Bank (Paoli)
ONB Bloomington (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
3
offer electronic data processing, brokerage and correspondent
banking services; issue credit cards; originate, market and
service mortgage loans; and rent safe deposit facilities.
Nonbank Affiliates
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, Indiana,
leased by affiliates. 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 has issued regulations under the BHC Act
requiring a bank holding company to serve as a source of
financial and managerial strength to its subsidiary banks. It is
the policy of the Federal Reserve that, pursuant to this
requirement, a bank holding company should stand ready to use its
resources to provide adequate capital funds to its subsidiary
banks during periods of financial stress or adversity.
The BHC Act requires the prior approval of the Federal
Reserve to acquire more than a 5% voting interest of any bank or
bank holding company. Additionally, the BHC Act restricts the
Registrant's nonbanking activities to those which are determined
by the Federal Reserve to be closely related to banking and a
proper incident thereto.
Under the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"), a bank holding company is required to
guarantee the compliance of any insured depository institution
subsidiary that may become "undercapitalized" (as defined in
FDICIA) with the terms of any capital restoration plan filed by
such subsidiary with its appropriate federal bank regulatory
agency.
Bank holding companies are required to comply with the
Federal Reserve's risk-based capital guidelines. The Federal
4
Deposit Insurance Corporation ("FDIC") and the Office of the
Comptroller of the Currency ("OCC") have adopted risk-based
capital ratio guidelines to which depository institutions under
their respective supervision are subject. The guidelines
establish a systematic analytical framework that makes regulatory
capital requirements more sensitive to differences in risk
profiles among banking organizations. Risk-based capital ratios
are determined by allocating assets and specified off-balance
sheet commitments to four risk weighted categories, with higher
levels of capital being required for the categories perceived as
representing greater risk. All of the Registrant's affiliate
banks exceeded the risk-based capital requirements of the FDIC
and OCC as of December 31, 1998. For the Registrant's regulatory
capital ratios and regulatory requirements as of December 31,
1998, 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 of charter and are supervised, regulated and
examined by the OCC or their respective state banking agency, and
are subject to the rules and regulations of the OCC, Federal
Reserve, and the FDIC.
A substantial portion of the Registrant's cash revenue is
derived from dividends paid to it by its affiliate banks. These
dividends are subject to various legal and regulatory
restrictions as summarized in Note 13 of the financial statements
referenced in Item 8.
5
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
opportunity, fair credit reporting, trading in securities and
other aspects of banking operations.
Insured state-chartered banks are prohibited under FDICIA
from engaging as principal in activities that are not permitted
for national banks, unless (i) the FDIC determines that the
activity would pose no significant risk to the appropriate
deposit insurance fund, and (ii) the bank is, and continues to
be, in compliance with all applicable capital standards.
Branching by the Registrant's affiliate banks in Indiana,
Kentucky and Illinois is subject to the jurisdiction, and
requires notice to or the prior approval of, the bank's primary
federal regulatory authority and, if the branching bank is a
state bank, the respective state's banking agency.
The Registrant and its affiliate banks are subject to the
Federal Reserve Act, which restricts financial transactions
between banks and affiliated companies. The statute limits
credit transactions between banks and affiliated companies. The
statute limits credit transactions between a bank and its
executive officers and its affiliates, prescribes terms and
conditions for bank affiliate transactions deemed to be
consistent with safe and sound banking practices, and restricts
the types of collateral security permitted in connection with a
bank's extension of credit to an affiliate.
FDICIA accomplished a number of sweeping changes in the
regulation of depository institutions, including the Registrant's
affiliate banks. FDICIA requires, among other things, federal
bank regulatory authorities to take "prompt corrective action"
with respect to banks which do not meet minimum capital
requirements. FDICIA further directs that each federal banking
agency prescribe standards for depository institutions and
depository institution holding companies relating to internal
controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset
growth, management compensation, a maximum ratio of classified
assets to capital, minimum earnings sufficient to absorb losses,
a minimum ratio of market value to book value of publicity traded
shares and such other standards as the agency deems appropriate.
The deposits of Registrant's affiliate banks are insured up
to $100,000 per insured account by the Bank Insurance Fund
6
("BIF"), which is administered by the FDIC, except for deposits
acquired in connection with affiliations with savings
associations, which deposits are insured by the Savings
Association Insurance Fund ("SAIF"). Accordingly, the
Registrant's affiliated banks pay deposit insurance premiums to
both BIF and SAIF.
The Riegle-Neal Community Development and Regulatory
Improvement Act of 1994 ("Act") contains seven titles pertaining
to community development and home ownership protection, small
business capital formation, paperwork reduction and regulatory
improvement, money laundering and flood insurance. The
applicable federal supervisory agencies 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 Financial 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.
7
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
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 111
banking offices operated by the Registrant's affiliate banks, 91
are owned by the respective banks and 20 are leased from non-
affiliated third parties.
Old National Realty Company, Inc., a wholly-owned non-banking
subsidiary of the Registrant, owns certain real properties in
downtown Evansville, Indiana, which generally are incidental to
the Registrant's banking operations. It does not engage in real
estate brokerage services.
8
Item 3. LEGAL PROCEEDINGS
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the
Registrant during the fourth quarter of 1998.
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, 1998 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, 1998 is expressly incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Pages 12 through 29 of the Registrant's Annual Report to
Shareholders for the year ended December 31, 1998 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, 1998 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.(3) of Form 10-K as the Registrant has filed with
9
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, 1998.
ITEM 11. EXECUTIVE COMPENSATION
This information is omitted from this report pursuant to General
Instruction G.(3) 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, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
This information is omitted from this report pursuant to General
Instruction G.(3) 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, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is omitted from this report pursuant to General
Instruction G.(3) 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, 1998.
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, 1998 and 1997
Consolidated Statement of Income -
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statement of Changes in Shareholders' Equity -
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statement of Cash Flows -
Years Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
10
(b) No reports on Form 8-K were filed with the Commission during
the fourth quarter of 1998.
(c) Exhibits - The following exhibits are filed herewith:
Exhibit 10 - Material Contracts
Exhibit 13 - Portions of Annual Report to Shareholders for the
year ended December 31, 1998
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: s/s Richard J. Bond 3/24/99
Richard J. Bond, Director Date
By:
Alan W. Braun, Director Date
By:
Wayne A. Davidson, Director Date
By: s/s Larry E. Dunigan 3/24/99
Larry E. Dunigan, Director Date
By: s/s David E. Eckerle 3/24/99
David E. Eckerle, Director Date
By:
Phelps L. Lambert, Director Date
12
By: s/s Ronald B. Lankford 3/24/99
Ronald B. Lankford, Date
President and Director
(Chief Operating Officer)
By: s/s Lucien H. Meis 3/24/99
Lucien H. Meis, Director Date
By: s/s Louis L. Mervis 3/24/99
Louis L. Mervis, Director Date
By: s/s Lawrence D. Prybil 3/24/99
Lawrence D. Prybil, Director Date
By: s/s James A. Risinger 3/24/99
James A. Risinger, Chairman Date
of the Board of Directors
(Chief Executive Officer)
By: s/s John N. Royse 3/24/99
John N. Royse, Director Date
By:
Marjorie Soyugenc, Director Date
By:
Charles D. Storms, Director Date
By: s/s John S. Poelker 3/24/99
John S. Poelker, Date
Senior Vice President
(Chief Financial Officer)
By: s/s Ronald W. Seib 3/24/99
Ronald W. Seib, Date
Vice President-
Corporate Controller
(Principal Accounting Officer)
13
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) 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.
(b) 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.
(c) 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.
(d) AT&T Credit Corporation Master Equipment Lease is
incorporated by reference to the Registrant's
Quarterly report on Form 10-Q for the quarter
ended March 31, 1998.
(e) Severance Agreement, as amended, is incorporated
by reference to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998.
(f) Employment Agreement is incorporated by reference
to the Registrant's Quarterly report on Form 10-Q
for the quarter ended June 30, 1998.
14
(g) The Old National Bancorp 1999 Equity Incentive
Plan is incorporated by reference to the Registrant's
Proxy Statement for the Annual Meeting of Shareholders
to be held April 15, 1999.
13 Portions of Annual Report to Shareholders for the year
ended December 31, 1998
21 Subsidiaries of the Registrant
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION ND RESULTS OF OPERATIONS
INTRODUCTION
Old National Bancorp ("ONB") is a multi-bank holding company
headquartered in Evansville, Indiana. Located in Indiana,
Illinois, and Kentucky, its affiliate banks serve customers
through 118 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, life, property, and casualty insurance;
investment services; fiduciary and trust services; and property
ownership.
FINANCIAL BASIS
The following discussion is an analysis of ONB's operating
results for the years 1996 through 1998 and financial condition
as of December 31, 1998 and 1997, 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.
During 1998, ONB sold the operations and related auto loans of
its consumer finance subsidiary headquartered in Indianapolis.
The sale and the operations prior to the sale resulted in a $9.9
million loss on discontinued operations, net of tax, in 1998. The
financial results of the discontinued operations in prior periods
are similarly broken out from ONB's continuing operations. The
net assets of the subsidiary are included in other assets on the
consolidated balance sheet for periods prior to the sale. The
following discussion and analysis of ONB's financial condition
and results of operations relates to its continuing operations.
For further details regarding the discontinued operations, see
the consolidated financial statements and Note 2.
Tax-exempt interest income in the following information has been
increased to an amount comparable to interest subject to income
taxes using the 35% federal statutory rate in effect for all
periods. An offsetting increase of the same amount is made in
the income tax section of the Selected Financial Data. Net
income is unaffected by these taxable equivalent adjustments.
COMPETITION AND ECONOMIC CONDITIONS
The banking industry and related financial service providers are
highly competitive. 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 rates on loans and deposits, convenient
12
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, and
steady growth. Recent signs of weaknesses include a rise in
consumer delinquency and bankruptcy levels and low commodity
prices in the agricultural sector. While ONB's numerous markets
vary, its major markets have demonstrated economic expansion and
a growing financial base with additions such as the new Toyota
and AK Steel manufacturing complexes.
US Government long-term interest rates rose in 1996 and
declined in 1997 and 1998. Short-term rates changed less
dramatically, though the Federal funds rate was lowered three
times in the fall of 1998. Despite this trend, certificate of
deposit rates generally increased during 1997, but began to move
down more in 1998. Prime rate stayed fairly constant with
minimal movement, but followed the Federal funds rate shift
downward in 1998. A flattening of the yield curve occurred
throughout 1998. Normally, the rate on U.S. Government securities
increases as the term lengthens, however by year-end 1998, the
yield on a six month bill was virtually the same as a five year
note. The combination of these factors applied pressure on the
spreads financial institutions earn between their assets, loans
and securities, and their liabilities, deposits and debt. This
is discussed further as it pertains to ONB in the Net Interest
Income section.
MERGER ACTIVITY
In 1997 and 1998 ONB did not complete any banking acquisitions.
During 1998, ONB agreed to merge with Southern Bancshares
Ltd.("Southern"), Carbondale, Illinois and Dulaney
Bancorp,Inc.("Dulaney"), Marshall, Illinois. At December 31,
1998, Southern had total assets of $255 million and Dulaney's
total assets were $39 million. Both mergers were consummated in
the first quarter of 1999 and accounted for as pooling-of-interests.
YEAR 2000
The national and local press have devoted much coverage to the
Year 2000 ("Y2K") issue, also know as the "Millennium Bug". This
refers to the possibility that some computers may be unable to
recognize the date change at the turn of the century. With the
high volume of transactions and electronic data, the banking
industry requires extensive computer capabilities to serve its
customers. With that in mind, ONB has devoted much attention to
its systems to prepare itself for the millennial change.
ONB has successfully completed its Y2K compliance testing of its
mission-critical computer systems and its core processing systems
used to serve its customers. Besides maintaining this status,
ONB is managing its third party system relationships, updating
disaster and contingency plans, and testing nonmission-critical
software. Renovation and testing of software and hardware may
not remove all risks related to Y2K. Alternative methods to
perform key activities will be addressed through contingency
planning.
There has been no significant financial impact to ONB as a result
of the Year 2000 project. ONB's 1998 Y2K expenses were less than
$500 thousand. Much of ONB's software is externally generated
with minimal internal software. Much of the software and hardware
items have been changed, upgraded, or replaced in preparation for
Y2K and have been part of the normal maintenance. While the
company will continue testing and implementing secondary systems
and replacing certain personal computers through 1999, it does
not expect any material impact on earnings associated with these
Y2K compliance efforts.
13
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
($ in thousands except per share data)
- -----------------------------------------------------------------------------------------------------------------------------
Five Year
Growth
1998 1997 1996 1995 1994 1993 Rate
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
(Taxable equivalent basis)
Interest income $452,202 $430,318 $404,514 $389,131 $343,852 $336,890
Interest expense 223,059 207,936 189,576 186,500 146,152 144,427
- -----------------------------------------------------------------------------------------------------------------
Net interest income 229,143 222,382 214,938 202,631 197,700 192,463 3.6%
Provision for loan losses 11,420 12,022 10,711 7,135 7,754 10,359 2.0
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 217,723 210,360 204,227 195,496 189,946 182,104 3.6
Noninterest income 54,557 46,706 44,357 39,594 34,876 33,993 9.9
Noninterest expense 158,125 150,018 150,495 147,315 147,295 135,259 3.2
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 114,155 107,048 98,089 87,775 77,527 80,838 7.1
Income taxes 42,437 41,383 38,404 33,836 28,524 30,268 7.0
- -----------------------------------------------------------------------------------------------------------------------------
Net income from
continuing operations 71,718 65,665 59,685 53,939 49,003 50,570 7.2
Discontinued operations (9,854) (5,005) 494 -- -- -- N/M
- -----------------------------------------------------------------------------------------------------------------------------
Net Income $61,864 $60,660 $60,179 $53,939 $49,003 $50,570 4.1%
=============================================================================================================================
YEAR-END BALANCES
Total assets $6,165,968 $5,688,215 $5,365,657 $5,103,195 $4,909,804 $4,748,112 5.4%
Loans, net of
unearned income 4,162,241 3,730,202 3,466,909 3,261,746 3,098,820 2,810,453 8.2
Deposits 4,443,472 4,298,730 4,268,024 4,183,082 3,875,752 3,898,967 2.6
Shareholders' equity 494,580 477,203 458,526 461,424 440,671 435,406 2.6
- -----------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
(on continuing operations)(1)
Net income-basic $2.48 $2.26 $1.98 $1.73 $1.54 $1.58 9.4
Net income-diluted (2) 2.41 2.18 1.92 1.69 1.50 1.54 9.4
Cash dividends paid 0.88 0.84 0.80 0.76 0.72 0.63 6.9
Book value at year-end 17.24 16.55 15.53 15.03 13.92 13.57 4.9
- -----------------------------------------------------------------------------------------------------------------------------
SELECTED PERFORMANCE RATIOS
(on continuing operations)
Return on assets 1.22% 1.20% 1.16% 1.09% 1.03% 1.09%
Return on equity (3) 15.21 14.47 13.18 12.01 10.92 11.38
Equity to assets 8.32 8.43 8.90 8.99 9.35 9.58
Dividend payout 35.26 36.91 39.63 44.04 47.00 39.78
Primary capital to assets 9.14 9.23 9.71 9.85 10.25 10.43
Net charge-offs to
average loans 0.21 0.20 0.30 0.26 0.28 0.25
Allowance for loan losses
to average loans 1.26 1.30 1.24 1.28 1.43 1.57
- ------------------------------------------------------------------------------------------------------------------
(1) Restated for all stock dividends.
(2) Assumes the conversion of ONB's subordinated debentures.
(3) Excludes unrealized gains (losses) on investment securities.
N/M = Not meaningful
</TABLE>
14
RESULTS OF OPERATIONS
NET INCOME
ONB earnings rose 9.2% to reach $71.7 million in 1998, a $6.0 million
increase. Shareholders' basic income per share for 1998 was $2.48,
up 9.7% over 1997, and diluted earnings per share totaled $2.41, a
10.6% increase over 1997. Strong noninterest income growth and
continued net interest income improvement combined to generate the
earnings growth in 1998. The specific effects of each of these factors
are discussed in the following paragraphs.
ONB's 1997 net income was $65.7 million, up 10.0% or $6.0 million above
1996 earnings. Strong net interest income growth of $7.4 million and
excellent noninterest expense control growth offset a $1.3 million loan
loss provision increase.
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 nearly 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 1998 grew $6.8
million or 3.0% over 1997. Average earning assets grew $352.1 million
or 6.8%, during 1998. Much of this growth was funded by interest-bearing
liabilities which increased $342.1 million or 7.6%. Other assets, which
averaged $304.0 million in 1998, included the net assets of the
discontinued finance company's operations discussed earlier and the
cash surrender value of bank-owned life insurance ("BOLI") explained
in the Noninterest Income section. Noninterest-bearing deposits increased
$14.4 million or 3.2% and other liabilities and equity provided an
additional $41.0 million of funding. Several factors combined to lower
ONB's net interest margin to 4.16% in 1998. The yield on earning assets
decreased 13 basis points to 8.22% which reflected the lower rate
environment. The cost of interest-bearing liabilities declined only 1
basis point to 4.61% as growth occurred in higher-rate liabilities.
Approximately 7 basis points of the lower net interest margin was due to
the purchase of BOLI which generates tax-free noninterest income, but is
not in net interest income. ONB's mix of earning assets continued the
shift to higher yielding loans which rose $348.9 million (9.8%) and
comprised over 70% of total earning assets. Overall, loans yielded
8.81%, a 14 basis point decrease, due to the lower rate environment.
Investment security balances remained fairly consistent with 1997 as
the yield decreased 24 basis points to 6.78% due to prepayments and
lower reinvestment rates. Money market investments rose $5.5 million,
yet still comprised under 1% of the total earning assets. ONB's
interest-bearing deposits grew $114.9 million or 3.0%. Traditional
products, such as NOW, savings and money market deposits, declined
1.0% in 1998. Certificates of deposit over $100,000 and other time
deposits both grew approximately $65 million to help fund ONB's asset
growth. Borrowed funds also funded the asset growth and increased $227.1
million.
During 1997, net interest income rose 3.5% to $7.4 million and totaled
$222.4 million. Average earning assets grew 6.1%, a $296.8 million
increase. Interest-bearing liabilities rose $323.0 million or 7.7%.
The growth in average other assets represents primarily the net assets
of the discontinued consumer finance subsidiary. Net interest margin
declined from 4.43% to 4.32%. The yield on earning assets increased 2
basis points to 8.35% due to loan growth and improved investment yields.
The cost of interest-bearing liabilities rose 8 basis points to 4.62%
due to market influences and an increased usage of longer term deposits
and nondeposit funding.
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 rates 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.
<TABLE>
<CAPTION>
15
NET INTEREST INCOME CHANGES (TABLE 1)
(Taxable equivalent basis, $ in thousands)
- --------------------------------------------------------------------------------------------------------------------------------
% Change From
Prior Year
- --------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans $344,556 $318,961 $301,390 8.0% 5.8%
Investment securities 106,740 110,669 99,830 (3.6) 10.9
Money market investments 906 688 3,294 31.7 (79.1)
- --------------------------------------------------------------------------------------------------------------------------------
Total interest income 452,202 430,318 404,514 5.1 6.4
- --------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
NOW deposits 6,191 6,710 8,254 (7.7) (18.7)
Savings deposits 12,774 14,267 14,403 (10.5) (0.9)
Money market deposits 23,114 24,180 23,843 (4.4) 1.4
Certificates of deposit
$100,000 and over 22,199 18,916 14,666 17.4 29.0
Other time deposits 107,952 104,052 102,255 3.7 1.8
Short-term borrowings 21,206 22,281 14,807 (4.8) 50.5
Other borrowings 29,623 17,530 11,348 69.0 54.5
- --------------------------------------------------------------------------------------------------------------------------------
Total interest expense 223,059 207,936 189,576 7.3 9.7
- --------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $229,143 $222,382 $214,938 3.0% 3.5%
================================================================================================================================
NET INTEREST MARGIN 4.16% 4.32% 4.43%
================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
NET INTEREST INCOME - RATE-VOLUME ANALYSIS (TABLE 2)
(Taxable equivalent basis, $ in thousands)
- --------------------------------------------------------------------------------------------------------------------------------
1998 vs. 997 1997 vs. 1996
- --------------------------------------------------------------------------------------------------------------------------------
Total Attributed to Total Attributed to
------------------- ----------------------
Change Volume Rate Change Volume Rate
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans $25,595 $30,971 ($5,376) $17,571 $19,299 ($1,728)
Investment securities (3,929) (161) (3,768) 10,839 9,058 1,781
Money market investments 218 304 (86) (2,606) (2,708) 102
- --------------------------------------------------------------------------------------------------------------------------------
Total interest income 21,884 31,114 (9,230) 25,804 25,649 155
- --------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
NOW deposits (519) 114 (633) (1,544) 74 (1,618)
Savings deposits (1,493) (468) (1,025) (136) (11) (125)
Money market deposits (1,066) (263) (803) 337 (497) 834
Certificates of deposit
$100,000 and over 3,283 3,728 (445) 4,250 2,245 2,005
Other time deposits 3,900 3,665 235 1,797 3,295 (1,498)
Short-term borrowings (1,075) (377) (698) 7,474 6,087 1,387
Other borrowings 12,093 13,005 (912) 6,182 6,747 (565)
- --------------------------------------------------------------------------------------------------------------------------------
Total interest expense 15,123 19,404 (4,281) 18,360 17,940 420
- --------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $6,761 $11,710 ($4,949) $7,444 $7,709 ($265)
================================================================================================================================
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)
- ---------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
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 $ 17,511 $ 906 5.17% $ 11,964 $ 688 5.75% $ 60,274 $ 3,294 5.47%
Investment securities:
U.S. Treasury and
Government agencies (1) 1,057,558 68,139 6.44 1,081,957 72,224 6.68 958,417 59,737 6.23
State and political subdivisions 464,738 35,032 7.54 450,222 35,519 7.89 444,127 36,052 8.12
Other securities 51,411 3,569 6.94 43,851 2,926 6.67 43,379 4,041 9.32
- ---------------------------------------------------------------------------------------------------------------------------------
Total investment securities 1,573,707 106,740 6.78 1,576,030 110,669 7.02 1,445,923 99,830 6.90
- ---------------------------------------------------------------------------------------------------------------------------------
Loans: (2) (3)
Commercial and financial 952,253 86,210 9.05 826,995 77,876 9.42 769,629 72,512 9.42
Commercial real estate 831,161 73,973 8.90 706,057 62,885 8.91 619,079 54,766 8.85
Residential real estate 1,467,228 118,260 8.06 1,346,793 110,422 8.20 1,257,141 104,775 8.33
Consumer, net of unearned
income 634,862 61,790 9.73 656,080 63,118 9.62 674,710 64,624 9.58
Credit card 27,399 4,323 15.78 28,101 4,660 16.58 28,441 4,713 16.57
- ---------------------------------------------------------------------------------------------------------------------------------
Total loans 3,912,903 344,556 8.81 3,564,026 318,961 8.95 3,349,000 301,390 9.00
- ---------------------------------------------------------------------------------------------------------------------------------
Total earning assets 5,504,121 $452,202 8.22% 5,152,020 $430,318 8.35% 4,855,197 $404,514 8.33%
Less: Allowance for loan losses (48,773) ================= (44,139) ================ (41,688) ==================
NON-EARNING ASSETS:
Cash and due from banks 124,064 123,767 134,257
Other assets 303,959 254,199 198,640
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $5,883,371 $5,485,847 $5,146,406
==============================================================================================================
INTEREST-BEARING LIABILITIES:
NOW deposits $ 456,874 $ 6,191 1.36% $ 448,831 $ 6,710 1.49% $ 444,427 $ 8,254 1.86%
Savings deposits 463,158 12,774 2.76 479,465 14,267 2.98 479,863 14,403 3.00
Money market deposits 645,569 23,114 3.58 652,796 24,180 3.70 666,462 23,843 3.58
Certificates of deposit
$100,000 and over 388,676 22,199 5.71 324,109 18,916 5.84 283,323 14,666 5.18
Other time deposits 1,937,914 107,952 5.57 1,872,047 104,052 5.56 1,813,209 102,255 5.64
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
deposits 3,892,191 172,230 4.43 3,777,248 168,125 4.45 3,687,284 163,421 4.43
- ---------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 402,643 21,206 5.27 409,671 22,281 5.44 293,523 14,807 5.04
Other borrowings 543,830 29,623 5.45 309,671 17,530 5.66 192,795 11,348 5.89
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 4,838,664 $223,059 4.61% $4,496,590 $207,936 4.62% 4,173,602 $189,576 4.54%
================= ================ ==================
NONINTEREST-BEARING LIABILITIES:
Demand deposits 468,024 453,616 450,004
Other liabilities 87,428 73,366 64,927
Shareholders' equity 489,255 462,275 457,873
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $5,883,371 $5,485,847 $5,146,406
=============================================================================================================
INTEREST MARGIN RECAP:
Interest income/earning assets $452,202 8.22% $430,318 8.35% $404,514 8.33%
Interest expense/earning assets 223,059 4.05 207,936 4.04 189,576 3.90
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest margin $229,143 4.16% $222,382 4.32% $214,938 4.43%
=================================================================================================================================
(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
Customer 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 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 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, the assets to liabilities ratio was 83%, down from
88% in 1997. Asset growth was primarily in time horizons greater than one
year while liability growth was slightly more in periods under one year.
Net interest income simulation modeling is used to better quantify the
impact of potential interest rate fluctuations on net interest income.
With this understanding, management can best determine possible balance
sheet changes, pricing strategies, and appropriate levels of capital and
liquidity which allow 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 additional 12 months. Key model assumptions include
prepayment speeds; changes in market conditions, loan volumes, and
pricing; deposit sensitivity; and customer preferences and are
inherently uncertain. The model cannot precisely estimate net interest
income or the impact of interest rate changes. Actual results will
differ from the simulated results due to timing, magnitude and frequency
of interest rate changes, changes in market conditions, and management
strategies, among other factors. ONB's policy limit for the maximum
negative impact on net interest income over 12 months is 10%. At
December 31, 1998, ONB was well within that limit as the model's
fluctuation was under 1% for the first 12 months and less than 2%
for the total 24 month period.
<TABLE>
<CAPTION>
ANALYSIS OF INTEREST RATE SENSITIVITY AT DECEMBER 31, 1998 (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 $ 19,266 -- $ 99 -- $ 19,365
Investment securities 312,326 $137,531 751,890 $395,135 1,596,882
Loans, net of unearned income 1,402,314 475,881 1,275,726 1,008,320 4,162,241
- -----------------------------------------------------------------------------------------------------------------
Total rate sensitive assets 1,733,906 613,412 2,027,715 1,403,455 $5,778,488
- -------------------------------------------------------------------------------------------------------==========
RATE-SENSITIVE LIABILITIES:
Deposits 1,549,538 430,509 736,100 1,198,863 3,915,010
Other borrowed funds 677,366 174,316 211,659 72,847 1,136,188
- -----------------------------------------------------------------------------------------------------------------
Total rate-sensitive liabilities 2,226,904 604,825 947,759 1,271,710 $5,051,198
- -------------------------------------------------------------------------------------------------------==========
Interest sensitivity gap
per period ($492,998) $8,587 $1,079,956 $131,745
Cumulative gap ($492,998) ($484,411) $595,545 $727,290
Cumulative ratio at December 31, 1998 (1) 78% 83% 116% 114%
====================================================================================================
Cumulative ratio at December 31, 1997 (1) 79% 88% 128% 115%
====================================================================================================
(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
is to ensure the ability to meet cash flow needs of customers, such
as new loan demand and deposit withdrawals, while at the same time
maximizing lending and investment opportunities.
Failure to properly manage liquidity requirements may result in
the need to satisfy customer withdrawals and other obligations with
expensive funding sources. Too much liquidity on the balance sheet
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,
capital markets, and affiliate banks' dividends which are subject
to regulatory limits and in some cases require regulatory approval.
Note 10 and 13 of the consolidated financial statements address this
further. At year-end 1998 ONB had $72.8 million in available lines
of credit from unaffiliated banks. ONB has capacity to issue up to
$85.7 million of a $150 million medium term note program available
for future liquidity needs. At December 31, 1998, 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 investments products and insurance. ONB continuously strives to
improve its noninterest income performance. Noninterest income, excluding
securities transactions, grew 16.9% in 1998 compared to 7.1% in 1997.
The trust company's fee income grew 11.4% in 1998 and 15.9% in 1997 and
benefited from an expanding revenue base of managed customer assets and
strong financial markets. Service charges on deposit accounts grew 1.8% in
1998 compared to 4.8% in 1997 as previously new pricing structures have
been fully implemented over the past several years. Management regularly
reviews these fees and compares them against competition in each separate
market and among affiliate banks. Loan servicing fees were fairly
consistent between the periods with 4.0% growth in 1998. Bank-owned life
insurance revenue, a new initiative, represents income on officers' life
insurance coverage and totaled $3.9 million in 1998. Insurance sales hit
$4.8 million, up 8.4% in 1998 and similar to 8.0% growth in 1997.
Investment and brokerage business increased 24.1% in 1998 with revenue
reaching $3.4 million, compared to 9.8% growth in 1997. The remaining other
income category was up $1.1 million and included loan sale gains.
ONB realized minimal net securities gains during 1998, 1997, and 1996 as
ONB has generally minimal security sales. During 1996, ONB sold a portion
of its Student Loan Marketing Association stock, resulting in a gain.
Table 5 below presents changes in the components of noninterest income for
the years 1996 through 1998.
<TABLE>
<CAPTION>
NONINTEREST INCOME (TABLE 5)
($ in thousands)
- --------------------------------------------------------------------------------------------------------------------
% Change From
Prior Year
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Trust fees $13,102 $11,766 $10,149 11.4% 15.9%
Service charges on deposit
accounts 16,207 15,914 15,179 1.8 4.8
Loan servicing fees 5,848 5,623 5,668 4.0 (0.8)
Insurance premiums and commissions 4,837 4,462 4,132 8.4 8.0
Investment product fees 3,432 2,766 2,519 24.1 9.8
Bank-owned life insurance 3,860 -- -- N/M N/M
Other income 7,239 6,125 5,929 18.2 3.3
- --------------------------------------------------------------------------------------------------------------------
Subtotal 54,525 46,656 43,576 16.9 7.1
Net securities gains 32 50 781 (36.0) (93.6)
- --------------------------------------------------------------------------------------------------------------------
Total noninterest income $54,557 $46,706 $44,357 16.8% 5.3%
====================================================================================================================
N/M = Not meaningful
</TABLE>
19
NONINTEREST EXPENSE
The banking industry continues to look for efficiency improvements. The
challenge is to achieve cost efficiencies while still providing quality
customer service. Several ratios are used to evaluate performance, with
lower percentages representing positive trends. ONB's efficiency ratio,
which is net interest income tax equivalized plus noninterest income,
excluding securities gains, divided by noninterest expense, was 55.74%
in 1998, 55.76% in 1997 and 58.21% in 1996. ONB's net overhead ratio,
noninterest expense less noninterest income divided by average assets,
showed more dramatic improvement with 1.76% in 1998, 1.88% in 1997 and
2.06% in 1996. Total noninterest expense grew 5.4% in 1998 compared to a
0.3% decrease in 1997.
Salaries and benefits, which comprised over 50% of total noninterest
expense, grew 4.7% in 1998 and 3.4% in 1997. Besides normal salary
increases in 1998, incentives rose by $2.2 million. Equipment expense rose
7.8% in 1998 partially due to accelerated depreciation on equipment to be
upgraded. Marketing expense increased 7.3% in 1998 after no increase in
1997. In 1997 FDIC insurance premiums dropped $2.4 million after the one-
time recapitalization charge in 1996 for SAIF-insured deposits which was
$2.5 million for ONB affiliate banks. Other expense grew 11.4% in 1998
after declining in 1997 by 3.4%. The increase was primarily in
professional fees which were similar to 1996 levels and outside services
due to the outsourcing of credit card processing in 1998.
Table 6 below presents changes in the components of noninterest expense for
the years 1996 through 1998.
<TABLE>
<CAPTION>
NONINTEREST EXPENSE (TABLE 6)
($ in thousands)
- ------------------------------------------------------------------------------------------------------------------
% Change From
Prior Year
- ------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $90,779 $86,681 $83,815 4.7% 3.4%
Occupancy expense 9,093 9,268 10,194 (1.9) (9.1)
Equipment expense 12,921 11,982 11,394 7.8 5.2
Marketing expense 5,605 5,226 5,286 7.3 (1.1)
FDIC insurance premiums 551 682 3,041 (19.2) (77.6)
Data processing expense 5,348 5,278 5,058 1.3 4.3
Communications and transportation expense 6,842 6,687 6,631 2.3 0.8
Other expense 26,986 24,214 25,076 11.4 (3.4)
- ------------------------------------------------------------------------------------------------------------------
Total noninterest expense $158,125 $150,018 $150,495 5.4% (0.3)%
===================================================================================================================
</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 28.2% in 1998, 29.6% in 1997, and 29.3% in
1996. 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, 1998 and 1997. 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>
1998:
Interest income $111,105 $111,855 $108,362 $106,587
Interest expense 56,642 58,066 55,111 53,240
- -----------------------------------------------------------------------------------------------------
Net interest income 54,463 53,789 53,251 53,347
Provision for loan losses 2,473 2,847 3,097 3,003
Noninterest income 14,365 14,016 13,567 12,609
Noninterest expense 41,547 39,284 38,871 38,423
- -----------------------------------------------------------------------------------------------------
Income before income taxes 24,808 25,674 24,850 24,530
Income taxes 6,597 6,637 7,495 7,415
- -----------------------------------------------------------------------------------------------------
Net income from continuing operations 18,211 19,037 17,355 17,115
Discontinued operations -- -- (9,193) (661)
- -----------------------------------------------------------------------------------------------------
Net income $18,211 $19,037 $8,162 $16,454
=====================================================================================================
Net income from continuing operations per share:
Basic $0.63 $0.66 $0.60 $0.59
Diluted 0.62 0.64 0.58 0.57
=====================================================================================================
Net income per share:
Basic $0.63 $0.66 $0.28 $0.57
Diluted 0.62 0.64 0.28 0.55
=====================================================================================================
Weighted average shares:
Basic 28,757 28,937 29,110 28,814
Diluted 29,895 30,145 30,340 30,438
=====================================================================================================
1997:
Interest income $106,993 $106,126 $103,620 $99,872
Interest expense 54,286 53,846 51,143 48,661
- -----------------------------------------------------------------------------------------------------
Net interest income 52,707 52,280 52,477 51,211
Provision for loan losses 3,392 3,001 2,811 2,818
Noninterest income 12,551 11,607 11,203 11,345
Noninterest expense 37,308 37,128 38,183 37,399
- -----------------------------------------------------------------------------------------------------
Income before income taxes 24,558 23,758 22,686 22,339
Income taxes 7,508 6,627 6,807 6,734
- -----------------------------------------------------------------------------------------------------
Net income from continuing operations 17,050 17,131 15,879 15,605
Discontinued operations (5,400) (451) 393 453
- -----------------------------------------------------------------------------------------------------
Net income $11,650 $16,680 $16,272 $16,058
=====================================================================================================
Net income from continuing operations per share:
Basic $0.59 $0.59 $0.55 $0.53
Diluted 0.57 0.57 0.53 0.51
=====================================================================================================
Net income per share:
Basic $0.40 $0.58 $0.56 $0.55
Diluted 0.39 0.56 0.54 0.53
=====================================================================================================
Weighted average shares:
Basic 28,826 28,947 29,174 29,396
Diluted 30,493 30,619 30,849 31,070
=====================================================================================================
</TABLE>
21
FINANCIAL CONDITION
OVERVIEW
Total assets reached $6.2 billion at December 31, 1998, 8.4% higher than
the prior year-end. Loans increased $432.0 million or 11.6%. Total
liabilities grew $460.4 million or 8.8% over 1997. Deposits rose 3.4% or
$144.7 million while other sources funded the remainder of the asset
growth.
INVESTMENT SECURITIES
Investment securities at December 31, 1998 comprised over 25% of total assets
and were up $29.9 million, 1.9% over 1997. The growth occurred chiefly in
U.S. Government agency and municipal securities where better yield and
spread opportunities existed during the year.
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, 1998, ONB held investment securities issued by the certain
states and their political subdivisions with the following aggregate market
value: $74.8 million by Indiana and $72.1 million by Illinois. There were
no other concentrations of investment securities issued by an individual
state and its political subdivisions which were greater than 10% of
shareholders' equity.
Average yields on the investment securities portfolio are calculated on a
taxable equivalent basis. Yields are based on the amortized cost and are
weighted for the scheduled maturity of each investment. At year-end,
average yields for the entire portfolio were 6.96% in 1998, 7.21% in 1997,
and 7.13% in 1996.The portfolio yield decline reflected the lower
reinvestment rates experienced in 1998.
Table 8 below presents the maturity distribution of the investment
portfolio, along with weighted average yields thereon.
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES (TABLE 8)
($ in thousands)
- ----------------------------------------------------------------------------------------------------------------
December 31, 1998
- ----------------------------------------------------------------------------------------------------------------
Within 1 - 5 5 - 10 Beyond
1 Year Years Years 10 Years Total 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FAIR VALUE:
U.S. Treasury $ 41,077 $46,938 -- $ 41 $ 88,056 $ 117,188 $ 154,524
U.S. Government agencies
and corporations 112,117 136,610 -- -- 248,727 226,005 222,993
Mortgage-backed securities 65,540 451,311 175,460 25,853 718,164 725,439 633,270
States and political
subdivisions 26,957 246,944 158,839 53,707 486,447 452,933 462,378
Other securities -- 5 -- 55,483 55,488 45,411 41,484
- ----------------------------------------------------------------------------------------------------------------
Total $245,691 $881,808 $334,299 $135,084 $1,596,882 $1,566,976 $1,514,649
================================================================================================================
AMORTIZED COST:
U.S. Treasury $ 40,725 $45,611 -- $ 40 $ 86,376 $ 116,135 $ 153,630
U.S. Government agencies
and corporations 111,396 132,233 -- -- 243,629 222,886 222,244
Mortgage-backed securities 65,330 446,112 175,276 25,573 712,291 716,961 632,065
States and political
subdivisions 26,538 238,033 150,614 52,627 467,812 438,020 452,720
Other securities -- 5 -- 55,483 55,488 45,411 40,856
- ----------------------------------------------------------------------------------------------------------------
Total $243,989 $861,994 $325,890 $133,723 $1,565,596 $1,539,413 $1,501,515
================================================================================================================
Weighted average yield, based
on amortized cost(taxable
equivalent basis) 6.81% 7.01% 7.01% 6.84% 6.96% 7.21% 7.13%
================================================================================================================
</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
and administered by ONB's 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, problem loans, and charge-offs. The
committee regularly reviews the loan policy to assure it remains
appropriate for the current lending environment. Executive and credit
committees at the banks provide additional knowledge, judgment, and
experience to ONB's lending administration.
ONB maintains an independent corporate loan review program. The 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 Indiana, Illinois, and
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.
The 11.6% loan growth in 1998 was reflected in most major categories.
Commercial real estate led the loan types with a 23.9% increase after 14.0%
growth in 1997. Commercial loans rose 14.8% following 11.2% in 1997. In
1998 commercial loans include a $60.7 million loan on the sale of ONB's
consumer finance subsidiary which will mature April 1999. Residential real
estate loans grew 10.1% in 1998 and 8.7% in 1997. Consumer credit declined
3.2% in 1998, similar to 1997. The portfolio is well diversified with
24% of the portfolio in commercial loans, 23% in commercial real estate,
38% in residential real estate, and 16% in consumer credit.
ONB's commercial lending is primarily to small to medium-sized businesses
in various industries in its region. Commercial real estate loans are
generally made to similar companies in ONB's geographical area. These
industries have been stable in ONB's market area and provide opportunities
for growth. A significant percentage of commercial and financial loans are
due within one year, reflecting the short-term nature of a large portion of
these loans. Table 9 on page 24 presents the maturity distribution and
rate sensitivity of loans and an analysis of loans with predetermined and
floating interest rates.
Residential real estate loans, primarily 1-4 family properties, represent
the most significant portion of the loan portfolio. ONB's portfolio
includes both adjustable rate and higher yielding, fixed rate loans.
Consumer loans include automobile loans, personal and home equity loans and
lines of credit, student loans, and credit card loans.
Loans in most categories have grown steadily over the past four years.
Commercial loans increased an average of 6.5% per year between 1994 and
1998. Commercial real estate grew 15.2% and residential real estate loans
grew 8.4% over the same period. Consumer loans remained relatively
unchanged. Table 10 on page 24 presents the composition of the loan
portfolio for each of the last five years.
23
<TABLE>
<CAPTION>
DISTRIBUTION OF LOAN MATURITIES AT DECEMBER 31, 1998 (TABLE 9)
($ in thousands)
- ----------------------------------------------------------------------------------------------------
Within 1-5 Beyond
1 Year Years 5 years Total
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $588,511 $279,127 $114,521 $ 982,159
Economic development bonds 3,900 7,510 8,935 20,345
- ----------------------------------------------------------------------------------------------------
Total $592,411 $286,637 $123,456 $1,002,504
====================================================================================================
Predetermined interest rates $214,371 $130,515 $ 44,243 $ 389,129
Floating interest rates 378,040 156,122 79,213 613,375
- ----------------------------------------------------------------------------------------------------
Total $592,411 $286,637 $123,456 $1,002,504
====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
LOAN PORTFOLIO AT YEAR-END (TABLE 10)
($ in thousands)
- -------------------------------------------------------------------------------------------------------------------------------
Four Year
1998 1997 1996 1995 1994 Growth Rate
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 982,159 $ 855,737 $ 769,889 $ 723,455 $ 764,173 6.5%
Economic development bonds 20,345 22,953 26,424 27,675 30,928 (9.9)
Commercial real estate 944,615 762,505 668,671 573,829 536,620 15.2
Residential real estate 1,560,695 1,416,963 1,303,283 1,238,772 1,131,805 8.4
Consumer credit 663,186 684,972 719,062 724,305 665,055 (0.1)
- -------------------------------------------------------------------------------------------------------------------------------
Total loans 4,171,000 3,743,130 3,487,329 3,288,036 3,128,581 7.5%
Less: Unearned income 8,759 12,928 20,420 26,290 29,761 ============
- ------------------------------------------------------------------------------------------------------------------
Subtotal 4,162,241 3,730,202 3,466,909 3,261,746 3,098,820
Less: Allowance for loan losses 49,437 46,233 41,448 40,917 41,943
- ------------------------------------------------------------------------------------------------------------------
Net loans $4,112,804 $3,683,969 $3,425,461 $3,220,829 $3,056,877
==================================================================================================================
COMPOSITION OF LOAN PORTFOLIO BY TYPE
Commercial and development 24.1% 23.6% 23.0% 23.0% 25.7%
Commercial real estate 22.7 20.4 19.3 17.6 17.3
Residential real estate 37.5 38.0 37.6 38.0 36.5
Consumer credit 15.7 18.0 20.1 21.4 20.5
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
24
The adequacy of the allowance for loan losses is 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 $8.2 million in 1998, compared to
$7.2 million in 1997 and $10.2 million in 1996 with elevated consumer
charge-offs in 1996. Recognizing the changing nature and risk of consumer
lending, management reevaluated its underwriting policies in 1997.
Management believes the revised policies more appropriately address the
risk in the consumer area, and the lower subsequent charge-off levels
reflected efforts to manage this risk. Net charge-offs to average loans
have consistently ranged from 0.20% to 0.30% for the last five years.
ONB makes monthly provisions at levels deemed necessary to provide
assurance that the allowance for loan losses is sufficient to absorb
estimated losses in the loan portfolio. For homogeneous loans, such as
residential mortgage, consumer, and credit card, provision levels are
determined using historic loss factors. For non-homogeneous loans,
management allocates specific losses to loans in the highest risk
categories with provisions for the remainder of the portfolio using
historic loss factors. In addition, provisions reflect other risks
affecting the loan portfolio, such as economic conditions in the geographic
area, specific industry financial conditions, experience of lending staff
and borrower risk associated with Year 2000. The provision for loan losses
was $11.4 million in 1998, slightly lower than the $12.0 million in 1997,
but greater than the $10.7 million in 1996.
Table 11 below summarizes activity in the allowance for loan losses for the
years 1994 through 1998, along with an allocation of the year-end balances
and related statistics for the allowance and net charge-offs.
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES (TABLE 11)
($ in thousands)
- ------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ANALYSIS:
Allowance for loan losses,January 1 $46,233 $41,448 $40,917 $41,943 $42,425
- ------------------------------------------------------------------------------------------------------------------
Loans charged off:
Commercial 3,395 2,955 4,211 4,912 4,594
Commercial and residential real estate 1,096 609 670 973 697
Consumer credit 7,028 8,078 9,668 5,335 5,465
- ------------------------------------------------------------------------------------------------------------------
Total charge-offs 11,519 11,642 14,549 11,220 10,756
- ------------------------------------------------------------------------------------------------------------------
Recoveries on charged-off loans:
Commercial 1,314 1,530 2,274 1,632 1,191
Commercial and residential real estate 305 1,148 320 301 186
Consumer credit 1,684 1,727 1,775 1,126 1,143
- ------------------------------------------------------------------------------------------------------------------
Total recoveries 3,303 4,405 4,369 3,059 2,520
- ------------------------------------------------------------------------------------------------------------------
Net charge-offs 8,216 7,237 10,180 8,161 8,236
Provision charged to expense 11,420 12,022 10,711 7,135 7,754
- ------------------------------------------------------------------------------------------------------------------
Allowance for loan lossses,December 31 $49,437 $46,233 $41,448 $40,917 $41,943
==================================================================================================================
Average loans for the year $3,912,903 $3,564,026 $3,349,000 $3,186,731 $2,928,347
Allowance/year-end loans 1.19% 1.24% 1.20% 1.25% 1.35%
Allowance/average loans 1.26 1.30 1.24 1.28 1.43
Net charge-offs/average loans 0.21 0.20 0.30 0.26 0.28
- ------------------------------------------------------------------------------------------------------------------
ALLOCATION AT DECEMBER 31:
Commercial $23,175 $23,337 $19,657 $22,207 $23,160
Commercial and residential real estate 11,645 11,828 11,533 11,633 11,219
Consumer credit 14,617 11,068 10,258 7,077 7,564
- ------------------------------------------------------------------------------------------------------------------
Total $49,437 $46,233 $41,448 $40,917 $41,943
==================================================================================================================
</TABLE>
25
Assets determined by the various evaluation processes to be under-
performing receive special attention by ONB and the affiliate banks. 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 $102.5 million at December 31, 1998, for
the borrowers' ability to comply with present repayment terms. For these
loans the existing conditions do not warrant either a partial charge-off or
classification as nonaccrual. Management believes it has taken a
conservative approach in its evaluation of under-performing credits and the
loan portfolio in general, both in acknowledging the portfolio's general
condition and in establishing the allowance for loan losses.
Under-performing assets as of year-end totalled $22.5 million in 1998 and
$18.7 million in 1997. As a percent of total loans and foreclosed
properties, under-performing assets at December 31 were fairly consistent
with 0.54% in 1998, 0.50% in 1997, and 0.54% in 1996. The growth in
nonaccruals in 1998 reflected a conservative nonaccrual policy and not a
general deterioration of the portfolio. At December 31, 1998, the
allowance for loan loss to under-performing assets ratio was 219.51%,
comparable to 246.35% in 1997 and 220.18% in 1996. Said in another way, in
1998 ONB had set aside $2.20 for every dollar of under-performing assets.
Table 12 below presents the components of under-performing assets as of
December 31, for the last five years.
<TABLE>
<CAPTION>
UNDER-PERFORMING ASSETS (TABLE 12)
($ in thousands)
- ------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $16,001 $11,233 $12,501 $ 6,919 $ 9,330
Renegotiated loans 116 248 746 1,120 1,280
Past due loans (90 days or more):
Commercial 1,003 1,394 980 1,499 1,169
Commercial and residential real estate 1,952 2,167 1,265 2,602 2,102
Consumer 970 844 700 1,059 1,257
- ------------------------------------------------------------------------------------------------------------------
Total 3,925 4,405 2,945 5,160 4,528
- ------------------------------------------------------------------------------------------------------------------
Foreclosed properties 2,480 2,881 2,633 1,733 1,702
- ------------------------------------------------------------------------------------------------------------------
Total under-performing assets $22,522 $18,767 $18,825 $14,932 $16,840
==================================================================================================================
Under-performing assets as a %
of total loans and
foreclosed properties 0.54% 0.50% 0.54% 0.46% 0.54%
Allowance for loan loss/under-performing
assets 219.51 246.35 220.18 274.02 249.07
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
26
Interest income of approximately $1.4 million would have been recorded in
1998 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 1998 on nonaccrual and
restructured loans was $0.4 million.
DEPOSITS
Customer deposits provide the core funding needs and include noninterest-
bearing demand, regular savings and NOW accounts, money market accounts,
and small denomination certificates of deposit. Average core deposits
increased 1.7% in 1998 compared to the 1.4% in 1997. Other time deposits
increased over 3% in both 1998 and 1997 and demand deposits rose 3.2% in
1998. Money market deposits declined in 1998 and 1997 after a special
promotion in 1996.
Table 13 below presents changes in the average balances of all funding
sources for the years 1996 through 1998.
<TABLE>
<CAPTION>
FUNDING SOURCES - AVERAGE BALANCE (TABLE 13)
($ in thousands)
- ---------------------------------------------------------------------------------------------------------
% Change From
Prior Year
- ---------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Demand deposits $ 468,024 $ 453,616 $ 450,004 3.2% 0.8%
NOW deposits 456,874 448,831 444,427 1.8 1.0
Savings deposits 463,158 479,465 479,863 (3.4) (0.1)
Money market deposits 645,569 652,796 666,462 (1.1) (2.1)
Other time deposits 1,937,914 1,872,047 1,813,209 3.5 3.2
- ---------------------------------------------------------------------------------------------------------
Total core deposits 3,971,539 3,906,755 3,853,965 1.7 1.4
- ---------------------------------------------------------------------------------------------------------
Certificates of deposit $100,000 and over 388,676 324,109 283,323 19.9 14.4
Short-term borrowings 402,643 409,671 293,523 (1.7) 39.6
Other Borrowings 543,830 309,671 192,795 75.6 60.6
- ---------------------------------------------------------------------------------------------------------
Total funding sources $5,306,688 $4,950,206 $4,623,606 7.2% 7.1%
=========================================================================================================
</TABLE>
The average balance of large certificates grew $64.6 million or 19.9% in
1998 compared to the prior year. Other borrowings increased $234.2 million
and primarily include FHLB advances. Table 14 below presents a maturity
distribution for certificates of deposit with denominations of $100,000 or
more.
<TABLE>
<CAPTION>
CERTIFICATES OF DEPOSIT, $100,000 AND OVER (TABLE 14)
($ in thousands)
- ---------------------------------------------------------------------------------------------------------------------
Maturity Distribution
-------------------------------------------------------
Year-End 1-90 91-180 181-365 Beyond Interest Average
Balance Days Days Days 1 Year Expense Rate
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998 $366,450 $140,716 $89,414 $74,756 $61,564 $22,199 5.71%
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
- ---------------------------------------------------------------------------------------------------------------------
</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 decreased $7.0 million or
1.7% in 1998. Short-term rates on borrowings adjusted more slowly than
long-term rates which made long-term funding more attractive.
Table 15 below presents the distribution of ONB's short-term borrowings and
the weighted average interest rates thereon for each of the last three
years.
<TABLE>
<CAPTION>
SHORT-TERM BORROWINGS (TABLE 15)
($ in thousands)
- -------------------------------------------------------------------------------------
Other
Funds Repurchase Short-term
Purchased Agreements Borrowings
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998:
Outstanding at year-end $294,575 $192,868 $ 18,877
Average amount outstanding 82,061 213,535 107,047
Maximum amount outstanding at
any month-end 294,575 233,308 174,558
Weighted average interest rate:
During year 5.58% 4.90% 5.77%
End of year 5.35 4.53 5.10
- -------------------------------------------------------------------------------------
1997:
Outstanding at year-end $170,675 $215,878 $ 56,133
Average amount outstanding 73,733 220,074 115,864
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 35,563 204,837 53,123
Maximum amount outstanding at
any month-end 90,875 217,337 116,965
Weighted average interest rate:
During year 5.39% 4.72% 6.05%
End of year 6.25 4.89 6.14
- -------------------------------------------------------------------------------------
</TABLE>
28
In 1997 ONB registered a $150 million medium term note program and issued
$10 million in 1998 and $54.3 million in 1997. These borrowings, combined
with prior issuances, totaled $96.3 million at December 31, 1998 and have a
weighted average effective interest rate of 6.81% with maturities between
2000 and 2007. The funds were used to reduce ONB's lines of credit.
Holders of ONB's 8% convertible debentures converted principal amounts of
$8.4 million in 1998 and $0.2 million in 1997. These conversions resulted
in the issuance of common stock shares totaling 415,597 in 1998 and 7,727
in 1997 with an offsetting increase in shareholders' equity.
CAPITAL RESOURCES
Shareholders' equity reached $494.6 million or 8.0% of total assets at
December 31, 1998, and $477.2 million or 8.4% at December 31, 1997. ONB
paid $0.88 cash dividends per share in 1998 which totaled $25.3 million
(restated for the 5% stock dividend paid in January 1999).
Treasury shares were repurchased to provide shares for reissuance under
ONB's dividend reinvestment and stock purchase plan and stock dividends.
Treasury shares repurchased reduced shareholders' equity by $46.7 million
in 1998 and $36.1 million in 1997. Shares reissued pursuant to the above
programs and in connection with conversions of ONB's subordinated
debentures added to shareholders' equity $25.1 million in 1998 and $9.7
million in 1997.
ONB and the banking industry are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can elicit certain mandatory actions by
regulators that, if undertaken, could have a direct material effect on
ONB's financial statements. Capital adequacy in the banking industry is
evaluated primarily by the use of ratios which measure capital against
assets and certain off-balance-sheet items. Certain ratios weight these
assets based on risk characteristics according to regulatory accounting
practices. At December 31, 1998, ONB and it affiliate banks exceeded the
regulatory minimums and met the regulatory definition of well-capitalized.
ONB's capital ratios and the regulatory guidelines are presented in Table
16 below.
<TABLE>
<CAPTION>
CAPITAL STRUCTURE AND REGULATORY GUIDELINES (TABLE 16)
($ in thousands)
- --------------------------------------------------------------------------------------------------------------------------------
Regulatory Guidelines December 31,
- --------------------------------------------------------------------------------------------------------------------------------
Minimum Well-Capitalized 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TIER 1 CAPITAL:
Shareholders' equity (1) $475,620 $460,663 $450,646
Less intangibles (11,630) (13,759) (13,750)
- --------------------------------------------------------------------------------------------------------------------------------
Tier 1 capital 463,990 446,904 436,896
TIER 2 CAPITAL:
Subordinated debentures 21,963 30,407 30,564
Qualifying allowance for loan losses 49,437 45,935 42,203
- --------------------------------------------------------------------------------------------------------------------------------
Total capital $535,390 $523,246 $509,663
================================================================================================================================
Risk adjusted assets $4,100,795 $3,674,769 $3,376,237
================================================================================================================================
Tier 1 capital to risk-adjusted assets 4.00% 6.00% 11.31% 12.16% 12.94%
Total capital to risk-adjusted assets 8.00 10.00 13.06 14.24 15.10
Tier 1 capital to quarterly average assets
(leverage ratio) 4.00 5.00 7.69 7.95 8.29
- --------------------------------------------------------------------------------------------------------------------------------
(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, 1998 and 1997, 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, 1998. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Old National Bancorp and affiliates as of December
31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted
accounting principles.
s/s Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Indianapolis, Indiana,
January 27, 1999.
31
<TABLE>
<CAPTION>
OLD NATIONAL BANCORP
CONSOLIDATED BALANCE SHEET
($ and shares in thousands)
- -------------------------------------------------------------------------------------------------------------------------------
December 31,
- -------------------------------------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 150,884 $ 147,337
Money market investments:
Interest-bearing deposits in other banks 5,283 12,528
Federal funds sold and securities purchased under agreements to resell 14,082 7,244
- -------------------------------------------------------------------------------------------------------------------------------
Total money market investments 19,365 19,772
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL CASH AND CASH EQUIVALENTS 170,249 167,109
- -------------------------------------------------------------------------------------------------------------------------------
Investment securities - available-for-sale, at fair value 1,596,882 1,566,976
- -------------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned income 4,162,241 3,730,202
Allowance for loan losses (49,437) (46,233)
- -------------------------------------------------------------------------------------------------------------------------------
NET LOANS 4,112,804 3,683,969
- -------------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 78,267 77,969
Accrued interest receivable 48,537 48,555
Other assets 159,229 143,637
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $6,165,968 $5,688,215
===============================================================================================================================
LIABILITIES
Deposits:
Noninterest-bearing demand $ 528,462 $ 502,276
Interest-bearing:
NOW accounts 498,643 450,381
Savings accounts 464,824 469,589
Money market accounts 662,754 660,240
Certificates of deposit $100,000 and over 366,450 359,695
Other time 1,922,339 1,856,549
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 4,443,472 4,298,730
- -------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 506,320 442,686
Accrued expenses and other liabilities 91,728 80,764
Other borrowings 629,868 388,832
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 5,671,388 5,211,012
- -------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 12)
SHAREHOLDERS' EQUITY
Preferred stock, 2,000 shares authorized, no shares issued or outstanding -- --
Common stock, $1 stated value, 50,000 shares authorized,
28,686 and 27,457 shares issued and outstanding, respectively 28,686 27,457
Capital surplus 350,060 299,988
Retained earnings 96,874 133,218
Accumulated other comprehensive income, net of tax 18,960 16,540
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 494,580 477,203
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $6,165,968 $5,688,215
===============================================================================================================================
The accompanying notes to consolidated financial statements are an integral part of this statement.
</TABLE>
32
<TABLE>
<CAPTION>
OLD NATIONAL BANCORP
CONSOLIDATED STATEMENT OF INCOME
($ and shares in thousands except per share data)
- -------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
- -------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Loans including fees:
Taxable $336,009 $312,617 $295,580
Nontaxable 5,742 4,250 3,897
Investment securities:
Taxable 71,884 75,504 64,392
Nontaxable 23,368 23,552 23,694
Money market investments 906 688 3,294
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 437,909 416,611 390,857
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Savings, NOW and money market deposits 42,079 45,157 46,500
Certificates of deposit $100,000 and over 22,199 18,916 14,666
Other time deposits 107,952 104,052 102,255
Short-term borrowings 21,206 22,281 14,807
Other borrowings 29,623 17,530 11,348
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 223,059 207,936 189,576
- -------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 214,850 208,675 201,281
Provision for loan losses 11,420 12,022 10,711
- -------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 203,430 196,653 190,570
- -------------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trust fees 13,102 11,766 10,149
Service charges on deposit accounts 16,207 15,914 15,179
Loan servicing fees 5,848 5,623 5,668
Insurance premiums and commissions 4,837 4,462 4,132
Investment product fees 3,432 2,766 2,519
Bank-owned life insurance 3,860 -- --
Net securities gains 32 50 781
Other income 7,239 6,125 5,929
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST INCOME 54,557 46,706 44,357
- -------------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 90,779 86,681 83,815
Occupancy expense 9,093 9,268 10,194
Equipment expense 12,921 11,982 11,394
Marketing expense 5,605 5,226 5,286
FDIC insurance premiums 551 682 3,041
Data processing expense 5,348 5,278 5,058
Communication and transportation expense 6,842 6,687 6,631
Other expense 26,986 24,214 25,076
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL NONINTEREST EXPENSE 158,125 150,018 150,495
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 99,862 93,341 84,432
Income taxes 28,144 27,676 24,747
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME FROM CONTINUING OPERATIONS 71,718 65,665 59,685
- -------------------------------------------------------------------------------------------------------------------------------
Discontinued operations (9,854) (5,005) 494
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME $61,864 $60,660 $60,179
===============================================================================================================================
NET INCOME FROM CONTINUING OPERATIONS PER COMMON SHARE:
Basic $2.48 $2.26 $1.98
Diluted 2.41 2.18 1.92
===============================================================================================================================
NET INCOME PER COMMON SHARE:
Basic $2.14 $2.09 $2.00
Diluted 2.09 2.02 1.94
===============================================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic 28,904 29,084 30,130
Diluted 30,212 30,755 31,805
===============================================================================================================================
The accompanying notes to consolidated financial statements are an integral part of this statement.
</TABLE>
33
<TABLE>
<CAPTION>
OLD NATIONAL BANCORP
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
($ and shares in thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Other Total
----------------- Capital Retained Comprehensive Comprehensive Shareholders'
Shares Amount Surplus Earnings Income Income Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <S> <C>
BALANCES, DECEMBER 31, 1995 26,453 $26,453 $253,986 $170,735 $10,250 -- $461,424
Net income -- -- -- 60,179 -- $60,179 60,179
Unrealized security loss and reclassification
adjustment, net of $1,403 tax -- -- -- -- (2,370) (2,370) (2,370)
--------
Comprehensive income -- -- -- -- -- $57,809 --
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
- --------------------------------------------------------------------------------------------------------- ----------
BALANCES, DECEMBER 31, 1996 26,778 26,778 265,584 158,284 7,880 458,526
Net income -- -- -- 60,660 -- $60,660 60,660
Unrealized security gain and reclassification
adjustment, net of $5,769 tax -- -- -- -- 8,660 8,660 8,660
-------
Comprehensive income -- -- -- -- -- $69,320 --
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
- --------------------------------------------------------------------------------------------------------- ----------
BALANCES, DECEMBER 31, 1997 27,457 27,457 299,988 133,218 16,540 477,203
Net income -- -- -- 61,864 -- $61,864 61,864
Unrealized security gain and reclassification
adjustment, net of $1,303 tax -- -- -- -- 2,420 2,420 2,420
-------
Comprehensive income -- -- -- -- -- $64,284 --
Cash dividends -- -- -- (25,290) -- ======= (25,290)
5% stock dividend 1,366 1,366 71,552 (72,918) -- --
Stock repurchased (954) (954) (45,748) -- -- (46,702)
Stock reissued under dividend reinvestment
and stock purchase plan 402 402 16,239 -- -- 16,641
Stock reissued due to conversion of
subordinated debentures 415 415 8,029 -- -- 8,444
- --------------------------------------------------------------------------------------------------------- -----------
BALANCES, DECEMBER 31, 1998 28,686 $28,686 $350,060 $96,874 $18,960 $494,580
========================================================================================================= ===========
The accompanying notes to consolidated financial statements are an integral part of this statement.
</TABLE>
34
<TABLE>
<CAPTION>
OLD NATIONAL BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
- --------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
- --------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $61,864 $60,660 $60,179
- --------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation 10,104 9,112 8,285
Amortization of intangible assets 1,165 1,277 1,435
Net premium amortization on investment securities 2,624 1,658 2,200
Provision for loan losses 11,420 12,022 10,711
Net securities gains (32) (50) (781)
(Gain) loss on sale of other assets (820) (223) 254
(Increase) decrease in interest receivable 18 (1,871) 526
Increase in other assets (16,552) (30,300) (55,879)
Increase in accrued expenses and other liabilities 9,661 10,119 4,237
- --------------------------------------------------------------------------------------------------------------------------------
Total adjustments 17,588 1,744 (29,012)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash flows provided by operating activities 79,452 62,404 31,167
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities available-for-sale (598,163) (401,094) (453,068)
Proceeds from maturities of investment securities available-for-sale 458,976 301,722 333,963
Proceeds from sales of investments securities available-for-sale 110,412 59,866 29,372
Net principal collected from (loans made to) customers:
Commercial (125,895) (83,802) (47,120)
Commercial and residential real estate, net of loans originated for sale (326,633) (206,975) (159,703)
Consumer 12,273 20,247 (8,520)
Residential real estate loans originated for sale (67,145) (26,775) (44,400)
Proceeds from sale of mortgage loans 67,752 26,979 44,734
Proceeds from sale of premises and equipment 682 976 1,059
Purchase of premises and equipment (11,076) (10,082) (12,987)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash flows used in investing activities (478,817) (318,938) (316,670)
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits, short-term and other borrowings:
Noninterest-bearing demand deposits 26,186 (10,005) 36,562
Savings, NOW and money market deposits 46,011 (63,840) 35,530
Certificates of deposit $100,000 and over 6,755 101,707 (27,473)
Other time deposits 65,790 2,844 40,323
Short-term borrowings 63,634 106,701 72,643
Other borrowings 251,480 96,444 111,891
Net (payments on) proceeds from medium term notes (2,000) 54,300 (6,000)
Cash dividends paid (25,290) (24,240) (23,655)
Common stock repurchased (46,702) (36,134) (44,861)
Common stock reissued, net of shares used to convert subordinated debentures 16,641 9,574 6,858
- --------------------------------------------------------------------------------------------------------------------------------
Net cash flows provided by financing activities 402,505 237,351 201,818
- --------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 3,140 (19,183) (83,685)
Cash and cash equivalents at beginning of period 167,109 186,292 269,977
- --------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $170,249 $167,109 $186,292
================================================================================================================================
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 is accrued on the principal balances of loans outstanding,
except on discounted loans which are 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, 1998, approximately $2.1 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, and fair market value of the
collateral and 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.
36
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.
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.
Total acquisition costs over the fair value of net assets
acquired was $11.7 million at December 31, 1998 and is being
amortized on the straight-line basis over periods ranging from 20
to 25 years. The recoverability of such assets and their
carrying value are periodically evaluated.
NET INCOME PER SHARE
Basic net income per share is computed by dividing net income by
the weighted average number of common shares outstanding during
each year, adjusted to reflect all stock dividends (Note 9) and
all mergers accounted for as pooling-of-interests as if they had
occurred at the beginning of the earliest year presented.
Diluted net income per share is computed as above and assumes the
conversion of outstanding subordinated debentures (Note 10).
Below is a table reconciling basic and diluted earnings per share
("EPS").
<TABLE>
<CAPTION>
NOTE 1 - EARNINGS PER SHARE RECONCILIATION
($ and shares in thousands except per share data)
- -------------------------------------------------------------------------------------------------------------------------------
For the Year Ended For the Year Ended For the Year Ended
December 31, 1998 December 31, 1997 December 31, 1996
- -------------------------------------------------------------------------------------------------------------------------------
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 from continuing
operations available to
common stockholders $71,718 28,904 $2.48 $65,665 29,084 $2.26 $59,685 30,130 $1.98
======= ======= =======
EFFECT OF
DILUTIVE SECURITIES
Stock options -- 66 -- 99 -- 95
8% convertible debentures 1,138 1,242 1,469 1,572 1,477 1,580
- --------------------------------------------------- -------------------- --------------------
DILUTED EPS
Income from continuing
operations available to
common stockholders
+ assumed conversions $72,856 30,212 $2.41 $67,134 30,755 $2.18 $61,162 31,805 $1.92
===============================================================================================================================
</TABLE>
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.
37
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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, 1998, 1997, and 1996, for interest was
$219.9 million, $203.4 million, and $189.9 million, respectively.
Total income tax payments during 1998, 1997, and 1996, were $22.4
million, $25.1 million, and $24.1 million, respectively.
IMPACT OF ACCOUNTING CHANGES
Effective January 1, 1998, ONB adopted the provisions of SFAS No.
130 "Reporting Comprehensive Income" which establishes standards
for reporting and display of comprehensive income and its
components.
Effective January 1, 1998, ONB adopted SFAS No. 131 "Disclosures
about Segments of an Enterprise and Related Information" which
establishes standards for reporting information on operating
segments.
The adoption of both above statements did not have a material
impact on ONB's financial condition or its results of operations.
In June 1998 the Financial Accounting Standards Board (FASB)
issued SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities." This statement requires that all derivative
instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period
in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. The statement is
effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999 (January 1, 2000 for ONB). ONB doesn't
expect the impact of this statement will be material to the
results of operations or its financial position, due to its
limited use of derivative instruments.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with
the 1998 presentation. Such reclassifications had no effect on
net income.
NOTE 2 - BUSINESS COMBINATIONS AND DISCONTINUED OPERATIONS
Mergers-Pending
On May 27, 1998, ONB and Southern Bancshares LTD ("Southern") of
Carbondale, Illinois, executed a definitive merger agreement.
ONB will issue common shares in exchange for all of the
outstanding common shares of Southern. The transaction will be
accounted for as a pooling-of-interests. As of December 31,
1998, Southern's financial statements reflected $254.6 million in
total assets, net loans of $190.1 million, total deposits of
$225.5 million and net income for the twelve months then ended of
$2.4 million. This merger was consummated in January 29, 1999.
On October 29, 1998, ONB and Dulaney Bancorp (Dulaney) of
Marshall, Illinois, executed a definitive merger agreement. ONB
will issue common shares in exchange for all of the outstanding
common shares of Dulaney. The transaction will be accounted for
as a pooling-of-interests. As of December 31, 1998, Dulaney's
financial statements reflected $38.9 million in total assets, net
loans of $19.5 million, total deposits of $31.8 million and net
income for the twelve months then ended of $339 thousand. This
merger was consummated on February 5,1999.
Discontinued Operations
In April 1998, ONB announced it would look at exit strategies
from its sub-prime lending affiliate, Consumer Acceptance
Corporation (CAC). During June 1998, ONB finalized the sale of
CAC's sub-prime auto loans, which closed in July 1998. ONB has
accounted for this entity as discontinued operations on the
consolidated financial statements. Net assets of the entity
which were included in other assets were $79.2 million at
December 31, 1997. The loss on discontinued operations included
interest expense of $2.6 million in 1998, $2.3 million in 1997,
and $1.1 million in 1996. Interest expense was directly
attributable to the debt associated to this business unit.
Income (loss) from discontinued operations for the years ended
December 31, 1998, 1997, and 1996 were as follows ($ in
thousands):
38
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Years Ended December 31
- --------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) before taxes from operations of
discontinued operations $(7,943) $(8,346) $816
Income tax expense (benefit) (3,183) (3,341) 322
- --------------------------------------------------------------------------------------------------------
Income (loss) from operations of discontinued operations (4,760) (5,005) 494
- --------------------------------------------------------------------------------------------------------
Loss before taxes from disposal of discontinued operations (8,489) - -
Income tax benefit (3,395) - -
- --------------------------------------------------------------------------------------------------------
Loss from disposal of discontinued operations (5,094) - -
- --------------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations $(9,854) $(5,005) $494
========================================================================================================
Income (loss) from discontinued operations per common share
Basic $ (0.34) $(0.17) $0.02
Diluted (0.32) (0.16) 0.02
========================================================================================================
</TABLE>
NOTE 3 - INVESTMENT SECURITIES
The following tables summarize the amortized cost and fair value
of the investment securities portfolio at December 31, 1998 and
1997, and the corresponding amounts of unrealized gains and
losses therein ($ in thousands):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Available-for-Sale
- ---------------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1998
U.S. Treasury $ 86,376 $ 1,682 $ (2) $ 88,056
U.S. Government agencies
and corporations 243,629 5,170 (72) 248,727
Mortgage-backed securities 712,291 6,577 (704) 718,164
State and political subdivisions 467,812 18,860 (225) 486,447
Other securities 55,488 -- -- 55,488
- ---------------------------------------------------------------------------------------------------
Total $1,565,596 $ 32,289 $ (1,003) $1,596,882
===================================================================================================
December 31, 1997
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
===================================================================================================
</TABLE>
The amortized cost and fair value of the investment securities
portfolio at December 31, 1998 and 1997, 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
were $110.4 million in 1998 and $59.9 million in 1997. In 1998
realized gains and losses were $0.1 million and $0.0 million,
respectively. In 1997 realized gains and losses were $0.3
million and $0.2 million.
At December 31, investment securities were pledged to secure
public and other funds with a carrying value of $612 million in
1998 and $564 million in 1997.
<TABLE>
<CAPTION>
($ in thousands)
- ----------------------------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maturity
Within one year $ 243,989 $ 245,691 $ 190,717 $ 191,265
One to five years 861,994 881,808 903,334 919,815
Five to ten years 325,890 334,299 362,688 371,853
Beyond ten years 133,723 135,084 82,674 84,043
- ----------------------------------------------------------------------------------------------------
Total $1,565,596 $1,596,882 $1,539,413 $1,566,976
====================================================================================================
</TABLE>
39
NOTE 4 - LOANS
The composition of loans at December 31, 1998 and 1997, by
lending classification was as follows ($ in thousands):
- -------------------------------------------------------------------------
December 31,
- -------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------
Commercial $ 982,159 $ 855,737
Economic development bonds 20,345 22,953
Commercial real estate 944,615 762,505
Residential real estate 1,560,695 1,416,963
Consumer credit, net 654,427 672,044
- -------------------------------------------------------------------------
Total loans $4,162,241 $3,730,202
=========================================================================
Through its affiliates, ONB makes loans to customers in various
industries including manufacturing, agribusiness, transportation,
mining, wholesaling, and retailing, predominately in its tri-state region.
The loan portfolio is diversified with no single industry exceeding
10% of the total.
Executive officers and directors of ONB and significant
subsidiaries and their related interests are loan customers of
ONB's affiliate banks in the normal course of business. These
loans are made on substantially the same terms, including
interest rates and collateral, as those prevailing at the same
time for comparable transactions with unrelated parties and
involve no unusual risk of collectibility. An analysis of the
1998 activity of these loans is as follows ($ in thousands):
----------------------------------------------------------------------
Balance, January 1, 1998 $ 97,697
New loans 225,828
Repayments (208,598)
Officer and director changes 76
----------------------------------------------------------------------
Balance, December 31, 1998 $115,003
======================================================================
<TABLE>
<CAPTION>
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses during the years 1998,
1997, and 1996 was as follows ($ in thousands):
- --------------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $46,233 $41,448 $40,917
Additions:
Provision charged to expense 11,420 12,022 10,711
Deductions:
Loans charged off 11,519 11,642 14,549
Recoveries (3,303) (4,405) (4,369)
- --------------------------------------------------------------------------------------
Net charge-offs 8,216 7,237 10,180
- --------------------------------------------------------------------------------------
Balance at end of year $49,437 $46,233 $41,448
======================================================================================
</TABLE>
At December 31, 1998, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS Nos. 114
and 118 was $6.1 million with no related allowance and $41.0
million with $8.7 million of related allowance. 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.
For the year ended December 31, 1998, the average balance of
impaired loans was $49.3 million, for which $2.8 million of
interest was recorded. 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.
40
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.
OTHER BORROWINGS
The fair value of FHLB borrowings and 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 as of December 31, 1998, are as follows ($ in
thousands):
- -----------------------------------------------------------------------------
Carrying Fair
Value Value
- -----------------------------------------------------------------------------
Financial Assets:
Cash, due from banks and
money market investments $ 170,249 $ 170,249
Investment securities 1,596,882 1,596,882
Loans, net 4,112,804 4,174,485
Financial Liabilities:
Deposits 4,443,472 4,467,083
Short-term borrowings 506,320 506,320
Other borrowings 629,868 643,278
Off-Balance-Sheet Financial Instruments:
Commitments to extend credit 1,007,049 1,007,049
Letters of credit 35,745 35,745
- -----------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision at statutory rate 35.0% 35.0% 35.0%
Tax exempt income (10.1) (8.8) (9.7)
State income taxes 3.6 4.0 3.6
Other, net (0.3) (0.6) 0.4
- --------------------------------------------------------------------------------------
Actual tax rate 28.2% 29.6% 29.3%
======================================================================================
</TABLE>
<TABLE>
<CAPTION>
The provision for income taxes consists of the following
components ($ in thousands):
- --------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes currently payable - federal $19,857 $20,382 $19,801
Income taxes currently payable - state 5,300 5,187 4,786
Deferred income taxes related to:
Provision for loan losses (2,119) (2,519) (996)
Other, net (1,472) 1,285 1,478
- ---------------------------------------------------------------------------------------
Deferred income tax expense (benefit) (3,591) (1,234) 482
- ---------------------------------------------------------------------------------------
Provision for income taxes $21,566 $24,335 $25,069
=======================================================================================
Provision Detail:
Continuing operations $28,144 $27,676 $24,747
Discontinued operations (6,578) (3,341) 322
- ---------------------------------------------------------------------------------------
Total $21,566 $24,335 $25,069
=======================================================================================
</TABLE>
<TABLE>
<CAPTION>
Significant components of ONB's net deferred tax assets at December 31 are as follows
($ in thousands):
- --------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets:
Allowance for loan losses,net of recapture $19,415 $17,296
Benefit plan accruals 3,926 4,110
Other, net 2,348 174
- --------------------------------------------------------------------------------------
Total deferred tax assets 25,689 21,580
- --------------------------------------------------------------------------------------
Deferred Tax Liabilities:
Premises and equipment (1,650) (2,389)
Accretion on investment securities (852) (957)
Unrealized gain on available-
for-sale investment securities (12,326) (11,023)
Lease receivable, net (3,439) (2,078)
- --------------------------------------------------------------------------------------
Total deferred tax liabilities (18,267) (16,447)
- --------------------------------------------------------------------------------------
Net deferred tax assets $7,422 $5,133
======================================================================================
</TABLE>
NOTE 8 - EMPLOYEE BENEFIT PLANS
RETIREMENT PLAN
ONB has a noncontributory defined benefit retirement plan covering
substantially all full-time employees. Retirement benefits are
based on years of service and compensation during the highest paid
five years of employment. ONB's policy is to contribute at least
the minimum funding requirement determined by the plan's actuary.
The following table sets forth the plan's funded status and the
amount recognized in the consolidated balance sheet at December 31,
1998, 1997, and 1996 ($ in thousands):
42
<TABLE>
<CAPTION>
EMPLOYEE BENEFIT PLANS (CONTINUED)
- --------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $27,747 $24,356 $20,720
Service cost 2,353 2,169 1,900
Interest cost 2,070 1,884 1,720
Acquisitions - 262 641
Benefits paid (4,022) (2,325) (1,907)
Actuarial loss 4,085 1,400 1,282
- --------------------------------------------------------------------------------------------
Benefit obligation at end of year 32,233 27,746 24,356
- --------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets
at beginning of year 24,138 21,859 19,943
Actual return on plan assets 5,359 4,122 1,707
Employer contributions 3,305 188 946
Transfers 84 447 1,328
Benefits paid (4,022) (2,325) (1,907)
Administrative expenses (170) (153) (158)
- --------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 28,694 24,138 21,859
- --------------------------------------------------------------------------------------------
Funded status (3,539) (3,608) (2,497)
Unrecognized net actuarial loss 1,106 446 1,128
Unrecognized transition asset (2,127) (2,488) (2,850)
Unrecognized prior service cost 388 445 887
- --------------------------------------------------------------------------------------------
Accrued benefit cost $ (4,172) $(5,205) $(3,332)
============================================================================================
Weighted-average assumptions as of December 31,
Discount rate 7.25% 7.75% 8.00%
Expected return on plan assets 8.00 8.00 8.00
Rate of compensation increase 5.00 5.00 5.00
</TABLE>
<TABLE>
<CAPTION>
The net pension expense and its components were as follows ($ in thousands):
- --------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 2,353 $ 2,169 $1,900
Interest cost 2,070 1,884 1,720
Expected return on plan assets (1,866) (1,693) (1,691)
Amortization of prior service cost 58 58 86
Amortization of transitional asset (362) (362) (362)
Recognized actuarial loss 18 5 -
- --------------------------------------------------------------------------------------------
Net pension expense $ 2,271 $ 2,061 $1,653
============================================================================================
</TABLE>
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 1998, 1997, and 1996
was $4.5 million, $4.5 million, and $4.0 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 33,148 in 1998, 28,158 in 1997, and
22,834 in 1996. Expense recorded in 1998, 1997, and 1996 was
$1.9 million, $1.2 million, and $0.8 million, respectively.
43
NOTE 9 - SHAREHOLDERS' EQUITY
STOCK DIVIDEND
A 5% stock dividend was declared on December 10, 1998, and
distributed on January 28, 1999. 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,
1998, 500 thousand 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, 1998, ONB had $80.0 million in unsecured lines of
credit with unaffiliated banks with $72.8 million unused. The
lines bear interest at the bank's federal funds rate plus 60 to
80 basis points. During the years 1998, 1997, and 1996, the
average interest rates on the lines were 6.25%, 6.26%, and 6.17%,
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, 1998, ONB had $511.6 million borrowed from
various Federal Home Loan Banks ("FHLB"). Floating-rate
borrowings totaled $53.3 million and will mature in 1999. The
remaining borrowings have a fixed interest rate and mature
between 1999 and 2018. The weighted average rates of the FHLB
borrowings were 5.25% and 5.96% at December 31, 1998 and 1997,
respectively. A portion of these borrowings is secured by
specific mortgage loans and securities which have a current book
values of approximately $465 million and $48 million,
respectively. 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, 1998, a total of $32 million of the notes were
outstanding with maturities ranging from two to five years and
fixed interest rates ranging from 6.70% 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, 1998, a total of $64.3 million of the notes were
outstanding, with maturities ranging from four to nine years and
fixed interest rates from 6.40% to 7.03%
SUBORDINATED DEBENTURES
ONB has outstanding $22.0 million of 8% convertible subordinated
debentures outstanding 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 51.679
shares per $1,000 principal amount of debentures. During 1998,
$8.4 million principal amount of debentures was converted into
415,597 shares of ONB common stock.
Interest on the debentures is payable 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, 1998, 1.1
million authorized and unissued common shares were reserved for
conversion of the remaining debentures.
44
NOTE 11 - INTEREST RATE CONTRACTS
ONB uses interest rate contracts such as interest swaps and caps
to manage its interest rate risk. These contracts are designated
as hedges of specific assets and liabilities. The net interest
receivable or payable on swaps is accrued and recognized as an
adjustment to the interest income or expense of the hedges asset
or liability. The premium paid for an interest rate cap is
included in the basis of the hedged item and is amortized as an
adjustment to the interest income or expense on the related asset
or liability.
At December 31, 1998, ONB had an interest rate swap with a
notional value of $20 million. The contract is an exchange of
interest payments with no effect on the principal amounts of the
underlying hedged liability. The fair value of the swap contract
was $0.3 million at December 31, 1998. ONB pays the counterparty
of variable rate based on three-month LIBOR and receives a fixed
rate of 6.50%. The contract terminates on or prior to March 13,
2008.
At December 31, 1998, ONB had an interest rate cap agreement
("cap") with a notional amount of $8 million with no fair value.
This cap is indexed to LIBOR with a strike price of 5.00% and
matures in 1999. The carrying value at December 31, 1998, was
$0.1 million.
ONB is exposed to losses if a counterparty fails to make its
payments under a contract in which ONB is in the receiving
position. Although collateral or other security is not obtained,
ONB minimizes its credit risk by monitoring the credit standing
of the couterparties and anticipates that the counterparties will
be able to fully satisfy their obligation under the agreements.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
LEASES
ONB rents certain premises and equipment under operating leases
which expire at various dates. Many of these leases require ONB
to pay 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
$3.9 million in 1998, $3.8 million in 1997, and $3.8 million in
1996.
Following is a summary of future minimum lease commitments ($ in
thousands):
1999 $3,133 2002 $2,144
2000 2,515 2003 1,679
2001 2,328 2004 and after 1,288
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 $1,007.0 million, including $576.9 million of
short-term commitments with fixed-rates, and letters of credit of
$35.7 million at December 31, 1998. These commitments are not
reflected in the consolidated financial statements. No material
losses are expected to result from these transactions.
LITIGATION
At December 31, 1998, various legal actions and proceedings were
pending against ONB and its affiliate banks. 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 13 - 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 noninterest
bearing and unavailable for investment purposes. The reserve
balances at December 31, 1998 and 1997, were $23.3 million and
$24.1 million, respectively.
RESTRICTIONS ON TRANSFERS FROM AFFILIATE BANKS
Regulations limit the amount of dividends an affiliate bank can
declare in any year without obtaining prior regulatory approval.
Such approval has been regularly provided as all affiliate banks
exceeded the regulatory definition of well-capitalized.
CAPITAL ADEQUACY
For additional information on capital adequacy see Table 16 in
Management's Discussion and Analysis on page 29.
45
NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS
The following are the condensed parent company only financial
statements of Old National Bancorp ($ in thousands)
<TABLE>
<CAPTION>
OLD NATIONAL BANCORP (PARENT COMPANY ONLY) CONDENSED BALANCE SHEET
- ----------------------------------------------------------------------------------------------------
December 31,
- ----------------------------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Deposits in affiliate banks $ 890 $ 427
Investment in affiliates:
Banks, including purchase accounting intangible assets of
$7,240 in 1998 and $7,927 in 1997 515,634 523,262
Non-banks 15,775 18,778
Advances to affiliates 8,777 76,888
Other assets 90,758 13,029
- ----------------------------------------------------------------------------------------------------
TOTAL ASSETS $631,834 $632,384
====================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings $ 7,250 $ 17,008
Other liabilities 11,741 9,466
Convertible subordinated debentures 21,963 30,407
Medium term notes 96,300 98,300
Shareholders' equity 494,580 477,203
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $631,834 $632,384
====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
OLD NATIONAL BANCORP (PARENT COMPANY ONLY) CONDENSED STATEMENT OF INCOME
- ----------------------------------------------------------------------------------------------------
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME
Dividends from affiliates $ 87,827 $ 82,746 $ 49,570
Other income 2,806 307 2,320
Other income from affiliates 11,066 12,631 5,918
- ----------------------------------------------------------------------------------------------------
TOTAL INCOME 101,699 95,684 57,808
- ----------------------------------------------------------------------------------------------------
EXPENSE
Interest on borrowings 9,653 10,283 7,014
Amortization of intangibles 687 686 707
Other expenses 13,435 10,187 9,378
- ----------------------------------------------------------------------------------------------------
TOTAL EXPENSE 23,775 21,156 17,099
- ----------------------------------------------------------------------------------------------------
Income before income taxes and equity in
undistributed earnings of affiliates 77,924 74,528 40,709
Income tax benefit (4,290) (3,415) (3,541)
- ----------------------------------------------------------------------------------------------------
Income before equity in
undistributed earnings of affiliates 82,214 77,943 44,250
Equity in undistributed earnings of affiliates (20,350) (17,283) 15,929
- ----------------------------------------------------------------------------------------------------
NET INCOME $61,864 $60,660 $60,179
====================================================================================================
</TABLE>
46
<TABLE>
<CAPTION>
OLD NATIONAL BANCORP (PARENT COMPANY ONLY)CONDENSED STATEMENT OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $61,864 $60,660 $60,179
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation 435 275 201
Amortization of intangible assets 687 686 707
(Increase) decrease in other assets (77,971) (4,635) 34,857
Increase (decrease) in other liabilities 2,275 3,452 (330)
Equity in undistributed earnings of affiliates 20,350 17,283 (15,929)
- ----------------------------------------------------------------------------------------------------
Total adjustments (54,224) 17,061 19,506
- ----------------------------------------------------------------------------------------------------
Net cash flows provided by operating activities 7,640 77,721 79,685
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net advances to affiliates 60,125 (30,295) (59,908)
Purchase of premises and equipment (193) (1,987) (283)
- ----------------------------------------------------------------------------------------------------
Net cash flows provided by (used in) investing activit 59,932 (32,282) (60,191)
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (payments on) proceeds from short-term borrowings (9,758) (50,198) 48,652
Net (payments on) proceeds from medium term notes (2,000) 54,300 (6,000)
Cash dividends paid (25,290) (24,240) (23,655)
Common stock repurchased (46,702) (36,134) (44,861)
Common stock reissued, net of shares used to
convert subordinated debentures 16,641 9,574 6,858
- ----------------------------------------------------------------------------------------------------
Net cash flows used in financing activities (67,109) (46,698) (19,006)
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 463 (1,259) 488
Cash and cash equivalents at beginning of period 427 1,686 1,198
- ----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 890 $ 427 $ 1,686
====================================================================================================
</TABLE>
NOTE 15 - SEGMENT INFORMATION
ONB's community banks have been aggregated into one reportable
segment: community banking. Our community banks provide a wide
range of financial services as discussed on page 12 and 13 of
Management's Discussion & Analysis. The accounting policies of the
segment are the same as those described in Note 1. Intersegment
sales and transfers are not significant.
Summarized financial information concerning ONB's segments is shown
in the following table, based on continuing operations. The other
column includes ONB's insignificant non-bank affiliates and
intercompany eliminations.
<TABLE>
<CAPTION>
($ in thousands)
- ----------------------------------------------------------------------------------------------------
Community
Banking Other Total
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
Net interest income $ 218,179 $(3,329) $ 214,850
Income tax expense(benefit) 33,029 (4,885) 28,144
Segment profit (loss) 78,080 (6,362) 71,718
Total assets 6,078,797 87,171 6,165,968
====================================================================================================
1997
Net interest income $ 216,452 $(7,777) $ 208,675
Income tax expense(benefit) 32,911 (5,235) 27,676
Segment profit (loss) 72,965 (7,300) 65,665
Total assets 5,613,049 75,166 5,688,215
====================================================================================================
1996
Net interest income $ 206,830 $(5,549) $ 201,281
Income tax expense(benefit) 30,183 (5,436) 24,747
Segment profit (loss) 67,972 (8,287) 59,685
Total assets 5,319,728 45,929 5,365,657
====================================================================================================
</TABLE>
47
ANNUAL MEETING
The Annual Meeting of Shareholders will be held Thursday, April 15, 1999,
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 1998, a 5% stock dividend was declared to
shareholders of record on January 7, 1999. There were 14,271 shareholders
of record as of December 31, 1998.
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.
Salomon Smith Barney
STOCK PURCHASE AND DISCOUNTED
DIVIDEND REINVESTMENT PLAN
The company offers a direct stock purchase and discounted dividend
reinvestment plan to all interested investors. For information
concerning this convenient method of purchasing shares of stock contact:
Shareholder Services Department
Old National Bancorp
Post Office Box 718
Evansville, Indiana 47705-0718
812-464-1296
ADDITIONAL INFORMATION
Shareholders and interested investors may obtain information about the
company upon written request or by calling:
John Claybon, CFA
Assistant Vice President-Investor Relations
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
1998
- --------------------------------------------------------------------------
First Quarter $45 15/32 $42 55/64 855,000 $ .22
Second Quarter 46 43/64 45 15/32 854,400 .22
Third Quarter 53 3/32 45 17/32 1,197,100 .22
Fourth Quarter 55 23/32 47 55/64 1,137,300 .22
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
1997
- --------------------------------------------------------------------------
First Quarter $34 15/64 $32 7/8 1,197,400 $ .21
Second Quarter 40 23/64 34 1/64 919,200 .21
Third Quarter 41 17/64 39 11/16 1,129,100 .21
Fourth Quarter 45 1/8 40 23/64 608,200 .21
- --------------------------------------------------------------------------
*Data adjusted for all stock dividends, including a 5% stock dividend to
shareholders of record on January 7, 1999, distributed on January 28, 1999.
53
EXHIBIT 21
OLD NATIONAL BANCORP
SUBSIDIARIES OF THE REGISTRANT
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
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)
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)
ONB Bloomington United States of America ONB Bloomington
(Bloomington, Indiana)
City National Bank United States of America City National Bank
(Fulton, Kentucky)
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)
ONB Finance Company Indiana ONB Finance
(Terre Haute, Indiana)
</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.
s/s Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Indianapolis, Indiana,
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM OLD NATIONAL
BANCORP'S DECEMBER 31, 1998 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-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 150,884
<INT-BEARING-DEPOSITS> 5,283
<FED-FUNDS-SOLD> 14,082
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,596,882
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 4,162,241
<ALLOWANCE> 49,437
<TOTAL-ASSETS> 6,165,968
<DEPOSITS> 4,443,472
<SHORT-TERM> 506,320
<LIABILITIES-OTHER> 91,728
<LONG-TERM> 629,868
0
0
<COMMON> 28,686
<OTHER-SE> 465,894
<TOTAL-LIABILITIES-AND-EQUITY> 6,165,968
<INTEREST-LOAN> 341,751
<INTEREST-INVEST> 95,252
<INTEREST-OTHER> 906
<INTEREST-TOTAL> 437,909
<INTEREST-DEPOSIT> 172,230
<INTEREST-EXPENSE> 223,059
<INTEREST-INCOME-NET> 214,850
<LOAN-LOSSES> 11,420
<SECURITIES-GAINS> 32
<EXPENSE-OTHER> 26,986
<INCOME-PRETAX> 99,862
<INCOME-PRE-EXTRAORDINARY> 71,718
<EXTRAORDINARY> (9,854)
<CHANGES> 0
<NET-INCOME> 61,864
<EPS-PRIMARY> 2.48
<EPS-DILUTED> 2.41
<YIELD-ACTUAL> 4.16
<LOANS-NON> 16,001
<LOANS-PAST> 3,925
<LOANS-TROUBLED> 2,480
<LOANS-PROBLEM> 102,506
<ALLOWANCE-OPEN> 46,233
<CHARGE-OFFS> 11,519
<RECOVERIES> 3,303
<ALLOWANCE-CLOSE> 49,437
<ALLOWANCE-DOMESTIC> 49,437
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
