UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File Number 0-10888
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OLD NATIONAL BANCORP
(Exact name of the Registrant as specified in its charter)
INDIANA 35-1539838
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
420 Main Street Evansville, Indiana 47708
(Address of principal executive offices) (Zip Code)
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(812) 464-1434
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value Preferred Stock Purchase Rights
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The Registrant has filed all reports required to be filed by Section 13 or 15
(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports)
and has been subject to such filing requirements for the past 90 days.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value (average bid price) of the Registrant's voting common
stock held by non-affiliates of the Registrant as of January 31, 2000, was
approximately $1,271 million. The total number of shares of Registrant's common
stock outstanding as of that date was 46,851,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held April 20, 2000, is incorporated by reference into Part
III of this Form 10-K.
<PAGE>
OLD NATIONAL BANCORP
1999 ANNUAL REPORT ON FORM 10-K
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Table of Contents
PART I PAGE
Item 1. Business 3
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
PART II
Item 5. Market for The Registrant's Common Stock and Related
Stockholder Matters 6
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 8
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 44
PART III
Item 10. Directors and Executive Officers of the Registrant 45
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial Owners and Management 45
Item 13. Certain Relationships and Related Transactions 45
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 45
SIGNATURES 46
INDEX OF EXHIBITS 47
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OLD NATIONAL BANCORP
1999 ANNUAL REPORT ON FORM 10-K
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PART I
Item 1. BUSINESS
Old National Bancorp (the "Registrant") is a bank holding company
incorporated in the State of Indiana and maintains its principal executive
office in Evansville, Indiana. Through its nonbank affiliates, the Registrant
provides services incidental to the business of banking. Since its formation,
the Registrant has acquired seventeen banks and two thrifts located in Indiana;
six banks and one thrift located in Kentucky; and eleven banks and one thrift
located in Illinois. As of December 31,1999, the registrant employed 2,451
full-time equivalent employees. For further discussion of the business of the
registrant see management's discussion and analysis in Part II, Item 7.
Banking Affiliates
As of December 31, 1999, the Registrant's affiliate banks operated 119
banking offices throughout Indiana, Illinois, and Kentucky.
The Registrant's affiliate banks are engaged in a wide range of commercial
and consumer banking activities, including accepting demand, savings, and time
deposits; making commercial, consumer, and real estate loans; money management
services; and providing other services relating to the general banking business.
Certain of the Registrant's affiliated entities also offer electronic data
processing, brokerage, and correspondent banking services; issue credit cards;
originate, market, and service mortgage loans; and rent safe deposit facilities.
Nonbank Affiliates
Indiana Old National Insurance Company reinsures credit life, accident, and
health insurance. Fiduciary and trust services are offered through three trust
companies in Indiana, Kentucky, and Illinois. Old National Realty owns certain
properties in Evansville, Indiana, leased by affiliates. Various subsidiaries of
an affiliate bank sell insurance products including property and casualty, life,
and disability.
Supervision and Regulation
The Registrant is registered as a bank holding company and is subject to
the supervision of, and regulation by, the Board of Governors of the Federal
Reserve System ("Federal Reserve") under the Bank Holding Company Act of 1956,
as amended ("BHC Act"). The Federal Reserve has issued regulations under the BHC
Act requiring a bank holding company to serve as a source of financial and
managerial strength to its subsidiary banks. It is the policy of the Federal
Reserve that, pursuant to this requirement, a bank holding company should stand
ready to use its resources to provide adequate capital funds to its subsidiary
banks during periods of financial stress or adversity.
The BHC Act requires the prior approval of the Federal Reserve to acquire
more than a 5% voting interest of any bank or bank holding company.
Additionally, the BHC Act restricts the Registrant's nonbanking activities to
those which are determined by the Federal Reserve to be closely related to
banking and a proper incident thereto.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), a bank holding company is required to guarantee the compliance of
any insured depository institution subsidiary that may become "undercapitalized"
(as defined in FDICIA) with the terms of any capital restoration plan filed by
such subsidiary with its appropriate federal bank regulatory agency.
Bank holding companies are required to comply with the Federal Reserve's
risk-based capital guidelines. The Federal Deposit Insurance Corporation
("FDIC") and the Office of the Comptroller of the Currency ("OCC") have adopted
risk-based capital ratio guidelines to which depository institutions under their
respective supervision are subject. The guidelines establish a systematic
analytical framework that makes regulatory capital requirements more sensitive
to differences in risk profiles among banking organizations. Risk-based capital
ratios are determined by allocating assets and specified off-balance sheet
commitments to four risk weighted categories, with higher levels of capital
being required for the categories perceived as representing greater risk. All of
the Registrant's affiliate banks exceeded the risk-based capital requirements of
the FDIC and OCC as of December 31, 1999. For the Registrant's regulatory
capital ratios and regulatory requirements as of December 31, 1999, see the
information in Part II, Item 7.
3
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The Registrant's affiliate banks are subject to the provisions of the
National Bank Act or the banking laws of their respective states of charter, are
supervised, regulated, and examined by the OCC or their respective state banking
agency, and are subject to the rules and regulations of the OCC, Federal
Reserve, and the FDIC.
A substantial portion of the Registrant's cash revenue is derived from
dividends paid to it by its affiliate banks. These dividends are subject to
various legal and regulatory restrictions as summarized in Note 13 of the
financial statements referenced in Item 8.
Both federal and state law extensively regulates various aspects of the
banking business, such as reserve requirements, truth-in-lending and
truth-in-savings disclosures, equal credit opportunity, fair credit reporting,
trading in securities, and other aspects of banking operations.
Insured state-chartered banks are prohibited under FDICIA from engaging as
principal in activities that are not permitted for national banks, unless (i)
the FDIC determines that the activity would pose no significant risk to the
appropriate deposit insurance fund, and (ii) the bank is, and continues to be,
in compliance with all applicable capital standards.
Branching by the Registrant's affiliate banks in Indiana, Kentucky, and
Illinois is subject to the jurisdiction and requires notice to or the prior
approval of the bank's primary federal regulatory authority and, if the
branching bank is a state bank, the respective state's banking agency.
The Registrant and its affiliate banks are subject to the Federal Reserve
Act, which restricts financial transactions between banks and affiliated
companies. The statute limits credit transactions between banks and affiliated
companies. The statute limits credit transactions between a bank and its
executive officers and its affiliates, prescribes terms and conditions for bank
affiliate transactions deemed to be consistent with safe and sound banking
practices, and restricts the types of collateral security permitted in
connection with a bank's extension of credit to an affiliate.
FDICIA accomplished a number of sweeping changes in the regulation of
depository institutions, including the Registrant's affiliate banks. FDICIA
requires, among other things, federal bank regulatory authorities to take
"prompt corrective action" with respect to banks which do not meet minimum
capital requirements. FDICIA further directs that each federal banking agency
prescribe standards for depository institutions and depository institution
holding companies relating to internal controls, information systems, internal
audit systems, loan documentation, credit underwriting, interest rate exposure,
asset growth, management compensation, a maximum ratio of classified assets to
capital, minimum earnings sufficient to absorb losses, a minimum ratio of market
value to book value of publicity traded shares, and such other standards as the
agency deems appropriate.
The deposits of Registrant's affiliate banks are insured up to $100,000 per
insured account by the Bank Insurance Fund ("BIF"), which is administered by the
FDIC, except for deposits acquired in connection with affiliations with savings
associations, which deposits are insured by the Savings Association Insurance
Fund ("SAIF"). Accordingly, the Registrant's affiliated banks pay deposit
insurance premiums to both BIF and SAIF.
The Riegle-Neal Community Development and Regulatory Improvement Act of
1994 ("Act") contains seven titles pertaining to community development and home
ownership protection, small business capital formation, paperwork reduction and
regulatory improvement, money laundering, and flood insurance. The applicable
federal supervisory agencies continue to promulgate regulations implementing the
Act which apply to Registrant's affiliate banks.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
allows for interstate banking and interstate branching without regard to whether
such activity is permissible under state law. Bank holding companies may now
acquire banks anywhere in the United States subject to certain state
restrictions.
On November 12, 1999, the President signed into law comprehensive
legislation that modernizes the financial services industry for the first time
in decades. The legislation permits bank holding companies to conduct
essentially unlimited securities and insurance activities, in addition to other
activities determined by the Federal Reserve to be related to financial
services. As a result, the Registrant would be able to underwrite and sell
securities and insurance. It would also be able to acquire, or be acquired by,
brokerage firms and insurance underwriters. The Registrant has not had an
opportunity to assess the impact of the legislation on its operations but at the
present time does not anticipate significant changes in its products or
services.
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In addition to the matters discussed above, the Registrant's affiliate
banks are subject to additional regulation of their activities, including a
variety of consumer protection regulations affecting their lending, deposit, and
collection activities and regulations affecting secondary mortgage market
activities. The earnings of financial institutions are also affected by general
economic conditions and prevailing interest rates, both domestic and foreign,
and by the monetary and fiscal policies of the United States government and its
various agencies, particularly the Federal Reserve.
Additional legislative and administrative actions affecting the banking
industry may be considered by the United States Congress, state legislatures,
and various regulatory agencies, including those referred to above. It cannot be
predicted with certainty whether such legislative or administrative action will
be enacted or the extent to which the banking industry in general or the
Registrant and its affiliate banks in particular would be affected.
Item 2. PROPERTIES
The principal office of the Registrant is located in leased space in the
multi-story Old National Bank Building located at 420 Main Street, Evansville,
Indiana. The building is owned by a non-affiliated third party.
The Registrant's affiliate banks conduct business primarily from facilities
owned by the respective affiliate banks. Of the 119 banking offices operated by
the Registrant's affiliate banks, 97 are owned by the respective banks and 22
are leased from non-affiliated third parties.
Old National Realty Company, Inc., a wholly-owned non-banking subsidiary of
the Registrant, owns certain real properties in downtown Evansville, Indiana,
which generally are incidental to the Registrant's banking operations. It does
not engage in real estate brokerage services.
Item 3. LEGAL PROCEEDINGS
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Registrant
during the fourth quarter of 1999.
5
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PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Annual Meeting
The Annual Meeting of Shareholders will be held Thursday, April 20, 2000,
at 10:30 a.m. Central Daylight Time, at The Centre, 715 Locust Street,
Evansville, Indiana.
Corporate Office
420 Main Street
Evansville, Indiana 47708
812-464-1434
Website: www.oldnational.com
Stock Information
The stock of the company is traded over-the-counter on the NASDAQ National
Market System under Ticker Symbol OLDB. The Stock Transfer Agent is:
Old National Bancorp
Post Office Box 929
Evansville, Indiana 47706-0929
In December 1999, a 5% stock dividend was declared to shareholders of
record on January 7, 2000. There were 14,478 shareholders of record as of
December 31, 1999.
Market Makers
The following firms make a market in Old National Bancorp's stock:
ABN AMRO
Bear, Stearns
Credit Suisse First Boston Corporation
Hilliard, Lyons Keefe,
Bruyette & Woods, Inc.
McDonald & Company Sec., Inc.
NatCity Investments, Inc.
Salomon, Smith Barney
Stock Purchase and Discounted Dividend Reinvestment Plan
The company offers a direct stock purchase and discounted dividend
reinvestment plan to all interested investors. For information concerning this
convenient method of purchasing shares of stock contact:
Shareholder Services Department
Old National Bancorp
Post Office Box 929
Evansville, Indiana 47706-0929
812-464-1296
Additional Information
Shareholders and interested investors may obtain information about the
company upon written request or by calling:
John C. Claybon, CFA
Assistant Vice President - Investor Relations
Old National Bancorp
Post Office Box 718
Evansville, Indiana 47705-0718
812-464-1442
Equal Opportunity Employer
The company maintains its commitment to equal opportunity and affirmative
action in employment and promotion policies and pledges to recruit, hire, train,
and promote persons in all job classifications without regard to race, color,
religion, sex, age, or handicap.
The table below lists the NASDAQ price quotes, share volume and dividend data
for Old National Bancorp stock over the last two years.*
Price Per Share
-------------------- Share Dividend
High Low Volume Declared
- ------------------------------------------------------------
1999
- ------------------------------------------------------------
First Quarter $35 5/64 $28 13/32 2,067,800 $ .15
Second Quarter 34 39/64 28 37/64 2,746,400 .16
Third Quarter 30 27/64 25 53/64 5,423,700 .16
Fourth Quarter 32 9/64 27 7/16 3,219,900 .16
- ------------------------------------------------------------
- ------------------------------------------------------------
1998
- ------------------------------------------------------------
First Quarter $28 7/8 $27 13/64 1,346,700 $ .14
Second Quarter 29 3/4 28 51/64 1,345,700 .14
Third Quarter 33 23/32 28 7/8 1,885,400 .14
Fourth Quarter 36 23/64 30 25/64 1,791,300 .14
- ------------------------------------------------------------
* Data adjusted for all stock dividends, including a 5% stock dividend paid to
shareholders on January 28, 2000.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
($ in thousands except per share data)
<TABLE>
<CAPTION>
Five
Year
Growth
1999 1998 1997 1996 1995 1994 Rate
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
(Taxable equivalent basis)
Interest income $ 505,761 $ 470,921 $ 448,895 $ 419,585 $ 402,793 $ 353,983
Interest expense 250,536 231,613 216,873 196,298 191,835 149,809
- ------------------------------------------------------------------------------------------------------------------
Net interest income 255,225 239,308 232,022 223,287 210,958 204,174 4.6%
Provision for loan losses 11,489 12,160 13,562 11,082 7,491 7,886 7.8
- ------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 243,736 227,148 218,460 212,205 203,467 196,288 4.4
Noninterest income 67,508 58,443 51,104 48,680 42,044 36,680 13.0
Noninterest expense 185,564 167,496 158,644 158,091 153,345 152,093 4.0
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes 125,680 118,095 110,920 102,794 92,166 80,875 9.2
Income taxes 42,986 43,960 42,837 40,107 35,222 29,550 7.8
- ------------------------------------------------------------------------------------------------------------------
Net income from
continuing operations 82,694 74,135 68,083 62,687 56,944 51,325 10.0
Discontinued operations 4,101 (9,854) (5,005) 494 0 0 N/M
- ------------------------------------------------------------------------------------------------------------------
Net Income $ 86,795 $ 64,281 $ 63,078 $ 63,181 $ 56,944 $ 51,325 11.1%
==================================================================================================================
YEAR-END BALANCES
Total assets $6,982,932 $6,416,611 $5,933,321 $5,602,460 $5,281,387 $5,081,088 6.6%
Loans, net of unearned income 4,837,934 4,354,305 3,915,901 3,627,662 3,375,915 3,205,097 8.6
Deposits 5,071,298 4,668,858 4,521,010 4,479,357 4,336,406 4,028,932 4.7
Shareholders' equity 492,744 519,645 500,609 480,405 481,511 457,971 1.5
PER SHARE DATA
(on continuing operations) (1)
Net income-basic $ 1.72 $ 1.54 $ 1.40 $ 1.25 $ 1.10 $ 0.97 12.1
Net income-diluted (2) 1.67 1.49 1.36 1.22 1.07 0.95 11.9
Cash dividends paid 0.63 0.56 0.53 0.50 0.48 0.46 6.5
Book value at year-end 10.42 10.86 10.38 9.77 9.43 8.72 3.6
SELECTED PERFORMANCE
RATIOS (on continuing operations)
Return on assets 1.22% 1.21% 1.19% 1.17% 1.11% 1.04%
Return on equity (3) 15.70 14.95 14.28 13.23 12.20 11.07
Equity to assets 7.75 8.38 8.46 8.95 9.02 9.36
Dividend payout 36.95 35.15 36.74 40.37 43.69 47.18
Primary capital to assets 8.57 9.22 9.27 9.77 9.88 10.26
Net charge-offs to average loans 0.16 0.23 0.21 0.30 0.25 0.27
Allowance for loan losses
to average loans 1.23 1.26 1.31 1.25 1.30 1.44
==================================================================================================================
</TABLE>
(1) Restated for all stock dividends, including a 5% stock dividend paid to
shareholders on January 28, 2000.
(2) Assumes the conversion of subordinated debentures.
(3) Excludes unrealized gains (losses) on investment securities.
N/M = Not meaningful
7
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Introduction
Old National Bancorp ("Old National") is a bank holding company
headquartered in Evansville, Indiana. Located in Indiana, Illinois, and
Kentucky, its 119 community banking locations serve customers in both urban and
rural markets. These community banking centers provide a wide range of financial
services, such as making commercial and consumer loans; originating and
servicing mortgage loans; issuing and servicing credit cards; leasing; offering
various deposit products; issuing letters of credit; issuing credit life,
accident, and health insurance; providing safe deposit facilities; and providing
alternative investments and brokerage services.
Old National's nonbank affiliates provide additional financial or support
services incidental to Old National's operations, including issuance and
reinsurance of credit life, accident, health, life, property, and casualty
insurance; investment services; fiduciary and trust services; and property
ownership.
Financial Basis
The following discussion is an analysis of Old National's operating results
for the years 1997 through 1999 and financial condition as of December 31, 1999
and 1998, and will assist readers of the accompanying consolidated financial
statements and related notes beginning on page 25. Management's forward-looking
statements are intended to benefit the reader but are subject to various risks
and uncertainties which may cause actual results to differ materially, including
but not limited to: (1) economic conditions generally and in the market areas of
the company; (2) increased competition in the financial services industry; (3)
actions by the Federal Reserve Board and changes in interest rates; and (4)
governmental legislation and regulation.
The financial information has been restated to reflect mergers accounted
for as pooling-of-interests as if they had occurred at the beginning of the
first year presented. Purchases have been included in reported results from the
date of the transaction.
During 1998, Old National sold the operations and related auto loans of its
consumer finance subsidiary headquartered in Indianapolis. The sale and the
operations prior to the sale resulted in a $9.9 million loss on discontinued
operations, net of tax, in 1998. In 1999 certain contingencies related to this
sale were successfully resolved and resulted in a $4.1 million gain on
discontinued operations. The financial results of the discontinued operations in
prior periods are similarly broken out from Old National's continuing
operations. The net assets of the subsidiary are included in other assets on the
consolidated balance sheet for periods prior to the sale. The following
discussion and analysis of Old National's financial condition and results of
operations relate to its continuing operations. For further details regarding
the discontinued operations, see the consolidated financial statements and Note
2.
Tax-exempt interest income in the following information has been increased
to an amount comparable to interest subject to income taxes using the federal
statutory rate in effect of 35% for all periods. An offsetting increase of the
same amount is made in the income tax section of the Selected Financial Data.
Net income is unaffected by these taxable equivalent adjustments.
Competition and Economic Conditions
The banking industry and related financial service providers are highly
competitive. Old National competes not only against other local and regional
banking institutions, thrifts, finance companies, and credit unions, but also
money market mutual funds, investment brokers, and insurance companies. This
competition takes place in terms of interest rates on loans and deposits,
convenient locations and hours, types of services, and quality of service. In
most of its markets, Old National ranks first or second in volume of loans and
deposits.
The economy in the United States and the Midwest has continued their
relatively low inflation and unemployment and steady growth. While there have
been some conflicting signs of weakness in certain sectors of the economy, Old
National's major markets have generally demonstrated economic expansion and a
growing financial base with additions such as the new and expanding Toyota and
AK Steel manufacturing complexes.
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Short-and long-term interest rates increased during the second half of
1999, reversing the declines of 1998. The Federal funds rate target established
by the Federal Reserve Open Market Committee was increased from 4.75% in June of
1999 to 5.5% by December 1999. The national prime lending rate moved in tandem
with the Federal funds target rate, increasing from 7.75% to 8.5% during 1999.
Long-term U.S. Treasury rates increased throughout 1999. The 30 year U.S.
Treasury bond yield finished the year at 6.60%, approximately 150 basis points
higher than in January 1999. The yield curve, as measured by the difference
between rates on 6 month U.S. Treasury bills and 30 year Treasury bonds,
steepened during 1999 from a fairly flat curve in 1998, reflecting continuing
concern within the financial markets that interest rates would increase further.
During 1997, the fixed-income market began requiring from corporate
customers higher spreads to U.S. Treasury rates. In 1997 and 1998, declining
rates muted some of this impact on the banking industry's and Old National's
cost of funds. With the rising rate environment in 1999, this additional spread
put pressure on the marginal cost of funds. This trend combined with competitive
issues on loan pricing continued to compress net interest margin in 1999 within
the banking industry and at Old National.
Merger and Consolidation Activity
During 1999, Old National merged with Southern Bancshares Ltd.
("Southern"), Carbondale, Illinois, and Dulaney Bancorp, Inc. ("Dulaney"),
Marshall, Illinois. As of December 31, 1998, Southern had total assets of $255
million, and Dulaney's total assets were $39 million. Both mergers were
consummated in the first quarter of 1999 and accounted for as
pooling-of-interests. These financial statements have been restated to reflect
the Southern merger. The Dulaney merger was not considered material.
In 1999 Old National announced merger agreements with ANB Corporation
("ANB"), Muncie, Indiana, Heritage Financial Services, Inc. ("Heritage"),
Clarksville, Tennessee, and Permanent Bancorp, Inc. ("Permanent"), Evansville,
Indiana. As of December 31, 1999, total assets for these entities were $880
million for ANB, $246 million for Heritage, and $497 million for Permanent. ANB
and Heritage mergers are anticipated to close in the first quarter of 2000 and
will be accounted for as pooling-of-interests. The Permanent transaction is
expected to close in the third quarter of 2000 and will be accounted for as a
purchase. These mergers are subject to shareholder and regulatory approvals.
In 1999 Old National implemented its charter consolidation project named
One Bank. In the third and fourth quarters Old National consolidated its banking
charters down to three banks with the ultimate plan to have one banking charter.
The goals of One Bank included a single brand image, common products offered
throughout the banking locations, and improved back-office efficiency.
Year 2000
Old National and its computer systems and software successfully made the
transition into the year 2000. The media devoted much coverage to the Year 2000
("Y2K") issue, also know as the "Millennium Bug." This refers to the possibility
that some computers may be unable to recognize the date change at the turn of
the century. With the high volume of transactions and electronic data, the
banking industry requires extensive computer capabilities to service its
customers. The change to the new year did not create any significant problems at
Old National or with its major customers.
RESULTS OF OPERATIONS
Net Income
Old National's earnings rose 11.5% to reach $82.7 million in 1999, an $8.6
million increase, despite nearly $2.0 million of charter consolidation expenses,
net of security gains and taxes. Shareholders' basic income per share for 1999
was $1.72, up 11.7% over 1998, and diluted earnings per share totaled $1.67, a
12.1% increase over 1998. Strong revenue growth (tax equivalized net interest
income plus noninterest income) of $25.0 million, an 8.4% increase, generated
the earnings growth in 1999. The specific effects of each of these factors are
discussed in the following paragraphs.
Old National's 1998 net income was $74.1 million, up $6.0 million above
1997 earnings. Revenue growth of $14.6 million combined with reduced provision
for loan loss created the 8.9% increase in earnings.
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Net Interest Income
As a financial intermediary, Old National pays interest on deposits and
other liabilities and receives interest and fee income on earning assets, such
as loans and investments. The difference between the income earned and the
interest paid is net interest income which provides nearly 80% of Old National's
revenues. Net interest margin is net interest income, on a taxable equivalent
basis, expressed as a percentage of average earning assets. Incorporating the
tax savings on certain assets permits effective yield comparability.
The net interest margin is influenced by a number of factors, such as the
volume and mix of earning assets and funding sources, the interest rate
environment, income tax rates, and the level of earning assets funded by
interest-free funding sources (primarily noninterest-bearing demand deposits and
equity capital). Old National can influence the effect of these factors through
its management of credit extension and interest rate sensitivity, both of which
are discussed in detail later in this report. External factors, such as the
overall condition of the economy, credit demand strength, Federal Reserve Board
monetary policy, and changes in tax laws, can also have significant effects on
changes in net interest income from one period to another.
On a taxable equivalent basis, net interest income grew 6.7%, a $15.9
million increase over 1998. Average earning assets grew 11.3% or $649.2 million
during 1999. Nonearning assets rose $7.7 million, in part due to increased cash
in late 1999 as a precaution for Y2K. Included in other assets is cash surrender
value of bank owned life insurance ("BOLI") discussed in the Noninterest Income
section of this report. Much of the asset growth was funded by interest-bearing
liabilities which increased $607.8 million or 12.0%. Noninterest-bearing
deposits increased $29.8 million or 6.0%, and other liabilities and equity
provided an additional $14.8 million of funding.
Several factors combined to lower Old National's net interest margin to
4.00%. Earning asset yield declined 29 basis points to 7.92%. The full year
impact of declining interest rates in 1998 and competitive market pressures
resulted in a 43 basis point decrease in loan yields, despite the Federal
Reserve Bank raising interest rates throughout the last half of 1999. Loans,
however, comprised a higher percentage of assets, increasing to 72.6% of earning
assets and 68.3% of total assets. The cost of interest-bearing liabilities
declined 16 basis points to 4.44%. Growth in higher-rate certificate of deposits
and borrowings contributed to the net interest margin compression, particularly
during the last half of 1999.
In 1998 net interest income grew 3.1% or $7.3 million and totaled $239.3
million. Average earning assets grew 6.6%, a $355.5 million increase.
Interest-bearing liabilities rose $340.6 million or 7.2%. The yield on earning
assets declined 13 basis points as all asset categories experienced similar
declines. The cost of interest-bearing liabilities decreased 2 basis points due
to growth in the higher-rate liabilities. Net interest margin declined from
4.31% to 4.17% due to these trends. Additionally, approximately 7 basis points
of the decrease was due to the purchase of BOLI which generates tax-free
noninterest income that is not included in net interest income.
Table 1 on page 11 details the changes in the components of net interest
income. Table 2 on page 11 attributes those fluctuations to the impact of
changes in the average balances of assets and liabilities and the yields earned
or rates paid. Table 3 on page 12 presents a three year average balance sheet
and for each major asset and liability category, its related interest income and
yield or its expense and rate.
10
<PAGE>
Net Interest Income Changes (Table 1)
(Taxable equivalent basis, $ in thousands)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
% Change From
Prior Year
--------------
1999 1998 1997 1999 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans $387,508 $360,493 $334,204 7.5% 7.9%
Investment securities 117,117 109,209 113,776 7.2 (4.0)
Money market investments 1,136 1,219 915 (6.8) 33.2
- ----------------------------------------------------------------------------------------
Total interest income 505,761 470,921 448,895 7.4 4.9
- ----------------------------------------------------------------------------------------
INTEREST EXPENSE:
NOW deposits 9,220 10,125 11,182 (8.9) (9.5)
Savings deposits 10,420 10,855 11,983 (4.0) (9.4)
Money market deposits 22,498 23,783 24,893 (5.4) (4.5)
Certificates of deposit $100,000 and over 20,345 23,417 19,927 (13.1) 17.5
Other time deposits 120,126 112,543 108,805 6.7 3.4
Short-term borrowings 28,237 18,879 20,379 49.6 (7.4)
Other borrowings 39,690 32,011 19,704 24.0 62.5
- ----------------------------------------------------------------------------------------
Total interest expense 250,536 231,613 216,873 8.2 6.8
- ----------------------------------------------------------------------------------------
NET INTEREST INCOME $255,225 $239,308 $232,022 6.7% 3.1%
========================================================================================
NET INTEREST MARGIN 4.00% 4.17% 4.31%
============================================================================
</TABLE>
Net Interest Income--Rate/Volume Analysis (Table 2)
(Taxable equivalent basis, $ in thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
- --------------------------------------------------------------------------------------------------------
Attributed to Attributed to
Total ------------------ Total -----------------
Change Volume Rate Change Volume Rate
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans $27,015 $45,926 $(18,911) $26,289 $31,719 $(5,430)
Investment securities 7,908 7,869 39 (4,567) (647) (3,920)
Money market investments (83) (144) 61 304 382 (78)
- --------------------------------------------------------------------------------------------------------
Total interest income 34,840 53,651 (18,811) 22,026 31,454 (9,428)
- --------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
NOW deposits (905) 526 (1,431) (1,057) 21 (1,078)
Savings deposits (435) 611 (1,046) (1,128) (434) (694)
Money market deposits (1,285) (31) (1,254) (1,110) (48) (1,062)
Certificates of deposit $100,000 and over (3,072) (1,153) (1,919) 3,490 3,962 (472)
Other time deposits 7,583 12,583 (5,000) 3,738 3,608 130
Short-term borrowings 9,358 8,186 1,172 (1,500) (408) (1,092)
Other borrowings 7,679 9,554 (1,875) 12,307 14,120 (1,813)
- --------------------------------------------------------------------------------------------------------
Total interest expense 18,923 30,276 (11,353) 14,740 20,821 (6,081)
- --------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $15,917 $23,375 $ (7,458) $ 7,286 $10,633 $(3,347)
========================================================================================================
</TABLE>
The variance not solely due to rate or volume is allocated equally between the
rate and volume variances.
11
<PAGE>
Three Year Average Balance Sheet and Net Interest Analysis (Table 3)
(Tax equivalent basis, $ in thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
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 $ 20,571 $ 1,136 5.52% $ 23,257 $ 1,219 5.24% $ 16,245 $ 915 5.63%
Investment securities:
U.S. Treasury and
Government agencies (1) 1,157,028 74,772 6.46 1,094,709 70,418 6.43 1,124,725 74,923 6.66
State and political subdivisions 513,785 38,248 7.44 467,562 35,236 7.54 454,544 35,821 7.88
Other securities 60,725 4,097 6.75 52,910 3,555 6.72 45,300 3,032 6.69
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities 1,731,538 117,117 6.76 1,615,181 109,209 6.76 1,624,569 113,776 7.00
- -----------------------------------------------------------------------------------------------------------------------------------
Loans: (2) (3)
Commercial 1,121,242 96,915 8.64 976,248 88,339 9.05 852,652 80,067 9.39
Commercial real estate 1,032,784 87,124 8.44 831,015 73,959 8.90 705,889 62,869 8.91
Residential real estate 1,762,102 134,661 7.64 1,584,180 127,824 8.07 1,440,237 118,195 8.21
Consumer, net of
unearned income 691,665 64,466 9.32 680,291 65,947 9.69 714,410 68,314 9.56
Credit card 27,769 4,342 15.64 28,303 4,424 15.63 28,932 4,759 16.45
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans 4,635,562 387,508 8.36 4,100,037 360,493 8.79 3,742,120 334,204 8.93
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 6,387,671 $505,761 7.92% 5,738,475 $470,921 8.21% 5,382,934 $448,895 8.34%
Less: Allowance for loan losses (56,111) ================ (51,482) ================ (46,284) ================
NON-EARNING ASSETS:
Cash and due from banks 142,334 132,484 131,857
Other assets 312,084 314,195 266,256
---------- ---------- ----------
TOTAL ASSETS $6,785,978 $6,133,672 $5,734,763
========== ========== ==========
INTEREST-BEARING
LIABILITIES:
NOW deposits $ 697,477 $ 9,220 1.32% $ 660,609 $ 10,125 1.53% $ 659,308 $ 11,182 1.70%
Savings deposits 441,679 10,420 2.36 417,050 10,855 2.60 433,211 11,983 2.77
Money market deposits 580,707 22,498 3.87 581,480 23,783 4.09 582,607 24,893 4.27
Certificates of deposit
$100,000 and over 388,252 20,345 5.24 409,282 23,417 5.72 340,787 19,927 5.85
Other time deposits 2,255,739 120,126 5.33 2,024,513 112,543 5.56 1,959,560 108,805 5.55
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-
bearing deposits 4,363,854 182,609 4.18 4,092,934 180,723 4.42 3,975,473 176,790 4.45
Short-term borrowings 573,080 28,237 4.93 402,796 18,879 4.69 411,233 20,379 4.96
Other borrowings 710,383 39,690 5.59 543,830 32,011 5.89 312,270 19,704 6.31
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $5,647,317 $250,536 4.44% $5,039,560 $231,613 4.60% $4,698,976 $216,873 4.62%
NONINTEREST-BEARING ================ ================ ================
LIABILITIES:
Demand deposits 522,219 492,435 475,868
Other liabilities 90,827 87,648 74,795
Shareholders' equity 525,615 514,029 485,124
---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $6,785,978 $6,133,672 $5,734,763
========== ========== ==========
INTEREST MARGIN RECAP:
Interest income/earning assets $505,761 7.92% $470,921 8.21% $448,895 8.34%
Interest expense/earning assets 250,536 3.92 231,613 4.04 216,873 4.03
---------------- ---------------- ----------------
Net interest margin $255,225 4.00% $239,308 4.17% $232,022 4.31%
================ ================ ================
</TABLE>
(1) Includes Government agency mortgage-backed securities.
(2) Includes principal balances of nonaccrual loans. Interest income relating
to nonaccrual loans is included only if received.
(3) The amount of loan fees is not material in any of the years presented.
12
<PAGE>
Asset/Liability Management--Interest Rate Sensitivity and Liquidity
Customer preferences for loans and deposits generate certain levels of
interest rate risk, which is the impact changing interest rates have on net
interest income. Asset/liability management's goal is to maximize and maintain
adequate growth of net interest income within certain interest rate sensitivity
and liquidity guidelines established by Old National's Balance Sheet Management
Committee. This committee, comprised of Old National senior managers, monitors
asset/liability issues and guidelines.
Old National uses both static gap and income simulation methods to measure
the impact of interest rate changes on its net interest income. Static gap,
measured at a point in time, measures interest rate risk as the difference
between interest rate-sensitive assets and interest rate-sensitive liabilities
within a given repricing period and is expressed as a ratio and as a dollar
amount known as the "gap." A ratio of 100% suggests a balanced position between
rate-sensitive assets and liabilities within a given repricing period. While the
measurement process and related assessment of risk are somewhat imprecise, Old
National believes its asset/liability management program allows adequate
reaction time for trends in the market place as they occur, thereby minimizing
the potential negative effect of its gap position against the event of interest
rate changes.
Table 4 below reflects Old National's interest rate sensitivity position
within specified time periods and cumulatively over various time horizons. In
the table, assets and liabilities are placed in categories based on their actual
or expected repricing date. In the 365 day cumulative time frame, the assets to
liabilities ratio was 63%, down from 83% in 1998. Asset growth was primarily in
time horizons greater than one year while liability growth was slightly more in
periods under one year.
Net interest income simulation modeling is used to better quantify the
impact of potential interest rate fluctuations on net interest income. With this
understanding, management can best determine possible balance sheet changes,
pricing strategies, and appropriate levels of capital and liquidity which allow
Old National to generate strong net interest income while controlling and
monitoring interest rate risk. Old National simulates both an immediate interest
rate shock up and down 200 basis points and a gradual change in rates of 200
basis points up or down over 12 months and sustained for additional 12 months.
Key model assumptions include asset prepayment speeds; changes in market
conditions, loan volumes, and pricing; deposit sensitivity; and customer
preferences and are inherently uncertain. The model cannot precisely estimate
net interest income or the impact of interest rate changes. Actual results will
differ from the simulated results due to timing, magnitude, and frequency of
interest rate changes, changes in market conditions, management strategies,
among other factors. Old National's policy limit using the gradual rate change
for the maximum negative impact on net interest income over 12 months is 10%. At
December 31, 1999, Old National was well within that limit as the model's
fluctuation was 2% for the first 12 months and less than 5% for the total 24
month period.
Analysis of Interest Rate Sensitivity at December 31, 1999 (Table 4)
($ in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
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 $ 16,431 $ -- $ -- $ -- $ 16,431
Investment securities 79,309 51,743 362,057 1,185,542 1,678,651
Loans, net of unearned income 1,390,933 501,693 1,677,980 1,267,328 4,837,934
- ------------------------------------------------------------------------------------------------------------
Total rate sensitive assets $1,486,673 $ 553,436 $2,040,037 $2,452,870 $6,533,016
- -------------------------------------------------------------------------------------------------===========
RATE-SENSITIVE LIABILITIES:
Deposits 1,632,556 525,310 973,089 1,394,917 4,525,872
Other borrowed funds 1,034,278 43,244 222,423 36,958 1,336,903
- ------------------------------------------------------------------------------------------------------------
Total rate-sensitive liabilities $2,666,834 $ 568,554 $1,195,512 $1,431,875 $5,862,775
- -------------------------------------------------------------------------------------------------===========
Interest sensitivity gap per period (1,180,161) (15,118) 844,525 1,020,995
=================================================================================================
Cumulative gap $(1,180,161) $(1,195,279) $ (350,754) $ 670,241
Cumulative ratio at December 31, 1999 (1) 56% 63% 92% 111%
Cumulative ratio at December 31, 1998 (1) 78% 83% 116% 114%
=================================================================================================
</TABLE>
(1) Rate-sensitive assets/rate-sensitive liabilities.
13
<PAGE>
Liquidity Management
In addition to the interest rate sensitivity the Balance Sheet Management
Committee monitors the company's liquidity position. The objective is to ensure
the ability to meet cash flow needs of customers, such as new loan demand and
deposit withdrawals, while at the same time maximizing lending and investment
opportunities.
Failure to properly manage liquidity requirements may result in the need to
satisfy customer withdrawals and other obligations with expensive funding
sources. Too much liquidity on the balance sheet is similarly undesirable as
earnings will suffer due to underutilized resources. Old National's banking
operations maintain adequate liquidity with sufficient levels of liquid assets,
unpledged securities, deposit growth, and other alternative funding sources,
such as the Federal Home Loan Bank ("FHLB") and the Federal Reserve Bank. At
December 31, 1999, the bank's debt rating was rated A3 by Moody's and A- by
Standard and Poor's.
The parent company's sources of liquidity include: bank lines of credit,
capital markets, and affiliate banks' dividends which are subject to regulatory
limits and in some cases require regulatory approval. Notes 10 and 13 of the
consolidated financial statements address this further. At year-end 1999 Old
National had $75 million in available lines of credit from unaffiliated banks.
Old National has capacity to issue up to $85.7 million of a $150 million medium
term note program available for future liquidity needs. At December 31, 1999,
these securities were rated Baa1 by Moody's and BBB+ by Standard and Poor's.
Noninterest Income
Besides net interest income, Old National generates additional revenue,
noninterest income, through fees and sales commissions from its core banking
franchise and other related businesses, such as investment products and
insurance. Noninterest income, excluding securities transactions, grew 12.0% in
1999 compared to 14.5% in 1998.
The trust fee income grew 7.5% in 1999 and 11.5% in 1998. Trust fees
benefited from a strong equity market in both years which was partially offset
by a poor bond market in 1999. Service charges on deposit accounts rose
dramatically in 1999 with a 23.4% increase compared to a 2.3% in 1998. As part
of One Bank, Worry-Free Checking was introduced which produced higher levels of
collectible overdraft fees. Loan servicing fees were relatively unchanged in
1999, up 0.2%, after a 4.3% decline in 1998. Lower mortgage banking and
commercial loan fees in 1999 negated higher consumer loan fees. Bank-owned life
insurance revenue, a new initiative in 1998, represented income on officers'
life insurance coverage, and in 1999 Old National had a full year of the
revenue. Insurance sales hit $6.1 million, up 11.5% in 1999 after 8.4% growth in
1998. The Sycamore Agency purchased on December 31, 1999, is not included but
will contribute additional revenue in 2000. Investment and brokerage business
increased 22.7% in 1999 with revenue exceeding $6.1 million, compared to 6.1%
growth in 1998. The coordination of trust and brokerage services contributed to
this growth. The remaining other income category was down $0.3 million from 1998
which included loan sale gains.
In 1999 Old National realized $2.5 million in net securities gains as
management restructured the investment portfolio and used these one-time gains
to partially offset the one-time charter consolidation expenses. During 1998 and
1997, Old National had minimal security sales.
Table 5 below presents changes in the components of noninterest income for
the years 1997 through 1999.
Noninterest Income (Table 5)
($ in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
% Change From
Prior Year
----------------
1999 1998 1997 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Trust fees $14,405 $13,404 $12,024 7.5% 11.5%
Service charges on deposit accounts 21,514 17,441 17,044 23.4 2.3
Loan servicing fees 4,827 4,816 5,031 0.2 (4.3)
Insurance premiums and commissions 6,114 5,481 5,058 11.5 8.4
Investment product fees 6,104 4,976 4,689 22.7 6.1
Bank-owned life insurance 4,260 3,860 -- 10.4 N/M
Other income 7,826 8,125 6,879 (3.7) 18.1
- ------------------------------------------------------------------------------
Subtotal 65,050 58,103 50,725 12.0 14.5
Net securities gains 2,458 340 379 622.9 (10.3)
- ------------------------------------------------------------------------------
Total noninterest income $67,508 $58,443 $51,104 15.5% 14.4%
==============================================================================
</TABLE>
N/M = Not meaningful
14
<PAGE>
Noninterest Expense
The banking industry continues to improve its efficiency through mergers
and technology advancements. The challenge for Old National and the industry is
to achieve cost efficiencies while still providing quality customer service. One
key ratio used to evaluate performance is the efficiency ratio, with lower
percentages representing positive trends. Old National's efficiency ratio (net
interest income, tax equivalized, plus noninterest income, excluding securities
gains, divided by noninterest expense), was 57.94% in 1999, 56.32% in 1998, and
56.11% in 1997. In 1999 consolidation expenses of $5.5 million negatively
impacted this ratio. If these are removed, the ratio for 1999 would have been
56.23%.
Salaries and benefits, which comprised over 50% of total noninterest
expense, grew 13.1% in 1999 and 4.6% in 1998. As a part of charter restructuring
in 1999, Old National had duplicate expenses as centralized operations were
staffed up to take over certain functions but did not fully take over these
operations until late in the year. Old National's strong earnings results and
retirements, severance, and incentives linked to charter reduction which totaled
$2.0 million in 1999, combined to increase incentives by $2.9 million over 1998
levels. Equipment expense declined 1.0% in 1999 after a 7.6% increase in 1998
partially due to accelerated depreciation on equipment to be upgraded. Marketing
expense increased 16.3% in 1999 compared to a 4.8% in 1998. In 1999 Old National
had several corporate-wide promotions, such as Worry-Free Checking, Y2K
advertising, and charter consolidation marketing efforts. Data processing
expense rose over 11% in both 1999 and 1998. In 1998 Old National outsourced
credit card processing which increased this particular expense. In 1999 Old
National had a full year of this outsource expense and additional costs and
higher expenses related to Y2K. Communications and transportation expense
increased 9.3% in 1999 and 2.1% in 1998. Higher postage in 1999 influenced by
Y2K and restructuring represented over half of the overall increase.
Professional fees increased 54.9% in 1999 and 45.4% in 1998, a big portion of
which related to consolidation consulting services. Other expense declined 3.0%
in 1999 after a 5.4% increase in 1998.
Table 6 below presents changes in the components of noninterest expense for
the years 1997 through 1999.
Noninterest Expense (Table 6)
($ in thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
% Change From
Prior Year
---------------
1999 1998 1997 1999 1998
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $108,555 $ 95,997 $ 91,791 13.1% 4.6%
Occupancy expense 10,932 9,898 10,051 10.4 (1.5)
Equipment expense 13,279 13,412 12,466 (1.0) 7.6
Marketing expense 6,856 5,895 5,623 16.3 4.8
FDIC insurance premiums 690 578 707 19.4 (18.2)
Data processing expense 9,996 8,933 7,860 11.9 13.7
Communications and transportation expense 7,777 7,115 6,968 9.3 2.1
Professional fees 6,934 4,477 3,079 54.9 45.4
Other expense 20,545 21,191 20,099 (3.0) 5.4
- -------------------------------------------------------------------------------------
Total noninterest expense $185,564 $167,496 $158,644 10.8% 5.6%
=====================================================================================
</TABLE>
Provision for Income Taxes
Old National records a provision for income taxes currently payable and for
income taxes payable in the future which arise due to timing differences in the
recognition of certain items for financial statement and income tax purposes.
The major differences between the effective tax rate applied to Old National's
financial statement income and the federal statutory rate are caused by interest
on tax-exempt securities and loans and state income taxes. Old National's
effective tax rate was 24.0% in 1999, 28.5% in 1998, and 29.9% in 1997. The drop
in rate in 1999 was due to a change in state tax laws and the implementation of
certain tax saving strategies. See Note 7 to the consolidated financial
statements for additional details on Old National's income tax provision.
15
<PAGE>
Interim Financial Data
Table 7 below provides a detailed summary of quarterly results of
operations for the years ended December 31, 1999 and 1998. These results contain
all normal and recurring adjustments of a material nature necessary for a fair
and consistent presentation.
Interim Financial Data (Table 7)
(Unaudited, $ and shares in thousands except per share data)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Quarter Ended
- -----------------------------------------------------------------------------------------
December September June March
31 30 30 31
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999:
Interest income $126,348 $125,398 $120,721 $116,456
Interest expense 66,813 64,523 60,808 58,392
- -----------------------------------------------------------------------------------------
Net interest income 59,535 60,875 59,913 58,064
Provision for loan losses 3,052 2,740 2,894 2,803
Noninterest income 17,323 16,925 17,180 16,080
Noninterest expense 50,869 45,756 45,301 43,638
- -----------------------------------------------------------------------------------------
Income before income taxes 22,937 29,304 28,898 27,703
Income taxes 3,091 7,718 7,646 7,693
- -----------------------------------------------------------------------------------------
Net income from continuing operations 19,846 21,586 21,252 20,010
Discontinued operations 618 -- 3,483 --
- -----------------------------------------------------------------------------------------
Net income $ 20,464 $ 21,586 $ 24,735 $ 20,010
=========================================================================================
Net income from continuing operations per share:
Basic $0.42 $0.45 $0.44 $0.41
Diluted $0.41 $0.43 $0.43 $0.40
=========================================================================================
Net income per share:
Basic $0.43 $0.45 $0.51 $0.41
Diluted $0.43 $0.43 $0.50 $0.40
=========================================================================================
Weighted average shares:
Basic 47,493 48,318 48,485 48,378
Diluted 48,810 50,066 50,358 50,275
=========================================================================================
1998:
Interest income $115,708 $116,451 $113,060 $111,315
Interest expense 58,683 60,154 57,298 55,478
- -----------------------------------------------------------------------------------------
Net interest income 57,025 56,297 55,762 55,837
Provision for loan losses 2,971 2,936 3,174 3,079
Noninterest income 15,563 15,020 14,229 13,631
Noninterest expense 45,054 41,326 40,630 40,486
- -----------------------------------------------------------------------------------------
Income before income taxes 24,563 27,055 26,187 25,903
Income taxes 6,570 7,064 8,011 7,928
- -----------------------------------------------------------------------------------------
Net income from continuing operations 17,993 19,991 18,176 17,975
Discontinued operations -- -- (9,193) (661)
- -----------------------------------------------------------------------------------------
Net income $ 17,993 $ 19,991 $ 8,983 $ 17,314
=========================================================================================
Net income from continuing operations per share:
Basic $0.38 $0.41 $0.38 $0.37
Diluted $0.37 $0.40 $0.36 $0.36
=========================================================================================
Net income per share:
Basic $0.38 $0.41 $0.18 $0.36
Diluted $0.37 $0.40 $0.18 $0.35
=========================================================================================
Weighted average shares:
Basic 47,971 48,255 48,529 48,062
Diluted 49,878 50,266 50,571 50,724
=========================================================================================
</TABLE>
16
<PAGE>
FINANCIAL CONDITION
Overview
Total assets reached $7.0 billion at December 31, 1999, 8.8% higher than
the prior year-end. Loans increased $483.6 million or 11.1%. Total liabilities
grew $593.2 million or 10.0% over 1998. Deposits rose 8.6% or $402.4 million
while other sources funded the remainder of the asset growth.
Investment Securities
Investment securities at December 31, 1999, comprised 24% of total assets,
down from 26% at year-end 1998. Investment securities increased $42.0 million,
2.6% over 1998, as the focal point for asset growth was loans rather than
investments.
While it does not actively trade its investment securities, Old National
has classified all securities as available-for-sale to maximize flexibility to
adapt to interest rate changes. The principal and interest payments along with
the ability to pledge or liquidate, if necessary, available-for-sale securities
provide funding to help meet unforeseen liquidity needs. The entire portfolio
has an effective duration of 4.1 years.
At December 31, 1999, Old National held investment securities issued by the
certain states and their political subdivisions with the following aggregate
market value: $103.8 million by Illinois, $82.2 million by Indiana. There were
no other concentrations of investment securities issued by an individual state
and its political subdivisions which were greater than 10% of shareholders'
equity.
Average yields on the investment securities portfolio are calculated on a
taxable equivalent basis. Yields are based on the amortized cost and are
weighted for the scheduled maturity of each investment. At year-end, average
yields for the entire portfolio were 6.97% in 1999, 6.94% in 1998, and 7.18% in
1997. The portfolio yield rose slightly in 1999 as the reinvestment rates
increased after the lower rate environment in 1998.
Table 8 below presents the maturity distribution of the investment
portfolio, along with weighted average yields thereon.
Maturity Distribution of Investment Securities (Table 8)
($ in thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
December 31, 1999
- --------------------------------------------------------------------------------------
Within 1 - 5 5 - 10 Beyond
1 Year Years Years 10 Years Total 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FAIR VALUE:
U.S. Treasury $ 15,489 $ 17,491 $ -- $ 3,746 $ 36,726 $ 92,704 $ 119,158
U.S. Government agencies
and corporations 107,986 183,918 28,338 -- 320,242 276,070 257,610
Mortgage-backed securities 36,332 88,125 421,549 189,768 735,774 719,422 727,434
States and political subdivisions 25,366 206,562 239,233 42,888 514,049 491,140 456,019
Other securities 424 2,455 781 68,200 71,860 57,301 46,653
- -------------------------------------------------------------------------------------------------------------
Total $185,597 $498,551 $689,901 $304,602 $1,678,651 $1,636,637 $1,606,874
=============================================================================================================
AMORTIZED COST:
U.S. Treasury $ 15,479 $ 17,765 $ -- $ 4,035 $ 37,279 $ 91,029 $ 118,109
U.S. Government agencies
and corporations 111,251 190,043 29,683 -- 330,977 270,749 254,282
Mortgage-backed securities 36,537 88,720 441,610 199,489 766,356 713,468 718,955
States and political subdivisions 25,209 204,592 243,608 44,478 517,887 472,461 441,031
Other securities 415 2,446 781 68,400 72,042 57,418 46,723
- -------------------------------------------------------------------------------------------------------------
Total $188,891 $503,566 $715,682 $316,402 $1,724,541 $1,605,125 $1,579,100
Weighted average yield,
based on amortized cost
(taxable equivalent basis) 6.88% 7.15% 6.92% 6.85% 6.97% 6.94% 7.18%
=============================================================================================================
</TABLE>
17
<PAGE>
Lending and Loan Administration
The key to Old National's success has long been its credit culture which
features decision-making near the customer with corporate oversight. Community
loan personnel have the authority to extend credit under guidelines established
and administered by Old National's Credit Policy Committee. This committee,
which meets quarterly, includes members of Old National's executive and
community bank management. The committee monitors credit quality through its
review of information such as delinquencies, problem loans, and charge-offs. The
committee regularly reviews the loan policy to assure it remains appropriate for
the current lending environment. Executive and credit committees at the local
level provide additional knowledge, judgment, and experience to Old National's
lending administration.
Old National maintains an independent corporate loan review program. Its
loan review system evaluates loan administration, credit quality, compliance
with corporate loan standards, and the adequacy of the allowance for loan
losses. This program includes periodic on-site visits as well as regular
off-site reviews of problem loan reports, delinquencies, and charge-offs.
Old National lends to commercial customers in various industries including
manufacturing, agribusiness, transportation, mining, wholesaling, and retailing.
Old National's policy is to concentrate its lending activity in the geographic
market areas it serves, primarily Indiana, Illinois, and Kentucky. Old National
has no concentration of loans in any single industry exceeding 10% of its
portfolio nor does its portfolio contain any loans to finance speculative
transactions, such as large, highly leveraged buyouts or loans to foreign
countries.
The 11.1% loan growth in 1999 was spread among all major categories but was
strongest in the commercial sector. Commercial real estate led all loan types
with a 16.1% increase in 1999 following 23.9% growth in 1998. Commercial loans
grew consistently with 14.3% in 1999 compared to 13.8% in 1998. The $60.7
million commercial loan made in 1998 to finance the sale of Old National's
consumer finance subsidiary paid off in 1999. Residential real estate loan
growth reached 7.3% in 1999, down from 10.8% in 1998. Higher interest rates in
the last half of 1999 impacted new originations. Consumer credit increased 7.9%
in 1999 after a 5.2% decrease in 1998. This growth included direct loans with
consumers, loans acquired from dealers and direct home equity loans. In 1999 as
part of the common product drive, a corporate-wide promotion for home equity
loans contributed to this growth. The portfolio is well diversified with 24% of
the portfolio in commercial loans, 23% in commercial real estate, 37% in
residential real estate, and 16% in consumer credit. Over the past five years,
commercial and commercial real estate loans have grown faster relative to the
other categories.
Old National's commercial lending is primarily to small to medium-sized
businesses in various industries in its region. Commercial real estate loans are
generally made to similar companies in Old National's geographical area. These
industries have been stable in Old National's market area and provide
opportunities for growth. A significant percentage of commercial loans are due
within one year, reflecting the short-term nature of a large portion of these
loans. Table 9 on page 19 presents the maturity distribution and rate
sensitivity of commercial loans and an analysis of these loans which have
predetermined and floating interest rates.
Residential real estate loans, primarily 1-4 family properties, represent
the most significant portion of the loan portfolio. This sector's percentage of
our total loan portfolio has remained fairly constant over the last several
years. Old National's portfolio includes both adjustable rate and fixed rate
loans.
Consumer loans include automobile loans, personal and home equity loans and
lines of credit, student loans, and credit card loans.
Loans in most categories have grown steadily over the past four years.
Commercial loans increased an average of 10.8% per year between 1995 and 1999.
Commercial real estate grew 17.6%, and residential real estate loans grew 8.4%
over the same period. Consumer loans remained relatively unchanged. Table 10 on
page 19 presents the composition of the loan portfolio for each of the last five
years.
18
<PAGE>
Distribution of Commercial Loan Maturities at December 31, 1999 (Table 9)
($ in thousands)
Within 1-5 Beyond
1 Year Years 5 years Total
- -------------------------------------------------------------------------
Predetermined interest rates $169,936 $236,735 $142,507 $ 549,178
Floating interest rates 374,696 147,277 103,547 625,520
- -------------------------------------------------------------------------
Total $544,632 $384,012 $246,054 $1,174,698
=========================================================================
Loan Portfolio at Year-End (Table 10)
($ in thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Four Year
1999 1998 1997 1996 1995 Growth Rate
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $1,174,698 $1,027,990 $ 903,271 $ 818,964 $ 780,542 10.8%
Commercial real estate 1,096,850 944,615 762,344 668,496 573,829 17.6
Residential real estate 1,811,768 1,688,621 1,523,485 1,385,183 1,311,271 8.4
Consumer credit 757,952 702,294 740,666 776,082 737,362 0.7
- --------------------------------------------------------------------------------------------------------------
Total loans 4,841,268 4,363,520 3,929,766 3,648,725 3,403,004 9.2%
Less: Unearned income 3,334 9,215 13,865 21,063 27,089
- -----------------------------------------------------------------------------------------------------=========
Subtotal 4,837,934 4,354,305 3,915,901 3,627,662 3,375,915
Less: Allowance for loan losses 57,046 51,847 49,053 43,527 42,857
- ----------------------------------------------------------------------------------------------------
Net loans $4,780,888 $4,302,458 $3,866,848 $3,584,135 $3,333,058
====================================================================================================
COMPOSITION OF LOAN
PORTFOLIO BY TYPE
Commercial 24.3% 23.6% 23.1% 22.6% 23.1%
Commercial real estate 22.7 21.7 19.5 18.4 17.0
Residential real estate 37.4 38.8 38.9 38.2 38.8
Consumer credit 15.6 15.9 18.5 20.8 21.1
====================================================================================================
</TABLE>
The adequacy of the allowance for loan losses is evaluated on a quarterly
basis. This evaluation is based on reviews of specific loans, changes in the
loan type and volume of the portfolios given current and anticipated economic
conditions, and historical loss experience. Loans are charged off when they are
deemed uncollectible.
Charge-offs, net of recoveries, totaled $7.3 million in 1999, compared to
$9.4 million in 1998 and $8.0 million in 1997. The most significant improvement
in net charge-offs occurred within the consumer portfolio. In 1997 management
revised its underwriting policies to address the changing nature and risk of
consumer lending. Charge-off levels for consumer loans have declined in both
1998 and 1999. Net charge-offs to average loans have consistently ranged from
0.16% to 0.30% for the last five years.
Old National makes monthly provisions at levels deemed necessary to provide
assurance that the allowance for loan losses is sufficient to absorb estimated
losses in the loan portfolio. For homogeneous loans, such as residential
mortgage, consumer, and credit card, provision levels are determined using
historic loss factors. For non-homogeneous loans, management allocates specific
losses to loans in the highest risk categories with provisions for the remainder
of the portfolio using historic loss factors. In addition, provisions reflect
other risks affecting the loan portfolio, such as economic conditions in the
geographic area, specific industry financial conditions, experience of lending
staff, and borrower risk associated with Year 2000. The provision for loan
losses was $11.5 million in 1999, slightly lower than $12.2 million in 1998 and
$13.6 million in 1997. The lower provision levels reflect the loan portfolio's
performance as a result of the strong economy in Old National's markets.
19
<PAGE>
Table 11 below summarizes activity in the allowance for loan losses for the
years 1995 through 1999, along with an allocation of the year-end balances and
related statistics for the allowance and net charge-offs.
Allowance for Loan Losses (Table 11)
($ in thousands)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ANALYSIS:
Allowance for loan losses, January 1 $51,847 $49,053 $43,527 $42,857 $43,513
Loans charged off:
Commercial 6,018 3,802 2,979 4,362 4,918
Commercial and residential real estate 1,308 1,249 639 675 993
Consumer credit 6,766 7,887 8,976 9,829 5,386
- ----------------------------------------------------------------------------------------------------
Total charge-offs 14,092 12,938 12,594 14,866 11,297
- ----------------------------------------------------------------------------------------------------
Recoveries on charged-off loans:
Commercial 2,852 1,330 1,561 2,281 1,647
Commercial and residential real estate 390 323 1,156 330 320
Consumer credit 3,560 1,919 1,841 1,843 1,183
- ----------------------------------------------------------------------------------------------------
Total recoveries 6,802 3,572 4,558 4,454 3,150
- ----------------------------------------------------------------------------------------------------
Net charge-offs 7,290 9,366 8,036 10,412 8,147
Provision charged to expense 11,489 12,160 13,562 11,082 7,491
Acquired from acquisition 1,000 -- -- -- --
- ----------------------------------------------------------------------------------------------------
Allowance for loan losses, December 31 $57,046 $51,847 $49,053 $43,527 $42,857
====================================================================================================
Average loans for the year $4,635,562 $4,100,037 $3,742,120 $3,481,036 $3,299,737
Allowance/year-end loans 1.18% 1.19% 1.25% 1.20% 1.27%
Allowance/average loans 1.23 1.26 1.31 1.25 1.30
Net charge-offs/average loans 0.16 0.23 0.21 0.30 0.25
ALLOCATION AT DECEMBER 31:
Commercial $24,527 $23,500 $23,607 $20,195 $22,547
Commercial and residential real estate 24,049 12,399 12,695 12,660 12,562
Consumer credit 8,470 15,948 12,751 10,672 7,748
- ----------------------------------------------------------------------------------------------------
Total $57,046 $51,847 $49,053 $43,527 $42,857
====================================================================================================
</TABLE>
Assets determined by the various evaluation processes to be
under-performing receive special attention by Old National management.
Under-performing assets consist of: 1) nonaccrual loans where the ultimate
collectibility of interest is uncertain, but the principal is considered
collectible; 2) loans which have been renegotiated to provide for a reduction or
deferral of interest or principal because the borrower's financial condition
deteriorated; 3) loans with principal or interest past due ninety (90) days or
more; and 4) foreclosed properties. Each month, problem loan reports are
prepared and reviewed at both the community and holding company levels. These
reports include loans which show signs of being unable to meet debt obligations
in the normal course of business, carry other characteristics deemed by bank
management to warrant special attention, or have been criticized by regulators
in the examination process. Besides the loans classified as under-performing,
management closely monitors loans totaling $122.5 million at December 31, 1999,
for the borrowers' ability to comply with present repayment terms. For these
loans the existing conditions do not warrant either a partial charge-off or
classification as nonaccrual. Management believes it has taken a conservative
approach in its evaluation of under-performing credits and the loan portfolio in
general, both in acknowledging the portfolio's general condition and in
establishing the allowance for loan losses.
Under-performing assets as of year-end totalled $24.2 million in 1999 and
$25.1 million in 1998. As a percent of total loans and foreclosed properties,
under-performing assets at December 31 were fairly consistent with 0.50% in
1999, 0.58% in 1998, and 0.51% in 1997. The growth in nonaccruals in 1998
reflected a conservative nonaccrual policy and not a general deterioration of
the portfolio. At December 31, 1999, the allowance for loan loss to
under-performing assets ratio improved to 236.05% from 206.72% in 1998 and
244.47% in 1997. Said in another way, at December 31, 1999, Old National had set
aside $2.36 for every dollar of under-performing assets.
20
<PAGE>
Table 12 below presents the components of under-performing assets as of December
31 for the last five years.
Under-Performing Assets (Table 12)
($ in thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $16,863 $17,034 $11,985 $13,162 $ 6,972
Renegotiated loans 169 116 248 746 1,120
Past due loans (90 days or more):
Commercial 1,751 1,025 1,394 1,227 1,499
Commercial and residential real estate 2,038 3,346 2,289 1,458 2,611
Consumer 824 1,018 945 868 1,084
- -------------------------------------------------------------------------------------
Total 4,613 5,389 4,628 3,553 5,194
- -------------------------------------------------------------------------------------
Foreclosed properties 2,522 2,542 3,204 2,742 1,792
- -------------------------------------------------------------------------------------
Total under-performing assets $24,167 $25,081 $20,065 $20,203 $15,078
=====================================================================================
Under-performing assets as % of
total loans and foreclosed properties 0.50% 0.58% 0.51% 0.56% 0.45%
Allowance for loan loss/
under-performing assets 236.05 206.72 244.47 215.45 284.24
=====================================================================================
</TABLE>
Interest income of approximately $1.5 million would have been recorded in
1999 on nonaccrual and restructured loans if such loans had been accruing
interest throughout the year in accordance with their original terms. The amount
of interest income actually recorded in 1999 on nonaccrual and restructured
loans was $1.0 million.
Deposits and Other Funding
Customer deposits provide the core funding needs and include
noninterest-bearing demand, regular savings and NOW accounts, money market
accounts, and small denomination certificates of deposit. Average core deposits
increased 7.7% in 1999 compared to 1.6% in 1998. Growth in 1999 was strong in
most core deposit categories. Other time deposits increased 11.4% in 1999 and
included brokerage certificate of deposits of $466.7 million in 1999, $222.2
million in 1998, and $105.1 million in 1997.
Table 13 below presents changes in the average balances of all funding
sources for the years 1997 through 1999.
Funding Sources--Average Balances (Table 13)
($ in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
% Change From
Prior Year
----------------
1999 1998 1997 1999 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Demand deposits $ 522,219 $ 492,435 $ 475,868 6.0% 3.5%
NOW deposits 697,477 660,609 659,308 5.6 0.2
Savings deposits 441,679 417,050 433,211 5.9 (3.7)
Money market deposits 580,707 581,480 582,607 (0.1) (0.2)
Other time deposits 2,255,739 2,024,513 1,959,560 11.4 3.3
- ------------------------------------------------------------------------------------------------
Total core deposits 4,497,821 4,176,087 4,110,554 7.7 1.6
- ------------------------------------------------------------------------------------------------
Certificates of deposit $100,000 and over 388,252 409,282 340,787 (5.1) 20.1
Short-term borrowings 573,080 402,796 411,233 42.3 (2.1)
Other borrowings 710,383 543,830 312,270 30.6 74.2
- ------------------------------------------------------------------------------------------------
Total funding sources $6,169,536 $5,531,995 $5,174,844 11.5% 6.9%
================================================================================================
</TABLE>
21
<PAGE>
The average balance of large certificates declined $21.0 million or 5.1% in
1999 compared to the prior year. Other borrowings increased $166.6 million and
primarily included FHLB advances. Table 14 below presents a maturity
distribution for certificates of deposit with denominations of $100,000 or more.
Certificates of Deposit, $100,000 and Over (Table 14)
($ in thousands)
- -------------------------------------------------------------------------
Maturity Distribution
----------------------------------
Year-End 1-90 91-180 181-365 Beyond Interest Average
Balance Days Days Days 1 Year Expense Rate
- -------------------------------------------------------------------------
1999 $207,925 $109,784 $34,308 $42,209 $21,624 $20,345 5.24%
1998 390,123 154,455 91,566 77,611 66,491 23,417 5.72
1997 380,254 170,178 74,268 58,229 77,579 19,927 5.85
- -------------------------------------------------------------------------
Borrowings
Other short-term sources of funds include overnight borrowings from other
financial institutions, securities sold under agreements to repurchase which
generally mature within 30 days, and borrowings under U.S. Treasury demand
notes. Collectively, the average short-term borrowings rose $170.3 million in
1999. The steeper yield curve of 1999 and the uncertainty surrounding Y2K in the
fixed income markets made short-term borrowings an attractive funding
alternative in 1999. Additionally, the consolidation of Old National's banking
charters increased its ability to consistently access the overnight Federal
funds purchased market.
Table 15 below presents the distribution of Old National's short-term
borrowings and related weighted average interest rates for each of the last
three years.
Short-Term Borrowings (Table 15)
($ in thousands)
- -----------------------------------------------------------------------------
Other
Funds Repurchase Short-term
Purchased Agreements Borrowings
- -----------------------------------------------------------------------------
1999:
Outstanding at year-end $391,861 $225,532 $ 56,537
Average amount outstanding 171,666 297,201 104,213
Maximum amount outstanding at any month-end 391,861 326,630 230,330
Weighted average interest rate:
During year 5.24% 4.65% 5.20%
End of year 4.88 5.64 4.23
1998:
Outstanding at year-end $294,575 $192,868 $ 18,877
Average amount outstanding 82,061 213,535 107,200
Maximum amount outstanding at any month-end 294,575 233,308 175,751
Weighted average interest rate:
During year 5.58% 4.90% 5.81%
End of year 5.35 4.53 5.10
1997:
Outstanding at year-end $170,675 $215,878 $ 56,132
Average amount outstanding 73,733 220,074 117,426
Maximum amount outstanding at any month-end 170,675 244,722 192,048
Weighted average interest rate:
During year 5.57% 4.98% 4.53%
End of year 6.34 5.18 5.87
- -----------------------------------------------------------------------------
22
<PAGE>
Other borrowings generally provide longer term funding and include debt
from the FHLB comprised of both short- and long-term maturities, medium term
notes, and convertible subordinated debentures.
In 1997 Old National registered a $150 million medium term note program and
issued $10 million in 1998 and $54.3 million in 1997. These borrowings, combined
with prior issuances, totaled $96.3 million at December 31, 1999, and have a
weighted average effective interest rate of 6.81% with maturities between 2000
and 2007. The funds were used to reduce Old National's lines of credit.
Holders of Old National's 8% convertible debentures converted principal
amounts of $9.3 million in 1999 and $8.4 million in 1998. These conversions
resulted in the issuance of common stock shares totaling 711,000 in 1999 and
415,000 in 1998 with a corresponding increase in shareholders' equity.
Capital Resources
Shareholders' equity was $492.7 million or 7.1% of total assets at December
31, 1999, and $519.6 million or 8.1% at December 31, 1998. Old National paid
$0.63 cash dividends per share in 1999 which totaled $30.6 million (restated for
the stock split paid in May 1999 and the 5% stock dividend paid in January
2000).
Treasury shares were repurchased to provide shares for reissuance under Old
National's dividend reinvestment and stock purchase plan and for stock
dividends. Treasury shares repurchased reduced shareholders' equity by $78.5
million in 1999 and $46.7 million in 1998. Shares reissued pursuant to the above
programs and in connection with conversions of Old National's subordinated
debentures added to shareholders' equity $24.1 million in 1999 and $25.1 million
in 1998.
The accumulated other comprehensive income component of equity is primarily
comprised of unrealized security gains (losses), net of tax. In the rising rate
environment during late 1999, this shifted from a positive or gain of $19.1
million to a negative or loss of $27.6 million. This basically represents the
estimated unrealized loss, net of tax, on Old National's available-for-sale
investment security portfolio at year-end.
Old National and the banking industry are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can elicit certain mandatory actions by
regulators that, if undertaken, could have a direct material effect on Old
National's financial statements. Capital adequacy in the banking industry is
evaluated primarily by the use of ratios which measure capital against assets
and certain off-balance-sheet items. Certain ratios weight these assets based on
risk characteristics according to regulatory accounting practices. At December
31, 1999, Old National and its bank subsidiaries exceeded the regulatory
minimums and met the regulatory definition of well-capitalized. Capital ratios
for Old National and its significant bank subsidiary and the regulatory
guidelines are presented in Table 16 on page 24.
23
<PAGE>
Capital Structure and Regulatory Guidelines (Table 16)
($ in thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Regulatory Guidelines December 31,
- -------------------------------------------------------------------------------------------------------
Minimum Well-Capitalized 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Old National Bancorp (Consolidated)
TIER 1 CAPITAL:
Shareholders' equity (1) $520,297 $500,546 $483,940
Less intangibles (22,711) (15,234) (17,049)
- -------------------------------------------------------------------------------------------------------
Tier 1 capital 497,586 485,312 466,891
TIER 2 CAPITAL:
Subordinated debentures 12,782 21,963 30,407
Qualifying allowance for loan losses 57,046 51,847 47,943
- -------------------------------------------------------------------------------------------------------
Total capital $567,414 $559,122 $545,241
=======================================================================================================
Risk adjusted assets $4,636,088 $4,258,612 $3,835,456
Tier 1 capital to risk-adjusted assets 4.00% 6.00% 10.73% 11.40% 12.17%
Total capital to risk-adjusted assets 8.00 10.00 12.24 13.13 14.22
Tier 1 capital to quarterly average assets
(leverage ratio) 4.00 5.00 7.16 7.72 7.95
=======================================================================================================
Old National Bank
TIER 1 CAPITAL:
Shareholders' equity (1) $501,390 $487,653 $496,136
Less intangibles (3,801) (4,849) (5,919)
- -------------------------------------------------------------------------------------------------------
Tier 1 capital 497,589 482,804 490,217
TIER 2 CAPITAL:
Qualifying allowance for loan losses 52,125 47,885 44,390
- -------------------------------------------------------------------------------------------------------
Total capital $549,714 $530,689 $534,607
=======================================================================================================
Risk adjusted assets $4,322,406 $3,959,096 $3,551,167
=======================================================================================================
Tier 1 capital to risk-adjusted assets 4.00% 6.00% 11.51% 12.19% 13.80%
Total capital to risk-adjusted assets 8.00 10.00 12.72 13.40 15.05
Tier 1 capital to quarterly average assets
(leverage ratio) 3.00 5.00 7.63 8.13 8.78
=======================================================================================================
</TABLE>
(1) Excludes unrealized gains (losses) on investment securities.
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
Management's Responsibility for the Financial Statements
Management is responsible for the preparation of the financial statements
and related financial information appearing in this annual report. The financial
statements and notes have been prepared in conformity with generally accepted
accounting principles and include some amounts which are estimates based upon
currently available information and management's judgment of current conditions
and circumstances. Financial information throughout this annual report is
consistent with that in the financial statements.
System of Internal Accounting Controls
Management maintains a system of internal accounting controls which is
believed to provide, in all material respects, reasonable assurance that assets
are safeguarded against loss from unauthorized use or disposition, transactions
are properly authorized and recorded, and the financial records are reliable for
preparing financial statements and maintaining accountability for assets. In
addition, Old National has a corporate code of conduct under which employees are
to maintain high levels of ethical business standards. All systems of internal
accounting controls are based on management's judgment that the cost of controls
should not exceed the benefits to be achieved and that no system can provide
absolute assurance that control objectives are achieved. Management believes its
system provides the appropriate balance between costs of controls and the
related benefits.
In order to monitor compliance with this system of controls, Old National
maintains an extensive internal audit program. Internal audit reports are issued
to appropriate officers and significant audit exceptions, if any, are reviewed
with management and the Audit Committee of the Board of Directors.
Audit Committee of the Board
The Board of Directors, through an Audit Committee comprised solely of
outside directors, oversees management's discharge of its financial reporting
responsibilities. The Audit Committee meets regularly with the Company's
independent public accountants, PricewaterhouseCoopers LLP, and the managers of
internal auditing and loan review. During these meetings, the committee has the
opportunity to meet privately with the independent public accountants as well as
with internal audit and loan review personnel to review accounting, auditing,
loan, and financial reporting matters. The appointment of the independent public
accountants is made by the Board of Directors upon the recommendation of the
Audit Committee.
Independent Accountants
The financial statements in this annual report have been audited by
PricewaterhouseCoopers LLP, for the purpose of determining that the financial
statements are presented fairly in all material respects. PricewaterhouseCoopers
LLP's report on the financial statements appears on page 26. Their audit
included a consideration of Old National's system of internal accounting
controls, for the purpose of setting the scope and timing of their auditing
procedures.
25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To The Shareholders and The Board of Directors of Old National Bancorp:
In our opinion, the accompanying consolidated balance sheet as of December
31, 1999 and the related consolidated statements of income, changes in
shareholders' equity and cash flows present fairly, in all material respects,
the financial position of Old National Bancorp and affiliates (the "Company") at
December 31, 1999, and the results of their operations and their cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
/s/ PricewaterhouseCoopers LLP
Chicago, IL
January 26, 2000
To The Shareholders and The Board of Directors of Old National Bancorp:
We have audited the accompanying consolidated balance sheet of Old National
Bancorp (an Indiana corporation) and affiliates as of December 31, 1998, and the
related consolidated statements of income, changes in shareholder's equity and
cash flows for each of the two years in the period ended December 31, 1998.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Old National
Bancorp and affiliates as of December 31, 1998, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
/s/ Arthur Andersen LLP
Indianapolis, Indiana
January 27, 1999
(except with respect to the business combination discussed in Note 2 as to which
the date is January 29, 1999).
26
<PAGE>
Old National Bancorp Consolidated Balance Sheet
($ and shares in thousands)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
December 31,
- ----------------------------------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 169,184 $ 160,162
Money market investments:
Interest-bearing deposits in other banks 3,644 5,287
Federal funds sold and securities purchased under agreements to resell 12,787 16,345
- ----------------------------------------------------------------------------------------------------
Total money market investments 16,431 21,632
- ----------------------------------------------------------------------------------------------------
TOTAL CASH AND CASH EQUIVALENTS 185,615 181,794
- ----------------------------------------------------------------------------------------------------
Investment securities--available-for-sale, at fair value 1,678,651 1,636,637
- ----------------------------------------------------------------------------------------------------
Loans, net of unearned income 4,837,934 4,354,305
Allowance for loan losses (57,046) (51,847)
- ----------------------------------------------------------------------------------------------------
NET LOANS 4,780,888 4,302,458
- ----------------------------------------------------------------------------------------------------
Premises and equipment, net 93,256 84,584
Accrued interest receivable 54,007 50,307
Other assets 190,515 160,831
- ----------------------------------------------------------------------------------------------------
TOTAL ASSETS $6,982,932 $6,416,611
====================================================================================================
LIABILITIES
Deposits:
Noninterest-bearing demand $ 545,426 $ 553,656
Interest-bearing:
NOW accounts 717,334 710,260
Savings accounts 455,457 420,296
Money market accounts 542,456 588,876
Certificates of deposit $100,000 and over 207,925 390,123
Other time 2,602,700 2,005,647
- ----------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 5,071,298 4,668,858
- ----------------------------------------------------------------------------------------------------
Short-term borrowings 673,930 506,320
Accrued expenses and other liabilities 81,987 91,920
Other borrowings 662,973 629,868
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 6,490,188 5,896,966
- ----------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 12)
SHAREHOLDERS' EQUITY
Preferred stock, 2,000 shares authorized, no shares issued or outstanding --
-- Common stock, $1 stated value, 75,000 shares authorized,
47,289 and 30,388 shares issued and outstanding, respectively 47,289 30,388
Capital surplus 376,598 350,255
Retained earnings 96,410 119,903
Accumulated other comprehensive income, net of tax (27,553) 19,099
- ----------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 492,744 519,645
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $6,982,932 $6,416,611
====================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
27
<PAGE>
Old National Bancorp Consolidated Statement of Income
($ and shares in thousands except per share data)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Years Ended December 31,
- ---------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME Loans including fees:
Taxable $374,703 $351,841 $327,722
Nontaxable 8,566 5,811 4,340
Investment securities:
Taxable 79,011 74,175 78,347
Nontaxable 25,507 23,488 23,732
Money market investments 1,136 1,219 915
- ---------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 488,923 456,534 435,056
- ---------------------------------------------------------------------------------------------
INTEREST EXPENSE
Savings, NOW and money market deposits 42,138 44,763 48,058
Certificates of deposit $100,000 and over 20,345 23,417 19,927
Other time deposits 120,126 112,543 108,805
Short-term borrowings 28,237 18,879 20,379
Other borrowings 39,690 32,011 19,704
- ---------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 250,536 231,613 216,873
- ---------------------------------------------------------------------------------------------
NET INTEREST INCOME 238,387 224,921 218,183
Provision for loan losses 11,489 12,160 13,562
- ---------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 226,898 212,761 204,621
- ---------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trust fees 14,405 13,404 12,024
Service charges on deposit accounts 21,514 17,441 17,044
Loan servicing fees 4,827 4,816 5,031
Insurance premiums and commissions 6,114 5,481 5,058
Investment product fees 6,104 4,976 4,689
Bank-owned life insurance 4,260 3,860 --
Net securities gains 2,458 340 379
Other income 7,826 8,125 6,879
- ---------------------------------------------------------------------------------------------
TOTAL NONINTEREST INCOME 67,508 58,443 51,104
- ---------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 108,555 95,997 91,791
Occupancy expense 10,932 9,898 10,051
Equipment expense 13,279 13,412 12,466
Marketing expense 6,856 5,895 5,623
FDIC insurance premiums 690 578 707
Processing expense 9,996 8,933 7,860
Communication and transportation expense 7,777 7,115 6,968
Professional fees 6,934 4,477 3,079
Other expense 20,545 21,191 20,099
- ---------------------------------------------------------------------------------------------
TOTAL NONINTEREST EXPENSE 185,564 167,496 158,644
- ---------------------------------------------------------------------------------------------
Income before income taxes 108,842 103,708 97,081
Income taxes 26,148 29,573 28,998
- ---------------------------------------------------------------------------------------------
NET INCOME FROM CONTINUING OPERATIONS 82,694 74,135 68,083
- ---------------------------------------------------------------------------------------------
Discontinued operations 4,101 (9,854) (5,005)
- ---------------------------------------------------------------------------------------------
NET INCOME $ 86,795 $ 64,281 $ 63,078
=============================================================================================
NET INCOME FROM CONTINUING OPERATIONS PER COMMON SHARE:
Basic $1.72 $1.54 $1.40
Diluted 1.67 1.49 1.36
=============================================================================================
NET INCOME PER COMMON SHARE:
Basic $1.80 $1.33 $1.30
Diluted 1.76 1.30 1.26
=============================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic 48,167 48,204 48,488
Diluted 49,875 50,372 51,135
=============================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
28
<PAGE>
Old National Bancorp Consolidated Statement of Changes in Shareholders' Equity
($ and shares in thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Other Total
----------------- Capital Retained Comprehensive Comprehensive Shareholders'
Shares Amount Surplus Earnings Income Income Equity
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1996 28,480 $28,480 $266,001 $178,018 $ 7,936 $480,435
Net income -- -- -- 63,078 -- $63,078 63,078
Unrealized security gain and reclassification
adjustment, net of $5,821 tax -- -- -- -- 8,733 8,733 8,733
-----------
Comprehensive income -- -- -- -- -- $71,811 --
Cash dividends -- -- -- (25,012) -- =========== (25,012)
5% stock dividend 1,307 1,307 60,179 (61,486) -- --
Stock repurchased (877) (877) (35,479) -- -- (36,356)
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 29,159 29,159 300,183 154,598 16,669 500,609
Net income -- -- -- 64,281 -- 64,281 64,281
Unrealized security gain and reclassification
adjustment, net of $1,308 tax -- -- -- -- 2,430 2,430 2,430
-----------
Comprehensive income -- -- -- -- -- $66,711 --
Cash dividends -- -- -- (26,058) -- =========== (26,058)
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 30,388 30,388 350,255 119,903 19,099 519,645
Net income -- -- -- 86,795 -- 86,795 86,795
Unrealized security loss and reclassification
adjustment, net of $30,751 tax -- -- -- -- (46,898) (46,898) (46,898)
-----------
Comprehensive income -- -- -- -- -- $39,897 --
Mergers 648 648 10,538 6,715 246 =========== 18,147
Cash dividends -- -- -- (30,552) -- (30,552)
3 for 2 stock split and 5% stock dividend 17,600 17,600 68,851 (86,451) -- --
Stock repurchased (2,582) (2,582) (75,917) -- -- (78,499)
Stock reissued under dividend reinvestment
and stock purchase plan 524 524 14,314 -- -- 14,838
Stock reissued due to conversion of
subordinated debentures 711 711 8,557 -- -- 9,268
- --------------------------------------------------------------------------------------------------- -------------
BALANCES, DECEMBER 31, 1999 47,289 $47,289 $376,598 $ 96,410 $(27,553) $492,744
=============================================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement.
29
<PAGE>
Old National Bancorp Consolidated Statement of Cash Flows
($ in thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 86,795 $ 64,281 $ 63,078
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation 10,174 11,059 9,718
Amortization of intangible assets 1,577 1,812 1,969
Net premium amortization on investment securities 1,258 2,648 1,638
Provision for loan losses 11,489 12,160 13,562
Net securities gains (2,458) (340) (379)
Gain on sale of other assets (447) (820) (189)
Increase in interest receivable (3,700) (1,429) (1,281)
Increase in other assets (19,505) (15,871) (30,846)
Increase in accrued expenses and other liabilities 17,741 10,427 8,118
- -----------------------------------------------------------------------------------------------------------------------------
Total adjustments 16,129 19,646 2,310
- -----------------------------------------------------------------------------------------------------------------------------
Net cash flows provided by operating activities 102,924 83,927 65,388
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash and cash equivalents of subsidiaries acquired 8,070 -- --
Purchase of investment securities available-for-sale (1,077,873) (616,442) (410,215)
Proceeds from maturities of investment securities available-for-sale 567,358 471,382 321,208
Proceeds from sales of investments securities available-for-sale 410,665 116,727 69,917
Net principal collected from (loans made to) customers:
Commercial (142,075) (127,191) (85,725)
Commercial and residential real estate, net of loans originated for sale (266,874) (348,333) (231,633)
Consumer (62,822) 27,753 21,084
Residential real estate loans originated for sale (6,044) (67,145) (26,775)
Proceeds from sale of mortgage loans 6,094 67,752 26,979
Proceeds from sale of premises and equipment 2,018 684 977
Purchase of premises and equipment (20,048) (11,408) (10,527)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash flows used in investing activities (581,531) (486,221) (324,710)
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits, short-term and other borrowings:
Noninterest-bearing demand deposits (25,374) 27,708 (6,770)
Savings, NOW and money market deposits (7,415) 50,356 (62,553)
Certificates of deposit $100,000 and over (184,233) 9,869 106,979
Other time deposits 583,680 59,915 3,998
Short-term borrowings 167,610 63,635 103,650
Other borrowings 42,373 249,480 96,444
Net proceeds from medium term notes -- -- 54,300
Cash dividends paid (30,552) (26,058) (25,012)
Common stock repurchased (78,499) (46,702) (36,356)
Common stock reissued, net of shares used to convert
subordinated debentures 14,838 16,641 9,574
- -----------------------------------------------------------------------------------------------------------------------------
Net cash flows provided by financing activities 482,428 404,844 244,254
- -----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 3,821 2,550 (15,068)
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 181,794 179,244 194,312
- -----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 185,615 $ 181,794 $ 179,244
=============================================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this statement
30
<PAGE>
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 ("Old National") 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
Old National, a bank holding company headquartered in Evansville, Indiana,
operates in Indiana, Illinois, and Kentucky. Through its bank and non-bank
affiliates, Old National provides to its customers an array of financial
services including loan, deposit, trust, investment, and insurance products.
Investment Securities
Old National 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 reclassed.
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.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed adequate by
management to absorb probable 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. Old National's policy for recognizing
income on impaired loans is to accrue interest unless a loan is placed on
nonaccrual status.
31
<PAGE>
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 Old
National's results of operation.
Total acquisition costs over the fair value of net assets acquired was
$20.8 million at December 31, 1999, and is being amortized on the straight-line
basis over periods ranging from 20 to 25 years. The recoverability of such
assets and their carrying value are periodically evaluated.
Net Income Per Share
Basic net income per share is computed by dividing net income by the
weighted average number of common shares outstanding during each year, adjusted
to reflect all stock dividends (Note 9) and all mergers accounted for as
pooling-of-interests as if they had occurred at the beginning of the earliest
year presented. Diluted net income per share is computed as above and assumes
the conversion of outstanding subordinated debentures (Note 10). Below is a
table reconciling basic and diluted earnings per share ("EPS").
Earnings Per Share Reconciliation
($ and shares in thousands except per share data)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
For the Year Ended For the Year Ended For the Year Ended
December 31, 1999 December 31, 1998 December 31, 1997
- ----------------------------------------------------------------------------------------------------------------
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 $82,694 48,167 $1.72 $74,135 48,204 $1.54 $68,083 48,488 $1.40
===== ===== =====
EFFECT OF
DILUTIVE SECURITIES
Stock options -- 86 -- 212 -- 172
8% convertible debentures 834 1,622 1,138 1,956 1,460 2,475
- --------------------------------------------- -------------------- -------------------
DILUTED EPS
Income from
continuing operations +
assumed conversions $83,528 49,875 $1.67 $75,273 50,372 $1.49 $69,543 51,135 $1.36
================================================================================================================
</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 Old National, 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, Old National'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.
32
<PAGE>
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 which have maturities less than 90 days. Cash paid during the
years ended December 31, 1999, 1998, and 1997, for interest was $241.0 million,
$227.2 million, and $213.0 million, respectively. Total income tax payments
during 1999, 1998, and 1997, were $26.6 million, $24.2 million, and $26.6
million, respectively.
Impact of Accounting Changes
In June 1998 the Financial Accounting Standards Board 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, 2000 (January 1, 2001, for Old National).
The impact of this statement is not expected to be material to Old National's
results of operations or financial position, due to the limited use of
derivative instruments.
Reclassifications
Certain prior year amounts have been reclassified to conform with the 1999
presentation. Such reclassifications had no effect on net income.
NOTE 2--BUSINESS COMBINATIONS AND DISCONTINUED OPERATIONS
Completed Mergers
On January 29, 1999, Old National and Southern Bancshares LTD ("Southern")
of Carbondale, Illinois, consummated a merger in which Old National issued
2,680,058 common shares in exchange for all of the shares of Southern. This
transaction was accounted for as a pooling-of-interests. Net income for Southern
prior to merger included in the 1999 statements for the period ended January 29,
1999, was $332 thousand.
The following table presents a restatement of net interest income, net
income, and basic net income from continuing operations per share to reflect
this pooling-of-interests transaction ($ in thousands, except per share data):
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
As reported in the 1998 Annual Report:
Net interest income $214,850 $208,675
Net income from continuing operations 71,718 65,665
Basic net income per share, as restated for stock dividends $ 1.58 $ 1.43
As restated herein:
Net interest income $224,921 $218,183
Net income from continuing operations 74,135 68,083
Basic net income per share $ 1.54 $ 1.40
- --------------------------------------------------------------------------------
On February 5, 1999, Old National acquired Dulaney Bancorp ("Dulaney") of
Marshall, Illinois, and issued 495,898 common shares in exchange for all the
shares of Dulaney. This transaction was accounted for as a pooling-of-interests
without restatement of prior years due to immateriality.
Pending Mergers
On July 30, 1999, Old National and ANB Corporation ("ANB") of Muncie,
Indiana, executed a definitive merger agreement. Old National will issue common
shares in exchange for all of the outstanding common shares of ANB. The
transaction will be accounted for as a pooling-of-interests. The merger is
subject to the approvals of ANB's shareholders. As of December 31, 1999, ANB's
financial statements reflected $880 million in total assets, net loans of $673
million, total deposits of $689 million, and net income for the year then ended
of $7.7 million. This merger is expected to be consummated in March 2000.
On September 10, 1999, Old National and Heritage Financial Services, Inc.
("Heritage") of Clarksville, Tennessee, executed a definitive merger agreement.
Old National will issue common shares in exchange for all of the outstanding
common shares of Heritage. The transaction will be accounted for as a
pooling-of-interests. The merger is subject to the approvals of Heritage's
shareholders. As of December 31, 1999, Heritage's financial statements reflected
$246 million in
33
<PAGE>
total assets, net loans of $195 million, total deposits of $202 million, and net
income for the year then ended of $2.9 million. This merger is expected to be
consummated in March 2000.
On December 20, 1999, Old National and Permanent Bancorp ("Permanent") of
Evansville, Indiana, executed a definitive merger agreement. Old National will
issue common shares in exchange for all of the outstanding common shares of
Permanent. The transaction will be accounted for as a purchase. The merger is
subject to the approvals of regulators and Permanent's shareholders. As of
December 31, 1999, Permanent's financial statements reflected $497 million in
total assets, net loans of $329 million, total deposits of $344 million, and net
income for the year then ended of $2.1 million. This merger is expected to be
consummated in the third quarter of 2000.
Discontinued Operations
In April 1998 Old National announced it would look at exit strategies from
its sub-prime lending affiliate, Consumer Acceptance Corporation ("CAC"). During
June 1998, the sale of CAC's sub-prime auto loans was finalized, which closed in
July 1998, and was treated as discontinued operations on the consolidated
financial statements. The loss on discontinued operations included interest
expense of $2.6 million in 1998 and $2.3 million in 1997. Interest expense was
directly attributable to the debt associated to this business unit. During 1999,
contingencies related to the sale were favorably resolved. Income (loss) from
discontinued operations for the years ended December 31, 1999, 1998, and 1997,
were as follows ($ in thousands):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Years Ended December 31
- -----------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loss before taxes from operations of discontinued operations $ -- $(7,943) $(8,346)
Income tax benefit -- (3,183) (3,341)
- -----------------------------------------------------------------------------------------------
Loss from operations of discontinued operations -- (4,760) (5,005)
Gain (loss) before taxes from disposal of discontinued operations 6,835 (8,489) --
Income tax expense (benefit) 2,734 (3,395) --
- -----------------------------------------------------------------------------------------------
Gain (loss) from disposal of discontinued operations 4,101 (5,094) --
- -----------------------------------------------------------------------------------------------
Income (loss) from discontinued operations $4,101 $(9,854) $(5,005)
===============================================================================================
Income (loss) from discontinued operations per common share
Basic $ 0.08 $ (0.21) $ (0.10)
Diluted $ 0.08 $ (0.19) $ (0.10)
===============================================================================================
</TABLE>
NOTE 3--Investment SECURITIES
The following tables summarize the amortized cost and fair value of the
investment securities portfolio at December 31, 1999 and 1998, 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, 1999
U.S. Treasury $ 37,279 $ 46 $ (599) $ 36,726
U.S. Government agencies and corporations 330,977 15 (10,750) 320,242
Mortgage-backed securities 766,356 402 (30,984) 735,774
State and political subdivisions 517,887 4,058 (7,896) 514,049
Other securities 72,042 34 (216) 71,860
- ----------------------------------------------------------------------------------------
Total $1,724,541 $ 4,555 $(50,445) $1,678,651
========================================================================================
December 31, 1998
U.S. Treasury $ 91,029 $ 1,952 $ (277) $ 92,704
U.S. Government agencies and corporations 270,749 5,648 (327) 276,070
Mortgage-backed securities 713,468 6,665 (711) 719,422
State and political subdivisions 472,461 18,904 (225) 491,140
Other securities 57,418 -- (117) 57,301
- ----------------------------------------------------------------------------------------
Total $1,605,125 $33,169 $ (1,657) $1,636,637
========================================================================================
</TABLE>
34
<PAGE>
The amortized cost and fair value of the investment securities portfolio at
December 31, 1999 and 1998, 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 $410.7
million in 1999 and $116.7 million in 1998. In 1999 realized gains and losses
were $3.2 million and $0.7 million, respectively. In 1998 realized gains were
$0.3 million.
At December 31, investment securities were pledged to secure public and
other funds with a carrying value of $852 million in 1999 and $638 million in
1998.
($ in thousands)
- -------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- -------------------------------------------------------------------
Maturity
Within one year $ 188,891 $ 185,597 $ 250,969 $ 252,694
One to five years 503,566 498,551 889,793 910,156
Five to ten years 715,682 689,901 326,045 334,457
Beyond ten years 316,402 304,602 138,318 139,330
- -------------------------------------------------------------------
Total $1,724,541 $1,678,651 $1,605,125 $1,636,637
===================================================================
NOTE 4--LOANS
The composition of loans at December 31, 1999 and 1998, by lending
classification was as follows ($ in thousands):
- -------------------------------------------------------------------
December 31,
- -------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------
Commercial $1,174,698 $1,027,990
Commercial real estate 1,096,850 944,615
Residential real estate 1,811,768 1,688,621
Consumer credit, net 754,618 693,079
- -------------------------------------------------------------------
Total loans $4,837,934 $4,354,305
===================================================================
Through its affiliates, Old National makes loans to customers in various
industries including manufacturing, agribusiness, transportation, mining,
wholesaling, and retailing, predominately in its tri-state region. The loan
portfolio is diversified with no single industry exceeding 10% of the total.
Executive officers and directors of Old National and significant
subsidiaries and their related interests are loan customers of its affiliate
banks in the normal course of business. These loans are made on substantially
the same terms, including interest rates and collateral, as those prevailing at
the same time for comparable transactions with unrelated parties and involve no
unusual risk of collectibility. An analysis of the 1999 activity of these loans
is as follows ($ in thousands):
- -------------------------------------------------------------------
Balance, January 1, 1999 $ 115,003
New loans 182,402
Repayments (171,888)
Officer and director changes (24,574)
- -------------------------------------------------------------------
Balance, December 31, 1999 $ 100,943
===================================================================
35
<PAGE>
NOTE 5--ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses during the years 1999, 1998, and 1997
was as follows ($ in thousands):
- ---------------------------------------------------------------------------
December 31,
- ---------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------
Balance at beginning of year $51,847 $49,053 $43,527
Additions:
Provision charged to expense 11,489 12,160 13,562
Acquired from acquisition 1,000 -- --
Deductions:
Loans charged off 14,092 12,938 12,594
Recoveries (6,802) (3,572) (4,558)
- ---------------------------------------------------------------------------
Net charge-offs 7,290 9,366 8,036
- ---------------------------------------------------------------------------
Balance at end of year $57,046 $51,847 $49,053
===========================================================================
At December 31, 1999, the recorded investment in loans for which impairment
has been recognized in accordance with SFAS Nos. 114 and 118 was $8.9 million
with no related allowance and $55.9 million with $14.3 million of related
allowance. At December 31, 1998, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS Nos. 114 and 118 was $7.5
million with no related allowance and $42.0 million with $9.0 million of related
allowance.
For the year ended December 31, 1999, the average balance of impaired loans
was $54.6 million, for which $4.4 million of interest was recorded. For the year
ended December 31, 1998, the average balance of impaired loans was $51.7
million, for which $3.0 million of interest was recorded.
NOTE 6--FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires entities to disclose the fair value of financial instruments, both
assets and liabilities recognized and not recognized in the consolidated balance
sheet, for which it is practicable to estimate fair value. The following methods
and assumptions were used to estimate the fair value of each type of financial
instrument.
Cash, Due From Banks, and Money Market Investments
For these instruments, the carrying amount is a reasonable estimate of fair
value.
Investment Securities
For investment securities, fair values are based on quoted market prices,
if available. For securities where quoted prices are not available, fair value
is estimated based on market prices of similar securities.
Loans
The fair value of loans is estimated by discounting future cash flows using
current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
Deposits
The fair value of noninterest-bearing demand deposits and savings, NOW, and
money market deposits is the amount payable as of the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using rates
currently offered for deposits with similar remaining maturities.
Short-Term Borrowings
Federal funds purchased and securities sold under agreements to repurchase
generally have an original term to maturity of 30 days or less and, therefore,
their carrying amount is a reasonable estimate of fair value.
36
<PAGE>
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 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 Old National's financial instruments
as of December 31, 1999, are as follows ($ in thousands):
- ------------------------------------------------------------------------------
Carrying Fair
Value Value
- ------------------------------------------------------------------------------
Financial Assets:
Cash, due from banks and money market investments $ 185,615 $ 185,615
Investment securities 1,678,651 1,678,651
Loans, net 4,780,888 4,728,298
Financial Liabilities:
Deposits 5,071,298 5,031,884
Short-term borrowings 673,930 673,930
Other borrowings 662,973 657,245
Off-Balance-Sheet Financial Instruments:
Commitments to extend credit 793,518 793,518
Letters of credit 37,195 37,195
- ------------------------------------------------------------------------------
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:
- ------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------
Provision at statutory rate 35.0% 35.0% 35.0%
Tax exempt income (10.7) (9.7) (8.5)
State income taxes 2.3 3.5 3.9
State apportionment changes (1.3) -- --
Other, net (1.3) (0.3) (0.5)
- ------------------------------------------------------------------------------
Actual tax rate, continuing operations 24.0% 28.5% 29.9%
==============================================================================
The provision for income taxes consists of the following components ($ in
thousands):
- ------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------
Income taxes currently payable--federal $23,278 $21,277 $21,909
Income taxes currently payable--state 4,089 5,469 5,355
- ------------------------------------------------------------------------------
Deferred income taxes related to:
Provision for loan losses (1,252) (1,889) (2,796)
Other, net 2,767 (1,862) 1,189
- ------------------------------------------------------------------------------
Deferred income tax expense (benefit) 1,515 (3,751) (1,607)
- ------------------------------------------------------------------------------
Provision for income taxes 28,882 22,995 25,657
==============================================================================
Provision Detail:
Continuing operations 26,148 29,573 28,998
Discontinued operations 2,734 (6,578) (3,341)
- ------------------------------------------------------------------------------
Total $28,882 $22,995 $25,657
==============================================================================
37
<PAGE>
NOTE 7--INCOME TAXES (continued)
Significant components of the net deferred tax assets at December 31 are as
follows ($ in thousands):
- ------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------
Deferred Tax Assets:
Allowance for loan losses, net of recapture $21,396 $20,144
Benefit plan accruals 6,134 4,298
Unrealized loss on available-for-sale investment securities 18,337 --
Other, net -- 2,391
- ------------------------------------------------------------------------------
Total deferred tax assets 45,867 26,833
- ------------------------------------------------------------------------------
Deferred Tax Liabilities:
Premises and equipment (2,252) (2,140)
Accretion on investment securities (664) (862)
Unrealized gain on available-for-sale investment securities -- (12,414)
Lease receivable, net (5,314) (3,439)
Other, net (423) --
- ------------------------------------------------------------------------------
Total deferred tax liabilities (8,653) (18,855)
- ------------------------------------------------------------------------------
Net deferred tax assets $37,214 $ 7,978
==============================================================================
NOTE 8--EMPLOYEE BENEFIT PLANS
Retirement Plan
Old National 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. Old
National'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, 1999, 1998, and
1997 ($ in thousands):
- ------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $32,233 $27,746 $24,356
Service cost 2,813 2,353 2,169
Interest cost 2,155 2,070 1,884
Acquisitions -- -- 262
Benefits paid (3,182) (4,022) (2,325)
Actuarial (gain) loss (3,208) 4,086 1,400
- ------------------------------------------------------------------------------
Benefit obligation at end of year $30,811 $32,233 $27,746
- ------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan asset at beginning of year $28,694 $24,138 $21,859
Actual return on plan assets 3,450 5,359 4,122
Employer contributions 1,269 3,305 188
Transfers 80 84 447
Benefits paid (3,182) (4,022) (2,325)
Administrative expenses (159) (170) (153)
- ------------------------------------------------------------------------------
Fair value of plan assets at end of year $30,152 $28,694 $24,138
- ------------------------------------------------------------------------------
Funded status $ (659) $(3,539) $(3,608)
Unrecognized net actuarial (gain) loss (3,430) 1,106 446
Unrecognized transition asset (1,765) (2,127) (2,488)
Unrecognized prior service cost 329 388 445
- ------------------------------------------------------------------------------
Accrued benefit cost $(5,525) $(4,172) $(5,205)
==============================================================================
Weighted-average assumptions as of December 31,
Discount rate 7.75% 7.25% 7.75%
Expected return on plan assets 8.00 8.00 8.00
Rate of compensation increase 5.00 5.00 5.00
- ------------------------------------------------------------------------------
38
<PAGE>
The net pension expense and its components were as follows ($ in thousands):
- ------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------
Service cost $ 2,813 $ 2,353 $ 2,169
Interest cost 2,155 2,070 1,884
Expected return on plan assets (2,131) (1,866) (1,693)
Amortization of prior service cost 58 58 58
Amortization of transitional asset (361) (362) (362)
Recognized actuarial loss 88 18 5
- ------------------------------------------------------------------------------
Net pension expense $ 2,622 $ 2,271 $ 2,061
==============================================================================
Profit Sharing Plan
Old National 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
Old National. The profit sharing expense for the years 1999, 1998, and 1997 was
$4.7 million, $4.5 million, and $4.5 million, respectively.
Restricted Stock Plan
Old National has a restricted stock plan which covers certain officers.
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 81,623 in 1999, 52,208 in 1998, and 44,349 in 1997.
Expense recorded in 1999, 1998, and 1997 was $2.3 million, $1.9 million, and
$1.2 million, respectively.
NOTE 9--SHAREHOLDERS' EQUITY
Stock Dividend
A 5% stock dividend was declared on December 9, 1999, and distributed on
January 28, 2000. All average share and per share amounts have been
retroactively adjusted to reflect this stock dividend.
Dividend Reinvestment and Stock Purchase Plan
Old National 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, 1999, 500 thousand authorized and
unissued common shares were reserved for issuance under the plan.
Shareholder Rights Plan
Old National has adopted a Shareholder Rights Plan whereby one right was
distributed for each outstanding share of 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 Old
National'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
Old National at a price of $.01 per right.
In the event an acquiring party becomes the beneficial owner of 20% or more
of Old National's outstanding shares, rights holders (other than the acquiring
person) may purchase two shares of common stock for the price of one share at
the then market price. If Old National is acquired and is not the surviving
corporation, or 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.
39
<PAGE>
NOTE 10--FINANCING ACTIVITIES
Lines of Credit
At December 31, 1999, Old National had $75.0 million in unsecured lines of
credit with unaffiliated banks, all of which are unused. The lines bear interest
at the bank's federal funds rate plus 60 to 80 basis points. During the years
1999, 1998, and 1997, the average interest rates on the lines were 5.93%, 6.25%,
and 6.26%, 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, 1999, Old National had $553.8 million borrowed from various
FHLB's. Floating-rate borrowings totaled $414.7 million and will mature between
2000 and 2008. The remaining borrowings have a fixed interest rate and mature
between 2000 and 2019. The weighted average rates of the FHLB borrowings were
5.69% and 5.25% at December 31, 1999 and 1998, respectively. These borrowings
are secured by specific mortgage loans and securities which have current book
values of approximately $1,030.9 million and $35.2 million, respectively.
Medium Term Notes
Old National has registered Series A Medium Term Notes in the principal
amount of $50 million. The series has been fully issued. At December 31, 1999, a
total of $32 million of the notes were outstanding with maturities ranging from
one to four years and fixed interest rates ranging from 6.70% to 7.10%.
Old National 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, 1999, a total of
$64.3 million of the notes were outstanding, with maturities ranging from three
to eight years and fixed interest rates from 6.40% to 7.03%.
Subordinated Debentures
Old National has outstanding $12.8 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 common
stock at a conversion rate of 81.395 shares per $1,000 principal amount of
debentures. During 1999, $9.2 million principal amount of debentures was
converted into 748,834 common stock shares.
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 Old
National 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. At December 31, 1999, 1.0 million authorized and unissued common
shares were reserved for conversion of the remaining debentures.
NOTE 11--INTEREST RATE CONTRACTS
Old National uses interest rate contracts such as interest swaps 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
hedged 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, 1999, Old National had interest rate swaps with a notional
value of $75 million. The contracts are an exchange of interest payments with no
effect on the principal amounts of the underlying hedged liability. The fair
value of the swap contracts were ($3.7) million at December 31, 1999. Old
National pays the counterparty of variable rate based on three-month LIBOR and
receives a fixed rate ranging from 5.375 to 7.00%. The contracts terminate on or
prior to May 3, 2009.
At December 31, 1998, Old National had an interest rate swap with a
notional value of $20 million. The fair value of the swap contract was $0.3
million.
40
<PAGE>
At December 31, 1998, Old National 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.
Old National is exposed to losses if a counterparty fails to make its
payments under a contract in which it is in the receiving position. Although
collateral or other security is not obtained, Old National minimizes its credit
risk by monitoring the credit standing of the counterparties and anticipates
that the counterparties will be able to fully satisfy their obligation under the
agreements.
NOTE 12--COMMITMENTS AND CONTINGENCIES
Leases
Old National rents certain premises and equipment under operating leases
which expire at various dates. Many of these leases require the payment of
property taxes, insurance premiums, maintenance, and other costs. In some cases,
rentals are subject to increases in relation to a cost-of-living index. Total
rental expense was $4.3 million in 1999, $4.0 million in 1998, and $3.9 million
in 1997.
Following is a summary of future minimum lease commitments ($ in
thousands):
2000 $2,319 2003 $1,806
2001 2,164 2004 752
2002 1,983 2005 and after 2,526
Letters and Lines of Credit
In the normal course of business, Old National's banking affiliates have
entered into various agreements to extend credit, such as loan commitments of
$793.5 million and letters of credit of $37.2 million at December 31, 1999.
These commitments are not reflected in the consolidated financial statements. No
material losses are expected to result from these transactions.
Litigation
At December 31, 1999, various legal actions and proceedings were pending
against Old National 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 Old National or its affiliates.
NOTE 13--REGULATORY RESTRICTIONS
Restrictions on Cash and Due From Banks
Old National'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, 1999
and 1998, were $16.3 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. At December 31, 1999,
affiliate banks could pay aggregate dividends to Old National of approximately
$2.5 million without prior regulatory approval. Such approval has been regularly
provided as all affiliate banks exceeded the regulatory definition of
well-capitalized.
Capital Adequacy
For additional information on capital adequacy see Table 16 in Management's
Discussion and Analysis on page 24.
41
<PAGE>
NOTE 14--PARENT COMPANY FINANCIAL STATEMENTS
The following are the condensed parent company only financial statements of
Old National Bancorp ($ in thousands):
Old National Bancorp (Parent Company Only) Condensed Balance Sheet
- ------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------
Assets:
Deposits in affiliate banks $ 16 $ 925
Investment in affiliates:
Banks, including purchase accounting intangible assets
of $6,221 in 1999 and $6,781 in 1998 526,786 544,389
Non-banks 10,886 12,046
Advances to affiliates 43,089 8,777
Other assets 31,384 91,243
- ------------------------------------------------------------------------------
TOTAL ASSETS $612,161 $657,380
==============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings $ -- $ 7,250
Other liabilities 10,335 12,222
Convertible subordinated debentures 12,782 21,963
Medium term notes 96,300 96,300
Shareholders' equity 492,744 519,645
- ------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $612,161 $657,380
==============================================================================
Old National Bancorp (Parent Company Only) Condensed Statement of Income
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Years Ended December 31
- ----------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME
Dividends from affiliates $ 87,066 $ 88,593 $83,445
Other income 5,884 2,851 380
Other income from affiliates 9,818 11,066 12,631
- ----------------------------------------------------------------------------------------
TOTAL INCOME 102,768 102,510 96,456
- ----------------------------------------------------------------------------------------
EXPENSE
Interest on borrowings 8,330 9,653 10,283
Amortization of intangibles 560 687 686
Other expenses 20,153 14,116 10,296
- ----------------------------------------------------------------------------------------
TOTAL EXPENSE 29,043 24,456 21,265
- ----------------------------------------------------------------------------------------
Income before income taxes and equity in
undistributed earnings of affiliates 73,725 78,054 75,191
Income tax benefit (7,777) (4,290) (3,415)
- ----------------------------------------------------------------------------------------
Income before equity in undistributed earnings of affiliates 81,502 82,344 78,606
Equity in undistributed earnings of affiliates 5,293 (18,063) (15,528)
- ----------------------------------------------------------------------------------------
NET INCOME $ 86,795 $ 64,281 $63,078
========================================================================================
</TABLE>
42
<PAGE>
Old National Bancorp (Parent Company Only) Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Years Ended December 31
- ---------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 86,795 $ 64,281 $ 63,078
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation 463 435 275
Amortization of intangible assets 560 687 686
(Increase) decrease in other assets 60,483 (77,945) (4,406)
Increase (decrease) in other liabilities (1,887) 2,751 3,452
Equity in undistributed earnings of affiliates (5,293) 18,063 15,528
- ---------------------------------------------------------------------------------------------
Total adjustments 54,326 (56,009) 15,535
- ---------------------------------------------------------------------------------------------
Net cash flows provided by operating activities 141,121 8,272 78,613
- ---------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (advances to) repayments from affiliates (40,014) 60,125 (30,295)
Purchase of premises and equipment (553) (193) (1,987)
- ---------------------------------------------------------------------------------------------
Net cash flows provided by (used in) investing activities (40,567) 59,932 (32,282)
- ---------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (payments on) proceeds from short-term borrowings (7,250) (9,758) (50,198)
Net (payments on) proceeds from medium term notes -- (2,000) 54,300
Cash dividends paid (30,552) (26,058) (25,012)
Common stock repurchased (78,499) (46,702) (36,356)
Common stock reissued, net of shares used to convert
subordinated debentures 14,838 16,641 9,574
- ---------------------------------------------------------------------------------------------
Net cash flows used in financing activities (101,463) (67,877) (47,692)
- ---------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (909) 327 (1,361)
Cash and cash equivalents at beginning of period 925 598 1,959
- ---------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16 $ 925 $ 598
=============================================================================================
</TABLE>
43
<PAGE>
NOTE 15--SEGMENT INFORMATION
Old National'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 pages 8 and 9 of Management's Discussion and
Analysis. The accounting policies of the segment are the same as those described
in Note 1. Intersegment sales and transfers are not significant. The charter
consolidation during 1999 impacted the internal reporting and makes prior year's
financial data not comparable to the new format.
Summarized financial information concerning segments is shown in the
following table, based on continuing operations. The other column includes
insignificant non-bank affiliates and intercompany eliminations.
- ------------------------------------------------------------------
Community
Banking Other Total
- ------------------------------------------------------------------
1999
Net interest income $ 201,914 $ 36,473 $ 238,387
Income tax expense (benefit) 25,942 206 26,148
Segment profit (loss) 53,955 28,739 82,694
Total assets 5,398,621 1,584,311 6,982,932
1998
Net interest income 228,250 (3,329) 224,921
Income tax expense (benefit) 34,458 (4,885) 29,573
Segment profit (loss) 81,133 (6,998) 74,135
Total assets 6,329,380 87,231 6,416,611
1997
Net interest income 225,655 (7,472) 218,183
Income tax expense (benefit) 34,060 (5,062) 28,998
Segment profit (loss) 74,824 (6,741) 68,083
Total assets $5,852,756 $ 80,565 $5,933,321
- ------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
This information is omitted from this report pursuant to General
Instruction G.(1) of Form 10-K as the Registrant has filed with the Commission
on July 29, 1999 a Form 8-K, as amended, relating to a change in accountants.
44
<PAGE>
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 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,
1999.
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,
1999.
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,
1999.
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,
1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements:
Report of Independent Accountants
Consolidated Balance Sheet--December 31, 1999 and 1998
Consolidated Statement of Income--Years Ended December 31, 1999, 1998,
and 1997
Consolidated Statement of Changes in Shareholders' Equity--Years Ended
December 31, 1999, 1998, and 1997
Consolidated Statement of Cash Flows--Years Ended December 31, 1999,
1998, and 1997
Notes to Consolidated Financial Statements
(b) Reports on Form 8-K filed during the quarter ended December 31, 1999.
Filed on December 1, 1999, Supplement to the 1998 annual report.
(c) Exhibits--The following exhibits are filed herewith:
Exhibit 21--Subsidiaries of the Registrant
Exhibit 23--Consent of Independent Accountants
Exhibit 27--Financial Data Schedule
(d) Financial Statement Schedules.
None
45
<PAGE>
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/ James A. Risinger
---------------------------
James A. Risinger,
Chairman of the Board of Directors,
President and CEO (Principal Executive Officer)
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: /s/ David L. Barning 3/14/2000
---------------------------------- ---------
David L. Barning, Director Date
By: /s/ Richard J. Bond 3/14/2000
---------------------------------- ---------
Richard J. Bond, Director Date
By: /s/ Alan W. Braun 3/14/2000
---------------------------------- ---------
Alan W. Braun, Director Date
By: /s/ Wayne A. Davidson 3/14/2000
---------------------------------- ---------
Wayne A. Davidson, Director Date
By: /s/ Larry E. Dunigan 3/14/2000
---------------------------------- ---------
Larry E. Dunigan, Director Date
By: /s/ David E. Eckerle 3/14/2000
---------------------------------- ---------
David E. Eckerle, Director Date
By: /s/ Phelps L. Lambert 3/14/2000
---------------------------------- ---------
Phelps L. Lambert, Director Date
By: /s/ Ronald B. Lankford 3/14/2000
---------------------------------- ---------
Ronald B. Lankford, Date
President and Director
(Chief Operating Officer)
By: /s/ Lucien H. Meis 3/14/2000
---------------------------------- ---------
Lucien H. Meis, Director Date
By: /s/ Louis L. Mervis 3/14/2000
---------------------------------- ---------
Louis L. Mervis, Director Date
By: /s/ James A. Risinger 3/14/2000
---------------------------------- ---------
James A. Risinger, Date
Chairman of the Board of Directors,
President and CEO (Principal
Executive Officer)
By: /s/ John N. Royse 3/14/2000
---------------------------------- ---------
John N. Royse, Director Date
By: /s/ Marjorie Soyugenc 3/14/2000
---------------------------------- ---------
Marjorie Soyugenc, Director Date
By: /s/ Charles D. Storms 3/14/2000
---------------------------------- ---------
Charles D. Storms, Director Date
By: /s/ John S. Poelker 3/14/2000
---------------------------------- ---------
John S. Poelker, Date
Executive Vice President and Chief
Financial Officer (Principal
Financial Officer)
By: /s/ Ronald W. Seib 3/14/2000
---------------------------------- ---------
Ronald W. Seib, Date
Vice President-Corporate Controller
(Principal Accounting Officer)
46
<PAGE>
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 Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999).
4 (a) The description of Registrant's common stock contained in its
Current Report on Form 8-K, dated January 6, 1983 (incorporated by
reference thereto).
(b) The description of Registrant's Preferred Stock Purchase Rights
contained in Registrant's Form 8-A, dated March 1, 1990 (incorporated
by reference thereto), including the Rights Agreement, dated March 1,
1990, between the Registrant and Old National Bank in Evansville, as
Trustee, as amended contained in the Registrant's Form 8-A, dated
March 1, 2000 (incorporated by reference thereto).
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) 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.
(e) Employment Agreement is incorporated by reference to the
Registrant's Quarterly report on Form 10-Q for the quarter ended June
30, 1998.
(f) The Old National Bancorp 1999 Equity Incentive Plan is
incorporated by reference to the Registrant's Quarterly report on Form
10-Q for the quarter ended March 31, 1999.
21 Subsidiaries of the Registrant
23 (a) Consent of PricewaterhouseCoopers
(b) Consent of Arthur Andersen LLP
27 Financial Data Schedule
47
EXHIBIT 21
OLD NATIONAL BANCORP
SUBSIDIARIES OF THE REGISTRANT
AS OF DECEMBER 31, 1999
Jurisdiction of Business Name
Name of Subsidiary Incorporation of Subsidiary
- ------------------ --------------- -------------
Old National Bank United States of America Old National Bank
(Lawrenceville, Illinois)
Old National Realty Company, Inc. Indiana Old National
(Evansville, Indiana) Realty Company,
Inc.
Indiana Old National Insurance Vermont IONIC
Company
(Evansville, Indiana)
Orange County Bank Indiana Orange County Bank
(Paoli, Indiana)
Old National Trust Company United States of America Old National Trust
(Evansville, Indiana) Company
Old National Trust Company United States of America Old National
-Kentucky Trust Company-
(Morganfield, Kentucky) Kentucky
Old National Trust Company United States of America Old National
-Illinois Trust Company-
(Mt. Carmel, Illinois) Illinois
ONB Finance Company Indiana ONB Finance
(Terre Haute, Indiana)
Exhibit 23.a
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (No. 333-87573 and 333-29433) of Old National Bancorp of
our report dated January 26, 2000 relating to the financial statements, which
appears in the Annual Report to Shareholders, which is incorporated in this
Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
January 26, 2000
Exhibit 23.b
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 Statements File No. 333-29433 and 333-87513.
/s/ Arthur Andersen
ARTHUR ANDERSEN LLP
Indianapolis, Indiana,
March 14, 2000.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM OLD NATIONAL
BANCORP'S DECEMBER 31, 1999 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 169,184
<INT-BEARING-DEPOSITS> 16,431
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,678,651
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 4,837,934
<ALLOWANCE> 57,046
<TOTAL-ASSETS> 6,982,932
<DEPOSITS> 5,071,298
<SHORT-TERM> 673,930
<LIABILITIES-OTHER> 81,987
<LONG-TERM> 662,973
0
0
<COMMON> 47,289
<OTHER-SE> 445,455
<TOTAL-LIABILITIES-AND-EQUITY> 6,982,932
<INTEREST-LOAN> 383,269
<INTEREST-INVEST> 104,518
<INTEREST-OTHER> 1,136
<INTEREST-TOTAL> 488,923
<INTEREST-DEPOSIT> 182,609
<INTEREST-EXPENSE> 250,536
<INTEREST-INCOME-NET> 238,387
<LOAN-LOSSES> 11,489
<SECURITIES-GAINS> 2,458
<EXPENSE-OTHER> 20,545
<INCOME-PRETAX> 108,842
<INCOME-PRE-EXTRAORDINARY> 82,694
<EXTRAORDINARY> 4,101<F1>
<CHANGES> 0
<NET-INCOME> 86,795
<EPS-BASIC> 1.72
<EPS-DILUTED> 1.67
<YIELD-ACTUAL> 4.00
<LOANS-NON> 16,863
<LOANS-PAST> 4,613
<LOANS-TROUBLED> 169
<LOANS-PROBLEM> 122,466
<ALLOWANCE-OPEN> 51,847
<CHARGE-OFFS> 14,092
<RECOVERIES> 6,802
<ALLOWANCE-CLOSE> 57,046
<ALLOWANCE-DOMESTIC> 57,046
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>DISCONTINUED OPERATIONS
</FN>
</TABLE>
