SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 1, 2000
OLD NATIONAL BANCORP
(Exact name of Registrant as specified in its charter)
Indiana 0-10888 35-1539838
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
420 Main Street, Evansville, IN 47708
(Address of Principal Executive Offices) Zip Code
(812) 464-1434
(Registrant's telephone number, including area code)
Item 5. Other Events
On March 1,2000 and March 10,2000, Old National Bancorp (the
"Registrant") completed its pooling of interests acquisitions of
Heritage Financial Services, Inc.(Heritage) and ANB Corporation (ANB).
Attached as an exhibit is Supplemental Consolidated Financial
Information, which sets forth on a restated basis to reflect the
Heritage and ANB mergers, Selected Financial Data, Management's
Discussion and Analysis of Financial Condition and Results of
Operations,the Registrant's consolidated balance sheets as of
December 31, 1999 and 1998, and the related consolidated statements
of income, changes in shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1999.
Item 7. Exhibits
(c ) Exhibits.
(23) Consents of Public Accountants
(27) Financial Data Schedule
(99) Supplemental Financial Information
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this Current Report on
Form 8-K to be signed on its behalf by the undersigned hereunto
duly authorized.
OLD NATIONAL BANCORP
(Registrant)
Date: April 18, 2000 By:/s/ James A. Risinger
James A. Risinger,
Chairman, President & CEO
Exhibit 99
OLD NATIONAL BANCORP
SUPPLEMENTAL CONSOLIDATED FINANCIAL INFORMATION
Restated to reflect the pooling of interests accounting
acquisitions of Heritage Financial Services, Inc. on March 1,
2000 and ANB Corporation on March 10, 2000.
<TABLE>
<CAPTION>
SELECTED SUPPLEMENTAL FINANCIAL DATA
($ in thousands except per share data)
_______________________________________________________________________________________________________________________________
Five Year
Growth
1999 1998 1997 1996 1995 1994 Rate
_______________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
(Taxable equivalent basis)
Interest income $583,791 $539,391 $510,786 $476,304 $455,107 $397,216
Interest expense 284,763 261,688 243,580 220,775 214,502 166,641
_______________________________________________________________________________________________________________________________
Net interest income 299,028 277,703 267,206 255,529 240,605 230,575 5.3 %
Provision for loan losses 14,798 14,987 15,265 12,723 9,009 8,595 11.5
_______________________________________________________________________________________________________________________________
Net interest income after
provision for loan losses 284,230 262,716 251,941 242,806 231,596 221,980 5.1
Noninterest income 82,974 72,643 62,505 59,487 51,465 45,782 12.6
Noninterest expense 223,583 198,644 186,345 184,288 177,636 175,400 5.0
_______________________________________________________________________________________________________________________________
Income before income taxes 143,621 136,715 128,101 118,005 105,425 92,362 9.2
Income taxes 50,364 51,272 49,675 46,143 40,568 34,110 8.1
_______________________________________________________________________________________________________________________________
Net income from continuing operations $93,257 85,443 78,426 71,862 64,857 58,252 9.9
Discontinued operations 4,101 (9,854) (5,005) 494 - - N/M
_______________________________________________________________________________________________________________________________
Net income $97,358 $75,589 $73,421 $72,356 $64,857 $58,252 9.9 %
===============================================================================================================================
YEAR-END BALANCES
Total assets $8,109,285 $7,333,386 $6,715,787 $6,320,187 $5,966,574 $5,702,969 7.3 %
Loans, net of
unearned income 5,714,543 5,058,370 4,526,521 4,171,851 3,862,799 3,645,640 9.4
Deposits 5,962,499 5,436,276 5,147,271 5,080,775 4,932,296 4,570,738 5.5
Shareholders' equity 584,995 605,849 579,599 552,403 549,239 518,793 2.4
PER SHARE DATA (on continuing operations)(1)
Net income-basic $1.63 $1.49 $1.37 $1.22 $1.07 $0.94 11.6
Net income-diluted (2) 1.59 1.45 1.33 1.19 1.05 0.92 11.6
Cash dividends paid 0.63 0.56 0.53 0.50 0.48 0.46 6.5
Book value at year-end 10.35 9.77 9.20 9.51 9.16 8.45 4.1
SELECTED PERFORMANCE RATIOS
(on continuing operations)
Return on assets 1.20 % 1.23 % 1.21 % 1.19 % 1.12 % 1.06 %
Return on equity (3) 15.16 14.33 14.02 13.26 12.23 11.15
Equity to assets 7.90 8.56 8.64 9.09 9.13 9.43
Dividend payout 38.13 35.73 36.93 40.98 44.04 47.42
Primary capital to assets 8.72 9.39 9.45 9.91 9.97 10.32
Net charge-offs to
average loans 0.17 0.24 0.21 0.28 0.24
Allowance for loan losses
to average loans 1.21 1.25 1.29 1.24 1.28
===============================================================================================================================
(1) Restated for all stock dividends.
(2) Assumes the conversion of ONB's subordinated debentures.
(3) Excludes unrealized gains (losses) on investment securities.
N/M = Not meaningful
</TABLE>
(Original-page 7)
SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
On March 1, 2000 and March 10, 2000 Old National Bancorp ("Old National")
merged with Heritage Financial Services, Inc ("Heritage") and ANB Corporation,
("ANB") respectively. The mergers were accounted for as pooling of
interests, and, as such, financial information included in this discussion
has been restated to present the combined financial condition and results of
operations of these companies as if the mergers had been in effect for all
periods presented. Under terms of the merger agreements, each outstanding
Heritage common share was exchanged for 3.3075 common shares of Old National
and each outstanding ANB common share was exchanged for 1.3125 common shares
of Old National.
INTRODUCTION
Old National is a bank holding company headquartered in Evansville, Indiana.
Located in Indiana, Illinois, Kentucky, Tennessee and Ohio, its 156 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 non-bank 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 supplemental 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 relates to its continuing operations. For
further details regarding the discontinued operations, see the
supplemental 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
its 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.
(Original-page 8)
Short- and long-term interest rates increased during the second
half of 1999, reversing the declines of 1998. The Federal funds
rate target established by the Federal Reserve Open Market
Committee was increased from 4.75% in June of 1999 to 5.5% by
December 1999. The national prime lending rate moved in tandem
with the Federal funds target rate, increasing from 7.75% to 8.5%
during 1999. Long term U.S. Treasury rates increased throughout
1999. The 30 year U.S. Treasury bond yield finished the year at
6.60%, approximately 150 basis points higher than in January
1999. The yield curve, as measured by the difference between
rates on 6 month U.S. Treasury bills and 30 year Treasury bonds,
steepened during 1999 from a fairly flat curve in 1998,
reflecting continuing concern within the financial markets that
interest rates would increase further.
During 1997, the fixed-income market began requiring from
corporate customers higher spreads to U.S. Treasury rates. In
1997 and 1998, declining rates muted some of this impact on the
banking industry's and Old National's cost of funds. With the
rising rate environment in 1999, this additional spread put
pressure on the marginal cost of funds. This trend combined with
competitive issues on loan pricing continued to compress net
interest margin in 1999 within the banking industry and at Old
National.
MERGER AND CONSOLIDATION ACTIVITY
During 1999, Old National merged with Southern Bancshares Ltd.
("Southern"), Carbondale, Illinois and Dulaney Bancorp,Inc.
("Dulaney"), Marshall, Illinois. As of December 31, 1998,
Southern had total assets of $255 million and Dulaney's total
assets were $39 million. Both mergers were consummated in the
first quarter of 1999 and accounted for as pooling-of-interests.
These financial statements have been restated to reflect the
Southern merger. The Dulaney merger was not considered material.
In 1999 Old National announced merger agreements with ANB
Corporation, Muncie, Indiana, Heritage Financial Services, Inc.,
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 closed in
March 2000 and were accounted for as pooling-of-interests. These
supplemental consolidated financial statements have been restated to
include these mergers. The Permanent transaction is expected to close
in the third quartaer of 2000 and will be accounted for as a purchase.
The Permanent merger is 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 9.1% to reach $93.2 million in 1999, a $7.8
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 $1.63, up 9.4% over 1998, and diluted earnings per share
totaled $1.59, a 9.6% increase over 1998. Strong revenue growth (tax
equivalized net interest income plus noninterest income) of $31.6 million,
a 9.0% 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 $85.4 million, up $7.0 million above
1997 earnings. Revenue growth of $20.6 million combined with reduced
provision for loan loss created the 8.9% increase in earnings.
(Original-page 9)
NET INTEREST INCOME
As a financial intermediary, Old National pays interest on deposits and
other liabilities and receives interest and fee income on earning assets,
such as loans and investments. The difference between the income earned
and the interest paid is net interest income which provides nearly 80% of
Old National's revenues. Net interest margin is net interest income, on a
taxable equivalent basis, expressed as a percentage of average earning
assets. Incorporating the tax savings on certain assets permits effective
yield comparability.
The net interest margin is influenced by a number of factors, such as the
volume and mix of earning assets and funding sources, the interest rate
environment, income tax rates, and the level of earning assets funded by
interest-free funding sources (primarily noninterest-bearing demand
deposits and equity capital). Old National can influence the effect of
these factors through its management of credit extension and interest rate
sensitivity, both of which are discussed in detail later in this report.
External factors, such as the overall condition of the economy, credit
demand strength, Federal Reserve Board monetary policy and changes in tax
laws, can also have significant effect on changes in net interest income
from one period to another.
On a taxable equivalent basis, net interest income grew 7.7%, a $21.3
million increase over 1998. Average earning assets grew 12.3% or $802.0
million during 1999. Nonearning assets rose $25.0 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
$750.9 million or 13.2%. Noninterest-bearing deposits increased $46.9
million or 8.3% and other liabilities and equity provided an additional
$23.5 million of funding.
Several factors combined to lower Old National's net interest margin to
4.09%. Earning asset yield declined 30 basis points to 7.98%. The full
year impact of declining interest rates in 1998 and competitive market
pressures resulted in a 44 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 74.2% of earning assets and 69.7% of total assets. The cost of interest-
bearing liabilities declined 17 basis points to 4.41%. 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 3.9% or $10.5 million and totaled $277.7
million. Average earning assets grew 7.3%, a $442.1 million increase.
Interest-bearing liabilities rose $425.0 million or 8.0%. The yield on
earning assets declined 13 basis points as all asset catagories experienced
similar declines. The cost of interest-bearing liabilities decreased 3
basis points due to growth in the higher-rate liabilities. Net interest
margin declined from 4.40% to 4.26% due to these trends. Additionally,
approximately 8 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.
(Original-page 10)
<TABLE>
<CAPTION>
NET INTEREST INCOME CHANGES (TABLE 1)
(Taxable equivalent basis, $ in thousands)
____________________________________________________________________________________________________________________
% Change From Prior Year
________________________
1999 1998 1997 1999 1998
____________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans $456,369 $419,626 $387,634 8.8 % 8.3 %
Investment securities 125,373 117,812 122,056 6.4 (3.5)
Money market investments 2,049 1,953 1,096 4.9 78.2
____________________________________________________________________________________________________________________
Total interest income 583,791 539,391 510,786 8.2 5.6
____________________________________________________________________________________________________________________
INTEREST EXPENSE:
NOW deposits 10,699 12,195 13,479 (12.3) (9.5)
Savings deposits 11,367 11,992 13,206 (5.2) (9.2)
Money market deposits 27,445 26,738 27,168 2.6 (1.6)
Time deposits 163,187 156,178 147,441 4.5 5.9
Short-term borrowings 28,961 19,430 21,181 49.1 (8.3)
Other borrowings 43,104 35,155 21,105 22.6 66.6
____________________________________________________________________________________________________________________
Total interest expense 284,763 261,688 243,580 8.8 7.4
____________________________________________________________________________________________________________________
NET INTEREST INCOME $299,028 $277,703 $267,206 7.7 % 3.9 %
====================================================================================================================
NET INTEREST MARGIN 4.09 % 4.26 % 4.40 %
==========================================================================================
</TABLE>
<TABLE>
<CAPTION>
NET INTEREST INCOME - RATE/VOLUME ANALYSIS (TABLE 2)
(Taxable equivalent basis, $ in thousands)
_________________________________________________________________________________________________________
1999 vs. 1998 1998 vs. 1997
_________________________________________________________________________________________________________
Total Attributed to Total Attributed to
_____________ _____________
Change Volume Rate Change Volume Rate
_________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans $36,743 $58,831 ($22,088) $31,992 $37,908 ($5,916)
Investment securities 7,561 8,034 (473) (4,244) (39) (4,205)
Money market investments 96 91 5 857 940 (83)
_________________________________________________________________________________________________________
Total interest income 44,400 66,956 (22,556) 28,605 38,809 (10,204)
_________________________________________________________________________________________________________
INTEREST EXPENSE:
NOW deposits (1,496) 657 (2,153) (1,284) 111 (1,395)
Savings deposits (625) 664 (1,289) (1,214) (424) (790)
Money market deposits 707 1,856 (1,149) (430) 713 (1,143)
Time deposits 7,009 15,422 (8,413) 8,737 9,330 (593)
Short-term borrowings 9,531 8,387 1,144 (1,751) (598) (1,153)
Other borrowings 7,949 9,916 (1,967) 14,050 15,896 (1,846)
_________________________________________________________________________________________________________
Total interest expense 23,075 36,902 (13,827) 18,108 25,028 (6,920)
_________________________________________________________________________________________________________
NET INTEREST INCOME $21,325 $30,054 ($8,729) $10,497 $13,781 ($3,284)
=========================================================================================================
The variance not solely due to rate or volume is allocated equally between the rate and volume variances.
</TABLE>
(Original-page 11)
<TABLE>
<CAPTION>
THREE-YEAR AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS (TABLE 3)
(Taxable equivalent basis, $ in thousands)
____________________________________________________________________________________________________________________________________
1999 1998 1997
____________________________________________________________________________________________________________________________________
Average Interest Yield/ Average Interest Yield/ Average Interest Yield/
Balance & Fees Rate Balance & Fees Rate Balance & Fees Rate
____________________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
Money market investments $38,610 $2,049 5.31 % $36,890 $1,953 5.29 % $19,635 $1,096 5.58
Investment securities:
U.S. Treasury and Government
agencies (1) 1,233,578 79,564 6.45 1,155,442 74,148 6.42 1,182,362 78,618 6.65
State and political
subdivisions 550,436 41,168 7.48 517,158 39,530 7.64 501,779 40,066 7.98
Other securities 67,876 4,641 6.84 60,844 4,134 6.79 49,847 3,372 6.76
____________________________________________________________________________________________________________________________________
Total investment securities 1,851,890 125,373 6.77 1,733,444 117,812 6.80 1,733,988 122,056 7.04
____________________________________________________________________________________________________________________________________
Loans: (2) (3)
Commercial 1,277,302 111,323 8.72 1,121,514 102,261 9.12 979,587 92,370 9.43
Commercial real estate 1,107,761 94,026 8.49 894,918 80,246 8.97 754,745 67,878 8.99
Residential real estate 2,203,418 170,617 7.74 1,948,613 159,282 8.17 1,773,556 147,400 8.31
Consumer, net of unearned
income 808,670 75,999 9.40 749,808 73,351 9.78 781,022 75,169 9.62
Credit card 28,403 4,404 15.51 28,892 4,486 15.53 29,452 4,817 16.36
____________________________________________________________________________________________________________________________________
Total loans 5,425,554 456,369 8.41 4,743,745 419,626 8.85 4,318,362 387,634 8.98
____________________________________________________________________________________________________________________________________
Total earning assets 7,316,054 $583,791 7.98 % 6,514,079 $539,391 8.28 % 6,071,985 $510,786 8.41
=================== ================== ================
Less: Allowance for loan losses (64,052) (58,330) (52,380)
NON-EARNING ASSETS:
Cash and due from banks 175,922 156,929 154,490
Other assets 360,580 354,564 297,434
__________ __________ __________
TOTAL ASSETS $7,788,504 $6,967,242 $6,471,529
========== ========== ==========
INTEREST-BEARING LIABILITIES:
NOW deposits $805,348 $10,699 1.33 % $760,543 $12,195 1.60 % $754,026 $13,479 1.79
Savings deposits 488,343 11,367 2.33 461,365 11,992 2.60 477,144 13,206 2.77
Money market deposits 712,102 27,445 3.85 664,954 26,738 4.02 647,609 27,168 4.20
Time deposits 3,095,636 163,187 5.27 2,810,782 156,178 5.56 2,643,195 147,441 5.58
____________________________________________________________________________________________________________________________________
Total interest-bearing deposits 5,101,429 212,698 4.17 4,697,644 207,103 4.41 4,521,974 201,294 4.45
Short-term borrowings 587,537 28,961 4.93 413,333 19,430 4.70 425,666 21,181 4.98
Other borrowings 770,934 43,104 5.59 598,022 35,155 5.88 336,397 21,105 6.27
____________________________________________________________________________________________________________________________________
Total interest-bearing liab. $6,459,900 $284,763 4.41 % $5,708,999 $261,688 4.58 % 5,284,037 $243,580 4.61
=================== ================== ===============
NONINTEREST-BEARING LIABILITIES:
Demand deposits 613,953 567,082 546,311
Other liabilities 99,498 95,056 81,750
Shareholders' equity 615,153 596,105 559,431
__________ __________ __________
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $7,788,504 $6,967,242 $6,471,529
========== ========== ==========
INTEREST MARGIN RECAP:
Interest income/earning assets $583,791 7.98 % $539,391 8.28 % $510,786 8.41
Interest expense/earning assets 284,763 3.89 261,688 4.02 243,580 4.01
___________________ __________________ _______________
Net interest margin $299,028 4.09 % $277,703 4.26 % $267,206 4.40
=================== ================== ===============
(1) Includes Government agency mortgage-backed securities.
(2) Includes principal balances of nonaccrual loans. Interest income relating to nonaccrual loans is included only if received.
(3) The amount of loan fees is not material in any of the years presented.
</TABLE>
(Original-page 12)
ASSET/LIABILITY MANAGEMENT- INTEREST RATE SENSITIVITY AND LIQUIDITY
Customer preferences for loans and deposits generate certain levels of
interest rate risk, which is the impact changing interest rates have on net
interest income. Asset/liability management's goal is to maximize and
maintain adequate growth of net interest income within certain interest
rate sensitivity and liquidity guidelines established by Old National's
Balance Sheet Management Committee. This committee, comprised of Old
National senior managers, monitors asset/liability issues and guidelines.
Old National uses both static gap and income simulation methods to measure
the impact of interest rate changes on its net interest income. Static gap,
measured at a point in time, measures interest rate risk as the difference
between interest rate-sensitive assets and interest rate-sensitive
liabilities within a given repricing period and is expressed as a ratio and
as a dollar amount known as the "gap." A ratio of 100% suggests a balanced
position between rate-sensitive assets and liabilities within a given
repricing period. While the measurement process and related assessment of
risk are somewhat imprecise, Old National believes its asset/liability
management program allows adequate reaction time for trends in the market
place as they occur, thereby minimizing the potential negative effect of
its gap position against the event of interest rate changes.
Table 4 below reflects Old National's interest rate sensitivity position
within specified time periods and cumulatively over various time horizons.
In the table, assets and liabilities are placed in categories based on
their actual or expected repricing date. In the 365 day cumulative time
frame, the assets to liabilities ratio was 64%, 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.
<TABLE>
<CAPTION>
ANALYSIS OF INTEREST RATE SENSITIVITY AT DECEMBER 31, 1999 (TABLE 4)
($ in thousands)
_______________________________________________________________________________________________________
1-180 181-365 1-5 Beyond
Days Days Years 5 years Total
_______________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
RATE-SENSITIVE ASSETS:
Money market investments $39,478 $0 $0 $0 $39,478
Investment securities 93,601 $57,469 371,698 $1,298,671 1,821,439
Loans, net of unearned income 1,702,466 605,138 1,722,823 1,684,116 5,714,543
_______________________________________________________________________________________________________
Total rate sensitive assets 1,835,545 662,607 2,094,521 2,982,787 $7,575,460
_______________________________________________________________________________________________________
RATE-SENSITIVE LIABILITIES:
Deposits 1,994,958 718,774 1,007,825 1,596,500 5,318,057
Other borrowed funds 1,133,356 49,753 222,463 64,842 1,470,414
_______________________________________________________________________________________________________
Total rate-sensitive liabilities 3,128,314 768,527 1,230,288 1,661,342 $6,788,471
_______________________________________________________________________________________________________
Interest sensitivity gap
per period ($1,292,769) $105,920) $864,233 $1,321,445
_______________________________________________________________________________________________________
Cumulative gap ($1,292,769) ($1,398,689) ($534,456) $786,989
Cumulative ratio at
December 31, 1999 (1) 59 % 64 % 90 % 112 %
Cumulative ratio at
December 31, 1998 (1) 80 % 83 % 116 % 114 %
=======================================================================================================
(1) Rate-sensitive assets/rate-sensitive liabilities.
</TABLE>
(Original-page 13)
LIQUIDITY MANAGEMENT
In addition to the interest rate sensitivity the Balance Sheet Management
Committee monitors the company's liquidity position. The objective is to
ensure the ability to meet cash flow needs of customers, such as new loan
demand and deposit withdrawals, while at the same time maximizing lending
and investment opportunities.
Failure to properly manage liquidity requirements may result in the need to
satisfy customer withdrawals and other obligations with expensive funding
sources. Too much liquidity on the balance sheet is similarly undesirable
as earnings will suffer due to underutilized resources. Old National's
banking operations maintain adequate liquidity with sufficient levels of
liquid assets, unpledged securities, deposit growth, and other alternative
funding sources, such as the Federal Home Loan Bank ("FHLB") and the
Federal Reserve Bank. At December 31, 1999, the bank's debt rating was
rated A3 by Moody's and A- by Standard and Poor's.
The parent company's sources of liquidity include: bank lines of credit,
capital markets, and affiliate banks' dividends which are subject to
regulatory limits and in some cases require regulatory approval. Note 10
and 13 of the supplemental 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 investments
products and insurance. Noninterest income, excluding securities
transactions, grew 12.3% in 1999 compared to 15.1% in 1998.
The trust fee income grew 10.7% in 1999 and 13.6% 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 22.1% increase compared to a 2.2% 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 2.9%, after a 1.1% 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's life insurance coverage, and in 1999 Old
National had a full year of the revenue. Insurance sales hit $6.5 million,
up 12.9% 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 22.3% in 1999
with revenue exceeding $6.8 million, compared to 7.1% growth in 1998. The
coordination of trust and brokerage services contributed to this growth.
The remaining other income category was down $0.4 million from 1998 which
included loan sale gains.
In 1999 Old National realized $2.6 million in net securities gains as
management restructured the investment portfolio and used these one-time
gains to partially offset the one-time charter consolidation expenses.
During 1998 and 1997, Old National had lower levels of security sales.
Table 5 below presents changes in the components of noninterest income for
the years 1997 through 1999.
<TABLE>
<CAPTION>
NONINTEREST INCOME (TABLE 5) ($ in thousands)
________________________________________________________________________________________________________
% Change From
Prior Year
________________________________________________________________________________________________________
1999 1998 1997 1999 1998
________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Trust fees $21,587 $19,501 $17,162 10.7 % 13.6 %
Service charges on deposit
accounts 25,094 20,550 20,100 22.1 2.2
Loan servicing fees 5,494 5,337 5,394 2.9 (1.1)
Insurance premiums and commissions 6,508 5,765 5,318 12.9 8.4
Investment product fees 6,860 5,609 5,237 22.3 7.1
Bank-owned life insurance 4,260 3,860 0 10.4 N/M
Other income 10,534 10,931 8,930 (3.6) 22.4
________________________________________________________________________________________________________
Subtotal 80,337 71,553 62,141 12.3 15.1
Net securities gains 2,637 1,090 364 141.9 199.5
________________________________________________________________________________________________________
Total noninterest income $82,974 $72,643 $62,505 14.2 % 16.2 %
========================================================================================================
N/M = Not meaningful
</TABLE>
(Original-page 14)
NONINTEREST EXPENSE
The banking industry continues to improve its efficiency through mergers
and technology advancements. The challenge for Old National and the
industry is to achieve cost efficiencies while still providing quality
customer service. One key ratio used to evaluate performance is the
efficiency ratio, with lower percentages representing positive trends. Old
National=s efficiency ratio, (noninterest expense divided by net interest
income, tax equivalized, plus noninterest income, excluding securities
gains) was 58.94% in 1999 and 56.88% in 1998 and 56.58% 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 57.49%.
Salaries and benefits, which comprised over 50% of total noninterest
expense, grew 14.5% in 1999 and 5.5% 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 $2.9 million over 1998 levels. Equipment expense
increased 0.4% in 1999 after a 9.7% increase in 1998 partially due to
accelerated depreciation on equipment to be upgraded. Marketing expense
increased 13.7% in 1999 compared to a 8.9% in 1998. In 1999 Old National
had several corporate-wide promotions, such as Worry Free checking, Y2K
advertising, and charter consolidation marketing efforts. Data processing
expense rose over 11% in both 1999 and 1998. In 1998 Old National
outsourced credit card processing which increased this particular expense.
In 1999 Old National had a full year of this outsource expense and
additional costs and higher expenses related to Y2K. Communications and
transportation expense increased 10.6% in 1999 and 4.0% in 1998. Higher
postage in 1999 influenced by Y2K and restructuring represented over half
of the overall increase. Professional fees increased 50.4% in 1999 and
38.3% in 1998, a big portion of which related to consolidation consulting
services. Other expense rose 4.3% in 1999 and 5.9% in 1998.
Table 6 below presents changes in the components of noninterest expense for
the years 1997 through 1999.
<TABLE>
<CAPTION>
NONINTEREST EXPENSE (TABLE 6) ($ in thousands)
_______________________________________________________________________________________________________________
% Change From
Prior Year
_______________
1999 1998 1997 1999 1998
________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $129,351 $112,942 $107,077 14.5 % 5.5 %
Occupancy expense 13,987 12,362 12,143 13.1 1.8
Equipment expense 16,585 16,514 15,056 0.4 9.7
Marketing expense 8,034 7,066 6,486 13.7 8.9
FDIC insurance premiums 929 700 756 32.7 (7.4)
Data processing expense 10,882 9,756 8,690 11.5 12.3
Communications and transportation expense 8,755 7,918 7,615 10.6 4.0
Professional fees 7,589 5,045 3,648 50.4 38.3
Other expense 27,471 26,341 24,874 4.3 5.9
________________________________________________________________________________________________________________
Total noninterest expense $223,583 $198,644 $186,345 12.6 % 6.6 %
================================================================================================================
</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 25.8% in 1999, 29.3% in 1998,
and 30.5% 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 supplemental consolidated financial statements for additional
details on Old National's income tax provision.
(Original-page 15)
INTERIM FINANCIAL DATA
Table 7 below provides a detailed summary of quarterly results of
operations for the years ended December 31, 1999 and 1998. These results
contain all normal and recurring adjustments of a material nature necessary
for a fair and consistent presentation.
<TABLE>
<CAPTION>
INTERIM FINANCIAL DATA (TABLE 7)
(Unaudited, $ and shares in thousands except per share data)
_______________________________________________________________________________________________________
Quarter Ended
_______________________________________________________________________________________________________
December September June March
31 30 30 31
_______________________________________________________________________________________________________
<S> <C> <C> <C> <C>
1999:
Interest income $147,421 $145,274 $139,203 $133,969
Interest expense 76,707 73,469 68,672 65,915
_______________________________________________________________________________________________________
Net interest income 70,714 71,805 70,531 68,054
Provision for loan losses 4,192 3,515 3,699 3,392
Noninterest income 21,446 20,879 21,029 19,620
Noninterest expense 61,484 54,845 54,771 52,483
_______________________________________________________________________________________________________
Income before income taxes 26,484 34,324 33,090 31,799
Income taxes 4,606 9,527 9,207 9,100
_______________________________________________________________________________________________________
Net income from continuing operations 21,878 24,797 23,883 22,699
Discontinued operations $618 $0 3,483 0
_______________________________________________________________________________________________________
Net income $22,496 $24,797 $27,366 $22,699
=======================================================================================================
Net income from continuing operations per share:
Basic $0.39 $0.43 $0.41 $0.40
Diluted $0.38 $0.42 $0.40 $0.39
=======================================================================================================
Net income per share:
Basic $0.40 $0.43 $0.47 $0.40
Diluted $0.39 $0.42 $0.46 $0.39
=======================================================================================================
Weighted average shares:
Basic 56,700 57,415 57,539 57,390
Diluted 58,305 59,443 59,644 59,546
=======================================================================================================
1998:
Interest income $133,425 $133,385 $129,408 $127,303
Interest expense 66,742 67,791 64,533 62,622
_______________________________________________________________________________________________________
Net interest income 66,683 65,594 64,875 64,681
Provision for loan losses 4,562 3,443 3,558 3,424
Noninterest income 19,639 18,371 17,846 16,787
Noninterest expense 53,554 48,865 48,320 47,905
_______________________________________________________________________________________________________
Income before income taxes 28,206 31,657 30,843 30,139
Income taxes 7,777 8,655 9,594 9,376
_______________________________________________________________________________________________________
Net income from continuing operations 20,429 23,002 21,249 20,763
Discontinued operations 0 0 (9,193) (661)
_______________________________________________________________________________________________________
Net income $20,429 $23,002 $12,056 $20,102
=======================================================================================================
Net income from continuing operations per share:
Basic $0.36 $0.40 $0.37 $0.36
Diluted $0.35 $0.39 $0.36 $0.35
=======================================================================================================
Net income per share:
Basic $0.36 $0.40 $0.21 $0.35
Diluted $0.35 $0.39 $0.21 $0.34
=======================================================================================================
Weighted average shares:
Basic 56,944 57,217 57,487 56,996
Diluted 59,125 59,537 59,818 59,902
=======================================================================================================
</TABLE>
(Original-page 16)
FINANCIAL CONDITION
OVERVIEW
Total assets reached $8.1 billion at December 31, 1999, 10.6%
higher than the prior year-end. Loans increased $656.2 million or 13.0%.
Total liabilities grew $796.8 million or 11.8% over 1998. Deposits rose
9.7% or $526.2 million while other sources funded the remainder of the
asset growth.
INVESTMENT SECURITIES
Investment securities at December 31, 1999 comprised 22% of total assets,
down from 24% at year end 1998. Investment securities increased $59.9
million, 3.4% 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 4.10 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: $104.3 million by Illinois, $102.0 million by
Indiana. There were no other concentrations of investment securities
issued by an individual state and its political subdivisions which were
greater than 10% of shareholders' equity.
Average yields on the investment securities portfolio are calculated on a
taxable equivalent basis. Yields are based on the amortized cost and are
weighted for the scheduled maturity of each investment. At year-end,
average yields for the entire portfolio were 6.97% in 1999, 6.95% in 1998,
and 7.21% in 1997. The portfolio yield rose slightly in 1999 as the
reinvestment rates increased after the lower rate environment in 1998.
Table 8 below presents the maturity distribution of the investment
portfolio, along with weighted average yields thereon.
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES (TABLE 8) ($ in thousands)
___________________________________________________________________________________________________________________________
December 31, 1999
___________________________________________________________________________________________________
Within 1 - 5 5 - 10 Beyond
1 Year Years Years 10 Years Total 1998 1997
____________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
FAIR VALUE:
U.S. Treasury $17,635 $17,885 $0 $3,746 $39,266 $107,513 $147,403
U.S. Government agencies
and corporations 113,958 196,509 35,587 6,033 352,087 314,420 278,777
Mortgage-backed securities 37,163 89,219 427,080 247,589 801,051 739,741 731,314
States and political
subdivisions 30,252 216,665 248,890 53,373 549,180 536,158 507,852
Other securities 1,159 2,550 781 75,365 79,855 63,728 53,103
____________________________________________________________________________________________________________________________
Total $200,167 $522,828 $712,338 $386,106 $1,821,439 $1,761,560 $1,718,449
============================================================================================================================
AMORTIZED COST:
U.S. Treasury $17,629 $18,166 $0 $4,035 $39,830 $105,683 $146,094
U.S. Government agencies
and corporations 117,225 202,998 37,384 6,294 363,901 309,009 275,445
Mortgage-backed securities 37,371 89,829 447,249 258,699 833,148 733,821 722,832
States and political
subdivisions 30,053 214,590 253,359 55,251 553,253 516,007 490,505
Other securities 1,150 2,542 781 75,565 80,038 63,845 53,173
____________________________________________________________________________________________________________________________
Total $203,428 $528,125 $738,773 $399,844 $1,870,170 $1,728,365 $1,688,049
============================================================================================================================
Weighted average yield, based on amortized cost
(taxable equivalent basis) 6.91 % 7.13 % 6.91 % 6.89 % 6.97 % 6.95 % 7.21 %
============================================================================================================================
</TABLE>
(Original-page 17)
LENDING AND LOAN ADMINISTRATION
The key to Old National's success has long been its credit culture which
features decision-making near the customer with corporate oversight.
Community loan personnel have the authority to extend credit under
guidelines established and administered by Old National's Credit Policy
Committee. This committee, which meets quarterly, includes members of Old
National's 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 13.0% 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 18.8% increase in 1999 following 22.0% growth in 1998.
Commercial loans grew consistently with 13.4% in 1999 compared to 13.6% 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 8.1% in 1999, down from 12.3%
in 1998. Higher interest rates in the last half of 1999 impacted new
originations. Consumer credit increased 15.1% in 1999 after a 4.3%
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 23% of
the portfolio in commercial loans, 24% 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 10.7% per year between 1995 and
1999. Commercial real estate grew 18.0% and residential real estate loans
grew 9.1% over the same period, while consumer loans rose 2.9%. Table 10
on page 19 presents the composition of the loan portfolio for each of the
last five years.
(Original-page 18)
<TABLE>
<CAPTION>
DISTRIBUTION OF LOAN MATURITIES AT DECEMBER 31, 1999 (TABLE 9) ($ in thousands)
Within 1-5 Beyond
1 Year Years 5 years Total
__________________________________________________________________________________________________
<S> <C> <C> <C> <C>
Commercial $635,259 $440,899 $266,853 $1,343,011
Predetermined interest rates $194,763 $269,964 $149,769 $614,496
Floating interest rates 440,496 170,935 117,084 728,515
__________________________________________________________________________________________________
Total $635,259 $440,899 $266,853 $1,343,011
==================================================================================================
</TABLE>
<TABLE>
<CAPTION>
LOAN PORTFOLIO AT YEAR-END (TABLE 10) ($ in thousands)
______________________________________________________________________________________________________________________
Four Year
1999 1998 1997 1996 1995 Growth Rate
______________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Commercial $1,343,011 $1,184,815 $1,042,656 $939,686 $893,289 10.7 %
Commercial real estate 1,372,230 1,154,890 946,299 828,024 708,852 18.0%
Residential real estate 2,106,494 1,948,820 1,735,557 1,575,060 1,486,798 9.1
Consumer credit 898,706 781,067 816,082 850,179 800,993 2.9
______________________________________________________________________________________________________________________
Total loans 5,720,441 5,069,592 4,540,594 4,192,949 3,889,932 10.1 %
Less: Unearned income 5,898 11,222 14,073 21,098 27,133
______________________________________________________________________________________________________________________
Subtotal 5,714,543 5,058,370 4,526,521 4,171,851 3,862,799
Less: Allowance for
______________________________________________________________________________________________________________________
loan losses 65,685 59,371 55,567 49,580 48,120
Net loans $5,648,858 $4,998,999 $4,470,954 $4,122,271 $3,814,679
=======================================================================================================================
COMPOSITION OF LOAN PORTFOLIO BY TYPE
Commercial and development 23.5 % 23.4 % 23.0 % 22.5 % 23.1 %
Commercial real estate 24.0 22.8 20.9 19.8 18.4
Residential real estate 36.8 38.5 38.3 37.8 38.5
Consumer credit 15.7 15.3 17.8 19.9 20.0
===========================================================================================================
</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 $9.5 million in 1999, compared to
$11.2 million in 1998 and $9.3 million in 1997. The most significant
improvement in net charge-offs occurred within the consumer portfolio. In
1997 management revised it 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 0.17% to 0.28% 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 $14.8 million in 1999, slightly lower than $15.0 million in 1998 and
$15.3 million in 1997. The lower provision levels reflect the loan
portfolio's performance as a result of the strong economy in Old National's
markets.
(Original-page 19)
Table 11 below summarizes activity in the allowance for loan losses for the
years 1995 through 1999, along with an allocation of the year-end balances
and related statistics for the allowance and net charge-offs.
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES (TABLE 11) ($ in thousands)
______________________________________________________________________________________________________________________
1999 1998 1997 1996 1995
______________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
ANALYSIS:
Allowance for loan losses,
_____________________________________________________________________________________________________________________
January 1 $59,371 $55,567 $49,580 $48,120 $48,280
Loans charged off:
Commercial 6,977 4,938 3,825 4,756 5,491
Commercial and residential real estate 1,524 1,312 736 852 1,254
Consumer credit 8,358 8,772 9,523 10,227 5,803
_____________________________________________________________________________________________________________________
Total charge-offs 16,859 15,022 14,084 15,835 12,548
_____________________________________________________________________________________________________________________
Recoveries on charged-off loans:
Commercial 2,975 1,374 1,652 2,327 1,688
Commercial and residential real estate 443 376 1,209 350 384
Consumer credit 3,957 2,089 1,945 1,895 1,307
_____________________________________________________________________________________________________________________
Total recoveries 7,375 3,839 4,806 4,572 3,379
_____________________________________________________________________________________________________________________
Net charge-offs 9,484 11,183 9,278 11,263 9,169
Provision charged to expense 14,798 14,987 15,265 12,723 9,009
Acquired from acquisition 1,000 0 0 0 0
_____________________________________________________________________________________________________________________
Allowance for loan losses,
December 31 $65,685 $59,371 $55,567 $49,580 $48,120
=====================================================================================================================
Average loans for the year $5,425,554 $4,743,745 $4,318,362 $3,994,795 $3,768,219
Allowance/year-end loans 1.15 % 1.17 % 1.23 % 1.19 % 1.25 %
Allowance/average loans 1.21 1.25 1.29 1.24 1.28
Net charge-offs/average loans 0.17 0.24 0.21 0.28 0.24
ALLOCATION AT DECEMBER 31:
Commercial $28,386 $26,277 $26,211 $23,131 $25,013
Commercial and residential real estate 26,474 15,513 15,210 14,594 14,298
Consumer credit 10,825 17,581 14,146 11,855 8,809
_____________________________________________________________________________________________________________________
Total $65,685 $59,371 $55,567 $49,580 $48,120
=====================================================================================================================
</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 $136.7 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 $28.6 million in 1999 and
$31.0 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, 0.61% in 1998, and 0.52% 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
229.33% from 191.40% in 1998 and 234.61% in 1997. Said in another way, at
December 31, 1999 Old National had set aside $2.29 for every dollar of
under-performing assets.
(Original-page 20)
Table 12 below presents the components of under-performing assets as of
December 31, for the last five years.
<TABLE>
<CAPTION>
UNDER-PERFORMING ASSETS (TABLE 12) ($ in thousands)
______________________________________________________________________________________________________________________
1999 1998 1997 1996 1995
______________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $19,286 $19,074 $12,626 $14,680 $8,276
Renegotiated loans 450 458 920 895 2,093
Past due loans (90 days or more):
Commercial 1,797 1,113 1,787 1,356 1,617
Commercial and residential real estate 2,462 5,802 3,077 2,835 2,982
Consumer 947 1,388 1,288 963 1,194
______________________________________________________________________________________________________________________
Total 5,206 8,303 6,152 5,154 5,793
______________________________________________________________________________________________________________________
Foreclosed properties 3,700 3,184 3,987 3,332 2,039
______________________________________________________________________________________________________________________
Total under-performing assets $28,642 $31,019 $23,685 $24,061 $18,201
======================================================================================================================
Under-performing assets as a %
of total loans and
foreclosed properties 0.50 % 0.61 % 0.52 % 0.58 % 0.47 %
Allowance for loan loss/
under-performing assets 229.33 191.40 234.61 206.06 264.38
=======================================================================================================================
</TABLE>
Interest income of approximately $1.7 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 $1.3 million.
DEPOSITS AND OTHER FUNDING
Customer deposits provide the funding needs and include noninterest-bearing
demand, regular savings and NOW accounts, money market accounts, and
certificates of deposits. Average deposits increased 8.6% in
1999 compared to the 3.9% in 1998. Growth in 1999 was strong in most
deposit categories. Other time deposits increased 10.1% in 1999 and
included brokerage certificate of deposits of $487.8 million in 1999,
$233.2 million in 1998, and $105.1 million in 1997.
Table 13 below presents changes in the average balances of all funding
sources for the years 1997 through 1999.
<TABLE>
<CAPTION>
FUNDING SOURCES - AVERAGE BALANCE (TABLE 13) ($ in thousands)
______________________________________________________________________________________________________
% Change From
Prior Year
__________________
1999 1998 1997 1999 1998
______________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Demand deposits $613,953 $567,082 $546,311 8.3 % 3.8 %
NOW deposits 805,348 760,543 754,026 5.9 0.9
Savings deposits 488,343 461,365 477,144 5.8 (3.3)
Money market deposits 712,102 664,954 647,609 7.1 2.7
Time deposits 3,095,636 2,810,782 2,643,195 10.1 6.3
______________________________________________________________________________________________________
Total deposits 5,715,382 5,264,726 5,068,285 8.6 3.9
______________________________________________________________________________________________________
Short-term borrowings 587,537 413,333 425,666 42.1 (2.9)
Other borrowings 770,934 598,022 336,397 28.9 77.8
______________________________________________________________________________________________________
Total funding sources $7,073,853 $6,276,081 $5,830,348 12.7 % 7.6 %
======================================================================================================
</TABLE>
(Original-page 21)
Other borrowings increased $172.9 million and primarily included FHLB
advances. Table 14 below presents a maturity distribution for
certificates of deposit with denominations of $100,000 or more.
<TABLE>
<CAPTION>
CERTIFICATES OF DEPOSIT, $100,000 AND OVER (TABLE 14) ($ in thousands)
__________________________________________________________________________________________________________
Maturity Distribution
__________________________________________________________________________
Year-End 1-90 91-180 181-365 Beyond
Balance Days Days Days 1 Year
__________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
1999 $374,486 $182,652 $74,678 $71,714 $45,442
1998 482,393 205,644 107,255 89,980 79,514
1997 458,389 208,144 91,626 68,960 89,659
__________________________________________________________________________________________________________
</TABLE>
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 $174.2
million in 1999. The steeper yield curve of 1999 and the uncertainty
surrounding Y2K in the fixed income markets made short-term borrowings an
attractive funding alternative in 1999. Additionally, the consolidation of
Old National's banking charters increased its ability to consistently
access the overnight Federal funds purchased market.
Table 15 below presents the distribution of Old National's short-term
borrowings and related weighted average interest rates for each of the last
three years.
<TABLE>
<CAPTION>
SHORT-TERM BORROWINGS (TABLE 15) ($ in thousands)
______________________________________________________________________________________________________
Other
Funds Repurchase Short-term
Purchased Agreements Borrowings
______________________________________________________________________________________________________
<S> <C> <C> <C>
1999:
Outstanding at year-end $409,511 $234,089 $65,760
Average amount outstanding 176,513 302,148 108,876
Maximum amount outstanding at
any month-end 413,386 335,187 240,913
Weighted average interest rate:
During year 5.25 % 4.65 % 5.19 %
End of year 4.90 5.62 4.36
1998:
Outstanding at year-end $298,250 $197,189 $20,397
Average amount outstanding 86,105 217,306 109,922
Maximum amount outstanding at
any month-end 304,610 238,661 183,577
Weighted average interest rate:
During year 5.58 % 4.90 % 5.80 %
End of year 5.34 4.52 5.03
1997:
Outstanding at year-end $185,200 $219,858 $59,498
Average amount outstanding 79,859 225,562 120,245
Maximum amount outstanding at
any month-end 190,825 251,654 197,337
Weighted average interest rate:
During year 5.58 % 4.99 % 4.55 %
End of year 6.34 5.18 5.83
======================================================================================================
</TABLE>
(Original-page 22)
Other borrowings generally provide longer term funding and include debt
from the FHLB comprised of both short- and long-term maturities, medium
term notes, and convertible subordinated debentures.
In 1997 Old National registered a $150 million medium term note program and
issued $10 million in 1998 and $54.3 million in 1997. These borrowings,
combined with prior issuances, totaled $96.3 million at December 31, 1999
and have a weighted average effective interest rate of 6.81% with
maturities between 2000 and 2007. The funds were used to reduce Old
National's lines of credit.
Holders of Old National's 8% convertible debentures converted principal
amounts of $9.3 million in 1999 and $8.4 million in 1998. These
conversions resulted in the issuance of common stock shares totaling
711,000 in 1999 and 415,000 in 1998 with an corresponding increase in
shareholders' equity.
CAPITAL RESOURCES
Shareholders' equity was $585.0 million or 7.2% of total assets at December
31, 1999, and $605.8 million or 8.3% at December 31, 1998. Old National
paid $0.63 cash dividends per share in 1999 which totaled $35.6 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 $47.1 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 $27.4 million in 1999
and $26.4 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
$20.1 million to a negative or loss of $29.3 million. This basically
represents the estimated unrealized loss, net of tax, on Old National's
available-for-sale investment security portfolio at year-end.
Old National and the banking industry are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure
to meet minimum capital requirements can elicit certain mandatory actions
by regulators that, if undertaken, could have a direct material effect on
Old National's financial statements. Capital adequacy in the banking
industry is evaluated primarily by the use of ratios which measure capital
against assets and certain off-balance-sheet items. Certain ratios weight
these assets based on risk characteristics according to regulatory
accounting practices. At December 31, 1999, Old National and its bank
subsidiaries exceeded the regulatory minimums and met the regulatory
definition of well-capitalized. Capital ratios for Old National and its
significant bank subsidiary and the regulatory guidelines are presented in
Table 16 on page 24.
(Original-page 23)
<TABLE>
<CAPTION>
CAPITAL STRUCTURE AND REGULATORY GUIDELINES (TABLE 16) ($ in thousands)
___________________________________________________________________________________________________________________________________
Regulatory Guidelines December 31,
___________________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Old National Bancorp (Consolidated) Minimum Well-Capitalized 1999 1998 1997
TIER 1 CAPITAL:
Shareholders' equity (1) $614,316 $585,718 $561,411
Less intangibles (33,531) (27,393) (22,233)
___________________________________________________________________________________________________________________________________
Tier 1 capital 580,785 558,325 539,178
TIER 2 CAPITAL:
Subordinated debentures 12,782 21,963 30,407
Qualifying allowance for loan losses 65,255 58,652 54,239
___________________________________________________________________________________________________________________________________
Total capital $658,822 $638,940 $623,824
===================================================================================================================================
Risk adjusted assets $5,457,624 $4,894,768 $4,402,106
===================================================================================================================================
Tier 1 capital to risk-adjusted assets 4.00 % 6.00 % 10.64 % 11.41 % 12.25 %
Total capital to risk-adjusted assets 8.00 10.00 12.07 13.05 14.17
Tier 1 capital to quarterly average assets
(leverage ratio) 4.00 5.00 7.46 % 8.01 % 8.30 %
===================================================================================================================================
Old National Bank
TIER 1 CAPITAL:
Shareholders' equity (1) $50l,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% ll.51% 12.19% 13.80%
Total capital to risk-adjusted assets 8.00 l0.00 l2.72 l3.40 l5.05
Tier 1 capital to quarterly average assets
(leverage ratio) 3.00 5.00 7.63 8.13 8.78
===================================================================================================================================
(1) Excludes unrealized gains (losses) on investment securities.
</TABLE>
(Original-page 24)
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 Old National's 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.
(Original-page 25)
Report of Independent Accountants
To the Shareholders and
Board of Directors of
Old National Bancorp:
We have audited the accompanying supplemental consolidated
balance sheet of Old National Bancorp and affiliates (the
"Company") as of December 31, 1999, and the related supplemental
consolidated statements of income, of changes in shareholders'
equity and of cash flows for the year then ended. 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 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. 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 audit provides a reasonable basis for our
opinion.
The supplemental consolidated financial statements give
retroactive effect to the merger of Old National Bancorp and
Heritage Financial Services, Inc. on March 1, 2000, and to the
merger of Old National Bancorp and ANB Corporation and
subsidiaries on March 10, 2000, which have been accounted for as
poolings of interests as described in note 1 to the supplemental
consolidated financial statements. Accounting principles
generally accepted in the United States proscribe giving effect
to a consummated business combination accounted for by the
pooling of interests method in financial statements that do not
include the date of consummation. These financial statements do
not extend through the dates of consummation; however, they will
become the historical consolidated financial statements of the
Company after financial statements covering the dates of
consummation of the business combinations are issued.
We did not audit the financial statements of Heritage Financial
Services, Inc. or ANB Corporation and subsidiaries, which
statements reflect total assets of $246,352,205 and $880,001,000,
respectively, as of December 31, 1999 and net income of
$2,850,723 and $7,712,000, respectively, for the year then ended.
Those statements were audited by other auditors whose reports
thereon have been furnished to us, and our opinion expressed
herein, insofar as it relates to the amounts included for
Heritage Financial Services, Inc. and ANB Corporation and
subsidiaries, is based solely on the reports of the other
auditors.
In our opinion, based on our audit and the reports of other
auditors, the supplemental consolidated financial statements
referred to above present fairly, in all material respects, the
consolidated financial position of the Company at December 31,
1999, and the results of its operations and its cash flows for
the year then ended in conformity with accounting principles
generally accepted in the United States.
PricewaterhouseCoopers LLP
/s/ PricewaterhouseCoopers LLP
Chicago, IL
March 10, 2000
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors
of Old National Bancorp:
We have audited the 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 shareholders' equity and cash flows for the years
ended December 31, 1997 and 1998 as included in Old National
Bancorp's annual report on Form 10-K for the year ended December
31, 1999 (which are not presented herein) and have expressed an
unqualified opinion on those financial statements. We have also
audited the accompanying supplemental consolidated balance sheet
of Old National Bancorp (an Indiana Corporation) and affiliates as
of December 31, 1998, and the related supplemental consolidated
statements of income, changes in shareholders' equity and cash
flows for each of the two years in the period ended December 31,
1998. The supplemental consolidated statements give retroactive
effect to the merger of Old National Bancorp and ANB Corporation
on March 10, 2000, and to the merger of Old National Bancorp and
Heritage Financial Services, Inc. on March 1, 2000, which have
been accounted for as pooling of interests as described in Note 2
to the supplemental consolidated financial statements. These
supplemental consolidated financial statements are the
responsibility of the Old National Bancorp's management. Our
responsibility is to express an opinion on these supplemental
financial statements based on our audits.
We did not audit the financial statements of ANB Corporation or
Heritage Financial Services, Inc. included in the supplemental
consolidated financial statements of Old National Bancorp, which
statements reflect total assets constituting 9.7 percent and 2.8
percent, respectively, and net income from continuing operations
constituting 9.9 percent and 3.3 percent, respectively, of the
related supplemental consolidated totals in 1998 and reflect net
income from continuing operations constituting 10.3 percent and
2.9 percent, respectively of the related supplemental
consolidated totals in 1997. These statements were audited by
other auditors whose reports thereon have been furnished to us,
and our opinion expressed herein, insofar as it relates to the
amounts included for ANB Corporation and Heritage Financial
Services, Inc. is based solely upon the reports of other
auditors.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. 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 audit and the reports of other auditors
provide a reasonable basis for our opinion.
In our opinion, based upon our audit and the reports of the other
auditors, the supplemental consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of the 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, after giving retroactive effect to the merger
with ANB Corporation and Heritage Financial Services, Inc. as
described in Note 2, all in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Indianapolis, Indiana,
January 27, 1999 (except with respect to the Southern Bancshares LTD,
ANB Corporation and Heritage Financial Services, Inc. business combinations
discussed in Note 2 as to which the dates are January 29, 1999, March 10,
2000 and March 1, 2000, respectively).
Independent Auditor's Report
To the Stockholders and
Board of Directors
ANB Corporation
Muncie, Indiana
We have audited the accompanying consolidated balance sheet
of ANB Corporation and subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1999 (not presented
separately herein). These consolidated financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these
consolidated 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
described above present fairly, in all material respects,
the consolidated financial position of ANB Corporation and
subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in
conformity with generally accepted accounting principles.
We have not audited the consolidated financial statements of
ANB Corporation for any period subsequent to December 31,
1999.
/s/ Olive LLP
Olive LLP
Indianapolis, Indiana
January 28, 2000
Independent Auditors' Report
To Board of Directors
Heritage Financial Services,Inc.
We have audited the consolidated balance sheets of Heritage Financial
Services, Inc. and Subsidiary as of December 31, 1999 and 1998, and
the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1999 (not presented separately herein).
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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits
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 financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of Heritage Financial Services, Inc. and subsidiary as of December 31,
1999 and 1998, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December
31, 1999, in conformity with generally accepted accounting principles.
We have not audited the consolidated financial statements of Heritage
Financial Services, Inc. and Subsidiary for any period subsequent to
December 31, 1999.
/s/ Heathcott & Mullaly, P.C.
Heathcott & Mullaly, P.C.
Brentwood, Tennessee
January 18, 2000
(Original-page 26)
<TABLE>
<CAPTION>
OLD NATIONAL BANCORP
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
($ and shares in thousands)
_____________________________________________________________________________________________________________________
December 31,
_____________________________________________________________________________________________________________________
1999 1998
_____________________________________________________________________________________________________________________
<S> <C> <C>
ASSETS
Cash and due from banks $211,337 $199,222
Money market investments:
Interest-bearing deposits in other banks 26,544 8,290
Federal funds sold and securities purchased under agreements to resell 12,934 21,545
_____________________________________________________________________________________________________________________
Total money market investments 39,478 29,835
_____________________________________________________________________________________________________________________
TOTAL CASH AND CASH EQUIVALENTS 250,815 229,057
_____________________________________________________________________________________________________________________
Investment securities - available-for-sale, at fair value 1,821,439 1,761,560
_____________________________________________________________________________________________________________________
Loans, net of unearned income 5,714,543 5,058,370
Allowance for loan losses (65,685) (59,371)
_____________________________________________________________________________________________________________________
NET LOANS 5,648,858 4,998,999
_____________________________________________________________________________________________________________________
Premises and equipment, net 117,500 108,382
Accrued interest receivable 61,442 57,760
Other assets 209,231 177,628
_____________________________________________________________________________________________________________________
TOTAL ASSETS $8,109,285 $7,333,386
=====================================================================================================================
LIABILITIES
Deposits:
Noninterest-bearing demand $644,442 $646,148
Interest-bearing:
NOW accounts 831,592 819,486
Savings accounts 499,258 466,262
Money market accounts 680,542 699,513
Time deposits 3,306,665 2,804,867
_____________________________________________________________________________________________________________________
TOTAL DEPOSITS 5,962,499 5,436,276
_____________________________________________________________________________________________________________________
Short-term borrowings 709,360 515,836
Accrued expenses and other liabilities 91,377 99,680
Other borrowings 761,054 675,745
_____________________________________________________________________________________________________________________
TOTAL LIABILITIES 7,524,290 6,727,537
_____________________________________________________________________________________________________________________
Commitments and contingencies (Note 12)
SHAREHOLDERS' EQUITY
Preferred stock, 2,000 shares authorized, no shares issued or outstanding 0 0
Common stock, $1 stated value, 75,000 shares authorized,
56,518 and 39,392 shares issued and outstanding, respectively 56,518 39,392
Capital surplus 395,414 365,898
Retained earnings 162,384 180,428
Accumulated other comprehensive income, net of tax (29,321) 20,131
_____________________________________________________________________________________________________________________
TOTAL SHAREHOLDERS' EQUITY 584,995 605,849
_____________________________________________________________________________________________________________________
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $8,109,285 $7,333,386
=====================================================================================================================
The accompanying notes to supplemental consolidated financial statements are an integral part of this statement.
</TABLE>
(Original-page 27)
<TABLE>
<CAPTION>
OLD NATIONAL BANCORP
SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME
($ and shares in thousands except per share data)
________________________________________________________________________________________________________________________________
Years Ended December 31,
________________________________________________________________________________________________________________________________
1999 1998 1997
________________________________________________________________________________________________________________________________
<S> <C> <C> <C>
INTEREST INCOME
Loans including fees:
Taxable $443,059 $410,596 $380,936
Nontaxable 8,904 6,067 4,490
Investment securities:
Taxable 84,348 78,483 82,380
Nontaxable 27,507 26,422 26,632
Money market investments 2,049 1,953 1,096
________________________________________________________________________________________________________________________________
TOTAL INTEREST INCOME 565,867 523,521 495,534
________________________________________________________________________________________________________________________________
INTEREST EXPENSE
Savings, NOW and money market deposits 49,511 50,926 53,854
Time deposits 163,187 156,178 147,439
Short-term borrowings 28,961 19,429 21,181
Other borrowings 43,104 35,155 21,106
________________________________________________________________________________________________________________________________
TOTAL INTEREST EXPENSE 284,763 261,688 243,580
________________________________________________________________________________________________________________________________
NET INTEREST INCOME 281,104 261,833 251,954
Provision for loan losses 14,798 14,987 15,265
________________________________________________________________________________________________________________________________
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 266,306 246,846 236,689
________________________________________________________________________________________________________________________________
NONINTEREST INCOME
Trust fees 21,587 19,501 17,162
Service charges on deposit accounts 25,094 20,550 20,100
Loan servicing fees 5,494 5,337 5,394
Insurance premiums and commissions 6,508 5,765 5,318
Investment product fees 6,860 5,609 5,237
Bank-owned life insurance 4,260 3,860 0
Net securities gains 2,637 1,090 364
Other income 10,534 10,931 8,930
________________________________________________________________________________________________________________________________
TOTAL NONINTEREST INCOME 82,974 72,643 62,505
________________________________________________________________________________________________________________________________
NONINTEREST EXPENSE
Salaries and employee benefits 129,351 112,942 107,077
Occupancy expense 13,987 12,362 12,143
Equipment expense 16,585 16,514 15,056
Marketing expense 8,034 7,066 6,486
FDIC insurance premiums 929 700 756
Processing expense 10,882 9,756 8,690
Communication and transportation expense 8,755 7,918 7,615
Professional fees 7,589 5,045 3,525
Other expense 27,471 26,341 24,997
________________________________________________________________________________________________________________________________
TOTAL NONINTEREST EXPENSE 223,583 198,644 186,345
________________________________________________________________________________________________________________________________
Income before income taxes 125,697 120,845 112,849
Income taxes 32,440 35,402 34,423
________________________________________________________________________________________________________________________________
NET INCOME FROM CONTINUING OPERATIONS $93,257 85,443 78,426
________________________________________________________________________________________________________________________________
Discontinued operations 4,101 (9,854) (5,005)
________________________________________________________________________________________________________________________________
NET INCOME $97,358 $75,589 $73,421
================================================================================================================================
NET INCOME FROM CONTINUING OPERATIONS PER COMMON SHARE:
Basic $1.63 $1.49 $1.37
Diluted 1.59 1.45 1.33
================================================================================================================================
NET INCOME PER COMMON SHARE:
Basic $1.70 $1.32 $1.28
Diluted 1.66 1.29 1.24
================================================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic 57,261 57,162 57,342
Diluted 59,215 59,617 60,184
================================================================================================================================
The accompanying notes to supplemental consolidated financial statements are an integral part of this statement.
</TABLE>
(Original-page 28)
<TABLE>
<CAPTION>
OLD NATIONAL BANCORP
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
($ and shares in thousands)
___________________________________________________________________________________________________________________________________
Accumulated
Common Stock Other Total
________________ Capital Retained Comprehensive Comprehensive Shareholders'
Shares Amount Surplus Earnings Income Income Equity
___________________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1996 37,357 $37,357 $279,636 $226,286 $9,154 $552,433
Net income 73,421 73,421 73,421
Unrealized security gain and reclassification
adjustment, net of $5,746 tax 9,034 9,034 9,034
___________
Comprehensive income 82,455 0
===========
Cash dividends (28,962) (28,962)
5% stock dividend 1,307 1,307 60,179 (61,486) --
Stock repurchased (955) (955) (35,808) (256) (37,019)
Stock reissued under dividend reinvestment,
stock options and stock purchase plan 362 362 10,332 (159) 10,535
Stock reissued due to conversion of
subordinated debentures 8 8 149 157
_____________________________________________________________________________________________________ ________
BALANCES, DECEMBER 31, 1997 38,079 38,079 314,488 208,844 18,188 579,599
Net income 75,589 75,589 75,589
Unrealized security gain and reclassification 1,943 1,943 1,943
tax adjustment, net of $1,724 tax
____________
Comprehensive income 77,532 0
============
Cash dividends (30,526) (30,526)
5% stock dividend 1,366 1,366 71,552 (72,918) --
Stock repurchased (975) (975) (45,776) (379) (47,130)
Stock reissued under dividend reinvestment,
stock options and stock purchase plan 507 507 17,605 (182) 17,930
Stock reissued due to conversion of
subordinated debentures 415 415 8,029 8,444
_____________________________________________________________________________________________________ ________
BALANCES, DECEMBER 31, 1998 39,392 39,392 365,898 180,428 20,131 605,849
Net income 97,358 97,358 97,358
Unrealized security loss and reclassification
adjustment, net of $32,566 tax (49,698) (49,698) (49,698)
____________
Comprehensive income 47,660 0
============
Mergers 648 648 10,538 6,715 246 18,147
Cash dividends (35,557) (35,557)
3 for 2 stock split and 5% stock dividend 17,600 17,600 68,851 (86,451) 0
Stock repurchased (2,582) (2,582) (75,917) (78,499)
Stock reissued under dividend reinvestment,
stock options and stock purchase plan 749 749 17,487 (109) 18,127
Stock reissued due to conversion of
subordinated debentures 711 711 8,557 9,268
_____________________________________________________________________________________________________ _________
BALANCES, DECEMBER 31, 1999 56,518 $56,518 $395,414 $162,384 ($29,321) $584,995
=================================================================================================================================
The accompanying notes to supplemental consolidated financial statements are an integral part of this statement.
</TABLE>
(Original-page 29)
<TABLE>
<CAPTION>
OLD NATIONAL BANCORP
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
($ in thousands)
______________________________________________________________________________________________________________________________
Years Ended December 31,
______________________________________________________________________________________________________________________________
1999 1998 1997
______________________________________________________________________________________________________________________________
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $97,358 $75,589 $73,421
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation 13,025 13,548 11,543
Amortization of intangible assets 2,667 2,632 2,464
Net premium amortization on investment securities 1,194 2,627 1,592
Provision for loan losses 14,799 14,987 15,265
Net securities gains (2,637) (1,089) (364)
(Gain) loss on sale of other assets (1,103) (1,781) (1,041)
(Increase) decrease in interest receivable (3,681) (1,885) (1,886)
Increase in other assets (18,986) (16,649) (30,824)
Increase in accrued expenses and other liabilities 18,279 11,461 8,403
______________________________________________________________________________________________________________________________
Total adjustments 23,557 23,851 5,152
______________________________________________________________________________________________________________________________
Net cash flows provided by operating activities 120,915 99,440 78,573
______________________________________________________________________________________________________________________________
CASH FLOWS FROM INVESTING ACTIVITIES
Cash and cash equivalents of subsidiaries acquired 8,070 82,252 7,342
Purchase of investment securities available-for-sale (1,159,107) (681,522) (428,509)
Proceeds from maturities of investment securities available-for-sale 615,272 506,209 338,712
Proceeds from sales of investments securities available-for-sale 421,903 133,519 77,990
Net principal collected from (loans made to) customers: (649,515) (540,414) (363,685)
Residential real estate loans originated for sale (66,318) (143,715) (74,889)
Proceeds from sale of mortgage loans 69,061 142,457 77,775
Proceeds from sale of premises and equipment 2,028 684 977
Purchase of premises and equipment (23,350) (18,401) (17,661)
______________________________________________________________________________________________________________________________
Net cash flows used in investing activities (781,956) (518,931) (381,948)
______________________________________________________________________________________________________________________________
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits, short-term and other borrowings:
Noninterest-bearing demand deposits (221) 60,118 (4,379)
Savings, NOW and money market deposits 4,271 60,788 (59,964)
Time deposits 486,576 78,064 121,771
Short-term borrowings 193,524 51,280 101,956
Other borrowings 94,577 246,956 130,662
Net (payments on) proceeds from medium term notes 0 0 54,300
Cash dividends paid (35,557) (30,526) (28,962)
Common stock repurchased (78,072) (46,661) (36,581)
Common stock reissued, net of shares used to convert subordinated debentures 17,701 17,462 10,096
______________________________________________________________________________________________________________________________
Net cash flows provided by financing activities 682,799 437,481 288,899
______________________________________________________________________________________________________________________________
Net increase (decrease) in cash and cash equivalents 21,758 17,990 (14,476)
______________________________________________________________________________________________________________________________
Cash and cash equivalents at beginning of period 229,057 211,067 225,543
______________________________________________________________________________________________________________________________
CASH AND CASH EQUIVALENTS AT END OF PERIOD $250,815 $229,057 $211,067
==============================================================================================================================
The accompanying notes to supplemental consolidated financial statements are an integral part of this statement
</TABLE>
(Original-page 30)
OLD NATIONAL BANCORP
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying supplemental 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.
The supplemental consolidated financial statements of Old National
have been prepared to give retroactive effect to the Mergers with
Heritage Financial Services on March 1, 2000 and ANB Corporation
on March 10, 2000 as required by generally accepted accounting
principles pertaining to business combinations accounted for by
the pooling of interests method. Although these financial statements
do not extend through the date of consummation, they will become the
historical consolidated financial statements of the corporation after
financial statements covering the date of consummation of the business
combination are issued.
NATURE OF OPERATIONS
Old National, a bank holding company headquartered in Evansville,
Indiana, operates in Indiana, Illinois, Kentucky, Tennessee and
Ohio. 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.
(Original-page 31)
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 $31.0 million at December 31, 1999 and is being
amortized on the straight-line basis over periods ranging from 20
to 25 years. The recoverability of such assets and their
carrying value are periodically evaluated.
NET INCOME PER SHARE
Basic net income per share is computed by dividing net income by
the weighted average number of common shares outstanding during
each year, adjusted to reflect all stock dividends (Note 9) and
all mergers accounted for as pooling-of-interests as if they had
occurred at the beginning of the earliest year presented.
Diluted net income per share is computed as above and assumes the
conversion of outstanding subordinated debentures (Note 10).
Below is a table reconciling basic and diluted earnings per share
("EPS").
<TABLE>
<CAPTION>
Note 1 - Earnings Per Share Reconciliation
($ and shares in thousands except per share data)
_______________________________________________________________________________________
For the Year Ended For the Year Ended For the Year Ended
December 31, 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 $93,257 57,261 $1.63 $85,443 57,162 $1.49 $78,426 57,342 $1.37
======= ======= =======
EFFECT OF DILUTIVE SECURITIES
Stock options 332 499 367
8% convertible debentures 834 1,622 1,138 1,956 1,460 2,475
___________________________________________________________ ___________________ _________________
DILUTED EPS
Income from continuing operations
+ assumed conversions $94,091 59,215 $1.59 $86,581 59,617 $1.45 $79,886 60,184 $1.33
=============================================================================================================================
</TABLE>
STOCK OPTIONS
Stock options subsequent to 1993 are granted for a fixed number
of shares with an exercise price equal to the fair value of the
shares at the date of grant. The Company accounts for and will
continue to account for stock option grants in accordance with
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees", and, accordingly, recognized no
compensation expense for the stock option grants.
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.
(Original-page 32)
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 $274.6 million, $256.6
million, and $239.6 million, respectively. Total income tax
payments during 1999, 1998, and 1997, were $32.3 million, $30.3
million, and $32.2 million, respectively.
IMPACT OF ACCOUNTING CHANGES
In June 1998 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("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 the
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.
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.
On July 30, 1999, Old National and ANB Corporation ("ANB") of
Muncie, Indiana, executed a definitive merger agreement. Old
National issued 7,316,153 common shares in exchange for all of the
outstanding common shares of ANB. The transaction was
accounted for as a pooling-of-interests. 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 closed on March 10, 2000 and is included in these supplemental
consolidated financial statements.
On September 10, 1999, Old National and Heritage Financial
Services, Inc. ("Heritage") of Clarksville, Tennessee, executed a
definitive merger agreement. Old National issued 2,191,322 common
shares in exchange for all of the outstanding common shares of
Heritage. The transaction was accounted for as a pooling-of-
interests. As of December 31, 1999, Heritage's financial
statements reflected $246 million in total assets, net loans of
(Original-page 33)
$196 million, total deposits of $202 million and net income for
the year then ended of $2.9 million. This merger was closed on
March 1, 2000 and is included in these supplemental consolidated
financial statements.
The following table presents a restatement of net interest
income, net income, and basic net income from continuing
operations per share to reflect these pooling-of-interests
transaction ($ in thousands, except per share data):
<TABLE>
<CAPTION>
____________________________________________________________________________________________________
1999 As
1999 restated
Original Heritage ANB herein
____________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Net interest income 238,387 10,754 31,963 281,104
Net income from continuing operations 82,694 2,851 7,712 93,257
Basic net income per share, 1.72 1.63
==== ====
____________________________________________________________________________________________________
____________________________________________________________________________________________________
1998 As
1998 restated
Original Southern Heritage ANB herein
____________________________________________________________________________________________________
Net interest income 214,850 10,071 9,403 27,509 261,833
Net income from continuing operations 71,718 2,417 2,852 8,456 85,443
Basic net income per share,
as restated for stock dividends 1.58 1.49
==== ====
____________________________________________________________________________________________________
1997 As
1997 restated
Original Southern Heritage ANB herein
____________________________________________________________________________________________________
Net interest income 208,675 9,508 7,694 26,077 251,954
Net income from continuing operations 65,665 2,418 2,302 8,041 78,426
Basic net income per share,
as restated for stock dividends 1.43 1.37
==== ====
____________________________________________________________________________________________________
</TABLE>
Pending Mergers
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 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):
_________________________________________________________________
Years Ended December 31
_________________________________________________________________
1999 1998 1997
_________________________________________________________________
Loss before taxes
from operations of discontinued
operations 0 $(7,943) $(8,346)
Income tax (benefit) 0 (3,183) (3,341)
_________________________________________________________________
Loss from operations of
discontinued operations 0 (4,760) (5,005)
Gain (loss) before taxes from disposal
of discontinued operations 6,835 (8,489) 0
Income tax expense (benefit) 2,734 (3,395) 0
_________________________________________________________________
Gain (loss) from disposal of discontinued
operations 4,101 (5,094) 0
_________________________________________________________________
Income (loss) from discontinued
operations 4,101 $(9,854) $(5,005)
=================================================================
Income (loss) from discontinued
operations per common share
Basic $ 0.07 $ (0.17) $(0.09)
Diluted $ 0.07 $ (0.16) $(0.09)
=================================================================
NOTE 3 - INVESTMENT SECURITIES
The following tables summarize the amortized cost and fair value
of the investment securities portfolio at December 31, 1999 and
1998, and the corresponding amounts of unrealized gains and
losses therein ($ in thousands):
<TABLE>
<CAPTION>
NOTE 3 - INVESTMENT SECURITIES
_______________________________________________________________________________________________
Available-for-Sale
_______________________________________________________________________________________________
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
_______________________________________________________________________________________________
<S> <C> <C> <C> <C>
December 31, 1999
U.S. Treasury $39,830 $48 ($612) $39,266
U.S. Government agencies
and corporations 363,901 17 (11,831) $352,087
Mortgage-backed securities 833,148 409 (32,506) $801,051
State and political subdivisions 553,253 4,409 (8,482) $549,180
Other securities 80,038 34 (217) $79,855
_______________________________________________________________________________________________
Total $1,870,170 $4,917 ($53,648) $1,821,439
===============================================================================================
December 31, 1998
U.S. Treasury $105,683 $2,107 ($277) $107,513
U.S. Government agencies
and corporations 309,009 5,837 (426) 314,420
Mortgage-backed securities 733,821 6,735 (815) 739,741
State and political subdivisions 516,007 20,399 (248) 536,158
Other securities 63,845 0 (117) 63,728
_______________________________________________________________________________________________
Total $1,728,365 $35,078 ($1,883) $1,761,560
===============================================================================================
</TABLE>
(Original-page 34)
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 $421.9 million in 1999 and $133.5 million in 1998. In 1999
realized gains and losses were $3.3 million and $0.7 million,
respectively. In 1998 realized gains were $1.1 million.
At December 31, investment securities were pledged to secure
public and other funds with a carrying value of $944 million in
1999 and $697 million in 1998.
<TABLE>
<CAPTION>
($ in thousands)
_________________________________________________________________________________
1999 1998
_________________________________________________________________________________
Amortized Fair Amortized Fair
Cost Value Cost Value
_________________________________________________________________________________
<S> <C> <C> <C> <C>
Maturity
Within one year $203,428 $200,167 $267,952 $269,754
One to five years 528,125 522,828 926,628 947,582
Five to ten years 738,773 712,338 359,956 369,041
Beyond ten years 399,844 386,106 173,829 175,183
_________________________________________________________________________________
Total $1,870,170 $1,821,439 $1,728,365 $1,761,560
=================================================================================
</TABLE>
NOTE 4 - LOANS
The composition of loans at December 31, 1999 and 1998, by
lending classification was as follows ($ in thousands):
_________________________________________________________________
December 31,
_________________________________________________________________
1999 1998
_________________________________________________________________
Commercial $1,343,011 $1,184,815
Commercial real estate 1,372,230 1,154,890
Residential real estate 2,106,494 1,948,820
Consumer credit, net 892,808 769,845
_________________________________________________________________
Total loans $5,714,543 $5,058,370
=================================================================
Through its affiliates, Old National makes loans to customers in
various industries including manufacturing, agribusiness,
transportation, mining, wholesaling, and retailing, predominately
in its multi-state region. The loan portfolio is diversified with
no single industry exceeding 10% of the total.
Executive officers and directors of Old National and significant
subsidiaries and their related interests are loan customers of
Old National's affiliate banks in the normal course of business.
These loans are made on substantially the same terms, including
interest rates and collateral, as those prevailing at the same
time for comparable transactions with unrelated parties and
involve no unusual risk of collectibility. An analysis of the
1999 activity of these loans is as follows ($ in thousands):
____________________________________________________
Balance, January 1, 1999 $129,531
New loans 200,080
Repayments (187,021)
Officer and director changes (24,847)
____________________________________________________
Balance, December 31, 1999 $117,743
____________________________________________________
(Original-page 35)
NOTE 5 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses during the years 1999,
1998, and 1997 was as follows ($ in thousands):
____________________________________________________________________________
December 31,
____________________________________________________________________________
1999 1998 1997
____________________________________________________________________________
Balance at beginning of year $59,371 $55,567 $49,580
Additions:
Provision charged to expense 14,798 14,987 15,265
Acquired from acquisition 1,000 0 0
Deductions:
Loans charged off 16,859 15,022 14,084
Recoveries (7,375) (3,839) (4,806)
____________________________________________________________________________
Net charge-offs 9,484 11,183 9,278
____________________________________________________________________________
Balance at end of year $65,685 $59,371 $55,567
============================================================================
At December 31, 1999, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS Nos. 114
and 118 was $9.1 million with no related allowance and $65.5
million with $15.3 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 $7.6
million with no related allowance and $44.5 million with $9.5
million of related allowance.
For the year ended December 31, 1999, the average balance of
impaired loans was $62.6 million, for which $5.0 million of
interest was recorded. For the year ended December 31, 1998, the
average balance of impaired loans was $54.0 million, for which
$3.1 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.
(Original-page 36)
OTHER BORROWINGS
The fair value of FHLB borrowings and medium term notes is
estimated using rates currently offered for obligations with
similar remaining maturities. The fair value of subordinated
debentures is estimated using rates currently available to Old
National 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 $ 250,815 250,815
Investment securities 1,821,439 1,821,439
Loans, net 5,714,543 5,591,175
Financial Liabilities:
Deposits 5,962,499 5,917,962
Short-term borrowings 709,360 709,360
Other borrowings 761,054 755,055
Off-Balance-Sheet Financial Instruments:
Commitments to extend credit 943,515 943,515
Letters of credit 43,838 43,838
__________________________________________________________________
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 -9.8% -9.1% -8.1%
State income taxes 2.7% 3.7% 4.0%
State apportionment changes -1.1% 0.0% 0.0%
Other, net -1.0% -0.3% -0.4%
__________________________________________________________________
Actual tax rate 25.8% 29.3% 30.5%
==================================================================
The provision for income taxes consists of the following components
($ in thousands):
<TABLE>
<CAPTION>
____________________________________________________________________________________
1999 1998 1997
____________________________________________________________________________________
<S> <C> <C> <C>
Income taxes currently payable - federal 28,446 25,970 26,507
Income taxes currently payable - state 5,565 6,727 6,584
____________________________________________________________________________________
Deferred income taxes related to:
Provision for loan losses (1,831) (2,456) (3,199)
Other, net 2,994 (1,417) 1,190
____________________________________________________________________________________
Deferred income tax expense (benefit) 1,163 (3,873) (2,009)
____________________________________________________________________________________
Provision for income taxes 35,174 28,824 31,082
====================================================================================
Provision Detail:
Continuing operations 32,440 35,402 34,423
Discontinued operations 2,734 (6,578) (3,341)
____________________________________________________________________________________
Total 35,174 28,824 31,082
====================================================================================
</TABLE>
(Original-page 37)
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 24,106 22,275
Benefit plan accruals 6,846 4,863
Unrealized gain on available-
for-sale investment securities 19,411 0
Other, net 317 2,732
_____________________________________________________________________
Total deferred tax assets 50,680 29,870
_____________________________________________________________________
Deferred Tax Liabilities:
Premises and equipment (2,942) (2,781)
Accretion on investment securities (664) (862)
Unrealized gain on available-
for-sale investment securities - (13,064)
Lease receivable, net (5,620) (3,505)
Other, net (1,091) (606)
______________________________________________________________________
Total deferred tax liabilities (10,317) (20,818)
______________________________________________________________________
Net deferred tax assets 40,363 9,052
======================================================================
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):
<TABLE>
<CAPTION>
________________________________________________________________________________________
1999 1998 1997
________________________________________________________________________________________
<S> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year 42,769 36,668 32,383
Service cost 3,383 2,819 2,643
Interest cost 2,854 2,705 2,473
Acquisitions 0 0 262
Benefits paid (3,592) (4,354) (2,932)
Actuarial (gain) loss (4,474) 4,931 1,839
________________________________________________________________________________________
Benefit obligation at end of year 40,940 42,769 36,668
________________________________________________________________________________________
Change in plan assets
Fair value of plan assets
at beginning of year 39,649 34,105 30,760
Actual return on plan assets 5,397 6,624 5,714
Employer contributions 1,310 3,360 269
Transfers 80 84 447
Benefits paid (3,592) (4,354) (2,932)
Administrative expenses (159) (170) (153)
________________________________________________________________________________________
Fair value of plan assets
at end of year 42,685 39,649 34,105
________________________________________________________________________________________
Funded status 1,745 (3,120) (2,563)
Unrecognized net actuarial (gain) loss (5,429) 1,382 288
Unrecognized transition asset (2,138) (2,577) (3,015)
Unrecognized prior service cost (10) 15 38
________________________________________________________________________________________
Accrued benefit cost (5,832) (4,300) (5,252)
========================================================================================
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%
________________________________________________________________________________________
(Original-page 38)
The net pension expense and its components were as follows ($ in thousands):
___________________________________________________________________________
1999 1998 1997
___________________________________________________________________________
Service cost 3,383 2,819 2,643
Interest cost 2,854 2,705 2,473
Expected return on plan assets (3,068) (2,721) (2,455)
Amortization of prior service cost 24 24 24
Amortization of transitional asset (438) (439) (439)
Recognized actuarial loss 88 18 5
___________________________________________________________________________
Net pension expense 2,843 2,406 2,251
===========================================================================
</TABLE>
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 $5.0 million, $4.7 million, and $4.7 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.
STOCK OPTION PLANS
Under Old National's stock options plans, which are
accounted for in accordance with APB No. 25, "Accounting for
Stock issued to Employees" and related interpretaions, the
Company grants selected executives and other key employees
and directors stock option awards. The exercise price of each
option since 1994 was equal to the market price of the Company's
stock on the date of grant; therefore, no compensation
expense was recognized. The excess of fair market value
over the option price at date of grant for grants prior to
1994 granted at 75% of fair market value was recorded as
prepaid compensation expense and allocated to paid-in
capital.
Under terms of ANB's Stock Option Plan (1990 Plan) for key
employees, 393,750 shares of common stock shall be available
for grant, and the option price upon exercise shall not be
less than 75% of fair market value of such stock at date of
grant. Options granted shall be exercisable in four annual
installments, on a cumulative basis, beginning one year after
date of grant, or upon a change in control of ANB as
defined in the 1990 Plan, a purchase of ANB stock pursuant
to a tender offer or exchange offer, or a merger or sale of
assets in which ANB does not survive as an independent
entity. The period for exercising options shall not exceed
ten years.
Under terms of ANB's 1995 Stock Option Plan
(1995 Plan) for key employees, 393,750 shares of common
stock shall be available for granting both incentive (ISO's)
and non-qualified stock options. The option price to be
paid upon exercise shall be not less than fair market value
at date of grant. The period for exercising options shall
not exceed ten years from the date of grant. The options
shall be exercisable in four annual installments, on a
cumulative basis, beginning one year after date of grant,
after reaching age 65, upon circumstances or earlier times
determined by the Compensation Committee or upon a change in
control as defined in the 1995 Plan.
Under terms of ANB's 1996 Directors' Stock Option Plan
(Directors' Plan) 126,000 shares of stock shall
be available for granting non-qualified stock options. The
option price to be paid upon exercise shall be not less than
fair market value at date of grant. The period for
exercising options shall not exceed ten years from the date
of grant. Options granted shall be exercisable in four
annual installments, on a cumulative basis, beginning one
year after date of grant. Exercise rights terminate thirty
days after status as a director terminates other than for
retirement after age 70, death or disability. Options for
up to 35,438 under a terminated plan were also authorized in 1996.
As a result of the July 1999 agreement with Old National and the
proposed merger with ANB, all shares granted under the above
plans became exercisable.
Heritage had two long-term incentive stock option plans for
key employees. The stock options plans provide for these
key employees to purchase shares of Heritage's common
stock at the fair market value at the date of the grant.
The options granted under the plans become exercisable over
a period not to exceed ten years. The 1989 Stock Option
Plan provides for the granting of options to purchase up to
150,000 shares and 116,119 options under this plan have been
granted. The 1998 Stock Option Plan also provides for the
granting of options to purchase up to 150,000 shares and
53,500 options under this plan have been granted.
In 1998, the shareholders of Heritage approved the
adoption of the Outside Directors' Stock Option Plan. This
stock option plan provides for non-employee directors to
purchase shares of Heritage's common stock at the fair
market value at the date of the grant. The options granted
under the plan become exercisable over a period not to
exceed ten years. The plan provides for the granting of
options to purchase up to 40,000 shares. Each non-employee
director is to be automatically granted 500 shares annually
for the years 1998 through 2002. Such options vest at the
rate of 20% annually, and 10,000 shares under this plan have
been granted.
The fair value of each option grant was estimated on the
grant date using an option-pricing model with the following
assumption:
1999 1998 1997
______ ______ _______
Dividend yield 2.5% 3.2% 3.1%
Risk-free interest rates 5.2 5.4 6.2
Expected lives of options 6 years 6 years 6 years
Expected volatility 20% 16% 15%
The following is a summary of the status of the Old National's
stock option plans and changes in those plans as of and for
the years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
____________________________________________________________________________
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise price Shares Exercise price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 830,512 13.08 620,864 10.03 572,438 7.48
Granted 40,688 19.27 289,958 17.70 136,361 15.95
Exercised (208,537) 11.95 (76,203) 5.79 (86,294) 4.24
Cancelled (2,044) 16.24 (4,107) 12.83 (1,641) 14.31
________________________________________________________________________________________________
Outstanding at
end of year 660,619 13.81 830,512 13.08 620,864 10.03
================================================================================================
Options exercisable
at year end 449,504 310,907 306,501
Weighted-average fair value of
Options granted during the year 12.43 8.35 5.52
</TABLE>
The following table summarizes information about the stock
options outstanding for ANB's plans at December 31, 1999:
Exercise Number Average Weighted-Average Number
Price ranges Outstanding Remaining Life Exercise Price Exercisable
3.63-5.44 66.439 2.2 years 4.82 54,862
6.70-9.67 137,655 3.4 years 8.19 82,688
11.76-16.63 304,132 7.5 years 14.97 177,091
18.33-24.79 152,393 8.6 years 20.48 134,863
_________________________________________________________
660,619 6.4 years 13.81 449,504
=========================================================
Under SFAS No. 123, "Accounting for Stock-Based Compensation"
compensation cost is recognized in the amount of the estimated
fair value of the options and amortized to expense over the
options' vesting period. The pro forma effect on net income
and earnings per share of this Statement is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net income As reported 93,257 85,443 78,426
Pro forma 92,619 85,250 78,346
Basic earnings per Share As reported 1.63 1.49 1.37
Pro forma 1.62 1.49 1.37
Diluted earnings per share As reported 1.59 1.45 1.33
Pro forma 1.58 1.45 1.33
</TABLE>
During the initial phase-in period of SFAS No. 123, the
effects of applying this Statement are not likely to be
representative of the effects on reported net income for
future years because options vest over several years and
additional awards generally are made each year.
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 Old
National's common stock. The rights become exercisable on the
tenth day following a public announcement that a person has
acquired or intends to acquire beneficial ownership of 20% or
more of 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 Old
National 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 if Old National 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.
(Original-page 39)
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 is 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 $651.9 million borrowed
from various FHLB's. Floating-rate borrowings totaled $442.8
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
5.71% and 5.28% at December 31, 1999 and 1998, respectively.
These borrowings are secured by specific mortgage loans and
securities which have current book values of approximately
$1,248.0 million and $89.7 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 Old National 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 of Old National. 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 contract is an exchange of
interest payments with no effect on the principal amounts of the
underlying hedged liability. The fair value of the swap
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 rates 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.
(Original-page 40)
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 matured 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 couterparties 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 increase in relation to a cost-of-living index. Total rental
expense was $5.1 million in 1999, $4.7 million in 1998, and $4.5
million in 1997.
Following is a summary of future minimum lease commitments ($ 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 $943.5 million, and letters of credit
of $43.8 million at December 31, 1999. These commitments are not
reflected in the supplemental 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 $21.7
million and $32.5 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 $12.3 million without
prior regulatory approval. Such approval has been regularly
provided as all affiliate banks exceeded the regulatory
definition of well-capitalized.
CAPITAL ADEQUACY
For additional information on capital adequacy see Table 16 in
Management's Discussion and Analysis on page 23.
(Original-page 41)
NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS
The following are the condensed parent company only financial
statements of Old National Bancorp ($ in thousands)
<TABLE>
<CAPTION>
OLD NATIONAL BANCORP (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEET
DECEMBER 31,
___________________________________________________________________________________________________
1999 1998
___________________________________________________________________________________________________
<S> <C> <C>
ASSETS
Deposits in affiliate banks $2,151 $1,990
Investment in affiliates:
Banks, including purchase accounting intangible
assets of $6,221 in 1999 and $6,781 in 1998 614,912 619,940
Non-banks 15,802 19,399
Advances to affiliates 43,089 8,777
Other assets 34,262 94,007
___________________________________________________________________________________________________
TOTAL ASSETS $710,216 $744,113
===================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings $5,000 $7,250
Other liabilities 11,139 12,751
Convertible subordinated debentures 12,782 21,963
Medium term notes 96,300 96,300
Shareholders' equity 584,995 605,849
___________________________________________________________________________________________________
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $710,216 $744,113
===================================================================================================
</TABLE>
<TABLE>
<CAPTION>
OLD NATIONAL BANCORP (PARENT COMPANY ONLY)
CONDENSED STATEMENT OF INCOME
___________________________________________________________________________________________________
Years Ended December 31,
___________________________________________________________________________________________________
1999 1998 1997
___________________________________________________________________________________________________
<S> <C> <C> <C>
INCOME
Dividends from affiliates $97,681 $94,727 $89,014
Other income 5,905 2,860 396
Other income from affiliates 10,730 11,763 12,849
___________________________________________________________________________________________________
TOTAL INCOME 114,316 109,350 102,259
___________________________________________________________________________________________________
EXPENSE
Interest on borrowings 8,440 9,653 10,283
Amortization of intangibles 587 715 718
Other expenses 25,345 17,328 11,787
___________________________________________________________________________________________________
TOTAL EXPENSE 34,372 27,696 22,788
___________________________________________________________________________________________________
Income before income taxes and equity in
undistributed earnings of affiliates 79,944 81,654 79,471
Income tax benefit (9,182) (5,299) (3,913)
___________________________________________________________________________________________________
Income before equity in
undistributed earnings of affiliates 89,126 86,953 83,384
Equity in undistributed earnings of affiliates 8,232 (11,364) (9,963)
___________________________________________________________________________________________________
NET INCOME $97,358 $75,589 $73,421
===================================================================================================
</TABLE>
(Original-page 42)
<TABLE>
<CAPTION>
OLD NATIONAL BANCORP (PARENT COMPANY ONLY)
CONDENSED STATEMENT OF CASH FLOWS
__________________________________________________________________________________________________________________________
Years Ended December 31,
__________________________________________________________________________________________________________________________
1999 1998 1997
__________________________________________________________________________________________________________________________
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $97,358 $75,589 $73,421
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation 947 896 367
Amortization of intangible assets 587 715 718
(Increase) decrease in other assets 60,178 (78,632) (3,904)
Increase (decrease) in other liabilities (1,760) 2,756 3,452
Equity in undistributed earnings of affiliates (8,232) 11,364 9,963
__________________________________________________________________________________________________________________________
Total adjustments 51,720 (62,901) 10,596
__________________________________________________________________________________________________________________________
Net cash flows provided by operating activities 149,078 12,688 84,017
__________________________________________________________________________________________________________________________
CASH FLOWS FROM INVESTING ACTIVITIES
Net advances to affiliates (50,014) 59,825 (30,295)
Purchase of premises and equipment (725) (736) (3,715)
__________________________________________________________________________________________________________________________
Net cash flows provided by (used in) investing activities (50,739) 59,089 (34,010)
__________________________________________________________________________________________________________________________
CASH FLOWS FROM FINANCING ACTIVITIES
Net (payments on) proceeds from short-term borrowings (2,250) (9,758) (50,198)
Net (payments on) proceeds from medium term notes 0 (2,000) 54,300
Cash dividends paid (35,557) (30,526) (28,962)
Common stock repurchased (78,072) (46,661) (36,581)
Common stock reissued, net of shares used to
convert subordinated debentures 17,701 17,462 10,096
__________________________________________________________________________________________________________________________
Net cash flows used in financing activities (98,178) (71,483) (51,345)
__________________________________________________________________________________________________________________________
Net increase (decrease) in cash and cash equivalents 161 294 (1,338)
Cash and cash equivalents at beginning of period 1,990 1,696 3,034
__________________________________________________________________________________________________________________________
CASH AND CASH EQUIVALENTS AT END OF PERIOD $2,151 $1,990 $1,696
==========================================================================================================================
</TABLE>
(Original-page 43)
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 page
8 and 9 of Management's Discussion & Analysis. The accounting
policies of the segment are the same as those described in Note
1. Intersegment sales and transfers are not significant. 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 $244,615 36,489 281,104
Income tax expense (benefit) 32,879 (439) 32,440
Segment profit (loss) 66,308 26,949 93,257
Total assets 6,516,232 1,593,053 8,109,285
1998
Net interest income $264,932 (3,099) 261,833
Income tax expense (benefit) 40,697 (5,295) 35,402
Segment profit (loss) 93,105 (7,662) 85,443
Total assets 7,240,892 92,494 7,333,386
1997
Net interest income $259,163 (7,209) 251,954
Income tax expense (benefit) 39,484 (5,061) 34,423
Segment profit (loss) 85,233 (6,807) 78,426
Total assets 6,626,371 89,416 6,715,787
___________________________________________________________________
(Original-page 44)
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Registration Statements on Form S-3 (Nos. 333-87573 and 333-
29433) of Old National Bancorp of our report dated March 10,
2000 appearing in this Form 8-K.
/s/ PricewaterhouseCoopers
Chicago, Illinois
April 14, 2000
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report dated January 27, 1999 (except with
respect to the Southern Bancshares LTD, ANB Corporation and
Heritage Financial Services, Inc. business combinations discussed
in Note 2, as to which the dates are January 29, 1999, March 10,
2000 and March 1, 2000, respectively) included in this Form 8-K
into the Registrant's previously filed Registration Statements
Files No. 333-29433 and 333-87573.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Indianapolis, Indiana,
April 14, 2000.
CONSENT OF OLIVE LLP
We hereby consent to the incorporation by reference in the
Registration Statements on Form S-3 (Nos. 333-87573 and 333-
29433) of Old National Bancorp of our report dated January 28,
2000 appearing in this Form 8-K.
/s/ Olive LLP
Olive LLP
Indianapolis, Indiana
April 13, 2000
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Registration Statements on Form S-3 (Nos. 333-87573 and 333-
29433) of Old National Bancorp of our report dated January 18,
2000 appearing in this Form 8-K.
/s/ Heathcott & Mullaly, P.C.
Heathcott & Mullaly, P.C.
Brentwood, Tennessee
April 14, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM OLD NATIONAL
BANCORP'S FORM 8-K DATED 3/1/2000AND 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> 211,337
<INT-BEARING-DEPOSITS> 26,544
<FED-FUNDS-SOLD> 12,934
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,821,439
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 5,714,543
<ALLOWANCE> 65,685
<TOTAL-ASSETS> 8,109,285
<DEPOSITS> 5,962,499
<SHORT-TERM> 709,360
<LIABILITIES-OTHER> 91,377
<LONG-TERM> 761,054
0
0
<COMMON> 56,518
<OTHER-SE> 528,477
<TOTAL-LIABILITIES-AND-EQUITY> 8,109,285
<INTEREST-LOAN> 451,963
<INTEREST-INVEST> 111,855
<INTEREST-OTHER> 2,049
<INTEREST-TOTAL> 565,867
<INTEREST-DEPOSIT> 212,698
<INTEREST-EXPENSE> 284,763
<INTEREST-INCOME-NET> 281,104
<LOAN-LOSSES> 14,798
<SECURITIES-GAINS> 2,637
<EXPENSE-OTHER> 27,471
<INCOME-PRETAX> 125,697
<INCOME-PRE-EXTRAORDINARY> 93,257
<EXTRAORDINARY> 4,101
<CHANGES> 0
<NET-INCOME> 97,358
<EPS-BASIC> 1.63
<EPS-DILUTED> 1.59
<YIELD-ACTUAL> 4.09
<LOANS-NON> 19,286
<LOANS-PAST> 5,206
<LOANS-TROUBLED> 450
<LOANS-PROBLEM> 136,700
<ALLOWANCE-OPEN> 59,371
<CHARGE-OFFS> 16,859
<RECOVERIES> 7,375
<ALLOWANCE-CLOSE> 65,685
<ALLOWANCE-DOMESTIC> 65,685
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
