EX-13 2 0002.txt EXHIBIT 13 FINANCIAL HIGHLIGHTS Years Ended December 31, (dollars in thousands, except per share data) 2000 1999 -------------------------------------------------------------------------------- Income Data(1) Net interest income $ 289,510 $ 299,165 Noninterest income 101,713 83,150 Total revenue 391,223 382,315 Provision for loan losses(2) 26,002 14,798 Noninterest expense 228,034 223,897 Income taxes 49,766 50,363 Operating earnings(2) 87,421 93,257 Merger and restructuring costs (after-tax) (25,725) -- Discontinued operations -- 4,101 Net income $ 61,696 $ 97,358 Per Share Data (diluted)(3) Operating earnings $ 1.45 $ 1.51 Operating earnings (cash basis)(4) 1.52 1.55 Net income 1.03 1.58 Cash dividends paid 0.65 0.60 Book value per share 10.39 9.86 Stock price at year end 28.51 29.42 Balance Sheet Data (at December 31) Total assets $ 8,767,748 $ 8,086,012 Loans 6,348,313 5,714,688 Deposits 6,583,906 5,962,069 Shareholders' equity 626,341 584,995 Performance Ratios (based on operating earnings) Return on average assets 1.03% 1.20% Return on average shareholders' equity(5) 14.33 15.13 Net interest margin(1) 3.65 4.09 Efficiency ratio(1) 58.29 58.56 Net charge-offs to average loans 0.39 0.17 Allowance for loan losses to ending loans 1.16 1.15 Non-performing loans to ending loans 0.42 0.41 Other Data Number of full-time equivalent employees 2,873 2,942 Number of shareholders 25,008 20,946 Number of shares traded (in thousands) 21,943 14,131 ================================================================================ (1) Tax equivalent basis. (2) Excludes portion related to merger and restructuring. (3) Restated for all stock dividends, including a 5% stock dividend paid to shareholders on January 30, 2001. Assumes the conversion of subordinated debentures. (4) Excludes after-tax impact of intangible asset amortization. (5) Excludes unrealized gains (losses) on investment securities. Page 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION Selected Financial Data
Five-Year (dollars in thousands, Growth except per share data) 2000 1999 1998 1997 1996 1995 Rate ------------------------------------------------------------------------------------------------------------------------------------ Results of Operations(1) Net interest income $ 289,510 $ 299,165 $ 277,892 $ 267,206 $ 255,529 $ 240,605 3.8% Noninterest income 101,713 83,150 72,898 62,505 59,487 51,465 14.6 ------------------------------------------------------------------------------------------------------------------------------------ Total revenue 391,223 382,315 350,790 329,711 315,016 292,070 6.0 ------------------------------------------------------------------------------------------------------------------------------------ Provision for loan losses(2) 26,002 14,798 14,987 15,265 12,723 9,009 23.6 Noninterest expense(2) 228,034 223,897 199,088 186,345 184,288 177,636 5.1 Income taxes 49,766 50,363 51,272 49,675 46,143 40,568 4.2 ------------------------------------------------------------------------------------------------------------------------------------ Operating earnings(2) 87,421 93,257 85,443 78,426 71,862 64,857 6.2 Merger and restructuring costs (after-tax) (25,725) -- -- -- -- -- N/M Discontinued operations -- 4,101 (9,854) (5,005) 494 -- N/M ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 61,696 $ 97,358 $ 75,589 $ 73,421 $ 72,356 $ 64,857 (1.0)% ==================================================================================================================================== Per Share Data (diluted)(3) Operating earnings $ 1.45 $ 1.51 $ 1.38 $ 1.26 $ 1.13 $ 1.02 7.3% Operating earnings (cash basis)(4) 1.52 1.55 1.42 1.28 1.15 1.05 7.7 Net income 1.03 1.58 1.23 1.26 1.13 1.02 0.2 Cash dividends paid 0.65 0.60 0.53 0.50 0.48 0.46 7.2 Book value at year-end 10.39 9.86 10.15 9.66 9.06 8.72 3.6 Balance Sheet Data (at December 31) Total assets $8,767,748 $8,086,012 $7,334,271 $6,715,787 $6,320,187 $5,966,574 8.0% Loans 6,348,313 5,714,688 5,058,460 4,526,521 4,171,851 3,862,799 10.4 Deposits 6,583,906 5,962,069 5,436,381 5,147,271 5,080,775 4,932,296 5.9 Shareholders' equity 626,341 584,995 605,849 579,599 552,403 549,239 2.7 Performance Ratios Based on operating earnings: Return on average assets 1.03% 1.20% 1.23% 1.21% 1.19% 1.12% Return on average shareholders' equity(5) 14.33 15.13 14.75 14.26 13.26 12.23 Equity to assets 6.92 7.90 8.57 8.64 9.09 9.13 Primary capital to average assets 7.76 8.73 9.41 9.45 9.91 9.97 Net charge-offs to average loans 0.39 0.17 0.24 0.21 0.28 0.24 Allowance for loan losses to average loans 1.21 1.21 1.25 1.29 1.24 1.28 Based on net income: Return on average assets 0.73% 1.25% 1.08% 1.13% 1.20% 1.12% Return on average shareholders' equity(5) 10.11 15.79 13.05 13.35 13.35 12.23 Dividend payout 62.84 36.52 40.38 ------------------------------------------------------------------------------------------------------------------------------------
(1) Tax equivalent basis. (2) Excludes portion related to merger and restructuring. (3) Restated for all stock dividends, including a 5% stock dividend paid to shareholders on January 30, 2001. Assumes the conversion of subordinated debentures. (4) Excludes after-tax impact of intangible asset amortization. (5) Excludes unrealized gains (losses) on investment securities. N/M = Not meaningful Page 14 Introduction Formed in 1983, Old National Bancorp ("Old National") is a bank holding company headquartered in Evansville, Indiana, with banking activity in Indiana, Illinois, Kentucky, Tennessee, and Ohio. Old National's banking operations date back over 160 years. With 148 community banking locations, Old National serves customers in both urban and rural markets. These banking centers provide a wide range of financial services, such as: - making commercial and consumer loans; - originating and servicing mortgage loans; - leasing; - offering various deposit products; - issuing letters of credit; - selling credit life, accident and health insurance; - providing safe deposit facilities; and - offering alternative investments and brokerage services. Old National's non-bank affiliates provide additional financial or support services incidental to its 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 1998 through 2000 and financial condition as of December 31, 2000 and 1999, and will assist readers of the accompanying consolidated financial statements and related notes beginning on page 28. 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 1999 certain contingencies related to this sale were successfully resolved, resulting in a $4.1 million gain on discontinued operations. The discontinued operations' financial results in prior periods are similarly broken out from Old National's continuing operations. The subsidiary's net assets are included in other assets on the consolidated balance sheet for periods prior to the sale. For further details regarding the discontinued operations, see the consolidated financial statements and Note 2. The following discussion and analysis of Old National's financial condition and results of operations relates to its continuing operations. References to operating earnings within this analysis represent net income from continuing operations excluding the impact of merger-related and restructuring expenses as discussed within this document. Tax-exempt interest income in the following information has been increased to an amount comparable to interest subject to income taxes using a 35% federal statutory rate in effect for all periods. An offsetting increase of the same amount is made in the income tax section of the Selected Financial Data. Net income is unaffected by these tax equivalent adjustments. Competition And Economic Conditions The banking industry and related financial service providers are highly competitive, especially as the industry continues to change. Within its geographic markets Old National's competition includes numerous local and regional banking institutions, thrifts, finance companies, credit unions, money market mutual funds, investment brokers, finance companies, and insurance companies. The competitive factors center around issues such as interest rates on loans and deposits, convenient locations and hours, types of services, and quality of service. The economy in the United States and the Midwest which has experienced relatively low inflation and unemployment plus steady growth started to show signs of deterioration in 2000. Interest rates continued to increase during most of 2000. The Federal funds target rate established by the Federal Open Market Committee increased from 5.50% in January 2000 to 6.50% in June. The national prime lending rate similarly increased, rising from 8.50% to 9.50% in 2000. Although long-term treasury rates began to decrease in 2000, this was due primarily to the U.S. Department of Treasury decision to reduce outstanding government debt. Short- and long-term interest rates increased during the second half of 1999, reversing the declines of 1998. The Federal funds target rate increased from 4.75% in June of 1999 to 5.50% by December 1999. The national prime lending rate moved in tandem with the Federal funds target rate, increasing from 7.75% to 8.50%. 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. Page 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION (CONTINUED) Merger And Consolidation Activity In the first quarter of 2000 Old National completed the acquisitions of ANB Corporation, Muncie, Indiana, with $880 million in total assets and Heritage Financial Services, Inc., Clarksville, Tennessee, with $246 million of total assets. These mergers were accounted for as pooling-of-interests. The financial statements have been restated accordingly. In the third quarter Old National purchased Permanent Bancorp, Inc. ("Permanent"), Evansville, Indiana, with $497 million in total assets. The assets and liabilities acquired from Permanent were adjusted to current market values. Goodwill and other intangibles from this acquisition totaled $60.5 million. During 1999, Old National merged with Southern Bancshares Ltd. ("Southern"), Carbondale, Illinois, with $255 million in assets, and Dulaney Bancorp, Inc. ("Dulaney"), Marshall, Illinois, a $39 million asset banking company. 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 implemented its charter consolidation project named One Bank and by December 31, 1999, consolidated its banking charters down to three banks. After completing the three major bank mergers in 2000, banking charters were down to two with the completion of the project scheduled for early 2001. The goals of One Bank included a single brand image, common products offered throughout the banking locations, and improved back-office efficiency. Results Of Operations Net Income In 2000 Old National operations generated net income of $61.7 million and diluted income per share of $1.03, both lower than 1999. Operating earnings (net income from continuing operations, excluding the impact of merger-related and restructuring expenses of $41.3 million pretax, $25.7 million after tax, or $0.42 per share) were $87.4 million, a 6.3% decrease from 1999. The provision for loan losses increase contributed to the lower earnings, despite the revenue growth exceeding the growth in operating expenses. The specific effects of these factors are discussed in the following paragraphs. In 1999 earnings rose 9.1% to reach $93.2 million, a $7.8 million increase. Diluted earnings per share totaled $1.51, a 9.4% increase over 1998. Strong revenue growth (tax equivalized net interest income plus noninterest income) of $31.5 million, a 9.0% increase, generated the earnings growth in 1999. Net Interest Income Over 70% of Old National's revenue arises from the interest and fee income received on earning assets, such as loans and investments, and the interest paid on deposits and borrowed funds. The difference between the income earned and the interest paid is net interest income. Net interest margin is net interest income, on a tax 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, competitive pressures, and changes in tax laws, can also exert significant influence on changes in net interest income from one period to another. Tax equivalized net interest income declined 3.2% in 2000, a $9.6 million decrease from 1999. The sharp increase in interest rates initiated by the Federal Reserve Bank during late 1999 and experienced throughout most of 2000 raised Old National's interest expense on its funding sources faster than its interest income on earning assets. Earning assets grew 8.4% or $617.7 million during 2000, and the yield on those assets rose 32 basis points. Goodwill from recent acquisitions produced the growth in nonearning assets. In 2000 low cost or free funding sources, such as NOW and savings deposits, equity, demand deposits, and other liabilities declined slightly. Old National funded the 8.6% growth in average assets primarily with borrowed funds and time deposits. The cost of interest-bearing deposits rose 65 basis points to 4.82% while the total cost of all interest-bearing liabilities increased 75 basis points to 5.16%. This significant shift in market interest rates and funding mix combined to lower Old National's net interest margin from 4.09% in 1999 to 3.65% in 2000. In 1999 net interest income grew 7.7%, a $21.3 million increase over 1998. Average earning assets grew 12.2% or $796.6 million during 1999. Nonearning assets rose $24.6 million, in part due to increased cash in late 1999 as a precaution for the Year 2000 or Y2K issue. Much of the asset growth was funded by interest-bearing liabilities that increased $747.2 million or 13.1%. Noninterest-bearing deposits increased $46.6 million or 8.2%. Other liabilities and equity provided an additional $21.6 million in funding. Old National's net interest margin declined 17 basis points 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. The cost of interest-bearing liabilities declined 17 basis points to 4.41%. Growth in higher-rate time deposits and borrowings contributed to the net interest margin compression, particularly during the last half of 1999. Table 1 on page 17 details the changes in the components of net interest income. Table 2 on page 17 attributes Table 1 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 18 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. Page 16 NET INTEREST INCOME CHANGES (TABLE 1) % Change From Prior Year (tax equivalent basis, 2000 1999 1998 2000 1999 dollars in thousands) ------------------------------------------------------------------------------ Interest Income Money market investments $ 1,619 $ 1,859 $ 1,963 (12.9)% (5.3)% Investment securities 128,577 125,378 117,826 2.6 6.4 Loans 527,718 456,499 419,800 15.6 8.7 ------------------------------------------------------------------------------ Total interest income 657,914 583,736 539,589 12.7 8.2 ------------------------------------------------------------------------------ Interest Expense NOW deposits 13,135 10,700 12,196 22.8 (12.3) Savings deposits 12,086 11,211 11,803 7.8 (5.0) Money market deposits 34,735 27,458 26,747 26.5 2.7 Time deposits 207,656 163,341 156,366 27.1 4.5 Short-term borrowings 42,446 28,550 19,252 48.7 48.3 Other borrowings 58,346 43,311 35,333 34.7 22.6 ------------------------------------------------------------------------------ Total interest expense 368,404 284,571 261,697 29.5 8.7 ------------------------------------------------------------------------------ Net interest income $289,510 $299,165 $277,892 (3.2)% 7.7% =============================================================================== Net interest margin 3.65% 4.09% 4.26% ============================================================ NET INTEREST INCOME - RATE/VOLUME ANALYSIS (TABLE 2)
2000 vs. 1999 1999 vs. 1998 --------------------------------- ---------------------------------- Attributed to Attributed to Total --------------------- Total ---------------------- (tax equivalent basis, Change Volume Rate Change Volume Rate dollars in thousands) ------------------------------------------------------------------------------------------------ Interest Income Money market investments $ (240) $ (655) $ 415 $ (104) $ (97) $ (7) Investment securities 3,199 (2,359) 5,558 7,552 7,956 (404) Loans 71,219 56,605 14,614 36,699 58,788 (22,089) ------------------------------------------------------------------------------------------------ Total interest income 74,178 53,591 20,587 44,147 66,647 (22,500) ------------------------------------------------------------------------------------------------ Interest Expense NOW deposits 2,435 215 2,220 (1,496) 656 (2,152) Savings deposits 875 (128) 1,003 (592) 668 (1,260) Money market deposits 7,277 (8) 7,285 711 1,864 (1,153) Time deposits 44,315 24,655 19,660 6,975 15,397 (8,422) Short-term borrowings 13,896 6,836 7,060 9,298 8,119 1,179 Other borrowings 15,035 6,540 8,495 7,978 9,989 (2,011) ------------------------------------------------------------------------------------------------ Total interest expense 83,833 38,110 45,723 22,874 36,693 (13,819) ------------------------------------------------------------------------------------------------ Net interest income $ (9,655) $ 15,481 $(25,136) $ 21,273 $ 29,954 $ (8,681) =================================================================================================
The variance not solely due to rate or volume is allocated equally between the rate and volume variances. Page 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION (CONTINUED) THREE-YEAR AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS (TABLE 3)
2000 1999 1998 ------------------------------ --------------------------------- ------------------------------ (Tax equivalent basis, Average Interest Yield/ Average Interest Yield/ Average Interest Yield/ dollars in thousands) Balance & Fees Rate Balance & Fees Rate Balance & Fees Rate ----------------------------------------------------------------------------------------------------------------------------------- Earning Assets Money market investments $ 24,130 $ 1,619 6.71% $ 35,046 $ 1,859 5.30% $ 36,892 $ 1,963 5.32% Investment securities: U.S. Treasury and Government agencies(1) 1,178,365 80,414 6.82 1,232,856 79,265 6.43 1,155,673 73,855 6.39 State and political subdivisions 542,469 40,636 7.49 551,189 41,178 7.47 519,166 39,534 7.61 Other securities 97,522 7,527 7.72 68,408 4,935 7.21 60,251 4,437 7.36 ----------------------------------------------------------------------------------------------------------------------------------- Total investment securities 1,818,356 128,577 7.07 1,852,453 125,378 6.77 1,735,090 117,826 6.79 ----------------------------------------------------------------------------------------------------------------------------------- Loans:(2) Commercial 1,476,135 136,941 9.28 1,277,572 111,604 8.74 1,120,020 102,445 9.15 Commercial real estate 1,537,810 132,776 8.63 1,211,022 98,746 8.15 972,820 83,248 8.56 Residential real estate 2,087,834 165,554 7.93 2,080,569 164,229 7.89 1,855,636 154,902 8.35 Consumer, net of unearned income 969,279 90,389 9.33 825,113 77,174 9.35 765,317 74,515 9.74 Credit card 16,811 2,058 12.24 30,872 4,746 15.37 30,298 4,690 15.48 ----------------------------------------------------------------------------------------------------------------------------------- Total loans 6,087,869 527,718 8.67 5,425,148 456,499 8.41 4,744,091 419,800 8.85 ----------------------------------------------------------------------------------------------------------------------------------- Total earning assets 7,930,355 $657,914 8.30% 7,312,647 $583,736 7.98% 6,516,073 $539,589 8.28% ================== =================== ================== Less: Allowance for loan losses (71,089) (64,051) (58,328) Non-Earning Assets Cash and due from banks 174,801 174,916 157,180 Other assets 417,006 361,836 354,972 --------------------------------------------- ------------- ------------ Total assets $8,451,073 $7,785,348 $6,969,897 ============================================= ============= ============ Interest-Bearing Liabilities NOW deposits $ 820,067 $ 13,135 1.60% $ 805,371 $ 10,700 1.33% $ 760,607 $ 12,196 1.60% Savings deposits 479,314 12,086 2.52 484,645 11,211 2.31 457,345 11,803 2.58 Money market deposits 712,215 34,735 4.88 712,401 27,458 3.85 665,078 26,747 4.02 Time deposits 3,542,215 207,656 5.86 3,099,269 163,341 5.27 2,814,812 156,366 5.56 ----------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 5,553,811 267,612 4.82 5,101,686 212,710 4.17 4,697,842 207,112 4.41 Short-term borrowings 708,840 42,446 5.99 583,209 28,550 4.90 413,230 19,252 4.66 Other borrowings 878,262 58,346 6.64 771,552 43,311 5.61 598,136 35,333 5.91 ----------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 7,140,913 $368,404 5.16% 6,456,447 $284,571 4.41% 5,709,208 $261,697 4.58% ================== =================== ================== Noninterest-Bearing Demand deposits 636,636 613,366 566,757 Other liabilities 88,933 100,114 96,492 Shareholders' equity 584,591 615,421 597,440 --------------------------------------------- ------------- ------------ Total liabilities and shareholders' equity $8,451,073 $7,785,348 $6,969,897 ============================================= ============= ============ Interest Margin Recap Interest income/average earning assets $657,914 8.30% $583,736 7.98% $539,589 8.28% Interest expense/average earning assets 368,404 4.65 284,571 3.89 261,697 4.02 ----------------------------------------------------------------------------------------------------------------------------------- Net interest margin $289,510 3.65% $299,165 4.09% $277,892 4.26% ===================================================================================================================================
(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. Loan fees included above were $10.5 million in 2000, $11.3 million in 1999, and $11.2 million in 1998. Page 18 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. The goal of asset/liability management is to maximize and maintain adequate growth of net interest income within certain interest rate sensitivity and liquidity guidelines established by Old National's Funds Management and Balance Sheet Management Committees. These committees, comprised of Old National directors and senior managers, establish asset/liability guidelines and monitor balance sheet risk positions. Old National uses income simulation methods to measure the impact of interest rate changes on its net interest income. Net interest income simulation modeling is used to 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 an additional 12 months. Key model assumptions include asset prepayment speeds; changes in market conditions, loan volumes, and pricing; deposit sensitivity; and customer preferences. Due to the inherent assumption uncertainty, the model cannot precisely estimate net interest income or the impact of interest rate changes. Actual results will differ from the simulated results due to timing, magnitude and frequency of interest rate changes, changes in market conditions and management strategies, among other factors. Old National's policy limit using the immediate rate change for the maximum negative impact on net interest income over 24 months is 5%. The following table shows Old National's estimated earnings sensitivity profile at December 31, 2000. Change in Percentage change in Interest rates Net Interest Income (Basis points) 12 months 24 months ------------------------------------------------ +200 (2.13)% (1.85)% -200 (1.04) (3.20) During the third quarter of 2000, Old National sold $600 million of seasoned, fixed-rate residential mortgage loans and securities as part of a balance sheet restructuring to improve its interest rate risk and liquidity positions. This resulted in a pre-tax loss of $18.3 million. On an ongoing basis, Old National sells much of the long-term, fixed-rate residential loans which conform to Federal Home Loan Mortgage Corporation or Federal National Mortgage Association guidelines in order to reduce interest rate fluctuation exposure. Liquidity Management In addition to interest rate sensitivity, the Balance Sheet Management Committee monitors Old National's liquidity position. The objective is to ensure the ability to meet cash flow needs of customers, such as new loan demand and unexpected deposit withdrawals, while at the same time maximizing lending and investment opportunities. Core deposits, selling or pledging available assets and wholesale funding from the capital and money markets provide liquidity. At December 31, 2000, Old National Bank's short-term debt and deposits carried the following ratings: P2 by Moody's Investor Services ("Moody's"), A2 by Standard and Poor's ("S&P"), and F1 by Fitch IBCA, Inc. ("Fitch"). The parent company's sources of liquidity include: bank lines of credit, capital markets, and affiliate banks' dividends which are subject to regulatory limits and in some cases require regulatory approval. Notes 10 and 13 of the consolidated financial statements address this further. At year-end 2000 Old National had $25 million in an available line of credit from an unaffiliated bank. Old National has capacity to issue up to $85.7 million of a $150 million medium term note program and $150 million of trust preferred securities for future liquidity needs. Old National senior long-term debt was rated BAA1 by Moody's, BBB+ by S&P, and A- by Fitch while its trust preferred securities were rated bAA1 by Moody's and BBB- by S&P. Noninterest Income Besides net interest income, Old National generates additional revenue, noninterest income, through fees and sales commissions from its core banking franchise and other related businesses, such as investment products and insurance. This source of revenue has grown as a percentage of total revenue, excluding securities transactions, from 20.5% in 1998 to 26.0% in 2000. Noninterest income, excluding securities transactions, grew 26.5% in 2000 compared to 12.1% in 1999. The trust fee income grew 3.9% in 2000 and 10.7% in 1999. The poor 2000 equity market negatively impacted trust fees. Service charges on deposit accounts rose 37.2% in 2000 compared to 22.2% in 1999. As part of One Bank, Worry Free checking was introduced in 1999 and produced higher levels of collectible overdraft fees. Loan fees declined 22.7% in 2000 after a 0.7% decrease in 1999. In 2000 Old National sold much of its credit card portfolio and the related fee income declined $2.3 million compared to 1999. This was partially offset by growth in mortgage banking revenue and other loan related fees. Insurance sales grew 73.9% or $4.9 million in 2000 after an 11.0% increase in 1999. Old National purchased agencies in December 1999 and in November 2000 that significantly contributed to insurance revenue in 2000. Investment and brokerage business increased 11.1% in 2000 with revenue exceeding $7.1 million despite the weaker investment markets after 19.6% growth in 1999. Bank-owned life insurance revenue, a new initiative in 1998 representing income on officers' life insurance coverage, grew 2.1% compared to 1999, the first full year for this revenue. The remaining other income category rose $7.0 million primarily due to the sale of the credit card portfolio and merchant processing business in 2000. 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. Page 19 Table 4 below presents changes in the components of noninterest income for the years 1998 through 2000. NONINTEREST INCOME (TABLE 4)
% Change From Prior Year (dollars in thousands) 2000 1999 1998 2000 1999 -------------------------------------------------------------------------------------------------- Trust fees $ 22,566 $ 21,722 $ 19,621 3.9% 10.7% Service charges on deposit accounts 34,337 25,022 20,480 37.2 22.2 Loan fees 5,124 6,630 6,679 (22.7) (0.7) Insurance premiums and commissions 11,502 6,615 5,960 73.9 11.0 Investment product fees 7,125 6,416 5,363 11.1 19.6 Bank-owned life insurance 4,350 4,260 3,860 2.1 10.4 Other income 16,828 9,848 9,845 70.9 -- -------------------------------------------------------------------------------------------------- Subtotal 101,832 80,513 71,808 26.5 12.1 Net securities gains (losses) (119) 2,637 1,090 (104.5) 141.9 -------------------------------------------------------------------------------------------------- Total noninterest income $ 101,713 $ 83,150 $ 72,898 22.3% 14.1% ================================================================================================== Noninterest income to total revenue (1) 26.0% 21.2% 20.5% ------------------------------------------------------------------------------
(1) Excludes securities gains (losses) and uses tax equivalent revenue. Noninterest Expense Old National continues to strive to improve its efficiency through mergers, consolidation, cost control efforts, and technology advancements 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 using operating earnings, (noninterest expense divided by net interest income, tax equivalized, plus noninterest income, excluding securities gains) was 58.29% in 2000, 58.56% in 1999, and 56.75% in 1998. Salaries and benefits, which comprised approximately 50% of total noninterest expense, grew 0.6% in 2000 and 14.5% in 1999. During the charter consolidation in 1999, Old National had duplicate expenses as centralized operations were staffed up to take over certain functions consolidated in late 1999. Salary incentives tied to financial results declined in 2000 by $4.0 million after increasing by $3.2 million in 1999. Equipment expense grew less than 2% in both 2000 and 1999. Marketing expense declined 1.2% in 2000 after a 14.1% increase in 1999 due to additional advertising for Worry Free checking, Y2K advertising, and charter consolidation. FDIC insurance premiums rose during 2000 and 1999 due to general rate increases. After the sale of the credit card portfolio in 2000, processing expense returned to 1998 levels after an 11.5% increase in 1999 when Old National outsourced credit card processing. In addition, Old National experienced higher expenses related to Y2K in 1999. Communications and transportation expense increased 9.5% in 2000 and 11.2% in 1999. Higher courier and dataline charges resulted from the consolidation process, in some cases due to duplicate costs in the short term. Postage costs rose in 1999 and subsequently declined due to Y2K and restructuring activities. Professional fees declined 39.6% in 2000 after a 67.5% increase in 1999 impacted by consolidation consulting services. Goodwill amortization rose in 2000 due to the Permanent and insurance agency acquisitions. Other expense rose 17.4% in 2000 after a 1.4% decline in 1999. Losses on deposit accounts rose $2.0 million in 2000 primarily due to a full year of Worry Free checking. Higher deposit service charge income exceeded these additional losses. Table 5 below presents changes in the components of noninterest expense for the years 1998 through 2000. NONINTEREST EXPENSE (TABLE 5) % Change From Prior Year (dollars in thousands) 2000 1999 1998 2000 1999 -------------------------------------------------------------------------------- Salaries and employee benefits $130,236 $129,419 $113,012 0.6% 14.5% Occupancy 14,198 13,396 11,903 6.0 12.5 Equipment 17,378 17,081 16,864 1.7 1.3 Marketing 7,958 8,056 7,061 (1.2) 14.1 FDIC insurance premiums 1,255 928 699 35.2 32.8 Processing 10,070 11,391 10,213 (11.6) 11.5 Communications and transportation 10,236 9,346 8,402 9.5 11.2 Professional fees 5,294 8,761 5,229 (39.6) 67.5 Intangible amortization 4,546 2,645 2,632 71.9 0.5 Other expense 26,863 22,874 23,073 17.4 (0.9) -------------------------------------------------------------------------------- Subtotal 228,034 223,897 199,088 1.8 12.5 Merger and restructuring costs 37,503 -- -- N/M N/M -------------------------------------------------------------------------------- Total noninterest expense $265,537 $223,897 $199,088 18.6% 12.5% ================================================================================ N/M = Not meaningful Page 20 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 19.1% in 2000, 25.8% in 1999, and 29.3% in 1998. The lower levels of overall income due to restructuring charges combined with higher tax-exempt income decreased the effective tax rate in 2000. The drop in rate in 1999 was due to a change in state tax laws and the implementation of certain tax saving strategies. See Note 7 to the consolidated financial statements for additional details on Old National's income tax provision. Interim Financial Data Table 6 below provides a detailed summary of quarterly results of operations for the years ended December 31, 2000 and 1999. These results contain all normal and recurring adjustments of a material nature necessary for a fair and consistent presentation. INTERIM FINANCIAL DATA (TABLE 6)
----------------------------------------------------------------------------------------------------------------------- Quarter Ended 2000 Quarter Ended 1999 (unaudited, dollars and shares December September June March December September June March in thousands, except per share data) 31 30 30 31 31 30 30 31 ----------------------------------------------------------------------------------------------------------------------- Interest income $168,220 $166,407 $154,889 $148,759 $147,357 $145,253 $139,207 $133,996 Interest expense 101,235 98,686 87,392 81,091 76,517 73,447 68,690 65,917 ----------------------------------------------------------------------------------------------------------------------- Net interest income 66,985 67,721 67,497 67,668 70,840 71,806 70,517 68,079 Provision for loan losses 12,965 4,968 4,437 7,433 4,192 3,515 3,699 3,392 Noninterest income 26,549 25,589 26,124 23,451 21,506 21,053 20,994 19,597 Noninterest expense 62,445 73,159 56,113 73,820 61,670 55,019 54,723 52,485 ----------------------------------------------------------------------------------------------------------------------- Income before income taxes 18,124 15,183 33,071 9,866 26,484 34,325 33,089 31,799 Income taxes 2,500 1,960 9,214 874 4,606 9,528 9,206 9,100 ----------------------------------------------------------------------------------------------------------------------- Net income from continuing operations 15,624 13,223 23,857 8,992 21,878 24,797 23,883 22,699 Discontinued operations -- -- -- -- 618 -- 3,483 -- ----------------------------------------------------------------------------------------------------------------------- Net income $ 15,624 $ 13,223 $ 23,857 $ 8,992 $ 22,496 $ 24,797 $ 27,366 $ 22,699 ======================================================================================================================= Net income from continuing operations per share: Basic $ 0.26 $ 0.22 $ 0.40 $ 0.15 $ 0.37 $ 0.41 $ 0.39 $ 0.38 Diluted 0.26 0.22 0.40 0.15 0.36 0.40 0.39 0.36 ======================================================================================================================= Net income per share: Basic $ 0.26 $ 0.22 $ 0.40 $ 0.15 $ 0.38 $ 0.41 $ 0.45 $ 0.38 Diluted 0.26 0.22 0.40 0.15 0.37 0.40 0.45 0.36 ======================================================================================================================= Weighted average shares: Basic 60,576 60,403 58,415 59,072 59,535 60,286 60,416 60,260 Diluted 60,692 60,568 59,045 60,463 61,220 62,415 62,626 62,523 =======================================================================================================================
Page 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION (Continued) Financial Condition Overview Total assets reached $8.8 billion at December 31, 2000, 8.4% higher than the prior year-end. Loans increased $633.6 million or 11.1%. Total liabilities grew $640.4 million or 8.5% over 1999. Investment Securities Investment securities continued to decline as a percentage of total assets and stood at 20.7% at December 31, 2000, down from 22.5% in 1999. Investment securities declined $9.9 million, 0.5% from 1999, as Old National continued to emphasize loan growth to generate higher levels of interest income. 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 2.89 years. At December 31, 2000, Old National held investment securities issued by the certain states and their political subdivisions with the following aggregate market value: $107.5 million by Illinois and $95.0 million by Indiana. There were no other concentrations of investment securities issued by an individual state and its political subdivisions that were greater than 10% of shareholders' equity. Average yields on the investment securities portfolio are calculated on a tax 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 7.13% in 2000, 6.97% in 1999, and 6.95% in 1998. The yield rose in 2000 due to the change in the mix of securities within the portfolio. As part of the third quarter restructuring, Old National sold $300 million of long-duration, low-yielding mortgage-backed securities and replaced them with shorter-duration but higher-yielding agency securities. Table 7 below presents the maturity distribution of the investment portfolio, along with weighted average yields thereon. MATURITY DISTRIBUTION OF INVESTMENT SECURITIES (TABLE 7)
---------------------------------------------------------------------------------------------------------------------------------- December 31, 2000 December 31, Within 1 - 5 5 - 10 Beyond (dollars in thousands) 1 Year Years Years Years 10 Years Total 1999 1998 ---------------------------------------------------------------------------------------------------------------------------------- Fair Value U.S. Treasury $ 30 $ 2,016 $ 2,367 $ 894 $ 5,307 $ 39,266 $ 107,513 U.S. Government agencies and corporations 466,321 162,991 300 210 629,822 352,087 314,420 Mortgage-backed securities 18,546 24,032 373,434 65,342 481,354 801,051 739,741 States and political subdivisions 37,990 197,748 266,204 44,102 546,044 549,18 536,158 Other securities 690 28,188 661 119,497 149,036 79,854 63,728 ---------------------------------------------------------------------------------------------------------------------------------- Total $ 523,577 $ 414,975 $ 642,966 $ 230,045 $1,811,563 $1,821,438 $1,761,560 ================================================================================================================================== Amortized Cost U.S. Treasury $ 30 $ 2,016 $ 2,342 $ 882 $ 5,270 $ 39,830 $ 105,683 U.S. Government agencies and corporations 467,760 160,946 300 210 629,216 363,901 309,009 Mortgage-backed securities 18,691 24,193 378,796 65,005 486,685 833,148 733,821 States and political subdivisions 37,836 195,175 262,816 42,468 538,295 553,253 516,007 Other securities 673 27,797 654 119,914 149,038 80,038 63,845 ---------------------------------------------------------------------------------------------------------------------------------- Total $ 524,990 $ 410,127 $ 644,908 $ 228,479 $1,808,504 $1,870,170 $1,728,365 ================================================================================================================================== Weighted average yield, based on amortized cost (tax equivalent basis) 6.83% 7.47% 7.00% 7.53% 7.13% 6.97% 6.95% ----------------------------------------------------------------------------------------------------------------------------------
Lending And Loan Administration The key to Old National's success has long been its credit culture that 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 from both the holding company and the community banks. 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. Page 22 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, Kentucky, Tennessee, and Ohio. 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 highly leveraged buyout transactions or loans to foreign countries. The 11.1% loan growth in 2000 followed 13.0% growth in 1999. Commercial real estate led all loan types with a 38.6% increase in 2000 after 18.7% growth in 1999. Commercial loans also experienced significant growth with 20.0% in 2000 compared to 13.2% in 1999. 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 loans declined 12.0% in 2000 after growing 8.2% in 1999. In 2000 Old National sold much of its fixed-rate loans originated during the year and sold $250.1 million of residential mortgage loans as part of its balance sheet restructuring. Consumer loans rose 12.6% in 2000 and 15.6% in 1999. The portfolio is well diversified with 25% in commercial loans, 28% in commercial real estate, 30% 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. With much of the originations being sold, the residential real estate loan balances should continue to decrease in dollars and as a percentage of the portfolio. 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 geographic area. These industries have been historically stable in Old National's market area and provide opportunities for growth. A significant percentage of commercial loans matures within one year, reflecting the short-term nature of a large portion of these loans. Table 8 below presents the maturity distribution and rate sensitivity of commercial loans and an analysis of these loans that have predetermined and floating interest rates. DISTRIBUTION OF COMMERCIAL LOAN MATURITIES AT DECEMBER 31, 2000 (TABLE 8) -------------------------------------------------------------------------------- Within 1-5 Beyond (dollars in thousands) 1 Year Years 5 years Total -------------------------------------------------------------------------------- Interest rates: Predetermined $203,857 $303,571 $192,447 $ 699,875 Floating 605,007 198,952 102,675 906,634 -------------------------------------------------------------------------------- Total $808,864 $502,523 $295,122 $1,606,509 ================================================================================ The significance of the residential real estate loans, primarily 1-4 family properties, to the loan portfolio has declined since 1998. The loan sales in 2000 contributed to the decrease during the year. 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, and student loans. Old National sold the bulk of its credit card loans in 2000. In the past four years commercial loans increased an average of 14.3% per year while commercial real estate grew 21.6%. Consumer and residential real estate loans both increased approximately 5.0% over the same period. Table 9 below presents the composition of the loan portfolio for each of the last five years. LOAN PORTFOLIO (TABLE 9)
------------------------------------------------------------------------------------------------------------------------ December 31, Four Year (dollars in thousands) 2000 1999 1998 1997 1996 Growth Rate ------------------------------------------------------------------------------------------------------------------------ Commercial $1,606,509 $1,338,255 $1,181,678 $1,042,656 $ 939,686 14.3% Commercial real estate 1,810,805 1,306,312 1,100,825 946,299 828,024 21.6 Residential real estate 1,890,872 2,148,974 1,986,195 1,735,557 1,575,060 4.7 Consumer credit 1,042,629 926,345 801,036 816,082 850,179 5.2 ------------------------------------------------------------------------------------------------------------------------ Subtotal 6,350,815 5,719,886 5,069,734 4,540,594 4,192,949 10.9% ============ Less: Unearned income 2,502 5,198 11,274 14,073 21,098 ------------------------------------------------------------------------------------------------------------ Total loans 6,348,313 5,714,688 5,058,460 4,526,521 4,171,851 Less: Allowance for loan losses 73,833 65,685 59,371 55,567 49,580 ------------------------------------------------------------------------------------------------------------ Net loans $6,274,480 $5,649,003 $4,999,089 $4,470,954 $4,122,271 ============================================================================================================ Composition Of Loan Portfolio By Type Commercial 25.3% 23.4% 23.4% 23.0% 22.5% Commercial real estate 28.5 22.9 21.8 20.9 19.8 Residential real estate 29.8 37.6 39.3 38.3 37.8 Consumer credit 16.4 16.1 15.5 17.8 19.9 ------------------------------------------------------------------------------------------------------------
Page 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION (Continued) 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 portfolio 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 $23.9 million in 2000 compared to $9.5 million in 1999 and $11.2 million in 1998. In 2000 commercial loan charge-offs accounted for the bulk of the increase and were focused in a limited number of credits. The 1999 improvement in net charge-offs occurred primarily within the consumer portfolio. Net charge-offs to average loans ranged from 0.17% to 0.39% over 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 inherent in the loan portfolio. For homogeneous loans, such as residential mortgage and consumer, provision levels are determined using historic loss factors. For non-homogeneous loans, management allocates specific losses to loans in the highest risk categories and provides for the remainder of the portfolio using historical loss factors. In addition, provisions reflect other risks affecting the loan portfolio, such as economic conditions in the geographic area, specific industry financial conditions, and experience of lending staff. The provision for loan losses in 2000 totaled $29.8 million, including a $3.8 million provision related to mergers, compared to $14.8 million in 1999 and $15.0 million in 1998. The higher 2000 provision levels reflected continued strong loan growth and the deterioration and subsequent charge-off of a few large credits. Table 10 below summarizes activity in the allowance for loan losses for the years 1996 through 2000, along with an allocation of the year-end balances and related statistics for the allowance and net charge-offs. ALLOWANCE FOR LOAN LOSSES (TABLE 10)
------------------------------------------------------------------------------------------------------------- (dollars in thousands) 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------------------- Analysis Balance, January 1 $ 65,685 $ 59,371 $ 55,567 $ 49,580 $ 48,120 Loans charged off: Commercial 19,561 6,977 4,938 3,825 4,756 Commercial and residential real estate 1,500 1,524 1,312 736 852 Consumer credit 8,284 8,358 8,772 9,523 10,227 ------------------------------------------------------------------------------------------------------------- Total charge-offs 29,345 16,859 15,022 14,084 15,835 ------------------------------------------------------------------------------------------------------------- Recoveries on charged-off loans: Commercial 2,402 2,975 1,374 1,652 2,327 Commercial and residential real estate 510 443 376 1,209 350 Consumer credit 2,546 3,957 2,089 1,945 1,895 ------------------------------------------------------------------------------------------------------------- Total recoveries 5,458 7,375 3,839 4,806 4,572 ------------------------------------------------------------------------------------------------------------- Net charge-offs 23,887 9,484 11,183 9,278 11,263 Provision charged to expense 29,803 14,798 14,987 15,265 12,723 Acquired from acquisition 2,232 1,000 -- -- -- ------------------------------------------------------------------------------------------------------------- Balance, December 31 $ 73,833 $ 65,685 $ 59,371 $ 55,567 $ 49,580 ============================================================================================================= Average loans for the year $6,087,869 $5,425,148 $4,744,091 $4,318,362 $3,994,795 Allowance/year-end loans 1.16% 1.15% 1.17% 1.23% 1.19% Allowance/average loans 1.21 1.21 1.25 1.29 1.24 Net charge-offs/average loans 0.39 0.17 0.24 0.21 0.28 Allocation At December 31 Commercial $ 30,372 $ 28,386 $ 26,277 $ 26,211 $ 23,131 Commercial and residential real estate 32,578 26,474 15,513 15,210 14,594 Consumer credit 10,883 10,825 17,581 14,146 11,855 ------------------------------------------------------------------------------------------------------------- Total $ 73,833 $ 65,685 $ 59,371 $ 55,567 $ 49,580 =============================================================================================================
Page 24 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 that show indications 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 $211.1 million at December 31, 2000, 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. Interest income of approximately $3.0 million would have been recorded in 2000 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 2000 on nonaccrual and restructured loans was $2.7 million. Under-performing assets as of year-end totaled $33.1 million in 2000 and $28.6 million in 1999. As a percent of total loans and foreclosed properties, under-performing assets at December 31 ranged between 0.50% and 0.61%. While the under - performing assets rose $4.5 million in 2000, the total under-performing asset ratio increased only 2 basis points to 0.52%. The growth in nonaccruals in 1998 reflected a conservative change to the nonaccrual policy and not a general deterioration of the portfolio. At December 31, 2000, the allowance for loan losses to under-performing assets ratio stood at 223% compared to 229% in 1999 and 191% in 1998. Said in another way, at December 31, 2000, Old National had set aside $2.23 for every dollar of under-performing assets. Table 11 below presents the components of under-performing assets for the last five years. UNDER-PERFORMING ASSETS (TABLE 11)
-------------------------------------------------------------------------------------------------------- December 31, (dollars in thousands) 2000 1999 1998 1997 1996 -------------------------------------------------------------------------------------------------------- Nonaccrual loans $22,690 $19,286 $19,074 $12,626 $14,680 Renegotiated loans 227 450 458 920 895 Past due loans (90 days or more): Commercial 2,269 1,797 1,113 1,787 1,356 Commercial and residential real estate 2,795 2,462 5,802 3,077 2,835 Consumer 1,524 947 1,388 1,288 963 -------------------------------------------------------------------------------------------------------- Total past due loans 6,588 5,206 8,303 6,152 5,154 -------------------------------------------------------------------------------------------------------- Foreclosed properties 3,616 3,700 3,184 3,987 3,332 -------------------------------------------------------------------------------------------------------- Total under-performing assets $33,121 $28,642 $31,019 $23,685 $24,061 ======================================================================================================== Under-performing assets/total loans and foreclosed properties 0.52% 0.50% 0.61% 0.52% 0.58% Allowance for loan losses/under-performing assets 222.92 229.33 191.40 234.61 206.06 --------------------------------------------------------------------------------------------------------
Deposits And Other Funding Customer deposits include noninterest-bearing demand, regular savings and NOW accounts, money market accounts, and time deposits. Average deposits increased 8.3% in 2000 compared to 8.6% in 1999. Deposit growth in 2000 was concentrated in time deposits after strong 1999 growth in all deposit categories. Other time deposits increased 14.3% in 2000 and 10.1% in 1999 and included brokered certificates of deposit of $829.4 million in 2000, $489.2 million in 1999, and $235.9 million in 1998. Table 12 below presents changes in the average balances of all funding sources for the years 1998 through 2000. FUNDING SOURCES - AVERAGE BALANCE (TABLE 12)
------------------------------------------------------------------------------------ % Change From Prior Year (dollars in thousands) 2000 1999 1998 2000 1999 ------------------------------------------------------------------------------------ Demand deposits $ 636,636 $ 613,366 $ 566,757 3.8% 8.2% NOW deposits 820,067 805,371 760,607 1.8 5.9 Savings deposits 479,314 484,645 457,345 (1.1) 6.0 Money market deposits 712,215 712,401 665,078 -- 7.1 Time deposits 3,542,215 3,099,269 2,814,812 14.3 10.1 ------------------------------------------------------------------------------------ Total deposits 6,190,447 5,715,052 5,264,599 8.3 8.6 Short-term borrowings 708,840 583,209 413,230 21.5 41.1 Other borrowings 878,262 771,552 598,136 13.8 29.0 ------------------------------------------------------------------------------------ Total funding sources $7,777,549 $7,069,813 $6,275,965 10.0% 12.6% ====================================================================================
Page 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION (Continued) Table 13 below presents a maturity distribution for certificates of deposit with denominations of $100,000 and over. CERTIFICATES OF DEPOSIT, $100,000 AND OVER (TABLE 13) --------------------------------------------------------------------------- Maturity Distribution ---------------------------------------- Year-End 1-90 91-180 181-365 Beyond (dollars in thousands) Balance Days Days Days 1 Year --------------------------------------------------------------------------- 2000 $845,637 $431,275 $253,691 $76,107 $84,564 1999 524,511 248,264 111,960 97,515 66,772 1998 482,393 205,644 107,255 89,980 79,514 --------------------------------------------------------------------------- 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 $125.6 million in 2000 and $170.0 million in 1999. Table 14 below presents the distribution of Old National's short-term borrowings and related weighted average interest rates for each of the last three years. SHORT-TERM BORROWINGS (TABLE 14) ------------------------------------------------------------------------ Other Funds Repurchase Short-term (dollars in thousands) Purchased Agreements Borrowings ------------------------------------------------------------------------ 2000 Outstanding at year-end $248,844 $239,064 $ 71,915 Average amount outstanding 355,140 268,505 85,195 Maximum amount outstanding at any month-end 568,998 288,347 233,197 Weighted average interest rate: During year 6.47% 5.26% 6.30% End of year 6.49 5.18 6.46 ------------------------------------------------------------------------ 1999 Outstanding at year-end $379,611 $234,088 $ 65,760 Average amount outstanding 172,227 302,137 108,845 Maximum amount outstanding at any month-end 379,611 355,961 234,447 Weighted average interest rate: During year 5.21% 4.65% 5.08% End of year 4.90 5.62 4.36 ------------------------------------------------------------------------ 1998 Outstanding at year-end $298,250 $197,189 $ 20,397 Average amount outstanding 86,020 217,301 109,909 Maximum amount outstanding at any month-end 298,250 236,324 183,577 Weighted average interest rate: During year 5.37% 4.90% 5.95% End of year 5.34 4.52 5.03 ------------------------------------------------------------------------ Other borrowings generally provide longer term funding and include both short- and long-term debt from the Federal Home Loan Bank ("FHLB"), medium term notes, convertible subordinated debentures, and trust preferred securities, if not separately listed. 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 $83.8 million at December 31, 2000, and have a weighted average effective interest rate of 6.81% with maturities between 2001 and 2007. The funds were used to reduce Old National's lines of credit. Holders of Old National's 8% convertible debentures converted to common stock the remaining $12.8 million in 2000 and $9.3 million in 1999. These conversions resulted in the issuance of common stock shares totaling 1,034,000 in 2000 and 749,000 in 1999 with a corresponding increase in shareholders' equity. In March 2000, Old National issued through a subsidiary $50 million of trust preferred securities which mature in 2030 and have a 9.50% annual distribution rate. These securities may be redeemed on or after March 15, 2005, and qualify as Tier 1 capital for regulatory purposes. CAPITAL RESOURCES Shareholders' equity totaled $626.3 million or 7.1% of total assets at December 31, 2000, and $585.0 million or 7.2% at December 31, 1999. Old National paid $0.65 cash dividends per share in 2000 which totaled $38.8 million (restated for the 5% stock dividend paid in January 2001). 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 $131.9 million in 2000 and $78.5 million in 1999. Shares reissued pursuant to the above programs and in connection with conversions of Old National's subordinated debentures added to shareholders' equity $28.2 million in 2000 and $27.4 million in 1999. Stock issued for purchase transactions, such as the Permanent acquisition and insurance agencies, totaled $90.8 million in 2000 and $18.1 million in 1999. Page 26 The accumulated other comprehensive income component of equity is primarily comprised of unrealized security gains (losses), net of tax. The rising rate environment during late 1999 produced a negative or loss of $29.3 million. In late 2000 rates fell and generated a positive or gain of $2.0 million by December 31, 2000. This basically represents the estimated unrealized gain or 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 that 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, 2000, 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 15 below. CAPITAL STRUCTURE AND REGULATORY GUIDELINES (TABLE 15)
-------------------------------------------------------------------------------------------------------------------------------- December 31, Regulatory Guidelines (dollars in thousands) 2000 1999 1998 MinimumWell-Capitalized -------------------------------------------------------------------------------------------------------------------------------- OLD NATIONAL BANCORP Tier 1 Capital Shareholders' equity(1) $ 624,387 $ 614,316 $ 585,718 Plus: guaranteed preferred beneficial interests in subordinated debentures 50,000 -- -- Less: intangibles (93,337) (33,531) (27,393) ---------------------------------------------------------------------------------------------------------- Tier 1 capital 581,050 580,785 558,325 Tier 2 Capital Subordinated debentures -- 12,782 21,963 Qualifying allowance for loan losses 73,833 65,255 58,652 ---------------------------------------------------------------------------------------------------------- Total capital $ 654,883 $ 658,822 $ 638,940 ========================================================================================================== Risk adjusted assets $ 6,291,155 $ 5,457,624 $ 4,894,768 Tier 1 capital to risk-adjusted assets 9.24% 10.64% 11.41% 4.00% N/A Total capital to risk-adjusted assets 10.41 12.07 13.05 8.00 N/A Tier 1 capital to quarterly average assets (leverage ratio) 6.68 7.46 8.01 4.00 N/A -------------------------------------------------------------------------------------------------------------------------------- OLD NATIONAL BANK Tier 1 Capital Shareholders' equity(1) $ 679,691 $ 501,390 $ 487,653 Less: intangibles (75,072) (3,801) (4,849) ---------------------------------------------------------------------------------------------------------- Tier 1 capital 604,619 497,589 482,804 Tier 2 Capital Qualifying allowance for loan losses 71,159 52,125 47,885 ---------------------------------------------------------------------------------------------------------- Total capital $ 675,778 $ 549,714 $ 530,689 Risk adjusted assets $ 6,263,810 $ 4,322,406 $ 3,959,096 ========================================================================================================== Tier 1 capital to risk-adjusted assets 9.65% 11.51% 12.19% 4.00% 6.00% Total capital to risk-adjusted assets 10.79 12.72 13.40 8.00 10.00 Tier 1 capital to quarterly average assets (leverage ratio) 6.94 7.63 8.13 3.00 5.00 --------------------------------------------------------------------------------------------------------------------------------
(1) Excludes unrealized gains (losses) on investment securities. N/A = Not Applicable Page 27 CONSOLIDATED BALANCE SHEET
------------------------------------------------------------------------------------------------------ December 31, (dollars and shares in thousands) 2000 1999 ------------------------------------------------------------------------------------------------------ Assets Cash and due from banks $ 202,600 $ 210,255 Money market investments 13,549 16,686 ------------------------------------------------------------------------------------------------------ Total cash and cash equivalents 216,149 226,941 Investment securities - available-for-sale, at fair value 1,811,563 1,821,438 Loans, net of unearned income 6,348,313 5,714,688 Allowance for loan losses (73,833) (65,685) ------------------------------------------------------------------------------------------------------ Net loans 6,274,480 5,649,003 ------------------------------------------------------------------------------------------------------ Premises and equipment, net 131,793 117,501 Accrued interest receivable 71,490 61,442 Other assets 262,273 209,687 ------------------------------------------------------------------------------------------------------ Total assets $ 8,767,748 $ 8,086,012 ====================================================================================================== Liabilities Deposits: Noninterest-bearing demand $ 711,413 $ 643,553 Interest-bearing: NOW 841,935 831,589 Savings 478,400 496,247 Money market 761,179 680,953 Time 3,790,979 3,309,727 ------------------------------------------------------------------------------------------------------ Total deposits 6,583,906 5,962,069 ------------------------------------------------------------------------------------------------------ Short-term borrowings 559,823 679,459 Accrued expenses and other liabilities 84,513 91,434 Guaranteed preferred beneficial interests in subordinated debentures 50,000 -- Other borrowings 863,165 768,055 ------------------------------------------------------------------------------------------------------ Total liabilities 8,141,407 7,501,017 ------------------------------------------------------------------------------------------------------ Commitments and contingencies (Note 12) Shareholders' Equity Preferred stock, 2,000 shares authorized, no shares issued or outstanding -- -- Common stock, $1 stated value, 150,000 shares authorized, 60,311 and 56,518 shares issued and outstanding, respectively 60,311 56,518 Capital surplus 457,267 395,414 Retained earnings 106,809 162,384 Accumulated other comprehensive income, net of tax 1,954 (29,321) ------------------------------------------------------------------------------------------------------ Total shareholders' equity 626,341 584,995 ------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $ 8,767,748 $ 8,086,012 ======================================================================================================
The accompanying notes to consolidated financial statements are an integral part of this statement. Page 28 CONSOLIDATED STATEMENT OF INCOME
--------------------------------------------------------------------------------------------- Years Ended December 31, (dollars and shares in thousands, except per share data) 2000 1999 1998 --------------------------------------------------------------------------------------------- Interest Income Loans including fees: Taxable $ 508,886 $ 443,211 $ 410,774 Nontaxable 12,606 8,894 6,066 Investment securities: Taxable 88,009 84,341 78,493 Nontaxable 27,155 27,508 26,423 Money market investments 1,619 1,859 1,963 --------------------------------------------------------------------------------------------- Total interest income 638,275 565,813 523,719 --------------------------------------------------------------------------------------------- Interest Expense Deposits 267,612 212,710 207,112 Short-term borrowings 42,446 28,550 19,252 Other borrowings 58,346 43,311 35,333 --------------------------------------------------------------------------------------------- Total interest expense 368,404 284,571 261,697 --------------------------------------------------------------------------------------------- Net interest income 269,871 281,242 262,022 Provision for loan losses 29,803 14,798 14,987 --------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 240,068 266,444 247,035 --------------------------------------------------------------------------------------------- Noninterest Income Trust fees 22,566 21,722 19,621 Service charges on deposit accounts 34,337 25,022 20,480 Loan fees 5,124 6,630 6,679 Insurance premiums and commissions 11,502 6,615 5,960 Investment product fees 7,125 6,416 5,363 Bank-owned life insurance 4,350 4,260 3,860 Net securities gains (losses) (119) 2,637 1,090 Other income 16,828 9,848 9,845 --------------------------------------------------------------------------------------------- Total noninterest income 101,713 83,150 72,898 --------------------------------------------------------------------------------------------- Noninterest Expense Salaries and employee benefits 130,236 129,419 113,012 Occupancy 14,198 13,396 11,903 Equipment 17,378 17,081 16,864 Marketing 7,958 8,056 7,061 FDIC insurance premiums 1,255 928 699 Processing 10,070 11,391 10,213 Communication and transportation 10,236 9,346 8,402 Professional fees 5,294 8,761 5,229 Intangible amortization 4,546 2,645 2,632 Other 26,863 22,874 23,073 --------------------------------------------------------------------------------------------- Subtotal 228,034 223,897 199,088 Merger and restructuring costs 37,503 -- -- --------------------------------------------------------------------------------------------- Total noninterest expense 265,537 223,897 199,088 --------------------------------------------------------------------------------------------- Income before income taxes 76,244 125,697 120,845 Income taxes 14,548 32,440 35,402 --------------------------------------------------------------------------------------------- Net income from continuing operations 61,696 93,257 85,443 Discontinued operations -- 4,101 (9,854) --------------------------------------------------------------------------------------------- Net income $ 61,696 $ 97,358 $ 75,589 ============================================================================================= Net Income From Continuing Operations Per Common Share Basic $ 1.03 $ 1.55 $ 1.42 Diluted 1.03 1.51 1.38 ============================================================================================= Net Income Per Common Share Basic $ 1.03 $ 1.62 $ 1.26 Diluted 1.03 1.58 1.23 ============================================================================================= Weighted Average Number Of Common Shares Outstanding Basic 59,621 60,124 60,020 Diluted 60,200 62,175 62,598 =============================================================================================
The accompanying notes to consolidated financial statements are an integral part of this statement. Page 29 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------------------------------------------------------- Accumulated Other Total Common Stock Capital Retained Comprehensive Shareholders' Comprehensive (dollars and shares in thousands) Shares Amount Surplus Earnings Income Equity Income --------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 38,079 $ 38,079 $ 314,488 $ 208,844 $ 18,188 $ 579,599 Net income -- -- -- 75,589 -- 75,589 $ 75,589 Unrealized net security gain and reclassification adjustment, net of $1,724 tax -- -- -- -- 1,943 1,943 1,943 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 plans 507 507 17,605 (182) -- 17,930 Stock reissued due to conversion of subordinated debentures 415 415 8,029 -- -- 8,444 ------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 39,392 39,392 365,898 180,428 20,131 605,849 $ 77,532 =========== Net income -- -- -- 97,358 -- 97,358 $ 97,358 Unrealized net security loss and reclassification adjustment, net of $32,566 tax -- -- -- -- (49,698) (49,698) (49,698) 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) -- -- Stock repurchased (2,582) (2,582) (75,917) -- -- (78,499) Stock reissued under dividend reinvestment, stock options, and stock purchase plans 749 749 17,487 (109) -- 18,127 Stock reissued due to conversion of subordinated debentures 711 711 8,557 -- -- 9,268 ------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 56,518 56,518 395,414 162,384 (29,321) 584,995 $ 47,660 =========== Net income -- -- -- 61,696 -- 61,696 $ 61,696 Unrealized net security gain and reclassification adjustment, net of $20,515 tax -- -- -- -- 31,275 31,275 31,275 Mergers 3,412 3,412 87,399 -- -- 90,811 Cash dividends -- -- -- (38,768) -- (38,768) 5% stock dividend 2,872 2,872 75,631 (78,503) -- -- Stock repurchased (4,336) (4,336) (127,572) -- -- (131,908) Stock reissued under dividend reinvestment, stock options, and stock purchase plans 811 811 14,770 -- -- 15,581 Stock reissued due to conversion of subordinated debentures 1,034 1,034 11,625 -- -- 12,659 ------------------------------------------------------------------------------------------------------------------------------- Balance December 31, 2000 60,311 $ 60,311 $ 457,267 $ 106,809 $ 1,954 $ 626,341 $ 92,971 ===============================================================================================================================
The accompanying notes to consolidated financial statements are an integral part of this statement. Page 30 CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------------------------------------------------------------------------------------------- Years Ended December 31, (dollars in thousands) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities Net income $ 61,696 $ 97,358 $ 75,589 ------------------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to cash provided by operating activities: Depreciation 13,746 13,473 13,548 Amortization of intangible assets 4,546 2,645 2,632 Net premium amortization on investment securities (2,098) 1,194 2,627 Provision for loan losses 29,803 14,798 14,987 Net securities gains (losses) 15,396 (2,637) (1,090) (Gain) loss on sale of other assets 6,452 (2,792) (1,780) Residential real estate loans originated for sale (332,855) (66,318) (143,715) Proceeds from sale of mortgage loans 324,988 69,061 142,457 Increase in interest receivable (10,048) (3,682) (1,885) (Increase) decrease in other assets 12,759 (22,181) (16,649) Increase (decrease) in accrued expenses and other liabilities (19,977) 19,605 11,461 ------------------------------------------------------------------------------------------------------------------------- Total adjustments 42,712 23,166 22,593 ------------------------------------------------------------------------------------------------------------------------- Net cash flows provided by operating activities 104,408 120,524 98,182 ------------------------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities Cash and cash equivalents of subsidiaries acquired 13,397 8,070 82,252 Purchase of investment securities available-for-sale (758,464) (1,159,107) (681,522) Proceeds from maturities of investment securities available-for-sale 285,045 616,035 506,209 Proceeds from sales of investment securities available-for-sale 636,706 421,903 133,519 Net loans made to customers (339,608) (646,564) (540,414) Proceeds from sale of premises and equipment 4,561 2,028 684 Purchase of premises and equipment (27,060) (24,153) (18,401) ------------------------------------------------------------------------------------------------------------------------- Net cash flows used in investing activities (185,423) (781,788) (517,673) ------------------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities Net increase (decrease) in deposits, short-term and other borrowings: Noninterest-bearing demand deposits 63,081 (19,670) 60,118 Savings, NOW and money market deposits (30,930) 23,672 60,788 Time deposits 270,005 485,904 78,064 Short-term borrowings (119,636) 163,623 51,280 Other borrowings 5,298 101,578 246,956 Net payments on medium term notes (12,500) -- -- Proceeds from guaranteed preferred beneficial interests in subordinated debentures 50,000 -- -- Cash dividends paid (38,768) (35,557) (30,526) Common stock repurchased (131,908) (78,499) (46,661) Common stock reissued, net of shares used to convert subordinated debentures 15,581 18,127 17,462 ------------------------------------------------------------------------------------------------------------------------- Net cash flows provided by financing activities 70,223 659,178 437,481 ------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (10,792) (2,086) 17,990 Cash and cash equivalents at beginning of period 226,941 229,027 211,037 ------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 216,149 $ 226,941 $ 229,027 =========================================================================================================================
The accompanying notes to consolidated financial statements are an integral part of this statement. Page 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis Of Presentation The accompanying consolidated financial statements include the accounts of Old National Bancorp ("Old National") and its wholly owned affiliates and have been prepared in conformity with generally accepted accounting principles and prevailing practices within the banking industry. Such principles require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosures of contingent assets and liabilities at the date of the financial statements and amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. All significant intercompany transactions and balances have been eliminated. The statements have been restated to reflect mergers accounted for by the pooling-of-interests method of accounting. A summary of the more significant accounting and reporting policies used in preparing the statements is presented below. Nature Of Operations Old National, a bank holding company headquartered in Evansville, Indiana, operates in Indiana, Illinois, 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 collectibility 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, 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 or 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. Premises And Equipment Premises and equipment are stated at cost less accumulated depreciation. Depreciation is charged to operating expense over the useful lives 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 $96.9 million at December 31, 2000, and is being amortized on the straight-line basis over original 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). On the next page is a table reconciling basic and diluted earnings per share ("EPS") for the years ended 2000, 1999 and 1998: Page 32 EARNINGS PER SHARE RECONCILIATION
Years Ended December 31, 2000 1999 1998 (dollars and shares in thousands,----------------------- -------------------------- --------------------------- except per share data) Income Shares Amount Income Shares Amount Income Shares Amount --------------------------------------------------------------------------------------------------------------------- Basic EPS Income from continuing operations $61,696 59,621 $1.03 $93,257 60,124 $1.55 $85,443 60,020 $1.42 ===== ===== ===== Effect Of Dilutive Securities Stock options -- 202 -- 349 -- 524 8% convertible debentures 130 377 834 1,703 1,138 2,054 ------------------------------------------------- ----------------- ----------------- Diluted EPS Income from continuing operations and assumed conversions $61,826 60,200 $1.03 $94,091 62,176 $1.51 $86,581 62,598 $1.38 ====================================================================================================================
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. 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, 2000, 1999, and 1998, for interest was $363.8 million, $274.5 million, and $256.6 million, respectively. Total income tax payments during 2000, 1999, and 1998, were $26.4 million, $32.3 million, and $30.3 million, respectively. Impact Of Accounting Changes In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("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. As issued, the Statement was effective for all fiscal quarters of fiscal years beginning after June 15, 1999. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133." The statement was effective upon issuance and it amends SFAS No. 133 to be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 (January 1, 2001 for Old National). On June 15, 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment of FASB Statement No. 133." The Statement addresses a limited number of issues causing implementation difficulties for numerous entities that are required to implement SFAS No. 133. SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, continues to be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133 expanded the derivative definition. Old National adopted SFAS No. 133 on January 1, 2001. A $35 thousand reduction to other comprehensive income was recorded as a transition adjustment. In September 2000, FASB issued SFAS No. 140, "Accounting for Transfers and Servicing Financial Assets and Extinguishment of Liabilities" that replaced SFAS No. 125. While much of SFAS No. 125 was incorporated into SFAS No. 140, certain standards for accounting for securitizations and other transfers of financial assets and disclosures were revised. This statement is effective for transfers made after March 31, 2001, and certain disclosures are effective for years ending after December 15, 2000. Old National does not believe the impact of this statement to be material to its financial conditions and results of operations. Reclassifications Certain prior year amounts have been reclassified to conform with the 2000 presentation. Such reclassifications had no effect on net income. Page 3 NOTE 2 - BUSINESS COMBINATIONS AND DISCONTINUED OPERATIONS Completed Mergers On March 1, 2000, Old National and Heritage Financial Services, Inc. ("Heritage") of Clarksville, Tennessee, consummated a merger in which 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. Net income for Heritage prior to merger included in the 2000 financial statements for the period ended March 1, 2000, was $509 thousand. On March 10, 2000, Old National and ANB Corporation ("ANB") of Muncie, Indiana, consummated a merger in which 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. Net income for ANB prior to merger included in the 2000 financial statements for the period ended March 10, 2000, was $1.3 million. On July 27, 2000, Old National and Permanent Bancorp ("Permanent") of Evansville, Indiana, consummated a merger in which Old National issued 3,301,047 common shares in exchange for all of the outstanding common shares of Permanent. The transaction was accounted for as a purchase. Intangible assets of $60.5 million were recorded from this purchase and are being amortized no longer than 20 years. As part of the regulatory approval process for the transaction, the Department of Justice required two Permanent branches in Evansville to be sold to another banking company. These two branches had total deposits of approximately $41 million, and were divested on November 17, 2000. 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 transactions (dollars in thousands, except per share data):
-------------------------------------------------------------------------------------------------- As Restated Original Southern Heritage ANB Herein -------------------------------------------------------------------------------------------------- 1999 Net interest income $238,387 $ -- $ 10,871 $ 31,984 $281,242 Net income from continuing operations 82,694 -- 2,851 7,712 93,257 Basic net income per share, as restated for stock dividends 1.64 1.55 1998 Net interest income $214,850 $ 10,071 $ 9,557 $ 27,544 $262,022 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 1.50 1.42 --------------------------------------------------------------------------------------------------
Discontinued Operations In April 1998, Old National announced it would develop exit strategies from its sub-prime lending affiliate, Consumer Acceptance Corporation ("CAC"). During June 1998, the sale of CAC's sub-prime auto loans was finalized, which closed in July 1998 and was treated as discontinued operations on the consolidated financial statements. The loss on discontinued operations included interest expense of $2.6 million in 1998. Interest expense was directly attributable to the debt associated with 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, and 1998 were as follows (dollars in thousands): DISCONTINUED OPERATIONS --------------------------------------------------------------- Years Ended December 31, 1999 1998 --------------------------------------------------------------- Loss before taxes $ -- $(7,943) Income tax benefit -- (3,183) --------------------------------------------------------------- Loss from discontinued operations -- (4,760) --------------------------------------------------------------- Gain (loss) before taxes from disposal 6,835 (8,489) Income tax expense (benefit) 2,734 (3,395) --------------------------------------------------------------- Gain (loss) from disposal 4,101 (5,094) --------------------------------------------------------------- Income (loss) from discontinued operations $ 4,101 $(9,854) =============================================================== Income (loss) from discontinued operations per common share: Basic $ 0.07 $ (0.16) Diluted 0.07 (0.15) =============================================================== Page 34 NOTE 3 - INVESTMENT SECURITIES The following tables summarize the amortized cost and fair value of the available-for-sale investment securities portfolio at December 31, 2000 and 1999, and the corresponding amounts of unrealized gains and losses therein (dollars in thousands):
---------------------------------------------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------------------------------------------------------------------------------------------- December 31, 2000 U.S. Treasury $ 5,270 $ 37 $ -- $ 5,307 U.S. Government agencies and corporations 629,216 3,617 (3,011) 629,822 Mortgage-backed securities 486,685 2,413 (7,744) 481,354 State and political subdivisions 538,295 9,071 (1,322) 546,044 Other securities 149,038 621 (623) 149,036 ---------------------------------------------------------------------------------------------- Total $1,808,504 $ 15,759 $ (12,700) $1,811,563 ============================================================================================== 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 (218) 79,854 ---------------------------------------------------------------------------------------------- Total $1,870,170 $ 4,917 $ (53,649) $1,821,438 ==============================================================================================
Proceeds from sales of investment securities available-for-sale were $636.7 million in 2000 and $421.9 million in 1999. In 2000 realized gains were $0.1 million and losses were $15.5 million. Losses of $15.3 million were related to restructuring. In 1999 realized gains and losses were $3.3 million and $0.7 million, respectively. At December 31, investment securities were pledged to secure public and other funds with a carrying value of $1,031 million in 2000 and $944 million in 1999. The amortized cost and fair value of the investment securities portfolio at December 31, 2000 and 1999, 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. ----------------------------------------------------------------------- 2000 1999 Amortized Fair Amortized Fair (dollars in thousands) Cost Value Cost Value ----------------------------------------------------------------------- Maturity Within one year $ 524,990 $ 523,577 $ 203,428 $ 200,167 One to five years 410,127 414,975 528,125 522,828 Five to ten years 644,908 642,966 738,773 712,338 Beyond ten years 228,479 230,045 399,844 386,105 ----------------------------------------------------------------------- Total $1,808,504 $1,811,563 $1,870,170 $1,821,438 ======================================================================= NOTE 4 - LOANS The composition of loans at December 31, 2000 and 1999, by lending classification was as follows (dollars in thousands): ---------------------------------------------------- December 31, 2000 1999 ---------------------------------------------------- Commercial $1,606,509 $1,338,255 Commercial real estate 1,810,805 1,306,312 Residential real estate 1,890,872 2,148,974 Consumer credit, net 1,040,127 921,147 ---------------------------------------------------- Total loans $6,348,313 $5,714,688 ==================================================== Through its affiliates, Old National makes loans to customers in various industries including manufacturing, agribusiness, transportation, mining, wholesaling, and retailing, predominantly in its five-state region. The loan portfolio is diversified with no single industry exceeding 10% of the total. Page 35 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 2000 activity of these loans is as follows (dollars in thousands): -------------------------------------------------------------- 2000 -------------------------------------------------------------- Balance, January 1 $107,632 New loans 342,464 Repayments (375,583) Officer and director changes (172) -------------------------------------------------------------- Balance, December 31 $ 74,341 ============================================================== NOTE 5 - ALLOWANCE FOR LOAN LOSSES Activity in the allowance for loan losses during the years 2000, 1999, and 1998 was as follows (dollars in thousands): ---------------------------------------------------------------------- December 31, 2000 1999 1998 ---------------------------------------------------------------------- Balance at beginning of year $ 65,685 $ 59,371 $ 55,567 Additions: Provision charged to expense 29,803 14,798 14,987 Acquired from acquisition 2,232 1,000 -- Deductions: Loans charged off 29,345 16,859 15,022 Recoveries (5,458) (7,375) (3,839) ---------------------------------------------------------------------- Net charge-offs 23,887 9,484 11,183 ---------------------------------------------------------------------- Balance at end of year $ 73,833 $ 65,685 $ 59,371 ====================================================================== At December 31, 2000, the recorded investment in loans for which impairment has been recognized was $13.9 million with no related allowance and $126.8 million with $28.8 million of related allowance. At December 31, 1999, the recorded investment in loans for which impairment has been recognized was $9.1 million with no related allowance and $65.5 million with $15.3 million of related allowance. For the year ended December 31, 2000, the average balance of impaired loans was $100.6 million, for which $10.9 million of interest was recorded. 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. NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of certain financial instruments, both assets and liabilities recognized and not recognized in the consolidated balance sheet, are required to be disclosed when it is practicable to estimate fair value. The following methods and assumptions were used to estimate the fair value of each type of financial instrument. Cash, Due From Banks And Money Market Investments For these instruments, the carrying amount is a reasonable estimate of fair value. Investment Securities For investment securities, fair values are based on quoted market prices, if available. For securities where quoted prices are not available, fair value is estimated based on market prices of similar securities. Loans The fair value of loans is estimated by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Deposits The fair value of noninterest-bearing demand deposits and savings, NOW, and money market deposits is the amount payable as of the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using rates currently offered for deposits with similar remaining maturities. Short-Term Borrowings Federal funds purchased and securities sold under agreements to repurchase generally have an original term to maturity of 30 days or less and, therefore, their carrying amount is a reasonable estimate of fair value. Other Borrowings The fair value of Federal Home Loan Bank ("FHLB") borrowings and medium term notes is estimated using rates currently offered for obligations with similar remaining maturities. The fair value of trust preferred securities 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, 2000, are as follows (dollars in thousands): ---------------------------------------------------------------------- Carrying Fair Value Value ---------------------------------------------------------------------- Financial Assets Cash, due from banks and money market investments $ 216,149 $ 216,149 Investment securities 1,811,563 1,811,563 Loans, net 6,348,313 6,361,238 Financial Liabilities Deposits $6,583,906 $6,601,873 Short-term borrowings 559,823 559,823 Other borrowings 913,165 923,176 Off-Balance Sheet Financial Instruments Commitments to extend credit $1,152,835 Letters of credit 36,216 Interest rate swaps 1,560 ---------------------------------------------------------------------- Page 36 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 for continuing operations in the consolidated statement of income for the years ended December 31: ---------------------------------------------------------- 2000 1999 1998 ---------------------------------------------------------- Provision at statutory rate 35.0% 35.0% 35.0% Tax exempt income (17.3) (9.8) (9.1) State income taxes 0.4 2.7 3.7 State apportionment changes -- (1.1) -- Other, net 1.0 (1.0) (0.3) ---------------------------------------------------------- Actual tax rate 19.1% 25.8% 29.3% ========================================================== The provision for income taxes consists of the following components for the years ended December 31 (dollars in thousands): ----------------------------------------------------------------------- 2000 1999 1998 ----------------------------------------------------------------------- Income taxes currently payable: Federal $ 21,068 $ 28,446 $ 25,970 State 758 5,565 6,727 Deferred income taxes related to: Provision for loan losses (2,915) (1,831) (2,456) Other, net (4,363) 2,994 (1,417) ----------------------------------------------------------------------- Deferred income tax expense (benefit) (7,278) 1,163 (3,873) ----------------------------------------------------------------------- Provision for income taxes $ 14,548 $ 35,174 $ 28,824 ======================================================================= Provision Detail: Continuing operations $ 14,548 $ 32,440 $ 35,402 Discontinued operations -- 2,734 (6,578) ----------------------------------------------------------------------- Total $ 14,548 $ 35,174 $ 28,824 ======================================================================= Significant components of net deferred tax assets at December 31 are as follows (dollars in thousands): ----------------------------------------------------------------- 2000 1999 ----------------------------------------------------------------- Deferred Tax Assets Allowance for loan losses, net of recapture $ 27,269 $ 24,106 Benefit plan accruals 7,978 6,846 Unrealized loss on available- for-sale investment securities -- 19,411 AMT credit 6,000 -- Purchase accounting 3,034 650 ----------------------------------------------------------------- Total deferred tax assets 44,281 51,013 ----------------------------------------------------------------- Deferred Tax Liabilities Premises and equipment (2,427) (2,942) Accretion on investment securities (1,114) (664) Unrealized gain on available- for-sale investment securities (1,104) -- Lease receivable, net (7,546) (5,620) Mortgage servicing rights (1,421) (294) Other, net (3,267) (1,130) ----------------------------------------------------------------- Total deferred tax liabilities (16,879) (10,650) ----------------------------------------------------------------- Net deferred tax assets $ 27,402 $ 40,363 ================================================================= 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, 2000, 1999, and 1998 and includes the impact of acquisitions when they are added to the plan (dollars in thousands): ------------------------------------------------------------------------ 2000 1999 1998 ------------------------------------------------------------------------ Change In Benefit Obligations Balance at January 1 $ 30,811 $ 32,233 $ 27,746 Service cost 2,998 2,813 2,353 Interest cost 2,694 2,155 2,070 Acquisitions 9,192 -- -- Benefits paid (4,096) (3,182) (4,022) Actuarial (gain) loss 2,234 (3,208) 4,086 ------------------------------------------------------------------------ Balance at December 31 43,833 30,811 32,233 ------------------------------------------------------------------------ Change In Plan Assets Fair value at January 1 30,152 28,694 24,138 Actual return on plan assets 315 3,450 5,359 Employer contributions 133 1,269 3,305 Transfers 13,662 80 84 Benefits paid (4,096) (3,182) (4,022) Administrative expenses (219) (159) (170) ------------------------------------------------------------------------ Fair value at December 31 39,947 30,152 28,694 ------------------------------------------------------------------------ Funded status (3,886) (659) (3,539) Unrecognized: Net actuarial (gain) loss (2,670) (3,430) 1,106 Transition asset (1,724) (1,765) (2,127) Prior service cost 31 329 388 ------------------------------------------------------------------------ Accrued benefit cost $ (8,249) $ (5,525) $ (4,172) ======================================================================== Assumptions as of December 31: Discount rate 7.75% 7.75% 7.25% Expected return on plan assets 8.00 8.00 8.00 Rate of compensation increase 5.00 5.00 5.00 ------------------------------------------------------------------------ The net pension expense and its components for the years ended December 31 were as follows (dollars in thousands): ------------------------------------------------------------------------ 2000 1999 1998 ------------------------------------------------------------------------ Service cost $ 2,998 $ 2,813 $ 2,353 Interest cost 2,694 2,155 2,070 Expected return on plan assets (2,851) (2,131) (1,866) Amortization of prior service cost (23) 58 58 Amortization of transitional asset (396) (361) (362) Recognized actuarial loss (gain) (89) 88 18 ------------------------------------------------------------------------ Net pension expense $ 2,333 $ 2,622 $ 2,271 ======================================================================== Page 37 Profit Sharing Plan Old National has a profit sharing plan for all employees who meet eligibility requirements. Contributions to the plan are made when certain consolidated profit conditions are met. Employees may participate by contributing a percentage of their salary, a portion of which is matched by Old National. The profit sharing expense was $5.7 million in 2000, $4.7 million in 1999, and $4.5 million in 1998. 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. Shares vesting totaled 53,754 in 2000; 85,704 in 1999; and 54,818 in 1998. Expense recorded in 2000, 1999, and 1998 was $1.5 million, $2.3 million, and $1.9 million, respectively. NOTE 9 - SHAREHOLDERS' EQUITY Stock Dividend A 5% stock dividend was declared on December 7, 2000, and distributed on January 30, 2001. 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, 2000, 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. NOTE 10 - FINANCING ACTIVITIES Short-Term Borrowings At December 31, 2000, Old National had $25.0 million in an unsecured line of credit with an unaffiliated bank, which was unused. This line bears interest at the lender's federal funds rate plus 50 basis points. During the years 2000, 1999, and 1998, the average interest rates on various lines of credit were 7.32%, 5.93%, and 6.25%, respectively. The lines of credit included various arrangements to maintain compensating balances or pay fees. For additional details concerning short-term borrowings, see Table 14 on page 26 in Management's Discussion and Analysis. Federal Home Loan Bank At December 31, 2000, Old National had borrowed $779.4 million from various FHLB's. Floating-rate borrowings totaled $185.6 million and will mature between 2001 and 2013. The remaining borrowings had a fixed interest rate and will mature between 2001 and 2019. The weighted average rates were 6.35% and 5.71% at December 31, 2000 and 1999, respectively. These borrowings are secured by investment securities and mortgage loans up to 150% of outstanding debt. At December 31, 1999, the outstanding balance was $658.9 million. Medium Term Notes At December 31, Old National had medium term notes outstanding of $83.8 million in 2000 and $96.3 million in 1999 with remaining maturities ranging from one to seven years and fixed interest rates ranging from 6.40% to 7.03%. Convertible Subordinated Debentures Old National called for redemption its 8% convertible subordinated debentures on May 14, 2000. Shares totaling 1,034,000 were issued during 2000 from conversions of the remaining debentures. At December 31, 1999, Old National had $12.8 million outstanding. During 1999, $9.3 million principal amount of debentures was converted into 749,000 common stock shares. Guaranteed Preferred Beneficial Interests In Subordinated Debentures During March 2000, Old National authorized $200 million of trust preferred securities and issued $50 million through a subsidiary, Old National Capital Trust I. The trust preferred securities have a liquidation amount of $25 per share with a cumulative annual distribution rate of 9.50%, or $2.375 per share, payable quarterly, and maturing on March 15, 2030. Old National may redeem the subordinated debentures and thereby cause a redemption of the trust preferred securities in whole (or in part from time to time) on or after March 15, 2005, or in whole (but not in part) following the occurrence and continuance of certain adverse federal income tax or capital treatment events. Page 38 Costs associated with the issuance of the trust preferred securities totaling $1.8 million were capitalized and are being amortized through the maturity date of the securities. The unamortized balance is included in other assets in the consolidated balance sheet. NOTE 11 - INTEREST RATE CONTRACTS Old National uses interest rate contracts such as interest rate 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, 2000, Old National had interest rate swaps with notional value of $175 million. The contract is an exchange of interest payments with no effect on the principal amount of the underlying hedged liability. The fair value of the swap contracts were $1.6 million at December 31, 2000. Old National pays the counterparty a variable rate based on three-month LIBOR and receives a fixed rate ranging from 5.50% to 7.23%. The contracts terminate on or prior to May 3, 2009. At December 31, 1999, Old National had interest rate swaps with notional value of $75 million. The fair value of the swap contracts was ($3.7) million at December 31, 1999. Old National pays the counterparty a variable rate based on three-month LIBOR and receives a fixed rate ranging from 5.375% to 7.00%. The contracts terminate on or prior to May 3, 2009. Old National is exposed to losses if it is in the receiving position and a counterparty fails to make payments under the contract. Old National anticipates that the counterparties will be able to fully satisfy their obligations under the agreements. Old National minimizes its credit risk by obtaining collateral if the exposure exceeds $1 million on certain contracts and by monitoring the credit standing of the counterparties. 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 $5.6 million in 2000, $5.1 million in 1999, and $4.7 million in 1998. Following is a summary of future minimum lease commitments at December 31, 2000 (dollars in thousands): 2001 $3,298 2002 2,980 2003 2,636 2004 1,248 2005 999 2006 and after 7,694 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 $1,153 million, and letters of credit of $36 million at December 31, 2000. These commitments are not reflected in the consolidated financial statements. No material losses are expected to result from these transactions. Litigation At December 31, 2000, 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 bank is 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 were $49.5 million in 2000 and $21.7 million in 1999. 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, 2000, prior regulatory approval would be required for all affiliate banks. Such approval has been regularly provided since all affiliate banks exceed the regulatory definition of well-capitalized. Capital Adequacy For additional information on capital adequacy see Table 15 in Management's Discussion and Analysis on page 27. Page 39 NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS The following are the condensed parent company only financial statements of Old National Bancorp (dollars in thousands): OLD NATIONAL BANCORP (PARENT COMPANY ONLY) CONDENSED BALANCE SHEET -------------------------------------------------------------- December 31, 2000 1999 -------------------------------------------------------------- Assets Deposits in affiliate banks $ 102 $ 2,151 Investment in affiliates: Banks, including purchase accounting intangible assets of $5,661 in 2000 and $6,221 in 1999 720,764 614,912 Non-banks 5,617 15,802 Advances to affiliates 11,153 43,089 Other assets 33,046 34,262 -------------------------------------------------------------- Total assets $770,682 $710,216 ============================================================== Liabilities And Shareholders' Equity Short-term borrowings $ -- $ 5,000 Other liabilities 10,541 11,139 Convertible subordinated debentures -- 12,782 Medium term notes 83,800 96,300 Guaranteed preferred beneficial interests in subordinated debentures 50,000 -- Shareholders' equity 626,341 584,995 -------------------------------------------------------------- Total liabilities and shareholders' equity $770,682 $710,216 ============================================================== OLD NATIONAL BANCORP (PARENT COMPANY ONLY) CONDENSED STATEMENT OF INCOME ------------------------------------------------------------------------ Years Ended December 31, 2000 1999 1998 ------------------------------------------------------------------------ Income Dividends from affiliates $ 108,737 $ 97,681 $ 94,727 Other income 577 5,905 2,860 Other income from affiliates 21,212 10,730 11,763 ------------------------------------------------------------------------ Total income 130,526 114,316 109,350 ------------------------------------------------------------------------ Expense Interest on borrowings 10,136 8,440 9,653 Amortization of intangibles 560 587 715 Other expenses 25,497 25,345 17,328 ------------------------------------------------------------------------ Total expense 36,193 34,372 27,696 ------------------------------------------------------------------------ Income before income taxes and equity in undistributed earnings of affiliates 94,333 79,944 81,654 Income tax benefit (5,248) (9,182) (5,299) ------------------------------------------------------------------------ Income before equity in undistributed earnings of affiliates 99,581 89,126 86,953 Equity in undistributed earnings of affiliates (37,885) 8,232 (11,364) ------------------------------------------------------------------------ Net income $ 61,696 $ 97,358 $ 75,589 ======================================================================== OLD NATIONAL BANCORP (PARENT COMPANY ONLY) CONDENSED STATEMENT OF CASH FLOWS ---------------------------------------------------------------------------- Years Ended December 31, 2000 1999 1998 ---------------------------------------------------------------------------- Cash Flows From Operating Activities Net income $ 61,696 $ 97,358 $ 75,589 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 888 947 896 Amortization of intangible assets 560 587 715 (Increase) decrease in other assets 651 60,178 (78,632) Increase (decrease) in other liabilities (598) (1,760) 2,756 Equity in undistributed earnings of affiliates 37,885 (8,232) 11,364 ---------------------------------------------------------------------------- Total adjustments 39,386 51,720 (62,901) ---------------------------------------------------------------------------- Net cash flows provided by operating activities 101,082 149,078 12,688 ---------------------------------------------------------------------------- Cash Flows From Investing Activities Net advances to affiliates 19,910 (50,014) 59,825 Purchase of premises and equipment (446) (725) (736) ---------------------------------------------------------------------------- Net cash flows provided by (used in) investing activities 19,464 (50,739) 59,089 ---------------------------------------------------------------------------- Cash Flows From Financing Activities Net payments on short-term borrowings (5,000) (2,250) (9,758) Net payments on medium term notes (12,500) -- (2,000) Proceeds from guaranteed preferred beneficial interest in subordinated debentures 50,000 -- -- Cash dividends paid (38,768) (35,557) (30,526) Common stock repurchased (131,908) (78,499) (46,661) Common stock reissued, net of shares used to convert subordinated debentures 15,581 18,127 17,462 ---------------------------------------------------------------------------- Net cash flows used in financing activities (122,595) (98,178) (71,483) ---------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (2,049) 161 294 Cash and cash equivalents at beginning of period 2,151 1,990 1,696 ---------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 102 $ 2,151 $ 1,990 ============================================================================ Page 40 NOTE 15 - SEGMENT INFORMATION Old National has been divided into two reportable segments: community banking and treasury. Our community banks provide a wide range of financial services as discussed on page 15 of Management's Discussion and Analysis. Treasury manages investments and obtains non-deposit funding. The accounting policies of the segments 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 years' 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 Treasury Other Total (dollars in thousands) ------------------------------------------------------------------------ 2000 Net interest income $ 293,873 $ (21,440) $ (2,562) $ 269,871 Income tax expense (benefit) 32,279 (2,860) (14,871) 14,548 Segment profit (loss) 68,893 24,129 (31,326) 61,696 Total assets 6,738,249 1,950,280 79,219 8,767,748 ======================================================================== 1999 Net interest income $ 259,677 N/A $ 21,565 $ 281,242 Income tax expense 21,595 N/A 10,845 32,440 Segment profit 67,568 N/A 25,689 93,257 Total assets 6,573,016 N/A 1,512,996 8,086,012 ======================================================================== 1998 Net interest income $ 265,144 N/A $ (3,122) $ 262,022 Income tax expense (benefit) 40,813 N/A (5,411) 35,402 Segment profit (loss) 93,641 N/A (8,198) 85,443 Total assets 7,263,232 N/A 71,039 7,334,271 ======================================================================== N/A Not Available NOTE 16 - MERGER AND RESTRUCTURING COSTS During the first quarter of 2000, Old National closed two mergers, finalized the charter consolidation efforts which began in 1999 and recorded related merger and restructuring charges of $22.5 million. Included in these charges were merger related costs, system conversion costs, balance sheet restructuring, elimination of duplicate or unnecessary facilities, centralization of certain support functions and personnel severance costs related to these items. During the third quarter, Old National completed an asset sale and reinvestment program designed to shorten the duration of its investment and fixed-rate mortgage loan portfolios. Approximately $600 million of mortgage-backed securities and residential mortgage loans were sold during the quarter with $500 million of the proceeds reinvested in shorter duration investments and the remainder of the net proceeds used to reduce borrowings and fund commercial loan growth. The components of the charges are shown below (dollars in thousands): ------------------------------------------------------------------- Year Ended December 31, 2000 ------------------------------------------------------------------- Professional fees $ 5,744 Severance and related costs 4,501 Fixed asset write-downs 3,687 Losses on sale of securities 15,277 Losses on sale of loans 6,407 Other 1,887 ------------------------------------------------------------------- Included in noninterest expense 37,503 ------------------------------------------------------------------- Provision for loan losses 3,801 ------------------------------------------------------------------- Total $41,304 =================================================================== Page 41 To The Shareholders And The Board Of Directors Of Old National Bancorp: In our opinion, based on our audits and the reports of other auditors, the accompanying consolidated balance sheets and the related consolidated statements of income, of changes in shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Old National Bancorp and affiliates (the "Company") at December 31, 2000 and 1999, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. 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. The consolidated financial statements give retroactive effect to the merger of Old National Bancorp and Heritage Financial Services, Inc. on March 1, 2000, and the merger of Old National Bancorp and ANB Corporation and subsidiaries on March 10, 2000, in transactions accounted for as poolings of interests, as described in Note 2 to the consolidated financial statements. 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. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Chicago, Illinois January 24, 2001 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 accompanying consolidated statement of income, change in shareholders' equity and cash flow for the year ended December 31, 1998. These consolidated financial statements are the responsibility of the Old National Bancorp's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of ANB Corporation or Heritage Financial Services, Inc. included in the 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 consolidated totals in 1998. 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 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 flow for the year 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). Page 42 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 42. 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. Page 43 OLD NATIONAL DIRECTORS AND EXECUTIVE MANAGEMENT OLD NATIONAL BANCORP Board of Directors James A. Risinger, Phelps L. Lambert Chairman, President & CEO Ronald B. Lankford David L. Barning Lucien H. Meis Richard J. Bond Louis L. Mervis Alan W. Braun John N. Royse Wayne A. Davidson Marjorie Z. Soyugenc Larry E. Dunigan Kelly N. Stanley David E. Eckerle Charles D. Storms Andrew E. Goebel OLD NATIONAL BANK Board of Directors James A. Risinger, Phelps L. Lambert Chairman, President & CEO Judd C. Peck Alan W. Braun George S. Ridgway W. Curtis Brighton J. Steven Rudolph Steven E. Chancellor James R. Schrecongost Michael V. Crouch Kathryn J. Simonds Larry E. Dunigan Marjorie Z. Soyugenc John M. Dunn Kelly N. Stanley Andrew E. Goebel Charles D. Storms Harold A. Harrell John A. Stovall EXECUTIVE MANAGEMENT James A. Risinger, Chairman, President and CEO Thomas F. Clayton, Executive Vice President Michael R. Hinton, Executive Vice President Daryl D. Moore, Executive Vice President and Chief Credit Officer John S. Poelker, Executive Vice President and Chief Financial Officer James R. Schrecongost, Chairman of Old National Trust Company and American National Trust and Investment Management Company Regional Executives David E. Eckerle, Central Region Jerome J. Gassen, Eastern Region John W. Stanley, Evansville Region William R. Britt, Northern Region Sanford L. Peyton, Southern Region Joe R. Kesler, Southern Illinois Region Bank Presidents Central Region Eastern Region Jasper, Indiana Marion, Indiana Paul R. Nolting Larry A. Myers Lawrenceville, Illinois Muncie, Indiana Bradley P. Wolfe Jerome J. Gassen Paoli, Indiana Union City, Ohio John W. Key James C. Gower Vincennes, Indiana Winchester, Indiana P. R. Sweeney Chris L. Talley Washington, Indiana Eric J. Lane Evansville Region Northern Region Carmi, Illinois Bloomington, Indiana James L. Whetstone Dan L. Doan Evansville, Indiana Clinton, Indiana John W. Stanley Robert J. Rendaci Henderson, Kentucky Covington, Indiana Keith A. Utley Robert D. Smith Mt. Carmel, Illinois Danville, Illinois Robert A. Reasor Richard T. Pittelkow Mt. Vernon, Indiana Greencastle, Indiana Steven A. Bennett Terry M. Osborne Tell City, Indiana Oblong, Illinois Jonathan Hartz Steven H. Holliday Rockville, Indiana Gregory A. Harbison Terre Haute, Indiana William R. Britt Southern Region Southern Illinois Region Clarksville, Tennessee Carbondale, Illinois Earl O. Bradley, III Joe R. Kesler Fulton, Kentucky Harrisburg, Illinois Robert K. Burrow Ronald W. Gibbons Greenville, Kentucky Mt. Vernon, Illinois Peggy M. Williams Randall L. Forby Madisonville, Kentucky R. Steven Cox Morganfield, Kentucky Jerry R. Ruark Owensboro, Kentucky Sanford L. Peyton Other Subsidiary Presidents American National Trust and Investment Management Company Kim T. Stacey Old National Service Division Annette W. Hudgions Old National Trust Company John S. Staser ONB Insurance Group, Inc. Don W. Scott ONB Investments Kenneth J. Ellsperman [MAP OF COMMUNITIES WITH OLD NATIONAL BANKING CENTERS APPEARS HERE] Page 44 Shareholder information Market Makers The following firms make a market Annual Meeting in Old National Bancorp's stock: The annual meeting of shareholders Herzog, Heine, Geduld, Inc. will be held Thursday, April 19, 2001, J.J.B. Hilliard, W.L. Lyons at 10:30 a.m. Central Daylight Time, Keefe, Bruyette & Woods, Inc. at The Centre, Evansville, Indiana. Knight Securities L.P. Lehman Brothers, Inc. Corporate Office McDonald & Company Sec., Inc. 420 Main Street NatCity Investments, Inc. Evansville, Indiana 47708 Salomon Smith Barney 812-464-1434 Sandler O'Neill & Partners Web site: www.oldnational.com Sherwood Securities Corp. Spear, Leeds & Kellogg Stock Information The stock of the company is traded Stock Purchase And Dividend over-the-counter on the NASDAQ Reinvestment Plan National Market System under the The company offers a direct stock ticker symbol OLDB. purchase and dividend reinvestment plan to all interested investors. The Stock Transfer Agent is: For information concerning this Old National Bancorp convenient method of purchasing Post Office Box 718 shares of stock contact: Evansville, Indiana 47705-0718 Shareholder Services Department Old National Bancorp In December 2000, a 5% stock Post Office Box 718 dividend was declared to shareholders Evansville, Indiana 47705-0718 of record on January 9, 2001. There 812-464-1296 were 25,008 shareholders of record 1-800-677-1749 as of December 31, 2000. Additional Information Shareholders and interested investors may obtain information about the company upon written request or by calling: Lynell J. Walton, CPA Old National Bancorp Post Office Box 718 Evansville, Indiana 47705-0718 812-464-1366 Equal Opportunity Employer The company maintains its commitment to equal opportunity and affirmative action in employment and promotion policies and pledges to recruit, hire, train, and promote persons in all job classifications without regard to race, color, religion, sex, age, or handicap. The table below lists the NASDAQ price quotes and dividend data for Old National Bancorp stock over the last two years.* --------------------------------------------------------------------------- Price Per Share Share Dividend High Low Volume Declared --------------------------------------------------------------------------- 2000 First Quarter $31.84 $21.96 6,912,700 $0.16 Second Quarter 33.33 27.14 6,356,600 0.16 Third Quarter 30.06 24.97 4,781,900 0.16 Fourth Quarter 29.41 27.20 3,891,500 0.17 --------------------------------------------------------------------------- --------------------------------------------------------------------------- 1999 --------------------------------------------------------------------------- First Quarter $33.41 $27.06 2,171,200 $0.14 Second Quarter 32.96 27.21 2,883,700 0.15 Third Quarter 28.97 24.60 5,694,900 0.15 Fourth Quarter 30.61 26.13 3,380,900 0.16 --------------------------------------------------------------------------- *Data adjusted for all stock dividends, including a 5% stock dividend to shareholders of record on January 9, 2001, distributed on January 30, 2001.