-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E5bBQnjo4wnooEXB03Vf8NNhVW25Mc01Vl1tIsz4L6ckoDf0ProLpNkgXbwY+WVL cjEBy8fFkQJ7iqvzYFf2MA== 0000707179-99-000011.txt : 19991202 0000707179-99-000011.hdr.sgml : 19991202 ACCESSION NUMBER: 0000707179-99-000011 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990129 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19991201 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OLD NATIONAL BANCORP /IN/ CENTRAL INDEX KEY: 0000707179 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 351539838 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 333-72117 FILM NUMBER: 99767339 BUSINESS ADDRESS: STREET 1: 420 MAIN ST CITY: EVANSVILLE STATE: IN ZIP: 47708 BUSINESS PHONE: 8124641434 MAIL ADDRESS: STREET 1: 420 MAIN STREET CITY: EVANSVILLE STATE: IN ZIP: 47708 FORMER COMPANY: FORMER CONFORMED NAME: OLD NATIONAL BANCORP DATE OF NAME CHANGE: 19920703 8-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): January 29, 1999 OLD NATIONAL BANCORP (Exact name of Registrant as specified in its charter) Indiana 0-10888 35-1439838 (State or other jurisdiction (Commission File Number) (IRS Employer of incorporation) Identification No.) 420 Main Street, Evansville, IN 47708 (Address of Principal Executive Offices) Zip Code (812) 464-1434 (Registrant's telephone number, including area code) Item 5. Other Events On January 29, 1999, Old National Bancorp (the "Registrant") completed its pooling of interests acquisition of Southern Bancshares LTD ("Southern"). As a result of such acquisition, the Registrant's historical financial statements have been restated. Attached as an exhibit is the Registrant's Supplement to the 1998 Annual Report, which sets forth on a restated basis to reflect the Southern acquisition, Management's discussion and analysis of financial condition and results of operations, the Registrant's consolidated balance sheet as of December 31, 1998 and 1997, and the related consolidated statement of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. Item 7. Exhibits (c ) Exhibits. (27) Financial Data Schedule (99) Supplement to the 1998 Annual Report SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Current Report on Form 8-K to be signed on its behalf by the undersigned hereunto duly authorized. OLD NATIONAL BANCORP (Registrant) Date: December 1, 1999 By:/s/ RONALD B. LANKFORD Ronald B. Lankford, President EX-99 2 Exhibit 99 OLD NATIONAL BANCORP SUPPLEMENT TO THE 1998 ANNUAL REPORT Restated to reflect the pooling of interests accounting acquisition of Southern Bancshares, LTD on January 29, 1999 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION Old National Bancorp ("ONB") is a multi-bank holding company headquartered in Evansville, Indiana. Located in Indiana, Illinois, and Kentucky, its 26 affiliate banks serve customers through 125 office locations in both urban and rural markets. A complete listing of ONB's affiliate banks is presented on page 10. These banks provide a wide range of financial services, such as making commercial and consumer loans; originating and servicing mortgage loans; issuing and servicing credit cards; leasing; offering various deposit products; issuing letters of credit; issuing credit life, accident and health insurance; providing safe deposit facilities; and providing alternative investments and brokerage services. ONB also has eight non-bank affiliates which provide additional financial or support services incidental to ONB's operations, including data processing; issuance and reinsurance of credit life, accident, health, life, property, and casualty insurance; investment services; fiduciary and trust services; and property ownership. FINANCIAL BASIS The following discussion is an analysis of ONB's operating results for the years 1996 through 1998 and financial condition as of December 31, 1998 and 1997, and will assist readers of the accompanying consolidated financial statements and related footnotes beginning on page 32. Management's forward-looking statements are intended to benefit the reader, but are subject to various risks and uncertainties which may cause actual results to differ materially, including but not limited to:(1)economic conditions generally and in the market areas of the company; (2)increased competition in the financial services industry; (3)actions by the Federal Reserve Board and changes in interest rates; and (4)governmental legislation and regulation. The financial information has been restated to reflect mergers accounted for as pooling-of-interests as if they had occurred at the beginning of the first year presented. Purchases have been included in reported results from the date of the transaction. During 1998, ONB sold the operations and related auto loans of its consumer finance subsidiary headquartered in Indianapolis. The sale and the operations prior to the sale resulted in a $9.9 million loss on discontinued operations, net of tax, in 1998. The financial results of the discontinued operations in prior periods are similarly broken out from ONB's continuing operations. The net assets of the subsidiary are included in other assets on the consolidated balance sheet for periods prior to the sale. The following discussion and analysis of ONB's financial condition and results of operations relates to its continuing operations. For further details regarding the discontinued operations, see the consolidated financial statements and Note 2. Tax-exempt interest income in the following information has been increased to an amount comparable to interest subject to income taxes using the federal statutory rate in effect of 35% for all periods. An offsetting increase of the same amount is made in the income tax section of the Selected Financial Data. Net income is unaffected by these taxable equivalent adjustments. COMPETITION AND ECONOMIC CONDITIONS The banking industry and related financial service providers are highly competitive. ONB competes not only against other local and regional banking institutions, thrifts, finance companies, and credit unions, but also money market mutual funds, investment brokers, and insurance companies. This competition takes place in terms of interest rates on loans and deposits, convenient locations and hours, types of services, and quality of service. 12 In most of its markets, ONB and its affiliates rank first or second in volume of loans and deposits. The economy in the United States and in the Midwest has been characterized by relatively low inflation and unemployment, and steady growth. Recent signs of weaknesses include a rise in consumer delinquency and bankruptcy levels and low commodity prices in the agricultural sector. While ONB's numerous markets vary, its major markets have demonstrated economic expansion and a growing financial base with additions such as the new Toyota and AK Steel manufacturing complexes. US Government long-term interest rates which rose in 1996 declined in 1997 and 1998. Short-term rates changed less dramatically, though the Federal funds rate was lowered three times in the fall of 1998. Despite this trend, certificate of deposit rates generally increased during 1997, but began to move down more in 1998. Prime rate stayed fairly constant with minimal movement, but followed the Federal funds rate shift downward in 1998. A flattening of the yield curve occurred throughout 1998. Normally, the rate on U.S. Government securities increases as the term lengthens, however by year-end 1998, the yield on a six month bill was virtually the same as a five year note. The combination of these factors applied pressure on the spreads financial institutions earn between their assets, loans and securities, and their liabilities, deposits and debt. This is discussed further as it pertains to ONB in the Net Interest Income section. MERGER ACTIVITY In 1997 and 1998 ONB did not complete any banking acquisitions. During 1998, ONB agreed to merge with Southern Bancshares Ltd.("Southern"), Carbondale, Illinois and Dulaney Bancorp,Inc.("Dulaney"), Marshall, Illinois. As of December 31, 1998, Southern had total assets of $255 million and Dulaney's total assets were $39 million. Both mergers were consummated in the first quarter of 1999 and accounted for as pooling-of- interests. These financial statements have been restated to reflect the Southern merger. The Dulaney merger was not considered material and is not reflected in these financial statements. YEAR 2000 The national and local press has devoted much coverage to the Year 2000 ("Y2K") issue, also know as the "Millennium Bug". This refers to the possibility that some computers may be unable to recognize the date change at the turn of the century. With the high volume of transactions and electronic data, the banking industry requires extensive computer capabilities to service its customers. With that in mind, ONB has devoted much attention to its systems to prepare itself for the millennial change. ONB has successfully completed its Y2K compliance testing of its mission-critical computer systems and its core processing systems used to service its customers. Besides maintaining this status, ONB is managing its third party system relationships, updating disaster and contingency plans, and testing nonmission-critical software. Renovation and testing of software and hardware may not remove all risks related to Y2K. Alternative methods to perform key activities will be addressed through contingency planning. There has been no significant financial impact to ONB as a result of the Year 2000 project. ONB's 1998 Y2K expenses were less than $500 thousand. Much of ONB's software is externally generated with minimal internal software. Much of the software and hardware items have been changed, upgraded, or replaced in preparation for Y2K and have been part of the normal maintenance. While the company will continue testing and implementing secondary systems and replacing certain personal computers through 1999, it does not expect any material impact on earnings associated with these Y2K compliance efforts. 13
SELECTED FINANCIAL DATA ($ in thousands except per share data) - ----------------------------------------------------------------------------------------------------------------------------------- Five Year Growth 1998 1997 1996 1995 1994 1993 Rate - ----------------------------------------------------------------------------------------------------------------------------------- RESULTS OF OPERATIONS (Taxable equivalent basis) Interest income $470,915 $448,875 $419,483 $402,793 $353,983 $346,604 Interest expense 231,613 216,868 196,289 191,835 149,809 147,972 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income 239,302 232,007 223,194 210,958 204,174 198,632 3.8 % Provision for loan losses 12,160 13,562 11,082 7,491 7,886 10,635 2.7 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 227,142 218,445 212,112 203,467 196,288 187,997 3.9 Noninterest income 58,891 51,104 47,402 42,044 36,680 35,642 10.6 Noninterest expense 167,937 158,631 156,720 153,345 152,093 139,579 3.8 - ----------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 118,096 110,918 102,794 92,166 80,875 84,060 7.0 Income taxes 43,961 42,835 40,107 35,222 29,550 31,203 7.1 - ----------------------------------------------------------------------------------------------------------------------------------- Net income from continuing operations $74,135 68,083 62,687 56,944 51,325 52,857 7.0 Discontinued operations (9,854) (5,005) 494 -- -- -- N/M - ----------------------------------------------------------------------------------------------------------------------------------- Net Income $64,281 $63,078 $63,181 $56,944 $51,325 $52,857 4.0 % =================================================================================================================================== YEAR-END BALANCES Total assets $6,416,611 $5,933,321 $5,602,460 $5,281,387 $5,081,088 $4,888,709 5.6 % Loans, net of unearned income 4,354,256 3,915,841 3,627,592 3,375,915 3,205,097 2,892,750 8.5 Deposits 4,668,858 4,521,010 4,479,357 4,336,406 4,028,932 4,020,643 3.0 Shareholders' equity 519,645 500,609 480,435 481,511 457,971 451,472 2.9 - ----------------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA (on continuing operations)(1) Net income-basic $1.61 $1.47 $1.31 $1.16 $1.02 $1.04 9.1 Net income-diluted (2) 1.57 1.43 1.28 1.13 0.99 1.02 9.0 Cash dividends paid 0.58 0.56 0.53 0.51 0.48 0.42 6.9 Book value at year-end 11.40 10.93 10.26 9.90 9.15 8.91 13.9 - ----------------------------------------------------------------------------------------------------------------------------------- SELECTED PERFORMANCE RATIOS (on continuing operations) Return on assets 1.21 % 1.19 % 1.17 % 1.11 % 1.04 % 1.11 % Return on equity (3) 14.95 14.28 13.23 12.20 11.07 11.50 Equity to assets 8.38 8.46 8.95 9.02 9.36 9.62 Dividend payout 35.15 36.74 38.96 43.90 47.36 40.13 Primary capital to assets 9.22 9.27 9.77 9.88 10.26 10.47 Net charge-offs to average loans 0.23 0.21 0.30 0.25 0.27 0.24 Allowance for loan losses to average loans 1.26 1.31 1.25 1.30 1.44 1.56 - ----------------------------------------------------------------------------------------------------------------------------------- (1) Restated for all stock dividends. (2) Assumes the conversion of ONB's subordinated debentures. (3) Excludes unrealized gains (losses) on investment securities. N/M = Not meaningful 14
RESULTS OF OPERATIONS NET INCOME ONB earnings rose 8.9% to reach $74.1 million in 1998, a $6.0 million increase. Shareholders' basic income per share for 1998 was $1.61, up 9.5% over 1997, and diluted earnings per share totaled $1.57, a 9.8% increase over 1997. Strong noninterest income growth and continued net interest income improvement combined to generate the earnings growth in 1998. The specific effects of each of these factors are discussed in the following paragraphs. ONB's 1997 net income was $68.1 million, up 8.6% or $5.4 million above 1996 earnings. Strong net interest income growth of $8.8 million and excellent noninterest expense control growth offset a $2.5 million loan loss provision increase. NET INTEREST INCOME As a financial intermediary, ONB pays interest on deposits and other liabilities and receives interest and fee income on earning assets, such as loans and investments. The difference between the income earned and the interest paid is net interest income which provides nearly 80% of ONB's net revenues (net interest income plus noninterest income). Net interest margin is net interest income, on a taxable equivalent basis, expressed as a percentage of average earning assets. Incorporating the tax savings on certain assets permits comparability. The net interest margin is influenced by a number of factors, such as the volume and mix of earning assets and funding sources, the interest rate environment and income tax rates. The level of earning assets funded by interest-free funding sources (primarily noninterest-bearing demand deposits and equity capital) also impacts net interest margin. ONB can control the effect of some of these factors through its management of credit extension and interest rate sensitivity, both of which are discussed in detail later in this report. External factors, such as the overall condition of the economy, credit demand strength, Federal Reserve Board monetary policy and changes in tax laws, can also have significant effect on changes in net interest income from one period to another. On a taxable equivalent basis, net interest income in 1998 grew $7.3 million or 3.1% over 1997. Average earning assets grew $355.5 million or 6.6%, during 1998. Much of this growth was funded by interest-bearing liabilities which increased $340.7 million or 7.2%. Other assets, which averaged $314.2 million in 1998, included the net assets of the discontinued finance company's operations discussed earlier and the cash surrender value of bank-owned life insurance ("BOLI")explained in the Noninterest Income section. Noninterest-bearing deposits increased $16.6 million or 3.5% and other liabilities and equity provided an additional $41.7 million of funding. Several factors combined to lower ONB's net interest margin to 4.17% in 1998. The yield on earning assets decreased 13 basis points to 8.21% which reflected the lower rate environment. The cost of interest-bearing liabilities declined only 2 basis points to 4.60% as growth occurred in higher-rate liabilities. Approximately 7 basis points of the lower net interest margin was due to the purchase of BOLI which generates tax-free noninterest income, but is not in net interest income. ONB's mix of earning assets continued the shift to higher yielding loans which rose $357.9 million (9.6%) and comprised over 70% of our total earning assets. Overall, loans yielded 8.79%, a 14 basis point decrease, due to lower rate environment. Investment security balances remained fairly consistent with 1997 as the yield decreased 24 basis points to 6.76% due to prepayments and lower reinvestment rates. Money market investments rose $7.0 million, yet still comprise under 1% of the total earnings assets. ONB's interest-bearing deposits grew $117.5 million or 3.0%. Traditional products, such as NOW, savings and money market deposits, declined 1.0% in 1998. Certificates of deposit over $100,000 and other time deposits both grew over $65 million to help fund ONB's asset growth. Borrowed funds also funded the asset growth and increased $223.1 million. During 1997, net interest income rose 3.9% or $8.8 million and totaled $232.0 million. Average earning assets grew 6.7%, a $338.8 million increase. Interest-bearing liabilities rose $367.4 million or 8.5%. The growth in average other assets represents primarily the net assets of the discontinued consumer finance subsidiary. Net interest margin declined from 4.42% to 4.31%. The yield on earning assets increased 2 basis points to 8.34% due to loan growth and improved investment yields. The cost of interest-bearing liabilities rose 9 basis points to 4.62% due to market influences and an increased usage of longer term deposits and nondeposit funding. Table 1 on page 16 details the changes in the components of net interest income. Table 2 on page 16 attributes those fluctuations to the impact of changes in the average balances of assets and liabilities and the yields earned or rates paid. Table 3 on page 17 presents a three year average balance sheet and for each major asset and liability category, its related interest income and yield or its expense and rate. 15
NET INTEREST INCOME CHANGES (TABLE 1) (Taxable equivalent basis, $ in thousands) - --------------------------------------------------------------------------------------------------------------------- % Change From Prior Year - --------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1998 1997 - --------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Loans $360,504 $334,202 $312,757 7.9 % 6.9 % Investment securities 109,192 113,758 103,226 (4.0) 10.2 Money market investments 1,219 915 3,500 33.2 (73.9) - --------------------------------------------------------------------------------------------------------------------- Total interest income 470,915 448,875 419,483 4.9 7.0 - --------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: NOW deposits 7,099 7,768 9,196 (8.6) (15.5) Savings deposits 14,177 15,668 15,501 (9.5) 1.1 Money market deposits 23,487 24,622 24,115 (4.6) 2.1 Certificates of deposit $100,000 and over 23,297 19,823 15,369 17.5 29.0 Other time deposits 112,664 108,908 105,666 3.4 3.1 Short-term borrowings 21,268 22,549 15,094 (5.7) 49.4 Other borrowings 29,621 17,530 11,348 69.0 54.5 - --------------------------------------------------------------------------------------------------------------------- Total interest expense 231,613 216,868 196,289 6.8 10.5 - --------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME $239,302 $232,007 $223,194 3.1 % 3.9 % ===================================================================================================================== NET INTEREST MARGIN 4.17 % 4.31 % 4.42 % =====================================================================================================================
NET INTEREST INCOME - RATE/VOLUME ANALYSIS (TABLE 2) (Taxable equivalent basis, $ in thousands) - ----------------------------------------------------------------------------------------------------------------------------------- 1998 vs. 1997 1997 vs. 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Attributed to Attributed to Total --------------------- Total --------------------- Change Volume Rate Change Volume Rate - ----------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Loans $26,302 $31,719 ($5,417) $21,445 $23,389 ($1,944) Investment securities (4,566) (648) (3,918) 10,532 8,727 1,805 Money market investments 304 382 (78) (2,585) (2,655) 70 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest income 22,040 31,453 (9,413) 29,392 29,461 (69) - ----------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: NOW deposits (669) 105 (774) (1,428) 172 (1,600) Savings deposits (1,491) (406) (1,085) 167 48 119 Money market deposits (1,135) (330) (805) 507 (240) 747 Certificates of deposit $100,000 and over 3,474 3,941 (467) 4,454 2,452 2,002 Other time deposits 3,756 3,617 139 3,242 4,703 (1,461) Short-term borrowings (1,281) (496) (785) 7,455 6,198 1,257 Other borrowings 12,091 12,865 (774) 6,182 6,705 (523) - ----------------------------------------------------------------------------------------------------------------------------------- Total interest expense 14,745 19,296 (4,551) 20,579 20,038 541 - ----------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME $7,295 $12,157 ($4,862) $8,813 $9,423 ($610) =================================================================================================================================== The variance not solely due to rate or volume is allocated equally between the rate and volume variances. 16
THREE-YEAR AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS (TABLE 3) (Taxable equivalent basis, $ in thousands) - ----------------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Average Interest Yield/ Average Interest Yield/ Average Interest Yield/ Balance & Fees Rate Balance & Fees Rate Balance & Fees Rate - ----------------------------------------------------------------------------------------------------------------------------------- EARNING ASSETS: Money market investments $23,257 $1,219 5.24 % $16,245 $915 5.63 % $64,172 $3,500 5.45 % Investment securities: U.S. Treasury and Government agencies (1) 1,094,756 70,418 6.43 1,124,797 74,922 6.66 1,003,943 62,636 6.24 State and political subdivisions 467,562 35,236 7.54 454,544 35,820 7.88 450,429 36,478 8.10 Other securities 52,910 3,538 6.69 45,299 3,016 6.66 44,572 4,112 9.23 - ----------------------------------------------------------------------------------------------------------------------------------- Total investment securities 1,615,228 109,192 6.76 1,624,640 113,758 7.00 1,498,944 103,226 6.89 - ----------------------------------------------------------------------------------------------------------------------------------- Loans: (2) (3) Commercial and financial 975,863 88,305 9.05 852,209 80,028 9.39 786,819 73,960 9.40 Commercial real estate 831,401 73,994 8.90 706,332 62,908 8.91 619,395 54,792 8.85 Residential real estate 1,584,127 127,836 8.07 1,440,169 118,195 8.21 1,330,981 110,871 8.33 Consumer, net of unearned income 680,291 65,945 9.69 714,411 68,315 9.56 714,617 68,343 9.56 Credit card 28,302 4,424 15.63 28,932 4,756 16.44 29,160 4,791 16.43 - ----------------------------------------------------------------------------------------------------------------------------------- Total loans 4,099,984 360,504 8.79 3,742,053 334,202 8.93 3,480,972 312,757 8.98 - ----------------------------------------------------------------------------------------------------------------------------------- Total earning assets 5,738,469 $470,915 8.21 % 5,382,938 $448,875 8.34 % 5,044,088 $419,483 8.32 % Less: Allowance for loan losses (51,482) =================== (46,284) ================== (43,709)================= NON-EARNING ASSETS: Cash and due from banks 132,575 131,856 141,207 Other assets 314,155 266,253 206,638 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $6,133,717 $5,734,763 $5,348,224 =================================================================================================================================== INTEREST-BEARING LIABILITIES: NOW deposits $495,942 $7,099 1.43 % $488,977 $7,768 1.59 % $479,209 $9,196 1.92 % Savings deposits 500,305 14,177 2.83 514,100 15,668 3.05 512,487 15,501 3.02 Money market deposits 662,890 23,487 3.54 672,049 24,622 3.66 678,720 24,115 3.55 Certificates of deposit $100,000 and over 409,282 23,297 5.69 340,787 19,823 5.82 296,216 15,369 5.19 Other time deposits 2,024,491 112,664 5.57 1,959,455 108,908 5.56 1,875,421 105,666 5.63 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 4,092,910 180,724 4.42 3,975,368 176,789 4.45 3,842,053 169,847 4.42 - ----------------------------------------------------------------------------------------------------------------------------------- Short-term borrowings 402,796 21,268 5.28 412,007 22,549 5.47 294,938 15,094 5.12 Other borrowings 543,830 29,621 5.45 311,496 17,530 5.63 194,487 11,348 5.83 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 5,039,536 $231,613 4.60 % $4,698,871 $216,868 4.62 % 4,331,478 $196,289 4.53 % =================== ================== ================= NONINTEREST-BEARING LIABILITIES: Demand deposits 492,547 475,974 471,364 Other liabilities 87,606 74,794 66,583 Shareholders' equity 514,028 485,124 478,799 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $6,133,717 $5,734,763 $5,348,224 =================================================================================================================================== INTEREST MARGIN RECAP: Interest income/earning assets $470,915 8.21 % $448,875 8.34 % $419,483 8.32 % Interest expense/earning assets 231,613 4.04 216,868 4.03 196,289 3.89 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest margin $239,302 4.17 % $232,007 4.31 % $223,194 4.42 % =================================================================================================================================== (1) Includes Government agency mortgage-backed securities. (2) Includes principal balances of nonaccrual loans. Interest income relating to nonaccrual loans is included only if received. (3) The amount of loan fees is not material in any of the years presented. 17
ASSET/LIABILITY MANAGEMENT- INTEREST RATE SENSITIVITY AND LIQUIDITY Customer preferences for loans and deposits generate certain levels of net interest income and interest rate risk, which is the impact changing interest rates have on net interest income. Asset/liability management's goal is to maximize and maintain adequate growth of net interest income within certain interest rate sensitivity and liquidity guidelines established by ONB's Funds Management Committee. This committee and similar committees at the affiliate banks monitor these guidelines on a consolidated basis and at the bank level. ONB uses both static gap and income simulation methods to measure the impact of interest rate changes on its net interest income. Static gap, measured at a point in time, measures interest rate risk as the difference between interest rate-sensitive assets and interest rate-sensitive liabilities within a given repricing period and is expressed as a ratio and as a dollar amount known as the "gap." A ratio of 100% suggests a balanced position between rate-sensitive assets and liabilities within a given repricing period. While the measurement process and related assessment of risk are somewhat imprecise, ONB believes its asset/liability management program allows adequate reaction time for trends in the market place as they occur, thereby minimizing the potential negative effect of its gap position against the event of interest rate changes. Table 4 below reflects ONB's interest rate sensitivity position within specified time periods and cumulatively over various time horizons. In the table, assets and liabilities are placed in categories based on their actual or expected repricing date. A significant percentage of ONB's assets and liabilities reprice within 180 days. In the 365 day cumulative time frame, the assets to liabilities ratio was 83%, down from 86% in 1997. Asset growth was primarily in time horizons greater than one year while liability growth was slightly more in periods under one year. Net interest income simulation modeling is used to better quantify the impact of potential interest rate fluctuations on net interest income. With this understanding, management can best determine possible balance sheet changes, pricing strategies, and appropriate levels of capital and liquidity which allow ONB to generate strong net interest income while controlling and monitoring interest rate risk. ONB simulates a gradual change in rates of 200 basis points up or down over 12 months and sustained for additional 12 months. Key model assumptions include prepayment speeds; changes in market conditions, loan volumes, and pricing; deposit sensitivity; and customer preferences and are inherently uncertain. The model cannot precisely estimate net interest income or the impact of interest rate changes. Actual results will differ from the simulated results due to timing, magnitude and frequency of interest rate changes, changes in market conditions, management strategies, among other factors. ONB's policy limit for the maximum negative impact on net interest income over 12 months is 10%. At December 31, 1998, ONB was well within that limit as the model's fluctuation was under 1% for the first 12 months and less than 2% for the total 24 month period.
ANALYSIS OF INTEREST RATE SENSITIVITY AT DECEMBER 31, 1998 (TABLE 4) ($ in thousands) - ----------------------------------------------------------------------------------------------------------------- 1-180 181-365 1-5 Beyond Days Days Years 5 years Total - ----------------------------------------------------------------------------------------------------------------- RATE-SENSITIVE ASSETS: Money market investments $21,533 -- $99 -- $21,632 Investment securities 318,708 $139,728 778,968 $399,270 1,636,674 Loans, net of unearned income 1,442,722 500,250 1,359,543 1,051,741 4,354,256 - ----------------------------------------------------------------------------------------------------------------- Total rate sensitive assets 1,782,963 639,978 2,138,610 1,451,011 $6,012,562 - ----------------------------------------------------------------------------------------------------------------- RATE-SENSITIVE LIABILITIES: Deposits 1,615,085 457,945 789,679 1,252,445 4,115,154 Other borrowed funds 677,366 174,316 211,659 72,847 1,136,188 - ----------------------------------------------------------------------------------------------------------------- Total rate-sensitive liabilities 2,292,451 632,261 1,001,338 1,325,292 $5,251,342 - ----------------------------------------------------------------------------------------------------------------- Interest sensitivity gap per period ($509,488) $7,717 $1,137,272 $125,719 Cumulative gap ($509,488) ($501,771) $635,501 $761,220 Cumulative ratio at December 31, 1998 (1) 78 % 83 % 116 % 114 % ================================================================================================================= Cumulative ratio at December 31, 1997 (1) 76 % 86 % 127 % 115 % ================================================================================================================= (1) Rate-sensitive assets/rate-sensitive liabilities. 18
LIQUIDITY MANAGEMENT In addition to the interest rate sensitivity the Funds Management Committee monitors the company's liquidity position. The objective is to ensure the ability to meet cash flow needs of customers, such as new loan demand and deposit withdrawals, while at the same time maximizing lending and investment opportunities. Failure to properly manage liquidity requirements may result in the need to satisfy customer withdrawals and other obligations with expensive funding sources. Too much liquidity on the balance sheet can also be undesirable as earnings will suffer due to underutilized resources. ONB's affiliates maintain adequate liquidity with sufficient levels of liquid assets, unpledged securities, deposit growth, and other alternative funding sources, such as the Federal Home Loan Bank ("FHLB"). The parent company's sources of liquidity include: lines of credit, capital markets, and affiliate banks' dividends which are subject to regulatory limits and in some cases require regulatory approval. Note 10 and 13 of the consolidated financial statements address this further. At year-end 1998 ONB had $72.8 million in available lines of credit from unaffiliated banks. ONB has capacity to issue up to $85.7 million of a $150 million medium term note program available for future liquidity needs. At December 31, 1998, these securities were rated Baa1 by Moody's and BBB+ by Standard and Poor's. The Funds Management Committee also monitors the quality of the investment portfolio by establishing guidelines for the types and quality of securities acceptable for purchase. ONB has a consistent, conservative investment strategy. Any exceptions to these guidelines must be approved by the committee. The committee reviews the quality of the portfolios on a regular basis, especially the obligations of corporations and state and political subdivisions. NONINTEREST INCOME Besides net interest income, ONB's earnings are enhanced by its ability to generate noninterest income from both core business and newer initiatives, such as investments products and insurance. ONB continuously strives to improve its noninterest income performance. Noninterest income, excluding securities transactions, grew 15.4% in 1998 compared to 9.0% in 1997. The trust company's fee income grew 11.5% in 1998 and 16.0% in 1997 and benefited from an expanding revenue base of managed customer assets and strong financial markets. Service charges on deposit accounts grew 2.3% in 1998 compared to 4.7% in 1997 as previously new pricing structures have been fully implemented over the past several years. Management regularly reviews these fees and compares them against competition in each separate market and among affiliate banks. Loan servicing fees were fairly consistent between the periods with 5.0% growth in 1998. Bank-owned life insurance revenue, a new initiative, represents income on officers' life insurance coverage and totaled $3.9 million in 1998. Insurance sales hit $5.2 million, up 8.2% in 1998, though down from 16.7% growth in 1997. Investment and brokerage business increased 6.1% in 1998 with revenue reaching $5.0 million, compared to 14.3% growth in 1997. The remaining other income category was up $1.2 million and included loan sale gains. ONB realized minimal net securities gains during 1998, 1997, and 1996 as ONB has generally minimal security sales. During 1996, ONB sold a portion of its Student Loan Marketing Association stock, resulting in a gain. Table 5 below presents changes in the components of noninterest income for the years 1996 through 1998.
NONINTEREST INCOME (TABLE 5) ($ in thousands) - ------------------------------------------------------------------------------------------------------------------- % Change From Prior Year - ------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1998 1997 - ------------------------------------------------------------------------------------------------------------------- Trust fees $13,404 $12,024 $10,369 11.5 % 16.0 % Service charges on deposit accounts 17,441 17,044 16,277 2.3 4.7 Loan servicing fees 5,532 5,269 5,066 5.0 4.0 Insurance premiums and commissions 5,213 4,820 4,132 8.2 16.7 Investment product fees 4,976 4,689 4,103 6.1 14.3 Bank-owned life insurance 3,860 -- -- N/M N/M Other income 8,125 6,879 6,570 18.1 4.7 - ------------------------------------------------------------------------------------------------------------------- Subtotal 58,551 50,725 46,517 15.4 9.0 Net securities gains 340 379 885 (10.3) (57.2) - ------------------------------------------------------------------------------------------------------------------- Total noninterest income $58,891 $51,104 $47,402 15.2 % 7.8 % =================================================================================================================== N/M = Not meaningful 19
NONINTEREST EXPENSE The banking industry continues to look for efficiency improvements. The challenge is to achieve cost efficiencies while still providing quality customer service. Several ratios are used to evaluate performance, with lower percentages representing positive trends. ONB's efficiency ratio, which is net interest income tax equivalized plus noninterest income, excluding securities gains, divided by noninterest expense, was 56.38% in 1998 and 56.11% in 1997 and 57.92% in 1996. The increase in 1998 was mostly merger costs related to the transactions closed in January, 1999. ONB's net overhead ratio, noninterest expense less noninterest income divided by average assets, showed more dramatic improvement with 1.78% in 1998, 1.88% in 1997 and 2.04% in 1996. Total noninterest expense grew 5.9% in 1998 compared to an 1.2% increase in 1997. Salaries and benefits, which comprised over 50% of total noninterest expense, grew 4.6% in 1998 and 4.4% in 1997. Besides normal salary increases in 1998, incentives rose by $2.2 million. Equipment expense rose 7.6% in 1998 partially due to accelerated depreciation on equipment to be upgraded. Marketing expense increased 4.9% in 1998 after no increase in 1997. In 1997 FDIC insurance premiums dropped $2.3 million after the one- time recapitalization charge in 1996 for SAIF-insured deposits which was $2.5 million for ONB affiliate banks. Other expense grew 15.3% in 1998 after minimal growth in 1997. The increase was primarily in professional fees which were similar to 1996 levels and outside services due to the outsourcing of credit card processing in 1998. Table 6 below presents changes in the components of noninterest expense for the years 1996 through 1998.
NONINTEREST EXPENSE (TABLE 6) ($ in thousands) - ------------------------------------------------------------------------------------------------------------------- % Change From Prior Year - ------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1998 1997 Salaries and employee benefits $95,974 $91,765 $87,938 4.6 % 4.4 % Occupancy expense 9,770 9,923 10,702 (1.5) (7.3) Equipment expense 13,424 12,478 11,787 7.6 5.9 Marketing expense 5,737 5,469 5,522 4.9 (1.0) FDIC insurance premiums 578 707 3,043 (18.2) (76.8) Data processing expense 6,045 5,918 5,577 2.1 6.1 Communications and transportation expense 7,115 6,968 6,891 2.1 1.1 Other expense 29,294 25,403 25,260 15.3 0.6 - ------------------------------------------------------------------------------------------------------------------- Total noninterest expense $167,937 $158,631 $156,720 5.9 % 1.2 % ===================================================================================================================
PROVISION FOR INCOME TAXES ONB records a provision for income taxes currently payable and for income taxes payable in the future which arise due to timing differences in the recognition of certain items for financial statement and income tax purposes. The major differences between the effective tax rate applied to ONB's financial statement income and the federal statutory rate are caused by interest on tax-exempt securities and loans and state income taxes. ONB's effective tax rate was 28.5% in 1998, 29.9% in 1997, and 29.6% in 1996. See Note 7 to the consolidated financial statements for additional details of ONB's income tax provision. 20 INTERIM FINANCIAL DATA Table 7 below provides a detailed summary of quarterly results of operations for the years ended December 31, 1998 and 1997. These results contain all normal and recurring adjustments of a material nature necessary for a fair and consistent presentation.
INTERIM FINANCIAL DATA (TABLE 7) (Unaudited, $ and shares in thousands except per share data) - --------------------------------------------------------------------------------------------------- Quarter Ended - --------------------------------------------------------------------------------------------------- December September June March 31 30 30 31 - --------------------------------------------------------------------------------------------------- 1998: Interest income $115,707 $116,450 $113,058 $111,313 Interest expense 58,684 60,154 57,298 55,478 - --------------------------------------------------------------------------------------------------- Net interest income 57,023 56,296 55,760 55,835 Provision for loan losses 2,971 2,936 3,174 3,079 Noninterest income 15,631 15,400 14,229 13,631 Noninterest expense 45,122 41,705 40,626 40,484 - --------------------------------------------------------------------------------------------------- Income before income taxes 24,561 27,055 26,189 25,903 Income taxes 6,570 7,064 8,011 7,928 Net income from continuing operations 17,991 19,991 18,178 17,975 Discontinued operations (9,193) (661) - --------------------------------------------------------------------------------------------------- Net income $17,991 $19,991 $8,985 $17,314 =================================================================================================== Net income from continuing operations per share: Basic $0.39 $0.44 $0.39 $0.39 Diluted $0.39 $0.42 $0.38 $0.38 =================================================================================================== Net income per share: Basic $0.39 $0.44 $0.19 $0.38 Diluted $0.39 $0.42 $0.19 $0.36 =================================================================================================== Weighted average shares: Basic 45,687 45,958 46,218 45,773 Diluted 47,503 47,872 48,163 48,308 =================================================================================================== 1997: Interest income $111,688 $110,764 $108,285 $104,301 Interest expense 56,524 56,072 53,445 50,827 - --------------------------------------------------------------------------------------------------- Net interest income 55,164 54,692 54,840 53,474 Provision for loan losses 4,485 3,115 2,932 3,030 Noninterest income 12,805 13,073 12,712 12,514 Noninterest expense 38,700 39,595 40,585 39,751 - --------------------------------------------------------------------------------------------------- Income before income taxes 24,784 25,055 24,035 23,207 Income taxes 7,596 7,085 7,288 7,029 - --------------------------------------------------------------------------------------------------- Net income from continuing operations 17,188 17,970 16,747 16,178 Discontinued operations (5,400) (451) 393 453 - --------------------------------------------------------------------------------------------------- Net income $11,788 $17,519 $17,140 $16,631 =================================================================================================== Net income from continuing operations per share: Basic $0.37 $0.39 $0.36 $0.35 Diluted $0.36 $0.38 $0.35 $0.34 =================================================================================================== Net income per share: Basic $0.26 $0.38 $0.37 $0.36 Diluted $0.25 $0.37 $0.36 $0.35 =================================================================================================== Weighted average shares: Basic 45,791 45,973 46,313 46,646 Diluted 48,359 48,481 48,826 49,157 =================================================================================================== 21
FINANCIAL CONDITION OVERVIEW Total assets reached $6.4 billion at December 31, 1998, 8.1% higher than the prior year-end. Loans increased $438.4 million or 11.2%. Total liabilities grew $464.3 million or 8.5% over 1997. Deposits rose 3.3% or $147.8 million while other sources funded the remainder of the asset growth. INVESTMENT SECURITIES Investment securities at December 31, 1998 comprised 25% of total assets and were up $29.7 million, 1.9% over 1997. The growth occurred chiefly in U.S. Government agency and municipal securities where better yield and spread opportunities existed during the year. While it does not actively trade its investment securities, ONB has classified all securities as available-for-sale to maximize flexibility to adapt to interest rate changes. The principal and interest payments along with the ability to liquidate, if necessary, available-for-sale securities provide funding to help meet unforeseen liquidity needs. The entire portfolio has an approximate weighted average maturity of 4.2 years. At December 31, 1998, ONB held investment securities issued by the certain states and their political subdivisions with the following aggregate market value: $75.0 million by Indiana and $74.6 million by Illinois. There were no other concentrations of investment securities issued by an individual state and its political subdivisions which were greater than 10% of shareholders' equity. Average yields on the investment securities portfolio are calculated on a taxable equivalent basis. Yields are based on the amortized cost and are weighted for the scheduled maturity of each investment. At year-end, average yields for the entire portfolio were 6.94% in 1998, 7.18% in 1997, and 7.11% in 1996. The portfolio yield decline reflected the lower reinvestment rates experienced in 1998. Table 8 below presents the maturity distribution of the investment portfolio, along with weighted average yields thereon.
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES (TABLE 8) ($ in thousands) - --------------------------------------------------------------------------------------------------------------------------------- December 31, 1998 - --------------------------------------------------------------------------------------------------------------------------------- Within 1 - 5 5 - 10 Beyond 1 Year Years Years 10 Years Total 1997 1996 - --------------------------------------------------------------------------------------------------------------------------------- FAIR VALUE: U.S. Treasury $41,077 $49,057 -- $2,336 $92,470 $119,177 $155,088 U.S. Government agencies and corporations 117,643 158,680 -- 276,323 257,666 273,500 Mortgage-backed securities 66,710 451,311 175,460 25,853 719,334 727,415 635,144 States and political subdivisions 27,264 251,103 158,997 53,762 491,126 455,949 467,327 Other securities -- 5 -- 57,416 57,421 46,723 42,649 - --------------------------------------------------------------------------------------------------------------------------------- Total $252,694 $910,156 $334,457 $139,367 $1,636,674 $1,606,930 $1,573,708 ================================================================================================================================= AMORTIZED COST: U.S. Treasury $40,725 $47,643 -- $2,697 $91,065 $118,125 $154,192 U.S. Government agencies and corporations 116,894 153,853 -- -- 270,747 254,322 272,628 Mortgage-backed securities 66,507 446,112 175,276 25,573 713,468 718,956 633,983 States and political subdivisions 26,843 242,180 150,769 52,669 472,461 441,030 457,662 Other securities -- 5 -- 57,416 57,421 46,723 42,023 - --------------------------------------------------------------------------------------------------------------------------------- Total $250,969 $889,793 $326,045 $138,355 $1,605,162 $1,579,156 $1,560,488 ================================================================================================================================= Weighted average yield, based on amortized cost (taxable equivalent basis) 6.79 % 6.98 % 7.01 % 6.82 % 6.94 % 7.18 % 7.11 % ================================================================================================================================= 22
LENDING AND LOAN ADMINISTRATION The key to ONB's success has long been its credit culture which features decision-making near the customer with corporate oversight. Affiliate loan personnel have the authority to extend credit under guidelines established and administered by ONB's Credit Policy Committee. This committee, which meets quarterly, includes members of ONB's executive management and, on a rotating basis, outside members of the Board of Directors and affiliate bank management. The committee monitors credit quality through its review of information such as delinquencies, problem loans, and charge-offs. The committee regularly reviews the loan policy to assure it remains appropriate for the current lending environment. Executive and credit committees at the banks provide additional knowledge, judgment, and experience to ONB's lending administration. ONB maintains an independent corporate loan review program. Its loan review system evaluates loan administration, credit quality, loan documentation, compliance with corporate loan standards, and the adequacy of the allowance for loan losses. This program includes periodic on-site visits as well as regular off-site reviews of problem loan reports, delinquencies, and charge-offs. ONB's affiliates lend to commercial customers in various industries including manufacturing, agribusiness, transportation, mining, wholesaling, and retailing. ONB's policy is to concentrate its lending activity in the geographic market areas it serves, primarily Indiana, Illinois, and Kentucky. ONB has no concentration of loans in any single industry exceeding 10% of its portfolio nor does its portfolio contain any loans to finance speculative transactions, such as large, highly leveraged buyouts or loans to foreign countries. The 11.2% loan growth in 1998 was reflected in most major categories. Commercial real estate led the loan types with a 23.9% increase after 14.0% growth in 1997. Commercial loans rose 14.5% following 11.1% in 1997. In 1998 commercial loans include a $60.7 million loan on the sale of ONB's consumer finance subsidiary which will mature April 1999. Residential real estate loans grew 10.8% in 1998 and 10.0% in 1997. Consumer credit declined 5.2% in 1998, similar to 1997. The portfolio is well diversified with 24% of the portfolio in commercial loans, 22% in commercial real estate, 39% in residential real estate, and 16% in consumer credit. ONB's commercial lending is primarily to small to medium-sized businesses in various industries in its region. Commercial real estate loans are generally made to similar companies in ONB's geographical area. These industries have been stable in ONB's market area and provide opportunities for growth. A significant percentage of commercial and financial loans are due within one year, reflecting the short-term nature of a large portion of these loans. Table 9 on page 24 presents the maturity distribution and rate sensitivity of loans and an analysis of loans with predetermined and floating interest rates. Residential real estate loans, primarily 1-4 family properties, represent the most significant portion of the loan portfolio. ONB's portfolio includes both adjustable rate and higher yielding, fixed rate loans. Consumer loans include automobile loans, personal and home equity loans and lines of credit, student loans, and credit card loans. Loans in most categories have grown steadily over the past four years. Commercial loans increased an average of 6.1% per year between 1994 and 1998. Commercial real estate grew 15.2% and residential real estate loans grew 9.0% over the same period. Consumer loans remained relatively unchanged. Table 10 on page 24 presents the composition of the loan portfolio for each of the last five years. 23
DISTRIBUTION OF LOAN MATURITIES AT DECEMBER 31, 1998 (TABLE 9) ($ in thousands) - --------------------------------------------------------------------------------------------------- Within 1-5 Beyond 1 Year Years 5 years Total - --------------------------------------------------------------------------------------------------- Commercial $601,857 $287,815 $117,775 $1,007,447 Economic development bonds 3,900 7,510 8,935 20,345 - --------------------------------------------------------------------------------------------------- Total $605,757 $295,325 $126,710 $1,027,792 =================================================================================================== Predetermined interest rates $223,335 $136,496 $47,301 $407,132 Floating interest rates 382,422 158,829 79,409 620,660 - --------------------------------------------------------------------------------------------------- Total $605,757 $295,325 $126,710 $1,027,792 ===================================================================================================
LOAN PORTFOLIO AT YEAR-END (TABLE 10) ($ in thousands) - --------------------------------------------------------------------------------------------------------------------------------- Four Year 1998 1997 1996 1995 1994 Growth Rate - --------------------------------------------------------------------------------------------------------------------------------- Commercial $1,007,447 $879,888 $792,077 $752,867 $794,746 6.1 % Economic development bonds 20,345 22,953 26,424 27,675 30,928 (9.9) Commercial real estate 944,813 762,774 668,958 573,829 536,620 15.2 Residential real estate 1,688,572 1,523,425 1,385,113 1,311,271 1,194,797 9.0 Consumer credit 702,293 740,666 776,086 737,362 678,932 0.8 - --------------------------------------------------------------------------------------------------------------------------------- Total loans 4,363,470 3,929,706 3,648,658 3,403,004 3,236,023 7.8 % Less: Unearned income 9,214 13,865 21,066 27,089 30,926 - --------------------------------------------------------------------------------------------------------------------------------- Subtotal 4,354,256 3,915,841 3,627,592 3,375,915 3,205,097 Less: Allowance for loan losses 51,847 49,053 43,527 42,857 43,513 - --------------------------------------------------------------------------------------------------------------------------------- Net loans $4,302,409 $3,866,788 $3,584,065 $3,333,058 $3,161,584 ================================================================================================================================= COMPOSITION OF LOAN PORTFOLIO BY TYPE Commercial and development 23.6 % 23.1 % 22.6 % 23.1 % 25.8 % Commercial real estate 21.7 19.5 18.4 17.0 16.7 Residential real estate 38.8 38.9 38.2 38.8 37.3 Consumer credit 15.9 18.5 20.8 21.1 20.2 - --------------------------------------------------------------------------------------------------------------------
24 The adequacy of the allowance for loan losses is evaluated on a quarterly basis at both the affiliate and holding company levels. This evaluation is based on reviews of specific loans, changes in the loan type and volume of the portfolios given current and anticipated economic conditions, and historical loss experience. Loans are charged off when they are deemed uncollectible. Charge-offs, net of recoveries, totaled $9.4 million in 1998, compared to $8.0 million in 1997 and $10.4 million in 1996 with elevated consumer charge-offs in 1996. Recognizing the changing nature and risk of consumer lending, management reevaluated its underwriting policies in 1997. Management believes the revised policies more appropriately address the risk in the consumer area, and the lower subsequent charge-off levels reflected efforts to manage this risk. Net charge-offs to average loans have consistently ranged from 0.21% to 0.30% for the last five years. ONB makes monthly provisions at levels deemed necessary to provide assurance that the allowance for loan losses is sufficient to absorb estimated losses in the loan portfolio. For homogeneous loans, such as residential mortgage, consumer, and credit card, provision levels are determined using historic loss factors. For non-homogeneous loans, management allocates specific losses to loans in the highest risk categories with provisions for the remainder of the portfolio using historic loss factors. In addition, provisions reflect other risks affecting the loan portfolio, such as economic conditions in the geographic area, specific industry financial conditions, experience of lending staff and borrower risk associated with Year 2000. The provision for loan losses was $12.2 million in 1998, slightly lower than the $13.6 million in 1997, but greater than the $11.1 million in 1996. Table 11 below summarizes activity in the allowance for loan losses for the years 1994 through 1998, along with an allocation of the year-end balances and related statistics for the allowance and net charge-offs.
ALLOWANCE FOR LOAN LOSSES (TABLE 11) ($ in thousands) - ----------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------------------------------------------------------- ANALYSIS: Allowance for loan losses, January 1 $49,053 $43,527 $42,857 $43,513 $43,863 - ----------------------------------------------------------------------------------------------------------------- Loans charged off: Commercial 3,802 2,979 4,362 4,918 4,609 Commercial and residential real estate 1,249 639 675 993 785 Consumer credit 7,887 8,976 9,829 5,386 5,511 - ----------------------------------------------------------------------------------------------------------------- Total charge-offs 12,938 12,594 14,866 11,297 10,905 - ----------------------------------------------------------------------------------------------------------------- Recoveries on charged-off loans: Commercial 1,330 1,561 2,281 1,647 1,216 Commercial and residential real estate 323 1,156 330 320 201 Consumer credit 1,919 1,841 1,843 1,183 1,252 - ----------------------------------------------------------------------------------------------------------------- Total recoveries 3,572 4,558 4,454 3,150 2,669 - ----------------------------------------------------------------------------------------------------------------- Net charge-offs 9,366 8,036 10,412 8,147 8,236 Provision charged to expense 12,160 13,562 11,082 7,491 7,886 - ----------------------------------------------------------------------------------------------------------------- Allowance for loan lossses, December 31 $51,847 $49,053 $43,527 $42,857 $43,513 ================================================================================================================= Average loans for the year $4,099,984 $3,742,053 $3,480,972 $3,299,737 $3,022,592 Allowance/year-end loans 1.19 % 1.25 % 1.20 % 1.27 % 1.36 % Allowance/average loans 1.26 1.31 1.25 1.30 1.44 Net charge-offs/average loans 0.23 0.21 0.30 0.25 0.27 - ----------------------------------------------------------------------------------------------------------------- ALLOCATION AT DECEMBER 31: Commercial $23,500 $23,607 $20,195 $22,547 $23,435 Commercial and residential real estate 12,399 12,695 12,660 12,562 11,971 Consumer credit 15,948 12,751 10,672 7,748 8,107 - ----------------------------------------------------------------------------------------------------------------- Total $51,847 $49,053 $43,527 $42,857 $43,513 =================================================================================================================
25 Assets determined by the various evaluation processes to be under- performing receive special attention by ONB and the affiliate banks. Under- performing assets consist of: 1) nonaccrual loans where the ultimate collectibility of interest is uncertain, but the principal is considered collectible; 2) loans which have been renegotiated to provide for a reduction or deferral of interest or principal because the borrower's financial condition deteriorated; 3) loans with principal or interest past due ninety (90) days or more; and 4) foreclosed properties. Each month, problem loan reports are prepared and reviewed at both the affiliate and holding company levels. These reports include loans which show signs of being unable to meet debt obligations in the normal course of business, carry other characteristics deemed by bank management to warrant special attention, or have been criticized by regulators in the examination process. Besides the loans classified as under-performing, management closely monitors loans totaling $105.0 million at December 31, 1998, for the borrowers' ability to comply with present repayment terms. For these loans the existing conditions do not warrant either a partial charge-off or classification as nonaccrual. Management believes it has taken a conservative approach in its evaluation of under-performing credits and the loan portfolio in general, both in acknowledging the portfolio's general condition and in establishing the allowance for loan losses. Under-performing assets as of year-end totalled $25.1 million in 1998 and $20.1 million in 1997. As a percent of total loans and foreclosed properties, under-performing assets at December 31 were fairly consistent with 0.58% in 1998, 0.51% in 1997, and 0.56% in 1996. The growth in nonaccruals in 1998 reflected a conservative nonaccrual policy and not a general deterioration of the portfolio. At December 31, 1998, the allowance for loan loss to under-performing assets ratio was 206.72%, comparable to 244.47% in 1997 and 215.45% in 1996. Said in another way, in 1998 ONB had set aside $2.07 for every dollar of under-performing assets. Table 12 below presents the components of under-performing assets as of December 31, for the last five years.
UNDER-PERFORMING ASSETS (TABLE 12) ($ in thousands) - ------------------------------------------------------------------------------------------------------------------ 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------ Nonaccrual loans $17,034 $11,985 $13,162 $6,972 $9,366 Renegotiated loans 116 248 746 1,120 1,280 Past due loans (90 days or more): Commercial 1,025 1,394 1,227 1,499 1,173 Commercial and residential real estate 3,346 2,289 1,458 2,611 2,102 Consumer 1,018 945 868 1,084 1,290 - ------------------------------------------------------------------------------------------------------------------ Total 5,389 4,628 3,553 5,194 4,565 - ------------------------------------------------------------------------------------------------------------------ Foreclosed properties 2,542 3,204 2,742 1,792 1,702 - ------------------------------------------------------------------------------------------------------------------ Total under-performing assets $25,081 $20,065 $20,203 $15,078 $16,913 ================================================================================================================== Under-performing assets as a % of total loans and foreclosed properties 0.58 % 0.51 % 0.56 % 0.45 % 0.53 % Allowance for loan loss/ under-performing assets 206.72 244.47 215.45 284.24 257.28 - ------------------------------------------------------------------------------------------------------------------
26 Interest income of approximately $1.5 million would have been recorded in 1998 on nonaccrual and restructured loans if such loans had been accruing interest throughout the year in accordance with their original terms. The amount of interest income actually recorded in 1998 on nonaccrual and restructured loans was $0.4 million. DEPOSITS Customer deposits provide the core funding needs and include noninterest- bearing demand, regular savings and NOW accounts, money market accounts, and small denomination certificates of deposit. Average core deposits increased 1.6% in 1998 compared to the 2.3% in 1997. Other time deposits increased over 3% in both 1998 and 1997 and demand deposits rose 3.5% in 1998. Money market deposits declined in both 1998 and 1997 after a special promotion in 1996. Table 13 below presents changes in the average balances of all funding sources for the years 1996 through 1998.
FUNDING SOURCES - AVERAGE BALANCE (TABLE 13) ($ in thousands) - ------------------------------------------------------------------------------------------------------------------- % Change From Prior Year - ------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1998 1997 - ------------------------------------------------------------------------------------------------------------------- Demand deposits $492,547 $475,974 $471,364 3.5 % 1.0 % NOW deposits 495,942 488,977 479,209 1.4 2.0 Savings deposits 500,305 514,100 512,487 (2.7) 0.3 Money market deposits 662,890 672,049 678,720 (1.4) (1.0) Other time deposits 2,024,491 1,959,455 1,875,421 3.3 4.5 - ------------------------------------------------------------------------------------------------------------------- Total core deposits 4,176,175 4,110,555 4,017,201 1.6 2.3 - ------------------------------------------------------------------------------------------------------------------- Certificates of deposit $100,000 and over 409,282 340,787 296,216 20.1 15.0 Short-term borrowings 402,796 412,007 294,938 (2.2) 39.7 Other Borrowings 543,830 311,496 194,487 74.6 60.2 - ------------------------------------------------------------------------------------------------------------------- Total funding sources $5,532,083 $5,174,845 $4,802,842 6.9 % 7.7 % ===================================================================================================================
The average balance of large certificates grew $68.5 million or 20.1% in 1998 compared to the prior year. Other borrowings increased $232.3 million and primarily included FHLB advances. Table 14 below presents a maturity distribution for certificates of deposit with denominations of $100,000 or more.
CERTIFICATES OF DEPOSIT, $100,000 AND OVER (TABLE 14) ($ in thousands) - ----------------------------------------------------------------------------------------------------------------------------- Maturity Distribution ---------------------------------------------------------- Year-End 1-90 91-180 181-365 Beyond Interest Average Balance Days Days Days 1 Year Expense Rate - ----------------------------------------------------------------------------------------------------------------------------- 1998 $390,123 $154,455 $91,566 $77,611 $66,491 $23,297 5.69 % 1997 380,254 170,178 74,268 58,229 77,579 19,823 5.82 1996 273,275 105,808 46,555 67,872 53,040 15,369 5.19 - -----------------------------------------------------------------------------------------------------------------------------
27 BORROWINGS Other short-term sources of funds include overnight borrowings from other financial institutions, securities sold under agreements to repurchase which generally mature within 30 days, and borrowings under U.S. Treasury demand notes. Borrowings from FHLB include both short- and long-term maturities. Medium term notes and convertible subordinated debentures provide longer term funds. Collectively, the average short-term borrowings decreased $9.2 million or 2.2% in 1998. Short-term rates on borrowings adjusted more slowly than long- term rates which made long-term funding more attractive. Table 15 below presents the distribution of ONB's short-term borrowings and the weighted average interest rates thereon for each of the last three years.
SHORT-TERM BORROWINGS (TABLE 15) ($ in thousands) - -------------------------------------------------------------------------------------- Other Funds Repurchase Short-term Purchased Agreements Borrowings - -------------------------------------------------------------------------------------- 1998: Outstanding at year-end $294,575 $192,868 $18,877 Average amount outstanding 82,061 213,535 107,200 Maximum amount outstanding at any month-end 294,575 233,308 175,751 Weighted average interest rate: During year 5.58 % 4.90 % 5.81 % End of year 5.35 4.53 5.10 - -------------------------------------------------------------------------------------- 1997: Outstanding at year-end $170,675 $215,878 $56,132 Average amount outstanding 73,733 220,074 118,200 Maximum amount outstanding at any month-end 170,675 244,722 192,048 Weighted average interest rate: During year 5.57 % 4.98 % 6.33 % End of year 6.34 5.18 5.87 - -------------------------------------------------------------------------------------- 1996: Outstanding at year-end $57,175 $177,463 $104,397 Average amount outstanding 35,563 204,837 54,538 Maximum amount outstanding at any month-end 92,100 217,337 121,965 Weighted average interest rate: During year 5.39 % 4.72 % 6.25 % End of year 6.25 4.89 6.12 - --------------------------------------------------------------------------------------
28 In 1997 ONB registered a $150 million medium term note program and issued $10 million in 1998 and $54.3 million in 1997. These borrowings, combined with prior issuances, totaled $96.3 million at December 31, 1998 and have a weighted average effective interest rate of 6.81% with maturities between 2000 and 2007. The funds were used to reduce ONB's lines of credit. Holders of ONB's 8% convertible debentures converted principal amounts of $8.4 million in 1998 and $0.2 million in 1997. These conversions resulted in the issuance of common stock shares totaling 415,597 in 1998 and 7,727 in 1997 with an offsetting increase in shareholders' equity. CAPITAL RESOURCES Shareholders' equity reached $519.6 million or 8.1% of total assets at December 31, 1998, and $500.6 million or 8.4% at December 31, 1997. ONB paid $0.58 cash dividends per share in 1998 which totaled $26.0 million (restated for the 5% stock dividend paid in January 1999 and the stock split paid in May 1999). Treasury shares were repurchased to provide shares for reissuance under ONB's dividend reinvestment and stock purchase plan and stock dividends. Treasury shares repurchased reduced shareholders' equity by $46.7 million in 1998 and $36.4 million in 1997. Shares reissued pursuant to the above programs and in connection with conversions of ONB's subordinated debentures added to shareholders' equity $25.1 million in 1998 and $9.7 million in 1997. ONB and the banking industry are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can elicit certain mandatory actions by regulators that, if undertaken, could have a direct material effect on ONB's financial statements. Capital adequacy in the banking industry is evaluated primarily by the use of ratios which measure capital against assets and certain off-balance-sheet items. Certain ratios weight these assets based on risk characteristics according to regulatory accounting practices. At December 31, 1998, ONB and it affiliate banks exceeded the regulatory minimums and met the regulatory definition of well-capitalized. ONB's capital ratios and the regulatory guidelines are presented in Table 16 below.
CAPITAL STRUCTURE AND REGULATORY GUIDELINES (TABLE 16) ($ in thousands) - -------------------------------------------------------------------------------------------------------------------------------- Regulatory Guidelines December 31, - -------------------------------------------------------------------------------------------------------------------------------- TIER 1 CAPITAL: Minimum Well-Capitalized 1998 1997 1996 Shareholders' equity (1) $500,546 $483,940 $472,499 Less intangibles (15,234) (17,049) (17,862) - -------------------------------------------------------------------------------------------------------------------------------- Tier 1 capital 485,312 466,891 454,637 TIER 2 CAPITAL: Subordinated debentures 21,963 30,407 30,564 Qualifying allowance for loan losses 51,847 47,943 43,527 - -------------------------------------------------------------------------------------------------------------------------------- Total capital $559,122 $545,241 $528,728 ================================================================================================================================ Risk adjusted assets $4,258,612 $3,835,456 $3,524,468 ================================================================================================================================ Tier 1 capital to risk-adjusted assets 4.00 % 6.00 % 11.40 % 12.17 % 12.90 % Total capital to risk-adjusted assets 8.00 10.00 13.13 14.22 15.00 Tier 1 capital to quarterly average assets (leverage ratio) 4.00 5.00 7.72 7.95 8.28 ------------------------------------------------------------------------------------------------------------------------------- (1) Excludes unrealized gains (losses) on investment securities.
29 REPORT OF MANAGEMENT MANAGEMENT'S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS Management is responsible for the preparation of the financial statements and related financial information appearing in this annual report. The financial statements and notes have been prepared in conformity with generally accepted accounting principles and include some amounts which are estimates based upon currently available information and management's judgment of current conditions and circumstances. Financial information throughout this annual report is consistent with that in the financial statements. SYSTEM OF INTERNAL ACCOUNTING CONTROLS Management maintains a system of internal accounting controls which is believed to provide, in all material respects, reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition, transactions are properly authorized and recorded, and the financial records are reliable for preparing financial statements and maintaining accountability for assets. In addition, ONB has a corporate code of conduct under which employees are to maintain high levels of ethical business standards. All systems of internal accounting controls are based on management's judgment that the cost of controls should not exceed the benefits to be achieved and that no system can provide absolute assurance that control objectives are achieved. Management believes ONB's system provides the appropriate balance between costs of controls and the related benefits. In order to monitor compliance with this system of controls, ONB maintains an extensive internal audit program. Internal audit reports are issued to appropriate officers and significant audit exceptions, if any, are reviewed with management and the Audit Committee of the Board of Directors. AUDIT COMMITTEE OF THE BOARD The Board of Directors, through an Audit Committee comprised solely of outside directors, oversees management's discharge of its financial reporting responsibilities. The Audit Committee meets regularly with the Company's independent public accountants, Arthur Andersen LLP, and the managers of internal auditing and loan review. During these meetings, the committee has the opportunity to meet privately with the independent public accountants as well as with internal audit and loan review personnel to review accounting, auditing, loan, and financial reporting matters. The appointment of the independent public accountants is made by the Board of Directors upon the recommendation of the Audit Committee. INDEPENDENT PUBLIC ACCOUNTANTS The financial statements in this annual report have been audited by Arthur Andersen LLP, for the purpose of determining that the financial statements are presented fairly in all material respects. Arthur Andersen's report on the financial statements appears on page 31. Their audit included a consideration of ONB's system of internal accounting controls, for the purpose of setting the scope and timing of their auditing procedures. 30 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE SHAREHOLDERS AND THE BOARD OF DIRECTORS OF OLD NATIONAL BANCORP: We have audited the accompanying consolidated balance sheet of Old National Bancorp (an Indiana corporation) and affiliates as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Old National Bancorp and affiliates as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Indianapolis, Indiana. January 27, 1999 (except with respect to the business combination discussed in Note 2 as to which the date is January 29,1999). 31
OLD NATIONAL BANCORP CONSOLIDATED BALANCE SHEET ($ and shares in thousands) - -------------------------------------------------------------------------------------------------------------------------------- December 31, - -------------------------------------------------------------------------------------------------------------------------------- 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $160,161 $155,579 Money market investments: Interest-bearing deposits in other banks 5,287 12,585 Federal funds sold and securities purchased under agreements to resell 16,345 11,079 - -------------------------------------------------------------------------------------------------------------------------------- Total money market investments 21,632 23,664 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL CASH AND CASH EQUIVALENTS 181,793 179,243 - -------------------------------------------------------------------------------------------------------------------------------- Investment securities - available-for-sale, at fair value 1,636,674 1,606,930 Loans, net of unearned income 4,354,256 3,915,841 Allowance for loan losses (51,847) (49,053) - -------------------------------------------------------------------------------------------------------------------------------- NET LOANS 4,302,409 3,866,788 Premises and equipment, net 83,847 83,829 Accrued interest receivable 50,307 48,878 Other assets 161,581 147,653 - ------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $6,416,611 $5,933,321 =============================================================================================================================== LIABILITIES Deposits: Noninterest-bearing demand $553,704 $525,958 Interest-bearing: NOW accounts 539,169 487,874 Savings accounts 501,780 504,464 Money market accounts 678,484 676,738 Certificates of deposit $100,000 and over 390,123 380,254 Other time 2,005,598 1,945,722 - ------------------------------------------------------------------------------------------------------------------------------- TOTAL DEPOSITS 4,668,858 4,521,010 - ------------------------------------------------------------------------------------------------------------------------------- Short-term borrowings 506,320 442,685 Accrued expenses and other liabilities 91,920 80,185 Other borrowings 629,868 388,832 - ------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 5,896,966 5,432,712 - ------------------------------------------------------------------------------------------------------------------------------- Commitments and contingencies (Note 12) SHAREHOLDERS' EQUITY Preferred stock, 2,000 shares authorized, no shares issued or outstanding -- -- Common stock, $1 stated value, 50,000 shares authorized, 30,388 and 29,159 shares issued and outstanding, respectively 30,388 29,159 Capital surplus 350,255 300,183 Retained earnings 119,903 154,598 Accumulated other comprehensive income, net of tax 19,099 16,669 - ------------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 519,645 500,609 - ------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $6,416,611 $5,933,321 =============================================================================================================================== The accompanying notes to consolidated financial statements are an integral part of this statement. 32
OLD NATIONAL BANCORP CONSOLIDATED STATEMENT OF INCOME ($ and shares in thousands except per share data) - ------------------------------------------------------------------------------------------------------------------------------- Years Ended December 31, - ------------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans including fees: Taxable $351,888 $327,761 $306,855 Nontaxable 5,787 4,314 3,958 Investment securities: Taxable 74,146 78,316 67,411 Nontaxable 23,488 23,732 23,945 Money market investments 1,219 915 3,500 - ------------------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST INCOME 456,528 435,038 405,669 - ------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Savings, NOW and money market deposits 44,763 48,058 48,812 Certificates of deposit $100,000 and over 23,297 19,823 15,369 Other time deposits 112,664 108,908 105,666 Short-term borrowings 21,268 22,549 15,094 Other borrowings 29,622 17,530 11,348 - ------------------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST EXPENSE 231,614 216,868 196,289 - ------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME 224,914 218,170 209,380 - ------------------------------------------------------------------------------------------------------------------------------- Provision for loan losses 12,160 13,562 11,082 - ------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 212,754 204,608 198,298 - ------------------------------------------------------------------------------------------------------------------------------- NONINTEREST INCOME Trust fees 13,404 12,024 10,369 Service charges on deposit accounts 17,441 17,044 16,277 Loan servicing fees 5,532 5,269 5,066 Insurance premiums and commissions 5,213 4,820 4,132 Investment product fees 4,976 4,689 4,103 Bank-owned life insurance 3,860 -- -- Net securities gains 340 379 885 Other income 8,125 6,879 6,570 - ------------------------------------------------------------------------------------------------------------------------------- TOTAL NONINTEREST INCOME 58,891 51,104 47,402 - ------------------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE Salaries and employee benefits 95,974 91,765 87,938 Occupancy expense 9,770 9,923 10,702 Equipment expense 13,424 12,478 11,787 Marketing expense 5,737 5,469 5,522 FDIC insurance premiums 578 707 3,043 Data processing expense 6,045 5,918 5,577 Communication and transportation expense 7,115 6,968 6,891 Other expense 29,294 25,403 25,260 - ------------------------------------------------------------------------------------------------------------------------------- TOTAL NONINTEREST EXPENSE 167,937 158,631 156,720 - ------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 103,708 97,081 88,980 Income taxes 29,573 28,998 26,293 - ------------------------------------------------------------------------------------------------------------------------------- NET INCOME FROM CONTINUING OPERATIONS $74,135 68,083 62,687 - ------------------------------------------------------------------------------------------------------------------------------- Discontinued operations (9,854) (5,005) 494 - ------------------------------------------------------------------------------------------------------------------------------- NET INCOME $64,281 $63,078 $63,181 =============================================================================================================================== NET INCOME FROM CONTINUING OPERATIONS PER COMMON SHARE: Basic $1.61 $1.47 $1.31 Diluted 1.57 1.43 1.28 =============================================================================================================================== NET INCOME PER COMMON SHARE: Basic $1.40 $1.37 $1.32 Diluted 1.36 1.33 1.29 =============================================================================================================================== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic 45,909 46,179 47,747 Diluted 47,974 48,700 50,259 =============================================================================================================================== The accompanying notes to consolidated financial statements are an integral part of this statement. 33
OLD NATIONAL BANCORP CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY ($ and shares in thousands) - ----------------------------------------------------------------------------------------------------------------------------------- Accumulated Common Stock Other Total ------------ Capital Retained Comprehensive Comprehensive Shareholders' Shares Amount Surplus Earnings Income Income Equity - ----------------------------------------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1995 28,155 $28,155 $254,448 $188,235 $10,673 $481,511 Net income 63,181 63,181 63,181 Unrealized security loss and reclassification adjustment, net of $1,592 tax (2,737) (2,737) (2,737) -------- Comprehensive income 60,444 -- Cash dividends (24,423) ======== (24,423) 5% stock dividend 1,277 1,277 47,698 (48,975) -- Stock repurchased (1,255) (1,255) (43,651) (44,906) Stock reissued under dividend reinvestment and stock purchase plan 262 262 6,596 6,858 Stock reissued due to conversion of subordinated debentures 41 41 910 951 - ----------------------------------------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1996 28,480 28,480 266,001 178,018 7,936 480,435 Net income 63,078 63,078 63,078 Unrealized security gain and reclassification adjustment, net of $5,821 tax 8,733 8,733 8,733 -------- Comprehensive income 71,811 -- Cash dividends (25,012) ======== (25,012) 5% stock dividend 1,307 1,307 60,179 (61,486) -- Stock repurchased (877) (877) (35,479) (36,356) Stock reissued under dividend reinvestment and stock purchase plan 241 241 9,333 9,574 Stock reissued due to conversion of subordinated debentures 8 8 149 157 - ----------------------------------------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1997 29,159 29,159 300,183 154,598 16,669 500,609 Net income 64,281 64,281 64,281 Unrealized security gain and reclassification adjustment, net of $1,308 tax 2,430 2,430 2,430 ------- Comprehensive income 66,711 -- Cash dividends (26,058) ======= (26,058) 5% stock dividend 1,366 1,366 71,552 (72,918) -- Stock repurchased (954) (954) (45,748) (46,702) Stock reissued under dividend reinvestment and stock purchase plan 402 402 16,239 16,641 Stock reissued due to conversion of subordinated debentures 415 415 8,029 8,444 - ----------------------------------------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1998 30,388 $30,388 $350,255 $119,903 $19,099 $519,645 =================================================================================================================================== The accompanying notes to consolidated financial statements are an integral part of this statement. 34
OLD NATIONAL BANCORP CONSOLIDATED STATEMENT OF CASH FLOWS ($ in thousands) - ------------------------------------------------------------------------------------------------------------------------------- Years Ended December 31, - ------------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $64,281 $63,078 $63,181 - ------------------------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to cash provided by operating activities: Depreciation 10,714 9,718 8,782 Amortization of intangible assets 1,729 1,969 1,637 Net premium amortization on investment securities 2,641 1,638 2,221 Provision for loan losses 12,160 13,562 11,082 Net securities gains (314) (347) (878) (Gain) loss on sale of other assets (820) (224) 269 (Increase) decrease in interest receivable 3 (1,441) 298 Net (increase) decrease in trading account securities 263 (206) Increase in other assets (15,934) (31,386) (56,944) Increase in accrued expenses and other liabilities 9,709 9,567 5,047 - ------------------------------------------------------------------------------------------------------------------------------- Total adjustments 19,888 3,319 (28,692) - ------------------------------------------------------------------------------------------------------------------------------- Net cash flows provided by operating activities 84,169 66,397 34,489 - ------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investment securities available-for-sale (616,442) (410,215) (479,585) Proceeds from maturities of investment securities available-for-sale 471,382 320,075 345,530 Proceeds from sales of investments securities available-for-sale 116,727 69,917 36,150 Net principal collected from (loans made to) customers: Commercial (127,423) (85,757) (54,717) Commercial and residential real estate, net of loans originated for sale (348,111) (231,610) (169,317) Consumer 27,753 21,084 (37,982) Residential real estate loans originated for sale (67,145) (26,775) (44,400) Proceeds from sale of mortgage loans 67,752 26,979 44,734 Proceeds from sale of premises and equipment 684 977 1,150 Purchase of premises and equipment (11,408) (10,527) (14,999) Cash and cash equivalents of acquired institutions, net of cash paid 305 Premium on the acquisition of deposits (3,107) - -------------------------------------------------------------------------------------------------------------------------------- Net cash flows used in investing activities (486,231) (325,852) (376,238) - -------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits, short-term and other borrowings: Noninterest-bearing demand deposits 27,745 (6,908) 36,749 Savings, NOW and money market deposits 50,358 (62,553) 49,459 Certificates of deposit $100,000 and over 9,869 106,979 (22,094) Other time deposits 59,878 4,034 79,107 Short-term borrowings 63,401 103,884 72,693 Other borrowings 251,480 96,444 111,891 Net (payments on) proceeds from medium term notes (2,000) 54,300 (6,000) Cash dividends paid (26,058) (25,012) (24,423) Common stock repurchased (46,702) (36,356) (44,906) Common stock reissued, net of shares used to convert subordinated debentures 16,641 9,574 6,858 - -------------------------------------------------------------------------------------------------------------------------------- Net cash flows provided by financing activities 404,612 244,386 259,334 - -------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 2,550 (15,069) (82,415) Cash and cash equivalents at beginning of period 179,243 194,312 276,727 - -------------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $181,793 $179,243 $194,312 ================================================================================================================================ The accompanying notes to consolidated financial statements are an integral part of this statement
35 OLD NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of Old National Bancorp ("ONB") and its wholly-owned affiliates and have been prepared in conformity with generally accepted accounting principles and prevailing practices within the banking industry. Such principles require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosures of contingent assets and liabilities at the date of the financial statements and amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. All significant intercompany transactions and balances have been eliminated. The statements have been restated to reflect mergers accounted for by the pooling-of-interests method of accounting. A summary of the more significant accounting and reporting policies used in preparing the statements is presented below. NATURE OF OPERATIONS ONB, a multi-bank holding company headquartered in Evansville, Indiana, operates in Indiana, Illinois, and Kentucky. Through its bank and non-bank affiliates, ONB provides to its customers an array of financial services including loan, deposit, trust, investment, and insurance products. INVESTMENT SECURITIES ONB has classified all investments as available-for-sale. Accordingly, these securities are recorded at fair value with the unrealized gains and losses, net of tax effect, recorded as a separate component of shareholders' equity. Realized gains and losses affect income and the prior fair value adjustments are reversed. Premiums and discounts are recognized in interest income using the interest method over the period to maturity. Gains and losses on the sale of available-for-sale securities are determined using the specific-identification method. LOANS Loans are stated at the principal amount outstanding. Interest income is accrued on the principal balances of loans outstanding, except on discounted loans which are recognized using other methods that generally approximate the interest method. A loan is generally placed on nonaccrual status when principal or interest becomes 90 days past due unless it is well secured and in the process of collection, or earlier when concern exists as to the ultimate collection of principal or interest. Interest accrued during the current year on such loans is reversed against earnings. Interest accrued in the prior year, if any, is charged to the allowance for loan losses. As an element of managing interest rate risk exposure, certain ONB affiliate banks pre-sell fixed rate mortgage loans to third parties. At December 31, 1998, approximately $2.1 million of such mortgage loans were held and carried at cost which approximated market value. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a level believed adequate by management to absorb potential losses in the consolidated loan portfolio. Management's evaluation of the adequacy of the allowance is an estimate based on reviews of individual loans, the risk characteristics of the various categories of loans given current economic conditions and other factors such as historical loss experience, the financial condition of the borrower, and fair market value of the collateral and growth of the loan portfolio. The allowance is increased through a provision charged to operating expense. Loans deemed to be uncollectible are charged to the allowance. Recoveries of loans previously charged off are added to the allowance. A loan is considered impaired when it is probable that contractual interest and principal payments will not be collected either for the amounts or by the dates as scheduled in the loan agreement. ONB's policy for recognizing income on impaired loans is to accrue interest unless a loan is placed on nonaccrual status. 36 PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation. Depreciation is charged to operating expense over the useful life of the assets, principally on the straight-line method. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. OTHER ASSETS Real estate properties acquired as a result of foreclosure are valued at the lower of the recorded investment in the related loan or fair value of the property less estimated cost to sell. The recorded investment is the sum of the outstanding principal loan balance, any accrued interest which has not been received, and acquisition cost associated with the loan. Any excess recorded investment over the fair value of the property received is charged to the allowance for loan losses. Any subsequent write-downs are charged to expense, as are the costs of operating the properties. Such costs are not material to ONB's results of operation. Total acquisition costs over the fair value of net assets acquired was $15.2 million at December 31, 1998 and is being amortized on the straight-line basis over periods ranging from 20 to 25 years. The recoverability of such assets and their carrying value are periodically evaluated. NET INCOME PER SHARE Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during each year, adjusted to reflect all stock dividends (Note 9) and all mergers accounted for as pooling-of-interests as if they had occurred at the beginning of the earliest year presented. Diluted net income per share is computed as above and assumes the conversion of outstanding subordinated debentures (Note 10). Below is a table reconciling basic and diluted earnings per share ("EPS").
Note 1 - Earnings Per Share Reconciliation ($ and shares in thousands except per share data) - ---------------------------------------------------------------------------------------------------------------------------------- For the Year Ended For the Year Ended For the Year Ended December 31, 1998 December 31, 1997 December 31, 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Per-Share Per-Share Per-Share Income Shares Amount Income Shares Amount Income Shares Amount - ---------------------------------------------------------------------------------------------------------------------------------- BASIC EPS Income from continuing operations available to common stockholders $74,135 45,909 $1.61 $68,083 46,179 $1.47 $62,687 47,747 $1.31 ===== ===== ===== EFFECT OF DILUTIVE SECURITIES Stock options -- 202 -- 163 -- 142 8% convertible debentures 1,138 1,863 1,469 2,358 1,477 2,370 - ---------------------------------------------------------------------------------------------------------------------------------- DILUTED EPS Income from continuing operations available to common stockholders + assumed conversions $75,273 47,974 $1.57 $69,552 48,700 $1.43 $64,164 50,259 $1.28 ==================================================================================================================================
INCOME TAXES Deferred tax assets and liabilities are recorded based on differences between the financial statement and tax bases of assets and liabilities at income tax rates currently in effect. For ONB, this results in a net deferred tax asset which relates principally to differences in the recognition of loan losses for book and tax purposes. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS In the ordinary course of business, ONB's affiliate banks have entered into off-balance-sheet financial instruments consisting of commitments to extend credit, commitments under credit card arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable. 37 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) STATEMENT OF CASH FLOWS DATA For the purpose of presentation in the accompanying Statement of Cash Flows, cash and cash equivalents are defined as cash, due from banks, and money market investments. Cash paid during the years ended December 31, 1998, 1997, and 1996, for interest was $227.2 million, $212.5 million, and $196.0 million, respectively. Total income tax payments during 1998, 1997, and 1996, were $24.2 million, $26.6 million, and $25.8 million, respectively. IMPACT OF ACCOUNTING CHANGES Effective January 1, 1998, ONB adopted the provisions of SFAS No. 130 "Reporting Comprehensive Income" which establishes standards for reporting and display of comprehensive income and its components. Effective January 1, 1998, ONB adopted SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" which establishes standards for reporting information on operating segments. The adoption of both above statements did not have a material impact on ONB's financial condition or its results of operations. In June 1998 the Financial Accounting Standards Board (FASB) issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." This statement requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The statement is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999 (January 1, 2000 for ONB). ONB doesn't expect the impact of this statement will be material to the results of operations or its financial position, due to its limited use of derivative instruments. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform with the 1998 presentation. Such reclassifications had no effect on net income. NOTE 2 - BUSINESS COMBINATIONS AND DISCONTINUED OPERATIONS Mergers-Pending On May 27, 1998, ONB and Southern Bancshares LTD ("Southern") of Carbondale, Illinois, executed a definitive merger agreement. ONB will issue common shares in exchange for all of the outstanding common shares of Southern. The transaction will be accounted for as a pooling-of-interests. As of December 31, 1998, Southern's financial statements reflected $254.6 million in total assets, net loans of $190.1 million, total deposits of $225.5 million and net income for the twelve months then ended of $2.4 million. This merger was consummated on January 29, 1999 and is included in these financial statements. On October 29, 1998, ONB and Dulaney Bancorp ("Dulaney") of Marshall, Illinois, executed a definitive merger agreement. ONB will issue common shares in exchange for all of the outstanding common shares of Dulaney. The transaction will be accounted for as a pooling-of-interests. As of December 31, 1998, Dulaney's financial statements reflected $38.9 million in total assets, net loans of $19.5 million, total deposits of $31.8 million and net income for the twelve months then ended of $339 thousand. This merger was consummated on February 5,1999 but is not included in these financial statements due to materiality. Discontinued Operations In April 1998, ONB announced it would look at exit strategies from its sub-prime lending affiliate, Consumer Acceptance Corporation (CAC). During June 1998, ONB finalized the sale of CAC's sub-prime auto loans, which closed in July 1998. ONB has accounted for this entity as discontinued operations on the consolidated financial statements. Net assets of the entity which were included in other assets were $79.2 million at December 31, 1997. The loss on discontinued operations included interest expense of $2.6 million in 1998, $2.3 million in 1997, and $1.1 million in 1996. Interest expense was directly attributable to the debt associated to this business unit. Income (loss) from discontinued operations for the years ended December 31, 1998, 1997, and 1996 were as follows ($ in thousands): 38 - --------------------------------------------------------------- Years Ended December 31 - --------------------------------------------------------------- 1998 1997 1996 - --------------------------------------------------------------- Income (loss) before taxes from operations of discontinued operations $(7,943) $(8,346) $816 Income tax expense (benefit) (3,183) (3,341) 322 - --------------------------------------------------------------- Income (loss) from operations of discontinued operations (4,760) (5,005) 494 - --------------------------------------------------------------- Loss before taxes from disposal of discontinued operations (8,489) - - Income tax benefit (3,395) - - - --------------------------------------------------------------- Loss from disposal of discontinued operations (5,094) - - - --------------------------------------------------------------- Income (loss) from discontinued operations $(9,854) $(5,005) $494 =============================================================== Income (loss) from discontinued operations per common share Basic $ (0.21) $(0.10) $0.01 Diluted $ (0.21) $(0.10) $0.01 ===============================================================
NOTE 3 - INVESTMENT SECURITIES The following tables summarize the amortized cost and fair value of the investment securities portfolio at December 31, 1998 and 1997, and the corresponding amounts of unrealized gains and losses therein ($ in thousands): - --------------------------------------------------------------------------------------------------- Available-for-Sale - --------------------------------------------------------------------------------------------------- Amortized Unrealized Unrealized Fair December 31, 1998 Cost Gains Losses Value - --------------------------------------------------------------------------------------------------- U.S. Treasury $91,065 $1,682 ($277) $92,470 U.S. Government agencies and corporations 270,747 5,648 (72) $276,323 Mortgage-backed securities 713,468 6,577 (711) $719,334 State and political subdivisions 472,461 18,890 (225) $491,126 Other securities 57,421 -- -- $57,421 - --------------------------------------------------------------------------------------------------- Total $1,605,162 $32,797 ($1,285) $1,636,674 =================================================================================================== December 31, 1997 U.S. Treasury $118,125 $1,130 ($77) $119,178 U.S. Government agencies and corporations 254,322 3,740 (396) $257,666 Mortgage-backed securities 718,956 9,293 (834) $727,415 State and political subdivisions 441,030 15,067 (149) $455,948 Other securities 46,723 -- -- $46,723 - --------------------------------------------------------------------------------------------------- Total $1,579,156 $29,230 ($1,456) $1,606,930 ===================================================================================================
The amortized cost and fair value of the investment securities portfolio at December 31, 1998 and 1997, are shown below by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Proceeds from sales of investment securities available-for-sale were $116.7 million in 1998 and $69.9 million in 1997. In 1998 realized gains and losses were $0.3 million and $0.0 million, respectively. In 1997 realized gains and losses were $0.6 million and $0.2 million. At December 31, investment securities were pledged to secure public and other funds with a carrying value of $638 million in 1998 and $595 million in 1997.
($ in thousands) - --------------------------------------------------------------------------------------------------- 1998 1997 - --------------------------------------------------------------------------------------------------- Amortized Fair Amortized Fair Cost Value Cost Value - --------------------------------------------------------------------------------------------------- Maturity Within one year $250,969 $252,694 $199,470 $200,037 One to five years 889,793 910,156 931,698 948,380 Five to ten years 326,045 334,457 363,923 373,079 Beyond ten years 138,355 139,367 84,065 85,434 - --------------------------------------------------------------------------------------------------- Total $1,605,162 $1,636,674 $1,579,156 $1,606,930 ===================================================================================================
39 NOTE 4 - LOANS The composition of loans at December 31, 1998 and 1997, by lending classification was as follows ($ in thousands): December 31, - ----------------------------------------------------------------------- 1998 1997 - ----------------------------------------------------------------------- Commercial $1,007,447 $879,888 Economic development bonds 20,345 22,953 Commercial real estate 944,813 762,774 Residential real estate 1,688,572 1,523,425 Consumer credit, net 693,079 726,801 - ----------------------------------------------------------------------- Total loans $4,354,256 $3,915,841 ======================================================================= Through its affiliates, ONB makes loans to customers in various industries including manufacturing, agribusiness, transportation, mining, wholesaling, and retailing, predominately in its tri- state region. The loan portfolio is diversified with no single industry exceeding 10% of the total. Executive officers and directors of ONB and significant subsidiaries and their related interests are loan customers of ONB's affiliate banks in the normal course of business. These loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with unrelated parties and involve no unusual risk of collectibility. An analysis of the 1998 activity of these loans is as follows ($ in thousands): - ------------------------------------------------------------------------ Balance, January 1, 1998 $97,697 New loans 225,828 Repayments (208,598) Officer and director changes 76 - ------------------------------------------------------------------------ Balance, December 31, 1998 $115,003 ========================================================================
NOTE 5 - ALLOWANCE FOR LOAN LOSSES Activity in the allowance for loan losses during the years 1998, 1997, and 1996 was as follows ($ in thousands): - ------------------------------------------------------------------------------------- December 31, - ------------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------- Balance at beginning of year $49,053 $43,527 $42,857 Additions: Provision charged to expense 12,160 13,562 11,082 Deductions: Loans charged off 12,938 12,594 14,866 Recoveries (3,572) (4,558) (4,454) - ------------------------------------------------------------------------------------- Net charge-offs 9,366 8,036 10,412 - ------------------------------------------------------------------------------------- Balance at end of year $51,847 $49,053 $43,527 =====================================================================================
At December 31, 1998, the recorded investment in loans for which impairment has been recognized in accordance with SFAS Nos. 114 and 118 was $7.5 million with no related allowance and $42.0 million with $9.0 million of related allowance. At December 31, 1997, the recorded investment in loans for which impairment has been recognized in accordance with SFAS Nos. 114 and 118 was $8.2 million with no related allowance and $46.0 million with $11.5 million of related allowance. For the year ended December 31, 1998, the average balance of impaired loans was $51.7 million, for which $3.0 million of interest was recorded. For the year ended December 31, 1997, the average balance of impaired loans was $56.5 million, for which $3.8 million of interest was recorded. 40 NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized in the consolidated balance sheet, for which it is practicable to estimate fair value. The following methods and assumptions were used to estimate the fair value of each type of financial instrument. CASH, DUE FROM BANKS AND MONEY MARKET INVESTMENTS For these instruments, the carrying amount is a reasonable estimate of fair value. INVESTMENT SECURITIES For investment securities, fair values are based on quoted market prices, if available. For securities where quoted prices are not available, fair value is estimated based on market prices of similar securities. LOANS The fair value of loans is estimated by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. DEPOSITS The fair value of noninterest-bearing demand deposits and savings, NOW, and money market deposits is the amount payable as of the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using rates currently offered for deposits with similar remaining maturities. SHORT-TERM BORROWINGS Federal funds purchased and securities sold under agreements to repurchase generally have an original term to maturity of 30 days or less and, therefore, their carrying amount is a reasonable estimate of fair value. OTHER BORROWINGS The fair value of FHLB borrowings and medium term notes is estimated using rates currently offered for obligations with similar remaining maturities. The fair value of subordinated debentures is estimated using rates currently available to ONB for debt with similar terms and remaining maturities. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS Loan commitments and standby letters of credit are generally short-term and therefore, their carrying amount is a reasonable estimate of their fair value. The estimated carrying and fair values of ONB's financial instruments at December 31, 1998, are as follows ($ in thousands): - ----------------------------------------------------------------- Carrying Fair Value Value - ----------------------------------------------------------------- Financial Assets: Cash, due from banks and money market investments $ 181,793 181,793 Investment securities 1,636,674 1,636,674 Loans, net 4,302,409 4,344,254 Financial Liabilities: Deposits 4,668,858 4,692,469 Short-term borrowings 506,320 506,320 Other borrowings 629,868 643,278 Off-Balance-Sheet Financial Instruments: Commitments to extend credit 1,019,877 1,019,877 Letters of credit 36,557 36,557 - ----------------------------------------------------------------- 41 NOTE 7 - INCOME TAXES Following is a summary of the major items comprising the difference in taxes computed at the federal statutory rate and as recorded in the consolidated statement of income: - ---------------------------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------- Provision at statutory rate 35.0% 35.0% 35.0% Tax exempt income (9.7) (8.5) (9.3) State income taxes 3.5 3.9 3.5 Other, net (0.3) (0.5) 0.4 - ---------------------------------------------------------------- Actual tax rate 28.5% 29.9% 29.6% ================================================================ The provision for income taxes consists of the following components ($ in thousands): - --------------------------------------------------------------- 1998 1997 1996 - --------------------------------------------------------------- Income taxes currently payable - federal$21,277 $21,909 $21,264 Income taxes currently payable - state 5,469 5,355 4,833 Deferred income taxes related to: Provision for loan losses (1,889) (2,796) (1,055) Other, net (1,862) 1,189 1,573 - --------------------------------------------------------------- Deferred income tax expense (benefit) (3,751) (1,607) 518 - --------------------------------------------------------------- Provision for income taxes $22,995 $25,657 $26,615 =============================================================== Provision Detail: Continuing operations $29,573 $28,998 $26,293 Discontinued operations (6,578) (3,341) 322 - --------------------------------------------------------------- Total $22,995 $25,657 $26,615 =============================================================== Significant components of ONB's net deferred tax assets at December 31 are as follows ($ in thousands): - --------------------------------------------------------- 1998 1997 - --------------------------------------------------------- Deferred Tax Assets: Allowance for loan losses, net of recapture $20,144 $18,255 Benefit plan accruals 4,298 4,225 Other, net 2,391 121 - --------------------------------------------------------- Total deferred tax assets 26,833 22,601 - --------------------------------------------------------- Deferred Tax Liabilities: Premises and equipment (2,140) (2,862) Accretion on investment securities (862) (1,021) Unrealized gain on available- for-sale investment securities (12,414) (11,105) Lease receivable, net (3,439) (2,078) - --------------------------------------------------------- Total deferred tax liabilities (18,855) (17,066) - --------------------------------------------------------- Net deferred tax assets $7,978 $5,535 ========================================================= NOTE 8 - EMPLOYEE BENEFIT PLANS RETIREMENT PLAN ONB has a noncontributory defined benefit retirement plan covering substantially all full-time employees. Retirement benefits are based on years of service and compensation during the highest paid five years of employment. ONB's policy is to contribute at least the minimum funding requirement determined by the plan's actuary. The following table sets forth the plan's funded status and the amount recognized in the consolidated balance sheet at December 31, 1998, 1997, and 1996 ($ in thousands): 42 - ---------------------------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------- Change in benefit obligation Benefit obligation at beginning of year $27,747 $24,356 $20,720 Service cost 2,353 2,169 1,900 Interest cost 2,070 1,884 1,720 Acquisitions - 262 641 Benefits paid (4,022) (2,325) (1,907) Actuarial loss 4,085 1,400 1,282 - ---------------------------------------------------------------- Benefit obligation at end of year 32,233 27,746 24,356 - ---------------------------------------------------------------- Change in plan assets Fair value of plan assets at beginning of year 24,138 21,859 19,943 Actual return on plan assets 5,359 4,122 1,707 Employer contributions 3,305 188 946 Transfers 84 447 1,328 Benefits paid (4,022) (2,325) (1,907) Administrative expenses (170) (153) (158) - ---------------------------------------------------------------- Fair value of plan assets at end of year 28,694 24,138 21,859 - ---------------------------------------------------------------- Funded status (3,539) (3,608) (2,497) Unrecognized net actuarial loss 1,106 446 1,128 Unrecognized transition asset (2,127) (2,488) (2,850) Unrecognized prior service cost 388 445 887 - ---------------------------------------------------------------- Accrued benefit cost $ (4,172) $(5,205)$(3,332) ================================================================ Weighted-average assumptions as of December 31, Discount rate 8.00% 7.75% Expected return on plan assets 8.00% 8.00% Rate of compensation increase 5.00% 5.00% The net pension expense and its components were as follows ($ in thousands): - ----------------------------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------- Service cost $ 2,353 $ 2,169 $1,900 Interest cost 2,070 1,884 1,720 Expected return on plan assets (1,866) (1,693) (1,691) Amortization of prior service cost 58 58 86 Amortization of transitional asset (362) (362) (362) Recognized actuarial loss 18 5 - - ----------------------------------------------------------------- Net pension expense $ 2,271 $ 2,061 $1,653 ================================================================= PROFIT SHARING PLAN ONB has a profit sharing plan for all employees who have completed one year of service. Contributions to the plan are made when certain consolidated profit conditions are met. Additionally, employees may participate by contributing a percentage of their salary, a portion of which is matched by ONB. ONB's profit sharing expense for the years 1998, 1997, and 1996 was $4.5 million, $4.5 million, and $4.0 million, respectively. RESTRICTED STOCK PLAN ONB has a restricted stock plan which covers certain officers of ONB and its affiliates. Shares are earned each year based on the achievement of net income targets. Shares vest over a four-year period. Unvested shares are subject to certain restrictions and risk of forfeiture by the participants. In accordance with the plan, shares vesting were 49,722 in 1998, 42,237 in 1997, and 34,251 in 1996. Expense recorded in 1998, 1997, and 1996 was $1.9 million, $1.2 million, and $0.8 million, respectively. 43 NOTE 9 - SHAREHOLDERS' EQUITY STOCK DIVIDEND A 5% stock dividend was declared on December 10, 1998, and distributed on January 28, 1999. On April 15, 1999,a three-for- two stock split was declared to shareholders of record on May 3, 1999. The dividend was paid on May 24, 1999. All average share and per share amounts have been retroactively adjusted to reflect this stock dividend and stock split. DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN ONB has a dividend reinvestment and stock purchase plan under which common shares issued may be either repurchased shares or authorized and previously unissued shares. As of December 31, 1998, 500 thousand authorized and unissued common shares were reserved for issuance under the plan. SHAREHOLDER RIGHTS PLAN ONB has adopted a Shareholder Rights Plan whereby one right was distributed for each outstanding share of ONB's common stock. The rights become exercisable on the tenth day following a public announcement that a person has acquired or intends to acquire beneficial ownership of 20% or more of ONB's outstanding common stock. Upon exercising the rights, the holder is entitled to buy 1/100 of a share of Junior Preferred Stock at $60 for every right held. Upon the occurrence of certain events, the rights may be redeemed by ONB at a price of $.01 per right. In the event an acquiring party becomes the beneficial owner of 20% or more of ONB's outstanding shares, rights holders (other than the acquiring person) may purchase two shares of ONB common stock for the price of one share at the then market price. If ONB is acquired and is not the surviving corporation, or if ONB survives a merger but has all or part of its common stock exchanged, each rights holder will be entitled to acquire shares of the acquiring company with a value of two times the then exercise price of the rights for each right held. NOTE 10 - FINANCING ACTIVITIES LINES OF CREDIT At December 31, 1998, ONB had $80.0 million in unsecured lines of credit with unaffiliated banks with $72.8 million unused. The lines bear interest at the bank's federal funds rate plus 60 to 80 basis points. During the years 1998, 1997, and 1996, the average interest rates on the lines were 6.25%, 6.26%, and 6.17%, respectively. The lines of credit include various arrangements to maintain compensating balances or pay fees to maintain the line. FEDERAL HOME LOAN BANK At December 31, 1998, ONB had $511.6 million borrowed from various Federal Home Loan Banks ("FHLB"). Floating-rate borrowings totaled $53.3 million and will mature in 1999. The remaining borrowings have a fixed interest rate and mature between 1999 and 2018. The weighted average rates of the FHLB borrowings were 5.25% and 5.96% at December 31, 1998 and 1997, respectively. A portion of these borrowings was secured by specific mortgage loans and securities which have a current book values of approximately $465 million and $48 million, respectively. FHLB requires collateral values up to 167% of the amount borrowed. MEDIUM TERM NOTES ONB has registered Series A Medium Term Notes in the principal amount of $50 million. The series has been fully issued. At December 31, 1998, a total of $32 million of the notes were outstanding with maturities ranging from two to five years and fixed interest rates ranging from 6.70% to 7.10%. ONB also has registered Medium Term Notes in the principal amount of $150 million. These notes may be issued with maturities of nine months or more and rates may either be fixed or variable. At December 31, 1998, a total of $64.3 million of the notes were outstanding, with maturities ranging from four to nine years and fixed interest rates from 6.40% to 7.03% SUBORDINATED DEBENTURES ONB has outstanding $22.0 million of 8% convertible subordinated debentures outstanding which are due September 15, 2012, unless previously converted or redeemed. The debentures are convertible into shares of ONB common stock at a conversion rate of 77.519 shares per $1,000 principal amount of debentures. During 1998, $8.4 million principal amount of debentures was converted into 415,597 shares of ONB common stock. Interest on the debentures is payable March 15 and September 15 of each year. The debentures are redeemable, in whole or in part, at the option of ONB at a premium to par value. Debenture holders are entitled to an annual sinking fund beginning September 15, 1998, of $2.5 million less conversions and redemptions. The debentures are subordinated in right of payment to all senior indebtedness of ONB. At December 31, 1998, 1.7 million authorized and unissued common shares were reserved for conversion of the remaining debentures. 44 NOTE 11 - INTEREST RATE CONTRACTS ONB uses interest rate contracts such as interest swaps and caps to manage its interest rate risk. These contracts are designated as hedges of specific assets and liabilities. The net interest receivable or payable on swaps is accrued and recognized as an adjustment to the interest income or expense of the 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, 1998, ONB had an interest rate swap with a notional value of $20 million. The contract is an exchange of interest payments with no effect on the principal amounts of the underlying hedged liability. The fair value of the swap contract was $0.3 million at December 31, 1998. ONB pays the counterparty a variable rate based on three-month LIBOR and receives a fixed rate of 6.50%. The contract terminates on or prior to March 13, 2008. At December 31, 1998, ONB had an interest rate cap agreement ("cap") with a notional amount of $8 million with no fair value. This cap is indexed to LIBOR with a strike price of 5.00% and matures in 1999. The carrying value at December 31, 1998, was $0.1 million. ONB is exposed to losses if a counterparty fails to make its payments under a contract in which ONB is in the receiving position. Although collateral or other security is not obtained, ONB minimizes its credit risk by monitoring the credit standing of the couterparties and anticipates that the counterparties will be able to fully satisfy their obligation under the agreements. NOTE 12 - COMMITMENTS AND CONTINGENCIES LEASES ONB rents certain premises and equipment under operating leases which expire at various dates. Many of these leases require ONB to pay property taxes, insurance premiums, maintenance, and other costs. In some cases, rentals are subject to increase in relation to a cost-of-living index. Total rental expense was $4.0 million in 1998, $3.9 million in 1997, and $3.9 million in 1996. Following is a summary of future minimum lease commitments ($ in thousands): 1999 $3,168 2002 $2,179 2000 2,550 2003 1,679 2001 2,363 2004 and after 1,288 LETTERS AND LINES OF CREDIT In the normal course of business, ONB's banking affiliates have entered into various agreements to extend credit, such as loan commitments of $1,019.9 million, including $584.0 million of short-term commitments with fixed-rates, and letters of credit of $36.6 million at December 31, 1998. These commitments are not reflected in the consolidated financial statements. No material losses are expected to result from these transactions. LITIGATION At December 31, 1998, various legal actions and proceedings were pending against ONB and its affiliate banks. These actions and proceedings are incidental to the banking business and are not expected to have a material adverse effect upon the consolidated financial position or results of operations of ONB or its affiliates. NOTE 13 - REGULATORY RESTRICTIONS RESTRICTIONS ON CASH AND DUE FROM BANKS ONB's affiliate banks are required to maintain reserve balances on hand and with the Federal Reserve Bank which are noninterest bearing and unavailable for investment purposes. The reserve balances at December 31, 1998 and 1997, were $24.1 million and $27.3 million, respectively. RESTRICTIONS ON TRANSFERS FROM AFFILIATE BANKS Regulations limit the amount of dividends an affiliate bank can declare in any year without obtaining prior regulatory approval. At December 31, 1998, affiliate banks could pay aggregate dividends to ONB of approximately $7.1 million without prior regulatory approval. Such approval has been regularly provided as all affiliate banks exceeded the regulatory definition of well-capitalized. CAPITAL ADEQUACY For additional information on capital adequacy see Table 16 in Management's Discussion and Analysis on page 29. 45 NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS The following are the condensed parent company only financial statements of Old National Bancorp ($ in thousands) NOTE 14 - PARENT COMPANY FINANCIAL STATEMENTS
OLD NATIONAL BANCORP (PARENT COMPANY ONLY) CONDENSED BALANCE SHEET - --------------------------------------------------------------------------------------------------- December 31, - --------------------------------------------------------------------------------------------------- 1998 1997 - --------------------------------------------------------------------------------------------------- ASSETS Deposits in affiliate banks $925 $598 Investment in affiliates: Banks, including purchase accounting intangible assets of $7,240 in 1998 and $7,927 in 1997 541,103 546,453 Non-banks 15,775 18,778 Advances to affiliates 8,777 76,888 Other assets 90,783 13,078 - --------------------------------------------------------------------------------------------------- TOTAL ASSETS $657,363 $655,795 =================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Short-term borrowings $7,250 $17,008 Other liabilities 12,222 9,471 Convertible subordinated debentures 21,963 30,407 Medium term notes 96,300 98,300 Shareholders' equity 519,628 500,609 - --------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $657,363 $655,795 ===================================================================================================
OLD NATIONAL BANCORP (PARENT COMPANY ONLY) CONDENSED STATEMENT OF INCOME - --------------------------------------------------------------------------------------------------- Years Ended December 31, - --------------------------------------------------------------------------------------------------- 1998 1997 1996 - --------------------------------------------------------------------------------------------------- INCOME Dividends from affiliates $88,593 $83,445 $50,208 Other income 2,851 380 2,378 Other income from affiliates 11,066 12,631 5,918 - --------------------------------------------------------------------------------------------------- TOTAL INCOME 102,510 96,456 58,504 - --------------------------------------------------------------------------------------------------- EXPENSE Interest on borrowings 9,653 10,283 7,014 Amortization of intangibles 687 686 707 Other expenses 14,116 10,296 9,450 - --------------------------------------------------------------------------------------------------- TOTAL EXPENSE 24,456 21,265 17,171 - --------------------------------------------------------------------------------------------------- Income before income taxes and equity in undistributed earnings of affiliates 78,054 75,191 41,333 Income tax benefit (4,290) (3,415) (3,541) - --------------------------------------------------------------------------------------------------- Income before equity in undistributed earnings of affiliates 82,344 78,606 44,874 Equity in undistributed earnings of affiliates (18,063) (15,528) 18,307 - --------------------------------------------------------------------------------------------------- NET INCOME $64,281 $63,078 $63,181 ===================================================================================================
46
OLD NATIONAL BANCORP (PARENT COMPANY ONLY) CONDENSED STATEMENT OF CASH FLOWS - --------------------------------------------------------------------------------------------------- Years Ended December 31, - --------------------------------------------------------------------------------------------------- 1998 1997 1996 - --------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $64,281 $63,078 $63,181 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 435 275 201 Amortization of intangible assets 687 686 707 (Increase) decrease in other assets (77,945) (4,406) 35,288 Increase (decrease) in other liabilities 2,751 3,452 (332) Equity in undistributed earnings of affiliates 18,063 15,528 (18,307) - --------------------------------------------------------------------------------------------------- Total adjustments (56,009) 15,535 17,557 - --------------------------------------------------------------------------------------------------- Net cash flows provided by operating activities 8,272 78,613 80,738 - --------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Net advances to affiliates 60,125 (30,295) (59,908) Purchase of premises and equipment (193) (1,987) (283) - --------------------------------------------------------------------------------------------------- Net cash flows provided by (used in) investing activit 59,932 (32,282) (60,191) CASH FLOWS FROM FINANCING ACTIVITIES Net (payments on) proceeds from short-term borrowings (9,758) (50,198) 48,652 Net (payments on) proceeds from medium term notes (2,000) 54,300 (6,000) Cash dividends paid (26,058) (25,012) (24,423) Common stock repurchased (46,702) (36,356) (44,906) Common stock reissued, net of shares used to convert subordinated debentures 16,641 9,574 6,858 - --------------------------------------------------------------------------------------------------- Net cash flows used in financing activities (67,877) (47,692) (19,819) - --------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 327 (1,361) 728 Cash and cash equivalents at beginning of period 598 1,959 1,231 - --------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $925 $598 $1,959 ===================================================================================================
NOTE 15 - SEGMENT INFORMATION ONB's community banks have been aggregated into one reportable segment: community banking. Our community banks provide a wide range of financial services as discussed on page 12 and 13 of Management's Discussion & Analysis. The accounting policies of the segment are the same as those described in Note 1. Intersegment sales and transfers are not significant. Summarized financial information concerning ONB's segments is shown in the following table, based on continuing operations. The other column includes ONB's insignificant non-bank affiliates and intercompany eliminations. - ------------------------------------------------------------ Community Banking Other Total - ------------------------------------------------------------ 1998 Net interest income $228,243 $(3,329) $224,914 Income tax expense(benefit) 34,458 (4,885) 29,573 Segment profit (loss) 81,133 (6,998) 74,135 Total assets 6,329,380 87,231 6,416,611 ============================================================ 1997 Net interest income $225,642 $(7,472) $218,170 Income tax expense(benefit) 34,060 (5,062) 28,998 Segment profit (loss) 74,824 (6,741) 68,083 Total assets 5,852,756 80,565 5,933,321 ============================================================ 1996 Net interest income $214,656 $(5,276) $209,380 Income tax expense(benefit) 31,587 (5,294) 26,293 Segment profit (loss) 70,413 (7,726) 62,687 Total assets 5,551,623 50,837 5,602,460 ============================================================ 47 EX-27 3
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM OLD NATIONAL BANCORP'S SUPPLEMENT TO THE 1998 ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1000 12-MOS 12-MOS 12-MOS DEC-31-1998 DEC-31-1997 DEC-31-1996 DEC-31-1998 DEC-31-1997 DEC-31-1996 160,161 155,579 187,614 5,287 12,585 3,140 16,345 11,079 3,558 0 0 0 1,636,674 1,606,930 1,573,708 0 0 0 0 0 0 4,354,256 3,915,841 3,627,592 51,847 49,053 43,527 6,416,611 5,933,321 5,602,460 4,668,858 4,521,010 4,479,357 506,320 442,685 339,035 91,920 80,185 65,419 629,868 388,832 238,245 0 0 0 0 0 0 30,388 29,159 28,480 489,257 471,450 451,955 6,416,611 5,933,321 5,602,460 357,675 332,075 310,813 97,634 102,048 91,356 1,219 915 3,500 456,528 435,038 405,669 180,724 176,789 169,847 231,614 216,868 196,289 224,914 218,170 209,380 12,160 13,562 11,082 340 379 885 29,294 25,403 25,260 103,708 97,081 88,980 74,135 68,083 62,687 (9,854) (5,005) 494 0 0 0 64,281 63,078 63,181 1.61 1.47 1.31 1.57 1.43 1.28 4.17 4.31 4.42 17,034 11,985 13,162 5,389 4,628 3,553 116 248 746 105,006 113,623 107,100 49,053 43,527 42,857 12,938 12,594 14,866 3,572 4,558 4,454 51,847 49,053 43,527 51,547 49,053 43,527 0 0 0 0 0 0
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