-----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, GgXx84f5a1ewJ8H9uWDWLvdb8rV469y//CNuqg6pAffRp5/CkZyy4aaD0TFvspin xGUeRZ9iShhyAqJhkZl9ug== 0000707179-98-000004.txt : 19980401 0000707179-98-000004.hdr.sgml : 19980401 ACCESSION NUMBER: 0000707179-98-000004 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD 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: 10-K405 SEC ACT: SEC FILE NUMBER: 000-10888 FILM NUMBER: 98581375 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 10-K405 1 UNITED STATES SECURITIES & EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from ________________ to ________________ Commission file Number 0-10888 OLD NATIONAL BANCORP (Exact name of the Registrant as specified in its charter) INDIANA 35-1539838 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 420 Main Street, Evansville, Indiana 47708 (Address of principal executive offices) (Zip Code) The Registrant's telephone number, including area code: (812) 464-1434 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, No Par Value Preferred Stock Purchase Rights The Registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and has been subject to such filing requirements for the past 90 days. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] The aggregate market value (average bid price) of the Registrant's voting common stock held by non-affiliates of the Registrant as of February 28, 1998 was approximately $1,278 million. The total number of shares of Registrant's common stock outstanding as of that date was 27,341,736. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's annual report to shareholders for the year ended December 31, 1997 is incorporated by reference into Part II of this Form 10-K. The Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held April 16, 1998 is incorporated by reference into Part III of this Form 10-K. OLD NATIONAL BANCORP 1997 ANNUAL REPORT ON FORM 10-K Table of Contents PART I. PAGE Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . 8 Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 8 Item 4. Submission of Matters to a Vote of Security Holders. . . . . 9 PART II. Item 5. Market for Registrant's Common Stock and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . 9 Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . 9 Item 8. Financial Statements and Supplementary Data. . . . . . . . . 9 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . 9 PART III. Item 10. Directors and Executive Officers of the Registrant . . . . . 9 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . .10 Item 12. Security Ownership of Certain Beneficial Owners and Management. . . . . . . . . . . . . . . . . . . . . . . .10 Item 13. Certain Relationships and Related Transactions . . . . . . .10 PART IV. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . .10 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 INDEX OF EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . . . . .15 2 OLD NATIONAL BANCORP 1997 ANNUAL REPORT ON FORM 10-K PART I Item 1. BUSINESS Old National Bancorp (the "Registrant") is a multibank holding company incorporated in the State of Indiana and maintains its principal executive office in Evansville, Indiana. As a bank holding company, the Registrant engages in banking and related activities authorized under the federal Bank Holding Company Act of 1956, as amended. Through its nonbank affiliates, the Registrant provides services incidental to the business of banking. Since its formation, the Registrant has acquired seventeen banks and two thrifts located in Indiana; six banks located in Kentucky; and ten banks and one thrift located in Illinois. Banking Affiliates As of December 31, 1997, the Registrant's affiliate banks operated 112 banking offices throughout Indiana, Illinois, and Kentucky. The following chart lists the affiliate banks by state:
Indiana Kentucky Illinois - ------------------------------ ---------------------------- ------------------------ Old National Bank (Evansville) First State Bank(Greenville) First National Bank Bank of Western Indiana (Covington) City National Bank (Fulton) (Harrisburg) First Citizens Bank & Farmers Bank & Trust Co. Peoples National Bank Trust Company (Greencastle) (Madisonville) (Lawrenceville) Merchants National Bank (Terre Haute) Morganfield National Bank Security Bank & Trust Co. Security Bank & Trust Co. (Vincennes) Farmers Bank & Trust Co. (Mt. Carmel) United Southwest Bank (Washington) (Henderson) Palmer-American National Bank Dubois County Bank (Jasper) (Danville) Orange County Bank (Paoli) First National Bank (Oblong) Citizens National Bank (Tell City) The National Bank of Carmi Workingmens/ONB Bank (Bloomington)
The Registrant's affiliate banks are engaged in a wide range of commercial and consumer banking activities, including accepting demand, savings and time deposits; making commercial, consumer and real estate loans; money management services; and providing other services relating to the general banking business. Certain of the Registrant's affiliated entities also offer electronic data processing, brokerage and correspondent banking services; issue credit cards; originate, market and service mortgage loans; and rent safe deposit facilities. 3 Nonbank Affiliates Old National Service Corporation provides data processing services primarily to our affiliates. Indiana Old National Insurance Company reinsures credit life, accident and health insurance. Fiduciary and trust services are offered through three trust companies in Indiana, Kentucky and Illinois. Old National Realty owns certain properties in Evansville, IN, leased by affiliates. Consumer Acceptance Corporation operates consumer finance offices primarily in Indiana. Various subsidiaries of affiliate banks sell insurance products including property and casualty, life and disability. Supervision and Regulation The Registrant is registered as a bank holding company and is subject to the supervision of, and regulation by, the Board of Governors of the Federal Reserve System ("Federal Reserve") under the Bank Holding Company Act of 1956, as amended ("BHC Act"). The Federal Reserve had issued regulations under the BHC Act requiring a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. It is the policy of the Federal Reserve that, pursuant to this requirement, a bank holding company should stand ready to use its resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity. The BHC Act requires the prior approval of the Federal Reserve to acquire more than a 5% voting interest of any bank or bank holding company. Additionally, the BHC Act restricts the Registrant's nonbanking activities to those which are determined by the Federal Reserve to be closely related to banking and a proper incident thereto. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), a bank holding company is required to guarantee the compliance of any insured depository institution subsidiary that may become "undercapitalized" (as defined in FDICIA) with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency. Bank holding companies are required to comply with the Federal Reserve's risk-based capital guidelines. The Federal Deposit Insurance Corporation ("FDIC") and the Office of the Comptroller of the Currency ("OCC") have adopted risk-based capital ratio guidelines to which depository institutions under their respective supervision are subject. The guidelines 4 establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations. Risk-based capital ratios are determined by allocating assets and specified off-balance sheet commitments to four risk weighted categories, with higher levels of capital being required for the categories perceived as representing greater risk. All of the Registrant's affiliate banks exceeded the risk-based capital guidelines of the FDIC and OCC as of December 31, 1997. For the Registrant's regulatory capital ratios and regulatory requirements as of December 31, 1997 see the information incorporated by reference in Part II, Item 7. The Federal Reserve and FDIC have issued regulations requiring that any bank holding company or bank which has significant exposure to market risk must measure such risk using its own internal model, subject to the requirements contained in the regulations, and must maintain adequate capital to support that exposure. The regulations apply to any bank holding company or bank whose trading activity equals 10% or more of its total assets, or whose trading activity equals $1 billion or more. Examiners may require a bank holding company or bank that does not meet the applicability criteria to comply with the capital requirements if necessary for safety and soundness purposes. The regulations contain supplemental rules to determine qualifying and excess capital, calculate risk-weighted assets, calculate market risk equivalent assets and calculate risk-based capital ratios adjusted for market risk. The Registrant's affiliate banks are subject to the provisions of the National Bank Act or the banking laws of their respective states and are supervised, regulated and examined by the OCC or the respective state banking agency, and are subject to the rules and regulations of the OCC, Federal Reserve, and the FDIC. A substantial portion of the Registrant's cash revenue is derived from dividends paid to it by its affiliate banks. These dividends are subject to various legal and regulatory restrictions as summarized in Note 12. Both federal and state law extensively regulate various aspects of the banking business, such as reserve requirements, truth-in-lending and truth-in-savings disclosure, equal credit 5 opportunity, fair credit reporting, trading in securities and other aspects of banking operations. Insured state-chartered banks are prohibited under FDICIA from engaging as principal in activities that are not permitted for national banks, unless (i) the FDIC determines that the activity would pose no significant risk to the appropriate deposit insurance fund, and (ii) the bank is, and continues to be, in compliance with all applicable capital standards. Branching by the Registrant's affiliate banks in Indiana, Kentucky and Illinois is subject to the jurisdiction, and requires the prior approval of, the bank's primary federal regulatory authority and, if the branching bank is a state bank, of the respective state's banking agency. The Registrant and its affiliate banks are subject to the Federal Reserve Act, which restricts financial transactions between banks and affiliated companies. The statute limits credit transactions between banks and affiliated companies. The statute limits credit transactions between a bank and its executive officers and its affiliates, prescribes terms and conditions for bank affiliate transactions deemed to be consistent with safe and sound banking practices, and restricts the types of collateral security permitted in connection with a bank's extension of credit to an affiliate. FDICIA accomplished a number of sweeping changes in the regulation of depository institutions, including the Registrant's affiliated banks. FDICIA requires, among other things, federal bank regulatory authorities to take "prompt corrective action" with respect to banks which do not meet minimum capital requirements. FDICIA further directs that each federal banking agency prescribe standards for depository institutions and depository institution holding companies relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, management compensation, a maximum ratio of classified assets to capital, minimum earnings sufficient to absorb losses, a minimum ratio of market value to book value of publicity traded shares and such other standards as the agency deems appropriate. The deposits of Registrant's affiliate banks are insured up to $100,000 per insured account by the Bank Insurance fund ("BIF"), which is administered by the FDIC, except for deposits acquired in connection with affiliations with savings associations, which deposits are insured by the Savings 6 Association Insurance fund ("SAIF"). Accordingly, the Registrant's affiliated banks pay deposit insurance premiums to both BIF and SAIF. The Riegle-Neal Community Development and Regulatory Improvement Act of 1994 ("Act") contains seven titles pertaining to community development and home ownership protection, small business capital formation, paperwork reduction and regulatory improvement, money laundering and flood insurance. The applicable federal supervisory agencies continues to promulgate regulations implementing the Act which apply to Registrant's affiliate banks. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 allows for interstate banking and interstate branching without regard to whether such activity is permissible under state law. Bank holding companies may now acquire banks anywhere in the United States subject to certain state restrictions. Safety and soundness guidance on the risks posed to financial institutions by the Year 2000 problem has been issued by the Federal Institutions Examination Council, whose members include the FDIC and the Federal Reserve Board. The guidance underscores that Year 2000 preparation is not only an information systems issue, but also an enterprise-wide challenge that must be addressed at the highest level of a financial institution. The guidance sets out the responsibilities of senior management and boards of directors in managing their Year 2000 projects. Among the responsibilities of institution managers and directors is the management of internal and external risks presented by providers of data-processing products and services, business partners, counterparties and major loan customers. Under the guidance, senior management must provide the board of directors with status reports, at least quarterly, on efforts to reach Year 2000 goals both internally and by the institution's major vendors. Senior managers and directors must allocate sufficient resources to ensure that high priority is given to seeing that remediation plans are fulfilled, and that the project receives the quality personnel and timely support it requires. The guidance does not require financial institutions to obtain Year 2000 certification from their vendors. Rather, an institution must implement its own internal testing or 7 verification processes for vendor products and services to ensure that its different computer systems function properly together. In addition to the matters discussed above, the Registrant's affiliate banks are subject to additional regulation of their activities, including a variety of consumer protection regulations affecting their lending, deposit and collection activities and regulations affecting secondary mortgage market activities. The earnings of financial institutions are also affected by general economic conditions and prevailing interest rates, both domestic and foreign and by the monetary and fiscal policies of the United States Government and its various agencies, particularly the Federal Reserve. Additional legislation and administrative actions affecting the banking industry may be considered by the United States Congress, state legislatures and various regulatory agencies, including those referred to above. It cannot be predicted with certainty whether such legislation or administrative action will be enacted or the extent to which the banking industry in general or the Registrant and its affiliate banks in particular would be affected thereby. Item 2. PROPERTIES The principal office of the Registrant is located in leased space in the multi-story Old National Bank Building located at 420 Main Street, Evansville, Indiana. The building is owned by a non- affiliated third party. The Registrant's affiliate banks conduct business primarily from facilities owned by the respective affiliate banks. Of the 112 banking offices operated by the Registrant's affiliate banks, 90 are owned by the respective banks and 22 are leased from non- affiliated third parties. Old National Realty Company, Inc., a wholly-owned non-banking subsidiary of the Registrant, owns certain real properties in downtown Evansville, Indiana, which generally are incidental to Registrant's banking operations. It does not engage in real estate brokerage services. Item 3. LEGAL PROCEEDINGS None. 8 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders of the Registrant during the fourth quarter of 1997. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Page 53 of the Registrant's Annual Report to Shareholders for the year ended December 31, 1997 is expressly incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA Page 14 of the Registrant's Annual Report to Shareholders for the year ended December 31, 1997 is expressly incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Pages 13 through 29 of the Registrant's Annual Report to Shareholders for the year ended December 31, 1997 are incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Pages 30 through 47 of the Registrant's Annual Report to Shareholders for the year ended December 31, 1997 are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT This information is omitted from this report pursuant to General Instruction G.(1) of Form 10-K as the Registrant has filed with the Commission its definitive Proxy Statement pursuant to Regulation 14-A of the Securities Exchange Act of 1934, as amended, not later than 120 days after December 31, 1997. 9 ITEM 11. EXECUTIVE COMPENSATION This information is omitted from this report pursuant to General Instruction G.(1) of Form 10-K as the Registrant has filed with the Commission its definitive Proxy Statement pursuant to Regulation 14-A of the Securities Exchange Act of 1934, as amended, not later than 120 days after December 31, 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT This information is omitted from this report pursuant to General Instruction G.(1) of Form 10-K as the Registrant has filed with the Commission its definitive Proxy Statement pursuant to Regulation 14-A of the Securities Exchange Act of 1934, as amended, not later than 120 days after December 31, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS This information is omitted from this report pursuant to General Instruction G.(1) of Form 10-K as the Registrant has filed with the Commission its definitive Proxy Statement pursuant to Regulation 14-A of the Securities Exchange Act of 1934, as amended, not later than 120 days after December 31, 1997. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Financial Statements: Report of Independent Public Accountants Consolidated Balance Sheet - December 31, 1997 and 1996 Consolidated Statement of Income - Years Ended December 31, 1997, 1996 and 1995 Consolidated Statement of Changes in Shareholders' Equity - Years Ended December 31, 1997, 1996 and 1995 Consolidated Statement of Cash Flows - Years Ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements (b) No reports on Form 8-K were filed with the Commission during the fourth quarter of 1997. 10 (c) Exhibits - The following exhibits are filed herewith: Exhibit 10 - Material Contracts Exhibit 11 - Statement re Computation of Per Share Earnings Exhibit 13 - Portions of Annual Report to Shareholders for the year ended December 31, 1997 Exhibit 21 - Subsidiaries of the Registrant Exhibit 23 - Consent of Independent Public Accountants Exhibit 27 - Financial Data Schedule (d) Financial Statement Schedules - This information is omitted since the required information is not applicable to the Registrant. 11 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OLD NATIONAL BANCORP By:s/s Ronald B. Lankford Ronald B. Lankford, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By: David L. Barning, Director Date By: Richard J. Bond, Director Date By:s/s Alan W. Braun 3/25/98 Alan W. Braun, Director Date By:s/s Wayne A. Davidson 3/25/98 Wayne A. Davidson, Director Date By:s/s Larry E. Dunigan 3/25/98 Larry E. Dunigan, Director Date By:s/s David E. Eckerle 3/25/98 David E. Eckerle, Director Date By:s/s Thomas B. Florida 3/25/98 Thomas B. Florida, Director Date 12 By:s/s Phelps L. Lambert 3/25/98 Phelps L. Lambert, Director Date By:s/s Ronald B. Lankford 3/25/98 Ronald B. Lankford, Date President and Director (Chief Operating Officer) By:s/s Lucien H. Meis 3/25/98 Lucien H. Meis, Director Date By: Louis L. Mervis, Director Date By: Lawrence D. Prybil, Director Date By:s/s James A. Risinger 3/25/98 James A. Risinger, Chairman Date of the Board of Directors (Chief Executive Officer) By:s/s John N. Royse 3/25/98 John N. Royse, Director Date By:s/s Marjorie Soyugenc 3/25/98 Marjorie Soyugenc, Director Date By: Charles D. Storms, Director Date By:s/s Steve H. Parker 3/27/98 Steve H. Parker, Date Senior Vice President (Chief Financial Officer) 13 By:s/s Ronald W. Seib 3/25/98 Ronald W. Seib, Date Vice President- Corporate Controller (Principal Accounting Officer) 14 INDEX OF EXHIBITS Regulation S-K Reference (Item 601) 3(i) Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3(i) of the Registrant's Registration Statement on Form S-4, File No. 333-09967, dated August 12, 1996) 3(ii) By-Laws of the Registrant (incorporated by reference to Exhibit 3(ii) of Registrant's Registration Statement on Form S-4, File No. 33-80670, dated June 23, 1994) 10 Material contracts (a) Severance agreement is incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. (b) Distribution Agreement is incorporated by reference to Exhibit 1.1 of amendment no. 2 of the Registrant's Registration Statement on Form S-3, File No. 333-29433, dated July 23, 1997. (c) Old National Bancorp Employees' Retirement Plan is incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997. (d) Employees' Savings and Profit Sharing Plan of Old National Bancorp is incorporated by reference to the Registrant's Quarterly report on Form 10-Q for the quarter ended June 30, 1997. 11 Statement re Computation of Per Share Earnings 13 Portions of Annual Report to Shareholders for the year ended December 31, 1997 21 Subsidiaries of the Registrant 23 Consent of Arthur Andersen LLP 27 Financial Data Schedule 15 EX-11 2 EXHIBIT 11 PAGE 1 OF 3 OLD NATIONAL BANCORP STATEMENT RE COMPUTATION OF PER SHARE EARNINGS ($ AND SHARES IN THOUSANDS EXCEPT PER SHARE) 1997 Basic Diluted Net income $ 60,660 $ 60,660 Interest expense foregone on assumed conversion of 8% convertible subordinated debentures, net of tax -- 1,469 Adjusted net income $ 60,660 $ 62,129 -------- -------- Weighted average common shares outstanding 27,699 27,699 Additional shares outstanding upon assumed conversion of 8% convertible subordinated debentures -- 1,497 Additional shares outstanding upon assumed exercise of stock options -- 95 -------- -------- Adjusted weighted average shares outstanding 27,699 29,291 ======== ======== Earnings per share $ 2.19 $ 2.12 ======== ======== EXHIBIT 11 PAGE 2 OF 3 OLD NATIONAL BANCORP STATEMENT RE COMPUTATION OF PER SHARE EARNINGS ($ AND SHARES IN THOUSANDS EXCEPT PER SHARE) 1996 Basic Diluted Net income $ 60,179 $60,179 Interest expense foregone on assumed conversion of 8% convertible subordinated debentures, net of tax -- 1,477 --------- ------- Adjusted net income $ 60,179 $61,656 Weighted average common shares outstanding 28,695 28,695 Additional shares outstanding upon assumed conversion of 8% convertible subordinated debentures -- 1,504 Additional shares outstanding upon assumed exercise of stock options -- 91 --------- -------- Adjusted weighted average shares outstanding 28,695 30,290 ========== ======== Earnings per share $ 2.10 $ 2.04 ========== ======== EXHIBIT 11 PAGE 3 OF 3 OLD NATIONAL BANCORP STATEMENT RE COMPUTATION OF PER SHARE EARNINGS ($ AND SHARES IN THOUSANDS EXCEPT PER SHARE) 1995 Basic Diluted Net income $ 53,939 $53,939 Interest expense foregone on assumed conversion of 8% convertible subordinated debentures, net of tax -- 1,523 -------- ------- Adjusted net income $ 53,939 $55,462 Weighted average common shares outstanding 29,631 29,631 Additional shares outstanding upon assumed conversion of 8% convertible subordinated debentures -- 1,551 Additional shares outstanding upon assumed exercise of stock options -- 88 ------- ------- Adjusted weighted average shares outstanding 29,631 31,270 ======= ======= Earnings per share $ 1.82 $ 1.77 ======== ======= EX-13 3 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 southwestern Indiana, southeastern Illinois, and western Kentucky, its 21 affiliate banks serve customers with 112 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, property, life and casualty insurance; investment services; fiduciary and trust services; property ownership; and consumer financing. During 1996, ONB opened a consumer finance subsidiary headquartered in Indianapolis, with the primary objective of originating traditional consumer finance and non-prime auto loans in the Midwest. Current offices are located only in Indiana. FINANCIAL BASIS The following discussion is an analysis of ONB's operating results for the years 1995 through 1997 and financial condition as of December 31, 1997 and 1996, 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. Tax-exempt interest income in the following information has been increased to an amount comparable to interest subject to income taxes using federal statutory rates in effect of 34% in 1992 and 35% in 1993 through 1997. 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 rate on loans and deposits, convenient locations and hours, types of services, and quality of service. In most of its markets, ONB and its affiliates rank first or second in volume of loans and deposits. The economy in the United States and in the Midwest has been characterized by relatively low inflation and unemployment. There have been some signs of weakness with a rise in consumer delinquency levels and bankruptcies. While ONB's numerous markets vary, its major markets have demonstrated economic expansion and a growing financial base with additions such as new Toyota and AK Steel manufacturing complexes. US Government long-term interest rates declined in 1997 while short-term rates changed less dramatically. Despite this trend, certificates of deposit rates generally increased during 1997. Prime rate stayed constant during 1997, except for a slight increase in February. MERGER ACTIVITY In 1997 ONB did not complete any banking acquisitions, but in 1996 ONB acquired two banks with combined total assets of nearly $300 million. The National Bank of Carmi in Illinois will become part of Old National Bank of Evansville in 1998. Workingmens Capital Holdings, Inc. in Bloomington, Indiana, was merged with our affiliate, ONB of Bloomington. Both acquisitions were accounted for as pooling-of-interests. YEAR 2000 With the new millenium drawing near, some computers and software throughout the world may be unable to properly handle dates after December 31, 1999. ONB has developed a plan to address its risk, and has identified and assessed its critical software and hardware. During 1998 and 1999, ONB will test these systems and any noncompliant item will be replaced. At this time the estimated cost of Year 2000 compliance is not expected to be material to ONB. 13
SELECTED FINANCIAL DATA ($ in thousands except per share data) Five Year Growth 1997 1996 1995 1994 1993 1992 Rate RESULTS OF OPERATIONS (Taxable equivalent basis) Interest income $443,151 $408,070 $389,131 $343,852 $336,890 $351,404 Interest expense 210,208 190,631 186,500 146,152 144,427 166,991 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income 232,943 217,439 202,631 197,700 192,463 184,413 4.8 % Provision for loan losses 26,965 11,012 7,135 7,754 10,359 11,919 17.7 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 205,978 206,427 195,496 189,946 182,104 172,494 3.6 Noninterest income 47,090 44,801 39,594 34,876 33,993 29,485 9.8 Noninterest expense 154,364 152,320 147,315 147,295 135,259 123,451 4.6 - ----------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 98,704 98,908 87,775 77,527 80,838 78,528 4.7 Income taxes 38,044 38,729 33,836 28,524 30,268 29,913 4.9 - ----------------------------------------------------------------------------------------------------------------------------------- Net income $60,660 60,179 53,939 49,003 $50,570 $48,615 4.5 % =================================================================================================================================== YEAR-END BALANCES Total assets $5,686,398 $5,366,591 $5,103,195 $4,909,804 $4,748,112 $4,434,160 5.1 % Total loans, net of unearned income 3,804,691 3,523,300 3,261,746 3,098,820 2,810,453 2,606,563 7.9 Total deposits 4,298,730 4,268,024 4,183,082 3,875,752 3,898,967 3,723,039 2.9 Shareholders' equity 477,203 458,526 461,424 440,671 435,406 406,137 3.3 - ----------------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA(1) Net income - basic $2.19 $2.10 $1.82 $1.61 $1.66 $1.59 6.6 Net income - diluted (2) 2.12 2.04 1.77 1.57 1.62 1.55 6.5 Cash dividends paid 0.88 0.84 0.80 0.76 0.66 0.63 7.0 Book value at year-end 17.38 16.31 15.82 14.62 14.25 13.29 5.5 - ----------------------------------------------------------------------------------------------------------------------------------- SELECTED PERFORMANCE RATIOS Return on assets 1.11 % 1.17 % 1.09 % 1.03 % 1.09 % 1.11 % Return on equity (3) 13.36 13.29 12.01 10.92 11.38 12.45 Equity to assets 8.43 8.90 8.99 9.35 9.58 8.89 Dividend payout 39.96 39.31 41.60 45.08 37.77 37.64 Primary capital to assets 9.29 9.72 9.85 10.25 10.43 9.72 Net charge-offs to average loans 0.70 0.33 0.26 0.28 0.25 0.31 Allowance for loan losses to average loans 1.34 1.31 1.28 1.43 1.57 1.47 (1) Restated for all stock dividends and stock splits. (2) Assumes the conversion of ONB's subordinated debentures. (3) Excludes unrealized gains (losses) on investment securities.
14 RESULTS OF OPERATIONS NET INCOME ONB earnings rose slightly to reach $60.7 million in 1997, an 0.8% increase over 1996. Net income in 1997 was adversely impacted by losses associated with the consumer finance subsidiary's purchase of a pool of sub-prime auto loans. During 1997, the finance subsidiary made additional provision for loan losses to cover the higher-than-expected losses in its portfolio. ONB's total provision for loan loss increased $16.0 million over 1996, of which $14.9 million related to the finance company. Basic income per share for 1997 was $2.19, up 4.3% over the $2.10 in 1996. Strong net interest income growth and minimal noninterest expense growth allowed ONB to absorb the loan loss provision increase and exceed net income in 1996. The specific effects of each of these factors are discussed in the following paragraphs. ONB's 1996 net income was $60.2 million, up 11.6% or $6.2 million above 1995 earnings. Strong net interest income growth of $14.8 million and $5.2 million noninterest income growth combined to generate the earnings growth. The loan loss provision rose due to increased consumer losses and general loan growth. 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 over 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 1997 grew $15.5 million or 7.1% over 1996. Average earning asset growth, $348.3 million or 7.1%, during 1997 out-paced interest-bearing liability growth $323.5 million or 7.8% with lower levels of nonearning assets, cash and due from banks, and higher noninterest-bearing liabilities and equity providing the funding differential. ONB was able to accomplish the earning asset growth while maintaining its net interest margin at 4.46%. The yield on earning assets increased 12 basis points to 8.49% while the cost of interest-bearing liabilities rose 10 basis points to 4.67%. ONB's mix of earning assets continued the shift to higher yielding loans which rose $266.0 million (7.9%) and comprised nearly 70% of our total earning assets. Overall, loan yields reached 9.13%, a 7 basis point increase, primarily due to the higher yields on consumer loans at ONB's consumer finance company. Investment securities grew 9.0% or $130.1 million and yields rose 11 basis points to 7.02%, mostly in the federal government and agency sector. Lower yielding money market investments decreased $47.8 million as ONB more efficiently deployed funds in higher yielding assets. ONB's interest-bearing deposits grew $90.0 million or 2.4%. Money market deposits declined 2.0% in 1997 after marketing and new products resulted in a 11.9% increase in 1996. Certificates of deposit over $100,000 grew 14.4% as higher deposit rates attracted new funds. Borrowed funds played a significant role in the funding of asset growth as they rose $233.5 million. During 1996, net interest income rose 7.3% or $14.8 million and totaled $217.4 million. Average earning assets grew 4.1%, a $194.0 million increase. Interest-bearing liabilities rose $159.4 million or 4.0%. Fewer non-earning assets, such as cash and due from banks, and higher levels noninterest-bearing liabilities and equity improved the deployment of funds into earning assets. Net interest margin rose from 4.33% to 4.46%. The yield on earning assets increased 5 basis points to 8.37% due to loan growth and rate improvement. The cost of interest-bearing liabilities decreased 8 basis points to 4.57% due to market influences and management's efforts to seek cost-effective funding sources for ONB's asset growth. 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 rate 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) % Change From (Taxable equivalent basis, $ in thousands) Prior Year 1997 1996 1995 1997 1996 INTEREST INCOME: Loans $331,794 $304,940 $286,523 8.8 % 6.4 % Investment securities 110,669 99,903 98,700 10.8 1.2 Money market investments 688 3,227 3,908 (78.7) (17.4) - --------------------------------------------------------------------------------------------------------------- Total interest income 443,151 408,070 389,131 8.6 4.9 - --------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: NOW deposits 6,710 8,254 11,201 (18.7) (26.3) Savings deposits 14,267 14,403 13,714 (0.9) 5.0 Money market deposits 24,179 23,843 22,208 1.4 7.4 Certificates of deposit $100,000 and over 18,916 14,666 14,472 29.0 1.3 Other time deposits 104,051 102,255 98,409 1.8 3.9 Short-term borrowings 22,281 14,806 16,736 50.5 (11.5) Other borrowings 19,804 12,404 9,760 59.7 27.1 - --------------------------------------------------------------------------------------------------------------- Total interest expense 210,208 190,631 186,500 10.3 2.2 - --------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME $232,943 $217,439 $202,631 7.1 % 7.3 % =============================================================================================================== NET INTEREST MARGIN 4.46 % 4.46 % 4.33 % ===================================================================================
NET INTEREST INCOME - RATE/VOLUME ANALYSIS (TABLE 2) (Taxable equivalent basis, $ in thousands) 1997 vs. 1996 1996 vs. 1995 Total Attributed to Total Attributed to Change Volume Rate Change Volume Rate INTEREST INCOME: Loans $26,854 $24,190 $2,664 $18,417 $16,281 $2,136 Investment securities 10,766 9,063 1,703 1,203 1,322 (119) Money market investments (2,539) (2,659) 120 (681) (313) (368) - --------------------------------------------------------------------------------------------------------------------------- Total interest income 35,081 30,594 4,487 18,939 17,290 1,649 - --------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: NOW deposits (1,544) 73 (1,617) (2,947) 171 (3,118) Savings deposits (136) (11) (125) 689 261 428 Money market deposits 336 (497) 833 1,635 2,589 (954) Certificates of deposit $100,000 and over 4,250 2,246 2,004 194 1,452 (1,258) Other time deposits 1,796 3,294 (1,498) 3,846 219 3,627 Short-term borrowings 7,475 6,118 1,357 (1,930) (2,192) 262 Other borrowings 7,400 7,497 (97) 2,644 3,463 (819) - --------------------------------------------------------------------------------------------------------------------------- Total interest expense 19,577 18,720 857 4,131 5,963 (1,832) - --------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME $15,504 $11,874 $3,630 $14,808 $11,327 $3,481 =========================================================================================================================== 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) 1997 1996 1995 Average Interest Yield/ Average Interest Yield/ Average Interest Yield/ Balance & Fees Rate Balance & Fees Rate Balance & Fees Rate EARNING ASSETS: Money market investments $11,997 $688 5.73 % $59,767 $3,227 5.40 % $65,274 $3,908 5.99 % Investment securities: U.S. Treasury and Government agencies (1) 1,081,957 72,224 6.68 958,417 59,737 6.23 962,872 59,698 6.20 State and political subdivisions 450,222 35,519 7.89 444,127 36,052 8.12 426,281 36,121 8.47 Other securities 43,851 2,926 6.67 43,379 4,114 9.48 37,640 2,881 7.65 - ---------------------------------------------------------------------------------------------------------------------------------- Total investment securities 1,576,030 110,669 7.02 1,445,923 99,903 6.91 1,426,793 98,700 6.92 - ---------------------------------------------------------------------------------------------------------------------------------- Loans: (2) (3) Commercial and financial 826,995 77,876 9.42 769,629 72,512 9.42 727,593 71,422 9.82 Commercial real estate 706,057 62,885 8.91 619,079 54,766 8.85 547,241 47,935 8.76 Residential real estate 1,346,793 110,422 8.20 1,257,141 104,775 8.33 1,244,331 102,067 8.20 Consumer, net of unearned income 725,205 75,949 10.47 692,864 68,174 9.84 640,706 60,502 9.44 Credit card 28,101 4,662 16.59 28,441 4,713 16.57 26,860 4,597 17.11 - ---------------------------------------------------------------------------------------------------------------------------------- Total loans 3,633,151 331,794 9.13 3,367,154 304,940 9.06 3,186,731 286,523 8.99 - ---------------------------------------------------------------------------------------------------------------------------------- Total earning assets 5,221,178 $443,151 8.49 % 4,872,844 $408,070 8.37 % 4,678,798 $389,131 8.32 % ================== ==================== =================== Less: Allowance for loan losses (47,158) (42,547) (42,497) NON-EARNING ASSETS: Cash and due from banks 124,443 134,427 161,103 Other assets 187,801 181,461 173,017 - ------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $5,486,264 $5,146,185 $4,970,421 ============================================================================================================ INTEREST-BEARING LIABILITIES: NOW deposits $448,831 $6,710 1.49 % $444,427 $8,254 1.86 % $436,705 $11,201 2.56 % Savings deposits 479,465 14,267 2.98 479,863 14,403 3.00 471,008 13,714 2.91 Money market deposits 652,796 24,179 3.70 666,462 23,843 3.58 595,583 22,208 3.73 Certificates of deposit $100,000 and over 324,109 18,916 5.84 283,323 14,666 5.18 256,480 14,472 5.64 Other time deposits 1,872,047 104,051 5.56 1,813,209 102,255 5.64 1,809,240 98,409 5.44 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 3,777,248 168,123 4.45 3,687,284 163,421 4.43 3,569,016 160,004 4.48 - ---------------------------------------------------------------------------------------------------------------------------------- Short-term borrowings 409,705 22,281 5.44 293,052 14,806 5.05 303,789 16,736 5.51 Other borrowings 309,671 19,804 6.40 192,795 12,404 6.43 140,937 9,760 6.93 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 4,496,624 $210,208 4.67 % $4,173,131 $190,631 4.57 % 4,013,742 $186,500 4.65 % ================== ==================== =================== NONINTEREST-BEARING LIABILITIES: Demand deposits 453,616 450,005 455,991 Other liabilities 73,749 65,176 53,673 Shareholders' equity 462,275 457,873 447,015 - ------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,486,264 $5,146,185 $4,970,421 ============================================================================================================ INTEREST MARGIN RECAP: Interest income/earning assets $443,151 8.49 % $408,070 8.37 % $389,131 8.32 % Interest expense/earning assets 210,208 4.03 190,631 3.91 186,500 3.99 - ---------------------------------------------------------------------------------------------------------------------------------- Net interest margin $232,943 4.46 % $217,439 4.46 % $202,631 4.33 % ================================================================================================================================== (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 Customers' 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 monthly 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 both individually 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, assets and liabilities are closely matched at 89%. 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 an additional 12 months. The policy limit for the maximum negative impact on net interest income in over 12 months is 10%. At December 31, 1997, ONB is well within that limit as the model's fluctuation is under 2% for the first 12 months and the total 24 months.
ANALYSIS OF INTEREST RATE SENSITIVITY AT DECEMBER 31, 1997 (TABLE 4) ($ in thousands) 1-180 181-365 1-5 Beyond Days Days Years 5 years Total RATE-SENSITIVE ASSETS: Money market investments $ 7,769 $ -- $ 99 $ -- $ 7,868 Investment securities 292,113 102,254 807,655 364,954 1,566,976 Loans, net of unearned income 1,364,273 541,337 1,230,146 668,935 3,804,691 - ------------------------------------------------------------------------------------------------------------ Total rate sensitive assets 1,664,155 643,591 2,037,900 1,033,889 $5,379,535 - -------------------------------------------------------------------------------------------------=========== RATE-SENSITIVE LIABILITIES: Deposits 1,550,198 448,215 645,331 1,152,710 3,796,454 Other borrowed funds 551,534 54,908 96,796 128,280 831,518 - ------------------------------------------------------------------------------------------------------------ Total rate-sensitive liabilities 2,101,732 503,123 742,127 1,280,990 $4,627,972 - --------------------------------------------------------------------------------------------------========== Interest sensitivity gap per period ($437,577) $140,468 $1,295,773 ($247,101) Cumulative gap ($437,577) ($297,109) $998,664 $751,563 Cumulative ratio at December 31, 1997 (1) 79 % 89 % 130 % 116 % =============================================================================================== Cumulative ratio at December 31, 1996 (1) 84 % 94 % 129 % 117 % ================================================================================================ (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 of liquidity management is to ensure the ability to meet cash flow needs of affiliates' 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 can 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, affiliate banks' dividends, and capital markets. Affiliate banks' dividends are subject to regulatory limits and in some cases require regulatory approval. Footnote 12 of the consolidated financial statements discusses this further. At year-end 1997 ONB had $63 million in available lines of credit from unaffiliated banks. In addition, ONB issued during 1997 $54.3 million of a $150 million medium term note with the remainder available for future liquidity needs. At December 31, 1997, 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 brokerage/alternative investments and insurance. ONB continuously strives to improve its noninterest income performance. In 1997 noninterest income, excluding securities transactions, grew 6.9%. The trust company's fee income grew 15.9% and benefited from an expanding revenue base of managed customer assets and strong financial markets. Service charges on deposit accounts, the largest individual noninterest category, grew 4.3% as new pricing structures have been fully implemented over the past several years. These fees are regularly reviewed and compared against competition in each separate market and among affiliate banks. Loan servicing fees were comparable to 1996. Other income increased 6.2% as ONB's alternative investments and brokerage business increased 9.8%,and insurance sales grew 8.0%. During 1996, noninterest income grew 11.3%. Trust fees and deposit service charges rose 10.1% and 10.2%, respectively. The base of accounts for both areas rose and the fees charged were reviewed and adjusted where necessary. Loan servicing fees declined slightly. Other income increased 20.3% over 1995 as insurance and alternative investment sales each increased $0.9 million. ONB realized net securities gains of $0.1, $0.8, and $0.1 million in 1997, 1996, and 1995, respectively. Generally, ONB has had minimal sales of securities. During 1996, ONB sold a portion of its Student Loan Marketing Association stock, resulting in a gain. Table 5 below presents changes in the components of noninterest income for the years 1995 through 1997.
NONINTEREST INCOME (TABLE 5) ($ in thousands) % Change From Prior Year 1997 1996 1995 1997 1996 Trust fees $11,766 $10,149 $9,216 15.9 % 10.1 % Service charges on deposit accounts 16,298 15,624 14,177 4.3 10.2 Loan servicing fees 5,623 5,668 5,691 (0.8) (0.4) Other income 13,353 12,579 10,458 6.2 20.3 - ----------------------------------------------------------------------------------------------------------------- Subtotal 47,040 44,020 39,542 6.9 11.3 Net securities gains 50 781 52 N/M N/M - ----------------------------------------------------------------------------------------------------------------- Total noninterest income $47,090 $44,801 $39,594 5.1 % 13.2 % ================================================================================================================= N/M = Not meaningful
19 NONINTEREST EXPENSE The industry faces the continual challenge of controlling operating costs and improve efficiencies while still providing higher levels of customer service. Several ratios are used to evaluate performance. ONB's efficiency ratio, net interest income tax equivalized plus noninterest income divided by noninterest expense, was 55.13% in 1997, down from 58.26% in 1996. The net overhead ratio, noninterest expense less noninterest income divided by average assets, also improved from 2.09% to 1.96%. In 1997 noninterest expense increased 1.3% compared to 1996. Salaries and benefits, which comprised over 50% of total noninterest expense, grew 5.4% in 1997. The relatively new consumer finance subsidiary added $1.7 million of personnel expense, plus expansion of our brokerage, insurance, trust and internal data processing operations added new compensation dollars. FDIC insurance premiums dropped $2.4 million. In 1996 the FDIC assessed a one-time recapitalization charge for all SAIF-insured deposits which was $2.5 million for ONB affiliate banks. During 1996, total noninterest expense increased 3.4% over 1995. Salaries and benefits increased 9.2% which included $2.5 million of increased incentive compensation and additional personnel in consumer finance, insurance, trust and data processing areas. Occupancy expense rose 13.7% primarily due to a duplicate branch writedown to fair value after a merger. Data processing expense dropped 15.8% our affiliate banks converted to our internal data operations. Communication and transportation expense increased 13.8% as computer networking capabilities were upgraded. Despite the $2.5 million one-time recapitalization charge, FDIC insurance premiums declined $2.3 million as the FDIC continued to adjust premiums on deposit insurance. Table 6 below presents changes in the components of noninterest expense for the years 1995 through 1997.
NONINTEREST EXPENSE (TABLE 6) ($ in thousands) % Change From Prior Year 1997 1996 1995 1997 1996 Salaries and employee benefits $89,223 $84,618 $77,479 5.4 % 9.2 % Occupancy expense 9,450 10,236 9,006 (7.7) 13.7 Equipment expense 12,144 11,446 11,119 6.1 2.9 Marketing expense 5,257 5,288 5,334 (0.6) (0.9) FDIC insurance premiums 682 3,041 5,324 (77.6) (42.9) Data processing expense 5,395 5,076 6,028 6.3 (15.8) Supplies expense 4,025 4,396 4,559 (8.4) (3.6) Communication and transportation expense 6,899 6,673 5,863 3.4 13.8 Other expense 21,289 21,546 22,603 (1.2) (4.7) - ---------------------------------------------------------------------------------------------------------------- Total noninterest expense $154,364 $152,320 $147,315 1.3 % 3.4 % ===============================================================================================================
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 28.6%, 29.4%, and 27.5% in 1997, 1996, and 1995, respectively, and has remained generally consistent between these periods. 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, 1997 and 1996. 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 1997: Interest income $110,058 $110,082 $106,584 $102,722 Interest expense 54,940 54,452 51,672 49,144 - ------------------------------------------------------------------------------------------------ Net interest income 55,118 55,630 54,912 53,578 Provision for loan losses 13,552 5,901 3,756 3,756 Noninterest income 12,650 11,717 11,290 11,433 Noninterest expense 38,658 38,444 39,107 38,155 - ------------------------------------------------------------------------------------------------ Income before income taxes 15,558 23,002 23,339 23,100 Income taxes 3,908 6,322 7,067 7,042 - ------------------------------------------------------------------------------------------------ Net income $11,650 $16,680 $16,272 $16,058 ================================================================================================ Net income per share: Basic $0.42 $0.61 $0.59 $0.57 Diluted $0.41 $0.58 $0.57 $0.56 ================================================================================================ Weighted average shares: Basic 27,453 27,568 27,784 27,996 Diluted 29,041 29,161 29,380 29,590 ================================================================================================ 1996: Interest income $101,583 $100,002 $96,879 $95,949 Interest expense 49,048 47,866 46,402 47,315 - ------------------------------------------------------------------------------------------------ Net interest income 52,535 52,136 50,477 48,634 Provision for loan losses 3,678 3,229 2,103 2,002 Noninterest income 12,230 11,114 11,195 10,262 Noninterest expense 39,981 39,038 37,460 35,841 - ------------------------------------------------------------------------------------------------ Income before income taxes 21,106 20,983 22,109 21,053 Income taxes 5,652 6,200 6,839 6,381 - ------------------------------------------------------------------------------------------------ Net income $15,454 $14,783 $15,270 $14,672 ================================================================================================ Net income per share: Basic $0.55 $0.52 $0.53 $0.50 Diluted 0.53 0.50 0.52 0.49 ================================================================================================ Weighted average shares: Basic 28,243 28,590 28,802 29,153 Diluted 29,841 30,186 30,399 30,747 ================================================================================================
21 FINANCIAL CONDITION OVERVIEW Fueled by loan growth, total assets reached $5.7 billion at December 31, 1997, 6.0% higher than the prior year-end. Loans grew $281.4 million or 8.0%. Total liabilities grew $301.1 million or 6.1% over 1996. Deposits remained constant while other funding sources provided the resources for the asset growth. INVESTMENT SECURITIES Investment securities at December 31, 1997, increased $52.3 million, 3.4% over 1996. The growth occurred chiefly in mortgage-backed securities where better yield opportunities existed during the year. Investment securities comprised nearly 30% of ONB's earning assets at December 31, 1997. 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, 1997, ONB held investment securities issued by the states of Indiana, Illinois, and Pennsylvania and their political subdivisions that had an aggregate market value of $74.8 million, $72.1 million, and $48.0 million, respectively. There were no other concentrations of investment securities issued by an individual state and its political subdivisions which were greater than 10% of shareholders' equity. Average yields of the investment securities portfolio are calculated on a taxable equivalent basis. Yields are based on the amortized cost and are weighted for the scheduled maturity of each investment. Average yields for the entire portfolio were 7.21%, 7.13%, and 6.95% for 1997, 1996, and 1995, respectively. The portfolio yield increased during the year as the purchases during 1997 were early in the year when higher yields were available. Table 8 below presents the maturity distribution of the investment portfolio, along with weighted average yields thereon.
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES (TABLE 8) ($ in thousands) December 31, 1997 Within 1 - 5 5 - 10 Beyond FAIR VALUE: 1 Year Years Years 10 Years Total 1996 1995 U.S. Treasury $35,487 $76,280 $5,421 -- $117,188 $154,524 $191,790 U.S. Government agencies and corporations 81,090 144,915 -- -- 226,005 222,993 203,330 Mortgage-backed securities 47,119 476,327 186,986 15,007 725,439 633,270 564,865 States and political subdivisions 27,569 222,244 179,430 23,690 452,933 462,378 442,302 Other securities -- 49 16 45,346 45,411 41,484 27,821 - ---------------------------------------------------------------------------------------------------------------------------- Total $191,265 $919,815 $371,853 $84,043 $1,566,976 $1,514,649 $1,430,108 ============================================================================================================================ AMORTIZED COST: U.S. Treasury $35,418 $75,452 $5,265 -- $116,135 $153,630 $189,506 U.S. Government agencies and corporations 81,066 141,820 -- -- 222,886 222,244 202,767 Mortgage-backed securities 46,913 470,936 184,212 14,900 716,961 632,065 562,685 States and political subdivisions 27,320 215,077 173,195 22,428 438,020 452,720 431,218 Other securities -- 49 16 45,346 45,411 40,856 27,025 - ---------------------------------------------------------------------------------------------------------------------------- Total $190,717 $903,334 $362,688 $82,674 $1,539,413 $1,501,515 $1,413,201 ============================================================================================================================ Weighted average yield, based on amortized cost (taxable equivalent basis) 6.89 % 7.18 % 7.45 % 7.33 % 7.21 % 7.13 % 6.95 % =============================================================================================================================
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 by ONB's Board of Directors and administered by the 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 and other problem loans and charge-offs. The committee regularly reviews its 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 southwestern Indiana, southeastern Illinois, and western 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. Strong, balanced growth occurred in 1997 in most major categories, led by commercial real estate which was up 14.0%. Commercial and residential real estate rose 11.2%, and 8.7%, respectively. Consumer credit decreased less than 2% between years. The portfolio is well diversified with 23% of the portfolio in commercial loans, 20% in commercial real estate, 37% in residential real estate, and 20% in consumer credit. In 1996 loans similarly grew 8.0% as commercial real estate increased 16.5% while commercial and consumer loans both rose over 7.0%. ONB's commercial lending is primarily to small to medium-sized businesses in various industries in its region. Commercial real estate loans are generally 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 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. Commercial loans increased an average of 6.1% per year between 1993 and 1997. Commercial and residential real estate loans and consumer loans increased 11.9%, 7.4%, and 7.6%, respectively, during this period. 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, 1997 (TABLE 9) ($ in thousands) Within 1-5 Beyond 1 Year Years 5 years Total Commercial and financial $466,342 $257,102 $132,293 $855,737 Economic development bonds 3,416 8,955 10,582 22,953 - ------------------------------------------------------------------------------------------------ Total $469,758 $266,057 $142,875 $878,690 ================================================================================================ Predetermined interest rates $119,743 $114,020 $40,127 $273,890 Floating interest rates 350,015 152,037 102,748 604,800 - ------------------------------------------------------------------------------------------------ Total $469,758 $266,057 $142,875 $878,690 ================================================================================================
LOAN PORTFOLIO AT YEAR-END (TABLE 10) ($ in thousands) Four Year 1997 1996 1995 1994 1993 Growth Rate Commercial $855,737 $769,889 $718,288 $761,627 $675,748 6.1 % Financial -- -- 5,167 2,546 10,000 (100.0) Economic development bonds 22,953 26,424 27,675 30,928 35,094 (10.1) Commercial real estate 762,505 668,671 573,829 536,620 487,039 11.9 Residential real estate 1,416,963 1,303,283 1,238,772 1,131,805 1,064,158 7.4 Consumer credit 761,144 776,614 724,305 665,055 567,841 7.6 - ----------------------------------------------------------------------------------------------------------------------------- Total loans 3,819,302 3,544,881 3,288,036 3,128,581 2,839,880 7.7 % Less: Unearned income 14,611 21,581 26,290 29,761 29,427 ========= - ------------------------------------------------------------------------------------------------------------- Subtotal 3,804,691 3,523,300 3,261,746 3,098,820 2,810,453 Less: Allowance for loan losses 48,655 44,053 40,917 41,943 42,425 - ------------------------------------------------------------------------------------------------------------- Net loans $3,756,036 $3,479,247 $3,220,829 $3,056,877 $2,768,028 ============================================================================================================= COMPOSITION OF LOAN PORTFOLIO BY TYPE: Commercial/financial/development 23.1 % 22.6 % 23.0 % 25.8 % 25.6 % Commercial real estate 20.0 19.0 17.6 17.3 17.3 Residential real estate 37.2 37.0 38.0 36.5 38.0 Consumer credit 19.7 21.4 21.4 20.4 19.1
24 The adequacy of the allowance for loan losses is formally 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 $25.3 million in 1997, $18.0 million at which came from ONB's consumer finance subsidiary. The finance subsidiary's losses stemmed from a pool of loans funded in 1996 and early 1997. The activities leading to these losses have been suspended. Net charge-offs were $11.0 million in 1996 and $8.2 million in 1995. The 1996 increase in charge-offs was concentrated in the consumer lending area, a trend experienced throughout the banking industry. ONB's affiliates make monthly provisions for possible loan losses in amounts estimated to be sufficient to maintain the allowance for loan losses at a level considered necessary by management to absorb estimated losses in the loan portfolios. The consolidated provision for loan losses was $27.0 million in 1997, up from $11.0 million in 1996, and $7.1 million in 1995. The consumer finance affiliate accounted for $14.9 million of the 1997 provision. The remainder of the provision increase resulted from srong loan growth. Table 11 below summarizes activity in the allowance for loan losses for the years 1993 through 1997, along with an allocation of the year-end balances and related statistics for the allowance and net charge-offs.
ALLOWANCE FOR LOAN LOSSES (TABLE 11) ($ in thousands) ANALYSIS: 1997 1996 1995 1994 1993 Allowance for loan losses, January 1 $44,053 $40,917 $41,943 $42,425 $37,911 - -------------------------------------------------------------------------------------------------------------- Loans charged off: Commercial 2,955 4,211 4,912 4,594 6,085 Commercial/residential real estate 609 670 973 697 2,701 Consumer credit 26,114 10,497 5,335 5,465 2,816 - -------------------------------------------------------------------------------------------------------------- Total charge-offs 29,678 15,378 11,220 10,756 11,602 - -------------------------------------------------------------------------------------------------------------- Recoveries on charged-off loans: Commercial 1,530 2,274 1,632 1,191 3,580 Commercial/residential real estate 1,148 320 301 186 318 Consumer credit 1,727 1,775 1,126 1,143 912 - -------------------------------------------------------------------------------------------------------------- Total recoveries 4,405 4,369 3,059 2,520 4,810 - -------------------------------------------------------------------------------------------------------------- Net charge-offs 25,273 11,009 8,161 8,236 6,792 Provision charged to expense 26,965 11,012 7,135 7,754 10,359 Acquisitions under purchase accounting -- -- -- -- 947 Nonrefundable dealer discounts 2,910 3,133 -- -- -- - -------------------------------------------------------------------------------------------------------------- Allowance for loan losses, December 31 $48,655 $44,053 $40,917 $41,943 $42,425 ============================================================================================================== Average loans for the year $3,633,151 $3,367,154 $3,186,731 $2,928,347 $2,700,408 Allowance/year-end loans 1.28 % 1.25 % 1.25 % 1.35 % 1.51 % Allowance/average loans 1.34 1.31 1.28 1.43 1.57 Net charge-offs/average loans 0.70 0.33 0.26 0.28 0.25 - -------------------------------------------------------------------------------------------------------------- ALLOCATION AT DECEMBER 31: Commercial $23,337 $19,657 $22,207 $23,160 $22,276 Commercial/residential real estate 11,828 11,533 11,633 11,219 12,991 Consumer credit 13,490 12,863 7,077 7,564 7,158 - -------------------------------------------------------------------------------------------------------------- Total $48,655 $44,053 $40,917 $41,943 $42,425 ==============================================================================================================
25 Assets determined by the various evaluation processes to be under-performing receive special attention by ONB and its affiliates. 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 $111.1 million as of December 31, 1997, 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 general condition of the portfolio and in establishing the allowance for loan losses. Under-performing assets rose $2.2 million in 1997 and $6.0 million in 1996. As a percent of total loans and foreclosed properties, under-performing assets were 0.61%, 0.59%, and 0.46% at year-end 1997, 1996 and 1995, respectively. The growth in nonaccrual loans in 1997 and foreclosed properties in 1996 was primarily consumer loans related. At December 31, 1997, the allowance for loan loss to under-performing assets ratio was 210.99%, comparable to 210.83% in 1996 and 274.02% in 1995. Said in another way, in 1997 ONB has set aside $2.11 for every dollar of under-performing assets. Table 12 below presents the components of under-performing assets as of December 31, for the last five years.
UNDER-PERFORMING ASSETS (TABLE 12) ($ in thousands) 1997 1996 1995 1994 1993 Nonaccrual loans $14,283 $12,501 $6,919 $9,330 $6,871 Renegotiated loans 248 746 1,120 1,280 833 Past due loans (90 days or more): Commercial 1,394 980 1,499 1,169 1,882 Commercial/residential real estate 2,167 1,265 2,602 2,102 2,692 Consumer 844 700 1,059 1,257 893 - -------------------------------------------------------------------------------------------------------------- Total 4,405 2,945 5,160 4,528 5,467 - -------------------------------------------------------------------------------------------------------------- Foreclosed properties 4,124 4,703 1,733 1,702 1,596 - -------------------------------------------------------------------------------------------------------------- Total under-performing assets $23,060 $20,895 $14,932 $16,840 $14,767 ============================================================================================================== Under-performing assets as a % of total loans and foreclosed properties 0.61 % 0.59 % 0.46 % 0.54 % 0.53 % Allowance for loan loss/ under-performing assets 210.99 % 210.83 % 274.02 % 249.07 % 287.30 % - ---------------------------------------------------------------------------------------------------------------
26 Interest income of approximately $2.1 million would have been recorded in 1997 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 1997 on nonaccrual and restructured loans was $0.4 million. DEPOSITS ONB's primary funding source for its assets is the base of core customer deposits which consist of noninterest-bearing demand, regular savings and NOW accounts, money market accounts, and small denomination certificates of deposit. Average core deposits increased 1.4% in 1997 compared to the 2.3% increase in 1996. Money market deposits, which grew 11.9% in 1996 as a result of marketing new products, decreased 2.1% in 1997. Other time deposits rose 3.2% in 1997 as brokered certificate of deposits were used to supplement local deposits. Table 13 below presents changes between years in the average balances of all funding sources.
FUNDING SOURCES - AVERAGE BALANCE (TABLE 13) ($ in thousands) % Change From Prior Year Core Deposits: 1997 1996 1995 1997 1996 Demand deposits $453,616 $450,005 $455,991 0.8 % (1.3)% NOW deposits 448,831 444,427 436,705 1.0 1.8 Savings deposits 479,465 479,863 471,008 (0.1) 1.9 Money market deposits 652,796 666,462 595,583 (2.1) 11.9 Other time deposits 1,872,047 1,813,209 1,809,240 3.2 0.2 - ---------------------------------------------------------------------------------------------------------------- Total core deposits 3,906,755 3,853,966 3,768,527 1.4 2.3 - ---------------------------------------------------------------------------------------------------------------- Certificates of deposit $100,000 and over 324,109 283,323 256,480 14.4 10.5 Short-term borrowings 409,705 293,052 303,789 139.8 (3.5) Other borrowings 309,671 192,795 140,937 160.6 36.8 - ---------------------------------------------------------------------------------------------------------------- Total funding sources $4,950,240 $4,623,136 $4,469,733 7.1 % 3.4 % ================================================================================================================
The average balance of large certificates grew $40.8 million or 14.4% in 1997 compared to the prior year. Table 14 below presents a maturity distribution for certificates of deposit with denominations of $100,000 and over.
CERTIFICATES OF DEPOSIT OF $100,000 AND OVER (TABLE 14) ($ in thousands) Maturity Distribution Year-End 1-90 91-180 181-365 Beyond Interest Average Balance Days Days Days 1 Year Expense Rate 1997 $359,695 $158,266 $72,299 $53,954 $75,176 $18,916 5.84 % 1996 257,988 98,035 44,632 65,271 50,050 14,666 5.18 1995 285,461 125,971 56,128 39,648 63,714 14,472 5.64
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 rose $116.7 million or 39.8% in 1997. ONB used these alternative funding sources to supplement deposit growth. Table 15 below presents the distribution of ONB's short-term borrowings and the weighted average interest rates thereon for each of the last three years.
SHORT-TERM BORROWINGS (TABLE 15) ($ in thousands) Other Funds Repurchase Short-term Purchased Agreements Borrowings 1997: Outstanding at year-end $170,675 $215,878 $56,133 Average amount outstanding 73,767 220,074 115,864 Maximum amount outstanding at any month-end 170,675 244,722 192,048 Weighted average interest rate: During year 5.57 % 4.98 % 6.23 % End of year 6.34 5.18 5.87 1996: Outstanding at year-end $57,175 $177,463 $101,347 Average amount outstanding 35,056 204,837 53,159 Maximum amount outstanding at any month-end 90,875 217,337 116,965 Weighted average interest rate: During year 5.47 % 4.72 % 6.05 % End of year 6.25 4.89 6.14 1995: Outstanding at year-end $11,775 $164,906 $86,661 Average amount outstanding 36,988 195,336 71,465 Maximum amount outstanding at any month-end 98,215 200,961 94,827 Weighted average interest rate: During year 5.98 % 5.13 % 6.41 % End of year 5.71 5.08 5.95
28 In 1997 ONB registered a $150 million medium term note program and issued $54.3 million. These borrowings, combined with prior issuances totaled $98.3 million at December 31, 1997. The notes have a weighted average effective interest rate of 6.68% and mature between 1998 and 2007. The funds were used to reduce ONB's lines of credit. During 1997, holders of ONB's 8% convertible debentures converted principal amounts of $0.2 million. These conversions resulted in the issuance of 7,727 shares of common stock and an offsetting increase in shareholders' equity. CAPITAL RESOURCES Shareholders' equity was $477.2 million or 8.4% of total assets at December 31, 1997, and $458.5 million or 8.5% at December 31, 1996. ONB paid cash dividends in 1997 totaling $24.2 million or $0.88 per share (restated for the 5% stock dividend paid in January 1998). Treasury shares are repurchased throughout the year as part of an ongoing program to provide shares for reissuance under ONB's dividend reinvestment and stock purchase plan and for future stock dividends. Treasury shares repurchased during 1997 reduced shareholders' equity by $36.1 million. Shares reissued pursuant to the above programs and in connection with conversions of ONB's subordinated debentures added $9.7 million to shareholders' equity in 1997. ONB and the banking industry are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can elicit certain mandatory actions by regulators that if undertaken, could have a direct material effect on ONB's financial statements. Capital adequacy in the banking industry is evaluated primarily by the use of ratios which measure capital against assets and certain off-balance-sheet items. Certain ratios weight these assets based on risk characteristics according to regulatory accounting practices. At December 31, 1997, ONB and it affiliate banks exceeded the regulatory minimums and met the regulatory definition of well-capitalized. ONB's capital ratios and the regulatory guidelines are presented in Table 16 below.
CAPITAL STRUCTURE AND REGULATORY GUIDELINES (TABLE 16) ($ in thousands) Regulatory Guidelines December 31, Minimum Well-Capitalized 1997 1996 1995 TIER 1 CAPITAL: Shareholders' equity (1) $460,663 $450,646 $451,174 Less intangibles (13,759) (13,750) (15,185) - -------------------------------------------------------------------------------------------------------------------- Tier 1 capital 446,904 436,896 435,989 TIER 2 CAPITAL: Subordinated debentures 30,407 30,564 31,515 Qualifying allowance for loan losses 45,935 42,203 39,609 - -------------------------------------------------------------------------------------------------------------------- Total capital $523,246 $509,663 $507,113 ==================================================================================================================== Risk adjusted assets $3,674,769 $3,376,237 $3,172,014 ==================================================================================================================== Tier 1 capital to risk-adjusted assets 4.00 % 6.00 % 12.16 % 12.94 % 13.74 % Total capital to risk-adjusted assets 8.00 10.00 14.24 15.10 15.99 Tier 1 capital to quarterly average assets (leverage ratio) 3.00 5.00 7.95 8.29 8.61 (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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. s/s Arthur Andersen LLP ARTHUR ANDERSEN LLP Indianapolis, Indiana, January 20, 1998. 31
OLD NATIONAL BANCORP CONSOLIDATED BALANCE SHEET ($ and shares in thousands) December 31, 1997 1996 ASSETS Cash and due from banks $160,813 $180,405 Money market investments: Interest-bearing deposits in other banks 624 3,140 Federal funds sold and securities purchased under agreements to resell 7,244 3,558 - ------------------------------------------------------------------------------------------------------- Total money market investments 7,868 6,698 - ------------------------------------------------------------------------------------------------------- TOTAL CASH AND CASH EQUIVALENTS 168,681 187,103 - ------------------------------------------------------------------------------------------------------- Investment securities - Available-for-sale, at fair value 1,566,976 1,514,649 - ------------------------------------------------------------------------------------------------------- Loans, net of unearned income 3,804,691 3,523,300 Allowance for loan losses (48,655) (44,053) - ------------------------------------------------------------------------------------------------------- NET LOANS 3,756,036 3,479,247 - ------------------------------------------------------------------------------------------------------- Premises and equipment, net 78,332 78,184 Accrued income receivable 49,562 47,058 Other assets 66,811 60,350 - ------------------------------------------------------------------------------------------------------- TOTAL ASSETS $5,686,398 $5,366,591 ======================================================================================================= LIABILITIES Deposits: Noninterest-bearing demand $502,276 $512,281 Interest-bearing: NOW accounts 450,381 449,486 Savings accounts 469,589 480,303 Money market accounts 660,240 714,261 Certificates of deposit $100,000 and over 359,695 257,988 Other time 1,856,549 1,853,705 - ------------------------------------------------------------------------------------------------------- TOTAL DEPOSITS 4,298,730 4,268,024 - ------------------------------------------------------------------------------------------------------- Short-term borrowings 442,686 335,985 Accrued expenses and other liabilities 78,947 65,811 Other borrowings 388,832 238,245 - ------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 5,209,195 4,908,065 - ------------------------------------------------------------------------------------------------------- Commitments and contingencies (Note 11) SHAREHOLDERS' EQUITY Preferred stock, 2,000 shares authorized, no shares issued or outstanding -- -- Common stock, $1 stated value, 50,000 shares authorized, 27,457 and 26,778 shares issued and outstanding, respectively 27,457 26,778 Capital surplus 299,988 265,584 Retained earnings 133,218 158,284 Net unrealized gain on available-for-sale investment securities 16,540 7,880 - ------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 477,203 458,526 - ------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,686,398 $5,366,591 ======================================================================================================= The accompanying notes to consolidated financial statements are an integral part of this statement.
32
OLD NATIONAL BANCORP CONSOLIDATED STATEMENT OF INCOME ($ and shares in thousands except per share data) Years Ended December 31, 1997 1996 1995 INTEREST INCOME Loans including fees: Taxable $325,449 $299,130 $281,111 Nontaxable 4,250 3,897 3,578 Investment securities: Taxable 75,507 64,465 63,554 Nontaxable 23,552 23,694 23,585 Money market investments 688 3,227 3,908 - ------------------------------------------------------------------------------------------------ TOTAL INTEREST INCOME 429,446 394,413 375,736 - ------------------------------------------------------------------------------------------------ INTEREST EXPENSE Savings, NOW and money market deposits 45,156 46,500 47,123 Certificates of deposit $100,000 and over 18,916 14,666 14,472 Other time deposits 104,051 102,255 98,409 Short-term borrowings 22,281 14,806 16,736 Other borrowings 19,804 12,404 9,760 - ------------------------------------------------------------------------------------------------ TOTAL INTEREST EXPENSE 210,208 190,631 186,500 - ------------------------------------------------------------------------------------------------ NET INTEREST INCOME 219,238 203,782 189,236 Provision for loan losses 26,965 11,012 7,135 - ------------------------------------------------------------------------------------------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 192,273 192,770 182,101 - ------------------------------------------------------------------------------------------------ NONINTEREST INCOME Trust fees 11,766 10,149 9,216 Service charges on deposit accounts 16,298 15,624 14,177 Loan servicing fees 5,623 5,668 5,691 Net securities gains 50 781 52 Other income 13,353 12,579 10,458 - ------------------------------------------------------------------------------------------------ TOTAL NONINTEREST INCOME 47,090 44,801 39,594 - ------------------------------------------------------------------------------------------------ NONINTEREST EXPENSE Salaries and employee benefits 89,223 84,618 77,479 Occupancy expense 9,450 10,236 9,006 Equipment expense 12,144 11,446 11,119 Marketing expense 5,257 5,288 5,334 FDIC insurance premiums 682 3,041 5,324 Data processing expense 5,395 5,076 6,028 Supplies expense 4,025 4,396 4,559 Communication and transportation expense 6,899 6,673 5,863 Other expense 21,289 21,546 22,603 - ------------------------------------------------------------------------------------------------ TOTAL NONINTEREST EXPENSE 154,364 152,320 147,315 - ------------------------------------------------------------------------------------------------ Income before income taxes 84,999 85,251 74,380 Income taxes 24,339 25,072 20,441 - ------------------------------------------------------------------------------------------------ NET INCOME $60,660 $60,179 $53,939 ================================================================================================ NET INCOME PER COMMON SHARE: Basic $2.19 $2.10 $1.82 Diluted 2.12 2.04 1.77 ================================================================================================ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic 27,699 28,695 29,631 Diluted 29,291 30,290 31,270 ================================================================================================ The accompanying notes to consolidated financial statements are an integral part of this statement.
33
OLD NATIONAL BANCORP CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY ($ and shares in thousands) Net Unrealized Gain (Loss) on Total Common Stock Capital Retained Investment Shareholders' Shares Amount Surplus Earnings Securities Equity BALANCES, DECEMBER 31, 1994 26,041 $26,041 $240,787 $182,822 ($8,979) $440,671 Net income -- -- -- 53,939 -- 53,939 Cash dividends -- -- -- (22,441) -- (22,441) 5% stock dividend 1,184 1,184 42,401 (43,585) -- -- Stock repurchased (1,238) (1,238) (41,572) -- -- (42,810) Stock reissued under dividend reinvestment and stock purchase plan 188 188 6,114 -- -- 6,302 Stock reissued due to conversion of subordinated debentures 278 278 6,256 -- 6,534 Net unrealized loss on investment securities -- -- -- -- 19,229 19,229 - ----------------------------------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1995 26,453 26,453 253,986 170,735 10,250 461,424 Net income -- -- -- 60,179 -- 60,179 Cash dividends -- -- -- (23,655) -- (23,655) 5% stock dividend 1,277 1,277 47,698 (48,975) -- -- Stock repurchased (1,255) (1,255) (43,606) -- -- (44,861) Stock reissued under dividend reinvestment and stock purchase plan 262 262 6,596 -- -- 6,858 Stock reissued due to conversion of subordinated debentures 41 41 910 -- -- 951 Net unrealized gain on investment securities -- -- -- -- (2,370) (2,370) - ----------------------------------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1996 26,778 26,778 265,584 158,284 7,880 458,526 Net income -- -- -- 60,660 -- 60,660 Cash dividends -- -- -- (24,240) -- (24,240) 5% stock dividend 1,307 1,307 60,179 (61,486) -- -- Stock repurchased (877) (877) (35,257) -- (36,134) Stock reissued under dividend reinvestment and stock purchase plan 241 241 9,333 -- 9,574 Stock reissued due to conversion of subordinated debentures 8 8 149 -- -- 157 Net unrealized loss on investment securities -- -- -- -- 8,660 8,660 - ----------------------------------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1997 27,457 $27,457 $299,988 $133,218 $16,540 $477,203 ============================================================================================================================= The accompanying notes to consolidated financial statements are an integral part of this statement.
34
OLD NATIONAL BANCORP CONSOLIDATED STATEMENT OF CASH FLOWS ($ in thousands) Years Ended December 31, 1997 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $60,660 $60,179 $53,939 - ----------------------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to cash provided by operating activities: Depreciation 9,208 8,298 7,902 Amortization of intangible assets 1,277 1,435 1,773 Net premium amortization on investment securities 1,658 2,200 1,722 Provision for loan losses 26,965 11,012 7,135 Net securities gains (50) (781) (52) (Gain) loss on sale of other assets (223) 254 (291) (Increase) decrease in interest receivable (2,504) 152 (6,031) (Increase) decrease in other assets (7,738) (1,615) 1,797 Increase in accrued expenses and other liabilities 7,367 5,172 8,576 - ----------------------------------------------------------------------------------------------------------------------------- Total adjustments 35,960 26,127 22,531 - ----------------------------------------------------------------------------------------------------------------------------- Net cash flows provided by operating activities 96,620 86,306 76,470 - ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of investment securities held-to-maturity -- -- (62,585) Purchase of investment securities available-for-sale (401,094) (453,068) (268,399) Proceeds from maturities of investment securities held-to-maturity -- -- 113,673 Proceeds from maturities of investment securities available-for-sale 301,722 333,963 189,170 Proceeds from sales of investments securities available-for-sale 59,866 29,372 35,210 Net principal collected from (loans made to) customers: Commercial and financial (83,802) (47,120) 40,691 Commercial/residential real estate, net of loans originated for sale (206,975) (159,703) (144,848) Consumer (12,977) (62,607) (66,930) Residential real estate loans originated for sale (26,775) (44,400) (36,322) Proceeds from sale of mortgage loans 26,979 44,734 36,541 Proceeds from sale of premises and equipment 976 1,059 1,258 Purchase of premises and equipment (10,313) (13,228) (12,041) - ----------------------------------------------------------------------------------------------------------------------------- Net cash flows used in investing activities (352,393) (370,998) (174,582) - ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits, short-term and other borrowings: Noninterest-bearing demand deposits (10,005) 36,562 27,161 Savings, NOW and money market deposits (63,840) 35,530 96,534 Certificates of deposit $100,000 and over 101,707 (27,473) 64,497 Other time deposits 2,844 40,323 119,139 Short-term borrowings 106,701 87,085 (187,374) Other borrowings 96,444 97,449 20,880 Net (payments on) proceeds from medium term notes 54,300 (6,000) 18,000 Cash dividends paid (24,240) (23,655) (22,441) Common stock repurchased (36,134) (44,861) (42,810) Common stock reissued, net of shares used to convert subordinated debentures 9,574 6,858 6,302 - ----------------------------------------------------------------------------------------------------------------------------- Net cash flows provided by financing activities 237,351 201,818 99,888 - ----------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (18,422) (82,874) 1,776 Cash and cash equivalents at beginning of period 187,103 269,977 268,201 - ----------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $168,681 $187,103 $269,977 ============================================================================================================================= 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 on nondiscounted loans is accrued on the principal balances of loans outstanding. Interest income on discounted loans is 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, 1997, approximately $1.2 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, the fair market value of the collateral and the 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. To appropriately reflect credit risks generally associated with ONB's non-prime automobile finance business, ONB purchases installment contracts from dealers at a discount from their principal amount. ONB negotiates the discount amount with dealers based upon various criteria, one of which is the credit risk associated with the contracts being purchased. The nonrefundable discount is allocated to the allowance for loan losses to further protect ONB from losses associated with such contracts. 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. 36 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. Identifiable intangible assets and the excess of total acquisition costs over the fair value of net assets acquired ($0.9 million and $12.8 million, respectively, at December 31, 1997) are being amortized on the straight-line basis over periods ranging from 8 to 25 years. Such assets are periodically evaluated as to the recoverability of their carrying value. NET INCOME PER SHARE Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during each year, adjusted to reflect all stock dividends (Note 9) and all mergers accounted for as pooling-of-interests as if they had occurred at the beginning of the earliest year presented. Net income per share, assuming dilution, is computed as above and assumes the conversion of outstanding subordinated debentures (Note 10). Below is a table reconciling basic and diluted earnings per share ("EPS").
NOTE 1 - EARNINGS PER SHARE RECONCILIATION ($ and shares in thousands except per share data): For the Year Ended For the Year Ended For the Year Ended December 31, 1997 December 31, 1996 December 31, 1995 Per-Share Per-Share Per-Share Income Shares Amount Income Shares Amount Income Shares Amount BASIC EPS Income available to common stockholders $60,660 27,699 $2.19 $60,179 28,695 $2.10 $53,939 29,631 $1.82 EFFECT OF DILUTIVE SECURITIES Stock options -- 95 -- 91 -- 88 8% convertible debentures 1,469 1,497 1,477 1,504 1,523 1,551 - -------------------------------------------------- ------------------- ---------------- DILUTED EPS Income available to common stockholders + assumed conversions $62,129 29,291 $2.12 $61,656 30,290 $2.04 $55,462 31,270 $1.77 =====================================================================================================================
37 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. 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, 1997, 1996, and 1995, for interest was $205.1 million, $190.2 million, and $180.6 million, respectively. Total income tax payments during 1997, 1996, and 1995, were $25.1 million, $24.1 million, and $17.1 million, respectively. IMPACT OF ACCOUNTING CHANGES Effective January 1, 1997, ONB adopted the provisions of SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This statement provides accounting standards for sales, securitization, and servicing of receivables, and other financial assets, secured borrowing and collateral transactions, and the extinguishment of liabilities. Certain other provisions of this statement are not effective until January 1, 1998. Effective December 31, 1997, ONB adopted the provisions of SFAS No. 128, "Earnings per Share". This statement established standards for computing and presenting EPS. The adoption of both above statements did not have a material impact on ONB's financial condition, results of operations, or EPS calculation. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" which establishes standards for reporting and display of comprehensive income and its components. The FASB also issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" which establishes standards for reporting information on operating segments. These statements are effective for fiscal years beginning after December 15, 1997. ONB does not expect the impact of these statements to be material to its disclosures. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform with the 1997 presentation. Such reclassifications had no effect on net income. NOTE 2 - BUSINESS COMBINATIONS MERGERS - PENDING During January 1998, ONB signed a non-binding letter of intent to merge with Edgar County Bank of Paris, Illinois, which had $148.2 million in total assets at December 31, 1997. The merger is subject to the execution of a definitive agreement and shareholder and regulatory approvals.
NOTE 3 - INVESTMENT SECURITIES The following tables summarize the amortized cost and fair value of the investment securities portfolio at December 31, 1997 and 1996, and the corresponding amounts of unrealized gains and losses therein ($ in thousands): Available-for-Sale Amortized Unrealized Unrealized Fair December 31, 1997: Cost Gains Losses Value U.S. Treasury $116,135 $1,130 ($77) $117,188 U.S. Government agencies and corporations 222,886 3,466 (347) $226,005 Mortgage-backed securities 716,961 9,291 (813) $725,439 State and political subdivisions 438,020 15,059 (146) $452,933 Other securities 45,411 -- $45,411 - ------------------------------------------------------------------------------------------------ Total $1,539,413 $28,946 ($1,383) $1,566,976 ================================================================================================ December 31, 1996: U.S. Treasury $153,630 $1,272 ($378) $154,524 U.S. Government agencies and corporations 222,244 1,565 (816) $222,993 Mortgage-backed securities 632,065 4,214 (3,009) $633,270 State and political subdivisions 452,720 11,218 (1,560) $462,378 Other securities 40,856 716 (88) $41,484 - ------------------------------------------------------------------------------------------------ Total $1,501,515 $18,985 ($5,851) $1,514,649 ================================================================================================
The amortized cost and fair value of the investment securities portfolio at December 31, 1997 and 1996, 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 during 1997 and 1996 were $59.9 million and $29.4 million, respectively. In 1997 realized gains and losses were $0.3 million and $0.2 million, respectively. In 1996 realized gains and losses were $0.8 million and $0.1 million. Investment securities with a carrying value of $564 million and $463 million at December 31, 1997 and 1996, respectively, were pledged to secure public and other funds as required.
($ in thousands) 1997 1996 Amortized Fair Amortized Fair Cost Value Cost Value MATURITY Within one year $190,717 $191,265 $192,906 $193,439 One to five years 903,334 919,815 694,576 701,232 Five to ten years 362,688 371,853 513,060 517,682 Beyond ten years 82,674 84,043 100,973 102,296 - --------------------------------------------------------------------------------- Total $1,539,413 $1,566,976 $1,501,515 $1,514,649 =================================================================================
39 NOTE 4 - LOANS The composition of loans at December 31, 1997 and 1996, by lending classification was as follows ($ in thousands): December 31, 1997 1996 Commercial $855,737 $769,889 Economic development bonds 22,953 26,424 Commercial real estate 762,505 668,671 Residential real estate 1,416,963 1,303,283 Consumer credit, net 746,533 755,033 - ------------------------------------------------------------------- Total loans $3,804,691 $3,523,300 =================================================================== Through its affiliates, ONB makes loans to customers in various industries including manufacturing, agribusiness, transportation, mining, wholesaling, and retailing, predominately in its tri-state region. The loan portfolio is diversified with no single industry exceeding 10% of the total. Executive officers and directors of ONB and significant subsidiaries and their related interests are loan customers of ONB's affiliate banks in the normal course of business. These loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with unrelated parties and involve no unusual risk of collectibility. An analysis of the 1997 activity of these loans is as follows ($ in thousands): Balance, January 1, 1997 $107,065 New loans 199,923 Repayments (176,548) Officer and director changes 1,016 - -------------------------------------------------------------------- Balance, December 31, 1997 $131,456 ====================================================================
NOTE 5 - ALLOWANCE FOR LOAN LOSSES Activity in the allowance for loan losses during the years 1997, 1996, and 1995 was as follows ($ in thousands): December 31, 1997 1996 1995 Balance at beginning of year $44,053 $40,917 $41,943 Additions: Provision charged to expense 26,965 11,012 7,135 Nonrefundable dealer discounts 2,910 3,133 -- Deductions: Loans charged off 29,678 15,378 11,220 Recoveries (4,405) (4,369) (3,059) - ---------------------------------------------------------------------------------- Net charge-offs 25,273 11,009 8,161 - ---------------------------------------------------------------------------------- Balance at end of year $48,655 $44,053 $40,917 ==================================================================================
40 At December 31, 1997, the recorded investment in loans for which impairment has been recognized in accordance with SFAS Nos. 114 and 118 was $6.8 million with no related allowance and $45.0 million with $11.2 million of related allowance. At December 31, 1996, the recorded investment in loans for which impairment has been recognized in accordance with SFAS Nos. 114 and 118 was $3.9 million with no related allowance and $51.5 million with $12.6 million of related allowance. For the year ended December 31, 1997, the average balance of impaired loans was $54.1 million, for which $3.6 million of interest was recorded. For the year ended December 31, 1996, the average balance of impaired loans was $54.8 million, for which $3.8 million of interest was recorded. NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized in the consolidated balance sheet, for which it is practicable to estimate fair value. The following methods and assumptions were used to estimate the fair value of each type of financial instrument. CASH, DUE FROM BANKS AND MONEY MARKET INVESTMENTS For these instruments, the carrying amount is a reasonable estimate of fair value. INVESTMENT SECURITIES For investment securities, fair values are based on quoted market prices, if available. For securities where quoted prices are not available, fair value is estimated based on market prices of similar securities. LOANS The fair value of loans is estimated by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. DEPOSITS The fair value of noninterest-bearing demand deposits and savings, NOW, and money market deposits is the amount payable as of the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using rates currently offered for deposits with similar remaining maturities. SHORT-TERM BORROWINGS Federal funds purchased and securities sold under agreements to repurchase generally have an original term to maturity of 30 days or less and, therefore, their carrying amount is a reasonable estimate of fair value. MEDIUM TERM NOTES AND SUBORDINATED DEBENTURES The fair value of 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, 1997, are as follows ($ in thousands): Carrying Fair Value Value Financial Assets: Cash, due from banks and money market investments $ 168,681 $ 168,681 Investment securities 1,566,976 1,566,976 Loans, net 3,756,036 3,801,107 Financial Liabilities: Deposits 4,298,730 4,290,546 Short-term borrowings 442,686 442,686 Other borrowings 388,832 424,872 Off-Balance-Sheet Financial Instruments: Commitments to extend credit 690,065 690,065 Letters of credit 29,145 29,145 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: 1997 1996 1995 Provision at statutory rate 35.0% 35.0% 35.0% Tax exempt income (9.7) (9.6) (10.9) State income taxes 4.0 3.6 3.2 Other, net (0.7) 0.4 0.2 - -------------------------------------------------------------------------- Actual tax rate 28.6% 29.4% 27.5% ==========================================================================
The provision for income taxes consists of the following components ($ in thousands): 1997 1996 1995 Income taxes currently payable - federal $20,382 $19,801 $16,048 Income taxes currently payable - state 5,187 4,786 3,790 Deferred income taxes related to: Provision for loan losses (2,519) (996) (117) Other, net 1,289 1,481 720 - ------------------------------------------------------------------------------------------ Deferred income tax expense (benefit) (1,230) 485 603 - ------------------------------------------------------------------------------------------ Provision for income taxes $24,339 $25,072 $20,441 ==========================================================================================
Significant components of ONB's net deferred tax assets at December 31 are as follows ($ in thousands): 1997 1996 Deferred Tax Assets: Allowance for loan losses, net of recapture $17,296 $15,006 Benefit plan accruals 4,110 3,309 Net operating loss carryforwards 613 1,484 Purchase accounting adjustments 579 579 - --------------------------------------------------------------------------- Total deferred tax assets 22,598 20,378 - --------------------------------------------------------------------------- Deferred Tax Liabilities: Premises and equipment (2,389) (2,702) Accretion on investment securities (957) (763) Unrealized gain on available- for-sale investment securities (11,023) (5,254) Lease receivable, net (2,078) (1,352) Other, net (1,018) (635) - --------------------------------------------------------------------------- Total deferred tax liabilities (17,465) (10,706) - --------------------------------------------------------------------------- Net deferred tax assets $5,133 $9,672 =========================================================================== At December 31, 1997, ONB had $1.5 million federal net operating loss carryforwards which expire between 2002 and 2009. These net operating loss carryforwards are attributable to several of ONB's affiliate banks. Tax law imposes a limitation on the utilization of net operating loss carryforwards generated by an acquired entity. ONB expects to utilize all of the federal net operating loss carryforwards in 1998. 42 NOTE 8 - EMPLOYEE BENEFIT PLANS RETIREMENT PLAN ONB has a noncontributory defined benefit retirement plan covering substantially all full-time employees. Retirement benefits are based on years of service and compensation during the highest paid five years of employment. ONB's policy is to contribute at least the minimum funding requirement determined by the plan's actuary. The table below sets forth the plan's funded status and the amount recognized in the consolidated balance sheet at December 31, 1997, 1996, and 1995.
($ in thousands) 1997 1996 1995 Acturial present value of the accumulated benefit obligation, including vested benefits of $17,823 in 1997, $16,099 in 1996, and $14,086 in 1995 $19,674 $17,576 $15,233 ===================================================================================== Actuarial present value of the projected benefit obligation, for service rendered to date 26,730 23,647 21,091 Plan assets, primarily common stocks, bonds, and guaranteed investment contracts 24,138 21,859 19,943 - ------------------------------------------------------------------------------------- Plan assets less than projected benefit obligation (2,592) (1,788) (1,148) Unrecognized net loss during the year 94 990 784 Unrecognized prior service cost 12 421 473 Remaining unrecognized overfunding at date of adoption of SFAS No. 87, being recognized over 18.5 years (2,488) (2,850) (3,058) - -------------------------------------------------------------------------------------- Accrued pension cost included in other liabilities $(4,974) $(3,227) $(2,949) ======================================================================================
The net pension expense and its components were as follows ($ in thousands): 1997 1996 1995 Service cost - benefits earned during period $ 2,134 $ 1,867 $1,667 Interest cost on projected benefit obligation 1,831 1,681 1,562 Actual return on plan assets (4,122) (1,707) (2,785) Net amortization and deferral 2,092 (293) 1,020 - -------------------------------------------------------------------------------------- Net pension expense $ 1,935 $ 1,548 $1,464 ======================================================================================
Each year, ONB consults with its actuary to assess the appropriateness of assumptions used in the determination of retirement plan expense and funded status information for the discount rate, the long-term rate of return on assets, and the rate of salary progression. The assumptions reflected in the table above include a discount rate at December 31 of 8.00% in 1997 and 7.75% in 1996 and 1995, a long-term rate of return of 8.00% in 1995-1997, and a rate of salary progression of 5.00% in 1995-1997. The total retirement plan expense for all plans was $2.2 million in 1997, $1.6 million in 1996, and $1.6 million in 1995. 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 1997, 1996, and 1995 was $4.5 million, $4.0 million, and $3.8 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 26,817 in 1997, 21,747 in 1996, and 25,131 in 1995. Expense recorded in 1997, 1996, and 1995 was $1.2 million, $0.8 million, and $0.7 million, respectively. 43 NOTE 9 - SHAREHOLDERS' EQUITY STOCK DIVIDEND A 5% stock dividend was declared on December 11, 1997, and distributed on January 29, 1998. All average share and per share amounts have been retroactively adjusted to reflect this stock dividend. DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN ONB has a dividend reinvestment and stock purchase plan under which common shares issued may be either repurchased shares or authorized and previously unissued shares. As of December 31, 1997, 2.0 million 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, 1997, ONB had $80.0 million in unsecured lines of credit with unaffiliated banks with $63.0 million unused. The lines bear interest at the bank's federal funds rate plus 60 to 80 basis points. During the years 1997, 1996, and 1995, the average interest rates on the lines were 6.26%, 6.17%, and 6.71%, 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, 1997, ONB had $260.1 million borrowed from various Federal Home Loan Banks (FHLB). Floating-rate borrowings totaled $103.3 million and will mature between 1998 and 1999. The remaining borrowings have a fixed interest rate and mature between 1998 and 2017. The weighted average rates of the FHLB borrowings were 5.96% and 5.84% at December 31, 1997 and 1996, respectively. A portion of these borrowings is secured by specific mortgage loans which have a current book value of approximately $191.8 million. 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, 1997, a total of $44 million of the notes were outstanding with maturities ranging from one to six years and fixed interest rates ranging from 6.04% 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, 1997, a total of $54.3 million of the notes were outstanding, with maturities ranging from five to ten years and fixed interest rates from 6.40% to 7.03% SUBORDINATED DEBENTURES ONB has outstanding $30.4 million of 8% convertible subordinated debentures 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 49.218 shares per $1,000 principal amount of debentures. During 1997, $0.2 million principal amount of debentures was converted into 7,727 shares of ONB common stock. Interest on the debentures is payable on 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, 1997, 1.5 million authorized and unissued common shares were reserved for conversion of the remaining debentures. 44 NOTE 11 - COMMITMENTS AND CONTINGENCIES LEASES ONB rents certain premises and equipment under operating leases which expire at various dates. Many of these leases provide for payment by ONB of property taxes, insurance premiums, maintenance, and other costs. In some cases, rentals are subject to increase in relation to a cost-of-living index. Total rental expense was $4.0 million in 1997, $3.9 million in 1996, and $3.9 million in 1995. Following is a summary of future minimum lease commitments ($ in thousands): 1998 $5,747 2001 $2,002 1999 2,713 2002 1,854 2000 2,050 2003 and after 1,597 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 $690.1 million, including $246.5 million of short-term commitments with fixed-rates, and letters of credit of $29.1 million at December 31, 1997. These commitments are not reflected in the consolidated financial statements. No material losses are expected to result from these transactions. LITIGATION At December 31, 1997, various legal actions and proceedings were pending against ONB and its affiliates. 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 12 - 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 non-interest bearing and unavailable for investment purposes. The reserve balances at December 31, 1997 and 1996, were $24.1 million and $32.4 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, 1997, affiliate banks could pay aggregate dividends to ONB of approximately $15.1 million without prior regulatory approval. CAPITAL ADEQUACY For additional information on capital adequacy see Table 16 in Management's Discussion and Analysis on page 29. 45 NOTE 13 - PARENT COMPANY FINANCIAL STATEMENTS The following are the condensed parent company only financial statements of Old National Bancorp ($ in thousands):
OLD NATIONAL BANCORP (PARENT COMPANY ONLY) CONDENSED BALANCE SHEET December 31, ASSETS 1997 1996 Deposits in affiliate banks $427 $1,686 Investment in affiliates: Banks, including purchase accounting intangible assets of $7,927 in 1997 and $8,613 in 1996 523,262 528,747 Non-banks 18,778 10,703 Advances to affiliates 76,888 58,492 Other assets 13,029 6,682 - ----------------------------------------------------------------------------------------------- TOTAL ASSETS $632,384 $606,310 =============================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Short-term borrowings $17,008 $67,206 Other liabilities 9,466 6,014 8% convertible subordinated debentures, due 2012 30,407 30,564 Medium term notes 98,300 44,000 Shareholders' equity 477,203 458,526 - ----------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $632,384 $606,310 ===============================================================================================
OLD NATIONAL BANCORP (PARENT COMPANY ONLY) CONDENSED STATEMENT OF INCOME Years Ended December 31, 1997 1996 1995 INCOME Dividends from affiliates $82,746 $49,570 $87,646 Income on other investments 307 2,320 1,202 Other income from affiliates 12,631 5,918 5,090 - ------------------------------------------------------------------------------------------------ TOTAL INCOME 95,684 57,808 93,938 - ------------------------------------------------------------------------------------------------ EXPENSE Interest on borrowings 10,283 7,014 7,023 Amortization of intangibles 686 707 1,231 Other expenses 10,187 9,378 7,816 - ------------------------------------------------------------------------------------------------ TOTAL EXPENSE 21,156 17,099 16,070 - ------------------------------------------------------------------------------------------------ Income before income taxes and equity in undistributed earnings of affiliates 74,528 40,709 77,868 Income tax benefit (3,415) (3,541) (3,464) - ------------------------------------------------------------------------------------------------ Income before equity in undistributed earnings of affiliates 77,943 44,250 81,332 Equity in undistributed earnings of affiliates (17,283) 15,929 (27,393) - ------------------------------------------------------------------------------------------------ NET INCOME $60,660 $60,179 $53,939 ================================================================================================
46
OLD NATIONAL BANCORP (PARENT COMPANY ONLY) CONDENSED STATEMENT OF CASH FLOWS Years Ended December 31, 1997 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $60,660 $60,179 $53,939 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 275 201 204 Amortization of intangible assets 686 707 1,231 (Increase) decrease in other assets (4,635) 34,857 (37,601) Increase (decrease) in other liabilities 3,452 (330) (163) Equity in undistributed earnings of affiliates 17,283 (15,929) 27,393 - ------------------------------------------------------------------------------------------------ Total adjustments 17,061 19,506 (8,936) - ------------------------------------------------------------------------------------------------ Net cash flows provided by operating activities 77,721 79,685 45,003 - ------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Net advances to affiliates (30,295) (59,908) (6,451) Purchase of premises and equipment (1,987) (283) (198) - ------------------------------------------------------------------------------------------------ Net cash flows used in investing activities (32,282) (60,191) (6,649) - ------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from short-term borrowings (50,198) 48,652 1,559 Net (payments on) proceeds from medium term notes 54,300 (6,000) 18,000 Cash dividends paid (24,240) (23,655) (22,441) Common stock repurchased (36,134) (44,861) (42,810) Common stock reissued, net of shares used to convert subordinated debentures 9,574 6,858 6,302 - ------------------------------------------------------------------------------------------------ Net cash flows used in financing activities (46,698) (19,006) (39,390) - ------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents (1,259) 488 (1,036) Cash and cash equivalents at beginning of period 1,686 1,198 2,234 - ------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $427 $1,686 $1,198 ================================================================================================
47 ANNUAL MEETING The Annual Meeting of Shareholders will be held Thursday, April 16, 1998, at 10:30 a.m. Central Daylight Time, at Roberts Municipal Stadium, 2600 Division St., Evansville, Indiana. CORPORATE OFFICE 420 Main Street Evansville, Indiana 47708 812-464-1434 Website: www.oldnational.com STOCK INFORMATION The stock of the company is traded over-the-counter on the NASDAQ National Market System under Ticker Symbol OLDB. The Stock Transfer Agent is Old National Bancorp Post Office Box 718 Evansville, Indiana 47705-0718 In December 1997, a 5% stock dividend was declared to shareholders of record on January 8, 1998. There were 13,781 shareholders of record as of December 31, 1997. MARKET MAKERS The following firms make a market in Old National Bancorp's stock: Herzog, Heine, Geduld, Inc. J.J.B. Hilliard, W.L. Lyons Keefe, Bruyette & Woods, Inc. McDonald & Company Sec., Inc. NatCity Investments, Inc. Smith Barney, Inc. STOCK PURCHASE AND DISCOUNTED DIVIDEND REINVESTMENT PLAN The company offers a direct stock purchase and discounted dividend reinvestment plan to all interested investors. For information concerning this convenient method of purchasing shares of stock contact: Shareholder Services Department Old National Bancorp Post Office Box 718 Evansville, Indiana 47705-0718 ADDITIONAL INFORMATION Shareholders and interested investors may obtain information about the company upon written request or by calling: John Claybon, CFA Investor Relations Officer Old National Bancorp Post Office Box 718 Evansville, Indiana 47705-0718 812-464-1442 FORM 10-K The Annual Report on Form 10-K, as required to be filed with the Securities and Exchange Commission, is available without charge upon written request or by calling: Ronald W. Seib, CPA Vice President-Corporate Controller Old National Bancorp Post Office Box 718 Evansville, Indiana 47705-0718 812-464-1530 EQUAL OPPORTUNITY EMPLOYER The company maintains its commitment to equal opportunity and affirmative action in employment and promotion policies and pledges to recruit, hire, train, and promote persons in all job classifications without regard to race, color, religion, sex, age, or handicap. The table below lists the NASDAQ price quotes and dividend data for Old National Bancorp stock over the last two years.* Price Per Share Share Dividend High Low Volume Declared 1997 First Quarter $35 61/64 $34 17/32 1,140,400 $.22 Second Quarter 42 3/8 35 23/32 875,400 .22 Third Quarter 43 21/64 41 43/64 1,075,300 .22 Fourth Quarter 47 31/32 42 17/64 579,200 .22 1996 First Quarter $30 25/64 $29 19/32 923,400 $.21 Second Quarter 34 1/64 30 5/32 1,604,700 .21 Third Quarter 34 1/8 32 7/8 1,134,500 .21 Fourth Quarter 35 19/32 32 49/64 1,629,800 .21 *Data adjusted for all stock dividends, including a 5% stock dividend to shareholders of record on January 8, 1998, distributed on January 29, 1998. 53 EX-21 4
EXHIBIT 21 OLD NATIONAL BANCORP SUBSIDIARIES OF THE REGISTRANT AS OF DECEMBER 31, 1997 Jurisdiction of Business Name Name of Subsidiary Incorporation of Subsidiary - ------------------------------ --------------------------- ----------------- Old National Bank in Evansville United States of America Old National Bank (Evansville, Indiana) Merchants National Bank United States of America Merchants National Bank of Terre Haute (Terre Haute, Indiana) First Citizens Bank and Indiana First Citizens Bank and Trust Company Trust Company (Greencastle, Indiana) Security Bank & Trust Co. Indiana Security Bank & Trust Co. (Vincennes, Indiana) Farmers Bank & Trust Co. Kentucky Farmers Bank & Trust Co. (Madisonville, Kentucky) The Peoples National Bank United States of America The Peoples National Bank of Lawrenceville of Lawrenceville (Lawrenceville, Illinois) First State Bank of Kentucky First State Bank Greenville Kentucky (Greenville, Kentucky) Morganfield National Bank United States of America Morganfield National Bank (Morganfield, Kentucky) The First National Bank of United States of America First National Bank Harrisburg (Harrisburg, Illinois) Security Bank & Trust Co. Illinois Security Bank & Trust Co. (Mt. Carmel, Illinois) Farmers Bank & Trust Company Kentucky Farmers Bank & Trust (Henderson, Kentucky) Company United Southwest Bank Indiana United Southwest Bank (Washington, Indiana) Palmer-American National Bank United States of America Palmer-American National (Danville, Illinois) Bank Old National Realty Company, Inc. Indiana Old National Realty (Evansville, Indiana) Company, Inc. Indiana Old National Insurance Arizona IONIC Company (Evansville, Indiana) Old National Service Corporation Indiana Old National Service (Evansville, Indiana) Corporation Jurisdiction of Business Name Name of Subsidiary Incorporation of Subsidiary - ----------------------- ---------------------- -------------------- Dubois County Bank Indiana Dubois County Bank (Jasper, Indiana) Bank of Western Indiana Indiana Bank of Western Indiana (Covington, Indiana) Orange County Bank Indiana Orange County Bank (Paoli, Indiana) First National Bank United States of America First National Bank (Oblong, Illinois) Citizens National Bank United States of America Citizens National Bank (Tell City, Indiana) Workingmens/ONB Bank United States of America Workingmens/ONB Bank (Bloomington, Indiana) City National Bank United States of America City National Bank (Fulton, Kentucky) The National Bank of Carmi United States of America The National Bank of Carmi (Carmi, Illinois) Old National Trust Company United States of America Old National Trust Company (Evansville, Indiana) Old National Trust Company United States of America Old National Trust Company- -Kentucky Kentucky (Morganfield, Kentucky) Old National Trust Company United States of America Old National Trust Company- -Illinois Illinois (Mt. Carmel, Illinois) Consumer Acceptance Corporation Indiana Consumer Acceptance (Indianapolis, Indiana) Corporation
EX-23 5 exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report incorporated by reference in this Form 10-K into the Registrant's previously filed Registration Statement File No. 333-29433. ARTHUR ANDERSEN LLP s/s Arthur Andersen LLP Indianapolis, Indiana, March 30, 1998 EX-27 6
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM OLD NATIONAL BANCORP'S DECEMBER 31, 1997 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 YEAR DEC-31-1997 DEC-31-1997 160,813 624 7,244 0 1,566,976 0 0 3,804,691 48,655 5,686,398 4,298,730 442,686 78,947 388,832 0 0 27,457 449,746 5,686,398 329,699 99,059 688 429,446 168,123 210,208 219,238 26,965 50 21,289 84,999 60,660 0 0 60,660 2.19 2.12 4.46 14,283 4,405 248 111,123 44,053 29,678 4,405 48,655 48,655 0 0
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