UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-15817
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OLD NATIONAL BANCORP
(Exact name of 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 47708
Evansville, Indiana (Zip Code)
(Address of principal executive offices)
----------------
(812) 464-1434
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) 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, and (2) has been subject to the filing requirements for
at least the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock. The Registrant has one class of common stock (no par value) with
66,073,000 shares outstanding at July 31, 2004.
OLD NATIONAL BANCORP
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
--------
Consolidated Balance Sheet
June 30, 2004 and 2003, and December 31, 2003 3
Consolidated Statement of Income
Three and six months ended June 30, 2004 and 2003 4
Consolidated Statement of Changes in Shareholders' Equity
Six months ended June 30, 2004 and 2003 5
Consolidated Statement of Cash Flows
Six months ended June 30, 2004 and 2003 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 27
Item 4. Controls and Procedures 30
PART II OTHER INFORMATION 31
SIGNATURES 34
2
OLD NATIONAL BANCORP
CONSOLIDATED BALANCE SHEET
- -----------------------------------------------------------------------------------------------------------------------
June 30, December 31,
(unaudited)
(dollars and shares in thousands) 2004 2003 2003
- -----------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 198,263 $ 228,472 $ 222,385
Money market investments 280,811 14,283 14,504
- -----------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 479,074 242,755 236,889
Investment securities - available-for-sale, at fair value:
U.S. Treasury 71,645 5,289 26,057
U.S. Government agencies and corporations 551,317 554,271 580,820
Mortgage-backed securities 1,169,560 1,725,616 1,298,881
States and political subdivisions 638,955 679,612 655,068
Other securities 135,928 122,652 145,514
- -----------------------------------------------------------------------------------------------------------------------
Investment securities - available-for-sale 2,567,405 3,087,440 2,706,340
Investment securities - held-to-maturity, at amortized cost:
Mortgage-backed securities (fair value $186,210, $234,853, and 192,934 232,322 210,905
$209,316, respectively)
Residential loans held for sale 26,846 56,270 16,338
Loans:
Commercial 1,618,677 1,709,921 1,618,095
Commercial real estate 1,758,748 1,876,033 1,849,275
Residential real estate 534,688 895,259 939,422
Consumer credit, net of unearned income 1,195,082 1,090,089 1,163,325
- -----------------------------------------------------------------------------------------------------------------------
Total loans 5,107,195 5,571,302 5,570,117
Allowance for loan losses (103,646) (98,027) (104,571)
- -----------------------------------------------------------------------------------------------------------------------
Net loans 5,003,549 5,473,275 5,465,546
- -----------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 201,689 151,403 181,398
Goodwill 129,265 115,106 129,251
Other intangible assets 40,313 30,952 41,912
Mortgage servicing rights 17,571 9,843 14,659
Accrued interest receivable and other assets 374,223 338,351 350,658
- -----------------------------------------------------------------------------------------------------------------------
Total assets $9,032,869 $9,737,717 $9,353,896
=======================================================================================================================
Liabilities
Deposits:
Noninterest-bearing demand $ 784,499 $ 835,100 $ 823,146
Interest-bearing:
NOW 1,727,947 1,560,974 1,612,145
Savings 477,238 513,442 441,427
Money market 579,490 565,216 608,177
Time 2,777,151 3,002,697 3,008,197
- -----------------------------------------------------------------------------------------------------------------------
Total deposits 6,346,325 6,477,429 6,493,092
Short-term borrowings 426,679 607,101 414,588
Other borrowings 1,456,179 1,552,105 1,624,092
Guaranteed preferred beneficial interests in subordinated debentures - 166,932 -
Accrued expenses and other liabilities 130,388 168,488 106,634
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 8,359,571 8,972,055 8,638,406
- -----------------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Preferred stock, 2,000 shares authorized, no shares issued or outstanding - - -
Common stock, $1 stated value, 150,000 shares authorized,
66,273, 63,522 and 66,575 shares issued and outstanding, respectively 66,273 63,522 66,575
Capital surplus 574,681 521,064 581,224
Retained earnings 58,667 125,792 53,107
Accumulated other comprehensive income (loss), net of tax (26,323) 55,284 14,584
- -----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 673,298 765,662 715,490
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $9,032,869 $9,737,717 $9,353,896
=======================================================================================================================
The accompanying notes to consolidated financial statements are an integral part
of this statement.
3
OLD NATIONAL BANCORP
CONSOLIDATED STATEMENT OF INCOME
- -------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
(dollars and shares in thousands, except per share data) June 30, June 30,
(unaudited) 2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------
Interest Income
Loans including fees:
Taxable $72,691 $ 81,515 $147,073 $166,470
Nontaxable 4,324 4,282 8,691 8,546
Investment securities, available-for-sale:
Taxable 18,995 24,213 38,888 50,195
Nontaxable 7,341 7,826 14,703 15,855
Investment securities, held-to-maturity, taxable 1,987 2,339 4,084 2,616
Money market investments 90 58 110 129
- -------------------------------------------------------------------------------------------------------
Total interest income 105,428 120,233 213,549 243,811
- -------------------------------------------------------------------------------------------------------
Interest Expense
Deposits 26,948 36,496 56,313 74,575
Short-term borrowings 1,063 2,008 2,053 4,582
Other borrowings 12,260 13,264 24,915 26,386
- -------------------------------------------------------------------------------------------------------
Total interest expense 40,271 51,768 83,281 105,543
- -------------------------------------------------------------------------------------------------------
Net interest income 65,157 68,465 130,268 138,268
Provision for loan losses 7,500 22,500 15,000 31,500
- -------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 57,657 45,965 115,268 106,768
- -------------------------------------------------------------------------------------------------------
Noninterest Income
Trust and asset management fees 8,042 7,723 15,542 15,083
Service charges on deposit accounts 12,386 11,581 23,151 22,359
ATM fees 2,190 2,025 4,155 3,892
Mortgage banking revenue 7,139 4,865 6,819 9,268
Insurance premiums and commissions 14,381 9,068 28,890 17,315
Investment product fees 3,775 2,683 6,960 5,361
Bank-owned life insurance 1,782 1,755 3,835 3,440
Net securities gains 21 20,750 2,006 23,480
Other income 1,356 2,463 5,342 5,635
- -------------------------------------------------------------------------------------------------------
Total noninterest income 51,072 62,913 96,700 105,833
- -------------------------------------------------------------------------------------------------------
Noninterest Expense
Salaries and employee benefits 53,526 44,135 102,795 85,795
Occupancy 4,667 4,536 9,518 9,057
Equipment 3,476 3,828 7,038 7,526
Marketing 2,032 2,798 4,390 5,225
Outside processing 5,619 4,861 10,589 9,053
Communication and transportation 2,751 2,774 5,720 5,893
Professional fees 17,025 2,451 20,113 4,867
Loan expense 1,804 1,616 3,271 2,995
Supplies 974 1,348 2,033 2,610
Other real estate owned expense 367 318 2,023 865
Other expense 6,446 5,295 11,650 10,239
- -------------------------------------------------------------------------------------------------------
Total noninterest expense 98,687 73,960 179,140 144,125
- -------------------------------------------------------------------------------------------------------
Income before income taxes 10,042 34,918 32,828 68,476
Income tax expense (benefit) (1,241) 7,851 2,036 15,149
- -------------------------------------------------------------------------------------------------------
Net income $ 11,283 $ 27,067 $ 30,792 $ 53,327
=======================================================================================================
Net Income Per Common Share
Basic $0.17 $0.41 $0.46 $0.80
Diluted 0.17 0.41 0.46 0.80
- -------------------------------------------------------------------------------------------------------
Weighted Average Number Of Common Shares Outstanding
Basic 66,334 66,646 66,347 66,767
Diluted 66,819 66,699 66,615 66,821
- -------------------------------------------------------------------------------------------------------
Dividends Per Common Share $0.19 $0.18 $0.38 $0.36
The accompanying notes to consolidated financial statements are an integral part
of this statement.
4
OLD NATIONAL BANCORP
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------
Accumulated
Other Total
(dollars and shares Common Stock Capital Retained Comprehensive Shareholders'
in thousands) (unaudited) Shares Amount Surplus Earnings Income (Loss) Equity
- -----------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 63,856 $63,856 $528,379 $ 96,652 $ 51,823 $740,710
Net income - - - 53,327 - 53,327
Unrealized net securities gains,
net of $7,788 tax - - - - 18,034 18,034
Reclassification adjustment for
gains included in net income,
net of $(7,821) tax - - - - (15,659) (15,659)
Net unrealized derivative gains
on cash flow hedges,
net of $647 tax - - - - 998 998
Reclassification adjustment on
cash flow hedges,
net of $56 tax - - - - 88 88
Stock issued for acquisitions 335 335 7,158 - - 7,493
Cash dividends - - - (24,187) - (24,187)
Stock repurchased (970) (970) (20,590) - - (21,560)
Stock issued under stock
option and stock purchase plans 301 301 6,117 - - 6,418
- -----------------------------------------------------------------------------------------------------------------
Balance, June 30, 2003 63,522 $63,522 $521,064 $125,792 $ 55,284 $765,662
=================================================================================================================
Balance, December 31, 2003 66,575 $66,575 $581,224 $ 53,107 $ 14,584 $715,490
Net income - - - 30,792 - 30,792
Unrealized net securities losses,
net of $(25,770) tax - - - - (40,354) (40,354)
Reclassification adjustment for
gains included in net income,
net of $(843) tax - - - - (1,163) (1,163)
Net unrealized derivative gains
on cash flow hedges,
net of $333 tax - - - - 516 516
Reclassification adjustment on
cash flow hedges,
net of $62 tax - - - - 94 94
Cash dividends - - - (25,232) - (25,232)
Stock repurchased (729) (729) (15,402) - - (16,131)
Stock issued under stock
option and stock purchase plans 427 427 8,859 - - 9,286
- -----------------------------------------------------------------------------------------------------------------
Balance, June 30, 2004 66,273 $66,273 $574,681 $ 58,667 $(26,323) $673,298
=================================================================================================================
The accompanying notes to consolidated financial statements are an integral part
of this statement.
5
OLD NATIONAL BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------
Six Months Ended
June 30,
(dollars in thousands) (unaudited) 2004 2003
- ----------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income $ 30,792 $ 53,327
- ----------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation 6,420 6,444
Amortization of other intangible assets 1,599 1,081
Net premium amortization on investment securities 4,346 6,741
Provision for loan losses 15,000 31,500
Net securities gains (2,006) (23,480)
Gains on sales of loans and other assets (4,645) (6,557)
Residential real estate loans originated for sale (193,881) (530,926)
Proceeds from sale of residential real estate loans 187,226 573,911
(Increase) decrease in other assets (37,299) 10,835
Increase in accrued expenses and other liabilities 49,972 45,721
- ----------------------------------------------------------------------------------------------------------
Total adjustments 26,732 115,270
- ----------------------------------------------------------------------------------------------------------
Net cash flows provided by operating activities 57,524 168,597
- ----------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Cash and cash equivalents of subsidiaries acquired - 1,497
Purchases of investment securities available-for-sale (548,877) (1,644,454)
Proceeds from maturities, prepayments and calls
of investment securities available-for-sale 401,356 720,980
Proceeds from sales of investment securities available-for-sale 216,493 933,167
Purchases of investment securities held-to-maturity - (237,190)
Proceeds from maturities, prepayments and calls
of investment securities held-to-maturity 17,464 4,618
Proceeds from sale of loans 404,424 8,854
Net principal collected from customers 42,573 75,666
Proceeds from sale of premises and equipment 2,669 433
Purchases of premises and equipment (28,993) (23,262)
- ----------------------------------------------------------------------------------------------------------
Net cash flows provided by (used in) investing activities 507,109 (159,691)
- ----------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Net increase (decrease) in deposits and short-term borrowings:
Noninterest-bearing demand deposits (38,647) 56,671
Savings, NOW and money market deposits 122,926 209,766
Time deposits (231,046) (228,288)
Short-term borrowings 12,091 (311,248)
Payments for maturities on other borrowings (210,238) (71,549)
Proceeds from issuance of other borrowings 54,543 381,600
Cash dividends paid (25,232) (24,187)
Common stock repurchased (16,131) (21,560)
Common stock issued under stock option and stock purchase plans 9,286 6,418
- ----------------------------------------------------------------------------------------------------------
Net cash flows used in financing activities (322,448) (2,377)
- ----------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 242,185 6,529
Cash and cash equivalents at beginning of period 236,889 236,226
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 479,074 $ 242,755
==========================================================================================================
Total interest paid $86,488 $108,425
Total taxes paid $6,990 $13,599
The accompanying notes to consolidated financial statements are an integral part
of this statement.
6
OLD NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Old National Bancorp and its wholly-owned affiliates ("Old
National") and have been prepared in conformity with accounting principles
generally accepted in the United States of America 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. Certain
prior year amounts have been reclassified to conform with the 2004 presentation.
Such reclassifications had no effect on net income. In the opinion of
management, the consolidated financial statements contain all the normal and
recurring adjustments necessary for a fair statement of the financial position
of Old National as of June 30, 2004 and 2003, and December 31, 2003, and the
results of its operations for the three and six months ended June 30, 2004 and
2003. Interim results do not necessarily represent annual results.
NOTE 2 - IMPACT OF ACCOUNTING CHANGES
In December 2003, the Financial Accounting Standards Board ("FASB") revised
Statement of Financial Accounting Standards ("SFAS") No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." This statement
requires annual disclosures in addition to those in the original SFAS No. 132,
which provides additional information regarding assets, obligations, cash flows
and net periodic benefit costs of defined benefit pension plans. In addition,
interim disclosure of the components of net periodic benefit costs is required.
The revised SFAS No. 132 is effective for financial statements with fiscal years
ending after December 15, 2003. Old National adopted this statement as of
December 31, 2003, and has included all such required disclosures in Note 10.
In December 2003, the FASB revised FASB Interpretation No. 46 ("FIN 46R"),
"Consolidation of Variable Interest Entities," which was initially released in
January 2003. FIN 46R provides guidance with respect to variable interest
entities and when the assets, liabilities, noncontrolling interest and results
of operations of a variable interest entity need to be included in a company's
consolidated financial statements. FIN 46R was effective for companies with
"special-purpose entities" as of December 31, 2003. Old National does not have
special-purpose entities. However, under this new guidance, Old National was
required to deconsolidate ONB Capital Trust I and ONB Capital Trust II as these
trusts no longer meet the definition of a related subsidiary under the terms of
FIN 46R. This change also resulted in the remaining debt being disclosed in
"other borrowings" beginning with the period ending December 31, 2003, compared
to the separate disclosure on the balance sheet prior to that date. The effect
of this deconsolidation was an increase of $4.6 million to both assets and
liabilities with no impact to the results of operations. The effective date for
consolidation of all other entities was after March 15, 2004. Old National
consolidated various low income housing partnerships on March 31, 2004, for
which the impact on the results of operations and financial position was
immaterial.
Old National applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for the stock option plan. Accordingly, no
compensation costs have been recognized. In accordance with SFAS No. 148,
"Accounting for Stock-based Compensation - Transition and Disclosure" and SFAS
No. 123, "Accounting for Stock-Based Compensation," Old National has presented
in the following table net income and net income per share adjusted to proforma
amounts had compensation cost for Old National's stock option plan been recorded
based on the fair value at the grant dates for awards under the plan. All per
share data has been adjusted for stock dividends, including a 5% stock dividend
distributed to shareholders on January 27, 2004.
7
- ---------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
(dollars in thousands, except per share data) 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------
Net income as reported $11,283 $27,067 $30,792 $53,327
Deduct total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (855) (1,212) (2,518) (2,311)
- ---------------------------------------------------------------------------------------------------
Proforma net income $10,428 $25,855 $28,274 $51,016
===================================================================================================
Basic net income per share:
As reported $0.17 $0.41 $0.46 $0.80
Proforma 0.16 0.39 0.43 0.76
Diluted net income per share:
As reported $0.17 $0.41 $0.46 $0.80
Proforma 0.16 0.39 0.43 0.76
- ---------------------------------------------------------------------------------------------------
NOTE 3 - 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 period,
adjusted to reflect all stock dividends. Diluted earnings per share reflects
additional common shares that would have been outstanding if dilutive potential
common shares had been issued. The following table reconciles basic and diluted
net income per share for the three and six months ended June 30:
- ------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended
(dollars and shares June 30, 2004 June 30, 2003
-------------------------------- -------------------------------
in thousands,
except per share data) Income Shares Amount Income Shares Amount
- ------------------------------------------------------------------------------------------------
Basic Net Income Per Share
Income from operations $11,283 66,334 $0.17 $27,067 66,646 $0.41
=========== ==========
Effect Of Dilutive Securities
Stock options - 485 - 53
- ---------------------------------------------------- ---------------------
Diluted Net Income Per Share
Income from operations
and assumed conversions $11,283 66,819 $0.17 $27,067 66,699 $0.41
================================================================================================
- ------------------------------------------------------------------------------------------------
Six Months Ended Six Months Ended
(dollars and shares June 30, 2004 June 30, 2003
-------------------------------- -------------------------------
in thousands,
except per share data) Income Shares Amount Income Shares Amount
- ------------------------------------------------------------------------------------------------
Basic Net Income Per Share
Income from operations $30,792 66,347 $0.46 $53,327 66,767 $0.80
=========== ==========
Effect Of Dilutive Securities
Stock options - 268 - 54
- ---------------------------------------------------- ---------------------
Diluted Net Income Per Share
Income from operations
and assumed conversions $30,792 66,615 $0.46 $53,327 66,821 $0.80
================================================================================================
8
NOTE 4 - INVESTMENT SECURITIES
The market value and amortized cost of investment securities as of June 30 are
set forth below:
- -----------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
(dollars in thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------
2004
Available-for-sale $2,611,786 $28,787 $(73,168) $2,567,405
Held-to-maturity 192,934 - (6,724) 186,210
- -----------------------------------------------------------------------------
2003
Available-for-sale $2,998,906 $94,826 $(6,292) $3,087,440
Held-to-maturity 232,322 2,531 - 234,853
- -----------------------------------------------------------------------------
NOTE 5 - LOANS HELD FOR SALE
Residential loans held for sale are recorded at lower of cost or market value
determined as of the balance sheet date. Old National's residential loans held
for sale have been hedged using fair value hedge accounting in accordance with
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended. The loans' carrying basis reflects the effects of the SFAS No. 133
adjustments. At June 30, 2004 and 2003, Old National had residential loans held
for sale of $26.8 million and $56.3 million, respectively. As of June 30, 2004
and 2003, ineffectiveness was immaterial.
During the second quarter of 2004, residential real estate loans held for
investment of $405.6 million were reclassified to residential loans held for
sale and sold for $404.4 million resulting in a write-down on loans transferred
to held for sale of $1.2 million, which was recorded as a reduction to the
allowance for loan losses. Also in connection with this transaction, mortgage
servicing rights of $2.7 million were capitalized, and a net gain of $2.7
million was recognized. During the second quarter of 2003, nonaccrual
residential real estate loans held for investment of $11.1 million were
reclassified to residential loans held for sale and sold for $8.9 million
resulting in a write-down on loans transferred to held for sale of $2.2 million,
which was recorded as a reduction to the allowance for loan losses.
NOTE 6 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows:
- -------------------------------------------------------------------------------
(dollars in thousands) 2004 2003
- -------------------------------------------------------------------------------
Balance, January 1 $104,571 $87,742
Additions:
Provision charged to expense 15,000 31,500
Deductions:
Write-downs on loans transferred to held for sale 1,177 2,250
Loans charged-off 18,332 22,258
Recoveries (3,584) (3,293)
- -------------------------------------------------------------------------------
Net charge-offs and other charges 15,925 21,215
- -------------------------------------------------------------------------------
Balance, June 30 $103,646 $98,027
===============================================================================
9
The following is a summary of information pertaining to impaired loans at June
30:
- -------------------------------------------------------------------------------
(dollars in thousands) 2004 2003
- -------------------------------------------------------------------------------
Impaired loans without a valuation allowance $20,911 $52,396
Impaired loans with a valuation allowance 63,721 216,150
- -------------------------------------------------------------------------------
Total impaired loans $84,632 $268,546
===============================================================================
Valuation allowance related to impaired loans $28,035 $67,924
- -------------------------------------------------------------------------------
A loan is considered impaired under SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan, an amendment of FASB Statement No. 5 and 15" when based on
current information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. An impaired loan does not include larger groups of smaller-balance
homogeneous loans that are collectively evaluated for impairment, loans that are
measured at fair value or at the lower of cost or fair value, leases or debt
securities.
For the six months ended June 30, 2004, the average balance of impaired loans
was $90.1 million for which $0.4 million of interest was recorded. For the six
months ended June 30, 2003, the average balance of impaired loans was $281.0
million for which $8.4 million of interest was recorded. No additional funds are
committed to be advanced in connection with impaired loans. Loans deemed
impaired are evaluated primarily using the fair value of the underlying
collateral.
During the third quarter of 2003, Old National revised its interpretation of
impaired loans to strictly follow SFAS No. 114. Prior to this change, Old
National's interpretation of impaired loans more conservatively included all
problem credits with a potential collateral deficiency in the event of default
and nonaccrual loans in larger groups of smaller-balance homogeneous loans. Had
Old National applied the current interpretation in the prior year, impaired
loans would have totaled $136.2 million with a valuation allowance of $33.3
million rather than $268.5 million with a valuation allowance of $67.9 million
as reported at June 30, 2003.
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
At June 30, 2004 and 2003, Old National had goodwill in the amount of $129.3
million and $115.1 million, respectively. During 2003, Old National performed
its annual goodwill impairment testing resulting in no impairment. At June 30,
2004, the community banking segment and the non-bank services segment had
goodwill of $71.0 million and $58.3 million, respectively. There was no material
change in the carrying amount of goodwill by segment for the six-month period
ended June 30, 2004.
Old National continues to amortize definite-lived intangible assets over the
estimated remaining life of each respective asset. At June 30, 2004, Old
National had $40.3 million in unamortized intangible assets compared with $31.0
million in unamortized identifiable intangible assets at June 30, 2003.
Indefinite-lived assets of $2.8 million were included in each year.
10
The following table shows the gross carrying amounts and accumulated
amortization for intangible assets as of June 30:
- --------------------------------------------------------------------------------------------------------
Gross Carrying Accumulated Net Carrying
(dollars in thousands) Amount Amortization Amount
- --------------------------------------------------------------------------------------------------------
2004
Amortized intangible assets:
Core deposit $5,574 $(3,353) $2,221
Customer business relationships 36,676 (3,104) 33,572
Non-compete agreements 1,100 (110) 990
Technology 1,300 (570) 730
- --------------------------------------------------------------------------------------------------------
Total amortized intangible assets 44,650 (7,137) 37,513
Unamortized intangible assets:
Trade name 2,800 - 2,800
- --------------------------------------------------------------------------------------------------------
Total intangible assets $47,450 $(7,137) $40,313
========================================================================================================
2003
Amortized intangible assets:
Core deposit $5,574 $(2,727) $2,847
Customer business relationships 24,184 (939) 23,245
Non-compete agreements 1,100 (55) 1,045
Technology 1,300 (285) 1,015
- --------------------------------------------------------------------------------------------------------
Total amortized intangible assets 32,158 $(4,006) 28,152
Unamortized intangible assets:
Trade name 2,800 - 2,800
- --------------------------------------------------------------------------------------------------------
Total intangible assets $34,958 $(4,006) $30,952
========================================================================================================
Total amortization expense associated with intangible assets for the three
months ended June 30 was $0.8 million in 2004 and $0.6 million in 2003.
Year-to-date amortization expense as of June 30, 2004 and 2003, was $1.6 million
and $1.1 million, respectively. The following is the estimated amortization
expense for the future years:
---------------------------------------------------------------------
Estimated
(dollars in thousands) Amortization
For the years ended: Expense
---------------------------------------------------------------------
2004 remaining $1,576
2005 3,065
2006 2,849
2007 2,386
2008 2,213
2009 2,122
Thereafter 23,302
---------------------------------------------------------------------
Total $37,513
=====================================================================
NOTE 8 - MORTGAGE SERVICING RIGHTS
Mortgage servicing rights derived from loans sold with servicing retained were
$17.6 million and $16.3 million at June 30, 2004 and 2003, respectively. Loans
serviced for others are not included in the consolidated balance sheet of Old
National. The unpaid principal balance of mortgage loans serviced for others at
June 30 was $2.134 billion in 2004 and $1.638 billion in 2003. At June 30, 2004
and 2003, the fair value of capitalized mortgage servicing rights was $21.5
million and $9.8 million, respectively. During the six months ended June 30,
2004, a full recovery of the valuation allowance of $1.1 million was recognized
due to decreases in average prepayment rates. Old National's key economic
assumptions used in determining the fair value of mortgage servicing rights were
a weighted average prepayment rate of 223 PSA and discount rates ranging from
9.0% to 10.5% at June 30, 2004, and a weighted average prepayment rate of 639
PSA and a discount rate of 8.5% at June 30, 2003.
11
The following summarizes the activities related to mortgage servicing rights and
the related valuation allowance at June 30:
- ------------------------------------------------------------------------------
(dollars in thousands) 2004 2003
- ------------------------------------------------------------------------------
Balance before valuation allowance, January 1 $15,790 $13,423
Rights capitalized 4,942 4,786
Amortization (3,161) (1,932)
- ------------------------------------------------------------------------------
Balance before valuation allowance, June 30 17,571 16,277
- ------------------------------------------------------------------------------
Valuation allowance:
Balance, January 1 (1,131) (2,056)
Additions to valuation allowance (1,940) (4,378)
Reductions to valuation allowance 3,071 -
- ------------------------------------------------------------------------------
Balance, June 30 - (6,434)
- ------------------------------------------------------------------------------
Mortgage servicing rights, net $17,571 $ 9,843
==============================================================================
NOTE 9 - FINANCING ACTIVITIES
The following table summarizes Old National's other borrowings at June 30:
- --------------------------------------------------------------------------------------
(dollars in thousands) 2004 2003
- --------------------------------------------------------------------------------------
Old National Bancorp:
Medium-term notes, Series 1997 (fixed rates
3.50% to 7.03%) maturities July 2004 to
June 2008 $ 113,200 $ 143,200
Junior subordinated debentures (fixed rates
8.00% to 9.50%) maturities March 2030
to April 2032 150,000 -
SFAS 133 hedge and other basis adjustments 1,940 380
Old National Bank:
Securities sold under agreements to repurchase
(variable rates 1.42% to 4.73%) maturities
March 2006 to December 2008 298,000 233,000
Federal Home Loan Bank advances (fixed rates
4.28% to 8.34% and variable rates 1.97% to
2.26%) maturities August 2004 to October 2022 580,116 813,607
Senior unsecured bank notes (fixed rate 3.95%
and variable rates 1.43% to 1.88%) maturities
January 2005 to February 2008 165,000 190,000
Subordinated bank notes (fixed rate 6.75%)
maturing October 2011 150,000 150,000
Capital lease obligation 4,536 -
SFAS 133 hedge and other basis adjustments (6,613) 21,918
- --------------------------------------------------------------------------------------
Total other borrowings $1,456,179 $1,552,105
======================================================================================
Contractual maturities of other borrowings at June 30, 2004, were as follows:
----------------------------------------------------------------------
(dollars in thousands)
----------------------------------------------------------------------
Due in 2004 $ 48,213
Due in 2005 195,082
Due in 2006 252,402
Due in 2007 160,034
Due in 2008 343,037
Thereafter 462,084
SFAS 133 hedge and other basis adjustments (4,673)
----------------------------------------------------------------------
Total $1,456,179
======================================================================
12
FEDERAL HOME LOAN BANK
Federal Home Loan Bank advances had weighted-average rates of 5.32% and 5.41% at
June 30, 2004 and 2003, respectively. These borrowings are secured by investment
securities and residential real estate loans up to 150% of outstanding debt.
SUBORDINATED BANK NOTES
Subordinated bank notes qualify as Tier 2 Capital for regulatory purposes and
are in accordance with the senior and subordinated global bank note program in
which Old National Bank may issue and sell up to a maximum of $1 billion. Notes
issued by Old National Bank under the global note program are not obligations
of, or guaranteed by, Old National Bancorp.
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S SUBORDINATED DEBENTURES
ONB Capital Trust II issued $100 million in preferred securities in April 2002.
The preferred securities have a liquidation amount of $25 per share with a
cumulative annual distribution rate of 8.0% or $2.00 per share payable quarterly
and maturing on April 15, 2032. Proceeds from the issuance of these securities
were used to purchase junior subordinated debentures with the same financial
terms as the securities issued by ONB Capital Trust II. Old National guarantees
the payment of distributions on the preferred securities issued by ONB Capital
Trust II.
ONB Capital Trust I issued $50 million in preferred securities in March 2000.
The preferred securities have a liquidation amount of $25 per share with a
cumulative annual distribution rate of 9.5% or $2.375 per share payable
quarterly and maturing on March 15, 2030. Proceeds from the issuance of these
securities were used to purchase junior subordinated debentures with the same
financial terms as the securities issued by ONB Capital Trust I. Old National
guarantees the payment of distributions on the preferred securities issued by
ONB Capital Trust I.
Old National may redeem the junior subordinated debentures and thereby cause a
redemption of the trust preferred securities in whole (or in part from time to
time) on or after March 15, 2005 (for debentures owned by ONB Capital Trust I)
and on or after April 12, 2007 (for debentures owned by ONB Capital Trust II),
and in whole (but not in part) following the occurrence and continuance of
certain adverse federal income tax or capital treatment events. These securities
qualify as Tier 1 capital for regulatory purposes and the SEC registration
related to these securities has remaining funding capacity of $50 million.
In accordance with FIN 46R, the outstanding junior subordinated debentures
related to these trust preferred securities were reclassified to "other
borrowings" at December 31, 2003, from the separate disclosure on the balance
sheet prior to that date.
CAPITAL LEASE OBLIGATION
On January 1, 2004, Old National entered into a long-term capital lease
obligation for a new branch office building in Owensboro, Kentucky, which
extends for 25 years with one renewal option for 10 years. The economic
substance of this lease is that Old National is financing the acquisition of the
building through the lease and accordingly, the building is recorded as an asset
and the lease is recorded as a liability. The fair value of the capital lease
obligation was estimated using a discounted cash flow analysis based on Old
National's current incremental borrowings rate for similar types of borrowing
arrangements. At June 30, 2004, the future minimum lease payments under the
capital lease were as follows:
13
----------------------------------------------------------------------
(dollars in thousands) Minimum
Lease
For the year ending: Payments
----------------------------------------------------------------------
2004 remaining $ 185
2005 371
2006 371
2007 371
2008 371
Thereafter 13,265
----------------------------------------------------------------------
Total minimum lease payments 14,934
Less amounts representing interest 10,398
----------------------------------------------------------------------
Present value of net minimum lease payments $ 4,536
======================================================================
NOTE 10 - EMPLOYEE BENEFIT PLANS
RETIREMENT PLAN
The following table sets forth the components of the net periodic benefit cost
for Old National's noncontributory defined benefit retirement plan for the three
and six months ended June 30:
- -----------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
(dollars in thousands) 2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------
Service cost $ 485 $ 460 $ 1,022 $ 946
Interest cost 999 1,000 1,974 1,846
Expected return on plan assets (901) (636) (1,752) (1,140)
Amortization of prior service cost 8 8 16 16
Amortization of transitional asset (108) (108) (216) (216)
Recognized actuarial loss 392 348 789 597
- -----------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 875 $ 1,072 $ 1,833 $ 2,049
===========================================================================================================
STOCK OPTIONS
On February 2, 2004, Old National granted 0.3 million stock options to key
employees at an option price of $21.45, the closing price of Old National's
stock on that date. The options vest 100% on December 31, 2004, and expire in
ten years. On January 31, 2003, Old National granted 2.6 million stock options
to key employees at an option price of $21.71, the closing price of Old
National's stock on that date. The options vest 25% per year over a four-year
period and expire in ten years. If certain financial targets are achieved,
vesting is accelerated. Old National is authorized to grant up to 7.3 million
shares of common stock under the 1999 Equity Incentive Plan. At June 30, 2004,
Old National had 6.2 million of stock options outstanding.
Old National applies APB Opinion No. 25 and related Interpretations in
accounting for the stock option plan. Accordingly, no compensation costs have
been recognized. See Note 2 for proforma net income and net income per share
data.
RESTRICTED STOCK
Subsequent to June 30, 2004, Old National's Board of Directors approved a
restricted stock award under the 1999 Equity Incentive Plan covering certain key
officers. The grants, approved on July 22, 2004, are earned at the end of a
three-year period based on the achievement of certain targets. Shares are
subject to certain restrictions and risk of forfeiture by the participants.
14
NOTE 11 - INCOME TAXES
The following is a summary of the major items comprising the differences in
taxes computed at the federal statutory rate and as recorded in the consolidated
statement of income for the three and six months ended June 30:
- ------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
(dollars in thousands) 2004 2003 2004 2003
- ------------------------------------------------------------------------------------
Provision at statutory rate of 35% $ 3,515 $12,221 $11,490 $23,967
Tax-exempt income (4,595) (5,281) (9,400) (9,658)
Other, net (161) 911 (54) 840
- ------------------------------------------------------------------------------------
Income tax expense (benefit) $(1,241) $7,851 $2,036 $15,149
- ------------------------------------------------------------------------------------
Effective tax rate (12.4)% 22.5 % 6.2 % 22.1 %
====================================================================================
For the three and six months ended June 30, 2004, the effective tax rate was
significantly lower than for the three and six months ended June 30, 2003. The
decrease in the effective tax rate resulted from a higher percentage of
tax-exempt income to total income for the three and six months ended June 30,
2004.
NOTE 12 - COMPREHENSIVE INCOME
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
(dollars in thousands) 2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------------------------------
Net income: $ 11,283 $ 27,067 $ 30,792 $ 53,327
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period, net of tax (62,283) 21,883 (40,354) 18,034
Less: reclassification adjustment for securities gains realized in net
income, net of tax (13) (14,045) (1,163) (15,659)
Cash flow hedges:
Net unrealized derivative gains on cash flow hedges, net of tax 151 1,157 516 998
Less: reclassification adjustment on cash flow hedges, net of tax 47 44 94 88
- -----------------------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) (62,098) 9,039 (40,907) 3,461
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $(50,815) $ 36,106 $(10,115) $ 56,788
===================================================================================================================================
NOTE 13 - COMMITMENTS AND CONTINGENCIES
LITIGATION
In the normal course of business, various legal actions and proceedings, which
are being vigorously defended, are pending against Old National and its
affiliates.
Among these are several lawsuits relating to activities in 1995 of First
National Bank & Trust Company, Carbondale, Illinois, ("First National"), which
Old National acquired in 1999. These lawsuits are pending against Old National
Bank, as successor to First National, and were filed by alleged third-party
creditors of certain structured settlement trusts. The lawsuits filed by the
third-party creditors allege actual damages totaling approximately $31 million,
as well as unspecified punitive damages and other damages and attorneys' fees.
In addition, certain of the corporate defendants in these lawsuits have filed
lawsuits asserting contribution and indemnity against Old National Bank. The
cases are pending in the City of St. Louis and St. Louis County in Missouri; St.
Clair County, Madison County and Cook County in Illinois; and U.S. Federal
District Court in southern Illinois.
During the fourth quarter of 2003, Old National established a reserve of $10
million for settlement of certain of the lawsuits. As of June 30, 2004, Old
National has paid $9.1 million of this reserve to settle a number of lawsuits
representing approximately $12 million in actual damages. Old National has
obtained a summary judgement in its favor at the trial court level on lawsuits
representing $16 million of the estimated $31 million exposure. These cases are
currently on appeal to the Court of Appeals in Illinois. The approximate $0.9
million remaining in the reserve for litigation settlement is deemed at this
time to be adequate to cover the remaining exposure of approximately $3 million.
15
It is not expected that future judgments or settlements in these matters will
have a material impact on Old National's results of operations.
BUILDING COMMITMENT
On October 11, 2002, Old National entered into a $52 million contract awarded to
a company controlled by a director for the construction of its Evansville-based
main banking center and bank headquarters. Construction began on June 27, 2002,
and is expected to be complete August 11, 2004.
CREDIT-RELATED FINANCIAL INSTRUMENTS
In the normal course of business, Old National's banking affiliates have entered
into various agreements to extend credit, including loan commitments of $1.345
billion, commercial letters of credit of $16.3 million and standby letters of
credit of $101.9 million at June 30, 2004. At June 30, 2003, loan commitments
were $1.301 billion, commercial letters of credit were $38.5 million and standby
letters of credit were $70.0 million. These commitments are not reflected in the
consolidated financial statements. No material losses are expected to result
from these transactions.
At June 30, 2004 and 2003, Old National had credit extensions of $72.1 million
and $64.5 million, respectively, with various unaffiliated banks related to
letter of credit commitments issued on behalf of Old National's customers. At
June 30, 2004 and 2003, Old National provided collateral to the unaffiliated
banks to secure credit extensions totaling $41.3 million and $27.1 million,
respectively. Old National did not provide collateral for the remaining credit
extensions.
NOTE 14 - FINANCIAL GUARANTEES
Old National holds instruments, in the normal course of business with customers,
that are considered financial guarantees in accordance with FIN 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." Standby letters of credit guarantees are
issued in connection with agreements made by customers to counterparties.
Standby letters of credit are contingent upon failure of the customer to perform
the terms of the underlying contract. Credit risk associated with standby
letters of credit is essentially the same as that associated with extending
loans to customers and is subject to normal credit policies. The term of these
standby letters of credit is typically one year or less. At June 30, 2004, the
notional amount of standby letters of credit was $101.9 million, which
represents the maximum amount of future funding requirements, and the carrying
value was $0.4 million.
Old National also enters into forward contracts for the future delivery of
conforming residential real estate loans at a specified interest rate to reduce
interest rate risk associated with loans held for sale. These forward contracts
are considered derivative instruments accounted for under SFAS No. 133. See
additional information in Note 16 to the consolidated financial statements of
the 2003 annual report
NOTE 15 - SEGMENT INFORMATION
Old National operates in three reportable segments: community banking, non-bank
services and treasury. The community banking segment serves customers in both
urban and rural markets providing a wide range of financial services including
commercial, real estate and consumer loans; lease financing; checking, savings,
time deposits and other depository accounts; cash management services; and debit
cards and other electronically accessed banking services and Internet banking.
The non-bank services segment combines the management and operations of trust,
asset management, insurance, brokerage and investment and annuity sales.
Treasury manages investments, wholesale funding, interest rate risk, liquidity
and leverage for Old National. Additionally, treasury provides other
miscellaneous capital markets products for its corporate banking customers.
In order to measure performance for each segment, Old National allocates
capital, corporate overhead and income tax provision to each segment. Capital
and corporate overhead are allocated to each segment using various
methodologies, which are subject to periodic changes by management. Income taxes
are allocated using the effective tax rate. Tax-exempt income is primarily
within the treasury segment, creating a tax benefit for this segment.
Intersegment sales and transfers are not significant.
16
Old National uses a funds transfer pricing ("FTP") system to eliminate the
effect of interest rate risk from the community banking and non-bank services
segments net interest income. The FTP system is used to credit or charge each
segment for the funds the segments create or use. The net FTP credit or charge
is reflected in segment net interest income.
The financial information for each operating segment is reported on the basis
used internally by Old National's management to evaluate performance and is not
necessarily comparable with similar information for any other financial
institution.
The following table summarizes financial information concerning segments for the
three and six months ended June 30:
- -----------------------------------------------------------------------------------------------------------------------
Community Non-bank
(dollars in thousands) Banking Services Treasury Other Total
- -----------------------------------------------------------------------------------------------------------------------
Three months ended June 30, 2004
Net interest income $ 71,862 $ 166 $ (3,341) $ (3,530) $ 65,157
Provision for loan losses 7,442 - 58 - 7,500
Noninterest income 24,117 24,545 2,271 139 51,072
Noninterest expense 73,673 26,603 1,802 (3,391) 98,687
Income tax expense (benefit) 2,965 (624) (3,582) - (1,241)
Segment profit 11,899 (1,268) 652 - 11,283
Total assets 5,383,787 119,654 3,392,650 136,778 9,032,869
- -----------------------------------------------------------------------------------------------------------------------
Three months ended June 30, 2003
Net interest income $ 69,762 $ 69 $ (2,848) $ 1,482 $ 68,465
Provision for loan losses 22,500 - - - 22,500
Noninterest income 21,371 18,145 22,543 854 62,913
Noninterest expense 55,147 16,382 95 2,336 73,960
Income tax expense 3,138 630 4,083 - 7,851
Segment profit 10,348 1,202 15,517 - 27,067
Total assets 5,900,226 98,380 3,622,543 116,568 9,737,717
- -----------------------------------------------------------------------------------------------------------------------
Six months ended June 30, 2004
Net interest income $ 142,053 $ 308 $ (5,250) $ (6,843) $ 130,268
Provision for loan losses 14,884 - 116 - 15,000
Noninterest income 39,147 48,508 6,370 2,675 96,700
Noninterest expense 133,143 47,764 2,401 (4,168) 179,140
Income tax expense (benefit) 7,366 331 (5,661) - 2,036
Segment profit 25,807 721 4,264 - 30,792
Total assets 5,383,787 119,654 3,392,650 136,778 9,032,869
- -----------------------------------------------------------------------------------------------------------------------
Six months ended June 30, 2003
Net interest income $ 139,974 $ 123 $ (4,308) $ 2,479 $ 138,268
Provision for loan losses 31,500 - - - 31,500
Noninterest income 41,765 35,098 27,011 1,959 105,833
Noninterest expense 107,611 31,740 336 4,438 144,125
Income tax expense 11,654 1,195 2,300 - 15,149
Segment profit 30,974 2,286 20,067 - 53,327
Total assets 5,900,226 98,380 3,622,543 116,568 9,737,717
- -----------------------------------------------------------------------------------------------------------------------
17
PART I. FINANCIAL INFORMATION
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXECUTIVE SUMMARY
Net income for the three and six months ended June 30, 2004, decreased
significantly compared to the three and six months ended June 30, 2003, impacted
primarily by nonrecurring charges related to "Ascend" and decreased securities
gains, offset in part by reduced provisions for loan losses. See "Results of
Operations" for further information on "Ascend".
Old National's financial condition showed a decrease in assets and liabilities
at June 30, 2004, compared to June 30, 2003 and December 31, 2003, which is
reflective of a large residential real estate loan sale, a reduction in the
commercial loan portfolio, a reduction in the investment portfolio, and a
reduction of certificates of deposits and borrowed funds. Management uses
various indicators such as return on assets, return on equity and asset quality
ratios to evaluate the performance of the business. These are discussed
throughout this "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
FINANCIAL BASIS AND FORWARD-LOOKING STATEMENTS
This discussion analyzes Old National's results of operations for the three and
six months ended June 30, 2004 and 2003, and financial condition as of June 30,
2004, compared to June 30, 2003 and December 31, 2003.
This management's discussion and analysis contains certain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements include expressions such as "expects,"
"intends," "believes," "anticipates," and "should," which are statements of
belief as to the expected outcomes of future events. Internal and external
factors that might cause a difference include, but are not limited to, market,
economic, operational, liquidity, credit and interest rate risks associated with
Old National's business, competition, government legislation and policies,
ability of Old National to execute its business plan and implement the "Ascend"
project initiatives, credit quality trends and the ability to generate loans,
and other matters discussed in this management's discussion and analysis. These
risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Actual
results could materially differ from those presented. Old National undertakes no
obligation to release revisions to these forward-looking statements or reflect
events or conditions after the date on which the forward-looking statement is
made or to reflect the occurrence of unanticipated events.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The "Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as disclosures found elsewhere in this report, are based
upon Old National's consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires Old National
to make estimates and judgements that affect the reported amounts of assets,
liabilities, revenues and expenses. Material estimates that are particularly
susceptible to significant change in the near term relate to the determination
of the allowance for loan losses, the valuation of the mortgage servicing rights
and the valuation of goodwill and intangibles. Actual results could differ from
those estimates.
o Allowance for Loan Losses. The allowance for loan losses is maintained at a
level believed adequate by management to absorb probable losses inherent in
the consolidated loan portfolio. Management's evaluation of the adequacy of
the allowance is an estimate based on reviews of individual loans,
assessments of the impact of current and anticipated economic conditions on
the portfolio and historical loss experience. The allowance represents
management's best estimate, but significant downturns in circumstances
relating to loan quality and economic conditions could result in a
requirement for additional allowance in the near future. Likewise, an
upturn in loan quality and improved economic conditions may allow a
reduction in the required allowance. In either instance, unanticipated
changes could have a significant impact on results of operations.
The allowance is increased through a provision charged to operating
expense. Uncollectible loans are charged-off through 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
18
either for the amounts or by the dates as scheduled in the loan agreement.
Old National's policy for recognizing income on impaired loans is to accrue
interest unless a loan is placed on nonaccrual status.
o Mortgage Servicing Rights. Mortgage servicing rights are recognized as
separate assets when loans are sold with servicing retained. The total
price of loans sold is allocated between the loans sold and the mortgage
servicing rights retained based on the relative fair values of each. The
fair value of capitalized mortgage servicing rights is estimated by
calculating the present value of estimated future net servicing income
derived from related cash flows. Amortization of capitalized mortgage
servicing rights is determined in proportion to and over the period of
estimated net servicing income of the underlying financial assets.
Impairment of mortgage servicing rights exists if the book value of the
mortgage servicing rights exceeds its estimated fair value. In determining
impairment, mortgage servicing rights are stratified by interest rates.
Critical assumptions used in determining fair value include expected
mortgage loan prepayment rates, discount rates and other economic factors,
which are determined based on current market conditions. The expected rates
of mortgage loan prepayments are the most significant factors driving the
value of mortgage servicing rights. Increases in expected mortgage loan
prepayments reduce estimated future net servicing cash flows because the
life of the underlying loan is reduced. Fair values, using estimated
mortgage loan prepayment rates, are derived from a third-party statistical
model. Negative adjustments to the value, if any, are recognized through a
valuation allowance by charges against mortgage servicing income. The use
of a valuation allowance enables the recovery of this value as market
conditions become more favorable.
o Goodwill and Intangibles. For acquisitions, Old National is required to
record the assets acquired, including identified intangible assets, and the
liabilities assumed at their fair value. These often involve estimates
based on third party valuations, such as appraisals, or internal valuations
based on discounted cash flow analyses or other valuation techniques that
may include estimates of attrition, inflation, asset growth rates or other
relevant factors. In addition, the determination of the useful lives for
which an intangible asset will be amortized is subjective.
Under Statement of Financial Accounting Standards ("SFAS") No. 142
"Goodwill and Other Intangible Assets," goodwill and indefinite-lived
assets recorded must be reviewed for impairment on an annual basis, as well
as on an interim basis if events or changes indicate that the asset might
be impaired. An impairment loss must be recognized for any excess of
carrying value over fair value of the goodwill or the indefinite-lived
intangible with subsequent reversal of the impairment loss being
prohibited. The determination of fair values are based on internal
valuations using management's assumptions of future growth rates, future
attrition, discount rates, multiples of earnings or other relevant factors.
Changes in these factors, as well as downturns in economic or business
conditions, could have a significant adverse impact on the carrying values
of goodwill or intangibles and could result in impairment losses affecting
the financials of the company as a whole and the individual lines of
business in which the goodwill or intangibles reside.
Management believes the accounting estimates related to the allowance for loan
losses; the capitalization, amortization and valuations of mortgage servicing
rights; and the valuation of goodwill and intangibles are "critical accounting
estimates" because: (1) the estimates are highly susceptible to change from
period to period because they require company management to make assumptions
concerning, among other factors, the changes in the types and volumes of the
portfolios, rates of future prepayments, valuation assumptions and anticipated
economic conditions, and (2) the impact of recognizing an impairment or loan
loss could have a material effect on Old National's assets reported on the
balance sheet as well as net income. Management has discussed the development
and selection of these critical accounting estimates with the Audit Committee of
the Board of Directors and the Audit Committee has reviewed the company's
disclosure relating to it in this "Management's Discussion and Analysis".
RESULTS OF OPERATIONS
Earnings Summary
Old National reported net income of $11.3 million for the three months ended
June 30, 2004, a reduction of $15.8 million or 58.3% from the $27.1 million
recorded for the three months ended June 30, 2003. For the six months ended June
30, 2004, net income was $30.8 million, a reduction of 42.3% from the $53.3
million recorded for the six months ended June 30, 2003. On a diluted per share
basis, net income was $0.17 for the three months ended June 30, 2004, compared
to $0.41 for the three months ended June 30, 2003. Diluted earnings per share
were $0.46 for the six months ended June 30, 2004, compared to $0.80 for the six
months ended June 30, 2003.
19
The decrease in the results of operations for the three months ended June 30,
2004, compared to the three months ended June 30, 2003, was primarily
attributable to the nonrecurring pre-tax charges relating to "Ascend" of $25.1
million, or $17.2 million after tax. The details of these expenses are discussed
further in the "Noninterest Expense" section of this "Management's Discussion
and Analysis". Also, see additional information on "Ascend" below. Positive
factors affecting the results of operations for the three months ended June 30,
2004, as compared to the three months ended June 30, 2003, included increased
insurance related revenues, increased mortgage banking revenue related to a
large residential real estate loan sale and the full recovery of the mortgage
servicing rights valuation allowance, and decreased provisions for loan losses.
These factors were offset by reduced securities gains during the three months
ended June 30, 2004, compared to the three months ended June 30, 2003.
Results of operations for the six months ended June 30, 2004, compared to the
six months ended June 30, 2003, were primarily affected by the nonrecurring
charges relating to "Ascend" discussed above. Other factors included increased
insurance related revenues and reduced provisions for loan losses which were
offset by decreased mortgage origination activity, reduced securities gains, and
severance payments to three executive officers who left the company during the
first quarter of 2004.
For the three months ended June 30, 2004, Old National's return on average
assets was 0.49% and return on shareholders' equity was 6.34%, compared to 1.12%
and 14.28%, respectively, for the three months ended June 30, 2003. Old
National's return on average assets was 0.67% and return on shareholders' equity
was 8.54% for the six months ended June 30, 2004, compared to 1.11% and 14.16%
for the six months ended June 30, 2003, respectively.
The company-wide program, "Ascend," was announced in late 2003. The initial
phase of the project was conducted with the assistance of EHS Partners and was
an intense evaluation of every aspect of operations for expense reductions and
revenue growth ideas. At June 30, 2004, "Ascend" was in the implementation
phase. Initiatives arising from the project are currently on schedule, with
expectations of full implementation by the end of 2005. Old National is
expecting to realize approximately $77.0 million in annualized pre-tax earnings
assuming the full implementation of these initiatives, excluding implementation
charges of $25.1 million. Approximately $42.0 million of the annualized benefit
is expected to be derived from efficiency improvement/cost reduction
initiatives. Revenue enhancement initiatives are expected to account for $24.0
million in revenue, and new products and services are expected to realize $11.0
million. Revenue and new product related benefits projections are net of $9.0
million of expenses expected to be necessary to implement the ideas.
Net Interest Income
Net interest income and margin are influenced by many factors, primarily the
volume and mix of earning assets, funding sources and interest rate
fluctuations. Net interest income and net interest margin in the following
discussion is presented on a fully taxable equivalent basis, which adjusts
tax-exempt or nontaxable interest income to an amount that would be comparable
to interest subject to income taxes. Net income is unaffected by these taxable
equivalent adjustments as the offsetting increase of the same amount is made in
the income tax section. Net interest income included taxable equivalent
adjustments of $6.0 million and $6.3 million for the three months ended June 30,
2004 and 2003, respectively. Taxable equivalent adjustments for the six months
ended June 30, 2004 and 2003, were $12.1 million and $12.7 million,
respectively.
Taxable equivalent net interest income was $71.2 million and $142.4 million for
the three and six months ended June 30, 2004, respectively, compared to $74.8
million and $151.0 million reported for the three and six months ended June 30,
2003, respectively. The reduction in net interest income reflects a smaller
portfolio of average earning assets when compared to the three and six months
ended June 30, 2003. Average earning assets were $8.435 billion for the three
months ended June 30, 2004, compared to $8.940 billion for the three months
ended June 30, 2003, a decrease of 5.6% or $505.0 million. Average earning
assets were $8.448 billion for the six months ended June 30, 2004, compared to
$8.868 billion for the six months ended June 30, 2003, a decrease of 4.7% or
$420.0 million. The net interest margin was relatively unchanged at 3.38% and
3.37% for the three and six months ended June 30, 2004, respectively, compared
to 3.35% and 3.41% for the three and six months ended June 30, 2003,
respectively.
The decrease in interest rates during 2003 and early 2004 had a significant
impact on the mix and yield of earning assets. Driven by lower rates, many of
the company's residential real estate loans were refinanced in 2003. Because new
loan production was sold into the secondary loan market, residential real estate
loans declined in 2003 and
20
2004. Additionally, commercial and commercial real estate loans did not grow
appreciably during 2003 or during the first six months of 2004, a result of
continued weak loan demand in Old National's markets and more stringent loan
underwriting standards. In a continuation of a strategy begun during 2003, the
company reduced its investment portfolio assets during the first quarter of 2004
because of the narrow spreads available on those assets in the current rate
environment.
Provision for Loan Losses
The provision for loan losses was $7.5 million and $15.0 million for the three
and six months ended June 30, 2004, respectively, compared to $22.5 million and
$31.5 million for the three and six months ended June 30, 2003, respectively.
The lower provisions in 2004 are the result of improvements in credit quality as
well as the continued reduction in classified loans. The higher provision in
2003 was driven by the negative impact of the weak regional economy on the loan
portfolio. Refer to "Allowance for Loan Losses and Asset Quality" section for
further discussion of non-performing loans, charge-offs and additional items
impacting the provision.
Noninterest Income
Noninterest income for the three months ended June 30, 2004, was $51.1 million,
a decrease of $11.8 million, or 18.8% over the $62.9 million reported for the
three months ended June 30, 2003. For the six months ended June 30, 2004,
noninterest income amounted to $96.7 million, a decrease of $9.1 million or 8.6%
over the $105.8 million reported for the six months ended June 30, 2003. Total
fee and service charge income, excluding gains on sales of securities, was $51.1
million and $94.7 million for the three and six months ended June 30, 2004,
respectively compared to $42.2 million and $82.4 million for the three and six
months ended June 30, 2003, respectively.
Primarily as a result of various insurance agency acquisitions beginning in the
second quarter of 2003, insurance premiums and commissions, the largest
component of this category of revenue, increased to $14.4 million and $28.9
million for the three and six months ended June 30, 2004, compared to $9.1
million and $17.3 million for the three and six months ended June 30, 2003, a
58.6% and 66.9% increase, respectively.
Mortgage banking revenue increased to $7.1 million for the three months ended
June 30, 2004, compared to $4.9 million for the three months ended June 30,
2003, a $2.2 million or 46.7% increase. This increase was primarily attributable
to both the $405.6 million residential real estate loan sale during the second
quarter of 2004 that resulted in a $2.7 million gain and the $2.6 million
recovery of the mortgage servicing rights valuation allowance. These factors
more than compensated for the decrease in mortgage origination activity during
the three months ended June 30, 2004, compared to the three months ended June
30, 2003, that resulted from rising interest rates. For the six months ended
June 30, 2004, mortgage banking revenue was $6.8 million compared to $9.3
million for the six months ended June 30, 2003, a $2.5 million or 26.4%
decrease. Residential real estate loan originations for the six months ended
June 30, 2004, were $332.7 million compared to $724.7 million for the six months
ended June 30, 2003.
Net securities gains decreased by $20.7 million and $21.5 million for the three
and six months ended June 30, 2004 and 2003, respectively. The gains in 2003
were part of a continuing strategy to address interest rate and yield curve
shifts.
Noninterest Expense
Noninterest expense for the three months ended June 30, 2004, totaled $98.7
million, an increase of $24.7 million or 33.4% over the three months ended June
30, 2003. For the six months ended June 30, 2004, noninterest expense was $179.1
million, an increase of $35.0 million or 24.3% over the $144.1 million recorded
for the six months ended June 30, 2003.
Salaries and benefits, the largest component of noninterest expense, totaled
$53.5 million for the three months ended June 30, 2004, compared to $44.1
million for the three months ended June 30, 2003, an increase of $9.4 million or
21.3%. For the six months ended June 30, 2004, salaries and benefits amounted to
$102.8 million compared to $85.8 million recorded for the six months ended June
30, 2003, an increase of $17.0 million or 19.8%. These increases are primarily
attributable to nonrecurring expenses related to "Ascend", including severance
costs for employees whose positions have been or will be eliminated and expenses
related to broad-based incentive programs for employees participating in the
"Ascend" project. Other factors significantly affecting the increase in salaries
and employee benefits for the six months ended June 30, 2004, included $2.9
million in severance expense related to three senior executives, including the
chief executive officer, who left the company during the first quarter of 2004
21
and additional expenses attributable to acquisitions of insurance agencies that
occurred after the first quarter of 2003.
As described in Note 10 to the consolidated financial statements, restricted
stock awards were approved by the Board of Directors on July 22, 2004, under the
1999 Equity Incentive Plan. It is estimated that 240,000 shares of common stock
will be issued to approximately 150 participants subject to certain restrictions
and risk of forfeiture by the participants. The related increase in salaries and
employee benefits during the performance period will vary based on many factors,
including participant changes and actual performance results.
Professional fees totaled $17.0 million for the three months ended June 30,
2004, compared to $2.5 million for the three months ended June 30, 2003. For the
six months ended June 30, 2004, professional fees were $20.1 million compared to
$4.9 million for the six months ended June 30, 2003. Consulting fees paid to EHS
Partners during 2004 in connection with "Ascend" accounted for the majority of
these increases.
All other components of noninterest expense totaled $28.1 million for the three
months ended June 30, 2004, compared to the $27.4 million for the three months
ended June 30, 2003. For the six months ended June 30, 2004 and 2003, all other
components of noninterest expense totaled $56.2 million and $53.5 million,
respectively. These increases are primarily attributable to write-downs of
surplus real estate of $1.0 million in connection with "Ascend" during the three
months ended June 30, 2004. Also affecting the increase for the six months ended
June 30, 2004, was $1.4 million in write-downs of foreclosed real estate during
the quarter ended March 31, 2004.
A summary of nonrecurring expenses related to "Ascend" are summarized below:
----------------------------------------------------------------------
Three Months Ended
(dollars in thousands) June 30, 2004
----------------------------------------------------------------------
Professional fees $14,564
Salaries and employee benefits 9,427
Other 1,074
----------------------------------------------------------------------
Total "Ascend" expenses $25,065
======================================================================
Refer to "Earnings Summary" of this "Management's Discussion and Analysis" for a
further discussion of "Ascend".
Provision for Income Taxes
Old National records a provision for income taxes currently payable and for
income taxes payable in the future, which arise due to timing differences in the
recognition of certain items for financial statement and income tax purposes.
The major difference between the effective tax rate applied to Old National's
financial statement income and the federal statutory tax rate is caused by
interest on tax-exempt securities and loans. The income tax benefit, as a
percentage of pre-tax income, was 12.4% for the three months ended June 30,
2004, compared to the provision for income tax expense of 22.5% for the three
months ended June 30, 2003. The provision for income tax expense, as a
percentage of pre-tax income, was 6.2% for the six months ended June 30, 2004,
compared to 22.1% for the six months ended June 30, 2003. The decreased
effective tax rate in 2004 resulted from a higher percentage of tax-exempt
income to total income.
FINANCIAL CONDITION
Overview
For the three and six months ended June 30, 2004, Old National continued balance
sheet strategies initiated in the second half of 2003 to mitigate its
sensitivity to rising interest rates, including continued reductions in the
investment and residential real estate loan portfolios as well as reductions in
certificates of deposit and borrowed funds. Old National's assets at June 30,
2004, were $9.033 billion, a 7.2% decrease compared to June 30, 2003, and a 6.9%
decrease compared to December 31, 2003. Investments and loans decreased $559.4
million and $464.1 million, respectively, since June 30, 2003, and decreased
$156.9 million and $462.9 million, respectively, since December 31, 2003. Total
liabilities declined $612.5 million compared to June 30, 2003, and $278.8
million since December 31, 2003.
22
Total shareholders' equity decreased $92.4 million from June 30, 2003, and
decreased $42.2 million compared to December 31, 2003, primarily as a result of
changes in the unrealized gain (loss) on investment securities. At June 30,
2004, accumulated other comprehensive income, of which the largest component is
unrealized gains (losses) on securities, was a net loss of $26.3 million
compared to a net gain of $55.3 million at June 30, 2003, and a net gain of
$14.6 million gain at December 31, 2003.
Earning Assets
Old National's earning assets are comprised of loans and loans held for sale,
investment securities and money market investments. Earning assets were $8.175
billion at June 30, 2004, a decrease of 8.8% from June 30, 2003, and a decrease
of 8.1% since December 31, 2003. The reduction in earning assets is due to a
continuation of balance sheet strategies initiated by management during the
second half of 2003. Old National reduced its investment portfolio in light of
fewer attractive investment opportunities and the company's desire to reduce its
sensitivity to rising interest rates. Total loans at June 30, 2004, including
residential loans held for sale, decreased $493.5 million compared to June 30,
2003, and $452.4 million compared to December 31, 2003. This decrease can be
attributed primarily to the sale of $405.6 million in residential real estate
loans during the three months ended June 30, 2004, and to continued weakness in
commercial lending. These decreases are partially offset by the growth in
consumer loans. Money market investments at June 30, 2004, increased by $266.5
million from June 30, 2003, and $266.3 million from December 31, 2003, which is
attributable to the investment of a portion of the proceeds from the sale of
residential real estate loans during the three months ended June 30, 2004.
Investment Securities
Old National has classified all investment securities as available-for-sale or
held-to-maturity on the date of purchase. The majority of Old National's
investment securities are classified as available-for-sale, which gives
management the flexibility to sell the securities prior to maturity, if needed,
based on fluctuating interest rates or changes in the company's funding
requirements.
At June 30, 2004, the investment securities portfolio was $2.760 billion
compared to $3.320 billion at June 30, 2003, a decrease of $559.4 million or
16.9%. Investment securities decreased $156.9 million at June 30, 2004, compared
to December 31, 2003, a decrease of 10.8%. Investment securities represented
33.8% of earning assets at June 30, 2004, compared to 37.0% at June 30, 2003,
and 34.2% at December 31, 2003. During the first half of 2003, Old National
increased the investment portfolio as a short-term alternative source of earning
assets to offset declining residential real estate and minimal commercial and
consumer loan growth. During the second half of 2003 and continuing into 2004,
Old National decreased the size of the investment portfolio and used the cash
flows generated by the declining investment portfolio to reduce borrowed funds.
Stronger economic activity and stronger commercial loan demand would likely
result in increased investments in loans and a reduction in the investment
securities portfolio.
The investment securities available-for-sale portfolio had net unrealized losses
of $44.4 million at June 30, 2004, compared to net unrealized gains of $88.5
million at June 30, 2003, and $23.7 million at December 31, 2003. The decrease
of $132.9 million and $68.1 million, respectively, was the result of higher
market interest rates and a smaller portfolio of securities available-for-sale
at June 30, 2004.
The investment portfolio had an average life of 5.05 years at June 30, 2004,
compared to 4.01 years at June 30, 2003, and 4.86 years at December 31, 2003.
The average yield on investment securities, on a taxable equivalent basis, was
4.68% for the three months ended June 30, 2004, compared to 4.59% for the three
months ended June 30, 2003, and 4.70% for the three months ended December 31,
2003. Average yields on investment securities, on a taxable equivalent basis,
were 4.76%, 4.60%, and 4.98% for the six months ended June 30, 2004 and 2003,
and for the year ended December 31, 2003, respectively. The decrease from
December 31, 2003 to June 30, 2004, was primarily due to prepayments of
mortgage-backed securities and calls of higher coupon agency securities that
left lower coupon securities in the portfolio.
Residential Loans Held for Sale
Residential loans held for sale were $26.8 million at June 30, 2004, compared to
$56.3 million at June 30, 2003, and $16.3 million at December 31, 2003.
Residential loans held for sale are loans that are closed, but not yet sold on
the secondary market. The amount of residential loans held for sale on the
balance sheet varies depending on the timing of movement of originations and
loan sales to the secondary market. At June 30, 2004, residential real estate
loan origination activity was down as compared to June 30, 2003, primarily due
to a reduced level of loan refinancing.
23
Commercial and Consumer Loans
Commercial and consumer loans are the largest classification within the earning
assets of Old National representing 55.9% of earning assets at June 30, 2004, an
increase from 52.2% at June 30, 2003, and 54.4% at December 31, 2003. At June
30, 2004, commercial and commercial real estate loans were $3.377 billion, a
decrease of $208.5 million since June 30, 2003, and a decrease of $89.9 million
since December 31, 2003. During the third quarter of 2003, Old National sold
$48.2 million of non-performing commercial loans. Weak loan demand in Old
National's markets impacted commercial loan growth in 2003 and continues into
2004.
At June 30, 2004, consumer loans, including automobile loans, personal and home
equity loans and lines of credit, and student loans, increased $105.0 million or
9.6% compared to June 30, 2003, and increased $31.8 million or 5.5% since
December 31, 2003, primarily due to enhancements to marketing and customer
contact programs.
Residential Real Estate Loans
Residential real estate loans, primarily 1-4 family properties, have decreased
in significance to the loan portfolio over the past five years due to higher
levels of loan sales into the secondary market, primarily to Federal Home Loan
Mortgage Corporation and Federal National Mortgage Association. Old National
sells the majority of residential real estate loans it originates as a strategy
to better manage interest rate risk and liquidity. These loans are generally
sold with loan servicing retained in order to maintain customer relationships
and generate noninterest income and fees. By using this strategy, Old National
is able to recognize an immediate gain in noninterest income versus a small net
interest income spread over a longer period of time. Old National sells the
majority of the residential real estate loans without recourse, currently having
less than 1% of loans sold with recourse.
At June 30, 2004, residential real estate loans were $534.7 million, a decrease
of $360.6 million or 40.3% from June 30, 2003, and $404.7 million or 86.2% from
December 31, 2003. The sale of $405.6 million of residential real estate loans
during the three months ended June 30, 2004, was the most significant
contributor to this decrease. In comparison, Old National's residential real
estate loan portfolio was also affected by the sales of $14.5 million of
delinquent loans in the second and third quarters of 2003. These sales were to
improve credit quality and reduce the level of non-performing loans and are not
a part of Old National's ongoing strategy.
Allowance for Loan Losses and Asset Quality Administration
Old National monitors the quality of its loan portfolio on an on-going basis and
uses a combination of detailed credit assessments by relationship managers and
credit officers, historic loss trends, and economic and business environment
factors in determining its allowance for loan losses. Old National records
provisions for loan losses based on current loans outstanding, grade changes,
mix of loans and expected losses. A detailed loan loss evaluation on an
individual loan basis for the company's highest risk loans is performed
quarterly.
Each month, problem loan reports are prepared and reviewed, which include
borrowers that show indications of being unable to meet debt obligations in the
normal course of business, and loans which have other characteristics deemed by
bank management to warrant special attention or have been criticized by
regulators in the examination process. Classified loans include non-performing
loans, past due 90 days and other problem loans while criticized loans, also
known as special mention loans, are loans that have potential weaknesses that
deserve management's close attention and require specific quarterly reviews by
the bank.
Assets determined by the various evaluation processes to be under-performing
receive special attention by Old National management. Under-performing assets
consist of: 1) nonaccrual loans where the ultimate collectibility of interest or
principal is uncertain; 2) loans renegotiated in some manner, primarily to
provide for a reduction or deferral of interest or principal payments because
the borrower's financial condition deteriorated; 3) loans with principal or
interest past due ninety (90) days or more; and 4) foreclosed properties.
A loan is generally placed on nonaccrual status when principal or interest
become 90 days past due unless it is well secured and in the process of
collection, or earlier when concern exists as to the ultimate collectibility of
principal or interest. When loans are classified as nonaccrual, interest accrued
during the year is reversed against earnings; interest accrued in the prior
year, if any, is charged to the allowance for loan losses. Cash received while a
loan is classified as nonaccrual is recorded to principal.
24
Old National analyzes on a semi-annual basis the composition of the loan
portfolio to determine if there is any concentration of loans in any single
industry exceeding 10% of its portfolio, and has determined that no such
concentration exists as of June 30, 2004, as measured by Old National. In
addition, Old National has no exposure to foreign borrowers or lesser-developed
countries.
Allowance for Loan Losses and Asset Quality
At June 30, 2004, the allowance for loan losses was $103.6 million, an increase
of $5.6 million compared to $98.0 million at June 30, 2003, and a decrease of
$1.0 million compared to $104.6 million at December 31, 2003. As a percentage of
total loans, including loans held for sale, the allowance increased to 2.02% at
June 30, 2004, from 1.74% at June 30, 2003, and 1.87% from December 31, 2003.
The improvement in coverage of total loans at June 30, 2004, is a result of
increased provisions during 2003 followed by reductions in total loans during
2004, primarily the sale of $405.6 million of residential real estate loans
during the three months ended June 30, 2004.
For the three months ended June 30, 2004, the provision for loan losses amounted
to $7.5 million, a decrease of $15.0 million from the three months ended June
30, 2003. The provision for the six months ended June 30, 2004, amounted to
$15.0 million compared to $31.5 million for the six months ended June 30, 2003.
The reduced provisions are reflective of a decline in every category of
under-performing assets and total criticized and classified loans since June 30,
2003 and December 31, 2003, as further discussed below.
Net charge-offs for the three months ended June 30, 2004, including write-downs
of $1.2 million on the residential real estate loans sold, totaled $12.5 million
compared to $8.5 million for the three months ended June 30, 2003, which
included $2.2 million in write-downs on residential real estate loans sold. Net
charge-offs for the six months ended June 30, 2004, including $1.2 million of
write-downs on the residential real estate loans sold, totaled $16.0 million
compared to $21.2 million for the six months ended June 30, 2003, which included
$2.2 million in write-downs on residential real estate loans sold. This decrease
is reflective of the improvement in total charge-offs and under-performing
assets. Net charge-offs to average loans were 0.89% and 0.57% for the three and
six months ended June 30, 2004, respectively, as compared to 0.60% and 0.75% for
the three and six months ended June 30, 2003.
Under-performing assets totaled $102.9 million at June 30, 2004, a decrease of
$58.0 million from June 30, 2003, and significantly lower than the $118.5
million at December 31, 2003. As a percent of total loans and foreclosed
properties, under-performing assets at June 30, 2004, were 2.00%, a reduction
from the June 30, 2003 ratio of 2.85% and the December 31, 2003 ratio of 2.12%.
Nonaccrual loans improved to $97.6 million at June 30, 2004, compared to $146.4
million at June 30, 2003, and $104.6 million at December 31, 2003. Changes to
separate the loan production functions from the underwriting functions,
significant strengthening of the commercial underwriting processes and the
elevation of the Credit Policy Committee to a board level committee have all
served to continue the emphasis on improving credit quality over the past year.
Management believes that it has appropriately identified and reserved for loan
losses related to nonaccrual loans at June 30, 2004. Approximately $37.6 million
of nonaccrual loans less than thirty days delinquent were contractually
performing at June 30, 2004. Management will continue its efforts to reduce the
level of non-performing loans and may consider the possibility of additional
sales of troubled and non-performing loans, which could result in additional
write-downs to the allowance for loan losses.
The total portfolio of loans identified by Old National as problem credits
continues to decline. Total classified and criticized loans were $492.4 million
at June 30, 2004, a decrease of $123.2 million from June 30, 2003, and $67.2
million from December 31, 2003. While the absolute level of classified and
criticized loans at June 30, 2004, decreased, management believes it has taken a
prudent approach to the evaluation of under-performing credits and the loan
portfolio in general, both in acknowledging the portfolio's general condition
and in establishing the allowance for loan losses.
Old National has been affected by weakness in the economy of its markets, which
has resulted in minimal growth of commercial loans and tighter credit
underwriting standards. Management expects that trends in nonaccrual loans will
be influenced by the degree to which the economy strengthens. The longer the
significant softness in manufacturing continues, the more stress it puts on Old
National's borrowers, increasing the potential for additional nonaccrual loans.
25
The table below shows the various components of under-performing assets:
- -----------------------------------------------------------------------------------------------------
June 30, December 31,
(dollars in thousands) 2004 2003 2003
- -----------------------------------------------------------------------------------------------------
Nonaccrual loans $ 97,620 $146,388 $104,627
Renegotiated loans - - -
Past due loans (90 days or more) 1,354 5,584 5,120
Foreclosed properties 3,879 8,862 8,763
- -----------------------------------------------------------------------------------------------------
Total under-performing assets $102,853 $160,834 $118,510
=====================================================================================================
Classified loans (includes non-performing loans,
past due 90 days and other problem loans) $307,873 $424,125 $343,943
Criticized loans 184,548 191,468 215,700
- -----------------------------------------------------------------------------------------------------
Total criticized and classified loans $492,421 $615,593 $559,643
=====================================================================================================
Asset Quality Ratios: (1)
Non-performing loans/total loans (1) (2) 1.90 % 2.60 % 1.87 %
Under-performing assets/total loans and
foreclosed properties (1) 2.00 2.85 2.12
Under-performing assets/total assets 1.14 1.65 1.27
Allowance for loan losses/under-performing assets 100.77 60.95 88.24
- -----------------------------------------------------------------------------------------------------
(1) Items referring to loans are net of unearned income and include residential
loans held for sale.
(2) Non-performing loans include nonaccrual and renegotiated loans.
Premises and Equipment
Premises and equipment was $201.7 million at June 30, 2004, an increase of $50.3
million or 33.2% since June 30, 2003, and an increase of $20.3 million or 22.4%
since December 31, 2003. The increase is primarily due to the
construction-in-progress of Old National's Evansville-based corporate
headquarters and main banking center. The building is expected to be complete
August 11, 2004, at which time additional equipment and occupancy expenses will
begin.
Goodwill and Other Intangible
Goodwill was $129.3 million at June 30, 2004, an increase of $14.2 million since
June 30, 2003. The increase is attributable to acquisitions in the non-bank
segment of the company in the second and third quarters of 2003. Also as a
result of these acquisitions, other intangible assets related to customer
business relationships increased to $40.3 million at June 30, 2004, from $31.0
million at June 30, 2003. Old National performs impairment testing of goodwill
and other intangibles on an annual basis. As of June 30, 2004 and 2003, there
was no impairment.
Funding
Total funding, comprised of deposits and wholesale borrowings, was $8.229
billion at June 30, 2004, a decrease of 6.5% from $8.804 billion at June 30,
2003, and a decrease of 7.1% from $8.532 billion at December 31, 2003. Total
deposits were $6.346 billion, including $3.569 billion in transaction accounts
and $2.777 billion in time deposits at June 30, 2004. Total deposits decreased
2.0% or $131.1 million compared to June 30, 2003, and 4.5% or $146.8 million
compared to December 31, 2003. Transaction accounts increased 2.7% or $94.4
million compared to June 30, 2003, and 4.8% or $84.3 million compared to
December 31, 2003. Time deposits decreased 7.5% or $225.5 million compared to
June 30, 2003, and 15.4% or $231.0 million compared to December 31, 2003. Old
National experienced growth in demand deposits and other low cost transaction
accounts offset by a reduction in time accounts when comparing these time
periods due to the lower rate environment and customer preference for
transaction accounts. The reduction in time accounts from June 30, 2004,
compared to June 30, 2003 and December 31, 2003, was also due to the maturity of
a group of higher interest rate certificates of deposits during the first
quarter of 2004.
Old National uses wholesale funding to augment deposit funding and to help
maintain its desired interest rate risk position. At June 30, 2004, wholesale
borrowings, including short-term borrowings and other borrowings, decreased
19.1% and 15.3% from June 30, 2003 and December 31, 2003, respectively.
Wholesale funding was increased during the first half of 2003 to finance
investment portfolio growth, offset a reduction in certificates of deposits, and
take advantages of favorable interest rates. During the second half of 2003 and
continuing into 2004,
26
wholesale borrowings decreased as the investment portfolio growth slowed.
Wholesale borrowings as a percentage of total funding was 22.9% at June 30,
2004, compared to 26.4% at June 30, 2003, and 23.9% at December 31, 2003. The
lower level of earning assets, primarily due to a residential real estate loan
sale of $405.6 million during second quarter of 2004, reduced the company's
reliance on wholesale funding.
Capital Resources and Regulatory Guidelines
Shareholders' equity totaled $673.3 million at June 30, 2004, a reduction of
12.1% or $92.4 million from June 30, 2003, and a decrease of 11.8% compared to
December 31, 2003. A change from unrealized gains on investment securities at
June 30, 2003 and December 31, 2003, to an unrealized loss at June 30, 2004, was
the primary contributor to the decrease in shareholders' equity. Other factors
contributing to the decrease were the reduction of net income during the three
and six months ended June 30, 2004, related to nonrecurring "Ascend" charges as
well as the decreased net income for the year ended December 31, 2003, compared
to the year ended December 31, 2002.
As reflected in the Consolidated Statement of Changes in Shareholders' Equity,
Old National paid cash dividends of $0.19 and $0.38 per share for the three and
six months ended June 30, 2004, respectively, decreasing equity by $25.2
million, compared to cash dividends of $0.18 and $0.36 per share for the three
and six months ended June 30, 2003, respectively, (restated for the 5% stock
dividend distributed on January 27, 2004), which decreased equity by $24.2
million. Old National purchased shares of its stock in the open market under an
ongoing repurchase program, reducing shareholders' equity by $16.1 million
during the six months ended June 30, 2004, and $21.6 million during the six
months ended June 30, 2003. Shares issued for stock options and stock purchase
plans increased shareholders' equity by $9.3 million during the six months ended
June 30, 2004, compared to $6.4 million during the six months ended June 30,
2003.
Old National and the banking industry are subject to various regulatory capital
requirements administered by the federal banking agencies. Old National's
consolidated capital position remains strong as evidenced by the following
comparisons of key industry ratios.
- -------------------------------------------------------------------------------------------------------
Regulatory
Guidelines June 30, December 31,
Minimum 2004 2003 2003
- -------------------------------------------------------------------------------------------------------
Risk-based capital:
Tier 1 capital to total avg assets (leverage ratio) 4.00 % 7.48 % 7.49 % 7.35 %
Tier 1 capital to risk-adjusted total assets 4.00 11.31 11.41 10.96
Total capital to risk-adjusted total assets 8.00 15.07 15.06 14.65
Shareholders' equity to assets N/A 7.45 7.86 7.65
- -------------------------------------------------------------------------------------------------------
ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK MANAGEMENT
Inherent in Old National's balance sheet is market risk, defined as the
sensitivity of income, fair market values and capital to changes in interest
rates, foreign currency exchange rates, commodity prices and other relevant
market rates or prices. The primary market risk to which Old National has
exposure is interest rate risk. Interest rate risk arises because assets and
liabilities may reprice, mature or prepay at different times or based upon
different market instruments as market interest rates change. Changes in the
slope of the yield curve and the pace of interest rate changes may also impact
net interest income and the fair value of the balance sheet.
Old National manages interest rate risk within an overall asset and liability
management framework that includes attention to credit risk, liquidity risk and
capitalization. A principal objective of asset/liability management is to manage
the sensitivity of net interest income to changing interest rates. Asset and
liability management activity is governed by a policy reviewed and approved
annually by the Board of Directors. The Board of Directors has delegated the
administration of this policy to the Funds Management Committee, a committee of
the Board of Directors, and the Balance Sheet Management Committee, a committee
comprised of senior company management. The Funds Management Committee meets
quarterly and oversees adherence to policy and recommends policy changes to the
Board. The Balance Sheet Management Committee meets monthly and provides
guidance to Treasury and other operating units of the company regarding the
execution of asset and liability management strategies.
27
Old National uses two modeling techniques to quantify the impact of changing
interest rates on the company, Net Interest Income at Risk and Economic Value of
Equity. Net Interest Income at Risk is used by management and the Board of
Directors to evaluate the impact of changing rates over a two-year horizon.
Economic Value of Equity is a useful tool to evaluate long-term interest rate
risk. These models simulate the likely behavior of the company's net interest
income and the likely change in the company's market value due to changes in
interest rates under various possible interest rate scenarios. Because the
models are driven by expected behavior in various interest rate scenarios and
many factors besides market interest rates impact the company's net interest
income and value, Old National recognizes that model outputs are not guarantees
of actual results. For this reason, Old National models many different
combinations of interest rates and balance sheet assumptions to best understand
its overall sensitivity to market interest rate changes.
Old National's Board of Directors, through its Funds Management Committee,
monitors the company's interest rate risk. The Funds Management Committee
establishes policy guidelines for the allowable change in cumulative net
interest income over a two-year period and the change in Economic Value of
Equity in an up or down 200 basis point instantaneous parallel change to the
yield curve (+/- 200 basis point yield curve shock). The current guideline for
Net Interest Income at Risk is +/- 5% of net interest income over a two-year
period in a 200 basis point shock to the yield curve. The current guideline for
the allowable fluctuation in Economic Value of Equity is +/- 12% in a 200 basis
point shock to the yield curve. In addition to the output of the model in up and
down 200 basis points shocks to the yield curve, Old National has provided the
output of its rate risk model in up and down 50 and 100 basis point yield curve
shocks to provide a better understanding of Old National's sensitivity to market
interest rate changes.
At June 30, 2004, modeling indicates that Old National was outside its policy of
Net Interest Income at Risk in an up 200 basis points yield curve shock.
Management is currently executing transactions to bring the company's
sensitivity to rising rates back within its policy parameters. The following
table shows Old National's market risk in various interest rate scenarios.
Interest Rate Risk /Static Balance Sheet Model
- ----------------------------------------------------------------------------------------
Estimated 24- Month Estimated Change
Interest Rate Cumulative Impact On in Economic
Change Net Interest Income Value of Equity
--------------------------------- --------------------------------
(basis points) Policy Actual Policy Actual
- ----------------------------------------------------------------------------------------
2004
+200 +/- 5.00 % -5.82 % +/- 12.00 % -10.81 %
+100 -2.41 -5.30
+50 -1.30 -2.98
-50 1.73 % 0.16 %
-100 1.90 0.22
-200 +/- 5.00 % 0.10 +/- 12.00 % -7.05
- ----------------------------------------------------------------------------------------
2003
+200 +/- 5.00 % -0.10 % +/- 12.00 % -1.34 %
+100 0.34 0.51
+50 0.30 0.31
-50 -0.63 % -2.75 %
-100 -2.11 -5.68
-200 +/- 5.00 % -4.24 +/- 12.00 % -15.09
- ----------------------------------------------------------------------------------------
The change in the modeled Net Interest Income at Risk in the up 200 basis point
yield curve shock from June 30, 2003 to June 30, 2004, is due primarily to three
factors. Earning assets decreased during the period, which reduced the model's
static balance sheet projected net interest income. Secondly, the company's NOW
and money market accounts, which have different rate sensitivity characteristics
than time deposits, increased while customer time deposits decreased. Lastly,
the average life of the investment portfolio increased by approximately one year
due to rising rates.
28
Subsequent to June 30, 2004, Old National executed several transactions to
reduce the company's sensitivity to rising rates. As of July 21, 2004, Old
National estimates its net interest income exposure to be -5.04% and change in
economic value of equity to be -10.48% in an up 200 basis points shock to the
yield curve. The company's rate risk model output depicted in the preceding
table is based on a static, or unchanged future balance sheet. Based on
management's expected balance sheet, which includes expected growth in the
company's loan portfolio and changes in the company's funding mix, Old National
expects net interest income to be positively impacted by the market's current
expectation of gradually increasing interest rates during the remainder of 2004
and into 2005.
Old National uses derivatives to manage interest rate risk in the ordinary
course of business. See Note 16 to the consolidated financial statements of the
2003 annual report for a discussion of derivative financial instruments. These
transactions serve to better balance the repricing of assets and liabilities in
various rate change scenarios and protect the company from changes in interest
rates.
LIQUIDITY MANAGEMENT
The Funds Management Committee of the Board of Directors and the Balance Sheet
Management Committee establish liquidity risk guidelines and monitor liquidity
risk. The objective of liquidity management is to ensure Old National has the
ability to fund balance sheet growth and meet deposit and debt obligations in a
timely and cost-effective manner. Management monitors liquidity through a
regular review of asset and liability maturities, funding sources, and loan and
deposit forecasts to minimize funding risk. The company maintains strategic and
contingency liquidity plans to ensure sufficient available funding to satisfy
requirements for balance sheet growth, properly manage capital markets' funding
sources and to address unexpected liquidity requirements.
Old National's ability to raise funding at competitive prices is influenced by
rating agencies' views of the company's credit quality, liquidity, capital and
earnings. The senior debt ratings of Old National Bancorp and Old National Bank
at June 30, 2004, are shown in the following table.
SENIOR DEBT RATINGS
- ------------------------------------------------------------------------------------------------------------------
Standard and Poor's Moody's Investor Services Fitch, Inc.
---------------------------- ----------------------------- -------------------------
Long-term Short-term Long-term Short-term Long-term Short-term
- ------------------------------------------------------------------------------------------------------------------
Old National Bancorp BBB N/A Baa1 N/A BBB F2
Old National Bank BBB+ A2 A3 P-2 BBB F2
- ------------------------------------------------------------------------------------------------------------------
N/A = not applicable
As of June 30, 2004, Old National Bank had the capacity to borrow $919.7 million
from the Federal Reserve Bank's discount window. Old National Bank is also a
member of the Federal Home Loan Bank ("FHLB") of Indianapolis, which provides a
source of funding through FHLB advances. Old National maintains relationships in
capital markets with brokers and dealers to issue certificates of deposits and
short-term and medium-term bank notes as well. In addition, at June 30, 2004,
Old National had $685 million available for issuance under a $1 billion global
bank note program for senior and subordinated debt.
Old National Bancorp, the parent company, has routine funding requirements
consisting primarily of operating expenses, dividends to shareholders, debt
service, net derivative cash flows and funds used for acquisitions. Old National
Bancorp obtains funding to meet its obligations from dividends and management
fees collected from its subsidiaries and the issuance of debt securities. At
June 30, 2004, the parent company's other borrowings outstanding was $265.1
million, compared with $143.6 million at June 30, 2003. This increase in other
borrowings was driven by the reclassification of guaranteed preferred beneficial
interests in subordinated debentures as described in Note 9 to the consolidated
financial statements. Old National Bancorp, the parent company, has debt
scheduled to mature in the next 12-months of $3.2 million. These debt
obligations are expected to be met through current cash balances and dividends
from subsidiaries. Federal banking laws regulate the amount of dividends that
may be paid by banking subsidiaries without prior approval. For further
information regarding dividend restrictions, see Note 19 to the consolidated
financial statements of the 2003 annual report. At June 30, 2004, Old National
had an SEC shelf registration in place for the issuance of $200 million of
preferred securities by a series of Trusts. Old National has issued $150 million
of these securities, called trust preferred securities, and has the capacity to
issue an additional $50 million.
29
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. Old National's principal
executive officer and principal financial officer have concluded that Old
National's disclosure controls and procedures (as defined in Exchange Act Rule
13a-14(c) under the Securities Exchange Act of 1934, as amended), based on their
evaluation of these controls and procedures as of the end of the period covered
by this Form 10-Q, are effective at the reasonable assurance level as discussed
below to ensure that information required to be disclosed by Old National in the
reports it files under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission and that such
information is accumulated and communicated to Old National's management,
including its principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
Limitations on the Effectiveness of Controls. Management, including the
principal executive officer and principal financial officer, does not expect
that Old National's disclosure controls and internal controls will prevent all
error and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within the company have
been detected. These inherent limitations include the realities that judgements
in decision-making can be faulty, and that breakdowns can occur because of
simple error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people or by
management override of the controls.
The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be only
reasonable assurance that any design will succeed in achieving its stated goals
under all potential future conditions, over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
30
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES
ISSUER PURCHASES OF EQUITY SECURITIES
- ----------------------------------------------------------------------------------------------------
Total Number
of Shares
Total Average Purchased as Maximum Number of
Number Price Part of Publically Shares that May Yet
of Shares Paid Per Announced Plans Be Purchased Under
Period Purchased Share or Programs the Plans or Programs
- ----------------------------------------------------------------------------------------------------
01/01/04 - 01/31/04 346,139 $21.31 346,139 2,965,183
02/01/04 - 02/29/04 94,100 21.28 94,100 2,867,307
03/01/04 - 03/31/04 27,500 22.36 27,500 2,854,710
04/01/04 - 04/30/04 91,600 22.19 91,600 2,758,517
05/01/04 - 05/31/04 119,500 23.42 119,500 2,635,936
06/01/04 - 06/30/04 49,921 23.92 49,921 2,584,867
- ----------------------------------------------------------------------------------------------------
Year-to-date 6/30/04 728,760 $22.14 728,760 2,584,867
====================================================================================================
NOTE: Old National announced on December 4, 2003, that the board of directors
approved the continuation of the company's stock repurchase program up to 5% of
the company's outstanding stock for 2004.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the April 29, 2004 Annual Meeting of Shareholders, the following matters were
submitted to a vote of the shareholders. Election of Directors - The following
directors were elected to Class II of the Board of Directors, each to hold
office for three years (until the 2007 Annual Meeting) and until his or her
successor shall have been duly elected and qualified:
Vote Counts
For Withheld
Class II Directors (term ending 2007) ---------- ---------
David E. Eckerle 49,005,736 2,018,265
Niel C. Ellerbrook 48,768,771 3,481,596
Kelly N. Stanley 48,776,402 2,659,091
Ratification of the selection of Independent Public Accountants -
PricewaterhouseCoopers LLP - For - 49,207,725; Votes Against - 1,149,351; Votes
Abstained - 646,376; Broker nonvotes - 1,264,517
ITEM 5. OTHER INFORMATION
NONE
31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits filed as part of this report and exhibits incorporated herein
by reference to other documents are as follows:
Exhibit
Number
3(i) Articles of Incorporation of Old National (incorporated by reference
to Exhibit 3(i) of Old National's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2002).
3 (ii) By-Laws of Old National, amended and restated effective April 22,
2004 (incorporated by reference to Exhibit 3(ii) of Old National's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2004).
4 Instruments defining rights of security holders, including indentures
Form of Indenture between Old National and Bank One Trust Company, NA,
as trustee (incorporated by reference to Exhibit 4.1 to Old National's
Registration Statement on Form S-3, Registration No. 333-87573, filed
with the Securities and Exchange Commission on September 22, 1999).
10 Material contracts
(a) Form of Severance Agreement for Thomas F. Clayton, Michael R.
Hinton, Daryl D. Moore and John S. Poelker, as amended
(incorporated by reference to Exhibit 10(a) of Old National's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2004).*
(b) Form of Change of Control Agreement for Thomas F. Clayton,
Michael R. Hinton, Daryl D. Moore and John S. Poelker, as amended
(incorporated by reference to Exhibit 10(b) of Old National's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2004).*
(c) Severance Agreement, between Old National and James A. Risinger
(incorporated by reference to Exhibit 10( c) of Old National's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2004).*
(d) Old National Bancorp 1999 Equity Incentive Plan (incorporated by
reference to Old National's Form S-8 filed on July 20, 2001).*
(e) Construction Manager Contract, dated as of May 30, 2002, between
Old National Bancorp and Industrial Contractors, Inc.
(incorporated by reference to Old National's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2002).
(f) Owner-Contractor Agreement, dated as of October 11, 2002, between
Old National Bancorp and Industrial Contractors, Inc.
(incorporated by reference to Old National's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2002).
(g) Summary of Old National Bancorp's Outside Director Compensation
Program (incorporated by reference to Old National's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003).*
31.1 Certification of Principal Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
--------------
* Management contract or compensatory plan or arrangement
32
(b) Reports on Form 8-K filed during the quarter ended June 30, 2004.
Old National filed a current report on Form 8-K dated June 9, 2004.
The purpose of this Form 8-K was to announce that Old National had
begun the 18-month implementation phase of project "Ascend" and the
anticipated financial impact of such and to report a summary of the
conference call slide presentation used to discuss the implementation
of project "Ascend".
Old National filed a current report on Form 8-K dated April 22, 2004.
The purpose of this Form 8-K was to report Old National's results for
the first quarter of 2004.
33
SIGNATURES
Pursuant to the requirements 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
(Registrant)
By: /s/ John S. Poelker
--------------------------------
John S. Poelker
Executive Vice President and Chief Financial Officer
Duly Authorized Officer and Principal Financial Officer
Date: August 9, 2004
34