OLD NATIONAL BANCORP /IN/
10-Ks and 10-Qs
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
Of the Securities Exchange Act of 1934
Of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2009
Commission File Number 1-15817
OLD NATIONAL BANCORP
(Exact name of the Registrant as specified in its charter)
| INDIANA | 35-1539838 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) | |
| One Main Street | ||
| Evansville, Indiana | 47708 | |
| (Address of principal executive offices) | (Zip Code) |
(812) 464-1294
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act
| Title of Each Class | Name of each exchange on which registered | |
| Common Stock, No Par Value | New York Stock Exchange | |
| Preferred Stock Purchase Rights |
| 8% Trust Preferred Securities of ONB Capital Trust II | ||
| (and Registrant’s guaranty with respect thereto) | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
None
Indicate by check mark if the Registrant is a well-known seasoned issuer (as defined in Rule 405 of
the Securities Act).
Yes
þ
No
o
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
Yes
o
No
þ
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 (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (s232.405 of this chapter) during the preceding 12 months
(or for shorter period that the registrant was required to submit and post such files).
Yes
o
No
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one)
| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes
o
No
þ
The aggregate market value of the Registrant’s voting common stock held by non-affiliates on June
30, 2009, was $623,161,091 (based on the closing price on that date of $9.82). In calculating the
market value of securities held by non-affiliates of the Registrant, the Registrant has treated as
securities held by affiliates as of June 30, 2009, voting stock owned of record by its directors
and principal executive officers, and voting stock held by the Registrant’s trust department in a
fiduciary capacity for benefit of its directors and principal executive officers. This calculation
does not reflect a determination that persons are affiliates for any other purposes.
The number of shares outstanding of the Registrant’s common stock, as of January 29, 2010, was
87,181,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held May 11, 2010, are
incorporated by reference into Part III of this Form 10-K.
OLD NATIONAL BANCORP
2009 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
2009 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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| Exhibit 10(as) | ||||||||
| Exhibit 10(at) | ||||||||
| Exhibit 10(au) | ||||||||
| Exhibit 21 | ||||||||
| Exhibit 23.1 | ||||||||
| Exhibit 31.1 | ||||||||
| Exhibit 31.2 | ||||||||
| Exhibit 32.1 | ||||||||
| Exhibit 32.2 | ||||||||
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Table of Contents
OLD NATIONAL BANCORP
2009 ANNUAL REPORT ON FORM 10-K
2009 ANNUAL REPORT ON FORM 10-K
FORWARD-LOOKING STATEMENTS
In this report, we have made various statements regarding current expectations or forecasts of
future events, which speak only as of the date the statements are made. These statements are
“forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements are also made from time-to-time in press releases and in oral
statements made by the officers of Old National Bancorp (“Old National,” or the “Company”).
Forward-looking statements are identified by the words “expect,” “may,” “could,” “intend,”
“project,” “estimate,” “believe”, “anticipate” and similar expressions. Forward-looking statements
also include, but are not limited to, statements regarding estimated cost savings, plans and
objectives for future operations, and expectations about performance as well as economic and market
conditions and trends.
Such forward-looking statements are based on assumptions and estimates, which although believed to
be reasonable, may turn out to be incorrect. Therefore, undue reliance should not be placed upon
these estimates and statements. We can not assure that any of these statements, estimates, or
beliefs will be realized and actual results may differ from those contemplated in these
“forward-looking statements.” We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events, or otherwise. You are advised
to consult further disclosures we may make on related subjects in our filings with the SEC. In
addition to other factors discussed in this report, some of the important factors that could cause
actual results to differ materially from those discussed in the forward-looking statements include
the following:
| • | economic, market, operational, liquidity, credit and interest rate risks associated with our business; | |
| • | economic conditions generally and in the financial services industry; | |
| • | increased competition in the financial services industry either nationally or regionally, resulting in, among other things, credit quality deterioration; | |
| • | our ability to achieve loan and deposit growth; | |
| • | volatility and direction of market interest rates; | |
| • | governmental legislation and regulation, including changes in accounting regulation or standards; | |
| • | our ability to execute our business plan; | |
| • | a weakening of the economy which could materially impact credit quality trends and the ability to generate loans; | |
| • | changes in the securities markets; and | |
| • | changes in fiscal, monetary and tax policies. |
Investors should consider these risks, uncertainties and other factors in addition to risk factors
included in our other filings with the SEC.
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Table of Contents
GENERAL
Old National is a financial holding company incorporated in the State of Indiana and maintains its
principal executive office in Evansville, Indiana. We, through our wholly owned banking
subsidiary, provide a wide range of services, including commercial and consumer loan and
depository services, investment and brokerage services, lease financing and other traditional
banking services. Through our non-bank affiliates, we provide services to supplement the banking
business including fiduciary and wealth management services, insurance and other financial
services. As of December 31, 2009, we employed 2,812 full-time equivalent associates.
COMPANY PROFILE
Old National Bank, our wholly owned banking subsidiary, (“Old National Bank”) was founded in 1834
and is the oldest company in Evansville, Indiana. In 1982, Old National was formed; in 2001 we
became a financial holding company and we are currently the largest financial holding company
headquartered in the state of Indiana. Also in 2001, we completed the consolidation of 21 bank
charters enabling us to operate under a common name with consistent product offerings throughout
the financial center locations, consolidating back-office operations and allowing us to provide
more convenient service to clients. We provide financial services primarily in Indiana, eastern
and southeastern Illinois, and central and western Kentucky.
OPERATING SEGMENTS
We operate in two segments: community banking and treasury. Substantially all of our revenues are
derived from customers located in, and substantially all of our assets are located in, the United
States. A description of each segment follows.
Community Banking Segment
The community banking segment operates through Old National Bank, and has traditionally been the
most significant contributor to our revenue and earnings. The primary goal of the community
banking segment is to provide products and services that address clients’ needs and help clients
reach their financial goals by offering a broad array of quality services. Our financial centers
focus on convenience factors such as location, space for private consultations and quick client
access to routine transactions.
As of December 31, 2009, Old National Bank operated 172 banking financial centers located primarily
in Indiana, Illinois, and Kentucky. The community banking segment primarily consists of lending
and depository activities along with merchant cash management, internet banking and other services
relating to the general banking business. In addition, the community banking segment includes
Indiana Old National Insurance Company (“IONIC”), which reinsures credit life insurance. IONIC
also provides property and casualty insurance for Old National and reinsures most of the coverage
with non-affiliated carriers.
Lending Activities
We earn interest income on loans as well as fee income from the origination of loans. Lending
activities include loans to individuals which primarily consist of home equity lines of credit,
residential real estate loans and consumer loans, and loans to commercial clients, which include
commercial loans, commercial real estate loans, letters of credit and lease financing. Typically,
residential real estate loans are sold servicing released to secondary investors, with gains or
losses from the sales being recognized.
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Depository Activities
We strive to serve individuals and commercial clients by providing depository services that fit
their needs at competitive rates. We pay interest on the interest-bearing deposits and receive
service fee revenue on various
accounts. Deposit accounts include products such as noninterest-bearing demand, negotiable order
of withdrawal (“NOW”), savings and money market, and time deposits. Debit and ATM cards provide
clients with access to their accounts 24 hours a day at any ATM location. We also provide 24-hour
telephone access and online banking as well as other electronic banking services.
Investment and Brokerage Services
We, through a registered third party broker-dealer, provide clients with convenient and
professional investment services and a variety of brokerage products. This line of business offers
a full array of investment options and investment advice to its clients.
Treasury Segment
Treasury manages investments, wholesale funding, interest rate risk, liquidity and leverage for Old
National. Treasury also provides capital markets products, including interest rate derivatives,
foreign exchange and industrial revenue bond financing for our commercial clients.
Other
The following lines of business are included in the “other” column for all periods reported:
Wealth Management
Fiduciary and trust services targeted at high net worth individuals are offered through an
affiliate trust company under the business name of Old National Trust Company.
Insurance Agency Services
Through our insurance agency subsidiaries, we offer full-service insurance brokerage services
including commercial property and casualty, surety, loss control services, employee benefits
consulting and administration, and personal insurance. These subsidiaries are insurance agencies
that offer products that are issued and underwritten by various insurance companies not affiliated
with us.
Additional information about our business segments is included in Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and Note 22 to the consolidated
financial statements.
MARKET AREA
We own the largest Indiana-based bank and one of the largest independent insurance agencies
headquartered in Indiana. Operating from a home base in Evansville, Indiana, we have continued to
grow our footprint in Indiana and Kentucky with continued expansion in the attractive Louisville,
Indianapolis and Lafayette markets. In February 2007, we expanded into Northern Indiana by
acquiring St. Joseph Capital Corporation, which had banking offices in Mishawaka and Elkhart,
Indiana. In March 2009, we completed the acquisition of the Indiana retail branch banking network
of Citizens Financial Group, which consisted of 65 branches and a training facility. The branches
are located primarily in the Indianapolis area.
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Table of Contents
The following table reflects the market locations where we have a significant share of the deposit
market. The market share data is by metropolitan statistical area. The Evansville, Indiana data
includes branches in Henderson, Kentucky.
Old National Deposit Market Share and Number of Branch Locations
Deposits as of June 30, 2009
Deposits as of June 30, 2009
| Number of | Deposit Market | |||||||
| Market Location | Branches | Share Rank | ||||||
|
Central City, Kentucky
|
4 | 1st | ||||||
|
Danville, Illinois
|
3 | 1st | ||||||
|
Harrisburg, Illinois
|
1 | 1st | ||||||
|
Evansville, Indiana
|
20 | 2nd | ||||||
|
Terre Haute, Indiana
|
6 | 2nd | ||||||
|
Jasper, Indiana
|
6 | 2nd | ||||||
|
Carbondale, Illinois
|
4 | 2nd | ||||||
|
Vincennes, Indiana
|
4 | 2nd | ||||||
|
Washington, Indiana
|
3 | 2nd | ||||||
|
Muncie, Indiana
|
6 | 3rd | ||||||
|
Madisonville, Kentucky
|
2 | 3rd | ||||||
Source: FDIC
ACQUISITION AND DIVESTITURE STRATEGY
Since the formation of Old National in 1982, we have acquired more than 40 financial institutions
and financial services companies. Future acquisitions and divestitures will be driven by a
disciplined financial process and will be consistent with the existing focus on community banking,
client relationships and consistent quality earnings. Targeted geographic markets for acquisitions
include mid-size markets within or near our existing franchise with average to above average growth
rates.
As with previous acquisitions, the consideration paid by us will be in the form of cash, debt or
Old National stock. The amount and structure of such consideration is based on reasonable growth
and cost savings assumptions and a thorough analysis of the impact on both long- and short-term
financial results.
COMPETITION
The banking industry and related financial service providers operate in a highly competitive
market. Old National competes with financial service providers such as local, regional and
national banking institutions, savings and loan associations, credit unions, finance companies,
investment brokers, and mortgage banking companies. In addition, Old National’s non-bank services
face competition with asset managers and advisory services, money market and mutual fund companies
and insurance agencies.
SUPERVISION AND REGULATION
Old National is registered as a bank holding company and has elected to be a financial holding
company. It is subject to the supervision of, and regulation by, the Board of Governors of the
Federal Reserve System (“Federal Reserve”) under the Bank Holding Company Act of 1956, as amended
(“BHC Act”). The Federal Reserve has issued regulations under the BHC Act requiring a bank holding
company to serve as a source of financial and managerial strength to its subsidiary banks. It is
the policy of the Federal Reserve that, pursuant to this requirement, a bank holding company should
stand ready to use its resources to provide adequate capital funds to its subsidiary banks during
periods of financial stress or adversity.
The BHC Act requires the prior approval of the Federal Reserve to acquire more than a 5% voting
interest of any bank or bank holding company. Additionally, the BHC Act restricts Old National’s
non-banking activities to those which are determined by the Federal Reserve to be closely related
to banking and a proper incident thereto.
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On July 30, 2002, the Senate and the House of Representatives of the United States (“Congress”)
enacted the Sarbanes-Oxley Act of 2002, a law that addresses, among other issues, corporate
governance, auditing and accounting, executive compensation and enhanced and timely disclosures of
corporate information. In response, the New York Stock Exchange also adopted new corporate
governance rules that are intended to allow shareholders to more easily and efficiently monitor the
performance of companies and directors.
Effective August 29, 2002, as directed by Section 302(a) of the Sarbanes-Oxley Act, Old National’s
principal executive officer and principal financial officer are required to certify that Old
National’s quarterly and annual reports do not contain any untrue statements of a material fact.
The rules also require that these officers certify that they are responsible for establishing,
maintaining and regularly evaluating the effectiveness of Old National’s internal controls; they
have made certain disclosures to auditors and the Audit Committee of the Board of Directors about
internal controls; and they have included information in Old National’s quarterly and annual
reports about their evaluation and whether there have been significant changes in Old National’s
internal controls or in other factors that could significantly affect internal controls subject to
the evaluation. Old National filed the Section 302(a) certifications with the SEC and the Listed
Company Manual Section 303A.12(a) CEO certification with the New York Stock Exchange for the prior
year. Old National’s current year’s Sarbanes-Oxley Section 302 certification is filed as an
exhibit to this Form 10-K.
On October 26, 2001, the USA Patriot Act of 2001 was signed into law. Enacted in response to the
terrorist attacks in New York, Pennsylvania and Washington, D.C. on September 11, 2001, the Patriot
Act is intended to strengthen U.S. law enforcement’s and the intelligence community’s ability to
work cohesively to combat terrorism on a variety of fronts. The Patriot Act contains sweeping
anti-money laundering and financial transparency laws and the statute and regulations promulgated
under it impose a number of significant obligations on entities subject to its provisions,
including: (a) due diligence requirements for financial institutions that administer, maintain, or
manage private bank accounts or correspondent accounts for non-U.S. persons; (b) standards for
verifying customer identification at account opening; (c) rules to promote cooperation among
financial institutions, regulators and law enforcement entities in identifying parties that may be
involved in terrorism or money laundering; (d) reports by non-financial trades and businesses filed
with the U.S. Treasury Department’s (the “Treasury Department” or the “Treasury”) Financial Crimes
Enforcement Network for transactions exceeding $10,000; and (e) filing of suspicious activities
reports by brokers and dealers if they believe a customer may be violating U.S. laws and
regulations.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), a bank holding
company is required to guarantee the compliance of any insured depository institution subsidiary
that may become “undercapitalized” (as defined in FDICIA) with the terms of any capital restoration
plan filed by such subsidiary with its appropriate federal bank regulatory agency.
Bank holding companies are required to comply with the Federal Reserve’s risk-based capital
guidelines. The Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Comptroller
of the Currency (“OCC”) have adopted risk-based capital ratio guidelines to which depository
institutions under their respective supervision are subject. The guidelines establish a systematic
analytical framework that makes regulatory capital requirements more sensitive to differences in
risk profiles among banking organizations. Risk-based capital ratios are determined by allocating
assets and specified off-balance sheet commitments to four risk-weighted categories, with higher
levels of capital being required for the categories perceived as representing greater risk. Old
National’s banking affiliate, Old National Bank, met all risk-based capital requirements of the
FDIC and OCC as of December 31, 2009. For Old National’s regulatory capital ratios and regulatory
requirements as of December 31, 2009, see Note 20 to the consolidated financial statements.
Old National Bank is subject to the provisions of the National Bank Act, is supervised, regulated
and examined by the OCC, and is subject to the rules and regulations of the OCC, Federal Reserve
and the FDIC.
A substantial portion of Old National’s cash revenue is derived from dividends paid to it by Old
National Bank. These dividends are subject to various legal and regulatory restrictions as
summarized in Note 20 to the consolidated financial statements.
Both federal and state law extensively regulate various aspects of the banking business, such as
reserve requirements, truth-in-lending and truth-in-savings disclosures, equal credit opportunity,
fair credit reporting, trading
in securities and other aspects of banking operations. Branching by Old National Bank is subject
to the jurisdiction and requires notice to or the prior approval of the OCC.
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Old National and Old National Bank are subject to the Federal Reserve Act, which restricts
financial transactions between banks and affiliated companies. The statute limits credit
transactions between banks, affiliated companies and its executive officers and its affiliates.
The statute prescribes terms and conditions for bank affiliate transactions deemed to be consistent
with safe and sound banking practices, and restricts the types of collateral security permitted in
connection with a bank’s extension of credit to an affiliate. Additionally, all transactions with
an affiliate must be on terms substantially the same or at least as favorable to the institution as
those prevailing at the time for comparable transactions with nonaffiliated parties.
FDICIA accomplished a number of sweeping changes in the regulation of depository institutions,
including Old National Bank. FDICIA requires, among other things, federal bank regulatory
authorities to take “prompt corrective action” with respect to banks which do not meet minimum
capital requirements. FDICIA further directs that each federal banking agency prescribe standards
for depository institutions and depository institution holding companies relating to internal
controls, information systems, internal audit systems, loan documentation, credit underwriting,
interest rate exposure, asset growth, management compensation, a maximum ratio of classified assets
to capital, minimum earnings sufficient to absorb losses, a minimum ratio of market value to book
value of publicly traded shares and such other standards as the agency deems appropriate.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 allows for interstate
banking and interstate branching without regard to whether such activity is permissible under state
law. Bank holding companies may now acquire banks anywhere in the United States subject to certain
state restrictions.
The Gramm-Leach-Bliley Act (“GLBA”) permits bank holding companies which have elected to become
financial holding companies to engage in a substantially broader range of non-banking activities,
including securities, investment advice and insurance activities, than is permissible for bank
holding companies that have not elected to become financial holding companies. Old National has
elected to be a financial holding company. As a result, Old National may underwrite and sell
securities and insurance. It may acquire, or be acquired by, brokerage firms and insurance
underwriters.
GLBA established new requirements for financial institutions to provide enhanced privacy
protections to customers. In June of 2000, the Federal banking agencies jointly adopted a final
regulation providing for the implementation of these protections. Financial institutions are
required to provide notice to consumers which details its privacy policies and practices, describes
under what conditions a financial institution may disclose nonpublic personal information about
consumers to nonaffiliated third parties and provides an “opt-out” method which enables consumers
to prevent the financial institution from disclosing customer information to nonaffiliated third
parties. Financial institutions were required to be in compliance with the final regulation by
July 1, 2001, and Old National was in compliance at such date and continues to be in compliance.
In October 2008, the Emergency Economic Stabilization Act of 2008 (“EESA”) was enacted. The EESA
authorizes the Treasury Department to purchase from financial institutions and their holding
companies up to $700 billion in mortgage loans, mortgage-related securities and certain other
financial instruments, including debt and equity securities issued by financial institutions and
their holding companies in a troubled asset relief program (“TARP”). The purpose of TARP is to
restore confidence and stability to the U.S. banking system and to encourage financial institutions
to increase their lending to customers and to each other. The Treasury Department has allocated
$350 billion towards the TARP Capital Purchase Program (“CPP”). Under the CPP, Treasury will
purchase debt or equity securities from participating institutions. The TARP also will include
direct purchases or guarantees of troubled assets of financial institutions. Participants in the
CPP are subject to executive compensation limits and are encouraged to expand their lending and
mortgage loan modifications. For details regarding Old National’s participation in TARP, refer to
the “Financial Condition — Capital” section of Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations”.
EESA also increased FDIC deposit insurance on most accounts from $100,000 to $250,000. This
increase is in place until the end of 2013 and is covered by deposit insurance premiums paid by the
banking industry.
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Following a systemic risk determination, the FDIC established a Temporary Liquidity Guarantee
Program (“TLGP”) on October 14, 2008. The TLGP includes the Transaction Account Guarantee Program
(“TAGP”), which provided unlimited deposit insurance coverage through December 31, 2009 for
noninterest-bearing transaction accounts (typically business checking accounts) and certain funds
swept into noninterest-bearing savings accounts. Institutions participating in the TAGP pay a 10
basis points fee (annualized) on the balance of each covered account in excess of $250,000, while
the extra deposit insurance is in place. The TAGP has been extended through June 30, 2010. The
TLGP also includes the Debt Guarantee Program (“DGP”), under which the FDIC guarantees certain
senior unsecured debt of FDIC-insured institutions and their holding companies. The unsecured debt
must be issued on or after October 14, 2008 and not later than October 31, 2009, and the guarantee
is effective through the earlier of the maturity date or June 30, 2012. The DGP coverage limit is
generally 125% of the eligible entity’s eligible debt outstanding on September 30, 2008 and
scheduled to mature on or before June 30, 2009 or, for certain insured institutions, 2% of their
liabilities as of September 30, 2008. Depending on the term of the debt maturity, the
nonrefundable DGP fee ranges from 50 to 100 basis points (annualized) for covered debt outstanding
until the earlier of maturity or June 30, 2012. The TAGP and DGP are in effect for all eligible
entities, unless the entity opted out on or before December 5, 2008. Old National Bank elected to
participate in the TAGP and both Old National Bank and Old National are eligible to participate in
DGP.
On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”) was signed into
law by President Obama. ARRA includes a wide variety of programs intended to stimulate the economy
and provide for extensive infrastructure, energy, health, and education needs. In addition, ARRA
imposes certain new executive compensation and corporate expenditure limits on all current and
future TARP recipients, including Old National, until the institution has repaid the Treasury,
which is now permitted under ARRA without penalty and without the need to raise new capital,
subject to the Treasury’s consultation with the recipient’s appropriate regulatory agency. Old
National has been a TARP recipient, but has exercised its right to repay Treasury and is no longer
subject to the compensation and corporate expenditure limits imposed by ARRA on TARP recipients.
For details regarding Old National’s participation in TARP, refer to the “Financial Condition —
Capital” section of Item 7. “Management’s Discussion and Analysis of Financial Condition and
Results of Operations”.
In addition to the matters discussed above, Old National Bank is subject to additional regulation
of its activities, including a variety of consumer protection regulations affecting its lending,
deposit and collection activities and regulations affecting secondary mortgage market activities.
The earnings of financial institutions are also affected by general economic conditions and
prevailing interest rates, both domestic and foreign and by the monetary and fiscal policies of the
United States government and its various agencies, particularly the Federal Reserve.
Additional legislative and administrative actions affecting the banking industry may be considered
by Congress, state legislatures and various regulatory agencies, including those referred to above.
It cannot be predicted with certainty whether such legislative or administrative action will be
enacted or the extent to which the banking industry in general or Old National and Old National
Bank in particular would be affected.
AVAILABLE INFORMATION
All reports filed electronically by Old National with the Securities and Exchange Commission
(“SEC”), including the annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, proxy and information statements, other information and amendments to those reports
filed (if applicable), are accessible at no cost on Old National’s web site at www.oldnational.com.
The SEC maintains an Internet site that contains reports, proxy and information statements and
other information regarding issuers that file electronically with the SEC, and Old National’s
filings are accessible on the SEC’s web site at www.sec.gov. The public may read and copy any
materials filed by Old National with the SEC at the SEC’s Public Reference Room at 100 F Street,
N.E, Washington, DC 20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330.
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Old National’s business could be harmed by any of the risks noted below. In analyzing whether to
make or to continue an investment in Old National, investors should consider, among other factors,
the following:
Risks Related to Old National’s Business
The current banking crisis, including the Enactment of EESA and ARRA, may significantly affect our
financial condition, results of operations, liquidity or stock price.
The capital and credit markets continue to experience volatility and disruption. In some cases,
the markets have produced downward pressure on stock prices and credit availability for certain
issuers seemingly without regard to those issuers’ underlying financial strength.
EESA, which established TARP, was signed into law in October 2008. As part of TARP, the Treasury
established the CPP to provide up to $700 billion of funding to eligible financial institutions
through the purchase of capital stock and other financial instruments for the purpose of
stabilizing and providing liquidity to the U.S. financial markets. Then, on February 17, 2009,
President Obama signed ARRA, as a sweeping economic recovery package intended to stimulate the
economy and provide for broad infrastructure, energy, health, and education needs. There can be no
assurance as to the actual impact that EESA or its programs, including the CPP, and ARRA or its
programs, will have on the national economy or financial markets. The failure of these significant
legislative measures to help stabilize the financial markets and a continuation or worsening of
current financial market conditions could materially and adversely affect our business, financial
condition, results of operations, access to credit or the trading price of our common shares.
There have been numerous actions undertaken in connection with or following EESA and ARRA by the
Federal Reserve Board, Congress, the Treasury, the FDIC, the SEC and others in efforts to address
the current liquidity and credit crisis in the financial industry that followed the sub-prime
mortgage market meltdown which began in 2007. These measures include homeowner relief that
encourages loan restructuring and modification; the establishment of significant liquidity and
credit facilities for financial institutions and investment banks; the lowering of the federal
funds rate; emergency action against short selling practices; a temporary guaranty program for
money market funds; the establishment of a commercial paper funding facility to provide back-stop
liquidity to commercial paper issuers; and coordinated international efforts to address illiquidity
and other weaknesses in the banking sector. The purpose of these legislative and regulatory
actions is to help stabilize the U.S. banking system. EESA, ARRA and the other regulatory
initiatives described above may not have their desired effects. If the volatility in the markets
continues and economic conditions fail to improve or worsen, our business, financial condition and
results of operations could be materially and adversely affected.
If Old National’s actual loan losses exceed Old National’s allowance for loan losses, Old
National’s net income will decrease.
Old National makes various assumptions and judgments about the collectibility of Old National’s
loan portfolio, including the creditworthiness of Old National’s borrowers and the value of the
real estate and other assets serving as collateral for the repayment of Old National’s loans.
Despite Old National’s underwriting and monitoring practices, the effect of the declining economy
could negatively impact the ability of Old National’s borrowers to repay loans in a timely manner
and could also negatively impact collateral values. As a result, Old National may experience
significant loan losses that could have a material adverse effect on Old National’s operating
results. Since Old National must use assumptions regarding individual loans and the economy, Old
National’s current allowance for loan losses may not be sufficient to cover actual loan losses.
Old National’s assumptions may not anticipate the severity or duration of the current credit cycle
and Old National may need to significantly increase Old National’s provision for losses on loans if
one or more of Old National’s larger loans or credit relationships becomes delinquent or if Old
National expands its commercial real estate and commercial lending. In addition, federal and state
regulators periodically review Old National’s allowance for loan losses and may require Old
National to increase the provision for loan losses or recognize loan charge-offs. Material
additions to Old National’s allowance would materially decrease Old National’s net income. There
can be no assurance that Old National’s monitoring procedures and policies will reduce certain
lending risks or that Old National’s allowance for loan losses will be adequate to cover actual
losses.
Old National’s loan portfolio includes loans with a higher risk of loss.
Old National Bank originates commercial real estate loans, commercial loans, agricultural real
estate loans, agricultural loans, consumer loans, and residential real estate loans primarily
within Old National’s market areas.
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Commercial real estate, commercial, consumer, and agricultural loans may expose a lender to greater
credit risk than loans secured by residential real estate because the collateral securing these
loans may not be sold as easily as residential real estate. These loans also have greater credit
risk than residential real estate for the following reasons:
| • | Commercial Real Estate Loans. Repayment is dependent upon income being generated in amounts sufficient to cover operating expenses and debt service. |
| • | Commercial Loans. Repayment is dependent upon the successful operation of the borrower’s business. |
| • | Consumer Loans. Consumer loans (such as personal lines of credit) are collateralized, if at all, with assets that may not provide an adequate source of payment of the loan due to depreciation, damage, or loss. |
| • | Agricultural Loans. Repayment is dependent upon the successful operation of the business, which is greatly dependent on many things outside the control of either Old National Bank or the borrowers. These factors include weather, commodity prices, and interest rates. |
Credit quality issues may continue to broaden in these sectors during 2010 depending on the
severity and duration of the declining economy and current credit cycle.
If Old National forecloses on collateral property, Old National may be subject to the increased
costs associated with the ownership of real property, resulting in reduced revenues.
Old National may have to foreclose on collateral property to protect Old National’s investment and
may thereafter own and operate such property, in which case Old National will be exposed to the
risks inherent in the ownership of real estate. The amount that Old National, as a mortgagee, may
realize after a default is dependent upon factors outside of Old National’s control, including, but
not limited to: (i) general or local economic conditions; (ii) neighborhood values; (iii) interest
rates; (iv) real estate tax rates; (v) operating expenses of the mortgaged properties; (vi)
environmental remediation liabilities; (vii) ability to obtain and maintain adequate occupancy of
the properties; (viii) zoning laws; (ix) governmental rules, regulations and fiscal policies; and
(x) acts of God. Certain expenditures associated with the ownership of real estate, principally
real estate taxes, insurance, and maintenance costs, may adversely affect the income from the real
estate. Therefore, the cost of operating real property may exceed the income earned from such
property, and Old National may have to advance funds in order to protect Old National’s investment,
or Old National may be required to dispose of the real property at a loss. The foregoing
expenditures and costs could adversely affect Old National’s ability to generate revenues,
resulting in reduced levels of profitability.
We face risks with respect to future expansion.
We may acquire other financial institutions or parts of those institutions in the future, and we
may engage in de novo branch expansion. We may also consider and enter into new lines of business
or offer new products or services. Acquisitions and mergers involve a number of expenses and
risks, including:
| • | the time and costs associated with identifying potential new markets, as well as acquisition and merger targets; |
| • | the estimates and judgments used to evaluate credit, operations, management and market risks with respect to the target institution may not be accurate; |
| • | the time and costs of evaluating new markets, hiring experienced local management and opening new offices, and the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion; |
| • | our ability to finance an acquisition and possible dilution to our existing shareholders; |
11
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| • | the diversion of our management’s attention to the negotiation of a transaction, and the integration of the operations and personnel of the combined businesses; |
| • | entry into new markets where we lack experience; |
| • | the introduction of new products and services into our business; |
| • | the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on our results of operations; and |
| • | the risk of loss of key employees and customers. |
We may incur substantial costs to expand, and we can give no assurance such expansion will result
in the levels of profits we seek. There can be no assurance integration efforts for any future
mergers or acquisitions will be successful. Also, we may issue equity securities in connection
with future acquisitions, which could cause ownership and economic dilution to our current
shareholders. There is no assurance that, following any future mergers or acquisitions, our
integration efforts will be successful or that, after giving effect to the acquisition, we will
achieve profits comparable to or better than our historical experience.
Economic conditions have affected and could continue to adversely affect our revenues and profits.
In response to economic and market conditions, from time to time we have undertaken initiatives to
reduce our cost structure where appropriate. These initiatives, as well as any future workforce
and facilities reductions, may not be sufficient to meet current and future changes in economic and
market conditions and allow us to achieve profitability. In addition, costs actually incurred in
connection with our restructuring actions may be higher than our estimates of such costs and/or may
not lead to the anticipated cost savings. Unless and until the economy, loan demand, credit
quality and consumer confidence improve, it is unlikely that revenues will increase significantly,
and may be reduced further.
Old National operates in an extremely competitive market, and Old National’s business will suffer
if Old National is unable to compete effectively.
In Old National’s market area, the Company encounters significant competition from other commercial
banks, savings and loan associations, credit unions, mortgage banking firms, consumer finance
companies securities brokerage firms, insurance companies, money market mutual funds and other
financial intermediaries. The Company’s competitors may have substantially greater resources and
lending limits than Old National does and may offer services that Old National does not or cannot
provide. Old National’s profitability depends upon Old National’s continued ability to compete
successfully in Old National’s market area.
The loss of key members of Old National’s senior management team could adversely affect Old
National’s business.
Old National believes that Old National’s success depends largely on the efforts and abilities of
Old National’s senior management. Their experience and industry contacts significantly benefit Old
National. The competition for qualified personnel in the financial services industry is intense,
and the loss of any of Old National’s key personnel or an inability to continue to attract, retain
and motivate key personnel could adversely affect Old National’s business.
A breach of information security or compliance breach by one of our agents or vendors could
negatively affect Old National’s reputation and business.
Old National relies upon a variety of computing platforms and networks over the internet for the
purposes of data processing, communication and information exchange. Despite the safeguards
instituted by Old National, such systems are susceptible to a breach of security. In addition, Old
National relies on the services of a variety of third-party vendors to meet Old National’s data
processing and communication needs. The occurrence of any failures,
interruptions or security breaches of Old National’s information systems or our vendors information
systems could damage our reputation, result in a loss of customer business, and expose us to civil
litigation and possible financial loss. Such costs and/or losses could materially affect Old
National’s earnings.
12
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Fiduciary Activity Risk Factor
Old National Is Subject To Claims and Litigation Pertaining To Fiduciary Responsibility
From time to time, customers make claims and take legal action pertaining to Old National’s
performance of its fiduciary responsibilities. If such claims and legal actions are not resolved
in a manner favorable to Old National they may result in significant financial liability and/or
adversely affect the market perception of Old National and its products and services as well as
impact customer demand for those products and services. Any financial liability or reputation
damage could have a material adverse effect on the Old National’s business, which, in turn, could
have a material adverse effect on the Old National’s financial condition and results of operations.
Risks Related to the Banking Industry
Changes in economic or political conditions could adversely affect Old National’s earnings, as Old
National’s borrowers’ ability to repay loans and the value of the collateral securing Old
National’s loans decline.
Old National’s success depends, to a certain extent, upon economic or political conditions, local
and national, as well as governmental monetary policies. Conditions such as the on-going
recession, unemployment, changes in interest rates, inflation, money supply and other factors
beyond Old National’s control may adversely affect its asset quality, deposit levels and loan
demand and, therefore, the Old National’s earnings. Because Old National has a significant amount
of commercial real estate loans, decreases in real estate values could adversely affect the value
of property used as collateral. Adverse changes in the economy may also have a negative effect on
the ability of Old National’s borrowers to make timely repayments of their loans, which would have
an adverse impact on Old National’s earnings. In addition, substantially all of Old National’s
loans are to individuals and businesses in Old National’s market area. Consequently, any economic
decline in Old National’s primary market areas which include Indiana, Kentucky and Illinois could
have an adverse impact on Old National’s earnings.
Markets are currently volatile
The capital and credit markets continue to experience volatility and disruption. In some cases,
the markets have produced downward pressure on stock prices and credit availability for certain
issuers seemingly without regard to those issuers’ underlying financial strength. The current
market volatility could contribute to a further decline in the market value of certain security
investments and other assets of Old National and if current levels of market disruption and
volatility continue or worsen, there can be no assurance that we will not experience an adverse
effect, which may be material, on results of operations, capital or financial position.
Changes in interest rates could adversely affect Old National’s results of operations and financial
condition.
Old National’s earnings depend substantially on Old National’s interest rate spread, which is the
difference between (i) the rates Old National earns on loans, securities and other earning assets
and (ii) the interest rates Old National pays on deposits and other borrowings. These rates are
highly sensitive to many factors beyond Old National’s control, including general economic
conditions and the policies of various governmental and regulatory authorities. If market interest
rates rise, Old National will have competitive pressures to increase the rates Old National pays
on deposits, which could result in a decrease of Old National’s net interest income. If market
interest rates decline, Old National could experience fixed rate loan prepayments and higher
investment portfolio cash flows, resulting in a lower yield on earnings assets.
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Table of Contents
Old National operates in a highly regulated environment, and changes in laws and regulations to
which Old National is subject may adversely affect Old National’s results of operations.
Old National operates in a highly regulated environment and is subject to extensive regulation,
supervision and examination by the Office of Comptroller of the Currency (“OCC”), the Federal
Deposit Insurance Corporation
(“FDIC”), the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and the
State of Indiana.
In addition, the Treasury has certain supervisory and oversight duties and
responsibilities under EESA and the CPP. See “Business —
Supervision and Regulation” herein. Applicable laws
and regulations may change, and such changes may adversely affect Old National’s business. Such
regulation and supervision of the activities in which an institution may engage is primarily
intended for the protection of the depositors and federal deposit insurance funds. Regulatory
authorities have extensive discretion in connection with their supervisory and enforcement
activities, including but not limited to the imposition of restrictions on the operation of an
institution, the classification of assets by the institution and the adequacy of an institution’s
allowance for loan losses. Any change in such regulation and oversight, whether in the form of
restrictions on activities, regulatory policy, regulations, or legislation, including but not
limited to changes in the regulations governing institutions, could have a material impact on Old
National and its operations.
Our Internal Operations are Subject to a Number of Risks.
Old National’s internal operations are subject to certain risks, including but not limited to, data
processing system failures and errors, customer or employee fraud and catastrophic failures
resulting from terrorist acts or natural disasters. Operational risk resulting from inadequate or
failed internal processes, people, and systems includes the risk of fraud by employees or persons
outside of our company, the execution of unauthorized transactions by employees, errors relating to
transaction processing and systems, and breaches of the internal control system and compliance
requirements. This risk of loss also includes potential legal actions that could arise as a result
of the operational deficiency or as a result of noncompliance with applicable regulatory standards.
The banking industry is undergoing technological innovation at a fast pace. To keep up with its
competition, Old National needs to stay abreast of innovations and evaluate those technologies that
will enable it to compete on a cost-effective basis. The cost of such technology, including
personnel, can be high in both absolute and relative terms. There can be no assurance, given the
fast pace of change and innovation, that Old National’s technology, either purchased or developed
internally, will meet or continue to meet the needs of Old National.
Our earnings could be adversely impacted by incidences of fraud and compliance failures that are
not within our direct control
.
Financial institutions are inherently exposed to fraud risk. A fraud can be perpetrated by a
customer of the Bank, an employee, a vendor, or members of the general public. We are most subject
to fraud and compliance risk in connection with the origination of loans, ACH transactions, ATM
transactions and checking transactions. Our largest fraud risk, associated with the origination of
loans, includes the intentional misstatement of information in property appraisals or other
underwriting documentation provided to us by third parties. Compliance risk is the risk that loans
are not originated in compliance with applicable laws and regulations and our standards. There can
be no assurance that we can prevent or detect acts of fraud or violation of law or our compliance
standards by the third parties that we deal with. Repeated incidences of fraud or compliance
failures would adversely impact the performance of our loan portfolio.
Risks Related to Old National’s Stock
We may not be able to pay dividends in the future in accordance with past practice.
Old National has traditionally paid a quarterly dividend to common stockholders. The payment of
dividends is subject to legal and regulatory restrictions. Any payment of dividends in the future
will depend, in large part, on Old National’s earnings, capital requirements, financial condition
and other factors considered relevant by Old National’s Board of Directors.
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The price of Old National’s common stock may be volatile, which may result in losses for investors.
General market price declines or market volatility in the future could adversely affect the price
of Old National’s common stock. In addition, the following factors may cause the market price for
shares of Old National’s common stock to fluctuate:
| • | announcements of developments related to Old National’s business; | ||
| • | fluctuations in Old National’s results of operations; | ||
| • | sales or purchases of substantial amounts of Old National’s securities in the marketplace; | ||
| • | general conditions in Old National’s banking niche or the worldwide economy; | ||
| • | a shortfall or excess in revenues or earnings compared to securities analysts’ expectations; | ||
| • | changes in analysts’ recommendations or projections; and | ||
| • | Old National’s announcement of new acquisitions or other projects. |
Old National’s charter documents and federal regulations may inhibit a takeover, prevent a
transaction that may favor or otherwise limit Old National’s growth opportunities, which could
cause the market price of Old National’s common stock to decline.
Certain provisions of Old National’s charter documents and federal regulations could have the
effect of making it more difficult for a third party to acquire, or of discouraging a third party
from attempting to acquire, control of Old National. In addition, Old National must obtain
approval from regulatory authorities before acquiring control of any other company. On February 2,
2010 Old National’s Board of Directors elected not to extend the Old National Rights Agreement,
which expires on March 1, 2010.
None.
The executive offices of Old National are located at 1 Main Street, Evansville, Indiana. This
building, which houses Old National’s general corporate functions, is leased from an unaffiliated
third party. The lease term expires December 31, 2031, and provides for the tenant’s option to
extend the term of the lease for four five-year periods. In addition, during 2007, 2008 and 2009,
eighty-six financial centers were sold in a series of sale leaseback transactions to unaffiliated
third parties. These properties are leased back from the landlord with lease terms ranging from
ten to twenty-four years. See Note 18 to the consolidated financial statements.
As of December 31, 2009, Old National and its affiliates operated a total of 172 banking centers,
loan production or other financial services offices, primarily in the states of Indiana, Illinois
and Kentucky. Of these facilities, 4 were owned and 168 were leased from unaffiliated third
parties.
In the normal course of business, Old National and its subsidiaries have been named, from time to
time, as defendants in various legal actions. Certain of the actual or threatened legal actions
include claims for substantial compensatory and/or punitive damages or claims for indeterminate
amounts of damages.
Old National contests liability and/or the amount of damages as appropriate in each pending matter.
In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases
where claimants seek substantial or indeterminate damages or where investigations and proceedings
are in the early stages, Old National cannot predict with certainty the loss or range of loss, if
any, related to such matters, how or if such matters will be
resolved, when they will ultimately be resolved, or what the eventual settlement, or other relief,
if any, might be. Subject to the foregoing, Old National believes, based on current knowledge and
after consultation with counsel, that the outcome of such pending matters will not have a material
adverse effect on the consolidated financial condition of Old National, although the outcome of
such matters could be material to Old National’s operating results and cash flows for a particular
future period, depending on, among other things, the level of Old National’s revenues or income for
such period.
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Table of Contents
In November 2002, several beneficiaries of certain trusts filed a complaint against Old National
and Old National Trust Company in the United States District Court for the Western District of
Kentucky relating to the administration of the trusts in 1997. The complaint, as amended, alleged
that Old National (through a predecessor), as trustee, mismanaged termination of a lease between
the trusts and a tenant mining company. The complaint seeks, among other relief, unspecified
damages, (costs and expenses, including attorneys’ fees, and such other relief as the court might
find just and proper.) On March 25, 2009, the Court granted summary judgment to Old National
concluding that the plaintiffs do not have standing to sue Old National in this matter. The
plaintiffs subsequently filed a motion to alter or amend the judgment with the Court. The
Plaintiffs motion to alter or amend the judgment was granted by the Court on July 29, 2009,
reversing the Court’s March 25, 2009 Order as to standing. The July 29, 2009 Order permitted Old
National to file a new motion for summary judgment with respect to issues that had not been
resolved by the Court. On December 10, 2009, the Court granted Old National partial summary
judgment and also granted a motion by Plaintiffs to amend their complaint. The Court’s December
10, 2009 Order permits Old National to file a new motion for summary judgment on the amended
complaint. Old National filed its motion for summary judgment on January 22, 2010. The briefing
schedule on the motion is now complete and it is now ripe for the judge to rule. Old National
continues to believe that it has meritorious defenses to each of the claims in the lawsuit and
intends to continue to vigorously defend the lawsuit. There can be no assurance, however, that Old
National will be successful, and an adverse resolution of the lawsuit could have a material adverse
effect on its consolidated financial position and results of operations in the period in which the
lawsuit is resolved. Old National is not presently able to reasonably estimate potential losses,
if any, related to the lawsuit and has not recorded a liability in its accompanying Consolidated
Balance Sheets.
No matters were submitted to a vote of security holders of Old National during the fourth quarter
of 2009.
Old National’s common stock is traded on the New York Stock Exchange (“NYSE”) under the ticker
symbol ONB. The following table lists the high and low closing sales prices as reported by the
NYSE, share volume and dividend data for 2009 and 2008:
| Price Per Share | Share | Dividend | ||||||||||||||
| High | Low | Volume | Declared | |||||||||||||
|
2009
|
||||||||||||||||
|
First Quarter
|
$ | 18.11 | $ | 8.97 | 52,994,300 | $ | 0.23 | |||||||||
|
Second Quarter
|
15.15 | 9.82 | 41,854,300 | 0.07 | ||||||||||||
|
Third Quarter
|
12.66 | 9.08 | 46,979,700 | 0.07 | ||||||||||||
|
Fourth Quarter
|
12.58 | 9.85 | 57,355,000 | 0.07 | ||||||||||||
|
2008
|
||||||||||||||||
|
First Quarter
|
$ | 19.26 | $ | 13.26 | 60,502,700 | $ | — | |||||||||
|
Second Quarter
|
19.13 | 14.26 | 50,756,900 | 0.23 | ||||||||||||
|
Third Quarter
|
25.00 | 12.71 | 74,613,700 | 0.23 | ||||||||||||
|
Fourth Quarter
|
20.80 | 14.14 | 46,792,400 | 0.23 | ||||||||||||
There were 26,204 shareholders of record as of December 31, 2009. Old National declared cash
dividends of $0.44 per share during the year ended December 31, 2009. Old National declared cash
dividends of $0.69 per share for 2008 and a cash dividend of $0.23 for the first quarter of 2008
during the year ended December 31, 2007. Old National’s ability to pay cash dividends depends
primarily on cash dividends received from Old National Bank.
16
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Dividend payments from Old National Bank are subject to various regulatory restrictions. See Note
20 to the consolidated financial statements for additional information.
The following table summarizes the purchases of equity securities made by Old National during the
fourth quarter of 2009:
| Total Number | ||||||||||||||||
| of Shares | ||||||||||||||||
| Total | Average | Purchased as | Maximum Number of | |||||||||||||
| Number | Price | Part of Publicly | Shares that May Yet | |||||||||||||
| of Shares | Paid Per | Announced Plans | Be Purchased Under | |||||||||||||
| Period | Purchased | Share | or Programs | the Plans or Programs | ||||||||||||
|
10/01/09 - 10/31/09
|
— | $ | — | — | — | |||||||||||
|
11/01/09 - 11/30/09
|
— | — | — | — | ||||||||||||
|
12/01/09 - 12/31/09
|
93 | 12.12 | 93 | — | ||||||||||||
|
|
||||||||||||||||
|
Total
|
93 | $ | 12.12 | 93 | — | |||||||||||
|
|
||||||||||||||||
During 2009, Old National repurchased a limited number of shares associated with employee
share-based incentive programs but did not repurchase any shares on the open market. There were no
Board approved repurchase plans or programs for the repurchase of stock as of December 31, 2009,
except for those associated with employee share-based incentive programs.
EQUITY COMPENSATION PLAN INFORMATION
The following table contains information concerning the 2008 Equity Incentive Plan approved by
security holders, as of December 31, 2009.
2008 EQUITY COMPENSATION PLAN
| Number of securities to | Weighted-average | Number of securities | ||||||||||
| be issued upon exercise | exercise price of | remaining available for | ||||||||||
| of outstanding options, | outstanding options, | future issuance under | ||||||||||
| warrants and rights | warrants and rights | equity compensation plan | ||||||||||
| Plan Category | (a) | (b) | (c) | |||||||||
|
Equity compensation plans
approved by security holders
|
6,530,936 | $ | 20.37 | 1,346,982 | ||||||||
|
|
||||||||||||
|
Equity compensation plans
not
approved by security holders
|
— | — | — | |||||||||
|
|
||||||||||||
|
Total
|
6,530,936 | $ | 20.37 | 1,346,982 | ||||||||
|
|
||||||||||||
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The following table compares cumulative five-year total shareholder returns, assuming reinvestment
of dividends, for the Company’s common stock to cumulative total returns of a broad-based equity
market index and two published industry indices.
The comparison of shareholder returns (change in December year end stock price plus reinvested
dividends) for each of the periods assumes that $100 was invested on December 31, 2004, in common
stock of each of the Company, the S&P Small Cap 600 Index, the NYSE Financial Index and the SNL
Bank and Thrift Index with investment weighted on the basis of market capitalization.
18
Table of Contents
| Five-Year | ||||||||||||||||||||||||||||
| Growth | ||||||||||||||||||||||||||||
| (dollars in thousands, except per share data) | 2009 | 2008 | 2007 | 2006 | 2005 | 2004 | Rate | |||||||||||||||||||||
|
Results of Operations
|
||||||||||||||||||||||||||||
|
Net interest income (1)
|
$ | 252,230 | $ | 262,651 | $ | 236,351 | $ | 232,243 | $ | 240,670 | $ | 255,652 | (0.3 | )% | ||||||||||||||
|
Fee and service charge income
|
153,984 | 154,231 | 151,734 | 147,902 | 149,540 | 149,162 | 0.6 | |||||||||||||||||||||
|
Net securities gains (losses)
|
27,251 | 7,562 | (3,023 | ) | 1,471 | 901 | 2,936 | 56.1 | ||||||||||||||||||||
|
Impairment on securities
|
(24,795 | ) | — | — | — | — | — | N/M | ||||||||||||||||||||
|
Gain on branch divestitures
|
— | — | — | 3,036 | 14,597 | — | N/M | |||||||||||||||||||||
|
Gain on sale leasebacks
|
6,301 | 6,320 | 6,261 | — | — | — | N/M | |||||||||||||||||||||
|
Gain (loss) on derivatives
|
719 | (1,144 | ) | 166 | 1,511 | (3,436 | ) | 10,790 | (41.8 | ) | ||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total revenue (1)
|
415,690 | 429,620 | 391,489 | 386,163 | 402,272 | 418,540 | (0.1 | ) | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Provision for loan losses
|
63,280 | 51,464 | 4,118 | 7,000 | 23,100 | 22,400 | 23.1 | |||||||||||||||||||||
|
Salaries & other operating expenses
|
338,956 | 297,229 | 277,998 | 264,690 | 263,811 | 309,403 | 1.8 | |||||||||||||||||||||
|
Income taxes (benefit) (1)
|
(283 | ) | 18,449 | 34,483 | 35,100 | 36,772 | 26,424 | N/M | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Income from continuing operations
|
13,737 | 62,478 | 74,890 | 79,373 | 78,589 | 60,313 | (25.6 | ) | ||||||||||||||||||||
|
Discontinued operations (after-tax)
|
— | — | — | — | (14,825 | ) | 2,751 | N/M | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Net income
|
13,737 | 62,478 | 74,890 | 79,373 | 63,764 | 63,064 | (26.3 | ) | ||||||||||||||||||||
|
Preferred stock dividends and
discount accretion
|
3,892 | 298 | — | — | — | — | N/M | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Net income available to common
shareholders
|
$ | 9,845 | $ | 62,180 | $ | 74,890 | $ | 79,373 | $ | 63,764 | $ | 63,064 | (31.0 | )% | ||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Per Common Share Data (2)
|
||||||||||||||||||||||||||||
|
Income from continuing
operations (diluted)
|
$ | 0.14 | $ | 0.95 | $ | 1.14 | $ | 1.20 | $ | 1.15 | $ | 0.86 | (30.4 | )% | ||||||||||||||
|
Net income (diluted)
|
0.14 | 0.95 | 1.14 | 1.20 | 0.93 | 0.90 | (31.1 | ) | ||||||||||||||||||||
|
Cash dividends (5)
|
0.44 | 0.69 | 1.11 | 0.84 | 0.76 | 0.72 | (9.4 | ) | ||||||||||||||||||||
|
Book value at year-end
|
9.68 | 9.56 | 9.86 | 9.66 | 9.61 | 10.16 | (1.0 | ) | ||||||||||||||||||||
|
Stock price at year-end
|
12.43 | 18.16 | 14.96 | 18.92 | 21.64 | 24.63 | (12.8 | ) | ||||||||||||||||||||
|
Balance Sheet Data (at December 31)
|
||||||||||||||||||||||||||||
|
Total assets
|
$ | 8,005,335 | $ | 7,873,890 | $ | 7,846,126 | $ | 8,149,515 | $ | 8,492,022 | $ | 8,898,304 | (2.1 | )% | ||||||||||||||
|
Loans (3)
|
3,908,276 | 4,777,514 | 4,699,356 | 4,716,637 | 4,937,631 | 4,987,326 | (4.8 | ) | ||||||||||||||||||||
|
Deposits
|
5,903,488 | 5,422,287 | 5,663,383 | 6,321,494 | 6,465,636 | 6,418,709 | (1.7 | ) | ||||||||||||||||||||
|
Other borrowings
|
699,059 | 834,867 | 656,722 | 747,545 | 954,925 | 1,306,953 | (11.8 | ) | ||||||||||||||||||||
|
Shareholders’ equity
|
843,826 | 730,865 | 652,881 | 642,369 | 649,898 | 704,092 | 3.7 | |||||||||||||||||||||
|
Performance Ratios
|
||||||||||||||||||||||||||||
|
Return on average assets
|
0.17 | % | 0.82 | % | 0.94 | % | 0.97 | % | 0.74 | % | 0.69 | % | ||||||||||||||||
|
Return on average common
shareholders’ equity
|
1.41 | 9.49 | 11.67 | 12.43 | 9.31 | 8.83 | ||||||||||||||||||||||
|
Common dividend payout (4) (5)
|
308.59 | 73.51 | 97.38 | 70.02 | 81.06 | 79.72 | ||||||||||||||||||||||
|
Average equity to average assets
|
9.06 | 8.67 | 8.04 | 7.81 | 7.94 | 7.83 | ||||||||||||||||||||||
|
Net interest margin (1)
|
3.52 | 3.82 | 3.28 | 3.15 | 3.09 | 3.08 | ||||||||||||||||||||||
|
Efficiency ratio
(noninterest expense/revenue) (1)
|
81.54 | 69.18 | 71.01 | 68.54 | 65.58 | 73.92 | ||||||||||||||||||||||
|
Net charge-offs
to average loans (3)
|
1.37 | 0.87 | 0.44 | 0.37 | 0.60 | 0.61 | ||||||||||||||||||||||
|
Allowance for loan losses to
ending loans (6)
|
1.81 | 1.41 | 1.20 | 1.44 | 1.61 | 1.73 | ||||||||||||||||||||||
|
Other Data
|
||||||||||||||||||||||||||||
|
Number of full-time
equivalent employees
|
2,812 | 2,507 | 2,494 | |||||||||||||||||||||||||
|
Number of shareholders
|
26,204 | 25,372 | 30,086 | |||||||||||||||||||||||||
|
Number of shares traded
(in thousands)
|
199,183 | 232,666 | 99,851 | |||||||||||||||||||||||||
| (1) | Includes the effect of taxable equivalent adjustments of $20.8 million for 2009, $19.3 million for 2008, $ 17.2 million for 2007, $19.5 million for 2006, $21.5 million for 2005, and $23.9 million for 2004, using the federal statutory tax rate in effect of 35% for all periods. | |
| (2) | All share and per share data have been adjusted for stock dividends. Diluted data assumes the exercise of stock options and the vesting of restricted stock. | |
| (3) | Includes residential loans and finance leases held for sale. | |
| (4) | Common stock dividends divided by income available to common stockholders. | |
| (5) | 2007 includes cash dividends of $.88 paid in 2007 and cash dividends of $.23 declared for the first quarter of 2008. | |
| (6) | Excludes residential loans and finance leases held for sale. | |
| N/M = Not meaningful | ||
19
Table of Contents
The following discussion is an analysis of our results of operations for the fiscal years ended
December 31, 2009, 2008 and 2007, and financial condition as of December 31, 2009 and 2008. This
discussion and analysis should be read in conjunction with our consolidated financial statements
and related notes. This discussion contains forward-looking statements concerning our business.
Readers are cautioned that, by their nature, forward-looking statements are based on estimates and
assumptions and are subject to risks, uncertainties, and other factors. Actual results may differ
materially from our expectations that are expressed or implied by any forward-looking statement.
The discussion in Item 1A, “Risk Factors,” lists some of the factors that could cause our actual
results to vary materially from those expressed or implied by any forward-looking statements, and
such discussion is incorporated into this discussion by reference.
In June 2009, the FASB issued Statement No. 168 —
The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles
(FASB ASC 105-10, Generally Accepted
Accounting Principles). SFAS No. 168 replaces SFAS No. 162 and establishes the FASB Accounting
Standards Codification as the source of authoritative accounting principles recognized by the FASB
to be applied by nongovernmental entities in the preparation of financial statements in conformity
with generally accepted accounting principles (“GAAP”). Rules and interpretative releases of the
Securities and Exchange Commission under federal securities laws are also sources of authoritative
GAAP for SEC registrants. The FASB Accounting Standards Codification became effective for
financial statements that cover interim and annual periods ending after September 15, 2009. Other
than resolving certain minor inconsistencies in current GAAP, the FASB Accounting Standards
Codification is not intended to change GAAP, but rather to make it easier to review and research
GAAP applicable to a particular transaction or accounting issue. Technical references to generally
accepted accounting principles included in this Form 10-K are provided under the new FASB ASC
structure with the prior terminology included parenthetically.
GENERAL OVERVIEW
Old National is a financial holding company incorporated in the State of Indiana and maintains its
principal executive offices in Evansville, Indiana. Old National, through Old National Bank,
provides a wide range of services, including commercial and consumer loan and depository services,
lease financing and other traditional banking services. Old National also provides services to
supplement the traditional banking business including fiduciary and wealth management services,
investment and brokerage services, investment consulting, insurance and other financial services.
The Company’s basic mission is to be THE community bank in the cities and towns it serves. The
Company focuses on establishing and maintaining long-term relationships with customers, and is
committed to serving the financial needs of the communities in its market area. Old National
provides financial services primarily in Indiana, eastern and southeastern Illinois, and central
and western Kentucky.
CORPORATE DEVELOPMENTS IN FISCAL 2009
Old National continues to be affected by a challenging credit environment and the continued
economic slowdown. Net income for 2009 was $13.7 million, a decrease of $48.7 million from 2008.
Diluted earnings per share available to common shareholders were $0.14 per share, a decrease of
$0.81 per share from 2008.
Our lower net income in 2009 was primarily due to the following:
| • | The provision for credit losses increased by $11.8 million compared to 2008 as the economic slowdown continued to challenge our clients; | ||
| • | Certain securities in our investment portfolio experienced other-than-temporary impairment of $24.8 million during 2009 as a result of credit deterioration of the underlying collateral; | ||
| • | Our Federal Deposit Insurance Corporation (“FDIC”) insurance expense increased by $10.9 million from 2008 due to the FDIC’s adoption of the restoration plan and special assessment of FDIC insurance expense; |
20
Table of Contents
| • | Our company owned life insurance policies yielded $6.8 million less than in 2008 as a result of restructuring to preserve cash surrender value; and | ||
| • | Net interest income decreased by $11.9 million and our net interest margin decreased by 30 basis points from the end of 2008, reflecting the effects of a decreasing interest rate environment and lower loan balances. |
Other significant actions taken during 2009 include:
| • | Old National completed the acquisition of Citizens Financial’s Indiana franchise in the first quarter of 2009. This acquisition added 65 locations to our footprint and positions Old National as the third largest branch network in the state of Indiana. | ||
| • | On March 31, 2009, Old National repurchased all of the $100 million in preferred, non-voting stock that was sold to the U.S. Department of Treasury as part of the CPP. In May, 2009, Old National repurchased the Warrants for up to 813,008 shares of the Company’s common stock issued by the Company to the Treasury on December 12, 2008 for $1.2 million. This repurchase was the final phase required of Old National to end its participation in the CPP. | ||
| • | During the third quarter, we significantly strengthened our capital position with a successful stock offering. Proceeds from the issuance of 20.7 million shares, net of issuance costs, were $195.7 million. | ||
| • | During the fourth quarter, we reduced long-term debt, a more expensive source of funding, by $105 million. Also, in response to economic and market conditions, Old National’s board approved a plan to reduce our cost structure. This initiative includes a workforce reduction and rationalization of our financial center network. |
Our balance sheet is well positioned given the current economic environment. We continue to
maintain strong liquidity and have substantial resources for sound lending and investment
opportunities.
Credit metrics remain well controlled relative to the industry. At December 31, 2009, our reserve
for loan losses was $69.5 million, compared to $67.1 million at December 31, 2008. The allowance
for loan losses equaled 104% of nonperforming loans at December 31, 2009 compared to 105% at
December 31, 2008. Net charge-offs were 1.37% of average loans in 2009 compared to 0.87% in 2008.
BUSINESS OUTLOOK
We believe 2010 will be just as difficult, if not more difficult, for the banking sector as was
2009. Loan demand remains soft in our markets as clients wait to see if the economic recovery is
real. While we think our credit quality is well controlled, we expect provision to remain elevated
relative to historical levels. In addition, we anticipate increasing regulatory and political
changes throughout 2010.
While there are many near-term challenges, we believe Old National is well-positioned for
longer-term opportunities. Management’s focus on the expense base should help the Company emerge
from this extended negative credit cycle as a more efficient and profitable core banking franchise.
In addition, we continue to look for accretive acquisitions in existing or adjacent markets, and
our strong capital position will allow us to add to the value of the Company when the opportunity
is right.
21
Table of Contents
RESULTS OF OPERATIONS
The following table sets forth certain income statement information of Old National for the years
ended December 31, 2009, 2008, and 2007:
| (dollars in thousands) | 2009 | 2008 | 2007 | |||||||||
|
Income Statement Summary:
|
||||||||||||
|
Net interest income
|
$ | 231,399 | $ | 243,325 | $ | 219,191 | ||||||
|
Provision for loan losses
|
63,280 | 51,464 | 4,118 | |||||||||
|
Noninterest income
|
163,460 | 166,969 | 155,138 | |||||||||
|
Noninterest expense
|
338,956 | 297,229 | 277,998 | |||||||||
|
Other Data:
|
||||||||||||
|
Return on average common equity
|
1.41 | % | 9.49 | % | 11.67 | % | ||||||
|
Efficiency ratio
|
81.54 | % | 69.18 | % | 71.01 | % | ||||||
|
Tier 1 leverage ratio
|
9.51 | % | 9.50 | % | 7.72 | % | ||||||
|
Net charge-offs to average loans
|
1.37 | % | 0.87 | % | 0.44 | % | ||||||
Comparison of Fiscal Years 2009 and 2008
Net Interest Income
Net interest income was the most significant component of our earnings, comprising over 60% of 2009
revenues. Net interest income and net interest margin in the following discussion are presented on
a fully taxable equivalent basis, which adjusts tax-exempt 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 an offsetting increase of the same amount is made in the income tax
section. Net interest income included taxable equivalent adjustments of $20.8 million for 2009 and
$19.3 million for 2008.
Net interest income and margin are influenced by many factors, primarily the volume and mix of
earning assets, funding sources and interest rate fluctuations. Other factors include prepayment
risk on mortgage and investment-related assets and the composition and maturity of earning assets
and interest-bearing liabilities. Loans typically generate more interest income than investment
securities with similar maturities. In the current market, wholesale funding sources cost less
than certain client deposits; however, ordinarily funding from client deposits costs less than
wholesale funding sources. Factors, such as general economic activity, Federal Reserve Board
monetary policy and price volatility of competing alternative investments, can also exert
significant influence on our ability to optimize the mix of assets and funding and the net interest
income and margin.
Taxable equivalent net interest income was $252.2 million in 2009, a 4.0% decrease from the $262.7
million reported in 2008. The net interest margin was 3.52% for 2009, a 30 basis point decrease
compared to the 3.82% reported in 2008. The decrease in both net interest income and net interest
margin is primarily due to the decrease in earning asset yield being greater than the decrease in
the cost of funding, combined with a change in the mix of interest earning assets and
interest-bearing liabilities. Although the cost of interest bearing liabilities declined by 70
basis points, the decrease was more than offset by the 95 basis decrease in the yield on average
assets. The yield on average earning assets decreased from 5.99% to 5.04% while the cost of
interest-bearing liabilities decreased from 2.52% to 1.82%. Average earning assets increased by
$290.3 million, or 4.2%. Average interest-bearing liabilities increased $101.4 million, or 1.7%.
The increase in average earning assets consisted of a $550.1 million increase in lower yielding
investment securities, a $276.3 million decrease in loans and a $16.5 million increase in federal
funds sold and money market investments. The increase in average interest-bearing liabilities
consisted of a $189.2 million increase in interest-bearing deposits, an $89.8 million decrease in
short-term borrowings and a $2.0 million increase in other borrowings. Noninterest-bearing
deposits increased by $183.4 million.
Fluctuation in interest rates has a notable effect on the volume, mix and yield of average earning
assets. The target federal funds rate, the rate that dictates national prime rate and determines
many other short-term loan and liability rates, started to decline in September 2007 and was 4.25%
at December 31, 2007. The decline continued during 2008 as the economy deteriorated and reached an
effective rate of 0% at December 31, 2008 and throughout 2009.
22
Table of Contents
Significantly affecting average earning assets during 2009 was the increase in the size of the
investment portfolio combined with the reduction in the size of the loan portfolio. During 2009,
approximately $2.373 billion of
investment securities were purchased and $1.396 billion of investment securities were called by the
issuers or sold. During the third quarter of 2009, approximately $258.0 million of leases held for
sale were sold. In addition, commercial and commercial real estate loans continue to be affected
by weak loan demand in our markets, more stringent loan underwriting standards and our desire to
lower future potential credit risk by being cautious towards the real estate market. The $94.8
million decline in average commercial loans during 2009 was combined with a $87.8 million decrease
in average commercial real estate loans. We sold $2.6 million of commercial and commercial real
estate loans during 2009. In 2008, we sold $2.2 million of commercial loans. Year-over-year, the
investment portfolio, which generally has an average yield lower than the loan portfolio, has
increased as a percent of interest earning assets.
Included in deposits at December 31, 2009 are $84.4 million of noninterest-bearing deposits and
$123.3 million of time deposits from the Citizens Financial branch acquisition. During 2009, $81.0
million of high cost brokered certificates of deposit were called and $70.0 million of retail
certificates of deposit were called. In the fourth quarter of 2009, we prepaid $105.0 million of
FHLB advances. During 2009, a total of $130.0 million of FHLB advances were prepaid. During 2008,
$137.6 million of high cost brokered certificates of deposit were called or matured and $100.5
million of retail certificates of deposit were called. A $50 million bank note matured in the
first quarter of 2008 and $100 million of medium-term notes matured in the second quarter of 2008.
In addition, $51 million of FHLB advances matured in the last half of 2008 and a revolving credit
facility with $55 million outstanding was paid off in the fourth quarter of 2008. Year over year,
brokered certificates of deposit, which have an average interest rate higher than other types of
deposits, have decreased as a percent of interest-bearing liabilities. Year over year,
noninterest-bearing demand deposits have increased as a percent of total funding. Funding from
client deposits generally cost less than wholesale funding, but not in the current market.
The following table presents a three-year average balance sheet and for each major asset and
liability category, its related interest income and yield or its expense and rate for the years
ended December 31.
23
Table of Contents
| 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||
| Average | Interest | Yield/ | Average | Interest | Yield/ | Average | Interest | Yield/ | ||||||||||||||||||||||||||||
| (tax equivalent basis, dollars in thousands) | Balance | & Fees | Rate | Balance | & Fees | Rate | Balance | & Fees | Rate | |||||||||||||||||||||||||||
|
Earning Assets
|
||||||||||||||||||||||||||||||||||||
|
Money market investments and federal funds sold
|
$ | 38,497 | $ | 133 | 0.34 | % | $ | 21,955 | $ | 746 | 3.40 | % | $ | 117,202 | $ | 6,266 | 5.35 | % | ||||||||||||||||||
|
Investment securities: (6)
|
||||||||||||||||||||||||||||||||||||
|
U.S. Treasury & Government-sponsored
agencies (1)
|
1,979,557 | 89,109 | 4.50 | 1,569,779 | 78,185 | 4.98 | 1,749,656 | 84,383 | 4.82 | |||||||||||||||||||||||||||
|
States and political subdivisions (3)
|
506,709 | 34,072 | 6.72 | 329,386 | 22,745 | 6.91 | 263,698 | 18,656 | 7.07 | |||||||||||||||||||||||||||
|
Other securities
|
214,414 | 10,570 | 4.93 | 251,444 | 13,927 | 5.54 | 268,564 | 14,091 | 5.25 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total investment securities
|
2,700,680 | 133,751 | 4.95 | 2,150,609 | 114,857 | 5.34 | 2,281,918 | 117,130 | 5.13 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Loans: (2)
|
||||||||||||||||||||||||||||||||||||
|
Commercial (3) (4)
|
1,684,693 | 75,629 | 4.49 | 1,779,445 | 104,617 | 5.88 | 1,679,626 | 125,512 | 7.47 | |||||||||||||||||||||||||||
|
Commercial real estate
|
1,117,285 | 51,652 | 4.62 | 1,205,087 | 74,960 | 6.22 | 1,374,703 | 103,939 | 7.56 | |||||||||||||||||||||||||||
|
Residential real estate (5)
|
469,446 | 26,422 | 5.63 | 528,049 | 30,989 | 5.87 | 556,038 | 32,568 | 5.86 | |||||||||||||||||||||||||||
|
Consumer, net of unearned income
|
1,155,420 | 73,921 | 6.40 | 1,190,565 | 85,679 | 7.20 | 1,204,503 | 93,113 | 7.73 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total loans (4) (5)
|
4,426,844 | 227,624 | 5.14 | 4,703,146 | 296,245 | 6.30 | 4,814,870 | 355,132 | 7.38 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total earning assets
|
7,166,021 | $ | 361,508 | 5.04 | % | 6,875,710 | $ | 411,848 | 5.99 | % | 7,213,990 | $ | 478,528 | 6.63 | % | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Less: Allowance for
loan losses
|
(70,098 | ) | (61,981 | ) | (68,179 | ) | ||||||||||||||||||||||||||||||
|
Non-Earning Assets
|
||||||||||||||||||||||||||||||||||||
|
Cash and due from banks (7)
|
168,901 | 155,868 | 172,963 | |||||||||||||||||||||||||||||||||
|
Other assets
|
724,969 | 648,225 | 666,211 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total assets
|
$ | 7,989,793 | $ | 7,617,822 | $ | 7,984,985 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Interest-Bearing Liabilities
|
||||||||||||||||||||||||||||||||||||
|
NOW deposits
|
$ | 1,250,745 | $ | 473 | 0.04 | % | $ | 1,249,482 | $ | 6,355 | 0.51 | % | $ | 1,490,413 | $ | 31,621 | 2.12 | % | ||||||||||||||||||
|
Savings deposits
|
937,642 | 3,585 | 0.38 | 886,351 | 12,919 | 1.46 | 622,398 | 15,141 | 2.43 | |||||||||||||||||||||||||||
|
Money market deposits
|
436,507 | 441 | 0.10 | 487,514 | 5,456 | 1.12 | 758,558 | 23,623 | 3.11 | |||||||||||||||||||||||||||
|
Time deposits
|
2,054,740 | 63,129 | 3.07 | 1,867,103 | 70,723 | 3.79 | 2,426,346 | 112,728 | 4.65 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total interest-bearing deposits
|
4,679,634 | 67,628 | 1.45 | 4,490,450 | 95,453 | 2.13 | 5,297,715 | 183,113 | 3.46 | |||||||||||||||||||||||||||
|
Short-term borrowings
|
527,147 | 1,410 | 0.27 | 616,935 | 10,902 | 1.77 | 461,780 | 18,193 | 3.94 | |||||||||||||||||||||||||||
|
Other borrowings
|
812,062 | 40,240 | 4.96 | 810,052 | 42,842 | 5.29 | 615,878 | 40,871 | 6.64 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total interest-bearing liabilities
|
6,018,843 | $ | 109,278 | 1.82 | % | 5,917,437 | $ | 149,197 | 2.52 | % | 6,375,373 | $ | 242,177 | 3.80 | % | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Noninterest-Bearing Liabilities
|
||||||||||||||||||||||||||||||||||||
|
Demand deposits
|
1,018,405 | 834,981 | 828,461 | |||||||||||||||||||||||||||||||||
|
Other liabilities
|
228,646 | 205,235 | 139,303 | |||||||||||||||||||||||||||||||||
|
Shareholders’ equity
|
723,899 | 660,169 | 641,848 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total liabilities and shareholders’ equity
|
$ | 7,989,793 | $ | 7,617,822 | $ | 7,984,985 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Interest Margin Recap
|
||||||||||||||||||||||||||||||||||||
|
Interest income/average earning assets
|
$ | 361,508 | 5.04 | % | $ | 411,848 | 5.99 | % | $ | 478,528 | 6.63 | % | ||||||||||||||||||||||||
|
Interest expense/average earning assets
|
109,278 | 1.52 | 149,197 | 2.17 | 242,177 | 3.35 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Net interest income and margin
|
$ | 252,230 | 3.52 | % | $ | 262,651 | 3.82 | % | $ | 236,351 | 3.28 | % | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| (1) | Includes U.S. Government-sponsored entities and agency mortgage-backed securities. | |
| (2) | Includes principal balances of nonaccrual loans. Interest income relating to nonaccrual loans is included only if received. | |
| (3) | Interest on state and political subdivision investment securities and commercial loans includes the effect of taxable equivalent adjustments of $9.7 million and $11.1 million, respectively, in 2009; $7.7 million and $11.6 million, respectively, in 2008; and $6.3 million and $10.8 million, respectively, in 2007; using the federal statutory tax rate in effect of 35% for all periods. | |
| (4) | Includes finance leases held for sale. | |
| (5) | Includes residential loans held for sale. | |
| (6) | Yield information does not give effect to changes in fair value that are reflected as a component of shareholders’ equity. | |
| (7) | The 2009 average balance includes $41.5 million of required and excess balances held at the Federal Reserve. The Federal Reserve paid 0.25% on these funds which was recorded in noninterest income. |
24
Table of Contents
The following table shows fluctuations in net interest income attributable to changes in the
average balances of assets and liabilities and the yields earned or rates paid for the years ended
December 31.
NET INTEREST INCOME — RATE/VOLUME ANALYSIS (tax equivalent basis, dollars in thousands)
| 2009 vs. 2008 | 2008 vs. 2007 | |||||||||||||||||||||||
| Total | Attributed to | Total | Attributed to | |||||||||||||||||||||
| Change | Volume | Rate | Change | Volume | Rate | |||||||||||||||||||
|
Interest Income
|
||||||||||||||||||||||||
|
Federal funds sold and
money market investments
|
$ | (613 | ) | $ | 310 | $ | (923 | ) | $ | (5,520 | ) | $ | (4,163 | ) | $ | (1,357 | ) | |||||||
|
Investment securities (1)
|
18,894 | 28,310 | (9,416 | ) | (2,273 | ) | (6,876 | ) | 4,603 | |||||||||||||||
|
Loans (1)
|
(68,621 | ) | (15,806 | ) | (52,815 | ) | (58,887 | ) | (7,639 | ) | (51,248 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Total interest income
|
(50,340 | ) | 12,814 | (63,154 | ) | (66,680 | ) | (18,678 | ) | (48,002 | ) | |||||||||||||
|
|
||||||||||||||||||||||||
|
Interest Expense
|
||||||||||||||||||||||||
|
NOW deposits
|
(5,882 | ) | 4 | (5,886 | ) | (25,266 | ) | (3,169 | ) | (22,097 | ) | |||||||||||||
|
Savings deposits
|
(9,334 | ) | 472 | (9,806 | ) | (2,222 | ) | 5,135 | (7,357 | ) | ||||||||||||||
|
Money market deposits
|
(5,015 | ) | (311 | ) | (4,704 | ) | (18,167 | ) | (5,737 | ) | (12,430 | ) | ||||||||||||
|
Time deposits
|
(7,594 | ) | 6,436 | (14,030 | ) | (42,005 | ) | (23,583 | ) | (18,422 | ) | |||||||||||||
|
Short-term borrowings
|
(9,492 | ) | (914 | ) | (8,578 | ) | (7,291 | ) | 4,427 | (11,718 | ) | |||||||||||||
|
Other borrowings
|
(2,602 | ) | 103 | (2,705 | ) | 1,971 | 11,578 | (9,607 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Total interest expense
|
(39,919 | ) | 5,790 | (45,709 | ) | (92,980 | ) | (11,349 | ) | (81,631 | ) | |||||||||||||
|
|
||||||||||||||||||||||||
|
Net interest income
|
$ | (10,421 | ) | $ | 7,024 | $ | (17,445 | ) | $ | 26,300 | $ | (7,329 | ) | $ | 33,629 | |||||||||
|
|
||||||||||||||||||||||||
The variance not solely due to rate or volume is allocated equally between the rate and volume
variances.
| (1) | Interest on investment securities and loans includes the effect of taxable equivalent adjustments of $9.7 million and $11.1 million, respectively, in 2009; $7.7 million and $11.6 million, respectively, in 2008; and $6.3 million and $10.8 million, respectively, in 2007; using the federal statutory rate in effect of 35% for all periods. |
Provision for Loan Losses
The provision for loan losses was $63.3 million in 2009, an $11.8 million increase from the $51.5
million recorded in 2008. The higher provision in 2009 is primarily attributable to the increase
in net charge-offs. During the fourth quarter of 2009 we recorded a charge-off of $12.0 million
for one non-real estate commercial loan. Included in 2009 net charge-offs is a $3.1 million
insurance recovery associated with the misconduct of a former loan officer in the Indianapolis
market. For additional information about non-performing loans, charge-offs and additional items
impacting the provision, refer to the “Risk Management — Credit Risk” section of Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
Noninterest Income
We generate revenues in the form of noninterest income through client fees and sales commissions
from our core banking franchise and other related businesses, such as wealth management, investment
consulting, investment products and insurance. This source of revenue has remained relatively
constant as a percentage of total revenue at 39.3% in 2009 compared to 38.9% in 2008.
Noninterest income for 2009 was $163.5 million, a decrease of $3.5 million, or 2.1% compared to
$167.0 million reported for 2008. Net securities gains were $2.5 million during 2009 compared to
$7.6 million for 2008. Included in 2009 is $24.8 million for other-than-temporary-impairment on
six pooled trust preferred securities and ten non-agency mortgage-backed securities. The 2008 net
securities gains were primarily the result of securities which were called by the issuers. Also
affecting noninterest income in 2009 is a $10.0 million increase in service charges on deposit
accounts, a $3.3 million increase in ATM and debit card fees and a $1.9 million increase in gains
on derivatives. Partially offsetting these increases were a $6.8 million decrease in revenue from
company-owned life insurance, a $1.4 million decrease in wealth management fees and a $4.1 million
decrease in other income.
Wealth management fees were $16.0 million during 2009 compared to $17.4 million during 2008. Trust
fee income has declined in connection with the lower market values of managed assets.
25
Table of Contents
Service charges and overdraft fees on deposit accounts increased by $10.0 million to $55.2 million
in 2009 as compared to $45.2 million in 2008. The increase in revenue is primarily attributable to
the acquisition of the retail branch banking network of Citizens Financial Group in March 2009.
Service charges and overdraft fees might be adversely affected in 2010 pending future regulatory
developments.
ATM fees increased by $3.3 million to $20.5 million in 2009 as compared to $17.2 million in 2008.
The increase in debit card usage is primarily attributable to the Citizens Financial branch
acquisition.
Revenue from company-owned life insurance was $2.4 million in 2009 compared to $9.2 million in
2008. During the third quarter of 2008, the crediting rate formula for the 1997 company-owned life
insurance policy was amended to adopt a more conservative position and improve the overall market
to book value ratio. This change resulted in lower revenues from company-owned life insurance in
2009 and while we expect revenues to increase in 2010 and future years, we also anticipate revenue
will remain below 2008 levels.
Fluctuations in the value of our derivatives resulted in gains on derivatives of $0.7 million in
2009 as compared to losses on derivatives of $1.1 million in 2008.
Other income decreased $4.1 million in 2009 as compared to 2008. Included in the third quarter of
2009 is a $1.4 million loss from the sale of approximately $258.0 million of leases held for sale,
net of transactions fees. Included in 2008 was a $1.5 million gain associated with the redemption
of class B VISA shares recorded during the first quarter of 2008.
The following table presents changes in the components of noninterest income for the years ended
December 31.
NONINTEREST INCOME
| % Change From | ||||||||||||||||||||
| Prior Year | ||||||||||||||||||||
| (dollars in thousands) | 2009 | 2008 | 2007 | 2009 | 2008 | |||||||||||||||
|
Wealth management fees
|
$ | 15,963 | $ | 17,361 | $ | 18,710 | (8.1 | )% | (7.2 | )% | ||||||||||
|
Service charges on deposit accounts
|
55,196 | 45,175 | 44,751 | 22.2 | 0.9 | |||||||||||||||
|
ATM fees
|
20,472 | 17,234 | 14,476 | 18.8 | 19.1 | |||||||||||||||
|
Mortgage banking revenue
|
6,238 | 5,100 | 4,439 | 22.3 | 14.9 | |||||||||||||||
|
Insurance premiums and commissions
|
37,851 | 39,153 | 38,996 | (3.3 | ) | 0.4 | ||||||||||||||
|
Investment product fees
|
8,515 | 9,493 | 10,727 | (10.3 | ) | (11.5 | ) | |||||||||||||
|
Company-owned life insurance
|
2,355 | 9,181 | 9,817 | (74.3 | ) | (6.5 | ) | |||||||||||||
|
Other income
|
7,394 | 11,534 | 9,818 | (35.9 | ) | 17.5 | ||||||||||||||
|
|
||||||||||||||||||||
|
Total fee and service charge income
|
153,984 | 154,231 | 151,734 | (0.2 | ) | 1.6 | ||||||||||||||
|
Net securities gains (losses)
|
27,251 | 7,562 | (3,023 | ) | N/M | N/M | ||||||||||||||
|
Impairment on
available-for-sale securities
|
(24,795 | ) | — | — | N/M | N/M | ||||||||||||||
|
Gain (loss) on derivatives
|
719 | (1,144 | ) | 166 | N/M | N/M | ||||||||||||||
|
Gain on sale leasebacks
|
6,301 | 6,320 | 6,261 | (0.3 | ) | 0.9 | ||||||||||||||
|
|
||||||||||||||||||||
|
Total noninterest income
|
$ | 163,460 | $ | 166,969 | $ | 155,138 | (2.1 | )% | 7.6 | % | ||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Noninterest income to total revenue (1)
|
39.3 | % | 38.9 | % | 39.6 | % | ||||||||||||||
| (1) | Total revenue includes the effect of a taxable equivalent adjustment of $20.8 million in 2009, $19.3 million in 2008 and $17.2 million in 2007. | |
| N/M = Not meaningful | ||
Noninterest Expense
Noninterest expense for 2009 totaled $339.0 million, an increase of $41.7 million, or 14.0% from
the $297.2 million recorded in 2008. The increased expenses in 2009 relate primarily to costs
associated with the 65 Citizens Financial branches acquired during March 2009, as well as an
increase in FDIC insurance expense. Included in 2008 was a $6.3 million fraud loss expense.
26
Table of Contents
Salaries and benefits, the largest component of noninterest expense, totaled $181.4 million in
2009, compared to $167.8 million in 2008, an increase of $13.6 million, or 8.1%. Included in 2009
is approximately $14.5 million of
personnel expense associated with the acquisition of the Indiana retail branch banking network of
Citizens Financial Group and $3.4 million for higher medical insurance expense. Partially
offsetting these increases was a $3.1 million decrease in performance-based incentive compensation
expense.
Occupancy expense increased $7.4 million in 2009, primarily as a result of a $3.2 million increase
in rent expense and a $2.1 million increase in amortization of leasehold improvements. The
increase in rent expense is primarily related to the additional 65 branches acquired from Citizens
Financial in the first quarter of 2009. The increase in amortization expense is also related to
the acquisition of the branches from Citizens Financial. Real estate taxes increased $0.7 million
during 2009 as compared to 2008. Further discussion of the sale leaseback transactions is included
in Note 18 to the consolidated financial statements.
Professional fees increased $2.3 million for 2009 as compared to 2008. The increase is primarily
attributable to legal and other professional fees associated with the acquisition of the Citizen
Financial branch network.
Supplies expense increased $1.0 million, or 30.8%, in 2009 primarily as a result of expense
associated with the acquisition of the Citizen Financial branch network.
Fraud loss expense in 2008 included a $6.3 million charge associated with a check fraud scheme
conducted by a commercial customer of Old National Bank.
FDIC assessment expense totaled $12.4 million in 2009, compared to $1.5 million for 2008. The
increase is primarily due to the increase in the rates banks pay for deposit insurance and the
expiration of our one-time assessment credit at the end of 2008. The FDIC implemented a special
assessment during the second quarter of 2009 which resulted in approximately $4.0 million of
additional expense during the quarter. In the fourth quarter of 2009, the FDIC announced that it
would require insured institutions to prepay their estimated 2010, 2011 and 2012 assessments in the
current year. As of December 31, 2009, our prepaid assessment was $30.8 million and will be
expensed over the next three years as the actual FDIC assessments are determined.
The increase in the expense for amortization of intangibles is primarily due to the core deposit
intangible associated with the acquisition of the retail branch banking network of Citizens
Financial Group and subsequent amortization of this asset.
Other noninterest expense totaled $22.1 million for 2009 compared to $13.8 million for 2008, an
increase of $8.3 million, or 60.2%. Loss on extinguishment of debt increased $4.5 million in 2009
as we terminated four FHLB advances with a total book value of $105.0 million in the fourth quarter
of 2009. The provision for unfunded commitments increased $2.2 million for 2009 as compared to
2008. Other real estate expenses increased $1.1 million in 2009 as compared to 2008. Included in
2009 is approximately $1.1 million of conversion expenses related to the acquisition of the retail
branch banking network of Citizens Financial Group.
27
Table of Contents
The following table presents changes in the components of noninterest expense for the years ended
December 31.
NONINTEREST EXPENSE
| % Change From | ||||||||||||||||||||
| Prior Year | ||||||||||||||||||||
| (dollars in thousands) | 2009 | 2008 | 2007 | 2009 | 2008 | |||||||||||||||
|
Salaries and employee
benefits
|
$ | 181,368 | $ | 167,764 | $ | 163,722 | 8.1 | % | 2.5 | % | ||||||||||
|
Occupancy
|
47,064 | 39,668 | 26,466 | 18.6 | 49.9 | |||||||||||||||
|
Equipment
|
10,440 | 9,464 | 11,109 | 10.3 | (14.8 | ) | ||||||||||||||
|
Marketing
|
9,578 | 9,554 | 8,407 | 0.3 | 13.6 | |||||||||||||||
|
Data processing
|
20,700 | 19,021 | 19,212 | 8.8 | (1.0 | ) | ||||||||||||||
|
Communications
|
10,922 | 9,267 | 9,334 | 17.9 | (0.7 | ) | ||||||||||||||
|
Professional fees
|
9,491 | 7,187 | 7,705 | 32.0 | (6.7 | ) | ||||||||||||||
|
Loan expense
|
4,335 | 6,619 | 5,965 | (34.5 | ) | 11.0 | ||||||||||||||
|
Supplies
|
4,294 | 3,283 | 3,495 | 30.8 | (6.1 | ) | ||||||||||||||
|
Fraud loss
|
184 | 6,406 | 90 | (97.1 | ) | N/M | ||||||||||||||
|
FDIC assessment
|
12,447 | 1,513 | 875 | N/M | 72.9 | |||||||||||||||
|
Amortization of intangibles
|
5,988 | 3,659 | 3,496 | 63.7 | 4.7 | |||||||||||||||
|
Other expense
|
22,145 | 13,824 | 18,122 | 60.2 | (23.7 | ) | ||||||||||||||
|
|
||||||||||||||||||||
|
Total noninterest expense
|
$ | 338,956 | $ | 297,229 | $ | 277,998 | 14.0 | % | 6.9 | % | ||||||||||
|
|
||||||||||||||||||||
| N/M = Not meaningful |
Provision for Income Taxes
We record a provision for income taxes currently payable and for income taxes payable or benefits
to be received 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 our financial statement income and the federal statutory tax rate is caused by
interest on tax-exempt securities and loans. The effective tax rate varied significantly from 2008
to 2009 due to large fluctuations in pre-tax income while the other items affecting the rate, in
particular tax-exempt income, remained relatively stable. See Note 11 to the consolidated
financial statements for additional details on Old National’s income tax provision.
Comparison of Fiscal Years 2008 and 2007
In 2008, we generated net income available to common stockholders of $62.2 million and diluted net
income per share of $0.95 compared to $74.9 million and $1.14, respectively in 2007. The 2008
earnings included a $24.1 million increase in net interest income, a $10.6 million increase in net
securities gains and an $18.2 million decrease in income tax expense, which were more than offset
by a $47.3 million increase in the provision for loan losses and a $19.3 million increase in
noninterest expense. Other factors which positively affected 2008 net income included a $2.8
million increase in ATM and debit card fees and a $1.7 million increase in other income.
Offsetting these increases to net income in 2008 was a $1.3 million decrease in gains on
derivatives.
Taxable equivalent net interest income was $262.7 million in 2008, an 11.1% increase from the
$236.4 million reported in 2007. The net interest margin was 3.82% for 2008, a 54 basis point
increase compared to 3.28% reported for 2007. Although average earning assets declined by $338.3
million during 2008 and the yield on average earning assets decreased 64 basis points from 6.63% to
5.59%, the decrease was more than offset by the 128 basis point decrease in the cost of interest
bearing liabilities and the $457.9 million decline in average interest-bearing liabilities. The
cost of interest-bearing liabilities decreased from 3.80% to 2.52%.
The provision for loan losses was $51.5 million in 2008, a $47.3 million increase from the $4.1
million recorded in 2007. The higher provision in 2008 was primarily attributable to the increase
in nonaccrual loans in the first quarter of 2008 associated with the misconduct of a former loan
officer in the Indianapolis market and subsequent deterioration of these credits combined with an
increase in classified and criticized loans in the latter part of 2008.
Noninterest income for 2008 was $167.0 million, an increase of $11.8 million, or 7.6% from the
$155.1 million reported for 2007. Net securities gains were $7.6 million during 2008 compared to
$3.0 million of losses for 2007.
28
Table of Contents
The 2008 net securities gains were primarily the result of securities which were called by the
issuers. In addition, ATM and debit card fees were $2.8 million higher and other income was $1.7
million higher in 2008 than 2007. Partially offsetting these increases were a $1.3 million
decrease in wealth management fees, a $1.3 million decrease in gains on derivatives and a $1.2
million decrease in investment product fees.
Noninterest expense for 2008 totaled $297.2 million, an increase of $19.2 million, or 6.9% from the
$278.0 million recorded in 2007. This increase was primarily related to a $13.2 million increase
in occupancy expense combined with a $6.3 million increase in fraud loss.
The provision for income taxes on continuing operations was a benefit of $0.9 million in 2008
compared to an expense of $17.3 million in 2007. Old National’s effective tax rate was (1.4)% in
2007 compared to 18.8% in 2007. The main factors for the decrease in the effective tax rate for
2008 was a higher percentage of tax-exempt income to income before income taxes in 2008 than in
2007 and a decrease in the unrecognized tax benefit liability.
BUSINESS LINE RESULTS
We operate in two operating segments: community banking and treasury. The following table
summarizes our business line results for the years ended December 31.
BUSINESS LINE RESULTS
| (dollars in thousands) | 2009 | 2008 | 2007 | |||||||||
|
Community banking
|
$ | 48,003 | $ | 64,894 | $ | 104,467 | ||||||
|
Treasury
|
(50,072 | ) | (2,357 | ) | (12,113 | ) | ||||||
|
Other
|
(5,308 | ) | (936 | ) | (141 | ) | ||||||
|
|
||||||||||||
|
Income (loss) before income taxes
|
$ | (7,377 | ) | $ | 61,601 | $ | 92,213 | |||||
|
|
||||||||||||
The 2009 community banking segment profit decreased $16.9 million, primarily as a result of an
increase in provision for loan loss expense, higher FDIC assessment expense and costs associated
with our acquisition of the 65 branches from Citizens Financial Group in the first quarter of 2009.
The 2008 community banking segment profit decreased $39.6 million from 2007, primarily as a result
of an increase in provision for loan loss expense.
The 2009 treasury segment profit decreased $47.7 million primarily as a result of $24.8 million of
other-than-temporary-impairment on six pooled trust preferred securities and ten non-agency
mortgage-backed securities. The treasury segment also absorbed part of the increase in the FDIC
assessment expense. The 2008 treasury segment profit increased $9.8 million from 2007 primarily as
a result of a $10.6 million increase in net securities gains. The 2008 net securities gains were
primarily the result of securities which were called by the issuers.
The 2009 “other” segment profit decreased approximately $4.4 million primarily as a result of lower
wealth management revenue and insurance premiums and commissions. The 2008 “other” segment profit
decreased approximately $0.8 million from 2007 primarily as a result of lower wealth management
revenue.
FINANCIAL CONDITION
Overview
At December 31, 2009, our total assets were $8.005 billion, a 1.7% increase from $7.874 billion at
December 31, 2008. On March 20, 2009, Old National completed its acquisition of the Indiana retail
branch banking network of Citizens Financial Group, which increased assets by approximately $424.7
million and deposits by $424.5 million. In September 2009, Old National sold $258.0 million of
finance leases and raised approximately $195.7 million, net of issuance costs, from a public
offering of common stock. Earning assets, comprised of investment securities, loans and loans and
leases held for sale, and money market investments, were $6.862 billion at December 31, 2009, a
decrease of $211.2 million, or 3.0%, from $7.073 billion at December 31, 2008. The decrease in
earnings assets is primarily a result of a decline in loans and the sale of the $258.0 million of
finance leases. Year over year, noninterest-bearing demand deposits have increased while
short-term borrowings and borrowed funds have decreased.
29
Table of Contents
Investment Securities
We classify investment securities primarily as available-for-sale to give management the
flexibility to sell the securities prior to maturity if needed, based on fluctuating interest rates
or changes in our funding requirements. However, we also have $165.6 million of 15- and 20-year
fixed-rate mortgage pass-through securities in our held-to-maturity investment portfolio and during
the second quarter of 2009 approximately $230.1 million of U.S. government-sponsored and agency
security securities were added to our held-to-maturity investment portfolio.
At December 31, 2009, the investment securities portfolio was $2.918 billion compared to $2.266
billion at December 31, 2008, an increase of 28.8%. Investment securities represented 42.5% of
earning assets at December 31, 2009, compared to 32.0% at December 31, 2008. Contributing to the
increase in investment securities were weak loan demand, strong deposit growth, cash proceeds from
the Citizens Financial branch acquisition and the sale of certain finance leases, and our public
offering of common stock. During 2009, approximately $2.373 billion of investment securities were
purchased, $1.042 billion of investment securities were sold and $353.8 million of investment
securities were called by their issuers. Stronger commercial loan demand in the future and
management’s efforts to deleverage the balance sheet could result in a reduction in the investment
securities portfolio. As of December 31, 2009, management does not intend to sell any securities
with an unrealized loss position.
Investment securities available-for-sale portfolio had net unrealized losses of $13.0 million at
December 31, 2009, compared to net unrealized losses of $64.6 million at December 31, 2008. A
$24.8 million charge was recorded during 2009 related to other-than-temporary-impairment on six
pooled trust preferred securities and ten non-agency mortgage-backed securities. Contributing to
the volatility in net unrealized losses over the past twelve months are changes in interest rates
and the financial crises affecting the banking system and financial markets. See Note 1 to the
consolidated financial statements for the impact of other-than-temporary-impairment in other
comprehensive income and Note 3 to the consolidated financial statements for details on
management’s evaluation of securities for other-than-temporary-impairment.
The investment portfolio had an effective duration of 4.63% at December 31, 2009, compared to 3.87%
at December 31, 2008. Effective duration measures the percentage change in value of the portfolio
in response to a change in interest rates. The weighted average yields on available-for-sale
investment securities were 4.52% in 2009 and 5.42% in 2008. The average yields on the
held-to-maturity portfolio were 3.78% in 2009 and 4.50% in 2008.
At December 31, 2009, Old National had a concentration of investment securities issued by the state
of Indiana and its political subdivisions with the following aggregate market value: $169.6
million, which represented 20.1% of shareholders’ equity. At December 31, 2008, Old National had a
concentration of investment securities issued by certain states and their political subdivisions
with the following aggregate market values: $183.3 million by Indiana, which represented 25.1% of
shareholders’ equity, and $82.3 million by Texas, which represented 11.3% of shareholders’ equity.
There were no other concentrations of investment securities issued by an individual state and its
political subdivisions that were greater than 10% of shareholders’ equity. In 2010 we plan to
continue to allow our holdings of non-taxable municipal bonds to decrease and replace them with
taxable municipal bonds.
Loan Portfolio
We lend primarily to small- and medium-sized commercial and commercial real estate clients in
various industries including manufacturing, agribusiness, transportation, mining, wholesaling and
retailing. Our policy is to concentrate our lending activity in the geographic market areas we
serve, primarily Indiana, Illinois and Kentucky.
30
Table of Contents
The following table presents the composition of the loan portfolio at December 31.
LOAN PORTFOLIO AT YEAR-END
| Four-Year | ||||||||||||||||||||||||
| (dollars in thousands) | 2009 | 2008 | 2007 | 2006 | 2005 | Growth Rate | ||||||||||||||||||
|
Commercial
|
$ | 1,287,168 | $ | 1,897,966 | $ | 1,694,736 | $ | 1,629,885 | $ | 1,553,742 | (4.6 | )% | ||||||||||||
|
Commercial real estate
|
1,062,910 | 1,154,916 | 1,270,408 | 1,386,367 | 1,534,385 | (8.8 | ) | |||||||||||||||||
|
Consumer credit
|
1,082,017 | 1,210,951 | 1,187,764 | 1,198,855 | 1,261,797 | (3.8 | ) | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total loans excluding
residential real estate
|
3,432,095 | 4,263,833 | 4,152,908 | 4,215,107 | 4,349,924 | (5.8 | ) | |||||||||||||||||
|
Residential real estate
|
403,391 | 496,526 | 533,448 | 484,896 | 543,903 | (7.2 | ) | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total loans
|
3,835,486 | 4,760,359 | 4,686,356 | 4,700,003 | 4,893,827 | (5.9 | )% | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Less: Allowance for loan losses
|
69,548 | 67,087 | 56,463 | 67,790 | 78,847 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net loans
|
$ | 3,765,938 | $ | 4,693,272 | $ | 4,629,893 | $ | 4,632,213 | $ | 4,814,980 | ||||||||||||||
|
|
||||||||||||||||||||||||
Commercial and Commercial Real Estate Loans
At December 31, 2009, commercial loans decreased $610.8 million while commercial real estate loans
decreased $92.0 million, respectively, from December 31, 2008. A portion of the decrease relates
to the $370.2 million of finance leases which were moved to held for sale status during 2009, of
which $258.0 million of these leases were sold in the third quarter of 2009. We sold $2.6 million
of commercial and commercial real estate loans during 2009. A write-down of $0.6 million was
recorded against the allowance for loan losses related to the sale. During 2008, we sold $2.2
million of commercial loans. No write-down was recorded against the allowance for loan losses
related to these sales. Weak loan demand in our markets continues to affect loan growth. Our
conservative underwriting standards have also contributed to slower loan growth. We continue to be
cautious towards the real estate market in an effort to lower credit risk.
The following table presents the maturity distribution and rate sensitivity of commercial loans and
an analysis of these loans that have predetermined and floating interest rates. A significant
percentage of commercial loans are due within one year, reflecting the short-term nature of a large
portion of these loans.
DISTRIBUTION OF COMMERCIAL LOAN MATURITIES AT DECEMBER 31, 2009
| Within | 1 - 5 | Beyond | ||||||||||||||
| (dollars in thousands) | 1 Year | Years | 5 Years | Total | ||||||||||||
|
Interest rates:
|
||||||||||||||||
|
Predetermined
|
$ | 294,504 | $ | 205,459 | $ | 67,067 | $ | 567,030 | ||||||||
|
Floating
|
423,852 | 220,330 | 75,957 | 720,139 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 718,356 | $ | 425,789 | $ | 143,024 | $ | 1,287,169 | ||||||||
|
|
||||||||||||||||
Consumer Loans
Consumer loans, including automobile loans, personal and home equity loans and lines of credit, and
student loans, decreased $128.9 million or 10.6% at December 31, 2009, compared to December 31,
2008.
Residential Real Estate Loans
Residential real estate loans, primarily 1-4 family properties, were $403.4 million at December 31,
2009, a decrease of $93.1 million or 18.8% from December 31, 2008. We sell the majority of
residential real estate loans originated into the secondary market, primarily to private investors,
as a strategy to better manage interest rate risk and liquidity. We sell almost all residential
real estate loans servicing released without recourse.
Allowance for Loan Losses
To provide for the risk of loss inherent in extending credit, we maintain an allowance for loan
losses. The determination of the allowance is based upon the size and current risk characteristics
of the loan portfolio and includes an assessment of individual problem loans, actual loss
experience, current economic events and regulatory guidance. Additional information about our
Allowance for Loan Losses is included in the “Risk Management —
Credit Risk” section of Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and Note 1 to the consolidated financial statements.
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Table of Contents
At December 31, 2009, the allowance for loan losses was $69.5 million, an increase of $2.4 million
compared to $67.1 million at December 31, 2008. As a percentage of total loans, the allowance
increased to 1.81% at December 31, 2009, from 1.41% at December 31, 2008. During 2009, the
provision for loan losses was $63.3 million, an increase of $11.8 million from the $51.5 million
recorded in 2008. The higher provision in 2009 is attributable to an increase in net charge-offs.
Included in 2009 net charge-offs is a $3.1 million insurance recovery associated with the
misconduct of a former loan officer in the Indianapolis market.
For commercial and commercial real estate loans, the reserve increased by $1.2 million at December
31, 2009, compared to December 31, 2008. The reserve as a percentage of the commercial and
commercial real estate loan portfolio increased to 2.30% at December 31, 2009, from 1.73% at
December 31, 2008. Nonaccrual loans increased $3.0 million since December 31, 2008. Criticized
and classified loans decreased $44.4 million from December 31, 2008. During 2009, other classified
assets, which consist of investment securities downgraded below investment grade, increased $126.6
million.
The reserve for residential real estate loans as a percentage of that portfolio increased to 0.42%
at December 31, 2009, from 0.37% at December 31, 2008. The reserve for consumer loans increased to
1.28% at December 31, 2009, from 1.03% at December 31, 2008. The higher reserve percentages for
these portfolios are a result of the continuing economic recession.
Allowance for Losses on Unfunded Commitments
We maintain an allowance for losses on unfunded commercial lending commitments and letters of
credit to provide for the risk of loss inherent in these arrangements. The allowance is computed
using a methodology similar to that used to determine the allowance for loan losses, modified to
take into account the probability of a drawdown on the commitment. This allowance is reported as a
liability on the balance sheet within accrued expenses and other liabilities, while the
corresponding provision for these loan losses is recorded as a component of other expense. As of
December 31, 2009 and 2008, the allowance for losses on unfunded commitments was $5.5 million and
$3.5 million, respectively.
Residential Loans Held for Sale
Residential loans held for sale were $17.5 million at December 31, 2009, compared to $17.2 million
at December 31, 2008. Residential loans held for sale are loans that are closed, but not yet
purchased by investors. The amount of residential loans held for sale on the balance sheet varies
depending on the amount of originations and timing of loan sales to the secondary market.
We elected the fair value option under FASB ASC 825-10, Financial Instruments (SFAS No. 159)
prospectively for residential loans held for sale. The election was effective for loans originated
since January 1, 2008. The aggregate fair value exceeded the unpaid principal balances by $0.3
million and $0.6 million as of December 31, 2009 and 2008, respectively.
Finance Leases Held for Sale
At December 31, 2009, Old National had finance leases held for sale of $55.3 million. In the
second quarter of 2009, $370.2 million of leases were transferred from the commercial loan category
at cost utilizing the lower of cost or fair value method. During the third quarter of 2009,
approximately $258.0 million of leases held for sale were sold at a price above par; however the
transaction resulted in a loss of $1.4 million after transaction fees. Approximately $46.0 million
of leases were transferred from held for sale back to the loan portfolio at the lower of cost or
market at September 30, 2009. After scheduled principal payments and prepayments, $55.3 million of
finance leases remained available for sale at December 31, 2009. The leases held for sale at
December 31, 2009 have maturities ranging from 1 to 18 years and interest rates ranging from 3.76%
to 9.73%. All of the leases held for sale are to municipalities, with various types of equipment
securing the leases, and all of the leases are current.
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Table of Contents
Goodwill and Other Intangible Assets
Goodwill and other intangible assets at December 31, 2009, totaled $200.2 million, an increase of
$13.4 million compared to $186.8 million at December 31, 2008. During the first quarter of 2009,
we recorded $19.9 million of goodwill and other intangible assets associated with the acquisition
of the Indiana retail branch banking network of Citizens Financial Group, which is included in the
“Community Banking” column for segment reporting. We recorded $0.5 million and $0.7 million of
impairment of intangibles during the years ended December 31, 2009 and 2008, respectively, due to
the loss of two unrelated insurance clients at one of our insurance subsidiaries. The remaining
decreases were the result of standard amortization expense related to the other intangible assets.
Other Assets
Other assets have increased $23.4 million, or 11.6%, since December 31, 2008 primarily as a result
of an increase in prepaid FDIC assessment expense. In the fourth quarter of 2009, the FDIC
announced that it would require insured institutions to prepay their estimated 2010, 2011 and 2012
assessments in the current year. As of December 31, 2009, our prepaid assessment was $30.8 million
and will be expensed over the next three years as the actual FDIC assessments are determined.
Funding
Total average funding, comprised of deposits and wholesale borrowings, was $7.037 billion at
December 31, 2009, an increase of 4.2% from $6.752 billion at December 31, 2008. Total deposits
were $5.903 billion, including $3.896 billion in transaction accounts and $2.007 billion in time
deposits at December 31, 2009. Total deposits increased 8.9% or $481.2 million compared to
December 31, 2008. Included in total deposits at December 31, 2009 is $325.3 million from the
acquisition of the Indiana retail branch banking network of Citizens Financial Group. In 2009, we
called $81.0 million of high cost brokered certificates of deposit and $70.0 million of retail
certificates of deposit. Noninterest-bearing demand deposits increased 33.7% or $300.0 million
compared to December 31, 2008. Savings deposits increased 11.2% or $97.6 million and NOW deposits
increased 4.8% or $61.8 million compared to December 31, 2008. Money market deposits decreased
9.4%, or $39.7 million, while time deposits increased 3.2% or $61.8 million compared to December
31, 2008. Year over year, we have experienced an increase in noninterest-bearing demand deposits.
Effective January 1, 2008, we elected the fair value option under FASB ASC 825-10, Financial
Instruments (SFAS No. 159) prospectively for certain retail certificates of deposit. The carrying
value of these retail certificates of deposit was $0 and $49.3 million as of December 31, 2009 and
2008, respectively. The carrying value at December 31, 2008 was comprised of a contractual balance
of $48.5 million and $0.8 million of fair value adjustments.
We use wholesale funding to augment deposit funding and to help maintain our desired interest rate
risk position. Wholesale borrowing as a percentage of total funding was 14.9% at December 31,
2009, compared to 21.5% at December 31, 2008. Short-term borrowings have decreased $318.5 million
since December 31, 2008 while long-term borrowings have decreased $135.8 million compared to
December 31, 2008. The public offering of common stock, the increase in deposit funding, funds
received in the Citizens Financial branch acquisition and proceeds from our finance lease sale have
all contributed to less reliance on wholesale funding. During 2009, $130.0 million of FHLB
advances were prepaid. See Notes 9 and 10 to the consolidated financial statements for additional
details on our financing activities.
33
Table of Contents
The following table presents changes in the average balances of all funding sources for the years
ended December 31.
FUNDING SOURCES — AVERAGE BALANCES
| % Change From | ||||||||||||||||||||
| Prior Year | ||||||||||||||||||||
| (dollars in thousands) | 2009 | 2008 | 2007 | 2009 | 2008 | |||||||||||||||
|
Demand deposits
|
$ | 1,018,405 | $ | 834,981 | $ | 828,461 | 22.0 | % | 0.8 | % | ||||||||||
|
NOW deposits
|
1,250,745 | 1,249,482 | 1,490,413 | 0.1 | (16.2 | ) | ||||||||||||||
|
Savings deposits
|
937,642 | 886,351 | 622,398 | 5.8 | 42.4 | |||||||||||||||
|
Money market deposits
|
436,507 | 487,514 | 758,558 | (10.5 | ) | (35.7 | ) | |||||||||||||
|
Time deposits
|
2,054,740 | 1,867,103 | 2,426,346 | 10.0 | (23.0 | ) | ||||||||||||||
|
|
||||||||||||||||||||
|
Total deposits
|
5,698,039 | 5,325,431 | 6,126,176 | 7.0 | (13.1 | ) | ||||||||||||||
|
Short-term borrowings
|
527,147 | 616,935 | 461,780 | (14.6 | ) | 33.6 | ||||||||||||||
|
Other borrowings
|
812,062 | 810,052 | 615,878 | 0.2 | 31.5 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total funding
sources
|
$ | 7,037,248 | $ | 6,752,418 | $ | 7,203,834 | 4.2 | % | (6.3 | )% | ||||||||||
|
|
||||||||||||||||||||
The following table presents a maturity distribution for certificates of deposit with denominations
of $100,000 or more at December 31.
CERTIFICATES OF DEPOSIT, $100,000 AND OVER
| Maturity Distribution | ||||||||||||||||||||
| Year-End | 1-90 | 91-180 | 181-365 | Beyond | ||||||||||||||||
| (dollars in thousands) | Balance | Days | Days | Days | 1 Year | |||||||||||||||
|
2009
|
$ | 653,345 | $ | 128,171 | $ | 54,361 | $ | 168,622 | $ | 302,191 | ||||||||||
|
2008
|
550,018 | 117,256 | 41,825 | 189,755 | 201,182 | |||||||||||||||
|
2007
|
562,077 | 218,620 | 91,728 | 149,238 | 102,491 | |||||||||||||||
Capital
Shareholders’ equity totaled $843.8 million or 10.5% of total assets at December 31, 2009, and
$730.9 million or 9.3% of total assets at December 31, 2008. The December 31, 2009 balance
includes approximately $195.7 million, net of issuance costs, from a public offering of 20.7
million shares of common stock that occurred late in the third quarter of 2009. The December 31,
2008 balance included $100 million of Series T Preferred Stock (as defined below) and Warrants (as
defined below) issued to the Treasury Department as part of the CPP for healthy financial
institutions.
As part of the CPP, we entered into a Letter Agreement and Securities Purchase Agreement with the
Treasury Department on December 12, 2008, pursuant to which Old National sold (i) 100,000 shares of
Old National’s Fixed Rate Cumulative Perpetual Preferred Stock, Series T (the “Series T Preferred
Stock”) and (ii) warrants (the “Warrants”) to purchase up to 813,008 shares of Old National’s
common stock at an initial per share exercise price of $18.45.
The Series T Preferred Stock qualified as Tier 1 capital and the Treasury Department was entitled
to cumulative dividends at a rate of 5% per year for the first five years, and 9% per year
thereafter. The Series T Preferred Stock had priority in the payment of dividends over any cash
dividends paid to common stockholders. The adoption of ARRA permitted Old National to redeem the
Series T Preferred Stock without penalty and without the need to raise new capital, subject to the
Treasury’s consultation with Old National’s regulatory agency. All of the Series T Preferred Stock
sold to the Treasury was repurchased by Old National on March 31, 2009.
The Warrants had a 10-year term and were immediately exercisable upon issuance. The Warrants were
repurchased by Old National on May 11, 2009, for $1.2 million. As a result of this Warrant
repurchase, the Treasury Department does not own any securities of Old National issued under the
CPP.
We paid cash dividends of $0.44 per share in 2009, which decreased equity by $30.4 million. We
also accrued dividends on the preferred shares for the three months ended March 31, 2009, which
reduced equity by $1.2 million.
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We declared cash dividends on common stock of $0.69 per share in 2008, which decreased equity by
$45.7 million. We repurchased shares of our stock, reducing shareholders’ equity by $0.4 million
in 2009 and $0.5 million in 2008. The repurchases related to our employee stock based compensation
plans. The change in unrealized losses on investment securities increased equity by $33.6 million
in 2009 and decreased equity by $36.8 million in 2008. Shares issued for reinvested dividends,
stock options, restricted stock and stock compensation plans increased shareholders’ equity by $3.5
million in 2009, compared to $4.2 million in 2008.
Capital Adequacy
Old National and the banking industry are subject to various regulatory capital requirements
administered by the federal banking agencies. For additional information on capital adequacy see
Note 20 to the consolidated financial statements.
RISK MANAGEMENT
Overview
Management, with the oversight of the Board of Directors, has in place company-wide structures,
processes, and controls for managing and mitigating risk. The following discussion addresses the
three major risks we face: credit, market, and liquidity.
Credit Risk
Credit risk represents the risk of loss arising from an obligor’s inability or failure to meet
contractual payment or performance terms. Our primary credit risks result from our investment and
lending activities.
Investment Activities
Within our securities portfolio, the non-agency collateralized mortgage obligations represent the
greatest exposure to the current instability in the residential real estate and credit markets. At
December 31, 2009, we had non-agency collateralized mortgage obligations with a market value of
$174.6 million, or approximately 7.0% of the available-for-sale securities portfolio. The
unrealized loss on these securities at December 31, 2009, was approximately $41.6 million.
We expect conditions in the overall residential real estate and credit markets to remain uncertain
for the foreseeable future. Deterioration in the performance of the underlying loan collateral
could result in deterioration in the performance of our asset-backed securities. Ten of these
securities were rated below investment grade as of December 31, 2009 and during 2009 we experienced
$39.4 million of other-than-temporary-impairment, of which $4.4 million was recorded as a credit
loss in earnings and $35.0 million is included in other comprehensive income.
We also carry a higher exposure to loss in our pooled trust preferred securities, which are
collateralized debt obligations, due to illiquidity in that market and performance of underlying
collateral. At December 31, 2009, we had pooled trust preferred securities with a fair value of
approximately $12.4 million, or 0.5% of the available-for-sale securities portfolio. During 2009,
we experienced $28.7 million of other-than-temporary-impairment, of which $20.4 million was
recorded as a credit loss in earnings for six of these securities and $8.3 million is included in
other comprehensive income. These securities remained classified as available-for-sale and at
December 31, 2009; the unrealized loss on our pooled trust preferred securities was approximately
$16.1 million.
The majority of the remaining mortgage-backed securities are backed by U.S. government-sponsored or
federal agencies. Municipal bonds, corporate bonds and other debt securities are evaluated by
reviewing the credit-worthiness of the issuer and general market conditions. We do not have the
intent to sell these securities and it is likely that we will not be required to sell these
securities before their anticipated recovery.
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Table of Contents
Counterparty Exposure
Counterparty exposure is the risk that the other party in a financial transaction will not fulfill
its obligation in a financial transaction. We define counterparty exposure as nonperformance risk
in transactions involving federal funds sold and purchased, repurchase agreements, correspondent
bank relationships, and derivative contracts with companies in the financial services industry.
Old National’s net counterparty exposure was an asset of $175.9 million at December 31, 2009.
Lending Activities
Community-based lending personnel, along with region-based independent underwriting and analytic
support staff, extend credit under guidelines established and administered by our Risk and Credit
Policy Committee. This committee, which meets quarterly, is made up of outside directors. The
committee monitors credit quality through its review of information such as delinquencies, credit
exposures, peer comparisons, problem loans and charge-offs. In addition, the committee reviews and
approves recommended loan policy changes to assure it remains appropriate for the current lending
environment.
We lend primarily to small- and medium-sized commercial and commercial real estate clients in
various industries including manufacturing, agribusiness, transportation, mining, wholesaling and
retailing. At December 31, 2009, we had no concentration of loans in any single industry exceeding
10% of our portfolio and had no exposure to foreign borrowers or lesser-developed countries. Our
policy is to concentrate our lending activity in the geographic market areas we serve, primarily
Indiana, Illinois and Kentucky. We continue to be affected by weakness in the economy of our
principal markets. Management expects that trends in under-performing, criticized and classified
loans will be influenced by the degree to which the economy strengthens or weakens.
36
Table of Contents
Summary of under-performing, criticized and classified assets:
ASSET QUALITY
| (dollars in thousands) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
|
Nonaccrual loans
|
||||||||||||||||||||
|
Commercial and commercial real estate
|
$ | 49,111 | $ | 52,394 | $ | 30,303 | $ | 32,307 | $ | 39,828 | ||||||||||
|
Residential real estate
|
9,621 | 5,474 | 5,996 | 5,686 | 5,818 | |||||||||||||||
|
Consumer
|
8,284 | 6,173 | 4,517 | 3,525 | 9,943 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total nonaccrual loans
|
67,016 | 64,041 | 40,816 | 41,518 | 55,589 | |||||||||||||||
|
Renegotiated loans not on nonaccrual
|
— | — | — | 52 | — | |||||||||||||||
|
Past due loans still
accruing (90 days or more):
|
||||||||||||||||||||
|
Commercial and commercial real estate
|
1,826 | 991 | 738 | 1,227 | 183 | |||||||||||||||
|
Residential real estate
|
— | — | — | 127 | 479 | |||||||||||||||
|
Consumer
|
1,675 | 1,917 | 773 | 787 | 1,173 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total past due loans
|
3,501 | 2,908 | 1,511 | 2,141 | 1,835 | |||||||||||||||
|
Foreclosed properties
|
8,149 | 2,934 | 2,876 | 3,313 | 3,605 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total under-performing assets
|
$ | 78,666 | $ | 69,883 | $ | 45,203 | $ | 47,024 | $ | 61,029 | ||||||||||
|
|
||||||||||||||||||||
|
Classified loans (includes nonaccrual,
renegotiated, past due 90 days
and other problem loans)
|
$ | 157,063 | $ | 180,118 | $ | 115,121 | $ | 153,215 | $ | 136,597 | ||||||||||
|
Other classified assets (3)
|
161,160 | 34,543 | — | — | — | |||||||||||||||
|
Criticized loans
|
103,512 | 124,855 | 103,210 | 119,757 | 83,213 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total criticized and classified assets
|
$ | 421,735 | $ | 339,516 | $ | 218,331 | $ | 272,972 | $ | 219,810 | ||||||||||
|
|
||||||||||||||||||||
|
Asset Quality Ratios:
|
||||||||||||||||||||
|
Non-performing loans/total loans (1) (2)
|
1.71 | % | 1.34 | % | 0.87 | % | 0.88 | % | 1.13 | % | ||||||||||
|
Under-performing assets/total loans and
foreclosed properties (1)
|
2.01 | 1.46 | 0.96 | 1.00 | 1.24 | |||||||||||||||
|
Under-performing assets/total assets
|
0.98 | 0.89 | 0.58 | 0.58 | 0.72 | |||||||||||||||
|
Allowance for loan losses/
under-performing assets
|
88.41 | 96.00 | 124.91 | 144.16 | 129.20 | |||||||||||||||
| (1) | Loans include residential loans held for sale and leases held for sale. | |
| (2) | Non-performing loans include nonaccrual and renegotiated loans. | |
| (3) | Includes 8 pooled trust preferrred securities, 10 non-agency mortgage-backed securities and 1 corporate security at December 31, 2009. |
Under-performing assets are closely monitored by our management and 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.
Under-performing assets totaled $78.7 million at December 31, 2009 and $69.9 million at December
31, 2008. As a percent of total loans and foreclosed properties, under-performing assets at
December 31 were 2.01% for 2009 and 1.46% for 2008. The nonaccrual category of under-performing
loans was $67.0 million at December 31, 2009, compared to $64.0 million at December 31, 2008. At
December 31, 2009, the allowance for loan losses to under-performing assets ratio stood at 88.41%
compared to 96.00% at December 31, 2008.
From time to time, Old National may agree to modify the contractual terms of a borrower’s loan. In
cases where such modifications represent a concession to a borrower experiencing financial
difficulty, the modification is considered a troubled debt restructuring. Loans modified in a
troubled debt restructuring are placed on nonaccrual status until the Company determines the future
collection of principal and interest is reasonably assured, which generally requires that the
borrower demonstrate a period of performance according to the restructured terms of six months. At
December 31, 2009, loans modified in a troubled debt restructuring, which are included in
nonaccrual loans, totaled $10.0 million. There were no loans modified in troubled debt
restructurings at December 31, 2008. Management will continue its efforts to reduce the level of under-performing loans and will
consider the possibility of sales of troubled and non-performing loans, which could result in
additional charge-offs to the allowance for loan losses.
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Table of Contents
Classified loans, including nonaccrual, renegotiated, past due 90 days and other problem loans,
were $157.1 million at December 31, 2009, a decrease of $23.0 million from $180.1 million at
December 31, 2008. Of this total, other problem loans, which are loans reviewed for the borrowers’
ability to comply with present repayment terms, totaled $86.5 million at December 31, 2009,
compared to $113.2 million at December 31, 2008. Other classified assets include $161.2 million of
investment securities that fell below investment grade rating at December 31, 2009. Criticized
loans, or special mention loans, were $103.5 million at December 31, 2009, a decrease of $21.4
million from $124.9 million at December 31, 2008.
Management believes it has taken a prudent approach to the evaluation of under-performing,
criticized and classified loans, and the loan portfolio in general both in acknowledging the
portfolio’s general condition and in establishing the allowance for loan losses.
Loan officers and credit underwriters jointly grade the larger commercial and commercial real
estate loans in the portfolio periodically as determined by loan policy requirements or determined
by specific guidelines based on loan characteristics as set by management and banking regulation.
Periodically, these loan grades are reviewed independently by the loan review department. For
impaired loans, an assessment is conducted as to whether there is likely loss in the event of
default. If such a loss is determined to be likely, the loss is quantified and a specific reserve
is assigned to the loan. For the balance of the commercial and commercial real estate loan
portfolio, loan grade migration analysis coupled with historic loss experience within the
respective grades is used to develop reserve requirement ranges. These reserve requirement ranges
are adjusted for management’s best estimate of the effects of current economic conditions, loan
quality trends, results from internal and external review examinations, loan volume trends, credit
concentrations and various other factors. Historic loss ratios adjusted for expectations of future
economic conditions are used in determining the appropriate level of reserves for consumer and
residential real estate loans.
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Table of Contents
The activity in our allowance for loan losses is as follows:
ALLOWANCE FOR LOAN LOSSES
| (dollars in thousands) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
|
Balance, January 1
|
$ | 67,087 | $ | 56,463 | $ | 67,790 | $ | 78,847 | $ | 85,749 | ||||||||||
|
Loans charged-off:
|
||||||||||||||||||||
|
Commercial and commercial
real estate
|
58,568 | 34,393 | 13,690 | 16,483 | 17,747 | |||||||||||||||
|
Residential real estate
|
1,315 | 1,442 | 1,613 | 765 | 1,975 | |||||||||||||||
|
Consumer credit
|
18,156 | 15,385 | 11,635 | 10,696 | 16,418 | |||||||||||||||
|
Write-downs on loans transferred
to held for sale
|
572 | — | 5,337 | 2,770 | 5,348 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total charge-offs
|
78,611 | 51,220 | 32,275 | 30,714 | 41,488 | |||||||||||||||
|
|
||||||||||||||||||||
|
Recoveries on charged-off loans:
|
||||||||||||||||||||
|
Commercial and commercial real
estate
|
12,323 | 5,259 | 5,927 | 7,282 | 7,830 | |||||||||||||||
|
Residential real estate
|
135 | 272 | 138 | 61 | 81 | |||||||||||||||
|
Consumer credit
|
5,334 | 4,849 | 5,066 | 5,314 | 3,575 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total recoveries
|
17,792 | 10,380 | 11,131 | 12,657 | 11,486 | |||||||||||||||
|
|
||||||||||||||||||||
|
Net charge-offs
|
60,819 | 40,840 | 21,144 | 18,057 | 30,002 | |||||||||||||||
|
Provision charged to expense
|
63,280 | 51,464 | 4,118 | 7,000 | 23,100 | |||||||||||||||
|
Allowance of acquired bank
|
— | — | 5,699 | — | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Balance, December 31
|
$ | 69,548 | $ | 67,087 | $ | 56,463 | $ | 67,790 | $ | 78,847 | ||||||||||
|
|
||||||||||||||||||||
|
Average loans for the year (1)
|
$ | 4,426,844 | $ | 4,703,146 | $ | 4,814,870 | $ | 4,823,140 | $ | 5,014,660 | ||||||||||
|
|
||||||||||||||||||||
|
Asset Quality Ratios:
|
||||||||||||||||||||
|
Allowance/year-end loans (2)
|
1.81 | % | 1.41 | % | 1.20 | % | 1.44 | % | 1.61 | % | ||||||||||
|
Allowance/average loans (2)
|
1.58 | 1.43 | 1.17 | 1.41 | 1.58 | |||||||||||||||
|
Net charge-offs/average loans (3)
|
1.37 | 0.87 | 0.44 | 0.37 | 0.60 | |||||||||||||||
| (1) | Loans include residential loans held for sale and leases held for sale. | |
| (2) | Loans exclude residential loans held for sale and leases held for sale. | |
| (3) | Net charge-offs include write-downs on loans transferred to held for sale. |
The allowance for loan losses increased $2.4 million from $67.1 million at December 31, 2008 to
$69.5 million at December 31, 2009. An increase of approximately $4.4 million in general
allocation related to credit deterioration in the commercial portfolio, offset by a decrease in
specific loan allocations of approximately $2.0 million in the commercial portfolio, were the
primary reasons for the increase in the allowance from December 31, 2008 to December 31, 2009.
Management believes that it has appropriately identified and reserved for its loan losses at
December 31, 2009. 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.
Interest income of approximately $4.3 million and $3.7 million would have been recorded on
nonaccrual and renegotiated loans outstanding at December 31, 2009 and 2008, respectively, if such
loans had been accruing interest throughout the year in accordance with their original terms. The
amount of interest income actually recorded on nonaccrual and renegotiated loans was $1.7 million
and $1.4 million in 2009 and 2008, respectively. Approximately $27.0 million of nonaccrual loans
were less than thirty days delinquent at December 31, 2009. We had $10.0 million of renegotiated
loans which are included in nonaccrual loans at December 31, 2009 and no renegotiated loans at
December 31, 2008.
Charge-offs, net of recoveries, excluding write-downs on loans transferred to held for sale totaled
$60.2 million in 2009 and $40.8 million in 2008. Included in 2009 net charge-offs is a $3.1
million insurance recovery associated with the misconduct of a former loan officer in the
Indianapolis market. Included in 2008 is $18.8 million of charge-offs, primarily in the real
estate acquisition and development industry category, associated with the misconduct of a former
loan officer in the Indianapolis market. There were no other industry segments representing
a significant share of total net charge-offs. Additionally write-downs related to loan sales of
$0.6 million in 2009 were recognized from loans transferred to held for sale. Approximately 76% of
net charge-offs have been concentrated in commercial and commercial real estate loans and 21% have
been in consumer loans. The allowance to average loans, which ranged from 1.17% to 1.58% for the
last five years, was 1.58% at December 31, 2009.
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Table of Contents
The following table details the allowance for loan losses by loan category and the percent of loans
in each category compared to total loans at December 31.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES BY CATEGORY OF LOANS AND THE PERCENTAGE OF LOANS BY CATEGORY TO TOTAL LOANS
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||||||||||||||||
| Percent | Percent | Percent | Percent | Percent | ||||||||||||||||||||||||||||||||||||
| of Loans | of Loans | of Loans | of Loans | of Loans | ||||||||||||||||||||||||||||||||||||
| to Total | to Total | to Total | to Total | to Total | ||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | ||||||||||||||||||||||||||||||
|
Commercial and
commercial real estate
|
$ | 54,007 | 61.3 | % | $ | 52,791 | 64.1 | % | $ | 45,927 | 63.3 | % | $ | 55,755 | 64.2 | % | $ | 59,498 | 63.1 | % | ||||||||||||||||||||
|
Residential real estate
|
1,688 | 10.5 | 1,861 | 10.4 | 1,601 | 11.4 | 1,702 | 10.3 | 3,849 | 11.1 | ||||||||||||||||||||||||||||||
|
Consumer credit
|
13,853 | 28.2 | 12,435 | 25.5 | 8,935 | 25.3 | 10,333 | 25.5 | 15,500 | 25.8 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Total
|
$ | 69,548 | 100.0 | % | $ | 67,087 | 100.0 | % | $ | 56,463 | 100.0 | % | $ | 67,790 | 100.0 | % | $ | 78,847 | 100.0 | % | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
Market Risk
Market risk is the risk of loss arising from adverse changes in the fair value of financial
instruments due to changes in interest rates, currency exchange rates, and other relevant market
rates or prices. Interest rate risk is our primary market risk and results from timing differences
in the re-pricing of assets and liabilities, changes in the slope of the yield curve, and the
potential exercise of explicit or embedded options.
We manage 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
Executive Balance Sheet Management Committee, a committee comprised of senior executive management.
The Funds Management Committee meets quarterly and oversees adherence to policy and recommends
policy changes to the Board. The Executive Balance Sheet Management committee meets at least
quarterly. This committee determines balance sheet management strategies and initiatives for the
Company. A group comprised of corporate and line management meets monthly to implement strategies
and initiatives determined by the Executive Balance Sheet Management Committee.
We use 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 used to evaluate long-term interest rate risk. These models
simulate the likely behavior of our net interest income and the likely change in our economic 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 affect our net interest income and value, we recognize that model outputs are
not guarantees of actual results. For this reason, we model many different combinations of
interest rates and balance sheet assumptions to understand its overall sensitivity to market
interest rate changes.
40
Table of Contents
Old National’s Board of Directors, through its Funds Management Committee, monitors our interest
rate risk. Policy guidelines, in addition to December 31, 2009 and 2008 results are as follows:
Net Interest Income — 12 Month Policies
| Interest Rate Change in Basis Points (bp) | ||||||||||||
| Down 300 | Down 200 | Down 100 | Up 100 | Up 200 | Up 300 | |||||||
|
Green Zone
|
-12.00% | -6.50% | -3.00% | -3.00% | -6.50% | -12.00% | ||||||
|
Yellow Zone
|
-12.00% to -15.00% | -6.50% to -8.50% | -3.00% to -4.00% | -3.00% to -4.00% | -6.50% to -8.50% | -12.00% to -15.00% | ||||||
|
Red Zone
|
-15.00% | -8.50% | -4.00% | -4.00% | -8.50% | -15.00% | ||||||
|
|
||||||||||||
|
12/31/2009
|
NA | NA | NA | 1.02% | 1.29% | 1.25% | ||||||
|
12/31/2008
|
NA | NA | NA | 3.07% | 4.84% | 5.86% | ||||||
Net Interest Income — 24 Month Cumulative Policies
| Interest Rate Change in Basis Points (bp) | ||||||||||||
| Down 300 | Down 200 | Down 100 | Up 100 | Up 200 | Up 300 | |||||||
|
Green Zone
|
-12.00% | -6.50% | -3.00% | -3.00% | -6.50% | -12.00% | ||||||
|
Yellow Zone
|
-12.00% to -15.00% | -6.50% to -8.50% | -3.00% to -4.00% | -3.00% to -4.00% | -6.50% to -8.50% | -12.00% to -15.00% | ||||||
|
Red Zone
|
-15.00% | -8.50% | -4.00% | -4.00% | -8.50% | -15.00% | ||||||
|
|
||||||||||||
|
12/31/2009
|
NA | NA | NA | 3.60% | 3.99% | 3.93% | ||||||
|
12/31/2008
|
NA | NA | NA | 4.10% | 6.33% | 7.67% | ||||||
Economic Value of Equity Policies
| Interest Rate Change in Basis Points (bp) | ||||||||||||
| Down 300 | Down 200 | Down 100 | Up 100 | Up 200 | Up 300 | |||||||
|
Green Zone
|
-22.00% | -12.00% | -5.00% | -5.00% | -12.00% | -22.00% | ||||||
|
Yellow Zone
|
-22.00% to -30.00% | -12.00% to -17.00% | -5.00% to -7.50% | -5.00% to -7.50% | -12.00% to -17.00% | -22.00% to -30.00% | ||||||
|
Red Zone
|
-30.00% | -17.00% | -7.50% | -7.50% | -17.00% | -30.00% | ||||||
|
|
||||||||||||
|
12/31/2009
|
NA | NA | NA | -3.08% | -8.65% | -13.42% | ||||||
|
12/31/2008
|
NA | NA | NA | 8.14% | 11.90% | 15.79% | ||||||
Red zone policy limits represent our normal absolute interest rate risk exposure compliance limit.
Policy limits defined as green zone represent the range of potential interest rate risk exposures
that the Funds Management Committee believes to be normal and acceptable operating behavior.
Yellow zone policy limits represent a range of interest rate risk exposures falling below the
bank’s maximum allowable exposure (red zone) but above its normally acceptable interest rate risk
levels (green zone). Policy limits are applicable to negative changes in Net Interest Income at
Risk and Economic Value of Equity.
Modeling for the “Down 100 Basis Points”, “Down 200 Basis Points”, and “Down 300 Basis Points”
scenarios for both the Net Interest Income at Risk and Economic Value of Equity are not applicable
in the current rate environment because the scenarios floor at Zero before absorbing the full 100,
200, and 300 basis point drop, respectively.
At December 31, 2009, modeling indicated Old National’s Net Interest Income at Risk values were
positive for Up 100, Up 200 and Up 300 scenarios for both the 12-month and 24-month Net Interest
Income at Risk. Positive results indicate that net interest income increases relative to net
interest income modeled using interest rates as of December 31, 2009.
41
Table of Contents
At December 31, 2009, modeling indicated that Old National was with in the green zone policy limit
for the Up 100, Up 200, and Up 300 Economic Value of Equity Scenarios, which is considered normal
and acceptable for Economic Value of Equity scenarios. Old National’s Economic Value of Equity
(“EVE”) scenarios indicated negative changes to economic value in rising interest rate scenarios at
December 31, 2009 compared to positive changes to economic
value in rising interest rate scenarios at December 31, 2008. These changes in EVE modeling
results were primarily driven by Old National’s increase in investments as a percent of interest
earning assets and were partially offset by an increase in Old National’s deposit base from
December 31, 2008 to December 31, 2009. Also impacting EVE at December 31, 2008 was the issuance
of 100,000 shares of Old National’s Fixed Rate Cumulative Perpetual Preferred Stock, Series T to
the Treasury as part of the CPP program. All of the Series T Preferred Stock sold to the Treasury
was repurchased by Old National on March 31, 2009.
In addition to policy-defined scenarios, Old National models other scenarios to measure interest
rate risk. For example, the company models a yield curve based on a 24-month forward curve. The
forward curve represents the market’s expectations of future interest rates. As of December 31,
2009, Old National’s 24 month cumulative Net Interest Income at Risk for the scenario resulted in a
4.01% increase in net interest income over an unchanged interest rate curve. In addition, Old
National models a ramp scenario where current interest rates are increased 25 basis points each
quarter over a 12 month timeframe. As of December 31, 2009, Old National’s 24 month cumulative Net
Interest Income at Risk for this scenario resulted in a 1.73% increase in net interest income over
an unchanged interest rate curve.
We use derivatives, primarily interest rate swaps, as one method to manage interest rate risk in
the ordinary course of business. Our derivatives had an estimated fair value gain of $0.4 million
at December 31, 2009, compared to an estimated fair value loss of $0.6 million at December 31,
2008. In addition, the notional amount of derivatives increased by $232.1 million from 2008. See
Note 17 to the consolidated financial statements for further discussion of derivative financial
instruments.
Liquidity Risk
Liquidity risk arises from the possibility that we may not be able to satisfy current or future
financial commitments, or may become unduly reliant on alternative funding sources. The Funds
Management Committee of the Board of Directors establishes liquidity risk guidelines and, along
with the Balance Sheet Management Committee, monitors liquidity risk. The objective of liquidity
management is to ensure we have 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. We
maintain 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.
Loan repayments and maturing investment securities are a relatively predictable source of funds.
However, deposit flows, calls of investment securities and prepayments of loans and
mortgage-related securities are strongly influenced by interest rates, the housing market, general
and local economic conditions, and competition in the marketplace. We continually monitor
marketplace trends to identify patterns that might improve the predictability of the timing of
deposit flows or asset prepayments.
Our ability to acquire funding at competitive prices is influenced by rating agencies’ views of our
credit quality, liquidity, capital and earnings. All of the rating agencies place us in an
investment grade that indicates a low risk of default. For both Old National and Old National
Bank:
| • | Standard and Poor’s has issued unsolicited ratings with stable outlook as of November 16, 2009 | ||
| • | Dominion Bond Rating Services has issued a stable outlook as of June 18, 2009 | ||
| • | Fitch Rating Services changed their long-term outlook rating from negative to stable as of December 12, 2008 | ||
| • | Moody’s Investor Service changed outlook to negative as of October 13, 2008 |
42
Table of Contents
The senior debt ratings of Old National and Old National Bank at December 31, 2009, are shown in
the following table.
| Standard and Poor’s | Moody's Investor Service | Fitch, Inc. | Dominion Bond Rating Svc. | |||||||||||||
| Long | Short | Long | Short | Long | Short | Long | Short | |||||||||
| term | term | term | term | term | term | term | term | |||||||||
|
Old National Bancorp
|
BBB | N/A | A2 | N/A | BBB | F2 | BBB (high) | R-2 (high) | ||||||||
|
Old National Bank
|
BBB+ | A-2 | A1 | P-1 | BBB+ | F2 | A (low) | R-1 (low) | ||||||||
| N/A = not applicable |
As of December 31, 2009, Old National Bank had the capacity to borrow $790.2 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 Bank maintains relationships in capital markets with brokers and dealers to issue
certificates of deposits and short-term and medium-term bank notes as well.
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.
The Parent Company obtains funding to meet its obligations from dividends and management fees
collected from its subsidiaries, operating line of credit and through the issuance of debt
securities. Additionally, the Parent Company has a shelf registration in place with the Securities
and Exchange Commission permitting ready access to the public debt markets. At December 31, 2009,
the Parent Company’s other borrowings outstanding remained unchanged at $157.3 million compared
with December 31, 2008. There is $50.0 million Parent Company debt scheduled to mature within the
next 12 months.
During the second quarter of 2009, Old National entered into a $30 million revolving credit
facility at the parent level. The facility had an interest rate of LIBOR plus 2.00% and a maturity
of 364 days. There was no amount outstanding as of December 31, 2009. Old National raised
approximately $195.7 million, net of issuance costs, from a public offering of 20.7 million shares
of common stock that occurred late in the third quarter of 2009.
Old National agreed to participate in the CPP for healthy financial institutions during fourth
quarter 2008. Under the program, Old National sold Series T Preferred Stock and Warrants valued at
$100 million to the Treasury Department. As of March 31, 2009, Old National repurchased all of the
$100 million of Series T Preferred Stock from the Treasury Department. The Warrants were
repurchased on May 11, 2009, for $1.2 million. As a result of these repurchases by Old National,
the Treasury Department does not own any securities of Old National issued under the CPP.
Federal banking laws regulate the amount of dividends that may be paid by banking subsidiaries
without prior approval. Prior regulatory approval is required if dividends to be declared in any
year would exceed net earnings of the current year plus retained net profits for the preceding two
years. At December 31, 2006, Old National Bank had received regulatory approval to declare a
dividend up to $76 million in the first quarter of 2007. Old National used the cash obtained from
the dividend to fund its purchase of St. Joseph Capital Corporation during the first quarter of
2007 and during the first quarter of 2009 received a $40 million dividend to repurchase the $100
million of non-voting preferred shares from the Treasury. As a result of these special dividends,
Old National Bank requires approval of regulatory authority for the payment of dividends to Old
National. Such approval was obtained for the payment of dividends during 2009 and currently.
OFF-BALANCE SHEET ARRANGEMENTS
Off-balance sheet arrangements include commitments to extend credit and financial guarantees.
Commitments to extend credit and financial guarantees are used to meet the financial needs of our
customers. Our banking affiliates have entered into various agreements to extend credit, including
loan commitments of $1.038 billion and standby letters of credit of $103.2 million at December 31,
2009. At December 31, 2009, approximately $992 million of the loan commitments had fixed rates and
$46 million had floating rates, with the fixed interest rates ranging from 0% to 18%. At December
31, 2008, loan commitments were $1.124 billion and standby letters of credit were $108.4 million.
The term of these off-balance sheet arrangements is typically one year or less.
43
Table of Contents
During the second quarter of 2007, we entered into a risk participation in an interest rate swap.
The interest rate swap had a notional amount of $9.2 million at December 31, 2009.
CONTRACTUAL OBLIGATIONS, COMMITMENTS AND CONTINGENT LIABILITIES
The following table presents our significant fixed and determinable contractual obligations and
significant commitments at December 31, 2009. Further discussion of each obligation or commitment
is included in the referenced note to the consolidated financial statements.
CONTRACTUAL OBLIGATIONS, COMMITMENTS AND CONTINGENT LIABILITIES
| Payments Due In | ||||||||||||||||||||||||
| Note | One Year | One to | Three to | Over | ||||||||||||||||||||
| (dollars in thousands) | Reference | or Less | Three Years | Five Years | Five Years | Total | ||||||||||||||||||
|
Deposits without stated maturity
|
$ | 3,895,934 | $ | — | $ | — | $ | — | $ | 3,895,934 | ||||||||||||||
|
Consumer and brokered
certificates of deposit
|
8 | 1,074,639 | 581,585 | 222,046 | 129,284 | 2,007,554 | ||||||||||||||||||
|
Short-term borrowings
|
9 | 331,144 | — | — | — | 331,144 | ||||||||||||||||||
|
Other borrowings
|
10 | 74,043 | 325,734 | 127,059 | 172,223 | 699,059 | ||||||||||||||||||
|
Operating leases
|
18 | 33,833 | 63,821 | 57,170 | 307,097 | 461,921 | ||||||||||||||||||
We rent certain premises and equipment under operating leases. See Note 18 to the consolidated
financial statements for additional information on long-term lease arrangements.
We are party to various derivative contracts as a means to manage the balance sheet and our related
exposure to changes in interest rates, to manage our residential real estate loan origination and
sale activity, and to provide derivative contracts to our clients. Since the derivative
liabilities recorded on the balance sheet change frequently and do not represent the amounts that
may ultimately be paid under these contracts, these liabilities are not included in the table of
contractual obligations presented above. Further discussion of derivative instruments is included
in Note 17 to the consolidated financial statements.
In the normal course of business, various legal actions and proceedings are pending against us and
our affiliates which are incidental to the business in which they are engaged. Further discussion
of contingent liabilities is included in Note 18 to the consolidated financial statements.
In addition, liabilities recorded under FASB ASC 740-10 (FASB Interpretation No. 48,
Accounting for
Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109
) are not included in the
table because the amount and timing of any cash payments cannot be reasonably estimated. Further
discussion of income taxes and liabilities recorded under FASB ASC 740-10 is included in Note 11 to
the consolidated financial statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our accounting policies are contained in the section of this annual report captioned “Notes to
Consolidated Financial Statements-Summary of Significant Accounting Policies”. Certain accounting
policies require management to use significant judgments and estimates, which can have a material
impact on the carrying value of certain assets and liabilities. We consider these policies to be
critical accounting policies. The judgments and assumptions made are based upon historical
experience or other factors that management believes to be reasonable under the circumstances.
Because of the nature of the judgments and assumptions, actual results could differ from estimates,
which could have a material affect on our financial condition and results of operations.
The following accounting policies materially affect our reported earnings and financial condition
and require significant judgments and estimates. Management has reviewed these critical accounting
estimates and related disclosures with the Audit Committee of our Board.
44
Table of Contents
Goodwill and Intangibles
| • | Description. For acquisitions, we are 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 over which an intangible asset will be amortized is subjective. Under FASB ASC 350 (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 asset. | ||
| • | Judgments and Uncertainties. The determination of fair values is based on internal valuations using management’s assumptions of future growth rates, future attrition, discount rates, multiples of earnings or other relevant factors. | ||
| • | Effect if Actual Results Differ From Assumptions. 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 intangible assets 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. |
Allowance for Loan Losses
| • | Description. The allowance for loan losses is maintained at a level believed adequate by management to absorb probable incurred losses in the consolidated loan portfolio. Management’s evaluation of the adequacy of the allowance is an estimate based on reviews of individual loans, pools of homogeneous 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. 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 either for the amounts or by the dates
as scheduled in the loan agreement. Our policy for recognizing income on impaired loans is
to accrue interest unless a loan is placed on nonaccrual status. A loan is generally placed
on nonaccrual status when principal or interest becomes 90 days past due unless it is well
secured and in the process of collection, or earlier when concern exists as to the ultimate
collectibility of principal or interest. We monitor the quality of our loan portfolio on an
on-going basis and use a combination of detailed credit assessments by relationship managers
and credit officers, historic loss trends, and economic and business environment factors in
determining the allowance for loan losses. We record 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 our highest risk loans is performed
quarterly. Management follows the progress of the economy and how it might affect our
borrowers in both the near and the intermediate term. We have a formalized and disciplined
independent loan review program to evaluate loan administration, credit quality and
compliance with corporate loan standards. This program includes periodic reviews and
regular reviews of problem loan reports, delinquencies and charge-offs.
| • | Judgments and Uncertainties. We use migration analysis as a tool to determine the adequacy of the allowance for loan losses for non-retail loans that are not impaired. Migration analysis is a statistical technique that attempts to estimate probable losses for existing pools of loans by matching actual losses incurred on loans back to their origination. |
45
Table of Contents
We calculate migration analysis using several different scenarios based on varying
assumptions to evaluate the widest range of possible outcomes. The migration-derived
historical commercial loan loss rates are applied to the current commercial loan pools to
arrive at an estimate of probable losses for the loans
existing at the time of analysis. The amounts determined by migration analysis are adjusted
for management’s best estimate of the effects of current economic conditions, loan quality
trends, results from internal and external review examinations, loan volume trends, credit
concentrations and various other factors. Historic loss ratios adjusted for expectations of
future economic conditions are used in determining the appropriate level of allowance for
consumer and residential real estate loans.
| • | Effect if Actual Results Differ From Assumptions. 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. 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. |
Management’s analysis of probable losses in the portfolio at December 31, 2009, resulted in
a range for allowance for loan losses of $7.4 million with the potential effect to net
income ranging from a decrease of $1.0 million to an increase of $3.9 million. These
sensitivities are hypothetical and are not intended to represent actual results.
Derivative Financial Instruments
| • | Description. As part of our overall interest rate risk management, we use derivative instruments to reduce exposure to changes in interest rates and market prices for financial instruments. The application of the hedge accounting policy requires judgment in the assessment of hedge effectiveness, identification of similar hedged item groupings and measurement of changes in the fair value of derivative financial instruments and hedged items. To the extent hedging relationships are found to be effective, as determined by FASB ASC 815 (SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities ), changes in fair value of the derivatives are offset by changes in the fair value of the related hedged item or recorded to other comprehensive income. Management believes hedge effectiveness is evaluated properly in preparation of the financial statements. All of the derivative financial instruments we use have an active market and indications of fair value can be readily obtained. We are not using the “short-cut” method of accounting for any fair value derivatives. |
| • | Judgments and Uncertainties. The application of the hedge accounting policy requires judgment in the assessment of hedge effectiveness, identification of similar hedged item groupings and measurement of changes in the fair value of derivative financial instruments and hedged items. |
| • | Effect if Actual Results Differ From Assumptions. To the extent hedging relationships are found to be effective, as determined by FASB ASC 815 (SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities ), changes in fair value of the derivatives are offset by changes in the fair value of the related hedged item or recorded to other comprehensive income. However, if in the future the derivative financial instruments used by us no longer qualify for hedge accounting treatment, all changes in fair value of the derivative would flow through the consolidated statements of income in other noninterest income, resulting in greater volatility in our earnings. |
Income Taxes
| • | Description. We are subject to the income tax laws of the U.S., its states and the municipalities in which we operate. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant government taxing authorities. We review income tax expense and the carrying value of deferred tax assets quarterly; and as new information becomes available, the balances are adjusted as appropriate. On January 1, 2007, we adopted FASB ASC 740-10 (FIN 48) to account for uncertain tax positions. FASB ASC 740-10 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. See Note 11 to the Consolidated Financial Statements for a further description of our provision and related income tax assets and liabilities. |
46
Table of Contents
| • | Judgments and Uncertainties. In establishing a provision for income tax expense, we must make judgments and interpretations about the application of these inherently complex tax laws. We must also make estimates about when in the future certain items will affect taxable income in the various tax jurisdictions. Disputes over interpretations of the tax laws may be subject to review/adjudication by the court systems of the various tax jurisdictions or may be settled with the taxing authority upon examination or audit. |
| • | Effect if Actual Results Differ From Assumptions. Although management believes that the judgments and estimates used are reasonable, actual results could differ and we may be exposed to losses or gains that could be material. To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our reserves, our effective income tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement would result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement would result in a reduction in our effective income tax rate in the period of resolution. |
Valuation of Securities
| • | Description. The fair value of our securities is determined with reference to price estimates. In the absence of observable market inputs related to items such as cash flow assumptions or adjustments to market rates, management judgment is used. Different judgments and assumptions used in pricing could result in different estimates of value. |
When the fair value of a security is less than its amortized cost for an extended period, we
consider whether there is an other-than-temporary-impairment in the value of the security.
If, in management’s judgment, an other-than-temporary-impairment exists, the portion of the
loss in value attributable to credit quality is transferred from accumulated other
comprehensive loss as an immediate reduction of current earnings and the cost basis of the
security is written down by this amount.
We consider the following factors when determining an other-than-temporary-impairment for a
security or investment:
| • | The length of time and the extent to which the market value has been less than amortized cost; | ||
| • | The financial condition and near-term prospects of the issuer; | ||
| • | The underlying fundamentals of the relevant market and the outlook for such market for the near future; | ||
| • | Our intent to sell the debt security or whether it is more likely than not that we will be required to sell the debt security before its anticipated recovery; and | ||
| • | When applicable for purchased beneficial interests, the estimated cash flows of the securities are assessed for adverse changes. |
Quarterly, securities are evaluated for other-than-temporary-impairment in accordance with
FASB ASC 320 (SFAS No. 115,
Accounting for Certain Investments in Debt and Equity
Securities
), and FASB ASC 325-10 (Emerging Issues Task Force No. 99-20,
Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interest in Securitized
Financial Assets
) and FASB ASC 320-10 (FSP No. FAS 115-2 and FAS 124-2,
Recognition and
Presentation of Other-Than-Temporary Impairments
). An impairment that is an
“other-than-temporary-impairment” is a decline in the fair value of an investment below its
amortized cost attributable to factors that indicate the decline will not be recovered over
the anticipated holding period of the investment. Other-than-temporary-impairments result
in reducing the security’s carrying value by the amount of credit loss. The credit
component of the other-than-temporary-impairment loss is realized through the statement of
income and the remainder of the loss remains in other comprehensive income.
| • | Judgments and Uncertainties. The determination of other-than-temporary-impairment is a subjective process, and different judgments and assumptions could affect the timing and amount of loss realization. In addition, significant judgments are required in determining valuation and impairment, which include making assumptions regarding the estimated prepayments, loss assumptions and interest cash flows. |
47
Table of Contents
| • | Effect if Actual Results Differ From Assumptions. Actual credit deterioration could be more or less severe than estimated. Upon subsequent review, if cash flows have significantly improved, the discount would be amortized into earnings over the remaining life of the debt security in a prospective manner based on the amount and timing of future cash flows. Additional credit deterioration resulting in an adverse change in cash flows would result in additional other-than-temporary impairment loss recorded in the income statement. |
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”.
The information contained under the caption “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Market Risk” on page 40 of this Form 10-K is incorporated
herein by reference in response to this item.
REPORT OF MANAGEMENT
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING
Management is responsible for the preparation of the financial statements and related financial
information appearing in this annual report on Form 10-K. The financial statements and notes have
been prepared in conformity with accounting principles generally accepted in the United States of
America and include some amounts which are estimates based upon currently available information and
management’s judgment of current conditions and circumstances. Financial information throughout
this annual report on Form 10-K is consistent with that in the financial statements.
Management maintains a system of internal accounting controls which is believed to provide, in all
material respects, reasonable assurance that assets are safeguarded against loss from unauthorized
use or disposition, transactions are properly authorized and recorded, and the financial records
are reliable for preparing financial statements and maintaining accountability for assets. In
addition, Old National has a Code of Business Conduct and Ethics, a Senior Financial and Executive
Officer Code of Ethics, Corporate Governance Guidelines that outline high levels of ethical
business standards and had a third party perform an independent validation of the Company’s ethics
program. Old National has also appointed a Chief Ethics Officer. All systems of internal
accounting controls are based on management’s judgment that the cost of controls should not exceed
the benefits to be achieved and that no system can provide absolute assurance that control
objectives are achieved. Management believes Old National’s system provides the appropriate
balance between cost of controls and the related benefits.
In order to monitor compliance with this system of controls, Old National maintains an extensive
internal audit program. Internal audit reports are issued to appropriate officers and significant
audit exceptions, if any, are reviewed with management and the Audit Committee of the Board of
Directors.
The Board of Directors, through an Audit Committee comprised solely of independent outside
directors, oversees management’s discharge of its financial reporting responsibilities. The Audit
Committee meets regularly with Old National’s independent registered public accounting firm, Crowe
Horwath LLP, and the managers of internal audit and loan review. During these meetings, the
committee has the opportunity to meet privately with the independent registered public accounting
firm as well as with internal audit and loan review personnel to review accounting, auditing, loan
and financial reporting matters. The appointment of the independent registered public accounting
firm is made by the Audit Committee of the Board of Directors.
48
Table of Contents
The consolidated financial statements in this annual report on Form 10-K have been audited by Crowe
Horwath LLP, for the purpose of determining that the consolidated financial statements are
presented fairly, in all material
respects in conformity with accounting principles generally accepted in the United States of
America. Crowe Horwath LLP’s report on the financial statements follows.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Old National is responsible for establishing and maintaining adequate internal
control over financial reporting. A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
Old National’s management assessed the effectiveness of the company’s internal control over
financial reporting as of December 31, 2009. In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in
Internal Control — Integrated Framework
. Based on that assessment Old National has concluded
that, as of December 31, 2009, the company’s internal control over financial reporting is
effective. Old National’s independent registered public accounting firm has audited the
effectiveness of the company’s internal control over financial reporting as of December 31, 2009 as
stated in their report which follows.
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Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Old National Bancorp
Evansville, Indiana
Old National Bancorp
Evansville, Indiana
We have audited the accompanying consolidated balance sheets of Old National Bancorp as of December
31, 2009 and 2008, and the related consolidated statements of income, changes in shareholders’
equity, and cash flows for each of the years in the three-year period ended December 31, 2009. We
also have audited Old National Bancorp’s internal control over financial reporting as of December
31, 2009, based on criteria established in
Internal Control
—
Integrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Old National Bancorp’s
management is responsible for these financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on these financial statements and
an opinion on the effectiveness of the company’s internal control over financial reporting based on
our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material
respects. Our audits of financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
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Table of Contents
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Old National Bancorp as of December 31, 2009 and 2008,
and the results of its operations and its cash flows for each of the years in the three-year period
ended December 31, 2009 in conformity with accounting principles generally accepted in the United
States of America. Also in our opinion, Old National Bancorp maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2009, based on criteria
established in
Internal Control—Integrated Framework
issued by the COSO.
|
|
|
|
|
|
Crowe Horwath LLP |
Indianapolis, Indiana
February 26, 2010
February 26, 2010
51
Table of Contents
OLD NATIONAL BANCORP
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||
| (dollars and shares in thousands, except per share data) | 2009 | 2008 | ||||||
|
Assets
|
||||||||
|
Cash and due from banks
|
$ | 461,656 | $ | 162,893 | ||||
|
Money market investments and federal funds sold
|
35,620 | 30,119 | ||||||
|
|
||||||||
|
Total cash and cash equivalents
|
497,276 | 193,012 | ||||||
|
Securities — available-for-sale, at fair value
|
2,486,219 | 2,125,026 | ||||||
|
Securities — held-to-maturity, at amortized cost
(fair value $399,953 and $100,831 respectively)
|
396,009 | 99,661 | ||||||
|
Federal Home Loan Bank stock, at cost
|
36,090 | 41,090 | ||||||
|
Residential loans held for sale, at fair value
|
17,530 | 17,155 | ||||||
|
Finance leases held for sale
|
55,260 | — | ||||||
|
Loans, net of unearned income
|
3,835,486 | 4,760,359 | ||||||
|
Allowance for loan losses
|
(69,548 | ) | (67,087 | ) | ||||
|
|
||||||||
|
Net loans
|
3,765,938 | 4,693,272 | ||||||
|
|
||||||||
|
Premises and equipment, net
|
52,399 | 44,625 | ||||||
|
Accrued interest receivable
|
49,340 | 49,030 | ||||||
|
Goodwill
|
167,884 | 159,198 | ||||||
|
Other intangible assets
|
32,307 | 27,628 | ||||||
|
Company-owned life insurance
|
224,652 | 223,126 | ||||||
|
Other assets
|
224,431 | 201,067 | ||||||
|
|
||||||||
|
Total assets
|
$ | 8,005,335 | $ | 7,873,890 | ||||
|
|
||||||||
|
|
||||||||
|
Liabilities
|
||||||||
|
Deposits:
|
||||||||
|
Noninterest-bearing demand
|
$ | 1,188,343 | $ | 888,578 | ||||
|
Interest-bearing:
|
||||||||
|
NOW
|
1,354,337 | 1,292,574 | ||||||
|
Savings
|
972,176 | 874,602 | ||||||
|
Money market
|
381,078 | 420,821 | ||||||
|
Time (including $0 and $49,309 respectively, at fair value)
|
2,007,554 | 1,945,712 | ||||||
|
|
||||||||
|
Total deposits
|
5,903,488 | 5,422,287 | ||||||
|
|
||||||||
|
Short-term borrowings
|
331,144 | 649,623 | ||||||
|
Other borrowings
|
699,059 | 834,867 | ||||||
|
Accrued expenses and other liabilities
|
227,818 | 236,248 | ||||||
|
|
||||||||
|
Total liabilities
|
7,161,509 | 7,143,025 | ||||||
|
|
||||||||
|
Commitments and contingencies (Note 18)
|
||||||||
|
Shareholders’ Equity
|
||||||||
|
Preferred stock, series A, 1,000 shares authorized, no shares issued or outstanding
|
— | — | ||||||
|
Preferred stock, series T, no par value, $100,000 liquidation value,
1,000 shares authorized, 0 and 100 shares issued and outstanding,
respectively
|
— | 97,358 | ||||||
|
Common stock, $1 per share stated value, 150,000 shares authorized,
87,182 and 66,321 shares issued and outstanding, respectively
|
87,182 | 66,321 | ||||||
|
Capital surplus
|
746,775 | 569,875 | ||||||
|
Retained earnings
|
30,235 | 50,815 | ||||||
|
Accumulated other comprehensive loss, net of tax
|
(20,366 | ) | (53,504 | ) | ||||
|
|
||||||||
|
Total shareholders’ equity
|
843,826 | 730,865 | ||||||
|
|
||||||||
|
Total liabilities and shareholders’ equity
|
$ | 8,005,335 | $ | 7,873,890 | ||||
|
|
||||||||
The accompanying notes to consolidated financial statements are an integral part of these
statements.
52
Table of Contents
CONSOLIDATED STATEMENTS OF INCOME
| Years Ended December 31, | ||||||||||||
| (dollars and shares in thousands, except per share data) | 2009 | 2008 | 2007 | |||||||||
|
Interest Income
|
||||||||||||
|
Loans including fees:
|
||||||||||||
|
Taxable
|
$ | 198,940 | $ | 261,455 | $ | 322,558 | ||||||
|
Nontaxable
|
19,053 | 23,155 | 21,735 | |||||||||
|
Investment securities, available-for-sale:
|
||||||||||||
|
Taxable
|
90,087 | 87,066 | 91,969 | |||||||||
|
Nontaxable
|
22,532 | 14,913 | 12,192 | |||||||||
|
Investment securities, held-to-maturity, taxable
|
9,932 | 5,187 | 6,649 | |||||||||
|
Money market investments and federal funds sold
|
133 | 746 | 6,265 | |||||||||
|
|
||||||||||||
|
Total interest income
|
340,677 | 392,522 | 461,368 | |||||||||
|
|
||||||||||||
|
Interest Expense
|
||||||||||||
|
Deposits
|
67,628 | 95,453 | 183,113 | |||||||||
|
Short-term borrowings
|
1,410 | 10,902 | 18,193 | |||||||||
|
Other borrowings
|
40,240 | 42,842 | 40,871 | |||||||||
|
|
||||||||||||
|
Total interest expense
|
109,278 | 149,197 | 242,177 | |||||||||
|
|
||||||||||||
|
Net interest income
|
231,399 | 243,325 | 219,191 | |||||||||
|
Provision for loan losses
|
63,280 | 51,464 | 4,118 | |||||||||
|
|
||||||||||||
|
Net interest income after provision for loan losses
|
168,119 | 191,861 | 215,073 | |||||||||
|
|
||||||||||||
|
Noninterest Income
|
||||||||||||
|
Wealth management fees
|
15,963 | 17,361 | 18,710 | |||||||||
|
Service charges on deposit accounts
|
55,196 | 45,175 | 44,751 | |||||||||
|
ATM fees
|
20,472 | 17,234 | 14,476 | |||||||||
|
Mortgage banking revenue
|
6,238 | 5,100 | 4,439 | |||||||||
|
Insurance premiums and commissions
|
37,851 | 39,153 | 38,996 | |||||||||
|
Investment product fees
|
8,515 | 9,493 | 10,727 | |||||||||
|
Company-owned life insurance
|
2,355 | 9,181 | 9,817 | |||||||||
|
Net securities gains (losses)
|
27,251 | 7,562 | (3,023 | ) | ||||||||
|
Impairment on available-for-sale securities (includes
loss of $68,090, net of $43,295 recognized in other
comprehensive income, pre-tax)
|
(24,795 | ) | — | — | ||||||||
|
Gain (loss) on derivatives
|
719 | (1,144 | ) | 166 | ||||||||
|
Gain on sale leaseback transactions
|
6,301 | 6,320 | 6,261 | |||||||||
|
Other income
|
7,394 | 11,534 | 9,818 | |||||||||
|
|
||||||||||||
|
Total noninterest income
|
163,460 | 166,969 | 155,138 | |||||||||
|
|
||||||||||||
|
Noninterest Expense
|
||||||||||||
|
Salaries and employee benefits
|
181,368 | 167,764 | 163,722 | |||||||||
|
Occupancy
|
47,064 | 39,668 | 26,466 | |||||||||
|
Equipment
|
10,440 | 9,464 | 11,109 | |||||||||
|
Marketing
|
9,578 | 9,554 | 8,407 | |||||||||
|
Data processing
|
20,700 | 19,021 | 19,212 | |||||||||
|
Communication
|
10,922 | 9,267 | 9,334 | |||||||||
|
Professional fees
|
9,491 | 7,187 | 7,705 | |||||||||
|
Loan expense
|
4,335 | 6,619 | 5,965 | |||||||||
|
Supplies
|
4,294 | 3,283 | 3,495 | |||||||||
|
Fraud loss
|
184 | 6,406 | 90 | |||||||||
|
FDIC assessment
|
12,447 | 1,513 | 875 | |||||||||
|
Amortization of intangibles
|
5,988 | 3,659 | 3,496 | |||||||||
|
Other expense
|
22,145 | 13,824 | 18,122 | |||||||||
|
|
||||||||||||
|
Total noninterest expense
|
338,956 | 297,229 | 277,998 | |||||||||
|
|
||||||||||||
|
Income (loss) before income taxes
|
(7,377 | ) | 61,601 | 92,213 | ||||||||
|
Income tax expense (benefit)
|
(21,114 | ) | (877 | ) | 17,323 | |||||||
|
|
||||||||||||
|
Net income
|
13,737 | 62,478 | 74,890 | |||||||||
|
Preferred stock dividends and discount accretion
|
(3,892 | ) | (298 | ) | — | |||||||
|
|
||||||||||||
|
Net income available to common stockholders
|
$ | 9,845 | $ | 62,180 | $ | 74,890 | ||||||
|
|
||||||||||||
|
Net income per common share:
|
||||||||||||
|
Basic earnings per share
|
$ | 0.14 | $ | 0.95 | $ | 1.14 | ||||||
|
Diluted earnings per share
|
0.14 | 0.95 | 1.14 | |||||||||
|
|
||||||||||||
|
Weighted average number of common shares outstanding
|
||||||||||||
|
Basic
|
71,314 | 65,660 | 65,684 | |||||||||
|
Diluted
|
71,367 | 65,776 | 65,750 | |||||||||
|
|
||||||||||||
|
Dividends per common share
|
0.44 | 0.69 | 1.11 | |||||||||
The accompanying notes to consolidated financial statements are an integral part of these
statements.
53
Table of Contents
OLD NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
| Accumulated | ||||||||||||||||||||||||||||
| Other | Total | |||||||||||||||||||||||||||
| Preferred | Common | Capital | Retained | Comprehensive | Shareholders’ | Comprehensive | ||||||||||||||||||||||
| (dollars and shares in thousands) | Stock | Stock | Surplus | Earnings | Income (Loss) | Equity | Income | |||||||||||||||||||||
|
Balance, January 1, 2007
|
$ | — | $ | 66,503 | $ | 565,106 | $ | 35,873 | $ | (25,113 | ) | $ | 642,369 | |||||||||||||||
|
Comprehensive income
|
||||||||||||||||||||||||||||
|
Net income
|
— | — | — | 74,890 | — | 74,890 | $ | 74,890 | ||||||||||||||||||||
|
Other comprehensive income (1)
|
||||||||||||||||||||||||||||
|
Change in unrealized gain (loss) on securities available for sale, net of reclassification and tax
|
— | — | — | — | 12,582 | 12,582 | 12,582 | |||||||||||||||||||||
|
Reclassification adjustment on cash flow hedges, net of tax
|
— | — | — | — | 343 | 343 | 343 | |||||||||||||||||||||
|
Net loss, settlement cost and amort. of net (gain) loss on defined benefit pension plans, net of tax
|
843 | 843 | 843 | |||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total comprehensive income
|
$ | 88,658 | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Adjustment to apply FIN No. 48 (1)
|
— | — | — | (3,368 | ) | — | (3,368 | ) | ||||||||||||||||||||
|
Adjustment to apply EITF No. 06-5 (1)
|
(118 | ) | (118 | ) | ||||||||||||||||||||||||
|
Dividends — common stock
|
— | — | — | (72,931 | ) | — | (72,931 | ) | ||||||||||||||||||||
|
Common stock repurchased
|
— | (230 | ) | (3,872 | ) | — | — | (4,102 | ) | |||||||||||||||||||
|
Stock based compensation expense
|
— | — | 1,590 | — | — | 1,590 | ||||||||||||||||||||||
|
Stock activity under incentive comp plans
|
— | (68 | ) | 299 | — | — | 231 | |||||||||||||||||||||
|
Stock options issued in acquisition
|
552 | 552 | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Balance, December 31, 2007
|
— | 66,205 | 563,675 | 34,346 | (11,345 | ) | 652,881 | |||||||||||||||||||||
|
Comprehensive income
|
||||||||||||||||||||||||||||
|
Net income
|
— | — | — | 62,478 | — | 62,478 | $ | 62,478 | ||||||||||||||||||||
|
Other comprehensive income (1)
|
||||||||||||||||||||||||||||
|
Change in unrealized gain (loss) on securities available for sale, net of reclassification and tax
|
— | — | — | — | (36,800 | ) | (36,800 | ) | (36,800 | ) | ||||||||||||||||||
|
Reclassification adjustment on cash flow hedges, net of tax
|
— | — | — | — | 175 | 175 | 175 | |||||||||||||||||||||
|
Net loss, settlement cost and amort. of net (gain) loss on defined benefit pension plans, net of tax
|
— | — | — | — | (5,534 | ) | (5,534 | ) | (5,534 | ) | ||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total comprehensive income
|
$ | 20,319 | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Dividends — common stock
|
— | — | — | (45,710 | ) | — | (45,710 | ) | ||||||||||||||||||||
|
Dividends — preferred stock
|
(273 | ) | (273 | ) | ||||||||||||||||||||||||
|
Issuance of preferred stock
|
97,358 | (26 | ) | 97,332 | ||||||||||||||||||||||||
|
Issuance of warrants to purchase common shares
|
2,553 | 2,553 | ||||||||||||||||||||||||||
|
Common stock repurchased
|
— | (26 | ) | (431 | ) | — | — | (457 | ) | |||||||||||||||||||
|
Stock based compensation expense
|
— | — | 2,005 | — | — | 2,005 | ||||||||||||||||||||||
|
Stock activity under incentive comp plans
|
— | 142 | 2,073 | — | — | 2,215 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Balance, December 31, 2008
|
97,358 | 66,321 | 569,875 | 50,815 | (53,504 | ) | 730,865 | |||||||||||||||||||||
|
Comprehensive income
|
||||||||||||||||||||||||||||
|
Net income
|
— | — | — | 13,737 | — | 13,737 | $ | 13,737 | ||||||||||||||||||||
|
Other comprehensive income (1)
|
||||||||||||||||||||||||||||
|
Change in unrealized gain (loss) on securities available for sale, net of reclassification and tax
|
— | — | — | — | 32,792 | 32,792 | 32,792 | |||||||||||||||||||||
|
Transferred securities, net of tax
|
— | — | — | — | 812 | 812 | 812 | |||||||||||||||||||||
|
Reclassification adjustment on cash flow hedges, net of tax
|
— | — | — | — | 667 | 667 | 667 | |||||||||||||||||||||
|
Net loss, settlement cost and amort. of net (gain) loss on defined benefit pension plans, net of tax
|
— | — | — | — | (1,133 | ) | (1,133 | ) | (1,133 | ) | ||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total comprehensive income
|
$ | 46,875 | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Dividends — common stock
|
— | — | — | (30,380 | ) | — | (30,380 | ) | ||||||||||||||||||||
|
Dividends — preferred stock
|
— | — | — | (1,250 | ) | — | (1,250 | ) | ||||||||||||||||||||
|
Common stock issued
|
— | 20,900 | 176,856 | — | — | 197,756 | ||||||||||||||||||||||
|
Preferred stock repurchased
|
(97,358 | ) | — | — | (2,642 | ) | — | (100,000 | ) | |||||||||||||||||||
|
Common stock repurchased
|
— | (28 | ) | (325 | ) | — | — | (353 | ) | |||||||||||||||||||
|
Warrants repurchased
|
— | — | (1,200 | ) | — | — | (1,200 | ) | ||||||||||||||||||||
|
Stock based compensation expense
|
— | — | 1,310 | — | — | 1,310 | ||||||||||||||||||||||
|
Stock activity under incentive comp plans
|
— | (11 | ) | 259 | (45 | ) | — | 203 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Balance, December 31, 2009
|
$ | 0 | $ | 87,182 | $ | 746,775 | $ | 30,235 | $ | (20,366 | ) | $ | 843,826 | |||||||||||||||
|
|
||||||||||||||||||||||||||||
The accompanying notes to consolidated financial statements are an integral part of these
statements.
| (1) | See Note 1 to the consolidated financial statements. |
54
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Years Ended December 31, | ||||||||||||
| (dollars in thousands) | 2009 | 2008 | 2007 | |||||||||
|
Cash Flows From Operating Activities
|
||||||||||||
|
Net income
|
$ | 13,737 | $ | 62,478 | $ | 74,890 | ||||||
|
|
||||||||||||
|
Adjustments to reconcile net income to cash provided by operating activities:
|
||||||||||||
|
Depreciation
|
8,853 | 5,952 | 7,855 | |||||||||
|
Amortization and impairment of other intangible assets
|
6,508 | 4,350 | 3,497 | |||||||||
|
Net premium (discount) amortization on investment securities
|
2,188 | (1,875 | ) | (2,511 | ) | |||||||
|
Restricted stock expense
|
918 | 1,598 | 1,292 | |||||||||
|
Stock option expense
|
392 | 407 | 298 | |||||||||
|
Provision for loan losses
|
63,280 | 51,464 | 4,118 | |||||||||
|
Net securities (gains) losses
|
(27,251 | ) | (7,562 | ) | 3,023 | |||||||
|
Impairment on available-for-sale securities
|
24,795 | — | — | |||||||||
|
Gain on sale leasebacks
|
(6,301 | ) | (6,320 | ) | (6,261 | ) | ||||||
|
(Gain) loss on derivatives
|
(719 | ) | 1,144 | (166 | ) | |||||||
|
Net gains on sales and write-downs of loans and other assets
|
(1,141 | ) | (3,054 | ) | (1,577 | ) | ||||||
|
(Gain) loss on retirement of debt
|
3,941 | (558 | ) | 1,541 | ||||||||
|
Increase in cash surrender value of company-owned life insurance
|
(1,526 | ) | (8,640 | ) | (7,756 | ) | ||||||
|
Residential real estate loans originated for sale
|
(259,664 | ) | (171,871 | ) | (238,460 | ) | ||||||
|
Proceeds from sale of residential real estate loans
|
262,784 | 170,577 | 245,654 | |||||||||
|
(Increase) decrease in interest receivable
|
(278 | ) | 1,247 | 5,290 | ||||||||
|
(Increase) decrease in other assets
|
(44,008 | ) | (65,003 | ) | 2,091 | |||||||
|
Increase (decrease) in accrued expenses and other liabilities
|
(6,212 | ) | 20,185 | (18,641 | ) | |||||||
|
|
||||||||||||
|
Total adjustments
|
26,559 | (7,959 | ) | (713 | ) | |||||||
|
|
||||||||||||
|
Net cash flows provided by operating activities
|
40,296 | 54,519 | 74,177 | |||||||||
|
|
||||||||||||
|
Cash Flows From Investing Activities
|
||||||||||||
|
Cash and cash equivalents of acquired banking branches, net
|
389,917 | — | 17,429 | |||||||||
|
Purchase of subsidiaries
|
— | — | (78,109 | ) | ||||||||
|
Purchases of investment securities available-for-sale
|
(2,274,090 | ) | (1,068,304 | ) | (811,266 | ) | ||||||
|
Purchases of investment securities held-to-maturity
|
(98,544 | ) | — | — | ||||||||
|
Purchase of loans
|
(8,024 | ) | — | — | ||||||||
|
Proceeds from maturities, prepayments and calls
of investment securities available-for-sale
|
697,082 | 754,669 | 739,443 | |||||||||
|
Proceeds from sales of investment securities available-for-sale
|
1,042,138 | 280,971 | 205,362 | |||||||||
|
Proceeds from maturities, prepayments and calls of investment securities held-to-maturity
|
29,230 | 26,464 | 34,495 | |||||||||
|
Proceeds from redemption of FHLB stock
|
5,000 | — | 838 | |||||||||
|
Proceeds from sale of loans and leases
|
259,127 | 2,251 | 15,581 | |||||||||
|
Net principal collected from (loans made to) customers
|
562,452 | (117,039 | ) | 306,848 | ||||||||
|
Proceeds from sale of premises and equipment and other assets
|
405 | 10,892 | 4,511 | |||||||||
|
Proceeds from sale leaseback of real estate
|
10,836 | 8,528 | 182,192 | |||||||||
|
Purchases of premises and equipment
|
(13,944 | ) | (11,722 | ) | (9,055 | ) | ||||||
|
|
||||||||||||
|
Net cash flows provided by (used in) investing activities
|
601,585 | (113,290 | ) | 608,269 | ||||||||
|
|
||||||||||||
|
Cash Flows From Financing Activities
|
||||||||||||
|
Net increase (decrease) in deposits and short-term borrowings:
|
||||||||||||
|
Noninterest-bearing demand deposits
|
220,070 | 33,130 | (61,720 | ) | ||||||||
|
Savings, NOW and money market deposits
|
(61,390 | ) | (158,851 | ) | (325,713 | ) | ||||||
|
Time deposits
|
(103,011 | ) | (113,904 | ) | (634,661 | ) | ||||||
|
Short-term borrowings
|
(318,479 | ) | 11,376 | 297,017 | ||||||||
|
Payments for maturities on other borrowings
|
(5,264 | ) | (154,207 | ) | (14,159 | ) | ||||||
|
Proceeds from issuance of other borrowings
|
— | 330,000 | 74,000 | |||||||||
|
Payments related to retirement of debt
|
(133,949 | ) | — | (189,790 | ) | |||||||
|
Cash dividends paid on common stock
|
(30,380 | ) | (60,801 | ) | (57,782 | ) | ||||||
|
Cash dividends paid on preferred stock
|
(1,514 | ) | — | — | ||||||||
|
Common stock repurchased
|
(353 | ) | (457 | ) | (4,102 | ) | ||||||
|
Proceeds from exercise of stock options, including tax benefit
|
97 | 1,940 | 119 | |||||||||
|
Proceeds from issuance of TARP preferred stock and warrants
|
— | 99,885 | — | |||||||||
|
Repurchase of TARP preferred stock and warrants
|
(101,200 | ) | — | — | ||||||||
|
Common stock issued
|
197,756 | — | 112 | |||||||||
|
|
||||||||||||
|
Net cash flows used in financing activities
|
(337,617 | ) | (11,889 | ) | (916,679 | ) | ||||||
|
|
||||||||||||
|
Net increase (decrease) in cash and cash equivalents
|
304,264 | (70,660 | ) | (234,233 | ) | |||||||
|
Cash and cash equivalents at beginning of period
|
193,012 | 263,672 | 497,905 | |||||||||
|
|
||||||||||||
|
Cash and cash equivalents at end of period
|
$ | 497,276 | $ | 193,012 | $ | 263,672 | ||||||
|
|
||||||||||||
The accompanying notes to consolidated financial statements are an integral part of these
statements.
55
Table of Contents
OLD NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NATURE OF OPERATIONS
Old National Bancorp, a financial holding company headquartered in Evansville, Indiana, operates
primarily in Indiana, Illinois, and Kentucky. Its principal subsidiaries include Old National
Bank, ONB Insurance Group, Inc., ONB Finance Inc. and American National Trust & Investment
Management Corp. Through its bank and non-bank affiliates, Old National Bancorp provides to its
clients an array of financial services including loan, deposit, wealth management, investment
consulting, investment and insurance products.
BASIS OF PRESENTATION
The accompanying 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. The allowance for loan
losses, valuation and impairment of securities, goodwill and intangibles, derivative financial
instruments, and income taxes are particularly subject to change. 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 December 31, 2009 and 2008,
and the results of its operations and cash flows for the years ended December 31, 2009, 2008 and
2007.
All significant intercompany transactions and balances have been eliminated. A summary of the more
significant accounting and reporting policies used in preparing the statements is presented below.
In June 2009, the FASB issued Statement No. 168 –
The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles
(FASB ASC 105-10, Generally Accepted
Accounting Principles). SFAS No. 168 replaces SFAS No. 162 and establishes the FASB Accounting
Standards Codification as the source of authoritative accounting principles recognized by the FASB
to be applied by nongovernmental entities in the preparation of financial statements in conformity
with generally accepted accounting principles (“GAAP”). Rules and interpretative releases of the
Securities and Exchange Commission under federal securities laws are also sources of authoritative
GAAP for SEC registrants. The FASB Accounting Standards Codification (“ASC”) became effective for
financial statements that cover interim and annual periods ending after September 15, 2009. Other
than resolving certain minor inconsistencies in current GAAP, the FASB Accounting Standards
Codification is not intended to change GAAP, but rather to make it easier to review and research
GAAP applicable to a particular transaction or accounting issue. Technical references to generally
accepted accounting principles included in the Notes to Consolidated Financial Statements are
provided under the new FASB ASC structure with the prior terminology included parenthetically.
Management has evaluated subsequent events for reporting and disclosure in these financial
statements through February 26, 2010, the date the financial statements were issued.
INVESTMENT SECURITIES
Old National classifies investment securities as available-for-sale or held-to-maturity on the date
of purchase. Securities classified as available-for-sale are recorded at fair value with the
unrealized gains and losses, net of tax effect, recorded in other comprehensive income. Realized
gains and losses affect income and the prior fair value adjustments are reclassified within
shareholders’ equity. Securities classified as held-to-maturity, which management has the intent
and ability to hold to maturity, are reported at amortized cost. Premiums and discounts are
amortized on the level-yield method. Anticipated prepayments are considered when amortizing
premiums and discounts on mortgage backed securities. Gains and losses on the sale of
available-for-sale securities are determined using the specific-identification method.
56
Table of Contents
Other-Than-Temporary- Impairment
– Management evaluates securities for
other-than-temporary-impairment at least on a quarterly basis, and more frequently when economic or
market conditions warrant such evaluation. Consideration is given to (1) the length of time and
the extent to which the fair value has been less than cost, (2) the financial condition and near
term prospects of the issuer including an evaluation of credit ratings, (3) the impact of changes
in market interest rates, (4) the intent of the Company to sell a security, and (5) whether it is
more likely than not the Company will have to sell the security before recovery of its cost basis.
If the Company intends to sell an impaired security, the Company records an other-than-temporary
loss in an amount equal to the entire difference between fair value and amortized cost. If a
security is determined to be other-than-temporarily-impaired, but the Company does not intend to
sell the security, only the credit portion of the estimated loss is recognized in earnings, with
the other portion of the loss recognized in other comprehensive income. See Note 3 to the
consolidated financial statements for a detailed description of the quarterly evaluation process.
FEDERAL HOME LOAN BANK (FHLB) STOCK
Old National is a member of the FHLB system. Members are required to own a certain amount of stock
based on the level of borrowings and other factors and may invest in additional amounts. FHLB
stock is carried at cost, classified as a restricted security and periodically evaluated for
impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as
income.
RESIDENTIAL LOANS HELD FOR SALE
Residential loans that Old National has committed to sell are classified as loans held for sale and
are recorded in accordance with FASB ASC 825-10 (SFAS No. 159) at fair value, determined
individually, as of the balance sheet date. The loans fair value includes the servicing value of
the loans as well as any accrued interest.
LOANS
Loans that Old National intends to hold for investment purposes are classified as portfolio loans.
Portfolio loans are carried at the principal balance outstanding, net of earned interest, purchase
premiums or discounts, deferred loan fees and costs, and an allowance for loan losses. Interest
income is accrued on the principal balances of loans outstanding. A loan is generally placed on
nonaccrual status when principal or interest becomes 90 days past due unless it is well secured and
in the process of collection, or earlier when concern exists as to the ultimate collectibility of
principal or interest. Interest accrued during the current year on such loans is reversed against
earnings. Interest accrued in the prior year, if any, is charged to the allowance for loan losses.
Cash interest received on these loans is applied to the principal balance until the principal is
recovered or until the loan returns to accrual status. Loans are returned to accrual status when
all the principal and interest amounts contractually due are brought current, remain current for
six months and future payments are reasonably assured.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level believed adequate by management to absorb
probable losses incurred in the loan portfolio. Management’s evaluation of the adequacy of the
allowance is an estimate based on reviews of individual loans, pools of homogeneous loans,
assessments of the impact of current economic conditions on the portfolio, and historical loss
experience. The allowance is increased through a provision charged to operating expense. Loans
deemed to be uncollectible are charged to the allowance. Recoveries of loans previously
charged-off are added to the allowance.
A loan is considered impaired when it is probable that contractual interest and principal payments
will not be collected either for the amounts or by the dates as scheduled in the loan agreement.
If a loan is impaired, a portion of the allowance is allocated so that the loan is reported net, at
the present value of estimated cash flows using the loan’s existing rate or at the fair value of
collateral if repayment is expected solely from the collateral. Old National’s policy for
recognizing income on impaired loans is to accrue interest unless a loan is placed on nonaccrual
status.
57
Table of Contents
It is Old National’s policy to charge off small commercial loans scored through our small business
credit center with contractual balances under $250,000 that have been placed on nonaccrual status
or became ninety days or more delinquent, without regard to the collateral position.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation. Land is stated at cost.
Depreciation is charged to operating expense over the useful lives of the assets, principally on
the straight-line method. Useful lives for premises and equipment are as follows: buildings and
building improvements – 15 to 39 years; and furniture and equipment – 3 to 10 years. Leasehold
improvements are depreciated over the lesser of their useful lives or the term of the lease.
Maintenance and repairs are expensed as incurred while major additions and improvements are
capitalized. Interest costs on construction of qualifying assets are capitalized.
Premises and equipment are reviewed for impairment when events indicate their carrying amount may
not be recoverable from future undiscounted cash flows. If impaired, the assets are adjusted to
fair value. Old National recorded impairment of $1.2 million for the year ended December 31, 2007.
Such impairments are included in other expense.
GOODWILL AND OTHER INTANGIBLE ASSETS
The excess of the cost of acquired entities over the fair value of identifiable assets acquired
less liabilities assumed is recorded as goodwill. In accordance with FASB ASC 350 (SFAS No. 142,
Goodwill and Other Intangible Assets
), amortization on goodwill and indefinite-lived assets is not
recorded. However, the recoverability of goodwill and other intangible assets are annually tested
for impairment. Other intangible assets, including core deposits and customer business
relationships, are amortized primarily on an accelerated cash flow basis over their estimated
useful lives, generally over a period of 7 to 25 years.
Old National recorded $0.5 million and $0.7 million of impairment of intangibles during the years
ended December 31, 2009 and 2008, respectively, due to the loss of two unrelated insurance clients
at one of its insurance subsidiaries. Such impairments are included in other expense.
COMPANY OWNED LIFE INSURANCE
Old National has purchased life insurance policies on certain key executives. The Company adopted
FASB ASC 325-30, Investments in Insurance Contracts (EITF 06-05,
Accounting for Purchases of Life
Insurance – Determining the Amount That Could Be Realized in Accordance with FASB Technical
Bulletin No. 85-4
) on January 1, 2007, and in accordance with this pronouncement records company
owned life insurance at the amount that can be realized under the insurance contract at the balance
sheet date, which is the cash surrender value adjusted for other charges or other amounts due that
are probable at settlement. The amount of company owned life insurance at December 31, 2009 and
2008 was $224.7 million and $223.1 million, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS
As part of the Company’s overall interest rate risk management, Old National uses derivative
instruments, including interest rate swaps, caps and floors. All derivative instruments are
recognized on the balance sheet at their fair value in accordance with FASB ASC 815 (SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities
), as amended. At the inception of the
derivative contract, the Company will designate the derivative as (1) a hedge of the fair value of
a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), (2) a
hedge of a forecasted transaction or of the variability of cash flows to be received or paid
related to a recognized asset or liability (“cash flow hedge”), or (3) an instrument with no
hedging designation (“stand-alone derivative”). For derivatives that are designated and qualify as
a fair value hedge, the change in value of the derivative, as well as the offsetting change in
value of the hedged item attributable to the hedged risk, are recognized in current earnings during
the period of the change in fair values. As of December 31, 2009, Old National was not using the
“short-cut” method of accounting for any fair value derivatives. For derivatives that are
designated and qualify as a cash flow hedge, the effective portion of the change in value on the
derivative is reported as a component of other comprehensive income and reclassified into earnings
in the same period or periods during which the hedged transaction affects earnings. For all
hedging relationships, changes in fair value of derivatives that are not effective in hedging the
changes in fair value or expected cash flows of the hedged item are recognized immediately in
current earnings during the period of the change. Similarly, the changes in the fair value of
derivatives that do not qualify for hedge accounting under FASB ASC 815 (SFAS No. 133) are also
reported currently in earnings, in noninterest income.
58
Table of Contents
The accrued net settlements on derivatives that qualify for hedge accounting are recorded in
interest income or interest expense, consistent with the item being hedged.
Old National formally documents all relationships between hedging instruments and hedged items, as
well as its risk-management objective and strategy for undertaking various hedge transactions.
This process includes linking all derivative instruments that are designated as fair-value or
cash-flow hedges to specific assets and liabilities on the balance sheet or to specific firm
commitments or forecasted transactions. The Company also formally assesses, both at the hedge’s
inception and on an ongoing basis, whether the derivative instruments that are used in hedging
transactions are highly effective in offsetting changes in fair values or cash flows of hedged
items. The Company discontinues hedge accounting prospectively when it is determined that (1) the
derivative is no longer effective in offsetting changes in the fair value or cash flows of the
hedged item; (2) the derivative expires, is sold, or terminated; (3) the derivative instrument is
dedesignated as a hedge because the forecasted transaction is no longer probable of occurring; (4)
a hedged firm commitment no longer meets the definition of a firm commitment; (5) or management
determines that designation of the derivative as a hedging instrument is no longer appropriate.
When hedge accounting is discontinued, the future changes in fair value of the derivative are
recorded as noninterest income. When a fair value hedge is discontinued, the hedged asset or
liability is no longer adjusted for changes in fair value and the existing basis adjustment is
amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is
discontinued but the hedged cash flows or forecasted transaction is still expected to occur,
changes in value that were accumulated in other comprehensive income are amortized or accreted into
earnings over the same periods which the hedged transactions will affect earnings.
Old National enters into various stand-alone mortgage-banking derivatives in order to hedge the
risk associated with the fluctuation of interest rates. Old National also enters into various
stand-alone derivative contracts to provide derivative products to customers which are carried at
fair value with changes in fair value recorded as mortgage banking revenue.
Old National is exposed to losses if a counterparty fails to make its payments under a contract in
which Old National is in the net receiving position. Old National anticipates that the
counterparties will be able to fully satisfy their obligations under the agreements. In addition,
Old National obtains collateral above certain thresholds of the fair value of its hedges for each
counterparty based upon their credit standing. All of the contracts to which Old National is a
party settle monthly, quarterly or semiannually. Further, Old National has netting agreements with
the dealers with which it does business.
CREDIT-RELATED FINANCIAL INSTRUMENTS
In the ordinary course of business, Old National’s affiliate bank has entered into credit-related
financial instruments consisting of commitments to extend credit, commercial letters of credit and
standby letters of credit. The notional amount of these commitments is not reflected in the
consolidated financial statements until they are funded.
FORECLOSED REAL ESTATE
Other assets include real estate properties acquired as a result of foreclosure and are initially
recorded at the fair value of the property less estimated cost to sell. Any excess recorded
investment over the fair value of the property received is charged to the allowance for loan
losses. Any subsequent write-downs are charged to expense, as are the costs of operating the
properties. Such costs are not material to Old National’s results of operation. The amount of
foreclosed properties at December 31, 2009 and 2008 was $8.1 million and $2.9 million,
respectively.
59
Table of Contents
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company purchases certain securities, generally U.S. Government-sponsored entity and agency
securities, under agreements to resell. The amounts advanced under these agreements represent
short-term secured loans and are reflected as assets in the accompanying consolidated balance
sheets. The Company also sells certain securities under agreements to repurchase. These
agreements are treated as collateralized financing transactions. These secured borrowings are
reflected as liabilities in the accompanying consolidated balance sheets and are recorded at the
amount of cash received in connection with the transaction. Short-term securities sold under
agreements to repurchase generally mature within one to four days from the transaction date.
Securities, generally U.S. government and federal agency securities, pledged as collateral under
these financing arrangements can be repledged by the secured party. Additional collateral may be
required based on the fair value of the underlying securities.
COMPREHENSIVE INCOME
Comprehensive income includes all changes in equity during a period, except those resulting from
investments by and distributions to owners. Following is a summary of other comprehensive income
for the years ended December 31, 2009, 2008 and 2007.
| (dollars in thousands) | 2009 | 2008 | 2007 | |||||||||
|
Net income
|
$ | 13,737 | $ | 62,478 | $ | 74,890 | ||||||
|
Other comprehensive income
|
||||||||||||
|
Change in securities available for sale:
|
||||||||||||
|
Unrealized holding gains (losses) arising during the period
|
99,164 | (50,328 | ) | 17,894 | ||||||||
|
Reclassification for securities transferred to held-to-maturity
|
(1,791 | ) | — | — | ||||||||
|
Reclassification adjustment for securities (gains) losses realized in income
|
(27,251 | ) | (7,562 | ) | 3,023 | |||||||
|
Other-than-temporary-impairment on available-for-sale debt securities recorded in
other comprehensive income
|
(43,295 | ) | — | — | ||||||||
|
Other-than-temporary-impairment on available-for-sale debt securities associated
with credit loss realized in income
|
24,795 | — | — | |||||||||
|
Income tax effect
|
(18,830 | ) | 21,090 | (8,335 | ) | |||||||
|
Change in securities held-to-maturity:
|
||||||||||||
|
Fair value adjustment for securities transferred from available-for-sale
|
1,791 | — | — | |||||||||
|
Amortization of fair value previously recognized into accumulated other
comprehensive income
|
(438 | ) | — | — | ||||||||
|
Income tax effect
|
(541 | ) | — | — | ||||||||
|
Cash flow hedges:
|
||||||||||||
|
Net unrealized derivative gains (losses) on cash flow hedges
|
821 | — | — | |||||||||
|
Reclassification adjustment on cash flow hedges
|
288 | 288 | 564 | |||||||||
|
Income tax effect
|
(442 | ) | (113 | ) | (221 | ) | ||||||
|
Defined benefit pension plans:
|
||||||||||||
|
Net loss, settlement cost and amortization of net (gain) loss recognized in income
|
(1,889 | ) | (9,223 | ) | 1,405 | |||||||
|
Income tax effect
|
756 | 3,689 | (562 | ) | ||||||||
|
|
||||||||||||
|
Total other comprehensive income
|
33,138 | (42,159 | ) | 13,768 | ||||||||
|
|
||||||||||||
|
Comprehensive income
|
$ | 46,875 | $ | 20,319 | $ | 88,658 | ||||||
|
|
||||||||||||
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The following table summarizes the changes within each classification of accumulated other
comprehensive income (“AOCI”) for the years ended December 31, 2009 and 2008:
| AOCI at | Other | AOCI at | Other | AOCI at | ||||||||||||||||
| December 31, | Comprehensive | December 31, | Comprehensive | December 31, | ||||||||||||||||
| 2007 | Income | 2008 | Income | 2009 | ||||||||||||||||
|
Unrealized gains (losses) on available-for-sale securities
|
$ | (3,704 | ) | $ | (36,800 | ) | $ | (40,504 | ) | $ | 76,087 | $ | 35,583 | |||||||
|
Other-than-temporary-impairment
|
— | — | — | (43,295 | ) | (43,295 | ) | |||||||||||||
|
Unrealized gains (losses) on held-to-maturity securities
|
— | — | — | 812 | 812 | |||||||||||||||
|
Unrecognized gain (loss) on cash flow hedges
|
(655 | ) | 175 | (480 | ) | 667 | 187 | |||||||||||||
|
Defined benefit pension plans
|
(6,986 | ) | (5,534 | ) | (12,520 | ) | (1,133 | ) | (13,653 | ) | ||||||||||
|
|
||||||||||||||||||||
|
Accumulated other comprehensive income (AOCI)
|
$ | (11,345 | ) | $ | (42,159 | ) | $ | (53,504 | ) | $ | 33,138 | $ | (20,366 | ) | ||||||
|
|
||||||||||||||||||||
NET INCOME PER SHARE
Basic net income per share is computed by dividing net income available to common shareholders (net
income less dividend requirements for preferred stock and accretion of preferred stock discount) by
the weighted-average number of common shares outstanding during each year. Diluted net income per
share is computed as above and assumes the conversion of outstanding stock options and restricted
stock.
The following table reconciles basic and diluted net income per share for the years ended December
31.
EARNINGS PER SHARE RECONCILIATION
| (dollars and shares in thousands, except per share data) | 2009 | 2008 | 2007 | |||||||||
|
|
||||||||||||
|
Basic Earnings Per Share
|
||||||||||||
|
Net income
|
$ | 13,737 | $ | 62,478 | $ | 74,890 | ||||||
|
Less: Preferred stock dividends and accretion of discount
|
3,892 | 298 | — | |||||||||
|
|
||||||||||||
|
Net income available to common stockholders
|
9,845 | 62,180 | 74,890 | |||||||||
|
|
||||||||||||
|
Weighted average common shares outstanding
|
71,314 | 65,660 | 65,684 | |||||||||
|
|
||||||||||||
|
Basic Earnings Per Share
|
$ | 0.14 | $ | 0.95 | $ | 1.14 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Diluted Earnings Per Share
|
||||||||||||
|
Net income available to common stockholders
|
$ | 9,845 | $ | 62,180 | $ | 74,890 | ||||||
|
|
||||||||||||
|
Weighted average common shares outstanding
|
71,314 | 65,660 | 65,684 | |||||||||
|
Effect of dilutive securities:
|
||||||||||||
|
Restricted stock (1)
|
44 | 82 | 40 | |||||||||
|
Stock options (2)
|
9 | 34 | 26 | |||||||||
|
|
||||||||||||
|
Weighted average shares outstanding
|
71,367 | 65,776 | 65,750 | |||||||||
|
|
||||||||||||
|
Diluted Earnings Per Share
|
$ | 0.14 | $ | 0.95 | $ | 1.14 | ||||||
|
|
||||||||||||
| (1) | 231, 0 and 96 shares of restricted stock and restricted stock units were not included in the computation of net income per diluted share at December 31, 2009, 2008 and 2007, respectively, because the effect would be antidulitive. | |
| (2) | Options to purchase 6,032 shares, 5,611 shares and 5,756 shares outstanding at December 31, 2009, 2008, and 2007, respectively, were not included in the computation of net income per diluted share because the exercise price of these options was greater than the average market price of the common shares and, therefore, the effect would be antidilutive. | |
| (3) | Warrants to purchase 813,008 shares at December 31, 2008, were not included in the computation because the effect would be antidilutive. See Note 15 to the consolidated financial statements. |
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In June 2008, the FASB issued new guidance impacting FASB ASC 260-10 (FSP No. EITF 03-06-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating
Securities
). This new guidance became effective for Old National on January 1, 2009. Upon
adoption, all prior-period earnings per share data were recalculated according to the new guidance.
These calculations resulted in no material changes to earnings per share data as previously
presented.
STOCK-BASED COMPENSATION
Compensation cost is recognized for stock options and restricted stock awards issued to employees
based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to
estimate the fair value of stock options, while the market price of the Company’s common stock at
the date of grant is used for restricted stock awards. Compensation expense is recognized over the
requisite service period.
INCOME TAXES
Income tax expense is the total of the current year income tax due or refundable and the change in
deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future
tax amounts for the temporary differences between carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred
tax assets to the amount expected to be realized.
The Company adopted new guidance impacting FASB ASC 740-10 (FASB Interpretation No. 48,
Accounting
for Uncertainty in Income Taxes
), as of January 1, 2007. A tax position is recognized as a benefit
only if it is “more likely than not” that the tax position would be sustained in a tax examination,
with a tax examination being presumed to occur. The amount recognized is the largest amount of tax
benefit that is greater than 50% likely of being realized on examination. For tax positions not
meeting the “more likely than not” test, no tax benefit is recorded. The impact of adopting FASB
ASC 740-10 was a reduction to January 1, 2007 retained earnings of $3.4 million.
The Company recognizes interest and/or penalties related to income tax matters in income tax
expense.
STATEMENT OF CASH FLOWS DATA
For the purpose of presentation in the accompanying consolidated statement of cash flows, cash and
cash equivalents are defined as cash, due from banks, federal funds sold and resell agreements, and
money market investments, which have maturities less than 90 days. Cash paid during 2009, 2008 and
2007 for interest was $111.6 million, $154.8 million and $249.2 million, respectively. Cash paid
for income tax, net of refunds, during 2009, 2008 and 2007 was $2.7 million, $18.9 million and
$30.0 million, respectively. Other noncash transactions include loans transferred to loans held
for sale of $2.6 million in 2009, $2.2 million in 2008 and $20.9 million in 2007, leases
transferred to held for sale of $370.2 million in 2009, a transfer of securities of $230.1 million
from the available-for-sale portfolio to the held-to-maturity portfolio and premises and equipment
transferred to assets held for sale of $74.1 million in 2007.
IMPACT OF ACCOUNTING CHANGES
FASB ASC 820-10 –
In February 2008, the FASB issued new guidance impacting FASB ASC 820-10, Fair
Value Measurements and Disclosures (FASB Staff Position No. 157-2,
Effective Date of FASB Statement
No. 157
). The staff position delays the effective date of FASB ASC 820-10 (SFAS No. 157,
Fair
Value Measurements
) for nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring basis. The delay
expired January 1, 2009, and the expiration of the delay did not have a material impact on Old
National’s consolidated financial position or results of operations.
FASB ASC 805 –
In December 2007, the FASB issued new guidance impacting FASB ASC 805,
Business
Combinations
(SFAS No. 141(R) – Business Combinations). The new guidance establishes principles
and requirements for how an acquiring company (1) recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed and any noncontrolling
interest in the acquiree, (2) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase, and (3) determines what information to disclose to
enable users of the financial statements to evaluate the nature and financial effects of the
business combination. The new standard became effective for the Company on January 1, 2009. See
Note 2 to the consolidated financial statements for the impact on the Company of adopting this
standard.
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Table of Contents
FASB ASC 810-10 –
In December 2007, the FASB issued FASB ASC 810-10, Consolidation (Statement No.
160 –
Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51
).
FASB ASC 810-10 requires the ownership interests in subsidiaries held by parties other than the
parent be clearly identified, labeled and presented in the consolidated balance sheet within
equity, but separate from the parent’s equity. It also requires the amount of consolidated net
income attributable to the parent and the noncontrolling interest to be clearly identified and
presented on the face of the consolidated statement of income. The new standard became effective
for the Company on January 1, 2009. The adoption of this standard did not have a material impact
on the Company’s consolidated financial position or results of operations.
FASB ASC 815-10
– In March 2008, the FASB issued FASB ASC 815-10, Derivatives and Hedging
(Statement No. 161 –
Disclosures about Derivative Instruments and Hedging Activities – an amendment
of FASB Statement No. 133
). FASB ASC 815-10 requires enhanced disclosures about how and why an
entity uses derivative instruments, how derivative instruments and related items are accounted for
and how derivative instruments and related hedged items affect an entity’s financial position,
financial performance and cash flows. The new standard became effective for the Company on January
1, 2009. The adoption of this standard did not have a material impact on the Company’s
consolidated financial position or results of operations and the required disclosures have been
included.
FASB ASC 855 –
In May 2009, the FASB issued FASB ASC 855, Subsequent Events (Statement No. 165 –
Subsequent Events
). FASB ASC 855 establishes the period after the balance sheet date during which
management shall evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements and the circumstances under which an entity shall recognize
events or transactions that occur after the balance sheet date. FASB ASC 855 also requires
disclosure of the date through which subsequent events have been evaluated. The Company adopted
this standard for the interim reporting period ending June 30, 2009. The adoption of this standard
did not have a material impact on the Company’s consolidated financial position or results of
operations.
FASB ASC 860 –
In June 2009, the FASB issued new guidance impacting FASB ASC 860, Transfers and
servicing (Statement No. 166 –
Accounting for Transfers of Financial Assets – an amendment of FASB
Statement No. 140
). The new guidance removes the concept of a qualifying special-purpose entity
and limits the circumstances in which a financial asset, or portion of a financial asset, should be
derecognized when the transferor has not transferred the entire financial asset to an entity that
is not consolidated with the transferor in the financial statements being presented and/or when the
transferor has continuing involvement with the transferred financial asset. The new standard
became effective for the Company on January 1, 2010 and did not have a material impact on the
Company’s consolidated financial position or results of operations.
FASB ASC 810-10 –
In June 2009, the FASB issued new guidance impacting FASB ASC 810-10,
Consolidation (Statement No. 167 –
Amendments to FASB Interpretation No. 46(R)
). The new guidance
amends tests for variable interest entities to determine whether a variable interest entity must be
consolidated. FASB ASC 810-10 requires an entity to perform an analysis to determine whether an
entity’s variable interest or interests give it a controlling financial interest in a variable
interest entity. This standard requires ongoing reassessments of whether an entity is the primary
beneficiary of a variable interest entity and enhanced disclosures that provide more transparent
information about an entity’s involvement with a variable interest entity. The new guidance became
effective for the Company on January 1, 2010 and did not have a material impact on the Company’s
consolidated financial position or results of operations.
FASB ASC 715-20-50 –
In December 2008, the FASB issued new guidance impacting FASB ASC 715-20-50,
Compensation Retirement Benefits – Defined Benefit Plans – General (FASB Staff Position No.
132(R)-1,
Employers’ Disclosures about Postretirement Benefit Plan Assets
). This provides guidance
on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement
plan. The guidance requires disclosure of the fair value of each major category of plan assets for
pension plans and other postretirement benefit plans. This standard became effective for the
Company on December 31, 2009. The new disclosures have been included in the consolidated financial
statements.
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Table of Contents
FASB ASC 825-10-50
– In April 2009, the FASB issued new guidance impacting FASB ASC 825-10-50,
Financial Instruments (FASB Staff Position No. FAS 107-1 and APB 28-1,
Interim Disclosures about
Fair Value of Financial Instruments
). This guidance amends existing GAAP to require disclosures
about fair values of financial instruments for interim reporting periods as well as in annual
financial statements. The guidance also amends existing GAAP to require those disclosures in
summarized financial information at interim reporting periods. The Company adopted this standard
for the interim reporting period ending March 31, 2009.
FASB ASC 320-10
– In April 2009, the FASB issued new guidance impacting FASB ASC 320-10,
Investments – Debt and Equity Securities (FASB Staff Position No. FAS 115-2 and FAS 124-2,
Recognition and Presentation of Other-Than-Temporary Impairments
). This guidance amends the
other-than-temporary impairment guidance in U.S. generally accepted accounting principles for debt
securities. If an entity determines that it has an other-than-temporary impairment on a security,
it must recognize the credit loss on the security in the income statement. The credit loss is
defined as the difference between the present value of the cash flows expected to be collected and
the amortized cost basis. FASB ASC 320-10 expands disclosures about other-than-temporary
impairment and requires that the annual disclosures in existing generally accepted accounting
principles be made for interim reporting periods. The Company adopted this guidance for the
interim reporting period ending March 31, 2009. See Note 3 to the consolidated financial
statements for the impact on the Company of adopting this new guidance.
FASB ASC 820
– In April 2009, the FASB issued new guidance impacting FASB ASC 820, Fair Value
Measurements and Disclosures (FASB Staff Position No. FAS 157-4,
Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly
). This provides additional guidance on determining
fair value when the volume and level of activity for the asset or liability have significantly
decreased when compared with normal market activity for the asset or liability. A significant
decrease in the volume or level of activity for the asset or liability is an indication that
transactions or quoted prices may not be determinative of fair value because transactions may not
be orderly. In that circumstance, further analysis of transactions or quoted prices is needed, and
an adjustment to the transactions or quoted prices may be necessary to estimate fair value. The
Company adopted this guidance for the interim reporting period ending March 31, 2009 and it did not
have a material impact on the Company’s consolidated financial position or results of operations.
SAB 111 –
In April 2009, the Securities and Exchange Commission issued Staff Accounting Bulletin
No. 111 (“SAB 111”). SAB 111 amends Topic 5.M. in the Staff Accounting Bulletin series entitled
Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities
. On April 9,
2009, the FASB issued new guidance impacting FASB ASC 320-10, Investments – Debt and Equity
Securities (FASB Staff Position No. FAS 115-2 and FAS 124-2,
Recognition and Presentation of
Other-Than-Temporary Impairments
). SAB 111 maintains the previous views related to equity
securities and amends Topic 5.M. to exclude debt securities from its scope. SAB 111 was effective
for the Company as of March 31, 2009. There was no material impact to Old National’s consolidated
financial position or results of operations upon adoption.
SAB 112 –
In June 2009, the Securities and Exchange Commission issued Staff Accounting Bulletin No.
112 (“SAB 112”). SAB 112 revises or rescinds portions of the interpretative guidance included in
the Staff Accounting Bulletin series in order to make the interpretative guidance consistent with
recent pronouncements by the FASB, specifically FASB ASC 805 and FASB ASC 810-10 (SFAS No. 141(R)
and SFAS No. 160). SAB 112 was effective for the Company as of June 30, 2009. There was no
material impact to Old National’s consolidated financial position or results of operations upon
adoption.
FASB ASC 323 –
In November 2008, the FASB Emerging Issues Task Force reached a consensus on FASB
ASC 323, Investments – Equity Method and Joint Ventures (Issue No. 08-6,
Equity Method Investment
Accounting Considerations
). The new guidance clarifies the accounting for certain transactions and
impairment considerations involving equity method investments. An equity investor shall not
separately test an investee’s underlying assets for impairment but will recognize its share of any
impairment charge recorded by an investee in earnings and consider the effect of the impairment on
its investment. An equity investor shall account for a share issuance by an investee as if the
investor had sold a proportionate share of its investment, with any gain or loss recognized in
earnings. The new guidance became effective for the Company on January 1, 2009 and did not have a
material impact on the Company’s consolidated financial position or results of operations.
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FASB ASC 350
– In November 2008, the FASB Emerging Issues Task Force reached a consensus on FASB
ASC 350, Intangibles – Goodwill and Other (Issue No. 08-7,
Accounting for Defensive Intangible
Assets
). The new guidance clarifies how to account for defensive intangible assets subsequent to
initial measurement. The guidance applies to acquired intangible assets in situations in which an
entity does not intend to actively use an asset but intends to hold the asset to prevent others
from obtaining access to the asset. A defensive intangible asset should be accounted for as a
separate unit of accounting with an expected life that reflects the consumption of the expected
benefits related to that asset. The benefit from holding a defensive intangible asset is the
direct and indirect cash flows resulting from the entity preventing others from using the asset.
The new guidance was effective for intangible assets acquired on or after January 1, 2009 and did
not have a material impact on the Company’s consolidated financial position or results of
operations.
FASB ASC 260-10 –
In June 2008, the FASB issued new guidance impacting FASB ASC 260-10, Earnings
Per Share (FSP No. EITF 03-06-1,
Determining Whether Instruments Granted in Share-Based Payment
Transactions are Participating Securities
). This new guidance concluded that all outstanding
unvested share-based payment awards that contain rights to nonforfeitable dividends participate in
undistributed earnings with common shareholders and therefore are considered participating
securities for purposes of computing earnings per share. Entities that have participating
securities that are not convertible into common stock are required to use the “two-class” method of
computing earnings per share. The two-class method is an earnings allocation formula that
determines earnings per share for each class of common stock and participating security according
to dividends declared (or accumulated) and participation rights in undistributed earnings. This
new guidance was effective for fiscal years beginning after December 15, 2008 and interim periods
within those fiscal years. This new guidance became effective for the Company on January 1, 2009
and did not have a material impact on the Company’s consolidated financial position or results of
operations.
FASB ASC 820-10 –
In August 2009, the FASB issued an update (ASC No. 2009-05, Measuring Liabilities
at Fair Value) impacting FASB ASC 820-10, Fair Value Measurements and Disclosures. The update
provides clarification about measuring liabilities at fair value in circumstances where a quoted
price in an active market for an identical liability is not available and the valuation techniques
that should be used. The update also clarifies that when estimating the fair value of a liability,
a reporting entity is not required to include a separate input or adjustment to other inputs
relating to the existence of a restriction that prevents the transfer of the liability. This
update became effective for the Company for the reporting period ending September 30, 2009 and did
not have a material impact on the Company’s consolidated financial position or results of
operations.
FASB ASC 820-10
- In September 2009, the FASB issued an update (ASC No. 2009-12, Investments in
Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)) impacting FASB ASC
820-10, Fair Value Measurements and Disclosures. The amendments in this update permit, as a
practical expedient, a reporting entity to measure the fair value of an investment that is within
the scope of the amendments in this update on the basis of the net asset value per share of the
investment (or its equivalent) if the net asset value of the investment is calculated in a manner
consistent with the measurement principles of Topic 946, Financial Services-Investment Companies.
The amendments in this update also require disclosures by major category of investment about the
attributes of investments within the scope of the amendments in this update, such as the nature of
any restrictions on the ability to redeem an investment on the measurement date. This update
became effective for the Company for interim and annual reporting periods ending after December 15,
2009 and did not have a material impact on the Company’s consolidated financial position or results
of operations.
FASB ASC 505-20 –
In January 2010, the FASB issued an update (ASC No. 2010-01, Accounting for
Distributions to Shareholders with Components of Stock and Cash) impacting FASB ASC 505-20, Equity
– Stock Dividends and Stock Splits. The amendments in this update clarify that the stock portion
of a distribution to shareholders that allows them to elect to receive cash or stock with a
potential limitation on the total amount of cash that all shareholders can elect to receive in the
aggregate is considered a share issuance that is reflected in earnings per share and is not a stock
dividend. This update became effective for the Company for interim and annual periods ending after
December 15, 2009 and did not have a material impact on the Company’s consolidated financial
position or results of operations.
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FASB ASC 810-10
– In January 2010, the FASB issued an update (ASC No. 2010-02, Accounting and
Reporting for Decreases in Ownership of a Subsidiary – a Scope Clarification) impacting FASB ASC
810-10, Consolidation. The amendments in this update address implementation issues related to the
changes in ownership provisions originally issued as FASB Statement 160. It also improves the
disclosures related to retained investments in a deconsolidated subsidiary or a preexisting
interest held by an acquirer in a business combination. This update became effective for the
Company for interim and annual periods ending after December 15, 2009 and did not have a material
impact on the Company’s consolidated financial position or results of operations.
FASB ASC 820-10
- In January 2010, the FASB issued an update (ASC No. 2010-06, Improving
Disclosures about Fair Value Measurements) impacting FASB ASC 820-10, Fair Value Measurements and
Disclosures. The amendments in this update require new disclosures about significant transfers in
and out of Level 1 and Level 2 fair value measurements. The amendments also require a reporting
entity to provide information about activity for purchases, sales, issuances and settlements in
Level 3 fair value measurements and clarify disclosures about the level of disaggregation and
disclosures about inputs and valuation techniques. This update becomes effective for the Company
for interim and annual reporting periods beginning after December 15, 2009. The Company is
currently evaluating the impact of adopting the new guidance on the consolidated financial
statements.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 2009 presentation. Such
reclassifications had no effect on net income and were insignificant amounts.
ACQUISITION
On February 1, 2007, Old National acquired St. Joseph Capital Corporation (''St. Joseph’’), a
banking franchise headquartered in Mishawaka, Indiana, for $78.1 million, including acquisition
costs. Pursuant to the merger agreement, the shareholders of St. Joseph received $40.00 in cash
for each share of St. Joseph stock in an all-cash transaction. Goodwill of $45.8 million was
recorded, of which none is deductible for tax purposes. In addition, intangible assets totaling
$14.5 million related to core deposits and customer relationships were recorded and are being
amortized over 10 to 11 years. See Note 7 to the consolidated financial statements for additional
information. On the date of acquisition, unaudited financial statements of St. Joseph showed
assets of $452.9 million, which included $336.6 million of loans and $78.6 million of securities,
$357.3 million of deposits and year-to-date net interest income and other income of $0.8 million
and net loss of $3.3 million.
On March 20, 2009, Old National completed its acquisition of the Indiana retail branch banking
network of Citizens Financial Group, which consisted of 65 branches and a training facility. The
branches are located primarily in the Indianapolis area, with additional locations in the
Lafayette, Fort Wayne, Anderson and Bloomington, Indiana markets. Pursuant to the terms of the
purchase agreement, Old National paid Citizens Financial Group approximately $17.2 million. In
accordance with FASB ASC 805 (SFAS No. 141(R) –
Business Combinations
), Old National has expensed
approximately $5.1 million of costs related to the business combination and recorded goodwill of
$8.7 million and $11.2 million of intangible assets. The intangible assets are related to core
deposits and are being amortized on an accelerated basis over 7 years. See Note 7 to the
consolidated financial statements for additional information. On the date of acquisition, Old
National assumed deposit liabilities valued at approximately $427 million and acquired a portfolio
of loans valued at approximately $5.6 million.
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The following tables summarize the amortized cost and fair value of the available-for-sale and
held-to-maturity investment securities portfolio at December 31 and the corresponding amounts of
unrealized gains and losses therein:
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| (dollars in thousands) | Cost | Gains | Losses | Value | ||||||||||||
|
2009
|
||||||||||||||||
|
Available-for-Sale
|
||||||||||||||||
|
U.S. Treasury
|
$ | 1,002 | $ | 1 | $ | — | $ | 1,003 | ||||||||
|
U.S. Government-sponsored entities and agencies
|
918,366 | 3,260 | (7,389 | ) | 914,237 | |||||||||||
|
Mortgage-backed securities — Agency
|
688,439 | 19,783 | (93 | ) | 708,129 | |||||||||||
|
Mortgage-backed securities — Non-agency
|
216,215 | 933 | (42,551 | ) | 174,597 | |||||||||||
|
States and political subdivisions
|
508,496 | 27,159 | (1,060 | ) | 534,595 | |||||||||||
|
Pooled trust prefered securities
|
28,498 | — | (16,100 | ) | 12,398 | |||||||||||
|
Other securities
|
138,200 | 6,098 | (3,038 | ) | 141,260 | |||||||||||
|
|
||||||||||||||||
|
Total available-for-sale securities
|
$ | 2,499,216 | $ | 57,234 | $ | (70,231 | ) | $ | 2,486,219 | |||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Held-to-Maturity
|
||||||||||||||||
|
U.S. Government-sponsored entities and agencies
|
$ | 227,461 | $ | 2,029 | $ | (1,613 | ) | $ | 227,877 | |||||||
|
Mortgage-backed securities — Agency
|
165,639 | 3,934 | — | 169,573 | ||||||||||||
|
Other securities
|
2,909 | — | (406 | ) | 2,503 | |||||||||||
|
|
||||||||||||||||
|
Total held-to-maturity securities
|
$ | 396,009 | $ | 5,963 | $ | (2,019 | ) | $ | 399,953 | |||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
2008
|
||||||||||||||||
|
Available-for-Sale
|
||||||||||||||||
|
U.S. Government-sponsored entities and agencies
|
$ | 381,634 | $ | 7,644 | $ | — | $ | 389,278 | ||||||||
|
Mortgage-backed securities — Agency
|
850,222 | 15,125 | (586 | ) | 864,761 | |||||||||||
|
Mortgage-backed securities — Non-agency
|
276,842 | 318 | (60,302 | ) | 216,858 | |||||||||||
|
States and political subdivisions
|
471,246 | 16,030 | (5,072 | ) | 482,204 | |||||||||||
|
Pooled trust preferred securities
|
48,853 | — | (29,186 | ) | 19,667 | |||||||||||
|
Other securities
|
160,848 | 883 | (9,473 | ) | 152,258 | |||||||||||
|
|
||||||||||||||||
|
Total available-for-sale securities
|
$ | 2,189,645 | $ | 40,000 | $ | (104,619 | ) | $ | 2,125,026 | |||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Held-to-Maturity
|
||||||||||||||||
|
Mortgage-backed securities
|
$ | 90,987 | $ | 1,529 | $ | — | $ | 92,516 | ||||||||
|
Other securities
|
8,674 | — | (359 | ) | 8,315 | |||||||||||
|
|
||||||||||||||||
|
Total held-to-maturity securities
|
$ | 99,661 | $ | 1,529 | $ | (359 | ) | $ | 100,831 | |||||||
|
|
||||||||||||||||
Proceeds from sales of investment securities available-for-sale were $1.042 billion in 2009,
$281.0 million in 2008 and $205.4 million in 2007. In 2009, realized gains were $28.2 million and
losses were $0.9 million. Included in the realized gains is $1.1 million of gains that resulted
from approximately $353.8 million of investment securities which were called by the issuers. Also
impacting investment securities in 2009 are other-than-temporary-impairment charges related to
credit loss on six pooled trust preferred securities and ten non-agency mortgage-backed securities
in the amount of $24.8 million, described below. In 2008, realized gains were $9.5 million and
losses were $1.9 million for a net realized gain of $7.6 million. The majority of this gain, or
$5.4 million, resulted from approximately $405.2 million of investment securities which were called
by the issuers. In 2007, realized gains were $1.2 million and losses were $4.2 million. At
December 31, investment securities were pledged to secure public and other funds with a carrying
value of $1.514 billion in 2009 and $1.262 billion in 2008.
67
Table of Contents
At December 31, 2009, Old National had a concentration of investment securities issued by certain
states and their political subdivisions with the following aggregate market values: $169.6 million
by Indiana, which represented 20.1% of shareholders’ equity. At December 31, 2008, Old National
had a concentration of investment securities issued by certain states and their political
subdivisions with the following aggregate market values: $183.3 million by Indiana, which
represented 25.1% of shareholders’ equity, and $82.3 million by Texas, which represented 11.3% of
shareholders’ equity.
All of the mortgage-backed securities in the investment portfolio are residential mortgage-backed
securities. The amortized cost and fair value of the investment securities portfolio are shown by
expected maturity. Expected maturities may differ from contractual maturities if borrowers have
the right to call or prepay obligations with or without call or prepayment penalties. Weighted
average yield is based on amortized cost.
| 2009 | Weighted | 2008 | Weighted | |||||||||||||||||||||
| Amortized | Fair | Average | Amortized | Fair | Average | |||||||||||||||||||
| (dollars in thousands) | Cost | Value | Yield | Cost | Value | Yield | ||||||||||||||||||
|
Maturity
|
||||||||||||||||||||||||
|
Available-for-sale
|
||||||||||||||||||||||||
|
Within one year
|
$ | 189,690 | $ | 178,687 | 3.97 | % | $ | 156,293 | $ | 156,558 | 4.94 | % | ||||||||||||
|
One to five years
|
1,019,693 | 1,012,714 | 3.89 | 1,002,564 | 956,394 | 4.96 | ||||||||||||||||||
|
Five to ten years
|
350,866 | 357,566 | 4.61 | 382,923 | 382,311 | 5.78 | ||||||||||||||||||
|
Beyond ten years
|
938,967 | 937,252 | 5.28 | 647,865 | 629,763 | 6.04 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 2,499,216 | $ | 2,486,219 | 4.52 | % | $ | 2,189,645 | $ | 2,125,026 | 5.42 | % | ||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Held-to-maturity
|
||||||||||||||||||||||||
|
One to five years
|
$ | 168,548 | $ | 172,076 | 3.64 | % | $ | 99,661 | $ | 100,831 | 4.50 | % | ||||||||||||
|
Five to ten years
|
227,461 | 227,877 | 3.88 | — | — | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 396,009 | $ | 399,953 | 3.78 | % | $ | 99,661 | $ | 100,831 | 4.50 | % | ||||||||||||
|
|
||||||||||||||||||||||||
68
Table of Contents
The following table summarizes the investment securities with unrealized losses at December 31
by aggregated major security type and length of time in a continuous unrealized loss position:
| Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| (dollars in thousands) | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
|
2009
|
||||||||||||||||||||||||
|
Available-for-Sale
|
||||||||||||||||||||||||
|
U.S. Government-sponsored entities and agencies
|
$ | 261,186 | $ | (7,389 | ) | $ | — | $ | — | $ | 261,186 | $ | (7,389 | ) | ||||||||||
|
Mortgage-backed securities — Agency
|
18,488 | (93 | ) | 37 | — | 18,525 | (93 | ) | ||||||||||||||||
|
Mortgage-backed securities — Non-agency
|
1,141 | (8 | ) | 140,622 | (42,543 | ) | 141,763 | (42,551 | ) | |||||||||||||||
|
States and political subdivisions
|
75,918 | (871 | ) | 6,783 | (189 | ) | 82,701 | (1,060 | ) | |||||||||||||||
|
Pooled trust preferrred securities
|
— | — | 12,398 | (16,100 | ) | 12,398 | (16,100 | ) | ||||||||||||||||
|
Other securities
|
4,445 | (40 | ) | 8,891 | (2,998 | ) | 13,336 | (3,038 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Total available-for-sale
|
$ | 361,178 | $ | (8,401 | ) | $ | 168,731 | $ | (61,830 | ) | $ | 529,909 | $ | (70,231 | ) | |||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Held-to-Maturity
|
||||||||||||||||||||||||
|
U.S. Government-sponsored entities and agencies
|
$ | 93,467 | $ | (1,613 | ) | $ | — | $ | — | $ | 93,467 | $ | (1,613 | ) | ||||||||||
|
Other securities
|
— | — | 2,502 | (406 | ) | 2,502 | (406 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total held-to-maturity
|
$ | 93,467 | $ | (1,613 | ) | $ | 2,502 | $ | (406 | ) | $ | 95,969 | $ | (2,019 | ) | |||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
2008
|
||||||||||||||||||||||||
|
Available-for-Sale
|
||||||||||||||||||||||||
|
Mortgage-backed securities — Agency
|
$ | 66,047 | $ | (212 | ) | $ | 33,689 | $ | (374 | ) | $ | 99,736 | $ | (586 | ) | |||||||||
|
Mortgage-backed securities — Non-agency
|
83,360 | (13,259 | ) | 116,192 | (47,043 | ) | 199,552 | (60,302 | ) | |||||||||||||||
|
States and political subdivisions
|
121,276 | (5,072 | ) | — | — | 121,276 | (5,072 | ) | ||||||||||||||||
|
Pooled trust preferrred securities
|
— | — | 19,668 | (29,186 | ) | 19,668 | (29,186 | ) | ||||||||||||||||
|
Other securities
|
81,326 | (7,793 | ) | 10,117 | (1,680 | ) | 91,443 | (9,473 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Total available-for-sale
|
$ | 352,009 | $ | (26,336 | ) | $ | 179,666 | $ | (78,283 | ) | $ | 531,675 | $ | (104,619 | ) | |||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Held-to-Maturity
|
||||||||||||||||||||||||
|
Other securities
|
$ | — | $ | — | $ | 8,315 | $ | (359 | ) | $ | 8,315 | $ | (359 | ) | ||||||||||
|
|
||||||||||||||||||||||||
|
Total held-to-maturity
|
$ | — | $ | — | $ | 8,315 | $ | (359 | ) | $ | 8,315 | $ | (359 | ) | ||||||||||
|
|
||||||||||||||||||||||||
During the second quarter of 2009, approximately $230.1 million of U.S. government-sponsored
entity and agency securities were transferred from the available-for-sale portfolio to the
held-to-maturity portfolio at fair value. The $1.8 million unrealized holding gain at the date of
transfer shall continue to be reported as a separate component of shareholders’ equity and will be
amortized over the remaining life of the securities as an adjustment of yield.
Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a
quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.
The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two
general segments and applying the appropriate OTTI model. Investment securities classified as
available for sale or held-to-maturity are generally evaluated for OTTI under FASB ASC 320 (SFAS
No. 115,
Accounting for Certain Investments in Debt and Equity Securities
). However, certain
purchased beneficial interests, including non-agency mortgage-backed securities, asset-backed
securities, and collateralized debt obligations, that had credit ratings at the time of purchase of
below AA are evaluated using the model outlined in FASB ASC 325-10 (EITF Issue No. 99-20,
Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial
Interests that Continue to be Held by a Transfer in Securitized Financial Assets
)
.
69
Table of Contents
In determining OTTI under the FASB ASC 320 (SFAS No. 115) model, management considers many factors,
including: (1) the length of time and the extent to which the fair value has been less than cost,
(2) the financial condition and near-term prospects of the issuer, (3) whether the market decline
was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the
debt security or more likely than not will be required to sell the debt security before its
anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a
high degree of subjectivity and judgment and is based on the information available to management at
a point in time. The second segment of the portfolio uses the OTTI guidance provided by FASB ASC
325-10 (EITF 99-20) that is specific to purchased beneficial interests that, on the purchase date,
were rated below AA. Under the FASB ASC 325-10 model, the Company compares the present value of
the remaining cash flows as estimated at the preceding evaluation date to the current expected
remaining cash flows. An OTTI is deemed to have occurred if there has been an adverse change in
the remaining expected future cash flows.
When other-than-temporary-impairment occurs under either model, the amount of the
other-than-temporary-impairment recognized in earnings depends on whether an entity intends to sell
the security or more likely than not will be required to sell the security before recovery of its
amortized cost basis less any current-period credit loss. If an entity intends to sell or more
likely than not will be required to sell the security before recovery of its amortized cost basis
less any current-period credit loss, the other-than-temporary-impairment shall be recognized in
earnings equal to the entire difference between the investment’s amortized cost basis and its fair
value at the balance sheet date. If an entity does not intend to sell the security and it is not
more likely than not that the entity will be required to sell the security before recovery of its
amortized cost basis less any current-period loss, the other-than-temporary-impairment shall be
separated into the amount representing the credit loss and the amount related to all other factors.
The amount of the total other-than-temporary-impairment related to the credit loss is determined
based on the present value of cash flows expected to be collected and is recognized in earnings.
The amount of the total other-than-temporary-impairment related to other factors shall be
recognized in other comprehensive income, net of applicable taxes. The previous amortized cost
basis less the other-than-temporary-impairment recognized in earnings shall become the new
amortized cost basis of the investment.
As of December 31, 2009, Old National’s security portfolio consisted of 1,078 securities, 136 of
which were in an unrealized loss position. The majority of unrealized losses are related to the
Company’s non-agency mortgage-backed and pooled trust preferred securities, as discussed below.
Non-agency Mortgage-backed Securities
At December 31, 2009, the Company’s securities portfolio contained non-agency collateralized
mortgage obligations with a market value of $174.6 million which had net unrealized losses of
approximately $41.6 million. All of these securities are residential mortgage-backed securities.
These non-agency mortgage-backed securities were rated AAA at purchase and are not within the scope
of FASB ASC 325-10 (EITF 99-20). As of December 31, 2009 ten of these securities were rated below
investment grade with grades ranging from B to CC. Three of the ten securities are rated B and
have a market value of $27.2 million, four of the securities are rated CCC with a market value of
$34.9 million and three of the securities are rated CC with a market value of $33.4 million. These
securities were evaluated to determine if the underlying collateral is expected to experience loss,
resulting in a principal write-down of the notes. As part of the evaluation, a detailed analysis
of deal-specific data was obtained from remittance reports provided by the trustee and data from
the servicer. The collateral was broken down into several distinct buckets based on loan
performance characteristics in order to apply different assumptions to each bucket. The most
significant drivers affecting loan performance were examined including original loan-to-value
(“LTV”), underlying property location and the loan status. The loans in the current status bucket
were further divided based on their original LTV: a high-LTV and a low-LTV group to which different
default curves and severity percentages were applied. The high-LTV group was further bifurcated
into loans originated in high-risk states and all other states and a higher default-curve and
severity percentages were applied to loans originated in the high-risk states. Different default
curves and severity rates were applied to the remaining non-current collateral buckets. Using
these collateral-specific assumptions, a model was built to project the future performance of the
instrument. Based on this analysis of the underlying collateral, Old National recorded $4.4
million of other-than-temporary impairment on these securities for the twelve months ended December
31, 2009. The market value of these non-agency mortgage-backed securities was $95.4 million at
December 31, 2009.
70
Table of Contents
Pooled Trust Preferred Securities
Seven of the pooled trust preferred securities in our portfolio fall within the scope of FASB ASC
325-10 (EITF 99-20) and include $14.4 million amortized cost. These securities were rated A2 and
A3 at inception, but at December 31, 2009, Moody’s rated one security Baa2, one security Caa3 and
five securities Ca. The issuers in these securities are primarily banks, but some of the pools do
include a limited number of insurance companies. The Company uses the OTTI evaluation model to
compare the present value of expected cash flows to the previous estimate to determine whether an
adverse change in cash flows has occurred during the quarter. The OTTI model considers the
structure and term of the collateralized debt obligation (“CDO”) and the financial condition of the
underlying issuers. Specifically, the model details interest rates, principal balances of note
classes and underlying issuers, the timing and amount of interest and principal payments of the
underlying issuers, and the allocation of the payments to the note classes. The current estimate
of expected cash flows is based on the most recent trustee reports and any other relevant market
information including announcements of interest payment deferrals or defaults of underlying trust
preferred securities. Assumptions used in the model include expected future default rates and
prepayments. We assume no recoveries on defaults and a limited number of recoveries on current or
projected interest payment deferrals. In addition we use the model to “stress” each CDO, or make
assumptions more severe than expected activity, to determine the degree to which assumptions could
deteriorate before the CDO could no longer fully support repayment of Old National’s note class.
For the twelve months ended December 31, 2009, our model indicated other-than-temporary-impairment
losses on six securities of $28.6 million, of which $20.4 million was recorded as expense and $8.2
million was recorded in other comprehensive income. At December 31, 2009, the book value of these
six securities was $13.2 million and they remained classified as available for sale. Together, the
seven securities subject to FASB ASC 325-10 accounted for $8.4 million of the unrealized loss in
the pooled trust preferred securities category at December 31, 2009. Two of our pooled trust
preferred securities are not subject to FASB ASC 325-10. These securities, with unrealized losses
of $7.7 million at December 31, 2009, were evaluated using collateral-specific assumptions to
estimate the expected future interest and principal cash flows. Our analysis indicated no
other-than-temporary-impairment on these securities.
The following table details all securities with other-than-temporary-impairment, their credit
rating at December 31, 2009 and the related credit losses recognized in earnings. There were no
credit losses recognized prior to 2009.
| Amount of other-than-temporary-impairment | ||||||||||||||||||||||||||||||||
| recognized in earnings | ||||||||||||||||||||||||||||||||
| Moody’s | Book | First | Second | Third | Fourth | |||||||||||||||||||||||||||
| Vintage | Rating (1) | Value | Quarter | Quarter | Quarter | Quarter | 2009 | |||||||||||||||||||||||||
|
Non-agency
mortgage-backed
securities:
|
||||||||||||||||||||||||||||||||
|
BAFC Ser 4
|
2007 | B2 | $ | 14,106 | $ | — | $ | — | $ | — | $ | 63 | $ | 63 | ||||||||||||||||||
|
CWALT Ser 73CB
|
2005 | B3 | 7,735 | — | — | — | 83 | 83 | ||||||||||||||||||||||||
|
CWALT Ser 73CB
|
2005 | B3 | 9,646 | — | — | — | 182 | 182 | ||||||||||||||||||||||||
|
CWHL 2006-10
|
2006 | CC | 10,339 | — | — | 276 | 486 | 762 | ||||||||||||||||||||||||
|
CWHL 2005-20
|
2005 | B | 13,989 | — | — | — | 72 | 72 | ||||||||||||||||||||||||
|
FHASI Ser 4
|
2007 | CCC | 22,246 | — | — | — | 223 | 223 | ||||||||||||||||||||||||
|
RFMSI Ser S9
|
2006 | CC | 32,992 | — | — | — | 1,880 | 1,880 | ||||||||||||||||||||||||
|
RFMSI Ser S10
|
2006 | CCC | 4,436 | — | — | — | 249 | 249 | ||||||||||||||||||||||||
|
RALI QS2
|
2006 | Caa1 | 7,868 | — | — | 216 | 523 | 739 | ||||||||||||||||||||||||
|
RFMSI S1
|
2006 | B1 | 7,117 | — | — | — | 176 | 176 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
130,474 | — | — | 492 | 3,937 | 4,429 | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Pooled trust
preferred securities:
|
||||||||||||||||||||||||||||||||
|
TROPC
|
2003 | Ca | 1,447 | 828 | 1,583 | 394 | 712 | 3,517 | ||||||||||||||||||||||||
|
MM Community Funding IX
|
2003 | Caa3 | 2,310 | 282 | 1,178 | 1,152 | — | 2,612 | ||||||||||||||||||||||||
|
Reg Div Funding
|
2004 | Ca | 4,601 | 1,281 | 2,915 | 110 | 893 | 5,199 | ||||||||||||||||||||||||
|
Pretsl XII
|
2003 | Ca | 2,895 | — | 810 | 517 | 570 | 1,897 | ||||||||||||||||||||||||
|
Pretsl XV
|
2004 | Ca | 1,693 | — | 895 | 816 | 1,663 | 3,374 | ||||||||||||||||||||||||
|
Reg Div Funding
|
2005 | Ca | 295 | — | 483 | 1,581 | 1,703 | 3,767 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
|
13,241 | 2,391 | 7,864 | 4,570 | 5,541 | 20,366 | ||||||||||||||||||||||||||
|
Total other-than-temporary-
impairment recognized in earnings
|
$ | 2,391 | $ | 7,864 | $ | 5,062 | $ | 9,478 | $ | 24,795 | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
| (1) | If Moody’s rating not available, lowest rating was used. |
71
Table of Contents
Since January 1, 2008, residential loans that Old National has committed to sell have been recorded
at fair value in accordance with FASB ASC 825-10 (SFAS No. 159 –
The Fair Value Option for
Financial Assets and Financial Liabilities
). Prior to this, these residential loans had been
recorded at the lower of cost or market value. At December 31, 2009 and 2008, Old National had
residential loans held for sale of $17.5 million and $17.2 million, respectively.
In June 2009, Old National transferred $370.2 million of leases to held for sale status. During
the third quarter, $258.0 million of these leases were sold at a price above par; however the
transaction resulted in a loss of $1.4 million after transaction fees. Approximately $46.0 million
of the remaining leases were transferred from held for sale back to the loan portfolio at the lower
of cost or market at September 30, 2009. Approximately $55.3 million of finance leases remained
available for sale at December 31, 2009. The leases held for sale have maturities ranging from 1
to 18 years and interest rates ranging from 3.76% to 9.73%. All of the leases held for sale are to
municipalities, with various types of equipment securing the leases, and all of the leases are
current.
During 2009, commercial and commercial real estate loans held for investment of $2.6 million were
reclassified to loans held for sale at the lower of cost or fair value and sold for $2.0 million,
resulting in a write-down on loans transferred to held for sale of $0.6 million, which was recorded
as a reduction to the allowance for loan losses. At December 31, 2009, there were no loans held
for sale under this arrangement.
During 2008, commercial loans held for investment of $2.2 million were reclassified to loans held
for sale at the lower of cost or fair value and sold, with no write-down on the loans transferred.
At December 31, 2008, there were no loans held for sale under this arrangement.
The composition of loans at December 31 by lending classification was as follows:
| (dollars in thousands) | 2009 | 2008 | ||||||
|
Commercial
|
$ | 1,287,168 | $ | 1,897,966 | ||||
|
Commercial real estate
|
1,062,910 | 1,154,916 | ||||||
|
Residential real estate
|
403,391 | 496,526 | ||||||
|
Consumer credit, net of unearned income
|
1,082,017 | 1,210,951 | ||||||
|
|
||||||||
|
Total loans
|
$ | 3,835,486 | $ | 4,760,359 | ||||
|
|
||||||||
Through its affiliate bank, Old National makes loans to clients in various industries
including manufacturing, agribusiness, transportation, mining, wholesaling and retailing. Old
National predominately operates in the geographic market areas of Indiana, Illinois and Kentucky.
Old National has no concentration of commercial loans in any single industry exceeding 10% of its
portfolio.
Executive officers and directors of Old National and significant subsidiaries and their related
interests are loan clients of Old National’s affiliate bank in the normal course of business. An
analysis of the current year activity of these loans is as follows:
| (dollars in thousands) | 2009 | |||
|
Balance, January 1
|
$ | 21,126 | ||
|
New loans
|
2,860 | |||
|
Repayments
|
(7,349 | ) | ||
|
Officer and director changes
|
(925 | ) | ||
|
|
||||
|
Balance, December 31
|
$ | 15,712 | ||
|
|
||||
72
Table of Contents
Activity in the allowance for loan losses was as follows:
| (dollars in thousands) | 2009 | 2008 | 2007 | |||||||||
|
Balance, January 1,
|
$ | 67,087 | $ | 56,463 | $ | 67,790 | ||||||
|
Additions:
|
||||||||||||
|
Provision charged to expense
|
63,280 | 51,464 | 4,118 | |||||||||
|
Allowance of acquired bank
|
— | — | 5,699 | |||||||||
|
Deductions:
|
||||||||||||
|
Write-downs from loans transferred to held for sale
|
572 | — | 5,337 | |||||||||
|
Loans charged-off
|
78,039 | 51,220 | 26,938 | |||||||||
|
Recoveries
|
(17,792 | ) | (10,380 | ) | (11,131 | ) | ||||||
|
|
||||||||||||
|
Net charge-offs
|
60,819 | 40,840 | 21,144 | |||||||||
|
|
||||||||||||
|
Balance, December 31
|
$ | 69,548 | $ | 67,087 | $ | 56,463 | ||||||
|
|
||||||||||||
Individually impaired loans were as follows:
| December 31, | December 31, | |||||||
| (dollars in thousands) | 2009 | 2008 | ||||||
|
Impaired loans without an allowance for loan losses allocation
|
$ | 12,659 | $ | 13,968 | ||||
|
Impaired loans with an allowance for loan losses allocation
|
36,452 | 38,425 | ||||||
|
|
||||||||
|
Total impaired loans
|
$ | 49,111 | $ | 52,393 | ||||
|
|
||||||||
|
Allowance for loan losses allocated to impaired loans
|
$ | 14,503 | $ | 13,599 | ||||
|
|
||||||||
For the years ended December 31, 2009 and 2008, the average balance of impaired loans was
$58.6 million and $56.5 million, respectively, for which no interest income was recorded. No
additional funds are committed to be advanced in connection with impaired loans. Loans deemed
impaired are evaluated using the fair value of the underlying collateral.
Nonperforming loans were as follows:
| December 31, | December 31, | |||||||
| (dollars in thousands) | 2009 | 2008 | ||||||
|
Nonaccrual loans
|
$ | 67,016 | $ | 64,041 | ||||
|
Renegotiated loans not on nonaccrual
|
— | — | ||||||
|
|
||||||||
|
Total nonperforming loans
|
$ | 67,016 | $ | 64,041 | ||||
|
|
||||||||
|
Past due loans (90 days or more and still accruing)
|
3,501 | 2,908 | ||||||
|
|
||||||||
Nonperforming loans includes both smaller balance homogeneous loans that are collectively
evaluated for impairment and individually classified impaired loans.
From time to time, Old National may agree to modify the contractual terms of a borrower’s loan. In
cases where such modifications represent a concession to a borrower experiencing financial
difficulty, the modification is considered a troubled debt restructuring. Loans modified in a
troubled debt restructuring are placed on nonaccrual status until the Company determines the future
collection of principal and interest is reasonably assured, which generally requires that the
borrower demonstrate a period of performance according to the restructured terms of six months. At
December 31, 2009, loans modified in a troubled debt restructuring, which are included in
nonaccrual loans, totaled $10.0 million and had specific allocations of allowance for loan losses
of $3.5 million. There were no loans modified in troubled debt restructurings at December 31,
2008.
73
Table of Contents
The following table shows the changes in the carrying amount of goodwill by segment for the years
ended December 31, 2009 and 2008:
| Community | ||||||||||||
| (dollars in thousands) | Banking | Other | Total | |||||||||
|
Balance, January 1, 2009
|
$ | 119,325 | $ | 39,873 | $ | 159,198 | ||||||
|
Goodwill acquired during the period
|
8,686 | — | 8,686 | |||||||||
|
|
||||||||||||
|
Balance, December 31, 2009
|
$ | 128,011 | $ | 39,873 | $ | 167,884 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Balance, January 1, 2008
|
$ | 119,325 | $ | 39,873 | $ | 159,198 | ||||||
|
Goodwill acquired during the period
|
— | — | — | |||||||||
|
|
||||||||||||
|
Balance, December 31, 2008
|
$ | 119,325 | $ | 39,873 | $ | 159,198 | ||||||
|
|
||||||||||||
Goodwill is reviewed annually for impairment. Old National completed its most recent annual
goodwill impairment test as of August 31, 2009 and determined that no impairment existed as of this
date. Old National recorded $8.7 million of goodwill in 2009 associated with the acquisition of
the Indiana retail branch banking network of Citizens Financial Group.
The gross carrying amounts and accumulated amortization of other intangible assets at December 31,
2009 and 2008 was as follows:
| Gross Carrying | Accumulated | Net Carrying | ||||||||||
| (dollars in thousands) | Amount | Amortization | Amount | |||||||||
|
2009
|
||||||||||||
|
Amortized intangible assets:
|
||||||||||||
|
Core deposit
|
$ | 26,810 | $ | (10,794 | ) | $ | 16,016 | |||||
|
Customer business relationships
|
25,753 | (12,705 | ) | 13,048 | ||||||||
|
Customer loan relationships
|
4,413 | (1,170 | ) | 3,243 | ||||||||
|
|
||||||||||||
|
Total intangible assets
|
$ | 56,976 | $ | (24,669 | ) | $ | 32,307 | |||||
|
|
||||||||||||
|
2008
|
||||||||||||
|
Amortized intangible assets:
|
||||||||||||
|
Core deposit
|
$ | 15,623 | $ | (7,203 | ) | $ | 8,420 | |||||
|
Customer business relationships
|
25,753 | (10,189 | ) | 15,564 | ||||||||
|
Customer loan relationships
|
4,413 | (769 | ) | 3,644 | ||||||||
|
|
||||||||||||
|
Total intangible assets
|
$ | 45,789 | $ | (18,161 | ) | $ | 27,628 | |||||
|
|
||||||||||||
Other intangible assets consist of core deposit intangibles and customer relationship
intangibles and are being amortized primarily on an accelerated basis over their estimated lives,
generally over a period of 7 to 25 years. During the first quarter of 2009, Old National recorded
$11.2 million of core deposit intangibles associated with the acquisition of the branch banking
network of Citizens Financial Group, which is included in the “Community Banking” segment. (See
Note 22 to the consolidated financial statements for a description of the Company’s operating
segments.) During the first quarter of 2008, Old National recorded $0.2 million of customer
relationship intangibles associated with the purchase of an insurance book of business, which is
included in the “Other” column for segment reporting.
Old National reviews other intangible assets for possible impairment whenever events or changes in
circumstances indicate that carrying amounts may not be recoverable. Old National recorded
impairment charges of $0.5 million and $0.7 million during the fourth quarter of 2009 and the
second quarter of 2008, respectively. Both charges related to a book of business held by one of
the Company’s insurance subsidiaries which experienced the loss of two significant customers. The
insurance subsidiary is included in the “Other” column for segment reporting. Total amortization
expense including impairment charges associated with intangible assets was $6.5 million in 2009,
$4.4 million in 2008 and $3.5 million in 2007.
74
Table of Contents
Estimated amortization expense for the future years is as follows:
| Estimated | ||||
| Amortization | ||||
| (dollars in thousands) | Expense | |||
|
2010
|
$ | 6,130 | ||
|
2011
|
5,546 | |||
|
2012
|
4,840 | |||
|
2013
|
4,050 | |||
|
2014
|
3,259 | |||
|
Thereafter
|
8,482 | |||
|
|
||||
|
Total
|
$ | 32,307 | ||
|
|
||||
The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2009 and
2008 was $653.3 million and $550.0 million, respectively. At December 31, 2009, the scheduled
maturities of total time deposits were as follows:
| (dollars in thousands) | ||||
|
Due in 2010
|
$ | 1,074,639 | ||
|
Due in 2011
|
337,345 | |||
|
Due in 2012
|
244,240 | |||
|
Due in 2013
|
188,986 | |||
|
Due in 2014
|
33,060 | |||
|
Thereafter
|
129,307 | |||
|
SFAS 133 fair value hedge
|
(23 | ) | ||
|
|
||||
|
Total
|
$ | 2,007,554 | ||
|
|
||||
The following table presents the distribution of Old National’s short-term borrowings and related
weighted-average interest rates for each of the years ended December 31:
| Other | ||||||||||||||||
| Federal Funds | Repurchase | Short-term | ||||||||||||||
| (dollars in thousands) | Purchased | Agreements | Borrowings | Total | ||||||||||||
|
2009
|
||||||||||||||||
|
Outstanding at year-end
|
$ | 1,483 | $ | 318,088 | $ | 11,573 | $ | 331,144 | ||||||||
|
Average amount outstanding
|
155,982 | 297,148 | 74,017 | 527,147 | ||||||||||||
|
Maximum amount outstanding at any month-end
|
488,392 | 319,590 | 158,809 | |||||||||||||
|
Weighted average interest rate:
|
||||||||||||||||
|
During year
|
0.20 | % | 0.20 | % | 0.68 | % | 0.27 | % | ||||||||
|
End of year
|
— | 0.17 | — | 0.16 | ||||||||||||
|
2008
|
||||||||||||||||
|
Outstanding at year-end
|
$ | 287,155 | $ | 332,505 | $ | 29,963 | $ | 649,623 | ||||||||
|
Average amount outstanding
|
233,648 | 324,659 | 58,628 | 616,935 | ||||||||||||
|
Maximum amount outstanding at any month-end
|
403,201 | 362,532 | 130,393 | |||||||||||||
|
Weighted average interest rate:
|
||||||||||||||||
|
During year
|
2.09 | % | 1.23 | % | 3.45 | % | 1.77 | % | ||||||||
|
End of year
|
0.20 | 0.26 | 0.77 | 0.26 | ||||||||||||
75
Table of Contents
Other Short-term Borrowings
Line of Credit
During the first quarter of 2008, Old National entered into a $100 million revolving credit
facility at the parent company level. Three unrelated financial institutions serve as lenders for
the facility. During part of 2008, $55 million was outstanding under the revolving credit facility
and was included in other short-term borrowings. The facility had an interest rate of LIBOR plus
1.00% and a maturity of 364 days. There was no amount outstanding as of December 31, 2008. On
February 13, 2009, the line of credit was terminated.
During the second quarter of 2009, Old National entered into a $30 million revolving credit
facility at the parent level. The facility had an interest rate of LIBOR plus 2.00% and a maturity
of 364 days. There was no amount outstanding as of December 31, 2009.
Term Auction Facility
On January 2, 2009, Old National borrowed $100 million from the Federal Reserve under its Term
Auction Facility. The borrowing had an interest rate of .20% and a maturity of 83 days. On
January 15, 2009, Old National borrowed an additional $50 million from the Federal Reserve under
the Term Auction Facility. The additional borrowing had an interest rate of .25% and a maturity of
28 days. On February 12, 2009, the $50 million borrowing was rolled over into new debt with an
interest rate of .25% and a maturity date of March 12, 2009. On March 12, 2009, the $50 million
borrowing was rolled over into new debt with an interest rate of .25% and a maturity date of April
9, 2009. On April 9, 2009, the $50 million debt matured and was replaced with $100 million of new
debt with an interest rate of .25% and a maturity date of May 7, 2009. On April 23, 2009, Old
National borrowed an additional $50 million with an interest rate of .25% and a maturity date of
July 16, 2009. On June 4, 2009, Old National borrowed an additional $50 million with an interest
rate of .25% and a maturity date of July 2, 2009. There was no amount outstanding under the Term
Auction Facility as of December 31, 2009.
Treasury Investment Program
As of December 31, 2009, Old National had $11.6 million of Treasury funds under the Treasury Tax
and Loan Account program. These funds typically have a short duration, are collateralized and can
be withdrawn by the Treasury Department at any time. At December 31, 2009, the effective interest
rate on these funds was 0%.
76
Table of Contents
The following table summarizes Old National and its subsidiaries’ other borrowings at December 31:
| (dollars in thousands) | 2009 | 2008 | ||||||
|
Old National Bancorp:
|
||||||||
|
Senior unsecured notes (fixed rate 5.00%)
maturing May 2010
|
$ | 50,000 | $ | 50,000 | ||||
|
Junior subordinated debentures (fixed rates 6.27% to 8.00% and
variable rate 3.30%) maturing maturing April 2032 to March 2035
|
108,000 | 108,000 | ||||||
|
SFAS 133 fair value hedge and other basis adjustments
|
(726 | ) | (771 | ) | ||||
|
Old National Bank:
|
||||||||
|
Securities sold under agreements to repurchase (fixed rates
2.45% to 3.46% and variable rate 3.08%) maturing December 2010
to October 2014
|
99,000 | 99,000 | ||||||
|
Federal Home Loan Bank advances (fixed rates 3.20% to 8.34% and
variable rates 1.85% to 2.56%) maturing August 2011 to January
2023
|
289,974 | 425,198 | ||||||
|
Subordinated bank notes (fixed rate 6.75%) maturing October 2011
|
150,000 | 150,000 | ||||||
|
Capital lease obligation
|
4,350 | 4,390 | ||||||
|
SFAS 133 fair value hedge and other basis adjustments
|
(1,539 | ) | (950 | ) | ||||
|
|
||||||||
|
Total other borrowings
|
$ | 699,059 | $ | 834,867 | ||||
|
|
||||||||
Contractual maturities of long-term debt at December 31, 2009, were as follows:
| (dollars in thousands) | ||||
|
Due in 2010
|
$ | 74,043 | ||
|
Due in 2011
|
225,046 | |||
|
Due in 2012
|
100,688 | |||
|
Due in 2013
|
76,170 | |||
|
Due in 2014
|
50,889 | |||
|
Thereafter
|
174,488 | |||
|
SFAS 133 fair value hedge and other basis adjustments
|
(2,265 | ) | ||
|
|
||||
|
Total
|
$ | 699,059 | ||
|
|
||||
FEDERAL HOME LOAN BANK
Federal Home Loan Bank advances had weighted-average rates of 3.68% and 3.81% at December 31, 2009,
and 2008, respectively. These borrowings are collateralized 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, subject to certain
limitations, 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.
JUNIOR SUBORDINATED DEBENTURES
Junior subordinated debentures related to trust preferred securities are classified in “other
borrowings”. These securities qualify as Tier 1 capital for regulatory purposes, subject to
certain limitations.
77
Table of Contents
Old National guarantees the payment of distributions on the trust preferred securities issued by
ONB Capital Trust II. 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 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 April 12, 2007. Costs associated
with the issuance of these trust preferred securities totaling $3.3 million in 2002 were
capitalized and are being amortized through the maturity dates of the securities. The unamortized
balance is included in other assets in the consolidated balance sheet.
In 2007, Old National acquired St. Joseph Capital Trust I and St. Joseph Capital Trust II in
conjunction with its acquisition of St. Joseph Capital Corporation. Old National guarantees the
payment of distributions on the trust preferred securities issued by St. Joseph Capital Trust I and
St. Joseph Capital Trust II. St. Joseph Capital Trust I issued $3.0 million in preferred
securities in July 2003. The preferred securities carry a variable rate of interest priced at the
three-month LIBOR plus 305 basis points, payable quarterly and maturing on July 11, 2033. Proceeds
from the issuance of these securities were used to purchase junior subordinated debentures with the
same financial terms as the securities issued by St. Joseph Capital Trust I. St. Joseph Capital
Trust II issued $5.0 million in preferred securities in March 2005. The preferred securities have
a cumulative annual distribution rate of 6.27% until March 2010 when it will carry a variable rate
of interest priced at the three-month LIBOR plus 175 basis points, payable quarterly and maturing
on March 17, 2035. Proceeds from the issuance of these securities were used to purchase junior
subordinated debentures with the same financial terms as the securities issued by St. Joseph
Capital Trust II. 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
September 30, 2008 (for debentures owned by St. Joseph Capital Trust I) and on or after March 31,
2010 (for debentures owned by St. Joseph 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.
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
obligation 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
borrowing rate for similar types of borrowing arrangements.
At December 31, 2009, the future minimum lease payments under the capital lease were as follows:
| (dollars in thousands) | ||||
|
2010
|
$ | 390 | ||
|
2011
|
390 | |||
|
2012
|
390 | |||
|
2013
|
390 | |||
|
2014
|
410 | |||
|
Thereafter
|
10,903 | |||
|
|
||||
|
Total minimum lease payments
|
12,873 | |||
|
Less amounts representing interest
|
8,523 | |||
|
|
||||
|
Present value of net minimum lease payments
|
$ | 4,350 | ||
|
|
||||
78
Table of Contents
Following is a summary of the major items comprising the differences in taxes computed at the
federal statutory tax rate and as recorded in the consolidated statement of income for the years
ended December 31:
| (dollars in thousands) | 2009 | 2008 | 2007 | |||||||||
|
Provision at statutory rate of 35%
|
$ | (2,582 | ) | $ | 21,560 | $ | 32,275 | |||||
|
Tax-exempt income
|
(14,854 | ) | (15,695 | ) | (14,298 | ) | ||||||
|
Reserve for unrecognized tax benefits
|
(706 | ) | (6,611 | ) | (1,847 | ) | ||||||
|
State income taxes
|
(3,829 | ) | (398 | ) | 140 | |||||||
|
Other, net
|
857 | 267 | 1,053 | |||||||||
|
|
||||||||||||
|
Income tax expense (benefit)
|
$ | (21,114 | ) | $ | (877 | ) | $ | 17,323 | ||||
|
|
||||||||||||
|
Effective tax rate
|
286.2 | % | (1.4 | )% | 18.8 | % | ||||||
|
|
||||||||||||
The effective tax rate varied significantly from 2007 to 2009 due to large fluctuations in
pre-tax income while the other items affecting the rate, in particular tax-exempt income, remained
relatively stable. The provision for income taxes consisted of the following components for the
years ended December 31:
| (dollars in thousands) | 2009 | 2008 | 2007 | |||||||||
|
Income taxes currently payable
|
||||||||||||
|
Federal
|
$ | 4,248 | $ | 8,269 | $ | 32,732 | ||||||
|
State
|
— | (612 | ) | 216 | ||||||||
|
Deferred income taxes related to:
|
||||||||||||
|
Provision for loan losses
|
(3,042 | ) | (5,982 | ) | 4,443 | |||||||
|
Other, net
|
(22,320 | ) | (2,552 | ) | (20,068 | ) | ||||||
|
|
||||||||||||
|
Deferred income tax benefit
|
(25,362 | ) | (8,534 | ) | (15,625 | ) | ||||||
|
|
||||||||||||
|
Provision for (benefit from) income taxes
|
$ | (21,114 | ) | $ | (877 | ) | $ | 17,323 | ||||
|
|
||||||||||||
79
Table of Contents
Significant components of net deferred tax assets (liabilities) were as follows at December
31:
| (dollars in thousands) | 2009 | 2008 | ||||||
|
Deferred Tax Assets
|
||||||||
|
Allowance for loan losses, net of recapture
|
$ | 35,183 | $ | 32,141 | ||||
|
Benefit plan accruals
|
6,131 | 3,107 | ||||||
|
AMT credit
|
25,075 | 15,999 | ||||||
|
Unrealized losses on available- for-sale investment securities
|
5,276 | 24,106 | ||||||
|
Unrealized losses on hedges
|
— | 311 | ||||||
|
Unrealized losses on benefit plans
|
9,102 | 8,346 | ||||||
|
Net operating loss
|
3,578 | 681 | ||||||
|
Premises and equipment
|
37,715 | 38,566 | ||||||
|
Other-than-temporary-impairment
|
9,451 | — | ||||||
|
Other, net
|
5,223 | 5,726 | ||||||
|
|
||||||||
|
Total deferred tax assets
|
136,734 | 128,983 | ||||||
|
|
||||||||
|
Deferred Tax Liabilities
|
||||||||
|
Accretion on investment securities
|
(993 | ) | (437 | ) | ||||
|
Lease receivable, net
|
(7,434 | ) | (7,008 | ) | ||||
|
Purchase accounting
|
(11,285 | ) | (10,899 | ) | ||||
|
Unrealized gains on held-to-maturity securities
|
(541 | ) | — | |||||
|
Unrealized gains on hedges
|
(131 | ) | — | |||||
|
Other, net
|
(3,533 | ) | (4,127 | ) | ||||
|
|
||||||||
|
Total deferred tax liabilities
|
(23,917 | ) | (22,471 | ) | ||||
|
|
||||||||
|
Net deferred tax assets
|
$ | 112,817 | $ | 106,512 | ||||
|
|
||||||||
No valuation allowance was recorded at December 31, 2009 and 2008 because, based on current
expectations, Old National believes it will generate sufficient income in future years to realize
deferred tax assets. Old National does not have a federal net operating loss carryforward at
December 31, 2009. Old National has state net operating loss carryforwards totaling $66.0 million.
If not used, the net operating loss carryforwards will begin to expire in 2022.
Unrecognized Tax Benefits
The Company adopted FASB ASC 740-10, Income Taxes (FASB Interpretation No. 48,
Accounting for
Uncertainty in Income Taxes
)
,
on January 1, 2007. Unrecognized state income tax benefits are
reported net of their related deferred federal income tax benefit.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| (dollars in thousands) | 2009 | 2008 | 2007 | |||||||||
|
Balance at January 1
|
$ | 7,513 | $ | 11,554 | $ | 11,002 | ||||||
|
Additions based on tax positions related to the current year
|
1,638 | 2,054 | 1,248 | |||||||||
|
Reductions due to statute of limitations expiring
|
(651 | ) | — | — | ||||||||
|
Reductions for tax positions of prior years
|
— | (4,735 | ) | — | ||||||||
|
Settlements
|
— | (1,360 | ) | (696 | ) | |||||||
|
|
||||||||||||
|
Balance at December 31
|
$ | 8,500 | $ | 7,513 | $ | 11,554 | ||||||
|
|
||||||||||||
Settlements include effective settlements from tax audits. No cash settlements were paid
during 2009. Approximately $1.3 million of unrecognized tax benefits, if recognized, would
favorably affect the effective income tax rate in future periods. The Company does not expect the
total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve
months.
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Table of Contents
It is the Company’s policy to recognize interest and penalties accrued relative to unrecognized tax
benefits in their respective federal or state income tax accounts. The Company recorded interest
and penalties in the income statement for the years ended December 31, 2009, 2008 and 2007 of $0, a
benefit of $0.2 million and $1.2 million, respectively. The amount accrued for interest and
penalties in the balance sheet at both December 31, 2009 and 2008 was $1.3 million.
The Company and its subsidiaries file a consolidated U.S. federal income tax return, as well as
filing various state returns. The 2006 through 2009 tax years are open and subject to examination.
In the third quarter of 2009, the Company reversed $0.7 million related to uncertain tax positions
accounted for under FASB ASC 740-10 (FASB Interpretation No. 48,
Accounting for Uncertainty in
Income Taxes
)
.
The positive $0.7 million income tax reversal relates to the 2005 statute of
limitations expiring. The statute of limitations expired in the third quarter of 2009. As a
result, the Company reversed a total of $0.7 million from its unrecognized tax benefit liability
which includes $.05 million of interest.
In the first quarter of 2008, the Company reversed $6.6 million related to uncertain tax positions
accounted for under FASB ASC 740-10 (FASB Interpretation No. 48,
Accounting for Uncertainty in
Income Taxes
)
.
The positive $6.6 million income tax reversal primarily relates to a U.S. Tax Court
decision confirming that a subsidiary of a bank can deduct the interest expense of tax exempt
obligations it has purchased. The time for the Internal Revenue Service to appeal the court ruling
expired in the first quarter. The Company also was informed by the Internal Revenue Service that
they would not audit tax year 2005 as they previously indicated. The statute of limitations for
2005 subsequently expired in the third quarter of 2009. As a result of these items, the Company
reversed a total of $6.6 million from its unrecognized tax benefit liability which includes $0.5
million of interest.
RETIREMENT PLAN AND RESTORATION PLAN
Old National maintains a funded noncontributory defined benefit plan (the “Retirement Plan”) that
was frozen as of December 31, 2005. Retirement benefits are based on years of service and
compensation during the highest paid five years of employment. The freezing of the plan provides
that future salary increases will not be considered. Old National’s policy is to contribute at
least the minimum funding requirement determined by the plan’s actuary.
Old National also maintains an unfunded pension restoration plan (the “Restoration Plan”) which
provides benefits for eligible employees that are in excess of the limits under Section 415 of the
Internal Revenue Code of 1986, as amended, that apply to the Retirement Plan. The Restoration Plan
is designed to comply with the requirements of ERISA. The entire cost of the plan, which was also
frozen as of December 31, 2005, is supported by contributions from the Corporation.
Old National adopted guidance impacting FASB ASC 715 (Statement of Accounting Standards No. 158,
“
Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of
FASB Statements No. 87, 88, 106, and 123(R)
” as of December 31, 2006. FASB ASC 715 requires that
the company recognize the overfunded or underfunded status of its defined benefit plans as an asset
or liability in the balance sheet. Future changes in the funded status will be recognized through
comprehensive income in the year in which they occur.
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Table of Contents
Old National uses a December 31 measurement date for its defined benefit pension plans. The
following table presents the combined activity of the Company’s defined benefit plans:
| (dollars in thousands) | 2009 | 2008 | ||||||
|
Change in Projected Benefit Obligation
|
||||||||
|
Balance at January 1
|
$ | 34,569 | $ | 41,731 | ||||
|
Interest cost
|
1,974 | 2,143 | ||||||
|
Benefits paid
|
(2,213 | ) | (1,487 | ) | ||||
|
Actuarial (gain)/loss
|
7,607 | (5,275 | ) | |||||
|
Settlement
|
— | (2,543 | ) | |||||
|
|
||||||||
|
Projected Benefit Obligation at December 31
|
41,937 | 34,569 | ||||||
|
|
||||||||
|
Change in Plan Assets
|
||||||||
|
Fair value at January 1
|
26,920 | 43,641 | ||||||
|
Actual return on plan assets
|
6,198 | (13,458 | ) | |||||
|
Employer contributions
|
370 | 767 | ||||||
|
Benefits paid
|
(2,213 | ) | (1,487 | ) | ||||
|
Settlement
|
— | (2,543 | ) | |||||
|
|
||||||||
|
Fair value of Plan Assets at December 31
|
31,275 | 26,920 | ||||||
|
|
||||||||
|
Funded status at December 31
|
(10,662 | ) | (7,649 | ) | ||||
|
|
||||||||
|
|
||||||||
|
Amounts recognized in the statement of financial position at December 31:
|
||||||||
|
Prepaid benefit cost
|
$ | — | $ | — | ||||
|
Accrued benefit liability
|
(10,662 | ) | (7,649 | ) | ||||
|
|
||||||||
|
Net amount recognized
|
$ | (10,662 | ) | $ | (7,649 | ) | ||
|
|
||||||||
|
|
||||||||
|
Amounts recognized in accumulated other comprehensive income at December 31:
|
||||||||
|
Net actuarial loss
|
$ | 22,754 | $ | 20,865 | ||||
|
|
||||||||
|
Total
|
$ | 22,754 | $ | 20,865 | ||||
|
|
||||||||
The estimated net loss for the defined benefit pension plans that will be amortized from
accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is
$1.6 million.
The accumulated benefit obligation and the projected benefit obligation were equivalent for the
defined benefit pension plans and were $41.9 million and $34.6 million at December 31, 2009 and
2008, respectively.
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Table of Contents
The net periodic benefit cost and its components were as follows for the years ended December 31:
| (dollars in thousands) | 2009 | 2008 | 2007 | |||||||||
|
Net Periodic Benefit Cost
|
||||||||||||
|
Interest cost
|
$ | 1,974 | $ | 2,143 | $ | 2,343 | ||||||
|
Expected return on plan assets
|
(1,933 | ) | (3,169 | ) | (3,331 | ) | ||||||
|
Recognized actuarial loss
|
1,453 | 632 | 772 | |||||||||
|
|
||||||||||||
|
Net periodic benefit cost
|
$ | 1,494 | $ | (394 | ) | $ | (216 | ) | ||||
|
Settlement cost
|
— | 1,498 | 1,188 | |||||||||
|
|
||||||||||||
|
Total net periodic benefit cost
|
$ | 1,494 | $ | 1,104 | $ | 972 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Other Changes in Plan Assets and Benefit
Obligations Recognized in Other Comprehensive
Income
|
||||||||||||
|
Net actuarial loss
|
$ | 3,342 | $ | 11,353 | $ | 556 | ||||||
|
Amortization of net actuarial loss
|
(1,453 | ) | (632 | ) | (773 | ) | ||||||
|
Settlement cost
|
— | (1,498 | ) | (1,188 | ) | |||||||
|
|
||||||||||||
|
Total recognized in Other Comprehensive Income
|
$ | 1,889 | $ | 9,223 | $ | (1,405 | ) | |||||
|
|
||||||||||||
|
Total recognized in net periodic benefit cost and
other comprehensive income
|
$ | 3,383 | $ | 10,327 | $ | (433 | ) | |||||
|
|
||||||||||||
The weighted-average assumptions used to determine the benefit obligations as of the end of
the years indicated and the net periodic benefit cost for the years indicated are presented in the
table below. Because the plans are frozen, increases in compensation are not considered.
| 2009 | 2008 | 2007 | ||||||||||
|
Benefit obligations:
|
||||||||||||
|
Discount rate at the end of the period
|
5.25 | % | 6.25 | % | 5.75 | % | ||||||
|
Net periodic benefit cost:
|
||||||||||||
|
Discount rate at the beginning of the period
|
6.25 | % | 5.75 | % | 5.75 | % | ||||||
|
Expected return on plan assets
|
8.00 | 8.00 | 8.00 | |||||||||
|
Rate of compensation increase
|
N/A | N/A | N/A | |||||||||
The expected long-term rate of return for each asset class was developed by combining a
long-term inflation component, the risk-free real rate of return and the associated risk premium.
A weighted average rate was developed based on those overall rates and the target asset allocation
of the plan. The discount rate used reflects the expected future cash flow based on Old National’s
funding valuation assumptions and participant data as of the beginning of the plan year. The
expected future cash flow is discounted by the Citigroup Pension Liability Index yield curve for
the month preceding the fiscal year-end.
Old National’s asset allocation of the Retirement Plan as of year-end is presented in the following
table. Old National’s Restoration Plan is unfunded.
| Expected | ||||||||||||||||||||
| Long-Term | 2010 Target | |||||||||||||||||||
| Asset Category | Rate of Return | Allocation | 2009 | 2008 | 2007 | |||||||||||||||
|
Equity securities
|
9.00% - 9.50 | % | 40 - 70 | % | 71 | % | 66 | % | 67 | % | ||||||||||
|
Debt securities
|
4.00% - 5.85 | % | 30 - 60 | % | 29 | 34 | 32 | |||||||||||||
|
Cash equivalents
|
— | 0 - 15 | % | — | — | 1 | ||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | ||||||||||||||
|
|
||||||||||||||||||||
The Company’s overall investment strategy is to achieve a mix of approximately 40% to 70% of
equity securities, 30% to 60% of debt securities and 0% to 15% of cash equivalents. Fixed income
securities and cash equivalents must meet minimum rating standards. Exposure to any particular
company or industry is also limited. The investment policy is reviewed annually. There was no Old
National stock in the plan as of December 31, 2009, 2008 and 2007, respectively.
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Table of Contents
The fair value of the Company’s plan assets are determined based on observable level 1 or 2 pricing
inputs, including quoted prices for similar assets in active or non-active markets. As of December
31, 2009, the fair value of plan assets, by asset category, is as follows:
| Fair Value Measurements at December 31, 2009 Using | ||||||||||||||||
| Significant | ||||||||||||||||
| Quoted Prices in | Other | Significant | ||||||||||||||
| Active Markets for | Observable | Unobservable | ||||||||||||||
| Carrying | Identical Assets | Inputs | Inputs | |||||||||||||
| (dollars in thousands) | Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
|
|
||||||||||||||||
|
Plan Assets
|
||||||||||||||||
|
Large U.S. Equity
|
$ | 15,761 | $ | — | $ | 15,761 | $ | — | ||||||||
|
International Equity
|
6,567 | — | 6,567 | — | ||||||||||||
|
Short-Term Fixed Income
|
27 | — | 27 | — | ||||||||||||
|
Fixed Income
|
8,920 | — | 8,920 | — | ||||||||||||
|
|
||||||||||||||||
|
Total Plan Assets
|
$ | 31,275 | $ | — | $ | 31,275 | $ | — | ||||||||
|
|
||||||||||||||||
As of December 31, 2009, expected future benefit payments related to Old National’s defined
benefit plans were as follows:
| (dollars in thousands) | ||||
|
2010
|
$ | 8,080 | ||
|
2011
|
3,550 | |||
|
2012
|
3,920 | |||
|
2013
|
3,210 | |||
|
2014
|
3,320 | |||
|
Years 2015 - 2019
|
13,950 |
Old National expects to contribute cash of $0.7 million to the pension plans in 2010.
EMPLOYEE STOCK OWNERSHIP PLAN
Effective January 1, 2006, the Employee Stock Ownership and Savings Plan (401k) was amended. The
amended plan permits employees to participate the first month following one month of service. Old
National’s contributions to the plan were made in the form of Old National Bancorp stock or cash
contributed to the plan for purchase of Old National Bancorp stock on the market. Old National
will match 100% of participant contributions up to 6% of each participant’s salary. All
contributions vest immediately and plan participants may elect to diversify 2006 and all future
contributions. Those participants who have attained the age of 55 may also diversify previous
contributions. Effective October 1, 2006, the plan was amended to allow all participants to
diversify previous contributions of Old National Bancorp stock. Effective October 1, 2008, Old
National’s contributions are in cash and invested in the Plan’s investment options in the same
percentages as participant contributions. In addition, Old National may contribute an amount
designated at the sole discretion of the Board of Directors. Old National’s Board of Directors’
designated no discretionary contributions in 2009, 2008 or 2007. During the years ended December
31, 2009, 2008 and 2007, the number of Old National shares allocated to the plan were 1.7 million,
1.8 million and 1.9 million, respectively. All shares owned through the plan are included in the
calculation of weighted-average shares outstanding for purposes of calculating diluted and basic
earnings per share. Contribution expense under the plan was $7.1 million in 2009, $6.6 million in
2008 and $6.4 million in 2007.
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Table of Contents
STOCK-BASED COMPENSATION
The Company’s 2008 Incentive Compensation Plan, which was shareholder-approved, permits the grant
of share-based awards to its employees. At December 31, 2009, 1.4 million shares were available
for issuance. The granting of awards to key employees is typically in the form of restricted stock
or options to purchase common shares of stock. The Company believes that such awards better align
the interests of its employees with those of its shareholders. Total compensation cost that has
been charged against income for these plans was $1.3 million, $2.0 million, and $1.6 million for
2009, 2008, and 2007, respectively. The total income tax benefit was $0.5 million, $0.7 million,
and $0.6 million, respectively.
Stock Options
Option awards are generally granted with an exercise price equal to the market price of the
Company’s common stock at the date of grant; these option awards have vesting periods ranging from
3 to 5 years and have 10-year contractual terms.
The fair value of each option award is estimated on the date of grant using the Black-Scholes
option pricing model and the assumptions noted in the table below. Expected volatilities are based
on historical volatilities of the Company’s common stock. The Company uses historical data to
estimate option exercise and post-vesting termination behavior. The expected term of options
granted represents the period of time that options granted are expected to be outstanding and is
calculated using the simplified method allowed by SAB 110. The simplified method is used in lieu
of historical experience because Old National does not have adequate historical experience to
provide a reasonable basis upon which to estimate expected term. The risk-free interest rate for
the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of
the grant.
The fair value of options granted was determined using the following weighted-average assumptions
as of grant date.
| 2009 | 2008 | 2007 | ||||||||||
|
Wtd-average risk-free interest rate
|
2.1 | % | 3.0 | % | 4.9 | % | ||||||
|
Expected life of option (years)
|
6 | 6 | 6 | |||||||||
|
Expected stock volatility
|
28.8 | % | 15.8 | % | 15.0 | % | ||||||
|
Expected dividend yield
|
5.3 | % | 5.3 | % | 4.2 | % | ||||||
A summary of the activity in the stock option plan for 2009 follows:
| Weighted | ||||||||||||||||
| Weighted | Average | Aggregate | ||||||||||||||
| Average | Remaining | Intrinsic | ||||||||||||||
| Exercise | Contractual | Value | ||||||||||||||
| (shares in thousands) | Shares | Price | Term in Years | (in thousands) | ||||||||||||
|
Outstanding, January 1
|
5,925 | $ | 20.55 | |||||||||||||
|
Granted
|
177 | 13.31 | ||||||||||||||
|
Exercised
|
(11 | ) | 8.92 | |||||||||||||
|
Forfeited
|
(35 | ) | 19.20 | |||||||||||||
|
|
||||||||||||||||
|
Outstanding, December 31
|
6,056 | $ | 20.37 | 3.1 | $ | 94.4 | ||||||||||
|
|
||||||||||||||||
|
Options exercisable at end of year
|
5,632 | $ | 20.77 | 2.7 | $ | 94.4 | ||||||||||
|
|
||||||||||||||||
Information related to the stock option plan during each year follows:
| (dollars in thousands) | 2009 | 2008 | 2007 | |||||||||
|
Intrinsic value of options exercised
|
$ | 44 | $ | 277 | $ | 81 | ||||||
|
Cash received from option exercises
|
97 | 1,940 | 130 | |||||||||
|
Tax benefit realized from option exercises
|
— | 45 | — | |||||||||
|
Weighted average fair value of options granted
|
2.03 | 1.12 | 3.39 | |||||||||
As of December 31, 2009, there was $0.4 million of total unrecognized compensation cost
related to nonvested stock options granted under the Plan. The cost is expected to be recognized
over a weighted-average period of 1 year.
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Table of Contents
During 2009, the Company modified the term of 23 thousand share options. As a result of the
modification, the Company recognized additional compensation expense of $35 thousand for the year
ended December 31, 2009. There were no modifications during 2008 and 2007.
Restricted Stock
Restricted stock awards require certain service-based or performance requirements and commonly have
vesting periods ranging from 3 to 5 years. Compensation expense is recognized over the vesting
period of the award based on the fair value of the stock at the date of issue adjusted for various
performance conditions.
A summary of changes in the Company’s nonvested shares for the year follows:
| Weighted Average | ||||||||
| Number | Grant-Date | |||||||
| (shares in thousands) | Outstanding | Fair Value | ||||||
|
Nonvested balance at January 1, 2009
|
582 | $ | 18.14 | |||||
|
Granted during the year
|
79 | 13.15 | ||||||
|
Vested during the year
|
(76 | ) | 18.77 | |||||
|
Forfeited during the year
|
(111 | ) | 21.34 | |||||
|
|
||||||||
|
Nonvested balance at December 31, 2009
|
474 | $ | 16.46 | |||||
|
|
||||||||
As of December 31, 2009, there was $1.8 million of total unrecognized compensation cost
related to nonvested shares granted under the Plan. The cost is expected to be recognized over a
weighted-average period of 1.02 years. The total fair value of the shares vested during the years
ended December 31, 2009, 2008 and 2007 was $1.4 million, $0.8 million and $0.6 million.
During 2008, the Company modified the number of shares, performance period and vesting schedule of
a restricted stock award issued to an employee. As a result of that modification, the Company
recognized additional compensation expense of $45 thousand for the year ended December 31, 2008.
There were no restricted stock modifications during 2007.
Restricted Stock Units
Restricted stock units require certain performance requirements and have vesting periods of 3
years. Compensation expense is recognized over the vesting period of the award based on the fair
value of the stock at the date of issue adjusted for various performance conditions.
A summary of changes in the Company’s nonvested shares for the year follows:
| Weighted Average | ||||||||
| Number | Grant-Date | |||||||
| (shares in thousands) | Outstanding | Fair Value | ||||||
|
Nonvested balance at January 1, 2009
|
— | $ | — | |||||
|
Granted during the year
|
106 | 12.55 | ||||||
|
|
||||||||
|
Nonvested balance at December 31, 2009
|
106 | $ | 12.55 | |||||
|
|
||||||||
As of December 31, 2009, there was $0.9 million of total unrecognized compensation cost
related to nonvested shares granted under the Plan. The cost is expected to be recognized over a
weighted-average period of 2.00 years. Old National began granting restricted stock units during
2009 and no shares had vested as of December 31, 2009.
Old National maintains a director stock compensation program covering all outside directors.
Compensation shares are earned semi-annually. A maximum of 165,375 shares of common stock is
available for issuance under this program. As of December 31, 2009, Old National had issued 46,805
shares under this program.
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Table of Contents
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
Old National has a dividend reinvestment and stock purchase plan under which common shares issued
may be either repurchased shares or authorized and previously unissued shares. A new plan became
effective on August 17, 2009, with total authorized and unissued common shares reserved for
issuance of 3.4 million. In 2009, 195 thousand shares were issued related to these plans with
proceeds of approximately $2.0 million. As of December 31, 2009, 3.3 million authorized and
unissued common shares were reserved for issuance under the plan.
EMPLOYEE STOCK PURCHASE PLAN
Old National has an employee stock purchase plan under which eligible employees can purchase common
shares at a price not less than 95% of the fair market value of the common shares on the purchase
date. The amount of common shares purchased can not exceed ten percent of the employee’s
compensation. The maximum number of shares that may be purchased under this plan is 500,000
shares.
SHAREHOLDER RIGHTS PLAN
Old National has a Rights Agreement whereby one right is distributed for each outstanding share of
Old National’s common stock. The rights become exercisable on the tenth day following a public
announcement that a person has acquired or intends to acquire beneficial ownership of 20% or more
of Old National’s outstanding common stock. Upon exercising the rights, the holder is entitled to
buy 1/100 of a share of Junior Preferred Stock at $60, subject to adjustment, for every right held.
Upon the occurrence of certain events, the rights may be redeemed by Old National at a price of
$0.01 per right.
In the event an acquiring party becomes the beneficial owner of 20% or more of Old National’s
outstanding shares, rights holders (other than the acquiring person) may purchase two shares of Old
National common stock for the price of one share at the then market price. If Old National is
acquired and is not the surviving corporation, or if Old National survives a merger but has all or
part of its common stock exchanged, each rights holder will be entitled to acquire shares of the
acquiring company with a value of two times the then exercise price for each right held.
The Old National Rights Agreement is scheduled to expire on March 1, 2010. As previously disclosed
in our current report on Form 8-K filed with the SEC on February 2, 2010, Old National’s Board of
Directors elected not to take action to amend or extend the term of the Rights Agreement.
PREFERRED STOCK
On December 12, 2008, Old National announced that it had entered into an agreement to sell Series T
Preferred Stock having a liquidation value of $100 million to the Treasury Department as part of
the CPP for healthy financial institutions announced in late October 2008. As part of the CPP, Old
National entered into a Letter Agreement and Securities Purchase Agreement with the Treasury
Department on December 12, 2008, pursuant to which Old National sold (i) 100,000 shares of Old
National’s Series T Preferred Stock and (ii) Warrants to purchase up to 813,008 shares of Old
National’s common stock at an initial per share exercise price of $18.45. The net proceeds were
allocated between the Series T Preferred Stock and Warrants based on relative fair value. The
Series T Preferred Stock would be accreted to liquidation value over the expected life of the
shares, with accretion charged to retained earnings.
The Series T Preferred Stock qualified as Tier 1 capital and the Treasury Department was entitled
to cumulative dividends at a rate of 5% per year for the first five years, and 9% per year
thereafter. The Series T Preferred Stock had priority in the payment of dividends over any cash
dividends paid to common stockholders. The adoption of ARRA permitted Old National to redeem the
Series T Preferred Stock without penalty and without the need to raise new capital, subject to the
Treasury’s consultation with Old National’s regulatory agency. On March 31, 2009, Old National
accelerated the accretion of the $2.6 million discount and repurchased all of the $100 million of
Series T Preferred Stock from the Treasury Department.
87
Table of Contents
The Warrants had a 10-year term and were immediately exercisable upon issuance. The Warrants were
repurchased by Old National on May 11, 2009, for $1.2 million. As a result of the Warrant
repurchase, the Treasury Department does not own any securities of Old National issued under the
CPP.
COMMON STOCK
The December 31, 2009 balance includes approximately $195.7 million, net of issuance costs, from a
public offering of 20.7 million shares of common stock that occurred late in the third quarter of
2009.
Effective January 1, 2008, the Company adopted FASB ASC 820-10 (SFAS No. 157) and FASB ASC 825-10
(SFAS No. 159). Both standards address aspects of the expanding application of fair value
accounting.
FASB ASC 820-10 defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the measurement date.
FASB ASC 820-10 also establishes a fair value hierarchy which requires an entity to maximize the
use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The standard describes three levels of inputs that may be used to measure fair values:
| • | Level 1 — Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. |
| • | Level 2 — Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. |
| • | Level 3 — Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. |
Old National used the following methods and significant assumptions to estimate the fair value of
each type of financial instrument:
Investment securities
: The fair values for investment securities are determined by quoted
market prices, if available (Level 1). For securities where quoted prices are not available, fair
values are calculated based on market prices of similar securities (Level 2). For securities
where quoted prices or market prices of similar securities are not available, fair values are
calculated using discounted cash flows or other market indicators (Level 3). Discounted cash
flows are calculated using spread to swap and libor curves that are updated to incorporate loss
severities, volatility, credit spread and optionality. During times when trading is more liquid,
broker quotes are used (if available) to validate the model. Rating agency and industry research
reports as well as defaults and deferrals on individual securities are reviewed and incorporated
into the calculations.
Residential loans held for sale
: The fair value of loans held for sale is determined using
quoted prices for a similar asset, adjusted for specific attributes of that loan (Level 2).
Derivative financial instruments
: The fair values of derivative financial instruments are
based on derivative valuation models using market data inputs as of the valuation date (Level 2).
Deposits
: The fair value of retail certificates of deposit is estimated by discounting
future cash flows using rates currently offered for deposits with similar remaining maturities
(Level 2).
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Table of Contents
Assets and liabilities measured at fair value on a recurring basis, including financial assets and
liabilities for which the Company has elected the fair value option, are summarized below:
| Fair Value Measurements at December 31, 2009 Using | ||||||||||||||||
| Significant | ||||||||||||||||
| Quoted Prices in | Other | Significant | ||||||||||||||
| Active Markets for | Observable | Unobservable | ||||||||||||||
| Carrying | Identical Assets | Inputs | Inputs | |||||||||||||
| (dollars in thousands) | Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
|
|
||||||||||||||||
|
Financial Assets
|
||||||||||||||||
|
Investment securities available-for-sale:
|
||||||||||||||||
|
U.S. Treasury
|
$ | 1,003 | $ | 1,003 | $ | — | $ | — | ||||||||
|
U.S. Government-sponsored entities and agencies
|
914,237 | — | 914,237 | — | ||||||||||||
|
Mortgage-backed securities — Agency
|
708,129 | — | 708,129 | — | ||||||||||||
|
Mortgage-backed securities — Non-agency
|
174,597 | — | 174,597 | — | ||||||||||||
|
States and political subdivisions
|
534,595 | — | 534,595 | — | ||||||||||||
|
Pooled trust preferred securities
|
12,398 | — | — | 12,398 | ||||||||||||
|
Other securities
|
141,260 | — | 141,260 | — | ||||||||||||
|
Residential loans held for sale
|
17,530 | — | 17,530 | — | ||||||||||||
|
Derivative assets
|
29,920 | — | 29,920 | — | ||||||||||||
|
Financial Liabilities
|
||||||||||||||||
|
Derivative liabilities
|
29,479 | — | 29,479 | — | ||||||||||||
| Fair Value Measurements at December 31, 2008 Using | ||||||||||||||||
| Significant | ||||||||||||||||
| Quoted Prices in | Other | Significant | ||||||||||||||
| Active Markets for | Observable | Unobservable | ||||||||||||||
| Carrying | Identical Assets | Inputs | Inputs | |||||||||||||
| (dollars in thousands) | Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
|
|
||||||||||||||||
|
Financial Assets
|
||||||||||||||||
|
Investment securities available-for-sale:
|
||||||||||||||||
|
U.S. Government-sponsored entities and agencies
|
$ | 389,278 | — | $ | 389,278 | $ | — | |||||||||
|
Mortgage-backed securities — Agency
|
864,761 | — | 864,761 | — | ||||||||||||
|
Mortgage-backed securities — Non-agency
|
216,858 | — | 216,858 | — | ||||||||||||
|
States and political subdivisions
|
482,204 | — | 482,204 | — | ||||||||||||
|
Pooled trust preferred securities
|
19,667 | — | — | 19,667 | ||||||||||||
|
Other securities
|
152,258 | — | 152,258 | — | ||||||||||||
|
Residential loans held for sale
|
17,155 | — | 17,155 | — | ||||||||||||
|
Derivative assets
|
46,768 | — | 46,768 | — | ||||||||||||
|
Financial Liabilities
|
||||||||||||||||
|
Certain retail certificates of deposit
|
49,309 | — | 49,309 | — | ||||||||||||
|
Derivative liabilities
|
47,414 | — | 47,414 | — | ||||||||||||
89
Table of Contents
The table below presents a reconciliation of all assets measured at fair value on a recurring
basis using significant unobservable inputs (Level 3) for the twelve months ended December 31,
2009:
| Fair Value Measurements | ||||
| using Significant | ||||
| Unobservable Inputs | ||||
| (Level 3) | ||||
| Pooled Trust Preferred | ||||
| Securities Available- | ||||
| (dollars in thousands) | for-Sale | |||
|
Beginning balance, January 1, 2009
|
$ | 19,667 | ||
|
Accretion/amortization of discount or premium
|
(141 | ) | ||
|
Payments received
|
(110 | ) | ||
|
Credit loss write-downs
|
(20,366 | ) | ||
|
Increase/decrease in fair value of securities
|
13,348 | |||
|
|
||||
|
Ending balance, December 31, 2009
|
$ | 12,398 | ||
|
|
||||
Included in the income statement is $141 thousand in interest expense from the amortization of
discounts on securities. The increase in fair value is reflected in the balance sheet as an
increase in the fair value of investment
securities available-for sale, an increase in accumulated other comprehensive income, which is
included in shareholders’ equity, and a decrease in other assets related to the tax impact.
The table below presents a reconciliation of all assets measured at fair value on a recurring basis
using significant unobservable inputs (Level 3) for the twelve months ended December 31, 2008:
| Fair Value Measurements | ||||
| using Significant | ||||
| Unobservable Inputs | ||||
| (Level 3) | ||||
| Pooled Trust Preferred | ||||
| Securities Available- | ||||
| (dollars in thousands) | for-Sale | |||
|
Beginning balance, January 1, 2008
|
$ | — | ||
|
Accretion/amortization of discount or premium
|
3 | |||
|
Payments received
|
(29 | ) | ||
|
Decrease in fair value of securities
|
(12,593 | ) | ||
|
Transfers in and/or out of Level 3
|
32,286 | |||
|
|
||||
|
Ending balance, December 31, 2008
|
$ | 19,667 | ||
|
|
||||
Assets measured at fair value on a non-recurring basis are summarized below:
| Fair Value Measurements at December 31, 2009 Using | ||||||||||||||||
| Significant | ||||||||||||||||
| Quoted Prices in | Other | Significant | ||||||||||||||
| Active Markets for | Observable | Unobservable | ||||||||||||||
| Carrying | Identical Assets | Inputs | Inputs | |||||||||||||
| (dollars in thousands) | Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
|
Financial Assets
|
||||||||||||||||
|
Impaired loans
|
$ | 21,949 | — | — | $ | 21,949 | ||||||||||
Impaired loans, which are measured for impairment using the fair value of the collateral, had
a principal amount of $36.4 million, with a valuation allowance of $14.5 million at December 31,
2009. Old National recorded $9.6 million of provision expense associated with these loans in 2009.
90
Table of Contents
| Fair Value Measurements at December 31, 2008 Using | ||||||||||||||||
| Significant | ||||||||||||||||
| Quoted Prices in | Other | Significant | ||||||||||||||
| Active Markets for | Observable | Unobservable | ||||||||||||||
| Carrying | Identical Assets | Inputs | Inputs | |||||||||||||
| (dollars in thousands) | Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
|
Financial Assets
|
||||||||||||||||
|
Impaired loans
|
$ | 24,826 | — | — | $ | 24,826 | ||||||||||
Impaired loans, which are measured for impairment using the fair value of the collateral, had
a principal amount of $38.4 million, with a valuation allowance of $13.6 million at December 31,
2008. Old National recorded $10.2 million of provision expense associated with these loans in
2008.
Financial instruments recorded using FASB ASC 825-10
Under FASB ASC 825-10, the Company may elect to report most financial instruments and certain other
items at fair value on an instrument-by instrument basis with changes in fair value reported in net
income. After the initial adoption, the election is made at the acquisition of an eligible
financial asset, financial liability or firm commitment or when certain specified reconsideration
events occur. The fair value election may not be revoked once an election is made.
Additionally, the transaction provisions of FASB ASC 825-10 permit a one-time election for existing
positions at the adoption date with a cumulative-effect adjustment included in beginning retained
earnings and future changes in fair value reported in net income. The Company did not elect the
fair value option for any existing position at January 1, 2008.
The Company did elect the fair value option prospectively for the following items:
| • | Residential mortgage loans held for sale |
| • | Certain retail certificates of deposit |
For items for which the fair value option has been elected, interest income is recorded in the
consolidated statements of income based on the contractual amount of interest income earned on
financial assets (except any that are on nonaccrual status). Included in the income statement are
$108 thousand and $635 thousand of interest income for residential loans held for sale for the
three and twelve months ended December 31, 2009, respectively. Included in the income statement
are $85 thousand and $427 thousand of interest income for residential loans held for sale for the
three and twelve months ended December 31, 2008, respectively. Interest expense is recorded based
on the contractual amount of interest expense incurred. The income statement includes $0 and $73
thousand of interest expense for the three and twelve months ended December 31, 2009, respectively,
for certain retail certificates of deposit. The income statement includes $430 thousand and $1.4
million of interest expense for the three and twelve months ended December 31, 2008, respectively,
for certain retail certificates of deposit.
Residential mortgage loans held for sale
Old National has elected the fair value option for newly originated conforming fixed-rate and
adjustable-rate first mortgage loans held for sale. These loans are intended for sale and are
hedged with derivative instruments. None of these loans are 90 days or more past due, nor are any
on nonaccrual status. Old National has elected the fair value option to mitigate accounting
mismatches in cases where hedge accounting is complex and to achieve operational simplification.
The fair value option was not elected for loans held for investment. This election was effective
for applicable loans originated since January 1, 2008.
Certain retail certificates of deposit
Old National has elected the fair value option for certain retail certificates of deposit;
specifically, pools of retail certificates of deposit that have been matched with derivative
instruments. Old National has elected the fair value option to mitigate accounting mismatches in
cases where hedge accounting is complex and to achieve operational simplification. This election
was adopted prospectively for certain retail certificates of deposit originated since January 1,
2008. At December 31, 2009, there were no retail certificates of deposit accounted for under the
fair value option.
91
Table of Contents
As of December 31, 2009, the difference between the aggregate fair value and the aggregate
remaining principal balance for loans for which the fair value option has been elected was as
follows. Accrued interest at period end is included in the fair value of the instruments.
| Aggregate | Contractual | |||||||||||
| (dollars in thousands) | Fair Value | Difference | Principal | |||||||||
|
Residential loans held for sale
|
$ | 17,530 | $ | 284 | $ | 17,246 | ||||||
The following table presents the amount of gains and losses from fair value changes included
in income before income taxes for financial assets and liabilities carried at fair value for the
twelve months ended December 31, 2009:
Changes in Fair Value for the Twelve Months ended December 31, 2009, for Items
Measured at Fair Value Pursuant to Election of the Fair Value Option
Measured at Fair Value Pursuant to Election of the Fair Value Option
| Total Changes | ||||||||||||||||
| in Fair Values | ||||||||||||||||
| Other | Included in | |||||||||||||||
| Gains and | Interest | Interest | Current Period | |||||||||||||
| (dollars in thousands) | (Losses) | Income | (Expense) | Earnings | ||||||||||||
|
Residential loans held for sale
|
$ | (295 | ) | $ | — | $ | — | $ | (295 | ) | ||||||
As of December 31, 2008, the difference between the aggregate fair value and the aggregate
remaining principal balance for loans and certificates of deposit for which the fair value option
has been elected was as follows. Accrued interest at period end is included in the fair value of
the instruments.
| Aggregate | Contractual | |||||||||||
| (dollars in thousands) | Fair Value | Difference | Principal | |||||||||
|
Residential loans held for sale
|
$ | 17,155 | $ | 579 | $ | 16,576 | ||||||
|
Certain retail certificates of deposit
|
49,309 | 837 | 48,472 | |||||||||
The following table presents the amount of gains and losses from fair value changes included
in income before income taxes for financial assets and liabilities carried at fair value for the
twelve months ended December 31, 2008:
Changes in Fair Value for the Twelve Months ended December 31, 2008, for Items
Measured at Fair Value Pursuant to Election of the Fair Value Option
Measured at Fair Value Pursuant to Election of the Fair Value Option
| Total Changes | ||||||||||||||||
| in Fair Values | ||||||||||||||||
| Other | Included in | |||||||||||||||
| Gains and | Interest | Interest | Current Period | |||||||||||||
| (dollars in thousands) | (Losses) | Income | (Expense) | Earnings | ||||||||||||
|
Residential loans held for sale
|
$ | 580 | $ | — | $ | (1 | ) | $ | 579 | |||||||
|
Certain retail certificates of deposit
|
(299 | ) | — | (538 | ) | (837 | ) | |||||||||
92
Table of Contents
The carrying amounts and estimated fair values of financial instruments, not previously
presented, at December 31, 2009 and 2008, respectively, are as follows:
| Carrying | Fair | |||||||
| (dollars in thousands) | Value | Value | ||||||
|
|
||||||||
|
2009
|
||||||||
|
Financial Assets
|
||||||||
|
Cash, due from banks, federal funds sold
and money market investments
|
$ | 497,276 | $ | 497,276 | ||||
|
Investment securities held-to-maturity
|
396,009 | 399,953 | ||||||
|
Federal Home Loan Bank stock
|
36,090 | 36,090 | ||||||
|
Finance leases held for sale
|
55,260 | 55,449 | ||||||
|
Loans, net (including impaired loans)
|
3,765,938 | 3,975,545 | ||||||
|
Accrued interest receivable
|
49,340 | 49,340 | ||||||
|
|
||||||||
|
Financial Liabilities
|
||||||||
|
Deposits
|
$ | 5,903,488 | $ | 5,950,705 | ||||
|
Short-term borrowings
|
331,144 | 331,156 | ||||||
|
Other borrowings
|
699,059 | 724,364 | ||||||
|
Accrued interest payable
|
12,778 | 12,778 | ||||||
|
Standby letters of credit
|
578 | 578 | ||||||
|
|
||||||||
|
Off-Balance Sheet Financial Instruments
|
||||||||
|
Commitments to extend credit
|
$ | — | $ | 1,643 | ||||
|
|
||||||||
|
2008
|
||||||||
|
Financial Assets
|
||||||||
|
Cash, due from banks,federal funds sold
and money market investments
|
$ | 193,012 | $ | 193,012 | ||||
|
Investment securities held-to-maturity
|
99,661 | 100,831 | ||||||
|
Federal Home Loan Bank stock
|
41,090 | 41,090 | ||||||
|
Loans, net (including impaired loans)
|
4,693,272 | 4,997,869 | ||||||
|
Accrued interest receivable
|
49,030 | 49,030 | ||||||
|
|
||||||||
|
Financial Liabilities
|
||||||||
|
Deposits
|
$ | 5,372,978 | $ | 5,425,134 | ||||
|
Short-term borrowings
|
649,623 | 649,610 | ||||||
|
Other borrowings
|
834,867 | 850,569 | ||||||
|
Accrued interest payable
|
14,954 | 14,954 | ||||||
|
Standby letters of credit
|
494 | 494 | ||||||
|
|
||||||||
|
Off-Balance Sheet Financial Instruments
|
||||||||
|
Commitments to extend credit
|
$ | — | $ | 1,614 | ||||
The following methods and assumptions were used to estimate the fair value of each type of
financial instrument.
Cash, due from banks, federal funds sold, resell agreements, money market investments and
accrued interest
: For these instruments, the carrying amounts approximate fair value.
Investment securities
: Fair values for investment securities held-to-maturity are based
on quoted market prices, if available. For securities where quoted prices are not available, fair
values are estimated based on market prices of similar securities.
Federal Home Loan Bank Stock
: The carrying value of Federal Home Loan Bank stock
approximates fair value based on the redemption provisions of the Federal Home Loan Bank.
93
Table of Contents
Finance leases held for sale
: The fair value of leases held for sale is estimated using
discounted future cash flows.
Loans
: The fair value of loans is estimated by discounting future cash flows using
current rates at which similar loans would be made to borrowers with similar credit ratings and
for the same remaining maturities.
Deposits
: The fair value of noninterest-bearing demand deposits and savings, NOW and
money market deposits is the amount payable as of the reporting date. The fair value of
fixed-maturity certificates of deposit is estimated using rates currently offered for deposits
with similar remaining maturities.
Short-term borrowings
: Federal funds purchased and other short-term borrowings generally
have an original term to maturity of 30 days or less and, therefore, their carrying amount is a
reasonable estimate of fair value. The fair value of securities sold under agreements to
repurchase is estimated by discounting future cash flows using current interest rates.
Other borrowings
: The fair value of medium-term notes, subordinated debt and senior bank
notes is determined using market quotes. The fair value of FHLB advances is determined using
quoted prices for new FHLB advances with similar risk characteristics. The fair value of other
debt is determined using comparable security market prices or dealer quotes.
Standby letters of credit
: Fair values for standby letters of credit are based on fees
currently charged to enter into similar agreements. The fair value for standby letters of credit
was recorded in “Accrued expenses and other liabilities” on the consolidated balance sheet in
accordance with FASB ASC 460-10 (FIN 45).
Off-balance sheet financial instruments
: Fair values for off-balance sheet credit-related
financial instruments are based on fees currently charged to enter into similar agreements. For
further information regarding the notional amounts of these financial instruments, see Notes 18
and 19.
As part of the Company’s overall interest rate risk management, Old National uses derivative
instruments, including interest rate swaps, caps and floors. The notional amount of these
derivative instruments was $297.5 million and $55.1 million at December 31, 2009 and December 31,
2008, respectively. The December 31, 2009 balances consist of $197.5 million notional amount of
receive-fixed interest rate swaps on certain of its FHLB advances and $100.0 million notional
amount of receive-fixed interest rate swaps on certain commercial loans. These hedges were entered
into to manage both interest rate risk and asset sensitivity on the balance sheet. These
derivative instruments are recognized on the balance sheet at their fair value. The December 31,
2008 balances include $55.1 million notional amount of receive-fixed interest rate swaps on certain
of its retail and brokered certificates of deposit.
In addition, commitments to fund certain mortgage loans (interest rate lock commitments) and
forward commitments for the future delivery of mortgage loans to third party investors are
considered derivatives. At December 31, 2009, the notional amount of the interest rate lock
commitments and forward commitments were $20.0 million and $36.1 million, respectively. At
December 31, 2008, the notional amount of the interest rate lock commitments and forward
commitments were $20.6 million and $37.0 million, respectively. It is the Company’s practice to
enter into forward commitments for the future delivery of residential mortgage loans to third party
investors when interest rate lock commitments are entered into in order to economically hedge the
effect of changes in interest rates resulting from its commitment to fund the loans. All
derivative instruments are recognized on the balance sheet at their fair value.
Old National also enters into derivative instruments for the benefit of its customers. The
notional amounts of these customer derivative instruments and the offsetting counterparty
derivative instruments were $479.8 million and $479.8 million, respectively, at December 31, 2009.
At December 31, 2008, the notional amounts of the customer derivative instruments and the
offsetting counterparty derivative instruments were $484.0 million and $484.0 million,
respectively. These derivative contracts do not qualify for hedge accounting. These instruments
include interest rate swaps, caps, foreign exchange forward contracts and commodity swaps and
options
.
Commonly, Old National will economically hedge significant exposures related to these
derivative contracts entered into for the benefit of customers by entering into offsetting
contracts with approved, reputable, independent counterparties with substantially matching terms.
94
Table of Contents
Credit risk arises from the possible inability of counterparties to meet the terms of their
contracts. Old National’s exposure is limited to the replacement value of the contracts rather
than the notional, principal or contract amounts. There are provisions in our agreements with the
counterparties that allow for certain unsecured credit exposure up to an agreed threshold.
Exposures in excess of the agreed thresholds are collateralized. In addition, the Company
minimizes credit risk through credit approvals, limits, and monitoring procedures.
The following tables summarize the fair value of derivative financial instruments utilized by Old
National:
| Asset Derivatives | ||||||||||||||||
| December 31, 2009 | December 31, 2008 | |||||||||||||||
| Balance | Balance | |||||||||||||||
| Sheet | Fair | Sheet | Fair | |||||||||||||
| (dollars in thousands) | Location | Value | Location | Value | ||||||||||||
|
Derivatives designated as hedging instruments
|
||||||||||||||||
|
Interest rate contracts
|
Other assets | $ | 1,789 | Other assets | $ | 1 | ||||||||||
|
|
||||||||||||||||
|
Total derivatives designated as hedging instruments
|
$ | 1,789 | $ | 1 | ||||||||||||
|
|
||||||||||||||||
|
Derivatives not designated as hedging instruments
|
||||||||||||||||
|
Interest rate contracts
|
Other assets | $ | 27,749 | Other assets | $ | 45,737 | ||||||||||
|
Commodity contracts
|
Other assets | — | Other assets | 130 | ||||||||||||
|
Foreign exchange contracts
|
Other assets | 12 | Other assets | 441 | ||||||||||||
|
Mortgage contracts
|
Other assets | 370 | Other assets | 459 | ||||||||||||
|
|
||||||||||||||||
|
Total derivatives not designated as hedging instruments
|
$ | 28,131 | $ | 46,767 | ||||||||||||
|
|
||||||||||||||||
|
Total derivatives
|
$ | 29,920 | $ | 46,768 | ||||||||||||
|
|
||||||||||||||||
| Liability Derivatives | ||||||||||||||||
| December 31, 2009 | December 31, 2008 | |||||||||||||||
| Balance | Balance | |||||||||||||||
| Sheet | Fair | Sheet | Fair | |||||||||||||
| (dollars in thousands) | Location | Value | Location | Value | ||||||||||||
|
Derivatives designated as hedging instruments
|
||||||||||||||||
|
Interest rate contracts
|
Other liabilities | $ | 1,188 | Other liabilities | $ | — | ||||||||||
|
Mortgage contracts
|
Other liabilities | — | Other liabilities | — | ||||||||||||
|
|
||||||||||||||||
|
Total derivatives designated as hedging instruments
|
$ | 1,188 | $ | — | ||||||||||||
|
|
||||||||||||||||
|
Derivatives not designated as hedging instruments
|
||||||||||||||||
|
Interest rate contracts
|
Other liabilities | $ | 28,279 | Other liabilities | $ | 46,338 | ||||||||||
|
Commodity contracts
|
Other liabilities | — | Other liabilities | 130 | ||||||||||||
|
Foreign exchange contracts
|
Other liabilities | 12 | Other liabilities | 441 | ||||||||||||
|
Mortgage contracts
|
Other liabilities | — | Other liabilities | 505 | ||||||||||||
|
|
||||||||||||||||
|
Total derivatives not designated as hedging instruments
|
$ | 28,291 | $ | 47,414 | ||||||||||||
|
|
||||||||||||||||
|
Total derivatives
|
$ | 29,479 | $ | 47,414 | ||||||||||||
|
|
||||||||||||||||
95
Table of Contents
The effect of derivative instruments on the Consolidated Statement of Income for the twelve
months ended December 31, 2009 and 2008 are as follows:
| Year ended | Year ended | |||||||||||
| (dollars in thousands) | December 31, 2009 | December 31, 2008 | ||||||||||
| Location of Gain or (Loss) | Amount of Gain or (Loss) | |||||||||||
| Recognized in Income on | Recognized in Income on | |||||||||||
| Derivatives in Fair Value Hedging Relationships | Derivative | Derivative | ||||||||||
|
Interest rate contracts (1)
|
Interest income / (expense) | $ | 1,995 | $ | 472 | |||||||
|
Interest rate contracts (2)
|
Other income / (expense) | 998 | 160 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 2,993 | $ | 632 | ||||||||
|
|
||||||||||||
| Location of Gain or (Loss) | Amount of Gain or (Loss) | |||||||||||
| Recognized in Income on | Recognized in Income on | |||||||||||
| Derivatives in Cash Flow Hedging Relationships | Derivative | Derivative | ||||||||||
|
Interest rate contracts (1)
|
Interest income / (expense) | $ | 1,259 | $ | — | |||||||
|
|
||||||||||||
|
Total
|
$ | 1,259 | $ | — | ||||||||
|
|
||||||||||||
| Location of Gain or (Loss) | Amount of Gain or (Loss) | |||||||||||
| Recognized in Income on | Recognized in Income on | |||||||||||
| Derivatives Not Designated as Hedging Instruments | Derivative | Derivative | ||||||||||
|
Interest rate contracts (1)
|
Interest income / (expense) | $ | (428 | ) | $ | 549 | ||||||
|
Interest rate contracts (3)
|
Other income / (expense) | (280 | ) | (1,305 | ) | |||||||
|
Mortgage contracts
|
Mortgage banking revenue | 416 | (63 | ) | ||||||||
|
|
||||||||||||
|
Total
|
$ | (292 | ) | $ | (819 | ) | ||||||
|
|
||||||||||||
| (1) | Amounts represent the net interest payments as stated in the contractual agreements. | |
| (2) | Amounts represent ineffectiveness on derivatives designated as fair value hedges. | |
| (3) | Includes both the valuation differences between the customer and offsetting counterparty swaps as well as the change in the value of the derivative instruments entered into to offset the change in fair value of certain retail certificates of deposit which the company elected to record at fair value. | |
| See Note 16 to the consolidated financial statements. | ||
LITIGATION
In the normal course of business, Old National and its subsidiaries have been named, from time to
time, as defendants in various legal actions. Certain of the actual or threatened legal actions
include claims for substantial compensatory and/or punitive damages or claims for indeterminate
amounts of damages.
Old National contests liability and/or the amount of damages as appropriate in each pending matter.
In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases
where claimants seek substantial or indeterminate damages or where investigations and proceedings
are in the early stages, Old National cannot predict with certainty the loss or range of loss, if
any, related to such matters, how or if such matters will be resolved, when they will ultimately be
resolved, or what the eventual settlement, or other relief, if any, might be. Subject to the
foregoing, Old National believes, based on current knowledge and after consultation with counsel,
that the outcome of such pending matters will not have a material adverse effect on the
consolidated financial condition of Old National, although the outcome of such matters could be
material to Old National’s operating results and cash flows for a particular future period,
depending on, among other things, the level of Old National’s revenues or income for such period.
In November 2002, several beneficiaries of certain trusts filed a complaint against Old National
and Old National Trust Company in the United States District Court for the Western District of
Kentucky relating to the administration of the trusts in 1997. The complaint, as amended, alleged
that Old National (through a predecessor), as trustee, mismanaged termination of a lease between
the trusts and a tenant mining company. The complaint seeks, among other relief, unspecified
damages, (costs and expenses, including attorneys’ fees, and such other relief as the court might
find just and proper.) On March 25, 2009, the Court granted summary judgment to Old National
concluding that the plaintiffs do not have standing to sue Old National in this matter.
96
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The
plaintiffs subsequently filed a motion to alter or amend the judgment with the Court. The
Plaintiffs motion to alter or amend the judgment was granted by the Court on July 29, 2009,
reversing the Court’s March 25, 2009 Order as to standing. The July 29, 2009 Order permitted Old
National to file a new motion for summary judgment with respect to issues that had not been
resolved by the Court. On December 10, 2009, the Court granted Old National partial summary
judgment and also granted a motion by Plaintiffs to amend their complaint. The Court’s December
10, 2009 Order permits Old National to file a new motion for summary judgment on the
amended complaint. Old National filed its motion for summary judgment on January 22, 2010. The
briefing schedule on the motion is now complete and it is now ripe for the judge to rule. Old
National continues to believe that it has meritorious defenses to each of the claims in the lawsuit
and intends to continue to vigorously defend the lawsuit. There can be no assurance, however, that
Old National will be successful, and an adverse resolution of the lawsuit could have a material
adverse effect on its consolidated financial position and results of operations in the period in
which the lawsuit is resolved. Old National is not presently able to reasonably estimate potential
losses, if any, related to the lawsuit and has not recorded a liability in its accompanying
Consolidated Balance Sheets.
LEASES
Old National rents certain premises and equipment under operating leases, which expire at various
dates. Many of these leases require the payment of property taxes, insurance premiums, maintenance
and other costs. In some cases, rentals are subject to increase in relation to a cost-of-living
index.
In December 2006, Old National entered into a sale leaseback agreement with an unrelated third
party for its three main buildings in downtown Evansville, Indiana. Old National sold assets with
a carrying value of $69.9 million, received approximately $79.0 million in cash and incurred $0.4
million of selling costs. The $8.7 million deferred gain will be amortized over the term of the
lease. The agreement requires rent payments of approximately $6.6 million per year over the next
20 years.
During 2007, seventy-three financial centers were sold in a series of sale leaseback transactions
to an unrelated party. Old National received cash proceeds of $176.3 million, net of selling
costs. The properties sold had a carrying value of $65.3 million, resulting in a gain of $111.1
million. In 2007, $4.7 million of this gain was recognized, the remainder has been deferred and is
being amortized over the term of the leases. The leases have terms of ten to twenty-four years,
and Old National has the right, at its option, to extend the term of the leases for four additional
successive terms of five years each, upon specified terms and conditions. Under the lease
agreements, Old National is obligated to pay base rents for the properties in an aggregate annual
amount of $14.1 million per year.
In addition, Old National sold an office building located in Evansville, Indiana to an unrelated
party in a separate transaction during 2007. This transaction resulted in cash proceeds of $3.4
million, net of selling costs. The
property had a carrying value of $3.7 million, resulting in a loss of $0.3 million. Old National
agreed to lease back the building for a term of five years. Under the lease agreement, Old
National is obligated to pay a base rent of $0.4 million per year.
During 2008, Old National sold eight financial centers in a series of sale leaseback transactions
to unrelated parties. Old National received cash proceeds of $15.9 million, net of selling costs.
The properties sold had a carrying value of $12.0 million. The $3.9 million deferred gain will be
amortized over the term of the leases. The leases have terms of fifteen to twenty years. Under
the lease agreements, Old National is obligated to pay a base rent of $1.5 million per year.
During 2009, Old National sold five financial centers in sale leaseback transactions to unrelated
parties. Old National received cash proceeds of $10.6 million, net of selling costs. The
properties sold had a carrying value of $9.2 million. The $1.4 million deferred gain will be
amortized over the term of the leases. The leases have terms of fifteen and twenty years. Under
the lease agreements, Old National is obligated to pay a base rent of $1.0 million per year.
In March 2009, Old National acquired the Indiana retail branch banking network of Citizens
Financial Group. The network included 65 leased locations. Old National closed or merged 11 of
these locations into existing branch locations during 2009. The leases have term of less than one
year to ten years. Under the remaining lease agreements, Old National is obligated to pay a base
rent of approximately $2.5 million per year.
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Total rental expense was $29.7 million in 2009, $26.5 million in 2008 and $14.5 million in 2007.
The following is a summary of future minimum lease commitments as of December 31, 2008:
| (dollars in thousands) | ||||
|
2010
|
$ | 33,833 | ||
|
2011
|
32,545 | |||
|
2012
|
31,276 | |||
|
2013
|
29,475 | |||
|
2014
|
27,695 | |||
|
Thereafter
|
307,097 | |||
|
|
||||
|
Total
|
$ | 461,921 | ||
|
|
||||
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 $1.038 billion and standby letters of
credit of $103.2 million at December 31, 2009. At December 31, 2009, approximately $992 million of
the loan commitments had fixed rates and $46 million had floating rates, with the fixed interest
rates ranging from 0% to 18%. At December 31, 2008, loan commitments were $1.124 billion and
standby letters of credit were $108.4 million. These commitments are not reflected in the
consolidated financial statements. At December 31, 2009 and 2008, the balance of the allowance for
credit losses on unfunded loan commitments was $5.5 million and $3.5 million, respectively.
At December 31, 2009 and 2008, Old National had credit extensions of $25.9 million and $29.0
million, respectively with various unaffiliated banks related to letter of credit commitments
issued on behalf of Old National’s clients. At December 31, 2009 and 2008, the unsecured portion
was $3.1 million and $4.0 million respectively.
Old National holds instruments, in the normal course of business with clients, that are considered
financial guarantees in accordance with FASB ASC 460-10 (FIN 45,
Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others
),
which requires the Company to record the instruments at fair value. Standby letters of credit
guarantees are issued in connection with agreements made by clients to counterparties. Standby
letters of credit are contingent upon failure of the client 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 clients and is subject to normal credit policies. The term of
these standby letters of credit is typically one year or less. At December 31, 2009, the notional
amount of standby letters of credit was $103.2 million, which represents the maximum amount of
future funding requirements, and the carrying value was $0.6
million. At December 31, 2008, the notional amount of standby letters of credit was $108.4
million, which represents the maximum amount of future funding requirements, and the carrying value
was $0.5 million.
During the second quarter of 2007, Old National entered into a risk participation in an interest
rate swap. The interest rate swap has a notional amount of $9.2 million at December 31, 2009.
RESTRICTIONS ON CASH AND DUE FROM BANKS
Old National’s affiliate bank is required to maintain reserve balances on hand and with the Federal
Reserve Bank which are interest bearing and unavailable for investment purposes. The reserve
balances at December 31 were $28.8 million in 2009 and $47.5 million in 2008. In addition, Old
National had $9.8 million in cash and due from banks which was held as collateral for
collateralized swap positions as of December 31, 2009 and 2008.
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RESTRICTIONS ON TRANSFERS FROM AFFILIATE BANK
Regulations limit the amount of dividends an affiliate bank can declare in any year without
obtaining prior regulatory approval. Prior regulatory approval is required if dividends to be
declared in any year would exceed net earnings of the current year plus retained net profits for
the preceding two years. At December 31, 2006, Old National Bank had received regulatory approval
to declare a dividend up to $76 million in the first quarter of 2007. Old National used the cash
obtained from the dividend to fund its purchase of St. Joseph Capital Corporation during the first
quarter of 2007 and during the first quarter of 2009 received permission to pay a $40 million
dividend to repurchase the $100 million of non-voting preferred shares from the U.S. Treasury. As
a result of these special dividends, Old National Bank requires approval of regulatory authority
for the payment of dividends to Old National. Such approval was obtained for the payment of
dividends during 2009 and currently.
RESTRICTIONS ON THE PAYMENT OF DIVIDENDS
Old National has traditionally paid a quarterly dividend to common stockholders. The payment of
dividends is subject to legal and regulatory restrictions. Any payment of dividends in the future
will depend, in large part, on Old National’s earnings, capital requirements, financial condition
and other factors considered relevant by Old National’s Board of Directors. Additionally, the
payment of dividends to the preferred shareholders in 2009 had priority over the payment of cash
dividends to the common stockholders. On March 31, 2009, Old National repurchased all of the $100
million of Series T Preferred Stock from the Treasury Department.
CAPITAL ADEQUACY
Old National and Old National Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital requirements can
elicit certain mandatory actions by regulators that, if undertaken, could have a direct material
effect on Old National’s financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, Old National and Old National Bank must meet
specific capital guidelines that involve quantitative measures of assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting practices. The capital amounts
and classifications are also subject to qualitative judgments by the regulators about components,
risk weightings and other factors. Prompt corrective action provisions are not applicable to bank
holding companies. Quantitative measures established by regulation to ensure capital adequacy
require Old National and Old National Bank to maintain minimum amounts and ratios as set forth in
the following table.
At December 31, 2009, Old National and Old National Bank exceeded the regulatory minimums and Old
National Bank met the regulatory definition of well-capitalized based on the most recent regulatory
notification. To be categorized as well-capitalized, Old National Bank must maintain minimum total
risk-based, Tier 1 risked-based and Tier 1 leverage ratios. There are no conditions or events
since that notification that management believes have changed the institution’s category.
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The following table summarizes capital ratios for Old National and Old National Bank as of December
31:
| For Capital | For Well | |||||||||||||||||||||||
| Actual | Adequacy Purposes | Capitalized Purposes | ||||||||||||||||||||||
| (dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
|
2009
|
||||||||||||||||||||||||
|
Total capital to
risk-weighted assets
|
||||||||||||||||||||||||
|
Old National Bancorp
|
$ | 832,096 | 16.09 | % | $ | 413,848 | 8.00 | % | $ | N/A | N/A | % | ||||||||||||
|
Old National Bank
|
619,864 | 12.21 | 406,224 | 8.00 | 507,780 | 10.00 | ||||||||||||||||||
|
Tier 1 capital to
risk-weighted assets
|
||||||||||||||||||||||||
|
Old National Bancorp
|
737,224 | 14.25 | 206,924 | 4.00 | N/A | N/A | ||||||||||||||||||
|
Old National Bank
|
526,168 | 10.36 | 203,112 | 4.00 | 304,668 | 6.00 | ||||||||||||||||||
|
Tier 1 capital to
average assets
|
||||||||||||||||||||||||
|
Old National Bancorp
|
737,224 | 9.51 | 310,210 | 4.00 | N/A | N/A | ||||||||||||||||||
|
Old National Bank
|
526,168 | 6.97 | 226,522 | 3.00 | 377,536 | 5.00 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
2008
|
||||||||||||||||||||||||
|
Total capital to
risk-weighted assets
|
||||||||||||||||||||||||
|
Old National Bancorp
|
$ | 836,759 | 15.06 | % | $ | 444,413 | 8.00 | % | $ | N/A | N/A | % | ||||||||||||
|
Old National Bank
|
732,318 | 13.41 | 436,732 | 8.00 | 545,915 | 10.00 | ||||||||||||||||||
|
Tier 1 capital to
risk-weighted assets
|
||||||||||||||||||||||||
|
Old National Bancorp
|
707,304 | 12.73 | 222,207 | 4.00 | N/A | N/A | ||||||||||||||||||
|
Old National Bank
|
604,051 | 11.06 | 218,366 | 4.00 | 327,549 | 6.00 | ||||||||||||||||||
|
Tier 1 capital to
average assets
|
||||||||||||||||||||||||
|
Old National Bancorp
|
707,304 | 9.50 | 297,859 | 4.00 | N/A | N/A | ||||||||||||||||||
|
Old National Bank
|
604,051 | 8.21 | 220,698 | 3.00 | 367,830 | 5.00 | ||||||||||||||||||
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Table of Contents
The following are the condensed parent company only financial statements of Old National Bancorp:
OLD NATIONAL BANCORP (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
CONDENSED BALANCE SHEETS
| December 31, | ||||||||
| (dollars in thousands) | 2009 | 2008 | ||||||
|
Assets
|
||||||||
|
Deposits in affiliate bank
|
$ | 22,111 | $ | 22,807 | ||||
|
Investment securities — available for sale
|
445 | 296 | ||||||
|
Investment in affiliates:
|
||||||||
|
Banking subsidiaries
|
661,272 | 684,597 | ||||||
|
Non-banks
|
47,762 | 60,783 | ||||||
|
Advances to affiliates
|
196,029 | 50,039 | ||||||
|
Other assets
|
95,451 | 89,070 | ||||||
|
|
||||||||
|
Total assets
|
$ | 1,023,070 | $ | 907,592 | ||||
|
|
||||||||
|
Liabilities and Shareholders’ Equity
|
||||||||
|
Other liabilities
|
$ | 21,970 | $ | 19,498 | ||||
|
Other borrowings
|
157,274 | 157,229 | ||||||
|
Shareholders’ equity
|
843,826 | 730,865 | ||||||
|
|
||||||||
|
Total liabilities and shareholders’ equity
|
$ | 1,023,070 | $ | 907,592 | ||||
|
|
||||||||
OLD NATIONAL BANCORP (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF INCOME
CONDENSED STATEMENTS OF INCOME
| Years Ended December 31, | ||||||||||||
| (dollars in thousands) | 2009 | 2008 | 2007 | |||||||||
|
Income
|
||||||||||||
|
Dividends from affiliates
|
$ | 94,958 | $ | 92,700 | $ | 153,000 | ||||||
|
Net securities gains
|
666 | — | — | |||||||||
|
Other income
|
647 | 2,493 | 2,685 | |||||||||
|
Other income from affiliates
|
869 | 92 | 29,796 | |||||||||
|
|
||||||||||||
|
Total income
|
97,140 | 95,285 | 185,481 | |||||||||
|
|
||||||||||||
|
Expense
|
||||||||||||
|
Interest on borrowings
|
11,618 | 15,331 | 18,025 | |||||||||
|
Other expenses
|
10,222 | 7,798 | 37,608 | |||||||||
|
|
||||||||||||
|
Total expense
|
21,840 | 23,129 | 55,633 | |||||||||
|
|
||||||||||||
|
Income before income taxes and equity
in undistributed earnings of affiliates
|
75,300 | 72,156 | 129,848 | |||||||||
|
Income tax benefit
|
(8,063 | ) | (9,358 | ) | (10,486 | ) | ||||||
|
|
||||||||||||
|
Income before equity in undistributed
earnings of affiliates
|
83,363 | 81,514 | 140,334 | |||||||||
|
Dividends receivable from affiliates in
excess of earnings
|
(69,626 | ) | (19,036 | ) | (65,444 | ) | ||||||
|
|
||||||||||||
|
Net Income
|
$ | 13,737 | $ | 62,478 | $ | 74,890 | ||||||
|
|
||||||||||||
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OLD NATIONAL BANCORP (PARENT COMPANY ONLY)
CONDENSED STATEMENT OF CASH FLOWS
CONDENSED STATEMENT OF CASH FLOWS
| Years Ended December 31, | ||||||||||||
| (dollars in thousands) | 2009 | 2008 | 2007 | |||||||||
|
Cash Flows From Operating Activities
|
||||||||||||
|
Net income
|
$ | 13,737 | $ | 62,478 | $ | 74,890 | ||||||
|
|
||||||||||||
|
Adjustments to reconcile net income to cash
provided by operating activities:
|
||||||||||||
|
Depreciation
|
67 | 106 | 113 | |||||||||
|
Net premium (discount) on investment securities
|
434 | — | — | |||||||||
|
Net securities (gains) losses
|
(663 | ) | — | — | ||||||||
|
Stock option expense
|
392 | 407 | 298 | |||||||||
|
Restricted stock expense (benefit)
|
918 | 1,597 | 1,292 | |||||||||
|
Net losses on sales and write-downs of premises and equipment
|
— | — | 311 | |||||||||
|
(Increase) decrease in other assets
|
(6,302 | ) | (6,479 | ) | (9,296 | ) | ||||||
|
(Decrease) increase in other liabilities
|
2,450 | (504 | ) | 15,740 | ||||||||
|
Dividends received from affiliates in excess of earnings
|
69,626 | 19,036 | 65,444 | |||||||||
|
|
||||||||||||
|
Total adjustments
|
66,922 | 14,163 | 73,902 | |||||||||
|
|
||||||||||||
|
Net cash flows provided by operating activities
|
80,659 | 76,641 | 148,792 | |||||||||
|
|
||||||||||||
|
Cash Flows From Investing Activities
|
||||||||||||
|
Cash and cash equivalents of subsidiaries acquired, net
|
— | — | 469 | |||||||||
|
Purchases and adjustments to purchase prices of subsidiaries
|
— | — | (78,109 | ) | ||||||||
|
Purchases of investment securities available-for-sale
|
(191,994 | ) | (296 | ) | — | |||||||
|
Proceeds from sales of investment securities available-for-sale
|
192,222 | — | — | |||||||||
|
Net payments from (advances to) affiliates
|
(145,989 | ) | (50,039 | ) | — | |||||||
|
Proceeds from sales of premises and equipment
|
— | — | 4 | |||||||||
|
Purchases of premises and equipment
|
— | (82 | ) | (253 | ) | |||||||
|
|
||||||||||||
|
Net cash flows provided by (used in) investing activities
|
(145,761 | ) | (50,417 | ) | (77,889 | ) | ||||||
|
|
||||||||||||
|
Cash Flows From Financing Activities
|
||||||||||||
|
Payments for maturities on other borrowings
|
— | (100,000 | ) | (10,000 | ) | |||||||
|
Cash dividends paid on common stock
|
(30,380 | ) | (60,801 | ) | (57,782 | ) | ||||||
|
Cash dividends paid on preferred stock
|
(1,514 | ) | — | — | ||||||||
|
Common stock repurchased
|
(353 | ) | (457 | ) | (4,102 | ) | ||||||
|
Proceeds from issuance of TARP preferred stock and warrants
|
— | 99,885 | — | |||||||||
|
Repurchase of TARP preferred stock and warrants
|
(101,200 | ) | — | — | ||||||||
|
Common stock reissued under stock option, restricted stock
and stock purchase plans
|
97 | 1,940 | 231 | |||||||||
|
Common stock issued
|
197,756 | — | — | |||||||||
|
|
||||||||||||
|
Net cash flows provided by (used in) financing activities
|
64,406 | (59,433 | ) | (71,653 | ) | |||||||
|
|
||||||||||||
|
Net increase (decrease) in cash and cash equivalents
|
(696 | ) | (33,209 | ) | (750 | ) | ||||||
|
Cash and cash equivalents at beginning of period
|
22,807 | 56,016 | 56,766 | |||||||||
|
|
||||||||||||
|
Cash and cash equivalents at end of period
|
$ | 22,111 | $ | 22,807 | $ | 56,016 | ||||||
|
|
||||||||||||
Old National operates in two operating segments: community banking 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. 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 clients.
Other is comprised of the parent company and several smaller business units including insurance,
wealth management and brokerage. It includes unallocated corporate overhead and intersegment
revenue and expense eliminations.
102
Table of Contents
In order to measure performance for each segment, Old National allocates capital and corporate
overhead to each segment. Capital and corporate overhead are allocated to each segment using
various methodologies, which are subject to periodic changes by management. Intersegment sales and
transfers are not significant.
Old National uses a funds transfer pricing (“FTP”) system to eliminate the effect of interest rate
risk from net interest income in the community banking segment and from companies included in the
“other” column. 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.
Summarized financial information concerning segments is shown in the following table for the years
ended December 31.
SEGMENT INFORMATION
| Community | ||||||||||||||||
| (dollars in thousands) | Banking | Treasury | Other | Total | ||||||||||||
|
2009
|
||||||||||||||||
|
Net interest income
|
$ | 287,404 | $ | (47,490 | ) | $ | (8,515 | ) | $ | 231,399 | ||||||
|
Provision for loan losses
|
63,284 | 126 | (130 | ) | 63,280 | |||||||||||
|
Noninterest income
|
94,132 | 5,422 | 63,906 | 163,460 | ||||||||||||
|
Noninterest expense
|
270,249 | 7,878 | 60,829 | 338,956 | ||||||||||||
|
Income (loss) before income taxes
|
48,003 | (50,072 | ) | (5,308 | ) | (7,377 | ) | |||||||||
|
Total assets
|
4,487,007 | 3,401,958 | 116,370 | 8,005,335 | ||||||||||||
|
|
||||||||||||||||
|
2008
|
||||||||||||||||
|
Net interest income
|
$ | 259,009 | $ | (13,337 | ) | $ | (2,347 | ) | $ | 243,325 | ||||||
|
Provision for loan losses
|
51,024 | 440 | — | 51,464 | ||||||||||||
|
Noninterest income
|
83,181 | 14,918 | 68,870 | 166,969 | ||||||||||||
|
Noninterest expense
|
226,272 | 3,498 | 67,459 | 297,229 | ||||||||||||
|
Income (loss) before income taxes
|
64,894 | (2,357 | ) | (936 | ) | 61,601 | ||||||||||
|
Total assets
|
4,959,736 | 2,802,889 | 111,265 | 7,873,890 | ||||||||||||
|
|
||||||||||||||||
|
2007
|
||||||||||||||||
|
Net interest income
|
$ | 234,637 | $ | (12,784 | ) | $ | (2,662 | ) | $ | 219,191 | ||||||
|
Provision for loan losses
|
3,492 | 626 | — | 4,118 | ||||||||||||
|
Noninterest income
|
80,328 | 5,815 | 68,995 | 155,138 | ||||||||||||
|
Noninterest expense
|
207,006 | 4,518 | 66,474 | 277,998 | ||||||||||||
|
Income (loss) before income taxes
|
104,467 | (12,113 | ) | (141 | ) | 92,213 | ||||||||||
|
Total assets
|
4,968,665 | 2,756,899 | 120,562 | 7,846,126 | ||||||||||||
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Table of Contents
The following table details the quarterly results of operations for the years ended December 31,
2009 and 2008.
INTERIM FINANCIAL DATA
| (unaudited, dollars | Quarters Ended 2009 | Quarters Ended 2008 | ||||||||||||||||||||||||||||||
| and shares in thousands, | December | September | June | March | December | September | June | March | ||||||||||||||||||||||||
| except per share data) | 31 | 30 | 30 | 31 | 31 | 30 | 30 | 31 | ||||||||||||||||||||||||
|
Interest income
|
$ | 80,090 | $ | 83,422 | $ | 89,182 | $ | 87,983 | $ | 95,344 | $ | 95,679 | $ | 97,365 | $ | 104,134 | ||||||||||||||||
|
Interest expense
|
25,067 | 27,011 | 28,415 | 28,785 | 32,749 | 36,083 | 36,021 | 44,344 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Net interest income
|
55,023 | 56,411 | 60,767 | 59,198 | 62,595 | 59,596 | 61,344 | 59,790 | ||||||||||||||||||||||||
|
Provision for loan losses
|
21,821 | 12,191 | 11,968 | 17,300 | 17,017 | 6,842 | 5,700 | 21,905 | ||||||||||||||||||||||||
|
Noninterest income
|
36,616 | 39,003 | 45,606 | 42,235 | 37,585 | 38,995 | 43,513 | 46,876 | ||||||||||||||||||||||||
|
Noninterest expense
|
90,775 | 83,966 | 86,751 | 77,464 | 78,996 | 72,463 | 74,834 | 70,936 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Income (loss) before income taxes
|
(20,957 | ) | (743 | ) | 7,654 | 6,669 | 4,167 | 19,286 | 24,323 | 13,825 | ||||||||||||||||||||||
|
Income tax expense (benefit)
|
(11,637 | ) | (4,760 | ) | (1,981 | ) | (2,736 | ) | (2,481 | ) | 2,271 | 4,848 | (5,515 | ) | ||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Net income (loss)
|
(9,320 | ) | 4,017 | 9,635 | 9,405 | 6,648 | 17,015 | 19,475 | 19,340 | |||||||||||||||||||||||
|
Preferred stock dividends and
discount accretion
|
— | — | — | (3,892 | ) | (298 | ) | — | — | — | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Net income (loss) attributable to
common stockholders
|
$ | (9,320 | ) | $ | 4,017 | $ | 9,635 | $ | 5,513 | $ | 6,350 | $ | 17,015 | $ | 19,475 | $ | 19,340 | |||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Net income (loss) per share :
|
||||||||||||||||||||||||||||||||
|
Basic
|
$ | (0.11 | ) | $ | 0.06 | $ | 0.15 | $ | 0.08 | $ | 0.10 | $ | 0.26 | $ | 0.30 | $ | 0.29 | |||||||||||||||
|
Diluted
|
(0.11 | ) | 0.06 | 0.15 | 0.08 | 0.10 | 0.26 | 0.30 | 0.29 | |||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Average shares
|
||||||||||||||||||||||||||||||||
|
Basic
|
86,701 | 66,635 | 65,950 | 65,793 | 65,730 | 65,645 | 65,640 | 65,623 | ||||||||||||||||||||||||
|
Diluted
|
86,701 | 66,706 | 65,999 | 65,882 | 65,922 | 65,790 | 65,812 | 65,754 | ||||||||||||||||||||||||
The higher provision for loan losses in 2009 is primarily attributable to the increase in net
charge-offs. During the fourth quarter of 2009 we recorded a charge-off of $12.0 million related
to a single commercial loan.
Noninterest expense increased in 2009 primarily due to expenses associated with the 65 Citizens
Financial branches acquired in March 2009 as well as the increase in FDIC insurance expense.
Income taxes decreased in 2009 because tax-exempt income comprised a higher percentage of total
income and pre-tax income was lower than in 2008.
104
Table of Contents
Not applicable.
Conclusion Regarding the Effectiveness of Disclosure 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 annual report on Form 10-K, 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 judgments 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.
Changes in Internal Control over Financial Reporting
. There were no changes in
Old National’s internal control over financial reporting that occurred during
the period covered by this report that have materially affected, or are
reasonably likely to materially affect, Old National’s internal control over
financial reporting.
Refer to Item 8 for “Management’s Report on Internal Control over Financial Reporting.”
None.
105
Table of Contents
This information is omitted from this report pursuant to General Instruction G.(3) of Form 10-K as
Old National will file with the Commission its definitive Proxy Statement pursuant to Regulation
14A of the Securities Exchange Act of 1934, as amended, not later than 120 days after December 31,
2009. The applicable information appearing in the Proxy Statement for the 2010 annual meeting is
incorporated by reference.
Old National has adopted a code of ethics that applies to directors, officers, and all other
employees including Old National’s principal executive officer, principal financial officer and
principal accounting officer. The text of the code of ethics is available on Old National’s
Internet website at www.oldnational.com or in print to any shareholder who requests it. Old
National intends to post information regarding any amendments to, or waivers from, its code of
ethics on its Internet website.
This information is omitted from this report pursuant to General Instruction G.(3) of Form 10-K as
Old National will file with the Commission its definitive Proxy Statement pursuant to Regulation
14A of the Securities Exchange Act of 1934, as amended, not later than 120 days after December 31,
2009. The applicable information appearing in our Proxy Statement for the 2010 annual meeting is
incorporated by reference.
This information is omitted from this report, (with the exception of the “Equity Compensation Plan
Information”, which is reported in Item 5 of this report and is incorporated herein by reference)
pursuant to General Instruction G.(3) of Form 10-K as Old National will file with the Commission
its definitive Proxy Statement pursuant to Regulation 14A of the Securities Exchange Act of 1934,
as amended, not later than 120 days after December 31, 2009. The applicable information appearing
in the Proxy Statement for the 2010 annual meeting is incorporated by reference.
This information is omitted from this report pursuant to General Instruction G.(3) of Form 10-K as
Old National will file with the Commission its definitive Proxy Statement pursuant to Regulation
14A of the Securities Exchange Act of 1934, as amended, not later than 120 days after December 31,
2009. The applicable information appearing in the Proxy Statement for the 2010 annual meeting is
incorporated by reference.
This information is omitted from this report pursuant to General Instruction G.(3) of Form 10-K as
Old National will file with the Commission its definitive Proxy Statement pursuant to Regulation
14A of the Securities Exchange Act of 1934, as amended, not later than 120 days after December 31,
2009. The applicable information appearing in the Proxy Statement for the 2010 annual meeting is
incorporated by reference.
106
Table of Contents
| 1. | Financial Statements: | |
| The following consolidated financial statements of the registrant and its subsidiaries are filed as part of this document under “Item 8. Financial Statements and Supplementary Data.” | ||
| Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets—December 31, 2009 and 2008 Consolidated Statements of Income—Years Ended December 31, 2009, 2008 and 2007 Consolidated Statements of Changes in Shareholders’ Equity—Years Ended December 31, 2009, 2008 and 2007 Consolidated Statements of Cash Flows—Years Ended December 31, 2009, 2008 and 2007 Notes to Consolidated Financial Statements | ||
| 2. | Financial Statement Schedules | |
| The schedules for Old National and its subsidiaries are omitted because of the absence of conditions under which they are required, or because the information is set forth in the consolidated financial statements or the notes thereto. | ||
| 3. | Exhibits | |
| The exhibits filed as part of this report and exhibits incorporated herein by reference to other documents are as follows: |
| Exhibit | ||||||
| Number | ||||||
| 2 |
Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession
|
|||||
|
|
||||||
| 2.1 |
Purchase and Assumption Agreement dated November 24, 2008 by and among Old National Bancorp, Old
National Bank and RBS Citizens, National Association (incorporated by reference to Exhibit 2.1 of Old
National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November
25, 2008).
|
|||||
|
|
||||||
| 3 | (i) |
Articles
of Incorporation of Old National, amended December 10, 2008 (incorporated by reference to Exhibit 3.1 of Old
National’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 12,
2008).
|
||||
|
|
||||||
| 3 | (ii) |
By-Laws of Old National, amended July 23, 2009 (incorporated by reference to Exhibit 3.1 of Old
National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 23,
2009).
|
||||
|
|
||||||
| 4 |
Instruments defining rights of security holders, including indentures
|
|||||
|
|
||||||
| 4.1 |
Senior Indenture between Old National and The Bank of New York Trust Company (as successor to J.P.
Morgan Trust Company, National Association (as successor to Bank One, N.A.)), as trustee, dated as of
July 23, 1997 (incorporated by reference to Exhibit 4.3 to Old National’s Registration Statement on
Form S-3, Registration No. 333-118374, filed with the Securities and Exchange Commission on December
2, 2004).
|
|||||
|
|
||||||
| 4.2 |
Form of Indenture between Old National and J.P. Morgan Trust Company, National Association (as
successor to Bank One, 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).
|
|||||
|
|
||||||
| 4.3 |
Rights Agreement, dated March 1, 1990, as amended on February 29, 2000, between Old National
Bancorp and Old National Bank, as trustee (incorporated by reference to Old National’s Form 8-A, dated
March 1, 2000).
|
|||||
107
Table of Contents
| Exhibit | ||||||
| Number | ||||||
| 4.4 |
First Indenture Supplement dated as of May 20, 2005, between Old National and J.P. Morgan Trust
Company, as trustee, providing for the issuance of its 5.00% Senior Notes due 2010 (incorporated by
reference to Exhibit 4.1 of Old National’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on May 20, 2005).
|
|||||
|
|
||||||
| 4.5 |
Form of 5.00% Senior Notes due 2010 (incorporated by reference to Exhibit 4.2 of Old National’s
Current Report on Form 8-K filed with the Securities and Exchange Commission on May 20, 2005).
|
|||||
|
|
||||||
| 10 |
Material contracts
|
|||||
|
|
||||||
| (a) |
Deferred Compensation Plan for Directors of Old National Bancorp and Subsidiaries (As Amended and
Restated Effective as of January 1, 2003) (incorporated by reference to Exhibit 10(a) of Old
National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December
15, 2004).*
|
|||||
|
|
||||||
| (b) |
Second Amendment to the Deferred Compensation Plan for Directors of Old National Bancorp and
Subsidiaries (As Amended and Restated Effective as of January 1, 2003) (incorporated by reference to
Exhibit 10(b) of Old National’s Current Report on Form 8-K filed with the Securities and Exchange
Commission on December 15, 2004).*
|
|||||
|
|
||||||
| (c) |
2005 Directors Deferred Compensation Plan (Effective as of January 1, 2005) (incorporated by reference
to Exhibit 10(c) of Old National’s Current Report on Form 8-K filed with the Securities and Exchange
Commission on December 15, 2004).*
|
|||||
|
|
||||||
| (d) |
Supplemental Deferred Compensation Plan for Select Executive Employees of Old National Bancorp and
Subsidiaries (As Amended and Restated Effective as of January 1, 2003) (incorporated by reference to
Exhibit 10(d) of Old National’s Current Report on Form 8-K filed with the Securities and Exchange
Commission on December 15, 2004).*
|
|||||
|
|
||||||
| (e) |
Second Amendment to the Supplemental Deferred Compensation Plan for Select Executive Employees of Old
National Bancorp and Subsidiaries (As Amended and Restated Effective as of January 1, 2003)
(incorporated by reference to Exhibit 10(e) of Old National’s Current Report on Form 8-K filed with
the Securities and Exchange Commission on December 15, 2004).*
|
|||||
|
|
||||||
| (f) |
Third Amendment to the Supplemental Deferred Compensation Plan for Select Executive Employees of Old
National Bancorp and Subsidiaries (As Amended and Restated Effective as of January 1, 2003)
(incorporated by reference to Exhibit 10(f) of Old National’s Current Report on Form 8-K filed with
the Securities and Exchange Commission on December 15, 2004).*
|
|||||
|
|
||||||
| (g) |
2005 Executive Deferred Compensation Plan (Effective as of January 1, 2005) (incorporated by reference
to Exhibit 10(g) of Old National’s Current Report on Form 8-K filed with the Securities and Exchange
Commission on December 15, 2004).*
|
|||||
|
|
||||||
| (h) |
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).*
|
|||||
|
|
||||||
| (i) |
Form of Executive Stock Option Award Agreement between Old National and certain key associates
(incorporated by reference to Exhibit 10(h) of Old National’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004).*
|
|||||
|
|
||||||
| (j) |
Form of 2006 “Performance-Based” Restricted Stock Award Agreement between Old National and certain key
associates (incorporated by reference to Exhibit 99.1 of Old National’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on March 2, 2006).*
|
|||||
|
|
||||||
| (k) |
Form of 2006 “Service-Based” Restricted Stock Award Agreement between Old National and certain key
associates (incorporated by reference to Exhibit 99.2 of Old National’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on March 2, 2006).*
|
|||||
108
Table of Contents
| Exhibit | ||||||
| Number | ||||||
| (l) |
Form of 2006 Non-qualified Stock Option Agreement (incorporated by reference to Exhibit 99.3 of Old
National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 2,
2006).*
|
|||||
|
|
||||||
| (m) |
Form of 2007 “Performance-Based” Restricted Stock Award Agreement between Old National and certain key
associates (incorporated by reference to Exhibit 10(w) of Old National’s Annual Report on Form 10-K
for the year ended December 31, 2006).*
|
|||||
|
|
||||||
| (n) |
Form of 2007 “Service-Based” Restricted Stock Award Agreement between Old National and certain key
associates (incorporated by reference to Exhibit 10(x) of Old National’s Annual Report on Form 10-K
for the year ended December 31, 2006).*
|
|||||
|
|
||||||
| (o) |
Form of 2007 Non-qualified Stock Option Agreement between Old National and certain key associates
(incorporated by reference to Exhibit 10(y) of Old National’s Annual Report on Form 10-K for the year
ended December 31, 2006).*
|
|||||
|
|
||||||
| (p) |
Lease Agreement, dated December 20, 2006 between ONB One Main Landlord, LLC and Old National Bank
(incorporated by reference to Exhibit 10(aa) of Old National’s Annual Report on Form 10-K for the year
ended December 31, 2006).
|
|||||
|
|
||||||
| (q) |
Lease Agreement, dated December 20, 2006 between ONB 123 Main Landlord, LLC and Old National Bank
(incorporated by reference to Exhibit 10(ab) of Old National’s Annual Report on Form 10-K for the year
ended December 31, 2006).
|
|||||
|
|
||||||
| (r) |
Lease Agreement, dated December 20, 2006 between ONB 4
th
Street Landlord, LLC and Old
National Bank (incorporated by reference to Exhibit 10(ac) of Old National’s Annual Report on Form
10-K for the year ended December 31, 2006).
|
|||||
|
|
||||||
| (s) |
Master Lease Agreement dated September 19, 2007, by and between ONB CTL Portfolio Landlord #1, LLC,
and Old National Bank (incorporated by reference to Exhibit 99.2 of Old National’s Current Report on
Form 8-K filed with the Securities and Exchange Commission on September 25, 2007).
|
|||||
|
|
||||||
| (t) |
Lease Supplement No. 1 dated September 19, 2007, by and between ONB CTL Portfolio Landlord #1, LLC,
Old National Bank and ONB Insurance Group, Inc. (incorporated by reference to Exhibit 99.3 of Old
National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September
25, 2007).
|
|||||
|
|
||||||
| (u) |
Master Lease Agreement dated September 19, 2007, by and between ONB CTL Portfolio Landlord #2, LLC,
and Old National Bank (incorporated by reference to Exhibit 99.4 of Old National’s Current Report on
Form 8-K filed with the Securities and Exchange Commission on September 25, 2007).
|
|||||
|
|
||||||
| (v) |
Master Lease Agreement dated September 19, 2007, by and between ONB CTL Portfolio Landlord #3, LLC,
and Old National Bank (incorporated by reference to Exhibit 99.5 of Old National’s Current Report on
Form 8-K filed with the Securities and Exchange Commission on September 25, 2007).
|
|||||
|
|
||||||
| (w) |
Master Lease Agreement dated September 19, 2007, by and between ONB CTL Portfolio Landlord #4, LLC,
and Old National Bank (incorporated by reference to Exhibit 99.6 of Old National’s Current Report on
Form 8-K filed with the Securities and Exchange Commission on September 25, 2007).
|
|||||
|
|
||||||
| (x) |
Master Lease Agreement dated September 19, 2007, by and between ONB CTL Portfolio Landlord #5, LLC,
and Old National Bank (incorporated by reference to Exhibit 99.7 of Old National’s Current Report on
Form 8-K filed with the Securities and Exchange Commission on September 25, 2007).
|
|||||
109
Table of Contents
| Exhibit | ||||||
| Number | ||||||
| (y) |
Form of Lease Agreement dated October 19, 2007 entered into by affiliates of Old National Bancorp and
affiliates of SunTrust Equity Funding, LLC (incorporated by reference to Exhibit 99.2 of Old
National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 25,
2007).
|
|||||
|
|
||||||
| (z) |
Form of Lease Agreement dated December 27, 2007 entered into by affiliates of Old National Bancorp and
affiliates of SunTrust Equity Funding, LLC (as incorporated by reference to Exhibit 99.2 of Old
National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December
31, 2007).
|
|||||
|
|
||||||
| (aa) |
Form of 2008 Non-qualified Stock Option Award Agreement (incorporated by reference to Exhibit 99.1 of
Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January
30, 2008).*
|
|||||
|
|
||||||
| (ab) |
Form of 2008 “Performance-Based” Restricted Stock Award Agreement between Old National and certain key
associates (incorporated by reference to Exhibit 99.2 of Old National’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on January 30, 2008).*
|
|||||
|
|
||||||
| (ac) |
Form of 2008 “Service-Based” Restricted Stock Award Agreement between Old National and certain key
associates (incorporated by reference to Exhibit 99.3 of Old National’s Current Report on Form 8-K
filed with the Securities and Exchange Commission on January 30, 2008).*
|
|||||
|
|
||||||
| (ad) |
Form of Employment Agreement for Robert G. Jones, Daryl D. Moore, Barbara A. Murphy and Christopher A.
Wolking (incorporated by reference to Exhibit 10.1 of Old National’s Current Report on Form 8-K filed
with the Securities and Exchange Commission on March 21, 2008).*
|
|||||
|
|
||||||
| (ae) |
Severance/Change in Control agreement between Old National and Annette W. Hudgions (incorporated by
reference to Exhibit 10.2 of Old National’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on March 21, 2008).*
|
|||||
|
|
||||||
| (af) |
Old National Bancorp 2008 Incentive Compensation Plan (incorporated by reference to Appendix II of Old
National’s Definitive Proxy Statement filed with the Securities and Exchange Commission on March 27,
2008).*
|
|||||
|
|
||||||
| (ag) |
Old National Bancorp Code of Conduct (incorporated by reference to Exhibit 14.1 of Old National’s
Current Report on Form 8-K filed with the Securities and Exchange Commission on October 29, 2008).
|
|||||
|
|
||||||
| (ah) |
Letter Agreement dated December 12, 2008 by and between Old National Bancorp and the United States
Department of Treasury which includes the Securities Purchase Agreement — Standard Terms (incorporated
by reference to Exhibit 10.1 of Old National’s Current Report on Form 8-K filed with the Securities
and Exchange Commission on December 12, 2008).
|
|||||
|
|
||||||
| (ai) |
Form of 2009 Performance Share Award Agreement — Internal Performance Measures between Old National
and certain key associates (incorporated by reference to Old National’s Current Report on Form 8-K/A
filed with the Securities and Exchange Commission on February 13, 2009).*
|
|||||
|
|
||||||
| (aj) |
Form of 2009 Performance Share Award Agreement — Relative Performance Measures between Old National
and certain key associates (incorporated by reference to Old National’s Current Report on Form 8-K/A
filed with the Securities and Exchange Commission on February 13, 2009).*
|
|||||
|
|
||||||
| (ak) |
Form of 2009 “Service-Based” Restricted Stock Award Agreement between Old National and certain key
associates (incorporated by reference to Old National’s Current Report on Form 8-K/A filed with the
Securities and Exchange Commission on February 13, 2009).*
|
|||||
|
|
||||||
| (al) |
Form of 2009 Executive Stock Option Agreement between Old National and certain key associates
(incorporated by reference to Old National’s Current Report on Form 8-K/A filed with the Securities
and Exchange Commission on February 13, 2009).*
|
|||||
110
Table of Contents
| Exhibit | ||||||
| Number | ||||||
| (am) |
Purchase and Assumption Agreement dated November 24, 2008 by and among Old National Bank and RBS
Citizens, National Association (the schedules and exhibits have been omitted pursuant to Item
601(b)(2) of Regulation S-K) (incorporated by reference to Exhibit 2.1 of Old National’s Current
Report on Form 8-K filed with the Securities and Exchange Commission on March 20, 2009).
|
|||||
|
|
||||||
| (an) |
Preferred Stock Repurchase Agreement dated March 31, 2009 by and between Old National Bancorp and the
United States Department of Treasury (incorporated by reference to Exhibit 10.1 of Old National’s
Current Report on Form 8-K filed with the Securities and Exchange Commission on March 31, 2009).
|
|||||
|
|
||||||
| (ao) |
Warrant Repurchase Agreement dated May 8, 2009 by and between Old National Bancorp and the United
States Department of Treasury (incorporated by reference to Exhibit 10.1 of Old National’s Current
Report on Form 8-K filed with the Securities and Exchange Commission on May 11, 2009).
|
|||||
|
|
||||||
| (ap) |
Stock Purchase and Dividend Reinvestment Plan (incorporated by reference to Old National’s
Registration Statement on Form S-3, Registration No. 333-161394 filed with the Securities and Exchange
Commission on August 17, 2009).
|
|||||
|
|
||||||
| (aq) |
Purchase Agreement dated September 17, 2009 between National City Commercial Capital Company, LLC, Old
National Bank and Indiana Old National Insurance Company (incorporated by reference to Exhibit 10.01
of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission on
September 18, 2009).
|
|||||
|
|
||||||
| (ar) |
Servicing Agreement dated September 17, 2009 between National City Commercial Capital Company, LLC,
Old National Bank and Indiana Old National Insurance Company (incorporated by reference to Exhibit
10.02 of Old National’s Current Report on Form 8-K filed with the Securities and Exchange Commission
on September 18, 2009).
|
|||||
|
|
||||||
| (as) |
Form of 2010 Performance Share Award Agreement — Internal Performance Measures between Old National
and certain key associates is filed herewith.*
|
|||||
|
|
||||||
| (at) |
Form of 2010 Performance Share Award Agreement — Relative Performance Measures between Old National
and certain key associates is filed herewith.*
|
|||||
|
|
||||||
| (au) |
Form of 2010 “Service Based” Restricted Stock Award Agreement between Old National and certain key
associates is filed herewith.*
|
|||||
|
|
||||||
| 21 |
Subsidiaries of Old National Bancorp
|
|||||
|
|
||||||
| 23.1 |
Consent of Crowe Horwath LLP
|
|||||
|
|
||||||
| 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 |
111
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Old National has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
| OLD NATIONAL BANCORP | ||||
|
|
||||
|
By:
|
/s/ Robert G. Jones
|
Date: February 26, 2010 | ||
|
|
President and Chief Executive Officer | |||
|
|
(Principal Executive Officer) | |||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on February 26, 2010, by the following persons on behalf of Old National and in the
capacities indicated.
|
By:
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/s/ Joseph D. Barnette, Jr. | By: | /s/ Robert G. Jones | |||||
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President and Chief Executive Officer | |||||||
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(Principal Executive Officer) | |||||||
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By:
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/s/ Alan W. Braun | By: | /s/ Marjorie Z. Soyugenc | |||||
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By:
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/s/ Larry E. Dunigan | By: | /s/ Kelly N. Stanley | |||||
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Chairman of the Board of Directors | |||||||
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By:
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/s/ Arthur H. McElwee Jr. | By: | /s/ Linda E. White | |||||
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By:
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/s/ Niel C. Ellerbrook | By: | /s/ Christopher A. Wolking | |||||
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Senior Executive Vice President | |||||||
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Financial Officer (Principal Financial Officer) | |||||||
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By:
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/s/ Andrew E. Goebel | By: | /s/ Joan M. Kissel | |||||
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Senior Vice President and Corporate Controller | |||||||
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(Principal Accounting Officer) | |||||||
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By:
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/s/ Phelps L. Lambert
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112
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission Of Matters To A Vote Of Security HoldersPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataNote 1 Basis Of Presentation and Significant Accounting PoliciesNote 2 Acquisition ActivityNote 3 Investment SecuritiesNote 4 Loans Held For SaleNote 5 LoansNote 6 Allowance For Loan LossesNote 7 Goodwill and Other Intangible AssetsNote 8 DepositsNote 9 Short-term BorrowingsNote 10 Financing ActivitiesNote 11 Income TaxesNote 12 Employee Benefit PlansNote 13 Stock-based CompensationNote 14 Outside Director Stock Compensation ProgramNote 15 Shareholders EquityNote 16 Fair ValueNote 17 Derivative Financial InstrumentsNote 18 Commitments and ContingenciesNote 19 Financial GuaranteesNote 20 Regulatory RestrictionsNote 21 Parent Company Financial StatementsNote 22 Segment InformationNote 23 Interim Financial Data (unaudited)Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors and Executive Officers Of The RegistrantItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related TransactionsItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules