OLD NATIONAL BANCORP /IN/
10-Ks and 10-Qs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
||
For the fiscal year ended December 31, 2010
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 | ||
| Preferred Stock Purchase Rights | 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
þ
No
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(s229.405 of this chapter) 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 | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) |
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, 2010, was $871,266,571 (based on the closing price on that date of $10.36). 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, 2010, 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 31, 2011, was
94,760,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held May 19, 2011,
are incorporated by reference into Part III of this Form 10-K.
OLD NATIONAL BANCORP
2010 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
2010 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
| PAGE | ||||||||
|
|
||||||||
| 4 | ||||||||
|
|
||||||||
| 11 | ||||||||
|
|
||||||||
| 16 | ||||||||
|
|
||||||||
| 16 | ||||||||
|
|
||||||||
| 16 | ||||||||
|
|
||||||||
| 17 | ||||||||
|
|
||||||||
|
|
||||||||
| 17 | ||||||||
|
|
||||||||
| 19 | ||||||||
|
|
||||||||
| 20 | ||||||||
|
|
||||||||
| 49 | ||||||||
|
|
||||||||
| 49 | ||||||||
|
|
||||||||
| 110 | ||||||||
|
|
||||||||
| 110 | ||||||||
|
|
||||||||
| 110 | ||||||||
|
|
||||||||
|
|
||||||||
| 111 | ||||||||
|
|
||||||||
| 111 | ||||||||
|
|
||||||||
| 111 | ||||||||
|
|
||||||||
| 111 | ||||||||
|
|
||||||||
| 111 | ||||||||
|
|
||||||||
|
|
||||||||
| 112 | ||||||||
|
|
||||||||
| 118 | ||||||||
|
|
||||||||
| Exhibit 10(av) | ||||||||
| Exhibit 10(aw) | ||||||||
| Exhibit 10(ax) | ||||||||
| Exhibit 21 | ||||||||
| Exhibit 23.1 | ||||||||
| Exhibit 31.1 | ||||||||
| Exhibit 31.2 | ||||||||
| Exhibit 32.1 | ||||||||
| Exhibit 32.2 | ||||||||
| EX-101 INSTANCE DOCUMENT | ||||||||
| EX-101 SCHEMA DOCUMENT | ||||||||
| EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
| EX-101 LABELS LINKBASE DOCUMENT | ||||||||
| EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
| EX-101 DEFINITION LINKBASE DOCUMENT | ||||||||
2
Table of Contents
OLD NATIONAL BANCORP
2010 ANNUAL REPORT ON FORM 10-K
2010 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.
3
Table of Contents
| ITEM 1. | BUSINESS |
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, 2010, we employed 2,491 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, 2010, Old National Bank operated 161 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. Residential
real estate loans are either kept in our loan portfolio or sold servicing released to secondary
investors, with gains or losses from the sales being recognized.
4
Table of Contents
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 21 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.
Subsequent to year-end, we closed on our acquisition of Monroe Bancorp, strengthening our presence
in Bloomington, Indiana and the central and south central Indiana markets.
5
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, 2010
Deposits as of June 30, 2010
| Number of | Deposit Market | |||||||
| Market Location | Branches | Share Rank | ||||||
|
Central City, Kentucky
|
4 | 1st | ||||||
|
Danville, Illinois
|
3 | 1st | ||||||
|
Harrisburg, Illinois
|
1 | 2nd | ||||||
|
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 | ||||||
| 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.
Subsequent to year end, we acquired Monroe Bancorp in an all stock transaction. Monroe Bancorp is
headquartered in Bloomington, Indiana and has 15 banking centers. Pursuant to the merger
agreement, the shareholders of Monroe Bancorp received approximately 7.6 million shares of Old
National Bancorp stock valued at approximately $90.1 million. On January 1, 2011, unaudited
financial statements of Monroe Bancorp showed assets of $808.1 million, which included $509.6
million of loans, $166.4 million of securities and $711.5 million of deposits. The acquisition
strengthens our deposit market share in the Bloomington, Indiana market and should improve our
deposit market share rank to first place in 2011.
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 subject to extensive regulation under federal and state laws. The regulatory
framework is intended primarily for the protection of depositors, federal deposit insurance funds
and the banking system as a whole and not for the protection of shareholders and creditors.
6
Table of Contents
Significant elements of the laws and regulations applicable to Old National and its subsidiaries
are described below. The description is qualified in its entirety by reference to the full text of
the statutes, regulations and policies that are described. Also, such statutes, regulations and
policies are continually under review by Congress and state legislatures and federal and state
regulatory agencies. A change in statutes, regulations or regulatory policies applicable to Old
National and its subsidiaries could have a material effect on the business of the company.
The Dodd-Frank Act
On July 21, 2010, financial regulatory reform legislation entitled the “Dodd-Frank Wall Street
Reform and Consumer Protection Act” (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act
implements far-reaching changes across the financial regulatory landscape, including provisions
that, among other things, will:
| • | Centralize responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau, responsible for implementing, examining and enforcing compliance with federal consumer financial laws. | ||
| • | Restrict the preemption of state law by federal law and disallow subsidiaries and affiliates of national banks, such as Old National Bank, from availing themselves of such preemption. | ||
| • | Apply the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies, which, among other things, will require Old National to deduct, over three years beginning January 1, 2013, all trust preferred securities from Old National’s Tier 1 capital. | ||
| • | Require the Office of the Comptroller of the Currency to seek to make its capital requirements for national banks, such as Old National Bank, countercyclical so that capital requirements increase in times of economic expansion and decrease in times of economic contraction. | ||
| • | Require financial holding companies to be well capitalized and well managed as of July 21, 2011. Bank holding companies and banks must also be both well capitalized and well managed in order to acquire banks located outside their home state. | ||
| • | Change the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminate the ceiling on the size of the Deposit Insurance Fund (“DIF”) and increase the floor of the size of the DIF. | ||
| • | Impose comprehensive regulation of the over-the-counter derivatives market, which would include certain provisions that would effectively prohibit insured depository institutions from conducting certain derivatives businesses in the institution itself. | ||
| • | Require large, publicly traded bank holding companies to create a risk committee responsible for the oversight of enterprise risk management. Old National already has a risk committee which meets this requirement. | ||
| • | Implement corporate governance revisions, including with regard to executive compensation and proxy access by shareholders, that apply to all public companies, not just financial institutions. | ||
| • | Make permanent the $250 thousand limit for federal deposit insurance and increase the cash limit of Securities Investor Protection Corporation protection from $100 thousand to $250 thousand and provide unlimited federal deposit insurance until December 31, 2012 for noninterest bearing demand transaction accounts at all insured depository institutions. | ||
| • | Repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction accounts as well as other accounts. | ||
| • | Amend the Electronic Fund Transfer Act (“EFTA”) to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer. |
Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several
years, making it difficult to anticipate the overall financial impact on Old National, its
customers or the financial industry more generally. Provisions in the legislation that affect the
payment of interest on demand deposits and interchange fees are likely to increase the costs
associated with deposits as well as place limitations on certain revenues those deposits may
generate. Provisions in the legislation that revoke the Tier 1 capital treatment of trust
preferred securities and otherwise require revisions to the capital requirements of Old National
and Old National Bank could require Old National and Old National Bank to seek other sources of
capital in the future.
7
Table of Contents
Other Regulatory Agencies and Requirements
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.
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, 2010. For Old National’s regulatory capital ratios and regulatory requirements
as of December 31, 2010, see Note 19 to the consolidated financial statements.
8
Table of Contents
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 19 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.
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.
9
Table of Contents
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. The
Dodd-Frank Act made permanent the $250,000 deposit insurance limit for insured deposits.
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 was extended through December 31, 2010.
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.
10
Table of Contents
| ITEM 1A. | RISK FACTORS |
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
Economic conditions have affected and could continue to adversely affect our revenues and profits.
From December 2007 through June 2009, the U.S. economy was in recession. Business activity across
a wide range of industries and regions in the U.S. was greatly reduced. Although economic
conditions have begun to improve, certain sectors, such as real estate, remain weak and
unemployment remains high. Local governments and many businesses are still in serious difficulty
due to lower consumer spending and the lack of liquidity in the credit markets.
Market conditions also led to the failure or merger of several prominent financial institutions and
numerous regional and community-based financial institutions. These failures, as well as projected
future failures, have had a significant negative impact on the capitalization level of the deposit
insurance fund of the FDIC, which, in turn, has led to a significant increase in deposit insurance
premiums paid by financial institutions.
Old National’s financial performance generally, and in particular the ability of borrowers to pay
interest on and repay principal of outstanding loans and the value of collateral securing those
loans, as well as demand for loans and other products and services that Old national offers, is
highly dependent upon the business environment in the markets where Old National operates and in
the United States as a whole. A favorable business environment is generally characterized by,
among other factors, economic growth, efficient capital markets, low inflation, low unemployment,
high business and investor confidence, and strong business earnings. Unfavorable or uncertain
economic and market conditions can be caused by declines in economic growth, business activity or
investor or business confidence; limitations on the availability or increases in the cost of credit
and capital; increases in inflation or interest rates; high unemployment, natural disasters, or a
combination of these or other factors.
Overall, during 2010 the business environment has been adverse for many households and businesses
in the United States and worldwide. While economic conditions in the United States and worldwide
have begun to improve, there can be no assurance that this improvement will continue. Such
conditions could adversely affect the credit quality of Old National’s loans, results of operations
and financial condition.
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.
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; |
11
Table of Contents
| • | 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; | ||
| • | 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.
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. 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. |
12
Table of Contents
| • | 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 2011 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.
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.
13
Table of Contents
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 reputational
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
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. 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. 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. The Dodd-Frank Act, enacted in July 2010, instituted major changes to the
banking and financial institutions regulatory regimes in light of the recent performance of and
government intervention in the financial services sector. In addition, 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.
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 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.
14
Table of Contents
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.
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.
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; |
15
Table of Contents
| • | 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. |
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
| ITEM 2. | PROPERTIES |
As of December 31, 2010, Old National and its affiliates operated a total of 161 banking centers,
loan production or other financial services offices, primarily in the states of Indiana, Illinois
and Kentucky. Of these facilities, 4 were owned.
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, we lease 157 financial
centers from unaffiliated third parties. The terms of these leases range from five to twenty-four
years. See Note 17 to the consolidated financial statements.
| ITEM 3. | LEGAL PROCEEDINGS |
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. 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 permitted 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, which
was granted in part and denied in part on
16
Table of Contents
August 6, 2010.
The Court has calendared a trial date of February 13, 2012. In addition, the Court has ordered
mediation that was rescheduled for March of 2011. 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.
In November 2010, Old National was named in a class action lawsuit, much like many other banks,
challenging Old National Bank’s checking account practices. The plaintiff seeks damages and other
relief, including restitution. Old National believes it has meritorious defenses to the claims
brought by the plaintiff. At this phase of the litigation, it is not possible for management of
Old National to determine the probability of a material adverse outcome or reasonably estimate the
amount of any loss.
| ITEM 4. | (REMOVED AND RESERVED) |
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
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 2010 and 2009:
| Price Per Share | Share | Dividend | ||||||||||||||
| High | Low | Volume | Declared | |||||||||||||
|
2010
|
||||||||||||||||
|
First Quarter
|
$ | 12.63 | $ | 11.01 | 40,933,700 | $ | 0.07 | |||||||||
|
Second Quarter
|
13.92 | 10.36 | 37,445,200 | 0.07 | ||||||||||||
|
Third Quarter
|
11.05 | 9.16 | 36,704,800 | 0.07 | ||||||||||||
|
Fourth Quarter
|
11.94 | 9.35 | 37,829,000 | 0.07 | ||||||||||||
|
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 | ||||||||||||
There were 24,233 shareholders of record as of December 31, 2010. Old National declared cash
dividends of $0.28 per share during the year ended December 31, 2010. Old National declared cash
dividends of $0.44 per share during the year ended December 31, 2009. Old National’s ability to
pay cash dividends depends primarily on cash dividends received from Old National Bank. Dividend
payments from Old National Bank are subject to various regulatory restrictions. See Note 19 to the
consolidated financial statements for additional information.
Old National repurchased no equity securities during the fourth quarter of 2010. During the twelve
months ended December 31, 2010, 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, 2010, except for those associated with employee share-based incentive programs.
Subsequent to year-end, the Board of Directors approved the repurchase of up to 2.25 million shares
of common stock over a twelve month period that runs through January 31, 2012.
17
Table of Contents
EQUITY COMPENSATION PLAN INFORMATION
The following table contains information concerning the 2008 Equity Incentive Plan approved by
security holders, as of December 31, 2010.
2008 EQUITY COMPENSATION PLAN
| Number of securities | ||||||||||||
| remaining available for | ||||||||||||
| Number of securities to | Weighted-average | future issuance under | ||||||||||
| be issued upon exercise | exercise price of | equity compensation plan | ||||||||||
| of outstanding options, | outstanding options, | (excluding securities | ||||||||||
| warrants and rights | warrants and rights | reflected in column (a)) | ||||||||||
| Plan Category | (a) | (b) | (c) | |||||||||
|
Equity compensation plans
approved by security holders
|
6,647,047 | $ | 20.37 | 1,282,523 | ||||||||
|
|
||||||||||||
|
Equity compensation plans not
approved by security holders
|
— | — | — | |||||||||
|
|
||||||||||||
|
Total
|
6,647,047 | $ | 20.37 | 1,282,523 | ||||||||
|
|
||||||||||||
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, 2005, 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
| ITEM 6. | SELECTED FINANCIAL DATA |
| (dollars in thousands, except per share data) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
|
Operating Results
|
||||||||||||||||||||
|
Net interest income
|
$ | 218,416 | $ | 231,399 | $ | 243,325 | $ | 219,191 | $ | 212,717 | ||||||||||
|
Conversion to fully taxable equivalent (1)
|
13,482 | 20,831 | 19,326 | 17,160 | 19,526 | |||||||||||||||
|
|
||||||||||||||||||||
|
Net interest income — tax equivalent basis
|
231,898 | 252,230 | 262,651 | 236,351 | 232,243 | |||||||||||||||
|
Provision for loan losses
|
30,781 | 63,280 | 51,464 | 4,118 | 7,000 | |||||||||||||||
|
Noninterest income
|
170,150 | 163,460 | 166,969 | 155,138 | 153,920 | |||||||||||||||
|
Noninterest expense
|
314,305 | 338,956 | 297,229 | 277,998 | 264,690 | |||||||||||||||
|
Net income available to common shareholders
|
38,214 | 9,845 | 62,180 | 74,890 | 79,373 | |||||||||||||||
|
Common Share Data (2)
|
||||||||||||||||||||
|
Weighted average diluted shares
|
86,928 | 71,367 | 65,776 | 65,750 | 66,261 | |||||||||||||||
|
Net income (diluted)
|
$ | 0.44 | $ | 0.14 | $ | 0.95 | $ | 1.14 | $ | 1.20 | ||||||||||
|
Cash dividends (3)
|
0.28 | 0.44 | 0.69 | 1.11 | 0.84 | |||||||||||||||
|
Common dividend payout ratio (4)
|
63.75 | 308.59 | 73.51 | 97.38 | 70.02 | |||||||||||||||
|
Book value at year-end
|
10.08 | 9.68 | 9.56 | 9.86 | 9.66 | |||||||||||||||
|
Stock price at year-end
|
11.89 | 12.43 | 18.16 | 14.96 | 18.92 | |||||||||||||||
|
Balance Sheet Data (at December 31)
|
||||||||||||||||||||
|
Loans (5)
|
$ | 3,747,270 | $ | 3,908,276 | $ | 4,777,514 | $ | 4,699,356 | $ | 4,716,637 | ||||||||||
|
Total assets
|
7,263,892 | 8,005,335 | 7,873,890 | 7,846,126 | 8,149,515 | |||||||||||||||
|
Deposits
|
5,462,925 | 5,903,488 | 5,422,287 | 5,663,383 | 6,321,494 | |||||||||||||||
|
Other borrowings
|
421,911 | 699,059 | 834,867 | 656,722 | 747,545 | |||||||||||||||
|
Shareholders’ equity
|
878,805 | 843,826 | 730,865 | 652,881 | 642,369 | |||||||||||||||
|
Performance Ratios
|
||||||||||||||||||||
|
Return on average assets (ROA)
|
0.50 | % | 0.17 | % | 0.82 | % | 0.94 | % | 0.97 | % | ||||||||||
|
Return on average common
shareholders’ equity (ROE)
|
4.40 | 1.41 | 9.49 | 11.67 | 12.43 | |||||||||||||||
|
Average equity to average assets
|
11.46 | 9.06 | 8.67 | 8.04 | 7.81 | |||||||||||||||
|
Net interest margin (6)
|
3.40 | 3.50 | 3.82 | 3.28 | 3.15 | |||||||||||||||
|
Efficiency ratio (7)
|
78.18 | 81.54 | 69.18 | 71.01 | 68.54 | |||||||||||||||
|
Asset Quality (8)
|
||||||||||||||||||||
|
Net charge-offs to average loans
|
0.75 | % | 1.40 | % | 0.87 | % | 0.44 | % | 0.38 | % | ||||||||||
|
Allowance for loan losses to ending loans
|
1.93 | 1.81 | 1.41 | 1.20 | 1.44 | |||||||||||||||
|
Allowance for loan losses
|
$ | 72,309 | $ | 69,548 | $ | 67,087 | $ | 56,463 | $ | 67,790 | ||||||||||
|
Underperforming assets (9)
|
77,108 | 78,666 | 69,883 | 45,203 | 47,024 | |||||||||||||||
|
Other Data
|
||||||||||||||||||||
|
Full-time equivalent employees
|
2,491 | 2,812 | 2,507 | 2,494 | 2,568 | |||||||||||||||
|
Branches and financial centers
|
161 | 172 | 117 | 115 | 120 | |||||||||||||||
| (1) | Calculated using the federal statutory tax rate in effect of 35% for all periods adjusted for the TEFRA interest disallowance applicable to certain tax-exempt obligations. | |
| (2) | Diluted data assumes the exercise of stock options and the vesting of restricted stock. | |
| (3) | 2007 includes cash dividends of $.88 paid in 2007 and cash dividends of $.23 declared for the first quarter of 2008. | |
| (4) | Cash dividends divided by income available to common stockholders. | |
| (5) | Includes residential loans and finance leases held for sale. | |
| (6) | Defined as net interest income on a tax equivalent basis as a percentage of average earning assets. | |
| (7) | Defined as noninterest expense divided by revenue (net interest income on a tax equivalent basis plus noninterest income). | |
| (8) | Excludes residential loans and finance leases held for sale. | |
| (9) | Includes nonaccrual loans, renegotiated loans, loans 90 days past due still accruing and other real estate owned. |
19
Table of Contents
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion is an analysis of our results of operations for the fiscal years ended
December 31, 2010, 2009 and 2008, and financial condition as of December 31, 2010 and 2009. 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 2010
From December 2007 through June 2009, the U.S. economy was in recession. Business activity across a
wide range of industries and regions in the U. S. was greatly reduced. Although economic conditions
have begun to improve, certain sectors, such as real estate, remain weak and unemployment remains
high. Local governments and many businesses are still in serious difficulty due to lower consumer
spending and the lack of liquidity in the credit markets.
Overall, during 2010, the business environment has been adverse for many households and businesses
in our footprint. While economic conditions in the State of Indiana, and the U.S. in general, have
begun to improve, there can be no assurance that this improvement will continue. Such conditions
could adversely affect the credit quality of our loans, results of operations and financial
condition.
Net income for 2010 was $38.2 million, an increase of $24.5 million from 2009. Diluted earnings
per share available to common shareholders were $0.44 per share, an increase of $0.30 per share
from 2009.
20
Table of Contents
Improvement in 2010 net income was primarily due to the following:
| • | The provision for credit losses declined $32.5 million due to lower net charge-offs; and | ||
| • | Actions taken by management to reduce non-interest expense including an 11.4% reduction in full time equivalent employees (“FTE”) and other cost containment efforts. |
Other significant actions taken during 2010 include:
| • | Old National launched two new initiatives designed to increase the speed and simplicity with which certain loan requests can be processed. The process improvements do not represent a willingness to increase risk, but instead, a better coordination of associates and process flow resulting in shared information that reduces decision making time. The result has been to better serve our customers while cutting unnecessary time and cost out of the process. | ||
| • | Old National announced the acquisition of Monroe Bancorp based out of Bloomington, Indiana during the third quarter of 2010. This acquisition will add 15 financial centers and increase our presence in central and south central Indiana. | ||
| • | During 2010, we continued to reduce long-term debt, a more expensive source of funding, as a $50.0 million senior unsecured note matured and we prepaid $75.0 million of FHLB advances and $49.0 million of long-term repurchase agreements. In addition, we redeemed $100.0 million of 8.0% trust preferred securities on December 15, 2010. |
BUSINESS OUTLOOK
We believe we will see slow improvement in 2011, but do not anticipate that we will see any
improvement in loan demand until unemployment levels improve and there is sustained confidence in
the economic recovery.
In addition, it is uncertain how the Dodd-Frank Act and other regulatory measures might impact the
Company. We do believe that the Dodd-Frank Act’s repeal of the federal prohibitions on the payment
of interest on demand deposits, thereby permitting depository institutions to pay interest on
business transaction and other accounts beginning July 21, 2011, will impact Old National. Although
the ultimate impact of this legislation on the Corporation has not yet been determined, we expect
interest costs associated with demand deposits to increase.
Our balance sheet has historically been asset sensitive, meaning that earning assets generally
re-price more quickly than interest-bearing liabilities. Therefore, our net interest margin is
likely to increase in sustained periods of rising interest rates and decrease in sustained periods
of declining interest rates.
Our capital levels remain solid and we believe we are well-positioned to take advantage of any
market disruptions in our footprint. Management will continue to focus on the expense base and
process improvement. We believe these actions should help Old National emerge from this extended
negative credit cycle as a more efficient and profitable core banking franchise.
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, 2010, 2009, and 2008:
| (dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
|
Income Statement Summary:
|
||||||||||||
|
Net interest income
|
$ | 218,416 | $ | 231,399 | $ | 243,325 | ||||||
|
Provision for loan losses
|
30,781 | 63,280 | 51,464 | |||||||||
|
Noninterest income
|
170,150 | 163,460 | 166,969 | |||||||||
|
Noninterest expense
|
314,305 | 338,956 | 297,229 | |||||||||
|
Other Data:
|
||||||||||||
|
Return on average common equity
|
4.40 | % | 1.41 | % | 9.49 | % | ||||||
|
Efficiency ratio
|
78.18 | % | 81.54 | % | 69.18 | % | ||||||
|
Tier 1 leverage ratio
|
9.01 | % | 9.51 | % | 9.50 | % | ||||||
|
Net charge-offs to average loans
|
0.75 | % | 1.40 | % | 0.87 | % | ||||||
Comparison of Fiscal Years 2010 and 2009
Net Interest Income
Net interest income is the most significant component of our earnings, comprising over 57% of 2010
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 includes taxable equivalent adjustments of $13.5 million for 2010 and
$20.8 million for 2009.
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, certain 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.
Net interest income is the excess of interest received from earning assets over interest paid on
interest-bearing liabilities. For analytical purposes, net interest income is also presented in
the table that follows, adjusted to a taxable equivalent basis to reflect what our tax-exempt
assets would need to yield in order to achieve the same after-tax yield as a taxable asset. We
used the federal statutory tax rate in effect of 35% for all periods adjusted for the TEFRA
interest disallowance applicable to certain tax-exempt obligations. This analysis portrays the
income tax benefits associated in tax-exempt assets and helps to facilitate a comparison between
taxable and tax-exempt assets. Management believes that it is a standard practice in the banking
industry to present net interest margin and net interest income on a fully taxable equivalent
basis. Therefore, management believes these measures provide useful information for both
management and investors by allowing them to make peer comparisons.
22
Table of Contents
| (dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
|
Net interest income
|
$ | 218,416 | $ | 231,399 | $ | 243,325 | ||||||
|
Conversion to fully taxable equivalent
|
13,482 | 20,831 | 19,326 | |||||||||
|
|
||||||||||||
|
Net interest income — taxable equivalent basis
|
$ | 231,898 | $ | 252,230 | $ | 262,651 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Average earning assets
|
6,814,607 | 7,207,225 | 6,875,710 | |||||||||
|
|
||||||||||||
|
Net interest margin
|
3.21 | % | 3.21 | % | 3.54 | % | ||||||
|
Net interest margin — taxable equivalent basis
|
3.40 | % | 3.50 | % | 3.82 | % | ||||||
Net interest income was $218.4 million in 2010, a 5.6% decrease from the $231.4 million
reported in 2009. Taxable equivalent net interest income was $231.9 million in 2010, an 8.1%
decrease from the $252.2 million reported in 2009. The net interest margin was 3.40% for 2010, a
10 basis point decrease compared to the 3.50% reported in 2009. 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 35 basis points, the decrease was more than offset by the 47 basis decrease
in the yield on average assets. The yield on average earning assets decreased from 5.02% to 4.55%
while the cost of interest-bearing liabilities decreased from 1.82% to 1.47%. Average earning
assets decreased by $392.6 million, or 5.4%. Average interest-bearing liabilities decreased $695.9
million, or 11.6%. The decrease in average earning assets consisted of a $184.9 million increase
in lower yielding investment securities, a $675.6 million decrease in loans and a $98.1 million
increase in money market and other interest-earning investments. The decrease in average
interest-bearing liabilities consisted of a $300.2 million decrease in interest-bearing deposits, a
$198.6 million decrease in short-term borrowings and a $197.1 million decrease in other borrowings.
Noninterest-bearing deposits increased by $164.2 million.
Significantly affecting average earning assets during 2010 was the increase in the size of the
investment portfolio combined with the increase in interest earning cash balances at the Federal
Reserve and the reduction in the size of the loan portfolio. During 2010, approximately $1.362
billion of investment securities were purchased and $1.318 billion of investment securities were
called by the issuers or 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 $413.2 million decline in average commercial loans during 2010 was combined with a $109.6
million decrease in average commercial real estate loans and a $148.0 million decrease in average
consumer loans. We sold $3.2 million of commercial and commercial real estate loans during 2010.
During the third quarter of 2009, approximately $258.0 million of leases held for sale were sold.
In 2009, we sold $2.6 million of commercial and commercial real estate loans. The investment
portfolio, which generally has an average yield lower than the loan portfolio, was approximately 40
percent of interest earning assets at December 31, 2010.
Positively affecting margin was an increase in noninterest-bearing demand deposits combined with a
decrease in time deposits. During 2010, we prepaid $75.0 million of FHLB advances and $49.0
million of long-term repurchase agreements. In the second quarter of 2010, a senior unsecured note
totaling $50.0 million matured. In the fourth quarter of 2010, we redeemed $100.0 million of 8.0%
trust preferred securities. 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. Year over year, time deposits and 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.
23
Table of Contents
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.
| 2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||
| (tax equivalent basis, | Average | Interest | Yield/ | Average | Interest | Yield/ | Average | Interest | Yield/ | |||||||||||||||||||||||||||
| dollars in thousands) | Balance | & Fees | Rate | Balance | & Fees | Rate | Balance | & Fees | Rate | |||||||||||||||||||||||||||
|
Earning Assets
|
||||||||||||||||||||||||||||||||||||
|
Money market and other interest-earning investments (7)
|
$ | 177,786 | $ | 431 | 0.24 | % | $ | 79,701 | $ | 133 | 0.17 | % | $ | 21,955 | $ | 746 | 3.40 | % | ||||||||||||||||||
|
Investment securities: (6)
|
||||||||||||||||||||||||||||||||||||
|
U.S. Treasury & Government-sponsored agencies (1)
|
2,150,562 | 77,208 | 3.59 | 1,979,557 | 89,109 | 4.50 | 1,569,779 | 78,185 | 4.98 | |||||||||||||||||||||||||||
|
States and political
subdivisions (3)
|
536,295 | 33,181 | 6.19 | 506,709 | 34,072 | 6.72 | 329,386 | 22,745 | 6.91 | |||||||||||||||||||||||||||
|
Other securities
|
198,747 | 9,307 | 4.68 | 214,414 | 10,570 | 4.93 | 251,444 | 13,927 | 5.54 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total investment securities
|
2,885,604 | 119,696 | 4.15 | 2,700,680 | 133,751 | 4.95 | 2,150,609 | 114,857 | 5.34 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Loans: (2)
|
||||||||||||||||||||||||||||||||||||
|
Commercial (3) (4)
|
1,271,515 | 56,153 | 4.42 | 1,684,693 | 75,629 | 4.49 | 1,779,445 | 104,617 | 5.88 | |||||||||||||||||||||||||||
|
Commercial real estate
|
1,007,636 | 44,992 | 4.47 | 1,117,285 | 51,652 | 4.62 | 1,205,087 | 74,960 | 6.22 | |||||||||||||||||||||||||||
|
Residential real estate (5)
|
464,676 | 26,209 | 5.64 | 469,446 | 26,422 | 5.63 | 528,049 | 30,989 | 5.87 | |||||||||||||||||||||||||||
|
Consumer, net of
unearned income
|
1,007,390 | 62,849 | 6.24 | 1,155,420 | 73,921 | 6.40 | 1,190,565 | 85,679 | 7.20 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total loans (4) (5)
|
3,751,217 | 190,203 | 5.07 | 4,426,844 | 227,624 | 5.14 | 4,703,146 | 296,245 | 6.30 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total earning assets
|
6,814,607 | $ | 310,330 | 4.55 | % | 7,207,225 | $ | 361,508 | 5.02 | % | 6,875,710 | $ | 411,848 | 5.99 | % | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Less: Allowance for
loan losses
|
(73,868 | ) | (70,098 | ) | (61,981 | ) | ||||||||||||||||||||||||||||||
|
Non-Earning Assets
|
||||||||||||||||||||||||||||||||||||
|
Cash and due from banks
|
124,565 | 127,697 | 155,868 | |||||||||||||||||||||||||||||||||
|
Other assets
|
721,142 | 724,969 | 648,225 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total assets
|
$ | 7,586,446 | $ | 7,989,793 | $ | 7,617,822 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Interest-Bearing Liabilities
|
||||||||||||||||||||||||||||||||||||
|
NOW deposits
|
$ | 1,221,352 | $ | 411 | 0.03 | % | $ | 1,250,745 | $ | 473 | 0.04 | % | $ | 1,249,482 | $ | 6,355 | 0.51 | % | ||||||||||||||||||
|
Savings deposits
|
1,043,289 | 3,134 | 0.30 | 937,642 | 3,585 | 0.38 | 886,351 | 12,919 | 1.46 | |||||||||||||||||||||||||||
|
Money market deposits
|
361,166 | 357 | 0.10 | 436,507 | 441 | 0.10 | 487,514 | 5,456 | 1.12 | |||||||||||||||||||||||||||
|
Time deposits
|
1,753,561 | 44,706 | 2.55 | 2,054,740 | 63,129 | 3.07 | 1,867,103 | 70,723 | 3.79 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total interest-bearing
deposits
|
4,379,368 | 48,608 | 1.11 | 4,679,634 | 67,628 | 1.45 | 4,490,450 | 95,453 | 2.13 | |||||||||||||||||||||||||||
|
Short-term borrowings
|
328,535 | 662 | 0.20 | 527,147 | 1,410 | 0.27 | 616,935 | 10,902 | 1.77 | |||||||||||||||||||||||||||
|
Other borrowings
|
615,006 | 29,162 | 4.74 | 812,062 | 40,240 | 4.96 | 810,052 | 42,842 | 5.29 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total interest-bearing
liabilities
|
5,322,909 | $ | 78,432 | 1.47 | % | 6,018,843 | $ | 109,278 | 1.82 | % | 5,917,437 | $ | 149,197 | 2.52 | % | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Noninterest-Bearing
Liabilities
|
||||||||||||||||||||||||||||||||||||
|
Demand deposits
|
1,182,653 | 1,018,405 | 834,981 | |||||||||||||||||||||||||||||||||
|
Other liabilities
|
211,651 | 228,646 | 205,235 | |||||||||||||||||||||||||||||||||
|
Shareholders’ equity
|
869,233 | 723,899 | 660,169 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total liabilities and
shareholders’ equity
|
$ | 7,586,446 | $ | 7,989,793 | $ | 7,617,822 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Interest Margin Recap
|
||||||||||||||||||||||||||||||||||||
|
Interest income/average
earning assets
|
$ | 310,330 | 4.55 | % | $ | 361,508 | 5.02 | % | $ | 411,848 | 5.99 | % | ||||||||||||||||||||||||
|
Interest expense/average
earning assets
|
78,432 | 1.15 | 109,278 | 1.52 | 149,197 | 2.17 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Net interest income
and margin
|
$ | 231,898 | 3.40 | % | $ | 252,230 | 3.50 | % | $ | 262,651 | 3.82 | % | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| (1) | Includes U.S. Government-sponsored entities, agency mortgage-backed securities and $126.8 million of non-agency mortgage-backed securities at December 31, 2010. | |
| (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 $8.5 million and $5.0 million, respectively, in 2010; $11.2 million and $9.6 million, respectively, in 2009; and $7.7 million and $11.6 million, respectively, in 2008; using the federal statutory tax rate in effect of 35% for all periods adjusted for the TEFRA interest disallowance applicable to certain tax-exempt obligations. | |
| (4) | Includes finance leases held for sale. | |
| (5) | Includes residential loans held for sale. | |
| (6) | Changes in fair value are reflected in the average balance; however, yield information does not give effect to changes in fair value that are reflected as a component of shareholders’ equity. | |
| (7) | The 2010 and 2009 average balances include $152.3 million and $41.2 million, respectively, of required and excess balances held at the Federal Reserve. |
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)
| 2010 vs. 2009 | 2009 vs. 2008 | |||||||||||||||||||||||
| Total | Attributed to | Total | Attributed to | |||||||||||||||||||||
| Change | Volume | Rate | Change | Volume | Rate | |||||||||||||||||||
|
Interest Income
|
||||||||||||||||||||||||
|
Money market and other interest-earning investments
|
$ | 298 | $ | 200 | $ | 98 | $ | (613 | ) | $ | 1,030 | $ | (1,643 | ) | ||||||||||
|
Investment securities (1)
|
(14,055 | ) | 8,415 | (22,470 | ) | 18,894 | 28,310 | (9,416 | ) | |||||||||||||||
|
Loans (1)
|
(37,421 | ) | (34,499 | ) | (2,922 | ) | (68,621 | ) | (15,806 | ) | (52,815 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Total interest income
|
(51,178 | ) | (25,884 | ) | (25,294 | ) | (50,340 | ) | 13,534 | (63,874 | ) | |||||||||||||
|
|
||||||||||||||||||||||||
|
Interest Expense
|
||||||||||||||||||||||||
|
NOW deposits
|
(62 | ) | (11 | ) | (51 | ) | (5,882 | ) | 4 | (5,886 | ) | |||||||||||||
|
Savings deposits
|
(451 | ) | 360 | (811 | ) | (9,334 | ) | 472 | (9,806 | ) | ||||||||||||||
|
Money market deposits
|
(84 | ) | (76 | ) | (8 | ) | (5,015 | ) | (311 | ) | (4,704 | ) | ||||||||||||
|
Time deposits
|
(18,423 | ) | (8,466 | ) | (9,957 | ) | (7,594 | ) | 6,436 | (14,030 | ) | |||||||||||||
|
Short-term borrowings
|
(748 | ) | (466 | ) | (282 | ) | (9,492 | ) | (914 | ) | (8,578 | ) | ||||||||||||
|
Other borrowings
|
(11,078 | ) | (9,432 | ) | (1,646 | ) | (2,602 | ) | 103 | (2,705 | ) | |||||||||||||
|
|
||||||||||||||||||||||||
|
Total interest expense
|
(30,846 | ) | (18,091 | ) | (12,755 | ) | (39,919 | ) | 5,790 | (45,709 | ) | |||||||||||||
|
|
||||||||||||||||||||||||
|
Net interest income
|
$ | (20,332 | ) | $ | (7,793 | ) | $ | (12,539 | ) | $ | (10,421 | ) | $ | 7,744 | $ | (18,165 | ) | |||||||
|
|
||||||||||||||||||||||||
| 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 $8.5 million and $5.0 million, respectively, in 2010; $11.2 million and $9.6 million, respectively, in 2009; and $7.7 million and $11.6 million, respectively, in 2008; using the federal statutory rate in effect of 35% for all periods adjusted for the TEFRA interest disallowance applicable to certain tax-exempt obligations. | |
Provision for Loan Losses
The provision for loan losses was $30.8 million in 2010, a $32.5 million decrease from the $63.3
million recorded in 2009. The lower provision in 2010 is primarily attributable to the decrease in
net charge-offs. 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 42.3% in 2010 compared to 39.3% in 2009.
Noninterest income for 2010 was $170.2 million, an increase of $6.7 million, or 4.1% compared to
$163.5 million reported for 2009. Net securities gains were $13.2 million during 2010 compared to
$2.5 million for 2009. Included in 2010 is $17.1 million of security gains partially offset by
$3.9 million of other-than-temporary-impairment on three pooled trust preferred securities and ten
non-agency mortgage-backed securities. Included in 2009 is $27.3 million of security gains
partially offset by $24.8 million of other-than-temporary-impairment on six pooled trust preferred
securities and ten non-agency mortgage-backed securities. Sales of securities increased during
2009 and continued into 2010 as we adjusted the composition of the investment portfolio to manage
the effective duration of the portfolio and reduce the leverage on the balance sheet as proceeds
from securities sales were used to reduce wholesale funding. Also affecting noninterest income in
2010 is a $5.2 million decrease in service charges on deposit accounts, a $4.0 million decrease in
mortgage banking revenue and a $1.4 million decrease in insurance premiums and commissions.
Partially offsetting these decreases were a $2.5 million increase in ATM and debit card fees, a
$1.7 million increase in revenue from company-owned life insurance and a $0.8 million increase in
gains on derivatives.
25
Table of Contents
Service charges and overdraft fees on deposit accounts decreased by $5.2 million to $50.0 million
in 2010 as compared to $55.2 million in 2009. The decrease in revenue is primarily attributable to
a decrease in fee income for overdrafts and returned items. Service charges and overdraft fees
were negatively impacted by new regulatory requirements in the third quarter of 2010. The negative
impact was partially mitigated with adjustments to our product pricing structure late in the third
quarter of 2010.
Debit card and ATM fees increased by $2.5 million to $23.0 million in 2010 as compared to $20.5
million in 2009. The increase in debit card usage is primarily attributable to the Citizens
Financial branch acquisition and an increase in transaction activity.
Mortgage banking revenue was $2.2 million in 2010, a decrease of $4.0 million as compared to $6.2
million in 2009. Mortgage fee revenue declined as a result of our decision to retain more mortgage
production and sell less to the secondary market.
Insurance premiums and commissions decreased $1.4 million to $36.5 million in 2010 as compared to
$37.9 million in 2009, primarily as a result of a decrease in contingency income.
Revenue from company-owned life insurance was $4.1 million in 2010 compared to $2.4 million in
2009. 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 revenues slowly improved in 2010 and should continue to improve in future years, we
anticipate revenue will remain below 2008 levels in future years.
Fluctuations in the value of our derivatives resulted in gains on derivatives of $1.5 million in
2010 as compared to gains on derivatives of $0.7 million in 2009.
Other income increased $0.6 million in 2010 as compared to 2009. Included in 2010 is a $0.9
million decrease in gain on sale of other real estate owned. Included in 2009 is a $1.4 million
loss from the sale of approximately $258.0 million of leases held for sale, net of transaction
fees.
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) | 2010 | 2009 | 2008 | 2010 | 2009 | |||||||||||||||
|
Wealth management fees
|
$ | 16,120 | $ | 15,963 | $ | 17,361 | 1.0 | % | (8.1 | )% | ||||||||||
|
Service charges on deposit accounts
|
50,018 | 55,196 | 45,175 | (9.4 | ) | 22.2 | ||||||||||||||
|
ATM fees
|
22,967 | 20,472 | 17,234 | 12.2 | 18.8 | |||||||||||||||
|
Mortgage banking revenue
|
2,230 | 6,238 | 5,100 | (64.3 | ) | 22.3 | ||||||||||||||
|
Insurance premiums and commissions
|
36,463 | 37,851 | 39,153 | (3.7 | ) | (3.3 | ) | |||||||||||||
|
Investment product fees
|
9,192 | 8,515 | 9,493 | 8.0 | (10.3 | ) | ||||||||||||||
|
Company-owned life insurance
|
4,052 | 2,355 | 9,181 | 72.1 | (74.3 | ) | ||||||||||||||
|
Other income
|
7,967 | 7,394 | 11,534 | 7.7 | (35.9 | ) | ||||||||||||||
|
|
||||||||||||||||||||
|
Total fee and service charge income
|
149,009 | 153,984 | 154,231 | (3.2 | ) | (0.2 | ) | |||||||||||||
|
Net securities gains
|
17,124 | 27,251 | 7,562 | (37.2 | ) | N/M | ||||||||||||||
|
Impairment on available-for-sale securities
|
(3,927 | ) | (24,795 | ) | — | (84.2 | ) | N/M | ||||||||||||
|
Gain (loss) on derivatives
|
1,492 | 719 | (1,144 | ) | 107.6 | N/M | ||||||||||||||
|
Gain on sale leasebacks
|
6,452 | 6,301 | 6,320 | 2.4 | (0.3 | ) | ||||||||||||||
|
|
||||||||||||||||||||
|
Total noninterest income
|
$ | 170,150 | $ | 163,460 | $ | 166,969 | 4.1 | % | (2.1 | )% | ||||||||||
|
|
||||||||||||||||||||
|
Noninterest income to total revenue (1)
|
42.3 | % | 39.3 | % | 38.9 | % | ||||||||||||||
|
|
||||||||||||||||||||
| (1) | Total revenue includes the effect of a taxable equivalent adjustment of $13.5 million in 2010, $20.8 million in 2009 and $19.3 million in 2008. | |
| N/M = Not meaningful | ||
26
Table of Contents
Noninterest Expense
Noninterest expense for 2010 totaled $314.3 million, a decrease of $24.7 million, or 7.3% from the
$339.0 million recorded in 2009. Decreases in salaries and benefits expense, marketing expense,
FDIC assessment expense and other noninterest expense were the primary reason for the decrease in
noninterest expense.
Salaries and benefits, the largest component of noninterest expense, totaled $170.6 million in
2010, compared to $181.4 million in 2009, a decrease of $10.8 million, or 5.9%. The decrease in
salaries and benefits expense is primarily a result of an 11.4% decline in full time equivalent
employees, a $2.6 million decrease in performance-based incentive compensation expense and a $3.0
million decrease in profit sharing expense. Partially offsetting these decreases was approximately
$1.7 million of severance expense related to full time equivalent employee reductions. Included in
2010 is a full year of expense associated with the acquisition of the retail branch banking network
of Citizens Financial Group, which occurred in the first quarter of 2009.
Marketing expense decreased $3.9 million in 2010 primarily as a result of decreases in advertising
expense, public relations expense and sales promotion expense due to our cost containment efforts.
Professional fees decreased $1.2 million for 2010 as compared to 2009. The decrease is primarily
attributable to legal and management consultant fees associated with the acquisition of the Citizen
Financial branch network in the first quarter of 2009 and cost containment efforts.
Supplies expense decreased $1.4 million, or 31.6%, in 2010 primarily as a result of expense
associated with the acquisition of the retail branch banking network of Citizen Financial Group.
The $2.2 million increase in loss on extinguishment of debt is primarily due to the call of our
$100 million 8% trust preferred security in December 2010.
FDIC assessment expense totaled $8.4 million in 2010, compared to $12.4 million for 2009. The
decrease is primarily due to the special assessment that the FDIC implemented during the second
quarter of 2009, which resulted in approximately $4.0 million of additional 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 December 2009. As of December 31, 2010, our prepaid
assessment was $23.4 million and will be expensed over the next two years as the actual FDIC
assessments are determined.
Other noninterest expense totaled $13.9 million for 2010 compared to $18.2 million for 2009, a
decrease of $4.3 million, or 23.8%. The provision for unfunded commitments decreased $3.7 million
for 2010 as compared to 2009. 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) | 2010 | 2009 | 2008 | 2010 | 2009 | |||||||||||||||
|
Salaries and employee
benefits
|
$ | 170,601 | $ | 181,368 | $ | 167,764 | (5.9 | )% | 8.1 | % | ||||||||||
|
Occupancy
|
46,410 | 47,064 | 39,668 | (1.4 | ) | 18.6 | ||||||||||||||
|
Equipment
|
10,641 | 10,440 | 9,464 | 1.9 | 10.3 | |||||||||||||||
|
Marketing
|
5,720 | 9,578 | 9,554 | (40.3 | ) | 0.3 | ||||||||||||||
|
Data processing
|
21,409 | 20,700 | 19,021 | 3.4 | 8.8 | |||||||||||||||
|
Communications
|
9,803 | 10,922 | 9,267 | (10.2 | ) | 17.9 | ||||||||||||||
|
Professional fees
|
8,253 | 9,491 | 7,187 | (13.0 | ) | 32.0 | ||||||||||||||
|
Loan expense
|
3,936 | 4,335 | 6,619 | (9.2 | ) | (34.5 | ) | |||||||||||||
|
Supplies
|
2,935 | 4,294 | 3,283 | (31.6 | ) | 30.8 | ||||||||||||||
|
Loss on extinguishment of
debt
|
6,107 | 3,941 | — | 55.0 | N/M | |||||||||||||||
|
Fraud loss
|
124 | 184 | 6,406 | (32.4 | ) | (97.1 | ) | |||||||||||||
|
FDIC assessment
|
8,370 | 12,447 | 1,513 | (32.8 | ) | N/M | ||||||||||||||
|
Amortization of intangibles
|
6,130 | 5,988 | 3,659 | 2.4 | 63.7 | |||||||||||||||
|
Other expense
|
13,866 | 18,204 | 13,824 | (23.8 | ) | 31.7 | ||||||||||||||
|
|
||||||||||||||||||||
|
Total noninterest expense
|
$ | 314,305 | $ | 338,956 | $ | 297,229 | (7.3 | )% | 14.0 | % | ||||||||||
|
|
||||||||||||||||||||
| 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 2010 due to large fluctuations in pre-tax income while the majority of other items affecting the
rate, in particular tax-exempt income, remained relatively stable. The increase in our state tax
benefit in 2009 directly correlated to the declines in pre-tax income. See Note 10 to the
consolidated financial statements for additional details on Old National’s income tax provision.
Comparison of Fiscal Years 2009 and 2008
In 2009, we generated net income available to common stockholders of $9.8 million and diluted net
income per share of $0.14 compared to $62.2 million and $0.95, respectively in 2008. The 2009
earnings included an $11.9 million decrease in net interest income, an $11.8 million increase in
the provision for loan losses, a $5.1 million decrease in net securities gains and a $41.7 million
increase in noninterest expense. Offsetting these decreases to net income in 2009 was a $20.2
million decrease in income tax expense.
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 3.50% for 2009, a 32 basis point decrease
compared to 3.82% reported for 2008. Although average earning assets increased by $331.5 million
during 2009, the yield on average earning assets decreased 97 basis points from 5.99% to 5.02%.
Average interest-bearing liabilities increased $101.4 million and the cost of interest-bearing
liabilities decreased from 2.52% to 1.82%.
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 was 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.
28
Table of Contents
Noninterest income for 2009 was $163.5 million, a decrease of $3.5 million, or 2.1% from the $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 $27.3 million of security gains partially offset by $24.8
million of other-than-temporary-impairment on six pooled trust preferred securities and ten
non-agency mortgage-backed securities. Sales of securities increased during 2009 as we adjusted
the composition of the investment portfolio to reduce the effective duration of the portfolio
during the second half of 2009 and reduce our holdings of tax-exempt securities. Also affecting
noninterest income in 2009 was 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 $1.4 million
decrease in other income.
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 in March 2009, as well as an increase
in FDIC insurance expense. Included in 2008 was a $6.3 million fraud loss expense.
The provision for income taxes on continuing operations was a benefit of $21.1 million in 2009
compared to a benefit of $0.9 million in 2008. Old National’s effective tax rate was 286.2% in
2009 compared to (1.4)% in 2008. 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.
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) | 2010 | 2009 | 2008 | |||||||||
|
Community banking
|
$ | 73,108 | $ | 48,003 | $ | 64,894 | ||||||
|
Treasury
|
(26,310 | ) | (50,072 | ) | (2,357 | ) | ||||||
|
Other
|
(3,318 | ) | (5,308 | ) | (936 | ) | ||||||
|
|
||||||||||||
|
Income (loss) before income taxes
|
$ | 43,480 | $ | (7,377 | ) | $ | 61,601 | |||||
|
|
||||||||||||
The 2010 community banking segment profit increased $25.1 million from 2009 levels, primarily
as a result of a decrease in provision for loan loss expense and lower FDIC assessment expense.
The 2009 community banking segment profit decreased $16.9 million from 2008, 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 2010 treasury segment profit increased $23.8 million from 2009 primarily as a result of the
$20.9 million decrease in other-than-temporary-impairment in 2010. In 2010, $3.9 million of
other-than-temporary impairment was recorded on three pooled trust preferred securities and ten
non-agency mortgage-backed securities. The 2009 treasury segment profit decreased $47.7 million
from 2008 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 2010 “other” segment profit increased approximately $2.0 million from 2009 primarily as a
result of lower expenses in the insurance agency area. The 2009 “other” segment profit decreased
approximately $4.4 million from 2008 primarily as a result of lower wealth management revenue and
insurance premiums and commissions.
FINANCIAL CONDITION
Overview
At December 31, 2010, our total assets were $7.264 billion, a 9.3% decrease from $8.005 billion at
December 31, 2009. The decrease in investment security balances, interest earning cash balances
and loan balances over the past twelve months has allowed us to reduce our reliance on higher cost
deposits and wholesale funding. 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, portfolio loans, loans and
leases held for sale, money market investments and interest earning accounts with the Federal
Reserve, were $6.522 billion at December 31, 2010, a decrease of $657.9 million, or 9.2%, from
$7.180 billion at December 31, 2009. The decrease in earnings assets is primarily a result of a
decline in investment securities, interest earning balances at the Federal Reserve and loans. Year
over year, time deposits and brokered certificates of deposit, which have an average interest rate
higher that other types of deposits, have decreased as a percent of total funding. Also, other
borrowings have decreased as a percent of total funding. Year over year, noninterest-bearing
demand deposits have increased as a percent of total funding.
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 $117.0 million of 15- and 20-year
fixed-rate mortgage pass-through securities, $303.3 million of U.S. government-sponsored entity and
agency securities and $217.4 million of state and political subdivision securities in our
held-to-maturity investment portfolio at December 31, 2010. During the second quarter of 2010,
approximately $143.8 million of state and political subdivision securities were transferred from
the available-for-sale portfolio to our held-to-maturity portfolio at fair value. During the
second quarter of 2009, approximately $230.1 million of U.S. government-sponsored and agency
securities were transferred from the available-for-sale portfolio to our held-to-maturity portfolio
at fair value.
At December 31, 2010, the investment securities portfolio was $2.630 billion compared to $2.918
billion at December 31, 2009, a decrease of 9.9%. Investment securities represented 40.3% of
earning assets at December 31, 2010, compared to 40.6% at December 31, 2009. Contributing to the
decrease in investment securities was the use of cash flows from calls and maturities of securities
to reduce our wholesale funding as part of management’s efforts to deleverage the balance sheet.
During 2010, approximately $1.362 billion of investment securities were purchased, $481.5 million
of investment securities were sold and proceeds from maturities, prepayments and calls of
investment securities were $1.201 billion. Stronger commercial loan demand in the future and
management’s efforts to deleverage the balance sheet could result in a further reduction in the
investment securities portfolio. As of December 31, 2010, management does not intend to sell any
securities with an unrealized loss position.
The investment securities available-for-sale portfolio had net unrealized gains of $6.4 million at
December 31, 2010, compared to net unrealized losses of $13.0 million at December 31, 2009. A $3.9
million charge was recorded during 2010 related to other-than-temporary-impairment on three pooled
trust preferred securities and ten non-agency mortgage-backed securities. 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. 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 4.23% at December 31, 2010, compared to 4.63%
at December 31, 2009. 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 4.06% in 2010 and 4.52% in 2009. The average yields on the
held-to-maturity portfolio were 3.84% in 2010 and 3.78% in 2009.
At December 31, 2010, Old National had a concentration of investment securities issued by the state
of Indiana and its political subdivisions with an aggregate market value of $212.2 million, which
represented 24.1% of shareholders’ equity. At December 31, 2009, Old National had a concentration
of investment securities issued by the state of Indiana and its political subdivisions with an
aggregate market value of $169.6 million, which represented 20.1% 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 2011 we plan to
continue to allow our holdings of non-taxable municipal bonds to decrease.
Loan Portfolio
We lend primarily to consumers and small to 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) | 2010 | 2009 | 2008 | 2007 | 2006 | Growth Rate | ||||||||||||||||||
|
Commercial
|
$ | 1,211,399 | $ | 1,287,168 | $ | 1,897,966 | $ | 1,694,736 | $ | 1,629,885 | (7.1 | )% | ||||||||||||
|
Commercial real estate
|
942,395 | 1,062,910 | 1,154,916 | 1,270,408 | 1,386,367 | (9.2 | ) | |||||||||||||||||
|
Consumer credit
|
924,952 | 1,082,017 | 1,210,951 | 1,187,764 | 1,198,855 | (6.3 | ) | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total loans excluding residential real estate
|
3,078,746 | 3,432,095 | 4,263,833 | 4,152,908 | 4,215,107 | (7.6 | ) | |||||||||||||||||
|
Residential real estate
|
664,705 | 403,391 | 496,526 | 533,448 | 484,896 | 8.2 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total loans
|
3,743,451 | 3,835,486 | 4,760,359 | 4,686,356 | 4,700,003 | (5.5 | )% | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Less: Allowance for loan losses
|
72,309 | 69,548 | 67,087 | 56,463 | 67,790 | |||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net loans
|
$ | 3,671,142 | $ | 3,765,938 | $ | 4,693,272 | $ | 4,629,893 | $ | 4,632,213 | ||||||||||||||
|
|
||||||||||||||||||||||||
Commercial and Commercial Real Estate Loans
At December 31, 2010, commercial loans decreased $75.8 million while commercial real estate loans
decreased $120.5 million, respectively, from December 31, 2009. Approximately $258.0 million of
finance leases were sold in the third quarter of 2009. During 2010, we sold $3.2 million of
commercial and commercial real estate loans. No write-down was recorded against the allowance for
loan losses related to these sales. 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. 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, 2010
| Within | 1 - 5 | Beyond | ||||||||||||||
| (dollars in thousands) | 1 Year | Years | 5 Years | Total | ||||||||||||
|
Interest rates:
|
||||||||||||||||
|
Predetermined
|
$ | 240,693 | $ | 204,672 | $ | 103,064 | $ | 548,429 | ||||||||
|
Floating
|
386,259 | 197,847 | 78,864 | 662,970 | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 626,952 | $ | 402,519 | $ | 181,928 | $ | 1,211,399 | ||||||||
|
|
||||||||||||||||
Consumer Loans
Consumer loans, including automobile loans, personal and home equity loans and lines of credit, and
student loans, decreased $157.1 million or 14.5% at December 31, 2010, compared to December 31,
2009. Payments on existing loans have more than offset new loan production.
Residential Real Estate Loans
Residential real estate loans, primarily 1-4 family properties, were $664.7 million at December 31,
2010, an increase of $261.3 million or 64.8% from December 31, 2009. The majority of the growth in
residential real estate loans came in the fourth quarter of 2010, primarily as a result of a new
mortgage product that was introduced. We usually sell the majority of residential real estate
loans originated as a strategy to better manage interest rate risk and liquidity. Typically, we
sell almost all residential real estate loans servicing released without recourse. However, the
majority of new loan production during 2010 was retained in our loan portfolio.
31
Table of Contents
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 Notes 1
and 5 to the consolidated financial statements.
At December 31, 2010, the allowance for loan losses was $72.3 million, an increase of $2.8 million
compared to $69.5 million at December 31, 2009. As a percentage of total loans, the allowance
increased to 1.93% at December 31, 2010, from 1.81% at December 31, 2009. During 2010, the
provision for loan losses was $30.8 million, a decrease of $32.5 million from the $63.3 million
recorded in 2009. The lower provision in 2010 is primarily attributable to a decrease 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 loans, the reserve decreased by $0.7 million at December 31, 2010, compared to
December 31, 2009. The reserve as a percentage of the commercial loan portfolio increased to 2.16%
at December 31, 2010, from 2.09% at December 31, 2009. For commercial real estate loans, the
reserve increased by $5.5 million at December 31, 2010, compared to December 31, 2009. The reserve
as a percentage of the commercial real estate loan portfolio increased to 3.47% at December 31,
2010, from 2.55% at December 31, 2009. Nonaccrual loans increased $3.9 million since December 31,
2009. Criticized and classified loans decreased $2.2 million from December 31, 2009. During 2010,
other classified assets, which consist of investment securities downgraded below investment grade,
decreased $55.6 million.
The reserve for residential real estate loans as a percentage of that portfolio decreased to 0.35%
at December 31, 2010, from 0.42% at December 31, 2009. The reserve for consumer loans decreased to
1.20% at December 31, 2010, from 1.28% at December 31, 2009. The lower reserve percentages for
these portfolios are a result of improved credit quality in these portfolios during 2010.
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, 2010 and 2009, the allowance for losses on unfunded commitments was $3.8 million and
$5.5 million, respectively.
Residential Loans Held for Sale
Residential loans held for sale were $3.8 million at December 31, 2010, compared to $17.5 million
at December 31, 2009. 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, timing of loan sales to the secondary market and the
percentage of residential loans being retained. The majority of new loan production during 2010
was retained in our loan portfolio, resulting in lower residential loans held for sale at December
31, 2010.
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. At December 31, 2010, the aggregate fair value equaled the unpaid principal
balance. The aggregate fair value exceeded the unpaid principal balances by $0.3 million as of
December 31, 2009.
32
Table of Contents
Finance Leases Held for Sale
During 2009, $258.0 million of finance leases were sold at a price above par; however, the sale
resulted in a loss of $1.4 million after transaction fees. At December 31, 2009, Old National had
finance leases held for sale of $55.3 million. During 2010, management decided to transfer leases
from held for sale back to the loan portfolio due to decreased levels of loan production. The
leases were transferred at the lower of cost or fair value. No losses were recorded in connection
with the transfer. There were no finance leases held for sale at December 31, 2010.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets at December 31, 2010, totaled $194.1 million, a decrease of
$6.1 million compared to $200.2 million at December 31, 2009. During 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 of impairment of intangibles
during the year ended December 31, 2009 due to the loss of an insurance client 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 decreased $29.4 million, or 13.1%, since December 31, 2009 primarily as a result
of decreases in our prepaid FDIC assessment and deferred tax assets. 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 December 2009. As of December 31, 2010, our prepaid assessment was
$23.4 million and will be expensed over the next two years as the actual FDIC assessments are
determined.
Funding
Total average funding, comprised of deposits and wholesale borrowings, was $6.506 billion at
December 31, 2010, a decrease of 7.6% from $7.037 billion at December 31, 2009. Total deposits
were $5.463 billion, including $3.988 billion in transaction accounts and $1.475 billion in time
deposits at December 31, 2010. Total deposits decreased 7.5% or $440.6 million compared to
December 31, 2009. Deposits have decreased during 2010 as higher cost certificates of deposit have
declined. 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 7.4% or
$87.7 million compared to December 31, 2009. Savings deposits increased 11.0% or $107.2 million.
NOW deposits decreased 4.2% or $56.9 million compared to December 31, 2009. Money market deposits
decreased 12.1%, or $46.3 million, while time deposits decreased 26.5% or $532.3 million compared
to December 31, 2009. Year over year, we have experienced an increase in noninterest-bearing
demand deposits.
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 11.6% at December 31,
2010, compared to 14.9% at December 31, 2009. Short-term borrowings have decreased $32.9 million
since December 31, 2009 while long-term borrowings have decreased $277.1 million compared to
December 31, 2009. The public offering of common stock in 2009, 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 2010, we prepaid $75.0 million of FHLB advances and $49.0
million of long-term repurchase agreements. In the second quarter of 2010, a senior unsecured note
totaling $50.0 million matured. In the fourth quarter of 2010, we redeemed $100.0 million of 8.0%
trust preferred securities. During 2009, $130.0 million of FHLB advances were prepaid. See Notes
8 and 9 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) | 2010 | 2009 | 2008 | 2010 | 2009 | |||||||||||||||
|
Demand deposits
|
$ | 1,182,653 | $ | 1,018,405 | $ | 834,981 | 16.1 | % | 22.0 | % | ||||||||||
|
NOW deposits
|
1,221,352 | 1,250,745 | 1,249,482 | (2.4 | ) | 0.1 | ||||||||||||||
|
Savings deposits
|
1,043,289 | 937,642 | 886,351 | 11.3 | 5.8 | |||||||||||||||
|
Money market deposits
|
361,166 | 436,507 | 487,514 | (17.3 | ) | (10.5 | ) | |||||||||||||
|
Time deposits
|
1,753,561 | 2,054,740 | 1,867,103 | (14.7 | ) | 10.0 | ||||||||||||||
|
|
||||||||||||||||||||
|
Total deposits
|
5,562,021 | 5,698,039 | 5,325,431 | (2.4 | ) | 7.0 | ||||||||||||||
|
Short-term borrowings
|
328,535 | 527,147 | 616,935 | (37.7 | ) | (14.6 | ) | |||||||||||||
|
Other borrowings
|
615,006 | 812,062 | 810,052 | (24.3 | ) | 0.2 | ||||||||||||||
|
|
||||||||||||||||||||
|
Total funding sources
|
$ | 6,505,562 | $ | 7,037,248 | $ | 6,752,418 | (7.6 | )% | 4.2 | % | ||||||||||
|
|
||||||||||||||||||||
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 | |||||||||||||||
|
2010
|
$ | 466,293 | $ | 73,376 | $ | 30,591 | $ | 121,153 | $ | 241,173 | ||||||||||
|
2009
|
653,345 | 128,171 | 54,361 | 168,622 | 302,191 | |||||||||||||||
|
2008
|
550,018 | 117,256 | 41,825 | 189,755 | 201,182 | |||||||||||||||
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities have decreased $25.8 million, or 11.3%, since December 31,
2009 primarily as a result of decreases in accrued interest, deferred gain on sale leaseback
transactions and accrued pension liabilities.
Capital
Shareholders’ equity totaled $878.8 million or 12.1% of total assets at December 31, 2010, and
$843.8 million or 10.5% of total assets at December 31, 2009. These balances include 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.
In December 2008, we issued $100 million of Series T Preferred Stock (as defined below) and
Warrants (as defined below) to the Treasury Department as part of the Capital Purchase Program
(“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.
34
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 this Warrant
repurchase, the Treasury Department does not own any securities of Old National.
We paid cash dividends of $0.28 per share in 2010, which decreased equity by $24.4 million. We
declared cash dividends on common stock 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. We repurchased shares of our stock, reducing
shareholders’ equity by $0.7 million in 2010 and $0.4 million in 2009. The repurchases related to
our employee stock based compensation plans. The change in unrealized losses on investment
securities increased equity by $16.4 million in 2010 and increased equity by $33.6 million in 2009.
Shares issued for reinvested dividends, stock options, restricted stock and stock compensation
plans increased shareholders’ equity by $2.7 million in 2010, compared to $3.6 million in 2009.
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 19 to the consolidated financial statements.
RISK MANAGEMENT
Overview
Management, with the oversight of the Board of Directors through its Risk and Credit Policy
Committee, 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, 2010, we had non-agency collateralized mortgage obligations with a market value of
$126.8 million, or approximately 6.5% of the available-for-sale securities portfolio. The
unrealized loss on these securities at December 31, 2010, was approximately $7.4 million.
We expect conditions in the overall residential real estate market 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. During the fourth
quarter of 2010 we sold two non-agency mortgage-backed securities with an amortized cost basis of
approximately $38.4 million that were below investment grade. Eight of these securities were rated
below investment grade as of December 31, 2010. During 2010 we experienced $4.1 million of
other-than-temporary-impairment losses on ten of these securities, of which $3.0 million was
recorded as a credit loss in earnings and $1.1 million is included in other comprehensive income.
During 2009 we experienced $39.4 million of other-than-temporary-impairment on these ten
securities, of which $4.4 million was recorded as a credit loss in earnings and $35.0 million was
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 the performance of the
underlying collateral. At December 31, 2010, we had pooled trust preferred securities with a fair
value of approximately $8.4 million, or 0.4% of the available-for-sale securities portfolio.
During 2010, we experienced $0.9 million of other-than-temporary-impairment on three of these
securities, all of which was recorded as a credit loss in earnings. These securities remained
classified as available-for-sale and at December 31, 2010, the unrealized loss on our pooled trust
preferred securities was approximately $19.0 million. During 2009, six of these securities
experienced $28.7 million of other-than-temporary-impairment, of which $20.4 million was recorded
as a credit loss in earnings and $8.3 million was included in other comprehensive income.
35
Table of Contents
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.
Included in the held-to-maturity category at December 31, 2010 are approximately $117.0 million of
agency mortgage-backed securities and $217.4 million of municipal securities at amortized cost.
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 $297.6 million at December 31, 2010.
Lending Activities
Commercial
Commercial and industrial loans are made primarily for the purpose of financing equipment
acquisition, expansion, working capital, and other general business purposes. Lease financing
consists of direct financing leases and are used by commercial customers to finance capital
purchases ranging from computer equipment to transportation equipment. The credit decisions for
these transactions are based upon an assessment of the overall financial capacity of the applicant.
A determination is made as to the applicant’s ability to repay in accordance with the proposed
terms as well as an overall assessment of the risks involved. In addition to an evaluation of the
applicant’s financial condition, a determination is made of the probable adequacy of the primary
and secondary sources of repayment, such as additional collateral or personal guarantees, to be
relied upon in the transaction. Credit agency reports of the applicant’s credit history supplement
the analysis of the applicant’s creditworthiness.
Commercial mortgages and construction loans are offered to real estate investors, developers, and
builders primarily domiciled in the geographic market areas we serve, primarily Indiana, Illinois
and Kentucky. These loans are secured by first mortgages on real estate at loan-to-value (“LTV”)
margins deemed appropriate for the property type, quality, location and sponsorship. Generally,
these LTV ratios do not exceed 80%. The commercial properties are predominantly non-residential
properties such as retail centers, apartments, industrial properties and, to a lesser extent, more
specialized properties. Substantially all of our commercial real estate loans are secured by
properties located in our primary market area.
In the underwriting of our commercial real estate loans, we obtain appraisals for the underlying
properties. Decisions to lend are based on the economic viability of the property and the
creditworthiness of the borrower. In evaluating a proposed commercial real estate loan, we
primarily emphasize the ratio of the property’s projected net cash flows to the loan’s debt service
requirement. The debt service coverage ratio normally is not less than 120% and it is computed
after deduction for a vacancy factor and property expenses as appropriate. In addition, a personal
guarantee of the loan or a portion thereof is sometimes required from the principal(s) of the
borrower. We require title insurance insuring the priority of our lien, fire, and extended
coverage casualty insurance, and flood insurance, if appropriate, in order to protect our security
interest in the underlying property. In addition, business interruption insurance or other
insurance may be required.
Construction loans are underwritten against projected cash flows derived from rental income,
business income from an owner-occupant or the sale of the property to an end-user. We may mitigate
the risks associated with these types of loans by requiring fixed-price construction contracts,
performance and payment bonding, controlled disbursements, and pre-sale contracts or pre-lease
agreements.
36
Table of Contents
Consumer
We offer a variety of first mortgage and junior lien loans to consumers within our markets with
residential home mortgages comprising our largest consumer loan category. These loans are secured
by a primary residence and are underwritten using traditional underwriting systems to assess the
credit risks of the consumer. Decisions are primarily based on LTV ratios, debt-to-income (“DTI”)
ratios, liquidity and credit score. A maximum LTV ratio of 80% is generally required, although
higher levels are permitted with mortgage insurance. We offer fixed rate mortgages and variable
rate mortgages with interest rates that are subject to change every year after the first, third,
fifth, or seventh year, depending on the product and are based on the London Interbank Offered Rate
(“LIBOR”). Variable rate mortgages are underwritten at fully-indexed rates. We do not offer
interest-only loans, payment-option facilities, sub-prime loans, or any product with negative
amortization.
Home equity loans are secured primarily by second mortgages on residential property of the
borrower. The underwriting terms for the home equity product generally permits borrowing
availability, in the aggregate, up to 90% of the appraised value of the collateral property at the
time of origination. We offer fixed and variable rate home equity loans, with variable rate loans
underwritten at fully-indexed rates. Decisions are primarily based on LTV ratios, DTI ratios,
liquidity, and credit scores. We do not offer home equity loan products with reduced
documentation.
Automobile loans include loans and leases secured by new or used automobiles. We originate
automobile loans and leases primarily on an indirect basis through selected dealerships. We
require borrowers to maintain collision insurance on automobiles securing consumer loans, with us
listed as loss payee. Our procedures for underwriting automobile loans include an assessment of an
applicant’s overall financial capacity, including credit history and the ability to meet existing
obligations and payments on the proposed loan. Although an applicant’s creditworthiness is the
primary consideration, the underwriting process also includes a comparison of the value of the
collateral security to the proposed loan amount.
Asset Quality
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, 2010, 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.
37
Table of Contents
Summary of under-performing, criticized and classified assets:
ASSET QUALITY
| (dollars in thousands) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
|
Nonaccrual loans
|
||||||||||||||||||||
|
Commercial
|
$ | 25,488 | $ | 24,257 | $ | 20,276 | $ | 15,654 | $ | 11,051 | ||||||||||
|
Commercial real estate
|
30,416 | 24,854 | 32,118 | 14,649 | 21,256 | |||||||||||||||
|
Residential real estate
|
8,719 | 9,621 | 5,474 | 5,996 | 5,686 | |||||||||||||||
|
Consumer
|
6,322 | 8,284 | 6,173 | 4,517 | 3,525 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total nonaccrual loans
|
70,945 | 67,016 | 64,041 | 40,816 | 41,518 | |||||||||||||||
|
Renegotiated loans not on nonaccrual
|
— | — | — | — | 52 | |||||||||||||||
|
Past due loans still accruing (90 days or more):
|
||||||||||||||||||||
|
Commercial
|
79 | 1,754 | 848 | 491 | 768 | |||||||||||||||
|
Commercial real estate
|
— | 72 | 143 | 247 | 459 | |||||||||||||||
|
Residential real estate
|
— | — | — | — | 127 | |||||||||||||||
|
Consumer
|
493 | 1,675 | 1,917 | 773 | 787 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total past due loans
|
572 | 3,501 | 2,908 | 1,511 | 2,141 | |||||||||||||||
|
Foreclosed properties
|
5,591 | 8,149 | 2,934 | 2,876 | 3,313 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total under-performing assets
|
$ | 77,108 | $ | 78,666 | $ | 69,883 | $ | 45,203 | $ | 47,024 | ||||||||||
|
|
||||||||||||||||||||
|
Classified loans (includes nonaccrual,
renegotiated, past due 90 days
and other problem loans)
|
$ | 174,341 | $ | 157,063 | $ | 180,118 | $ | 115,121 | $ | 153,215 | ||||||||||
|
Other classified assets (3)
|
105,572 | 161,160 | 34,543 | — | — | |||||||||||||||
|
Criticized loans
|
84,017 | 103,512 | 124,855 | 103,210 | 119,757 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total criticized and classified assets
|
$ | 363,930 | $ | 421,735 | $ | 339,516 | $ | 218,331 | $ | 272,972 | ||||||||||
|
|
||||||||||||||||||||
|
Asset Quality Ratios:
|
||||||||||||||||||||
|
Non-performing loans/total loans (1)
(2)
|
1.90 | % | 1.75 | % | 1.35 | % | 0.87 | % | 0.88 | % | ||||||||||
|
Under-performing assets/total loans
and
foreclosed properties (1)
|
2.06 | 2.05 | 1.47 | 0.96 | 1.00 | |||||||||||||||
|
Under-performing assets/total assets
|
1.06 | 0.98 | 0.89 | 0.58 | 0.58 | |||||||||||||||
|
Allowance for loan losses/
under-performing assets
|
93.78 | 88.41 | 96.00 | 124.91 | 144.16 | |||||||||||||||
| (1) | Loans exclude residential loans held for sale and leases held for sale. | |
| (2) | Non-performing loans include nonaccrual and renegotiated loans. | |
| (3) | Includes 9 pooled trust preferred securities, 8 non-agency mortgage-backed securities and 1 corporate security at December 31, 2010. |
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 $77.1 million at December 31, 2010 and $78.7 million at December
31, 2009. As a percent of total loans and foreclosed properties, under-performing assets at
December 31 were 2.06% for 2010 and 2.05% for 2009. The nonaccrual category of under-performing
loans was $70.9 million at December 31, 2010, compared to $67.0 million at December 31, 2009. At
December 31, 2010, the allowance for loan losses to under-performing assets ratio stood at 93.78%
compared to 88.41% at December 31, 2009.
In the course of resolving nonperforming loans, we may choose to restructure the contractual terms
of certain loans. We attempt to work out an alternative payment schedule with the borrower in order
to avoid foreclosure actions. Any loans that are modified are reviewed by us to identify if a
troubled debt restructuring (“TDR”) has occurred, which is when for economic or legal reasons
related to a borrower’s financial difficulties, the Bank grants a concession to the borrower that
it would not otherwise consider. Terms may be modified to fit the ability of the
borrower to repay in line with its current financial status and could include reduction of the
stated interest rate other than normal market rate adjustments, extension of maturity dates, or
reduction of principal balance or accrued interest. The decision to restructure a loan, versus
aggressively enforcing the collection of the loan, may benefit us by increasing the ultimate
probability of collection.
38
Table of Contents
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. All of our troubled debt restructurings were included with nonaccrual loans at
December 31, 2010 and consisted of $3.8 million of commercial loans and $1.0 million of commercial
real estate loans. All of our troubled debt restructurings were included with nonaccrual loans at
December 31, 2009 and consisted of $7.6 million of commercial loans and $2.4 million of commercial
real estate loans.
In addition, the Company modified one loan during the fourth quarter of 2009 that was not
considered a troubled debt restructuring. The loan had a balance of $3.1 million at December 31,
2009. The loan modification was in the commercial loan portfolio and resulted in an insignificant
delay in payments, which was considered along with other factors. The loan was paid in full in the
third quarter of 2010.
Management will continue its efforts to reduce the level of under-performing loans and will also
consider the possibility of sales of troubled and non-performing loans, which could result in
additional charge-offs to the allowance for loan losses.
Classified loans, including nonaccrual, renegotiated, past due 90 days and other problem loans,
were $174.3 million at December 31, 2010, an increase of $17.2 million from $157.1 million at
December 31, 2009. Of this total, other problem loans, which are loans reviewed for the borrowers’
ability to comply with present repayment terms, totaled $102.8 million at December 31, 2010,
compared to $86.5 million at December 31, 2009. Other classified assets include $105.6 million of
investment securities that fell below investment grade rating at December 31, 2010. Criticized
loans, or special mention loans, were $84.0 million at December 31, 2010, a decrease of $19.5
million from $103.5 million at December 31, 2009.
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.
39
Table of Contents
The activity in our allowance for loan losses is as follows:
ALLOWANCE FOR LOAN LOSSES
| (dollars in thousands) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
|
Balance, January 1
|
$ | 69,548 | $ | 67,087 | $ | 56,463 | $ | 67,790 | $ | 78,847 | ||||||||||
|
Loans charged-off:
|
||||||||||||||||||||
|
Commercial
|
11,967 | 36,682 | 12,402 | 7,835 | 11,745 | |||||||||||||||
|
Commercial real estate
|
10,196 | 21,886 | 21,991 | 5,855 | 4,738 | |||||||||||||||
|
Residential real estate
|
2,296 | 1,315 | 1,442 | 1,613 | 765 | |||||||||||||||
|
Consumer credit
|
16,848 | 18,156 | 15,385 | 11,635 | 10,696 | |||||||||||||||
|
Write-downs on loans transferred
to held for sale
|
— | 572 | — | 5,337 | 2,770 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total charge-offs
|
41,307 | 78,611 | 51,220 | 32,275 | 30,714 | |||||||||||||||
|
|
||||||||||||||||||||
|
Recoveries on charged-off loans:
|
||||||||||||||||||||
|
Commercial
|
5,060 | 4,865 | 2,689 | 4,153 | 3,018 | |||||||||||||||
|
Commercial real estate
|
2,041 | 7,458 | 2,570 | 1,774 | 4,264 | |||||||||||||||
|
Residential real estate
|
172 | 135 | 272 | 138 | 61 | |||||||||||||||
|
Consumer credit
|
6,014 | 5,334 | 4,849 | 5,066 | 5,314 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total recoveries
|
13,287 | 17,792 | 10,380 | 11,131 | 12,657 | |||||||||||||||
|
|
||||||||||||||||||||
|
Net charge-offs
|
28,020 | 60,819 | 40,840 | 21,144 | 18,057 | |||||||||||||||
|
Provision charged to expense
|
30,781 | 63,280 | 51,464 | 4,118 | 7,000 | |||||||||||||||
|
Allowance of acquired bank
|
— | — | — | 5,699 | — | |||||||||||||||
|
|
||||||||||||||||||||
|
Balance, December 31
|
$ | 72,309 | $ | 69,548 | $ | 67,087 | $ | 56,463 | $ | 67,790 | ||||||||||
|
|
||||||||||||||||||||
|
Average loans for the year (1)
|
$ | 3,722,861 | $ | 4,330,247 | $ | 4,695,950 | $ | 4,805,664 | $ | 4,804,241 | ||||||||||
|
|
||||||||||||||||||||
|
Asset Quality Ratios:
|
||||||||||||||||||||
|
Allowance/year-end loans (1)
|
1.93 | % | 1.81 | % | 1.41 | % | 1.20 | % | 1.44 | % | ||||||||||
|
Allowance/average loans (1)
|
1.94 | 1.61 | 1.43 | 1.17 | 1.41 | |||||||||||||||
|
Net charge-offs/average loans (2)
|
0.75 | 1.40 | 0.87 | 0.44 | 0.38 | |||||||||||||||
| (1) | Loans exclude residential loans held for sale and leases held for sale. | |
| (2) | Net charge-offs include write-downs on loans transferred to held for sale. |
The allowance for loan losses increased $2.8 million from $69.5 million at December 31, 2009
to $72.3 million at December 31, 2010. The primary reasons for the increase in the allowance from
December 31, 2009 to December 31, 2010 were an increase of approximately $1.2 million in general
allocation related to credit deterioration in the commercial portfolio combined with an increase in
specific loan allocations of approximately $3.6 million in the commercial portfolio, which more
than offset the $2.0 million reduction for residential loans.
Management believes that it has appropriately identified and reserved for its loan losses at
December 31, 2010. 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 $4.5 million and $4.3 million would have been recorded on
nonaccrual and renegotiated loans outstanding at December 31, 2010 and 2009, 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 $1.8 million
and $1.7 million in 2010 and 2009, respectively. Approximately $36.6 million of nonaccrual loans
were less than thirty days delinquent at December 31, 2010. We had $4.8 million of renegotiated
loans which are included in nonaccrual loans at December 31, 2010 and $10.0 million of renegotiated
loans which were included in nonaccrual loans at December 31, 2009.
Charge-offs, net of recoveries, excluding write-downs on loans transferred to held for sale totaled
$28.0 million in 2010 and $60.2 million in 2009. 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. There were no 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 25% of net charge-offs have been
concentrated in commercial loans, 29% have been in commercial real estate loans and 39% have been
in consumer loans. The allowance to average loans, which ranged from 1.17% to 1.94% for the last
five years, was 1.94% at December 31, 2010.
40
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
AND THE PERCENTAGE OF LOANS BY CATEGORY TO TOTAL LOANS
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| Percent | Percent | Percent | ||||||||||||||||||||||
| of Loans | of Loans | of Loans | ||||||||||||||||||||||
| to Total | to Total | to Total | ||||||||||||||||||||||
| (dollars in thousands) | Amount | Loans | Amount | Loans | Amount | Loans | ||||||||||||||||||
|
Commercial
|
$ | 26,204 | 32.3 | % | $ | 26,869 | 33.6 | % | $ | 29,254 | 39.9 | % | ||||||||||||
|
Commercial real estate
|
32,654 | 25.2 | 27,138 | 27.7 | 22,362 | 24.2 | ||||||||||||||||||
|
Residential real estate
|
2,309 | 17.8 | 1,688 | 10.5 | 2,067 | 10.4 | ||||||||||||||||||
|
Consumer credit
|
11,142 | 24.7 | 13,853 | 28.2 | 13,404 | 25.5 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 72,309 | 100.0 | % | $ | 69,548 | 100.0 | % | $ | 67,087 | 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 our overall sensitivity to market
interest rate changes.
41
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, 2010 and 2009 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% | ||||||
|
|
||||||||||||
|
12/31/2010
|
NA | NA | NA | -0.28% | -0.01% | -1.37% | ||||||
|
12/31/2009
|
NA | NA | NA | 1.02% | 1.29% | 1.25% | ||||||
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% | ||||||
|
|
||||||||||||
|
12/31/2010
|
NA | NA | NA | 0.89% | 2.30% | 1.42% | ||||||
|
12/31/2009
|
NA | NA | NA | 3.60% | 3.99% | 3.93% | ||||||
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% | ||||||
|
|
||||||||||||
|
12/31/2010
|
NA | NA | NA | -3.57% | -10.36% | -17.42% | ||||||
|
12/31/2009
|
NA | NA | NA | -3.08% | -8.65% | -13.42% | ||||||
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, 2010, modeling indicated Old National was within the green zone policy limit for
the 12-month Net Interest Income at Risk values for Up 100, Up 200 and Up 300 scenarios, which is
considered normal and acceptable for Net Interest Income at Risk. Negative results for the
12-month Net Interest Income at Risk indicate that net interest income decreases relative to net
interest income modeled using interest rates as of December 31, 2010. Results for the cumulative
24-month Net Interest Income at Risk were positive for Up 100, Up 200 and Up 300 scenarios. This
indicates that net interest income increases relative to net interest income modeled using interest
rates as of December 31, 2010. Positive increases to Net Interest Income at Risk in our scenarios
are not applicable to policy limits.
42
Table of Contents
At December 31, 2010, modeling indicated that Old National was within 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 more negative changes to economic value in rising interest rate
scenarios at December 31, 2010 compared to December 31, 2009. These changes in EVE modeling
results were primarily driven by mix changes within in the balance sheet. Additionally, EVE
results were also impacted by a smaller balance sheet, which included a reduction in the size of
the investment portfolio and wholesale funding and a change in the mix within the loan portfolio.
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,
2010, Old National’s 24 month cumulative Net Interest Income at Risk for this scenario resulted in
a 2.98% 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, 2010, Old National’s 24 month cumulative Net
Interest Income at Risk for this scenario resulted in a 0.39% decrease 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 $4.4 million
at December 31, 2010, compared to an estimated fair value gain of $0.4 million at December 31,
2009. In addition, the notional amount of derivatives decreased by $262.9 million from 2009. See
Note 16 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:
| • | Fitch Rating Service kept their long-term outlook rating as stable (unchanged) during the latest rating review on March 12, 2010 | ||
| • | Dominion Bond Rating Services has issued a stable outlook as of August 18, 2010 | ||
| • | Moody’s Investor Service does not rate Old National Bancorp as of December 20, 2010. The outlook for Old National Bank changed to negative as of October 13, 2008. |
43
Table of Contents
The senior debt ratings of Old National and Old National Bank at December 31, 2010, are shown in
the following table.
| Moody’s Investor Service | Fitch, Inc. | Dominion Bond Rating Svc. | ||||||||||||||||||||||
| Long | Short | Long | Short | Long | Short | |||||||||||||||||||
| term | term | term | term | term | term | |||||||||||||||||||
|
Old National Bancorp
|
N/A | N/A | BBB | F2 | BBB (high | ) | R-2 (high | ) | ||||||||||||||||
|
Old National Bank
|
A1 | P-1 | BBB+ | F2 | A (low | ) | R-1 (low | ) | ||||||||||||||||
| N/A = | not applicable |
As of December 31, 2010, Old National Bank had the capacity to borrow $712.0 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 can obtain 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, 2010,
the Parent Company’s other borrowings outstanding decreased to $8.0 million as compared to $157.3
million as of December 31, 2009. In the second quarter of 2010, $50.0 million Parent Company debt
matured. Old National’s Board of Directors approved the redemption of junior subordinated
debentures, resulting in the trustee of ONB Capital Trust II redeeming all $100.0 million of the 8%
trust preferred securities on December 15, 2010.
Old National opted in to the Temporary Account Guarantee Program (TAGP) offered in 2008 as a part
of Federal Deposit Insurance Corporation’s (FDIC) Temporary Liquidity Guarantee Program (TLGP).
The TAGP program ended Dec 31, 2010. The coverage under the TAGP program has been made permanent
and all funds in a ‘‘noninterest-bearing transaction account’’ are insured in full by the FDIC from
January 1, 2011, through December 31, 2012. This unlimited coverage is in addition to, and
separate from, the coverage of at least $250,000 available to depositors under the FDIC’s general
deposit insurance rules.
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. The facility matured in April 2010 and Old National did not renew the facility.
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.
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 2010 and currently.
44
Table of Contents
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 $1.106 billion and standby letters of credit of $74.3 million at December 31,
2010. At December 31, 2010, approximately $1.064 billion of the loan commitments had fixed rates
and $42 million had floating rates, with the fixed interest rates ranging from 0% to 13.25%. At
December 31, 2009, loan commitments were $1.038 billion and standby letters of credit were $103.2
million. The term of these off-balance sheet arrangements is typically one year or less.
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 $9.0 million at December 31, 2010.
CONTRACTUAL OBLIGATIONS, COMMITMENTS AND CONTINGENT LIABILITIES
The following table presents our significant fixed and determinable contractual obligations and
significant commitments at December 31, 2010. 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
|
$ | 3,987,668 | $ | — | $ | — | $ | — | $ | 3,987,668 | ||||||||||||||
|
Consumer and brokered certificates of deposit
|
7 | 716,453 | 582,837 | 88,551 | 87,416 | 1,475,257 | ||||||||||||||||||
|
Short-term borrowings
|
8 | 298,232 | — | — | — | 298,232 | ||||||||||||||||||
|
Other borrowings
|
9 | 150,046 | 76,606 | 109,323 | 85,936 | 421,911 | ||||||||||||||||||
|
Fixed interest payments (a)
|
17,101 | 16,756 | 10,219 | 27,495 | 71,571 | |||||||||||||||||||
|
Operating leases
|
17 | 34,527 | 63,823 | 58,733 | 296,045 | 453,128 | ||||||||||||||||||
|
Other long-term liabilities (b)
|
800 | — | — | — | 800 | |||||||||||||||||||
| (a) | Our subordinated bank notes and certain Federal Home Loan Bank advances have fixed rates ranging from 1.24% to 8.34%. All of our other long-term debt is at Libor based variable rates at December 31, 2010. The projected variable interest assumes no increase in Libor rates from December 31, 2010. | |
| (b) | Amount expected to be contributed to the pension plans in 2011. Amounts for 2012 and beyond are unknown at this time. |
We rent certain premises and equipment under operating leases. See Note 17 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 16 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 17 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 10 to
the consolidated financial statements.
45
Table of Contents
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our accounting policies are described in Note 1 to the consolidated financial statements included
in this Annual Report for the year ended December 31, 2010. Certain accounting policies require
management to use significant judgment 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 judgment 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 judgment 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.
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 |
46
Table of Contents
| 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 performing commercial loans. 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. Judgment is used to select and weight the historical periods which are most representative of the current environment. | ||
| 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. | |||
| We use historic loss ratios adjusted for expectations of future economic conditions to determine 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, 2010, resulted in a range for allowance for loan losses of $8.5 million. The range pertains to general (FASB ASC 310, Receivables/SFAS 5) reserves for both retail and performing commercial loans. Specific (FASB ASC 310, Receivables/SFAS 114) reserves do not have a range of probable loss. Due to the risks and uncertainty associated with the economy, our projection of FAS 5 loss rates inherent in the portfolio, and our selection of representative historical periods, we establish a range of probable outcomes (a high-end estimate and a low-end estimate) and evaluate our position within this range. The potential effect to net income based on our position in the range relative to the high and low endpoints is a decrease of $2.4 million and an increase of $3.1 million, respectively, after taking into account the tax effects. 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. |
47
Table of Contents
| • | 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. FASB ASC 740-10 (FIN 48) 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 10 to the Consolidated Financial Statements for a further description of our provision and related income tax assets and liabilities. | ||
| • | 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. |
48
Table of Contents
| 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 fair 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. | ||
| • | 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”.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The information contained under the caption “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Market Risk” on page 41 of this Form 10-K is incorporated
herein by reference in response to this item.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
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.
49
Table of Contents
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 and Corporate Governance Guidelines that outline high levels of ethical
business standards. We also 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 meets 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.
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, 2010. 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, 2010, 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, 2010 as
stated in their report which follows.
50
Table of Contents
|
|
Crowe Horwath LLP | |
|
|
Independent Member Crowe Horwath International |
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, 2010 and 2009, 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, 2010. We
also have audited Old National Bancorp’s internal control over financial reporting as of December
31, 2010, 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.
51
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, 2010 and 2009,
and the results of its operations and its cash flows for each of the years in the three-year period
ended December 31, 2010 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, 2010, based on criteria
established in
Internal Control—Integrated Framework
issued by the COSO.
Crowe Horwath LLP
Indianapolis, Indiana
February 24, 2011
February 24, 2011
52
Table of Contents
OLD NATIONAL BANCORP
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||
| (dollars and shares in thousands, except per share data) | 2010 | 2009 | ||||||
|
Assets
|
||||||||
|
Cash and due from banks
|
$ | 107,368 | $ | 144,156 | ||||
|
Money market and other interest-earning investments
|
144,184 | 353,120 | ||||||
|
|
||||||||
|
Total cash and cash equivalents
|
251,552 | 497,276 | ||||||
|
Securities — available-for-sale, at fair value
|
1,960,222 | 2,486,219 | ||||||
|
Securities — held-to-maturity, at amortized cost
(fair value $625,643 and $399,953 respectively)
|
638,210 | 396,009 | ||||||
|
Federal Home Loan Bank stock, at cost
|
31,937 | 36,090 | ||||||
|
Residential loans held for sale, at fair value
|
3,819 | 17,530 | ||||||
|
Finance leases held for sale
|
— | 55,260 | ||||||
|
Loans, net of unearned income
|
3,743,451 | 3,835,486 | ||||||
|
Allowance for loan losses
|
(72,309 | ) | (69,548 | ) | ||||
|
|
||||||||
|
Net loans
|
3,671,142 | 3,765,938 | ||||||
|
|
||||||||
|
Premises and equipment, net
|
48,775 | 52,399 | ||||||
|
Accrued interest receivable
|
42,971 | 49,340 | ||||||
|
Goodwill
|
167,884 | 167,884 | ||||||
|
Other intangible assets
|
26,178 | 32,307 | ||||||
|
Company-owned life insurance
|
226,192 | 224,652 | ||||||
|
Other assets
|
195,010 | 224,431 | ||||||
|
|
||||||||
|
Total assets
|
$ | 7,263,892 | $ | 8,005,335 | ||||
|
|
||||||||
|
|
||||||||
|
Liabilities
|
||||||||
|
Deposits:
|
||||||||
|
Noninterest-bearing demand
|
$ | 1,276,024 | $ | 1,188,343 | ||||
|
Interest-bearing:
|
||||||||
|
NOW
|
1,297,443 | 1,354,337 | ||||||
|
Savings
|
1,079,376 | 972,176 | ||||||
|
Money market
|
334,825 | 381,078 | ||||||
|
Time
|
1,475,257 | 2,007,554 | ||||||
|
|
||||||||
|
Total deposits
|
5,462,925 | 5,903,488 | ||||||
|
|
||||||||
|
Short-term borrowings
|
298,232 | 331,144 | ||||||
|
Other borrowings
|
421,911 | 699,059 | ||||||
|
Accrued expenses and other liabilities
|
202,019 | 227,818 | ||||||
|
|
||||||||
|
Total liabilities
|
6,385,087 | 7,161,509 | ||||||
|
|
||||||||
|
Commitments and contingencies (Note 17)
|
||||||||
|
Shareholders’ Equity
|
||||||||
|
Preferred stock, series A, 1,000 shares authorized, no shares
issued or outstanding
|
— | — | ||||||
|
Common stock, $1 per share stated value, 150,000 shares authorized,
87,183 and 87,182 shares issued and outstanding, respectively
|
87,183 | 87,182 | ||||||
|
Capital surplus
|
748,873 | 746,775 | ||||||
|
Retained earnings
|
44,018 | 30,235 | ||||||
|
Accumulated other comprehensive loss, net of tax
|
(1,269 | ) | (20,366 | ) | ||||
|
|
||||||||
|
Total shareholders’ equity
|
878,805 | 843,826 | ||||||
|
|
||||||||
|
Total liabilities and shareholders’ equity
|
$ | 7,263,892 | $ | 8,005,335 | ||||
|
|
||||||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
53
Table of Contents
CONSOLIDATED STATEMENTS OF INCOME
| Years Ended December 31, | ||||||||||||
| (dollars and shares in thousands, except per share data) | 2010 | 2009 | 2008 | |||||||||
|
Interest Income
|
||||||||||||
|
Loans including fees:
|
||||||||||||
|
Taxable
|
$ | 175,607 | $ | 198,940 | $ | 261,455 | ||||||
|
Nontaxable
|
9,631 | 19,053 | 23,155 | |||||||||
|
Investment securities, available-for-sale:
|
||||||||||||
|
Taxable
|
71,057 | 90,087 | 87,066 | |||||||||
|
Nontaxable
|
16,294 | 22,532 | 14,913 | |||||||||
|
Investment securities, held-to-maturity, taxable
|
23,828 | 9,932 | 5,187 | |||||||||
|
Money market and other interest-earning investments
|
431 | 133 | 746 | |||||||||
|
|
||||||||||||
|
Total interest income
|
296,848 | 340,677 | 392,522 | |||||||||
|
|
||||||||||||
|
Interest Expense
|
||||||||||||
|
Deposits
|
48,608 | 67,628 | 95,453 | |||||||||
|
Short-term borrowings
|
662 | 1,410 | 10,902 | |||||||||
|
Other borrowings
|
29,162 | 40,240 | 42,842 | |||||||||
|
|
||||||||||||
|
Total interest expense
|
78,432 | 109,278 | 149,197 | |||||||||
|
|
||||||||||||
|
Net interest income
|
218,416 | 231,399 | 243,325 | |||||||||
|
Provision for loan losses
|
30,781 | 63,280 | 51,464 | |||||||||
|
|
||||||||||||
|
Net interest income after provision for loan losses
|
187,635 | 168,119 | 191,861 | |||||||||
|
|
||||||||||||
|
Noninterest Income
|
||||||||||||
|
Wealth management fees
|
16,120 | 15,963 | 17,361 | |||||||||
|
Service charges on deposit accounts
|
50,018 | 55,196 | 45,175 | |||||||||
|
ATM fees
|
22,967 | 20,472 | 17,234 | |||||||||
|
Mortgage banking revenue
|
2,230 | 6,238 | 5,100 | |||||||||
|
Insurance premiums and commissions
|
36,463 | 37,851 | 39,153 | |||||||||
|
Investment product fees
|
9,192 | 8,515 | 9,493 | |||||||||
|
Company-owned life insurance
|
4,052 | 2,355 | 9,181 | |||||||||
|
Net securities gains
|
17,124 | 27,251 | 7,562 | |||||||||
|
Total other-than-temporary impairment losses
|
(5,060 | ) | (68,090 | ) | — | |||||||
|
Loss recognized in other comprehensive income
|
1,133 | 43,295 | — | |||||||||
|
|
||||||||||||
|
Impairment losses recognized in earnings
|
(3,927 | ) | (24,795 | ) | — | |||||||
|
Gain (loss) on derivatives
|
1,492 | 719 | (1,144 | ) | ||||||||
|
Gain on sale leaseback transactions
|
6,452 | 6,301 | 6,320 | |||||||||
|
Other income
|
7,967 | 7,394 | 11,534 | |||||||||
|
|
||||||||||||
|
Total noninterest income
|
170,150 | 163,460 | 166,969 | |||||||||
|
|
||||||||||||
|
Noninterest Expense
|
||||||||||||
|
Salaries and employee benefits
|
170,601 | 181,368 | 167,764 | |||||||||
|
Occupancy
|
46,410 | 47,064 | 39,668 | |||||||||
|
Equipment
|
10,641 | 10,440 | 9,464 | |||||||||
|
Marketing
|
5,720 | 9,578 | 9,554 | |||||||||
|
Data processing
|
21,409 | 20,700 | 19,021 | |||||||||
|
Communication
|
9,803 | 10,922 | 9,267 | |||||||||
|
Professional fees
|
8,253 | 9,491 | 7,187 | |||||||||
|
Loan expense
|
3,936 | 4,335 | 6,619 | |||||||||
|
Supplies
|
2,935 | 4,294 | 3,283 | |||||||||
|
Loss on extinguishment of debt
|
6,107 | 3,941 | — | |||||||||
|
Fraud loss
|
124 | 184 | 6,406 | |||||||||
|
FDIC assessment
|
8,370 | 12,447 | 1,513 | |||||||||
|
Amortization of intangibles
|
6,130 | 5,988 | 3,659 | |||||||||
|
Other expense
|
13,866 | 18,204 | 13,824 | |||||||||
|
|
||||||||||||
|
Total noninterest expense
|
314,305 | 338,956 | 297,229 | |||||||||
|
|
||||||||||||
|
Income (loss) before income taxes
|
43,480 | (7,377 | ) | 61,601 | ||||||||
|
Income tax expense (benefit)
|
5,266 | (21,114 | ) | (877 | ) | |||||||
|
|
||||||||||||
|
Net income
|
38,214 | 13,737 | 62,478 | |||||||||
|
Preferred stock dividends and discount accretion
|
— | (3,892 | ) | (298 | ) | |||||||
|
|
||||||||||||
|
Net income available to common stockholders
|
$ | 38,214 | $ | 9,845 | $ | 62,180 | ||||||
|
|
||||||||||||
|
Net income per common share:
|
||||||||||||
|
Basic earnings per share
|
$ | 0.44 | $ | 0.14 | $ | 0.95 | ||||||
|
Diluted earnings per share
|
0.44 | 0.14 | 0.95 | |||||||||
|
|
||||||||||||
|
Weighted average number of common shares outstanding
|
||||||||||||
|
Basic
|
86,785 | 71,314 | 65,660 | |||||||||
|
Diluted
|
86,928 | 71,367 | 65,776 | |||||||||
|
|
||||||||||||
|
Dividends per common share
|
0.28 | 0.44 | 0.69 | |||||||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
54
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, 2008
|
$ | — | $ | 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 securitites, 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
|
— | 87,182 | 746,775 | 30,235 | (20,366 | ) | 843,826 | |||||||||||||||||||||
|
Comprehensive income
|
||||||||||||||||||||||||||||
|
Net income
|
— | — | — | 38,214 | — | 38,214 | $ | 38,214 | ||||||||||||||||||||
|
Other comprehensive income (1)
|
||||||||||||||||||||||||||||
|
Change in unrealized gain (loss) on
securities available for sale, net of
reclassification and tax
|
— | — | — | — | 11,501 | 11,501 | 11,501 | |||||||||||||||||||||
|
Transferred securities, net of tax
|
— | — | — | — | 4,855 | 4,855 | 4,855 | |||||||||||||||||||||
|
Reclassification adjustment on
cash flow hedges, net of tax
|
— | — | — | — | 659 | 659 | 659 | |||||||||||||||||||||
|
Net loss, settlement cost and amort
of net (gain) loss on defined benefit
pension plans, net of tax
|
— | — | — | — | 2,082 | 2,082 | 2,082 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total comprehensive income
|
$ | 57,311 | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Dividends — common stock
|
— | — | — | (24,361 | ) | — | (24,361 | ) | ||||||||||||||||||||
|
Common stock issued
|
— | 19 | 178 | — | — | 197 | ||||||||||||||||||||||
|
Common stock repurchased
|
— | (41 | ) | (664 | ) | — | — | (705 | ) | |||||||||||||||||||
|
Stock based compensation expense
|
— | — | 2,369 | — | — | 2,369 | ||||||||||||||||||||||
|
Stock activity under incentive comp plans
|
— | 23 | 215 | (70 | ) | — | 168 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Balance, December 31, 2010
|
$ | — | $ | 87,183 | $ | 748,873 | $ | 44,018 | $ | (1,269 | ) | $ | 878,805 | |||||||||||||||
|
|
||||||||||||||||||||||||||||
| The accompanying notes to consolidated financial statements are an integral part of these statements. | ||
| (1) | See Note 1 to the consolidated financial statements. | |
55
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Years Ended December 31, | ||||||||||||
| (dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
|
Cash Flows From Operating Activities
|
||||||||||||
|
Net income
|
$ | 38,214 | $ | 13,737 | $ | 62,478 | ||||||
|
|
||||||||||||
|
Adjustments to reconcile net income to cash provided by operating activities:
|
||||||||||||
|
Depreciation
|
8,990 | 8,853 | 5,952 | |||||||||
|
Amortization and impairment of other intangible assets
|
6,129 | 6,508 | 4,350 | |||||||||
|
Net premium (discount) amortization on investment securities
|
7,590 | 2,188 | (1,875 | ) | ||||||||
|
Restricted stock expense
|
2,116 | 918 | 1,598 | |||||||||
|
Stock option expense
|
253 | 392 | 407 | |||||||||
|
Provision for loan losses
|
30,781 | 63,280 | 51,464 | |||||||||
|
Net securities gains
|
(17,124 | ) | (27,251 | ) | (7,562 | ) | ||||||
|
Impairment on available-for-sale securities
|
3,927 | 24,795 | — | |||||||||
|
Gain on sale leasebacks
|
(6,452 | ) | (6,301 | ) | (6,320 | ) | ||||||
|
(Gain) loss on derivatives
|
(1,492 | ) | (719 | ) | 1,144 | |||||||
|
Net gains on sales and write-downs of loans and other assets
|
(1,410 | ) | (1,141 | ) | (3,054 | ) | ||||||
|
(Gain) loss on retirement of debt
|
6,107 | 3,941 | (558 | ) | ||||||||
|
Increase in cash surrender value of company-owned life insurance
|
(1,540 | ) | (1,526 | ) | (8,640 | ) | ||||||
|
Residential real estate loans originated for sale
|
(57,523 | ) | (259,664 | ) | (171,871 | ) | ||||||
|
Proceeds from sale of residential real estate loans
|
72,773 | 262,784 | 170,577 | |||||||||
|
(Increase) decrease in interest receivable
|
6,369 | (278 | ) | 1,247 | ||||||||
|
(Increase) decrease in other assets
|
16,797 | (44,008 | ) | (65,003 | ) | |||||||
|
Increase (decrease) in accrued expenses and other liabilities
|
(17,995 | ) | (6,212 | ) | 20,185 | |||||||
|
|
||||||||||||
|
Total adjustments
|
58,296 | 26,559 | (7,959 | ) | ||||||||
|
|
||||||||||||
|
Net cash flows provided by operating activities
|
96,510 | 40,296 | 54,519 | |||||||||
|
|
||||||||||||
|
Cash Flows From Investing Activities
|
||||||||||||
|
Cash and cash equivalents of acquired banking branches, net
|
— | 389,917 | — | |||||||||
|
Purchases of investment securities available-for-sale
|
(1,106,040 | ) | (2,274,090 | ) | (1,068,304 | ) | ||||||
|
Purchases of investment securities held-to-maturity
|
(255,828 | ) | (98,544 | ) | — | |||||||
|
Purchase of loans
|
(7,660 | ) | (8,024 | ) | — | |||||||
|
Proceeds from maturities, prepayments and calls of investment securities available-for-sale
|
1,046,431 | 697,082 | 754,669 | |||||||||
|
Proceeds from sales of investment securities available-for-sale
|
481,471 | 1,042,138 | 280,971 | |||||||||
|
Proceeds from maturities, prepayments and calls of investment securities held-to-maturity
|
150,837 | 29,230 | 26,464 | |||||||||
|
Proceeds from redemption of FHLB stock
|
4,153 | 5,000 | — | |||||||||
|
Proceeds from sale of loans and leases
|
3,627 | 259,127 | 2,251 | |||||||||
|
Net principal collected from (loans made to) customers
|
123,308 | 562,452 | (117,039 | ) | ||||||||
|
Proceeds from sale of premises and equipment and other assets
|
32 | 405 | 10,892 | |||||||||
|
Proceeds from sale leaseback of real estate
|
3,697 | 10,836 | 8,528 | |||||||||
|
Purchases of premises and equipment
|
(7,460 | ) | (13,944 | ) | (11,722 | ) | ||||||
|
|
||||||||||||
|
Net cash flows provided by (used in) investing activities
|
436,568 | 601,585 | (113,290 | ) | ||||||||
|
|
||||||||||||
|
Cash Flows From Financing Activities
|
||||||||||||
|
Net increase (decrease) in deposits and short-term borrowings:
|
||||||||||||
|
Noninterest-bearing demand deposits
|
87,681 | 220,070 | 33,130 | |||||||||
|
Savings, NOW and money market deposits
|
4,053 | (61,390 | ) | (158,851 | ) | |||||||
|
Time deposits
|
(532,297 | ) | (103,011 | ) | (113,904 | ) | ||||||
|
Short-term borrowings
|
(32,912 | ) | (318,479 | ) | 11,376 | |||||||
|
Payments for maturities on other borrowings
|
(75,821 | ) | (5,264 | ) | (154,207 | ) | ||||||
|
Proceeds from issuance of other borrowings
|
75,000 | — | 330,000 | |||||||||
|
Payments related to retirement of debt
|
(279,649 | ) | (133,949 | ) | — | |||||||
|
Cash dividends paid on common stock
|
(24,361 | ) | (30,380 | ) | (60,801 | ) | ||||||
|
Cash dividends paid on preferred stock
|
— | (1,514 | ) | — | ||||||||
|
Common stock repurchased
|
(705 | ) | (353 | ) | (457 | ) | ||||||
|
Proceeds from exercise of stock options, including tax benefit
|
12 | 97 | 1,940 | |||||||||
|
Proceeds from issuance of TARP preferred stock and warrants
|
— | — | 99,885 | |||||||||
|
Repurchase of TARP preferred stock and warrants
|
— | (101,200 | ) | — | ||||||||
|
Common stock issued
|
197 | 197,756 | — | |||||||||
|
|
||||||||||||
|
Net cash flows used in financing activities
|
(778,802 | ) | (337,617 | ) | (11,889 | ) | ||||||
|
|
||||||||||||
|
Net increase (decrease) in cash and cash equivalents
|
(245,724 | ) | 304,264 | (70,660 | ) | |||||||
|
Cash and cash equivalents at beginning of period
|
497,276 | 193,012 | 263,672 | |||||||||
|
|
||||||||||||
|
Cash and cash equivalents at end of period
|
$ | 251,552 | $ | 497,276 | $ | 193,012 | ||||||
|
|
||||||||||||
The accompanying notes to consolidated financial statements are an integral part of these statements.
56
Table of Contents
OLD NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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., 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, 2010 and 2009,
and the results of its operations and cash flows for the years ended December 31, 2010, 2009 and
2008.
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.
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.
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) whether the market
decline was affected by macroeconomic conditions, (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.
57
Table of Contents
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.
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.
Further information regarding Old National’s policies and methodology used to estimate the
allowance for loan losses is presented in Note 5.
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.
58
Table of Contents
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. 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, 2010 and
2009 was $226.2 million and $224.7 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. 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.
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.
59
Table of Contents
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
de-designated 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. Changes in fair value are recorded as
mortgage banking revenue. 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 other noninterest income.
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 ASSETS
Other assets include real estate properties acquired as a result of foreclosure and repossessed
personal property 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 assets at December 31, 2010 and 2009 was $5.6 million and $8.1 million,
respectively.
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.
60
Table of Contents
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, 2010, 2009 and 2008.
| (dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
|
Net income
|
$ | 38,214 | $ | 13,737 | $ | 62,478 | ||||||
|
Other comprehensive income
|
||||||||||||
|
Change in securities available for sale:
|
||||||||||||
|
Unrealized holding gains (losses) arising during the period
|
43,078 | 99,164 | (50,328 | ) | ||||||||
|
Reclassification for securities transferred to held-to-maturity
|
(9,371 | ) | (1,791 | ) | — | |||||||
|
Reclassification adjustment for securities (gains) losses realized in income
|
(17,124 | ) | (27,251 | ) | (7,562 | ) | ||||||
|
Other-than-temporary-impairment on available-for-sale debt securities
recorded in other comprehensive income
|
(1,133 | ) | (43,295 | ) | — | |||||||
|
Other-than-temporary-impairment on available-for-sale debt securities
associated with credit loss realized in income
|
3,927 | 24,795 | — | |||||||||
|
Income tax effect
|
(7,876 | ) | (18,830 | ) | 21,090 | |||||||
|
Change in securities held-to-maturity:
|
||||||||||||
|
Fair value adjustment for securities transferred from available-for-sale
|
9,371 | 1,791 | — | |||||||||
|
Amortization of fair value previously recognized into accumulated other comprehensive income
|
(1,284 | ) | (438 | ) | — | |||||||
|
Income tax effect
|
(3,232 | ) | (541 | ) | — | |||||||
|
Cash flow hedges:
|
||||||||||||
|
Net unrealized derivative gains (losses) on cash flow hedges
|
807 | 821 | — | |||||||||
|
Reclassification adjustment on cash flow hedges
|
288 | 288 | 288 | |||||||||
|
Income tax effect
|
(436 | ) | (442 | ) | (113 | ) | ||||||
|
Defined benefit pension plans:
|
||||||||||||
|
Net loss, settlement cost and amortization of net (gain) loss recognized in income
|
3,469 | (1,889 | ) | (9,223 | ) | |||||||
|
Income tax effect
|
(1,387 | ) | 756 | 3,689 | ||||||||
|
|
||||||||||||
|
Total other comprehensive income (loss)
|
19,097 | 33,138 | (42,159 | ) | ||||||||
|
|
||||||||||||
|
Comprehensive income
|
$ | 57,311 | $ | 46,875 | $ | 20,319 | ||||||
|
|
||||||||||||
The following table summarizes the changes within each classification of accumulated other
comprehensive income (“AOCI”) for the years ended December 31, 2010 and 2009:
| AOCI at | Other | AOCI at | Other | AOCI at | ||||||||||||||||
| December 31, | Comprehensive | December 31, | Comprehensive | December 31, | ||||||||||||||||
| 2008 | Income | 2009 | Income | 2010 | ||||||||||||||||
|
Unrealized gains (losses) on
available-for-sale securities
|
$ | (40,504 | ) | $ | 60,293 | $ | 19,789 | $ | 12,173 | $ | 31,962 | |||||||||
|
Unrealized losses on securities for which other-
than-temporary-impairment has been recognized
|
— | (27,501 | ) | (27,501 | ) | (672 | ) | (28,173 | ) | |||||||||||
|
Unrealized gains (losses) on
held-to-maturity securities
|
— | 812 | 812 | 4,855 | 5,667 | |||||||||||||||
|
Unrecognized gain (loss) on cash flow hedges
|
(480 | ) | 667 | 187 | 659 | 846 | ||||||||||||||
|
Defined benefit pension plans
|
(12,520 | ) | (1,133 | ) | (13,653 | ) | 2,082 | (11,571 | ) | |||||||||||
|
|
||||||||||||||||||||
|
Accumulated other comprehensive income (loss)
|
$ | (53,504 | ) | $ | 33,138 | $ | (20,366 | ) | $ | 19,097 | $ | (1,269 | ) | |||||||
|
|
||||||||||||||||||||
61
Table of Contents
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) | 2010 | 2009 | 2008 | |||||||||
|
|
||||||||||||
|
Basic Earnings Per Share
|
||||||||||||
|
Net income
|
$ | 38,214 | $ | 13,737 | $ | 62,478 | ||||||
|
Less: Preferred stock dividends and
accretion of discount
|
— | 3,892 | 298 | |||||||||
|
|
||||||||||||
|
Net income available to common stockholders
|
38,214 | 9,845 | 62,180 | |||||||||
|
|
||||||||||||
|
Weighted average common shares outstanding
|
86,785 | 71,314 | 65,660 | |||||||||
|
|
||||||||||||
|
Basic Earnings Per Share
|
$ | 0.44 | $ | 0.14 | $ | 0.95 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Diluted Earnings Per Share
|
||||||||||||
|
Net income available to common stockholders
|
$ | 38,214 | $ | 9,845 | $ | 62,180 | ||||||
|
|
||||||||||||
|
Weighted average common shares outstanding
|
86,785 | 71,314 | 65,660 | |||||||||
|
Effect of dilutive securities:
|
||||||||||||
|
Restricted stock (1)
|
132 | 44 | 82 | |||||||||
|
Stock options (2)
|
11 | 9 | 34 | |||||||||
|
|
||||||||||||
|
Weighted average shares outstanding
|
86,928 | 71,367 | 65,776 | |||||||||
|
|
||||||||||||
|
Diluted Earnings Per Share
|
$ | 0.44 | $ | 0.14 | $ | 0.95 | ||||||
|
|
||||||||||||
| (1) | 56, 231 and 0 shares of restricted stock and restricted stock units were not included in the computation of net income per diluted share at December 31, 2010, 2009 and 2008, respectively, because the effect would be antidilutive. | |
| (2) | Options to purchase 5,995 shares, 6,032 shares and 5,611 shares outstanding at December 31, 2010, 2009, and 2008, 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 maket price of the common shares and, therefore, the effect would be antidilutive. | |
| (3) | Warrants to purchase 813 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. |
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.
62
Table of Contents
The Company adopted FASB ASC 740-10 (FASB Interpretation No. 48,
Accounting for Uncertainty in
Income Taxes
), as of January 1, 2007, and in accordance with this pronouncement, 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 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 2010, 2009 and
2008 for interest was $83.3 million, $111.6 million and $154.8 million, respectively. Cash paid
for income tax, net of refunds, was a net refund of $2.0 million during 2010 and payments of $2.7
million and $18.9 million during 2009 and 2008, respectively. Other noncash transactions include
loans transferred to loans held for sale of $3.2 million in 2010, $2.6 million in 2009 and $2.2
million in 2008, leases transferred from held for sale of $51.4 million in 2010, leases transferred
to held for sale of $370.2 million in 2009 and transfers of securities from the available-for-sale
portfolio to the held-to-maturity portfolio of $143.8 million in 2010 and $230.1 million in 2009.
IMPACT OF ACCOUNTING CHANGES
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.
Old National has loan participations, which qualify as participating interests, with other
financial institutions. At December 31, 2010, these loans totaled $87.3 million, of which $45.9
million had been sold to other financial institutions and $41.4 million was retained by Old
National. The loan participations convey proportionate ownership rights with equal priority to
each participating interest holder, involve no recourse (other than ordinary representations and
warranties) to, or subordination by, any participating interest holder, all cash flows are divided
among the participating interest holders in proportion to each holder’s share of ownership and no
holder has the right to pledge the entire financial asset unless all participating interest holders
agree.
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 815 —
In March 2010, the FASB issued an update (ASU No. 2010-11, Scope Exception Related
to Embedded Credit Derivatives) impacting FASB ASC 815-15, Derivatives and Hedging — Embedded
Derivatives. The amendments clarify the scope exception for embedded credit derivative features
related to the transfer of credit
risk in the form of subordination of one financial instrument to another. This update became
effective for the Company for the interim reporting period beginning after June 15, 2010 and did
not have a material impact on the Company’s consolidated financial statements or results of
operations.
63
Table of Contents
FASB ASC 310 —
In April 2010, the FASB issued an update (ASU No. 2010-18, Effect of a Loan
Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset) impacting
FASB ASC 310-30, Receivables — Loans and Debt Securities Acquired with Deteriorated Credit
Quality. Under the amendments, modifications of loans that are accounted for within a pool do not
result in the removal of those loans from the pool even if the modification of those loans would
otherwise be considered a troubled debt restructuring. An entity will continue to be required to
consider whether the pool of assets in which the loan is included is impaired if expected cash
flows for the pool change. This update became effective for the Company for the interim reporting
period beginning after June 15, 2010 and did not have a material impact on the Company’s
consolidated financial statements or results of operations.
FASB ASC 350 —
In December 2010, the FASB issued an update (ASU No. 2010-28, When to Perform Step
2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts)
impacting FASB ASC 350-20, Intangibles — Goodwill and Other — Goodwill. The amendments modify Step
1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For
these reporting units, an entity is required to perform Step 2 of the goodwill impairment test if
it is more likely than not that a goodwill impairment exists. In determining whether it is more
likely than not that a goodwill impairment exists, an entity should consider whether there are any
adverse qualitative factors indicating that an impairment may exist. This update becomes effective
for the Company for interim and annual reporting periods beginning after December 15, 2010. The
Company is currently evaluating the impact of adopting the new guidance on the consolidated
financial statements, but it is not expected to have a material impact.
FASB ASC 805 —
In December 2010, the FASB issued an update (ASU No. 2010-29, Disclosure of
Supplementary Pro Forma Information for Business Combinations) impacting FASB ASC 805-10, Business
Combinations — Overall. The amendments specify that if an entity presents comparative financial
statements, the entity should disclose pro forma information, including pro forma revenue and
earnings, for the combined entity as though the business combination that occurred in the current
year had occurred as of the beginning of the comparable prior annual reporting period.
Supplemental pro forma disclosures should include a description of the nature and amount of
material, nonrecurring pro forma adjustments directly attributable to the business combination
included in the reported pro forma revenue and earnings. This update becomes effective for
business combinations for which the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15, 2010. The Company is currently
evaluating the impact of adopting the new guidance for providing enhanced disclosures, but it is
not expected to have a material impact.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 2010 presentation. Such
reclassifications had no effect on net income and were insignificant amounts.
64
Table of Contents
ACQUISITION
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. Old
National recorded goodwill of $8.7 million, intangible assets of $11.2 million, cash of $372.7
million, loans of $5.6 million and other assets of $11.7 million. Old National assumed deposits of
$426.9 million and other liabilities of $0.2 million. The intangible assets are related to core
deposits and are being amortized on an accelerated basis over 7 years. See Note 6 to the
consolidated financial statements for additional information.
On January 1, 2011, Old National acquired 100% of Monroe Bancorp in an all stock transaction.
Monroe Bancorp is headquartered in Bloomington, Indiana and has 15 banking centers. The
acquisition strengthens Old National’s position as the third largest branch network in Indiana.
Pursuant to the merger agreement, the shareholders of Monroe Bancorp received approximately 7.6
million shares of Old National Bancorp stock valued at approximately $90.1 million. On January 1,
2011, unaudited financial statements of Monroe showed total assets of $808.1 million, including
$493.4 million of net loans, $166.4 million of securities, $78.4 million of cash, and $69.9 million
of other assets. Liabilities assumed include $711.5 million of deposits, $38.5 of borrowings, and
$7.1 million of other accrued expenses and liabilities. The acquired assets and liabilities will
be marked to fair value no later than March 31, 2011, when appraisals and valuations are complete.
The Company expects to record goodwill associated with the transaction based on early indications
of the loan mark, but the amount and allocation by segment is not known as the initial fair value
accounting for the acquisition is incomplete. The goodwill will not be deductible for tax
purposes. The Company also expects to record a core deposit intangible and a customer relationship
intangible associated with the trust business acquired.
65
Table of Contents
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 | ||||||||||||
|
2010
|
||||||||||||||||
|
Available-for-Sale
|
||||||||||||||||
|
U.S. Treasury
|
$ | 62,206 | $ | 371 | $ | (27 | ) | $ | 62,550 | |||||||
|
U.S. Government-sponsored entities and agencies
|
315,922 | 1,612 | (2,401 | ) | 315,133 | |||||||||||
|
Mortgage-backed securities — Agency
|
922,005 | 22,926 | (485 | ) | 944,446 | |||||||||||
|
Mortgage-backed securities — Non-agency
|
134,168 | 1,018 | (8,380 | ) | 126,806 | |||||||||||
|
States and political subdivisions
|
343,970 | 7,503 | (2,549 | ) | 348,924 | |||||||||||
|
Pooled trust prefered securities
|
27,368 | — | (18,968 | ) | 8,400 | |||||||||||
|
Other securities
|
148,203 | 7,816 | (2,056 | ) | 153,963 | |||||||||||
|
|
||||||||||||||||
|
Total available-for-sale securities
|
$ | 1,953,842 | $ | 41,246 | $ | (34,866 | ) | $ | 1,960,222 | |||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Held-to-Maturity
|
||||||||||||||||
|
U.S. Government-sponsored entities and agencies
|
$ | 303,265 | $ | 2,247 | $ | (3,703 | ) | $ | 301,809 | |||||||
|
Mortgage-backed securities — Agency
|
117,013 | 2,577 | (510 | ) | 119,080 | |||||||||||
|
States and political subdivisions
|
217,381 | 1 | (13,003 | ) | 204,379 | |||||||||||
|
Other securities
|
551 | — | (176 | ) | 375 | |||||||||||
|
|
||||||||||||||||
|
Total held-to-maturity securities
|
$ | 638,210 | $ | 4,825 | $ | (17,392 | ) | $ | 625,643 | |||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
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 preferred 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 | |||||||
|
|
||||||||||||||||
Proceeds from sales of investment securities available-for-sale were $481.5 million in 2010,
$1.042 billion in 2009 and $281.0 million in 2008. In 2010, realized gains were $21.7 million and
losses were $4.6 million. Included in the realized gains is $0.8 million of gains that resulted
from approximately $836.1 million of investment securities which were called by the issuers. Also
impacting earnings in 2010 are other-than-temporary impairment charges related to credit losses on
three pooled trust preferred securities and ten non-agency mortgage-backed securities in the amount
of $3.9 million, described below. 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 earnings 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. The majority of
this gain, or $5.4 million, resulted from approximately $405.2 million of investment securities
which were called by the issuers. At December 31, investment securities were pledged to secure
public and other funds with a carrying value of $1.481 billion in 2010 and $1.514 billion in 2009.
66
Table of Contents
At December 31, 2010, Old National had a concentration of investment securities issued by certain
states and their political subdivisions with the following aggregate market values: $212.2 million
in Indiana, which represented 24.1% of shareholders’ equity. At December 31, 2009, Old National
had a concentration of investment securities issued in certain states and their political
subdivisions with the following aggregate market values: $169.6 million in Indiana, which
represented 20.1% 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.
| 2010 | Weighted | 2009 | Weighted | |||||||||||||||||||||
| (dollars in thousands) | Amortized | Fair | Average | Amortized | Fair | Average | ||||||||||||||||||
| Cost | Value | Yield | Cost | Value | Yield | |||||||||||||||||||
|
Maturity
|
||||||||||||||||||||||||
|
Available-for-sale
|
||||||||||||||||||||||||
|
Within one year
|
$ | 70,326 | $ | 70,865 | 3.24 | % | $ | 189,690 | $ | 178,687 | 3.97 | % | ||||||||||||
|
One to five years
|
828,636 | 850,288 | 3.51 | 1,019,693 | 1,012,714 | 3.89 | ||||||||||||||||||
|
Five to ten years
|
441,900 | 444,474 | 3.97 | 350,866 | 357,566 | 4.61 | ||||||||||||||||||
|
Beyond ten years
|
612,980 | 594,595 | 4.97 | 938,967 | 937,252 | 5.28 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 1,953,842 | $ | 1,960,222 | 4.06 | % | $ | 2,499,216 | $ | 2,486,219 | 4.52 | % | ||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Held-to-maturity
|
||||||||||||||||||||||||
|
Within one year
|
$ | 71 | $ | 56 | 2.67 | % | $ | — | $ | — | — | % | ||||||||||||
|
One to five years
|
117,833 | 119,724 | 3.65 | 168,548 | 172,076 | 3.64 | ||||||||||||||||||
|
Five to ten years
|
12,248 | 11,785 | 3.91 | 227,461 | 227,877 | 3.88 | ||||||||||||||||||
|
Beyond ten years
|
508,058 | 494,078 | 3.88 | — | — | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 638,210 | $ | 625,643 | 3.84 | % | $ | 396,009 | $ | 399,953 | 3.78 | % | ||||||||||||
|
|
||||||||||||||||||||||||
67
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 | ||||||||||||||||||
|
2010
|
||||||||||||||||||||||||
|
Available-for-Sale
|
||||||||||||||||||||||||
|
U.S. Treasury
|
$ | 10,944 | $ | (27 | ) | $ | — | $ | — | $ | 10,944 | $ | (27 | ) | ||||||||||
|
U.S. Government-sponsored entities
and agencies
|
120,404 | (2,401 | ) | — | — | 120,404 | (2,401 | ) | ||||||||||||||||
|
Mortgage-backed securities — Agency
|
160,784 | (485 | ) | 483 | — | 161,267 | (485 | ) | ||||||||||||||||
|
Mortgage-backed securities — Non-agency
|
13,265 | (1,696 | ) | 79,327 | (6,684 | ) | 92,592 | (8,380 | ) | |||||||||||||||
|
States and political subdivisions
|
94,448 | (2,549 | ) | — | — | 94,448 | (2,549 | ) | ||||||||||||||||
|
Pooled trust preferrred securities
|
— | — | 8,400 | (18,968 | ) | 8,400 | (18,968 | ) | ||||||||||||||||
|
Other securities
|
12,283 | (206 | ) | 6,204 | (1,850 | ) | 18,487 | (2,056 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Total available-for-sale
|
$ | 412,128 | $ | (7,364 | ) | $ | 94,414 | $ | (27,502 | ) | $ | 506,542 | $ | (34,866 | ) | |||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Held-to-Maturity
|
||||||||||||||||||||||||
|
U.S. Government-sponsored entities
and agencies
|
$ | 111,975 | $ | (3,703 | ) | $ | — | $ | — | $ | 111,975 | $ | (3,703 | ) | ||||||||||
|
Mortgage-backed securities — Agency
|
67,837 | (510 | ) | — | — | 67,837 | (510 | ) | ||||||||||||||||
|
States and political subdivisions
|
203,093 | (13,003 | ) | — | — | 203,093 | (13,003 | ) | ||||||||||||||||
|
Other securities
|
— | — | 375 | (176 | ) | 375 | (176 | ) | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total held-to-maturity
|
$ | 382,905 | $ | (17,216 | ) | $ | 375 | $ | (176 | ) | $ | 383,280 | $ | (17,392 | ) | |||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
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 | ) | |||||||||
|
|
||||||||||||||||||||||||
During the second quarter of 2010, approximately $143.8 million of state and political
subdivision securities were transferred from the available-for-sale portfolio to the
held-to-maturity portfolio at fair value. The $9.4 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.
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
)
.
68
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. Otherwise, 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, 2010, Old National’s security portfolio consisted of 1,019 securities, 262 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, 2010, the Company’s securities portfolio contained 15 non-agency collateralized
mortgage obligations with a fair value of $126.8 million which had net unrealized losses of
approximately $7.4 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). In the fourth quarter of 2010, two non-agency mortgage-backed
securities were sold. As of December 31, 2010, eight of these securities were rated below
investment grade with grades ranging from B- to C. One of the eight securities is rated B- and has
a fair value of $8.3 million, four of the securities are rated CCC with a fair value of $28.1
million, two of the securities are rated CC with a fair value of $25.1 million and one of the
securities is rated C with a fair value of $8.8 million. These securities were evaluated to
determine if the underlying collateral is expected to experience loss, resulting in a principal
loss 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 with a higher default-curve and severity
percentages being 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 $3.0
million of credit losses on ten of these securities for the twelve months ended December 31, 2010.
The fair value of the eight non-agency mortgage-backed securities below investment grade remaining
at December 31, 2010 was $70.3 million.
69
Table of Contents
At December 31, 2009, the Company’s securities portfolio contained 17 non-agency collateralized
mortgage obligations with a fair value of $174.6 million which had net unrealized losses of
approximately $41.6 million. All of these securities were 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 were rated B and
had a market value of $27.2 million, four of the securities were rated CCC with a market value of
$34.9 million and three of the securities were 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 fair value of these ten non-agency mortgage-backed securities was $95.4 million at
December 31, 2009.
Pooled Trust Preferred Securities
At December 31, 2010, the Company’s securities portfolio contained nine pooled trust preferred
securities with a fair value of $8.4 million and unrealized losses of $19.0 million. Seven of the
pooled trust preferred securities in our portfolio fall within the scope of FASB ASC 325-10 (EITF
99-20) and have a fair value of $4.4 million with unrealized losses of $8.8 million at December 31,
2010. These securities were rated A2 and A3 at inception, but at December 31, 2010, one security
was rated BB, five securities were rated C and one security D. 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, 2010, our
model indicated other-than-temporary-impairment losses on three securities of $0.9 million, all of
which was recorded as a credit loss in earnings. At December 31, 2010, the fair value of these
three securities was $1.8 million and they remained classified as available for sale.
Two of our pooled trust preferred securities with a fair value of $4.0 million and unrealized
losses of $10.2 million at December 31, 2010 are not subject to FASB ASC 325-10. These securities
are 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.
70
Table of Contents
At December 31, 2009, the Company’s securities portfolio contained nine pooled trust preferred
securities with a market value of $12.4 million and unrealized losses of $16.1 million. Seven of
the pooled trust preferred securities in our portfolio fall within the scope of FASB ASC 325-10
(EITF 99-20) and have a market value of $6.0 million with unrealized losses of $8.4 million at
December 31, 2009. These securities were rated A2 and A3 at inception, but at December 31, 2009,
one security was rated BBB, four securities were rated CC, one security was rated C and one
security was rated D. 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 fair value of these
six securities was $5.0 million and they remained classified as available for sale.
Two of our pooled trust preferred securities with a fair value of $6.4 million and unrealized
losses of $7.7 million at December 31, 2009, are not subject to FASB ASC 325-10. These securities
are 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 table below summarizes the relevant characteristics of our nine pooled trust preferred
securities as well as four single issuer trust preferred securities which are included with other
securities in Note 3 to the consolidated financial statements. Each of the pooled trust preferred
securities support a more senior tranche of security holders except for the MM Community Funding II
security which, due to payoffs, Old National is now in the most senior class.
As depicted in the table below, all nine securities have experienced credit defaults. However,
three of these securities have excess subordination and are not other-than-temporarily-impaired as
a result of their class hierarchy which provides more loss protection.
71
Table of Contents
Trust preferred securities
December 31, 2010
(Dollars in Thousands)
December 31, 2010
(Dollars in Thousands)
| Actual | Expected | Excess | ||||||||||||||||||||||||||||||||||
| Deferrals and | Defaults as | Subordination | ||||||||||||||||||||||||||||||||||
| # of Issuers | Defaults as a | a % of | as a % | |||||||||||||||||||||||||||||||||
| Lowest | Unrealized | Realized | Currently | Percent of | Remaining | of Current | ||||||||||||||||||||||||||||||
| Credit | Amortized | Fair | Gain/ | Losses | Performing/ | Original | Performing | Performing | ||||||||||||||||||||||||||||
| Class | Rating (1) | Cost | Value | (Loss) | 2010 | Remaining | Collateral | Collateral | Collateral | |||||||||||||||||||||||||||
|
Pooled trust preferred
securities:
|
||||||||||||||||||||||||||||||||||||
|
TROPC 2003-1A
|
A4L | C | $ | 982 | $ | 246 | $ | (736 | ) | $ | 444 | 20/39 | 38.8 | % | 18.2 | % | 0.0 | % | ||||||||||||||||||
|
MM Community Funding IX
|
B-2 | C | 2,097 | 848 | (1,249 | ) | 165 | 19/33 | 35.4 | % | 16.3 | % | 0.0 | % | ||||||||||||||||||||||
|
Reg Div Funding 2004
|
B-2 | D | 4,233 | 720 | (3,513 | ) | 321 | 27/46 | 40.2 | % | 24.1 | % | 0.0 | % | ||||||||||||||||||||||
|
Pretsl XII
|
B-1 | C | 2,886 | 1,219 | (1,667 | ) | — | 50/77 | 30.4 | % | 8.8 | % | 0.0 | % | ||||||||||||||||||||||
|
Pretsl XV
|
B-1 | C | 1,695 | 435 | (1,260 | ) | — | 52/72 | 35.0 | % | 12.7 | % | 0.0 | % | ||||||||||||||||||||||
|
Reg Div Funding 2005
|
B-1 | C | 311 | 38 | (273 | ) | — | 23/49 | 51.3 | % | 38.7 | % | 0.0 | % | ||||||||||||||||||||||
|
MM Community Funding II
|
B | BB | 992 | 929 | (63 | ) | — | 5/8 | 4.7 | % | 0.0 | % | 12.3 | % | ||||||||||||||||||||||
|
Pretsl XXVII LTD
|
B | CC | 4,798 | 1,077 | (3,721 | ) | — | 33/49 | 27.1 | % | 25.9 | % | 23.6 | % | ||||||||||||||||||||||
|
Trapeza Ser 13A
|
A2A | CCC- | 9,374 | 2,888 | (6,486 | ) | — | 44/63 | 28.5 | % | 25.8 | % | 36.1 | % | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
|
27,368 | 8,400 | (18,968 | ) | 930 | |||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Single Issuer trust
preferred securities:
|
||||||||||||||||||||||||||||||||||||
|
First Empire Cap (M&T)
|
BBB- | 954 | 983 | 29 | — | |||||||||||||||||||||||||||||||
|
First Empire Cap (M&T)
|
BBB- | 2,902 | 2,949 | 47 | — | |||||||||||||||||||||||||||||||
|
Fleet Cap Tr V (BOA)
|
BB+ | 3,351 | 2,442 | (909 | ) | — | ||||||||||||||||||||||||||||||
|
JP Morgan Chase Cap XIII
|
BBB+ | 4,703 | 3,762 | (941 | ) | — | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
|
11,910 | 10,136 | (1,774 | ) | — | |||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total
|
$ | 39,278 | $ | 18,536 | $ | (20,742 | ) | $ | 930 | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| (1) | Lowest rating for the security provided by any nationally recognized credit rating agency. |
The following table details all securities with other-than-temporary-impairment, their credit
rating at December 31, 2010 and the related credit losses recognized in earnings:
| Amount of other-than-temporary | ||||||||||||||||||||||||
| impairment recognized in earnings | ||||||||||||||||||||||||
| Lowest | Twelve months ended | |||||||||||||||||||||||
| Credit | Amortized | December 31, | Life-to | |||||||||||||||||||||
| Vintage | Rating (1) | Cost | 2010 | 2009 | date | |||||||||||||||||||
|
Non-agency mortgage-backed
securities:
|
||||||||||||||||||||||||
|
BAFC Ser 4
|
2007 | CCC | $ | 14,026 | $ | 79 | $ | 63 | $ | 142 | ||||||||||||||
|
CWALT Ser 73CB
|
2005 | CCC | 5,481 | 207 | 83 | 290 | ||||||||||||||||||
|
CWALT Ser 73CB
|
2005 | CCC | 6,248 | 427 | 182 | 609 | ||||||||||||||||||
|
CWHL 2006-10
|
2006 | C | 10,030 | 309 | 762 | 1,071 | ||||||||||||||||||
|
CWHL 2005-20
|
2005 | B- | 8,593 | 39 | 72 | 111 | ||||||||||||||||||
|
FHASI Ser 4
|
2007 | CC | 21,617 | 629 | 223 | 852 | ||||||||||||||||||
|
RFMSI Ser S9 (2)
|
2006 | — | — | 923 | 1,880 | 2,803 | ||||||||||||||||||
|
RFMSI Ser S10
|
2006 | CC | 4,360 | 76 | 249 | 325 | ||||||||||||||||||
|
RALI QS2 (2)
|
2006 | — | — | 278 | 739 | 1,017 | ||||||||||||||||||
|
RFMSI S1
|
2006 | CCC | 4,499 | 30 | 176 | 206 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
74,854 | 2,997 | 4,429 | 7,426 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Pooled trust preferred
securities:
|
||||||||||||||||||||||||
|
TROPC
|
2003 | C | 982 | 444 | 3,517 | 3,961 | ||||||||||||||||||
|
MM Community Funding IX
|
2003 | C | 2,097 | 165 | 2,612 | 2,777 | ||||||||||||||||||
|
Reg Div Funding
|
2004 | D | 4,233 | 321 | 5,199 | 5,520 | ||||||||||||||||||
|
Pretsl XII
|
2003 | C | 2,886 | — | 1,897 | 1,897 | ||||||||||||||||||
|
Pretsl XV
|
2004 | C | 1,695 | — | 3,374 | 3,374 | ||||||||||||||||||
|
Reg Div Funding
|
2005 | C | 311 | — | 3,767 | 3,767 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
12,204 | 930 | 20,366 | 21,296 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total other-than-temporary-
impairment recognized in earnings
|
$ | 3,927 | $ | 24,795 | $ | 28,722 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
| (1) | Lowest rating for the security provided by any nationally recognized credit rating agency. | |
| (2) | Sold during fourth quarter 2010. |
72
Table of Contents
Residential loans that Old National has committed to sell are recorded at fair value in accordance
with FASB ASC 825-10 (SFAS No. 159 —
The Fair Value Option for Financial Assets and Financial
Liabilities
). At December 31, 2010 and 2009, Old National had residential loans held for sale of
$3.8 million and $17.5 million, respectively. The majority of new production during 2010 was
retained in Old National’s loan portfolio, resulting in lower residential loans held for sale.
During 2009, $258.0 million of finance leases were sold at a price above par; however, the sale
resulted in a loss of $1.4 million after transaction fees. At December 31, 2009, Old National had
finance leases held for sale of $55.3 million. During 2010, management decided to transfer leases
from held for sale back to the loan portfolio due to
decreased levels of loan production. The leases were transferred at the lower of cost or fair
value. No losses were recorded in connection with the transfer. There were no finance leases held
for sale at December 31, 2010.
During 2010, commercial and commercial real estate loans held for investment of $3.2 million were
reclassified to loans held for sale at the lower of cost or fair value and sold for $3.6 million,
resulting in a recovery of $0.4 million on the loans transferred. At December 31, 2010, there were
no loans held for sale under this arrangement.
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.
Old National’s finance receivables consist primarily of loans made to consumers and commercial
clients in various industries including manufacturing, agribusiness, transportation, mining,
wholesaling and retailing. Most of Old National’s lending activity occurs within the Company’s
principal geographic markets of Indiana, Illinois and Kentucky. Old National has no concentration
of commercial loans in any single industry exceeding 10% of its portfolio.
The composition of loans at December 31 by lending classification was as follows:
| (dollars in thousands) | 2010 | 2009 | ||||||
|
Commercial (1)
|
$ | 1,211,399 | $ | 1,287,168 | ||||
|
Commercial real estate:
|
||||||||
|
Construction
|
101,016 | 109,027 | ||||||
|
Other
|
841,379 | 953,883 | ||||||
|
Residential real estate
|
664,705 | 403,391 | ||||||
|
Consumer credit:
|
||||||||
|
Heloc
|
248,293 | 274,751 | ||||||
|
Auto
|
497,102 | 573,476 | ||||||
|
Other
|
179,557 | 233,790 | ||||||
|
|
||||||||
|
Subtotal
|
3,743,451 | 3,835,486 | ||||||
|
Allowance for loan losses
|
(72,309 | ) | (69,548 | ) | ||||
|
|
||||||||
|
Net loans
|
$ | 3,671,142 | $ | 3,765,938 | ||||
|
|
||||||||
| (1) | Includes $106.1 million of direct finance leases. |
The risk characteristics of each loan portfolio segment are as follows:
Commercial
Commercial loans are primarily based on the identified cash flows of the borrower and secondarily
on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may
not be as expected and the collateral securing these loans may fluctuate in value. Most commercial
loans are secured by the assets being financed or other business assets such as accounts receivable
or inventory and may incorporate a personal guarantee; however, some short-term loans may be made
on an unsecured basis. In the case of loans secured by accounts receivable, the availability of
funds for the repayment of these loans may be substantially dependent on the ability of the
borrower to collect amounts due from its customers.
73
Table of Contents
Commercial real estate
These loans are viewed primarily as cash flow loans and secondarily as loans secured by real
estate. Commercial real estate lending typically involves higher loan principal amounts and the
repayment of these loans is generally dependent on the successful operation of the property
securing the loan or the business conducted on the property
securing the loan. Commercial real estate loans may be more adversely affected by conditions in
the real estate markets or in the general economy. The properties securing Old National’s
commercial real estate portfolio are diverse in terms of type and geographic location. Management
monitors and evaluates commercial real estate loans based on collateral, geography and risk grade
criteria. As a general rule, Old National avoids financing single purpose projects unless other
underwriting factors are present to help mitigate risk. In addition, management tracks the level
of owner-occupied commercial real estate loans versus non-owner occupied loans.
Construction
Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews,
sensitivity analysis of absorption and lease rates and financial analysis of the developers and
property owners. Construction loans are generally based on estimates of costs and value associated
with the complete project. These estimates may be inaccurate. Construction loans often involve
the disbursement of substantial funds with repayment substantially dependent on the success of the
ultimate project. Sources of repayment for these types of loans may be pre-committed permanent
loans from approved long-term lenders, sales of developed property or an interim loan commitment
from Old National until permanent financing is obtained. These loans are closely monitored by
on-site inspections and are considered to have higher risks than other real estate loans due to
their ultimate repayment being sensitive to interest rate changes, governmental regulation of real
property, general economic conditions and the availability of long-term financing.
Residential and Consumer
With respect to residential loans that are secured by 1-4 family residences and are generally owner
occupied, Old National generally establishes a maximum loan-to-value ratio and requires PMI if that
ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family
residences, and consumer loans are secured by consumer assets such as automobiles or recreational
vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of
credit. Repayment of these loans is primarily dependent on the personal income of the borrowers,
which can be impacted by economic conditions in their market areas such as unemployment levels.
Repayment can also be impacted by changes in property values on residential properties. Risk is
mitigated by the fact that the loans are of smaller individual amounts and spread over a large
number of borrowers.
In the ordinary course of business, Old National grants loans to certain executive officers,
directors, and significant subsidiaries (collectively referred to as “related parties”).
Activity in related party loans during 2010 is presented in the following table:
| (dollars in thousands) | 2010 | |||
|
Balance, January 1
|
$ | 15,712 | ||
|
New loans
|
6,684 | |||
|
Repayments
|
(8,145 | ) | ||
|
|
||||
|
Balance, December 31
|
$ | 14,251 | ||
|
|
||||
74
Table of Contents
Portfolio loans, or loans Old National intends to hold for investment purposes, 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.
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,
historical loss experience, and assessments of the impact of current economic conditions on the
portfolio.
The allowance is increased through a provision charged to operating expense. Loans deemed to be
uncollectible are charged to the allowance. Recoveries of loans previously charged-off are added
to the allowance.
Old National’s recorded investment in financing receivables by portfolio segment and the related
activity in the allowance for loan losses for the years ended December 31, 2010, and 2009 is as
follows:
| Commercial | ||||||||||||||||||||||||
| (dollars in thousands) | Commercial | Real Estate | Consumer | Residential | Unallocated | Total | ||||||||||||||||||
|
2010
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Allowance for credit losses:
|
||||||||||||||||||||||||
|
Beginning balance
|
$ | 26,869 | $ | 27,138 | $ | 13,853 | $ | 1,688 | — | $ | 69,548 | |||||||||||||
|
Charge-offs
|
11,967 | 10,196 | 16,848 | 2,296 | — | 41,307 | ||||||||||||||||||
|
Recoveries
|
5,060 | 2,041 | 6,014 | 172 | — | 13,287 | ||||||||||||||||||
|
Provision
|
6,242 | 13,671 | 8,123 | 2,745 | — | 30,781 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Ending balance
|
$ | 26,204 | $ | 32,654 | $ | 11,142 | $ | 2,309 | — | $ | 72,309 | |||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Ending balance: individually
evaluated for impairment
|
$ | 6,063 | $ | 8,514 | — | — | — | $ | 14,577 | |||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Ending balance: collectively
evaluated for impairment
|
$ | 20,141 | $ | 24,140 | $ | 11,142 | $ | 2,309 | — | $ | 57,732 | |||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Financing receivables:
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Ending balance
|
$ | 1,211,399 | $ | 942,395 | $ | 924,952 | $ | 664,705 | — | $ | 3,743,451 | |||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Ending balance: individually
evaluated for impairment
|
$ | 23,944 | $ | 29,377 | — | — | — | $ | 53,321 | |||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Ending balance: collectively
evaluated for impairment
|
$ | 1,187,455 | $ | 913,018 | $ | 924,952 | $ | 664,705 | — | $ | 3,690,130 | |||||||||||||
|
|
||||||||||||||||||||||||
75
Table of Contents
| Commercial | ||||||||||||||||||||||||
| (dollars in thousands) | Commercial | Real Estate | Consumer | Residential | Unallocated | Total | ||||||||||||||||||
|
2009
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Allowance for credit losses:
|
||||||||||||||||||||||||
|
Beginning balance
|
$ | 29,254 | $ | 22,362 | $ | 13,404 | $ | 2,067 | — | $ | 67,087 | |||||||||||||
|
Charge-offs
|
37,254 | 21,886 | 18,156 | 1,315 | — | 78,611 | ||||||||||||||||||
|
Recoveries
|
4,865 | 7,458 | 5,334 | 135 | — | 17,792 | ||||||||||||||||||
|
Provision
|
30,004 | 19,204 | 13,271 | 801 | — | 63,280 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Ending balance
|
$ | 26,869 | $ | 27,138 | $ | 13,853 | $ | 1,688 | — | $ | 69,548 | |||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Ending balance: individually
evaluated for impairment
|
$ | 7,512 | $ | 6,991 | — | — | — | $ | 14,503 | |||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Ending balance: collectively
evaluated for impairment
|
$ | 19,357 | $ | 20,147 | $ | 13,853 | $ | 1,688 | — | $ | 55,045 | |||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Financing receivables:
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Ending balance
|
$ | 1,287,168 | $ | 1,062,910 | $ | 1,082,017 | $ | 403,391 | — | $ | 3,835,486 | |||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Ending balance: individually
evaluated for impairment
|
$ | 24,257 | $ | 24,854 | — | — | — | $ | 49,111 | |||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Ending balance: collectively
evaluated for impairment
|
$ | 1,262,911 | $ | 1,038,056 | $ | 1,082,017 | $ | 403,391 | — | $ | 3,786,375 | |||||||||||||
|
|
||||||||||||||||||||||||
Old National’s management monitors the credit quality of its financing receivables in an
on-going manner. Internally, management assigns a credit quality grade to each non-homogeneous
commercial and commercial real estate loan in the portfolio. The primary determinants of the
credit quality grade are based upon the reliability of the primary source of repayment and the
past, present, and projected financial condition of the borrower. The credit quality rating also
reflects current economic and industry conditions. Major factors used in determining the grade can
vary based on the nature of the loan, but commonly include factors such as debt service coverage,
internal cash flow, liquidity, leverage, operating performance, debt burden, FICO scores,
occupancy, interest rate sensitivity, and expense burden. Old National uses the following
definitions for risk ratings:
Criticized
. Special mention loans that have a potential weakness that deserves management’s
close attention. If left uncorrected, these potential weaknesses may result in deterioration of
the repayment prospects for the loan or of the institution’s credit position at some future date.
Classified — Substandard
. Loans classified as substandard are inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans
so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the
debt. They are characterized by the distinct possibility that the institution will sustain some
loss if the deficiencies are not corrected.
Classified — Doubtful
. Loans classified as doubtful have all the weaknesses inherent in
those classified as substandard, with the added characteristic that the weaknesses make collection
or liquidation in full, on the basis of currently existing facts, conditions, and values, highly
questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described
process are considered to be pass rated loans.
76
Table of Contents
As of December 31, 2010 and 2009, the risk category of loans by class of loans is as follows:
| (dollars in thousands) | ||||||||||||||||||||||||
| Corporate Credit Exposure | Commercial Real Estate- | Commercial Real Estate- | ||||||||||||||||||||||
| Credit Risk Profile by Internally | Commercial | Construction | Other | |||||||||||||||||||||
| Assigned Grade | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||
|
Grade:
|
||||||||||||||||||||||||
|
Pass
|
$ | 1,105,382 | $ | 1,170,845 | $ | 77,241 | $ | 100,391 | $ | 729,243 | $ | 839,340 | ||||||||||||
|
Criticized
|
38,629 | 48,008 | 16,223 | 8,366 | 29,161 | 47,137 | ||||||||||||||||||
|
Classified — substandard
|
41,899 | 44,058 | 7,552 | — | 52,559 | 42,822 | ||||||||||||||||||
|
Classified — doubtful
|
25,489 | 24,257 | — | 270 | 30,416 | 24,584 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 1,211,399 | $ | 1,287,168 | $ | 101,016 | $ | 109,027 | $ | 841,379 | $ | 953,883 | ||||||||||||
|
|
||||||||||||||||||||||||
Old National considers the performance of the loan portfolio and its impact on the allowance
for loan losses. For residential and consumer loan classes, Old National also evaluates credit
quality based on the aging status of the loan and by payment activity. The following table
presents the recorded investment in residential and consumer loans based on payment activity as of
December 31, 2010 and 2009:
| 2010 | Consumer | |||||||||||||||
| (dollars in thousands) | Heloc | Auto | Other | Residential | ||||||||||||
|
Performing
|
$ | 246,390 | $ | 494,771 | $ | 177,470 | $ | 655,986 | ||||||||
|
Nonperforming
|
1,903 | 2,331 | 2,087 | 8,719 | ||||||||||||
|
|
||||||||||||||||
|
|
$ | 248,293 | $ | 497,102 | $ | 179,557 | $ | 664,705 | ||||||||
|
|
||||||||||||||||
| 2009 | Consumer | |||||||||||||||
| (dollars in thousands) | Heloc | Auto | Other | Residential | ||||||||||||
|
Performing
|
$ | 272,818 | $ | 570,221 | $ | 230,695 | $ | 393,770 | ||||||||
|
Nonperforming
|
1,933 | 3,255 | 3,095 | 9,621 | ||||||||||||
|
|
||||||||||||||||
|
|
$ | 274,751 | $ | 573,476 | $ | 233,790 | $ | 403,391 | ||||||||
|
|
||||||||||||||||
Large commercial credits are subject to individual evaluation for impairment. Retail credits
and other small balance credits that are part of a homogeneous group are not subject to testing for
individual impairment. 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. For the years ended December 31, 2010 and 2009, the average balance
of impaired loans was $51.2 million and $50.8 million, respectively, for which no interest income
was recorded. No additional funds are committed to be advanced in connection with impaired loans.
77
Table of Contents
The following table shows Old National’s impaired loans that are individually evaluated as of
December 31:
| Unpaid | Average | Interest | ||||||||||||||||||
| Recorded | Principal | Related | Recorded | Income | ||||||||||||||||
| (dollars in thousands) | Investment | Balance | Allowance | Investment | Recognized (1) | |||||||||||||||
|
2010
|
||||||||||||||||||||
|
With no related allowance recorded:
|
||||||||||||||||||||
|
Commercial
|
$ | 6,116 | $ | 8,001 | $ | — | $ | 4,972 | $ | 61 | ||||||||||
|
Commercial Real Estate — Construction
|
— | — | — | — | — | |||||||||||||||
|
Commercial Real Estate — Other
|
10,554 | 16,781 | — | 9,693 | 250 | |||||||||||||||
|
With an allowance recorded:
|
||||||||||||||||||||
|
Commercial
|
17,828 | 20,341 | 6,063 | 19,129 | 545 | |||||||||||||||
|
Commercial Real Estate — Construction
|
— | — | — | 135 | — | |||||||||||||||
|
Commercial Real Estate — Other
|
18,823 | 19,849 | 8,514 | 17,288 | 423 | |||||||||||||||
|
Total
|
||||||||||||||||||||
|
Commercial
|
53,321 | 64,972 | 14,577 | 51,217 | 1,279 | |||||||||||||||
|
|
||||||||||||||||||||
|
2009
|
||||||||||||||||||||
|
With no related allowance recorded:
|
||||||||||||||||||||
|
Commercial
|
$ | 3,827 | $ | 18,422 | $ | — | $ | 3,070 | $ | 89 | ||||||||||
|
Commercial Real Estate — Construction
|
— | — | — | 608 | — | |||||||||||||||
|
Commercial Real Estate — Other
|
8,831 | 16,694 | — | 9,636 | 131 | |||||||||||||||
|
With an allowance recorded:
|
||||||||||||||||||||
|
Commercial
|
20,430 | 27,972 | 7,512 | 19,189 | 497 | |||||||||||||||
|
Commercial Real Estate — Construction
|
270 | 314 | — | 690 | 5 | |||||||||||||||
|
Commercial Real Estate — Other
|
15,752 | 19,286 | 6,991 | 17,560 | 333 | |||||||||||||||
|
Total
|
||||||||||||||||||||
|
Commercial
|
49,110 | 82,688 | 14,503 | 50,753 | 1,055 | |||||||||||||||
| (1) | The Company does not record interest on nonaccrual loans until cash payments are received. |
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.
78
Table of Contents
Old National’s past due financing receivables as of December 31 are as follows:
| Recorded | ||||||||||||||||||||||||
| Investment > | ||||||||||||||||||||||||
| 30-59 Days | 60-89 Days | 90 Days and | Total | |||||||||||||||||||||
| (dollars in thousands) | Past Due | Past Due | Accruing | Nonaccrual | Past Due | Current | ||||||||||||||||||
|
2010
|
||||||||||||||||||||||||
|
Commercial
|
$ | 2,543 | $ | 583 | $ | 79 | $ | 25,488 | $ | 28,693 | $ | 1,182,706 | ||||||||||||
|
Commercial Real Estate:
|
||||||||||||||||||||||||
|
Construction
|
— | — | — | — | — | 101,016 | ||||||||||||||||||
|
Other
|
992 | 98 | — | 30,416 | 31,506 | 809,873 | ||||||||||||||||||
|
Consumer:
|
||||||||||||||||||||||||
|
Heloc
|
849 | 477 | 189 | 1,903 | 3,418 | 244,875 | ||||||||||||||||||
|
Auto
|
5,791 | 1,316 | 120 | 2,331 | 9,558 | 487,544 | ||||||||||||||||||
|
Other
|
1,129 | 972 | 184 | 2,088 | 4,373 | 175,184 | ||||||||||||||||||
|
Residential
|
9,126 | 1,589 | — | 8,719 | 19,434 | 645,271 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 20,430 | $ | 5,035 | $ | 572 | $ | 70,945 | $ | 96,982 | $ | 3,646,469 | ||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
2009
|
||||||||||||||||||||||||
|
Commercial
|
$ | 2,967 | $ | 2,291 | $ | 1,753 | $ | 24,257 | $ | 31,268 | $ | 1,255,900 | ||||||||||||
|
Commercial Real Estate:
|
||||||||||||||||||||||||
|
Construction
|
— | — | — | 270 | 270 | 108,757 | ||||||||||||||||||
|
Other
|
2,663 | 1,905 | 72 | 24,584 | 29,224 | 924,659 | ||||||||||||||||||
|
Consumer:
|
||||||||||||||||||||||||
|
Heloc
|
695 | 739 | 822 | 1,933 | 4,189 | 270,562 | ||||||||||||||||||
|
Auto
|
7,603 | 1,326 | 287 | 3,255 | 12,471 | 561,005 | ||||||||||||||||||
|
Other
|
1,656 | 1,142 | 567 | 3,096 | 6,461 | 227,329 | ||||||||||||||||||
|
Residential
|
6,860 | 1,426 | — | 9,621 | 17,907 | 385,484 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 22,444 | $ | 8,829 | $ | 3,501 | $ | 67,016 | $ | 101,790 | $ | 3,733,696 | ||||||||||||
|
|
||||||||||||||||||||||||
In the course of resolving nonperforming loans, Old National may choose to restructure the
contractual terms of certain loans. The Company may attempt to work out an alternative payment
schedule with the borrower in order to avoid foreclosure actions. Any loans that are modified are
reviewed by Old National to identify if a troubled debt restructuring (“TDR”) has occurred, which
is when for economic or legal reasons related to a borrower’s financial difficulties, the Bank
grants a concession to the borrower that it would not otherwise consider. Terms may be modified to
fit the ability of the borrower to repay in line with its current financial status and could
include reduction of the stated interest rate other than normal market rate adjustments, extension
of maturity dates, or reduction of principal balance or accrued interest. The decision to
restructure a loan, versus aggressively enforcing the collection of the loan, may benefit Old
National by increasing the ultimate probability of collection.
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, 2010, loans modified in a troubled debt restructuring, which are
included in nonaccrual loans, totaled $4.8 million, consisting of $3.8 million of commercial loans
and $1.0 million of commercial real estate loans, and had specific allocations of allowance for
loan losses of $1.6 million. At December 31, 2009, loans modified in a troubled debt
restructuring, which are included in nonaccrual loans, totaled $10.0 million, consisting of $7.6
million of
commercial loans and $2.4 million of commercial real estate loans, and had specific allocations of
allowance for loan losses of $3.5 million.
If the Company is unable to resolve a nonperforming loan issue the credit will be charged off when
it is apparent there will be a loss. For large commercial type loans, each relationship is
individually analyzed for evidence of apparent loss based on quantitative benchmarks or
subjectively based upon certain events or particular circumstances. 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. For residential and consumer loans, a
charge off is recorded at the time foreclosure is initiated or when the loan becomes 120 to 180
days past due.
79
Table of Contents
The following table shows the changes in the carrying amount of goodwill by segment for the years
ended December 31, 2010 and 2009:
| Community | ||||||||||||
| (dollars in thousands) | Banking | Other | Total | |||||||||
|
Balance, January 1, 2010
|
$ | 128,011 | $ | 39,873 | $ | 167,884 | ||||||
|
Goodwill acquired during the period
|
— | — | — | |||||||||
|
|
||||||||||||
|
Balance, December 31, 2010
|
$ | 128,011 | $ | 39,873 | $ | 167,884 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
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 | ||||||
|
|
||||||||||||
Goodwill is reviewed annually for impairment. Old National completed its most recent annual
goodwill impairment test as of August 31, 2010 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,
2010 and 2009 was as follows:
| Gross Carrying | Accumulated | Net Carrying | ||||||||||
| (dollars in thousands) | Amount | Amortization | Amount | |||||||||
|
2010
|
||||||||||||
|
Amortized intangible assets:
|
||||||||||||
|
Core deposit
|
$ | 26,810 | $ | (14,646 | ) | $ | 12,164 | |||||
|
Customer business relationships
|
25,753 | (14,581 | ) | 11,172 | ||||||||
|
Customer loan relationships
|
4,413 | (1,571 | ) | 2,842 | ||||||||
|
|
||||||||||||
|
Total intangible assets
|
$ | 56,976 | $ | (30,798 | ) | $ | 26,178 | |||||
|
|
||||||||||||
|
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 | |||||
|
|
||||||||||||
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 21 to the consolidated financial statements for a description of the Company’s operating
segments.
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 $6.1 million in 2010,
$6.5 million in 2009 and $4.4 million in 2008.
80
Table of Contents
Estimated amortization expense for the future years is as follows:
| Estimated | ||||
| Amortization | ||||
| (dollars in thousands) | Expense | |||
|
2011
|
$ | 5,546 | ||
|
2012
|
4,840 | |||
|
2013
|
4,050 | |||
|
2014
|
3,259 | |||
|
2015
|
2,659 | |||
|
Thereafter
|
5,824 | |||
|
|
||||
|
Total
|
$ | 26,178 | ||
|
|
||||
The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2010 and
2009 was $466.3 million and $653.3 million, respectively. At December 31, 2010, the scheduled
maturities of total time deposits were as follows:
| (dollars in thousands) | ||||
|
Due in 2011
|
$ | 716,453 | ||
|
Due in 2012
|
342,554 | |||
|
Due in 2013
|
240,283 | |||
|
Due in 2014
|
36,102 | |||
|
Due in 2015
|
52,449 | |||
|
Thereafter
|
87,416 | |||
|
SFAS 133 fair value hedge
|
— | |||
|
|
||||
|
Total
|
$ | 1,475,257 | ||
|
|
||||
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 | ||||||||||||
|
2010
|
||||||||||||||||
|
Outstanding at year-end
|
$ | 1,663 | $ | 287,414 | $ | 9,155 | $ | 298,232 | ||||||||
|
Average amount outstanding
|
7,012 | 312,773 | 8,750 | 328,535 | ||||||||||||
|
Maximum amount outstanding at
any month-end
|
41,365 | 348,403 | 10,423 | |||||||||||||
|
Weighted average interest rate:
|
||||||||||||||||
|
During year
|
0.18 | % | 0.17 | % | 1.27 | % | 0.20 | % | ||||||||
|
End of year
|
— | 0.16 | — | 0.16 | ||||||||||||
|
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 | ||||||||||||
81
Table of Contents
Other Short-term Borrowings
Line of Credit
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. Old National did not use the facility. The facility matured in April 2010 and Old
National did not renew the facility.
Treasury Investment Program
As of December 31, 2010, Old National had $9.2 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, 2010, the effective interest
rate on these funds was 0%.
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%.
The following table summarizes Old National and its subsidiaries’ other borrowings at December 31:
| (dollars in thousands) | 2010 | 2009 | ||||||
|
Old National Bancorp:
|
||||||||
|
Senior unsecured notes (fixed rate 5.00%)
maturing May 2010
|
$ | — | $ | 50,000 | ||||
|
Junior subordinated debentures (variable rates 2.05%
to 3.35%) maturing July 2033 to March 2035
|
8,000 | 108,000 | ||||||
|
SFAS 133 fair value hedge and other basis adjustments
|
(36 | ) | (726 | ) | ||||
|
Old National Bank:
|
||||||||
|
Securities sold under agreements to repurchase (variable
rate 3.09%) maturing October 2014
|
50,000 | 99,000 | ||||||
|
Federal Home Loan Bank advances (fixed rates
1.24% to 8.34% and variable rate 2.57%)
maturing June 2012 to January 2023
|
211,696 | 289,974 | ||||||
|
Subordinated bank notes (fixed rate 6.75%)
maturing October 2011
|
150,000 | 150,000 | ||||||
|
Capital lease obligation
|
4,307 | 4,350 | ||||||
|
SFAS 133 fair value hedge and other basis adjustments
|
(2,056 | ) | (1,539 | ) | ||||
|
|
||||||||
|
Total other borrowings
|
$ | 421,911 | $ | 699,059 | ||||
|
|
||||||||
Contractual maturities of long-term debt at December 31, 2010, were as follows:
| (dollars in thousands) | ||||
|
Due in 2011
|
$ | 150,046 | ||
|
Due in 2012
|
688 | |||
|
Due in 2013
|
75,918 | |||
|
Due in 2014
|
92,560 | |||
|
Due in 2015
|
16,763 | |||
|
Thereafter
|
88,028 | |||
|
SFAS 133 fair value hedge and other basis adjustments
|
(2,092 | ) | ||
|
|
||||
|
Total
|
$ | 421,911 | ||
|
|
||||
82
Table of Contents
FEDERAL HOME LOAN BANK
Federal Home Loan Bank advances had weighted-average rates of 3.32% and 3.68% at December 31, 2010,
and 2009, respectively. These borrowings are collateralized by investment securities and
residential real estate loans up to 150% of outstanding debt.
SUBORDINATED BANK NOTES
Old National Bank’s notes are issued under the global note program and are not obligations of, or
guaranteed by, Old National Bancorp.
According to capital guidelines, the portion of limited-life capital instruments that is includible
in Tier 2 capital is limited within five years or less until maturity. As of December 31, 2010,
none of the subordinated bank notes qualified as Tier 2 Capital for regulatory purposes. As shown
in the table above, the subordinated bank notes mature October 2011. Capital treatment ceased
October 2010, or one year prior to the maturity date.
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.
ONB Capital Trust II issued $100 million in preferred securities in April 2002. Old National
guaranteed the payment of distributions on the trust preferred securities issued by ONB Capital
Trust II. The preferred securities had 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. On
November 9, 2010, Old National’s Board of Directors approved the redemption of the junior
subordinated debentures. As a result of the redemption of the debentures, the trustee of ONB
Capital Trust II redeemed all $100 million of the 8% trust preferred securities on December 15,
2010. The $3.0 million remaining balance of the unamortized issuance costs at the time of the
redemption were expensed.
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 had a
cumulative annual distribution rate of 6.27% until March 2010 and now 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.
83
Table of Contents
At December 31, 2010, the future minimum lease payments under the capital lease were as follows:
| (dollars in thousands) | ||||
|
2011
|
$ | 390 | ||
|
2012
|
390 | |||
|
2013
|
390 | |||
|
2014
|
410 | |||
|
2015
|
410 | |||
|
Thereafter
|
10,494 | |||
|
|
||||
|
Total minimum lease payments
|
12,484 | |||
|
Less amounts representing interest
|
8,177 | |||
|
|
||||
|
Present value of net minimum lease payments
|
$ | 4,307 | ||
|
|
||||
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) | 2010 | 2009 | 2008 | |||||||||
|
Provision at statutory rate of 35%
|
$ | 15,218 | $ | (2,582 | ) | $ | 21,560 | |||||
|
Tax-exempt income:
|
||||||||||||
|
Tax-exempt interest
|
(9,060 | ) | (14,545 | ) | (13,309 | ) | ||||||
|
Section 291/265 interest disallowance
|
329 | 515 | 827 | |||||||||
|
Bank owned life insurance income
|
(1,418 | ) | (824 | ) | (3,213 | ) | ||||||
|
|
||||||||||||
|
Tax-exempt income
|
(10,149 | ) | (14,854 | ) | (15,695 | ) | ||||||
|
|
||||||||||||
|
Reserve for unrecognized tax benefits
|
(652 | ) | (706 | ) | (6,611 | ) | ||||||
|
State income taxes
|
518 | (3,829 | ) | (398 | ) | |||||||
|
Other, net
|
331 | 857 | 267 | |||||||||
|
|
||||||||||||
|
Income tax expense (benefit)
|
$ | 5,266 | $ | (21,114 | ) | $ | (877 | ) | ||||
|
|
||||||||||||
|
Effective tax rate
|
12.1 | % | 286.2 | % | (1.4 | )% | ||||||
|
|
||||||||||||
The effective tax rate varied significantly from 2008 through 2010 due to large fluctuations
in pre-tax income while the majority of other items affecting the rate, in particular tax-exempt
income, remained relatively stable. The increase in our state tax benefit in 2009 directly
correlates to the declines in pre-tax income. The provision for income taxes consisted of the
following components for the years ended December 31:
| (dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
|
Income taxes currently payable
|
||||||||||||
|
Federal
|
$ | 2,687 | $ | 4,248 | $ | 8,269 | ||||||
|
State
|
— | — | (612 | ) | ||||||||
|
Deferred income taxes related to:
|
||||||||||||
|
Provision for loan losses
|
(460 | ) | (3,042 | ) | (5,982 | ) | ||||||
|
Other, net
|
3,039 | (22,320 | ) | (2,552 | ) | |||||||
|
|
||||||||||||
|
Deferred income tax benefit
|
2,579 | (25,362 | ) | (8,534 | ) | |||||||
|
|
||||||||||||
|
Provision for (benefit from) income taxes
|
$ | 5,266 | $ | (21,114 | ) | $ | (877 | ) | ||||
|
|
||||||||||||
In 2009, the primary components of the $22,320 Other deferred income tax benefit included
$2,897 related to our net operating loss, $3,024 related to benefit plan accruals, $9,451 related
to other-than-temporary impairment and $9,076 related to alternative minimum tax credit
carryforwards.
84
Table of Contents
Significant components of net deferred tax assets (liabilities) were as follows at December 31:
| (dollars in thousands) | 2010 | 2009 | ||||||
|
Deferred Tax Assets
|
||||||||
|
Allowance for loan losses,
net of recapture
|
$ | 29,334 | $ | 28,874 | ||||
|
Benefit plan accruals
|
1,369 | 6,131 | ||||||
|
AMT credit
|
25,509 | 25,075 | ||||||
|
Unrealized losses on available-for-sale investment securities
|
— | 5,276 | ||||||
|
Unrealized losses on benefit plans
|
7,715 | 9,102 | ||||||
|
Net operating loss
|
3,452 | 3,578 | ||||||
|
Premises and equipment
|
35,657 | 37,715 | ||||||
|
Low income housing credit
|
3,621 | 451 | ||||||
|
Other-than-temporary-impairment
|
9,624 | 9,451 | ||||||
|
Other, net
|
6,427 | 9,593 | ||||||
|
|
||||||||
|
Total deferred tax assets
|
122,708 | 135,246 | ||||||
|
|
||||||||
|
Deferred Tax Liabilities
|
||||||||
|
Accretion on investment securities
|
(559 | ) | (993 | ) | ||||
|
Lease receivable, net
|
(7,761 | ) | (7,434 | ) | ||||
|
Purchase accounting
|
(11,605 | ) | (11,285 | ) | ||||
|
Unrealized gains on available-for-sale investment securities
|
(2,600 | ) | — | |||||
|
Unrealized gains on held-to-maturity securities
|
(3,773 | ) | (541 | ) | ||||
|
Unrealized gains on hedges
|
(567 | ) | (131 | ) | ||||
|
Other, net
|
(1,940 | ) | (2,045 | ) | ||||
|
|
||||||||
|
Total deferred tax liabilities
|
(28,805 | ) | (22,429 | ) | ||||
|
|
||||||||
|
Net deferred tax assets
|
$ | 93,903 | $ | 112,817 | ||||
|
|
||||||||
No valuation allowance was recorded at December 31, 2010 and 2009 because, based on current
expectations, Old National believes it will generate sufficient income in future years to realize
deferred tax assets. Old National did not have a federal net operating loss carryforward at
December 31, 2010 or 2009, respectively. Old National has alternative minimum tax credit
carryforwards at December 31, 2010 and 2009 of $25.5 million and $25.1 million, respectively. The
alternative minimum tax credit carryforward does not expire. Old National has low income housing
credit carryforwards at December 31, 2010 and 2009 of $3.6 million and $0.5 million, respectively.
If not used, the low income housing credit carryforwards will begin to expire in 2026. Old
National has state net operating loss carryforwards totaling $63.7 million and $66.0 million at
December 31, 2010 and 2009, respectively. If not used, the net operating loss carryforwards will
begin to expire in 2020.
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.
85
Table of Contents
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| (dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
|
Balance at January 1
|
$ | 8,500 | $ | 7,513 | $ | 11,554 | ||||||
|
Additions based on tax positions related to the current year
|
3,806 | 7,293 | 5,849 | |||||||||
|
Reductions due to statute of limitations expiring
|
(3,440 | ) | (5,186 | ) | — | |||||||
|
Reductions for tax positions of prior years
|
(4,313 | ) | (1,120 | ) | (6,422 | ) | ||||||
|
Settlements
|
— | — | (3,468 | ) | ||||||||
|
|
||||||||||||
|
Balance at December 31
|
$ | 4,553 | $ | 8,500 | $ | 7,513 | ||||||
|
|
||||||||||||
Settlements include effective settlements from tax audits. No cash settlements were paid
during 2010 or 2009. Approximately $0.76 million of unrecognized tax benefits, net of interest, 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.
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, 2010, 2009 and 2008 of $0.3
million, $0, and a benefit of $0.2 million, respectively. The amount accrued for interest and
penalties in the balance sheet at December 31, 2010 and 2009 was $1.6 million and $1.3 million,
respectively.
The Company and its subsidiaries file a consolidated U.S. federal income tax return, as well as
filing various state returns. The 2007 through 2010 tax years are open and subject to examination.
In the third quarter of 2010, the Company reversed $0.65 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 $0.65 million income tax reversal relates to the 2006 statute of
limitations expiring. The statute of limitations expired in the third quarter of 2010. As a
result, the Company reversed a total of $0.65 million from its unrecognized tax benefit liability
which includes $.05 million of interest.
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.
86
Table of Contents
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 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) | 2010 | 2009 | ||||||
|
Change in Projected Benefit Obligation
|
||||||||
|
Balance at January 1
|
$ | 41,937 | $ | 34,569 | ||||
|
Interest cost
|
1,990 | 1,974 | ||||||
|
Benefits paid
|
(983 | ) | (2,213 | ) | ||||
|
Actuarial (gain)/loss
|
1,233 | 7,607 | ||||||
|
Settlement
|
(2,015 | ) | — | |||||
|
|
||||||||
|
Projected Benefit Obligation at December 31
|
42,162 | 41,937 | ||||||
|
|
||||||||
|
|
||||||||
|
Change in Plan Assets
|
||||||||
|
Fair value at January 1
|
31,275 | 26,920 | ||||||
|
Actual return on plan assets
|
4,177 | 6,198 | ||||||
|
Employer contributions
|
7,647 | 370 | ||||||
|
Benefits paid
|
(983 | ) | (2,213 | ) | ||||
|
Settlement
|
(2,015 | ) | — | |||||
|
|
||||||||
|
Fair value of Plan Assets at December 31
|
40,101 | 31,275 | ||||||
|
|
||||||||
|
Funded status at December 31
|
(2,061 | ) | (10,662 | ) | ||||
|
|
||||||||
|
|
||||||||
|
Amounts recognized in the statement of financial position
at December 31:
|
||||||||
|
Prepaid benefit cost
|
$ | — | $ | — | ||||
|
Accrued benefit liability
|
(2,061 | ) | (10,662 | ) | ||||
|
|
||||||||
|
Net amount recognized
|
$ | (2,061 | ) | $ | (10,662 | ) | ||
|
|
||||||||
|
Amounts recognized in accumulated
other comprehensive income at December 31:
|
||||||||
|
Net actuarial loss
|
$ | 19,284 | $ | 22,754 | ||||
|
|
||||||||
|
Total
|
$ | 19,284 | $ | 22,754 | ||||
|
|
||||||||
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
$2.8 million.
The accumulated benefit obligation and the projected benefit obligation were equivalent for the
defined benefit pension plans and were $42.2 million and $41.9 million at December 31, 2010 and
2009, respectively.
87
Table of Contents
The net periodic benefit cost and its components were as follows for the years ended December 31:
| (dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
|
Net Periodic Benefit Cost
|
||||||||||||
|
Interest cost
|
$ | 1,990 | $ | 1,974 | $ | 2,143 | ||||||
|
Expected return on plan assets
|
(1,960 | ) | (1,933 | ) | (3,169 | ) | ||||||
|
Recognized actuarial loss
|
1,603 | 1,453 | 632 | |||||||||
|
|
||||||||||||
|
Net periodic benefit cost
|
$ | 1,633 | $ | 1,494 | $ | (394 | ) | |||||
|
Settlement cost
|
883 | — | 1,498 | |||||||||
|
|
||||||||||||
|
Total net periodic benefit cost
|
$ | 2,516 | $ | 1,494 | $ | 1,104 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Other Changes in Plan Assets and
Benefit Obligations Recognized in Other
Comprehensive Income
|
||||||||||||
|
Net actuarial loss
|
$ | (983 | ) | $ | 3,342 | $ | 11,353 | |||||
|
Amortization of net actuarial loss
|
(1,603 | ) | (1,453 | ) | (632 | ) | ||||||
|
Settlement cost
|
(883 | ) | — | (1,498 | ) | |||||||
|
|
||||||||||||
|
Total recognized in Other
Comprehensive Income
|
$ | (3,469 | ) | $ | 1,889 | $ | 9,223 | |||||
|
|
||||||||||||
|
Total recognized in net periodic benefit cost and
other comprehensive income
|
$ | (953 | ) | $ | 3,383 | $ | 10,327 | |||||
|
|
||||||||||||
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.
| 2010 | 2009 | 2008 | ||||||||||
|
Benefit obligations:
|
||||||||||||
|
Discount rate at the end of the period
|
5.50 | % | 5.25 | % | 6.25 | % | ||||||
|
Net periodic benefit cost:
|
||||||||||||
|
Discount rate at the beginning of the period
|
5.25 | % | 6.25 | % | 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 Principal Pension Discount yield curve as of
December 31, 2010.
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 | 2010 | 2009 | 2008 | |||||||||||||||
|
Equity securities
|
9.00% – 9.50 | % | 40 – 70 | % | 68 | % | 71 | % | 66 | % | ||||||||||
|
Debt securities
|
4.00% – 5.85 | % | 30 – 60 | % | 27 | 29 | 34 | |||||||||||||
|
Cash equivalents
|
— | 0 – 15 | % | 5 | — | — | ||||||||||||||
|
|
||||||||||||||||||||
|
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, 2010, 2009 and 2008, respectively.
88
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, 2010, the fair value of plan assets, by asset category, is as follows:
| Fair Value Measurements at December 31, 2010 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
|
$ | 18,740 | $ | — | $ | 18,740 | $ | — | ||||||||
|
International Equity
|
8,334 | — | 8,334 | — | ||||||||||||
|
Short-Term Fixed Income
|
2,036 | — | 2,036 | — | ||||||||||||
|
Fixed Income
|
10,991 | — | 10,991 | — | ||||||||||||
|
|
||||||||||||||||
|
Total Plan Assets
|
$ | 40,101 | $ | — | $ | 40,101 | $ | — | ||||||||
|
|
||||||||||||||||
As of December 31, 2010, expected future benefit payments related to Old National’s defined
benefit plans were as follows:
| (dollars in thousands) | ||||
|
2011
|
$ | 8,000 | ||
|
2012
|
4,640 | |||
|
2013
|
3,520 | |||
|
2014
|
3,470 | |||
|
2015
|
3,240 | |||
|
Years 2016 - 2020
|
14,790 |
Old National expects to contribute cash of $0.8 million to the pension plans in 2011.
EMPLOYEE STOCK OWNERSHIP PLAN
The Employee Stock Ownership and Savings Plan (401k) permits employees to participate the first
month following one month of service. Effective as of April 1, 2010, the Company suspended safe
harbor matching contributions to the Plan. However, the Company may make discretionary matching
contributions to the Plan. For 2010, the Company matched 50% of employee compensation deferral
contributions, up to six percent of compensation. In addition to matching contributions, Old
National may contribute to the Plan an amount designated as a profit sharing
contribution in the form of Old National Bancorp stock or cash. Old National’s Board of Directors
designated no discretionary profit sharing contributions in 2010, 2009 or 2008. All contributions
vest immediately and plan participants may elect to redirect funds among any of the investment
options provided under the plan. During the years ended December 31, 2010, 2009 and 2008, the
number of Old National shares allocated to the plan were 1.5 million, 1.7 million and 1.8 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 $4.3 million in 2010, $7.1 million in 2009 and $6.6
million in 2008.
89
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, 2010, 1.3 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 $2.4 million, $1.3 million, and $2.0 million for
2010, 2009, and 2008, respectively. The total income tax benefit was $0.9 million, $0.5 million,
and $0.7 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. No stock options were granted in 2010.
| 2010 | 2009 | 2008 | ||||||||||
|
Wtd-average risk-free interest
rate
|
— | % | 2.1 | % | 3.0 | % | ||||||
|
Expected life of option (years)
|
— | 6 | 6 | |||||||||
|
Expected stock volatility
|
— | % | 28.8 | % | 15.8 | % | ||||||
|
Expected dividend yield
|
— | % | 5.3 | % | 5.3 | % | ||||||
A summary of the activity in the stock option plan for 2010 follows:
| Weighted | ||||||||||||||||
| Weighted | Average | Aggregate | ||||||||||||||
| Average | Remaining | Intrinsic | ||||||||||||||
| Exercise | Contractual | Value | ||||||||||||||
| (shares in thousands) | Shares | Price | Term in Years | (in thousands) | ||||||||||||
|
Outstanding, January 1
|
6,056 | $ | 20.37 | |||||||||||||
|
Granted
|
— | — | ||||||||||||||
|
Exercised
|
(2 | ) | 5.44 | |||||||||||||
|
Forfeited
|
(36 | ) | 20.90 | |||||||||||||
|
|
||||||||||||||||
|
Outstanding, December 31
|
6,018 | $ | 20.37 | 3.6 | $ | 67.3 | ||||||||||
|
|
||||||||||||||||
|
Options exercisable at end of year
|
5,810 | $ | 20.59 | 3.5 | $ | 67.3 | ||||||||||
|
|
||||||||||||||||
90
Table of Contents
Information related to the stock option plan during each year follows:
| (dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
|
Intrinsic value of options exercised
|
$ | 13 | $ | 44 | $ | 277 | ||||||
|
Cash received from option exercises
|
12 | 97 | 1,940 | |||||||||
|
Tax benefit realized from option exercises
|
— | — | 45 | |||||||||
|
Weighted average fair value of options granted
|
— | 2.03 | 1.12 | |||||||||
As of December 31, 2010, there was $0.1 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 1.02 year.
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 2010.
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, 2010
|
474 | $ | 16.42 | |||||
|
Granted during the year
|
112 | 11.84 | ||||||
|
Vested during the year
|
(110 | ) | 16.59 | |||||
|
Forfeited during the year
|
(100 | ) | 18.31 | |||||
|
|
||||||||
|
Nonvested balance at December 31, 2010
|
376 | $ | 14.49 | |||||
|
|
||||||||
As of December 31, 2010, there was $1.6 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 1.62 years.
The total fair value of the shares vested during the years ended December 31, 2010, 2009 and 2008
was $1.3 million, $1.4 million and $0.8 million, respectively.
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.
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, 2010
|
106 | $ | 12.55 | |||||
|
Granted during the year
|
137 | 13.07 | ||||||
|
Reinvested dividend equivalents
|
10 | 10.90 | ||||||
|
|
||||||||
|
Nonvested balance at December 31, 2010
|
253 | $ | 12.83 | |||||
|
|
||||||||
As of December 31, 2010 and 2009, there was $1.8 million and $0.9 million, respectively, 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 1.89 years. Old National began
granting restricted stock units during 2009 and no shares had vested as of December 31, 2010.
91
Table of Contents
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, 2010, Old National had issued 56,178
shares under this program.
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 2010, no shares were issued related to these plans. In 2009, 195
thousand shares were issued related to these plans with proceeds of approximately $2.0 million. As
of December 31, 2010, 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. In 2010, 19 thousand shares were issued related to this plan with proceeds of
approximately $197 thousand. In 2009, 5 thousand shares were issued related to this plan with
proceeds of approximately $51 thousand.
SHAREHOLDER RIGHTS PLAN
Old National had a Rights Agreement whereby one right is distributed for each outstanding share of
Old National’s common stock. The rights became exercisable on the tenth day following a public
announcement that a person had acquired or intended to acquire beneficial ownership of 20% or more
of Old National’s outstanding common stock. Upon exercising the rights, the holder was 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 could be redeemed by Old National at a price of
$0.01 per right.
In the event an acquiring party became the beneficial owner of 20% or more of Old National’s
outstanding shares, rights holders (other than the acquiring person) could purchase two shares of
Old National common stock for the price of one share at the then market price. If Old National was
acquired and was not the surviving corporation, or if Old National survived a merger but had all or
part of its common stock exchanged, each rights holder would 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 expired 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.
92
Table of Contents
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.
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.
COMMON STOCK
The December 31, 2010 and 2009 balances include 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.
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 swap and libor curves plus spreads that adjust for loss severities,
volatility, credit risk 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.
93
Table of Contents
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).
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, 2010 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
|
$ | 62,550 | $ | 62,550 | $ | — | $ | — | ||||||||
|
U.S. Government-sponsored entities and
agencies
|
315,133 | — | 315,133 | — | ||||||||||||
|
Mortgage-backed securities — Agency
|
944,446 | — | 944,446 | — | ||||||||||||
|
Mortgage-backed securities — Non-agency
|
126,806 | — | 126,806 | — | ||||||||||||
|
States and political subdivisions
|
348,924 | — | 348,924 | — | ||||||||||||
|
Pooled trust preferred securities
|
8,400 | — | — | 8,400 | ||||||||||||
|
Other securities
|
153,963 | — | 153,963 | — | ||||||||||||
|
Residential loans held for sale
|
3,819 | — | 3,819 | — | ||||||||||||
|
Derivative assets
|
34,082 | — | 34,082 | — | ||||||||||||
|
Financial Liabilities
|
||||||||||||||||
|
Derivative liabilities
|
29,721 | — | 29,721 | — | ||||||||||||
| 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 | — | ||||||||||||
94
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,
2010:
| Fair Value Measurements | ||||
| using Significant | ||||
| Unobservable Inputs | ||||
| (Level 3) | ||||
| Pooled Trust Preferred | ||||
| Securities Available- | ||||
| (dollars in thousands) | for-Sale | |||
|
Beginning balance, January 1, 2010
|
$ | 12,398 | ||
|
Accretion/(amortization) of discount or premium
|
(101 | ) | ||
|
Payments received
|
(163 | ) | ||
|
Credit loss write-downs
|
(930 | ) | ||
|
Increase/(decrease) in fair value of securities
|
(2,804 | ) | ||
|
|
||||
|
Ending balance, December 31, 2010
|
$ | 8,400 | ||
|
|
||||
Included in the income statement are $101 thousand of expense included in interest income from
the amortization of premiums on securities and $930 thousand of credit losses included in
noninterest income. The decrease in fair value is reflected in the balance sheet as a decrease in
the fair value of investment securities available-for sale, a decrease in accumulated other
comprehensive income, which is included in shareholders’ equity, and an increase 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, 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 are $141 thousand of expense included in interest income from
the amortization of premiums on securities and $20.4 million of credit losses included in
noninterest income. 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.
95
Table of Contents
Assets measured at fair value on a non-recurring basis are summarized below:
| Fair Value Measurements at December 31, 2010 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
|
$ | 22,833 | — | — | $ | 22,833 | ||||||||||
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 $13.6 million at December 31,
2010. Old National recorded $7.1 million of provision expense associated with these loans in 2010.
| 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.
Financial instruments recorded using fair value option
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.
The Company has elected the fair value option for residential mortgage loans held for sale.
| • | 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 is
$214 thousand of interest income for residential loans held for sale for the year ended December
31, 2010. Included in the income statement is $635 thousand of interest income for residential
loans held for sale for the year ended December 31, 2009. Interest expense is recorded based on
the contractual amount of interest expense incurred. The income statement includes no interest
expense for the year ended December 31, 2010, for certain retail certificates of deposit. The
income statement includes $73 thousand of interest expense for the year ended December 31, 2009,
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.
96
Table of Contents
Certain retail certificates of deposit
Previously, Old National had elected the fair value option for certain retail certificates of
deposit; specifically, pools of retail certificates of deposit that had been matched with
derivative instruments. Old National had elected the fair value option to mitigate accounting
mismatches in cases where hedge accounting is complex and to achieve operational simplification.
At both December 31, 2010 and 2009, there were no retail certificates of deposit accounted for
under the fair value option.
As of December 31, 2010, 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
|
$ | 3,819 | $ | (20 | ) | $ | 3,839 | |||||
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, 2010:
Changes in Fair Value for the Twelve Months ended December 31, 2010, 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
|
$ | (306 | ) | $ | 2 | $ | — | $ | (304 | ) | ||||||
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 | ) | ||||||
97
Table of Contents
The carrying amounts and estimated fair values of financial instruments, not previously
presented, at December 31, 2010 and 2009, respectively, are as follows:
| Carrying | Fair | |||||||
| (dollars in thousands) | Value | Value | ||||||
|
2010
|
||||||||
|
Financial Assets
|
||||||||
|
Cash, due from banks, federal funds sold and money market investments
|
$ | 251,552 | $ | 251,552 | ||||
|
Investment securities held-to-maturity:
|
||||||||
|
U.S. Government-sponsored entities and agencies
|
303,265 | 301,809 | ||||||
|
Mortgage-backed securities — Agency
|
117,013 | 119,080 | ||||||
|
State and political subdivisions
|
217,381 | 204,379 | ||||||
|
Other securities
|
551 | 375 | ||||||
|
Federal Home Loan Bank stock
|
31,937 | 31,937 | ||||||
|
Loans, net (including impaired loans)
|
||||||||
|
Commercial
|
1,185,194 | 1,220,464 | ||||||
|
Commercial real estate
|
909,742 | 952,885 | ||||||
|
Residential real estate
|
662,396 | 710,865 | ||||||
|
Consumer credit
|
913,810 | 969,263 | ||||||
|
Accrued interest receivable
|
42,971 | 42,971 | ||||||
|
|
||||||||
|
Financial Liabilities
|
||||||||
|
Deposits:
|
||||||||
|
Noninterest-bearing demand deposits
|
$ | 1,276,024 | $ | 1,276,024 | ||||
|
NOW, savings and money market deposits
|
2,711,644 | 2,711,644 | ||||||
|
Time deposits
|
1,475,257 | 1,520,093 | ||||||
|
Short-term borrowings
|
||||||||
|
Federal funds purchased
|
1,663 | 1,663 | ||||||
|
Repurchase agreements
|
287,414 | 287,416 | ||||||
|
Other short-term borrowings
|
9,155 | 9,155 | ||||||
|
Other borrowings:
|
||||||||
|
Junior subordinated debentures
|
8,000 | 7,998 | ||||||
|
Repurchase agreements
|
50,000 | 54,104 | ||||||
|
Federal Home Loan Bank advances
|
211,696 | 220,531 | ||||||
|
Subordinated bank notes
|
150,000 | 154,420 | ||||||
|
Capital lease obligation
|
4,307 | 5,138 | ||||||
|
Accrued interest payable
|
7,860 | 7,860 | ||||||
|
Standby letters of credit
|
518 | 518 | ||||||
|
|
||||||||
|
Off-Balance Sheet Financial Instruments
|
||||||||
|
Commitments to extend credit
|
$ | — | $ | 1,311 | ||||
98
Table of Contents
| 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 | ||||
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 and resell agreements and money market investments: 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: Old National Bank is a member of the Federal Home Loan Bank 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 and periodically evaluated for impairment based on ultimate recovery of par value. The carrying value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank. |
| 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. |
| Accrued interest receivable: The carrying amount approximates fair value. |
| 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. |
99
Table of Contents
| 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 17 and 18. |
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 $195.0 million and $297.5 million at December 31, 2010 and December 31,
2009, respectively. The December 31, 2010 balances consist of $95.0 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. 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.
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, 2010, the notional amount of the interest rate lock
commitments and forward commitments were $7.7 million and $9.3 million, respectively. 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. 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 $419.2 million and $419.2 million, respectively, at December 31, 2010.
At December 31, 2009, the notional amounts of the customer derivative instruments and the
offsetting counterparty derivative instruments were $479.8 million and $479.8 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.
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.
100
Table of Contents
The following tables summarize the fair value of derivative financial instruments utilized by Old
National:
| Asset Derivatives | ||||||||||||
| December 31, 2010 | December 31, 2009 | |||||||||||
| Balance | Balance | |||||||||||
| Sheet | Fair | Sheet | Fair | |||||||||
| (dollars in thousands) | Location | Value | Location | Value | ||||||||
|
Derivatives designated as hedging instruments
|
||||||||||||
|
Interest rate contracts
|
Other assets | $ | 4,766 | Other assets | $ | 1,789 | ||||||
|
|
||||||||||||
|
Total derivatives designated as hedging instruments
|
$ | 4,766 | $ | 1,789 | ||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Derivatives not designated as hedging instruments
|
||||||||||||
|
Interest rate contracts
|
Other assets | $ | 28,930 | Other assets | $ | 27,749 | ||||||
|
Commodity contracts
|
Other assets | 132 | Other assets | — | ||||||||
|
Foreign exchange contracts
|
Other assets | — | Other assets | 12 | ||||||||
|
Mortgage contracts
|
Other assets | 254 | Other assets | 370 | ||||||||
|
|
||||||||||||
|
Total derivatives not designated as hedging instruments
|
$ | 29,316 | $ | 28,131 | ||||||||
|
|
||||||||||||
|
Total derivatives
|
$ | 34,082 | $ | 29,920 | ||||||||
|
|
||||||||||||
| Liability Derivatives | ||||||||||||
| December 31, 2010 | December 31, 2009 | |||||||||||
| Balance | Balance | |||||||||||
| Sheet | Fair | Sheet | Fair | |||||||||
| (dollars in thousands) | Location | Value | Location | Value | ||||||||
|
Derivatives designated as hedging instruments
|
||||||||||||
|
Interest rate contracts
|
Other liabilities | $ | — | Other liabilities | $ | 1,188 | ||||||
|
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 | $ | 29,589 | Other liabilities | $ | 28,279 | ||||||
|
Commodity contracts
|
Other liabilities | 132 | Other liabilities | — | ||||||||
|
Foreign exchange contracts
|
Other liabilities | — | Other liabilities | 12 | ||||||||
|
Mortgage contracts
|
Other liabilities | — | Other liabilities | — | ||||||||
|
|
||||||||||||
|
Total derivatives not designated as hedging instruments
|
$ | 29,721 | $ | 28,291 | ||||||||
|
|
||||||||||||
|
Total derivatives
|
$ | 29,721 | $ | 29,479 | ||||||||
|
|
||||||||||||
101
Table of Contents
The effect of derivative instruments on the Consolidated Statement of Income for the twelve
months ended December 31, 2010 and 2009 are as follows:
| Year ended | Year ended | |||||||||
| (dollars in thousands) | December 31, 2010 | December 31, 2009 | ||||||||
| Derivatives in | Location of Gain or (Loss) | Amount of Gain or (Loss) | ||||||||
| Fair Value Hedging | Recognized in Income on | Recognized in Income on | ||||||||
| Relationships | Derivative | Derivative | ||||||||
|
Interest rate contracts (1)
|
Interest income / (expense) | $ | 3,656 | $ | 1,995 | |||||
|
Interest rate contracts (2)
|
Other income / (expense) | 1,621 | 998 | |||||||
|
|
||||||||||
|
Total
|
$ | 5,277 | $ | 2,993 | ||||||
|
|
||||||||||
| Derivatives in | Location of Gain or (Loss) | Amount of Gain or (Loss) | ||||||||
| Cash Flow Hedging | Recognized in Income on | Recognized in Income on | ||||||||
| Relationships | Derivative | Derivative | ||||||||
|
Interest rate contracts (1)
|
Interest income / (expense) | $ | 1,553 | $ | 1,259 | |||||
|
|
||||||||||
|
Total
|
$ | 1,553 | $ | 1,259 | ||||||
|
|
||||||||||
| Location of Gain or (Loss) | Amount of Gain or (Loss) | |||||||||
| Derivatives Not Designated as | Recognized in Income on | Recognized in Income on | ||||||||
| Hedging Instruments | Derivative | Derivative | ||||||||
|
Interest rate contracts (1)
|
Interest income / (expense) | $ | — | $ | (428 | ) | ||||
|
Interest rate contracts (3)
|
Other income / (expense) | (129 | ) | (280 | ) | |||||
|
Mortgage contracts
|
Mortgage banking revenue | (117 | ) | 416 | ||||||
|
|
||||||||||
|
Total
|
$ | (246 | ) | $ | (292 | ) | ||||
|
|
||||||||||
| (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 the valuation differences between the customer and offsetting counterparty swaps. |
LITIGATION
In the normal course of business, Old National Bancorp 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. 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 permitted 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,
which was granted in part and denied in part on August 6, 2010. The Court has calendared a trial
date of February 13, 2012. In addition, the Court has ordered mediation that was rescheduled for
March of 2011. 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.
102
Table of Contents
In November 2010, Old National was named in a class action lawsuit, much like many other banks,
challenging Old National Bank’s checking account practices. The plaintiff seeks damages and other
relief, including restitution. Old National believes it has meritorious defenses to the claims
brought by the plaintiff. At this phase of the litigation, it is not possible for management of
Old National to determine the probability of a material adverse outcome or reasonably estimate the
amount of any loss.
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 prior periods, Old National entered into sale leaseback transactions for four office buildings
in downtown Evansville, Indiana and eighty-eight financial centers. The properties sold had a
carrying value of $163.6 million. Old National received cash proceeds of approximately $287.4
million, net of selling costs, resulting in a gain of approximately $123.9 million. Approximately
$119.5 million of the gain was deferred and is being recognized over the term of the leases. The
leases have original terms ranging from five to twenty-four years, and Old National has the right,
at its option, to extend the term of certain of the leases for four additional successive terms of
five years. Under the lease agreements, Old National is obligated to pay base rents of
approximately $25.4 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. As of December 31, 2010, Old National
had closed 22 of these locations and terminated the leases. The leases have terms of less than one
year to ten years. Under the remaining lease agreements, Old National is obligated to pay a base
rent of approximately $2.2 million per year.
Total rental expense was $31.4 million in 2010, $29.7 million in 2009 and $26.5 million in 2008.
The following is a summary of future minimum lease commitments as of December 31, 2010:
| (dollars in thousands) | ||||
|
2011
|
$ | 34,527 | ||
|
2012
|
32,462 | |||
|
2013
|
31,361 | |||
|
2014
|
29,998 | |||
|
2015
|
28,735 | |||
|
Thereafter
|
296,045 | |||
|
Total
|
$ | 453,128 | ||
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 $1.106 billion and standby letters of
credit of $74.3 million at December 31, 2010. At December 31, 2010, approximately $1.064 billion
of the loan commitments had fixed rates and $42 million had floating rates, with the fixed interest
rates ranging from 0% to 13.25%. At December 31, 2009, loan commitments were $1.038 billion and
standby letters of credit were $103.2 million. These commitments are not reflected in the
consolidated financial statements. At December 31, 2010 and 2009, the balance of the allowance for
credit losses on unfunded loan commitments was $3.8 million and $5.5 million, respectively.
103
Table of Contents
At December 31, 2010 and 2009, Old National had credit extensions of $25.7 million and $25.9
million, respectively, with various unaffiliated banks related to letter of credit commitments
issued on behalf of Old National’s clients. At December 31, 2010 and 2009, the unsecured portion
was $5.5 million and $3.1 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, 2010, the notional
amount of standby letters of credit was $74.3 million, which represents the maximum amount of
future funding requirements, and the carrying value was $0.5 million. 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.
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 $9.0 million at December 31, 2010.
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 $26.0 million in 2010 and $28.8 million in 2009. In addition, Old
National had $1.1 million and $9.8 million as of December 31, 2010 and 2009, respectively, in cash
and due from banks which was held as collateral for collateralized swap positions.
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. During the first quarter of 2009, Old National Bank received permission
to pay a $40 million dividend. Old National used the cash obtained from the dividend to repurchase
the $100 million of non-voting preferred shares from the U.S. Treasury. As a result of this
special dividend, 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 2010 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.
104
Table of Contents
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, 2010, 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.
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 | ||||||||||||||||||
|
2010
|
||||||||||||||||||||||||
|
Total capital to
risk-weighted assets
|
||||||||||||||||||||||||
|
Old National Bancorp
|
$ | 699,871 | 14.83 | % | $ | 377,669 | 8.00 | % | $ | N/A | N/A | % | ||||||||||||
|
Old National Bank
|
576,533 | 12.43 | 370,968 | 8.00 | 463,710 | 10.00 | ||||||||||||||||||
|
Tier 1 capital to
risk-weighted assets
|
||||||||||||||||||||||||
|
Old National Bancorp
|
640,469 | 13.57 | 188,835 | 4.00 | N/A | N/A | ||||||||||||||||||
|
Old National Bank
|
518,165 | 11.17 | 185,454 | 4.00 | 278,226 | 6.00 | ||||||||||||||||||
|
Tier 1 capital to
average assets
|
||||||||||||||||||||||||
|
Old National Bancorp
|
640,469 | 9.01 | 284,226 | 4.00 | N/A | N/A | ||||||||||||||||||
|
Old National Bank
|
518,165 | 7.37 | 281,242 | 4.00 | 351,552 | 5.00 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
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 | 302,029 | 4.00 | 377,536 | 5.00 | ||||||||||||||||||
105
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) | 2010 | 2009 | ||||||
|
Assets
|
||||||||
|
Deposits in affiliate bank
|
$ | 26,653 | $ | 22,111 | ||||
|
Investment securities — available for sale
|
976 | 445 | ||||||
|
Investment in affiliates:
|
||||||||
|
Banking subsidiaries
|
703,949 | 661,272 | ||||||
|
Non-banks
|
45,330 | 47,762 | ||||||
|
Advances to affiliates
|
45,177 | 196,029 | ||||||
|
Other assets
|
83,026 | 95,451 | ||||||
|
|
||||||||
|
Total assets
|
$ | 905,111 | $ | 1,023,070 | ||||
|
|
||||||||
|
Liabilities and Shareholders’ Equity
|
||||||||
|
Other liabilities
|
$ | 18,342 | $ | 21,970 | ||||
|
Other borrowings
|
7,964 | 157,274 | ||||||
|
Shareholders’ equity
|
878,805 | 843,826 | ||||||
|
|
||||||||
|
Total liabilities and shareholders’ equity
|
$ | 905,111 | $ | 1,023,070 | ||||
|
|
||||||||
OLD NATIONAL BANCORP (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF INCOME
CONDENSED STATEMENTS OF INCOME
| Years Ended December 31, | ||||||||||||
| (dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
|
Income
|
||||||||||||
|
Dividends from affiliates
|
$ | 27,744 | $ | 94,958 | $ | 92,700 | ||||||
|
Net securities gains
|
— | 666 | — | |||||||||
|
Other income
|
1,020 | 647 | 2,493 | |||||||||
|
Other income from affiliates
|
435 | 869 | 92 | |||||||||
|
|
||||||||||||
|
Total income
|
29,199 | 97,140 | 95,285 | |||||||||
|
|
||||||||||||
|
Expense
|
||||||||||||
|
Interest on borrowings
|
9,165 | 11,618 | 15,331 | |||||||||
|
Other expenses
|
11,672 | 10,222 | 7,798 | |||||||||
|
|
||||||||||||
|
Total expense
|
20,837 | 21,840 | 23,129 | |||||||||
|
|
||||||||||||
|
Income before income taxes and equity
in undistributed earnings of affiliates
|
8,362 | 75,300 | 72,156 | |||||||||
|
Income tax benefit
|
(7,833 | ) | (8,063 | ) | (9,358 | ) | ||||||
|
|
||||||||||||
|
Income before equity in undistributed
earnings of affiliates
|
16,195 | 83,363 | 81,514 | |||||||||
|
Equity in undistributed earnings of affiliates
|
22,019 | — | — | |||||||||
|
Dividends receivable from affiliates in
excess of earnings
|
— | (69,626 | ) | (19,036 | ) | |||||||
|
|
||||||||||||
|
Net Income
|
$ | 38,214 | $ | 13,737 | $ | 62,478 | ||||||
|
|
||||||||||||
106
Table of Contents
OLD NATIONAL BANCORP (PARENT COMPANY ONLY)
CONDENSED STATEMENT OF CASH FLOWS
CONDENSED STATEMENT OF CASH FLOWS
| Years Ended December 31, | ||||||||||||
| (dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
|
Cash Flows From Operating Activities
|
||||||||||||
|
Net income
|
$ | 38,214 | $ | 13,737 | $ | 62,478 | ||||||
|
|
||||||||||||
|
Adjustments to reconcile net income to cash
provided by operating activities:
|
||||||||||||
|
Depreciation
|
49 | 67 | 106 | |||||||||
|
Net premium (discount) on investment securities
|
— | 434 | — | |||||||||
|
Net securities (gains) losses
|
— | (663 | ) | — | ||||||||
|
Stock option expense
|
253 | 392 | 407 | |||||||||
|
Restricted stock expense
|
2,116 | 918 | 1,597 | |||||||||
|
Net losses on sales and write-downs of premises and equipment
|
— | — | — | |||||||||
|
(Increase) decrease in other assets
|
13,064 | (6,302 | ) | (6,479 | ) | |||||||
|
(Decrease) increase in other liabilities
|
(3,414 | ) | 2,450 | (504 | ) | |||||||
|
Equity in undistributed earnings of affiliates
|
(22,019 | ) | — | — | ||||||||
|
Dividends received from affiliates in excess of earnings
|
— | 69,626 | 19,036 | |||||||||
|
|
||||||||||||
|
Total adjustments
|
(9,951 | ) | 66,922 | 14,163 | ||||||||
|
|
||||||||||||
|
Net cash flows provided by operating activities
|
28,263 | 80,659 | 76,641 | |||||||||
|
|
||||||||||||
|
Cash Flows From Investing Activities
|
||||||||||||
|
Transfer subsidiary from parent to bank subsidairy
|
791 | — | — | |||||||||
|
Purchases of investment securities available-for-sale
|
(500 | ) | (191,994 | ) | (296 | ) | ||||||
|
Proceeds from sales of investment securities available-for-sale
|
— | 192,222 | — | |||||||||
|
Net payments from (advances to) affiliates
|
150,852 | (145,989 | ) | (50,039 | ) | |||||||
|
Purchases of premises and equipment
|
(7 | ) | — | (82 | ) | |||||||
|
|
||||||||||||
|
Net cash flows provided by (used in) investing activities
|
151,136 | (145,761 | ) | (50,417 | ) | |||||||
|
|
||||||||||||
|
Cash Flows From Financing Activities
|
||||||||||||
|
Payments related to retirement of debt
|
(150,000 | ) | — | — | ||||||||
|
Payments for maturities on other borrowings
|
— | — | (100,000 | ) | ||||||||
|
Cash dividends paid on common stock
|
(24,361 | ) | (30,380 | ) | (60,801 | ) | ||||||
|
Cash dividends paid on preferred stock
|
— | (1,514 | ) | — | ||||||||
|
Common stock repurchased
|
(705 | ) | (353 | ) | (457 | ) | ||||||
|
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
|
12 | 97 | 1,940 | |||||||||
|
Common stock issued
|
197 | 197,756 | — | |||||||||
|
|
||||||||||||
|
Net cash flows provided by (used in) financing activities
|
(174,857 | ) | 64,406 | (59,433 | ) | |||||||
|
|
||||||||||||
|
Net increase (decrease) in cash and cash equivalents
|
4,542 | (696 | ) | (33,209 | ) | |||||||
|
Cash and cash equivalents at beginning of period
|
22,111 | 22,807 | 56,016 | |||||||||
|
|
||||||||||||
|
Cash and cash equivalents at end of period
|
$ | 26,653 | $ | 22,111 | $ | 22,807 | ||||||
|
|
||||||||||||
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.
107
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 | ||||||||||||
|
2010
|
||||||||||||||||
|
Net interest income
|
$ | 252,519 | $ | (30,378 | ) | $ | (3,725 | ) | $ | 218,416 | ||||||
|
Provision for loan losses
|
30,806 | — | (25 | ) | 30,781 | |||||||||||
|
Noninterest income
|
88,037 | 17,871 | 64,242 | 170,150 | ||||||||||||
|
Noninterest expense
|
236,642 | 13,803 | 63,860 | 314,305 | ||||||||||||
|
Income (loss) before income taxes
|
73,108 | (26,310 | ) | (3,318 | ) | 43,480 | ||||||||||
|
Total assets
|
3,759,529 | 3,396,189 | 108,174 | 7,263,892 | ||||||||||||
|
|
||||||||||||||||
|
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 | ||||||||||||
The 2010 community banking segment profit increased $25.1 million from 2009 levels, primarily
as a result of a decrease in provision for loan loss expense and lower FDIC assessment expense.
The 2010 treasury segment profit increased $23.8 million from 2009 primarily as a result of the
$20.9 million decrease in other-than-temporary-impairment in 2010. The 2010 “other” segment profit
increased approximately $2.0 million from 2009 primarily as a result of lower expenses in the
insurance agency area.
108
Table of Contents
The following table details the quarterly results of operations for the years ended December 31,
2010 and 2009.
INTERIM FINANCIAL DATA
| (unaudited, dollars | Quarters Ended 2010 | Quarters Ended 2009 | ||||||||||||||||||||||||||||||
| 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
|
$ | 70,965 | $ | 72,945 | $ | 75,596 | $ | 77,342 | $ | 80,090 | $ | 83,422 | $ | 89,182 | $ | 87,983 | ||||||||||||||||
|
Interest expense
|
16,988 | 18,777 | 20,442 | 22,225 | 25,067 | 27,011 | 28,415 | 28,785 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Net interest income
|
53,977 | 54,168 | 55,154 | 55,117 | 55,023 | 56,411 | 60,767 | 59,198 | ||||||||||||||||||||||||
|
Provision for loan losses
|
7,100 | 6,400 | 8,000 | 9,281 | 21,821 | 12,191 | 11,968 | 17,300 | ||||||||||||||||||||||||
|
Noninterest income
|
42,205 | 41,979 | 42,974 | 42,992 | 36,616 | 39,003 | 45,606 | 42,235 | ||||||||||||||||||||||||
|
Noninterest expense
|
83,272 | 76,102 | 77,871 | 77,060 | 90,775 | 83,966 | 86,751 | 77,464 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Income (loss) before income taxes
|
5,810 | 13,645 | 12,257 | 11,768 | (20,957 | ) | (743 | ) | 7,654 | 6,669 | ||||||||||||||||||||||
|
Income tax expense (benefit)
|
84 | 1,749 | 1,734 | 1,699 | (11,637 | ) | (4,760 | ) | (1,981 | ) | (2,736 | ) | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Net income (loss)
|
5,726 | 11,896 | 10,523 | 10,069 | (9,320 | ) | 4,017 | 9,635 | 9,405 | |||||||||||||||||||||||
|
Preferred stock dividends and
discount accretion
|
— | — | — | — | — | — | — | (3,892 | ) | |||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Net income (loss) attributable to
common stockholders
|
$ | 5,726 | $ | 11,896 | $ | 10,523 | $ | 10,069 | $ | (9,320 | ) | $ | 4,017 | $ | 9,635 | $ | 5,513 | |||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Net income (loss) per share:
|
||||||||||||||||||||||||||||||||
|
Basic
|
$ | 0.07 | $ | 0.13 | $ | 0.12 | $ | 0.12 | $ | (0.11 | ) | $ | 0.06 | $ | 0.15 | $ | 0.08 | |||||||||||||||
|
Diluted
|
0.07 | 0.13 | 0.12 | 0.12 | (0.11 | ) | 0.06 | 0.15 | 0.08 | |||||||||||||||||||||||
|
Average shares
|
||||||||||||||||||||||||||||||||
|
Basic
|
86,804 | 86,795 | 86,786 | 86,752 | 86,701 | 66,635 | 65,950 | 65,793 | ||||||||||||||||||||||||
|
Diluted
|
87,005 | 86,931 | 86,911 | 86,797 | 86,701 | 66,706 | 65,999 | 65,882 | ||||||||||||||||||||||||
Interest income and interest expense decreased in 2010 primarily due to the lower interest
rate environment.
The lower provision for loan losses in 2010 is primarily attributable to the decrease 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 decreased in 2010 primarily due to decreases in salaries and benefits expense,
marketing expense, FDIC assessment expense and other noninterest expenses. Income taxes increased
in 2010 because tax-exempt income comprised a lower percentage of total income and pre-tax income
was higher than in 2009.
109
Table of Contents
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Not applicable.
| ITEM 9A. | CONTROLS AND PROCEDURES |
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-15(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 last fiscal quarter 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.”
| ITEM 9B. | OTHER INFORMATION |
None.
110
Table of Contents
| ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT |
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,
2010. The applicable information appearing in the Proxy Statement for the 2011 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.
| ITEM 11. | EXECUTIVE COMPENSATION |
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,
2010. The applicable information appearing in our Proxy Statement for the 2011 annual meeting is
incorporated by reference.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
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, 2010. The applicable information appearing
in the Proxy Statement for the 2011 annual meeting is incorporated by reference.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
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,
2010. The applicable information appearing in the Proxy Statement for the 2011 annual meeting is
incorporated by reference.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
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,
2010. The applicable information appearing in the Proxy Statement for the 2011 annual meeting is
incorporated by reference.
111
Table of Contents
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
| 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, 2010 and 2009
|
||||
|
Consolidated Statements of Income—Years Ended December 31, 2010, 2009 and 2008
|
||||
|
Consolidated Statements of Changes in Shareholders’ Equity—Years Ended December 31, 2010, 2009 and 2008
|
||||
|
Consolidated Statements of Cash Flows—Years Ended December 31, 2010, 2009 and 2008
|
||||
|
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) and amended on March 20, 2009 (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).
|
|||
|
|
||||
| 2.2 |
Agreement and Plan of Merger dated as of October 5, 2010 by and among Old National Bancorp and Monroe
Bancorp (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 October 6, 2010).
|
|||
|
|
||||
| 3.1 |
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).
|
|||
|
|
||||
| 3.2 |
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).
|
|||
112
Table of Contents
| Exhibit | ||||
| Number | ||||
| 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 |
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).
|
|||
|
|
||||
| 4.4 |
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).*
|
|||
113
Table of Contents
| Exhibit | ||||
| Number | ||||
| (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).*
|
|||
|
|
||||
| (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).
|
|||
114
Table of Contents
| Exhibit | ||||
| Number | ||||
| (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).
|
|||
|
|
||||
| (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) |
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).*
|
|||
|
|
||||
| (ae) |
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).
|
|||
|
|
||||
| (af) |
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).
|
|||
|
|
||||
| (ag) |
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).*
|
|||
|
|
||||
| (ah) |
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).*
|
|||
|
|
||||
| (ai) |
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).*
|
|||
115
Table of Contents
| Exhibit | ||||
| Number | ||||
| (aj) |
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).*
|
|||
|
|
||||
| (ak) |
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).
|
|||
|
|
||||
| (al) |
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).
|
|||
|
|
||||
| (am) |
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).
|
|||
|
|
||||
| (an) |
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).
|
|||
|
|
||||
| (ao) |
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).
|
|||
|
|
||||
| (ap) |
Form of 2010 Performance Share Award Agreement — Internal Performance Measures between Old National
and certain key associates (incorporated by reference to Exhibit 10(as) of Old National’s Annual
Report on Form 10-K for the year ended December 31, 2009).*
|
|||
|
|
||||
| (aq) |
Form of 2010 Performance Share Award Agreement — Relative Performance Measures between Old National
and certain key associates (incorporated by reference to Exhibit 10(at) of Old National’s Annual
Report on Form 10-K for the year ended December 31, 2009).*
|
|||
|
|
||||
| (ar) |
Form of 2010 “Service Based” Restricted Stock Award Agreement between Old National and certain key
associates (incorporated by reference to Exhibit 10(au) of Old National’s Annual Report on Form 10-K
for the year ended December 31, 2009).*
|
|||
|
|
||||
| (as) |
Voting agreement by and among directors of Monroe Bancorp (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
October 6, 2010).*
|
|||
|
|
||||
| (at) |
Form of Employment Agreement for Robert G. Jones (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 January 27,
2011).*
|
|||
|
|
||||
| (au) |
Form of Employment Agreement for Barbara A. Murphy, Christopher A. Wolking, Allen R. Mounts and Daryl
D. Moore (incorporated by reference to Exhibit 10.2 of Old National’s Current Report on Form 8-K with
the Securities and Exchange Commission on January 27, 2011).*
|
|||
|
|
||||
| (av) |
Form of 2011 Performance Share Award Agreement — Internal Performance Measures between Old National
and certain key associates is filed herewith.*
|
|||
|
|
||||
| (aw) |
Form of 2011 Performance Share Award Agreement — Relative Performance Measures between Old National
and certain key associates is filed herewith.*
|
|||
116
Table of Contents
| Exhibit | ||||
| Number | ||||
| (ax) |
Form of 2011 “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.
|
|||
|
|
||||
| 101 |
The following materials from Old National Bancorp’s Annual Report on Form 10-K Report for the year
ended December 31, 2010, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated
Statements of Income, (iii) the Consolidated Statements of Changes in Shareholders’ Equity, (iv) the
Consolidated Statements of Cash Flows, and (v) the Notes to Consolidated Financial Statements, tagged
as blocks of text.**
|
|||
| * | Management contract or compensatory plan or arrangement | |
| ** | Furnished, not filed |
117
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 25, 2011 | ||
|
|
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 25, 2011, by the following persons on behalf of Old National and in the capacities indicated.
|
By:
|
/s/ Joseph D. Barnette, Jr.
|
By: |
/s/ Robert G. Jones
|
|||||||
|
|
President and Chief Executive Officer | |||||||||
|
|
(Principal Executive Officer) | |||||||||
|
|
||||||||||
|
By:
|
/s/ Alan W. Braun | By: | /s/ Marjorie Z. Soyugenc | |||||||
|
|
||||||||||
|
|
Alan W. Braun, Director | Marjorie Z. Soyugenc, Director | ||||||||
|
|
||||||||||
|
By:
|
/s/ Larry E. Dunigan | By: | /s/ Kelly N. Stanley | |||||||
|
|
||||||||||
|
|
Larry E. Dunigan, | Kelly N. Stanley, Director | ||||||||
|
|
Chairman of the Board of Directors | |||||||||
|
|
||||||||||
|
By:
|
/s/ Arthur H. McElwee Jr. | By: | /s/ Linda E. White | |||||||
|
|
||||||||||
|
|
Arthur H. McElwee Jr., Director | Linda E. White, Director | ||||||||
|
|
||||||||||
|
By:
|
/s/ Niel C. Ellerbrook | By: | /s/ Christopher A. Wolking | |||||||
|
|
||||||||||
|
|
Niel C. Ellerbrook, Director | Christopher A. Wolking, | ||||||||
|
|
Senior Executive Vice President | |||||||||
|
By:
|
/s/ Andrew E. Goebel
|
Financial Officer (Principal Financial Officer) | ||||||||
|
|
||||||||||
|
By:
|
/s/ Phelps L. Lambert | By: | /s/ Joan M. Kissel | |||||||
|
|
||||||||||
|
|
Phelps L. Lambert, Director | Joan M. Kissel, | ||||||||
|
|
Senior Vice President and Corporate Controller | |||||||||
|
|
(Principal Accounting Officer) | |||||||||
|
|
||||||||||
|
By:
|
/s/ James T. Morris
|
|||||||||
|
|
James T. Morris, Director |
118
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. (removed and Reserved)Part 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 Finance Receivables and Allowance For Credit LossesNote 6 Goodwill and Other Intangible AssetsNote 7 DepositsNote 8 Short-term BorrowingsNote 9 Financing ActivitiesNote 10 Income TaxesNote 11 Employee Benefit PlansNote 12 Stock-based CompensationNote 13 Outside Director Stock Compensation ProgramNote 14 Shareholders EquityNote 15 Fair ValueNote 16 Derivative Financial InstrumentsNote 17 Commitments and ContingenciesNote 18 Financial GuaranteesNote 19 Regulatory RestrictionsNote 20 Parent Company Financial StatementsNote 21 Segment InformationNote 22 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