Filed by Bowne Pure Compliance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2008
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-15817
OLD NATIONAL BANCORP
(Exact name of Registrant as specified in its charter)
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INDIANA
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35-1539838 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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1 Main Street
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47708 |
Evansville, Indiana
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(Zip Code) |
(Address of principal executive offices) |
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(812) 464-1294
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to the filing requirements for at least the past 90 days. Yes þ No 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.
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock. The Registrant has one class of common stock (no par value) with 66,202,000 shares outstanding at April 30, 2008.
OLD NATIONAL BANCORP
FORM 10-Q
INDEX
2
OLD
NATIONAL BANCORP
CONSOLIDATED BALANCE SHEET
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March 31, |
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December 31, |
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March 31, |
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(dollars and shares in thousands, except per share data) |
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2008 |
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2007 |
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2007 |
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(unaudited) |
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(unaudited) |
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Assets |
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Cash and due from banks |
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$ |
228,734 |
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$ |
255,192 |
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$ |
177,585 |
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Federal funds sold and resell agreements |
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330,000 |
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Money market investments |
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72,843 |
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8,480 |
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30,105 |
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Total cash and cash equivalents |
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301,577 |
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263,672 |
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537,690 |
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Investment securities available-for-sale, at fair value
U.S. Government-sponsored entities and agencies |
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469,311 |
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688,947 |
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582,901 |
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Mortgage-backed securities |
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1,012,127 |
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940,967 |
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1,029,772 |
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States and political subdivisions |
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294,310 |
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294,884 |
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267,030 |
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Other securities |
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210,567 |
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215,843 |
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196,458 |
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Investment securities available-for-sale |
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1,986,315 |
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2,140,641 |
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2,076,161 |
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Investment securities held-to-maturity, at amortized cost
(fair value $120,067, $124,504 and $149,184 respectively) |
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119,380 |
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126,769 |
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153,232 |
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Federal Home Loan Bank stock, at cost |
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41,090 |
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41,090 |
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41,170 |
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Residential loans held for sale, at fair value |
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10,155 |
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13,000 |
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18,976 |
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Loans: |
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Commercial |
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1,740,278 |
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1,694,736 |
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1,667,194 |
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Commercial real estate |
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1,235,302 |
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1,270,408 |
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1,454,150 |
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Residential real estate |
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528,534 |
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533,448 |
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560,780 |
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Consumer credit, net of unearned income |
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1,176,708 |
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1,187,764 |
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1,199,108 |
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Total loans |
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4,680,822 |
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4,686,356 |
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4,881,232 |
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Allowance for loan losses |
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(72,250 |
) |
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(56,463 |
) |
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(71,330 |
) |
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Net loans |
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4,608,572 |
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4,629,893 |
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4,809,902 |
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Premises and equipment, net |
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45,775 |
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48,652 |
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54,123 |
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Accrued interest receivable |
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44,489 |
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50,277 |
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49,908 |
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Goodwill |
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159,198 |
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159,198 |
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159,850 |
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Other intangible assets |
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31,102 |
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31,778 |
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34,533 |
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Company-owned life insurance |
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216,917 |
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214,486 |
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209,091 |
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Assets held for sale |
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2,996 |
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3,969 |
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70,322 |
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Other assets |
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155,900 |
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122,701 |
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116,686 |
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Total assets |
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$ |
7,723,466 |
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$ |
7,846,126 |
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$ |
8,331,644 |
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Liabilities |
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Deposits: |
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Noninterest-bearing demand |
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$ |
861,114 |
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$ |
855,449 |
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$ |
859,402 |
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Interest-bearing: |
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NOW |
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1,312,216 |
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1,410,667 |
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1,635,796 |
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Savings |
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923,367 |
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774,054 |
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581,675 |
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Money market |
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517,776 |
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562,127 |
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851,049 |
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Time (including $41,429, $0 and $0, respectively, at fair value) |
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1,732,012 |
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2,061,086 |
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2,681,814 |
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Total deposits |
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5,346,485 |
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5,663,383 |
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6,609,736 |
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Short-term borrowings |
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640,503 |
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638,247 |
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380,966 |
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Other borrowings |
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834,888 |
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656,722 |
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|
592,473 |
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Accrued expenses and other liabilities |
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226,197 |
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234,893 |
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107,798 |
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Total liabilities |
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7,048,073 |
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7,193,245 |
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7,690,973 |
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Shareholders Equity |
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Preferred stock, 2,000 shares authorized, no shares issued or outstanding |
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Common stock, $1 stated value, 150,000 shares authorized,
66,202, 66,205 and 66,416 shares issued and outstanding, respectively |
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66,202 |
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66,205 |
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66,416 |
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Capital surplus |
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564,397 |
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563,675 |
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|
565,827 |
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Retained earnings |
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53,563 |
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|
34,346 |
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28,699 |
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Accumulated other comprehensive loss, net of tax |
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(8,769 |
) |
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(11,345 |
) |
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(20,271 |
) |
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Total shareholders equity |
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675,393 |
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652,881 |
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640,671 |
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Total liabilities and shareholders equity |
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$ |
7,723,466 |
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$ |
7,846,126 |
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$ |
8,331,644 |
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The accompanying notes to consolidated financial statements are an integral part of these statements.
3
OLD
NATIONAL BANCORP
CONSOLIDATED STATEMENT OF INCOME (unaudited)
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Three Months Ended |
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March 31, |
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(dollars in thousands, except per share data) |
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2008 |
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2007 |
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Interest Income |
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Loans including fees: |
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Taxable |
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$ |
71,128 |
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$ |
79,663 |
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Nontaxable |
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|
5,461 |
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5,252 |
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Investment securities, available-for-sale: |
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Taxable |
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|
22,562 |
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|
23,122 |
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Nontaxable |
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|
3,221 |
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|
3,103 |
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Investment securities, held-to-maturity, taxable |
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|
1,430 |
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|
1,831 |
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Money market investments |
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|
332 |
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|
3,341 |
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Total interest income |
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|
104,134 |
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|
116,312 |
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|
|
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Interest Expense |
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|
|
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|
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Deposits |
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|
29,736 |
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|
50,321 |
|
Short-term borrowings |
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|
3,929 |
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|
3,796 |
|
Other borrowings |
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|
10,679 |
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|
|
10,393 |
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|
|
|
|
|
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Total interest expense |
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|
44,344 |
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|
|
64,510 |
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|
|
|
|
|
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Net interest income |
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|
59,790 |
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|
|
51,802 |
|
Provision for loan losses |
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|
21,905 |
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|
|
2,445 |
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|
|
|
|
|
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|
Net interest income after provision for loan losses |
|
|
37,885 |
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|
|
49,357 |
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|
|
|
|
|
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|
Noninterest Income |
|
|
|
|
|
|
|
|
Wealth management fees |
|
|
4,569 |
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|
|
4,892 |
|
Service charges on deposit accounts |
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|
10,238 |
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|
|
10,233 |
|
ATM fees |
|
|
4,034 |
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|
|
3,176 |
|
Mortgage banking revenue |
|
|
1,233 |
|
|
|
956 |
|
Insurance premiums and commissions |
|
|
12,069 |
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|
|
10,639 |
|
Investment product fees |
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|
2,718 |
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|
|
2,856 |
|
Company-owned life insurance |
|
|
2,760 |
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|
|
2,379 |
|
Net securities gains (losses) |
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|
4,519 |
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|
(2,667 |
) |
Gain (loss) on derivatives |
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|
(616 |
) |
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|
14 |
|
Gain on sale leaseback |
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|
1,565 |
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|
|
87 |
|
Other income |
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|
3,787 |
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|
|
2,192 |
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|
|
|
|
|
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Total noninterest income |
|
|
46,876 |
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|
34,757 |
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|
|
|
|
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|
|
Noninterest Expense |
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
42,328 |
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|
|
41,348 |
|
Occupancy |
|
|
9,645 |
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|
6,360 |
|
Equipment |
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|
2,568 |
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|
|
3,056 |
|
Marketing |
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|
2,044 |
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|
|
2,349 |
|
Data processing |
|
|
4,622 |
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|
|
5,054 |
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Communication |
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|
2,311 |
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|
|
2,383 |
|
Professional fees |
|
|
1,658 |
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|
|
1,956 |
|
Loan expense |
|
|
1,251 |
|
|
|
1,187 |
|
Supplies |
|
|
884 |
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|
|
1,027 |
|
Loss on extinguishment of debt |
|
|
207 |
|
|
|
1,234 |
|
Impairment of long-lived assets |
|
|
|
|
|
|
1,163 |
|
Other expense |
|
|
3,418 |
|
|
|
5,916 |
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
70,936 |
|
|
|
73,033 |
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
13,825 |
|
|
|
11,081 |
|
Income tax expense (benefit) |
|
|
(5,515 |
) |
|
|
291 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
19,340 |
|
|
$ |
10,790 |
|
|
|
|
|
|
|
|
Net income per common share |
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
0.29 |
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|
$ |
0.16 |
|
Diluted net income per share |
|
|
0.29 |
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|
|
0.16 |
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
|
|
|
|
|
|
|
|
Basic |
|
|
65,623 |
|
|
|
65,806 |
|
Diluted |
|
|
65,754 |
|
|
|
65,863 |
|
|
|
|
|
|
|
|
Dividends per common share (1) |
|
$ |
|
|
|
$ |
0.22 |
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(1) |
|
A $0.23 cash dividend was paid in the first quarter of 2008. However, the
first quarter dividend was declared in December 2007 and is included in fourth
quarter 2007 results.
|
The accompanying notes to consolidated financial statements are an integral part of these
statements.
4
OLD
NATIONAL BANCORP
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY (unaudited)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
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|
Other |
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|
Total |
|
|
|
|
(dollars and shares |
|
Common Stock |
|
|
Capital |
|
|
Retained |
|
|
Comprehensive |
|
|
Shareholders |
|
|
Comprehensive |
|
in thousands) |
|
Shares |
|
|
Amount |
|
|
Surplus |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Equity |
|
|
Income |
|
Balance, December 31, 2006 |
|
|
66,503 |
|
|
$ |
66,503 |
|
|
$ |
565,106 |
|
|
$ |
35,873 |
|
|
$ |
(25,113 |
) |
|
$ |
642,369 |
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,790 |
|
|
|
|
|
|
|
10,790 |
|
|
$ |
10,790 |
|
Other comprehensive income (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss) on
securities available for sale, net of
reclassification and tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,735 |
|
|
|
4,735 |
|
|
|
4,735 |
|
Reclassification adjustment on
cash flows hedges, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107 |
|
|
|
107 |
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
15,632 |
|
Adjustment to apply FIN No. 48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,368 |
) |
|
|
|
|
|
|
(3,368 |
) |
|
|
|
|
Adjustment to apply EITF No. 06-5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(118 |
) |
|
|
|
|
|
|
(118 |
) |
|
|
|
|
Cash dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,478 |
) |
|
|
|
|
|
|
(14,478 |
) |
|
|
|
|
Stock repurchased |
|
|
(8 |
) |
|
|
(8 |
) |
|
|
(142 |
) |
|
|
|
|
|
|
|
|
|
|
(150 |
) |
|
|
|
|
Stock based compensation expense |
|
|
|
|
|
|
|
|
|
|
232 |
|
|
|
|
|
|
|
|
|
|
|
232 |
|
|
|
|
|
Stock issued (forfeited) under
restricted stock and stock
compensation plans |
|
|
(79 |
) |
|
|
(79 |
) |
|
|
79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options issued in acquisition |
|
|
|
|
|
|
|
|
|
|
552 |
|
|
|
|
|
|
|
|
|
|
|
552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2007 |
|
|
66,416 |
|
|
$ |
66,416 |
|
|
$ |
565,827 |
|
|
$ |
28,699 |
|
|
$ |
(20,271 |
) |
|
$ |
640,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007 |
|
|
66,205 |
|
|
$ |
66,205 |
|
|
$ |
563,675 |
|
|
$ |
34,346 |
|
|
$ |
(11,345 |
) |
|
$ |
652,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,340 |
|
|
|
|
|
|
|
19,340 |
|
|
$ |
19,340 |
|
Other comprehensive income (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss) on
securities available for sale, net of
reclassification and tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,438 |
|
|
|
2,438 |
|
|
|
2,438 |
|
Reclassification adjustment on
cash flows hedges, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43 |
|
|
|
43 |
|
|
|
43 |
|
Reclassification adjustment on
defined benefit pension plans, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95 |
|
|
|
95 |
|
|
|
95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
21,916 |
|
Other adjustments |
|
|
|
|
|
|
|
|
|
|
47 |
|
|
|
(123 |
) |
|
|
|
|
|
|
(76 |
) |
|
|
|
|
Stock repurchased |
|
|
(13 |
) |
|
|
(13 |
) |
|
|
(213 |
) |
|
|
|
|
|
|
|
|
|
|
(226 |
) |
|
|
|
|
Exercise of stock options,
including tax benefits |
|
|
1 |
|
|
|
1 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
24 |
|
|
|
|
|
Stock based compensation expense |
|
|
|
|
|
|
|
|
|
|
874 |
|
|
|
|
|
|
|
|
|
|
|
874 |
|
|
|
|
|
Stock issued (forfeited) under
restricted stock and stock
compensation plans |
|
|
9 |
|
|
|
9 |
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2008 |
|
|
66,202 |
|
|
$ |
66,202 |
|
|
$ |
564,397 |
|
|
$ |
53,563 |
|
|
$ |
(8,769 |
) |
|
$ |
675,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 5 to the consolidated financial statements.
|
The accompanying notes to consolidated financial statements are an integral part of these
statements.
5
OLD
NATIONAL BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(dollars in thousands) |
|
2008 |
|
|
2007 |
|
Cash Flows From Operating Activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
19,340 |
|
|
$ |
10,790 |
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
1,493 |
|
|
|
2,687 |
|
Amortization of other intangible assets and goodwill impairment |
|
|
876 |
|
|
|
743 |
|
Net discount accretion on investment securities |
|
|
(443 |
) |
|
|
(597 |
) |
Restricted stock expense |
|
|
765 |
|
|
|
165 |
|
Stock option expense |
|
|
109 |
|
|
|
66 |
|
Provision for loan losses |
|
|
21,905 |
|
|
|
2,445 |
|
Net securities (gains) losses |
|
|
(4,519 |
) |
|
|
2,667 |
|
Gain on sale leaseback |
|
|
(1,565 |
) |
|
|
(87 |
) |
(Gain) loss on derivatives |
|
|
616 |
|
|
|
(14 |
) |
Net (gains) losses on sales and write-downs of loans and other assets |
|
|
(780 |
) |
|
|
711 |
|
Loss on retirement of debt |
|
|
207 |
|
|
|
1,234 |
|
Increase in cash surrender value of company owned life insurance |
|
|
(2,431 |
) |
|
|
(2,221 |
) |
Residential real estate loans originated for sale |
|
|
(43,908 |
) |
|
|
(70,885 |
) |
Proceeds from sale of residential real estate loans |
|
|
47,523 |
|
|
|
69,374 |
|
Decrease in interest receivable |
|
|
5,788 |
|
|
|
5,659 |
|
(Increase) decrease in other assets |
|
|
(31,506 |
) |
|
|
8,510 |
|
Increase (decrease) in accrued expenses and other liabilities |
|
|
4,142 |
|
|
|
(27,269 |
) |
|
|
|
|
|
|
|
Total adjustments |
|
|
(1,728 |
) |
|
|
(6,812 |
) |
|
|
|
|
|
|
|
Net cash flows provided by operating activities |
|
|
17,612 |
|
|
|
3,978 |
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities |
|
|
|
|
|
|
|
|
Cash and cash equivalents of subsidiaries acquired, net |
|
|
|
|
|
|
17,429 |
|
Purchase of subsidiaries |
|
|
|
|
|
|
(78,109 |
) |
Purchases of investment securities available-for-sale |
|
|
(417,852 |
) |
|
|
(268,730 |
) |
Proceeds from maturities, prepayments and calls of investment securities available-for-sale |
|
|
480,824 |
|
|
|
306,612 |
|
Proceeds from sales of investment securities available-for-sale |
|
|
100,177 |
|
|
|
145,470 |
|
Proceeds from maturities, prepayments and calls of investment securities held-to-maturity |
|
|
7,201 |
|
|
|
8,645 |
|
Proceeds from redemption of FHLB stock |
|
|
|
|
|
|
758 |
|
Proceeds from sale of loans |
|
|
2,251 |
|
|
|
3,876 |
|
Net principal collected from (loans made to) customers |
|
|
(2,780 |
) |
|
|
139,290 |
|
Proceeds from sale of premises and equipment and other assets |
|
|
4,104 |
|
|
|
328 |
|
Proceeds from sale leaseback of real estate |
|
|
4,542 |
|
|
|
|
|
Purchase of premises and equipment |
|
|
(2,519 |
) |
|
|
(2,568 |
) |
|
|
|
|
|
|
|
Net cash flows provided by investing activities |
|
|
175,948 |
|
|
|
273,001 |
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities |
|
|
|
|
|
|
|
|
Net increase (decrease) in deposits and short-term borrowings: |
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits |
|
|
5,666 |
|
|
|
(57,767 |
) |
Savings, NOW and money market deposits |
|
|
6,510 |
|
|
|
(4,042 |
) |
Time deposits |
|
|
(329,642 |
) |
|
|
(11,936 |
) |
Short-term borrowings |
|
|
2,256 |
|
|
|
39,736 |
|
Payments for maturities on other borrowings |
|
|
(50,077 |
) |
|
|
(1,072 |
) |
Proceeds from issuance of other borrowings |
|
|
225,000 |
|
|
|
|
|
Payments related to retirement of debt |
|
|
|
|
|
|
(187,485 |
) |
Cash dividends paid |
|
|
(15,166 |
) |
|
|
(14,478 |
) |
Common stock repurchased |
|
|
(226 |
) |
|
|
(150 |
) |
Proceeds from exercise of stock options, including tax benefit |
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows used in financing activities |
|
|
(155,655 |
) |
|
|
(237,194 |
) |
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
37,905 |
|
|
|
39,785 |
|
Cash and cash equivalents at beginning of period |
|
|
263,672 |
|
|
|
497,905 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
301,577 |
|
|
$ |
537,690 |
|
|
|
|
|
|
|
|
Total interest paid |
|
$ |
44,719 |
|
|
$ |
62,153 |
|
Total taxes paid (net of refunds) |
|
$ |
5,250 |
|
|
$ |
5,633 |
|
The accompanying notes to consolidated financial statements are an integral part of these statements.
6
OLD
NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the accounts of Old National
Bancorp and its wholly-owned affiliates (Old National) and have been prepared in conformity with
accounting principles generally accepted in the United States of America and prevailing practices
within the banking industry. Such principles require management to make estimates and assumptions
that affect the reported amounts of assets, liabilities and the disclosures of contingent assets
and liabilities at the date of the financial statements and amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. The allowance for loan
losses, 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 March
31, 2008 and 2007, and December 31, 2007, and the results of its operations for the three months
ended March 31, 2008 and 2007. Interim results do not necessarily represent annual results. These
financial statements should be read in conjunction with Old Nationals Annual Report for the year
ended December 31, 2007.
All significant intercompany transactions and balances have been eliminated. Certain prior year
amounts have been reclassified to conform with the 2008 presentation. Such reclassifications had
no effect on net income.
NOTE 2 RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 157 In September 2006, the FASB issued Statement No. 157 Fair Value Measurements. The
standard defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. The standard establishes a fair value hierarchy about
the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a
restriction on the sale or use of an asset. SFAS No. 157 became effective for the Company on
January 1, 2008. See note 19 to the consolidated financial statements for additional information.
FSP SFAS No. 157-2 In February 2008, the FASB issued FASB Staff Position No. 157-2. The staff
position delays the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial
liabilities, except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis. The delay is intended to allow additional time to consider the
effect of various implementation issues with regard to the application of SFAS No. 157. The new
staff position defers the effective date of SFAS No. 157 to January 1, 2009 for items within the
scope of the staff position. The Company is currently evaluating the impact of FSP SFAS No. 157-2
on the consolidated financial statements.
SFAS No. 159 In February 2007, the FASB issued Statement No. 159 The Fair Value Option for
Financial Assets and Financial Liabilities. The standard provides companies with an option to
report selected financial assets and liabilities at fair value and establishes presentation and
disclosure requirements designed to facilitate comparisons between companies that choose different
measurement attributes for similar types of assets and liabilities. On January 1, 2008, the date
this pronouncement became effective for the Company, Old National elected the fair value option on
newly originated residential mortgage loans held for sale and certain retail certificates of
deposit on a prospective basis. See note 19 to the consolidated financial statements for
additional information.
7
SFAS No. 141(R) In December 2007, the FASB issued Statement No. 141(R) Business Combinations.
This statement replaces FASB Statement No. 141 Business Combinations. SFAS No. 141(R)
establishes principles and requirements for how an acquiring company (1) recognizes and measures in
its financial statements the identifiable assets acquired, the liabilities assumed and any
noncontrolling interest in the acquiree, (2) recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase, and (3) determines what information to
disclose to enable users of the financial statements to evaluate the nature and financial effects
of the business combination. The new standard is effective for the Company on January 1, 2009.
The Company is currently evaluating the impact of adopting SFAS No. 141(R) on the consolidated
financial statements.
SFAS No. 160 In December 2007, the FASB issued Statement No. 160 Noncontrolling Interests in
Consolidated Financial Statements an amendment of ARB No. 51. SFAS No. 160 requires the
ownership interests in subsidiaries held by parties other than the parent be clearly identified,
labeled and presented in the consolidated balance sheet within equity, but separate from the
parents equity. It also requires the amount of consolidated net income attributable to the parent
and the noncontrolling interest be clearly identified and presented on the face of the consolidated
statement of income. The new standard is effective for the Company on January 1, 2009. The
Company is currently evaluating the impact of adopting SFAS No. 160 on the consolidated financial
statements.
SFAS No. 161 In March 2008, the FASB issued Statement No. 161 Disclosures about Derivative
Instruments and Hedging Activities an amendment of FASB Statement No. 133. FASB No. 161 requires
enhanced disclosures about how and why an entity uses derivative instruments, how derivative
instruments and related items are accounted for under Statement 133 and how derivative instruments
and related hedged items affect an entitys financial position, financial performance and cash
flows. The new standard is effective for the Company on January 1, 2009. The Company is currently
evaluating the impact of adopting SFAS No. 161 on the consolidated financial statements.
SAB 109 In November 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin
No. 109 (SAB 109). SAB 109 modifies how to apply generally accepted accounting principles to
loan commitments that are accounted for at fair value through earnings. Prior to SAB 109, when
companies measured the fair value of a derivative loan commitment, the expected net future cash
flows related to the associated servicing of the loan was excluded. Under SAB 109, the expected
net future cash flows related to the associated servicing of the loans sold will be included in the
measurement of all written loan commitments that are accounted for at fair value through earnings.
SAB 109 was effective for the Company on January 1, 2008. There was no material impact to Old
Nationals consolidated financial position or results of operations upon adoption.
EITF 06-4 In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-4,
Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar
Life Insurance Arrangements. This EITF Issue addresses accounting for separate agreements which
split life insurance policy benefits between an employer and employee. The Issue requires the
employer to recognize a liability for future benefits payable to the employee under these
agreements. The effects of applying this issue must be recognized through either a change in
accounting principle through an adjustment to equity or through the retrospective application to
all prior periods. EITF 06-4 became effective for the Company on January 1, 2008, and did not have
a material impact on the Companys consolidated financial position or results of operations.
EITF 06-10 In March 2007, the FASB Emerging Issues Task Force reached a consensus on Issue No.
06-10,
Accounting for Deferred Compensation and Postretirement Benefit Aspects of Collateral Assignment
Split-Dollar Life Insurance Arrangements. This Issue provides guidance to help companies determine
whether a liability for the postretirement benefit associated with a collateral assignment
split-dollar life insurance arrangement should be recorded in accordance with either SFAS No. 106
Employers Accounting for Postretirement Benefits Other Than Pensions (if, in substance, a
postretirement benefit plan exists) or Accounting Principles Board Opinion No. 12 (if the
arrangement is, in substance, an individual deferred compensation contract). EITF 06-10 also
provides guidance on how a company should recognize and measure the asset in a collateral
assignment split-dollar life insurance contract. EITF 06-10 became effective for the Company on
January 1, 2008, and did not have a material impact on the Companys consolidated financial
position or results of operations.
8
NOTE 3
ACQUISITION
On February 1, 2007, Old National acquired St. Joseph Capital Corporation (''St. Joseph), a
banking franchise headquartered in Mishawaka, Indiana, for $78.1 million, including acquisition
costs. Pursuant to the merger agreement, the shareholders of St. Joseph received $40.00 in cash
for each share of St. Joseph stock in an all-cash transaction. Goodwill of $46.5 million was
recorded on the date of acquisition and subsequently adjusted to $45.8 million, of which none is
deductible for tax purposes. In addition, intangible assets totaling $14.5 million related to core
deposits and customer relationships were recorded and are being amortized over 10 to 11 years. See
Note 9 to the consolidated financial statements for additional information. On the date of
acquisition, unaudited financial statements of St. Joseph showed assets of $452.9 million, which
included $336.6 million of loans and $78.6 million of securities, $357.3 million of deposits and
year-to-date net interest income and other income of $0.8 million and net loss of $3.3 million.
NOTE 4 NET INCOME PER SHARE
Basic net income per share is computed by dividing net income by the weighted-average number of
common shares outstanding during each period. Diluted net income per share reflects additional
common shares that would have been outstanding if dilutive potential common shares had been issued.
At March 31, 2008 and 2007, stock options to purchase approximately 5.7 million and 6.1 million
shares, respectively, were excluded from the computation of diluted net income per share because
their inclusion would have been anti-dilutive.
The following table reconciles basic and diluted net income per share for the three months ended
March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars and shares |
|
Three Months Ended |
|
|
Three Months Ended |
|
in thousands, |
|
March 31, 2008 |
|
|
March 31, 2007 |
|
except per share data) |
|
Income |
|
|
Shares |
|
|
Amount |
|
|
Income |
|
|
Shares |
|
|
Amount |
|
Basic Net Income Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
$ |
19,340 |
|
|
|
65,623 |
|
|
$ |
0.29 |
|
|
$ |
10,790 |
|
|
|
65,806 |
|
|
$ |
0.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock |
|
|
|
|
|
|
106 |
|
|
|
|
|
|
|
|
|
|
|
27 |
|
|
|
|
|
Stock options |
|
|
|
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Net Income Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations and
assumed conversions |
|
$ |
19,340 |
|
|
|
65,754 |
|
|
$ |
0.29 |
|
|
$ |
10,790 |
|
|
|
65,863 |
|
|
$ |
0.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
NOTE 5
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 three months ended March 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
19,340 |
|
|
$ |
10,790 |
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
Change in securities available for sale: |
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) arising during the period |
|
|
8,344 |
|
|
|
5,268 |
|
Reclassification adjustment for securities (gains) losses realized in income |
|
|
(4,519 |
) |
|
|
2,667 |
|
Income tax effect |
|
|
(1,387 |
) |
|
|
(3,200 |
) |
Cash flow hedges: |
|
|
|
|
|
|
|
|
Net unrealized derivative gains (losses) on cash flow hedges |
|
|
|
|
|
|
|
|
Reclassification adjustment on cash flow hedges |
|
|
71 |
|
|
|
176 |
|
Income tax effect |
|
|
(28 |
) |
|
|
(69 |
) |
Defined benefit pension plans: |
|
|
|
|
|
|
|
|
Amortization of net (gain) loss recognized in income |
|
|
158 |
|
|
|
|
|
Income tax effect |
|
|
(63 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income |
|
|
2,576 |
|
|
|
4,842 |
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
21,916 |
|
|
$ |
15,632 |
|
|
|
|
|
|
|
|
The following table summarizes the changes within each classification of accumulated other
comprehensive income for the three months ended March 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized |
|
|
Defined |
|
|
Accumulated |
|
|
|
Unrealized |
|
|
gain (loss) on |
|
|
benefit |
|
|
other |
|
|
|
gains (losses) |
|
|
cash flow |
|
|
pension |
|
|
comprehensive |
|
(dollars in thousands) |
|
on securities |
|
|
hedges |
|
|
plans |
|
|
income |
|
Balance at December 31, 2007 |
|
$ |
(3,704 |
) |
|
$ |
(655 |
) |
|
$ |
(6,986 |
) |
|
$ |
(11,345 |
) |
Other comprehensive income |
|
|
2,438 |
|
|
|
43 |
|
|
|
95 |
|
|
|
2,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2008 |
|
$ |
(1,266 |
) |
|
$ |
(612 |
) |
|
$ |
(6,891 |
) |
|
$ |
(8,769 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 |
|
$ |
(16,286 |
) |
|
$ |
(998 |
) |
|
$ |
(7,829 |
) |
|
$ |
(25,113 |
) |
Other comprehensive income |
|
|
4,735 |
|
|
|
107 |
|
|
|
|
|
|
|
4,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007 |
|
$ |
(11,551 |
) |
|
$ |
(891 |
) |
|
$ |
(7,829 |
) |
|
$ |
(20,271 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
10
NOTE 6 INVESTMENT SECURITIES
The following table summarizes the amortized cost and fair value of the available-for-sale and
held-to-maturity investment securities portfolio at March 31, 2008 and December 31, 2007 and the
corresponding amounts of unrealized gains and losses therein:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
(dollars in thousands) |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
March 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored entities and agencies |
|
$ |
456,317 |
|
|
$ |
12,994 |
|
|
$ |
|
|
|
$ |
469,311 |
|
Mortgage-backed securities |
|
|
1,029,654 |
|
|
|
5,506 |
|
|
|
(23,033 |
) |
|
|
1,012,127 |
|
States and political subdivisions |
|
|
283,599 |
|
|
|
10,979 |
|
|
|
(268 |
) |
|
|
294,310 |
|
Other securities |
|
|
219,649 |
|
|
|
2,456 |
|
|
|
(11,538 |
) |
|
|
210,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities |
|
$ |
1,989,219 |
|
|
$ |
31,935 |
|
|
$ |
(34,839 |
) |
|
$ |
1,986,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
$ |
103,504 |
|
|
$ |
474 |
|
|
$ |
|
|
|
$ |
103,978 |
|
Other securities |
|
|
15,876 |
|
|
|
213 |
|
|
|
|
|
|
|
16,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held-to-maturity securities |
|
$ |
119,380 |
|
|
$ |
687 |
|
|
$ |
|
|
|
$ |
120,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored entities and agencies |
|
$ |
678,545 |
|
|
$ |
10,757 |
|
|
$ |
(355 |
) |
|
$ |
688,947 |
|
Mortgage-backed securities |
|
|
963,039 |
|
|
|
1,838 |
|
|
|
(23,910 |
) |
|
|
940,967 |
|
States and political subdivisions |
|
|
286,898 |
|
|
|
8,404 |
|
|
|
(418 |
) |
|
|
294,884 |
|
Other securities |
|
|
218,888 |
|
|
|
1,007 |
|
|
|
(4,052 |
) |
|
|
215,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities |
|
$ |
2,147,370 |
|
|
$ |
22,006 |
|
|
$ |
(28,735 |
) |
|
$ |
2,140,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
$ |
107,830 |
|
|
$ |
|
|
|
$ |
(2,237 |
) |
|
$ |
105,593 |
|
Other securities |
|
|
18,939 |
|
|
|
|
|
|
|
(28 |
) |
|
|
18,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held-to-maturity securities |
|
$ |
126,769 |
|
|
$ |
|
|
|
$ |
(2,265 |
) |
|
$ |
124,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2008 and 2007, proceeds from the sales of investment
securities available-for-sale were $100.2 million and $145.5 million, respectively. For the three
months ended March 31, 2008, realized gains were $4.6 million and losses were $0.1 million.
Included in the $4.6 million of gains were $3.4 million of gains related to securities that were
called by the issuers. For the three months ended March 31, 2007, realized gains were $0.2 million
and losses were $2.9 million.
At March 31, 2008, Old National does not believe any individual unrealized loss represents
other-than-temporary impairment. The unrealized losses are primarily attributable to changes in
interest rates and recent market events. Factors considered in evaluating the securities included
whether the securities were backed by U.S. Government-sponsored entities and agencies and credit
quality concerns surrounding the recovery of the full principal balance. At March 31, 2008,
approximately 74% of the mortgage-backed securities held by Old National were issued by U.S.
government-sponsored entities and agencies. Because the decline in market value is attributable to
changes in interest rates and not credit quality, and because the Company has the intent and
ability to hold these mortgage-backed securities until a recovery of fair value, which may be
maturity, the Company does not consider these securities to be other-than-temporarily impaired at
March 31, 2008.
The Companys unrealized losses on other securities relate primarily to its investment in pooled
trust preferred securities. The decline in value is attributable to temporary illiquidity in that
market and not credit quality. Due to the illiquidity in that market, it is unlikely that the
Company would be able to recover its investment in the pooled trust preferred securities if the
Company sold the securities at this time. Because the Company has the intent and ability to hold
these securities until a recovery of fair value, which may be at maturity, it does not consider the
investment in the pooled trust preferred securities to be other-than-temporary impairment at March
31, 2008.
11
NOTE 7 LOANS HELD FOR SALE
Effective January 1, 2008, residential loans that Old National has committed to sell are recorded
at fair value in accordance with SFAS No. 159 The Fair Value Option for Financial Assets and
Financial Liabilities. Prior to this, these residential loans had been recorded at the lower of
cost or market value. At March 31, 2008 and December 31, 2007, Old National had residential loans
held for sale of $10.2 million and $13.0 million, respectively.
During the first quarter of 2008, $2.2 million of commercial loans were reclassified to loans held
for sale and sold, with no write-down on the loans transferred. During the first quarter of 2007,
$3.8 million of commercial real estate loans were transferred to loans held for sale and sold, with
no write-down on the loans transferred.
NOTE 8 ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(dollars in thousands) |
|
2008 |
|
|
2007 |
|
Balance, January 1 |
|
$ |
56,463 |
|
|
$ |
67,790 |
|
Additions: |
|
|
|
|
|
|
|
|
Provision charged to expense |
|
|
21,905 |
|
|
|
2,445 |
|
Allowance of acquired bank |
|
|
|
|
|
|
5,699 |
|
Deductions: |
|
|
|
|
|
|
|
|
Loans charged-off |
|
|
8,689 |
|
|
|
7,704 |
|
Recoveries |
|
|
(2,571 |
) |
|
|
(3,100 |
) |
|
|
|
|
|
|
|
Net charge-offs |
|
|
6,118 |
|
|
|
4,604 |
|
|
|
|
|
|
|
|
Balance, March 31 |
|
$ |
72,250 |
|
|
$ |
71,330 |
|
|
|
|
|
|
|
|
Individually impaired loans were as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
(dollars in thousands) |
|
2008 |
|
|
2007 |
|
Impaired loans without an allowance for loan losses allocation |
|
$ |
12,578 |
|
|
$ |
11,278 |
|
Impaired loans with an allowance for loan losses allocation |
|
|
47,339 |
|
|
|
19,027 |
|
|
|
|
|
|
|
|
Total impaired loans |
|
$ |
59,917 |
|
|
$ |
30,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses allocated to impaired loans |
|
$ |
23,832 |
|
|
$ |
5,904 |
|
|
|
|
|
|
|
|
For the three months ended March 31, 2008 and 2007, the average balance of impaired loans was $45.1
million and $42.1 million, respectively, for which no interest income was recorded. No additional
funds are committed to be advanced in connection with impaired loans. Loans deemed impaired are
evaluated using the fair value of the underlying collateral.
Nonperforming loans were as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
(dollars in thousands) |
|
2008 |
|
|
2007 |
|
Nonaccrual loans |
|
$ |
70,223 |
|
|
$ |
40,816 |
|
Renegotiated loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
$ |
70,223 |
|
|
$ |
40,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Past due loans (90 days or more and still accruing) |
|
$ |
1,547 |
|
|
$ |
1,511 |
|
|
|
|
|
|
|
|
12
Nonperforming loans includes both smaller balance homogeneous loans that are collectively evaluated
for impairment and individually classified impaired loans. Included in nonaccrual loans at March
31, 2008, is $23.0 million related to the misconduct of a former loan officer.
NOTE 9 GOODWILL AND OTHER INTANGIBLE ASSETS
The following table shows the changes in the carrying amount of goodwill by segment for the three
months ended March 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community |
|
|
|
|
|
|
|
(dollars in thousands) |
|
Banking |
|
|
Other |
|
|
Total |
|
Balance, January 1, 2008 |
|
$ |
119,325 |
|
|
$ |
39,873 |
|
|
$ |
159,198 |
|
Adjustments to goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2008 |
|
$ |
119,325 |
|
|
$ |
39,873 |
|
|
$ |
159,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2007 |
|
$ |
73,477 |
|
|
$ |
39,873 |
|
|
$ |
113,350 |
|
Goodwill acquired during the period |
|
|
46,500 |
|
|
|
|
|
|
|
46,500 |
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2007 |
|
$ |
119,977 |
|
|
$ |
39,873 |
|
|
$ |
159,850 |
|
|
|
|
|
|
|
|
|
|
|
Goodwill is reviewed annually for impairment. Old National completed its most recent annual
goodwill impairment test as of August 31, 2007 and determined that no impairment existed as of this
date. Old National recorded $46.5 million of goodwill in the first quarter of 2007 associated with
the acquisition of St. Joseph Capital Corporation.
The gross carrying amount and accumulated amortization of other intangible assets at March 31, 2008
and December 31, 2007 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
(dollars in thousands) |
|
Amount |
|
|
Amortization |
|
|
Amount |
|
March 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Core deposit |
|
$ |
15,623 |
|
|
$ |
(6,230 |
) |
|
$ |
9,393 |
|
Customer business relationships |
|
|
25,753 |
|
|
|
(7,989 |
) |
|
|
17,764 |
|
Customer loan relationships |
|
|
4,413 |
|
|
|
(468 |
) |
|
|
3,945 |
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
$ |
45,789 |
|
|
$ |
(14,687 |
) |
|
$ |
31,102 |
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Core deposit |
|
$ |
15,623 |
|
|
$ |
(5,897 |
) |
|
$ |
9,726 |
|
Customer business relationships |
|
|
25,553 |
|
|
|
(7,546 |
) |
|
|
18,007 |
|
Customer loan relationships |
|
|
4,413 |
|
|
|
(368 |
) |
|
|
4,045 |
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
$ |
45,589 |
|
|
$ |
(13,811 |
) |
|
$ |
31,778 |
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets consist of core deposit intangibles and customer relationship intangibles
and are being amortized primarily on an accelerated basis over their estimated useful lives,
generally over a period of 10 to 25 years. Old National reviews intangible assets for possible
impairment whenever events or changes in circumstances indicate that carrying amounts may not be
recoverable. Old National recorded $14.5 million of other intangibles associated with the
acquisition of St. Joseph Capital Corporation in 2007. Total amortization expense associated with
other intangible assets for the three months ended March 31 was $0.9 million in 2008 and $0.7
million in 2007.
13
Estimated amortization expense for the future years is as follows:
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
2008 remaining |
|
$ |
2,605 |
|
2009 |
|
|
3,319 |
|
2010 |
|
|
3,134 |
|
2011 |
|
|
2,988 |
|
2012 |
|
|
2,811 |
|
Thereafter |
|
|
16,245 |
|
|
|
|
|
Total |
|
$ |
31,102 |
|
|
|
|
|
NOTE 10 ASSETS HELD FOR SALE
Assets held for sale are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
(dollars in thousands) |
|
2008 |
|
|
2007 |
|
Assets held for sale: |
|
|
|
|
|
|
|
|
Land |
|
$ |
895 |
|
|
$ |
21,637 |
|
Building and improvements |
|
|
5,862 |
|
|
|
101,284 |
|
|
|
|
|
|
|
|
Total |
|
|
6,757 |
|
|
|
122,921 |
|
Accumulated depreciation |
|
|
(3,761 |
) |
|
|
(52,599 |
) |
|
|
|
|
|
|
|
Assets held for sale net |
|
$ |
2,996 |
|
|
$ |
70,322 |
|
|
|
|
|
|
|
|
Included in assets held for sale at March 31, 2008 are five financial centers which are pending
sale. Old National plans to continue occupying these properties under long-term lease
arrangements. See note 16 to the consolidated financial statements for additional information on
Old Nationals long-term lease arrangements.
14
NOTE 11 FINANCING ACTIVITIES
The following table summarizes Old Nationals and its subsidiaries other borrowings at March 31,
2008, and December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
(dollars in thousands) |
|
2008 |
|
|
2007 |
|
Old National Bancorp: |
|
|
|
|
|
|
|
|
Medium-term notes, Series 1997 (fixed rate
3.50%) maturing June 2008 |
|
$ |
100,000 |
|
|
$ |
100,000 |
|
Senior unsecured note (fixed rate 5.00%)
maturing May 2010 |
|
|
50,000 |
|
|
|
50,000 |
|
Junior subordinated debenture (fixed rates 6.27%
to 8.00% and variable rate 5.75%) maturing
April 2032 to March 2035 |
|
|
108,000 |
|
|
|
108,000 |
|
SFAS 133 fair value hedge and other basis adjustments |
|
|
(1,227 |
) |
|
|
(1,872 |
) |
Old National Bank: |
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase (fixed
rates 2.45% to 4.06%) maturing December 2010
to October 2012 |
|
|
99,000 |
|
|
|
74,000 |
|
Federal Home Loan Bank advances (fixed rates
2.11% to 8.34%) maturing July 2008 to
January 2023 |
|
|
324,301 |
|
|
|
124,369 |
|
Senior unsecured bank notes (fixed rate 3.95%)
maturing February 2008 |
|
|
|
|
|
|
50,000 |
|
Subordinated bank notes (fixed rate 6.75%)
maturing October 2011 |
|
|
150,000 |
|
|
|
150,000 |
|
Capital lease obligation |
|
|
4,418 |
|
|
|
4,427 |
|
SFAS 133 fair value hedge and other basis adjustments |
|
|
396 |
|
|
|
(2,202 |
) |
|
|
|
|
|
|
|
Total other borrowings |
|
$ |
834,888 |
|
|
$ |
656,722 |
|
|
|
|
|
|
|
|
Contractual maturities of other borrowings at March 31, 2008, were as follows:
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
Due in 2008 |
|
$ |
101,028 |
|
Due in 2009 |
|
|
2,040 |
|
Due in 2010 |
|
|
124,043 |
|
Due in 2011 |
|
|
250,046 |
|
Due in 2012 |
|
|
150,688 |
|
Thereafter |
|
|
207,874 |
|
SFAS 133 fair value hedge and other basis adjustments |
|
|
(831 |
) |
|
|
|
|
Total |
|
$ |
834,888 |
|
|
|
|
|
LINE OF CREDIT
Subsequent to the end of the first quarter of 2008, Old National entered into a $100 million
revolving credit facility at the parent company level. Three unrelated financial institutions
serve as lenders for the facility. The facility has an interest rate of LIBOR plus 1.00% and a
maturity of 364 days. The proceeds will be used primarily to retire debt.
FEDERAL HOME LOAN BANK
Federal Home Loan Bank advances had weighted-average rates of 3.76% and 5.19% at March 31, 2008,
and December 31, 2007, respectively. These borrowings are collateralized by investment securities
and residential real estate loans up to 150% of outstanding debt.
15
SUBORDINATED BANK NOTES
Subordinated bank notes qualify as Tier 2 Capital for regulatory purposes, subject to certain
limitations, and are in accordance with the senior and subordinated global bank note program in
which Old National Bank may issue and sell up to a maximum of $1 billion. Notes issued by Old
National Bank under the global note program are not obligations of, or guaranteed by, Old National
Bancorp.
JUNIOR SUBORDINATED DEBENTURES
Junior subordinated debentures related to trust preferred securities are classified in other
borrowings. These securities qualify as Tier 1 capital for regulatory purposes, subject to
certain limitations.
Old National guarantees the payment of distributions on the trust preferred securities issued by
ONB Capital Trust II. ONB Capital Trust II issued $100 million in preferred securities in April
2002. The preferred securities have a liquidation amount of $25 per share with a cumulative annual
distribution rate of 8.0% or $2.00 per share payable quarterly and maturing on April 15, 2032.
Proceeds from the issuance of these securities were used to purchase junior subordinated debentures
with the same financial terms as the securities issued by ONB Capital Trust II. Old National may
redeem the junior subordinated debentures and thereby cause a redemption of the trust preferred
securities in whole (or in part from time to time) on or after April 12, 2007. Costs associated
with the issuance of these trust preferred securities totaling $3.3 million in 2002 were
capitalized and are being amortized through the maturity dates of the securities. The unamortized
balance is included in other assets in the consolidated balance sheet.
During February 2007, Old National acquired St. Joseph Capital Trust I and St. Joseph Capital Trust
II in conjunction with its acquisition of St. Joseph Capital Corporation. Old National guarantees
the payment of distributions on the trust preferred securities issued by St. Joseph Capital Trust I
and St. Joseph Capital Trust II. St. Joseph Capital Trust I issued $3.0 million in preferred
securities in July 2003. The preferred securities carry a variable rate of interest priced at the
three-month LIBOR plus 305 basis points, payable quarterly and maturing on July 11, 2033. Proceeds
from the issuance of these securities were used to purchase junior subordinated debentures with the
same financial terms as the securities issued by St. Joseph Capital Trust I. St. Joseph Capital
Trust II issued $5.0 million in preferred securities in March 2005. The preferred securities have
a cumulative annual distribution rate of 6.27% until March 2010 when it will carry a variable rate
of interest priced at the three-month LIBOR plus 175 basis points, payable quarterly and maturing
on March 17, 2035. Proceeds from the issuance of these securities were used to purchase junior
subordinated debentures with the same financial terms as the securities issued by St. Joseph
Capital Trust II. Old National may redeem the junior subordinated debentures and thereby cause a
redemption of the trust preferred securities in whole (or in part from time to time) on or after
September 30, 2008 (for debentures owned by St. Joseph Capital Trust I) and on or after March 31,
2010 (for debentures owned by St. Joseph Capital Trust II), and in whole (but not in part)
following the occurrence and continuance of certain adverse federal income tax or capital treatment
events.
CAPITAL LEASE OBLIGATION
On January 1, 2004, Old National entered into a long-term capital lease obligation for a financial
center in Owensboro, Kentucky, which extends for 25 years with one renewal option for 10 years.
The economic substance of this lease is that Old National is financing the acquisition of the
building through the lease and accordingly, the building is recorded as an asset and the lease is
recorded as a liability. The fair value of the capital lease obligation was estimated using a
discounted cash flow analysis based on Old Nationals current incremental borrowing rate for
similar types of borrowing arrangements.
16
At March 31, 2008, the future minimum lease payments under the capital lease were as follows:
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
2008 remaining |
|
$ |
278 |
|
2009 |
|
|
390 |
|
2010 |
|
|
390 |
|
2011 |
|
|
390 |
|
2012 |
|
|
390 |
|
Thereafter |
|
|
11,704 |
|
|
|
|
|
Total minimum lease payments |
|
|
13,542 |
|
Less amounts representing interest |
|
|
9,124 |
|
|
|
|
|
Present value of net minimum lease payments |
|
$ |
4,418 |
|
|
|
|
|
NOTE 12 EMPLOYEE BENEFIT PLANS
RETIREMENT 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 Nationals policy is to contribute at
least the minimum funding requirement determined by the plans 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 Company.
Old National contributed $0.6 million to cover benefit payments from the Restoration Plan during
the first three months of 2008. Old National expects to contribute an additional $0.2 million to
cover benefit payments from the Restoration Plan during the remainder of 2008.
The net periodic benefit cost and its components were as follows for the three months ended March
31:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(dollars in thousands) |
|
2008 |
|
|
2007 |
|
Interest cost |
|
$ |
536 |
|
|
$ |
593 |
|
Expected return on plan assets |
|
|
(792 |
) |
|
|
(822 |
) |
Recognized actuarial loss |
|
|
158 |
|
|
|
219 |
|
Settlement |
|
|
|
|
|
|
300 |
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
(98 |
) |
|
$ |
290 |
|
|
|
|
|
|
|
|
NOTE 13 STOCK-BASED COMPENSATION
Under the 1999 Equity Incentive Plan, Old National is authorized to grant up to 7.6 million shares
of common stock. At March 31, 2008, 6.6 million shares were outstanding under the plan, including
6.0 million stock options and 0.6 million shares of restricted stock, 0.5 million shares have been
exercised or released, and 0.5 million shares were available for issuance.
Stock Options
Old National recorded $0.1 million of stock based compensation expense, net of tax, during the
first three months of 2008 as compared to $0.1 million for the first three months of 2007.
17
The Company granted 278 thousand stock options during the first quarter of 2008. Using the
Black-Scholes option pricing model, the Company estimated the fair value of these stock options to
be $0.3 million. The Company will
expense this amount ratably over the three-year vesting period. The assumptions used in the option
pricing model and the determination of stock option expense were an expected volatility of 15.8%; a
risk free interest rate of 3.03%; an expected option term of six years; a 5.33% dividend yield; and
a forfeiture rate of 7%. These options expire in ten years.
Restricted Stock
Old National recorded expense of $0.5 million, net of tax benefit, during the first three months of
2008, compared to expense of $0.1 million during the first three months of 2007 related to the
vesting of restricted share awards. Included in the first three months of 2007 is the reversal of
$0.7 million of expense associated with certain performance-based restricted stock grants.
The Company granted 136 thousand shares of performance based restricted stock awards to certain key
officers during 2008, with shares vesting at the end of a thirty-six month period based on the
achievement of certain targets. In addition, the Company granted 43 thousand time-based restricted
stock awards to certain key officers during 2008, with shares vesting at the end of a thirty-six
month period. Compensation expense is recognized on a straight-line basis over the vesting period.
Shares are subject to certain restrictions and risk of forfeiture by the participants. As of
March 31, 2008, unrecognized compensation expense was estimated to be $6.4 million for unvested
restricted share awards.
NOTE 14 INCOME TAXES
Following is a summary of the major items comprising the differences in taxes from continuing
operations computed at the federal statutory rate and as recorded in the consolidated statement of
income for the three months ended March 31:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(dollars in thousands) |
|
2008 |
|
|
2007 |
|
Provision at statutory rate of 35% |
|
$ |
4,839 |
|
|
$ |
3,878 |
|
Tax-exempt income |
|
|
(3,773 |
) |
|
|
(3,516 |
) |
Reversal of portion of unrecognized tax benefits |
|
|
(6,611 |
) |
|
|
|
|
State income taxes |
|
|
4 |
|
|
|
|
|
Other, net |
|
|
26 |
|
|
|
(71 |
) |
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
$ |
(5,515 |
) |
|
$ |
291 |
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
(39.9 |
)% |
|
|
2.6 |
% |
|
|
|
|
|
|
|
For the three months ended March 31, 2008, the effective tax rate was lower than for the three
months ended March 31, 2007. The lower effective tax rate was primarily a result of a decrease in
the unrecognized tax benefit liability.
Unrecognized Tax Benefits
The Company and its subsidiaries file a consolidated U.S. federal income tax return, as well as
filing various state returns. In the first quarter, the Company reversed $6.6 million related to
uncertain tax positions accounted for under FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes. The positive $6.6 million income tax reversal primarily relates to a recent U.S.
Tax Court decision. The opinion issued by the Court confirmed 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 has been
informed by the Internal Revenue Service that they will not audit tax year 2005 as they previously
indicated. 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.
18
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
(dollars in thousands) |
|
2008 |
|
Balance at January 1 |
|
$ |
11,554 |
|
Additions based on tax positions related to the current year |
|
|
29 |
|
Reductions of tax positions of prior years |
|
|
(4,735 |
) |
Settlements |
|
|
(1,360 |
) |
|
|
|
|
Balance at March 31 |
|
$ |
5,488 |
|
|
|
|
|
Approximately $1.7 million of unrecognized tax benefits, if recognized, would favorably affect the
effective income tax rate in future periods.
NOTE 15 DERIVATIVE FINANCIAL INSTRUMENTS
Old National designates its derivatives based upon criteria established by SFAS No. 133, as amended
by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an
Amendment to FASB Statement No. 133, and SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities.
The following table summarizes the derivative financial instruments utilized by Old National:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
|
December 31, 2007 |
|
|
|
Notional |
|
|
Estimated Fair Value |
|
|
Notional |
|
|
Estimated Fair Value |
|
(dollars in thousands) |
|
Amount |
|
|
Gain |
|
|
Loss |
|
|
Amount |
|
|
Gain |
|
|
Loss |
|
Fair Value Hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive fixed interest rate swaps |
|
$ |
176,813 |
|
|
$ |
3,224 |
|
|
$ |
|
|
|
$ |
216,735 |
|
|
$ |
716 |
|
|
$ |
(649 |
) |
Forward mortgage loan contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,935 |
|
|
|
|
|
|
|
(62 |
) |
Stand Alone Derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receive fixed interest rate swaps |
|
|
41,080 |
|
|
|
79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate lock commitments |
|
|
20,689 |
|
|
|
114 |
|
|
|
|
|
|
|
6,900 |
|
|
|
70 |
|
|
|
|
|
Forward mortgage loan contracts |
|
|
30,001 |
|
|
|
|
|
|
|
(232 |
) |
|
|
6,702 |
|
|
|
|
|
|
|
(55 |
) |
Matched Customer Hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer interest rate swaps |
|
|
383,100 |
|
|
|
24,735 |
|
|
|
|
|
|
|
369,109 |
|
|
|
13,929 |
|
|
|
(118 |
) |
Counterparty interest rate swaps |
|
|
383,100 |
|
|
|
|
|
|
|
(24,934 |
) |
|
|
369,109 |
|
|
|
118 |
|
|
|
(13,929 |
) |
Customer interest rate cap & collars |
|
|
5,454 |
|
|
|
131 |
|
|
|
|
|
|
|
3,573 |
|
|
|
53 |
|
|
|
|
|
Counterparty interest rate cap
& collars |
|
|
5,454 |
|
|
|
|
|
|
|
(133 |
) |
|
|
3,573 |
|
|
|
|
|
|
|
(53 |
) |
Customer commodity swaps |
|
|
558 |
|
|
|
|
|
|
|
(1,902 |
) |
|
|
558 |
|
|
|
|
|
|
|
(2,011 |
) |
Counterparty commodity swaps |
|
|
558 |
|
|
|
1,902 |
|
|
|
|
|
|
|
558 |
|
|
|
2,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,046,807 |
|
|
$ |
30,185 |
|
|
$ |
(27,201 |
) |
|
$ |
989,752 |
|
|
$ |
16,897 |
|
|
$ |
(16,877 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Old National utilizes interest rate swap agreements as part of its asset liability management
strategy to help manage its interest rate risk position. The notional amount of the interest rate
swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by
reference to the notional amount and the other terms of the individual interest rate swap
agreements.
The notional amount of Old Nationals mortgage derivatives represents the dollar amount of loans
which are committed and the notional amount of the customer commodity swaps represents the per
period units times the fixed commodity price.
Interest Rate Swaps
Interest rate swaps with notional amounts totaling $176.8 million and $216.7 million as of March
31, 2008 and December 31, 2007, respectively, were designated as fair value hedges of changes in
the benchmark interest rate of certain fixed-rate liabilities. As of March 31, 2008, Old National
paid the counterparty a weighted average variable rate of 3.39% and received a fixed rate of 4.78%.
Derivative gains and losses from these fair value hedges are recognized in earnings currently
along with the change in fair value of the hedged item attributable to the risk being hedged.
Ineffectiveness related to these fair value hedges was not material for the periods ended March 31,
2008 and 2007, and is reported in other income in the consolidated statement of income.
19
A portion of Old Nationals interest rate swaps are not designated as fair value hedges and are
treated as stand-alone derivatives. The fair value of the interest rate swaps is reflected as a
derivative asset or liability with changes in the fair values included in other income.
Mortgage Banking Derivatives
Commitments to fund certain mortgage loans (interest rate locks) and forward commitments for the
future delivery of mortgage loans to third party investors are considered derivatives. It is the
Companys 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.
These interest rate lock commitments and forward commitments for the future delivery of mortgage
loans are considered stand alone derivatives and are recorded at fair value. The fair value of
these instruments fluctuates based on changes in interest rates over time. The fair value
adjustment is recorded as a derivative asset or liability with the change recorded in net gain on
sale of loans.
As of January 1, 2008, the Company no longer designates any portion of its forward commitments as
fair value hedges.
Customer Derivatives
Old National enters into various derivative contracts with its clients, which include interest rate
swaps, caps, foreign exchange forward contracts and commodity swaps and options. Old National
offsets nearly all of the exposure associated with these derivatives by entering into offsetting
third-party contract with reputable counterparties with matching terms, which are offset through
earnings. Contracts are carried at fair value with changes recorded as a component of other
noninterest income. Old National assumes no interest rate risk associated with these contracts and
a minimal amount of credit risk.
NOTE 16 COMMITMENTS AND CONTINGENCIES
LITIGATION
In the normal course of business, various legal actions and proceedings, which are being vigorously
defended, are pending against Old National and its affiliates. Management does not believe any of
these claims will have a material impact on Old Nationals results of operations.
LEASES
Old National rents certain premises and equipment under operating leases, which expire at various
dates. Many of these leases require the payment of property taxes, insurance premiums, maintenance
and other costs. In some cases, rentals are subject to increase in relation to a cost-of-living
index.
In December 2006, Old National entered into a sale leaseback agreement for its three main buildings
in downtown Evansville, Indiana. Old National sold assets with a carrying value of $69.9 million,
received approximately $79.0 million in cash and incurred $0.4 million of selling costs. The $8.7
million deferred gain will be amortized over the term of the lease. The agreement requires rent
payments of approximately $6.6 million per year over the next 23 years.
During 2007, seventy-three financial centers were sold in a series of sale leaseback transactions
to an unrelated party. Old National received cash proceeds of $176.3 million, net of selling
costs. The properties sold had a carrying value of $65.3 million, resulting in a gain of $111.1
million. In 2007, $4.7 million of this gain was recognized, the remainder will be deferred and
amortized over the term of the leases. The leases have terms of ten to twenty-four years, and Old
National has the right, at its option, to extend the term of the leases for four additional
successive terms of five years each, upon specified terms and conditions. Under the agreements
signed in 2007, Old National is obligated to pay base rents for the properties in an aggregate
annual amount of $14.0 million in the first year.
20
In addition, Old National sold an office building located in Evansville, Indiana to an unrelated
party in a separate transaction during 2007. This transaction resulted in cash proceeds of $3.4
million, net of selling costs. The property had a carrying value of $3.7 million, resulting in a
loss of $0.3 million. Old National agreed to lease back the building for a term of five years.
Under the lease agreement, Old National is obligated to pay a base rent of $0.4 million per year.
During March 2008, Old National sold four financial centers in a series of sale leaseback
transactions to unrelated parties. Old National received cash proceeds of $2.8 million, net of
selling costs. The properties sold had a carrying value of $0.9 million. The $1.9 million
deferred gain will be amortized over the term of the leases. The leases have terms of fifteen to
twenty years. Under the lease agreements, Old National is obligated to pay a base rent of $0.4
million per year.
CREDIT-RELATED FINANCIAL INSTRUMENTS
In the normal course of business, Old Nationals banking affiliates have entered into various
agreements to extend credit, including loan commitments of $1.168 billion and standby letters of
credit of $109.0 million at March 31, 2008. At March 31, 2008, approximately $1.093 billion of the
loan commitments had variable rates and $75 million had fixed rates, with the fixed interest rates
ranging from 2.75% to 21.0%. At December 31, 2007, loan commitments were $1.195 billion and
standby letters of credit were $114.1 million. These commitments are not reflected in the
consolidated financial statements. At March 31, 2008 and December 31, 2007, the balance of the
allowance for unfunded loan commitments was $3.0 million and $3.7 million, respectively.
At March 31, 2008 and December 31, 2007, Old National had credit extensions of $50.1 million and
$55.6 million, respectively, with various unaffiliated banks related to letter of credit
commitments issued on behalf of Old Nationals clients. At March 31, 2008 and December 31, 2007,
Old National provided collateral to the unaffiliated banks to secure credit extensions totaling
$32.7 million and $41.8 million, respectively. Old National did not provide collateral for the
remaining credit extensions.
NOTE 17 FINANCIAL GUARANTEES
Old National holds instruments, in the normal course of business with clients, that are considered
financial guarantees in accordance with FIN 45, Guarantors 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 March 31, 2008, the notional amount of standby letters of
credit was $109.0 million, which represents the maximum amount of future funding requirements, and
the carrying value was $0.4 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 $9.6 million.
NOTE 18 SEGMENT INFORMATION
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.
21
In order to measure performance for each segment, Old National allocates capital, corporate
overhead and income tax provision to each segment. Capital and corporate overhead are allocated to
each segment using various
methodologies, which are subject to periodic changes by management. Income taxes are allocated
using the effective tax rate. 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 Nationals 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 three
months ended March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community |
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
Banking |
|
|
Treasury |
|
|
Other |
|
|
Total |
|
Three months ended March 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
63,240 |
|
|
$ |
(3,029 |
) |
|
$ |
(421 |
) |
|
$ |
59,790 |
|
Provision for loan losses |
|
|
21,886 |
|
|
|
19 |
|
|
|
|
|
|
|
21,905 |
|
Noninterest income |
|
|
19,101 |
|
|
|
6,643 |
|
|
|
21,132 |
|
|
|
46,876 |
|
Noninterest expense |
|
|
51,915 |
|
|
|
1,335 |
|
|
|
17,686 |
|
|
|
70,936 |
|
Income before income taxes |
|
|
8,540 |
|
|
|
2,260 |
|
|
|
3,025 |
|
|
|
13,825 |
|
Income tax benefit |
|
|
(3,537 |
) |
|
|
(1,944 |
) |
|
|
(34 |
) |
|
|
(5,515 |
) |
Segment profit |
|
|
12,077 |
|
|
|
4,204 |
|
|
|
3,059 |
|
|
|
19,340 |
|
Total assets |
|
|
4,935,482 |
|
|
|
2,670,811 |
|
|
|
117,173 |
|
|
|
7,723,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
55,066 |
|
|
$ |
(2,637 |
) |
|
$ |
(627 |
) |
|
$ |
51,802 |
|
Provision for loan losses |
|
|
1,979 |
|
|
|
466 |
|
|
|
|
|
|
|
2,445 |
|
Noninterest income |
|
|
18,651 |
|
|
|
(1,953 |
) |
|
|
18,059 |
|
|
|
34,757 |
|
Noninterest expense |
|
|
55,335 |
|
|
|
342 |
|
|
|
17,356 |
|
|
|
73,033 |
|
Income (loss) before income taxes |
|
|
16,403 |
|
|
|
(5,398 |
) |
|
|
76 |
|
|
|
11,081 |
|
Income tax expense (benefit) |
|
|
3,000 |
|
|
|
(2,731 |
) |
|
|
22 |
|
|
|
291 |
|
Segment profit (loss) |
|
|
13,403 |
|
|
|
(2,667 |
) |
|
|
54 |
|
|
|
10,790 |
|
Total assets |
|
|
5,152,032 |
|
|
|
3,052,898 |
|
|
|
126,714 |
|
|
|
8,331,644 |
|
NOTE 19 FAIR VALUE
Effective January 1, 2008, the Company adopted SFAS No. 157 and SFAS No. 159. Both standards
address aspects of the expanding application of fair value accounting.
SFAS No. 157 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. SFAS No.
157 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. |
22
|
|
Level 3 Significant unobservable inputs that reflect a companys 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).
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 under SFAS No. 157 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 March 31, 2008 Using |
|
|
|
|
|
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Active Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
Carrying |
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
(dollars in thousands) |
|
Value |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale |
|
$ |
1,986,315 |
|
|
|
|
|
|
$ |
1,986,315 |
|
|
|
|
|
Residential loans held for sale |
|
|
10,155 |
|
|
|
|
|
|
|
10,155 |
|
|
|
|
|
Derivative assets |
|
|
30,185 |
|
|
|
|
|
|
|
30,185 |
|
|
|
|
|
Financial Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain retail certificates of deposit |
|
|
41,429 |
|
|
|
|
|
|
|
41,429 |
|
|
|
|
|
Derivative liabilities |
|
|
27,201 |
|
|
|
|
|
|
|
27,201 |
|
|
|
|
|
Financial instruments recorded using SFAS No. 159
Under SFAS No. 159, the Company may elect to report most financial instruments and certain other
items at fair value on an instrument-by instrument basis with changes in fair value reported in net
income. After the initial adoption, the election is made at the acquisition of an eligible
financial asset, financial liability or firm commitment or when certain specified reconsideration
events occur. The fair value election may not be revoked once an election is made.
Additionally, the transaction provisions of SFAS No. 159 permit a one-time election for existing
positions at the adoption date with a cumulative-effect adjustment included in beginning retained
earnings and future changes in fair value reported in net income. The Company did not elect the
fair value option for any existing position at January 1, 2008.
The Company did elect the fair value option under SFAS No. 159 prospectively for the following
items:
|
|
|
Residential mortgage loans held for sale |
|
|
|
|
Certain retail certificates of deposit |
23
Residential mortgage loans held for sale
Old National has elected the fair value option under SFAS No. 159 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. Old National has elected the fair value option to
mitigate accounting mismatches in cases where hedge accounting is complex and to achieve
operational simplification. The fair value option was not elected for loans held for investment.
This election was effective for applicable loans originated since January 1, 2008.
The balance of these residential mortgage loans held for sale was $10.2 million as of March 31,
2008. The aggregate fair value exceeded the unpaid principal balances by $0.2 million as of March
31, 2008. None of these loans were 90 days or more past due, nor were any on nonaccrual status.
The change in fair value of these residential mortgage loans held for sale resulted in a gain of
$0.2 million recorded in mortgage banking revenue and interest income of $0.1 million recorded in
interest income during the first quarter of 2008.
Certain retail certificates of deposit
Old National has elected the fair value option under SFAS No. 159 for certain retail certificates
of deposit; specifically, pools of retail certificates of deposit that have been hedged with
derivative instruments. Old National has elected the fair value option to mitigate accounting
mismatches in cases where hedge accounting is complex and to achieve operational simplification.
This election was adopted prospectively for certain retail certificates of deposit originated since
January 1, 2008.
The balance of these retail certificates of deposit was $41.4 million as of March 31, 2008. The
aggregate fair value exceeded the carrying value by $0.3 million as of March 31, 2008.
The $0.3 million change in fair value of these retail certificates of deposit resulted in an other
loss of $0.2 million and interest expense of $0.1 million for the first quarter of 2008.
As of March 31, 2008, the difference between the aggregate fair value and the aggregate remaining
principal balance for loans and certificates of deposit for which the fair value option has been
elected was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate |
|
|
|
|
|
|
Contractual |
|
(dollars in thousands) |
|
Fair Value |
|
|
Difference |
|
|
Principal |
|
Residential loans held for sale |
|
|
10,155 |
|
|
|
168 |
|
|
|
9,987 |
|
Certain retail certificates of deposit |
|
|
41,429 |
|
|
|
296 |
|
|
|
41,133 |
|
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). Interest expense is recorded based on
the contractual amount of interest expense incurred.
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 three
months ended March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Fair Value for the Period ended March 31, 2008, for Items |
|
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 |
|
|
166 |
|
|
|
96 |
|
|
|
|
|
|
|
262 |
|
Certain retail certificates of deposit |
|
|
(152 |
) |
|
|
|
|
|
|
(144 |
) |
|
|
(296 |
) |
24
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is an analysis of Old Nationals results of operations for the three
months ended March 31, 2008 and 2007, and financial condition as of March 31, 2008, compared to
March 31, 2007, and December 31, 2007. This discussion and analysis should be read in conjunction
with Old Nationals consolidated financial statements and related notes. This discussion contains
forward-looking statements concerning Old Nationals business that are based on estimates and
involves certain risks and uncertainties. Therefore, future results could differ significantly
from managements current expectations and the related forward-looking statements.
EXECUTIVE SUMMARY
Net interest margin in the first quarter of 2008 improved to 3.68% compared to 3.56% during the
fourth quarter of 2007, and 3.00% year-over-year. The margin benefited from both the Companys
deposit pricing initiatives as well as the Federal Reserves interest rate reductions and their
impact on the Companys slightly liability sensitive balance sheet.
While the Companys fundamental credit quality remains strong, provision expense of $21.9 million
was recorded during the first quarter. Approximately $17.0 million of this amount is related to
the misconduct of a single loan officer. The former loan officers misconduct included falsified
documentation and other violations of the Companys lending policies, which combined with the
slowing economy and other factors, contributed to downgrades of several credits during the quarter.
Old National believes that only one employee of the Company, the former loan officer, was involved
in the misconduct and that it does not represent systemic issues within the Companys commercial
loan portfolio or a breakdown of internal controls over financial reporting. Management will work
hard to minimize any actual losses on this loan portfolio and should the Company experience a loss
that is directly tied to fraud, it may have the ability to recover that loss through insurance.
Other items significantly impacting the first quarter of 2008 include the reversal of a $6.6
million income tax liability related to previous accruals for uncertain tax positions, a $1.5
million gain related to the redemption of Class B VISA shares, and securities gains of $4.5 million
- the majority resulting from securities called by the issuers.
Net income for the first quarter of 2008 is $19.3 million, compared to $22.0 million for the
quarter ended December 31, 2007 and $10.8 million compared to the quarter ending March 31, 2007.
The first quarter of 2007 included various strategic initiatives to improve the Companys operating
platform. These initiatives, which included balance sheet restructuring, workforce reductions, and
costs associated with eight branch closures resulted in pre-tax charges of $7.7 million during that
quarter.
During 2008, management will focus on managing through the current credit cycle, maintaining a
strong capital position and continuing to improve its efficiency ratio.
25
RESULTS OF OPERATIONS
The following table sets forth certain income statement information of Old National for the three
months ended March 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, |
|
|
% |
|
(dollars in thousands) |
|
2008 |
|
|
2007 |
|
|
Change |
|
Income Statement Summary: |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
59,790 |
|
|
$ |
51,802 |
|
|
|
15.4 |
% |
Provision for loan losses |
|
|
21,905 |
|
|
|
2,445 |
|
|
|
795.9 |
|
Noninterest income |
|
|
46,876 |
|
|
|
34,757 |
|
|
|
34.9 |
|
Noninterest expense |
|
|
70,936 |
|
|
|
73,033 |
|
|
|
(2.9 |
) |
Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|
Return on average equity |
|
|
11.51 |
% |
|
|
6.74 |
% |
|
|
|
|
Efficiency ratio |
|
|
63.87 |
|
|
|
80.44 |
|
|
|
|
|
Tier 1 leverage ratio |
|
|
8.03 |
|
|
|
7.14 |
|
|
|
|
|
Net charge-offs to average loans |
|
|
0.52 |
|
|
|
0.38 |
|
|
|
|
|
Net Interest Income
Net interest income is Old Nationals most significant component of earnings, comprising over 56%
of revenues at March 31, 2008. Net interest income and margin are influenced by many factors,
primarily the volume and mix of earning assets, funding sources and interest rate fluctuations.
Other factors include prepayment risk on mortgage and investment-related assets and the composition
and maturity of earning assets and interest-bearing liabilities. Loans typically generate more
interest income than investment securities with similar maturities. Funding from client deposits
generally cost 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 Old Nationals ability to optimize its mix of assets and
funding and its net interest income and margin.
Net interest income and net interest margin in the following discussion are presented on a fully
taxable equivalent basis, which adjusts tax-exempt or nontaxable interest income to an amount that
would be comparable to interest subject to income taxes using the federal statutory tax rate of 35%
in effect for all periods. Net income is unaffected by these taxable equivalent adjustments as the
offsetting increase of the same amount is made to income tax expense. Net interest income includes
taxable equivalent adjustments of $4.4 million and $4.2 million for the three months ended March
31, 2008 and 2007, respectively.
Taxable equivalent net interest income was $64.2 million for the three months ended March 31, 2008,
up from the $56.0 million reported for the three months ended March 31, 2007. The net interest
margin was 3.68% for the three months ended March 31, 2008, compared to 3.00% for the three months
ended March 31, 2007. The increase in both net interest income and net interest margin is
primarily due to the decrease in the cost of funding being greater than the decrease in the earning
asset yields, combined with a change in the mix of interest earning assets and interest-bearing
liabilities. The yield on average earning assets decreased 26 basis points from 6.51% to 6.25%.
The cost of interest-bearing liabilities decreased 95 basis points from 3.93% to 2.98%.
Average earning assets were $6.974 billion for the three months ended March 31, 2008, compared to
$7.463 billion for the three months ended March 31, 2007, a decrease of 6.5%, or $488.8 million.
Significantly affecting average earning assets at March 31, 2008 compared to March 31, 2007, was
the reduction in federal funds sold combined with the reduction of the size of the loan portfolio
and the investment portfolio. During the first quarter of 2008, $284.9 million of investment
securities were called by the issuers. In addition, commercial and commercial real estate loans
have been affected by continued weak loan demand in Old Nationals markets, more stringent loan
underwriting standards and the Companys desire to lower future potential credit risk by being
cautious towards the real estate market. During the last three quarters of 2007, the Company sold
$17.1 million of nonaccrual and substandard commercial and commercial real estate loans. During
the first quarter of 2008, the Company sold $2.2 million of commercial loans. Year over year,
commercial and consumer loans, which have an average yield higher than the investment portfolio,
have increased as a percent of interest earning assets.
26
Also affecting margin was a decrease in time deposits. In 2007, Old National called $98 million of
high cost brokered certificates of deposit and $48.3 million of retail certificates of deposit. In
the first quarter of 2008, Old National called $22.5 million of retail certificates of deposit; and
$85.7 million of high cost brokered certificates of deposit were called or matured. In addition, a
$50 million bank note matured in the first quarter of 2008. Year over year, brokered certificates
of deposit, which have an average interest rate higher than other types of deposits, have decreased
as a percent of interest-bearing liabilities. Borrowed funds have increased as a percent of
interest-bearing liabilities, due to the Companys ability to purchase low-cost FHLB advances
during 2008.
Provision for Loan Losses
The provision for loan losses was $21.9 million for the first three months ended March 31, 2008,
compared to $2.4 million for the three months ended March 31, 2007. The higher provision in 2008
is primarily attributable to the
increase in nonaccrual loans associated with the misconduct of a former loan officer in the
Indianapolis market and subsequent deterioration of these credits.
Noninterest Income
Old National generates revenues in the form of noninterest income through client fees and sales
commissions from its core banking franchise and other related businesses, such as wealth
management, investment consulting, investment products and insurance. Noninterest income for the
three months ended March 31, 2008, was $46.9 million, an increase of $12.1 million, or 34.9%, from
the $34.8 million reported for the three months ended March 31, 2007.
Net securities gains were $4.5 million for the three months ended March 31, 2008, compared to net
securities losses of $2.7 million for the three months ended March 31, 2007, an increase of $7.2
million. During the first quarter of 2008, $284.9 million of securities were called by the
issuers, resulting in gains of approximately $3.4 million. The primary reason for the net
securities losses in the first quarter of 2007 was managements decision to reduce the size of the
investment portfolio.
Insurance premiums and commissions increased to $12.1 million during the first quarter of 2008
compared to $10.6 million during the first quarter of 2007. The increase was primarily a result of
higher contingency revenue in the first quarter of 2008.
Amortization of deferred gains associated with the sale leaseback transactions were $1.6 million in
the three months ended March 31, 2008, compared to $0.1 million in the three months ended March 31,
2007. Old National entered into a sale and leaseback transaction of its corporate offices in
December of 2006. In addition, seventy-three financial centers were sold in a series of sale
leaseback transactions during 2007. The majority of the $111.1 million gain associated with these
transactions was deferred and is being amortized over the term of the leases.
Other income increased $1.7 million from the first quarter of 2007 primarily as a result of a $1.5
million gain associated with the redemption of class B VISA shares during in the first quarter of
2008.
Noninterest Expense
Noninterest expense for the three months ended March 31, 2008, totaled $70.9 million, a decrease of
$2.1 million, or 2.9%, from the $73.0 million recorded for the three months ended March 31, 2007.
Salaries and benefits is the largest component of noninterest expense. For the three months ended
March 31, 2008, salaries and benefits were $42.3 million compared to $41.3 million for the three
months ended March 31, 2007. The increase is primarily attributable to higher performance-based
compensation expense in 2008.
Occupancy expense increased $3.3 million in the three months ended March 31, 2008, compared to the
three months ended March 31, 2007, primarily as a result of a $3.6 million increase in rent
expense. The increase is rent expense is related to the sale leaseback transactions that occurred
in December of 2006 and during 2007. Partially offsetting the increase in rent expense was a $0.7
million decrease in depreciation expense, also related to the sale leaseback transactions.
27
Loss on extinguishment of debt decreased $1.0 million in the first quarter of 2008 compared to the
first quarter of 2007. During the first quarter of 2007, Old National recorded a $1.2 million loss
on the extinguishment of debt related to the early retirement of Federal Home Loan Bank advances
and repurchase agreements.
The first quarter of 2007 included $1.2 million of impairment associated with eight financial
centers which the Company consolidated into other higher performing branches during the first
quarter of 2007.
Other expense for the three months ended March 31, 2008, totaled $3.4 million, a decrease of $2.5
million compared to the three months ended March 31, 2007. Included in the first quarter of 2008
were a reduction of $0.3 million in litigation settlements and a $0.7 million reduction in the
provision expense for unfunded commitments. The first quarter of 2007 included $1.2 million in
charges to terminate leases on buildings that the Company no longer occupies.
Provision for Income Taxes
Old National records 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 Old Nationals financial statement income and the federal statutory
tax rate is caused by interest on tax-exempt securities and loans. The provision for income taxes
on continuing operations, as a percentage of pre-tax income, was (39.9)% for the three months ended
March 31, 2008, compared to 2.6% for the three months ended March 31, 2007. The negative effective
tax rate in 2008 resulted from a $6.6 million reversal of tax liability related to previous
accruals for uncertain tax positions. See note 14 to the consolidated financial statements for
additional information.
FINANCIAL CONDITION
Overview
Old Nationals assets at March 31, 2008, were $7.723 billion, a 7.3% decrease compared to March 31,
2007 assets of $8.332 billion, and an annualized decrease of 6.3% compared to December 31, 2007
assets of $7.846 billion. The redemption of $284.9 million of investment securities in the first
quarter of 2008 combined with the reduction in federal funds sold, a decrease in commercial real
estate loan balances and the various sale-leaseback transactions have lowered our total assets,
reducing the Companys reliance on high-cost deposits and brokered certificates of deposit. Year
over year, brokered certificates of deposit, which have an average interest rate higher than other
types of deposits, have decreased as a percent of interest-bearing liabilities. Borrowed funds
have increased as a percent of interest-bearing liabilities due to the Companys ability to
purchase low-cost FHLB advances during 2008.
Earning Assets
Old Nationals earning assets are comprised of investment securities, loans and loans held for
sale, and money market investments. Earning assets were $6.911 billion at March 31, 2008, a
decrease of 8.2% from March 31, 2007, and an annualized decrease of 6.0% since December 31, 2007.
Investment Securities
Old National classifies 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 the Companys funding requirements. However, Old National also has some 15-
and 20-year fixed-rate mortgage pass-through securities in its held-to-maturity investment
portfolio. At March 31, 2008, Old National does not believe any individual unrealized loss on
available-for-sale securities represents other-than-temporary impairment. The unrealized losses
are primarily attributable to changes in interest rates and recent market conditions. As of March
31, 2008, Old National had both the intent and ability to hold the securities for a time necessary
to recover the amortized cost.
At March 31, 2008, the investment securities portfolio was $2.147 billion compared to $2.271
billion at March 31, 2007, a decrease of $123.8 million or 5.5%. Investment securities decreased
$161.7 million compared to December 31, 2007, an annualized decrease of 28.0%. Investment
securities represented 31.1% of earning assets at March 31, 2008, compared to 30.2% at March 31,
2007, and 32.9% at December 31, 2007. Approximately $284.9 million of investment securities were
called by their issuers during the first quarter of 2008. The cash proceeds from these sales were
used to purchase similarly yielding securities and to reduce brokered certificates of deposit.
Stronger commercial loan demand in the future could result in increased investments in loans and a
continued reduction in the investment securities portfolio.
28
The investment securities available-for-sale portfolio had net unrealized losses of $2.9 million at
March 31, 2008, a decrease of $16.8 million compared to net unrealized losses of $19.7 million at
March 31, 2007, and a decrease of $3.8 million compared to net unrealized losses of $6.7 million at
December 31, 2007. The decrease over the past twelve months was primarily attributable to changes
in interest rates and recent market conditions.
The investment portfolio had an average duration of 3.56 years at March 31, 2008, compared to 2.94
years at March 31, 2007, and 2.96 years at December 31, 2007. The annualized average yields on
investment securities, on a taxable equivalent basis, were 5.07% for the three months ended March
31, 2008, compared to 5.09% for the three months ended March 31, 2007, and 5.21% for the three
months ended December 31, 2007.
Residential Loans Held for Sale
Residential loans held for sale were $10.2 million at March 31, 2008, compared to $19.0 million at
March 31, 2007, and $13.0 million at December 31, 2007. Residential loans held for sale are loans
that are closed, but not yet purchased by investors. The amount of residential loans held for sale
on the balance sheet varies depending on the amount of originations and timing of loan sales to the
secondary market. The decrease in residential loans held for sale from March 31, 2007, is
primarily attributable to increased efficiencies in processing loan sales and the timing of loan
sales to the secondary market.
Old National elected the fair value option under SFAS No. 159 prospectively for residential loans
held for sale. The election was effective for loans originated since January 1, 2008. The
aggregate fair value exceeded the unpaid principal balances by $0.2 million as of March 31, 2008.
Commercial and Commercial Real Estate Loans
Commercial and commercial real estate loans are the largest classification within the earning
assets of Old National, representing 43.1% of earning assets at March 31, 2008, an increase from
41.4% at March 31, 2007, and an increase from 42.3% at December 31, 2007. At March 31, 2008,
commercial and commercial real estate loans were $2.976 billion, a decrease of $145.8 million since
March 31, 2007, and an increase of $10.4 million since December 31, 2007. Commercial loans have
increased $73.1 million since March 31, 2007 while commercial real estate loans have decreased
$218.8 million since March 31, 2007. During the last three quarters of 2007, the Company sold $8.3
million of commercial and $8.8 million of commercial real estate loans. During the first quarter
of 2008, the Company sold $2.2 million of commercial loans. Weak loan demand in Old Nationals
markets continues to affect loan growth. Old Nationals conservative underwriting standards have
also contributed to slower loan growth. The Company continues to be cautious towards the real
estate market in an effort to lower credit risk.
Consumer Loans
At March 31, 2008, consumer loans, including automobile loans, personal and home equity loans and
lines of credit, and student loans, decreased $22.4 million or 1.9% compared to March 31, 2007, and
decreased $11.1 million or, annualized, 3.7% since December 31, 2007.
Residential Real Estate Loans
Residential real estate loans, primarily 1-4 family properties, have decreased in significance to
the loan portfolio over the past five years due to higher levels of loan sales into the secondary
market, primarily to private investors. Old National sells the majority of residential real estate
loans originated as a strategy to better manage interest rate risk and liquidity. Old National
sells almost all residential real estate loans servicing released without recourse.
At March 31, 2008, residential real estate loans were $528.5 million, a decrease of $32.2 million,
or 5.8%, from March 31, 2007.
29
Goodwill and Other Intangible Assets
Goodwill and other intangible assets at March 31, 2008, totaled $190.3 million, a decrease of $4.1
million compared to $194.4 million at March 31, 2007, and a decrease of $0.7 million compared to
$191.0 million at December 31, 2007. These decreases were the result of standard amortization
expense related to the other intangible assets.
Assets Held for Sale
Assets held for sale were $3.0 million at March 31, 2008, a decrease of $67.3 compared to $70.3
million at March 31, 2007. The sale leaseback transactions that have occurred in 2007 and the
first quarter of 2008 were the reason for the decline. Included in assets held for sale at March
31, 2008 are five financial centers that are pending sale. Old National plans to continue
occupying these properties under long-term lease agreements.
Other assets have increased $33.2 million, or 33.6%, since December 31, 2007 primarily as a result
of increases in customer derivative swap valuations and deferred tax assets.
Funding
Total funding, comprised of deposits and wholesale borrowings, was $6.822 billion at March 31,
2008, a decrease of 10.0% from $7.583 billion at March 31, 2007, and an annualized decrease of 7.8%
from $6.958 billion at December 31, 2007. Included in total funding were deposits of $5.346
billion at March 31, 2008, a decrease of $1.263 billion, or 19.1%, compared to March 31, 2007, and
a decrease of $316.9 million compared to December 31, 2007. In 2007, Old National called $98
million of high cost brokered certificates of deposit and $48.3 million of retail certificates of
deposit. In the first quarter of 2008, Old National called $22.5 million of retail certificates of
deposit; and $85.7 million of high cost brokered certificates of deposit were called or matured.
Savings deposits increased 58.7 % or $341.7 million compared to March 31, 2007. Money market
deposits decreased 39.2% or $333.3 million and time deposits decreased 35.4% or $949.8 million
compared to March 31, 2007. Year over year, Old National has experienced a shift into lower cost
deposit types.
Effective January 1, 2008, Old National elected the fair value option under SFAS No. 159
prospectively for certain retail certificates of deposit. The balance of these retail certificates
of deposit was $41.1 million as of March 31, 2008. The aggregate fair value exceeded the carrying
value by $0.3 million as of March 31, 2008.
Old National uses wholesale funding to augment deposit funding and to help maintain its desired
interest rate risk position. At March 31, 2008, wholesale borrowings, including short-term
borrowings and other borrowings, increased $502.0 million, or 51.6%, from March 31, 2007 and
increased $180.4 million, or 55.7%, annualized, from December 31, 2007, respectively. Wholesale
funding as a percentage of total funding was 21.6% at March 31, 2008, compared to 12.8% at March
31, 2007, and 18.6% at December 31, 2007. Short-term borrowings have increased $259.5 million
since March 31, 2007 while long-term borrowings have increased $242.4 million since March 31, 2007.
Old National purchased $200.0 million low-cost FHLB advances during the first quarter of 2008.
Other liabilities have increased $118.4 million, or 109.8%, since March 31, 2007 primarily as a
result of the deferred gains arising from the sale leaseback transactions entered into by Old
National during 2007 and 2008.
Capital
Shareholders equity totaled $675.4 million at March 31, 2008, compared to $640.7 million at March
31, 2007, and $652.9 million at December 31, 2007.
During the fourth quarter of 2007, Old National declared a cash dividend of $0.23 per share for the
first quarter of 2008, which was included in the fourth quarter 2007 financial results. Old
National paid cash dividends of $0.22 per share for the three months ended March 31, 2007, which
decreased equity by $14.5 million. Old National purchased shares of its stock, reducing
shareholders equity by $0.2 million during both the three months ended March 31, 2008 and March
31, 2007, respectively. The change in unrealized losses on investment securities increased equity
by $2.4 million during the three months ended March 31, 2008, and increased equity by $4.7 million
during the three months ended March 31, 2007. Shares issued for stock options, restricted stock
and stock compensation plans
increased shareholders equity by $0.9 million during the three months ended March 31, 2008,
compared to $0.2 million during the three months ended March 31, 2007. In addition, $0.5 million
of restricted stock and options were issued in connection with the acquisition of St. Joseph in
2007. The adoption of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109, resulted in a $3.4 million reduction in equity during the
first quarter of 2007. The adoption of EITF 06-5, Accounting for Purchases of Life Insurance
Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4
(Accounting for Purchases of Life Insurance), also affected equity in the first quarter of 2007,
resulting in a $0.1 million reduction.
30
Capital Adequacy
Old National and the banking industry are subject to various regulatory capital requirements
administered by the federal banking agencies. Old Nationals consolidated capital position remains
strong as evidenced by the following comparisons of key industry ratios.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory |
|
|
|
|
|
|
|
|
|
Guidelines |
|
|
March 31, |
|
|
December 31, |
|
|
|
Minimum |
|
|
2008 |
|
|
2007 |
|
|
2007 |
|
Risk-based capital: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital to total avg assets (leverage ratio) |
|
|
4.00 |
% |
|
|
8.03 |
% |
|
|
7.14 |
% |
|
|
7.72 |
% |
Tier 1 capital to risk-adjusted total assets |
|
|
4.00 |
|
|
|
10.95 |
|
|
|
9.70 |
|
|
|
10.60 |
|
Total capital to risk-adjusted total assets |
|
|
8.00 |
|
|
|
13.84 |
|
|
|
12.97 |
|
|
|
13.34 |
|
Shareholders equity to assets |
|
|
N/A |
|
|
|
8.74 |
|
|
|
7.69 |
|
|
|
8.32 |
|
RISK MANAGEMENT
Overview
Old National management, with the oversight of the Board of Directors, has in place company-wide
structures, processes, and controls for managing and mitigating risk. The following discussion
addresses the three major risks facing Old National: credit, market, and liquidity.
Credit Risk
Credit risk represents the risk of loss arising from an obligors inability or failure to meet
contractual payment or performance terms. Old Nationals primary credit risks result from the
Companys investment and lending activities.
Investment Activities
Within Old Nationals 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 March 31, 2008, Old National had non-agency collateralized mortgage obligations
of $260.3 million or approximately 13% of the available-for-sale securities portfolio.
The Company expects conditions in the overall residential real estate and credit markets to remain
uncertain for the foreseeable future. Deterioration in the performance of the underlying loan
collateral could result in deterioration in the performance of our asset-backed securities.
At March 31, 2008, Old National does not believe that any individual unrealized loss represents an
other-than-temporary impairment. The majority of the unrealized losses on mortgage-backed
securities are attributable to both changes in interest rates and market aberrations.
The Company also carries a higher exposure to loss in its pooled trust preferred securities due to
illiquidity in that market and performance of underlying collateral. At March 31, 2008, Old
National had pooled trust preferred securities of approximately $40.5 million, or 2% of the
available-for-sale securities portfolio.
The remainder of Old Nationals 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. The Company has the
intent and ability to hold all securities in an unrealized loss position at March 31, 2008 until
the market value recovers or the securities mature.
31
Lending Activities
Community-based lending personnel, along with region-based independent underwriting and analytic
support staff, extend credit under guidelines established and administered by Old Nationals 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.
Old National lends primarily to small- and medium-sized commercial and commercial real estate
clients in various industries including manufacturing, agribusiness, transportation, mining,
wholesaling and retailing. As measured by Old National at March 31, 2008, the Company had no
concentration of loans in any single industry exceeding 10% of its portfolio and has no exposure to
foreign borrowers or lesser-developed countries. Old Nationals policy is to concentrate its
lending activity in the geographic market areas it serves, primarily Indiana, Illinois and
Kentucky. Old National continues to be affected by weakness in the economy of its 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.
Summary of under-performing, criticized and classified loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
(dollars in thousands) |
|
2008 |
|
|
2007 |
|
|
2007 |
|
Nonaccrual loans |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and commercial real estate |
|
$ |
59,915 |
|
|
$ |
52,140 |
|
|
$ |
30,303 |
|
Residential real estate |
|
|
5,890 |
|
|
|
4,255 |
|
|
|
5,996 |
|
Consumer |
|
|
4,418 |
|
|
|
4,045 |
|
|
|
4,517 |
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans |
|
|
70,223 |
|
|
|
60,440 |
|
|
|
40,816 |
|
Renegotiated loans |
|
|
|
|
|
|
30 |
|
|
|
|
|
Past due loans (90 days or more and still accruing) |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and commercial real estate |
|
|
958 |
|
|
|
199 |
|
|
|
738 |
|
Residential real estate |
|
|
121 |
|
|
|
|
|
|
|
|
|
Consumer |
|
|
468 |
|
|
|
340 |
|
|
|
773 |
|
|
|
|
|
|
|
|
|
|
|
Total past due loans |
|
|
1,547 |
|
|
|
539 |
|
|
|
1,511 |
|
Foreclosed properties |
|
|
2,320 |
|
|
|
3,551 |
|
|
|
2,876 |
|
|
|
|
|
|
|
|
|
|
|
Total under-performing assets |
|
$ |
74,090 |
|
|
$ |
64,560 |
|
|
$ |
45,203 |
|
|
|
|
|
|
|
|
|
|
|
Classified loans (includes nonaccrual,
renegotiated, past due 90 days and other problem loans) |
|
$ |
153,732 |
|
|
$ |
166,428 |
|
|
$ |
115,121 |
|
Criticized loans |
|
|
103,815 |
|
|
|
97,808 |
|
|
|
103,210 |
|
|
|
|
|
|
|
|
|
|
|
Total criticized and classified loans |
|
$ |
257,547 |
|
|
$ |
264,236 |
|
|
$ |
218,331 |
|
|
|
|
|
|
|
|
|
|
|
Asset Quality Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans/total loans (1) (2) |
|
|
1.50 |
% |
|
|
1.23 |
% |
|
|
0.87 |
|
Under-performing assets/total loans and
foreclosed properties (1) |
|
|
1.58 |
|
|
|
1.32 |
|
|
|
0.96 |
|
Under-performing assets/total assets |
|
|
0.96 |
|
|
|
0.77 |
|
|
|
0.58 |
|
Allowance for loan losses/under-performing assets |
|
|
97.52 |
|
|
|
110.49 |
|
|
|
124.91 |
|
|
|
|
(1) |
|
Loans include residential loans held for sale. |
|
(2) |
|
Non-performing loans include nonaccrual and renegotiated loans. |
Loan charge-offs, net of recoveries, totaled $6.1 million for the three months ended March 31,
2008, an increase of $1.5 million from the three months ended March 31, 2007. Included in the
first quarter of 2008 is $3.0 million of
charge-offs associated with the misconduct of a former loan officer in the Indianapolis market.
Annualized, net charge-offs to average loans were 0.52% for the three months ended March 31, 2008,
as compared to 0.38% for the three months ended March 31, 2007.
32
Under-performing assets totaled $74.1 million at March 31, 2008, an increase of $9.5 million
compared to $64.6 million at March 31, 2007, and an increase of $28.9 million compared to $45.2
million at December 31, 2007. As a percent of total loans and foreclosed properties,
under-performing assets at March 31, 2008, were 1.58%, an increase from the March 31, 2007 ratio of
1.32% and an increase from the December 31, 2007 ratio of 0.96%. Nonaccrual loans were $70.2
million at March 31, 2008, compared to $60.4 million at March 31, 2007, and $40.8 million at
December 31, 2007. The increase in nonaccrual loans from December 31, 2007 to March 31, 2008 is
primarily related to $23.0 million of nonaccrual loans associated with the misconduct of a former
loan officer in the Indianapolis market. Management will continue its efforts to reduce the level
of under-performing loans and will consider the possibility of sales of troubled and non-performing
loans, which could result in additional charge-offs to the allowance for loan losses.
Total classified and criticized loans were $257.5 million at March 31, 2008, a decrease of $6.7
million from March 31, 2007, and an increase of $39.2 million from December 31, 2007.
Allowance for Loan Losses and Reserve for Unfunded Commitments
To provide for the risk of loss inherent in extending credit, Old National maintains 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. At March 31, 2008, the
allowance for loan losses was $72.3 million, an increase of $0.9 million compared to $71.3 million
at March 31, 2007, and an increase of $15.8 million compared to $56.5 million at December 31, 2007.
As a percentage of total loans, the allowance increased to 1.54% at March 31, 2008, compared to
1.46% at March 31, 2007, and 1.20% at December 31, 2007. The provision for the three months ended
March 31, 2008, amounted to $21.9 million compared to $2.4 million for the three months ended March
31, 2007. Approximately $17.0 million of the increase in the provision during the first quarter
of 2008 is associated with the misconduct of a former loan officer in the Indianapolis market.
Old National maintains 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. In accordance with
generally accepted accounting principles, the $3.0 million reserve for unfunded loan commitments is
classified as a liability account on the balance sheet. The reserve for unfunded loan commitments
decreased $0.7 million during the first three months of 2008 from $3.7 million at December 31,
2007, as the methodology indicated a lower reserve balance was appropriate.
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 Old Nationals 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.
Old National manages interest rate risk within an overall asset and liability management framework
that includes attention to credit risk, liquidity risk and capitalization. A principal objective
of asset/liability management is to manage the sensitivity of net interest income to changing
interest rates. Asset and liability management activity is governed by a policy reviewed and
approved annually by the Board of Directors. The Board of Directors has delegated the
administration of this policy to the Funds Management Committee, a committee of the Board of
Directors, and the 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 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.
Old National uses two modeling techniques to quantify the impact of changing interest rates on the
Company, Net Interest Income at Risk and Economic Value of Equity. Net Interest Income at Risk is
used by management and the Board of Directors to evaluate the impact of changing rates over a
two-year horizon. Economic Value of Equity is used to evaluate long-term interest rate risk.
These models simulate the likely behavior of the Companys net interest income and the likely
change in the Companys 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 the Companys net interest
income and value, Old National recognizes that model outputs are not guarantees of actual results.
For this reason, Old National models many different combinations of interest rates and balance
sheet assumptions to understand its overall sensitivity to market interest rate changes.
33
Old Nationals Board of Directors, through its Funds Management Committee, monitors the Companys
interest rate risk. Policy guidelines, in addition to March 31, 2008 and 2007 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% - 15.00% |
|
6.50% - 8.50% |
|
3.00% - 4.00% |
|
3.00% - 4.00% |
|
6.50% - 8.50% |
|
12.00% - 15.00% |
Red Zone |
|
15.00% |
|
8.50% |
|
4.00% |
|
4.00% |
|
8.50% |
|
15.00% |
|
3/31/2008 |
|
N/A |
|
-0.91% |
|
1.16% |
|
-0.84% |
|
-1.91% |
|
-2.83% |
3/31/2007 |
|
-1.38% |
|
0.87% |
|
1.30% |
|
-0.90% |
|
-1.69% |
|
-2.79% |
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 |
|
10.00% |
|
5.00% |
|
2.25% |
|
2.25% |
|
5.00% |
|
10.00% |
Yellow Zone |
|
10.00% - 12.50% |
|
5.00% - 7.00% |
|
2.25% - 3.25% |
|
2.25% - 3.25% |
|
5.00% - 7.00% |
|
10.00% - 12.50% |
Red Zone |
|
12.50% |
|
7.00% |
|
3.25% |
|
3.25% |
|
7.00% |
|
12.50% |
|
3/31/2008 |
|
N/A |
|
-4.57% |
|
-0.42% |
|
0.29% |
|
0.19% |
|
0.22% |
3/31/2007 |
|
-2.85% |
|
-0.33% |
|
0.81% |
|
-1.10% |
|
-2.38% |
|
-4.06% |
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% - 30.00% |
|
12.00% - 17.00% |
|
5.00% - 7.50% |
|
5.00% - 7.50% |
|
12.00% - 17.00% |
|
22.00% - 30.00% |
Red Zone |
|
30.00% |
|
17.00% |
|
7.50% |
|
7.50% |
|
17.00% |
|
30.00% |
|
3/31/2008 |
|
N/A |
|
-15.15% |
|
-2.89% |
|
-1.32% |
|
-5.34% |
|
-10.46% |
3/31/2007 |
|
-22.33% |
|
-11.24% |
|
-2.40% |
|
1.71% |
|
1.25% |
|
-0.87% |
Red zone policy limits represent Old Nationals 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 banks maximum allowable exposure (red zone) but above its normally acceptable interest
rate risk levels (green zone).
At March 31, 2008, modeling indicated Old National was within the green zone policy limits for all
Net Interest Income at Risk Scenarios. Old Nationals green zone is considered the normal and
acceptable interest rate risk
level. Modeling for the Down 300 Basis Point Net Interest Income at Risk Scenario is not
applicable in the current rate environment; the scenarios floor at zero before absorbing the full
300 basis point drop.
At March 31, 2008, modeling indicated Old National was within the yellow zone policy limit for the
Down 200 Economic Value of Equity Scenario. The Funds Management Committee has deemed this
scenario as an acceptable risk in the short term given the companys interest rate outlook. All
other modeling scenarios fell within Old Nationals green zone, which is considered the normal and
acceptable interest rate risk level. Modeling for the Down 300 Basis Point Economic Value of
Equity Scenario is not applicable in the current rate environment; the scenario floors at zero
before absorbing the full 300 basis point drop.
Old National uses derivatives, primarily interest rate swaps, as one method to manage interest rate
risk in the ordinary course of business. The Companys derivatives had an estimated fair value
gain of $3.0 million at March 31, 2008, compared to an estimated fair value gain of $20 thousand at
December 31, 2007. In addition, the notional amount of derivatives increased by $57.1 million.
The increase in market value is primarily due to the rapid reduction in market rates since December
31, 2007, specifically affecting the receive fixed interest rate swaps.
34
Liquidity Risk
Liquidity risk arises from the possibility the Company 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 Old National has the ability to fund balance sheet growth and meet deposit
and debt obligations in a timely and cost-effective manner. Management monitors liquidity through
a regular review of asset and liability maturities, funding sources, and loan and deposit
forecasts. The Company maintains strategic and contingency liquidity plans to ensure sufficient
available funding to satisfy requirements for balance sheet growth, properly manage capital
markets funding sources and to address unexpected liquidity requirements.
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.
Old Nationals ability to acquire funding at competitive prices is influenced by rating agencies
views of the Companys credit quality, liquidity, capital and earnings. Standard and Poors,
Moodys Investor Service and Dominion Bond Rating Services have each issued a stable outlook in
conjunction with their ratings as of March 31, 2008. Fitch Rating Services reaffirmed a negative
outlook in conjunction with their ratings as of March 31, 2008. The senior debt ratings of Old
National Bancorp and Old National Bank at March 31, 2008, are shown in the following table.
SENIOR DEBT RATINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard and Poors |
|
|
Moodys Investor Services |
|
|
Fitch, Inc. |
|
|
Dominion Bond Rating Svc. |
|
|
|
Long |
|
|
Short |
|
|
Long |
|
|
Short |
|
|
Long |
|
|
Short |
|
|
Long |
|
|
Short |
|
|
|
term |
|
|
term |
|
|
term |
|
|
term |
|
|
term |
|
|
term |
|
|
term |
|
|
term |
|
Old National Bancorp |
|
BBB |
|
|
|
N/A |
|
|
|
A2 |
|
|
|
N/A |
|
|
BBB |
|
|
|
F2 |
|
|
BBB (high |
) |
|
R-2 (high |
) |
Old National Bank |
|
BBB |
+ |
|
|
A2 |
|
|
|
A1 |
|
|
P-1 |
|
|
BBB |
+ |
|
|
F2 |
|
|
A (low |
) |
|
R-1 (low |
) |
As of March 31, 2008, Old National Bank had the capacity to borrow $675.7 million from the Federal
Reserve Banks discount window. Old National Bank is also a member of the Federal Home Loan Bank
(FHLB) of Indianapolis, which provides a source of funding through FHLB advances. Old National
maintains relationships in capital markets with brokers and dealers to issue certificates of
deposits and short-term and medium-term bank notes as well.
Old National Bancorp, the parent company, has routine funding requirements consisting primarily of
operating expenses, dividends to shareholders, debt service, net derivative cash flows and funds
used for acquisitions. Old
National Bancorp obtains funding to meet its obligations from dividends and management fees
collected from its subsidiaries and the issuance of debt securities. At March 31, 2008, the parent
companys other borrowings outstanding was $258.2 million, remaining constant with $258.2 million
at December 31, 2007. Old National Bancorp, the parent company, has $100 million of debt scheduled
to mature within the next 3 months.
35
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. The holding company used the cash
obtained from the dividend to fund its purchase of St. Joseph Capital Corporation during the first
quarter of 2007. As a result of this special dividend, Old National Bank requires approval of
regulatory authority for the payment of dividends to the holding company in 2008. Such approval
was obtained for the payment of dividends at March 31, 2008.
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 Old
Nationals customers. Old Nationals banking affiliates have entered into various agreements to
extend credit, including loan commitments of $1.168 billion and standby letters of credit of $109.0
million at March 31, 2008. At March 31, 2008, approximately $1.093 billion of the loan commitments
had variable rates and $75.0 million had fixed rates, with the fixed rates ranging from 2.75% to
21.0%. At December 31, 2007, loan commitments were $1.195 billion and standby letters of credit
were $114.1 million. The term of these off-balance sheet arrangements is typically one year or
less.
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 $9.6 million.
CONTRACTUAL OBLIGATIONS
The following table presents Old Nationals significant fixed and determinable contractual
obligations at March 31, 2008:
CONTRACTUAL OBLIGATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due In |
|
|
|
|
|
|
One Year |
|
|
One to |
|
|
Three to |
|
|
Over |
|
|
|
|
(dollars in thousands) |
|
or Less (A) |
|
|
Three Years |
|
|
Five Years |
|
|
Five Years |
|
|
Total |
|
Deposits without stated maturity |
|
$ |
3,614,473 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,614,473 |
|
IRAs, consumer and brokered certificates of deposit |
|
|
956,522 |
|
|
|
415,701 |
|
|
|
140,134 |
|
|
|
219,655 |
|
|
|
1,732,012 |
|
Short-term borrowings |
|
|
640,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
640,503 |
|
Other borrowings |
|
|
101,028 |
|
|
|
126,083 |
|
|
|
400,734 |
|
|
|
207,043 |
|
|
|
834,888 |
|
Operating leases |
|
|
21,271 |
|
|
|
54,620 |
|
|
|
51,543 |
|
|
|
326,551 |
|
|
|
453,985 |
|
|
|
|
(A) |
|
For the remaining nine months of fiscal 2008. |
Old National rents certain premises and equipment under operating leases. See note 16 to the
consolidated financial statements for additional information on long-term lease arrangements.
Old National is party to various derivative contracts as a means to manage the balance sheet and
its related exposure to changes in interest rates, to manage its residential real estate loan
origination and sale activity, and to provide derivative contracts to its 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 15 to the consolidated financial statements.
In the normal course of business, various legal actions and proceedings are pending against Old
National and its affiliates which are incidental to the business in which they are engaged.
Further discussion of contingent liabilities is included in Note 16 to the consolidated financial
statements.
In addition, liabilities recorded under FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement No. 109 (FIN 48) 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 FIN 48 is included in Note 14 to the
consolidated financial statements.
36
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Old Nationals accounting policies are described in Note 1 to the consolidated financial statements
included in the Companys Annual Report on Form 10-K for the year ended December 31, 2007. 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 these judgments and 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.
|
|
Allowance for Loan Losses. The allowance for loan losses is maintained at a level believed
adequate by management to absorb probable incurred losses in the consolidated loan portfolio.
Managements 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 managements 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. Old Nationals policy for recognizing income on impaired loans
is to accrue interest unless a loan is placed on nonaccrual status. A loan is generally placed
on nonaccrual status when principal or interest becomes 90 days past due unless it is well
secured and in the process of collection, or earlier when concern exists as to the ultimate
collectibility of principal or interest.
Old National monitors the quality of its loan portfolio on an on-going basis and uses a
combination of detailed credit assessments by relationship managers and credit officers,
historic loss trends, and economic and business environment factors in determining its allowance
for loan losses. Old National records provisions for loan losses based on current loans
outstanding, grade changes, mix of loans and expected losses. A detailed loan loss evaluation
on an individual loan basis for the Companys highest risk loans is performed quarterly.
Management follows the progress of the economy and how it might affect Old Nationals borrowers
in both the near and the intermediate term. Old National has 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. |
|
|
|
Old National uses migration analysis as a tool to determine the adequacy of the allowance for
loan losses for non-retail loans that are not impaired. Migration analysis is a statistical
technique that attempts to estimate probable losses for existing pools of loans by matching
actual losses incurred on loans back to their origination. |
|
|
|
Old National calculates 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 managements best estimate of the effects of
current economic conditions, loan quality trends, results from internal and external review
examinations, loan volume trends, credit concentrations and various other factors. Historic
loss ratios
adjusted for expectations of future economic conditions are used in determining the appropriate
level of allowance for consumer and residential real estate loans. |
|
|
|
Managements analysis of probable losses in the portfolio at March 31, 2008, resulted in a range
for allowance for loan losses of $7.5 million with the potential effect to net income ranging
from a decrease of $0.7 million to an increase of $4.1 million. These sensitivities are
hypothetical and are not intended to represent actual results. |
37
|
|
Goodwill and Intangibles. For acquisitions, Old National is required to record the assets
acquired, including identified intangible assets, and the liabilities assumed at their fair
value. These often involve estimates based on third-party valuations, such as appraisals, or
internal valuations based on discounted cash flow analyses or other valuation techniques that
may include estimates of attrition, inflation, asset growth rates or other relevant factors.
In addition, the determination of the useful lives for which an intangible asset will be
amortized is subjective. Under Statement of Financial Accounting Standards (SFAS) No. 142
Goodwill and Other Intangible Assets, goodwill and indefinite-lived assets recorded must be
reviewed for impairment on an annual basis, as well as on an interim basis if events or
changes indicate that the asset might be impaired. An impairment loss must be recognized for
any excess of carrying value over fair value of the goodwill or the indefinite-lived
intangible asset with subsequent reversal of the impairment loss being prohibited. |
|
|
|
The determination of fair values is based on internal valuations using managements assumptions
of future growth rates, future attrition, discount rates, multiples of earnings or other
relevant factors. Changes in these factors, as well as downturns in economic or business
conditions, could have a significant adverse impact on the carrying values of goodwill or
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. |
|
|
|
Derivative Financial Instruments. As part of the Companys overall interest rate risk
management, Old National uses 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 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 the Company 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. Management believes hedge effectiveness is evaluated properly in preparation of the
financial statements. All of the derivative financial instruments used by the Company have
active markets and indications of fair value can be readily obtained. As of March 31, 2008,
the Company was not using the short-cut method of accounting for any fair value derivatives. |
|
|
|
Income Taxes. The Company is subject to the income tax laws of the U.S., its states and
the municipalities in which the Company operates. These tax laws are complex and subject to
different interpretations by the taxpayer and the relevant government taxing authorities. In
establishing a provision for income tax expense, the Company must make judgments and
interpretations about the application of these inherently complex tax laws. The Company 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. The Company reviews income tax expense
and the carrying value of deferred tax assets quarterly; and as new information becomes
available, the balances are adjusted as appropriate. |
|
|
|
On January 1, 2007, the Company adopted FIN 48 to account for uncertain tax positions. 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 14 to the Consolidated Financial Statements
for a further description of the Companys provision and related income tax assets and
liabilities. |
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 Companys
disclosure relating to it in this Managements Discussion and Analysis.
38
FORWARD-LOOKING STATEMENTS
The following is a cautionary note about forward-looking statements. In its oral and written
communications, Old National from time to time includes forward-looking statements, within the
meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements
can include statements about estimated cost savings, plans and objectives for future operations,
and expectations about performance as well as economic and market conditions and trends. These
statements often can be identified by the use of words like expect, may, could, intend,
project, estimate, believe or anticipate. Old National may include forward-looking
statements in filings with the Securities and Exchange Commission, such as this Form 10-Q, in other
written materials and in oral statements made by senior management to analysts, investors,
representatives of the media and others. It is intended that these forward-looking statements
speak only as of the date they are made, and Old National undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on which the
forward-looking statement is made or to reflect the occurrence of unanticipated events. By their
nature, forward-looking statements are based on assumptions and are subject to risks, uncertainties
and other factors. Actual results may differ materially from those contained in any
forward-looking statement. Uncertainties which could affect Old Nationals future performance
include, but are not limited to: (1) economic, market, operational, liquidity, credit and interest
rate risks associated with Old Nationals business; (2) economic conditions generally and in the
financial services industry; (3) increased competition in the financial services industry either
nationally or regionally, resulting in, among other things, credit quality deterioration; (4) the
ability of Old National to achieve loan and deposit growth; (5) volatility and direction of market
interest rates; (6) governmental legislation and regulation, including changes in accounting
regulation or standards; (7) the ability of Old National to execute its business plan; (8) a
weakening of the economy which could materially impact credit quality trends and the ability to
generate loans; (9) changes in the securities markets; and (10) changes in fiscal, monetary and tax
policies. Investors should consider these risks, uncertainties and other factors in addition to
those mentioned by Old National in this and its other filings from time to time when considering
any forward-looking statement.
ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Managements Discussion and Analysis of Financial Condition and Results of Operations-Market
Risk and Liquidity Risk.
39
ITEM 4. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Evaluation of disclosure controls and procedures. Old Nationals principal executive
officer and principal financial officer have concluded that Old Nationals disclosure controls and
procedures (as defined in Exchange Act Rule 13a-15(e) under the Securities Exchange Act of 1934, as
amended), based on their evaluation of these controls and procedures as of the end of the period
covered by this Form 10-Q, are effective at the reasonable assurance level as discussed below to
ensure that information required to be disclosed by Old National in the reports it files under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within
the time periods specified in the rules and forms of the Securities and Exchange Commission and
that such information is accumulated and communicated to Old Nationals 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 Nationals disclosure
controls and internal controls will prevent all error and all fraud. A control system, no matter
how well conceived and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all control issues and
instances of fraud, if any, within the Company have been detected. These inherent limitations
include the realities that judgements in decision-making can be faulty, and that breakdowns can
occur because of a 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
Nationals internal control over financial reporting that occurred during the period covered by
this report that have materially affected, or are
reasonably likely to materially affect, Old Nationals internal control over financial reporting.
40
PART II
OTHER INFORMATION
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors previously disclosed in the Risk
Factors section of the Companys annual report on Form 10-K for the year ended December 31, 2007.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) ISSUER PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of Shares |
|
|
|
|
|
|
Total |
|
|
Average |
|
|
Purchased as |
|
|
Maximum Number of |
|
|
|
Number |
|
|
Price |
|
|
Part of Publically |
|
|
Shares that May Yet |
|
|
|
of Shares |
|
|
Paid Per |
|
|
Announced Plans |
|
|
Be Purchased Under |
|
Period |
|
Purchased |
|
|
Share |
|
|
or Programs |
|
|
the Plans or Programs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
01/01/08 - 01/31/08 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
4,323,645 |
|
02/01/08 - 02/29/08 |
|
|
13,433 |
|
|
|
16.81 |
|
|
|
13,433 |
|
|
|
4,310,212 |
|
03/01/08 - 03/31/08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,310,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter-to-date 03/31/08 |
|
|
13,433 |
|
|
$ |
16.81 |
|
|
|
13,433 |
|
|
|
4,310,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 5. OTHER INFORMATION
(a) |
|
None |
|
(b) |
|
There have been no material changes in the procedure by which security holders recommend
nominees to the Companys board of directors. |
ITEM 6. EXHIBITS
|
|
|
Exhibit No. |
|
Description |
3.1
|
|
Articles of Incorporation of Old National, amended May 22, 2007 (incorporated by reference to
Exhibit 3.1 of Old Nationals Current Report on Form 8-K, filed with the Securities and
Exchange Commission on May 22, 2007). |
|
|
|
3.2
|
|
By-Laws of Old National, amended April 26, 2007 (incorporated by reference to Exhibit 3.1 of
Old Nationals Current Report on Form 8-K filed with the Securities and Exchange Commission on
April 30, 2007). |
|
|
|
4.1
|
|
Senior 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 4.3 to Old
Nationals 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
Nationals Registration Statement on Form S-3, Registration No. 333-87573, filed with the
Securities and Exchange Commission on September 22, 1999). |
|
|
|
4.3
|
|
Rights Agreement, dated March 1, 1990, as amended on February 29, 2000, between Old National
Bancorp and Old National Bank, as trustee (incorporated by reference to Old Nationals Form
8-A, dated March 1, 2000). |
41
|
|
|
Exhibit No. |
|
Description |
4.4
|
|
First Indenture Supplement dated as of May 20, 2005, between Old National and J.P. Morgan
Trust Company, as trustee, providing for the issuance of its 5.00% Senior Notes due 2010
(incorporated by reference to Exhibit 4.1 of Old Nationals Current Report on Form 8-K filed
with the Securities and Exchange Commission on May 20, 2005). |
|
|
|
4.5
|
|
Form of 5.00% Senior Notes due 2010 (incorporated by reference to Exhibit 4.2 of Old
Nationals Current Report on Form 8-K filed with the Securities and Exchange Commission on May
20, 2005). |
|
|
|
10.1
|
|
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 Nationals Current Report on Form 8-K filed with the Securities and Exchange Commission on
December 15, 2004).* |
|
|
|
10.2
|
|
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 Nationals Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 15, 2004).* |
|
|
|
10.3
|
|
2005 Directors Deferred Compensation Plan (Effective as of January 1, 2005) (incorporated by
reference to Exhibit 10(c) of Old Nationals Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 15, 2004).* |
|
|
|
10.4
|
|
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 Nationals Current Report on Form 8-K filed
with the Securities and Exchange Commission on December 15, 2004).* |
|
|
|
10.5
|
|
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 Nationals Current Report
on Form 8-K filed with the Securities and Exchange Commission on December 15, 2004).* |
|
|
|
10.6
|
|
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 Nationals Current Report on Form 8-K
filed with the Securities and Exchange Commission on December 15, 2004).* |
|
|
|
10.7
|
|
2005 Executive Deferred Compensation Plan (Effective as of January 1, 2005) (incorporated by
reference to Exhibit 10(g) of Old Nationals Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 15, 2004).* |
|
|
|
10.8
|
|
Summary of Old National Bancorps Outside Director Compensation Program (incorporated by
reference to Old Nationals Quarterly Report on Form 10-Q for the quarter ended June 30,
2003).* |
|
|
|
10.9
|
|
Old National Bancorp Short-Term Incentive Compensation Plan (incorporated by reference to
Appendix II of Old Nationals Definitive Proxy Statement filed with the Securities and
Exchange Commission on March 16, 2005).* |
|
|
|
10.10
|
|
Old National Bancorp 1999 Equity Incentive Plan (incorporated by reference to Old Nationals
Form S-8 filed on July 20, 2001).* |
|
|
|
10.11
|
|
First Amendment to the Old National Bancorp 1999 Equity Incentive Plan (incorporated by
reference to Exhibit 10(f) of Old Nationals Quarterly Report on Form 10-Q for the quarter
ended September 30, 2004).* |
42
|
|
|
Exhibit No. |
|
Description |
10.12
|
|
Form of 2004 Performance-Based Restricted Stock Award Agreement between Old National and
certain key associates (incorporated by reference to Exhibit 10(g) of Old Nationals Quarterly
Report on Form 10-Q for the quarter ended September 30, 2004).* |
|
|
|
10.13
|
|
Form of 2005 Performance-Based Restricted Stock Award Agreement between Old National and
certain key associates, (incorporated by reference to Exhibit 10(r) of Old Nationals
Quarterly Report on Form 10-Q for the quarter ended March 31, 2005). * |
|
|
|
10.14
|
|
Form of Executive Stock Option Award Agreement between Old National and certain key
associates (incorporated by reference to Exhibit 10(h) of Old Nationals Quarterly Report on
Form 10-Q for the quarter ended September 30, 2004).* |
|
|
|
10.15
|
|
Stock Purchase and Dividend Reinvestment Plan (incorporated by reference to Old Nationals
Registration Statement on Form S-3, Registration No. 333-120545 filed with the Securities and
Exchange Commission on November 16, 2004). |
|
|
|
10.16
|
|
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 Nationals Current
Report on Form 8-K filed with the Securities and Exchange Commission on March 2, 2006).* |
|
|
|
10.17
|
|
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 Nationals Current
Report on Form 8-K filed with the Securities and Exchange Commission on March 2, 2006).* |
|
|
|
10.18
|
|
Form of 2006 Non-qualified Stock Option Agreement (incorporated by reference to Exhibit 99.3
of Old Nationals Current Report on Form 8-K filed with the Securities and Exchange Commission
on March 2, 2006).* |
|
|
|
10.19
|
|
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 Nationals Annual
Report on Form 10-K for the year ended December 31, 2006).* |
|
|
|
10.20
|
|
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 Nationals Annual
Report on Form 10-K for the year ended December 31, 2006).* |
|
|
|
10.21
|
|
Form of 2007 Non-qualified Stock Option Agreement between Old National and certain key
associates (incorporated by reference to Exhibit 10(y) of Old Nationals Annual Report on Form
10-K for the year ended December 31, 2006).* |
|
|
|
10.22
|
|
Purchase and Sale Agreement dated December 20, 2006, between Old National Bancorp, Old
National Bank, Old National Realty Company, Inc., ONB One Main Landlord, LLC, ONB 123 Main
Landlord, LLC, and ONB 4th Street Landlord, LLC (incorporated by reference to
Exhibit 10(z) of Old Nationals Annual Report on Form 10-K for the year ended December 31,
2006). |
|
|
|
10.23
|
|
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 Nationals Annual Report on Form 10-K
for the year ended December 31, 2006). |
|
|
|
10.24
|
|
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 Nationals Annual Report on Form 10-K
for the year ended December 31, 2006). |
43
|
|
|
Exhibit No. |
|
Description |
10.25
|
|
Lease Agreement, dated December 20, 2006 between ONB 4th Street Landlord, LLC and
Old National Bank (incorporated by reference to Exhibit 10(ac) of Old Nationals Annual Report
on Form 10-K for the year ended December 31, 2006). |
|
|
|
10.26
|
|
Agreement and Plan of Merger dated as of October 21, 2006 by and among Old National Bancorp,
St. Joseph Capital Corporation and SMS Subsidiary, Inc. (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 Nationals Current Report on Form 8-K filed with the Securities and Exchange
Commission on October 23, 2006). |
|
|
|
10.27
|
|
Purchase and Sale Agreement dated September 19, 2007, by and among Old National Bank, ONB
Insurance Group, Inc., ONB CTL Portfolio Landlord #1, LLC, ONB CTL Portfolio Landlord #2, LLC,
ONB CTL Portfolio Landlord #3, LLC, ONB CTL Portfolio Landlord #4, LLC and ONB CTL Portfolio
Landlord #5, LLC (incorporated by reference to Exhibit 99.1 of Old Nationals Current Report
on Form 8-K filed with the Securities and Exchange Commission on September 25, 2007). |
|
|
|
10.28
|
|
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 Nationals
Current Report on Form 8-K filed with the Securities and Exchange Commission on September 25,
2007). 8-K filed with the Securities and Exchange Commission on September 24, 2007). |
|
|
|
10.29
|
|
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 Nationals Current Report on Form 8-K filed with the Securities and Exchange
Commission on September 25, 2007). |
|
|
|
10.30
|
|
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 Nationals
Current Report on Form 8-K filed with the Securities and Exchange Commission on September 25,
2007). |
|
|
|
10.31
|
|
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 Nationals
Current Report on Form 8-K filed with the Securities and Exchange Commission on September 25,
2007). |
|
|
|
10.32
|
|
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 Nationals
Current Report on Form 8-K filed with the Securities and Exchange Commission on September 25,
2007). |
|
|
|
10.33
|
|
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 Nationals
Current Report on Form 8-K filed with the Securities and Exchange Commission on September 25,
2007). |
|
|
|
10.34
|
|
Purchase and Sale Agreement dated October 19, 2007, by and among Old National Bank, American
National Trust and Investment Management Company, ONB Traditional Portfolio Landlord, LLC, ONB
Site 3 Landlord, LLC, ONB Site Landlord 4, LLC, ONB Site Landlord 6, LLC, ONB Site Landlord
14, LLC, ONB Site Landlord 15, LLC, ONB Site Landlord 17, LLC, ONB Site Landlord 19, LLC, ONB
Site Landlord 20, LLC, ONB Site Landlord 25, LLC, ONB Site Landlord 26, LLC, ONB Site Landlord
27, LLC, ONB Site Landlord 29, LLC, ONB Site Landlord 33, LLC, ONB Site
Landlord 35, LLC, ONB Site Landlord 36, LLC, ONB Site Landlord 37, LLC, ONB Site
Landlord 41, LLC, ONB Site Landlord 43, LLC, ONB Site Landlord 44, LLC, ONB Site
Landlord 45, LLC, ONB Site Landlord 47, LLC, ONB Site Landlord 48, LLC and ONB Site
Landlord 57, LLC (incorporated by reference to Exhibit 99.1 of Old Nationals Current
Report on Form 8-K filed with the Securities and Exchange Commission on October 25, 2007). |
44
|
|
|
Exhibit No. |
|
Description |
10.35
|
|
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 Nationals Current Report on Form 8-K filed with the Securities and Exchange
Commission on October 25, 2007). |
|
|
|
10.36
|
|
Purchase and Sale Agreement dated December 27, 2007, by and among Old National Bank, ONB
Traditional Portfolio Landlord, LLC, ONB Site 1 Landlord, LLC, ONB Site 8 Landlord, LLC, ONB
Site 9 Landlord, LLC, ONB Site 38 Landlord, LLC, and ONB Site 42 Landlord, LLC (as
incorporated by reference to Exhibit 99.1 of Old Nationals Current Report on Form 8-K filed
with the Securities and Exchange Commission on December 31, 2007). |
|
|
|
10.37
|
|
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 Nationals Current Report on Form 8-K filed with the Securities and
Exchange Commission on December 31, 2007). |
|
|
|
10.38
|
|
Form of 2008 Non-qualified Stock Option Award Agreement (incorporated by reference to
Exhibit 99.1 of Old Nationals Current Report on Form 8-K filed with the Securities and
Exchange Commission on January 30, 2008).* |
|
|
|
10.39
|
|
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 Nationals Current
Report on Form 8-K filed with the Securities and Exchange Commission on January 30, 2008).* |
|
|
|
10.40
|
|
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 Nationals Current
Report on Form 8-K filed with the Securities and Exchange Commission on January 30, 2008).* |
|
|
|
10.41
|
|
Form of Employment Agreement for Robert G. Jones, Daryl D. Moore, Barbara A. Murphy and
Christopher A. Wolking (incorporated by reference to Exhibit 10.1 of Old Nationals Current
Report on Form 8-K filed with the Securities and Exchange Commission on March 21, 2008).* |
|
|
|
10.42
|
|
Severance/Change in Control Agreement between Old National and Annette W. Hudgions
(incorporated by reference to Exhibit 10.2 of Old Nationals Current Report on Form 8-K filed
with the Securities and Exchange Commission on March 21, 2008).* |
|
|
|
31.1
|
|
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
|
|
|
31.2
|
|
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
|
|
|
32.1
|
|
Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. |
|
|
|
32.2
|
|
Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. |
|
|
|
* |
|
Management contract or compensatory plan or arrangement |
45
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
OLD NATIONAL BANCORP
(Registrant)
|
|
|
By: |
/s/ Christopher A. Wolking
|
|
|
|
Christopher A. Wolking |
|
|
|
Senior Executive Vice President and
Chief Financial Officer
Duly Authorized Officer and Principal Financial Officer |
|
|
|
Date: May 5, 2008 |
|
|
46
EXHIBIT INDEX
|
|
|
Exhibit No. |
|
Description |
|
|
|
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. |