Old National Bank -- a Leader in Performance Management

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Old National Bank A Leader in Performance Management Executive Summary

Evansville, Ind.-based Old National Bancorp embarked on a transformation shortly after President and CEO Robert G. Jones joined the community bank in late 2004. The change it planned and implemented qualifies as both straightforward and profound for a community banking company that celebrated its 175th anniversary in 2009.

At the most basic level, Old National Bank shifted its orientation from a reactive business to a proactive one. This shift in decision-making perspective also required an extensive, multi-year overhaul of the bank’s “enterprise management reporting” capabilities (a phrase the company uses to broadly define budgeting, forecasting, balanced scorecard and other business performance management processes). The transformation so far has delivered significant improvements within each of the company’s three core strategic imperatives:

• Strengthen the Risk Profile

• Enhance Management Discipline

• Achieve Consistent Quality Earnings

The improvements have helped Old National Bank become one of the top 25 best performing banks in the United States, according to Forbes, for the past two years. Old National also was among the first four banks in 2009 to return all of the money it received through the Troubled Asset Relief Program (TARP) the U.S. Trea- sury Department created in the wake of the global financial crisis. In addition to the honors and recognition Old National has received for its community-support activities and its commitment to workforce diversity, the bank continues to deliver on its mission of consistently exceeding the expectations of clients, associates and shareholders. The company’s 2010 financial performance reflected both a vast improvement in net income (up 290 percent compared to 2009) and an ongoing commitment to cost-reduction efforts. Old National reduced expenses by more than 7 percent, or $24.7 million, during 2010.

Despite these achievements, the transformation continues as the executive team and the corporate finance function, with the active support of the board of directors and its finance committee, strive to further strengthen the execution of the company’s three strategic imperatives.

PROTIVITI • OLD NATIONAL BANK • 1 Old National Bank Is Ready for the Future

“In preparing for battle I have always found that plans are useless, but planning is indispensible.”

Dwight D. Eisenhower

President Eisenhower, who spent his formative years in the Midwest, might have appreciated community banking leader Old National Bancorp’s budgeting, forecasting and planning transformation.

When the Evansville, Ind.-based financial services holding company realized that its plans – its annual budget and quarterly forecasts, in particular – were less than useful, the organization’s CEO, with support from the board of directors, directed the corporate finance team to overhaul the bank’s business performance management capabilities (the company refers to these capabilities as “enterprise management reporting”). The effort, which began in 2004 and continues today, includes:

• Revamping a balanced scorecard program;

• Streamlining the budgeting process;

• Moving to a rolling forecast;

• Achieving a better understanding of profitability throughout the company;

• Implementing supporting technology (from SAP);

• Creating more effective links between incentive compensation and performance; and

• Harvesting data to produce insights that strengthen scenario planning efforts as well as decision-making at all levels of the company.

This ongoing transformation has succeeded in clarifying the link between Old National Bank’s strategic objectives and individual business unit and branch performance; strengthened accountability throughout the enterprise; and enhanced the bank’s risk profile as well as its ability to provide shareholders with consistent, quality return. Not coincidentally, for two years running, Old National has been identified by Forbes Magazine as one of the 25 best performing banks in the United States.

PROTIVITI • OLD NATIONAL BANK • 2 About Old National Bancorp

Old National Bancorp, which celebrated its 175th anniversary in 2009, is the largest financial services holding company headquartered in Indiana and, with $8.1 billion in assets, ranks among the top 100 banking companies in the United States. Since its founding in Evansville in 1834, Old National has focused on community banking by building long-term, highly valued partnerships with clients in its primary footprint of Indiana, Illinois and Kentucky. In addition to providing extensive services (through roughly 200 branch offices) in retail and commercial banking, wealth management, investments, and brokerage, Old National also owns one of the largest independent insurance agencies headquartered in Indiana, offering complete personal and commercial insurance solutions.

“You don’t receive this type of performance recognition through your good looks,” notes Old National Bancorp President and CEO Robert G. Jones, “you get there because you’re providing value to your shareholders.”

One of the most immediate benefits of the new performance management capability is that the company now is able to complete its annual budget in November rather than in February, two months into the new fiscal year.

“More important,” Jones continues, “the tools and insights we have been able to provide to decision-makers from the board level down to the branch level have helped us become much more proactive. And our new processes and tools enable our CFO to provide investors with a far more detailed analysis of our financial performance.”

The benefits of Old National’s shift to more proactive decision-making also include early responses to the likely financial impacts of the Federal Reserve Board Regulation E (Reg E) rules changes and the more sweeping Dodd–Frank Wall Street Reform and Consumer Protection Act. By understanding the nature of these regulatory (and related balance sheet) risks, Old National was among the first banks to make adjustments that successfully offset the eventual decline of some fee-based revenue streams.

“A number of [banking] CEOs have come up to me and either said, ‘We wish we had the foresight to respond how you responded to Reg E,’ or asked, ‘How did you know the challenge was going to be so big?’” Jones explains. “We knew about this and were able to take action early because of our management reporting system.”

To understand how continuous planning became indispensible at Old National Bank, it helps to understand the previous state of its management reporting and how it continues to evolve.

Starting from Scratch

Shortly after Jones joined Old National in September 2004, he called the company’s market presidents. “I introduced myself and then asked how they were doing toward their budget,” Jones recalls. “The common response was, ‘We don’t have budgets at the bank level, or the market level, let alone at the branch level.’”

At the time, the company budgeted at an enterprise level, but the budget was not well vetted deeper in the organization. The annual budget was frequently approved in the first quarter of the fiscal year, and it was largely based on the company’s performance early in the first quarter. “Our existing system did not allow for managers at the grassroots level of the company to contribute information that could be rolled up at the

PROTIVITI • OLD NATIONAL BANK • 3 The Accountability Payoff

Old National Bancorp’s implementation of a new performance management capability – a transformation driven by executive leadership’s desire for greater accountability throughout the organization – has delivered a number of strategic benefits, including improvements in its three strategic imperatives:

• Strengthen the Risk Profile: Old National analyzed the potential financial impact of the Federal Reserve Board Regulation E rules changes before the changes were finalized; then, the company adjusted fees on other product lines to offset the revenue loss the rules changes would eventually cause. Additionally, Old National was one of the first banks to return all of its Troubled Asset Relief Program (TARP) money to the U.S. Treasury Department.

• Enhance Management Discipline: Rather than completing its annual budget two months into the new fiscal year, Old National now finalizes and approves its annual budget two months before the fiscal year begins. Additionally, the forecasting process, which previously was conducted almost entirely by the corporate finance team, is now a collaborative, and more accurate, effort: The finance function owns the process and tools while the business units own the data.

• Achieve Consistent, Quality Returns: The new budgeting, forecasting and reporting capabilities have freed up corporate finance personnel to focus more on the future growth opportunities and less on the manual gathering and review of data related to past performance.

corporate level. Our budgeting and forecasting were not accurate and these processes did not deliver timely information,” recalls Chris Wolking, who joined the company in 1999 as treasurer and was appointed CFO shortly after Jones became CEO.

“At this point,” Jones recalls, “we were a loose confederation of community banks that had a single banner but little to no accountability … we started from scratch compared to where we are today in terms of management reporting that drives accountability throughout our entire organization.”

Jones and Wolking discussed the challenges they wanted to address. These were organized into four categories by Wolking’s senior finance team, which conducted interviews with dozens of organizational leaders and produced a report on their findings:

• Reporting issues: Overall, the previous management reporting system did not provide information related to business drivers that managers could use to take action. The largely manual management reporting process frequently produced unstructured data that managers had to sift through in order to find useful information. Profitability metrics existed only at the consolidated, corporate level, which prevented managers and executives from understanding how a specific business unit was performing on a return on capital (ROC) basis.

• Measurement issues: The lack of reliable links between enterprise-level key performance indicators (KPIs) and meaningful business-unit KPIs clouded assessments of business unit performance and limited the effectiveness of driver-based incentive compensation plans where they existed in the company.

PROTIVITI • OLD NATIONAL BANK • 4 • Data issues: Although Old National’s financial reporting processes and financial statements had always been first-rate, thanks to what Wolking describes as an excellent financial accounting and reporting group, data management shortcomings – including differences in line-item definitions among different parts of the business – increased the amount of manual reviews required in management reporting processes.

• Budgeting and forecasting issues: An extremely manual and time-consuming budgeting process required the bank’s financial analysts to invest most of their time gathering data and left little time for more valuable assessments of important analytics. Forecasting was completed quarterly and only at the highest level of the company; these forecasts, which frequently were inaccurate, contained too much detail, further slowing the review process.

Wolking and Jones decided on a course of action that included revamping the balanced scorecard currently in use, strengthening board-level oversight, and creating entirely new management reporting and business performance management capabilities supported by leading-edge business software.

But first, Jones set to work on articulating a strategy that would guide this effort and all others within Old National under his leadership.

Leadership Vision

Fortunately, Jones had a head start thanks to Old National’s rich heritage of customer service, shareholder returns, community service and its core value of integrity.

The company’s dedication to transparency is reflected in its 4-Star (“Excellent”) standing from Bauer Finan- cial, a prominent independent bank rating and research firm. Old National also received its Ethics Inside® certification from Ethisphere Institute. Old National’s numerous community programs promote financial literacy and financial management skills for all ages, and associates collectively donate tens of thousands of vol- unteer hours every year to service organizations in the bank’s communities.

To provide a better framework for these accomplishments as well as future internal improvements, Jones identified three strategic imperatives that would help Old National differentiate itself by consistently exceeding the expectations of clients, associates and shareholders. These imperatives remain in place today:

1. Continually maintaining and strengthening the company’s risk profile;

2. Maintaining a continual focus on management discipline (which centers on accountability); and

3. Providing shareholders with a consistent, quality return.

(The importance and day-to-day relevance of these strategic imperatives are evident in Old National’s earnings releases: In addition to providing a standard assessment of financial performance, they also report on the specific ways the company is making progress within each strategic imperative.)

Old National’s risk consists primarily of balance-sheet risk (which includes investments and credit), operational risk and reputation risk. The need for the management reporting project arose, initially, in the context of the second strategic imperative. Jones and his senior leadership team wanted to create a better way to hold their people accountable. The leadership team knew that if this effort succeeded, more effective management reporting – the type that can drive better product profitability decisions – would help deliver consistent, quality earnings.

PROTIVITI • OLD NATIONAL BANK • 5 Of note, the multi-phase performance management solution that Wolking’s finance function proposed was far from the only strategic investment Jones considered in 2008. “We get a lot of requests for capital and talent,” Jones notes. “At the end of the day you need to operate your company on the basis of your strategic imperatives. This effort supported our imperative so strongly, it really wasn’t a debate in my mind as to whether we should do this or not; it was a question of the expediency with which it could be accomplished.”

Four Objectives

The board of directors enthusiastically agreed with Jones’ assessment, and the improvement effort, under Wolking’s leadership, began. He formed a management reporting team, led by Senior Vice President of Finan- cial Planning & Analysis Jim Hopkins (who has since been promoted to Director of Operational Excellence) and Manager of Management Reporting Craig Berkeley, to guide the project’s implementation. (Old National enlisted Protiviti to assist with the initiative.) The initial step taken by Hopkins was to establish a vision for this new capability, which he articulated in a memo to the Old National Bank Executive Leadership Group. In this memo, he also set the goals for the performance management initiative, which features four high-level objectives:

1. Resolve data and information-reporting issues;

2. Build more robust profitability models;

3. Revise budget and forecasting processes; and

4. Develop and implement balanced scorecards.

Two other changes, the creation of a finance committee of the board and the formation of a performance peer group for benchmarking purposes, also represented noteworthy steps in the initiative.

Wolking had introduced the balanced scorecard three years prior to the performance management initiative; however, the scorecard lacked a proper foundation of accountability in terms of meaningful links between business units and the performance of the organization.

“Our initial balanced scorecard was more of a cultural tone-setting tool than a financial tool,” explains Jones, who used the revamping of the balanced scorecard that accompanied the performance management initiative as an opportunity to set a new tone. “I used those meetings more to communicate that we wanted to hold our people accountable.”

The formation of a finance committee of Old National’s board, which, like most boards, already operated separate audit and risk committees, further strengthened the message of accountability. Wolking now presents a report to the finance committee each time it meets. “The finance committee established more oversight,” Jones notes. “It has improved our communications with the board and helped our directors better understand the financial engine and our financial processes.”

To help provide benchmarks Old National could use once its performance management capabilities were in place, Wolking and his team formed a “Back-to-Basics Peer Group” – a small group of similar-sized companies (but not competitors) that Old National deems as high-performers based on their historical results. The peer group serves as a measuring stick for Old National and is used to identify performance gaps that require attention.

“Our aspiration is to be the highest-performing bank in the peer group,” Jones asserts. “We will get there.”

That goal already seems possible; several of the finance executives and managers within the peer group companies already have approached Wolking to learn how they might put in place similar capabilities. “Today, I field

PROTIVITI • OLD NATIONAL BANK • 6 a lot more questions about performance management from my fellow CFOs,” Wolking reports. Part of the interest in ONB’s approach stems from ongoing revenue constraints: Many banks are looking for better ways to manage expenses.

Old National’s new performance management capabilities strengthen its expense management efforts, Wolking adds. From a technology perspective, these new capabilities are supported by SAP software and func- tionality that was implemented during the initiative. This technology includes:

Capability SAP’s Supporting Technology

Monthly Forecasting BusinessObjects Planning and Consolidation (BPC)

Profitability Reporting Profitability & Cost Management

Balanced Scorecard Strategy Management

The forecasting tool supports Old National’s move from quarterly forecasts to monthly rolling forecasts, and it also enables scenario modeling, which represents one of the numerous benefits (e.g., effective government- mandated stress tests) that the new management reporting capabilities have delivered.

Strategic Benefits

The benefits Old National has reaped from its investment in more advanced management reporting fall into three familiar categories:

A Stronger Risk Profile The stress tests used monthly forecasting data and relate to U.S. Treasury Department requirements as part of TARP. Old National was an early recipient of TARP funding and used forecasting data to help with stress tests mandated by the Treasury. The stress test output enabled the company to be one of the first four banks to return, in the spring of 2009, all of the money it received through TARP. “We could not have been one of the first banks to pay back TARP without this new system,” Jones points out.

By forecasting the potential bottom-line impact of Reg E (before it was finalized), which restricts certain types of consumer overdraft and automated teller machine (ATM) fees, Old National Bank’s new scenario modeling capability helped it identify, evaluate and implement actions, including adjusting fees on other products, that offset the financial impact the company expected once the rules were finalized.

In this case, the likelihood of new rules created a financial risk that the company addressed proactively.

Better Management Discipline As Jones and Wolking emphasize, this discipline equates to accountability. By replacing highly manual, late and often inaccurate budgeting and forecasting processes with a more efficient and effective budgeting exercise as well as a monthly rolling forecast, Old National enables greater accountability through more meaningful process and performance indicators. Historically, the budget and forecast were products owned and produced by the finance department. Now, Hopkins points out, business line managers are much more involved in the process. “Finance no longer ‘owns’ the numbers,” Hopkins explains. “Line managers do.”

As a result, rather than completing a budget two months into the new year, Old National approves its annual budget two months before the fiscal year begins.

PROTIVITI • OLD NATIONAL BANK • 7 “In 2010, all banks’ revenue streams were challenged by the introduction of new regulations as well as a host of other economic issues,” Wolking notes. “Looking back at our year, I can see that [through our new business forecasting capabilities] we received good information very quickly about the potential impacts of various regulatory issues as well as marketplace challenges. That information started at the branch level and rolled all the way up. I feel confident that we contributed to some very good strategic decisions.”

Consistent, Quality Returns The new budgeting, forecasting and reporting capabilities have freed up corporate finance personnel to focus more on the future (e.g., identifying products and areas of the company ripe for profitability improvements and analyzing different growth opportunities) and less on the manual manipulation and review of data related to past performance.

“We’ve gone from a reactive-reactive system to a reactive-proactive system,” Jones explains. “In the old days, we reacted to what we saw and then we had to react to the numbers because we were not quite sure that they were right. Now we can react to what we see and be proactive in the decisions that we make in response to what we see. Chris [Wolking] has definitely become a strategic partner.”

“(By) using this information to make intelligent decisions about our business and our future performance,” Wolking notes, “Old National has assumed greater control of its bottom line, which should please shareholders.”

Looking Ahead: Visibility into Profitability

Higher-quality shareholder returns will likely come from two areas of the performance management initiative that are currently underway: product, customer and officer profitability, and more accurate incentive compensation links.

Many incentive compensation plans throughout the financial services industry contributed to the financial crisis; many of these plans either failed to account sufficiently for balance sheet risks or simply placed too much emphasis on short-term performance. While the industry as a whole has been understandably cautious about wading back into variable compensation programs, Wolking remains enthusiastic about using the bank’s capabilities to develop the most effective – and valuable – links between individual performance and corporate profitability over the long term. “I can put an incentive plan in place that will illustrate value clearly by using the information in the system.”

For his part, Jones expresses excitement about the greater visibility into product, officer, branch and client profitability the new capabilities eventually will deliver.

“Once I can understand the profitability of an individual product, I can understand the profitability of the client, which then helps us create our pricing and growth strategies,” Jones asserts. That help is important, given the increase in merger and acquisition activity that appears likely within the industry during the next 12 to 24 months. Jones and Wolking expect the new management reporting system to analyze the potential return on capital of various growth opportunities quickly and accurately.

Looking ahead to the additional capabilities and benefits Jones and Wolking describe calls to mind words that appear at the end of Hopkins’ 2008 memo that deftly laid out the management reporting challenges Old National faced as well as the solution it should consider.

In that document, the final phase of the performance management initiative is described as “continuous revision,” and the word used to describe the implementation time line is telling: “Infinite.”

Phase three never ends at Old National Bank, where continuous performance management has truly become indispensible.

PROTIVITI • OLD NATIONAL BANK • 8 About Protiviti

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In order to provide critical information and insights for decision-making, the finance organization must play an active role in planning, measuring and monitoring business performance. Recent surveys have indicated that “measurement managed” companies are ranked in the top third of their respective industries in terms of leadership, financial results and the ability to assimilate change in the organization.

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