SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
------------------
[ ] 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 0-10888
--------------------------------------------------
OLD NATIONAL BANCORP
(Exact name of Registrant as specified in its charter)
INDIANA 35-1539838
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
420 MAIN STREET,
EVANSVILLE, INDIANA 47708
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code, (812) 464-1200
Former name, former address and former fiscal year, if changed since last
reports.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to the filing requirements for
at least the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock. The Registrant has one class of common stock (no par value) with
approximately 27.5 million shares outstanding at September 30, 1998.
<PAGE>
OLD NATIONAL BANCORP
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements --------
Consolidated Balance Sheet
September 30, 1998 and 1997, and December 31, 1997........ 3
Consolidated Statement of Income
Three and nine months ended September 30, 1998 and 1997... 4
Consolidated Statement of Cash Flows
Nine months ended September 30, 1998 and 1997............. 5
Notes to Consolidated Financial Statements................ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 11
PART II OTHER INFORMATION......................................... 15
SIGNATURES......................................................... 16
INDEX OF EXHIBITS.................................................. 17
2
<PAGE>
OLD NATIONAL BANCORP
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
($ IN THOUSANDS) (UNAUDITED) 1998 1997 1997
- - ---------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks................................... $ 131,690 $ 136,327 $ 159,241
Money market investments.................................. 14,742 3,003 7,868
INVESTMENT SECURITIES:
U.S. Treasury.......................................... 99,584 128,069 117,188
U.S. Government agencies
and corporations....................................... 941,570 982,267 951,444
Obligations of states and political
subdivisions........................................ 477,210 450,562 452,933
Other.................................................. 52,202 42,663 45,411
---------- ---------- ----------
TOTAL INVESTMENT SECURITIES......................... 1,570,566 1,603,561 1,566,976
---------- ---------- ----------
LOANS
Commercial............................................. 918,903 858,489 878,690
Commercial real estate................................. 878,269 727,715 762,505
Residential real estate................................ 1,497,998 1,379,645 1,416,963
Consumer credit, net of unearned income................ 661,695 676,339 672,043
Financial.............................................. 80,690 - -
---------- ---------- ----------
Total Loans......................................... 4,037,555 3,642,188 3,730,201
Allowance for loan losses........................... (49,194) (45,289) (46,233)
---------- ---------- ----------
NET LOANS........................................... 3,988,361 3,596,899 3,683,968
Other assets.............................................. 282,073 273,769 270,162
---------- ---------- ----------
TOTAL ASSETS........................................ $5,987,432 $5,613,559 $5,688,215
========== ========== ==========
LIABILITIES
DEPOSITS
Noninterest bearing demand............................. $ 476,992 $ 463,076 $ 502,276
Interest bearing:
NOW accounts........................................ 434,080 419,870 450,381
Savings accounts.................................... 453,063 475,065 469,589
Money market accounts............................... 645,484 645,756 660,240
Certificates of deposit
$100,000 and over................................... 396,391 364,007 359,695
Other time.......................................... 1,965,539 1,895,907 1,856,549
---------- ---------- ----------
TOTAL DEPOSITS...................................... 4,371,549 4,263,681 4,298,730
---------- ---------- ----------
Short-term borrowings..................................... 405,923 444,631 442,686
Other borrowings.......................................... 629,758 358,039 388,832
Accrued expenses and other liabilities.................... 88,008 77,564 80,764
---------- ---------- ----------
TOTAL LIABILITIES...................................... 5,495,238 5,143,915 5,211,012
SHAREHOLDERS' EQUITY
Common stock........................................... 27,495 26,169 27,457
Capital surplus........................................ 285,384 242,941 299,988
Retained earnings...................................... 157,864 187,213 133,218
Accumulated other comprehensive
income, net of tax.................................... 21,451 13,321 16,540
---------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY............................. 492,194 469,644 477,203
---------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY.............................................. $5,987,432 $5,613,559 $5,688,215
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE>
OLD NATIONAL BANCORP
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
($ IN THOUSANDS EXCEPT SHARE ----------------------- -------------------------
AND PER SHARE DATA) (UNAUDITED) 1998 1997 1998 1997
- - ------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans including fees:
Taxable ...................................... $ 86,459 $ 79,556 $ 250,298 $ 231,881
Non-taxable................................... 1,501 1,062 4,143 3,102
Investment securities:
Taxable....................................... 17,863 19,515 54,151 56,317
Non-taxable................................... 5,892 5,813 17,381 17,740
Money market investments......................... 140 180 829 578
---------- ---------- ---------- ----------
Total Interest Income......................... 111,855 106,126 326,802 309,618
---------- ---------- ---------- ----------
INTEREST EXPENSE
Savings, NOW and
money market accounts......................... 10,630 11,408 32,171 33,831
Certificates of deposit of $100,000
and over...................................... 5,618 4,837 16,540 12,644
Other time deposits.............................. 27,845 26,799 81,057 78,280
Short-term borrowings............................ 5,656 6,085 16,077 16,564
Other borrowings................................. 8,317 4,717 20,572 12,331
---------- ---------- ---------- ----------
Total Interest Expense........................ 58,066 53,846 166,417 153,650
---------- ---------- ---------- ----------
Net Interest Income........................... 53,789 52,280 160,385 155,968
Provision for loan losses........................ 2,847 3,001 8,947 8,631
---------- ---------- ---------- ----------
Net Interest Income After Provision
For Loan Losses............................... 50,942 49,279 151,438 147,337
---------- ---------- ---------- ----------
NONINTEREST INCOME
Trust fees....................................... 3,271 2,765 9,515 8,318
Service charges on deposit accounts.............. 4,082 4,028 12,003 11,830
Loan servicing fees.............................. 1,486 1,428 4,438 4,224
Securities gains (losses), net................... (32) (2) 19 (12)
Bank-owned life insurance........................ 1,307 - 2,640 -
Other income..................................... 3,902 3,388 11,577 9,794
---------- ---------- ---------- ----------
Total Noninterest Income...................... 14,016 11,607 40,192 34,154
---------- ---------- ---------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits................... 22,807 21,277 67,431 64,867
Occupancy expense................................ 2,307 2,338 6,799 6,933
Equipment expense................................ 3,146 2,913 9,371 9,077
Marketing expense................................ 1,397 1,328 4,236 4,031
FDIC insurance expense........................... 149 175 496 503
Data processing expense.......................... 1,372 1,310 3,923 3,884
Supplies expense................................. 947 957 2,902 3,072
Communication and transportation expense......... 1,685 1,698 5,131 5,024
Other expenses................................... 5,474 5,132 16,285 15,319
---------- ---------- ---------- ----------
Total Noninterest Expense..................... 39,284 37,128 116,574 112,710
---------- ---------- ---------- ----------
Income from continuing operations ...............
before income taxes............................ 25,674 23,758 75,056 68,781
Provision for income taxes....................... 6,637 6,627 21,549 20,166
---------- ---------- ---------- ----------
Income from continuing operations................ 19,037 17,131 53,507 48,615
Income (loss) from discontinued
operations..................................... - (451) (9,854) 395
---------- ---------- ---------- ----------
Net Income....................................... $ 19,037 $ $16,680 $ 43,653 $ 49,010
========== ========== ========== ==========
INCOME FROM CONTINUING OPERATIONS
PER COMMON SHARE
Basic......................................... $ 0.69 $ 0.62 $ 1.94 $ 1.75
========== ========== ========== ==========
Diluted....................................... $ 0.67 $ 0.60 $ 1.88 $ 1.70
========== ========== ========== ==========
Weighted average common shares outstanding:
Basic......................................... 27,558,932 27,568,395 27,575,431 27,782,167
========== ========== ========== ==========
Diluted....................................... 28,709,286 29,161,180 28,874,475 29,375,337
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE>
OLD NATIONAL BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
($ IN THOUSANDS) (UNAUDITED) 1998 1997
- - ---------------------------- ---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................. $ 43,653 $ 49,010
--------- ---------
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation........................................................ 7,191 7,043
Amortization of intangible assets................................... 1,026 973
Net premium amortization on investment securities................... 2,102 1,174
Provision for loan losses........................................... 8,947 8,631
Loss (gain) on sale of investment securities........................ (19) 12
Gain on sale of assets.............................................. (236) (236)
Increase in interest receivable..................................... (2,871) (4,314)
Increase in other assets............................................ (11,583) (31,551)
Increase in accrued expenses and
other liabilities.................................................. 3,999 9,079
--------- ---------
Total adjustments................................................ 8,556 (9,189)
--------- ---------
Net cash flows provided by operating activities..................... 52,209 39,821
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities available-for-sale................... (430,911) (321,576)
Proceeds from maturities and paydowns of investment
securities available-for-sale....................................... 343,224 216,247
Proceeds from sales of investment securities available-
for-sale............................................................ 90,170 24,281
Net principal collected from (loans made to) customers:
Commercial and financial............................................. (122,592) (63,123)
Mortgage............................................................. (250,257) (149,748)
Consumer............................................................. 6,396 17,741
Proceeds from sale of mortgage loans................................... 53,520 15,199
Proceeds from sale of premises and equipment........................... 438 571
Purchase of premises and equipment..................................... (6,372) (7,139)
--------- ---------
Net cash flows used in investing activities......................... (316,384) (267,547)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits and short-term borrowings:
Noninterest bearing demand.......................................... (25,284) (49,205)
NOW Accounts........................................................ (16,301) (29,616)
Savings accounts.................................................... (16,526) (13,706)
Money market accounts............................................... (14,756) (60,037)
Certificates of deposit $100,000 and over........................... 36,696 106,019
Other time deposits................................................. 108,990 42,202
Short-term borrowings............................................... (36,763) 108,646
Other borrowings.................................................... 249,370 70,631
Issuance of medium-term notes.......................................... - 49,300
Cash dividends paid.................................................... (19,006) (16,898)
Common stock repurchased............................................... (35,610) (32,059)
Common stock reissued, net of shares used to convert
subordinated debentures.............................................. 12,688 5,487
--------- ---------
Net cash flows provided by financing activities..................... 243,498 180,764
--------- ---------
Net increase (decrease) in cash and cash equivalents................... (20,677) (46,962)
Cash and cash equivalents at beginning of period....................... 167,109 186,292
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................. $ 146,432 $ 139,330
========= =========
Total interest paid................................................. $ 163,900 $ 148,834
========= =========
Total taxes paid.................................................... $ 17,873 $ 18,217
========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
5
<PAGE>
OLD NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
---------------------
The accompanying consolidated financial statements include the accounts of the
Old National Bancorp and its affiliate entities (ONB). All significant
intercompany transactions and balances have been eliminated. In the opinion of
management, the consolidated financial statements contain all the normal and
recurring adjustments necessary to present fairly the financial position of ONB
as of September 30, 1998 and 1997 and December 31, 1997, and the results of its
operations for the three and nine months ended September 30, 1998 and 1997 and
its cash flows for the nine months ended September 30, 1998 and 1997. All prior
period information has been restated for the effects of business combinations
accounted for as pooling-of-interests.
2. NET INCOME PER SHARE
--------------------
Net income per common share computations are based on the weighted average
number of common shares outstanding during the periods presented. A 5% stock
dividend was paid January 29, 1998 to shareholders of record on January 8, 1998.
All share and per share data presented herein have been restated for the effects
of this stock dividend.
Net income on a diluted basis is computed as above and assumes the conversion of
ONB's 8% convertible subordinated debentures (Note 5). For the diluted
computation, net income is adjusted for the assumed reduction in interest
expense, net of income tax effect, and an additional common shares, 1.1 million
for the quarter and 1.2 million year-to-date, are assumed to be issued in
connection with the conversion of the remaining outstanding debentures.
Earnings Per Share Reconciliation
($ and shares in thousands except per share data):
<TABLE>
<CAPTION>
For the three For the three
months ended months ended
September 30, 1998 September 30, 1997
-------------------------------- -------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
- - ---------
Income from continuing
operations available to
common stockholders $19,037 27,559 $0.69 $17,131 27,568 $0.62
===== =====
Effect of Dilutive
Securities:
Stock options 68 95
8% convertible debentures 263 1,082 368 1,498
------- ------ ------- ------
Diluted EPS
- - -----------
Income from continuing
operations available to
common stockholders
+ assumed conversions $19,300 28,709 $0.67 $17,499 29,161 $0.60
======= ====== ===== ======= ====== =====
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
For the nine For the nine
months ended months ended
September 30, 1998 September 30, 1997
-------------------------------- -------------------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
- - ---------
Income from continuing
operations available to
common stockholders $53,507 27,575 $1.94 $48,615 27,782 $1.75
===== =====
Effect of Dilutive
Securities:
Stock options 82 96
8% convertible debentures 875 1,217 1,103 1,497
------- ------ ------- ------
Diluted EPS
- - -----------
Income from continuing
operations available to
common stockholders
+ assumed conversions $54,382 28,874 $1.88 $49,718 29,375 $1.70
======= ====== ===== ======= ====== =====
</TABLE>
3. MERGER AND DIVESTITURE ACTIVITY
-------------------------------
Pending Mergers
- - ---------------
On May 27, 1998, ONB and Southern Bancshares LTD (Southern) of Carbondale,
Illinois, executed a definitive merger agreement. ONB will issue common shares
in exchange for all of the outstanding common shares of Southern. The
transaction will be accounted for as a pooling-of-interests. The merger is
subject to the approvals of Southern's shareholders and regulatory authorities.
As of September 30, 1998, Southern's financial statements reflected $251.0
million in total assets, net loans of $188.4 million, total deposits of $221.4
million and net income for the nine months then ended of $2,637 thousand. This
merger is expected to be consummated in the first quarter of 1999.
Discontinued Operations
- - -----------------------
In April 1998, ONB announced it would look at exit strategies from its sub-
prime lending affiliate, Consumer Acceptance Corporation (CAC). During June
1998, ONB finalized the sale of CAC's sub-prime auto loans, which closed in July
1998. ONB has accounted for this entity as discontinued operations on the
consolidated financial statements. Net assets of the entity which were included
in other assets were $78.6 million at September 30, 1997 and $79.2 million at
December 31, 1997. Income(loss) from discontinued operations for the three and
nine months ended September 30, 1998 and 1997 were as follows ($ in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Income (loss) before taxes
from operations of discontinued
operations $ - $ (754) $(7,943) $ 657
Income tax expense (benefit) - (303) (3,183) 262
---- ------- -------- -----
Income (loss) from operations of
discontinued operations - (451) (4,760) 395
---- ------- -------- -----
7
<PAGE>
Loss before taxes from disposal
of discontinued operations - - (8,489) -
Income tax benefit - - (3,395) -
---- ------- -------- -----
Loss from disposal of discontinued
operations - - (5,094) -
---- ------- -------- -----
Income (loss) from discontinued
operations $ - $ (451) $(9,854) $ 395
==== ======= ======== =====
Income (loss) from discontinued
operations per common share
Basic $ - $(0.01) $ (0.36) $0.02
==== ======= ======== =====
Diluted $ - $(0.02) $ (0.34) $0.01
==== ======= ======== =====
</TABLE>
4. INVESTMENTS
-----------
The market value and amortized cost of investment securities as of September 30,
1998 are set forth below ($ in thousands):
Market Value Amortized Cost
------------ --------------
Available-for-Sale, at market value $1,570,566 $1,534,847
========== ==========
5. BORROWINGS
----------
ONB has outstanding $22.0 million of 8% convertible subordinated debentures
which are due September 15, 2012, unless previously converted or redeemed. The
debentures are convertible at any time prior to maturity into shares of common
stock of ONB at a conversion rate of 49.218 shares for each one thousand dollars
principal amount of debentures. Interest on the debentures is payable on March
15 and September 15 of each year. The debentures are redeemable in whole or in
part at the option of ONB at par value. Beginning September 15, 1998, debenture
holders are entitled to an annual sinking fund contribution of $2.5 million
principal amount of debentures less conversions and redemptions. The debentures
are subordinated in right of payment to all senior indebtedness of ONB. As of
September 30, 1998, 1.1 million authorized and unissued common shares were
reserved for conversion of the debentures.
ONB has registered Series A Medium Term Notes in the principal amount of $50
million. The series has been fully issued. As of September 30, 1998, a total of
$32.0 million of the notes were outstanding, with maturities ranging from one to
five years and fixed interest rates of 6.1% to 7.0%. At September 30, 1997, ONB
had outstanding $44 million of medium term notes.
ONB also has registered Medium Term Notes in the principal amount of $150
million. These notes may be issued with maturities of nine months or more and
rates may either be fixed or variable. As of September 30, 1998, a total of
$64.3 million of the notes were outstanding, with maturities ranging from four
to nine years and fixed interest rates from 6.4% to 7.0%. At September 30, 1997,
ONB had $49.3 million outstanding under this program.
As of September 30, 1998, ONB has $80 million in unsecured lines of credit with
unaffiliated banks. These lines of credit include various informal arrangements
to maintain compensating balances. The compensating balances are maintained for
the benefit of the parent company by affiliate banks which normally maintain
correspondent balances with these unaffiliated banks. As of September 30, 1998,
$8.1 million was outstanding under these lines bearing interest rates that
averaged 6.34%. As of September 30, 1997, $25.4 million was outstanding.
8
<PAGE>
6. INTEREST RATE CONTRACTS
-----------------------
ONB uses interest rate contracts such as interest swaps and caps to manage its
interest rate risk. These contracts are designated as hedges of specific assets
and liabilities. The net interest receivable or payable on swaps is accrued and
recognized as an adjustment to the interest income or expense of the hedged
asset or liability. The premium paid for an interest rate cap is included in the
basis of the hedged item and is amortized as an adjustment to the interest
income or expense on the related asset or liability.
At September 30, 1998, ONB has an interest rate swap with a notional value of
$20 million. The contract is an exchange of interest payments with no affect on
the principle amounts of the underlying hedged liability. The fair value of the
swap contract was $0.1 million as of September 30, 1998. ONB pays the
counterparty a variable rate based on three-month LIBOR and receives a fixed
rate of 6.50%. The contract terminates on or prior to March 13, 2008.
At September 30, 1998, ONB has interest rate cap agreements (caps) with notional
amounts of $11 million with no fair value. These caps are indexed to LIBOR with
a strike price of 5.00% and mature in 1999. The carrying value at September 30,
1998 was $0.1 million.
ONB is exposed to losses if a counterparty fails to make its payments under a
contract in which ONB is in the receiving position. Although collateral or other
security is not obtained, ONB minimizes its credit risk by monitoring the credit
standing of the counterparties and anticipates that the counterparties will be
able to fully satisfy their obligation under the agreements.
7. IMPACT OF ACCOUNTING CHANGES
----------------------------
Effective January 1, 1998, ONB adopted Statement of Financial Accounting
Standards (SFAS) No. 130 "Reporting Comprehensive Income" which establishes
standards for reporting and display of comprehensive income and its components.
The new rule requires reporting of comprehensive income, which includes net
income and all other nonowner changes in equity during the period.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September September September September
30, 1998 30, 1997 30, 1998 30, 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
($ in Thousands)
Net income $19,037 $16,680 $43,653 $49,010
Unrealized gains (losses) on securities:
Unrealized holding gains
arising during period, net of tax 5,822 4,704 4,900 5,434
Less: reclassification adjustment
for (gains) losses realized
in net income, net of tax (19) 1 11 7
------- ------- ------- -------
Net unrealized gains 5,803 4,705 4,911 5,441
------- ------- ------- -------
Comprehensive income $24,840 $21,385 $48,564 $54,451
======= ======= ======= =======
</TABLE>
ONB also adopted SFAS No. 131 "Disclosures about Segments of an Enterprise and
Related Information" which establishes standards for reporting information on
operating segments. Segment data will be disclosed starting December 31, 1998,
including interim periods. The adoption of the above statement did not have a
material impact on ONB's disclosures.
9
<PAGE>
In June 1998 the Financial Accounting Standards Board (FASB) issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." This statement
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The statement is effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999 (January 1, 2000 for ONB). ONB
doesn't expect the impact of this statement will be material to the results of
operations or its financial position, due to its limited use of derivative
instruments.
10
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following management's discussion and analysis is presented to provide
information concerning the financial condition of ONB as of September 30, 1998,
as compared to September 30, 1997 and December 31, 1997, and the results of
operations from continuing operations for the three and nine months ended
September 30, 1998 and 1997.
FINANCIAL CONDITION
- - -------------------
ONB's assets at September 30, 1998 were $5.987 billion, a 6.7% increase since
September 1997 and a 5.3% increase since December 1997. Earning assets, which
consist primarily of money market investments, investment securities and loans,
grew 7.1% over the prior year. During the past year, the mix of earning assets
reflected loan growth of 10.8% while money market investments and investment
securities decreased a combined 1.3%. Since December 1997, earning assets
increased 6.0% with loans growing 8.2% and investment securities and money
market investments increasing 0.7%.
At September 30, 1998, total risk assets (defined as loans 90 days or more past
due, nonaccrual and restructured loans and foreclosed properties) increased
slightly to $20.8 million from $18.8 million as of December 31, 1997. As of
these dates, risk assets in total were 0.52% and 0.50%, respectively, of total
loans and foreclosed properties.
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Nonaccrual loans $12,735 $11,233
Restructured loans 169 248
Foreclosed properties 2,355 2,881
-------- --------
Total Non-Performing Assets 15,259 14,362
Past due 90 days or more 5,578 4,405
-------- --------
Total Risk Assets $20,837 $18,767
======== ========
Risk assets as a % of total
loans and foreclosed properties 0.52% 0.50%
======== ========
</TABLE>
As of September 30, 1998, the recorded investment in loans for which impairment
has been recognized in accordance with SFAS No. 114 and 118 was $6.6 million
with no related allowance and $45.0 million with $10.0 million of related
allowance.
ONB's policy for recognizing income on impaired loans is to accrue earnings
unless a loan becomes nonaccrual. When loans are classified as nonaccrual,
interest accrued during the current year is reversed against earnings; interest
accrued in the prior year, if any, is charged to the allowance for loan losses.
Cash received while a loan is classified nonaccrual is recorded to principal.
For the nine months ended September 30, 1998, the average balance of impaired
loans was $49.8 million and $2.6 million of interest was recorded.
ONB's consolidated loan portfolio is well diversified and contains no
concentrations of credit in any particular industry exceeding 10% of its
portfolio. ONB has minimal exposure to construction lending or leveraged buyouts
and no exposure in credits to foreign or lesser-developed countries.
11
<PAGE>
Total deposits at September 30, 1998, increased $107.9 million or 2.5% compared
to September 1997. Brokered CD's, included in other time, increased $116.7
million since September 1997. Since December 1997, total deposits increased
$72.8 million or 1.7% with brokered CD's increasing $121.1 million in this same
period. Other categories had minimal fluctuations.
Short-term borrowings, comprised of Federal funds purchased, securities sold
under agreements to repurchase and other short-term borrowings, decreased $38.7
million since September 1997 and $36.8 million since December 1997. Other
borrowings, which is primarily debt from Federal Home Loan Banks, rose $271.7
million over September 1997 and $240.9 million over December 1997.
CAPITAL
- - -------
Total shareholders' equity increased $22.6 million since September 1997 and has
increased $15.0 million since December 1997. Accumulated other comprehensive
income, primarily net unrealized gain on investment securities, increased $8.1
million since September 1997 and $4.9 million since December 1997. The lower
current interest rate environment increased the market value of the investment
security portfolio. In the first quarter of 1998 $8.3 million of subordinated
debentures converted to common stock.
ONB's consolidated capital position remains strong as evidenced by the following
comparisons of key industry ratios:
<TABLE>
<CAPTION>
Regulatory Guidelines September 30, December 31,
---------------------------- ----------------- ------------
Minimum Well-Capitalized 1998 1997 1997
------- ---------------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Risk-based capital:
Tier 1 capital to total
avg assets (leverage ratio).......... 4.00% 5.00% 7.74% 7.99% 7.95%
Tier 1 capital to risk-adjusted
total assets......................... 4.00 6.00 11.49 12.24 12.16
Total capital to risk-adjusted
total assets......................... 8.00 10.00 13.27 14.33 14.24
Shareholders' equity to total assets... N/A N/A 8.22 8.37 8.39
</TABLE>
Each of ONB's affiliate banks have capital ratios which exceed regulatory
minimum and well-capitalized guidelines.
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
- - ----------------------------------------
ONB continually monitors its liquidity and actively manages its asset/liability
position. The purpose of liquidity management is to match the sources of funds
with anticipated customer borrowings and withdrawals and other obligations. The
primary purpose of asset/liability management is to minimize the effect on net
income of changes in interest rates and to maintain a prudent match within
specified time periods of rate-sensitive assets and rate-sensitive liabilities.
ONB also uses net interest income simulation modeling to better quantify the
impact of potential interest rate fluctuations on net interest income. With this
understanding, management can best determine possible balance sheet changes,
pricing strategies, and appropriate levels of capital and liquidity which allow
ONB to generate strong net interest income while controlling and monitoring
interest rate risk. ONB simulates a gradual change in rates of 200 basis points
up or down over 12 months and sustained for an additional 12 months. The policy
limit for the maximum negative impact on net interest income over 12 months is
10%. At September 30, 1998 the model's fluctuations has not materially changed
from December 31, 1997.
Using static gap, ONB's rate-sensitive assets at September 30, 1998 were 79% of
rate-sensitive liabilities in the 1-180 day maturity category and 84% in the
181-365 day category. These figures compared to 79% and 89% on December 31, 1997
and 78% and 87% on September 30, 1997. ONB's funds management committee meets
bi-monthly to closely monitor and effect changes as needed in the consolidated
rate-sensitivity position.
12
<PAGE>
YEAR 2000
- - ---------
With the new millennium drawing near, some computers and software throughout the
world may be unable to properly handle dates after December 31, 1999. Business,
including banking organizations, rely on modern computers to handle the high
volume of transactions which comprise our financial results. ONB has developed a
plan to address its risk, and has identified and assessed its critical software
and hardware. ONB is following a four step approach which includes assessment,
renovation, validation and implementation, with awareness being a top priority
within and throughout each phase. This approach allows ONB to systematically
identify and evaluate all areas of our corporation in a timely and effective
manner. All mission critical items have completed the assessment phase and are
on schedule to complete the renovation and validation phases by December 31,
1998. Non-mission critical items have been evaluated and will be tested by June
30, 1999. Besides testing and replacing software and computers, ONB is also
preparing contingency plans for mission critical operational processes and is
evaluating critical customers, vendors and service suppliers. Updates are
reported to executive management of the holding company and the status of the
project are reviewed periodically by the corporate and affiliate board of
directors. At this time the estimated cost of Year 2000 compliance is not
expected to be material to ONB.
RESULTS OF OPERATIONS
- - ---------------------
INCOME FROM CONTINUING OPERATIONS
- - ---------------------------------
Income from continuing operations for the nine months ended September 30, 1998
was $53.5 million, a 10.1% increase from the same period 1997. Income from
continuing operations for the third quarter of 1998 was up 11.1% over 1997.
Basic net income from continuing operations per common share for the third
quarter of 1998 and for the nine months ended September 30, 1998 were $0.69 and
$1.94, respectively.
The company's return on average assets (ROA) for the third quarter of 1998 was
1.28% compared to 1.23% for 1997. Year-to-date ROA percentages were 1.22% in
1998 and 1.19% for 1997. Return on average equity (ROE) for the quarter and the
first nine months of 1998 were 16.12% and 15.17%, respectively, excluding
unrealized security gains(losses). These compared favorably to 1997 ROE results
of 15.09% and 14.33% for similar periods. Growth in net interest income and
other income combined with a lower effective tax rate generated the net income
improvements.
NET INTEREST INCOME/NET INTEREST MARGIN (TAXABLE EQUIVALENT BASIS)
- - ------------------------------------------------------------------
Year-to-date net interest income for 1998 was $170,912, a 2.8% increase over
1997. Net interest income for the third quarter of 1998 was $57,390 compared to
$55,652 in 1997, a 3.1% increase over the prior year. The net interest margin
for the third quarter was 4.13% and 4.27% for 1998 and 1997, respectively. The
year-to-date net interest margin percentage in 1998 was 4.19% compared to 4.34%
in 1997. The lower net interest margin resulted from the lower and flatter yield
curve and our investment in bank-owned life insurance discussed in noninterest
income. Increases in earning assets offset the declining yields to contribute to
an improved net interest income.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
- - ---------------------------------------
The provision for loan losses was $3.0 million in the third quarter of 1998
compared to $2.8 million in the third quarter of 1997. Year-to-date, the
provision for loan losses of $8.9 million compared to $8.6 million in 1997.
ONB's net charge-offs were 0.25% of average loans for the current quarter,
compared to 0.23% in the third quarter of 1997. For the first nine months, net
charge-offs were 0.21% in 1998 compared to 0.18% in 1997. The provision and net
charge-off levels in the first half of 1997 were lower than in the
13
<PAGE>
last half of 1997. Levels in 1998 are comparable with the second half of 1997.
The allowance for loan losses is continually monitored and evaluated both within
each affiliate bank and at the holding company level to provide adequate
coverage for potential losses. ONB maintains a comprehensive loan review program
to provide independent evaluations of loan administration, credit quality, loan
documentation, and adequacy of the allowance for loan losses. The allowance for
loan losses to end-of-period loans of 1.22% at September 30, 1998 compares to
1.24% in 1997. The allowance for loan losses covers all under-performing loans
by 2.4 times at September 30, 1998 compared to 2.5 times at December 31, 1997.
NONINTEREST INCOME
- - ------------------
Excluding securities gains (losses), noninterest income increased 20.8% in the
three months ended September 30, 1998 as compared to the same period in 1997.
For the first nine months, this increase was 17.7%. Both increases were fueled
by several factors. Trust fees were up 18.3% for the third quarter and 14.4% for
the first nine months due to continued development of new and current trust
business. Income from bank-owned life insurance (BOLI) policies, purchased in
March 1998, generated $1.3 million income in the third quarter and $2.6 million
year-to-date. There was no BOLI income in 1997. In other income, brokerage
revenue rose over 1997 in excess of 25% for both periods and reached $0.9
million for the quarter and $2.7 million for the first nine months. Insurance
commission income increased 11.1% over 1997 for the first nine months and added
income of $1.2 million for the quarter and $3.7 million for the first nine
months. Most other categories of noninterest income were comparable to last
year's results.
NONINTEREST EXPENSE
- - -------------------
Noninterest expense increased 5.8% in the third quarter of 1998 compared to
1997. For the first nine months noninterest expense increased 3.4% from 1997.
Salaries and benefits, together the largest individual component of noninterest
expense, increased 7.2% in the third quarter of 1998 and 4.0% for the first nine
months compared to 1997. Incentives were negatively impacted in 1997 by the
Consumer Acceptance Corporation losses. Other expense increased 6.7% over the
third quarter of 1997 and 6.3% over 1997 year-to-date. These increases were
mainly related to new outsourcing charges, which would have replaced previous
salaries and benefit expense, professional fees, and loan related expenses. Most
other categories of noninterest expense experienced relatively small changes
between the years.
PROVISION FOR INCOME TAXES
- - --------------------------
The provision for income taxes, as a percentage of pre-tax income, decreased in
the third quarter to 25.8% compared to 27.9% in 1997. For the first nine months,
this percentage was 28.7% for 1998 and 29.3% in 1997. The BOLI income discussed
in noninterest income is exempt from taxation. The tax benefit since the initial
investment was recorded in the third quarter of 1998 which corresponded with the
contract finalization.
14
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
- - --------------------------
NONE
ITEM 2. Changes in Securities
- - ------------------------------
NONE
ITEM 3. Defaults Upon Senior Securities
- - ----------------------------------------
NONE
ITEM 4. Submission of Matters to a Vote of Security Holders
- - ------------------------------------------------------------
NONE
ITEM 5. Other Information
- - --------------------------
NONE
ITEM 6. Exhibits and Reports on Form 8-K
- - -----------------------------------------
(a) Exhibits as required by Item 601 of Regulation S-K.
(27) Financial Data Schedule
(b) ONB did not file a current report on Form 8-K during the quarter ended
September 30, 1998.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OLD NATIONAL BANCORP
--------------------
(Registrant)
By: /s/ John S. Poelker
-----------------------
John S. Poelker
Senior Vice President
Chief Financial Officer
Date: November 16, 1998
16
<PAGE>
INDEX OF EXHIBITS
REGULATION S-K
REFERENCE
(ITEM 601)
- - ----------
27 Financial Data Schedule
17
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM OLD NATIONAL
BANCORP'S SEPTEMBER 30, 1998 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 131,690
<INT-BEARING-DEPOSITS> 14,742
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,570,566
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 4,037,555
<ALLOWANCE> 49,194
<TOTAL-ASSETS> 5,987,432
<DEPOSITS> 4,371,549
<SHORT-TERM> 405,923
<LIABILITIES-OTHER> 88,008
<LONG-TERM> 629,758
0
0
<COMMON> 27,495
<OTHER-SE> 464,699
<TOTAL-LIABILITIES-AND-EQUITY> 5,987,432
<INTEREST-LOAN> 254,441
<INTEREST-INVEST> 71,532
<INTEREST-OTHER> 829
<INTEREST-TOTAL> 326,802
<INTEREST-DEPOSIT> 129,768
<INTEREST-EXPENSE> 166,417
<INTEREST-INCOME-NET> 160,385
<LOAN-LOSSES> 8,947
<SECURITIES-GAINS> 19
<EXPENSE-OTHER> 16,285
<INCOME-PRETAX> 75,056
<INCOME-PRE-EXTRAORDINARY> 53,507
<EXTRAORDINARY> (9,854)
<CHANGES> 0
<NET-INCOME> 43,653
<EPS-PRIMARY> 1.94
<EPS-DILUTED> 1.88
<YIELD-ACTUAL> 4.19
<LOANS-NON> 12,735
<LOANS-PAST> 5,578
<LOANS-TROUBLED> 169
<LOANS-PROBLEM> 98,837
<ALLOWANCE-OPEN> 46,233
<CHARGE-OFFS> 8,272
<RECOVERIES> 2,286
<ALLOWANCE-CLOSE> 49,194
<ALLOWANCE-DOMESTIC> 49,194
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
