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 June 30, 1999
[ ] 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 46.2 million shares
outstanding at June 30, 1999.
OLD NATIONAL BANCORP
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial
Statements Page No.
Consolidated Balance Sheet
June 30, 1999 and 1998, and December 31, 1998 3
Consolidated Statement of Income
Three and Six months ended June 30, 1999 and 1998 4
Consolidated Statement of Cash Flows
Six months ended June 30, 1999 and 1998 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
<TABLE>
<CAPTION>
OLD NATIONAL BANCORP
CONSOLIDATED BALANCE SHEET
June 30 December 31,
($ in thousands) (unaudited) 1999 1998 1998
<S> <C> <C> <C>
Assets
Cash and due from banks ------------- $176,077 $183,837 $165,094
Money market investments------------- 10,035 2,384 16,699
Investment Securities
U.S. Treasury ---------------------- 63,585 106,702 92,741
U.S. Government agencies
and corporations ----------------- 1,134,842 1,008,414 995,492
Obligations of states and political
Subdivisions --------------------- 516,575 471,563 491,139
Other ------------------------------ 63,326 53,301 57,302
--------- --------- ---------
Total Investment Securities ------ 1,778,328 1,639,980 1,636,674
--------- --------- ---------
Loans
Commercial ------------------------- 1,147,404 1,012,746 1,027,792
Commercial real estate ------------- 1,050,763 800,817 944,813
Residential real estate ------------ 1,759,231 1,570,554 1,688,572
Consumer credit, net of unearned income 719,221 706,436 693,079
--------- --------- ---------
Total Loans ---------------------- 4,676,619 4,090,553 4,354,256
Allowance for loan losses -------- (56,271) (51,548) (51,847)
--------- --------- ---------
Net Loans ------------------------ 4,620,348 4,039,005 4,302,409
Other assets ------------------------ 313,632 360,130 295,735
--------- --------- ---------
Total Assets --------------------- $6,898,420 $6,225,336 $6,416,611
========= ========= =========
Liabilities
Deposits
Noninterest bearing demand --------- $495,816 $509,861 $553,704
Interest bearing:
NOW accounts --------------------- 515,735 475,634 539,169
Savings accounts ----------------- 504,796 505,293 501,780
Money market accounts ------------ 735,197 667,806 678,484
Certificates of deposit
$100,000 and over ---------------- 402,371 382,021 390,123
Other time ----------------------- 2,150,340 2,082,990 2,005,598
--------- --------- ---------
Total Deposits ------------------- 4,804,255 4,623,605 4,668,858
--------- --------- ---------
Short-term borrowings --------------- 720,715 489,628 506,320
Other borrowings -------------------- 769,653 520,212 629,868
Accrued expenses and other liabilities 74,511 81,784 91,920
--------- --------- ---------
Total Liabilities ------------------ 6,369,134 5,715,229 5,896,966
Shareholders' Equity
Common stock ----------------------- 46,159 29,340 30,388
Capital surplus -------------------- 352,285 297,149 350,256
Retained earnings ------------------ 140,888 167,978 119,902
Accumulated other comprehensive
Income (loss), net of tax ------- (10,046) 15,640 19,099
--------- --------- ---------
Total Shareholders' Equity --------- 529,286 510,107 519,645
--------- --------- ---------
Total Liabilities and Shareholders'
Equity --------------------------- $6,898,420 $6,225,336 $6,416,611
========= ========= =========
The accompanying notes are an integral part of this statement.
</TABLE>
3
<TABLE>
<CAPTION>
OLD NATIONAL BANCORP
CONSOLIDATED STATEMENT OF INCOME
Three Months Ended Six Months Ended
($ and shares in thousands except June 30, June 30,
per share data) (Unaudited) 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Interest income
Loans including fees:
Taxable -----------------------------------$92,018 $87,018 $181,347 $171,722
Non-taxable ------------------------------- 2,082 1,407 3,817 2,665
Investment securities:
Taxable ----------------------------------- 19,972 18,493 38,774 37,550
Non-taxable ------------------------------- 6,310 5,857 12,510 11,549
Money market investments -------------------- 308 287 697 891
------- ------- ------- -------
Total Interest Income ---------------------120,690 113,062 237,145 224,377
------- ------- ------- -------
Interest Expense
Savings, NOW and
money market accounts --------------------- 10,473 11,404 20,799 22,931
Certificates of deposit of $100,000
and over ---------------------------------- 5,632 5,849 11,419 11,485
Other time deposits ------------------------- 28,098 28,469 55,353 55,655
Short-term borrowings ----------------------- 6,870 5,252 12,816 10,452
Other borrowings ---------------------------- 9,734 6,326 18,812 12,255
------- ------- ------- -------
Total Interest Expense -------------------- 60,807 57,300 119,199 112,778
------- ------- ------- -------
Net Interest Income ----------------------- 59,883 55,762 117,946 111,599
Provision for loan losses ------------------- 2,894 3,174 5,697 6,253
------- ------- ------- -------
Net Interest Income After Provision
For Loan Losses ------------------------- 56,989 52,588 112,249 105,346
------- ------- ------- -------
Noninterest Income
Trust fees ---------------------------------- 3,711 3,145 7,189 6,389
Service charges on deposit accounts---------- 5,448 4,394 9,655 8,526
Loan servicing fees ------------------------- 1,254 1,338 2,527 2,714
Insurance premiums and commissions ---------- 1,469 1,282 2,797 2,639
Investment product fees --------------------- 1,674 1,334 2,987 2,512
Bank-owned life insurance ------------------- 1,152 1,181 2,252 1,334
Securities gains, net ----------------------- 919 171 2,240 216
Other income -------------------------------- 1,749 1,670 3,810 3,817
------- ------- ------- -------
Total Noninterest Income ------------------ 17,376 14,515 33,457 28,147
------- ------- ------- -------
Noninterest Expense
Salaries and employee benefits -------------- 26,386 23,511 51,635 47,053
Occupancy expense --------------------------- 2,589 2,433 5,180 4,814
Equipment expense --------------------------- 3,347 3,267 6,583 6,511
Marketing expense --------------------------- 1,504 1,586 2,831 2,964
FDIC insurance expense ---------------------- 173 174 360 360
Data processing expense --------------------- 1,773 1,483 3,206 2,880
Supplies expense ---------------------------- 1,157 1,016 2,177 2,051
Communication and transportation expense 1,845 1,721 3,676 3,582
Other expenses ------------------------------ 6,693 5,724 13,457 11,185
------- ------- ------- -------
Total Noninterest Expense ----------------- 45,467 40,915 89,105 81,400
------- ------- ------- -------
Income From Continuing Operations
Before Income Taxes ----------------------- 28,898 26,188 56,601 52,093
Provision for income taxes ------------------ 7,646 8,012 15,339 15,942
------- ------- ------- -------
Income from continuing operations ----------- 21,252 18,176 41,262 36,151
Discontinued operations --------------------- 3,483 (9,193) 3,483 (9,854)
------- ------- ------- -------
Net Income ----------------------------------$24,735 $8,983 $44,745 $26,297
======= ======= ======= =======
Income from continuing operations
per common share:
Basic ------------------------------------- $0.46 $0.39 $0.89 $0.78
Diluted ----------------------------------- $0.45 $0.38 $0.87 $0.76
Net income per common share:
Basic ------------------------------------- $0.54 $0.19 $0.97 $0.57
Diluted ----------------------------------- $0.52 $0.19 $0.94 $0.56
Weighted average common shares outstanding:
Basic ------------------------------------- 46,176 46,218 46,126 45,997
Diluted ----------------------------------- 47,960 48,163 47,921 48,236
The accompanying notes are an integral part of this statement.
</TABLE>
4
<TABLE>
<CAPTION>
OLD NATIONAL BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended
June 30,
($ in thousands) (unaudited) 1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income ------------------------------------------------ $ 44,745 $ 26,297
-------- --------
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation --------------------------------------------- 5,016 5,136
Amortization of intangible assets ------------------------ 782 1,273
Net premium amortization on investment securities -------- 903 906
Provision for loan losses -------------------------------- 5,697 6,253
Gain on sale of investment securities -------------------- (2,240) (216)
Gain on sale of assets ----------------------------------- (47) (454)
Increase in interest receivable -------------------------- (1,911) (998)
Increase in other assets --------------------------------- (15,301) (80,457)
Increase in accrued expenses and
other liabilities -------------------------------------- 1,944 2,294
-------- --------
Total adjustments ------------------------------------- (5,157) (66,263)
-------- --------
Net cash flows provided by (used in) operating activities 39,588 (39,966)
-------- --------
Cash flows from investing activities:
Cash and cash equivalents of subsidiary acquired ----------- 5,914 --
Purchase of investment securities available-for-sale ------- (714,992) (317,151)
Proceeds from maturities and paydowns of investment
securities available-for-sale ---------------------------- 368,877 219,189
Proceeds from sales of investment securities available-
for-sale ------------------------------------------------- 175,190 62,131
Net principal collected from (loans made to) customers:
Commercial and financial --------------------------------- (111,998) (110,603)
Mortgage ------------------------------------------------- (173,599) (132,894)
Consumer ------------------------------------------------- (25,793) 17,432
Proceeds from sale of mortgage loans ----------------------- 5,952 48,030
Proceeds from sale of premises and equipment --------------- 295 410
Purchase of premises and equipment ------------------------- (5,675) (4,837)
-------- --------
Net cash flows used in investing activities -------------- (475,829) (218,293)
-------- --------
Cash flows from financing activities:
Net increase (decrease) in deposits and short-term borrowings:
Noninterest bearing demand ------------------------------- (75,032) (16,097)
NOW Accounts --------------------------------------------- (23,434) (12,240)
Savings accounts ----------------------------------------- (214) 829
Money market accounts ------------------------------------ 56,713 (8,932)
Certificates of deposit $100,000 and over ---------------- 10,213 1,767
Other time deposits -------------------------------------- 131,369 137,268
Short-term borrowings ------------------------------------ 214,395 46,943
Other borrowings ----------------------------------------- 139,812 139,794
Cash dividends paid ---------------------------------------- (15,144) (12,908)
Common stock repurchased ----------------------------------- (6,598) (20,648)
Common stock reissued, net of shares used to convert
subordinated debentures ---------------------------------- 8,480 9,461
-------- --------
Net cash flows provided by financing activities ---------- 440,560 265,237
-------- --------
Net increase in cash and cash equivalents ------------------ 4,319 6,978
Cash and cash equivalents at beginning of period ----------- 181,793 179,243
-------- --------
Cash and cash equivalents at end of period ----------------- $186,112 $186,221
======== ========
Total interest paid -------------------------------------- $120,200 $109,492
======== ========
Total taxes paid ----------------------------------------- $ 15,306 $ 13,588
======== ========
The accompanying notes are an integral part of this statement.
</TABLE>
5
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 June 30, 1999 and 1998 and December 31,
1998, and the results of its operations for the three and six
months ended June 30, 1999 and 1998 and its cash flows for the
six months ended June 30, 1999 and 1998. All prior period
information has been restated for the effects of business
combinations accounted for as pooling-of-interests as discussed
in Note 3.
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 28, 1999
to shareholders of record on January 7, 1999. On April 15, 1999,
a three-for-two stock split was declared to shareholders of
record on May 3, 1999. The dividend was paid on May 24, 1999.
All share and per share data presented herein have been restated
for the effects of the stock dividend and stock split.
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 additional common shares of 1.7 million year-to-date
and quarter-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):
For the three For the three
months ended months ended
June 30, 1999 June 30, 1998
--------------------- -------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
Basic EPS
Income from continuing
operations available to
common stockholders $21,252 46,176 $0.46 $18,176 46,218 $0.39
===== =====
Effect of Dilutive
Securities:
Stock options 83 240
8% convertible debentures 263 1,701 264 1,705
------- ------ ------- -----
Diluted EPS
Income from continuing
operations available to
common stockholders
+ assumed conversions $21,515 47,960 $0.45 $18,440 48,163 $0.38
======= ====== ===== ======= ====== =====
6
For the six For the six
months ended months ended
June 30, 1999 June 30, 1998
--------------------- --------------------
Per-Share Per-Share
Income Shares Amount Income Shares Amount
Basic EPS
Income from continuing
operations available to
common stockholders $41,262 46,126 $0.89 $36,151 45,997 $0.78
===== =====
Effect of Dilutive
Securities:
Stock options 93 240
8% convertible debentures 526 1,702 612 1,999
------ ------ ------ -----
Diluted EPS
Income from continuing
operations available to
common stockholders
+ assumed conversions $41,788 47,921 $0.87 $36,763 48,236 $0.76
======= ====== ===== ======= ====== =====
3. Merger and Divestiture Activity
Completed Mergers
On Januray 29, 1999, ONB and Southern Bancshares LTD (Southern)
of Carbondale, Illinois, consummated a merger in which ONB issued
2,552,436 common shares in exchange for all of the shares of
Southern. This transaction was accounted for as a pooling-of-
interests. Net income for Southern prior to merger included in
the 1999 statements for the period ended January 29, 1999 was
$332 thousand.
On February 5,1999 ONB and Dulaney Bancorp (Dulaney) of Marshall,
Illinois, consummated a merger in which ONB issued 472,284 common
shares in exchange for all the shares of Dulaney. This
transaction was accounted for as a pooling-of-interests without
restatement of prior years due to immateriality.
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. During the second quarter of
1999, contingencies related to the sale were favorably resolved.
Net assets of the entity which were included in other assets were
$71.1 million at June 30, 1998. Income (loss) from discontinued
operations for the three and six months ended June 30, 1999 and
1998 was as follows ($ in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
Loss before taxes
from operations of discontinued
operations $0 $(6,833) $0 $(7,943)
Income tax benefit 0 (2,734) 0 (3,183)
-- ------- -- --------
Loss from operations of
discontinued operations $0 (4,099) $0 (4,760)
-- ------- -- --------
7
Income (loss) before taxes from
disposal of discontinued
operations 5,805 (8,489) 5,805 (8,489)
Income tax expense (benefit) 2,322 (3,395) 2,322 (3,395)
----- ------- ----- --------
Income (loss) from disposal of
Discontinued operations 3,483 (5,094) 3,483 (5,094)
----- ------- ----- --------
Income (loss) from discontinued
operations $3,483 $(9,193) $3,483 $(9,854)
====== ======= ====== =======
Income (loss) from discontinued
operations per common share
Basic $0.08 $(0.20) $0.08 $(0.21)
===== ====== ===== ======
Diluted $0.07 $(0.19) $0.07 $(0.20)
===== ====== ===== ======
4. Investments
The market value and amortized cost of investment securities as
of June 30, 1999 are set forth below ($ in thousands):
Market Value Amortized Cost
Available-for-sale, at market value $1,778,328 $1,795,650
========== ==========
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 77.519 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 June 30, 1999, 1.7
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
June 30, 1999, a total of $32.0 million of the notes were
outstanding, with maturities ranging from one to four years and
fixed interest rates of 6.7% to 7.1%. At June 30, 1998, ONB had
outstanding $32.0 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 June 30, 1999 and 1998, a total of $64.3 million of the
notes were outstanding, with maturities ranging from one to nine
years and fixed interest rates from 6.4% to 7.0%.
As of June 30, 1999, 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 June
30, 1999, no balance was outstanding under these lines. As of
June 30, 1998, $13.4 million was outstanding.
8
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 June 30, 1999, ONB has interest rate swaps with a notional
value of $65 million. The contracts are an exchange of interest
payments with no affect on the principal amounts of the
underlying hedged liability. The fair value of the swaps were
$(2.1) million as of June 30, 1999. ONB pays the counterparty a
variable rate based on three-month LIBOR and receives fixed rates
ranging from 5.375% to 7.0%. The contracts terminate on or prior
to January 28, 2009.
ONB is exposed to losses if a counterparty fails to make its
payments under a contract in which ONB is in the receiving
position. Although collateral or other security is not obtained,
ONB minimizes its credit risk by monitoring the credit standing
of the counterparties and anticipates that the counterparties
will be able to fully satisfy their obligation under the
agreements.
7. Comprehensive Income
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
($ in Thousands)
<S> <C> <C> <C> <C>
Net income $24,735 $8,983 $44,745 $26,297
Unrealized gains (losses) on
securities:
Unrealized holding losses
Arising during period, net of
tax (22,377) (1,462) (27,801) (899)
Less: reclassification adjustment
for gains realized
In net income, net of tax (551) (103) ( 1,344) (130)
------- ------ ------- ------
Net unrealized losses (22,928) (1,565) (29,145) (1,029)
------- ------ ------- ------
Comprehensive income $1,807 $7,418 $ 15,600 $25,268
====== ====== ======== =======
</TABLE>
8. Segment Data
Community
Banking Other Total
June 30,1999
Net interest income (loss) $119,507 $(1,561) $117,946
Income tax expense (benefit) 18,168 (2,829) 15,339
Segment profit (loss) 44,214 (2,952) 41,262
Total assets 6,770,881 127,539 6,898,420
9
June 30, 1998
Net interest income (loss) $113,738 $(2,139) 111,599
Income tax expense (benefit) 17,873 (1,931) 15,942
Segment profit (loss) 39,470 (3,319) 36,151
Total assets 6,099,836 125,500 6,225,336
9. Impact of Accounting Changes
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, 2000 (January 1, 2001 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
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 June 30, 1999, as compared to June 30, 1998 and December
31, 1998, and the results of operations from continuing
operations for the three and six months ended June 30, 1999 and
1998.
Financial Condition
ONB's assets at June 30, 1999 were $6.898 billion, a 10.8%
increase since June 1998 and a 7.5% increase since December 1998.
Earning assets, which consist primarily of money market
investments, investment securities and loans, grew 12.8% over the
prior year. During the past year, the mix of earning assets
reflected loan growth of 14.3% while money market investments and
investment securities increased a combined 8.9%. Since December
1998, earning assets increased 7.6% with loans growing 7.4% and
investment securities and money market investments increasing
8.2%.
At June 30, 1999, total under-performing assets (defined as loans
90 days or more past due, nonaccrual and restructured loans and
foreclosed properties) decreased slightly to $22.6 million from
$25.1 million as of December 31, 1998. As of these dates, under-
performing assets in total were 0.48% and 0.58%, respectively, of
total loans and foreclosed properties.
June 30, December 31,
1999 1998
Nonaccrual loans $15,259 $17,034
Restructured loans 171 116
Foreclosed properties 2,709 2,542
------- -------
Total Non-performing Assets 18,139 19,692
Past due 90 days or more 4,418 5,389
------- -------
Total Under-performing Assets $22,557 $25,081
======= =======
Unper-performing assets as a % of total
loans and foreclosed properties 0.48% 0.58%
==== ====
As of June 30, 1999, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS No. 114
and 118 was $5.3 million with no related allowance and $46.3
million with $9.7 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 six months ended June 30, 1999, the average balance of
impaired loans was $50.0 million and $1.6 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.
Total deposits at June 30, 1999, increased $180.6 million or 3.9%
compared to June 1998. Brokered CD's, included in other time,
increased $85.7 million since June 1998. Since December 1998,
11
total deposits increased $135.4 million or 2.9% with brokered
CD's increasing $146.4 million in this same period.
Short-term borrowings, comprised of Federal funds purchased,
securities sold under agreements to repurchase and other short-
term borrowings, increased $231.1 million since June 1998 and
$214.4 million since December 1998. Other borrowings, which is
primarily debt from Federal Home Loan Banks, rose $249.4 million
over June 1998 and $139.8 million over December 1998.
Capital
Total shareholders' equity increased $19.2 million since June
1998 and $9.6 million since December 1998. Accumulated other
comprehensive income (loss), primarily net unrealized gain (loss)
on investment securities, decreased $25.7 million since June 1998
and $29.1 million since December 1998.
ONB's consolidated capital position remains strong as evidenced
by the following comparisons of key industry ratios:
<TABLE>
<CAPTION>
Regulatory Guidelines June 30, December 31,
Minimum Well-Capitalized 1999 1998 1998
<S> <C> <C> <C> <C> <C> <C>
Risk-based capital:
Tier 1 capital to total
avg assets (leverage ratio) 4.00% 5.00% 7.78% 7.84% 7.94%
Tier 1 capital to risk-adjusted
total assets 4.00 6.00 11.47 11.88 11.40
Total capital to risk-adjusted
total assets 8.00 10.00 13.17 13.65 13.11
Shareholders' equity to total assets N/A N/A 7.67 8.19 8.10
</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 June 30, 1999 ONB was well within that limit
as the model's fluctuation was under 2% for the first 12 months
and less than 4% for the total 24 month period.
Using static gap, ONB's rate-sensitive assets at June 30, 1999
were 58% of rate-sensitive liabilities in the 1-180 day maturity
category and 64% in the 181-365 day category. These figures
compared to 78% and 83% on December 31, 1998 and 78% and 83% on
June 30, 1998. With strong loan demand and liabilities moving
to shorter time horizons, the static gap percentages have decreased
since year-end. Subsequent to June 30, ONB lengthened some of its
liabilities. ONB's funds management committee meets bi-monthly
to closely monitor and effect changes as needed in the
consolidated rate-sensitivity position.
12
Year 2000
The national and local press have devoted much coverage to the
Year 2000 ("Y2K") issue, also know as the "Millennium Bug". This
refers to the possibility that some computers may be unable to
recognize the date change at the turn of the century. With the
high volume of transactions and electronic data, the banking
industry requires extensive computer capabilities to serve its
customers. With that in mind, ONB has devoted much attention to
its systems to prepare itself for the millennial change.
ONB has successfully completed its Y2K compliance testing of its
mission-critical computer systems and its core processing systems
used to serve its customers. Besides maintaining this status,
ONB is managing its third party system relationships, updating
disaster and contingency plans, and testing nonmission-critical
software. Renovation and testing of software and hardware may
not remove all risks related to Y2K. Alternative methods to
perform key activities will be addressed through contingency
planning.
There has been no significant financial impact to ONB as a result
of the Year 2000 project. ONB's 1998 Y2K expenses were less than
$500 thousand. Much of ONB's software is externally generated
with minimal internal software. Much of the software and hardware
items have been changed, upgraded, or replaced in preparation for
Y2K and have been part of the normal maintenance. While the
company will continue testing and implementing secondary systems
and replacing certain personal computers through 1999, it does
not expect any material impact on earnings associated with these
Y2K compliance efforts.
Results of Operations
Income from Continuing Operations
Income from continuing operations for the six months ended June
30, 1999 was $41.3 million, a 14.1% increase from the same period
1998. Income from continuing operations for the second quarter
of 1999 was up 16.9% over 1998. Basic net income from continuing
operations per common share for the second quarter of 1999 and
for the six months ended June 30, 1999 were $0.46 and $0.89,
respectively.
The company's return on average assets (ROA) for the second
quarter of 1999 was 1.26% compared to 1.19% for 1998. Year-to-
date ROA percentages were 1.25% in 1999 and 1.21% for 1998.
Return on average equity (ROE) for the quarter and the first six
months of 1999 were 16.07% and 16.01%, respectively, excluding
unrealized security gains (losses). These compared favorably to
1998 ROE results of 14.60% and 14.78% 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 1999 was $125,845, a 6.1%
increase over 1998. Net interest income for the second quarter of
1999 was $63,928 compared to $59,318 in 1998, a 7.8% increase
over the prior year. The net interest margin for the second
quarter was 4.03% and 4.20% for 1999 and 1998, respectively. The
year-to-date net interest margin percentage in 1999 was 4.06%
compared to 4.26% in 1998. 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.
13
Provision and Allowance for Loan Losses
The provision for loan losses was $2.9 million in the second
quarter of 1999 compared to $3.2 million in the second quarter of
1998. Year-to-date, the provision for loan losses of $5.7
million compared to $6.3 million in 1998. ONB's net charge-offs
were 0.10% of average loans for the current quarter, compared to
0.23% in the second quarter of 1998. For the first six months,
net charge-offs were 0.10% in 1999 compared to 0.19% in 1998.
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
1.20% at June 30, 1999 compares to 1.26% in 1998. The allowance
for loan losses covers all under-performing loans by 2.5 times at
June 30, 1999 compared to 2.1 times at December 31, 1998.
Noninterest Income
Excluding securities gains (losses), noninterest income increased
14.7% in the three months ended June 30, 1999 as compared to the
same period in 1998. For the first six months, this increase was
11.8%. Both increases were fueled by several factors. Trust fees
were up 18.0% for the second quarter and 12.5% for the first six
months due to continued development of new and current trust
business. Income from bank-owned life insurance (BOLI) policies,
purchased in March 1998, generated $1.2 million income in the
second quarter and $2.3 million year-to-date. Insurance premiums
and commissions increased 14.6% over 1998 for the quarter and
6.0% year-to-date. Investment product fees rose over 1998 in
excess of 25% for the second quarter and 18.9% year-to-date. The
security gains of $0.9 million for the quarter and $2.2 million
year-to-date were taken to offset a similar level of non-
recurring charges incurred in connection with the restructuring
of ONB's banks into a single charter. Most other categories of
noninterest income were comparable to last year's results.
Noninterest Expense
Noninterest expense increased 11.1% in the first quarter of 1999
compared to 1998 and 9.5% for the first six months. Salaries and
benefits, together the largest individual component of
noninterest expense, increased 12.2% in the second quarter of
1999 compared to 1998 and 9.7% year-to-date. Most of this
increase was due to additional incentive accruals over prior year
due to the increase in income. Other expense increased 16.9%
over the second quarter of 1998 and 20.3% year-to-date. These
increases, primarily professional fees were mainly related to the
restructuring discussed previously. 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 second quarter to 26.5% compared to 30.6%
in 1998. For the first six months, this percentage was 27.1% for
1999 and 30.6% in 1998. Higher levels of BOLI income and other
tax exempt income, as well as favorable state taxation
developments, helped lower our effective rate in 1999.
14
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 June 30, 1999.
15
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/s John S. Poelker
John S. Poelker
Senior Vice President
Chief Financial Officer
Date: August 13, 1999
16
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 JUNE 30, 1999 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 176,077
<INT-BEARING-DEPOSITS> 10,035
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,778,328
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 4,676,619
<ALLOWANCE> 56,271
<TOTAL-ASSETS> 6,898,420
<DEPOSITS> 4,804,255
<SHORT-TERM> 720,715
<LIABILITIES-OTHER> 74,511
<LONG-TERM> 769,653
0
0
<COMMON> 46,159
<OTHER-SE> 483,127
<TOTAL-LIABILITIES-AND-EQUITY> 6,898,420
<INTEREST-LOAN> 185,164
<INTEREST-INVEST> 51,284
<INTEREST-OTHER> 697
<INTEREST-TOTAL> 237,145
<INTEREST-DEPOSIT> 87,571
<INTEREST-EXPENSE> 119,199
<INTEREST-INCOME-NET> 117,946
<LOAN-LOSSES> 5,697
<SECURITIES-GAINS> 2,240
<EXPENSE-OTHER> 13,457
<INCOME-PRETAX> 56,601
<INCOME-PRE-EXTRAORDINARY> 41,262
<EXTRAORDINARY> 3,483<F1>
<CHANGES> 0
<NET-INCOME> 44,745
<EPS-BASIC> .89<F2>
<EPS-DILUTED> .87<F2>
<YIELD-ACTUAL> 4.06
<LOANS-NON> 15,259
<LOANS-PAST> 4,418
<LOANS-TROUBLED> 171
<LOANS-PROBLEM> 129,817
<ALLOWANCE-OPEN> 51,847
<CHARGE-OFFS> 4,850
<RECOVERIES> 2,577
<ALLOWANCE-CLOSE> 56,271
<ALLOWANCE-DOMESTIC> 56,271
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>DISCONTINUED OPERATIONS
<F2>FROM CONTINUING OPERATIONS
</FN>
</TABLE>
