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, 2000
[ ] 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 55.4 million shares
outstanding at June 30, 2000.
OLD NATIONAL BANCORP
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements Page No.
Consolidated Balance Sheet
June 30, 2000 and 1999, and December 31, 1999 3
Consolidated Statement of Income
Three and six months ended June 30, 2000 and 1999 4
Consolidated Statement of Cash Flows
Six months ended June 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2.Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3.Quantitative and Qualitative disclosures about
Market Risk 15
PART II OTHER INFORMATION 16
SIGNATURES 17
INDEX OF EXHIBITS 18
2
<TABLE>
<CAPTION>
OLD NATIONAL BANCORP
CONSOLIDATED BALANCE SHEET
June 30, December 31,
($ in thousands) (Unaudited) 2000 1999 1999
Assets
<S> <C> <C> <C>
Cash and due from banks ------------------- $182,745 $212,325 $210,255
Money market investments------------------- 25,275 44,700 16,686
Investment Securities
U.S. Treasury ----------------------------- 8,537 71,235 39,591
U.S. Government agencies
and corporations ----------------------- 1,114,626 1,180,662 1,152,770
Obligations of states and political
Subdivisions --------------------------- 542,286 553,862 549,228
Other ------------------------------------ 99,752 70,504 79,849
--------- --------- ---------
Total Investment Securities ------------ 1,765,201 1,876,263 1,821,438
--------- --------- ---------
Loans
Commercial ------------------------------- 1,483,116 1,301,063 1,338,255
Commercial real estate ------------------- 1,507,800 1,230,449 1,306,312
Residential real estate ------------------ 2,095,607 2,077,783 2,148,974
Consumer credit, net of unearned income -- 941,393 862,722 921,147
--------- --------- ---------
Total Loans ---------------------------- 6,027,916 5,472,017 5,714,688
Allowance for loan losses -------------- (71,696) (64,150) (65,685)
--------- --------- ---------
Net Loans ------------------------------ 5,956,220 5,407,867 5,649,003
Other assets ------------------------------ 393,118 364,101 388,630
--------- --------- ---------
Total Assets --------------------------- $8,322,559 $7,905,256 $8,086,012
========= ========= =========
Liabilities
Deposits
Noninterest bearing demand --------------- $657,072 $604,364 $643,553
Interest bearing:
Savings, NOW and money market accounts - 1,963,711 2,033,061 2,008,789
Time deposits -------------------------- 3,457,050 3,010,486 3,309,727
--------- --------- ---------
Total Deposits ------------------------- 6,077,833 5,647,911 5,962,069
--------- --------- ---------
Short-term borrowings --------------------- 753,222 736,348 679,459
Guaranteed preferred beneficial interests in
Company's subordinated debentures-------- 50,000 -- --
Other borrowings -------------------------- 807,712 820,360 768,055
Accrued expenses and other liabilities ---- 95,225 82,602 91,434
--------- --------- ---------
Total Liabilities ------------------------ 7,783,992 7,287,221 7,501,017
Shareholders= Equity
Common stock ----------------------------- 55,431 55,235 56,518
Capital surplus -------------------------- 334,592 368,187 395,414
Retained earnings ------------------------ 176,662 205,119 162,384
Accumulated other comprehensive
income (loss), net of tax ------------- (28,118) (10,506) (29,321)
--------- --------- ---------
Total Shareholders' Equity --------------- 538,567 618,035 584,995
--------- --------- ---------
Total Liabilities and Shareholders'
Equity --------------------------------- $8,322,559 $7,905,256 $8,086,012
========= ========= =========
The accompanying notes are an integral part of this statement.
</TABLE>
3
<TABLE>
<CAPTION>
OLD NATIONAL BANCORP
CONSOLIDATED STATEMENT OF INCOME
Three Months Ended Six Months Ended
($ and shares in thousands except June 30, June 30,
per share data) (Unaudited) 2000 1999 2000 1999
Interest Income
Loans including fees:
<S> <C> <C> <C> <C>
Taxable ----------------------------------- $123,924 $108,704 $241,213 $213,625
Non-taxable ------------------------------- 3,117 2,162 5,934 3,973
Investment securities:
Taxable ----------------------------------- 20,687 20,993 42,124 40,948
Non-taxable ------------------------------- 6,756 6,797 13,590 13,540
Money market investments -------------------- 404 552 786 1,115
------- ------- ------- -------
Total Interest Income --------------------- 154,888 139,208 303,647 273,201
------- ------- ------- -------
Interest Expense
Savings, NOW and
money market accounts --------------------- 14,114 12,123 27,390 24,093
Time deposits ------------------------------- 48,514 39,131 94,726 77,305
Short-term borrowings ----------------------- 11,296 6,999 20,370 13,032
Other borrowings ---------------------------- 13,469 10,437 25,998 20,177
------- ------- ------- -------
Total Interest Expense -------------------- 87,393 68,690 168,484 134,607
------- ------- ------- -------
Net Interest Income ----------------------- 67,495 70,518 135,163 138,594
Provision for loan losses ------------------- 4,437 3,699 11,870 7,091
------- ------- ------- -------
Net Interest Income After Provision
For Loan Losses ------------------------- 63,058 66,819 123,293 131,503
------- ------- ------- -------
Noninterest Income
Trust fees ---------------------------------- 5,851 5,447 11,283 10,585
Service charges on deposit accounts---------- 7,865 6,301 14,275 11,264
Loan fees ----------------------------------- 1,256 1,529 2,440 3,079
Insurance premiums and commissions ---------- 2,837 1,597 5,780 3,186
Investment product fees --------------------- 1,744 1,747 3,499 3,147
Bank-owned life insurance ------------------- 1,081 1,152 1,914 2,252
Securities gains (losses), net -------------- (121) 979 (25) 2,363
Other income -------------------------------- 5,611 2,434 10,410 5,071
------- ------- ------- -------
Total Noninterest Income ------------------ 26,124 21,186 49,576 40,947
------- ------- ------- -------
Noninterest Expense
Salaries and employee benefits -------------- 32,487 31,449 65,915 61,567
Occupancy expense --------------------------- 3,527 3,229 6,955 6,466
Equipment expense --------------------------- 4,789 4,299 9,131 8,476
Marketing expense --------------------------- 2,011 1,859 3,537 3,518
FDIC insurance expense ---------------------- 313 214 621 449
Processing expense -------------------------- 2,656 3,183 5,062 5,880
Communication and transportation expense----- 2,595 2,248 5,001 4,459
Professional fees --------------------------- 974 2,115 2,036 4,286
Other expenses ------------------------------ 6,760 6,319 13,020 12,462
------- ------- ------- -------
56,112 54,915 111,278 107,563
------- ------- ------- -------
Merger and restructuring costs--------------- -- -- 18,651 --
Total Noninterest Expense ----------------- 56,112 54,915 129,929 107,563
------- ------- ------- -------
Net Income Before Income Taxes -------------- 33,070 33,090 42,940 64,887
Provision for income taxes ------------------ 9,213 9,207 10,090 18,305
------- ------- ------- -------
Net Income from Continuing Operations ------- 23,857 23,883 32,850 46,582
Discontinued operations---------------------- -- 3,483 -- 3,483
------- ------- ------- -------
Net Income----------------------------------- $23,857 $27,366 $32,850 $50,065
======= ======= ======= =======
Net Income from Continuing Operations per common share:
Basic ------------------------------------ $0.43 $0.41 $0.59 $0.81
===== ===== ===== =====
Diluted ---------------------------------- $0.42 $0.40 $0.58 $0.79
===== ===== ===== =====
Net Income per common share:
Basic ------------------------------------ $0.43 $0.47 $0.59 $0.87
===== ===== ===== =====
Diluted ---------------------------------- $0.42 $0.46 $0.58 $0.85
===== ===== ===== =====
Weighted average common shares outstanding:
Basic ------------------------------------ 55,633 57,539 55,946 57,464
====== ====== ====== ======
Diluted ---------------------------------- 56,234 59,644 56,915 59,595
====== ====== ====== ======
The accompanying notes are an integral part of this statement.
</TABLE>
4
<TABLE>
<CAPTION>
OLD NATIONAL BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended
June 30,
($ in thousands) (Unaudited) 2000 1999
Cash flows from operating activities:
<S> <C> <C>
Net income ------------------------------------------------ $ 32,850 $ 50,065
------- -------
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation --------------------------------------------- 6,944 6,141
Amortization of intangible assets ------------------------ 1,304 1,316
Net premium amortization on investment securities -------- 236 864
Provision for loan losses -------------------------------- 11,870 7,091
Loss (gain) on sale of investment securities ------------- 3,406 (2,363)
Loss (gain) on sale of assets ---------------------------- 1,336 (159)
Increase in other assets --------------------------------- (7,618) (18,552)
Increase in accrued expenses and
other liabilities -------------------------------------- 3,509 2,866
------- -------
Total adjustments ------------------------------------- 20,987 (2,796)
------- -------
Net cash flows provided by operating activities 53,837 47,269
------- -------
Cash flows from investing activities:
Cash and cash equivalents of subsidiary acquired ----------- -- 5,914
Purchase of investment securities available-for-sale -------(218,341) (725,821)
Proceeds from maturities and paydowns of investment
securities available-for-sale ---------------------------- 129,282 403,914
Proceeds from sales of investment securities available-
for-sale ------------------------------------------------- 143,139 176,343
Net principal collected from (loans made to) customers:
Commercial and financial ---------------------------------(147,846) (112,178)
Mortgage -------------------------------------------------(158,832) (236,320)
Consumer ------------------------------------------------- (22,769) (73,189)
Proceeds from sale of mortgage loans ----------------------- 10,594 24,128
Proceeds from sale of premises and equipment --------------- 1,088 640
Purchase of premises and equipment ------------------------- (7,899) (8,147)
------- -------
Net cash flows used in investing activities -------------- (271,584) (544,716)
------- -------
Cash flows from financing activities:
Net increase (decrease) in deposits and short-term borrowings:
Noninterest bearing demand ------------------------------- 13,519 (58,859)
Savings,NOW and Money Market Accounts -------------------- (45,078) 47,944
Time deposits -------------------------------------------- 147,323 186,663
Short-term borrowings ------------------------------------ 73,763 220,512
Other borrowings ----------------------------------------- 52,439 144,642
Proceeds from Guaranteed preferred beneficial interests in
Company's subordinated debentures------------------------- 50,000 --
Cash dividends paid ---------------------------------------- (19,010) (17,046)
Common stock repurchased ----------------------------------- (87,303) (7,492)
Common stock reissued, net of shares used to convert
subordinated debentures ---------------------------------- 13,173 9,081
------- -------
Net cash flows provided by financing activities ---------- 198,826 525,445
------- -------
Net increase (decrease) in cash and cash equivalents ------- (18,921) 27,998
Cash and cash equivalents at beginning of period ----------- 226,941 229,027
------- -------
Cash and cash equivalents at end of period -----------------$208,020 $257,025
======= =======
Total interest paid -------------------------------------- $166,186 $135,709
======= =======
Total taxes paid ----------------------------------------- $ 11,987 $16,312
======= =======
The accompanying notes are an integral part of this statement.
</TABLE>
5
Old National Bancorp
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying consolidated financial statements include the
accounts of Old National Bancorp and its affiliate entities ("Old
National"). All significant intercompany transactions and
balances have been eliminated. In the opinion of management, the
consolidated financial statements contain all the normal and
recurring adjustments necessary to present fairly the financial
position of Old National as of June 30, 2000 and 1999 and
December 31, 1999, and the results of its operations for the
three and six months ended June 30, 2000 and 1999 and its cash
flows for the six months ended June 30, 2000 and 1999. All prior
period information has been restated for the effects of business
combinations accounted for as pooling-of-interests as discussed
in Note 3.
2. Net Income Per Share
Net income per common share computations are based on the
weighted average number of common shares outstanding during the
periods presented. A 5% stock dividend was paid January 28, 2000
to shareholders of record on January 7, 2000. All share and per
share data presented herein have been restated for the effects of
the stock dividend.
Net income on a diluted basis is computed as above and assumes
the conversion of Old National's 8% convertible subordinated
debentures (Note 5) for the periods they were outstanding. For
the diluted computation, net income is adjusted for the assumed
reduction in interest expense, net of income tax effect, and
additional common shares of 0.4 million quarter-to-date and 0.7
million year-to-date, are assumed to be issued in connection with
the conversion of the remaining outstanding debentures.
Earnings Per Share Reconciliation
($ and shares in thousands except per share data):
Three Three
Months Ended Months Ended
June 30, 2000 June 30, 1999
Per Share Per Share
Income Shares Amount Income Shares Amount
Basic EPS
Income from continuing
operations available to
common stockholders $ 23,857 55,634 $0.43 $23,883 57,539 $0.41
===== =====
Effect of Dilutive
Securities:
Stock options 202 319
8% convertible debentures (25) 398 266 1,786
------- ------ ------ ------
Diluted EPS
Income from continuing
operations available to
common stockholders
+ assumed conversions $23,832 56,234 $0.42 $24,149 59,644 $0.40
======= ====== ===== ======= ====== =====
6
Six Six
Months Ended Months Ended
June 30, 2000 June 30, 1999
Per Share Per Share
Income Shares Amount Income Shares Amount
Basic EPS
Income from continuing
operations available to
common stockholders $ 32,850 55,946 $0.59 $46,582 57,464 $0.81
===== =====
Effect of Dilutive
Securities:
Stock options 250 344
8% convertible debentures 130 719 531 1,787
------ ------ ------ ------
Diluted EPS
Income from continuing
operations available to
common stockholders
+ assumed conversions $32,980 56,914 $0.58 $47,113 59,595 $0.79
======= ====== ===== ======= ====== =====
3. Merger and Divestiture Activity
Pending Mergers
On December 20, 1999, Old National and Permanent Bancorp
("Permanent") of Evansville, Indiana, executed a definitive
merger agreement. Old National will issue common shares in
exchange for all of the outstanding common shares of Permanent.
The transaction will be accounted for as a purchase. As part of
the regulatory approval process for the transaction, the
Department of Justice required two Permanent branches in
Evansville to be sold to another banking company. These two
branches have total deposits of approximately $41 million, and an
agreement has been reached with First Federal Savings Bank of
Evansville. The divestiture is expected to be completed by
December, 2000. As of June 30, 2000, Permanent's financial
statements reflected $489 million in total assets, net loans of
$324 million, total deposits of $336 million, and net income for
the six months then ended of $1,425 thousand. This merger was
consummated July 27, 2000.
Completed Mergers
On March 1, 2000, Old National and Heritage Financial Services,
Inc. ("Heritage") of Clarksville, Tennessee, consummated a merger
in which Old National issued 2,191,322 common shares in exchange
for all of the outstanding common shares of Heritage. The
transaction was accounted for as a pooling-of-interests. Net
income for Heritage prior to merger included in the 2000
statements for the period ended March 1, 2000 was $509 thousand.
On March 10, 2000, Old National and ANB Corporation ("ANB") of
Muncie, Indiana, consummated a merger in which Old National
issued 7,316,153 common shares in exchange for all of the
outstanding common shares of ANB. The transaction was accounted
for as a pooling-of-interests. Net income for ANB prior to merger
included in the 2000 statements for the period ended March 10,
2000 was $1.3 million.
7
Discontinued Operations
During June 1998, ONB finalized the sale of Consumer Acceptance
Corporations=s sub-prime auto loans, which closed in July 1998.
ONB has accounted for this entity as discontinued operations on
the consolidated financial statements. Loss from discontinued
operations for the three and six months ended June 30, 1999 was
as follows ($ in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
1999 1999
Income (loss) before taxes
from operations of discontinued
operations $0 $0
Income tax expense (benefit) 0 0
Income (loss) from operations of
discontinued operations $0 $0
Income before taxes from disposal
of discontinued operations 5,805 5,805
Income tax expense (2,322) (2,322)
----- -----
Income from disposal of discontinued
operations 3,483 3,483
----- -----
Income from discontinued
operations $3,483 $3,483
===== =====
Income from discontinued
operations per common share
Basic $0.06 $0.06
==== ====
Diluted $0.06 $0.06
==== ====
4. Investments
The market value and amortized cost of investment securities as
of June 30, 2000 are set forth below ($ in thousands):
Market Value Amortized Cost
Available-for-sale, at market value $1,765,201 $1,811,863
========== ==========
5. Borrowings
Old National called for redemption its 8% convertible
subordinated debentures on May 14, 2000. At June 30, 1999 $21.9
million were outstanding.
Old National has registered Series A Medium Term Notes in the
principal amount of $50 million. The series has been fully
issued. As of June 30, 2000, a total of $24.5 million of the
notes were outstanding, with maturities ranging from one to three
years and fixed interest rates of 6.9% to 7.0%. At June 30,
1999, Old National had outstanding $32.0 million of medium term
notes.
Old National also has registered Medium Term Notes in the
principal amount of $150 million. $85.7 million of notes are
available for issuance at June 30, 2000. These notes may be
issued with maturities of nine months or more and rates may
either be fixed or variable. As of June 30, 2000, a total of
$59.3 million of the notes were outstanding, with maturities
8
ranging from two to seven years and fixed interest rates from
6.4% to 7.0%. At June 30, 1999, Old National had $64.3 million
outstanding.
As of June 30, 2000, Old National has $75 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, 2000 and 1999, no balance was outstanding under
these lines.
6. Guaranteed Preferred Beneficial Interests in Company's
Subordinated Debentures
During March 2000, Old National issued $50 million of trust
preferred securities through a subsidiary Old National Capital
Trust I. The trust preferred securities have a liquidation
amount of $25 per share with a cumulative annual distribution
rate of 9.5%, or $2.375 per share, payable quarterly, and
maturing on March 15, 2030.
Old National may redeem the subordinated debentures and thereby
cause a redemption of the trust preferred securities in whole (or
in part from time to time) on or after March 15, 2005, or in
whole (but not in part) following the occurrence and continuance
of certain adverse federal income tax or capital treatment
events.
Costs associated with the issuance of the trust preferred
securities totaling $1.8 million were capitalized and are being
amortized through the maturity date of the securities. The
unamortized balance is included in other assets in the
consolidated balance sheet.
7. Interest Rate Contracts
Old National uses interest rate contracts such as interest swaps
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, 2000, Old National has interest rate swaps with a
notional value of $75 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 was
$(4.4) million as of June 30, 2000. Old National pays the
counterparty a variable rate based on three-month LIBOR and
receives fixed rates ranging from 5.375% to 7.0%. The contracts
terminate on or prior to May 3, 2009.
Old National is exposed to losses if a counterparty fails to make
its payments under a contract in which Old National is in the
receiving position. Although collateral or other security is not
obtained, Old National minimizes its credit risk by monitoring
the credit standing of the counterparties and anticipates that
the counterparties will be able to fully satisfy their obligation
under the agreements.
9
8. Comprehensive Income
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
($ in Thousands)
<S> <C> <C> <C> <C>
Net income $23,857 $27,366 $32,850 $50,065
Unrealized gains gains (losses) on securities:
Unrealized holding losses
arising during period, net of tax 2,313 (23,462) 1,188 (28,304)
Less: reclassification adjustment
for losses (gains) realized in net
income,net of tax 73 (587) 15 (1,417)
------ ------- ----- ------
Net unrealized gains (losses) 2,386 (24,049) 1,203 (29,721)
------ ------- ----- ------
Comprehensive income $26,243 $ 3,317 $34,053 $20,344
====== ======= ======= =======
</TABLE>
9. Segment Data
Community
Banking Other Total
June 30, 2000
Net interest income (loss) $143,959 $(8,796) $135,163
Income tax expense (benefit) 17,935 (7,845) 10,090
Segment profit (loss) 36,984 (4,134) 32,850
Total assets 7,018,802 1,303,757 8,322,559
June 30, 1999
Net interest income (loss) $118,748 $19,846 $138,594
Income tax expense (benefit) 10,741 7,564 18,305
Segment profit (loss) 32,278 14,304 46,582
Total assets 5,770,877 2,134,379 7,905,256
The charter consolidation during 1999 impacted the internal
reporting and makes prior year's financial data not comparable to
the new format.
10. Impact of Accounting Changes
In June 1998 the Financial Accounting Standards Board 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 Old National). SFAS No.
133 expands the derivative definition which Old National is
currently reviewing to determine its application. Due to its
limited use of traditional derivative instruments, Old National
does not expect the impact of this statement to be material to
the results of operations or its financial position.
11. Merger and Restructuring Charges
During the first quarter of 2000, Old National closed two
mergers, finalized the charter consolidation efforts which began
in 1999 and recorded related merger and restructuring charges of
$22.5 million. Included in these charges were merger related
10
costs, system conversion costs, balance sheet restructuring,
elimination of duplicate or unnecessary facilities,
centralization of certain support functions and personnel
severance costs related to these items. The components of the
charges are shown below ($ in thousands).
Three months ended Six months ended
June 30, 2000 June 30, 2000
Professional fees -- $ 5,744
Severance and related costs -- 4,501
Fixed asset write-downs -- 3,687
Losses on sale of securities -- 3,381
Other -- 1,338
------ -------
Included in noninterest expense -- 18,651
------ -------
Provision for loan losses -- 3,801
------ -------
Total -- $22,452
====== =======
11
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 Old National
as of June 30, 2000, as compared to June 30, 1999 and December 31,
1999, and the results of operations for the three and six months ended
June 30, 2000 and 1999.
Financial Condition
Old National's assets at June 30, 2000 were $8.323 billion, a 5.3%
increase since June 1999 and a 5.9% increase since December 1999.
Earning assets, which consist primarily of money market investments,
investment securities and loans, grew 5.8% over the prior year.
During the past year, the mix of earning assets reflected loan growth
of 10.2% while money market investments and investment securities
decreased a combined 6.8%. Since December 1999, earning assets
increased 7.0% with loans growing 11.0% and investment securities and
money market investments decreasing 5.2%.
At June 30, 2000, total under-performing assets (defined as loans 90
days or more past due, nonaccrual and restructured loans and
foreclosed properties) increased to $38.3 million from $28.6 million
as of December 31, 1999. As of these dates, under-performing assets
in total were 0.64% and 0.50%, respectively, of total loans and
foreclosed properties.
June 30, December 31,
2000 1999
Nonaccrual loans $26,105 $19.286
Restructured loans 285 450
Foreclosed properties 3,301 3,700
------ ------
Total Non-performing Assets 29,691 23,436
------ ------
Past due 90 days or more 8,640 5,206
------ ------
Total Under-performing Assets $38,331 $28,642
====== ======
Unper-performing assets as a % of total
loans and foreclosed properties 0.64% 0.50%
==== ====
As of June 30, 2000, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS No. 114 and 118
was $14.6 million with no related allowance and $83.9 million with
$24.4 million of related allowance.
Old National'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, 2000, the average balance of
impaired loans was $85.1 million and $3.3 million of interest was
recorded.
Old National's consolidated loan portfolio is well diversified and
contains no concentrations of credit in any particular industry
exceeding 10% of its portfolio. Old National 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, 2000, increased $429.9 million or 7.6%
compared to June 1999. Brokered certificates of deposit, included in
other time, increased $483.8 million since June 1999. Since December
1999, total deposits increased $115.8 million or 3.9% with brokered
12
certificates of deposit increasing $137.5 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 $16.9 million since June 1999 and increased
$73.8 million since December 1999. Other borrowings, which is
primarily debt from Federal Home Loan Banks, declined $12.6 million
over June 1999 and increased $39.7 million over December 1999. In
addition, $50 million of trust preferred securities were issued by Old
National Capital Trust I during March 2000.
Capital
Total shareholders' equity decreased $79.5 million since June 1999 and
$46.4 million since December 1999. Accumulated other comprehensive
income (loss), primarily net unrealized gain (loss) on investment
securities, decreased $17.6 million since June 1999 and increased $1.2
million since December 1999.
Old National'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 2000 1999 1999
Risk-based capital:
<S> <C> <C> <C> <C> <C>
Tier 1 capital to total
avg assets (leverage ratio) 4.00% 5.00% 7.13% 7.80% 7.46%
Tier 1 capital to risk-adjusted
total assets 4.00 6.00 10.08 11.35 10.64
Total capital to risk-adjusted
total assets 8.00 10.00 11.31 12.96 12.07
Shareholders' equity to total assets N/A N/A 6.47 7.82 7.23
</TABLE>
Each of Old National's affiliate banks have capital ratios which
exceed regulatory minimum and well-capitalized guidelines.
Liquidity and Asset/Liability Management
Old National 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.
Old National 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 Old National
to generate strong net interest income while controlling and
monitoring interest rate risk. Old National 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, 2000 Old National was well within that limit as the
model's fluctuation was under 3% for the first 12 months and the total
24 month period.
Using static gap, Old National's rate-sensitive assets at June 30,
2000 were 67% of rate-sensitive liabilities in the 1-180 day maturity
category and 72% in the 181-365 day category. These figures compared
to 59% and 64% on December 31, 1999 and 58% and 64% on June 30, 1999.
Old National's funds management committee meets quarterly to closely
monitor and effect changes as needed in the consolidated rate-
sensitivity position.
13
Results of Operations
Net Income
Net income from continuing operations for the quarter ended June 30,
2000 was $23.9 million, identical with the same quarter last year.
With the inclusion of significant merger and restructuring costs as
discussed below, net income from continuing operations for the year
ended June 30, 2000 was $32.9 million compared to $46.6 million in
1999. Diluted earnings per common share were $0.42 and $0.58 for the
second quarter and year-to-date of 2000, compared to $0.40 and $0.79
for the same period of the prior year.
Included in the year-to-date 2000 results were $22.5 million of merger
and restructuring charges, recorded during the first quarter. Included
in this merger and restructuring charge was $3.4 million in securities
losses related to the Heritage and ANB balance sheet restructuring,
$4.5 million of severance and employee related costs, $5.7 million in
professional fees, $3.7 million write-down of fixed assets and $1.3
million of other merger and restructuring costs. Also included in the
$22.5 million merger and restructuring expense was a $3.8 million
provision for loan losses that was charged to earnings on the merger
date to conform ANB with Old National's credit policies.
Excluding the above merger and restructuring charges, net income year-
to-date was $23.9 million and $47.3 million which is identical to the
same quarter last year and an increase of 1.5% over year-to-date 1999.
The corresponding adjusted year-to-date 2000 diluted earnings per
common share were $.83 or a 5.1% increase over last year. The
corresponding adjusted return on average assets (ROA) was 1.16%
quarter and year-to-date while return on equity (ROE) was 16.59% in
the second quarter of 2000 and 15.99% year-to-date. These compared to
1999 results of 1.24% quarter-to-date and 1.23% year-to-date ROA and
15.44% for the quarter and 15.35% year-to-date ROE. Growth in other
income offset the decline in net interest income to generate the net
income improvements.
Net Interest Income/Net Interest Margin (taxable equivalent basis)
Quarter-to-date net interest income for 2000 was $72,374, a 2.9%
decrease over 1999. Net interest income for the current year-to-date
was $144,810 a decline of 1.2% from the prior year. The net interest
margin for the second quarter and year-to-date was 3.74% and 3.78% for
2000 compared to 4.11% for both periods in 1999. The net interest
margin was compressed by the rising interest rate environment
impacting funding costs, maturity extension of borrowings, and the
decline in core deposits which required additional wholesale
borrowings. Year-to-date earning asset yields increased 26 basis
points over 1999 while the cost of interest bearing liabilities
increased 56 basis points compared to 1999.
Provision and Allowance for Loan Losses
The provision for loan losses was $4.4 million for the second quarter
compared to $3.7 million for the same quarter in 1999. The provision
for loan losses was $8.1 million year-to-date 2000 compared to 7.1
million in 1999. Merger-related provision was $3.8 million in the
first quarter of 2000. Old National's net charge-offs were 0.25% of
average loans for the current quarter, compared to 0.13% in the second
quarter of 1999. This ratio year-to-date was 0.20% for 2000 compared
to 0.13% for 1999.
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. Old National
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
14
allowance for loan losses to end-of-period loans of 1.19% at June 30,
2000 compares to 1.17% in 1999. The allowance for loan losses covers
all under-performing loans by 1.9 times at June 30, 2000 compared to
2.3 times at December 31, 1999.
Noninterest Income
Excluding securities gains (losses), noninterest income increased
29.9% in the three months ended June 30, 2000 as compared to the same
period in 1999, 28.6% year-to-date. Trust fees were up 7.4% for the
quarter compared to prior year, 6.6% year-to-date. Service charges on
deposit accounts were up 26.7% for the six months mainly due to
additional overdraft fees generated from a new product, "Worry-free"
checking, started March 1999. Quarter-to-date 2000 fees were also up
24.8% over prior year. Insurance premiums and commissions increased
77.6% over 1999 for the quarter, 81.4% year-to-date due to the
December 31, 1999, purchase of the Sycamore Agency. Investment
product fees rose over 1999 in excess of 11% for the six months. The
security gains of $1.0 million for the quarter in 1999 and $2.4
million year-to-date were taken to offset a portion of the charges
incurred in connection with the restructuring of Old National's banks
into a single charter. Other income includes a gain of $2.5 million
from the sale of Old National's credit card business in the second
quarter of 2000. Year-to-date this gain was combined with the $2.4
million gain recorded in the first quarter 2000 on the merchant credit
card business. This sale also negatively impacted loan fees. Most
other categories of noninterest income were comparable to last year's
results.
Noninterest Expense
Noninterest expense increased 2.2% in the second quarter of 2000
compared to 1999, 3.4% year-to-date. Salaries and benefits, together
the largest individual component of noninterest expense, increased
3.3% in the quarter, 7.1% year-to-date 2000 compared to 1999.
Professional fees decreased $1.1 million for the quarter, $2.3 million
year-to-date due to additional expenses in prior year related to the
charter consolidation. Processing expense decreased 16.6% for the
quarter, 13.9% for the six months. The largest decrease for the
quarter was related to credit card outsource expense in prior year.
Other expense increased 7.0% over the second quarter of 1999, 4.5%
year-to-date. 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,
remained steady in the second quarter at 27.9% compared to 27.8% in
1999. Year-to-date these percentages were 23.5% for 2000 and 28.2% for
1999. Excluding merger and restructuring charges, this year-to-date
percentage would have been 27.7% for 2000.
Item 3.
Quantitative and Qualitative disclosures
About Market Risk
Quantitative and qualitative disclosures about market risk were
included in the 1999 Form 10-K. There have been no significant
changes in the contractual balances and the estimated fair value of
Old National's on-balance sheet financial instruments, the notional
amount and estimated fair value of the company's off-balance sheet
derivative financial instruments, or weighted-average interest rates.
15
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.
3(i) Articles of Incorporation, as amended
27 Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended June 30, 2000.
Filed 8-K on 4/19/2000, Supplemental Consolidated Financial
Information.
16
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
Executive Vice President
Chief Financial Officer
Date: August 14, 2000
17
INDEX OF EXHIBITS
Regulation S-K
Reference
(Item 601)
3(i) Articles of Incorporation, as amended
27 Financial Data Schedule
18
