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, 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 58.2 million shares
outstanding at September 30, 2000.
OLD NATIONAL BANCORP
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements Page No.
Consolidated Balance Sheet
September 30, 2000 and 1999, and December 31, 1999 3
Consolidated Statement of Income
Three and nine months ended September 30, 2000 and 1999 4
Consolidated Statement of Cash Flows
Nine months ended September 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
September 30, December 31,
($ in thousands) (Unaudited) 2000 1999 1999
Assets
<S> <C> <C> <C>
Cash and due from banks -------------------- $166,724 $190,513 $210,255
Money market investments-------------------- 13,387 16,366 16,686
Investment Securities
U.S. Treasury ----------------------------- 5,238 46,907 39,591
U.S. Government agencies
and corporations ------------------------ 1,285,535 1,188,886 1,152,770
Obligations of states and political
Subdivisions ---------------------------- 552,365 562,362 549,228
Other ------------------------------------- 134,437 71,313 79,849
--------- --------- ---------
Total Investment Securities ------------- 1,977,575 1,869,468 1,821,438
--------- --------- ---------
Loans
Commercial -------------------------------- 1,569,603 1,322,684 1,338,255
Commercial real estate -------------------- 1,709,901 1,277,215 1,306,312
Residential real estate ------------------- 1,926,767 2,126,622 2,148,974
Consumer credit, net of unearned income --- 1,055,959 906,718 921,147
--------- --------- ---------
Total Loans ----------------------------- 6,262,230 5,633,239 5,714,688
Allowance for loan losses --------------- (72,201) (66,299) (65,685)
--------- --------- ---------
Net Loans ------------------------------- 6,190,029 5,566,940 5,649,003
Other assets ------------------------------- 459,129 382,860 388,630
--------- --------- ---------
Total Assets ----------------------------$8,806,844 $8,026,147 $8,086,012
========= ========= =========
Liabilities
Deposits
Noninterest bearing demand ----------------- $656,013 $618,056 $643,553
Interest bearing:
Savings, NOW and money market accounts -- 2,024,524 1,996,839 2,008,789
Time deposits --------------------------- 3,729,915 3,285,568 3,309,727
--------- --------- ---------
Total Deposits -------------------------- 6,410,452 5,900,463 5,962,069
--------- --------- ---------
Short-term borrowings ---------------------- 769,338 576,446 679,459
Guaranteed preferred beneficial interests in
Company's subordinated debentures--------- 50,000 -- --
Other borrowings --------------------------- 865,712 844,678 768,055
Accrued expenses and other liabilities ----- 81,749 97,110 91,434
--------- --------- ---------
Total Liabilities ------------------------- 8,177,251 7,418,697 7,501,017
Shareholders' Equity
Common stock ------------------------------ 58,189 54,835 56,518
Capital surplus --------------------------- 403,075 349,499 395,414
Retained earnings ------------------------- 179,949 221,036 162,384
Accumulated other comprehensive
income (loss), net of tax -------------- (11,620) (17,920) (29,321)
--------- --------- ---------
Total Shareholders' Equity ---------------- 629,593 607,450 584,995
--------- --------- ---------
Total Liabilities and Shareholders'
Equity ----------------------------------$8,806,844 $8,026,147 $8,086,012
========= ========= =========
The accompanying notes are an integral part of this statement.
3
</TABLE>
<TABLE>
<CAPTION>
OLD NATIONAL BANCORP
CONSOLIDATED STATEMENT OF INCOME
Three Months Ended Nine Months Ended
($ and shares in thousands except September 30, September 30,
per share data) (Unaudited) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Interest Income
Loans including fees:
Taxable ----------------------------------- $133,975 $113,737 $375,188 $327,363
Non-taxable ------------------------------- 3,081 2,356 9,015 6,329
Investment securities:
Taxable ----------------------------------- 22,113 21,593 64,237 62,542
Non-taxable ------------------------------- 6,808 6,951 20,398 20,491
Money market investments -------------------- 430 616 1,218 1,730
------- ------- ------- -------
Total Interest Income --------------------- 166,407 145,253 470,056 418,455
------- ------- ------- -------
Interest Expense
Savings, NOW and
money market accounts --------------------- 15,524 12,320 42,914 36,413
Time deposits ------------------------------- 55,138 41,994 149,864 119,299
Short-term borrowings ----------------------- 11,258 7,623 31,627 20,655
Other borrowings ---------------------------- 16,767 11,510 42,764 31,687
------- ------- ------- -------
Total Interest Expense -------------------- 98,687 73,447 267,169 208,054
------- ------- ------- -------
Net Interest Income ----------------------- 67,720 71,806 202,887 210,401
Provision for loan losses ------------------- 4,968 3,515 16,838 10,606
------- ------- ------- -------
Net Interest Income After Provision
For Loan Losses ------------------------- 62,752 68,291 186,049 199,795
------- ------- ------- -------
Noninterest Income
Trust fees ---------------------------------- 5,537 5,506 16,820 16,091
Service charges on deposit accounts---------- 9,649 6,696 23,924 17,960
Loan fees ----------------------------------- 1,695 2,024 4,134 5,103
Insurance premiums and commissions ---------- 2,669 1,664 8,449 4,850
Investment product fees --------------------- 1,719 1,520 5,219 4,668
Bank-owned life insurance ------------------- 1,257 1,155 3,171 3,407
Securities gains (losses), net -------------- (121) 180 (146) 2,543
Other income -------------------------------- 3,184 2,503 13,593 7,572
------- ------- ------- -------
Total Noninterest Income ------------------ 25,589 21,248 75,164 62,194
------- ------- ------- -------
Noninterest Expense
Salaries and employee benefits -------------- 29,425 32,024 95,339 93,591
Occupancy expense --------------------------- 3,708 3,275 10,663 9,741
Equipment expense --------------------------- 4,111 4,225 13,242 12,701
Marketing expense --------------------------- 1,857 1,894 5,394 5,412
FDIC insurance expense ---------------------- 317 245 938 694
Processing expense -------------------------- 2,574 3,079 7,635 8,959
Communication and transportation expense----- 2,531 2,364 7,532 6,823
Professional fees --------------------------- 1,386 2,001 3,423 6,287
Other expenses ------------------------------ 8,399 6,107 21,424 18,567
------- ------- ------- -------
54,308 55,214 165,590 162,775
Merger and restructuring costs--------------- 18,852 -- 37,503 --
------- ------- ------- -------
Total Noninterest Expense ----------------- 73,160 55,214 203,093 162,775
------- ------- ------- -------
Net Income Before Income Taxes -------------- 15,181 34,325 58,120 99,214
Provision for income taxes ------------------ 1,958 9,528 12,047 27,835
------- ------- ------- -------
Net Income from Continuing Operations ------- 13,223 24,797 46,073 71,379
Discontinued operations---------------------- -- -- -- 3,483
------- ------- ------- -------
Net Income----------------------------------- $13,223 $24,797 $46,073 $74,862
======= ======= ======= =======
Net Income from Continuing Operations per common share:
Basic ------------------------------------ $0.23 $0.43 $0.82 $1.24
======= ======= ======= =======
Diluted ---------------------------------- $0.23 $0.42 $0.81 $1.21
======= ======= ======= =======
Net Income per common share:
Basic ------------------------------------ $0.23 $0.43 $0.82 $1.30
======= ======= ======= =======
Diluted ---------------------------------- $0.23 $0.42 $0.81 $1.27
======= ======= ======= =======
Weighted average common shares outstanding:
Basic ------------------------------------ 57,527 57,415 56,477 57,448
======= ======= ======= =======
Diluted ---------------------------------- 57,684 59,443 57,175 59,544
======= ======= ======= =======
The accompanying notes are an integral part of this statement.
4
</TABLE>
<TABLE>
<CAPTION>
OLD NATIONAL BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended
September 30,
($ in thousands) (Unaudited) 2000 1999
<S> <C> <C>
Cash flows from operating activities:
Net income ------------------------------------------------ $46,073 $ 74,862
------- -------
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation --------------------------------------------- 9,815 9,744
Amortization of intangible assets ------------------------ 2,914 1,931
Net premium amortization (discount accretion)
on investment securities ----------------------------- (2,102) 1,125
Provision for loan losses -------------------------------- 16,838 10,606
Loss (gain) on sale of investment securities ------------- 15,423 (2,543)
Loss (gain) on sale of assets ---------------------------- 10,930 (718)
(Increase) decrease in other assets ---------------------- 5,343 (7,379)
Increase in accrued expenses and
other liabilities ------------------------------------- (17,117) (3,690)
------- -------
Total adjustments -------------------------------------- 42,044 9,076
------- -------
Net cash flows provided by operating activities 88,117 83,938
------- -------
Cash flows from investing activities:
Cash and cash equivalents of subsidiary acquired ---------- 13,243 5,914
Purchase of investment securities available-for-sale ------(732,865) (916,394)
Proceeds from maturities and paydowns of investment
securities available-for-sale ---------------------------- 177,024 523,249
Proceeds from sales of investment securities available-
for-sale ------------------------------------------------- 529,789 242,223
Net principal collected from (loans made to) customers:
Commercial and financial --------------------------------(169,282) (131,242)
Mortgage ------------------------------------------------(309,474) (320,673)
Consumer ------------------------------------------------ (58,340) (137,692)
Proceeds from sale of mortgage loans ---------------------- 283,842 29,134
Proceeds from sale of premises and equipment -------------- 2,098 1,755
Purchase of premises and equipment ------------------------ (15,544) (17,721)
------- -------
Net cash flows used in investing activities --------------(279,509) (721,447)
------- -------
Cash flows from financing activities:
Net increase (decrease) in deposits and short-term borrowings:
Noninterest bearing demand ------------------------------- 7,681 (45,341)
Savings,NOW and Money Market Accounts -------------------- (87,920) 6,313
Time deposits -------------------------------------------- 208,941 467,328
Short-term borrowings ------------------------------------ 89,879 60,610
Other borrowings ----------------------------------------- (4,655) 172,961
Proceeds from Guaranteed preferred beneficial interests in
Company's subordinated debentures------------------------ 50,000 --
Cash dividends paid --------------------------------------- (28,947) (25,831)
Common stock repurchased ----------------------------------(105,280) (35,580)
Common stock reissued, net of shares used to convert
subordinated debentures --------------------------------- 14,863 14,901
------- -------
Net cash flows provided by financing activities ---------- 144,562 615,361
------- -------
Net increase (decrease) in cash and cash equivalents ------ (46,830) (22,148)
Cash and cash equivalents at beginning of period ---------- 226,941 229,027
------- -------
Cash and cash equivalents at end of period ----------------$180,111 $206,879
======= =======
Total interest paid --------------------------------------$265,652 $204,086
======= =======
Total taxes paid -----------------------------------------$ 18,033 $24,045
======= =======
The accompanying notes are an integral part of this statement.
</TABLE>
5
Old National Bancorp
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying consolidated financial statements include the
accounts of Old National Bancorp and its affiliate entities ("Old
National"). All significant intercompany transactions and
balances have been eliminated. In the opinion of management, the
consolidated financial statements contain all the normal and
recurring adjustments necessary to present fairly the financial
position of Old National as of September 30, 2000 and 1999 and
December 31, 1999, and the results of its operations for the
three and nine months ended September 30, 2000 and 1999 and its
cash flows for the nine months ended September 30, 2000 and 1999.
All prior period information has been restated for the effects of
business combinations accounted for as pooling-of-interests as
discussed in Note 3.
2. Net Income Per Share
Net income per common share computations are based on the
weighted average number of common shares outstanding during the
periods presented. A 5% stock dividend was paid January 28, 2000
to shareholders of record on January 7, 2000. All share and per
share data presented herein have been restated for the effects of
the stock dividend.
Net income on a diluted basis is computed as above and assumes
the conversion of Old National's 8% convertible subordinated
debentures (Note 5) for the periods they were outstanding. For
the diluted computation, net income is adjusted for the assumed
reduction in interest expense, net of income tax effect, and
additional common shares of 0.5 million year-to-date, are assumed
to be issued in connection with the conversion of the remaining
outstanding debentures.
<TABLE>
<CAPTION>
Earnings Per Share Reconciliation
($ and shares in thousands except per share data):
Three Three
Months Ended Months Ended
September 30, 2000 September 30, 1999
Per Share Per Share
Income Shares Amount Income Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income from continuing
operations available to
common stockholders $ 13,223 57,527 $0.23 $24,797 57,415 $0.43
===== =====
Effect of Dilutive
Securities:
Stock options -- 157 -- 358
8% convertible debentures -- -- 159 1,670
------ ------ ------ ------
Diluted EPS
Net income from continuing
operations available to
common stockholders
+ assumed conversions $13,223 57,684 $0.23 $24,956 59,443 $0.42
====== ====== ===== ====== ====== =====
6
Nine Nine
Months Ended Months Ended
September 30, 2000 September 30, 1999
Per Share Per Share
Income Shares Amount Income Shares Amount
Basic EPS
Net income from continuing
operations available to
common stockholders $ 46,073 56,477 $0.82 $71,379 57,448 $1.24
===== =====
Effect of Dilutive
Securities:
Stock options -- 219 -- 348
8% convertible debentures 130 479 690 1,748
------- ------ ------ ------
Diluted EPS
Net income from continuing
operations available to
common stockholders
+ assumed conversions $46,203 57,175 $0.81 $72,069 59,544 $1.21
======= ====== ===== ====== ====== =====
</TABLE>
3. Merger and Divestiture Activity
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
financial 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 financial statements for the period ended
March 10, 2000 was $1.3 million.
On July 27, 2000, Old National and Permanent Bancorp
("Permanent") of Evansville, Indiana, consummated a merger in
which Old National issued 3,301,047 common shares in exchange for
all of the outstanding common shares of Permanent. The
transaction was accounted for as a purchase. Intangible assets of
$60.5 million were recorded from this purchase and are being
amortized over 20 years. 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 $41 million, and an agreement has been reached with
First Federal Savings Bank of Evansville. The divestiture is
expected to be completed on November 17, 2000.
7
Discontinued Operations
During June 1998, ONB finalized the sale of Consumer Acceptance
Corporations's sub-prime auto loans, which closed in July 1998.
ONB has accounted for this entity as discontinued operations in
the consolidated financial statements. Loss from discontinued
operations for the three and nine months ended September 30, 1999
was as follows ($ in thousands):
Three Months Ended Nine Months Ended
September 30, September 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 0 5,805
Income tax expense (0) (2,322)
-- ------
Income from disposal of discontinued
operations 0 3,483
-- ------
Income from discontinued
operations $ 0 $3,483
== ======
Income from discontinued
operations per common share
Basic $0.00 $0.06
===== =====
Diluted $0.00 $0.06
===== =====
4. Investments Securities
The market value and amortized cost of investment securities as
of September 30, 2000 are set forth below ($ in thousands):
Market Value Amortized Cost
Available-for-sale $1,977,575 $1,997,235
========== ==========
5. Borrowings
Old National called for redemption its 8% convertible
subordinated debentures on May 14, 2000. At September 30, 1999,
$17.9 million was 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 September 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
September 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 September 30, 2000. These notes may be
issued with maturities of nine months or more and rates may
either be fixed or variable. As of September 30, 2000, a total
of $59.3 million of the notes were outstanding, with maturities
ranging from two to seven years and fixed interest rates from
8
6.4% to 7.0%. At September 30, 1999, Old National had $64.3
million outstanding.
As of September 30, 2000, Old National has $25 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, 2000 and 1999, there were no
borrowings 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 September 30, 2000, Old National has interest rate swaps with
a notional value of $175 million. The contracts are an exchange
of interest payments with no effect on the principal amounts of
the underlying hedged liabilities. The fair value of the swaps
was $(2.4) million as of September 30, 2000. Old National pays
the counterparty a variable rate based on LIBOR and receives
fixed rates ranging from 5.50% to 7.23%. The contracts terminate
on or prior to May 3, 2009.
Old National is exposed to losses if a counterparty fails to make
its payments under a contract in which Old National is in the
receiving position. Although collateral or other security is not
obtained, Old National minimizes its credit risk by monitoring
the credit standing of the counterparties and anticipates that
the counterparties will be able to fully satisfy their obligation
under the agreements.
9
8. Comprehensive Income
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
($ in Thousands)
Net income $13,223 $24,797 $46,073 $74,862
Unrealized gains (losses)
on securities:
Unrealized holding gains (losses)
arising during period, net of tax 9,288 (7,306) 8,359 (36,525)
Less: reclassification adjustment
for securities losses (gains)
realized in net income,net of tax 7,210 (108) 9,254 (1,526)
------ ------ ------ ------
Net unrealized gains (losses) 16,498 (7,414) 17,701 (38,051)
------ ------ ------ ------
Comprehensive income $29,721 $17,383 $63,774 $36,811
====== ====== ====== ======
9. Segment Data
Community
Banking Other Total
September 30, 2000
Net interest income (loss) $220,200 $(17,313) $202,887
Income tax expense (benefit) 27,353 (15,306) 12,047
Segment profit (loss) 55,926 (9,853) 46,073
Total assets 6,641,829 2,165,015 8,806,844
September 30, 1999
Net interest income (loss) $185,131 $25,270 $210,401
Income tax expense (benefit) 17,152 10,683 27,835
Segment profit (loss) 51,009 20,370 71,379
Total assets 6,029,380 1,996,767 8,026,147
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. As issued, the
Statement was effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. In June 1999, the FASB issued
SFAS No. 137, " Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No.
133". The statement was effective upon issuance and it amends
SFAS No. 133 to be effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000 (January 1, 2001 for
Old National). On June 15, 2000, The FASB issued SFAS No. 138, "
Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an amendment of FASB Statement No. 133." The
Statement addresses a limited number of issued causing
implementation difficulties for numerous entities that are
required to implement SFAS No. 133. SFAS No. 133, as amended by
10
SFAS No. 137 and SFAS No. 138, continues to be effective for all
fiscal quarter of all fiscal years beginning after June 15, 2000.
SFAS No. 133 expanded the derivative definition. Due to its
current limited use of traditional derivative instruments, and
minimal additional derivatives as defined by SFAS No. 133, it is the
opinion of Old National's management that the impact of adoption of
SFAS No. 133, including current interpretations, would not have a
material impact to the results of operations or its financial position
at the adoption date.
11. Merger and Restructuring Charges
During the third quarter of 2000, Old National completed an asset
sale and reinvestment program designed to shorten the duration of
its investment and fixed-rate mortgage loan portfolios.
Approximately $600 million of mortgage- backed securities and
residential mortgage loans were sold during the quarter with $500
million of the proceeds reinvested in shorter duration
investments and the remainder used to reduce borrowings and fund
commercial loan growth. 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 $22.5 million. Included in these
charges were merger-related costs, system conversion costs,
balance sheet restructuring, elimination of duplicate or
unnecessary facilities, centralization of certain support
functions and personnel severance costs related to these items.
The components of the charges are shown below ($ in thousands).
Three months ended Nine months ended
September 30, 2000 September 30, 2000
Professional fees $-- $ 5,744
Severance and related costs -- 4,501
Fixed asset write-downs -- 3,687
Losses on sale of securities 11,896 15,277
Losses on sale of loans 6,407 6,407
Other 549 1,887
------ ------
Included in noninterest expense 18,852 37,503
Provision for loan losses -- 3,801
------ ------
Total $18,852 $41,304
====== ======
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 September 30, 2000, as compared to September 30, 1999 and
December 31, 1999, and the results of operations for the three and
nine months ended September 30, 2000 and 1999.
Financial Condition
Old National's assets at September 30, 2000 were $8.807 billion, a
9.7% increase since September 1999 and an 11.9% increase since
December 1999. Earning assets, which consist primarily of money
market investments, investment securities and loans, grew 9.8% over
the prior year. During the past year, the mix of earning assets
reflected loan growth of 11.2% while money market investments and
investment securities increased a combined 5.6%. Since December 1999,
earning assets increased 12.4% with loans growing 12.8% and investment
securities and money market investments increasing 11.1%. Commercial
real estate loans have increased 33.9% over prior year and 41.2% over
December 1999. Commercial loans have increased 18.7% over prior year
and 23.0% since December 1999.
At September 30, 2000, total under-performing assets (defined as loans
90 days or more past due, nonaccrual and restructured loans and
foreclosed properties) increased to $30.6 million from $28.6 million
as of December 31, 1999. As of these dates, under-performing assets
in total were 0.49% and 0.50%, respectively, of total loans and
foreclosed properties.
September 30, December 31,
2000 1999
Nonaccrual loans $18,551 $19,286
Restructured loans 283 450
Foreclosed properties 4,569 3,700
------ ------
Total Non-performing Assets 23,403 23,436
Past due 90 days or more 7,189 5,206
------ ------
Total Under-performing Assets $30,592 $28,642
====== ======
Unper-performing assets as a % of total
loans and foreclosed properties 0.49% 0.50%
==== ====
As of September 30, 2000, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS No. 114 and 118
was $7.6 million with no related allowance and $104.5 million with
$20.9 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 nine months ended September 30, 2000, the average balance of
impaired loans was $91.9 million and $6.5 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.
12
Total deposits at September 30, 2000, increased $510.0 million or 8.6%
compared to September 1999. Brokered certificates of deposit,
included in time deposits, increased $158.5 million since September
1999. Since December 1999, total deposits increased $448.4 million or
10.0% with brokered certificates of deposit increasing $115.6 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 $192.9 million since September 1999 and
increased $89.9 million since December 1999. Other borrowings, which
is primarily advances from Federal Home Loan Banks, increased $21.0
million over September 1999 and increased $97.7 million over December
1999. In addition, $50 million of trust preferred securities were
issued by Old National Capital Trust I in March 2000.
Capital
Total shareholders' equity increased $22.1 million since September
1999 and $44.6 million since December 1999. Accumulated other
comprehensive income (loss), primarily net unrealized gain (loss) on
investment securities, increased $6.3 million since September 1999 and
increased $17.7 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 September 30, December 31,
Minimum Well-Capitalized 2000 1999 1999
<S> <C> <C> <C> <C> <C>
Risk-based capital:
Tier 1 capital to total
avg assets (leverage ratio) 4.00% 5.00% 6.95% 7.60% 7.46%
Tier 1 capital to risk-adjusted
total assets 4.00 6.00 9.57 11.44 10.64
Total capital to risk-adjusted
total assets 8.00 10.00 10.74 12.99 12.07
Shareholders' equity to total assets N/A N/A 7.15 7.57 7.23
Each of Old National's affiliate banks have capital ratios which
exceed regulatory minimum and well-capitalized guidelines.
</TABLE>
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 an
instantaneous (shock) 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 24
months is 5%. At September 30, 2000 Old National was 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 September
30, 2000 were 73% of rate-sensitive liabilities in the 1-180 day
maturity category and 77% in the 181-365 day category. These figures
compared to 59% and 64% on December 31, 1999 and 62% and 67% on
September 30, 1999. Old National's funds management committee meets
quarterly to monitor the asset/liability position and effect changes
as needed in the consolidated rate-sensitivity position.
13
Results of Operations
Net Income
With the inclusion of significant merger and restructuring costs as
discussed below, net income from continuing operations for the quarter
ended September 30, 2000 was $13.2 million, compared to $24.8 million
for the same quarter last year. Net income from continuing operations
for the year ended September 30, 2000 was $46.1 million compared to
$71.4 million in 1999. Diluted earnings per common share were $0.23
and $0.81 for the third quarter and year-to-date of 2000, compared to
$0.42 and $1.21 for the same period of the prior year.
Included in the quarter-to-date results were $18.3 million in
restructuring charges from an asset sale and reinvestment program
designed to shorten the duration of the investment and fixed-rate
mortgage loan portfolios. Losses on sales of securites were $11.9
million for the quarter and losses on sales of loans were $6.4
million. The year-to-date 2000 results also include $22.5 million of
merger and restructuring charges recorded during the first quarter.
Included in the first quarter 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 in write-downs
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 for
the quarter and year-to-date was $24.5 million and $71.8. The
corresponding adjusted year-to-date 2000 diluted earnings per common
share were $1.25 or a 3.3% increase over last year. The corresponding
adjusted return on average assets (ROA) was 1.13% for the quarter and
1.15% year-to-date while return on equity (ROE) was 15.75% in the
third quarter of 2000 and 15.91% year-to-date. These compared to 1999
results of 1.25% quarter-to-date and 1.24% year-to-date ROA and 15.72%
for the quarter and 15.48% year-to-date ROE. Growth in other income
offset the decline in net interest income to generate similar net
income.
Net Interest Income/Net Interest Margin (taxable equivalent basis)
Quarter-to-date net interest income for 2000 was $72,604, a 4.8%
decrease over 1999. Net interest income for the current year-to-date
was $217,414 a decline of 2.4% from the prior year. The net interest
margin for the third quarter and year-to-date was 3.56% and 3.70% for
2000 compared to 4.09% and 4.10% 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. The third quarter 2000 net interest margin was also
reduced from the Permanent acquisition which had a lower margin. Year-
to-date earning asset yields increased 30 basis points over 1999 while
the cost of interest bearing liabilities increased 69 basis points
compared to 1999.
Provision and Allowance for Loan Losses
The provision for loan losses was $5.0 million for the third quarter
compared to $3.5 million for the same quarter in 1999. The provision
for loan losses was $13.0 million for the year-to-date 2000 compared
to $10.6 million in 1999. Merger-related provision was $3.8 million in
the first quarter of 2000. Old National's net charge-offs were 0.42%
of average loans for the current quarter, compared to 0.10% in the
14
third quarter of 1999. This ratio year-to-date was 0.28% for 2000
compared to 0.12% for 1999.
The allowance for loan losses is continually monitored and evaluated
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 allowance for loan losses to end-of-period loans of
1.15% at September 30, 2000 compares to 1.18% in 1999. The allowance
for loan losses covers all under-performing loans by 2.4 times at
September 30, 2000 compared to 2.3 times at December 31, 1999.
Noninterest Income
Excluding securities gains (losses), noninterest income increased
22.0% in the three months ended September 30, 2000 as compared to the
same period in 1999, 26.3% year-to-date. Trust fees were up 4.5% year-
to-date. Service charges on deposit accounts were up 44.1% for the
quarter and 33.2% for the nine months mainly due to additional
overdraft fees generated. Insurance premiums and commissions increased
60.4% over 1999 for the quarter and 74.2% 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 nine months. The security
gains of $2.5 million year-to-date in the prior year 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 gains of $2.4 million recorded in the first quarter
2000 on the sale of the merchant credit card business and $2.5 million
in the second quarter from the sale of Old National's credit card
business. These sales also negatively impacted loan fees. Most other
categories of noninterest income were comparable to last year's
results.
Noninterest Expense
Noninterest expense decreased 1.6% in the third quarter of 2000
compared to 1999, and increased 1.7% year-to-date. Salaries and
benefits, together the largest individual component of noninterest
expense, decreased 8.1% in the quarter, and increased 1.9% year-to-
date 2000 compared to 1999. Professional fees decreased $0.6 million
for the quarter, $2.9 million year-to-date due to additional expenses
in prior year related to the charter consolidation. Processing expense
decreased 16.4% for the quarter, 14.8% for the nine months. The
largest decrease for the quarter was related to credit card outsource
expense in prior year. Other expense increased 37.5% over the third
quarter of 1999, 15.4% year-to-date. The current year other expense
includes an increase of amortization of intangible assets of $0.6
million quarter-to-date and $1.0 million year-to-date and checking and
saving losses over 1999 of $0.4 million for the quarter and $0.6 million for
the year. 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, was
12.9% compared to 27.8% in 1999. Year-to-date these percentages were
20.7% for 2000 and 28.1% for 1999. Excluding merger and restructuring
charges, these percentages would have been 28.0% for the quarter and
27.8% year-to-date.
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.
27 Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended September 30,
2000.
NONE
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: November 14, 2000
17
INDEX OF EXHIBITS
Regulation S-K
Reference
(Item 601)
27 Financial Data Schedule
32