SECURITIES AND 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, 2002 ------------- [ ] 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 1-15817 --------------------------------------------- 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) 464-1434 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 60,839,844 shares outstanding at July 31, 2002.
OLD NATIONAL BANCORP FORM 10-Q INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Page No. -------- Consolidated Balance Sheet -------------------------- June 30, 2002 and 2001, and December 31, 2001 3 Consolidated Statement of Income -------------------------------- Three and six months ended June 30, 2002 and 2001 4 Consolidated Statement of Cash Flows ------------------------------------ Six months ended June 30, 2002 and 2001 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 18 - ---------- INDEX OF EXHIBITS 19 - ----------------- 2
<TABLE> <CAPTION> Old National Bancorp Consolidated Balance Sheet ($ in thousands) (Unaudited) June 30, December 31, 2002 2001 2001 -------------------------- ----------- <S> <C> <C> <C> Assets Cash and due from banks $ 230,868 $ 217,249 $ 224,663 Money market investments 21,450 56,830 71,703 Investment securities: U.S. Treasury 5,322 5,260 5,300 U.S. Government agencies and corporations 1,936,734 1,147,899 1,527,561 Obligations of states and political subdivisions 648,807 581,930 594,557 Other 116,871 167,162 120,967 ----------- ----------- ----------- Investment securities - available-for-sale, at fair value 2,707,734 1,902,251 2,248,385 ----------- ----------- ----------- Loans: Commercial 1,711,125 1,727,147 1,742,937 Commercial real estate 1,847,017 1,868,336 1,848,945 Residential real estate 1,272,529 1,676,890 1,477,180 Consumer credit, net of unearned income 1,062,560 1,061,234 1,063,792 ----------- ----------- ----------- Total loans 5,893,231 6,333,607 6,132,854 Allowance for loan losses (80,865) (74,641) (74,241) ----------- ----------- ----------- NET LOANS 5,812,366 6,258,966 6,058,613 ----------- ----------- ----------- Other assets 527,077 457,766 477,109 ----------- ----------- ----------- TOTAL ASSETS $ 9,299,495 $ 8,893,062 $ 9,080,473 =========== =========== =========== Liabilities Deposits: Noninterest-bearing demand $ 734,438 $ 653,787 $ 733,814 Interest-bearing: Savings, NOW and money market 2,307,164 2,068,866 2,206,161 Time deposits 3,498,265 3,774,895 3,676,465 ----------- ----------- ----------- TOTAL DEPOSITS 6,539,867 6,497,548 6,616,440 Short-term borrowings 657,700 567,159 602,312 Guaranteed preferred beneficial interests in subordinated debentures 150,000 50,000 50,000 Other borrowings 1,170,724 1,054,989 1,083,046 Accrued expenses and other liabilities 85,808 81,875 89,440 ----------- ----------- ----------- TOTAL LIABILITIES 8,604,099 8,251,571 8,441,238 ----------- ----------- ----------- Shareholders' Equity Common stock 61,109 59,328 61,174 Capital surplus 470,345 432,587 472,467 Retained earnings 126,624 128,773 91,062 Accumulated other comprehensive income, net of tax 37,318 20,803 14,532 ----------- ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 695,396 641,491 639,235 ----------- ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,299,495 $ 8,893,062 $ 9,080,473 =========== =========== =========== </TABLE> The accompanying notes are an integral part of this statement. 3
<TABLE> <CAPTION> Old National Bancorp Consolidated Statement of Income Three Months Ended Six Months Ended ($ and shares in thousands, except per share data) June 30, June 30, (Unaudited) 2002 2001 2002 2001 -------- -------- -------- -------- <S> <C> <C> <C> <C> Interest Income Loans including fees: Taxable $ 99,722 $127,784 $203,498 $259,559 Nontaxable 4,433 3,970 8,777 7,664 Investment securities: Taxable 28,028 22,563 52,972 45,512 Nontaxable 7,434 6,941 14,619 13,593 Money market investments 87 221 188 467 -------- -------- -------- -------- TOTAL INTEREST INCOME 139,704 161,479 280,054 326,795 -------- -------- -------- -------- Interest Expense Savings, NOW and money market deposits 7,781 12,550 15,014 27,888 Time deposits 40,610 52,827 82,116 108,790 Short-term borrowings 2,362 6,382 4,787 14,694 Other borrowings 15,597 16,122 30,326 32,004 -------- -------- -------- -------- TOTAL INTEREST EXPENSE 66,350 87,881 132,243 183,376 -------- -------- -------- -------- NET INTEREST INCOME 73,354 73,598 147,811 143,419 Provision for loan losses 7,500 6,000 15,000 10,000 -------- -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 65,854 67,598 132,811 133,419 -------- -------- -------- -------- Noninterest Income Trust fees 5,083 5,382 10,073 10,620 Service charges on deposit accounts 10,209 10,441 19,552 20,088 Mortgage banking revenue 2,659 2,784 6,077 3,568 Loan fees 271 418 666 685 Insurance premiums and commissions 4,201 3,441 8,384 6,839 Investment product fees 2,078 1,760 3,850 3,497 Bank-owned life insurance 2,354 1,292 3,838 2,551 Net securities gains 957 932 2,523 1,013 Other income 3,312 2,817 6,668 5,667 -------- -------- -------- -------- TOTAL NONINTEREST INCOME 31,124 29,267 61,631 54,528 -------- -------- -------- -------- Noninterest Expense Salaries and employee benefits 34,847 34,731 71,051 70,357 Occupancy 3,869 3,784 7,678 7,901 Equipment 3,825 4,270 7,661 8,464 Marketing 2,462 2,564 4,406 4,465 FDIC insurance premiums 286 307 576 634 Processing 2,780 2,581 5,734 5,217 Communication and transportation 2,980 2,702 5,951 5,536 Professional fees 2,311 2,071 4,249 3,784 Other expenses 7,185 9,122 14,503 17,711 -------- -------- -------- -------- 60,545 62,132 121,809 124,069 Merger and restructuring costs -- 9,703 -- 9,703 -------- -------- -------- -------- TOTAL NONINTEREST EXPENSE 60,545 71,835 121,809 133,772 -------- -------- -------- -------- Net income before income taxes 36,433 25,030 72,633 54,175 Provision for income taxes 7,920 4,946 16,259 11,991 -------- -------- -------- -------- Net Income $ 28,513 $ 20,084 $ 56,374 $ 42,184 ======== ======== ======== ======== Net income per common share: Basic $ 0.46 $ 0.33 $ 0.92 $ 0.68 Diluted $ 0.46 $ 0.32 $ 0.92 $ 0.67 Weighted average number of common shares outstanding: Basic 61,163 62,564 61,145 62,756 Diluted 61,318 62,655 61,271 62,853 Dividends per common share $ 0.17 $ 0.16 $ 0.34 $ 0.32 </TABLE> The accompanying notes are an integral part of this statement. 4
<TABLE> <CAPTION> Old National Bancorp Consolidated Statement of Cash Flows Six Months Ended June 30, 2002 2001 ----------- ----------- ($ in thousands) (Unaudited) - ---------------------------- <S> <C> <C> Cash flows from operating activities: Net income $ 56,374 $ 42,184 ----------- ----------- Adjustments to reconcile net income to cash provided by (used in) operating activities: Depreciation 6,316 6,917 Amortization of intangible assets 481 3,516 Net premium amortization on investment securities 2,714 34 Provision for loan losses 15,000 10,000 Gain on sale of investment securities (2,523) (1,013) (Gain) loss on sale of assets (770) 800 Residential real estate loans originated for sale (347,046) (354,675) Proceeds from sale of mortgage loans 347,840 354,721 Increase in other assets (47,800) (2,361) Decrease in accrued expenses and other liabilities (18,835) (14,562) ----------- ----------- Total adjustments (44,623) 3,377 ----------- ----------- Net cash flows provided by operating activities 11,751 45,561 ----------- ----------- Cash flows from investing activities: Purchase of investment securities available-for-sale (1,146,659) (619,199) Proceeds from maturities and paydowns of investment securities available-for-sale 334,670 483,095 Proceeds from sales of investment securities available-for-sale 390,534 77,168 Net principal collected from (loans made to) customers: Commercial 28,260 (123,623) Mortgage 204,953 156,060 Consumer (1,966) (26,923) Proceeds from sale of premises and equipment 1,362 620 Purchase of premises and equipment (10,447) (1,771) ----------- ----------- Net cash flows used in investing activities (199,293) (54,573) ----------- ----------- Cash flows from financing activities: Net increase (decrease) in: Noninterest bearing demand 624 (57,626) Savings, NOW and Money Market Accounts 101,003 (12,648) Time deposits (178,200) (16,084) Short-term borrowings (27,612) 55,336 Other borrowings 110,678 143,824 Proceeds from the issue of long-term debt 60,000 -- Proceeds from guaranteed preferred beneficial interests in subordinated debentures 100,000 -- Cash dividends paid (20,801) (20,281) Common stock repurchased (8,487) (27,134) Common stock reissued, net of shares used to convert subordinated debentures 6,289 1,555 ----------- ----------- Net cash flows provided by financing activities 143,494 66,942 ----------- ----------- Net (decrease) increase in cash and cash equivalents (44,048) 57,930 Cash and cash equivalents at beginning of period 296,366 216,149 ----------- ----------- Cash and cash equivalents at end of period $ 252,318 $ 274,079 =========== =========== Total interest paid $ 131,345 $ 189,840 Total taxes paid $ 12,492 $ 19,111 </TABLE> The accompanying notes are an integral part of this statement. 5
Old National Bancorp Notes to Consolidated Financial Statements 1. Basis of Presentation The accompanying unaudited 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, 2002 and 2001 and December 31, 2001, and the results of its operations for the three and six months ended June 30, 2002 and 2001 and its cash flows for the six months ended June 30, 2002 and 2001. 2. Impact of Accounting Changes In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement No. 141, "Business Combinations" (Statement 141), and Statement No. 142, "Goodwill and Other Intangible Assets" (Statement 142). Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 141 also specifies the criteria for intangible assets acquired in a purchase method business combination to be recognized and reported apart from goodwill. Statement 142 requires companies to no longer amortize goodwill and intangible assets with indefinite useful lives, but to instead test those assets for impairment at least annually in accordance with the provisions of Statement 142. Under Statement 142, intangible assets with definite useful lives continue to be amortized over their respective estimated useful lives to their estimated residual values. Old National adopted the provisions of Statement 142 effective January 1, 2002. As of the date of adoption, Old National had unamortized goodwill in the amount of $82.8 million, and unamortized identifiable intangible assets in the amount of $4.4 million, all of which were subject to the transition provisions of Statements 141 and 142. As part of its adoptions of Statement 142, Old National performed a transitional impairment test on its goodwill assets, which indicated no impairment charge was required. Old National does not currently have any indefinite-lived intangible assets recorded in its statement of financial condition. In addition, no material reclassifications or adjustments to the useful lives of finite-lived intangible assets were made as a result of adopting the new guidance. The full impact of adopting Statement 142 is expected to result in an increase in net income of approximately $5.4 million or approximately $0.09 per share in 2002 as a result of Old National no longer having to amortize goodwill against earnings. At June 30, 2002 and 2001, Old National had $4.7 million and $4.8 million, respectively, in unamortized identifiable intangible assets substantially all of which were core deposit intangibles. Total amortization expense associated with these intangible assets in the second quarter of 2002 and 2001 was $236 thousand and $218 thousand, respectively. The following table is a reconciliation of net income and earnings per share excluding goodwill amortization for the three and six months periods ended June 30, 2001: <TABLE> <CAPTION> ($ in thousands except per share data): For the Three Months For the Six Months Ended June 30, 2001 Ended June 30, 2001 -------------------- -------------------- Net Earnings Net Earnings Income Per Share Income Per Share ------ --------- ------ --------- <S> <C> <C> <C> <C> Basic earnings per common share computation: Reported net income $20,084 $ 0.33 $42,184 $ 0.68 Add back goodwill amortization 1,366 .02 2,734 .04 ------- -------- ------- -------- Adjusted net income/Earnings per share $21,450 $ 0.35 $44,918 $ 0.72 ======= ======== ======= ======== Diluted earnings per common share computation: Reported net income $20,084 $ 0.32 $42,184 $ 0.67 Add back goodwill amortization 1,366 .02 2,734 .04 ------- -------- ------- -------- Adjusted net income/Earnings per share $21,450 $ 0.34 $44,918 $ 0.71 ======= ======== ======= ======== </TABLE> 6
3. Acquisition and Divestiture Activity Subsequent to quarter end, July 1, 2002, Old National completed the purchase of Fund Evaluation Group, Inc. (FEG), a Cincinnati, Ohio, based investment consulting firm. The transaction will be accounted for as a purchase in accordance with Statement of Financial Accounting Standards No. 141. Intangible assets of $11.8 million were recorded from this purchase and are being amortized over ranges of 4 to 35 years. In addition, goodwill of $11.3 million was recorded. As of June 30, 2002, FEG's financial statements reflected $3.0 million in total assets and net income for the six months then ended of $440 thousand. During July 2002 and subsequent to quarter end, Old National finalized sales of five of its branches. The gain on the sales totaling approximately $5 million will be recorded in continuing operations. In addition, Old National has agreements to sell three additional branches in the third quarter 2002. 4. Net Income Per Share Net income per common share computations are based on the weighted average number of common shares outstanding during the periods presented. A 5% stock dividend was paid January 25, 2002 to shareholders of record on January 4, 2002. All share and per share data presented herein have been restated for the effects of the stock dividend. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Earnings Per Share Reconciliation ($ and shares in thousands except per share data): <TABLE> <CAPTION> Three Three Months Ended Months Ended June 30, 2002 June 30, 2001 ------------- ------------- 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 $28,513 61,163 $ 0.46 $ 20,084 62,564 $ 0.33 ======== ======== Effect of dilutive securities: Stock options -- 155 -- 91 ------- ------- -------- -------- Diluted EPS Net income from continuing Operations available to common stockholders + assumed conversions $28,513 61,318 $ 0.46 $ 20,084 62,655 $ 0.32 ======= ======= ======== ======== ======== ======== </TABLE> 7
<TABLE> <CAPTION> Six Six Months Ended Months Ended June 30, 2002 June 30, 2001 ------------- ------------- 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 $56,374 61,145 $ 0.92 $ 42,184 62,756 $ 0.68 ======== ======== Effect of dilutive securities: Stock options -- 126 -- 97 ------- ------- -------- -------- Diluted EPS Net income from continuing operations available to common stockholders + assumed conversions $56,374 61,271 $ 0.92 $ 42,184 62,853 $ 0.67 ======= ======= ======== ======== ======== ======== </TABLE> 5. Investments Securities The market value and amortized cost of investment securities as of June 30, 2002 are set forth below ($ in thousands): Market Value Amortized Cost Unrealized Gain ------------ -------------- --------------- Available-for-sale $2,707,734 $2,643,544 $64,190 ========== ========== ========== 6. Borrowings During 2001, Old National Bank issued $150 million of subordinated bank notes bearing a fixed interest rate of 6.75%, payable semiannually, and maturing in 2011. The notes qualify as Tier 2 Capital for regulatory purposes and are in accordance with the senior and subordinated global bank note program in which Old National Bank may issue and sell up to a maximum of $1 billion. Notes issued by Old National Bank under the global note program are not obligations of, or guaranteed by, Old National Bancorp. During the second quarter of 2002, Old National issued $60 million of floating rate senior unsecured bank notes under the senior and subordinated global bank note program. The notes mature from 2004 to 2006. 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, 2002, a total of $23.0 million of the notes were outstanding, with maturities in 2002 and 2003 and fixed interest rates of 6.9%. At June 30, 2001, Old National had outstanding $23.0 million of medium term notes. Old National also has registered Medium-Term Notes in the principal amount of $150 million. There were $87.5 million of notes available for issuance at June 30, 2002. These notes may be issued with maturities of nine months or more and rates may either be fixed or variable. As of June 30, 2002, a total of $54.3 million of the notes were outstanding, with maturities ranging from one to seven years and fixed interest rates from 6.4% to 7.0%. At June 30, 2001, Old National had $59.3 million outstanding. 8
As of June 30, 2002, Old National has $25 million in an unsecured line of credit with an unaffiliated bank. This line of credit includes various arrangements to maintain compensating balances or pay fees. As of June 30, 2002 and 2001, there were no borrowings under this line. The contractual maturities of long-term debt are as follows: Guaranteed Preferred Other Beneficial Interest in Borrowings Subordinated Debentures Total ---------- ----------------------- ----- Due in 2002 $ 31,100 $ - $ 31,100 Due in 2003 184,230 - 184,230 Due in 2004 256,700 - 256,700 Due in 2005 145,053 - 145,053 Due in 2006 72,442 - 72,442 Thereafter 481,199 150,000 631,199 ---------- -------- ---------- Total $1,170,724 $150,000 $1,320,724 ========== ======== ========== 7. Guaranteed Preferred Beneficial Interests in Subordinated Debentures During 2002, Old National issued $100 million of trust preferred securities through a subsidiary, ONB Capital Trust II. The trust preferred securities have a liquidation amount of $25 per share with a cumulative annual distribution rate of 8.0% or $2.00 per share, payable quarterly, and maturing on April 15, 2032. As guarantor, Old National unconditionally guarantees payment of accrued and unpaid distributions required to be paid on the trust preferred securities, the redemption price when a trust preferred security is called for redemption, and amounts due if a trust is liquidated or terminated. During March 2000, Old National issued $50 million of trust preferred securities through a subsidiary, ONB 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 (for debentures owned by ONB Capital Trust I) and on or after April 12, 2007 (for debentures owned by ONB Capital Trust II), and 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 $3.3 million in 2002 and $1.8 million in 2000, 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. 8. Interest Rate Contracts Old National adopted Statement of Financial Accounting Standard ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment of FASB Statement No. 133" on January 1, 2001. A $35 thousand reduction to current income was recorded as a transition adjustment. Old National designates its derivatives based upon criteria established by SFAS No. 133. For a derivative designated as a fair value hedge, the derivative is recorded at fair value on the Balance Sheet. The change in fair value of the derivative and hedged item along with any ineffectiveness of the hedge is recorded in current earnings. For a derivative designated as a cash flow hedge, the effective portion of the derivative's gain or loss is initially reported as a component of accumulated other comprehensive income (loss) and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately. 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 9
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, 2002, Old National had interest rate swaps with a notional value of $500 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 $13.4 million as of June 30, 2002. Old National pays the counterparty a variable rate based on LIBOR and receives fixed rates ranging from 4.37% to 9.5%. The contracts terminate on or prior to April 2032. During 2001, Old National entered into a forecasted interest rate swap with a notional value of $75 million. The transaction was designated as a cash flow hedge with the effective portion of the derivative's loss initially reported as a component of accumulated other comprehensive income (loss). Upon termination, this amount is being reclassified into earnings as a yield adjustment over the 10-year term of the $150 million 6.75% fixed-rate subordinated bank notes issued on October 5, 2001. Old National is exposed to losses if a counterparty fails to make its payments under a contract in which Old National is in the receiving position. Although collateral or other security is not obtained, Old National minimizes its credit risk by monitoring the credit standing of the counterparties and anticipates that the counterparties will be able to fully satisfy their obligation under the agreements. 9. Comprehensive Income <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, 2002 2001 2002 2001 -------- -------- -------- -------- ($ in thousands) <S> <C> <C> <C> <C> Net income $ 28,513 $ 20,084 $ 56,374 $ 42,184 Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period, net of tax 32,273 1,651 24,237 19,467 Less: reclassification adjustment for securities losses (gains) realized in net income, net of tax (584) (569) (1,539) (618) Cash flow hedges: Reclassification of net derivative losses, net of tax 44 -- 88 -- -------- -------- -------- -------- Net unrealized gains (losses) 31,733 1,082 22,786 18,849 -------- -------- -------- -------- Comprehensive income $ 60,246 $ 21,166 $ 79,160 $ 61,033 ======== ======== ======== ======== </TABLE> 10. Segment Data <TABLE> <CAPTION> Community Banking Treasury Other Total ------- -------- ----- ----- <S> <C> <C> <C> <C> June 30, 2002 - ------------- Net interest income $ 118,361 $ 28,236 $ 1,214 $ 147,811 Income tax expense (benefit) 19,562 (4,034) 731 16,259 Segment profit 48,253 6,807 1,314 56,374 Total assets 6,185,608 2,947,612 166,275 9,299,495 June 30, 2001 - ------------- Net interest income (loss) 145,752 (3,720) 1,387 143,419 Income tax expense (benefit) 16,471 (1,826) (2,654) 11,991 Segment profit (loss) 37,267 8,743 (3,826) 42,184 Total assets $ 6,612,402 $ 2,132,668 $ 147,992 $ 8,893,062 </TABLE> 10
11. Merger and Restructuring Charges During the second quarter of 2001, Old National announced that it would further restructure its regional banking administrative structure and incur additional expenses in the consolidation of ANB Corporation, which it acquired in the first quarter of 2000. The restructuring of the banking operations involved consolidating the administrative structure of the banking franchise from six regions into three regions and the closure or sale of up to 10 branches. Approximately 100 positions were eliminated and the charges associated with severance, facilities and equipment write-offs were $7.7 million. The operations and management integration plan was finalized for the ANB acquisition and additional charges of $2.0 million for personnel costs and costs of consolidating the operation function of the Trust business were recorded. The accrual of these restructuring charges was $2.1 million as of June 30, 2002. The components of the charges are shown below ($ in thousands). Three months ended Six months ended June 30, 2001 June 30, 2001 ------------------ ----------------- Severance and related costs $6,477 $6,477 Fixed asset write-downs 2,047 2,047 Professional fees 428 428 Other 751 751 ------ ------ Included in noninterest expense $9,703 $9,703 ====== ====== 12. Stock Options On January 22, 2002, Old National granted 1.8 million stock options to key employees at an option price of $23.83. On June 27, 2001, Old National granted 1.5 million stock options to key employees at an option price of $25.13. The options vest 25% per year over a four year period and expire in 10 years. If certain financial targets are achieved, vesting is accelerated. Old National can grant up to 6.6 million shares of common stock under the 1999 Equity Incentive Plan. Under this plan, active employees with unvested restricted stock shares could exchange those shares for stock options by August 27, 2001. On that date, 36,468 restricted stock shares were converted to stock options. Options have been accounted for in accordance with APB Opinion No. 25 and related Interpretations. Accordingly, no compensation costs have been recognized. 13. Reclassifications Certain prior year amounts have been restated to conform with the 2002 presentation. Such reclassifications had no effect on net income. 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, 2002, as compared to June 30, 2001 and December 31, 2001, and the results of operations for the three and six months ended June 30, 2002 and 2001. Management's forward-looking statements are intended to benefit the reader, but are subject to various risks and uncertainties which may cause actual results to differ materially, including but not limited to: (1) economic conditions generally and in the financial services industry; (2) increased competition in the financial services industry; (3) actions by the Federal Reserve Board and changes in interest rates; and (4) governmental legislation and regulation. Financial Condition Old National's assets at June 30, 2002 were $9.3 billion, a 4.6% increase since June 2001 and a 4.8% increase since December 2001. Earning assets, which consist primarily of money market investments, investment securities and loans, grew 4.0% over the prior year. During the past year, the mix of earning assets reflected a decrease in loans of 7.0% while money market investments and investment securities increased a combined 39.3%. Since December 2001, earning assets increased 4.0% with loans decreasing 7.8% and investment securities and money market investments increasing 35.3%. Commercial real estate loans have decreased 1.1% over prior year and 0.2% since December 2001. Commercial loans have decreased 0.9% over prior year and 3.7% since December 2001. Residential real estate loans have decreased 24.1% from prior year and 27.7% from December 2001 due to sales or securitizations of existing and recently originated fixed-rate mortgages which began in the third quarter of 2000. At June 30, 2002, total under-performing assets (defined as loans 90 days or more past due, nonaccrual and restructured loans and foreclosed properties) decreased to $62.8 million from $85.5 million as of December 31, 2001. As of these dates, under-performing assets in total were 1.06% and 1.39%, respectively, of total loans and foreclosed properties. The decrease in under-performing loans resulted primarily from the removal of approximately $25.8 million in loans from the restructured category. With regard to the decrease in restructured loans, the loans removed were loans related to the lodging/accommodation industry where only payment terms had been modified and, accordingly, were required to be reported as restructured only in one fiscal year period. June 30, December 31, 2002 2001 ---------- ------------ Nonaccrual loans $35,162 $37,894 Restructured loans 6,682 25,871 Foreclosed properties 8,786 9,204 ------- ------- Total non-performing assets 50,630 72,969 Past due 90 days or more 12,186 12,580 ------- ------- Total under-performing assets $62,816 $85,549 ======= ======= Under-performing assets as a % of total loans and foreclosed properties 1.06% 1.39% ======= ======= As of June 30, 2002, the recorded investment in loans for which impairment has been recognized in accordance with SFAS Nos. 114 and 118 was $27.5 million with no related allowance and $227.7 million with $64.9 million of related allowance. Old National's policy for recognizing income on impaired loans is to accrue earnings unless a loan becomes nonaccrual. A loan is generally placed on nonaccrual status when principal or interest becomes 90 days past due unless it is well secured and in the process of collection, or earlier when concern exists as to the ultimate collectibility of principal or interest. When loans are classified as nonaccrual, interest accrued during the current year is reversed against earnings; interest accrued in the prior 12
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, 2002, the average balance of impaired loans was $221.1 million and $7.0 million of interest was recorded. Old National's consolidated loan portfolio is well diversified. The only concentration of credit in any particular industry exceeding 10% of its portfolio was in real estate rental and leasing which comprised 12.9% of total loans at June 30, 2002. 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, 2002, increased $42.3 million or 0.7% compared to June 2001. Brokered certificates of deposit, included in time deposits, decreased $399.7 million since June 2001. Since December 2001, total deposits decreased $76.6 million or 2.3% with brokered certificates of deposit decreasing $186.6 million in this same period. The growth in core deposits and additional FHLB borrowings replaced maturing brokered certificates of deposit. Short-term borrowings, comprised of Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings, increased $90.5 million since June 2001 and increased $55.4 million since December 2001. Other borrowings, which is primarily advances from Federal Home Loan Banks and subordinated bank notes, increased $115.7 million over June 2001 and increased $87.7 million over December 2001. Capital Total shareholders' equity increased $53.9 million since June 2001 and $56.2 million since December 2001. Accumulated other comprehensive income (loss), primarily net unrealized gain (loss) on investment securities, increased $16.5 million since June 2001 and increased $22.8 million since December 2001. 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 2002 2001 2001 Risk-based capital: ------- ---------------- ------ ------ ------ <S> <C> <C> <C> <C> <C> Tier 1 capital to total avg assets (leverage ratio) 4.00% 5.00% 7.80% 6.63% 6.58% Tier 1 capital to risk-adjusted total assets 4.00 6.00 11.48 9.14 9.28 Total capital to risk-adjusted total assets 8.00 10.00 15.15 10.31 12.83 Shareholders' equity to total assets N/A N/A 7.48 7.21 7.04 </TABLE> Asset/Liability Management Old National actively monitors and manages its interest rate risk, liquidity and capital positions to help sustain an appropriate net interest margin at the company. Old National also uses net interest modeling to quantify the likely changes in net interest income in many market-driven interest rate environments. Old National Bancorp's board of directors, through its Funds Management Committee, establishes policy guidelines for the maximum change in net interest income over a 24-month period the company is willing to accept in an up or down 200 basis point instantaneous change to the yield curve (+/- 200 basis point yield curve shock). The current guideline is +/- 5% of net interest income over a 24-month period in a 200 basis point shock to the yield curve. As of June 30, 2002, Old National projects that in a -200 basis point shock to interest rates net interest income would be down 7.04% cumulative over the next 24 months. In a +200 basis point shock to interest rates Old National projects net interest income would be up 0.97% cumulative over the next 24 months. While the current risk position is outside the current guideline in the -200 basis point shock, executive management and the Funds Management Committee believe this is an acceptable interest rate risk position in the current extraordinarily low interest rate environment. Results of Operations Net Income Net income for the quarter ended June 30, 2002 was $28.5 million, compared to $20.1 million for the same quarter last year with the inclusion of significant merger and restructuring costs for 2001 as discussed below. Year-to-date net income, was $56.4 million for 2002 and $42.2 million for 2001, including merger and restructuring costs as discussed below. Diluted 13
earnings per common share were $0.46 for the quarter compared to $0.32 for the same period of the prior year. Diluted earnings per share were $0.92 for 2002 compared to $0.67 for 2001. The 2001 results included $9.7 million of merger and restructuring charges recorded in the second quarter. This includes $6.5 million of severance and employee-related costs, $2.1 million of fixed asset write downs and $1.1 million of other costs. Return on average assets (ROA) for the quarter was1.24% for 2002 and 1.18% for 2001. Return on equity (ROE) for the quarter was 17.31% for 2002 and 12.78% for 2001. Year-to-date, ROA was 1.23% in 2002 compared to 1.09% in 2001 and ROE was 17.43% for 2002 and 13.50% for 2001. A portion of the improvement in net income resulted from Old National's adoption, on January 1, 2002, of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (Statement 142). Statement 142 requires companies to no longer amortize goodwill and intangible assets with indefinite useful lives, but instead test these assets for impairment at least annually in accordance with the provisions of Statement 142. The impact to second quarter earnings of adopting Statement 142 and no longer amortizing goodwill against earnings was an increase in net income of approximately $1.4 million or $0.02 per share when compared to the same period in 2001. The year-to-date impact to earnings was $2.7 million or $0.04 per share. The full impact of adopting Statement 142 is expected to result in an increase in net income of approximately $5.4 million or $0.09 per share in 2002. Net Interest Income/Net Interest Margin (taxable equivalent basis) Quarter-to-date net interest income for 2002 was $79.6 million, a 0.7% increase over 2001. The net interest margin for the quarter was 3.71% for 2002 compared to 3.82% for 2001. The decrease in net interest margin relates to continued weakness in loan demand and the related increase in the investment portfolio at lower yields than are normally available for commercial and consumer loans. Year-to-date net interest income for 2002 was $160.0 million, a 4.1% increase over 2001. The net interest margin for the six months ended was 3.76% for 2002 compared to 3.73% for 2001. Provision and Allowance for Loan Losses The provision for loan losses was $7.5 million for the quarter compared to $6.0 million for the same quarter in 2001. The increase in the quarter was due to continued loan growth, changes in loan mix and slightly higher charge-offs. The year-to-date provision for loan losses was $15 million for 2002 compared to $10 million for 2001. Old National's net charge-offs were .23% of average loans for the current quarter, compared to .34% in the same quarter of 2001. This rate year-to-date was 0.28% for 2002 and 0.29% for 2001. The allowance for loan losses is continually monitored and evaluated at the holding company level to provide adequate coverage for probable 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 was 1.37% at June 30, 2002 compared to 1.18% in 2001. The allowance for loan losses covers all under-performing loans by 1.5 times at June 30, 2002 and 1.0 times at December 31, 2001. Noninterest Income Excluding securities gains (losses), noninterest income increased 6.5% in the three months ended June 30, 2002 and 10.5% year-to-date as compared to the same period in 2001. Mortgage banking revenue decreased slightly for the quarter but increased $2.5 million year-to-date compared to prior year. Insurance premiums and commissions increased $1.5 million or 22.6% year-to-date over 2001. Bank-owned life insurance increased $1.1 million for the quarter and $1.3 million for the year over prior year due to increases in underlying assets. Noninterest Expense Noninterest expense decreased 2.6% in the second quarter and 1.8% for the six months of 2002 compared to 2001. Salaries and benefits, together the largest individual component of noninterest expense, increased 0.3% in the quarter and 1.0% for the year-to-date. This increase was offset largely by a decrease in other expense of $1.7 million during the quarter ended June 30, 2002, due primarily to the decrease of amortization of goodwill resulting from the implementation of Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets". 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 21.7% compared to 19.8% in 2001 for the quarter and 22.4% for 2002 and 22.1% for 2001 year-to-date. 14
Critical Accounting Policies and Estimates The "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as disclosures found elsewhere in this Form 10-Q, are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of the mortgage servicing assets. Actual results could differ from those estimates. o Allowance for loan losses. The allowance for loan losses is maintained at a level believed adequate by management to absorb probable losses in the consolidated loan portfolio. Management's evaluation of the adequacy of the allowance is an estimate based on reviews of individual loans, the risk characteristics of the various categories of loans given current economic conditions and other factors such as historical loss experience, financial condition of the borrower, fair market value of the collateral, and growth of the loan portfolio. The allowance is increased through a provision charged to operating expense. Loans deemed to be uncollectible are charged to the allowance. Recoveries of loans previously charged off are added to the allowance. A loan is considered impaired when it is probable that contractual interest and principal payments will not be collected either for the amounts or by the dates as scheduled in the loan agreement. Old National's policy for recognizing income on impaired loans is to accrue interest unless a loan is placed on nonaccrual status. o Servicing. Servicing assets are recognized as separate assets when loans are sold with servicing retained. Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Item 3. Quantitative and Qualitative disclosures About Market Risk As described in Old National's Form 10-K for the year ended December 31, 2001, Old National's market risk is composed primarily of interest rate risk. There have been no material changes in market risk or the manner in which Old National manages market risk since December 31, 2001. 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 At the April 18, 2002 Annual Meeting of Shareholders, the following matters were submitted to a vote of the shareholders. Election of Directors - The following directors were elected to serve until the Annual Meeting of Shareholders for the year indicated: Vote Counts For Withheld Class I Directors (term ending 2003) --------------- --------------- David L. Barning 43,668,004 16,703,796 Larry E. Dunigan 43,693,619 16,772,395 Phelps L. Lambert 43,703,473 16,740,924 Louis L. Mervis 43,671,612 16,717,106 Marjorie Z. Soyugenc 43,702,450 16,776,361 Class II Directors (term ending 2004) Richard J. Bond 43,710,978 16,730,540 David E. Eckerle 43,649,290 16,724,904 Ronald B. Lankford 43,699,027 16,713,426 James A. Risinger 43,666,424 16,474,900 Kelly N. Stanley 43,716,423 16,772,029 Class III Directors (term ending 2005) Alan W. Braun 43,693,328 16,724,603 Andrew E. Goebel 43,704,986 16,727,378 Lucien H. Meis 43,650,541 16,631,725 John N. Royse 43,670,819 16,729,953 Charles D. Storms 43,706,736 16,740,609 Approval of the amendment of the Articles of Incorporation to Provide for a Board of Directors with Staggered Terms - For - 31,417,583 Votes Against - 5,164,025 Votes Abstained - 358,594 Broker Nonvotes - 24,144,837. Approval of the amendment of the Articles of Incorporation to Update the Purpose and General Powers of the Company - For - 42,810,580 Votes Against - 1,012,509 Votes Abstained - 486,639 Broker Nonvotes - 16,775,311. Ratification of the selection of Independent Public Accountants - PricewaterhouseCoopers LLP - For - 43,418,202 Votes Against - 516,456 Votes Abstained - 394,526 Unvoted 16,755,855. ITEM 5. Other Information NONE 16
ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits as required by Item 601 of Regulation S-K. The exhibits listed in the Exhibit Index at page 19 of this Form 10-Q are filed herewith or are incorporated by reference herein. (b) Reports on Form 8-K filed during the quarter ended June 30, 2002. The Registrant filed a current report on Form 8-K dated April 11, 2002. The purpose of this report was to file certain agreements and other documents related to the issuance by ONB Capital Trust II of its trust preferred securities as exhibits for incorporation into Registrant's Registration Statement on Form S-3 (File No. 333-87573) filed with the Securities and Exchange Commission on September 22, 1999. 17
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Old National BANCORP (Registrant) By: /s/ John S. Poelker -------------------------------- John S. Poelker Executive Vice President and Chief Financial Officer Duly Authorized Officer and Principal Financial Officer Date: August 14, 2002 18
INDEX OF EXHIBITS Regulation S-K Reference (Item 601) - ---------- 3 (i) Articles of Incorporation of the Registrant, amended and restated effective June 27, 2002 are filed herewith. 3 (ii) By-Laws of the Registrant, amended and restated effective May 15, 2002 are filed herewith. 4 Instruments defining rights of security holders, including indentures Form of Indenture between the Registrant and Bank One Trust Company, NA, as trustee (incorporated by reference to Exhibit 4.1 to Registrant's Registration Statement on Form S-3, Registration No. 333-87573, filed with the Securities and Exchange Commission on September 22, 1999.) 10 Material contracts (a) Old National Bancorp Employees' Retirement Plan (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997).* (b) Employees' Savings and Profit Sharing Plan of Old National Bancorp (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997).* (c) Form of Severance Agreement for James A. Risinger, Thomas F. Clayton, Michael R. Hinton, Daryl D. Moore, and John S. Poelker, as amended, (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998).* (d) The Old National Bancorp 1999 Equity Incentive Plan (incorporated by reference to the Registrant's Form S-8 filed on July 20, 2001). (e) Stock Purchase and Dividend Reinvestment Plan (incorporated by reference to the Registrant's Post-Effective Amendment of the Registration Statement on Form S-3, Registration No. 333-20073, filed with the Securities and Exchange Commission on August 14, 2000). ------ *Management contract or compensatory plan or arrangement 19