SECURITIES & EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission File Number 0-10888 OLD NATIONAL BANCORP (Exact name of Registrant as specified in its charter) INDIANA 35-1539838 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 420 Main Street, Evansville, Indiana 47708 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code, (812) 464-1200 Former name, former address and former fiscal year, if changed since last reports. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to the filing requirements for at least the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock. The Registrant has one class of common stock (no par value) with approximately 55.4 million shares outstanding at June 30, 2000. OLD NATIONAL BANCORP FORM 10-Q INDEX PART I. FINANCIAL INFORMATION Item 1.Financial Statements Page No. Consolidated Balance Sheet June 30, 2000 and 1999, and December 31, 1999 3 Consolidated Statement of Income Three and six months ended June 30, 2000 and 1999 4 Consolidated Statement of Cash Flows Six months ended June 30, 2000 and 1999 5 Notes to Consolidated Financial Statements 6 Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3.Quantitative and Qualitative disclosures about Market Risk 15 PART II OTHER INFORMATION 16 SIGNATURES 17 INDEX OF EXHIBITS 18 2 <TABLE> <CAPTION> OLD NATIONAL BANCORP CONSOLIDATED BALANCE SHEET June 30, December 31, ($ in thousands) (Unaudited) 2000 1999 1999 Assets <S> <C> <C> <C> Cash and due from banks ------------------- $182,745 $212,325 $210,255 Money market investments------------------- 25,275 44,700 16,686 Investment Securities U.S. Treasury ----------------------------- 8,537 71,235 39,591 U.S. Government agencies and corporations ----------------------- 1,114,626 1,180,662 1,152,770 Obligations of states and political Subdivisions --------------------------- 542,286 553,862 549,228 Other ------------------------------------ 99,752 70,504 79,849 --------- --------- --------- Total Investment Securities ------------ 1,765,201 1,876,263 1,821,438 --------- --------- --------- Loans Commercial ------------------------------- 1,483,116 1,301,063 1,338,255 Commercial real estate ------------------- 1,507,800 1,230,449 1,306,312 Residential real estate ------------------ 2,095,607 2,077,783 2,148,974 Consumer credit, net of unearned income -- 941,393 862,722 921,147 --------- --------- --------- Total Loans ---------------------------- 6,027,916 5,472,017 5,714,688 Allowance for loan losses -------------- (71,696) (64,150) (65,685) --------- --------- --------- Net Loans ------------------------------ 5,956,220 5,407,867 5,649,003 Other assets ------------------------------ 393,118 364,101 388,630 --------- --------- --------- Total Assets --------------------------- $8,322,559 $7,905,256 $8,086,012 ========= ========= ========= Liabilities Deposits Noninterest bearing demand --------------- $657,072 $604,364 $643,553 Interest bearing: Savings, NOW and money market accounts - 1,963,711 2,033,061 2,008,789 Time deposits -------------------------- 3,457,050 3,010,486 3,309,727 --------- --------- --------- Total Deposits ------------------------- 6,077,833 5,647,911 5,962,069 --------- --------- --------- Short-term borrowings --------------------- 753,222 736,348 679,459 Guaranteed preferred beneficial interests in Company's subordinated debentures-------- 50,000 -- -- Other borrowings -------------------------- 807,712 820,360 768,055 Accrued expenses and other liabilities ---- 95,225 82,602 91,434 --------- --------- --------- Total Liabilities ------------------------ 7,783,992 7,287,221 7,501,017 Shareholders= Equity Common stock ----------------------------- 55,431 55,235 56,518 Capital surplus -------------------------- 334,592 368,187 395,414 Retained earnings ------------------------ 176,662 205,119 162,384 Accumulated other comprehensive income (loss), net of tax ------------- (28,118) (10,506) (29,321) --------- --------- --------- Total Shareholders' Equity --------------- 538,567 618,035 584,995 --------- --------- --------- Total Liabilities and Shareholders' Equity --------------------------------- $8,322,559 $7,905,256 $8,086,012 ========= ========= ========= The accompanying notes are an integral part of this statement. </TABLE> 3 <TABLE> <CAPTION> OLD NATIONAL BANCORP CONSOLIDATED STATEMENT OF INCOME Three Months Ended Six Months Ended ($ and shares in thousands except June 30, June 30, per share data) (Unaudited) 2000 1999 2000 1999 Interest Income Loans including fees: <S> <C> <C> <C> <C> Taxable ----------------------------------- $123,924 $108,704 $241,213 $213,625 Non-taxable ------------------------------- 3,117 2,162 5,934 3,973 Investment securities: Taxable ----------------------------------- 20,687 20,993 42,124 40,948 Non-taxable ------------------------------- 6,756 6,797 13,590 13,540 Money market investments -------------------- 404 552 786 1,115 ------- ------- ------- ------- Total Interest Income --------------------- 154,888 139,208 303,647 273,201 ------- ------- ------- ------- Interest Expense Savings, NOW and money market accounts --------------------- 14,114 12,123 27,390 24,093 Time deposits ------------------------------- 48,514 39,131 94,726 77,305 Short-term borrowings ----------------------- 11,296 6,999 20,370 13,032 Other borrowings ---------------------------- 13,469 10,437 25,998 20,177 ------- ------- ------- ------- Total Interest Expense -------------------- 87,393 68,690 168,484 134,607 ------- ------- ------- ------- Net Interest Income ----------------------- 67,495 70,518 135,163 138,594 Provision for loan losses ------------------- 4,437 3,699 11,870 7,091 ------- ------- ------- ------- Net Interest Income After Provision For Loan Losses ------------------------- 63,058 66,819 123,293 131,503 ------- ------- ------- ------- Noninterest Income Trust fees ---------------------------------- 5,851 5,447 11,283 10,585 Service charges on deposit accounts---------- 7,865 6,301 14,275 11,264 Loan fees ----------------------------------- 1,256 1,529 2,440 3,079 Insurance premiums and commissions ---------- 2,837 1,597 5,780 3,186 Investment product fees --------------------- 1,744 1,747 3,499 3,147 Bank-owned life insurance ------------------- 1,081 1,152 1,914 2,252 Securities gains (losses), net -------------- (121) 979 (25) 2,363 Other income -------------------------------- 5,611 2,434 10,410 5,071 ------- ------- ------- ------- Total Noninterest Income ------------------ 26,124 21,186 49,576 40,947 ------- ------- ------- ------- Noninterest Expense Salaries and employee benefits -------------- 32,487 31,449 65,915 61,567 Occupancy expense --------------------------- 3,527 3,229 6,955 6,466 Equipment expense --------------------------- 4,789 4,299 9,131 8,476 Marketing expense --------------------------- 2,011 1,859 3,537 3,518 FDIC insurance expense ---------------------- 313 214 621 449 Processing expense -------------------------- 2,656 3,183 5,062 5,880 Communication and transportation expense----- 2,595 2,248 5,001 4,459 Professional fees --------------------------- 974 2,115 2,036 4,286 Other expenses ------------------------------ 6,760 6,319 13,020 12,462 ------- ------- ------- ------- 56,112 54,915 111,278 107,563 ------- ------- ------- ------- Merger and restructuring costs--------------- -- -- 18,651 -- Total Noninterest Expense ----------------- 56,112 54,915 129,929 107,563 ------- ------- ------- ------- Net Income Before Income Taxes -------------- 33,070 33,090 42,940 64,887 Provision for income taxes ------------------ 9,213 9,207 10,090 18,305 ------- ------- ------- ------- Net Income from Continuing Operations ------- 23,857 23,883 32,850 46,582 Discontinued operations---------------------- -- 3,483 -- 3,483 ------- ------- ------- ------- Net Income----------------------------------- $23,857 $27,366 $32,850 $50,065 ======= ======= ======= ======= Net Income from Continuing Operations per common share: Basic ------------------------------------ $0.43 $0.41 $0.59 $0.81 ===== ===== ===== ===== Diluted ---------------------------------- $0.42 $0.40 $0.58 $0.79 ===== ===== ===== ===== Net Income per common share: Basic ------------------------------------ $0.43 $0.47 $0.59 $0.87 ===== ===== ===== ===== Diluted ---------------------------------- $0.42 $0.46 $0.58 $0.85 ===== ===== ===== ===== Weighted average common shares outstanding: Basic ------------------------------------ 55,633 57,539 55,946 57,464 ====== ====== ====== ====== Diluted ---------------------------------- 56,234 59,644 56,915 59,595 ====== ====== ====== ====== The accompanying notes are an integral part of this statement. </TABLE> 4 <TABLE> <CAPTION> OLD NATIONAL BANCORP CONSOLIDATED STATEMENT OF CASH FLOWS Six Months Ended June 30, ($ in thousands) (Unaudited) 2000 1999 Cash flows from operating activities: <S> <C> <C> Net income ------------------------------------------------ $ 32,850 $ 50,065 ------- ------- Adjustments to reconcile net income to cash provided by (used in) operating activities: Depreciation --------------------------------------------- 6,944 6,141 Amortization of intangible assets ------------------------ 1,304 1,316 Net premium amortization on investment securities -------- 236 864 Provision for loan losses -------------------------------- 11,870 7,091 Loss (gain) on sale of investment securities ------------- 3,406 (2,363) Loss (gain) on sale of assets ---------------------------- 1,336 (159) Increase in other assets --------------------------------- (7,618) (18,552) Increase in accrued expenses and other liabilities -------------------------------------- 3,509 2,866 ------- ------- Total adjustments ------------------------------------- 20,987 (2,796) ------- ------- Net cash flows provided by operating activities 53,837 47,269 ------- ------- Cash flows from investing activities: Cash and cash equivalents of subsidiary acquired ----------- -- 5,914 Purchase of investment securities available-for-sale -------(218,341) (725,821) Proceeds from maturities and paydowns of investment securities available-for-sale ---------------------------- 129,282 403,914 Proceeds from sales of investment securities available- for-sale ------------------------------------------------- 143,139 176,343 Net principal collected from (loans made to) customers: Commercial and financial ---------------------------------(147,846) (112,178) Mortgage -------------------------------------------------(158,832) (236,320) Consumer ------------------------------------------------- (22,769) (73,189) Proceeds from sale of mortgage loans ----------------------- 10,594 24,128 Proceeds from sale of premises and equipment --------------- 1,088 640 Purchase of premises and equipment ------------------------- (7,899) (8,147) ------- ------- Net cash flows used in investing activities -------------- (271,584) (544,716) ------- ------- Cash flows from financing activities: Net increase (decrease) in deposits and short-term borrowings: Noninterest bearing demand ------------------------------- 13,519 (58,859) Savings,NOW and Money Market Accounts -------------------- (45,078) 47,944 Time deposits -------------------------------------------- 147,323 186,663 Short-term borrowings ------------------------------------ 73,763 220,512 Other borrowings ----------------------------------------- 52,439 144,642 Proceeds from Guaranteed preferred beneficial interests in Company's subordinated debentures------------------------- 50,000 -- Cash dividends paid ---------------------------------------- (19,010) (17,046) Common stock repurchased ----------------------------------- (87,303) (7,492) Common stock reissued, net of shares used to convert subordinated debentures ---------------------------------- 13,173 9,081 ------- ------- Net cash flows provided by financing activities ---------- 198,826 525,445 ------- ------- Net increase (decrease) in cash and cash equivalents ------- (18,921) 27,998 Cash and cash equivalents at beginning of period ----------- 226,941 229,027 ------- ------- Cash and cash equivalents at end of period -----------------$208,020 $257,025 ======= ======= Total interest paid -------------------------------------- $166,186 $135,709 ======= ======= Total taxes paid ----------------------------------------- $ 11,987 $16,312 ======= ======= The accompanying notes are an integral part of this statement. </TABLE> 5 Old National Bancorp Notes to Consolidated Financial Statements 1. Basis of Presentation The accompanying consolidated financial statements include the accounts of Old National Bancorp and its affiliate entities ("Old National"). All significant intercompany transactions and balances have been eliminated. In the opinion of management, the consolidated financial statements contain all the normal and recurring adjustments necessary to present fairly the financial position of Old National as of June 30, 2000 and 1999 and December 31, 1999, and the results of its operations for the three and six months ended June 30, 2000 and 1999 and its cash flows for the six months ended June 30, 2000 and 1999. All prior period information has been restated for the effects of business combinations accounted for as pooling-of-interests as discussed in Note 3. 2. Net Income Per Share Net income per common share computations are based on the weighted average number of common shares outstanding during the periods presented. A 5% stock dividend was paid January 28, 2000 to shareholders of record on January 7, 2000. All share and per share data presented herein have been restated for the effects of the stock dividend. Net income on a diluted basis is computed as above and assumes the conversion of Old National's 8% convertible subordinated debentures (Note 5) for the periods they were outstanding. For the diluted computation, net income is adjusted for the assumed reduction in interest expense, net of income tax effect, and additional common shares of 0.4 million quarter-to-date and 0.7 million year-to-date, are assumed to be issued in connection with the conversion of the remaining outstanding debentures. Earnings Per Share Reconciliation ($ and shares in thousands except per share data): Three Three Months Ended Months Ended June 30, 2000 June 30, 1999 Per Share Per Share Income Shares Amount Income Shares Amount Basic EPS Income from continuing operations available to common stockholders $ 23,857 55,634 $0.43 $23,883 57,539 $0.41 ===== ===== Effect of Dilutive Securities: Stock options 202 319 8% convertible debentures (25) 398 266 1,786 ------- ------ ------ ------ Diluted EPS Income from continuing operations available to common stockholders + assumed conversions $23,832 56,234 $0.42 $24,149 59,644 $0.40 ======= ====== ===== ======= ====== ===== 6 Six Six Months Ended Months Ended June 30, 2000 June 30, 1999 Per Share Per Share Income Shares Amount Income Shares Amount Basic EPS Income from continuing operations available to common stockholders $ 32,850 55,946 $0.59 $46,582 57,464 $0.81 ===== ===== Effect of Dilutive Securities: Stock options 250 344 8% convertible debentures 130 719 531 1,787 ------ ------ ------ ------ Diluted EPS Income from continuing operations available to common stockholders + assumed conversions $32,980 56,914 $0.58 $47,113 59,595 $0.79 ======= ====== ===== ======= ====== ===== 3. Merger and Divestiture Activity Pending Mergers On December 20, 1999, Old National and Permanent Bancorp ("Permanent") of Evansville, Indiana, executed a definitive merger agreement. Old National will issue common shares in exchange for all of the outstanding common shares of Permanent. The transaction will be accounted for as a purchase. As part of the regulatory approval process for the transaction, the Department of Justice required two Permanent branches in Evansville to be sold to another banking company. These two branches have total deposits of approximately $41 million, and an agreement has been reached with First Federal Savings Bank of Evansville. The divestiture is expected to be completed by December, 2000. As of June 30, 2000, Permanent's financial statements reflected $489 million in total assets, net loans of $324 million, total deposits of $336 million, and net income for the six months then ended of $1,425 thousand. This merger was consummated July 27, 2000. Completed Mergers On March 1, 2000, Old National and Heritage Financial Services, Inc. ("Heritage") of Clarksville, Tennessee, consummated a merger in which Old National issued 2,191,322 common shares in exchange for all of the outstanding common shares of Heritage. The transaction was accounted for as a pooling-of-interests. Net income for Heritage prior to merger included in the 2000 statements for the period ended March 1, 2000 was $509 thousand. On March 10, 2000, Old National and ANB Corporation ("ANB") of Muncie, Indiana, consummated a merger in which Old National issued 7,316,153 common shares in exchange for all of the outstanding common shares of ANB. The transaction was accounted for as a pooling-of-interests. Net income for ANB prior to merger included in the 2000 statements for the period ended March 10, 2000 was $1.3 million. 7 Discontinued Operations During June 1998, ONB finalized the sale of Consumer Acceptance Corporations=s sub-prime auto loans, which closed in July 1998. ONB has accounted for this entity as discontinued operations on the consolidated financial statements. Loss from discontinued operations for the three and six months ended June 30, 1999 was as follows ($ in thousands): Three Months Ended Six Months Ended June 30, June 30, 1999 1999 Income (loss) before taxes from operations of discontinued operations $0 $0 Income tax expense (benefit) 0 0 Income (loss) from operations of discontinued operations $0 $0 Income before taxes from disposal of discontinued operations 5,805 5,805 Income tax expense (2,322) (2,322) ----- ----- Income from disposal of discontinued operations 3,483 3,483 ----- ----- Income from discontinued operations $3,483 $3,483 ===== ===== Income from discontinued operations per common share Basic $0.06 $0.06 ==== ==== Diluted $0.06 $0.06 ==== ==== 4. Investments The market value and amortized cost of investment securities as of June 30, 2000 are set forth below ($ in thousands): Market Value Amortized Cost Available-for-sale, at market value $1,765,201 $1,811,863 ========== ========== 5. Borrowings Old National called for redemption its 8% convertible subordinated debentures on May 14, 2000. At June 30, 1999 $21.9 million were outstanding. Old National has registered Series A Medium Term Notes in the principal amount of $50 million. The series has been fully issued. As of June 30, 2000, a total of $24.5 million of the notes were outstanding, with maturities ranging from one to three years and fixed interest rates of 6.9% to 7.0%. At June 30, 1999, Old National had outstanding $32.0 million of medium term notes. Old National also has registered Medium Term Notes in the principal amount of $150 million. $85.7 million of notes are available for issuance at June 30, 2000. These notes may be issued with maturities of nine months or more and rates may either be fixed or variable. As of June 30, 2000, a total of $59.3 million of the notes were outstanding, with maturities 8 ranging from two to seven years and fixed interest rates from 6.4% to 7.0%. At June 30, 1999, Old National had $64.3 million outstanding. As of June 30, 2000, Old National has $75 million in unsecured lines of credit with unaffiliated banks. These lines of credit include various informal arrangements to maintain compensating balances. The compensating balances are maintained for the benefit of the parent company by affiliate banks, which normally maintain correspondent balances with these unaffiliated banks. As of June 30, 2000 and 1999, no balance was outstanding under these lines. 6. Guaranteed Preferred Beneficial Interests in Company's Subordinated Debentures During March 2000, Old National issued $50 million of trust preferred securities through a subsidiary Old National Capital Trust I. The trust preferred securities have a liquidation amount of $25 per share with a cumulative annual distribution rate of 9.5%, or $2.375 per share, payable quarterly, and maturing on March 15, 2030. Old National may redeem the subordinated debentures and thereby cause a redemption of the trust preferred securities in whole (or in part from time to time) on or after March 15, 2005, or in whole (but not in part) following the occurrence and continuance of certain adverse federal income tax or capital treatment events. Costs associated with the issuance of the trust preferred securities totaling $1.8 million were capitalized and are being amortized through the maturity date of the securities. The unamortized balance is included in other assets in the consolidated balance sheet. 7. Interest Rate Contracts Old National uses interest rate contracts such as interest swaps to manage its interest rate risk. These contracts are designated as hedges of specific assets and liabilities. The net interest receivable or payable on swaps is accrued and recognized as an adjustment to the interest income or expense of the hedged asset or liability. The premium paid for an interest rate cap is included in the basis of the hedged item and is amortized as an adjustment to the interest income or expense on the related asset or liability. At June 30, 2000, Old National has interest rate swaps with a notional value of $75 million. The contracts are an exchange of interest payments with no affect on the principal amounts of the underlying hedged liability. The fair value of the swaps was $(4.4) million as of June 30, 2000. Old National pays the counterparty a variable rate based on three-month LIBOR and receives fixed rates ranging from 5.375% to 7.0%. The contracts terminate on or prior to May 3, 2009. Old National is exposed to losses if a counterparty fails to make its payments under a contract in which Old National is in the receiving position. Although collateral or other security is not obtained, Old National minimizes its credit risk by monitoring the credit standing of the counterparties and anticipates that the counterparties will be able to fully satisfy their obligation under the agreements. 9 8. Comprehensive Income <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 ($ in Thousands) <S> <C> <C> <C> <C> Net income $23,857 $27,366 $32,850 $50,065 Unrealized gains gains (losses) on securities: Unrealized holding losses arising during period, net of tax 2,313 (23,462) 1,188 (28,304) Less: reclassification adjustment for losses (gains) realized in net income,net of tax 73 (587) 15 (1,417) ------ ------- ----- ------ Net unrealized gains (losses) 2,386 (24,049) 1,203 (29,721) ------ ------- ----- ------ Comprehensive income $26,243 $ 3,317 $34,053 $20,344 ====== ======= ======= ======= </TABLE> 9. Segment Data Community Banking Other Total June 30, 2000 Net interest income (loss) $143,959 $(8,796) $135,163 Income tax expense (benefit) 17,935 (7,845) 10,090 Segment profit (loss) 36,984 (4,134) 32,850 Total assets 7,018,802 1,303,757 8,322,559 June 30, 1999 Net interest income (loss) $118,748 $19,846 $138,594 Income tax expense (benefit) 10,741 7,564 18,305 Segment profit (loss) 32,278 14,304 46,582 Total assets 5,770,877 2,134,379 7,905,256 The charter consolidation during 1999 impacted the internal reporting and makes prior year's financial data not comparable to the new format. 10. Impact of Accounting Changes In June 1998 the Financial Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." This statement requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The statement is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 (January 1, 2001 for Old National). SFAS No. 133 expands the derivative definition which Old National is currently reviewing to determine its application. Due to its limited use of traditional derivative instruments, Old National does not expect the impact of this statement to be material to the results of operations or its financial position. 11. Merger and Restructuring Charges During the first quarter of 2000, Old National closed two mergers, finalized the charter consolidation efforts which began in 1999 and recorded related merger and restructuring charges of $22.5 million. Included in these charges were merger related 10 costs, system conversion costs, balance sheet restructuring, elimination of duplicate or unnecessary facilities, centralization of certain support functions and personnel severance costs related to these items. The components of the charges are shown below ($ in thousands). Three months ended Six months ended June 30, 2000 June 30, 2000 Professional fees -- $ 5,744 Severance and related costs -- 4,501 Fixed asset write-downs -- 3,687 Losses on sale of securities -- 3,381 Other -- 1,338 ------ ------- Included in noninterest expense -- 18,651 ------ ------- Provision for loan losses -- 3,801 ------ ------- Total -- $22,452 ====== ======= 11 PART I. FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following management's discussion and analysis is presented to provide information concerning the financial condition of Old National as of June 30, 2000, as compared to June 30, 1999 and December 31, 1999, and the results of operations for the three and six months ended June 30, 2000 and 1999. Financial Condition Old National's assets at June 30, 2000 were $8.323 billion, a 5.3% increase since June 1999 and a 5.9% increase since December 1999. Earning assets, which consist primarily of money market investments, investment securities and loans, grew 5.8% over the prior year. During the past year, the mix of earning assets reflected loan growth of 10.2% while money market investments and investment securities decreased a combined 6.8%. Since December 1999, earning assets increased 7.0% with loans growing 11.0% and investment securities and money market investments decreasing 5.2%. At June 30, 2000, total under-performing assets (defined as loans 90 days or more past due, nonaccrual and restructured loans and foreclosed properties) increased to $38.3 million from $28.6 million as of December 31, 1999. As of these dates, under-performing assets in total were 0.64% and 0.50%, respectively, of total loans and foreclosed properties. June 30, December 31, 2000 1999 Nonaccrual loans $26,105 $19.286 Restructured loans 285 450 Foreclosed properties 3,301 3,700 ------ ------ Total Non-performing Assets 29,691 23,436 ------ ------ Past due 90 days or more 8,640 5,206 ------ ------ Total Under-performing Assets $38,331 $28,642 ====== ====== Unper-performing assets as a % of total loans and foreclosed properties 0.64% 0.50% ==== ==== As of June 30, 2000, the recorded investment in loans for which impairment has been recognized in accordance with SFAS No. 114 and 118 was $14.6 million with no related allowance and $83.9 million with $24.4 million of related allowance. Old National's policy for recognizing income on impaired loans is to accrue earnings unless a loan becomes nonaccrual. When loans are classified as nonaccrual, interest accrued during the current year is reversed against earnings; interest accrued in the prior year, if any, is charged to the allowance for loan losses. Cash received while a loan is classified nonaccrual is recorded to principal. For the six months ended June 30, 2000, the average balance of impaired loans was $85.1 million and $3.3 million of interest was recorded. Old National's consolidated loan portfolio is well diversified and contains no concentrations of credit in any particular industry exceeding 10% of its portfolio. Old National has minimal exposure to construction lending or leveraged buyouts and no exposure in credits to foreign or lesser-developed countries. Total deposits at June 30, 2000, increased $429.9 million or 7.6% compared to June 1999. Brokered certificates of deposit, included in other time, increased $483.8 million since June 1999. Since December 1999, total deposits increased $115.8 million or 3.9% with brokered 12 certificates of deposit increasing $137.5 million in this same period. Short-term borrowings, comprised of Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings, increased $16.9 million since June 1999 and increased $73.8 million since December 1999. Other borrowings, which is primarily debt from Federal Home Loan Banks, declined $12.6 million over June 1999 and increased $39.7 million over December 1999. In addition, $50 million of trust preferred securities were issued by Old National Capital Trust I during March 2000. Capital Total shareholders' equity decreased $79.5 million since June 1999 and $46.4 million since December 1999. Accumulated other comprehensive income (loss), primarily net unrealized gain (loss) on investment securities, decreased $17.6 million since June 1999 and increased $1.2 million since December 1999. Old National's consolidated capital position remains strong as evidenced by the following comparisons of key industry ratios: <TABLE> <CAPTION> Regulatory Guidelines June 30, December 31, Minimum Well-Capitalized 2000 1999 1999 Risk-based capital: <S> <C> <C> <C> <C> <C> Tier 1 capital to total avg assets (leverage ratio) 4.00% 5.00% 7.13% 7.80% 7.46% Tier 1 capital to risk-adjusted total assets 4.00 6.00 10.08 11.35 10.64 Total capital to risk-adjusted total assets 8.00 10.00 11.31 12.96 12.07 Shareholders' equity to total assets N/A N/A 6.47 7.82 7.23 </TABLE> Each of Old National's affiliate banks have capital ratios which exceed regulatory minimum and well-capitalized guidelines. Liquidity and Asset/Liability Management Old National continually monitors its liquidity and actively manages its asset/liability position. The purpose of liquidity management is to match the sources of funds with anticipated customer borrowings and withdrawals and other obligations. The primary purpose of asset/liability management is to minimize the effect on net income of changes in interest rates and to maintain a prudent match within specified time periods of rate-sensitive assets and rate-sensitive liabilities. Old National also uses net interest income simulation modeling to better quantify the impact of potential interest rate fluctuations on net interest income. With this understanding, management can best determine possible balance sheet changes, pricing strategies, and appropriate levels of capital and liquidity which allow Old National to generate strong net interest income while controlling and monitoring interest rate risk. Old National simulates a gradual change in rates of 200 basis points up or down over 12 months and sustained for an additional 12 months. The policy limit for the maximum negative impact on net interest income over 12 months is 10%. At June 30, 2000 Old National was well within that limit as the model's fluctuation was under 3% for the first 12 months and the total 24 month period. Using static gap, Old National's rate-sensitive assets at June 30, 2000 were 67% of rate-sensitive liabilities in the 1-180 day maturity category and 72% in the 181-365 day category. These figures compared to 59% and 64% on December 31, 1999 and 58% and 64% on June 30, 1999. Old National's funds management committee meets quarterly to closely monitor and effect changes as needed in the consolidated rate- sensitivity position. 13 Results of Operations Net Income Net income from continuing operations for the quarter ended June 30, 2000 was $23.9 million, identical with the same quarter last year. With the inclusion of significant merger and restructuring costs as discussed below, net income from continuing operations for the year ended June 30, 2000 was $32.9 million compared to $46.6 million in 1999. Diluted earnings per common share were $0.42 and $0.58 for the second quarter and year-to-date of 2000, compared to $0.40 and $0.79 for the same period of the prior year. Included in the year-to-date 2000 results were $22.5 million of merger and restructuring charges, recorded during the first quarter. Included in this merger and restructuring charge was $3.4 million in securities losses related to the Heritage and ANB balance sheet restructuring, $4.5 million of severance and employee related costs, $5.7 million in professional fees, $3.7 million write-down of fixed assets and $1.3 million of other merger and restructuring costs. Also included in the $22.5 million merger and restructuring expense was a $3.8 million provision for loan losses that was charged to earnings on the merger date to conform ANB with Old National's credit policies. Excluding the above merger and restructuring charges, net income year- to-date was $23.9 million and $47.3 million which is identical to the same quarter last year and an increase of 1.5% over year-to-date 1999. The corresponding adjusted year-to-date 2000 diluted earnings per common share were $.83 or a 5.1% increase over last year. The corresponding adjusted return on average assets (ROA) was 1.16% quarter and year-to-date while return on equity (ROE) was 16.59% in the second quarter of 2000 and 15.99% year-to-date. These compared to 1999 results of 1.24% quarter-to-date and 1.23% year-to-date ROA and 15.44% for the quarter and 15.35% year-to-date ROE. Growth in other income offset the decline in net interest income to generate the net income improvements. Net Interest Income/Net Interest Margin (taxable equivalent basis) Quarter-to-date net interest income for 2000 was $72,374, a 2.9% decrease over 1999. Net interest income for the current year-to-date was $144,810 a decline of 1.2% from the prior year. The net interest margin for the second quarter and year-to-date was 3.74% and 3.78% for 2000 compared to 4.11% for both periods in 1999. The net interest margin was compressed by the rising interest rate environment impacting funding costs, maturity extension of borrowings, and the decline in core deposits which required additional wholesale borrowings. Year-to-date earning asset yields increased 26 basis points over 1999 while the cost of interest bearing liabilities increased 56 basis points compared to 1999. Provision and Allowance for Loan Losses The provision for loan losses was $4.4 million for the second quarter compared to $3.7 million for the same quarter in 1999. The provision for loan losses was $8.1 million year-to-date 2000 compared to 7.1 million in 1999. Merger-related provision was $3.8 million in the first quarter of 2000. Old National's net charge-offs were 0.25% of average loans for the current quarter, compared to 0.13% in the second quarter of 1999. This ratio year-to-date was 0.20% for 2000 compared to 0.13% for 1999. The allowance for loan losses is continually monitored and evaluated both within each affiliate bank and at the holding company level to provide adequate coverage for potential losses. Old National maintains a comprehensive loan review program to provide independent evaluations of loan administration, credit quality, loan documentation, and adequacy of the allowance for loan losses. The 14 allowance for loan losses to end-of-period loans of 1.19% at June 30, 2000 compares to 1.17% in 1999. The allowance for loan losses covers all under-performing loans by 1.9 times at June 30, 2000 compared to 2.3 times at December 31, 1999. Noninterest Income Excluding securities gains (losses), noninterest income increased 29.9% in the three months ended June 30, 2000 as compared to the same period in 1999, 28.6% year-to-date. Trust fees were up 7.4% for the quarter compared to prior year, 6.6% year-to-date. Service charges on deposit accounts were up 26.7% for the six months mainly due to additional overdraft fees generated from a new product, "Worry-free" checking, started March 1999. Quarter-to-date 2000 fees were also up 24.8% over prior year. Insurance premiums and commissions increased 77.6% over 1999 for the quarter, 81.4% year-to-date due to the December 31, 1999, purchase of the Sycamore Agency. Investment product fees rose over 1999 in excess of 11% for the six months. The security gains of $1.0 million for the quarter in 1999 and $2.4 million year-to-date were taken to offset a portion of the charges incurred in connection with the restructuring of Old National's banks into a single charter. Other income includes a gain of $2.5 million from the sale of Old National's credit card business in the second quarter of 2000. Year-to-date this gain was combined with the $2.4 million gain recorded in the first quarter 2000 on the merchant credit card business. This sale also negatively impacted loan fees. Most other categories of noninterest income were comparable to last year's results. Noninterest Expense Noninterest expense increased 2.2% in the second quarter of 2000 compared to 1999, 3.4% year-to-date. Salaries and benefits, together the largest individual component of noninterest expense, increased 3.3% in the quarter, 7.1% year-to-date 2000 compared to 1999. Professional fees decreased $1.1 million for the quarter, $2.3 million year-to-date due to additional expenses in prior year related to the charter consolidation. Processing expense decreased 16.6% for the quarter, 13.9% for the six months. The largest decrease for the quarter was related to credit card outsource expense in prior year. Other expense increased 7.0% over the second quarter of 1999, 4.5% year-to-date. Most other categories of noninterest expense experienced relatively small changes between the years. Provision for Income Taxes The provision for income taxes, as a percentage of pre-tax income, remained steady in the second quarter at 27.9% compared to 27.8% in 1999. Year-to-date these percentages were 23.5% for 2000 and 28.2% for 1999. Excluding merger and restructuring charges, this year-to-date percentage would have been 27.7% for 2000. Item 3. Quantitative and Qualitative disclosures About Market Risk Quantitative and qualitative disclosures about market risk were included in the 1999 Form 10-K. There have been no significant changes in the contractual balances and the estimated fair value of Old National's on-balance sheet financial instruments, the notional amount and estimated fair value of the company's off-balance sheet derivative financial instruments, or weighted-average interest rates. 15 PART II OTHER INFORMATION ITEM 1. Legal Proceedings NONE ITEM 2. Changes in Securities NONE ITEM 3. Defaults Upon Senior Securities NONE ITEM 4. Submission of Matters to a Vote of Security Holders NONE ITEM 5. Other Information NONE ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits as required by Item 601 of Regulation S-K. 3(i) Articles of Incorporation, as amended 27 Financial Data Schedule (b) Reports on Form 8-K filed during the quarter ended June 30, 2000. Filed 8-K on 4/19/2000, Supplemental Consolidated Financial Information. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Old National BANCORP (Registrant) By: s/s John S. Poelker John S. Poelker Executive Vice President Chief Financial Officer Date: August 14, 2000 17 INDEX OF EXHIBITS Regulation S-K Reference (Item 601) 3(i) Articles of Incorporation, as amended 27 Financial Data Schedule 18