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, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission File Number 0-10888 OLD NATIONAL BANCORP (Exact name of Registrant as specified in its charter) INDIANA 35-1539838 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 420 Main Street, Evansville, Indiana 47708 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code, (812) 464-1200 Former name, former address and former fiscal year, if changed since last reports. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to the filing requirements for at least the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock. The Registrant has one class of common stock (no par value) with approximately 45.6 million shares outstanding at September 30, 1999. OLD NATIONAL BANCORP FORM 10-Q INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Page No. Consolidated Balance Sheet September 30, 1999 and 1998, and December 31, 1998 3 Consolidated Statement of Income Three and Nine months ended September 30, 1999 and 1998 4 Consolidated Statement of Cash Flows Nine months ended September 30, 1999 and 1998 5 Notes to Consolidated Financial Statements 6 Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II OTHER INFORMATION 17 SIGNATURES 18 INDEX OF EXHIBITS 19 2 <TABLE> <CAPTION> OLD NATIONAL BANCORP CONSOLIDATED BALANCE SHEET September 30 December 31, ($ in thousands) (unaudited) 1999 1998 1998 Assets <S> <C> <C> <C> Cash and due from banks ---------------------- $156,439 $136,581 $160,162 Money market investments---------------------- 11,917 19,654 21,632 Investment Securities U.S. Treasury ------------------------------ 40,685 101,576 92,704 U.S. Government agencies and corporations ------------------------ 1,093,679 975,375 995,492 Obligations of states and political Subdivisions ---------------------------- 526,835 480,190 491,140 Other -------------------------------------- 64,179 53,944 57,301 --------- --------- --------- Total Investment Securities ------------- 1,725,378 1,611,085 1,636,637 --------- --------- --------- Loans Commercial --------------------------------- 1,169,189 1,023,893 1,027,990 Commercial real estate --------------------- 1,083,855 878,119 944,615 Residential real estate -------------------- 1,796,079 1,622,753 1,688,621 Consumer credit, net of unearned income ---- 747,433 704,099 693,079 --------- --------- --------- Total Loans ----------------------------- 4,796,556 4,228,864 4,354,305 Allowance for loan losses --------------- (58,117) (51,836) (51,847) --------- --------- --------- Net Loans ------------------------------- 4,738,439 4,177,028 4,302,458 Other assets --------------------------------- 331,134 291,630 295,722 --------- --------- --------- Total Assets ---------------------------- $6,963,307 $6,235,978 $6,416,611 ========= ========= ========= Liabilities Deposits Noninterest bearing demand ----------------- $520,560 $501,965 $553,656 Interest bearing: NOW accounts ---------------------------- 685,986 632,608 710,260 Savings accounts ------------------------ 491,307 409,470 420,296 Money market accounts ------------------- 528,176 582,173 588,876 Certificates of deposit $100,000 and over --------------------- 359,854 416,503 390,123 Other time ------------------------------ 2,439,447 2,050,273 2,005,647 --------- --------- --------- Total Deposits -------------------------- 5,025,330 4,592,992 4,668,858 --------- --------- --------- Short-term borrowings ------------------------ 560,673 407,610 506,320 Other borrowings ----------------------------- 774,259 629,758 629,868 Accrued expenses and other liabilities ------- 88,110 87,535 91,920 --------- --------- --------- Total Liabilities -------------------------- 6,448,372 5,717,895 5,896,966 Shareholders' Equity Common stock ------------------------------- 45,635 29,197 30,388 Capital surplus ---------------------------- 331,711 285,580 350,256 Retained earnings -------------------------- 154,632 181,523 119,902 Accumulated other comprehensive income (loss), net of tax ---------------- (17,043) 21,783 19,099 --------- --------- --------- Total Shareholders' Equity ------------------ 514,935 518,083 519,645 --------- --------- --------- Total Liabilities and Shareholders'Equity ---$6,963,307 $6,235,978 $6,416,611 ========= ========= ========= The accompanying notes are an integral part of this statement. 3 </TABLE> <TABLE> <CAPTION> OLD NATIONAL BANCORP CONSOLIDATED STATEMENT OF INCOME Three Months Ended Nine MonthsEnded ($ and shares in thousands except September 30, September 30, per share data) (Unaudited) 1999 1998 1999 1998 <S> <C> <C> <C> <C> Interest income Loans including fees: Taxable ----------------------------------- $96,105 $90,456 $277,441 $262,154 Non-taxable ------------------------------- 2,276 1,517 6,097 4,195 Investment securities: Taxable ----------------------------------- 20,183 18,395 58,994 55,954 Non-taxable ------------------------------- 6,467 5,920 18,977 17,469 Money market investments -------------------- 367 164 1,065 1,054 ------- ------- ------- ------- Total Interest Income --------------------- 125,398 116,452 362,574 340,826 ------- ------- ------- ------- Interest Expense Savings, NOW and money market accounts --------------------- 10,399 11,296 31,197 34,227 Certificates of deposit of $100,000 and over ---------------------------------- 5,121 5,895 16,597 17,443 Other time deposits ------------------------- 30,970 28,971 86,266 84,562 Short-term borrowings ----------------------- 7,422 5,675 20,238 13,567 Other borrowings ---------------------------- 10,611 8,316 29,424 23,131 ------- ------- ------- ------- Total Interest Expense -------------------- 64,523 60,153 183,722 172,930 ------- ------- ------- ------- Net Interest Income ----------------------- 60,875 56,299 178,852 167,896 Provision for loan losses ------------------- 2,740 2,936 8,437 9,189 ------- ------- ------- ------- Net Interest Income After Provision For Loan Losses ------------------------- 58,135 53,363 170,415 158,707 ------- ------- ------- ------- Noninterest Income Trust fees ---------------------------------- 3,619 3,342 10,809 9,731 Service charges on deposit accounts---------- 5,729 4,392 15,384 12,918 Loan fees ----------------------------------- 1,539 1,190 3,711 3,593 Insurance premiums and commissions ---------- 1,525 1,400 4,479 4,063 Investment product fees --------------------- 1,437 1,281 4,424 3,793 Bank-owned life insurance ------------------- 1,155 1,307 3,407 2,640 Securities gains, net ----------------------- 143 56 2,383 271 Other income -------------------------------- 1,778 2,051 5,589 5,870 ------- ------- ------- ------- Total Noninterest Income ------------------ 16,925 15,019 50,186 42,879 ------- ------- ------- ------- Noninterest Expense Salaries and employee benefits -------------- 26,966 23,989 78,614 71,050 Occupancy expense --------------------------- 2,660 2,501 7,902 7,378 Equipment expense --------------------------- 3,261 3,265 9,838 9,772 Marketing expense --------------------------- 1,603 1,434 4,512 4,477 FDIC insurance expense ---------------------- 173 156 533 517 Processing expense -------------------------- 2,526 2,338 7,421 6,494 Supplies expense ---------------------------- 1,264 978 3,419 3,019 Communication and transportation expense 1,970 1,750 5,646 5,332 Other expenses ------------------------------ 5,333 4,916 16,811 14,402 ------- ------- ------- ------- Total Noninterest Expense ----------------- 45,756 41,327 134,696 122,441 ------- ------- ------- ------- Income From Continuing Operations Before Income Taxes ----------------------- 29,304 27,055 85,905 79,145 Provision for income taxes ------------------ 7,718 7,064 23,057 23,004 ------- ------- ------- ------- Income From Continuing Operations ----------- 21,586 19,991 62,848 56,141 Discontinued operations Gain (loss) from discontinued operations --- 0 0 3,483 (9,854) ------- ------- ------- ------- Income (loss)from discontinued operations -- 0 0 3,483 (9,854) ------- ------- ------- ------- Net Income ---------------------------------- $21,586 $19,991 $66,331 $46,287 Income from continuing operations ======= ======= ======= ======= Per common share: Basic ------------------------------------ $0.47 $0.44 $1.36 $1.22 ===== ===== ===== ===== Diluted ---------------------------------- $0.46 $0.42 $1.33 $1.18 ===== ===== ===== ===== Net income per common share: Basic ------------------------------------ $0.47 $0.44 $1.44 $1.01 ===== ===== ===== ===== Diluted ---------------------------------- $0.46 $0.42 $1.40 $0.98 ===== ===== ===== ===== Weighted average common shares outstanding: Basic ------------------------------------ 46,017 45,957 46,089 45,984 ====== ====== ====== ====== Diluted ---------------------------------- 47,681 47,872 47,840 48,113 ====== ====== ====== ====== The accompanying notes are an integral part of this statement. 4 </TABLE> <TABLE> <CAPTION> OLD NATIONAL BANCORP CONSOLIDATED STATEMENT OF CASH FLOWS Nine Months Ended September 30, ($ in thousands) (unaudited) 1999 1998 <S> <C> <C> Cash flows from operating activities: Net income -------------------------------------------------$ 66,331 $ 46,287 -------- -------- Adjustments to reconcile net income to cash provided by (used in) operating activities: Depreciation --------------------------------------------- 7,627 7,404 Amortization of intangible assets ------------------------ 1,188 1,359 Net premium amortization on investment securities -------- 1,073 2,102 Provision for loan losses -------------------------------- 8,437 9,189 Gain on sale of investment securities -------------------- (2,383) (271) Gain on sale of assets ----------------------------------- (932) (350) Increase in interest receivable -------------------------- (5,151) (4,121) Increase in other assets --------------------------------- (369) (10,416) Increase (decrease) in accrued expenses and other liabilities -------------------------------------- (4,146) 3,977 -------- -------- Total adjustments ------------------------------------- 5,344 8,873 -------- -------- Net cash flows provided by (used in) operating activities 71,675 55,160 -------- -------- Cash flows from investing activities: Cash and cash equivalents of subsidiary acquired ----------- 5,914 -- Purchase of investment securities available-for-sale -------(846,700) (443,082) Proceeds from maturities and paydowns of investment securities available-for-sale ---------------------------- 476,422 350,153 Proceeds from sales of investment securities available- for-sale ------------------------------------------------- 241,070 95,374 Net principal collected from (loans made to) customers: Commercial and financial ---------------------------------(134,043) (122,326) Mortgage -------------------------------------------------(243,857) (273,726) Consumer ------------------------------------------------- (54,414) 18,347 Proceeds from sale of mortgage loans ----------------------- 6,094 58,857 Proceeds from sale of premises and equipment --------------- 1,755 438 Purchase of premises and equipment ------------------------- (14,613) (6,199) -------- -------- Net cash flows used in investing activities -------------- (562,372) (322,164) -------- -------- Cash flows from financing activities: Net increase (decrease) in deposits and short-term borrowings: Noninterest bearing demand ------------------------------- (50,240) (23,983) NOW Accounts --------------------------------------------- (24,274) (19,885) Savings accounts ----------------------------------------- 67,781 (10,640) Money market accounts ------------------------------------ (60,700) (14,300) Certificates of deposit $100,000 and over ---------------- (32,304) 36,249 Other time deposits -------------------------------------- 420,427 104,541 Short-term borrowings ------------------------------------ 54,353 (35,075) Other borrowings ----------------------------------------- 148,419 249,370 Cash dividends paid ---------------------------------------- (22,888) (19,360) Common stock repurchased ----------------------------------- (35,580) (35,610) Common stock reissued, net of shares used to convert subordinated debentures ---------------------------------- 12,265 12,688 -------- -------- Net cash flows provided by financing activities ---------- 477,259 243,995 -------- -------- Net increase in cash and cash equivalents ------------------ (13,438) (23,009) Cash and cash equivalents at beginning of period ----------- 181,794 179,244 -------- -------- Cash and cash equivalents at end of period -----------------$168,356 $156,235 ======== ======== Total interest paid -------------------------------------- $180,026 $169,212 ======== ======== Total taxes paid ----------------------------------------- $ 19,774 $ 13,588 ======== ======== The accompanying notes are an integral part of this statement. 5 </TABLE> Old National Bancorp Notes to Consolidated Financial Statements 1. Basis of Presentation The accompanying consolidated financial statements include the accounts of the Old National Bancorp and its affiliate entities (ONB). All significant intercompany transactions and balances have been eliminated. In the opinion of management, the consolidated financial statements contain all the normal and recurring adjustments necessary to present fairly the financial position of ONB as of September 30, 1999 and 1998 and December 31, 1998, and the results of its operations for the three and nine months ended September 30, 1999 and 1998 and its cash flows for the nine months ended September 30, 1999 and 1998. All prior period information has been restated for the effects of business combinations accounted for as pooling-of-interests as discussed in Note 3. 2. Net Income Per Share Net income per common share computations are based on the weighted average number of common shares outstanding during the periods presented. A 5% stock dividend was paid January 28, 1999 to shareholders of record on January 7, 1999. On April 15, 1999, a three-for-two stock split was declared to shareholders of record on May 3, 1999. The dividend was paid on May 24, 1999. All share and per share data presented herein have been restated for the effects of the stock dividend and stock split. Net income on a diluted basis is computed as above and assumes the conversion of ONB's 8% convertible subordinated debentures (Note 5). For the diluted computation, net income is adjusted for the assumed reduction in interest expense, net of income tax effect, and additional common shares of 1.7 million year-to-date and 1.6 million quarter-to-date, are assumed to be issued in connection with the conversion of the remaining outstanding debentures. Earnings Per Share Reconciliation ($ and shares in thousands except per share data): Three Three Months Ended Months Ended September 30, 1999 September 30, 1998 Per-Share Per-Share Income Shares Amount Income Shares Amount Basic EPS Income from continuing operations available to common stockholders $21,586 46,017 $0.47 $19,991 45,957 $0.44 ===== ===== Effect of Dilutive Securities: Stock options 74 210 8% convertible debentures 156 1,590 263 1,705 ------- ------ ------- ------ 6 Diluted EPS Income from continuing operations available to common stockholders + assumed conversions $21,742 47,681 $0.46 $20,254 47,872 $0.42 ======= ====== ===== ======= ====== ===== Nine Nine Months Ended Months Ended September 30, 1999 September 30, 1998 Per-Share Per-Share Income Shares Amount Income Shares Amount Basic EPS Income from continuing operations available to common stockholders $62,848 46,089 $1.36 $56,141 45,984 $1.22 ===== ===== Effect of Dilutive Securities: Stock options 86 229 8% convertible debentures 682 1,665 875 1,900 ------- ------ ------- ------ Diluted EPS Income from continuing operations available to common stockholders + assumed conversions $63,530 47,840 $1.33 $57,016 48,113 $1.18 ======= ====== ===== ======= ====== ===== 3. Merger and Divestiture Activity Pending Mergers On July 30, 1999, ONB and ANB Corporation (ANB) of Muncie, Indiana, executed a definitive merger agreement. ONB will issue common shares in exchange for all of the outstanding common shares of ANB. The transaction will be accounted for as a pooling-of-interests. The merger is subject to the approvals of ANB's shareholders and regulatory authorities. As of September 30, 1999, ANB's financial statements reflected $833.9 million in total assets, net loans of $648.1 million, total deposits of $676.6 million and net income for the nine months then ended of $6,245 thousand. This merger is expected to be consummated in the first quarter of 2000. On September 10, 1999, ONB and Heritage Financial Services, Inc. (Heritage) of Clarksville, Tennessee, executed a definitive merger agreement. ONB will issue common shares in exchange for all of the outstanding common shares of Heritage. The transaction will be accounted for as a pooling-of-interests. The merger is subject to the approvals of Heritage's shareholders and regulatory authorities. As of September 30, 1999, Heritage's financial statements reflected $234.0 million in total assets, net loans of $180.1 million, total deposits of $200.5 million and 7 net income for the nine months then ended of $2,288 thousand. This merger is expected to be consummated in the first quarter of 2000. Completed Mergers On January 29, 1999, ONB and Southern Bancshares LTD (Southern) of Carbondale, Illinois, consummated a merger in which ONB issued 2,552,436 common shares in exchange for all of the shares of Southern. This transaction was accounted for as a pooling-of- interests. Net income for Southern prior to merger included in the 1999 statements for the period ended January 29, 1999 was $332 thousand. On February 5,1999 ONB and Dulaney Bancorp (Dulaney) of Marshall, Illinois, consummated a merger in which ONB issued 472,284 common shares in exchange for all the shares of Dulaney. This transaction was accounted for as a pooling-of-interests without restatement of prior years due to immateriality. Discontinued Operations In April 1998, ONB announced it would look at exit strategies from its sub-prime lending affiliate, Consumer Acceptance Corporation (CAC). During June 1998, ONB finalized the sale of CAC's sub-prime auto loans, which closed in July 1998. ONB has accounted for this entity as discontinued operations on the consolidated financial statements. During the second quarter of 1999, contingencies related to the sale were favorably resolved. Income (loss) from discontinued operations for the three and nine months ended September 30, 1999 and 1998 was as follows ($ in thousands): Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 Loss before taxes from operations of discontinued operations $0 $0 $0 $(7,943) Income tax benefit 0 0 0 (3,183) -- -- ------ ------- Loss from operations of discontinued operations 0 0 0 (4,760) -- -- ------ ------- Income (loss) before taxes from disposal of discontinued operations 0 0 5,805 (8,489) Income tax expense (benefit) 0 0 2,322 (3,395) -- -- ------ ------- Income (loss) from disposal of discontinued operations 0 0 3,483 (5,094) -- -- ------ ------- Income (loss) from discontinued operations $0 $0 $3,483 $(9,854) == == ====== ======= Income (loss) from discontinued operations per common share Basic $0.00 $0.00 $0.08 $(0.21) ===== ===== ===== ====== Diluted $0.00 $0.00 $0.07 $(0.20) ===== ===== ===== ====== 8 4. Investments The market value and amortized cost of investment securities as of September 30, 1999 are set forth below ($ in thousands): Market Value Amortized Cost Available-for-sale, at market value $1,725,378 $1,754,009 ========== ========== 5. Borrowings ONB has outstanding $17.9 million of 8% convertible subordinated debentures which are due September 15, 2012, unless previously converted or redeemed. The debentures are convertible at any time prior to maturity into shares of common stock of ONB at a conversion rate of 77.519 shares for each one thousand dollars principal amount of debentures. Interest on the debentures is payable on March 15 and September 15 of each year. The debentures are redeemable in whole or in part at the option of ONB at par value. Beginning September 15, 1998, debenture holders are entitled to an annual sinking fund contribution of $2.5 million principal amount of debentures less conversions and redemptions. The debentures are subordinated in right of payment to all senior indebtedness of ONB. As of September 30, 1999, 1.4 million authorized and unissued common shares were reserved for conversion of the debentures. ONB has registered Series A Medium Term Notes in the principal amount of $50 million. The series has been fully issued. As of September 30, 1999, a total of $32.0 million of the notes were outstanding, with maturities ranging from one to four years and fixed interest rates of 6.7% to 7.1%. At September 30, 1998, ONB had outstanding $32.0 million of medium term notes. ONB also has registered Medium Term Notes in the principal amount of $150 million. These notes may be issued with maturities of nine months or more and rates may either be fixed or variable. As of September 30, 1999 and 1998, a total of $64.3 million of the notes were outstanding, with maturities ranging from one to nine years and fixed interest rates from 6.4% to 7.0%. As of September 30, 1999, ONB has $80 million in unsecured lines of credit with unaffiliated banks. These lines of credit include various informal arrangements to maintain compensating balances. The compensating balances are maintained for the benefit of the parent company by affiliate banks which normally maintain correspondent balances with these unaffiliated banks. As of September 30, 1999, no balance was outstanding under these lines. As of September 30, 1998, $8.1 million was outstanding. 6. Interest Rate Contracts ONB uses interest rate contracts such as interest swaps and caps to manage its interest rate risk. These contracts are designated as hedges of specific assets and liabilities. The net interest receivable or payable on swaps is accrued and recognized as an adjustment to the interest income or expense of the hedged asset or liability. The premium paid for an interest rate cap is included in the basis of the hedged item and is amortized as an adjustment to the interest income or expense on the related asset or liability. 9 At September 30, 1999, ONB 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 were $(4.6) million as of September 30, 1999. ONB pays the counterparty a variable rate based on three-month LIBOR and receives fixed rates ranging from 5.375% to 7.0%. The contracts terminate on or prior to May 3, 2009. ONB is exposed to losses if a counterparty fails to make its payments under a contract in which ONB is in the receiving position. Although collateral or other security is not obtained, ONB minimizes its credit risk by monitoring the credit standing of the counterparties and anticipates that the counterparties will be able to fully satisfy their obligation under the agreements. 7. Comprehensive Income Three Months Ended Nine Months Ended September 30 September 30 1999 1998 1999 1998 ($ in Thousands) Net income $21,586 $19,991 $66,331 $46,287 Unrealized gains (losses) on securities: Unrealized holding losses Arising during period, net of tax (6,911) 6,177 (34,712) 5,277 Less: reclassification adjustment for gains realized in net income, net of tax (86) (34) (1,430) (163) ------- ------ ------- ------- Net unrealized losses (6,997) 6,143 (36,142) 5,114 ------- ------ ------- ------- Comprehensive income $14,589 $26,134 $30,189 $51,401 ======= ======= ======= ======= 8. Segment Data Community Banking Other Total September 30,1999 Net interest income (loss) $180,403 $(1,551) $178,852 Income tax expense (benefit) 27,689 (4,632) 23,057 Segment profit (loss) 67,665 (4,817) 62,848 Total assets 6,824,500 138,807 6,963,307 September 30, 1998 Net interest income (loss) $170,297 $(2,401) 167,896 Income tax expense (benefit) 25,933 (2,929) 23,004 Segment profit (loss) 60,299 (4,158) 56,141 Total assets 6,113,059 303,552 6,416,611 9. 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 10 instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The statement is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 (January 1, 2001 for ONB). ONB doesn't expect the impact of this statement will be material to the results of operations or its financial position, due to its limited use of derivative instruments. 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 ONB as of September 30, 1999, as compared to September 30, 1998 and December 31, 1998, and the results of operations from continuing operations for the three and nine months ended September 30, 1999 and 1998. Financial Condition ONB's assets at September 30, 1999 were $6.963 billion, an 11.7% increase since September 1998 and an 8.5% increase since December 1998. Earning assets, which consist primarily of money market investments, investment securities and loans, grew 11.5% over the prior year. During the past year, the mix of earning assets reflected loan growth of 13.4% while money market investments and investment securities increased a combined 6.5%. Since December 1998, earning assets increased 8.7% with loans growing 10.2% and investment securities and money market investments increasing 4.8%. At September 30, 1999, total under-performing assets (defined as loans 90 days or more past due, nonaccrual and restructured loans and foreclosed properties) decreased slightly to $22.9 million from $25.1 million as of December 31, 1998. As of these dates, under-performing assets in total were 0.48% and 0.58%, respectively, of total loans and foreclosed properties. June 30, December 31, 1999 1998 Nonaccrual loans $16,589 $17,034 Restructured loans 170 116 Foreclosed properties 2,320 2,542 ------- ------- Total Non-performing Assets 19,079 19,692 Past due 90 days or more 3,880 5,389 ------- ------- Total Under-performing Assets $22,887 $25,081 ======= ======= Unper-performing assets as a % of total loans and foreclosed properties 0.48% 0.58% ==== ==== As of September 30, 1999, the recorded investment in loans for which impairment has been recognized in accordance with SFAS No. 114 and 118 was $7.8 million with no related allowance and $50.4 million with $14.3 million of related allowance. ONB's policy for recognizing income on impaired loans is to accrue earnings unless a loan becomes nonaccrual. When loans are classified as nonaccrual, interest accrued during the current year is reversed against earnings; interest accrued in the prior year, if any, is charged to the allowance for loan losses. Cash received while a loan is classified nonaccrual is recorded to principal. For the nine months ended September 30, 1999, the average balance of impaired loans was $52.1 million and $2.9 million of interest was recorded. 12 ONB's consolidated loan portfolio is well diversified and contains no concentrations of credit in any particular industry exceeding 10% of its portfolio. ONB has minimal exposure to construction lending or leveraged buyouts and no exposure in credits to foreign or lesser-developed countries. Total deposits at September 30, 1999, increased $432.3 million or 9.4% compared to September 1998. Brokered CD's, included in other time, increased $411.6 million since September 1998. Since December 1998, total deposits increased $356.5 million or 7.6% with brokered CD's increasing $446.2 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 $153.1 million since September 1998 and $54.4 million since December 1998. Other borrowings, which is primarily debt from Federal Home Loan Banks, rose $144.5 million over September 1998 and $144.4 million over December 1998. Capital Total shareholders' equity decreased $3.1 million since September 1998 and $4.7 million since December 1998. Accumulated other comprehensive income (loss), primarily net unrealized gain (loss) on investment securities, decreased $38.8 million since September 1998 and $36.1 million since December 1998. ONB's consolidated capital position remains strong as evidenced by the following comparisons of key industry ratios: <TABLE> <CAPTION> Regulatory Guidelines September 30, December 31, Minimum Well-Capitalized 1999 1998 1998 <S> <C> <C> <C> <C> <C> Risk-based capital: Tier 1 capital to total avg assets (leverage ratio) 4.00% 5.00% 7.51% 7.80% 7.94% Tier 1 capital to risk-adjusted total assets 4.00 6.00 11.58 11.58 11.40 Total capital to risk-adjusted total assets 8.00 10.00 13.23 13.32 13.11 Shareholders' equity to total assets N/A N/A 7.39 8.31 8.10 Each of ONB's affiliate banks have capital ratios which exceed regulatory minimum and well-capitalized guidelines. </TABLE> Liquidity and Asset/Liability Management ONB continually monitors its liquidity and actively manages its asset/liability position. The purpose of liquidity management is to match the sources of funds with anticipated customer borrowings and withdrawals and other obligations. The primary purpose of asset/liability management is to minimize the effect on net income of changes in interest rates and to maintain a prudent match within specified time periods of rate-sensitive assets and rate-sensitive liabilities. ONB also uses net interest income simulation modeling to better quantify the impact of potential interest rate fluctuations on net interest income. With this understanding, management can best determine possible balance sheet changes, pricing strategies, and appropriate levels of capital and liquidity which allow ONB to generate strong net interest income while controlling and monitoring interest rate risk. ONB simulates a gradual change in rates of 200 basis points up or down over 12 13 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 September 30, 1999 ONB was well within that limit as the model's fluctuation was under 2% for the first 12 months and less than 3% for the total 24 month period. Using static gap, ONB's rate-sensitive assets at September 30, 1999 were 62% of rate-sensitive liabilities in the 1-180 day maturity category and 67% in the 181-365 day category. These figures compared to 78% and 83% on December 31, 1998 and 79% and 87% on September 30, 1998. With strong loan demand and liabilities moving to shorter time horizons, the static gap percentages have decreased since year-end. ONB's funds management committee meets bi-monthly to closely monitor and effect changes as needed in the consolidated rate-sensitivity position. Year 2000 The national and local press have devoted much coverage to the Year 2000 ("Y2K") issue, also know as the "Millennium Bug". This refers to the possibility that some computers may be unable to recognize the date change at the turn of the century. With the high volume of transactions and electronic data, the banking industry requires extensive computer capabilities to serve its customers. With that in mind, ONB has devoted much attention to its systems to prepare itself for the millennial change. ONB has successfully completed its Y2K compliance testing of its mission-critical computer systems and its core processing systems used to serve its customers. Besides maintaining this status, ONB is managing its third party system relationships, updating disaster and contingency plans, and testing nonmission-critical software. Renovation and testing of software and hardware may not remove all risks related to Y2K. Alternative methods to perform key activities will be addressed through contingency planning. There has been no significant financial impact to ONB as a result of the Year 2000 project. ONB's 1998 Y2K expenses were less than $500 thousand. Much of ONB's software is externally generated with minimal internal software. Much of the software and hardware items have been changed, upgraded, or replaced in preparation for Y2K and have been part of the normal maintenance. While the company will continue testing and implementing secondary systems and replacing certain personal computers through 1999, it does not expect any material impact on earnings associated with these Y2K compliance efforts. Results of Operations Income from Continuing Operations Income from continuing operations for the nine months ended September 30, 1999 was $62.8 million, an 11.9% increase from the same period 1998. Income from continuing operations for the third quarter of 1999 was up 8.0% over 1998. Basic net income from continuing operations per common share for the third quarter of 1999 and for the nine months ended September 30, 1999 were $0.47 and $1.36, respectively. The company's return on average assets (ROA) for the third quarter of 1999 was 1.25% compared to 1.29% for 1998. Year-to- 14 date ROA percentages were 1.25% in 1999 and 1.23% for 1998. Return on average equity (ROE) for the quarter and the first nine months of 1999 were 15.99% and 15.91%, respectively, excluding unrealized security gains (losses). These compared to 1998 ROE results of 16.07% and 15.13% for similar periods. Growth in net interest income and other income combined with a lower effective tax rate generated the net income improvements. Net Interest Income/Net Interest Margin (taxable equivalent basis) Year-to-date net interest income for 1999 was $191,183, a 7.1% increase over 1998. Net interest income for the third quarter of 1999 was $65,307 compared to $59,926 in 1998, a 9.0% increase over the prior year. The net interest margin for the third quarter was 4.01% and 4.13% for 1999 and 1998, respectively. The year-to-date net interest margin percentage in 1999 was 4.02% compared to 4.19% in 1998. The lower net interest margin resulted from the lower and flatter yield curve and our investment in bank-owned life insurance discussed in noninterest income. Increases in earning assets offset the declining yields to contribute to an improved net interest income. Provision and Allowance for Loan Losses The provision for loan losses was $2.7 million in the third quarter of 1999 compared to 2.9 million in the third quarter of 1998. Year-to-date, the provision for loan losses of $8.4 million compared to $9.2 million in 1998. ONB's net charge-offs were 0.08% of average loans for the current quarter, compared to 0.25% in the third quarter of 1998. For the first nine months, net charge-offs were 0.09% in 1999 compared to 0.21% in 1998. The improved charge-off results were due to both lower charge-off levels and increased recoveries. The allowance for loan losses is continually monitored and evaluated both within each affiliate bank and at the holding company level to provide adequate coverage for potential losses. ONB maintains a comprehensive loan review program to provide independent evaluations of loan administration, credit quality, loan documentation, and adequacy of the allowance for loan losses. The allowance for loan losses to end-of-period loans of 1.21% at September 30, 1999 compares to 1.23% in 1998. The allowance for loan losses covers all under-performing loans by 2.5 times at September 30, 1999 compared to 2.1 times at December 31, 1998. Noninterest Income Excluding securities gains (losses), noninterest income increased 12.2% in the three months ended September 30, 1999 as compared to the same period in 1998. For the first nine months, this increase was also 12.2%. Both increases were fueled by several factors. Trust fees were up 8.3% for the third quarter and 11.1% for the first nine months due to continued development of new and current trust business. Service charges on deposit accounts were up 30.4% for the quarter and 19.1% year-to-date, mainly due to additional overdraft fees generated from a new product, "Worry- free" checking. Income from bank-owned life insurance (BOLI) policies, purchased in March 1998, generated $1.2 million income in the third quarter and $3.4 million year-to-date. Insurance premiums and commissions increased 8.9% over 1998 for the quarter and 10.2% year-to-date. Investment product fees rose over 1998 in excess of 10% for the third quarter and 16.6% year-to-date. 15 The security gains of $0.1 million for the quarter and $2.4 million year-to-date were taken to offset a portion of the non- recurring charges incurred in connection with the restructuring of ONB's banks into a single charter. Most other categories of noninterest income were comparable to last year's results. Noninterest Expense Noninterest expense increased 10.7% in the third quarter of 1999 compared to 1998 and 10.0% for the first nine months. Expenses of $3.1 million year-to-date, and $0.9 million quarter-to-date related to the conversion of our 22 separate banks into a single charter. Salaries and benefits, together the largest individual component of noninterest expense, increased 12.4% in the third quarter of 1999 compared to 1998 and 9.6% year-to-date. Most of this increase was due to additional incentive accruals over prior year due to the increase in income. Processing expense increased 8.0% for the quarter, 14.3% year-to-date. The largest increase for the year was related to credit card which was outsourced during the second quarter of 1998. Other expense increased 8.5% over the third quarter of 1998 and 16.7% year-to-date. This increase, primarily professional fees was mainly related to the restructuring discussed previously. Most other categories of noninterest expense experienced relatively small changes between the years or the increase was related to the restructuring. Provision for Income Taxes The provision for income taxes, as a percentage of pre-tax income,increased in the third quarter to 26.3% compared to 26.1% in 1998. For the first nine months, this percentage was 26.8% for 1999 and 29.1% in 1998. Higher levels of BOLI income and other tax exempt income, as well as favorable state taxation developments, helped lower our effective rate in 1999. 16 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(ii) By-laws of the Registrant, as amended (27) Financial Data Schedule (b) Reports on Form 8-K filed during the quarter ended September 30, 1999. Filed 8-K on 7/29/99, change in Registrant's certifying accountants. 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/s John S. Poelker John S. Poelker Senior Vice President Chief Financial Officer Date: November 15, 1999 18 INDEX OF EXHIBITS Regulation S-K Reference (Item 601) 3(ii) By-Laws of the Registrant, as amended 27 Financial Data Schedule 19