SECURITIES & EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission File Number 0-10888 OLD NATIONAL BANCORP (Exact name of Registrant as specified in its charter) INDIANA 35-1539838 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 420 Main Street, Evansville, Indiana 47708 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code, (812) 464-1200 Former name, former address and former fiscal year, if changed since last reports. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to the filing requirements for at least the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock. The Registrant has one class of common stock (no par value) with approximately 58.2 million shares outstanding at September 30, 2000. OLD NATIONAL BANCORP FORM 10-Q INDEX PART I. FINANCIAL INFORMATION Item 1.Financial Statements Page No. Consolidated Balance Sheet September 30, 2000 and 1999, and December 31, 1999 3 Consolidated Statement of Income Three and nine months ended September 30, 2000 and 1999 4 Consolidated Statement of Cash Flows Nine months ended September 30, 2000 and 1999 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3.Quantitative and Qualitative disclosures about Market Risk 15 PART II OTHER INFORMATION 16 SIGNATURES 17 INDEX OF EXHIBITS 18 2 <TABLE> <CAPTION> OLD NATIONAL BANCORP CONSOLIDATED BALANCE SHEET September 30, December 31, ($ in thousands) (Unaudited) 2000 1999 1999 Assets <S> <C> <C> <C> Cash and due from banks -------------------- $166,724 $190,513 $210,255 Money market investments-------------------- 13,387 16,366 16,686 Investment Securities U.S. Treasury ----------------------------- 5,238 46,907 39,591 U.S. Government agencies and corporations ------------------------ 1,285,535 1,188,886 1,152,770 Obligations of states and political Subdivisions ---------------------------- 552,365 562,362 549,228 Other ------------------------------------- 134,437 71,313 79,849 --------- --------- --------- Total Investment Securities ------------- 1,977,575 1,869,468 1,821,438 --------- --------- --------- Loans Commercial -------------------------------- 1,569,603 1,322,684 1,338,255 Commercial real estate -------------------- 1,709,901 1,277,215 1,306,312 Residential real estate ------------------- 1,926,767 2,126,622 2,148,974 Consumer credit, net of unearned income --- 1,055,959 906,718 921,147 --------- --------- --------- Total Loans ----------------------------- 6,262,230 5,633,239 5,714,688 Allowance for loan losses --------------- (72,201) (66,299) (65,685) --------- --------- --------- Net Loans ------------------------------- 6,190,029 5,566,940 5,649,003 Other assets ------------------------------- 459,129 382,860 388,630 --------- --------- --------- Total Assets ----------------------------$8,806,844 $8,026,147 $8,086,012 ========= ========= ========= Liabilities Deposits Noninterest bearing demand ----------------- $656,013 $618,056 $643,553 Interest bearing: Savings, NOW and money market accounts -- 2,024,524 1,996,839 2,008,789 Time deposits --------------------------- 3,729,915 3,285,568 3,309,727 --------- --------- --------- Total Deposits -------------------------- 6,410,452 5,900,463 5,962,069 --------- --------- --------- Short-term borrowings ---------------------- 769,338 576,446 679,459 Guaranteed preferred beneficial interests in Company's subordinated debentures--------- 50,000 -- -- Other borrowings --------------------------- 865,712 844,678 768,055 Accrued expenses and other liabilities ----- 81,749 97,110 91,434 --------- --------- --------- Total Liabilities ------------------------- 8,177,251 7,418,697 7,501,017 Shareholders' Equity Common stock ------------------------------ 58,189 54,835 56,518 Capital surplus --------------------------- 403,075 349,499 395,414 Retained earnings ------------------------- 179,949 221,036 162,384 Accumulated other comprehensive income (loss), net of tax -------------- (11,620) (17,920) (29,321) --------- --------- --------- Total Shareholders' Equity ---------------- 629,593 607,450 584,995 --------- --------- --------- Total Liabilities and Shareholders' Equity ----------------------------------$8,806,844 $8,026,147 $8,086,012 ========= ========= ========= The accompanying notes are an integral part of this statement. 3 </TABLE> <TABLE> <CAPTION> OLD NATIONAL BANCORP CONSOLIDATED STATEMENT OF INCOME Three Months Ended Nine Months Ended ($ and shares in thousands except September 30, September 30, per share data) (Unaudited) 2000 1999 2000 1999 <S> <C> <C> <C> <C> Interest Income Loans including fees: Taxable ----------------------------------- $133,975 $113,737 $375,188 $327,363 Non-taxable ------------------------------- 3,081 2,356 9,015 6,329 Investment securities: Taxable ----------------------------------- 22,113 21,593 64,237 62,542 Non-taxable ------------------------------- 6,808 6,951 20,398 20,491 Money market investments -------------------- 430 616 1,218 1,730 ------- ------- ------- ------- Total Interest Income --------------------- 166,407 145,253 470,056 418,455 ------- ------- ------- ------- Interest Expense Savings, NOW and money market accounts --------------------- 15,524 12,320 42,914 36,413 Time deposits ------------------------------- 55,138 41,994 149,864 119,299 Short-term borrowings ----------------------- 11,258 7,623 31,627 20,655 Other borrowings ---------------------------- 16,767 11,510 42,764 31,687 ------- ------- ------- ------- Total Interest Expense -------------------- 98,687 73,447 267,169 208,054 ------- ------- ------- ------- Net Interest Income ----------------------- 67,720 71,806 202,887 210,401 Provision for loan losses ------------------- 4,968 3,515 16,838 10,606 ------- ------- ------- ------- Net Interest Income After Provision For Loan Losses ------------------------- 62,752 68,291 186,049 199,795 ------- ------- ------- ------- Noninterest Income Trust fees ---------------------------------- 5,537 5,506 16,820 16,091 Service charges on deposit accounts---------- 9,649 6,696 23,924 17,960 Loan fees ----------------------------------- 1,695 2,024 4,134 5,103 Insurance premiums and commissions ---------- 2,669 1,664 8,449 4,850 Investment product fees --------------------- 1,719 1,520 5,219 4,668 Bank-owned life insurance ------------------- 1,257 1,155 3,171 3,407 Securities gains (losses), net -------------- (121) 180 (146) 2,543 Other income -------------------------------- 3,184 2,503 13,593 7,572 ------- ------- ------- ------- Total Noninterest Income ------------------ 25,589 21,248 75,164 62,194 ------- ------- ------- ------- Noninterest Expense Salaries and employee benefits -------------- 29,425 32,024 95,339 93,591 Occupancy expense --------------------------- 3,708 3,275 10,663 9,741 Equipment expense --------------------------- 4,111 4,225 13,242 12,701 Marketing expense --------------------------- 1,857 1,894 5,394 5,412 FDIC insurance expense ---------------------- 317 245 938 694 Processing expense -------------------------- 2,574 3,079 7,635 8,959 Communication and transportation expense----- 2,531 2,364 7,532 6,823 Professional fees --------------------------- 1,386 2,001 3,423 6,287 Other expenses ------------------------------ 8,399 6,107 21,424 18,567 ------- ------- ------- ------- 54,308 55,214 165,590 162,775 Merger and restructuring costs--------------- 18,852 -- 37,503 -- ------- ------- ------- ------- Total Noninterest Expense ----------------- 73,160 55,214 203,093 162,775 ------- ------- ------- ------- Net Income Before Income Taxes -------------- 15,181 34,325 58,120 99,214 Provision for income taxes ------------------ 1,958 9,528 12,047 27,835 ------- ------- ------- ------- Net Income from Continuing Operations ------- 13,223 24,797 46,073 71,379 Discontinued operations---------------------- -- -- -- 3,483 ------- ------- ------- ------- Net Income----------------------------------- $13,223 $24,797 $46,073 $74,862 ======= ======= ======= ======= Net Income from Continuing Operations per common share: Basic ------------------------------------ $0.23 $0.43 $0.82 $1.24 ======= ======= ======= ======= Diluted ---------------------------------- $0.23 $0.42 $0.81 $1.21 ======= ======= ======= ======= Net Income per common share: Basic ------------------------------------ $0.23 $0.43 $0.82 $1.30 ======= ======= ======= ======= Diluted ---------------------------------- $0.23 $0.42 $0.81 $1.27 ======= ======= ======= ======= Weighted average common shares outstanding: Basic ------------------------------------ 57,527 57,415 56,477 57,448 ======= ======= ======= ======= Diluted ---------------------------------- 57,684 59,443 57,175 59,544 ======= ======= ======= ======= The accompanying notes are an integral part of this statement. 4 </TABLE> <TABLE> <CAPTION> OLD NATIONAL BANCORP CONSOLIDATED STATEMENT OF CASH FLOWS Nine Months Ended September 30, ($ in thousands) (Unaudited) 2000 1999 <S> <C> <C> Cash flows from operating activities: Net income ------------------------------------------------ $46,073 $ 74,862 ------- ------- Adjustments to reconcile net income to cash provided by (used in) operating activities: Depreciation --------------------------------------------- 9,815 9,744 Amortization of intangible assets ------------------------ 2,914 1,931 Net premium amortization (discount accretion) on investment securities ----------------------------- (2,102) 1,125 Provision for loan losses -------------------------------- 16,838 10,606 Loss (gain) on sale of investment securities ------------- 15,423 (2,543) Loss (gain) on sale of assets ---------------------------- 10,930 (718) (Increase) decrease in other assets ---------------------- 5,343 (7,379) Increase in accrued expenses and other liabilities ------------------------------------- (17,117) (3,690) ------- ------- Total adjustments -------------------------------------- 42,044 9,076 ------- ------- Net cash flows provided by operating activities 88,117 83,938 ------- ------- Cash flows from investing activities: Cash and cash equivalents of subsidiary acquired ---------- 13,243 5,914 Purchase of investment securities available-for-sale ------(732,865) (916,394) Proceeds from maturities and paydowns of investment securities available-for-sale ---------------------------- 177,024 523,249 Proceeds from sales of investment securities available- for-sale ------------------------------------------------- 529,789 242,223 Net principal collected from (loans made to) customers: Commercial and financial --------------------------------(169,282) (131,242) Mortgage ------------------------------------------------(309,474) (320,673) Consumer ------------------------------------------------ (58,340) (137,692) Proceeds from sale of mortgage loans ---------------------- 283,842 29,134 Proceeds from sale of premises and equipment -------------- 2,098 1,755 Purchase of premises and equipment ------------------------ (15,544) (17,721) ------- ------- Net cash flows used in investing activities --------------(279,509) (721,447) ------- ------- Cash flows from financing activities: Net increase (decrease) in deposits and short-term borrowings: Noninterest bearing demand ------------------------------- 7,681 (45,341) Savings,NOW and Money Market Accounts -------------------- (87,920) 6,313 Time deposits -------------------------------------------- 208,941 467,328 Short-term borrowings ------------------------------------ 89,879 60,610 Other borrowings ----------------------------------------- (4,655) 172,961 Proceeds from Guaranteed preferred beneficial interests in Company's subordinated debentures------------------------ 50,000 -- Cash dividends paid --------------------------------------- (28,947) (25,831) Common stock repurchased ----------------------------------(105,280) (35,580) Common stock reissued, net of shares used to convert subordinated debentures --------------------------------- 14,863 14,901 ------- ------- Net cash flows provided by financing activities ---------- 144,562 615,361 ------- ------- Net increase (decrease) in cash and cash equivalents ------ (46,830) (22,148) Cash and cash equivalents at beginning of period ---------- 226,941 229,027 ------- ------- Cash and cash equivalents at end of period ----------------$180,111 $206,879 ======= ======= Total interest paid --------------------------------------$265,652 $204,086 ======= ======= Total taxes paid -----------------------------------------$ 18,033 $24,045 ======= ======= The accompanying notes are an integral part of this statement. </TABLE> 5 Old National Bancorp Notes to Consolidated Financial Statements 1. Basis of Presentation The accompanying consolidated financial statements include the accounts of Old National Bancorp and its affiliate entities ("Old National"). All significant intercompany transactions and balances have been eliminated. In the opinion of management, the consolidated financial statements contain all the normal and recurring adjustments necessary to present fairly the financial position of Old National as of September 30, 2000 and 1999 and December 31, 1999, and the results of its operations for the three and nine months ended September 30, 2000 and 1999 and its cash flows for the nine months ended September 30, 2000 and 1999. All prior period information has been restated for the effects of business combinations accounted for as pooling-of-interests as discussed in Note 3. 2. Net Income Per Share Net income per common share computations are based on the weighted average number of common shares outstanding during the periods presented. A 5% stock dividend was paid January 28, 2000 to shareholders of record on January 7, 2000. All share and per share data presented herein have been restated for the effects of the stock dividend. Net income on a diluted basis is computed as above and assumes the conversion of Old National's 8% convertible subordinated debentures (Note 5) for the periods they were outstanding. For the diluted computation, net income is adjusted for the assumed reduction in interest expense, net of income tax effect, and additional common shares of 0.5 million year-to-date, are assumed to be issued in connection with the conversion of the remaining outstanding debentures. <TABLE> <CAPTION> Earnings Per Share Reconciliation ($ and shares in thousands except per share data): Three Three Months Ended Months Ended September 30, 2000 September 30, 1999 Per Share Per Share Income Shares Amount Income Shares Amount <S> <C> <C> <C> <C> <C> <C> Basic EPS Net income from continuing operations available to common stockholders $ 13,223 57,527 $0.23 $24,797 57,415 $0.43 ===== ===== Effect of Dilutive Securities: Stock options -- 157 -- 358 8% convertible debentures -- -- 159 1,670 ------ ------ ------ ------ Diluted EPS Net income from continuing operations available to common stockholders + assumed conversions $13,223 57,684 $0.23 $24,956 59,443 $0.42 ====== ====== ===== ====== ====== ===== 6 Nine Nine Months Ended Months Ended September 30, 2000 September 30, 1999 Per Share Per Share Income Shares Amount Income Shares Amount Basic EPS Net income from continuing operations available to common stockholders $ 46,073 56,477 $0.82 $71,379 57,448 $1.24 ===== ===== Effect of Dilutive Securities: Stock options -- 219 -- 348 8% convertible debentures 130 479 690 1,748 ------- ------ ------ ------ Diluted EPS Net income from continuing operations available to common stockholders + assumed conversions $46,203 57,175 $0.81 $72,069 59,544 $1.21 ======= ====== ===== ====== ====== ===== </TABLE> 3. Merger and Divestiture Activity Completed Mergers On March 1, 2000, Old National and Heritage Financial Services, Inc. ("Heritage") of Clarksville, Tennessee, consummated a merger in which Old National issued 2,191,322 common shares in exchange for all of the outstanding common shares of Heritage. The transaction was accounted for as a pooling-of-interests. Net income for Heritage prior to merger included in the 2000 financial statements for the period ended March 1, 2000 was $509 thousand. On March 10, 2000, Old National and ANB Corporation ("ANB") of Muncie, Indiana, consummated a merger in which Old National issued 7,316,153 common shares in exchange for all of the outstanding common shares of ANB. The transaction was accounted for as a pooling-of-interests. Net income for ANB prior to merger included in the 2000 financial statements for the period ended March 10, 2000 was $1.3 million. On July 27, 2000, Old National and Permanent Bancorp ("Permanent") of Evansville, Indiana, consummated a merger in which Old National issued 3,301,047 common shares in exchange for all of the outstanding common shares of Permanent. The transaction was accounted for as a purchase. Intangible assets of $60.5 million were recorded from this purchase and are being amortized over 20 years. As part of the regulatory approval process for the transaction, the Department of Justice required two Permanent branches in Evansville to be sold to another banking company. These two branches have total deposits of approximately $41 million, and an agreement has been reached with First Federal Savings Bank of Evansville. The divestiture is expected to be completed on November 17, 2000. 7 Discontinued Operations During June 1998, ONB finalized the sale of Consumer Acceptance Corporations's sub-prime auto loans, which closed in July 1998. ONB has accounted for this entity as discontinued operations in the consolidated financial statements. Loss from discontinued operations for the three and nine months ended September 30, 1999 was as follows ($ in thousands): Three Months Ended Nine Months Ended September 30, September 30, 1999 1999 Income (loss) before taxes from operations of discontinued operations $0 $0 Income tax expense (benefit) 0 0 -- ------ Income (loss) from operations of discontinued operations $0 $0 Income before taxes from disposal of discontinued operations 0 5,805 Income tax expense (0) (2,322) -- ------ Income from disposal of discontinued operations 0 3,483 -- ------ Income from discontinued operations $ 0 $3,483 == ====== Income from discontinued operations per common share Basic $0.00 $0.06 ===== ===== Diluted $0.00 $0.06 ===== ===== 4. Investments Securities The market value and amortized cost of investment securities as of September 30, 2000 are set forth below ($ in thousands): Market Value Amortized Cost Available-for-sale $1,977,575 $1,997,235 ========== ========== 5. Borrowings Old National called for redemption its 8% convertible subordinated debentures on May 14, 2000. At September 30, 1999, $17.9 million was outstanding. Old National has registered Series A Medium-Term Notes in the principal amount of $50 million. The series has been fully issued. As of September 30, 2000, a total of $24.5 million of the notes were outstanding, with maturities ranging from one to three years and fixed interest rates of 6.9% to 7.0%. At September 30, 1999, Old National had outstanding $32.0 million of medium term notes. Old National also has registered Medium-Term Notes in the principal amount of $150 million. $85.7 million of notes are available for issuance at September 30, 2000. These notes may be issued with maturities of nine months or more and rates may either be fixed or variable. As of September 30, 2000, a total of $59.3 million of the notes were outstanding, with maturities ranging from two to seven years and fixed interest rates from 8 6.4% to 7.0%. At September 30, 1999, Old National had $64.3 million outstanding. As of September 30, 2000, Old National has $25 million in unsecured lines of credit with unaffiliated banks. These lines of credit include various informal arrangements to maintain compensating balances. The compensating balances are maintained for the benefit of the parent company by affiliate banks, which normally maintain correspondent balances with these unaffiliated banks. As of September 30, 2000 and 1999, there were no borrowings under these lines. 6. Guaranteed Preferred Beneficial Interests in Company's Subordinated Debentures During March 2000, Old National issued $50 million of trust preferred securities through a subsidiary, Old National Capital Trust I. The trust preferred securities have a liquidation amount of $25 per share with a cumulative annual distribution rate of 9.5%, or $2.375 per share, payable quarterly, and maturing on March 15, 2030. Old National may redeem the subordinated debentures and thereby cause a redemption of the trust preferred securities in whole (or in part from time to time) on or after March 15, 2005, or in whole (but not in part) following the occurrence and continuance of certain adverse federal income tax or capital treatment events. Costs associated with the issuance of the trust preferred securities totaling $1.8 million were capitalized and are being amortized through the maturity date of the securities. The unamortized balance is included in other assets in the consolidated balance sheet. 7. Interest Rate Contracts Old National uses interest rate contracts such as interest swaps to manage its interest rate risk. These contracts are designated as hedges of specific assets and liabilities. The net interest receivable or payable on swaps is accrued and recognized as an adjustment to the interest income or expense of the hedged asset or liability. The premium paid for an interest rate cap is included in the basis of the hedged item and is amortized as an adjustment to the interest income or expense on the related asset or liability. At September 30, 2000, Old National has interest rate swaps with a notional value of $175 million. The contracts are an exchange of interest payments with no effect on the principal amounts of the underlying hedged liabilities. The fair value of the swaps was $(2.4) million as of September 30, 2000. Old National pays the counterparty a variable rate based on LIBOR and receives fixed rates ranging from 5.50% to 7.23%. The contracts terminate on or prior to May 3, 2009. Old National is exposed to losses if a counterparty fails to make its payments under a contract in which Old National is in the receiving position. Although collateral or other security is not obtained, Old National minimizes its credit risk by monitoring the credit standing of the counterparties and anticipates that the counterparties will be able to fully satisfy their obligation under the agreements. 9 8. Comprehensive Income Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 ($ in Thousands) Net income $13,223 $24,797 $46,073 $74,862 Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period, net of tax 9,288 (7,306) 8,359 (36,525) Less: reclassification adjustment for securities losses (gains) realized in net income,net of tax 7,210 (108) 9,254 (1,526) ------ ------ ------ ------ Net unrealized gains (losses) 16,498 (7,414) 17,701 (38,051) ------ ------ ------ ------ Comprehensive income $29,721 $17,383 $63,774 $36,811 ====== ====== ====== ====== 9. Segment Data Community Banking Other Total September 30, 2000 Net interest income (loss) $220,200 $(17,313) $202,887 Income tax expense (benefit) 27,353 (15,306) 12,047 Segment profit (loss) 55,926 (9,853) 46,073 Total assets 6,641,829 2,165,015 8,806,844 September 30, 1999 Net interest income (loss) $185,131 $25,270 $210,401 Income tax expense (benefit) 17,152 10,683 27,835 Segment profit (loss) 51,009 20,370 71,379 Total assets 6,029,380 1,996,767 8,026,147 The charter consolidation during 1999 impacted the internal reporting and makes prior year's financial data not comparable to the new format. 10. Impact of Accounting Changes In June 1998 the Financial Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." This statement requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. As issued, the Statement was effective for all fiscal quarters of fiscal years beginning after June 15, 1999. In June 1999, the FASB issued SFAS No. 137, " Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133". The statement was effective upon issuance and it amends SFAS No. 133 to be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 (January 1, 2001 for Old National). On June 15, 2000, The FASB issued SFAS No. 138, " Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133." The Statement addresses a limited number of issued causing implementation difficulties for numerous entities that are required to implement SFAS No. 133. SFAS No. 133, as amended by 10 SFAS No. 137 and SFAS No. 138, continues to be effective for all fiscal quarter of all fiscal years beginning after June 15, 2000. SFAS No. 133 expanded the derivative definition. Due to its current limited use of traditional derivative instruments, and minimal additional derivatives as defined by SFAS No. 133, it is the opinion of Old National's management that the impact of adoption of SFAS No. 133, including current interpretations, would not have a material impact to the results of operations or its financial position at the adoption date. 11. Merger and Restructuring Charges During the third quarter of 2000, Old National completed an asset sale and reinvestment program designed to shorten the duration of its investment and fixed-rate mortgage loan portfolios. Approximately $600 million of mortgage- backed securities and residential mortgage loans were sold during the quarter with $500 million of the proceeds reinvested in shorter duration investments and the remainder used to reduce borrowings and fund commercial loan growth. During the first quarter of 2000, Old National closed two mergers, finalized the charter consolidation efforts which began in 1999 and recorded related merger and restructuring charges of $22.5 million. Included in these charges were merger-related costs, system conversion costs, balance sheet restructuring, elimination of duplicate or unnecessary facilities, centralization of certain support functions and personnel severance costs related to these items. The components of the charges are shown below ($ in thousands). Three months ended Nine months ended September 30, 2000 September 30, 2000 Professional fees $-- $ 5,744 Severance and related costs -- 4,501 Fixed asset write-downs -- 3,687 Losses on sale of securities 11,896 15,277 Losses on sale of loans 6,407 6,407 Other 549 1,887 ------ ------ Included in noninterest expense 18,852 37,503 Provision for loan losses -- 3,801 ------ ------ Total $18,852 $41,304 ====== ====== 11 PART I. FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following management's discussion and analysis is presented to provide information concerning the financial condition of Old National as of September 30, 2000, as compared to September 30, 1999 and December 31, 1999, and the results of operations for the three and nine months ended September 30, 2000 and 1999. Financial Condition Old National's assets at September 30, 2000 were $8.807 billion, a 9.7% increase since September 1999 and an 11.9% increase since December 1999. Earning assets, which consist primarily of money market investments, investment securities and loans, grew 9.8% over the prior year. During the past year, the mix of earning assets reflected loan growth of 11.2% while money market investments and investment securities increased a combined 5.6%. Since December 1999, earning assets increased 12.4% with loans growing 12.8% and investment securities and money market investments increasing 11.1%. Commercial real estate loans have increased 33.9% over prior year and 41.2% over December 1999. Commercial loans have increased 18.7% over prior year and 23.0% since December 1999. At September 30, 2000, total under-performing assets (defined as loans 90 days or more past due, nonaccrual and restructured loans and foreclosed properties) increased to $30.6 million from $28.6 million as of December 31, 1999. As of these dates, under-performing assets in total were 0.49% and 0.50%, respectively, of total loans and foreclosed properties. September 30, December 31, 2000 1999 Nonaccrual loans $18,551 $19,286 Restructured loans 283 450 Foreclosed properties 4,569 3,700 ------ ------ Total Non-performing Assets 23,403 23,436 Past due 90 days or more 7,189 5,206 ------ ------ Total Under-performing Assets $30,592 $28,642 ====== ====== Unper-performing assets as a % of total loans and foreclosed properties 0.49% 0.50% ==== ==== As of September 30, 2000, the recorded investment in loans for which impairment has been recognized in accordance with SFAS No. 114 and 118 was $7.6 million with no related allowance and $104.5 million with $20.9 million of related allowance. Old National's policy for recognizing income on impaired loans is to accrue earnings unless a loan becomes nonaccrual. When loans are classified as nonaccrual, interest accrued during the current year is reversed against earnings; interest accrued in the prior year, if any, is charged to the allowance for loan losses. Cash received while a loan is classified nonaccrual is recorded to principal. For the nine months ended September 30, 2000, the average balance of impaired loans was $91.9 million and $6.5 million of interest was recorded. Old National's consolidated loan portfolio is well diversified and contains no concentrations of credit in any particular industry exceeding 10% of its portfolio. Old National has minimal exposure to construction lending or leveraged buyouts and no exposure in credits to foreign or lesser-developed countries. 12 Total deposits at September 30, 2000, increased $510.0 million or 8.6% compared to September 1999. Brokered certificates of deposit, included in time deposits, increased $158.5 million since September 1999. Since December 1999, total deposits increased $448.4 million or 10.0% with brokered certificates of deposit increasing $115.6 million in this same period. Short-term borrowings, comprised of Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings, increased $192.9 million since September 1999 and increased $89.9 million since December 1999. Other borrowings, which is primarily advances from Federal Home Loan Banks, increased $21.0 million over September 1999 and increased $97.7 million over December 1999. In addition, $50 million of trust preferred securities were issued by Old National Capital Trust I in March 2000. Capital Total shareholders' equity increased $22.1 million since September 1999 and $44.6 million since December 1999. Accumulated other comprehensive income (loss), primarily net unrealized gain (loss) on investment securities, increased $6.3 million since September 1999 and increased $17.7 million since December 1999. Old National's consolidated capital position remains strong as evidenced by the following comparisons of key industry ratios: <TABLE> <CAPTION> Regulatory Guidelines September 30, December 31, Minimum Well-Capitalized 2000 1999 1999 <S> <C> <C> <C> <C> <C> Risk-based capital: Tier 1 capital to total avg assets (leverage ratio) 4.00% 5.00% 6.95% 7.60% 7.46% Tier 1 capital to risk-adjusted total assets 4.00 6.00 9.57 11.44 10.64 Total capital to risk-adjusted total assets 8.00 10.00 10.74 12.99 12.07 Shareholders' equity to total assets N/A N/A 7.15 7.57 7.23 Each of Old National's affiliate banks have capital ratios which exceed regulatory minimum and well-capitalized guidelines. </TABLE> Liquidity and Asset/Liability Management Old National continually monitors its liquidity and actively manages its asset/liability position. The purpose of liquidity management is to match the sources of funds with anticipated customer borrowings and withdrawals and other obligations. The primary purpose of asset/liability management is to minimize the effect on net income of changes in interest rates and to maintain a prudent match within specified time periods of rate-sensitive assets and rate-sensitive liabilities. Old National also uses net interest income simulation modeling to better quantify the impact of potential interest rate fluctuations on net interest income. With this understanding, management can best determine possible balance sheet changes, pricing strategies, and appropriate levels of capital and liquidity which allow Old National to generate strong net interest income while controlling and monitoring interest rate risk. Old National simulates an instantaneous (shock) change in rates of 200 basis points up or down over 12 months and sustained for an additional 12 months. The policy limit for the maximum negative impact on net interest income over 24 months is 5%. At September 30, 2000 Old National was within that limit as the model's fluctuation was under 3% for the first 12 months and the total 24 month period. Using static gap, Old National's rate-sensitive assets at September 30, 2000 were 73% of rate-sensitive liabilities in the 1-180 day maturity category and 77% in the 181-365 day category. These figures compared to 59% and 64% on December 31, 1999 and 62% and 67% on September 30, 1999. Old National's funds management committee meets quarterly to monitor the asset/liability position and effect changes as needed in the consolidated rate-sensitivity position. 13 Results of Operations Net Income With the inclusion of significant merger and restructuring costs as discussed below, net income from continuing operations for the quarter ended September 30, 2000 was $13.2 million, compared to $24.8 million for the same quarter last year. Net income from continuing operations for the year ended September 30, 2000 was $46.1 million compared to $71.4 million in 1999. Diluted earnings per common share were $0.23 and $0.81 for the third quarter and year-to-date of 2000, compared to $0.42 and $1.21 for the same period of the prior year. Included in the quarter-to-date results were $18.3 million in restructuring charges from an asset sale and reinvestment program designed to shorten the duration of the investment and fixed-rate mortgage loan portfolios. Losses on sales of securites were $11.9 million for the quarter and losses on sales of loans were $6.4 million. The year-to-date 2000 results also include $22.5 million of merger and restructuring charges recorded during the first quarter. Included in the first quarter merger and restructuring charge was $3.4 million in securities losses related to the Heritage and ANB balance sheet restructuring, $4.5 million of severance and employee-related costs, $5.7 million in professional fees, $3.7 million in write-downs of fixed assets and $1.3 million of other merger and restructuring costs. Also included in the $22.5 million merger and restructuring expense was a $3.8 million provision for loan losses that was charged to earnings on the merger date to conform ANB with Old National's credit policies. Excluding the above merger and restructuring charges, net income for the quarter and year-to-date was $24.5 million and $71.8. The corresponding adjusted year-to-date 2000 diluted earnings per common share were $1.25 or a 3.3% increase over last year. The corresponding adjusted return on average assets (ROA) was 1.13% for the quarter and 1.15% year-to-date while return on equity (ROE) was 15.75% in the third quarter of 2000 and 15.91% year-to-date. These compared to 1999 results of 1.25% quarter-to-date and 1.24% year-to-date ROA and 15.72% for the quarter and 15.48% year-to-date ROE. Growth in other income offset the decline in net interest income to generate similar net income. Net Interest Income/Net Interest Margin (taxable equivalent basis) Quarter-to-date net interest income for 2000 was $72,604, a 4.8% decrease over 1999. Net interest income for the current year-to-date was $217,414 a decline of 2.4% from the prior year. The net interest margin for the third quarter and year-to-date was 3.56% and 3.70% for 2000 compared to 4.09% and 4.10% for both periods in 1999. The net interest margin was compressed by the rising interest rate environment impacting funding costs, maturity extension of borrowings, and the decline in core deposits which required additional wholesale borrowings. The third quarter 2000 net interest margin was also reduced from the Permanent acquisition which had a lower margin. Year- to-date earning asset yields increased 30 basis points over 1999 while the cost of interest bearing liabilities increased 69 basis points compared to 1999. Provision and Allowance for Loan Losses The provision for loan losses was $5.0 million for the third quarter compared to $3.5 million for the same quarter in 1999. The provision for loan losses was $13.0 million for the year-to-date 2000 compared to $10.6 million in 1999. Merger-related provision was $3.8 million in the first quarter of 2000. Old National's net charge-offs were 0.42% of average loans for the current quarter, compared to 0.10% in the 14 third quarter of 1999. This ratio year-to-date was 0.28% for 2000 compared to 0.12% for 1999. The allowance for loan losses is continually monitored and evaluated at the holding company level to provide adequate coverage for potential losses. Old National maintains a comprehensive loan review program to provide independent evaluations of loan administration, credit quality, loan documentation, and adequacy of the allowance for loan losses. The allowance for loan losses to end-of-period loans of 1.15% at September 30, 2000 compares to 1.18% in 1999. The allowance for loan losses covers all under-performing loans by 2.4 times at September 30, 2000 compared to 2.3 times at December 31, 1999. Noninterest Income Excluding securities gains (losses), noninterest income increased 22.0% in the three months ended September 30, 2000 as compared to the same period in 1999, 26.3% year-to-date. Trust fees were up 4.5% year- to-date. Service charges on deposit accounts were up 44.1% for the quarter and 33.2% for the nine months mainly due to additional overdraft fees generated. Insurance premiums and commissions increased 60.4% over 1999 for the quarter and 74.2% year-to-date due to the December 31, 1999 purchase of the Sycamore Agency. Investment product fees rose over 1999 in excess of 11% for the nine months. The security gains of $2.5 million year-to-date in the prior year were taken to offset a portion of the charges incurred in connection with the restructuring of Old National's banks into a single charter. Other income includes gains of $2.4 million recorded in the first quarter 2000 on the sale of the merchant credit card business and $2.5 million in the second quarter from the sale of Old National's credit card business. These sales also negatively impacted loan fees. Most other categories of noninterest income were comparable to last year's results. Noninterest Expense Noninterest expense decreased 1.6% in the third quarter of 2000 compared to 1999, and increased 1.7% year-to-date. Salaries and benefits, together the largest individual component of noninterest expense, decreased 8.1% in the quarter, and increased 1.9% year-to- date 2000 compared to 1999. Professional fees decreased $0.6 million for the quarter, $2.9 million year-to-date due to additional expenses in prior year related to the charter consolidation. Processing expense decreased 16.4% for the quarter, 14.8% for the nine months. The largest decrease for the quarter was related to credit card outsource expense in prior year. Other expense increased 37.5% over the third quarter of 1999, 15.4% year-to-date. The current year other expense includes an increase of amortization of intangible assets of $0.6 million quarter-to-date and $1.0 million year-to-date and checking and saving losses over 1999 of $0.4 million for the quarter and $0.6 million for the year. Most other categories of noninterest expense experienced relatively small changes between the years. Provision for Income Taxes The provision for income taxes, as a percentage of pre-tax income, was 12.9% compared to 27.8% in 1999. Year-to-date these percentages were 20.7% for 2000 and 28.1% for 1999. Excluding merger and restructuring charges, these percentages would have been 28.0% for the quarter and 27.8% year-to-date. Item 3. Quantitative and Qualitative disclosures About Market Risk Quantitative and qualitative disclosures about market risk were included in the 1999 Form 10-K. There have been no significant changes in the contractual balances and the estimated fair value of Old National's on-balance sheet financial instruments, the notional amount and estimated fair value of the company's off-balance sheet derivative financial instruments, or weighted-average interest rates. 15 PART II OTHER INFORMATION ITEM 1. Legal Proceedings NONE ITEM 2. Changes in Securities NONE ITEM 3. Defaults Upon Senior Securities NONE ITEM 4. Submission of Matters to a Vote of Security Holders NONE ITEM 5. Other Information NONE ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits as required by Item 601 of Regulation S-K. 27 Financial Data Schedule (b) Reports on Form 8-K filed during the quarter ended September 30, 2000. NONE 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Old National BANCORP (Registrant) By: s/s John S. Poelker John S. Poelker Executive Vice President Chief Financial Officer Date: November 14, 2000 17 INDEX OF EXHIBITS Regulation S-K Reference (Item 601) 27 Financial Data Schedule 32