SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
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
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 58.6 million shares outstanding at September 30, 2001.
INDEX
PART I.
FINANCIAL INFORMATION
Item 1.
Financial Statements
Page No.
September 30, 2001 and 2000, and December 31, 2000
3
Three and nine months ended September 30, 2001 and 2000
4
Nine months ended September 30, 2001 and 2000
5
6
Item 2.
Financial Condition and Results of Operations
12
Item 3.
Market Risk
15
PART II
16
18
19
Old National Bancorp
Consolidated Balance Sheet
($ in thousands) (Unaudited)
September 30,
December 31,
2001
2000
----------------
-----------------
Assets
Cash and due from banks
$189,096
$166,724
$202,600
Money market investments
18,004
13,387
13,549
Investment securities:
U.S. Treasury
5,396
5,238
5,307
U.S. Government agencies and corporations
1,317,397
1,285,535
1,111,176
Obligations of states and political subdivisions
594,049
552,365
546,044
Other
163,702
134,437
149,036
-------------
Investment securities - available-for-sale, at fair value
2,080,544
1,977,575
1,811,563
Loans:
Commercial
1,751,481
1,569,603
1,606,509
Commercial real estate
1,866,025
1,709,901
1,810,805
Residential real estate
1,584,740
1,926,767
1,890,872
Consumer credit, net of unearned income
1,063,894
1,055,959
1,040,127
Total loans
6,266,140
6,262,230
6,348,313
Allowance for loan losses
(75,380)
(72,201)
(73,833)
NET LOANS
6,190,760
6,190,029
6,274,480
Other assets
465,362
459,129
465,556
TOTAL ASSETS
$8,943,766
$8,806,844
$8,767,748
========
Liabilities
Deposits:
Noninterest-bearing demand
$691,254
$656,013
$711,413
Interest-bearing:
Savings, NOW and money market
2,106,145
2,024,524
2,081,514
Time deposits
3,671,946
3,729,915
3,790,979
TOTAL DEPOSITS
6,469,345
6,410,452
6,583,906
Short-term borrowings
817,811
769,338
599,823
Guaranteed preferred beneficial interests in
Company's subordinated debentures
50,000
Other borrowings
868,396
865,712
863,165
Accrued expenses and other liabilities
87,627
81,749
84,513
TOTAL LIABILITIES
8,293,179
8,177,251
8,141,407
Shareholders' Equity
Common stock
58,560
58,189
60,311
Capital surplus
413,812
403,075
457,267
Retained earnings
144,945
179,949
106,809
Accumulated other comprehensive income (loss), net of tax
33,270
(11,620)
1,954
TOTAL SHAREHOLDERS' EQUITY
650,587
629,593
626,341
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
The accompanying notes are an integral part of this statement.
Consolidated Statement of Income
Three Months Ended
Nine Months Ended
($ and shares in thousands, except per share data)
(Unaudited)
---------------
Interest Income
Loans including fees:
Taxable
$122,764
$133,975
$382,323
$375,188
Nontaxable
4,207
3,081
11,871
9,015
21,571
22,113
67,083
64,237
6,997
6,808
20,590
20,398
201
430
668
1,218
-----------
TOTAL INTEREST INCOME
155,740
166,407
482,535
470,056
Interest Expense
Savings, NOW and money market deposits
11,801
15,524
39,689
42,914
50,935
55,138
159,725
149,864
5,173
11,258
20,170
31,627
14,406
16,767
46,107
42,764
TOTAL INTEREST EXPENSE
82,315
98,687
265,691
267,169
NET INTEREST INCOME
73,425
67,720
216,844
202,887
Provision for loan losses
7,400
4,968
17,400
16,838
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
66,025
62,752
199,444
186,049
Noninterest Income
Trust fees
4,960
5,537
15,580
16,820
Service charges on deposit accounts
9,918
9,649
30,006
23,924
Loan and Mortgage banking revenue
2,923
1,695
7,176
4,134
Insurance premiums and commissions
3,204
2,669
10,043
8,449
Investment product fees
1,524
1,719
5,021
5,219
Bank-owned life insurance
1,320
1,257
3,871
3,171
Net securities gains (losses)
745
(121)
1,758
(146)
Other income
2,731
3,184
8,398
13,593
TOTAL NONINTEREST INCOME
27,325
25,589
81,853
75,164
Noninterest Expense
Salaries and employee benefits
34,041
29,425
104,398
95,339
Occupancy
3,938
3,708
11,839
10,663
Equipment
3,836
4,111
12,300
13,242
Marketing
1,393
1,857
5,858
5,394
FDIC insurance premiums
295
317
929
938
Processing
2,601
2,574
7,818
7,635
Communication and transportation
2,620
2,531
8,156
7,532
Professional fees
1,217
1,386
5,001
3,423
Other expenses
8,699
8,399
26,410
21,424
58,640
54,308
182,709
165,590
Merger and restructuring costs
--
18,852
9,703
37,503
TOTAL NONINTEREST EXPENSE
73,160
192,412
203,093
Net income before income taxes
34,710
15,181
88,885
58,120
Provision for income taxes
8,577
1,958
20,568
12,047
Net Income
26,133
13,223
68,317
46,073
======
Net income per common share:
Basic
$0.45
$0.22
$1.15
$0.78
Diluted
$0.77
Weighted average number of common shares outstanding:
58,790
60,403
59,438
59,301
58,875
60,568
59,528
60,034
Consolidated Statement of Cash Flows
--------------------
Cash flows from operating activities:
Net income
------------
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Depreciation
10,169
9,815
Amortization of intangible assets
5,243
2,914
Net premium amortization (discount accretion) on investment securities
406
(2,102)
Loss (gain) on sale of investment securities
(1,758)
15,423
Loss on sale of assets
950
10,930
(Increase) decrease in other assets
(14,008)
5,343
Decrease in accrued expenses and other liabilities
(16,430)
(17,117)
Total adjustments
1,972
42,044
Net cash flows provided by operating activities
70,289
88,117
Cash flows from investing activities:
Cash and cash equivalents of subsidiary acquired
13,243
Purchase of investment securities available-for-sale
(1,029,107)
(732,865)
Proceeds from maturities and paydowns of investment securities available-for-sale
636,749
177,024
Proceeds from sales of investment securities available- for-sale
177,990
529,789
Net principal collected from (loans made to) customers:
(155,682)
(169,282)
Mortgage
(269,965)
(309,474)
Consumer
(28,775)
(58,340)
Proceeds from sale of mortgage loans
519,674
283,842
Proceeds from sale of premises and equipment
1,041
2,098
Purchase of premises and equipment
(3,598)
(15,544)
Net cash flows used in investing activities
(151,673)
(279,509)
Cash flows from financing activities:
Net increase (decrease) in deposits and short-term borrowings:
Noninterest bearing demand
(20,159)
7,681
Savings, NOW and Money Market Accounts
24,631
(87,920)
(119,523)
208,941
257,988
89,879
4,762
(4,655)
Proceeds from guaranteed preferred beneficial interests in Company's subordinated debentures
Cash dividends paid
(30,243)
(28,947)
Common stock repurchased
(47,225)
(105,280)
Common stock reissued, net of shares used to convert subordinated debentures
2,104
14,863
Net cash flows provided by financing activities
72,335
144,562
Net decrease in cash and cash equivalents
(9,049)
(46,830)
Cash and cash equivalents at beginning of period
216,149
226,941
Cash and cash equivalents at end of period
207,100
$180,111
=======
Total interest paid
$267,599
$265,652
Total taxes paid
$19,111
$18,033
Old National BancorpNotes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying consolidated financial statements include the accounts of Old National Bancorp and its affiliate entities ("Old National"). All significant intercompany transactions and balances have been eliminated. In the opinion of management, the consolidated financial statements contain all the normal and recurring adjustments necessary to present fairly the financial position of Old National as of September 30, 2001 and 2000 and December 31, 2000, and the results of its operations for the three and nine months ended September 30, 2001 and 2000 and its cash flows for the nine months ended September 30, 2001 and 2000. All prior period information has been restated for the effects of business combinations accounted for as pooling-of-interests as discussed in Note 3.
2. Net Income Per Share
Net income per common share computations are based on the weighted average number of common shares outstanding during the periods presented. A 5% stock dividend was paid January 30, 2001 to shareholders of record on January 9, 2001. All share and per share data presented herein have been restated for the effects of the stock dividend.
Net income on a diluted basis is computed as above and assumes the conversion of Old National's 8% convertible subordinated debentures (Note 5) for the periods they were outstanding. For the diluted computation, net income is adjusted for the assumed reduction in interest expense, net of income tax effect, and additional common shares are assumed to be issued in connection with the conversion of the remaining outstanding debentures.
Earnings Per Share Reconciliation
($ and shares in thousands except per share data):
Three
Months Ended
September 30, 2001
September 30, 2000
Per Share
Income
Shares
Amount
--------------
Basic EPS
Net income from continuing
operations available to
common stockholders
$26,133
$13,223
=====
Effect of Dilutive
Securities:
Stock options
85
165
----------
Diluted EPS
+ assumed conversions
Nine
Operations available to
Common stockholders
$68,317
$46,073
90
230
8% convertible debentures
130
503
$46,203
3. Merger and Divestiture Activity
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 no longer than 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 had total deposits of approximately $41 million and were divested on November 17, 2000.
4. Investments Securities
The market value and amortized cost of investment securities as of September 30, 2001 are set forth below ($ in thousands):
Market Value
Amortized Cost
Unrealized Gain (loss)
Available-for-sale
$2,080,544
$2,024,580
$55,964
5. Borrowings
Old National called for redemption its 8% convertible subordinated debentures on May 14, 2000.
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, 2001, a total of $23.0 million of the notes was outstanding, with maturities in 2002 and 2003 and fixed interest rates of 6.9%. At September 30, 2000, Old National had outstanding $24.5 million of medium term notes.
Old National also has registered Medium-Term Notes in the principal amount of $150 million. $87.5 million of notes are available for issuance at September 30, 2001. These notes may be issued with maturities of nine months or more and rates may either be fixed or variable. As of September 30, 2001, a total of $59.3 million of the notes were outstanding, with maturities ranging from one to seven years and fixed interest rates from 6.4% to 7.0%. At September 30, 2000, Old National had $59.3 million outstanding.
As of September 30, 2001, Old National has $25 million in an unsecured line of credit with an unaffiliated bank. This line of credit includes various arrangements to maintain compensating balances or pay fees. As of September 30, 2001, there was $2 million outstanding under this line. At September 30, 2000, there were no borrowings under this line.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 adopted Statement of Financial Accounting Standard ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment of FASB Statement No. 133" on January 1, 2001. A $35 thousand reduction to current income was recorded as a transition adjustment.
Old National's designates its derivatives based upon criteria established by SFAS No. 133. For a derivative designated as a fair value hedge, the derivative is recorded at fair value on the Balance Sheet. The change in fair value of the derivative and hedged item along with any ineffectiveness of the hedge is recorded in current earnings. For a derivative designated as a cash flow hedge, the effective portion of the derivative's gain or loss is initially reported as a component of accumulated other comprehensive income (loss) and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately.
Old National uses interest rate contracts such as interest swaps to manage its interest rate risk. These contracts are designated as hedges of specific assets and liabilities. The net interest receivable or payable on swaps is accrued and recognized as an adjustment to the interest income or expense of the hedged asset or liability. The premium paid for 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, 2001, Old National has interest rate swaps with a notional value of $220 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 $12.7 million as of September 30, 2001. Old National pays the counterparty a variable rate based on LIBOR and receives fixed rates ranging from 4.37% to 7.23%. The contracts terminate on or prior to September 12, 2011.
On September 12, 2001, Old National entered into a forecasted interest rate swap with a notional value of $75 million. The transaction was designated as a cash flow hedge with the effective portion of the derivative's loss initially reported as a component of accumulated other comprehensive income (loss). Subsequent to the quarter ended September 30, 2001, this amount will be reclassified into earnings as a yield adjustment over the 10-year term of the $150 million 6.75% fixed-rate Subordinated Bank Notes issued on October 5, 2001. Changes in fair value and any ineffectiveness of the hedge were immaterial for the quarter and year-to-date ended September 30, 2001.
Old National is exposed to losses if a counterparty fails to make its payments under a contract in which Old National is in the receiving position. Although collateral or other security is not obtained, Old National minimizes its credit risk by monitoring the credit standing of the counterparties and anticipates that the counterparties will be able to fully satisfy their obligation under the agreements.
8. Comprehensive Income
-------------------
------------------
($ in thousands)
Unrealized gains (losses)
on securities:
Unrealized holding gains (losses)
arising during period, net of tax
14,379
9,288
33,846
8,447
Less: reclassification adjustment
for securities losses (gains)
realized in net income, net of tax
(454)
7,210
(1,072)
9,254
Cash flow hedges:
Net derivative losses, net of tax
(1,458)
Net unrealized gains (losses)
12,467
16,498
31,316
17,701
Comprehensive income
$38,600
$29,721
$99,633
$63,774
9. Segment Data
Community
Banking
Treasury
Total
Net interest income (loss)
$214,743
$74
$2,027
$216,844
Income tax expense (benefit)
25,715
(2,829)
(2,318)
Segment profit (loss)
58,322
13,202
(3,207)
Total assets
6,646,544
2,260,052
37,170
8,943,766
$221,671
$(17,033)
$(1,751)
$202,887
26,218
(1,181)
(12,990)
49,980
18,629
(22,536)
6,674,712
2,130,050
2,082
8,806,844
10. Impact of Accounting Changes
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations." The Statement addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16, "Business Combination." It requires all business combinations within the scope of the Statement to be accounted for using one method, the purchase method. It establishes criteria for the initial recognition of intangible assets acquired in a business combination. The provisions of the Statement apply to all business combinations initiated after June 30, 2001 and to all business combinations accounted for by the purchase method for which the date of acquisition is July 1, 2001 or later. Old National is in the process of assessing the impact of adopting the Statement on its financial position and results of operations.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." The Statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." Under this Standard, goodwill and other intangible assets that have indefinite useful lives will not be subject to amortization. The Statement is effective for fiscal years beginning after December 15, 2001. Certain provisions of the Statement are effective for goodwill and other acquired intangible assets for which the acquisition date is after June 30, 2001. Old National is in the process of assessing the impact of adopting the Statement on its financial position and results of operations. While the work will be formally completed by year-end, Old National believes that it will have no impairment adjustment to goodwill and intangible balances, which are currently $88 million. It is estimated that the positive impact on 2002 earnings of the elimination o f the amortization of goodwill will be approximately $5.4 million.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing Financial Assets and Extinguishment of Liabilities" that replaced SFAS No. 125. While much of SFAS No. 125 was incorporated into SFAS No. 140, certain standards for accounting for securitizations and other transfers of financial assets and disclosures were revised. This statement was effective for transfers made after March 31, 2001, and certain disclosures are effective for years ending after December 15, 2000. The impact of this statement was not material to Old National's financial conditions and results of operations.
11. Merger and Restructuring Charges
During the second quarter of 2001, Old National announced that it would further restructure its regional banking administrative structure and incur additional expenses in the consolidation of ANB Corporation, which it acquired in the first quarter of 2000. The restructuring of the banking operations involved consolidating the administrative structure of the banking franchise from six regions into three regions and the closure or sale of up to 10 branches. Approximately 100 positions were eliminated and the charges associated with severance, facilities and equipment write-offs were $7.7 million. The operations and management integration plan was finalized for the ANB acquisition and additional charges of $2.0 million for personnel costs and costs of consolidating the operation function of the Trust business were recorded. The remaining restructuring charge accrual was $5.2 million as of September 30, 2001.
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 $22.5 million. Included in these charges were merger-related costs, system conversion costs, balance sheet restructuring, elimination of duplicate or unnecessary facilities, centralization of certain support functions and personnel severance costs related to these items. The majority of these charges have occurred. The remaining accrual as of September 30, 2001 is immaterial.
The components of the charges are shown below ($ in thousands).
Three months ended
Nine months ended
Severance and related costs
$ --
$6,477
Fixed asset write-downs
2,047
428
751
Included in noninterest expense
$9,703
---------------------
$ 5,744
4,501
3,687
Losses on sale of securities
11,896
15,277
Losses on sale of loans
6,407
549
1,887
3,801
$18,852
$41,304
On June 27, 2001, Old National granted 1.4 million stock options to key employees at an option price of $26.39. The options vest 25% per year over a four year period and expire in 10 years. Old National can grant up to 6.3 million shares of common stock under the 1999 Equity Incentive Plan. Under this plan, active employees with unvested restricted stock shares could exchange those shares for stock options by August 27, 2001. On that date, 34,731 restricted stock shares were converted to stock options, totaling $440 thousand.
PART I. FINANCIAL INFORMATION
ITEM 2.
Management's Discussion and Analysis of
The following management's discussion and analysis is presented to provide information concerning the financial condition of Old National as of September 30, 2001, as compared to September 30, 2000 and December 31, 2000, and the results of operations for the three and six months ended September 30, 2001 and 2000. Management's forward-looking statements are intended to benefit the reader, but are subject to various risks and uncertainties which may cause actual results to differ materially, including but not limited to: (1) economic conditions generally and in the financial services industry; (2) increased competition in the financial services industry; (3) actions by the Federal Reserve Board and changes in interest rates; and (4) governmental legislation and regulation.
Financial Condition
Old National's assets at September 30, 2001 were $8.944 billion, a 1.6% increase since September 2000 and a 2.7% increase since December 2000. Earning assets, which consist primarily of money market investments, investment securities and loans, grew 1.4% over the prior year. During the past year, the mix of earning assets reflected loan growth of 0.1% while money market investments and investment securities increased a combined 5.4%. Since December 2000, earning assets increased 3.1% with loans decreasing 1.7% and investment securities and money market investments increasing 20.0%. Commercial real estate loans have increased 9.1% over the prior year and 4.1% over December 2000. Commercial loans have increased 11.6% over September 2000 and 12.0% since December 2000. Residential real estate loans have decreased 17.8% from the prior year and 21.6% from December 2000 due to sales or securitizations of existing and recently originated fixed-rate mortgage originations which began in the third quarter o f 2000. The pace of new origination sales increased in 2001 due to the lower rate environment.
At September 30, 2001, total under-performing assets (defined as loans 90 days or more past due, nonaccrual and restructured loans and foreclosed properties) increased to $63.2 million from $33.1 million as of December 31, 2000. As of these dates, under-performing assets in total were 1.01% and 0.52%, respectively, of total loans and foreclosed properties. The increase in nonaccrual loans resulted from the addition of a number of credits in industries that experienced the effects of the ongoing economic slowdown.
The increase in loans past due 90 days or more was centered in various loans that are either currently the subject of internal collection efforts or loans intentionally held past due by the bank until satisfactory restructuring efforts are completed. The increase in foreclosed properties was concentrated in a few, closely monitored properties that are actively being marketed for sale.
Nonaccrual loans
$40,643
$22,690
Restructured loans
227
Foreclosed properties
7,146
3,616
-------
Total non-performing assets
47,789
26,533
Past due 90 days or more
15,412
6,588
Total under-performing assets
$63,201
$33,121
Under-performing assets as a % of total
Loans and foreclosed properties
1.01%
0.52%
As of September 30, 2001, the recorded investment in loans for which impairment has been recognized in accordance with SFAS Nos. 114 and 118 was $21.0 million with no related allowance and $264.0 million with $69.9 million of related allowance.
Old National's policy for recognizing income on impaired loans is to accrue earnings unless a loan becomes nonaccrual. A loan is generally placed on nonaccrual status when principal or interest becomes 90 days past due unless it is well secured and in the process of collection, or earlier when concern exists as to the ultimate collectibility of principal or interest. When loans are classified as nonaccrual, interest accrued during the current year is reversed against earnings; interest accrued in the prior 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, 2001, the average balance of impaired loans was $206.1 million and $12.9 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 September 30, 2001, increased $58.9 million or 0.9% compared to September 2000. Brokered certificates of deposit, included in time deposits, decreased $337.4 million since September 2000. The growth in core deposits replaced maturing brokered certificates of deposit. Since December 2000, total deposits decreased $114.6 million or 2.3% with brokered certificates of deposit decreasing $298.0 million in this same period. The growth in core deposits and additional FHLB borrowings replaced maturing brokered certificates of deposit.
Short-term borrowings, comprised of Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings, increased $48.5 million since September 2000 and increased $218.0 million since December 2000. Other borrowings, which is primarily advances from Federal Home Loan Banks, increased $2.7 million over September 2000 and increased $5.2 million over December 2000.
Capital
Total shareholders' equity increased $21.0 million since September 2000 and $24.2 million since December 2000. Accumulated other comprehensive income (loss), primarily net unrealized gain (loss) on investment securities, increased $44.9 million since September 2000 and increased $31.3 million since December 2000. Subsequent to the quarter ended September 30, 2001, Old National issued $150 million of Subordinated Bank Notes which will qualify as Tier II capital.
Old National's consolidated capital position remains strong as evidenced by the following comparisons of key industry ratios:
Regulatory Guidelines
-------------------------------------------
---------------------------
Minimum
Well-Capitalized
Risk-based capital:
-----------------------
Tier 1 capital to total avg assets (leverage ratio)
4.00%
5.00%
6.61%
6.95%
6.68%
Tier 1 capital to risk-adjusted total assets
4.00
6.00
9.16
9.57
9.24
Total capital to risk-adjusted total assets
8.00
10.00
10.35
10.74
10.41
Shareholders' equity to total assets
N/A
7.27
7.15
7.14
Asset/Liability Management
Old National actively manages its asset/liability position. The primary purpose of asset/liability management is to minimize the effect on net income of changes in interest rates.
Old National uses net interest income simulation modeling to better quantify the impact of potential interest rate fluctuations on net interest income. Old National simulates several possible interest rate scenarios, including an instantaneous change in rates of up and down 200 basis points along the entire yield curve (parallel rate shocks). Policy guidelines limit the cumulative net interest income sensitivity over a 24 month period to +/- 5% in the up or down 200 basis point parallel rate shocks. Several factors, most significantly very low market interest rates at September 30, 2001, contributed to projected cumulative net interest income sensitivity over a 24 month period of -8.4% in a down 200 basis point parallel rate shock and -0.7% in an up 200 basis point parallel rate shock. Old National is currently evaluating the factors contributing to its projected rate sensitivity in a down 200 basis point parallel rate shock and is making changes where and when practical to bring its rate sensitivity w i thin the guideline.
Results of Operations
Net income for the quarter ended September 30, 2001 was $26.1 million, compared to $13.2 million for the same quarter last year with the inclusion of significant merger and restructuring costs as discussed below. Year-to-date net income, including merger and restructuring costs were $68.3 million for 2001 and $46.1 million for 2000. Diluted earnings per common share were $0.45 for the quarter compared to $0.22 for the same period of the prior year. Diluted earnings per share were $1.15 for 2001 compared to $0.77 for 2000.
The year-to-date 2001 results included $9.7 million of merger and restructuring charges recorded in the second quarter. This includes $6.5 million of severance and employee-related costs, $2.1 million of fixed asset write downs and $1.1 million of other costs. The year-to-date 2000 results included $41.3 million of merger and restructuring charges. Included in the 2000 merger and restructuring charge was $15.3 million in securities losses related to the Heritage and ANB balance sheet restructuring, $6.4 million of losses on sales of loans, $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 $1.9 million of other merger and restructuring costs. Also included in the $41.3 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, return on average assets (ROA) for the quarter was 1.18% for 2001 and 1.13% for 2000. Return on equity (ROE) for the quarter was 16.88% for 2001 and 15.75% for 2000. Year-to-date, ROA was 1.12% in 2001 compared to 1.15% in 2000 and ROE was 15.89% for 2001 and 15.91% for 2000. Growth in net interest income and other income offset some of the additional expenses during the quarter.
Net Interest Income/Net Interest Margin (taxable equivalent basis)
Quarter-to-date net interest income for 2001 was $78.9 million, an 8.7% increase over 2000. The net interest margin for the quarter was 3.82% for 2001 compared to 3.56% for 2000. Year-to-date net interest income for 2001 was $232.6 million, a 7.0% increase over 2000. The net interest margin for the nine months ended was 3.76% for 2001 compared to 3.70% for 2000.
Provision and Allowance for Loan Losses
The provision for loan losses was $7.4 million for the quarter compared to $5.0 million for the same quarter in 2000. The increase in the quarter was due to continued loan growth, changes in loan mix and slightly higher charge-offs. The year-to-date provision for loan losses was $17.4 million for 2001 compared to $16.9 million for 2000. 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 0.42% in the same quarter of 2000. This rate year-to-date was 0.34% for 2001 and 0.28% for 2000.
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 1.20% at September 30, 2001 compared to 1.15% in 2000. The allowance for loan losses covers all under-performing loans by 1.3 times at September 30, 2001 and 2.5 times at December 31, 2000.
Excluding securities gains (losses), noninterest income increased 3.4% in the three months ended September 30, 2001 and 6.4% year-to-date as compared to the same period in 2000. Service charges on deposit accounts were up 2.8% for the quarter and 25.4% year-to-date mainly due to additional overdraft fees generated. Loan and mortgage banking revenue increase $1.2 million for the quarter and $3.0 million for the year compared to prior year. These increases are due to additional mortgage banking revenue as mortgage originations have increased with the lower rate environment in 2001. Insurance premiums and commissions increased 20.0% over 2000 due to the acquisition of an insurance subsidiary subsequent to the quarter ended September 2000. Bank-owned life insurance increased $0.1 million for the quarter and $0.7 million for the year over prior year due to increased earnings on the underlying assets that benefited from continued impact of the higher rate environment during most of 2000. Year-to-date o t her income in 2000 included a gain of $4.9 million on the sale of Old National's credit card business. These sales also negatively impacted subsequent loan fees.
Before restructuring, noninterest expense increased 8.0% in the third quarter and 10.3% for the nine months of 2001 compared to 2000. Salaries and benefits, together the largest individual component of noninterest expense, increased 15.7% in the quarter and 9.5% for the year-to-date. During September 2000, Old National reversed incentive expenses totaling $2.8 million due to net income not meeting incentive targets. Had these expenses been included in the third quarter, salaries and benefits would have increased 5.6% for the quarter and 6.4% for the year to date. This increase was due, in part, to a bank merger occurring in July 2000. Increases in utilities and real estate taxes and the addition of new offices caused occupancy expense to increase 11.0% over prior year, 6.2% for the quarter. Professional fees increased $1.6 million year-to-date due to additional legal related expenses and one-time consulting expenses incurred for implementation of the new Privacy Act requirements. Other expense i ncreased $5.0 million year-to-date. The current year other expense includes an increase of amortization of intangible assets of $0.4 million quarter-to-date, $2.3 million year-to-date and checking and saving losses over 2000 of a nominal change for the quarter and $1.3 million for the nine months. 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 24.7% compared to 12.9% in 2000 for the quarter and 23.1% for 2001 and 20.7% for 2000 year-to-date. Excluding merger and restructuring charges, the percentages would be 24.7% compared to 28.0% in 2000 for the quarter and 24.7% for 2001 and 27.8% for 2000 year-to-date. The decrease in the quarter-to-date and year-to-date percentages compared to prior year excluding merger and restructuring charges is due to additional tax-exempt income and state income tax strategies.
Quantitative and Qualitative disclosures
About Market Risk
As described in Old National's Form 10-K for the year ended December 31, 2000, Old National's market risk is composed primarily of interest rate risk. There have been no material changes in market risk or the manner in which Old National manages market risk since December 31, 2000.
OTHER INFORMATION
ITEM 1. Legal Proceedings
No material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which Old National or any of its subsidiaries is a party or of which any of their property is subject.
ITEM 2. Changes in Securities
NONE
ITEM 3. Defaults Upon Senior Securities
ITEM 4. Submission of Matters to a Vote of Security Holders
ITEM 5. Other Information
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 of the Registrant (incorporated by reference to Exhibit 3(i) of the Registrant's Registration Statement on Form S-4, File No. 333-09967, dated August 12, 1996).
3 (ii)
By-Laws of the Registrant (incorporated by reference to Exhibit 3(ii) of Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999).
4 (a)
The description of Registrant's common stock contained in its Current Report on Form 8-K, dated January 6, 1983 (incorporated by reference thereto).
(b)
The description of Registrant's Preferred Stock Purchase Rights contained in Registrant's Form 8-A, dated March 1, 1990, as amended by the Registrant's Form 8-A, dated March 1, 2000 (incorporated by reference thereto), including the Rights Agreement, dated March 1, 1990, between the Registrant and Old National Bank in Evansville, as Trustee, as amended on March 1, 2000 (incorporated by reference thereto).
(c)
The description of The Trust Preferred Securities, Series I contained in Registrant's Form 8-A, dated April 11, 2000 (incorporated by reference thereto).
10
Material contracts
(a)
Distribution Agreement is incorporated by reference to Exhibit of amendment no. 2 of the Registrant's Registration Statement on Form S-3, File No. 333-29433, dated July 23, 1997.
Old National Bancorp Employees' Retirement Plan is incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.
Employees' Savings and Profit Sharing Plan of Old National Bancorp is incorporated by reference to the Registrant's Quarterly report on Form 10-Q for the quarter ended June 30, 1997.
(d)
Form of Severance Agreement for James A. Risinger, Thomas F. Clayton, Michael R. Hinton, Daryl D. Moore, John S. Poelker, John W. Stanley and Jerome J. Gassen, as amended, is incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
(e)
The Old National Bancorp 1999 Equity Incentive Plan is incorporated by reference to the Registrant's Form S-8 filed on July 20, 2001.
(b) Reports on Form 8-K filed during the quarter ended September 30, 2001.
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, 2001
Regulation S-K
Reference
(Item 601)