10-Q 1 onb-302q.txt 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 March 31, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission File Number 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 61.2 million shares outstanding at March 31, 2002. OLD NATIONAL BANCORP FORM 10-Q INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Page No. -------- Consolidated Balance Sheet March 31, 2002 and 2001, and December 31, 2001 3 Consolidated Statement of Income Three months ended March 31, 2002 and 2001 4 Consolidated Statement of Cash Flows Three months ended March 31, 2002 and 2001 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative disclosures about Market Risk 14 PART II OTHER INFORMATION 15 SIGNATURES 16 INDEX OF EXHIBITS 17 2
Old National Bancorp Consolidated Balance Sheet ($ in thousands) (Unaudited) March 31, December 31, 2002 2001 2001 ----------- ----------- ----------- Assets Cash and due from banks $ 173,218 $ 182,093 $ 224,663 Money market investments 19,669 45,691 71,703 Investment securities: U.S. Treasury 5,234 2,512 5,300 U.S. Government agencies and corporations 1,877,070 1,197,677 1,527,561 Obligations of states and political subdivisions 601,587 568,246 594,557 Other 115,912 168,796 120,967 ----------- ----------- ----------- Investment securities - available-for-sale, at fair value 2,599,803 1,937,231 2,248,385 ----------- ----------- ----------- Loans: Commercial 1,693,608 1,634,450 1,742,937 Commercial real estate 1,848,925 1,834,082 1,848,945 Residential real estate 1,349,644 1,755,056 1,477,180 Consumer credit, net of unearned income 1,035,750 1,041,143 1,063,792 ----------- ----------- ----------- Total loans 5,927,927 6,264,731 6,132,854 Allowance for loan losses (76,791) (73,937) (74,241) ----------- ----------- ----------- NET LOANS 5,851,136 6,190,794 6,058,613 ----------- ----------- ----------- Other assets 525,249 453,867 477,109 ----------- ----------- ----------- TOTAL ASSETS $ 9,169,075 $ 8,809,676 $ 9,080,473 =========== =========== =========== Liabilities Deposits: Noninterest-bearing demand $ 708,578 $ 625,452 $ 733,814 Interest-bearing: Savings, NOW and money market 2,275,557 2,078,041 2,206,161 Time deposits 3,637,853 3,681,981 3,676,465 ----------- ----------- ----------- TOTAL DEPOSITS 6,621,988 6,385,474 6,616,440 Short-term borrowings 635,405 645,989 602,312 Guaranteed preferred beneficial interests in subordinated debentures 50,000 50,000 50,000 Other borrowings 1,128,809 1,008,766 1,083,046 Accrued expenses and other liabilities 85,827 76,828 89,440 ----------- ----------- ----------- TOTAL LIABILITIES 8,522,029 8,167,057 8,441,238 ----------- ----------- ----------- Shareholders' Equity Common stock 61,161 59,817 61,174 Capital surplus 471,812 444,275 472,467 Retained earnings 108,488 118,806 91,062 Accumulated other comprehensive income, net of tax 5,585 19,721 14,532 ----------- ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 647,046 642,619 639,235 ----------- ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,169,075 $ 8,809,676 $ 9,080,473 =========== =========== ===========
The accompanying notes are an integral part of this statement 3
Old National Bancorp Consolidated Statement of Income Three Months Ended ($ and shares in thousands, except per share data) March 31, (Unaudited) 2002 2001 ------------------- Interest Income Loans including fees: Taxable $103,776 $131,775 Nontaxable 4,344 3,694 Investment securities: Taxable 24,944 22,949 Nontaxable 7,185 6,652 Money market investments 101 246 -------- -------- TOTAL INTEREST INCOME 140,350 165,316 -------- -------- Interest Expense Savings, NOW and money market deposits 7,233 15,338 Time deposits 41,506 55,963 Short-term borrowings 2,425 8,312 Other borrowings 14,729 15,882 -------- -------- TOTAL INTEREST EXPENSE 65,893 95,495 -------- -------- NET INTEREST INCOME 74,457 69,821 Provision for loan losses 7,500 4,000 -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 66,957 65,821 -------- -------- Noninterest Income Trust fees 4,990 5,238 Service charges on deposit accounts 9,343 9,647 Mortgage banking revenue 3,221 783 Loan fees 395 268 Insurance premiums and commissions 4,183 3,398 Investment product fees 1,772 1,737 Bank-owned life insurance 1,233 1,259 Net securities gains 1,565 81 Other income 3,805 2,850 -------- -------- TOTAL NONINTEREST INCOME 30,507 25,261 -------- -------- Noninterest Expense Salaries and employee benefits 36,204 35,626 Occupancy 3,809 4,117 Equipment 3,836 4,194 Marketing 1,944 1,901 FDIC insurance premiums 290 327 Processing 2,954 2,636 Communication and transportation 2,971 2,834 Professional fees 1,938 1,713 Other expenses 7,318 8,589 -------- -------- TOTAL NONINTEREST EXPENSE 61,264 61,937 -------- -------- Income before income taxes 36,200 29,145 Provision for income taxes 8,339 7,045 -------- -------- Net Income $ 27,861 $ 22,100 ======== ======== Net income per common share: Basic $ 0.46 $ 0.35 Diluted $ 0.46 $ 0.35 Weighted average number of common shares outstanding: Basic 61,127 62,950 Diluted 61,220 63,053
The accompanying notes are an integral part of this statement. 4
Old National Bancorp Consolidated Statement of Cash Flows Three Months Ended March 31, 2002 2001 ($ in thousands) (Unaudited) ---------------------- ---------------------------- Cash flows from operating activities: Net income $ 27,861 $ 22,100 --------- --------- Adjustments to reconcile net income to cash provided by (used in) operating activities: Depreciation 3,196 3,482 Amortization of intangible assets 242 1,709 Net premium amortization (discount accretion) on investment securities 1,300 15 Provision for loan losses 7,500 4,000 Loss (gain) on sale of investment securities (1,565) (81) Loss (gain) on sale of assets (174) (76) Residential real estate loans originated for sale (211,895) (165,808) Proceeds from sale of mortgage loans 212,110 165,957 (Increase) decrease in other assets (50,301) (4,808) Decrease in accrued expenses and other liabilities 2,366 (7,685) --------- --------- Total adjustments (37,221) (3,295) --------- --------- Net cash flows provided by (used in) operating activities (9,360) 18,805 --------- --------- Cash flows from investing activities: Purchase of investment securities available-for-sale (651,775) (459,950) Proceeds from maturities and paydowns of investment securities available-for-sale 198,979 341,631 Proceeds from sales of investment securities available- for-sale 86,789 22,133 Net principal collected from (loans made to) customers: Commercial 47,318 (30,249) Mortgage 126,540 112,355 Consumer 26,119 (2,420) Proceeds from sale of premises and equipment 1,163 272 Purchase of premises and equipment (2,553) (688) --------- --------- Net cash flows used in investing activities (167,420) (16,916) --------- --------- Cash flows from financing activities: Net increase (decrease) in deposits and short-term borrowings: Noninterest bearing demand (25,236) (85,961) Savings, NOW and Money Market Accounts 69,396 (3,473) Time deposits (38,612) (108,998) Short-term borrowings (49,907) 86,166 Other borrowings 128,763 145,601 Cash dividends paid (10,402) (10,189) Common stock repurchased (6,699) (14,699) Common stock reissued, net of shares used to convert subordinated debentures 5,998 1,299 --------- --------- Net cash flows provided by financing activities 73,301 9,746 --------- --------- Net decrease in cash and cash equivalents (103,479) 11,635 Cash and cash equivalents at beginning of period 296,366 216,149 --------- --------- Cash and cash equivalents at end of period $ 192,887 $ 227,784 ========= ========= Total interest paid $ 67,620 $ 103,151 Total taxes paid $ -- $ 5,080
The accompanying notes are an integral part of this statement. 5 Old National Bancorp Notes to Consolidated Financial Statements 1. Basis of Presentation The accompanying 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 for a fair statement of the financial position of Old National as of March 31, 2002 and 2001 and December 31, 2001, and the results of its operations for the three months ended March 31, 2002 and 2001 and its cash flows for the three months ended March 31, 2002 and 2001. 2. Impact of Accounting Changes In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement No. 141, "Business Combinations" (Statement 141), and Statement No. 142, "Goodwill and Other Intangible Assets" (Statement 142). Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 141 also specifies the criteria for intangible assets acquired in a purchase method business combination to be recognized and reported apart from goodwill. Statement 142 requires companies to no longer amortize goodwill and intangible assets with indefinite useful lives, but to instead test those assets for impairment at least annually in accordance with the provisions of Statement 142. Under Statement 142, intangible assets with definite useful lives continue to be amortized over their respective estimated useful lives to their estimated residual values. Old National adopted the provisions of Statement 142 effective January 1, 2002. As of the date of adoption, Old National had unamortized goodwill in the amount of $ 82.8 million, and unamortized identifiable intangible assets in the amount of $4.4 million, all of which were subject to the transition provisions of Statements 141 and 142. As part of its adoptions of Statement 142, Old National performed a transitional impairment test on its goodwill assets, which indicated no impairment charge was required. Old National does not currently have any indefinite-lived intangible assets recorded in its statement of financial condition. In addition, no material reclassifications or adjustments to the useful lives of finite-lived intangible assets were made as a result of adopting the new guidance. The full impact of adopting Statement 142 is expected to result in an increase in net income of approximately $5.4 million or approximately $0.09 per share in 2002 as a result of Old National no longer having to amortize goodwill against earnings. At March 31, 2002 and 2001, Old National had $ 5.0 million and $ 5.1 million, respectively, in unamortized identifiable intangible assets substantially all of which were core deposit intangibles. Total amortization expense associated with these intangible assets in the first quarter of 2002 and 2001 was $242 thousand and $224 thousand, respectively. ($ in thousands): Estimated amortization expense in future years: ----------------------------------------------- For the year ended: 2003 $ 925 2004 925 2005 899 2006 776 2007 559 The following table is a reconciliation of net income and earnings per share excluding goodwill amortization for the year ended December 31, 2001 and quarter ended March 31, 2001: 6
($ in thousands except per share data): For the Year Ended For the Quarter Ended December 31, 2001 March 31, 2001 --------------------------- --------------------------- Net Earnings Net Earnings Income Per Share Income Per Share ------ --------- ------ --------- Basic earnings per common share computation: Reported net income $93,044 $1.49 $22,100 $0.35 Add back goodwill amortization 5,417 .09 1,368 .02 ------- ----- ------- ----- Adjusted net income / Earnings per share $98,461 $1.58 $23,468 $0.37 ======= ===== ======= ===== Diluted earnings per common share computation: Reported net income $93,044 $1.49 $22,100 $0.35 Add back goodwill amortization 5,417 .09 1,368 .02 ------- ----- ------- ----- Adjusted net income / Earnings per share $98,461 $1.58 $23,468 $0.37 ======= ===== ======= =====
3. Net Income Per Share Net income per common share computations are based on the weighted average number of common shares outstanding during the periods presented. A 5% stock dividend was paid January 25, 2002 to shareholders of record on January 4, 2002. All share and per share data presented herein have been restated for the effects of the stock dividend. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Earnings Per Share Reconciliation ($ and shares in thousands except per share data):
Three Three Months Ended Months Ended March 31, 2002 March 31, 2001 -------------- -------------- Per Share Per Share Income Shares Amount Income Shares Amount --------------------------------------------------------------------------- Basic EPS --------- Net income from continuing operations available to common stockholders $27,861 61,127 $0.46 $22,100 62,950 $0.35 ===== ===== Effect of Dilutive Securities: Stock options -- 93 -- 103 ------- ------ ------- ------ Diluted EPS ----------- Net income from continuing operations available to common stockholders + assumed conversions $27,861 61,220 $0.46 $22,100 63,053 $0.35 ======= ====== ===== ======= ====== =====
7 4. Investments Securities The market value and amortized cost of investment securities as of March 31, 2002 are set forth below ($ in thousands): Market Value Amortized Cost Unrealized Gain ------------ -------------- --------------- Available-for-sale $2,599,803 $2,588,552 $11,251 ========== ========== ======= 5. Borrowings During 2001, Old National issued $150 million of subordinated bank notes bearing a fixed interest rate of 6.75%, payable semiannually, and maturing in 2011. The notes qualify as Tier 2 Capital for regulatory purposes and are in accordance with the senior and subordinated global bank note program in which Old National may issue and sell up to a maximum of $1 billion. Old National has registered Series A medium-term notes in the principal amount of $50 million. The series has been fully issued. As of March 31, 2002, 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 March 31, 2001, 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 March 31, 2002. These notes may be issued with maturities of nine months or more and rates may either be fixed or variable. As of March 31, 2002, 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 March 31, 2001, Old National had $59.3 million outstanding. As of March 31, 2002, Old National has $25 million in an unsecured line of credit with an unaffiliated bank. This line of credit includes various arrangements to maintain compensating balances or pay fees. As of March 31, 2002 and 2001, there were no borrowings under this line. The contractual maturities of long-term debt are as follows: Guaranteed Preferred Other Beneficial Interest in Borrowings Subordinated Debentures Total ---------- ----------------------- ----- Due in 2002 $ 88,100 $ - $ 88,100 Due in 2003 184,352 - 184,352 Due in 2004 206,700 - 206,700 Due in 2005 130,053 - 130,053 Due in 2006 52,442 - 52,442 Thereafter 467,162 50,000 517,162 ---------- -------- ---------- Total $1,128,809 $ 50,000 $1,178,809 ========== ======== ========== 6. Guaranteed Preferred Beneficial Interests in Subordinated Debentures 8 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. Subsequent to the quarter ended March 31, 2002, Old National issued $100 million of trust preferred securities through a subsidiary, Old National Capital Trust II. The trust preferred securities have a liquidation amount of $25 per share with a cumulative annual distribution rate of 8.0%, or $2.00 per share, payable quarterly, and maturing on April 15, 2032. 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 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 March 31, 2002, Old National had interest rate swaps with a notional value of $374 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 March 31, 2002. Old National pays the counterparty a variable rate based on LIBOR and receives fixed rates ranging from 4.37% to 9.50%. The contracts terminate on or prior to March 27, 2012. During 2001, Old National entered into a forecasted interest rate swap with a notional value of $75 million. The transaction was designated as a cash flow hedge with the effective portion of the derivative's loss initially reported as a component of accumulated other comprehensive income (loss). Upon termination, this amount is being reclassified into earnings as a yield adjustment over the 10-year term of the $150 million 6.75% fixed-rate subordinated bank notes issued on October 5, 2001. Old National is exposed to losses if a counterparty fails to make its payments under a contract in which Old National is in the receiving position. Although collateral or other security is not obtained, Old National minimizes its credit risk by monitoring the credit standing of the counterparties and anticipates that the counterparties will be able to fully satisfy their obligation under the agreements. 9 8. Comprehensive Income Three Months Ended March 31, 2002 2001 ----------------------- ($ in thousands) Net income $ 27,861 $ 22,100 Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period, net of tax (8,036) 17,816 Less: reclassification adjustment for securities losses (gains) realized in net income, net of tax (955) (49) Cash flow hedges: Reclassification of net derivative losses, net of tax 44 -- -------- -------- Net unrealized (losses) gains (8,947) 17,767 -------- -------- Comprehensive income $ 18,914 $ 39,867 ======== ======== 9. Segment Data
Community Banking Treasury Other Total ------- -------- ----- ----- March 31, 2002 -------------- Net interest income $ 61,309 $ 12,677 $ 471 $ 74,457 Income tax expense (benefit) 9,288 (1,433) 484 8,339 Segment profit 22,559 4,309 993 27,861 Total assets 6,163,685 2,857,626 147,764 9,169,075 March 31, 2001 -------------- Net interest income (loss) $ 76,162 $ (3,682) $ (2,659) $ 69,821 Income tax expense (benefit) 8,402 (1,226) (131) 7,045 Segment profit (loss) 18,852 3,493 (245) 22,100 Total assets 6,537,608 2,229,183 42,885 8,809,676
10. 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 $2.6 million as of March 31, 2002. 10 11. Stock Options On January 22, 2002, Old National granted 1.8 million stock options to key employees at an option price of $23.83. On June 27, 2001, Old National granted 1.5 million stock options to key employees at an option price of $25.13. The options vest 25% per year over a four year period and expire in 10 years. If certain financial targets are achieved, vesting is accelerated. Old National can grant up to 6.6 million shares of common stock under the 1999 Equity Incentive Plan. Under this plan, active employees with unvested restricted stock shares could exchange those shares for stock options by August 27, 2001. On that date, 36,468 restricted stock shares were converted to stock options. 12. Reclassifications Certain prior year amounts have been restated to conform with the 2002 presentation. Such reclassifications had no effect on net income. 11 PART I. FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following Management's Discussion and Analysis is presented to provide information concerning the financial condition of Old National as of March 31, 2002, as compared to March 31, 2001 and December 31, 2001, and the results of operations for the three months ended March 31, 2002 and 2001. Old National's critical accounting policies, which may require management's judgment, are discussed throughout the applicable areas of Management's Discussion and Analysis. 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 March 31, 2002 were $9.169 billion, a 4.1% increase since March 2001 and a 3.9% increase since December 2001. Earning assets, which consist primarily of money market investments, investment securities and loans, grew 3.6% over the prior year. During the past year, the mix of earning assets reflected growth in money market investments and investment securities combined of 32.1%, while loans decreased 5.4%. Since December 2001, earning assets increased 4.5% with investment securities and money market investments increasing 51.6% and loans decreasing 13.4%. Commercial real estate loans have increased 0.8% over the prior year and had little change from December 2001. Commercial loans have increased 3.6% over March 2001 and decreased 11.3% since December 2001. Residential real estate loans have decreased 23.1% from the prior year and 34.5% from December 2001 due to sales or securitizations of existing and recently originated fixed-rate mortgages which began in the third quarter of 2000. At March 31, 2002, total under-performing assets (defined as loans 90 days or more past due, nonaccrual and restructured loans and foreclosed properties) decreased to $58.0 million from $85.5.million as of December 31, 2001. As of these dates, under-performing assets in total were 0.98% and 1.39%, respectively, of total loans and foreclosed properties. The decrease in under-performing loans resulted from the removal of approximately $25.8 million in loans from the restructured category and a significant reduction in loans past due 90 days or more. With regard to the decrease in restructured loans, the loans removed were loans related to the lodging/accommodation industry where only payment terms had been modified and, accordingly, were required to be reported as restructured only in one fiscal year period. Decreases in loans 90 days or more past due were a result of continued efforts to either rework those credits to mitigate risk to the bank, or to move those credits out of the bank's portfolio. March 31, December 31, 2002 2001 --------------------------- Nonaccrual loans $35,624 $37,894 Restructured loans 6,604 25,871 Foreclosed properties 9,239 9,204 ------- ------- Total non-performing assets 51,467 72,969 Past due 90 days or more 6,489 12,580 ------- ------- Total under-performing assets $57,956 $85,549 ======= ======= Under-performing assets as a % of total loans and foreclosed properties 0.98% 1.39% ======= ======= As of March 31, 2002, the recorded investment in loans for which impairment has been recognized in accordance with SFAS Nos. 114 and 118 was $10.9 million with no related allowance and $200.5 million with $59.3 million of related allowance. 12 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 three months ended March 31,2002, the average balance of impaired loans was $204.1 million and $3.2 million of interest was recorded. Old National's consolidated loan portfolio is well diversified. The only concentration of credit in any particular industry exceeding 10% of its portfolio was in real estate rental and leasing which comprised 12.9% of total loans at March 31, 2002. Old National has minimal exposure to construction lending or leveraged buyouts and no exposure in credits to foreign or lesser-developed countries. Total deposits at March 31, 2002, increased $236.5 million or 3.7% compared to March 2001. Brokered certificates of deposit, included in time deposits, decreased $358.1 million since March 2001. The growth in core deposits replaced maturing brokered certificates of deposit. Since December 2001, total deposits increased $5.5 million or 0.3% with brokered certificates of deposit decreasing $88.4 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, decreased $10.6 million since March 2001 and increased $33.1 million since December 2001. Other borrowings, which is primarily advances from Federal Home Loan Banks and subordinated bank notes, increased $120.0 million over March 2001 and increased $45.8 million over December 2001. Capital Total shareholders' equity increased $4.4 million since March 2001 and $7.8 million since December 2001. Accumulated other comprehensive income (loss), primarily net unrealized gain (loss) on investment securities, decreased $14.1 million since March 2001 and decreased $8.9 million since December 2001 Old National's consolidated capital position remains strong as evidenced by the following comparisons of key industry ratios:
Regulatory Guidelines March 31, December 31, ------------------------- --------------- ------------ Minimum Well-Capitalized 2002 2001 2001 Risk-based capital: ------- ---------------- ------ ------ ------ Tier 1 capital to total avg assets (leverage ratio) 4.00% 5.00% 6.71% 6.70% 6.58% Tier 1 capital to risk-adjusted total assets 4.00 6.00 9.70 9.35 9.28 Total capital to risk-adjusted total assets 8.00 10.00 13.35 10.54 12.83 Shareholders' equity to total assets N/A N/A 7.06 7.29 7.04
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 March 31, 2002, contributed to projected cumulative net interest income sensitivity over a 24 month period of -10.0% in a down 200 basis point parallel rate shock and -2.4% in an up 200 basis point parallel rate shock. The Funds Management Committee and the Balance Sheet Management Committee believe that this is acceptable due to the current, unusually low interest rate environment. 13 Results of Operations Net Income Net income for the quarter ended March 31, 2002 was $27.9 million, compared to $22.1 million for the same quarter last year. Diluted earnings per common share were $0.46 for the quarter compared to $0.35 for the same period of the prior year. Return on average assets (ROA) for the quarter was 1.23% for 2002 and 1.01% for 2001. Return on equity (ROE) for the quarter was 17.55% for 2002 and 14.22% for 2001. Growth in net interest income and other income offset some of the additional expenses during the quarter. The improvement in net income reflected Old National's adoption, on January 1, 2002, of Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets" (Statement 142). Statement 142 requires companies to no longer amortize goodwill and intangible assets with indefinite useful lives, but instead test these assets for impairment at least annually in accordance with the provisions of Statement 142. The impact to first quarter earnings of adopting Statement 142 and no longer amortizing goodwill against earnings was an increase in net income of approximately $1.4 million or $0.02 per share when compared to the same period in 2001. The full impact of adopting Statement 142 is expected to result in an increase in net income of approximately $5.4 million or $0.09 per share in 2002. Net Interest Income/Net Interest Margin (taxable equivalent basis) Quarter-to-date net interest income for 2002 was $80.3 million, a 7.6% increase over 2001. The net interest margin for the quarter was 3.81% for 2002 compared to 3.63% for 2001. Provision and Allowance for Loan Losses The provision for loan losses was $7.5 million for the quarter compared to $4.0 million for the same quarter in 2001. The increase in the quarter was due to continued concern about general strength of the economy as well as the changing mix of loans in the portfolio. Old National's net charge-offs were 0.33% of average loans for the current quarter, compared to 0.25% in the same quarter of 2001. The allowance for loan losses is continually monitored and evaluated at the holding company level to provide adequate coverage for probable losses. Old National maintains a comprehensive loan review program to provide independent evaluations of loan administration, credit quality, loan documentation, and adequacy of the allowance for loan losses. The allowance for loan losses to end-of-period loans of 1.30% at March 31, 2002 compared to 1.18% in 2001. The allowance for loan losses covers all under-performing loans by 1.6 times at March 31, 2002 and 1.0 times at December 31, 2001. Noninterest Income Excluding securities gains (losses), noninterest income increased $3.8 million or 14.9% in the three months ended March 31, 2002 as compared to the same period in 2001. Mortgage banking revenue increased $2.4 million for the quarter compared to prior year. These increases are due to increases of mortgage originations given the lower rate environment and continued sales of a significant portion of the mortgage loan production. Insurance premiums and commissions increased $0.8 million or 23.1% over 2001. Noninterest Expense Noninterest expense decreased 1.1% in the first quarter. Salaries and benefits, together the largest individual component of noninterest expense, increased 1.6% in the quarter. This increase was offset largely by a decrease in other expense of $1.3 million during the quarter ended March 31, 2002, due primarily to the decrease of amortization of goodwill resulting from the implementation of Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets". Most other categories of noninterest expense experienced relatively small changes between the years. Provision for Income Taxes The provision for income taxes, as a percentage of pre-tax income, was 23.0% compared to 24.2% in 2001 for the quarter. The decrease compared to the same period in the prior year is due to additional tax-exempt income and state income tax strategies. Item 3. Quantitative and Qualitative disclosures About Market Risk As described in Old National's Form 10-K for the year ended December 31, 2001, Old National's market risk is composed primarily of interest rate risk. There have been no material changes in market risk or the manner in which Old National manages market risk since December 31, 2001. 14 PART II 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 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. The exhibits listed in the Exhibit Index at page 18 of this Form 10-Q are filed herewith or are incorporated by reference herein. (b) Reports on Form 8-K filed during the quarter ended March 31, 2002. NONE 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Old National BANCORP (Registrant) By: /s/ John S. Poelker -------------------------------- John S. Poelker Executive Vice President Chief Financial Officer (Principal Financial Officer) Date: May 14, 2002 16 INDEX OF EXHIBITS Regulation S-K Reference (Item 601) ---------- 3(i) Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3(i) of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, dated August 14, 2000). 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 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 to Form 8-A dated March 1, 1990 and Form 8-A dated March 1, 2000). 10 Material contracts (a) Distribution Agreement (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). (b) Old National Bancorp Employees' Retirement Plan (incorporated by reference to the Registrant's Quarterly (b) Report on Form 10-Q for the quarter ended March 31, 1997).* (c) Employees' Savings and Profit Sharing Plan of Old National Bancorp (incorporated by reference to the (c) 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, and John S. Poelker, as amended, (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998).* (e) The Old National Bancorp 1999 Equity Incentive Plan (incorporated by reference to the Registrant's Form S-8 filed on July 20, 2001). (f) Stock Purchase and Dividend Reinvestment Plan (incorporated by reference to the Registrant's Post-Effective Amendment of the Registration Statement on Form S-3 filed on August 14, 2000). ------ *Management contract or compensatory plan or arrangement 17