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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002.
or
[ ] 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: 0-13585
INTEGRA BANK CORPORATION
(Exact name of registrant as specified in its charter)
INDIANA 35-1632155
(State or other jurisdiction of (IRS Employee
incorporation or organization) Identification No.)
PO BOX 868, EVANSVILLE, INDIANA 47705-0868
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (812) 464-9677
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT AUGUST 1, 2002
(Common stock, $1.00 Stated Value) 17,291,368
INTEGRA BANK CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
PAGE NO.
Item 1. Unaudited Financial Statements
Condensed consolidated statements of financial position-
June 30, 2002, December 31, 2001, and June 30, 2001 3
Condensed consolidated statements of income-
Three months and six months ended June 30, 2002 and 2001 4
Condensed consolidated statements of comprehensive income-
Three months and six months ended June 30, 2002 and 2001 6
Condensed consolidated statements of cash flow-
Six months ended June 30, 2002 and 2001 7
Notes to condensed consolidated financial statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes In Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submissions of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 26
2
PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
INTEGRA BANK CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands, except for per share data)
June 30, December 31, June 30,
2002 2001 2001
- ---------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 82,066 $ 79,178 $ 79,102
Federal funds sold and other short-term investments 43,476 102,918 360,976
- ---------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 125,542 182,096 440,078
Loans held for sale (at lower of cost or fair value) 11,660 58,571 2,635
Securities available for sale 1,002,773 1,010,470 914,479
Loans, net of unearned income 1,602,151 1,599,732 1,770,691
Less: Allowance for loan losses (24,438) (23,868) (27,748)
- ---------------------------------------------------------------------------------------------------------------
Net loans 1,577,713 1,575,864 1,742,943
Premises and equipment 53,578 54,123 52,441
Intangible assets 56,546 57,594 64,583
Other assets 97,805 97,172 67,398
- ---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 2,925,617 $ 3,035,890 $ 3,284,557
===============================================================================================================
LIABILITIES
Deposits:
Non-interest-bearing demand $ 202,470 $ 220,447 $ 199,258
Interest-bearing:
Savings, interest checking and money market accounts 712,236 719,147 724,642
Time deposits of $100,000 or more 208,447 232,938 352,445
Other interest-bearing 681,079 755,880 842,369
- ---------------------------------------------------------------------------------------------------------------
Total deposits 1,804,232 1,928,412 2,118,714
Federal funds purchased and securities sold
under repurchase agreements 262,914 244,032 253,283
Other borrowings 547,196 564,448 605,450
Guaranteed preferred beneficial interests
in the Corporation's subordinated debentures 52,500 52,500 34,500
Other liabilities 26,039 25,401 26,632
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 2,692,881 2,814,793 3,038,579
- ---------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock-1,000 shares authorized - None outstanding
Common stock - $1.00 stated value:-29,000 shares authorized 17,291 17,284 17,396
Capital surplus 125,467 125,334 128,346
Retained earnings 81,040 77,935 93,738
Unearned compensation (209) (270) (331)
Accumulated other comprehensive income 9,147 814 6,829
- ---------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 232,736 221,097 245,978
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,925,617 $ 3,035,890 $ 3,284,557
===============================================================================================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
INTEGRA BANK CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except for per share data)
Three Months Ended Six Months Ended
June 30, June 30,
- ------------------------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans:
Taxable $ 27,557 $ 37,207 $ 56,039 $ 75,265
Tax-exempt 327 629 634 893
Interest and dividends on securities:
Taxable 12,539 13,139 24,420 28,775
Tax-exempt 1,850 1,859 3,683 3,740
Interest on loans held for sale 724 142 1,356 201
Interest on federal funds sold and other investments 150 4,252 736 7,581
- ------------------------------------------------------------------------------------------------------------------------------
Total interest income 43,147 57,228 86,868 116,455
INTEREST EXPENSE
Interest on deposits 11,334 22,663 24,232 45,958
Interest on federal funds purchased and securities sold
under repurchase agreements 2,340 2,854 4,635 6,841
Interest on other borrowings 9,592 10,127 19,118 19,893
- ------------------------------------------------------------------------------------------------------------------------------
Total interest expense 23,266 35,644 47,985 72,692
NET INTEREST INCOME 19,881 21,584 38,883 43,763
Provision for loan losses 180 1,695 830 3,390
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 19,701 19,889 38,053 40,373
- ------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service charges on deposit accounts 2,861 2,374 4,978 4,531
Trust income 532 577 1,055 1,152
Other service charges and fees 1,870 1,197 3,792 2,272
Net securities gains 214 3,404 592 5,401
Other 1,173 2,297 2,894 4,120
- ------------------------------------------------------------------------------------------------------------------------------
Total non-interest income 6,650 9,849 13,311 17,476
NON-INTEREST EXPENSE
Salaries and employee benefits 9,489 9,234 18,910 18,306
Occupancy 1,257 1,117 2,590 2,254
Equipment 1,132 1,266 2,221 2,291
Professional fees 1,135 1,050 2,120 2,120
Communication and transportation 935 906 1,965 2,011
Marketing 553 487 1,007 1,142
Processing 1,214 823 2,472 1,651
Writedown of loans held for sale 496 - 1,439 -
Amortization of intangible assets 580 1,194 1,163 2,267
Other 2,028 2,356 3,827 4,571
- ------------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 18,819 18,433 37,714 36,613
- ------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of accounting change 7,532 11,305 13,650 21,236
Income taxes 1,502 3,222 2,421 6,023
- ------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 6,030 8,083 11,229 15,213
Cumulative effect of accounting change, net of tax - - - (273)
- ------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 6,030 $ 8,083 $ 11,229 $ 14,940
==============================================================================================================================
Unaudited Condensed Consolidated Statements of Income are continued on next
page.
4
INTEGRA BANK CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
(In thousands, except for per share data)
Three Months Ended Six Months Ended
June 30, June 30,
- ------------------------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic:
Income before cumulative effect of accounting change $ 0.35 $ 0.46 $ 0.65 $ 0.88
Cumulative effect of accounting change, net of tax - - - (0.01)
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $ 0.35 $ 0.46 $ 0.65 $ 0.87
==============================================================================================================================
Diluted:
Income before cumulative effect of accounting change $ 0.35 $ 0.46 $ 0.65 $ 0.88
Cumulative effect of accounting change, net of tax - - - (0.01)
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $ 0.35 $ 0.46 $ 0.65 $ 0.87
==============================================================================================================================
Weighted average shares outstanding:
Basic 17,275 17,396 17,272 17,131
Diluted 17,298 17,415 17,284 17,156
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
INTEGRA BANK CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three Months Ended Six Months Ended
June 30, June 30,
- --------------------------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 6,030 $ 8,083 $ 11,229 $ 14,940
Other comprehensive income, net of tax:
Unrealized gain (loss) on securities:
Unrealized gain (loss) arising in period 9,658 (633) 8,921 6,892
Reclassification of realized amounts (127) (2,025) (352) (3,212)
- --------------------------------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on securities 9,531 (2,658) 8,569 3,680
- --------------------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) on derivative hedging instruments arising in period (603) - (236) -
- --------------------------------------------------------------------------------------------------------------------------------
Net unrealized gain (loss), recognized in other comprehensive income 8,928 (2,658) 8,333 3,680
- --------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 14,958 $ 5,425 $ 19,562 $ 18,620
================================================================================================================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
INTEGRA BANK CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
Six Months Ended
June 30,
2002 2001
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 11,229 $ 14,940
Adjustments to reconcile net income to
net cash provided by operating activities:
Federal Home Loan Bank stock dividends (97) (143)
Amortization and depreciation 7,904 6,418
Provision for loan losses 830 3,390
Net securities gains (592) (5,401)
Loss on sale of premises and equipment 13 17
Loss on sale of other real estate owned 31 18
Loss on low-income housing investments 323 346
Amortization of unearned stock compensation 61 36
(Increase) decrease in loans held for sale 28,801 (675)
(Increase) decrease in other assets (2,173) 2,736
Decrease in other liabilities (3,848) (12,155)
- -----------------------------------------------------------------------------------------------------
Net cash flows provided by operating activities 42,482 9,527
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale 206,693 382,453
Proceeds from sales of securities available for sale 294,921 578,181
Purchase of securities available for sale (482,938) (767,731)
Decrease in loans made to customers 14,079 73,524
Purchase of premises and equipment (1,692) (1,826)
Proceeds from sale of premises and equipment 31 16
Proceeds from sale of other real estate owned 1,187 681
Net cash and cash equivalents from acquisitions - 22,769
- -----------------------------------------------------------------------------------------------------
Net cash flows provided by investing activities 32,281 288,067
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits (124,180) (275)
Termination fee on interest rate swap (783) -
Net borrowings (payments) in federal funds purchased and securities sold
under repurchase agreement 18,882 (141,228)
Proceeds from other borrowings - 60,247
Repayment of other borrowings (17,252) (6,435)
Dividends paid (8,124) (7,995)
Repurchase of common stock - (240)
Proceeds from exercise of stock options 140 147
- -----------------------------------------------------------------------------------------------------
Net cash flows used in financing activities (131,317) (95,779)
- -----------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (56,554) 201,815
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 182,096 238,263
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 125,542 $ 440,078
=====================================================================================================
Unaudited Condensed Consolidated Statements of Cash Flow are continued on next
page.
7
INTEGRA BANK CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED)
(In thousands)
Six Months Ended
June 30,
2002 2001
- ---------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
Change in unrealized (gain)/loss on securities available for sale $ 14,408 $ 6,186
Change in deferred taxes attributable to securities available for sale 5,678 (2,507)
Change in fair value of derivative hedging instruments (376) -
Other real estate acquired in settlement of loans 1,416 2,157
Loans transferred from held for sale to loan portfolio 17,799 -
Purchase of subsidiaries:
- ---------------------------------------------------------------------------------------------------
Assets acquired:
Securities $ 99,991
Loans 159,948
Premises and equipment 3,368
Other assets 5,170
Liabilities assumed:
Deposits (247,953)
Federal funds purchased and securities sold under repurchase agreements (10,776)
Other borrowings (11,134)
Other liabilities (2,557)
Shareholders' Equity (18,826)
- ---------------------------------------------------------------------------------------------------
Net cash and cash equivalents from acquisitions $ 22,769
===================================================================================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
8
INTEGRA BANK CORPORATION AND SUBSIDIARIES
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for per share data)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of Integra Bank Corporation and its subsidiaries (the
"Corporation"). At June 30, 2002, the Corporation's subsidiaries consisted of a
commercial bank, a property management company, and two Delaware statutory
business trusts. All significant intercompany transactions are eliminated in
consolidation.
The financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). While the
financial statements are unaudited, they do reflect all adjustments which, in
the opinion of management, are necessary for a fair presentation of the
financial position, results of operations, and cash flows for the interim
periods. All such adjustments are of a normal recurring nature. Pursuant to SEC
rules, certain information and note disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted from these
financial statements unless significant changes have taken place since the end
of the most recent fiscal year. The accompanying financial statements and notes
thereto should be read in conjunction with the Corporation's financial
statements and notes for the year ended December 31, 2001 included in the
Corporation's Annual Report on Form 10-K filed with the SEC.
Because the results from commercial banking operations are so closely related
and responsive to changes in economic conditions, the results for any interim
period are not necessarily indicative of the results that can be expected for
the entire year.
RECENT ACCOUNTING PRONOUNCEMENTS:
SFAS No. 142, Goodwill and Other Intangible Assets, was issued in June 2001 and
requires that goodwill and certain other intangible assets having indefinite
lives no longer be amortized to earnings, but rather be subject to annual
testing for impairment. Intangible assets with a determinable useful life will
continue to be amortized over that period. Effective January 1, 2002, the
Corporation adopted SFAS No. 142. The Corporation has completed its initial
assessment review and determined that there is no impairment of goodwill as of
January 1, 2002. See additional disclosures regarding goodwill and other
intangible assets in Note 5.
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
was issued in August 2001 and excludes from the definition of long-lived assets,
goodwill and other intangibles that are not amortized in accordance with SFAS
No. 142. SFAS No. 144 requires that long-lived assets to be disposed of by sale
be measured at the lower of carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations. SFAS
No. 144 also expands the reporting of discontinued operations to include
components of an entity that have been or will be disposed of rather than
limiting such discontinuance to a segment of a business. This Statement was
effective for the Corporation beginning January 1, 2002 and did not have a
material effect on the Corporation's consolidated results of operations,
financial position or cash flows.
In April 2002, the Financial Accounting Standards Board issued SFAS No. 145,
Rescission of FASB Statements No. 4,44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections. This Statement rescinds FASB Statement No. 4,
Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that
Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. This Statement also rescinds FASB Statement No. 44,
Accounting for Intangible Assets of Motor Carriers. This Statement amends FASB
Statement No. 13, Accounting for Leases, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. This Statement also amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions. This
statement was adopted by the Corporation effective July 1, 2002 and did not have
a material effect on the Corporation's consolidated results of operations,
financial position or cash flows.
The Financial Accounting Standards Board has issued SFAS No. 146, Accounting for
Exit or Disposal Activities. This statement addresses the recognition,
measurement, and reporting of costs associated with exit and disposal
activities, including costs related to terminating contracts and termination
benefits to employees who are involuntarily terminated. This statement
supersedes Emerging Issues Task Force Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring) and requires liabilities
associated with exit and disposal activities to be recognized when incurred.
This statement will be effective for exit or disposal activities of the
Corporation that are initiated after December 31, 2002.
9
NOTE 2. BUSINESS COMBINATIONS
On January 31, 2001, the Corporation issued 1,499,967 shares of common stock in
exchange for all of the outstanding shares of Webster Bancorp, Inc., parent
company of West Kentucky Bank, headquartered in Madisonville, Kentucky. At
January 31, 2001, Webster Bancorp had total assets and shareholders' equity of
$291,246 and $18,826, respectively. Goodwill and core deposit intangible assets
of $6,994 and $2,213, respectively, were recorded in connection with this
transaction. The core deposit intangible asset is being amortized on a
straight-line basis over 12.5 years. The acquisition was accounted for under the
purchase method of accounting, and accordingly, the consolidated financial
statements include the assets and liabilities and results of operations from the
acquisition date forward.
NOTE 3. EARNINGS PER SHARE
The calculation of earnings per share as of June 30 is summarized as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------
Net income $ 6,030 $ 8,083 $11,229 $14,940
Weighted average shares outstanding - Basic 17,275 17,396 17,272 17,131
Stock option adjustment 23 19 12 25
- ---------------------------------------------------------------------------------------------
Average shares outstanding - Diluted 17,298 17,415 17,284 17,156
=============================================================================================
Earnings per share-Basic $ 0.35 $ 0.46 $ 0.65 $ 0.87
Effect of stock options - - - -
- ---------------------------------------------------------------------------------------------
Earnings per share-Diluted $ 0.35 $ 0.46 $ 0.65 $ 0.87
=============================================================================================
NOTE 4. SECURITIES
Amortized cost and fair value of securities classified as available for sale as
of June 30, 2002 and 2001 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
June 2002 Cost Gains Losses Value
- -------------------------------------------------------------------------------------------
U.S. Government agencies $ 32,365 $ - $ 165 $ 32,200
Mortgage-backed securities 685,888 9,975 175 695,688
States & political subdivisions 146,177 5,365 256 151,286
Other securities 121,078 2,765 244 123,599
- -------------------------------------------------------------------------------------------
Total available for sale $ 985,508 $ 18,105 $ 840 $1,002,773
===========================================================================================
Gross Gross
Amortized Unrealized Unrealized Fair
June 2001 Cost Gains Losses Value
- -------------------------------------------------------------------------------------------
U.S. Government agencies $ 210,392 $ 941 $ 483 $ 210,850
Mortgage-backed securities 430,204 7,092 29 437,267
States & political subdivisions 145,256 3,379 588 148,047
Other securities 117,145 1,293 123 118,315
- -------------------------------------------------------------------------------------------
Total available for sale $ 902,997 $ 12,705 $ 1,223 $ 914,479
===========================================================================================
The amortized cost and fair value of the securities as of June 30, 2002, by
contractual maturity, except for mortgaged-backed securities which are based on
estimated average lives, are shown below. Expected maturities may differ from
contractual maturities in mortgage-backed securities, because certain mortgages
may be called or prepaid without penalties.
10
NOTE 4. SECURITIES (CONTINUED)
Maturity of securities available for sale:
Maturity 1 - 5 Years 5 - 10 Years Over 10 Years
Under 1 Year Maturity Maturity Maturity Total
------------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Government agencies $ - - % $ 32,365 4.25% $ - 0.00% $ - - % $ 32,365 4.25%
Mortgage-backed securities 80 7.87% 98,308 7.42% 482,636 6.43% 104,864 5.71% 685,888 6.46%
States & subdivisions 8,743 7.33% 21,495 6.75% 33,322 6.91% 82,617 7.10% 146,177 7.02%
Other securities - - % 500 12.00% 29,863 5.78% 90,715 6.36% 121,078 6.24%
- -----------------------------------------------------------------------------------------------------------------------------------
Amortized Cost $ 8,823 7.33% $ 152,668 6.67% $ 545,821 6.42% $ 278,196 6.33% $ 985,508 6.44%
===================================================================================================================================
Fair Value $ 8,862 $ 158,247 $ 551,412 $ 284,252 $ 1,002,773
===================================================================================================================================
Note: The yield is calculated on a federal-tax-equivalent basis.
At June 30, 2002 and December 31, 2001, the carrying value of securities pledged
to secure public deposits, trust funds, securities sold under repurchase
agreements and other borrowings was $712,309 and $591,383, respectively.
NOTE 5. INTANGIBLE ASSETS
Intangible assets at June 30, 2002 were:
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
---------------------------------------------
Amortizing intangible assets
Goodwill $ 9,464 $ (1,051) $ 8,413
Core deposits 17,080 (4,342) 12,738
---------------------------------------------
26,544 (5,393) 21,151
Non-amortizing intangible assets
Goodwill 35,395 - 35,395
---------------------------------------------
Total intangible assets $ 61,939 $ (5,393) $ 56,546
=============================================
All of the intangible assets relate to the banking operating segment.
Estimated intangible asset amortization expense for each of the succeeding years
is as follows:
Year ending December 31,
2002 $ 2,320
2003 2,320
2004 2,313
2005 1,634
2006 1,634
The following table reflects our results adjusted as though we had adopted SFAS
No. 142 on January 1, 2001:
Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
- -------------------------------------------------------------------------------------
Net income as reported $ 6,030 $ 8,083 $ 11,229 $ 14,940
Goodwill amortization - 758 - 1,482
Tax effect - (36) - (73)
- -------------------------------------------------------------------------------------
Net income as adjusted $ 6,030 $ 8,805 $ 11,229 $ 16,349
=====================================================================================
Net income per share, as reported:
Basic $ 0.35 $ 0.46 $ 0.65 $ 0.87
Diluted 0.35 0.46 0.65 0.87
Net income per share, as adjusted:
Basic $ 0.35 $ 0.51 $ 0.65 $ 0.96
Diluted 0.35 0.51 0.65 0.96
11
NOTE 6. FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Included in Federal funds purchased and securities sold under repurchase
agreements are $175,000 of national market repurchase agreements with original
maturity dates greater than one year. Integra Bank NA (the "Bank") borrows these
funds under a master repurchase agreement. The Bank must maintain collateral
with a value equal to 105% of the repurchase price of the securities
transferred. In addition, the holders have an option on a specific date to put
the collateral back to the Bank at the repurchase price. The following table
summarizes information on these national market repurchase agreements, including
amount outstanding, maturity date, interest rate and the optional repurchase
date:
Optional
Amount Maturity Date Interest Rate Repurchase Date (a)
----------------------------------------------------------------------
$25,000 01/22/06 5.00% 01/22/03
25,000 03/13/06 4.98% 03/12/03
25,000 04/04/06 4.63% 04/04/03
25,000 04/26/06 4.60% 04/26/03
25,000 05/03/06 4.70% 05/03/03
25,000 05/04/06 4.66% 05/07/03
25,000 05/22/06 4.75% 05/22/03
----------------------------------------------------------------------
$175,000 4.76%
(a) The right to repurchase must be exercised on the optional repurchase date,
except for the instrument with a 1/22/06 maturity date where the holder can
exercise this right on the same day of each succeeding three month period
thereafter.
NOTE 7. OTHER BORROWINGS
Included in Other borrowings are $526,561 in advances from Federal Home Loan
Banks to fund investments in mortgage-backed securities, loan programs and to
satisfy certain other funding needs. Integra Bank NA must pledge collateral in
the form of mortgage-backed securities and mortgage loans to secure these
advances. At June 30, 2002, Integra Bank NA had an adequate amount of
mortgage-backed securities and mortgage loans pledged to satisfy the collateral
requirements associated with these borrowings.
FEDERAL HOME LOAN BANK ADVANCES June 30, 2002
- --------------------------------------------------------------
Convertible advances $432,000
Fixed maturity advances 55,000
Amortizing and other advances 39,561
- --------------------------------------------------------------
Total Federal Home Loan Bank advances $526,561
==============================================================
An aggregate of $432,000 of these are advances that may be converted at the
option of the FHLB from fixed rate advances to 3-month LIBOR based floating rate
advances starting on the first conversion date and quarterly thereafter. While
the maturity date of these advances will not change, if any of these advances
are converted into floating rate advances, Integra Bank NA has the option to
prepay such converted advances at par value. The following table summarizes key
information relating to these advances, including amount outstanding, maturity
date, interest rate and first conversion date:
12
NOTE 7. OTHER BORROWINGS (CONTINUED)
Amount Maturity Date Interest Rate First Conversion Date
-------------------------------------------------------------------
$25,000 09/26/05 6.00% 09/26/01
25,000 10/05/05 5.95% 10/05/01
25,000 11/30/05 5.65% 02/28/01
25,000 03/01/06 6.28% 09/04/01
25,000 03/03/06 6.37% 09/04/01
25,000 03/29/06 6.44% 10/01/01
25,000 02/02/07 6.55% 02/04/02
5,000 02/14/07 6.60% 02/14/02
10,000 02/14/07 6.60% 02/14/02
10,000 02/14/07 6.60% 02/14/02
30,000 05/02/07 6.65% 05/06/02
25,000 05/14/07 6.65% 11/14/01
25,000 10/15/07 6.00% 10/15/02
25,000 10/29/07 5.85% 10/28/02
25,000 02/05/08 4.63% 08/05/02
2,000 02/25/08 5.60% 02/25/03
25,000 08/16/10 6.10% 08/16/02
25,000 08/23/10 6.10% 08/21/02
25,000 09/08/10 5.93% 09/09/02
25,000 10/27/10 5.98% 10/27/01
25,000 07/28/07 6.50% No longer convertible
30,000 05/01/09 6.63% No longer convertible
-------------------------------------------------------------------
$487,000 6.16%
Advances totaling $55,000 were not converted following their only conversion
date. These advances carry a weighted average fixed interest rate of 6.57% with
final maturities ranging from 2007 through 2009.
NOTE 8. COMMITMENTS AND CONTINGENCIES
The Corporation and its subsidiaries are parties to legal actions that arise in
the normal course of their business activities. In the opinion of management,
the ultimate resolution of these matters is not expected to have a materially
adverse effect on the financial position or on the results of operations of the
Corporation and its subsidiaries.
The Corporation has guaranteed debt of its property management subsidiary and
the Bank's leasing subsidiary, which totaled $11,181 at June 30, 2002. On the
same date, the Corporation was not in compliance with certain provisions in the
agreements for these loans, including a financial covenant which requires that
the Corporation maintain, on a consolidated basis, a return on average assets
ratio in excess of 1.00%. On July 30, 2002, the leasing subsidiary repaid its
$1,221 debt in full. The lender subsequently waived the defaults relating to the
remaining debt guarantee.
In the normal course of business, there are additional outstanding commitments
and contingent liabilities that are not reflected in the accompanying
consolidated financial statements. The Corporation uses the same credit policies
in making commitments and conditional obligations as it does for other
instruments.
The following table reflects commitments and contingent liabilities not
reflected in the consolidated financial statements:
June 30, 2002 December 31, 2001 June 30, 2001
- --------------------------------------------------------------------------------
Standby letters of credit $ 7,738 $ 31,535 $ 33,797
Commitments to extend credit 270,713 356,239 287,075
13
NOTE 9. INTEREST RATE CONTRACTS
The Corporation had entered into interest rate contracts to limit its exposure
to rising interest costs of repurchase agreements. The Corporation purchased
fixed rate mortgage-backed securities funded by repurchase agreements as a means
of increasing earnings and utilizing excess capital. The interest rate contracts
limited the Corporation's interest rate exposure to owning long-term, fixed rate
assets funded by short-term, variable rate liabilities. At June 30, 2002 and
December 31, 2001, the notional value of the interest rate caps was $75,000 and
$125,000, respectively. The caps are indexed to one-month LIBOR with contract
strike prices of 7.00% and mature prior to 2003. The caps had carrying values
and related market values of $0 at both June 30, 2002 and December 31, 2001.
During 2001, the Corporation entered into interest rate swap agreements totaling
$75,000 notional amount to convert a portion of its liabilities from variable
rate to fixed rate to assist in managing its interest rate sensitivity. The
interest rate swaps required the Corporation to pay a fixed rate of interest
ranging from 4.56% to 4.74% and receive a variable rate based on one-month LIBOR
and expired on or prior to September 10, 2004. The Corporation terminated a
$25,000 notional amount agreement in June 2002. The loss due to termination of
$460, net of tax, is recorded as a component of accumulated other comprehensive
income and will be amortized into earnings over the remaining term of the
agreement. The remaining $50,000 notional amount agreements were terminated in
July 2002. The resulting losses totaling $661, net of tax, will also remain as a
component of accumulated other comprehensive income and be amortized into
earnings over the remaining term of the agreements.
During the second quarter of 2002, the Corporation entered into an interest rate
floor contract. At June 30, 2002, the notional amount was $200,000. The interest
rate floor is indexed to one-month LIBOR with a contract strike price of 2.00%
and terminates May 17, 2004. This derivative transaction is accounted for as a
free-standing derivative with cash flows and changes in market value recorded in
current period earnings.
The Corporation is exposed to losses if a counterparty fails to make its
payments under a contract in which the Corporation is in a receiving status.
Although collateral or other security is not obtained, the Corporation 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.
14
NOTE 10. SEGMENT INFORMATION
The Corporation operates one major line of business, Banking. Banking services
include various types of deposit accounts; safe deposit boxes; safekeeping of
securities; automated teller machines; consumer, mortgage and commercial loans;
mortgage loan sales and servicing; letters of credit; corporate cash management
services; brokerage and annuity products and services; and complete personal and
corporate trust services. Other includes the operating results of the Parent
Company and its non-bank subsidiaries, including Integra Capital Trust I,
Integra Capital Trust II and its property management company, Twenty One
Southeast Third Corporation. The Corporation evaluates performance based on
profit or loss from operations before income taxes excluding nonrecurring gains
and losses. The following tables present selected segment information for
Banking and other operating units.
Six months ended June 30, 2002 Banking Other Eliminations Total
- ----------------------------------------------------------------------------------------------------------------------------
Interest income $ 86,720 $ 2,680 $ (2,532) $ 86,868
Interest expense 46,007 4,510 (2,532) 47,985
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income 40,713 (1,830) - 38,883
Provision for loan losses 830 - - 830
Non-interest income 13,188 12,719 (12,596) 13,311
Non-interest expense 37,443 303 (32) 37,714
- ----------------------------------------------------------------------------------------------------------------------------
Income before taxes and cumulative effect of accounting change $ 15,628 $ 10,586 $ (12,564) $ 13,650
============================================================================================================================
Other segment information:
Segment assets at June 30, 2002 $2,908,113 $ 356,595 $ (339,091) $2,925,617
============================================================================================================================
Six months ended June 30, 2001 Banking Other Eliminations Total
- ----------------------------------------------------------------------------------------------------------------------------
Interest income $ 116,200 $ 2,029 $ (1,774) $ 116,455
Interest expense 70,381 4,084 (1,773) 72,692
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income 45,819 (2,055) (1) 43,763
Provision for loan losses 3,390 - - 3,390
Non-interest income 17,505 16,570 (16,599) 17,476
Non-interest expense 36,229 414 (30) 36,613
- ----------------------------------------------------------------------------------------------------------------------------
Income before taxes and cumulative effect of accounting change $ 23,705 $ 14,101 $ (16,570) $ 21,236
============================================================================================================================
Other segment information:
Segment assets at June 30, 2001 $3,276,561 $ 352,152 $ (344,156) $3,284,557
============================================================================================================================
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Dollar amounts in thousands except for share data)
INTRODUCTION
The discussion and analysis which follows is presented to assist in the
understanding and evaluation of the financial condition and results of
operations of Integra Bank Corporation and its subsidiaries as presented in the
preceding condensed consolidated financial statements and related notes. The
text of this review is supplemented with various financial data and statistics.
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements to be materially different from the results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: the outcome of efforts to sell
loans; general, regional and local economic conditions which may affect interest
rates and net interest income; credit risks and risks from concentrations
(geographic and by industry) within the loan portfolio; the outcome of efforts
to reduce interest rate risk within the investment portfolio; changes in
regulations affecting financial institutions; and competition. The Corporation
does not intend to update information in any forward-looking statements it
makes.
OVERVIEW
Net income for the quarter ended June 30, 2002 was $6,030 compared to $8,083 for
the same period of 2001. Earnings per share, on a diluted basis, were $.35 for
the second quarter of 2002 compared to $.46 in 2001.
Net income for the six months ended June 30, 2002 was $11,229 compared to
$14,940 for the same period of 2001. Earnings per share, on a diluted basis,
were $.65 for the first half of 2002 compared to $.87 in 2001. Effective January
1, 2001, the Corporation adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. In accordance with the transition provisions
of SFAS No. 133, the Corporation recorded in the first quarter of 2001 a
cumulative-effect-type transaction loss, net of tax, of $273, or $.01 per
diluted share, to recognize excess of carrying value over the fair value of all
interest rate caps. Excluding the cumulative effect of accounting change, net
income was $15,213, or $.88 per diluted share, for the six months ended June 30,
2001.
Net interest income decreased $1,703, or 7.9%, during the three months ended
June 30, 2002 compared to the three months ended June 30, 2001. Although the net
interest margin improved to 3.17% during the second quarter of 2002 from 2.92%
during the second quarter of 2001, this was partially offset by a $475,570
decline in average earning assets, resulting in the lower net interest income.
Provision for loan losses was $180 for the three months ended June 30, 2002
compared to $1,695 for the same period one year ago. Non-interest income
decreased $3,199 compared to the second quarter of 2001. Excluding securities
gains, non-interest income was approximately equal to the same period last year.
Non-interest expenses increased $386, or 2.1%, for the same period.
Annualized returns on average assets and equity for the three months ended June
30, 2002 were 0.83% and 10.74%, respectively, compared with 0.96% and 13.43% in
the same period of 2001.
On a year-to-date basis, net interest income decreased $4,880, or 11.2%,
compared to the first six months of 2001. Although the net interest margin
improved to 3.07% during the first half of 2002 from 3.00% during the first half
of 2001, this was partially offset by a $382,407 decline in average earning
assets, which resulted in the lower net interest income. Provision for loan
losses was $830 for the six months ended June 30, 2002 compared to $3,390 for
the same period one year ago. Non-interest income decreased $4,165 compared to
the first six months of 2001. Excluding securities gains, non-interest income
increased $644, or 5.3%. Non-interest expenses increased $1,101, or 3.0%, for
the same period. The results for the six months ended June 30, 2001 include the
results of the January 31, 2001 purchase of Webster Bancorp, Inc. from the
acquisition date forward.
Annualized returns on average assets and equity for the first half of 2002 were
0.77% and 10.06%, respectively, compared with 0.91% and 12.82%, respectively in
the same period of 2001.
During the fourth quarter of 2001, the Corporation identified and transferred
$78,312 of performing and non-performing loans from the loan portfolio to loans
held for sale. These loans, carried at the lower of cost or fair value, were
written down by $26,047 to $52,265, their then fair value, prior to being
reclassified from the loan portfolio into loans held for sale. During the first
half of 2002, the Corporation sold approximately $24,152 of the loans held for
sale and transferred $17,799 of performing loans back into the loan portfolio.
In addition, during the same period the Corporation wrote down the held for sale
portfolio by a total of $1,439. This writedown was necessitated due to the rapid
deterioration of a significant commercial credit in the portfolio, lower
realization on the loans sold and lower estimated realization on the remaining
loans held for sale. As of June 30, 2002, approximately $8,463 of residential
real estate and small business commercial loans remain held for sale. The
Corporation expects to substantially complete the sale of the remaining loans
during the second half of 2002.
16
NET INTEREST INCOME
Net interest income was $19,881 for the three months ended June 30, 2002
compared with $21,584 for the same period in 2001. Average earning assets were
$2,667,107 for the second quarter of 2002 compared to $3,142,677 for the second
quarter of 2001. Average interest-bearing liabilities were $2,462,741 and
$2,909,021 for the three months ended June 30, 2002 and 2001, respectively. The
net interest margin for the three months ended June 30, 2002 was 3.17% compared
to 2.92% for the same period one year ago. The decrease in net interest income
was the result of the 15.1% decline in average earning assets partially offset
by the 25 basis point improvement in net interest margin. During the second
quarter of 2002, $255 in interest income was recovered on a non-performing loan
that had been sold.
Average earning assets decreased $475,570 from the second quarter of 2001
compared with the second quarter of 2002. Average loans decreased $180,703, or
10.1%; average investment securities increased $40,608, or 4.1%; and other
earning assets decreased $335,475 during this period. The mix of earning assets
changed with the percentage of average loans to average earning assets
increasing slightly from 57.1% during the second quarter of 2001 to 60.5% during
the same period of 2002. Average investment securities as a percentage of
average earning assets increased from 31.3% to 38.4% during the same period.
Average loans were $1,612,422 during the second quarter of 2002 compared to
$1,793,125 during the second quarter of 2001. The decrease is primarily the
result of accelerated loan prepayments and refinancings. The significant drop in
rates in 2001 increased prepayments in both fixed-rate loan portfolios,
including residential mortgages and mortgage-backed investment securities, and
this trend continued into 2002. Interest income on loans decreased 24.7% during
the second quarter of 2002 compared to 2001 as a result of a decrease in average
balances and a 141 basis point decline in loan yields. The yield on loans was
7.15% for the second quarter of 2002 compared to 8.56% for the same period of
2001.
Average investment securities were $1,022,947 during the second quarter of 2002
compared to $982,339 during the second quarter of 2001. The yield on securities
declined to 6.08% during the second quarter of 2002 from 6.52% during the same
period in 2001. While the average balances increased this quarter compared to
last year, the reinvestment of cash proceeds received from sales or accelerated
prepayments of securities occurred during the declining rate environment of 2001
and the first half of 2002.
Average deposits decreased from $2,194,998 during the second quarter of 2001 to
$1,803,554 during the second quarter of 2002. Non-interest-bearing deposits
increased $12,996, or 6.9%, while interest-bearing deposits decreased $404,440,
or 20.1%, during this period. The declining rate environment experienced
throughout 2001 and a marketing effort focused on reducing single product
relationships shifted depositors' preferences to short-term liquid deposit
products or annuities as opposed to long-term certificate of deposits. The mix
of average deposits illustrates this shift in customer preferences as the
percentage of non-interest-bearing deposits to total deposits increased to 11.1%
during the second quarter of 2002 from 8.6% during the same period of 2001. This
mix change provides the Corporation with additional interest free-funds,
reducing interest expense. The declining interest rate environment, shift in
customer preferences and change in deposit product mix resulted in the cost of
deposits decreasing to 2.84% during the second quarter of 2002 from 4.53% during
the second quarter of 2001.
Other interest-bearing liabilities consist primarily of federal funds purchased,
repurchase agreements, Federal Home Loan Bank advances and other long-term
borrowings. The average balance declined $41,839, or 4.6%, from $901,748 during
the second quarter of 2001 to $859,909 for the same period of 2002. The cost of
funds declined 20 basis points during this period, to 5.57% for the second
quarter of 2002. The decline was the result of repricing of federal funds
purchased and short-term repurchase agreements to lower market rates throughout
2001.
On a year-to-date basis, net interest income was $38,883 for the six months
ended June 30, 2002 compared with $43,763 for the same period in 2001. Average
earning assets were $2,715,467 for the first six months of 2002 compared to
$3,097,874 for the first six months of 2001. Average interest-bearing
liabilities were $2,506,834 and $2,866,949 for the six months ended June 30,
2002 and 2001, respectively. The net interest margin for the six months ended
June 30, 2002 was 3.07% compared to 3.00% for the same period one year ago. The
deterioration in net interest income was the result of the 12.3% decline in
average earning assets partially offset by the 7 basis point improvement in net
interest margin.
Average earning assets decreased $382,407 from the first six months of 2001
compared with the first six months of 2002. Average loans were $1,629,107 during
the first six months of 2002 compared to $1,783,754 during the first six months
of 2001, a decrease of $154,647 or 8.7%. Interest income on loans decreased
24.0% during the first six months of 2002 compared to 2001 as a result of the
decrease in average balances and a 147 basis point decline in loan yields. The
yield on loans was 7.21% for the first six months of 2002 compared to 8.68% for
the same period of 2001. Average investment securities increased $2,682, or
0.3%, to $1,013,583 during the first half of 2002 compared to $1,010,901 during
the first half of 2001. The yield on securities declined to 6.04% during the
first half of 2002 from 6.88% during the first half of 2001. Other earning
assets decreased $230,442, or 76.0% during the first half of 2002 compared to
the same period of 2001. The mix of earning assets remained fairly constant with
the percentage of average loans to average earning assets increasing slightly
from 57.6% during the first half of 2001 to 60.0% during the same period of
2002. Average investment securities as a percentage of average earning assets
increased from 32.6% to 37.3% during the same period.
17
Average deposits decreased from $2,148,243 during the first six months of 2001
to $1,848,480 during the first six months of 2002. Non-interest-bearing deposits
increased $20,786, or 11.3%, while interest-bearing deposits decreased $320,549,
or 16.3%, during this period. The declining rate environment experienced
throughout 2001 and an emphasis on broader customer product usage shifted
depositors' preferences to short-term liquid deposit products or annuities as
opposed to long-term certificate of deposits. The average deposits mix shifted
as the percentage of non-interest-bearing deposits to total deposits increased
to 11.1% during the first half of 2002 from 8.6% during the same period of 2001.
The cost of deposits decreased to 2.97% during the first half of 2002 from 4.72%
during the first half of 2001. Average other interest-bearing liabilities
declined $39,565, or 4.4%, from $902,620 during the first six months of 2001 to
$863,055 for the same period of 2002. The cost of funds declined 42 basis points
during this period, from 5.97% to 5.55%.
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
Net Interest Margin Analysis 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------
Yields (federal-tax-equivalent)
Loans 7.15% 8.56% 7.21% 8.68%
Securities 6.08 6.52 6.04 6.88
Other earning assets 1.89 4.64 2.04 5.04
- -----------------------------------------------------------------------------------------------------------------
Total earning assets 6.67 7.46 6.63 7.73
Cost of funds
Interest bearing deposits 2.84 4.53 2.97 4.72
Other interest bearing liabilities 5.57 5.77 5.55 5.97
Total interest bearing liabilities 3.79 4.91 3.86 5.11
- -----------------------------------------------------------------------------------------------------------------
Total interest expense to earning assets 3.50 4.55 3.56 4.73
- -----------------------------------------------------------------------------------------------------------------
Net interest margin 3.17% 2.92% 3.07% 3.00%
=================================================================================================================
NON-INTEREST INCOME
Non-interest income for the three months ended June 30, 2002, was $6,650
compared to $9,849 from the same period in 2001. Securities transactions
resulted in gains of $214 during the second quarter of 2002 compared with $3,404
in the same period of 2001. Excluding securities gains, non-interest income for
the three months ended June 30, 2002 totaled $6,436 compared to $6,445 for the
same period of 2001.
Non-interest income for the six months ended June 30, 2002, was $13,311 compared
to $17,476 from the same period in 2001. Securities transactions resulted in
gains of $592 during the first six months of 2002 compared with $5,401 in the
same period of 2001. Excluding securities gains, non-interest income for the six
months ended June 30, 2002 totaled $12,719, an increase of $644, or 5.3%,
compared to the same period of 2001.
Three Months Ended Six Months Ended
June 30, Increase June 30, Increase
Non-Interest Income 2002 2001 (Decrease) 2002 2001 (Decrease)
- ---------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts $ 2,861 $ 2,374 $ 487 $ 4,978 $ 4,531 $ 447
Trust income 532 577 (45) 1,055 1,152 (97)
Other service charges and fees 1,870 1,197 673 3,792 2,272 1,520
Net securities gains 214 3,404 (3,190) 592 5,401 (4,809)
Other 1,173 2,297 (1,124) 2,894 4,120 (1,226)
- ---------------------------------------------------------------------------------------------------------------------
Total non-interest income $ 6,650 $ 9,849 $ (3,199) $ 13,311 $ 17,476 $ (4,165)
=====================================================================================================================
Service charges on deposit accounts increased $487 or 20.5% during the second
quarter of 2002 compared to the same period one year ago due to higher activity
fees, new fee sources, including a new overdraft protection product, and
improved efforts to collect a greater percentage of assessed fees. Service
charges increased $447, or 9.9% during the first half of 2002 compared to the
same period one year ago.
Trust revenues, based primarily on the market values of assets under management,
totaled $532 for the second quarter of 2002 compared to $577 for the second
quarter of 2001. The market value of assets under management declined from
$403,672 at June 30, 2001
18
to $373,115 at June 30, 2002 as a result of the general decline in investment
values over the past year. Trust revenues totaled $1,055 for the first half of
2002 compared to $1,152 for the first half of 2001.
Other service charges and fees increased $673, from $1,197 for the second
quarter of 2001 to $1,870 for the second quarter of 2002. Mortgage servicing
fees for the three months ended June 30, 2002 were $176 compared to $111 for the
comparable period of 2001 due to demand for new and refinanced residential
mortgages. Revenues from the sale of brokerage and annuity products increased
$375 during the second quarter of 2002 compared to 2001 as the Corporation
offered new products to customers. A significant portion of this revenue
increase was due to certificate of deposit maturities moving to annuity products
in the current low-rate environment. Insurance commissions increased $62 during
the second quarter of 2002 compared to one year ago as the Corporation placed a
greater emphasis on the sale of credit related insurance. Card-related fees
increased $162 to $671 from the second quarter of 2001 due to increased sales
efforts of credit and debit cards and the continued increasing preference of
these cards as the choice of payments over checks. On a year-to-date basis,
other service charges and fees increased $1,520, from $2,272 for the first six
months of 2001 to $3,792 for the first six months of 2002. Mortgage servicing
fees increased $351, brokerage and annuity commissions $633, insurance
commissions increased $176 and card-related fees increased $342 during this
period.
Other non-interest revenues decreased $1,124 during the second quarter ended
June 30, 2002 from the comparable period of 2001. Revenues from writing covered
call options and net securities trading account gains totaled $1,259 and $266,
respectively, during the second quarter of 2001. There was no revenue from these
activities in the second quarter of 2002. Effective April 30, 2002, the
Corporation has ceased writing covered call option contracts. Revenues from
equipment leased to others increased $343 during the second quarter of 2002
compared to 2001. On a year-to-date basis, other non-interest revenues decreased
$1,226 during the six months ended June 30, 2002 from the comparable period of
2001. Net securities trading account gains declined from $1,112 in the first
half of 2001 to $97 in the first half of 2002. Revenues from writing covered
call options totaled $402 in the first half of 2002 compared to $1,652 during
the same period of 2001. Revenues from equipment leased to others and the sale
of loans increased $572 and $127, respectively, during the first half of 2002
compared to 2001. Income from bank-owned life insurance increased $205 during
the first half of 2002 compared to the first half of 2001, due primarily to the
receipt of $178 of death benefits during the first quarter of 2002.
NON-INTEREST EXPENSE
Non-interest expense increased $386, or 2.1%, in the second quarter of 2002
compared to the same period in 2001. During the second quarter of 2002, $496 of
expenses related to the loans held for sale were incurred. Excluding this
write-down, non-interest expense decreased 0.6% from the second quarter of 2001.
On a year-to-date basis, non-interest expense increased $1,101, or 3.0%, in the
first six months of 2002 compared to the first six months of 2001. The first
half of 2002 included $1,439 of expenses related to the loans held for sale.
Excluding this write-down, non-interest expense decreased 0.9% from the first
half of 2001.
Three Months Ended Six Months Ended
June 30, Increase June 30, Increase
Non-Interest Expense 2002 2001 (Decrease) 2002 2001 (Decrease)
- ------------------------------------------------------------------------------------------------------------
Salaries and employee benefits $ 9,489 $ 9,234 $ 255 $18,910 $18,306 $ 604
Occupancy 1,257 1,117 140 2,590 2,254 336
Equipment 1,132 1,266 (134) 2,221 2,291 (70)
Processing 1,214 823 391 2,472 1,844 628
Professional fees 1,135 1,050 85 2,120 2,120 -
Communication and transportation 935 906 29 1,965 2,011 (46)
Marketing 553 487 66 1,007 1,142 (135)
Writedown of loans held for sale 496 - 496 1,439 - 1,439
Amortization of intangible assets 580 1,194 (614) 1,163 2,267 (1,104)
Other 2,028 2,356 (328) 3,827 4,378 (551)
- ------------------------------------------------------------------------------------------------------------
Total non-interest expense $18,819 $18,433 $ 386 $37,714 $36,613 $ 1,101
============================================================================================================
Salaries and employee benefits increased $255, or 2.8%, for the three months
ended June 30, 2002 compared to 2001. Performance-based incentives and
commissions increased $429 to $642 during the second quarter of 2002 and
represented 6.8% of salaries and employee benefits expense compared to 2.3% for
the same period of 2001. The Corporation is initiating performance-based awards
tied to sales of fee-based services and origination of loan and deposit
products. Salaries and employee benefits increased $604, or 3.3%, for the
six-month period in 2002 compared to 2001.
19
Occupancy expense increased $140, or 12.5% and $336, or 14.9% during the three
and six months ended June 30, 2002, respectively, compared to 2001. The increase
is driven in large part by the acquisition of six branches from Webster Bancorp,
Inc. during the first quarter of 2001 and the opening of three new offices since
January 1, 2001.
Processing expense increased $391, or 47.5%, during the second quarter of 2002
compared to 2001 as the Corporation continues to invest in technology to provide
additional services and products to its expanding customer base. Processing
expense increased $628 during the first six months of 2002 compared to the same
period one-year prior.
As mentioned above, the Corporation recorded expenses of $496 and $1,439 during
the three and six months ended June 30, 2002, respectively, related to its
portfolio of loans held for sale. This portfolio is carried at the lower of cost
or fair value. The rapid deterioration in one specific commercial loan and lower
estimated realization on the remaining loans held for sale resulted in the
writedown.
Amortization of intangible assets decreased $614 and $1,104 for the three months
and six months ended June 30, 2002, respectively, compared to the same period of
2001 as a result of the Corporation adopting SFAS No. 142, Goodwill and Other
Intangible Assets. Goodwill and certain other intangible assets having
indefinite lives are no longer amortized to earnings, but rather are subject to
testing for impairment.
Other non-interest expenses decreased $328 during the second quarter of 2002
compared to 2001. Expenses related to equipment leased to others increased $132
during this period. Other real estate owned expenses decreased $139 during the
second quarter of 2002 compared to one-year prior. Training and travel expenses
in the second quarter of 2002 decreased as the Corporation was training new
employees and converting its recent branch and bank acquisitions to a common
operating system and process during the 2001 period. Other non-interest expenses
decreased $551 during the first half of 2002 compared to 2001. Even as levels of
business activity increase and new products and services are offered to
customers, the Corporation continues to focus on expense control.
INCOME TAX EXPENSE
Income tax expense was $1,502 for the three months ended June 30, 2002 compared
with $3,222 for the same period in 2001. The effective tax rates were 19.9% and
28.5% for the three months ended June 30, 2002 and 2001, respectively. For the
six months ended June 30, 2002, income tax expense and the effective tax rate
was $2,421 and 17.7%, respectively, compared with $6,023 and 28.4%,
respectively, for the same period in 2001. Income from tax exempt or
tax-preferred sources, including interest on municipal loans and investments,
corporate-owned life insurance and dividends on tax-preferred securities
increased in terms of percent of total income in the first half of 2002 compared
to the first half of 2001.
FINANCIAL POSITION
Total assets at June 30, 2002 were $2,925,617 a decrease of $110,273 compared to
$3,035,890 at December 31, 2001. Total assets were $3,284,557 at June 30, 2001.
SECURITIES
Total investment securities comprised 37.7% of earning assets at June 30, 2002
compared to 36.5% at December 31, 2001 and 30.0% at June 30, 2001. They
represent the second largest earning asset component after loans. Securities
increased $88,294 to $1,002,773 at June 30, 2002 from one-year prior. The
portfolio has continued to shift toward investments in mortgage-backed
securities, which generally have higher yields than comparable U.S. Treasury
securities. Inherent in mortgage-backed securities is prepayment risk, which
occurs when borrowers prepay their obligations due to market fluctuations and
rates. Prepayment rates generally can be expected to increase during periods of
lower interest rates as some of the underlying mortgages are refinanced at lower
rates. Mortgage-backed securities represented 69.4% of the investment portfolio
at June 30, 2002 as compared to 65.1% and 47.8% at December 31, 2001 and June
30, 2001, respectively.
LOANS
Total loans at June 30, 2002, were $1,602,151 compared to $1,599,732 and
$1,770,691 at December 31, 2001 and June 30, 2001, respectively. As of December
31, 2001, the Corporation identified $78,312 of performing and non-performing
loans which it intended to sell. This portfolio consisted of $68,964 of
commercial loans, $8,689 of residential mortgage loans and $659 of consumer
loans. The loans identified for sale were written down to fair value, resulting
in charge-offs totaling $26,047, prior to being reclassified from the loan
portfolio into loans held for sale. Loans secured by real estate have declined
$26,621 or 2.4% since year-end 2001 as customers continue to take advantage of
lower mortgage rates and refinancing opportunities. Commercial and industrial
loans declined $2,762 or 0.8% since year-end. While the loan volume has
declined, the Corporation's improved underwriting process has resulted in higher
quality commercial loans being originated. Consumer loans increased $19,864 or
15.7% since December 31, 2001. Demand for home equity based loans remains strong
for the Corporation.
20
LOAN PORTFOLIO
June 30, December 31, June 30,
2002 2001 2001
- -----------------------------------------------------------------------------
Real estate loans $1,091,986 $1,118,607 $1,216,884
Commercial, industrial, and
agricultural loans 323,658 326,420 373,309
Economic development loans and
other obligations of state and
political subdivisions 29,107 19,980 30,170
Consumer loans 146,001 126,137 135,566
Leasing 7,668 8,004 13,332
All other loans 3,731 584 1,430
- -----------------------------------------------------------------------------
Total loans $1,602,151 $1,599,732 $1,770,691
=============================================================================
ASSET QUALITY
The allowance for loan losses is the amount, which, in management's opinion, is
adequate to absorb probable inherent loan losses as determined by management's
ongoing evaluation of the loan portfolio. The evaluation by management is based
upon consideration of various factors including growth of the portfolio, an
analysis of individual credits, adverse situations that could affect a
borrower's ability to repay, prior and current loss experience, the results of
recent regulatory examinations and current economic conditions. Loans that are
deemed to be uncollectible are charged-off to the allowance, while recoveries of
previously charged-off amounts are credited to the allowance. A provision for
loan losses is expensed to operations at levels deemed necessary to provide
assurance that the allowance for loan losses is sufficient to absorb probable
losses based on management's ongoing evaluation of the loan portfolio.
The allowance for loan losses was $24,438 at June 30, 2002, representing 1.53%
of total loans compared with $23,868 and $27,748 at December 31, 2001 and June
30, 2001, respectively, which represented 1.49% and 1.56% of total loans,
respectively. Annualized net charge-offs to average loans was .02% during the
second quarter of 2002 compared to .66% for the same period of 2001. On a
year-to-date basis, annualized net charge-offs to average loans was .03% during
the first six months of 2002 compared to .55% for the same period of 2001.
Recoveries of amounts exceeding the carrying value of held for sale loans
totaling $950 were recorded in the second quarter of 2002. In addition, the
Corporation recorded a $400 recovery on one specific commercial credit that
resulted in the significantly lower net charge-off rate for the first quarter of
2002. Excluding these items, the net charge-off ratio would have been 0.26% and
0.20% for the three months and for the six months ended June 30, 2002,
respectively. The provision for loan losses totaled $830 for the first half of
2002, exceeding net charge-offs by $570. During the same period of 2001, the
provision for loan losses was $3,390. The allowance for loan losses to
non-performing loans was 117.9% at June 30, 2002 compared to 98.5% at December
31, 2001 and 84.3% at June 30, 2001.
SUMMARY OF ALLOWANCE FOR LOAN LOSSES
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------
Beginning Balance $ 24,330 $ 29,004 $ 23,868 $ 25,264
Allowance associated with purchase acquisitions - - - 4,018
Loans charged off (1,432) (3,261) (2,260) (5,662)
Recoveries 1,360 310 2,000 738
Provision for loan losses 180 1,695 830 3,390
- ---------------------------------------------------------------------------------------------------------
Ending Balance $ 24,438 $ 27,748 $ 24,438 $ 27,748
=========================================================================================================
Percent of total loans 1.53% 1.56% 1.53% 1.56%
=========================================================================================================
Annualized % of average loans:
Net charge-offs 0.02% 0.66% 0.03% 0.55%
Provision for loan losses 0.05% 0.38% 0.10% 0.38%
As of June 30, 2002 total non-performing assets decreased $3,357 from December
31, 2001. Non-performing loans, consisting of nonaccrual, restructured and 90
days or more past due loans, were 1.29%, 1.51% and 1.86% of total loans at June
30, 2002, December 31, 2001
21
and June 30, 2001, respectively. The improvement in the non-performing loan to
total loan ratio is due to better management of problem loans and the
Corporation's sale of non-performing loans.
Listed below is a comparison of non-performing assets.
June 30, December 31, June 30,
2002 2001 2001
- ------------------------------------------------------------------------------------------------------------
Nonaccrual loans $17,709 $21,722 $30,027
Restructured loans - - -
90 days or more past due loans 3,022 2,500 2,882
- ------------------------------------------------------------------------------------------------------------
Total non-performing loans 20,731 24,222 32,909
Other real estate owned 3,000 2,866 2,835
- ------------------------------------------------------------------------------------------------------------
Total non-performing assets $23,731 $27,088 $35,744
============================================================================================================
Ratios:
Non-performing Loans to Loans 1.29% 1.51% 1.86%
Non-performing Assets to Loans and Other Real Estate Owned 1.48% 1.69% 2.01%
Allowance for Loan Losses to Non-performing Loans 117.88% 98.54% 84.32%
DEPOSITS
Total deposits were $1,804,232, at June 30, 2002, compared to $1,928,412 and
$2,118,714 at December 31, 2001 and June 30, 2001, respectively. Total
transaction accounts, including non-interest-bearing and interest-bearing demand
deposits, increased $5,880, or 1.0% to $592,650 since year-end. Money market
accounts and savings deposits decreased by $30,768, or 8.7% during this same
period. During the declining interest rate environment experienced in 2001,
customer preferences shifted to shorter term, liquid deposit products and to
deposit alternatives, including annuities. Time deposits greater than $100,000
have declined $24,491, or 10.5%, during this period as the Corporation has not
aggressively priced these products during the current rate environment. Other
time deposits decreased $74,801, or 9.9%, from December 31, 2001 to June 30,
2002.
June 30, December 31, June 30,
Deposits 2002 2001 2001
- -----------------------------------------------------------------------------------------
Non-interest-bearing demand $ 202,470 $ 220,447 $ 199,258
Interest-bearing demand 390,180 366,323 356,357
Money market 187,708 230,242 243,176
Savings 134,348 122,582 125,109
Time deposits of $100,000 or more 208,447 232,938 352,445
Other time deposits 681,079 755,880 842,369
- -----------------------------------------------------------------------------------------
Total deposits $1,804,232 $1,928,412 $2,118,714
=========================================================================================
BORROWINGS
Federal funds purchased and securities sold under repurchase agreements totaled
$262,914 at June 30, 2002 compared to $244,032 and $253,283 at December 31, 2001
and June 30, 2001, respectively. Securities sold under repurchase agreements are
collateralized transactions acquired in national markets as well as from the
Corporation's commercial customers as part of a cash management service. These
repurchase agreements include an aggregate $175 million with final maturity
dates that occur during the first five months of 2006. These long term
repurchase agreements have a weighted average interest rate of 4.76%. The Bank
must maintain collateral equal to 105% of the repurchase price of the securities
transferred. In addition, the holders of $150 million of these repurchase
agreements have an option on a specific date during the first five months of
2003 to put the collateral back to the Bank at the repurchase price. In
addition, the holders of another $25 million of these repurchase agreements have
the option in January 2003 and quarterly thereafter to put the collateral back
to the Bank. If any or all of these options are exercised by the holders, the
Bank has sufficient liquidity to repurchase the collateral.
Other borrowings totaled $547,196 at June 30, 2002 compared to $564,448 and
$605,450 at December 31, 2001 and June 30, 2001, respectively. Other borrowings
generally provide longer term funding and include advances from the Federal Home
Loan Bank (FHLB) and term notes from other financial institutions. Included in
Other borrowings are $527 million in advances from the FHLB to fund investments
in mortgage-backed securities, loan programs and to satisfy certain other
funding needs. The Bank must pledge collateral in the form of mortgage-backed
securities and mortgage loans to secure these advances. At June 30, 2002, the
Bank had an adequate amount of mortgage-backed securities and mortgage loans
pledged to satisfy the collateral requirements associated with these
22
borrowings. An aggregate of $432 million of the FHLB advances may be converted
at the sole option of the FHLB from fixed rate advances to 3-month LIBOR based
floating rate advances starting on the first conversion date that occurs during
the period from February 2001 through October 2002 and quarterly thereafter.
While the maturity date of these advances will not change, if any of these
advances are converted into floating rate advances, the Bank has the option to
prepay any of such converted advances at par value. These advances carry a
weighted average interest rate of 6.11% with final maturities occurring from
2005 through 2010. In addition, advances totaling $55 million were not converted
following their only conversion date. These advances carry a weighted average
interest rate of 6.57% with final maturities in 2007 and in 2009.
CAPITAL RESOURCES AND LIQUIDITY
The Corporation and its subsidiary bank have capital ratios that substantially
exceed all regulatory requirements, including the regulatory guidelines for
"well-capitalized" that apply only to the Corporation's subsidiary bank, Integra
Bank NA. The regulatory capital ratios for Integra Bank Corporation and Integra
Bank NA are shown below.
Regulatory Guidelines
--------------------------
Minimum Well- June 30, December 31, June 30,
Requirements Capitalized 2002 2001 2001
- ---------------------------------------------------------------------------------------------------------------------
Integra Bank Corporation:
Total Capital (to Risk-Weighted Assets) 8.00% 13.63% 12.96% 10.53%
Tier 1 Capital (to Risk-Weighted Assets) 4.00% 12.38% 11.71% 9.30%
Tier 1 Capital (to Average Assets) 4.00% 7.71% 6.98% 6.34%
Integra Bank NA:
Total Capital (to Risk-Weighted Assets) 8.00% 10.00% 12.44% 11.32% 10.96%
Tier 1 Capital (to Risk-Weighted Assets) 4.00% 6.00% 11.19% 10.07% 9.72%
Tier 1 Capital (to Average Assets) 4.00% 5.00% 6.98% 5.97% 6.61%
Liquidity of a banking institution reflects the ability to provide funds to meet
loan requests, to accommodate possible outflows in deposits and other
borrowings, and to take advantage of interest rate market opportunities. Funding
loan requests, providing for liability outflows, and managing interest rate
fluctuations require continuous analysis in order to match maturities of
specific categories of short-term and long-term loans and investments with
specific types of deposits and borrowings. Bank liquidity is normally considered
in terms of the nature of mix of the banking institution's sources and uses of
funds.
For the Corporation, the primary sources of short-term liquidity have been
federal funds sold, commercial paper, interest-bearing deposits and investment
securities with maturities of one year or less. In addition to these sources,
short-term liquidity is provided by maturing loans. The balance between these
sources and needs to fund loan demand and deposit withdrawals is monitored under
the Corporation's asset/liability management program. When these sources are not
adequate, the Corporation may use federal funds purchased, brokered deposits and
its lines with the Federal Home Loan Banks as alternative sources of liquidity.
At June 30, 2002 and December 31, 2001, federal funds sold and other short-term
investments were $43,476 and $102,918, respectively, and investment securities
with maturities of one year or less were $8,823 and $10,026, respectively.
Liquidity for the Corporation is provided by dividends from Integra Bank NA,
cash balances and lines of credit availability. The amount of dividends which
commercial banks, including Integra Bank NA, may pay is limited by applicable
laws and regulations. The amount of dividends that could be paid is further
restricted by management to maintain prudent capital levels. As of June 30,
2002, the Bank could not pay any dividends to the Corporation without prior
regulatory approval. Based upon its current analysis, management believes that
prior regulatory approval of dividends will be required through the second
quarter of 2003. During 2001, the Bank paid dividends of $46,000 to the
Corporation, pre-funding expected cash needs for debt repayment obligations and
dividends to shareholders for this timeframe. During 2002, the Corporation
retired $12,000 of debt previously outstanding on an unsecured line of credit,
which expired June 28, 2002, and paid $8,124 in dividends to shareholders.
Management believes that the Corporation's current cash balances, $20,720 at
June 30, 2002 are adequate to meet its foreseeable liquidity needs, including
expected dividends to shareholders at current levels and debt repayment
obligations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk is the exposure of earnings and capital to changes in
interest rates. Fluctuations in rates affect earnings by changing net interest
income and other interest-sensitive income and expense levels. Interest rate
changes affect capital by altering the underlying value of assets, liabilities
and off balance sheet instruments. The interest rate risk management program,
which was redesigned and implemented during the second quarter, for the
Corporation is comprised of several components, including (1) Board of
Directors' oversight, (2) senior management oversight, (3) risk limits and
control, (4) risk identification and measurement, (5) risk
23
monitoring and reporting and (6) independent review. It is the objective of our
interest rate risk management processes to minimize the impact of interest rate
volatility on bank earnings and capital.
At the Corporation, interest rate risk is managed through the Corporate Asset
and Liability Committee (Corporate ALCO) with oversight through the Asset and
Liability Committee of the Board of Directors (Board ALCO). The Board ALCO meets
monthly and is responsible for the establishment of policies, risk limits and
authorization levels. The Corporate ALCO meets each month and is responsible for
implementing policies and procedures that translate these goals, objectives, and
risk limits into operating standards, overseeing the entire interest rate risk
management process and establishing internal controls.
Interest rate risk is measured and monitored on a proactive basis by utilizing a
simulation model. The Corporation uses several key methodologies to measure
interest rate risk.
EARNINGS AT RISK (EAR). EAR is considered management's best source of managing
short-term interest rate risk (one year time frame). This measure reflects the
dollar amount of net interest income that will be impacted by changes in
interest rates. The Corporation uses a simulation model to run immediate and
parallel changes in interest rates ranging from down 200 basis points to up 300
basis points. In today's interest rate environment, Corporate ALCO has
determined that incorporating an immediate and parallel downward movement in
interest rates of 100 basis points is a more realistic scenario due to the
unique interest-rate environment in which a 200 basis point decrease would drive
many key market interest rates below zero or established at predetermined
floors, and, therefore, the risk assessment may not be as meaningful. A scenario
where interest rates are assumed to stay constant ("Flat" interest rate
scenario) is also run. These interest rate scenarios are executed against a
constant or stable balance sheet position ("Flat" balance scenario) in order to
isolate the impact of interest rate changes on the current structure and
composition of the balance sheet. This simulation model projects the net
interest income forecasted under each scenario and calculates the percentage
change from the "Flat" interest rate scenario. The Board ALCO has approved
policy limits for changes in EAR. The limit for percentage change in EAR from
the "Flat" interest rate scenario is minus 10 percent. At June 30, 2002, the
Corporation would experience a minus 0.75% change in net interest income, or
EAR, if interest rates moved downward 100 basis points. And, if interest rates
moved upward 200 basis points, the Corporation would experience a positive 0.65%
change in net interest income. Both simulation results reside within the policy
limits established by Board ALCO.
Earnings at Risk
At June 30, 2002
--------------------------------------------
Estimated Estimated
Estimated Change Change
Change in Interest Rates EAR Amount Amount Percent
- -----------------------------------------------------------------------------------------
+200 basis points $78,717 $ 507 0.65%
- -----------------------------------------------------------------------------------------
Flat 78,210
- -----------------------------------------------------------------------------------------
- -100 basis points 77,627 (584) -0.75%
- -----------------------------------------------------------------------------------------
Trends in Earnings at Risk
Estimated Change in EAR from the Flat Interest Rate Scenario
------------------------------------------------------------------
-100 basis points +200 basis points
- -------------------------------------------------------------------------------------------------
June 30, 2002 -0.75% 0.65%
- -------------------------------------------------------------------------------------------------
March 31, 2002 -6.51% 4.27%
- -------------------------------------------------------------------------------------------------
During the second quarter of 2002 the Corporation entered into an interest rate
floor contract. At June 30, 2002, the notional amount of this contract was
$200,000. The interest rate floor is indexed to one-month LIBOR with a contract
strike price of 2.00% and terminates May 17, 2004. This contract is accounted
for as a free-standing derivative with cash flows and changes in market value
recorded in current period earnings. During 2001, the Corporation entered into
interest rate swap agreements totaling $75,000 notional amount to convert a
portion of its liabilities from variable rate to fixed rate. The Corporation
terminated a $25,000 notional amount interest rate swap agreement in June 2002.
The remaining $50,000 notional amount interest rate swap agreements were
terminated in July 2002. For purposes of the June 30, 2002 simulation modeling,
the effects of the full swap termination have been included in the EAR and the
EVE analysis.
ECONOMIC VALUE OF EQUITY (EVE). Management considers EVE to be best analytical
tool for measuring long-term interest rate risk. This measure reflects the
dollar amount of net equity that will be impacted by changes in interest rates.
The Corporation uses a simulation model to run immediate and parallel changes in
interest rates ranging from down 200 basis points to up 300 basis points. A
scenario where interest rates are assumed to stay constant ("Flat" interest rate
scenario) is also run. These interest rate scenarios are executed against a
constant or stable balance sheet position ("Flat" balance scenario) in order to
isolate the impact of interest rate
24
changes on the current structure and composition of the balance sheet. This
simulation model projects the estimated economic value of assets and liabilities
under each scenario. The difference between the economic value of total assets
and the economic value of total liabilities will be the economic value of
equity. The simulation model calculates the percentage change from the "Flat"
interest rate scenario.
The Board ALCO has approved policy limits for changes in EVE. The variance limit
for EVE is measured in an environment where rates are shocked up or down 200
basis points. Integra uses a graduated monitoring system ("Green-Yellow-Red") in
determining appropriate interest rate risk responses. The "Green Zone" (less
than -20%) represents a level of EVE measurement where the interest rate risk
tolerance level is within an acceptable target range. The "Yellow Zone" (between
- -20% and -25%) represents a level of EVE measurement where interest rate risk is
at a level that requires greater attention and an explanation of reasons and
causes of the variance, directional trends are observed and Corporate ALCO
identifies strategies that will reduce risk exposure to an acceptable tolerance
level over time. The "Red Zone" (greater than -25%) represents a level of EVE
measurement where interest rate risk is at a level that requires more immediate
action such that steps are identified to bring risk exposure to an acceptable
target by specific date, reviewed with Board ALCO and approved steps are
implemented to correct this position. At June 30, 2002, the Corporation would
experience a negative 11.4% change in EVE, if interest rates moved downward 200
basis points, which falls within our "Green zone" policy limit. And, if interest
rates moved upward 200 basis points, the Corporation would experience a negative
23.48% change in EVE, which resides within the "Yellow zone". Corporate ALCO has
reviewed this level of EVE change, the stability over the last several months
and has determined that this level needs close monitoring. Management is
evaluating further strategies to adjust the balance sheet composition to lower
the level of EVE risk as measured in the up 200 basis points simulation scenario
and will execute those strategies as opportunities become available.
Economic Value of Equity
At June 30, 2002
-----------------------------------------------
Estimated Estimated
Estimated EVE Change Change
Change in Interest Rates Amount Amount Percent
- --------------------------------------------------------------------------------------------
+200 basis points $209,219 ($64,189) -23.48%
- --------------------------------------------------------------------------------------------
Flat 273,408
- --------------------------------------------------------------------------------------------
- -100 basis points 242,251 (31,157) -11.40%
- --------------------------------------------------------------------------------------------
Trends in Economic Value of Equity
Estimated Change in EVE from the Flat Interest Rate Scenario
----------------------------------------------------------------
-100 basis points +200 basis points
- --------------------------------------------------------------------------------------------------------
June 30, 2002 -11.40% -23.48%
- --------------------------------------------------------------------------------------------------------
March 31, 2002 -11.30% -23.89%
- --------------------------------------------------------------------------------------------------------
The assumptions in any of these simulation runs are inherently uncertain, and
any simulation cannot precisely estimate net interest income or economic value
of the assets and liabilities or predict the impact of higher or lower interest
rates on net interest income or on the economic value of the assets and
liabilities. Actual results will differ from simulated results due to the
timing, magnitude and frequency of interest-rate changes, the difference between
actual experience and the characteristics assumed, as well as changes in market
conditions and management strategies.
25
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Corporation and its subsidiaries are parties to legal actions that arise in
the normal course of their business activities. In the opinion of management,
the ultimate resolution of these matters is not expected to have a materially
adverse effect on the financial position or on the results of operations of the
Corporation and its subsidiaries.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following documents are filed as exhibits to this report:
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
(b) Reports on Form 8-K. None
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.
INTEGRA BANK CORPORATION
By /s/ Michael T. Vea
------------------
Chairman of the Board, Chief
Executive Officer and President
August 14, 2002
/s/ Donald J. Spring
--------------------
Senior Vice President and Controller
August 14, 2002
26