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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 September 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 NOVEMBER 1, 2002
(Common stock, $1.00 Stated Value) 17,291,368
INTEGRA BANK CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements PAGE NO.
Condensed consolidated statements of financial position-
September 30, 2002, December 31, 2001, and September 30, 2001 3
Condensed consolidated statements of income-
Three months and nine months ended September 30, 2002 and 2001 4
Condensed consolidated statements of comprehensive income-
Three months and nine months ended September 30, 2002 and 2001 6
Condensed consolidated statements of cash flow-
Nine months ended September 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 24
Item 4. Controls and Procedures 26
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes In Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submissions of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
Certifications 29
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)
September 30, December 31, September 30,
2002 2001 2001
- --------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 74,056 $ 79,178 $ 75,300
Federal funds sold and other short-term investments 43 102,918 376,384
- --------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 74,099 182,096 451,684
Loans held for sale (at lower of cost or fair value) 7,141 58,571 1,868
Securities available for sale 992,199 1,010,470 954,751
Loans, net of unearned income 1,606,073 1,599,732 1,716,127
Less: Allowance for loan losses (24,554) (23,868) (26,619)
- --------------------------------------------------------------------------------------------------------------
Net loans 1,581,519 1,575,864 1,689,508
Premises and equipment 53,485 54,123 51,730
Intangible assets 55,966 57,594 62,617
Other assets 96,046 97,172 65,396
- --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 2,860,455 $ 3,035,890 $ 3,277,554
==============================================================================================================
LIABILITIES
Deposits:
Non-interest-bearing demand $ 218,618 $ 220,447 $ 193,616
Interest-bearing:
Savings, interest checking and money market accounts 692,477 719,147 706,805
Time deposits of $100,000 or more 244,061 232,938 305,990
Other interest-bearing 632,620 755,880 813,381
- --------------------------------------------------------------------------------------------------------------
Total deposits 1,787,776 1,928,412 2,019,792
Federal funds borrowed and securities sold
under repurchase agreements 190,158 244,032 350,678
Other borrowings 543,997 564,448 574,262
Guaranteed preferred beneficial interests
in the Corporation's subordinated debentures 52,500 52,500 52,500
Other liabilities 50,392 25,401 31,918
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 2,624,823 2,814,793 3,029,150
- --------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock-1,000 shares authorized - None outstanding
Common stock - $1.00 stated value:-29,000 shares authorized 17,291 17,284 17,239
Capital surplus 125,467 125,334 124,604
Retained earnings 81,783 77,935 95,085
Unearned compensation (178) (270) (300)
Accumulated other comprehensive income 11,269 814 11,776
- --------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 235,632 221,097 248,404
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,860,455 $ 3,035,890 $ 3,277,554
==============================================================================================================
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 Nine Months Ended
September 30, September 30,
- --------------------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans:
Taxable $ 27,381 $ 35,207 $ 83,421 $ 110,472
Tax-exempt 318 395 951 1,288
Interest and dividends on securities:
Taxable 9,708 11,396 34,128 40,171
Tax-exempt 1,744 1,848 5,427 5,588
Interest on loans held for sale 226 52 1,582 253
Interest on federal funds sold and other investments 304 4,057 1,040 11,638
- -------------------------------------------------------------------------------------------------------------------------
Total interest income 39,681 52,955 126,549 169,410
INTEREST EXPENSE
Interest on deposits 10,499 19,315 34,731 65,273
Interest on federal funds purchased and securities sold
under repurchase agreements 2,101 3,390 6,736 10,231
Interest on other borrowings 9,565 10,540 28,683 30,433
- --------------------------------------------------------------------------------------------------------------------------
Total interest expense 22,165 33,245 70,150 105,937
NET INTEREST INCOME 17,516 19,710 56,399 63,473
Provision for loan losses 930 1,695 1,760 5,085
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 16,586 18,015 54,639 58,388
- --------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service charges on deposit accounts 2,944 2,286 7,922 6,817
Trust income 473 639 1,528 1,791
Other service charges and fees 1,823 1,440 5,615 3,712
Net securities gains 5,264 2,279 5,856 7,680
Other 2,603 1,706 5,497 5,826
- --------------------------------------------------------------------------------------------------------------------------
Total non-interest income 13,107 8,350 26,418 25,826
NON-INTEREST EXPENSE
Salaries and employee benefits 9,544 9,460 28,454 27,766
Occupancy 1,468 1,281 4,058 3,535
Equipment 1,147 1,141 3,368 3,432
Professional fees 1,277 1,585 3,397 3,705
Communication and transportation 1,026 1,061 2,991 3,072
Marketing 375 509 1,382 1,651
Processing 1,155 831 3,627 2,482
Loans held for sale expense 1,294 - 2,733 -
Debt prepayment fees 3,672 - 3,672 -
Amortization of intangible assets 580 1,191 1,743 3,458
Other 2,579 1,911 6,406 6,482
- --------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 24,117 18,970 61,831 55,583
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of accounting change 5,576 7,395 19,226 28,631
Income taxes 769 1,960 3,190 7,983
- --------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 4,807 5,435 16,036 20,648
Cumulative effect of accounting change, net of tax - - - (273)
- --------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 4,807 $ 5,435 $ 16,036 $ 20,375
=========================================================================================================================
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 Nine Months Ended
September 30, September 30,
- --------------------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic:
Income before cumulative effect of accounting change $ 0.28 $ 0.31 $ 0.93 $ 1.19
Cumulative effect of accounting change, net of tax - - - (0.01)
- --------------------------------------------------------------------------------------------------------------------------
Net Income $ 0.28 $ 0.31 $ 0.93 $ 1.18
==========================================================================================================================
Diluted:
Income before cumulative effect of accounting change $ 0.28 $ 0.31 $ 0.93 $ 1.19
Cumulative effect of accounting change, net of tax - - - (0.01)
- --------------------------------------------------------------------------------------------------------------------------
Net Income $ 0.28 $ 0.31 $ 0.93 $ 1.18
==========================================================================================================================
Weighted average shares outstanding:
Basic 17,281 17,320 17,275 17,184
Diluted 17,295 17,360 17,288 17,212
Dividends per share 0.235 0.235 0.705 0.705
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 Nine Months Ended
September 30, September 30,
- ----------------------------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 4,807 $ 5,435 $ 16,036 $ 20,375
Other comprehensive income, net of tax:
Unrealized gain on securities:
Unrealized gain arising in period 5,087 7,422 14,008 14,315
Reclassification of realized amounts (3,131) (1,355) (3,483) (4,568)
- ----------------------------------------------------------------------------------------------------------------------------------
Net unrealized gain on securities 1,956 6,067 10,525 9,747
- ----------------------------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) on derivative hedging instruments arising in period 166 (1,120) (70) (1,120)
- ----------------------------------------------------------------------------------------------------------------------------------
Net unrealized gain, recognized in other comprehensive income 2,122 4,947 10,455 8,627
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 6,929 $ 10,382 $ 26,491 $ 29,002
==================================================================================================================================
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)
Nine Months Ended
September 30,
2002 2001
- ------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 16,036 $ 20,375
Adjustments to reconcile net income to
net cash provided by operating activities:
Federal Home Loan Bank stock dividends (148) (215)
Amortization and depreciation 11,505 10,009
Provision for loan losses 1,760 5,085
Net securities gains (5,856) (7,680)
(Gain) loss on sale of premises and equipment (156) 52
Loss on sale of other real estate owned 88 68
Loss on low-income housing investments 488 518
Amortization of unearned stock compensation 92 68
Decrease in loans held for sale 26,999 92
(Increase) decrease in other assets (1,872) 4,814
Decrease in other liabilities (4,985) (11,862)
- ------------------------------------------------------------------------------------------
Net cash flows provided by operating activities 43,951 21,324
- ------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale 287,036 684,767
Proceeds from sales of securities available for sale 653,223 936,455
Purchase of securities available for sale (878,251) (1,457,211)
Decrease in loans made to customers 15,283 124,499
Purchase of premises and equipment (2,930) (5,187)
Proceeds from sale of premises and equipment 427 2,978
Proceeds from sale of other real estate owned 2,175 1,512
Net cash and cash equivalents from acquisitions - 22,769
- ------------------------------------------------------------------------------------------
Net cash flows provided by investing activities 76,963 310,582
- ------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits (140,636) (99,197)
Termination fee on interest rate swap (1,904) -
Net payments in federal funds purchased and securities sold
under repurchase agreement (53,874) (43,833)
Proceeds from other borrowings - 78,247
Repayment of other borrowings (20,451) (37,623)
Dividends paid (12,186) (12,087)
Repurchase of common stock - (4,306)
Proceeds from exercise of stock options 140 314
- ------------------------------------------------------------------------------------------
Net cash flows used in financing activities (228,911) (118,485)
- ------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (107,997) 213,421
- ------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 182,096 238,263
- ------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 74,099 $ 451,684
==========================================================================================
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)
Nine Months Ended
September 30,
2002 2001
- -------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
Change in unrealized gain on securities available for sale $ 17,696 $ 16,388
Change in deferred taxes attributable to securities available for sale 7,124 (5,724)
Change in fair value of derivative instruments (1,488) -
Other real estate acquired in settlement of loans 1,733 2,921
Loans transferred from held for sale to loan portfolio 23,985 -
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
NOTES TO UNAUDITED 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 September 30, 2002, the Corporation's subsidiaries consisted
of Integra Bank NA (the "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 statement 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 at least an
annual test 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.
SFAS No. 145, Rescission of FASB Statements No. 4,44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections was issued in April 2002. 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.
SFAS No. 146, Accounting for Exit or Disposal Activities was issued in June
2002. 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
SFAS No. 147, Acquisitions of Certain Financial Institutions - an amendment of
FASB No. 72 and 144 and FASB Interpretation No. 9. was issued in October 2002.
SFAS No. 147 removes acquisitions of financial institutions, except for
transactions between two or more mutual enterprises, from the scope of both SFAS
No. 72, Accounting for Certain Acquisition of Banking or Thrift Institutions,
and FIN No. 9, Applying APB Opinion No. 16 and 17 When a Savings and Loan
Association or a Similar Institution is Acquired in a Business Combination
Accounted for by the Purchase Model. SFAS No. 147 requires that such
acquisitions are accounted for in accordance with SFAS No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. In
addition, SFAS No. 147 amends SFAS No. 144, Accounting for the impairment of
Disposal of Long-Lived Assets to include in its scope long-term
customer-relationship, borrower-relationship and credit cardholder intangible
assets. SFAS No. 147 applies to relevant acquisitions on or after October 1,
2002. This pronouncement is not expected to have a material effect on the
Corporation's consolidated results of operations, financial position or cash
flows.
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 September 30 is summarized as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 4,807 $ 5,434 $ 16,036 $ 20,375
=======================================================================================================================
Weighted average shares outstanding - Basic 17,281 17,320 17,275 17,184
Stock option adjustment 14 40 13 28
- -----------------------------------------------------------------------------------------------------------------------
Average shares outstanding - Diluted 17,295 17,360 17,288 17,212
=======================================================================================================================
Earnings per share-Basic $ 0.28 $ 0.31 $ 0.93 $ 1.19
Effect of stock options - - - (0.01)
- -----------------------------------------------------------------------------------------------------------------------
Earnings per share-Diluted $ 0.28 $ 0.31 $ 0.93 $ 1.18
=======================================================================================================================
NOTE 4. SECURITIES
Amortized cost and fair value of securities classified as available for sale as
of September 30, 2002 and 2001 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
September 30, 2002 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
U.S. Government agencies $ 81,997 $ 54 $ - $ 82,051
Mortgage-backed securities 641,408 8,528 249 649,687
States & political subdivisions 144,272 8,483 477 152,278
Other securities 103,969 4,356 142 108,183
- ---------------------------------------------------------------------------------------------------------------------------
Total available for sale $ 971,646 $ 21,421 $ 868 $ 992,199
===========================================================================================================================
10
NOTE 4. SECURITIES (CONTINUED)
Gross Gross
Amortized Unrealized Unrealized Fair
September 30, 2001 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
U.S. Government agencies $ 250,360 $ 7,209 $ 195 $ 257,374
Mortgage-backed securities 411,898 8,683 4 420,577
States & political subdivisions 148,939 5,417 298 154,058
Other securities 121,871 1,015 144 122,742
- ---------------------------------------------------------------------------------------------------------------------------
Total available for sale $ 933,068 $ 22,324 $ 641 $ 954,751
===========================================================================================================================
The amortized cost and fair value of the securities as of September 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.
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 $ - -% $ 81,997 3.85% $ - -% $ - -% $ 81,997 3.85%
Mortgage-backed securities 266 7.26% 183,289 6.23% 165,101 5.06% 292,752 5.04% 641,408 5.39%
States & subdivisions 9,909 5.28% 22,730 6.83% 31,448 6.88% 80,185 7.10% 144,272 6.88%
Other securities - -% 500 12.00% 29,914 6.03% 73,555 6.17% 103,969 6.16%
- ------------------------------------------------------------------------------------------------------------------------------------
Amortized Cost $ 10,175 5.33% $ 288,516 5.61% $ 226,463 5.44% $ 446,492 5.60% $ 971,646 5.56%
====================================================================================================================================
Fair Value $ 9,814 $ 295,370 $ 229,544 $ 457,471 $ 992,199
====================================================================================================================================
Note: The yield is calculated on a federal-tax-equivalent basis.
At September 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 $616,419 and $591,383, respectively.
NOTE 5. INTANGIBLE ASSETS
Intangible assets at September 30, 2002 were: Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
--------------------------------------------------
Amortizing intangible assets
Goodwill $ 9,464 $ (1,226) $ 8,238
Core deposits 17,080 (4,747) 12,333
--------------------------------------------------
26,544 (5,973) 20,571
Non-amortizing intangible assets
Goodwill 35,395 - 35,395
--------------------------------------------------
Total intangible assets $ 61,939 $ (5,973) $ 55,966
==================================================
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
2007 1,634
11
NOTE 5. INTANGIBLE ASSETS (CONTINUED)
The following table reflects our results adjusted as though we had adopted SFAS
No. 142 on January 1, 2001:
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
------------- ------------ ------------ -------------
Net income as reported $ 4,807 $ 5,435 $16,036 $20,375
Goodwill amortization - 756 - 2,238
Tax effect - (38) - (111)
------------- ------------ ------------ -------------
Net income as adjusted $ 4,807 $ 6,153 $16,036 $22,502
============= ============ ============ =============
Net income per share, as reported:
Basic $ 0.28 $ 0.31 $ 0.93 $ 1.18
Diluted 0.28 0.31 0.93 1.18
Net income per share, as adjusted:
Basic $ 0.28 $ 0.36 $ 0.93 $ 1.32
Diluted 0.28 0.35 0.93 1.31
NOTE 6. FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Included in Federal funds purchased and securities sold under repurchase
agreements are $115,000 of national market repurchase agreements with original
maturity dates greater than one year. This represents a $60,000 decrease in
repurchase agreements outstanding since June 30, 2002. During the third quarter,
the Corporation terminated $60,000 in long-term repurchase agreements in advance
of their scheduled maturity. The Corporation incurred an expense of $3,672 on
the early termination.
The Corporation borrows these funds under a master repurchase agreement. The
Corporation 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 Corporation 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 05/03/06 4.70% 05/03/03
15,000 05/07/06 4.66% 05/07/03
25,000 05/22/06 4.75% 05/22/03
- -------------------------------------------------------------------------------
$ 115,000 4.83%
===============================================================================
(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 $525,049 in advances from Federal Home Loan
Banks ("FHLBs") to fund investments in mortgage-backed securities, loan programs
and to satisfy certain other funding needs. The Corporation must pledge
collateral in the form of mortgage-backed securities and mortgage loans to
secure these advances. At September 30, 2002, the Corporation had an adequate
amount of mortgage-backed securities and mortgage loans pledged to satisfy the
collateral requirements associated with these borrowings.
12
NOTE 7. OTHER BORROWINGS (CONTINUED)
FEDERAL HOME LOAN BANK ADVANCES September 30, 2002
- ------------------------------------------------------------------------------
Convertible advances $432,000
Fixed maturity advances 55,000
Amortizing and other advances 38,049
- ------------------------------------------------------------------------------
Total Federal Home Loan Bank advances $525,049
==============================================================================
An aggregate of $432,000 of these are advances that may be converted at the
option of the FHLBs 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, the Corporation 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:
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 is party 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.
The Corporation has guaranteed debt of its property management subsidiary which
totaled $9,667 at September 30, 2002. The Corporation was in compliance with the
agreement for this loan.
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 commitments and contingent liabilities not reflected in the consolidated
financial statements were $354,860 and $365,261 at September 30, 2002 and
December 31, 2001, respectively.
13
NOTE 9. INTEREST RATE CONTRACTS
The Corporation purchased interest rate caps in 2000 to limit its exposure to
rising interest rate. The Corporation purchased long-term fixed rate securities,
that would extend in duration in a rising rate environment, funded by long-term
debt, that would contract in duration in a rising rate environment, as a means
of increasing earnings and utilizing excess capital. The caps limited the
Corporation's interest rate exposure to owning long-term, fixed rate assets
which decrease in value in a rising rate environment. At September 30, 2002 and
December 31, 2001, the notional value of the interest rate caps was $50,000 and
$125,000, respectively. The caps are indexed to one-month LIBOR with contract
strike rates of 7.00% and mature prior to 2003. The caps had carrying values and
related market values of $0 at both September 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 swap agreements were terminated in July 2002. The
resulting losses totaling $661, net of tax, also remain as a component of
accumulated other comprehensive income and are being amortized into earnings
over the remaining term of the agreements.
During the second quarter of 2002, the Corporation purchased a $200,000 notional
interest rate floor contract for $195. The interest rate floor is indexed to
one-month LIBOR with a contract strike rate 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.
As of September 30, 2002, this contract had a market value of $1,385. The floor
was terminated on October 25, 2002 with a market value of $920. The results of
which are not reflected in the accompanying financial statements.
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
obligations 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.
Nine months ended September 30, 2002 Banking Other Eliminations Total
- -----------------------------------------------------------------------------------------------------------------------------------
Interest income $ 126,373 $ 3,847 $ (3,671) $ 126,549
Interest expense 67,193 6,628 (3,671) 70,150
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 59,180 (2,781) - 56,399
Provision for loan losses 1,760 - - 1,760
Non-interest income 26,310 18,216 (18,108) 26,418
Non-interest expense 61,389 488 (46) 61,831
- -----------------------------------------------------------------------------------------------------------------------------------
Income before taxes and cumulative effect of accounting change $ 22,341 $ 14,947 $ (18,062) $ 19,226
===================================================================================================================================
Other segment information:
Segment assets at September 30, 2002 $ 2,845,783 $ 356,206 $ (341,534) $ 2,860,455
===================================================================================================================================
Nine months ended September 30, 2001 Banking Other Eliminations Total
- -----------------------------------------------------------------------------------------------------------------------------------
Interest income $ 169,066 $ 3,422 $ (3,078) $ 169,410
Interest expense 102,297 6,717 (3,077) 105,937
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 66,769 (3,295) (1) 63,473
Provision for loan losses 5,085 - - 5,085
Non-interest income 25,870 22,928 (22,972) 25,826
Non-interest expense 54,990 638 (45) 55,583
- -----------------------------------------------------------------------------------------------------------------------------------
Income before taxes $ 32,564 $ 18,995 $ (22,928) $ 28,631
===================================================================================================================================
Other segment information:
Segment assets at September 30, 2001 $ 3,269,069 $ 394,410 $ (385,925) $ 3,277,554
===================================================================================================================================
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 (the "Corporation")
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. When used in this report, the words "may," "will," "should," "would,"
"anticipate," "estimate," "expect," "plan," "believe," "predict," "potential,"
"intend," and similar expressions are intended to identify forward-looking
statements. 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: 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 September 30, 2002 was $4,807 compared to
$5,435 for the same period of 2001. Earnings per share, on a diluted basis, were
$.28 for the third quarter of 2002 compared to $.31 in 2001.
Net income for the nine months ended September 30, 2002 was $16,036 compared to
$20,375 for the same period of 2001. Earnings per share, on a diluted basis,
were $.93 for the first three quarters of 2002 compared to $1.18 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 the excess of carrying value over the fair value of
all interest rate caps. Excluding the cumulative effect of accounting change,
net income was $20,648, or $1.19 per diluted share, for the nine months ended
September 30, 2001.
Net interest income was $17,516 for three months ended September 30, 2002
compared to $19,710 for three months ended September 30, 2001, a decrease of
$2,194, or 11.1%. Although the net interest margin improved to 2.82% during the
third quarter of 2002 from 2.68% during the third quarter of 2001, this was
partially offset by a $458,147 decline in average earning assets, resulting in
the lower net interest income. Provision for loan losses was $930 for the three
months ended September 30, 2002 compared to $1,695 for the same period one year
ago. Non-interest income increased $4,757 to $13,107 in third quarter 2002
compared to $8,350 for the third quarter of 2001. Excluding securities gains,
non-interest income was $1,772 higher than the same period last year. Excluding
the expenses related to debt retirement and loans held for sale, non-interest
expense was $19,151 in the third quarter of 2002, or 1.0% higher than third
quarter 2001.
Annualized returns on average assets and equity for the three months ended
September 30, 2002 were 0.67% and 8.12%, respectively, compared with 0.65% and
8.75% in the same period of 2001.
Net interest income for the nine months ended September 30, 2002 was $56,399
which was a decrease of $7,074, or 11.1%, compared to $63,473 for the first nine
months of 2001. Although the net interest margin improved to 2.99% during the
first three quarters of 2002 from 2.89% during the first three quarters of 2001,
this was partially offset by a $407,931 decline in average earning assets, which
resulted in the lower net interest income. Provision for loan losses was $1,760
for the nine months ended September 30, 2002 compared to $5,085 for the same
period one year ago. Non-interest income increased $592 compared to the first
nine months of 2001. Excluding securities gains, non-interest income increased
$2,416, or 13.3%. Excluding the expenses related to debt retirement and loans
held for sale, non-interest expenses decreased $157, or .3%, for the same
period. The results for the nine months ended September 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 nine months of 2002 were
0.73% and 9.39%, respectively, compared with 0.82% and 11.40%, 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
three quarters of 2002, the Corporation sold approximately $25,162 of the loans
held for sale and transferred $23,985 of performing loans back into
16
the loan portfolio, as the Corporation no longer has the intent to sell these
loans. In addition, during the same period the Corporation wrote down the held
for sale portfolio by a total of $2,733. 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 September 30, 2002, the Corporation has
completed the loan sale project.
NET INTEREST INCOME
Net interest income was $17,516 for the three months ended September 30, 2002
compared with $19,710 for the same period in 2001. Average earning assets were
$2,615,567 for the third quarter of 2002 compared to $3,073,714 for the third
quarter of 2001. Average interest-bearing liabilities were $2,390,100 and
$2,840,501 for the three months ended September 30, 2002 and 2001, respectively.
The net interest margin for the three months ended September 30, 2002 was 2.82%
compared to 2.68% for the same period one year ago. The decrease in net interest
income was the result of the 14.9% decline in average earning assets partially
offset by the 14 basis point improvement in net interest margin.
Average earning assets decreased $458,147, or 14.9%, from the third quarter of
2001 compared with the third quarter of 2002. Average loans decreased $130,309,
or 7.5%; average long-term investment securities increased $18,240, or 2.0%; and
other earning assets, primarily short-term investments, decreased $346,078
during this period. The mix of earning assets changed with the percentage of
average loans to average earning assets increasing slightly from 56.7% during
the third quarter of 2001 to 61.6% during the same period of 2002. Average
investment securities as a percentage of average earning assets increased from
30.0% to 36.0% during the same period.
Average loans were $1,611,485 during the third quarter of 2002 compared to
$1,741,794 during the third quarter of 2001. The decrease is primarily the
result of accelerated loan prepayments and refinancings. The significant drop in
rates which began in 2001 increased prepayments in fixed-rate loans, including
residential mortgages, and certain investment securities. Interest income on
loans decreased 21.7% during the third quarter of 2002 compared to 2001 as a
result of a decrease in average balances and a 125 basis point decline in loan
yields. The yield on loans was 6.90% for the third quarter of 2002 compared to
8.15% for the same period of 2001.
Average investment securities were $940,813 during the third quarter of 2002
compared to $922,573 during the third quarter of 2001. The yield on securities
declined to 5.23% during the third quarter of 2002 from 6.08% 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 a declining rate environment resulting
in the lower yield.
Average deposits decreased from $2,063,330 during the third quarter of 2001 to
$1,765,910 during the third quarter of 2002. Non-interest-bearing deposits
increased $17,851, or 9.4%, while interest-bearing deposits decreased $315,271,
or 16.8%, during this period. The declining rate environment 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 certificates of deposit. The mix of average deposits illustrates this
shift in customer preferences as the percentage of non-interest-bearing deposits
to total deposits increased to 11.7% during the third quarter of 2002 from 9.2%
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 2.67% during the
third quarter of 2002 from 4.09% during the third quarter of 2001.
Other interest-bearing liabilities consist primarily of federal funds purchased,
repurchase agreements, FHLB advances and other long-term borrowings. The average
balance declined $135,130, or 14.0%, from $966,323 during the third quarter of
2001 to $831,193 for the same period of 2002. During the third quarter, Integra
Bank NA (the "Bank") terminated $60,000 in long-term repurchase agreements in
advance of their scheduled maturity. The cost of funds declined 15 basis points
during this period, to 5.57% for the third quarter of 2002. The decline was the
result of repricing federal funds purchased and short-term repurchase agreements
to lower market rates throughout 2002 and the extinguishment of high-rate,
long-term debt.
On a year-to-date basis, net interest income was $56,399 for the nine months
ended September 30, 2002 compared with $63,473 for the same period in 2001.
Average earning assets were $2,681,801 for the first nine months of 2002
compared to $3,089,732 for the first nine months of 2001. Average
interest-bearing liabilities were $2,467,495 and $2,858,036 for the nine months
ended September 30, 2002 and 2001, respectively. The net interest margin for the
nine months ended September 30, 2002 was 2.99% compared to 2.89% for the same
period one year ago. The lower net interest income was the result of the 13.2%
decline in average earning assets partially offset by the 10 basis point
improvement in net interest margin.
Average earning assets decreased $407,931, or 13.2%, from $3,089,732 for the
first nine months of 2001 compared with $2,681,801 for the first nine months of
2002. Average loans were $1,623,169 during the first nine months of 2002
compared to $1,769,614 during the first nine months of 2001, a decrease of
$146,445 or 8.3%. Interest income on loans decreased 23.3% during the first nine
months of 2002 compared to 2001 as a result of the decrease in average balances
and a 139 basis point decline in loan yields. The yield on loans was 7.11% for
the first nine months of 2002 compared to 8.50% for the same period of 2001.
Average investment securities
17
increased $7,925, or 0.8%, to $989,060 during the first three quarters of 2002
compared to $981,135 during the first three quarters of 2001. The yield on
securities declined to 5.78% during the first nine months of 2002 from 6.63%
during the first nine months of 2001. Other earning assets decreased $269,411,
or 79.5% during the first three quarters 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 57.3% during
the first nine months of 2001 to 60.5% during the same period of 2002. Average
investment securities as a percentage of average earning assets increased from
31.8% to 36.9% during the same period.
Average deposits decreased from $2,119,628 during the first nine months of 2001
to $1,820,654 during the first nine months of 2002. Non-interest-bearing
deposits increased $19,796, or 10.7%, while interest-bearing deposits decreased
$318,770, or 16.5%, during this period. The declining rate environment 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 11.3% during the
first nine months of 2002 from 8.8% during the same period of 2001. The cost of
deposits decreased to 2.87% during the first nine months of 2002 from 4.51%
during the first nine months of 2001. Average other interest-bearing liabilities
declined $71,770, or 7.8%, from $924,087 during the first nine months of 2001 to
$852,317 for the same period of 2002. The cost of funds declined 32 basis points
during this period, from 5.88% to 5.56%.
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
Net Interest Margin Analysis 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------
Yields (federal-tax-equivalent)
Loans 6.90% 8.15% 7.11% 8.50%
Securities 5.23% 6.08% 5.78% 6.63%
Other earning assets 1.91% 3.93% 2.00% 4.59%
- -----------------------------------------------------------------------------------------------------------------
Total earning assets 6.18% 6.97% 6.49% 7.47%
Cost of funds
Interest bearing deposits 2.67% 4.09% 2.87% 4.51%
Other interest bearing liabilities 5.57% 5.72% 5.56% 5.88%
Total interest bearing liabilities 3.68% 4.64% 3.80% 4.96%
- -----------------------------------------------------------------------------------------------------------------
Total interest expense to earning assets 3.36% 4.29% 3.50% 4.58%
- -----------------------------------------------------------------------------------------------------------------
Net interest margin 2.82% 2.68% 2.99% 2.89%
=================================================================================================================
NON-INTEREST INCOME
Non-interest income for the three months ended September 30, 2002, was $13,107
compared to $8,350 from the same period in 2001. Securities transactions
resulted in gains of $5,264 during the third quarter of 2002 compared with
$2,279 in the same period of 2001. Excluding securities gains, non-interest
income for the three months ended September 30, 2002 totaled $7,843 compared to
$6,071 for the same period of 2001, primarily due to the introduction of new
deposit products.
Non-interest income for the nine months ended September 30, 2002, was $26,418
compared to $25,826 from the same period in 2001. Securities transactions
resulted in gains of $5,856 during the first nine months of 2002 compared with
$7,680 in the same period of 2001. The securities gains recognized in the third
quarter of 2002 were used to offset $3,672 of expenses incurred from terminating
long-term debt obligations which are included in non-interest expense. Excluding
securities gains, non-interest income for the nine months ended September 30,
2002 totaled $20,562, an increase of $2,416, or 13.3%, compared to the same
period of 2001, primarily due to the introduction of new deposit products and
greater customer utilization of fee-based services.
18
Three Months Ended Nine Months Ended
September 30, Increase September 30, Increase
Non-Interest Income 2002 2001 (Decrease) 2002 2001 (Decrease)
- ---------------------------------------------------------------------------------------------------------------------
Service charges on deposit accounts $ 2,944 $ 2,286 $ 658 $ 7,922 $ 6,817 $ 1,105
Trust income 473 639 (166) 1,528 1,791 (263)
Other service charges and fees 1,823 1,440 383 5,615 3,712 1,903
Net securities gains 5,264 2,279 2,985 5,856 7,680 (1,824)
Other 2,603 1,706 897 5,497 5,826 (329)
- ---------------------------------------------------------------------------------------------------------------------
Total non-interest income $ 13,107 $ 8,350 $ 4,757 $ 26,418 $ 25,826 $ 592
=====================================================================================================================
Service charges on deposit accounts increased $658 or 28.8% during the third
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 $1,105, or 16.2% during the first three quarters of 2002
compared to the same period one year ago.
Trust revenues, based primarily on the market values of assets under management,
totaled $473 for the third quarter of 2002 compared to $639 for the third
quarter of 2001. The market value of assets under management declined from
$395,750 at September 30, 2001 to $335,108 at September 30, 2002 as a result of
the general decline in investment values over the past year. Trust revenues
totaled $1,528 for the first three quarters of 2002 compared to $1,791 for the
first three quarters of 2001.
Other service charges and fees increased $383, from $1,440 for the third quarter
of 2001 to $1,823 for the third quarter of 2002. Mortgage servicing fees for the
three months ended September 30, 2002 were $272 compared to $249 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
$229 during the third quarter of 2002 compared to 2001 as the Corporation
offered new products to customers. A significant portion of this revenue
increase was due to certificates of deposit maturities moving to annuity
products. Insurance commissions decreased $25 during the third quarter of 2002
compared to one year ago. A significant portion of the third quarter insurance
revenue is being held in escrow by our third party insurance product provider
pending regulatory approval to form a captive insurance agency. Card-related
fees increased $71 to $722 from the third 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 $1,903, from $3,712 for the first nine
months of 2001 to $5,615 for the first nine months of 2002. Mortgage servicing
fees increased $374, brokerage and annuity commissions $861, insurance
commissions increased $152 and card-related fees increased $245 during this
period.
Other non-interest revenues increased $897, to $2,603, during the third quarter
ended September 30, 2002 from the comparable period of 2001. Revenues from
writing covered call options and net securities trading account gains totaled
$983 during the third quarter of 2001. Effective April 30, 2002, the Corporation
ceased writing covered call option contracts. Revenues from equipment leased to
others increased $343 during the third quarter of 2002 compared to 2001. On a
year-to-date basis, other non-interest revenues decreased $329, to $5,497,
during the nine months ended September 30, 2002 from the comparable period of
2001. Net securities trading account gains declined from $2,142 in the first
nine months of 2001 to $97 in the first nine months of 2002. Revenues from
writing covered call options totaled $402 in the first nine months of 2002
compared to $1,606 during the same period of 2001. Revenues from equipment
leased to others and the sale of loans increased $915 and $103, respectively,
during the first three quarters of 2002 compared to 2001.
NON-INTEREST EXPENSE
Non-interest expense increased by $5,147, or 27.1%, to $24,117, in the third
quarter of 2002 compared to the same period in 2001. During the third quarter of
2002, $1,294 of expenses related to the loans held for sale and debt prepayment
fees of $3,672 were incurred. Excluding these items, non-interest expense
increased 1.0% from the third quarter of 2001.
On a year-to-date basis, non-interest expense increased $6,248, or 11.2%, to
$61,831, in the first nine months of 2002 compared to the first nine months of
2001. The first three quarters of 2002 included $2,733 of expenses related to
the loans held for sale and debt prepayment fees of $3,672. Excluding these
items, non-interest expense decreased 0.3% from the first nine months of 2001.
19
Three Months Ended Nine Months Ended
September 30, Increase September 30, Increase
Non-Interest Expense 2002 2001 (Decrease) 2002 2001 (Decrease)
- ---------------------------------------------------------------------------------------------------------------------
Salaries and employee benefits $ 9,544 $ 9,460 $ 84 $ 28,454 $ 27,766 $ 688
Occupancy 1,468 1,281 187 4,058 3,535 523
Equipment 1,147 1,141 6 3,368 3,432 (64)
Professional fees 1,277 1,585 (308) 3,397 3,705 (308)
Communication and transportation 1,026 1,061 (35) 2,991 3,072 (81)
Marketing 375 509 (134) 1,382 1,651 (269)
Processing 1,155 831 324 3,627 2,482 1,145
Loans held for sale expense 1,294 - 1,294 2,733 - 2,733
Debt prepayment fees 3,672 - 3,672 3,672 - 3,672
Amortization of intangible assets 580 1,191 (611) 1,743 3,458 (1,715)
Other 2,579 1,911 668 6,406 6,482 (76)
- ---------------------------------------------------------------------------------------------------------------------
Total non-interest expense $ 24,117 $ 18,970 $ 5,147 $ 61,831 $ 55,583 $ 6,248
=====================================================================================================================
Salaries and employee benefits increased $84, or 0.9%, for the three months
ended September 30, 2002 compared to 2001. Performance-based incentives and
commissions decreased $72 to $273 during the third quarter of 2002 and
represented 2.9% of salaries and employee benefits expense compared to 3.6% 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 $688, or 2.5%, for the
nine-month period in 2002 compared to 2001.
Occupancy expense increased $187, or 14.6% and $523, or 14.8% during the three
and nine months ended September 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 $324, or 39.0%, during the third 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 $1,145 during the first nine months of 2002 compared to the
same period one-year prior.
As mentioned above, the Corporation recorded expenses of $1,294 and $2,733
during the three and nine months ended September 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 writedown was precipitated by the rapid deterioration
in one commercial loan and lower than anticipated prices were realized on the
remaining loans held for sale. The loan sale project has been completed.
In the third quarter of 2002, the Corporation restructured a portion of its
balance sheet by selling certain mortgaged-backed investment securities, using
the proceeds to retire repurchase agreements and reinvest in adjustable-rate
investments. The proceeds were used to prepay $60,000 of term repurchase
agreements, at a net cost of $3,672, reducing the Corporation's non-core funding
dependency.
Amortization of intangible assets decreased $611 and $1,715 for the three months
and nine months ended September 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 increased $668 during the third quarter of 2002
compared to 2001. Expenses related to equipment leased to others increased $132
during this period. Other real estate owned expenses increased $236 during the
third quarter of 2002 compared to one-year prior. Other non-interest expenses
decreased $76 during the first nine months 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 $769 for the three months ended September 30, 2002
compared with $1,960 for the same period in 2001. The effective tax rates were
13.8% and 26.5% for the three months ended September 30, 2002 and 2001,
respectively. For the nine months ended September 30, 2002, income tax expense
and the effective tax rate was $3,190 and 16.6%, respectively, compared with
$7,983 and 27.9%, respectively, for the same period in 2001. Income from tax
exempt or tax-preferred sources, including interest on
20
municipal loans and investments, bank-owned life insurance and dividends on
tax-preferred securities increased in terms of percent of total income in the
first nine months of 2002 compared to the first nine months of 2001.
FINANCIAL POSITION
Total assets at September 30, 2002 were $2,860,455 a decrease of $175,435
compared to $3,035,890 at December 31, 2001. Total assets were $3,277,554 at
September 30, 2001.
SECURITIES
Total investment securities comprised 38.1% of earning assets at September 30,
2002 compared to 36.5% at December 31, 2001 and 31.3% at September 30, 2001.
They represent the second largest earning asset component after loans.
Securities increased $37,448 to $992,199 at September 30, 2002 from one-year
prior. During the quarter, the portfolio composition has been managed to reduce
prepayment and extention risks. 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 underlying mortgages are
refinanced at lower rates. Mortgage-backed securities represented 65.5% of the
investment portfolio at September 30, 2002 as compared to 65.1% and 44.1% at
December 31, 2001 and September 30, 2001, respectively. Management is currently
reviewing the securities portfolio and may modify the securities portfolio
composition over the next several quarters in the context of existing market
risks and the interest rate environment.
LOANS
Total loans at September 30, 2002, were $1,606,073 compared to $1,599,732 and
$1,716,127 at December 31, 2001 and September 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 in 2001 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 $14,320 or 1.3% since year-end 2001 as customers continue to take
advantage of lower mortgage rates and refinancing opportunities. Commercial and
industrial loans declined $20,425 or 6.3% since year-end. While the loan volume
has declined, management believes that the Corporation's improved underwriting
process has resulted in higher quality consumer, residential, and commercial
loans being originated. Consumer loans increased $21,853 or 17.3% since December
31, 2001. Demand for home equity based loans remains strong.
LOAN PORTFOLIO
September 30, December 31, September 30,
2002 2001 2001
- ------------------------------------------------------------------------------------------------------
Real estate loans $ 1,104,287 $ 1,118,607 $ 1,202,964
Commercial, industrial, and
agricultural loans 305,995 326,420 345,624
Economic development loans and
other obligations of state and
political subdivisions 30,841 19,980 28,159
Consumer loans 147,990 126,137 125,464
Leasing 7,579 8,004 12,853
All other loans 9,381 584 1,063
- ------------------------------------------------------------------------------------------------------
Total loans $ 1,606,073 $ 1,599,732 $ 1,716,127
======================================================================================================
ASSET QUALITY
The allowance for loan losses is the amount, which, in management's opinion, is
adequate to absorb probable incurred 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
incurred losses based on management's ongoing evaluation of the loan portfolio.
21
The allowance for loan losses was $24,554 at September 30, 2002, representing
1.53% of total loans compared with $23,868 and $26,619 at December 31, 2001 and
September 30, 2001, respectively, which represented 1.49% and 1.55% of total
loans, respectively. Annualized net charge-offs to average loans was .20% during
the third quarter of 2002 compared to .64% for the same period of 2001. On a
year-to-date basis, annualized net charge-offs to average loans was .09% during
the first nine months of 2002 compared to .59% for the same period of 2001.
Recoveries of amounts exceeding the carrying value of held for sale loans
totaling $981 were recorded in the first nine months of 2002. In addition, the
Corporation recorded a $400 recovery on one 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 0.21% for both
the three months and nine months ended September 30, 2002. The provision for
loan losses totaled $1,760 for the first nine months of 2002, exceeding net
charge-offs by $686. During the same period of 2001, the provision for loan
losses was $5,085. The allowance for loan losses to non-performing loans was
122.8% at September 30, 2002 compared to 98.5% at December 31, 2001 and 71.6% at
September 30, 2001.
SUMMARY OF ALLOWANCE FOR LOAN LOSSES
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
Beginning Balance $ 24,438 $ 27,748 $ 23,868 $ 25,264
Allowance associated with purchase acquisitions - - - 4,018
Loans charged off (1,305) (3,157) (3,565) (8,819)
Recoveries 491 333 2,491 1,071
Provision for loan losses 930 1,695 1,760 5,085
- -----------------------------------------------------------------------------------------------------------------------------
Ending Balance $ 24,554 $ 26,619 $ 24,554 $ 26,619
=============================================================================================================================
Percent of total loans 1.53% 1.55% 1.53% 1.55%
=============================================================================================================================
Annualized % of average loans:
Net charge-offs 0.20% 0.64% 0.09% 0.59%
Provision for loan losses 0.23% 0.39% 0.15% 0.38%
As of September 30, 2002 total non-performing assets decreased by $2,414 from
$27,088 at December 31, 2001 and by $15,189 from $37,863 at September 30, 2001.
Non-performing loans, consisting of nonaccrual, restructured and 90 days or more
past due loans, were 1.24%, 1.51% and 2.17% of total loans at September 30,
2002, December 31, 2001 and September 30, 2001, respectively. Management
believes that 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. A municipal bond issued by an Indiana regional utility has
gone into default. Management expects a full recovery to be realized after a
rate issue is resolved by the courts.
Listed below is a comparison of non-performing assets.
September 30, December 31, September 30,
2002 2001 2001
- -------------------------------------------------------------------------------------------------------------------------
Nonaccrual loans $18,319 $21,722 $34,980
90 days or more past due loans 1,674 2,500 2,187
- -------------------------------------------------------------------------------------------------------------------------
Total non-performing loans 19,993 24,222 37,167
Other real estate owned 2,145 2,866 2,696
Investment securities 2,536 - -
- -------------------------------------------------------------------------------------------------------------------------
Total non-performing assets $24,674 $27,088 $39,863
=========================================================================================================================
Ratios:
Non-performing Loans to Loans 1.24% 1.51% 2.17%
Non-performing Loans to Loans and Other Real Estate Owned 1.53% 1.69% 2.32%
Allowance for Loan Losses to Non-performing Loans 122.81% 98.54% 71.62%
DEPOSITS
Total deposits were $1,787,776, at September 30, 2002, compared to $1,928,412
and $2,019,792 at December 31, 2001 and September 30, 2001, respectively. Total
transaction accounts, including non-interest-bearing and interest-bearing demand
deposits,
22
increased $28,708, or 4.9% to $615,478 since year-end. Money market accounts and
savings deposits decreased by $57,207, or 16.2% during this same period. During
the current low interest rate environment, customer preferences have shifted to
shorter term, liquid deposit products and to deposit alternatives, including
annuities. Time deposits greater than $100,000 have increased $11,123, or 4.8%,
during this period. Other time deposits decreased $123,260, or 16.3%, from
December 31, 2001 to September 30, 2002.
September 30, December 31, September 30,
Deposits 2002 2001 2001
- --------------------------------------------------------------------------------------------------------
Non-interest-bearing demand $218,618 $220,447 $193,616
Interest-bearing demand 396,860 366,323 341,354
Money market 163,373 230,242 240,521
Savings 132,244 122,582 124,930
Time deposits of $100,000 or more 244,061 232,938 305,990
Other time deposits 632,620 755,880 813,381
- --------------------------------------------------------------------------------------------------------
Total deposits $1,787,776 $1,928,412 $2,019,792
========================================================================================================
BORROWINGS
Federal funds purchased and securities sold under repurchase agreements totaled
$190,158 at September 30, 2002 compared to $244,032 and $350,678 at December 31,
2001 and September 30, 2001, respectively. During the third quarter, the Bank
terminated $60,000 in long-term repurchase agreements in advance of their
scheduled maturity. The Corporation incurred an expense of $3,672 on the early
termination. 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 $115,000 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 4.83%. The Corporation must maintain
collateral equal to 105% of the repurchase price of the securities transferred.
In addition, the holders of $90,000 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 Corporation at the repurchase price. In addition, the
holders of another $25,000 of these repurchase agreements have the option in
January 2003 and quarterly thereafter to put the collateral back to the
Corporation. If these options are exercised by the holders, the Corporation has
sufficient liquidity to repurchase the collateral.
Other borrowings totaled $543,997 at September 30, 2002 compared to $564,448 and
$574,262 at December 31, 2001 and September 30, 2001, respectively. Other
borrowings generally provide longer term funding and include advances from the
Federal Home Loan Bank and term notes from other financial institutions.
Included in Other borrowings are $525,000 in advances from the FHLB to fund
investments in mortgage-backed securities, loan programs and to satisfy certain
other funding needs. The Corporation must pledge collateral in the form of
mortgage-backed securities and mortgage loans to secure these advances. At
September 30, 2002, the Corporation had an adequate amount of mortgage-backed
securities and mortgage loans pledged to satisfy the collateral requirements
associated with these borrowings. An aggregate of $432,000 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
Corporation 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
$55,000 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.
Management is currently reviewing the Corporation's liability composition and
may modify it over the next several quarters. Those modifications could
adversely affect the profitability of the Corporation over the near term, but
would be undertaken if management determines that restructuring the balance
sheet will improve the Corporation's interest rate risk and liquidity risk
profile.
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 subsidiary bank, Integra Bank NA. It
is management's intent for the Bank and Corporation to remain well-capitalized
at all times. The regulatory capital ratios for Integra Bank Corporation and
Integra Bank NA are shown below.
23
Regulatory Guidelines
----------------------------
Minimum Well- September 30, December 31, September 30,
Requirements Capitalized 2002 2001 2001
- -----------------------------------------------------------------------------------------------------------------
Integra Bank Corporation:
Total Capital (to Risk-Weighted Assets) 8.00% 13.44% 12.96% 11.41%
Tier 1 Capital (to Risk-Weighted Assets) 4.00% 12.19% 11.71% 10.21%
Tier 1 Capital (to Average Assets) 4.00% 7.94% 6.98% 6.99%
Integra Bank NA:
Total Capital (to Risk-Weighted Assets) 8.00% 10.00% 12.52% 11.32% 10.98%
Tier 1 Capital (to Risk-Weighted Assets) 4.00% 6.00% 11.27% 10.07% 9.77%
Tier 1 Capital (to Average Assets) 4.00% 5.00% 7.35% 5.97% 6.68%
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 Bank, the primary sources of short-term asset liquidity are federal
funds sold, commercial paper, interest-bearing deposits and readily marketable
and unencumbered investment securities that can be sold or pledged to a
repurchase agreement. 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
Bank may purchase federal funds, solicit brokered deposits and use its lines
with the Federal Home Loan Banks as alternative sources of liquidity. At
September 30, 2002 and December 31, 2001, federal funds sold and other
short-term investments were $43 and $102,918, respectively, and readily
marketable and unencumbered investment securities were $308,607 and $377,095,
respectively.
Liquidity for the Corporation is provided by dividends from the Bank, cash
balances and credit line availability. The dividend amount which commercial
banks, including Integra Bank NA, may pay is limited by applicable laws and
regulations. The dividend amount that could be paid is further restricted by
management to maintain prudent capital levels. As of September 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 $12,186 in dividends to shareholders. As a supplemental
source of liquidity the Corporation entered into a new $7,500 line of credit
agreement with a lender which matures on August 29, 2003. The Corporation has
the ability to draw on this line as required for general corporate purposes.
Management believes that the Corporation's current cash balances, $14,071 at
September 30, 2002 and other available sources of liquidity are adequate to meet
its foreseeable liquidity needs, including expected dividends to shareholders
and debt repayment obligations.
As part of management's anticipated review of the securities portfolio and
liability composition, management will maintain a particular focus on the
capital and liquidity requirements of both the Bank and the Corporation.
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 for
the Corporation, which was redesigned and implemented during the second quarter,
is comprised of several components. The components include (1) Board of
Directors' oversight, (2) senior management oversight, (3) risk limits and
control, (4) risk identification and measurement, (5) risk 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
24
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. 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 September 30, 2002, the Corporation would experience a minus 1.29%
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 2.30% change in net interest income.
Both simulation results reside within the policy limits established by Board
ALCO.
Earnings at Risk
At September 30, 2002
-------------------------------------------------------
Estimated Estimated
Estimated Change Change
Change in Interest Rates EAR Amount Amount Percent
- ----------------------------------------------------------------------------------------------
+200 basis points $ 75,154 1,689 2.30%
- ----------------------------------------------------------------------------------------------
Flat 73,464
- ----------------------------------------------------------------------------------------------
- -100 basis points 72,520 (944) -1.29%
- ----------------------------------------------------------------------------------------------
Trends in Earnings at Risk
Estimated Change in EAR from the Flat Interest Rate Scenario
---------------------------------------------------------------------
-100 basis points +200 basis points
- ------------------------------------------------------------------------------------------------------------
September 30, 2002 -1.29% 2.30%
- ------------------------------------------------------------------------------------------------------------
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 September 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. The floor was terminated on October 25,
2002 with a market value of $920. 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 effect of the full swap termination was included in the EAR and the EVE
analysis. For purposes of the September 30, 2002 simulation, the effect of the
floor was included in the EAR and the EVE analysis.
ECONOMIC VALUE OF EQUITY (EVE). Management considers EVE to be its 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 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.
25
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. The Corporation 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 is required to identify 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 a specific date,
reviewed with Board ALCO and approved steps are implemented to correct this
position. At September 30, 2002, the Corporation would experience a negative
4.58% change in EVE, if interest rates moved downward 100 basis points, which
falls within the "Green zone" policy limit. And, if interest rates moved upward
200 basis points, the Corporation would experience a negative 13.76% change in
EVE, which resides within the "Green zone". The impact of a 200 basis point rate
increase on EVE has been significantly decreased in the third quarter largely
due to the balance sheet restructuring activities detailed earlier and improved
modeling capabilities.
Economic Value of Equity
At September 30, 2002
-------------------------------------------------------
Estimated Estimated
Estimated Change Change
Change in Interest Rates EVE Amount Amount Percent
- ----------------------------------------------------------------------------------------------
+200 basis points $ 213,175 (34,018) -13.76%
- ----------------------------------------------------------------------------------------------
Flat 247,193
- ----------------------------------------------------------------------------------------------
- -100 basis points 235,873 (11,320) -4.58%
- ----------------------------------------------------------------------------------------------
Trends in Economic Value of Equity
Estimated Change in EVE from the Flat Interest Rate Scenario
--------------------------------------------------------------------
-100 basis points +200 basis points
- -----------------------------------------------------------------------------------------------------------
September 30, 2002 -4.58% -13.76%
- -----------------------------------------------------------------------------------------------------------
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.
ITEM 4: CONTROLS AND PROCEDURES
Based on an evaluation of the Corporation's disclosure controls and procedures
(as defined in ss.ss. 240.13a-14(c) and 240.15b-14(c)) as of November 13, 2002,
the Corporation's principal executive officer and principal financial officer
have concluded that such disclosure controls and procedures were effective as of
that date.
There have been no significant changes in the Corporation's internal controls
and other factors that could significantly affect these controls subsequent to
November 13, 2002, including any corrective actions with regard to significant
deficiencies and material weaknesses.
26
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:
10.1 Credit Agreement dated as of August 30, 2002 between Integra
Bank Corporation and The Northern Trust Company
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
(b) Reports on Form 8-K. None
27
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
November 14, 2002
/s/ Charles A. Caswell
------------------------
Executive Vice President
and Chief Financial Officer
November 14, 2002
28
CERTIFICATIONS
I, Michael T. Vea, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Integra Bank
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the "Evaluation Date");
and
c. presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's auditors any
material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/ Michael T. Vea
------------------
Michael T. Vea, Chairman of the
Board, Chief Executive Officer
and President
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CERTIFICATIONS
I, Charles A. Caswell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Integra Bank
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the "Evaluation Date");
and
c. presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's auditors any
material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/ Charles A. Caswell
----------------------
Charles A. Caswell,
Executive Vice President
and Chief Financial Officer
30