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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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 (I.R.S. Employer
incorporation or organization) Identification number)
21 S.E. Third Street, P.O. Box 868, Evansville, IN 47705-0868
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 812-464-9677
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $1.00 STATED VALUE
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |X| No | |
Based on the closing sales price as of June 28, 2002 (the last business day of
the registrant's most recently completed second quarter), the aggregate market
value of the voting stock held by non-affiliates of the registrant was
approximately $328,570,000.
The number of shares outstanding of the registrant's common stock was 17,291,368
at February 28, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the 2003 Annual Meeting of
Shareholders. (Part III)
1
INTEGRA BANK CORPORATION
2002 FORM 10-K ANNUAL REPORT
Table of Contents
PAGE
NUMBER
PART I
Item 1. Business 3
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 8
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation 10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 26
Item 8. Financial Statements and Supplementary Data 28
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures 62
PART III
Item 10. Directors and Executive Officers of the Registrant 62
Item 11. Executive Compensation 62
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 62
Item 13. Certain Relationships and Related Transactions 62
Item 14. Controls and Procedures 62
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 63
Signatures
Certifications
2
FORM 10-K
INTEGRA BANK CORPORATION
December 31, 2002
PART I
ITEM 1. BUSINESS
Integra Bank Corporation (the "Corporation") is a bank holding company that is
based in Evansville, Indiana. The Corporation's principal subsidiary is Integra
Bank N.A., a national banking association ("Integra Bank"). The Corporation also
owns a real estate property management company and has a controlling interest in
Integra Capital Trust I and Integra Capital Trust II, its trust securities
affiliates. At December 31, 2002, the Corporation had total Consolidated assets
of $2.9 billion. The Corporation provides services and assistance to its wholly
owned subsidiaries and Integra Bank's subsidiaries in the areas of strategic
planning, administration, and general corporate activities. In return, the
Corporation receives income and/or dividends from Integra Bank, where most of
the Corporation's business activities take place.
Integra Bank provides a wide range of financial services to the communities it
serves in Indiana, Kentucky, Illinois and Southwestern Ohio. These services
include various types of personal and commercial banking services and products,
investment and trust services and selected insurance services. Specifically,
these products and services include commercial, consumer and mortgage loans,
lines of credit, credit cards, transaction accounts, time deposits, repurchase
agreements, letters of credit, corporate cash management services, correspondent
banking services, mortgage servicing, brokerage and annuity products and
services, credit life and other selected insurance products, securities
safekeeping, safe deposit boxes and complete personal and corporate trust
services. Integra Bank also has a 29% ownership interest in Total Title
Services, LLC, a provider of residential title insurance, which is accounted for
under the equity method of accounting as an unconsolidated subsidiary.
Integra Bank's products and services are delivered through our customers'
channel of preference. At December 31, 2002, Integra Bank served its customers
through 74 banking centers and 128 automatic teller machines ("ATMs"). Integra
Bank also serves its customers through its telephone banking, web banking, and
offers a suite of Internet-based products and services that can be found at
www.integrabank.com. Please refer to page 27 of our 2002 Summary Annual Report
for additional information on the Corporation's retail distribution network.
Integra Bank's wholly owned subsidiary, IBNK Leasing Corp., holds leases
originated in years prior to 2000. In 2002, Integra Bank did not originate
leases through this subsidiary.
Twenty-One Southeast Third Corporation ("TSTC") is the Corporation's real estate
property management subsidiary and the entity through which the Corporation
constructed a nine-story addition to the main office of Integra Bank. Integra
Bank and the Corporation occupy a majority of the building and the remaining
space has been sold or leased as condominiums. TSTC serves in a property
management capacity for this facility.
Integra Capital Trust I and Integra Capital Trust II are statutory business
trusts created under the law of the State of Delaware that have issued trust
preferred securities guaranteed by the Corporation.
The Corporation has grown significantly through acquisition. Since 1987, the
Corporation has acquired or merged with more than thirty bank holding companies,
banks, savings associations or branches of banks or savings associations. The
Corporation may acquire additional banking-related or financial service
companies in the future.
During 2000, the Corporation completed the consolidation of its subsidiary banks
into a single national bank charter.
At December 31, 2002, the Corporation and its subsidiaries had 915 full-time
equivalent employees. The Corporation and its subsidiaries provide a wide range
of employee benefits, are not parties to any collective bargaining agreements,
and in the opinion of management, enjoy good relations with its employees. The
Corporation is an Indiana corporation which was formed in 1985.
COMPETITION
The Corporation has active competition in all areas in which it presently
engages in business. Integra Bank competes for commercial and individual
deposits, loans and financial services with other bank and non-bank
institutions. Since the amount of money a bank may lend to a single borrower, or
to a group of related borrowers, is limited to a percentage of the bank's
shareholders' equity, competitors larger than Integra Bank have higher lending
limits than Integra Bank.
In addition to competing with depository institutions operating in our market
areas, the Corporation competes with various money market and other mutual
funds, brokerage houses, other financial institutions, insurance companies,
leasing companies, regulated
3
small loan companies, credit unions, governmental agencies, and commercial
entities offering financial services and products.
FOREIGN OPERATIONS
The Corporation and its subsidiaries have no foreign branches or significant
business with foreign obligors or depositors.
REGULATION AND SUPERVISION
General
The Corporation is a registered bank holding company under the Bank Holding
Company Act of 1956, as amended ("BHCA"), and as such is subject to regulation
by the Board of Governors of the Federal Reserve System ("Federal Reserve"). The
Corporation files periodic reports with the Federal Reserve regarding the
business operations of the Corporation and its subsidiaries, and is subject to
examination by the Federal Reserve.
Integra Bank is supervised and regulated primarily by the Office of the
Comptroller of the Currency ("OCC"). It is also a member of the Federal Reserve
System and subject to the applicable provisions of the Federal Reserve Act and
subject to the provisions of the Federal Deposit Insurance Act.
The federal banking agencies have broad enforcement powers, including the power
to terminate deposit insurance, impose substantial fines and other civil and
criminal penalties, and appoint a conservator or receiver. Failure to comply
with applicable laws, regulations, and supervisory agreements could subject the
Corporation, Integra Bank, as well as their officers, directors, and other
institution-affiliated parties, to administrative sanctions and potentially
substantial civil money penalties. In addition to the measures discussed under
"Deposit Insurance," the appropriate federal banking agency may appoint the
Federal Deposit Insurance Corporation ("FDIC") as conservator or receiver for a
banking institution (or the FDIC may appoint itself, under certain
circumstances) if any one or more of a number of circumstances exist, including,
without limitation, the banking institution becoming undercapitalized and having
no reasonable prospect of becoming adequately capitalized, it fails to become
adequately capitalized when required to do so, it fails to submit a timely and
acceptable capital restoration plan, or it materially fails to implement an
accepted capital restoration plan. Supervision and regulation of bank holding
companies and their subsidiaries is intended primarily for the protection of
depositors, the deposit insurance funds of the FDIC, and the banking system as a
whole, not for the protection of bank holding company shareholders or creditors.
Acquisitions and Changes in Control
Under the BHCA, without the prior approval of the Federal Reserve, the
Corporation may not acquire direct or indirect control of more than 5% of the
voting stock or substantially all of the assets of any company, including a
bank, and may not merge or consolidate with another bank holding company. In
addition, the BHCA generally prohibits the Corporation from engaging in any
nonbanking business unless such business is determined by the Federal Reserve to
be so closely related to banking as to be a proper incident thereto. Under the
BHCA, the Federal Reserve has the authority to require a bank holding company to
terminate any activity or relinquish control of a non-bank subsidiary (other
than a nonbank subsidiary of a bank) upon the Federal Reserve's determination
that such activity or control constitutes a serious risk to the financial
soundness and stability of any bank subsidiary of the bank holding company.
The Change in Bank Control Act prohibits a person or group of persons from
acquiring "control" of a bank holding company unless the Federal Reserve has
been notified and has not objected to the transaction. Under a rebuttable
presumption established by the Federal Reserve, the acquisition of 10% or more
of a class of voting stock of a bank holding company with a class of securities
registered under Section 12 of the Securities Exchange Act of 1934, as amended,
such as the Corporation, would, under the circumstances set forth in the
presumption, constitute acquisition of control of the Corporation. In addition,
any company is required to obtain the approval of the Federal Reserve under the
BHCA before acquiring 25% (5% in the case of an acquiror that is a bank holding
company) or more of the outstanding common stock of the Corporation, or
otherwise obtaining control or a "controlling influence" over the Corporation.
Dividends and Other Relationships with Affiliates
The Corporation is a legal entity separate and distinct from its subsidiaries.
The primary source of the Corporation's cash flow, including cash flow to pay
dividends on the Corporation's common stock, is the payment of dividends to the
Corporation by Integra Bank. Generally, such dividends are limited to the lesser
of: undivided profits (less bad debts in excess of the allowance for credit
losses); and absent regulatory approval, the net profits for the current year
combined with retained net profits for the preceding two years. Further, a
depository institution may not pay a dividend if: it would thereafter be
"undercapitalized" as determined by federal banking regulatory agencies; or if,
in the opinion of the appropriate banking regulator, the payment of dividends
would constitute an unsafe or unsound practice.
4
Integra Bank is subject to additional restrictions on its transactions with
affiliates, including the Corporation. State and federal statutes limit credit
transactions with affiliates, prescribing forms and conditions deemed consistent
with sound banking practices, and imposing limits on permitted collateral for
credit extended.
Under Federal Reserve policy, the Corporation is expected to serve as a source
of financial and managerial strength to Integra Bank. The Federal Reserve
requires the Corporation to stand ready to use its resources to provide adequate
capital funds during periods of financial stress or adversity. This support may
be required by the Federal Reserve at times when the Corporation may not have
the resources to provide it or, for other reasons, would not be inclined to
provide it. Additionally, under the Federal Deposit Insurance Corporation
Improvements Act of 1991, the Corporation may be required to provide limited
guarantee of compliance of any insured depository institution subsidiary that
may become "undercapitalized" (as defined in the statute) with the terms of any
capital restoration plan filed by such subsidiary with its appropriate federal
banking agency.
Regulatory Capital Requirements
The Corporation and Integra Bank are subject to risk-based and leverage capital
requirements imposed by the appropriate primary bank regulator. Both complied
with applicable minimums as of December 31, 2002, and Integra Bank qualified as
well capitalized under the regulatory framework for prompt corrective action.
See Note 17 of Item 8 on page 52 for additional discussion of regulatory
capital.
Failure to meet capital requirements could result in a variety of enforcement
remedies, including the termination of deposit insurance or measures by banking
regulators to correct the deficiency in the manner least costly to the deposit
insurance fund.
Deposit Insurance
Integra Bank is subject to federal deposit insurance assessments by the FDIC.
The assessment rate is based on classification of a depository institution into
a risk assessment category. Such classification is based upon the institution's
capital level and certain supervisory evaluations of the institution by its
primary regulator.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, order, or any condition imposed in writing by, or written agreement
with, the FDIC. The FDIC may also suspend deposit insurance temporarily during
the hearing process for a permanent termination of insurance if the institution
has no tangible capital. Management is not aware of any activity or condition
that could result in termination of the deposit insurance of Integra Bank.
Community Reinvestment Act
The Community Reinvestment Act of 1977 ("CRA") requires financial institutions
to meet the credit needs of their entire communities, including low-income and
moderate-income areas. CRA regulations impose a performance-based evaluation
system, which bases the CRA rating on an institution's actual lending, service,
and investment performance. Federal banking agencies may take CRA compliance
into account when regulating a bank or bank holding company's activities; for
example, CRA performance may be considered in approving proposed bank
acquisitions.
Gramm-Leach-Bliley Act
On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB") was signed into
law, which may facilitate the convergence of the banking, securities and
insurance industries. The major provisions of the GLB took effect on March 12,
2000.
The GLB enables a broad-scale consolidation among banks, securities firms, and
insurance companies by creating a new type of financial services company called
a "financial holding company," a bank holding company with dramatically expanded
powers. Financial holding companies can offer virtually any type of financial
service, including banking, securities underwriting, insurance (both agency and
underwriting) and merchant banking. Activities that United States banking
organizations are currently permitted to conduct both domestically and overseas
can be conducted by financial holding companies domestically (they include a
broad range of financial activities, including operating a travel agency). In
addition, the GLB permits the Federal Reserve and the Treasury Department to
authorize additional activities for financial holding companies, but only if
they jointly determine that such activities are "financial in nature" or
"complementary to financial activities."
The Federal Reserve serves as the primary "umbrella" regulator of financial
holding companies, with jurisdiction over the parent company and more limited
oversight over its subsidiaries. The primary regulator of each subsidiary of a
financial holding company depends on the activities conducted by the subsidiary.
A financial holding company need not obtain Federal Reserve approval prior
5
to engaging, either de novo or through acquisitions, in financial activities
previously determined to be permissible by the Federal Reserve. Instead, a
financial holding company need only provide notice to the Federal Reserve within
30 days after commencing the new activity or consummating the acquisition.
The Corporation has no present plans to become a financial holding company.
Additional Regulation, Government Policies, and Legislation
In addition to the restrictions discussed above, the activities and operations
of the Corporation and Integra Bank are subject to a number of additional
detailed, complex, and sometimes overlapping laws and regulations. These include
state usury and consumer credit laws, state laws relating to fiduciaries, the
Federal Truth-in-Lending Act, the Federal Equal Credit Opportunity Act, the Fair
Credit Reporting Act, the Truth-in-Savings Act, anti-redlining legislation, and
antitrust laws.
The actions and policies of banking regulatory authorities have had a
significant effect on the operating results of the Corporation and Integra Bank
in the past and are expected to do so in the future.
Finally, the earnings of Integra Bank are strongly affected by the attempts of
the Federal Reserve to regulate aggregate national credit and the money supply
through such means as open market dealings in securities, establishment of the
discount rate on member bank borrowings from the Federal Reserve, establishment
of the federal funds rate on member bank borrowings among themselves, and
changes in reserve requirements against member bank deposits. The Federal
Reserve's policies may be influenced by many factors, including inflation,
unemployment, short-term and long-term changes in the international trade
balance and fiscal policies of the United States Government. The effects of
Federal Reserve actions on future performance cannot be predicted.
STATISTICAL DISCLOSURE
The statistical disclosure concerning the Corporation and Integra Bank, on a
consolidated basis, included in response to Item 7 of this report is hereby
incorporated by reference herein.
AVAILABLE INFORMATION
The Corporation's Internet website address is www.integrabank.com. The
Corporation's annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act are available or may be
accessed free of charge through the Investor Relations section of our Internet
website as soon as reasonably practicable after it electronically files such
material with, or furnishes it to, the SEC. The Corporation's Internet website
and the information contained therein or connected thereto are not intended to
be incorporated into this Annual Report on Form 10-K.
6
EXECUTIVE OFFICERS OF THE CORPORATION
Certain information concerning the executive officers of the Corporation as of
March 1, 2003, is set forth in the following table.
NAME AGE OFFICE AND BUSINESS EXPERIENCE
- ---- --- ------------------------------
Michael T. Vea 44 Chairman of the Board, President, and Chief Executive Officer of the
Corporation (January 2000 to present); Chairman of the Board and Chief
Executive Officer of the Corporation (September 1999 to January 2000);
President and Chief Executive Officer, Bank One, Cincinnati, OH
(1995-1999).
Charles A. Caswell 40 Chief Financial Officer and Executive Vice President of the
Corporation (October 2002 to present); Chief Financial Officer, RBC
Centura Banks Inc. (May 2001 to October 2002); Treasurer, RBC Centura
Banks Inc. (May 1997 to May 2001); Vice President Quantitative Risk
Management of CoBank ACB (November 1995 to 1997); Vice President
Funding and Positioning of CoBank ACB (October 1993 to May 1995).
D. Michael Kramer 45 Executive Vice President, Chief Technology and Operations Manager of
the Corporation (December 1999 to present); President and Chief
Operating Officer, Target Media (1996 to 1999); Senior Vice President
and Manager of Financial Institutions Division, Star Bank, N.A.
(1990-1996).
Archie M. Brown 42 Executive Vice President, Retail Manager and Community Markets Manager
of the Corporation (March 2001 to present); Senior Vice President,
Firstar Bank, N.A. (1997 to 2001); Executive Vice President and
Partner, Profit Resources, Inc. (1997).
Martin M. Zorn 46 Executive Vice President, Chief Credit and Risk Manager of the
Corporation (March 2001 to present); Regional Vice President and
Region Executive, Wachovia Corporation (1999 to 2001); Senior Vice
President, Regional Corporate Banking Manager, Wachovia Corporation
(1994 to 1999).
The above information includes business experience during the past five years
for each of the Corporation's executive officers. Executive officers of the
Corporation serve at the discretion of the Board of Directors. There is no
family relationship between any of the directors or executive officers of the
Corporation.
(Pursuant to General Instructions G(3) of Form 10-K, the foregoing information
regarding executive officers is included in an unnumbered Item in Part I of this
Annual Report in lieu of being included in the Corporation's Proxy Statement for
its 2003 Annual Meeting of Shareholders).
ITEM 2. PROPERTIES
The net investment of the Corporation and its subsidiaries in real estate and
equipment at December 31, 2002, was $53.5 million. The Corporation's offices are
located at 21 S.E. Third Street, Evansville, Indiana, in a building owned by the
Corporation's property management subsidiary. The main and all branch offices of
Integra Bank, the leasing company, and the property management company are
located on premises either owned or leased. None of the property is subject to
any major encumbrance.
A nine-story addition to Integra Bank's main office was completed in 1998 at a
total cost of approximately $18.0 million. Integra Bank and the Corporation
occupy the majority of the building and the remaining floors have been sold or
leased to third parties. The Corporation's share of the building cost was
approximately $10.0 million.
7
ITEM 3. LEGAL PROCEEDINGS
The Corporation and its subsidiaries are involved in legal proceedings from time
to time arising in the ordinary course of business. None of such legal
proceedings are, in the opinion of management, expected to have a materially
adverse effect on the Corporation's consolidated financial position or results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Corporation's common stock is traded on the Nasdaq Stock Market under the
symbol IBNK.
The following table lists the stock price for the past two years and dividend
information for the Corporation's common stock.
Range of Stock Price Dividends
Quarter Low High Declared
------- --- ---- --------
2002 1st $ 18.25 $ 22.50 $ 0.235
2nd 18.80 23.55 0.235
3rd 18.00 22.88 0.235
4th 15.00 18.30 0.235
Range of Stock Price Dividends
Quarter Low High Declared
------- --- ---- --------
2001 1st $ 19.38 $ 26.25 $ 0.235
2nd 20.02 24.78 0.235
3rd 21.62 25.66 0.235
4th 19.26 24.50 0.235
The Corporation has historically paid quarterly cash dividends. The Corporation
generally depends upon the dividends from Integra Bank to pay cash dividends to
its shareholders. The ability of Integra Bank to pay such dividends is limited
by banking laws and regulations. Additional discussion regarding dividends is
included in the Liquidity section of Management's Discussion and Analysis of
Financial Condition and Results of Operations.
As of February 28, 2003, there were approximately 2,604 holders of record of
common stock.
8
ITEM 6. SELECTED FINANCIAL DATA
Integra Bank Corporation and Subsidiaries
(In Thousands, Except Per Share Data and Ratios)
FOR THE YEAR ENDED DECEMBER 31, 2002 2001 2000 1999 1998
Net interest income $ 73,845 $ 82,080 $ 91,856 $ 89,817 $ 87,897
Provision for loan losses 3,143 31,077 4,138 12,497 7,143
Non-interest income 36,281 33,202 20,131 13,523 16,621
Non-interest expense 82,877 78,303 63,438 60,290 67,289
----------- ------------ ----------- ----------- -----------
Income before income taxes and cumulative effect
of accounting change 24,106 5,902 44,411 30,553 30,086
Income taxes (benefit) 3,778 (1,629) 13,920 7,909 7,970
----------- ------------ ----------- ----------- -----------
Income before cumulative effect of
accounting change 20,328 7,531 30,491 22,644 22,116
Cumulative effect of accounting change, net of tax -- (273) -- -- --
----------- ------------ ----------- ----------- -----------
Net income $ 20,328 $ 7,258 $ 30,491 $ 22,644 $ 22,116
=========== ============ =========== =========== ===========
PER COMMON SHARE
Net income:
Basic $ 1.18 $ 0.42 $ 1.77 $ 1.28 $ 1.26
Diluted 1.18 0.42 1.77 1.27 1.25
Cash dividends declared 0.94 0.94 0.87 0.78 0.68
Book value 13.45 12.79 12.94 12.73 12.34
Weighted average shares:
Basic 17,276,304 17,199,568 17,233,413 17,701,235 17,602,440
Diluted 17,283,448 17,221,404 17,254,335 17,794,188 17,719,649
AT YEAR-END
Total assets $ 2,857,738 $ 3,035,890 $ 3,068,818 $ 2,203,477 $ 2,195,224
Securities 982,263 1,010,470 997,494 332,359 365,841
Loans, net of unearned income 1,606,155 1,599,732 1,687,330 1,694,004 1,639,532
Deposits 1,781,948 1,928,412 1,871,036 1,694,661 1,734,585
Shareholders' equity 232,600 221,097 205,517 223,088 218,280
Shares outstanding 17,291,368 17,284,035 15,880,999 17,518,117 17,687,818
AVERAGE BALANCES
Total assets $ 2,906,846 $ 3,266,322 $ 2,511,947 $ 2,154,168 $ 2,158,314
Securities 982,412 970,382 642,327 344,999 422,821
Loans, net of unearned income 1,596,462 1,747,882 1,674,864 1,636,924 1,532,927
Interest-bearing deposits 1,614,167 1,894,300 1,512,294 1,456,703 1,470,507
Shareholders' equity 230,298 241,252 227,573 228,740 217,524
FINANCIAL RATIOS
Return on average assets 0.70% 0.22% 1.21% 1.05% 0.99%
Return on average equity 8.83 3.01 13.40 9.90 9.86
Net interest margin 2.94 2.85 4.15 4.79 4.72
Cash dividends payout 79.66 223.81 49.15 60.94 53.97
Average shareholders' equity to average assets 7.92 7.39 9.06 10.62 10.08
Note: Data presented includes amounts for 2001 and 2000 acquistions accounted
for under purchase method of accounting from acquisition date forward. On
January 1, 2002, the Corporation adopted Financial Accounting Standards No. 142,
Goodwill and Other Intangibles which resulted in the discontinuance of
amortization of goodwill.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
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 following consolidated financial statements and related
notes. The text of this review is supplemented with various financial data and
statistics. All information has been restated to give effect to all stock
dividends. Unless otherwise noted all dollar amounts other than share and per
share data are in thousands (000's).
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," "intend," and similar
expressions 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:
management's ability to reduce and effectively manage interest rate risk;
fluctuations in the value of the Corporation's investment securities; 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; changes in regulations affecting financial
institutions; and competition. The Corporation undertakes no obligation to
release revisions to these forward-looking statements or to reflect events or
conditions occurring after the date of this report.
BUSINESS DESCRIPTION
Integra Bank Corporation (the "Corporation") is a bank holding company that is
based in Evansville, Indiana. The Corporation's principal subsidiary is Integra
Bank N.A., a national banking association ("Integra Bank"). The Corporation also
owns a real estate property management company and has a controlling interest in
Integra Capital Trust I and Integra Capital Trust II, its trust securities
affiliates. At December 31, 2002, the Corporation had total consolidated assets
of $2.9 billion. The Corporation provides services and assistance to its wholly
owned subsidiaries and Integra Bank's subsidiaries in the areas of strategic
planning, administration, and general corporate activities. In return, the
Corporation receives income and/or dividends from Integra Bank, where most of
the Corporation's business activities take place.
Integra Bank provides a wide range of financial services to the communities it
serves in Indiana, Kentucky, Illinois and Southwestern Ohio. These services
include various types of personal and commercial banking services and products,
investment and trust services and selected insurance services. Specifically,
these products and services include commercial, consumer and mortgage loans,
lines of credit, credit cards, transaction accounts, time deposits, repurchase
agreements, letters of credit, corporate cash management services, correspondent
banking services, mortgage servicing, brokerage and annuity products and
services, credit life and other selected insurance products, securities
safekeeping, safe deposit boxes and complete personal and corporate trust
services. Integra Bank also has a 29% ownership interest in Total Title
Services, LLC, a provider of residential title insurance, which is accounted for
under the equity method of accounting as an unconsolidated subsidiary.
On January 31, 2001, the Corporation issued 1,499,967 shares of common stock,
valued at $30,089, in exchange for all of the outstanding shares of Webster
Bancorp, Inc., parent company for West Kentucky Bank, headquartered in
Madisonville, Kentucky. At January 31, 2001, Webster Bancorp, Inc. 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 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. Pro forma disclosures of the
effects of this acquisition have not been presented as the amounts involved in
this transaction were not material to the Corporation's financial results.
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of the Corporation conform with accounting
principles generally accepted in the United States and general practices within
the financial services industry. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. These estimates, assumptions, and judgements
are based on information available as of the date of the financial statements;
accordingly, as this information changes, the financial statements could reflect
different estimates, assumptions, and judgements. Certain policies inherently
have a greater reliance on the use of estimates, assumptions, and judgements and
as such have a greater possibility of producing results that could be materially
different than originally reported. The Corporation considers its critical
accounting policies to include the following:
10
CRITICAL ACCOUNTING POLICIES (continued)
Allowance for Loan Losses: The allowance for loan losses represents management's
best estimate of probable losses inherent in the existing loan portfolio. The
allowance for loan losses is increased by the provision for losses, on losses
charged to expense and reduced by loans charged off, net of recoveries. The
provision for loan losses is determined based on management's assessment of
several factors: actual loss experience, changes in composition of the loan
portfolio, evaluation of specific borrowers and collateral, current economic
conditions, trends in past-due and non-accrual loan balances, and the results of
recent regulatory examinations.
Loans are considered impaired when, based on current information and events, it
is probable the Corporation will not be able to collect all amounts due in
accordance with the contractual terms. The measurement of impaired loans is
generally based on the present value of expected future cash flows discounted at
the historical effective interest rate stipulated in the loan agreement, except
that all collateral-dependent loans are measured for impairment based on the
fair value of the collateral, less estimated cost to liquidate. In measuring the
fair value of the collateral, management uses assumptions and methodologies
consistent with those that would be utilized by unrelated third parties.
Changes in the financial condition of individual borrowers, in economic
conditions, in historical loss experience and in the conditions of the various
markets in which the collateral may be liquidated may all affect the required
level of the allowance for loan losses and the associated provision for loan
losses.
Estimation of Fair Value: The estimation of fair value is significant to several
of the Corporation's assets, including loans held for sale, investment
securities available for sale, mortgage servicing rights, other real estate
owned, as well as fair values associated with derivative financial instruments
and goodwill and other intangibles. These are all recorded at either fair value
or the lower of cost or fair value. Fair values are determined based on third
party sources, when available. Furthermore, accounting principles generally
accepted in the United States require disclosure of the fair value of financial
instruments as a part of the notes to the consolidated financial statements.
Fair values are volatile and may be influenced by a number of factors, including
market interest rates, prepayment speeds, discount rates and the shape of yield
curves.
Fair values for securities available for sale are based on quoted market prices.
If a quoted market price is not available, fair values are estimated using
quoted market prices for similar securities. The fair values for loans held for
sale are based upon quoted market values while the fair values of mortgage
servicing rights are based on discounted cash flow analysis utilizing dealer
consensus prepayment speeds and market discount rates. The fair values of other
real estate owned are typically determined based on appraisals by third parties,
less estimated costs to sell. The fair values of derivative financial
instruments are estimated based on current market quotes.
FINANCIAL REVIEW
Net income for 2002 was $20,328 compared to $7,258 earned in 2001. The increase
in earnings was primarily the result of the increased provision for loan losses
in 2001 as a result of the Corporation's decision in 2001 to identify and
transfer $78,312 in non-performing and performing loans from the loan portfolio
to loans held for sale. Net interest income decreased by $8,235, or 10.0%, in
2002. The decrease in net interest income was precipitated by a $383 million
decline in average earning assets and an asset sensitive interest rate risk
profile, partially offset with a more favorable mix of loan and deposit
products. Provision for loan losses decreased $27,934 to $3,143 in 2002.
Non-interest income was $36,281 in 2002 compared with $33,202 in 2001, which
included $9,098 and $8,212 of securities gains in 2002 and 2001, respectively.
Non-interest expenses increased $4,574 in 2002, which included debt prepayment
fees of $5,938 and loans held for sale expenses of $2,677.
Net income for 2001 was $7,258 compared to $30,491 earned in 2000. The decrease
in earnings was primarily the result of increased provision for loan losses as a
result of the loan sale project and decreased net interest income. Net interest
income decreased by $9,776, or 10.6%, as the Federal Reserve lowered the federal
funds interest rate 475 basis points during 2001 and the Corporation's assets
repriced at lower yields more quickly than did its liabilities. Provision for
loan losses increased $26,939 to $31,077 in 2001 resulting primarily from the
proposed loan sale. Non-interest income was $33,202 in 2001 compared to $20,131
in 2000, which included $8,212 and $1,497 of securities gains in 2001 and 2000,
respectively. A gain of $1,808 from the sale of mortgage servicing is included
in 2000. Excluding the servicing gain and securities gains and losses,
non-interest income increased $8,164, or 48.5% in 2001. Non-interest expenses
increased $14,865, or 23.4%, in 2001.
Earnings per share, on a diluted basis were $1.18 for 2002 compared to $0.42 in
2001 and $1.77 in 2000.
Annualized returns on average assets and equity for 2002 were 0.70% and 8.83%,
respectively, compared with 0.22% and 3.01% in 2001. Effective January 1, 2001,
the Corporation adopted Statement of Financial Accounting Standards ("SFAS") No.
133, Accounting for Derivative Instruments and Hedging Activities. In accordance
with the transition provisions of SFAS No. 133, the Corporation recorded 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
11
FINANCIAL REVIEW (continued)
$7,531, or $.43 per diluted share, for the twelve months ended December 31,
2001.
At December 31, 2001, $78,312 of identified loans were written down by $26,047
to the lower of cost or fair value prior to being reclassified from the loan
portfolio into loans held for sale. During 2002, the Corporation sold
approximately $25,162 of the loans held for sale and transferred $23,985 of
performing loans back into the loan portfolio, as the Corporation no longer had
the intent to sell these loans. Net activity on these loans totaled $441 in
2002. In addition, during 2002 the Corporation wrote down the held for sale
portfolio by a total of $2,677. 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. The Corporation completed the loan sale during 2002.
The Corporation began a leverage program in 2000 in which medium and long-term
mortgage-backed securities and agency and trust preferred securities were
acquired with long-term Federal Home Loan Bank advances and long term national
market repurchase agreements. During 2002, the Corporation announced that it was
terminating the leverage program, reduced its dependency on non-core funding
sources and began taking other steps to reduce its sensitivity to changes in
interest rates. These steps included selling fixed-rate, longer-maturity,
mortgage-backed securities and reinvesting the proceeds in shorter maturity
securities with a more stable and predictable cash flow. Gains from securities
sales were used to cover the costs associated with prepaying $90 million in
long-term debt and expenses incurred from the loan sale. The Corporation expects
to employ a disciplined, opportunistic approach to gradually reduce the
remaining approximately $565 million in higher-rate, long-term debt, but
recognizes the process may take several years in the current interest rate
environment.
Management is continually evaluating the effectiveness of Integra Bank's retail
distribution network. During 2002, Integra Bank opened one new branch, relocated
two existing branches and closed three branches for a net reduction of two
offices during the year. During 2003, Integra Bank intends to open a full
service branch in Georgetown, Kentucky. In addition, Integra Bank may open,
close, sell or consolidate other branches or open or close automatic teller
machines ("ATMs") throughout 2003.
NET INTEREST INCOME
Net interest income is the difference between interest income on earning assets,
such as loans and investments, and interest expense paid on liabilities such as
deposits and borrowings. Net interest income is affected by the general level of
interest rates, changes in interest rates, and by changes in the amount and
composition of interest-earning assets and interest-bearing liabilities. Changes
in net interest income for the last two years are presented in the following
schedule. The change in net interest income not solely due to changes in volume
or rates has been allocated in proportion to the absolute dollar amounts of the
change in each. In addition to this schedule, at the end of Management's
Discussion and Analysis, there is a three-year balance sheet analysis on an
average basis and an analysis of net interest income.
12
NET INTEREST INCOME (continued)
CHANGES IN NET INTEREST INCOME (INTEREST ON A FEDERAL-TAX-EQUIVALENT BASIS)
2002 Compared to 2001 2001 Compared to 2000
-------------------------------------- --------------------------------------
Change Due to Change Due to
Increase (decrease) a Change in a Change in
----------------------- -----------------------
Total Total
Interest income Volume Rate Change Volume Rate Change
-------- -------- -------- -------- -------- --------
Loans $(11,849) $(21,422) $(33,271) $ 6,362 $(11,727) $ (5,365)
Securities 811 (8,276) (7,465) 21,212 (8,552) 12,660
Loans held for sale 1,535 (141) 1,394 (169) 85 (84)
Other short-term investments (7,451) (4,922) (12,373) 12,573 (1,007) 11,566
-------- -------- -------- -------- -------- --------
Total interest income (16,954) (34,761) (51,715) 39,978 (21,201) 18,777
Interest expense
Deposits (10,772) (26,255) (37,027) 16,548 (3,796) 12,752
Borrowings (4,593) (1,852) (6,445) 20,539 (3,858) 16,681
-------- -------- -------- -------- -------- --------
Total interest expense (15,365) (28,107) (43,472) 37,087 (7,654) 29,433
-------- -------- -------- -------- -------- --------
Net interest income $ (1,589) $ (6,654) $ (8,243) $ 2,891 $(13,547) $(10,656)
======== ======== ======== ======== ======== ========
The following discussion of results of operations is on a federal-tax-equivalent
basis. Tax-exempt income, such as interest on loans and securities of state and
political subdivisions, has been increased to an amount that would have been
earned had such income been taxable.
In 2002, net interest income was $78,479, $8,243 or 9.5% less than that earned
in 2001. Earning assets averaged $2,665,192 in 2002 compared to $3,047,930 in
2001. Average interest-bearing liabilities were $2,446,184 and $2,808,705 in
2002 and 2001, respectively. The net interest margin for the twelve months ended
December 31, 2002 was 2.94% compared to 2.85% for the same period one year ago.
The lower net interest income in 2002 was the result of the 12.6% decline in
average earning assets partially offset by the nine basis point improvement in
net interest margin. Though the balance sheet remained asset sensitive in 2002,
the margin improvement resulted from a higher proportion of higher spread loans
and fewer time deposits in 2002 than 2001.
During 2002, the Federal Reserve lowered the targeted federal funds interest
rates 50 basis points. The significant drop in rates over the past two years
increased prepayments in both the mortgage-backed investment securities and
fixed-rate loan portfolios, including a significant impact on residential
mortgages. These funds were reinvested at lower rates.
In 2001, net interest income decreased $10,656 from 2000 to $86,722. The
reduction in net interest income in 2001 was a result of a 130 basis point
decline in net interest margin, partially offset by average earning asset growth
of 29.6%.
Average earning assets decreased $382,738 during 2002 to $2,665,192. Average
federal funds sold and other short-term investments decreased $265,225, and the
average yield decreased 2.23% in 2002. Average loans held for sale increased
$22,195, in 2002 due primarily to the loan sale. During 2002 average loans
decreased $151,420, or 8.7%; average other earning assets decreased $265,543;
and average investment securities increased $12,030, or 1.2%. The mix of earning
assets shows average loans to average earning assets increased from 57.3% in
2001 to 59.9% in 2002 and average securities to average earning assets increased
from 31.8% in 2001 to 36.9% in 2002.
Average loans decreased $151,420, or 8.7%, during 2002, compared to an increase
of $73,018, or 4.4%, during 2001. The acquisitions of Webster Bancorp, Inc. in
early 2001 and four branches from AmSouth in late 2000 increased average loans
by $225,029 in 2001. The positive effects of these acquisitions were partially
offset by the declining rate environment, which resulted in accelerated loan
prepayments and refinancings. Loan income decreased 22.9% in 2002 as a result of
a 130 basis point decline in loan yields accompanied with a decrease in average
balances. The average yield on loans was 7.00% in 2002 versus 8.30% in 2001.
Average investment securities increased $12,030, or 1.2% in 2002. The yield on
securities declined from 6.49% in 2001 to 5.64% in 2002. Security income
decreased 12.0% in 2002 as a result of an 85 basis point decline in security
yields partially offset by the increase in average balances.
Average interest-bearing deposit balances decreased by $280,133, or 14.8%, in
2002 while average non-interest-bearing deposits increased $15,736, or 8.2%.
During the current low interest rate environment, customer preferences have
shifted to shorter term,
13
NET INTEREST INCOME (continued)
liquid deposit products and to deposit alternatives, including annuities. During
2002, average federal funds purchased and securities sold under agreements to
repurchase decreased $54,328 and average other borrowings decreased $28,060. The
decrease in borrowings was primarily due to the prepayment of long-term, higher
rate debt.
NON-INTEREST INCOME
Non-interest income totaled $36,281 for the twelve months ended December 31,
2002 compared to $33,202 for 2001 and $20,131 for 2000. Included in the results
for 2000 is a $1,808 gain on the sale of mortgage loan investor servicing.
Excluding this gain and gains or losses on securities transactions, non-interest
income totaled $27,183 in 2002, $24,990 in 2001 and $16,826 in 2000.
Non-interest income continues to be an increasingly significant portion of
revenue for the Corporation and has grown to represent 25.7% of net
federal-tax-equivalent revenues in 2002 as compared to 22.4% in 2001 and 14.7%
in 2000, excluding gains and losses from the sale of securities and the mortgage
servicing gain discussed above.
Service charges on deposit accounts increased $1,834, or 19.7%, in 2002. Growth
in these fees resulted from higher activity fees, new fee sources, including a
new overdraft protection product, the Integra Honors program, and improved
efforts to collect a greater percentage of assessed fees. Service charge income
totaled $11,135 in 2002, $9,301 in 2001, and $7,880 in 2000.
Other service charges and fees increased $733 from $4,403 in 2001 to $5,136 in
2002. Card-related fees totaled $3,934 in 2002 compared to $3,271 in 2001 and
$2,442 in 2000 due to increased sales efforts of credit and debit cards and the
increasing preference of these cards over checks.
Mortgage servicing income in 2002 was $1,087 compared to $877 in 2001 due to the
demand for new and refinanced residential mortgages. The Corporation sold the
majority of its current year's mortgage loan production to generate fee income
and reduce interest rate exposure. The Corporation continues to service most of
these loans. At December 31, 2002, the Corporation was servicing $198,570 of
sold residential mortgage loans compared to $105,464 at December 31, 2001.
Mortgage loan servicing revenues were lower in 2000 primarily as a result of the
Corporation selling $189,000 of serviced mortgages during the first quarter of
2000.
Investment services commissions, which include brokerage and annuity
commissions, totaled $1,115 in 2002 compared to $392 in 2001 and $122 in 2000.
The Corporation continues to place greater emphasis on the sale of annuities,
mutual funds and other non-traditional banking products.
Trust income for 2002 was $2,041, a decrease of $232, or 10.2%, compared to
2001. Total trust assets under management decreased $77 million, or 18.9%, from
$408 million in 2001 to $331 million in 2002 primarily due to the overall
decline in values of the financial assets during the past year. Trust income for
2001 was $2,273, a decrease of 6.7% from 2000 as trust assets under management
decreased $46 million, or 10.1%, from $454 million in 2000.
Other non-interest income totaled $6,669 in 2002 compared to $7,744 in 2001 and
$4,305 in 2000. Included in 2002 are $402 from the expiration of covered call
option contracts and $97 from net securities trading account income, compared to
$2,417 and $2,385, respectively in 2001. These revenue sources were related to
the leverage program. Also included in other non-interest income in 2002 was
$1,925 from bank-owned life insurance and $1,014 from gains on the sale of
loans, versus $1,606 from bank-owned life insurance and $907 from the sale of
loans and loan servicing, in 2001 and $1,808 and $1,700, respectively, in 2000.
Securities transactions resulted in gains of $9,098 in 2002, $8,212 in 2001, and
$1,497 in 2000. The gains in 2002 were used to cover the costs associated with
prepaying approximately $90 million in long-term debt and defray the 2002 loan
sale expenses.
NON-INTEREST EXPENSE
Non-interest expense for 2002 totaled $82,877, an increase of $4,574 or 5.8%
compared to the prior year. Excluding the expenses related to debt
extinguishment and loans held for sale, non-interest expense was $74,262 for
2002, or 5.2% lower than 2001.
Salaries and employee benefits accounted for 46.8% of non-interest expense in
2002 compared to 48.8% in 2001 and 49.5% in 2000. Salaries and employee benefits
totaled $38,825 in 2002 compared to $38,215 in 2001. The increase in 2002 was
primarily due to initiating performance-based awards tied to sales of fee-based
services and origination of loan and deposit products. Personnel expense
increased $6,782 from $31,433 in 2000. A significant portion of the increase in
2001 was due to the acquisition of Webster Bancorp, Inc. and the four banking
centers in Bowling Green and Franklin, Kentucky. Salary expense also increased
due to staff additions from the opening of new branches, to provide new products
and services to customers and to manage the Corporation's non-performing loan
portfolio. Benefits expense increased in 2001 due to a $645 charge related to
the curtailment of a defined benefit cash balance plan and benefits associated
with the increased staff size. At December 31, 2002, the Corporation had 915
full time
14
NON-INTEREST EXPENSE (continued)
equivalent employees compared to 941 one-year prior and 801 in 2000.
Occupancy expense and equipment expense for 2002 were $5,586 and $4,474,
respectively, compared to $4,994 and $5,049, respectively in 2001 and $3,635 and
$4,342, respectively in 2000. The increases from 2000 were driven in large part
by the acquisition or opening of nine offices in 2001. The Corporation was
operating 74 offices at December 31, 2002 compared to 76 offices one-year prior
and 69 in 2000. The Corporation anticipates that it will continue to look for
opportunities to enhance its retail distribution network in the coming year.
Professional fees were $4,905 in 2002, a decrease of $685, or 12.3%, from 2001.
Tax and accounting fees accounted for $491 of this decrease due to expenses in
2001 related to a tax strategy study. Professional fees were $5,590 in 2001, an
increase of $1,121, or 25.1% from 2000.
Communication and transportation expenses remained relatively flat while
processing expenses increased $1,479 in 2002 as the Corporation continues to
invest in technology to provide additional services and products to its
expanding customer base.
Marketing expense was $1,789 in 2002 compared to $2,115 in 2001 and $2,943 in
2000. Advertising expense was higher in 2000 due to increased marketing efforts
related to loan and deposit promotions and corporate identity promotions related
to the name change to Integra and banking centers acquired in 2000 and 2001 of
the banking centers previously discussed.
During 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 shorter maturity securities with
more predictable cash flows. Most of the proceeds were used to prepay $90,000 of
term repurchase agreements, at a net cost of $5,938.
The Corporation recorded expenses of $2,677 in 2002 related to the loan sale
project. The writedown was precipitated primarily 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 was completed in 2002.
Amortization of intangible assets was $1,622 in 2002 compared to $5,299 and
$3,441 in 2001 and 2000, respectively. The decrease in 2002, resulted from 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.
The Corporation completed this testing in 2002 and found no impairment. The
purchase of Webster Bancorp, Inc. in January 2001 and the full year effect of
the branch purchase completed in November 2000 account for the increase in 2001.
During the fourth quarter of 2002, the Corporation adopted SFAS No. 147,
Acquisitions of Certain Financial Institutions, and, as required, reversed
approximately $526 of pre-tax amortization expense incurred during the first
nine months of 2002.
Other non-interest expenses were $8,191 in 2002, decreasing $1,409, or 14.7%,
from the prior year. Pre-tax operating losses related to the Corporation's
investment in low-income housing projects decreased $274 and expenses related to
other real estate owned decreased $67 in 2002 compared to 2001. Training,
travel, contributions and other losses also decreased by $840.
INCOME TAXES
The Corporation recognized an income tax expense of $3,778, or an effective tax
rate of 16%, for the twelve months ended December 31, 2002 compared with a tax
benefit of $1,629, or an effective tax rate of 28%, in 2001 and a tax expense of
$13,920, or an effective tax rate of 31%, in 2000. The 2001 tax benefit was
primarily the result of lower taxable income as a result of the additional
provision for loan losses recorded in the fourth quarter. Income from tax-exempt
or tax-preferred sources, including bank-owned life insurance, low income
housing projects and dividends on tax-preferred securities, including municipals
and tax preferred agencies, increased in 2002 compared to one year prior.
Investments in bank-owned life insurance policies on certain officers generated
$1,925 of income during 2002 compared to $1,606 in 2001. Dividend income on
tax-preferred securities increased $63 during 2002 compared to 2001.
15
INTERIM FINANCIAL DATA
The following table reflects summarized quarterly data for the periods
described:
2002
----------------------------------------------------
December September June March
Three months ended 31 30 30 31
- ------------------ -------- ------- ------- --------
Interest income $ 38,082 $39,681 $43,147 $ 43,721
Interest expense 20,636 22,165 23,266 24,719
-------- ------- ------- --------
Net interest income 17,446 17,516 19,881 19,002
Provision for loan losses 1,383 930 180 650
Non-interest income 9,863 13,107 6,650 6,661
Non-interest expense 21,572 23,942 18,644 18,719
-------- ------- ------- --------
Income before income taxes and cumulative effect of
accounting change 4,354 5,751 7,707 6,294
Income taxes 385 836 1,570 987
-------- ------- ------- --------
Net income $ 3,969 $ 4,915 $ 6,137 $ 5,307
======== ======= ======= ========
Earnings per share:
Basic $ 0.23 $ 0.28 $ 0.36 $ 0.31
Diluted 0.23 0.28 0.36 0.31
Weighted average shares:
Basic 17,281 17,281 17,275 17,269
Diluted 17,281 17,295 17,298 17,275
2001
----------------------------------------------------
December September June March
Three months ended 31 30 30 31
- ------------------ -------- ------- ------- --------
Interest income $ 46,929 $52,955 $57,228 $ 59,227
Interest expense 28,322 33,245 35,644 37,048
-------- ------- ------- --------
Net interest income 18,607 19,710 21,584 22,179
Provision for loan losses 25,992 1,695 1,695 1,695
Non-interest income 7,376 8,350 9,849 7,627
Non-interest expense 22,720 18,970 18,433 18,180
-------- ------- ------- --------
Income (loss) before income taxes and cumulative effect of
accounting change (22,729) 7,395 11,305 9,931
Income taxes (benefit) (9,612) 1,960 3,222 2,801
-------- ------- ------- --------
Income (loss) before cumulative effect of accounting change (13,117) 5,435 8,083 7,130
Cumulative effect of accounting change, net of tax -- -- -- (273)
-------- ------- ------- --------
Net income (loss) $(13,117) $ 5,435 $ 8,083 $ 6,857
======== ======= ======= ========
Earnings per share:
Basic:
Income (loss) before cumulative effect of accounting change $ (0.76) $ 0.31 $ 0.46 $ 0.42
Cumulative effect of accounting change, net of tax -- -- -- (0.01)
-------- ------- ------- --------
Net income (loss) $ (0.76) $ 0.31 $ 0.46 $ 0.41
======== ======= ======= ========
Diluted:
Income (loss) before cumulative effect of accounting change $ (0.76) $ 0.31 $ 0.46 $ 0.42
Cumulative effect of accounting change, net of tax -- -- -- (0.01)
-------- ------- ------- --------
Net income (loss) $ (0.76) $ 0.31 $ 0.46 $ 0.41
======== ======= ======= ========
Weighted average shares:
Basic 17,245 17,320 17,396 16,864
Diluted 17,254 17,360 17,415 16,894
The first three quarters of 2002 have been restated to reflect the adoption of
SFAS No. 147. Pre-tax amortization expense of approximately $175 for each
quarter has been reversed.
16
FINANCIAL CONDITION
Total assets at December 31, 2002, were $2,857,738, compared to $3,035,890 at
December 31, 2001. Changes in the balance sheet mix from December 31, 2001 to
December 31, 2002 were impacted by the selling of fixed-rate, longer-maturity,
mortgage-backed securities. The proceeds were used to repay $90 million of
long-term debt and remaining funds were reinvested in shorter duration, more
predictable securities, completing the loan sale and commercial loan growth.
Management believes these changes contributed to having a stronger balance sheet
at year-end 2002.
SHORT-TERM INVESTMENTS
The Corporation maintained a short-term liquidity position in anticipation of a
high concentration of time deposits maturing in the first half of 2002. Federal
funds sold and other short-term investments totaled $488 at December 31, 2002
compared to $102, 918 one year prior.
SECURITIES PORTFOLIO
Total investment securities, which are all classified as available for sale,
comprised 37.7% of earning assets at December 31, 2002 compared to 36.5% at
December 31, 2001. They represent the second largest earning asset component
after loans. Securities decreased $28,207 to $982,263 at December 31, 2002 from
one-year prior. The portfolio has continued to shift toward investments in
mortgage-backed securities, which generally have higher yields than comparable
U.S. Government agencies. Inherent in mortgage-backed securities is prepayment
risk, which occurs when borrowers prepay their obligations due to market
fluctuations and rates. Prepayment rates generally can be expected to increase
during periods of lower interest rates as some of the underlying mortgages are
refinanced at lower rates, which occurred in 2002. Mortgage-backed securities
represented 71.2% of the investment portfolio at December 31, 2002 as compared
to 65.1% and 59.1% at December 31, 2001 and 2000, respectively. Management
repositioned a portion of the portfolio late in 2002 in order to reduce the
exposure to unanticipated premium write-downs going forward. The Corporation's
present investment strategy focuses on shorter duration securities with
predictable cash flows in a variety of interest rate scenarios.
December 31,
SECURITIES PORTFOLIO -------------------------------------
(At Fair Value) 2002 2001 2000
- --------------- -------- ---------- --------
U.S. Government agencies $ 15,437 $ 144,615 $226,231
Mortgage-backed securities 699,509 657,546 589,419
State & political subdivisions 147,214 147,444 134,836
Other securities 120,103 60,865 47,008
-------- ---------- --------
Total $982,263 $1,010,470 $997,494
======== ========== ========
LOANS
Loans, net of unearned income at December 31, 2002 totaled $1,606,155 compared
to $1,599,732 at year-end 2001, reflecting an increase of $6,423.
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. During 2002, the Corporation
sold approximately $25,162 of the loans held for sale and transferred $23,985 of
performing loans back into the loan portfolio, as the Corporation no longer had
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 $2,677. This
additional 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. Net
activity, including payments and disbursements, on these loans totaled $441 in
2002. The loan sale was completed in 2002.
17
LOANS (continued)
LOAN PORTFOLIO AT YEAR END
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- ---------
Real estate loans $ 1,113,404 $ 1,118,607 $ 1,154,129 $ 1,115,569 $ 955,729
Commercial, industrial and
agricultural loans 310,740 326,420 353,318 355,485 415,579
Economic development loans and
other obligations of state and
political subdivisions 18,104 19,980 25,120 22,331 19,780
Consumer loans 147,630 126,280 138,230 165,246 223,377
Direct lease financing 1,649 2,346 8,932 11,598 12,988
Leveraged leases 5,717 5,658 5,554 5,382 5,102
Other loans 8,944 584 2,190 18,937 7,606
----------- ----------- ----------- ----------- -----------
Total loans 1,606,188 1,599,875 1,687,473 1,694,548 1,640,161
Less: unearned income 33 143 143 544 629
----------- ----------- ----------- ----------- -----------
Loans, net of unearned income $ 1,606,155 $ 1,599,732 $ 1,687,330 $ 1,694,004 $ 1,639,532
=========== =========== =========== =========== ===========
Different types of loans are subject to varying levels of risk. Management
mitigates this risk through portfolio diversification as well as geographic
diversification. The Corporation concentrates its lending activity in the
geographic market areas that it serves, primarily Indiana, Illinois, Kentucky
and Southwestern Ohio. The loan portfolio is diversified by type of loan and
industry.
The Corporation lends to customers in various industries including
manufacturing, agricultural, health and other related services, transportation,
and mining. There is no concentration of loans in any single industry exceeding
10% of the portfolio nor does the portfolio contain any loans to finance
speculative transactions, such as large, highly leveraged buyouts or loans to
foreign countries.
LOAN MATURITIES AND RATE SENSITIVITIES AT DECEMBER 31, 2002
ON AGRICULTURAL, COMMERCIAL, AND TAX-EXEMPT LOANS
After 1 Year
Within But Within Over
Rate sensitivities: 1 Year 5 Years 5 Years Total
- ------------------- ------ ------- ------- -----
Fixed rate loans $ 10,514 $ 89,767 $ 20,680 $ 120,961
Variable rate loans 198,946 4,421 -- 203,367
-------- -------- -------- ---------
Subtotal $209,460 $ 94,188 $ 20,680 324,328
-------- -------- --------
Percent of total 64.58% 29.04% 6.38%
Nonaccrual loans 4,516
---------
Total loans $ 328,844
=========
NON-PERFORMING ASSETS
Non-performing assets consist primarily of nonaccrual loans, restructured loans,
loans past due 90 days or more and other real estate owned. Nonaccrual loans are
loans on which interest recognition has been suspended because of doubts as to
the borrower's ability to repay principal or interest. Loans are generally
placed on nonaccrual status after becoming 90 days past due if the ultimate
collectibility of the loan is in question. Loans which are current, but as to
which serious doubt exists about repayment ability, may also be placed on
nonaccrual status. Restructured loans are loans for which the terms have been
renegotiated to provide a reduction or deferral of principal or interest because
of the borrower's financial position. Loans 90 days or more past-due are loans
that are continuing to accrue interest, but which are contractually past due 90
days or more as to interest or principal payments. Other real estate owned
represents properties obtained for debts previously contracted. Management is
not aware of any loans which have not been disclosed as non-performing assets
that represent or result from unfavorable trends or uncertainties which
management reasonably believes will materially adversely affect future operating
results, liquidity or capital resources, or represent material credits as to
which management has serious doubt as to the ability of such borrower to comply
with loan repayment terms. A municipal bond
18
NON-PERFORMING ASSETS (continued)
with an approximate value of $3 million is in default. Management expects a full
recovery to be realized after a rate issue is resolved by the courts.
NON-PERFORMING ASSETS AT YEAR END
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Non-performing loans:(1)
Nonaccrual $ 20,010 $ 21,722 $ 33,079 $ 32,025 $ 9,782
Restructured -- -- 160 1,275 374
90 days past due 2,367 2,500 3,760 1,629 1,610
-------- -------- -------- -------- --------
Total non-performing loans 22,377 24,222 36,999 34,929 11,766
Defaulted municipal securities 2,536 -- -- -- --
Other real estate owned 2,286 2,866 1,522 936 715
-------- -------- -------- -------- --------
Total non-performing assets $ 27,199 $ 27,088 $ 38,521 $ 35,865 $ 12,481
======== ======== ======== ======== ========
(1) Includes non-performing loans classified as loans held for sale.
Nonaccrual, restructured and past due loans were 1.39% and 1.51% of loans, net
of unearned income at the end of 2002 and 2001, respectively. The improvement in
the non-performing loan to total loan ratio is due to the combination of
aggressive management of non-performing loans and the effect of the loan sale.
The interest recognized on nonaccrual loans was approximately $68, $132 and
$133, in 2002, 2001 and 2000, respectively.
In addition to those loans classified as non-performing, the Corporation
recognizes accruing potential problem loans of approximately $25,702, $41,261
and $74,025 as of December 31, 2002, 2001 and 2000, respectively. These
potential problem loans have well defined weaknesses that are not believed to
impair the ultimate collection of principal and interest.
CREDIT MANAGEMENT
The Corporation utilizes a centralized credit administration function and loan
policies supervised by the Board of Directors. Board oversight of the lending
function is the responsibility of the Board's Credit and Risk Management
Committee, which meets monthly. The committee monitors credit quality through
its review of information such as delinquencies, problem loans and charge-offs.
The lending policies address risks associated with each type of lending,
including collateralization, loan-to-value ratios, loan concentrations, insider
lending and other pertinent matters and are regularly reviewed to ensure that
they remain appropriate for the current lending environment. In addition, the
credit risk functions are monitored by Integra Bank credit review personnel,
outsourced loan review, regulatory agencies and internal audit, for compliance
as well as loan quality.
The allowance for loan losses is that amount which, in management's opinion, is
adequate to absorb probable inherent loan losses as determined by management's
ongoing evaluation of the loan portfolio. The evaluation by management is based
upon consideration of various factors including growth of the portfolio, an
analysis of individual credits, adverse situations that could affect a
borrower's ability to repay, prior and current loss experience, the results of
recent regulatory examinations and economic conditions. Loans that are deemed to
be uncollectible are charged to the allowance, while recoveries of previously
charged off amounts are credited to the allowance. A provision for loan losses
is charged to operations at levels deemed necessary to provide assurance that
the allowance for loan losses is sufficient to absorb probable losses based on
management's ongoing evaluation of the loan portfolio.
The adequacy of the allowance for loan losses is based on ongoing quarterly
assessments of the probable losses inherent in the credit portfolios. The
methodology for assessing the adequacy of the allowance establishes both an
allocated and unallocated component. The allocated component of the allowance
for commercial loans is based on a review of specific loans as well as
delinquency and historic charge-offs for pools of non-reviewed loans. For
consumer loans, the allocated component is based on loan payment status and
historical loss rates.
A review of selected loans (based on loan type and size) is conducted to
identify loans with heightened risk or probable losses. The primary
responsibility for this review rests with management assigned accountability for
the credit relationship. This review is supplemented with reviews by the credit
review function and regulatory agencies. These reviews provide information which
assist in the timely identification of problems and potential problems and in
deciding whether the credit represents a probable loss or risk which should be
recognized. Where appropriate, an allocation is made to the allowance for
individual loans based on management's estimate of the borrower's ability to
repay the loan given the availability of collateral, other sources of cash flow
and legal options available to the Corporation.
19
CREDIT MANAGEMENT (continued)
Included in the review of individual loans are those that are impaired as
provided in SFAS No. 114, Accounting by Creditors for Impairment of a Loan.
Loans are considered impaired when, based on current information and events, it
is probable the Corporation will not be able to collect all amounts due in
accordance with the contractual terms. The allowance established for impaired
loans is generally based on the present value of expected future cash flows
discounted at the historical effective interest rate stipulated in the loan
agreement, except that all collateral-dependent loans are measured for
impairment based on the fair value of the collateral, less estimated cost to
liquidate.
Historical loss ratios are applied to other loans not subject to specific
allowance allocations. Homogeneous pools of loans, such as consumer installment
and residential real estate loans, are not individually reviewed. An allowance
is established for each pool of loans based upon historical loss ratios, based
on the net charge-off history by loan category. In addition, the allowance
reflects other risks affecting the loan portfolio, such as economic conditions
in the Corporation's geographic areas, specific industry financial conditions
and other factors.
The unallocated portion of the allowance is determined based on management's
assessment of economic conditions and specific economic factors in the
individual markets in which the Corporation operates. During 2002, the factors
used to evaluate homogenous loans in accordance with the SFAS No. 5 Accounting
for Contingencies were updated, resulting in improved allocation of specific
reserves. The provision for loan losses is the amount necessary to adjust the
allowance for loan losses to an amount that is adequate to absorb estimated loan
losses as determined by management's periodic evaluations of the loan portfolio.
This evaluation by management is based upon consideration of actual loss
experience, changes in composition of the loan portfolio, evaluation of specific
borrowers and collateral, current economic conditions, trends in past-due and
non-accrual loan balances and the results of recent regulatory examinations.
The adequacy of the allowance for loan losses is reviewed on a quarterly basis
and presented to the Audit Committee of the Board of Directors for approval. The
accounting policies related to the allowance for loan losses are significant
policies that involve the use of estimates and a high degree of subjectivity.
Management believes that they have developed appropriate policies and procedures
for assessing the adequacy of the allowance for loan losses that reflect the
assessment of credit risk after careful consideration of known relevant facts.
In developing this assessment, management must rely on estimates and exercise
judgement regarding matters where the ultimate outcome is unknown such as
economic factors, developments affecting companies in specific industries or
issues with respect to single borrowers. Depending on changes in circumstances,
future assessments of credit risk may yield different results, which may require
an increase or decrease in the allowance for loan losses.
The provision for loan losses totaled $3,143 in 2002, a decrease of $27,934 from
the $31,077 provided in 2001. At December 31, 2002, the allowance for loan
losses as a percentage of loans was 1.53% as compared to 1.49% as of year-end
2001. During 2002, the Corporation's ratio of net charge-offs to average loans
was 15 basis points compared to 60 basis points in 2001 (excluding the impact of
the loan sale project). The allowance for loan losses to non-performing loans at
December 31 was 110.08% in 2002 and 98.54% in 2001.
20
CREDIT MANAGEMENT (continued)
SUMMARY OF LOAN LOSS EXPERIENCE (ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES)
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
Allowance for loan losses, January 1 $ 23,868 $ 25,264 $ 25,155 $ 18,443 $ 13,854
Allowance associated with purchase acquisitions -- 4,018 1,103 -- 1,086
Writedowns related to loans transferred
to loans held for sale -- 26,047 -- -- --
Loans charged off:
Commercial 1,091 4,457 1,722 1,859 875
Real estate mortgage 3,138 4,452 1,658 2,539 687
Consumer 1,480 2,934 3,065 3,256 3,411
Direct lease financing -- 113 48 10 42
---------- ---------- ---------- ---------- ----------
Total 5,709 11,956 6,493 7,664 5,015
Recoveries on charged off loans:
Commercial 1,157 270 242 534 307
Real estate mortgage 1,472 371 235 251 541
Consumer 697 869 871 1,094 516
Direct lease financing 4 2 13 -- 11
---------- ---------- ---------- ---------- ----------
Total 3,330 1,512 1,361 1,879 1,375
---------- ---------- ---------- ---------- ----------
Net charge-offs 2,379 10,444 5,132 5,785 3,640
Provision for loan losses 3,143 31,077 4,138 12,497 7,143
---------- ---------- ---------- ---------- ----------
Allowance for loan losses, December 31 $ 24,632 $ 23,868 $ 25,264 $ 25,155 $ 18,443
========== ========== ========== ========== ==========
Total loans at year-end, net of unearned income $1,606,155 $1,599,732 $1,687,330 $1,694,004 $1,639,532
Average loans* 1,621,859 1,751,083 1,679,881 1,647,210 1,556,113
Total non-performing loans 22,377 24,222 36,999 34,929 11,766
Net charge-offs to average loans** 0.15% 2.08% 0.31% 0.35% 0.23%
Provision for loan losses to average loans 0.19 1.77 0.25 0.76 0.46
Allowance for loan losses to loans 1.53 1.49 1.50 1.48 1.12
Allowance for loan losses to non-performing loans 110.08 98.54 68.28 72.02 156.75
* Includes loans classified as held for sale.
** 2001 includes writedowns related to loans transferred to loans held for
sale. Excluding this amount, net charge-offs to average loans was 0.60%.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES AT DECEMBER 31
Allowance Applicable to Percent of Loans to Total Gross Loans
Loan Type 2002 2001 2000 1999 1998 2002 2001 2000 1999 1998
- --------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Commercial $ 6,694 $ 6,845 $ 6,042 $ 7,252 $ 6,037 20% 21% 23% 22% 27%
Real estate mortgage 12,198 9,993 9,508 9,291 3,656 69% 70% 68% 66% 58%
Leases 129 140 3,184 3,230 97 1% 1% 1% 1% 1%
Consumer 3,046 2,405 2,690 3,217 5,461 10% 8% 8% 11% 14%
------- ------- ------- ------- ------- --- --- --- --- ---
Allocated 22,067 19,383 21,424 22,990 15,251 100% 100% 100% 100% 100%
=== === === === ===
Unallocated 2,565 4,485 3,840 2,165 3,192
------- ------- ------- ------- -------
Total $24,632 $23,868 $25,264 $25,155 $18,443
======= ======= ======= ======= =======
21
DEPOSITS
Total deposits were $1,781,948 at December 31, 2002 compared to $1,928,412 at
December 31, 2001. The declining rate environment shifted some depositors'
preferences to short-term liquid deposit products or annuities as opposed to
long-term time deposits. This migration was consistent with management's
objective to reduce the Corporation's reliance on high-yield, single service
time deposit customers. Total transaction accounts, including
non-interest-bearing and interest-bearing demand deposits, increased $62,903
since year-end 2001. Money market accounts and savings deposits decreased by
$66,606 during this same period. Time deposits greater than $100,000 have
increased $6,305, while other time deposits decreased $149,066 since December
31, 2001.
The following table presents changes in average deposit balances and rates for
the years 2000 through 2002.
AVERAGE DEPOSITS
2002 2001 2000
------------------ ------------------- -------------------
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
Non-interest-bearing demand $ 206,763 -- $ 191,027 -- $ 187,275 --
Money market accounts 193,403 2.31% 236,658 3.75% 141,964 5.04%
Interest-bearing demand 388,445 0.94% 345,510 1.37% 273,771 1.73%
Savings 130,460 0.99% 122,710 1.52% 139,775 2.32%
Time deposits of $100,000 or more 236,038 3.43% 367,233 5.78% 314,360 6.28%
Other time deposits 665,821 4.04% 823,192 5.44% 642,424 5.28%
---------- ---- ---------- ---- ---------- ----
Total average deposits $1,820,930 2.44% $2,086,330 3.91% $1,699,569 4.05%
========== ==== ========== ==== ========== ====
TIME DEPOSITS OF $100,000 OR MORE AT DECEMBER 31, 2002
Maturing:
3 months or less $ 126,219
Over 3 to 6 months 38,069
Over 6 to 12 months 24,130
Over 12 months 50,825
---------
Total $ 239,243
=========
BORROWINGS
Federal funds borrowed and securities sold under repurchase agreements totaled
$161,784 at December 31, 2002, a decrease of $82,248 from year-end 2001. Federal
funds purchased represent short-term borrowings from other financial
institutions. Securities sold under agreements to repurchase are collateralized
transactions acquired in national markets as well as from the Corporation's
commercial customers as a part of a cash management service. Repurchase
agreements generally provide the Corporation with a lower interest cost than
similar sources of funds. The Corporation had repurchase agreements outstanding
of $149,384 and $244,032 at December 31, 2002 and 2001, respectively. During
2002, the reliance on this funding source was decreased mainly due to the
prepayment of the longer term national market repurchase agreements.
SHORT-TERM BORROWINGS AT DECEMBER 31,
2002 2001 2000
-------- -------- --------
Federal funds purchased $ 12,400 $ -- $ 3,300
Securities sold under agreements to repurchase 149,384 244,032 380,435
-------- -------- --------
Total $161,784 $244,032 $383,735
======== ======== ========
22
BORROWINGS (continued)
Securities
Sold Under
Federal Agreements
Funds to
Purchased Repurchase
--------- ----------
2002
Average amount outstanding $ 4,188 $ 225,609
Maximum amount at any month end 14,700 262,933
Weighted average interest rate:
During the year 1.89% 3.61%
End of year 1.25% 3.07%
2001
Average amount outstanding $ 2,176 $ 281,949
Maximum amount at any month end 6,250 350,678
Weighted average interest rate:
During the year 4.27% 4.44%
End of year N/A 3.75%
2000
Average amount outstanding $ 14,402 $ 192,744
Maximum amount at any month end 46,000 380,435
Weighted average interest rate:
During the year 5.65% 6.16%
End of year 6.00% 6.69%
Other borrowings generally provide longer term funding and include advances from
the Federal Home Loan Bank (FHLB) and term notes from other financial
institutions. Other borrowings decreased $28,406 during 2002 to $536,042. Of
this decrease, FHLB advances accounted for $13,132 and the Corporation's line of
credit payoff accounted for $12,000.
TRUST PREFERRED SECURITIES
On July 16, 2001, the Corporation issued $18 million of Floating Rate Capital
Securities as a participant in a Pooled Trust Preferred Fund through a
subsidiary, Integra Capital Trust II. The trust preferred securities have a
liquidation amount of $1,000 per security with a variable per annum rate equal
to six-month LIBOR plus 3.75% with interest payable semiannually. The issue
matures on July 25, 2031. Issuance costs of $581 were paid by the Corporation
and are being amortized over the life of the securities. The Corporation has the
right to call these securities at Par effective July 16, 2011.
On March 30, 1998, the Corporation issued through a subsidiary, Integra Capital
Trust I, $34.5 million of 8.25% Cumulative Trust Preferred Securities which will
mature on March 31, 2028. Issuance costs of $1,514 were paid by the Corporation
and are being amortized over the life of the securities. The Corporation has the
right to call these securities at Par effective March 30, 2003. Management
anticipates that it is possible that some or all of these may be called in the
future. For further discussion, see Note 15 to the consolidated financial
statements.
CAPITAL RESOURCES
At December 31, 2002, shareholders' equity totaled $232,600, an increase of
$11,503, or 5.2%, from 2001. In 2001, the Corporation issued $30,089 of equity
related to the acquisition of Webster Bancorp, Inc. The amount of net earnings
retained after the declaration of cash dividends was $4,076 for the year ended
December 31, 2002 compared to ($9,055) in the prior year. The dividend payout
ratio for 2002 was 79.66%, compared to 223.81% in 2001. During 2001 and 2000,
the Corporation repurchased $4,306 and $41,897, respectively, or 175,500 shares
and 1,693,773 shares, respectively, of its common stock. No repurchases were
made in 2002. The average equity to average asset ratio was 7.92% and 7.39% for
2002 and 2001, respectively.
Though there were no material commitments for capital expenditures as of
December 31, 2002, the possibility exists that capital expenditures may be
incurred in 2003 to enhance our retail distribution network.
23
CAPITAL RESOURCES (continued)
The Corporation and the banking industry are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can elicit certain mandatory actions by
regulators that, if undertaken, could have a direct material effect on the
Corporation's financial statements. Capital adequacy in the banking industry is
evaluated primarily by the use of ratios that measure capital against assets and
certain off-balance sheet items. Certain ratios weight these assets based on
risk characteristics according to regulatory accounting practices. At December
31, 2002, the Corporation and Integra Bank exceeded the regulatory minimums and
Integra Bank met the regulatory definition of well capitalized.
LIQUIDITY
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 Integra Bank, the primary sources of short-term asset liquidity have been
federal funds sold, commercial paper, interest-bearing deposits and U.S.
Government and agency securities available for sale. In addition to these
sources, short-term asset liquidity is provided by maturing loans and
securities. The balance between these sources and needs to fund loan demand and
deposit withdrawals is monitored under the Corporation's asset/liability
management program. When these sources are not adequate, the Corporation may use
federal funds purchased, brokered deposits, repurchase agreements, securities
sales and its line with the FHLB as alternative sources of liquidity.
Additionally, the Corporation's underwriting standards for its mortgage loan
portfolio comply with standards established by government housing agencies; as a
result, a portion of the mortgage loan portfolio could be sold to provide
additional liquidity. At December 31, 2002 and 2001, respectively, federal funds
sold and other short-term investments were $488 and $102,918. Additionally, at
December 31, 2002, the Corporation had $145,000 available from unused federal
funds lines and in excess of $187,000 in unencumbered securities available for
repurchase agreements.
Liquidity for the Corporation is provided by dividends from Integra Bank, cash
balances, line of credit availability and access to the capital markets. Banking
regulations impose restrictions on the ability of Integra Bank to pay dividends
to the Corporation. The amount of dividends that could be paid is further
restricted by management to maintain prudent capital levels. As of December 31,
2002, Integra Bank was unable to pay dividends to the Corporation without prior
regulatory approval. During 2001, Integra Bank paid $46,000 in dividends to the
Corporation. During 2002, Integra Bank paid no dividends to the Corporation.
The Corporation has a $7,500 unsecured line of credit with an unaffiliated
commercial bank that may be used from time to time to supplement the
Corporation's cash requirements. The line was not in use at December 31, 2002.
At December 31, 2002, the Corporation was not in compliance with the return on
assets debt covenant; however, the agreement for the line was amended subsequent
to year-end and effective December 31, 2002 and the Corporation is in compliance
with the financial covenants contained in the agreement as amended.
Liquidity for the Corporation is required to support operational expenses of the
Corporation, pay taxes, meet the outstanding debt and trust preferred securities
obligations of the Corporation, provide dividends to common shareholders and
other general corporate purposes. Management believes that funds to fulfill
these obligations for 2003 will be available from currently available cash and
marketable securities, accessing the Corporation's line of credit, requesting
prior regulatory approval for Integra Bank to pay dividends to the Corporation,
or other sources that management expects to be available during the year. While
management believes that maintaining the current dividend level is important to
the Corporation's shareholders, the Board of Directors will determine on a
quarterly basis whether to pay dividends and the amount of the dividend after
taking into account the availability of funds, the results of current operations
and prospects for future operations, and the need to maintain prudent capital
levels at the Corporation and Integra Bank.
ACCOUNTING CHANGES
For information regarding accounting standards issued which will be adopted in
future periods, refer to Note 1 to the Consolidated Financial Statements.
24
AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
For the Years Ended
December 31, 2002 2001
------------------------------- ------------------------------
Average Interest Yield/ Average Interest Yield/
EARNING ASSETS: Balances & Fees Cost Balances & Fees Cost
-------- -------- ------ -------- -------- ------
Interest-bearing deposits in banks $ 63 $ 1 1.59% $ 381 $ 14 3.67%
Federal funds sold & other
short-term investments 60,859 1,171 1.92% 326,084 13,531 4.15%
Loans held for sale 25,396 1,717 6.76% 3,201 323 10.09%
Securities:
Taxable 825,453 44,388 5.38% 811,945 51,776 6.38%
Tax-exempt 143,609 10,233 7.13% 144,393 10,310 7.14%
Securities before fair value
adjustment 969,062 54,621 5.64% 956,338 62,086 6.49%
Fair value adjustment on
securities available for sale 13,350 14,044
Total securities 982,412 970,382
Loans 1,596,462 111,755 7.00% 1,747,882 145,026 8.30%
Total earning assets 2,665,192 $169,265 6.35% 3,047,930 $220,980 7.25%
======== ========
Non-earning assets 241,654 218,392
---------- ----------
TOTAL ASSETS $2,906,846 $3,266,322
========== ==========
INTEREST-BEARING LIABILITIES:
Deposits
Savings and interest-bearing demand $ 518,905 $ 4,953 0.95% $ 468,220 $ 6,579 1.41%
Money market accounts 193,403 4,475 2.31% 236,658 8,883 3.75%
Certificates of deposit and other time 901,859 34,976 3.88% 1,189,422 65,969 5.55%
Total interest-bearing deposits 1,614,167 44,404 2.75% 1,894,300 81,431 4.30%
Federal funds purchased 4,188 79 1.89% 2,176 93 4.27%
Repurchase agreements 225,609 8,149 3.61% 281,949 12,530 4.44%
Other borrowings 602,220 38,154 6.34% 630,280 40,204 6.38%
Total interest-bearing liabilities 2,446,184 $ 90,786 3.71% 2,808,705 $134,258 4.78%
======== ========
Noninterest-bearing liabilities and
shareholders' equity 460,662 457,617
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,906,846 $3,266,322
========== ==========
Interest income/earning assets $169,265 6.35% $220,980 7.25%
Interest expense/earning assets 90,786 3.41% 134,258 4.40%
-------- ---- -------- ----
Net interest income/earning assets $ 78,479 2.94% $ 86,722 2.85%
======== ==== ======== ====
December 31, 2000
---------------------------------
Average Interest Yield/
EARNING ASSETS: Balances & Fees Cost
-------- -------- ------
Interest-bearing deposits in banks $ 1,522 $ 136 8.94%
Federal funds sold & other
short-term investments 28,311 1,843 6.51%
Loans held for sale 5,017 407 8.11%
Securities:
Taxable 492,288 36,793 7.47%
Tax-exempt 151,491 12,633 8.34%
Securities before fair value
adjustment 643,779 49,426 7.68%
Fair value adjustment on
securities available for sale (1,452)
Total securities 642,327
Loans 1,674,864 150,391 8.98%
Total earning assets 2,352,041 $202,203 8.60%
========
Non-earning assets 159,906
-----------
TOTAL ASSETS $ 2,511,947
===========
INTEREST-BEARING LIABILITIES:
Deposits
Savings and interest-bearing demand $ 413,546 $ 7,985 1.93%
Money market accounts 141,964 7,160 5.04%
Certificates of deposit and other time 956,784 53,534 5.60%
Total interest-bearing deposits 1,512,294 68,679 4.54%
Federal funds purchased 14,402 813 5.65%
Repurchase agreements 192,744 11,868 6.16%
Other borrowings 356,810 23,465 6.58%
Total interest-bearing liabilities 2,076,250 $104,825 5.05%
========
Noninterest-bearing liabilities and
shareholders' equity 435,697
-----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 2,511,947
===========
Interest income/earning assets $202,203 8.60%
Interest expense/earning assets 104,825 4.45%
-------- ----
Net interest income/earning assets $ 97,378 4.15%
======== ====
Note: Income is on a federal-tax-equivalent basis using a 35% tax rate. Average
loans include nonaccrual loans.
25
ITEM 7A. 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
of 2002, 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 the Corporation's
interest rate risk management processes to manage 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 ALCO
Committee of the Board of Directors (Board ALCO). The Board ALCO meets monthly
and is responsible for the establishment of policies, risk limits and
authorization levels. The Corporate ALCO meets at least monthly and is
responsible for implementing policies and procedures, 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 the following 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 from a "Base" scenario using implied forward
rates. The standard simulation analysis assesses the impact on net interest
income over a 24-month horizon by shocking the implied forward yield curve up
and down 100, 200, and 300 basis points. Additional yield curve scenarios are
tested from time to time to assess the risk to changes in the slope of the yield
curve and changes in basis relationships. These interest rate scenarios are
executed against a balance sheet utilizing projected growth and composition.
Additional simulations are run from time to time to assess the risk to earnings
and liquidity from balance sheet growth occurring faster or slower than
anticipated as well as the impact of faster or slower prepayments in the loan
and securities portfolio. This simulation model projects the net interest income
forecasted under each scenario and calculates the percentage change from the
"Base" interest rate scenario. The Board ALCO has approved policy limits for
changes in one year EAR from the "Base" interest rate scenario of minus 10
percent to a 200 basis point rate shock in either direction. At December 31,
2002, the Corporation would experience a negative 7.96% change in EAR, if
interest rates moved downward 200 basis points. If interest rates moved upward
200 basis points, the Corporation would experience a positive 5.82% change in
net interest income. Both simulation results are within the policy limits
established by the Board ALCO. Prior to December 2002, the Corporation used the
simulation model to calculate these changes assuming that rates and balance
sheet composition remain unchanged. The changes in EAR using the unchanged rate
and balance sheet composition assumptions produced risk measures that are
materially the same as the risk measures produced by the current assumptions.
Estimated Change in EAR from the Flat Interest Rate Scenario
------------------------------------------------------------
-200 basis points +200 basis points
----------------- -----------------
December 31, 2002 -7.96% 5.82%
September 30, 2002 -4.09% 2.30%
June 30, 2002 -5.21% 0.65%
March 31, 2002 -16.51% 4.27%
December 31, 2001 -22.60% 5.80%
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 evaluate the impact
of immediate and parallel changes in interest rates from a "Base" scenario using
implied forward rates. The standard simulation analysis assesses the impact on
EVE by shocking the implied forward yield curve up and down 100, 200, and 300
basis points. Additional yield curve scenarios are tested from time to time to
assess the EVE risk to changes in the slope of the yield curve. 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 is referred to as the economic value of
equity. The simulation model calculates the percentage change from the "Base"
interest rate scenario.
The Board ALCO has approved policy limits for changes in EVE. The variance limit
for EVE is measured in an environment when the "Base" interest rate scenario is
shocked up or down 200 basis points. The Corporation uses a graduated monitoring
system in determining the appropriate course of action for a given level of
risk.
Effective January 31, 2003, the Board of Directors updated and approved a policy
that allows Corporate ALCO to manage EVE risk to a 200 basis point rate shock
within a range of plus or minus 15%. The discretionary limit prior to January
31, 2003 had been 20%.
26
If EVE risk to a 200 basis point rate shock is greater than 15%, but less than
20%, management must present an explanation of reasons and causes of the
variance and present alternative strategies or actions to reduce risk exposure
to acceptable levels over time. If EVE risk to a 200 basis point rate shock is
greater than 20%, management must bring Board ALCO recommendations on specific
actions to reduce the risk exposure to below 20% by a specific date. The policy
limit prior to January 31, 2003 had been 25%. Upon review and approval of Board
ALCO the action plan is implemented. Subsequent risk measurement will assess the
effectiveness of the action plan and report to Board and Corporate ALCO
significant deviations in updated risk measures compared to the action plan's
anticipated results.
At December 31, 2002, the Corporation would experience a negative 2.69% change
in EVE if interest rates moved downward 200 basis points. If interest rates
moved upward 200 basis points, the Corporation would experience a negative
12.35% change in EVE. Both of these measures are within Board approved policy
limits. The impact of a 200 basis point rate increase on EVE has been
significantly decreased in 2002 largely due to the balance sheet restructuring
activities during the year. Prior to December 2002, the Corporation used the
simulation model to calculate these changes assuming that rates remain
unchanged. For EVE calculations, future balance sheet composition is not a
factor. The changes in EVE using unchanged rates and balance sheet composition
assumptions produced risk measures that are materially the same as the risk
measures produced by the current assumptions.
Estimated Change in EVE from the Flat Interest Rate Scenario
------------------------------------------------------------
-200 basis points +200 basis points
----------------- -----------------
December 31, 2002 -2.69% -12.35%
September 30, 2002 -9.44% -13.76%
June 30, 2002 -11.40% -23.48%
March 31, 2002 -11.30% -23.89%
December 31, 2001 -19.90% -10.20%
The assumptions in any of these simulation runs are inherently uncertain. 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.
During the first quarter of 2003, the Corporation entered into interest rate
swap agreements totaling $75,000 notional amount to convert a portion of its
liabilities from fixed rate to variable rate. For purposes of the December 31,
2002 simulation modeling, the effect of the swap agreements was not included in
the EAR and the EVE analysis. The impact of the swaps was estimated to reduce
one year EAR to a 200 basis point rate increase by 2.3 percent. The swaps were
estimated to increase EVE risk to a 200 basis point rate increase by 2.0
percent.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Integra Bank Corporation
In our opinion, the accompanying consolidated statements of financial position
and the related consolidated statements of income, of comprehensive income, of
changes in shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Integra Bank Corporation
("Integra") and its subsidiaries at December 31, 2002 and 2001, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of Integra's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2002, Integra adopted new accounting standards for goodwill and other
intangibles.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Atlanta, Georgia
January 22, 2003
28
INTEGRA BANK CORPORATION and Subsidiaries
Consolidated Statements of Financial Position
(In Thousands, Except for Share Data)
December 31,
2002 2001
----------- -----------
ASSETS
Cash and due from banks $ 70,045 $ 79,178
Federal funds sold and other short-term investments 488 102,918
----------- -----------
Total cash and cash equivalents 70,533 182,096
Loans held for sale (at lower of cost or fair value) 13,767 58,571
Securities available for sale 982,263 1,010,470
Loans, net of unearned income 1,606,155 1,599,732
Less: Allowance for loan losses (24,632) (23,868)
----------- -----------
Net loans 1,581,523 1,575,864
Premises and equipment 53,537 54,123
Goodwill 44,159 44,047
Other intangible assets 11,928 13,547
Other assets 100,028 97,172
----------- -----------
TOTAL ASSETS $ 2,857,738 $ 3,035,890
=========== ===========
LIABILITIES
Deposits:
Non-interest-bearing demand $ 213,405 $ 220,447
Interest-bearing:
Savings, interest checking and money market accounts 722,486 719,147
Time deposits of $100,000 or more 239,243 232,938
Other interest-bearing 606,814 755,880
----------- -----------
Total deposits 1,781,948 1,928,412
Federal funds borrowed and securities sold
under repurchase agreements 161,784 244,032
Other borrowings 536,042 564,448
Guaranteed preferred beneficial interests
in the Corporation's subordinated debentures 52,500 52,500
Other liabilities 92,864 25,401
----------- -----------
TOTAL LIABILITIES 2,625,138 2,814,793
Commitments and contingent liabilities (Note 20) -- --
SHAREHOLDERS' EQUITY
Preferred stock - 1,000,000 shares authorized
None outstanding
Common stock - $1.00 stated value:
Shares authorized: 29,000,000
SSharesooutstanding: 17,291,368 and 17,284,035, respectively 17,291 17,284
Capital surplus 125,467 125,334
Retained earnings 82,011 77,935
Unearned compensation (147) (270)
Accumulated other comprehensive income 7,978 814
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 232,600 221,097
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,857,738 $ 3,035,890
=========== ===========
See Accompanying Notes to Consolidated Financial Statements.
29
INTEGRA BANK CORPORATION and Subsidiaries
Consolidated Statements of Income
(In Thousands, Except for Share Data)
Year Ended December 31,
----------------------------------
2002 2001 2000
-------- --------- --------
INTEREST INCOME
Interest and fees on loans:
Taxable $110,042 $ 142,718 $148,175
Tax-exempt 1,257 1,656 1,278
Interest and dividends on securities:
Taxable 43,230 50,652 36,793
Tax-exempt 7,213 7,445 8,049
Interest on loans held for sale 1,717 323 407
Interest on federal funds sold and other short-term investments 1,172 13,545 1,979
-------- --------- --------
Total interest income 164,631 216,339 196,681
INTEREST EXPENSE
Interest on deposits 44,404 81,432 68,679
Interest on federal funds purchased and securities
sold under repurchase agreements 8,228 12,624 12,681
Interest on other borrowings 38,154 40,203 23,465
-------- --------- --------
Total interest expense 90,786 134,259 104,825
NET INTEREST INCOME 73,845 82,080 91,856
Provision for loan losses 3,143 31,077 4,138
-------- --------- --------
Net interest income after provision for loan losses 70,702 51,003 87,718
-------- --------- --------
NON-INTEREST INCOME
Service charges on deposit accounts 11,135 9,301 7,880
Other service charges and fees 5,136 4,403 3,640
Mortgage servicing income 1,087 877 250
Investment services commissions 1,115 392 122
Trust income 2,041 2,273 2,437
Securities gains 9,098 8,212 1,497
Other 6,669 7,744 4,305
-------- --------- --------
Total non-interest income 36,281 33,202 20,131
NON-INTEREST EXPENSE
Salaries and employee benefits 38,825 38,215 31,433
Occupancy 5,586 4,994 3,635
Equipment 4,474 5,049 4,342
Professional fees 4,905 5,590 4,469
Communication and transportation 4,030 4,080 2,885
Processing 4,840 3,361 2,682
Marketing 1,789 2,115 2,943
Debt prepayment fees 5,938 -- --
Loans held for sale expense 2,677 -- --
Amortization of intangible assets 1,622 5,299 3,441
Other 8,191 9,600 7,608
-------- --------- --------
Total non-interest expense 82,877 78,303 63,438
-------- --------- --------
Income before income taxes and cumulative effect of accounting change 24,106 5,902 44,411
Income taxes (benefit) 3,778 (1,629) 13,920
-------- --------- --------
Income before cumulative effect of accounting change 20,328 7,531 30,491
Cumulative effect of accounting change, net of tax -- (273) --
-------- --------- --------
NET INCOME $ 20,328 $ 7,258 $ 30,491
======== ========= ========
Consolidated Statements of Income are continued on the following page.
30
INTEGRA BANK CORPORATION and Subsidiaries
Consolidated Statements of Income (Continued)
(In Thousands, Except for Share Data)
Year Ended December 31,
------------------------------------------------
2002 2001 2000
----------- ----------- -----------
Earnings per share:
Basic:
Income before cumulative effect of accounting change $ 1.18 $ 0.43 $ 1.77
Cumulative effect of accounting change, net of tax -- (0.01) --
----------- ----------- -----------
Net Income $ 1.18 $ 0.42 $ 1.77
=========== =========== ===========
Diluted:
Income before cumulative effect of accounting change $ 1.18 $ 0.43 $ 1.77
Cumulative effect of accounting change, net of tax -- (0.01) --
----------- ----------- -----------
Net Income $ 1.18 $ 0.42 $ 1.77
=========== =========== ===========
Weighted average shares outstanding:
Basic 17,276,304 17,199,568 17,233,413
Diluted 17,283,448 17,221,404 17,254,335
See Accompanying Notes to Consolidated Financial Statements
INTEGRA BANK CORPORATION and Subsidiaries
Consolidated Statements of Comprehensive Income
(In Thousands, Except for Share Data)
Year Ended December 31,
---------------------------------
2002 2001 2000
-------- ------- --------
Net income $ 20,328 $ 7,258 $ 30,491
Other comprehensive income, net of tax:
Unrealized gain (loss) on securities:
Unrealized gain arising in period 12,465 3,434 5,881
Reclassification of realized amounts (5,411) (4,884) (890)
-------- ------- --------
Net unrealized gain (loss) on securities 7,054 (1,450) 4,991
Unrealized gain (loss) on hedged derivatives arising in period 110 (885) --
-------- ------- --------
Net unrealized gain (loss), recognized in other comprehensive income 7,164 (2,335) 4,991
-------- ------- --------
Comprehensive income $ 27,492 $ 4,923 $ 35,482
======== ======= ========
See Accompanying Notes to Consolidated Financial Statements.
31
INTEGRA BANK CORPORATION and Subsidiaries
Consolidated Statements of Changes In Shareholders' Equity
(In Thousands, Except for Share Data)
Common Common Capital Retained
Shares Stock Surplus Earnings
---------- -------- --------- --------
BALANCE AT DECEMBER 31, 1999 17,518,117 $ 17,518 $ 138,893 $ 71,299
Net income -- -- -- 30,491
Cash dividend declared -- -- -- (14,800)
Repurchase of outstanding shares (1,693,773) (1,694) (40,203) --
Change in unrealized gain/loss on securities -- -- -- --
Exercise of stock options 56,655 57 807 --
Market value and shares issued adjustment -- -- -- --
---------- -------- --------- --------
BALANCE AT DECEMBER 31, 2000 15,880,999 15,881 99,497 86,990
---------- -------- --------- --------
Net income -- -- -- 7,258
Cash dividend declared -- -- -- (16,313)
Repurchase of outstanding shares (175,500) (176) (4,130) --
Change in unrealized gain/loss on:
Securities -- -- -- --
Interest rate swaps -- -- -- --
Exercise of stock options 62,569 63 1,026 --
Issuance of stock for acquisition 1,499,967 1,500 28,589 --
Grant of restricted stock 16,000 16 352 --
Unearned compensation amortization -- -- -- --
---------- -------- --------- --------
BALANCE AT DECEMBER 31, 2001 17,284,035 17,284 125,334 77,935
---------- -------- --------- --------
Net income -- -- -- 20,328
Cash dividend declared -- -- -- (16,252)
Change in unrealized gain/loss on:
Securities -- -- -- --
Interest rate swaps -- -- -- --
Exercise of stock options 7,333 7 133 --
Unearned compensation amortization -- -- -- --
---------- -------- --------- --------
BALANCE AT DECEMBER 31, 2002 17,291,368 $ 17,291 $ 125,467 $ 82,011
========== ======== ========= ========
Accumulated Common
Other Stock
Unearned Comprehensive Owned
Compensation Income By ESOP
------------ ------------- --------
BALANCE AT DECEMBER 31, 1999 $ -- $(1,842) $(2,780)
Net income -- -- --
Cash dividend declared -- -- --
Repurchase of outstanding shares -- -- --
Change in unrealized gain/loss on securities -- 4,991 --
Exercise of stock options -- -- --
Market value and shares issued adjustment -- -- 2,780
-------- ------- -------
BALANCE AT DECEMBER 31, 2000 -- 3,149 --
-------- ------- -------
Net income -- -- --
Cash dividend declared -- -- --
Repurchase of outstanding shares -- -- --
Change in unrealized gain/loss on:
Securities -- (1,450) --
Interest rate swaps -- (885) --
Exercise of stock options -- -- --
Issuance of stock for acquisition -- -- --
Grant of restricted stock (368) -- --
Unearned compensation amortization 98 -- --
-------- ------- -------
BALANCE AT DECEMBER 31, 2001 (270) 814 --
-------- ------- -------
Net income -- -- --
Cash dividend declared -- -- --
Change in unrealized gain/loss on:
Securities -- 7,054 --
Interest rate swaps -- 110 --
Exercise of stock options -- -- --
Unearned compensation amortization 123 -- --
-------- ------- -------
BALANCE AT DECEMBER 31, 2002 $ (147) $ 7,978 $ --
======== ======= =======
See Accompanying Notes to Consolidated Financial Statements.
32
INTEGRA BANK CORPORATION and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
Year Ended December 31,
---------------------------------------------------
2002 2001 2000
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 20,328 $ 7,258 $ 30,491
Adjustments to reconcile net income to
net cash provided by operating activities:
Federal Home Loan Bank stock dividends (186) (272) (378)
Amortization and depreciation 15,258 15,476 6,417
Employee benefit expenses 123 98 --
Provision for loan losses 3,143 31,077 4,138
Net securities gains (9,098) (8,212) (1,497)
(Gain) loss on sale of premises and equipment (156) 48 (151)
(Gain) loss on sale of other real estate owned (65) 158 82
Loss on low-income housing investments 653 927 691
Increase (decrease) in deferred taxes (9,081) 10,057 371
Decrease in loans held for sale 20,373 -- --
Debt prepayment fees 5,938 -- --
Increase in other assets (3,230) (29,322) (24,594)
Increase (decrease) in other liabilities 71,670 (19,998) 8,847
----------- ----------- -----------
Net cash flows provided by operating activities 115,670 7,295 24,417
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale 405,015 1,020,133 169,215
Proceeds from sales of securities available for sale 988,234 1,170,692 326,043
Purchase of securities available for sale (1,351,661) (2,103,148) (1,149,235)
Decrease in loans made to customers 13,269 154,759 103,130
Purchase of premises and equipment (4,118) (3,498) (8,244)
Proceeds from sale of premises and equipment 437 275 4,105
Proceeds from sale of other real estate owned 2,661 1,818 1,851
Net cash and cash equivalents from acquisitions -- 25,115 41,405
----------- ----------- -----------
Net cash flows provided by (used in) investing activities 53,837 266,146 (511,730)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (146,464) (190,576) 11,631
Termination fee on interest rate swap (1,904) -- --
Net proceeds (payments) on short-term borrowings (82,248) (150,479) 293,746
Proceeds from other borrowings -- 87,979 527,171
Repayment of other borrowings (34,344) (57,169) (125,038)
Dividends paid (16,250) (16,146) (14,584)
Repurchase of common stock -- (4,306) (41,897)
Proceeds from exercise of stock options 140 1,089 864
----------- ----------- -----------
Net cash flows provided by (used in) financing activities (281,070) (329,608) 651,893
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (111,563) (56,167) 164,580
----------- ----------- -----------
Cash and cash equivalents at beginning of year 182,096 238,263 73,683
----------- ----------- -----------
Cash and cash equivalents at end of year $ 70,533 $ 182,096 $ 238,263
=========== =========== ===========
Consolidated Statements of Cash Flows are continued on the following page.
33
INTEGRA BANK CORPORATION and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(In Thousands)
Year Ended December 31,
---------------------------------------
2002 2001 2000
-------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year:
Interest $ 96,482 $ 135,309 $ 98,600
Income taxes 37 7,228 13,695
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
Change in allowance for unrealized (gain)/loss on securities available for sale $ 11,861 $ (2,438) $ 8,141
Change in deferred taxes attributable to securities available for sale 4,807 (988) (3,150)
Change in fair value of derivative hedging instruments (1,488) -- --
Other real estate acquired in settlement of loans 2,360 3,703 2,535
Loans transferred from held for sale to loan portfolio 23,985 -- --
Purchase of subsidiaries:
Assets acquired:
Securities $ 99,991 $ --
Loans 159,948 98,150
Premises and equipment 5,814 3,397
Other assets 11,641 22,645
Liabilities assumed:
Deposits (247,953) (164,744)
Short-term borrowings (10,776) --
Other borrowings (11,134) --
Other liabilities (2,557) --
Shareholders' Equity (30,089) (853)
--------- ---------
Net cash and cash equivalents from acquisitions $ 25,115 $ 41,405
========= =========
See Accompanying Notes to Consolidated Financial Statements.
34
INTEGRA BANK CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except for Share Data)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Integra Bank Corporation (the "Corporation") is a bank holding company that is
based in Evansville, Indiana. The Corporation's principal subsidiary is Integra
Bank N.A., a national banking association ("Integra Bank"). The Corporation also
owns a real estate property management company and has a controlling interest in
Integra Capital Trust I and Integra Capital Trust II, its trust securities
affiliates. At December 31, 2002, the Corporation had total consolidated assets
of $2.9 billion. The Corporation provides services and assistance to its wholly
owned subsidiaries and Integra Bank's subsidiaries in the areas of strategic
planning, administration, and general corporate activities. In return, the
Corporation receives income and/or dividends from Integra Bank, where most of
the Corporation's activities take place.
Integra Bank provides a wide range of financial services to the communities it
serves in Indiana, Kentucky, Illinois and Southwestern Ohio. These services
include various types of personal and commercial banking services and products,
investment and trust services and selected insurance services. Specifically,
these products and services include commercial, consumer and mortgage loans,
lines of credit, credit cards, transaction accounts, time deposits, repurchase
agreements, letters of credit, corporate cash management services, correspondent
banking services, mortgage servicing, brokerage and annuity products and
services, credit life and other selected insurance products, securities
safekeeping, safe deposit boxes and complete personal and corporate trust
services. Integra Bank also has a 29 percent ownership interest in Total Title
Services, LLC, a provider of residential title insurance, which is accounted for
under the equity method of accounting as an unconsolidated subsidiary.
Integra Bank's products and services are delivered through our customers'
channel of preference. At December 31, 2002, Integra Bank served its customers
through 74 banking centers and 128 automatic teller machines ("ATMs"). Integra
Bank also serves its customers through its telephone banking, web banking, and
offers a suite of Internet-based products and services that can be found at
www.integrabank.com.
Integra Bank's wholly owned subsidiary, IBNK Leasing Corp. holds leases
originated in years prior to 2000. In 2002, Integra Bank did not originate
leases through this subsidiary.
Twenty-One Southeast Third Corporation ("TSTC") is the Corporation's real estate
property management subsidiary. TSTC is the entity through which the Corporation
constructed a nine-story addition to the main office of Integra Bank. Integra
Bank and the Corporation occupy a majority of the building and the remaining
space has been sold or leased as condominiums. TSTC serves in a property
management capacity for this facility.
Integra Capital Trust I and Integra Capital Trust II are statutory business
trusts created under the law of the State of Delaware. Additional detail is
provided in Note 15 to the consolidated financial statements.
The Corporation has grown significantly through acquisition. Since 1987, the
Corporation has acquired or merged with more than 30 bank holding companies,
banks, savings associations or branches of banks or savings associations. The
Corporation may acquire additional banking-related or financial service
companies in the future.
During 2000, the Corporation completed the consolidation of its subsidiary banks
into a single national bank charter. The Corporation is an Indiana corporation
which was formed in 1985.
On January 31, 2001, the Corporation issued 1,499,967 shares of common stock,
valued at $30,089, in exchange for all of the outstanding shares of Webster
Bancorp, Inc., parent company for West Kentucky Bank, headquartered in
Madisonville, Kentucky. At January 31, 2001, Webster Bancorp, Inc. 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 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. Pro forma disclosures of the
effects of this acquisition have not been presented as the amounts involved in
this transaction were not material to the Corporation's financial results.
The consolidated financial statements of the Corporation have been prepared in
conformity with accounting principles generally accepted in the United States
and conform to predominate practice within the banking industry.
35
The following is a description of the Corporation's significant accounting
policies.
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Corporation and its wholly owned subsidiaries: Integra Bank, Integra Capital
Trust I, Integra Capital Trust II and Twenty-One Southeast Third Corporation.
All significant intercompany transactions and balances have been eliminated. The
Corporation and its subsidiaries utilize the accrual basis of accounting.
Certain prior period amounts have been reclassified to conform with the 2002
financial reporting presentation.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements. Significant estimates which are particularly
susceptible to short-term changes include valuation of the securities portfolio,
the determination of the allowance for loan losses and valuation of real estate
and other properties acquired in connection with foreclosures or in satisfaction
of amounts due from borrowers on loans. Actual results could differ from those
estimates.
CASH FLOWS
Cash and cash equivalents include cash on hand, amounts due from banks,
commercial paper and federal funds sold which are readily convertible to known
amounts of cash. Interest-bearing deposits in banks, regardless of maturity, are
considered short-term investments.
TRUST ASSETS
Property held for customers in fiduciary or agency capacities, other than trust
cash on deposit at Integra Bank, is not included in the accompanying
consolidated financial statements since such items are not assets of the
Corporation.
SECURITIES
Securities classified as trading are those debt and equity securities that the
Corporation bought and principally held for the purpose of selling them in the
near future. Gains and losses on sales and fair-value adjustments are included
as a component of net income.
Securities classified as held to maturity are those securities the Corporation
has both the intent and ability to hold to maturity regardless of changes in
market conditions, liquidity needs or changes in general economic conditions.
These securities are carried at cost adjusted for amortization of premium and
accretion of discount, computed by the interest method over their contractual
lives.
Securities classified as available for sale are those debt and equity securities
that the Corporation intends to hold for an indefinite period of time, but not
necessarily to maturity. Any decision to sell a security classified as available
for sale would be based on various factors, including significant movements in
interest rates, changes in the maturity mix of assets and liabilities, liquidity
needs, regulatory capital considerations, and other similar factors. Securities
available for sale are carried at fair value. Unrealized gains or losses are
reported as increases or decreases in shareholders' equity, net of the related
deferred tax effect. Realized gains or losses, determined on the basis of the
cost of specific securities sold, are included as a component of net income.
Security transactions are accounted for on a trade date basis.
LOAN SALES
When the Corporation sells loans through either securitizations or individual
loan sales, it may retain one or more subordinated tranches, servicing rights
and in some cases a cash reserve account, all of which are retained interests in
the securitized or sold loans. Gain or loss on sale of the loans depends in part
on the previous carrying amount of the financial assets involved in the sale,
allocated between the assets sold and the retained interests based on their
relative fair value at the date of sale. To obtain fair values, quoted market
prices are used if available. If quotes are not available for retained
interests, the Corporation calculates fair value based on the present value of
future expected cash flows using management's best estimates of the key
assumptions - credit losses, prepayments speeds, forward yield curves and
discount rates commensurate with the risks involved.
Servicing rights resulting from loan sales are amortized in proportion to, and
over the period of estimated net servicing revenues. Servicing rights are
assessed for impairment on an ongoing basis, based on fair value, with any
impairment recognized through a valuation allowance. For purposes of measuring
impairment, the rights are stratified based on interest rate and original
maturity. Fees received for servicing mortgage loans owned by investors are
based on a percentage of the outstanding monthly principal balance of such loans
and are included in income as loan payments are received. Costs of servicing
loans are charged to expense as incurred. At December 31, 2002 and 2001, the
Corporation had mortgage servicing rights assets of $1,440 and $726,
respectively.
36
LOANS
Loans are stated at the principal amount outstanding, net of unearned income.
Loans held for sale are valued at the lower of aggregate cost or fair value.
Interest income on loans is based on the principal balance outstanding, with the
exception of interest on discount basis loans, computed using a method which
approximates the effective interest rate. Loan origination fees, certain direct
costs and unearned discounts are amortized as an adjustment to the yield over
the term of the loan. Management endeavors to recognize as quickly as possible
situations where the borrower's repayment ability has become impaired or the
collectability of interest is doubtful or involves more than the normal degree
of risk. Generally, a loan is placed on non-accrual status upon becoming 90 days
past due as to interest or principal (unless both well-secured and in the
process of collection), when the full timely collection of interest or principal
becomes uncertain or when a portion of the principal balance has been
charged-off. Real estate 1 - 4 family loans (both first and junior liens) are
placed on nonaccrual status within 120 days of becoming past due as to interest
or principal, regardless of security. The Corporation adheres to the standards
for classification and treatment of open and closed-end credit extended to
individuals for household, family and other personal expenditures, and includes
consumer loans and credit cards, that are established by the Uniform Retail
Classification and Account Management Policy (OCC Bulletin 2000-20). At the time
a loan is placed in nonaccrual status, all unpaid accrued interest will be
reversed. When doubt exists as to the collectability of the remaining book
balance of a loan placed in nonaccrual status, any payments received will be
applied to reduce principal to the extent necessary to eliminate such doubt.
Nonaccrual loans are returned to accrual status when, in the opinion of
management, the financial position of the borrower indicates there is no longer
any reasonable doubt as to the timely collectability of interest and principal.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is that amount which, in management's opinion, is
adequate to absorb probable 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 economic conditions. Loans that are deemed to be uncollectible
are charged to the allowance, while recoveries of previously charged-off amounts
are credited to the allowance. A provision for loan losses is charged to
operations based upon management's ongoing evaluation of the factors previously
mentioned as well as any other pertinent factors.
The adequacy of the allowance for loan losses is based on ongoing quarterly
assessments of the probable losses inherent in the loan portfolio. The
Corporation's methodology for assessing the appropriate reserve level consists
of several key elements.
A review of selected loans (based on loan type and size) is conducted to
identify loans with heightened risk or inherent losses. The primary
responsibility for this review rests with management assigned accountability for
the credit relationship. This review is supplemented with reviews by Integra
Bank's credit review function and regulatory agencies. These reviews provide
information which assists in the timely identification of problems and potential
problems and in deciding whether the credit represents a probable loss or risk
which should be recognized. Where appropriate, an allocation is made to the
allowance for individual loans based on management's estimate of the borrower's
ability to repay the loan given the availability of collateral, other sources of
cash flow and legal options available to the Corporation.
Included in the review of individual loans are those that are impaired as
provided in Statement of Financial Accounting Standards ("SFAS") No. 114
Accounting by Creditors for Impairment of a Loan. Loans are considered impaired
when, based on current information and events, management considers it probable
the Corporation will not be able to collect all amounts due. The allowance
established for impaired loans is determined based on the fair value of the
investment measured using either the present value of expected cash flows based
on the initial effective interest rate on the loan or the fair value of the
collateral if the loan is collateral dependent.
Historical loss ratios are applied to other loans not subject to specific
allowance allocations. Homogeneous pools of loans, such as consumer installment
and residential real estate loans, are not individually reviewed. In addition,
the allowance reflects other risks affecting the loan portfolio, such as
economic conditions in the bank's geographic areas, specific industry financial
conditions and other factors.
The unallocated portion of the allowance is determined based on management's
assessment of economic conditions and specific economic factors in the
individual markets in which the Corporation operates.
37
OTHER REAL ESTATE OWNED
Properties acquired through foreclosure and unused bank premises are initially
recorded at fair value, reduced by estimated selling costs. The fair values of
other real estate are typically determined based on appraisals by independent
third parties. Write downs of the related loans at or prior to the date of
foreclosure are charged to the allowance for losses on loans. Subsequent
write-downs, income and expense incurred in connection with holding such assets,
and gains and losses realized from the sales of such assets, are included in
non-interest income and expense. At December 31, 2002 and 2001, net other real
estate owned was $2.3 million and $2.9 million, respectively.
PREMISES AND EQUIPMENT
Premises and equipment, including leasehold improvements, are stated at cost
less accumulated depreciation and amortization. Depreciation is calculated using
the straight-line method based on estimated useful lives of up to thirty-one and
one-half years for premises and five to ten years for furniture and equipment.
Costs of major additions and improvements are capitalized. Maintenance and
repairs are charged to operating expenses as incurred.
INTANGIBLE ASSETS
Costs in excess of fair value of net assets acquired consist primarily of
goodwill and core deposit intangibles. Management evaluates the carrying value
of intangibles based upon facts and circumstances surrounding the associated
assets. In the event that facts and circumstances indicate that the carrying
value of intangibles may be impaired, an evaluation of recoverability would be
performed.
Prior to December 31, 2001, the unamortized costs in excess of the fair value of
acquired net tangible assets were included in goodwill and other intangibles.
All intangible assets were amortized over the estimated period benefited, which
ranged up to 25 years.
On January 1, 2002, the Corporation adopted SFAS No. 142, Goodwill and Other
Intangible Assets. This standard changed how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in the financial statements upon
their acquisition .
SFAS No. 142 adopts a view of goodwill that bases the accounting for goodwill on
the reporting units of the combined entity into which the acquired entity is
integrated. The standard requires goodwill and other intangible assets that have
indefinite lives to be tested at least annually for impairment rather than being
amortized. Intangible assets that have finite useful lives continue to be
amortized over their useful lives, but without the constraint of an arbitrary
ceiling. SFAS No. 142 provides specific guidance for testing goodwill for
impairment and provides specific guidance on testing intangible assets that will
not be amortized for impairment and thus removes those assets from the scope of
other impairment guidance.
Upon adoption of SFAS No. 142, the Corporation assessed both its goodwill and
other intangible assets and determined that there was no impairment.
Consequently, other intangible assets continued to be amortized in accordance
with their previously established lives.
Intangible assets acquired through the purchase of branches were excluded from
the scope of SFAS No. 142 resulting in the continued amortization of certain
unidentified intangibles included in goodwill. In October 2002, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 147, Acquisitions of Certain
Financial Institutions, which amends the accounting for acquisitions of branches
qualifying as a business. Such acquisitions are now accounted for in accordance
with SFAS No. 142. During the fourth quarter of 2002, the Corporation adopted
this standard and, as required, reversed approximately $526 of pre-tax
amortization expense incurred during the first nine months of 2002.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are generally treated as
collateralized financing transactions and are recorded at the amounts at which
the securities were sold plus accrued interest. Securities, generally U.S.
government and federal agency securities, pledged as collateral under these
financing arrangements cannot be sold or repledged by the secured party. The
fair value of collateral provided to a third party is continually monitored and
additional collateral provided, obtained or requested to be returned to the
Corporation as deemed appropriate.
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights are stratified based on guarantor, origination period,
original maturity and interest rate. The servicing rights are carried at the
lower of cost or market by strata. The servicing rights capitalized are
amortized in proportion to and over the period of estimated servicing income.
Management evaluates the recoverability of the servicing rights in relation to
the impact of actual and anticipated loan portfolio prepayment, foreclosure and
delinquency experience.
38
DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation maintains an overall interest rate risk management strategy that
incorporates the use of derivative instruments to minimize significant unplanned
fluctuations in earnings and cash flows caused by interest rate volatility. The
Corporation's interest rate risk management strategy involves modifying the
repricing characteristics of certain assets and liabilities so that changes in
interest rates do not adversely affect the net interest margin and cash flows.
Derivative instruments that the Corporation may use as part of its interest rate
risk management strategy include interest rate swaps, interest rate floors,
forward contracts and both futures contracts and options on futures contracts.
Interest rate swap contracts are exchanges of interest payments, such as
fixed-rate payments for floating-rate payments, based on a common notional
amount and maturity date. Forward contracts are contracts in which the buyer
agrees to purchase and the seller agrees to make delivery of a specific
financial instrument at a predetermined price or yield. Futures contracts
represent the obligation to buy or sell a predetermined amount of debt subject
to the contract's specific delivery requirements at a predetermined date and a
predetermined price. Options on futures contracts represent the right but not
the obligation to buy or sell. Free-standing derivatives also include derivative
transactions entered into for risk management purposes that do not otherwise
qualify for hedge accounting.
Effective January, 2001, the Corporation adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended, which establishes
accounting and reporting standards for derivative instruments and hedging
activities and requires recognition of all derivatives as either assets or
liabilities in the statement of financial condition and measurement of those
instruments at fair value. On the date the Corporation enters into a derivative
contract, the Corporation designates the derivative instrument as either a fair
value hedge, cash flow hedge or as a free-standing derivative instrument. For a
fair value hedge, changes in the fair value of the derivative instrument and
changes in the fair value of the hedged asset or liability or of an unrecognized
firm commitment attributable to the hedged risk are recorded in current period
net income. For a cash flow hedge, changes in the fair value of the derivative
instrument, to the extent that it is effective, are recorded as a component of
accumulated other comprehensive income within shareholders' equity and
subsequently reclassified to net income in the same period that the hedged
transaction impacts net income. For free-standing derivative instruments,
changes in the fair values are reported in current period net income.
Prior to entering a hedge transaction, the Corporation formally documents the
relationship between hedging instruments and hedged items, as well as the risk
management objective and strategy for undertaking various hedge transactions.
This process includes linking all derivative instruments that are designated as
fair value or cash flow hedges to specific assets and liabilities on the balance
sheet or to specific forecasted transactions along with a formal assessment at
both inception of the hedge and on an ongoing basis as to the effectiveness of
the derivative instrument in offsetting changes in fair values or cash flows of
the hedged item. The Corporation considers hedge instruments with a correlation
from 80% to 120% to be sufficiently effective to qualify as a hedge instrument.
If it is determined that the derivative instrument is no longer highly effective
as a hedge or if the hedge instrument is terminated, hedge accounting is
discontinued and the adjustment to fair value of the derivative instrument is
recorded in net income.
Upon adoption of this statement on January 1, 2001, the Corporation recorded a
cumulative effect of change in accounting principle of $273, net of tax.
Cash Flow Hedges - The Corporation had previously entered into interest rate
swaps to convert floating-rate liabilities to fixed rates. The liabilities are
typically grouped and share the same risk exposure for which they are being
hedged. Gains and losses on derivative contracts that are reclassified from
accumulated other comprehensive income to current period earnings are included
in the line item in which the hedged item's effect in earnings is recorded.
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
Corporation terminated these agreements in 2002. The loss due to termination of
$1,121, net of tax, was recorded as a component of accumulated other
comprehensive income and is being amortized into earnings over the remaining
term of the agreements.
Free-Standing Derivative Instruments - Derivative transactions that do not
qualify for hedge accounting treatment under FAS 133 would be considered
free-standing derivative instruments. Gains of losses from these instruments
would be marked-to-market on a monthly basis and the impact recorded in net
income. It is the Corporation's policy not to enter into free-standing
derivative instruments without prior approval from the Board Asset-Liability
Management Committee.
INCOME TAXES
The Corporation and its subsidiaries file a consolidated federal income tax
return with each organization computing its taxes on a separate company basis.
The provision for income taxes is based on income as reported in the financial
statements. Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax basis of assets and
liabilities that will result in taxable or deductible amounts in the future. The
deferred tax assets and liabilities are computed based on enacted tax laws and
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to an amount expected to be realized. Income tax expense is
the tax payable
39
or refundable for the period plus or minus the change during the period in
deferred tax assets and liabilities. Investment tax credits are recorded as a
reduction to tax provision in the period for which the credits may be utilized.
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 10.
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.
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 or
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.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of SFAS No. 123. SFAS 148
provides alternative methods of transition for a change to the fair value based
method of accounting for stock-based employee compensation. SFAS 148 also
provides for disclosures in interim as well as compensation and the effect of
the method used on reported net income. SFAS 148 is effective for fiscal years
ended after December 15, 2002. It is the Corporation's intent to adopt SFAS 148
for the 2003 fiscal year. The Corporation is currently analyzing the impact of
the adoption.
40
Stock options are accounted for following Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees and related interpretations.
Had compensation costs been determined based on the grant date fair values of
awards (the method described in SFAS No. 123, Accounting for Stock-Based
Compensation), reported net income and earnings per common share would have been
reduced to the proforma amounts shown below.
For the Year Ended December 31 2002 2001 2000
- ------------------------------ ---------- ---------- ----------
Net income:
As reported $ 20,328 $ 7,258 $ 30,491
Proforma 19,699 6,148 29,256
Earnings per share:
Basic
As reported $ 1.18 $ 0.42 $ 1.77
Proforma 1.14 0.36 1.70
Diluted
As reported $ 1.18 $ 0.42 $ 1.77
Proforma 1.14 0.36 1.70
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others, An Interpretation of FASB Statements No. 5, 57 and 107
and Rescission of FASB interpretation No. 34, to clarify accounting and
disclosure requirements relating to a guarantor's issuance of certain types of
guarantees. FIN 45 requires entities to disclose additional information about
guarantees, or groups of similar guarantees, even if the likelihood of the
guarantor's having to make any payments under the guarantee is remote. The
disclosure provisions are effective for financial statements for fiscal years
ended after December 15, 2002. For certain guarantees, FIN 45 requires that
guarantors recognize a liability equal to the fair value of the guarantee upon
issuance. This initial recognition and measurement provision is to be applied
only on a prospective basis to guarantees issued after December 31, 2002.
Management is currently assessing the impact of FIN 45 and does not expect a
material effect on the Corporation's consolidated results of operations,
financial position or cash flows.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, ("VIEs"). FIN 46 provides that business enterprises
that represent the primary beneficiary of another entity by retaining a
controlling financial interest in that entity's assets, liabilities, and results
of operating activities must consolidate the entity in their financial
statements. Prior to the issuance of FIN 46, consolidation generally occurred
when an enterprise controlled another entity through voting interest. Certain
VIEs that are qualifying special purpose entities subject to the reporting
requirements of SFAS 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities, will not be required to be
consolidated under the provisions of FIN 46. The consolidation provisions of FIN
46 apply to VIEs created or entered into after January 31, 2003, and for
pre-existing VIEs in the first reporting period beginning after June 15, 2003.
Management is currently assessing the impact of FIN 46 and does not expect 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 for 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 will be amortized over the period
benefited and is up to 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
Basic earnings per share is computed by dividing net income for the year by the
weighted average number of shares outstanding. Diluted earnings per share is
computed as above, adjusted for the dilutive effects of stock options and
restricted stock. Weighted average shares of common stock have been increased
for the assumed exercise of stock options with proceeds used to purchase
treasury stock at the average market price for the period.
41
NOTE 3. EARNINGS PER SHARE (continued)
The following provides a reconciliation of basic and diluted earnings per share:
For the Year Ended December 31, 2002 2001 2000
- ------------------------------- ----------- ----------- -----------
Net income $ 20,328 $ 7,258 $ 30,491
Weighted average shares outstanding - Basic 17,276,304 17,199,568 17,233,413
Stock option adjustment 7,144 20,145 20,922
Restricted stock adjustment -- 1,691 --
----------- ----------- -----------
Average shares outstanding - Diluted 17,283,448 17,221,404 17,254,335
=========== =========== ===========
Earnings per share-Basic $ 1.18 $ 0.42 $ 1.77
Effect of stock options -- -- --
----------- ----------- -----------
Earnings per share - Diluted $ 1.18 $ 0.42 $ 1.77
=========== =========== ===========
Options to purchase 667,315 and 559,292 shares were outstanding at December 31,
2002 and 2001, respectively, were not included in the computation of net income
per diluted share because the exercise price of these options was greater than
the average market price of the common shares, and therefore, the effect would
be antidilutive.
NOTE 4. CASH AND DUE FROM BANKS
Aggregate cash and due from bank balances were maintained in satisfaction of the
statutory reserve requirements of the Federal Reserve Bank of St. Louis of
$5,070 and $0 as of December 31, 2002 and 2001, respectively.
NOTE 5. SECURITIES
Amortized cost and fair value of securities classified as available for sale are
as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ----------
December 31, 2002:
U.S. Government agencies $ 15,422 $ 15 $ -- $ 15,437
Mortgage-backed securities 692,525 7,032 48 699,509
States & political subdivisions 141,097 6,638 521 147,214
Other securities 118,501 3,002 1,400 120,103
---------- ------- ------ ----------
Total $ 967,545 $16,687 $1,969 $ 982,263
========== ======= ====== ==========
December 31, 2001:
U.S. Government agencies $ 144,695 $ 1,018 $1,098 $ 144,615
Mortgage-backed securities 657,025 6,596 6,075 657,546
States & political subdivisions 146,125 2,635 1,316 147,444
Other securities 59,768 1,127 30 60,865
---------- ------- ------ ----------
Total $1,007,613 $11,376 $8,519 $1,010,470
========== ======= ====== ==========
The amortized cost and fair value of the securities as of December 31, 2002, by
contractual maturity, except for mortgage-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.
42
NOTE 5. SECURITIES (continued)
Maturity of securities available for sale:
Maturity 1 - 5 Years 5 - 10 Years Over 10 Years
Under 1 Year Maturity Maturity Maturity Total
--------------- ----------------- ------------------- ------------------ ----------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
U. S. Government agencies $ 15,422 1.49% $ -- --% $ -- --% $ -- --% $ 15,422 1.49%
Mortgage-backed securities 11,488 7.69% 515,890 3.78% 87,471 4.40% 77,676 5.04% 692,525 4.06%
States & subdivisions 9,568 4.88% 21,442 6.78% 33,133 6.92% 76,954 7.14% 141,097 6.88%
Other securities 9,087 2.70% 500 12.00% 27,858 6.13% 81,056 6.21% 118,501 5.95%
-------- ---- --------- ----- --------- ---- --------- ---- --------- ----
Amortized Cost $ 45,565 4.01% $ 537,832 3.91% $ 148,462 5.29% $ 235,686 6.13% $ 967,545 4.66%
======== ==== ========= ===== ========= ==== ========= ==== ========= ====
Fair Value $ 46,036 $ 543,436 $ 151,104 $ 241,687 $ 982,263
======== ========= ========= ========= =========
Note: The yield is calculated on a federal-tax-equivalent basis.
Securities gains and (losses) are summarized as follows:
2002 2001 2000
------- ------- -------
Gross realized gains $ 9,196 $ 8,927 $ 2,103
Gross realized losses (98) (715) (606)
------- ------- -------
Total $ 9,098 $ 8,212 $ 1,497
======= ======= =======
At December 31, 2002 and 2001, the carrying value of securities pledged to
secure public deposits, trust funds, repurchase agreements and FHLB advances was
$539,775 and $591,383, respectively. Included in securities classified as
available for sale is $32,763 and $34,691 of nonmarketable equity securities,
primarily Federal Home Loan Bank and Federal Reserve Bank stock at December 31,
2002 and 2001, respectively.
During 2000, the Corporation securitized residential mortgage loans with a
market value of $37,842, effectively transferring the underlying mortgages from
loans to investment securities. The securities, guaranteed by the Federal Home
Loan Mortgage Corporation, were carried at fair value as determined by market
quotes. Key assumptions used in measuring the retained interests at the date of
securitization, included prepayment speed of 11.70%, discount rate of 7.62% and
weighted average life of 4.4 years. At December 31, 2000, the remaining interest
in the securitized assets totaled $5,693. The remaining securities were sold
during 2001.
NOTE 6. LOANS
A summary of loans as of December 31 follows:
2002 2001
----------- -----------
Real estate loans $ 1,113,404 $ 1,118,607
Commercial, industrial and agricultural loans 310,740 326,420
Economic development loans and other
obligations of state and political subdivisions 18,104 19,980
Consumer loans 147,630 126,280
Direct lease financing 1,649 2,346
Leveraged leases 5,717 5,658
Other loans 8,944 584
----------- -----------
Total loans 1,606,188 1,599,875
Less: unearned income 33 143
----------- -----------
Loans - net of unearned income $ 1,606,155 $ 1,599,732
=========== ===========
43
NOTE 6. LOANS (continued)
A summary of non-performing loans, including those classified as loans held for
sale, as of December 31 follows:
2002 2001 2000
------- ------- --------
Nonaccrual $20,010 $21,722 $ 33,079
Restructured -- -- 160
90 days past due 2,367 2,500 3,760
------- ------- --------
Total non-performing loans $22,377 $24,222 $ 36,999
======= ======= ========
The following table presents data on impaired loans at December 31:
2002 2001 2000
------- ------- --------
Impaired loans for which there is a related allowance for loan losses $ 8,807 $ 3,033 $ 20,345
Impaired loans for which there is no related allowance for loan losses 13,079 13,323 3,263
------- ------- --------
Total impaired loans 21,886 16,356 23,608
Less: Government guaranteed portion of impaired loans -- -- (1,584)
------- ------- --------
Net $21,886 $16,356 $ 22,024
======= ======= ========
Allowance for loan losses for impaired loans
included in the allowance for loan losses $ 4,186 $ 1,948 $ 10,213
Average recorded investment in impaired loans 20,855 16,410 26,076
Interest income recognized from impaired loans 436 651 254
Cash basis interest income recognized from impaired loans 198 616 272
There are no unused commitments available on any impaired loans.
The amount of loans serviced by the Corporation for the benefit of others is not
included in the accompanying Consolidated Statements of Financial Position. The
amount of unpaid principal balances of these loans was $198,570, $105,464, and
$44,693 as of December 31, 2002, 2001 and 2000, respectively. During the first
quarter of 2000, the Corporation sold approximately $189,000 of serviced
mortgages.
In the normal course of business, Integra Bank makes loans to its executive
officers and directors and to companies and individuals affiliated with officers
and directors of Integra Bank and the Corporation. The activity in these loans
during 2002 is as follows:
Balance as of January 1, 2002 $ 15,300
New loans 2,936
Repayments (2,242)
Director and officer changes (13,233)
--------
Balance as of December 31, 2002 $ 2,761
========
NOTE 7. LEASE FINANCING
The Corporation's leasing operations include direct financing, leveraged leases
and operating leases. The direct financing leasing activity involves the leasing
of various types of office, data processing, and transportation equipment. These
equipment leases have lives of three to seven years.
Under the direct financing method of accounting for leases, the total net
rentals receivable under the lease contracts, initial direct costs (net of
fees), and the estimated unguaranteed residual value of the leased equipment,
net of unearned income, are recorded as a net investment in direct financing
leases, and the unearned income on each lease is recognized using an effective
interest rate method.
44
NOTE 7. LEASE FINANCING (continued)
The composition of the net investment in direct lease financing at December 31
is as follows:
2002 2001
------- -------
Minimum lease payments receivable $ 858 $ 1,303
Add estimated residual values of leased equipment 1,186 1,576
Add initial direct costs 3 5
Less: unearned lease income (398) (538)
------- -------
Net investment in direct lease financing $ 1,649 $ 2,346
======= =======
At December 31, 2002, the minimum future lease payments due under the direct
financing leases are as follows:
2003 $ 508
2004 174
2005 128
2006 48
2007 --
-----
Total minimum future lease payments $ 858
=====
In 1997 IBNK Leasing entered into two leveraged leases with a regional air
carrier for aircraft, which have an estimated economic life of 23 years, and
were leased for a term of 16.5 years. The equity investment in the aircraft
represented 22% of the purchase price; the remaining 78% was furnished by
third-party financing in the form of long-term debt with no recourse against the
lessor and is secured by a first lien on the aircraft. At the end of the lease
term, the aircraft will be returned to the lessor. The residual value at that
time was estimated to be 32% of the cost. For federal income tax purposes, the
lessor receives the benefit of tax deductions for depreciation on the entire
leased asset and for the interest on the long-term debt. Since during the early
years of the lease those deductions exceeded the lease rental income, excess
deductions are available to offset other taxable income. In the later years of
the lease, rental income will exceed the deductions, which will increase taxable
income. Deferred taxes are provided to reflect this reversal of tax deductions.
The net investment in leveraged leases at December 31 is composed of the
following elements:
2002 2001
------ ------
Rentals receivable (net of principal and interest on nonrecourse debt) $1,841 $1,841
Estimated residual value of leased assets 5,722 5,722
Less: unearned and deferred income 1,846 1,905
------ ------
Investment in leveraged leases 5,717 5,658
Less: deferred taxes arising from leveraged leases 4,422 4,120
------ ------
Net investment in leveraged leases $1,295 $1,538
====== ======
NOTE 8. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows during the three years
ended December 31:
2002 2001 2000
-------- -------- --------
Balance at beginning of year $ 23,868 $ 25,264 $ 25,155
Allowance associated with acquisitions -- 4,018 1,103
Provision for loan losses 3,143 31,077 4,138
Loans charged to allowance (5,709) (11,956) (6,493)
Writedowns from loans transferred to held for sale -- (26,047) --
Recoveries credited to allowance 3,330 1,512 1,361
-------- -------- --------
Balance at end of year $ 24,632 $ 23,868 $ 25,264
======== ======== ========
45
NOTE 9. PREMISES AND EQUIPMENT
Premises and equipment as of December 31 consist of:
2002 2001
------- -------
Land, buildings, and lease improvements $65,742 $63,708
Equipment 30,104 30,757
Construction in progress 1,253 1,112
------- -------
Total cost 97,099 95,577
Less accumulated depreciation 43,562 41,454
------- -------
Net premises and equipment $53,537 $54,123
======= =======
Depreciation expense for 2002, 2001 and 2000 was $4,265, $4,428, and $3,689,
respectively.
NOTE 10. INTANGIBLE ASSETS
Intangible assets at December 31, 2002 were: Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
-------- ------------ --------
Core deposits (Amortizing) $ 17,080 (5,152) $ 11,928
Goodwill (Non-amortizing) 44,159 -- 44,159
-------- -------- --------
Total intangible assets $ 61,239 $ (5,152) $ 56,087
======== ======== ========
All of the intangible assets relate to the banking operating segment.
Amortization expense for core deposit intangibles for 2002, 2001 and 2000 were
$1,619, $1,605 and $682, respectively.
Estimated intangible asset amortization expense for each of the succeeding years
is as follows:
Year ending December 31,
2003 $ 1,619
2004 1,619
2005 1,612
2006 933
2007 933
2008 933
The following table reflects our results adjusted as though we had adopted SFAS
No. 142 on January 1, 2000:
Year ended
December 31,
2002 2001 2000
---------- ---------- ----------
Net income as reported $ 20,328 $ 7,258 $ 30,491
Goodwill amortization -- 2,996 2,758
Tax effect -- (148) (148)
---------- ---------- ----------
Net income as adjusted $ 20,328 $ 10,106 $ 33,101
========== ========== ==========
Net income per share, as reported:
Basic $ 1.18 $ 0.42 $ 1.77
Diluted 1.18 0.42 1.77
Net income per share, as adjusted:
Basic $ 1.18 $ 0.59 $ 1.92
Diluted 1.18 0.59 1.92
46
NOTE 10. INTANGIBLE ASSETS (continued)
A summary of capitalized mortgage servicing rights ("MSRs") at December 31
follows:
2002 2001
---- ----
Balance at beginning of year $ 726 $ --
MSRs capitalized 1,062 755
MSRs amortized (348) (29)
------ ------
Balance at end of year 1,440 726
====== ======
NOTE 11. DEPOSITS
As of December 31, 2002, the scheduled maturities of time deposits are as
follows:
Time Deposit Maturities
2003 $ 564,125
2004 122,630
2005 95,940
2006 18,672
2007 and thereafter 44,690
---------
Total $ 846,057
=========
NOTE 12. INCOME TAXES
The components of income tax expense for the three years ended December 31 are
as follows:
2002 2001 2000
------- ------- --------
Federal:
Current $(4,462) $ 7,128 $ 11,861
Deferred 8,149 (8,791) (6)
------- ------- --------
Total 3,687 (1,663) 11,855
State:
Current (841) 1,300 2,430
Deferred 932 (1,266) (365)
------- ------- --------
Total 91 34 2,065
------- ------- --------
Total income taxes $ 3,778 $(1,629) $ 13,920
======= ======= ========
The portion of the tax provision relating to realized securities gains and
losses amounted to $3,687, $3,328, and $607 for 2002, 2001 and 2000,
respectively.
47
NOTE 12. INCOME TAXES (continued)
A reconciliation of income taxes in the statement of income, with the amount
computed by applying the statutory rate of 35%, is as follows:
2002 2001 2000
------- ------- --------
Federal income tax computed at the statutory rates $ 8,437 $ 2,066 $ 15,544
Adjusted for effects of:
Nontaxable municipal interest (3,007) (3,247) (2,817)
Goodwill amortization -- 1,155 865
Nondeductible expenses 424 561 540
State income taxes, net of federal tax benefits 59 22 1,342
Low Income Housing Credit (1,042) (838) (835)
Cash surrender value of life insurance policies (657) (515) (308)
Dividend received deduction (532) (776) (236)
Other differences 96 (57) (175)
------- ------- --------
Total income taxes (benefit) $ 3,778 $(1,629) $ 13,920
======= ======= ========
The net deferred tax asset (liability) in the accompanying statements of
financial position includes the following amounts of deferred tax assets and
liabilities:
December 31,
2002 2001
-------- --------
Deferred tax liability $(18,937) $(15,011)
Deferred tax asset 22,733 23,311
Valuation allowance for deferred tax assets (330) (330)
-------- --------
Net deferred tax asset (liability) $ 3,466 $ 7,970
======== ========
The tax effects of principal temporary differences are shown in the following
table:
December 31,
2002 2001
-------- --------
Allowance for loan losses $ 9,386 $ 9,042
Direct financing and leveraged leases 5,477 5,007
Premises and equipment (15,987) (11,216)
Purchase accounting adjustments (1,377) (1,857)
Writedown on loans held for sale 4,806 9,262
Unrealized loss on hedging instruments (248) (603)
Unrealized gain on securities available for sale 3,064 (1,158)
Other (1,325) (177)
-------- --------
Net temporary differences 3,796 8,300
-------- --------
Valuation allowances (330) (330)
-------- --------
Net deferred tax asset (liability) $ 3,466 $ 7,970
======== ========
48
NOTE 13. FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Information concerning short-term borrowings for the years ended December 31 was
as follows:
2002 2001
--------- --------
Federal funds purchased:
Average amount outstanding $ 4,188 $ 2,176
Maximum amount at any month-end 14,700 6,250
Weighted average interest rate:
During year 1.89% 4.27%
End of year 1.25% N/A
Securities sold under agreements to repurchase:
Average amount outstanding $ 225,609 $281,949
Maximum amount at any month-end 262,933 350,678
Weighted average interest rate:
During year 3.61% 4.44%
End of year 3.07% 3.75%
Included in securities sold under repurchase agreements are $85,000 of national
market repurchase agreements with original maturity dates greater than one year.
During 2002, the Corporation terminated $90,000 in long-term repurchase
agreements in advance of their scheduled maturity. The Corporation incurred an
expense of $5,938 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. As originally issued, the
Corporation's repurchase agreement counterparty had an option to put the
collateral back to the Corporation at the repurchase price on a specified date.
The following table summarizes information on these national market repurchase
agreements, including amount outstanding, maturity date, interest rate and the
optional repurchase date:
Amount Maturity Date Interest Rate Repurchase Date
------ ------------- ------------- ---------------
$ 25,000 03/13/06 4.98% 03/12/03
25,000 05/03/06 4.70% 05/03/03
10,000 05/07/06 4.66% 05/07/03
25,000 05/22/06 4.75% 05/22/03
- -------- ----
$ 85,000 4.79%
======== ====
The Corporation has negotiated the termination of the optional repurchase on
three of the four outstanding transactions for approximately $8.
49
NOTE 14. OTHER BORROWINGS
Other borrowings at December 31 consist of the following:
2002 2001
-------- --------
Parent Company:
Unsecured line of credit, variable rate adjusted for changes to
LIBOR, due in 2002 (3.12% at December 31, 2001) $ -- $ 12,000
Subsidiaries:
Federal Home Loan Bank advances, due at various dates through 2018, 517,519 530,652
secured by mortgage-backed securities and mortgage loans
(weighted average rates of 6.13% and 6.14% at December 31, 2002 and
2001, respectively)
Unsecured note payable, 8.10%, payable $83 plus interest monthly 9,417 10,417
through 2003 with a final balloon payment of $9,083
Notes payable secured by equipment and an investment in a leveraged -- 1,647
lease, due at various dates through 2004, interest rates varying from
5.97% to 8.16%
Notes payable secured by equipment, 7.26%, due at various dates 9,106 9,732
through 2012
-------- --------
Total other borrowings $536,042 $564,448
======== ========
At December 31, 2002, the Corporation had $145,000 available from unused federal
funds purchased lines. In addition, the Corporation has an unsecured line of
credit available which permits it to borrow up to $7,500 at variable rates
adjusted with changes in LIBOR through August 29, 2003. At December 31, 2002,
all $7,500 remained available for future use. In conjunction with the line of
credit, at December 31, 2002, the Corporation was not in compliance with the
return of assets debt covenant; however, the agreement was subsequently amended
and effective dated December 31, 2002 resulting in the Corporation being in
compliance with the amended debt covenants.
Aggregate maturities required on other borrowings at December 31, 2002 are due
in future years as follows:
2003 $ 24,342
2004 4,698
2005 106,310
2006 57,944
2007 173,923
Thereafter 168,825
--------
Total principal payments $536,042
========
Included in Other Borrowings are $517,519 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 December 31, 2002, the Corporation had an adequate
amount of mortgage-backed securities and mortgage loans pledged to satisfy the
collateral requirements associated with these borrowings.
FEDERAL HOME LOAN BANK ADVANCES December 31, 2002
- ------------------------------- -----------------
Convertible advances $ 427,000
Fixed maturity advances 55,000
Amortizing and other advances 35,519
---------
Total Federal Home Loan Bank advances $ 517,519
=========
50
NOTE 14. OTHER BORROWINGS (continued)
An aggregate of $427,000 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
30,000 03/29/06 6.44% 10/01/01
15,000 02/02/07 6.50% 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 05/05/07 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
- --------- ----
$ 482,000 6.15%
========= ====
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 15. TRUST PREFERRED SECURITIES
On July 16, 2001, the Corporation issued $18 million of Floating Rate Capital
Securities as a participant in a Pooled Trust Preferred Fund through a
subsidiary, Integra Capital Trust II. The trust preferred securities have a
liquidation amount of $1,000 per security with a variable per annum rate equal
to six-month LIBOR plus 3.75% with interest payable semiannually. The issue
matures on July 25, 2031. Issuance costs of $581 were paid by the Corporation
and are being amortized over the life of the securities. The Corporation has the
right to call these securities at Par effective July 16, 2011.
On March 30, 1998, the Corporation issued through a subsidiary, Integra Capital
Trust I, $34.5 million of 8.25% Cumulative Trust Preferred Securities which will
mature on March 31, 2028. Issuance costs of $1,514 were paid by the Corporation
and are being amortized over the life of the securities. The Corporation has the
right to call these securities at Par effective March 30, 2003.
The principal assets of each trust subsidiary are subordinated debentures of the
Corporation. The subordinated debentures bear interest at the same rate as the
related trust preferred securities and mature on the same dates. The trust
preferred securities are included in Tier 1 capital for regulatory capital
adequacy determination purposes, subject to certain limitations.
The obligations of the Corporation with respect to the trust preferred
securities constitute a full and unconditional guarantee by the Corporation of
the trusts' obligations with respect to the securities.
Subject to certain exceptions and limitations, the Corporation may, from time to
time, defer subordinated debenture interest payments, which would result in a
deferral of distribution payments on the related trust preferred securities and,
with certain exceptions, prevent the Corporation from declaring or paying cash
distributions on the Corporation's common stock or debt securities that rank
pari passu or junior to the subordinated debenture.
51
NOTE 16. SHAREHOLDERS' EQUITY
On July 18, 2001, the Corporation adopted a Shareholder Rights Plan. Under the
Plan, rights were distributed at the rate of one right for each share held by
shareholders of record as of the close of business on July 30, 2001. Initially,
each right will entitle shareholders to buy one one-hundredth of a share of
preferred stock at a purchase price of $75.
The rights generally will be exercisable only if a person or group acquires 15%
or more of the Corporation's common stock or commences a tender or exchange
offer which, upon consummation, would result in a person or group owning 15% or
more of the Corporation's common stock. In such event, each right not owned by
such person or group will entitle its holder to purchase at the then current
purchase price, shares of common stock (or their equivalent) having a value of
twice the purchase price. Under certain circumstances, the rights are
exchangeable for shares or are redeemable at a price of one cent per right. The
rights will expire on July 18, 2011.
The Corporation had a stock repurchase program to purchase up to 5% of the
outstanding shares of the Corporation's common stock through July 18, 2002. The
shares of common stock purchased will be used to fund future stock dividends,
awards under stock-based compensation programs and other corporate uses. As of
the expiration date of July 18, 2002, the Corporation had repurchased 166,070
shares pursuant to this program.
NOTE 17. CAPITAL RATIOS
The Corporation and Integra Bank are subject to various regulatory capital
requirements administered by federal and state banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
materially adverse effect on the Corporation's financial condition. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, a bank must meet specific capital guidelines that involve quantitative
measures of assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. Capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and Integra Bank to maintain minimum amounts and ratios
(set forth in the following table) of total and Tier 1 capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). As of December 31, 2002, that the
Corporation and Integra Bank met all capital adequacy requirements to which they
were subject.
As of December 31, 2002, the most recent notification from the federal and state
regulatory agencies categorized Integra Bank as well capitalized. Integra Bank
must maintain the minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes has changed the categorization
of Integra Bank.
The amounts of dividends which the Corporation's subsidiaries may pay is limited
by applicable laws and regulations. For Integra Bank, prior regulatory approval
is required if dividends to be declared in any year would exceed net earnings of
the current year (as defined under the National Banking Act) plus retained net
profits for the preceding two years. As of December 31, 2002, Integra Bank is
unable to pay dividends to the Corporation without prior regulatory approval.
52
NOTE 17. CAPITAL RATIOS (continued)
The following table presents the actual capital amounts and ratios for the
Corporation, on a consolidated basis, and Integra Bank:
Minimum
Minimum Ratios For Capital Capital Ratios
Actual Adequacy Purposes: To Be Well Capitalized
-------------------- -------------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 2002:
Total Capital (to Risk Weighted Assets)
Consolidated $ 244,104 13.16% $ 148,442 8.00% N/A N/A
Integra Bank 231,158 12.52% 147,748 8.00% $ 184,685 10.00%
Tier I Capital (to Risk Weighted Assets)
Consolidated $ 220,892 11.90% $ 74,221 4.00% N/A N/A
Integra Bank 208,053 11.27% 73,874 4.00% $ 110,811 6.00%
Tier I Capital (to Average Assets)
Consolidated $ 220,892 7.94% $ 111,290 4.00% N/A N/A
Integra Bank 208,053 7.52% 110,716 4.00% $ 138,395 5.00%
As of December 31, 2001:
Total Capital (to Risk Weighted Assets)
Consolidated $ 238,086 12.96% $ 146,943 8.00% N/A N/A
Integra Bank 206,382 11.32% 145,843 8.00% $ 182,303 10.00%
Tier I Capital (to Risk Weighted Assets)
Consolidated $ 215,115 11.71% $ 73,472 4.00% N/A N/A
Integra Bank 183,581 10.07% 72,921 4.00% $ 109,382 6.00%
Tier I Capital (to Average Assets)
Consolidated $ 215,115 6.98% $ 123,354 4.00% N/A N/A
Integra Bank 183,581 5.97% 123,023 4.00% $ 153,778 5.00%
NOTE 18. STOCK OPTION PLAN
The Corporation's 1999 Stock Option and Incentive Plan currently reserves shares
of common stock for issuance upon the exercise of options granted as incentive
awards to directors and key employees of the Corporation. Awards may be
incentive stock options or non-qualified stock options. All options granted
under the plan or its predecessor (the "Plans") are required to be exercised
within ten years of the date granted. The exercise price of options granted
under the Plans cannot be less than the fair value of the common stock on the
date of grant. At December 31, 2002, there were 139,101 shares available for the
granting of additional options.
In 1999, the Corporation also granted non-qualified options to purchase 31,500
shares of common stock at an exercise price of $25.83, outside of the Plans, in
connection with the employment of its new Chairman and CEO. Such options vest
over a two-year period and must be exercised within ten years. At December 31,
2002, all 31,500 options remained outstanding.
A summary of the status of the options granted under the Plans by the
Corporation, adjusted for all stock dividends, as of December 31, 2002, 2001 and
2000, and changes during the years ending on those dates is presented below:
53
NOTE 18. STOCK OPTION PLAN (continued)
2002 2001 2000
------------------------- -------------------------- --------------------------
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ ---------------- ------ ---------------- ------ ----------------
Options outstanding, beginning of year 697,285 $ 24.65 608,461 $ 25.09 576,022 $ 26.38
Options granted 222,700 19.61 252,500 23.26 186,000 21.32
Options exercised (7,333) 19.11 (62,569) 17.41 (58,207) 15.49
Options forfeited (139,180) 27.52 (101,107) 28.40 (95,354) 31.37
-------- ----------- -------- ----------- ------- -----------
Options outstanding, end of year 773,472 $ 22.73 697,285 $ 24.65 608,461 $ 25.09
======== =========== ======== =========== ======= ===========
Options exercisable 430,216 330,250 343,662
Weighted-average fair value of options
granted during the year $4.70 $7.33 $11.33
All options granted prior to 1999 vest one year from the grant date. Subsequent
grants, except the special grant noted above, vest one-third in each year
following the date of the grant.
The following table summarizes information about options granted under the Plans
that were outstanding at December 31, 2002.
Weighted Average
Range of Weighted Average Remaining Weighted Average
Exercise Number Exercise Contractual Life Number Exercise
Price Outstanding Price (in years) Exercisable Price
-------- ----------- ---------------- ----------------- ----------- ----------------
$ 15.75 - 23.38 606,324 $ 21.08 7.8 219,629 $ 21.20
23.81 - 25.83 115,200 25.43 6.9 107,033 25.49
33.92 - 38.00 51,948 35.97 5.3 51,948 35.97
------- ------- --- ------- -------
773,472 $ 22.73 7.5 378,610 $ 24.44
======= ======= === ======= =======
The fair value of the stock options granted under the Plans has been estimated
using the Black-Scholes options pricing model with the following weighted
average assumptions.
2002 2001 2000
-------- -------- --------
Number of options granted 222,700 252,500 186,000
Risk-free interest rate 5.77% 5.67% 6.49%
Expected life, in years 10 10 10
Expected volatility 34.06% 45.03% 51.05%
Expected dividend yield 4.81% 4.04% 3.95%
Estimated fair value per option $ 4.70 $ 7.33 $ 11.33
54
NOTE 19. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table reflects a comparison of the carrying amounts and fair
values of financial instruments of the Corporation at December 31:
2002 2001
--------------------------- ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ----------- -----------
Financial Assets:
Cash and short-term investments $ 70,533 $ 70,533 $ 182,096 $ 182,096
Loans held for sale (at lower of cost or market) 13,767 13,767 58,571 58,571
Securities available for sale 982,263 982,263 1,010,470 1,010,470
Loans-net of allowance 1,581,523 1,606,663 1,575,864 1,602,621
Mortgage servicing rights 1,440 1,440 726 726
Financial Liabilities:
Deposits $1,781,948 $1,732,898 $ 1,928,412 $ 1,947,882
Short-term borrowings 161,784 169,348 244,032 265,162
Other borrowings 536,042 612,392 564,448 604,227
Guaranteed preferred beneficial interests in
the Corporation's subordinated debenture 52,500 52,320 52,500 52,111
Financial Instruments:
Interest rate swap agreements $ -- $ -- $ (1,488) $ (1,488)
The above fair value information was derived using the information described
below for the groups of instruments listed. It should be noted the fair values
disclosed in this table do not represent market values of all assets and
liabilities of the Corporation and, thus, should not be interpreted to represent
a market or liquidation value for the Corporation.
CASH AND SHORT-TERM INVESTMENTS
Cash and short-term investments include cash and due from banks,
interest-bearing deposits in banks, short-term money market investments,
commercial paper and federal funds sold. For cash and other short-term
investments, the carrying amount is a reasonable estimate of fair value.
LOANS HELD FOR SALE
These instruments are carried in the consolidated statements of financial
position at the lower of cost or fair value. The fair values are based on quoted
market prices of similar instruments.
SECURITIES
For securities, fair value equals quoted market price, if available. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities. Fair values for nonmarketable equity securities
are equal to cost, as there is no readily determinable fair value. Carrying
amount of accrued interest receivable approximates fair value.
LOANS
For certain homogeneous categories of loans, such as some residential mortgages,
fair value is estimated using the quoted market prices for securities backed by
similar loans, adjusted for differences in loan characteristics. The fair value
of other types of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities. Carrying amount of accrued
interest receivable approximates fair value.
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights are stratified based on guarantor, origination period,
original maturity and interest rate. The servicing rights are carried at the
lower of cost or market by strata. The servicing rights capitalized are
amortized in proportion to and over the period of estimated servicing income.
Management evaluates the recoverability of the servicing rights in relation to
the impact of actual and anticipated loan portfolio prepayment, foreclosure and
delinquency experience.
DEPOSITS
The fair value of demand deposits, savings accounts, money market deposits, and
variable rate certificates of deposit is the amount payable on demand at the
reporting date. The fair value of other time deposits is estimated using the
rates currently offered for deposits of similar remaining maturities. Carrying
amount of accrued interest payable approximates fair value.
55
NOTE 19. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
SHORT-TERM BORROWINGS
Rates currently available to the Corporation for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt. These
instruments adjust on a periodic basis and thus the carrying amount represents
fair value. Carrying amount of accrued interest payable approximates fair value.
OTHER BORROWINGS
Rates currently available for debt with similar terms and maturities are used to
estimate fair value of existing debt. Carrying amount of accrued interest
payable approximates fair value.
DERIVATIVE INSTRUMENTS
The fair values of the interest rate caps and swap agreements was based on
quoted market prices of comparable instruments.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair value of
guarantees and letters of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle the
obligations with the counterparties at the reporting date. Because all
commitments and standby letters of credit reflect current fees and interest
rates, no unrealized gains or losses are reflected in the summary of fair
values.
NOTE 20. COMMITMENTS, CONTINGENCIES, AND CREDIT RISK
The Corporation is committed under various operating leases for premises and
equipment. Future minimum rentals for lease commitments having initial or
remaining non-cancelable lease terms in excess of one year totaled $9,537 at
December 31, 2002. Rental expense for operating leases totaled $1,610, $901, and
$249 in 2002, 2001 and 2000, respectively.
Most of the business activity of the Corporation and its subsidiaries is
conducted with customers located in the immediate geographic area of their
offices. These areas are comprised of Indiana, Illinois, Kentucky, and
Southwestern Ohio. The Corporation maintains a diversified loan portfolio which
contains no concentration of credit risk from borrowers engaged in the same or
similar industries exceeding 10% of total loans.
The Corporation and Integra Bank evaluate each credit request of their customers
in accordance with established lending policies. Based on these evaluations and
the underlying policies, the amount of required collateral (if any) is
established. Collateral held varies but may include negotiable instruments,
accounts receivable, inventory, property, plant and equipment, income producing
properties, residential real estate and vehicles. The Corporation's access to
these collateral items is generally established through the maintenance of
recorded liens or, in the case of negotiable instruments, possession.
The Corporation and its subsidiaries are parties to legal actions which arise in
the normal course of their business activities. In the opinion of management,
the ultimate resolution of these matters is not expected to have a materially
adverse effect on the financial position or on the results of operations of the
Corporation and its subsidiaries.
The Corporation is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the balance sheet. The
contractual or notional amounts of those instruments reflect the extent of
involvement the Corporation has in particular classes of financial instruments.
The Corporation's exposure to credit loss, in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit, is represented by the contractual notional amount of
those instruments. The Corporation uses the same credit policies in making
commitments and conditional obligations as it does for other on-balance sheet
instruments. Financial instruments whose contract amounts represent credit risk
at December 31, 2002, follows:
Variable Rate Fixed Rate Total on Fixed Rate
Commitment Commitment Commitment Commitments
------------- ---------- ---------- -------------
Commitments to extend credit $ 265,660 $105,388 $371,048 1.96%-21.00%
Standby letters of credit -- -- 8,159 --
56
NOTE 20. COMMITMENTS, CONTINGENCIES, AND CREDIT RISK (continued)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Standby letters of credit written are conditional commitments issued by the
banks to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing, and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
NOTE 21. 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. The caps had expired by
December 31, 2002, but had a notional value of $125,000 at December 31, 2001.
The caps were indexed to one-month LIBOR with contract strike rates of 7.00% and
matured prior to 2003. The caps had no carrying values or related market values
at both December 31, 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 4.92% 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 was indexed to
one-month LIBOR with a contract strike rate of 2.00% and had a termination date
of May 17, 2004. This derivative transaction was 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.
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
NOTE 22. EMPLOYEE RETIREMENT PLANS
Through December 31, 2001 the Corporation maintained a noncontributory cash
balance plan in which substantially all full-time employees were eligible to
participate. Plan benefits, totalling approximately $2,926 were distributed to
participants during 2002.
In establishing the amounts reflected in the financial statements, the following
significant assumption rates were used:
2002 2001 2000
---- ---- ----
Discount rate 5.12% 5.78% 6.15%
Increase in compensation rate N/A 5.00% 5.00%
Expected long-term rate of return N/A N/A 6.50%
The following summary reflects the plan's funded status and the amounts
reflected on the Corporation's financial statements.
57
NOTE 22. EMPLOYEE RETIREMENT PLANS (continued)
Actuarial present values of benefit obligations at December 31 are:
2002 2001
------- -------
Change in Fair Value of Plan Assets:
Balance at beginning of year $ 2,617 $ 2,548
Actual return on plan assets (49) (1)
Employer contributions 358 525
Benefits paid (2,926) (455)
------- -------
Balance at end of year -- 2,617
------- -------
Change in Benefit Obligation:
Balance at beginning of year 2,751 2,130
Service cost -- 980
Interest costs 141 108
Actuarial gains 34 (12)
Benefits paid (2,926) (455)
------- -------
Balance at end of year -- 2,751
------- -------
Funded status -- (134)
Unrecognized net actuarial loss -- 1
------- -------
(Accrued) prepaid benefit cost $ -- $ (133)
======= =======
Net periodic pension cost included the following components for the years ended
December 31:
2002 2001 2000
------- ------- -------
Service cost - benefits earned during the period $ -- $ 980 $ 926
------- ------- -------
Interest cost on projected benefit obligation 141 108 78
Return on assets -- -- (190)
Net amortization and deferral -- 645 239
Termination settlement gain 84 -- --
------- ------- -------
Net periodic pension cost $ 225 $ 1,733 $ 1,053
======= ======= =======
Substantially all employees are eligible to contribute a portion of their pretax
salary to a defined contribution plan. The Corporation may make contributions to
the plan in varying amounts depending on the level of employee contributions.
The Corporation's expense related to this plan was $887, $842, and $599 for
2002, 2001, and 2000, respectively.
Certain of the Corporation's subsidiaries sponsored an employee stock ownership
plan (ESOP) that covered certain eligible employees. During the first quarter of
2000, the Corporation made the final distribution of all shares from the ESOP
and closed out the plan.
As the result of previous mergers and subsequent amendment of the Corporation's
pension and profit-sharing plans to include employees of the other subsidiaries,
retirement plans previously maintained by those subsidiaries have been
terminated or frozen.
58
NOTE 23. SEGMENT INFORMATION
The Corporation operates only 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;
complete personal and corporate trust services; credit cards; selected insurance
products; and correspondent banking. 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 accounting policies of the Banking segment are the same as those described
in the summary of significant accounting policies. 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.
For the Year Ended
December 31, 2002 Banking Other Eliminations Total
- ----------------- ---------- --------- ------------ ----------
Interest income $ 164,429 $ 4,995 $ (4,793) $ 164,631
Interest expense 86,813 8,766 (4,793) 90,786
---------- --------- --------- ----------
Net interest income 77,616 (3,771) -- 73,845
Provision for loan losses 3,143 -- -- 3,143
Other income 36,186 23,177 (23,082) 36,281
Other expense 82,287 650 (60) 82,877
---------- --------- --------- ----------
Earnings before income taxes and
cumulative effect of accounting change $ 28,372 $ 18,756 $ (23,022) $ 24,106
========== ========= ========= ==========
Segment assets $2,849,139 $ 348,727 $(340,128) $2,857,738
========== ========= ========= ==========
For the Year Ended
December 31, 2001 Banking Other Eliminations Total
- ----------------- ---------- --------- ------------ ----------
Interest income $ 215,882 $ 4,918 $ (4,461) $ 216,339
Interest expense 129,617 9,101 (4,459) 134,259
---------- --------- --------- ----------
Net interest income 86,265 (4,183) (2) 82,080
Provision for loan losses 31,077 -- -- 31,077
Other income 33,260 10,562 (10,620) 33,202
Other expense 77,453 909 (59) 78,303
---------- --------- --------- ----------
Earnings before income taxes and
cumulative effect of accounting change $ 10,995 $ 5,470 $ (10,563) $ 5,902
========== ========= ========= ==========
Segment assets $3,015,239 $ 353,094 $(332,443) $3,035,890
========== ========= ========= ==========
For the Year Ended
December 31, 2000 Banking Other Eliminations Total
- ----------------- ---------- --------- ------------ ----------
Interest income $ 198,275 $ 4,547 $ (6,141) $ 196,681
Interest expense 104,157 6,807 (6,139) 104,825
---------- --------- --------- ----------
Net interest income 94,118 (2,260) (2) 91,856
Provision for loan losses 4,138 -- -- 4,138
Other income 20,092 41,532 (41,493) 20,131
Other expense 62,135 9,980 (8,677) 63,438
---------- --------- --------- ----------
Earnings before income taxes $ 47,937 $ 29,292 $ (32,818) $ 44,411
========== ========= ========= ==========
Segment assets $3,057,458 $ 312,619 $(301,259) $3,068,818
========== ========= ========= ==========
59
NOTE 24. FINANCIAL INFORMATION OF PARENT COMPANY
Condensed financial data for Integra Bank Corporation (parent company only)
follows:
CONDENSED STATEMENTS OF FINANCIAL CONDITION December 31,
2002 2001
--------- ---------
ASSETS
Cash and cash equivalents $ 5,057 $ 38,269
Investment in subsidiaries 275,404 244,592
Securities available for sale 1,039 1,060
Other assets 9,844 8,280
--------- ---------
TOTAL ASSETS $ 291,344 $ 292,201
========= =========
LIABILITIES
Other borrowings $ 54,124 $ 66,124
Dividends payable 4,063 4,062
Other liabilities 557 918
--------- ---------
Total liabilities 58,744 71,104
SHAREHOLDERS' EQUITY
Common stock 17,291 17,284
Capital surplus 125,467 125,334
Retained earnings 82,011 77,935
Unearned compensation (147) (270)
Accumulated other comprehensive income 7,978 814
--------- ---------
Total shareholders' equity 232,600 221,097
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 291,344 $ 292,201
========= =========
CONDENSED STATEMENTS OF INCOME Year Ended December 31,
2002 2001 2000
-------- -------- -------
Dividends from subsidiaries $ -- $ 46,000 $23,300
Other income 587 579 9,456
-------- -------- -------
Total income 587 46,579 32,756
Interest expense 4,050 4,711 2,976
Other expenses 927 1,077 10,063
-------- -------- -------
Total expenses 4,977 5,788 13,039
-------- -------- -------
Income before income taxes and equity in
undistributed earnings of subsidiaries (4,390) 40,791 19,717
Income tax benefit 1,696 1,905 1,255
-------- -------- -------
Income before equity in undistributed earnings of subsidiaries (2,694) 42,696 20,972
Equity in undistributed earnings of subsidiaries 23,022 (35,438) 9,519
-------- -------- -------
Net income $ 20,328 $ 7,258 $30,491
======== ======== =======
60
NOTE 24. FINANCIAL INFORMATION OF PARENT COMPANY (continued)
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------------------------
2002 2001 2000
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 20,328 $ 7,258 $ 30,491
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization and depreciation 80 265 588
Employee benefit expenses 123 98 --
Undistributed earnings of subsidiaries (23,022) 35,438 (9,519)
Securities (gains) losses -- -- (62)
(Gain) loss on sale of premises and equipment -- -- (14)
(Decrease) increase in deferred taxes (467) (275) 195
(Increase) decrease in other assets (1,881) 113 2,021
(Decrease) increase in other liabilities (283) (11,303) 9,570
-------- -------- --------
Net cash flows provided by operating activities (5,122) 31,594 33,270
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities 20 -- 1,741
Purchases of securities -- -- (1,020)
Purchase of property and equipment -- -- (908)
Proceeds from sale of property and equipment -- 71 2,150
Capital contributions (to) from subsidiaries -- (405) 1,000
-------- -------- --------
Net cash flows provided by (used in) investing activities 20 (334) 2,963
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (16,250) (16,146) (14,584)
Proceeds from other borrowings -- 28,557 12,000
Repayments of other borrowings (12,000) (10,000) --
Repurchase of common stock -- (4,306) (41,897)
Proceeds from exercise of stock options 140 1,089 864
-------- -------- --------
Net cash flows used in financing activities (28,110) (806) (43,617)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (33,212) 30,454 (7,384)
-------- -------- --------
Cash and cash equivalents at beginning of year 38,269 7,815 15,199
-------- -------- --------
Cash and cash equivalents at end of year $ 5,057 $ 38,269 $ 7,815
======== ======== ========
61
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no changes in or disagreements with accountants on accounting and
financial disclosures.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item concerning the directors and nominees for
director of the Corporation is incorporated herein by reference from the
Corporation's definitive Proxy Statement for its 2003 Annual Meeting of
Shareholders, which will be filed with the Commission pursuant to Regulation 14A
within 120 days after the end of the Corporation's last fiscal year. Information
concerning the executive officers of the Corporation is included under the
caption "Executive Officers of the Company" at the end of Part I of this Annual
Report. Such information is incorporated herein by reference, in accordance with
General Instruction G(3) to Form 10-K and Instruction 3 to Item 401(b) of
Regulation S-K.
ITEM 11. EXECUTIVE COMPENSATION
The information under the heading "Compensation of Executive Officers" in the
Corporation's Proxy Statement for its 2003 Annual Meeting of Shareholders is
hereby incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information under the headings "Voting Securities and Principal
Shareholders" and "Proposal 2: Adoption of the Corporation's 2003 Stock Option
and Incentive Plan - Equity Compensation Plan Information" in the Corporation's
Proxy Statement for its 2003 Annual Meeting of Shareholders is hereby
incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the heading "Transactions with Management" in the
Corporation's Proxy Statement for its 2003 Annual Meeting of Shareholders is
hereby incorporated by reference herein.
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, the Corporation carried out an
evaluation under the supervision and with participation of management, including
the chief executive officer and chief financial officer, of the effectiveness of
the design and operation of the Corporation's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-4. Based upon that evaluation, the
Corporation's management, including the chief executive officer and chief
financial officer, concluded that the Corporation's disclosure controls and
procedures were effective as of the evaluation date. There were no significant
changes in the internal controls or other factors that could significantly
affect the controls subsequent to the evaluation date.
62
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Documents Filed as Part of Form 10-K
1. Financial Statements
Report of Independent Accountants
Consolidated Statements of Financial Position at December 31, 2002 and 2001
Consolidated Statements of Income for the years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Comprehensive Income for the years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
2. Schedules
No schedules are included because they are not applicable or the required
information is shown in the financial statements or The notes thereto.
3. Exhibits
Exhibit Index is on page 68.
Reports on Form 8-K
The Corporation filed no reports on Form 8-K during the last quarter of
the year ended December 31, 2002.
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the dates indicated.
INTEGRA BANK CORPORATION
/s/ MICHAEL T. VEA 3/19/2003
---------------------------------------------- -----------
Michael T. Vea Date
Chairman of the Board, Chief Executive Officer
and President
/s/ CHARLES A. CASWELL 3/19/2003
---------------------------------------------- ------------
Charles A. Caswell Date
Executive Vice President and
Chief Financial Officer
64
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ SANDRA CLARK BERRY 3/19/2003
---------------------------------------------- ------------
Sandra Clark Berry Date
Director
/s/ H. RAY HOOPS 3/19/2003
---------------------------------------------- ------------
H. Ray Hoops Date
Director
/s/ GEORGE D. MARTIN 3/19/2003
---------------------------------------------- ------------
George D. Martin Date
Director
/s/ THOMAS W. MILLER 3/19/2003
---------------------------------------------- ------------
Thomas W. Miller Date
Director
/s/ RONALD G. REHERMAN 3/19/2003
---------------------------------------------- ------------
Ronald G. Reherman Date
Director
/s/ RICHARD M. STIVERS 3/19/2003
---------------------------------------------- ------------
Richard M. Stivers Date
Director
/s/ ROBERT W. SWAN 3/19/2003
---------------------------------------------- ------------
Robert W. Swan Date
Director
/s/ ROBERT D. VANCE 3/19/2003
---------------------------------------------- ------------
Robert D. Vance Date
Director
/s/ MICHAEL T. VEA 3/19/2003
---------------------------------------------- ------------
Michael T. Vea Date
Chairman, CEO, President and Director
(Principal Executive Officer)
/s/ WILLIAM E. VIETH 3/19/2003
---------------------------------------------- ------------
William E. Vieth Date
Director
/s/ DANIEL T. WOLFE 3/19/2003
---------------------------------------------- ------------
Daniel T. Wolfe Date
Director
65
CERTIFICATIONS
I, Michael T. Vea, certify that:
1. I have reviewed this annual report on Form 10-K of Integra Bank
Corporation;
2. Based on my knowledge, this annual 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
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c. presented in this annual 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 annual report whether 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: March 19, 2003 /s/ MICHAEL T. VEA
------------------
Michael T. Vea, Chairman of the Board, Chief
Executive Officer and President
66
CERTIFICATIONS
I, Charles A. Caswell, certify that:
1. I have reviewed this annual report on Form 10-K of Integra Bank
Corporation;
2. Based on my knowledge, this annual 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
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c. presented in this annual 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 annual report whether 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: March 19, 2003 /s/ CHARLES A. CASWELL
----------------------
Charles A. Caswell, Executive Vice President
and Chief Financial Officer
67
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
3(a)(i) Restated Articles of Incorporation (incorporated by reference
to Exhibit 3.1 to Form 8-A/A dated June 12, 1998)
3(a)(ii) Articles of Amendment dated May 17, 2000 (incorporated by
reference to Exhibit 3(a) to Quarterly Report on Form 10-Q for
the period ending September 30, 2000)
3(a)(iii) Articles of Amendment dated July 18, 2001 (incorporated by
reference to Exhibit 4(a))
3(b) By-Laws(as amended through April 1, 2002)
4(a) Rights Agreement, dated July 18, 2001, between Integra Bank
Corporation and Integra Bank N.A., as Rights Agent. The Rights
Agreement includes the form of Articles of Amendment setting
forth terms of Series A Junior Participating Preferred Stock
as Exhibit A, the form of Right Certificate as Exhibit B and
the Summary of Rights to Purchase Preferred Shares as Exhibit
C (incorporated by reference to Exhibit 1 to the Current
Report on Form 8-K dated July 18, 2001)
10(a)* Integra Bank Corporation Employees' 401(K) Plan (2000
Restatement)(incorporated by reference to Exhibit 10(p) to
Annual Report on Form 10-K for the fiscal year ended December
31, 2001)
10(b)* Incentive Stock Option Plan (incorporated by reference to
Exhibit 10(b) to Quarterly Report on Form 10-Q for the period
ending June 30, 1996)
10(c)* Incentive Stock Option Plan, First Amendment, dated as of
December 18, 1996 (incorporated by reference to Exhibit 10(c)
to Annual Report on Form 10-K for the fiscal year ended
December 31, 1996)
10(d)* Incentive Stock Option Plan, Second Amendment, dated as of
March 19, 1997 (incorporated by reference to Exhibit 10(d) to
Annual Report on Form 10-K for the fiscal year ended December
31, 1996)
10(e)* 1999 Stock Option and Incentive Plan (incorporated by
reference to Exhibit A to Definitive Proxy Materials filed
April 24, 1999)
10(f)* Contract of Employment dated August 23, 1999, between National
City Bancshares, Inc. and Michael T. Vea (incorporated by
reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for
the period ending September 30, 1999)
10(g)* Amendment to Contract of Employment dated September 20, 2000
between Integra Bank Corporation and Michael T.
Vea (incorporated by reference to Exhibit 10(h) to Annual
Report on Form 10-K for the fiscal year ended December 31,
2000)
10(h)* Nonqualified Stock Option Agreement dated September 7, 1999,
between National City Bancshares, Inc. and Michael T. Vea
(incorporated by reference to Exhibit 10.2 to Quarterly Report
on Form 10-Q for the period ending September 30, 1999)
10(i)* Nonqualified Stock Option Agreement (Non Plan) dated September
7, 1999, between National City Bancshares, Inc. and Michael T.
Vea (incorporated by reference to Exhibit 10.3 to Quarterly
Report on Form 10-Q for the period ending September 30, 1999)
10(j)* Termination Benefits Agreement dated December 31, 1999,
between National City Bancshares, Inc. and D. Michael Kramer
(incorporated by reference to Exhibit 10(s) to Annual Report
on Form 10-K for the fiscal year ended December 31, 1999)
10(k)* Termination Benefits Agreement dated March 12, 2001, between
Integra Bank Corporation and Archie M. Brown, Jr.
(incorporated by reference to Exhibit 10(k) to Annual Report
on Form 10-K for the fiscal year ended December 31, 2001)
10(l)* Termination Benefits Agreement dated March 19, 2001, between
Integra Bank Corporation and Martin M. Zorn (incorporated by
reference to Exhibit 10(l) to Annual Report on Form 10-K for
the fiscal year ended December 31, 2001)
10(m) Termination Benefits Agreement dated October 29, 2002, between
Integra Bank Corporation and Charles A. Caswell
10(n) Credit Agreement dated August 30, 2002 between Integra Bank
Corporation and The Northern Trust Company (incorporated by
reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for
the period ending September 30, 2002)
10(o) First Amendment to Credit Agreement dated as of December 31,
2002 between Integra Bank Corporation and The Northern Trust
Company
10(p)* First Amendment to Integra Bank Corporation Employees' 401(K)
Plan dated March 7, 2001 (incorporated by reference to Exhibit
10(q) to Annual Report on Form 10-K for the fiscal year ended
December 31, 2001)
10(q)* Second Amendment to Integra Bank Corporation Employees' 401(K)
Plan dated October 17, 2001 (incorporated by reference to
Exhibit 10(r) to Annual Report on Form 10-K for the fiscal
year ended December 31, 2001)
10(r)* Third Amendment to Integra Bank Corporation Employees' 401(K)
Plan dated January 30, 2002 (incorporated by reference to
Exhibit 10(s) to Annual Report on Form 10-K for the fiscal
year ended December 31, 2001)
21 Subsidiaries of the Registrant
68
23 Consent of PricewaterhouseCoopers LLP
99.1 Certification pursuant to 18 U.S.C. Section 1350 by the Chief
Executive Officer, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification pursuant to 18 U.S.C. Section 1350 by the Chief
Financial Officer, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
* The indicated exhibit is a management contract, compensatory
plan or arrangement required to be filed by Item 601 of
Regulation S-K.
69