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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2004.
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 incorporation (IRS Employee
or organization) Identification No.)
PO BOX 868, EVANSVILLE, INDIANA 47705-0868
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (812) 464-9677
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate 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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT APRIL 30, 2004
(Common stock, $1.00 Stated Value) 17,334,734
INTEGRA BANK CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
PAGE NO.
Item 1. Unaudited Financial Statements
Consolidated balance sheets-
March 31, 2004 and December 31, 2003 3
Consolidated statements of income-
Three months ended March 31, 2004 and 2003 4
Consolidated statements of comprehensive income-
Three months ended March 31, 2004 and 2003 6
Consolidated statements of changes in shareholders equity-
Three months ended March 31, 2004 7
Consolidated statements of cash flow-
Three months ended March 31, 2004 and 2003 8
Notes to consolidated financial statements 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 24
Item 4. Controls and Procedures 26
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes In Securities, Use of Proceeds and Issuer Purchases of Equity Securities 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submissions of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
2
PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
INTEGRA BANK CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands, except for share data)
March 31, December 31,
2004 2003
- ------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 57,946 $ 66,285
Federal funds sold and interest-bearing deposits with banks 567 8,658
- -----------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 58,513 74,943
Loans held for sale (at lower of cost or market value) 1,519 242
Securities available for sale 740,846 1,006,986
Loans, net of unearned income 1,653,599 1,699,688
Less: Allowance for loan losses (25,494) (25,403)
- -----------------------------------------------------------------------------------------------------------
Net loans 1,628,105 1,674,285
Premises and equipment 55,457 54,563
Goodwill 44,839 44,839
Other intangibles 9,904 10,309
Other assets 109,546 92,127
- -----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 2,648,729 $ 2,958,294
===========================================================================================================
LIABILITIES
Deposits:
Non-interest-bearing demand $ 228,224 $ 219,983
Interest-bearing:
Savings, interest checking and money market accounts 765,016 747,619
Time deposits of $100,000 or more 284,649 305,863
Other interest-bearing 538,272 539,165
- -----------------------------------------------------------------------------------------------------------
Total deposits 1,816,161 1,812,630
Short-term borrowings 127,679 253,978
Long-term borrowings 463,007 638,698
Other liabilities 38,071 19,996
- -----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 2,444,918 2,725,302
- -----------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock - 1,000 shares authorized - None outstanding
Common stock - $1.00 stated value - 29,000 shares authorized 17,329 17,311
Additional paid-in capital 126,092 125,789
Retained earnings 52,200 83,510
Unvested restricted stock (240) (292)
Accumulated other comprehensive income 8,430 6,674
- -----------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 203,811 232,992
- -----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,648,729 $ 2,958,294
===========================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
3
INTEGRA BANK CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
Three Months Ended
March 31,
- ---------------------------------------------------------------------------------------------
2004 2003
- ---------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans:
Taxable $ 23,350 $ 25,193
Tax-exempt 137 245
Interest and dividends on securities:
Taxable 8,935 8,989
Tax-exempt 1,723 1,737
Interest on loans held for sale 34 151
Interest on federal funds sold and other short-term investments 12 14
- ---------------------------------------------------------------------------------------------
Total interest income 34,191 36,329
INTEREST EXPENSE
Interest on deposits 6,252 8,407
Interest on short-term borrowings 456 549
Interest on long-term borrowings 8,866 9,883
- ---------------------------------------------------------------------------------------------
Total interest expense 15,574 18,839
NET INTEREST INCOME 18,617 17,490
Provision for loan losses 650 1,235
- ---------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 17,967 16,255
- ---------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Service charges on deposit accounts 2,788 2,789
Other service charges and fees 1,766 1,704
Mortgage servicing income 228 586
Trust income 496 506
Securities gains 5,200 325
Gain on mortgage loans sold 141 548
CSV life insurance income 406 488
Other 992 584
- ---------------------------------------------------------------------------------------------
Total non-interest income 12,017 7,530
NON-INTEREST EXPENSE
Salaries 8,041 7,621
Commissions and incentives 1,359 1,105
Other benefits 1,847 2,155
Occupancy 1,590 1,550
Equipment 1,077 1,108
Professional fees 1,198 1,136
Communication and transportation 895 1,042
Processing 1,286 1,209
Marketing 447 344
Debt prepayment fees 56,998 -
Low income housing project losses 552 722
Amortization of intangible assets 405 405
Other 1,870 1,974
- ---------------------------------------------------------------------------------------------
Total non-interest expense 77,565 20,371
- ---------------------------------------------------------------------------------------------
Income (loss) before income taxes (47,581) 3,414
Income tax benefit (20,343) (515)
- ---------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (27,238) $ 3,929
=============================================================================================
Unaudited Consolidated Statements of Income are continued on next page.
4
INTEGRA BANK CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
(In thousands, except for per share data)
Three Months Ended
March 31,
- ---------------------------------------------------------------------------------------------
2004 2003
- ---------------------------------------------------------------------------------------------
Earnings (loss) per share:
Basic $ (1.57) $ 0.23
Diluted (1.57) 0.23
Weighted average shares outstanding:
Basic 17,297 17,281
Diluted 17,379 17,282
Dividends per share $ 0.235 $ 0.235
The accompanying notes are an integral part of the consolidated financial
statements.
5
INTEGRA BANK CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three Months Ended
March 31,
- ------------------------------------------------------------------------------------------------------------
2004 2003
- ------------------------------------------------------------------------------------------------------------
Net income (loss) $ (27,238) $ 3,929
Other comprehensive income, net of tax:
Unrealized gain on securities:
Unrealized gain arising in period 4,756 2,699
Reclassification of realized amounts (3,093) (193)
- ------------------------------------------------------------------------------------------------------------
Net unrealized gain on securities 1,663 2,506
- ------------------------------------------------------------------------------------------------------------
Unrealized gain on derivative hedging instruments arising in period 93 175
- ------------------------------------------------------------------------------------------------------------
Net unrealized gain, recognized in other comprehensive income 1,756 2,681
- ------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ (25,482) $ 6,610
============================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
6
INTEGRA BANK CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, Except for Share and Per Share Data)
Accumulated
Additional Unvested Other
Common Common Paid-in Retained Restricted Comprehensive
Shares Stock Capital Earnings Stock Income Total
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2003 17,310,782 $ 17,311 $125,789 $ 83,510 $ (292) $ 6,674 $232,992
- -----------------------------------------------------------------------------------------------------------------------------------
Net loss - - - (27,238) - - (27,238)
Cash dividend declared ($0.235 per share) - - - (4,072) - - (4,072)
Change in unrealized gain (loss) on:
Securities - - - - 1,663 1,663
Interest rate swaps - - - - 93 93
Exercise of stock options 17,982 18 303 321
Unearned compensation amortization - - - 52 - 52
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2004 17,328,764 $ 17,329 $126,092 $ 52,200 $ (240) $ 8,430 $203,811
- -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
7
INTEGRA BANK CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
Three Months Ended
March 31,
2004 2003
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ (27,238) $ 3,929
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Federal Home Loan Bank stock dividends (24) -
Amortization and depreciation 2,301 3,203
Amortization of unearned compensation 52 30
Provision for loan losses 650 1,235
Net securities gains (5,200) (325)
Gain on sale of premises and equipment (162) (85)
(Gain) loss on sale of other real estate owned 12 (26)
Loss on low-income housing investments 79 170
Decrease in deferred taxes (34) -
Net gain on sale of loans held for sale (141) (548)
Proceeds from sale of loans held for sale 18,744 59,624
Origination of loans held for sale (19,880) (48,774)
(Increase) decrease in other assets (18,281) 3,110
Increase (decrease) in other liabilities 17,384 (77,372)
- -----------------------------------------------------------------------------------------------------------------
Net cash flows provided by (used in) operating activities (31,738) (55,829)
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale 66,790 45,762
Proceeds from sales of securities available for sale 336,088 52,295
Purchase of securities available for sale (129,204) (114,388)
(Increase) decrease in loans made to customers 45,206 (40,163)
Purchase of premises and equipment (2,025) (712)
Proceeds from sale of premises and equipment 272 152
Proceeds from sale of other real estate owned 387 228
- -----------------------------------------------------------------------------------------------------------------
Net cash flows provided by (used in) investing activities 317,514 (56,826)
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 3,531 17,373
Net increase (decrease) in short-term borrowed funds (168,299) 101,392
Proceeds from long-term borrowings 334,003 -
Repayment of long-term borrowings (467,694) (1,292)
Dividends paid (4,068) (4,063)
Proceeds from exercise of stock options 321 -
- -----------------------------------------------------------------------------------------------------------------
Net cash flows provided by (used in) financing activities (302,206) 113,410
- -----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (16,430) 755
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 74,943 70,533
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 58,513 $ 71,288
=================================================================================================================
Unaudited Consolidated Statements of Cash Flow are continued on next page.
8
INTEGRA BANK CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED)
(In thousands)
Three Months Ended
March 31,
2004 2003
- ------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
Change in allowance for unrealized (gain) loss on securities available for sale $ (2,794) $ 4,216
Change in deferred taxes attributable to securities available for sale 1,130 1,708
Other real estate acquired in settlement of loans 324 74
The accompanying notes are an integral part of the consolidated financial
statements.
9
INTEGRA BANK CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for per share data)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of Integra Bank Corporation and its subsidiaries (the "Company" or
"Integra"). At March 31, 2004, the Company's subsidiaries consisted of Integra
Bank N.A. (the "Bank"), and a reinsurance company and two statutory business
trusts. All significant intercompany transactions are eliminated in
consolidation.
The financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). While the
financial statements are unaudited, they do reflect all adjustments which, in
the opinion of management, are necessary for a fair statement of the financial
position, results of operations, and cash flows for the interim periods. All
such adjustments are of a normal recurring nature. Pursuant to SEC rules,
certain information and note disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America ("GAAP") have been condensed or omitted from
these financial statements unless significant changes have taken place since the
end of the most recent fiscal year. The accompanying financial statements and
notes thereto should be read in conjunction with the Company's financial
statements and notes for the year ended December 31, 2003 included in the
Company's Annual Report on Form 10-K filed with the SEC.
Because the results from commercial banking operations are so closely related
and responsive to changes in economic conditions, the results for any interim
period are not necessarily indicative of the results that can be expected for
the entire year.
RECENT ACCOUNTING PRONOUNCEMENTS:
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS No.
123, Accounting for Stock-Based Compensation. SFAS No. 148 provides alternative
methods of transition for a change to the fair value based method of accounting
for stock-based employee compensation. SFAS No. 148 also provides for
disclosures in interim financial statements as well as compensation and the
effect of the method used on reported net income. SFAS No. 148 is effective for
fiscal years ending after December 15, 2002. The Company is currently analyzing
the impact of the adoption.
Stock options and other forms of stock-based compensation 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 fair values of awards on the grant date (the method
described in SFAS No. 123) reported net income and earnings per common share
would have been reduced to the pro forma amounts shown below.
Three Months Ended
March 31,
(In thousands, except per share data) 2004 2003
- ----------------------------------------------------------------------------------
Net income (loss):
As reported $ (27,238) $ 3,929
Proforma (27,241) 3,889
Earnings (loss) per share:
Basic
As reported $ (1.57) $ 0.23
Proforma (1.57) 0.23
Diluted
As reported $ (1.57) $ 0.23
Proforma (1.57) 0.23
10
NOTE 2. EARNINGS PER SHARE
The calculation of earnings per share for the three months ended March 31, 2004
and 2003 is summarized as follows:
Three Months Ended
March 31,
------------------
(In thousands except share data) 2004 2003
- ----------------------------------------------------------------------------------------
Net income (loss) $ (27,238) $ 3,929
========================================================================================
Weighted average shares outstanding - Basic 17,297 17,281
Stock option adjustment 82 1
- ----------------------------------------------------------------------------------------
Average shares outstanding - Diluted 17,379 17,282
========================================================================================
Earnings (loss) per share-Basic $ (1.57) $ 0.23
Effect of stock options - -
- ----------------------------------------------------------------------------------------
Earnings (loss) per share-Diluted $ (1.57) $ 0.23
========================================================================================
NOTE 3. SECURITIES
Amortized cost and fair value of securities classified as available for sale as
of March 31, 2004 and December 31, 2003 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
March 31, 2004 (In thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------
U.S. Government agencies $ 25,498 $ 585 $ - $ 26,083
Mortgage passthrough securities 174,187 3,200 15 177,372
Collateralized Mortgage Obligations 343,689 1,097 326 344,460
States & political subdivisions 98,765 6,445 287 104,923
Federal Home Loan Bank
and Federal Reserve stock 32,899 - - 32,899
Other securities 51,409 3,838 138 55,109
- ----------------------------------------------------------------------------------------------------------
Total $726,447 $ 15,165 $ 766 $ 740,846
==========================================================================================================
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2003 (In thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------
U.S. Government agencies $ 40,773 $ 206 $ 2 $ 40,977
Mortgage passthrough securities 282,377 3,934 314 285,997
Collateralized Mortgage Obligations 465,682 1,354 2,474 464,562
States & political subdivisions 111,147 6,242 311 117,078
Federal Home Loan Bank
and Federal Reserve stock 32,875 - - 32,875
Other securities 62,527 3,395 425 65,497
- ----------------------------------------------------------------------------------------------------------
Total $995,381 $ 15,131 $ 3,526 $1,006,986
==========================================================================================================
The amortized cost and fair value of the securities as of March 31, 2004, by
contractual maturity, except for mortgage passthrough securities and
collateralized mortgage obligations which are based on estimated average lives,
are shown below. Expected maturities may differ from contractual maturities in
mortgage passthrough securities and collateralized mortgage obligations, because
certain mortgages may be called or prepaid without penalties.
11
Maturity of securities available for sale:
Maturity 1 - 5 Years 5 - 10 Years Over 10 Years
(In thousands) Under 1 Year Maturity Maturity Maturity Total
- -----------------------------------------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- -----------------------------------------------------------------------------------------------------------------------------------
U. S. Government agencies $ - -% $ 25,449 3.56% $ 49 3.83% $ - -% $ 25,498 3.56%
Mortgage passthrough securities - -% 119,232 4.77% 53,013 4.32% 1,942 3.91% 174,187 4.62%
Collateralized Mortgage
Obligations - -% 136,839 3.61% 162,555 4.04% 44,295 4.24% 343,689 3.90%
States & subdivisions 9,133 5.57% 19,819 7.40% 30,962 7.53% 38,851 7.49% 98,765 7.31%
Federal Home Loan Bank
and Federal Reserve stock - -% - -% - -% 32,899 5.07% 32,899 5.07%
Other securities - -% - -% - -% 51,409 7.32% 51,409 7.32%
- -----------------------------------------------------------------------------------------------------------------------------------
Amortized Cost $9,133 5.57% $301,339 4.32% $ 246,579 4.54% $ 169,396 6.08% $ 726,447 4.82%
===================================================================================================================================
Fair Value $8,974 $306,143 $ 249,744 $ 175,985 $ 740,846
===================================================================================================================================
Note: The yield is calculated on a federal-tax-equivalent basis.
At March 31, 2004 and December 31, 2003, the carrying value of securities
pledged to secure public deposits, trust funds, securities sold under repurchase
agreements and Federal Home Loan Bank advances was $348,534 and $605,971,
respectively.
NOTE 4. INTANGIBLE ASSETS
Intangible assets at March 31, 2004 were:
Gross Net
Carrying Accumulated Carrying
(In thousands) Amount Amortization Amount
--------------------------------------------
Core deposits (Amortizing) $ 17,080 $ (7,176) $ 9,904
Goodwill (Non-amortizing) 44,839 - 44,839
---------------------------------------------
Total intangible assets $ 61,919 $ (7,176) $ 54,743
=============================================
All of the intangible assets relate to the banking operating segment.
NOTE 5. SHORT-TERM BORROWINGS
Included in short-term borrowings are Federal funds purchased, securities sold
under repurchase agreements, Federal Home Loan Bank ("FHLB") advances with
maturities less than one year and other short-term borrowings. The Company
currently has an unsecured line of credit for $15,000 with the entire amount
available at March 31, 2004.
March 31, December 31,
(In thousands) 2004 2003
- ---------------------------------------------------------------------------------------------------------
Federal funds purchased $ 7,000 $ 51,000
Securities sold under agreements to repurchase 75,100 195,372
Short-term Federal Home Loan Bank advances 45,579 3,606
Other short-term borrowed funds - 4,000
--------- ---------
Total short-term borrowed funds $ 127,679 $ 253,978
========= =========
NOTE 6. LONG-TERM BORROWINGS
Long-term borrowings include $226,704 in advances from FHLB. The Bank must
pledge collateral in the form of mortgage passthrough securities, collateralized
mortgage obligations, and mortgage loans to secure these advances. At March 31,
2004, the Bank had sufficient collateral pledged to satisfy the FHLB's
requirements.
12
March 31, December 31,
(In thousands) 2004 2003
- -----------------------------------------------------------------------------------------------------------------------------
FHLB Advances
Convertible advances $ - $ 412,000
Fixed maturity advances (weighted average rate of 2.26% at March 31, 2004) 215,000 55,000
Amortizing and other advances (weighted average rate
of 5.98% at March 31, 2004) 11,704 14,202
--------- ------------
Total FHLB Advances 226,704 481,202
Securities sold under repurchase agreements with maturities
at various dates through 2008. (weighted average rate of 3.85%
at March 31, 2004) 160,000 85,000
Notes payable, secured by equipment, with an interest rate of 7.26%,
due at various dates through 2012 8,178 8,371
Subordinated debt, unsecured, with a floating interest rate equal to three-
month LIBOR plus 3.25%, with a maturity date of April 24, 2013 10,000 10,000
Subordinated debt, unsecured, with a floating interest rate equal to three-
month LIBOR plus 2.85%, with a maturity date of April 7, 2014 4,000 -
Floating Rate Capital Securities, with an interest rate equal to six-month
LIBOR plus 3.75%, with a maturity date of July 25, 2031, and callable
effective July 16, 2011 18,557 18,557
Floating Rate Capital Securities, with an interest rate equal to three-month
LIBOR plus 3.10%, with a maturity date of June 26, 2033 and callable
effective June 25, 2008 35,568 35,568
- -----------------------------------------------------------------------------------------------------------------------------
Total long-term borrowings $ 463,007 $ 638,698
=============================================================================================================================
During the first quarter of 2004 as part of the balance sheet restructure, the
Company prepaid $467 million in long-term FHLB fixed rate advances with an
average yield of 6.16% and a remaining average life of about 4 years. The
Company also entered into $294 million of new fixed rate borrowings during the
quarter as part of the balance sheet restructuring.
NOTE 7. COMMITMENTS AND CONTINGENCIES
The Company is party to legal actions that arise in the normal course of their
business activities. In the opinion of management, the ultimate resolution of
these matters is not expected to have a materially adverse effect on the
financial position or on the results of operations of the Company.
In the normal course of business, there are additional outstanding commitments
and contingent liabilities that are not reflected in the accompanying
consolidated financial statements. The Company uses the same credit policies in
making commitments and conditional obligations as it does for other instruments.
The commitments and contingent liabilities not reflected in the consolidated
financial statements were $296,313 and $256,436 at March 31, 2004 and December
31, 2003, respectively.
NOTE 8. INTEREST RATE CONTRACTS
During 2001, the Company entered into $75,000 notional amount of interest rate
swap agreements 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 Company to pay fixed rates of interest ranging from
4.56% to 4.92% and receive a variable rate based on one-month LIBOR. The swaps
were scheduled to mature on or prior to September 10, 2004. The Company
terminated these swaps in the period of June and July 2002. The cost to
terminate these transactions was $1,121, net of tax, and is recorded as a
component of accumulated other comprehensive
13
income. At March 31, 2004, a total of $135 remained in Other Comprehensive
Income and will be amortized into earnings over the remaining original term of
the liabilities being hedged.
During the first quarter of 2003, the Company entered into $75,000 notional
amount of interest rate swap contracts to convert a portion of its liabilities
from fixed rate to variable rate as part of its balance sheet management
strategy. The interest rate swaps require the Company to pay a variable rate
based on three-month LIBOR and receive a fixed rate of interest ranging from
2.60% to 2.72%. The interest rate swaps which had a fair value of $1,309 as of
March 31, 2004 expire on or prior to May 22, 2006.
The Company is exposed to losses if a counterparty fails to make its payments
under a contract in which the Company is in a receiving status. Although
collateral or other security is not obtained, the Company 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 9. SEGMENT INFORMATION
The Company reports only one major line of business, Banking. Banking services
include various types of deposit accounts; safe deposit boxes; securities
safekeeping; automated teller machines; consumer, mortgage and commercial loans;
mortgage loan sales and servicing; letters of credit; corporate cash management
services; brokerage and annuity products and services; and complete personal and
corporate trust services. The Other category includes the operating results of
the Parent Company and its non-bank subsidiaries, including Integra Reinsurance
Company LTD (formed in May 2003), and its property management company,
Twenty-One Southeast Third Corporation (merged into the Parent Company in May
2003). The Company 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 three months ended March 31, 2004
(In thousands) Banking Other Eliminations Total
- -------------------------------------------------------------------------------------------------------
Interest income $ 34,141 $ 54 $ (4) $ 34,191
Interest expense 14,828 750 (4) 15,574
- -------------------------------------------------------------------------------------------------------
Net interest income (loss) 19,313 (696) - 18,617
Provision for loan losses 650 - - 650
Other income (loss) (1) 11,967 (26,565) 26,615 12,017
Other expense 77,260 328 (23) 77,565
- -------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (46,630) (27,589) 26,638 (47,581)
- -------------------------------------------------------------------------------------------------------
Income tax (benefit) (19,947) (396) - (20,343)
- -------------------------------------------------------------------------------------------------------
Net income (loss) $ (26,683) $ (27,193) $ 26,638 $ (27,238)
=======================================================================================================
Segment assets $ 2,621,850 $ 270,507 $ (243,628) $2,648,729
=======================================================================================================
For three months ended March 31, 2003
(In thousands) Banking Other Eliminations Total
- -------------------------------------------------------------------------------------------------------
Interest income $ 36,304 $ 1,101 $ (1,076) $ 36,329
Interest expense 17,826 2,089 (1,076) 18,839
- -------------------------------------------------------------------------------------------------------
Net interest income (loss) 18,478 (988) - 17,490
Provision for loan losses 1,235 - - 1,235
Other income (1) 7,544 4,639 (4,653) 7,530
Other expense 20,155 230 (14) 20,371
- -------------------------------------------------------------------------------------------------------
Earnings before income taxes 4,632 3,421 (4,639) 3,414
- -------------------------------------------------------------------------------------------------------
Income tax (benefit) (21) (494) - (515)
- -------------------------------------------------------------------------------------------------------
Net income (loss) $ 4,653 $ 3,915 $ (4,639) $ 3,929
=======================================================================================================
Segment assets $ 2,895,705 $ 357,347 $ (351,382) $2,901,670
=======================================================================================================
(1) Includes income (loss) on subsidiaries
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Dollar amounts in millions except for share data)
INTRODUCTION
The discussion and analysis which follows is presented to assist in the
understanding and evaluation of the financial condition and results of
operations of Integra Bank Corporation and its subsidiaries (the "Company" or
"Integra") as presented in the preceding condensed consolidated financial
statements and related notes. The text of this review is supplemented with
various financial data and statistics.
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. When used in this report, the words "may," "will," "should," "would,"
"anticipate," "estimate," "expect," "plan," "believe," "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
without limitation: general, regional and local economic conditions and their
effect on interest rates, the Company and its customers; credit risks and risks
from concentrations (geographic and by industry) within the loan portfolio;
changes in regulations or accounting policies affecting financial institutions;
the costs and effects of litigation and of unexpected or adverse outcomes in
such litigation; technological changes; acquisitions and integration of acquired
business; the failure of assumptions underlying the establishment of resources
for loan losses and estimations of values of collateral and various financial
assets and liabilities; the outcome of efforts to manage interest rate or
liquidity risk; competition; and acts of war or terrorism. The Company
undertakes no obligation to release revisions to these forward-looking
statements or to reflect events or conditions occurring after the date of this
report.
This discussion and analysis uses the non-GAAP financial measures of "adjusted
non-interest income", which represents non-interest income, less securities
gains, "adjusted non-interest expense", which represents non-interest expense,
less debt extinguishment expenses, and "diluted net operating income per share",
which is net operating income divided by the total number of diluted shares.
This discussion and analysis includes a table which reconciles adjusted
non-interest income and adjusted non-interest expenses, respectively, to the
most directly comparable GAAP financial measures. This discussion and analysis
furnished herewith, also uses the non-GAAP financial measure of net operating
income, which represents net income, less securities gains, after tax and debt
extinguishment expense, after tax. This discussion and analysis includes a table
which reconciles net operating income to the most directly comparable GAAP
financial measure. The presentation of these non-GAAP financial measures is
intended to supplement investors' understanding of the Company's core business
activities, unaffected by the fluctuations caused by securities transactions and
debt prepayments, and are useful to investors for comparative purposes. There
are no additional purposes for which management uses these non-GAAP financial
measures.
OVERVIEW
This overview of management's discussion and analysis highlights selected
information in this document and may not contain all of the information that is
important to you. For a more complete understanding of trends, events,
commitments, uncertainties, liquidity, capital resources, and critical
accounting estimates, you should carefully read this entire document. These have
an impact on the Company's financial condition and results of operations.
During the first quarter of 2004, Integra executed several key initiatives and
incurred a net $32 after-tax charge to restructure its balance sheet. The net
effects of the restructuring should enhance future earnings, improve the
Company's liquidity, and contribute to the Company reaching its interest rate
risk management objectives including reducing the adverse impact of higher
interest rates on earnings and market value of equity.
The Company also indicated plans to adjust its cash dividend policy as explained
further under the caption "Change in Dividend Philosophy".
SUMMARY OF BALANCE SHEET RESTRUCTURING ACTIVITIES
The key steps of the balance sheet restructuring included:
1) Integra prepaid $467 in long-term FHLB advances with an average yield of
6.16% that had constrained earnings and masked the significant financial
progress the Company has made in recent years. The remaining average life
of the debt was about 3.7 years and maturities ranged from September 2005
to October 2010. Integra incurred a charge of $57 ($35.1 after-tax) to
extinguish the debt.
15
2) Integra also reduced its balance sheet and funded a portion of the FHLB
debt extinquishment by reducing its investment portfolio by approximately
$262. This action improved Integra's interest rate risk profile by reducing
the amount of assets susceptible to prepayments and in a rising rate
environment reduces extension risk. Integra recognized a gain of $5.2 ($3.2
after-tax) on the sale of these securities. The average yield on the
securities sold was 4.29% and their duration was approximately 2.6 years.
3) Integra further improved its interest rate risk profile and improved its
liquidity position by arranging $330 of new fixed rate borrowing with final
maturities ranging from 1 to 4 years, having an average life of
approximately 2.6 years and an average yield of 2.28%. Additionally, the
Company issued $4 of subordinated debt and paid off the outstanding balance
on its line of credit.
4) Integra used the surplus cash proceeds from these transactions to reduce
short-term borrowings.
ADDITIONAL DEVELOPMENTS
During the quarter, Integra received an investment grade rating of Baa2 from
Moody's Investor Service for the long-term deposits of its principal subsidiary,
Integra Bank N.A. (the "Bank"). Management believes this public rating bolsters
Integra's liquidity with enhanced access to the capital markets.
CHANGE IN DIVIDEND PHILOSOPHY
Concurrently with the balance sheet restructuring, the Company announced a
change in its dividend philosophy which is likely to reduce the quarterly common
stock dividend from $0.235 cents per share to $0.16 cents per share beginning
with the July 2004 dividend payment.
As a result, the Company will be moving to a target long-term dividend payout
ratio of 35% to 50%. This contrasts with a dividend payout ratio that was over
91% in 2003.
2004 STRATEGIC OBJECTIVES
Integra anticipates taking actions in 2004 which, if successful, over time would
lead to expanding its customer base, expanding the use of existing products
among current customers, expanding the number of total products used among
current customers, and enhancing the efficiency of how products and services are
delivered to customers.
Integra also anticipates taking actions in 2004 to improve its overall
profitability through prudent risk management, a focus on competing on service
rather than price, and analyzing its businesses, products, and markets to ensure
capital is allocated to the areas that have the potential to generate the
highest risk adjusted rates of return.
The Company anticipates achieving these objectives through developing new
products, making additional investments in training and technology, optimizing
its retail delivery network, and emphasizing new customer sales and service
initiatives, such as the I CARE program. The Company will continue to emphasize
growing valuable core deposits (defined as money market, demand deposit, and
savings accounts), building on recent investments in a high-quality commercial
real estate niche, and concentrating investments in new markets and products
that have superior growth and/or income demographic profiles.
16
FINANCIAL OVERVIEW
RECONCILIATION TABLE - NET OPERATING INCOME AND DILUTED NET
OPERATING INCOME PER SHARE
(In millions, except per share data)
Three Months Ended % Change
----------------------- --------
March 31, March 31, Previous
2004 2003 Year
----------------------- --------
Net income (loss) $ (27.2) $ 3.9
Less:
Securities gains, after tax 3.2 0.4
Debt extinguishment expense, after tax 35.1 -
---------------------
Net operating income $ 4.7 $ 3.5 34%
=====================
Net income (loss) per share $ (1.57) $ 0.23
Less:
Securities gains, after tax 0.18 0.03
Debt extinguishment expense, after tax 2.02 -
---------------------
Diluted net operating income per share $ 0.27 $ 0.20 35%
=====================
Net income (loss) for the quarter ended March 31, 2004 was $(27.2) compared to
$3.9 for the same period of 2003. Earnings (loss) per share, on a diluted basis,
were $(1.57) for the first quarter of 2004 compared to $0.23 for the first
quarter of 2003. Net operating income, which is defined as net income less
securities gains and debt extinguishment net of tax, was $4.7 for the first
three months of 2004 compared to $3.5 for the first three months of 2003,
representing a 34% increase. The adjustments primarily represent the effects of
the balance sheet restructuring described above. The diluted net operating
income per share was $0.27 for the first quarter of 2004 compared to $0.20 for
the same period of 2003.
Net interest income grew to $18.6 for three months ended March 31, 2004 from
$17.5 for the three months ended March 31, 2003, an increase of $1.1, or 6.4%.
On a tax-equivalent basis, net interest income grew 4.1% to $19.6 in the first
quarter of 2004 from the $18.8 reported in the same period a year ago. The
improvement is attributable, in part, to growth in consumer and mortgage loan
balances, stronger valuable core deposit levels, improved loan and deposit
pricing discipline and enhancements in the Company's financial risk management
capabilities. These activities produced a net interest margin that increased by
10 basis points to 2.94% during the first quarter of 2004 compared to the same
quarter a year ago. Interest rates overall were lower in the first quarter of
2004 compared with the same time period of 2003. Earning asset yields dropped 47
basis points over this horizon, comprised of a 67 basis point decline in loan
yields and a 14 basis point decline in investment yields, while the Company's
cost of funds decreased 59 basis points from the prior year period, driven
primarily by a 60 basis point decline in interest bearing deposit yields. The
balance sheet restructuring took place late in the first quarter of 2004, and
thus had a negligible effect on net interest income and the net interest margin
for the quarter.
Credit quality trends were generally stable to positive. Provision for loan
losses was $0.7 for the three months ended March 31, 2004, a $0.5 reduction
compared to $1.2 for the same period one year ago. The improvement is related to
lower net charge-offs. Net charge-offs were $0.6 in the 2004 first quarter
compared to $1.3 in the 2003 first quarter, or 14 and 34 basis points of average
loans respectively, over the same periods. The net charge-offs experienced in
the 2004 first quarter reflected a better than expected performance. Given the
current composition of the loan portfolio, current and expected economic
conditions, management's expectations are that the normalized net charge-off
rate should average 25-35 basis points of average loans.
Non-interest income was impacted by the balance sheet restructuring and a
slowing in mortgage related revenue. Non-interest income increased $4.5 to $12.0
in the first quarter 2004 compared to $7.5 for the first quarter of 2003. The
increase is attributable to the $5.2 in securities gains taken in the first
quarter of 2004 related to the balance sheet restructuring. Securities gains in
the first quarter of 2003 totaled $0.3. Excluding the impact of securities gains
in both quarters, adjusted non-interest income was $6.8 in the first quarter of
2004, a $0.4 reduction compared to the same quarter of 2003. The reduction is
primarily due to lower mortgage related revenues.
Non-interest expense was significantly impacted by the balance sheet
restructuring. Non-interest expense was $77.6 for the first quarter of 2004
compared to $20.4 for the same period of 2003 an increase of $57.2. Of this
increase, $57.0 is attributable to debt extinguishment prepayment penalties from
the balance sheet restructuring. There was no debt extinguishment expense
incurred in the first quarter of 2003. Excluding the impact of debt
extinguishment expense, adjusted non-interest expense was $0.2 higher, in the
2004
17
first quarter compared to the same quarter a year ago. The Company incurred
professional fee expenses of approximately $0.2 in the first quarter of 2004
related to the balance sheet restructuring.
Annualized returns on average assets and equity for the three months ended March
31, 2004 were (3.76)% and (47.20)%, respectively, compared with 0.55% and 6.78%
in the same period of 2003. The annualized returns, excluding the balance sheet
restructure loss of $31.9, on average assets and equity for the first three
months of 2004 were 0.65% and 8.10%, respectively.
CRITICAL ACCOUNTING POLICIES
There have been no changes to the Company's critical accounting policies since
those disclosed in the Annual Report on Form 10-K for the year ended December
31, 2003.
NET INTEREST INCOME
Net interest income grew to $18.6 for three months ended March 31, 2004 from
$17.5 for the three months ended March 31, 2003, an increase of $1.1, or 6.4%.
On a tax-equivalent basis, net interest income grew 4.1% to $19.6 in the first
quarter of 2004 from the $18.8 reported in the same period a year ago. The
improvement is attributable, in part, to growth in consumer and mortgage loan
balances, stronger valuable core deposit (defined as money market, demand
deposit, and savings accounts) levels, improved loan and deposit pricing
discipline and enhancements in the Company's financial risk management
capabilities. These activities produced a net interest margin that increased by
10 basis points to 2.94% during the first quarter of 2004 compared to the same
quarter a year ago. Interest rates overall were lower in the first quarter of
2004 compared with the same time period of 2003. Earning asset yields dropped 47
basis points over this horizon, comprised of a 67 basis point decline in loan
yields and a 14 basis point decline in investment yields, while the Company's
cost of funds decreased 59 basis points from the prior year period, driven
primarily by a 60 basis point decline in interest bearing deposit yields. The
balance sheet restructuring took place very late in the first quarter of 2004,
and thus had a negligible effect on net interest income and the net interest
margin for the quarter.
Average earning assets were $2,652 for the first quarter of 2004 compared to
$2,622 for the first quarter of 2003, reflecting a 1.1% increase. Average loans
increased $38, to $1,661 from $1,623 or 2.4%, from the first quarter of 2003.
The growth was concentrated in the consumer and mortgage portfolios, which grew
by $43 and $21, or 13.0% and 5.3% respectively. Over the same time period,
average commercial loan balances fell $26, or 2.9%. A significant contributor to
the decline in commercial loan balances was Integra choosing not to renew
approximately $22 in commercial loans that had low returns on economic capital.
Loan yields declined 67 basis points to 5.65% for the first quarter of 2004
compared to 6.32% for the same period in 2003.
Between the first quarters of 2003 and 2004, the average balance of investment
securities showed little change. Average long-term investment securities were
$998 for the first quarter of 2004 compared to $1,001 for the first quarter of
2003 a decline of 0.2%. The investment portfolio average yield was 4.69% in the
first quarter of 2004 compared with 4.83% for the same time period in 2003
despite significantly lower interest rates in the first quarter of 2004. The 14
basis point decline in securities yields resulted from a shift in portfolio
strategy late in 2002 to invest in securities with shorter duration and less
convexity; both of which, lowered the overall portfolio yield at the time, but
provided more stable and predictable returns going forward. As part of the
balance sheet restructuring, the investment portfolio was reduced by
approximately $262. The average yield on securities sold was 4.29%. Since this
transaction happened at the end of the quarter, averages were not significantly
impacted.
Average interest-bearing liabilities were almost unchanged, declining $5, or
0.2%, to $2,418 for the three months ended March 31, 2004 compared to the same
period in 2003. The mix, however, changed as stronger, valuable core deposit
growth offset a lower reliance on certificates of deposit and wholesale funding.
The interest-bearing liability yield decreased from 3.15% to 2.56% over the same
period.
Average interest-bearing deposits increased $33 from $1,596 to $1,629 while
average non-interest-bearing demand deposits increased $29, or 14.0%, from $208
to $237 for the first quarter of 2004 compared to the same period in 2003.
Overall, valuable core deposits grew 8.0% year over year to $1,008 from $933. As
higher rate promotional certificates of deposit matured in 2003, the Company
offered these customers an opportunity to move their deposits into money market,
interest checking and savings accounts along with various annuity products. The
declining rate environment, an improvement in our pricing discipline and change
in deposit product mix resulted in the cost of deposits decreasing from 2.14% to
1.54% for the first quarter of 2004 compared to the first quarter of 2003.
Average short-term borrowings decreased $5 from $169 to $164 for the first
quarter of 2004 compared to the same period in 2003. The cost of short-term
borrowings declined 27 basis points during this period, to 1.05% for the first
quarter of 2004.
Average long-term borrowings decreased $34 from $659 to $625 for the first
quarter of 2004 compared to the same period in 2003. The Company has reduced
high-coupon, long-term debt on an opportunistic basis in the past six quarters
culminating with the balance sheet restructuring in late March 2004. The cost of
long-term borrowings decreased 45 basis points from 6.08% during the first
quarter of 2003 to 5.63% for the same period of 2004. In April 2003, the Company
issued $10 of subordinated debt which had a
18
floating rate of 4.33% at the end of the first quarter of 2004. In late June
2003, the Company called $34.5 of trust preferred securities at par which had a
fixed rate of 8.25% and issued $35.6 of new, floating rate trust preferred
securities, which had an interest rate on March 31, 2004 of 4.21%. In March
2004, the Company issued $4 of subordinated debt, which had a floating rate of
3.96% on March 31, 2004. Since both the new subordinated debt and the balance
sheet restructure happened late in the quarter, neither the average balances nor
the rates were materially impacted.
Three Months Ended
March 31, March 31,
Net Interest Margin Analysis 2004 2003
- -----------------------------------------------------------------------------------------
Yields (federal-tax-equivalent)
Loans 5.65% 6.32%
Securities 4.69 4.83
Other earning assets 2.45 4.49
- --------------------------------------------------------------------------------------
Total earning assets 5.28 5.75
Cost of funds
Interest bearing deposits 1.54 2.14
Other interest bearing liabilities 4.68 5.11
Total interest bearing liabilities 2.56 3.15
- --------------------------------------------------------------------------------------
Total interest expense to earning assets 2.34 2.91
- --------------------------------------------------------------------------------------
Net interest margin 2.94% 2.84%
======================================================================================
NON-INTEREST INCOME
Non-interest income for the three months ended March 31, 2004, was $12.0
compared to $7.5 for the first quarter of 2003. Securities gains were $5.2 for
the three months of 2004 and were mainly a result of the balance sheet
restructuring, while the first three months of 2003 had $0.3 in securities
gains. Adjusted non-interest income, consisting of non-interest income less
securities gains, was $6.8 for the three months ended March 31, 2004 compared to
$7.2 for the same period of 2003. This decrease is attributable to a decrease in
mortgage related revenue. The Company sells the majority of the fixed rate
mortgage loans in the secondary market with servicing retained. As interest
rates stabilize or increase, the Company expects mortgage-refinancing activities
to slow resulting in lower mortgage servicing income and gain on sale of
mortgage loans.
Other non-interest income increased $0.4 from $0.6 for the first quarter of 2003
to $1.0 for the period ending March 31, 2004. The increase was due, in part, to
an increase in brokerage and annuity income.
Three Months Ended
Non-Interest Income March 31, Increase
(In thousands) 2004 2003 (Decrease)
- -------------------------------------------------------------------------------------
Service charges on deposit accounts $ 2,788 $ 2,789 $ (1)
Other service charges and fees 1,766 1,704 62
Mortgage servicing income 228 586 (358)
Trust income 496 506 (10)
Gain on sale of mortgage loans 141 548 (407)
CSV life insurance income 406 488 (82)
Securities gains 5,200 325 4,875
Other 992 584 408
- ------------------------------------------------------------------------------------
Total non-interest income $ 12,017 $ 7,530 $ 4,487
====================================================================================
Less securities gains 5,200 325 4,875
- ------------------------------------------------------------------------------------
Total adjusted non-interest income $ 6,817 $ 7,205 $ (388)
====================================================================================
NON-INTEREST EXPENSE
Non-interest expense was significantly impacted by the balance sheet
restructuring. Non-interest expense was $77.6 for the first quarter of 2004
compared to $20.4 for the same period of 2003 an increase of $57.2. Of this
increase, $57.0 is attributable to debt extinguishment prepayment penalties from
the balance sheet restructuring. There was no debt extinguishment expense
incurred in the
19
first quarter of 2003. Excluding the impact of debt extinguishment expense,
adjusted non-interest expense was $0.2 higher, in the 2004 first quarter
compared to the same quarter a year ago. The Company incurred professional fee
expenses of approximately $0.2 in the first quarter of 2004 related to the
balance sheet restructuring.
Salaries, commissions and incentives and other benefits increased $0.4, or 3.4%,
for the three months ended March 31, 2004 compared to the same period of 2003.
This increase was comprised of commissions and incentives, annual salary
adjustments and payroll taxes, offset by a decrease in health insurance expense.
Performance-based incentives and commissions increased $0.3 to $1.4 during the
first quarter of 2004. In 2003 the Company initiated performance-based awards
tied to sales of fee-based services and origination of loan and deposit
products. Salaries increased $0.4, or 5.5%, and payroll taxes increased $0.1,
from the same period of 2003. Employee health benefits expense decreased $0.4 as
the Company experienced lower claims and restructured its reinsurance contract.
The Company offered an alternative choice in medical plans to the employees,
which provides its employees the opportunity to more actively manage their
health care consumption and could help control the increase in these expenses in
the future.
Communication and transportation expense decreased $0.1 from $1.0 for the
quarter ending March 31, 2003 to $0.9 for the first quarter of 2004. Nearly all
of this decrease is due to switching providers on communication lines. The
Company expects comparable decreases in all of 2004.
Three Months Ended
Non-Interest Expense March 31, Increase
(In thousands) 2004 2003 (Decrease)
- ------------------------------------------------------------------------------------
Salaries $ 8,041 $ 7,621 $ 420
Commissions and incentives 1,359 1,105 254
Other benefits 1,847 2,155 (308)
Occupancy 1,590 1,550 40
Equipment 1,077 1,108 (31)
Professional fees 1,198 1,136 62
Communication and transportation 895 1,042 (147)
Processing 1,286 1,209 77
Marketing 447 344 103
LIHP operating losses 552 722 (170)
Debt prepayment fees 56,998 - 56,998
Amortization of intangible assets 405 405 -
Other 1,870 1,974 (104)
- ------------------------------------------------------------------------------------
Total non-interest expense $ 77,565 $ 20,371 $ 57,194
====================================================================================
Less debt prepayment fees 56,998 - 56,998
- ------------------------------------------------------------------------------------
Total adjusted non-interest expense $ 20,567 $ 20,371 $ 196
====================================================================================
INCOME TAX EXPENSE
Income tax benefit was $20.3 for the three months ended March 31, 2004 compared
with $0.5 for the same period in 2003. The effective tax rates were (42.8)% and
(15.1)% for the three months ended March 31, 2004 and 2003, respectively. Income
from tax exempt or tax-preferred sources, including interest on municipal loans
and investments, bank-owned life insurance and dividends on tax-preferred
securities decreased $0.8 in the first three months of 2004 compared to the
first three months of 2003. Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or settled. The
Company expects the effective tax rate to be approximately 18% for the remainder
of 2004.
FINANCIAL POSITION
Total assets at March 31, 2004 were $2,649, a decrease of $309 compared to
$2,958 at December 31, 2003. Total assets were $2,902 at March 31, 2003.
SECURITIES
Total investment securities available for sale were $741 at March 31, 2004,
$1,007 at December 31, 2003 and $1,002 at March 31, 2003. These securities
represent the second largest earning asset component after loans. The Company
currently has no investment securities classified as held to maturity. The
market value of the investment securities available for sale on March 31, 2004
was $14 higher than the amortized cost. During the quarter, the portfolio was
reduced by the sale of $262 of securities during the balance sheet
20
restructure. The composition and remaining lives have remained relatively the
same as before the restructure. The yield for the portfolio after the balance
sheet restructure is 4.69% compared to 4.61% on December 31, 2003. Management
regularly reviews the composition of the securities portfolio, taking into
account market risks and the interest rate environment.
LOANS
Total loans at March 31, 2004 were $1,654 compared to $1,700 and $1,645 at
December 31, 2003 and March 31, 2003, respectively. The $9 increase in loan
balances between March 31, 2003 and March 31, 2004 is attributable to a $41
increase in consumer-oriented loans and a $17 increase in mortgage loans,
partially offset by a $50 decline in commercial-oriented loans. Commercial
mortgages decreased $28, or 11.9%, since December 31, 2003 while Commercial,
industrial and agricultural loans decreased by $4, or 0.7%, for the first three
months of 2004. Economic development loans and other obligations of state and
political subdivisions decreased by $7. The decrease in commercial, industrial
and economic development and other obligations of state and political
subdivisions was a result of a reduction in low yielding loans. Consumer loans
increased $0.8, or 0.4%.
LOAN PORTFOLIO
March 31, December 31,
(In thousands) 2004 2003
- ---------------------------------------------------------------------------------
Commercial, industrial and
agricultural loans $ 581,827 $ 586,159
Economic development loans and
other obligations of state and
political subdivisions 13,827 20,951
Lease financing 5,945 6,796
Commercial mortgages 209,976 238,261
Construction and development 50,069 53,108
Residential mortgages 474,011 477,895
Home equity 132,710 132,101
Consumer loans 185,234 184,417
- --------------------------------------------------------------------------------
Loans, net of unearned income $ 1,653,599 $ 1,699,688
================================================================================
ASSET QUALITY
The allowance for loan losses is the amount that, in management's opinion, is
adequate to absorb probable inherent loan losses as determined by management's
ongoing evaluation of the loan portfolio. The evaluation by management is based
upon consideration of various factors including growth of the portfolio, an
analysis of individual credits, adverse situations that could affect a
borrower's ability to repay, prior and current loss experience, the results of
recent regulatory examinations and current economic conditions. Loans that are
deemed to be uncollectible are charged-off to the allowance, while recoveries of
previously charged off amounts are credited to the allowance. A provision for
loan losses is expensed to operations at levels deemed necessary to provide
assurance that the allowance for loan losses is sufficient to absorb probable
losses based on management's ongoing evaluation of the loan portfolio.
The allowance for loan losses was $25.5 at March 31, 2004, representing 1.54% of
total loans compared with $25.4 at December 31, 2003 which represented 1.50% of
total loans and $24.5 which represented 1.49% of total loans at March 31, 2003.
Annualized net charge-offs to average loans was 0.14% during the first quarter
of 2004 compared to 0.34% for the same period of 2003. The provision for the
first three months of 2004 was $0.7, which was a decrease of $0.6 compared to
the same period in 2003 and exceeded net charge-offs by $0.1. The allowance for
loan losses to non-performing loans was 126.5% at March 31, 2004 compared to
138.9% and 119.5% at December 31, 2003 and March 31, 2003, respectively.
21
SUMMARY OF ALLOWANCE FOR LOAN LOSSES
Three Months Ended
March 31,
(In thousands) 2004 2003
- ----------------------------------------------------------------------------------------------
Beginning Balance $ 25,403 $ 24,632
Loans charged off (1,205) (1,976)
Recoveries 646 630
Provision for loan losses 650 1,235
- ---------------------------------------------------------------------------------------------
Ending Balance $ 25,494 $ 24,521
=============================================================================================
Percent of total loans 1.54% 1.49%
=============================================================================================
Annualized % of average loans:
Net charge-offs 0.14% 0.34%
Provision for loan losses 0.16% 0.31%
As of March 31, 2004, total non-performing loans were $20.2 which is $1.9 higher
than the level at December 31, 2003 and $0.4 lower than at March 31, 2003. The
increase in the first quarter of 2004 from December 31, 2003 is primarily
attributable to one agricultural credit relationship. Non-performing loans,
consisting of nonaccrual and 90 days or more past due loans, were 1.22%, 1.08%
and 1.25% of total loans at March 31, 2004, December 31, 2003 and March 31,
2003, respectively. A municipal obligation included in securities available for
sale with an approximate amortized cost of $3 is in default. Management
currently expects to realize a full recovery after completion of the refinancing
of the bond anticipation note.
Listed below is a comparison of non-performing assets.
March 31, December 31,
(In thousands) 2004 2003
- -------------------------------------------------------------------------------------------------------
Nonaccrual loans $ 19,468 $ 15,725
90 days or more past due loans 685 2,566
- ------------------------------------------------------------------------------------------------------
Total non-performing loans 20,153 18,291
Other real estate owned 1,266 1,341
Investment securities 2,716 2,692
- ------------------------------------------------------------------------------------------------------
Total non-performing assets $ 24,135 $ 22,324
======================================================================================================
Ratios:
Non-performing Loans to Loans 1.22% 1.08%
Non-performing Assets to Loans and Other Real Estate Owned 1.46% 1.31%
Allowance for Loan Losses to Non-performing Loans 126.50% 138.88%
DEPOSITS
Total deposits were $1,816 at March 31, 2004, compared to $1,813 and $1,799 at
December 31, 2003 and March 31, 2003, respectively. Total valuable core
deposits, including non-interest and interesting bearing demand, money market
and savings deposits, increased $55 to $993 at March 31, 2004 from $938 on March
31, 2003 and $25 from $968 at December 31, 2003. During the current low rate
environment, customer preferences have shifted to shorter term, liquid deposit
products and to deposit alternatives, including annuities. Time deposits greater
than $100 thousand have decreased $21, or 6.9%, since December 31, 2003 while
other time deposits decreased $0.9, or 0.2%, for this same period. Time deposits
greater than $0.1 increased $21, or 8.1%, and other time deposits decreased $60,
or 10.0%, from March 31, 2003 to March 31, 2004.
22
March 31, December 31,
(In thousands) 2004 2003
- -------------------------------------------------------------------------------------------
Non-interest-bearing demand $ 228,224 $ 219,983
Interest-bearing demand 394,971 405,765
Money market 229,693 210,289
Savings 140,352 131,565
- ------------------------------------------------------------------------------------------
Valuable core deposits $ 993,240 $ 967,602
Time deposits of $100 or more 284,649 305,863
Other time deposits 538,272 539,165
- ------------------------------------------------------------------------------------------
Total deposits $ 1,816,161 $ 1,812,630
==========================================================================================
SHORT-TERM BORROWINGS
Federal funds purchased and securities sold under repurchase agreements totaled
$82 at March 31, 2004 compared to $246 at December 31, 2003. Securities sold
under repurchase agreements are collateralized transactions acquired in national
markets as well as from the Company's commercial customers as part of a cash
management service. Additional short-term borrowings include short-term advances
from FHLB, Treasury Tax & Loan, and advances against outstanding bank lines.
At March 31, 2004, the Company had a $15 line of credit available. The Company
also had the capacity to borrow in excess of $350 from the Federal Reserve Bank
discount window, $368 in uncommitted securities eligible for pledging or sale
that were available, and available uncommitted Fed Funds lines of $320 from 11
different financial institutions at the end of the first quarter 2004.
LONG-TERM BORROWINGS
Long-term borrowings include FHLB advances, term notes, or other similar
obligations. Included in long-term borrowings is $227 of FHLB advances to fund
investments and loans and to satisfy other funding needs. The Company must
pledge collateral in the form of mortgage-backed securities and mortgage loans
to secure these advances and at March 31, 2004, was in compliance with those
requirements.
On March 25, 2004, the Company issued $4.0 of subordinated debt that will mature
on April 7, 2014. Issuance costs of $0.1 were paid by the Company and are being
amortized over the life of the debt.
On April 10, 2003, the Company issued $10.0 of subordinated debt that will
mature on April 10, 2013. Issuance costs of $0.3 were paid by the Company and
are being amortized over the life of the debt.
During the second quarter of 2003, the Company issued $36 Floating Rate Capital
Securities as a participant in a Pooled Trust Preferred Fund through a
subsidiary, Integra Capital Statutory Trust III. The issue matures on June 26,
2033. Issuance costs of $1 were paid by the Company and are being amortized over
the life of the securities. The Company has the right to call these securities
at par effective June 25, 2008. The funds were used to redeem $35 of trust
preferred securities which had a fixed rate of 8.25%.
On July 16, 2001, the Company issued Floating Rate Capital Securities of $18 as
a participant in a Pooled Trust Preferred Fund through a subsidiary, Integra
Capital Trust II. The issue matures on July 25, 2031. Issuance costs of $0.6
were paid by the Company and are being amortized over the life of the
securities. The Company has the right to call these securities at par effective
July 16, 2011.
CAPITAL EXPENDITURES
The Company is currently building a new banking center in Evansville and has
plans to build in the Northern Kentucky or Cincinnati area. Capital expenditures
for the new banking center were $0.8 in the first quarter of 2004 and are
expected to total between $1.5 and $2.0 over the next twelve months.
OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
Commitments to extend credit are primarily loan commitments, which assure a
borrower of financing for a specified period of time at a specified rate. An
approved but unfunded loan commitment represents a potential credit risk once
the funds are advanced to the customer.
Standby letters of credit are bank-issued conditional guarantees of payment.
Standby letters of credit are often used to support many types of domestic and
international payment and performance instruments such as bid bonds, performance
bonds, lease obligations, or repayment of loans.
23
There were no material changes in off-balance sheet arrangements and contractual
obligations during the first quarter of 2004.
CAPITAL RESOURCES AND LIQUIDITY
The Company and the Bank have capital ratios that exceed all regulatory
requirements, including the regulatory guidelines for "well-capitalized" that
apply to the Bank. It is management's intent for the Bank to remain well
capitalized at all times. The regulatory capital ratios for Integra Bank
Corporation and the Bank are shown below.
Regulatory Guidelines Actual
--------------------------- --------------------------
Minimum Well- March 31, December 31,
Requirements Capitalized 2004 2003
- -------------------------------------------------------------------------------------------------------------------
Integra Bank Corporation:
Total Capital (to Risk-Weighted Assets) 8.00% 12.52% 13.13%
Tier 1 Capital (to Risk-Weighted Assets) 4.00% 10.21% 11.37%
Tier 1 Capital (to Average Assets) 4.00% 6.65% 7.64%
Integra Bank N.A.:
Total Capital (to Risk-Weighted Assets) 8.00% 10.00% 11.83% 12.74%
Tier 1 Capital (to Risk-Weighted Assets) 4.00% 6.00% 10.58% 11.49%
Tier 1 Capital (to Average Assets) 4.00% 5.00% 6.86% 7.70%
Liquidity of a banking institution reflects the ability to provide funds to meet
loan requests and to accommodate possible outflows in deposits and other
borrowings. Funding loan requests, providing for deposit out flows, and managing
interest rate fluctuations require monitoring and continuous analysis in order
to match maturities of specific categories of short-term and long-term loans and
investments with specific types of deposits and borrowings. Bank liquidity is
normally considered in terms of the nature of mix of the banking institution's
sources and uses of funds.
For the Bank, the primary sources of short-term asset liquidity have been
Federal Funds sold, commercial paper, interest-bearing deposits with other
financial institutions, and securities available for sale. In addition to these
sources, short-term asset liquidity is provided by scheduled principal paydowns
and maturing loans and securities. The balance between these sources and needs
to fund loan demand and deposit withdrawals is monitored under the Company's
asset/liability management program. When these sources are not adequate, the
Company may use Fed Fund purchases, brokered deposits, repurchase agreements,
sale of investment securities or utilize its borrowing capacity with FHLB
Indianapolis, as alternative sources of liquidity. Additionally, the Company'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 March
31, 2004 and 2003, respectively, federal funds sold and other short-term
investments were $0.6 and $0.04. Additionally, at March 31, 2004, the Company
had $320 available from unused federal funds lines and in excess of $368 in
unencumbered securities available for repurchase agreements. The Bank also has a
"borrower in custody" line with the Federal Reserve Bank totaling over $396 as
part of its liquidity contingency.
For the Company, liquidity is provided by dividends from the Bank, cash
balances, credit line availability, liquid assets, and proceeds from capital
market transactions. Federal banking law limits the amount of capital
distributions that national banks can make to their holding companies without
obtaining prior regulatory approval. A national bank's dividend paying capacity
is affected by several factors, including the amount of its net profits (as
defined by statute) for the two previous calendar years and net profits for the
current year up to the date of dividend declaration. The Company has an
unsecured line of credit available which permits it to borrow up to $15. At
March 31, 2004, the Company had $15 available for future use. Management
believes that the Company has adequate liquidity to meet its foreseeable needs.
Liquidity for the Company is required to support operational expenses of the
Company, pay taxes, meet the outstanding debt and trust preferred securities
obligations of the Company, provide dividends to common shareholders and other
general corporate purposes. During the first quarter, the Company announced a
change in its dividend philosophy and expects to move to a long-term dividend
payout ratio of 35% to 50% of net earnings. Management believes that funds to
fulfill these obligations for 2004 will be available from currently available
cash and marketable securities, dividends from the Bank, accessing the
Company's line of credit, or other sources that management expects to be
available during the year.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk is the exposure of earnings and capital to changes in
interest rates. Fluctuations in rates affect earnings by changing net interest
income and other interest-sensitive income and expense levels. Interest rate
changes affect the market value of capital by
24
altering the underlying value of assets, liabilities and off balance sheet
instruments. The interest rate risk management program for the Company 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 Company's interest rate risk
management processes to manage the impact of interest rate volatility on
earnings and capital.
At the Company, 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 at least twice a
quarter 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. The
process is externally validated at least annually by an independent third party.
Interest rate risk is measured and monitored on a proactive basis by utilizing a
simulation model. The Company 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 Company 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 12-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 March 31, 2004,
the Company would experience a (6.18)% change in EAR, if interest rates moved
downward 200 basis points. If interest rates moved upward 200 basis points, the
Company would experience a (0.74)% change in net interest income. The
improvement in the up 200 scenario risk measure from the prior quarter, can be
attributed to the reduction of both investment securities and short-term
borrowings, and prepayment of high coupon debt as part of the balance sheet
restructure that occurred in March 2004. Both simulation results are within the
policy limits established by the Board ALCO.
Trends in Earnings at Risk
Estimated Change in EAR from the Flat Interest Rate Scenario
-------------------------------------------------------------
-200 basis points +200 basis points
- -------------------------------------------------------------------------------------------------
March 31, 2004 (6.18)% (0.74)%
- -------------------------------------------------------------------------------------------------
December 31, 2003 (5.20)% (4.26)%
- -------------------------------------------------------------------------------------------------
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 Company 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. 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 within a range of plus or minus 15%.
At March 31, 2004, the Company would experience a (1.17)% change in EVE if
interest rates moved downward 200 basis points. If interest rates moved upward
200 basis points, the Company would experience (7.21)% change in EVE. The
reduction in EVE risk for the up 200 scenario from the previous quarter, can be
attributed to the sizable reduction in the investment securities portfolio and
short term borrowings, which were part of the balance sheet restructuring that
occurred in March 2004. Both of these measures are within Board approved policy
limits.
25
Trends in Economic Value of Equity
Estimated Change in EVE from the Flat Interest Rate Scenario
------------------------------------------------------------
-200 basis points +200 basis points
- --------------------------------------------------------------------------------------------------
March 31, 2004 (1.17)% (7.21)%
- --------------------------------------------------------------------------------------------------
December 31, 2003 0.04% (12.77)%
- --------------------------------------------------------------------------------------------------
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.
ITEM 4: CONTROLS AND PROCEDURES
Based on an evaluation of the Company's disclosure controls and procedures [as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)] as of March 31, 2004, the
Company's principal executive officer and principal financial officer have
concluded that such disclosure controls and procedures were effective as of that
date.
There have been no changes in internal controls over financial reporting that
occurred during the quarter ended March 31, 2004 that have materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.
26
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to legal actions that arise in the
normal course of their business activities. In the opinion of management, the
ultimate resolution of these matters is not expected to have a materially
adverse effect on the financial position or on the results of operations of the
Company and its subsidiaries.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
During the period covered by this report, the Audit Committee of our Board of
Directors approved the engagement of PricewaterhouseCoopers LLP, our independent
auditors, to perform the following non-audit services:
- - Examination of FHLB Schedule of Eligible Collateral for Integra Bank, N. A.
- - Preparation of Corporate Income Tax Return
- - Federal, state and local tax planning, compliance and advice.
This disclosure is made pursuant to Section 10A(i)(2) of the Securities Exchange
Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following documents are filed as exhibits to this report:
10.1 Third Amendment to Credit Agreement dated as of December 31, 2002
between Integra Bank Corporation and The Northern Trust Company.
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
of Chief Executive Officer.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
of Chief Financial Officer.
32 Certification of Chief Executive Officer and Chief Financial Officer.
(b) Reports on Form 8-K.
On January 27, 2004, under Item 12, the Company furnished a press release to
the Securities and Exchange Commission containing earnings information for
the period ending December 31, 2003.
On February 24, 2004, under Item 9, the Company furnished a slide
presentation to the Securities and Exchange Commission that was used at the
Midwest 2004 Super-Community Bank Conference in Chicago, Illinois.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTEGRA BANK CORPORATION
By /s/ Michael T. Vea
----------------------
Chairman of the Board,
Chief Executive
Officer and President
May 10, 2004
/s/ Charles A. Caswell
----------------------
Executive Vice
President and Chief
Financial Officer
May 10, 2004
28