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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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 (IRS Employee Identification No.)
incorporation or organization)
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 NOVEMBER 1, 2004
(Common stock, $1.00 Stated Value) 17,374,671
INTEGRA BANK CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
PAGE NO.
Item 1. Unaudited Financial Statements
Consolidated balance sheets-
September 30, 2004 and December 31, 2003 3
Consolidated statements of income-
Three months and nine months ended September 30, 2004 and 2003 4
Consolidated statements of comprehensive income- Three months and nine
months ended September 30, 2004 and 2003 6
Consolidated statement of changes in shareholders' equity-
Nine months ended September 30, 2004 7
Consolidated statements of cash flow-
Nine months ended September 30, 2004 and 2003 8
Notes to unaudited consolidated financial statements 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 29
Item 4. Controls and Procedures 30
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 31
Item 3. Defaults Upon Senior Securities 31
Item 4. Submissions of Matters to a Vote of Security Holders 31
Item 5. Other Information 31
Item 6. Exhibits 31
Signatures 32
2
PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
INTEGRA BANK CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share data)
September 30, December 31,
2004 2003
---- ----
ASSETS
Cash and due from banks $ 57,577 $ 66,285
Federal funds sold and other short-term investments 76 8,658
----------- -----------
Total cash and cash equivalents 57,653 74,943
Loans held for sale (at lower of cost or fair value) 2,108 242
Securities available for sale 823,498 1,006,986
Loans, net of unearned income 1,610,985 1,699,688
Less: Allowance for loan losses (24,577) (25,403)
----------- -----------
Net loans 1,586,408 1,674,285
Premises and equipment 53,338 54,563
Goodwill 44,839 44,839
Other intangible assets 9,097 10,309
Other assets 107,414 92,127
----------- -----------
TOTAL ASSETS $ 2,684,355 $ 2,958,294
=========== ===========
LIABILITIES
Deposits:
Non-interest-bearing demand $ 240,887 $ 219,983
Interest-bearing:
Savings, interest checking and money market accounts 781,636 747,619
Time deposits of $100 or more 305,733 305,863
Other interest-bearing 519,525 539,165
----------- -----------
Total deposits 1,847,781 1,812,630
Short-term borrowings 152,325 253,978
Long-term borrowings 458,410 638,698
Other liabilities 18,983 19,996
----------- -----------
TOTAL LIABILITIES 2,477,499 2,725,302
----------- -----------
SHAREHOLDERS' EQUITY
Preferred stock - 1,000,000 shares authorized
None outstanding
Common stock - $1.00 stated value:
Shares authorized: 29,000,000
Shares outstanding: 17,374,671 and 17,310,782 respectively 17,375 17,311
Additional paid-in capital 126,971 125,789
Retained earnings 60,182 83,510
Unvested restricted stock (649) (292)
Accumulated other comprehensive income 2,977 6,674
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 206,856 232,992
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,684,355 $ 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, except for per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2004 2003 2004 2003
---- ---- ---- ----
INTEREST INCOME
Interest and fees on loans:
Taxable $23,736 $25,103 $ 70,506 $ 75,615
Tax-exempt 100 197 349 700
Interest and dividends on securities:
Taxable 7,462 7,794 23,093 24,207
Tax-exempt 1,522 2,230 4,672 6,871
Interest on loans held for sale 44 170 131 408
Interest on federal funds sold and other short-term
investments 17 12 48 45
------- ------- --------- ---------
Total interest income 32,881 35,506 98,799 107,846
INTEREST EXPENSE
Interest on deposits 6,396 7,026 18,781 23,394
Interest on short-term borrowings 644 699 1,604 1,967
Interest on long-term borrowings 3,712 9,368 16,099 29,091
------- ------- --------- ---------
Total interest expense 10,752 17,093 36,484 54,452
NET INTEREST INCOME 22,129 18,413 62,315 53,394
Provision for loan losses 150 1,110 955 3,945
------- ------- --------- ---------
Net interest income after provision for loan losses 21,979 17,303 61,360 49,449
------- ------- --------- ---------
NON-INTEREST INCOME
Service charges on deposit accounts 3,272 2,937 9,259 8,620
Other service charges and fees 1,895 1,647 5,576 5,056
Mortgage banking 178 521 650 1,359
Trust income 506 509 1,527 1,519
Securities gains 5 1,233 4,502 2,515
Gain on mortgage loans sold 164 664 471 1,835
Gain on sale of other assets 50 89 1,410 1,171
CSV life insurance income 377 412 1,169 1,393
Other 652 570 2,068 1,531
------- ------- --------- ---------
Total non-interest income 7,099 8,582 26,632 24,999
NON-INTEREST EXPENSE
Salaries 7,923 7,519 24,082 22,535
Commissions and incentives 981 1,037 3,356 2,994
Other benefits 1,634 1,737 5,126 5,799
Occupancy 1,713 1,567 4,882 4,650
Equipment 1,008 1,087 3,105 3,273
Professional fees 1,113 1,121 3,444 3,388
Communication and transportation 845 982 2,581 3,047
Processing 1,051 896 2,639 2,586
Marketing 511 519 1,498 1,307
Debt prepayment fees - 1,243 56,998 1,243
Low income housing project losses 552 642 1,655 2,076
Amortization of intangible assets 403 404 1,213 1,214
Other 2,555 2,336 7,845 8,327
------- ------- --------- ---------
Total non-interest expense 20,289 21,090 118,424 62,439
------- ------- --------- ---------
Income (loss) before income taxes 8,789 4,795 (30,432) 12,009
Income tax expense (benefit) 1,905 141 (16,733) (887)
------- ------- --------- ---------
NET INCOME (LOSS) $ 6,884 $ 4,654 $ (13,699) $ 12,896
======= ======= ========= =========
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 Nine Months Ended
September 30, September 30,
------------- -------------
2004 2003 2004 2003
---- ---- ---- ----
Earnings (loss) per share:
Basic $ 0.40 $ 0.27 $ (0.79) $ 0.75
Diluted 0.40 0.27 (0.79) 0.75
Weighted average shares outstanding:
Basic 17,328 17,286 17,312 17,285
Diluted 17,378 17,303 17,312 17,289
Dividends per share $ 0.16 $ 0.235 $ 0.555 $ 0.705
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 Nine Months Ended
September 30, September 30,
------------- -------------
2004 2003 2004 2003
---- ---- ---- ----
Net income (loss) $ 6,884 $ 4,654 $(13,699) $ 12,896
Other comprehensive income, net of tax:
Unrealized gain (loss) on securities:
Unrealized gain (loss) arising in period 7,999 (7,992) (1,247) (669)
Reclassification of realized amounts (3) (733) (2,678) (1,496)
-------- ------- -------- --------
Net unrealized gain (loss) on securities 7,996 (8,725) (3,925) (2,165)
-------- ------- -------- --------
Unrealized gain on derivative hedging instruments arising in period 42 102 228 454
-------- ------- -------- --------
Net unrealized gain (loss), recognized in other comprehensive income 8,038 (8,623) (3,697) (1,711)
-------- ------- -------- --------
Comprehensive income (loss) $ 14,922 $(3,969) $(17,396) $ 11,185
======== ======= ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
6
INTEGRA BANK CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except for per share data)
Accumulated
Additional Unvested Other
Common Common Paid-in Retained Restricted Comprehensive
Shares Stock Capital Earnings Stock Income (Loss) Total
------ ----- ------- -------- ----- ------------- -----
Balance at December 31, 2003 17,310,782 $ 17,311 $ 125,789 $ 83,510 $ (292) $ 6,674 $ 232,992
---------- -------- ---------- --------- ------ ------- ----------
Net loss - - - (13,699) - - (13,699)
Cash dividend declared ($0.555 per share) - - - (9,629) - - (9,629)
Change in unrealized gain (loss) on: -
Securities - - - - - (3,925) (3,925)
Interest rate swaps - - - - - 228 228
Exercise of stock options 37,565 38 669 - 14 - 721
Grant of restricted stock 26,324 26 513 - (539) - -
Unearned compensation amortization - - - - 168 - 168
---------- -------- ---------- --------- ------ ------- ----------
Balance at September 30, 2004 17,374,671 $ 17,375 $ 126,971 $ 60,182 $ (649) $ 2,977 $ 206,856
---------- -------- ---------- --------- ------ ------- ----------
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)
Nine Months Ended
September 30,
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (13,699) $ 12,896
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Federal Home Loan Bank stock dividends (74) (69)
Amortization and depreciation 6,961 9,909
Amortization of unvested restricted stock 169 120
Provision for loan losses 955 3,945
Net securities gains (4,502) (2,515)
(Gain) loss on sale of premises and equipment (103) 23
Gain on sale of other real estate owned (81) (77)
Gain on sale of loans (1,158) -
Loss on low-income housing investments 1,655 2,075
Decrease in deferred taxes (77) -
Net gain on sale of loans held for sale (471) (1,835)
Proceeds from sale of loans held for sale 62,431 171,155
Origination of loans held for sale (63,826) (161,811)
(Increase) decrease in other assets (15,260) 1,279
Increase (decrease) in other liabilities 414 (76,059)
--------- ---------
Net cash flows used in operating activities (26,666) (40,964)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale 159,753 217,194
Proceeds from sales of securities available for sale 361,876 251,211
Purchase of securities available for sale (341,785) (522,540)
(Increase) decrease in loans made to customers 80,403 (98,635)
Proceeds from sale of loans 7,043 -
Purchase of premises and equipment (4,068) (3,277)
Proceeds from sale of premises and equipment 2,267 865
Proceeds from sale of other real estate owned 874 1,046
--------- ---------
Net cash flows provided by (used in) investing activities 266,363 (154,136)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 35,151 25,208
Net increase (decrease) in short-term borrowed funds (146,709) 194,158
Proceeds from long-term borrowings 334,003 10,000
Repayment of long-term borrowings (469,235) (27,824)
Proceeds from trust preferred securities - 35,568
Repayment of trust preferred securities - (34,500)
Dividends paid (10,918) (12,193)
Proceeds from exercise of stock options 721 -
--------- ---------
Net cash flows provided by (used in) financing activities (256,987) 190,417
--------- ---------
Net decrease in cash and cash equivalents (17,290) (4,683)
--------- ---------
Cash and cash equivalents at beginning of period 74,943 70,533
--------- ---------
Cash and cash equivalents at end of period $ 57,653 $ 65,850
========= =========
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)
Nine Months Ended
September 30,
2004 2003
---- ----
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
Change in allowance for unrealized (gain) loss on securities available for sale $ 6,601 $(3,640)
Change in deferred taxes attributable to securities available for sale (2,676) (1,475)
Other real estate acquired in settlement of loans 728 272
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 consolidated financial statements include the
accounts of Integra Bank Corporation and its subsidiaries (the "Company" or
"Integra"). At September 30, 2004, the Company's subsidiaries consisted of
Integra Bank N.A. (the "Bank"), 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 presentation of the
financial position, results of operations, and cash flows for the interim
periods. All such adjustments are of a normal recurring nature. Pursuant to SEC
rules, certain information and note disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America ("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.
Certain prior year amounts in the accompanying consolidated financial statements
and notes thereon have been reclassified to conform to current period
presentation. These reclassifications had no effect on the results of operations
or financial position for any year presented.
RECENT ACCOUNTING PRONOUNCEMENTS:
In the second quarter of 2004, the Emerging Issues Task Force ("EITF") released
EITF Issue 03-01, "The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments." The Issue provided guidance for evaluating
whether an investment is other-than - temporarily impaired and requires certain
disclosures with respect to these investments. On September 30, 2004, Integra
held certain investments having continuous unrealized loss positions for more
than 12 months. It is expected that the securities would not be settled at a
price less than their amortized cost. Because the decline in market value was
caused by interest rate increases and not credit quality, and because Integra
has the ability and intent to hold these investments until a recovery of fair
value, which may be maturity, Integra has not recognized any
other-than-temporary impairment in connection with these investments.
On March 31, 2004, the Financial Accounting Standards Board ("FASB") issued its
Exposure Draft, "Share-Based Payment" (the "Exposure Draft"), which is a
proposed amendment to Statement of Financial Accounting Standard No. 123, the
"Accounting for Stock Based Compensation" ("SFAS 123"). The Exposure Draft would
require all share-based payments to employees, including stock options, to be
expensed in the income statement based on their fair values. Currently, the
Company applies Accounting Principles Board ("APB") Opinion No. 25 "Accounting
for Stock Issued to Employees" and related Interpretations to its stock-based
compensation plans which results in no compensation expense being recognized for
stock option grants with exercise prices equal to the market value of the
underlying common stock on the date of grant. However, the fair value
recognition provisions of the Exposure Draft differ in some regards from the
fair value recognition provisions of SFAS 123. The FASB is expected to issue a
final standard in late 2004 that would be effective for fiscal periods beginning
after June 15, 2005.
Stock options are currently accounted for following APB Opinion No. 25, and
related interpretations. Had compensation costs been determined based on market
values of awards on the grant date (the method described in SFAS 123) reported
net income and earnings per common share would have been reduced to the pro
forma amounts shown below.
10
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands, except per share data) 2004 2003 2004 2003
- ------------------------------------- ---- ---- ---- ----
Net income (loss):
As reported $ 6,884 $ 4,654 $ (13,699) $ 12,896
Add: Stock-based compensation expense
included in reported net income (loss), net of tax 50 57 123 129
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of tax 52 630 1,523 1,342
---------- ---------- ---------- ----------
Proforma $ 6,882 $ 4,081 $ (15,099) $ 11,683
========== ========== ========== ==========
Earnings (loss) per share:
Basic
As reported $ 0.40 $ 0.27 $ (0.79) $ 0.75
Proforma 0.40 0.24 (0.87) 0.68
Diluted
As reported $ 0.40 $ 0.27 $ (0.79) $ 0.75
Proforma 0.40 0.24 (0.87) 0.68
NOTE 2. EARNINGS PER SHARE
The calculation of earnings per share is summarized as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
(In thousands, except per share data) 2004 2003 2004 2003
- ------------------------------------- ------- ------- -------- -------
Net income (loss) $ 6,884 $ 4,654 $(13,699) $12,896
======= ======= ======== =======
Weighted average shares outstanding - Basic 17,328 17,286 17,312 17,285
Stock-based compensation adjustment 50 17 - 4
------- ------- -------- -------
Average shares outstanding - Diluted 17,378 17,303 17,312 17,289
======= ======= ======== =======
Earnings per share-Basic $ 0.40 $ 0.27 $ (0.79) $ 0.75
Effect of stock-based compensation - - - -
------- ------- -------- -------
Earnings per share-Diluted $ 0.40 $ 0.27 $ (0.79) $ 0.75
======= ======= ======== =======
On September 30, 2004, there were vested options outstanding to purchase 610
shares of the Company's common stock. The exercise price of the vested options
to purchase 370 shares exceeded the stock's closing price as of September 30,
2004. On September 2003, there were vested options outstanding to purchase up to
555 shares of the Company's common stock. The exercise price of all the vested
options except for 38 shares exceeded the stock's closing price as of September
30, 2003.
11
NOTE 3. SECURITIES
All investment securities are held as available for sale. Amortized cost and
market value of securities classified as available for sale as of September 30,
2004 and December 31, 2003 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
September 30, 2004 (In thousands) Cost Gains Losses Value
- --------------------------------- ---- ----- ------ -----
U.S. Government agencies $ 998 $ 6 $ 3 $ 1,001
Mortgage-backed securities 250,870 1,961 660 252,171
Collateralized Mortgage Obligations 392,807 205 4,736 388,276
States & political subdivisions 89,464 4,973 1 94,436
Federal Home Loan Bank
and Federal Reserve stock 32,949 - - 32,949
Other securities 51,407 3,274 16 54,665
-------- ------- ------ --------
Total $818,495 $10,419 $5,416 $823,498
======== ======= ====== ========
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-backed 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 market value of the securities as of September 30, 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
certain securities where actual cashflows deviate from originally contracted
cashflows.
Maturity of securities available for sale:
Less than 1 Year 1 - 5 Years 5 - 10 Years Over 10 Years
Maturity Maturity Maturity Maturity
-------- -------- -------- --------
(In thousands) Amount Yield Amount Yield Amount Yield Amount Yield
- -------------- ------ ----- ------ ----- ------ ----- ------ -----
U. S. Government agencies $ - - $ 649 3.90% $ 349 4.14% $ - -
Mortgage-backed securities - - 131,701 4.47% 117,306 4.51% 1,863 3.89%
Collateralized Mortgage
Obligations - - 131,192 4.11% 261,615 4.10% - -
States & political subdivisions 3,991 7.74% 14,199 7.48% 34,286 7.79% 36,988 7.89%
Federal Home Loan Bank
and Federal Reserve stock - - - - - - 32,949 4.71%
Other securities - - - - - - 51,407 7.80%
------ ---- ----------- ---- ----------- ---- ----------- ----
Amortized Cost $3,991 7.74% $ 277,741 4.45% $ 413,556 4.52% $ 123,207 6.94%
====== ==== =========== ==== =========== ==== =========== ====
Fair Value $4,033 $ 278,352 $ 412,459 $ 128,654
====== ==== =========== ==== =========== ==== =========== ====
Total
-----
(In thousands) Amount Yield
- -------------- ------ -----
U. S. Government agencies $ 998 3.98%
Mortgage-backed securities 250,870 4.48%
Collateralized Mortgage
Obligations 392,807 4.10%
States & political subdivisions 89,464 7.78%
Federal Home Loan Bank
and Federal Reserve stock 32,949 4.71%
Other securities 51,407 7.80%
----------- ----
Amortized Cost $ 818,495 4.88%
=========== ====
Fair Value $ 823,498
=========== ====
Note: The yield is calculated on a 35 percent federal-tax-equivalent basis.
12
At September 30, 2004 and December 31, 2003, the carrying value of securities
pledged to secure public deposits, trust funds, securities sold under repurchase
agreements and other borrowings was $424,240 and $605,971, respectively.
Securities, at September 30, 2004, with unrealized losses not recognized in
income are as follows:
Less Than 12 Months 12 Months or More Total
---------------------- ---------------------- ----------------------
Unrealized Unrealized Unrealized
(In thousands) Fair Value Losses Fair Value Losses Fair Value Losses
- -------------- ---------- ---------- ---------- ---------- ---------- -----------
U.S. Government agencies $ 297 $ 3 $ - $ - $ 297 $ 3
Mortgage-backed securities 105,600 660 - - 105,600 660
Collateralized Mortgage Obligations 253,694 2,970 88,228 1,766 341,922 4,736
State & political subdivisions 609 1 - - 609 1
Other securities 6,227 16 - - 6,227 16
-------- ------ ------- ------ -------- ------
Total $366,427 $3,650 $88,228 $1,766 $454,655 $5,416
======== ====== ======= ====== ======== ======
NOTE 4. INTANGIBLE ASSETS
Intangible assets at September 30, 2004 were:
Gross Net
Carrying Accumulated Carrying
(In thousands) Amount Amortization Amount
- -------------- ------ ------------ ------
Goodwill (Non-amortizing) $ 44,839 $ - $ 44,839
Core deposits (Amortizing) 17,080 (7,983) 9,097
---------- ------------- ----------
Total intangible assets $ 61,919 $ (7,983) $ 53,936
========== ============= ==========
All of the intangible assets relate to the banking operating segment.
NOTE 5. INCOME TAXES
The components of income tax expense (benefit) for the three and nine months
ended September 30, 2004 and 2003 are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2004 2003 2004 2003
- -------------- ---- ---- ---- ----
Federal income tax computed at the statutory rates $ 3,076 $ 1,678 $(10,651) $ 4,203
Adjusted for effects of:
Tax exempt interest (497) (654) (1,493) (2,057)
Nondeductible expenses 65 85 263 261
Low income housing credit (651) (752) (1,953) (2,391)
Cash surrender value of life insurance policies (132) (144) (409) (488)
Dividend received deduction (54) (146) (199) (436)
State taxes, net of federal tax benefit 160 3 (1,492) (77)
Other differences (62) 71 (799) 98
------- ------- -------- -------
Total income taxes (benefit) $ 1,905 $ 141 $(16,733) $ (887)
======= ======= ======== =======
NOTE 6. SHORT-TERM BORROWINGS
Short-term borrowings include Federal funds purchased, securities sold under
repurchase agreements, 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 September 30, 2004.
13
September 30, December 31,
(In thousands) 2004 2003
- -------------- ---- ----
Federal funds purchased $ - $ 51,000
Securities sold under agreements to repurchase 107,250 195,372
Federal Home Loan Bank advances 45,075 3,606
Other short-term borrowings - 4,000
-------- --------
Total short-term borrowings $152,325 $253,978
======== ========
NOTE 7. LONG-TERM BORROWINGS
Long-term borrowings include $222,502 of FHLB advances and $160,000 of term
repurchase agreements. The Bank pledges collateral, including securities and
mortgage loans, to secure these borrowings.
September 30, December 31,
(In thousands) 2004 2003
- -------------- ---- ----
FHLB Advances
Convertible advances $ - $412,000
Fixed maturity advances (weighted average rate
of 2.26% at September 30, 2004) 215,000 55,000
Amortizing and other advances (weighted average rate
of 5.97% at September 30, 2004) 7,502 14,202
-------- --------
Total FHLB Advances 222,502 481,202
Securities sold under repurchase agreements with maturities
at various dates through 2008 (weighted average rate of 3.85%
at September 30, 2004) 160,000 85,000
Notes payable, secured by equipment, with an interest rate of 7.26%,
due at various dates through 2012 7,783 8,371
Subordinated debt, unsecured, with a floating interest rate equal to three-
month LIBOR plus 3.25%, with a maturity date of April 10, 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 $458,410 $638,698
======== ========
During the first quarter of 2004 the Company prepaid $467,000 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 $294,000 of new long-term
advances during the first quarter of 2004 as part of the balance sheet
restructuring, with an average life of 2.6 years.
14
NOTE 8. COMMITMENTS AND CONTINGENCIES
The Company is party to legal actions that arise in the normal course of its
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:
September 30, December 31,
(In thousands) 2004 2003
- -------------- ---- ----
Commitments to extend credit $ 373,955 $281,595
Standby letters of credit 10,305 7,308
NOTE 9. INTEREST RATE CONTRACTS
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 long term
repurchase agreements from fixed rate to variable rate. The interest rate swaps
require the Company to pay a variable rate based on three-month LIBOR and
receive a fixed interest rate ranging from 2.60% to 2.72%. The interest rate
swaps, which had a fair value of $35 as of September 30, 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 currently obtained, the Company minimizes
its credit risk by monitoring the credit standing of the counterparties, the
aggregate credit exposure to each counterparty and anticipates that the
counterparties will be able to fully satisfy their obligations under the
agreements.
NOTE 10. 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 insurance 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. The following tables present selected segment
information for Banking and other operating units.
15
For three months ended September 30, 2004
(In thousands) Banking Other Eliminations Total
- -------------- ------- ----- ------------ -----
Interest income $32,825 $ 58 $ (2) $32,881
Interest expense 9,896 858 (2) 10,752
------- ------- ------- -------
Net interest income (loss) 22,929 (800) - 22,129
Provision for loan losses 150 - - 150
Other income (1) 7,006 7,665 (7,572) 7,099
Other expense 19,949 362 (22) 20,289
------- ------- ------- -------
Earnings before income taxes 9,836 6,503 (7,550) 8,789
------- ------- ------- -------
Income tax expense (benefit) 2,345 (440) - 1,905
------- ------- ------- -------
Net income $ 7,491 $ 6,943 $(7,550) $ 6,884
======= ======= ======= =======
For nine months ended September 30, 2004
(In thousands) Banking Other Eliminations Total
- -------------- ------- ----- ------------ -----
Interest income $ 98,643 $ 163 $ (7) $ 98,799
Interest expense 34,122 2,369 (7) 36,484
----------- --------- --------- -----------
Net interest income (loss) 64,521 (2,206) - 62,315
Provision for loan losses 955 - - 955
Other income (loss) (1) 26,399 (11,483) 11,716 26,632
Other expense 117,365 1,128 (69) 118,424
----------- --------- --------- -----------
Loss before income taxes (27,400) (14,817) 11,785 (30,432)
----------- --------- --------- -----------
Income tax benefit (15,469) (1,264) - (16,733)
----------- --------- --------- -----------
Net loss $ (11,931) $ (13,553) $ 11,785 $ (13,699)
=========== ========= ========= ===========
Segment assets $ 2,658,723 $ 272,123 $(246,491) $ 2,684,355
=========== ========= ========= ===========
(1) Includes income (loss) on subsidiaries.
For three months ended September 30, 2003
(In thousands) Banking Other Eliminations Total
- -------------- ------- ----- ------------ -----
Interest income $35,472 $ 262 $ (228) $35,506
Interest expense 16,383 938 (228) 17,093
------- ------- ------- -------
Net interest income (loss) 19,089 (676) - 18,413
Provision for loan losses 1,110 - - 1,110
Other income (1) 8,567 5,292 (5,277) 8,582
Other expense 20,866 259 (35) 21,090
------- ------- ------- -------
Earnings before income taxes 5,680 4,357 (5,242) 4,795
------- ------- ------- -------
Income tax expense (benefit) 434 (293) - 141
------- ------- ------- -------
Net income $ 5,246 $ 4,650 $(5,242) $ 4,654
======= ======= ======= =======
For nine months ended September 30, 2003
(In thousands) Banking Other Eliminations Total
- -------------- ------- ----- ------------ -----
Interest income $ 107,745 $ 2,469 $ (2,368) $ 107,846
Interest expense 51,626 5,194 (2,368) 54,452
---------- --------- --------- -----------
Net interest income (loss) 56,119 (2,725) - 53,394
Provision for loan losses 3,945 - - 3,945
Other income (1) 24,971 15,965 (15,937) 24,999
Other expense 60,305 2,228 (94) 62,439
---------- --------- --------- -----------
Earnings before income taxes 16,840 11,012 (15,843) 12,009
---------- --------- --------- -----------
Income tax expense (benefit) 1,010 (1,897) - (887)
---------- --------- --------- -----------
Net income $ 15,830 $ 12,909 $ (15,843) $ 12,896
========== ========= ========= ===========
Segment assets $2,974,002 $ 316,950 $(307,551) $ 2,983,401
========== ========= ========= ===========
(1) Includes income (loss) on subsidiaries.
16
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 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 following non-GAAP financial measures:
"net operating income", which represents net income, less gain on sale of credit
card portfolio, gain on sale of branch, loss on fixed assets disposition, and
securities gains/losses, net of tax and severance pay, trust preferred
redemption expenses and debt extinguishment expense, net of tax; "diluted net
operating income per share", which is net operating income divided by the total
number of diluted shares; "adjusted non-interest income", which represents
non-interest income less gain on sale of credit card portfolio, gain on sale of
branch, loss on fixed assets disposition, and securities gains/losses; and
"adjusted non-interest expense", which represents non-interest expense, less
severance pay, trust preferred redemption expenses and debt extinguishment
expenses. All non-GAAP financial measures are reconciled 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 the above
mentioned items, and may be useful to investors for comparative purposes. The
Company also uses these measures for trend analysis and for peer comparisons.
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 the entire document.
During the third quarter of 2004, Integra was able to build upon many of the
trends that contributed to its performance in the second quarter, as well as
focusing new and existing resources to address challenges which we anticipate
will create opportunities for improved performance in the future.
To summarize the financial results, net income for the quarter ended September
30, 2004 was $6.9 compared to $4.7 for the same period of 2003. This represented
a 48 percent increase in net income from the year-earlier quarter. Earnings per
share, on a diluted basis, were $0.40 for the third quarter of 2004 compared to
$0.27 in 2003.
A key driver to the improved results was the 86 basis point improvement in the
net interest margin, which improved from 2.87 percent to 3.73 percent from the
third quarter of 2003 to the third quarter of 2004. This represented the fifth
consecutive quarterly improvement in net interest margin. While the balance
sheet restructuring which was executed during the first quarter of 2004 had a
material impact on the improvement, growth in consumer loans and low cost
deposits, continued execution of loan and deposit pricing disciplines, and
continued refinements to our market risk management capabilities also
contributed to the improvement. Since the margin is determined by a broad number
of factors including loan and deposit growth, loan and deposit pricing, balance
sheet composition, and the future direction and pace of interest rate changes,
management cannot say whether or not this trend will continue into the future.
Management will, however, continue to invest in the resources necessary to
understand and manage the risks inherent in its balance sheet.
The Company has allocated resources and anticipates allocating additional
resources in the future to assist banking center and market management
leadership in estimating the return on capital on various loan, investment,
deposit and other borrowing activities.
17
Management believes this has contributed to the margin improvement, helping
drive some of the recent trends in balance sheet composition.
Regarding deposit gathering, Integra's focus for the past several quarters has
been in building low cost, or valuable core deposits which Integra defines as
savings, money market and demand deposit accounts. These balances, on average,
grew by $73.6, or 7.7 percent in the third quarter of 2004 from the year-earlier
quarter. Management expects that building valuable core deposit balances will
continue to be an integral part of its strategy for the foreseeable future.
Additionally, the Company allows for a level of local market autonomy in pricing
Certificates of Deposit ("CDs") depending on deposit size, current or potential
relationship value, tenor of the deposit , competitive forces and other factors.
This, in concert with the pricing analytics mentioned above, client preferences,
evolving demographic trends in our markets, and other factors, management
believes, has combined to reduce the contribution of non-public CDs to Integra's
overall deposit base. Management is addressing clients' evolving savings needs
through offering annuities and other investment products through Integra's
wealth management division. Based on average balances for the quarter,
non-public CDs represented 33.3 percent of total deposits in the third quarter
of 2004, compared with 36.1 percent in the year-earlier quarter. Management
believes it is likely that this trend will continue.
The past twelve months has been marked by a lending environment that has created
mixed opportunities for Integra. Looking at Integra's 3 major lending
classifications: commercial, consumer, and mortgage, growth has not been uniform
across the groups. Comparing average balances between the third quarters of 2003
and 2004, consumer loan balances grew by $25.9 or 7.1 percent, mortgage loans
were essentially flat, growing by $1.0 or 0.2 percent, but commercial loan
balances contracted by $82.5 or 9.0 percent. Integra's commercial loan volumes
have been hindered by a combination of sluggish macroeconomic trends in
Integra's main commercial markets, unscheduled payoffs of existing loans, and a
diminished appetite for loans with tax advantaged income characteristics.
Management expects the general trends in the consumer and mortgage lending areas
to continue, but is devoting significant attention to building new and
strengthening existing commercial loan relationships.
One way Integra is expanding its commercial lending capabilities is through its
metro commercial real estate initiative. In place for about a year, the
portfolio had outstandings of about $70 at the end of the third quarter. Lending
opportunities are managed out of three loan production offices located in
Louisville, KY, suburban Cincinnati, OH and Cleveland, OH. The team leading this
initiative are experienced commercial real estate lenders with a long track
record of successful execution and with whom management has previously worked.
The loans in this portfolio represent a higher average credit quality relative
to Integra's pre-initiative commercial real estate portfolio.
Non-interest income in the third quarter of 2004 was adversely effected by a
$0.9 reduction in mortgage-related revenue from the year-earlier quarter due to
a general slow down in national mortgage origination volume. The impact was
partly offset by a $0.5 increase in service fee revenue over the same time
period. Additional detail is included in the section labeled "Financial
Overview" below. Management does not expect a material improvement in
mortgage-related revenues for the next several quarters and is evaluating
alternatives to deliver the product to clients in a more cost effective manner.
The Company's credit trends continue to be positively impacted by credit
recoveries that exceed expectations. This has had the benefit of keeping net
chargeoffs lower than anticipated over the past several quarters. This, in
tandem with lower loan growth than anticipated, contributed to a $1.0 reduction
in loan loss provision expense in the third quarter of 2004 compared to the same
quarter of 2003. The Company currently expects loan loss provision expense to
increase in subsequent quarters as loan growth picks up and credit recoveries
return to longer-term historical trends, but offset somewhat by a lower overall
level of loan loss provision to total loans should non-performing loan ratios
improve in the future.
The Company maintains an investment portfolio as a store of liquidity, a tool to
assist in the management of corporate interest rate risk, and a way to provide a
stable, predictable source of earnings, amongst other reasons. Management
believes the recent Emerging Issues Task Force ("EITF") 03-01 proposal has the
potential impact of altering the portfolio's ability to achieve the objectives
mentioned above. Management is actively studying the proposal, an outcome of
which might involve repositioning part or the entire portfolio at some future
point.
The Company continued its efforts to develop new products, make additional
investments in training and technology, optimize its retail delivery network,
and emphasize new customer sales and service initiatives, including the I CARE
program. The Company will continue to evaluate current and potential markets,
products, and delivery channels, to concentrate investments in areas that have
superior return on capital, growth, and/or income demographic profiles and to
disinvest in those areas which have inferior returns or growth prospects.
FINANCIAL OVERVIEW
Net income for the quarter ended September 30, 2004 was $6.9 compared to $4.7
for the same period of 2003. Earnings per share, on a diluted basis, were $0.40
for the third quarter of 2004 compared to $0.27 in 2003.
18
Net loss for the nine months ended September 30, 2004 was $13.7 compared to net
earnings of $12.9 for the same period of 2003. Earnings per share, on a diluted
basis, were $(0.79) for the first nine months of 2004 compared to $0.75 in 2003.
Annualized returns on average assets and equity for the three months ended
September 30, 2004 were 1.01% and 13.67%, respectively, compared with 0.62% and
7.88% in the same period of 2003.
Net interest income was $22.1 during the three months ended September 30, 2004
compared to $18.4 for the three months ended September 30, 2003, representing an
increase of 20.1%. Improved net interest margin was the primary driver for the
increase. The net interest margin increased 86 basis points to 3.73% during the
third quarter of 2004 from 2.87% during the third quarter of 2003 as a result of
improvements in product pricing discipline and balance sheet management.
Provision for loan losses was $0.2 for the three months ended September 30, 2004
compared to $1.1 for the same period one year ago. Non-interest income decreased
$1.5 to $7.1 compared to the third quarter of 2003, primarily due to lower gains
from securities and mortgage loan sales. Non-interest expense for the third
quarter decreased $0.8 to $20.3 from the same period in 2003.
On a year-to-date basis, net interest income was $62.3 for the nine-month period
ending September 30, 2004, an increase of $8.9, or 16.7%, compared to $53.4 for
the first nine months of 2003. The net interest margin was 3.43% during the
first nine months of 2004 compared to 2.82% during the first nine months of
2003. Provision for loan losses was $1.0 for the nine months ended September 30,
2004 compared to $3.9 for the same period one year ago. Non-interest income
increased $1.6, or 6.5%, to $26.6 compared to the first nine months of 2003.
Non-interest expenses increased $56.0 to $118.4 for the same periods. This was
primarily due to the $57.0 of debt prepayment fees incurred as a result of the
balance sheet restructuring in the first quarter of 2004.
Annualized returns on average assets and equity for the first nine months of
2004 were (0.66)% and (8.68)%, respectively, compared with 0.59% and 7.31%,
respectively, in the same period of 2003.
During the third quarter of 2003, the Company sold $17.4 of municipal securities
resulting in a gain of $1.2 and prepaid $15.0 in Federal Home Loan Bank ("FHLB")
advances incurring a prepayment charge of $1.2.
Total assets at September 30, 2004 declined $299.0 to $2,684.4 from $2,983.4 at
September 30, 2003.
Three Months Ended Nine Months Ended
RECONCILIATION TABLE--NET OPERATING INCOME ------------------ -----------------
(In millions, except per share data) September 30, September 30, Percent September 30, September 30, Percent
2004 2003 Change 2004 2003 Change
---- ---- ------ ---- ---- ------
Net income (loss) $ 6.9 $ 4.7 $ (13.7) $ 12.9
Excluding:
Gain on sale of credit cards, net of tax - - 1.1 -
Gain on sale of branch, net of tax - - - 1.2
Loss on fixed asset disposition, net of tax - - - 0.2
Securities gains (losses), net of tax - 1.2 2.7 2.7
Severance pay, net of tax - - 0.4 -
Trust preferred redemption expense, net of tax - - - 1.6
Debt extinguishment expense, net of tax - 1.2 35.1 1.2
------ ----- -- -------- --------- --
Net operating income $ 6.9 $ 4.7 47% $ 18.0 $ 12.0 50%
====== ===== == ======== ========= ==
Diluted net income (loss) per share $ 0.40 $0.27 $ (0.79) $ 0.75
Excluding:
Gain on sale of credit cards, net of tax - - 0.06 -
Gain on sale of branch, net of tax - - - 0.07
Loss on fixed asset disposition, net of tax - - - 0.01
Securities gains (losses), net of tax - 0.07 0.15 0.15
Severance pay, net of tax - - 0.02 -
Trust preferred redemption expense, net of tax - - - 0.09
Debt extinguishment expense, net of tax - 0.07 2.02 0.07
------ ----- -- -------- --------- --
Diluted net operating income per share $ 0.40 $0.27 48% $ 1.04 $ 0.70 49%
====== ===== == ======== ========= ==
19
CRITICAL ACCOUNTING POLICIES
During the third quarter of 2004, the Company enhanced the process that it uses
in measuring the adequacy of the allowance for loan losses. Refer to the section
labeled "Asset Quality" for further discussion.
There have been no other 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, on a tax equivalent basis, was $23.0 for the three months
ended September 30, 2004 compared with $19.6 for the same period in 2003.
Pricing discipline and improved balance sheet management were the drivers of the
improvement. On a year-to-date and tax equivalent basis, net interest income was
$64.9 for the nine months ended September 30, 2004, or $7.7 higher than the same
period in 2003. The net interest margin for the three months ended September 30,
2004 was 3.73% compared to 2.87% for the same period one year ago. The net
interest margin for the nine months ended September 30, 2004 was 3.43% compared
to 2.82% for the same period one year ago. The increase in both the year-to-date
net interest income and margin is largely attributable to the Company's balance
sheet restructuring in the first quarter of 2004. In late March of 2004, the
Company prepaid $467 in long-term FHLB advances with a yield of 6.16% and
reduced its investment portfolio by $262. The Company also added $330 of new
fixed rate advances with an average rate of 2.28%. Late in the second quarter of
2003, the Company paid off $34.5 of trust preferred debt with a fixed rate of
8.25% and issued a new trust preferred of $34.5 with a floating rate of LIBOR
plus 3.10%. As a result, the cost of total interest-bearing liabilities dropped
81 basis points to 1.89% for the third quarter of 2004 compared to 2.70% for the
third quarter of 2003. The cost of total interest-bearing liabilities for the
first nine months of 2004 decreased 84 basis points to 2.10% from 2.94% for the
same period of 2003.
Average earning assets were $2,449.9 for the third quarter of 2004 compared to
$2,710.6 for the third quarter of 2003 a decrease of $260.7. A decrease in
commercial loans and reductions in portfolio and short-term investments
attributed to this decrease. Yields on earning assets increased from 5.37% to
5.46% for the same period. The yield increase was primarily due to a decrease in
loan rate and volume offset by an increase in investment yields. Average earning
assets decreased $160.7 from $2,672.5 for the first nine months of 2003 to
$2,511.8 for the first nine months of 2004. The yield on earning assets for the
first nine months of 2004 was 5.35% compared to 5.55% for the same period of
2003. The yield decrease was the result of the decrease in both loan volume and
rates and investment volume.
Average loan balances were $1,634.4 for the third quarter of 2004 compared to
$1,690.1 for the third quarter of 2003. In late April 2004, the Company sold its
credit card portfolio for approximately $6.1 and generated a net gain of $1.1
after tax. Average commercial loans decreased $82.5 to $830.5, consumer loans
increased $25.9 to $390.1, and mortgage loans increased $1.0 to $413.8 for the
third quarter of 2004 compared to the same quarter of 2003. Total tax equivalent
interest income on loans decreased $1.5 for the third quarter of 2004 compared
to 2003 as the result of a decline in loan volume and yields. The yield on loans
was 5.77% for the third quarter of 2004 compared to 5.93% for the same period of
2003. Average loans were $1,653.2 for the first nine months of 2004 compared to
$1,662.4 for the first nine months of 2003, a decrease of $9.2, or 0.6%.
Consumer loans and mortgage loans, on an average basis, experienced growth of
$34.5 and $12.3, respectively, for the nine months of 2004 compared to the same
period of 2003, while commercial loans, on an average basis, decreased $56.0 for
the same periods. The yield on loans was 5.69% for the first nine months of 2004
compared to 6.12% for the same period of 2003.
Average investment securities were $807.9 for the third quarter of 2004 compared
to $1,004.6 for the third quarter of 2003. The yield on securities increased to
4.84% for the third quarter of 2004 from 4.43% for the same period in 2003. The
Company sold $262 in investments as part of the balance sheet restructuring in
late March 2004 for a gain of $5.2. In late June 2004, the Company sold $25.0 of
U.S. government agency securities for a loss of $0.7. In the second quarter of
2003, $70 mortgage-backed securities were sold which generated a gain of $1.0.
The proceeds from the securities sold in second quarter 2003 were reinvested in
structured mortgage-backed securities with more predictable cashflows and
yields. Average investment securities decreased $146.0, or 14.7%, to $849.9 for
the first nine months of 2004 compared to $995.9 for the first nine months of
2003. The yield on securities increased to 4.73% for the first nine months of
2004 from 4.62% for the first nine months of 2003.
Average other earning assets decreased $8.4 for the third quarter of 2004
compared to the same period of 2003. The decline resulted primarily from a
decrease of $8.5 in loans held for sale offset by a $0.1 increase in short-term
investments. Average other earning assets decreased $5.6 for the first nine
months of 2004 compared to the same period of 2003, primarily from an increase
of $0.6 in short term investments offset by a decrease of $6.2 in loans held for
sale.
Average interest-bearing liabilities were $2,240.9 and $2,511.1 for the three
months ended September 30, 2004 and 2003, respectively, a decrease of $270.2;
while the cost of these funds decreased from 2.70% to 1.89% for the same period.
Average interest-bearing liabilities were $2,300.7 and $2,474.0 for the nine
months ended September 30, 2004 and 2003, respectively.
20
Average interest-bearing deposits decreased $12.9 from $1,603.7 to $1,590.8
while average non-interest-bearing demand deposits increased $28.0, or 12.7%,
from $220.9 to $248.9 for the third quarter of 2004 compared to the same period
in 2003. Valuable core deposits, which are demand, non-interest bearing,
interest checking, money market and savings deposits, increased $73.6 for the
third quarter of 2004 to $1,031.0 compared to the same period of 2003. The
increase in average valuable core deposits of $73.6 was partially offset by a
decrease of $58.5 in CDs and other time deposits for the third quarter of 2004
compared to the same period of 2003. The change in deposit product mix resulted
in the cost of deposits decreasing from 1.74% to 1.60% for the third quarter of
2004 compared to the third quarter of 2003. Average valuable core deposits were
$1,018.4 for the first nine months of 2004 compared to $946.1 for the first nine
months of 2003. Average money market accounts increased $28.2 as savings and
interest checking increased $14.8 and CDs and other time deposits decreased
$35.7. Non-interest-bearing deposits increased $29.3, or 13.7%. The cost of
deposits decreased to 1.56% for the first nine months of 2004 from 1.95% for the
first nine months of 2003.
Average short-term borrowings decreased $64.9 from $255.3 to $190.4 for the
third quarter of 2004 compared to the same period in 2003. The cost of
short-term borrowings increased 23 basis points during this period, to 1.32% for
the third quarter of 2004. For the first nine months of 2004, average short-term
borrowings decreased $38.3 to $178.0 compared to the same period in 2003. As
part of the balance sheet restructuring, the Company paid off some of its
long-term FHLB borrowings and refinanced into short-term borrowings. For the
first nine-month period of 2004 and 2003, the cost of short-term borrowings was
1.18% and 1.22%, respectively.
Average long-term borrowings decreased $192.5 from $652.1 to $459.6 for the
third quarter of 2004 compared to the same period in 2003. The cost of long-term
borrowings decreased 254 basis points from 5.70% for the third quarter of 2003
to 3.16% for the same period of 2004. For the first nine months period of 2004,
average long-term borrowings decreased $142.4 from $657.4 in 2003 to $515.0 and
long-term borrowing costs were 5.92% and 4.11% for the same time periods. In
April 2003, the Company issued $10 of subordinated debt with a floating rate of
4.49% for the second quarter of 2003. In late June 2003 the Company called $34.5
of trust preferred securities at par, which had a fixed rate of 8.25%. During
the second quarter of 2003, the Company issued $34.5 of new, floating rate trust
preferred securities which had an initial yield of 4.16%. In late March 2004 the
Company restructured its balance sheet by prepaying $467 in long-term FHLB
advances with an average yield of 6.16% and arranged new financing of $330 with
maturities of 1 to 4 years with an average yield of 2.28%.
21
Average Balance Sheet and Analysis of Net Interest Income
Three Months Ended September 30
2004 2003
---------------------------------------- ---------------------------------------------
Interest & Interest &
(In thousands) Average Balances Fees Yield/Cost Average Balances Fees Yield/Cost
EARNING ASSETS
Short-term investments $ 5,007 $ 17 1.38% $ 4,893 $ 12 0.89%
Loans held for sale 2,550 44 6.95% 11,095 170 6.12%
Securities 807,923 9,768 4.84% 1,004,581 11,129 4.43%
Loans 1,634,419 23,890 5.77% 1,690,072 25,406 5.93%
------------- --------- ---- ---------------- --------- ----
Total earning assets 2,449,899 $ 33,719 5.46% 2,710,641 $ 36,717 5.37%
=========
Fair value adjustment on securities
available for sale (3,357) 14,941
Allowance for loan loss (25,095) (25,099)
Other non-earning assets 284,798 280,952
------------- --------- ---- ---------------- --------- ----
Total Assets $ 2,706,245 $ 2,981,435
============= ========= ==== ================ ========= ====
INTEREST-BEARING LIABILITIES
Savings and interest-bearing demand $ 574,388 $ 707 0.49% $ 530,074 $ 690 0.52%
Money market accounts 207,703 721 1.38% 206,457 796 1.53%
Certificates of deposit and other time 808,703 4,968 2.44% 867,170 5,540 2.53%
------------- --------- ---- ---------------- --------- ----
Total interest-bearing deposits 1,590,794 6,396 1.60% 1,603,701 7,026 1.74%
Short-term borrowings 190,390 644 1.32% 255,274 699 1.09%
Long-term borrowings 459,668 3,712 3.16% 652,149 9,368 5.70%
------------- --------- ---- ---------------- --------- ----
Total interest-bearing liabilities 2,240,852 $ 10,752 1.89% 2,511,124 $ 17,093 2.70%
========= =========
Non-interest-bearing deposits 248,919 220,870
Other non-interest-bearing liabilities 16,103 15,023
Shareholders' equity 200,371 234,418
------------- --------- ---- ---------------- --------- ----
Total Liabilities and Shareholders' Equity $ 2,706,245 $ 2,981,435
============= ========= ==== ================ ========= ====
Interest income/earning assets $ 33,719 5.46% $ 36,717 5.37%
Interest expense/earning assets 10,752 1.73% 17,093 2.50%
------------- --------- ---- ---------------- --------- ----
Net interest income/earning assets $ 22,967 3.73% $ 19,624 2.87%
============= ========= ==== ================ ========= ====
Tax exempt income presented on a tax equivalent basis based on a 35% federal tax
rate.
Federal tax equivalent adjustments on securities are $784 and $1,105 for 2004
and 2003, respectively.
Federal tax equivalent adjustments on loans are $54 and $106 for 2004 and 2003,
respectively.
22
Average Balance Sheet and Analysis of Net Interest Income
Nine Months Ended September 30,
2004 2003
---------------------------------------- --------------------------------------------
Interest & Interest &
(In thousands) Average Balances Fees Yield/Cost Average Balances Fees Yield/Cost
EARNING ASSETS
Short-term investments $ 5,931 $ 48 1.08% $ 5,306 $ 45 1.12%
Loans held for sale 2,675 131 6.53% 8,926 408 6.10%
Securities 849,939 30,150 4.73% 995,919 34,490 4.62%
Loans 1,653,220 71,043 5.69% 1,662,395 76,692 6.12%
------------- --------- ---- ---------------- --------- ----
Total earning assets 2,511,765 $ 101,372 5.35% 2,672,546 $ 111,635 5.55%
========= =========
Fair value adjustment on securities
available for sale 4,982 17,669
Allowance for loan loss (25,405) (24,765)
Other non-earning assets 282,791 273,960
------------- --------- ---- ---------------- --------- ----
Total Assets $ 2,774,133 $ 2,939,410
============= ========= ==== ================ ========= ====
INTEREST-BEARING LIABILITIES
Savings and interest-bearing demand $ 555,406 $ 1,865 0.45% $ 540,596 $ 2,772 0.69%
Money market accounts 219,843 2,358 1.43% 191,659 2,586 1.80%
Certificates of deposit and other time 832,365 14,558 2.33% 868,079 18,036 2.78%
------------- --------- ---- ---------------- --------- ----
Total interest-bearing deposits 1,607,614 18,781 1.56% 1,600,334 23,394 1.95%
Short-term borrowings 178,042 1,604 1.18% 216,310 1,967 1.22%
Long-term borrowings 515,021 16,099 4.11% 657,394 29,091 5.92%
------------- --------- ---- ---------------- --------- ----
Total interest-bearing liabilities 2,300,677 $ 36,484 2.10% 2,474,038 $ 54,452 2.94%
========= =========
Non-interest-bearing deposits 243,138 213,883
Other non-interest bearing liabilities 19,504 15,535
Shareholders' equity 210,814 235,954
------------- --------- ---- ---------------- --------- ----
Total Liabilities and Shareholders' Equity$ 2,774,133 $ 2,939,410
============= ========= ==== ================ ========= ====
Interest income/earning assets $ 101,372 5.35% $ 111,635 5.55%
Interest expense/earning assets 36,484 1.92% 54,452 2.73%
------------- --------- ---- ---------------- --------- ----
Net interest income/earning assets $ 64,888 3.43% $ 57,183 2.82%
============= ========= ==== ================ ========= ====
Tax exempt income presented on a tax equivalent basis based on a 35% federal tax
rate. Federal tax equivalent adjustments on securities are $2,385 and $3,412 for
2004 and 2003, respectively. Federal tax equivalent adjustments on loans are
$188 and $377 for 2004 and 2003, respectively.
NON-INTEREST INCOME
Non-interest income for the three months ended September 30, 2004, was $7.1
compared to $8.6 from the same period in 2003. The decrease was primarily
attributable to gains on sale of mortgages and securities. In the third quarter
of 2003, the Company sold securities that generated a gain of $1.2. In the third
quarter of 2003, the mortgage refinancing market was still strong and generated
gains of $0.7 compared to $0.2 in the same quarter of 2004. Adjusted
non-interest income for the same periods decreased $0.2 and was $7.1 and $7.3,
respectively. Adjusted non-interest income excludes gains on securities
transactions and the impact of certain non-recurring items which, in
management's view, are not expected to recur in the foreseeable future.
Non-interest income for the nine months ended September 30, 2004 was $26.6
compared to $25.0 from the same period in 2003. Adjusted non-interest income was
$21.0 and $21.6 for the first nine months ended September 30, 2004 and 2003,
respectively. In addition to the above-mentioned items that occurred in the
third quarter of 2004, the Company restructured its balance sheet recognizing
$5.2 of securities gains in the first quarter of 2004. In the second quarter of
2004, the Company sold approximately $6.1 in credit card loans for a gain of
$1.2 and sold $25.0 of U.S. government agencies for a loss of $0.7. In 2003 the
Company had a loss on the disposition of fixed assets of $0.1, and sold a branch
and securities for a gain of $1.1 and $2.5, respectively.
23
Reconciliation Table - Non-Interest Income to Adjusted Non-Interest Income
Three Months Ended Nine Months Ended
Non-Interest Income September 30, Increase September 30, Increase
(In thousands) 2004 2003 (Decrease) 2004 2003 (Decrease)
- -------------- ---- ---- ---------- ---- ---- ----------
Service charges on deposit accounts $3,272 $2,937 $ 335 $ 9,259 $ 8,620 $ 639
Other service charges and fees 1,895 1,647 248 5,576 5,056 520
Mortgage banking 178 521 (343) 650 1,359 (709)
Trust income 506 509 (3) 1,527 1,519 8
Securities gains 5 1,233 (1,228) 4,502 2,515 1,987
Gain on sale of mortgage loans 164 664 (500) 471 1,835 (1,364)
Gain on sale of other assets 50 89 (39) 1,410 1,171 239
CSV life insurance income 377 412 (35) 1,169 1,393 (224)
Other 652 570 82 2,068 1,531 537
------ ------ ------- ------- -------- -------
Total non-interest income $7,099 $8,582 $(1,483) $26,632 $ 24,999 $ 1,633
------ ------ ------- ------- -------- -------
Less gain on sale of credit cards - - - 1,158 - 1,158
Less gain on sale of branch - - - - 1,056 (1,056)
Less loss on fixed asset disposition - - - - (148) 148
Less securities gains 5 1,233 (1,228) 4,502 2,515 1,987
------ ------ ------- ------- -------- -------
Total adjusted non-interest income $7,094 $7,349 $ (255) $20,972 $ 21,576 $ (604)
====== ====== ======= ======= ======== =======
Service charges on deposit accounts were $0.3 greater, or 11.4%, and $0.6, or
7.4%, during the third quarter and first nine months of 2004, respectively, than
the same periods one year ago. Other service charges and fees increased $0.2, or
15.1%, for the third quarter of 2004 compared to the same period of 2003 and
$0.5, or 10.3%, for the first nine months of the same time periods. This was
primarily the result of increased number of deposit accounts and usage of
deposit products in 2004.
Securities gains were $1.2 lower in the third quarter of 2004 compared to the
third quarter of 2003. In late June 2004, the Company sold $25.0 in U.S.
government agencies generating a loss of $0.7. In late March 2004, as a result
of the balance sheet restructuring, the Company sold securities for a gain of
$5.2. In 2003 the Company sold $70.0 of mortgage-backed securities for a gain of
$1.0. These securities were reinvested in structured mortgage-backed securities
with more predictable cashflows and yields.
Gain on sale of mortgage loans was $0.5 lower for the third quarter of 2004
compared to the same period in 2003 and $1.4 below the first nine months of the
same years. In 2003, the Company experienced one of its most active refinancing
markets due to the low interest rate environment. Generally higher interest
rates late in 2003 and 2004 reduced the demand for refinancing. The Company
sells the majority of its fixed rate residential mortgage loans servicing
retained. As a result of the decrease in refinancing demand, mortgage-servicing
income has also decreased. The third quarter decrease was also impacted by a
mortgage servicing rights impairment charge of $0.2 recorded in the third
quarter of 2003.
In late April 2004, the Company sold its credit card portfolio of approximately
$6.1. The Company experienced a gain of $1.2 from the sale. In late May 2003,
the Company sold branch for a gain of $1.1. Also in the second quarter of 2003,
the Company recorded a loss of $0.1 for a writedown of certain fixed assets.
NON-INTEREST EXPENSE
Non-interest expense decreased $0.8 in the third quarter of 2004 compared to the
same period in 2003. On a year-to-date basis, non-interest expense increased
$56.0 in the first nine months of 2004 compared to the first nine months of
2003. Adjusted non-interest expense is non-interest expense less $57.0 of debt
prepayment fees experienced in March of 2004 as a result of the balance sheet
restructuring and $1.4 of trust preferred redemption expenses related to calling
$34.5 of trust preferred debt in late June 2003. The Company does not expect
that these items will recur in the foreseeable future and therefore the items
have been excluded for analysis purposes. Adjusted non-interest expense
increased $0.4, or 2.2%, for the third quarter of 2004 compared to the same
period last year. For the nine months ending September 30, 2004, the increase in
adjusted non-interest expense was $1.1, or 1.9%, compared to the same period of
2003.
Salaries increased $0.4, or 5.4%, for the three months ended September 30, 2004
and $1.5, or 6.9%, for nine months ended September 30, 2004 compared to the same
periods of 2003. These increases include a minimal amount of severance for the
third quarter of 2004 and $0.5 for the nine months ended September 30, 2004
compared to the same periods of 2003. Other benefits decreased $0.1 for the
third quarter of 2004 and $0.7 for the nine months ended September 30, 2004
compared to the same periods a year ago.
24
Low Income Housing Project ("LIHP") operating losses decreased approximately
$0.1 to $0.6 for the third quarter of 2004 compared to $0.6 for the same period
of 2003. For the nine months ended September 30 2004, LIHP operating losses was
$1.7 compared to $2.1 for the same period in 2003. As a component of LIHP, the
Company receives a tax credit, which lowers the Company's tax liability.
Reconciliation Table - Non-Interest Expense to Adjusted Non-Interest Expense
Three Months Ended Nine Months Ended
Non-Interest Expense September 30, Increase September 30, Increase
(In thousands) 2004 2003 (Decrease) 2004 2003 (Decrease)
- -------------- ---- ---- ---------- ---- ---- ----------
Salaries $ 7,923 $ 7,519 $ 404 $ 24,082 $22,535 $ 1,547
Commissions and incentives 981 1,037 (56) 3,356 2,994 362
Other benefits 1,634 1,737 (103) 5,126 5,799 (673)
Occupancy 1,713 1,567 146 4,882 4,650 232
Equipment 1,008 1,087 (79) 3,105 3,273 (168)
Professional fees 1,113 1,121 (8) 3,444 3,388 56
Communication and transportation 845 982 (137) 2,581 3,047 (466)
Processing 1,051 896 155 2,639 2,586 53
Marketing 511 519 (8) 1,498 1,307 191
Debt prepayment fees - 1,243 (1,243) 56,998 1,243 55,755
Low income housing project losses 552 642 (90) 1,655 2,076 (421)
Amortization of intangible assets 403 404 (1) 1,213 1,214 (1)
Other 2,555 2,336 219 7,845 8,327 (482)
------- ------- ------- -------- ------- --------
Total non-interest expense $20,289 $21,090 $ (801) $118,424 $62,439 $ 55,985
------- ------- ------- -------- ------- --------
Less severance pay 51 46 5 630 144 486
Less trust preferred redemption expense - - - - 1,400 (1,400)
Less debt extinguishment expenses - 1,243 (1,243) 56,998 1,243 55,755
------- ------- ------- -------- ------- --------
Total adjusted non-interest expense $20,238 $19,801 $ 437 $ 60,796 $59,652 $ 1,144
======= ======= ======= ======== ======= ========
INCOME TAX EXPENSE
Income tax expense (benefit) was $1.9 and $(16.7) for the three months and nine
months ended September 30, 2004, respectively, compared with $0.1 and $(0.9) for
the same period in 2003. The effective tax rates were 21.7% and 2.9% for the
quarter ended September 30, 2004 and 2003, respectively. See Note 5 "Income
Taxes" for the components of the income tax expense (benefit).
FINANCIAL POSITION
Total assets at September 30, 2004 were $2,684.4 a decrease of $273.9 compared
to $2,958.3 at December 31, 2003.
SECURITIES
Total available for sale investment securities were $823.5 at September 30, 2004
and $1,007.0 at December 31, 2003. The Company currently has no investment
securities classified as held to maturity. The investment securities market
value on September 30, 2004 was $5.0 above the amortized cost. During the first
quarter, the portfolio was reduced by the sale of $262 of securities as part of
the balance sheet restructuring. The average portfolio yield was 4.84% in the
third quarter of 2004 and 4.43% in the third quarter of 2003. Management
regularly reviews the composition of the securities portfolio, taking into
account market risks, interest rate environment, liquidity needs, and the
Company's overall interest rate risk profile.
LOANS
Total loans at September 30, 2004, were $1,611.0 compared to $1,699.7 at
December 31, 2003. On April 30, 2004, the Company sold its credit card portfolio
of approximately $6.1 in loans. Commercial mortgages decreased $48.5, or 20.3%,
since December 31, 2003 while commercial, industrial and agricultural loans
decreased by $31.3, or 5.3%, for the first nine months of 2004. Consumer loans
increased $5.1, or 2.8%. One to four family loans, which includes residential
mortgages and home equity loans, decreased $5.4, or 0.9%.
25
LOAN PORTFOLIO
September 30, December 31,
(In thousands) 2004 2003
- -------------- ---- ----
Commercial, industrial and
agricultural loans $ 554,856 $ 586,159
Economic development loans and
other obligations of state and
political subdivisions 14,001 20,951
Lease financing 5,727 6,796
Commercial mortgages 189,783 238,261
Construction and development 52,509 53,108
Residential mortgages 460,979 477,895
Home equity 143,638 132,101
Consumer loans 189,499 184,426
---------- ----------
Total loans 1,610,992 1,699,697
Less: unearned income 7 9
---------- ----------
Loans, net of unearned income $1,610,985 $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. During the third
quarter of 2004, management enhanced the process that it uses to perform this
analysis. These enhancements included expanded data analysis, improved
back-testing and continued refinements to documentation surrounding the adequacy
of the allowance. The result is more reliable measures of the probability of
default and risk of loss given default for the Company's categories of loans
with similar risk characteristics. The principal change involved the ability to
analyze loss data over a longer period of time. This allows us to improve the
measure of inherent loss over a complete economic cycle and reduces the impact
for qualitative adjustments. These changes do not impact losses estimated in
accordance with Financial Accounting Standard 114, "Accounting by Creditors for
Impairment of a Loan."
Loans that are deemed to be uncollectible are charged-off to the allowance,
while recoveries of previously charged off amounts are credited to the
allowance. A provision for loan losses is expensed to operations at levels
deemed necessary to provide assurance that the allowance for loan losses is
sufficient to absorb probable losses based on management's ongoing evaluation of
the loan portfolio.
The allowance for loan losses was $24.6 at September 30, 2004, representing
1.53% of total loans compared with $25.4 at September 30, 2003 which represented
1.50% of total loans. Management expects that the allowance to total loans will
continue to decline as the economy and the Company's level of non-performing
assets improves. Annualized net charge-offs to average loans was 0.14% during
the third quarter of 2004 compared to 0.11% for the same period of 2003. On a
year-to-date basis, the ratio of annualized net charge-offs to average loans was
0.12% during the first nine months of 2004 compared to 0.25% for the same period
of 2003. The provision for the first nine months of 2004 was $1.0, which was a
decrease of $3.0 compared to the same period of 2003. The ratio of the allowance
for loan losses to non-performing loans was 123.32% at September 30, 2004
compared to 138.88% at December 31, 2003 and 151.04% at September 30, 2003.
26
SUMMARY OF ALLOWANCE FOR LOAN LOSSES
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2004 2003 2004 2003
- -------------- ---- ---- ---- ----
Beginning Balance $ 25,007 $ 24,862 $ 25,403 $ 24,632
Loans charged off (1,127) (1,103) (3,579) (5,041)
Recoveries 547 651 2,097 1,984
Provision for loan losses 150 1,110 955 3,945
Decrease due to sale of loans - - (299) -
-------- -------- -------- --------
Ending Balance $ 24,577 $ 25,520 $ 24,577 $ 25,520
======== ======== ======== ========
Percent of total loans 1.53% 1.50% 1.53% 1.50%
======== ======== ======== ========
Annualized % of average loans:
Net charge-offs 0.14% 0.11% 0.12% 0.25%
Provision for loan losses 0.04% 0.26% 0.08% 0.32%
As of September 30, 2004, total non-performing assets decreased $1.5 from
December 31, 2003. This decrease was primarily the result of the Company
receiving $3.0 in settlement of a municipal obligation which had been previously
reported as in default. Non-performing loans, consisting of nonaccrual and 90
days or more past due loans and still accruing, were 1.24% and 1.08% of total
loans at September 30, 2004 and December 31, 2003, respectively.
Listed below is a comparison of non-performing assets.
September 30, December 31,
(In thousands) 2004 2003
- -------------- ---- ----
Nonaccrual loans $19,439 $15,725
90 days or more past due loans and still accruing 490 2,566
------- -------
Total non-performing loans 19,929 18,291
Other real estate owned 862 1,341
Investment securities - 2,692
------- -------
Total non-performing assets $20,791 $22,324
======= =======
Ratios:
Non-performing Loans to Loans 1.24% 1.08%
Non-performing Assets to Loans and Other Real Estate Owned 1.29% 1.31%
Allowance for Loan Losses to Non-performing Loans 123.32% 138.88%
DEPOSITS
Total deposits were $1,847.8 at September 30, 2004, compared to $1,812.6 at
December 31, 2003. Total valuable core deposits increased $54.9 to $1,022.5 at
September 30, 2004 from $967.6 at December 31, 2003. Despite recent increases in
interest rates, customers have continued to favor shorter term, liquid deposit
products and deposit alternatives, including annuities. Time deposits greater
than $0.1 have had little change since December 31, 2003 while other time
deposits decreased $19.6, or 3.6%, for this same period.
September 30, December 31,
(In thousands) 2004 2003
- -------------- ---- ----
Non-interest-bearing demand $ 240,887 $ 219,983
Interest-bearing demand 428,124 405,765
Money market 211,842 210,289
Savings 141,670 131,565
---------- ----------
Valuable core deposits $1,022,523 $ 967,602
Time deposits of $100 or more 305,733 305,863
Other time deposits 519,525 539,165
---------- ----------
Total deposits $1,847,781 $1,812,630
========== ==========
27
SHORT-TERM BORROWINGS
Federal funds purchased and securities sold under repurchase agreements totaled
$107.3 at September 30, 2004 compared to $246.4 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 September 30, 2004, the Company had a $15.0 line of credit available.
LONG-TERM BORROWINGS
Long-term borrowings include FHLB advances, term notes, or other similar
obligations. Included in long-term borrowings are $222.5 of FHLB advances used
to fund investments and loans and to satisfy other funding needs. The Company
must pledge mortgage-backed securities and mortgage loans as collateral to
secure these advances.
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 $35.6 of 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 $1.0 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 $34.5
of trust preferred securities which had a fixed rate of 8.25%.
CAPITAL EXPENDITURES
The Company opened a new banking center in Evansville in July of 2004 and
currently has plans to open two in the next twelve months. Capital expenditures
for the new banking center were $0.4 in the third quarter of 2004. The Company
currently anticipates additional capital expenditures between $0.5 and $1.5 for
subsequent banking centers building expenses for the rest of 2004.
OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
There have been no material changes in off-balance sheet arrangements and
contractual obligations since December 31, 2003.
CAPITAL RESOURCES AND LIQUIDITY
The Company and the Bank have capital ratios that substantially 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
the Company and the Bank are shown below.
Regulatory Guidelines Actual
--------------------- ------
Minimum Well- September 30, December 31,
Requirements Capitalized 2004 2003
------------ ----------- ---- ----
Integra Bank Corporation:
Total Capital (to Risk-Weighted Assets) 8.00% 12.90% 13.13%
Tier 1 Capital (to Risk-Weighted Assets) 4.00% 10.71% 11.37%
Tier 1 Capital (to Average Assets) 4.00% 7.50% 7.64%
Integra Bank NA:
Total Capital (to Risk-Weighted Assets) 8.00% 10.00% 12.19% 12.74%
Tier 1 Capital (to Risk-Weighted Assets) 4.00% 6.00% 10.94% 11.49%
Tier 1 Capital (to Average Assets) 4.00% 5.00% 7.69% 7.70%
Liquidity of a banking institution reflects the ability to provide funds to meet
loan requests, accommodate possible outflows in deposits and other borrowings,
and take advantage of interest rate market opportunities. The Company
continuously analyzes its current and
28
prospective business activity in order to match maturities of specific
categories of short-term and long-term loans and investments with specific types
of deposits and borrowings.
For Integra Bank N.A. (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 Federal Funds 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 September 30, 2004 and December 31, 2003, respectively,
Federal Funds sold and other short-term investments were $0.1 and $8.7.
Additionally, at September 30, 2004, the Company had $365 available from unused
Federal Funds lines and in excess of $363 in unencumbered securities available
for repurchase agreements. The Bank also has a "borrower in custody" line with
the Federal Reserve Bank totaling over $417 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 $15.0.
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 outstanding debt and trust preferred securities
obligations, provide dividends to common shareholders and other general
corporate purposes. During the first quarter of 2004, the Company announced a
change in its dividend philosophy and moved 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 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
29
September 30, 2004, the Company would experience a negative 5.90% change in EAR
if interest rates moved downward 200 basis points. If interest rates moved
upward 200 basis points, the Company would experience a negative 0.70% change in
net interest income. The reduction in EAR in the down 200 basis points scenario
can be attributed to a favorable impact from the quarter over quarter increase
in interest rates. Both simulation results are within the policy limits
established by the Board ALCO.
Trends in Earnings at Risk
Estimated Change in EAR from the Base Interest Rate Scenario
------------------------------------------------------------
-200 basis points +200 basis points
----------------- -----------------
September 30, 2004 (5.90)% (0.70)%
----- -----
June 30, 2004 (4.41)% (0.68)%
----- -----
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 September 30, 2004, the Company would experience a negative 1.60% change in
EVE if interest rates moved downward 200 basis points. If interest rates moved
upward 200 basis points, the Company would experience a negative 7.10% change in
EVE. Both of these measures are within Board approved policy limits.
Trends in Economic Value of Equity
Estimated Change in EVE from the Base Interest Rate Scenario
------------------------------------------------------------
-200 basis points +200 basis points
----------------- -----------------
September 30, 2004 (1.60)% (7.10)%
----- -----
June 30, 2004 1.65% (8.04)%
----- -----
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 September 30, 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 our internal controls over financial reporting
that occurred during the quarter ended September 30, 2004 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
30
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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS
The following documents are filed as exhibits to this report:
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
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTEGRA BANK CORPORATION
By /s/ Michael T. Vea
----------------------
Chairman of the Board, Chief
Executive Officer and President
November 8, 2004
/s/ Charles A. Caswell
-------------------------
Chief Financial Officer and
Executive Vice President
November 8, 2004
32