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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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 (I.R.S. Employer
incorporation or organization) Identification number)
21 S.E. Third Street,
P.O. Box 868, Evansville, IN 47705-0868
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 812-464-9677
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $1.00 STATED VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ]
Based on the closing sales price as of June 30, 2004 (the last business day of
the registrant's most recently completed second quarter), the aggregate market
value of the voting stock held by non-affiliates of the registrant was
approximately $324,681,000.
The number of shares outstanding of the registrant's common stock was 17,384,599
at March 1, 2005.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the 2005 Annual Meeting of
Shareholders (Part III).
1
INTEGRA BANK CORPORATION
2004 FORM 10-K ANNUAL REPORT
Table of Contents
PAGE
NUMBER
------
PART I
Item 1. Business 3
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 8
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation 10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 28
Item 8. Financial Statements and Supplementary Data 30
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 62
Item 9A. Controls and Procedures 62
Item 9B. Other Information 62
PART III
Item 10. Directors and Executive Officers of the Registrant 62
Item 11. Executive Compensation 62
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 62
Item 13. Certain Relationships and Related Transactions 62
Item 14. Principal Accountant Fees and Services 62
PART IV
Item 15. Exhibits and Financial Statement Schedules 63
Signatures
2
FORM 10-K
INTEGRA BANK CORPORATION
December 31, 2004
PART I
ITEM 1. BUSINESS
General
Integra Bank Corporation (the "Company" or "Integra") is a bank holding company
based in Evansville, Indiana. The Company's principal subsidiary is Integra Bank
N.A., a national banking association ("Integra Bank" or the "Bank"). At December
31, 2004, the Company had total consolidated assets of $2.8 billion. The Company
provides services and assistance to its wholly owned subsidiaries and Integra
Bank's subsidiaries in the areas of strategic planning, administration, and
general corporate activities. In return, the Company receives income and/or
dividends from Integra Bank, where most of the Company's business activities
take place.
Integra Bank provides a wide range of financial services to the communities it
serves in Indiana, Kentucky, Illinois and Ohio. These services include
commercial, consumer and mortgage loans, lines of credit, credit cards,
transaction accounts, time deposits, repurchase agreements, letters of credit,
corporate cash management services, correspondent banking services, mortgage
servicing, brokerage and annuity products and services, credit life and other
selected insurance products, safe deposit boxes, online banking, and complete
personal and corporate trust services.
Integra Bank's products and services are delivered through our customers'
channel of preference. At December 31, 2004, Integra Bank had 76 banking
centers, 122 automatic teller machines ("ATMs"), and three loan production
offices ("LPOs"). Integra Bank also provides telephone banking services, and a
suite of Internet-based products and services that can be found at
http://www.integrabank.com.
At December 31, 2004, the Company and its subsidiaries had 839 full-time
equivalent employees. The Company and its subsidiaries provide a wide range of
employee benefits, are not parties to any collective bargaining agreements, and
in the opinion of management, enjoy good relations with its employees. The
Company is an Indiana corporation and was formed in 1985.
COMPETITION
The Company has active competition in all areas in which it presently engages in
business. Integra Bank competes for commercial and individual deposits, loans
and financial services with other bank and non-bank institutions. Since the
amount of money a bank may lend to a single borrower, or to a group of related
borrowers, is limited to a percentage of the bank's capital, competitors larger
than Integra Bank have higher lending limits than Integra Bank.
In addition to competing with depository institutions operating in our market
areas, the Company competes with various money market and other mutual funds,
brokerage houses, other financial institutions, insurance companies, leasing
companies, regulated small loan companies, credit unions, governmental agencies,
and commercial entities offering financial services and products.
FOREIGN OPERATIONS
The Company and its subsidiaries have no foreign banking centers or significant
business with foreign obligors or depositors.
REGULATION AND SUPERVISION
General
The Company is a registered bank holding company under the Bank Holding Company
Act of 1956, as amended ("BHCA"), and as such is subject to regulation by the
Board of Governors of the Federal Reserve System ("Federal Reserve"). The
Company files periodic reports with the Federal Reserve regarding the business
operations of the Company and its subsidiaries, and is subject to examination by
the Federal Reserve.
Integra Bank is supervised and regulated primarily by the Office of the
Comptroller of the Currency ("OCC"). It is also a member of the Federal Reserve
System and subject to the applicable provisions of the Federal Reserve Act and
the Federal Deposit Insurance Act.
The federal banking agencies have broad enforcement powers, including the power
to terminate deposit insurance, impose substantial
3
fines and other civil and criminal penalties, and appoint a conservator or
receiver. Failure to comply with applicable laws, regulations, and supervisory
agreements could subject the Company, Integra Bank, as well as their officers,
directors, and other institution-affiliated parties, to administrative sanctions
and potentially substantial civil money penalties. In addition to the measures
discussed under "Deposit Insurance," the appropriate federal banking agency may
appoint the Federal Deposit Insurance Corporation ("FDIC") as conservator or
receiver for a banking institution (or the FDIC may appoint itself, under
certain circumstances) if one or more of a number of circumstances exist,
including, without limitation, the banking institution becoming undercapitalized
and having no reasonable prospect of becoming adequately capitalized, it fails
to become adequately capitalized when required to do so, it fails to submit a
timely and acceptable capital restoration plan, or it materially fails to
implement an accepted capital restoration plan. Supervision and regulation of
bank holding companies and their subsidiaries is intended primarily for the
protection of depositors, the deposit insurance funds of the FDIC, and the
banking system as a whole, not for the protection of bank holding company
shareholders or creditors.
Acquisitions and Changes in Control
Under the BHCA, without the prior approval of the Federal Reserve, the Company
may not acquire direct or indirect control of more than 5% of the voting stock
or substantially all of the assets of any company, including a bank, and may not
merge or consolidate with another bank holding company. In addition, the BHCA
generally prohibits the Company from engaging in any nonbanking business unless
such business is determined by the Federal Reserve to be so closely related to
banking as to be a proper incident thereto. Under the BHCA, the Federal Reserve
has the authority to require a bank holding company to terminate any activity or
relinquish control of a non-bank subsidiary (other than a nonbank subsidiary of
a bank) upon the Federal Reserve's determination that such activity or control
constitutes a serious risk to the financial soundness and stability of any bank
subsidiary of the bank holding company.
The Change in Bank Control Act prohibits a person or group of persons from
acquiring "control" of a bank holding company unless the Federal Reserve has
been notified and has not objected to the transaction. Under a rebuttable
presumption established by the Federal Reserve, the acquisition of 10% or more
of a class of voting stock of a bank holding company with a class of securities
registered under Section 12 of the Securities Exchange Act of 1934, as amended,
such as the Company, would, under the circumstances set forth in the
presumption, constitute acquisition of control of the Company. In addition, any
company is required to obtain the approval of the Federal Reserve under the BHCA
before acquiring 25% (5% in the case of an acquirer that is a bank holding
company) or more of the outstanding common stock of the Company, or otherwise
obtaining control or a "controlling influence" over the Company.
Dividends and Other Relationships with Affiliates
The Company is a legal entity separate and distinct from its subsidiaries. The
primary source of the Company's cash flow, including cash flow to pay dividends
on the Company's common stock, is the payment of dividends to the Company by
Integra Bank. Generally, such dividends are limited to the lesser of: undivided
profits (less bad debts in excess of the allowance for credit losses); and
absent regulatory approval, the net profits for the current year combined with
retained net profits for the preceding two years. Further, a depository
institution may not pay a dividend if it would become "undercapitalized" as
determined by federal banking regulatory agencies; or if, in the opinion of the
appropriate banking regulator, the payment of dividends would constitute an
unsafe or unsound practice.
Integra Bank is subject to additional restrictions on its transactions with
affiliates, including the Company. State and federal statutes limit credit
transactions with affiliates, prescribing forms and conditions deemed consistent
with sound banking practices, and imposing limits on permitted collateral for
credit extended.
Under Federal Reserve policy, the Company is expected to serve as a source of
financial and managerial strength to Integra Bank. The Federal Reserve requires
the Company to stand ready to use its resources to provide adequate capital
funds during periods of financial stress or adversity. This support may be
required by the Federal Reserve at times when the Company may not have the
resources to provide it or, for other reasons, would not be inclined to provide
it. Additionally, under the Federal Deposit Insurance Corporation Improvements
Act of 1991, the Company may be required to provide limited guarantee of
compliance of any insured depository institution subsidiary that may become
"undercapitalized" with the terms of any capital restoration plan filed by such
subsidiary with its appropriate federal banking agency.
Regulatory Capital Requirements
The Company and Integra Bank are subject to risk-based and leverage capital
requirements imposed by the appropriate primary bank regulator. Both complied
with applicable minimums as of December 31, 2004, and Integra Bank qualified as
"well capitalized" under the regulatory framework. See Note 15 of the Notes to
Consolidated Financial Statements for an additional discussion of regulatory
capital.
4
Failure to meet capital requirements could result in a variety of enforcement
remedies, including the termination of deposit insurance or measures by banking
regulators to correct the deficiency in the manner least costly to the deposit
insurance fund.
Deposit Insurance
Integra Bank is subject to federal deposit insurance assessments by the FDIC.
The assessment rate is based on classification of a depository institution into
a risk assessment category. Such classification is based upon the institution's
capital level and certain supervisory evaluations of the institution by its
primary regulator.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, order, or any condition imposed in writing by, or written agreement
with, the FDIC. The FDIC may also suspend deposit insurance temporarily during
the hearing process for a permanent termination of insurance if the institution
has no tangible capital. Management is not aware of any activity or condition
that could result in termination of the deposit insurance of Integra Bank.
Community Reinvestment Act
The Community Reinvestment Act of 1977 ("CRA") requires financial institutions
to meet the credit needs of their entire communities, including low-income and
moderate-income areas. CRA regulations impose a performance-based evaluation
system, which bases the CRA rating on an institution's actual lending, service,
and investment performance. Federal banking agencies may take CRA compliance
into account when regulating a bank or bank holding company's activities; for
example, CRA performance may be considered in approving proposed bank
acquisitions. A copy of the CRA public evaluation issued by the Office of the
Comptroller of the Currency is available at each banking center location.
Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act (the "GLB Act") has fostered further consolidation
among banks, securities firms, and insurance companies by creating a new type of
financial services company called a "financial holding company," a bank holding
company with expanded powers. Financial holding companies can offer banking,
securities underwriting, insurance (both agency and underwriting) and merchant
banking services.
The Federal Reserve serves as the primary "umbrella" regulator of financial
holding companies, with jurisdiction over the parent company and more limited
oversight over its subsidiaries. The primary regulator of each subsidiary of a
financial holding company depends on the activities conducted by the subsidiary.
A financial holding company need not obtain Federal Reserve approval prior to
engaging, either de novo or through acquisitions, in financial activities
previously determined to be permissible by the Federal Reserve. Instead, a
financial holding company need only provide notice to the Federal Reserve within
30 days after commencing the new activity or consummating the acquisition. The
Company has no present plans to become a financial holding company.
Under the GLB Act, federal banking regulators adopted rules limiting the ability
of banks and other financial institutions to disclose nonpublic information
about consumers to nonaffiliated third parties. The rules require disclosure of
privacy policies to consumers and, in some circumstances, allow consumers to
prevent disclosure of certain personal information to nonaffiliated third
parties. The privacy provisions of the GLB Act affect how consumer information
is transmitted through diversified financial services companies and conveyed to
outside vendors.
The Company does not disclose any nonpublic personal information about any
current or former customers to anyone except as permitted by law and subject to
contractual confidentiality provisions which restrict the release and use of
such information.
USA Patriot Act of 2001
On October 6, 2001, the "Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism (USA Patriot) Act
of 2001" was enacted. The statute increased the power of the United States
Government to obtain access to information and to investigate a full array of
criminal activities. In the area of money laundering activities, the statute
added terrorism, terrorism support, and foreign corruption to the definition of
money laundering offenses and increased the civil and criminal penalties for
money laundering; applied certain anti-money laundering measures to United
States bank accounts used by foreign persons; prohibited financial institutions
from establishing, maintaining, administering or managing a correspondent
account with a foreign shell bank; provided for certain forfeitures of funds
deposited in United States interbank accounts by foreign banks; provided the
Secretary of the Treasury with regulatory authority to ensure that certain types
of bank accounts are not used to hide the identity of customers transferring
funds and to impose additional reporting requirements with respect to money
laundering activities; and included other measures. On October 28, 2002, the
Department of Treasury issued a final rule concerning compliance by covered
United States financial institutions with the new statutory anti-money
laundering requirement regarding correspondent
5
accounts established or maintained for foreign banking institutions, including
the requirement that financial institutions take reasonable steps to ensure that
correspondent accounts provided to foreign banks are not being used to
indirectly provide banking services to foreign shell banks.
Integra Bank has in place appropriate policies, procedures and controls to
detect, prevent and report money laundering and terrorist financing. Integra has
implemented policies and procedures to comply with regulations including: (a)
due diligence requirements that administer, maintain, or manage private bank
accounts or correspondent accounts for non-U.S. persons; (b) standards for
verifying customer identification at account opening; and (c) rules to promote
cooperation among financial institutions, regulators and law enforcement
entities in identifying parties that may be involved in terrorism or money
laundering.
Sarbanes-Oxley Act of 2002
The passage of the Sarbanes-Oxley Act of 2002 and subsequent actions of the
Securities and Exchange Commission and stock exchanges have had a significant
impact on the Company's corporate governance and related matters.
In June 2003, the Securities and Exchange Commission adopted final rules under
Section 404 of the Sarbanes-Oxley Act of 2002. Commencing with this 2004 Annual
Report on Form 10-K, the Company has included a report of management on the
Company's internal control over financial reporting as well as the Company's
registered independent public accounting firm's attestation report on
management's assessment of the Company's internal control over financial
reporting, which is also filed as part of this Annual Report.
Additional Regulation, Government Policies, and Legislation
In addition to the restrictions discussed above, the activities and operations
of the Company and Integra Bank are subject to a number of additional complex
and, sometimes overlapping, laws and regulations. These include state usury and
consumer credit laws, state laws relating to fiduciaries, the Federal
Truth-in-Lending Act, the Federal Equal Credit Opportunity Act, the Fair Credit
Reporting Act, the Truth-in-Savings Act, anti-redlining legislation, and
antitrust laws.
The actions and policies of banking regulatory authorities have had a
significant effect on the operating results of the Company and Integra Bank in
the past and are expected to do so in the future.
Finally, the earnings of Integra Bank are affected by actions of the Federal
Reserve to regulate aggregate national credit and the money supply through such
means as open market dealings in securities, establishment of the discount rate
on member bank borrowings from the Federal Reserve, establishment of the federal
funds rate on member bank borrowings among themselves, and changes in reserve
requirements against member bank deposits. The Federal Reserve's policies may be
influenced by many factors, including inflation, unemployment, short-term and
long-term changes in the international trade balance and fiscal policies of the
United States Government. The effects of Federal Reserve actions on future
performance cannot be predicted.
STATISTICAL DISCLOSURE
The statistical disclosure concerning the Company and Integra Bank, on a
consolidated basis, included in response to Item 7 of this report is hereby
incorporated by reference herein.
AVAILABLE INFORMATION
The Company's Internet website address is http://www.integrabank.com. The
Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Exchange Act are available or may be accessed
free of charge through the Investor Relations section of the Company's Internet
website as soon as reasonably practicable after it electronically files such
material with, or furnishes it to, the Securities and Exchange Commission. The
Company's Internet website and the information contained therein or connected
thereto are not intended to be incorporated into this Annual Report on Form
10-K.
The following corporate governance documents are also available through the
Investor Relations section of the Company's Internet website or may be obtained
in print form by request to Secretary, Integra Bank Corporation, 21 S. E. Third
Street, P. O. Box 868, Evansville, IN 47705-0868: Corporate Governance
Principles, Code of Business Conduct and Ethics, Audit Committee Charter,
Compensation Committee Charter and Nomination and Governance Committee Charter.
6
EXECUTIVE OFFICERS OF THE COMPANY
Certain information concerning the executive officers of the Company as of March
1, 2005, is set forth in the following table.
NAME AGE OFFICE AND BUSINESS EXPERIENCE
- ---- --- ------------------------------
Michael T. Vea 46 Chairman of the Board, President, and Chief Executive
Officer of the Company (January 2000 to present);
Chairman of the Board and Chief Executive Officer of the
Company (September 1999 to January 2000); President and
Chief Executive Officer, Bank One, Cincinnati, OH
(1995-1999).
Archie M. Brown 44 Executive Vice President, Commercial and Consumer
Banking of the Company (October 2003 to present);
Executive Vice President, Retail Manager and Community
Markets Manager of the Company (March 2001 to October
2003); Senior Vice President, Firstar Bank, N.A. (1997
to 2001).
Sheila A. Stoke 55 Senior Vice President and Controller of the Company
(February 28, 2003 to present); Vice President and
Controller, Republic Bank & Trust Co. (February 2002 to
February 2003); Senior Vice President and Controller,
Bank of Louisville & Trust Co. (1985 to 2002).
Martin M. Zorn 48 Executive Vice President, Chief Risk Officer (March 2002
to present); Executive Vice President, Commercial and
Metro Markets Manager (March 2001 to March 2002);
Regional Vice President and Region Executive, Wachovia
Corporation (1999 to 2001); Senior Vice President,
Regional Corporate Banking Manager, Wachovia Corporation
(1980 to 1999).
The above information includes business experience during the past five years
for each of the Company's executive officers. Executive officers of the Company
serve at the discretion of the Board of Directors. There is no family
relationship between any of the directors or executive officers of the Company.
ITEM 2. PROPERTIES
The net investment of the Company and its subsidiaries in real estate and
equipment at December 31, 2004, was $50,233. The Company's offices are located
at 21 S.E. Third Street, Evansville, Indiana. The main and all banking center
offices of Integra Bank, loan production offices, and other subsidiaries are
located on premises either owned or leased. None of the property is subject to
any major encumbrance.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in legal proceedings from time to
time arising in the ordinary course of business. None of such legal proceedings
are, in the opinion of management, expected to have a materially adverse effect
on the Company's consolidated financial position or results of operations or
cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common stock is traded on the Nasdaq Stock Market under the symbol
IBNK.
The following table lists the stock price for the past two years and dividend
information for the Company's common stock.
Range of Stock Price
-------------------- Dividends
Quarter High Low Declared
------- ------ ------ ---------
2004 1st $24.40 $21.43 $0.235
2nd 24.50 19.70 0.160
3rd 22.72 19.25 0.160
4th 23.97 21.49 0.160
2003 1st $19.77 $15.50 $0.235
2nd 18.30 16.12 0.235
3rd 20.42 16.95 0.235
4th 23.00 19.21 0.235
The Company has historically paid quarterly cash dividends. The Company
generally depends upon the dividends from Integra Bank to pay cash dividends to
its shareholders. The ability of Integra Bank to pay such dividends is governed
by banking laws and regulations. Additional discussion regarding dividends is
included in the Liquidity section of Management's Discussion and Analysis of
Financial Condition and Results of Operations.
As of February 1, 2005, there were approximately 2,360 holders of record of
common stock.
The Company did not sell any equity securities which were not registered under
the Securities Act during the fourth quarter of 2004.
The information required by this Item concerning equity compensation plans is
incorporated by reference in Item 12 "Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters" to this report.
8
ITEM 6. SELECTED FINANCIAL DATA
Integra Bank Corporation and Subsidiaries
(In Thousands, Except Per Share Data and Ratios)
YEAR ENDED DECEMBER 31, 2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Net interest income $ 84,467 $ 72,242 $ 73,845 $ 82,080 $ 91,856
Provision for loan losses 1,305 4,945 3,143 31,077 4,138
Non-interest income 33,607 32,793 36,281 33,202 20,131
Non-interest expense 138,180 82,267 82,877 78,303 63,438
---------- ---------- ---------- ---------- ----------
Income (Loss) before income taxes and
cumulative effect of accounting change (21,411) 17,823 24,106 5,902 44,411
Income taxes (benefit) (14,791) 58 3,778 (1,629) 13,920
---------- ---------- ---------- ---------- ----------
Income (Loss) before cumulative effect of
accounting change (6,620) 17,765 20,328 7,531 30,491
Cumulative effect of accounting change, net
of tax -- -- -- (273) --
---------- ---------- ---------- ---------- ----------
Net income (loss) $ (6,620) $ 17,765 $ 20,328 $ 7,258 $ 30,491
========== ========== ========== ========== ==========
PER COMMON SHARE
Net income (loss):
Basic $ (0.38) $ 1.03 $ 1.18 $ 0.42 $ 1.77
Diluted (0.38) 1.03 1.18 0.42 1.77
Cash dividends declared 0.72 0.94 0.94 0.94 0.87
Book value 12.05 13.46 13.45 12.79 12.94
Weighted average shares:
Basic 17,318 17,285 17,276 17,200 17,233
Diluted 17,318 17,300 17,283 17,221 17,254
AT YEAR-END
Total assets $2,757,165 $2,958,294 $2,857,738 $3,035,890 $3,068,818
Securities 801,059 974,111 949,500 975,799 969,513
Loans, net of unearned income 1,665,324 1,699,688 1,606,155 1,599,732 1,687,330
Deposits 1,896,541 1,812,630 1,781,948 1,928,412 1,871,036
Shareholders' equity 209,291 232,992 232,600 221,097 205,517
Shares outstanding 17,375 17,311 17,291 17,284 15,881
AVERAGE BALANCES
Total assets $2,758,924 $2,949,016 $2,906,846 $3,266,322 $2,511,947
Securities, at amortized cost 810,716 967,327 934,586 923,213 620,457
Loans, net of unearned income 1,644,471 1,670,938 1,596,462 1,747,882 1,674,864
Interest-bearing deposits 1,613,000 1,606,116 1,614,167 1,894,300 1,512,294
Shareholders' equity 210,280 234,948 230,298 241,252 227,573
FINANCIAL RATIOS
Return on average assets (0.24)% 0.60% 0.70% 0.22% 1.21%
Return on average equity (3.15) 7.56 8.83 3.01 13.40
Net interest margin 3.52 2.87 2.96 2.85 4.14
Cash dividends payout N/M* 91.26 79.66 223.81 49.15
Average shareholders' equity to average assets 7.62 7.97 7.92 7.39 9.06
* Number is not meaningful.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
INTRODUCTION
The discussion and analysis which follows is presented to assist in the
understanding and evaluation of the financial condition and results of
operations of Integra Bank Corporation and its subsidiaries (the "Company") as
presented in the following 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 on 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.
OVERVIEW
This overview highlights selected information in this document and may not
contain all of the information that is important to you. For a more complete
understanding of trends, events, commitments, uncertainties, liquidity, capital
resources, and critical accounting estimates, you should carefully read this
entire document. These have an impact on the Company's financial condition and
results of operations. All numbers except per share data and ratios are
presented in thousands.
Summary 2004 Results, Goals, and Objectives
At the beginning of 2004, management set three primary goals intended to
facilitate the Company's transition to a growth company. First, to improve net
interest margin, second, continue to increase earnings and transform the Company
by investing in higher growth opportunities, and third, to continue to improve
credit quality.
The first goal was achieved in the first quarter by restructuring the balance
sheet. A summary of that restructure follows.
The key steps of the balance sheet restructuring included:
1) The Company prepaid $467,000 in long-term FHLB advances with an average
yield of 6.16% that had constrained earnings and masked the significant
financial progress the Company has made in recent years. The remaining
average life of the debt was about 3.7 years and maturities ranged from
September 2005 to October 2010. Integra incurred a charge of $56,998
($35,114 after-tax) to extinguish the debt.
2) The Company also reduced its balance sheet and funded a portion of the FHLB
debt extinquishment by reducing its investment portfolio by approximately
$262,000. This action improved Integra's interest rate risk profile by
reducing the amount of assets susceptible to prepayments and in a rising
rate environment reduces extension risk. Integra recognized a gain of
$5,198 ($3,200 after-tax) on the sale of these securities. The average
yield on the securities sold was 4.29% and their duration was approximately
2.6 years.
3) The Company further improved its interest rate risk profile and improved
its liquidity position by arranging $330,000 of new fixed rate borrowings
with final maturities ranging from 1 to 4 years, having an average life of
approximately 2.6 years and an average cost of 2.28%. Additionally, the
Company issued $4,000 of subordinated debt and paid off the outstanding
balance on its line of credit.
4) The Company used the surplus cash proceeds from these transactions to
reduce short-term borrowings.
The balance sheet restructuring improved the Company's margin and earnings, and
reduced its interest rate risk profile.
Additional Developments
During the first quarter, Integra received an investment grade rating of Baa2
from Moody's Investor Service for the long-term deposits of its principal
subsidiary, Integra Bank N.A. (the "Bank"). Management believes this public
rating bolsters the Company's liquidity with enhanced access to the capital
markets.
10
As a result of the balance sheet restructuring, the second goal of increasing
earnings was achieved. By the fourth quarter, net income compared to the same
period for 2003 was up 45% and the net interest margin had improved by 81 basis
points. The Company also experienced low cost deposit growth and implemented
expense control measures. In order to improve capital ratios and retain capital,
the Company changed its dividend philosophy, which reduced the quarterly common
stock dividend from $0.235 cents per share to $0.16 cents per share beginning
with the July 2004 dividend payment. As a result, the Company moved to a target
long-term dividend payout ratio of 35% to 50%. This contrasts with a dividend
payout ratio that was over 91% in 2003.
The third goal was improving credit quality. Net chargeoffs were 15 basis points
of total average loans and non-performing assets declined $3,500 or 16% from
2003. The ratio of allowance for loan losses to non-performing assets decreased
8% to 128% for 2004.
2005 Priorities
The Company has set three priorities for 2005. These goals are:
- - Grow revenue
- - Improve Efficiencies
- - Service Quality and Employee Development
Executing loan growth initiatives in consumer, small business, and commercial
real estate will help to increase revenue in 2005. This will be complemented by
heightening low cost deposit initiatives to retail and cash management
customers. The Company has initiated a high performance checking program that
began in late January. This program is a direct mailing program designed to
focus on core checking account acquisition through product simplification and
marketing expertise.
The second priority is to improve efficiencies through increased revenue growth.
The Company also plans to exercise disciplined expense management, which will
include continuing to execute on strategies to divest or improve
under-performing areas and products. These strategies also encompass our plans
to balance the mix of our branch markets closer to an equal number of community
and metro markets, which will be accomplished by branch build-outs,
divestitures, and acquisitions in growing metro markets.
The third priority is to continue high service quality and develop employees.
The Company will continue its "I Care" service initiatives which has improved
the level and awareness of service to customers. The Company will continue to
invest in employee training to develop, challenge, motivate and reward its
greatest asset, its employees.
The Company believes all these priorities will accelerate loan growth, increase
core deposits, and enhance shareholder value.
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform with accounting
principles generally accepted in the United States and general practices within
the financial services industry. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. These estimates, assumptions, and judgements
are based on information available as of the date of the financial statements;
accordingly, as this information changes, the financial statements could reflect
different estimates, assumptions, and judgements. Certain policies inherently
have a greater reliance on the use of estimates, assumptions, and judgements and
as such have a greater possibility of producing results that could be materially
different than originally reported. The Company considers its critical
accounting policies to include the following:
Allowance for Loan Losses: The allowance for loan losses represents management's
best estimate of probable losses inherent in the existing loan portfolio. The
allowance for loan losses is increased by the provision for losses, and reduced
by loans charged off, net of recoveries. The provision for loan losses is
determined based on management's assessment of several factors: actual loss
experience, changes in composition of the loan portfolio, evaluation of specific
borrowers and collateral, current economic conditions, trends in past-due and
non-accrual loan balances, and the results of recent regulatory examinations.
See section labeled "Credit Management" contained in Management's Discussion and
Analysis.
Loans are considered impaired when, based on current information and events, it
is probable the Company will not be able to collect all amounts due in
accordance with the contractual terms. The measurement of impaired loans is
generally based on the present value of expected future cash flows discounted at
the historical effective interest rate stipulated in the loan agreement, except
that all collateral-dependent loans are measured for impairment based on the
market value of the collateral, less estimated cost to liquidate. In measuring
the market value of the collateral, management uses assumptions and
methodologies consistent with those that would be utilized by unrelated third
parties.
Changes in the financial condition of individual borrowers, in economic
conditions, in historical loss experience and in the conditions of the various
markets in which the collateral may be liquidated may all affect the required
level of the allowance for loan losses and
11
the associated provision for loan losses.
Estimation of Market Value: The estimation of market value is significant to
several of the Company's assets, including loans held for sale, investment
securities available for sale, mortgage servicing rights, other real estate
owned, as well as market values associated with derivative financial instruments
and goodwill and other intangibles. These are all recorded at either market
value or the lower of cost or market value. Market values are determined based
on third party sources, when available. Furthermore, accounting principles
generally accepted in the United States require disclosure of the market value
of financial instruments as a part of the notes to the consolidated financial
statements. Market values may be influenced by a number of factors, including
market interest rates, prepayment speeds, discount rates and the shape of yield
curves.
Market values for securities available for sale are based on quoted market
prices. If a quoted market price is not available, market values are estimated
using quoted market prices for similar securities. The market values for loans
held for sale are based upon quoted market values while the market values of
mortgage servicing rights are based on discounted cash flow analysis utilizing
dealer consensus prepayment speeds and market discount rates. The market values
of other real estate owned are typically determined based on appraisals by third
parties, less estimated costs to sell. The market values of derivative financial
instruments are estimated based on current market quotes.
Goodwill represents the excess of the cost of an acquisition over the fair value
of the net assets acquired. The Company assesses goodwill for impairment no less
than annually by applying a fair-value-based test using net present value of
estimated net cash flows. Impairment exists when the net book value of the
reporting unit exceeds its fair value and the carrying amount of the goodwill
exceeds its implied fair value. If the Company's calculation of the fair value
decreased by 20% goodwill could be impaired. Other intangible assets represent
purchased assets that also lack physical substance but can be distinguished from
goodwill because of contractual or other legal rights or because the asset is
capable of being sold or exchanged either on its own or in combination with an
asset or liability.
Mortgage servicing rights ("MSRs") represent an estimate of the present value of
future cash servicing income, net of estimated costs, the Company expects to
receive on loans sold with servicing retained. MSRs are capitalized as separate
assets when loans are sold and servicing is retained. The carrying value of MSRs
is amortized in proportion to and over the period of, net servicing income and
this amortization is recorded as a reduction to income.
The carrying value of the MSRs asset is periodically reviewed for impairment
based on the fair value of the MSRs, using groupings of the underlying loans by
interest rates and loan types. Any impairment of a grouping would need to be
reported as a valuation allowance. A primary factor influencing the fair value
is the estimated life of the underlying loans serviced. The estimated life of
the loans serviced is significantly influenced by market interest rates. During
a period of declining interest rates, the fair value of the MSRs should decline
due to expected prepayments within the portfolio. Alternatively, during a period
of rising interest rates the fair value of MSRs should increase as prepayments
on the underlying loans would be expected to decline. If the Company experienced
a 20% increase in prepayments, the tranches of the asset could be impaired. On
an ongoing basis, management considers all relevant factors to estimate the fair
value of the MSRs to be recorded when the loans are initially sold with
servicing retained.
FINANCIAL OVERVIEW
Net income (loss) for 2004 was $(6,620) compared to $17,765 in 2003 and $20,328
in 2002. In the first quarter of 2004, the Company restructured its balance
sheet incurring a net loss after tax of $31,914. Earnings (loss) per share on a
diluted basis was $(0.38), $1.03, and $1.18 for 2004, 2003, and 2002,
respectively. Return on average assets and return on average equity were (0.24)%
and (3.15)% for 2004, respectively, 0.60% and 7.56% for 2003, respectively, and
0.70% and 8.83% for 2002, respectively.
NET INTEREST INCOME
Net interest income is on a tax equivalent basis and is the difference between
interest income on earning assets, such as loans and investments, and interest
expense paid on liabilities, such as deposits and borrowings. Net interest
income is affected by the general level of interest rates, changes in interest
rates, and by changes in the amount and composition of interest-earning assets
and interest-bearing liabilities. Changes in net interest income for the last
two years are presented in the schedule following the three-year balance sheet
analysis on an average basis and an analysis of net interest income. The change
in net interest income not solely due to changes in volume or rates has been
allocated in proportion to the absolute dollar amounts of the change in each.
12
AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
2004 2003 2002
------------------------------ ------------------------------ ------------------------------
Average Interest Yield/ Average Interest Yield/ Average Interest Yield/
Balances & Fees Cost Balances & Fees Cost Balances & Fees Cost
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
Year Ended December 31,
EARNING ASSETS:
Interest-bearing deposits in
banks $ 268 $ 2 0.75% $ 351 $ 3 0.85% $ 63 $ 1 1.59%
Federal funds sold & other
short-term investments 6,070 83 1.37% 5,127 57 1.11% 60,859 1,171 1.92%
Loans held for sale 2,760 179 6.49% 7,314 451 6.17% 25,396 1,717 6.76%
Securities:
Taxable 696,549 29,221 4.20% 799,931 31,388 3.92% 740,356 38,124 5.15%
Tax-exempt 114,167 9,134 8.00% 165,788 13,025 7.86% 195,838 14,469 7.39%
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total securities 810,716 38,355 4.73% 965,719 44,413 4.60% 936,194 52,593 5.62%
Regulatory Stock 32,981 1,518 4.60% 34,476 1,696 4.92% 32,868 2,028 6.17%
Loans 1,644,471 95,565 5.81% 1,670,938 101,300 6.06% 1,596,462 111,755 7.00%
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total earning assets 2,497,266 $135,702 5.44% 2,683,925 $147,920 5.51% 2,651,842 $169,265 6.38%
======== ======== ========
Fair value adjustment on
securities available for sale 4,671 15,701 13,350
Allowance for loan loss (25,154) (24,967) (24,473)
Other non-earning assets 282,141 274,357 266,127
---------- ---------- ----------
TOTAL ASSETS $2,758,924 $2,949,016 $2,906,846
========== ========== ==========
INTEREST-BEARING LIABILITIES:
Deposits
Savings and interest-bearing
demand $ 561,117 $ 2,650 0.47% $ 539,234 $ 3,370 0.62% $ 518,905 $ 4,953 0.95%
Money market accounts 220,465 3,207 1.45% 198,707 3,379 1.70% 193,403 4,475 2.31%
Certificates of deposit and
other time 831,418 19,895 2.39% 868,175 23,246 2.68% 901,859 34,976 3.88%
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total interest-bearing
deposits 1,613,000 25,752 1.60% 1,606,116 29,995 1.87% 1,614,167 44,404 2.75%
Short-term borrowings 170,295 2,207 1.30% 221,522 2,613 1.18% 97,474 2,043 2.10%
Long-term borrowings 500,673 19,945 3.98% 652,967 38,265 5.86% 734,543 44,339 6.04%
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total interest-bearing
liabilities 2,283,968 $ 47,904 2.10% 2,480,605 $ 70,873 2.86% 2,446,184 $ 90,786 3.71%
======== ======== ========
Non-interest bearing deposits 245,538 218,022 206,763
Other noninterest-bearing
liabilities and
shareholders' equity 229,418 250,389 253,899
---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,758,924 $2,949,016 $2,906,846
========== ========== ==========
Interest income/earning assets $135,702 5.44% $147,920 5.51% $169,265 6.38%
Interest expense/earning assets 47,904 1.92% 70,873 2.64% 90,786 3.42%
-------- ---- -------- ---- -------- ----
Net interest income/earning
assets $ 87,798 3.52% $ 77,047 2.87% $ 78,479 2.96%
======== ==== ======== ==== ======== ====
Note: Tax exempt income presented on a tax equivalent basis based on a 35%
federal tax rate.
Loans include loan fees of $2,590, $2,843, and $2,983 for 2004, 2003, and
2002, respectively, and nonaccrual loans.
Securities yields are calculated on an amortized cost basis.
Federal tax equivalent adjustments on securities are $3,089, $4,333, and
$4,178 for 2004, 2003, and 2002, respectively.
Federal tax equivalent adjustments on loans are $242, $472, and $456 for
2004, 2003, and 2002, respectively.
13
CHANGES IN NET INTEREST INCOME (INTEREST ON A FEDERAL-TAX-EQUIVALENT BASIS)
2004 Compared to 2003 2003 Compared to 2002
----------------------------- -----------------------------
Change Due to Change Due to
a Change in a Change in
------------------ Total ------------------ Total
Volume Rate Change Volume Rate Change
------- -------- -------- ------- -------- --------
Increase (decrease)
Interest income
Loans $(1,592) $ (4,143) $ (5,735) $ 5,208 $(15,662) $(10,454)
Securities (7,285) 1,225 (6,060) 1,614 (9,796) (8,182)
Regulatory Stock (72) (106) (178) 95 (427) (332)
Loans held for sale (294) 23 (271) (1,126) (138) (1,264)
Other short-term investments 10 16 26 (752) (361) (1,113)
------- -------- -------- ------- -------- --------
Total interest income (9,233) (2,985) (12,218) 5,039 (26,384) (21,345)
Interest expense
Deposits 128 (4,371) (4,243) (221) (14,188) (14,409)
Short-term borrowings (651) 245 (406) 1,838 (1,268) 570
Long-term borrowings (7,712) (10,608) (18,320) (5,057) (1,017) (6,074)
------- -------- -------- ------- -------- --------
Total interest expense (8,235) (14,734) (22,969) (3,440) (16,473) (19,913)
------- -------- -------- ------- -------- --------
Net interest income $ (998) $ 11,749 $ 10,751 $ 8,479 $ (9,911) $ (1,432)
======= ======== ======== ======= ======== ========
The following discussion of results of operations is on a tax-equivalent basis.
Tax-exempt income, such as interest on loans and securities of state and
political subdivisions, has been increased to an amount that would have been
earned had such income been taxable. Rate / volume variances are allocated on
the basis of the absolute value of the change in each.
Net interest income was $87,798, or 14.0%, higher in 2004 than in 2003. The
increase was primarily due to the balance sheet restructuring in the first
quarter of 2004 and pricing discipline through 2004 both in deposits and loans.
Net interest income was $77,047, or 1.8%, lower in 2003 than in 2002. The
decrease was primarily due to an asset-sensitive balance sheet for most of 2002
in a lower rate environment. Pricing discipline on both loans and deposits was
stressed and monitored in 2003. The securities portfolio was restructured and 15
and 30 year fixed-rate high premium mortgaged-backed securities were replaced
primarily with two to three year duration low premium or discount collateralized
mortgage obligations with significant prepayment protection of the cashflow and
3 to 5 year hybrid adjustable rate mortgages ("ARMs").
Earning assets averaged $2,497,266 in 2004 compared to $2,683,925 in 2003. The
decrease was due to mainly to the balance sheet restructuring. Average
interest-bearing liabilities were $2,283,968 and $2,480,605 in 2004 and 2003,
respectively. The decrease in liabilities was due primarily from the reduction
in FHLB borrowings during the balance sheet restructuring. The net interest
margin for the twelve months ended December 31, 2004 was 3.52% compared to 2.87%
for the same period one-year prior. The 65 basis points increase in margin was
mainly the result of the balance sheet restructuring and monitoring and control
of deposit pricing. Although rates increased in 2004, a soft loan market
resulted in tighter loan pricing which offset the increase.
The net interest margin decreased from 2.96% in 2002 to 2.87% in 2003. Earning
assets averaged $2,651,842 in 2002 compared to $2,683,925 in 2003. Average
interest-bearing liabilities were $2,480,605 and $2,446,184 in 2003 and 2002,
respectively. During 2003 and 2002, the Federal Reserve lowered the targeted
federal funds interest rates 25 and 50 basis points, respectively. The
significant drop in rates over 2002 and 2001, approximately 525 basis points,
increased prepayments in both the mortgage-backed investment securities and
fixed-rate loan portfolios, including a significant impact on residential
mortgages. When prepaid, these funds were generally reinvested at lower rates.
Another result of the balance sheet restructuring was the decrease in average
earning assets, which decreased $186,659 to $2,497,266 in 2004. Securities,
which were sold during the restructuring, were the main component of the
$155,003 decrease from 2003. The impact of this repositioning was a 13 basis
point increase in security income to 4.73% in 2004. Average loans held for sale
decreased $4,554 as a result of slowing mortgage loan refinancing demand which
was primarily due to higher mortgage loan rates. Average loans also decreased
$26,467 in 2004. Along with a lower loan demand in the Midwest markets, the
Company in April sold its credit card portfolio, which decreased loans by
$6,090. The mix of earning assets shows average loans to average earning assets
increased from 60.2% in 2002 and 62.3% in 2003 to 65.9% in 2004.
Average earning assets increased $32,083 during 2003 to $2,683,925. The Company
made a decision to hold fewer short-term investments in 2003, finding other
alternatives to provide liquidity. Average federal funds sold and other
short-term investments decreased $55,732 compared to 2002. Average loans held
for sale decreased $18,082, in 2003 due primarily to the loan sale conducted
during 2002. During 2003 average loans increased $74,476, or 4.7%.
14
Average investment securities increased $29,525, or 3.2%, in 2003 partially
offsetting the reduction in short-term investments. The yield on securities
declined from 5.62% in 2002 to 4.60% in 2003. Security income decreased 15.6% in
2003 as a result of a 102 basis point decline in security yields partially
offset by the increase in average balances.
Average valuable core deposits which include demand deposits both interest
bearing and non-interest bearing, money market and savings, increased $71,157 in
2004. This was offset by a decrease of $36,757 in certificates of deposits and
other time deposits. These lower interest valuable core deposits and the pricing
discipline the Company maintained throughout 2004 lowered the interest costs on
deposits 27 basis points in a rising rate environment. Primarily as a result of
the balance sheet restructuring, average short-term borrowings decreased
$51,227, or 23.1%, and average long-term borrowings decreased $152,294, or
23.3%, in 2004. Average short-term borrowings cost rose 12 basis points mainly
as a result of the federal funds rate increasing 125 basis points throughout the
year. This increase was offset by the decrease in the cost of long-term
borrowings. The cost of these funds decreased 188 basis points, again primarily
as the result of the restructuring.
Overall, average deposit balances rose by $3,208, or 0.2%, in 2003. This
reflects a $36,892 increase in valuable core deposits, partially offset by a
$33,684 reduction in time deposits. During the current low-interest rate
environment, customer preferences have shifted to shorter term, liquid deposit
products and to deposit alternatives, including annuities. During 2003, average
short-term borrowings increased $124,048 and average long-term borrowings
decreased $81,576. The decrease in long-term borrowings was primarily due to the
prepayment of long-term, higher rate debt.
NON-INTEREST INCOME
Non-interest income totaled $33,607 for the twelve months ended December 31,
2004 compared to $32,793 for 2003 and $36,281 for 2002. Adjusted non-interest
income totaled $27,972 in 2004, $28,833 in 2003 and $27,183 in 2002. Adjusted
non-interest income continues to be an increasingly significant portion of
revenue for the Company and has grown to represent 24.2% of net
federal-tax-equivalent revenues in 2004 as compared to 27.2% in 2003 and 25.7%
in 2002. The table below illustrates several non-interest income items incurred
outside the traditional core bank operations and reconciles non-interest income
and adjusted non-interest income. Securities gains are excluded in adjusted
non-interest income since the gains were used to offset the impact of the debt
prepayment expense incurred in each year. Management believes excluding these
items presents a clearer picture of core operating non-interest income.
Reconciliation Table - Adjusted non-interest income
2004 2003 2002
------- ------- -------
Non-interest income as reported $33,607 $32,793 $36,281
Less Gain on sale of credit cards 1,158 -- --
Less Gain on branch sale -- 1,056 --
Less Loss on fixed asset disposition -- (148) --
Less Securities gains 4,477 3,052 9,098
------- ------- -------
Adjusted non-interest income $27,972 $28,833 $27,183
Service charges on deposit accounts increased $786, or 6.8%, in 2004. Growth in
these fees resulted from an increase in fee charges in the first quarter and
greater product and service usage. Service charge income totaled $12,414 in
2004, $11,628 in 2003, and $11,135 in 2002.
Other service charges and fees increased $219 from $5,035 in 2003 to $5,254 in
2004. Card-related fees totaled $2,060 in 2004 compared to $1,864 in 2003 and
$1,576 in 2002 due to increased sales efforts of debit cards and the increasing
preference of these cards over checks. As a result of the national
MasterCard/Visa settlement with Wal-Mart Stores Inc., debit card interchange
fees decreased in the second half of 2003. The Company is making an effort to
increase the usage of debit cards, which through normal growth has decreased the
impact in 2004 and with increased usage will further improve these fees.
Mortgage banking income in 2004 was $813 compared to $1,931 in 2003 due to the
high demand for new and refinanced residential mortgages in 2003. The Company
sold the majority of its current year's fixed rate mortgage loan production to
generate fee income and reduce interest rate exposure. The Company continues to
service most of these loans. At December 31, 2004, the Company was servicing
$304,292 of sold residential mortgage loans compared to $290,830 at December 31,
2003. Gain on mortgage loans sold decreased $1,370 in 2004 compared to 2003. In
2003 gains on sale of mortgages increased $974 from 2002. There was a slower
mortgage origination environment in 2004 due to a higher interest rate
environment as compared to 2003. The Company utilizes multiple distribution
channels in servicing customers in our area. Primarily fixed rate mortgage loans
are sold with servicing retained while the majority of adjustable rate mortgages
are placed in the Company's loan portfolio.
Investment services commissions, which include brokerage and annuity
commissions, totaled $1,228 in 2004 compared to $1,196 in
15
2003 and $1,115 in 2002. Management sees additional opportunities in the sale of
annuities, mutual funds and other non-traditional banking products in 2005.
Trust income for 2004 was $2,025, essentially flat when compared to 2003. Total
trust assets under management increased $4,046, or 1.0%, from $394,650 in 2003
to $398,696 in 2004 primarily due to the overall increase in values of the
financial assets during the past year. Trust income for 2003 was $2,035,
essentially flat when compared to 2002 as trust assets under management
increased $63,861, or 19.3%, from $330,789 in 2002.
During the second quarter of 2004, the Company sold its $6,090 credit card
portfolio. The gain realized on the sale was $1,158 after tax. Integra entered
into an arrangement with the purchaser of the portfolio to offer Integra's
customers a wider variety of credit card products. Management anticipates that
the transaction will be approximately income neutral to positive in future
periods with the reduction in spread income, and fees more than offset by fee
sharing arrangements with the purchaser of the portfolio, as well as reduced
loan loss provision and processing expenses.
The Company announced in December 2004 its intention to sell three branches in
southern Illinois. This sale should be completed in the second quarter of 2005.
The deposits for these three branches were approximately $73,929 at December 31,
2004; however, certain deposits may be excluded from the sale.
Other non-interest income totaled $4,399 in 2004 compared to $3,472 in 2003 and
$3,730 in 2002. During 2004 the Company recorded income of nearly $600 from the
loan to a foreign subsidiary of a domestic company. This gain was the result of
the fluctuations in the eurodollar exchange rate. This is the Company's only
foreign currency exposure. There was a corresponding expense recorded in other
expense which netted to a gain of $11. Included in 2002, was $402 from the
expiration of covered call option contracts and $97 from net securities trading
account income. These revenue sources were related to a discontinued leverage
program. Management has no plans to revive these programs.
Securities transactions resulted in gains of $4,477 in 2004, $3,052 in 2003, and
$9,098 in 2002. The gains in 2004 were, in large part, a result of the balance
sheet restructuring. The gains in 2003 were used, in part, to offset the costs
associated with prepaying $15,000 in long-term FHLB borrowings and the
redemption of $34,500 of trust preferred securities.
NON-INTEREST EXPENSE
Non-interest expense for 2004 totaled $138,180, an increase of $55,913, or 68.0%
compared to the prior year. The increase is primarily attributable to $56,998 of
debt prepayment fees paid during the balance sheet restructure, which culminated
in the first quarter of 2004. Adjusted non-interest expense was $78,902 for
2004, or 2.1%, higher than 2003. The table below illustrates several expenses
incurred outside the traditional core bank operations and reconciles
non-interest expense and adjusted non-interest expense. Management believes
excluding these items presents a clearer picture of core operating expense.
Reconciliation Table - Adjusted non-interest expense
2004 2003 2002
-------- ------- -------
Non-interest expense as reported $138,180 $82,267 $82,877
Less Debt prepayment expenses 56,998 1,243 5,938
Less Loan held for sale expense 87 1 2,677
Less Low income housing project losses 2,193 2,570 652
Less Accelerated Trust Preferred amortization -- 1,196 --
-------- ------- -------
Adjusted non-interest expense $ 78,902 $77,257 $73,610
Salaries and employee benefits accounted for 54.4% of adjusted non-interest
expense in 2004 compared to 54.8% in 2003 and 52.7% in 2002. Salaries and
employee benefits totaled $42,907 in 2004 compared to $42,347 in 2003, an
increase of $560, or 1.3%. Salaries, incentives and commissions increased
$1,227, or 3.5% while insurance and other benefits decreased $667.
In 2003 salaries and benefits rose $3,522 compared to 2002. The increase was
attributable to three items (1) salaries increased approximately $1,074, or
3.7%, (2) medical insurance increased $1,129, and (3) commissions and incentives
increased $1,481. Part of the increase in salary expense in 2003 is attributable
to in-sourcing the Company's internal audit and loan review functions. The
Company has reviewed the costs of medical insurance and in 2004 offered an
alternative choice to employees that incents employees to manage their health
care consumption and could help control the increase in these expenses in the
future. The alternative plan has higher deductibles but provides a savings
account for the employee which, if not used in the current year, can be utilized
to offset health care deductibles in future periods. The commissions and
incentives increases in 2003 and 2002 were mainly due to the increase in
performance-based awards tied to loan originations and sales of fee-based
services and deposit products.
16
At December 31, 2004, the Company had 839 full-time equivalent employees
compared to 886 in 2003 and 915 in 2002.
Occupancy expense and equipment expense for 2004 were $6,625 and $4,052,
respectively, compared to $5,909 and $4,361, respectively in 2003 and $5,586 and
$4,474, respectively in 2002. The Company was operating 76 banking centers at
December 31, 2004 compared to 72 banking centers in 2003 and 74 in 2002. New
banking centers were opened in Bowling Green and Georgetown, Kentucky during the
first quarter of 2004 and in Evansville, Indiana and Henderson, Kentucky in the
third and fourth quarters of 2004, respectively. Included in occupancy and
equipment expense for 2004 is $296 and $24, respectively, directly related to
the new branches. Another banking center is under construction in Florence,
Kentucky to be opened in the second quarter of 2005. The Company has entered
into a definitive agreement to sell three branches in southern Illinois in the
second quarter of 2005. In May 2003, the Company sold its Owingsville, Kentucky
banking center.
Professional fees were $4,485 in 2004, an increase of $81, or 1.8%, from 2003.
Legal fees, which are included in professional fees, decreased $541 as the
Company started an internal legal department, brought some legal services
in-house, and closely monitored other legal and professional fees. This decrease
was mainly offset by an increase in audit fees as a direct result of compliance
with Sarbanes-Oxley section 404. Professional fees were $4,404 in 2003, a
decrease of $501, or 10.2% from 2002 as internal audit and loan review services
were brought in-house.
Communication and transportation expenses decreased $563, or 14.1%, from 2003
compared to 2004 and $40, or 1.0% in 2003 compared to 2002. The decrease from
2003 to 2004 was due to switching to a different telecommunications carrier in
the later part of 2003. Processing expenses increased slightly in 2004 almost to
the level of 2002.
Marketing expenses increased in 2004 by $350 due to a program to increase low
cost deposit growth.
In 2004 the Company incurred debt prepayment fees of $56,998 as a result of the
balance sheet restructuring. The Company incurred debt prepayment expenses of
$1,243 in 2003 and $5,938 in 2002 as a result of prepaying $15,000 in long-term
FHLB advances and $90,000 in term repurchase agreements in 2003 and 2002,
respectively. The Company restructured a portion of its balance sheet each year
by selling certain mortgaged-backed investment securities, using the proceeds to
retire the debt and reinvest in shorter maturity securities with more
predictable cash flows.
Pre-tax operating losses related to the Company's investment in low-income
housing projects ("LIHP") decreased $377 in 2004 compared to an increase of
$1,918 in 2003. The increase in 2003 was mainly attributable to the LIHP entered
into in late 2002.
Amortization of intangible assets was $1,612 in 2004 compared to $1,619 in 2003
and $1,622 in 2002. Goodwill and certain other intangible assets having
indefinite lives are no longer amortized to earnings, but rather are subject to
testing for impairment. The Company completed this testing in 2004 and found no
impairment. During the fourth quarter of 2002, the Company adopted SFAS No. 147,
Acquisitions of Certain Financial Institutions, and, as required, reversed
approximately $526 of pre-tax amortization expense incurred during the first
nine months of 2002.
Other non-interest expense decreased $868 in 2004 compared to 2003. Other
non-interest expenses were $9,233 in 2003, decreasing $914, or 9.0%, from the
prior year. Expenses related to trust preferred amortization also increased
$1,196, caused mainly from the redemption of $34,500 of fixed rate trust
preferred securities in the second quarter of 2003.
INCOME TAXES
The Company recognized income tax benefit of $14,791 for the twelve months ended
December 31, 2004, compared with a tax expense of $58 in 2003 and a tax expense
of $3,778 in 2002. The 2004 benefit resulted from the loss incurred as a result
of the balance sheet restructuring. The Company expects to be able to utilize
these net-operating losses in future periods. After the balance sheet
restructuring the effective tax rate for the following three-quarters was
approximately 21%.
Investments in bank-owned life insurance policies on certain officers, a
tax-exempt item, generated $1,547 of income during 2004 compared to $1,788 in
2003. Dividend income on tax-preferred securities decreased $791 during 2004
compared to 2003. In late 2002, the Company invested in a LIHP, which generated
$1,344 more tax credits in 2003 than in 2002. The credits were approximately
equal for 2004 and 2003. These credits are a direct offset to tax expense and a
large component of lowering the tax expense in 2003 and 2002. See Note 11 of the
Notes to the Consolidated Financial Statements for an additional discussion of
these sources.
17
INTERIM FINANCIAL DATA
The following tables reflect summarized quarterly data for the periods
described:
2004
-----------------------------------------------
Three months ended December 31 September 30 June 30 March 31
- ------------------ ----------- ------------ ------- --------
Interest income $33,572 $32,881 $31,727 $ 34,191
Interest expense 11,420 10,752 10,158 15,574
------- ------- ------- --------
Net interest income 22,152 22,129 21,569 18,617
Provision for loan losses 350 150 155 650
Non-interest income 6,975 7,099 7,516 12,017
Non-interest expense 19,756 20,289 20,570 77,565
------- ------- ------- --------
Income (loss) before income taxes 9,021 8,789 8,360 (47,581)
Income taxes (benefits) 1,942 1,905 1,705 (20,343)
------- ------- ------- --------
NET INCOME (LOSS) $ 7,079 $ 6,884 $ 6,655 $(27,238)
======= ======= ======= ========
Earnings per share:
Basic $ 0.41 $ 0.40 $ 0.38 $ (1.57)
Diluted 0.41 0.40 0.38 (1.57)
Average shares:
Basic 17,337 17,328 17,312 17,297
Diluted 17,437 17,378 17,368 17,297
2003
-----------------------------------------------
Three months ended December 31 September 30 June 30 March 31
- ------------------ ----------- ------------ ------- --------
Interest income $35,269 $35,506 $36,011 $36,329
Interest expense 16,421 17,093 18,520 18,839
------- ------- ------- --------
Net interest income 18,848 18,413 17,491 17,490
Provision for loan losses 1,000 1,110 1,600 1,235
Non-interest income 7,794 8,582 8,887 7,530
Non-interest expense 19,828 21,090 20,978 20,371
------- ------- ------- --------
Income before income taxes 5,814 4,795 3,800 3,414
Income taxes (benefits) 945 141 (513) (515)
------- ------- ------- --------
NET INCOME $ 4,869 $ 4,654 $ 4,313 $ 3,929
======= ======= ======= ========
Earnings per share:
Basic $ 0.28 $ 0.27 $ 0.25 $ 0.23
Diluted 0.28 0.27 0.25 0.23
Average shares:
Basic 17,287 17,286 17,286 17,273
Diluted 17,310 17,303 17,287 17,274
FOURTH QUARTER 2004
The fourth quarter net income was $7,079, or $0.41 per diluted share. This
represents a $2,210, or 45.4% increase, in net income from the same quarter 2003
result of $0.28 per diluted share. The stronger performance was driven, in part,
by an 81 basis point improvement in the net interest margin to 3.71% on a fully
tax equivalent basis, lower non-performing assets and solid credit trends.
Comparisons to the fourth quarter of 2003 are impacted by Integra's balance
sheet restructuring which occurred late in the first quarter of 2004. Interest
income in the fourth quarter of 2004, on a tax-equivalent basis, benefited from
a $804 collection of interest and margin related fees on a loan that had
previously been on nonaccrual status and contributed approximately 13 basis
points to the net interest margin in the fourth quarter of 2004.
18
Return on assets and return on equity were 1.04% and 13.49%, respectively, for
the fourth quarter of 2004 compared to 0.65% and 8.33% for the fourth quarter of
2003.
FINANCIAL CONDITION
Total assets at December 31, 2004, were $2,757,165, compared to $2,958,294 at
December 31, 2003.
SHORT-TERM INVESTMENTS
Federal funds sold and other short-term investments totaled $64 at December 31,
2004 compared to $8,658 one-year prior. At December 31, 2004 there were no
federal funds sold compared to $8,100 on December 31, 2003.
SECURITIES PORTFOLIO
Total investment securities, which are all classified as available for sale,
comprised 29.1% of total assets at December 31, 2004 compared to 32.9% at
December 31, 2003. They represent the second largest asset component after
loans. Securities decreased $173,052 to $801,059 at December 31, 2004 from
one-year prior. The balance sheet restructuring included a reduction in the
security portfolio of approximately $262,000. The portfolio has continued to
shift toward investments in 2-3 year low premium or discount Collateralized
Mortgage Obligations ("CMOs") and 3 to 5 year hybrid ARMs, and out of high
premium 15 and 30 year fixed rate passthrough mortgage-backed securities.
Inherent in mortgage-backed securities is prepayment risk, which occurs when
borrowers prepay their obligations due to market fluctuations and rates.
Prepayment rates generally can be expected to increase during periods of lower
interest rates as underlying mortgages are refinanced at lower rates, which
occurred in 2003. Mortgage-backed securities and CMOs represented 79.6% of the
investment portfolio at December 31, 2004 as compared to 77.1% and 73.7% at
December 31, 2003 and 2002, respectively. Management repositioned a portion of
the portfolio late in 2002 and early 2003 in order to reduce the exposure to
accelerating prepayments and unanticipated premium write-downs going forward.
The Company's present investment strategy focuses on shorter duration securities
with more predictable cash flows in a variety of interest rate scenarios.
December 31,
SECURITIES PORTFOLIO ------------------------------
(At Fair Value) 2004 2003 2002
- -------------------- -------- -------- --------
U.S. Government agencies $ 1,095 $ 40,977 $ 15,437
Mortgage-backed securities 230,685 285,997 369,405
Collateralized Mortgage Obligations 407,126 464,562 330,104
State & political subdivisions 97,813 117,078 147,214
Other securities 64,340 65,497 87,340
-------- -------- --------
Total $801,059 $974,111 $949,500
======== ======== ========
REGULATORY STOCK
Regulatory stock includes mandatory equity securities which do not have a
readily determinable fair value and are therefore carried at cost on the balance
sheet. From time to time the Company purchases this dividend paying stock
according to capital requirements set by the respective regulatory agencies.
LOANS
Loans, net of unearned income, at December 31, 2004 totaled $1,665,324 compared
to $1,699,688 at year-end 2003, reflecting a decrease of $34,364, or 2.0%.
Commercial loans, which include commercial, industrial and agricultural;
commercial real estate; and construction and development, decreased $17,563 at
December 31, 2004 compared to the same period in 2003. Commercial, industrial
and agricultural loans decreased $22,777 to $563,382 from $586,159 at December
31, 2003 while commercial real estate and construction loans increased $5,214 as
a result of the commercial real estate strategy. In the second half of 2003, the
Company expanded its commercial lending activities by adding a team of
commercial lenders with a particular focus on commercial real estate. The
Company opened loan production offices ("LPOs") in metro Cincinnati and
Cleveland, Ohio and Louisville, Kentucky. By year-end 2004, this group has
originated approximately $107,000 in loans compared to $28,000 in 2003. Most of
these loans are located within the areas the LPOs serve. Loans are occasionally
made on projects outside the markets served by the LPOs, to borrowers located
within the Company's defined lending area.
Residential mortgage loans decreased $21,888, or 4.6%, to $456,007 at December
31, 2004 compared to $477,895 at the same time in 2003. Home equity loans
increased to $143,037 at December 31, 2004 an increase of $10,936. Home equity
loans are generally lines of credit collateralized by a mortgage on the
customer's primary residence.
19
Consumer loans increased $2,969, or 1.6% to $187,395 at December 31, 2004.
Consumer loans include direct and indirect loans to consumers. Indirect loans at
December 31, 2004 were $107,746 compared to $88,409 at December 31, 2003. These
indirect loans are primarily recreational vehicle and boat loans to borrowers in
the Midwest.
LOAN PORTFOLIO AT YEAR END (1)
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Commercial, industrial and
agricultural loans $ 563,382 $ 586,159 $ 644,084 $ 326,549 $ 353,934
Economic development loans and
other obligations of state and
political subdivisions 13,195 20,951 18,360 19,980 25,120
Lease financing 5,731 6,796 7,366 8,004 14,486
Commercial mortgages 224,066 238,261 172,640 -- --
Construction and development 72,517 53,108 36,981 -- --
Real estate loans -- -- -- 1,118,607 1,154,129
Residential mortgages 456,007 477,895 451,920 -- --
Home equity 143,037 132,101 126,257 -- --
Consumer loans 187,395 184,426 148,580 126,735 139,804
---------- ---------- ---------- ---------- ----------
Total loans 1,665,330 1,699,697 1,606,188 1,599,875 1,687,473
Less: unearned income 6 9 33 143 143
---------- ---------- ---------- ---------- ----------
Loans, net of unearned income $1,665,324 $1,699,688 $1,606,155 $1,599,732 $1,687,330
========== ========== ========== ========== ==========
(1) In 2003, the Company changed its methodology for classifying the types of
loans in its portfolio. The principal effect of this change was to reduce
the number of loans reported prior to 2002 as real estate or real estate
mortgage loans. The Company determined that it was not practical to apply
the new methodology to earlier years. As a result, information for years
2001 and 2000 are shown as previously reported and are not comparable to
the information for 2004, 2003, and 2002. Comparable amounts that would be
included in the real estate loans line for 2004, 2003, and 2002 would be
$1,139,620, $1,136,431 and $1,113,404, respectively.
Different types of loans are subject to varying levels of risk. Management
mitigates this risk through portfolio diversification as well as geographic
diversification. The Company concentrates its lending activity in the geographic
market areas that it serves, primarily Indiana, Illinois, Kentucky and Ohio. The
loan portfolio is also diversified by type of loan and industry.
The Company lends to customers in various industries including real estate,
agricultural, health and other related services, and manufacturing. There is no
concentration of loans in any single industry exceeding 10% of the portfolio nor
does the portfolio contain any loans to finance speculative transactions or
loans to foreign entities. The Company has one loan of approximately $2,000 to a
foreign subsidiary of a domestic company. This loan is guaranteed by the
domestic parent which hedges the currency through a Eurodollar agent.
LOAN MATURITIES AND RATE SENSITIVITIES AT DECEMBER 31, 2004
After 1 Year
Total Loans Within But Within Over
Rate sensitivities: 1 Year 5 Years 5 Years Total
- ------------------- -------- ---------- -------- ----------
Fixed rate loans $ 56,665 $335,868 $293,020 $ 685,553
Variable rate loans 657,853 244,635 59,312 961,800
-------- -------- -------- ---------
Subtotal $714,518 $580,503 $352,332 1,647,353
-------- -------- --------
Percent of total 43.37% 35.24% 21.39%
Nonaccrual loans 17,971
----------
Total loans $1,665,324
==========
20
LOAN MATURITIES AND RATE SENSITIVITIES AT DECEMBER 31, 2004
Commercial, Industrial, Agricultural, Construction and Development Loans
After 1 Year
Within But Within Over
1 Year 5 Years 5 Years Total
-------- ------------ ------- --------
Commercial, industrial and
agriculture loans $290,916 $202,659 $58,844 $552,419
Construction and development 68,008 4,408 17 72,433
-------- -------- ------- --------
Total $358,924 $207,067 $58,861 $624,852
======== ======== ======= ========
Fixed rate $ 17,307 $177,411 $53,776 $248,494
Variable rate 341,617 29,656 5,085 376,358
-------- -------- ------- --------
Subtotal $358,924 $207,067 $58,861 624,852
-------- -------- -------
Percent of total 57.44% 33.14% 9.42%
Nonaccrual loans 11,047
--------
Total $635,899
========
NON-PERFORMING ASSETS
Non-performing assets consist primarily of nonaccrual loans, restructured loans,
loans past due 90 days or more and other real estate owned. Nonaccrual loans are
loans on which interest recognition has been suspended because of doubts as to
the borrower's ability to repay principal or interest according to the terms of
the contract. Loans are generally placed on nonaccrual status after becoming 90
days past due if the ultimate collectability of the loan is in question. Loans
which are current, but as to which serious doubt exists about repayment ability,
may also be placed on nonaccrual status. Restructured loans are loans for which
the terms have been renegotiated to provide a reduction or deferral of principal
or interest because of the borrower's financial position. Loans 90 days or more
past-due are loans that are continuing to accrue interest, but which are
contractually past due 90 days or more as to interest or principal payments.
Other real estate owned represents properties obtained for debts previously
contracted. Management is not aware of any loans which have not been disclosed
as non-performing assets that represent or result from unfavorable trends or
uncertainties which management reasonably believes will materially adversely
affect future operating results, liquidity or capital resources, or represent
material credits as to which management has serious doubt as to the ability of
such borrower to comply with loan repayment terms. Included in the
non-performing assets in 2003 and 2002 was a defaulted utility bond anticipation
note issue, with a face value of $3,000. In the second quarter of 2004 the
Company received total payment on the issue.
NON-PERFORMING ASSETS AT YEAR END
2004 2003 2002 2001 2000
------- ------- ------- ------- -------
Non-performing loans:(1)
Nonaccrual $17,971 $15,725 $20,010 $21,722 $33,079
Restructured -- -- -- -- 160
90 days past due and still accruing interest 576 2,566 2,367 2,500 3,760
------- ------- ------- ------- -------
Total non-performing loans 18,547 18,291 22,377 24,222 36,999
Defaulted municipal securities -- 2,692 2,536 -- --
Other real estate owned 243 1,341 2,286 2,866 1,522
------- ------- ------- ------- -------
Total non-performing assets $18,790 $22,324 $27,199 $27,088 $38,521
======= ======= ======= ======= =======
(1) Includes non-performing loans classified as loans held for sale.
Non-performing loans were 1.11% and 1.08% of loans, net of unearned income at
the end of 2004 and 2003, respectively. The Company actively manages
non-performing loans in order to maintain this level. The change in the
components of non-performing loans was due to one large loan which was included
in 90 days past due category for 2003. During 2004 this loan was placed in
non-accrual status. Non-performing assets decreased $3,534 mainly due to the
settlement of the above-mentioned municipal security. The interest recognized on
nonaccrual loans was approximately $109, $69 and $68, in 2004, 2003 and 2002,
respectively. The amount of interest that would have been earned had these
nonaccrual loans remained in accruing status was $1,148, $943 and $1,143 for
2004,
21
2003 and 2002, respectively.
The Company monitors watch list assets. For the most part, assets are designated
as watch list to ensure more frequent monitoring. The assets are reviewed to
insure proper earning status and security perfection. If it is determined that
there is serious doubt as to performance in accordance with the original terms
of the contract then the loan is placed on nonaccrual. These loans are reviewed
on an ongoing basis.
CREDIT MANAGEMENT
The Company's credit management procedures include Board oversight of the
lending function by the Board's Credit and Risk Management Committee, which
meets at least quarterly. The committee monitors credit quality through its
review of information such as delinquencies, non-performing loans and assets,
problem and watch list loans and charge-offs. The lending policies address risks
associated with each type of lending, including collateralization, loan-to-value
ratios, loan concentrations, insider lending and other pertinent matters and are
regularly reviewed to ensure that they remain appropriate for the current
lending environment. In addition, a sample of loans is reviewed by an
independent loan review department or outside independent third party, as well
as by a compliance department and regulatory agencies.
Consumer, mortgage and small business loans are centrally underwritten and
approved while commercial loans are approved through a combination of low
individual lending authorities, independent senior credit officers and an
executive loan committee. The executive loan committee approves or ratifies all
loans in excess of $2,500.
The allowance for loan losses is that amount which, in management's opinion, is
adequate to absorb probable inherent loan losses as determined by management's
ongoing evaluation of the loan portfolio. The evaluation by management is based
upon consideration of various factors including growth of the portfolio, an
analysis of individual credits, adverse situations that could affect a
borrower's ability to repay, prior and current loss experience, the results of
recent regulatory examinations and economic conditions. Loans that are deemed to
be uncollectible are charged to the allowance, while recoveries of previously
charged off amounts are credited to the allowance. The provision for loan losses
is the amount charged to operations to provide assurance that the allowance for
loan losses is sufficient to absorb probable losses.
The adequacy of the allowance for loan losses is based on ongoing quarterly
assessments of the probable losses inherent in the credit portfolios. The
methodology for assessing the adequacy of the allowance establishes both an
allocated and unallocated component. The allocated component of the allowance
for commercial loans is based on a review of specific loans as well as
delinquency, classification levels and historic charge-offs for pools of
non-reviewed loans. For consumer loans, the allocated component is based on loan
payment status and historical loss rates.
A review of selected loans (based on risk rating and size) is conducted to
identify loans with heightened risk or probable losses. The primary
responsibility for this review rests with management assigned accountability for
the credit relationship. This review is supplemented by the loan review area,
which provides information assisting in the timely identification of problems
and potential problems and in deciding whether the credit represents a probable
loss or risk which should be recognized. Where appropriate, an allocation is
made to the allowance for individual loans based on management's estimate of the
borrower's ability to repay the loan given the availability of collateral, other
sources of cash flow and legal options available to the Company.
Included in the review of individual loans are those that are impaired as
provided in SFAS No. 114, Accounting by Creditors for Impairment of a Loan.
Loans are considered impaired when, based on current information and events, it
is probable the Company will not be able to collect all amounts due in
accordance with the contractual terms. The allowance established for impaired
loans is generally based on the present value of expected future cash flows
discounted at the historical effective interest rate stipulated in the loan
agreement, except that all collateral-dependent loans are measured for
impairment based on the market value of the collateral, less estimated cost to
liquidate.
Homogeneous pools of loans, such as consumer installment and residential real
estate loans, are not individually reviewed. An allowance is established for
each pool of loans based upon historical loss ratios, based on the net
charge-off history by loan category. In addition, the allowance reflects other
risks affecting the loan portfolio, such as economic conditions in the Company's
geographic areas, specific industry financial conditions and other factors.
The unallocated portion of the allowance covers general economic uncertainties
as well as the imprecision inherent in any loan and lease loss forecasting
methodology. It will vary over time depending on economic, industry,
organization and portfolio conditions.
The factors used to evaluate homogenous loans in accordance with the SFAS No. 5,
Accounting for Contingencies are reviewed at least quarterly and are updated as
conditions warrant, resulting in improved allocation of specific reserves. The
provision for loan losses is the amount necessary to adjust the allowance for
loan losses to an amount that is adequate to absorb estimated loan losses as
determined by management's periodic evaluations of the loan portfolio. This
evaluation by management is based upon consideration
22
of actual loss experience, changes in composition of the loan portfolio,
evaluation of specific borrowers and collateral, current economic conditions,
trends in past-due and non-accrual loan balances and the results of recent
regulatory examinations. The adequacy of the allowance for loan losses is
reviewed on a quarterly basis and presented to the Audit Committee of the Board
of Directors for approval. The accounting policies related to the allowance for
loan losses are significant policies that involve the use of estimates and a
high degree of subjectivity. Management believes it has developed appropriate
policies and procedures for assessing the adequacy of the allowance for loan
losses that reflect the assessment of credit risk after careful consideration of
known relevant facts. In developing this assessment, management must rely on
estimates and exercise judgement regarding matters where the ultimate outcome is
unknown such as economic factors, developments affecting companies in specific
industries or issues with respect to single borrowers. Depending on changes in
circumstances, future assessments of credit risk may yield different results,
which may require an increase or decrease in the allowance for loan losses.
During the third quarter of 2004, management refined the process that it uses to
perform this analysis. These included expanded data analysis, improved
back-testing and continued refinements to documentation surrounding the adequacy
of the allowance. Additionally, the controls utilized for data entry, testing,
review and approval were enhanced. Management believes these changes provide
more reliable measures of the probability of default and risk of loss 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" and overall did not have a
material effect on the balance of the allowance for loan losses.
The Company continues to enhance its loan portfolio monitoring system to enhance
its risk management capabilities. During the year the Company implemented the
Markov migration model for it's commercial portfolio. Among the most significant
enhancements were expanded score band performance, loan to value analysis, and
vintage analysis.
The provision for loan losses totaled $1,305 in 2004, a decrease of $3,640 from
the $4,945 provided in 2003. The lower provision reflected the change in the
loan origination mix and the improved quality of the portfolio. At December 31,
2004, the allowance for loan losses as a percentage of loans was 1.43% as
compared to 1.50% as of year-end 2003. During 2004, the Company's ratio of net
charge-offs to average loans was 15 basis points compared to 25 basis points in
2003. Net charge-offs in 2002 were low due to the effects of the loan sale that
was announced in 2001 and consummated in 2002. The allowance for loan losses to
non-performing loans at December 31 was 128.29% in 2004 and 138.88% in 2003.
During 2004 the Company reclassified $76 from the allowance for loan losses to
other liabilities reflecting the Company's estimated liability for losses on
standby letters of credit and unfunded loan commitments. No amounts were
reclassified for the prior years since the reserve for the commitments were
immaterial.
23
SUMMARY OF LOAN LOSS EXPERIENCE (ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES) (1)
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Allowance for loan losses, January 1 $ 25,403 $ 24,632 $ 23,868 $ 25,264 $ 25,155
Allowance associated with purchase acquisitions -- -- -- 4,018 1,103
Writedowns related to loans transferred
to loans held for sale -- -- -- 26,047 --
Loans charged off:
Commercial, industrial and agriculture 1,550 2,330 1,235 4,457 1,722
Lease financing -- 59 -- 113 48
Commercial mortgages 859 840 492 -- --
Construction and development 13 -- -- -- --
Real estate mortgage -- -- -- 4,452 1,658
Residential mortgages 1,321 1,734 2,236 -- --
Home Equity 154 180 266 -- --
Consumer 961 1,367 1,480 2,934 3,065
---------- ---------- ---------- ---------- ----------
Total 4,858 6,510 5,709 11,956 6,493
Recoveries on charged off loans:
Commercial, industrial and agriculture 1,386 1,105 1,192 270 242
Lease financing -- 119 4 2 13
Commercial mortgages 242 86 138 -- --
Construction and development 24 -- -- -- --
Real estate mortgage -- -- -- 371 235
Residential mortgages 249 405 1,266 -- --
Home Equity 24 1 33 -- --
Consumer 394 620 697 869 871
---------- ---------- ---------- ---------- ----------
Total 2,319 2,336 3,330 1,512 1,361
---------- ---------- ---------- ---------- ----------
Net charge-offs 2,539 4,174 2,379 10,444 5,132
Provision for loan losses 1,305 4,945 3,143 31,077 4,138
Allowance related to loans sold (299) -- -- -- --
Transfer to reserve for unfunded commitments (76) -- -- -- --
---------- ---------- ---------- ---------- ----------
Allowance for loan losses, December 31 $ 23,794 $ 25,403 $ 24,632 $ 23,868 $ 25,264
========== ========== ========== ========== ==========
Total loans at year-end, net of unearned income $1,665,324 $1,699,688 $1,606,155 $1,599,732 $1,687,330
Average loans 1,644,471 1,670,938 1,596,462 1,747,882 1,674,864
Total non-performing loans 18,547 18,291 22,377 24,222 36,999
Net charge-offs to average loans* 0.15% 0.25% 0.15% 2.09% 0.31%
Provision for loan losses to average loans 0.08 0.30 0.20 1.78 0.25
Allowance for loan losses to loans 1.43 1.50 1.53 1.49 1.50
Allowance for loan losses to non-performing loans 128.29 138.88 110.08 98.54 68.28
* 2001 includes writedowns related to loans transferred to loans held for
sale. Excluding this amount, net charge-offs to average loans was 0.60%.
(1) In 2003, the Company changed its methodology for classifying the types of
loans in its portfolio. As a result, information for years 2001 and 2000
are shown as previously reported and are not comparable to the information
for 2004, 2003 and 2002.
24
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES AT DECEMBER 31 (1)
Allowance Applicable to Percent of Loans to Total Gross Loans
----------------------------------------------- -------------------------------------
Loan Type 2004 2003 2002 2001 2000 2004 2003 2002 2001 2000
- --------- ------- ------- ------- ------- ------- ---- ---- ---- ---- ----
Commercial, industrial
and agriculture $10,326 $12,789 $13,421 $ 6,845 $ 6,042 48% 57% 61% 21% 23%
Economic development loans
and other obligations of
state and political
subdivisions 86 135 117 -- -- -- 1% 1% -- --
Lease financing 63 105 129 140 3,184 -- 1% 1% 1% 1%
Commercial mortgages 3,127 3,130 2,198 -- -- 15% 14% 10% -- --
Construction and
development 763 344 280 -- -- 4% 2% 1% -- --
Real estate mortgage -- -- -- 9,993 9,508 -- -- -- 70% 68%
Residential mortgages 3,622 1,845 2,347 -- -- 17% 8% 10% -- --
Home equity 1,059 778 529 -- -- 5% 3% 2% -- --
Consumer 2,291 3,095 3,046 2,405 2,690 11% 14% 14% 8% 8%
------- ------- ------- ------- ------- --- --- --- --- ---
Allocated 21,337 22,221 22,067 19,383 21,424 100% 100% 100% 100% 100%
=== === === === ===
Unallocated 2,457 3,182 2,565 4,485 3,840
------- ------- ------- ------- -------
Total $23,794 $25,403 $24,632 $23,868 $25,264
======= ======= ======= ======= =======
(1) In 2003, the Company changed its methodology for classifying the types of
loans in its portfolio. As a result, information for years 2001 and 2000
are shown as previously reported and are not comparable to the information
for 2004, 2003 and 2002.
DEPOSITS
Total deposits were $1,896,541 at December 31, 2004 compared to $1,812,630 at
December 31, 2003. The growth in deposits was in non-interest bearing and low
cost interest bearing accounts. Measured at year-end, valuable core deposits
grew by $110,465, or 11.4% in 2004. Time deposits greater than $100 decreased
$1,368, while other time deposits decreased $25,186 since December 31, 2003. The
Company had $7,096 in brokered deposits at December 31, 2004 and none at
December 31, 2003.
TIME DEPOSITS OF $100 OR MORE AT DECEMBER 31, 2004
Maturing:
3 months or less $140,944
Over 3 to 6 months 79,157
Over 6 to 12 months 36,543
Over 12 months 47,851
--------
Total $304,495
========
SHORT-TERM BORROWINGS
Short-term borrowings totaled $174,933 at December 31, 2004, a decrease of
$79,045 from year-end 2003. Federal funds purchased represent short-term
borrowings, usually overnight, from other financial institutions. Securities
sold under agreements to repurchase are collateralized transactions acquired in
national markets as well as from the Company's commercial customers as a part of
a cash management service. Repurchase agreements provide the Company with a
lower interest cost than similar sources of funds. The Company had repurchase
agreements outstanding of $74,194 and $195,372 at December 31, 2004 and 2003,
respectively. Short-term Federal Home Loan Bank ("FHLB") advances and other
short-term borrowed funds are borrowings with a maturity date of one year or
less. Short-term borrowed funds totaled $45,039 and $7,606 at December 31, 2004
and 2003, respectively. The Company currently has an unsecured line of credit
for $15,000 with the full amount available at year-end 2004.
LONG-TERM BORROWINGS
Long-term borrowings have maturities greater than one year and include advances
from the FHLB and term notes from other financial institutions. Long-term
borrowings decreased $181,339 during 2004 to $457,359 from $638,698 at December
31, 2003 mainly as a result of the balance sheet restructuring. Included in
long-term borrowings are $54,125 in trust preferred securities and $221,653 of
FHLB advances. These advances carried a weighted average interest rate of 2.37%
with final maturities ranging from 2005 through 2010.
25
As part of the balance sheet restructuring the Company added $75,000 in fixed
rate national market repurchase agreements by $75,000 and issued $4,000 of
floating rate unsecured subordinated debt. The repurchase agreements which have
a final maturity in 2008 have an average fixed rate of 2.78%.
The unsecured subordinated debt has a floating rate of three-month LIBOR plus
2.85% and will mature on April 7, 2014. Issuance costs of $141 were paid by the
Company and are being amortized over the life of the debt.
In April 2003, the Company issued $10,000 of floating rate-subordinated debt
which will mature on April 10, 2013. Issuance costs of $331 were paid by the
Company and are being amortized over the life of the debt.
During the second quarter of 2003, the Company issued $35,568 in trust preferred
securities as a participant in a pooled fund with a floating interest rate,
which was 5.65% on December 31, 2004. The issue matures on June 26, 2033.
Issuance costs of $1,045 were paid by the Company and are being amortized over
the life of the debt. The Company has the right to call these securities at par
effective June 25, 2008. The funds were used to redeem $34,500 of trust
preferred securities which had a fixed rate of 8.25%.
Management continuously reviews the Company's liability composition. Any
modifications could adversely affect the profitability and capital levels of the
Company over the near term, but would be undertaken if management determines
that restructuring the balance sheet will improve the Company's interest rate
risk and liquidity risk profile on a longer-term basis.
OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
The Company has certain obligations and commitments to make future payments
under contracts. The Company's long-term borrowings represent FHLB advances with
various terms and rates collateralized primarily by first mortgage loans and
certain specifically assigned securities, securities sold under repurchase
agreements, notes payable secured by equipment, subordinated debt and trust
preferred securities. The Company is also committed under various operating
leases for premises and equipment.
In the normal course of business, there are various outstanding commitments and
contingencies, including letters of credit and standby letters of credit, that
are not reflected in the consolidated financial statements. The Company's
exposure to credit loss in the event the nonperformance by the other party to
the commitment is limited to the contractual amount. Many commitments expire
without being used. Therefore, the amounts stated below do not necessarily
represent future cash commitments. The Company uses the same credit policies in
making commitments and conditional obligations as it does for other on-balance
sheet instruments.
The following table lists the Company's significant contractual obligations and
significant commitments coming due in the periods indicated at December 31,
2004. Further discussion of these obligations or commitments is included in Note
18 to the consolidated financial statements.
Less than 1 to 3 3 to 5 After 5
Total One Year Years Years Years
-------- --------- -------- ------- --------
As of December 31, 2004
Contractual On Balance Sheet Obligations
Long-term debt $457,359 $ 850 $314,279 $70,725 $ 71,505
Operating leases 18,920 2,129 3,958 2,768 10,065
-------- -------- -------- ------- --------
Total contractual cash obligations $476,279 $ 2,979 $318,237 $73,493 $ 81,570
======== ======== ======== ======= ========
Off Balance Sheet Obligations
Lines of credit $266,949 $ 89,395 $ 29,684 $11,014 $136,856
Standby letters of credit 7,886 7,682 204 -- --
Other commitments 141,975 25,206 57,270 30,258 29,241
-------- -------- -------- ------- --------
Total other commitments $416,810 $122,283 $ 87,158 $41,272 $166,097
======== ======== ======== ======= ========
CAPITAL RESOURCES
At December 31, 2004, shareholders' equity totaled $209,291, a decrease of
$23,701, or 10.2%, from 2003. This decrease was primarily the result of a net
loss of $6,620 due to the balance sheet restructuring in the first quarter of
2004 and the declaration of cash dividends of $12,409 for the year ended
December 31, 2004. This compares to net income of $17,765 and cash dividends
declared of $16,266 in 2003. In the first quarter of 2004 in conjunction with
the balance sheet restructuring, the Company reduced the
26
dividend from $0.235 per share to $0.16 per share. The dividend payout ratio for
2004 was not meaningful due to the net loss and was 91.26% in 2003. The average
equity to average asset ratio was 7.62% and 7.97% for 2004 and 2003,
respectively.
The Company has opened four branches in 2004: two new banking centers in early
2004, a third in the third quarter and a fourth in the fourth quarter. The
Company plans to open a branch in the second quarter of 2005 located in
Florence, Kentucky. The Florence banking center will also serve as a regional
office for the Cincinnati metro area. In late 2004, the Company announced its
intentions to sell three branches in Illinois.
The Company and the banking industry are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can elicit certain mandatory actions by regulators
that, if undertaken, could have a direct material effect on the Company's
financial statements. Capital adequacy in the banking industry is evaluated
primarily by the use of ratios that measure capital against assets and certain
off-balance sheet items. Certain ratios weight these assets based on risk
characteristics according to regulatory accounting practices. At December 31,
2004, the Company and Integra Bank exceeded the regulatory minimums and Integra
Bank met the regulatory definition of well capitalized. See additional
discussion in Note 15.
Capital trust preferred securities held by the Company's wholly-owned
subsidiaries currently qualify as Tier 1 capital for the Company under Federal
Reserve Board guidelines. As a result of the issuance of FASB Interpretation No.
46 ("FIN 46"), the Federal Reserve Board adopted a rule that allows the limited
inclusion of trust preferred securities in Tier 1 capital, subject to stricter
qualitative limits.
LIQUIDITY
Liquidity of a banking institution reflects the ability to provide funds to meet
loan requests, to accommodate possible outflows in deposits and other
borrowings, and to take advantage of interest rate market opportunities. Funding
loan requests, providing for deposit out flows, and managing interest rate
fluctuations require monitoring and continuous analysis in order to match
maturities of specific categories of short-term and long-term loans and
investments with specific types of deposits and borrowings. Bank liquidity is
normally considered in terms of the nature of mix of the banking institution's
sources and uses of funds.
For Integra Bank N.A., 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 fund purchases, brokered deposits, repurchase
agreements, sale of investment securities or utilize its borrowing capacity with
FHLB Indianapolis, as alternative sources of liquidity. Additionally, the
Company's underwriting standards for its mortgage loan portfolio comply with
standards established by government housing agencies; as a result, a portion of
the mortgage loan portfolio could be sold to provide additional liquidity. At
December 31, 2004 and 2003, respectively, federal funds sold and other
short-term investments were $64 and $8,658. Additionally, at December 31, 2004,
the Company had $244,000 available from unused federal funds lines and in excess
of $270,000 in unencumbered securities available for repurchase agreements. The
Bank also has a "borrower in custody" ("BIC") line with the Federal Reserve Bank
totaling over $468,125 as part of its liquidity contingency.
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. 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. 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. The Company also
has an unsecured line of credit available which permits it to borrow up to
$15,000. At December 31, 2004 the Company had $15,000 available for future use.
Management believes that the Company has adequate liquidity to meet its
foreseeable needs.
ACCOUNTING CHANGES
For information regarding accounting standards issued which will be adopted in
future periods, refer to Note 1 to the Consolidated Financial Statements.
27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk is the exposure of earnings and capital to changes in
interest rates. Fluctuations in rates affect earnings by changing net interest
income and other interest-sensitive income and expense levels. Interest rate
changes affect 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 bank 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 and
Finance 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.
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 December 31,
2004, the Company would experience a negative 5.77% 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 0.59% change in net interest
income. Both simulation results are within the policy limits established by the
Board ALCO. During 2004, EAR in the up 200 basis point scenario was favorably
impacted by an increase in floating rate loans and by the reduction in both
investment securities and short-term borrowings which were part of the balance
sheet restructuring that occurred in March 2004.
Estimated Change in EAR from the Base Interest Rate Scenario
------------------------------------------------------------
-200 basis points +200 basis points
----------------- -----------------
December 31, 2004 -5.77% -0.59%
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. For EVE calculations, future
balance sheet composition is not a factor.
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 December 31, 2004, the Company would experience a positive 1.37% 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 7.77% change in
EVE. Both of these measures are within Board approved policy limits. The
reduction in the size of the investment securities portfolio, which was part of
the balance sheet restructure in March 2004, accounts for the majority of the
improvement in the EVE risk measure from the previous year in the up 200 basis
point scenario.
28
Estimated Change in EVE from the Base Interest Rate Scenario
------------------------------------------------------------
-200 basis points +200 basis points
----------------- -----------------
December 31, 2004 1.37% -7.77%
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.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Integra Bank Corporation (the "Company") is responsible
for establishing and maintaining adequate internal control over financial
reporting. Internal control over financial reporting is defined in Rule
13a-15(f) promulgated under the Securities Exchange Act of 1934 as a process
designed by, or under the supervision of, the Company's principal executive and
principal financial officers and effected by the Company's board of directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles and includes those policies and procedures that:
- Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
- Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and
- Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
The Company's management assessed the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004. In making
this assessment, the Company's management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in
Internal Control-Integrated Framework.
Based on our assessment, management believes that, as of December 31, 2004,
the Company's internal control over financial reporting is effective based on
those criteria.
Our management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm as
stated in their report which appears on page 31 of this Annual Report on Form
10-K.
/s/ Michael T. Vea /s/ Sheila A. Stoke
- -------------------------------------- -------------------------------------
Chairman of the Board, Chief Executive Senior Vice President, Controller and
Officer and President Principal Accounting Officer
30
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Integra Bank Corporation:
We have completed an integrated audit of Integra Bank Corporation's 2004
consolidated financial statements and of its internal control over financial
reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of comprehensive income, of changes in
shareholders' equity and of cash flows present fairly, in all material respects,
the financial position of Integra Bank Corporation and its subsidiaries at
December 31, 2004 and 2003, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2004 in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit of financial statements includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that the
Company maintained effective internal control over financial reporting as of
December 31, 2004 based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control - Integrated Framework
issued by the COSO. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Columbus, Ohio
March 10, 2005
31
INTEGRA BANK CORPORATION and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share Data)
December 31,
-----------------------
2004 2003
---------- ----------
ASSETS
Cash and due from banks $ 71,770 $ 66,285
Federal funds sold and other short-term investments 64 8,658
---------- ----------
Total cash and cash equivalents 71,834 74,943
Loans held for sale (at lower of cost or fair value) 1,173 242
Securities available for sale 801,059 974,111
Regulatory stock 32,975 32,875
Loans, net of unearned income 1,665,324 1,699,688
Less: Allowance for loan losses (23,794) (25,403)
---------- ----------
Net loans 1,641,530 1,674,285
Premises and equipment 50,233 54,563
Goodwill 44,839 44,839
Other intangible assets 8,697 10,309
Other assets 104,825 92,127
---------- ----------
TOTAL ASSETS $2,757,165 $2,958,294
========== ==========
LIABILITIES
Deposits:
Non-interest-bearing demand $ 257,963 $ 219,983
Interest-bearing:
Savings, interest checking and money market accounts 820,104 747,619
Time deposits of $100 or more 304,495 305,863
Other interest-bearing 513,979 539,165
---------- ----------
Total deposits 1,896,541 1,812,630
Short-term borrowings 174,933 253,978
Long-term borrowings 457,359 638,698
Other liabilities 19,041 19,996
---------- ----------
TOTAL LIABILITIES 2,547,874 2,725,302
Commitments and contingent liabilities (Note 18) -- --
SHAREHOLDERS' EQUITY
Preferred stock - 1,000,000 shares authorized
None outstanding
Common stock - $1.00 stated value:
Shares authorized: 29,000,000
Shares outstanding: 17,375,004 and 17,310,782, respectively 17,375 17,311
Additional paid-in capital 126,977 125,789
Retained earnings 64,481 83,510
Unvested restricted stock (578) (292)
Accumulated other comprehensive income 1,036 6,674
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 209,291 232,992
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,757,165 $2,958,294
========== ==========
See Accompanying Notes to Consolidated Financial Statements.
32
INTEGRA BANK CORPORATION and Subsidiaries
Consolidated Statements of Income
(In Thousands, Except Share and Per Share Data)
Year Ended December 31,
------------------------------
2004 2003 2002
-------- -------- --------
INTEREST INCOME
Interest and fees on loans:
Taxable $ 94,874 $ 99,951 $110,042
Tax-exempt 449 877 1,257
Interest and dividends on securities:
Taxable 29,221 31,388 38,124
Tax-exempt 6,045 8,692 10,291
Dividends on regulatory stock 1,518 1,696 2,028
Interest on loans held for sale 179 451 1,717
Interest on federal funds sold and other short-term investments 85 60 1,172
-------- -------- --------
Total interest income 132,371 143,115 164,631
INTEREST EXPENSE
Interest on deposits 25,752 29,995 44,404
Interest on short-term borrowings 2,207 2,613 2,043
Interest on long-term borrowings 19,945 38,265 44,339
-------- -------- --------
Total interest expense 47,904 70,873 90,786
NET INTEREST INCOME 84,467 72,242 73,845
Provision for loan losses 1,305 4,945 3,143
-------- -------- --------
Net interest income after provision for loan losses 83,162 67,297 70,702
-------- -------- --------
NON-INTEREST INCOME
Service charges on deposit accounts 12,414 11,628 11,135
Other service charges and fees 5,254 5,035 4,675
Credit card fee income 2,060 1,864 1,576
Mortgage banking 813 1,931 1,087
Trust income 2,025 2,035 2,041
Securities gains 4,477 3,052 9,098
Gain on mortgage loans sold 618 1,988 1,014
Cash surrender value life insurance income 1,547 1,788 1,925
Other 4,399 3,472 3,730
-------- -------- --------
Total non-interest income 33,607 32,793 36,281
NON-INTEREST EXPENSE
Salaries and employee benefits 42,907 42,347 38,825
Occupancy 6,625 5,909 5,586
Equipment 4,052 4,361 4,474
Professional fees 4,485 4,404 4,905
Communication and transportation 3,427 3,990 4,030
Processing 3,496 3,215 3,452
Software 1,841 1,547 1,372
Marketing 2,179 1,829 1,874
Debt prepayment fees 56,998 1,243 5,938
Low income housing project losses 2,193 2,570 652
Amortization of intangible assets 1,612 1,619 1,622
Other 8,365 9,233 10,147
-------- -------- --------
Total non-interest expense 138,180 82,267 82,877
-------- -------- --------
Income (loss) before income taxes (21,411) 17,823 24,106
Income taxes (benefit) (14,791) 58 3,778
-------- -------- --------
NET INCOME (LOSS) $ (6,620) $ 17,765 $ 20,328
======== ======== ========
Earnings (loss) per share:
Basic $ (0.38) $ 1.03 $ 1.18
Diluted $ (0.38) $ 1.03 $ 1.18
Weighted average shares outstanding:
Basic 17,318 17,285 17,276
Diluted 17,318 17,300 17,283
See Accompanying Notes to Consolidated Financial Statements.
33
INTEGRA BANK CORPORATION and Subsidiaries
Consolidated Statements of Comprehensive Income
(In Thousands)
Year Ended December 31,
----------------------------
2004 2003 2002
-------- ------- -------
Net income (loss) $ (6,620) $17,765 $20,328
Other comprehensive income, net of tax:
Unrealized gain (loss) on securities:
Unrealized gain (loss) arising in period
(net of tax $(2,181), $(24) and $8,494 respectively) (3,202) (37) 12,465
Reclassification of realized amounts
(net of tax $(1,814), $(1,237) and $(3,687) respectively) (2,663) (1,815) (5,411)
-------- ------- -------
Net unrealized gain (loss) on securities (5,865) (1,852) 7,054
Unrealized gain on hedged derivatives arising in period
(net of tax $155, $373 and $74 respectively) 227 548 110
-------- ------- -------
Net unrealized gain (loss), recognized in other comprehensive income (5,638) (1,304) 7,164
-------- ------- -------
Comprehensive income (loss) $(12,258) $16,461 $27,492
======== ======= =======
See Accompanying Notes to Consolidated Financial Statements.
34
INTEGRA BANK CORPORATION and Subsidiaries
Consolidated Statements of Changes In Shareholders' Equity
(In Thousands, Except Share and Per Share Data)
Accumulated
Shares of Additional Unvested Other Total
Common Common Paid-In Retained Restricted Comprehensive Shareholders'
Stock Stock Capital Earnings Stock Income (Loss) Equity
---------- ------- ---------- -------- ---------- ------------- -------------
BALANCE AT DECEMBER 31, 2001 17,284,035 $17,284 $125,334 $ 77,935 $(270) $ 814 $221,097
---------- ------- -------- -------- ----- ------- --------
Net income -- -- -- 20,328 -- -- 20,328
Cash dividend declared ($0.94 per share) -- -- -- (16,252) -- -- (16,252)
Change, net of tax, in unrealized gain/loss on:
Securities -- -- -- -- -- 7,054 7,054
Interest rate swaps -- -- -- -- -- 110 110
Exercise of stock options 7,333 7 133 -- -- -- 140
Unearned compensation amortization -- -- -- -- 123 -- 123
---------- ------- --------- -------- ----- ------- --------
BALANCE AT DECEMBER 31, 2002 17,291,368 $17,291 $125,467 $ 82,011 $(147) $ 7,978 $232,600
========== ======= ======== ======== ===== ======= ========
Net income -- -- -- 17,765 -- -- 17,765
Cash dividend declared (0.94 per share) -- -- -- (16,266) -- -- (16,266)
Change, net of tax, in unrealized gain/loss on:
Securities -- -- -- -- -- (1,852) (1,852)
Interest rate swaps -- -- -- -- -- 548 548
Exercise of stock options 1,000 1 19 -- -- -- 20
Grant of restricted stock 18,414 19 303 -- (322) -- --
Unearned compensation amortization -- -- -- -- 177 -- 177
---------- ------- -------- -------- ----- ------- --------
BALANCE AT DECEMBER 31, 2003 17,310,782 $17,311 $125,789 $ 83,510 $(292) $ 6,674 $232,992
========== ======= ======== ======== ===== ======= ========
Net income -- -- -- (6,620) -- -- (6,620)
Cash dividend declared ($0.715 per share) -- -- -- (12,409) -- -- (12,409)
Change, net of tax, in unrealized gain/loss on:
Securities -- -- -- -- -- (5,865) (5,865)
Interest rate swaps -- -- -- -- -- 227 227
Exercise of stock options 38,648 39 688 -- -- -- 727
Grant of restricted stock, net of forfeitures 25,574 25 500 -- (525) -- --
Unearned compensation amortization -- -- -- -- 239 -- 239
---------- ------- -------- -------- ----- ------- --------
BALANCE AT DECEMBER 31, 2004 17,375,004 $17,375 $126,977 $ 64,481 $(578) $ 1,036 $209,291
========== ======= ======== ======== ===== ======= ========
See Accompanying Notes to Consolidated Financial Statements.
35
INTEGRA BANK CORPORATION and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
Year Ended December 31,
-----------------------------------
2004 2003 2002
--------- --------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (6,620) $ 17,765 $ 20,328
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Federal Home Loan Bank stock dividends (100) (93) (186)
Amortization and depreciation 8,991 12,300 15,258
Amortization of unearned compensation 239 177 123
Provision for loan losses 1,305 4,945 3,143
Net securities gains (4,477) (3,052) (9,098)
(Gain) loss on sale of premises and equipment 24 24 (156)
Gain on sale of other real estate owned (145) (117) (65)
Gain on sale of loans (1,158) -- --
Loss on low-income housing investments 2,193 286 653
Increase (decrease) in deferred taxes (13,192) 3,724 (9,081)
Net gain on sale of loans held for sale (618) (1,988) (1,014)
Proceeds from sale of loans held for sale 81,352 189,664 173,068
Origination of loans held for sale (81,665) (174,151) (151,681)
(Increase) decrease in other assets 528 2,824 (3,230)
Increase (decrease) in other liabilities 396 (73,403) 71,670
--------- --------- -----------
Net cash flows provided by (used in) operating activities (12,947) (21,095) 109,732
--------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale 209,824 419,893 405,015
Proceeds from sales of securities available for sale 373,630 328,278 988,234
Purchase of securities available for sale (417,778) (777,119) (1,351,661)
(Increase) decrease in loans made to customers 24,892 (98,150) 13,269
Proceeds from sale of loans 7,043 -- --
Purchase of premises and equipment (5,439) (6,568) (4,118)
Proceeds from sale of premises and equipment 5,512 1,513 437
Proceeds from sale of other real estate owned 1,598 1,424 2,661
--------- --------- -----------
Net cash flows provided by (used in) investing activities 199,282 (130,729) 53,837
--------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 83,911 30,682 (146,464)
Termination fee on interest rate swap -- -- (1,904)
Net increase (decrease) in short-term borrowed funds (124,118) 159,302 (1,155)
Proceeds from long-term borrowings 334,003 10,000 --
Repayment of long-term borrowings (470,269) (28,577) (109,499)
Proceeds from trust preferred securities -- 35,568 --
Repayment of trust preferred securities -- (34,500) --
Dividends paid (13,698) (16,261) (16,250)
Proceeds from exercise of stock options 727 20 140
--------- --------- -----------
Net cash flows provided by (used in) financing activities (189,444) 156,234 (275,132)
--------- --------- -----------
Net increase (decrease) in cash and cash equivalents (3,109) 4,410 (111,563)
--------- --------- -----------
Cash and cash equivalents at beginning of year 74,943 70,533 182,096
--------- --------- -----------
Cash and cash equivalents at end of year $ 71,834 $ 74,943 $ 70,533
========= ========= ===========
Consolidated Statements of Cash Flows are continued on the following page.
36
INTEGRA BANK CORPORATION and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(In Thousands)
Year Ended December 31,
---------------------------
2004 2003 2002
------- ------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year:
Interest $48,702 $72,484 $96,482
Income taxes (benefit) (681) (3,340) 37
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
Change in allowance for unrealized (gain)/loss on
securities available for sale $ 9,860 $(3,113) $11,861
Change in deferred taxes attributable to securities
available for sale (3,995) (1,261) 4,807
Change in fair value of derivative hedging instruments -- (2,283) (1,488)
Other real estate acquired in settlement of loans 843 443 2,360
Loans transferred from held for sale to loan portfolio -- -- 23,985
Dividends declared and not paid 2,780 4,068 4,063
See Accompanying Notes to Consolidated Financial Statements.
37
INTEGRA BANK CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and Per Share Data)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Integra Bank Corporation (the "Company") is a bank holding company that is based
in Evansville, Indiana. The Company's principal subsidiary is Integra Bank N.A.,
a national banking association ("Integra Bank" or "Bank"). The Company owns
Integra Reinsurance Company, Ltd. which was formed under the laws of the Turks
and Caicos Islands and the state of Arizona. The Company merged a real estate
holding subsidiary, Twenty-One South East Corporation, into the Company in May
2003. The Company also has a controlling interest in Integra Capital Trust II
and Integra Capital Statutory Trust III, its trust securities affiliates. In
June 2003, the Company dissolved Integra Capital Trust I, when the trust
securities were called and issued new securities through the new affiliate,
Integra Capital Statutory Trust III. The Company provides services and
assistance to its wholly owned subsidiaries and Integra Bank's subsidiaries in
the areas of strategic planning, administration, and general corporate
activities. In return, the Company receives income and/or dividends from Integra
Bank, where most of the Company's activities take place.
Integra Bank provides a wide range of financial services to the communities it
serves in Indiana, Kentucky, Illinois and Ohio. These services include various
types of personal and commercial banking services and products, investment and
trust services and selected insurance services. Specifically, these products and
services include commercial, consumer and mortgage loans, lines of credit,
credit cards, transaction accounts, time deposits, repurchase agreements,
letters of credit, corporate cash management services, correspondent banking
services, mortgage servicing, brokerage and annuity products and services,
credit life and other selected insurance products, securities safekeeping, safe
deposit boxes, online banking, and complete personal and corporate trust
services. Integra Bank also has a 71 percent ownership interest in Total Title
Services, LLC, a provider of residential title insurance.
Integra Bank's products and services are delivered through its customers'
channel of preference. At December 31, 2004, Integra Bank served its customers
through 76 banking centers, 122 automatic teller machines ("ATMs") and three
loan production offices. Integra Bank also serves its customers through its
telephone banking and offers a suite of Internet-based products and services
that can be found at http:\\www.integrabank.com.
Integra Reinsurance Company, Ltd. is an insurance company formed in June 2002
under the laws of the Turks and Caicos Islands as an exempted company for twenty
years under the companies Ordinance 1981. It operates as an alien corporation in
the state of Arizona and as such is subject to the rules and regulations of the
National Association of Insurance Companies ("NAIC"). The company sells only
American United Life Insurance Company's credit life and disability policies and
operates within the Bank's banking center system. Integra Reinsurance Company
began operation in May 2003.
The consolidated financial statements of the Company have been prepared in
conformity with generally accepted accounting principles in the United States.
The following is a description of the Company's significant accounting policies.
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Integra Bank Corporation and its certain subsidiaries. At December 31, 2004, the
Company's subsidiaries included in the consolidated financial statements
consisted of a commercial bank, Integra Bank, and a reinsurance company. In May
2003, the Company merged its property management company into the parent company
and also formed a reinsurance company. In January 2003, the FASB issued
Interpretation ("FIN") No. 46, Consolidation of Variable Interest Entities
("VIEs"). FIN 46 provides that business enterprises that represent the primary
beneficiary of another entity by retaining a controlling financial interest in
that entity's assets, liabilities, and results of operating activities must
consolidate the entity in their financial statements. Prior to the issuance of
FIN 46, consolidation generally occurred when an enterprise controlled another
entity through voting interest. Certain VIEs that are qualifying special purpose
entities subject to the reporting requirements of SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,
will not be required to be consolidated under the provisions of FIN 46. The
consolidation provisions of FIN 46 apply to VIEs created or entered into after
January 31, 2003, and for pre-existing VIEs of the Company beginning July 1,
2003. SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, was issued in May 2003. This
statement establishes guidance for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. As of
July 1, 2003 the Company adopted FIN 46 and SFAS 150 for Integra Statutory
Capital Trust III, by deconsolidating the statutory business trust it created in
June, 2003 to issue additional trust preferred securities that were used to
redeem an earlier issue of trust preferred securities. The Company also
deconsolidated Integra Capital Trust II in accordance with FIN 46. Earlier
periods will have the statutory business trust that issued the trust preferred
securities redeemed included in the consolidated financial statements.
38
All significant intercompany transactions and balances have been eliminated. The
Company and its subsidiaries utilize the accrual basis of accounting. Certain
prior period amounts have been reclassified to conform to the 2004 financial
reporting presentation.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements. Significant estimates which are particularly
susceptible to short-term changes include valuation of the securities portfolio,
the determination of the allowance for loan losses and valuation of real estate
and other properties acquired in connection with foreclosures or in satisfaction
of amounts due from borrowers on loans. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, amounts due from banks,
commercial paper and federal funds sold which are readily convertible to known
amounts of cash. Interest-bearing deposits in banks, regardless of maturity, are
considered short-term investments and included as cash equivalents.
TRUST ASSETS
Property held for customers in fiduciary or agency capacities, other than trust
cash on deposit at Integra Bank, is not included in the accompanying
consolidated financial statements since such items are not assets of the
Company.
SECURITIES
Securities classified as trading are those debt and equity securities that the
Company bought and principally held for the purpose of selling them in the near
future. Gains and losses on sales and fair-value adjustments are included as a
component of net income. The Company does not have securities classified as
trading in any period presented.
Securities classified as held to maturity are those securities the Company has
both the intent and ability to hold to maturity regardless of changes in market
conditions, liquidity needs or changes in general economic conditions. These
securities are carried at cost adjusted for amortization of premium and
accretion of discount, computed by the interest method over their contractual
lives. The Company does not have securities classified as held to maturity in
any period presented.
Securities classified as available for sale are those debt and equity securities
that the Company intends to hold for an indefinite period of time, but not
necessarily to maturity. Any decision to sell a security classified as available
for sale would be based on various factors, including significant movements in
interest rates, changes in the maturity mix of assets and liabilities, liquidity
needs, regulatory capital considerations, and other similar factors. Securities
available for sale are carried at market value. Unrealized gains or losses are
reported as increases or decreases in shareholders' equity, net of the related
deferred tax effect. Realized gains or losses, determined on the basis of the
cost of specific securities sold, are included as a component of net income.
Security transactions are accounted for on a trade date basis.
Declines in the fair value of available for sale securities below their cost
that are deemed to be other than temporary are reflected in earnings as realized
losses. In estimating other than temporary impairment losses, management
considers the length of time and the extent to which the fair value has been
less than cost, the financial condition and near term prospects of the issuer,
and the intent and ability of the Company to retain its investment in the issuer
for a period of time sufficient to allow for any anticipated recovery in fair
value.
LOANS
Loans are stated at the principal amount outstanding, net of unearned income.
Loans held for sale are valued at the lower of aggregate cost or fair value.
Interest income on loans is based on the principal balance outstanding, with the
exception of interest on discount basis loans, computed using a method, which
approximates the effective interest rate. Loan origination fees, certain direct
costs and unearned discounts are amortized as an adjustment to the yield over
the term of the loan. Management endeavors to recognize as quickly as possible
situations where the borrower's repayment ability has become impaired or the
collectability of interest is doubtful or involves more than the normal degree
of risk. Generally, a loan is placed on non-accrual status upon becoming 90 days
past due as to interest or principal (unless both well-secured and in the
process of collection), when the full timely collection of interest or principal
becomes uncertain or when a portion of the principal balance has been
charged-off. Real estate 1 - 4 family loans (both first and junior liens) are
placed on nonaccrual status within 120 days of becoming past due as to interest
or principal, regardless of security. The Company adheres to the standards for
classification and treatment of open and closed-end credit extended to
individuals for household, family and other personal expenditures, and includes
consumer loans and credit cards, that are established by the Uniform Retail
Classification and Account Management Policy (OCC Bulletin 2000-20). At the time
a loan is placed in nonaccrual status, all
39
unpaid accrued interest is reversed and deferred loan fees amortization is
discontinued. When doubt exists as to the collectability of the remaining book
balance of a loan placed in nonaccrual status, any payments received will be
applied to reduce principal to the extent necessary to eliminate such doubt.
Nonaccrual loans are returned to accrual status when, in the opinion of
management, the financial position of the borrower indicates there is no longer
any reasonable doubt as to the timely collectability of interest and principal.
Past due loans are loans that are contractually past due as to interest or
principal payments.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is that amount which, in management's opinion, is
adequate to absorb probable loan losses as determined by management's ongoing
evaluation of the loan portfolio. The evaluation by management is based upon
consideration of various factors including growth of the portfolio, an analysis
of individual credits, adverse situations that could affect a borrower's ability
to repay, prior and current loss experience, the results of recent regulatory
examinations and economic conditions. 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 includes 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 the Company 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 the Statement of Financial Accounting Standards
("SFAS") No. 114, Accounting by Creditors for Impairment of a Loan and overall
did not have a material effect on the balance of the allowance for loan losses.
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.
A review of selected loans (based on loan type and size) is conducted to
identify loans with heightened risk or inherent losses. The primary
responsibility for this review rests with those members of management assigned
accountability for the credit relationship. This review is supplemented with
reviews by the Company's loan review function and regulatory agencies. These
reviews provide information which assists in the timely identification of
problems and potential problems and in deciding whether the credit represents a
probable loss or risk which should be recognized. Where appropriate, an
allocation is made to the allowance for individual loans based on management's
estimate of the borrower's ability to repay the loan given the availability of
collateral, other sources of cash flow and legal options available to the
Company.
Included in the review of individual loans are those that are impaired as
provided in SFAS No. 114. Loans are considered impaired when, based on current
information and events, management considers it probable the Company will not be
able to collect all amounts that are due based on contractual terms. The
allowance established for impaired loans is determined based on the market value
of the investment measured using either the present value of expected cash flows
based on the initial effective interest rate on the loan or the market value of
the collateral if the loan is collateral dependent.
Historical loss ratios are applied to other homogeneous pools of loans, such as
consumer installment and residential real estate loans not subject to specific
allowance allocations. In addition, the allowance reflects other risks affecting
the loan portfolio, such as economic conditions in the bank's geographic areas,
specific industry financial conditions and other factors.
The unallocated portion of the allowance is determined based on management's
assessment of economic conditions and specific economic factors in the
individual markets in which the Company operates.
OTHER REAL ESTATE OWNED
Properties acquired through foreclosure and unused bank premises are initially
recorded at market value, reduced by estimated selling costs and are accounted
for at lower of cost or fair value. The market values of other real estate are
typically determined based on appraisals by independent third parties.
Write-downs of the related loans at or prior to the date of foreclosure are
charged to the allowance for losses on loans. Subsequent write-downs, income and
expense incurred in connection with holding such assets, and gains and losses
realized from the sales of such assets, are included in non-interest income and
expense. At December 31, 2004 and 2003, net other real estate owned was $243 and
$1,341, respectively.
PREMISES AND EQUIPMENT
Land is carried at cost. Premises and equipment, including leasehold
improvements, are stated at cost less accumulated depreciation and amortization.
Depreciation is calculated using the straight-line method based on estimated
useful lives of up to thirty-one and one-half years for premises and three to
ten years for furniture and equipment. Costs of major additions and improvements
are capitalized. Maintenance and repairs are charged to operating expenses as
incurred.
40
INTANGIBLE ASSETS
Costs in excess of market value of net assets acquired consist primarily of
goodwill and core deposit intangibles. The Company assesses goodwill for
impairment annually by applying a fair-value-based test using net present value
of estimated net cash flows. Impairment exists when the net book value of the
reporting unit exceeds its fair value and the carrying amount of the goodwill
exceeds its implied fair value. Other intangible assets represent purchased
assets that also lack physical substance but can be distinguished from goodwill
because of contractual or other legal rights or because the asset is capable of
being sold or exchanged either on its own or in combination with an asset or
liability.
Under the provisions of SFAS 142, Goodwill and Other Intangible Assets, goodwill
is no longer ratably amortized into the income statement over an estimated life,
but rather is tested at least annually for impairment. Intangible assets, which
have finite lives, continue to be amortized over their estimated useful lives
and also continue to be subject to impairment testing. All other intangible
assets have finite lives and are amortized on a straight-line basis over varying
periods not exceeding 15 years.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are generally treated as
collateralized financing transactions and are recorded at the amounts at which
the securities were sold plus accrued interest. Securities, generally U.S.
government and federal agency securities, pledged as collateral under these
financing arrangements cannot be sold or repledged by the secured party. The
market value of collateral provided to a third party is continually monitored
and additional collateral provided, obtained or requested to be returned to the
Company as deemed appropriate.
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights ("MSRs") represent an estimate of the present value of
future cash servicing income, net of estimated costs, the Company expects to
receive on loans sold with servicing retained. MSRs are capitalized as separate
assets when loans are sold and servicing is retained. The carrying value of MSRs
is amortized in proportion to and over the period of, net servicing income and
this amortization is recorded as a reduction to income.
The carrying value of the MSRs asset is periodically reviewed for impairment
based on the fair value of the MSRs, using groupings of the underlying loans by
interest rates and by prepayment characteristics. Any impairment of a grouping
would need to be reported as a valuation allowance. A primary factor influencing
the fair value is the estimated life of the underlying loans serviced. The
estimated life of the loans serviced is significantly influenced by market
interest rates. During a period of declining interest rates, the fair value of
the MSRs should decline due to expected prepayments within the portfolio.
Alternatively, during a period of rising interest rates the fair value of MSRs
should increase as prepayments on the underlying loans would be expected to
decline. On an ongoing basis, management considers all relevant factors to
estimate the fair value of the MSRs to be recorded when the loans are initially
sold with servicing retained.
Servicing rights resulting from loan sales are amortized in proportion to, and
over the period of estimated net servicing revenues. Servicing rights are
assessed for impairment on an ongoing basis, based on market value, with any
impairment recognized through a valuation allowance. For purposes of measuring
impairment, the rights are stratified based on interest rate and original
maturity. Fees received for servicing mortgage loans owned by investors are
based on a percentage of the outstanding monthly principal balance of such loans
and are included in income as loan payments are received. Costs of servicing
loans are charged to expense as incurred. At December 31, 2004 and 2003, the
Company had mortgage servicing rights assets of $2,806 and $2,744, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company maintains an overall interest rate risk management strategy that
incorporates the use of derivative instruments to minimize significant unplanned
fluctuations in earnings and cash flows caused by interest rate volatility. The
Company's interest rate risk management strategy involves modifying the
repricing characteristics of certain assets and liabilities so that changes in
interest rates do not adversely affect the net interest margin and cash flows.
Derivative instruments that the Company may use as part of its interest rate
risk management strategy include interest rate swaps, interest rate floors,
forward contracts and both futures contracts and options on futures contracts.
Interest rate swap contracts are exchanges of interest payments, such as
fixed-rate payments for floating-rate payments, based on a common notional
amount and maturity date. Forward contracts are contracts in which the buyer
agrees to purchase and the seller agrees to make delivery of a specific
financial instrument at a predetermined price or yield. Futures contracts
represent the obligation to buy or sell a predetermined amount of debt subject
to the contract's specific delivery requirements at a predetermined date and a
predetermined price. Options on futures contracts represent the right but not
the obligation to buy or sell. Freestanding derivatives also include derivative
transactions entered into for risk management purposes that do not otherwise
qualify for hedge accounting.
Effective January, 2001, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as
41
amended, which establishes accounting and reporting standards for derivative
instruments and hedging activities and requires recognition of all derivatives
as either assets or liabilities in the statement of financial condition and
measurement of those instruments at fair value. On the date the Company enters
into a derivative contract, the Company designates the derivative instrument as
either a fair value hedge, cash flow hedge or as a freestanding derivative
instrument. For a market value hedge, changes in the market value of the
derivative instrument and changes in the market value of the hedged asset or
liability or of an unrecognized firm commitment attributable to the hedged risk
are recorded in current period net income. For a cash flow hedge, changes in the
market value of the derivative instrument, to the extent that it is effective,
are recorded as a component of accumulated other comprehensive income within
shareholders' equity and subsequently reclassified to net income in the same
period that the hedged transaction impacts net income. For freestanding
derivative instruments, changes in the market values are reported in current
period net income.
Prior to entering a hedge transaction, the Company formally documents the
relationship between hedging instruments and hedged items, as well as the risk
management objective and strategy for undertaking various hedge transactions.
This process includes linking all derivative instruments that are designated as
fair value or cash flow hedges to specific assets and liabilities on the balance
sheet or to specific forecasted transactions along with a formal assessment at
both inception of the hedge and on an ongoing basis as to the effectiveness of
the derivative instrument in offsetting changes in market values or cash flows
of the hedged item. The Company considers hedge instruments with a correlation
from 80% to 120% to be sufficiently effective to qualify as a hedge instrument.
If it is determined that the derivative instrument is no longer highly effective
as a hedge or if the hedge instrument is terminated, hedge accounting is
discontinued and the adjustment to market value of the derivative instrument is
recorded in net income.
The Company previously entered into interest rate swaps to convert floating-rate
liabilities to fixed rates. The liabilities are typically grouped and share the
same risk exposure for which they are being hedged. Gains and losses on
derivative contracts that are reclassified from accumulated other comprehensive
income to current period earnings are included in the line item in which the
hedged item's effect in earnings is recorded.
Free-Standing Derivative Instruments - Derivative transactions that do not
qualify for hedge accounting treatment under FAS 133 would be considered
free-standing derivative instruments. Gains of losses from these instruments
would be marked-to-market on a monthly basis and the impact recorded in net
income. It is the Company's policy not to enter into freestanding derivative
instruments without prior approval from the Asset Liability Committee and
Finance ("ALCO") of the Board of Directors.
INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax return
with each organization computing its taxes on a separate company basis. The
provision for income taxes is based on income as reported in the financial
statements. Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax basis of assets and
liabilities that will result in taxable or deductible amounts in the future. The
deferred tax assets and liabilities are computed based on enacted tax laws and
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to an amount expected to be realized. Income tax expense is
the tax payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities. Investment tax credits are
recorded as a reduction to tax provision in the period for which the credits may
be utilized.
42
STOCK-BASED COMPENSATION
Stock options are accounted for using the intrinsic value method following
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees and related interpretations. Had compensation costs been determined
based on the grant date market values of awards (the method described in SFAS
No. 123, Accounting for Stock-Based Compensation), reported net income and
earnings per common share would have been reduced to the proforma amounts shown
below.
For the Year Ended December 31, 2004 2003 2002
- ------------------------------- ------- ------- -------
Net income (loss):
As reported $(6,620) $17,765 $20,328
Add: Stock-based compensation expense
included in reported net income (loss), net of tax 142 105 73
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of tax 1,210 873 696
------- ------- -------
Proforma $(7,688) $16,997 $19,705
======= ======= =======
Earnings (loss) per share:
Basic
As reported $ (0.38) $ 1.03 $ 1.18
Proforma (0.44) 0.98 1.14
Diluted
As reported $ (0.38) $ 1.03 $ 1.18
Proforma (0.44) 0.98 1.14
The market value of the stock options granted have been estimated using the
Black-Scholes options pricing model with the following weighted average
assumptions.
2004 2003 2002
-------- -------- --------
Number of options granted 304,772 354,946 222,700
Risk-free interest rate 3.97% 3.35% 5.77%
Expected life, in years 7 7 10
Expected volatility 33.16% 33.40% 34.06%
Expected dividend yield 3.13% 5.31% 4.81%
Estimated fair value per option $ 5.89 $ 3.63 $ 4.70
RECENT ACCOUNTING PRONOUNCEMENTS
Emerging Issues Task Force released EITF Issue No. 03-1 - In March 2004, the
Emerging Issues Task Force released EITF Issue No. 03-1, "The Meaning of Other
Than Temporary Impairment and Its Application to Certain Investments" ("EITF
03-1"). EITF 03-1 provides guidance for determining when an investment is other
than temporarily impaired and applies to investments classified as either
Available for sale or Held to maturity under SFAS 115 (including individual
securities and investments in mutual funds), and investments accounted for under
the cost method. In addition, EITF 03-1 contains disclosure requirements for
impairments that have not been recognized as other than temporary. In October
2004, the FASB voted to delay the effective date of the recognition and
measurement provisions related to determining other than temporary impairment on
Available for sale securities. The effective dates for the disclosure
requirements vary depending on the type of investment being considered, however,
all disclosures are now effective.
Management is monitoring the ongoing discussions by the FASB related to the
recognition and measurement provisions mentioned above in order to assess the
potential impact of this guidance on the financial statements of the Company.
In December 2003, the American Institute of Certified Public Accountants
("AICPA") issued "Statement of Position 03-3 "Accounting for Certain Loans or
Debt Securities Acquired in a Transfer" ("SOP 03-3"), that addresses accounting
for differences between contractual cash flows and cash flows expected to be
collected from an investor's initial investment in loans or debt securities
acquired in a transfer if those differences are attributable, at least in part,
to credit quality. SOP 03-3 does not apply to loans originated by the Company.
SOP 03-3 limits the accretable yield to the excess of the investor's estimate of
undiscounted expected principal, interest, and other cash flows (expected at
acquisition to be collected) over the investor's initial investment in the loan
and it prohibits "carrying over" or creating a valuation allowance for the
excess of contractual cash flows over cash flows expected to be collected in the
initial accounting of a loan acquired in a transfer. SOP 03-3 is effective for
loans acquired in fiscal years beginning
43
after December 15, 2004. Adoption of SOP 03-3 is not expected to have a material
impact on the Company's financial condition or results of operations.
In December 2004, the FASB issued Statement No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123(R)"), which requires the cost resulting from stock
options be measured at fair value and recognized in earnings. This Statement
replaces Statement No. 123, "Accounting for Stock-Based Compensation" and
supersedes Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," which permitted the recognition of compensation expense
using the intrinsic value method. SFAS No. 123(R) will be effective July 1,
2005. We estimate that the impact of adoption of SFAS No. 123(R) will
approximate the impact of the adjustments made to determine pro forma net income
and pro forma earnings per share under Statement No. 123. The Company plans to
adopt SFAS No. 123(R) on July 1, 2005 and is currently analyzing the transition
method that will be used.
NOTE 2. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income (loss) for the year
by the weighted average number of shares outstanding. Diluted earnings per share
is computed as above, adjusted for the dilutive effects of stock options and
restricted stock. Weighted average shares of common stock have been increased
for the assumed exercise of stock options with proceeds used to purchase
treasury stock at the average market price for the period.
The following provides a reconciliation of basic and diluted earnings per share:
For the Year Ended December 31, 2004 2003 2002
- ------------------------------- ------- ------- -------
Net income (loss) $(6,620) $17,765 $20,328
Weighted average shares outstanding - Basic 17,318 17,285 17,276
Stock option adjustment -- 10 7
Restricted stock adjustment -- 5 --
------- ------- -------
Average shares outstanding - Diluted 17,318 17,300 17,283
======= ======= =======
Earnings per share-Basic $ (0.38) $ 1.03 $ 1.18
Effect of stock options -- -- --
------- ------- -------
Earnings per share - Diluted $ (0.38) $ 1.03 $ 1.18
======= ======= =======
Options to purchase 1,058 shares, 1,095 shares and 667 shares were outstanding
at December 31, 2004, 2003 and 2002, respectively, were not included in the
computation of net income per diluted share because the exercise price of these
options was greater than the average market price of the common shares, and
therefore, the effect would be antidilutive.
Average shares outstanding were used in calculating both basic and diluted
earnings per share for 2004. In a loss situation, as was experienced in 2004,
the effect of any stock options or restricted stock would be antidilutive. For
2004 the antidilutive amount of the stock options was 64,000 shares and the
restricted stock was 18,000 shares.
44
NOTE 3. SECURITIES
On December 31, 2004 and 2003, the Company held only available for sale
securities. Amortized cost and market value of securities classified as
available for sale are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
December 31, 2004:
U.S. Government agencies $ 1,100 $ 3 $ 8 $ 1,095
Mortgage-backed securities 230,843 916 1,074 230,685
Collateralized Mortgage Obligations 411,925 130 4,929 407,126
States & political subdivisions 93,520 4,298 5 97,813
Other securities 61,926 2,841 427 64,340
-------- ------- ------ --------
Total $799,314 $ 8,188 $6,443 $801,059
======== ======= ====== ========
December 31, 2003:
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
Other securities 62,527 3,395 425 65,497
-------- ------- ------ --------
Total $962,506 $15,131 $3,526 $974,111
======== ======= ====== ========
The amortized cost and fair value of the securities as of December 31, 2004, by
contractual maturity, except for mortgage-backed securities and collateralized
mortgage obligations which are based on estimated average lives, are shown
below. Expected maturities may differ from contractual maturities in
mortgage-backed securities, because certain mortgages may be called or prepaid
without penalties.
Maturity of securities available for sale:
Less than 1 Year 1 - 5 Years 5 - 10 Years Over 10 Years
Maturity Maturity Maturity Maturity Total
---------------- ---------------- ---------------- ----------------- ----------------
(In thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- -------- ----- -------- ----- -------- ------ -------- -----
U. S. Government agencies $ -- -- $ 649 3.92% $ 451 4.17% $ -- -- $ 1,100 4.02%
Mortgage-backed securities -- -- 123,242 4.49% 105,785 4.33% 1,816 3.90% 230,843 4.41%
Collateralized Mortgage
Obligations 2,500 4.06% 263,474 3.94% 145,951 4.38% -- -- 411,925 4.10%
States & political subdivisions 3,752 7.88% 17,216 7.62% 37,097 7.76% 35,455 10.32% 93,520 8.71%
Other securities -- -- -- -- -- -- 61,926 7.37% 61,926 7.37%
------ ---- -------- ---- -------- ---- -------- ----- -------- ----
Amortized Cost $6,252 6.35% $404,581 4.26% $289,284 4.79% $ 99,197 8.36% $799,314 4.98%
====== ==== ======== ==== ======== ==== ======== ==== ======== ====
Fair Value $6,272 $401,773 $289,501 $103,513 $801,059
====== ======== ======== ======== ========
Note: The yield is calculated on a 35 percent federal-tax-equivalent basis
Securities available for sale realized gains and (losses) are summarized as
follows:
2004 2003 2002
------- ------ ------
Gross realized gains $ 5,635 $3,079 $9,196
Gross realized losses (1,158) (27) (98)
------- ------ ------
Total $ 4,477 $3,052 $9,098
======= ====== ======
Securities with unrealized losses not recognized in income are as follows:
45
Less Than 12 Months 12 Months or More Total
----------------------- ----------------------- -----------------------
Unrealized Unrealized Unrealized
December 31, 2004 Fair Value Losses Fair Value Losses Fair Value Losses
- ----------------- ---------- ---------- ---------- ---------- ---------- ----------
U.S. Government agencies $ 694 $ 8 $ -- $ -- $ 694 $ 8
Mortgage-backed securities 144,871 1,014 1,755 60 146,626 1,074
Collateralized Mortgage Obligations 268,533 2,983 83,813 1,946 352,346 4,929
State & political subdivisions 1,098 5 -- -- 1,098 5
Other securities 20,867 427 -- -- 20,867 427
-------- ------ ------- ------ -------- ------
Total $436,063 $4,437 $85,568 $2,006 $521,631 $6,443
======== ====== ======= ====== ======== ======
Less Than 12 Months 12 Months or More Total
----------------------- ----------------------- -----------------------
Unrealized Unrealized Unrealized
December 31, 2003 Fair Value Losses Fair Value Losses Fair Value Losses
- ----------------- ---------- ---------- ---------- ---------- ---------- ----------
U.S. Government agencies $ 248 $ 2 $ -- $ -- $ 248 $ 2
Mortgage-backed securities 44,884 314 -- -- 44,884 314
Collateralized Mortgage Obligations 224,885 2,474 -- -- 224,885 2,474
State & political subdivisions 1,328 3 2,692 308 4,020 311
Other securities 12,081 287 2,862 138 14,943 425
-------- ------ ------ ---- -------- ------
Total $283,426 $3,080 $5,554 $446 $288,980 $3,526
======== ====== ====== ==== ======== ======
The Company does not believe any individual unrealized loss as of December 31,
2004 represents an other than temporary impairment. Factors considered include
whether the securities are backed by the U.S. Government or its agencies and
concerns surrounding the recovery of full principal. The Company has both the
intent and the ability to hold these securities for the time necessary to
recover the amortized cost. The securities are of high credit quality, and the
Company expects to receive its recorded investment.
At December 31, 2004 and 2003, the carrying value of securities pledged to
secure public deposits, trust funds, repurchase agreements and FHLB advances was
$424,952 and $605,971, respectively.
NOTE 4. LOANS
A summary of loans as of December 31, follows:
2004 2003
---------- ----------
Commercial
Commercial, industrial and
agricultural loans $ 563,382 $ 586,159
Economic development loans and
other obligations of state and
political subdivisions 13,195 20,951
Lease financing 5,731 6,796
---------- ----------
Total commercial 582,308 613,906
Commercial real estate
Commercial mortgages 224,066 238,261
Construction and development 72,517 53,108
---------- ----------
Total commercial real estate 296,583 291,369
Residential mortgages 456,007 477,895
Home equity 143,037 132,101
Consumer loans 187,395 184,426
---------- ----------
Total loans 1,665,330 1,699,697
Less: unearned income 6 9
---------- ----------
Loans, net of unearned income $1,665,324 $1,699,688
========== ==========
46
A summary of non-performing loans, including those classified as loans held for
sale, as of December 31 follows:
2004 2003 2002
------- ------- -------
Nonaccrual $17,971 $15,725 $20,010
90 days past due 576 2,566 2,367
------- ------- -------
Total non-performing loans $18,547 $18,291 $22,377
======= ======= =======
The following table presents data on impaired loans at December 31:
2004 2003 2002
------- ------- -------
Impaired loans for which there is a related allowance for loan losses $ 4,241 $ 6,726 $ 8,807
Impaired loans for which there is no related allowance for loan losses 13,730 10,080 13,079
------- ------- -------
Total impaired loans $17,971 $16,806 $21,886
======= ======= =======
Allowance for loan losses for impaired loans
included in the allowance for loan losses $ 2,482 $ 3,112 $ 4,186
Average recorded investment in impaired loans 19,224 18,043 20,855
Interest income recognized from impaired loan 58 110 --
Cash basis interest income recognized from impaired loans 109 98 198
There are no unused commitments available on any impaired loans.
The amount of loans serviced by the Company for the benefit of others is not
included in the accompanying Consolidated Balance Sheets. The amount of unpaid
principal balances of these loans was $304,292, $290,830, and $198,570 as of
December 31, 2004, 2003 and 2002, respectively.
NOTE 5. RELATED PARTY TRANSACTIONS
In the normal course of business, Integra Bank makes loans to its executive
officers and directors and to companies and individuals affiliated with officers
and directors of Integra Bank and the Company. The activity in these loans
during 2004 is as follows:
2004 2003
------- -------
Balance as of January 1 $ 3,795 $ 2,761
New loans 2,235 2,298
Repayments (2,805) (1,869)
Director and officer changes -- 605
------- -------
Balance as of December 31 $ 3,225 $ 3,795
======= =======
The balance of related party deposits as of December 31 $11,702 $ 3,705
======= =======
NOTE 6. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows during the three years
ended December 31:
2004 2003 2002
------- ------- -------
Balance at beginning of year $25,403 $24,632 $23,868
Loans charged to allowance (4,858) (6,510) (5,709)
Recoveries credited to allowance 2,319 2,336 3,330
------- ------- -------
Net charge-offs (2,539) (4,174) (2,379)
Provision for loan losses 1,305 4,945 3,143
Allowance related to loans sold (299) -- --
Reclassification of allowance related to unfunded commitments
to other liabilities (76) -- --
------- ------- -------
Balance at end of year $23,794 $25,403 $24,632
======= ======= =======
47
NOTE 7. PREMISES AND EQUIPMENT
Premises and equipment as of December 31 consist of:
2004 2003
------- --------
Land $ 5,837 $ 5,956
Buildings and lease improvements 61,916 60,439
Equipment 26,267 29,716
Construction in progress 2,415 5,234
------- --------
Total cost 96,435 101,345
Less accumulated depreciation 46,202 46,782
------- --------
Net premises and equipment $50,233 $ 54,563
======= ========
Depreciation and amortization expense for 2004, 2003 and 2002 was $4,240,
$4,060, and $4,265 respectively.
NOTE 8. INTANGIBLE ASSETS
December 31, 2004 December 31, 2003
---------------------------------- ----------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
-------- ------------ -------- -------- ------------ --------
Goodwill (Non-amortizing) $44,839 $ -- $44,839 $44,839 $ -- $44,839
Core deposits (Amortizing)
17,080 (8,383) 8,697 17,080 (6,771) 10,309
------- ------- ------- ------- ------- -------
Total intangible assets $61,919 $(8,383) $53,536 $61,919 $(6,771) $55,148
======= ======= ======= ======= ======= =======
Amortization expense for core deposit intangibles for 2004, 2003 and 2002 was
$1,612, $1,619 and $1,619, respectively. There were no valuation impairments for
goodwill or core deposit intangibles for 2004 or 2003.
Estimated intangible asset amortization expense for each of the succeeding years
is as follows:
Year ending December 31,
- ------------------------
2005 933
2006 933
2007 933
2008 933
2009 933
Thereafter 4,034
NOTE 9. MORTGAGE SERVICING RIGHTS
A summary of capitalized Mortgage Servicing Rights ("MSRs") at December 31,
which are included in other assets follows:
2004 2003 2002
------ ------ ------
Balance at beginning of year $2,744 $1,440 $ 726
Amount capitalized 751 1,673 1,062
Amount amortized (689) (498) (219)
Change in valuation allowance -- 129 (129)
------ ------ ------
Balance at end of year $2,806 $2,744 $1,440
====== ====== ======
An increase in prepayment speeds of 10% and 20% variations may result in a
decline in fair value of $84 and $164, respectively. Also, the effect of a
variation in a particular assumption on the fair value of the MSRs is calculated
independently without changing any other assumption. In reality, changes in one
factor may result in changes in another (for example, changes in mortgage
interest rates, which drive changes in prepayment rate estimates, could result
in changes in the discount rates), which might magnify or counteract the
sensitivities. There was no valuation reserve at December 31, 2004.
48
NOTE 10. DEPOSITS
As of December 31, 2004, the scheduled maturities of time deposits are as
follows:
2005 $584,751
2006 119,946
2007 65,429
2008 21,168
2009 and thereafter 27,180
--------
Total $818,474
========
The Company had $7,096 in brokered deposits at December 31, 2004 and none at
December 31, 2003.
NOTE 11. INCOME TAXES
The components of income tax expense for the three years ended December 31 are
as follows:
2004 2003 2002
-------- ------- -------
Federal:
Current $ (2,988) $ 3,472 $(4,462)
Deferred (9,879) (3,254) 8,149
-------- ------- -------
Total (12,867) 218 3,687
-------- ------- -------
State:
Current $ 1,389 $ 310 $ (841)
Deferred (3,313) (470) 932
-------- ------- -------
Total (1,924) (160) 91
-------- ------- -------
Total income taxes (benefit) $(14,791) $ 58 $ 3,778
======== ======= =======
The portion of the tax provision relating to net realized securities gains
amounted to $1,814, $1,237, and $3,687 for 2004, 2003 and 2002, respectively.
A reconciliation of income taxes in the statement of income, with the amount
computed by applying the statutory rate of 35%, is as follows:
2004 2003 2002
-------- ------- -------
Federal income tax computed at the statutory rates $ (7,494) $ 6,238 $ 8,437
Adjusted for effects of:
Tax exempt interest (1,939) (2,633) (3,007)
Nondeductible expenses 321 342 424
Low income housing credit (2,625) (2,386) (1,042)
Cash surrender value of life insurance policies (542) (626) (657)
Dividend received deduction (253) (530) (532)
Reduction of valuation allowance -- (330) --
State taxes, net of Federal benefit (1,251) (104) 59
Other differences (1,008) 87 96
-------- ------- -------
Total income taxes $(14,791) $ 58 $ 3,778
======== ======= =======
49
The tax effects of principal temporary differences are shown in the following
table:
December 31, 2004 2003
- ------------ -------- --------
Allowance for loan losses $ 9,070 $ 9,684
Low income housing credits 7,410 4,785
Net operating loss carryforward 10,732 1,332
Unrealized gain (loss) on hedging -- 155
Writedown on loans held for sale 846 1,111
Other, net 2,114 578
-------- --------
Total deferred tax assets 30,172 17,645
Direct financing and leveraged leases (5,778) (5,930)
FHLB dividend (1,579) (1,541)
Mortgage servicing rights (1,070) (1,046)
Partnership income (968) (999)
Premises and equipment (2,292) (2,549)
Purchase accounting adjustments (919) (1,051)
Unrealized gain (loss) on securities available for sale (707) (4,703)
-------- --------
Total deferred tax liabilities (13,313) (17,819)
-------- --------
Net deferred tax asset (liability) $ 16,859 $ (174)
======== ========
The Company has, in its judgement, made reasonable assumptions relating to the
realization of deferred tax assets. Based upon these assumptions, the Company
has determined that no valuation allowance is required with respect to the
deferred tax assets.
NOTE 12. SHORT-TERM BORROWINGS
Information concerning short-term borrowings for the years ended December 31 was
as follows:
2004 2003
-------- --------
Federal funds purchased $ 55,700 $ 51,000
Securities sold under agreements to repurchase 74,194 195,372
Short-term Federal Home Loan Bank advances 45,039 3,606
Other short-term borrowed funds -- 4,000
-------- --------
Total short-term borrowed funds $174,933 $253,978
======== ========
A summary of selected data related to short-term
borrowed funds follows:
Average amount outstanding $170,295 $221,512
Maximum amount at any month-end 239,654 288,832
Weighted average interest rate:
During year 1.30% 1.18%
End of year 1.90% 1.05%
At December 31, 2004, the Company had $244,000 available from unused federal
funds purchased lines. In addition, the Company has an unsecured line of credit
available which permits it to borrow up to $15,000 at variable rates adjusted
daily to the effective Federal Fund rate, through July 26, 2005. At December 31,
2004, $15,000 remained available for future use. At December 31, 2004, the
Company was in compliance with all debt covenants associated with short-term
borrowings.
50
NOTE 13. LONG-TERM BORROWINGS
Long-term borrowings at December 31 consist of the following:
2004 2003
-------- --------
FHLB Advances
Convertible advances (weighted average rate of 6.10% as of December 31, 2003) $ -- $412,000
Fixed maturity advances (weighted average rate
of 2.26% and 6.57% as of December 31, 2004 and 2003, respectively) 215,000 55,000
Amortizing and other advances (weighted average rate of 5.85% and 5.93% as
of December 31, 2004 and 2003, respectively) 6,653 14,202
-------- --------
Total FHLB Advances 221,653 481,202
Securities sold under repurchase agreements with maturities
at various dates through 2008 (weighted average fixed rate of 3.85% and
4.79% as of December 31, 2004 and 2003, respectively) 160,000 85,000
Notes payable, secured by equipment, with a fixed interest rate of 7.26%,
due at various dates through 2012 7,581 8,371
Subordinated debt, unsecured, with a floating interest rate equal to three-
month LIBOR plus 3.25%, with a maturity date of April 24, 2013 10,000 10,000
Subordinated debt, unsecured, with a floating interest rate equal to three-
month LIBOR plus 2.85%, with a maturity date of April 7, 2014 4,000 --
Floating Rate Capital Securities, with an interest rate equal to six-month
LIBOR plus 3.75%, with a maturity date of July 25, 2031, and callable
effective July 16, 2011 18,557 18,557
Floating Rate Capital Securities, with an interest rate equal to three-month
LIBOR plus 3.10%, with a maturity date of June 26, 2033 and callable
effective June 25, 2008 35,568 35,568
-------- --------
Total long-term borrowings $457,359 $638,698
======== ========
Aggregate maturities required on long-term borrowings at December 31, 2004 are
due in future years as follows:
2005 $ 850
2006 199,177
2007 115,102
2008 68,208
2009 2,517
Thereafter 71,505
--------
Total principal payments $457,359
========
During the first quarter of 2004, the Company prepaid $467,000 in long-term
Federal Home Loan Banks ("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. As a
result of the prepayment of long-term FHLB advances, the Company incurred debt
prepayment expenses of $56,998 in 2004. In 2003, the Company prepaid $15,000 in
long-term FHLBs advances and incurred debt prepayment expenses of $1,243.
Included in long-term borrowings is $160,000 of national market repurchase
agreements with original maturity dates of greater than one year.
The Company borrows these funds under a master repurchase agreement. The Company
must maintain collateral with a value equal to 105% of the repurchase price of
the securities transferred. As originally issued, the Company's repurchase
agreement counterparty
51
had an option to put the collateral back to the Company at the repurchase price
on a specified date.
Also included in long-term borrowings are $221,653 in FHLB advances to fund
investments in mortgage-backed securities, loan programs and to satisfy certain
other funding needs. The Company must pledge collateral in the form of
mortgage-backed securities and mortgage loans to secure these advances. At
December 31, 2004, the Company had an adequate amount of mortgage-backed
securities and mortgage loans to satisfy the collateral requirements associated
with these borrowings. At December 31, 2004, the amount of the mortgage loans
pledged as collateral totaled $348,167.
In June 2003, the Company issued through a subsidiary, Integra Capital Statutory
Trust III, $34,500 of floating rate capital securities with a variable interest
rate of 3.10% plus 3-month LIBOR. Issuance costs of $1,045 were paid by the
Company and are being amortized over the life of the securities. The securities
mature in 2033. The Company has the right to call these securities at par
effective June 25, 2008.
In July 2001, the Company issued $18,000 of Floating Rate Capital Securities as
a participant in a Pooled Trust Preferred Fund through a subsidiary, Integra
Capital Trust II. The trust preferred securities have a liquidation amount of
$1,000 per security with a variable per annum rate equal to six-month LIBOR plus
3.75% with interest payable semiannually. The issue matures on July 25, 2031.
Issuance costs of $581 were paid by the Company and are being amortized over the
life of the securities. The Company has the right to call these securities at
par effective July 16, 2011.
The principal assets of each trust subsidiary are subordinated debentures of the
Company. The subordinated debentures bear interest at the same rate as the
related trust preferred securities and mature on the same dates. The obligations
of the Company with respect to the trust preferred securities constitute a full
and unconditional guarantee by the Company of the trusts' obligations with
respect to the securities.
Subject to certain exceptions and limitations, the Company may, from time to
time, defer subordinated debenture interest payments, which would result in a
deferral of distribution payments on the related trust preferred securities and,
with certain exceptions, prevent the Company from declaring or paying cash
distributions on the Company's common stock or debt securities that rank junior
to the subordinated debenture.
At December 31, 2004, the Company was in compliance with all debt covenants
associated with long-term borrowings.
NOTE 14. SHAREHOLDERS' EQUITY
On July 18, 2001, the Company adopted a Shareholder Rights Plan. Under the Plan,
rights were distributed at the rate of one right for each share held by
shareholders of record as of the close of business on July 30, 2001. Initially,
each right will entitle shareholders to buy one one-hundredth of a share of
preferred stock at a purchase price of $75.
The rights generally will be exercisable only if a person or group acquires 15%
or more of the Company's common stock or commences a tender or exchange offer
which, upon consummation, would result in a person or group owning 15% or more
of the Company's common stock. In such event, each right not owned by such
person or group will entitle its holder to purchase at the then current purchase
price, shares of common stock (or their equivalent) having a value of twice the
purchase price. Under certain circumstances, the rights are exchangeable for
shares or are redeemable at a price of one cent per right. The rights will
expire on July 18, 2011.
On September 15, 2004, the Company executed an amendment (the "Amendment") to
the rights agreement. The Amendment amended the rights agreement to eliminate
the continuing director or so-called "dead-hand" provisions. Previously, these
provisions prevented the Company from taking certain actions under the rights
agreement (such as amending the rights agreement or, in some cases, redeeming
the rights) without approval from a majority of the "Continuing Directors."
"Continuing Director" was defined generally to mean any director of the Company
who was not an Acquiring Person or an Affiliate or Associate of an Acquiring
Person (as those terms are defined in the rights agreement) and who either (1)
was a director on July 18, 2001, or (2) subsequently became a director and whose
nomination for election or election was recommended or approved by a majority of
the Continuing Directors then serving on the Board of Directors. As a result of
the Amendment, actions which previously required approval by a majority of the
Continuing Directors now instead require approval solely by the Board of
Directors of the Company.
NOTE 15. REGULATORY MATTERS
Integra Bank is required by the Board of Governors of the Federal Reserve System
to maintain reserve balances in the form of vault cash or deposits with the
Federal Reserve Bank of St. Louis based on specified percentages of certain
deposit types, subject to various adjustments. At December 31, 2004, the net
reserve requirement totaled $7,354. The Bank was in compliance with all cash
reserve requirements as of December 31, 2004.
52
The Company and Integra Bank are subject to various regulatory capital
requirements administered by federal and state banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
materially adverse effect on the Company's financial condition. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action, a
bank must meet specific capital guidelines that involve quantitative measures of
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. Capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and Integra Bank to maintain minimum amounts and ratios (set
forth in the following table) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). As of December 31, 2004, the Company
and Integra Bank met all capital adequacy requirements to which they were
subject.
As of December 31, 2004, the most recent notification from the federal and state
regulatory agencies categorized Integra Bank as well capitalized. Integra Bank
must maintain the minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes has changed the categorization
of Integra Bank.
The amount of dividends which the Company's subsidiaries may pay is governed by
applicable laws and regulations. For Integra Bank, prior regulatory approval is
required if dividends to be declared in any year would exceed net earnings of
the current year (as defined under the National Banking Act) plus retained net
profits for the preceding two years. As of December 31, 2004, Integra Bank has
retained earnings available for distribution in the form of dividends to the
Company without prior regulatory approval.
The following table presents the actual capital amounts and ratios for the
Company, on a consolidated basis, and Integra Bank:
Minimum Ratios For Minimum Capital
Capital Ratios To Be
Actual Adequacy Purposes: Well Capitalized
---------------- ------------------ ----------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- -----
As of December 31, 2004
Total Capital (to Risk Weighted Assets)
Consolidated $242,042 12.56% $154,195 8.00% N/A N/A
Integra Bank 230,636 12.01% 153,574 8.00% $191,967 10.00%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated $202,715 10.52% $ 77,098 4.00% N/A N/A
Integra Bank 206,766 10.77% 76,787 4.00% $115,180 6.00%
Tier 1 Capital (to Average Assets)
Consolidated $202,715 7.64% $106,139 4.00% N/A N/A
Integra Bank 206,766 7.86% 105,160 4.00% $131,450 5.00%
As of December 31, 2003
Total Capital (to Risk Weighted Assets)
Consolidated $257,102 13.13% $156,606 8.00% N/A N/A
Integra Bank 247,838 12.74% 155,592 8.00% $194,490 10.00%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated $222,621 11.37% $ 78,303 4.00% N/A N/A
Integra Bank 223,513 11.49% 77,796 4.00% $116,694 6.00%
Tier 1 Capital (to Average Assets)
Consolidated $222,621 7.64% $116,490 4.00% N/A N/A
Integra Bank 223,513 7.70% 116,140 4.00% $145,174 5.00%
NOTE 16. STOCK OPTION PLAN AND AWARDS
The Company's 2003 Stock Option and Incentive Plan currently reserves shares of
common stock for issuance as incentive awards to directors and key employees of
the Company. Awards may be incentive stock options, non-qualified stock options,
restricted shares, performance shares and performance units. The Company's 1999
Stock Option and Incentive Plan provided for incentive stock
53
options and non-qualified stock options. All options granted under the current
plans or any predecessor (the "Plans") are required to be exercised within ten
years of the date granted. The exercise price of options granted under the Plans
cannot be less than the market value of the common stock on the date of grant.
Under the Plans, at December 31, 2004, there were 588,743 shares available for
the granting of additional awards.
In 1999, the Company also granted non-qualified options to purchase 31,500
shares of common stock at an exercise price of $25.83, outside of the Plans, in
connection with the employment of its Chairman and CEO. Such options are vested
and must be exercised within ten years. At December 31, 2004, all 31,500 options
remained outstanding.
A summary of the status of the options granted under the Plans by the Company as
of December 31, 2004, 2003 and 2002, and changes during the years ending on
those dates is presented below:
2004 2003 2002
---------------------------- ---------------------------- ---------------------------
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
---------- ---------------- ---------- ---------------- --------- ----------------
Options outstanding, beginning of year 1,086,377 $21.20 773,472 $22.73 697,285 $24.65
Options granted 304,772 20.45 354,946 17.75 222,700 19.61
Options exercised (38,648) 18.82 (1,000) 19.69 (7,333) 19.11
Options forfeited (124,849) 21.07 (41,041) 19.97 (139,180) 27.52
---------- ------ ---------- ------ --------- ------
Options outstanding, end of year 1,227,652 $21.10 1,086,377 $21.20 773,472 $22.73
========== ====== ========== ====== ========= ======
Options exercisable 584,038 530,594 378,610
Weighted-average fair value of options
granted during the year $ 5.89 $ 3.63 $ 4.70
All options granted prior to 1999 vested one year from the grant date.
Subsequent grants from the 1999 Plan, except the special grant noted above, vest
one-third in each year following the date of the grant. As of December 31, 2004,
all options granted from the 2003 Plan vest two years from the date of the
grant.
The following table summarizes information about options granted under the Plans
that were outstanding at December 31, 2004.
Weighted Average
Range of Remaining
Exercise Number Weighted Average Contractual Life Number Weighted Average
Price Outstanding Exercise Price (in years) Exercisable Exercise Price
- -------------- ----------- ---------------- ---------------- ----------- ----------------
$15.75 - 20.00 497,970 $18.24 7.7 152,395 $18.81
20.01 - 23.50 575,034 21.46 7.5 276,995 22.54
23.51 - 26.00 102,700 25.47 4.9 102,700 25.47
26.01 - 38.00 51,948 35.97 3.3 51,948 35.97
--------- ------ --- ------- ------
1,227,652 $21.10 7.2 584,038 $23.27
========= ====== === ======= ======
The 2003 Plan permits the award of up to 300,000 shares of restricted stock.
Prior to 2003, the Company made awards of restricted stock outside of any plan.
The shares vest equally over a three-year period. Unvested shares are subject to
certain restrictions and risk of forfeiture by the participants. A summary of
the status of the restricted stock granted by the Company as of December 31,
2004, 2003 and 2002, and changes during the years ending on those dates is
presented below:
2004 2003 2002
Shares Shares Shares
-------- ------- -------
Restricted shares outstanding, beginning of year 23,748 10,668 16,000
Shares granted 27,326 18,414 --
Shares vested (11,222) (5,334) (5,332)
Shares forfeited (1,752) -- --
-------- ------- -------
Restricted shares outstanding, end of year 38,100 23,748 10,668
======== ======= =======
Weighted-average fair value per share
at date of grant $ 20.35 $ 17.48 $ --
Compensation expense (in thousands) $ 239 $ 177 $ 123
54
NOTE 17. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table reflects a comparison of the carrying amounts and fair
values of financial instruments of the Company at December 31:
2004 2003
----------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Financial Assets:
Cash and short-term investments $ 71,834 $ 71,834 $ 74,943 $ 74,943
Loans held for sale (at lower of cost or market) 1,173 1,173 242 242
Securities available for sale 801,059 801,059 974,111 974,111
Regulatory stock 32,975 32,975 32,875 32,875
Loans-net of allowance 1,641,530 1,720,490 1,674,285 1,763,741
Mortgage servicing rights 2,806 3,154 2,744 2,964
Interest rate swap agreement $ 53 $ 53 $ -- $ --
Financial Liabilities:
Deposits $1,896,541 $1,900,337 $1,812,630 $1,760,579
Short-term borrowings 174,933 174,854 253,978 253,977
Long-term borrowings 457,359 465,238 638,698 697,521
Interest rate swap agreements $ (448) $ (448) $ 703 $ 703
The above fair value information was derived using the information described
below for the groups of instruments listed. It should be noted the fair values
disclosed in this table do not represent fair values of all assets and
liabilities of the Company and, thus, should not be interpreted to represent a
market or liquidation value for the Company.
CASH AND SHORT-TERM INVESTMENTS
Cash and short-term investments include cash and due from banks,
interest-bearing deposits in banks, short-term money market investments, and
federal funds sold. For cash and other short-term investments, the carrying
amount is a reasonable estimate of fair value.
LOANS HELD FOR SALE
These instruments are carried in the consolidated statements of financial
position at the lower of cost or fair value. The fair values are based on quoted
market prices of similar instruments.
SECURITIES
For securities, fair value equals quoted market price, if available. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities. Fair values for nonmarketable equity securities
are equal to cost, as there is no readily determinable fair value. The carrying
amount of accrued interest receivable approximates fair value.
LOANS
The fair value of loans is estimated by discounting expected future cash flows
using market rates of like maturity.
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights are stratified based on guarantor original maturity
and interest rate. Servicing rights are carried at the lower of cost or market
by strata and are amortized in proportion to and over the period of estimated
servicing income. Management evaluates the recoverability of the servicing
rights in relation to the impact of actual and anticipated loan portfolio
prepayment, foreclosure and delinquency experience.
DEPOSITS
The fair value of demand deposits, savings accounts, money market deposits, and
variable rate certificates of deposit is the amount payable on demand at the
reporting date. The fair value of other time deposits is estimated by
discounting future cashflows using market rates currently offered for debt with
similar expected maturities. The carrying amount of accrued interest payable
approximates fair value.
SHORT-TERM BORROWINGS
The carrying amounts of Federal funds purchased and sweep accounts approximate
their fair value. The fair value of other short-term
55
borrowings is estimated by discounting future cash flows using market rates with
similar terms and maturities. The carrying amount of accrued interest payable
approximates fair value.
LONG-TERM BORROWINGS
The fair value of long-term borrowings is estimated by discounting future
cashflows using market rates with similar terms and maturities. The carrying
amount of accrued interest payable approximates fair value.
DERIVATIVE INSTRUMENTS
The fair value of interest rate swap agreements is based on dealer estimates.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair value of
guarantees and letters of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle the
obligations with the counterparties at the reporting date. Because all
commitments and standby letters of credit reflect current fees and interest
rates, no unrealized gains or losses are reflected in the summary of fair
values.
NOTE 18. COMMITMENTS, CONTINGENCIES, AND CREDIT RISK
The Company is committed under various operating leases for premises and
equipment. Future minimum rentals for lease commitments having initial or
remaining non-cancelable lease terms in excess of one year are as follows:
Year Ending December 31,
- ------------------------
2005 $ 2,129
2006 2,084
2007 1,874
2008 1,470
2009 1,298
Thereafter 10,065
-------
Total $18,920
Rental expense for these operating leases totaled $1,694, $1,715, and $1,610 in
2004, 2003 and 2002, respectively.
Most of the business activity of the Company and its subsidiaries is conducted
with customers located in the immediate geographic area of their offices. These
areas are comprised of Indiana, Illinois, Kentucky, and Ohio. The Company
maintains a diversified loan portfolio which contains no concentration of credit
risk from borrowers engaged in the same or similar industries exceeding 10% of
total loans.
Integra Bank evaluates each credit request of their customers in accordance with
established lending policies. Based on these evaluations and the underlying
policies, the amount of required collateral (if any) is established. Collateral
held varies but may include negotiable instruments, accounts receivable,
inventory, property, plant and equipment, income producing properties,
residential real estate and vehicles. Integra Bank's access to these collateral
items is generally established through the maintenance of recorded liens or, in
the case of negotiable instruments, possession.
The Company and its subsidiaries are parties to legal actions which arise in the
normal course of their business activities. In the opinion of management, the
ultimate resolution of these matters is not expected to have a materially
adverse effect on the financial position or on the results of operations of the
Company and its subsidiaries.
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the balance sheet. The
contractual or notional amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss, in the event of nonperformance by the
counter party to the financial instrument for commitments to extend credit and
standby letters of credit, is represented by the contractual notional amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for other on-balance sheet
instruments. Financial instruments whose contract amounts represent credit risk
at December 31, 2004, follows:
56
Ranges of Rates
Variable Rate Fixed Rate Total on Fixed Rate
Commitment Commitment Commitment Commitments
------------- ---------- ---------- ---------------
Commitments to extend credit $371,477 $27,812 $399,289 1.88% - 21.00%
Standby letters of credit 5,297 2,589 7,886 3.75% - 8.50%
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Standby letters of credit, both financial and performance, are written
conditional commitments issued by the banks to guarantee the performance of a
customer to a third party. Those guarantees are primarily issued to support
public and private borrowing arrangements, including commercial paper, bond
financing, and similar transactions. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending loan facilities
to customers.
NOTE 19. INTEREST RATE CONTRACTS
During the fourth quarter of 2004, the Company entered into an interest rate
swap agreement with a $7,500 notional amount to convert a fixed rate security to
a variable rate. The interest rate swap requires the Company to pay a fixed rate
of interest of 4.90% and receive a variable rate based on three-month LIBOR and
expires on or prior to January 5, 2016.
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 as part of its balance
sheet management strategy. The interest rate swaps require the Company to pay a
variable rate based on three-month LIBOR and receive a fixed rate of interest
ranging from 2.60% to 2.72%. The interest rate swaps expire on or prior to May
22, 2006. These swaps qualify for the short cut method of accounting under FAS
133.
During the second quarter of 2002, the Company purchased a $200,000 notional
interest rate floor contract for $195. The interest rate floor was indexed to
one-month LIBOR with a contract strike rate of 2.00% and had a termination date
of May 17, 2004. This derivative transaction was accounted for as a freestanding
derivative with cash flows and changes in market value recorded in current
period earnings. The floor was terminated on October 25, 2002 with a market
value of $920.
During 2001, the Company entered into interest rate swap agreements totaling
$75,000 notional amount to convert a portion of its liabilities from variable
rate to fixed rate to assist in managing its interest rate sensitivity. The
interest rate swaps required the Company to pay a fixed rate of interest ranging
from 4.56% to 4.92% and receive a variable rate based on one-month LIBOR and
expired on September 10, 2004. The Company terminated a $25,000 notional amount
agreement in June 2002. The loss due to termination of $460, net of tax, is
recorded as a component of accumulated other comprehensive income and will be
amortized into earnings over the remaining term of the agreement. The remaining
swap agreements were terminated in July 2002. The resulting losses totaling
$661, net of tax, also remain as a component of accumulated other comprehensive
income and have been amortized into earnings over the remaining term of the
agreements. At December 31, 2004 there were no liabilities and all expense had
been recorded on these swaps.
The Company is exposed to losses if a counterparty fails to make its payments
under a contract in which the Company is in a receiving status. Although
collateral or other security is not obtained, the Company minimizes its credit
risk by monitoring the credit standing of the counterparties and anticipates
that the counterparties will be able to fully satisfy their obligations under
the agreements.
NOTE 20. EMPLOYEE RETIREMENT PLANS
The Company has a benefit plan offering postretirement medical benefits. The
medical portion of the plan is contributory to the participants. The Company has
no plan assets attributable to the plan and funds the benefits as claims arise.
Benefit costs related to this plan are recognized in the periods employees are
provided service for such benefits. Employees of the Company hired by The
National City Bank of Evansville before 1978 who are age 55 with 20 years of
service and retire directly from the Company are eligible for a medical plan
premium reimbursement. The Company reserves the right to terminate or make
changes at any time.
The 2004 health care cost trend rate is projected to be 11.0%. The rate is
assumed to decrease incrementally each year until it reaches
57
5.0% and remain at that level thereafter. Increasing or decreasing the health
care cost trend rates by one percentage point would not have had a material
effect on the December 31, 2004, accumulated postretirement benefit obligation
or the annual cost of retiree health plans.
The discount rate reflected in the financial statements was 6.25% and 6.75% for
2004 and 2003, respectively.
The following summary reflects the plan's funded status and the amounts
reflected on the Company's financial statements.
Actuarial present values of benefit obligations at December 31 are:
Postretirement Benefits
-----------------------
2004 2003
------- -------
Change in Fair Value of Plan Assets:
Balance at beginning of year $ -- $ --
Actual return on plan assets -- --
Employer contributions 159 61
Benefits paid, net of retiree contributions (159) (61)
------- -------
Balance at end of year $ -- $ --
------- -------
Change in Benefit Obligation:
Balance at beginning of year $ 1,885 $ 1,802
Service cost 103 45
Interest costs 113 115
Actuarial gains 30 (16)
Benefits paid, net of retiree contributions (159) (61)
------- -------
Balance at end of year $ 1,972 $ 1,885
------- -------
Funded status $(1,972) $(1,885)
Unrecognized prior service cost 267 301
Unrecognized net actuarial loss 1,149 1,061
------- -------
(Accrued) prepaid benefit cost $ (556) $ (523)
======= =======
Net periodic pension cost included the following components for the years ended
December 31:
Other
Cash Balance Plan Postretirement Benefits
------------------ -----------------------
2004 2003 2002 2004 2003 2002
---- ---- ---- ---- ---- ----
Service cost - benefits earned during the period $-- $-- $ -- $103 $ 45 $ 10
Interest cost on projected benefit obligation -- -- 141 113 115 85
Net amortization and deferral -- -- -- 101 87 28
Termination settlement gain -- -- 84 -- -- --
--- --- ---- ---- ---- ----
Net periodic cost $-- $-- $225 $317 $247 $123
=== === ==== ==== ==== ====
The following table shows the future benefit payments, net of retiree
contributions, which are expected to be paid during the following years:
Year ending December 31,
- ------------------------
2005 $194
2006 183
2007 192
2008 166
2009 175
Thereafter 942
58
Through December 31, 2001 the Company maintained a noncontributory cash balance
plan in which substantially all full-time employees were eligible to
participate. Plan benefits, totaling approximately $2,926 were distributed to
participants during 2002.
Substantially all employees are eligible to contribute a portion of their pretax
salary to a defined contribution plan. The Company may make contributions to the
plan in varying amounts depending on the level of employee contributions. The
Company's expense related to this plan was $1,045, $988 and $887 for 2004, 2003
and 2002, respectively.
NOTE 21. SEGMENT INFORMATION
The Company operates one reporting line of business: Banking. Banking services
include various types of deposit accounts; safe deposit boxes; automated teller
machines; consumer, mortgage and commercial loans; mortgage loan sales and
servicing; letters of credit; corporate cash management services; brokerage and
annuity products and services; and complete personal and corporate trust
services. Other includes the operating results of the Parent Company and its
non-bank subsidiaries, including, Integra 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 accounting policies of the Banking segment are the same as those described
in the summary of significant accounting policies. The following tables present
selected segment information for Banking and other operating units.
For the Year Ended
December 31, 2004 Banking Other Eliminations (1) Total
- ------------------ ---------- -------- ---------------- ----------
Interest income $ 132,157 $ 223 $ (9) $ 132,371
Interest expense 44,630 3,283 (9) 47,904
---------- -------- --------- ----------
Net interest income 87,527 (3,060) -- 84,467
Provision for loan losses 1,305 -- -- 1,305
Other income 33,309 (3,708) 4,006 33,607
Other expense 136,923 1,345 (88) 138,180
---------- -------- --------- ----------
Earnings before income taxes (17,392) (8,113) 4,094 (21,411)
---------- -------- --------- ----------
Income taxes (benefit) (13,120) (1,671) -- (14,791)
---------- -------- --------- ----------
Net income $ (4,272) $ (6,442) $ 4,094 $ (6,620)
========== ======== ========= ==========
Segment assets $2,732,901 $277,177 $(252,913) $2,757,165
========== ======== ========= ==========
For the Year Ended
December 31, 2003 Banking Other Eliminations (1) Total
- ------------------ ---------- -------- ---------------- ----------
Interest income $ 142,966 $ 2,522 $ (2,373) $ 143,115
Interest expense 67,297 5,949 (2,373) 70,873
---------- -------- --------- ----------
Net interest income 75,669 (3,427) -- 72,242
Provision for loan losses 4,945 -- -- 4,945
Other income 32,599 21,228 (21,034) 32,793
Other expense 79,912 2,459 (104) 82,267
---------- -------- --------- ----------
Earnings before income taxes 23,411 15,342 (20,930) 17,823
---------- -------- --------- ----------
Income taxes (benefit) 2,615 (2,557) -- 58
---------- -------- --------- ----------
Net income $ 20,796 $ 17,899 $ (20,930) $ 17,765
========== ======== ========= ==========
Segment assets $2,951,085 $300,199 $(292,990) $2,958,294
========== ======== ========= ==========
59
For the Year Ended
December 31, 2002 Banking Other Eliminations (1) Total
- ------------------ ---------- -------- ---------------- ----------
Interest income $ 164,429 $ 4,995 $ (4,793) $ 164,631
Interest expense 86,813 8,766 (4,793) 90,786
---------- -------- --------- ----------
Net interest income 77,616 (3,771) -- 73,845
Provision for loan losses 3,143 -- -- 3,143
Other income 36,186 23,177 (23,082) 36,281
Other expense 82,287 650 (60) 82,877
---------- -------- --------- ----------
Earnings before income taxes 28,372 18,756 (23,022) 24,106
---------- -------- --------- ----------
Income taxes (benefit) 5,423 (1,645) -- 3,778
---------- -------- --------- ----------
Net income $ 22,949 $ 20,401 $ (23,022) $ 20,328
========== ======== ========= ==========
Segment assets $2,849,139 $348,727 $(340,128) $2,857,738
========== ======== ========= ==========
(1) Eliminations include intercompany loan and deposits, interest income and
expense, and earnings (loss) of the subsidiaries.
NOTE 22. FINANCIAL INFORMATION OF PARENT COMPANY
Condensed financial data for Integra Bank Corporation (parent company only)
follows:
CONDENSED STATEMENTS OF BALANCE SHEETS
December 31,
-------------------
2004 2003
-------- --------
ASSETS
Cash and cash equivalents $ 5,570 $ 4,992
Investment in banking subsidiaries 263,841 287,732
Investment in other subsidiaries 373 226
Securities available for sale 2,635 2,664
Other assets 8,944 10,268
-------- --------
TOTAL ASSETS $281,363 $305,882
======== ========
LIABILITIES
Short-term borrowings $ -- $ 4,000
Long-term borrowings 68,125 64,125
Dividends payable 2,780 4,068
Other liabilities 1,167 697
-------- --------
Total liabilities 72,072 72,890
SHAREHOLDERS' EQUITY
Common stock 17,375 17,311
Capital surplus 126,977 125,789
Retained earnings 64,481 83,510
Unvested restricted stock (578) (292)
Accumulated other comprehensive income 1,036 6,674
-------- --------
Total shareholders' equity 209,291 232,992
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $281,363 $305,882
======== ========
60
CONDENSED STATEMENTS OF INCOME
Year Ended December 31,
----------------------------
2004 2003 2002
-------- ------- -------
Dividends from banking subsidiaries $ 14,000 $ 4,000 $ --
Other income 182 389 587
-------- ------- -------
Total income 14,182 4,389 587
Interest expense 3,283 3,810 4,050
Other expenses 1,098 2,319 927
-------- ------- -------
Total expenses 4,381 6,129 4,977
-------- ------- -------
Income (loss) before income taxes and equity in
undistributed earnings of subsidiaries 9,801 (1,740) (4,390)
Income tax benefit 1,701 2,581 1,696
-------- ------- -------
Income (loss) before equity in undistributed earnings of subsidiaries 11,502 841 (2,694)
Equity in undistributed earnings of subsidiaries (18,122) 16,924 23,022
-------- ------- -------
Net income (loss) $ (6,620) $17,765 $20,328
======== ======= =======
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31,
------------------------------
2004 2003 2002
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (6,620) $ 17,765 $ 20,328
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Amortization and depreciation 113 1,327 80
Employee benefit expenses 239 177 123
Excess distributions (undistributed) earnings of subsidiaries 18,122 (16,924) (23,022)
Decrease in deferred taxes (79) (9) (467)
(Increase) decrease in other assets 1,304 (75) (1,881)
(Decrease) increase in other liabilities 470 141 (283)
-------- -------- --------
Net cash flows provided by (used in) operating activities 13,549 2,402 (5,122)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities -- -- 20
Payments for investments in and advances to subsidiaries -- (1,380) --
Sale or repayment of investments in and advances to subsidiaries -- 2,821 --
Capital expenditures -- (1,668) --
-------- -------- --------
Net cash flows provided by (used in) investing activities -- (227) 20
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (13,698) (16,261) (16,250)
Net increase (decrease) in short-term borrowed funds (4,000) 4,000 (12,000)
Proceeds from long-term borrowings 4,000 45,568 --
Repayment of long-term borrowings -- (35,567) --
Proceeds from exercise of stock options 727 20 140
-------- -------- --------
Net cash flows used in financing activities (12,971) (2,240) (28,110)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 578 (65) (33,212)
-------- -------- --------
Cash and cash equivalents at beginning of year 4,992 5,057 38,269
-------- -------- --------
Cash and cash equivalents at end of year $ 5,570 $ 4,992 $ 5,057
======== ======== ========
61
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no changes in or disagreements with accountants on accounting and
financial disclosures.
ITEM 9A. 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-15c) as of December 31, 2004,
the Company's Chief Executive Officer and Chief Financial Officer have concluded
that the Company's disclosure controls and procedures were effective as of that
date in timely alerting the Company's management to material information
required to be included in this Form 10-K and other Exchange Act filings.
Management's report on internal control over financial reporting is set forth on
page 30 of this report.
There have been no changes in the Company's internal control over financial
reporting that occurred during the quarter ended December 31, 2004 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item concerning the directors and nominees for
director of the Company is incorporated herein by reference from the Company's
definitive Proxy Statement for its 2005 Annual Meeting of Shareholders, which
will be filed with the Commission pursuant to Regulation 14A within 120 days
after the end of the Company's last fiscal year. Information concerning the
executive officers of the Company is included under the caption "Executive
Officers of the Company" at the end of Part I of this Annual Report.
ITEM 11. EXECUTIVE COMPENSATION
The information under the headings "Director Compensation" and "Compensation of
Executive Officers" in the Company's Proxy Statement for its 2005 Annual Meeting
of Shareholders is hereby incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information under the headings "General Information - Security Ownership of
Management and Principal Owners" and "Compensation of Executive Officers -
Equity Compensation Plan Information" in the Company's Proxy Statement for its
2005 Annual Meeting of Shareholders is hereby incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the heading "Transactions with Management" in the
Company's Proxy Statement for its 2005 Annual Meeting of Shareholders is hereby
incorporated by reference herein.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information under the headings "Audit-Related Matters - Principal Accounting
Firm Fees" and "Audit-Related Matters - Pre-Approval Policies and Procedures" in
the Company's Proxy Statement for its 2005 Annual Meeting of Shareholders is
hereby incorporated by reference herein.
62
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Documents Filed as Part of Form 10-K
1. Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2004 and 2003
Consolidated Statements of Income for the years ended December 31, 2004,
2003 and 2002
Consolidated Statements of Comprehensive Income for the years ended
December 31, 2004, 2003 and 2002
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 2004, 2003 and 2002
Consolidated Statements of Cash Flows for the years ended December 31,
2004, 2003 and 2002
Notes to Consolidated Financial Statements
2. Schedules
No schedules are included because they are not applicable or the required
information is shown in the financial statements or the notes thereto.
3. Exhibits
Exhibit Index is on page 66.
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the dates indicated.
INTEGRA BANK CORPORATION
/s/ MICHAEL T. VEA 3/9/2005
- -------------------------------------- Date
Michael T. Vea
Chairman of the Board, Chief Executive
Officer and President
/s/ SHEILA A. STOKE 3/9/2005
- -------------------------------------- Date
Sheila A. Stoke
Senior Vice President, Controller and
Principal Accounting Officer
64
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ SANDRA CLARK BERRY 3/9/2005
- -------------------------------------- Date
Sandra Clark Berry
Director
/s/ H. RAY HOOPS 3/9/2005
- -------------------------------------- Date
H. Ray Hoops
Director
/s/ GEORGE D. MARTIN 3/9/2005
- -------------------------------------- Date
George D. Martin
Director
/s/ THOMAS W. MILLER 3/9/2005
- -------------------------------------- Date
Thomas W. Miller
Director
/s/ RONALD G. REHERMAN 3/9/2005
- -------------------------------------- Date
Ronald G. Reherman
Director
/s/ RICHARD M. STIVERS 3/9/2005
- -------------------------------------- Date
Richard M. Stivers
Director
/s/ ROBERT W. SWAN 3/9/2005
- -------------------------------------- Date
Robert W. Swan
Director
/s/ ROBERT D. VANCE 3/9/2005
- -------------------------------------- Date
Robert D. Vance
Director
/s/ MICHAEL T. VEA 3/9/2005
- -------------------------------------- Date
Michael T. Vea
Chairman, CEO, President and Director
(Principal Executive Officer)
/s/ WILLIAM E. VIETH 3/9/2005
- -------------------------------------- Date
William E. Vieth
Director
/s/ DANIEL T. WOLFE 3/9/2005
- -------------------------------------- Date
Daniel T. Wolfe
Director
65
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
3(a)(i) Restated Articles of Incorporation (incorporated by reference to
Exhibit 3.1 to Form 8-A/A dated June 12, 1998)
3(a)(ii) Articles of Amendment dated May 17, 2000 (incorporated by reference
to Exhibit 3(a) to Quarterly Report on Form 10-Q for the period
ending September 30, 2000)
3(a)(iii) Articles of Amendment dated July 18, 2001 (incorporated by reference
to Exhibit 4(a))
3(b) By-Laws (as amended through February 18, 2004)
4(a) Rights Agreement, dated July 18, 2001, between Integra Bank
Corporation and Integra Bank N.A., as Rights Agent. The Rights
Agreement includes the form of Articles of Amendment setting forth
terms of Series A Junior Participating Preferred Stock as Exhibit A,
the form of Right Certificate as Exhibit B and the Summary of Rights
to Purchase Preferred Shares as Exhibit C (incorporated by reference
to Exhibit 1 to the Current Report on Form 8-K dated July 18, 2001)
4(b) Amendment to Rights Agreement dated September 15, 2004, between
Integra Bank Corporation and Integra Bank N.A., as Rights Agent
(incorporated by reference to Exhibit 4.2 to the Current Report on
Form 8-A/A dated September 16, 2004)
10(a)* Integra Bank Corporation Employees' 401(K) Plan (2000 Restatement)
(incorporated by reference to Exhibit 10(p) to Annual Report on Form
10-K for the fiscal year ended December 31, 2001)
10(b)* 1999 Stock Option and Incentive Plan (incorporated by reference to
Exhibit A to Proxy Statement on Schedule 14A filed April 24, 1999)
10(c)* Contract of Employment dated August 23, 1999, between National City
Bancshares, Inc. and Michael T. Vea (incorporated by reference to
Exhibit 10.1 to Quarterly Report on Form 10-Q for the period ending
September 30, 1999)
10(d)* Amendment to Contract of Employment dated September 20, 2000 between
Integra Bank Corporation and Michael T. Vea (incorporated by
reference to Exhibit 10(h) to Annual Report on Form 10-K for the
fiscal year ended December 31, 2000)
10(e)* Nonqualified Stock Option Agreement (Non Plan) dated September 7,
1999, between National City Bancshares, Inc. and Michael T. Vea
(incorporated by reference to Exhibit 10.3 to Quarterly Report on
Form 10-Q for the period ending September 30, 1999)
10(f)* Employment Agreement dated July 28, 2003, between Integra Bank
Corporation and Archie M. Brown, Jr. (incorporated by reference to
Exhibit 10(a) to Quarterly Report on Form 10-Q for the period ended
September 30, 2003)
10(g)* Employment Agreement dated July 28, 2003, between Integra Bank
Corporation and Martin M. Zorn (incorporated by reference to Exhibit
10(c) to Quarterly Report on Form 10-Q for the period ended
September 30, 2003)
10(h)* First Amendment to Integra Bank Corporation Employees' 401(K) Plan
dated March 7, 2001 (incorporated by reference to Exhibit 10(q) to
Annual Report on Form 10-K for the fiscal year ended December 31,
2001)
10(i)* Second Amendment to Integra Bank Corporation Employees' 401(K) Plan
dated October 17, 2001 (incorporated by reference to Exhibit 10(r)
to Annual Report on Form 10-K for the fiscal year ended December 31,
2001)
10(j)* Third Amendment to Integra Bank Corporation Employees' 401(K) Plan
dated January 30, 2002 (incorporated by reference to Exhibit 10(s)
to Annual Report on Form 10-K for the fiscal year ended December 31,
2001)
10(k)* 2003 Stock Option and Incentive Plan (incorporated by reference to
Exhibit B to Proxy Statement on Schedule 14A filed March 20, 2003)
10(l)* Executive Annual and Long-Term Incentive Plan (incorporated by
reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the
period ended June 30, 2003)
10(m)* Form of Award Agreement for Nonqualified Stock Option Grant under
2003 Stock Option and Incentive Plan
10(n)* Form of Award Agreement for Incentive Stock Option Grant under 2003
Stock Option and Incentive Plan
10(o)* Form of Award Agreement for Restricted Stock Grant under 2003 Stock
Option and Incentive Plan
10(p)* Summary Sheet of 2005 Compensation
66
21 Subsidiaries of the Registrant
23 Consent of PricewaterhouseCoopers LLP
31 (a) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 of Chief Executive Officer
31 (b) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 of Chief Financial Officer
32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
* The indicated exhibit is a management contract, compensatory plan or
arrangement required to be filed by Item 601 of Regulation S-K.
67