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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2005.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________________ to. ________________
Commission file number: 0-13585
INTEGRA BANK CORPORATION
(Exact name of registrant as specified in its charter)
INDIANA 35-1632155
(State or other jurisdiction of incorporation (IRS Employee Identification
or organization) No.)
PO BOX 868, EVANSVILLE, INDIANA 47705-0868
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (812) 464-9677
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT APRIL 30, 2005
(Common stock, $1.00 Stated Value) 17,392,449
INTEGRA BANK CORPORATION
INDEX
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
Consolidated balance sheets-
March 31, 2005 and December 31, 2004 3
Consolidated statements of income-
Three months ended March 31, 2005 and 2004 4
Consolidated statements of comprehensive income-
Three months ended March 31, 2005 and 2004 6
Consolidated statements of changes in shareholders' equity-
Three months ended March 31, 2005 7
Consolidated statements of cash flow-
Three months ended March 31, 2005 and 2004 8
Notes to consolidated financial statements 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 26
Item 4. Controls and Procedures 27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submissions of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits 28
Signatures 29
2
PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
INTEGRA BANK CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands, except for share data)
March 31, December 31,
2005 2004
----------- -----------
ASSETS
Cash and due from banks $ 60,753 $ 71,770
Federal funds sold and interest-bearing deposits with banks 129 64
----------- -----------
Total cash and cash equivalents 60,882 71,834
Loans held for sale (at lower of cost or market value) 14,372 1,173
Securities available for sale 802,650 801,059
Regulatory stock 33,003 32,975
Loans, net of unearned income 1,659,371 1,665,324
Less: Allowance for loan losses (23,259) (23,794)
----------- -----------
Net loans 1,636,112 1,641,530
Premises and equipment 51,686 50,233
Goodwill, net 44,839 44,839
Other intangibles, net 8,464 8,697
Other assets 106,991 104,825
----------- -----------
TOTAL ASSETS $ 2,758,999 $ 2,757,165
=========== ===========
LIABILITIES
Deposits:
Non-interest-bearing demand $ 247,457 $ 257,963
Interest-bearing:
Savings, interest checking and money market accounts 808,347 820,104
Time deposits of $100,000 or more 322,829 304,495
Other interest-bearing 514,211 513,979
----------- -----------
Total deposits 1,892,844 1,896,541
Short-term borrowings 319,183 174,933
Long-term borrowings 319,109 457,359
Other liabilities 19,383 19,041
----------- -----------
TOTAL LIABILITIES 2,550,519 2,547,874
----------- -----------
SHAREHOLDERS' EQUITY
Preferred stock - 1,000 shares authorized - None outstanding
Common stock - $1.00 stated value - 29,000 shares authorized 17,387 17,375
Additional paid-in capital 127,165 126,977
Retained earnings 68,088 64,481
Unvested restricted stock (468) (578)
Accumulated other comprehensive income (loss) (3,692) 1,036
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 208,480 209,291
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,758,999 $ 2,757,165
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
3
INTEGRA BANK CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
Three Months Ended
March 31,
------------------
2005 2004
-------- --------
INTEREST INCOME
Interest and fees on loans:
Taxable $ 23,946 $ 23,350
Tax-exempt 115 137
Interest and dividends on securities:
Taxable 7,529 8,514
Tax-exempt 1,416 1,723
Dividends on regulatory stock 374 421
Interest on loans held for sale 105 34
Interest on federal funds sold and other short-term investments 11 12
-------- --------
Total interest income 33,496 34,191
INTEREST EXPENSE
Interest on deposits 7,676 6,252
Interest on short-term borrowings 814 456
Interest on long-term borrowings 3,945 8,866
-------- --------
Total interest expense 12,435 15,574
NET INTEREST INCOME 21,061 18,617
Provision for loan losses 375 650
-------- --------
Net interest income after provision for loan losses 20,686 17,967
-------- --------
NON-INTEREST INCOME
Service charges on deposit accounts 3,022 2,788
Other service charges and fees 1,874 1,766
Mortgage banking 152 228
Trust income 477 496
Net securities gains (losses) (733) 5,200
Gain on mortgage loans sold 117 141
Cash surrender value life insurance 380 406
Other 1,255 992
-------- --------
Total non-interest income 6,544 12,017
NON-INTEREST EXPENSE
Salaries 7,316 7,868
Commissions and incentives 863 1,359
Other benefits 1,636 2,020
Occupancy 1,881 1,590
Equipment 923 1,077
Professional fees 983 1,198
Communication and transportation 1,122 895
Processing 934 865
Software 437 416
Marketing 511 466
Debt prepayment fees - 56,998
Low income housing project losses 546 552
Amortization of intangible assets 233 405
Other 1,844 1,856
-------- --------
Total non-interest expense 19,229 77,565
-------- --------
Income (loss) before income taxes 8,001 (47,581)
Income tax expense (benefit) 1,612 (20,343)
-------- --------
NET INCOME (LOSS) $ 6,389 $(27,238)
======== ========
Unaudited Consolidated Statements of Income are continued on next page.
4
INTEGRA BANK CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
(In thousands, except for per share data)
Three Months Ended
March 31,
------------------------
2005 2004
----------- -----------
Earnings (loss) per share:
Basic $ 0.37 $ (1.57)
Diluted 0.37 (1.57)
Weighted average shares outstanding:
Basic 17,343 17,297
Diluted 17,414 17,297
Dividends per share $ 0.160 $ 0.235
The accompanying notes are an integral part of the consolidated financial
statements.
5
INTEGRA BANK CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three Months Ended
March 31,
------------------
2005 2004
------- --------
Net income (loss) $ 6,389 $(27,238)
Other comprehensive income, net of tax:
Unrealized gain (loss) on securities:
Unrealized gain (loss) arising in period
(net of tax $(2,921) and $977, respectively) (5,164) 4,756
Reclassification of realized amounts
(net of tax $297 and $(2,107), respectively) 436 (3,093)
------- --------
Net unrealized gain (loss) on securities (4,728) 1,663
------- --------
Unrealized gain on derivative hedging instruments arising in period
(net of tax of $63 for 2004) - 93
------- --------
Net unrealized gain (loss), recognized in other comprehensive income (4,728) 1,756
------- --------
Comprehensive income (loss) $ 1,661 $(25,482)
======= ========
The accompanying notes are an integral part of the consolidated financial
statements.
6
INTEGRA BANK CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except for share and per share data)
Accumulated
Additional Unvested Other
Common Common Paid-in Retained Restricted Comprehensive
Shares Stock Capital Earnings Stock Income (Loss) Total
---------- -------- --------- -------- ---------- ------------- ---------
BALANCE AT DECEMBER 31, 2004 17,375,004 $ 17,375 $ 126,977 $ 64,481 $ (578) $ 1,036 $ 209,291
---------- -------- --------- -------- --------- --------- ---------
Net income - - - 6,389 - - 6,389
Cash dividend declared ($0.16 per share) - - - (2,782) - - (2,782)
Change, net of tax, in unrealized gain (loss)
on Securities - - - - - (4,728) (4,728)
Exercise of stock options 14,762 15 246 - - - 261
Grant of restricted stock, net of forfeitures (3,167) (3) (58) - 61 - -
Unearned compensation amortization - - - - 49 - 49
---------- -------- --------- -------- --------- --------- ---------
BALANCE AT MARCH 31, 2005 17,386,599 $ 17,387 $ 127,165 $ 68,088 $ (468) $ (3,692) $ 208,480
========== ======== ========= ======== ========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
7
INTEGRA BANK CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
Three Months Ended
March 31,
--------------------
2005 2004
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 6,389 $ (27,238)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Federal Home Loan Bank stock dividends (28) (24)
Amortization and depreciation 1,642 2,301
Amortization of unearned compensation 49 52
Provision for loan losses 375 650
Net securities (gains) losses 733 (5,200)
(Gain) loss on sale of premises and equipment 10 (162)
(Gain) loss on sale of other real estate owned (15) 12
Gain on sale of merchant processing program (417) -
Loss on low-income housing investments 546 79
Decrease in deferred taxes (69) (34)
Net gain on sale of loans held for sale (117) (141)
Proceeds from sale of loans held for sale 16,385 18,744
Origination of loans held for sale (15,879) (19,880)
(Increase) decrease in other assets 201 (18,281)
Increase in other liabilities 340 17,384
-------- ---------
Net cash flows provided by (used in) operating activities 10,145 (31,738)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale 38,603 66,790
Proceeds from sales of securities available for sale 8,713 336,088
Purchase of securities available for sale (57,837) (129,204)
(Increase) decrease in loans made to customers (8,746) 45,206
Proceeds from sale of merchant processing program 585 -
Purchase of premises and equipment (2,507) (2,025)
Proceeds from sale of premises and equipment 4 272
Proceeds from sale of other real estate owned 304 387
-------- ---------
Net cash flows provided by (used in) investing activities (20,881) 317,514
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (3,697) 3,531
Net increase (decrease) in short-term borrowed funds 6,732 (168,299)
Proceeds from long-term borrowings - 334,003
Repayment of long-term borrowings (732) (467,694)
Dividends paid (2,780) (4,068)
Proceeds from exercise of stock options 261 321
-------- ---------
Net cash flows used in financing activities (216) (302,206)
-------- ---------
Net decrease in cash and cash equivalents (10,952) (16,430)
-------- ---------
Cash and cash equivalents at beginning of period 71,834 74,943
-------- ---------
Cash and cash equivalents at end of period $ 60,882 $ 58,513
======== =========
Unaudited Consolidated Statements of Cash Flow are continued on next page.
8
INTEGRA BANK CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED)
(In thousands)
Three Months Ended
March 31,
2005 2004
------- -------
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
Change in allowance for unrealized (gain) loss on securities available for sale $ 8,700 $(2,794)
Change in deferred taxes attributable to securities available for sale (3,218) 1,130
Other real estate acquired in settlement of loans 201 324
Dividends declared and not paid 2,782 4,072
The accompanying notes are an integral part of the consolidated financial
statements.
9
INTEGRA BANK CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for per share data)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of Integra Bank Corporation and its subsidiaries (the "Company" or
"Integra"). At March 31, 2005, the Company's subsidiaries consisted of Integra
Bank N.A. (the "Bank"), a reinsurance company and two statutory business trusts.
All significant intercompany transactions are eliminated in consolidation.
The financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). While the
financial statements are unaudited, they do reflect all adjustments which, in
the opinion of management, are necessary for a fair statement of the financial
position, results of operations, and cash flows for the interim periods. All
such adjustments are of a normal recurring nature. Pursuant to SEC rules,
certain information and note disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America ("GAAP") have been condensed or omitted from
these financial statements unless significant changes have taken place since the
end of the most recent fiscal year. The accompanying financial statements and
notes thereto should be read in conjunction with the Company's financial
statements and notes for the year ended December 31, 2004, included in the
Company's Annual Report on Form 10-K filed with the SEC.
Because the results from commercial banking operations are so closely related
and responsive to changes in economic conditions, the results for any interim
period are not necessarily indicative of the results that can be expected for
the entire year.
RECENT ACCOUNTING PRONOUNCEMENTS:
In December 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" ("SFAS No.
123") and supersedes Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 25"), which permitted the recognition of
compensation expense using the intrinsic value method. SFAS No. 123(R) has been
amended and will now be effective January 1, 2006. The Company estimates 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
January 1, 2006, and is currently analyzing the transition method that will be
used.
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 after December 15, 2004. Adoption of
SOP 03-3 did not have a material impact on the Company's financial condition or
results of operations.
10
STOCK-BASED COMPENSATION:
Stock options are accounted for using the intrinsic value method following APB
No. 25 and related interpretations. Had compensation costs been determined based
on the grant date market values of awards (the method described in SFAS No.
123), reported net income and earnings per common share would have been reduced
to the proforma amounts shown below.
Three Months Ended
March 31,
2005 2004
---------- ----------
Net income (loss):
As reported $ 6,389 $ (27,238)
Add: Stock-based compensation expense
included in reported net income (loss), net of tax 27 31
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of tax 51 34
---------- ----------
Proforma $ 6,365 $ (27,241)
========== ==========
Earnings (loss) per share:
Basic
As reported $ 0.37 $ (1.57)
Proforma 0.37 (1.57)
Diluted
As reported $ 0.37 $ (1.57)
Proforma 0.37 (1.57)
NOTE 2. EARNINGS PER SHARE
The calculation of earnings per share for the three months ended March 31, 2005
and 2004 is summarized as follows:
Three Months Ended
March 31,
------------------
2005 2004
------- --------
Net income (loss) $ 6,389 $(27,238)
======= ========
Weighted average shares outstanding - Basic 17,343 17,297
Stock-based compensation adjustment 71 82
------- --------
Average shares outstanding - Diluted 17,414 17,379
======= ========
Earnings per share-Basic $ 0.37 $ (1.57)
Effect of stock-based compensation - -
------- --------
Earnings per share-Diluted $ 0.37 $ (1.57)
======= ========
On March 31, 2005, there were vested options outstanding to purchase 650 shares
of the Company's common stock. The exercise price of the vested options to
purchase 367 shares exceeded the stock's closing price as of March 31, 2005. On
March 31, 2004, there were vested options outstanding to purchase up to 623
shares of the Company's common stock, of which 176 shares exceeded the stock's
closing price as of March 31, 2004.
11
NOTE 3. SECURITIES
All investment securities are held as available for sale. Amortized cost and
fair value of securities classified as available for sale as of March 31, 2005
and December 31, 2004 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
March 31, 2005:
U.S. Government agencies $ 1,100 $ - $ 13 $ 1,087
Mortgage-backed securities 219,072 543 2,776 216,839
Collateralized Mortgage Obligations 428,248 - 9,881 417,625
States & political subdivisions 90,131 4,374 3 94,502
Other securities 71,043 1,981 427 72,597
--------- ---------- ---------- --------
Total $ 809,594 $ 6,898 $ 13,100 $802,650
========= ========== ========== ========
The Company recognized two securities as other-than-temporarily impaired which
resulted in a loss of $742 for the first quarter of 2005.
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
========= ========== ========== ========
The amortized cost and fair value of the securities as of March 31, 2005, by
contractual maturity, except for mortgage passthrough securities and
collateralized mortgage obligations which are based on estimated average lives,
are shown below. Expected maturities may differ from contractual maturities for
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
---------------- ---------------- --------------- ---------------- ----------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- --------- ----- -------- ----- -------- ------ --------- -----
U. S. Government agencies $ - - $ 649 3.96% $ 451 4.18% $ - - $ 1,100 4.05%
Mortgage-backed securities - - 116,307 4.46% 102,765 4.32% - - 219,072 4.39%
Collateralized Mortgage
Obligations 1,567 4.22% 187,378 3.91% 239,303 4.37% - - 428,248 4.17%
States & political subdivisions 3,774 7.62% 16,962 7.61% 40,111 7.69% 29,284 11.12% 90,131 8.79%
Other securities - - - - - - 71,043 6.91% 71,043 6.91%
------ ---- --------- ---- -------- ---- -------- ---- --------- ----
Amortized Cost $5,341 6.62% $ 321,296 4.31% $382,630 4.70% $100,327 8.14% $ 809,594 4.98%
====== ==== ========= ==== ======== ==== ======== ==== ========= ====
Fair Value $5,289 $ 315,810 $377,778 $103,773 $ 802,650
====== ========= ======== ======== =========
Note: The yield is calculated on a 35 percent federal-tax-equivalent basis.
At March 31, 2005 and December 31, 2004, the carrying value of securities
pledged to secure public deposits, trust funds, securities sold under repurchase
agreements and other borrowings was $442,934 and $424,952, respectively.
12
Securities, at March 31, 2005, with unrealized losses not recognized in income
are as follows:
Less Than 12 Months 12 Months or More Total
-------------------- -------------------- --------------------
Fair Unrealized Fair Unrealized Fair Unrealized
March 31, 2005 Value Losses Value Losses Value Losses
- ----------------------------------- -------- ---------- -------- ---------- -------- ----------
U.S. Government agencies $ 937 $ 13 $ - $ - $ 937 $ 13
Mortgage-backed securities 177,977 2,463 12,502 313 190,479 2,776
Collateralized Mortgage Obligations 244,443 6,532 152,514 3,349 396,957 9,881
State & political subdivisions - - 155 3 155 3
Other securities 25,262 427 - - 25,262 427
-------- ---------- -------- ---------- -------- ----------
Total $448,619 $ 9,435 $165,171 $ 3,665 $613,790 $ 13,100
======== ========== ======== ========== ======== ==========
The Company does not believe any individual unrealized loss represents
other-than-temporary impairment. The unrealized losses are primarily
attributable to changes in interest rates. Factors considered in evaluating the
securities included whether the securities were backed by the U.S. government or
its agencies and credit quality surrounding the recovery of the full principal
balance. The Company has the ability to hold the securities for a time necessary
to recover the amortized cost.
NOTE 4. INTANGIBLE ASSETS
March 31, 2005 December 31, 2004
-------------------------------- --------------------------------
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 (8,616) 8,464 17,080 (8,383) 8,697
-------- ----------- -------- -------- ----------- -------
Total intangible assets $ 61,919 $ (8,616) $ 53,303 $ 61,919 $ (8,383) $53,536
======== =========== ======== ======== =========== =======
All of the intangible assets relate to the banking operating segment. There were
no valuation impairments for goodwill or core deposit intangibles at March 31,
2005.
NOTE 5. INCOME TAXES
A reconciliation of income taxes in the statement of income, with the amount
computed by applying the statutory rate of 35%, is as follows:
Three Months Ended
March 31,
2005 2004
------- --------
Federal income tax computed at the statutory rates $ 2,800 $(16,653)
Adjusted for effects of:
Tax exempt interest (475) (527)
Nondeductible expenses 55 136
Low income housing credit (629) (651)
Cash surrender value of life insurance policies (133) (142)
Dividend received deduction (168) (53)
State taxes, net of federal tax benefit 51 (1,793)
Other differences 111 (660)
------- --------
Total income taxes (benefit) $ 1,612 $(20,343)
======= ========
13
NOTE 6. SHORT-TERM BORROWINGS
Included in short-term borrowings are Federal funds purchased, securities sold
under repurchase agreements, Federal Home Loan Bank ("FHLB") advances with
maturities less than one year and other short-term borrowings. The Company
currently has an unsecured line of credit for $15,000 with the entire amount
available at March 31, 2005.
March 31, December 31,
2005 2004
--------- ------------
Federal funds purchased $ 25,000 $ 55,700
Securities sold under agreements to repurchase 139,151 74,194
Short-term Federal Home Loan Bank advances 155,032 45,039
Other short-term borrowed funds - -
--------- ------------
Total short-term borrowed funds $ 319,183 $ 174,933
========= ============
NOTE 7. LONG-TERM BORROWINGS
Long-term borrowings consist of the following:
March 31, December 31,
2005 2004
--------- ------------
FHLB Advances
Fixed maturity advances (weighted average rate
of 2.64% and 2.26% as of March 31, 2005 and December 31, 2004 , respectively) $ 102,500 $ 215,000
Amortizing and other advances (weighted average rate
of 5.84% and 5.85% as of March 31, 2005 and December 31, 2004, respectively) 6,110 6,653
--------- ------------
Total FHLB Advances 108,610 221,653
Securities sold under repurchase agreements with maturities
at various dates through 2008 (weighted average fixed rate of 3.64%
and 3.85% as of March 31, 2005 and December 31, 2004, respectively) 135,000 160,000
Notes payable, secured by equipment, with a fixed interest rate of 7.26%,
due at various dates through 2012 7,374 7,581
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 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 $ 319,109 $ 457,359
========= ============
Long-term borrowings include $108,610 in advances from the FHLB. The Company
must pledge collateral in the form of mortgage-backed securities and mortgage
loans to secure these advances. At March 31, 2005, the Company had sufficient
collateral pledged to satisfy the FHLB's requirements.
14
NOTE 8. COMMITMENTS AND CONTINGENCIES
The Company is party to legal actions that arise in the normal course of their
business activities. In the opinion of management, the ultimate resolution of
these matters is not expected to have a materially adverse effect on the
financial position or on the results of operations of the Company.
In the normal course of business, there are additional outstanding commitments
and contingent liabilities that are not reflected in the accompanying
consolidated financial statements. The Company uses the same credit policies in
making commitments and conditional obligations as it does for other instruments.
The commitments and contingent liabilities not reflected in the consolidated
financial statements were:
March 31, December 31,
2005 2004
--------- ------------
Commitments to extend credit $ 480,885 $ 399,289
Standby letters of credit 9,049 7,886
NOTE 9. 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 that
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 liabilities
from fixed rate to variable rate as part of its balance sheet management
strategy. The interest rate swaps require the Company to pay a variable rate
based on three-month LIBOR and receive a fixed rate of interest ranging from
2.60% to 2.72%. The interest rate swaps, which had a fair value of $876 as of
March 31, 2005, expire on or prior to May 22, 2006.
The Company is exposed to losses if a counterparty fails to make its payments
under a contract in which the Company is in a receiving status. Although
collateral or other security is not obtained, the Company minimizes its credit
risk by monitoring the credit standing of the counterparties and anticipates
that the counterparties will be able to fully satisfy their obligations under
the agreements.
15
NOTE 10. 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
reinsurance subsidiary.
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 three months ended March 31, 2005 Banking Other Eliminations Total
- ------------------------------------- ----------- --------- ------------ -----------
Interest income $ 33,436 $ 62 $ (2) $ 33,496
Interest expense 11,431 1,006 (2) 12,435
----------- --------- --------- -----------
Net interest income (loss) 22,005 (944) - 21,061
Provision for loan losses 375 - - 375
Other income (1) 6,443 7,453 (7,352) 6,544
Other expense 18,802 447 (20) 19,229
----------- --------- --------- -----------
Earnings before income taxes 9,271 6,062 (7,332) 8,001
----------- --------- --------- -----------
Income tax expense (benefit) 2,034 (422) - 1,612
----------- --------- --------- -----------
Net income (loss) $ 7,237 $ 6,484 $ (7,332) $ 6,389
=========== ========= ========= ===========
Segment assets $ 2,732,490 $ 275,857 $(249,348) $ 2,758,999
=========== ========= ========= ===========
For three months ended March 31, 2004 Banking Other Eliminations Total
- ------------------------------------- ----------- --------- ------------ -----------
Interest income $ 34,141 $ 54 $ (4) $ 34,191
Interest expense 14,828 750 (4) 15,574
----------- --------- --------- -----------
Net interest income (loss) 19,313 (696) - 18,617
Provision for loan losses 650 - - 650
Other income (loss) (1) 11,967 (26,565) 26,615 12,017
Other expense 77,260 328 (23) 77,565
----------- --------- --------- -----------
Earnings (loss) before income taxes (46,630) (27,589) 26,638 (47,581)
----------- --------- --------- -----------
Income tax (benefit) (19,947) (396) - (20,343)
----------- --------- --------- -----------
Net income (loss) $ (26,683) $ (27,193) $ 26,638 $ (27,238)
=========== ========= ========= ===========
Segment assets $ 2,621,850 $ 270,507 $(243,628) $ 2,648,729
=========== ========= ========= ===========
(1) Includes income (loss) on subsidiaries.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Dollar amounts in thousands except for share data)
INTRODUCTION
The discussion and analysis which follows is presented to assist in the
understanding and evaluation of the financial condition and results of
operations of Integra Bank Corporation and its subsidiaries (the "Company" or
"Integra") as presented in the preceding condensed consolidated financial
statements and related notes. The text of this review is supplemented with
various financial data and statistics.
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. When used in this report, the words "may," "will," "should," "would,"
"anticipate," "estimate," "expect," "plan," "believe," "intend," and similar
expressions identify forward-looking statements. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements to be materially different from
the results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following
without limitation: general, regional and local economic conditions and their
effect on interest rates, the Company and its customers; credit risks and risks
from concentrations (geographic and by industry) within the loan portfolio;
changes in regulations or accounting policies affecting financial institutions;
the costs and effects of litigation and of unexpected or adverse outcomes in
such litigation; technological changes; acquisitions and integration of acquired
business; the failure of assumptions underlying the establishment of resources
for loan losses and estimations of values of collateral and various financial
assets and liabilities; the outcome of efforts to manage interest rate or
liquidity risk; competition; and acts of war or terrorism. The Company
undertakes no obligation to release revisions to these forward-looking
statements or to reflect events or conditions occurring after the date of this
report.
This discussion and analysis uses the following non-GAAP financial measures:
"net operating income", which represents net income, less securities
gains/losses and gain on sale of merchant program, net of tax and debt
extinguishment expense, net of tax; "diluted net operating income per share",
which is net operating income divided by the total number of diluted shares;
"adjusted non-interest income", which represents non-interest income, less
securities gains/losses and gain on sale of merchant program; and "adjusted
non-interest expense", which represents non-interest expense, less debt
extinguishment expenses. This discussion and analysis includes tables which
reconcile the non-GAAP financial measures to the most directly comparable GAAP
financial measures. The presentation of these non-GAAP financial measures is
intended to supplement investors' understanding of the Company's business
activities, unaffected by certain fluctuations caused primarily by the 2004
balance sheet restructuring. There are no additional purposes for which
management uses these non-GAAP financial measures.
OVERVIEW
This overview of management's discussion and analysis highlights selected
information in this document and may not contain all of the information that is
important to you. For a more complete understanding of trends, events,
commitments, uncertainties, liquidity, capital resources, and critical
accounting estimates, you should carefully read this entire document. These have
an impact on the Company's financial condition and results of operations.
The Company has set three priorities for 2005.
[ ] 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
new low cost deposit initiatives to consumers and focusing on selling cash
management services to commercial customers. The Company initiated its High
Performance Checking ("HPC") program in late January 2005. This program utilizes
direct mail and word of mouth referrals to increase core personal checking
account acquisitions. The goal is to double new account openings compared to
2004. As of March 31, 2005, the Company is ahead of goal. The Company is also
targeting its cash management products for commercial and public entities.
The second priority is to improve efficiencies through increased revenue growth.
The Company also will continue to exercise disciplined expense management, which
may include continuing to execute on strategies to divest or improve
under-performing units. These strategies also encompass our plans to balance the
mix of our markets closer to an equal number of community and metro markets,
which will be accomplished by branch build-outs, divestitures, and acquisitions.
The third priority is to continue high service quality and development of
employees. The Company will continue its "I Care" service initiatives. This
emphasis includes frequent mystery shopping and ensures accountability in our
branches. The Company will continue to invest in employee training to develop,
challenge, motivate, and reward its greatest asset, its employees.
17
The Company believes all these priorities will accelerate loan growth, increase
core deposits, grow revenue and earnings, and enhance shareholder value.
In May of 2005, the Company expects to close the previously announced sale of
three banking centers in Southern Illinois. All regulatory approvals have been
received. This sale is expected to generate a pretax gain of $5-6 million,
depending on the final deposit balances at closing. The Company may divest
underperforming businesses, non-performing loans, or investment securities
during the second quarter.
CRITICAL ACCOUNTING POLICIES
There have been no changes to the Company's critical accounting policies since
those disclosed in the Annual Report on Form 10-K for the year ended December
31, 2004.
FINANCIAL OVERVIEW
Net income (loss) for the quarter ended March 31, 2005, was $6,389 compared to
$(27,238) for the same period of 2004. Earnings (loss) per share, on a diluted
basis, were $0.37 for the first quarter of 2005 compared to $(1.57) for the
first quarter of 2004. Net operating income, which is defined as net income less
securities gains/losses, gain on sale of merchant program and debt
extinguishment net of tax, was $6,577 for the first three months of 2005
compared to $4,649 for the first three months of 2004, representing a 41%
increase. Management believes that net operating income provides a more
comparable trend analysis of the Company's core earnings. The diluted net
operating income per share was $0.38 for the first quarter of 2005 compared to
$0.27 for the same period of 2004.
RECONCILIATION TABLE - NET OPERATING INCOME AND DILUTED NET OPERATING INCOME PER
SHARE
(In millions, except per share data)
Three Months Ended
-------------------------------
March 31, March 31, Percent
2005 2004 Change
--------- --------- -------
Net income (loss) $ 6,389 $ (27,238)
Excluding:
Gain on sale of merchant program, net of tax 248 -
Securities gains (losses), net of tax (436) 3,201
Debt extinguishment expense, net of tax - 35,088
--------- ---------
Net operating income $ 6,577 $ 4,649 41%
========= ========= ==
Diluted net income (loss) per share $ 0.37 $ (1.57)
Excluding:
Gain on sale of merchant program, net of tax 0.01 -
Securities gains (losses), net of tax (0.02) 0.18
Debt extinguishment expense, net of tax - 2.02
--------- ---------
Diluted net operating income per share $ 0.38 $ 0.27 41%
========= ========= ==
Credit quality trends were stable to positive. Provision for loan losses was
$375 for the three months ended March 31, 2005, a $275 reduction compared to
$650 for the same period one year ago. The Company expects an increase in the
provision for loan losses for the remainder of 2005, as a result of a more
normal level of charge-offs for the commercial business, stable consumer credit
quality, and an accelerated level of bankruptcy filings because of the new
legislation signed into law on April 20, 2005. Bankruptcy filings are expected
to normalize after the legislation becomes effective. Net charge-offs were $910
in the 2005 first quarter compared to $559 in the 2004 first quarter, or 22 and
14 basis points, of average loans respectively, over the same periods. During
the first quarter of 2005, one loan represented $713, which was fully reserved,
of the total net charge-offs. Another loan, which had a specific reserve, went
to auction and the reserve on that loan was released as the Company expects a
full recovery on the loan. The net charge-offs experienced in the 2005 first
quarter reflected a better than expected performance.
Annualized returns on average assets and equity for the three months ended March
31, 2005, were 0.94% and 12.26%, respectively, compared with (3.76)% and
(47.20)% in the same period of 2004. The annualized returns, excluding the loss
from the balance sheet restructuring of $31,887 (debt extinguishment loss of
$35,088 net of securities gains of $3,201) on average assets and equity for the
first three months of 2004 were 0.65% and 8.10%, respectively.
18
NET INTEREST INCOME
Net interest income grew to $21,061 for the three months ended March 31, 2005
from $18,617 for the three months ended March 31, 2004, an increase of $2,444,
or 13.1%. On a tax-equivalent basis, net interest income grew 11.7% to $21,850
in the first quarter of 2005 from the $19,558 reported in the same period a year
ago. The improvement is attributable, in part, to the increase in rates in
commercial and consumer loans and a decrease in liability costs as a result of
the balance sheet restructuring in the first quarter of 2004. This was augmented
by increases in valuable core deposits and deposit pricing discipline. These
activities produced a net interest margin that increased by 56 basis points to
3.50% during the first quarter of 2005 compared to the same quarter a year ago.
Interest rates overall were higher and interest costs for borrowings were lower
in the first quarter of 2005 compared with the same period of 2004.
Earning asset yields increased 23 basis points from the first quarter of 2004
compared to the first quarter of 2005, comprised of a 22 basis point increase in
loan yields and a 13 basis point increase in investment yields. The Company's
cost of funds decreased 33 basis points from the prior year period, driven
primarily by a 157 basis point decline in other interest bearing liabilities
yields, which includes both short-term and long-term liabilities. The balance
sheet restructuring took place late in the first quarter of 2004, and thus had a
negligible effect on net interest income and the net interest margin for that
quarter.
Average earning assets were $2,496,073 for the first quarter of 2005 compared to
$2,651,509 for the first quarter of 2004, reflecting a 5.9% decrease. Average
loans decreased $11,859, to $1,649,168 from $1,661,027, or 0.7%, from the first
quarter of 2004. The decrease was concentrated in the commercial and mortgage
portfolios, which fell by $12,632 and $19,400, or 1.5% and 4.6% respectively;
however, on average, commercial loans increased $34,679 from the fourth quarter
of 2004. The decrease in mortgage loans is a result of payoffs and lower demand
for adjustable rate mortgages. Over the same time period, average consumer loan
balances grew $20,173, or 5.4%. Loan yields increased 22 basis points to 5.87%
for the first quarter of 2005 compared to 5.65% for the same period in 2004.
Between the first quarters of 2004 and 2005, the average balance of investment
securities showed a decrease of $144,616. This was the direct result of the
balance sheet restructuring. As part of the balance sheet restructuring, the
investment portfolio was reduced by approximately $262,000. Since this
transaction happened at the end of the quarter, averages were not significantly
impacted. The average yield on securities sold in the first quarter of 2004 was
4.29%. The investment portfolio average yield was 4.80% in the first quarter of
2005 compared with 4.67% for the same time period in 2004.
Average interest-bearing liabilities declined $148,269, or 6.1%, to $2,269,409
for the three months ended March 31, 2005 compared to the same period in 2004.
The mix improved as valuable core deposit growth reduced the reliance on
certificates of deposit and wholesale funding. The interest-bearing liability
yield decreased from 2.56% to 2.21% for the first quarter of 2005 compared to
the same period in 2004.
Average interest bearing deposits increased $26,702 from $1,628,946 to
$1,655,648 while average non-interest-bearing demand deposits increased $15,340,
or 6.5%, from $237,047 to $252,387 for the first quarter of 2005 compared to the
same period in 2004. Overall, valuable core deposits grew 5.4% year over year to
$1,062,462 from $1,007,940. Consistent pricing discipline held costs to an
increase of 34 basis points from 1.54% for the first quarter of 2004 to 1.88%
for the same period this year, while rates in the market increased 175 basis
points from the first quarter of 2004 over the same period.
Average short-term borrowings decreased $3,171 from $164,107 to $160,936 for the
first quarter of 2005 compared to the same period in 2004. The cost of
short-term borrowings increased 92 basis points during this period, to 2.02% for
the first quarter of 2005.
Average long-term borrowings decreased $171,800 from $624,625 to $452,825 for
the first quarter of 2005 compared to the same period in 2004. The Company
reduced high-coupon, long-term debt as part of the balance sheet restructuring
in late March 2004. The cost of long-term borrowings decreased 213 basis points
from 5.62% during the first quarter of 2004 to 3.49% for the same period of
2005. In March 2004, the Company issued $4,000 of subordinated debt, which had a
floating rate of 3.96% on March 31, 2004. Since both the new subordinated debt
and the balance sheet restructuring occurred late in the quarter, neither the
average balances nor the rates were materially impacted in the first quarter of
2004.
19
AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
For Three Months Ended March 31, 2005 2004
--------------------------------- ----------------------------
Average Interest Yield/ Average Interest Yield
Balances & Fees Cost Balances & Fees /Cost
----------- ----------- ------ ---------- -------- -----
EARNING ASSETS:
Short-term investments $ 1,748 $ 44 2.51% $ 5,441 $ 46 0.85%
Loans held for sale 6,683 431 6.45% 2,043 136 6.67%
Securities 805,432 38,661 4.80% 950,048 44,367 4.67%
Regulatory Stock 33,042 1,497 4.53% 32,950 1,684 5.11%
Loans 1,649,168 96,806 5.87% 1,661,027 93,848 5.65%
----------- ----------- ---- ---------- -------- ----
Total earning assets 2,496,073 $ 137,439 5.51% 2,651,509 $140,081 5.28%
=========== ========
Allowance for loan loss (23,551) (25,577)
Other non-earning assets 278,654 285,887
----------- ----------
TOTAL ASSETS $ 2,751,176 $2,911,819
=========== ==========
INTEREST-BEARING LIABILITIES:
Deposits
Savings and interest-bearing demand $ 585,210 $ 3,921 0.67% $ 544,566 $ 2,341 0.43%
Money market accounts 224,865 4,092 1.82% 226,327 3,281 1.45%
Certificates of deposit and other time 845,573 23,084 2.73% 858,053 19,478 2.27%
----------- ----------- ---- ---------- -------- ----
Total interest-bearing deposits 1,655,648 31,097 1.88% 1,628,946 25,100 1.54%
Short-term borrowings 160,936 3,251 2.02% 164,107 1,805 1.10%
Long-term borrowings 452,825 15,804 3.49% 624,625 35,104 5.62%
----------- ----------- ---- ---------- -------- ----
Total interest-bearing liabilities 2,269,409 $ 50,152 2.21% 2,417,678 $ 62,009 2.56%
=========== ========
Non-interest bearing deposits 252,387 237,047
Other noninterest-bearing liabilities and
shareholders' equity 229,380 257,094
----------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 2,751,176 $2,911,819
=========== ========== ======== ====
Interest income/earning assets $ 137,439 5.51% $140,081 5.28%
Interest expense/earning assets 50,152 2.01% 62,009 2.34%
----------- ---- -------- ----
Net interest income/earning assets $ 87,287 3.50% $ 78,072 2.94%
=========== ==== ======== ====
Tax exempt income presented on a tax equivalent basis based on a 35% federal tax
rate.
Federal tax equivalent adjustments on securities are $728 and $867 for 2005 and
2004, respectively
Federal tax equivalent adjustments on loans are $62 and $74 for 2005 and 2004,
respectively.
NON-INTEREST INCOME
Non-interest income decreased $5,473 to $6,544 in the first quarter of 2005
compared to $12,017 for the first quarter of 2004. The decrease is attributable
to the $5,200 in securities gains taken in the first quarter of 2004 related to
the balance sheet restructuring. Securities losses in the first quarter of 2005
totaled $733. Excluding the impact of securities gains/losses in both quarters
and the sale of the merchant program in the first quarter of 2005, adjusted
non-interest income was $6,860 in the first quarter of 2005, a $43 increase
compared to the same quarter of 2004. The Company recognized two securities as
impaired which resulted in a loss of $742 for the first quarter of 2005. The
Company sold its merchant program in March of 2005 as part of its goal to
improve efficiencies and recognized a net gain of $417.
The increase in service charges on deposits was attributable to both an increase
in deposit accounts and an increase in fees in February of 2004. This increase
occurred even though the Company lowered fees of personal checking products as
part of its new HPC program. Other service charge fees decreased due primarily
to a decline in commissions on annuities and brokerage sales. Mortgage banking
income decreased due to the decline in refinancing demand for fixed rate
mortgage loans. Debit card income increased as the Company issued more cards as
a result of the HPC program and customers increased the usage of the cards.
20
Reconciliation Table - Non-Interest Income to Adjusted Non-Interest Income
Three Months Ended
March 31,
Increase
Non-Interest Income 2005 2004 (Decrease)
- -------------------------------------- ------- -------- ----------
Service charges on deposit accounts $ 3,022 $ 2,788 $ 234
Other service charges and fees 816 960 (144)
Credit card fee income 515 493 22
Mortgage banking 152 228 (76)
Debit card income 543 313 230
Trust income 477 496 (19)
Securities gains (losses) (733) 5,200 (5,933)
Gain on sale of mortgage loans 117 141 (24)
Gain on sale of other assets 432 8 424
CSV life insurance income 380 406 (26)
Other 823 984 (161)
------- ------- ---------
Total non-interest income $ 6,544 $12,017 $ (5,473)
======= ======= =========
Less securities gains (losses) (733) 5,200 (5,933)
Less gain on sale of merchant program 417 - 417
------- ------- ---------
Total adjusted non-interest income $ 6,860 $ 6,817 $ 43
======= ======= =========
NON-INTEREST EXPENSE
Non-interest expense was $19,229 for the first quarter of 2005 compared to
$77,565 for the same period of 2004, a decrease of $58,336. Of this decrease,
$56,998 is attributable to the prepayment fees incurred from the balance sheet
restructuring in the first quarter of 2004. There was no comparable expense in
the first quarter of 2005. Excluding the impact of debt extinguishment expense,
adjusted non-interest expense was $1,338 lower, in the 2005 first quarter
compared to the same quarter a year ago. This was primarily the result of lower
salaries, incentives and commissions, and benefit expenses.
Salaries, commissions and incentives and other benefits decreased $1,432, or
12.7%, for the three months ended March 31, 2005, compared to the same period of
2004. This decrease was primarily the result of severance payments of $269 and a
larger pay out of commissions and incentives in the first quarter of 2004, and
decrease in full time equivalent employees and lower health claims in the first
quarter of 2005. The Company began offering an alternative choice in medical
plans to the employees in 2004, which provides its employees the opportunity to
more actively manage their health care consumption and could help control the
increase in these expenses in the future.
Professional fees decreased $215, or 17.9%, from $1,198 to $983. This was
primarily the result of incurring additional professional fees during the
balance sheet restructuring which occurred in the first quarter of 2004 and
additional legal expenses in 2004. Communication and transportation expense
increased $227 from $895 for the quarter ending March 31, 2004, to $1,122 for
the first quarter of 2005. Nearly all of this increase is due to the additional
postage for the HPC program. The Company expects to have larger postage expense
for all of 2005 compared to 2004 as a result of this program. The majority of
the increase in occupancy expense is due to the four branches that were opened
in 2004.
21
Reconciliation Table - Non-Interest Expense to Adjusted Non-Interest Expense
Three Months Ended
March 31,
Increase
Non-Interest Expense 2005 2004 (Decrease)
- ------------------------------------ ------- ------- ---------
Salaries $ 7,316 $ 7,868 $ (552)
Commissions and incentives 863 1,359 (496)
Other benefits 1,636 2,020 (384)
Occupancy 1,881 1,590 291
Equipment 923 1,077 (154)
Professional fees 983 1,198 (215)
Communication and transportation 1,122 895 227
Processing 934 865 69
Software 437 416 21
Marketing 511 466 45
Debt prepayment fees - 56,998 (56,998)
Low income housing project losses 546 552 (6)
Amortization of intangible assets 233 405 (172)
Other 1,844 1,856 (12)
------- ------- ---------
Total non-interest expense $19,229 $77,565 $ (58,336)
======= ======= =========
Less debt prepayment fees - 56,998 (56,998)
------- ------- ---------
Total adjusted non-interest expense 19,229 20,567 (1,338)
======= ======= =========
INCOME TAX EXPENSE
Income tax expense was $1,612 for the three months ended March 31, 2005,
compared to a benefit of $20,343 for the same period in 2004. The effective tax
rates were 20.1% and (42.8)% for the three months ended March 31, 2005 and 2004,
respectively. Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. The Company
expects the effective tax rate to be approximately 22% for the remainder of
2005. See Note 5 "Income Taxes" for the components of the income tax expense
(benefit).
FINANCIAL POSITION
Total assets at March 31, 2005 were $2,758,999, an increase of $1,834 compared
to $2,757,165 at December 31, 2004. Total assets were $2,648,729 at March 31,
2004.
SECURITIES
Total investment securities available for sale were $802,650 at March 31, 2005,
$801,059 at December 31, 2004, and $707,947 at March 31, 2004. These securities
represent the second largest earning asset component after loans. The Company
currently has no investment securities classified as held to maturity. The
market value of the investment securities available for sale on March 31, 2005,
was $6,945 lower than the amortized cost. The yield for the portfolio is 4.80%
compared to 4.73% on December 31, 2004. Management regularly reviews the
composition of the securities portfolio, taking into account market risks,
interest rate environment, liquidity needs, and the Company's overall interest
rate risk profile.
REGULATORY STOCK
Regulatory stock, defined as Federal Reserve and Federal Home Loan Bank
("FHLB"), 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 Federal Reserve dividend paying stock
according to requirements set by the regulatory agency. Dividends from FHLB are
primarily paid in the form of stock.
LOANS HELD FOR SALE
Loans held for sale increased $13,199 at March 31, 2005, to $14,372 from $1,173
at December 31, 2004. The increase was due to the reclassification of loans
expected to be sold in the second quarter of 2005 in conjunction with the sale
of three Illinois branches previously announced in late 2004.
22
LOANS
Total loans at March 31, 2005 were $1,659,371 compared to $1,665,324 at December
31, 2004. A reclassification of $13,588 from loans to loans held for sale
occurred during the first quarter of 2005 due to the pending sale of three
banking centers. Including these loans, loans increased $7,635, or 0.5%, from
December 31, 2004 to March 31, 2005. Because of the reclassification, loans
decreased $5,953 between December 31, 2004, and March 31, 2005. This decrease is
mainly attributable to an $11,402 decrease in commercial loans, a $5,189
decrease in residential mortgages, and a $5,178 decrease in home equity loans.
These decreases were partially offset by an increase of $7,902 in commercial
real estate loans and $7,914 in consumer loans. The commercial decrease of
$11,402 was primarily the result of funding a line of credit that was repaid in
early January 2005. Mortgage loans decreased as consumers sought fixed rate
funding in the rising rate environment. The Company retains variable rate
mortgage loans but sells its fixed rate mortgages. Consumer loans are seasonal
and the Company expects the growth in this category to continue over the next
two quarters.
March 31, December 31,
2005 2004
---------- ------------
Commercial
Commercial, industrial and
agricultural loans $ 553,494 $ 563,382
Economic development loans and
other obligations of state and
political subdivisions 11,684 13,195
Lease financing 5,728 5,731
---------- ------------
Total commercial 570,906 582,308
Commercial real estate
Commercial mortgages 207,358 224,066
Construction and development 97,127 72,517
---------- ------------
Total commercial real estate 304,485 296,583
Residential mortgages 450,818 456,007
Home equity 137,859 143,037
Consumer loans 195,309 187,395
---------- ------------
Total loans 1,659,377 1,665,330
Less: unearned income 6 6
---------- ------------
Loans, net of unearned income $1,659,371 $ 1,665,324
========== ============
ASSET QUALITY
The allowance for loan losses is the amount that, in management's opinion, is
adequate to absorb probable inherent loan losses as determined by management's
ongoing evaluation of the loan portfolio. The evaluation by management is based
upon consideration of various factors including growth of the portfolio, an
analysis of individual credits, adverse situations that could affect a
borrower's ability to repay, prior and current loss experience, the results of
recent regulatory examinations and current economic conditions. During the third
quarter of 2004, management enhanced the process that it uses to perform this
analysis. These enhancements included expanded data analysis, improved
back-testing and continued refinements to documentation surrounding the adequacy
of the allowance. The result is more reliable measures of the probability of
default and risk of loss given default for the Company's categories of loans
with similar risk characteristics. The principal change involved the ability to
analyze loss data over a longer period of time. This allows us to improve the
measure of inherent loss over a complete economic cycle and reduces the impact
for qualitative adjustments. These changes do not impact losses estimated in
accordance with Financial Accounting Standard 114, "Accounting by Creditors for
Impairment of a Loan."
Loans that are deemed to be uncollectible are charged-off to the allowance,
while recoveries of previously charged off amounts are credited to the
allowance. A provision for loan losses is expensed to operations at levels
deemed necessary to provide assurance that the allowance for loan losses is
sufficient to absorb probable losses based on management's ongoing evaluation of
the loan portfolio.
The allowance for loan losses was $23,259 at March 31, 2005, representing 1.40%
of total loans, compared with $23,794 at December 31, 2004, and $25,494 at March
31, 2004, which represented 1.43% and 1.54% of total loans, respectively.
Annualized net charge-offs to average loans was 0.22% during the first quarter
of 2005 compared to 0.14% for the same period of 2004. The provision for the
first three months of 2005 was $375, which was a decrease of $275 compared to
the same period in 2004. Net charge-offs exceeded the provision by $535 in the
first quarter of 2005. The lower provision for the quarter is due primarily to
the release of $621 in specific reserves related to a non-performing
agricultural loan that went to auction late in the first quarter and a charge
off of a loan for $713
23
which was fully reserved. The allowance for loan losses to non-performing loans
was 129.11% at March 31, 2005, compared to 128.29% and 126.50% at December 31,
2004 and March 31, 2004, respectively.
SUMMARY OF ALLOWANCE FOR LOAN LOSSES
Three Months Ended
March 31,
2005 2004
-------- --------
Beginning Balance $ 23,794 $ 25,403
Loans charged off (1,133) (1,205)
Recoveries 223 646
Provision for loan losses 375 650
-------- --------
Ending Balance $ 23,259 $ 25,494
======== ========
Percent of total loans 1.40% 1.54%
======== ========
Annualized % of average loans:
Net charge-offs 0.22% 0.14%
Provision for loan losses 0.09% 0.16%
As of March 31, 2005, total non-performing loans were $18,015, which is $532
lower than the level at December 31, 2004, and $2,138 lower than March 31, 2004.
Non-performing loans, consisting of nonaccrual and 90 days or more past due
loans, were 1.09%, 1.11% and 1.22% of total loans at March 31, 2005, December
31, 2004, and March 31, 2004, respectively. A municipal obligation included in
securities available for sale with a market value of $2,716 was in default in
the first quarter of 2004 but was recovered in full in the third quarter of
2004.
Listed below is a comparison of non-performing assets.
March 31, December 31,
2005 2004
--------- ------------
Nonaccrual loans $ 17,883 $ 17,971
90 days or more past due loans 132 576
-------- -----------
Total non-performing loans 18,015 18,547
Other real estate owned 152 243
-------- -----------
Total non-performing assets $ 18,167 $ 18,790
======== ===========
Ratios:
Non-performing Loans to Loans 1.09% 1.11%
Non-performing Assets to Loans and Other Real Estate Owned 1.09% 1.13%
Allowance for Loan Losses to Non-performing Loans 129.11% 128.29%
DEPOSITS
Total deposits were $1,892,844 at March 31, 2005, compared to $1,896,541 and
$1,816,161 at December 31, 2004, and March 31, 2004, respectively. Total
valuable core deposits, including non-interest and interesting bearing demand,
money market and savings deposits, increased $62,564 to $1,055,804 at March 31,
2005, from $993,240 on March 31, 2004, but decreased $22,263 from $1,078,067 at
December 31, 2004. The decrease from December 31, 2004 was caused primarily by
the daily fluctuations in balances of some larger demand deposit accounts;
however, on average, valuable core deposits increased from December 31, 2004 to
March 31, 2005. The Company's HPC program is expected to grow valuable core
deposits in 2005. The program began in late January with a goal to double the
number of new accounts that were opened in 2004. As of March 31, 2005, the
Company was above the goal set for the first two months of the program. Time
deposits greater than $100 have increased $18,334, or 6.0%, since December 31,
2004. Other time deposits increased $232 for the same period. Time deposits
greater than $100 increased $38,180, or 13.4%, and other time deposits decreased
$24,061, or 4.5%, from March 31, 2004, to March 31, 2005. The increase in the
time deposits over $100 is primarily due to an increase in public fund deposits.
24
SHORT-TERM BORROWINGS
Federal funds purchased and securities sold under repurchase agreements totaled
$164,151 at March 31, 2005, compared to $129,894 at December 31, 2004.
Securities sold under repurchase agreements are collateralized transactions
acquired in national markets as well as from the Company's commercial customers
as part of a cash management service. Additional short-term borrowings include
short-term advances from FHLB. These borrowings increased $109,993 as previously
classified long-term borrowings reached the short-term position.
At March 31, 2005, the Company had a $15,000 line of credit with no outstanding
balance. The Company also had the capacity to borrow from the Federal Reserve
Bank discount window, uncommitted securities eligible for pledging, and
available uncommitted Fed Funds lines from various financial institutions at the
end of the first quarter 2005.
LONG-TERM BORROWINGS
Long-term borrowings include FHLB advances, term notes, or other similar
obligations. Included in long-term borrowings is $108,610 of FHLB advances to
fund investments and loans and to satisfy other funding needs. The Company must
pledge collateral in the form of mortgage-backed securities and mortgage loans
to secure these advances. At March 31, 2005, the Company was in compliance with
those requirements.
On March 25, 2004, the Company issued $4,000 of subordinated debt that will
mature on April 7, 2014. Issuance costs of $144 were paid by the Company and are
being amortized over the life of the debt.
CAPITAL EXPENDITURES
The Company is currently constructing a new banking center in Florence,
Kentucky, which is located near Cincinnati, Ohio. Capital expenditures for the
new banking center were $571 in the first quarter of 2005. This banking center
is scheduled to open in the second quarter of 2005.
OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
There have been no material changes in off-balance sheet arrangements and
contractual obligations since December 31, 2004.
CAPITAL RESOURCES AND LIQUIDITY
The Company and Integra Bank N.A. (the "Bank") have capital ratios that
substantially exceed all regulatory requirements, including the regulatory
guidelines for "well-capitalized" that apply to the Bank. It is management's
intent for the Bank to remain well-capitalized at all times. The regulatory
capital ratios for the Company and the Bank are shown below.
Regulatory Guidelines Actual
------------------------- -----------------------
Minimum Well- March 31, December 31,
Requirements Capitalized 2005 2004
------------ ----------- --------- ------------
Integra Bank Corporation:
Total Capital (to Risk-Weighted Assets) 8.00% N/A 12.58% 12.56%
Tier 1 Capital (to Risk-Weighted Assets) 4.00% N/A 10.64% 10.52%
Tier 1 Capital (to Average Assets) 4.00% N/A 7.72% 7.64%
Integra Bank NA:
Total Capital (to Risk-Weighted Assets) 8.00% 10.00% 12.04% 12.01%
Tier 1 Capital (to Risk-Weighted Assets) 4.00% 6.00% 10.84% 10.77%
Tier 1 Capital (to Average Assets) 4.00% 5.00% 7.91% 7.86%
Liquidity of a banking institution reflects the ability to provide funds to meet
loan requests, accommodate possible outflows in deposits and other borrowings,
and take advantage of interest rate market opportunities. The Company
continuously analyzes its current and prospective business activity in order to
match maturities of specific categories of short-term and long-term loans and
investments with specific types of deposits and borrowings.
For the Bank, the primary sources of short-term asset liquidity have been
Federal Funds sold, commercial paper, interest-bearing deposits with other
financial institutions, and securities available for sale. In addition to these
sources, short-term asset liquidity is provided by scheduled principal paydowns
and maturing loans and securities. The balance between these sources and needs
to fund
25
loan demand and deposit withdrawals is monitored under the Company's
asset/liability management program. When these sources are not adequate, the
Company may use Federal Funds purchases, brokered deposits, repurchase
agreements, sale of investment securities or utilize its borrowing capacity with
the FHLB, as alternative sources of liquidity. Additionally, the Company's
underwriting standards for its mortgage loan portfolio comply with standards
established by government housing agencies; as a result, a portion of the
mortgage loan portfolio could be sold to provide additional liquidity. At March
31, 2005, and December 31, 2004, respectively, Federal Funds sold and other
short-term investments were $129 and $64. Additionally, at March 31, 2005, the
Company had $205,000 available from unused Federal Funds lines and in excess of
$354,803 in unencumbered securities available for repurchase agreements. The
Bank also has a "borrower in custody" line with the Federal Reserve Bank
totaling over $438,771 as part of its liquidity contingency plan.
For the Company, liquidity is provided by dividends from the Bank, cash
balances, credit line availability, liquid assets, and proceeds from capital
market transactions. Federal banking law limits the amount of capital
distributions that national banks can make to their holding companies without
obtaining prior regulatory approval. A national bank's dividend paying capacity
is affected by several factors, including the amount of its net profits (as
defined by statute) for the two previous calendar years and net profits for the
current year up to the date of dividend declaration. The Company has an
unsecured line of credit available which permits it to borrow up to $15,000.
Management believes that the Company has adequate liquidity to meet its
foreseeable needs.
Liquidity for the Company is required to support operational expenses of the
Company, pay taxes, meet outstanding debt and trust preferred securities
obligations, provide dividends to shareholders and other general corporate
purposes. During the first quarter of 2004, the Company announced a change in
its dividend philosophy and moved to a long-term dividend payout ratio of 35% to
50% of net earnings. Management believes that funds to fulfill these obligations
for 2005 will be available from currently available cash and marketable
securities, dividends from the Bank, accessing the Company's line of credit, or
other sources that management expects to be available during the year.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk is the exposure of earnings and capital to changes in
interest rates. Fluctuations in rates affect earnings by changing net interest
income and other interest-sensitive income and expense levels. Interest rate
changes affect the market value of capital by altering the underlying value of
assets, liabilities and off balance sheet instruments. The interest rate risk
management program for the Company is comprised of several components. The
components include (1) Board of Directors' oversight, (2) senior management
oversight, (3) risk limits and control, (4) risk identification and measurement,
(5) risk monitoring and reporting and (6) independent review. It is the
objective of the Company's interest rate risk management processes to manage the
impact of interest rate volatility on earnings and capital.
At the Company, interest rate risk is managed through the Corporate Asset and
Liability Committee (Corporate ALCO) with oversight through the ALCO Committee
of the Board of Directors (Board ALCO). The Board ALCO meets at least twice a
quarter and is responsible for the establishment of policies, risk limits and
authorization levels. The Corporate ALCO meets at least monthly and is
responsible for implementing policies and procedures, overseeing the entire
interest rate risk management process and establishing internal controls. The
model is externally validated periodically by an independent third party.
Interest rate risk is measured and monitored on a proactive basis by utilizing a
simulation model. The Company uses the following key methodologies to measure
interest rate risk.
EARNINGS AT RISK ("EAR"). EAR is considered management's best source of managing
short-term interest rate risk (one year time frame). This measure reflects the
dollar amount of net interest income that will be impacted by changes in
interest rates. The Company uses a simulation model to run immediate and
parallel changes in interest rates from a "Base" scenario using implied forward
rates. The standard simulation analysis assesses the impact on net interest
income over a 12-month horizon by shocking the implied forward yield curve up
and down 100, 200, and 300 basis points. Additional yield curve scenarios are
tested from time to time to assess the risk to changes in the slope of the yield
curve and changes in basis relationships. These interest rate scenarios are
executed against a balance sheet utilizing projected growth and composition.
Additional simulations are run from time to time to assess the risk to earnings
and liquidity from balance sheet growth occurring faster or slower than
anticipated as well as the impact of faster or slower prepayments in the loan
and securities portfolio. This simulation model projects the net interest income
forecasted under each scenario and calculates the percentage change from the
"Base" interest rate scenario. The Board ALCO has approved policy limits for
changes in one year EAR from the "Base" interest rate scenario of minus 10
percent to a 200 basis point rate shock in either direction. At March 31, 2005,
the Company would experience a negative 4.21% 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 0.89% change in net interest
income. The reduction in EAR in the down 200 basis points scenario can be
attributed to a favorable impact from the quarter over quarter increase in
interest rates. Both simulation results are within the policy limits established
by the Board ALCO.
26
Trends in Earnings at Risk
Estimated Change in EAR from the Base Interest Rate Scenario
------------------------------------------------------------
-200 basis points +200 basis points
----------------- -----------------
March 31, 2005 -4.21% -0.89%
December 31, 2004 -5.77% -0.59%
ECONOMIC VALUE OF EQUITY ("EVE"). Management considers EVE to be its best
analytical tool for measuring long-term interest rate risk. This measure
reflects the dollar amount of net equity that will be impacted by changes in
interest rates. The Company uses a simulation model to evaluate the impact of
immediate and parallel changes in interest rates from a "Base" scenario using
implied forward rates. The standard simulation analysis assesses the impact on
EVE by shocking the implied forward yield curve up and down 100, 200, and 300
basis points. This simulation model projects the estimated economic value of
assets and liabilities under each scenario. The difference between the economic
value of total assets and the economic value of total liabilities is referred to
as the economic value of equity. The simulation model calculates the percentage
change from the "Base" interest rate scenario.
The Board ALCO has approved policy limits for changes in EVE. The variance limit
for EVE is measured in an environment when the "Base" interest rate scenario is
shocked up or down 200 basis points within a range of plus or minus 15%.
At March 31, 2005, the Company would experience a positive 3.18% 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 8.25% change in
EVE. Both of these measures are within Board approved policy limits.
Trends in Economic Value of Equity
Estimated Change in EVE from the Base Interest Rate Scenario
------------------------------------------------------------
-200 basis points +200 basis points
----------------- -----------------
March 31, 2005 3.18% -8.25%
December 31, 2004 1.37% -7.77%
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 precisely predict the impact of higher or lower
interest rates on net interest income or on the economic value of the assets and
liabilities. Actual results will differ from simulated results due to the
timing, magnitude and frequency of interest-rate changes, the difference between
actual experience and the characteristics assumed, as well as changes in market
conditions and management strategies.
ITEM 4: CONTROLS AND PROCEDURES
Based on an evaluation of the Company's disclosure controls and procedures, as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of March 31, 2005, the
Company's principal executive officer and principal financial officer have
concluded that such disclosure controls and procedures were effective as of that
date.
There have been no changes in the Company's internal control over financial
reporting that occurred during the quarter ended March 31, 2005, that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
27
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to legal actions that arise in the
normal course of their business activities. In the opinion of management, the
ultimate resolution of these matters is not expected to have a materially
adverse effect on the financial position or on the results of operations of the
Company and its subsidiaries.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
During the period covered by this report, the Audit Committee of our Board of
Directors approved the engagement of PricewaterhouseCoopers LLP, our independent
registered public accounting firm, to perform the following non-audit services:
[ ] Preparation of Corporate Income Tax Return
[ ] Federal, state and local tax planning, compliance and advice.
This disclosure is made pursuant to Section 10A(i)(2) of the Securities Exchange
Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002.
ITEM 6. EXHIBITS
Exhibits. The following documents are filed as exhibits to this report:
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 of Chief Executive Officer.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 of Chief Financial Officer.
32 Certification of Chief Executive Officer and Chief Financial Officer.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTEGRA BANK CORPORATION
By /s/ Michael T. Vea
---------------------------------
Chairman of the Board, Chief
Executive Officer and President
May 9, 2005
/s/ Sheila A. Stoke
---------------------------------
Senior Vice President, Controller
and Principal Accounting Officer
May 9, 2005
29