Attached files
file | filename |
---|---|
EX-32 - EXHIBIT 32 - INTEGRA BANK CORP | c91922exv32.htm |
EX-10.2 - EXHIBIT 10.2 - INTEGRA BANK CORP | c91922exv10w2.htm |
EX-31.1 - EXHIBIT 31.1 - INTEGRA BANK CORP | c91922exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - INTEGRA BANK CORP | c91922exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2009.
or
o | 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 or organization) | (IRS Employee Identification No.) | |
PO BOX 868, EVANSVILLE, INDIANA | 47705-0868 | |
(Address of principal executive offices) | (Zip Code) |
Registrants 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12
months (or for shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act.
Large accelerated filer o
|
Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act of 1934).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
CLASS | OUTSTANDING AT OCTOBER 30, 2009 | |
(Common stock, $1.00 Stated Value) | 20,932,790 |
INTEGRA BANK CORPORATION
INDEX
PAGE NO. | ||||||||
3 | ||||||||
4 | ||||||||
6 | ||||||||
7 | ||||||||
8 | ||||||||
10 | ||||||||
34 | ||||||||
51 | ||||||||
53 | ||||||||
54 | ||||||||
54 | ||||||||
55 | ||||||||
55 | ||||||||
55 | ||||||||
55 | ||||||||
56 | ||||||||
57 | ||||||||
Exhibit 10.2 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32 |
2
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. | Unaudited Financial Statements |
INTEGRA BANK CORPORATION and Subsidiaries
Unaudited Consolidated Balance Sheets
(In thousands, except for share data)
(In thousands, except for share data)
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 391,171 | $ | 62,354 | ||||
Federal funds sold and other short-term investments |
49,946 | 419 | ||||||
Total cash and cash equivalents |
441,117 | 62,773 | ||||||
Loans held for sale (at lower of cost or fair value) |
41,253 | 5,776 | ||||||
Securities available for sale |
342,240 | 561,739 | ||||||
Securities held for trading |
13,237 | | ||||||
Regulatory stock |
29,124 | 29,155 | ||||||
Loans, net of unearned income |
2,205,661 | 2,490,243 | ||||||
Less: Allowance for loan losses |
(79,364 | ) | (64,437 | ) | ||||
Net loans |
2,126,297 | 2,425,806 | ||||||
Premises and equipment |
45,296 | 48,500 | ||||||
Other intangible assets |
8,664 | 9,928 | ||||||
Other assets |
211,097 | 213,423 | ||||||
TOTAL ASSETS |
$ | 3,258,325 | $ | 3,357,100 | ||||
LIABILITIES |
||||||||
Deposits: |
||||||||
Non-interest-bearing demand |
$ | 287,723 | $ | 284,032 | ||||
Interest-bearing: |
||||||||
Savings, interest checking and money market accounts |
1,070,942 | 901,785 | ||||||
Time deposits of $100 or more |
627,732 | 603,519 | ||||||
Other interest-bearing |
486,365 | 550,856 | ||||||
Total deposits |
2,472,762 | 2,340,192 | ||||||
Short-term borrowings |
188,011 | 415,006 | ||||||
Long-term borrowings |
361,364 | 360,917 | ||||||
Other liabilities |
33,656 | 36,194 | ||||||
TOTAL LIABILITIES |
3,055,793 | 3,152,309 | ||||||
Commitments
and contingent liabilities (Note 10) |
| | ||||||
SHAREHOLDERS EQUITY |
||||||||
Preferred stock no par, $1,000 per share liquidation preference: |
||||||||
Shares authorized: 1,000,000 |
||||||||
Shares outstanding: 83,586 |
81,928 | | ||||||
Common stock $1.00 stated value: |
||||||||
Shares authorized: 129,000,000 |
||||||||
Shares outstanding: 20,937,184 and 20,748,880, respectively |
20,937 | 20,749 | ||||||
Additional paid-in capital |
217,205 | 208,732 | ||||||
Retained earnings |
(114,320 | ) | (15,754 | ) | ||||
Accumulated other comprehensive income (loss) |
(3,218 | ) | (8,936 | ) | ||||
TOTAL SHAREHOLDERS EQUITY |
202,532 | 204,791 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
$ | 3,258,325 | $ | 3,357,100 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
3
Table of Contents
INTEGRA BANK CORPORATION and Subsidiaries
Unaudited Consolidated Statements of Income
(In thousands, except for per share data)
(In thousands, except for per share data)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
INTEREST INCOME |
||||||||||||||||
Interest and fees on loans: |
||||||||||||||||
Taxable |
$ | 24,374 | $ | 35,079 | $ | 75,410 | $ | 109,456 | ||||||||
Tax-exempt |
192 | 122 | 597 | 304 | ||||||||||||
Interest and dividends on securities: |
||||||||||||||||
Taxable |
3,265 | 5,514 | 13,736 | 17,264 | ||||||||||||
Tax-exempt |
592 | 1,091 | 2,425 | 3,517 | ||||||||||||
Interest on securities held for trading |
81 | | 103 | 570 | ||||||||||||
Dividends on regulatory stock |
337 | 385 | 1,015 | 1,170 | ||||||||||||
Interest on loans held for sale |
89 | 88 | 319 | 281 | ||||||||||||
Interest on federal funds sold and other short-term investments |
272 | 26 | 539 | 94 | ||||||||||||
Total interest income |
29,202 | 42,305 | 94,144 | 132,656 | ||||||||||||
INTEREST EXPENSE |
||||||||||||||||
Interest on deposits |
10,356 | 12,888 | 34,302 | 42,131 | ||||||||||||
Interest on short-term borrowings |
268 | 1,995 | 1,614 | 6,116 | ||||||||||||
Interest on long-term borrowings |
2,528 | 3,562 | 7,921 | 11,865 | ||||||||||||
Total interest expense |
13,152 | 18,445 | 43,837 | 60,112 | ||||||||||||
NET INTEREST INCOME |
16,050 | 23,860 | 50,307 | 72,544 | ||||||||||||
Provision for loan losses |
18,913 | 17,978 | 82,843 | 27,615 | ||||||||||||
Net interest income after provision for loan losses |
(2,863 | ) | 5,882 | (32,536 | ) | 44,929 | ||||||||||
NON-INTEREST INCOME |
||||||||||||||||
Service charges on deposit accounts |
5,335 | 5,884 | 14,783 | 15,642 | ||||||||||||
Other service charges and fees |
825 | 880 | 2,422 | 2,752 | ||||||||||||
Commissions on annuities |
273 | 223 | 720 | 1,245 | ||||||||||||
Debit card income-interchange |
1,368 | 1,358 | 3,998 | 3,977 | ||||||||||||
Trust income |
630 | 573 | 1,652 | 1,686 | ||||||||||||
Net securities gains (losses) |
6,578 | 13 | 8,057 | 40 | ||||||||||||
Gain on sale of other assets |
(219 | ) | (47 | ) | 2,255 | (59 | ) | |||||||||
Other than temporary loss: |
||||||||||||||||
Total impairment losses |
| | (20,334 | ) | (6,302 | ) | ||||||||||
Reclassification of loss from other comprehensive income |
| | (1,150 | ) | | |||||||||||
Net impairment loss recognized in earnings |
| | (21,484 | ) | (6,302 | ) | ||||||||||
Warrant fair value adjustment |
| | (6,145 | ) | | |||||||||||
Cash surrender value of life insurance |
(397 | ) | 574 | 687 | 1,792 | |||||||||||
Other |
434 | 726 | 2,390 | 3,157 | ||||||||||||
Total non-interest income |
14,827 | 10,184 | 9,335 | 23,930 | ||||||||||||
NON-INTEREST EXPENSE |
||||||||||||||||
Salaries and employee benefits |
10,187 | 12,125 | 33,823 | 36,965 | ||||||||||||
Occupancy |
2,348 | 2,621 | 7,307 | 7,722 | ||||||||||||
Equipment |
749 | 974 | 2,406 | 2,857 | ||||||||||||
Professional fees |
1,699 | 1,390 | 5,486 | 3,925 | ||||||||||||
Communication and transportation |
1,126 | 1,223 | 3,378 | 3,816 | ||||||||||||
Processing |
647 | 715 | 2,138 | 2,137 | ||||||||||||
Software |
654 | 673 | 1,901 | 1,760 | ||||||||||||
Marketing |
312 | 453 | 1,152 | 1,546 | ||||||||||||
Loan and OREO expense |
2,545 | 870 | 9,881 | 1,752 | ||||||||||||
FDIC assessment |
1,721 | 163 | 5,676 | 317 | ||||||||||||
Low income housing project losses |
161 | 556 | 1,324 | 1,930 | ||||||||||||
Debt prepayment penalities |
27 | | 1,538 | | ||||||||||||
Amortization of intangible assets |
421 | 431 | 1,264 | 1,293 | ||||||||||||
Goodwill impairment |
| 48,000 | | 48,000 | ||||||||||||
Other |
1,772 | 1,993 | 5,737 | 6,465 | ||||||||||||
Total non-interest expense |
24,369 | 72,187 | 83,011 | 120,485 | ||||||||||||
Income (Loss) before income taxes |
(12,405 | ) | (56,121 | ) | (106,212 | ) | (51,626 | ) | ||||||||
Income tax expense (benefit) |
7,330 | (22,794 | ) | (9,952 | ) | (22,373 | ) | |||||||||
Net income (loss) |
(19,735 | ) | (33,327 | ) | (96,260 | ) | (29,253 | ) | ||||||||
Preferred stock dividends and discount accretion |
1,117 | | 2,669 | | ||||||||||||
Net income (loss) available to common shareholders |
$ | (20,852 | ) | $ | (33,327 | ) | $ | (98,929 | ) | $ | (29,253 | ) | ||||
Unaudited Consolidated Statements of Income are continued on next page.
4
Table of Contents
INTEGRA BANK CORPORATION and Subsidiaries
Unaudited Consolidated Statements of Income (Continued)
(In thousands, except for per share data)
Unaudited Consolidated Statements of Income (Continued)
(In thousands, except for per share data)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Earnings (Loss) per share: |
||||||||||||||||
Basic |
$ | (1.01 | ) | $ | (1.62 | ) | $ | (4.78 | ) | $ | (1.42 | ) | ||||
Diluted |
(1.01 | ) | (1.62 | ) | (4.78 | ) | (1.42 | ) | ||||||||
Weighted average shares outstanding: |
||||||||||||||||
Basic |
20,707 | 20,567 | 20,713 | 20,553 | ||||||||||||
Diluted |
20,707 | 20,567 | 20,713 | 20,553 | ||||||||||||
Dividends per share |
$ | | $ | 0.01 | $ | 0.03 | $ | 0.37 |
The accompanying notes are an integral part of the consolidated financial statements.
5
Table of Contents
INTEGRA BANK CORPORATION and Subsidiaries
Unaudited Consolidated Statements of Comprehensive Income
(In thousands)
(In thousands)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net income (Loss) |
$ | (19,735 | ) | $ | (33,327 | ) | $ | (96,260 | ) | $ | (29,253 | ) | ||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||
Unrealized gain (loss) on securities: |
||||||||||||||||
Unrealized gain (loss) arising in period (net of tax of $2,246, $(5,774), $(1,395) and $(10,550), respectively) |
3,695 | (9,769 | ) | (2,295 | ) | (17,851 | ) | |||||||||
Reclassification of amounts realized through impairment charges and
sales (net of tax of $(2,487), $(5), $5,076 and $2,326, respectively) |
(4,091 | ) | (8 | ) | 8,351 | 3,936 | ||||||||||
Net unrealized gain (loss) on securities |
(396 | ) | (9,777 | ) | 6,056 | (13,915 | ) | |||||||||
Change in net pension plan liability (net of tax of $9, $14, $28 and $43 respectively) |
15 | 23 | 46 | 73 | ||||||||||||
Unrealized gain (loss) on derivative hedging instruments arising in period (net of tax of $(13), $(2), $(233) and $76, respectively) |
(22 | ) | (4 | ) | (384 | ) | 127 | |||||||||
Net unrealized gain (loss), recognized in other comprehensive income (loss) |
(403 | ) | (9,758 | ) | 5,718 | (13,715 | ) | |||||||||
Comprehensive income (loss) |
$ | (20,138 | ) | $ | (43,085 | ) | $ | (90,542 | ) | $ | (42,968 | ) | ||||
The accompanying notes are an integral part of the consolidated financial statements.
6
Table of Contents
INTEGRA BANK CORPORATION and Subsidiaries
Unaudited Consolidated Statements of Changes In Shareholders Equity
(In thousands, except for share and per share data)
(In thousands, except for share and per share data)
Accumulated | ||||||||||||||||||||||||||||
Shares of | Additional | Other | ||||||||||||||||||||||||||
Preferred | Common | Common | Paid-in | Retained | Comprehensive | |||||||||||||||||||||||
Stock | Stock | Stock | Capital | Earnings | Income (Loss) | Total | ||||||||||||||||||||||
BALANCE AT DECEMBER 31, 2008 |
$ | | 20,748,880 | $ | 20,749 | $ | 208,732 | $ | (15,754 | ) | $ | (8,936 | ) | $ | 204,791 | |||||||||||||
Net income (loss) |
| | | | (96,260 | ) | | (96,260 | ) | |||||||||||||||||||
Cash dividend declared ($0.02 per share) |
| | | | (415 | ) | | (415 | ) | |||||||||||||||||||
Net change, net of tax, in accumulated
other comprehensive income |
| | | | | 5,781 | 5,781 | |||||||||||||||||||||
Cumulative effect of change in accounting principles,
adoption of FSP FAS 115-2 and 124-2 (net of tax) |
| | | | 778 | (778 | ) | | ||||||||||||||||||||
Change in unrealized gains (losses) on securities available-
for-sale for which a portion of an other-than temporary
impairment has been recognized in earnings, net of
reclassification and taxes |
| | | | | 715 | 715 | |||||||||||||||||||||
Preferred stock |
83,586 | | | | | | 83,586 | |||||||||||||||||||||
Common stock warrants |
| 7,999 | 7,999 | |||||||||||||||||||||||||
Discount on preferred stock |
(1,855 | ) | | | | | | (1,855 | ) | |||||||||||||||||||
Preferred stock dividend and discount accretion |
197 | | | | (2,669 | ) | | (2,472 | ) | |||||||||||||||||||
Vesting of restricted shares, net |
| (9,296 | ) | (9 | ) | (307 | ) | | | (316 | ) | |||||||||||||||||
Grant of restricted stock, net of forfeitures |
| 197,600 | 197 | (197 | ) | | | | ||||||||||||||||||||
Stock-based compensation expense |
| | | 978 | | | 978 | |||||||||||||||||||||
BALANCE AT SEPTEMBER 30, 2009 |
$ | 81,928 | 20,937,184 | $ | 20,937 | $ | 217,205 | $ | (114,320 | ) | $ | (3,218 | ) | $ | 202,532 | |||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
7
Table of Contents
INTEGRA BANK CORPORATION and Subsidiaries
Unaudited Consolidated Statements of Cash Flow
(In thousands)
(In thousands)
Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net income (loss) |
$ | (96,260 | ) | $ | (29,253 | ) | ||
Adjustments to reconcile net income (loss) to
net cash provided by operating activities: |
||||||||
Amortization and depreciation |
5,214 | 5,443 | ||||||
Provision for loan losses |
82,843 | 27,615 | ||||||
Income tax valuation allowance |
25,357 | | ||||||
Net securities (gains) losses |
(8,057 | ) | (40 | ) | ||||
Impairment charge on available for sale securities |
21,484 | 6,302 | ||||||
Net held for trading (gains) losses |
1,002 | (321 | ) | |||||
(Gain) loss on sale of premises and equipment |
68 | (2 | ) | |||||
(Gain) loss on sale of other real estate owned |
227 | 61 | ||||||
Gain on sale of branches |
(2,549 | ) | | |||||
Loss on low-income housing investments |
1,324 | 1,930 | ||||||
Proceeds from maturity of held for trading securities |
| 1,684 | ||||||
Proceeds from sale of held for trading securities |
7,100 | 52,419 | ||||||
Purchase of held for trading securities |
(19,745 | ) | | |||||
Increase (decrease) in deferred taxes |
(3,461 | ) | (22,902 | ) | ||||
Net gain on sale of loans held for sale |
(1,277 | ) | (555 | ) | ||||
Proceeds from sale of loans held for sale |
148,833 | 86,147 | ||||||
Origination of loans held for sale |
(102,352 | ) | (86,343 | ) | ||||
Goodwill impairment |
| 48,000 | ||||||
Debt prepayment fees |
1,538 | | ||||||
Change in other operating |
(13,384 | ) | (5,693 | ) | ||||
Net cash flows provided by (used in) operating activities |
47,905 | 84,492 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Proceeds from maturities of securities available for sale |
98,580 | 101,446 | ||||||
Proceeds from sales of securities available for sale |
296,671 | 17,758 | ||||||
Purchase of securities available for sale |
(180,189 | ) | (89,663 | ) | ||||
(Increase) decrease in loans made to customers |
89,658 | (167,457 | ) | |||||
Decrease in loans from sale of branches |
26,940 | | ||||||
Purchase of premises and equipment |
(977 | ) | (2,563 | ) | ||||
Proceeds from sale of premises and equipment from branch sale |
1,148 | | ||||||
Proceeds from sale of premises and equipment |
17 | 21 | ||||||
Proceeds from sale of other real estate owned |
5,830 | 228 | ||||||
Net cash flows provided by (used in) investing activities |
337,678 | (140,230 | ) | |||||
Unaudited Consolidated Statements of Cash Flow are continued on next page.
8
Table of Contents
INTEGRA BANK CORPORATION and Subsidiaries
Unaudited Consolidated Statements of Cash Flow (Continued)
(In thousands)
Unaudited Consolidated Statements of Cash Flow (Continued)
(In thousands)
Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Net increase (decrease) in deposits |
183,260 | 45,532 | ||||||
Decrease in deposits from sale of branches |
(50,796 | ) | | |||||
Net increase (decrease) in short-term borrowed funds |
(226,995 | ) | 33,912 | |||||
Proceeds from long-term borrowings |
50,000 | 50,000 | ||||||
Repayment of long-term borrowings |
(49,550 | ) | (68,027 | ) | ||||
Proceeds from issuance of common stock warrants |
7,999 | | ||||||
Proceeds from issuance of TARP preferred stock |
81,928 | | ||||||
Accreton of discount on TARP preferred stock |
(197 | ) | | |||||
Dividends paid on TARP preferred stock |
(1,950 | ) | | |||||
Dividends paid on common stock |
(622 | ) | (11,172 | ) | ||||
Proceeds from vesting of restricted shares, net |
(316 | ) | | |||||
Net cash flows provided by (used in) financing activities |
(7,239 | ) | 50,245 | |||||
Net increase in cash and cash equivalents |
378,344 | (5,493 | ) | |||||
Cash and cash equivalents at beginning of period |
62,773 | 75,990 | ||||||
Cash and cash equivalents at end of period |
$ | 441,117 | $ | 70,497 | ||||
Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS |
||||||||
Other real estate acquired in settlement of loans |
19,387 | 4,961 | ||||||
Dividends for common shareholders declared and not paid |
| 207 | ||||||
Dividends accrued not paid on preferred stock |
522 | |
The accompanying notes are an integral part of the consolidated financial statements.
9
Table of Contents
INTEGRA BANK CORPORATION and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for share and per share data)
(In thousands, except for share and per share data)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
References to the terms we, us, our, the Company and Integra used throughout this report
refer to Integra Bank Corporation and, unless the context indicates otherwise, its subsidiaries.
At September 30, 2009, our subsidiaries consisted of Integra Bank N.A. (the Bank), a reinsurance
company and four statutory business trusts which are not consolidated under FIN 46. All
significant intercompany transactions are eliminated in consolidation.
The financial statements have been prepared pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC). While the financial statements are unaudited, they do reflect all
adjustments which, in the opinion of management, are necessary for a fair presentation of the
financial position, results of operations, and cash flows for the interim periods. All such
adjustments are of a normal recurring nature. Pursuant to SEC rules, certain information and note
disclosures normally included in
financial statements prepared in accordance with accounting principles generally accepted in the
United States of America (GAAP) have been condensed or omitted from these financial statements
unless significant changes have taken place since the end of the most recent fiscal year. The
accompanying financial statements and notes thereto should be read in conjunction with our
financial statements and notes for the year ended December 31, 2008, included in our 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.
ACCOUNTING ESTIMATES:
We are required to make estimates and assumptions based on available information that affect the
amounts reported in the consolidated financial statements. Significant estimates, which are
particularly susceptible to short-term changes, include the valuation of the securities portfolio,
in particular, level 3 securities, the determination of the allowance for loan losses, the
valuation of real estate and other properties acquired in connection with foreclosures or in
satisfaction of amounts due from borrowers on loans, and the valuation of our deferred tax asset.
The decline in the value of residential real estate, other impacts of the recession on the Bank,
and our overall financial performance have all had a meaningful influence on the application of
certain of our critical accounting policies and development of these significant estimates. In
applying those policies, and in making our best estimates during the first three quarters of 2009,
we recorded provisions for loan losses, other than temporary impairment (OTTI) on investment
securities and a partial valuation allowance on our deferred tax asset. In 2008, considering
similar factors, we recorded significant provisions for loan losses, other than temporary
impairment on investment securities and goodwill impairment.
Our customers abilities to make scheduled loan payments depend in part on the performance of their
businesses and future economic conditions. In the event our loan customers perform worse than
expected, we could incur substantial additional provisions for loan losses in future periods.
There are trust preferred securities in our securities portfolio and loans in our loan portfolio as
to which we have estimated losses in part based on the assumption that the plans being executed by
the issuers or our borrowers will be implemented as planned and have the effect of improving their
financial positions. Should these plans not be executed, or have unintended consequences, our
losses would increase.
On a quarterly basis, we determine whether a valuation allowance is necessary for our deferred tax
asset. In performing this analysis, we consider all evidence currently available, both positive
and negative, in determining whether, based on the weight of that evidence, the deferred tax asset
will be realized. We establish a valuation allowance when it is more likely than not that a
recorded tax benefit is not expected to be realized. The expense to create the tax valuation
allowance is recorded as additional income tax expense in the period the tax valuation allowance is
established. The valuation allowance estimate is highly dependent on our projections of future
levels of taxable income. Should the actual amount of taxable income be less than what we have
projected, it may be necessary for us to increase the valuation allowance.
10
Table of Contents
RECENT ACCOUNTING PRONOUNCEMENTS:
In April 2009, the FASB issued Staff Position (FSP) No. 115-2 and No. 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments, which amends existing guidance for determining
OTTI for debt securities and which was subsequently incorporated into ASC Topic 320, Investments
and Debt Securities. The guidance requires an entity to assess whether it intends to sell, or it
is more likely than not that it will be required to sell a security in an unrealized loss position
before recovery of its amortized cost basis. If either of these criteria is met, the entire
difference between amortized cost and fair value is recognized in earnings. For securities that do
not meet the aforementioned criteria, the amount of impairment recognized in earnings is limited to
the amount related to credit losses, while impairment related to other factors is recognized in
other comprehensive income. Additionally, the guidance expands and increases the frequency of
existing disclosures about OTTI for debt and equity securities. Through March 31, 2009, we had
recognized cumulative OTTI charges of $11,782 for various securities held in our portfolio at that
date. We adopted the FSP effective April 1, 2009 and reversed $1,250 for the non-credit portion of
the cumulative OTTI charge. The adoption was recognized as a cumulative effect adjustment that
increased retained earnings and decreased accumulated other comprehensive income by $778, net of
tax of $472, as of April 1, 2009.
In April 2009, the FASB issued Staff Position (FSP) No. 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset and Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly, which was subsequently incorporated into ASC Topic
820, Fair Value Measurement and Disclosures. This guidance emphasizes that even if there has
been a significant decrease in the volume and level of activity, the objective of a fair value
measurement remains the same. Fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or
distressed sale) between market participants. The guidance provides a number of factors to
consider when evaluating whether there has been a significant decrease in the volume and level of
activity for an asset or liability in relation to normal market activity. In addition, when
transactions or quoted prices are not considered orderly, adjustments to those prices based on the
weight of available information may be needed to determine the appropriate fair value. The FSP
also requires increased disclosures. The adoption of this guidance at June 30, 2009 did not have a
material impact on our results of operations or financial position.
In April 2009, the FASB issued FSP No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of
Financial Instruments, which was subsequently incorporated into ASC Topic 825, Financial
Instruments. This guidance amended FASB Statement No. 107, Disclosures about Fair Value of
Financial Instruments, to require disclosures about fair value of financial instruments for
interim reporting periods of publicly traded companies that were previously only required in annual
financial statements. The adoption of this guidance at June 30, 2009 did not impact our results of
operations or financial position as it only required disclosures which are included in the
following section.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS No. 165), which was
subsequently incorporated into ASC Topic 855, Subsequent Events, which is effective for interim
and annual periods ending after June 15, 2009. This guidance establishes general standards of
accounting for and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. The statement introduces new
terminology but is based on the same principles that previously existed in the auditing standards.
The guidance requires disclosure of the date through which management has evaluated subsequent
events and whether that date represents the date the financial statements were issued or the date
the financial statements were available to be issued. For the financial statements related to the
three and nine months periods ending September 30, 2009 and 2008 contained herein, we evaluated
subsequent events through November 4, 2009, the date in which these financial statements were filed
with the SEC.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles (SFAS No. 168), which was subsequently
incorporated into ASC Topic 105, Generally Accepted Accounting Principles, which is effective for
interim and annual periods ending after September 15, 2009. This guidance defines a new hierarchy
for U.S. GAAP and establishes the FASB Accounting Standards Codification as the sole source for
authoritative guidance to be applied by nongovernmental entities. It replaced SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles, which was issued in May 2008. The adoption
of this guidance changes the manner in which U.S. GAAP guidance is referenced, but it will not have
any impact on our financial position or results of operations.
11
Table of Contents
FAIR VALUE MEASUREMENT
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the measurement date. We use
various valuation techniques to determine fair value, including market, income and cost approaches.
The accounting literature also establishes a fair value hierarchy which requires an entity to
maximize the use of observable inputs and minimize the use of unobservable inputs when measuring
fair value. It describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) or identical assets or liabilities in active markets that
an entity has the ability to access as of the measurement date, or observable inputs.
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices
for similar assets or liabilities,
quoted prices in markets that are not active, and other inputs that are observable or can be
corroborated by observable market
data.
Level 3: Significant unobservable inputs that reflect an entitys own assumptions about the
assumptions that market participants would use in pricing an asset or liability.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair
value hierarchy. When that occurs, we classify the fair value hierarchy on the lowest level of
input that is significant to the fair value measurement. We used the following methods and
significant assumptions to estimate fair value.
Securities: We determine the fair values of trading securities and securities available for sale
in our investment portfolio by obtaining quoted prices on nationally recognized securities
exchanges or matrix pricing, which is a mathematical technique used widely in the
industry to value debt securities without relying exclusively on quoted prices for the specific
securities but rather by relying on the securities relationship to other benchmark quoted
securities. Matrix pricing relies on the securities relationship to similarly traded securities,
benchmark curves, and the benchmarking of like securities. Matrix pricing utilizes observable
market inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads,
two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic
events and is considered Level 2. In instances where broker quotes are used, these quotes are
obtained from market makers or broker-dealers recognized to be market participants. This valuation
method is classified as Level 2 in the fair value hierarchy.
The markets for pooled collateralized debt obligations, or CDOs continue to reflect an overall lack
of activity and observable transactions in the secondary and new issue markets for these
securities. Those conditions are indicative of an illiquid market and transactions that do occur
are not considered orderly. This led us to value our CDOs using both Level 2 and Level 3 inputs.
The single name issues continue to come from the brokers and are considered Level 2 valuations.
The marks for the pooled issues classified as available for sale were derived from a financial
model and are considered Level 3 valuations. The pricing for the pooled CDOs held for trading were
derived from a broker and are considered Level 2 inputs.
When determining fair value, ASC 820 indicates that the lowest available level should be used. It
also provides guidance on determining fair value when a transaction is not considered orderly
because the volume and level of activity have significantly decreased. In evaluating the fair value
of our two PreTSL pooled CDOs we determined that the market transactions for similar securities
were disorderly. Therefore, we priced our PreTSL pooled CDOs using the Moodys Analytics valuation
process. The Moodys Analytics is a Level 3 pricing model that uses an income valuation approach
and computes present values. During the third quarter of 2009, Moodys updated their analytics,
Discounted Cash flow Valuations (DCV). The changes were made to refine and improve the estimate of
default probabilities and align the valuation methodology with industry practices.
New | Prior | |||||||
Default Probabilities | Issuer Specific | Industry Average | ||||||
Prepayments |
0% | 1% | ||||||
Recovery |
0% | 5% | ||||||
Spread to Libor |
300 basis points | 200 basis points | ||||||
Correlation within Same Industry |
50% | 30% | ||||||
Correlation Between Industries |
30% | 20% |
The probability of default (PDs) is based on physical PDs (uses historical data). Moodys estimates
physical PDs primarily using the expected default frequency approach and is issuer specific. The
loss given default has been historically high for trust preferred securities and is set at 100%
equating to a 0% recovery. The DCV analysis uses a spread of Libor +300 as the discount rate (to
reflect illiquidity the credit component of the discount rate is embedded in the credit
analysis). Building on the cash flows and discount rates, Moodys uses its CDOnet tool which
utilizes a Monte Carlo simulation engine to model the discounted flows and establish a distribution
of DCVs.
The effective discount rates are highly dependent upon the credit quality of the collateral, the
relative position of the tranche in the capital structure of the CDO and the prepayment
assumptions.
The remaining four pooled CDOs were classified as trading. We utilized pricing from a broker that
was considered to be Level 2. The broker provided us with actual prices if they had executed a
trade for the same deal or if they had knowledge that another trader had traded the same deal.
Otherwise they compared the structure of the pooled CDO with other CDOs exhibiting the same
characteristics that had experienced recent trades.
12
Table of Contents
Loans held for sale: The fair value of residential mortgage loans held for sale is determined
using quoted secondary-market prices. The purchaser provides us with a commitment to purchase the
loan at the origination price. Under ASC 820, this commitment is classified as a Level 2 in the
fair value hierarchy. If no such quoted price exists, the fair value of these loans would be
determined using quoted prices for a similar asset or assets, adjusted for the specific attributes
of that loan. Commercial loans held for sale at September 30, 2009 include loans offered to a
single buyer and are currently carried at the lower of cost or market, which in this case is cost.
Derivatives: Our derivative instruments consist of over-the-counter (OTC) interest-rate swaps and
mortgage loan interest locks that trade in liquid markets. The fair value of our derivative
instruments is primarily measured by obtaining pricing from broker-dealers recognized to be market
participants. On those occasions that broker-dealer pricing is not available, pricing is obtained
using the Bloomberg system. The pricing is derived from market observable inputs that can
generally be verified and do not typically involve significant judgment by us. This valuation
method is classified as Level 2 in the fair value hierarchy.
Impaired Loans: Impaired loans are evaluated at the time full payment under the loan terms is not
expected. If a loan is impaired, a portion of the allowance for loan losses is allocated so that
the loan is reported, net, at the present value of estimated cash flows using the loans existing
rate or at the fair value of the collateral, if the loan is collateral dependent. Fair value is
measured based on the value of the collateral securing these loans, is classified as Level 3 in the
fair value hierarchy and is determined using several methods. Generally the fair value of real
estate is determined based on appraisals by qualified licensed appraisers. If an appraisal is not
available, the fair value may be determined by using a cash flow analysis, a brokers opinion of
value, the net present value of future cash flows, or an observable market price from an active
market. Fair value on non-real estate loans is determined using similar methods. In addition,
business equipment may be valued by using the net book value from the business financial
statements. Impaired loans are evaluated quarterly for additional impairment.
Other Real Estate Owned: Other real estate owned is evaluated at the time a property is acquired
through foreclosure or shortly thereafter. Fair value is based on appraisals by qualified licensed
appraisers and is classified as Level 3 input.
13
Table of Contents
Assets and Liabilities Measured on a Recurring Basis:
Assets and liabilities measured at fair value on a recurring basis, including financial liabilities
for which we have elected the fair value option, are summarized below.
September 30, 2009
Quoted Prices | ||||||||||||||||
in Active | ||||||||||||||||
Markets for | Significant | |||||||||||||||
Identical | Other | Significant | ||||||||||||||
Assets and | Observable | Unobservable | ||||||||||||||
Liabilities | Inputs | Inputs | Balance as of | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | September 30, 2009 | |||||||||||||
Assets |
||||||||||||||||
Securities, available for sale |
||||||||||||||||
U.S. Government agencies |
$ | | $ | 408 | $ | | $ | 408 | ||||||||
Collateralized mortgage obligations: |
||||||||||||||||
Agency |
115,390 | 115,390 | ||||||||||||||
Private Label |
| 25,607 | | 25,607 | ||||||||||||
Mortgage backed securities |
155,180 | 155,180 | ||||||||||||||
Trust Preferred |
| 7,866 | 2,016 | 9,882 | ||||||||||||
State & political subdivisions |
| 27,099 | | 27,099 | ||||||||||||
Other securities |
| 8,674 | 8,674 | |||||||||||||
Total securities, available for sale |
$ | | $ | 340,224 | $ | 2,016 | $ | 342,240 | ||||||||
Securities, held for trading |
||||||||||||||||
U.S. Treasuries |
$ | | $ | 13,115 | $ | | $ | 13,115 | ||||||||
Trust Preferred |
| 122 | | 122 | ||||||||||||
Total securities, held for trading |
$ | | $ | 13,237 | $ | | $ | 13,237 | ||||||||
Derivatives |
| 8,499 | | 8,499 | ||||||||||||
Liabilities |
||||||||||||||||
Derivatives |
$ | | $ | 8,504 | $ | | $ | 8,504 |
December 31, 2008
Quoted Prices | ||||||||||||||||
in Active | ||||||||||||||||
Markets for | Significant | |||||||||||||||
Identical | Other | Significant | ||||||||||||||
Assets and | Observable | Unobservable | ||||||||||||||
Liabilities | Inputs | Inputs | Balance as of | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | December 31, 2008 | |||||||||||||
Assets |
||||||||||||||||
Securities, available for sale |
$ | | $ | 544,204 | $ | 17,535 | $ | 561,739 | ||||||||
Derivatives |
| 12,296 | | 12,296 | ||||||||||||
Liabilities |
||||||||||||||||
Derivatives |
$ | | $ | 11,851 | $ | | $ | 11,851 |
14
Table of Contents
Assets and Liabilities Measured on a Non-Recurring Basis:
Assets and liabilities measured at fair value on a non-recurring basis are summarized below.
September 30, 2009
Quoted Prices | ||||||||||||||||
in Active | ||||||||||||||||
Markets for | Significant | |||||||||||||||
Identical | Other | Significant | ||||||||||||||
Assets and | Observable | Unobservable | ||||||||||||||
Liabilities | Inputs | Inputs | Balance as of | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | September 30, 2009 | |||||||||||||
Assets |
||||||||||||||||
Impaired loans |
$ | | $ | | $ | 98,310 | $ | 98,310 | ||||||||
Loans held for sale |
| 41,253 | | 41,253 | ||||||||||||
Other real estate owned |
| | 23,281 | 23,281 | ||||||||||||
Liabilities |
$ | | $ | | $ | | $ | |
December 31, 2008
Quoted Prices | ||||||||||||||||
in Active | ||||||||||||||||
Markets for | Significant | |||||||||||||||
Identical | Other | Significant | ||||||||||||||
Assets and | Observable | Unobservable | ||||||||||||||
Liabilities | Inputs | Inputs | Balance as of | |||||||||||||
(Level 1) | (Level 2) | (Level 3) | December 31, 2008 | |||||||||||||
Assets |
||||||||||||||||
Impaired loans |
$ | | $ | | $ | 69,590 | $ | 69,590 | ||||||||
Loans held for sale |
| 5,776 | | 5,776 | ||||||||||||
Liabilities |
$ | | $ | | $ | | $ | |
At September 30, 2009, impaired loans with specific reserves, which are measured for
impairment using the fair value of the collateral for collateral dependent loans, had a carrying
amount of $125,010, with a valuation allowance of $26,700, resulting in an additional provision for
loan losses of $9,963 for the three month period and $17,249 for the nine month period ended
September 30, 2009.
For those properties held in other real estate owned and carried at fair value, writedowns of
$2,148 and $2,630 were charged to earnings for the three and nine months ended September 30, 2009,
compared to $319 and $343 for the three and nine months ended September 30, 2008.
The following table presents a reconciliation of all assets measured at fair value on a recurring
basis using significant unobservable inputs (Level 3) for the three and nine month periods ending
September 30, 2009.
Fair Value Measurements Using Significant | ||||||||
Unobservable Inputs (Level 3) | ||||||||
Securities | ||||||||
Available for sale | Total | |||||||
Three months ended September 30, 2009 |
||||||||
Beginning Balance at July 1, 2009 |
$ | 2,483 | $ | 2,483 | ||||
Transfers in and/or out of Level 3 |
| | ||||||
Gains (Losses) included in other comprehensive income |
(467 | ) | (467 | ) | ||||
Gains (Losses) included in earnings |
| | ||||||
Ending Balance |
$ | 2,016 | $ | 2,016 | ||||
15
Table of Contents
Fair Value Measurements Using Significant | ||||||||
Unobservable Inputs (Level 3) | ||||||||
Securities | ||||||||
Available for sale | Total | |||||||
Nine months ended September 30, 2009 |
||||||||
Beginning Balance at January 1, 2009 |
$ | 17,535 | $ | 17,535 | ||||
Transfers in and/or out of Level 3 |
(250 | ) | (250 | ) | ||||
Gains (Losses) included in other comprehensive income |
559 | 559 | ||||||
Gains (Losses) included in earnings |
(15,828 | ) | (15,828 | ) | ||||
Ending Balance |
$ | 2,016 | $ | 2,016 | ||||
Unrealized gains and losses for securities classified as available for sale are generally not
recorded in earnings. However, during the nine months ended September 30, 2009, impairment charges
of $21,484 were charged to earnings for some of our trust preferred securities.
The carrying amounts and estimated fair values of financial instruments, at September 30, 2009 and
December 31, 2008 are as follows:
September 30, 2009 | December 31, 2008 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
Financial Assets: |
||||||||||||||||
Cash and short-term investments |
$ | 441,117 | $ | 441,117 | $ | 62,773 | $ | 62,773 | ||||||||
Loans-net of allowance |
2,027,987 | 2,065,205 | 2,356,216 | 2,415,290 | ||||||||||||
Accrued interest receivable |
10,215 | 10,215 | 14,114 | 14,114 | ||||||||||||
Financial Liabilities: |
||||||||||||||||
Deposits |
$ | 2,472,762 | $ | 2,495,464 | $ | 2,340,192 | $ | 2,367,354 | ||||||||
Short-term borrowings |
188,011 | 188,050 | 415,006 | 415,542 | ||||||||||||
Long-term borrowings |
361,364 | 363,156 | 360,917 | 362,848 | ||||||||||||
Accrued interest payable |
8,001 | 8,001 | 10,560 | 10,560 |
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 of our assets and liabilities and should not be interpreted to
represent our market or liquidation value.
Carrying amount is the estimated fair value for cash and short-term investments, accrued interest
receivable and payable, demand deposits and short-term debt. The fair value of loans is estimated
in accordance with paragraph 31 of SFAS No. 107 Disclosures about Fair Value of Financial
Instruments, which was subsequently incorporated into ASC Topic 825, Financial Instruments by
discounting expected future cash flows using market rates of like maturity. For time deposits,
fair value is based on discounted cash flows using current market rates applied to the estimated
life. Fair value of debt is based on current rates for similar financing. It was not practicable
to determine the fair value of regulatory stock due to restrictions placed on its transferability.
The fair value of off-balance-sheet items is not considered material.
STOCK OPTION PLAN AND AWARDS
In April 2007, our shareholders approved the Integra Bank Corporation 2007 Equity Incentive Plan
(the 2007 Plan) which reserved 600,000 shares of common stock for issuance as incentive awards to
directors and key employees. Awards may include incentive stock options, non-qualified stock
options, restricted shares, performance shares, performance units or stock appreciation rights
(SARs). All options granted under the 2007 Plan or any predecessor stock-based incentive plans
(the Prior Plans) have a termination period of ten years from 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. Upon the adoption of the 2007 Plan, no additional awards were granted under
the Prior Plans. In April 2009, our shareholders approved an amendment to the 2007 Plan that
increased the number of shares available under the plan to 1,000,000 shares. Under the 2007 Plan,
at September 30, 2009, there were 341,331 shares available for the granting of additional awards.
16
Table of Contents
A summary of the status of the options or SARs granted under the 2007 Plan and Prior Plans as of
September 30, 2009, and changes during the year is presented below:
September 30, 2009 | Weighted Average | |||||||||||
Weighted Average | Remaining Term | |||||||||||
Shares | Exercise Price | (In years) | ||||||||||
Options/SARs outstanding at December 31, 2008 |
1,415,433 | $ | 20.53 | |||||||||
Options/SARs granted |
5,000 | 2.13 | ||||||||||
Options/SARs exercised |
| | ||||||||||
Options/SARs forfeited/expired |
(173,967 | ) | 22.07 | |||||||||
Options/SARs outstanding at September 30, 2009 |
1,246,466 | $ | 20.24 | 5.3 | ||||||||
Options/SARs exercisable at September 30, 2009 |
1,067,119 | $ | 20.72 | 4.8 |
The options and SARs outstanding at September 30, 2009, had a weighted average remaining term of
5.3 years with no aggregate intrinsic value, while the options and SARs that were exercisable at
September 30, 2009, had a weighted average remaining term of 4.8 years and no aggregate intrinsic
value. As of September 30, 2009, there was $495 of total unrecognized compensation cost related to
our stock options and SARs. The cost is expected to be recognized over a weighted-average period
of 2.0 years. Compensation expense for options and SARs for the three and nine months ended
September 30, 2009, was $51 and $289, compared to $153 and $517 for the three and nine months ended
September 30, 2008.
One of the Prior Plans permitted the award of up to 300,000 shares of restricted stock. The
majority of shares granted under that plan vest equally over a three-year period. Unvested shares
are subject to certain restrictions and risk of forfeiture by the participants. Shares granted
since 2007 have been granted from the 2007 Plan which, prior to April 2009, permitted the award of
up to 450,000
shares of restricted stock or SARs. In April 2009, our shareholders approved an amendment to the
Plan that eliminated the 450,000 share limit. The shares granted under the 2007 Plan vest equally
over a three or four-year period.
A summary of the status of the restricted stock granted by us as of September 30, 2009 and changes
during the first, second and third quarters of 2009 is presented below:
Weighted-Average | ||||||||
Grant-Date | ||||||||
Shares | Fair Value | |||||||
Restricted shares outstanding, December 31, 2008 |
179,613 | $ | 17.57 | |||||
Shares granted |
241,750 | |||||||
Shares vested |
(59,300 | ) | ||||||
Shares forfeited |
(44,150 | ) | ||||||
Restricted shares outstanding, September 30, 2009 |
317,913 | $ | 5.10 | |||||
We record the fair value of restricted stock grants, net of estimated forfeitures, and an
offsetting deferred compensation amount within stockholders equity for unvested restricted stock.
As of September 30, 2009, there was $958 of total unrecognized compensation cost related to the
nonvested restricted stock granted after the adoption of SFAS No. 123(R). The cost is expected to
be recognized over a weighted-average period of 2.0 years. Compensation expense for restricted
stock for the three and nine months ended September 30, 2009, was $190 and $689, compared to $266
and $761 for the three and nine months ended September 30, 2008.
The annual grant of restricted shares occurred during the third quarter of 2009. No cash dividends
will be paid on these shares to any participants during the restriction period. Our participation
in the U.S. Department of Treasurys, or Treasury Department, Capital Purchase Program, or CPP,
imposes additional vesting restrictions on shares held by any of our five most-highly compensated
employees. These restricted shares vest over time; however, they are also subject to the
limitations of the CPP.
In April 2009, our shareholders approved an increase in authorized shares of common stock of
100,000,000 shares, bringing total authorized common shares to 129,000,000.
17
Table of Contents
BANK OWNED LIFE INSURANCE
Bank owned life insurance income includes a loss on the transfer of $63,150 of our bank owned life
insurance to bank owned life insurance held for surrender or sale. During the third quarter of
2009, we evaluated the potential sale or surrender of our policies, primarily for the purposes of
reducing regulatory higher risk-weighted assets and improving our regulatory capital ratios. In
October 2009, we made the decision to sell $40,048 of these policies and to surrender $23,102 of
them. As a result, we recorded the expected loss on sale of $788, as well as an estimate of the
surrender penalty of $241 at September 30, 2009. The penalty was recorded in tax expense and
cannot be offset by a net operating loss. We also recorded tax expense totaling $5,603 on the
taxable gain on sale and the taxable gain on the surrender.
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, SARs, and restricted stock.
The following provides a reconciliation of basic and diluted earnings per share:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net income (loss) |
$ | (19,735 | ) | $ | (33,327 | ) | $ | (96,260 | ) | $ | (29,253 | ) | ||||
Preferred dividends and discount accretion |
(1,117 | ) | | (2,669 | ) | | ||||||||||
Net income (loss) available to common shareholders |
$ | (20,852 | ) | $ | (33,327 | ) | $ | (98,929 | ) | $ | (29,253 | ) | ||||
Weighted average shares outstanding Basic |
20,706,560 | 20,567,252 | 20,713,301 | 20,552,567 | ||||||||||||
Incremental shares related to stock compensation |
| | | | ||||||||||||
Average shares outstanding Diluted |
20,706,560 | 20,567,252 | 20,713,301 | 20,552,567 | ||||||||||||
Earnings (Loss) per share Basic |
$ | (1.01 | ) | $ | (1.62 | ) | $ | (4.78 | ) | $ | (1.42 | ) | ||||
Effect of incremental shares related to stock compensation |
| | | | ||||||||||||
Earnings (Loss) per share Diluted |
$ | (1.01 | ) | $ | (1.62 | ) | $ | (4.78 | ) | $ | (1.42 | ) | ||||
Options to purchase 1,246,466 shares and 1,575,472 shares were outstanding at September 30,
2009 and 2008, respectively, and were not included in the computation of net income per diluted
share in both periods because the exercise price of these options was greater than the average
market price of the common shares, and therefore antidilutive and also because of the net loss in
both years.
On February 27, 2009, the Treasury Department invested $83,586 in us as part of the CPP. We issued
to the Treasury Department 83,586 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series
B, or Treasury Preferred Stock, having a liquidation amount per share of $1,000, and a warrant, or
Warrant, to purchase up to 7,418,876 shares, or Warrant Shares, of our common stock, at an initial
per share exercise price of $1.69. The warrant shares were not included in the computation of net
income per diluted share in both periods because the exercise price of these shares was greater
than the average market price of the common shares, and therefore antidilutive and also because of
the net loss.
The Treasury Warrant was not fully exercisable at the time of issuance. In April 2009, our
shareholders approved an increase in the authorized shares of common stock and the issuance of the
Warrant Shares.
NOTE 3. SECURITIES
At September 30, 2009, the majority of securities in our investment portfolio were classified as
available for sale.
Trading securities at September 30, 2009, consist of two U.S. Treasury securities valued at $13,115
and four trust preferred securities valued at $122. During the third quarter of 2009, we recorded
trading losses of $1,237, compared to none during the third quarter of 2008. These losses
included a loss of $1,268 on a Colonial BancGroup trust preferred security for which we recognized
a $5,656 OTTI charge during the second quarter of 2009.
18
Table of Contents
Amortized cost, fair value and the related gross unrealized gains and losses recognized in
accumulated other comprehensive income (loss) of available for sale securities were as follows:
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
September 30, 2009 |
||||||||||||||||
U.S. Government agencies |
$ | 402 | $ | 8 | $ | 2 | $ | 408 | ||||||||
Collateralized mortgage obligations: |
||||||||||||||||
Agency |
113,249 | 2,157 | 16 | 115,390 | ||||||||||||
Private label |
27,053 | | 1,446 | 25,607 | ||||||||||||
Mortgage-backed securities residential |
153,763 | 1,425 | 8 | 155,180 | ||||||||||||
Trust preferred |
17,231 | | 7,349 | 9,882 | ||||||||||||
States & political subdivisions |
25,309 | 1,841 | 51 | 27,099 | ||||||||||||
Other securities |
8,641 | 38 | 5 | 8,674 | ||||||||||||
Total |
$ | 345,648 | $ | 5,469 | $ | 8,877 | $ | 342,240 | ||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
December 31, 2008: |
||||||||||||||||
U.S. Government agencies |
$ | 742 | $ | 19 | $ | | $ | 761 | ||||||||
Collateralized mortgage obligations: |
||||||||||||||||
Agency |
272,038 | 3,040 | 1,002 | 274,076 | ||||||||||||
Private label |
35,341 | | 6,731 | 28,610 | ||||||||||||
Mortgage-backed securities residential |
130,367 | 1,179 | 293 | 131,253 | ||||||||||||
Trust preferred |
38,759 | 969 | 11,327 | 28,401 | ||||||||||||
States & political subdivisions |
88,765 | 1,710 | 447 | 90,028 | ||||||||||||
Other securities |
8,641 | | 31 | 8,610 | ||||||||||||
Total |
$ | 574,653 | $ | 6,917 | $ | 19,831 | $ | 561,739 | ||||||||
The amortized cost and fair value of the securities available for sale portfolio are shown by
expected maturity. Expected maturities may differ from contractual maturities if borrowers have the
right to call or prepay obligations with or without call or prepayment penalties.
September 30, 2009 | ||||||||
Amortized | Fair | |||||||
Cost | Value | |||||||
Maturity |
||||||||
Available-for-sale |
||||||||
Within one year |
$ | 9,299 | $ | 8,948 | ||||
One to five years |
91,888 | 93,103 | ||||||
Five to ten years |
93,053 | 94,270 | ||||||
Beyond ten years |
151,408 | 145,919 | ||||||
Total |
$ | 345,648 | $ | 342,240 | ||||
19
Table of Contents
Available for sale securities with unrealized losses at September 30, 2009, aggregated by
investment category and length of time the individual securities have been in a continuous
unrealized loss position, are as follows:
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | |||||||||||||||||||
September 30, 2009 |
||||||||||||||||||||||||
U.S. Government agencies |
$ | 99 | $ | 2 | $ | | $ | | $ | 99 | $ | 2 | ||||||||||||
Collateralized mortgage obligations: |
||||||||||||||||||||||||
Agency |
13,291 | 16 | | | 13,291 | 16 | ||||||||||||||||||
Private label |
| | 25,607 | 1,446 | 25,607 | 1,446 | ||||||||||||||||||
Mortgage-backed securities residential |
18,658 | 8 | | | 18,658 | 8 | ||||||||||||||||||
Trust preferred |
| | 9,158 | 7,349 | 9,158 | 7,349 | ||||||||||||||||||
State & political subdivisions |
1,545 | 11 | 1,079 | 40 | 2,624 | 51 | ||||||||||||||||||
Other securities |
| | 20 | 5 | 20 | 5 | ||||||||||||||||||
Total |
$ | 33,593 | $ | 37 | $ | 35,864 | $ | 8,840 | $ | 69,457 | $ | 8,877 | ||||||||||||
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
December 31, 2008 | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
U.S. Government agencies |
$ | 125 | $ | | $ | | $ | | $ | 125 | $ | | ||||||||||||
Collateralized mortgage obligations: |
||||||||||||||||||||||||
Agency |
43,710 | 256 | 31,834 | 746 | 75,544 | 1,002 | ||||||||||||||||||
Private Label |
20,674 | 5,792 | 7,936 | 939 | 28,610 | 6,731 | ||||||||||||||||||
Mortgage-backed
securities
residential |
54,912 | 271 | 8,229 | 22 | 63,141 | 293 | ||||||||||||||||||
Trust Preferred |
6,616 | 4,372 | 6,609 | 6,955 | 13,225 | 11,327 | ||||||||||||||||||
State & political subdivisions |
17,594 | 388 | 433 | 59 | 18,027 | 447 | ||||||||||||||||||
Other securities |
2,662 | 23 | 16 | 8 | 2,678 | 31 | ||||||||||||||||||
Total |
$ | 146,293 | $ | 11,102 | $ | 55,057 | $ | 8,729 | $ | 201,350 | $ | 19,831 | ||||||||||||
Proceeds from sales and calls of securities available for sale were $308,258 and $42,173 for the
nine months ended September 30, 2009 and 2008, respectively. Gross gains of $8,073 and $72 and
gross losses of $16 and $31 were realized on these sales and calls during 2009 and 2008,
respectively.
Proceeds from sales and calls of securities available for sale were $238,869 and $1,251 for the
three months ended September 30, 2009 and 2008, respectively. Gross gains of $6,593 and $13 and
gross losses of $15 and $0 were realized on these sales and calls during 2009 and 2008,
respectively.
We regularly review the composition of our securities portfolio, taking into account market risks,
the current and expected interest rate environment, liquidity needs, and our overall interest rate
risk profile and strategic goals.
On a quarterly basis, we evaluate each security in our portfolio with an individual unrealized loss
to determine if that loss represents other-than-temporary impairment. The factors we consider in
evaluating the securities include whether the securities were guaranteed by the U.S. government or
its agencies and the securities public ratings, if available, and how those two factors affect
credit quality and recovery of the full principal balance, the relationship of the unrealized
losses to increases in market interest rates, the length of time the securities have had temporary
impairment, and our ability to hold the securities for the time necessary to recover the amortized
cost. We also review the payment performance, delinquency history and credit support of the
underlying collateral for certain securities in our portfolio as part of our impairment analysis
and review.
The ratings of our pooled trust preferred CDOs, single issue trust preferred securities, and
private label CMOs are listed below as of September 30, 2009 and at June 30, 2009. The trust
preferred securities consist of two pooled trust preferred CDOs classified as available for sale
and four pooled CDOs classified as held for trading and four single name issues listed below. The
private label CMOs consist of six issues of which five were originated in 2003-2004 while one was
originated in 2006.
20
Table of Contents
Ratings
Issuer | Ratings as of June 30, 2009 | Ratings as of September 30, 2009 | ||
Pooled Trust Preferred CDOs |
||||
PreTSL VI
|
Caa1 (Moodys) / CCC (Fitch) | Caa1 (Moodys) / CCC (Fitch) | ||
PreTSL XIV
|
Ca (Moodys) /CC (Fitch) | Ca (Moodys) /CC (Fitch) | ||
Pooled Trust Preferred CDOs (Held For Trading) | ||||
Alesco 10A C1
|
Ca (Moodys) / CC (Fitch) | Ca (Moodys) / CC (Fitch) | ||
Trapeza 11A D1
|
C (Fitch) | C (Fitch) | ||
Trapeza 12A D1
|
C (Fitch) | C (Fitch) | ||
US Capital Funding
|
Caa3 (Moodys) / CC (Fitch) | Caa3 (Moodys) / CC (Fitch) | ||
Single Issue Trust Preferred |
||||
Bank One Cap Tr VI (JP Morgan)
|
A1(Moodys) | A1(Moodys) | ||
First Citizens Bancshares
|
Non-Rated | Non-Rated | ||
First Union Instit Cap I (Wells Fargo)
|
A3(Moodys)/A-(S&P)/AA-(Fitch) | A3(Moodys)/A-(S&P)/A(Fitch)* | ||
Sky Financial Cap Trust III (Huntington) |
BB(S&P) | B(S&P)* | ||
Private Label CMOs |
||||
CWHL 2003-58 2A1
|
Aaa(Moodys)/AAA(S&P) | Aaa(Moodys)/AAA(S&P) | ||
CMSI 2004-4 A2
|
AAA(S&P)/AAA(Fitch) | AAA(S&P)/AAA(Fitch) | ||
GSR 2003-10 2A1
|
Aaa(Moodys)/AAA(S&P) | Aaa(Moodys)/AAA(S&P) | ||
RAST 2003-A15 1A1
|
AAA(S&P)/AAA(Fitch) | AAA(S&P)/AAA(Fitch) | ||
SASC 2003-31A 3A
|
A1(Moodys)/AAA(S&P) | A1(Moodys)/AAA(S&P) | ||
WFMBS 2006-8 A13
|
B3(Moodys)/AA(Fitch) | B3(Moodys)/B(Fitch)* |
The ratings above range
from highly speculative, defined as equal to or below Ca per
Moodys and CC
per Fitch and S&P, to the highest credit quality defined as
Aaa or AAA
per the aforementioned rating agencies, respectively. Changes that occurred
to the ratings are denoted with an *.
We recognized additional impairment charges during the first and second quarter of 2009 on Alesco
10A C1 of $4,448; Trapeza 11A D1 of $5,074; Trapeza 12A D1 for $3,767; US Capital Funding V B1 for
$2,124 along with a charge of $5,656 for Colonial BancGroup. We reclassified all of these
securities as trading as of June 30, 2009. We took an additional charge of $415 against PreTSL VI
during the first quarter. This security remains in the available for sale portfolio. In total, we
have taken $21,484 in OTTI charges during 2009.
At September 30, 2009, net unrealized losses for our securities portfolio available for sale
totaled $3,408. Net unrealized losses for trust preferred CDOs totaled $7,349, while private label
CMOs accounted for an additional $1,446, offset by $5,387 of unrealized gains in remainder of the
securities portfolio.
The marks for the single name issues and the pooled CDOs designated as trading came from brokers,
while the pricing for the available for sale (AFS) pooled CDOs came from financial models and the
private label CMOs were derived from IDC and S&P pricing.
As part of the analysis this quarter, we considered recently revised guidance on determining fair
value when there is no active market and gives guidance to identify circumstances that indicate a
transaction is not orderly.
Factors utilized in our analysis of the private label CMOs included a review of underlying
collateral performance, the length of time and extent that fair value has been less than cost,
changes in market valuation and review of rating changes to determine if other-than-temporary
impairment had occurred. As of September 2009, all six private label CMOs in our portfolio had
unrealized losses for 12 consecutive months. During the third quarter, one of the private label
CMOs (WFMBS 2006-8 A13) incurred a rating downgrade as noted in the ratings table. The remaining
private label CMOs remain rated as High Grade Investment Securities by Moodys, Standard & Poors
or Fitch at the highest level of AAA. During the third quarter of 2009, the prices on five of our
six issues reflected improvement quarter over quarter. CMSI 2004-4 A2 was the only security that
experienced a decline in value.
The issuers within the portfolio continue to perform according to their contractual terms. The
underlying collateral performance for our entire private label collateralized mortgage obligation
portfolio has been reviewed. The collateral has seen delinquencies over 90 days continue to
increase in the third quarter with the exception of SASC 2003-31A 3A, which experienced a decline
in delinquencies over 90 days from its high in May of 8.21% to 4.52% in August. The reported
cumulative loss on the portfolio remained low with 0.496% being the highest. Borrower weighted
average FICO scores all remain above 728. The exposure to the high risk geographies (CA, AZ, NV,
and FL) has had little change since our last review. The credit support for all of the issues
continues to provide evidence that there is adequate structural support. Four of the private label
CMOs experienced an increase in credit support this quarter while the support on all six issues
remains higher than their original percentages.
21
Table of Contents
We also received a third party review of our private label CMOs. This review contains a stress
test for each security including home price appreciation scenarios that project more extreme
collateral defaults and losses ranging up to three times higher than would normally be projected.
The purpose of the stress test is to account for more severe scenarios and the possible
underestimation of the collateral losses for any particular modeled scenario. Only one of the
securities, WFMBS 2006-8 A13, projected a minimal loss in the extreme scenarios. The findings in
this report support our conclusion that there is adequate structural support even under stressed
scenarios. The review of the underlying mortgage collateral for the tranches we own demonstrates
that it is unlikely that the contractual cash flows will be disrupted. Therefore given the
performance of these securities at September 30, 2009, and our ability to hold these securities to
maturity, we concluded that the $1,446 in unrealized loss was temporary.
The factors used to determine whether the two pooled CDOs in our available for sale portfolio had
incurred OTTI included review of trustee reports, monitoring of break in yield tests, analysis of
current defaults and deferrals and the expectation for future defaults and deferrals. We also
reviewed key financial characteristics for individual issuers in the pooled CDOs and tracked issuer
participation in the Treasury Departments CPP. This review analyzed capital ratios, leverage
ratios, non-performing loan and non-performing asset ratios. We utilized an internal watch list
and near watch list that is reviewed quarterly and compared to the prior quarter to determine
migration patterns and direction. We also reviewed the changes to ratings. As noted in the
ratings table, there are no changes to the ratings.
PreTSL VI experienced no additional credit deterioration from the prior quarter and as such we
determined no additional OTTI had occurred during the third quarter. Bank Atlantic represented 61%
of the remaining collateral of this pooled CDO. The risk of future OTTI will be highly dependent
upon the performance of this issuer. The review of PreTSL XIV showed a 3.8% increase to deferrals
and defaults over the prior quarter. PreTSL XIV continues to pass the break in yield test and
additional stress tests indicate the bond can withstand an additional 14% of immediate defaults or
deferrals before experiencing a break in yield. Thirty-nine percent of the issuers in our tranche
are participating in the CPP. Overall PreTSL XIV continues to perform and as such we determined no
OTTI had occurred during the third quarter. We continue to utilize Moodys Analytics to compute the
fair value of the securities. Moodys continues to update their valuation process. During the
third quarter, Moodys made changes to refine and improve the estimate of default probabilities to
better align the valuation methodology with industry practices. We determined that the $1,208 in
unrealized loss associated with the two trust preferred pooled CDOs in our available for sale
portfolio was temporary.
At September 30, 2009, our single issue trust preferred portfolio included the following
securities: Bank One Capital Trust VI (acquired by JP Morgan Chase), First Citizens Bancshares,
First Union Institutional Cap I (acquired by Wells Fargo) and Sky Financial Cap Trust III (acquired
by Huntington Bank). As noted in the ratings table, First Union and Sky experienced downgrades
during the quarter. Based on our overall review of our single issue trust preferred portfolio, Sky
Financial Cap Trust III (Huntington Bank (HBAN)) remains on our watch list given their ratings and
higher default probabilities.
Colonial BancGroup was the only single name trust preferred CDO that was designated as held for
trading as of June 30, 2009. After taking an OTTI charge of $5,656 during the second quarter of
2009, this security was moved to held for trading at a market value of $1,344. In August, we sold
this security for $76 and recognized a trading loss of $1,268.
Amortized | Unrealized | |||||||||||||||
Security | Par | Cost | Market | gain/(loss) | ||||||||||||
Pooled Trust Preferred CDOs (AFS) |
||||||||||||||||
PreTSL VI Class B |
$ | 1,038 | $ | 724 | $ | 724 | $ | | ||||||||
PreTSL XIV Class B1 |
2,500 | 2,500 | 1,292 | (1,208 | ) | |||||||||||
CDOs AFS subtotal |
$ | 3,538 | $ | 3,224 | $ | 2,016 | $ | (1,208 | ) | |||||||
Pooled Trust Preferred CDOs (Trading) |
||||||||||||||||
Alesco Preferred Funding 10A C1 |
8,253 | 41 | | |||||||||||||
Trapeza 11A D1 |
7,930 | 20 | | |||||||||||||
Trapeza 12A D1 |
6,080 | 31 | | |||||||||||||
US Capital Funding V Class B1 |
3,021 | 30 | | |||||||||||||
CDOs Trading subtotal |
$ | 25,284 | $ | | $ | 122 | $ | | ||||||||
22
Table of Contents
Total | Collateral | Percentage of | ||||||||||||||||||||||
Number | Number | Number | remaining | balance for | class to total | |||||||||||||||||||
Security | of issuers | of deferrals | of defaults | collateral | our class | collateral | ||||||||||||||||||
Pooled Trust Preferred CDOs (AFS) |
||||||||||||||||||||||||
PreTSL VI Class B |
5 | 1 | 0 | $ | 40,750 | $ | 25,946 | 63.7 | % | |||||||||||||||
PreTSL XIV Class B1 |
65 | 12 | 2 | 477,350 | 117,000 | 24.5 | % | |||||||||||||||||
Pooled Trust Preferred CDOs (Trading) |
||||||||||||||||||||||||
Alesco Preferred Funding 10A C1 |
85 | 11 | 9 | 950,000 | 101,832 | 10.7 | % | |||||||||||||||||
Trapeza 11A D1 |
58 | 5 | 7 | 505,000 | 23,790 | 4.7 | % | |||||||||||||||||
Trapeza 12A D1 |
50 | 6 | 6 | 500,000 | 15,200 | 3.0 | % | |||||||||||||||||
US Capital Funding V Class B1 |
44 | 12 | 7 | 353,909 | 48,330 | 13.7 | % |
Amortized | Unrealized | |||||||||||||||
Security | Par | Cost | Market | gain/(loss) | ||||||||||||
Single Issue Trust Preferred (AFS) |
||||||||||||||||
Bank One Cap Tr VI (JP Morgan) |
$ | 1,000 | $ | 1,000 | $ | 990 | $ | (10 | ) | |||||||
First Citizens Bancshares |
5,000 | 5,018 | 1,500 | (3,518 | ) | |||||||||||
First Union Instit Cap I (Wells Fargo) |
3,000 | 2,989 | 2,876 | (113 | ) | |||||||||||
Sky Financial Cap Trust III (Huntington) |
5,000 | 5,000 | 2,500 | (2,500 | ) | |||||||||||
Trust Preferred subtotal |
$ | 14,000 | $ | 14,007 | $ | 7,866 | $ | (6,141 | ) | |||||||
Private Label CMOs |
||||||||||||||||
CWHL 2003-58 2A1 |
$ | 3,047 | $ | 3,047 | $ | 2,712 | $ | (335 | ) | |||||||
CMSI 2004-4 A2 |
1,589 | 1,545 | 1,571 | 26 | ||||||||||||
GSR 2003-10 2A1 |
7,969 | 7,894 | 7,649 | (245 | ) | |||||||||||
RAST 2003-A15 1A1 |
5,651 | 5,673 | 5,333 | (340 | ) | |||||||||||
SASC 2003-31A 3A |
6,139 | 6,148 | 5,764 | (384 | ) | |||||||||||
WFMBS 2006-8 A13 |
2,759 | 2,746 | 2,578 | (168 | ) | |||||||||||
Private Label CMOs Total |
$ | 27,154 | $ | 27,053 | $ | 25,607 | $ | (1,446 | ) | |||||||
The
table below presents a roll forward of the credit losses recognized in earnings for 2009.
Amount of OTTI related to credit loss at April 1, 2009 |
$ | 10,531 | ||
Addition |
20,314 | |||
Amount of OTTI related to credit loss at June 30, 2009 |
30,845 | |||
Addition |
| |||
Amount of OTTI related to credit loss at September 30, 2009 |
$ | 30,845 | ||
23
Table of Contents
NOTE 4. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows for the three and nine months ended
September 30, 2009 and 2008:
SUMMARY OF ALLOWANCE FOR LOAN LOSSES
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Beginning balance |
$ | 82,309 | $ | 31,780 | $ | 64,437 | $ | 27,261 | ||||||||
Loans charged off |
(22,396 | ) | (8,456 | ) | (69,226 | ) | (14,337 | ) | ||||||||
Recoveries |
538 | 464 | 1,310 | 1,227 | ||||||||||||
Provision for loan losses |
18,913 | 17,978 | 82,843 | 27,615 | ||||||||||||
Ending balance |
$ | 79,364 | $ | 41,766 | $ | 79,364 | $ | 41,766 | ||||||||
Percent of total loans |
3.60 | % | 1.70 | % | 3.60 | % | 1.70 | % | ||||||||
Annualized % of average loans: |
||||||||||||||||
Net charge-offs |
3.74 | % | 1.31 | % | 3.80 | % | 0.74 | % | ||||||||
Provision for loan losses |
3.24 | % | 2.94 | % | 4.63 | % | 1.55 | % |
The allowance for loan losses was $79,364 at September 30, 2009, representing 3.60% of total
loans, compared with $64,437 at December 31, 2008, or 2.59% of total loans and $82,309 at June 30,
2009, or 3.50% of total loans. The allowance for loan losses to non-performing loans ratio was
41.8%, compared to 42.7% at December 31, 2008 and 45.1% at June 30, 2009. At September 30, 2009,
we believe that our allowance appropriately considers the expected loss in our loan portfolio.
During the second and third quarters of 2009, we offered a discount to some of our CRE customers in
exchange for early repayment. The program that we offered was intended to reduce the level of CRE
loan concentration in our portfolio and reduce our total risk-weighted assets, thereby improving
our regulatory capital ratios.
Payoffs or paydowns under this program totaled $16,665 and $14,576 during the second and third
quarters of 2009, respectively. Of the $31,241 in CRE loans that were paid off or paid down
through this program, many were considered to be of increasing credit risk and all discounts
provided to borrowers were recorded as a charge-off against the allowance for loan losses. Since a
substantial number of the loans had credit related losses and the remaining loans were in a
category of loans that contain more risk, all charge-offs were recorded against the allowance.
This program ended on September 30, 2009.
Total non-performing loans at September 30, 2009, consisting of nonaccrual loans and loans 90 days
or more past due, were $189,897, an increase of $38,998 from December 31, 2008 and an increase of
$7,484 from June 30, 2009. Non-performing loans were 8.61% of total loans, compared to 6.06% at
December 31, 2008 and 7.76% at June 30, 2009. Non-performing assets were 9.69% of total loans and
other real estate owned at September 30, 2009, compared to 6.79% at December 31, 2008 and 8.90% at
June 30, 2009.
Listed below is a comparison of non-performing assets.
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Nonaccrual loans |
$ | 185,558 | $ | 150,002 | ||||
90 days or more past due loans |
4,339 | 897 | ||||||
Total non-performing loans |
189,897 | 150,899 | ||||||
Other real estate owned |
26,435 | 19,396 | ||||||
Total non-performing assets |
$ | 216,332 | $ | 170,295 | ||||
Ratios: |
||||||||
Non-performing Loans to Loans |
8.61 | % | 6.06 | % | ||||
Non-performing Assets to Loans and Other Real Estate Owned |
9.69 | % | 6.79 | % | ||||
Allowance for Loan Losses to Non-performing Loans |
41.79 | % | 42.70 | % |
24
Table of Contents
NOTE 5. BRANCH DIVESTITURES AND LOAN SALES
In September 2009, we announced the planned sale of three banking offices located in Crittenden,
Dry Ridge and Warsaw, Kentucky to The Bank of Kentucky of Crestview Hills, Kentucky and certain
deposit liabilities and assets of banking offices located in Union and Florence, Kentucky. In a
separate transaction, The Bank of Kentucky agreed to purchase a portfolio of primarily commercial
loans originated by our Covington, Kentucky loan production office.
In the branch purchase transaction, The Bank of Kentucky is expected to assume approximately
$85,000 of deposit liabilities related to the five branches at a premium of approximately $5,200
and to buy certain branch-related assets, including at least $35,000 in selected loans at book
value, less applicable reserves. All other assets will be sold at their book values. We intend to
close the Union and Florence banking offices following the completion of this transaction and seek
a buyer for the real estate. This transaction is subject to customary conditions, including
regulatory approval for the branch sale. We expect the branch purchase transaction to close during
the fourth quarter of 2009.
In the commercial loan purchase transaction, The Bank of Kentucky purchased $49,545 in commercial
loans originated by our Covington, Kentucky loan production office during the third quarter of
2009. We recognized a gain of $676 on the sale of these loans. It is anticipated that additional
commercial loans related to our Covington, Kentucky loan production office will be purchased prior
to the closing of the branch purchase transaction. Approximately $32,000 in additional loans are
available to be purchased at the discretion of The Bank of Kentucky and were classified as
available for sale at September 30, 2009.
In February 2009, we sold three banking offices located in Georgetown and Lexington, Kentucky to
Peoples Exchange Bank of Beattyville, Kentucky. In the transaction, Peoples Exchange Bank assumed
the deposit liabilities of the three branches and purchased certain branch-related assets,
including loans. There were $16,133 in loans and $18,516 in deposits sold in the transaction.
The sale generated a pre-tax gain of $628.
In January 2009, we sold our two banking offices in Lawrenceburg, Kentucky, to Town & Country Bank
and Trust Company, who assumed the deposit liabilities of the branches and purchased branch-related
assets, including loans and the two Lawrenceburg facilities. The transaction included loans of
$10,807 and deposits of $32,280. The sale generated a pre-tax gain of $1,921.
NOTE 6. DEPOSITS
As of September 30, 2009, the scheduled maturities of time deposits are as follows:
2009 |
$ | 306,448 | ||
2010 |
546,062 | |||
2011 |
188,217 | |||
2012 |
31,782 | |||
2013 and thereafter |
41,588 | |||
Total |
$ | 1,114,097 | ||
We had $321,996 in brokered deposits at September 30, 2009 and $267,205 at December 31, 2008.
NOTE 7. INCOME TAXES
The income tax benefit for the first nine months of 2009 was $9,952, which equates to an effective
tax rate of 9.4%. Income tax benefit recorded for the first nine months of 2009 is based on our
estimate of the expected effective tax rate for the full year, coupled with our assessment of our
ability to realize our deferred tax assets. The tax benefit is a result of the net loss, the
impact of general business tax credits and tax free loan, municipal security and bank-owned life
insurance income, partially offset by an increase in our income tax valuation allowance of $25,357.
During the third quarter of 2009, our valuation allowance increased $6,853.
In October 2009, we made the decision to sell $40,048 of our bank owned life insurance policies and
to surrender $23,102 of them. As a result, we recorded the expected loss on sale of $788, as well
as an estimate of the surrender penalty of $241. The penalty was
recorded in tax expense and must be paid, even if we have a taxable loss. We also recorded tax
expense totaling $5,603 on the estimated taxable gains on sale and surrender.
The net deferred tax asset at September 30, 2009, was $68,005, consisting of deferred assets of
$96,542, reduced by valuation allowances totaling $28,537. The net federal deferred tax asset was
$60,826 and the net state amount was $7,179.
Our gross deferred tax asset of $96,542 consists of assets of $111,330 and liabilities of $14,788.
The primary components of our gross deferred tax asset include a timing difference representing the
excess of the cumulative provision for loan losses over cumulative net charge-offs of $29,987,
goodwill impairment of $29,941, general business credits of $17,738, and $9,560 related to OTTI
charges for financial statement purposes not yet deductible for tax return purposes. The benefit
associated with net operating loss carryforwards was $10,506 at September 30, 2009. The deferred
tax asset associated with net operating loss carryforwards arose in 2009, and therefore expires in
2029. The majority of the 2009 net operating loss will be carried back to 2007.
25
Table of Contents
On a quarterly basis, we determine whether a valuation allowance is necessary for our deferred tax
asset. In performing this analysis, we consider all evidence currently available, both positive
and negative, in determining whether, based on the weight of that evidence, the deferred tax asset
will be realized. We establish a valuation allowance when it is more likely than not that a
recorded tax benefit is not expected to be realized. The expense to create the valuation allowance
is recorded as additional income tax expense in the period the valuation allowance is established.
During the first nine months of 2009, we increased our state income tax valuation allowance by
$1,656 to $4,836, with $416 of this increase arising during the third quarter. We also recorded a
federal income tax valuation allowance of $23,701, with $6,437 recorded in the third quarter and
$13,025 recorded during the second quarter. We did not have a federal valuation allowance recorded
prior to 2009, but recognized one during the first quarter of 2009 primarily because our estimates
of future taxable income declined from the amounts forecasted at December 31, 2008. Those estimates
declined further during the second and third quarters of 2009, resulting in additions to the total
valuation allowance.
Our estimate of the required valuation allowance is highly dependent upon our estimate of projected
levels of future taxable income. Projections carry a degree of uncertainty, particularly for
longer-term forecasts. In our case, the amount of uncertainty is increased due to the effects of
the economic downturn and estimates for the timing and magnitude of economic recovery, as well as
the level of provision for loan losses we have experienced during the last fifteen months. Should
the actual amount of taxable income be less than what is projected, it has been, and may continue
to be necessary for us to increase our valuation allowance. Given the risk of additional
deterioration in our loan and securities portfolios not included in our projections, we stress
tested those projections and considered the results of those tests in establishing our federal
income tax valuation allowance.
Our process for determining the need and amount of our valuation allowance at September 30, 2009
included the following steps.
| Earnings forecasts were prepared for the remainder of 2009 through 2012. These
forecasts include projections of net interest income that are obtained from our
asset/liability management model as well as projections of credit related information that
are obtained from our Chief Credit and Risk Officer. The credit related information
includes estimates of specific and general reserves for the provision for loan losses,
non-performing loans and assets, net charge-offs and the allowance for loan losses as a
percentage of both total and non-performing loans. |
| Non-interest income and expense forecasts were updated quarterly as part of our regular
rolling four quarter reforecast process, as were estimates of earning asset balances and
the liabilities that fund them. |
| The income before tax amounts were discounted by 15% to reflect the uncertainty
contained in the projections. We arrived at this discount amount earlier in 2009 after
reviewing the risk of further adverse developments in asset quality in our loan and
investment security portfolios. We then combined the adjusted income before tax amount
with anticipated permanent and timing differences to determine projected taxable income.
We assumed pretax income would increase 4.25% after 2012. |
| The valuation allowance was computed as the total of all of the tax credits included in
our deferred income tax inventory, plus net operating loss carryforwards. |
The three year time period used at September 30, 2009 to evaluate the net operating loss
carryforward compares to a four year period used at June 30, 2009. The reduction takes into
account the fact that our current projections for 2010 project less reported and taxable income
than what was projected one quarter ago. We currently have a valuation allowance for all of our
net operating loss and general business tax credits that are included in our deferred tax asset
and are subject to future expiration dates. The remainder of our deferred tax asset consists only
of net timing differences and alternative minimum tax credits. The expiration date for timing
differences is not determined until those items become deductible for tax purposes. We plan to
adjust the three year period, as well as the 15% discount from our projected earnings up or down in
the future, depending on the accuracy of our forecasts. This could result in increases or
decreases in our valuation allowance. Should our actual and/or projected results in future
reporting periods show lower levels of taxable income than what we are currently projecting, we may
have to establish an additional allowance against all or a portion of the net timing differences or
alternative minimum tax credits remaining in our deferred tax asset at September 30, 2009.
During the first nine months of 2009, our actual net income before tax was significantly less than
what we projected the prior quarter. The differences were primarily in the following five areas:
| We recognized OTTI charges of $21,484 during the first nine months of 2009, while none
was originally forecast at December 31, 2008. We did not anticipate the extent of
deterioration experienced by some of the trust preferred securities we hold, all of which
are tied to the financial results of other financial institutions, specifically as
evidenced by the increasing number of deferrals and defaults on those securities. The OTTI
charges were partially offset by securities gains of $8,057. |
| We charged off our $17,500 loan to Peoples Community Bancorp Inc. (Peoples) due to
developments since January 1, 2009. A total of $17,000 was charged off during the second
quarter of 2009, with $8,250 of the related provision expense occurring in the same
quarter, while the remainder was charged off during the third quarter. |
26
Table of Contents
| The majority of the remainder of the excess of our net loss before tax over our
projected loss is within the provision for loan losses, especially in the portion of the
allowance determined by using the principles of SFAS 5, Accounting for Contingencies, or
the FAS 5 reserve. That portion of the allowance has increased more than anticipated
during 2009 as the macro economic factors we utilize in its preparation, in particular real
estate values and unemployment rates, have deteriorated more severely than we anticipated.
Higher than expected specific reserves and charge-offs for loans in our Chicago and
commercial real estate portfolios have also resulted in a higher than expected provision.
A higher than anticipated level of non-performing assets has also led to higher loan and
other real estate owned expenses than we expected. |
| Warrant fair value adjustments totaling $6,145 were recorded during the six months ended
June 30, 2009. These adjustments are not tax deductible and were necessary only because we
had to classify the Treasury Warrant underlying the preferred shares issued to the Treasury
Department as a liability during the first and for part of the second quarters until the
number of authorized shares necessary to make the Warrant exercisable were approved by our
shareholders in the second quarter. |
| Net interest income was less than the amount projected at December 31, 2008, largely due
to near historic lows in the adjustable rate indexes we use to price our earning assets,
especially one and three month LIBOR and the national prime lending rate. While declines
in LIBOR benefited us on the liability side of our balance sheet, the impact on our earning
assets was far greater and impacted us more quickly, since our balance sheet remains asset
sensitive. Additionally, the spread between 30 and 90 day LIBOR was at historic levels,
which negatively impacted us as our LIBOR based assets tend to be based on 30 day LIBOR and
our LIBOR based liabilities tend to be based on 90 day LIBOR. Our forecasts assume some
increases in our net interest margin for the foreseeable future from increases in rates and
from lower nonperforming assets. These forecasts are in part based on an increase in
interest rates beginning in the third quarter of 2010, which will benefit us since we are
asset sensitive. |
We recognized our initial state valuation allowance during the fourth quarter of 2008 and have
increased that allowance in each of the first three quarters of 2009. We also recorded provision
for federal income tax valuation allowances in each of the first three quarters of 2009. The
following details increases to the valuation allowance recognized in 2008 and 2009:
Federal | State | |||||||
Balance at September 30, 2008 |
$ | | $ | | ||||
Addition |
| 3,180 | ||||||
Balance at December 31, 2008 |
| 3,180 | ||||||
Addition |
4,239 | 776 | ||||||
Balance at March 31, 2009 |
4,239 | 3,956 | ||||||
Addition |
13,025 | 464 | ||||||
Balance at June 30, 2009 |
17,264 | 4,420 | ||||||
Addition |
6,437 | 416 | ||||||
Balance at September 30, 2009 |
$ | 23,701 | $ | 4,836 |
The income tax benefit recognized during 2009, net of the related valuation allowance was $9,952.
The largest portion of this benefit relates to losses which will be carried back to 2007, in which
we had taxable income of $35,214.
Our valuation allowance at September 30, 2009, assumes that we are unable to utilize any of the
general business tax credits or net operating losses included in our deferred tax asset. We
believe that these adjustments, coupled with the 15% discount to our projected earnings, provide a
reasonable estimate for the effects of estimation error or further deterioration in the economy
that could affect our borrowers or the issuers of our remaining trust preferred securities.
Federal net operating loss and general business credit carryforward periods are twenty years, while
our state net operating loss carryforward periods are fifteen years for Indiana and twelve years
for Illinois. Our general business credits expire in varying amounts through 2029 and the net
operating loss carryforwards expire in 2029.
We consider both positive and negative evidence when determining the need for a valuation
allowance. At September 30, 2009, we considered the following negative evidence:
| we have experienced net losses in each of the last six quarters, and |
| we did not meet our forecasted levels of earnings in each of the first three quarters of
2009, although the difference for the third quarter of 2009 to net income before taxes was
significantly less than in the first and second quarters and totaled $2,849, and |
| our intent to defer payment of dividends and distributions on our outstanding
securities; and |
| forecasting the pace and amount of improvement in asset quality has been difficult,
particularly in the current macroeconomic environment, resulting in lower forecasted levels
of earnings in 2010. |
27
Table of Contents
The losses we have experienced are largely attributed to the impact of the current recession,
including its impact on real estate values and the resulting impact on the banking industry as a
whole. Our credit losses have been largely from the Chicago market, which we entered in April 2007
when we acquired Prairie Financial Corporation (Prairie) and from loans originated by our
Commercial Real Estate Group headquartered in the Cincinnati, Ohio area. Prairie was a highly
profitable entity that operated primarily in the residential construction sector. When economic
conditions began to deteriorate, it resulted in lower home values and a dramatic slowdown in
construction and residential home sales for our borrowers, and ultimately, in increased provisions
for loan loss and charge-offs to us.
The acquisition of Prairie was the only acquisition we have executed since 2001 and has clearly
negatively impacted our operating results in the areas of our provision for loan losses, our net
interest income because of higher nonaccrual loans, loan and collection expense and FDIC insurance
expense, due to higher assessment rates. The losses experienced during the last six quarters have
also negatively impacted our capital levels. Actions we may take to increase risk-based capital
levels include additional sales of earning assets that carry a high risk weighting percentage in
our regulatory capital computations, which could impact our earnings.
At September 30, 2009, we also considered the following positive evidence:
| To the best of our knowledge, we have never had a credit or net operating loss expire. |
||
| Our core community banking franchise, exclusive of Chicago, has historically been
profitable and continues to be profitable and has not been affected by the current economy
to the extent our land acquisition and development and commercial real estate based lending
operations have. From 2005 to 2007, our earnings per share were $1.56, $1.11 and $1.55, a
cumulative three year total of $4.22. Our projected earnings levels in our earnings
forecast for 2010 through 2012 assume less than 15% of that three year total for this
recovery period, and then a return to more normalized earnings levels. |
||
| Our valuation allowance assumes that we do not realize any of our general business tax
credit or net operating loss carryforwards, despite a 20 year carryforward period for both.
Our federal net operating loss carryforwards expire in 2029, while our state net
operating losses begin to expire in 2017. |
||
| The risk of further OTTI charges has been reduced, as unrealized losses in our trust
preferred securities portfolio totaled $7,349 at September 30, 2009, down from $7,838 at
June 30, 2009. This compares to net unrealized losses in that portfolio of $14,044 at
March 31, 2009 and $10,358 at December 31, 2008. Trust preferred securities held in our
available for sale portfolio totaled $9,882 at September 30, 2009, compared to $9,393 at
June 30, 2009, $23,667 at March 31, 2009 and $28,401 at December 31, 2008. All of the OTTI
charges we have recognized since 2007 has been in our trust preferred securities portfolio. |
During the third quarter of 2009, for purposes of forecasting, we increased our estimates of future
provisions for loan losses and the length of time it will take to reduce our level of
non-performing assets to take into account the impact of the economic conditions on our credit
quality. We believe that the positive evidence we considered during the third quarter is an
indication that our credit position is beginning to stabilize. That evidence, along with
improvements we have implemented in our collection and loan workout personnel and processes,
increases our level of confidence in our provision forecasts.
Positive evidence that helps support the confidence we have in our credit forecasts includes the
fact that our level of delinquencies for loans from the Chicago region were $6,599 at September 30,
2009, which is the lowest level for that portfolio since April 2007, when
we acquired the Chicago region. The improvement reflects greater attention managing delinquent
accounts, as well as, the reclassification of delinquent loans to nonaccrual status. The
Case-Schiller index of residential housing values for July, 2009 showed an increase from the index
for June 2009, representing the third consecutive month the index has increased. Negative evidence
making it difficult to predict credit performance includes the deterioration we have seen in the
residential development and construction area and, to a lesser extent, in the retail construction
and development area within our CRE portfolio. As the unemployment rate rises and consumer
spending slows, the retail sector has experienced increasing pressure. Delinquencies in the
portfolio managed by our CRE group totaled $22,282 at September 30, 2009 compared to $6,299 at June
30, 2009.
Additionally, while our non-performing assets increased during 2009, the rate of increase in our
non-performing assets, exclusive of the previously discussed Peoples loan, has slowed. The rate of
increase in our non-performing assets was 4.1% and 10.3% for the third and second quarters of 2009,
compared to 25.4%, 65.3% and 63.9% for the preceding three quarters, also exclusive of the Peoples
loan.
The realization of our deferred income tax asset is not dependent on tax planning strategies or the
offset of deferred tax liability. At September 30, 2009, we believe it is more likely than not
that we will be able to realize the benefits recorded as a deferred tax asset, net of the valuation
allowance provided.
28
Table of Contents
NOTE 8. SHORT-TERM BORROWINGS
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Federal funds purchased |
$ | | $ | 25,000 | ||||
Securities sold under agreements to repurchase |
63,011 | 88,106 | ||||||
Short-term Federal Home Loan Bank advances |
40,000 | 125,000 | ||||||
Federal Reserve Term Auction Facility (TAF) borrowings |
85,000 | 176,900 | ||||||
Total short-term borrowed funds |
$ | 188,011 | $ | 415,006 | ||||
We must pledge collateral in the form of mortgage-backed securities or mortgage loans to secure
Federal Home Loan Bank (FHLB) advances. At September 30, 2009, we had sufficient collateral
pledged to satisfy the collateral requirements.
At September 30, 2009, we had available federal funds purchased lines of $335,000, however in the
current economic environment it is highly unlikely that we would be able to access these unsecured
lines.
29
Table of Contents
NOTE 9. LONG-TERM BORROWINGS
Long-term borrowings consist of the following:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Federal Home Loan Bank (FHLB) Advances |
||||||||
Fixed maturity advances with maturities at various dates
through 2016 (weighted average rate of 2.63% and 3.02%
as of September 30, 2009 and December 31, 2008, respectively) |
$ | 126,005 | $ | 136,009 | ||||
Amortizing and other advances
(weighted average rate of 4.98%
as of December 31, 2008) |
| 706 | ||||||
Total FHLB Advances |
126,005 | 136,715 | ||||||
Securities sold under repurchase agreements with maturities
at various dates through 2013 (weighted average rate of 2.11%
and 3.30% as of September 30, 2009 and December 31, 2008, respectively) |
80,000 | 100,000 | ||||||
Note payable, secured by equipment, with a fixed interest rate of 7.26%,
due at various dates through 2012 |
2,937 | 3,780 | ||||||
Note payable, unsecured, with a floating interest rate equal to one-month
LIBOR plus 0.875%, with a maturity date of April 1, 2012 |
| 18,000 | ||||||
Subordinated debt, unsecured, with a floating interest rate equal to three-
month LIBOR plus 3.20%, 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 25, 2011, at par |
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
quarterly, at par |
35,568 | 35,568 | ||||||
Floating Rate Capital Securities, with an interest rate equal to three-month
LIBOR plus 1.57%, with a maturity date of June 30, 2037, and callable
effective June 30, 2012, at par |
20,619 | 20,619 | ||||||
Floating Rate Capital Securities, with an interest rate equal to three-month
LIBOR plus 1.70%, with a maturity date of December 15, 2036, and callable
effective December 15, 2011, at par |
10,310 | 10,310 | ||||||
Senior unsecured debt guaranteed by FDIC under the TLGP, with a fixed
rate of 2.625%, with a maturity date of March 30, 2012 |
50,000 | | ||||||
Other |
3,368 | 3,368 | ||||||
Total long-term borrowings |
$ | 361,364 | $ | 360,917 | ||||
Securities sold under agreements to repurchase include $80,000 in variable rate national
market repurchase agreements. These repurchase agreements have an average rate of 2.11% with
$30,000 maturing in 2012 and $50,000 maturing in 2013. We borrowed these funds under a master
repurchase agreement. We must maintain collateral with a value equal to 105% of the repurchase
price of the securities transferred. As originally issued, our repurchase agreement counterparty
had an option to put the collateral back to us at the repurchase price on a specified date.
During the third quarter, we paid off all of our remaining amortizing advances, incurring debt
prepayment penalties of $27.
Also included in long-term borrowings is $126,005 in FHLB advances to fund investments in
mortgage-backed securities, loan programs and to satisfy certain other funding needs. Included in
the long-term FHLB borrowings are $40,000 of putable advances. Each advance is payable at its
maturity date, with a prepayment penalty for fixed rate advances. Total FHLB advances were
collateralized by $221,987 of mortgage loans and securities under collateral agreements at
September 30, 2009.
The floating rate capital securities callable at par on July 25, 2011, are also callable at an
earlier date, but only upon payment of a premium based on a percentage of the outstanding principal
balance. The call is effective at a premium of 1.5375% at July 25, 2010. Unamortized
organizational costs for these securities were $421 at September 30, 2009.
30
Table of Contents
The floating rate capital securities with a maturity date of June 26, 2033, are callable at par
quarterly. Unamortized organizational costs for these securities were $827 at September 30, 2009.
The floating rate capital securities callable at par on December 15, 2011, and quarterly
thereafter, may be called prior to that date but only upon payment of a premium based on a
percentage of the outstanding principal balance. The calls are effective annually at premiums of
1.57% at December 15, 2009, and 0.785% at December 15, 2010.
The floating rate capital securities callable at par on June 30, 2012, and quarterly thereafter may
be called prior to that date with a payment of a call premium, which is based on a percentage of
the outstanding principal balance. The calls are effective annually at premiums of 1.40% at June
30, 2010 and 0.70% at June 30, 2011.
The principal assets of each trust subsidiary are our subordinated debentures. The subordinated
debentures bear interest at the same rate as the related trust preferred securities and mature on
the same dates. Our obligations with respect to the trust preferred securities constitute a full
and unconditional guarantee by us of the trusts obligations with respect to the securities.
Unsecured subordinated debt includes $4,000 of debt that has a floating rate of three-month LIBOR
plus 2.85% and will mature on April 7, 2014. We paid issuance costs of $141 and are amortizing
those costs over the life of the debt. A second issue includes $10,000 of floating
rate-subordinated debt issued in April 2003 that has a floating rate of three-month LIBOR plus
3.20%, which will mature on April 24, 2013. We paid issuance costs of $331 and are amortizing those
costs over the life of the debt.
Commencing in the fourth quarter of 2009, we intend to 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 us from declaring or paying cash distributions on
our common or preferred stock or debt securities that rank junior to the subordinated debenture.
During the first quarter of 2009, the Bank issued a $50,000 principal amount, 2.625% senior
unsecured note due in 2012 as part of the Temporary Liquidity Guarantee Program (TLGP) of the
Federal Deposit Insurance Corporation (FDIC).
NOTE 10. COMMITMENTS AND CONTINGENCIES
We are involved in legal proceedings in the ordinary course of our business. We do not expect that
any of those legal proceedings would have a material adverse effect on our consolidated financial
position, results of operations or cash flows.
In the normal course of business, there are additional outstanding commitments and contingent
liabilities that are not reflected in the accompanying consolidated financial statements. We use
the same credit policies in making commitments and conditional obligations as we do for other
instruments.
The commitments and contingent liabilities not reflected in the consolidated financial statements
were:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Commitments to extend credit |
$ | 504,527 | $ | 684,245 | ||||
Standby letters of credit |
20,400 | 22,320 | ||||||
Non-reimbursable standby letters of credit and commitments |
1,660 | 2,574 |
NOTE 11. INTEREST RATE CONTRACTS
We adopted SFAS 161, Disclosures about Derivative Instruments and Hedging Activities an
amendment of FASB Statement No. 133, at the beginning of the first quarter of 2009, and have
included here the expanded disclosures required by that statement. This statement was subsequently
incorporated into ASC Topic 815, Derivatives and Hedging.
We are exposed to interest rate risk relating to our ongoing business operations and utilize
derivatives, such as interest rate swaps and floors to help manage that risk.
During the fourth quarter of 2004, we entered into an interest rate swap agreement with a $7,500
notional amount to convert a fixed rate security to a variable rate. This rate swap is designated
as a fair value hedge. The interest rate swap requires us to pay a fixed rate of interest of 4.90%
and receive a variable rate based on three-month LIBOR. The variable rate received was 1.2825% at
September 30, 2009. The swap expires on or prior to January 5, 2016, and had a notional amount of
$4,880 at September 30, 2009.
31
Table of Contents
During the second quarter of 2006, we initiated an interest rate protection program in which we
earn fee income by providing our commercial loan customers the ability to swap from variable to
fixed, or fixed to variable interest rates. Under these agreements, we enter into a variable or
fixed rate loan agreement with our customer in addition to a swap agreement. The swap agreement
effectively swaps the customers variable rate to a fixed rate or vice versa. We then enter into a
corresponding swap agreement with a third party in order to swap our exposure on the variable to
fixed rate swap with our customer. Since the swaps are structured to offset each other, changes in
fair values, while recorded, have no net earnings impact.
Mortgage banking derivatives used in the ordinary course of business consist of forward sales
contracts and rate lock loan commitments. The fair value of these derivative instruments is
obtained using the Bloomberg system.
The table below provides data about the carrying values of our derivative instruments, which are
included in Other assets and Other liabilities in our consolidated balance sheets.
September 30, 2009 | December 31, 2008 | |||||||||||||||||||||||
Assets | (Liabilities) | Derivative | Assets | (Liabilities) | Derivative | |||||||||||||||||||
Carrying | Carrying | Net Carrying | Carrying | Carrying | Net Carrying | |||||||||||||||||||
Value | Value | Value | Value | Value | Value | |||||||||||||||||||
Derivatives designated as
hedging instruments: |
||||||||||||||||||||||||
Interest rate contracts |
$ | 8,170 | $ | (8,504 | ) | $ | (334 | ) | $ | 12,080 | $ | (11,835 | ) | $ | 245 | |||||||||
Derivatives not designated
as hedging instruments: |
||||||||||||||||||||||||
Mortgage banking derivatives |
334 | (5 | ) | 329 | 216 | (16 | ) | 200 |
We recognized an after tax loss of $384 related to our interest rate contracts in other
comprehensive income during the first nine months of 2009, compared to a gain of $127 during the
first nine months of 2008.
Income recognized on our mortgage rate locks, which are derivative instruments not designated as
hedging instruments, were $186 and $91 for the three and nine months ended September 30, 2009.
During the three and nine months ended September 30, 2008, we recognized losses of $10 and $37 from
the change in value of our mortgage loan commitments.
We are exposed to losses if a counterparty fails to make its payments under a contract in which we
are in a receiving status. Although collateral or other security is not obtained, we minimize our
credit risk by monitoring the credit standing of the counterparties. We anticipate that the
counterparties will be able to fully satisfy their obligations under these agreements.
NOTE 12. SEGMENT INFORMATION
We operate 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 origination and sales; letters of credit; corporate cash management services;
insurance products and services; and complete personal and corporate trust services. Other
includes the operating results of our parent company and its reinsurance subsidiary, as well as
eliminations. The reinsurance subsidiary does not meet the reporting criteria for a separate
segment.
32
Table of Contents
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 the
banking and other operating units.
For three months ended September 30, 2009 | Banking | Other | Total | |||||||||
Interest income |
$ | 29,172 | $ | 30 | $ | 29,202 | ||||||
Interest expense |
12,304 | 848 | 13,152 | |||||||||
Net interest income (loss) |
16,868 | (818 | ) | 16,050 | ||||||||
Provision for loan losses |
18,913 | | 18,913 | |||||||||
Other income |
14,770 | 57 | 14,827 | |||||||||
Other expense |
24,056 | 313 | 24,369 | |||||||||
Earnings (Loss) before income taxes |
(11,331 | ) | (1,074 | ) | (12,405 | ) | ||||||
Income tax expense (benefit) |
2,192 | 5,138 | 7,330 | |||||||||
Net income (loss) |
$ | (13,523 | ) | $ | (6,212 | ) | $ | (19,735 | ) | |||
For nine months ended September 30, 2009 | Banking | Other | Total | |||||||||
Interest income |
$ | 94,045 | $ | 99 | $ | 94,144 | ||||||
Interest expense |
40,969 | 2,868 | 43,837 | |||||||||
Net interest income (loss) |
53,076 | (2,769 | ) | 50,307 | ||||||||
Provision for loan losses |
82,843 | | 82,843 | |||||||||
Other income |
15,264 | (5,929 | ) | 9,335 | ||||||||
Other expense |
81,728 | 1,283 | 83,011 | |||||||||
Earnings (Loss) before income taxes |
(96,231 | ) | (9,981 | ) | (106,212 | ) | ||||||
Income tax expense (benefit) |
(14,078 | ) | 4,126 | (9,952 | ) | |||||||
Net income (loss) |
$ | (82,153 | ) | $ | (14,107 | ) | $ | (96,260 | ) | |||
Segment assets |
$ | 3,251,530 | $ | 6,795 | $ | 3,258,325 | ||||||
For three months ended September 30, 2008 | Banking | Other | Total | |||||||||
Interest income |
$ | 42,253 | $ | 52 | $ | 42,305 | ||||||
Interest expense |
16,865 | 1,580 | 18,445 | |||||||||
Net interest income (loss) |
25,388 | (1,528 | ) | 23,860 | ||||||||
Provision for loan losses |
17,978 | | 17,978 | |||||||||
Other income |
10,120 | 64 | 10,184 | |||||||||
Other expense |
71,843 | 344 | 72,187 | |||||||||
Earnings (Loss) before income taxes |
(54,313 | ) | (1,808 | ) | (56,121 | ) | ||||||
Income tax expense (benefit) |
(22,118 | ) | (676 | ) | (22,794 | ) | ||||||
Net income (loss) |
$ | (32,195 | ) | $ | (1,132 | ) | $ | (33,327 | ) | |||
For nine months ended September 30, 2008 | Banking | Other | Total | |||||||||
Interest income |
$ | 132,486 | $ | 170 | $ | 132,656 | ||||||
Interest expense |
54,981 | 5,131 | 60,112 | |||||||||
Net interest income (loss) |
77,505 | (4,961 | ) | 72,544 | ||||||||
Provision for loan losses |
27,615 | | 27,615 | |||||||||
Other income |
23,700 | 230 | 23,930 | |||||||||
Other expense |
119,613 | 872 | 120,485 | |||||||||
Earnings (Loss) before income taxes |
(46,023 | ) | (5,603 | ) | (51,626 | ) | ||||||
Income tax expense (benefit) |
(20,265 | ) | (2,108 | ) | (22,373 | ) | ||||||
Net income (loss) |
$ | (25,758 | ) | $ | (3,495 | ) | $ | (29,253 | ) | |||
Segment assets |
$ | 3,343,706 | $ | 13,136 | $ | 3,356,842 | ||||||
33
Table of Contents
NOTE 13. REGULATORY CAPITAL
The banking industry is 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 our
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
September 30, 2009 and December 31, 2008, both our capital ratios and those of the Bank exceeded
all minimum regulatory requirements and the Bank met the regulatory guidelines for
well-capitalized status. It is our goal for the Bank to exceed the requirements for
well-capitalized status at all times. The Bank has agreed with the Office of the Comptroller of
the Currency to develop a plan to increase its total capital ratio to at least 11.5% and its tier 1
leverage ratio to 8% by December 31, 2009.
At September 30, 2009 the total risk based capital ratio for the Bank was 10.20%, an increase of 36
basis points from June 30, 2009. The increase resulted primarily from the sale of securities and
reinvestment of those funds into lower risk-weighted assets, the sale of loans to the Bank of
Kentucky, targeted declines in loan balances, and capital infusions we made of $9,900, partially
offset by the impact of the quarters net loss and settlement of intercompany tax liabilities. The
Banks tier 1 risk-based capital ratio increased 36 basis points to 8.92% and its tier 1 leverage
ratio increased 14 basis points to 6.61%. Our total risk based capital ratio increased 2 basis
points to 10.44%, our tier 1 risk-based capital ratio decreased 31 basis points to 8.21% and our
tier 1 leverage ratio decreased 37 basis points to 6.06%. Our tangible common equity to tangible
assets ratio declined 53 basis points to 3.44%.
The regulatory capital ratios for us and the Bank are shown below.
Regulatory Guidelines | Actual | |||||||||||||||
Minimum | Well- | September 30, | December 31, | |||||||||||||
Requirements | Capitalized | 2009 | 2008 | |||||||||||||
Integra Bank Corporation: |
||||||||||||||||
Total Capital (to Risk-Weighted Assets) |
8.00 | % | N/A | 10.44 | % | 9.75 | % | |||||||||
Tier 1 Capital (to Risk-Weighted Assets) |
4.00 | % | N/A | 8.21 | % | 7.68 | % | |||||||||
Tier 1 Capital (to Average Assets) |
4.00 | % | N/A | 6.06 | % | 6.41 | % | |||||||||
Integra Bank N.A.: |
||||||||||||||||
Total Capital (to Risk-Weighted Assets) |
8.00 | % | 10.00 | % | 10.20 | % | 10.07 | % | ||||||||
Tier 1 Capital (to Risk-Weighted Assets) |
4.00 | % | 6.00 | % | 8.92 | % | 8.81 | % | ||||||||
Tier 1 Capital (to Average Assets) |
4.00 | % | 5.00 | % | 6.61 | % | 7.37 | % |
Further discussion on regulatory capital ratios can be found in the Capital Resources and
Liquidity section of the Managements Discussion and Analysis of Financial Condition and Results
of Operations below.
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
INTRODUCTION
The discussion and analysis which follows is presented to assist in the understanding and
evaluation of our financial condition and results of operations as presented in the following
consolidated financial statements and related notes. The text of this review is supplemented with
various financial data and statistics. All amounts presented are in thousands, except for share
and per share data and ratios.
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 the risks and uncertainties described in Item 1A Risk Factors and other risks and
uncertainties disclosed in future periodic reports. We undertake no obligation to release
revisions to these forward-looking statements or to reflect events or conditions occurring after
the date of this report, except as required to do so in future periodic reports.
OVERVIEW
The unfavorable economic conditions that have existed since 2007 continued to significantly impact
the banking industry and our performance during the third quarter of 2009 as seen by continued
lower levels of core earnings, pressure on operating earnings, changes in liquidity and declining
credit quality. While the past several months have brought early signs of stabilization, credit
quality will remain under pressure until we see meaningful improvement in the economy, especially
unemployment.
34
Table of Contents
During the third quarter of 2009, non-performing assets increased $4,633, or 2.2%, compared to an
increase of $2,637 or 1.3% during the second quarter of 2009. Our provision for loan losses
decreased 41.9% from the second quarter of 2009 to $18,913, while our net charge-offs decreased
$6,894 or 24.0%. Our allowance for loan losses to total loans increased 10 basis points to 3.60%,
while our allowance, as a percentage of non-performing loans declined 3 basis points to 41.8%. Our
credit quality continued to significantly impact our operations in the areas of lower net interest
income, a higher provision for loan losses and higher non-interest expense as a result of loan,
collection and legal expense. Our focus continues to be on managing our credit, liquidity and
capital positions.
During the first and second quarters of 2009, we invested $45,000 of the funds received from the U.
S. Department of the Treasury, or Treasury Department, under its Capital Purchase Program, or CPP,
into our subsidiary, Integra Bank N.A., or the Bank. This additional capital positively impacted
the Banks capital ratios and provided additional liquidity to the Bank. During the third quarter
of 2009, we made additional capital contributions into the Bank of $9,900 using the CPP funds.
On May 20, 2009, the Bank entered into a formal written agreement with the Office of the
Comptroller of the Currency (the OCC). Pursuant to the agreement, the Bank agreed to undertake
certain actions within designated timeframes and operate in compliance with the agreements
provisions during its term. The agreement is based on the results of an annual examination of the
Bank by the OCC.
The agreement generally provides for the development and implementation of actions to reduce the
Banks level of criticized assets and improve earnings. The agreement requires the Banks Board of
Directors to act or cause actions to be taken with respect to six areas:
| developing and implementing a staffing plan for the loan work-out department; |
||
| adopting, implementing and adhering to a written program to reduce criticized assets; |
||
| conducting robust guarantor analyses for certain commercial and industrial loans and
commercial real estate loans; |
||
| enhancing the loan management information system to allow for split classifications for
portions of single credits; |
||
| establishing a process to identify and correct the root causes of untimely
identification of problem credits by relationship managers; and |
||
| revising and maintaining a comprehensive liquidity risk management program which
assesses the Banks current and projected funding needs. |
The Bank is required to submit written progress reports on a quarterly basis to the OCC and
believes it is in compliance with the terms of the agreement at September 30, 2009.
In September 2009, we entered into a memorandum of understanding with the Federal Reserve Bank of
St. Louis. Pursuant to the memorandum, we have made informal commitments to, among other
requirements use our financial and management resources to assist the Bank in addressing weaknesses
identified by the OCC, not pay dividends on outstanding shares or interest or other sums on
outstanding trust preferred securities and not incur any additional debt.
On September 2, 2009, we announced an agreement to sell three banking offices located in
Crittenden, Dry Ridge and Warsaw, Kentucky to The Bank of Kentucky, Inc. The agreement also
included the sale of certain deposit liabilities and assets of our banking offices located in
Union and Florence, Kentucky. In this transaction, The Bank of Kentucky will assume approximately
$85,000 of deposit liabilities related to the five branches at a premium of approximately $5,200,
and buy certain branch-related assets, including at least $35,000 in selected loans at book value,
less applicable reserves. All other assets will be sold at their book values. We intend to close
the Union and Florence banking offices following the completion of this transaction and seek a
buyer for the real estate. This transaction is subject to customary conditions, including
regulatory approval for the branch sale. In a separate transaction with The Bank of Kentucky,
Inc., we agreed to sell a portfolio of primarily commercial loans originated from our Covington,
Kentucky loan production office. During September, 2009, a portion of these commercial loans,
totaling $49,545, were sold to The Bank of Kentucky. The loans were sold at a gain of $676. It
is anticipated that additional commercial loans related from our Covington, Kentucky loan
production office will be purchased by The Bank of Kentucky prior to the closing of the branch
purchase transaction, which is expected to close during the fourth quarter of 2009. Approximately
$32,000 in additional loans were available to be purchased at the discretion of The Bank of
Kentucky at September 30, 2009.
On September 18, 2009, we announced the suspension of cash dividends on our common stock for an
indefinite period. The quarterly cash dividend had previously been $0.01 per share.
Beginning in the fourth quarter of 2009, we intend to defer the payment of cash dividends on our
outstanding preferred stock, as well as the payment of interest on the outstanding junior
subordinated notes related to our trust preferred securities. The terms of the junior subordinated
notes and the trust documents allow us to defer payments of interest for up to five years without
default or penalty. During the deferral period, the respective trusts will likewise suspend the
declaration and payment of dividends on the trust preferred securities. Also during the deferral
period, we may not, among other things and with limited exceptions, pay cash dividends on or
repurchase our common stock or preferred stock nor make any payment on outstanding debt obligations
that rank equally with or junior to the junior subordinated notes. We believe that the suspension
of cash dividends on our common and preferred stock and the deferral of interest payments on the
junior subordinated notes will preserve approximately $1,800 per quarter (compared with the current
level of dividend and interest payments), thereby enhancing our liquidity and our ability to
bolster the Banks capital ratios. The decision to defer payment of dividends and interest is in
line with guidance issued by the Federal Reserve in February 2009, as revised in March 2009
(SR-09-4) related to payment of dividends on common and preferred stock, as well as interest on the
subordinated notes underlying trust preferred securities.
35
Table of Contents
The net loss available for common shareholders for the third quarter of 2009 was $20,852, or $1.01
per share, compared to $49,603, or $2.39 per share, for the second quarter of 2009 and $33,327 or
$1.62 per share during the third quarter of 2008. The provision for loan losses was $18,913, while
net-charge-offs totaled $21,858, or 3.74% of total loans on an annualized basis. Net charge-offs
included $1,258 of charge-offs related to a program designed to obtain early repayment of
commercial real estate loans. Net charge-offs also included $1,848 of gross charge-offs related to
both loans sold during the third quarter of 2009, and loans transferred to loans held for sale at
September 30, 2009.
The net loss for the second and third quarters of 2009 include $1,117 and $1,139 of dividends on
the preferred shares sold to the Treasury Department in February 2009 under the CPP and discount
accretion on the related warrant issued to the Treasury. The net loss for the third quarter also
includes securities gains of $6,578, partially offset by trading losses of $1,237, as well as an
increase in the income tax valuation allowance associated with our deferred tax asset of $6,853.
The net loss for the second quarter included an other-than-temporary securities impairment (OTTI)
charge of $20,314, an increase of $13,489 in the income tax valuation allowance, a special 5 basis
point FDIC assessment of $1,623 and a $1,407 non-tax deductible mark to market adjustment for the
warrant that reduced earnings.
The allowance to total loans increased 10 basis points during the third quarter of 2009 to 3.60% at
September 30, 2009, while the allowance to non-performing loans decreased from 45.1% to 41.8%.
Non-performing loans increased to $189,897, or 8.61% of total loans, compared to $182,413, or 7.76%
at June 30, 2009 and $150,899, or 6.06% of total loans at December 31, 2008. Other real estate
owned decreased $2,851 during the quarter, bringing total non-performing assets to $216,332 at
September 30, 2009. Total non-performing assets increased $4,633, or 2.2% during the third
quarter of 2009.
Net interest income was $16,050 for the third quarter of 2009, compared to $16,774 for the second
quarter of 2009. The net interest margin was 2.35%, compared to 2.34% for the second quarter of
2009. Liability costs declined 20 basis points during the quarter, while earning asset yields
declined 16 basis points. The decline in earning asset yields and liability costs was in part
driven by the impact of the short end of the yield curve, actions we took to improve capital and
liquidity, and the increase in non-accrual loans. The decline in net interest income was also
driven by a decline in average earning assets of $171,607.
Non-interest income was $14,827 for the third quarter of 2009, compared to $(10,984) for the
second quarter of 2009. The third quarter of 2009 included $6,578 of securities gains and $1,237
of trading losses. The second quarter of 2009 included an OTTI charge on securities of $20,314,
securities gains from sales of $1,479, and a $1,407 reduction to non-interest income for a
mark-to-market adjustment for the Treasury warrant. Deposit service charges increased $300 during
the third quarter of 2009 from the second quarter of 2009, while debit card interchange income
declined $5.
Non-interest expense was $24,369 for the third quarter of 2009, compared to $29,169 for the second
quarter of 2009. Decreases during the third quarter of 2009 compared to the second quarter
included debt prepayment penalties of $1,484, personnel expense of $1,374, FDIC insurance of
$1,284, professional fees of $358 and low income housing partnership losses of $313. These
decreases offset an increase in loan and other real estate owned expense of $657.
Income tax expense for the third quarter of 2009 was $7,330, and included an increase in our income
tax valuation allowance of $6,853.
Total assets decreased $87,937 during the third quarter of 2009. During the third quarter, we
sold $105,718 of agency issued CMOs, $65,812 of mortgage backed securities, and $54,261 of
municipal securities at a gain of $6,578. A portion of the proceeds from these sales were used to
purchase $170,651 of GNMA securities, which carry a zero percent risk weight, therefore lowering
risk weighted assets and improving our total risk based capital ratios. The repositioning
improved the Banks total risk based capital ratio by approximately 45 basis points. Total
securities decreased $92,156 while total loans decreased $143,811. The decrease in loans included
early payoffs from our commercial real estate discount program of $14,576, the sale of $49,545 of
commercial loans to The Bank of Kentucky, net charge-offs of $21,858, transfers to loans held for
sale of $32,984 and other net paydowns or payoffs totaling $26,696.
This funding created from the decrease in earning assets was used to increase cash and due from
banks by $78,938 and short-term investments by $49,201. The remaining funds generated from the
decrease in earning assets was used to reduce other sources of funding, including repurchase
agreements, by $12,907, and Federal Home Loan Bank advances, by $60,848. These actions reduced our
reliance on wholesale funding sources, reduced our risk weighted assets and improved our capital
ratios. We have continued to carry a higher than normal amount of short-term liquid funds, which
improves our liquidity position, but negatively affected our net interest margin and earnings.
36
Table of Contents
Commercial loan average balances decreased $67,912 in the third quarter of 2009, or 14.9% on an
annualized basis. This included declines in construction land and development loan balances of
$119,832 and commercial and industrial loans of $18,372, partially offset by an increase in
commercial real estate loans of $70,291. The shift out of construction and land development loans
to commercial real estate loans reflects the completion of construction for several of the projects
securing these loans, net of payoffs and paydowns. Low cost deposit average balances increased
$57,103 during the third quarter of 2009 to $1,059,055.
At September 30, 2009, the Banks regulatory capital ratios were above the requirements for well
capitalized status. Integra Banks total risk based capital ratio was 10.20%, an increase of 36
basis points from June 30, 2009. The increase was a result of the sale of securities and
reinvestment of those funds into lower risk weighted assets, the sale of loans to The Bank of
Kentucky, other declines in loan balances, and capital infusions from us of $9,900, partially
offset by the impact of the quarters net loss, and settlement of intercompany tax liabilities.
The Banks tier 1 risk based capital ratio increased 36 basis points to 8.92% and its tier 1
leverage ratio increased 14 basis points to 6.61%. Our tangible common equity to tangible assets
ratio declined 53 basis points to 3.44%.
Our plan for the fourth quarter of 2009 continues to include the following key priorities:
| improving our regulatory capital levels; |
||
| stabilizing and then improving our credit profile (as measured by non-performing
assets); |
||
| returning to profitability; |
||
| growing core deposits faster than loans; |
||
| improving our efficiency, primarily through continued execution of our profit
improvement program and ongoing expense management; and |
||
| enhancing liquidity at the parent company level by suspending dividends and
distributions on our outstanding securities. |
CRITICAL ACCOUNTING POLICIES
On April 9, 2009, the FASB amended the guidance for determining OTTI on debt securities. We
adopted this position effective April 1, 2009, and reversed $1,250 for the non-credit portion of
the cumulative OTTI charge. The adoption was recognized as a cumulative effect adjustment that
increased retained earnings and decreased accumulated other comprehensive income $778, net of tax
of $472, as of April 1, 2009. As a result of implementing the new standard, the amount of OTTI
recognized in income for the second quarter of
2009 was $20,314. The amount of OTTI that would have been recognized in income for the period under
prior guidance would have been $20,334.
There have been no other changes to our critical accounting policies since those disclosed in the
Annual Report on Form 10-K for the year ended December 31, 2008.
NET INTEREST INCOME
Net interest income decreased $7,810, or 32.7% to $16,050 for the three months ended September 30,
2009, from $23,860 for the three months ended September 30, 2008 and $22,237, or 30.7%, to $50,307
for the nine months ended September 30, 2009, from $72,544 for September 30, 2008. The net
interest margin for the three months ended September 30, 2009, was 2.35% compared to 3.22% for the
same three months of 2008, while the margin for the nine months ended September 30, 2009 was 2.36%,
as compared to 3.29% for the nine months ended September 30, 2008. The yield on earning assets
decreased 141 basis points to 4.22% for the third quarter of 2009, compared to the same quarter in
2008, while the cost of interest-bearing liabilities decreased 81 basis points to 1.86%.
37
Table of Contents
The primary components of the changes in margin and net interest income to the third quarter of
2009 as compared to the third quarter of 2008 were as follows:
| Average loan yields decreased 152 basis points to 4.18% for the quarter ended September
30, 2009, from 5.70% in the quarter ended September 30, 2008, led by a decrease in
commercial loan yields, including loan fees of 174 basis points to 3.62%. Commercial loan
yields fell as loans repriced in response to declines in prime and LIBOR. At September 30,
2009, approximately 38% of our variable rate loans are tied to prime, 52% to LIBOR and 10%
to other floating rate indices. During the twelve months ended September 30, 2009, the
national prime lending rate declined 175 basis points, while one and three month LIBOR
declined 376 and 387 basis points, respectively. Approximately 60% of our loans were
variable rate at September 30, 2009. Commercial loan yields also declined in large part
because of the increase in non-performing loans we experienced during the past four
quarters. The impact of total non-performing assets on the net interest margin has
increased since early 2008, and was 44 basis points for the third quarter of 2009. |
| Changes in our earning asset mix adversely impacted both the net interest margin and net
interest income, as average balances for higher yielding earning assets have declined more
quickly than lower yielding assets. Total average commercial loan balances decreased
$30,444, or 1.7% from the year ago quarter, while the average balance of higher yielding
residential mortgage loan balances decreased $57,257, or 25.0%, as did the average balance
of higher yielding securities, which decreased $174,878, or 31.1%. The higher percentage
of commercial loans positively impacted our net interest margin for the first part of 2008,
but has negatively impacted it since then reflecting the declines in prime and LIBOR rates
and higher average balances of non-accrual loans. Total commercial loan average balances
represented 62.6% of total earning assets in the third quarter of 2009, up from 58.5% for
the third quarter of 2008. The 174 basis point decline in commercial loan yields for the
third quarter of 2009 outpaced declines in more stable residential mortgage loans and
securities yields of 67 and 70 basis points, respectively. In addition, we took steps to
increase our liquidity and as a result, average cash and cash equivalent balances increased
by $337,314. The increase in these cash reserves also had a negative impact on the net
interest margin. |
| The decline in interest rates throughout the second half of 2008 and the first nine
months of 2009 resulted in lower liabilities costs. The average rate paid on interest
bearing liabilities was 1.86% for the third quarter of 2009, a 81 basis point decline from
the third quarter of 2008. Time deposit rates declined 79 basis points and money market
rates declined 78 basis points. Savings deposit rates increased 35 basis points, leading
to higher average balances. The average rate paid on sources of funds other than time and
transaction deposits, which include repurchase agreements, Federal Home Loan Bank or FHLB
advances and other sources, decreased from 3.18% to 1.92% for the quarter ended September
30, 2009, as compared to the quarter ended September 30, 2008. Changes in funding sources
included borrowings under the Federal Reserves Term Auction Facility, or TAF, which
averaged $83,370 during the third quarter of 2009 compared to none during the third quarter
of 2008, the borrowing we executed in the first quarter of 2009 of $50,000 under the FDICs
Temporary Loan Guaranty Program, or TLGP, and increases in savings and time deposit average
balances of $214,924 and $30,148. These increases were partially offset by declines in
FHLB advances of $131,135, money market deposits of $63,687, federal funds purchased of
$55,880, and repurchase agreements of $44,916. |
38
Table of Contents
AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
2009 | 2008 | |||||||||||||||||||||||
Average | Interest | Yield/ | Average | Interest | Yield/ | |||||||||||||||||||
For Three Months Ended September 30, | Balances | & Fees | Cost | Balances | & Fees | Cost | ||||||||||||||||||
EARNING ASSETS: |
||||||||||||||||||||||||
Short-term investments |
$ | 46,270 | $ | 272 | 2.33 | % | $ | 8,726 | $ | 26 | 1.21 | % | ||||||||||||
Loans held for sale |
8,977 | 89 | 3.97 | % | 5,460 | 88 | 6.46 | % | ||||||||||||||||
Securities |
386,384 | 4,257 | 4.42 | % | 561,511 | 7,192 | 5.12 | % | ||||||||||||||||
Regulatory Stock |
29,137 | 337 | 4.63 | % | 29,182 | 385 | 5.27 | % | ||||||||||||||||
Loans |
2,319,141 | 24,669 | 4.18 | % | 2,434,064 | 35,267 | 5.70 | % | ||||||||||||||||
Total earning assets |
2,789,909 | $ | 29,624 | 4.22 | % | 3,038,943 | $ | 42,958 | 5.63 | % | ||||||||||||||
Allowance for loan loss |
(81,746 | ) | (33,023 | ) | ||||||||||||||||||||
Other non-earning assets |
641,296 | 371,341 | ||||||||||||||||||||||
TOTAL ASSETS |
$ | 3,349,459 | $ | 3,377,261 | ||||||||||||||||||||
INTEREST-BEARING LIABILITIES: |
||||||||||||||||||||||||
Deposits |
||||||||||||||||||||||||
Savings and interest-bearing demand |
$ | 772,901 | $ | 1,684 | 0.86 | % | $ | 566,259 | $ | 1,275 | 0.90 | % | ||||||||||||
Money market accounts |
303,573 | 943 | 1.23 | % | 367,260 | 1,855 | 2.01 | % | ||||||||||||||||
Certificates of deposit and other time |
1,157,820 | 7,729 | 2.65 | % | 1,127,672 | 9,758 | 3.44 | % | ||||||||||||||||
Total
interest-bearing
deposits |
2,234,294 | 10,356 | 1.84 | % | 2,061,191 | 12,888 | 2.49 | % | ||||||||||||||||
Short-term borrowings |
203,646 | 268 | 0.52 | % | 326,742 | 1,995 | 2.39 | % | ||||||||||||||||
Long-term borrowings |
366,917 | 2,528 | 2.70 | % | 358,859 | 3,562 | 3.88 | % | ||||||||||||||||
Total interest-bearing liabilities |
2,804,857 | $ | 13,152 | 1.86 | % | 2,746,792 | $ | 18,445 | 2.67 | % | ||||||||||||||
Non-interest bearing deposits |
286,154 | 283,836 | ||||||||||||||||||||||
Other noninterest-bearing liabilities and
shareholders equity |
258,448 | 346,633 | ||||||||||||||||||||||
TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY |
$ | 3,349,459 | $ | 3,377,261 | ||||||||||||||||||||
Interest income/earning assets |
$ | 29,624 | 4.22 | % | $ | 42,958 | 5.63 | % | ||||||||||||||||
Interest expense/earning assets |
13,152 | 1.87 | % | 18,445 | 2.41 | % | ||||||||||||||||||
Net interest income/earning assets |
$ | 16,472 | 2.35 | % | $ | 24,513 | 3.22 | % | ||||||||||||||||
Tax exempt income presented on a tax equivalent basis based on a 35% federal tax rate.
Federal tax equivalent adjustments on securities are $319 and $587 for 2009 and 2008, respectively
Federal tax equivalent adjustments on loans are $103 and $66 for 2009 and 2008, respectively.
39
Table of Contents
AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
2009 | 2008 | |||||||||||||||||||||||
Average | Interest | Yield/ | Average | Interest | Yield/ | |||||||||||||||||||
For Nine Months Ended September 30, | Balances | & Fees | Cost | Balances | & Fees | Cost | ||||||||||||||||||
EARNING ASSETS: |
||||||||||||||||||||||||
Short-term investments |
$ | 15,948 | $ | 539 | 4.52 | % | $ | 6,675 | $ | 94 | 1.89 | % | ||||||||||||
Loans held for sale |
9,274 | 319 | 4.59 | % | 5,969 | 281 | 6.28 | % | ||||||||||||||||
Securities |
487,110 | 17,570 | 4.81 | % | 602,611 | 23,245 | 5.14 | % | ||||||||||||||||
Regulatory Stock |
29,143 | 1,015 | 4.64 | % | 29,181 | 1,170 | 5.34 | % | ||||||||||||||||
Loans |
2,392,606 | 76,328 | 4.23 | % | 2,381,814 | 109,924 | 6.09 | % | ||||||||||||||||
Total earning assets |
2,934,081 | $ | 95,771 | 4.36 | % | 3,026,250 | $ | 134,714 | 5.94 | % | ||||||||||||||
Allowance for loan loss |
(76,661 | ) | (30,212 | ) | ||||||||||||||||||||
Other non-earning assets |
596,450 | 378,329 | ||||||||||||||||||||||
TOTAL ASSETS |
$ | 3,453,870 | $ | 3,374,367 | ||||||||||||||||||||
INTEREST-BEARING LIABILITIES: |
||||||||||||||||||||||||
Deposits |
||||||||||||||||||||||||
Savings and interest-bearing demand |
$ | 700,643 | $ | 4,791 | 0.91 | % | $ | 555,788 | $ | 3,715 | 0.89 | % | ||||||||||||
Money market accounts |
321,987 | 3,289 | 1.37 | % | 383,152 | 6,661 | 2.32 | % | ||||||||||||||||
Certificates of deposit and other time |
1,222,809 | 26,222 | 2.87 | % | 1,107,482 | 31,755 | 3.83 | % | ||||||||||||||||
Total
interest-bearing
deposits |
2,245,439 | 34,302 | 2.04 | % | 2,046,422 | 42,131 | 2.75 | % | ||||||||||||||||
Short-term borrowings |
271,951 | 1,614 | 0.78 | % | 311,886 | 6,116 | 2.58 | % | ||||||||||||||||
Long-term borrowings |
369,878 | 7,921 | 2.82 | % | 378,140 | 11,865 | 4.12 | % | ||||||||||||||||
Total interest-bearing liabilities |
2,887,268 | $ | 43,837 | 2.03 | % | 2,736,448 | $ | 60,112 | 2.94 | % | ||||||||||||||
Non-interest bearing deposits |
291,005 | 280,754 | ||||||||||||||||||||||
Other noninterest-bearing liabilities and
shareholders equity |
275,597 | 357,165 | ||||||||||||||||||||||
TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY |
$ | 3,453,870 | $ | 3,374,367 | ||||||||||||||||||||
Interest income/earning assets |
$ | 95,771 | 4.36 | % | $ | 134,714 | 5.94 | % | ||||||||||||||||
Interest expense/earning assets |
43,837 | 2.00 | % | 60,112 | 2.65 | % | ||||||||||||||||||
Net interest income/earning assets |
$ | 51,934 | 2.36 | % | $ | 74,602 | 3.29 | % | ||||||||||||||||
Tax exempt income presented on a tax equivalent basis based on a 35% federal tax rate.
Federal tax equivalent adjustments on securities are $1306 and $1,894 for 2009 and 2008, respectively
Federal tax equivalent adjustments on loans are $321 and $164 for 2009 and 2008, respectively.
40
Table of Contents
NON-INTEREST INCOME
Non-interest income increased $4,643 to $14,827 for the quarter ended September 30, 2009, compared
to $10,184 from the third quarter of 2008. The primary contributor to the increase in non-interest
income from the third quarter of 2008 to the third quarter of 2009 was the gain of $6,578 we
recognized from the sale of $255,791 of securities. A portion of the proceeds from these sales
were used to purchase $170,651 of GNMA securities, which carry a zero percent risk weight for
regulatory capital requirements, thereby reducing the amount of risk weighted assets and improving
total risk-based capital ratios. The repositioning improved the Banks total risk-based capital
ratio by approximately 45 basis points. The third quarter of 2008 included $13 of securities
gains. We also recognized a $676 gain on the sale of $49,545 of loans. The primary items
partially offsetting this increase were as follows:
| The third quarter of 2009 included trading losses of $1,237, compared to none during the
third quarter of 2008. These losses included a loss of $1,268 on a Colonial BancGroup
trust preferred CDO, on which we had previously taken OTTI charges of $5,656 during the
second quarter of 2009. The security was sold during the third quarter of 2009. |
| Deposit service charges declined $549, or 9.33% for the third quarter of 2009, in part
due to the sale of five banking centers during the first quarter of 2009, including $50,796
of deposits. |
| Bank owned life insurance includes a loss on the transfer of $63,150 of our bank owned
life insurance to bank owned life insurance held for surrender or sale. During the third
quarter of 2009, we evaluated the potential sale or surrender of our policies, primarily
for the purposes of reducing regulatory higher risk-weighted assets and improving our
regulatory capital ratios. In October 2009, we made the decision to sell $40,048 of these
policies and to surrender $23,102 of them. As a result, we recorded the expected loss on
sale of $788, as well as an estimate of the surrender penalty of $241 at September 30,
2009. The penalty was recorded in tax expense and cannot be offset by a net operating
loss. We also recorded tax expense totaling $5,603 on the taxable gain on sale and the
taxable gain on the surrender. |
Debit card interchange fees of $1,368 were $10, or 0.7%, more than the third quarter of 2008, while
annuity income of $273 was $50, or 22.3% higher.
Non-interest income for the nine months ended September 30, 2009, was $9,335, a decrease of $14,595
from the nine months ended September 30, 2008. The primary components of the difference include an
increase in OTTI charges of $15,182, the fair value adjustment on the Treasury Warrant of $6,145, a
decline in trading income of $1,323, declines in deposit service charges and annuity income of $859
and $526, and the mark-to-market adjustment on bank owned life insurance of $788 partially offset
by higher gains on the sale of securities of $8,017, gains on the sale of five banking offices
during the first quarter of 2009 of $2,549 and loan sale gains of $676.
NON-INTEREST EXPENSE
Non-interest expense decreased $47,818 to $24,369 for the quarter ended September 30, 2009,
compared to $72,187 for the third quarter of 2008. The third quarter of 2008 included a $48,000
goodwill impairment charge. Major components of the remaining change in non-interest expense from
the third quarter of 2008 to the third quarter of 2009 are as follows:
| FDIC insurance premiums increased $1,558 to $1,721, as rates charged by the FDIC
increased substantially, our insured deposit balances increased and our one-time credit was
fully utilized during the first quarter of 2009. |
| Loan and other real estate owned expenses increased $1,675 to $2,545, as writedowns
taken on other real estate owned properties increased $1,860 to $2,179 during the third
quarter of 2009. Loan expenses include loan collection costs, costs incurred to maintain
other real estate owned and deferred origination costs. The primary component of the loan
collection and real estate owned collection costs are the accrual of real estate taxes for
properties we own or for properties securing non-performing loans. |
| Personnel expense declined $1,938, or 16.0%. The decrease included declines in salaries
of $1,133, or 12.5%, 401(k) plan expense of $302, medical insurance of $253, or 27.3%, and
incentives of $213, or 36.8%. The decline in salaries is due to the sale of five banking
centers in the first quarter of 2009, as well as a reduction in work force that occurred
during the second and third quarters of 2009 as part of our profit improvement program.
The reduction in 401(k) plan expense reflects the suspension of our matching 401(k)
contribution in an effort to control personnel expense. |
| Low income housing project operating losses declined $395, or 71.1%, as actual losses
were less than those projected in earlier periods. |
| Professional fees increased $309, or 22.2%, consisting of higher legal fees of $340,
offset by net decreases in other areas. |
| Occupancy and equipment
expenses declined $273, or 10.4%, and $225, or 23.1%,
respectively, in part due to the first quarter sale of five banking centers and also due to
a lower level of capital expenditures. |
Non-interest expense for the nine months ended September 30, 2009, was $83,011, a decrease of
$37,474, or 31.1% from the nine months ended September 30, 2008. The primary components of the
decrease include the third quarter 2008 goodwill impairment charge of $48,000, decreases in
personnel expense of $3,142 and low income housing operating losses of $606, and lower occupancy
and equipment expenses of $415 and $450. Partially offsetting these decreases were increases in
loan and other real estate owned expenses of $8,129, FDIC insurance of $5,359, professional fees of
$1,561 and debt prepayment penalties of $1,538. The decrease in personnel expense consists of
decreases in salaries of $1,542, incentives of $884, 401(k) expense of $698 and post retirement
expense of $356, partially offset by increases in deferred personnel costs of $463 and severance of
$676. The increase in loan and other real estate owned expenses includes increases in loan and
collection and repossession expense of $3,326, other real estate owned writedowns of $2,783 and
other real estate owned expenses of $1,723.
41
Table of Contents
INCOME TAX EXPENSE (BENEFIT)
Income tax expense (benefit) was $7,330 and $(9,952) for the three months and nine months ended
September 30, 2009, respectively, compared to $(22,794) and $(22,373) for the same period in 2008.
Tax expense for the third quarter of 2009 included an addition to the income tax valuation
allowance of $6,853, as more fully explained in Note 6 to the unaudited consolidated financial
statements.
In October 2009, we made the decision to sell $40,048 of our bank owned life insurance policies and
to surrender $23,102 of additional policies. As a result, we recorded the expected loss on sale of
$788, as well as an estimate of the surrender penalty of $241 at September 30, 2009. The penalty
was recorded in tax expense and cannot be offset by a net operating loss. We also recorded tax
expense totaling $5,603 on the taxable gain on sale and the taxable gain on the surrender.
FINANCIAL POSITION
Total assets at September 30, 2009 were $3,258,325 compared to $3,357,100 at December 31, 2008.
SECURITIES
The securities portfolio represents our second largest earning asset after commercial loans and
serves as a source of liquidity. Investment securities available for sale were $342,240 at
September 30, 2009, compared to $561,739 at December 31, 2008, and are recorded at their fair
values. The fair value of securities available for sale on September 30, 2009, was $3,408 lower
than the amortized cost, as compared to $12,914 lower at December 31, 2008.
Trading securities at September 30, 2009, consist of two U.S. treasury securities valued at $13,115
and four trust preferred securities valued at $122. During the third quarter of 2009, we recorded
trading losses of $1,237, compared to none during the third quarter of 2008. These losses
included a loss of $1,268 on a Colonial BancGroup trust preferred security on which we had
previously taken OTTI charges of $5,656 during the second quarter of 2009.
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. This includes both Federal
Reserve and FHLB stock. From time-to-time, we purchase or sell shares of these dividend paying
securities according to capital requirements set by the Federal Reserve or FHLB. The balance of
regulatory stock was $29,124 at September 30, 2009, compared to $29,155 at December 31, 2008.
LOANS HELD FOR SALE
Loans held for sale represent approximately 1.3% of total assets and increased to $41,253 at
September 30, 2009, from $5,776 at December 31, 2008. Loans held for sale consist of residential
mortgage loans sold to the secondary market of $8,956 and commercial loans available for sale of
$32,297 and are valued at the lower of cost or market in the aggregate.
LOANS
Loans, net of unearned income, at September 30, 2009, totaled $2,205,661 compared to $2,490,243 at
year-end 2008, reflecting a decrease of $284,582, or 11.4%. The decrease was driven primarily by
decreases in construction and land development loans of $185,126, commercial, industrial and
agricultural loans of $148,495, residential mortgage loans of $57,372 and consumer loans of
$18,442, partially offset by an increase in commercial real estate mortgage loans of $122,250. The
shift out of construction and land development loans to commercial mortgage loans reflects the
completion of construction for several of the projects securing these loans, net of payoffs and
paydowns.
Residential mortgage loan average balances declined 24.1% on an annualized basis and are expected
to continue to decline during the remainder of 2009 because we sell substantially all originations
to a private label provider on a servicing released basis. We evaluate our counterparty risk with
this provider on a quarterly basis by evaluating their financial results and the potential impact
to our relationship with them of any declines in financial performance. If we were unable to sell
loans to this provider, we would seek an alternate provider and record new loans on our balance
sheet until one was found, impacting both our liquidity and our interest rate risk. We have never
had a strategy of originating subprime or Alt-A mortgages, option adjustable rate mortgages or any
other exotic mortgage products and these types of products do not have a material impact on our
operations. The impact of private mortgage insurance is not material to our determination of loss
factors within the allowance for loan losses for the residential mortgage portfolio. Loans with
private mortgage insurance comprise only a small portion of our portfolio and the coverage amount
typically does not exceed 10% of the loan balance.
42
Table of Contents
Home equity lines of credit, or HELOC loan average balances increased only $104 from 2008. HELOC
loans are generally collateralized by a second mortgage on the customers primary residence.
Increases in second and third quarter average balances of $107 and $3,410 were offset by a decline
during the first quarter of 2009.
The average balance of indirect consumer loans declined $4,694, or 25.8% annualized during the
third quarter of 2009, as expected, since we exited this line of business in December 2006. These
loans are to borrowers located primarily in the Midwest and are generally secured by recreational
vehicle or marine assets. Indirect loans at September 30, 2009, were $65,456 compared to $79,128
at December 31, 2008.
Commercial loan average balances for the third quarter of 2009 decreased $67,913, or 14.8%
annualized from the second quarter of 2009. The decrease in commercial loan average balances during
the third quarter of 2009 included decreases in construction and land development loans of
$119,832, offset by an increase in commercial mortgage loans of $70,291. The shift out of
construction and land development loans to commercial mortgage loans reflects the completion of
construction for several of the projects securing these loans, net of payoffs and paydowns.
Commercial and industrial, or C&I loan average balances decreased $18,372, or 14.4% annualized
during the third quarter of 2009. During the third quarter of 2009, a total of $49,545 of
commercial loans were sold to the Bank of Kentucky for a gain of $676. This transaction is
discussed in detail in Note 5 to the consolidated financial statements.
We manage our non-owner occupied commercial real estate, or CRE portfolio through three areas. The
non-owner occupied CRE portfolio totaled $1,021,370 at September 30, 2009, with $694,659 managed by
our CRE group headquartered in the Cincinnati, Ohio area, $231,798 managed by our Chicago region,
and $94,913 managed in our other markets. Our largest property-type concentration is in retail
projects at $263,199, or 25.8%, of the total non-owner occupied CRE portfolio, which includes
direct loans or participations in larger loans primarily for stand-alone retail buildings for large
national or regional retailers such as Walgreens, Sherwin Williams and Advance Auto Parts, for
regional shopping centers with national and regional tenants and for smaller local shopping
centers. Our second largest concentration is multifamily at $199,433, or 19.5% of that portfolio.
Our third largest concentration is for land acquisition and development at $152,812, or 15.0% of
the total, which represents both commercial development and residential development. Finally, our
fourth largest concentration at $122,021, or 11.9%, is to the single-family residential development
and construction category, 65.6% of which is in the Chicago area. No other category exceeds 8% of
our non-owner occupied CRE portfolio.
Of the total non-owner occupied CRE portfolio, 45.2%, or $461,173, is classified as construction.
At September 30, 2009, $749,389, or 73.4%, of the non-owner occupied CRE portfolio is located in
our core market states of Indiana, Kentucky, Illinois and Ohio. The three largest concentrations
outside of our core market states are $65,763, or 6.4%, located in Florida, $29,870, or 2.9%,
located in Nevada, and $29,684, or 2.9%, located in Georgia. Non-owner occupied CRE non-performing
loans in our core market states of Indiana, Kentucky, Illinois and Ohio totaled $128,984 at
September 30, 2009, with another $20,016 located in Florida, $2,833 located in North Carolina out
of a total of $20,094, and none in Nevada or Georgia. A total of $6,044 of our non-performing CRE
loans at September 30, 2009 were located in South Carolina, in which we had $7,161 of loans
outstanding. The majority of projects located outside of Indiana, Kentucky, Illinois and Ohio are
with developers located in or with a major presence in our four-state area that have developed or
are developing properties in other states. We do not provide non-recourse financing.
The decline in our C&I portfolio, coupled with the planned decline in our indirect consumer and
residential mortgage loan portfolio, has increased the level of our concentration risk to non-owner
occupied CRE. The balance in our non-owner occupied CRE portfolio was $1,021,370, or 46.3% of the
total loan portfolio at September 30, 2009, compared to $1,091,499, or 43.8% of the total loan
portfolio at December 31, 2008.
We require a higher level of approval authority for larger relationships. Any new relationship in
excess of $10,000 specifically requires the approval of the Chief Executive Officer and the Chief
Credit and Risk Officer. During the third quarter of 2009, we did not add any new relationships
with commitments in excess of $10,000.
The growth in our non-owner occupied CRE portfolio from 2007 to 2009 is attributable, in part, to
the disruption of the permanent financing market, which has made it more difficult for borrowers to
refinance completed and stabilized projects on a permanent basis. During the third quarter of
2008, we discontinued pursuing new non-owner occupied CRE opportunities, regardless of property
type. Our balances continued to grow during the first quarter of 2009, as we funded against
committed credit facilities, although the rate of growth declined significantly from 2008 and 2007
growth rates. During the second and third quarters of 2009, the non-owner occupied CRE portfolio
declined, as paydowns, payoffs and charge-offs outpaced additional fundings.
During the second and third quarters of 2009, we offered a discount to some of our CRE customers in
exchange for early repayment. We did this to reduce our concentration in commercial real estate,
which in turn reduces our credit risk and improves our regulatory capital ratios. The discounts
are reflected as charge-offs at the time the payments are received. The provision for loan loss
recorded as payments are received is the difference between the discount given and the reserves for
those credits already included in the allowance for loan losses. Net charge-offs for this program
totaled $896 and $1,258 during the second and third quarters of 2009, while payoffs or paydowns
totaled $16,665 and $14,576, respectively. This program ended on September 30, 2009.
43
Table of Contents
We expect to take additional measures to reduce the size of our CRE loan portfolio.
Loan balances managed by our CRE group headquartered in Cincinnati were $774,280 at September 30,
2009, compared to $775,812 at December 31, 2008. This included growth, net of payoffs of $13,210,
and charge-offs of $14,742. Non-performing loans for this portfolio were $70,610, compared to
$40,437 at December 31, 2008, while past due loans were 2.88% of total loans, up from 0.41% at
December 31, 2008.
Loan balances in Chicago were $305,557 at September 30, 2009, compared to $351,749 at December 31,
2008. This included loan payoffs, net of growth of $21,266, and net charge-offs of $24,926.
Non-performing loans for this portfolio were $104,966, compared to $83,125 at December 31, 2008,
while past due loans were 2.16% of total loans, down from 12.82% at December 31, 2008.
Loans delinquent 30-89 days were $36,112, or 1.64% of total loans at September 30, 2009, compared
to $19,892, or 0.85% of at June 30, 2009 and $64,947 or 2.61% at December 31, 2008. Delinquent
loans include $27,401 of CRE loans, or 2.14% of that portfolio, $3,531 of C&I loans, or 0.99% of
that portfolio, $1,514 of residential mortgage loans, or 0.90% of that portfolio, and $3,667 of
consumer and HELOC loans, or 0.92% of that portfolio.
The delinquency levels we have experienced for loans from the Chicago region since 2008 reflect the
downturn in the Chicago real estate market. Our Chicago delinquencies totaled $6,599 at September
30, 2009, compared to $6,710 at June 30, 2009, which is the lowest level for that portfolio since
April 2007, when we acquired the Chicago region. The improvement reflects greater attention
managing delinquent accounts, as well as, the reclassification of delinquent loans to nonaccrual
status. We expect that delinquency levels in Chicago will continue to be an area of risk and could
increase until that market improves.
In addition to difficulties in our Chicago portfolio, we expect that difficulties in loans managed
by our CRE group will continue to be an area of risk. We have seen deterioration in that portfolio
in the residential development and construction area and, to a lesser extent, in the retail
construction and development area. As the unemployment rate rises and consumer spending slows, the
retail sector has experienced increasing pressure. We continue to watch this portfolio very
closely and are conducting periodic portfolio reviews. In addition, as described earlier, we
provided discounts totaling $2,154 to some of our CRE customers in exchange for early repayments of
$31,241 during the second and third quarters of 2009 in order to further reduce the size of our CRE
portfolio. Delinquencies in the portfolio managed by our CRE group totaled $22,282 at September
30, 2009 compared to $6,299 at June 30, 2009.
We have limited exposure to shared national credits. Our total outstanding amount of shared
national credits, which are any loans or loan commitments of at least $20,000 that are shared by
three or more supervised institutions, was $43,850 at September 30, 2009. Of this amount, $10,159,
or 23.2% was classified as non-performing.
LOAN PORTFOLIO
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Commercial, industrial and
agricultural loans |
$ | 599,951 | $ | 748,446 | ||||
Economic development loans and
other obligations of state and
political subdivisions |
26,574 | 24,502 | ||||||
Lease financing |
5,524 | 5,397 | ||||||
Total commercial |
632,049 | 778,345 | ||||||
Commercial real estate |
||||||||
Commercial mortgages |
558,886 | 436,336 | ||||||
Construction and development |
456,334 | 641,460 | ||||||
Total commercial real estate |
1,015,220 | 1,077,796 | ||||||
Residential mortgages |
252,025 | 309,397 | ||||||
Home equity |
171,345 | 171,241 | ||||||
Consumer loans |
135,022 | 153,464 | ||||||
Total loans |
$ | 2,205,661 | $ | 2,490,243 | ||||
44
Table of Contents
ASSET QUALITY
The allowance for loan losses is the amount that, in our opinion, is adequate to absorb probable
incurred loan losses as determined by the ongoing evaluation of the loan portfolio. Our evaluation
is based upon consideration of various factors including growth of the loan portfolio, an analysis
of individual credits, loss data over an extended period of time, adverse situations that could
affect a borrowers ability to repay, prior and current loss experience, the results of recent
regulatory examinations, and current economic conditions.
Under our Credit Risk Policy, we charge off loans to the allowance as soon as a loan or a portion
thereof is determined to be uncollectible, and we credit recoveries of previously charged off
amounts to the allowance. At a minimum, charge-offs for retail loans are recognized in accordance
with OCC 2000-20, the Uniform Retail Credit Classification and Account Management Policy. We
charge a provision for loan losses against earnings at levels we believe are necessary to assure
that the allowance for loan losses can absorb probable losses.
The allowance for loan losses was $79,364 at September 30, 2009, representing 3.60% of total loans,
compared with $64,437 at December 31, 2008, or 2.59% of total loans and $82,309 at June 30, 2009,
or 3.50% of total loans. The allowance for loan losses to non-performing loans ratio at September
30, 2009, was 41.8%, compared to 42.7% at December 31, 2008 and 45.1% at June 30, 2009. We do not
target specific allowance to total loans or allowance to non-performing loan percentages when
determining the adequacy of the allowance, but we do consider and evaluate the factors that go into
making that determination. We believe that our allowance at September 30, 2009, appropriately
considers the expected loss in our loan portfolio at that date. The provision for loan losses was
$18,913 for the three months ended September 30, 2009 and $82,843 for the nine months ended
September 30, 2009, compared to $17,978 and $27,615 for the three and nine months ended September
30, 2008.
Net charge-offs of $21,858 exceeded the provision of $18,913 by $2,945 during the third quarter of
2009. Annualized net charge-offs to average loans were 3.74% for the quarter, compared to 1.31%
for the third quarter of 2008. Net charge-offs during the third quarter of 2009 included $17,717
of CRE loans, of which $15,617 was for non-owner occupied CRE loans and $1,258 was from the
previously mentioned discount program, $2,367 of C&I loans, $590 of HELOC loans, $430 of indirect
consumer loans and $259 for direct consumer loans, while the remaining $495 came from various other
loan categories. Charge-offs from the Chicago portfolio totaled $10,856, while net charge-offs
from the CRE groups loan portfolio totaled $7,178. The majority of the charge-offs from Chicago
and the CRE group relates to the residential development and construction area. Three charge-offs
exceeded $1,000 and were incurred on accounts which previously had been identified as problem
loans. The largest charge-off was $2,502 and represents a partial write-down due to a valuation
decline on a loan secured by a vacant retail building in northern Ohio. The loan has been on
non-accrual since the first quarter of 2009 and the charge-off was specifically reserved for in the
allowance for loan losses at June 30, 2009. The second largest charge-off was $2,055 and represents
a partial write-down due to a valuation decline on a loan secured by a condominium project in South
Carolina. The loan has been on non-accrual since the third quarter of 2008 and the charge-off was
covered by a specific reserve in place at June 30, 2009. The third loss was $1,262 and resulted
from charging off a loan in the Chicago area secured by junior mortgages on vacant land and a nine
unit apartment building. This loan had been placed on non-accrual in the fourth quarter of 2008
and the loss was covered by a specific reserve in place at June 30, 2009. Approximately 63% of
our charge-offs were covered by specific reserves within the allowance for loan losses at June 30,
2009. Net charge-offs included $1,848 of gross charge-offs related to both loans sold during the
third quarter of 2009, and loans transferred to loans held for sale at September 30, 2009.
Excluding the $1,258 of charge-offs related to the CRE discount program, net charge-offs totaled
$20,600, or $1,687 more than the third quarter provision for loan losses.
The provision of $18,913 was less than the provision recorded for the second quarter of 2009 due to
a number of factors including the decline in our loan portfolio, the continued stabilization of
loans 30-89 days delinquent, the stabilization of housing values in Chicago as reflected in the
Case-Schiller index for the months of May, June and July, and an improvement in the foreclosure
rate in much of our footprint. In evaluating our allowance for loan losses, we look at a variety
of factors. First, we identify impaired loans against which we calculate specific reserves based
primarily on collateral values. Second, we group the remaining portfolio, net of impaired loans
for which we calculate a specific reserve, into 26 homogenous pools. For each of these pools, we
calculate a base loss rate based on historical loss information over a rolling 21 quarter period.
These base loss rates then are adjusted to reflect the current conditions of each pool as well as
current economic conditions. Adjustments are made based upon quantitative factors including the
level of loans 60 or more days delinquent and accruing, various portfolio concentration factors
such as market location and Chicago housing value indices, regional unemployment, foreclosure and
bankruptcy statistics and for various qualitative factors. The adjusted loss rates then are
applied against each homogenous pool in order to arrive at the reserve required for each pool.
Finally, we maintain a portion of the reserve as unallocated to protect against collateral value
declines, formula or modeling errors and subsequent events.
45
Table of Contents
SUMMARY OF ALLOWANCE FOR LOAN LOSSES
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Beginning balance |
$ | 82,309 | $ | 31,780 | $ | 64,437 | $ | 27,261 | ||||||||
Loans charged off |
(22,396 | ) | (8,456 | ) | (69,226 | ) | (14,337 | ) | ||||||||
Recoveries |
538 | 464 | 1,310 | 1,227 | ||||||||||||
Provision for loan losses |
18,913 | 17,978 | 82,843 | 27,615 | ||||||||||||
Ending balance |
$ | 79,364 | $ | 41,766 | $ | 79,364 | $ | 41,766 | ||||||||
Percent of total loans |
3.60 | % | 1.70 | % | 3.60 | % | 1.70 | % | ||||||||
Annualized % of average loans: |
||||||||||||||||
Net charge-offs |
3.74 | % | 1.31 | % | 3.80 | % | 0.74 | % | ||||||||
Provision for loan losses |
3.24 | % | 2.94 | % | 4.63 | % | 1.55 | % |
As previously disclosed, we extended a $17,500 secured line of credit to Peoples Community
Bancorp, Inc. of Cincinnati, Ohio, (Peoples), which matured on June 30, 2008. On July 31, 2009,
Peoples primary regulator declared its savings association subsidiary insolvent, and appointed the
Federal Deposit Insurance Corporation as receiver, which sold the assets and transferred the
deposits of the subsidiary to an unrelated third party. We charged-off $17,000 of the loan in the
second quarter of 2009. During the third quarter of 2009, we charged-off the remaining $500
balance.
Our largest non-performing relationship of $12,568 is with a builder in the Chicago area. This
relationship is secured by multiple properties, including for-sale residential units, rental units
and residential lots. The borrower is cooperative and we are working with him to reduce the level
of his exposure. Loans within this relationship were put on non-accrual status throughout 2009 and
new appraisals on each of the properties securing this relationship were obtained in 2009. The
second largest relationship with a commitment of $10,000 and an outstanding balance of $6,592 is a
participation in a large construction loan for a mixed-used retail and office development in the
Cincinnati, Ohio area. This project has been plagued by significant cost overruns and construction
has been halted. The bank group is working with the developer, guarantors and mechanics liens
holders to restructure the loan with additional equity in order to resume construction. This loan
was put on non-accrual status in April 2009. The most recent appraisal for this property was
obtained in August 2009. The third largest nonperforming relationship with a commitment and
balance of $9,900 is with a Louisville, Kentucky-area developer and is secured by 4,700 acres of
land in Volusia County, Florida. The loan was placed on non-accrual due to its delinquency at
September 30, 2009. The most recent appraisal is dated May 2005 and reflects a 21% loan to value
percentage. An internal evaluation was completed in December 2008 which reflected a revised
loan-to-value of 35%. A new appraisal has been ordered and is expected to be received during the
fourth quarter of 2009. The fourth largest non-performing relationship with a commitment of $6,982
and a balance of $6,625 is with a residential builder and developer in Bloomington, Indiana. This
relationship is secured by a mixture of residential units and lots and by a commercial building and
commercial lots. The relationship was placed on non-accrual in June 2009. New appraisals on the
residential lots and condo units were obtained in July 2009, while the commercial building was last
appraised in January 2007 and the commercial lots in October 2008. New appraisals have been
ordered on the commercial properties. The fifth largest non-performing relationship with a balance
of $6,188 is secured by multiple residential properties in the Chicago area. The components of
this relationship were placed on non-accrual throughout 2009 and new appraisals on each of the
properties securing the loans have been obtained during 2009.
The majority of the remainder of our commercial non-performing loans are secured by one or more
residential properties in the Chicago area, typically at an 80% or less loan to value ratio at
inception. The Chicago residential real estate market continued to experience low levels of sales
activity and declines in housing prices. The Case-Schiller index of residential housing values
shows a decline in the value of Chicago single-family residential properties of 23.9% from the peak
of the index in September 2006 to the most recent index for July 2009, as published in September
2009. The index for July showed an increase from the index for June, representing the third
consecutive month the index has increased. The Zillow index for the second quarter of 2009 showed
a decline of 23.6% from its peak during the second quarter of 2006. On a year-over-year basis, the
Zillow index shows a decline of 13.6% for all homes, with a 13.6% decline for single family housing
and a 13.2% decline for condominiums. New appraisals we have obtained for existing loans have been
consistent generally with the declines indicated by Case-Schiller and Zillow. Should sales levels
and values in Chicago not improve further in the remainder of 2009 and in 2010, it is likely that
we would experience further deterioration.
Impaired loans totaled $182,757 at September 30, 2009, compared to $142,496 at December 31, 2008.
A total of $125,010 of impaired loans at September 30, 2009, had a related specific reserve within
the allowance for loan loss, compared to $141,301 at December 31, 2008. The total amount of
specific reserves for impaired loans included in the allowance for loan losses was $26,700 at
September 30, 2009, compared to $24,561 at December 31, 2008.
46
Table of Contents
Other real estate owned increased to $26,435 at September 30, 2009, compared to $19,396 at December
31, 2008, again, due largely to our CRE portfolio. The ratio of non-performing assets to total
loans and other real estate owned increased to 9.69% at September 30, 2009, compared to 6.79% at
year end 2008 and 8.90% at June 30, 2009. Approximately 57.5%, or $124,453, of our total
non-performing assets are in our Chicago region and 35.0%, or $75,699, are in our CRE group. These
assets represent approximately 38% of the total loans and other real estate owned in our Chicago
region and almost 10% of our total loans and other real estate owned in our CRE group.
Total non-performing loans at September 30, 2009, consisting of non-accrual and loans 90 days or
more past due, were $189,897, reflecting increases of $38,998 from December 31, 2008 and $7,484
from June 30, 2009. Non-performing loans were 8.61% of total loans, compared to 6.06% at December
31, 2008 and 7.76% at June 30, 2009. Of the non-performing loans, $174,005 are in our commercial
real estate portfolio and $8,752 are commercial and industrial, while the balance consists of
homogenous 1-4 family residential and consumer loans.
Our residential builder business is located primarily in Chicago and within our CRE group.
Non-performing CRE loans at September 30, 2009, totaled $174,005, of which $132,742 was for
residential real estate related projects. Of this total, $90,653 was from Chicago and $40,105 from
our CRE line of business. The Chicago non-owner occupied commercial real estate portfolio had
commitments of $235,824 and outstanding balances of $231,798 at September 30, 2009. The Chicago
portfolio made up 55% and 58% of our total non-performing loans and non-performing assets at
September 30, 2009, compared to 62% and 63% at June 30, 2009. Non-owner occupied real estate
within the CRE line of business had commitments of $806,960 and outstanding balances of $694,659 at
September 30, 2009. This portfolio made up 37% and 35% of our total non-performing loans and
non-performing assets at September 30, 2009, compared to 31% and 29% at June 30, 2009. Chicago and
the CRE group make up 13.9% and 35.1% of total outstanding loans.
Given the continued economic downturn, we continuously improve our credit management processes.
Actions taken during 2009 include the following:
| We continue to obtain new appraisals on properties securing our commercial real estate
non-performing loans and have used those appraisals to help determine the need for and
amount of specific reserves within the allowance for loan losses. As new appraisals are
received on properties securing non-performing loans, charge-offs are recognized, and
specific reserves are adjusted as appropriate. In addition, we are continuing to order new
or updated appraisals for other CRE loans as warranted. |
| We reorganized our Chicago staff and have dedicated additional resources to reducing
the Chicago portfolio. |
| We shifted the credit analysis effort for our Chicago portfolio from Chicago to our
centralized Business Service Center in Evansville. |
| We discontinued pursuing new CRE opportunities, regardless of property type. In
addition, we offered a discount to some of our commercial real estate customers in exchange
for early repayment in an effort to reduce our commercial real estate balances. |
| We instituted a new portfolio review process in which relationship managers are required
to present selected loans in their portfolio to credit administration and executive
management. The loans to be presented are selected by credit administration based upon a
number of factors, including the size and age of the loan, product type, industry type and
delinquency. The frequency of these reviews depends upon the portfolio with reviews of the
commercial real estate portfolio conducted most frequently. |
| We implemented other policy and process changes, including actions to reduce our
concentration risk, as well as tightening our loan underwriting and approval standards and
processes. |
47
Table of Contents
Listed below is a comparison of non-performing assets.
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Nonaccrual loans |
$ | 185,558 | $ | 150,002 | ||||
90 days or more past due loans |
4,339 | 897 | ||||||
Total non-performing loans |
189,897 | 150,899 | ||||||
Other real estate owned |
26,435 | 19,396 | ||||||
Total non-performing assets |
$ | 216,332 | $ | 170,295 | ||||
Ratios: |
||||||||
Non-performing Loans to Loans |
8.61 | % | 6.06 | % | ||||
Non-performing Assets to Loans and Other Real Estate Owned |
9.69 | % | 6.79 | % | ||||
Allowance for Loan Losses to Non-performing Loans |
41.79 | % | 42.70 | % |
DEPOSITS
Total deposits were $2,472,762 at September 30, 2009, compared to $2,340,192 at December 31, 2008,
an increase of $132,570. During the first quarter of 2009, we sold five banking offices. The
buyers of these offices assumed $50,796 of deposits in these transactions.
Average balances of deposits for the third quarter of 2009, as compared to the second quarter of
2009, included increases in savings accounts of $66,042 and public fund deposits of $3,343.
Decreases in retail certificates of deposit of $45,554, brokered time deposits of $37,107, money
market accounts of $32,765, non-interest bearing demand deposits of $7,216 and interest checking
accounts of $1,724 more than offset these increases.
SHORT-TERM BORROWINGS
Short-term borrowings totaled $188,011 at September 30, 2009, a decrease of $226,995 from December
31, 2008. Short-term borrowings primarily include federal funds purchased (which are purchased from
other financial institutions, generally on an overnight basis), securities sold under agreements to
repurchase (which are collateralized transactions acquired in national markets as well as from our
commercial customers as a part of a cash management service), short-term FHLB advances and term
funds under the TAF. TAF borrowings were $85,000 at September 30, 2009, compared to $176,900 at
December 31, 2008. The average balance of TAF borrowings was $83,370 during the third quarter of
2009, up from $81,044 during the second quarter.
At September 30, 2009, we had $335,000 available from unused, uncommitted federal funds lines;
however, in the current economic environment it is highly unlikely that we would be able to access
these unsecured lines. The Bank also has a borrower in custody line with the Federal Reserve
Bank totaling over $560,723 as part of its liquidity contingency plan.
LONG-TERM BORROWINGS
Long-term borrowings have original maturities greater than one year and include long-term advances
from the FHLB, securities sold under repurchase agreements, term notes from other financial
institutions, the FDIC-guaranteed note issued under the TLGP, floating rate unsecured subordinated
debt and trust preferred securities. Long-term borrowings increased to $361,364 at September 30,
2009, from $360,917 at December 31, 2008.
We continuously review our liability composition. Any modifications could adversely affect our
profitability and capital levels over the near term, but would be undertaken if we believe that
restructuring the balance sheet will improve our interest rate risk and liquidity risk profile on a
longer-term basis.
CAPITAL EXPENDITURES
In October 2009, we signed a contract to construct a new banking center in the Evansville, Indiana
metro area at a cost of $2,350. We expect that this banking center will be completed in early to
mid 2010.
OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
We have obligations and commitments to make future payments under contracts. Our 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.
We are also committed under various operating leases for premises and equipment and our obligation
to the Treasury Department for the funds we received under the CPP.
48
Table of Contents
In the normal course of our 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. Our 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.
We use the same credit policies in making commitments and conditional obligations as we do for
other on-balance sheet instruments.
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Commitments to extend credit |
$ | 504,527 | $ | 684,245 | ||||
Standby letters of credit |
20,400 | 22,320 | ||||||
Non-reimbursable standby letters of credit and commitments |
1,660 | 2,574 |
There have been no other material changes in off-balance sheet arrangements and contractual
obligations since December 31, 2008.
CAPITAL RESOURCES AND LIQUIDITY
We and the Bank have capital ratios that exceed all minimum regulatory requirements. The Banks
capital ratios meet the regulatory guidelines for well-capitalized status. It is our goal for
the Bank to exceed the requirements for well-capitalized status at all times.
At September 30, 2009 the total risk based capital ratio for the Bank was 10.20%, an increase of 36
basis points from June 30, 2009. The increase resulted primarily from the sale of securities and
reinvestment of those funds into lower risk-weighted assets, the sale of loans to the Bank of
Kentucky, targeted declines in loan balances, and capital infusions we made of $9,900, partially
offset by the impact of the quarters net loss. The Banks tier 1 risk-based capital ratio
increased 36 basis points to 8.92% and its tier 1 leverage ratio increased 14 basis points to
6.61%. Our total risk based capital ratio increased 2 basis points to 10.44%, our tier 1
risk-based capital ratio decreased 31 basis points to 8.21% and our tier 1 leverage ratio decreased
37 basis points to 6.06%. Our tangible common equity to tangible assets ratio declined 53 basis
points to 3.44%. The Bank has agreed with the OCC to develop a plan to increase its total capital
ratio to at least 11.5% and its tier 1 leverage ratio to 8% by December 31, 2009.
The regulatory capital ratios for us and the Bank are shown below.
Regulatory Guidelines | Actual | |||||||||||||||
Minimum | Well- | September 30, | December 31, | |||||||||||||
Requirements | Capitalized | 2009 | 2008 | |||||||||||||
Integra Bank Corporation: |
||||||||||||||||
Total Capital (to Risk-Weighted Assets) |
8.00 | % | N/A | 10.44 | % | 9.75 | % | |||||||||
Tier 1 Capital (to Risk-Weighted Assets) |
4.00 | % | N/A | 8.21 | % | 7.68 | % | |||||||||
Tier 1 Capital (to Average Assets) |
4.00 | % | N/A | 6.06 | % | 6.41 | % | |||||||||
Integra Bank N.A.: |
||||||||||||||||
Total Capital (to Risk-Weighted Assets) |
8.00 | % | 10.00 | % | 10.20 | % | 10.07 | % | ||||||||
Tier 1 Capital (to Risk-Weighted Assets) |
4.00 | % | 6.00 | % | 8.92 | % | 8.81 | % | ||||||||
Tier 1 Capital (to Average Assets) |
4.00 | % | 5.00 | % | 6.61 | % | 7.37 | % |
On September 18, 2009, we announced the suspension of cash dividends on our common stock for an
indefinite period. The quarterly cash dividend had previously been $0.01 per share. As long as
we are participating in the CPP, we will not be able to increase the quarterly dividend without
the prior consent of the Treasury Department. The amount of cash dividends we pay directly
affects our capital levels. Once we return to profitability, we expect to build capital through
earnings retention until there is clear improvement in the credit cycle and economy.
During the first quarter of 2009, we made a capital contribution of $40,000 into the Bank using the
CPP funds. This additional capital positively impacted the Banks capital ratios and liquidity.
We used approximately $17,500 of the CPP funds to pay off a line of credit, and invested the
remainder in short-term liquid funds at March 31, 2009. We made additional capital contributions
into the Bank during the second quarter and third quarters of 2009 of $5,000 and $9,900.
49
Table of Contents
The first quarter of 2009 included a $4,738 reduction to non-interest income for a non-tax
deductible mark to market adjustment for the Treasury Warrant. The Treasury Warrant was reflected
as a liability because it was not fully exercisable at the time of issuance. In April 2009, our
shareholders approved an increase in the authorized shares of common stock and the issuance of the
shares underlying the Treasury Warrant, at which point we began accounting for the Treasury Warrant
as equity, as prescribed by Emerging Issues Task Force 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Companys Own Stock, which was subsequently
incorporated into ASC Topic 815, Derivatives and Hedging. The value of the Treasury Warrant
increased $1,407 in April 2009 prior to being transferred to equity. This resulted in $1,407 of
expense in the second quarter. The transfer, in April 2009, of the value of the Treasury Warrant
to equity improved the holding companys capital ratios, but did not affect those of the Bank.
The banking industry is 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 our
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.
Our strategy for increasing capital at the Bank, includes the following:
| Continuing to reduce risk weighted assets through delevering through reduction of
targeted loans and bank owned life insurance; |
| Selling non core assets, including branches; |
| Improving our level of earnings; |
| Reducing construction and development and CRE lending; |
| Conserving cash by suspending cash dividends on common and preferred stock and
deferring distributions on our trust preferred securities; and |
| Issuing new capital in an opportunistic basis. |
There can be no assurance this strategy will be successful. If we are unable to improve the
capital ratios of the Bank at the levels we deem prudent, through these actions then further
actions will be required.
Capital trust preferred securities currently qualify as Tier 1 capital for the parent holding
company subject to limitations imposed by Federal Reserve guidelines.
Liquidity of a banking institution reflects the ability to provide funds to meet loan requests, to
fund existing commitments, to accommodate possible outflows in deposits and other borrowings. We
continuously monitor our current and prospective business activity in order to design maturities of
specific categories of short-term and long-term loans and investments that are in line with
specific types of deposits and borrowings.
During the second half of 2008, the financial markets experienced unprecedented volatility as the
interbank markets were severely disrupted and federal funds rates varied widely intraday. Banking
customers concerns regarding deposit safety caused increased deposit volatility. The actions
taken by the Treasury Department, the Federal Reserve and the FDIC included increases in insurance
coverage, extension of discount window availability and borrowing terms, and creation of the CPP,
TAF and the TLGP. All of these actions have improved the performance of the markets and reduced
deposit volatility. As the credit markets have stabilized, the Federal Reserve and FDIC have begun
designing and implementing exit strategies for the liquidity initiatives described above.
On August 27, 2009, the FDIC announced an extension of the Transaction Account Guarantee program,
which provides unlimited insurance coverage on non-interest bearing transaction accounts, as well
as transaction accounts bearing an interest rate of less 0.5%. Financial institutions may opt out
of this program. We did not opt out and plan to maintain the higher coverage amounts until the
expiration date of June 30, 2010. This follows extension of the $250 per depositor limit, which
had previously been $100, through December 2013.
For the Bank, the primary sources of short-term asset liquidity have been cash, 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 the need to fund loan demand and deposit withdrawals is monitored under our Capital Markets
Risk Policy. When these sources are not adequate, we may use funds from the TAF, brokered deposits,
repurchase agreements or federal funds. We may also sell investment securities or utilize the
Banks borrowing capacity with the FHLB and Federal Reserve Bank as alternative sources of
liquidity. At September 30, 2009, federal funds sold and other short-term investments were $49,946.
50
Table of Contents
Additionally, at September 30, 2009, we had $335,000 available from unused, uncommitted federal
funds lines; however, in the current economic environment it is highly unlikely that we would be
able to access these unsecured lines and in excess of $110,523 in unencumbered securities available
for repurchase agreements or liquidation. The Bank has a borrower in custody line with the
Federal Reserve Bank totaling over $560,723 as part of its liquidity contingency plan. The Bank
also had excess borrowing capacity at the FHLB of $50,239 at September 30, 2009.
The financial markets remained stressed during the first three quarters of 2009. In light of these
conditions, we have taken steps to increase our cash position in each of those three quarters. Cash
and due from banks totaled $391,171 at September 30, 2009, up from $312,233 at June 30, 2009 and
$62,354 at December 31, 2009. We increased use of the brokered certificate of deposit markets to
diversify our sources of funding, extend our maturities and improve pricing at certain terms as
compared to local market pricing. During the second quarter of 2009, we continued to use the TAF
program as a source of short-term funding to assist with short-term liquidity needs. In October
2009, we paid off $85,000 of these borrowings. The Bank utilized the TLGP debt program and issued
a $50,000 aggregate principal amount FDIC guaranteed note during the first quarter 2009. This
senior unsecured note is due in 2012 and carries an interest rate of 2.625%.
On September 29, 2009, the FDIC adopted a notice of Proposed Rulemaking that would require insured
financial institutions to prepay their estimated quarterly risk-based assessments for the fourth
quarter of 2009 and for all of 2010, 2011 and 2012. Public comments on this notice are due by
October 29, 2009. Should the notice be passed in its current form, it would impact our level of
liquidity. We estimate that the amount of our required prepayment would approximate $23,000.
Our liquidity at the holding company level is normally 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 banks 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. Because of our net losses in 2008 and 2009, we are required to obtain
advance approval from the Banks primary regulator prior to paying a dividend to our parent
company. Should we make such a request, no assurance can be given that it would be approved.
Beginning in the fourth quarter of 2009, we are suspending the payment of cash dividends on our
outstanding preferred stock and deferring the payment of interest on our outstanding junior
subordinated notes related to our trust preferred securities. The terms of the junior subordinated
notes and the trust documents allow us to defer payments of interest for up to five years without
default or penalty. During the deferral period, the respective trusts will likewise suspend the
declaration and payment of distributions on the trust preferred securities. Also during the
deferral period, we may not, among other things and with limited exceptions, pay cash dividends on
or repurchase our common stock or preferred stock nor make any payment on outstanding debt
obligations that rank equally with or junior to the junior subordinated notes.
We believe that the suspension of dividends and distributions on our outstanding securities will
preserve approximately $1,800 per quarter (compared with the current level of dividend and interest
payments), thereby enhancing our liquidity and our ability to bolster the Banks capital ratios.
Our decision is in line with guidance issued by the Federal Reserve in February 2009, as revised in
March 2009 (SR-09-4) related to payment of dividends on common and preferred stock and
distributions on trust preferred securities.
Our liquidity is required to support operational expenses, pay taxes, meet outstanding debt and
trust preferred securities obligations, provide dividends to shareholders, and other general
corporate purposes. We believe that funds necessary to meet our remaining 2009 liquidity needs
will be available from cash and securities, or other sources that we expect 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. Our interest rate
risk management program is comprised of several components. They 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 interest rate risk management processes to manage the impact of interest rate volatility on
earnings and capital.
Our 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 quarterly and is responsible
for implementing policies and procedures, overseeing the entire interest rate risk management
process and establishing internal controls.
We measure and monitor interest rate risk on a proactive basis by utilizing a simulation model.
The model is externally validated periodically by an independent third party.
We use the following key methodologies to measure interest rate risk.
51
Table of Contents
Earnings at Risk (EAR). We consider EAR to be our best measure for 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. Since March 31, 2009, we have used a
simulation model to run immediate and parallel changes in interest rates from a base scenario using
a static yield curve. Prior to that, implied forward rates were used for the base scenario. The
standard simulation analysis assesses the impact on net interest income over a 12-month horizon by
shocking the base scenario 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. 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 portfolios. This simulation model projects the net interest income 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 September 30, 2009, we would
experience a negative 10.58% change in EAR, if interest rates moved downward 200 basis points,
compared to a negative 6.62% change at June 30, 2009. If interest rates moved upward 200 basis
points, we would experience a positive 10.42% change in net interest income compared to a positive
7.55% change at June 30, 2009. Both scenarios are within the policy limits established by Board
ALCO. Because downward parallel rate shocks have limited meaning in todays historically low
interest rate environment, we have chosen to use the impact from a downward 100 basis point rate
shock to evaluate our risk. EAR in the downward 100 basis point scenario was negative 4.46% at
September 30, 2009 versus a negative 2.26% at June 30, 2009. The increase in benefit to rising
rates resulted from an increase in floating rate interest bearing bank deposits, a decrease in
short term debt and the expiration of the put provision on a fixed rate FHLB Advance. The EAR to
declining rates was negatively impacted by the low level of rates.
Trends in Earnings at Risk
Estimated Change in EAR from the Base Interest Rate Scenario | ||||||||||||
-200 basis points | -100 basis points | +200 basis points | ||||||||||
September 30, 2009 |
-10.58 | % | -4.46 | % | 10.42 | % | ||||||
December 31, 2008 |
-12.63 | % | -5.72 | % | 4.35 | % | ||||||
Economic Value of Equity (EVE). We consider EVE to be our 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. We use a simulation model running multiple rate paths to
evaluate the impact of immediate and parallel changes in interest rates from a base scenario based
on the current yield curve. The standard simulation analysis assesses the impact on EVE by
shocking the current yield curve up and down 100, 200, and 300 basis points. This simulation model
projects multiple rate paths under each rate scenario and projects the estimated economic value of
assets and liabilities for 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 with
a limit of minus 15%.
At September 30, 2009, we would experience a negative 6.46% change in EVE if interest rates moved
downward 200 basis points, compared to a negative 5.64% change at June 30, 2009. If interest rates
moved upward 200 basis points, we would experience a positive 1.60% change in EVE, compared to a
positive 0.81% change at June 30, 2009. Both of these measures are within Board approved policy
limits. Because downward parallel rate shocks have limited meaning in the current interest rate
environment, we have chosen to use the impact from a downward 100 basis point rate shock to
evaluate our risk. EVE risk in the downward 100 basis point scenario was a negative 3.30% at
September 30, 2009 versus a negative 2.98% for June 30, 3009. EVE risk to rising rates was
positively impacted by the increase in quarter end demand deposit balances and the expiration of
the put provision on a fixed rate FHLB advance. The impact from an increase in the average life of
the securities portfolio was offset by a reduction in total securities outstanding.
Trends in Economic Value of Equity
Estimated Change in EVE from the Base Interest Rate Scenario | ||||||||||||
-200 basis points | -100 basis points | +200 basis points | ||||||||||
September 30, 2009 |
-6.46 | % | -3.30 | % | 1.60 | % | ||||||
December 31, 2008 |
-13.35 | % | -6.07 | % | 0.57 | % | ||||||
The assumptions in any of these simulation runs are inherently uncertain. A simulation will not
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.
52
Table of Contents
Item 4. | Controls and Procedures |
As of September 30, 2009, based on an evaluation of our disclosure controls and procedures, as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e), our principal executive officer and
principal financial officer have concluded that such disclosure controls and procedures were
effective as of that date.
There have been no changes in our internal control over financial reporting that occurred during
the quarter ended September 30, 2009, that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
53
Table of Contents
PART II OTHER INFORMATION
Item 1. | LEGAL PROCEEDINGS |
We are involved in legal proceedings in the ordinary course of our business. We do not expect that
any of those legal proceedings would have a material adverse effect on our consolidated financial
position, results of operations or cash flows. There have been no material changes in those
proceedings from what was reported in our Form 10-K at December 31, 2009, except as supplemented in
our Form 10-Q at June 30, 2009.
Item 1A. | RISK FACTORS |
The following should be added to the risk factors disclosed in our Annual Report on Form 10-K for
the year ended December 31, 2008, and replace the additional risk factors in our Form 10-Q for the
quarter ended June 30, 2009.
We Are Subject to the Risk of Additional Impairment Charges Relating to Our Securities Portfolio.
Our investment securities portfolio is our second largest earning asset. The value of our
investment portfolio has been adversely affected by the unfavorable conditions of the capital
markets in general as well as declines in values of the securities we hold. We have taken an
aggregate of $32,096,000 in charges against earnings since January 1, 2008 for impairments to the
value of trust preferred securities that we have concluded were other than temporary. The value
of the trust preferred segment is particularly sensitive to adverse developments affecting the
banking industry and the financial condition or performance of the issuing banks factors that we
have no control over and as to which we may receive no advance warning, as was the case in the
second quarter for one of these securities. Although we believe we have appropriately valued our
securities portfolio, we cannot assure you that there will not be additional material impairment
charges which could have a material adverse effect on our financial condition and results of
operations.
Our Ability to Fully Utilize the Value of Our Deferred Tax Asset Is Uncertain.
Our intangible assets include a net deferred tax asset that was $68,005,000 at September 30, 2009.
Our ability to fully utilize the benefit of this asset depends upon our returning to profitability
in the reasonably near future. Our current earnings projections for the remainder of 2009 and
beyond support our conclusion that we will be able to fully utilize the deferred tax asset.
However, any projections involve a degree of uncertainty, which in our case may be greater due to
the current recession and the losses we have experienced in the recent past. We have established
federal and state valuation allowances to take this uncertainty into account. The amount of the
valuation reserve was $28,537,000 at September 30, 2009, and increased by $6,853,000 during the
third quarter of 2009. We cannot assure you that we will not have to increase the allowance, which
could have an adverse effect on our financial condition or results of operations.
Failure to Comply With Both the Agreement With the OCC and the Memorandum of Understanding With the
Federal Reserve Bank of St. Louis May Have a Material Adverse Effect on Our Business.
The Bank is subject to primary supervision and regulation by the OCC, while we are subject to
primary supervision and regulation by the Federal Reserve. Our good standing with regulators is of
fundamental importance to the continuation of our businesses. In May 2009, the Bank entered into a
formal written agreement by which the Bank agreed to develop and implement actions to reduce the
amount of classified assets and improve earnings. Any material failures to comply with the
agreement would likely result in more stringent enforcement actions by the OCC which could damage
the reputation of the Bank and have a material adverse effect on our business.
In September 2009, we entered into a memorandum of understanding with the Federal Reserve Bank of
St. Louis. Pursuant to the memorandum, we made informal commitments to, among other things, use
our financial and management resources to assist the Bank in addressing weaknesses identified by
the OCC, not pay dividends on outstanding shares or interest or other sums on outstanding trust
preferred securities and not incur any additional debt. Any material failures to comply with the
agreement would likely result in more stringent enforcement actions by the Federal Reserve which
could damage our reputation and have a material adverse effect on our business.
We May Not Succeed in Our Efforts to Maintain Regulatory Capital at Desired Levels.
Given the remaining risks in our loan and investment portfolios, we intend to take actions to
increase the Banks regulatory capital to levels in well above the minimum amounts required for
well-capitalized status. The Bank has agreed with the OCC to develop a plan to increase its total
capital ratio to at least 11.5% and its tier 1 leverage ratio to 8% by December 31, 2009. Current
market conditions indicate that it is unlikely that we could raise capital by selling additional
shares of common stock without significantly diluting our
existing shareholders ownership. Accordingly, we have taken and are considering other actions to
reduce our total assets, including possible sales of loans, investment securities and banking
offices. We cannot assure you that we will be successful in these efforts.
54
Table of Contents
If we are not able to maintain the Banks regulatory capital at levels that are satisfactory to us
and our regulators, our regulators could take additional, more stringent, enforcement actions. In
addition, declines in the Banks capital levels could impact its ability to access lower-cost
sources of funding that are currently available, such as public funds and brokered deposits.
Future earnings and liquidity may be adversely affected.
The Impact of Pending Legislation in the Senate Could Significantly Reduce our Deposit Service
Charge Income.
On October 19, 2009, the Senate Banking Committee filed The Fairness and Accountability in
Receiving (FAIR) Overdraft Coverage Act. The bill, if passed in its current form, would require
banks to obtain a customers consent before enrolling them in an overdraft protection program for
ATM and debit card transactions, would limit the number of overdraft coverage charge fees banks can
charge to one per month and six per year, would require fees to be proportional to the cost of
processing the overdraft, could change the order in which overdrafts are processed, would require
customer notification when they overdraw their account, and would require that customers be given
the chance to cancel ATM or branch teller transactions that would create an overdraft.
Although we have already implemented some of the provisions outlined in the bill, such as providing
two opt-out options at our customers request for either point of sale or all overdrafts, providing
customer notification when they overdraw their account and the option for a customer to cancel an
ATM transaction if it would create an overdraft, there is a risk that the bill, if passed in its
current form, would reduce the amount of non-sufficient funds and overdraft fees that we charge and
include in income.
We are not paying cash dividends on our common and preferred stock and are deferring interest
payments on the junior subordinated debentures that relate to our trust preferred securities, and
we are restricted in our ability to resume such payments. The failure to resume paying dividends
and distributions on our securities may adversely affect us.
We historically paid cash dividends on our common stock before we suspended them in September 2009.
We announced our intention in October 2009 to suspend cash dividends on the preferred stock we
issued to the Treasury Department under its Capital Purchase Program, or CPP (which is the only
series of our preferred stock that is outstanding), and, in addition, to defer interest payments on
the junior subordinated notes relating to our trust preferred securities. Deferring interest
payments on the junior subordinated notes will result in a deferral of distributions on our trust
preferred securities. The Federal Reserve has provided guidance that bank holding companies should
not pay dividends or make distributions on trust preferred securities using funds from the CPP. In
addition, we have made informal commitments to obtain the prior approval of the Federal Reserve
Bank of St. Louis before paying dividends on our common or preferred stock or distribution on our
trust preferred securities. There is no assurance that, if we make such a request, we would
receive such approvals. Moreover, even if the Reserve Bank agreed that we could resume making such
payments, future payment of cash dividends on our common stock will be subject to the prior payment
of all unpaid dividends on our preferred stock and all deferred distributions on our trust
preferred securities. Dividends are declared and paid at the discretion of our board of directors
and are dependent upon our liquidity, financial condition, results of operations, capital
requirements and such other factors as our board of directors may deem relevant. If we miss six
quarterly dividend payments on our preferred stock, whether or not consecutive, the Treasury
Department will have the right to appoint two directors to our board of directors until all accrued
but unpaid dividends have been paid.
Dividends on our preferred stock and deferred distributions on our trust preferred securities are
cumulative and therefore unpaid dividends and distributions will accrue and compound on each
subsequent payment date. In the event we become subject to any liquidation, dissolution or winding
up of affairs, holders of the trust preferred securities and then holders of the preferred stock
will be entitled to receive the liquidation amounts they are entitled to plus the amount of any
accrued and unpaid distributions and dividends, before any distribution to the holders of common
stock.
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, Crowe Horwath LLP, our independent registered public
accounting firm, was not engaged to perform any services that represent non-audit services. 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.
55
Table of Contents
Item 6. | EXHIBITS |
The following documents are filed as exhibits to this report:
10.1 | Separation and Release Agreement between the Company and Michael T. Vea dated August
28, 2009 (incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K filed September 1, 2009) |
|||
10.2 | Memorandum of Understanding with the Federal Reserve Board of St. Louis dated
September 16, 2009. |
|||
10.3 | Form of Restricted Stock Agreement (CPP) (incorporated by reference to Exhibit 10.1 to
the Current Report on Form 8-K filed July 20, 2009) |
|||
10.4 | Form of Restricted Stock Agreement (Employee) (incorporated by reference to Exhibit
10.2 to the Current Report on Form 8-K filed July 20, 2009) |
|||
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 |
56
Table of Contents
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 J. Alley | |||
Michael J. Alley | ||||
Interim Chairman of the Board and Chief Executive Officer November 4, 2009 |
||||
/s/ Martin M. Zorn | ||||
Martin M. Zorn | ||||
Chief Operating Officer and Chief Financial Officer November 4, 2009 |
57
Table of Contents
EXHIBIT INDEX
Exhibit | ||||
Number | Description | |||
10.1 | Separation and Release Agreement between the Company and Michael T. Vea dated August
28, 2009 (incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K filed September 1, 2009) |
|||
10.2 | Memorandum of Understanding with the Federal Reserve Board of St. Louis dated
September 16, 2009. |
|||
10.3 | Form of Restricted Stock Agreement (CPP) (incorporated by reference to Exhibit 10.1 to
the Current Report on Form 8-K filed July 20, 2009) |
|||
10.4 | Form of Restricted Stock Agreement (Employee) (incorporated by reference to Exhibit
10.2 to the Current Report on Form 8-K filed July 20, 2009) |
|||
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 |