Attached files
file | filename |
---|---|
EX-32 - INTEGRA BANK CORP | v191717_ex32.htm |
EX-31.1 - INTEGRA BANK CORP | v191717_ex31-1.htm |
EX-31.2 - INTEGRA BANK CORP | v191717_ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
x
|
Quarterly Report Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For the
quarterly period ended June 30, 2010.
or
¨
|
Transition Report Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For the
transition period from ________________________ to
________________________.
Commission
file number: 0-13585
INTEGRA
BANK CORPORATION
|
(Exact
name of registrant as specified in its
charter)
|
INDIANA
|
35-1632155
|
(State
or other jurisdiction of incorporation or organization)
|
(IRS
Employee Identification No.)
|
PO
BOX 868, EVANSVILLE, INDIANA
|
47705-0868
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant's
telephone number, including area code: (812) 464-9677
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x
No ¨
Indicate
by check mark whether the registrant 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 ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Smaller
reporting company x
|
(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 ¨ No x
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
CLASS
|
OUTSTANDING
AT JULY 23, 2010
|
(Common
stock, $1.00 Stated Value)
|
21,092,374
|
INTEGRA
BANK CORPORATION
INDEX
PAGE
NO.
|
|
PART
I - FINANCIAL INFORMATION
|
|
Item
1. Unaudited Financial Statements
|
|
Consolidated
balance sheets-
|
|
June
30, 2010 and December 31, 2009
|
3
|
Consolidated
statements of income-
|
|
Three
months and six months ended June 30, 2010 and 2009
|
4
|
Consolidated
statements of comprehensive income-
|
|
Three
months and six months ended June 30, 2010 and 2009
|
6
|
|
|
Consolidated
statements of changes in shareholders’ equity-
|
|
Six
months ended June 30, 2010
|
7
|
Consolidated
statements of cash flow-
|
|
Six
months ended June 30, 2010 and 2009
|
8
|
Notes
to unaudited consolidated financial statements
|
10
|
Item
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
|
32
|
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
|
48
|
Item
4. Controls and Procedures
|
50
|
PART
II - OTHER INFORMATION
|
|
Item
1. Legal Proceedings
|
51
|
Item
1A. Risk Factors
|
51
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
56
|
Item
3. Defaults Upon Senior Securities
|
56
|
Item
4. Reserved
|
56
|
Item
5. Other Information
|
56
|
Item
6. Exhibits
|
56
|
Signatures
|
57
|
2
PART
I - FINANCIAL INFORMATION
ITEM
1. Unaudited Financial Statements
INTEGRA
BANK CORPORATION and Subsidiaries
Unaudited
Consolidated Balance Sheets
(In
thousands, except for per share data)
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
ASSETS
|
||||||||
Cash
and due from banks
|
$ | 591,160 | $ | 304,921 | ||||
Federal funds sold and other short-term
investments
|
50,003 | 49,653 | ||||||
Total
cash and cash equivalents
|
641,163 | 354,574 | ||||||
Loans
held for sale (at lower of cost or fair value)
|
321,137 | 93,572 | ||||||
Securities
available for sale
|
440,386 | 361,719 | ||||||
Securities
held for trading
|
60 | 36 | ||||||
Regulatory
stock
|
26,299 | 29,124 | ||||||
Loans,
net of unearned income
|
1,497,106 | 2,019,732 | ||||||
Less: Allowance for loan
losses
|
(106,745 | ) | (88,670 | ) | ||||
Net
loans
|
1,390,361 | 1,931,062 | ||||||
Premises
and equipment
|
32,115 | 37,814 | ||||||
Premises
and equipment held for sale
|
9,352 | 4,249 | ||||||
Other
intangible assets
|
7,419 | 8,242 | ||||||
Other
real estate owned
|
33,706 | 31,982 | ||||||
Other assets
|
67,813 | 69,567 | ||||||
TOTAL ASSETS
|
$ | 2,969,811 | $ | 2,921,941 | ||||
LIABILITIES
|
||||||||
Deposits:
|
||||||||
Non-interest-bearing
demand
|
$ | 209,366 | $ | 263,530 | ||||
Non-interest-bearing
held for sale
|
38,925 | 7,319 | ||||||
Interest-bearing
|
1,884,079 | 2,004,369 | ||||||
Interest-bearing held for
sale
|
340,084 | 89,888 | ||||||
Total
deposits
|
2,472,454 | 2,365,106 | ||||||
Short-term
borrowings
|
66,058 | 62,114 | ||||||
Long-term
borrowings
|
348,470 | 361,071 | ||||||
Other liabilities
|
36,549 | 31,304 | ||||||
TOTAL
LIABILITIES
|
2,923,531 | 2,819,595 | ||||||
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
|
||||||||
Liquidation
preference of $87,243 at June 30, 2010
|
82,183 | 82,011 | ||||||
Common
stock - $1.00 stated value:
|
||||||||
Shares
authorized: 129,000,000
|
||||||||
Shares
outstanding: 20,892,308 and 20,847,589
respectively
|
20,892 | 20,848 | ||||||
Additional
paid-in capital
|
217,092 | 216,939 | ||||||
Retained
earnings
|
(274,455 | ) | (210,371 | ) | ||||
Accumulated other comprehensive income
(loss)
|
568 | (7,081 | ) | |||||
TOTAL SHAREHOLDERS' EQUITY
|
46,280 | 102,346 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY
|
$ | 2,969,811 | $ | 2,921,941 |
The
accompanying notes are an integral part of the consolidated financial
statements.
3
INTEGRA
BANK CORPORATION and Subsidiaries
Unaudited
Consolidated Statements of Income
(In
thousands, except for per share data)
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
June 30,
|
June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
INTEREST
INCOME
|
||||||||||||||||
Interest
and fees on loans:
|
||||||||||||||||
Taxable
|
$ | 20,872 | $ | 25,287 | $ | 42,389 | $ | 51,036 | ||||||||
Tax-exempt
|
99 | 202 | 200 | 405 | ||||||||||||
Interest
and dividends on securities:
|
||||||||||||||||
Taxable
|
3,495 | 5,027 | 6,817 | 10,493 | ||||||||||||
Tax-exempt
|
220 | 825 | 442 | 1,833 | ||||||||||||
Dividends
on regulatory stock
|
186 | 157 | 407 | 678 | ||||||||||||
Interest
on loans held for sale
|
32 | 127 | 58 | 230 | ||||||||||||
Interest on federal funds sold and other
short-term investments
|
327 | 174 | 546 | 267 | ||||||||||||
Total
interest income
|
25,231 | 31,799 | 50,859 | 64,942 | ||||||||||||
INTEREST
EXPENSE
|
||||||||||||||||
Interest
on deposits
|
8,483 | 11,759 | 16,585 | 23,946 | ||||||||||||
Interest
on short-term borrowings
|
52 | 583 | 97 | 1,346 | ||||||||||||
Interest on long-term
borrowings
|
2,785 | 2,683 | 5,406 | 5,393 | ||||||||||||
Total
interest expense
|
11,320 | 15,025 | 22,088 | 30,685 | ||||||||||||
NET
INTEREST INCOME
|
13,911 | 16,774 | 28,771 | 34,257 | ||||||||||||
Provision for loan losses
|
16,938 | 32,536 | 69,638 | 63,930 | ||||||||||||
Net interest income after provision for loan
losses
|
(3,027 | ) | (15,762 | ) | (40,867 | ) | (29,673 | ) | ||||||||
NON-INTEREST
INCOME
|
||||||||||||||||
Service
charges on deposit accounts
|
4,559 | 5,035 | 8,544 | 9,448 | ||||||||||||
Other
service charges and fees
|
1,011 | 951 | 2,090 | 2,044 | ||||||||||||
Debit
card income-interchange
|
1,414 | 1,373 | 2,724 | 2,630 | ||||||||||||
Trust
income
|
456 | 563 | 951 | 1,022 | ||||||||||||
Gain
(Loss) on sale of other assets
|
171 | (22 | ) | 236 | (75 | ) | ||||||||||
Premiums
on sales of deposits
|
4,371 | - | 4,371 | 2,549 | ||||||||||||
Net
securities gains (losses)
|
3,351 | 1,479 | 3,349 | 1,479 | ||||||||||||
Other
than temporary impairment loss:
|
||||||||||||||||
Total
impairment losses recognized on securities
|
- | (19,164 | ) | (1,631 | ) | (20,334 | ) | |||||||||
Loss
or reclassification recognized in other comprehensive
income
|
- | (1,150 | ) | 1,421 | (1,150 | ) | ||||||||||
Net
impairment loss recognized in earnings
|
- | (20,314 | ) | (210 | ) | (21,484 | ) | |||||||||
Warrant
fair value adjustment
|
- | (1,407 | ) | - | (6,145 | ) | ||||||||||
Cash
surrender value life insurance
|
14 | 394 | 32 | 1,084 | ||||||||||||
Other
|
778 | 964 | 1,628 | 1,956 | ||||||||||||
Total
non-interest income
|
16,125 | (10,984 | ) | 23,715 | (5,492 | ) | ||||||||||
NON-INTEREST
EXPENSE
|
||||||||||||||||
Salaries
and employee benefits
|
8,900 | 11,561 | 18,098 | 23,636 | ||||||||||||
Occupancy
|
2,000 | 2,378 | 4,118 | 4,959 | ||||||||||||
Equipment
|
687 | 808 | 1,437 | 1,657 | ||||||||||||
Professional
fees
|
2,776 | 2,057 | 4,469 | 3,787 | ||||||||||||
Communication
and transportation
|
891 | 1,091 | 1,888 | 2,252 | ||||||||||||
Processing
|
519 | 734 | 1,234 | 1,491 | ||||||||||||
Software
|
541 | 627 | 1,138 | 1,247 | ||||||||||||
Marketing
|
265 | 424 | 489 | 840 | ||||||||||||
Loan
and OREO expense
|
1,404 | 1,888 | 3,001 | 7,336 | ||||||||||||
FDIC
assessment
|
2,338 | 3,005 | 4,381 | 3,955 | ||||||||||||
Low
income housing project losses
|
424 | 473 | 848 | 1,163 | ||||||||||||
Debt
prepayment penalties
|
- | 1,511 | - | 1,511 | ||||||||||||
Amortization
of intangible assets
|
412 | 422 | 824 | 843 | ||||||||||||
State
and local franchise tax
|
22 | 473 | 424 | 788 | ||||||||||||
Other
|
1,307 | 1,717 | 2,630 | 3,177 | ||||||||||||
Total non-interest expense
|
22,486 | 29,169 | 44,979 | 58,642 | ||||||||||||
Income
(Loss) before income taxes
|
(9,388 | ) | (55,915 | ) | (62,131 | ) | (93,807 | ) | ||||||||
Income tax expense
(benefit)
|
(316 | ) | (7,451 | ) | (308 | ) | (17,282 | ) | ||||||||
Income
before cumulative effect of accounting change
|
(9,072 | ) | (48,464 | ) | (61,823 | ) | (76,525 | ) | ||||||||
Preferred stock dividends and discount
accretion
|
1,133 | 1,139 | 2,261 | 1,552 | ||||||||||||
Net income (loss) available to common
shareholders
|
$ | (10,205 | ) | $ | (49,603 | ) | $ | (64,084 | ) | $ | (78,077 | ) |
Unaudited
Consolidated Statements of Income are continued on next page.
4
INTEGRA
BANK CORPORATION and Subsidiaries
Unaudited
Consolidated Statements of Income (Continued)
(In
thousands, except for per share data)
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
June 30,
|
June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Earnings
(Loss) per common share:
|
||||||||||||||||
Basic
|
$ | (0.49 | ) | $ | (2.39 | ) | $ | (3.10 | ) | $ | (3.77 | ) | ||||
Diluted
|
(0.49 | ) | (2.39 | ) | (3.10 | ) | (3.77 | ) | ||||||||
Weighted
average common shares outstanding:
|
||||||||||||||||
Basic
|
20,664 | 20,715 | 20,665 | 20,717 | ||||||||||||
Diluted
|
20,664 | 20,715 | 20,665 | 20,717 | ||||||||||||
Dividends
per common share
|
$ | - | $ | 0.01 | $ | - | $ | 0.02 |
The
accompanying notes are an integral part of the consolidated financial
statements.
5
INTEGRA
BANK CORPORATION and Subsidiaries
Unaudited
Consolidated Statements of Comprehensive Income
(In
thousands)
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
June 30,
|
June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
income (loss)
|
$ | (9,072 | ) | $ | (48,464 | ) | $ | (61,823 | ) | $ | (76,525 | ) | ||||
Other
comprehensive income (loss), net of tax:
|
||||||||||||||||
Unrealized
gain (loss) on securities:
|
||||||||||||||||
Unrealized
gain (loss) arising in period
|
||||||||||||||||
(net
of tax of $3,436, $(5,240), $5,587 and $(3,641),
respectively)
|
5,779 | (8,622 | ) | 9,396 | (5,991 | ) | ||||||||||
Reclassification
of amounts realized through impairment charges
|
||||||||||||||||
and
sales (net of tax of $(1,249), $7,120, $(1,170) and $7,562,
respectively)
|
(2,102 | ) | 11,715 | (1,969 | ) | 12,443 | ||||||||||
Net
unrealized gain (loss) on
securities
|
3,677 | 3,093 | 7,427 | 6,452 | ||||||||||||
Change
in net pension plan liability
(net
of tax of $31, $10, $132 and $19, respectively)
|
52 | 16 | 222 | 31 | ||||||||||||
Unrealized
gain (loss) on derivative hedging instruments arising in
period
(net
of tax of $(114) and $(220) for
2009)
|
- | (187 | ) | - | (362 | ) | ||||||||||
Net
unrealized gain (loss), recognized in other comprehensive income
(loss)
|
3,729 | 2,922 | 7,649 | 6,121 | ||||||||||||
Comprehensive
income (loss)
|
$ | (5,343 | ) | $ | (45,542 | ) | $ | (54,174 | ) | $ | (70,404 | ) |
The
accompanying notes are an integral part of the consolidated financial
statements.
6
INTEGRA
BANK CORPORATION and Subsidiaries
Unaudited
Consolidated Statements of Changes In Shareholders’ Equity
(In
thousands, except for share and per share data)
Accumulated
|
||||||||||||||||||||||||||||
Shares of
|
Additional
|
Other
|
||||||||||||||||||||||||||
Preferred
|
Common
|
Common
|
Paid-in
|
Retained
|
Comprehensive
|
|||||||||||||||||||||||
Stock
|
Stock
|
Stock
|
Capital
|
Earnings
|
Income (Loss)
|
Total
|
||||||||||||||||||||||
BALANCE
AT DECEMBER 31, 2009
|
$ | 82,011 | 20,847,589 | $ | 20,848 | $ | 216,939 | $ | (210,371 | ) | $ | (7,081 | ) | $ | 102,346 | |||||||||||||
Net
income (loss)
|
- | - | - | - | (61,823 | ) | - | (61,823 | ) | |||||||||||||||||||
Net
change, net of tax, in accumulated other comprehensive
income
|
- | - | - | - | - | 7,649 | 7,649 | |||||||||||||||||||||
Discount
on preferred stock
|
172 | - | - | - | - | - | 172 | |||||||||||||||||||||
Preferred
stock dividend
|
- | - | - | - | (2,261 | ) | - | (2,261 | ) | |||||||||||||||||||
Vesting
of restricted shares, net
|
- | (1,398 | ) | (1 | ) | - | - | - | (1 | ) | ||||||||||||||||||
Grant
of restricted stock, net of forfeitures
|
- | 46,117 | 45 | (45 | ) | - | - | - | ||||||||||||||||||||
Stock-based
compensation expense
|
- | - | - | 198 | - | - | 198 | |||||||||||||||||||||
BALANCE
AT JUNE 30, 2010
|
$ | 82,183 | 20,892,308 | $ | 20,892 | $ | 217,092 | $ | (274,455 | ) | $ | 568 | $ | 46,280 |
The
accompanying notes are an integral part of the consolidated financial
statements.
7
INTEGRA
BANK CORPORATION and Subsidiaries
Unaudited
Consolidated Statements of Cash Flow
(In
thousands)
Six Months Ended
|
||||||||
June 30,
|
||||||||
2010
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
income (loss)
|
$ | (61,823 | ) | $ | (76,525 | ) | ||
Adjustments
to reconcile net income to
|
||||||||
net
cash provided by operating activities:
|
||||||||
Amortization
and depreciation
|
3,788 | 3,510 | ||||||
Provision
for loan losses
|
69,638 | 63,930 | ||||||
Income
tax valuation allowance
|
22,649 | 18,504 | ||||||
Net
securities (gains) losses
|
(3,349 | ) | (1,479 | ) | ||||
Impairment
charge on available for sale securities
|
210 | 21,484 | ||||||
Net
held for trading (gains) losses
|
(24 | ) | (235 | ) | ||||
(Gain)
loss on sale of premises and equipment
|
(459 | ) | - | |||||
(Gain)
loss on sale of other real estate owned
|
223 | 77 | ||||||
Premiums
on sales of deposits
|
(4,371 | ) | (2,549 | ) | ||||
Loss
on low-income housing investments
|
848 | 1,163 | ||||||
Purchase
of held for trading securities
|
- | (19,745 | ) | |||||
Increase
(decrease) in deferred taxes
|
(22,649 | ) | (29,506 | ) | ||||
Net
gain on sale of loans held for sale
|
(522 | ) | (439 | ) | ||||
Proceeds
from sale of loans held for sale
|
33,037 | 73,250 | ||||||
Origination
of loans held for sale
|
(33,725 | ) | (77,570 | ) | ||||
Debt
prepayment fees
|
- | 1,511 | ||||||
Change in other operating
|
15,046 | 6,776 | ||||||
Net cash flows provided by (used in) operating
activities
|
18,517 | (17,843 | ) | |||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Proceeds
from maturities of securities available for sale
|
31,134 | 70,674 | ||||||
Proceeds
from sales of securities available for sale
|
124,618 | 64,304 | ||||||
Purchase
of securities available for sale
|
(224,409 | ) | (9,538 | ) | ||||
Decrease
in loans made to customers
|
142,298 | 52,740 | ||||||
Purchase
of premises and equipment
|
(2,076 | ) | (578 | ) | ||||
Proceeds
from sale of premises and equipment
|
(474 | ) | 11 | |||||
Proceeds
from sale of other real estate owned
|
4,211 | 2,951 | ||||||
(Increase) decrease from sale of branches, net of
cash acquired
|
(1,676 | ) | (22,708 | ) | ||||
Net cash flows provided by (used in) investing
activities
|
73,626 | 157,856 | ||||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Net
increase (decrease) in deposits
|
205,363 | 184,889 | ||||||
Net
increase (decrease) in short-term borrowed funds
|
3,944 | (174,088 | ) | |||||
Proceeds
from long-term borrowings
|
- | 50,000 | ||||||
Repayment
of long-term borrowings
|
(12,599 | ) | (38,703 | ) | ||||
Proceeds
from issuance of TARP preferred stock
|
- | 89,843 | ||||||
Accretion
of discount on TARP preferred stock
|
(2,261 | ) | (113 | ) | ||||
Dividends
paid on TARP preferred stock
|
- | (906 | ) | |||||
Dividends
paid on common stock
|
- | (415 | ) | |||||
Proceeds from exercise of stock options and
restricted shares, net
|
(1 | ) | (315 | ) | ||||
Net cash flows provided by (used in) financing
activities
|
194,446 | 110,192 | ||||||
Net increase (decrease) in cash and cash
equivalents
|
286,589 | 250,205 | ||||||
Cash and cash equivalents at beginning of
year
|
354,574 | 62,773 | ||||||
Cash and cash equivalents at end of
period
|
$ | 641,163 | $ | 312,978 |
Unaudited
Consolidated Statements of Cash Flow are continued on next
page.
8
INTEGRA
BANK CORPORATION and Subsidiaries
Unaudited
Consolidated Statements of Cash Flow (Continued)
(In
thousands)
Six Months Ended
|
||||||||
June 20,
|
||||||||
2010
|
2009
|
|||||||
SUPPLEMENTAL
DISCLOSURE OF NONCASH TRANSACTIONS
|
||||||||
Other
real estate acquired in settlement of loans
|
7,893 | 15,033 | ||||||
Dividends
for common shareholders declared and not paid
|
- | 207 | ||||||
Dividends
accrued not paid on preferred stock
|
3,657 | 1,439 |
The
accompanying notes are an integral part of the consolidated financial
statements.
9
INTEGRA
BANK CORPORATION and Subsidiaries
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except for 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 June 30, 2010, our subsidiaries
consisted of Integra Bank N.A. (the “Bank” or “Integra Bank”), a reinsurance
company and four statutory business trusts which are not consolidated under
applicable accounting guidance. 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, 2009, 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, 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 and commercial real
estate (CRE), 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 making
our best estimates during the current quarter, we recorded provisions for loan
losses and an additional valuation allowance on our deferred tax
asset.
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 the 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 a valuation
allowance is recorded as additional income tax expense in the period the tax
valuation allowance is established. To the extent that we generate taxable
income in a given quarter, the valuation allowance may be reduced to fully or
partially offset the corresponding income tax expense. Any remaining deferred
tax asset valuation allowance may be reversed through income tax expense once we
can demonstrate a sustainable return to profitability and conclude that it is
more likely than not the deferred tax asset will be utilized prior to
expiration.
RECENT
ACCOUNTING PRONOUNCEMENTS
Effective
January 1, 2010, we adopted the new accounting guidance under ASC 860 that
requires more information about transfers of financial assets, including
securitization transactions, and where entities have continuing exposure to the
risks related to transferred financial assets. The guidance
eliminates the concept of a “qualifying special-purpose entity,” changes the
requirements for derecognizing financial assets, and requires additional
disclosures about continuing involvement with transferred financial assets
including information about gains and losses resulting from transfers during the
period. The adoption of this accounting guidance did not have a
material impact on our consolidated financial position or results of
operations.
10
ASC Topic
810 provides guidance for consolidation of variable interest entities by
focusing on identifying which enterprise has the power to direct the activities
of a variable interest entity that most significantly impacts the entity’s
economic performance and (1) the obligation to absorb losses of the entity or
(2) the right to receive benefits from the entity. This guidance also
requires additional disclosures about our involvement in variable interest
entities. This guidance was effective for us on January 1, 2010, and did not
have a significant impact on our results of operations or financial
position.
FAIR
VALUE MEASUREMENT
ASC Topic
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. ASC 820 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. ASC 820 describes
three levels of inputs that may be used to measure fair value:
Level 1: Quoted
prices (unadjusted) of 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 entity’s 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 (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 observable market data should
be used to determine the lowest available level. 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 fair value generated from the cash flow
analysis used as part of our review for other-than-temporary
impairment. The cash flows include the deferrals and defaults
associated with each security, along with anticipated deferrals, defaults and
projected recoveries. This price is considered Level 3
pricing.
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.
11
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.
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. Loans held for sale associated with branch
transactions are presented at face value, which is substantially the same as the
value in the transaction. Loans held for sale at June 30, 2010
include $316,972 of loans that we expect to sell in branch divestiture
transactions during the third quarter of 2010.
Derivatives: Our
derivative instruments consist of over-the-counter 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 when 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 loan’s
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 broker’s 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’s 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.
Premises and equipment held for
sale: Premises and equipment held for sale are evaluated at
the time the property is deemed as held for sale. Fair value is based
on appraisals by qualified licensed appraisers and is classified as Level 3
input. On occasion, when an appraisal is not performed, fair value is
based on sales offers received from potential buyers. Premises and
equipment held for sale at June 30, 2010, include $6,134 of premises and
equipment that will be sold in probable branch divestitures.
Deposits held for sale: The fair
value of deposits held for sale is based on the actual purchase price as agreed
upon between Integra Bank and the purchaser. Because this transaction
occurs in an orderly transaction between market participants, the fair value
qualifies as a Level 2 fair value. Deposits held for sale at June 30,
2010, include $379,009 of deposits that will be sold in probable branch
divestiture transactions during the third quarter of 2010.
12
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.
Fair Value Measurements at June 30, 2010
|
||||||||||||||||
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)
|
June 30, 2010
|
|||||||||||||
Assets
|
||||||||||||||||
Securities,
available for sale
|
||||||||||||||||
U.S.
Treasuries
|
$ | - | $ | 18,242 | $ | - | $ | 18,242 | ||||||||
U.S.
Government agencies
|
- | 155 | - | 155 | ||||||||||||
Collateralized
mortgage obligations:
|
||||||||||||||||
Agency
|
- | 193,891 | - | 193,891 | ||||||||||||
Private
Label
|
- | 20,736 | - | 20,736 | ||||||||||||
Mortgage
backed securities: residential
|
- | 165,271 | - | 165,271 | ||||||||||||
Trust
Preferred
|
- | 8,691 | 1,523 | 10,214 | ||||||||||||
State
& political subdivisions
|
- | 23,170 | - | 23,170 | ||||||||||||
Other
securities
|
- | 8,707 | - | 8,707 | ||||||||||||
Total
securities, available for sale
|
$ | - | $ | 438,863 | $ | 1,523 | $ | 440,386 | ||||||||
Securities,
held for trading
|
||||||||||||||||
Trust
Preferred
|
$ | - | $ | 60 | $ | - | $ | 60 | ||||||||
Derivatives
|
- | 8,067 | - | 8,067 | ||||||||||||
Liabilities
|
||||||||||||||||
Derivatives
|
$ | - | $ | 8,099 | $ | - | $ | 8,099 |
13
Fair Value Measurements at December 31, 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)
|
December 31, 2009
|
|||||||||||||
Assets
|
||||||||||||||||
Securities,
available for sale
|
||||||||||||||||
U.S.
Treasuries
|
$ | - | $ | 8,833 | $ | - | $ | 8,833 | ||||||||
U.S.
Government agencies
|
- | 279 | - | 279 | ||||||||||||
Collateralized
mortgage obligations:
|
||||||||||||||||
Agency
|
118,431 | 118,431 | ||||||||||||||
Private
Label
|
- | 23,229 | - | 23,229 | ||||||||||||
Mortgage
backed securities: residential
|
167,232 | 167,232 | ||||||||||||||
Trust
Preferred
|
- | 8,450 | 1,588 | 10,038 | ||||||||||||
State
& political subdivisions
|
- | 25,040 | - | 25,040 | ||||||||||||
Other
securities
|
- | 8,637 | 8,637 | |||||||||||||
Total
securities, available for sale
|
$ | - | $ | 360,131 | $ | 1,588 | $ | 361,719 | ||||||||
Securities,
held for trading
|
||||||||||||||||
Trust
Preferred
|
$ | - | $ | 36 | $ | - | $ | 36 | ||||||||
Derivatives
|
- | 5,945 | - | 5,945 | ||||||||||||
Liabilities
|
||||||||||||||||
Derivatives
|
$ | - | $ | 6,307 | $ | - | $ | 6,307 |
Assets
and liabilities measured at fair value on a non-recurring basis are summarized
below.
Fair Value Measurements at June 30, 2010
|
||||||||||||||||
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)
|
June 30, 2010
|
|||||||||||||
Assets
|
||||||||||||||||
Impaired
loans
|
$ | - | $ | - | $ | 133,661 | $ | 133,661 | ||||||||
Loans
held for sale
|
- | 321,137 | - | 321,137 | ||||||||||||
Other
real estate owned
|
- | - | 29,516 | 29,516 | ||||||||||||
Premises
and equipment held for sale
|
- | - | 9,352 | 9,352 | ||||||||||||
Liabilities
|
||||||||||||||||
Deposits
held for sale
|
$ | - | $ | 379,009 | $ | - | $ | 379,009 |
14
Fair Value Measurements at December 31, 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)
|
December 31, 2009
|
|||||||||||||
Assets
|
||||||||||||||||
Impaired
loans
|
$ | - | $ | - | $ | 92,715 | $ | 92,715 | ||||||||
Loans
held for sale
|
- | 93,572 | - | 93,572 | ||||||||||||
Other
real estate owned
|
- | - | 29,317 | 29,317 | ||||||||||||
Premises
and equipment held for sale
|
- | - | 4,249 | 4,249 | ||||||||||||
Liabilities
|
||||||||||||||||
Deposits
held for sale
|
$ | - | $ | 97,207 | $ | - | $ | 97,207 |
At June
30, 2010, 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 $173,504, with a valuation allowance of $39,843,
resulting in an additional provision for loan losses of $12,483 for the three
month period and $29,797 for the six month period ended June 30,
2010.
For those
properties held in other real estate owned and carried at fair value, writedowns
of $81 and $477 were charged to earnings for the three and six months ended June
30, 2010, compared to $182 and $482 for both the three and six months ended June
30, 2009.
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 six month periods ending June 30, 2010.
Fair Value Measurements
Using Significant
|
||||||||
Unobservable Inputs (Level 3)
|
||||||||
Securities
|
||||||||
Available for sale
|
Total
|
|||||||
Three
months ended June 30, 2010
|
||||||||
Beginning
Balance at April 1, 2010
|
$ | 1,516 | $ | 1,516 | ||||
Transfers
in and/or out of Level 3
|
- | - | ||||||
Gains
(Losses) included in other comprehensive income
|
7 | 7 | ||||||
Gains
(Losses) included in earnings
|
- | - | ||||||
Ending
Balance
|
$ | 1,523 | $ | 1,523 |
Fair Value Measurements
Using Significant
|
||||||||
Unobservable Inputs (Level 3)
|
||||||||
Securities
|
||||||||
Available for sale
|
Total
|
|||||||
Six
months ended June 30, 2010
|
||||||||
Beginning
Balance at January 1, 2010
|
$ | 1,588 | $ | 1,588 | ||||
Transfers
in and/or out of Level 3
|
- | - | ||||||
Gains
(Losses) included in other comprehensive income
|
145 | 145 | ||||||
Gains
(Losses) included in earnings
|
(210 | ) | (210 | ) | ||||
Ending
Balance
|
$ | 1,523 | $ | 1,523 |
Unrealized
gains and losses for securities classified as available for sale are generally
not recorded in earnings. However, during the three and six months
ended June 30, 2010, impairment charges remain unchanged from the three months
ended March 31, 2010.
15
The
carrying amounts and estimated fair values of financial instruments, at June 30,
2010 and December 31, 2009 are as follows:
June 30, 2010
|
December 31, 2009
|
|||||||||||||||
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
Amount
|
Value
|
Amount
|
Value
|
|||||||||||||
Financial
Assets:
|
||||||||||||||||
Cash
and short-term investments
|
$ | 641,163 | $ | 641,163 | $ | 354,574 | $ | 354,574 | ||||||||
Loans-net
of allowance
|
1,256,700 | 1,266,551 | 1,838,347 | 1,840,053 | ||||||||||||
Accrued
interest receivable
|
8,534 | 8,534 | 9,336 | 9,336 | ||||||||||||
Financial
Liabilities:
|
||||||||||||||||
Deposits
|
$ | 2,093,445 | $ | 2,119,257 | $ | 2,267,899 | $ | 2,288,866 | ||||||||
Short-term
borrowings
|
66,058 | 66,058 | 62,114 | 62,114 | ||||||||||||
Long-term
borrowings
|
348,470 | 352,511 | 361,071 | 362,271 | ||||||||||||
Accrued
interest payable
|
9,200 | 9,200 | 8,200 | 8,200 |
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, deposits without defined maturities and
short-term debt. The fair value of loans is estimated in
accordance with 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. At June 30, 2010, there were 589,129 shares available for the
granting of additional awards under the 2007 Plan.
A summary
of the status of the options or SARs granted under the 2007 Plan and Prior Plans
as of June 30, 2010, and changes during the year is presented
below:
June 30, 2010
|
||||||||||||
Weighted Average
|
||||||||||||
Weighted Average
|
Remaining Term
|
|||||||||||
Shares
|
Exercise Price
|
(In years)
|
||||||||||
Options/SARs
outstanding at December 31, 2009
|
1,099,536 | $ | 20.52 | |||||||||
Options/SARs
granted
|
- | - | ||||||||||
Options/SARs
exercised
|
- | - | ||||||||||
Options/SARs
forfeited/expired
|
(585,743 | ) | 20.40 | |||||||||
Options/SARs
outstanding at June 30, 2010
|
513,793 | $ | 20.66 | 4.8 | ||||||||
Options/SARs
exercisable at June 30, 2010
|
491,647 | $ | 20.78 | 4.7 |
The
options and SARs outstanding at June 30, 2010, had a weighted average remaining
term of 4.8 years with no aggregate intrinsic value, while the options and SARs
that were exercisable at June 30, 2010, had a weighted average remaining term of
4.7 years and no aggregate intrinsic value. As of June 30, 2010,
there was $52 of total unrecognized compensation cost related to the stock
options and SARs. The cost is expected to be recognized over a
weighted-average period of one year. Compensation expense for options
and SARs for the three and six months ended June 30, 2010, was $10 and $19,
compared to $78 and $238 for the three and six months ended June 30,
2009.
16
A summary
of the status of the restricted stock granted by us as of June 30, 2010, and
changes during the first and second quarters of 2010 is presented
below:
Weighted-Average
|
||||||||
Grant-Date
|
||||||||
Shares
|
Fair Value
|
|||||||
Restricted
shares outstanding, December 31, 2009
|
226,113 | $ | 4.94 | |||||
Shares
granted
|
80,000 | 0.82 | ||||||
Shares
vested
|
(24,148 | ) | ||||||
Shares
forfeited
|
(33,883 | ) | ||||||
Restricted
shares outstanding, June 30, 2010
|
248,082 | 2.41 |
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 June 30, 2010, there was $548 of total
unrecognized compensation cost related to the nonvested restricted
stock. The cost is expected to be recognized over a weighted-average
period of 1.4 years. Compensation expense for restricted stock for
the three and six months ended June 30, 2010, was $87 and $181, compared to $212
and $499 for the three and six months ended June 30, 2009.
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.
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. Weighted average shares of common stock have been
increased for the assumed exercise of stock options and SARs with proceeds used
to purchase treasury stock at the average market price for the
period.
The
following provides a reconciliation of basic and diluted earnings per
share:
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
June 30,
|
June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
income (loss)
|
$ | (9,072 | ) | $ | (48,464 | ) | $ | (61,823 | ) | $ | (76,525 | ) | ||||
Preferred
dividends and discount accretion
|
(1,133 | ) | (1,139 | ) | (2,261 | ) | (1,552 | ) | ||||||||
Net
income (loss) available to common shareholders
|
$ | (10,205 | ) | $ | (49,603 | ) | $ | (64,084 | ) | $ | (78,077 | ) | ||||
Weighted
average common shares outstanding - Basic
|
20,663,626 | 20,714,521 | 20,664,924 | 20,716,728 | ||||||||||||
Incremental
shares related to stock compensation
|
- | - | - | - | ||||||||||||
Average
common shares outstanding - Diluted
|
20,663,626 | 20,714,521 | 20,664,924 | 20,716,728 | ||||||||||||
Earnings
(Loss) per common share - Basic
|
$ | (0.49 | ) | $ | (2.39 | ) | $ | (3.10 | ) | $ | (3.77 | ) | ||||
Effect
of incremental shares related to stock compensation
|
- | - | - | - | ||||||||||||
Earnings
(Loss) per common share - Diluted
|
$ | (0.49 | ) | $ | (2.39 | ) | $ | (3.10 | ) | $ | (3.77 | ) |
Options
to purchase 513,793 shares and 1,433,100 shares were outstanding at June 30,
2010 and 2009, 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.
On
February 27, 2009, we issued 83,586 shares of Fixed Rate Cumulative
Perpetual Preferred Stock, Series B (Treasury Preferred Stock), having a
liquidation amount per share of $1,000, to the U.S. Department of Treasury under
its Capital Purchase Program. We also issued a warrant (Treasury
Warrant) to the Treasury Department to purchase up to 7,418,876 shares (Warrant
Shares) of our common stock at an initial per share exercise price of
$1.69.
17
The
7,418,876 Warrant Shares issuable upon exercise of the Warrant were not included
in the computation of net income per diluted share because the exercise price of
these shares was greater than the average market price of the common shares, and
therefore, antidilutive and due to the net loss.
NOTE
3. SECURITIES
At June
30, 2010, the majority of securities in our investment portfolio were classified
as available for sale.
Trading
securities at June 30, 2010, consisted of four trust preferred securities valued
at $60. During the second quarter of 2010, we recorded trading losses
of $155, compared to trading gains of $235 during the second quarter of
2009.
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
|
|||||||||||||
June
30, 2010
|
||||||||||||||||
U.S.
Treasuries
|
$ | 17,920 | $ | 322 | $ | - | $ | 18,242 | ||||||||
U.S.
Government agencies
|
150 | 5 | - | 155 | ||||||||||||
Collateralized
mortgage obligations:
|
||||||||||||||||
Agency
|
191,145 | 3,081 | 335 | 193,891 | ||||||||||||
Private
label
|
21,605 | - | 869 | 20,736 | ||||||||||||
Mortgage-backed
securities - residential
|
162,021 | 3,250 | - | 165,271 | ||||||||||||
Trust
preferred
|
17,054 | 16 | 6,856 | 10,214 | ||||||||||||
States
& political subdivisions
|
21,795 | 1,401 | 26 | 23,170 | ||||||||||||
Other
securities
|
8,641 | 70 | 4 | 8,707 | ||||||||||||
Total
|
$ | 440,331 | $ | 8,145 | $ | 8,090 | $ | 440,386 |
Gross
|
Gross
|
|||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
December
31, 2009
|
||||||||||||||||
U.S.
Treasuries
|
$ | 8,856 | $ | - | $ | 23 | $ | 8,833 | ||||||||
U.S.
Government agencies
|
277 | 5 | 3 | 279 | ||||||||||||
Collateralized
mortgage obligations:
|
||||||||||||||||
Agency
|
117,930 | 1,624 | 1,123 | 118,431 | ||||||||||||
Private
label
|
25,164 | - | 1,935 | 23,229 | ||||||||||||
Mortgage-backed
securities - residential
|
167,533 | 537 | 838 | 167,232 | ||||||||||||
Trust
preferred
|
17,238 | 10 | 7,210 | 10,038 | ||||||||||||
States
& political subdivisions
|
23,529 | 1,589 | 78 | 25,040 | ||||||||||||
Other
securities
|
8,640 | - | 3 | 8,637 | ||||||||||||
Total
|
$ | 369,167 | $ | 3,765 | $ | 11,213 | $ | 361,719 |
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.
18
June 30, 2010
|
||||||||
Amortized
|
Fair
|
|||||||
Cost
|
Value
|
|||||||
Maturity
|
||||||||
Available-for-sale
|
||||||||
Within
one year
|
$ | 12,171 | $ | 11,921 | ||||
One
to five years
|
92,128 | 92,836 | ||||||
Five
to ten years
|
234,505 | 238,929 | ||||||
Beyond
ten years
|
101,527 | 96,700 | ||||||
Total
|
$ | 440,331 | $ | 440,386 |
Available
for sale securities with unrealized losses at June 30, 2010, 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
|
||||||||||||||||||||||
June 30, 2010
|
Fair Value
|
Unrealized
Losses
|
Fair Value
|
Unrealized
Losses
|
Fair Value
|
Unrealized
Losses
|
||||||||||||||||||
Collateralized
mortgage obligations:
|
||||||||||||||||||||||||
Agency
|
$ | 30,336 | $ | 335 | $ | - | $ | - | $ | 30,336 | $ | 335 | ||||||||||||
Private
Label
|
5,841 | 46 | 14,895 | 823 | 20,736 | 869 | ||||||||||||||||||
Mortgage-backed
securities - residential
|
- | - | - | - | - | - | ||||||||||||||||||
Trust
Preferred
|
3,511 | 203 | 5,686 | 6,653 | 9,197 | 6,856 | ||||||||||||||||||
State
& political subdivisions
|
- | - | 864 | 26 | 864 | 26 | ||||||||||||||||||
Other
securities
|
- | - | 21 | 4 | 21 | 4 | ||||||||||||||||||
Total
|
$ | 39,688 | $ | 584 | $ | 21,466 | $ | 7,506 | $ | 61,154 | $ | 8,090 |
Proceeds
from sales and calls of securities available for sale were $125,083 and $69,389
for the six months ended June 30, 2010 and 2009, respectively. Gross gains of
$3,351 and $1,480 and gross losses of $2 and $0 were realized on these sales and
calls during 2010 and 2009, respectively.
Proceeds
from sales and calls of securities available for sale were $124,543 and $67,379
for the three months ended June 30, 2010 and 2009, respectively. Gross gains of
$3,351 and $1,479 were realized on these sales and calls during 2010 and 2009,
respectively.
Securities
held for trading include trust preferred securities and totaled $60 at June 30,
2010, compared to $36 at December 31, 2009. The net gain on trading
activities included in earnings for 2010 was $24.
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.
When
other-than-temporary impairment occurs for debt securities, the amount of the
other-than-temporary impairment recognized in earnings depends on whether an
entity intends to sell the security or it is more likely than not it will be
required to sell the security before recovery of its amortized cost basis, less
any current-period credit loss. If we intend to sell or it is more
likely than not we will be required to sell the security before recovery of its
amortized cost basis, less any current-period credit loss, the
other-than-temporary impairment shall be recognized in earnings equal to the
entire difference between the investment’s amortized cost basis and its fair
value at the balance sheet date. If we do not intend to sell the
security, and it is not more likely than not that we would be required to sell
the security before recovery of its amortized cost basis, less any
current-period loss, the other-than-temporary impairment shall be separated into
the amount representing the credit loss and the amount related to all other
factors. The amount of the total other-than-temporary impairment
related to other factors is recognized in other comprehensive income, net of
applicable taxes. The previous amortized cost basis less the
other-than-temporary impairment recognized in earnings becomes the new amortized
cost basis of the investment.
19
The
ratings of our pooled trust preferred CDOs that have incurred
other-than-temporary impairment are listed below as of June 30, 2010. This group
of trust preferred securities consist of two pooled trust preferred CDOs
classified as available for sale and four pooled CDOs classified as held for
trading. The ratings of our four single issue trust preferred
securities and private label CMOs are listed below as of June 30, 2010, and at
March 31, 2010. The private label CMOs consist of six issues of which
five were originated in 2003-2004 while one was originated in 2006.
Ratings
Gross
|
Gross
|
||||||||||||||
Amortized
|
Fair
|
Unrealized
|
|||||||||||||
Issuer
|
Cost
|
Value
|
Gains/(Losses)
|
Ratings as of June 30, 2010
|
Ratings as of March 31, 2010
|
||||||||||
Pooled
Trust Preferred CDOs
|
|||||||||||||||
PreTSL
VI
|
724 | 587 | (137 | ) |
Caa1
(Moodys) / CC (Fitch)
|
Caa1
(Moodys) / CC (Fitch)*
|
|||||||||
PreTSL
XIV
|
2,329 | 936 | (1,393 | ) |
Ca
(Moodys) /C (Fitch)
|
Ca
(Moodys) /C (Fitch)*
|
|||||||||
Total
|
$ | 3,053 | $ | 1,523 | $ | (1,530 | ) | ||||||||
Single
Issue Trust Preferred
|
|||||||||||||||
Bank
One Cap Tr VI (JP Morgan)
|
1,000 | 1,016 | 16 |
A2(Moodys)
|
A2(Moodys)
|
||||||||||
First
Citizen Bancshares
|
5,010 | 2,000 | (3,010 | ) |
Non-Rated
|
Non-Rated
|
|||||||||
First
Union Instit Cap I (Wells Fargo)
|
2,991 | 2,925 | (66 | ) |
Baa2(Moodys)/A-(S&P)/A(Fitch)
|
Baa2(Moodys)/A-(S&P)/A(Fitch)
|
|||||||||
Sky
Financial Cap Trust III (Huntington)
|
5,000 | 2,750 | (2,250 | ) |
B(S&P)
|
B(S&P)
|
|||||||||
Total
|
$ | 14,001 | $ | 8,691 | $ | (5,310 | ) | ||||||||
Private
Label CMOs
|
|||||||||||||||
CWHL
2003-58 2A1
|
2,697 | 2,493 | (204 | ) |
Aaa/*-(Moodys)*/AAA(S&P)
|
Aaa(Moodys)/AAA(S&P)
|
|||||||||
CMSI
2004-4 A2
|
1,362 | 1,402 | 40 |
AAA(S&P)/AAA(Fitch)
|
AAA(S&P)/AAA(Fitch)
|
||||||||||
GSR
2003-10 2A1
|
5,887 | 5,841 | (46 | ) |
Aaa/*-(Moodys)*/AAA(S&P)
|
Aaa(Moodys)/AAA(S&P)
|
|||||||||
RAST
2003-A15 1A1
|
4,491 | 4,254 | (237 | ) |
AAA(S&P)/AAA(Fitch)
|
AAA(S&P)/AAA(Fitch)
|
|||||||||
SASC
2003-31A 3A
|
5,227 | 4,942 | (285 | ) |
A1/*-(Moodys)*/AAA(S&P)
|
A1(Moodys)/AAA(S&P)
|
|||||||||
WFMBS
2006-8 A13
|
1,941 | 1,804 | (137 | ) |
B2(Moodys)*/B(Fitch)
|
B3/*-(Moodys)/B(Fitch)
|
|||||||||
Total
|
$ | 21,605 | $ | 20,736 | $ | (869 | ) |
The
ratings above range from highly speculative, defined as equal to or below “Ca”
per Moody’s and “CC” per Fitch and S&P, to the highest credit quality
defined as “Aaa” or “AAA” per the aforementioned rating agencies,
respectively. Changes to the ratings that occurred during the quarter
are denoted with an * and subsequent changes are denoted with a
**. The *- indicates a negative watch.
Pooled Trust Preferred
CDOs
We
incorporated several factors into our determination of whether the CDOs in our
portfolio had incurred other-than-temporary impairment, including review of
current defaults and deferrals, the likelihood that a deferring issuer will
reinstate, recovery assumptions on defaulted issuers, expectations for future
defaults and deferrals and the coupon rate at the issuer level compared to the
coupon on the tranche. We examined the trustee reports to determine
current payment history and the structural support that existed within the CDOs.
We also reviewed key financial characteristics of each individual issuer in the
pooled CDOs. Additionally, we utilized an internal watch list and
near watch list which is updated and reviewed quarterly. Changes are
compared to the prior quarter to determine migration patterns and
direction. This review analyzed capital ratios, leverage ratios,
non-performing loan and non-performing asset ratios.
We also
utilize a third party cash flow analysis that compares the present value of
expected cash flows to the previous estimate to ensure there are no adverse
changes in cash flows during the quarter. This analysis considers the
structure and term of the CDO and the financial condition of the underlying
issuers. The review details the interest rates, principal balances of
note classes and underlying issuers, the timing and amount of interest and
principal payments of the underlying issuers, and the allocation of the payments
to the note classes. The current estimate of expected cash flows is
based on the most recent trustee reports and any other relevant market
information including subsequent announcements of interest payment deferrals or
defaults of underlying trust preferred securities. Assumptions used
in the review include expected future default rates and
prepayments.
We
recognized impairment charges during the second quarter of 2009 on four of our
six pooled CDOs totaling $14,658. Throughout 2009, we noticed
substantial deterioration in the underlying credit quality of four of the six
pooled issuers as deferrals and defaults increased
substantially. Based on the significant decline in the Alesco, Trap
11, Trap 12 and the US Cap CDOs and given our intention to sell these four
securities when it is more economically attractive, we reclassified these
securities as of June 30, 2009, and designated them as trading.
20
During
the second quarter 2010, our review indicated no additional other-than-temporary
impairment had occurred on our available for sale pooled trust preferred
securities. Both of the PreTSL securities experienced little or no
additional credit deterioration during the second quarter
2010. As part of the other-than-temporary impairment review for
PreTSL VI, the cash flow analysis assumed a 10% recovery, lagged for two years
for all issuers except for Bank Atlantic, which incorporates a 20% recovery
lagged for two years. Based on the review of the first quarter 2010
cash flows for PreTSL VI, it shows the cash flow improved quarter-over-quarter,
thus no additional impairment is required. The cash flow analysis for PreTSL XIV
assumes a 10% recovery, lagged for two years on defaults and treats all interest
payment deferrals as defaults. Based on the review of the first
quarter cash flows for PreTSL XIV, it also experienced an improvement in the
cash flow quarter over quarter and as such no additional impairment has
occurred.
Single Issue Trust
Preferred
During
the second quarter of 2009, we took an other-than-temporary impairment charge of
$5,656 on the Colonial BankGroup (CNB) single issue trust preferred security and
subsequently moved it to trading.
With
respect to our single issuer trust preferred securities, we look at rating
agency actions, payment history, the capital levels of the banks, and the
financial performance as filed in regulatory reports. Based on our
second quarter 2010 review, we determined that all four securities were still
performing and, as such, the $5,310 unrealized loss is temporary.
Private Label
CMOs
Factors
utilized in the analysis of the private label CMOs in our portfolio 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 rating
changes to determine if other-than-temporary impairment has
occurred. As of June 30, 2010, five of the six private label CMOs in
our portfolio had unrealized losses for 12 consecutive months.
The
issuers within the portfolio continue to perform according to their contractual
terms. The underlying collateral performance for each of the private
label CMOs has been reviewed. The collateral has seen delinquencies
over 90 days continue to move higher in the second quarter of 2010 with the
exception of two securities (GSR 2003-10 2A1 & RAST 03 A15 1A1), where the
delinquencies over 90 days moved slightly lower than their March 2010 levels.
The reported cumulative loss for all six securities remained low with 0.994%
being the highest. The exposure to the high risk geographies (CA, AZ, NV, and
FL) has experienced little change since our last review. The credit
support for four of the private label CMOs increased during the second quarter
of 2010, while the credit support on all six issues remains higher than the
original credit support percentages.
We also
received a third party review of our private label CMOs. This review
contains a stress test for each security that models multiple scenarios
projecting various levels of delinquencies, loss severity rates and different
liquidation time frames. The purpose of the stress test is to account for
increasingly stressful macroeconomic scenarios that take into consideration
various economic stresses, including but not limited to, home prices, gross
domestic product index, and employment data. Only one of the
securities, WFMBS 2006-8 A13, projected a minimal loss in the extreme
scenario. The findings in this report continue to support our
analysis that there is adequate structural support even under stressed
scenarios. The overall review of the underlying mortgage collateral
for the tranches we own demonstrates it is unlikely that the contractual cash
flows will be disrupted. Therefore, given the performance of these
securities at June 30, 2010, and that it is not our intent to sell these
securities and it is likely that we will not be required to sell the securities
before their anticipated recovery, we concluded that there is no
other-than-temporary impairment. The $869 in unrealized loss was
temporary.
As noted
in the above discussion related to CDOs, including both pooled and single issue
CDOs and the private label CMOs, we determined no other-than-temporary
impairment charge was required for the second quarter of 2010. The
remainder of the securities portfolio continues to perform as
expected.
21
The table
below presents a roll forward of the credit losses recognized in earnings for
the period ended June 30, 2010:
Ending
balance December 31, 2009
|
$ | 315 | ||
Additions
for amounts related to credit loss for which an other-
|
||||
than-temporary
impairment was not previously recognized
|
210 | |||
Reductions
for amounts related to securities for which the company
intends
|
||||
to
sell or that it will be more likely than not that the company will
be
|
||||
required
to sell prior to recovery of amortized cost basis
|
- | |||
Ending
balance June 30, 2010
|
$ | 525 |
NOTE
4. ALLOWANCE FOR LOAN LOSSES
Changes
in the allowance for loan losses were as follows for the three and six months
ended June 30, 2010 and 2009.
SUMMARY OF ALLOWANCE FOR LOAN LOSSES
|
||||||||||||||||
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
June 30,
|
June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Beginning
Balance
|
$ | 101,981 | $ | 78,525 | $ | 88,670 | $ | 64,437 | ||||||||
Loans
charged off
|
(13,334 | ) | (29,194 | ) | (53,447 | ) | (46,830 | ) | ||||||||
Recoveries
|
1,160 | 442 | 1,884 | 772 | ||||||||||||
Provision
for loan losses
|
16,938 | 32,536 | 69,638 | 63,930 | ||||||||||||
Ending
Balance
|
$ | 106,745 | $ | 82,309 | $ | 106,745 | $ | 82,309 | ||||||||
Percent
of total loans (1)
|
5.88 | % | 3.50 | % | 5.88 | % | 3.50 | % | ||||||||
Annualized
% of average loans:
|
||||||||||||||||
Net
charge-offs
|
2.49 | % | 4.80 | % | 5.14 | % | 3.82 | % | ||||||||
Provision
for loan losses
|
3.46 | % | 5.43 | % | 6.95 | % | 5.31 | % |
(1)
Includes loans held for sale for probable branch divestitures in
2010.
The
allowance for loan losses was $106,745 at June 30, 2010, representing 5.88% of
total loans, compared with $88,670 at December 31, 2009, or 4.20% 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 46.2%, compared to 41.3% at
December 31, 2009 and 45.1% at June 30, 2009. At June 30, 2010, we
believe that our allowance appropriately considers incurred losses in our loan
portfolio.
Total
non-performing loans at June 30, 2010, consisting of nonaccrual loans and loans
90 days or more past due, were $231,317, an increase of $16,437 from December
31, 2009. Non-performing loans were 12.75% of total loans, compared
to 10.18% at December 31, 2009, and 7.76% at June 30,
2009. Non-performing assets were 14.35% of total loans and other real
estate owned at June 30, 2010, compared to 11.52% at December 31, 2009 and 8.90%
at June 30, 2009. Both the non-performing loan and non-performing
asset ratios increased during the second quarter primarily as a result of the
sale of performing loans in the United Community Bank (UCB) and The Cecilian
Bank (Cecilian) branch and loan transactions.
While we
currently have the ability and intent to hold for the foreseeable future loans
that are not classified as held for sale, our problem asset disposition strategy
now contemplates a more rapid disposition of our non-performing assets if and
when opportunities arise. We may take advantage of opportunities to
sell, exchange for other assets or accept discounted payoffs where appropriate,
particularly in situations in which we expect it would take several quarters for
values to recover. We believe this more rapid disposition policy for troubled
assets will accelerate our return to profitability and credit quality norms by
providing increased liquidity for redeployment, reduce real estate taxes, legal
fees, and other asset carrying costs, allow for more effective utilization of
our workout team, and reduce our overall staffing costs.
22
Listed
below is a comparison of non-performing assets.
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Nonaccrual
loans
|
$ | 223,476 | $ | 210,753 | ||||
90
days or more past due loans
|
7,841 | 4,127 | ||||||
Total
non-performing loans (1)
|
231,317 | 214,880 | ||||||
Trust
preferred held for trading
|
60 | 36 | ||||||
Other
real estate owned
|
33,706 | 31,982 | ||||||
Total
non-performing assets
|
$ | 265,083 | $ | 246,898 | ||||
Ratios:
|
||||||||
Non-performing
Loans to Loans
|
12.75 | % | 10.18 | % | ||||
Non-performing
Assets to Loans and Other Real Estate Owned
|
14.35 | % | 11.52 | % | ||||
Allowance
for Loan Losses to Non-performing Loans
|
46.15 | % | 41.26 | % |
(1) Includes
non-performing loans classified as loans held for sale
Changes
in other real estate owned were as follows for the three and six months ended
June 30, 2010:
SUMMARY OF OTHER REAL ESTATE OWNED
|
||||||||
Three Months
Ended
|
Six Months
Ended
|
|||||||
June 30, 2010
|
June 30, 2010
|
|||||||
Beginning
Balance
|
$ | 36,173 | $ | 31,982 | ||||
Additions
|
1,085 | 6,687 | ||||||
Sales
|
(3,432 | ) | (4,434 | ) | ||||
Write-downs
|
(81 | ) | (477 | ) | ||||
Other
changes
|
(39 | ) | (52 | ) | ||||
Ending
Balance
|
$ | 33,706 | $ | 33,706 |
The net
gain on sale of other real estate owned was $289 and $223 for the three and six
months ended June 30, 2010.
NOTE
5. FUTURE PLANS AND BRANCH DIVESTITURES
During
the second quarter, we successfully executed several components of the strategic
plan we outlined in the fourth quarter of 2009 to reduce credit risk and improve
our capital ratios. The key components of that plan, and our progress
during the quarter towards executing them, are as follows:
|
·
|
We
continued our exit from the CRE lending line of business. We
are managing our current CRE exposure downward through the sale of
performing and nonperforming loans, discontinuing the generation of new,
material commitments, and providing incentives for customers and
relationship managers to prepay their outstanding loans and increase our
yields. During the second quarter, we completed the sale of two
branch clusters which included the sale of commercial real estate and
other non-branch generated loans. We also completed a separate
sale of commercial real estate loans and successfully obtained early
repayment of three significant participation loans from the originating
bank. We also aggressively pursued loan paydowns and payoffs
through a modest discount program. As a result of these
initiatives, we reduced outstanding commercial real estate loan balances
by $91,054, or 9.9%, from those at March 31, 2010. We also
increased pricing on $13,140 of commercial credits, from low LIBOR based
variable rates, to minimum floor rates of at least 4%, during the
quarter. Existing initiatives to reduce commercial real estate
balances and increase pricing on credits we cannot exit will continue
throughout 2010.
|
23
|
·
|
We
are continuing to narrow our geographic operating footprint through the
sale of multiple branch clusters. During the last half of 2009,
we sold the loans and deposits from five branches, along with other groups
of commercial and CRE loans. During the second quarter of 2010,
we completed branch and loan sales to UCB and Cecilian reducing our
footprint by five branches and shedding $98,057 in deposits and $86,646 in
loans and increasing Integra Bank’s Tier 1 and Total Risk-Based Capital
Ratios by 57 basis points and Tier One Leverage Ratio by 23 basis
points. We have definitive agreements to sell fifteen banking
centers, along with groups of commercial and indirect consumer loans in
three pending transactions. The Bank continues working towards
a third quarter close on the sale of three Indiana branches to First
Security Bank of Owensboro, Inc. (First Security). The other
two pending branch and loan sale transactions are with FNB Bank, Inc.
(FNB) and Citizens Deposit Bank and Trust (Citizens). The First
Security, FNB and Citizens transactions are expected to include
approximately $316,972 in loans and $379,009 in deposits, while generating
deposit premiums of approximately $17,205. These three
transactions are expected to improve Integra Bank’s Tier 1 and Total
Risk-Based Capital Ratios by approximately 300 basis points, while
increasing its Tier 1 Leverage Ratio by approximately 150 basis
points. The transactions are also expected to increase our
Tangible Common Equity to Tangible Assets Ratio by approximately 85 basis
points. The transaction with First Security includes five
Kentucky branches and three Indiana branches, as well as loans from other
offices needed to balance the liquidity impact of those
transactions. The sale of the five Kentucky branches closed on
July 22, 2010, and included loans of $104,929 and deposits of $115,110,
while increasing Integra Bank’s Tier 1 and Total Risk-Based Capital Ratios
by approximately 80 basis points, its Tier 1 Leverage Ratio by 42 basis
points and our Tangible Common Equity to Tangible Assets Ratio by 21 basis
points. The sale of the three Indiana branches to First
Security is expected to close in September 2010, as are the FNB and
Citizens transactions. We have nearly achieved our objective of
narrowing our geographic operating footprint, although we continue to work
with multiple interested buyers for our four branches in the Chicago
market. Excluding that market and after completing the
remaining three announced divestitures, our pro-forma operating footprint
will include approximately forty-five branches within a one-hundred mile
radius of Evansville with a genuine focus on community
banking.
|
|
·
|
We
continue to evaluate multiple alternatives to sell or exchange our
performing and nonperforming CRE loans for cash or other types of
assets. We recently signed a new engagement letter with Keefe,
Bruyette & Woods for advisory services related to the sale of these
assets along with other non-core assets and to also assist with
recapitalization or new capital raising strategies. This
engagement letter also allows for the engagement of certain other advisors
to assist us with specific asset disposition or capital raising
initiatives.
|
|
·
|
During
the second and early third quarters of 2010, we have executed multiple
cost reduction initiatives. Those initiatives included a
reduction in workforce of personnel not included in the branch sale
transactions, along with normal attrition, that is expected to result in
lower annualized personnel costs of approximately $4,000, as well as other
expense reductions. Expense reduction of our back-office
operations is one of the primary components of offsetting the net income
lost as a result of the divested branches. We are reducing our
costs where possible while taking into consideration the resources
necessary to execute the branch divestitures and other strategies,
evaluating remaining terms on existing contracts and identifying expenses
we cannot reduce currently, but expect to be able to in 2011 and 2012,
such as FDIC insurance, examination fees and loan workout and other real
estate owned (OREO) expenses. These efforts will remain
ongoing.
|
|
·
|
We
also maintained a solid liquidity position and maintained “adequately
capitalized” status at Integra Bank. Our efforts in these areas
are ongoing and will continue.
|
|
·
|
We
made significant progress in preparing for the effective date of
Regulation E minimizing its potential impact to our fee
income. On November 12, 2009, the Federal Reserve Board
announced final rules that prohibit financial institutions from charging
consumers fees for paying overdrafts on automated teller machine (ATM) and
one-time debit card transactions. The new rules require
consumers to consent, or opt in, to the overdraft service for these two
types of transactions before fees can be charged. We anticipate
these new rules could significantly impact our non-sufficient funds and
overdraft income the last two quarters of 2010 because of the required
implementation dates of July 1 for new accounts and August 15 for existing
accounts. Our staff is communicating with our customers to educate them on
the various overdraft options.
|
|
·
|
We
made significant progress during the second quarter in the area of credit
quality. More specifically, we saw a lower level of new
non-performing assets and new specific reserves than in recent quarters,
significant improvement in our delinquencies, and much lower levels of
provisions and charge-offs. We also
continued to enhance the staff in our workout group and are pleased with
their progress. Our efforts continue to be focused around
reducing our level of non-performing assets, improving our capital and
liquidity and increasing the operating income of our core community
banking franchise.
|
|
·
|
Finally, we do not expect that
branch and loan sale transactions will result in the Bank achieving the
regulatory capital levels agreed to with the Office of the Comptroller of
the Currency (OCC). We expect that it will be necessary to
raise additional capital by selling common stock or preferred stock in the
private or public markets and restructure other elements of our capital
structure to achieve those levels. There can be no assurance we
will be successful in these
efforts.
|
The June
2010 transaction with UCB included three branches located in Osgood, Versailles
and Milan, Indiana, as well as a pool of commercial and residential mortgage
loans. UCB assumed the deposit liabilities of the three branches and
purchased certain branch-related assets, including loans. There were
$45,913 in loans and $53,057 in deposits sold. The sale generated a
deposit premium of $2,394.
The June
2010 transaction with Cecilian included two branches in Leitchfield and
Hardinsburg, Kentucky, along with a group of CRE loans. Cecilian
assumed the deposit liabilities of the two branches and purchased certain
branch-related assets, including loans. There were $40,733 in loans
and $45,000 in deposits sold. The sale generated a deposit premium of
$1,977.
24
The
following paragraphs outline the pending branch and loan sale transactions that
are expected to close during the third quarter of 2010 and include balances of
loans and deposits as of the announcement date.
On March
3, 2010, we announced a definitive agreement with First Security First Security
to sell five branches located in Bowling Green and Franklin, Kentucky and single
offices located in Paoli, Mitchell and Bedford, Indiana. In addition,
First Security agreed to acquire a pool of indirect consumer, commercial and CRE
loans. First Security agreed to assume approximately $188,200 of
deposit liabilities related to the eight branches and acquire $74,800 of branch
related loans, as well as $38,400 of additional CRE, $2,000 of other commercial
and $56,900 of indirect consumer loans originated in other
offices. The Kentucky branches include approximately $122,400 of
deposits, while the Indiana branches include approximately $65,800 of
deposits. We closed the sale of the Kentucky branches to First
Security on July 22, 2010. The sale of the Kentucky branches resulted
in a deposit premium of $5,758. Each of the owned banking offices and
fixed assets were and are to be sold at book value. The Kentucky
branch transaction had minimal impact on our liquidity position. The
second phase of the First Security transaction, which includes the sale of the
three Indiana branches, is expected to close in September 2010. First
Security has received all required regulatory approvals, subject to certain
contingencies they must meet.
On April
28, 2010, we announced a definitive agreement with FNB to sell three branches
located in Cadiz and Mayfield, Kentucky, along with a pool of commercial,
agricultural, consumer and CRE loans. FNB will assume approximately
$125,000 of deposit liabilities related to the three branches and acquire
$30,100 of branch related loans, as well as $61,200 of additional commercial,
agricultural, consumer and CRE loans selected by FNB originated from other
Integra offices. FNB will pay a 5.30% deposit premium for the deposit
liabilities it assumes and will acquire the loans included in the transaction at
par value. The deposit premium will be paid on total deposits up to a
maximum of $125,000 as of the closing date. The banking offices and
fixed assets will be sold at book value.
On April
29, 2010, we announced a definitive agreement with Citizens to sell branches
located in Maysville and Mt. Olivet, Kentucky and Ripley and Aberdeen,
Ohio. In addition, Citizens has agreed to acquire a pool of
commercial and CRE loans. Citizens will assume approximately $73,400
of deposit liabilities related to the four branches and acquire $18,300 of
branch related loans, as well as $38,100 of additional CRE and $10,600 of other
commercial loans selected by Citizens. Both parties expect that the
transaction will have minimal impact on the liquidity of either
company. In a separate loan purchase agreement, Citizens has also
agreed to purchase $15,000 of additional commercial loans at 98% of their
outstanding principal balance. On June 24, 2010, we sold $8,297 of
commercial loans to Citizens. Citizens will pay a deposit premium for
the deposit liabilities it assumes and will also acquire the commercial and CRE
loans included in the branch sale transaction at par value. The final
deposit premium will be determined at the closing date and is dependent upon the
deposit mix and balances at each of the branches but is estimated to approximate
3.38%. The banking offices and fixed assets will be sold at book
value.
The
pending branch divestitures are summarized in the table below. The
amounts shown for deposits, loans and deposit premium represent our best current
estimates of such items. The deposit premium was calculated by
multiplying the deposits by the premium rate stated in the definitive
agreements. The actual amounts will be determined at closing of the
transactions.
Branch Divestitures
|
||||||||||||||
Announcement
|
Deposit
|
|||||||||||||
Buyer
|
Date
|
Deposits
|
Loans
|
Premium
|
||||||||||
First
Security-KY
|
March
3, 2010
|
$ | 115,110 | $ | 104,929 | $ | 5,758 | |||||||
First
Security-IN
|
March
3, 2010
|
64,079 | 59,340 | 2,280 | ||||||||||
FNB
|
April
28, 2010
|
125,001 | 90,035 | 6,627 | ||||||||||
Citizens
|
April
29, 2010
|
74,819 | 62,668 | 2,540 |
NOTE
6. INCOME TAXES
The
income tax benefit for the first six months of 2010 was $308, which equates to
an effective tax rate of 0%. The zero effective tax rate is a result
of the increase in our income tax valuation allowance on our net deferred tax
asset of $2,238, with $3,669 being recorded to income tax
expense. This brings our total valuation allowance at June 30, 2010,
to $123,872 and represents a continuation of the full valuation allowance
established at December 31, 2009.
25
NOTE
7. DEPOSITS
The
following table shows deposits, including those held for probable branch sales,
by category.
June 30,
2010
|
December 31,
2009
|
|||||||
Deposits:
|
||||||||
Non-interest-bearing
|
$ | 248,291 | $ | 270,849 | ||||
Interest
checking
|
364,064 | 416,635 | ||||||
Money
market accounts
|
259,124 | 249,490 | ||||||
Savings
|
319,452 | 342,453 | ||||||
Time
deposits of $100 or more
|
823,002 | 623,670 | ||||||
Other
interest-bearing
|
458,521 | 462,009 | ||||||
$ | 2,472,454 | $ | 2,365,106 |
As of
June 30, 2010, the scheduled maturities of time deposits are as
follows:
Time
Deposit Maturities
|
||||
2010
|
$ | 423,935 | ||
2011
|
461,347 | |||
2012
|
216,050 | |||
2013
|
90,444 | |||
2014
and thereafter
|
89,747 | |||
Total
|
$ | 1,281,523 |
We had
$449,806 in brokered deposits at June 30, 2010 and $353,050 at December 31,
2009.
NOTE
8. SHORT-TERM BORROWINGS
Short-term
borrowings consist of securities sold under agreements to repurchase and totaled
$66,058 at June 30, 2010 and $62,114 at December 31, 2009.
We must
pledge collateral in the form of mortgage-backed securities or mortgage loans to
secure Federal Home Loan Bank (FHLB) advances. At June 30, 2010, we
had sufficient collateral pledged to satisfy the collateral
requirements.
26
NOTE
9. LONG-TERM BORROWINGS
Long-term
borrowings consist of the following:
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
FHLB
Advances
|
||||||||
Fixed
maturity advances (weighted average rate of 2.83%
and 2.53%
|
||||||||
as
of June 30, 2010 and December 31, 2009, respectively)
|
$ | 114,002 | $ | 126,004 | ||||
Securities
sold under repurchase agreements with maturities
|
||||||||
at
various dates through 2013 (weighted average rate of 4.60%
|
||||||||
and
3.29% as of June 30, 2010 and December 31, 2009,
respectively)
|
80,000 | 80,000 | ||||||
Note
payable, secured by equipment, with a fixed interest rate of
7.26%,
|
||||||||
due
at various dates through 2012
|
2,046 | 2,645 | ||||||
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 | 50,000 | ||||||
Other
|
3,368 | 3,368 | ||||||
Total
long-term borrowings
|
$ | 348,470 | $ | 361,071 |
* Payment
of interest has been deferred since September 2009.
Securities
sold under agreements to repurchase include $80,000 in fixed rate national
market repurchase agreements. A $25,000 variable rate
agreement converted to a 4.565% fixed rate instrument on April 30, 2010. These
repurchase agreements have an average rate of 4.60%, with $30,000 maturing in
2012, and $50,000 maturing in 2013. We borrowed these funds under a
master repurchase agreement. The counterparty to our repurchase agreements is
exposed to credit risk. We are required to pledge collateral for the
repurchase agreement. The amount of collateral pledged June 30, 2010,
included $48,011 in cash and $42,925 in securities.
Also
included in long-term borrowings are $114,002 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 $245,897 of mortgage loans and securities under
collateral agreements at June 30, 2010. Based on this collateral and
our holdings of FHLB stock, we were eligible to borrow additional amounts of
$142,897 at June 30, 2010.
The
floating rate capital securities with a maturity date of July 25, 2031, are
callable at par on July 25, 2011. Unamortized organizational costs
for these securities were $407 at June 30, 2010.
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 $801 at June 30, 2010.
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 call is effective at a premium of 0.785% at
December 15, 2010.
27
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 call at a premium of 0.70% is effective 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.
Subject
to certain exceptions and limitations, we may from time to time defer paying
interest on our subordinated debentures, 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 stock or debt securities that rank junior to the subordinated
debenture. In September 2009, we began deferring interest payments on
all of our subordinated debentures relating to trust preferred
securities. This deferral period could extend through September
2014. The unpaid amounts continue to accrue until paid. We
have also suspended dividend payments on our common and preferred
stock. At June 30, 2010, we have $3,657 of accrued but unpaid
dividends on our preferred stock, which were included in the computation of the
liquidation preference amount on the consolidated balance sheet.
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:
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Commitments
to extend credit
|
$ | 355,759 | $ | 421,908 | ||||
Standby
letters of credit
|
16,280 | 18,419 | ||||||
Non-reimbursable
standby letters of credit and commitments
|
1,557 | 2,014 |
NOTE
11. INTEREST RATE CONTRACTS
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 0.9965% at June 30, 2010. The
swap expires on or prior to January 5, 2016, and had a notional amount of $4,555
at June 30, 2010.
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 customer’s 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.
28
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.
June 30, 2010
|
December 31, 2009
|
|||||||||||||||||||||||
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
|
$ | 7,678 | $ | (8,099 | ) | $ | (421 | ) | $ | 5,963 | $ | (6,307 | ) | $ | (344 | ) | ||||||||
Derivatives
not designated
|
||||||||||||||||||||||||
as
hedging instruments:
|
||||||||||||||||||||||||
Mortgage
banking derivatives
|
389 | (1 | ) | 388 | 91 | (109 | ) | (18 | ) |
Gains
recognized in income and expense on our mortgage rate locks, which are
derivative instruments not designated as hedging instruments, was $238 and $307
for the three and six months ended June 30, 2010. During the three
and six months ended June 30, 2009, we recognized losses of $303 and $95 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.
The
counterparties to our derivatives are exposed to credit risk whenever the
derivatives discussed above are in a liability position. As a result,
we have collateralized the liabilities with securities and cash. We
are required to post collateral to cover the market value of the various
swaps. The amount of collateral pledged to cover the market position
at June 30, 2010 was $12,137.
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.
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.
29
For three months ended June 30, 2010
|
Banking
|
Other
|
Total
|
|||||||||
Interest
income
|
$ | 25,208 | $ | 23 | $ | 25,231 | ||||||
Interest
expense
|
10,558 | 762 | 11,320 | |||||||||
Net
interest income
|
14,650 | (739 | ) | 13,911 | ||||||||
Provision
for loan losses
|
16,938 | - | 16,938 | |||||||||
Other
income
|
16,078 | 47 | 16,125 | |||||||||
Other
expense
|
22,302 | 184 | 22,486 | |||||||||
Earnings
(Loss) before income taxes
|
(8,512 | ) | (876 | ) | (9,388 | ) | ||||||
Income
taxes (benefit)
|
(97 | ) | (219 | ) | (316 | ) | ||||||
Net
income (loss)
|
(8,415 | ) | (657 | ) | (9,072 | ) | ||||||
Preferred
stock dividends and discount accretion
|
- | 1,133 | 1,133 | |||||||||
Net
income (loss) available to common shareholders
|
$ | (8,415 | ) | $ | (1,790 | ) | $ | (10,205 | ) |
For six months ended June 30, 2010
|
Banking
|
Other
|
Total
|
|||||||||
Interest
income
|
$ | 50,813 | $ | 46 | $ | 50,859 | ||||||
Interest
expense
|
20,542 | 1,546 | 22,088 | |||||||||
Net
interest income
|
30,271 | (1,500 | ) | 28,771 | ||||||||
Provision
for loan losses
|
69,638 | - | 69,638 | |||||||||
Other
income
|
23,579 | 136 | 23,715 | |||||||||
Other
expense
|
44,597 | 382 | 44,979 | |||||||||
Earnings
(Loss) before income taxes
|
(60,385 | ) | (1,746 | ) | (62,131 | ) | ||||||
Income
taxes (benefit)
|
(97 | ) | (211 | ) | (308 | ) | ||||||
Net
income (loss)
|
(60,288 | ) | (1,535 | ) | (61,823 | ) | ||||||
Preferred
stock dividends and discount accretion
|
- | 2,261 | 2,261 | |||||||||
Net
income (loss) available to common shareholders
|
$ | (60,288 | ) | $ | (3,796 | ) | $ | (64,084 | ) | |||
Segment
assets
|
$ | 2,963,744 | $ | 6,067 | $ | 2,969,811 |
For three months ended June 30, 2009
|
Banking
|
Other
|
Total
|
|||||||||
Interest
income
|
$ | 31,764 | $ | 35 | $ | 31,799 | ||||||
Interest
expense
|
14,070 | 955 | 15,025 | |||||||||
Net
interest income (loss)
|
17,694 | (920 | ) | 16,774 | ||||||||
Provision
for loan losses
|
32,536 | - | 32,536 | |||||||||
Other
income
|
(9,647 | ) | (1,337 | ) | (10,984 | ) | ||||||
Other
expense
|
28,473 | 696 | 29,169 | |||||||||
Earnings
(Loss) before income taxes
|
(52,962 | ) | (2,953 | ) | (55,915 | ) | ||||||
Income
tax expense (benefit)
|
(6,890 | ) | (561 | ) | (7,451 | ) | ||||||
Net
income (loss)
|
(46,072 | ) | (2,392 | ) | (48,464 | ) | ||||||
Preferred
stock dividends and discount accretion
|
- | 1,139 | 1,139 | |||||||||
Net
income (loss) available to common shareholders
|
$ | (46,072 | ) | $ | (3,531 | ) | $ | (49,603 | ) |
For six months ended June 30, 2009
|
Banking
|
Other
|
Total
|
|||||||||
Interest
income
|
$ | 64,873 | $ | 69 | $ | 64,942 | ||||||
Interest
expense
|
28,665 | 2,020 | 30,685 | |||||||||
Net
interest income (loss)
|
36,208 | (1,951 | ) | 34,257 | ||||||||
Provision
for loan losses
|
63,930 | - | 63,930 | |||||||||
Other
income
|
494 | (5,986 | ) | (5,492 | ) | |||||||
Other
expense
|
57,672 | 970 | 58,642 | |||||||||
Earnings
(Loss) before income taxes
|
(84,900 | ) | (8,907 | ) | (93,807 | ) | ||||||
Income
tax expense (benefit)
|
(16,270 | ) | (1,012 | ) | (17,282 | ) | ||||||
Net
income (loss)
|
(68,630 | ) | (7,895 | ) | (76,525 | ) | ||||||
Preferred
stock dividends and discount accretion
|
- | 1,552 | 1,552 | |||||||||
Net
income (loss)
|
$ | (68,630 | ) | $ | (9,447 | ) | $ | (78,077 | ) | |||
Segment
assets
|
$ | 3,334,386 | $ | 11,876 | $ | 3,346,262 |
30
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.
As of
June 30, 2010, the Bank’s regulatory capital ratios met the minimum capital
adequacy requirements to which it was subject and is considered “adequately
capitalized”. The Bank’s capital ratios fell below the minimum ratios
to be considered “well-capitalized” during the first quarter of
2010.
Because
the Bank is not currently classified as “well-capitalized”, our liquidity is
affected in two ways. Banks that are not “well-capitalized” may not
obtain any new brokered funds as a funding source and are subject to rate
restrictions that limit the amount that can be paid on all types of retail
deposits. The maximum rates we can pay on all types of retail
deposits are limited to the national average rate, plus 75 basis
points. We have compared the rates we are currently paying with the
national rate caps and reduced any rates over the rate cap to fall within those
caps. We have made changes in product design and established a new
source for retail certificates of deposit that we believe will significantly
mitigate the risk associated with deposits we might lose due to the rate
restriction requirement. There has been no material impact to our
deposit balances resulting from the rate caps.
In August
2009, the Bank agreed with the OCC to develop a plan to increase the Bank’s Tier
1 Capital Ratio to at least 8%, and its Total Risk-Based Capital Ratio to at
least 11.5%. At June 30, 2010, these capital ratio requirements were
not met. We do not expect that the Bank will achieve the regulatory
capital ratios we have agreed to with the OCC unless we raise capital by selling
common or preferred stock in the private or public markets and recapitalizing
other elements of our capital structure.
Our
holding company capital ratios are lower than the minimum to be considered
adequately capitalized. The plan we are executing to improve the
Bank's capital ratios is expected to also increase our holding company
regulatory capital ratios. The impact of falling below the adequately
capitalized level at the holding company level does not impact us in the area of
liquidity or result in any additional restrictions or limitations beyond what
already exist.
The
regulatory capital ratios for us and the Bank are shown below.
Regulatory Guidelines
|
Actual
|
|||||||||||||||
Minimum
|
Well-
|
June 30,
|
December 31,
|
|||||||||||||
Requirements
|
Capitalized
|
2010
|
2009
|
|||||||||||||
Integra
Bank Corporation:
|
||||||||||||||||
Total
Capital (to Risk-Weighted Assets)
|
8.00 | % | N/A | 5.47 | % | 9.94 | % | |||||||||
Tier
1 Capital (to Risk-Weighted Assets)
|
4.00 | % | N/A | 2.73 | % | 6.17 | % | |||||||||
Tier
1 Capital (to Average Assets)
|
4.00 | % | N/A | 1.78 | % | 4.43 | % | |||||||||
Integra
Bank N.A.:
|
||||||||||||||||
Total
Capital (to Risk-Weighted Assets)
|
8.00 | % | 10.00 | % | 8.33 | % | 10.05 | % | ||||||||
Tier
1 Capital (to Risk-Weighted Assets)
|
4.00 | % | 6.00 | % | 7.02 | % | 8.76 | % | ||||||||
Tier
1 Capital (to Average Assets)
|
4.00 | % | 5.00 | % | 4.53 | % | 6.30 | % |
31
Item
2. Management's 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. References to the terms
“we”, “us”, “our”, and the “Company” refer to Integra Bank Corporation and its
subsidiaries unless the context indicates otherwise. References to
the “Bank” or “Integra Bank” are to our subsidiary, Integra Bank
N.A.
Loans,
premises and deposits held for pending branch and loan sale transactions are
shown separately in the presentation of the consolidated balance sheet
only. The items that are held for pending branch sales include the
loans, premises and deposits related to the announced sales to First Security
Bank of Owensboro, Inc. (First Security), FNB Bank, Inc. (FNB) and Citizens
Deposit Bank and Trust (Citizens). Each of these transactions is
expected to close during the third quarter of 2010, and therefore, the loans,
premises and deposits from those transactions have been classified as held for
sale.
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 following risks and uncertainties: the results of examinations of us and the
Bank by bank regulatory authorities, including the possibility that any such
regulatory authority may, among other things, institute additional formal or
informal enforcement actions against us or the Bank which could require us to
increase our reserve for loan losses, write-down assets, change our regulatory
capital position or affect our ability to borrow funds or maintain or increase
deposits, which could adversely affect our liquidity and earnings; the
requirements and restrictions that have been imposed on us and the Bank by bank
regulatory authorities and the possibility that we and the Bank will be unable
to fully comply with such undertakings, which could result in the imposition of
additional enforcement actions, requirements or restrictions; our ability to
improve the quality of our assets and maintain an adequate allowance for loan
losses; the adverse impact that the Bank’s capital ratios may have on the
availability of funding sources, including brokered deposits and public funds;
the risks presented by continued unfavorable economic conditions in our market
area, which could continue to adversely affect credit quality, collateral
values, including real estate collateral and OREO properties, investment values,
liquidity and loan originations, reserves for loan losses and charge offs of
loans and loan portfolio delinquency rates; changes in the interest rate
environment that reduce our net interest margin and negatively affect funding
sources; we may be compelled to seek additional capital in the future to augment
capital levels or ratios or improve liquidity, but capital or liquidity may not
be available when needed or on acceptable terms; the impact of our suspension of
dividends on our outstanding preferred stock and deferral of payments on our
subordinated debentures relating to our outstanding trust preferred securities;
our ability to regain compliance with the minimum bid requirement necessary to
retain the listing of our common stock on the Nasdaq Stock Market; competitive
pressures among depository institutions; effects of critical accounting policies
and judgments; changes in accounting policies or procedures as may be required
by the financial institution regulatory agencies or the Financial Accounting
Standards Board; legislative or regulatory changes or actions, including
financial reform legislation, or significant litigation that adversely affects
us or our business; changes to the regulatory capital treatment of our
outstanding trust preferred securities; future legislative or regulatory changes
in the United States Department of Treasury’s Troubled Asset Relief Program
Capital Purchase Program; our ability to attract and retain key personnel; our
ability to secure confidential information through our computer systems and
telecommunications network; and other factors we describe in the periodic
reports and other documents we file with the SEC.
Readers
of this report are cautioned not to place undue reliance on these
forward-looking statements. While we believe the assumptions on which
the forward-looking statements are based are reasonable, there can be no
assurance that these forward-looking statements will prove to be
accurate. This cautionary statement is applicable to all
forward-looking statements contained in this report. We
disclaim any intention or obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise,
except as may be set forth in our periodic reports and our other filings with
the Securities and Exchange Commission.
OVERVIEW
We made
substantive progress in executing our strategic recovery plan during the second
quarter; however, our overall performance has been negatively impacted by the
unfavorable economic conditions that have persisted since 2007 that have
significantly impacted the banking industry and, more specifically, real estate
values and borrowers’ ability to repay outstanding obligations.
During
the second quarter, we successfully executed several components of the strategic
plan we outlined in the fourth quarter of 2009 to reduce credit risk and improve
our capital ratios. The key components of that plan and our progress
during the quarter towards executing them are as follows:
32
|
·
|
We
continued our exit from the commercial real estate (CRE) lending line of
business. We are managing our current CRE exposure downward
through the sale of performing and nonperforming loans, discontinuing the
generation of new, material commitments, and providing incentives for
customers and relationship managers to prepay their outstanding loans and
increase our yields. During the second quarter, we completed
the sale of two branch clusters which included the sale of CRE and other
non-branch generated loans. We also completed a separate sale
of CRE loans and successfully obtained early repayment of three
significant participation loans from the originating bank. We
also aggressively pursued loan paydowns and payoffs through a modest
discount program. As a result of these initiatives, we reduced
outstanding CRE loan balances by $91,054, or 9.9%, from those at March 31,
2010. We also increased pricing on $13,140 of commercial
credits from low LIBOR based variable rates to minimum floor rates of at
least 4% during the quarter.
|
|
·
|
We
are continuing to narrow our geographic operating footprint through the
sale of multiple branch clusters. During the last half of 2009,
we sold the loans and deposits from five branches, along with other groups
of commercial and CRE loans. During the second quarter, we
completed branch and loan sales to United Community Bank (UCB) and The
Cecilian Bank (Cecilian) reducing our footprint by five branches and
shedding $98,057 in deposits and $86,646 in loans and increasing Integra
Bank’s Tier 1 and Total Risk-Based Capital Ratios by 57 basis points and
Tier 1 Leverage Ratio by 23 basis points. We have definitive agreements to
sell another fifteen banking centers, along with groups of commercial and
indirect consumer loans to three parties that are pending. The
Bank continues working towards a third quarter close on the sale of three
Indiana branches to First Security. The other two pending branch and loan
sale transactions are with FNB and Citizens. The First
Security, FNB and Citizens transactions are expected to include
approximately $316,972 in loans and $379,009 in deposits, while generating
deposit premiums of approximately $17,205. These three
transactions are expected to improve Integra Bank’s Tier 1 and Total
Risk-Based Capital Ratios by approximately 300 basis points, while
increasing its Tier 1 Leverage Ratio by approximately 150 basis
points. The transactions are also expected to increase our
tangible common equity to tangible assets ratio by approximately 85 basis
points. The transaction with First Security includes five
Kentucky branches and three Indiana branches, as well as loans from other
offices needed to balance the liquidity impact of those
transactions. The sale of the five Kentucky branches closed on
July 22, 2010, and included loans of $104,929 and deposits of $115,110,
while increasing Integra Bank’s Tier 1 and Total Risk-Based Capital Ratios
by approximately 80 basis points, its Tier 1 Leverage Ratio by 42 basis
points and our Tangible Common Equity to Tangible Assets Ratio by 21 basis
points. The sale of the three Indiana branches to First
Security is expected to close in September 2010, as are the FNB and
Citizens transactions. The loans, premises and equipment for
these three transactions are classified as held for sale at June 30,
2010. We have nearly achieved our objective of narrowing our
geographic operating footprint although we continue to work with multiple
interested buyers for our four branches in the Chicago
market. Excluding that market and after completing the
remaining three announced divestitures, our pro-forma operating footprint
will include approximately forty-five branches within a one-hundred mile
radius of Evansville with a genuine focus on community
banking.
|
|
·
|
We
continue to evaluate multiple alternatives to sell or exchange our
performing and nonperforming CRE loans for cash or other types of
assets. We recently signed a new engagement letter with Keefe,
Bruyette & Woods for advisory services related to the sale of these
assets along with other non-core assets and to also assist with
recapitalization or new capital raising strategies. This
engagement letter also allows for the engagement of certain other advisors
to assist us with specific asset disposition or capital raising
initiatives.
|
|
·
|
During
the second and early third quarters of 2010, we have executed multiple
cost reduction initiatives. Those initiatives included a
reduction in workforce of personnel not included in the branch sale
transactions, along with normal attrition, that is expected to result in
lower annualized personnel costs of approximately $4,000, as well as other
expense reductions. Expense reduction of our back-office
operations is one of the primary components of offsetting the net income
lost as a result of the divested branches. We are reducing our
costs where possible while taking into consideration the resources
necessary to execute the branch divestitures and other strategies,
evaluating remaining terms on existing contracts and identifying expenses
we cannot reduce currently, but expect to be able to in 2011 and 2012,
such as FDIC insurance, examination fees and loan workout and other real
estate owned (OREO) expenses. These efforts will remain
ongoing.
|
|
·
|
We
also maintained a solid liquidity position and maintained “adequately
capitalized” status at Integra Bank. Our efforts in these areas
are ongoing and will continue.
|
|
·
|
We
made significant progress in preparing for the effective date of
Regulation E minimizing its potential impact to our fee
income. On November 12, 2009, the Federal Reserve Board
announced final rules that prohibit financial institutions from charging
consumers fees for paying overdrafts on automated teller machine (ATM) and
one-time debit card transactions. The new rules require
consumers to consent, or opt in, to the overdraft service for these two
types of transactions before fees can be charged. We anticipate
these new rules could significantly impact our non-sufficient funds and
overdraft income the last two quarters of 2010 because of the required
implementation dates of July 1 for new accounts and August 15 for existing
accounts. Our staff is communicating with our customers
to educate them on the various overdraft
options.
|
33
|
·
|
We
made significant progress during the second quarter in the area of credit
quality. More specifically, we saw a lower level of new
non-performing assets and new specific reserves than in recent quarters,
significant improvement in our delinquencies, and much lower levels of
provisions and charge-offs. We also continued to enhance
the staff in our workout group and are pleased with their
progress. Our efforts continue to be focused around reducing
our level of non-performing assets, improving our capital and liquidity
and increasing the operating income of our core community banking
franchise.
|
|
·
|
Finally,
we do not expect that branch and loan sale transactions will result in the
Bank achieving the regulatory capital levels agreed to with the
OCC. We expect that it will be necessary to raise additional
capital by selling common stock or preferred stock in the private or
public markets and restructure other elements of our capital structure to
achieve those levels. There can be no assurance we will be
successful in these efforts.
|
The net
loss available to common shareholders for the second quarter of 2010 was
$10,205, or $0.49 per diluted share, compared to $53,879, or $2.61 per diluted
share for the first quarter of 2010. The provision for loan losses
was $16,938, down $35,762 from $52,700 during the first quarter of 2010, while
net charge-offs for the second quarter totaled $12,174, or 2.49% of total loans
on an annualized basis, a $27,215 decrease from $39,389, or 7.67% of total loans
annualized for the first quarter of 2010. The net interest margin was
2.33% for the second quarter of 2010 compared with 2.40% for the first quarter
of 2010. The second quarter also included deposit premiums of $4,371
and securities gains of $3,351.
The
allowance to total loans plus loans held for sale increased 81 basis points
during the second quarter of 2010, to 5.88% at June 30, 2010, and the allowance
to non-performing loans remained at 46%. The increase in the
allowance for loan losses to total loans and loans held for sale is in part due
to the sale of $86,646 of performing loans in the UCB and Cecilian transactions,
a separate loan sale that included $8,297 of performing loans, $24,235 of
participation loans purchased that we sold back to the originating bank at par,
and other payoffs and paydowns of performing loans. Non-performing
loans increased $9,212 to $231,317, or 12.8% of total loans, compared to
$222,105, or 11.0% of total loans at March 31, 2010. Non-performing
assets were $265,083, an increase of $6,590 from the first quarter of
2010. A decrease in other real estate owned of $2,467 offset a
portion of the increase in non-performing loans.
Net
interest income was $13,911 for the second quarter of 2010, compared to $14,860
for the first quarter of 2010, while the net interest margin decreased to
2.33%. The yield on earning assets increased 6 basis points during
the second quarter of 2010, while liability costs declined by 2 basis
points. The decrease in the net interest margin was in part due
to an increase in average cash levels of $174,556 and rate resets on
$25,000 of structured repurchase agreements, partially offset by a reduction in
net interest reversals of $234 and lower retail funding costs.
Our
provision for loan losses decreased from $52,700 for the first quarter of 2010
to $16,938, while our net charge-offs decreased $27,215 to
$12,174. The provision included the benefit from the branch and loan
sales closed during the second quarter. These sales resulted in a
reduction in our allowance for loan losses of $2,342. While still
significant, the provision for loan losses of $16,938 was the lowest amount for
any quarter since the second quarter of 2008.
Non-interest
income was $16,125 for the second quarter of 2010, compared to $7,590 for the
first quarter. The increase was due to the $4,371 deposit premium,
securities gains of $3,351 and increases of $575 in deposit service charges and
$104 in debit card interchange income.
Non-interest
expense was $22,486 for the second quarter of 2010, compared to $22,493 in the
first quarter. Professional fees increased $1,083, including
increases in legal and investment banking fees.
We
recognized $3,669 of additional valuation allowance expense during the second
quarter of 2010 to offset the tax benefit which resulted from our reported
loss.
Commercial
loan average balances decreased $95,746 in the second quarter of 2010, or 6.1%,
including a decline in CRE and construction and land development loans of
$76,388. CRE, including construction and land development loan
balances at June 30 were $829,468, a reduction of $91,054 or 9.9% from the March
31 balance of $920,522. Low cost deposit average balances decreased
$22,379 during the second quarter of 2010. The decrease was primarily
due to the branch sale transactions which occurred in June and included the sale
of $62,062 in low cost deposits.
Due to
the continued uncertainty in the financial markets, we continued to maintain a
higher level of liquidity during the second quarter of 2010. Cash and
due from bank average balances increased $174,556, or 48.6%, during the second
quarter of 2010 to $533,936. We anticipate reducing the average
balance of cash as we execute our strategic initiatives and improve our capital
ratios.
Integra
Bank’s Total Risk-Based Capital Ratio was 8.33%, an increase of 33 basis points
from March 31, 2010, which maintains Integra Bank’s classification as adequately
capitalized for regulatory purposes at June 30, 2010. The increase
resulted from the branch and loan sales, loan paydowns and securities gains,
partially offset by the quarter’s net loss. Integra Bank’s Tier 1
Risk-Based Capital Ratio increased 31 basis points to 7.02% and its Tier 1
Leverage Ratio decreased 38 basis points to 4.53%. We were not
considered adequately capitalized at the holding company level at both June 30,
2010 and March 31, 2010 and our Tangible Common Equity to Tangible Assets Ratio
declined 17 basis points to (1.46)% during the second quarter of
2010.
34
On
May 20, 2009, the Bank entered into a formal written agreement with the
Office of the Comptroller of the Currency (OCC). Pursuant to the agreement, the
Bank agreed to undertake certain actions within designated timeframes and
operate in compliance with the agreement’s provisions during its term. In August
2009, the Bank agreed with the OCC to develop a plan to increase the Bank’s Tier
1 Capital Ratio to at least 8%, and its Risk-Based Capital Ratio to at least
11.5%. At June 30, 2010, these capital ratio requirements had not
been met. We do not expect that the Bank will achieve the regulatory
capital ratios we have agreed to with the OCC unless we raise additional capital
by selling common or preferred stock in the private or public markets and
recapitalizing other elements of our capital structure.
On May 6,
2010, we entered into a formal written agreement with the Federal Reserve Bank
of St. Louis (the Reserve Bank). Pursuant to the agreement, we agreed to use our
financial and managerial resources to serve as a source of strength to the Bank,
including taking steps to ensure that the Bank complies with its agreement with
the OCC. In addition, the agreement provides that we shall:
|
·
|
not
declare or pay any dividends without the prior approval of the Reserve
Bank and the Director of the Division of Banking Supervision and
Regulation of the Board of Governors of the Federal Reserve System
(Federal Reserve);
|
|
·
|
not
take dividends or any other form of payment representing a reduction in
capital from the Bank without the prior approval of the Reserve
Bank;
|
|
·
|
not
make any distributions of interest, principal, or other sums on
subordinated debentures or trust preferred securities without prior
approval of the Reserve Bank;
|
|
·
|
not
incur, increase, or guarantee any debt without the prior approval of the
Reserve Bank;
|
|
·
|
not
purchase or redeem any shares of our stock without prior approval of the
Reserve Bank;
|
|
·
|
within
60 days of the agreement, submit to the Reserve Bank an acceptable plan to
maintain sufficient capital on a consolidated
basis;
|
|
·
|
within
30 days after the end of any quarter in which any of our capital ratios
fall below the approved capital plan’s minimum ratios, notify the Reserve
Bank of such shortfall and submit an acceptable capital plan detailing
corrective steps for increasing ratios to or above the approved plan’s
minimums;
|
|
·
|
within
60 days of the Agreement, submit to the Reserve Bank a projection of cash
flow for 2010, and then submit projections of cash flow for each
subsequent calendar year at least one month prior to the beginning of such
year;
|
|
·
|
comply
with notice requirements in advance of appointing any new director or
senior executive officer or changing the responsibilities of any senior
executive officer and comply with certain restrictions on indemnification
and severance payments and, within 30 days of the end of each quarter,
submit progress reports to the Reserve Bank detailing the form and manner
of all actions taken to secure compliance with the agreement and the
results thereof along with a parent company-level balance sheet, income
statement, and, as applicable, report of changes in stockholder’s
equity.
|
We
submitted the capital plan and projections of cash flow to the Reserve Bank
within the time period specified in the agreement. We continue to
work closely with both the OCC and Federal Reserve as we execute the strategies
outlined above.
Our plans
for the third and fourth quarters of 2010 include the following:
|
·
|
close
the three pending branch and loan sale transactions with First Security,
FNB and Citizens;
|
|
·
|
negotiate
a definitive agreement to sell our four remaining Chicago branches in the
third quarter and execute that sale during the fourth
quarter;
|
|
·
|
continue
efforts to reduce non-performing assets and our overall credit
exposure;
|
|
·
|
execute
additional expense reduction initiatives to better match our levels of
infrastructure and overhead with our reduced revenue
base;
|
|
·
|
develop
and execute a specific plan and strategy to continue to pursue bulk sales
of performing and non-performing
loans;
|
35
|
·
|
work
with our investment bankers to finalize and execute plans to raise
additional capital by selling common or preferred equity on the private or
public market and recapitalizing other elements of our capital
structure;
|
|
·
|
use
a portion of the new capital to reduce non-performing assets through a
bulk sale to distressed asset buyers and redeem higher cost wholesale
indebtedness; and
|
|
·
|
continue
to market our services to community banking customers in our core market
area that we will serve going forward and make continual adjustments to
increase profitability.
|
CRITICAL
ACCOUNTING POLICIES
There
have been no changes to our critical accounting policies since those disclosed
in the Annual Report on Form 10-K for the year ended December 31,
2009.
NET
INTEREST INCOME
Net
interest income decreased $2,863, or 17.1%, to $13,911 for the three months
ended June 30, 2010, from $16,774 for the three months ended June 30, 2009, and
$5,486, or 16.0%, to $28,771 for the six months ended June 30, 2010, from
$34,257 for the six months ended June 30, 2009. The net interest margin for the
three months ended June 30, 2010, was 2.33% compared to 2.34% for the same three
months of 2009, while the margin for the six months ended June 30, 2010, was
2.36%, as compared to 2.37% for the six months ended June 30,
2009. The yield on earning assets decreased 19 basis points to 4.19%
for the second quarter of 2010, compared to the same quarter in 2009, while the
cost of interest-bearing liabilities decreased 36 basis points to
1.70%.
The
primary components of the changes in margin and net interest income to the
second quarter of 2010, as compared to the second quarter of 2009 were as
follows:
|
·
|
Average
loan yields increased 4 basis points to 4.27% for the quarter ended June
30, 2010, from 4.23% in the quarter ended June 30, 2009, led by an
increase in commercial loan yields, including an increase in loan fees of
14 basis points to 3.75%. The increase in yields for commercial
loans is largely the result of an initiative to increase minimum rates on
new and renewing variable rate loans. At June 30, 2010,
$262,784 of our variable rate commercial loans had interest rate floors of
at least 4.00%, compared to $235,719 at December 31, 2009. At
June 30, 2010, approximately 33% of our variable rate loans are tied to
prime, 56% to LIBOR and 11% to other floating rate
indices. Approximately 55% of all loans were variable rate at
June 30, 2010. The impact of total non-accrual loans on the net
interest margin has continually increased since early 2008, and was 54
basis points for the second quarter of 2010, up from 42 basis points for
the second quarter of 2009. We are asset sensitive, meaning that a change
in prevailing interest rates impacts our assets more quickly than our
liabilities. If rates were to rise, our asset yields should
increase faster and more than the cost of the liabilities funding those
assets, causing our net interest margin to
increase.
|
|
·
|
Average
securities yields decreased 95 basis points to 3.92% due partially to a
shift in securities to lower yielding GNMA securities and U.S. Treasuries,
which carry a zero percent risk weight, reducing the amount of our
risk-weighted assets and improving our risk-based capital
ratios.
|
|
·
|
Average
earning assets decreased $530,715, or 17.9%, as average loans decreased
$443,052. This decrease was partially caused by the 2009 and
2010 branch and loan sales and other paydowns and payoffs, as well as by
charge-offs.
|
|
·
|
The
decline in interest rates since 2008 resulted in lower liabilities costs.
The average rate paid on interest bearing liabilities was 1.70% for the
second quarter of 2010, a 36 basis point decline from the second quarter
of 2009. Time deposit rates declined 66 basis points, money
market rates declined 39 basis points, and savings deposit rates decreased
87 basis points. The average rate paid on short-term sources of
funds other than time and transaction deposits, which include repurchase
agreements, FHLB advances and other sources, decreased from 0.92% to 0.33%
for the quarter ended June 30, 2010, as compared to the quarter ended June
30, 2009. Decreases in these funding sources included $90,000
in short-term FHLB borrowings, $81,044 in Term Auction Facility (TAF)
borrowings and $17,634 in customer repurchase agreements. The reset of
variable rate structured repurchase agreements to a higher fixed rate and
the maturity of a lower rate long-term FHLB advance increased the cost of
long-term borrowings to 3.16% for the second quarter of
2010.
|
36
AVERAGE
BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
For Three Months Ended June 30,
|
2010
|
2009
|
||||||||||||||||||||||
Average
|
Interest
|
Yield/
|
Average
|
Interest
|
Yield/
|
|||||||||||||||||||
|
Balances
|
& Fees
|
Cost
|
Balances
|
& Fees
|
Cost
|
||||||||||||||||||
EARNING ASSETS: | ||||||||||||||||||||||||
Short-term
investments
|
$ | 49,548 | $ | 327 | 2.65 | % | $ | 574 | $ | 174 | 121.50 | % | ||||||||||||
Loans
held for sale
|
2,980 | 32 | 4.24 | % | 10,493 | 127 | 4.86 | % | ||||||||||||||||
Securities
|
390,958 | 3,833 | 3.92 | % | 517,244 | 6,296 | 4.87 | % | ||||||||||||||||
Regulatory
Stock
|
26,299 | 186 | 2.83 | % | 29,137 | 157 | 2.15 | % | ||||||||||||||||
Loans
|
1,961,016 | 21,025 | 4.27 | % | 2,404,068 | 25,598 | 4.23 | % | ||||||||||||||||
Total
earning assets
|
2,430,801 | $ | 25,403 | 4.19 | % | 2,961,516 | $ | 32,352 | 4.38 | % | ||||||||||||||
Allowance
for loan loss
|
(108,251 | ) | (81,217 | ) | ||||||||||||||||||||
Other
non-earning assets
|
690,015 | 633,110 | ||||||||||||||||||||||
TOTAL
ASSETS
|
$ | 3,012,565 | $ | 3,513,409 | ||||||||||||||||||||
INTEREST-BEARING
LIABILITIES:
|
||||||||||||||||||||||||
Deposits
|
||||||||||||||||||||||||
Savings
and interest-bearing demand
|
$ | 748,824 | $ | 974 | 0.52 | % | $ | 708,583 | $ | 1,742 | 0.99 | % | ||||||||||||
Money
market accounts
|
263,080 | 659 | 1.00 | % | 336,338 | 1,169 | 1.39 | % | ||||||||||||||||
Certificates
of deposit and other time
|
1,244,306 | 6,850 | 2.21 | % | 1,237,139 | 8,848 | 2.87 | % | ||||||||||||||||
Total
interest-bearing deposits
|
2,256,210 | 8,483 | 1.51 | % | 2,282,060 | 11,759 | 2.07 | % | ||||||||||||||||
Short-term
borrowings
|
62,608 | 52 | 0.33 | % | 251,287 | 583 | 0.92 | % | ||||||||||||||||
Long-term
borrowings
|
348,617 | 2,785 | 3.16 | % | 388,201 | 2,683 | 2.73 | % | ||||||||||||||||
Total
interest-bearing liabilities
|
2,667,435 | $ | 11,320 | 1.70 | % | 2,921,548 | $ | 15,025 | 2.06 | % | ||||||||||||||
Non-interest
bearing deposits
|
260,820 | 293,369 | ||||||||||||||||||||||
Other
noninterest-bearing liabilities and shareholders' equity
|
84,310 | 298,492 | ||||||||||||||||||||||
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
$ | 3,012,565 | $ | 3,513,409 | ||||||||||||||||||||
Interest
income/earning assets
|
$ | 25,403 | 4.19 | % | $ | 32,352 | 4.38 | % | ||||||||||||||||
Interest
expense/earning assets
|
11,320 | 1.86 | % | 15,025 | 2.04 | % | ||||||||||||||||||
Net
interest income/earning assets
|
$ | 14,083 | 2.33 | % | $ | 17,327 | 2.34 | % |
Tax
exempt income presented on a tax equivalent basis based on a 35% federal tax
rate.
Federal
tax equivalent adjustments on securities are $118 and $444 for 2010 and 2009,
respectively.
Federal
tax equivalent adjustments on loans are $54 and $109 for 2010 and 2009,
respectively.
37
AVERAGE
BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
For Six Months Ended June 30,
|
2010
|
2009
|
||||||||||||||||||||||
Average
|
Interest
|
Yield/
|
Average
|
Interest
|
Yield/
|
|||||||||||||||||||
|
Balances
|
& Fees
|
Cost
|
Balances
|
& Fees
|
Cost
|
||||||||||||||||||
EARNING ASSETS: | ||||||||||||||||||||||||
Short-term
investments
|
$ | 49,653 | $ | 546 | 2.22 | % | $ | 535 | $ | 267 | 100.63 | % | ||||||||||||
Loans
held for sale
|
2,585 | 58 | 4.48 | % | 9,426 | 230 | 4.88 | % | ||||||||||||||||
Securities
|
377,545 | 7,497 | 3.97 | % | 538,308 | 13,313 | 4.95 | % | ||||||||||||||||
Regulatory
Stock
|
27,501 | 407 | 2.98 | % | 29,146 | 678 | 4.65 | % | ||||||||||||||||
Loans
|
2,021,223 | 42,697 | 4.22 | % | 2,429,947 | 51,659 | 4.24 | % | ||||||||||||||||
Total
earning assets
|
2,478,507 | $ | 51,205 | 4.16 | % | 3,007,362 | $ | 66,147 | 4.43 | % | ||||||||||||||
Allowance
for loan loss
|
(100,708 | ) | (74,077 | ) | ||||||||||||||||||||
Other
non-earning assets
|
599,085 | 573,656 | ||||||||||||||||||||||
TOTAL
ASSETS
|
$ | 2,976,884 | $ | 3,506,941 | ||||||||||||||||||||
INTEREST-BEARING
LIABILITIES:
|
||||||||||||||||||||||||
Deposits
|
||||||||||||||||||||||||
Savings
and interest-bearing demand
|
$ | 754,773 | $ | 2,264 | 0.60 | % | $ | 663,916 | $ | 3,107 | 0.94 | % | ||||||||||||
Money
market accounts
|
261,294 | 1,333 | 1.03 | % | 331,346 | 2,346 | 1.43 | % | ||||||||||||||||
Certificates
of deposit and other time
|
1,171,626 | 12,988 | 2.24 | % | 1,255,841 | 18,493 | 2.97 | % | ||||||||||||||||
Total
interest-bearing deposits
|
2,187,693 | 16,585 | 1.53 | % | 2,251,103 | 23,946 | 2.15 | % | ||||||||||||||||
Short-term
borrowings
|
61,653 | 97 | 0.32 | % | 306,671 | 1,346 | 0.87 | % | ||||||||||||||||
Long-term
borrowings
|
354,148 | 5,406 | 3.04 | % | 371,382 | 5,393 | 2.89 | % | ||||||||||||||||
Total
interest-bearing liabilities
|
2,603,494 | $ | 22,088 | 1.71 | % | 2,929,156 | $ | 30,685 | 1.98 | % | ||||||||||||||
Non-interest
bearing deposits
|
265,999 | 293,471 | ||||||||||||||||||||||
Other
noninterest-bearing liabilities and shareholders' equity
|
107,391 | 284,314 | ||||||||||||||||||||||
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
$ | 2,976,884 | $ | 3,506,941 | ||||||||||||||||||||
Interest
income/earning assets
|
$ | 51,205 | 4.16 | % | $ | 66,147 | 4.43 | % | ||||||||||||||||
Interest
expense/earning assets
|
22,088 | 1.80 | % | 30,685 | 2.06 | % | ||||||||||||||||||
Net
interest income/earning assets
|
$ | 29,117 | 2.36 | % | $ | 35,462 | 2.37 | % |
Tax
exempt income presented on a tax equivalent basis based on a 35% federal tax
rate.
Federal
tax equivalent adjustments on securities are $238 and $987 for 2010 and 2009,
respectively
Federal
tax equivalent adjustments on loans are $108 and $218 for 2010 and 2009,
respectively.
NON-INTEREST
INCOME
Non-interest
income increased $27,109 to $16,125 for the quarter ended June 30, 2010,
compared to $(10,984) from the second quarter of 2009. Major
contributors to the increase in non-interest income from the second quarter of
2009 to the second quarter of 2010 are as follows:
|
·
|
An
other-than-temporary impairment (OTTI) charge of $20,314 was taken during
the second quarter of 2009 on six securities, compared to no charge taken
during the second quarter of 2010.
|
|
·
|
The
second quarter of 2010 includes $3,351 of gains on sale of securities,
compared to $1,479 during the second quarter of
2009.
|
|
·
|
Deposit
premiums received from the sales of five branch locations during the
second quarter of 2010 totaled $4,371; however, deposit service charges
declined by $476, in part, due to the impact on those fees from these
sales, as well as the sales of five other branches in the fourth quarter
of 2009. Despite the lower number of branches, debit card
interchange fees increased $41.
|
|
·
|
The
second quarter of 2009 included a $1,407 reduction to non-interest income
reflecting a non-tax deductible mark-to-market adjustment for the warrant
issued to the U.S. Department of Treasury under the Capital Purchase
Program (Treasury Warrant). The Treasury Warrant was reflected as a
liability at March 31, 2009, 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. The second quarter fair
value adjustment reflects the change in value of the Treasury Warrant from
March 31, 2009, through the date it was reclassified to
equity.
|
38
|
·
|
Gain
on sale of fixed assets increased $460 during the second quarter of 2010,
which included a gain of $456 from the sale of five branch
locations. This was partially offset by a $267 increase in
losses on sale of other real estate owned (OREO)
properties.
|
|
·
|
The
second quarter of 2010 included trading losses of $155, compared to
trading gains of $235 during the second quarter of
2009.
|
Non-interest
income for the six months ended June 30, 2010, was $23,715, an increase of
$29,207 from the six months ended June 30, 2009. The primary
components of the difference include: a decrease in OTTI charges of $21,274; the
fair value adjustment in 2009 on the Treasury Warrant of $6,145; an increase in
gains on the sale of securities of $1,870; the difference in gains on the sale
of branches during 2010 totaling $4,371 versus gains in 2009 of $2,549; a
decrease in bank-owned life insurance of $1,052 resulting from our decision to
sell or surrender the majority of our polices in 2009; an increase of $458 in
gains on the sale of fixed assets; declines in deposit service charges of $904;
a decrease in trading income of $211; and a decrease of $147 in gains and losses
on OREO properties.
NON-INTEREST
EXPENSE
Non-interest
expense decreased $6,683, or 22.9%, to $22,486 for the quarter ended June 30,
2010, compared to $29,169 for the second quarter of 2009. Major
contributors to the decrease in non-interest expense from the second quarter of
2009 to the second quarter of 2010 are as follows:
|
·
|
A
decline in personnel expense of $2,661, including decreases in salaries of
$1,880, severance of $472 and stock-based compensation of
$195. These decreases are primarily due to the reduction in
workforce that occurred during the second quarter of 2009 as part of our
profit improvement program, along with the staff reduction resulting from
the branch and loan sales occurring in the third and fourth quarters of
2009.
|
|
·
|
During
the second quarter of 2009, we incurred debt prepayment penalties of
$1,511. The penalties were incurred when we repaid a $20,000
structured repurchase agreement prior to
maturity.
|
|
·
|
Professional
fees increased $719, or 35.0%, consisting of higher legal fees of $601 and
consulting fees of $281.
|
|
·
|
FDIC
insurance premiums decreased $667 to $2,338, as a special 5 basis point
assessment totaling $1,623 expensed during the second quarter of 2009 was
partially offset by higher rates during the second quarter of
2010.
|
|
·
|
State
and local franchise taxes decreased $451 due to the disposition of offices
in jurisdictions which impose franchise type
taxes.
|
|
·
|
Loan
and other real estate owned expenses decreased $484 to $1,404, including
other real estate owned related costs of $284, $101 of other real estate
owned write-downs, and decreases in loan collection costs of
$99. 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.
|
|
·
|
Occupancy
expense decreased $378 as the number of branch locations declined with the
branch divestitures.
|
Non-interest
expense for the six months ended June 30, 2010, was $44,979, a decrease of
$13,663, or 23.3% from the six months ended June 30, 2009. The
primary components of the difference include lower personnel expenses of $5,538,
including salaries of $3,558, severance of $593, stock-based compensation of
$538 and 401(k) expense of $231; a decrease in loan and other real estate owned
expenses of $4,335; debt prepayment penalties of $1,511 occurring in 2009; a
decrease in occupancy expense of $841; a decrease in FDIC insurance of $426; and
a decrease in bank share taxes of $364. These decreases were
partially offset by an increase of $682 in professional fees, which included
increases of $704 for legal expense and $211 for consulting
expense.
INCOME
TAX BENEFIT
Income
tax benefit was $316 and $308 for the three months and six months ended June 30,
2010, respectively, compared to $7,451 and $17,282 for the same period in 2009.
The tax benefit includes a favorable adjustment recognized on an amended return
which was filed during the period.
The
effective tax rate for the second quarter of 2010 was 3.4%, compared to 13.3%
for the second quarter 2009. The decrease in the effective tax rate
resulted from the continuation of a full valuation allowance established on
deferred tax assets at December 31, 2009.
39
FINANCIAL
POSITION
Total
assets at June 30, 2010, were $2,969,811, compared to $2,921,941 at December 31,
2009.
SECURITIES
AVAILABLE FOR SALE AND TRADING 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 $440,386 at June 30, 2010, compared to
$361,719 at December 31, 2009, and are recorded at their fair market
values. The fair value of securities available for sale on June 30,
2010, was $55 higher than the amortized cost, as compared to $7,448 lower at
December 31, 2009. There was no OTTI on securities recognized during
the second quarter of 2010. Additional information on OTTI is
provided in Note 3 of the Notes to the unaudited consolidated financial
statements in this report.
Trading
securities at June 30, 2010, consist of four pooled trust preferred securities
valued at $60. During the second quarter of 2010, we recorded net
trading losses of $155.
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 $26,299 at June 30, 2010,
compared to $29,124 at December 31, 2009.
LOANS
HELD FOR SALE
Loans
held for sale consist of residential mortgage loans sold to the secondary market
and are valued at the lower of cost or market in the aggregate. Loans
held for probable branch sales are included in this total on the Consolidated
Balance Sheet.
LOANS
Loans,
including those held for sale in announced branch divestitures, at June 30,
2010, totaled $1,814,078, compared to $2,110,348 at year-end 2009, reflecting a
decrease of $296,270, or 14.0%. Decreases in CRE and construction and
land development loans of $135,723, commercial, industrial and agricultural
loans (C&I) of $88,306, residential mortgage loans of $40,859, consumer
loans of $13,999, and home equity lines of credit (HELOC) loans of $12,124 came
from the branch and loan sales occurring during June 2010, as well as additional
initiatives to receive paydowns or payoffs of other CRE loans. The
loan and branch sale transactions, which occurred during the second quarter,
included $28,255 of CRE, $552 of construction and land development, $24,407 of
C&I, $27,281 of residential mortgage, $3,966 of consumer and $10,308 of
HELOC loans.
Loans
held for sale include loans expected to be sold in probable third quarter branch
divestitures totaling $316,972.
Residential
mortgage loan average balances declined $10,008, or 26.2% on an annualized basis
during the second quarter of 2010. We expect the balance of
residential mortgage loans will continue to decline, because we sell the
majority of new originations to a private label provider on a servicing released
basis. We evaluate our counterparty risk with this provider on a
quarterly basis by reviewing their financial results and the potential impact to
our relationship 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 sub prime or Alt-A mortgages, option adjustable rate mortgages or
any other exotic mortgage products. 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
portion of our portfolio and the coverage amount typically does not exceed 10%
of the loan balance.
HELOC
loan average balances decreased $4,500, or 11.0% annualized from the first
quarter 2010. HELOC loans are generally collateralized by a second
mortgage on the customer’s primary residence. Approximately $10,308
of HELOC loans were included in the loan and branch sales in
June. HELOC loans were $150,810 at June 30, 2010, compared to
$162,934 at December 31, 2009.
The
average balance of indirect consumer loans declined $4,286, or 28.4% annualized
during the second quarter of 2010, 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 June 30, 2010, were $54,010 compared
to $62,062 at December 31, 2009. The average balance of direct
consumer loans decreased $6,456, or 18.3% annualized during the second quarter
of 2010.
40
Commercial
loan average balances for the second quarter of 2010 decreased $95,746, or 24.6%
annualized from the first quarter of 2010, and included a decrease in CRE,
including commercial construction and land development loans of $76,388, or
26.5% annualized. C&I loan average balances decreased $19,358, or
19.1% annualized. Approximately $28,807 of CRE including commercial
construction and land development loans, and $24,407 of C&I loans were
included in the branch and loan sales during the second quarter of
2010. In addition, $24,235 of CRE participation loans were sold back
to the originating bank at par in late June 2010. CRE loan balances,
including construction and land development loans, were $829,468 at June 30,
2010, $91,054, or 9.9% less than at March 31, 2010.
Our
non-owner occupied CRE portfolio was previously managed as three distinct
areas. The largest portion was managed out of our team headquartered
in Greater Cincinnati, Ohio, as our CRE line of business. The next
largest portion of the CRE portfolio was managed by our Chicago
region. The remainder of the CRE portfolio was managed in various
areas within the core bank franchise. The entire CRE portfolio is now
managed under the direction of our Evansville-based management
team. This has provided a more efficient collection effort as we have
utilized dedicated workout officers to assist with this effort. Our
largest property-type concentration is in retail projects at $220,208, or 26.3%,
of the total CRE portfolio, which includes direct loans and participations in
larger loans primarily for stand-alone retail buildings for large national or
regional retailers. Our second largest concentration is multi-family
at $148,283, or 17.7%, of the total CRE portfolio. Our third largest
concentration is for land acquisition and development at $124,944, or 14.9%, of
the total, which represents both commercial development and residential
development. Finally, our fourth largest concentration at $99,834, or
11.9%, is to the single-family residential and construction category, 64.9% of
which is in the Chicago region. No other category exceeds 9% of the
CRE portfolio. Of the total non-owner occupied CRE portfolio,
$388,814, or 46.4%, is classified as construction. At June 30, 2010,
$620,180, or 74.1%, of the CRE portfolio is located within our four core market
states of Indiana, Kentucky, Illinois and Ohio. The three largest
concentrations outside of our core market states are $49,605, or 6.0%, located
in Florida, $24,047, or 2.9%, located in Georgia, and $22,659, or 2.7%, located
in Tennessee. Non-owner occupied CRE non-performing loans in our core
market states totaled $148,427 at June 30, 2010, with another $29,155 located in
Florida, and $13,551 located in Georgia. Non-performing loans
totaling $2,833 and $2,746 at June 30, 2010, were located in North and South
Carolina respectively, in which they had $19,640 and $3,816 of loans
outstanding. The majority of projects located outside of our
core market states are with developers based in, or having previous connections
to, our core market states when these loans were originated that developed or
are developing properties in other states. We do not provide non-recourse
financing.
The
reduction in the size of our loan portfolio from loan sales, branch divestitures
and the planned decline in our indirect consumer and residential mortgage loan
portfolios, has impacted our level of concentration risk. The balance
in our non-owner occupied CRE portfolio was $837,114, or 46.1%, of the total
portfolio at June 30, 2010, compared to $978,927, or 46.4%, at December 31,
2009. We expect to continue to see balance reductions
resulting from our previously stated portfolio reduction initiatives in our
non-owner occupied CRE.
The rapid
increase of our non-owner occupied CRE portfolio began in 2007 and was partially
accelerated due to the disruption of the permanent financing market, and the
acquisition of Prairie Financial Corporation in the spring of 2007, which
further increased our concentration in non-owner occupied CRE. During the third
quarter of 2008, we discontinued pursuing new CRE opportunities, regardless of
property type, as additional stress of this market became
apparent. We are exiting the CRE line of business
altogether. We will continue to reduce our current CRE exposure
through the sale of performing and nonperforming loans, not make any new
commitments, and incent our customers and relationship managers to reduce their
outstandings ahead of their prescribed maturities, while increasing our yields
as pricing opportunities arise. This effort includes pursuing payoffs from lead
banks from whom we have purchased participating interests in
loans. This effort resulted in paydowns of three loans totaling
$24,235 during the second quarter of 2010. We continue to strengthen
our Evansville-based workout team while reducing the number of production based
CRE lenders within our Chicago and Cincinnati area offices, or moving them to
workout roles or specific roles designed to manage existing relationships and
receive paydowns and payoffs.
CRE loan
balances in Chicago were $206,822 at June 30, 2010, compared to $233,437 at
December 31, 2009. CRE balances from our team in the Greater
Cincinnati, Ohio area were $620,763 at June 30, 2010, compared to $735,055 at
December 31, 2009.
Loans
delinquent 30-89 days were $28,584, or 1.58% of our portfolio at June 30, 2010,
compared to $32,352, or 1.61% at March 31, 2010, and $20,605, or 0.98% at
December 31, 2009. Delinquent loans include $7,118 of CRE loans, or 0.68% of
that portfolio, $17,287 of C&I loans, or 5.60% of that portfolio, $967 of
residential mortgage loans, or 0.76% of that portfolio, and $3,212 of consumer
and home equity loans, or 0.95% of that portfolio. Of the delinquent
CRE loans, $686, or 9.64%, are located in the Chicago region. Of the $28,584 in
30-89 day past dues, $12,571 was to one C&I borrower which was a maturity
driven participation delinquency scheduled to be paid in full during the third
quarter by other financial institutions as arranged by the lead
bank. This represented 69 basis points of our total
delinquencies.
The Bank
has established a committee to oversee OREO for property acquired from
foreclosures, which is managed by an experienced property manager from our
facilities management group. The purpose of the OREO committee is to
manage these properties and assist in their rapid disposition. In
addition, we have established an OREO link on our web site to further assist in
the sale and marketing of these properties.
41
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
$37,900 at June 30, 2010. Of this amount, $6,388, or 16.85%, was
classified as non-performing.
LOAN PORTFOLIO
|
||||||||
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Commercial,
industrial and agricultural loans
|
$ | 514,300 | $ | 602,606 | ||||
Economic
development loans and other obligations of state and political
subdivisions
|
13,214 | 14,773 | ||||||
Lease
financing
|
1,879 | 5,579 | ||||||
Commercial
mortgages
|
535,372 | 583,123 | ||||||
Construction
and development
|
294,096 | 382,068 | ||||||
Residential
mortgages
|
191,940 | 232,799 | ||||||
Home
equity lines of credit
|
150,810 | 162,934 | ||||||
Consumer
loans
|
112,467 | 126,466 | ||||||
Loans,
net of unearned income
|
$ | 1,814,078 | $ | 2,110,348 |
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 borrower’s 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 $106,745 at June 30, 2010, representing 5.88% of
total loans plus loans classified as held for sale for the potential branch
divestitures, compared with $101,981 at March 31, 2010, representing 5.07% of
total loans, and $88,670 at December 31, 2009, or 4.20% of total
loans. The allowance for loan losses to non-performing loans ratio
was 46.1%, compared to 45.9% at March 31, 2010, and 41.3% at December 31,
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. At June 30, 2010, we believe that our allowance
appropriately considers the incurred loss in our loan portfolio. The
provision for loan losses was $16,938 for the three months ended June 30, 2010,
and $69,638 for the six months ended June 30, 2010, compared to $32,536 and
$63,930 for the three and six months ended June 30, 2009.
The
provision for loan losses of $16,938 exceeded net charge-offs of $12,174 by
$4,764 during the second quarter of 2010. Annualized net charge-offs
to average loans were 2.49% for the quarter, compared to 4.80% for the second
quarter of 2009. Net charge-offs during the second quarter of 2010
included $11,408 of CRE loans, $(122) of C&I loans, $262 of HELOC loans,
$248 of indirect consumer loans and $100 for direct consumer loans, while the
remaining $278 came from various other loan categories. Charge-offs
from the Chicago region totaled $3,665, while charge-offs from the CRE line of
business totaled $7,603. The majority of these charge-offs relate to
the residential development and construction area. The largest
charge-off this quarter was for a partial charge down of $3,387 secured by a CRE
construction project for mixed use retail and office purposes located in
Georgia. The second largest charge-off was another partial charge down of $1,408
which was secured by a multi-family CRE property located in Kentucky. The third
largest charge-off was for $1,038 and was associated with a retail CRE
development in the state of Florida. More than 50% of our charge-offs during the
second quarter of 2010 were covered by specific reserves within the allowance
for loan losses at March 31, 2010. The $12,174 in net charge-offs
represent the lowest level since the third quarter of 2008 and the provision for
loan losses of $16,938 was the lowest since the second quarter of
2008. The provision for loan losses and allowance for loan losses
were reduced by $2,342 for the excess of the recorded allowance over the
discount, if any, for loans sold that were included in the two branch and loan
sales which occurred during the second quarter of 2010.
42
SUMMARY OF ALLOWANCE FOR LOAN LOSSES
|
||||||||||||||||
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
June 30,
|
June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Beginning
Balance
|
$ | 101,981 | $ | 78,525 | $ | 88,670 | $ | 64,437 | ||||||||
Loans
charged off
|
(13,334 | ) | (29,194 | ) | (53,447 | ) | (46,830 | ) | ||||||||
Recoveries
|
1,160 | 442 | 1,884 | 772 | ||||||||||||
Provision
for loan losses
|
16,938 | 32,536 | 69,638 | 63,930 | ||||||||||||
Ending
Balance
|
$ | 106,745 | $ | 82,309 | $ | 106,745 | $ | 82,309 | ||||||||
Percent
of total loans (1)
|
5.88 | % | 3.50 | % | 5.88 | % | 3.50 | % | ||||||||
Annualized
% of average loans:
|
||||||||||||||||
Net
charge-offs
|
2.49 | % | 4.80 | % | 5.14 | % | 3.82 | % | ||||||||
Provision
for loan losses
|
3.46 | % | 5.43 | % | 6.95 | % | 5.31 | % |
(1)
Includes loans held for sale for probable branch divestitures in
2010.
At June
30, 2010, a relationship with a total balance of $15,538 to a Chicago area
builder secured by a commercial construction project for land acquisition
purposes was our largest non-performing loan. The second largest non-performing
loan or relationship had a balance of $13,551, after charge-offs of $6,887, and
is secured by a real estate project for mixed use retail and office space
located in Georgia. The third largest non-performing relationship was with a
developer in the Chicago area that had an outstanding balance of $12,995, after
charge-offs of $3,091 and is secured by a residential
development. The fourth largest non-performing loan is secured by
undeveloped raw land located in Florida and had a balance of
$9,900.
The
majority of the remainder of our commercial non-performing loans is secured by
one or more residential properties arising from our Chicago region or CRE line
of business, typically at an 80% or less loan-to-value ratio at
inception. The Chicago residential real estate market has continued
to experience less sales activity than we originally anticipated. The
Case-Schiller index of residential housing values shows a decline in the value
of Chicago single-family residential properties of 29.3% from the peak of the
index in September 2006 to the most recent index for April, as published in
June. The Zillow index for the first quarter of 2010 shows a decline
of 28.8% from its peak during the second quarter of 2006. On a
year-over-year basis, the Zillow index shows a decline of 11.7% for all homes,
with a 16.2% decline for single-family housing and a 9.4% decline for
condominiums. Information we gained by reviewing new appraisals for
existing loans has been consistent generally with the declines indicated by the
Case-Schiller and Zillow indices. If sales levels and values in
Chicago continue to decline through the rest of the year, it is likely that we
will experience further losses.
Impaired
loans, including troubled debt restructures, totaled $243,129 at June 30, 2010,
and had a specific reserve of $39,844 included in the loan loss reserve of
$106,745. This compares to impaired loans of $203,470 at December 31, 2009, and
$248,053 at March 31, 2010 with specific reserves of $32,036 and $36,750,
respectively. Impaired loans consist primarily of non-performing loans and
certain other loans where a specific reserve allocation is consistent with our
more aggressive disposition strategy.
Occasionally,
we may agree to modify contractual terms of a borrower’s loan. In such cases,
where modifications represent a concession to a borrower experiencing financial
difficulty, the modification is considered a troubled debt restructure (TDR).
Loans modified in a TDR are generally placed on nonaccrual status until we
determine the future collection of principal and interest is reasonably assured,
which will require that the borrower demonstrates a period of performance in
accordance to the restructured terms of six months or more. At June 30, 2010,
loans fitting this description totaled $19,568. At December 31, 2009, loans
modified in a TDR, totaled $4,266 with specific allocation of allowance for
loans losses of $717.
OREO
decreased to $33,706 at June 30, 2010, compared to $36,173 at March 31, 2010,
and was up slightly from the year-end 2009 total of $31,982. The
ratio of non-performing assets to total loans and other real estate owned
increased to 14.35% at June 30, 2010, compared to 11.52% at year end 2009
because of the increase in non-performing assets, the impact on the ratio of
performing branch and balancing loans included in the second quarter branch and
loan sales, and other payoffs and paydowns of performing loans. This
percentage is expected to increase as a result of the three pending branch and
loan sale transactions expected to close during the third
quarter. Approximately 52%, or $138,134, of our total non-performing
assets are in our Chicago region. These assets represent
approximately 57% of the total assets in our Chicago region.
Total
non-performing loans at June 30, 2010, consisting of non-accrual and loans 90
days or more past due, were $231,317, an increase of $16,437 from December 31,
2009 and $9,212 from March 31, 2010. Non-performing loans were 12.75%
of total loans, compared to 10.18% at December 31, 2009, and 11.04% at March 31,
2010. This percentage was again impacted by the second quarter sale
of performing loans in the branch and loan sale transactions. Of the
non-performing loans, $220,132 are in our CRE portfolio and $3,620 are C&I
loans, while the balance consists of homogenous 1-4 family residential and
consumer loans. Total non-performing CRE loans at June 30, 2010
included $122,362 of residential real estate related projects. Of this total,
$74,365 was from the Chicago region and $46,071 from our CRE line of
business. The Chicago non-owner occupied CRE portfolio had
commitments of $179,868 and outstanding balances of $179,630 at June 30,
2010. The Chicago portfolio made up 50% and 52% of our total
non-performing loans and non-performing assets respectively at June 30,
2010. Non-owner occupied real estate within the CRE line of business
had commitments of $641,189 and outstanding balances of $585,709 at June 30,
2010. This portfolio made up 44% and 42% of our total non-performing
loans and non-performing assets, respectively, at June 30, 2010. The Chicago
region and the CRE line of business make up 13.2% and 35.7% of total outstanding
loans.
43
We are
continuing to improve our credit management processes in several ways, including
the following:
|
·
|
We
are continuing to obtain new appraisals on properties securing our
non-performing CRE loans and using those appraisals to determine specific
reserves within the allowance for loan losses. As we receive
new appraisals on properties securing non-performing loans, we recognize
charge-offs and adjust specific reserves as
appropriate.
|
|
·
|
We
shifted the credit analysis effort for our Chicago region and CRE line of
business to our centralized Credit Service Center in
Evansville.
|
|
·
|
We
are managing the work out effort of our CRE line of business within our
Evansville-based workout group.
|
|
·
|
We
have added additional loan workout specialists in Evansville to service
our Chicago and CRE portfolios and transitioned our relationship managers
to assist with an orderly exit
strategy.
|
|
·
|
During
the first quarter of 2010, we modified our problem asset disposition
strategy and are now pursuing more rapid dispositions of our
non-performing assets as opportunities arise. We will take
advantage of opportunities to sell, exchange for other assets or accept
discounted payoffs where appropriate, particularly in situations in which
we expect it would take several quarters for values to
recover. We believe this more rapid disposition policy for
troubled assets will accelerate our return to profitability and credit
quality norms by providing increased liquidity for redeployment, reduce
real estate taxes, legal fees, and other asset carrying costs, allow for
more effective utilization of our workout team, and reduce our overall
staffing costs.
|
44
Listed
below is a comparison of non-performing assets.
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Nonaccrual loans
|
$ | 223,476 | $ | 210,753 | ||||
90
days or more past due loans
|
7,841 | 4,127 | ||||||
Total
non-performing loans (1)
|
231,317 | 214,880 | ||||||
Trust
preferred held for trading
|
60 | 36 | ||||||
Other
real estate owned
|
33,706 | 31,982 | ||||||
Total
non-performing assets
|
$ | 265,083 | $ | 246,898 | ||||
Ratios:
|
||||||||
Non-performing
Loans to Loans
|
12.75 | % | 10.18 | % | ||||
Non-performing
Assets to Loans and Other Real Estate Owned
|
14.35 | % | 11.52 | % | ||||
Allowance
for Loan Losses to Non-performing Loans
|
46.15 | % | 41.26 | % |
(1) Includes
non-performing loans classified as loans held for sale
Changes
in other real estate owned were as follows for the three and six months ended
June 30, 2010:
SUMMARY OF OTHER REAL ESTATE OWNED
Three Months
Ended
|
Six Months
Ended
|
|||||||
June
30, 2010
|
June
30, 2010
|
|||||||
Beginning
Balance
|
$ | 36,173 | $ | 31,982 | ||||
Additions
|
1,085 | 6,687 | ||||||
Sales
|
(3,432 | ) | (4,434 | ) | ||||
Write-downs
|
(81 | ) | (477 | ) | ||||
Other
changes
|
(39 | ) | (52 | ) | ||||
Ending
Balance
|
$ | 33,706 | $ | 33,706 |
DEPOSITS
Total
deposits were $2,472,454 at June 30, 2010, compared to $2,365,106 at December
31, 2009, an increase of $107,348. During the second quarter of 2010,
we sold five banking offices. The buyers of these offices assumed
$98,057 of deposits in these transactions. The decrease in deposits
from the branch sales were offset by the increases of $96,756 in brokered time
deposits and $91,825 in certificates of deposit.
Average
balances of deposits for the second quarter of 2010, as compared to the first
quarter ended March 31, 2010, included increases in brokered time deposits of
$121,803, retail certificates of deposit of $46,952, and money market accounts
of $3,592. Decreases in public fund time deposits of $20,978,
non-interest bearing demand deposits of $10,415, savings accounts of $6,815, and
interest checking accounts of $5,149, partially offset these
increases.
We have
used brokered certificate of deposits to diversify our sources of funding,
extend our maturities and improve pricing at certain terms as compared to local
market pricing pressure.
Because
the Bank’s regulatory capital ratios are less than the levels necessary to be
considered “well capitalized”, it may not obtain new brokered funds as a funding
source and is subject to rate restrictions that limit the amount that can be
paid on all types of retail deposits. The maximum rates the Bank can
pay on all types of retail deposits are limited to the national average rate,
plus 75 basis points. We have compared the Bank’s current rates with
the national rate caps and reduced any rates over the rate cap to fall within
those caps. We have made changes in product design and established a
new source for retail certificates of deposit that we believe will mitigate any
risk associated with deposits we might lose due to the rate
restrictions.
SHORT-TERM
BORROWINGS
Short-term
borrowings totaled $66,058 at June 30, 2010, an increase of $3,944 from December
31, 2009. Short-term borrowings consist of 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.
45
At June
30, 2010, we had availability from the FHLB of $142,897, and availability of
$111,681 under the Federal Reserve secondary credit program.
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
Temporary Liquidity Guarantee Program (TLGP), floating rate unsecured
subordinated debt and trust preferred securities. Long-term
borrowings decreased to $348,470 at June 30, 2010, from $361,071 at December 31,
2009.
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. This banking
center was completed and opened in the second quarter of 2010. There
were no material commitments for additional capital expenditures at June 30,
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.
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 of 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.
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Commitments
to extend credit
|
$ | 355,759 | $ | 421,908 | ||||
Standby
letters of credit
|
16,280 | 18,419 | ||||||
Non-reimbursable
standby letters of credit and commitments
|
1,557 | 2,014 |
There
have been no other material changes in off-balance sheet arrangements and
contractual obligations since December 31, 2009.
CAPITAL
RESOURCES AND LIQUIDITY
We, and
Integra Bank, are subject to various regulatory capital requirements
administered by federal and state banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory actions and generate
the possibility of additional discretionary actions by regulators that, if
undertaken, could have a materially adverse effect on our financial
condition. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, a bank must meet specific capital
guidelines that involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. Capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative
measures established by regulation to ensure capital adequacy require us and the
Bank to maintain minimum Total Capital and Tier 1 Capital to Risk-Weighted
Assets Ratios, and Tier 1 Capital to Average Assets Ratios (as defined). As of
June 30, 2010, the Bank met all minimum capital adequacy requirements to which
it is subject and is considered “adequately capitalized”.
In August
2009, the Bank agreed with the OCC to develop a plan to increase the Bank’s Tier
1 Capital Ratio to at least 8%, and its Total Risk-Based Capital Ratio to at
least 11.5%. At June 30, 2010, these capital ratio requirements had
not been met. We do not expect that the Bank will achieve the
regulatory capital ratios we have agreed to with the OCC unless we raise
additional capital by selling common or preferred stock in the private or public
markets and recapitalizing other elements of our capital
structure.
46
The
following table presents the actual capital amounts and ratios for us, on a
consolidated basis, and the Bank:
Regulatory Guidelines
|
Actual
|
|||||||||||||||
Minimum
|
Well-
|
June 30,
|
December 31,
|
|||||||||||||
Requirements
|
Capitalized
|
2010
|
2009
|
|||||||||||||
Integra
Bank Corporation:
|
||||||||||||||||
Total
Capital (to Risk-Weighted Assets)
|
8.00 | % | N/A | 5.47 | % | 9.94 | % | |||||||||
Tier
1 Capital (to Risk-Weighted Assets)
|
4.00 | % | N/A | 2.73 | % | 6.17 | % | |||||||||
Tier
1 Capital (to Average Assets)
|
4.00 | % | N/A | 1.78 | % | 4.43 | % | |||||||||
Integra
Bank N.A.:
|
||||||||||||||||
Total
Capital (to Risk-Weighted Assets)
|
8.00 | % | 10.00 | % | 8.33 | % | 10.05 | % | ||||||||
Tier
1 Capital (to Risk-Weighted Assets)
|
4.00 | % | 6.00 | % | 7.02 | % | 8.76 | % | ||||||||
Tier
1 Capital (to Average Assets)
|
4.00 | % | 5.00 | % | 4.53 | % | 6.30 | % |
The
amount of dividends which our subsidiaries may pay to us is governed by
applicable laws and regulations. Federal banking law limits the
amount of dividends that national banks can pay to their holding companies
without obtaining prior regulatory approval. For the
Bank, prior regulatory approval is required if dividends to be declared in any
year would exceed net earnings of the current year (as defined under the
National Banking Act) plus retained net profits for the preceding two years,
subject to the capital requirements discussed above. As of June 30,
2010, the Bank did not have retained earnings available for distribution in the
form of dividends to the holding company without prior regulatory
approval.
At June
30, 2010, the Bank was considered “adequately capitalized” while the Company was
considered undercapitalized under regulatory guidelines, subjecting both
entities to restrictions under the FDIC Improvement Act of
1991. These restrictions prohibit the Bank from accepting, renewing,
or rolling over brokered deposits except with a waiver from the
FDIC. This act also subjects the Bank to restrictions on the interest
rates that can be paid on deposits.
Liquidity
management involves monitoring sources and uses of funds in order to meet
day-to-day cash flow requirements. These daily requirements reflect
the ability to provide funds to meet loan requests, fund existing commitments
and to accommodate possible outflows in deposits and other
borrowings. Liquidity represents the ability of a company to convert
assets into cash or cash equivalents without significant loss and to raise
additional funds by increasing liabilities. Asset liquidity is
provided by cash and assets that are readily marketable, can be pledged, or will
mature in the near future.
The
Bank’s primary sources of funds are customer deposits, loan payments, maturities
of and cash flow from investments securities, and borrowings. We have
significant balances in public fund deposits in Indiana, Kentucky, Illinois and
Ohio. We are required to pledge collateral to cover the balances held
in Kentucky, Illinois and Ohio as directed by the laws of each
state. The State of Indiana currently doesn’t require
collateralization of public fund deposits as they are covered by the Public
Deposit Insurance Fund of Indiana (PDIF). The State of Indiana
changed this law effective July 1, 2010, and plans to require some banks to
pledge collateral for public fund deposits based on the strength of their
financial ratings. The PDIF is in the process of determining what
collateral requirements will be imposed based upon the financial
ratings. The revisions to the law are likely to result in additional
pledging requirements for the Bank in the third or fourth quarter of
2010. Securities available for sale balances increased $80,938 during
the second quarter of 2010, while the percentages of total securities pledged as
collateral declined to 54% compared to 65% at March 31, 2010. If we
become subject to these new collateral requirements in Indiana, we expect to
meet the requirements through the pledging of additional
securities.
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. We continuously monitor our
current and prospective business activity in order to design maturities of
specific categories of short-term loans and investments that are in line with
specific types of deposits and borrowings. 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 considered to
be adequate, we have utilized brokered deposits and repurchase agreements,
secured funding through the TLGP program and utilized borrowing programs from
the Federal Reserve, including TAF. We may utilize the Bank’s
borrowing capacity with the FHLB or we can also sell investments and
loans.
Due to
our recent financial performance, we elected to maintain a higher level of
liquidity and increased our cash position during the first half of
2010. Cash and due from banks totaled $591,160 at June 30, 2010, as
compared to $304,921 at December 31, 2009 and $312,233 at June 30,
2009.
47
In the
event that the Bank’s ability to attract and retain deposits is negatively
impacted by interest rate restrictions, we believe that sufficient cash and
liquid assets exist to maintain operations and meet all obligations as they come
due. We complied with the national rate cap limitations during the
second quarter of 2010. While the restrictions have impacted some of
our deposit products, they have not resulted in a meaningful loss in
deposits, and have in fact, contributed to an increase in our net interest
margin. We have made changes in product design and established a new
source for retail certificates of deposits to mitigate the risk associated with
these regulatory restrictions on deposits.
At June
30, 2010, federal funds sold and other short-term investments were
$50,003. Additionally, at June 30, 2010, we had in excess of $190,960
in unencumbered securities available for repurchase agreements or
liquidation.
Following
changes in the borrowing rate and maturity for loans through the Federal
Reserve’s discount window, the Bank shifted collateral pledged for borrowing
capacity from the Federal Reserve to the FHLB in an effort to maximize the
borrowing capacity and allow for longer maturities. As of June 30,
2010, the excess borrowing capacity at the FHLB was in excess of $142,897 while
the capacity at the Federal Reserve was in excess of $111,681 under the
secondary credit program.
The
existing Transaction Account Guarantee (TAG) program provides unlimited
insurance coverage through December 31, 2010 on non-interest bearing transaction
accounts and NOW accounts bearing an interest rate of .25% or
less. As part of the new financial regulatory reform bill signed on
July 21, 2010, the TAG program was extended until December 31,
2012. This final rule was modified and provides unlimited insurance
coverage on non-interest bearing transaction accounts only. The
financial regulatory reform bill also made permanent the extension of the $250
per depositor insurance coverage, which was increased from the $100
limit.
Liquidity
at the holding company level has historically been provided by dividends from
Integra Bank, cash balances, liquid assets, and proceeds from capital market
transactions. Because of recent losses, the Bank cannot pay any
dividends to us without advance approval from the OCC. Should the
Bank make such a request, no assurance can be given that it would be
approved.
Liquidity
is required to support operational expenses, pay taxes, meet outstanding debt
obligations, and other general corporate purposes. In order to
enhance our liquidity, we have suspended payments of cash dividends on all of
our outstanding stock, and deferred the payment of interest on our outstanding
subordinated notes relating to our trust preferred securities. 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 lower than the
subordinated debentures.
We
believe that the suspension of dividends on our common and preferred stock and
the deferral of interest payments on our subordinated debentures are preserving
approximately $1,900 per quarter, thereby enhancing our liquidity. At
June 30, 2010, the cash balance held by the parent company was $1,940, which is
expected to remain stable as our projected cash inflows are similar to our cash
outflows.
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.
48
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 (NII) 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. Simulations are run using a dynamic balance sheet
that is consistent with current strategic initiatives and expectations for
growth. 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 rate scenario using consistent
balance sheet projections 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 downward 100 basis point shock and minus 10 percent to an upward 200 basis
point shock. At June 30, 2010, we would experience a negative 19.22% change in
EAR if interest rates moved downward 100 basis points versus a negative 4.80%
change at December 31, 2009. While the EAR measure to falling rates
exceeds policy guidelines, Board ALCO has approved a temporary exception as the
risk is primarily driven by strategic decisions to strengthen liquidity and
capital. This includes restructuring and growing the securities
portfolio, additional fixed rate term CDs as well as an increase in the level of
cash. In addition, market rates are already comparatively low with
both two year treasury and two year swap rates declining to below one percent at
June 30, 2010. If interest rates moved upward 200 basis points, we
would experience a positive 17.74% change in net interest income versus a
positive 7.96% change at December 31, 2009. The positive change in
NII to rising rates continues to be driven by a high volume of floating rate
loans, an absence of overnight funding and the use of longer term fixed rate CDs
to enhance liquidity. The EAR measure is also sensitive to the total
earnings in the base NII forecast. Since projected earnings have
declined due to loan runoff and branch divestitures, dollar changes in NII due
to rising or falling rates will now result in a larger percentage change from
the base forecast.
Trends in
Earnings at Risk
Estimated Change in EAR from
the Base Interest Rate Scenario
|
||||||||
-100 basis points
|
+200 basis points
|
|||||||
June
30, 2010
|
-19.22 | % | 17.74 | % | ||||
December
31, 2009
|
-4.80 | % | 7.96 | % |
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 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 where
the base interest rate scenario is shocked downward by 100 basis points and
upward by 200 basis points with a limit on the change in EVE of minus
15%.
At June
30, 2010, we would experience a negative 9.59% change in EVE if interest rates
moved downward 100 basis points compared to negative 2.01% at December 31, 2009.
If interest rates moved upward 200 basis points, we would experience a positive
8.74% change in EVE compared to positive 0.81% at December 31,
2009. Both of these measures are within Board approved policy limits.
The variances in EVE risk from year end are largely liquidity driven and reflect
a change in the balance sheet mix. This includes a decrease in loans
and transaction deposits along with a significant increase in cash and longer
term fixed rate CDs. The shift to longer term CDs locks in funding
costs for an extended period of time and yields a positive impact to risk with
rising rates and a negative impact to risk with falling rates. Cash
has a stable value in all rate scenarios unlike fixed rate earnings assets which
generally lose value as market rates rise and gain value as market rates
decline. In addition, the investment portfolio was restructured and
enlarged and overall consists of securities with shorter average lives and less
extension risk to rising rates than at year end. While the balance
sheet changes noted above have an overall positive impact on risk to rising
rates as well as strengthening liquidity, they have an adverse impact on future
earnings and net interest margin in a stable rate environment.
Trends in
Economic Value of Equity
Estimated Change in EVE from
the Base Interest Rate Scenario
|
||||||||
-100 basis points
|
+200 basis points
|
|||||||
June
30, 2010
|
-9.59 | % | 8.74 | % | ||||
December
31, 2009
|
-2.01 | % | 0.81 | % |
49
The
assumptions in any of these simulation runs are inherently
uncertain. Any simulation cannot precisely estimate net interest
income or economic value of the assets and liabilities or predict the impact of
higher or lower interest rates on net interest income or on the economic value
of the assets and liabilities. Actual results will differ from simulated results
due to the timing, magnitude and frequency of interest-rate changes, the
difference between actual experience and the assumptions used, as well as
changes in market conditions and management strategies.
Item
4. Controls and Procedures
As of
June 30, 2010, 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 June 30, 2010, that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
50
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.
Item
1A. RISK FACTORS
The
following risk factors replace in their entirety the risk factors contained in
our Annual Report on Form 10-K for the year ended December 31, 2009 and
Quarterly Report on Form 10-Q for the quarter ended March 31,
2010. Dollar amounts are shown in thousands.
We
are required to comply with the terms of agreements and understandings with our
regulators and if we do not comply with them, we are likely to become subject to
additional regulatory actions.
The
agreements with the OCC and the Reserve Bank will remain in effect until stayed,
modified, terminated or suspended by the applicable regulator. We
have been directing efforts to comply with the requirements of these
regulatory agreements; however, compliance will be determined by the
regulators. If the Bank does not achieve and maintain the minimum
capital ratios that we have agreed to with the OCC, it is likely that the OCC
will take some additional enforcement action requiring us to raise additional
capital by a specified date. If the regulators take additional
enforcement actions against us, it would likely increase our expenses and could
limit our business activities. There could be other expenses
associated with a continued deterioration of the Bank's capital, such as
increased deposit insurance premiums payable to the FDIC.
We
do not expect to be able to raise additional capital without existing
shareholders suffering substantial dilution.
We
believe we will need to raise capital in order to achieve the regulatory capital
levels we have agreed to with the OCC. Our ability to raise
additional capital will depend on conditions in the private and public capital
markets, economic conditions and a number of other factors, many of which are
outside our control, and on our financial performance. Accordingly,
there can be no assurance that we can raise additional capital or on terms
acceptable to us. If we cannot raise additional capital when needed,
it may have a material adverse effect on our financial condition, results of
operations and prospects.
The
decline in the value of our common stock since January 1, 2009, means that
any issuance of common stock would significantly dilute the ownership of our
existing shareholders because we would have to issue more shares than if we had
raised the same amount of capital when our share price was
higher. Absent a substantial improvement in our financial
performance, it is unlikely that we would be able to raise additional capital
without further diluting the ownership of our existing
shareholders.
Our
common stock constitutes equity and is subordinate to our existing and future
indebtedness and Treasury Preferred Stock, and effectively subordinated to all
the indebtedness and other non-common equity claims against our
subsidiaries.
The
shares of our common stock represent equity interests in us and do not
constitute indebtedness. Accordingly, the shares of our common stock
will rank junior to all of our existing and future indebtedness and to other
non-equity claims on the parent company with respect to assets available to
satisfy its claims. Further, holders of our common stock are subject
to the prior dividend and liquidation rights of the holder(s) of Treasury
Preferred Stock. The Treasury Preferred Stock has an aggregate
liquidation preference of $83,586. The terms of the Treasury
Preferred Stock prohibit us from paying dividends with respect to our common
stock unless all accrued and unpaid dividends for all completed dividend periods
with respect to the Treasury Preferred Stock have been paid.
In
addition, our right to participate in any distribution of assets of the Bank
upon the Bank's liquidation or otherwise, and the ability of holders of our
common stock to benefit indirectly from such distribution, will be subject to
the prior claims of creditors of the Bank. As a result, holders of
our common stock are structurally subordinated to all existing and future
liabilities and obligations of the Bank. At June 30, 2010, the Bank's total
deposits and other liabilities were approximately $2,923,531.
51
If
we continue to suffer significant loan losses, it may be difficult to continue
in operation.
We have
recorded net losses of $64,084 in the first six months of 2010, $194,981 in
2009, and $110,875 in 2008. Further significant losses will make it
difficult for us to continue in operation.
Our
losses have largely resulted from loan and investment
impairments. Since January 1, 2008, we have recorded total
provisions for loan losses of $248,790 and other than temporary impairment
charges on investments of $32,306. While our losses also included a
charge off of goodwill of $122,824, and charges to establish an allowance
against the realization of our deferred tax asset of $123,872, these latter
charges would not have been required had we not incurred the losses on loans and
investments.
We do not
expect to incur any additional significant losses from our investment portfolio.
However, substantial risks remain in certain portions of our loan portfolio. As
of June 30, 2010, approximately 58% of our loan portfolio consisted of
CRE and C&I loans. These types of loans are typically larger than
the loans, which made up the remaining portion of our loan
portfolio. The deterioration of one or a few of these loans can lead
to a significant increase in non-performing loans. Additional
increases in non-performing loans could result in a net loss of earnings from
these loans, an increase in the provision for loan losses and an increase in
loan charge-offs, all of which could have a material adverse effect on our
financial condition and results of operations.
We
may not successfully execute our plan to return to profitability.
We are
executing a plan to return to profitability by restructuring our operations and
balance sheet and focusing on our profitable core community banking
franchise. We have sold multiple clusters of branches and loans and
have definitive agreements for additional sales to help us achieve our
priorities. However, by themselves, it is unlikely that these
transactions will result in a return to profitability or permit us to reach our
regulatory capital targets.
Our
operations may be adversely affected if we are unable to secure adequate
funding. Our use of wholesale funding sources exposes us to liquidity risk and
potential earnings volatility.
We rely
on wholesale funding, including FHLB advances and brokered deposits, to augment
our core deposits to fund our business. As of June 30, 2010, our use of such
wholesale funding sources amounted to approximately $1,072,317 or 37% of total
funding. Because wholesale funding sources are affected by general market
conditions, the availability of funding from wholesale lenders may be dependent
on the confidence these investors have in our commercial and consumer banking
operations. The continued availability to us of these funding sources is
uncertain. We are currently restricted from accepting new brokered
deposits and it may be difficult for us to retain or replace them at attractive
rates as they mature. Our liquidity will be constrained if we are unable to
renew our wholesale funding sources or if adequate financing is not available in
the future at acceptable rates of interest or at all. We may not have sufficient
liquidity to continue to fund new loans, and we may need to liquidate loans or
other assets unexpectedly, in order to repay obligations as they
mature.
As a
result of these liquidity risks, we have increased our cash balance accounts to
$591,160 at June 30, 2010 from $304,921 at December 31, 2009. These
actions have had and are expected to continue to have an adverse impact on our
net interest income and net interest margin.
In
addition, if the Bank fails to remain “adequately capitalized” under federal
regulatory capital standards, it may no longer be eligible to accept public
fund deposits. As of June 30, 2010, we had public fund deposits of approximately
$276,180. Approximately $137,474 of these public deposits mature by December 31,
2011. As a result, any such restrictions on our ability to accept public
deposits are likely to have a material adverse impact on our business and
financial condition.
Our
financial performance will be materially and adversely affected if we are unable
to maintain our access to funding or if we are required to rely more heavily on
more expensive funding sources. In such case, our net interest income and
results of operations would be adversely affected.
Current
market developments, particularly in real estate markets, may adversely affect
our industry, business and results of operations.
Dramatic
declines in the housing and commercial real estate markets in the past two
years, have resulted in, and may continue to result in, significant write-downs
of asset values by us and other financial institutions. These write-downs have
caused many financial institutions to seek additional capital, to merge with
larger and stronger institutions and, in some cases, to fail. As a result of
these conditions, many lenders and institutional investors have reduced, and in
some cases ceased to provide, funding to borrowers including financial
institutions.
This
market turmoil and tightening of credit have led to an increased level of
commercial and consumer delinquencies, lack of consumer confidence, increased
market volatility, and widespread reduction of business activity generally. The
resulting lack of available credit, lack of confidence in the financial sector,
increased volatility in the financial markets, and reduced business activity
could materially and adversely affect our business, financial condition and
results of operations.
52
Further
negative market developments may continue to negatively affect consumer
confidence levels and may continue to contribute to increases in delinquencies
and default rates, which may impact our charge-offs and provisions for credit
losses. A worsening of these conditions would likely exacerbate the adverse
effects of these difficult market conditions on us and others in the financial
services industry.
We
are deferring payments on our preferred stock and trust preferred securities and
the accrued but unpaid amounts are accumulating as a liability on our balance
sheet, and this liability is expected to continue to increase as we have no
current plans to resume such dividend payments at any time in the near
future.
We are
currently deferring payment of quarterly dividends on the Treasury Preferred
Stock, which accrue cumulative dividends quarterly at a rate of 5% per annum
through February 27, 2014, and 9% per annum thereafter. In addition, we have
exercised our right to defer interest payments on the subordinated debentures
relating to our trust preferred securities. As a result, quarterly dividends on
the related trust preferred securities are also being deferred. We may defer
such interest payments for a total of 20 consecutive calendar quarters without
causing an event of default under the documents governing these securities.
After such period, we must pay all deferred interest and resume quarterly
interest payments or we will be in default.
We do not
have any current plans to resume payments on the preferred stock or subordinated
debentures in the near future. Before we can resume these payments, however, we
will have to pay the accrued amounts in full. As of June 30, 2010, these
accrued but unpaid amounts totaled $5,834.
Our
allowance for loan losses may be insufficient.
We
maintain an allowance for loan losses, which is a reserve established through a
provision for loan losses charged to expense. This reserve represents our best
estimate of probable losses that have been incurred within the existing
portfolio of loans. The allowance, in our judgment is necessary to
reserve for estimated loan losses and risks inherent in the loan
portfolio. The level of the allowance reflects our ongoing evaluation
of various factors, including growth of the portfolio, an analysis of individual
credits, adverse situations that could affect a borrower’s ability to repay,
prior and current loss experience, the results of regulatory examinations, and
current economic conditions. The determination of the appropriate
level of the allowance for loan losses inherently involves a high degree of
subjectivity and requires us to make significant estimates of current credit
risks and future trends, all of which may undergo material changes. Changes in
economic conditions affecting borrowers and guarantors, new information
regarding existing loans, identification of additional problem loans and other
factors, both within and outside of our control, may require an increase in the
allowance for loan losses. In addition, the OCC periodically reviews
our allowance for loan losses and may require an increase in the provision for
loan losses or the recognition of further loan charge-offs, based on judgments
different than those of management. In addition, if charge-offs in
future periods exceed the allowance for loan losses, we will need additional
provisions to increase the allowance for loan losses. Our
non-performing assets increased by $76,603 to $246,898 in 2009 and by $18,185 to
$265,083 in the first six months of 2010. Any further significant
increases in the allowance for loan losses will result in a decrease in net
income and, possibly, capital, and may have a material adverse effect on our
financial condition and results of operations.
The
Treasury Preferred Stock impacts net income available to our common shareholders
and earnings per common share, and the warrant we issued to Treasury may be
dilutive to holders of our common stock.
The
dividends on the Treasury Preferred Stock reduce the net income available to
common shareholders and our earnings per common share. The Treasury
Preferred Stock will also receive preferential treatment in the event of
liquidation, dissolution or winding up of the parent
company. Additionally, the ownership interest of the existing holders
of our common stock will be diluted to the extent the Treasury Warrant in
conjunction with the sale of the Treasury Preferred Stock is
exercised. The shares of common stock underlying the Treasury Warrant
represent approximately 38% of the shares of our common stock outstanding as of
June 30, 2010 (including the shares issuable upon exercise of the warrant
in total shares outstanding). Although the Treasury Department has
agreed not to vote any of the shares of common stock it receives upon exercise
of the warrant, a transferee of any portion of the Treasury Warrant or of any
shares of common stock acquired upon exercise of the Warrant is not bound by
this restriction.
If
we are unable to redeem the Treasury Preferred Stock by February 2015 the cost
of this capital to us will increase substantially.
The
agreement we have with the Reserve Bank prohibits us from redeeming our
outstanding capital stock without the prior written approval of the Reserve
Bank. If we are unable to redeem our Treasury Preferred Stock prior
to May 15, 2015, the cost of this capital to us will increase substantially
on that date, from 5.0% per annum (approximately $4,179 annually) to 9.0% per
annum (approximately $7,523 annually). Depending on our financial
condition at the time, this increase in the annual dividend rate on the Treasury
Preferred Stock could have a material negative effect on our
liquidity.
53
If
we fail to pay dividends on the Treasury Preferred Stock for six or more
dividend periods, the holders will be entitled to elect two
directors.
If we do
not pay dividends on the Treasury Preferred Stock for six dividend periods or
through the dividend payable February, 2011, the total number of positions on
our board of directors will automatically increase by two and the holders of the
Treasury Preferred Stock, acting as a class with any other parity securities
having similar voting rights, will have the right to elect two individuals to
serve in the new director positions. This right and the terms of such
directors will end when we have paid in full all accrued and unpaid dividends on
the Treasury Preferred Stock for all past dividend periods.
Increases
in FDIC insurance premiums may have a material adverse effect on our
earnings.
As an
FDIC-insured institution, we are required to pay deposit insurance premium
assessments to the FDIC. Due to higher levels of bank failures beginning in
2008, the FDIC has taken numerous steps to restore reserve ratios of the deposit
insurance fund. Our deposit insurance expense increased substantially in 2009
compared to prior periods, reflecting higher rates and a special assessment in
the second quarter of 2009.
The
amount of deposit insurance that we are required to pay is subject to factors
outside of our control, including bank failures and regulatory initiatives. Such
increases may adversely affect our results of operations.
As
a participant in the CPP, we are subject to many restrictions on the
compensation we can pay to executive officers.
As a
participant in the Treasury Department's CPP, we must comply with numerous
executive compensation requirements for as long as the Treasury holds any of the
Treasury Preferred Stock. These standards include (1) ensuring
that incentive compensation plans and arrangements for our Chief Executive
Officer, Chief Financial Officer and the next most highly compensated executive
officers (the "Senior Executive Officers") do not encourage unnecessary and
excessive risks that threaten our value; (2) required clawback of any
bonus, retention award or incentive compensation paid (or under a legally
binding obligation to be paid) to a Senior Executive Officer or any of our 20
next most highly-compensated employees based on materially inaccurate financial
statements or other materially inaccurate performance metric criteria;
(3) prohibitions on making golden parachute payments to Senior Executive
Officers and our five next most highly-compensated employees, except for
payments for services performed or benefits accrued; (4) prohibitions on
paying or accruing any bonus, retention award or incentive compensation with
respect to our five most highly-compensated employees, except for grants of
restricted stock that do not fully vest while we participate in the CPP and do
not have a value which exceeds one-third of an employee’s total annual
compensation; (5) prohibitions on compensation plans that encourage
manipulation of reported earnings; (6) retroactive review of bonuses,
retention awards or other compensation that the Treasury finds to be
inconsistent with the purposes of the CPP or otherwise contrary to the public
interest; and (7) agreement not to claim a deduction, for federal income
tax purposes, for compensation paid to any of the Senior Executive Officers in
excess of $500,000 per year. The overall effect of these restrictions
has been to make it more difficult to attract and retain talented executive
officers.
We
operate in a highly competitive industry and market area.
We face
substantial competition in all areas of our operations from a variety of
different competitors, many of which are larger and may have more financial
resources. Such competitors primarily include national, regional, and
community banks within the various markets in which we operate. We
also face competition from many other types of financial institutions,
including, without limitation, savings and loans, credit unions, finance
companies, brokerage firms, insurance companies, factoring companies and other
financial intermediaries. Additionally, technology has lowered
barriers to entry and made it possible for non-banks to offer products and
services traditionally provided by banks, such as automatic transfer and
automatic payment systems. Some of our competitors have fewer
regulatory constraints and may have lower cost
structures. Additionally, due to their size, many competitors may be
able to achieve economies of scale and, as a result, may offer a broader range
of products and services as well as better pricing for those products and
services than we can. Local or privately held community banking
organizations in certain markets may price or structure their products in such a
way that it makes it difficult for us to compete in those markets in a way that
allows us to meet our profitability or credit goals. Any competitor
may choose to offer pricing on loans and deposits that we think is irrational
and choose to not compete with. Competitors may also be willing to
extend credit without obtaining covenants or collateral and by offering weaker
loan structures than we are willing to accept.
Our
ability to compete successfully depends on a number of factors, including, among
other things:
|
·
|
The
ability to develop, maintain and build upon long-term customer
relationships;
|
|
·
|
The
ability to expand our market
position;
|
|
·
|
The
scope, relevance and pricing of products and
services;
|
|
·
|
Our
reputation with consumers who reside in the markets we
serve;
|
54
|
·
|
The
rate at which we introduce new products and
services;
|
|
·
|
Customer
satisfaction; and
|
|
·
|
Industry
and general economic trends.
|
If we
fail to perform in any of these areas, our competitive position and ability to
retain market share or grow would be weakened, which, in turn, could have a
material adverse effect on our financial condition and results of
operations.
Our
controls and procedures may fail or be circumvented.
We
regularly review and update our internal controls, disclosure controls and
procedures, and corporate governance policies and procedures. Any
system of controls, however well designed and operated, is based in part on
certain assumptions and can provide only reasonable, not absolute, assurances
that the objectives of the system are met. Any failure or
circumvention of our controls and procedures or failure to comply with
regulations related to controls and procedures could result in fraud,
operational or other losses that adversely impact our business, results of
operations and financial condition. Fraud risks could include fraud
by employees, vendors, customers or anyone we or our customers do business or
come in contact with.
Our
information systems may experience an interruption or breach in
security.
We rely
heavily on communications and information systems to conduct our
business. Any failure, interruption or breach in security of these
systems could result in failures or disruptions in our general ledger, deposit,
loan and other systems, including risks to data integrity. While we
have policies and procedures designed to prevent or limit the effect of the
failure, interruption or security breach of our information systems, there can
be no assurance that any such failures, interruptions or security breaches will
not occur or, if they do occur, that they will be adequately
addressed. The occurrence of any failures, interruptions or security
breaches of our information systems could damage our reputation, result in a
loss of customer business, subject us to additional regulatory scrutiny, or
expose us to civil litigation and possible financial liability, any of which
could have a material adverse effect on our financial condition and results of
operations.
We
may not be able to attract and retain skilled people.
Our
success depends, in large part, on our ability to attract and retain key
people. Competition for the best people in most activities engaged in
by us can be intense and we may not be able to hire people or to retain them.
Due to our participation in the Capital Purchase Program, we do not have
employment agreements with our most senior executives. Many of our competitors
do not face the same restrictions. The unexpected loss of services of one or
more of our key personnel could have a material adverse impact on our business
because of their skills, knowledge of our local markets, years of industry
experience and the difficulty of promptly finding qualified replacement
personnel.
We
continually encounter technological change.
The
financial services industry is continually undergoing rapid technological change
with frequent introductions of new technology-driven products and
services. The effective use of technology increases efficiency and
enables financial institutions to better serve customers and to reduce
costs. Our future success depends, in part, upon our ability to
address the needs of our customers by using technology to provide products and
services that will satisfy customer demands, as well as to create additional
efficiencies in our operations. Many of our competitors have
substantially greater resources to invest in technological improvements. We may
not be able to effectively implement new technology-driven products and services
or be successful in marketing these products and services to our
customers. Failure to successfully keep pace with technological
change affecting the financial services industry could have a material adverse
impact on our business and, in turn, our financial condition and results of
operations.
Restrictions
on bank overdraft programs could significantly reduce our deposit service charge
income.
On
November 12, 2009, the Federal Reserve issued final rules that prohibit
financial institutions from charging consumers fees for paying overdrafts on
automated teller machine (ATM) and one-time debit card transactions if the
consumers have not consented, or opted in, to the overdraft service for these
types of transactions. We anticipate these new rules could
significantly impact our non-sufficient funds and overdraft income the last two
quarters of 2010. Financial institutions will be required to comply
with new disclosure requirements by July 1, 2010 for new accounts and
August 15, 2010 for existing accounts.
55
We
may not be able to return our stock price to a level necessary to be listed on
the NASDAQ Global Market.
We
received a letter from The Nasdaq Stock Market Inc. ("Nasdaq") on July 2,
2010, indicating that we no longer met the requirement under Rule 5450(a)(1)
(the "Bid Price Rule") because the closing bid price per share of our common
stock has been below $1.00 per share for 30 consecutive business
days. The letter stated that we have until December 27, 2010, to
regain compliance by maintaining a minimum closing bid price of at least $1.00
per share for a minimum of ten consecutive business days. Nasdaq will
provide us written confirmation of compliance with Rule 5450(a)(1) if this
condition is met.
Should we
not regain compliance with the Bid Price Rule prior to the expiration of the
grace period, we will receive written notification from Nasdaq that our
securities are subject to delisting. Alternatively, we may be eligible for an
additional grace period if we meet the initial listing standards, with the
exception of bid price, for The Nasdaq Capital Market. We will need
to submit an application to transfer our securities from The Nasdaq Global
Market to The Nasdaq Capital Market. If the application is approved,
Nasdaq will notify us that we have been granted an additional 180 calendar day
grace period.
The
impact of financial reform legislation on us is uncertain.
The
recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act
institutes a wide range of reforms that will have an impact on all financial
institutions. Changes to the deposit insurance and financial
regulatory systems, enhanced bank capital requirements and new regulations
designed to protect consumers in financial transactions are only a few of the
provisions of the Act. Many of these provisions are subject to rule
making procedures and studies that will be conducted in the
future. Accordingly, we cannot assess the impact the Act will have on
us at the present time.
Item
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
Not
Applicable
Item
3. DEFAULTS UPON SENIOR SECURITIES
Not
Applicable
Item
4. RESERVED
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.
Item
6. EXHIBITS
The
following documents are filed as exhibits to this report:
31.1
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief
Executive Officer
|
|
31.2
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief
Financial Officer
|
|
32
|
Certification
of Chief Executive Officer and Chief Financial
Officer
|
56
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
|
|
Chairman
of the Board
|
|
and
Chief Executive Officer
|
|
July
29, 2010
|
|
/s/ Michael B. Carroll
|
|
Michael
B. Carroll
|
|
Chief
Financial Officer
|
|
July
29, 2010
|
57