SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ x ] Quarterly Report pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the quarter ended September 30, 1995
or
[ ] Transition Report pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
Commission File Number: 0-17452
INTEGRA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
COMMONWEALTH OF PENNSYLVANIA 25-1597793
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Four PPG Place, Pittsburgh, Pennsylvania 15222-5408
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,including area code: (412) 644-7669
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 1995
Common Stock, $1.00 Par Value 32,917,405
<PAGE>
INTEGRA FINANCIAL CORPORATION
FORM 10-Q
For the Quarter Ended September 30, 1995
INDEX
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet - September 30, 1995
and December 31, 1994
Consolidated Statement of Income - For the Three
and Nine Months Ended September 30, 1995 and 1994
Consolidated Statement of Cash Flows - For the Nine
Months Ended September 30, 1995 and 1994
Notes to Consolidated Financial Statements
Report of Independent Auditors
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II - Other Information
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibits
<PAGE> PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
INTEGRA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<CAPTION> September 30, December 31,
(Dollars in thousands) 1995 1994
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 313,664 $ 428,771 <PAGE>
Federal funds sold 30,000 -0-
Other short-term investments 107,836 13,740
Securities held to maturity (fair value of $2,107,558 at
September 30, 1995 and $1,474,141 at December 31, 1994) 2,092,676 1,546,295
Securities available for sale, at fair value 3,602,048 3,695,504
Loans held for sale 140,462 67,994
Loans, net of unearned income of $103,124 at September 30,
1995 and $96,110 at December 31, 1994 7,881,900 7,598,056
Reserve for loan losses (221,809) (237,433)
Net loans 7,660,091 7,360,623
Premises and equipment 172,833 169,509
Foreclosed assets 14,547 32,229
Other assets 443,036 440,695
TOTAL ASSETS $14,577,193 $13,755,360
LIABILITIES
Deposits:
Non-interest bearing $ 1,342,349 $ 1,488,106
Interest bearing 8,869,884 8,595,300
Total deposits 10,212,233 10,083,406
Short-term borrowings 1,788,912 1,582,756
Long-term debt 1,263,426 1,056,649
Other liabilities 234,712 173,953
TOTAL LIABILITIES 13,499,283 12,896,764
SHAREHOLDERS' EQUITY
Preferred stock, no par value -0- -0-
Common stock, $1.00 par value 33,592 33,592
Capital surplus 451,352 451,769
Retained earnings 590,288 518,346
Net unrealized gains (losses) on securities 31,131 (113,402)
Treasury stock, at cost (28,453) (31,709)
TOTAL SHAREHOLDERS' EQUITY 1,077,910 858,596
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $14,577,193 $13,755,360
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
INTEGRA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<CAPTION>
(Dollars in thousands except Three Months Ended Nine Months Ended
per share data) September 30, September 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
INTEREST
Loans, including fees $175,858 $156,197 $518,164 $447,324
Loans held for sale 1,893 2,843 4,468 8,650
Securities:
Taxable interest 84,876 74,225 241,281 229,709
Tax exempt interest 2,017 1,374 5,941 3,901
Dividends 7,634 6,199 21,156 18,483<PAGE>
Trading securities 329 1,008 1,607 1,848
Short-term investments 3,206 227 8,365 816
TOTAL INTEREST INCOME 275,813 242,073 800,982 710,731
INTEREST EXPENSE
Deposits 100,285 79,682 290,168 233,410
Short-term borrowings 26,261 16,423 74,602 45,885
Long-term debt 21,575 11,727 55,597 32,717
TOTAL INTEREST EXPENSE 148,121 107,832 420,367 312,012
NET INTEREST INCOME 127,692 134,241 380,615 398,719
PROVISION FOR LOAN LOSSES 4,000 6,000 12,000 24,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 123,692 128,241 368,615 374,719
NET SECURITIES GAINS 8,809 737 16,956 19,050
NON-INTEREST INCOME
Service charges on deposit accounts 9,308 8,541 26,502 25,078
Other service charges and fees 8,485 7,866 24,243 23,035
Trust income 6,943 6,849 21,726 20,640
Mortgage banking income 3,698 2,417 13,783 6,393
Other 3,611 3,317 14,758 11,332
TOTAL NON-INTEREST INCOME 32,045 28,990 101,012 86,478
NON-INTEREST EXPENSE
Salaries and wages 36,562 34,842 107,467 101,690
Employee benefits 9,599 10,156 36,951 31,355
Net occupancy 8,726 7,991 24,426 24,977
Furniture and equipment 8,337 7,275 23,925 21,337
Outside data processing 6,649 6,453 20,354 20,163
FDIC premium 10,973 5,616 22,458 16,900
Foreclosed asset expense 541 1,260 61 2,340
Amortization of intangible assets 1,952 1,440 6,052 4,512
Other 25,956 23,776 77,409 70,101
TOTAL NON-INTEREST EXPENSE 109,295 98,809 319,103 293,375
Income before income taxes 55,251 59,159 167,480 186,872
Income tax expense 15,404 17,723 47,487 56,892
NET INCOME $ 39,847 $ 41,436 $119,993 $129,980
NET INCOME PER COMMON SHARE $1.20 $1.22 $3.63 $3.84
Average common shares outstanding 33,193,667 33,847,628 33,082,371 33,830,252
Common dividends declared and
paid per share $.50 $.45 $1.45 $1.25
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
INTEGRA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS<PAGE>
(Unaudited)
<CAPTION>
(Dollars in thousands) Nine Months Ended September 30,
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $119,993 $129,980
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 12,000 24,000
Deferred tax expense 7,376 5,574
Depreciation and amortization 31,930 27,768
Net securities gains (16,956) (19,050)
Decrease (increase) in loans held for sale (72,468) 94,331
Increase in trading securities -0- (75,753)
Increase in interest and other accounts (19,071) (7,690)
receivable 49,319 1,281
Increase in interest and other accounts payable (1,075) 324
Other, net
NET CASH PROVIDED BY OPERATING ACTIVITIES 111,048 180,765
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for purchases of:
Securities available for sale (1,363,758) (1,753,708)
Securities held to maturity (1,191,690) (426,430)
Proceeds from repayment and maturities of:
Securities available for sale 196,793 336,753
Securities held to maturity 597,656 106,844
Proceeds from sales of securities available for sale 1,652,471 2,415,567
Purchases of short-term investments (619,159) (232,138)
Maturities of short-term investments 498,345 227,320
Net increase in loans, net of reserve (199,360) (425,014)
Proceeds from collection and sale of foreclosed assets 26,441 33,210
Purchases of premises and equipment (23,953) (26,798)
Payment for purchase of company, net of cash acquired (46,654) -0-
Increase in other assets (1,746) (27,226)
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES
(474,614) 228,380
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in demand and savings deposits (174,696) (249,978)
Net increase in time deposits 143,879 133,458
Increase (decrease) in short-term borrowings 113,553 (478,548)
Proceeds from long-term debt 784,023 386,626
Payments on long-term debt (576,975) (186,409)
Increase (decrease) in other liabilities 3,887 (908)
Common stock dividends paid (47,547) (41,863)
Issuance of common stock 8,452 4,803
Treasury stock purchased (6,117) (3,631)
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 248,459 (436,450)
DECREASE IN CASH AND CASH EQUIVALENTS (115,107) (27,305)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 428,771 433,423
CASH AND CASH EQUIVALENTS, END OF PERIOD $313,664 $406,118 <PAGE>
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE> INTEGRA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
(Unaudited)
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks and federal funds sold for a one day
period. Noncash investing activity consisted of transfers of loans in
liquidation to foreclosed assets of $6.3 million and $11.8 million in the
first nine months of 1995 and 1994, respectively, and $1.28 billion of
securities transferred to held to maturity from the available for sale
portfolio on March 31, 1994. Loans originated to facilitate the sale of other
real estate were not significant. Cash of $50.5 million was paid for net
assets acquired in the Lincoln Savings Bank (Lincoln) acquisition. The fair
values of assets acquired and liabilities assumed were $377.5 million and
$327.0 million, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
In the opinion of the management of Integra Financial Corporation (Integra or
the Corporation), the accompanying consolidated financial statements include
all normal recurring adjustments necessary for a fair presentation of the
financial position and results of operations for the periods presented. All
significant intercompany transactions have been eliminated in consolidation.
Certain amounts have been reclassified for comparative purposes. Certain
information and footnote disclosure normally included in financial statements
presented in accordance with generally accepted accounting principles have
been condensed or omitted. It is suggested that the accompanying consolidated
financial statements be read in conjunction with Integra's 1994 Annual Report
on Form 10-K. The consolidated financial statements included herein have been
reviewed by Coopers & Lybrand L.L.P., the Corporation's independent auditors,
whose report is included herein.
2. Proposed Merger
On August 27, 1995, a definitive agreement for National City Corporation to
acquire Integra was signed. Under the terms of the merger, Integra
shareholders will receive two shares of National City Corporation common stock
for each share of Integra common stock in a tax-free exchange, which will be
accounted for as a pooling-of-interests. Subject to regulatory and
shareholder approvals, the transaction is expected to close in the second
quarter of 1996. National City Corporation is a registered bank holding
company with headquarters in Cleveland, Ohio. At September 30, 1995, National
City Corporation had total consolidated assets of $34.8 billion and total
consolidated deposits of $24.5 billion. National City Corporation conducts a
general retail and commercial banking business through its bank subsidiaries
and operates other financial services subsidiaries principally in Ohio,
Kentucky and Indiana.
3. Acquisition
On January 5, 1995, Integra acquired Lincoln, a Pennsylvania chartered
publicly-owned savings bank. At December 31, 1994, Lincoln had total deposits<PAGE>
of $159.6 million and operated seven branch offices located in Integra's
market area. Integra paid $58.00 cash for each outstanding share (other than
shares held by the Corporation) of Lincoln common stock for a total purchase
price of $50.5 million. The transaction was accounted for as a purchase.
Goodwill of $32.9 million and core deposit acquisition premiums of $2.5
million were recorded and are amortized on a straight-line method over fifteen
years and an accelerated method over ten years, respectively. Upon
consummation of the transaction, Lincoln was merged into Integra's retail
banking subsidiary and five branch offices were closed and consolidated with
nearby branch locations. The consolidated statements of income reflect the
operations of Lincoln from the date of acquisition.
4. Securities
The Corporation's securities held to maturity and available for sale at
September 30, 1995 are as follows:
<TABLE>
Securities Held to Maturity Securities Available for Sale
<CAPTION>
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
(Dollars in millions) Cost Gains Losses Value Cost Gains Losses Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities $ 135 $ 1 $-0- $ 136 $ 437 $ 3 $ (8) $ 432
U.S. Government agency
securities 614 4 (1) 617 90 1 -0- 91
Mortgage-backed securities 374 2 -0- 376 1,815 -0- (38) 1,777
Collateralized mortgage
obligations 412 3 (2) 413 348 1 (4) 345
Corporate debt securities 60 1 (1) 60 189 1 (4) 186
Marketable equity
securities -0- -0- -0- -0- 368 112 (9) 471
Asset-backed securities 369 5 (1) 373 221 1 (1) 221
Federal Home Loan Bank and
Federal Reserve Bank
stock -0- -0- -0- -0- 76 -0- -0- 76
State and political
subdivision securities 129 5 (1) 133 3 -0- -0- 3
$2,093 $21 $(6) $2,108 $3,547 $119 $(64) $3,602
</TABLE>
5. Mortgage Banking
Integra adopted Financial Accounting Standards Board (FASB) Statement 122
"Accounting for Mortgage Servicing Rights" during the second quarter of 1995
effective as of January 1, 1995. Statement 122 amends certain provisions of
Statement 65 "Accounting for Certain Mortgage Banking Activities" to require
that rights to service mortgage loans for others be recognized as separate
assets, whether acquired through purchase or origination of mortgage loans.
Prior to adoption, the cost of mortgage servicing rights acquired through loan
origination activities was not separately capitalized. Statement 122 requires
that capitalized mortgage servicing rights be evaluated for impairment based
on their fair value. Impairment is recognized through a valuation allowance
for each stratum for the amount that exceeds fair value. Strata are defined
based on predominant risk characteristics of the underlying loans. Integra<PAGE>
bases its strata on loan type and, within type, by loan rate intervals.
Acquisition costs of mortgage servicing rights are deferred and amortized in
proportion to and over the period of estimated net service fee income.
The effect on the Corporation from the adoption of Statement 122 for the nine
months ended September 30, 1995 was an increase in pre-tax income of $2.7
million for the capitalization of the cost of mortgage servicing rights
acquired through loan origination activities after December 31, 1994, and a
reduction of $.8 million for the establishment of impairment reserves. No
changes were made to previously reported net income.
The activity in the Corporation's capitalized mortgage servicing rights during
the nine months ended September 30, 1995 is summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
(Dollars in thousands)
Balance, December 31, 1994 $24,062
Additions:
Bulk purchases 6,531
Wholesale and retail origination
activities 5,664
Amortization (3,613)
Sales (3,162)
29,482
Impairment reserves (800)
Balance, September 30, 1995 $28,682
</TABLE>
The estimated fair value of Integra's capitalized mortgage servicing rights at
September 30, 1995 was $37.8 million, based on the present value of expected
future cash flows using a discount rate commensurate with the risks involved.
Impairment reserves totalling $.3 million were established upon adoption of
Statement 122 in the second quarter and additional reserves of $.5 million
were recorded in the third quarter of 1995 with no other activity occurring in
the aggregate reserves.
5. Shareholders' Equity
The following is a summary of changes in shareholders' equity during the first
nine months of 1995:
<TABLE>
<CAPTION>
Net
Unrealized Total
Common Capital Retained Gains Treasury Shareholders'
(Dollars in thousands) Stock Surplus Earnings (Losses) Stock Equity
S> <C> <C> <C> <C> <C> <C
<PAGE>
Balance, December 31, 1994 $33,592 $451,769 $518,346 $(113,402) $(31,709) $ 858,596
Net income 119,993 119,993
Common stock dividends, $1.45 per share (47,547) (47,547)
Shares issued through stock plans,
234,614 shares (417) (504) 9,373 8,452
Treasury stock purchased, 148,311 shares (6,117) (6,117)
Change in net unrealized gains (losses)
on securities 144,533 144,533
Balance, September 30, 1995 $33,592 $451,352 $590,288 $ 31,131 $(28,453) $1,077,910
</TABLE>
6. Net Income Per Common Share
Net income per common share was computed as follows:
<TABLE>
<CAPTION>
(Dollars in Three Months Ended Nine Months Ended
thousands except September 30, September 30,
per share data) 1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net income $39,847 $41,436 $119,993 $129,980
Average number of
common shares
outstanding 32,893,015 33,519,969 32,806,089 33,496,596
Common stock
equivalents -
dilutive effect of
assumed exercise
of stock options 300,652 327,659 276,282 333,656
Average common
shares outstanding
- including common
stock equivalent
shares 33,193,667 33,847,628 33,082,371 33,830,252
Net income per
common share $1.20 $1.22 $3.63 $3.84
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and
Shareholders of Integra Financial Corporation:
We have reviewed the accompanying consolidated balance sheet of Integra
Financial Corporation (Integra) and subsidiaries as of September 30, 1995 and
the related consolidated statements of income and cash flows for the three-
month and nine-month periods ended September 30, 1995 and 1994. These
consolidated financial statements are the responsibility of Integra's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
consolidated financial information consists principally of applying analytical
review procedures to financial data and making inquiries of persons
responsible for financial and accounting matters. It is substantially less in
scope than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion regarding
the consolidated financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Integra Financial Corporation as
of December 31, 1994, and the related consolidated statements of income,
change in shareholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated January 18, 1995, we expressed an
unqualified opinion on these consolidated financial statements. In our
opinion the information set forth in the accompanying consolidated balance
sheet as of December 31, 1994 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
Pittsburgh, Pennsylvania
October 16, 1995
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Integra entered into an Agreement and Plan of Merger (the Agreement)
dated August 27, 1995 providing for the merger of Integra with and into
National City Corporation (National City). As of the effective time of the
merger, each outstanding share of Integra common stock will be converted into
two shares of National City common stock. Based on the September 30, 1995
market price of National City stock, the transaction has a value of $61.76 per
share for a total of $2.03 billion. Consummation of the merger is subject to
a number of conditions including receipt of approval of the Agreement by
shareholders of Integra and National City, receipt of all required regulatory
approvals and receipt of opinions of legal counsel and independent
accountants. None of the required regulatory approvals has yet been obtained.
Under the Agreement, Integra will operate its business in the ordinary course<PAGE>
and use its commercially reasonable efforts to preserve intact its business
organization. The transaction is expected to close in the second quarter of
1996.
National City is a registered bank holding company with headquarters in
Cleveland, Ohio. At September 30, 1995, National City had total consolidated
assets of $34.84 billion and total consolidated deposits of $24.47 billion.
National City conducts a general retail and commercial banking business
through its bank subsidiaries, which operate in Ohio, Indiana and Kentucky.
Results of Operations
Net income for the third quarter of 1995 was $39.8 million or $1.20 per
common share compared to net income of $41.4 million or $1.22 per common share
for the third quarter of 1994. For the first nine months of 1995 net income
totalled $120.0 million or $3.63 per common share compared to $130.0 million
or $3.84 per common share for the same period a year ago. The 1995 results
include a one-time charge of $10.5 million for a special assessment expected
to be levied in January 1996 on deposits insured by the Savings Association
Insurance Fund (SAIF) partially offset by a $5.3 million premium refund on
deposits insured by the Bank Insurance Fund (BIF) recorded in non-interest
expense in the third quarter. Also impacting 1995 earnings were lower net
interest income, a reduced provision for loan losses, increased non-interest
income and higher non-interest expense compared to the prior year.
Net interest income decreased $6.5 million or 5% for the third quarter
of 1995 and $18.1 million or 5% for the nine months ended September 30, 1995
compared to the same periods of 1994. Net interest income was negatively
affected by increased funding costs from higher short-term interest rates
compared to last year and a shift in the mix of deposits from savings and
money market accounts into higher cost time deposits. Integra's net interest
margin declined during the third quarter of 1995 to 3.81% from 3.88% in the
second quarter of 1995 and 4.30% in the third quarter of 1994. The margin for
the first nine months of 1995 and 1994 was 3.88% and 4.23%, respectively. The
cost of interest bearing liabilities increased more than the yield on earning
assets as a result of interest rate levels with higher short-term rates
driving up funding costs, and only slightly higher longer term rates limiting
asset repricing. Additionally, competitive pressures influenced loan pricing
and deposit mix.
Total interest income increased $33.7 million for the third quarter of
1995 compared to 1994 and $90.3 million for the year-to-date periods. Higher
interest income was attributable to increases in the average yield and balance
of earning assets. The yield on earning assets rose to 8.03% for the first
nine months of 1995 from 7.44% for the same period in 1994 due to a higher
level of market interest rates. Additionally, the yield on securities was
positively impacted by changes in the mix and lengthening the duration of the
portfolio. Average earning assets increased $604.5 million or 5% for the nine
months ended September 30, 1995 over the 1994 period. Increases occurred in
residential real estate and consumer loans and securities.
Interest expense increased $40.3 million and $108.4 million for the
three and nine months ended September 30, 1995, respectively, compared to the
same periods in 1994. Average interest bearing liabilities increased $677.8
million or 6% year-to-date 1995 compared to the same period of 1994. The
average cost of interest bearing funds was 4.80% in the first nine months of
1995, up from 3.78% in the corresponding 1994 period. A shift from savings
and money market accounts into more costly time and premium-priced money
market deposits contributed to the upward funding costs. Additionally, steps<PAGE>
to manage interest rate sensitivity with longer term funding added to the
higher cost of borrowings.
The margin is expected to improve in the fourth quarter of 1995 as a
result of an increased yield on earning assets from anticipated consumer loan
growth and the improved securities portfolio yield, and a lower cost of
interest bearing liabilities based in part on forecasted core deposit growth.
The provision for loan losses was $4.0 million for the third quarter of
1995 and $12.0 million year-to-date compared to $6.0 million and $24.0 million
for the third quarter and first nine months of 1994. The reduction in the
provision was driven by continued improvement in measurements of asset
quality.
Net securities gains were $8.8 million and $17.0 million for the three
and nine months ended September 30, 1995, respectively, compared to gains of
$.7 million and $19.1 million for the same periods in 1994. The 1995 gains
were realized in the normal course of portfolio management and were composed
of $21.1 million net gains on equity securities and $4.1 million net losses on
debt securities. Equity securities gains resulted primarily from a strong
stock market and were realized mainly on bank common stocks. Net losses on
debt securities occurred on U.S. Treasury securities called under covered
options written by Integra, and sales of balloon and convertible variable rate
mortgage-backed securities and corporate debt securities. Proceeds were
reinvested in higher yielding securities.
Total non-interest income increased $3.1 million or 11% and $14.5
million or 17% for the three and nine months ended September 30, 1995,
respectively, from the same periods in the prior year. The higher income for
the year-to-date period was mainly attributable to a $5.5 million gain from
the sale of mortgage servicing and $3.2 million of gains on consumer finance
loans sold. Additionally, service charges on deposit accounts and other
service charges and fees increased in 1995 with growth occurring primarily in
automated teller machine, credit card and nonsufficient fund fees.
Trust income increased slightly during the third quarter of 1995 and
$1.1 million during the first nine months of the year from the same periods a
year ago due to a change in 1995 to accrual of management fees relating to
employee benefit plans previously accounted for on a cash basis and the
positive impact of an increase in the market value of trust assets to $8.73
billion at September 30, 1995 from $8.41 billion a year ago.
Mortgage banking income increased in 1995 due to the first quarter gain
on the sale of $426.4 million of mortgage servicing and the adoption of
Financial Accounting Standards Board (FASB) Statement 122. The effect of
Statement 122 for the nine months ended September 30, 1995 was $1.9 million
which consisted of an increase in mortgage banking income of $2.7 million for
the capitalization of the cost of mortgage servicing rights partly offset by
$.8 million of impairment reserves. The mortgage banking portfolio of loans
serviced for others totalled $3.65 billion and $3.72 billion at September 30,
1995 and 1994, respectively. Integra buys and sells servicing periodically as
part of its normal mortgage banking activities. During the first nine months
of 1995, $435.4 million of servicing was purchased. Integra sold loans on a
flow basis with servicing released totalling $119.9 million in the second and
third quarters of 1995 under a nine month commitment expiring in January 1996
to sell a minimum of $150.0 million of loans.
Other non-interest income increased $.3 million and $3.4 million for the
three and nine months ended September 30, 1995, respectively, compared to the
same periods in the prior year. In the second quarter of 1995 $3.2 million of<PAGE>
gains were recognized on $37.3 million of consumer finance loans sold and in
the first quarter of 1995 non-recurring income of $1.2 million relating to
foreclosed assets was recorded. In the first nine months of 1994, other non-
interest income included $.8 million of one-time recoveries and settlements
and $1.1 million of fees recognized in connection with writing covered call
options on U.S. Treasury securities compared to $.4 million in 1995. In
addition, other non-interest income increased in 1995 over 1994 due to higher
operating lease income from expanded activity of a commercial leasing
subsidiary.
Total non-interest expense increased $10.5 million and $25.7 million for
the three and nine months ended September 30, 1995 compared to the same
periods a year ago due primarily to higher Federal Deposit Insurance
Corporation (FDIC) premium expense. Other contributing factors were normal
employment cost increases and higher occupancy and equipment expenses.
FDIC premium expense increased $5.4 million and $5.6 million for the
three and nine months ended September 30, 1995, respectively, compared to the
same periods a year ago. In August 1995, the FDIC lowered the BIF insurance
rate for healthy banks from 23 cents to 4 cents per hundred dollars of
eligible deposits retroactive to June 1, 1995. During the third quarter of
1995, a premium refund on deposits reflecting this rate reduction was received
totalling $5.3 million, of which $1.3 million related to the second quarter of
1995. The SAIF premium rate remains at 23 cents, however, the FDIC is
expected to levy in January 1996 a one-time assessment on SAIF deposits for
which Integra accrued 66 cents per hundred dollars of deposits or $10.5
million in the third quarter of 1995. Approximately $1.60 billion of
Integra's deposits are assessed the SAIF premium rate. Such deposits were
purchased from or obtained in acquisitions of savings institutions.
Total compensation and employee benefit costs increased $1.2 million and
$11.4 million for the three and nine months ended September 30, 1995,
respectively, compared to the year ago periods. Charges relating to an early
retirement program offered as part of corporate restructuring totalled $3.6
million for the nine months ended September 30, 1995. Normal employment and
benefit cost increases were also contributing factors to the higher expense in
1995.
Year-to-date net occupancy expense decreased in 1995 from the prior year
due to lower repairs and maintenance costs relating mainly to branch offices.
During the third quarter of 1995, net occupancy exceeded the same quarter a
year ago as a result of new leasing arrangements for office space primarily
for administrative functions of the banking subsidiary. Higher furniture and
equipment expenses in the current year compared to 1994 resulted from
increased computer hardware and software maintenance costs and depreciation
expense on a higher balance of assets held by a commercial leasing subsidiary.
Gains of $1.5 million recognized during the first quarter of 1995 on
sales of commercial properties previously held in other real estate owned
lowered foreclosed asset expense for the year-to-date period. Similarly, $2.0
million of gains occurred during the second quarter of 1994. Excluding these
gains, foreclosed asset expense decreased in 1995 over the prior year as
holdings of other real estate owned declined.
Amortization of intangible assets increased in the three and nine months
ended September 30, 1995 compared to the same periods in 1994 due to
amortization of goodwill relating to the Lincoln Savings Bank (Lincoln)
acquisition. Other non-interest expense increased $2.2 million for the
quarter and $7.3 million for the nine months ended September 30, 1995,
respectively, compared to the same periods in the previous year due largely to<PAGE>
consulting fees related to revenue enhancement, human resource and corporate
reorganization projects and normal operating cost increases.
The Corporation recorded federal income taxes of $15.4 million and $47.5
million for the three and nine months ended September 30, 1995, respectively,
compared to $17.7 million and $56.9 million for the three and nine months
ended September 30, 1994, respectively. The decrease in the tax provision
during 1995 resulted primarily from a lower level of taxable earnings. An
effective tax rate of approximately 28% is expected for the final quarter of
1995.
Integra merged its three retail banks under a single state charter
effective May 25, 1995 as part of its plans to restructure the Corporation
into five separate industry groups. The banking industry group consists of
ten community bank markets within western Pennsylvania. The reorganization
was not designed to be a cost-cutting measure, and expense reductions in
certain business lines are expected to offset increased expenses in growth-
oriented businesses.
Interest Rate Sensitivity and Liquidity
The objective of asset/liability management at Integra is to maximize
current and future net interest income within acceptable levels of interest
rate risk while satisfying liquidity and capital requirements. The
Asset/Liability Management Committee is responsible for managing interest rate
risk within tolerable limits as established in the Corporation's policy.
Interest rate risk is measured and managed based primarily on information
provided by an earnings simulation model that is used to project the effect of
upward and downward changes in interest rates on net interest income and net
income. Included in the simulations are such variables as loan and deposit
volume and mix, spreads, prepayments and maturities, repricing and other
balance sheet characteristics and assumptions which might impact the
Corporation's expected performance results under various market conditions.
The sensitivity of off-balance sheet derivative financial instruments to
changing interest rates is also monitored in the model. One method to measure
the sensitivity of net interest income to interest rate changes is through
comparison of a base simulation that holds market interest rates constant to
simulations of upward movements in market rates. As of September 30, 1995, in
gradually rising 100 and 200 basis point scenarios, net interest income over a
twelve month period would decrease by 2.1% and 4.3%, respectively. The
comparable estimates at June 30, 1995 were 1.5% and 3.5% for 100 and 200 basis
point gradually rising rates, respectively. Due to the perceived remote
possibility of rising rates, the Corporation allowed its liability sensitive
position to increase somewhat during the third quarter by lengthening the
duration of the securities portfolio and through growth in new, premium-priced
money market accounts. An increase in liability sensitivity enhances the
potential benefit of declining interest rates. Current expectations are for a
relatively stable to slightly lower interest rate environment.
Integra views derivative financial instruments, such as interest rate
swaps and caps and forward commitments, as alternatives, both on- and off-
balance sheet, to manage interest rate sensitivity and, to a lesser degree,
liquidity and capital adequacy. The Corporation uses derivatives for interest
rate risk management in accordance with its policy guidelines. Integra
assesses the effectiveness of interest rate swaps and caps, which are entered
into specifically to hedge/alter groups of assets or liabilities, in<PAGE>
conjunction with its overall interest rate sensitivity analyses. These
analyses are performed as part of strategy development as well as to provide
ongoing monthly evaluations.
Management utilized interest rate swaps to hedge/alter certain
designated securities, deposits and long-term debt by changing their interest
rate repricing characteristics. Interest rate caps were purchased to reduce
the impact of then-anticipated increases in interest rates on short-term
borrowings. The following table summarizes the change in notional principal
amount of interest rate swaps and caps during the nine months ended September
30, 1995:
<TABLE>
Interest Rate Swaps Interest Rate Caps
<CAPTION>
Index Forward
(Dollars in millions) Amortizing Other Total Start Other Total
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $981 $160 $1,141 - $1,000 $1,000
New agreements - - - $200 100 300
Amortization (190) - (190) - - -
Terminations (200) - (200) - - -
Maturities - (60) (60) - - -
Balance, September 30, 1995 $591 $100 $691 $200 $1,100 $1,300
</TABLE>
For index amortizing swaps, the notional amount is unchanged for a
specified period after which, based on the level of the index at each
quarterly reset date, the contract will mature, amortize, or continue at its
full notional amount. In the second quarter of 1995, $200.0 million interest
rate swaps that hedged/altered consumer loans were terminated, resulting in an
immaterial loss which was expensed. Although the hedging strategy was
effective, the swaps were terminated as part of the asset/liability management
process due to the volatility of interest rates.
The following table summarizes maturities, weighted average interest
rates received and paid and estimated fair value of interest rate swaps and
caps as of September 30, 1995:
<TABLE>
<CAPTION>
Estimated
Reset/Maturity Fair
(Dollars in millions) 1995 1996 1997 Total Value
S> <C> <C> <C> <C> <C
<PAGE>
Index amortizing swaps
Notional amount by hedged/altered
category:
Securities available for sale $191 $100 $291 $(4)
Deposits 100 200 300 (3)
$291 $300 $591 $(7)
Reference rate (1) 4.53% 5.35% 4.95%
Weighted average final maturity in years 2.4 3.4 2.9
Fixed receive rate 4.94% 5.85% 5.40%
Floating pay rate 5.90% 5.96% 5.93%
Other swaps
Notional amount by hedged/altered
category:
Long-term debt $100 $100 $(1)
Fixed receive rate 5.12% 5.12%
Floating pay rate 6.25% 6.25%
Interest rate caps
Notional amount $1,000 $100 $1,100 -
Reference rate (2) 6.00% 7.00% 6.09%
Floating index rate 5.89% 5.88% 5.89%
Forward start caps (3)
Notional amount $200 $200 -
Reference rate (2) 7.00% 7.00%
<FN>
(1) When LIBOR is at or below this level on initial maturity or quarterly
reset dates, swap experiences 100% amortization.
(2) Interest is received based on differential of floating index rate over
fixed reference rates; no payment is received if index rate is below
reference rate.
(3) Commence November 1995.
</TABLE>
Floating rates, which are based on LIBOR for all agreements, represent
rates in effect on September 30, 1995. Subsequent changes in LIBOR rates will
affect all floating rates and actual amortization and maturities of index
amortizing swaps. Maturity information reflects contractual terms based on
rates on September 30, 1995. Index amortizing swaps are included in the table
at their initial maturity dates or, if beyond, their next quarterly reset
dates. While terms of index amortizing swaps may extend beyond the quarterly
reset dates in the table, amortization is anticipated to accelerate based on
expectations for a lower LIBOR level. As of September 30, 1995, based on
Integra's interest rate sensitivity analysis, the estimated weighted average
expected life of the index amortizing swap portfolio was 1.3 years. A 300
basis point upward movement in interest rates could extend the expected
average life to 2.9 years.
The fair value of derivatives changes with shifts in market interest
rates and should be considered in the context of the entire balance sheet. A
mark to market evaluation is performed at least monthly on interest rate swaps<PAGE>
and caps. The estimated fair value of interest rate swaps and caps, which
represents the amount the Corporation would pay, or receive if a gain, to
terminate the agreements was a net unrealized loss of $8.3 million at
September 30, 1995 compared to a net unrealized loss of $73.3 million at
December 31, 1994. The improvement in fair value during the nine months
reflected the decline in market interest rates and the financial market's
expectation for stable interest rates. The unrealized loss on interest rate
swaps that hedge/alter securities available for sale of $4.4 million was
recorded as part of the net unrealized gain/loss on the underlying securities
in accordance with FASB Statement 115. At September 30, 1995, the fair value
of interest rate caps was positive $.2 million, unamortized premiums paid for
the interest rate caps were $2.3 million with an unrealized loss of $2.1
million.
Integra receives fixed and pays floating interest rates on all of its
swaps. The impact on net interest income of swaps will increase or be
positive during periods of declining rates and decrease or be negative in
periods of rising rates. Caps will contribute to net interest income in
periods of rising rates. Any negative effect of Integra's caps on net
interest income is limited to amortization of the upfront premiums paid. The
effect of interest rate swaps and caps on net interest income and the margin
for the nine months ended September 30, 1995 and 1994 was as follows:
<TABLE>
Nine months ended September 30,
<CAPTION>
(Dollars in millions) 1995 1994
<S> <C> <C>
Increase (decrease) in:
Interest income $(4.0) $4.3
Interest expense (5.9) 2.8
Net interest income $(9.9) $7.1
Net interest margin (.10%) .07%
</TABLE>
Based on management's interest rate forecast, the effect of interest
rate swaps and caps on net interest income and the margin for the fourth
quarter of 1995 is anticipated to remain negative but improve as index
amortizing swaps continue to amortize and $1.0 billion of caps expire. The
anticipated impact on the net interest margin for the year 1995 of caps and
swaps is estimated to be negative eight basis points compared to negative ten
basis points in the above table for the first nine months of 1995.
The Corporation utilizes off-balance sheet financial instruments in the
form of forward commitments in conjunction with its mortgage banking
activities. Forward commitments are used to hedge the interest rate risk from
the time residential real estate loans are committed to until they are sold in
the secondary mortgage market. On September 30, 1995, the Corporation had
$179.4 million of forward commitments to sell mortgage-backed securities and
$4.0 million option contracts outstanding.
Integra manages its liquidity position by continually evaluating its
funding needs and the costs and terms of funding sources. The Corporation has
sufficient sources of funds available at all times to meet its routine,<PAGE>
operational cash needs by virtue of its monetary assets and liabilities.
Long-term sources of funds include debt issued in the financial market and
FHLB borrowing programs. Short-term borrowings in the form of FHLB advances
and securities sold under agreements to repurchase have been regular financing
sources for Integra. In the second quarter of 1995, a $2.00 billion bank note
program was established and $100.0 million in senior bank notes were issued.
Also in 1995, Integra became more active in the federal funds purchased and
broker repo markets and has the availability of other sources of funding such
as brokered certificates of deposit.
Cash for operating activities is provided by net income adjusted for
noncash related items such as depreciation and amortization expense and
provision for loan losses. Cash was used for investing activities for the
first nine months of 1995 largely to fund growth in securities, loans and
short-term investments. Additionally, net cash of $46.7 million was used to
fund the purchase of Lincoln on January 5, 1995. Financing activities
provided cash from net increases in long-term debt, time deposits and short-
term borrowings partly offset by outflows in demand and savings deposits.
Financial Condition
Integra's total assets were $14.58 billion at September 30, 1995, an
increase of $821.8 million from December 31, 1994. The higher asset level
resulted from an increase in securities and loans and the Lincoln acquisition
on January 5, 1995.
Loans. Loans, net of unearned income, increased $283.8 million to $7.88
billion at September 30, 1995 from $7.60 billion at December 31, 1994. During
the third quarter of 1995, Integra experienced loan growth of $168.8 million
or 9% on an annualized basis, primarily in consumer and residential real
estate loans. The Lincoln acquisition added $120.2 million of loans comprised
of $67.7 million residential real estate, $36.4 million commercial real
estate, $10.5 million commercial, $3.5 million consumer and $2.1 million
designated for sale. Loan growth is anticipated for the last quarter of 1995
primarily in consumer, residential and commercial loans to small businesses.
The composition of loans is shown in the following table:
<TABLE>
<CAPTION>
September 30, December 31, Increase
(Dollars in millions) 1995 1994 (Decrease)
<S> <C> <C> <C>
Commercial $1,161 $1,452 $(291)
Real estate:
Construction 163 153 10
Commercial 929 722 207
Residential 2,173 1,986 187
Consumer 3,474 3,295 179
Lease finance 85 86 (1)
7,985 7,694 291 <PAGE>
Unearned income (103) (96) (7)
Total, net of
unearned income $7,882 $7,598 $ 284
</TABLE>
The apparent fluctuation in commercial and commercial real estate loans
was in large measure due to reclassifications resulting from a corporate-wide
project to correct certain loan system coding inconsistencies relating to
various mergers in prior years. Commercial and commercial real estate loans
declined in total by $83.2 million during the first nine months of 1995
largely as a result of sales of nonstrategic out-of-market loans obtained in a
merger. During the nine months ended September 30, 1995, Integra sold $61.8
million of such loans which essentially eliminated the portfolio of
nonstrategic out-of-market loans.
Residential loans increased during 1995 from a higher volume of loan
originations due to greater market demand. During the first nine months of
1995, $68.9 million of permanent construction and $76.1 million of variable
rate real estate portfolio loans were sold servicing retained by the mortgage
banking subsidiary at gains of $1.5 million, which were included in mortgage
banking income. Consumer loans increased in 1995 due mainly to originations
of home equity, consumer finance, education and indirect automobile loans.
This growth was somewhat offset by sales of $37.3 million of consumer finance
loans at gains totalling $3.2 million. Integra's consumer finance business,
which consists of collateral-based, nonconforming lending, is conducted
through a subsidiary, Altegra Credit Company. The Corporation is expanding
this line of business in states generally east of the Mississippi River with
seven direct lending offices opened through September and plans for seven more
in 1995. Sales of consumer finance loans may occur from time to time to cover
expansion costs.
Nonperforming Assets. Nonperforming loans declined from $83.2 million at
September 30, 1994 to $60.7 million at September 30, 1995. Nonperforming
assets decreased to $75.2 million at September 30, 1995 from $97.7 million at
December 31, 1994 and $119.3 million a year ago. The $22.5 million decrease
in nonperforming assets from year end 1994 was due in part to sales of
nonperforming assets consisting of $8.6 million of nonperforming loans located
outside of Integra's market area sold in the second quarter and $10.8 million
of other real estate owned sold in the first quarter. The ratio of
nonperforming assets to loans plus foreclosed assets was .95% at September 30,
1995, down from 1.59% a year ago and 1.28% at December 31, 1994.
The following table presents the composition of nonperforming assets and
past due loans at the dates indicated:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
(Dollars in thousands) 1995 1994 1994
S> <C> <C> <C
<PAGE>
Nonaccrual loans $ 60,631 $ 63,071 $ 80,774
Renegotiated debt 63 2,392 2,452
Total nonperforming
loans 60,694 65,463 83,226
In-substance foreclosures (1) -0- 6,140 7,449
Other real estate owned 14,547 26,089 28,663
Total foreclosed assets 14,547 32,229 36,112
Total nonperforming
assets 75,241 97,692 119,338
Loans past due 90 days or
more and still accruing 27,656 23,412 24,080
Total nonperforming assets
and past due loans $102,897 $121,104 $143,418
(1) In-substance foreclosures were reclassified to nonaccrual loans upon the adoption of FASB
Statement 114 as of January 1, 1995.
</TABLE>
Reserve for Loan Losses. The Corporation's loan loss reserve at September 30,
1995 was $221.8 million or 2.81% of total loans compared to $241.4 million or
3.23% of total loans at September 30, 1994. The reserve to nonperforming
loans ratio was 365% at September 30, 1995, up from 290% a year earlier. Net
loan charge-offs for the nine months ended September 30, 1995 and 1994 were
$30.1 million and $24.5 million, respectively. The 1995 net charge-offs
included $16.1 million related to non-strategic, primarily out-of-market,
loans. The remaining, normal charge-offs of $14.0 million were slightly above
the year-to-date provision for loan losses of $12.0 million. Integra's
management believes that the reserve for loan losses is adequate to absorb
reasonably foreseeable losses on loans.
The following table details the activity in the loan loss reserve and
information regarding the relationship of the reserve to loans, nonperforming
loans and nonperforming assets and the ratio of net charge-offs to average
loans for the nine months ended September 30, 1995 and 1994.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
(Dollars in thousands) 1995 1994
S> <C> <C
<PAGE>
Reserve balance, beginning of period $237,433 $241,901
Provision for loan losses 12,000 24,000
Loan charge-offs:
Commercial (7,933) (16,742)
Real estate:
Construction (220) (328)
Commercial (16,108) (7,724)
Residential (846) (386)
Consumer (17,485) (18,165)
Lease finance (63) (86)
Total loan charge-offs (42,655) (43,431)
Loan recoveries:
Commercial 6,281 12,942
Real estate:
Construction 1 -0-
Commercial 731 515
Residential 53 21
Consumer 5,501 5,416
Lease finance 14 52
Total loan recoveries 12,581 18,946
Net loan charge-offs (30,074) (24,485)
Reserve of acquired company 2,450 -0-
Reserve balance, end of period $221,809 $241,416
Loan loss reserve to loans 2.81% 3.23%
Loan loss reserve to nonperforming loans 365.45 290.07
Loan loss reserve to nonperforming assets 294.80 202.30
Net loan charge-offs to average loans .52 .45
</TABLE>
Securities. Securities available for sale and held to maturity totalled $5.69
billion at September 30, 1995, up from $5.24 billion at December 31, 1994.
The held to maturity portfolio increased $546.4 million during the nine month
period and available for sale securities declined by $93.5 million. The
securities portfolio was restructured through purchases, most of which were
classified as held to maturity, that included callable agency securities,
asset-backed securities and collateralized mortgage obligations, and sales of
available for sale securities consisting mainly of mortgage-backed securities,
primarily variable rate for which prepayment risk was a concern, and U.S.
Treasury securities. Increasing the held to maturity portfolio was not an
intended goal, but resulted from the types of securities that were purchased
based on market opportunities during the period. These transactions had the
effect of lengthening the duration of the securities portfolio and improving
the yield on average securities which rose eight basis points in the third
quarter of 1995 over the second quarter, excluding the impact to the yield of
net unrealized gains/losses on securities available for sale.
Net unrealized losses on securities available for sale at December 31,
1994 of $168.6 million improved during the first nine months of 1995 to $55.0
million net unrealized gains at September 30, 1995 as market interest rates
declined. The quarter end net unrealized gain was comprised of $102.7 million
unrealized gain on equity securities and $47.7 million unrealized loss on debt
securities.
The composition of the Corporation's securities held to maturity at
amortized cost and securities available for sale at fair value is shown in the
following table:
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
Held to Available Held to Available
(Dollars in millions) Maturity for Sale Maturity for Sale
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 135 $ 432 $ 125 $ 577
U.S. Government agency
securities 614 91 424 164
Mortgage-backed securities 374 1,777 242 1,849
Collateralized mortgage
obligations 412 345 384 278
Corporate debt securities 60 186 17 225
Marketable equity securities -0- 471 -0- 348
Asset-backed securities 369 221 258 146
Federal Home Loan Bank and
Federal Reserve Bank stock -0- 76 -0- 107
State and political
subdivision securities 129 3 96 1
Other securities -0- -0- -0- 1
Total securities $2,093 $3,602 $1,546 $3,696
</TABLE>
As of September 30, 1995, mortgage-backed securities and collateralized
mortgage obligations in total represented 51% of Integra's securities
portfolio. These mortgage-related securities are impacted by the effects that
changing interest rates have on the level of prepayments. Such susceptibility
to prepayment variations is factored into Integra's interest rate sensitivity
analysis. The weighted average expected lives of fixed rate mortgage-backed
securities and collateralized mortgage obligations were 4.7 years and 3.2
years, respectively, as of September 30, 1995. A 300 basis point upward
movement in interest rates could extend the expected average lives to 5.9
years and 5.0 years for fixed rate mortgage-backed securities and
collateralized mortgage obligations, respectively. Stress tests are performed
at least quarterly in which 100, 200 and 300 basis point instantaneous up and
down interest rate movements are evaluated. Included in U.S. government
agency securities held to maturity as of September 30, 1995 were $10.0 million
in structured notes, a decline of $216.5 million from June 30, 1995.
Structured notes were called by the issuer agencies during the third quarter
due to interest rate levels.
Integra writes covered call options primarily on U.S. Treasury
securities in connection with its securities activities. The Corporation
writes such options with the objective of enhancing the performance of fixed
income securities when market conditions, such as anticipated periods of low
volatility, warrant such activities. During the first nine months of 1995,
premium fee income of $.4 million was recognized in non-interest income on
expired options compared to $1.1 million in the 1994 period. A net loss on
options exercised of $2.7 million was included in net securities gains in the
1995 year-to-date period compared to a net loss of $1.3 million in the 1994<PAGE>
period. A call option written on $30.0 million of U.S. Treasury securities
was outstanding on September 30, 1995 with deferred fees of $.1 million. The
contract expires in October 1995.
Liabilities. Total liabilities were $13.50 billion at September 30, 1995, up
$602.5 million from the December 31, 1994 level. Increases occurred in long-
term debt, short-term borrowings and deposits.
Deposits. Total deposits increased $128.8 million to $10.21 billion at
September 30, 1995 from $10.08 billion at December 31, 1994. Integra obtained
$159.6 million of deposits in the Lincoln acquisition, including $84.5 million
of time deposits and $46.3 million of savings accounts. During the nine
months of 1995, Integra experienced a shift in its deposit mix into time
deposits out of savings and demand accounts. This industry-wide trend
occurred as depositors were attracted by the higher rates on time deposits
which moved up as a result of the rise in market interest rates which
typically impacts deposit pricing on a time lag. Growth in time deposits
occurred mainly in certificates with terms between twelve and 24 months. Non-
interest bearing demand deposits declined in the nine month period of 1995 due
in part to the reclassification to money market deposits of escrow accounts
with limited monthly transactions totalling $60.9 million at September 30,
1995 held in conjunction with Integra's mortgage banking business. During the
third quarter of 1995, a new type of money market account linked to existing
interest bearing demand accounts was established. Balances of accounts that
do not exceed maximum transaction levels and which are in excess of the
amounts needed to cover each customer's historic activity level are
transferred from the demand accounts to the related money market accounts,
with the effect of lowering the requirement for reserves that must be
maintained by Federal Reserve member banks. Such balances, which are paid the
interest bearing demand account rate, totalled $710.2 million at September 30,
1995 and are included in the following table with interest bearing demand.
Integra's money market deposits increased in 1995 with the promotion of a
preferred investment account which offers customers higher rates on accounts
with balances over $25,000. Integra considers its retail funding base to be
stable.
The composition of deposits is shown in the following table:
<TABLE>
<CAPTION>
September 30, December 31, Increase
(Dollars in millions) 1995 1994 (Decrease)
<S> <C> <C> <C>
Non-interest bearing demand $ 1,342 $ 1,488 $(146)
Interest bearing demand 874 946 (72)
Savings 1,033 1,086 (53)
Money market 1,822 1,650 172
Time deposits under $100,000 4,505 4,342 163
Time deposits of $100,000 or
more 636 571 65
Total deposits $10,212 $10,083 $ 129
</TABLE>
Borrowings. During the nine months of 1995, the Corporation extended the
terms of wholesale borrowings to manage its liability sensitivity. Average
short-term borrowings declined slightly and long term debt increased for the
nine month period of 1995 compared to 1994.
Short-term borrowings increased $206.2 million from December 31, 1994 to
September 30, 1995 and the mix of short-term funds changed, with increases of
$290.4 million in securities sold to brokers under agreements to repurchase,
$200.4 million in federal funds purchased and $134.8 million in FHLB advances
partly offset by a decline of $441.7 million in securities sold to FHLBs under
agreements to repurchase. Integra became more active in the term federal
funds and broker repo markets during 1995 as a part of its ongoing evaluations
of funding alternatives. The Corporation's banking subsidiary established a
brokered certificate of deposit program which had not been utilized as of
September 30, 1995.
The following table sets forth certain information regarding short-term
borrowings of the Corporation, which are due in one year or less, for the
periods indicated.
<TABLE>
<CAPTION>
Nine months ended Year ended
(Dollars in thousands) September 30, 1995 December 31, 1994
Weighted Weighted
Average Average
Balance Rate Balance Rate
<S> <C> <C> <C> <C>
Securities sold under
agreements to repurchase:
Balance at end of
period $1,083,984 5.64% $1,164,076 5.49%
Average during period 1,096,033 6.04 1,134,341 4.02
Maximum month-end
balance 1,315,259 1,695,085
FHLB advances:
Balance at end of
period $346,800 5.82% $212,000 4.31%
Average during period 378,281 3.77
Maximum month-end 250,066 5.89
balance 346,800 502,000
Federal funds purchased:
Balance at end of
period $233,450 6.30% $33,100 6.00%
Average during period 194,133 6.14 39,863 4.50
Maximum month-end
balance 310,440 64,003
</TABLE>
Long-term debt increased $206.8 million or 20% from year end 1994 to
$1.26 billion at September 30, 1995. Securities sold to brokers under
agreements to repurchase increased $408.2 million somewhat offset by a $263.3
million decrease in long-term FHLB advances. In the second quarter of 1995,<PAGE>
$100.0 million of five year, 6.55% senior bank notes were issued under a $2.00
billion program.
Capital Resources. Shareholders' equity increased $219.3 million from $858.6
million at December 31, 1994 to $1.08 billion at September 30, 1995 due to a
$144.5 million improvement in the after-tax net unrealized gains on securities
available for sale and nine months 1995 net income of $120.0 million. Equity
was reduced by cash dividends paid to shareholders of $47.5 million. On April
26, 1995, Integra's board of directors increased the quarterly dividend from
$.45 to $.50 per share of common stock. This was Integra's third dividend
increase in fifteen months. The fourth quarter dividend of $.50 per share is
payable on December 1, 1995 to shareholders of record as of November 15, 1995.
Common shares outstanding were 32,912,820 on September 30, 1995 compared to
32,826,517 shares on December 31, 1994 and 33,502,722 shares on September 30,
1994. Integra has repurchased its common stock under an existing stock
repurchase program with two million shares authorized. During the first nine
months of 1995, 148,311 shares of common stock were repurchased at an average
price of $41.24. Since inception of the program in 1993, 1,099,518 shares
have been purchased at an average cost of $41.93.
Integra continues to maintain a strong capital position, with a leverage
ratio of 6.91%, a tangible leverage ratio of 6.66%, a core capital to risk-
weighted assets ratio of 11.18% and a total capital to risk-weighted assets
ratio of 14.67% at September 30, 1995. All of the capital ratios exceeded
current regulatory requirements for consideration as a "well capitalized" bank
holding company which is the highest designation.
<PAGE>
<TABLE>
INTEGRA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCES AND NET INTEREST ANALYSIS
<CAPTION>
Three Months Ended September 30,
1995 1994
(Dollars in thousands) Daily Interest Average Daily Interest Average
Average Income/ Annualized Average Income/ Annualized
ASSETS Balance Expense(1) Yield/Rate Balance Expense(1) Yield/Rate
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Short-term investments $ 187,077 $ 3,206 6.80% $ 17,894 $ 227 5.04%
Debt securities 5,329,259 89,235 6.70 4,864,302 77,650 6.38
Equity securities 459,394 8,772 7.64 368,421 6,725 7.30
Total securities 5,788,653 98,007 6.77 5,232,723 84,375 6.44
Trading securities 25,345 329 5.15 74,351 1,008 5.38
Loans held for sale 139,458 1,893 5.43 140,424 2,843 8.10
Loans, net of earned
income 7,789,262 177,394 9.05 7,376,143 157,647 8.49
Total earning assets 13,929,795 280,829 8.03 12,841,535 246,100 7.63
Cash and due from banks 308,967 363,229
Other assets 575,179 537,087
Reserve for loan losses (224,724) (244,730)
Total assets $14,589,217 $13,497,121 <PAGE>
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing
liabilities:
Interest bearing demand $ 573,063 1,984 1.37 $ 966,568 3,308 1.36
Savings 1,052,208 6,391 2.41 1,136,690 6,461 2.26
Money market 2,135,830 16,908 3.14 1,766,904 11,232 2.52
Time deposits 5,136,200 75,003 5.79 4,716,222 58,681 4.94
Total interest
bearing deposits 8,897,301 100,286 4.47 8,586,384 79,682 3.68
Short-term borrowings 1,694,426 26,260 6.15 1,568,435 16,423 4.15
Long-term debt 1,362,007 21,575 6.30 797,989 11,732 5.85
Total interest
bearing liabilities 11,953,734 148,121 4.92 10,952,808 107,837 3.91
Non-interest bearing
deposits 1,353,997 1,443,476
Other liabilities 227,750 177,523
Total liabilities 13,535,481 12,573,807
Shareholders' equity 1,053,736 923,314
Total liabilities and
shareholders'equity $14,589,217 $13,497,121
Net interest spread 3.11% 3.72%
Net interest income/Net
interest margin 132,708 3.81% 138,263 4.30%
Taxable equivalent
adjustment 5,016 4,022
Net interest income per
financial
statements $127,692 $134,241
<FN>
(1) Presented on a fully taxable equivalent basis.
</TABLE>
<PAGE>
<TABLE>
INTEGRA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCES AND NET INTEREST ANALYSIS
<CAPTION>
Nine Months Ended September 30, 1995
1995 1994
(Dollars in thousands) Daily Interest Average Daily Interest Average
Average Income/ Annualized Average Income/ Annualized
ASSETS Balance Expense(1) Yield/Rate Balance Expense(1) Yield/Rate
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Short-term investments $ 163,190 $ 8,365 6.90% $ 28,433 $ 816 3.83%
Debt securities 5,115,037 254,488 6.64 5,140,233 240,144 6.23
Equity securities 396,441 23,503 7.90 369,123 19,336 6.98 <PAGE>
Total securities 5,511,478 277,991 6.73 5,509,356 259,480 6.28
Trading securities 35,700 1,607 6.02 50,111 1,848 4.93
Loans held for sale 91,170 4,468 6.53 145,916 8,650 7.90
Loans, net of unearned
income 7,760,292 522,777 9.00 7,223,536 451,575 8.35
Total earning assets 13,561,830 815,208 8.03 12,957,352 722,369 7.44
Cash and due from banks 324,921 367,207
Other assets 592,562 489,773
Reserve for loan losses (233,857) (244,139)
Total assets $14,245,456 $13,570,193
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest bearing
liabilities:
Interest bearing demand $ 804,789 8,017 1.33 $ 976,774 10,135 1.39
Savings 1,087,189 19,471 2.39 1,144,881 19,481 2.28
Money market 1,821,674 42,988 3.06 1,813,253 33,000 2.43
Time deposits 5,153,458 219,692 5.73 4,650,665 170,794 4.91
Total interest bearing
deposits 8,867,110 290,168 4.37 8,585,573 233,410 3.64
Short-term borrowings 1,655,706 74,602 6.02 1,684,419 45,885 3.64
Long-term debt 1,183,381 55,601 6.28 758,399 32,732 5.76
Total interest bearing
liabilities 11,706,197 420,371 4.80 11,028,391 $312,027 3.78
Non-interest bearing
deposits 1,354,685 1,407,524
Other liabilities 206,457 175,645
Total liabilities 13,267,339 12,611,560
Shareholders' equity 978,117 958,633
Total liabilities and
shareholders' equity $14,245,456 $13,570,193
Net interest spread 3.23% 3.66%
Net interest income/Net
interest margin 394,837 3.88% $410,342 4.23%
Taxable equivalent
adjustment 14,222 11,623
Net interest income per
financial statements $380,615 $398,719
<FN>
(1) Presented on a fully taxable equivalent basis.
</TABLE>
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As of September 30, 1995, a number of legal proceedings were pending
against Integra (some of which were formerly against Equimark Corporation). A
discussion of several of these proceedings was included in Note 19 to the<PAGE>
Consolidated Financial Statements filed in the Corporation's Annual Report on
Form 10-K dated December 31, 1994.
Class Action Suits. As more fully discussed in the Form 10-K, a second
amended class action complaint was filed by plaintiffs in the United States
District Court for the Western District of Pennsylvania on or about July 8,
1991, on behalf of purchasers of Equimark common stock during the period
January 17, 1989 through October 25, 1990. The complaint alleges, among other
things, violations of various provisions of the federal securities laws and
state common law. The plaintiffs seek unspecified monetary damages as well as
declaratory and injunctive relief. The case had been in discovery since 1993.
Trial has been scheduled to begin in April 1996.
Truth-in-Lending Act Class Action Suit. As more fully discussed in the
Form 10-K, Altegra Credit Company, a subsidiary of Integra and formerly known
as American Financial Corporation of Tampa (AFC), was named as the defendant
in an action entitled Stone v. American Financial Corporation of Tampa, filed
in the United States District Court for the Middle District of Florida.
Plaintiffs allege that AFC engaged in a pattern and practice of buying
consumer loans wherein overnight messenger fees were improperly included in
the amount financed instead of in the finance charge as required by the Truth-
in-Lending Act and Federal Reserve Board Regulation Z. Plaintiffs seek
unspecified compensatory damages, attorneys' fees, loan rescission and costs.
Legislation was enacted which would, in effect, prevent plaintiffs other than
the named plaintiffs from receiving any relief. However, plaintiffs have
filed an amended complaint alleging violations of the Truth-in-Lending Act,
State Unfair and Deceptive Trade Practices Acts, and the Racketeering
Influenced and Corrupt Organizations Act.
Altegra Truth-in-Lending Class Actions: Hall, et al v. Altegra Credit
Company, et al and American Financial Corporation v. Jones. Altegra is also a
defendant and a counterclaim defendant in the above putative class actions
alleging that Altegra, through and in conjunction with its correspondents, so-
called "pass through lenders", has engaged in a pattern and practice of
"predatory" lending that in numerous ways violate federal and state consumer
protection laws. At this time, Altegra has moved to dismiss the complaint and
counterclaim. Classes have not been certified. Altegra cannot now assess the
risk of a material adverse impact from these suits.
Items 2 through 5. Not applicable pursuant to the instructions to Part II.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2 Agreement and Plan of Merger dated as of August 27, 1995 between
National City Corporation and Integra Financial Corporation, which is
Exhibit 99(a) to Form 8-K dated August 27, 1995, is incorporated herein
by reference.
15 Awareness letter from Coopers & Lybrand L.L.P. regarding unaudited
interim financial information for the nine month period ended September
30, 1995.
27 Financial Data Schedule
(b) Reports on Form 8-K
Integra filed a report on Form 8-K dated August 27, 1995 to
disclose that Integra entered into an Agreement and Plan of Merger
providing for the merger of Integra with and into National City
Corporation.
<PAGE> 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 FINANCIAL CORPORATION
(Registrant)
Dated: November 8, 1995 By /s/ Gary E. Wolbert
Gary E. Wolbert
Senior Vice President and
Chief Financial Officer
(Duly Authorized Officer and
Principal Accounting Officer)
<PAGE>
Integra Financial Corporation
Quarterly Report on Form 10-Q
For the Quarter Ended September 30, 1995
Exhibit Index
Exhibit
Number Description and Reference
15 Awareness letter from Coopers & Lybrand L.L.P. regarding unaudited
interim financial information for the nine month period ended September
30, 1995
27 Financial Data Schedule
November 6, 1995
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
We are aware that our report dated October 16, 1995 on our review of the
interim financial information of Integra Financial Corporation for the three-
month and nine-month periods ended September 30, 1995 and 1994 included in
this Form 10-Q is incorporated by reference in the following registration
statements:
Integra Financial Corporation Post-Effective Amendments to Form S-4
(Registration No. 33-20844) on:
Form S-3 Dividend Reinvestment and Stock Purchase Plan
Form S-8 Employee Stock Option Plan
Form S-8 Employee Stock Purchase Plan
Form S-8 Management Incentive Plan
Form S-8 Non-Employee Directors Stock Option Plan
Pursuant to Rule 436(c) under the Securities Act of 1933, this report should
not be considered a part of the registration statements prepared or certified
by us within the meaning of Sections 7 and 11 of that Act.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 313,664
<INT-BEARING-DEPOSITS> 102,229
<FED-FUNDS-SOLD> 30,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,602,048
<INVESTMENTS-CARRYING> 2,092,676
<INVESTMENTS-MARKET> 2,107,558
<LOANS> 7,881,900
<ALLOWANCE> (221,809)
<TOTAL-ASSETS> 14,577,193
<DEPOSITS> 10,212,233
<SHORT-TERM> 1,788,912
<LIABILITIES-OTHER> 234,712
<LONG-TERM> 1,263,426
<COMMON> 33,592
0
0
<OTHER-SE> 1,044,318
<TOTAL-LIABILITIES-AND-EQUITY> 14,577,193
<INTEREST-LOAN> 518,164
<INTEREST-INVEST> 268,378
<INTEREST-OTHER> 14,440
<INTEREST-TOTAL> 800,982
<INTEREST-DEPOSIT> 290,168
<INTEREST-EXPENSE> 420,367
<INTEREST-INCOME-NET> 380,615
<LOAN-LOSSES> 12,000
<SECURITIES-GAINS> 16,956
<EXPENSE-OTHER> 319,103
<INCOME-PRETAX> 167,480
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 119,993
<EPS-PRIMARY> 3.63
<EPS-DILUTED> 3.63
<YIELD-ACTUAL> 3.88
<LOANS-NON> 60,631
<LOANS-PAST> 27,656
<LOANS-TROUBLED> 63
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 237,433
<CHARGE-OFFS> (42,655)
<RECOVERIES> 12,581
<ALLOWANCE-CLOSE> 221,809
<ALLOWANCE-DOMESTIC> 147,259
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 74,550
</TABLE>
