Integra Bank 10-K 2011
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Commission file number 0-13585
INTEGRA BANK CORPORATION
(Exact name of registrant as specified in its charter)
Registrant's telephone number, including area code: 812-464-9677
Securities registered pursuant to Section 12(b) of the Act: COMMON STOCK, $1.00 STATED VALUE
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ¨ No x
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(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). Yes ¨ No x
Based on the closing sales price as of June 30, 2010 (the last business day of the registrant’s most recently completed second quarter), the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $15,268,000.
The number of shares outstanding of the registrant's common stock was 21,052,697 at March 1, 2011.
Documents incorporated by reference: None
INTEGRA BANK CORPORATION
2010 FORM 10-K ANNUAL REPORT
Table of Contents
Forward Looking Statements
Certain matters discussed in the Annual Report on Form 10-K including, but not limited to, matters described in Item 1, “Business,” Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” and Item 8, “Financial Statements and Supplementary Data” are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (PSLRA). Such forward-looking statements may include statements of forecasts about the Company’s financial condition and results of operation, expectations for future financial performance, and assumptions for those forecasts and expectations. The Company makes forward-looking statements about potential problem loans, cash flows, strategic initiatives, capital initiatives, and the adequacy of the allowance for loan losses. Actual results might differ significantly from the Company’s forecasts and expectations due to several factors. Some of these factors include, but are not limited to, impact of the current national and regional economy (including real estate values), changes in loan portfolio composition, the ability of the Company and its subsidiary to comply with regulatory enforcement agreements, directives and obligations, the Company’s ability to recapitalize its subsidiary, the Company’s access to liquidity sources, the Company’s ability to attract and retain quality customers, interest rate movements and the impact on net interest margins such movements may cause, the Company’s products and services, the Company’s ability to attract and retain qualified employees, regulatory changes, and competition with other banks and financial institutions. Words such as “expects,” “anticipates,” “believes,” and other similar expressions, and future or conditional verbs such as “will,” “may,” “should,” “would,” and “could,” are intended to identify such forward-looking statements. Readers should not place undue reliance on the forward-looking statements, which reflect management’s view only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances. This statement is included for the express purpose of protecting the Company under PSLRA’s safe harbor provisions.
INTEGRA BANK CORPORATION
December 31, 2010
ITEM 1. BUSINESS
Integra Bank Corporation is a bank holding company that is based in Evansville, Indiana, whose principal subsidiary is Integra Bank N.A., a national banking association, or Integra Bank or the Bank. As used in this report and unless the context provides otherwise, the terms we, us, the company and Integra refer to Integra Bank Corporation and its subsidiaries. At December 31, 2010, we had total consolidated assets of $2.4 billion. We provide services and assistance to our wholly-owned subsidiaries and Integra Bank’s subsidiaries in the areas of strategic planning, administration, and general corporate activities. In return, we receive income and/or dividends from Integra Bank, where most of our business activities take place.
Integra Bank provides a wide range of financial services to the communities it serves in Indiana, Kentucky, and Illinois. These services include commercial, consumer and mortgage loans, lines of credit, credit, debit and gift cards, transaction accounts, time deposits, repurchase agreements, letters of credit, corporate treasury management services, correspondent banking services, mortgage servicing, annuity products and services, credit life and other selected insurance products, safe deposit boxes, online banking, and complete personal and corporate trust services.
Integra Bank’s products and services are delivered through its customers’ channel of preference. At December 31, 2010, Integra Bank had 52 banking centers, and 100 automatic teller machines. Integra Bank also provides telephone banking services, and a suite of Internet-based products and services that can be found at our website, http://www.integrabank.com.
At December 31, 2010, we had 517 full-time equivalent employees. We provide a wide range of employee benefits, are not a party to any collective bargaining agreements, and in the opinion of management, enjoy good relations with our employees. We are an Indiana corporation which was formed in 1985.
We have active competition in all areas in which we presently engage in business. Integra Bank competes for commercial and individual deposits, loans and financial services with other banks and depository institutions and non-bank financial service companies in its market area. Since the amount of money a bank may lend to a single borrower, or to a group of related borrowers, is limited to a percentage of the bank’s capital, competitors larger than Integra Bank have higher lending limits than Integra Bank.
We also compete with various money market and other mutual funds, brokerage houses, other financial institutions, insurance companies, leasing companies, regulated small loan companies, credit unions, governmental agencies, and commercial entities offering financial services and products.
We and our subsidiaries have no foreign banking centers or significant business with foreign obligors or depositors.
REGULATION AND SUPERVISION
We are a registered bank holding company under the Bank Holding Company Act of 1956, or BHCA, and as such are subject to regulation by the Board of Governors of the Federal Reserve System, or the Federal Reserve. We file periodic reports with the Federal Reserve regarding our business operations, and are subject to examination by the Federal Reserve.
Integra Bank is supervised and regulated primarily by the Office of the Comptroller of the Currency, or the OCC. It is also a member of the Federal Reserve System and subject to the applicable provisions of the Federal Reserve Act and the Federal Deposit Insurance Act.
The federal banking agencies have broad enforcement powers, including the power to terminate deposit insurance, impose substantial fines and other civil and criminal penalties, and appoint a conservator or receiver. Failure to comply with applicable laws, regulations, and supervisory agreements could subject us, Integra Bank, as well as our officers, directors, and other institution-affiliated parties, to administrative sanctions and potentially substantial civil money penalties.
Capital Adequacy and Prompt Corrective Action
Federal bank regulatory agencies use capital adequacy guidelines in the examination and regulation of banks and bank holding companies. If regulatory capital falls below minimum guideline levels, a bank or bank holding company will become subject to certain restrictions, depending on the severity of the capital deficiency.
The OCC and Federal Reserve Board use risk-based capital guidelines that are designed to make such capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Under the guidelines, an institution’s regulatory capital is divided into two categories, tier 1 capital and tier 2 capital. Tier 1 capital generally consists of common shareholders’ equity, surplus, undivided profits, and certain trust preferred securities, less intangibles. Tier 2 capital generally consists of the allowance for credit losses subject to certain limitations and hybrid capital instruments, such as preferred stock and mandatory convertible debt. Tier 2 capital is limited to 100% of tier 1 capital. Total capital is the sum of tier 1 and tier 2 capital. Capital adequacy is primarily measured with reference to the institution’s risk-weighted assets. The guidelines assign risk weightings to an institution’s assets and certain off balance sheet items, such as commitments, in an effort to quantify the relative risk of each asset and to determine the minimum capital required to support the risk. These risk-weighted assets are then divided by tier 1 capital and to total capital to arrive at the tier 1 risk-based ratio and the total capital risk-based ratio, respectively. Current guidelines require all bank holding companies and federally regulated banks to maintain a minimum risk-based total capital ratio equal to 8%, of which at least 4% must be tier 1 capital. However, the agencies may require banks or bank holding companies to maintain ratios in excess of the minimums.
The federal regulations also establish, as a supplement to risk-based guidelines, minimum requirements for a leverage ratio, which is tier 1 capital as a percentage of total average assets less intangibles. The principal objective of the tier 1 leverage ratio is to constrain the maximum degree to which a bank or bank holding company may leverage its tangible equity capital base.
Under Prompt Corrective Action, or PCA, regulations adopted by the OCC, an institution is assigned to one of five capital categories depending on its total risk-based capital ratio, tier 1 risk-based capital ratio, tier 1 leverage ratio and certain subjective factors. As of December 31, 2010, Integra Bank was considered undercapitalized which is the third of the five categories for purposes of the PCA regulations. An institution which is deemed to be undercapitalized, or worse, may be subject to certain mandatory supervisory corrective actions and face restrictions on increasing its average total assets, making acquisitions, establishing branches, engaging in new lines of business, accepting or renewing brokered deposits, paying interest rates on deposits in excess of regulatory limits and making senior executive management changes without prior regulatory approval and will be required to submit a capital restoration plan, or CRP.
As discussed below, Integra Bank is subject to a Capital Directive requiring it to increase its regulatory capital to achieve and maintain a Total Risk-Based Capital Ratio of at least 11.5% and a Tier 1 Leverage Ratio of at least 8.0%. Integra Bank is not in compliance with the Capital Directive. The Company’s and Bank’s regulatory capital ratios are also reported in Note 16 to the Consolidated Financial Statements under Item 8.
Additional broad regulatory authority is granted with respect to the lowest two capital categories – significantly undercapitalized and critically undercapitalized – including forced mergers, ordering new elections for directors, forcing divestiture by its holding company, requiring management changes and prohibiting the payment of bonuses to senior management. Additional mandatory and discretionary regulatory actions apply to significantly undercapitalized and critically undercapitalized banks, the latter being a bank with a tangible capital ratio of 2% or less. The primary federal regulatory agency may appoint a receiver or conservator for a critically undercapitalized bank after 90 days, even if the bank is still solvent.
In addition, the appropriate federal banking agency may appoint the FDIC as conservator or receiver for a banking institution (or the FDIC may appoint itself, under certain circumstances) if one or more of a number of circumstances exist, including, without limitation, the banking institution: becoming undercapitalized and having no reasonable prospect of becoming adequately capitalized; failing to become adequately capitalized when required to do so; failing to submit a timely and acceptable capital restoration plan, or materially failing to implement an accepted capital restoration plan. Supervision and regulation of bank holding companies and their subsidiaries is intended primarily for the protection of depositors, the deposit insurance funds of the FDIC, and the banking system as a whole, not for the protection of bank holding company shareholders or creditors.
Failure to submit an acceptable Capital Restoration Plan, or CRP, could result in the Bank being treated as if it was in the "significantly undercapitalized" category for PCA purposes. This would result in the imposition of additional enforcement actions or restrictions, and could include the following:
Recent Regulatory Developments
The Bank is subject to a formal agreement it entered into with the OCC in May 2009 that requires the Bank to reduce its non-performing assets and improve earnings. In August 2010, the Bank received a Capital Directive from the OCC directing it to increase and maintain its Total Risk-Based Capital Ratio to at least 11.5% and its Tier 1 Leverage Ratio to at least 8% by November 20, 2010, which it failed to do. The additional capital required to satisfy the Capital Directive as of December 31, 2010 was approximately $119.0 million.
In May 2010, we entered into an agreement with the Federal Reserve Bank of St. Louis. Pursuant to the agreement, we made commitments to, among other things, use financial and management resources to assist Integra Bank in addressing weaknesses identified by the OCC, not pay dividends on outstanding shares or interest or other sums on outstanding trust preferred securities and not incur any additional debt.
On January 30, 2011, the Bank filed its call report as of December 31, 2010, indicating that its regulatory capital had declined from the "adequately capitalized" to "undercapitalized" category for purposes of the PCA regulations. As an undercapitalized bank, the Bank is subject to several mandatory requirements, including restrictions on payment of capital distributions and management fees, asset growth and on certain expansionary activities, including acquisitions, new branches and new lines of business. The Bank is also restricted from accepting certain types of employee benefit plan deposits. The Bank is also required to submit an acceptable CRP to the OCC no later than March 16, 2011. The CRP must include a written guarantee from the Company of the Bank's obligations until the Bank has been adequately capitalized on average during each of four consecutive calendar quarters and the guarantee must be secured by a pledge of assets acceptable to the OCC.
Acquisitions and Changes in Control
Under the BHCA, without the prior approval of the Federal Reserve, we may not acquire direct or indirect control of more than 5% of the voting stock or substantially all of the assets of any company, including a bank, and may not merge or consolidate with another bank holding company. In addition, the BHCA generally prohibits us from engaging in any non-banking business unless such business is determined by the Federal Reserve to be so closely related to banking as to be a proper incident thereto. Under the BHCA, the Federal Reserve has the authority to require a bank holding company to terminate any activity or relinquish control of a non-bank subsidiary (other than a non-bank subsidiary of a bank) upon the Federal Reserve's determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.
The Change in Bank Control Act prohibits a person or group of persons from acquiring "control" of a bank holding company unless the Federal Reserve has been notified and has not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Securities Exchange Act of 1934 would, under the circumstances set forth in the presumption, constitute acquisition of control of the Company. In addition, any company is required to obtain the approval of the Federal Reserve, under the BHCA, before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of our outstanding common stock, or otherwise obtaining control or a "controlling influence" over us.
Dividends and Other Relationships with Affiliates
The parent holding company is a legal entity separate and distinct from its subsidiaries. The primary source of the parent company's cash flow has been the payment of dividends to it by Integra Bank. Generally, such dividends are limited to the lesser of: undivided profits (less bad debts in excess of the allowance for credit losses); and absent regulatory approval, the net profits for the current year combined with retained net profits for the preceding two years. Further, a depository institution may not pay a dividend if it would become "undercapitalized" as determined by federal banking regulatory agencies; or if, in the opinion of the appropriate banking regulator, the payment of dividends would constitute an unsafe or unsound practice. Due to recent operating losses, Integra Bank can not pay any dividends without prior regulatory approval.
Integra Bank is subject to additional restrictions on its transactions with affiliates, including the parent company. State and federal statutes limit credit transactions with affiliates, prescribing forms and conditions deemed consistent with sound banking practices, and imposing limits on permitted collateral for credit extended.
Under Federal Reserve policy, the parent company is expected to serve as a source of financial and managerial strength to Integra Bank. The Federal Reserve requires the parent company to stand ready to use its resources to provide adequate capital funds during periods of financial stress or adversity. This support may be required by the Federal Reserve at times when the parent company may not have the resources to provide it or, for other reasons, would not be inclined to provide it. Additionally, under the Federal Deposit Insurance Corporation Improvements Act of 1991, the parent company may be required to provide a limited guarantee of compliance of any insured depository institution subsidiary that may become "undercapitalized" with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency. We intend to guarantee the Bank's obligations under the CRP that is to be filed no later than March 16, 2011. We currently have no source of revenues because of the Bank's inability to pay us dividends and our other resources are limited. As a result, our guarantee may, as a practical matter, provide no meaningful support for the CRP.
Integra Bank is subject to federal deposit insurance assessments by the FDIC. The assessment rate is based on classification of a depository institution into a risk assessment category. Such classification is based upon the institution's capital level and certain supervisory evaluations of the institution by its primary regulator.
The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order, or any condition imposed in writing by, or written agreement with, the FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing process for a permanent termination of insurance if the institution has no tangible capital. Management is not aware of any activity or condition that could result in termination of the deposit insurance of Integra Bank.
Community Reinvestment Act
The Community Reinvestment Act of 1977, or CRA requires financial institutions to meet the credit needs of their entire communities, including low-income and moderate-income areas. CRA regulations impose a performance-based evaluation system, which bases the CRA rating on an institution's actual lending, service, and investment performance. Federal banking agencies may take CRA compliance into account when regulating a bank or bank holding company's activities; for example, CRA performance may be considered in approving proposed bank acquisitions. A copy of the most recent CRA public evaluation issued by the OCC for Integra Bank is available at each banking center location.
The Gramm-Leach-Bliley Act, or the GLB Act, fostered further consolidation among banks, securities firms, and insurance companies by allowing eligible bank holding companies to register as “financial holding companies.” Financial holding companies can offer banking, securities underwriting, insurance (both agency and underwriting) and merchant banking services.
The Federal Reserve serves as the primary “umbrella” regulator of financial holding companies, with jurisdiction over the parent company and more limited oversight over its subsidiaries. The primary regulator of each subsidiary of a financial holding company depends on the activities conducted by the subsidiary. A financial holding company need not obtain Federal Reserve approval prior to engaging, either de novo or through acquisitions, in financial activities previously determined to be permissible by the Federal Reserve. Instead, a financial holding company need only provide notice to the Federal Reserve within 30 days after commencing the new activity or consummating the acquisition. We have no present plans to become a financial holding company.
Under the GLB Act, federal banking regulators adopted rules limiting the ability of banks and other financial institutions to disclose nonpublic information about consumers to nonaffiliated third parties. The rules require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to nonaffiliated third parties. The privacy provisions of the GLB Act affect how consumer information is transmitted through diversified financial services companies and conveyed to outside vendors.
We do not disclose any nonpublic personal information about any current or former customers to anyone except as permitted by law and subject to contractual confidentiality provisions which restrict the release and use of such information.
USA Patriot Act of 2001
The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 or USA Patriot Act increased the power of the United States Government to obtain access to information and to investigate a full array of criminal activities. In the area of money laundering activities, the statute added terrorism, terrorism support, and foreign corruption to the definition of money laundering offenses and increased the civil and criminal penalties for money laundering; applied certain anti-money laundering measures to United States bank accounts used by foreign persons; prohibited financial institutions from establishing, maintaining, administering or managing a correspondent account with a foreign shell bank; provided for certain forfeitures of funds deposited in United States interbank accounts by foreign banks; provided the Secretary of the Treasury with regulatory authority to ensure that certain types of bank accounts are not used to hide the identity of customers transferring funds and to impose additional reporting requirements with respect to money laundering activities; and included other measures. The Department of Treasury has issued regulations concerning compliance by covered United States financial institutions with the statutory anti-money laundering requirements regarding correspondent accounts established or maintained for foreign banking institutions, including the requirement that financial institutions take reasonable steps to ensure that correspondent accounts provided to foreign banks are not being used to indirectly provide banking services to foreign shell banks.
Integra Bank has policies, procedures and controls in place to detect, prevent and report money laundering and terrorist financing. Integra has implemented policies and procedures to comply with regulations including: (1) due diligence requirements that administer, maintain, or manage private bank accounts or correspondent accounts for non-U.S. persons; (2) standards for verifying customer identification at account opening; and (3) rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.
The Dodd-Frank Act
On July 21, 2010, financial regulatory reform legislation entitled the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act implements many changes across the financial services sector, including provision that, among other things, will:
Some of these provisions may have the consequence of increasing our expenses, decreasing our revenues, and changing the activities in which we choose to engage. The environment in which banking organizations will now operate, including legislative and regulatory changes affecting capital, liquidity, supervision, permissible activities, corporate governance and compensation, changes in fiscal policy and steps to eliminate government support for banking organizations cannot now be foreseen. Provisions in the legislation that revoke the Tier 1 capital treatment of trust preferred securities do not affect us as our trust preferred securities were issued before May 19, 2010, and we are grandfathered under an exception for depository institution holding companies with total consolidated assets of less than $15 billion as of December 31, 2009. The specific impact of the Dodd-Frank Act on our current activities or new financial activities we may consider in the future, our financial performance and the markets in which we operate will depend on the manner in which the relevant agencies develop and implement the required rules and the reaction of market participants to these regulatory developments. Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on us, our customers or the financial industry more generally.
Additional Regulation, Government Policies, and Legislation
In addition to the restrictions discussed above, the activities and operations of us and Integra Bank are subject to a number of additional complex and, sometimes overlapping, laws and regulations. These include state usury and consumer credit laws, state laws relating to fiduciaries, the Federal Truth-in-Lending Act, the Federal Equal Credit Opportunity Act, the Fair and Accurate Credit Transactions Act, the Fair Credit Reporting Act, the Truth-in-Savings Act, anti-redlining legislation, and antitrust laws.
The actions and policies of banking regulatory authorities have had a significant effect on our operating results and those of Integra Bank in the past and are expected to do so in the future.
Finally, the earnings of Integra Bank are affected by actions of the Federal Reserve to regulate aggregate national credit and the money supply through such means as open market dealings in securities, establishment of the discount rate on member bank borrowings from the Federal Reserve, establishment of the federal funds rate on member bank borrowings among themselves, and changes in reserve requirements against member bank deposits. The Federal Reserve's policies may be influenced by many factors, including inflation, unemployment, short-term and long-term changes in the international trade balance and fiscal policies of the United States Government. The effects of Federal Reserve actions on our future performance cannot be predicted.
Capital Purchase Program
On February 27, 2009, we entered into a Letter Agreement with the United States Department of Treasury, or Treasury Department, as part of the Treasury Department’s Troubled Asset Relief Program/Capital Purchase Program, or CPP, established under the Emergency Economic Stabilization Act of 2008, or EESA. Pursuant to the Securities Purchase Agreement-Standard Terms, or Securities Purchase Agreement, attached to the Letter Agreement, we issued to the Treasury Department 83,586 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series B, or Treasury Preferred Stock, having a liquidation amount per share of $1, and a warrant, or Warrant, to purchase up to 7,418,876 shares, or Warrant Shares, of our common stock, at an initial per share exercise price of $1.69, for an aggregate purchase price of $83.6 million.
The Treasury Preferred Stock pays cumulative dividends at a rate of 5% per year for the first five years and 9% per year thereafter. The Treasury Preferred Stock is generally non-voting. The Warrant entitles the holder to purchase 7,418,876 shares of common stock at an initial per share exercise price of $1.69, subject to adjustment, for a term of ten years. The Warrant also provides for the adjustment of the exercise price and the number of shares of common stock issuable upon exercise pursuant to customary anti-dilution provisions, such as upon stock splits or distributions of securities or other assets to holders of our common stock, and upon certain issuances of our common stock at or below a specified price relative to the initial exercise price. The Treasury Department has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the Warrant.
We did not have a sufficient number of authorized shares of our common stock to permit full exercise of the Warrant as of February 27, 2009. Our shareholders approved an amendment to our articles of incorporation increasing the number of authorized shares of common stock and the issuance of the common stock upon exercise of the Warrant in accordance with applicable stock exchange rules.
As a result of our participation in the CPP, we agreed to various requirements and restrictions imposed on all participants. The Treasury Department can change the terms of participation at any time.
The current terms of participation in the Capital Purchase Program include the following:
The Treasury Department has certain supervisory and oversight duties and responsibilities under the EESA, the CPP and the ARRA. Also, the Special Inspector General for the Troubled Asset Relief Program has the duty, among other things, to conduct, supervise and coordinate audits and investigations of the purchase, management and sale of assets by the Treasury Department under the CPP, including the Treasury Preferred Stock purchased from us.
The statistical disclosure concerning us and Integra Bank, on a consolidated basis, included in response to Item 7 of this report is hereby incorporated by reference herein.
Our Internet website address is http://www.integrabank.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available or may be accessed free of charge through the Investor Relations section of our Internet website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, or SEC. Our Internet website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.
The following corporate governance documents are also available through the Investor Relations section of our Internet website or may be obtained in print form by request to Secretary, Integra Bank Corporation, 21 S. E. Third Street, P. O. Box 868, Evansville, IN 47705-0868: ALCO and Finance Committee Charter, Audit Committee Charter, Code of Business Conduct and Ethics, Compensation Committee Charter, Nominating and Governance Committee Charter, Corporate Governance Principles, Credit and Risk Management Committee Charter, Wealth Management Committee Charter, and Policy Against Excessive or Luxury Expenditures.
EXECUTIVE OFFICERS OF THE COMPANY
Certain information concerning our executive officers as of March 1, 2011, is set forth in the following table.
The above information includes business experience during the past five years for each of our executive officers. Our executive officers serve at the discretion of the Board of Directors. There is no family relationship between any of our directors or executive officers.
ITEM 1A. RISK FACTORS
The following are the material risks and uncertainties that we believe are relevant to us. You should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report. These are not the only risks facing us. Additional risks and uncertainties that management is not aware of, focused on, or that we currently deem immaterial may also impair our business operations.
RISKS RELATED TO OUR BUSINESS
We May Not be Able to Continue to Operate as a Going Concern.
We reported a net loss of $124.2 million in 2010, and total losses of $430.1 million in the past three years. We have determined that the Bank will have to be recapitalized in the very near future to continue operations. We have engaged financial advisors and have been working with them to explore a number of strategic alternatives to recapitalize the Bank. However, there can be no assurance that we will be able to raise enough capital to complete a successful recapitalization. Federal regulators are continually monitoring the Bank’s liquidity and capital adequacy and evaluating our ability to continue to operate in a safe and sound manner. The Bank’s regulator could, if deemed warranted, impose additional enforcement actions or appoint the FDIC as receiver of the Bank, to protect the interests of the depositors insured by the FDIC. The uncertainty regarding our ability to obtain additional capital or meet future liquidity requirements raises doubt about our ability to continue as a going concern. The consolidated financial statements included in this report, however, do not include any adjustments that may result as an outcome of these uncertainties.
In addition, our customers, employees, vendors, correspondent institutions, and others with whom we do business may react negatively to the substantial doubt about our ability to continue as a going concern. This negative reaction may lead to heightened concerns regarding our financial condition that could result in losses in deposits and customer relationships, key employees, vendor relationships and our ability to do business with correspondent institutions upon which we rely.
Failure to Comply With Bank Regulatory Agreements and Directives Will Have a Material Adverse Effect on Our Business.
The Bank is subject to primary supervision and regulation by the OCC, while we are subject to primary supervision and regulation by the Federal Reserve. We and the Bank are currently subject to a number of enforcement actions with our regulators.
The Bank is subject to a formal agreement it entered into with the OCC in May 2009 that requires the Bank to reduce its non-performing assets and improve earnings. In August 2010, the Bank received a Capital Directive from the OCC directing it to increase and maintain its Total Risk-Based Capital Ratio to at least 11.5% and its Tier 1 Leverage Ratio to at least 8% by November 20, 2010, which it failed to do. The additional capital required to satisfy the Capital Directive as of December 31, 2010 was approximately $119.0 million.
In May 2010, we entered into an agreement with the Federal Reserve Bank of St. Louis. Pursuant to the agreement, we made commitments to, among other things, use financial and management resources to assist Integra Bank in addressing weaknesses identified by the OCC, not pay dividends on outstanding shares or interest or other sums on outstanding trust preferred securities and not incur any additional debt. Any material failures to comply with the agreement would likely result in more stringent enforcement actions by the Federal Reserve which could damage our reputation and have a material adverse effect on our financial position or results of operations.
On January 30, 2011, the Bank filed its call report as of December 31, 2010, indicating that its regulatory capital had declined from the "adequately capitalized" to "undercapitalized" category for purposes of the Prompt Corrective Action (PCA) regulations. As an undercapitalized bank, the Bank is subject to several mandatory requirements, including restrictions on payment of capital distributions and management fees, asset growth and on certain expansionary activities, including acquisitions, new branches and new lines of business. The Bank is also required to submit an acceptable Capital Restoration Plan ("CRP") to the OCC no later than March 16, 2011. The CRP must include a written guarantee from the Company of the Bank's obligations until the Bank has been adequately capitalized on average during each of four consecutive calendar quarters and the guarantee must be secured by a pledge of assets acceptable to the OCC.
Failure to submit an acceptable CRP would result in the Bank being treated as if it was in the "significantly undercapitalized" category for PCA purposes. This would result in the imposition of additional enforcement actions or restrictions.
Imposition of additional enforcement actions could damage our reputation and have a material adverse effect on our business. Ultimately, if the OCC believes the CRP is unacceptable or is not expected to result in the recapitalization of the Bank, it could appoint the FDIC as receiver of the Bank.
Imposition of more stringent enforcement actions could damage our reputation and have a material adverse effect on our business. The OCC may also appoint the FDIC as receiver for the Bank if the OCC believes the CRP is unacceptable and is not expected to result in the recapitalization of the Bank.
We are Required to Raise Additional Capital, but That Capital May Not Be Available.
We and the Bank are required by federal regulatory authorities to maintain adequate levels of capital to support operations. Additional capital is also required for the Bank to support future loan losses. Our ability to raise additional capital depends on conditions in the capital markets, which are outside our control, and on our financial performance and prospects. Accordingly, we cannot be certain of our ability to raise additional capital on any terms. If we cannot raise additional capital, we and the Bank expect to be subject to additional adverse regulatory action including the prospect of the Bank being placed into FDIC receivership, resulting in a complete loss of value for all of our equity holders.
Our Holding Company Debt and Preferred Stock Makes it Difficult to Raise Capital.
At December 31, 2010, we had an aggregate obligation of $102.7 million relating to the principal and accrued unpaid interest on six issues of junior subordinate debentures we have issued. Four of the debentures are held by our statutory business trust subsidiaries that issued trust preferred securities or TRUPs. The TRUPs and the other junior subordinated debentures are held in collaterallized debt obligation (CDO) trusts and were pooled with similar securities issued at the same time by other banks or bank holding companies. The CDO trusts then issued CDO securities to investors in multiple tranches with differing terms of payment and priority. Payments on the CDO securities are funded by payments on the TRUPs or debentures held by the CDO trusts. Each of the CDO trusts are fixed pools meaning that the pooled assets were not intended to be sold, exchanged or modified prior to their maturity. Although we are permitted to defer payments on these securities for up to five years (and we commenced doing so in 2009), the deferred interest payments continue to accrue until paid in full.
In addition, in February 2009 we issued shares of preferred stock and common stock purchase warrants to the U. S. Treasury Department under the TARP/Capital Purchase Plan. The preferred stock has an aggregate liquidation preference of $83.6 million and carries a cumulative dividend of 5% per annum which would increase to 9% in 2014. We stopped paying dividends on the Treasury preferred stock in 2009. Like the holding company debt, unpaid dividends on the Treasury preferred stock continue to accrue until the preferred stock is repaid or restructured.
Our holding company debt and the Treasury preferred stock make it difficult to recapitalize or sell the parent company because any investor or purchaser would effectively assume the outstanding liability on the debt and be required to repay or restructure the Treasury preferred stock in addition to the amount of funds such investors or purchaser would need to recapitalize the Bank.
The Bank has a Significant Concentration in Commercial Real Estate Loans and Continued Deterioration in the Market for Commercial Properties could Significantly Harm its Business and Prospects for Growth.
As of December 31, 2010, approximately 75% of our loan portfolio consisted of commercial and industrial, agricultural, construction and commercial real estate loans. These types of loans are typically larger than residential real estate and consumer loans, which made up the remaining 25% of our loan portfolio. Because the portfolio contains a significant number of commercial and industrial, agricultural, construction and commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans can lead to a significant increase in non-performing loans. Increases in non-performing loans typically 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.
The Allowance for Credit losses may not be Adequate to Cover Actual Losses.
In accordance with generally accepted accounting principles, we maintain an allowance for credit losses. The allowance for credit losses may not be adequate to cover actual loan losses, and future provisions for loan losses could adversely impact operating results. The allowance for credit losses is based on prior experience, as well as an evaluation of the inherent risks in the current portfolio. The amount of future losses is susceptible to changes in economic, operating and other conditions that may be beyond our control, and these losses may exceed current estimates. Federal regulatory agencies, as an integral part of their examination process, review the loans and allowance for credit losses. While management believes that the allowance for credit losses is adequate to cover current potential losses, management may decide to increase the allowance for credit losses or regulators may require us to increase this allowance. Either of these occurrences could reduce future earnings and regulatory capital ratios.
Our Net Interest Income Has Been Declining.
Our earnings and cash flows are largely dependent upon our net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Net interest income is dependent on both the level of our earning assets and interest spread. The portions of our assets that are non-earning have increased significantly during the past three years, reducing our net interest income. Further increases in non-earning assets would further reduce net interest income. We have also experienced a significant increase in low earning assets such as cash and zero percent risk weighted U.S. Treasuries and GNMA investment securities in order to maintain a high level of liquidity. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but such changes could also affect (1) our ability to originate loans and obtain deposits, (2) the fair value of our financial assets and liabilities, and (3) the average duration of our earning assets. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.
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, bank regulatory agencies periodically review 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. 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. Our annual provision for 2010 was $134.6 million, $20.2 million more than our net charge-offs of $114.4 million.
Our Profitability Depends Significantly on Local Economic Conditions and Trends.
Our success depends primarily on the general economic conditions of the specific local markets in which we operate. Unlike larger national or other regional banks that are more geographically diversified, we provide banking and financial services primarily to customers within a market area of approximately 100 miles surrounding Evansville, Indiana. The local economic conditions in this area have a significant impact on the demand for our products and services as well as the ability of our customers to repay loans, the value of the collateral securing loans and the stability of our deposit funding sources. A significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, outbreak of hostilities or other domestic occurrences, unemployment, changes in securities markets or other factors could impact these local economic conditions and, in turn, have a material adverse effect on our financial condition and results of operations.
We Are Not Able to Pay Interest Payments on our Junior Subordinated Debentures and Dividends on our Common and Preferred Stock.
We have suspended cash dividends on our common stock and the Treasury Preferred Stock and are deferring interest payments on our outstanding junior subordinated debentures. Deferring interest payments on certain of the junior subordinated debentures also results in a deferral of distributions on related trust preferred securities. Deferred payments on our junior subordinated debentures and dividends on the Treasury Preferred Stock are cumulative and therefore unpaid dividends and distributions will accrue and compound on each subsequent payment date. In the event we become subject to any liquidation, dissolution or winding up of affairs, first, the holders of our trust preferred securities, junior subordinated debentures and other creditors and second, holders of the preferred stock will be entitled to receive the liquidation amounts they are entitled to plus the amount of any accrued and unpaid distributions and dividends, before any distribution to the holders of common stock.
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.
If we fail to develop, maintain and build upon long-term customer relationships 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.
We Are Subject to Extensive Government Regulation and Supervision and Face Legal Risks.
We are subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not creditors or shareholders. These regulations affect several areas, including our lending practices, capital structure, investment practices, dividend policy and growth, and requirements to maintain the confidentiality of information relating to our customers. Congress and federal agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation of statutes, regulations or policies could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies, or the agreements with our regulators could result in more severe enforcement sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations. While we have policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. Additionally, the number of regulations we must comply with and the financial resources required to comply with those regulations has continually increased. The cost of complying with these regulations makes it more difficult to remain competitive.
The agencies regulating the financial services industry frequently adopt changes to their regulations. Substantial regulatory and legislative initiatives, including a comprehensive overhaul of the regulatory system in the United States are possible in the years ahead. We are unable to predict whether any of these initiatives will succeed, which form they will take, or whether any additional changes to statutes or regulations, including the interpretation or implementation thereof, will occur in the future. Any such action could affect us in substantial and unpredictable ways and could have a material adverse effect on our business, 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.
We Cannot Rely On Dividends From the Bank.
As a holding company we are a separate and distinct legal entity from our subsidiary, Integra Bank. Historically, we have received substantially all of our revenue in the form of dividends from the Bank. Federal laws and regulations limit the amount of dividends that the Bank may pay to us. Recent losses have had the consequence of not allowing the Bank to pay any dividends to us without prior regulatory approval. The holding company has no other sources of revenue.
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. 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.
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 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.
We Are Subject to the Risk of Additional Impairment Charges Relating to Our Securities Portfolio.
Our investment securities portfolio is our second largest earning asset. The value of our investment portfolio has been adversely affected by the unfavorable conditions of the capital markets in general as well as declines in values of the securities we hold. We have taken an aggregate of $22.6 million in charges against earnings since January 1, 2009 for impairments to the value of pooled collateralized debt obligations that we have concluded were "other than temporary." The value of this segment is particularly sensitive to adverse developments affecting the banking industry and the financial condition or performance of the issuing banks – factors that we have no control over and as to which we may receive no advance warning. Although we believe we have appropriately valued our securities portfolio, we cannot assure you that there will not be additional material impairment charges which could have a material adverse effect on our financial condition and results of operations.
Our Common Stock May Not Qualify for Continued Listing on the Nasdaq Capital Market after June 27, 2011.
Our common stock is currently listed on the Nasdaq Capital Market, but it will be delisted unless the closing price of the common stock exceeds $1 for at least ten consecutive trading days prior to June 27, 2011. Although we have agreed to effect a reverse stock split if necessary to regain compliance with the minimum bid rule of the Nasdaq Capital Market, the reverse stock may not have the desired effect. If our common stock is delisted from the Nasdaq Capital Market, there is no assurance that a liquid and efficient market for common stock will be available or develop. Although the shares may be eligible for trading on other exchanges, such as the “OTC Bulletin Board,” it is possible that the ability of a selling shareholder to realize the best market price will be impeded as the result of wider bid-ask spreads.
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
Our net investment in real estate and equipment at December 31, 2010, including that which was held for sale, was $35.4 million. Our offices are located at 21 S.E. Third Street, Evansville, Indiana. The main and all banking center and loan production offices of Integra Bank, and other subsidiaries are located on premises either owned or leased. None of the property is subject to any major encumbrance.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. [REMOVED AND RESERVED]
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the Nasdaq Capital Market under the symbol IBNK.
The following table lists the stock price for the past two years and dividend information for our common stock.
Historically, the holding company has depended upon the dividends it received from Integra Bank to pay cash dividends to its shareholders. Currently, Integra Bank cannot pay such dividends without prior approval of the OCC. Given our and the Bank’s regulatory agreements and obligations and the need to recapitalize the Bank, it is highly unlikely that we will pay dividends in the foreseeable future.
As of February 1, 2011, we were owned by 1,941 shareholders of record not including nominee holders.
The following table shows certain information as of December 31, 2010, regarding our compensation plans under which our equity securities are authorized for issuance.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
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.
The following discussion contains certain forward-looking statements that reflect our plans, estimates and beliefs. The actual results may be materially different from the results implied by such forward-looking statements.
The unfavorable economic conditions that have persisted since 2007 continued to significantly impact the banking industry and our performance during 2010. During 2010, we continued to experience significant loan loss provisions and charge-offs. Our level of non-performing assets, and resulting credit quality impacted our operations during 2010 in the areas of net interest income, provision for loan losses, non-interest expense and reversals of tax benefits.
While we faced many challenges in 2010, we substantially completed restructuring to our new operating footprint. Our core banking operations in that market remain strong and we received much support from our employees, customers and communities.
The net loss for 2010 was $124,222, or $6.01 per share, compared to net loss of $194,981 or $9.42 per share in 2009. The 2010 results include a provision for loan losses of $134,571 and loan collection and other real estate owned expenses of $13,921. The 2009 results included a provision for loan losses of $113,368, other than temporary securities impairment of $21,484, and an increase of $100,964 in our deferred income tax valuation allowance, which was for the entire amount of our remaining deferred tax asset. The net interest margin for 2010 was 2.18%, compared to 2.37% in 2009.
The provision for loan losses was primarily attributed to commercial real estate and construction and land development loans originated out of either our Chicago operations or one of the commercial real estate, or CRE, loan production offices, or LPOs, that existed prior to December 31, 2010. Net charge-offs increased to $114,370 in 2010 from $89,135 in 2009.
The allowance to total loans was 7.10% at December 31, 2010 compared to 4.20% at December 31, 2009, while the allowance to non-performing loans increased to 48.63% at December 31, 2010, up from 41.26% at December 31, 2009. The increase in the allowance for loan losses to total loans was due in part to the reduction in the loan portfolio resulting from the 2010 branch sale transactions and other payoffs and paydowns of performing loans. Net charge-offs totaled 643 basis points for 2010, compared to 381 basis points for 2009. Non-performing loans were $197,015, or 14.60% of total loans at December 31, 2010 compared to $214,880 or 10.64% of total loans at December 31, 2009. The decrease in non-performing loans was primarily due to a decline in the amount of additional loans being classified as non-performing, coupled with net charge-offs of $114,370. Non-performing assets decreased to $246,582 at December 31, 2010, compared to $246,898 at December 31, 2009.
Net interest income was $49,574 for 2010, compared to $66,036 for 2009, while the net interest margin was 2.18% for 2010, compared to 2.37% in 2009. The decline in net interest income reflects the lower amount of earning assets and related funding that resulted from second and third quarter branch sales. The decrease in the net interest margin was primarily due to the lower level of earning assets, lower securities and loan yields and an increase in average cash levels of $206,407, partially offset by lower retail funding costs.
Non-interest income increased $38,282 to $61,450 and included $15,612 of premiums on sales of deposits realized from second and third quarter branch sales, net of a core deposit intangible write-off of $2,959 and net gains on the sale of loans sold in branch sales of $11,742. Non-interest income for 2010 also included a decrease in net securities gains of $2,257 and a reduction in other-than-temporary securities impairment of $20,382. Service charges on deposit accounts declined $4,735 to $15,144, primarily due to a lower number of deposit accounts because of the second and third quarter branch sales in 2010. Non-interest income for 2009 also included a negative mark-to-market adjustment for the warrant we issued to the U.S. Treasury of $6,145.
Non-interest expense decreased $8,327 to $97,842, primarily due to declines in salaries and employee benefits of $7,420, offset by increases in professional fees of $4,179 and loan collection and OREO expenses of $2,918. Non-interest expense in 2009 also included $1,639 of building impairment expense, as well as $1,538 of debt prepayment penalties. The increase in professional fees includes legal and professional fees related to the second and third quarter branch sales, while the lower amount of salaries and employee benefits resulted from a lower number of employees due to the branch sales and reductions in force.
Commercial real estate loans, including construction and land development loans, declined 36.5%, or $352,662 to $612,529 at December 31, 2010, as compared to December 31, 2009. Low cost deposits, which include non-interest bearing, interest checking and savings deposits, decreased 27.4%, or $282,285 to $747,652 at December 31, 2010, primarily due to the effect of the second and third quarter branch sales.
We increased our liquidity during 2010. Cash and due from bank average balances increased $206,407, or 59.8%, during 2010 to $551,753.
We successfully executed a number of strategic initiatives in our strategic recovery plan during 2010, as outlined below:
Throughout 2010, we pursued multiple initiatives in our plan to raise new capital. Working with our financial advisor, Keefe, Bruyette & Woods (KBW), we had, and continue to have, discussions with private investors, private equity firms and others about potential capital investments. To date, we have not been able to finalize a strategy that would recapitalize the Bank to levels required by regulators; however, we continue to pursue these initiatives.
During 2010, we experienced higher levels of provision and charge-offs than anticipated. In part, this is due to the updated appraisals we obtain on non-performing assets which leads to lower carrying values, increased loan loss provision and OREO expense and increased loan loss reserves. These losses have almost entirely come from loans made prior to 2010 in either Chicago or from the previously operating CRE LPOs. We continue to pursue aggressive disposition strategies for all of these assets which further contributed to our significant loan loss provision and increased level of net charge-offs during 2010. We did report the first decrease in non-performing assets since 2006 and disposed of several of our non-performing assets. Our efforts continue to be focused on reducing our level of non-performing assets, improving our capital and liquidity and increasing the operating income of our core community banking franchise.
Integra Bank’s Total Risk-Based Capital Ratio declined 272 basis points to 7.32% from December 31, 2009, its Tier 1 Risk-Based Capital Ratio decreased 276 basis points to 6.00% and its Tier 1 Leverage Ratio decreased 296 basis points to 3.34%. The decline in these ratios during the year means that Integra Bank is now considered to be in the undercapitalized category for purposes of the Prompt Corrective Action, or PCA, regulations. Our Total Risk-Based Capital Ratio declined 1,120 basis points to (1.26)%, while our Tier 1 Leverage Ratio decreased 513 basis points to (0.70)%.
Additional information on the PCA regulations and capital levels is discussed in Item 1, “Business – Capital Adequacy and Prompt Corrective Action” and Note 16 to the Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data”.
At January 31, 2011, the Bank had approximately $117,000 of deposits from public fund entities based in the State of Indiana, consisting of approximately $81,600 of transaction account and $35,400 of time deposit balances. Because Integra Bank is considered as being in the undercapitalized category for purposes of the PCA regulations, its no longer eligible to accept new Indiana public fund deposits. Existing time accounts may be held to maturity, while transaction accounts are being transitioned to other eligible financial institutions. During February 2011, we communicated this information to the public fund entities affected and have assisted them in understanding these consequences. The ongoing decline in these public fund balances in 2011 has not had a material impact on liquidity because of the effect of freeing up the investment securities used to collateralize them.
Our plans for 2011 include the following:
CRITICAL ACCOUNTING POLICIES
Our accounting and reporting policies conform with accounting principles generally accepted in the United States and general practices within the financial services industry. The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. We consider our critical accounting policies to include the following:
Allowance for Loan Losses: The allowance for loan losses represents our best estimate of probable losses inherent in the existing loan portfolio. The allowance for loan losses is increased by the provision for losses, and reduced by loans charged off, net of recoveries. The provision for loan losses is determined based on our assessment of several factors: actual loss experience, changes in composition of the loan portfolio, evaluation of specific borrowers and collateral, current economic conditions, trends in past-due and non-accrual loan balances, and the results of recent regulatory examinations. The section labeled “Credit Management” below provides additional information on this subject.
We consider loans impaired when, based on current information and events, it is probable we will not be able to collect all amounts due in accordance with the contractual terms. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate stipulated in the loan agreement, except that all collateral-dependent loans are measured for impairment based on the market value of the collateral, less estimated cost to liquidate. In measuring the market value of the collateral, we use assumptions and methodologies consistent with those that would be utilized by unrelated third parties.
Changes in the financial condition of individual borrowers, economic conditions, historical loss experience and the conditions of the various markets in which the collateral may be liquidated may all affect the required level of the allowance for loan losses and the associated provision for loan losses.
Estimation of Fair Value: The estimation of fair value is significant to several of our assets, including loans held for sale, investment securities available for sale and other real estate owned, as well as fair values associated with derivative financial instruments, intangible assets and the value of loan collateral when valuing loans. These are all recorded at either market value or the lower of cost or fair value. Fair values are determined based on third party sources, when available. Furthermore, accounting principles generally accepted in the United States require disclosure of the fair value of financial instruments as a part of the notes to the consolidated financial statements. Fair values may be influenced by a number of factors, including market interest rates, prepayment speeds, discount rates and the shape of yield curves.
Fair values for securities available for sale are typically based on quoted market prices. If a quoted market price is not available, fair values are estimated using quoted market prices for similar securities or level 3 values. Note 18 to the consolidated financial statements provides additional information on how we determine level 3 values. The fair values for loans held for sale are based upon quoted prices. The fair values of other real estate owned are typically determined based on appraisals by third parties, less estimated costs to sell. If necessary, appraisals are updated to reflect changes in market conditions. The fair values of derivative financial instruments are estimated based on current market quotes.
Other intangible assets represent purchased assets that also lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with an asset or liability. Core deposit intangibles are recorded at fair value based on a discounted cash flow model valuation at the time of acquisition and are evaluated periodically for impairment. Customer relationship intangibles utilize a method that discounts the cash flows related to future loan relationships that are expected to result from referrals from existing customers. Estimated cash flows are determined based on estimated future net interest income resulting from these relationships, less a provision for loan losses, non-interest expense, income taxes and contributory asset charges.
Other-than-temporary securities impairment: Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating other-than-temporary losses, we consider: 1) the length of time and extent that fair value has been less than cost; 2) the financial condition and near term prospects of the issuer; and 3) our ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value.
For securities falling under EITF 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to be Held by a Transferor in Securitized Financial Assets”, which was subsequently incorporated into ASC 325, such as collateralized mortgage obligations, or CMOs, and collateralized debt obligations, or CDOs, an other-than-temporary impairment is deemed to have occurred when there is an adverse change in the expected cash flows (principal or interest) to be received and the fair value of the beneficial interest is less than its carrying amount. In determining whether an adverse change in cash flows occurred, the present value of the remaining cash flows, as estimated at the initial transaction date (or the last date previously revised), was compared to the present value of the expected cash flows at the current reporting date. The estimated cash flows reflect those a “market participant” would use and were discounted at a rate equal to the current effective yield. If an other-than-temporary impairment was recognized as a result of this analysis, the yield was changed to the market rate. The last revised estimated cash flows were then used for future impairment analysis purposes.
In January 2009, the Financial Accounting Standards Board, or FASB, issued FASB Staff Position No 99-20-1 (ASC 325). This ASC substantially aligns the basis for determining impairment with the guidance found in paragraph 16 of SFAS No. 115, or ASC 320, which requires entities to assess whether it is probable that the holder will be unable to collect all amounts due according to contractual terms. ASC 320 does not require exclusive reliance on market participant assumptions regarding future cash flows, permitting the use of reasonable management judgment of the probability that the holder will be unable to collect all amounts due.
In April 2009, the FASB issued Staff Position (FSP) No. 115-2 and No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”, which amends existing guidance for determining OTTI for debt securities. The FSP requires an entity to assess whether it intends to sell, or it is more likely than not that it will be required to sell a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria is met, the entire difference between amortized cost and fair value is recognized in earnings. For securities that do not meet the aforementioned criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income. Additionally, the FSP expands and increases the frequency of existing disclosures about other-than-temporary impairments for debt and equity securities.
Income Taxes: The provision for income taxes is based on income as reported in the financial statements. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future. The deferred tax assets and liabilities are computed based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. An assessment is made as to whether it is more likely than not that deferred tax assets will be realized. Valuation allowances are established when necessary to reduce deferred tax assets to an amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Tax credits are recorded as a reduction to tax provision in the period for which the credits may be utilized.
NET INCOME (LOSS)
Net loss available to common shareholders for 2010 was $124,222 compared to $194,981 in 2009. Earnings per share on a diluted basis were $(6.01) and $(9.42) for 2010 and 2009, respectively. Return on average assets and return on average common equity were (4.20)% and (220.91)% for 2010, and (5.68)% and (122.77)% for 2009, respectively.
NET INTEREST INCOME
Net interest income in the following tables is presented on a tax equivalent basis and is the difference between interest income on earning assets, such as loans and investments, and interest expense paid on liabilities, such as deposits and borrowings. Net interest income is affected by the general level of interest rates, changes in interest rates, and by changes in the amount and composition of interest-earning assets and interest-bearing liabilities. Changes in net interest income are presented in the schedule following the average balance sheet analysis. The change in net interest income not solely due to changes in volume or rates has been allocated in proportion to the absolute dollar amounts of the change in each.
AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
CHANGES IN NET INTEREST INCOME (INTEREST ON A FEDERAL-TAX-EQUIVALENT BASIS)
The following discussion of results of operations is on a tax-equivalent basis. Tax-exempt income, such as interest on loans and securities of state and political subdivisions, has been increased to an amount that would have been earned had such income been taxable.
Net interest income for 2010 was $50,211, or 26.0% lower than 2009. The increase in non-accrual loans contributed to this decrease, as did reductions in interest rates. Yields on earning assets decreased 29 basis points, while costs on interest-bearing liabilities decreased 28 basis points in 2010. The net interest margin was 2.18%, compared to 2.37% in 2009.
Major components of the change in net interest income from 2009 to 2010 are as follows:
Non-interest income for 2010 was $61,450 compared to $23,168 for 2009. Results for 2010 included deposit premiums of $15,612 from the branch sales and $11,742 of gains from the sale of divested loans, which were offset by decreases in deposit service charges of $4,735, bank owned life insurance, or BOLI, income of $818, and debit card interchange income of $312. Securities gains, including other-than-temporary impairment (“OTTI”) losses, were $4,701 for 2010, compared to losses of $13,424 for 2009.
Major contributors to the change in non-interest income from 2009 to 2010 are as follows:
Non-interest expense for 2010 was $97,842, compared to $106,169 in 2009, a decrease of 7.8%. Non-interest expense for 2010 reflected decreases in personnel expense of $7,420, building impairment charges of $1,639, occupancy expense of $1,602, debt prepayment penalties of $1,538, and increases in loan and OREO expenses of $2,918, consultant fees of $2,667, legal fees of $1,752, and FDIC assessments of $1,597.
Major contributors to the differences in non-interest expense for 2010 and 2009 are as follows:
We recognized income tax benefit of $1,694 in 2010, as compared to income tax expense of $60,850 in 2009. Generally, the calculation for the income tax provision or benefit does not consider the tax effects of changes in other comprehensive income, or OCI, which is a component of shareholders’ equity on the balance sheet. However, an exception is provided in certain circumstances, such as when there is a full valuation allowance against net deferred tax assets, there is a loss from continuing operations and income in other components of the financial statements. In such a case, pre-tax income from other categories, such as changes in OCI, must be considered in determining a tax benefit to be allocated to the loss from continuing operations. For 2010, this resulted in $1,354 of income tax benefit allocated to continuing operations. The recognition of income tax expense for 2009 resulted mainly from a non-cash charge of approximately $100,964 to increase the valuation allowance for our deferred tax asset. The increase resulted in a full valuation allowance of our deferred tax asset at December 31, 2009, which continued in 2010.
We establish valuation allowances for our deferred tax assets when the amount of the expected future taxable income is not sufficient to support the use of the carryforward, credit or other deferred tax asset. A three year cumulative loss position and continued near-term losses provided significant negative evidence to maintain a full valuation allowance at December 31, 2010.
The valuation allowance does not have any impact on our liquidity, nor does it preclude us from using the tax losses, tax credits or other timing differences in the future. 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.
See Note 13 of the Notes to the Consolidated Financial Statements for an additional discussion of our income taxes.
INTERIM FINANCIAL DATA
The following tables reflect summarized quarterly data for the periods described:
FOURTH QUARTER 2010 AND 2009
The fourth quarter 2010 net loss available to common shareholders was $42,851, or $(2.07) per diluted share, while the pre-tax loss was $43,062. The pre-tax loss for the fourth quarter of 2010 was largely attributable to the provision for loan losses of $36,351. The income tax benefit for the fourth quarter of 2010 was $1,344, which resulted mainly from the disproportionate tax effects within Other Comprehensive Income.
Fourth quarter 2010 results, as compared to third quarter 2010, included an increase in the provision for loan losses of $10,111 and decreases in non-interest income of $19,365, non-interest expense of $4,729, and net interest income of $2,119.
The increased provision was primarily allocated to CRE and construction and land development loans which represented 84% of total non-performing loans. The provision for loan losses was $36,351 compared to net charge-offs of $35,885 for the fourth quarter of 2010.
The allowance to total loans increased 54 basis points to 7.10% at December 31, 2010, while annualized net charge-offs increased 364 basis points to 10.07%. Non-performing loans decreased to $197,015, or 14.60% of total loans, compared to 14.60% at September 30, 2010, while the allowance to non-performing loans increased from 44.92% to 49.63% for the same dates. Non-performing assets decreased to $246,582, compared to $247,628 at September 30, 2010. The net charge-off ratio for all of 2010 was 6.43%.
Net interest income was $9,342 for the fourth quarter of 2010, compared to $11,461 for the third quarter of 2010, while the net interest margin decreased 22 basis points to 1.86%. The decrease in the margin was due partially from the full quarter impact of the third quarter 2010 branch divestitures and loan sales.
Low cost deposits, which include non-interest checking, NOW and savings deposits, decreased during the fourth quarter by $6,013, primarily due to the full quarter impact of the branch divestitures. Retail certificates of deposit decreased $7,191, brokered certificates of deposit decreased $52,307, and money market balances declined $18,681.
Commercial loan average balances decreased $184,160 in the fourth quarter of 2010. CRE loan average balances decreased $93,319, and commercial and land development loan average balances decreased $39,405. The average balance of all other commercial loans decreased $51,436, mainly due to the branch divestitures and loan sales that occurred during the third quarter.
Non-interest income was $8,014 for the fourth quarter of 2010, compared to $27,379 for the third quarter. The third quarter included $11,241 from net premiums on the sale of deposits from the branch sales and $9,498 from net gains on the sale of divested loans.
Non-interest expense for the fourth quarter of 2010 was $24,067.
The fourth quarter 2009 net loss was $96,052, or $(4.64), per diluted share.
Total assets at December 31, 2010, were $2,420,785, compared to $2,921,941 at December 31, 2009.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents, including federal funds sold and other short-term investments totaled $486,812 at December 31, 2010, compared to $354,574 one-year prior. The balance of this account fluctuates daily based on the needs of our customers. However, the majority of the year over year increase in the cash position was driven by our desire to maintain a higher level of liquidity.
SECURITIES AVAILABLE FOR SALE AND TRADING SECURITIES
The securities portfolio represents our second largest earning asset after loans and serves as a liquidity source for us. Total investment securities classified as available for sale of $528,904 comprised 21.8% of total assets at December 31, 2010, compared to 12.4% at December 31, 2009, reflecting a $167,185 increase during 2010. Securities held for trading totaled $329 at December 31, 2010 and were comprised of four pooled trust preferred collateralized debt obligations, or CDOs.
During 2010, we increased the size of our securities portfolio and restructured a portion to take available gains. The increase in the portfolio facilitated our compliance with the collateralization requirements for Indiana public funds that went into effect in 2010. In 2010, we purchased $494,658 in securities that carry a zero percent risk weight including $18,610 in U.S. Treasuries and $476,048 in GNMA securities. During 2010, we sold or experienced maturities, calls or pay-downs of $331,189. We took gains during the second and fourth quarter related to the sale of Treasuries and GNMA securities totaling $5,791.
During 2009, we reduced the size of our securities portfolio. In 2009, we used the cash flow to reduce debt and improve liquidity. During 2009, we sold $145,839 of agency issued collateralized mortgage obligations, or CMOs, $88,479 of mortgage backed securities, and $54,263 of municipal securities at a gain of $8,041. A portion of the proceeds from these sales was used to purchase $199,742 of GNMA securities and $8,856 of U.S. Treasuries which carry a zero percent risk weight, therefore lowering the risk weighted assets and improving our total risk based capital ratios.
Mortgage-backed securities and CMOs represented 88.7% of the available for sale securities portfolio at December 31, 2010, as compared to 85.4% at December 31, 2009. Mortgage-backed securities carry an inherent prepayment risk, which occurs when borrowers prepay their obligations due to market fluctuations and rates. Prepayment rates generally can be expected to increase during periods of lower interest rates as underlying mortgages are refinanced at lower rates.
The fair value of available for sale securities as of December 31, 2010, by contractual maturity, except for mortgage-backed securities and CMOs, which are based on estimated average lives, are shown below. Expected maturities may differ from contractual maturities in mortgage-backed securities, because certain mortgages may be called or prepaid without penalties.
Proceeds from sales and calls of securities available for sale were $209,881and $302,760 for the twelve months ended December 31, 2010 and 2009, respectively. Gross gains of $5,805 and $8,076 and gross losses of $2 and $16 were realized on these sales and calls during 2010 and 2009, respectively.
The net gain (loss) on trading activities included in non-interest income for 2010 and 2009 was $292 and $(1,004), respectively.
We regularly review the composition of our securities portfolio, taking into account market risks, the current and expected interest rate environment, liquidity needs, and our overall interest rate risk profile and strategic goals.
On a quarterly basis, or more frequently when necessary, 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, whether the market decline was affected by macroeconomic conditions, the length of time the securities have had temporary impairment and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and whether we have the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. We also review the payment performance, delinquency history and credit support of the underlying collateral for certain securities in our portfolio as part of our impairment analysis and review. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to us at a point in time.
See Note 5 of the Notes to Consolidated Financial Statements for additional information on our securities portfolio.
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 Federal Home Loan Bank, or 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. During 2010 and 2009, we sold $2,541 and $39, respectively, of our FHLB stock back to the FHLB at par. We also sold $4,411 of Federal Reserve stock back at par during 2010.
Loans at December 31, 2010, totaled $1,349,504 compared to $2,110,348 at year-end 2009, which included loans held for sale in probable branch divestitures, reflecting a decrease of $760,844, or 36.1%. This decrease was due partially to the branch and loan sales in 2010 that included $332,675 of loans. Commercial loans (which include commercial, industrial and agricultural, tax exempt, lease financing, commercial real estate, and construction and development) decreased $564,268 at December 31, 2010, compared to year-end 2009. This decrease was driven primarily by a decrease in commercial construction and development loans of $219,831, or 57.5%, commercial, industrial and agricultural loans of $200,670, or 33.3%, and commercial mortgage loans of $132,831, or 22.8%. Commercial loans in the Chicago region totaled $174,284 at December 31, 2010, compared to $261,445 at December 31, 2009. During 2010, the Chicago commercial portfolio experienced significant increases in past due and non-performing loans, as well as higher losses. Charge-offs recorded during 2010 from this portfolio totaled $32,918, down from $34,976 taken in 2009.
Our non-owner occupied CRE portfolio originated from three areas, with $429,941 being formerly managed by our commercial lending team that was headquartered in Greater Cincinnati, our CRE line of business, $140,678 managed by our Chicago region and the remainder managed in our community banking markets. Our largest property-type concentration is in retail projects at $154,871, or 25.0%, of the total CRE portfolio, which includes direct loans or participations in larger loans primarily for stand-alone retail buildings for large national or regional retailers with national and regional tenants. Our second largest concentration is multifamily at $115,150, or 18.6%, of the total CRE portfolio. Our third largest concentration is for land acquisition and development at $97,378, or 15.7%, of the total, which represents both commercial development and residential development. Finally, our fourth largest concentration at $69,912, or 11.3%, is to the single-family residential and construction category, 77.0% of which is in the Chicago area. No other category exceeds 9% of the CRE portfolio. Of the total non-owner occupied CRE portfolio, 36.9%, or $228,592 is classified as construction. At December 31, 2010, $280,626, or 45.3%, of the CRE portfolio is located in our core market states of Indiana, Kentucky, and Illinois. The three largest concentrations outside of our core market states are $187,348, or 30.3% located in Ohio, $28,632, or 4.6% located in Florida and $23,222, or 3.8%, located in Tennessee. Non-owner occupied CRE non-performing loans in our core market states totaled $98,493 at December 2010, with another $33,286 located in Ohio, $24,402 located in Florida, and $6,306 located in Tennessee. A total of $1,700 of our non-performing loans at December 31, 2010 were located in North Carolina, in which we had $18,562 of loans outstanding. We do not offer non-recourse financing.
The reduction in size of our loan portfolio, including the decline in CRE loans, coupled with the planned decline in our indirect consumer and residential mortgage loan portfolios and sale of consumer and commercial loans in branch sale transactions, has resulted in a small decline in our CRE concentration risk. The balance in our non-owner occupied CRE portfolio decreased from $978,927, or 46.4% of the total loan portfolio at December 31, 2009, to $618,873 or 45.9% of the total portfolio at December 31, 2010.
The change in our non-owner occupied CRE portfolio from 2007 to 2010 is attributable, in part, to the disruption of the permanent financing market, which made it more difficult for borrowers to refinance completed and stabilized projects on a permanent basis. During the third quarter of 2008, we discontinued pursuing new non-owner occupied CRE opportunities, regardless of property type, as additional stress to the portfolio of this product became apparent. While exiting the CRE line of business all together, we have been reducing our current CRE exposure through the sale of performing and nonperforming loans, not making any new commitments, and incenting our customers and relationship managers to reduce their outstandings ahead of their prescribed maturities and increasing our yields as pricing opportunities arise.
CRE loan balances in Chicago were $139,043 at December 31, 2010 compared to $202,871 at December 31, 2009. CRE balances from our former CRE line of business in Cincinnati, Ohio were $425,757 at December 31, 2010 compared to $678,680 at December 31, 2009.
C&I loans decreased $200,670, or 33.3%, from year-end 2009. Approximately $90,326 of the decline was due to the branch divestitures, loan sales and sales of participation interests to limit the Bank’s exposure to larger credits.
Residential mortgage loans decreased $89,556, or 38.5%, from year-end 2009, primarily due to the sale of $59,893 of loans in the branch divestitures and loan sales. We expect the balance of residential mortgage loans will continue to decline during 2011, since we sell substantially all originations to a private label provider on a servicing released basis. We evaluate our counterparty risk with this provider on a quarterly basis by evaluating their financial results and the potential impact to our relationship with them of any declines in financial performance. If we were unable to sell loans to this provider, we would seek an alternate provider and record new loans on our balance sheet until one was found, impacting both our liquidity and our interest rate risk. We have never had a strategy of originating subprime or Alt-A mortgages, option adjustable rate mortgages or any other exotic mortgage products. 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.
Home equity lines of credit, or HELOC loans decreased $44,528, or 27.3%, at December 31, 2010, from year end 2009. Approximately $38,021 loans were sold in connection with the branch divestitures. HELOC loans are generally collateralized by a second mortgage on the customer’s primary residence.
Consumer loans, which include both direct and indirect loans, decreased $62,492, or 49.4% from the prior year, of which approximately $48,355 was from the branch divestitures during 2010. The average balance of indirect consumer loans declined $29,476, or 42.1% during 2010, as we exited the indirect line of business in December 2006 in order to originate higher yielding commercial loans and sold $32,928 of indirect loans in a third quarter branch and loan sale. The indirect loans are to borrowers located primarily in the Midwest and are generally secured by recreational vehicle or marine assets. Indirect loans at December 31, 2010, were $17,963 compared to $62,062 at December 31, 2009.
The average balance of direct consumer loans decreased $38,690, or 24.2% during 2010, in large part due to the sale of $15,427 in branch sale transactions.
Loans delinquent 30-89 days were $19,623, or 1.45% of our portfolio at December 31, 2010, an increase of $678 from September 30, 2010. Delinquent loans include $10,570 of CRE loans, or 1.73% of that portfolio, $2,289 of C&I loans, or 0.56% of that portfolio, $4,946 of residential mortgage loans, or 3.45% of that portfolio, and $1,818 of consumer and home equity loans, or 1.00%, of that portfolio.
Of the delinquent CRE loans, $9,265, or 88%, were originated by the former CRE group. The increase in the delinquencies during the fourth quarter reflects greater attention managing delinquent accounts, as well as, the reclassification of delinquent loans to nonaccrual status and into OREO.
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 $34,891 at December 31, 2010. Of this amount, $11,282, or 34.3% was classified as non-performing.
LOAN PORTFOLIO AT YEAR END
Different types of loans are subject to varying levels of risk, and we mitigate this risk through portfolio diversification by type of loan and industry. We concentrate substantially all of our lending activity by lending to customers located in the geographic market areas that we serve, primarily Indiana, Illinois, and Kentucky.
We lend to customers in various industries including real estate, agricultural, health and other related services, and manufacturing. Our loan portfolio does not contain any loans to foreign entities.
Non-performing assets consist primarily of nonaccrual loans, restructured loans, loans past due 90 days or more and other real estate owned. Nonaccrual loans are loans on which we have suspended recognizing interest because of doubts as to the borrower's ability to repay principal or interest according to the terms of the contract. Loans are generally placed on nonaccrual status after becoming 90 days past due if the ultimate collectability of the loan is in question or when we determine the loan is impaired. Loans which are less than 90 days past due, but as to which serious doubt exists about repayment ability, may also be placed on nonaccrual status. Restructured loans are loans for which the terms have been renegotiated to provide a reduction or deferral of principal or interest because of the borrower's financial position. Loans 90 days or more past due, which totaled $73 at December 31, 2010, are loans that are continuing to accrue interest, but which are contractually past due 90 days or more as to interest or principal payments. Other real estate owned represents properties obtained for debts previously contracted.