Like many community banking companies striving to protect capital against a rising tide of problem assets, Integra Bank Corp. in Evansville, Ind., is making some tough choices.
The $2.9 billion-asset company is likely to shrink by as much as a third in the coming year, scaling back its four-state branch network to one that is centered on its Indiana headquarters market.
"Selling core franchise branches is a painful thing to do," Mike Alley, Integra's chairman and chief executive, said in an interview Friday. "But it is a balancing act. Do you cut into muscle or do you just sit back and watch it wither away? It hurts, but we've got to do it."
Though Integra was well capitalized at yearend, executives at the company acknowledged that won't be the case without these fundamental changes. Integra completed a deal to sell a batch of branches late last year, has announced three more deals this year and plans to announce more in the next 90 days.
Capital generated through the sales will help offset expected loan losses. Integra reported Friday that on Dec. 31 its nonperforming assets stood at $246 million, or 12.03% of total assets, up 45% from a year earlier.
Branch sales have become an increasingly common practice for struggling banks that are unlikely acquisition targets and are unable or unwilling to execute highly dilutive capital raises. The results of such sales vary; sometimes they succeed. Conversely, several banks that have failed tried such strategies in their final months.
"We've seen several banks sell off the family jewels, just to be left with cubic zirconia," said Terry Keating, managing director in the Chicago office of Amherst Partners LLC, an investment bank. "That just creates a zombie bank."
Yet Keating applauded the timing of Integra's strategy. "It sounds like they are trying to get in front of it while they are still well capitalized," he said.
Integra has announced that it is selling 13 of its 69 branches in three deals, which are slated to close by June 30. That would reduce its branch network 18%, to 56 branches. Alley said that by yearend he would like to have a network of just 35 to 40 branches. Through these branch sales, as well as a run-off of existing loans, Integra's goal is to have assets of $1.8 billion to $2 billion.
Alley said the company continues to look for opportunities for divestiture, including in Chicago. A sale of those branches would likely fetch a high premium but wouldn't reduce the company's problem construction credits there as such sales would only include performing loans.
The branch-sale deals, which include $265 million in loans, should add as much as 180 basis points to Integra Bank's capital ratios. As of Dec. 31 it had a leverage ratio of 6.30% and a total risk-based capital ratio of 10.05%.
Those increases would allow the bank to exceed the ratios it has endorsed under an informal agreement struck last August with the Office of the Comptroller of the Currency. That called for the bank to have a leverage ratio of 8% and a total risk-based capital ratio of 11.5% by the end of 2009.
The OCC plans to re-examine the bank's capital as of March 31, Alley said.
Though the bank is well capitalized, Integra's tangible common equity ratio is a razor-thin 0.42%. At that level, the company could become technically insolvent if credit costs are high this quarter, said Ross Demmerle, an analyst at J.J.B. Hilliard, W.L. Lyons Inc.
"Their primary issue is how much in provisions they are going to have to take," he said. "If it is anything like the last four quarters, it is going to wipe out their common equity."
The company reported a provision for the fourth quarter of $30.5 million, down 21% from a year earlier. The provision, along with a $75.6 million tax valuation allowance, drove Integra to a $96.1 million loss for the fourth quarter, widening its loss by 16% from a year earlier.
Demmerle said Integra may not be done on the reserving front.
"It is reasonable to assume that another large provision is possible," he said.