Integra Bank Corp. in Evansville, Ind., has a new strategy for addressing its problem assets: Get them off the books as quickly as possible.
The $2.9 billion-asset company reported late Wednesday a provision for loan losses dramatically higher than expected because it is focused on flushing out rather than working through nonperforming assets. Though more companies are exploring this strategy as a way to move beyond their problem credits, it is noteworthy in Integra's case because the approach is eating away at its already thin capital.
"It is a strategy that makes sense; the new CEO is trying to put his stamp on the company by trying to get in front of their credit problems," said Chris McGratty, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc. "But you have to have the capital to take the losses, and they don't."
During a conference call Wednesday, Integra said nearly half its chargeoffs in the quarter stemmed from decisions to accept larger losses up-front rather than continue to carry the loans. The drastic haircuts left the company with a tangible common equity ratio of negative 1.29%, making it technically insolvent. Its loss provision totaled $52.7 million, up 68% from a year earlier.
Still, the company appears undaunted.
"We will take advantage of opportunities to sell, exchange for other assets or accept discounted payoffs where appropriate, particularly in situations in which we expect it would take several quarters for values to recover," Michael J. Alley, who became Integra's president and chief executive last May, said during the call.
In an interview Thursday, Alley said the strategy is designed to move the most troubled credits out and let his team focus instead on the problem credits that are salvageable.
"We think our resources are better utilized on the credits where we can do something to bring them back," Alley said.
To address the capital shortfall, Integra has begun a massive branch selloff. In the past year, it has made six deals to sell 25 of its 75 branches, along with $500 million in deposits and $545 million in performing loans.
As of March 31, only one of the deals had closed, leaving the company with 69 branches. Integra's hope is to retain a 45-branch network within 100 miles of its Evansville headquarters.
In all, the divestitures would boost regulatory capital ratios by 375 basis points, Stephen Geyen, an analyst at Stifel, Nicolaus & Co. Inc., wrote in a research note published Thursday.
Yet given the steady rise in nonperforming assets, Jeff K. Davis, an analyst at Guggenheim Partners, said the branch deals would provide only temporary relief. "The gains they are going to book on those deals give them periodic gulps of air," he said. "But they are caught up in a rip tide."
Alley acknowledged that an outside infusion ultimately will be needed. This helps explain Integra's aggressive move to shed problem loans.
"We are trying to build credibility with the market by showing them that we've recognized and moved on from the deepest parts of our problems," he said.
More divestitures are in the works. Integra is seeking to unload the four Chicago branches of Prairie Financial Corp., a company in Bridgeview, Ill., that it bought in 2007. Construction and commercial real estate loans originated by Prairie have caused Integra a heap of headaches; they make up 45% of the company's nonperforming assets, Alley said.
"It was definitely an ill-timed" deal, said KBW's McGratty.
As of March 31 Integra's nonperforming assets totaled $258.5 million, or 13.31% of total assets. The nonperformers were up 4.7% from the fourth quarter, despite chargeoffs of $39.6 million. Davis said that, given the high level of nonperforming assets, the latest push to flush assets quickly could be driven by regulators.
The company's Integra Bank has been operating under a consent order from the Office of the Comptroller of the Currency for the past year. As credit deteriorated and capital began dwindling, the OCC increased the order's stringency, giving the bank until March 31 to boost its leverage ratio to 8% and its total risk-based capital ratio to 11.5%.
However, after reporting a first-quarter loss of $53.9 million, 87% bigger than a year earlier, the bank's leverage ratio was 4.91% and its total risk-based capital ratio 8%.