EVANSVILLE —Business was booming, and in the fall of 2006 Integra Bank’s President and Chief Executive Officer, Mike Vea, was brimming with good news about the bank.
Speaking at a Rotary Club of Evansville gathering that November, Vea told the group that Integra’s stock price and earnings were up 30 percent, and the company was bullish on its acquisition of Prairie Financial Group in suburban Chicago.
“As we look at our growth markets, we see Evansville, Cincinnati and Chicago as really great opportunities for growth in our company,” Vea told the group, according to an Evansville Courier & Press story from the time.
No one knew it then, but this optimistic view would end up dooming the company.
The Chicago and Cincinnati markets ended up being the source of many troubled loans that dragged down Integra’s portfolio, and eventually the entire company.
It wasn’t the first time that Integra had gotten swept up in economic hopes that ended in bitter disappointment.
The bank had encountered this dynamic before – in fact, it was born during such a time.
Established in the mid-19th century and then called Canal Bank, the company’s very name reflected promise and optimism.
The bank took its name from the Wabash and Erie Canal, a project designed to link Lake Erie near Toledo, Ohio, with the Ohio River in Evansville.
By the late 1840s it was clear that, after years of delays, the canal would finally be completed all the way to Evansville.
“The canal assured, the whole town was in an attitude of expectancy, on tiptoe for the great day when the water should finally roll in. … Evansville was preparing for the growth and expansion which the water traffic was bound to bring,” wrote Louis Benezet, who wrote “A River, a City and a Bank” to honor the bank’s 100th anniversary in 1950.
The Canal Bank opened on Independence Day on 1850.
Water finally flowed through the canal to Evansville in September 1853, but the canal did not succeed as hoped.
By 1854 the canal was facing competition from the railroads. Damage from vandals and heavy rains followed. By 1867, the canal was history.
“Small wonder that the ‘Canal Bank’ went into the courts to change its name!” Benezet wrote.
Canal Bank moved beyond the failed Wabash and Erie Canal. The bank became known as First National Bank in 1863. The bank went through several other name changes over the years, and was later known as First National Bank of Evansville (1882-1902); City National Bank (1902-1922) and National City Bank of Evansville (1922-2000) before taking its final name, Integra.
A look at the bank’s final phase – its “Integra” years – shows a company with lofty aspirations. The bank did achieve financial successes during this time, but its aspirations ultimately brought the entire company to an end.
In 1999, the company then known as National City Bank had a new chief executive who was brimming with optimism, and a network of 66 banking centers set to be brought together under a new united identity: Integra Bank.
In his letter to shareholders that year, President, Chairman and Chief Executive Officer Mike Vea writes that he has taken the job because “I could see a tremendous potential for this firm to become one of the top bank holding companies in the nation.”
The bank’s earnings varied in years to follow, but in 2007 its annual earnings of $30.7 million ($1.55 per share) were the best in its history.
The very next year Integra began losing money, and it never regained its footing. In 2009 Vea left the company, to be replaced by Mike Alley.
Integra’s 2010 annual report, filed in March, reveals a company fighting for its very survival.
By the end of 2010, Integra had posted a cumulative three-year loss of $430.1 million.
The company’s shareholder equity – the value of its assets minus its liabilities – had dropped below zero, to negative $18.8 million.
Integra said it needed additional capital of approximately $119 million in order to satisfy a capital directive issued by federal banking regulators the previous summer.
Failure to raise this capital, the bank wrote, would have grave consequences.
“If we (the bank’s holding company, Integra Bank Corp.) 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.”
So how did Integra go from such lofty goals to utter collapse?
A look at Integra’s annual reports provides a snapshot into the bank’s financial standing during this time period.
All publicly traded companies such as Integra are required to file certain public documents, including an annual report. The annual report, or 10-K, includes narrative and financial details about what the company does, how it operates and the possible risks it faces.
Sometimes, companies also include extras such as letters to shareholders, photos and mission statements. (These extras aren’t required by law, and Integra stopped issuing them in 2008.)
1999:
In his first letter to shareholders as the bank’s top executive, Vea writes that the company faces some challenges. The bank’s stock has underperformed, he says, and the company did not meet its goals for revenue growth. But Vea says he is bullish on the bank’s potential, and he outlines the bank’s four major goals. They are: to produce earnings growth of 15 percent annually; to grow earnings per share by 15 percent a year; to achieve a return on equity of 20 percent; and to have stock price performance in the top 10 percent of Integra’s bank peer group.
“While ambitious, these objectives represent realistic expectations,” Vea writes.
Financial highlights:
Annual earnings: $22.6 million ($1.27 per diluted share)
Stock price low/high: $22.80/$36.19
Company size: 833 employees/66 banking centers
Shareholders’ equity: $223.1 million
Nonperforming loans: 2.1 percent of total loans
2000:
Growth is a big theme in this year’s communication from Vea.
The executive highlights branch acquisitions in Bowling Green, Ky. and Franklin, Ky. “This type of high-growth market is exciting to us,” Vea writes. In the past year, the bank also acquired Webster Bancorp in Western Kentucky.
Integra’s top goals for the upcoming year, Vea writes, will be “achieving the 15 percent targeted growth in earnings and earnings per share, growing the core franchise and continuing to look at acquisitions.”
Having achieved the standardization of the banks that united under the Integra name, Vea says, the company will spend the next year focusing on its core franchise.
“Last year we built the rocket, this year we are going to send it up,” Vea writes.
Financial highlights:
Annual earnings: $30.5 million ($1.77 per share)
Stock price low/high: $16.25/$28.00
Company size: 801 employees, 77 banking centers
Shareholders’ equity: $205.5 million
Nonperforming loans: 2.2 percent of total loans
2001:
In this year’s letter to shareholders, Vea addresses two factors that negatively affected earnings: the credit quality of the bank’s loans, and falling interest rates.
Vea says the bank has changed its internal underwriting and credit processes in order to reduce its number of non-performing and problem loans, and it has also written down about $78 million in problem loans.
Integra’s return on equity and earnings per share growth, meanwhile, are in the bottom half of its banking peer group. Vea calls this “unacceptable,” and says Integra’s goal is “to reach the top half of the group, and eventually, the top quartile.”
At this point Integra has 77 banking centers in Indiana, Illinois, Kentucky and Ohio. Though acquisition activity might be slow in the coming year, Vea writes, this is still a long-term goal of the company.
“We plan to target high-growth banks and high-growth markets,” Vea writes.
Financial highlights:
Annual earnings: $7.3 million (42 cents per share)
Stock price low/high: $19.26/$26.25
Company size: 941 employees, 77 banking centers
Shareholders’ equity: $221.1 million
Nonperforming loans: 1.5 percent of total loans
2002:
In his letter to shareholders Vea highlights Integra’s core banking operation, which he says “performed admirably in 2002, exceeding budgeted goals, and will continue to be our primary focus in 2003 and beyond.”
But Integra’s share price, Vea writes, has declined 22 percent over the past two years, largely because of the bank’s sensitivity to interest rates. In an effort to reduce this sensitivity, Vea says, the bank has put a focus on “more predictable and stable securities” in its investment portfolio.
Though some executives this year received bonuses or incentive pay based on their performance, Vea writes, he did not receive a bonus because the corporation did not achieve its earnings goals.
Still, Vea closes his letter to shareholders by citing Integra’s “bright future.”
Financial highlights:
Annual earnings: $20.3 million ($1.18 per share)
Stock price low/high: $15.00/$23.55
Company size: 915 employees, 74 banking centers
Shareholders’ equity: $232.6 million
Nonperforming loans: 1.39 percent of total loans
2003:
Vea’s letter to shareholders contains several pieces of positive news about the bank. Integra grew its loans and core deposits, particularly in the Evansville market. It also posted a 29.8 percent rate of return on its stock, and it reduced its nonperforming assets by $4.9 million, or 18 percent, from the previous year.
The bank’s future plans, Vea writes, are to continue to grow its loans and deposits while keeping credit quality steady; to continue to strengthen its balance sheet; and to continue efforts to grow in metropolitan markets. About 75 percent of Integra’s banking centers are in community markets, with the other 25 percent in metro markets. Over the next three or four years, Vea says, the bank wants to make this closer to a 50/50 mix.
“Our job is far from over. In fact, we’re still referred to as a ‘turnaround story’ by many, though I believe the signs are clear that we have engineered the turnaround and are laying down some significant milestones on our growth journey,” Vea writes.
Financial highlights:
Annual earnings: $17.8 million ($1.03 per share)
Stock price low/high: $15.50/$23.00
Company size: 886 employees, 72 banking centers
Shareholders’ equity: $233.0 million
Nonperforming loans: 1.1 percent of total loans
2004:
Vea writes that Integra accomplished its year’s goals of restructuring its balance sheet to reduce interest rate risk and improve earning; growing earning; and continuing to improve its credit quality.
Further, Vea writes, Integra meets regulatory definitions of “well capitalized,” and it earned investment-grade ratings from Moody’s Investors Service for the first time in 2004. Such a rating, Vea says, is “rare for a bank of our size.”
Looking ahead, Vea says, commercial real estate lending will represent one of several growth areas for loans.
Integra continues to work on growing its metropolitan markets through acquisition and by building new banking centers.
“This will allow us to continue to gather low-cost deposits and grow fee income in our community markets, while taking advantage of the better lending opportunities in metropolitan markets,” Vea writes.
Financial highlights:
Annual earnings: Net loss of $6.6 million (38 cents per share)
Stock price low/high: $19.25/$24.50
Company size: 839 employees, 76 banking centers
Shareholders’ equity: $209.3 million
Nonperforming loans: 1.1 percent of total loans
2005:
“2005 was a good year!” Vea writes in his shareholders’ letter.
The bank had its best earnings in five years; it reduced noninterest expenses; it grew its net checking accounts by 12 percent; and its commercial real estate loans grew to $250 million, “which is well ahead of our expectations.”
Integra looks to increase revenue from its wealth management, commercial and mortgage lending departments in 2006, Vea writes.
“Despite a continued difficult revenue environment, 2006 represents a great opportunity for Integra to break out of the pack. … We continue to believe we have all areas pointing in the right direction,” Vea writes.
Financial highlights:
Annual earnings: $27.3 million ($1.56 per share)
Stock price low/high: $19.47/$23.60
Company size: 843 employees, 74 banking centers
Shareholders’ equity: $220.1 million
Nonperforming loans: 1.4 percent of total loans
2006:
Vea’s letter to shareholders is full of big news this year. Integra grew in two major markets, acquiring Prairie Financial Corp. in Chicago and adding a commercial banking team in the greater Cincinnati office. Integra’s stock price and dividend both increased, resulting in a total shareholder return of 32 percent.
Net checking accounts grew, as did fee income. Commercial real-estate loans grew faster than expected, ending the year at $362 million. And nonperforming loans, Vea says, are at their lowest level since 1997.
Looking ahead, Vea sees more positive things ahead for Integra, allowing it to outperform its banking peers.
“We are focused during the next three years on improving our performance from peer median to first quartile,” he writes.
On a less positive note, Vea also makes mention of a $17.7 million write-off the bank took related to a “customer fraud issue with a large borrower.” (This borrower, unnamed in Vea’s letter, was former music mogul Lou Pearlman, who is currently serving a federal prison sentence for financial fraud.)
Financial highlights:
Annual earnings: $19.5 million ($1.11 per share)
Stock price low/high: $19.81/$28.30
Company size: 802 employees, 74 banking centers
Shareholders’ equity: $235.5 million
Nonperforming assets: 0.49 percent of total loans
2007:
Vea’s message to shareholders this year contains a mixed bag of news items.
“As I am sure you are aware, 2007 was a very difficult year in our industry and bank stocks were severely impacted. … The housing downturn has caused investors to view bank stocks with skepticism in anticipation of increased problem loans and future credit losses,” Vea writes.
This had a direct impact on Integra, which in September 2007 had announced its plans to acquire Cincinnati-based Peoples Community Bancorp. Integra’s stock price fell after the announcement, and the two parties agreed to terminate the deal in January 2008 because of “the ongoing uncertainty in the credit markets and the homebuilder/housing sector,” Vea writes.
On the positive side, Integra’s 2007 net income was the highest in the company’s history. The bank also added more than 34,000 new retail and business customers on top of the customers it acquired through its acquisition of Prairie Financial Corp.
“We know we cannot afford to rest on our past accomplishments, and are extremely excited about our prospects for the future,” Vea writes.
Financial highlights:
Annual earnings: $30.7 million ($1.55 per share)
Stock price low/high: $14.03/$27.88
Company size: 848 employees, 80 banking centers
Shareholders’ equity: $327.8 million
Nonperforming assets: 1.0 percent of total loans
2008:
As a way to reduce its expenses, starting this year Integra issues only the required 10-K report. It no longer packages this report with the glossy photos, letter to shareholders and other extras as it did in previous years.
Financial highlights:
Annual earnings: Net loss of $110.9 million ($5.39 per share)
Stock price low/high: $1.27/$17.32
Company size: 870 employees, 80 banking centers
Shareholders’ equity: $204.8 million
Nonperforming loans: 6.1 percent of total loans
2009 Financial highlights:
Annual earnings: Net loss of $195.0 million ($9.42 per share)
Stock price low/high: 56 cents/$2.90
Company size: 736 employees, 69 banking centers
Shareholders’ equity: $102.3 million
Nonperforming loans: 10.6 percent of total loans
2010 Financial highlights:
Annual earnings: Net loss of $124.2 million ($6.01 per share)
Stock price low/high: 50 cents/$2.00
Company size: 517 employees, 52 banking centers
Shareholders’ equity: Negative $18.8 million
Nonperforming assets: 14.6 percent of total loans