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4/21/2012 2:46:00 PM
Federal audit cites commercial loans as key in Integra's failure

Susan Orr, Evansville Courier & Press

—As Integra Bank fought for survival in its final months and years, the bank's executives repeatedly identified bad commercial loans — especially those originating in its Chicago market — as their main source of troubles.

A recently-released federal audit report reaches the same conclusions about Integra, which failed on July 29, 2011 and was acquired by Old National Bank.

The Department of the Treasury's Office of Inspector General released its material loss review of Integra earlier this month. The report examines both the reasons for the bank's failure and whether banking regulators properly supervised the bank.

Federal inspectors complete material loss reviews of failed banks if the failure results in more than $200 million in losses to the federal Deposit Insurance Fund. As of Dec. 31, the Federal Deposit Insurance Corp. estimated that the Integra failure would cost the fund $205.9 million, up from its original estimate of $170 million. Money for the Deposit Insurance Fund comes from insurance premiums paid by FDIC-member financial institutions.

In analyzing Integra's failure, auditors pointed to the bank's decision in 2003 to grow through commercial real estate lending.

To this end the bank opened loan production offices in Ohio (Cincinnati, Columbus and Cleveland), Louisville and Nashville. In April 2007 Integra acquired Prairie Bank and Trust, a Chicago-area bank that specialized in commercial construction loans.

That acquisition, the audit report concluded, "was a primary contributor to the failure of Integra."

One reason Prairie dragged down Integra, the report said, was that "Prairie had weak credit administration practices and, as a whole, the overall credit quality of its loan portfolio was inferior to that of Integra's."

The acquisition also increased Integra's concentration of commercial real estate loans, bringing it above the level considered risky by bank regulators, the auditors said. Integra's primary banking regulator was the Office of the Comptroller of the Currency, also known as the OCC.

The audit report also revealed that OCC officials communicated their concerns to Integra and gave the bank recommendations on how to deal with the risks. The OCC chose not to take stronger measures at the time, the audit report said, because OCC officials "had confidence in the management's willingness and ability to address the concerns when integrating Prairie into Integra."

Other details from the audit report:

* In reviewing Integra's failure, auditors learned that the OCC had "opened an Order of Investigation regarding allegations of fraudulent activity by bank officials." These matters were referred to the Treasury Inspector General's Office of Investigation. A representative from that office said information about investigations is generally not public, unless the matter leads to a criminal investigation or a civil penalty is imposed and announced.

* In February 2009, Integra received $83.5 million from the federal Troubled Asset Relief Program, or TARP. The entire amount of that investment is expected to be lost, the report said.

* The OCC's supervision of Integra was appropriate, the Treasury audit report concluded.

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Editor, John C. DePrez Jr.; Executive Editor, Carol Rogers; Publishers: IBRC and IAR

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