First Financial gets sweet deal on Irwin Financial’s bank assets

It’s good to be among the favored few, those blessed by the Federal Deposit Insurance Corp. to scoop up the remnants
of failed banks.

Because it was on the FDIC list of approved buyers,
Cincinnati-based First Financial Bancorp was able to acquire Columbus, Ind.-based
Irwin Financial Corp.’s banking operations under terms that would make any deal-maker
proud.

Here’s the upshot: First Financial scooped up $2.1 billion
in deposits at a mere 1-percent premium. Meanwhile, it bought performing loans at
a 25-percent discount and saddled the FDIC with the scary stuff—all construction loans,
non-performing loans and real estate Irwin owned.

Better yet, the FDIC
is taking much of the risk for the loans First Financial put on its balance sheet.
Under a loss-sharing agreement, the FDIC is shouldering 80 percent or more of losses on those loans.

The FDIC has offered similar terms to buyers of many of the 100 or
so U.S. banks that have failed this year. It does so not out of generosity, of course. It wants to entice
buyers to the table. And it wants to ensure those buyers don’t put themselves
at risk of financial ruin.

But it’s no wonder
shareholders and analysts are giving First Financial execs a pat on the back. The deal was announced
Sept. 18. Over the next two trading days, First Financial shares spiked 45 percent.

“First Financial’s acquisition of Irwin’s subsidiaries
is a major win for shareholders that significantly enhances the company’s presence in Indiana,”
Stephen M. Moss, an analyst with Janney Montgomery Scott, said in a report.

It’s not clear how many banks the FDIC has on its list of approved
buyers; the government doesn’t make that public. But the ingredients for winning a spot—strong
management and a strong balance sheet—are no secret.

The investment firm Keefe Bruyette & Woods lists two dozen U.S. banks “with sufficient capital,
credit quality and management talent” to roll up failed institutions. First Financial is on that
list, as is Evansville-based Old National Bancorp.

Both banks have
similar stories. They made tough decisions a few years ago to sharpen performance, putting
them in a stronger position than most of their brethren when the recession set in.

For its part, First Financial cut back on risk by shrinking its mortgage and auto-lending
businesses. Old National installed new management and reduced credit risk.

Both had stock offerings this year that gave them the firepower to make acquisitions.
Old National raised more than $200 million last month—money analysts expect
the bank eventually will be able to deploy.

“It is wise for Old
National to think of expanding. Its existing geography in central and southwest
Indiana has held up through the downturn, with relatively minimal dents to credit quality,” Jason
Ren, an analyst with Morningstar Inc., said in a report.

“Although
expanding in and around this area won’t confer tremendous growth prospects, attractive
opportunities could still arise.”

Appetite for growth

First Financial entered the Indianapolis market
by opening a commercial lending office here in mid-2008 and already had been planning to establish a
branch-banking presence before the Irwin opportunities arose.

In August, it bought three Irwin branches—in Carmel, Greensburg and
Shelbyville. When the FDIC seized Irwin’s banking units last month, it acquired 12 more Indiana
outposts.

“We felt it was a good time competitively to enter
the market because, based on our research, we found some of the Indianapolis-based banks had pulled
back on their lending activities and their expansion plans,” said Claude Davis, First Financial’s
CEO.

Davis

The bank already had offices in the northwest, north central
and southeast parts of the state. The addition of the Irwin branches gives it 49
statewide.

Don’t expect First Financial brass to stop there.
Davis said First Financial plans to add Indianapolis branches next year. In a PowerPoint investor presentation,
First Financial notes that the population in Indianapolis is expected to increase
8.6 percent by 2013, one of the best growth rates among its Midwestern markets.

Davis, 48, knows the strengths and weaknesses of this market firsthand.
He’s a Butler University graduate and a Butler trustee and worked for Irwin
from 1987 to 2004, spending seven years as president of its commercial bank. He was
living in Carmel when he joined First Financial.

Now, he finds himself
mining opportunities on his former home turf.

“This deal made us a very large player in Indiana, and we view it as a strategic market for us,”
he said. “You will see us continue to grow and expand.”•