Financial crisis offers opening for banks’ market-share reshuffling

Market observers rank today's credit crisis on par with some of the ugliest moments in U.S. banking history.

News service Bloomberg predicted fourth-quarter lending losses could make it "the worst earnings period for the financial
industry since the Great Depression." And local observer John Reed expects the financial fallout will eclipse the savings
and loan debacle of the late 1980s.

Yet amid the carnage, financial institutions are sniffing around for opportunities.

The most stable banks, such as New York-based JP Morgan Chase, are eyeing acquisition targets across the country. Milwaukee-based
Marshall & Ilsley Corp., fresh off its $529 million purchase of First Indiana Corp., has added 20 mortgage and commercial
bankers in a bid to grab market share. The hardest-hit banks, including Columbus-based Irwin Financial Corp., are trying to
clean up the books and hold on until the market turns.

The most-credit-worthy borrowers will continue to find willing lenders, but others will find bankers less liberal with loans.
The last few quarters have been grim for banks large and small across the United States, and the outlook remains tough despite
aggressive rate cuts by the Federal Reserve aimed at averting a recession.

The big national financial players, led by Merrill Lynch and Citigroup, already have written off $150 billion in lending
losses. A problem that began with defaults on subprime mortgage loans has spread to all types of lending.

Shares of Indiana's listed banks trade on average 20 percent below last year's peaks. The market has punished just
about every bank, even those with little exposure to subprime mortgages.

"I'm alternately scared to death, and more circumspect," said Reed, an executive vice president for Chicago-based
investment firm David A. Noyes & Co. "It's frightening. You're talking about Citibank, the largest bank in
world, could be broken up or bought. It's stuff that would have been unthinkable a year or two ago."

Finding opportunities

The last few months have been particularly brutal for Milwaukee-based M&I Its stock is off about 30 percent since July,
when the company announced its acquisition of locally based First Indiana. In one year, shares have lost 45 percent.

Still, the company is in a strong capital position thanks to its $1.8 billion spin-off of data processing unit Metavante.
Some of the windfall financed the First Indiana acquisition; the rest remains on M&I's books.

"We've got that capital to invest in these things that will pay off, when others don't have that luxury,"
said Reagan Rick, M&I's regional president for Indiana.

Rick, a 1983 graduate of Ball State University, joined First Indiana in September 2004 after stints at American Fletcher
National Bank, Lincoln Bank and National City Bank.

In his interview with M&I CEO Mark Furlong, Rick promised the Milwaukee bank's shareholders would be happy they bought
First Indiana. So far, M&I hasn't lost many local customers, a good sign.

M&I has shed about 170 back-office employees since the merger, bringing its local head count to 330. Meanwhile, the company
has added 15 mortgage bankers and five commercial bankers focused on loans up to $30 million, with the goal of increasing
market share beyond its current 6.3 percent. The bank's official name change is scheduled for Feb. 4.

Even for M&I, expansion doesn't come without risk. The company's ratio of nonperforming assets jumped to 1.7
percent in 2007, from 0.52 percent in 2003, Reed said. Its loan loss reserves are dwindling. And real estate and repossessed
assets on M&I's books jumped to $115 million at the end of 2007 from $13 million in 2003.

On Jan. 25, Moody's put a negative outlook on M&I's holding company, citing its exposure to commercial real estate,
although the credit agency noted the company's strong capital position offsets some of the risk.

Fundamentals haven't changed

The banking fundamentals of collecting deposits and cultivating credit-worthy borrowers haven't changed, said John Pelizzari,
president and CEO for Fifth Third Bank in central Indiana.

Pelizzari's marching orders to Fifth Third's bankers: Pound the pavement in search of opportunities that weren't
around when banks, including Fifth Third, were flying high. Wall Street shaved 35 percent off the Cincinnati-based bank's
share price in the last year. The bank has an Indianapolis market share of 9.2 percent.

"It's in times like this that you can make some moves in the market," Pelizzari said. "If others retrench
a bit, and we're out there calling on people and actively seeking new business, it's a great opportunity."

One of Fifth Third's big competitors, Cleveland-based National City Corp., has taken a big hit from subprime loans. The
bank, whose local market share is 17.3 percent, has written off $1.4 billion.

Another bank with a local presence that has taken big write-downs is United Kingdom-based Royal Bank of Scotland, the parent
company of Charter One, which wrote off $2.5 billion.

The write-downs give a competitive advantage to banks that aren't limping into 2008.

New York-based JP Morgan Chase & Co. mostly avoided the subprime morass (the bank's $3.2 billion in write-offs are
tiny compared with its $1.6 trillion in assets), and its shares have shed only 7 percent over the last year. The company has
more than $700 billion in cash on its books. Analysts believe it's on the hunt for acquisitions.

Chase has the largest market share in central Indiana, 24.3 percent, and is hoping to gain more ground by adding to its mortgage
and student loan business. Mortgage refinancing also is expected to surge now that rates have dropped again to historic lows.

"Without a doubt, the strategy is to take market share, either by acquisition or internal growth," said Dennis
Bassett, Chase's CEO for Indiana. "We're in a great position to direct our own destiny."

'Bullish on good opportunities'

A modest rebound in financial stocks these last few weeks offers some hope, but banks haven't cleared the credit crisis
yet, Reed said. Subprime mortgages are most commonly blamed for the problems, but excessive borrowing and overinflated real
estate prices also are factors.

"It's bad. It's quite bad. It's awful," Reed said. "Confidence in the financial system is greatly
shaken."

And a meaningful recovery isn't likely until 2009 at the earliest, said Brad Kime, president of Irwin Union Bank, one
of the state's hardest-hit institutions.

The stock price of Irwin Union's parent company, Irwin Financial, is down 60 percent over the past 12 months, thanks
in large part to its high exposure to the mortgage market. The company sold its mortgage business, Irwin Mortgage, in 2006,
and still is trying to unravel the damage, Kime said. Irwin Union has a 1-percent market share in the Indianapolis area.

"The industry is having quite its share of challenges," Kime said. "Unfortunately, that won't be ending
anytime soon."

More banking consolidation is possible, although transactions are more likely to close in cash thanks to depressed stock
prices, said Mike Renninger, principal of Carmel-based Renninger & Associates LLC, a consulting firm specializing in bank
mergers and acquisitions.

Renninger said he is "bullish on good opportunities" to invest in quality banks that have been thrown under the
bus with the bad ones.

There still are good loans to be made, he said.

"He who is aggressive when things are dicey sometimes comes out ahead," Renninger said. "The bank that pulls
in its horns and doesn't want to do anything is going to miss out."