Regulators hike Irwin Union’s capital requirements

Regulators have told Irwin Union Bank FSB that it must boost its capital by the end of next month or face the possible
suspension of its business.

The bank is the thrift subsidiary of Columbus, Ind.-based Irwin Financial Corp., which
has been struggling for more than a year.

The order to boost capital from the federal Office of Thrift Supervision
was disclosed in a filing Irwin Financial made with the Securities and Exchange Commission this morning.

Irwin
Financial Chief Administrative Officer Matt Souza said this morning that if his company misses that deadline, it will be required
to submit a contingency plan to the OTS. He declined to share more detail about Irwin’s compliance strategy.

“There are several alternatives that the thrift will consider. The plan right now is to of course hit those targets,”
he said. “Beyond that, since we’re in a period when we haven’t released financial performance [for the second
quarter], I should reserve comment.”

But Ross Demmerle, a research analyst for Louisville-based Hilliard
Lyons Inc. who follows Irwin Financial, said the consequences could be much more dire. To meet the OTS’s new standards,
he said the thrift will need to raise at least $5 million.

Unfortunately, there’s no obvious source for the
money. Demmerle said Irwin Financial has unsuccessfully attempted to borrow from the U.S. Treasury through the federal Troubled
Asset Relief Program, or TARP, since last fall.

“[The OTS is] saying ‘Look, you need to have more capital…
because things have gotten worse since the last regulatory agreement came out in October,’” Demmerle said. “Things
aren’t moving fast enough. If you don’t get it, you’re going to have to merge, be acquired by someone or
liquidate. Unless you find more capital in 60 days, you won’t be around after that time.”

On Oct. 10,
Irwin Financial entered a written restructuring agreement with the Federal Reserve Bank and the Indiana Department of Financial
Institutions. That same day, Irwin’s thrift subsidiary entered its own agreement with the OTS. Both pacts require increases
in capital reserves. Irwin Financial’s other subsidiary is Irwin Union Bank and Trust.

As a result, Irwin
Financial last fall announced plans to raise $50 million from investors. Columbus-based Cummins Inc. pledged $25 million.
Cummins spokesman Mark Land today said the engine-maker remains committed to the bank’s recapitalization efforts, but
hasn’t yet invested.

Irwin Financial has disclosed its raised another $9 million from other investors. The
company has also sold branches across central Indiana to Cincinnati-based First Financial Bancorp. Souza declined to offer
a detailed update on Irwin Financial’s capital campaign.

“We’re still working on that recapitalization
plan,” he said.

But Irwin Financial continues to struggle. In the first quarter, the company lost $94 million,
or $3.07 per share, due to its restructuring. That compares to a loss of $22 million, or 77 cents per share lost in the same
period a year ago. But it is less than the $104 million Irwin lost in the fourth quarter.

Irwin Union Bank FSB’s
agreement with the OTS required it to maintain a Tier 1 capital ratio of at least 9.0 percent and a total capital ratio of
11.0 percent.

According to Irwin Financial’s 2008 annual report, the thrift closed 2008 with $50.8 million
in core capital, or an 8.2-percent core-capital ratio. At that time, the thrift had total capital of $57.2 million, or an
11.2-percent ratio.

This morning, Irwin revealed it entered a new “Stipulation and Consent to the issuance
of an Order to Cease and Desist” with the OTS on July 24.

The new agreement increased the thrift’s
reserve requirements to 10-percent core capital and 12-percent total capital. Dollar terms of the thrift’s new requirements
were not immediately available, but Demmerle estimated them at $5 million or more. Souza said Irwin Financial is in the middle
of closing its books for the second quarter, and expects new financials to be available in mid-August.

Irwin Union
Bank FSB has assets of about $500 million, or 15 percent of Irwin Financial’s total. Souza noted that the OTS order
thus affects only a small portion of the overall Irwin Financial Corp.

But it’s a headache all the same.
Demmerle said Irwin Financial has few attractive options available to raise the capital it now needs for its thrift. Irwin
Union Bank FSB could sell off some of its assets, such as a portion of its book of loans or some of its branches, which are
spread across the country. Or Irwin Financial might choose to divest the thrift completely. But a fire sale would likely be
the company’s only option in the current recessionary economy.

“They’re kind of being forced
into this position right now,” Demmerle said. “I think they’re probably more concerned about the [Irwin
Union] bank [and Trust] and it being headquartered in Columbus, and wanting to take care of that. I think that’s their
focus right now.”

Whether or not Irwin Financial hangs on to the thrift, it’s currently operating under
strict rules, regulatory filings reveal.

“As was the case under the prior supervisory agreement, the thrift
must not make any new construction or land loans without the prior approval of the OTS. We believe, however, that the consent
and order will not restrict the thrift from continuing to serve its customers with their banking transactions,” read
Irwin’s regulatory filing this morning. “Failure to comply with the terms of the consent and order could result
in significant actions of increasing severity by the OTS, up to and including a regulatory takeover of the thrift.”

Irwin Union Bank FSB stopped making commercial construction and land loans in the third quarter, according to Irwin
Financial’s annual report. It is also no longer able to accept brokered deposits without a waiver from the FDIC. A call
requesting comment to the OTS was not immediately returned.

Irwin Financial shares were trading at 71 cents each
this afternoon, up 3 cents.