Rash of bank failures sure to spread to Indiana

Not a single Indiana bank has failed since the sector tanked last year. But Bob Jones, CEO of Old National Bancorp in Evansville,
figures it’s only a matter of time.

“I don’t think the state can be immune to having failing
banks,” said Jones, whose institution is poised to be a buyer when assets of institutions seized by the government hit
the market. “I think the number will be less than other places in the Midwest.”

No one knows which
Indiana institution might snap the streak, though Columbus-based Irwin Financial Corp. and Evansville-based Integra Bank Corp.
are the largest Hoosier banks going through harrowing times.

Both have seen steep losses sap their firepower. Irwin
Union Bank & Trust Co., Irwin’s principal banking subsidiary, has the dubious distinction of being the only Hoosier
bank with an E (very weak) financial grade from TheStreet.com Ratings. Integra Bank comes in at a D-.

Nationally,
109 banks have failed since the beginning of last year. The list includes 14 institutions in Illinois, two in Michigan, and
one in Ohio. The closest was in Danville, Ill., just across the Indiana line. After the Federal Deposit Insurance Corp. took
over the five-branch First National Bank of Danville on July 2, Terre Haute’s First Financial Corp. assumed its deposits
and acquired most of its assets.

Irwin Financial, which got into trouble expanding into California and other western
markets, has been under special regulatory oversight since last fall. In July, the company disclosed that the Office of Thrift
Supervision had ordered its relatively small thrift subsidiary to boost capital levels or face the possible suspension of
its business.

So far, Irwin Financial’s efforts at lining up a capital infusion have come up empty. Last
fall, the company announced plans for a $50 million stock offering, with Cummins Inc. committing to buy up to $25 million
of the shares.

That deal now looks dead. In an Aug. 31 letter to the Securities and Exchange Commission, Irwin
said it was withdrawing those plans “due to adverse market conditions for almost all financial institutions and its
inability to date to participate” in any of the government programs aiding the ailing industry. Company officials did
not return calls.

Integra also ran into trouble expanding outside its home turf. In October 2006, the bank paid
$117 million to buy Prairie Financial Corp. of suburban Chicago—an institution that, in retrospect, was way too concentrated
in lending to builders.

Integra’s losses so far this year total $76 million. The bank has entered into a
formal agreement with the Comptroller of the Currency “to reduce the level of criticized assets and improve earnings.”

Mike Alley, a former Indianapolis banker brought in as CEO of Integra in May, said the bank’s top priority is
taking the steps necessary to protect customers and their deposits.

“I don’t think anyone can say it
can’t happen,” he said of a government takeover. “At the same time, we are definitely not in an adversarial
relationship with our regulators. We have a very positive relationship.”

One challenge for Integra and all
banks is that conditions within their industry continue to worsen, even as the overall economy shows signs of stabilizing.
The FDIC announced this month that it had 416 banks on its confidential “problem list,” up from 311 at the end
of March.

The troubles at some banks could spell opportunity for others. Keefe Bruyette & Woods analyst Sandra
Osborne lists Old National and Jasper-based German American Bancorp among two dozen U.S. banks positioned to scoop up remnants
of their failed brethren.

“We continue to believe a select group of regional banks with sufficient capital,
credit quality and management talent stand to benefit by rolling up failed institutions, thereby expanding their banking franchise,”
she said in a report.•