Unfinished federal bailout sealed Irwin’s failure

Up to the end, Columbus-based Irwin Financial Corp. anticipated a government bailout that never materialized. Without it,
the bank couldn’t cash in Columbus-based engine-maker Cummins Inc.’s $25 million pledge, or the $9 million in
commitments it had from other investors.

In his last quarterly conference call, on Aug. 5, Irwin Chairman and CEO
Will Miller told analysts his company was still expecting assistance from the federal Troubled Asset Relief Program.

“We have been advised that Treasury is in active discussions with other banking agencies as part of Plan C about a
new program to make additional TARP capital available to community banks, which have the ability to raise private capital
as part of a re-capitalization process,” Miller said during the call. “Our commitments from private parties to
invest $34 million alongside a Treasury investment have been extended again, this time to the end of the year.”

But on Friday, Irwin ran out of time. Regulators seized and shut down its two banking units: Irwin Union Bank and Trust,
which had $2.7 billion and assets and $2.1 billion in deposits; and thrift Irwin Bank FSB, which had $493 million in assets
and $441 million in deposits.

The Federal Deposit Insurance Corp. arranged Irwin’s sale to Hamilton, Ohio-based
First Financial Bank. First Financial already had bought Irwin’s Carmel, Greensburg and Shelbyville bank branches in
August.  The purchase included Irwin’s 27 remaining branches, 12 of which are in Indiana.

Irwin fell
victim to the fact that the TARP program wasn’t designed for relatively small community banks, said Mark Foster, chief
investment officer of Columbus-based investment advisory firm Kirr Marbach and Co.

“Part of the work over
the last couple of quarters was to get the government to get a public-private investment partnership program for community
banks,” Foster said. “Citigroup, Wachovia, all the big guys get in trouble and there’s a program to help,
because of systemic risk to markets. But Irwin doesn’t propose that risk, so there was nothing to help.”

The collapse of Irwin’s two units marks the 93rd and 94th failures this year of U.S. federally insured banks. Foster
said there was very little immediate disruption in the community from concerned depositors. He said First Financial and the
FDIC engineered a smooth transition of bank operations over the weekend. Irwin’s other businesses, such as a venture
capital fund and a leasing operation already had been sold or closed.

First Financial has quickly replaced some
of Irwin’s bank branch signs. Foster said employees of both banks spent the weekend taking inventory of assets. The
FDIC took on Irwin’s riskiest assets and expects to book an $850 million charge to its insurance fund in connection
to the failure.

Irwin Financial had been in financial decline for more than a year, in part because of steep losses
on home equity loans. Over the last six quarters, Irwin posted losses totaling more than $450 million.

Foster bemoaned
Irwin’s disappearance from Columbus’ landscape. Founded in 1871, it was one of the state’s oldest banks.
There’s plenty of competition in the local bank market, Foster noted, so the community’s lending needs will be
served. But civic demands are another question.

“Many of the innovative things that have taken place in Columbus
over the years have been the result of either Cummins or Irwin. Their leadership and financial muscle have been key contributors,
and that will be missed,” he said.

“We saw the same thing with the Arvin Industries purchase by Meritor”
in 2000, he added. “It was only a year or two later when Arvin had very little presence, and community support was a
fraction of what it was.”

Likely the biggest loser in Irwin’s failure will be the family of Will Miller,
the son of legendary Cummins chief J. Irwin Miller.

According to filings with the Securities and Exchange Commission,
Irwin Financial’s largest shareholders are the J. Irwin Miller Marital Trust II, which holds 5.17 million shares, and
the IFC Trust, which holds 5.16 million shares. Will Miller is trustee of both. Irwin’s stock fetched 48 cents per share
before regulators suspended trading Friday. Foster noted that the stock was worth $35 per share just five years ago.

“Whether you live in Columbus or New York, $350 million is a lot of money,” he said. “That has to have
some sort of impact.”

Despite its troubles, Foster said, Irwin had more than one suitor before the FDIC arranged
its marriage to First Financial. He said he’d heard rumors that Evansville-based Old National Bank, for example, had
investigated a deal. Old National CEO Bob Jones said in an e-mail this morning that he couldn’t comment. He said any
bank that considers such an FDIC deal is required to maintain confidentiality.

First Financial may have had the
inside track because of its close links to Irwin. First Financial CEO Claude Davis was an Irwin employee until 2004, Foster
noted. And First Financial had been hiring key former Irwin employees for the last six months, he said.

“My
guess is that had some bearing on the [FDIC] decision to choose them,” Foster said, “because they know the operation
and can hit the ground running as they take it over.”