A pair of community banks see loan woes escalate

Irwin Financial Corp. didn’t fail because its commercial banking business unraveled. What did the company in was
its national home equity loan unit, which went into a tailspin after mortgage markets collapsed, piling up $350 million in
losses.

But the struggles of two central Indiana financial institutions show bread-and-butter banking can be pretty
rough these days, too. Both Community Bank of Noblesville and Blue River Bancshares Inc. of Shelbyville have seen loans sour
at a rate that might have seemed unimaginable before the housing market tanked and the recession set in.

The two
have the dubious distinction of being the only central Indiana banks with a so-called Texas ratio topping 50 percent. The
ratio is widely used to assess credit problems and measures nonperforming assets as a percentage of tangible common equity
plus loan-loss reserves. Just nine Indiana banks have Texas ratios above that threshold, according to research firm SNL Financial.

Neither bank is in dire shape. Community has a ratio of 66 percent and Blue River, 62—both far better than Irwin,
which had a ratio above 140 percent when regulators stepped in last month. It joined about 100 other U.S. financial institutions
that have failed this year.

Both companies have Indiana finance veterans at the helm. Chuck Crow, a Noblesville
banker for 40 years, has served as president of Community since he helped found it in 1991. Russ Breeden, Blue River’s
CEO and largest shareholder, is the former CEO of the Indianapolis investment firm Raffensperger Hughes, now part of NatCity
Investments.

They’re going to need all that expertise to clean up their books. At Blue River, parent of SCB
Bank, nonperforming assets have swelled to $10.5 million, nearly double the total at year-end.

Blue River, which
lends throughout the metro area, has experienced souring commercial-and-industrial loans. Real estate has been tough as well,
with declining commercial and residential property prices eroding the value of collateral.

“We don’t
like it, but we are certainly pretty comfortable with things,” Breeden, 60, said. He noted that SCB Bank has a healthy
cushion of capital even before factoring in a $5 million infusion received in March from the federal Troubled Asset Relief
Program, or TARP.

Much of Community’s difficulty stems from loans to builders and developers of subdivisions.
Nonaccruing construction and land development loans swelled to $13 million in the second quarter, triple their level a year
earlier. The bank also has had to seize collateral, saddling its balance sheet with $5.5 million in “other real estate
owned.”

The good news, Crow said, is that the bank often lent far less than the value of collateral, leaving
it in a strong position to collect even if borrowers go under. The bank also boasts a ratio of tangible common equity to assets
topping 13 percent, giving it a bigger cushion to absorb loan losses than the other Hoosier banks on the Texas ratio list.
“If you look at the numbers, you’ll see we are one of the highest-capitalized banks in the state,” Crow,
66, said. “Not that we want to give any of that back, but we can weather a pretty heavy storm.”

Crow
is optimistic that homebuilding in fast-growing Hamilton County will come back, and many of the loans now in default will
be paid off.

But veteran investment banker John Reed said banking conditions may get worse before they get better.
He said banks on the Texas ratio list likely will have to devote much of their management firepower for several quarters to
working out troubled loans. In the meantime, he said, management will have less time to devote to drumming up new loans, and
the ones borrowers have stopped paying on won’t be contributing to profit.

“It’s going to hamper
earnings. It is going to sap management energy and focus, and it has the potential to bring them to their knees, any of them,”
Reed said. “That’s the big risk.”•