Why did regulators take control of Columbus bank?

    Regulators took control of its sister thrift bank, Irwin Union FCB, partially because of inadequate management.

    "Irwin Union Bank and Trust was operating in an unsafe and unsound manner, and its failing liquidity position left the bank in imminent danger of insolvency," Indiana Department of Financial Institutions Director David Mills wrote in a press release Sept. 18. 

    "The Savings Bank's increasing operating losses, deteriorating asset quality, deteriorating capital position, lack of realistic prospects for raising capital and inadequate management support the conclusion that the Savings Bank is in an unsafe and unsound condition to transact business," wrote Office of Thrift Supervision Acting Director John Bowman in a four-page report Sept. 18. 

    Bowman detailed significant losses by IUFSB, trends he considered irreversible, and decided to pull the charter. 

    State and federal bank agencies pulled the charters of Irwin Union Bank & Trust and Irwin Union Bank Federal Savings Bank last week. 

    Federal Deposit Insurance Corp. seized the assets, and FDIC employees walked into all 27 Irwin Union branches Friday at the close of business to begin taking inventory. 

    FDIC already had brokered a sale of the banks, subsidiaries of Columbus-based Irwin Financial Corp., and through a bidding process awarded deposits and performing loans to Cincinnati, Ohio-based First Financial Bancorp.

Longstanding problem 

    Banks that lose their charters and are sold typically have longstanding problems despite attempts to turn things around, said Bill Ruberry, spokesman for the OTS, which pulled Irwin Union FSB's charter. 

    Irwin Financial Corp. had lost more than $450 million in the last six quarters. 

    Analysts have explained IFC's demise in part through a failed expansion strategy in the Western U.S. and risky home-equity loans. 

    Irwin Union routinely issued home equity loans without collateral, a practice that worked so long as real estate prices kept rising: A few months after obtaining the home and the loan, the owner could sell the home for a tidy profit - even after paying back the mortgage and home equity loans.
    That mechanism faltered when the recession began and home prices plummeted. 

    The Western expansion strategy, selling mortgages in high-growth areas such as Phoenix and Las Vegas, initially produced healthy profits for IFC. 

    But when the economy soured and expelled millions of workers, and properties started losing value, people began struggling to pay back loans, and much more so out West than in Indiana. 

    In 2006 in southern Indiana, about 1 in 714 of Irwin Union's borrowers defaulted on his loan. In 2007, the rate increased to 1 in 189. In 2008, it fell to 1 in 263. In Las Vegas, however, the default rate of Irwin Union-issued loans in 2008 jumped to 1 in 5.6. 

    IFC has filed for Chapter 7 bankruptcy, listing assets of $10 million to $50 million, and liabilities of $100 million to $500 million.

Reviews assess health 

    OTS, a federal chartering agency, and IDFI, a state chartering agency, use on-site reports from their bank examiners and reviews of required institutional reports to determine the health of banks. 

    Ruberry said OTS conducts on-site checks of banks every 12 to 18 months. IDFI conducts on-site checks every six to 18 months, said Troy Pogue, IDFI public affairs officer.

    Banks are ranked on a scale of one to five, with one being the best and five the worst score. The rankings address areas such as a bank's asset quality, management, earnings and liquidity.
    Those banks with scores of three, four or five receive extra monitoring by the chartering agencies. Sometimes FDIC examiners are brought in to assess the situation, Ruberry said. 

    Corrective orders are made to give struggling banks direction and goals for improving their health. 

    If a chartering agency decides all possible corrective measures have failed, and the bank has no hope of improving, it can pull the charter. 

    Pogue said IDFI's sevenmember board of directors votes whether to pull a bank's charter. A majority vote is needed.

Bids for banks 

    When a chartering agency decides to pull a charter, it notifies FDIC, which starts brokering the sale of the bank through a bidding process. 

    The bidding process can start as soon as 90 days before the planned takeover date, or as late as one or two days prior, said David Barr, FDIC spokesman. 

    Once a charter is officially pulled, FDIC is named receiver of the failing bank and it directs the takeover by the winning bidder. 

    Hamilton, Ohio-based First Financial Bank, which already had a branch in Columbus, submitted the winning bid to buy IUBT and IUFSB.

    First Financial bought IUBT's deposits for 1 percent of their value, about $21 million, and its assets at the discounted price of $544.1 million, or 75 percent of their value, according to a filing with the Securities and Exchange Commission.

    First Financial's purchase agreement excluded all non-performing assets of the banks.