FDIC sues executives over Irwin failure

The Federal Deposit Insurance Corp. has filed suit against four former officers of defunct Irwin Financial Corp. banks, alleging they “closed their eyes to known risks” in approving loans that contributed to the banks’ 2009 takeover by regulators.

The demise of Columbus-based Irwin Union Bank and Trust and of Louisville-based Irwin Union Bank resulted in losses to the FDIC’s deposit insurance fund of more than $550 million.

The suit in U.S. District Court for the Southern District of Indiana seeks to recover “no less than” $42 million in losses on 19 loans totaling $127.5 million. FDIC alleges the loans were written by former Irwin officers Bradley Kime, Duncan Burdette, Michael Waters and Kim Roerig.

Kime, who was president of Irwin Union Bank, and Burdette, who was executive vice president and chief credit officer, are Indiana residents, according to the complaint.

The loans were for commercial real estate and for acquisition, development and construction, called ADC loans.

The FDIC alleges the loans relied on appraisals inconsistent with the banks’ appraisal standards and contained loan-to-value ratio violations.

But Jim Knauer, an Indianapolis attorney representing the former Irwin officers, said the FDIC is using inaccurate information. “They’re just dead wrong on the facts about a lot of the [loans].”

Furthermore, Knauer said the FDIC’s Office of Inspector General found more issues from a risk management perspective in the banks’ residential lending. He said the commercial lending side, relatively speaking, “was doing quite well.”

Nick of time

The suit, filed May 13, came one day before a statute of limitations expired for bringing a case against the banks’ executives, Knauer said.

The FDIC further alleges that the ex-officers failed to properly value collateral or to provide current financial statements from borrowers and failed to identify contingent liabilities of borrowers and guarantors.

“Not a single loan contained an analysis of credit information that was sufficient to ascertain the adequacy of cash flows to service the loans or to identify a clear repayment source,” states the government’s complaint.

It continues: “By approving the loans despite their myriad deficiencies, the defendants acted negligently, grossly negligently and breached their fiduciary duties to the banks.”

According to the government’s complaint, the former officers pursued an aggressive growth strategy that depended on volatile, non-core funding sources to support the banks’ investment in high-risk, high-yielding assets.

“Key corporate control functions and risk management practices did not keep pace with the banks’ increasingly complex operations and escalating risk profile,” the complaint says.

The aggressive growth strategy had the effect of nearly tripling Irwin’s assets from 2000 to 2005 while profit decreased, the FDIC alleges in the complaint.

The largest of the loans cited was a $15.9 million note to refinance a $12 million loan on 219 acres of undeveloped land outside Casa Grande, Ariz.

The key source of repayment was to be the sale of lots to homebuilders, with the land as the collateral. The government alleges that defendants failed to conduct adequate analysis that would have revealed that borrowers didn’t have the means to make good on the loans.

The FDIC alleges a credit memo noted a concern about a slowdown in the Phoenix housing market and reluctance of buyers to move into the outlying community.

Legal deja vu

It’s the second lawsuit brought against former officers of Irwin over the demise of Irwin Union, which was founded in 1871.

In 2011, the bankruptcy trustee for parent Irwin Financial Corp. sued the holding company’s officers, alleging breach of fiduciary duty. Named were CEO William Miller, Chief Financial Officer Gregory Ehlinger and Executive VP Thomas Washburn.

But last September, U.S. District Judge Sarah Evans Barker dismissed the complaint, saying only the FDIC had the right to bring a suit.

An FDIC spokesman said the agency generally doesn’t comment on pending litigation.

Irwin Bank and Trust was closed by the Indiana Department of Financial Institutions in 2009, when it had assets of $2.7 billion and deposits of $2.1 billion.

Irwin Union Bank, based in Louisville, was closed by the Office of Thrift Supervision and had assets of $493 million and deposits of $441 million.

Ohio-based First Financial Bank bought the assets of the banks.•