The housing meltdown and recession gave banks in Indiana and across the nation their biggest test in decades.

One major Indiana bank failed. Columbus-based Irwin Financial Corp., whose roots date to 1871, was seized this fall by banking regulators, which sold most of its assets and deposits to Hamilton, Ohio-based First Financial Bancorp.

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.

Helping many banks weather the 2009 storm was money from the federal government’s Troubled Asset Relief Program, or TARP. Regional banks that dominate the central Indiana market scooped up the funds, as did 17 banks headquartered in the state.

But financial institutions aren’t out of the woods yet. As the year closed, falling prices for commercial real estate were forcing banks to write off an increasing number of troubled business loans, a trend that’s likely to suppress bank earnings for many quarters.

The tough conditions have led many banks to play hardball with struggling business customers they might have been willing to work with in the past. It also has made many institutions slow to lend, pinching firms that need financing for growth.

Banking observers say the pressures ultimately may spur consolidation, thinning the number of local bank competitors. The area has 559 offices spread among 54 institutions, according to the Federal Deposit Insurance Corp.

“You drive around Indy and, on so many good corners, there are four bank branches,” said longtime local banking executive Steve Beck. “There will be some consolidation.”

So far, the tumult hasn’t led to a big shakeup in bank market shares, FDIC data show. But it has brought a big new player to town. On Dec. 31, 2008, Pittsburgh-based PNC Financial Services Group Inc. acquired Cleveland-based National City Corp. for $5.6 billion.

Before their merger, PNC had no presence here, while National City was No. 2 in the city, with 75 branches in the Indianapolis area.•