FORT WAYNE – Bankers nationwide are bracing for a new flood of foreclosures.
But this time commercial borrowers – not homeowners – are dancing with default.
The Congressional Oversight Panel last month issued a report that said it “is deeply concerned that commercial loan losses could jeopardize the stability of many banks, particularly the nation’s mid-size and smaller banks.” It went on to express concern “that as the damage spreads beyond individual banks … it will contribute to prolonged weakness throughout the economy.”
Bob Hall, Fort Wayne market president for Old National Bank, confirmed this area’s commercial real estate market is soft.
“You can drive around Fort Wayne and see a lot of for-lease, vacant office spaces,” he said.
The lack of rental income affects property values and will make it harder to renew those loans, Hall said. Commercial loans, unlike home loans, come due every three to five years, he said. When they come due, banks have to assess the value of the property and compare it to the outstanding loan balance.
Those comparisons are expected to trigger some commercial loan defaults.
As long as customers struggle, banks will struggle, Hall said.
The Congressional Oversight Panel, created by Congress in October 2008, is charged with reviewing financial markets and the regulatory system. It attributed loan weakness to several causes.
Commercial property bought at the height of the real estate bubble has fallen in value. Some retailers aren’t generating enough sales to allow them to make full, on-time rent payments. Some apartment complexes have higher vacancies, leading to less rental income for landlords. And tighter lending standards could make it tougher for some borrowers to refinance loans that come due.
“Over the next few years, a wave of commercial real estate loan failures could threaten America‘s already-weakened financial system,” the February report said.
“Between 2010 and 2014, about $1.4 trillion in commercial real estate loans will reach the end of their terms. Nearly half are at present underwater – that is, the borrower owes more than the underlying property is currently worth,” the report said.
The panel estimated losses at banks alone could reach $300 billion.
Local troubles
Real Capital Analytics, a New York-based research firm, has counted eight distressed commercial assets worth a combined $229 million in Fort Wayne. Toledo, which has a population similar to Fort Wayne’s, has 17 distressed commercial properties valued at $112 million.
Real Capital Analytics defines distressed properties as those that are in foreclosure, bankruptcy or have restructured or modified loan terms. The firm uses assessor records, public records, news sources and other sources to compile its lists, research services director Jessica Ruderman told The Journal Gazette last week.
Not all the local distressed properties represent loans made by local banks. Glenbrook Square, owned by General Growth Properties Inc., is the largest of those commercial properties. General Growth, the second-largest shopping center owner in the country, is in bankruptcy and negotiating exit terms.
Fort Wayne Hotel and Conference Center, the former downtown Holiday Inn, is another example of a building in distress. The 208-room hotel was sold at a sheriff’s sale in September after Fort Wayne Hospitality LLC defaulted on $3.7 million borrowed from New York-based BRT Realty Trust.
TRB Fort Wayne Inn LLC bought the property at East Washington Boulevard and Lafayette Street. Attorney Michael O’Hara said the new owners don’t want to be identified or announce plans for the hotel’s future.
Greg Leatherman, Fort Wayne’s redevelopment director, hasn’t met with the new owners, but he understands they have approached some city officials, asking for resources to improve the property. Those officials told Leatherman the property owners haven’t decided whether to keep the building as a hotel or convert it to another use.
Although the Congressional Oversight Panel focuses on commercial loans tied to real estate, those aren’t the only loans in trouble.
When Steve Zacher, a commercial real estate broker, surveys the area, he sees one thing – the auto effect.
The owner of The Zacher Co. said the suppliers who did business with struggling automotive companies have been left in the lurch.
“They’re hurting,” said Zacher, whose offices are at 444 E. Main St. “It’s led to them having to liquidate real estate.”
In terms of square footage, Zacher said, auto suppliers likely are at the top of northeast Indiana’s loan default list.
Area banks hurting
Problem commercial loans are being mentioned with increasing frequency in earnings reports issued by community banks doing business in northeast Indiana.
Old National Bancorp waved the white flag in January, warning that a borrower had defaulted on a commercial loan in the fourth quarter, forcing the Evansville bank to record a $12 million loss on the loan, which was not tied to real estate.
The bank’s fourth-quarter loan losses totaled $21.8 million, according to its earnings release dated Feb. 1.
Lakeland Financial Corp. reported increased loan losses in its fourth-quarter earnings.
The Warsaw company more than doubled its loan loss provision to $6.3 million compared with the same quarter of 2008, when it was $2.3 million. The company said it needed to increase its fund to cover bad loans, in part because of more loan defaults and “possible weaknesses in our borrowers’ future performance and prospects.”
1st Source Corp. saw its loan losses double in the fourth quarter to $5.63 million, compared with $2.88 million for 2008’s fourth quarter.
The South Bend company reported loan losses of $22.64 million for last year, more than six times the $3.47 million lost in 2008.
Chairman Christopher Murphy III described the company’s loan losses as “substantial” in a written statement. He said 1st Source staff was “proactive … in working with our clients through difficult situations and in recognizing credit problems as they occurred.” The company also increased its loan loss reserves, he said.
Years of weakness
Tower Financial Corp. has struggled with commercial loan quality for several quarters.
The company first publicly acknowledged “elements of weakness” in two “lending relationships” in April 2007. The loans, a spokeswoman said at the time, used real estate as collateral.
Since then, Tower Bank’s 11-year-old parent company has reported losses for five of the 10 most recent quarters. That includes 2009’s second quarter, when the company reported that nine borrowers were responsible for more than $17.8 million in overdue loans.
Tower Financial in January reported a $5.6 million loss for 2009. The company also reported a fourth-quarter loss of $1.2 million. One drag on the company’s annual earnings was a $1.1 million increase in FDIC insurance premiums.
Tower officials said the quarterly loss was mainly due to costs related to former Chairman Don Schenkel’s early retirement and the write-down of state deferred tax assets. Without those expenses, the company would have reported fourth-quarter earnings of about $40,000.
Paul Wyche of The Journal Gazette contributed to this story.
