Banks slapped again; commercial real estate delinquencies mushroom

| Sunday, Aug. 30, 2009

The subprime mortgage fiasco is being compounded by a newer stress factor at banks these days: Commercial loans, especially for real estate.

Delinquencies on such loans are a hot spot of potential trouble, experts say, because many regional banks hold large numbers of them. The cause is companies that shut down amid the recession, vacating shopping malls and office buildings financed by the loans.

According to Foresight Analytics, a real estate research firm in Oakland, Calif., delinquent payments 30 or more days late reached 4.3 percent during the April-June quarter, the worst since the recession in the early 1990s. An estimated $7 billion of commercial mortgages were in foreclosure last quarter, nearly four times the level in fourth-quarter 2007, when the recession began.

"Commercial real estate is the next shoe to drop. The question is, how bad will it get?" said Matt Schultheis, a bank analyst for Boenning & Scattergood, an investment banking firm in West Conshohocken. "We're still in the early stages of this."

For example, S&T Bank, of Indiana, Pa., is foreclosing on part of a housing project under construction in Richland. The bank is owed nearly $1.2 million by a partnership controlled by a Cleveland-area developer, according to court documents.

Of the 89 units planned for White Tail Ridge, 56 unsold villas and carriage houses plus undeveloped parcels are scheduled for sheriff's sale Sept. 8. The project has not sold a single unit in the past three years, according to local real estate agents involved with the project.

Because banks are getting clobbered by bad commercial real estate loans, financing for development deals is hard to come by, experts say. The problem is compounded by lower prices for commercial real estate properties, which have fallen 24 percent during the past year.

While commercial real estate in the Pittsburgh area has been relatively stable, local banks are not unscathed by the trend, according to a Pittsburgh Tribune-Review review of banks' financial reports.

Banks have especially suffered losses on loans for properties and projects elsewhere, often in Florida, which they either had to write off as losses or set aside money for to cover anticipated losses.

"Every area of our commercial portfolio is being scrutinized for early warning signs," said Todd Brice, CEO of S&T Bank on a conference call with analysts in late July. S&T is the eighth-largest bank in the area, with 30 local branches and $1.4 billion in deposits.

"When you look at First Commonwealth and S&T, for instance, the biggest problems they are having are not in their home markets — they are out-of-market loans or loans syndicated from other areas," said Schultheis.

First Commonwealth Bank, also based in Indiana County, reported a loss of nearly $19 million in the April-June quarter, which included a $48.3 million provision for possible loan losses. That set-aside was nine times higher than a year ago. First Commonwealth declared a loss on $26 million in construction loans that were accounted for in previous quarters.

Three-quarters of the second-quarter provision related to out-of-state loans, officials First Commonwealth told analysts. The bank is this region's fifth largest, with 62 local branches and nearly $2.2 billion in deposits.

"The real estate construction portfolio is feeling the most strain," said First Commonwealth President Mike Price. The bank said $10 million of last quarter's provision was for a condominium construction loan in Kissimmee, Fla., for instance, while $3.9 million was for a senior-center construction loan in Ohio.

"Since the plunge in employment that kicked in late last year, you've seen the performance of commercial real estate loans really deteriorate," said Matt Anderson, a partner at Foresight Analytics.

About 14.5 million Americans were without jobs in July, said the Bureau of Labor Statistics, which reported the unemployment rate at 9.4 percent.

"Commercial real estate prices are really depressed and performance has been poor, with delinquencies and defaults rising," said Anderson. Commercial mortgage defaults jumped four-fold, from $9.4 billion in fourth-quarter 2007 to an estimated $38.0 billion last quarter, according to Foresight Analytics.

FNB Corp.'s net income dropped 37 percent last quarter to $9.1 million. The bank company, based in Hermitage, Mercer County, set aside nearly $14 million for possible loan losses last quarter, up from $10.5 million in the first quarter. FNB is the area's seventh largest bank, with 56 local branches and about $1.6 billion in deposits.

Nearly one-quarter, or 23.9 percent, of FNB's loans in Florida were in nonperforming status last quarter, vs. a more-normal 1 percent of its Pennsylvania loans, according to FNB's financial reports. A nonperforming loan generally means one that is at least 90 days past due.

"Real estate fundamentals have held up better in Pittsburgh than in other parts of the country. The office market is fundamentally sound because for the most part, we did not have the overbuilding that other parts of the country had," said Jeremy Kronman, executive vice president in the Pittsburgh office of national real estate broker CB Richard Ellis.

"But retail is not as strong as office here because the national retail market is in disarray," said Kronman.

For instance, a Wells Fargo Bank trustee is foreclosing on a vacant Circuit City store building on William Penn Highway in Wilkins, which is bound for Allegheny County Sheriff's sale scheduled for Sept. 8. The bank is owed nearly $8.7 million of the original $9.8 million mortgage, according to court documents.

Circuit City, the consumer electronics giant, declared bankruptcy last November and rejected the local lease. A Pep Boys automotive outlet continues to operate on the property. But the land owner, the WMI/MPI and WML/MPL business trusts, haven't made mortgage payments since February, said Philadelphia attorney James Hennessey, who represents Wells Fargo.

Just as mounting job losses exacerbated the subprime mortgage crisis nationally, banks are coping with business failures across the country, fueled by the recession. According to the American Bankruptcy Institute, 16,014 businesses filed for bankruptcy in the second quarter. That's the most of any quarter in 15 years, and double the 7,985 filed in fourth-quarter 2007, when the recession began.

Last quarter, S&T Bank declared a loss of $1.1 million on a loan to an unidentified regional restaurant that went bankrupt, the bank said. The bank also wrote off $26.5 million of loans to an unnamed natural-gas exploration and drilling company, and $5.3 million of Florida development loans, said S&T.

"We are seeing stress in segments of our commercial loan portfolio as a result of this recession," said CEO Brice. "We are paying particular attention to our out-of-state loans."

"We are amidst a national credit crisis. It's very difficult to get money for commercial projects these days," said James Starman, executive vice president of CBRE Capital Markets, a real estate investment banking arm of CB Richard Ellis.

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