Commercial real estate loans are still weak

The first small batch of third-quarter earnings reports from local banks shows continued weakness in commercial real estate loans, an area long expected to be the next big problem for the industry.

Fulton Financial Corp., which owns The Bank in South Jersey, yesterday reported an increase in troubled construction loans and commercial mortgages in the quarter ended Sept. 30, compared with the previous quarter - although the rate of deterioration in its loan portfolio had slowed.

The Lancaster bank said its third-quarter net income fell 37 percent, to $18 million from $29 million in the same quarter a year earlier.

Other area banks, including Allegiance Bank of North America, of Bala Cynwyd; Sun Bancorp Inc., of Vineland, N.J.; and VIST Financial Corp., of Wyomissing, Pa., are reporting similarly persistent problems in commercial loans.

Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., has warned of the potential for rising losses in commercial real estate loans nationally as weak economic conditions persist and the slumping job market saps demand for commercial properties.

"The most prominent area of risk for rising credit losses at FDIC-insured institutions during the next several quarters is in CRE lending," Bair said in recent congressional testimony, referring to commercial real estate.

The nation's credit crisis began nearly two years ago with shaky home loans.

VIST Financial, which has branches in Philadelphia and its suburban counties in Pennsylvania, is dealing with two construction and development loans totaling $10.9 million that were added to its troubled-loan book in the second quarter. Troubled or nonperforming loans are those on which payments are more than 90 days past due.

VIST chief executive officer Bob Davis said that the developments, in Berks and Montgomery Counties, had strong current appraisals and that the loans were backed by adequate reserves.

Sun said this month that it expected its third-quarter earnings, to be reported next week, to include an $800,000 write-down of a warehouse on which it holds the mortgage.

Allegiance Bank said last week that its nonperforming loans on Sept. 30 included 15 commercial real estate and construction loans totaling $7.4 million. That was an increase of $1.9 million from a year earlier.

The good news is that it is getting easier to sell troubled loans to investors, Allegiance chief executive Gregg Wagner said yesterday. "There's a lot more activity in the marketplace," he said.