Battered banks don’t see light at end of tunnel

Many of Indiana’s recession-battered banks remain black and blue, but executives and analysts say at least the body
blows are beginning to subside.

One of the largest, Muncie-based First Merchants Corp.—which made a big push into Indianapolis in recent years—posted
a first-quarter profit after reporting three consecutive quarterly losses.

But there’s little to celebrate. The profit was a mere $136,000—this from a bank that just a few years ago regularly
earned more than $30 million a year.

Loan woes continue to bedevil institutions big and small. First Merchants said non-accrual loans totaled $122.9 million in
the first quarter, down slightly from their peak two quarters ago but more than four times their level two years ago.

“While much of the severe problems appear to be behind them,” Brian Martin, an analyst with Atlanta-based FIG
Partners said in a report, First Merchants “is not yet out of the woods.”

Many of the loan problems in Indiana and nationally are in commercial real estate. The weak economy has sapped demand for
commercial space, pushing vacancies up and lease rates down. That’s translated into dramatically lower appraisals for
the underlying real estate that banks seize and sell when loans go bad.

First Merchants said, that of the $28 million in loans that slipped into non-accrual status in the first quarter, $10.1 million
was related to the lodging industry. Medical office and residential lot development together represented another $6.7 million.

Bank bosses throughout central Indiana feel First Merchants’ pain.

Third Century Bancorp of Franklin, parent of tiny Mutual Savings Bank, increased its provision for loan losses by $1 million
in the first quarter after poring through its portfolio for potential problems.

“Management specifically reserved for commercial loans secured by real estate, which have been negatively impacted
by the severe recession in the local commercial real estate market,” Third Century CEO Robert Heuchan said in the earnings

Faring among the worst was another tiny institution, Indiana Business Bank. Its parent, Indianapolis-based Indiana Business
Bancorp, lost $519,043 after earning $32,252 in the same quarter a year earlier.

“As a result of the meltdown in real estate values over the past 18 months, our level of non-performing assets are
at an unacceptable level,” CEO James Young said in the earnings release.

But most bank executives were at least a little more upbeat.

“We are continuing to achieve improvement with our nonperforming loans,” said Russell Breeden III, CEO of Shelbyville-based
Blue River Bancshares, parent of SCB Bank. “Positive activity seems to be occurring in each category.”

Franklin-based Heartland Bancshares Inc., parent of Heartland Community Bank, said many measures improved in the first quarter,
including nonperforming loans. But CEO Steve Bechman said he added to reserves, anyway, in part because “the local economy
and real estate markets have not shown material improvements.”

Judge tosses some ATA claims

A federal judge in Indianapolis has dealt a blow to defunct ATA Airlines as it heads toward trial in its
multimillion-dollar lawsuit against FedEx Corp., its former partner on a lucrative military-charter contract.

ATA charges in the 2-year-old suit that the Memphis company’s unexpected decision in January 2008 to drop it as a military-charter
partner forced it into bankruptcy liquidation that spring.

Judge Richard Young late last month threw out five of the six counts in the suit, asserting they involve issues of state
law that are pre-empted by the Airline Deregulation Act of 1978.

Counts tossed aside included breach of fiduciary duty, breach of good faith and fraud—leaving breach of contract as
the sole count to be litigated. The trial is scheduled to begin Aug. 9 and last seven or eight days. Any recovery for ATA
would go to creditors.

ATA had been flying military charters for more than two decades. It contends FedEx was legally obligated to keep it on board
through at least September 2009. FedEx contends ATA is relying on a September 2006 letter of understanding that was far from
being negotiated into an actual contract.

The U.S. military awarded carriers in its charter program points based on the number and type of aircraft they committed.
A FedEx executive said in a deposition that the company decided to dump ATA because Northwest Airlines wanted more business
and was being courted to join United Parcel Service’s team.

Because Northwest contributed nearly 25 percent of the FedEx team’s points, “if it was not part of the team,
there would be a substantial reduction in business for all remaining carriers,” according to a FedEx filing.•

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