Construction loans are increasingly the source of non-performing assets for regional banks, and so they are taking steps to shrink their builder loan portfolios or restrict builder access to credit lines. The possibility of a highly-leveraged, large public homebuilder failing is still a possibility.
Real estate loans… comprise [95%] of the nonaccruals. The increase in nonaccruals of approximately $30 million from Q2 really centers around four particular credits. The first one is a $9 million construction loan to a large homebuilder to construct smaller homes in the greater Houston area. While Texas really has remained their best market, their projects in Arizona and other areas have drained cash from the company. They are really unable to meet their obligations.
Dick Evans, Chairman, CEO:
Potential problems were $42.4 million on September 30th, up from $33.4 million as of June 30. One primary borrower contributed to this increase, a home builder for $13.1 million.
I think you said that you expect to sell some of [your homebuilder] loans in fourth quarter, whereas your current statements were more than you expect to sell all of the loans in the quarter… What's changed on the margin to get you a little less confident that those can be sold quickly?
I don't believe that I've ever said that we were going to sell them all in the fourth quarter simply because that would be a lot to get accomplished in the market…We always talked about tiering the portfolio… We've been in the last year working to sell the bulk of those loans… We would hope that… 10 to 15 loans approximately would be able to be concluded in the fourth quarter.
Where we [had] let [builders just draw on the lines, we now do it a lot differently… We look at every deal before they go into it and if a builder has two specs or three specs that haven’t been selling for a long time and wants to do some more specs, we’re not allowing that to happen right now.
We've reduced… the size of our… residential construction portfolio from $8.768 billion at the end of the first quarter to $3.28 at the end of the third quarter… Obviously we’ll not finance any new developments… We’ll work with builders if they have reasonable economic expectations that they can work through the problems… Other builders weren’t cautious… And so, it's not practical to help them through this cycle.
CH: I think if we hadn’t had this upset in the capital markets, we were clearly seeing the end of the real estate cycle. We’d have been having a recovery next spring. I hope that will still happen, but I don't know what the economy is going to do to it.