Academic journal article ABA Banking Journal

C&D Asset Quality Takes a Hit

Academic journal article ABA Banking Journal

C&D Asset Quality Takes a Hit

Article excerpt

One of the secondary impacts of the housing market crunch is predicted to be a similar pullback in construction and land development (C&D) lending. This lending segment includes the building of new homes and commercial developments, as well as alterations to existing structures. Intuitively this relationship makes sense. If there is a glut of homes on the market, building more does not improve the situation. The excess capacity would put these portfolios at higher risk for default as well.

To measure the impact of the slowdown in the segment, SNL examined reported C&D loan and asset quality data aggregated at the commercial bank call report level over the last five quarters (see chart).

In the aggregate, in the third quarter of 2003 C&D loans grew 15% on a year-over-year basis, half of the year-ago growth rate. At the same time the ratio of C&D loans 30 to 80 days past due and accruing interest to total C&D loans grew from 72 to 128 basis points; C&D Loans 90+ days past due and still accruing interest more than doubled; and C&D loans on nonaccrual status more than tripled.

At the state level, Florida saw nonaccruing C&D loans grow by over 900% on a year-over-year basis, from $52 million to $526 million. Contrasting this is Texas, which grew a relatively modest 36%, from $55 million to $75M. The Midwest market has been one of the hardest hit, with nonaccruals growing year-over-year by 198% in Ohio, growing from $276 to $823 million, and roughly 520% in Michigan, from $87 to $538 million.

The results are not good for the near-term outlook of the segment. In general, look for this trend to continue into 2008, with an early year plateau leading to a gradual improvement as the market sorts itself out, with geographic region playing a significant factor in recovery time. …

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