FORT WORTH — Comptroller of the Currency John Dugan urged Texas banks with high concentrations of commercial real estate and construction loans on their books to build up their loan-loss reserves.
Bank concentrations of construction and CRE loans are, on average, higher in Texas banks than in most other states. "Weaknesses are beginning to emerge" in construction and development loan portfolios, largely as a result of the slowdown in residential home sales, Mr. Dugan warned Tuesday at an Independent Bankers Association of Texas conference.
"Given the traditional cyclicality of the economy and real estate markets, prospects for a commercial real estate project can change considerably between conception and completion," he said. "Even a well-structured and soundly underwritten project can become a problem during the periodic overbuilding cycles."
The percentage of construction and development loans that are more than 30 days past due have more than doubled over the last year for banks outside Texas, to 2.6% of their loan portfolios as of June 30, and Mr. Dugan expects more Texas borrowers to start experiencing similar problems soon.
"Although starting from an admittedly very low baseline, such an increase … is clearly a trend that bears watching," he said.
In Texas, 30-day delinquencies are well below the national average, but Mr. Dugan cautioned bankers not to be overconfident.
"As a regulator, I can't help but look at the rapid increase in the national average, which to me illustrates just how quickly things can change," he said. "Given the heightened level of C&D lending in Texas, this is plainly a part of your banks' portfolios that requires strong controls and consistent monitoring.
"I know that in recent years some bankers have been fearful of criticism from their external auditors if the bank's loan-loss reserves were deemed too high," Mr. Dugan said. "But I firmly believe that in this environment, increases in loan-loss reserves for many banks are both warranted and prudent. I would be extremely surprised if your auditors disagreed with this position - but if they do, with respect to a national bank, I urge you to contact your examiner in charge or assistant deputy comptroller. If we have to intervene in this situation, we will do so."
