There's no love more bittersweet than the kind where you discover you've stopped measuring up to your partner's expectations. Tim Rollins knows the feeling.

Rollins, president of Colonial Sash & Door in Frederick, Md., enjoyed two decades of good relations with his bank, even after it was taken over by an out-of-state institution 15 years ago. But over the past five years, as the housing boom faded, he has seen his bank slowly tighten the belt each time the terms of their relations were renewed. He's OK through 2013, but gets the feeling his bank wouldn't mind if he moved.

"The most disturbing part of this situation is that as I eliminate expenses, rewrite my business plan, and regain margins, the bank wants to saddle me with more fees and more restrictions," he says. "I said to the bank at our most recent meeting, 'The most stressful part of turning my own economy around, in this down economy, is dealing with the bank.' I got a shrug from that statement."

Painful as this spurning has been, Rollins also winces when he imagines having to go courting for a new financier. The usual pressures of setting up a new relationship are compounded by the fact that, like most dealers, Colonial Sash & Door's finances aren't as handsome these days as they once were. Rollins notes he has kept paying his lender on time throughout the downturn, but to most banks it won't matter: They regard construction supply dealers as a Charles Atlas who's shrunk into a 97-pound weakling.

Attachments between dealers and their banks aren't this strained for most other LBM operations nationwide, returns to a recent ProSales survey suggest, but there are signs a significant minority of dealers have been getting re-appraised by their partners. The online poll conducted in August found:

  • 18.7% of the dealers responding said their bank had required additional collateral from them this year.
  • 30.9% were asked to provide additional information to the bank.
  • 11.1% saw their credit line reduced.
  • 18.7% had to find other means of financing aside from a bank credit line.

A total of 194 people responded to the survey, of which 148 worked at building material dealers.
"We have a very good relationship with our primary banks, but there is a much greater sense of caution than in the past," a dealer in Arkansas reports. "People are nervous about the solvency of lumberyards, and probably for good reason."

Why Banks Are Hurting

To be sure, the more than 1,600 LBM facilities that, by ProSales' count, have closed nationwide since 2008 no doubt gives lenders pause. But anecdotal evidence suggests that dealers' bigger problem is that they've been lumped in with a new-home construction sector that has proven poisonous to financiers.

As late as fall 2007, less than 2% of banks' construction and development (C&D) loans were more than 90 days past due, according to the government's quarterly profile of all banks insured by the Federal Deposit Insurance Corp. (FDIC). Over the next three years, that percentage of nonperforming loans–loans at least 90 days past due–shot as high as 16.87%. At the same time, banks hit the brakes, cutting their volume of C&D loans outstanding from $632 billion in early 2008 to just $274.9 billion in the second quarter of this year. But as of June 30, 15.01% of those loans still were classed as nonperforming. And the dollar value of the real estate they have taken over as a result of bad C&D loans now totals $17.65 billion. That's 46% more than the combined value of the 1-4 family residential homes that banks have acquired.

Of course, dealers have had their own issues getting paid by builders, but several years' worth of ProSales surveys suggest they're getting the problem under control. Dealers responding to our first survey half a decade ago reported that customers in 2006 took an average of 43.98 days to pay their bills. By 2009, that average had risen to 49.76 days. This year, it's been whittled to 43.91. These numbers aren't exactly comparable because of variations in the number and type of dealers who took the survey, but they do suggest payment times have improved.

In addition, just 28.3% of all respondents reported they have increased their bad debt reserves this year. In past years, as many as 44.6% of the dealers had set aside bigger reserves. And the amount by which the reserves increased this year–an average of 16.21%–was less than half the increase reported last year.

Just over 45% of dealers said they have written off an increasing amount of bad debt in January through August of this year compared with the same period in 2010; 42% said the amount written off had held steady; and only 13% said their writeoffs had increased. Lien activity also appeared to have steadied, with 57% saying the number of liens they have issued this year is about the same as in 2010.

Several dealers said the downturn prompted them to improve their credit and collections processes, but they also speculated their numbers got better because the housing recession has wiped out so many weak builders.

"Accounts receivable has improved because the spec builder is the typical customer who uses/abuses our credit," writes a Tennessee dealer who, like the others, was promised anonymity unless he agreed to be named. "Builders who have survived the recession are those who are better business operators, and they have less need for extended terms."