Construction loan delinquencies at U.S. banks rose in the first quarter in both absolute and relative terms while banks' outstanding construction loans as a share of total loans fell for the fourth straight quarter.
The COVID-19 pandemic, which struck much of the U.S. near the end of the quarter, forced many developers to shut down or delay their projects, in some cases amid government-mandated work stoppages. While the months in which the virus' impact was most severe are not included in the data, many individual lenders said in earnings calls that their construction books were well-structured to withstand a downturn.
The total volume of delinquent construction loans on bank balance sheets climbed to $3.67 billion in the quarter, up 23.8% from the fourth quarter of 2019 and 24.6% higher on a year-over-year basis, according to S&P Global Market Intelligence data. Delinquent loans represented 0.97% of total nonresidential construction loans, compared to 0.78% a quarter earlier, while the percentage of residential construction loans that were delinquent grew to 1.07% from 0.97% in the prior quarter.
Banks continued to gradually back away from real estate construction lending, meanwhile, with construction loans representing 3.37% of total loans and leases, down from 3.44% in the previous quarter and 3.49% a year earlier.
Wells Fargo & Co. had the greatest nominal exposure to construction among U.S. banks in the first quarter, with $19.42 billion in loans, mostly in commercial real estate. Construction loans represented a relatively slim 1.89% of the bank's total loans and leases, however. The banks with the largest share of construction loans, among top 20 lenders, were Bank OZK, where construction made up 35.00% of total loans and leases, and PacWest Bancorp, where it accounted for 15.53%.
In a June 10 conference appearance, Wells Fargo CFO John Shrewsberry said that more than 90% of the loans in its roughly $150 billion commercial real estate book, which includes construction, have loan-to-value ratios below 70%.
"We'll have losses," he said. "We'll have people who just can't make it. But the way we underwrite it, the way we service it, the customers we select, in general, for our commercial real estate business, we expect to perform well through the cycle."
U.S. Bancorp, the second-largest construction lender for the quarter, with $10.60 billion, has "really gone upmarket and focused on stronger sponsors" in its commercial real estate business since the last downturn, Chief Credit Officer Mark Runkel said in an April 15 earnings call.
CFO Terrance Dolan added that the bank has been tightening its construction lending underwriting and reducing its exposure to the segment for the last two years, in anticipation of another downturn.
Bank OZK executives also said, in March, that the bank's concentrations in commercial real estate and construction were trending downward over time as a result of growth in its indirect lending and community banking businesses. Later, in an April 24 earnings conference call, Chairman and CEO George Gleason said the bank's construction loans typically have provisions in which borrowers guarantee they will complete their projects on time and on budget, and added that Bank OZK will modify loans in a "very judicious manner."
Still, he acknowledged that some property sectors, like travel and leisure, have suffered especially severe damage from the coronavirus.
"Most of these properties, if you're completing a property today, you're probably not starting operations," he said. "You're probably just mothballing that project for a month or two or three, until economic conditions become better to restart it."