Construction loan delinquencies at U.S. banks rose to new post-COVID-19 highs in the third quarter, but banks continued to add volume in the sector as they have throughout the pandemic.
Nonresidential construction loans drove the overall delinquency increase, rising to $3.04 billion at U.S. banks in the third quarter from $2.78 billion in the second quarter and $2.05 billion in the third quarter of 2019. As a share of total nonresidential construction loans, delinquencies rose to 0.99%, up from 0.73% a year earlier and 0.93% in the second quarter.
Delinquent construction loans on four-family and smaller residential properties declined sequentially in the third quarter but remained elevated above their levels from a year earlier.
Despite the higher delinquency levels, U.S. banks' holdings of construction loans continued to grow in the third quarter, to a total of $386.06 billion in residential and nonresidential loans. Construction loans represented 3.5% of gross loans and leases, the highest level in the past five years.
At Little Rock, Ark.-based Bank OZK, construction loans accounted for 38.26% of total loans and leases, and nonresidential loans grew 7.8% from the second quarter. On a third-quarter earnings conference call, Chairman and CEO George Gleason said members of the bank's group that originates construction loans are "going to have to play their A game" to maintain growth in the coming months, amid elevated loan prepayments.
Other banks with especially large construction exposure included Beverly Hills, Calif.-based PacWest Bancorp and Buffalo, N.Y.-based M&T Bank Corp. Providence, R.I.-based Citizens Financial Group Inc. grew nonresidential construction loans to 11.9% to $3.87 billion.
By volume, the leading construction lenders in the quarter were Wells Fargo & Co., U.S. Bancorp and JPMorgan Chase & Co. JPMorgan increased the size of both its residential and nonresidential construction portfolios in the quarter — residential by 111.3% — while Wells Fargo and U.S. Bancorp both dialed back residential and increased nonresidential.