1 Mar, 2024
Construction loans grow, delinquencies fall in Q4 2023
By Zoe Sagalow and Ronamil Portes
Construction loan delinquencies at US banks dropped in the fourth quarter of 2023 while loans continued their rise.
Total delinquencies fell for nonresidential construction loans to $3.40 billion in the fourth quarter of 2023 from $3.75 billion in the previous quarter, but they rose for residential loans to $861.9 million from $744.8 million.
Delinquent nonresidential construction loans dropped as a percentage of total nonresidential construction loans to 0.8% in the fourth-quarter of 2023 from 0.9% in the third-quarter of 2023, while delinquent residential construction loans rose as a percentage of total residential construction loans to 0.9% from 0.7%.
Year over year, total delinquent construction loans rose 34.6% as of the fourth quarter of 2023.
Loan growth
Meanwhile, construction loans continued their decadelong spike, up from $210.05 billion in 2013, according to S&P Global Market Intelligence data.
The total for these loans reached $501.52 billion in 2023, growing 138.8% over the decade. Nonresidential loans rose to $404.48 billion in 2023 from $166.36 billion in 2013, while residential loans rose to $97.04 billion in 2023 from $43.69 billion in 2013.
Wells Fargo holds most construction loans
With $22.45 billion, Wells Fargo & Co. remained the US bank with the largest dollar amount of construction loans on its books in the fourth quarter of 2023 compared with the top 20 banks measured by construction loan balances. However, this loan type made up a higher proportion of gross loans and leases at Bank OZK, 44%, than it did at the other banks in the top 20 with construction loans. Pinnacle Financial Partners Inc. had the second-highest percentage, 12.3%, and Comerica Inc. had the third-highest percentage, 10.1%.
Of the top 20, the bank with the largest quarter-over-quarter and year-over-year percentage decreases in construction loans was Santander Holdings USA Inc. Its residential construction loans dropped 65.4% quarter over quarter and 93.9% year over year.
Aside from banks that made acquisitions, the largest year-over-year increase among the top 20 was at RBC US Group Holdings LLC, where residential construction loans rose 13.4% quarter over quarter and jumped 52.4% year over year.
Nonresidential construction loans did not vary as much overall.
For the industry overall, construction loans made up 4% of gross loans and leases, with residential loans having decreased by 2.5% quarter over quarter and by 7.4% year over year while nonresidential loans grew by 1.7% quarter over quarter and by 11.5% year over year.
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Executives' commentary
First Interstate BancSystem Inc. CFO Marcy Mutch said during the company's fourth-quarter 2023 earnings call that the weighted average yield of its construction fundings was 5.7%.
"There will continue to be some pressure from that portfolio in the first half of [2024] which should taper off as we get to the back half of the year," Mutch said.
UMB Financial Corp. said that construction was one of the loan types, along with commercial real estate, driving most of the company's 2023 fourth-quarter loan growth.
BankUnited Inc. mentioned opportunities in construction loans during its fourth-quarter 2023 earnings call.
"Compared to other banks that have much larger [commercial real estate] and construction exposure issues, I think we'll be in a good position to selectively take advantage of some good quality opportunities as we get to the second half of [2024] if the rate market performs the way it's expected to perform," said COO Thomas Cornish.
S&T Bancorp Inc. saw a conflicted trend.
"A continuing theme in our commercial book is reduced demand for an exposure to construction-related borrowings in both the [commercial real estate] and [commercial and industrial] books," said President David Antolik.
"Conversely, in our residential mortgage book, we continue to see demand for our construction-related products as well as purchase activity."