Construction Loan Performance Not as Bad for Smaller Banks

September 29, 2008

By: Barbra Murray – Commercial Property News

The credit crunch and the downturn in the economy have had the inevitable negative impact on the real estate industry, leaving banks that have handed out construction loans facing their share of delinquencies and the like. On certain levels, however, the situation is far worse for banks with assets exceeding $50 billion or more, than smaller banks with assets under $1 billion, according to a new study involving federally insured banks by Oldwick, N.J.-based credit rating firm A.M. Best Company.

For smaller banks, those with assets under $1 billion, the construction loan sector comprises a greater portion of business than it does for lending institutions with assets over $50 billion. The numbers break down to an average 15.14 percent and 4.73 percent, respectively.

Regardless, banks of all sizes–the two aforementioned groups as well as the $1 to $10 billion and the $10 billion to $50 billion asset groups in the middle–have taken a hit in the construction loan sector. Size always matters but, with regard to recent construction loan performance, it appears that smaller is better–at least for now.

During the first quarter of 2008, the average rate of construction loan net charge-offs for banks with less than $1 billion in assets was 0.16 percent, compared to 0.28 percent for the group of lenders with assets exceeding $50 billion. The rate of non-current construction loans for the smaller banks was 4.21 percent, while the figure reached 4.40 percent for the largest banks.

Additionally, the emerging 39-89-day past due construction loan rates were a respective 2.31 percent and 2.45 percent. “The results did seem different from what has expected,” Diane Goodheart, senior financial analyst with A.M. Best, told CPN. “The prediction was the smaller banks would have more trouble with construction loans.” Potential factors that could have helped spare smaller banks from becoming the biggest victims of increases in charge-offs and delinquencies, according to the report, include their possible superior knowledge of their borrowers or tighter underwriting standards.


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