A.M. Best Special Report: Small Banks Fare Better Than Larger Banks in Construction Loan Sector

OLDWICK, N.J.--(BUSINESS WIRE)--The current real estate correction is likely to have the biggest impact on construction loan portfolios of banks with the most lenient underwriting standards and those whose construction loans are concentrated in geographic areas hardest-hit by construction industry declines, according to a new special report by A.M. Best Co. Given industry wide increases in construction loan noncurrent rates, charge-offs, and Real Estate Owned in the past two quarters, all sizes of banks are subjects of concern.

Some differences exist, however, between banks of various asset sizes’ performance. While construction loans make up a larger percentage of smaller U.S. banks’ total book of business, larger banks have seen the sharpest increases in charge-offs and nonperforming assets. This indicates small banks, under $1 billion, may have better knowledge of borrowers or tighter underwriting standards and have positioned themselves more favorably to weather the storm.

• U.S. banks will continue to struggle to work through existing loans, while having limited opportunities to replenish construction portfolios with sound, newly-originated loans.
• In first quarter 2008, the smallest U.S. banks—those having assets under $1 billion—had the lowest rate of construction charge-offs, the lowest construction loan noncurrent rate and the lowest rate of loans emerging 30-89 days past due.

• Large banks, banks with assets more than $50 billion, led the industry surge in delinquencies between fourth quarter 2007 and first quarter 2008 with a 191.4% six-month increase in noncurrent construction loan rates.
• U.S. banks’ current capital is extended to the point where further lending expansion is in doubt given their troubled portfolios and declining loan demand.
• While loan growth remained positive in first quarter 2008, the high rate of charge-offs and provisions, swelling of nonperforming assets, attempts by banks to preserve capital and depressed economic factors raise the possibility of negative overall aggregated loan growth in the future.

To download a PDF copy of all banking special reports at no cost and to access data, analytical methodologies and news on the U.S. banking industry, please visit www.ambest.com/banks.

Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.