Don't look now, but construction lending is making a comeback.
Although they were the scourge of many a bank before the downturn, construction-and-development loans surged over the past year at dozens of regional and community banks. The category grew in dollars and as a percentage of total loans at institutions ranging from the $97 billion-asset BMO Harris Bank in Chicago to the $17 billion-asset First National Bank of Omaha.
Even some banks that already were heavily weighted toward C&D loans doubled down on the category. At the $6.8 billion-asset Bank of the Ozarks in Little Rock, Ark., C&D loans grew from $796 million at the end of 2013 to $1.5 billion at the end of 2014, according to its fourth-quarter call report. They rose from 23.71% of its total loans to 29.48%.
The trend is expected to continue this year. The $8.3 billion-asset Glacier Bancorp in Kalispell, Mont., said construction loans both for residential and commercial development rose 23% in 2014, to $555 million at yearend. That figure may rise further in 2015, driven in large part by residential construction, Chief Executive Mick Blodnick said. Glacier's residential-construction loans in the fourth quarter rose 24%, to $104 million, from a year earlier.
"It was nice to see residential construction for the first time in a number of years start to move back the other way," Blodnick said in a Friday conference call with analysts to discuss fourth-quarter earnings. "We ended the year a little over $100 million, and we would certainly like to see that number be in that $150- million-to-$175-million range."
While some bankers remain cautious on C&D loans, many are able to add construction loans with a clear conscience because of tighter risk controls, said Sameer Gokhale, an analyst at Janney Capital Markets.
"Given how much they were burned the last time, they are being more careful now," Gokhale said. "Regulators are also looking at these portfolios more carefully. They're not letting these banks take a disproportionate amount of risk."
The economic environment is also ripe for further expansion of C&D loans, said Marty Mosby, an analyst at Vining Sparks IBG.
"Portfolios have finally worked through the cleansing process [of purging bad loans], and low interest rates are creating opportunities for some new projects," Mosby said.
As if on cue, the $99 billion-asset M&T Bank in Buffalo, N.Y., announced Tuesday that it is the lead lender on a $36.5 million syndicated construction loan to finance the redevelopment of the Tower at Midtown in Rochester, N.Y. M&T expanded its construction loan portfolio by 15% in 2014, to $5.1 billion. Such loans were 7.62% of its total loan book at Dec. 31.
The others lenders on the project are the $38 billion-asset First Niagara Financial Group in Buffalo and the $5 billion-asset ESL Federal Credit Union in Rochester.
As the market heats up, many banks are requiring more equity from borrowers as a way to manage risk, Gokhale said.
"We're seeing loan-to-value ratios of 65% to 70%" on construction loans, Gokhale said. "To the extent that you have that, unless there's a significant decrease in property values, the lenders are relatively well-protected."
Many bankers are still extremely wary of construction lending. Stephen Ulenberg, the chief risk officer at Great Western Bancorp in Sioux Falls, S.D., was asked about the $9.6 billion-asset company's fourth-quarter loan growth. Ulenberg responded: "We have got a low exposure in the construction-development area, and that's intentional."
Kevin Hanigan, president of LegacyTexas Financial Group in Plano, was more explicit in his answer to a similar question during the $1.9 billion-asset company's Jan. 28 conference call.
"The smallest asset class we have is our land construction-and-development portfolio, representing a mere 4.4% of pro forma loans," Hanigan said. "We're not a big construction lender, so we're not out there financing any of these construction projects. Don't look for us to be become a big C&D or land and construction kind of lender."
Harris Simmons, the chairman and CEO of Zions Bancorp. in Salt Lake City, was also circumspect in predicting growth in construction loans at the $57 billion-asset company.
Construction lending "is about 5% of total loans," Simmons said. "That's less than a quarter of what it was at its peak. And it's not going anywhere close to even halfway of where it was at the peak."