Community Banks Account for Nearly Half of Residential Construction Loans

Residential construction loans held on FDIC-insured banks’ balance sheets reached $70.7 billion in the first quarter of 2017 with community banks accounting for approximately 49 percent of these loans. The current share of residential construction loans held by community banks is higher than community banks’ share of other types of loans, with the exception of farm-related loans.

However, in recent years, residential construction loan growth at community banks has been lower than the rate of growth across non-community banks, and so the share of residential construction loans held by community banks has fallen. Despite the lower growth in the stock of loans held by community banks, when compared to total assets, residential construction loans held at community banks are larger and have been growing. Meanwhile, in aggregate, residential construction loans relative to assets at non-community banks are smaller and have stagnated.

A previous post showed that commercial banks are an important source for AD&C loans. The Federal Deposit Insurance Corporation (FDIC), in addition to providing information on banks’ loan stock, also identifies whether the bank is considered a community bank. According to the FDIC, its community bank identifier is based on criteria defined in a study it conducted in 2012.  Using detailed balance sheet and geographic data, the study goes beyond just the size of the bank in terms of its total assets to define community banks primarily in terms of their traditional relationship banking and limited geographic scope of operations.

According to the figure above, the share of residential construction loans held at community banks is sizable compared to community banks’ share of all net loans and leases, 16 percent. Additionally, when compared to their share of other loan categories, community banks’ holdings of residential construction loans is higher than all loan categories except for farm-related loans. According to the FDIC, farm loans encompass loans to finance agricultural production and other loans to farmers, while farmland loans refer to loans secured by farmland held in domestic offices. Residential mortgages includes those loans remaining on bank balance sheets.

The figure above shows that the share of residential construction loans held by FDIC-insured community banks rose as the total stock of loans was contracting, indicating that the residential construction loans held by non-community banks were shrinking faster than those at community banks. Second, the stock of residential construction loans held by community banks began rising in 2013 while the stock of loans at non-residential construction loans did not begin to increase until 2014. However, since 2015, the share of residential construction loans held by community banks has begun to fall indicating that growth in the residential construction loan stock at these banks now lags growth at non-community banks.

Although the stock of residential construction loans at non-community banks is growing faster than the stock of loans at community banks in recent years, when compared to total assets, residential construction loans at non-community banks remain lower and steadier. Total residential construction loans are compared to total assets in order to understand changes in the loan volume relative to one metric of changes in bank size.

The lower percentage of residential construction loans on the balance sheets of non-community banks relative to community banks indicates that community banks have a larger residential construction loan portfolio relative to their size than non-community banks. The constant percent of residential construction loans on the balance sheets of non-community banks relative to community banks signals that the higher growth in the residential construction loan volume on the balance sheets of non-community banks is matched by the expansion in total assets held at non-community banks.

Despite the lower growth in the level of residential construction loans at community banks relative to non-community banks, as implied by the falling community bank share of residential construction loans showed in the second chart above, the level of growth in the residential construction loan stock held by community banks exceeds the growth in its aggregate assets, and so the residential construction loan volume at community banks relative to its assets has risen.



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