Construction Lending Still Hot with Community Banks

Eight community banks made $483.5 million in construction and land development loans between Sept. 30, 2005 and Sept. 30, 2006.
The value was up almost 88 percent from a year prior, according to call reports from the Federal Deposit Insurance Corp. The September-to-September time frame is the most recent data available.
The FDIC defines construction loans as, “Construction and land development loans secured by real estate held in domestic offices. This item includes loans for all property types under construction, as well as loans for land acquisition and development.”
The eight banks were selected from the other 19 banks with operations in Benton and Washington counties because all are chartered within the market and most of their business takes place within the two-county footprint.
Arvest Bank, for instance, is chartered in Fayetteville, but it has significant operations in central Arkansas and Oklahoma, making an apples-to-apples comparison impossible.
Public banks chartered within the market were also excluded.
Of the eight banks, three are considered “new.” Legacy National Bank of Springdale, Fayetteville-based Signature Bank of Arkansas and Pinnacle Bank of Bentonville all opened their doors in late 2004 or early 2005, so their year-over-year percentage increases are skewed slightly.
The numbers signal significant growth for the “little guys” who are facing more competition from larger banks and those moving in from out-of-market, particularly Bank of the Ozarks, Metropolitan National Bank and Liberty Bank of Arkansas, which all have Arkansas ties and are fighting for a slice of the market share pie.
Omitting new banks because of their opening dates, Chambers Bank of North Arkansas had the largest increase in construction loans for the 12-month period, from $84.1 million to $181 million, or about 115 percent.
The bank specializes in “Mini Perms” (short for miniature permanent) which are short-term financing options used to pay off construction costs on commercial developments, usually three to five years, with a balloon payment at the end of the term, so the increase is no surprise.
But the overall increase begs the question, if Northwest Arkansas is overbuilt, why are banks still lending for new construction?
Kathy Deck is an associate director of the Center for Business & Economic Research in the Walton College of Business at the University of Arkansas.
She wasn’t surprised by the numbers and said the fact that three of the banks are “new” means they’ve got to find a place to put their capital to use.
“What are the choices for where they’re going to put their money to work?” she said.
Traditional land development and real estate is the most obvious choice for most bankers, rather than, say, high tech development, she said.