Smaller Banks Are the Largest Source of AD&C Lending

Data from the FDIC indicate that smaller financial institutions, typically community banks, are the most common sources of lending for home building acquisition, development and construction (AD&C) loans. This trend strengthened during years of the housing crisis.

The FDIC data are split into two sources: commercial banks and savings institutions. As of the final quarter of 2013, total 1-4 residential construction and development loans held by commercial banks summed to $38.9 billion. Such loans from savings institutions represented a smaller source: $4.8 billion.

With respect to commercial banks, the fourth quarter 2013 FDIC data reveal that 62% of home building AD&C lending was held by banks roughly matching the community bank standard of possessing less than $10 billion in total assets. This lending was decentralized as there are almost 5800 such institutions, although it is not possible to determine how many held residential AD&C loans. In contrast, there were 90 commercial banks with more than $10 billion in assets, holding a still significant $14.7 billion in home building AD&C loans.

Nonresidential AD&C lending, which includes some land development financing and commercial real estate, is more likely to be held by larger banks, as the chart above indicates. In fact, more than half (56%) of such loans were held by commercial banks with more than $10 billion in assets.

A larger share of residential AD&C was held by larger institutions prior to the recession. The chart above notes the change in market share from the end of 2007 to the end of 2013. While the share of nonresidential AD&C held by large banks increased over this six-year period, the market share of residential AD&C shifted to smaller banks. For example, at the end of 2007, 52% of home building AD&C was held by banks with more than $10 billion in assets, a swing of 14 percentage points of market share from 2007 to 2013.

The smaller savings institutions side of the market tells a similar story. At the end of 2013, 86% of home building AD&C loans held by savings institutions was controlled by institutions with less than $5 billion in assets. A noticeable difference is that both residential and nonresidential AD&C lending shifted, in terms of market share, toward smaller savings institutions from the end of 2007 to the end of 2013, as the following chart demonstrates.