US banks' delinquent construction loans hit their highest point in at least three years during the first quarter.

Total delinquent construction loans at US banks climbed to $4.86 billion as of the end of the first quarter, up from $4.27 billion in the linked quarter. Of the total, nonresidential construction loans made up $3.89 billion while residential construction loans made up $977.2 million. As total delinquent construction loans surged, so too did delinquency ratios.

The industry's residential delinquency ratio climbed to 1.03% from 0.89% quarter over quarter, reaching its highest point since at least the first quarter of 2021. That ratio has increased for the past three quarters. Meanwhile, the nonresidential delinquency ratio increased to 0.96% from 0.84%, its highest point since the second quarter of 2022.

Delinquencies remain on the upswing despite construction loan balances actually falling in the first quarter.

Banks held $498.51 billion in total construction loans as of March 31, down 0.3% from $500.17 billion at the end of 2023, according to S&P Global Market Intelligence data. The decline was largely driven by residential loans, which fell to $94.92 billion from $96.84 billion in the fourth quarter of 2023. Meanwhile, nonresidential loans rose slightly to $403.59 billion from $403.33 billion.

Construction loans as a percentage of gross loans and leases were mostly unchanged, ticking down to 4.01% as of March 31 from 4.02% in the previous quarter.

Residential construction loans drop at key banks

Among the top 20 banks with the most construction loans in the first quarter, 14 posted quarter-over-quarter declines in residential construction loans.

PNC Financial Services Group Inc. posted the largest quarter-over-quarter residential construction loan decline at 28.3%, while Santander Holdings USA Inc. reported the largest year-over-year drop at 93.2%.

Half of the top 20 construction loan banks reported sequential declines in nonresidential construction loans.

Wells Fargo & Co. remained the biggest construction lender in the US with $22.33 billion in construction loans in the first quarter, well outpacing second-place JPMorgan Chase & Co., which clocked in at $15.54 billion.

Wells Fargo grew residential loans both quarter over quarter and year over year, but shrunk nonresidential.

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Bank OZK continued to hold the highest proportion of construction loans relative to gross loans and leases among the banks on the list at 44%, 11x the industry aggregate of 4.0%.

Bank OZK's construction loan concentration was also well above the banks in second and third place: Cadence Bank with 11.7% and Pinnacle Financial Partners Inc. at 11.5%.

Pinnacle's commercial real estate construction portfolio continues "to perform very well," CFO Harold Carpenter said during a first-quarter earnings call.

"I know there's a lot of noise out there that lenders were panicked and borrowers are desperate to get out of these construction projects," Carpenter said. "There remains ample liquidity, which recently appears to be getting somewhat more attractive to our borrowers."