A privately held bank in South Dakota is hoping it can diversify its loan portfolio by expanding into an area that many financial institutions abandoned in recent years construction loans to home builders.
The $684 million-asset 1st Financial Bank USA recently reached a loan purchase agreement with Shepherds’ Finance, a struggling boutique lender in Jacksonville, Fla. Under terms of the Dec. 29 agreement, the Dakota Dunes banking company can buy home construction loans from Shepherds’ Finance.
Shepherds’ Finance had $7.5 million of loans on its books at Sept. 30. The company has an impressive pedigree in home construction Daniel Wallach, former chief financial officer of 84 Lumber, founded the lender in 2007 but it has encountered difficulty finding financial footing.
The construction lender received approval from the Securities and Exchange Commission in October 2012 to sell up to $700 million in notes to investors. The company has since been relying on note sales to finance its operations, but investors had bought just $4.6 million of the notes by the end of September. So the loan purchase agreement with 1st Financial offers Shepherd’s Finance a source of much-needed liquidity.
Wallach did not respond to repeated requests for comment.
For 1st Financial, the arrangement provides the company, best known for offering credit cards to college students, with an opportunity to diversify. At Sept. 30, credit card loans made up 71% of total assets, according to data from the Federal Deposit Insurance Corp. While it markets home builder finance on its website, 1st Financial had virtually no construction loans on its balance sheet at the end of the third quarter.
On its website, 1st Financial states that it makes construction loans in 10 states, including Florida, capping the size of its loans to $350,000. The company says it will not provide acquisition financing, requiring borrowers to own their lots prior to a loan’s closing.
The company, which added construction lending last year, plans to expand into six additional states soon. Wayne Nesje, a senior vice president at 1st Financial, said the company also opened a loan production office on East 59th Street in New York, adding that the plan is to increase construction loan volume this year.
The residential construction industry needs more deals like the one between 1st Financial and Shepherds’ Finance, said Gerald Howard, chief executive of the National Association of Homebuilders. Community banks have historically provided the lion’s share of financing for small and midsize home builders, but they cut back considerably in the wake of the financial crisis.
Overall, construction and development loans fell 67% between 2007 and 2012, to $203 million, according to FDIC data. The recovery has been slow, with the amount of C&D loans rising just 14% from the end of 2012 to last year’s third quarter, totaling $230 million.
Banks with $10 billion or less in assets have historically made up about half the volume.
The pullback “left a vacuum in the world of financing that has yet to be filled,” Howard said.
“Small and midsize home builders make up the vast majority of the industry,” Howard added. “Their traditional source of capitalization is [community] banks, but they’ve been unwilling or unable to make the loans. From our perspective, that’s the story of why the country’s economy is still sluggish.”
There are indications that other banks are warming up to construction lending. The $453 million-asset TrustAtlantic Bancorp in Raleigh, N.C., said in November that it would form a residential home builder division after hiring veteran banker, Franklin Shell, from NewBridge Bancorp to run it.
TrustAtlantic agreed to sell itself to First Horizon National in October, but James Beck, the seller’s chief executive, said the deal would boost new construction lending. TrustAtlantic’s sale is expected to close in the first half of this year.