Building slump cuts lending by isle banks

The four-year slump in Hawaii’s construction industry has reverberated throughout the local economy, including the banking industry, where loan portfolios have been squeezed by a decline in construction lending.

Construction loans made by the state’s top seven banks dwindled to $773 million in the fourth quarter of 2011, a 66 percent decline from $2.26 billion at the end of 2007, according to a Star-Advertiser analysis of lending data filed with the Federal Deposit Insurance Corp.

The numbers were skewed by a significant number of loans Central Pacific Bank made to California homebuilders before 2007 that the bank later wrote off because they were nonperforming.

The drop in construction lending at the seven banks was much more severe than the overall decline in their loan portfolios, which fell by 8 percent to $21.04 billion in the fourth quarter of 2011 from $22.83 billion four years earlier. Construction loans as a share of total lending fell to 3.7 percent in 2011 from 9.9 percent in 2007.

The downturn in the state’s construction sector has been a drag on economic growth. The industry has lost more than 10,000 jobs lost since 2007, and the contracting tax base has shrunk by hundreds of millions of dollars.

Hawaii’s construction industry is a major piece of the state’s economy, accounting for 5.6 percent of economic output, according to the U.S. Commerce Department. That’s tied with Florida for third highest in the nation, according to the Commerce Department.

The state Department of Business, Economic Development and Tourism estimates that for every three jobs lost or gained in Hawaii’s construction industry, another job is gained or lost in the rest of the economy. In 2010, construction workers’ pay in Hawaii averaged $62,632 annually, 59 percent more than the average for private-sector employees in the state, according to the U.S. Bureau of Labor Statistics. Nationally, construction workers earned an average of $49,588 per year, or 7 percent more than the average private-sector employee, the BLS reported.

For the state’s banks, the cyclical booms and busts experienced by Hawaii’s construction industry over the years have become a part of doing business. Lenders say they have shifted funds to other types of products to help take up the slack due to the drop in construction loans.

Bob Fujioka, vice chairman and chief lending officer at First Hawaiian Bank, said the drop in construction lending has been made up at his bank by demand from people buying or refinancing commercial income properties to take advantage of low interest rates.

First Hawaiian Bank is one of the few local lenders that has been able to grow its overall loan portfolio during the economic downturn. First Hawaiian’s loans and leases net of unearned income totaled $8.39 billion in the fourth quarter of 2011, up from $6.55 billion in the fourth quarter of 2007. That came despite a 20 percent decline in construction loans to $341 million from $428 million during the same period.

"We are primarily a retail bank, so even though construction lending plays an important role, consumer lending — including residential mortgage lending — has a greater impact on our profitability than commercial construction lending," Fujioka said.

Wayne Hamano, vice chairman and chief commercial officer at Bank of Hawaii, said the bank has diversified its loan portfolio to guard against volatility in a single loan category.

"We’re active in pretty much all sectors of commercial lending. Construction lending is the most cyclical and most sensitive to wide swings tied to the health of the economy," Hamano said.

Central Pacific Bank cut back its construction lending more severely than any other local bank during the downturn, but the contraction was mostly due to CPB writing off bad loans it made in California rather than its activity in the Hawaii market. CPB at one point had more than $300 million in California construction loans on its books.

"We’ve exited the California market. Our construction loan exposure there now is virtually nil," said Arnold Martines, CPB’s manager of commercial real estate, Hawaii division.

With its balance sheet back on a solid footing, CPB is prepared for the next construction expansion, Martines said.

And it’s not just CPB. Hawaii’s banks have been steadily accumulating deposits during the economic slowdown, capped by an 11 percent increase last year, according to the FDIC.

"Banks have ample latitude to increase loans given the big increase in deposits seen in 2011. More lending requires more demand, which we see improving gradually as the economy improves," said John White, executive director of the Pacific Resource Partnership, an advocacy group for Hawaii’s unionized carpenters and contractors.

There are growing signs that both public and private construction are poised for a rebound. The University of Hawaii Economic Research Organization is forecasting the issuance of building permits statewide to rise by 53 percent this year after falling 23 percent in 2011. Construction jobs are expected to grow by just over 4 percent in 2012, which would be the first annual increase in five years, according to the UHERO forecast.

However, some of UHERO’s optimism is based on the planned Hono­lulu rail transit project, which "remains somewhat murky," according to a recent economic outlook published by the organization.

Other government projects on a more firm timetable include more than $100 million in improvements at UH-Manoa this year and next. The largest of those is a $15 million renovation of Edmondson Hall, which broke ground last week.

"The UH is doing a great job in recognizing the need to upgrade its facilities. And it couldn’t come at a better time," said Ron Taketa, executive secretary and treasurer of the Hawaii Regional Council of Carpenters, which represents 6,500 unionized carpenters in the state. The unemployment rate for carpenters is running about 50 percent, he said.

"We need everyone paddling in the same direction if we want to make a difference in the economy," he said.

There are also indications that a rebound in private construction is in the pipeline. Alexander & Baldwin said it could start construction later this year on a 340-unit condominium tower in Kakaako if enough binding sales contracts are signed. Several other projects also are on the drawing board, including a 400-unit high-rise across the street from Blaisdell Center.

The projects are an indication that confidence is coming back into the markets, CPB’s Martines said.

"Developers appear to be re-engaging," he said. "This is where it starts. We have to get people back to work, and this activity will help."