Bank Call Report FAQ: What is a Construction, Development, or Other Land Loan?
The call report guidelines for coding loans are more complex than many banks realize and how loans are coded for the call report impacts the regulators’ perception of a bank’s overall risk. So continuing our blog series on call report frequently asked questions, today we will address the area of construction, land development, and other land loans.
Definition
Loans classified as construction, land development, or other land loans are reported in Line 1a on Schedule RC-C. This classification includes a variety of loans all of which are generally considered to be of somewhat higher risk by bank regulators.
The classification includes loans secured by real estate made to finance any of the following:
- Initial land development and preparations to erect new structures (i.e. laying sewers, water pipes, roads)
- On-site construction of new industrial, commercial, residential, or ag buildings
- Substantial additions and alterations to existing buildings
- Removal or demolition of existing buildings to make way for new buildings
- Vacant land that is not used or usable to agriculture even if it is not currently being developed
- The acquisition of property that will be used for future development
From my experience, it is often loans secured by vacant land or held for future development (often on a speculative basis) that tend to be underreported on Line 1a. Banks often consider these owner-occupied or non-owner occupied commercial real estate properties, but from a call report perspective they should be reported in Line 1a.
How Long is a Loan a Construction Loan?
Most construction loans should continue to be reported as construction loans on the call report until the loan is either paid off or refinanced into permanent financing even if the construction project is complete. This is true unless the original loan document is written as a combination construction-permanent loan with a construction phase followed by an amortization period. In that case, the loan should continue to be reported as a construction loan until either the construction is completed or the amortization period of the loan begins, whichever comes first.
Recoding loans that are a combination of construction and permanent financing tends to be a manual process and I have heard of banks that have forgotten to reclassify their loans after the construction phase has ended. So if you use this kind of loan structure, be on the lookout for loans that have been sitting in Line 1a for more than a year or two.
Next Steps
Construction, land development, and other land loans tend to come and go from the loan portfolio relatively quickly as loans are made and subsequently refinanced. As new loans are originated, management should carefully review their classifications to ensure that all necessary loans are included in Line 1a to avoid regulatory comments.
If you have questions about the call report or loan coding, CLA is here to help. Please contact us.
Amanda Garnett is a principal in the financial institutions practice of CliftonLarsonAllen (CLA) from Peoria, Illinois. She currently leads the firm’s Midwest financial institution tax team and serves institutions ranging in size from $15 million to $3.5 billion in total assets. In addition to tax compliance, Amanda assists clients in the areas of tax consulting, mergers and acquisitions, and regulatory reporting. She also routinely teaches courses for banking associations across the country.
Comments are closed.