Credit Corner

By David Brown, Managing Director ACBB Advisory Services

So, six months ago I reported that, while we were not in a recession, there were strong indicators in the commercial loan portfolios. The commercial credit indicators (Past Due, Non-Accruals and Charge-offs) were nearly all negative for 2018. Further, 66% percent of the “experts” believed we would be in a recession by Qtr. 4, 2019. Now we are in Qtr. 4, 2019. I have reviewed the first half of 2019’s commercial loans credit profile and read multiple economic reports. I can definitely state we are NOT in a recession. After that, it’s anyone’s guess.


The data we have seen so far this year appears good. Generally, the Past Due Loans (30-90 days) are down in both New England and the Mid-Atlantic with non-accrual loans and charge-offs loans mainly down, as well, for the first half of 2019. The Fed seems comfortable with the potential for inflation and has upped its GDP projection slightly to 2.2%. The 10-year Treasury Rate and Prime Rate were both down, 74 bps and 75 bps, respectively, for YTD 2019. All major stock market indices are at all-time highs. Unemployment continued lower by 3 bps to 3.6% in 2019, while the average hourly wage growth remained flat at 3.2%.


We did have an inverted yield curve in 2019. More recently, however, the longer-term US securities have climbed relative to the shorter-term US securities, un-inverting the yield curve. An inverted yield curve has been a strong indicator of an impending recession.


All the indicators suggest that we will not be in a recession over the next 6 to 12 months. However, since we have now entered the 10th year since the end of the last recession, we are in a historic abnormality. The prior longest period between recessions was 10 years (1991-2001).


As it concerns the current community bank commercial loan credit trends, the issues of 2018 appear to have righted themselves through June 30, 2019.


Although, in the Northeast, the past due (30-89 days) Acquisition Development and Construction (“ADC”) loans increased by 18% in the Northeast, this was exclusively driven by NY (up 202%) with the New England sub-region decreasing 54%. Mid-Atlantic past due ADC loans were up 6%. This time NJ was the sole contributor with 116% growth and all other regions down by double digits. The non-accruing ADC loans were down by 13% in the Mid-Atlantic. So, both regions have seen a turnaround in ADC from 2018 with only a couple of states (NY & NJ) needing to more closely monitor the construction activity.


Commercial Real Estate (“CRE”) loans were generally good. Overall, in the Northeast, the past due CRE loans were down 10%, however non-accruing CRE loans were up 19%. Like ADC, the main driver of the non-accrual increase was NY, up 51%, with New England down slightly at 2%. In the Mid-Atlantic, the results were much better with a 25% decline in past due CRE loans and a 9% reduction in non-accruing CRE loans.


For Commercial and Industrial (“C&I”) loans, the results continued to be mixed. The Northeast reported flat past due C&I loans, up only 0.2%, but New England was down significantly at 20%. The non-accrual C&I loans were up 15%, however New England was down by 24%. Mid-Atlantic reported a 6% increase in past due C&I loans, primarily from NJ (up 24%) and PA (up 14%) with a 5% decrease in non-accruing C&I loans.

Table 1

Northeast Banks - Credit Quality Report - Comparison of 6/30/2019 from 12/31/2018 

 

Table 2

Mid-Atlantic Banks - Credit Quality Report - Comparison of 6/30/2019 from 12/31/2018