Credit Commentary

By David Brown, Managing Director ACBB Advisory Services

So, is the recession here yet? We have been hearing those recessionary drums beating for over a year now, but what does the data tell us? From a macro view, we are 10 years from the last recession, and we have had a recession nearly every 10 years since the 1970’s, so a recession is coming. As part of our Loan Review practice, we analyze data trends in the banking communities of the Northeast and the Mid-Atlantic regions. Most recently, we looked at credit trends from December 31, 2017 to December 31, 2018.

 These trends confirm what our clients are telling us. A recessionary market is very close and you need to proceed with caution, especially with certain types of loans. I have broken the credit data into the two major regions, the Northeast and the Mid-Atlantic. See Tables 1 and 2 for a summary. There is one common risk that is very evident from the data, construction loans throughout all the regions are showing weakness. Past due (30-89 days) Acquisition Development and Construction (“ADC”) loans increased by 15% in the Northeast with the New England sub-region increasing 60%. Non-accruing ADC loans were also up 18% in the Northeast. Mid-Atlantic past due ADC loans were up 46% with non-accruing ADC loans up 28%. The worst sub-group of ADC loans was the 1-4 family construction loans. The past due loans for this group were up 164% in the Northeast and 79% in the Mid-Atlantic.

Commercial Real Estate (“CRE”) loans also exhibited weakness. Overall, in the Northeast, the past due CRE loans were up 8% with non-accruing CRE loans up 4%.   In the Mid-Atlantic the results were worse. The past due CRE loans were up 37% with non-accruing CRE loans up 5%.

For Commercial and Industrial (“C&I”) loans, the results were mixed. The Northeast reported a slight increase of 4% in past due C&I loans with a decrease of 11% in non-accruing C&I loans. Mid-Atlantic reported a 20% increase in past due C&I loans with a small 3% increase in non-accruing C&I loans. This region also reported a 90% increase in C&I charge-offs.

Speaking of charge-offs, the news is mixed. In the Northeast, in most loan categories, we continued to see a decline in charge-offs. So far, this weakening in the commercial loan market has not materialized into significant losses. However, in the Mid-Atlantic overall charge-offs of commercial loans were up 9%. Lastly, charge-offs tend to be the last category impacted by a shift in the market.

What does this mean for our lending clients? Clearly you need to be very careful. We continue to see our clients stretching to win deals. CRE is the life blood of the community commercial loan portfolio and you will need to increase your diligence and strengthen your credit resolve. We have been seeing high growth in construction loans. Be extra cautious and increase the oversight of these loans, especially if you have a multi-year sellout period for ADC loans. Always remember, a 10% decline in the price of a new house is a 30%-40% decrease in the lot value for unbuilt lots.

I recognize that we are fortunate to be coming out of a protracted recovery, so the aforementioned trends are relative to low base levels; however, the trends should not be ignored.  As a credit professional, I have been through the last three major recessions. One thing they had in common was the lack of predictability of the cause and the severity of the effect. We know the next recession is coming soon, but we don’t know the significance of the impact.   You need to make sure your house is as clean as can be in order to minimize the impact.

If you desire the bank level credit data sorted by state and region for all community banks with Total Assets under $10 Billion, please email me at This email address is being protected from spambots. You need JavaScript enabled to view it. or call me at 978.844.4192.

Table 1

Northeast Banks - Credit Quality Report - Comparison of 12/31/2018 from 12/31/2017


Table 2

Mid-Atlantic Banks - Credit Quality Report - Comparison of 12/31/2018 from 12/31/2017