I just completed a study of thrift reports for the commercial lenders in Massachusetts. Bank owned property also known as REO or OREO and non-accrual balances are skyrocketing.

I began this exercise last year as we were “cranking up” the auction business in order to get a feel for what is happening in our local market. At that time some banks 30-89 day balances were beginning to accrue but there was virtually no REO to speak of. What a difference a year makes.

This study consists only of lenders in Massachusetts with a “Commercial Lending Specialization”. That means this study does not include banks like Boston Private Bank & Trust or other wealth management firms, and it does not include banks that specialize in “Mortgage Lending”. This study is primarily composed of lenders who specialize in development, and other commercial real estate ventures. Certainly some of the numbers I’m going to share with you are inclusive of some residential notes but the vast majority of these balances are failed developments and other commercial ventures.

The OREO (bank owned) column shows our Massachusetts commercial lenders now carrying $52,456,000 worth of failed projects on their books. This may sound like a lot or a little to you but let me assure you that as of 12 months ago this column was basically empty. Lenders have been taking back projects wholesale. The scary part of this number is that it is the tip of the iceberg.

The non accrual column for these same lenders tells a story of what is to come. Just so you understand what this means there are 3 columns on a bank’s thrift report. They are:

• Past Due 30-89 Days and Still Accruing (A)
• Past Due 90 Days or More and Still Accruing (B)
• Nonaccrual (C)

Answers dot com defines nonaccrual like this:

Asset, usually a loan, that is not earning the contractual rate of interest in the loan agreement, due to financial difficulties of the borrower. Nonaccrual assets are loans in which interest accruals have been suspended because full collection of principal is in doubt, or interest payments have not been made for a sustained period of time. A reserve for possible loan losses is set aside for these loans, and any payments received from the borrower are applied first to principal, and then to loan interest due. According to the guidelines of banking regulators, a loan with principal and interest unpaid for at least 90 days is considered a nonaccrual loan, unless the lender has adequate collateral.

Loans generally move through these columns in order until the loans are satisfied or there is a foreclosure auction where the asset is transfered or else taken back by the bank where it must be resold as it has become REO.

The nonaccrual balances for the the same lenders above total $144,479,000. That is nearly three times the amount already on the books. Columns A and B tell us that this is not the end, this is the beginning.

Our campaign to help lenders shed this inventory and free their cash begins in earnest next week. Stay tuned here for details.