Regional banks recorded concentrated credit losses in small business lending portfolios during 2025, prompting a strategic shift toward commercial and industrial loans and owner-occupied real estate.
First Bank's non-performing assets rose to 46 basis points of total assets in Q4 2025, up from 36 basis points in the prior quarter. Chief Credit Officer Andrew Hibshman said charge-offs during 2025 occurred "almost exclusively in the small business portfolio."
The bank responded by redirecting origination activity. C&I and owner-occupied real estate loans comprised 62% of 2025 originations, according to Chief Lending Officer Peter Cahill. First Bank also experienced $135 million in Q4 loan payoffs, representing 47% of annual payoffs.
CEO John Martin guided investors to expect charge-offs "in a 15-20 basis-point range" going forward, signaling continued pressure in small business segments.
The shift reflects broader stress in small business credit quality as elevated interest rates and softening demand impact borrowers with limited balance sheet cushions. Regional banks typically hold higher concentrations of small business loans compared to larger institutions, making them more vulnerable to sector-specific deterioration.
C&I loans and owner-occupied commercial real estate carry lower loss rates during credit cycles. Owner-occupied properties benefit from direct borrower involvement in the asset, reducing default risk. C&I loans to established businesses typically feature stronger covenants and monitoring.
The portfolio rebalancing marks a risk management response to late-cycle credit conditions. Small business loans often show stress earlier than other commercial segments due to thinner capital buffers and revenue volatility.
Regional bank investors are monitoring NPA ratios and charge-off guidance as indicators of credit cycle positioning. Banks with high small business concentrations face pressure to demonstrate proactive risk management while maintaining loan growth targets.
The trend suggests regional banks are prioritizing credit quality over volume as economic uncertainty persists into 2026.