Regional banks redirected loan originations away from small business portfolios in late 2025 after credit stress pushed non-performing assets to 46 basis points from 36 basis points at First Bank in Q4.
Commercial and industrial loans plus owner-occupied real estate comprised 62% of new originations in 2025, according to First Bank executive Peter Cahill. The shift marks a retreat from small business lending after charge-offs concentrated almost exclusively in that segment.
"Charge-offs during 2025 were almost exclusively in the small business portfolio," said First Bank's Andrew Hibshman. The bank experienced $135 million in Q4 loan payoffs, representing 47% of annual payoffs and signaling accelerated portfolio runoff.
Banks are recalibrating risk models as small business borrowers face refinancing pressure and margin compression. First Bank's management guided to charge-offs in a 15-20 basis point range going forward, per CFO John Martin, suggesting elevated credit costs remain embedded in 2026 planning.
The portfolio reallocation favors established commercial borrowers with tangible collateral. Owner-occupied commercial real estate offers property backing, while C&I loans typically serve larger businesses with stronger balance sheets and cash flow stability.
Regional bank stocks face pressure from rising credit costs and narrowing net interest margins. Investors are monitoring whether peers show similar small business stress patterns or if First Bank's experience reflects idiosyncratic underwriting issues.
Q1 2026 earnings reports will reveal if the small business charge-off trend broadens across regional banks. Portfolio composition shifts take quarters to materialize, meaning 2025's origination pivot will reshape bank balance sheets through 2026.
Banks with concentrated small business exposure face potential write-downs if economic conditions deteriorate. Unemployment remains low, but small business sentiment surveys show weakening confidence as refinancing costs squeeze operating margins.
The lending pullback reduces credit availability for smaller firms while channeling capital to established corporates. Banks are choosing profitability over growth in small business segments where credit losses now exceed risk-adjusted returns.