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This podcast provides you the ability to listen to new regulatory guidance issued by the National Credit Union Administration, and occasionally the F D I C, the O C C, the F F I E C, or the C F P B. We will focus on new and material agency guidance, and historically important and still active guidance from past years that NCUA cites in examinations or conversations. This podcast is educational only and is not legal advice. We are sponsored by Credit Union Exam Solutions Incorporated. We also have another podcast called With Flying Colors where we provide tips for achieving success with the N C U A examination process and discuss hot topics that impact your credit union.
Samantha: Hello, this is Samantha Shares.
This episode covers the
F D I C 2026 Risk Review.
The following is an audio
version of that document.
This podcast is educational
and is not legal advice.
We are sponsored by Credit Union
Exam Solutions Incorporated, whose
team has over two hundred and
forty years of National Credit
Union Administration experience.
We assist our clients with N C
U A so they save time and money.
If you are worried about a recent,
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examination, reach out to learn how they
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And now the document.
Introduction.
The F D I C was created in 1933 to
maintain stability and public confidence
in the nation's financial system.
A key part of accomplishing this mission
is the F D I C's work to identify
and analyze risks that could affect
the safety and soundness of banks.
The Risk Review summarizes the F D I
C's assessment of economic and market
conditions affecting the banking industry.
The analysis pays particular attention
to risks that may affect community banks,
as the F D I C is the primary federal
regulator for most community banks.
The 2026 Risk Review provides an
overview of funding, interest rate,
and credit risks banks faced in 2025.
Changes in interest rates can present
risks for banks stemming from changes
in securities values, declines in
profitability, and funding challenges.
The discussion of funding and
interest rate risk covers net
interest margins, unrealized losses
on securities, liquidity, deposit
growth, and wholesale funding.
Credit risks are inherent in lending
exposures and represent potential for
losses from loans, particularly as
borrower financial conditions deteriorate.
The report covers credit risks and trends
in commercial real estate, nondepository
financial institution lending,
business lending, consumer lending,
residential real estate, and agriculture.
Section One.
Executive Summary.
Market conditions and
banking performance overview.
Economic conditions slowed in 2025, and
financial market conditions improved
during the second half of the year.
Economic growth slowed in 2025,
but consumer spending supported
economic growth overall.
The labor market moderated as job gains
slowed and inflation remained elevated.
Interest rates fell during the year,
with shorter-term rates declining
more than longer-term rates.
Equity and fixed income markets
had strong gains, and corporate
bond spreads edged lower.
The banking industry's
performance was steady.
Net income remained strong, supported
by both higher net interest income
and noninterest income in 2025.
Loan growth increased but was
well below pre-pandemic levels.
Asset quality metrics remained
generally favorable, despite
weakness in certain portfolios.
The number of problem banks
remained within the normal
range for non-crisis periods.
Key risks to banks.
Interest rate risks remained elevated
with modestly improving net interest
margins and elevated unrealized securities
losses, while liquidity remained stable.
Lower interest rates in 2025,
particularly on the short end of the
yield curve, helped reduce funding
costs, and a steeper yield curve
helped improve net interest margins.
Unrealized losses on securities
eased but remained elevated.
On balance sheet liquidity remained
stable in 2025, and banks continued
to build borrowing capacity.
Deposits continued to grow at a steady
pace, led by uninsured deposits.
Wholesale funding declined as
institutions reduced Federal Home Loan
Bank borrowings and brokered deposits.
Credit risks were generally
contained in 2025, with continued
weakness in commercial real estate
and some consumer loan types.
On commercial real estate.
Commercial real estate loan portfolios
at banks grew modestly and reached
a new peak in 2025, while commercial
real estate loan delinquency rates and
net charge-off ratios remained low.
However, commercial real estate loan
concentration and delinquency rates
were uneven across bank groups.
Mounting operating costs, elevated
interest rates, and vacancy
rates challenged some borrowers'
ability to refinance and repay
commercial real estate debt.
Banks used loan modifications to provide
relief, more often at larger banks.
Conditions in some property
markets stabilized.
On nondepository financial
institution lending.
Bank loans to nondepository
financial institutions were among
the fastest-growing segments in
recent years and were heavily
concentrated at the largest banks.
In 2025, reporting changes resulted
in banks reclassifying loans across
categories, driving some of the
growth in this lending category.
These reporting changes provided
more granular data on bank
exposures to nondepository financial
institutions, showing that more
than half of these loans were to
credit intermediaries for mortgages,
business loans, and consumer loans.
Credit quality measures for
these loans remained favorable.
On business lending.
Business conditions were tepid,
with tighter bank underwriting and
weaker demand for business loans.
Small business loan growth was
weak amid higher financing costs
and weaker business conditions.
Bank exposures to larger businesses
through corporate bond holdings
increased in 2025, while collateralized
loan obligations declined.
Corporate default rates edged down
but remained elevated, and signs of
stress in leveraged lending continued.
On consumer lending.
Household finances weakened in 2025, but
debt burdens remained low and real incomes
and net worth continued to increase.
Consumer loan growth at banks was
mixed in 2025 as households reduced
demand for some loans and banks
continued to tighten lending standards.
Consumer loan asset quality held steady in
2025, but delinquency rates were elevated,
particularly for autos and credit cards.
Consumer loan performance at
community banks was generally
unchanged from the previous year.
On residential real estate.
Elevated mortgage rates continued to
weigh on the housing market in 2025.
Home price growth moderated, but
high prices and elevated housing
costs persisted in many markets.
Banks reported higher one to four
family residential loan balances
and concentrations in 2025.
Credit quality for one to four family
residential loan portfolios remained
generally sound, but some banks reported
elevated past-due and nonaccrual rates.
Sound underwriting standards and
higher home equity helped mitigate
potential credit risks in bank
residential mortgage loan portfolios.
On agriculture.
Agriculture lending
conditions weakened in 2025.
Grain and oilseed farmers reported
operating losses as crop receipts declined
for the third consecutive year, while
production expenses remained elevated.
Operating losses eroded working
capital positions for many row crop
farmers, leading to strong loan demand.
Farm bank agricultural loan
delinquency rates increased in 2025.
Despite these weaker conditions,
ample farmland equity
supported loan restructuring.
Section Two.
Overview of Market Conditions
and Banking Performance.
Economic and financial market conditions.
Economic growth slowed in 2025,
with some components of the
economy experiencing major swings
in the first half of the year.
The labor market cooled as job gains
slowed and the unemployment rate edged up.
Inflation remained above the
Federal Reserve's two percent
target, though interest rates
declined across most tenors.
Equity and fixed income markets had
strong gains despite volatility.
Private credit continued to expand,
and leveraged loan issuance rose.
United States economic growth slowed
in 2025, but economic activity
was supported by consumer spending
and business fixed investment.
Real gross domestic product grew two
point two percent in 2025, compared
to two point eight percent in 2024.
Real gross domestic product growth
contracted in the first quarter
of 2025 due to a large increase in
imports, which reduced growth as
businesses increased imports before
tariffs were expected to take effect.
Growth rebounded in the middle
of the year, as the drag from
imports reversed, and exceeded
expectations in the third quarter.
Business investment fluctuated,
driven by swings in inventories, but
fixed investment remained steady.
Growth in consumer spending continued
to be a primary component of growth.
Labor markets moderated with slowing
job gains and wage growth and a slight
increase in the unemployment rate.
A slowdown in hiring and a narrower
set of industries with job gains in
the second half of the year brought
average monthly job gains lower.
Wage growth slowed but
remained higher than inflation.
The unemployment rate increased
slightly, partially due to an increase
in the labor force participation rate.
Both quits and layoffs remained low.
After tightness in recent years, the
ratio of job openings per unemployed
person fell below one point zero,
suggesting there are slightly more
unemployed people than open positions.
Inflation fluctuated during
the year but continued to cool.
Annual inflation measures, including
the Consumer Price Index and Personal
Consumption Expenditures, fell
in the first part of the year but
accelerated in the summer months as
food and energy prices increased.
Inflation continued to cool
in the final months of 2025.
Core inflation, which excludes the
more volatile components of food and
energy, began to abate as pressure from
key components such as shelter eased.
Inflation remained above the
Federal Reserve's longer-run
target of two percent.
Interest rates fell in 2025
as monetary policy eased.
The Federal Reserve's Federal Open
Market Committee reduced the target
federal funds rate by twenty-five
basis points at each of its September,
October, and December meetings.
The Federal Reserve ended its balance
sheet runoff policy in December.
Total securities held by the Federal
Reserve fell two percent during
the year and were down twenty-seven
percent since the peak in 2022.
Yields on short-term and medium-term
United States Treasury securities
declined despite periods of volatility.
Yields fell across almost all tenors in
2025, with shorter-term interest rates
declining more than longer-term rates.
The greater decrease in short-term
interest rates helped steepen
the yield curve, which had
been inverted in recent years.
Corporate funding conditions
improved in the second half of 2025.
Bond issuances continued
to increase in 2025.
High-yield issuances were almost
seventeen percent higher than in
2024, and investment grade issuances
were more than ten percent higher.
Spreads on both high-yield and
investment-grade bonds were flat
despite a temporary widening in April.
Total returns of United States
high-yield corporate bonds
continued to increase in 2025.
Leveraged loan prices were relatively
stable in 2025 and ended the year
a little lower than at the start.
Short-term funding market
conditions remained generally stable
apart from repurchase agreement
market tightness in October.
Equities performed well
across most sectors.
The Standard and Poor's five hundred
index, which contains both large financial
and nonfinancial companies, gained more
than seventeen percent in 2025, driven in
part by larger gains in the stock prices
of some companies that are investing
heavily in artificial intelligence.
Bank stock indices were also up in 2025.
Banking performance overview.
The banking industry reported
strong earnings in 2025, supported
by both higher net interest
income and noninterest income.
Community banks reported
strong earnings gains in 2025.
Loan growth accelerated from 2024.
Asset quality metrics remained
generally favorable, despite
weakness in certain portfolios.
The number of problem banks
remained within the normal
range for non-crisis periods.
The banking industry's net
income improved in 2025.
Net income rose in 2025 due to
strong growth in net interest and
noninterest income but was partially
offset by higher noninterest expense.
Improvement in net interest income
was driven by a larger decline
in interest expense relative to
interest income, which was reflected
in improved net interest margin.
Noninterest expense increased due to
higher salaries and employee benefits.
The banking industry's aggregate return
on assets of one point two zero percent
increased eight basis points from 2024,
reaching its highest level since 2021.
Community banks reported strong
full-year 2025 net income, which
increased twenty-two point five
percent from 2024 due primarily
to higher net interest income.
However, growth in earnings was
partially offset by higher noninterest
expense and provision expense.
The pretax return on assets for community
banks rose eighteen basis points from
2024 to one point three two percent.
Loan growth accelerated from 2024.
Loan growth was five point nine
percent in 2025, higher than growth
in 2024 and the fastest annual
growth rate in eleven quarters.
Loan growth was led by loans to
nondepository financial institutions
and loans to purchase or carry
securities, including margin loans.
Growth in these categories partly reflects
reclassifications from other categories.
Growth was more modest across
other major loan categories.
Total loans and leases at community
banks rose five point four percent in
2025, with a six point nine percent
increase in nonfarm nonresidential
commercial real estate and a three
point four percent increase in one
to four family residential mortgages.
Loan performance was favorable in 2025,
but past-due and nonaccrual rates for
certain loan categories remained elevated.
The past-due and nonaccrual rate for
the banking industry declined four
basis points from 2024 to one point
five six percent and remained well
below the pre-pandemic average rate.
But past-due and nonaccrual rates for
non-owner-occupied commercial real estate,
multifamily commercial real estate,
auto loans, and credit card portfolios
were above their pre-pandemic averages.
The aggregate net charge-off rate
declined during the year to zero
point six three percent but remained
above the pre-pandemic average rate
of zero point four eight percent.
Credit cards, non-owner-occupied
commercial real estate, and auto
loans drove the annual decrease.
Net charge-off rates for most portfolios
were above their pre-pandemic averages.
Community bank asset quality
metrics deteriorated slightly from
2024 but were still favorable.
The past-due and nonaccrual rate
at community banks increased to
one point three six percent, below
the pre-pandemic average rate
of one point five zero percent.
The net charge-off rate at community
banks rose four basis points from
2024 to zero point two nine percent,
above the pre-pandemic average rate
of zero point one five percent.
The banking industry's aggregate leverage
capital ratio declined slightly in 2025.
Strong earnings and lower unrealized
losses helped boost equity
capital levels during the year.
However, the industry's leverage capital
ratio declined slightly from 2024 to nine
point two six percent, as asset growth
slightly outpaced the increase in capital.
Growth in risk-weighted assets
throughout the year also lowered
risk-based capital ratios slightly.
The number of problem banks at
year-end 2025 remained within the
normal range for non-crisis periods.
The number of banks on the F D I C's
Problem Bank List decreased by a net
of six to sixty at year-end 2025 from
sixty-six banks at year-end 2024.
The number of problem banks represented
one point four percent of total banks at
year-end 2025, within the normal range of
one to two percent for non-crisis periods.
Section Three.
Funding and Interest Rate Risk.
Net interest margins remained
modest but improved in 2025
as the yield curve steepened.
Unrealized losses on securities
improved but remained elevated.
On balance sheet liquidity remained
stable in 2025, and banks continued
to build borrowing capacity.
Deposits increased, led by
growth in uninsured deposits.
Wholesale funding reliance eased as
banks reduced Federal Home Loan Bank
borrowings and brokered deposits.
The banking industry's net
interest margin increased in 2025.
The yield curve steepened in
2025 after being flat and often
inverted the previous two years.
Reduction in short-term interest rates
in the second half of 2024 and throughout
2025 contributed to the steepening yield
curve that supported a more favorable
net interest margin environment.
Short-term United States Treasury
rates declined seventy basis
points on average in 2025.
Bank funding costs, which generally
reflect short-term market rates, declined
from two point six one percent in 2024 to
two point two six percent in 2025, much of
which occurred in the first half of 2025.
Most of the reduction in bank funding
costs was driven by a thirty-three basis
point decline in the cost of deposits.
Borrowing costs declined sixty-four
basis points as costs for term debt
and other wholesale funding declined.
Bank asset yields also declined but
more modestly than funding costs.
Asset yields declined from five
point eight three percent in 2024 to
five point five six percent in 2025,
largely reflecting lower loan yields.
The yield on securities portfolios
rose slightly, likely reflecting older,
lower-yielding securities maturing and an
increase in the share of bank securities
portfolios invested at the longer-term,
higher-rate part of the yield curve.
Net interest margins widened
as the decline in cost of funds
outpaced the drop in asset yields.
The net interest margin increased
eight basis points in 2025 to
three point three zero percent.
Improvement in net interest
margins was widespread.
Ninety-one percent of banks reported
a higher net interest margin in 2025.
The steeper yield curve at the end of
2025 may support a favorable environment
for net interest margins in 2026.
Unrealized losses on securities
improved but remained elevated.
In 2025, unrealized losses across the
industry fell thirty-six percent to
three hundred six billion dollars,
a notable improvement from the third
quarter 2022 peak of six hundred
eighty-eight billion dollars.
Similarly, the number of institutions
with unrealized loss positions exceeding
twenty-five percent of tier one capital
fell from the third quarter 2022 peak
of two thousand two hundred fifty-nine
to four hundred seventy-two institutions
in the fourth quarter of 2025.
Improvements in loss exposure reflect
bond sales and the natural runoff of
maturing securities, further aided
by falling interest rates in the
intermediate segment of the yield curve.
Collectively, these factors led to
steady improvement in unrealized loss
positions, even as long-term interest
rates remained relatively unchanged.
Despite these improvements, unrealized
securities losses remained elevated.
Banking industry liquidity
continued to improve after the
volatility of 2022 and 2023.
Overall levels of liquid assets
improved in 2025, prompted by
growth in interest-bearing balances
held by community banks and
increases in securities portfolio
balances at noncommunity banks.
Industry wide, banks held a higher
proportion of unpledged securities
and reduced portfolio durations,
a reflection of experience with
interest rate sensitivity and
associated unrealized losses in 2023.
Bank liquidity also benefited
from overall gains in bond values.
Banks increased pledged collateral
to borrowing lines with the Federal
Home Loan Bank and the Federal Reserve
Discount Window as a precautionary
measure under contingency funding
plans to improve immediate access
during potential market disruptions.
In aggregate, pledged collateral
grew across the industry, with
midsize banks, those with ten
billion to one hundred billion
dollars in assets, leading the trend.
The median share of assets pledged
by midsize banks rose from thirty-six
percent to fifty-three percent over
the past five years, compared to an
industry-wide increase from twenty-four
percent to thirty-three percent.
Deposits continued to increase
across the industry in 2025, led
by growth in uninsured deposits.
Industry deposits increased three point
nine percent, underpinned by growth of
seven percent in uninsured deposits.
Community banks outpaced the
broader industry with deposit growth
of five percent, with uninsured
deposits outpacing insured deposits.
The increase in community banks'
uninsured deposits represents a rebound
after the sharp contraction in 2023.
Reciprocal deposits, which are a subset
of insured deposits, also grew strongly
at community banks in 2025, increasing
by fourteen point six percent, likely
reflecting continued heightened depository
sensitivity to insurance coverage.
Wholesale funding was flat and shifted to
lower-cost or more stable funding sources.
In aggregate, industry wholesale
funding as a share of total assets
remained effectively unchanged
in 2025, despite compositional
shifts in funding mix and tenor.
Increases in foreign-office deposits
and other borrowings offset reductions
in brokered deposits and Federal
Home Loan Bank term paydowns.
For community banks, wholesale funding
declined slightly during the year,
largely driven by reductions in Federal
Home Loan Bank advances and brokered
deposits, suggesting an intentional
move to reduce dependence on higher-cost
or more volatile funding sources.
Public deposits, which are state and
municipal deposits, increased one
point seven percent and represented
almost half of community bank wholesale
funding, up from slightly less than
thirty-nine percent a decade earlier.
This long-term shift reflects
a growing strategic reliance on
municipal accounts as a relatively
stable, lower-cost wholesale funding
channel while reducing exposure to
market-dependent funding sources.
Section Four.
Credit Risks.
Four point one.
Commercial Real Estate.
Signs of stabilization emerged in some
commercial real estate property types.
Bank commercial real estate loan
portfolios grew modestly in 2025.
Bank aggregate commercial real
estate loan delinquency and
charge-off ratios remained low.
However, commercial real estate loan
concentration and delinquency levels
were uneven across bank groups.
High operating costs, elevated
interest rates, and elevated vacancy
rates challenged some borrowers'
ability to refinance and repay
commercial real estate debt.
Banks used loan modifications to
provide relief to commercial real
estate borrowers, often at larger banks.
Commercial real estate conditions
remained soft, particularly in the
office sector, but stabilized in 2025.
Vacancy rates continued to
increase but at a slower pace
across most major property types.
Property values edged up and sales
transaction volume increased.
Despite these improvements, net
operating income growth continued
to slow, reflecting elevated vacancy
rates, higher property operating
costs, and tepid rent growth.
Vacancy rates rose in 2025 but at
a slower pace than the year before.
Office vacancy rates remained the
highest among the four major property
types and reached fourteen point zero
percent at year-end 2025, just four
basis points above the 2024 level.
While still rising, the increase
was a significant improvement
from that experienced in 2024.
Multifamily and industrial property
vacancy rates also rose but at a
slower pace than the year before,
while retail vacancy rates increased
modestly for the first time since 2020.
Despite this increase, retail vacancy
rates remained the lowest among
the four major property types and
below the recent historical average.
Rents were pressured by
elevated vacancy rates.
Rent growth remained positive but
slowed across all major property types.
Net operating income growth
also slowed due to higher
vacancy and slower rent growth.
The net operating income and debt
service capacities of some properties
may be challenged by the increase
in borrowing costs in recent years.
Despite the challenging environment,
commercial real estate property
values improved slightly in 2025.
Values ticked up across most
sectors in 2025, with retail and
industrial posting solid gains,
while the improvement in office and
multifamily properties was more muted.
In general, commercial real estate
properties in smaller markets continued
to outperform properties in major markets.
Outlying suburbs generally outperformed
central business districts, particularly
among office properties, which
continued to have substantially
lower values compared to 2020.
The upward trend in commercial real
estate property values accompanied
increased financing from banks,
commercial mortgage-backed securities
origination, and private credit.
Commercial real estate sales in 2025
increased nearly twenty percent from
the same period the year before.
Sales volume was up across all major
property types, including office, for
which transactions increased more than
thirty percent over the same period.
Banks remained the largest source
of financing for commercial real
estate properties, and commercial
real estate loans continued to expand
across most major lending categories.
Commercial mortgage-backed securities
activity was slightly below the
2024 level but remained well
above the 2022 and 2023 levels.
Private credit, still small relative
to bank and commercial mortgage-backed
securities financing activity in
commercial real estate markets, reached
an estimated three hundred billion
dollars through the first half of 2025.
Commercial real estate loan
growth was modest in 2025.
Commercial real estate loans held by
banks grew three point one percent
in 2025 but were a lower portion
of bank loans compared to 2024.
Nonfarm nonresidential loans and
multifamily loans increased and
remained the largest commercial real
estate portfolio components at banks.
Acquisition, development, and construction
loans, historically a riskier commercial
real estate loan segment, were five
point eight percent lower than in 2024
and were down eight point eight percent
since their recent peak at year-end 2023.
Commercial real estate loan
concentrations remained high but
were uneven across bank groups.
The banking industry's median commercial
real estate loan concentration ratio was
two hundred percent, with most of the 2025
growth occurring in the fourth quarter.
The concentration remained lower than
the Great Recession peak of two hundred
fourteen percent at year-end 2008 but
higher than the pre-pandemic average.
Some bank groups are more concentrated
in commercial real estate lending.
For instance, banks with total
assets between ten billion and
one hundred billion dollars had a
median commercial real estate loan
concentration of two hundred eighty-nine
percent, similar to year-end 2024.
The median was three hundred
eleven percent for banks
with total assets between one
billion and ten billion dollars.
Comparatively, the largest and smallest
banks were much less concentrated
in commercial real estate loans.
In 2025, commercial real estate
loan delinquency and charge-off
ratios were higher than in
recent years but remained low.
After ten consecutive quarters of
slowly rising delinquencies, the banking
industry's total commercial real estate
past-due and nonaccrual ratio eased in
the second and third quarters of 2025.
As of the fourth quarter of 2025,
the ratio ticked up to one point
four five percent, which was
slightly higher than a year earlier.
The net charge-off ratio for commercial
real estate loans was nominal at a
median zero point zero seven percent.
Commercial real estate loan performance
also was uneven across bank groups.
The median commercial real estate loan
past-due and nonaccrual ratio at banks
with more than one hundred billion
dollars in assets was one point six
seven percent, down twenty-five basis
points from the most recent peak of one
point nine two percent at year-end 2024.
This level was well above
the ratios of smaller banks.
Nonfarm nonresidential loans,
predominantly financing office
properties, and multifamily loans
largely drove commercial real estate
delinquencies at banks with more than
one hundred billion dollars in assets.
Reflecting challenges such as lower
property values in certain areas,
elevated operating expenses, and
higher interest rates, many banks
modified loans, which contributed
to lower commercial real estate
loan past-due and nonaccrual ratios.
Modified commercial real estate loans
totaled eleven point six billion
dollars, or zero point three eight
percent of the commercial real
estate secured portfolio, of which
eighty-two percent was performing.
Noncommunity banks with more than
one hundred billion dollars in
assets accounted for an outsized
share of loan modifications.
This group of banks held only twenty-nine
percent of commercial real estate secured
loans but accounted for more than half
of the modification volume in 2025.
Commercial mortgage-backed
securities delinquencies increased,
reflecting weakness in office
and multifamily properties.
The overall delinquency rate for these
loans increased to seven point three zero
percent in December 2025, up from six
point five seven percent at year-end 2024.
Loans for multifamily properties
experienced the largest increase in
delinquency rates among property types
and reached six point six four percent
in December 2025, up from four point
five eight percent the year before.
Office loan delinquency rates rose
to eleven point three one percent,
up from eleven point zero one percent
the year before, and remained above
the prior cycle peak reached in 2012.
Despite the uptick in delinquencies,
credit exposure via commercial
mortgage-backed securities portfolios
remained limited, as most of these
securities held by banks were agency and
government-sponsored entity issuances.
Commercial real estate borrowers
and lenders faced continued
challenges as 2025 came to a close.
Lower interest rates in 2025 provided
some relief to borrowers, but
operating expenses for commercial
real estate properties remained high.
Soft market conditions, such as in the
office and multifamily sectors, continued
to challenge the credit landscape.
Four point two.
Nondepository Financial
Institution Lending.
Bank lending to nondepository financial
institutions has been a fast-growing
loan segment, though growth is
concentrated at the largest banks.
New data on disaggregated bank
exposures show that more than
half of these loans are to credit
intermediaries for mortgages,
business loans, and consumer loans.
Credit quality measures remained favorable
in 2025, but potential risks to banks
come from various transmission channels.
Bank lending to nondepository financial
institutions has been the fastest
growing loan segment since the 2008
to 2009 Global Financial Crisis, and
the banking industry continues to
increase its exposure to nonbanks.
Banks provide vital liquidity and leverage
to nonbanks in support of their daily
operations or investment strategies,
which may include intermediating
credit for consumers and nonfinancial
companies, or deploying investor
capital across various asset classes.
These institutions include a wide
range of entities, including private
equity funds, mortgage lenders, private
credit funds, insurers, real estate
investment trusts, business development
companies, securitization vehicles,
and other special purpose entities.
From 2010 through the fourth quarter
of 2025, outstanding balances of
bank loans to nondepository financial
institutions had a compound annual
growth rate of twenty-two point
seven percent, more than triple the
next-highest sector, multifamily
lending, which grew at a seven point
four percent compound annual growth rate.
In 2025, these loans grew thirty-five
point two percent year over year.
However, some of this growth is
attributed to banks reclassifying loans
due to revised Consolidated Report
of Condition and Income instructions,
known as Call Report instructions.
As of December thirty-first, 2025,
bank loans outstanding to nondepository
financial institutions totaled
one point four trillion dollars,
which represented five point six
percent of total industry assets.
Bank loans to nondepository
financial institutions are heavily
concentrated in the largest banks.
At year-end 2025, eighty-six percent
of the balance was held by banks
with more than one hundred billion
dollars in assets, and ten of those
banks held about sixty-six percent
of total loans in this category.
Ninety-eight percent was held
by banks with more than ten
billion dollars in assets.
These loans now make up a
material portion of total loans
outstanding at the largest banks.
Since 2010, for banks with more than
two hundred fifty billion dollars
in assets, these loans grew from one
point two percent of total loans to
fifteen point six percent, and as a
percentage of capital they increased
from six point three percent to
seventy-six point four percent.
In contrast, for banks with less than ten
billion dollars in assets, these loans
increased from zero point two percent of
total loans to one point two percent, and
grew from one point zero percent to six
point eight percent as a share of capital.
New data provide greater visibility
on subsegments and show that more
than half of this lending in 2025
was to credit intermediaries.
Before 2024, banks had been required to
report only their aggregate exposure.
To improve transparency, the Federal
Financial Institutions Examination Council
issued regulatory reporting changes in
2024 that required banks with more than
ten billion dollars in assets to segment
these loans into five subcategories:
loans to mortgage credit intermediaries,
business credit intermediaries,
consumer credit intermediaries, private
equity funds, and all other loans.
Banks were also required to
begin reporting data on past-due
loans, nonaccrual loans, and
unfunded commitment balances.
In addition, the reporting instructions
were revised to improve clarity
and consistency among banks.
These revisions resulted in
some banks reclassifying lending
from other categories starting
in the fourth quarter of 2024.
For banks with assets greater
than ten billion dollars, about
fifty-seven percent of this lending
was to credit intermediaries
in the fourth quarter of 2025.
Mortgage credit and business credit
intermediaries each made up about
twenty-five percent of these loans,
while consumer credit intermediaries
made up about eight percent.
Loans to private equity funds were
about twenty-five percent of total
loans in this category, most of which
were loans secured by a fund's capital
call commitments, and other loans
accounted for about eighteen percent.
Composition differs depending
on a bank's asset size.
Banks with assets between ten billion
and one hundred billion dollars have a
higher proportion of loans to mortgage
credit intermediaries, while banks with
assets greater than one hundred billion
dollars have a more even distribution
across private equity, business credit,
and mortgage credit subcategories.
Bank lending to nondepository financial
institutions has low direct credit risk,
but banks can be exposed to potential
losses on loans pledged as collateral to
a bank, and to liquidity pressures from
credit line drawdowns in times of stress.
These vulnerabilities have the potential
to pose direct credit risks to banks as
well as indirect risks to asset values.
In an economic downturn, these
institutions may need to sell assets,
causing downward pressure on asset
values that can affect valuations
for assets pledged for collateral
or held by other nonbanks and banks.
Institutions that rely on less
stable funding sources could also
face significant liquidity stress
due to margin calls on collateral
pledged under their bank facilities.
This could increase liquidity demands
at banks as these institutions
collectively draw on bank-funded
borrowing lines to safeguard operations,
and individual borrowers may find
themselves without access to funding.
The composition and structure of
bank loans to nondepository financial
institutions generally exhibit
a lower degree of credit risk.
Most of the credit facilities are
short-term revolving credit lines
that are typically collateralized
with conservative advance rates
against the collateral pledged,
providing a layer of loss protection.
Supervisory observations reflect strong
historical performance and more favorable
credit ratings for these loans compared
to traditional commercial loans.
In the fourth quarter of 2025, the
past-due and nonaccrual rate for these
loans was zero point one five percent.
In comparison, the past-due and nonaccrual
rate for commercial and industrial
loans was one point three nine percent.
Asset quality of these loans was
stronger at larger banks, but
past-due and nonaccrual rates
were low for all size categories.
In the fourth quarter of 2025, the
rate was zero point eight zero percent
for banks with assets less than ten
billion dollars, zero point three
six percent for banks with assets
between ten billion and one hundred
billion dollars, and zero point one one
percent for banks with assets greater
than one hundred billion dollars.
These rates remained well below
commercial and industrial past-due and
nonaccrual rates across asset size groups.
Four point three.
Business Lending.
Business conditions were tepid in 2025
with relatively tight bank underwriting
and weak business demand for loans.
Small business loan growth was
stagnant amid higher financing costs
and weaker business conditions.
Bank exposures to larger businesses
through corporate bond holdings
increased in 2025, while collateralized
loan obligations declined.
Corporate default rates edged down
but remained elevated, and signs of
stress in leveraged lending continued.
Business conditions were tepid in 2025,
as bank lending standards remained
tight and business loan demand slowed.
Bank lending to businesses, other
than commercial real estate,
nondepository financial institution,
and agriculture lending, comprises
commercial and industrial loans to
small and large businesses, which
includes leveraged lending, and other
syndicated loans to larger businesses.
In 2025, fewer banks reported tightening
lending conditions for commercial and
industrial loans than in 2024, but,
on net, they continued to tighten
standards for these loans to businesses.
The banks that tightened lending standards
reported a reduced tolerance for risk
and a less favorable economic outlook,
according to the January 2026 release
of the Senior Loan Officer Opinion
Survey on Bank Lending Practices.
Commercial and industrial
loan demand improved but was
generally weak overall in 2025.
Business bankruptcy filings
edged up slightly in 2025.
Commercial and industrial loans
at community banks grew in 2025,
while loan quality at these
institutions deteriorated slightly.
Total commercial and industrial lending
at community banks, which made up
twelve point one percent of their loan
book, grew four point nine percent
in 2025, slightly more than in 2024.
The commercial and industrial past-due
and nonaccrual rate continued to
rise at community banks to one point
eight one percent as of the fourth
quarter and was above the pre-pandemic
average of one point six two percent.
The rate for the industry was also
slightly above its pre-pandemic average.
Small business conditions remained weak in
2025 as uncertainty increased and business
financing costs remained elevated.
Small business uncertainty increased
during the year, according to the National
Federation of Independent Business.
Small businesses cited higher
input costs and supply chain
interruptions and indicated that
they intend to raise prices.
As of the third quarter of 2025, median
interest rates on new small business
loans decreased on average sixty-three
basis points from a year earlier but
remained elevated compared to pre-pandemic
median levels from the fourth quarter
of 2017 to the fourth quarter of 2019.
Community banks remained an important
source of small business lending in 2025.
As of December thirty-first, 2025,
the banking industry held seven
hundred seventeen billion dollars
in small business loans, as measured
by small-dollar commercial and
industrial, nonfarm nonresidential
commercial real estate, farmland,
and agricultural production loans.
Community banks maintained an outsized
share, thirty-seven percent, of
the industry's total small business
loans despite holding only fourteen
percent of total industry loans.
Small business loans represented
eighty-one percent of tier one capital
and allowance for credit losses
at community banks, well above the
twenty-one percent at noncommunity banks.
Commercial and industrial lending
made up fifty-six percent of
banking industry small-dollar loans.
Annual small-dollar commercial and
industrial loan growth reported by
community banks remained slow at
zero point one percent in the fourth
quarter of 2025, down slightly from
zero point four percent in 2024.
Industry commercial and industrial loan
growth increased a little more than
one percent during the same period.
Small-dollar commercial and
industrial lending by community
banks grew at a slower rate than
total commercial and industrial
lending by community banks, which
grew four point nine percent in 2025.
Bank financing to larger businesses
through corporate debt was
roughly unchanged during the year.
The banking industry finances
larger businesses through loans
and holdings of corporate debt
securities, which expose them to both
credit risk and interest rate risk.
Bank holdings of corporate debt
securities represented less than
three percent of assets in 2025,
roughly unchanged from 2024.
In addition, larger banks
hold corporate debt securities
related to their market-making,
hedging, and trading activities.
While trading assets increased
in 2025, the share of other debt
securities holdings, including
corporate debt as a percentage of
trading assets, remained unchanged.
Banks also extend loans to businesses.
The highest-risk segment of
commercial lending is leveraged loans.
Leveraged borrowers typically have
higher debt levels relative to their
cash flow, which can make them more
vulnerable to stressed conditions.
Data from the 2025 Shared National
Credit Program indicate that banks held
one point eight five trillion dollars
of the total three point one trillion
dollars of leveraged commitments.
Bank commitments remained unchanged during
the year, while total Shared National
Credit leveraged commitments increased
one hundred fourteen billion dollars.
Bank holdings of collateralized loan
obligations, which typically contain
leveraged loans, edged lower as a share
of total banking sector assets from
2024 and remained below one percent.
Collateralized loan obligation holdings
are concentrated in a small number
of banks, with the top four banks by
assets accounting for sixty-six percent
of estimated bank-held collateralized
loan obligations and the top twenty
banks by holdings accounting for
ninety-eight percent of total holdings.
While banks typically hold the
higher-rated tranches of collateralized
loan obligations, they also have
a variety of exposures to nonbank
financial institutions that hold
or arrange these securities.
These interconnected risks may
expose banks to stress in the
underlying leveraged loan market in
ways that are difficult to measure.
Corporate default rates remained elevated,
but credit risks were mitigated by
relatively supportive corporate debt
market conditions, with generally stable
corporate debt and leveraged loan yields,
and narrower corporate bond spreads.
Corporate bond and leveraged loan issuance
surpassed 2024 levels, and leveraged
loan borrowers extended maturities
into the late 2020s and early 2030s,
reducing near-term refinancing risks.
Default rates for both bonds
and loans drifted lower during
2025 but remained elevated.
Loan distress ratios for leveraged
loans, which capture the share of
performing loans priced below eighty
cents on the dollar, increased
in 2025, suggesting signs of
potential strain for some companies.
Four point four.
Consumer Lending.
Household income growth eased in
2025 but balance sheets improved.
Consumer loan growth at banks was
mixed in 2025 as households reduced
their demand for some loans and banks
continued to tighten lending standards.
Consumer loan asset quality
improved slightly in 2025, but
delinquency rates remained elevated
relative to pre-pandemic levels.
Consumer loan asset quality at
community banks was flat in 2025.
The median past-due and nonaccrual rates
for auto and other consumer loans were
flat, while the median rate for credit
card loans, which are a small part of
community bank loan portfolios, improved.
Household income growth eased in
2025, but debt burdens remained low
and net worth continued to increase.
Income growth softened as the labor
market slowed but remained stable,
with slower job growth in the
economy and slowing wage growth.
Real income and spending growth both
slowed from 2024 but remained positive.
The savings rate declined in
2025 as spending growth outpaced
incomes, and was below the 2015
to 2019 average in December.
Household wealth increased, and
debt burdens generally remained low.
Low debt burdens partially
reflected lower mortgage payments
from households that locked in low
mortgage rates in 2020 and 2021.
The debt service ratio rose slightly
from 2024, and the ratio of debt to
gross domestic product ticked down to the
lowest level in more than twenty years.
Federal student loan repayments resumed
in October 2023, potentially stretching
budgets for consumers who have student
loans, but total student loans are only
about nine percent of consumer debt.
Consumer loan growth at banks was
mixed in 2025 as households reduced
their demand for some loans and
banks tightened lending standards.
Total consumer loans held by the
banking industry rose in 2025.
Credit card loan growth continued to slow
during the year but remained positive.
Total auto loans held by the banking
industry fell in the first quarter
for an eighth straight quarter but
grew the rest of the year, while other
consumer loans continued to decline.
Consumer loan demand softened during
the year and banks tightened lending
standards for some consumer loans.
According to the Federal Reserve
Senior Loan Officer Opinion Survey on
Bank Lending Practices, the banking
industry, on net, reported lower
demand for credit card loans and other
consumer loans for most of the year.
Auto loan demand declined in each
quarter except the second quarter,
when consumers borrowed more to
buy ahead of expected auto tariffs.
Banks also reported net tightening of
lending standards on credit card and
other consumer loans, but they loosened
standards on auto loans later in the year.
Consumer loan asset quality
across the banking industry
was fairly steady in 2025.
Aggregate past-due and nonaccrual rates
for credit card loans and auto loans
declined from a year earlier but remained
above their pre-pandemic averages.
Delinquency measures for other consumer
loans, which were about a quarter of
all consumer loans, also fell slightly
but remained below pre-pandemic levels.
Aggregate net charge-off rates
for all consumer loan categories
except other consumer loans fell
from a year earlier but were higher
than average pre-pandemic levels.
At community banks, consumer loans
are a relatively small share, less
than four percent of loan portfolios.
Consumer loan performance among community
banks was generally unchanged in 2025.
The median past-due and nonaccrual
rate for consumer loans at community
banks was flat from a year earlier.
The median rate for credit card loans
at community banks fell, but credit card
loans are only zero point two percent
of community bank loan portfolios.
The median rates for auto and other
consumer loans at community banks
were about flat from a year earlier.
Four point five.
Residential Real Estate.
Elevated mortgage rates continued to
weigh on the housing market in 2025.
Home price growth moderated and varied
in magnitude across geographies.
Higher property taxes and insurance
premiums raised housing costs, further
hampering affordability in some areas.
Banks reported higher one to four
family residential loan balances
and concentrations in 2025.
Credit quality in bank one to four family
residential loan portfolios remained
relatively sound, but some banks reported
elevated past-due and nonaccrual rates.
Relatively sound underwriting
standards and generally higher
equity levels will likely offset
potential credit quality risks in
residential mortgage loan portfolios.
Elevated mortgage rates
continued to constrain home
sales and housing supply in 2025.
After rising sharply in the first
quarter of 2022, the thirty-year
fixed-rate mortgage averaged six
point three five percent through
the fourth quarter of 2025.
Stubbornly high mortgage rates
contributed to weak home sales
activity during the year.
Existing home sales trended persistently
lower since the fourth quarter of
2021 but increased modestly through
the fourth quarter of 2025 from
the year before, as homebuyers took
advantage of mortgage rates that
trended slightly lower in late 2025.
New home sales rose slightly through
the fourth quarter of 2025 on an
annual basis and comprised less than
twenty percent of total home sales.
Despite the overall lower annual trend
in new home sales by the end of the
fourth quarter of 2025, the volume
of quarterly new home sales improved
relative to the first quarter of 2025
due to builder incentives and price cuts.
Higher mortgage rates also weighed
on the supply of existing homes on
the market, as existing homeowners
remained reluctant to sell and lose
their ultra-low mortgage rates.
In addition, permits and starts continued
to decline year over year through the
fourth quarter of 2025 as builders
reduced construction activity to move
excess supply, which suggests fewer
new homes coming to market in 2026.
Home price gains eased in
2025, but prices remained high.
The Standard and Poor's Cotality
Case-Shiller Home Price Index increased
one point four percent year over
year as of the fourth quarter of
2025, the slowest gain in two years.
Home price gains remained well below the
double-digit levels reached in 2021 and
2022 and continued to slow across the
nation through the fourth quarter of 2025.
In some markets, home prices declined
following a period of strong growth.
Prices declined in eight of the nation's
twenty major metro areas tracked
through the fourth quarter of 2025.
For example, in Tampa, Denver, and
Phoenix, where prices once surged
above twenty percent following
the pandemic recession, prices
were down more than one percent.
All states experienced an aggregate
increase in prices, despite price
declines in some major metropolitan areas.
Home prices nationally were fifty-four
percent above their 2020 levels.
Housing affordability
remained low in 2025.
Since 2020, the National Association
of Realtors Housing Affordability
Index had been trending lower
for the average homebuyer.
In 2025, lower interest rates and
slowing home price appreciation led to
a slight improvement in affordability.
The index rose to just above the minimum
level of affordability reading of one
hundred by the fourth quarter of 2025 but
remained well below the long-term average
of one hundred twenty-five point seven.
Affordability for first-time home buyers
remained well below the minimum level
of affordability at seventy-two point
three in the fourth quarter of 2025.
Weak affordability reflects several
years of rapid home price appreciation.
Affordability has been further hampered by
a rise in housing-related costs, such as
property taxes and homeowners insurance.
The median property tax bill increased
twenty-five percent from 2019 to 2024.
The average homeowner insurance
premium rose twenty-nine
percent between 2021 and 2024.
The banking industry reported moderate
residential mortgage loan growth in 2025.
Banks reported a nearly two percent
increase in mortgage loans in
the fourth quarter of 2025 from
the year before to two point nine
trillion dollars, the highest
balance on record for the industry.
Both community banks, at zero point
eight percent, and noncommunity banks,
at two point two percent, reported higher
residential mortgage loans from 2024.
Since 2019, a higher volume of
residential mortgage loans contributed
to a generally higher ratio of
residential mortgage loans to capital.
As of the fourth quarter of 2025,
this ratio had risen to one hundred
forty-four percent, up one hundred fifteen
basis points from one year earlier.
Nearly fifteen percent of banks reported
total residential loans to capital above
three hundred percent, up moderately
from the prior year but below the
seventeen percent peak reached in 2011.
Residential mortgage past-due
and nonaccrual rates weakened
but remained historically low.
The banking industry reported an
aggregate residential mortgage past-due
and nonaccrual rate of two point zero
four percent in the fourth quarter of
2025, up seven basis points from the
prior year but still historically low.
Community banks reported a residential
mortgage past-due and nonaccrual rate of
one point four one percent, up sixteen
basis points from one year earlier.
Community banks in the South reported the
highest residential mortgage past-due and
nonaccrual rate in the nation at one point
seven four percent in the fourth quarter
of 2025, up from one point four nine
percent in the fourth quarter of 2024.
Relatively sound underwriting
standards and generally higher
equity levels will likely offset
potential credit quality risks in
residential mortgage loan portfolios.
On net, banks tightened lending
standards on various types of residential
mortgage loans in recent years, but
fewer banks tightened standards in
2025, according to the Federal Reserve
Senior Loan Officer Opinion Survey.
In addition, nearly two-thirds, or
sixty-five point three percent, of
mortgage originations in the fourth
quarter of 2025 were to borrowers with
credit scores of seven hundred sixty or
higher, according to the Federal Reserve
Bank of New York Consumer Credit Panel.
Conversely, only four point nine percent
of mortgage originations in the fourth
quarter of 2025 were to borrowers with
credit scores of less than six hundred
twenty, well below the fifteen point two
percent reached in the first quarter of
2007, just before the Great Recession.
Relatively sound underwriting standards
and strong homeowner equity levels
may help mitigate potential credit
risk in bank residential mortgage
loan portfolios going forward.
Four point six.
Agriculture.
Grain and oilseed farmers reported
operating losses as crop receipts declined
for the third consecutive year, and
production expenses remained elevated.
Operating losses eroded working
capital positions for many row crop
farmers, leading to strong loan demand.
Farm bank agricultural loan
delinquency rates increased in 2025.
Ample farmland equity
supported loan restructuring.
F D I C-insured banks held two
hundred thirteen billion dollars
in agricultural loans in the fourth
quarter of 2025, up three point
eight percent from one year earlier.
Agriculture loans represented
only one point six percent
of loans held by all banks.
However, more than one-fifth, or nine
hundred forty-five, of all United States
banks are considered agricultural banks,
or farm banks, because of their sizeable
concentration of lending in agriculture.
These banks tend to be small community
banks located in Midwestern states where
agricultural loan portfolios are dominated
by cattle, corn, soybeans, and wheat.
Agricultural credit quality concerns
center on row crop producers as
operating losses continued in 2025.
Receipts for corn, soybeans, and wheat
are forecast to have declined another
six point five percent in 2025, which
brings the total decline in these row
crop receipts to twenty-eight point
two percent since their peak in 2022.
Meanwhile, production costs remained
elevated in 2025, leading to
another year of operating losses
for many row crop producers.
A recent survey of bankers found that
only about half of agricultural borrowers
were expected to be profitable in
2025, and that lenders expect slight
deterioration in profitability in 2026.
Credit quality was agricultural
bankers' highest concern in 2025, with
row crop production being the most
concerning portion of lender portfolios.
Weakened cash flows have led to declines
in working capital and strong loan demand.
Supervisory observations suggest
a greater occurrence of declining
working capital at agricultural credit
reviews, and agricultural lenders
cite producer liquidity as their
highest concern for their borrowers.
Producers' weakened liquidity
positions caused them to turn to
bank loans for operational financing.
The median agricultural production
loan growth rate was six point three
percent at farm banks in 2025, down from
eight point nine percent in 2024 but a
strong pace relative to recent history.
Despite strong loan growth, farm bank
agricultural loan concentration ratios
remained below their long-term average.
Reflecting growing stress among
crop producer borrowers, farm bank
agricultural loan delinquencies
continued to increase in 2025.
Among the fifty-nine percent of farm
banks reporting past-due and nonaccrual
rates for agricultural loans as
of the fourth quarter of 2025, the
median rate rose thirteen basis points
to zero point eight one percent.
The share of banks reporting delinquencies
was the highest since 2020, and the
median rate was the highest since 2021.
Net charge-off rates, however,
remained negligible at zero
point zero nine percent.
Farmland values remained
resilient in 2025, providing ample
capacity for many borrowers to
restructure unpaid operating loans.
Producers have been able to tap
into farmland equity to restructure
debt, mitigating credit problems.
Farmland values increased four point
three percent year over year through
June 2025, according to the latest
U S D A land value survey, and
the aggregate farm debt-to-equity
ratio increased only modestly in
2025 to fifteen point six percent.
Surveys conducted by Federal Reserve
Banks show that Midwestern agricultural
land values have remained stable or
in some cases declined modestly since
the U S D A land survey was released.
Producers also benefited from
government payments that provided
cushion to poor returns in 2025.
These factors helped support borrowers
and cushion potential losses for banks.
This concludes the document.
If your credit union could use assistance
with your exam, reach out to Mark Treichel
on LinkedIn or at Mark Treichel dot com.
This is Samantha Shares, and
we thank you for listening.