What Rising NPLs Signal for Credit Risk Management

The Richmond Fed publishes a quarterly Banking Conditions Report focusing on key metrics to help equip bank supervisors and bankers with valuable insights into Fifth District and national financial performance and emerging trends. We hope to use the data, as well as the examiner perspective, to share insights into the District's financial institution safety and soundness. This article takes a closer look at the recent modest rise in non-performing loans (NPLs) in the Fifth District—particularly in commercial and industrial (C&I) loans.

NPLs in the Fifth District edged upward in late 2025, rising from 0.50% to 0.67% of total loans on a year-over-year basis. At the same time, average annual loan growth increased for the first time since late 2022, driven largely by renewed demand for C&I and commercial real estate (CRE) loans. Among Fifth District banks, C&I lending grew an average of 3.5% over the previous year.

While the overall rise in NPLs in the Fifth District was modest, C&I NPLs were a key driver of this increase at the same time as C&I lending expanded. For bank examiners and bankers alike, these parallel trends merit attention as they may signal emerging credit quality concerns. We'll now examine these trends more closely, exploring their potential causes and effective risk management approaches that bankers can consider.

What Constitutes a Non-performing Loan?

For monitoring purposes, banks classify loans as non-performing when they are either 90 days or more past due or when they are in nonaccrual status. According to call report instructions, a loan is generally considered to be in nonaccrual status if:¹

• It is maintained on a cash basis because of deterioration in the financial condition of the borrower,
• Full payment of principal or interest is not expected, or
• Principal or interest has been in default for a period of 90 days or more unless the asset is both well secured and in the process of collection.

For bankers, a solid understanding of these definitions is critical, as NPLs serve as indicators of credit quality and can have direct implications for earnings through provisioning requirements.

C&I Lending and Non-performing Loan Trends

The Commercial Bank Examination Manual (CBEM) describes C&I loans as "loans to a corporation, commercial enterprise, or joint venture that are not ordinarily maintained in either the real estate or consumer installment loan portfolios."² These loans typically include financing for equipment purchases, inventory, accounts receivable, and working capital needs—making them a central component of economic activity in the region.

As shown in the chart, current non-performing loan metrics remain low compared to those witnessed during the Great Recession. The recent uptick in NPLs has also been uniform across the nation and the Fifth District. Looking further into the data, we see that C&I loans exhibited the largest year-over-year dollar amount increase in NPLs among all commercial loan types in the Fifth District, which equates to a 20% increase. Furthermore, this increase was concentrated in about one third of Fifth District banks. Categorically, C&I NPL growth occurred across institutions of varying asset size, regulatory portfolio, geographic location, and C&I lending strategy. Moreover, as of Q4 2025, C&I loans now exhibit the highest dollar amount of NPLs among all commercial loan types in the Fifth District.

This concentrated pattern suggests several underlying factors may be at work. While economic conditions broadly affect all loan categories, C&I loans are particularly sensitive to industry-specific pressures such as supply chain disruptions and labor shortages that can disproportionately affect borrowers' repayment capacity. The maturity structure of debt originated during lower interest rate periods may also create refinancing challenges as these loans come due in today's higher-rate environment.

Additionally, variations in credit policies and competitive responses across institutions may explain why some banks are experiencing more pronounced NPL increases than others. For examiners and bankers, these differential impacts warrant closer attention to portfolio composition, quality, and risk management practices. With this understanding of current trends, let's consider effective risk management approaches in today's lending environment.

Credit Risk Management Considerations

The January 2026 Senior Loan Officer Opinion Survey (SLOOS) noted banks that reported easing C&I loan standards or terms cited "more aggressive competition from other lenders as an important reason for doing so."³ This competitive pressure represents a credit risk scenario that examiners frequently monitor: the tendency to relax standards to maintain market share during periods of growth.

To guard against this, examiners aim to ensure banks' credit risk management practices remain aligned with their risk profiles. According to the CBEM, commercial loans typically represent "the largest asset concentration of a state member bank, offer the most complexity, and require the greatest commitment from bank management to monitor and control risks."

Effective credit risk management often includes:

• Clear, well-articulated credit policies that promote consistent underwriting and sound administration

• Active board and senior management engagement, including review of large credit originations and extensions
• Robust reporting—such as concentration analyses, watch lists, and policy-exception tracking—to identify risks early
• Internal controls that support lien perfection, timely financial reporting from borrowers, and accurate borrowing-base monitoring

C&I nonaccrual loans may also be collateral-dependent, which drives the need for careful loan-level analysis within the allowance for credit loss (ACL) framework. Industry practice suggests that ACL levels should reflect both loan growth and evolving risks, incorporating historical performance and forward-looking indicators.

As these NPL trends evolve, maintaining strong credit risk management fundamentals will remain essential—and our quarterly Banking Conditions Report will continue to track these developments across the Fifth District.

Bankers with questions or comments are encouraged to contact their Fifth District supervisory team for more information.

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