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Benign Credit
Most banks look healthy when it comes to credit right now. In fact, it’s hard to differentiate the banks that are good at underwriting from those that aren’t.
The CEO of $36 billion Commerce Bancshares brought up the credit environment coming out of 2025 at his Kansas City, Missouri-based bank’s annual shareholder meeting this spring. “Despite some trend toward normalization on things like consumer credit losses,” John Kemper said in a transcript of the proceedings, “credit continues to be an area where banks are probably over-earning relative to historic averages.” In a downturn, Kemper believes his bank will outperform those with weaker credit.
For a few years now, researchers and journalists have loved calling the credit environment “benign.” We’ve gone nearly two decades since the last financial crisis, an unusually long time in an economy prone to financial cycles.
David Ruffin, head of credit risk solutions for OptimaFI, agrees with Kemper’s assessment, but he has started to see signs of credit stress. For example, the past due and nonaccrual rate for community banks has been trending upward since 2023. Still, it remains low by historical standards, at 1.44% in the first quarter of 2026, according to the Federal Deposit Insurance Corp.
Although not dire, it’s an uptick in the wrong direction. Ruffin also sees signs of the old “extend and pretend” tactic — a reference to practices where institutions would extend loans rather than take a loss or acknowledge a problem. Ruffin has watched some banks renew borrowers at below-market rates to keep them on the books, which may ease problems when new debt service coverage ratios don’t meet the bank’s policies. “There's a psychology at work,” he says, “where it's going to be difficult to acknowledge credit stress as it rears its head, because no one likes to be leading a parade on problem credit.”
He doesn’t believe we’ll repeat the financial crisis of 2007-09, because banks are better capitalized and have stronger underwriting than they did then. But it may not be accurate anymore to call the environment benign. “I can’t imagine us being in 2008 territory,” he says. “But we do need to stay vigilant.”
• Naomi Snyder, editor-in-chief for Bank Director
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