If 2025 was anything to go by, the financial industry already knows to be prepared for anything in 2026. While government shutdowns, sudden changes in rate expectations, and congressional sign-off on major digital currency guidelines aren’t easy to predict, that doesn’t mean everything that will happen within banking in 2026 is fully obscured. There are also trends that community financial institutions (CFIs) have been prepping for and responding to that are likely to be at the forefront of bankers’ minds. We interviewed PCBB’s President, Mike Dohren, for his take on key trends that could impact CFIs in 2026. Threats There are plenty of risks to go around in banking, but which ones are at the top shift. Right now, Dohren sees fraud and cyber risk as the major threats on CFIs’ radars, and he expects them to stay at the top of the board agenda in 2026 as attackers use the same advanced technologies banks are adopting. “Even if it’s a low probability of an event occurring, the impact for an institution that experiences a security breach is very high,” he said. In addition, credit deterioration is a likely risk for 2026, but Dohren believes that the impact won’t be very widespread. “We all know banking is cyclical, and there are sectors that fall out of favor,” he noted, pointing to recent challenges in office real estate where “the losses were not as severe as expected.” He expects a modest “reversion to kind of the mean loss rate” by 2026 rather than a broad credit crisis.Competition is another challenge for CFIs to contend with this year. “Those small businesses are being courted on a regular basis by fintechs, by regional banks, by large banks,” Dohren said, and he expects that pressure to intensify as banking-friendly regulatory changes spur more de novo institutions and payment-focused entrants. Based on survey data, a large portion of customers and small businesses already do not have a singular banking relationship, and Dohren anticipates that multi-provider behavior will become even more common in 2026.It’s not just other financial institutions that CFIs should be eyeing as competitors, though. Expanding enterprises like embedded finance are broadening the definition of what it means to be a financial service provider. He noted that everything from utility bills to payments at parking garages is seeing some form of disintermediation from banking and predicts that the share of transactions handled by non-bank third parties will continue to growRegulatory ExpectationsDeregulation was a huge topic for banking in 2025, and the impact is still being sorted out by CFIs, amid even more changes on the way at regulatory agencies. Criteria for exams are changing, and regulatory bodies are facing job cuts and shakeups, with some even headed for possible closure. “There’s a fundamental shift occurring,” Dohren said, “where some of the regulatory guidance isn’t so prescriptive. Statements are high-level, and the onus is more on CFIs to figure out the specifics of how to adjust their risk documentation and risk decisioning.” He believes this shift will continue in 2026, with regulators focusing more on outcomes and major risk pillars than on detailed checklists.CFIs are taking on the task of scrutinizing regulatory changes that have been coming down the pipeline rapidly. “You can’t anticipate everything, so you have to make sure you understand your CFI’s risks and that your risk team is dialed in on all the different proposals and changes coming in,” Dohren advised. In 2026, he expects that institutions with strong internal risk teams and board-level understanding of topics like AI, payments innovation, and digital assets will be better positioned to interpret and implement evolving rules.Stablecoin and tokenized deposits are poised to become more pressing regulatory topics this year. Dohren expects CFIs to face more questions from customers, partners, and boards about their plans in this space once the GENIUS Act and related rules take fuller effect. “Stablecoin is coming. 2026 is the time that banks need to have a stake in the ground of what their plan is,” he said, noting that CFIs can choose to stay out, participate through partners, or take a more direct role, as long as they end the year with a defined stance.Along with changes at regulatory agencies, the number of examiners is projected to slim down. “With that change, they’re going to spend the most time focusing on the bigger risks for institutions,” said Dohren. “CFIs may need to focus more on the smaller details and risks, especially for states that have smaller regulatory bodies to oversee safety and soundness.”Mergers & Acquisitions (M&A)After several years of slow M&A deals, the pace picked up in 2025 and is likely to continue in 2026, according to Dohren. He cited statements from multiple regulatory agencies that have promised to make the M&A process more streamlined, allowing deals to close faster and implying a more receptive environment for certain types of applications. Here are a few reasons Dohren sees behind the uptick in M&A:
- Cost and efficiency pressures. Mergers are often used to gain efficiencies, like merging back-office and middle-office functions to reduce costs. “It’s common,” said Dohren, “to see third-party costs going up double-digit percentages right now. Even if margins are preserved right now, banks aren’t able to pass along all of those extra costs to customers, so the bottom line is getting squeezed.” He expects more institutions in 2026 to look at M&A as one of the few levers left to offset rising vendor and compliance costs.
- Gaining capabilities or market segments. Bringing in deposits and finding new niches is arduous work with often mixed results. A more surefire path to success could be combining forces with a CFI that already has that market cornered. “Some institutions may not offer the same services,” Dohren noted, “but they’re trying to bring organizations with niche focuses together to create a whole that’s greater than the sum of its parts.”
- Conserving or accessing resources. Major transformations are a huge undertaking with a lot of moving parts and unpredictable needs. “Boards or management teams might not have the capacity, time, or desire to ride through those challenges right now, so the quickest way to gain those capabilities could be to combine with another organization that does have them,” said Dohren. He anticipates that more boards will weigh the feasibility of keeping up with technology and customer expectations against possibilities like M&A to acquire the capabilities they need.
Economy and Interest Rates Interest rates took a sharp turn from holding steady to undergoing several cuts of 25bp toward the end of 2025. Even though both the market and the Federal Open Markets Committee (FOMC) release forecasts of where rates are expected to go in both the near future and several years down the road, Dohren noted that the current expectations are more up in the air than usual, due to the government shutdown in Q4. “There’s an asterisk right now by the interest rate forecasts, because those forecasts have been made without the availability of most of the data points that are traditionally used to generate them. Data is backlogged, so even some third-quarter data isn’t available yet for the inputs economists use to generate these models.” “There’s less certainty in these forecasts than at any time in recent memory,” he said. As the backlogged data is released — particularly jobs and inflation numbers — he explained that changes to forecasts could be seen during the first quarter of 2026. At the same time, Dohren believes the baseline scenario still points to “continuation of strong margins or slightly improving margins across the industry,” offset by a modest increase in credit costs as loss rates normalize.Dohren’s advice to CFIs is to ensure that risk management teams and ALCO committees stay diligent in monitoring how the market and rate expectations are changing. “CFIs should have multiple highly trusted sources of data from big banks and other market participants outside of the FOMC to help them stay adaptable and prepared.”With more M&A deals, regulatory shifts, economic and rate forecasts remaining uncertain, and rising threats from cybercrime and competitors, 2026 could be a complex year for CFIs to navigate. But just because something is complex doesn’t mean that there aren’t plenty of opportunities to make strategic decisions and carefully planned moves to set your CFI up for future success. Eyeing trends carefully, being adaptable, and actively managing risks will be the keys to a prosperous year for your CFI. For further insights from Dohren on topics like digital assets, AI, instant payments, profitability, and more, tune into our latest podcast.
