Looking Ahead: The Lending Landscape for 2026

Community banks are heading into 2026 with a generally positive outlook on lending activity, even as they remain hypervigilant for signs of stress in the economy and weakening borrower credit. 

Banks are positioned well to lend in the coming year. Earnings have improved, net margins have increased and capital levels are in good shape. 

“As an industry, I think we’re set to take advantage of rate cuts, which hopefully will lead to increased loan activity and economic growth, but in a very methodical, focused way,” says Joshua Marron, president and chief banking officer at $1.5 billion-asset Park Bank in Madison, Wisconsin.

Part of the optimism stems from relatively healthy loan growth over the past year amid a challenging landscape marked by higher interest rates and widespread uncertainty in the wake of new tariff policy. 

“While the higher interest rate environment is still affecting borrowers and projects, we’re going to end 2025 on a good note, and we have positive momentum going into 2026,” Marron says. Park Bank was on pace to achieve a 3% annual growth rate in its lending volume last year. 

According to the Federal Reserve, loans and leases in bank credit among commercial banks averaged a 4.2% annual growth rate as of September 2025. However, lending volume was a bit choppy when digging deeper into the numbers. Two of the leading sectors were revolving home equity loans, at a growth rate of 7.1%, and C&I loans at 4.7%. Residential real estate loans were relatively flat at 0.9%.

CRE and commercial lending

Lenders anticipate that cheaper capital will spur more demand for commercial real estate (CRE) and commercial and industrial (C&I) loans in the coming year, as well as restart construction projects that have been put on hold due to higher costs.

Industry data shows that construction starts have been a bit of a mixed bag across regions and sectors. According to construction data provider Dodge Construction Network, total construction starts were up 1.7% in August to a seasonally adjusted rate of $1.23 trillion. Nonresidential building starts dipped 5.4%, while residential starts increased 2.4%. 

“We’re hoping that continued interest rate reductions and stabilization in inflation could create modest growth opportunities going into 2026,” says Vicky Arroyo, chief lending officer at $3.5 billion-asset Stearns Bank, which has branches in Minnesota, Florida and Arizona. She notes that higher costs and uncertainty have resulted in credit tightening across the board. 

Lenders are understandably cautious about the downside risks of financing new construction. Stearns Bank is focused on relationship lending and working with experienced developers that have the liquidity to stand behind their transactions. 

“We’ve been very disciplined with our construction lending to make sure that we’re really understanding the capacity for borrowers to be able to support their projects,” Arroyo says. 

Developers also are hesitant to put more equity into deals. So, there is a bit of a “tug of war” between the lender and borrower to get them to commit more capital and lower leverage, she adds.

Looking to government guarantees

Small Business Administration (SBA) lending showed strong momentum coming into 2026, with total guarantees for 7(a) and 504 loans reaching $44.8 billion in fiscal 2025. 

“I do think that SBA lending demand will continue to increase,” Arroyo says, “because entrepreneurs are gaining some confidence and capital is becoming more affordable.”

Community banks like the added protection of government-guaranteed loans. Appraised values are at or near the top in a lot of different areas, such as commercial real estate and land, notes Barry Anderson, president and chief operating officer at $750 million-asset F&M Bank in Guthrie, Oklahoma. As a result, the community bank’s lenders think it’s a good time to talk to borrowers about an SBA loan.

“We get the SBA guarantee wrapped around it,” Anderson says. “So, we feel a bit better, the customer feels better and we can pass on a little bit better terms.” 

F&M Bank has also started working with a loan guarantee program backed by the Bureau of Indian Affairs. The community bank expects to generate loan growth from that program this year as it looks for lending opportunities with Native American tribes nationwide.

Resilient consumer spending

Consumer spending is still relatively strong, for the most part, which is a big driver for lending activity and the broader economy. Higher-income households, in particular, are credited with helping to lift retail sales, which rose 0.5% in September. 

“The consumer really drives a lot of what we do in suburban and rural Oklahoma City,” Anderson says. When the Fed started lowering rates in the third quarter of 2025, F&M Bank saw a slight increase in its consumer lines and commercial lending. 

Overall, Anderson expects lending activity in the coming year to be fairly similar to 2025. “The economy is slowing a little bit, but inflation is down,” he says. “So those things kind of counterbalance each other.”

Lenders are still keeping a close eye on consumer credit, which is showing some cracks. The University of Michigan’s Consumer Sentiment Index dipped to a five-month low of 55 in October, while national data shows rising credit card debt and an uptick in auto loan delinquencies. 

“Our delinquencies are at an all-time low right now in every category across the bank, and that includes credit cards as well,” Marron says. “I think that goes back to having strong relationships as a community bank and knowing our clients.”

Falling interest rates could bring some welcome relief to the mortgage market, sparking more activity in both new originations and refinancings in 2026. The Fannie Mae Forecast calls for a 25% jump in residential mortgage originations to $2.3 trillion this year, while single-family home construction starts are expected to remain relatively flat at 943,000 units.

Keeping an eye on credit quality

The opportunities for growth ahead vary depending on the dynamics of local markets and the lending focus for individual banks. Some of the areas where Stearns Bank sees opportunities for loan growth in 2026 are affordable and workforce housing, healthcare, and small business lending. “We continue to see a decline in interest rates, and I think that will propel more activity in the lending sector in 2026,” Arroyo says. 

Other community banks see opportunities to continue to support nonprofits, expansion of domestic manufacturing and a thaw in the single-family housing market. At the same time, lenders are continuing to closely monitor loan performance and credit quality. “We’re in a really good spot with where our past-dues are right now and our credit quality,” Marron says. “But there’s still uncertainty in the economy, and I think that has to be front and center.”

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