The Lending Outlook and Loan Growth Trends for Community Banks in 2026

Community banks that rolled into 2026 with strong momentum and a positive outlook for lending growth are staying the course. Despite higher interest rates, geopolitical headwinds and lingering tariff uncertainty, lending activity has remained relatively resilient. Across commercial, personal and agriculture business lines, bankers are continuing to extend credit, support borrowers and steadily grow their loan portfolios. Regulatory reforms, potential capital rule changes and a shift toward shorter-duration loans are also boosting lending capacity and activity.

“We’re in a climate right now where the administration and regulators are looking at how to unburden community banks and help them to grow their businesses and flourish,” says Ron Haynie, senior vice president of housing finance policy for ICBA. That is evident in some of the proposed changes to residential mortgage origination and servicing rules—and other lending rules—put in place following the Great Recession.

“There’s a real concerted effort on the part of the administration to reach out and help community banks be more competitive and pull back some of this regulation that was put in place after the financial crisis,” says Haynie. The original one-size-fits-all approach appears to be shifting toward rules and regulations that are more proportionate to the size of the bank, he adds.

Interest Rate Impacts on Lending and Economic Caution

Banks started 2026 with a sense of optimism following a strong year of lending. Total loans at commercial banks increased 5.4% from 2025, in part due to a 4.3% increaase in commercial and industrial (C&I) portfolios, according to the Federal Reserve.

“We have experienced significant growth over the past five years, both in total assets and our loan portfolio,” says Jarred Merchant, chief lending officer at $335 million-asset Sherburne State Bank in Becker, Minnesota. The community bank provides C&I, commercial real estate (CRE) and Small Business Administration (SBA) loans, as well as consumer loans and residential mortgages, and has a current loan portfolio of about $265 million.

Economic uncertainty creates caution

Yet there is an underlying sense of caution among both lenders and customers. Commercial customers are less certain about the direction of the economy, especially due to the United States’ conflict with Iran and resulting spike in oil prices. News headlines are creating mixed sentiment among Sherburne State Bank’s small business and manufacturing customers. Some companies are holding off on new investment, while others are taking advantage of opportunities to grow their businesses and are continuing to finance new equipment and expansion. 

Borrowers are also adapting to what could be the “new norm” of a higher rate environment. According to the latest FedWatch data, a rate cut in 2026 appears increasingly unlikely. 

“I really think these rates are here to stay,” Merchant says. “So, we’re working with our customers, and potential new customers, to make sure they’re aware that you can’t just price in interest rate cuts.” 

The conversations lenders are having with borrowers account for the rise in expenses, which Merchant says aren’t likely to come back down at a significant margin anytime soon. 

“We’re taking a look at the health of the businesses, health of the consumers, and really making sure everyone’s comfortable with the new prices and the new rates to make sure the deal still makes sense for both parties,” he says.

Credit Tightening Strategies and Local Relationship Banking

Community bankers are keeping a close eye on the moving parts of the economy that could affect their borrower customers. High oil prices have a big ripple effect on different areas of businesses’ operations, from shipping costs and utility bills to consumer demand. 

“As we go through the year, some of the global economic factors are going to trickle into the rest of this year,” says Jeni Kampeas Chokron, chief lending officer at $1.27 billion-asset OptimumBank in Fort Lauderdale, Florida. “We really have to keep a close watch on that, and we have to really understand the industries we serve.” 

OptimumBank has seen a surge in lending activity in recent months. Starting last November, the volume of loan inquiries the community bank receives has nearly doubled. The increase is likely due to a combination of factors, including underlying strength in the southern Florida economy and bank consolidation in the area that has brought in new customers. OptimumBank also has a growing national niche as a lender for skilled nursing facilities.

This activity is also making the community bank wonder if loan requests are rising because other lenders are pulling back. 

“It’s nice to think that everyone’s coming to you because you’re great,” says Chokron. “But are people coming to you because you’re doing something that other banks are not? If that’s the case, why are [those banks not doing those things]?” 

OptimumBank is not changing its risk appetite, but it is tightening its credit approach and being selective in the loans it’s making. Its lenders are also staying disciplined, focusing on solid metrics and being mindful of the exit strategy. “We always dig deep, and now we’re digging deeper to make sure that we’re not leaving anything unaddressed or unresolved,” Chokron says. 

SBA 7(a) Small Loan Changes and Small Business Financing

Lending activity has been supported by a resilient, albeit uneven, economy. Economists are continuing to predict positive GDP growth, with forecasts ranging between 2.1% and 2.8%. Small business growth is both a big driver for the economy and a steady source of lending activity for many community banks in both conventional and SBA products.

Plumas Bank in Quincy, California, closed $19 million in SBA loans in the first quarter of the year and is expecting to make more than $60 million in SBA loans this year, with the average loan size at $1 million. The community bank’s SBA lending team is active in nine states, with much of its lending focused on providing 7(a) loans to borrowers who are looking to acquire a business or purchase or refinance owner-occupied real estate. Networking with business brokers has been key to the bank’s success. 

“We market to the spheres of influence: the business brokers, loan brokers, other banks and commercial real estate brokers,” says Rodney Broges, senior vice president and SBA manager of the $2.2 billion-asset community bank. “So, we’re not calling directly on an applicant. It’s generally a warm lead.”

If the economy does slow this year, it could spur more demand for SBA lending, as demand tends to run countercyclical to the economy, notes Broges. “If things tighten in the economy, banks tend to tighten their conventional lending policy. So, better-quality borrowers sometimes then fall into the SBA arena,” he says. SBA loans allow borrowers to qualify if they have a cash flow stream but no underlying collateral. These loans also allow for higher loan-to-value financing than conventional loans.

SBA lenders are navigating several rule changes, as well as new initiatives aimed at increasing credit to small manufacturing businesses. For example, a new “Made in America” guarantee program increases SBA 7(a) and 504 loan limits from $5 million to $10 million for qualified small manufacturing businesses. 

In addition, the Manufacturers’ Access to Revolving Credit (MARC) program, which went into effect last October, is a specialized loan initiative that aims to provide flexible working capital to small manufacturers. 

“Not a lot of those have been done on a national basis yet, because the line of credit is a lot harder to manage in service than the typical SBA term loan,” Broges says. “But that is another program out there that could gain some traction.”

Another recent change sees the United States’ 12.8 million lawful permanent residents—green card holders—disqualified from receiving SBA 7(a) or 504 loans whether they’re a direct or indirect owner of the business. The impact on banks’ SBA loan volume and compliance processes remains to be seen.

Commercial Real Estate Loan Maturities 2026 and CRE Growth

Although new commercial and multifamily construction starts have slowed due to higher costs and excess supply in some markets, CRE lending is poised to regain momentum this year. The Mortgage Bankers Association is forecasting that total commercial mortgage origination volume will increase 27% to $805.5 billion this year, while multifamily originations are expected to rise 21% to $399.2 billion.

That is welcome news following what has been lower volumes of CRE lending for many banks over the past two and a half years. Most of the CRE loans that Sherburne Bank is doing involve loans for owner-occupiers who are looking to renovate an existing facility or purchase a building for expansion. 

“The owner-occupied is a little bit easier to underwrite,” Merchant says. “On the investment side, we’re still seeing some properties change hands, but a lot of it depends on the leases and the tenants.” Some properties have leases in place where it doesn’t make sense for an investment at current interest rates, he adds.

The Honesdale National Bank in Honesdale, Pennsylvania, grew its loan portfolio by about 13.5% last year, due in part to its CRE lending. “I anticipate at least the same growth we had in 2025, if not more, in 2026,” says Ronald Sebastianelli, executive vice president and chief lending officer at the $1.2 billion-asset community bank. 

A key focus for The Honesdale National Bank is providing loans to borrowers who are investing in 1–4-unit residential rental properties. In some cases, individuals have started with one or two units and have grown their rental portfolio to more than 40 and 50 units. 

“We have some borrowers that come in and start with one unit, and then they’ll continue to come back and come back, and we’ve been able to participate in that growth with them,” says Sebastianelli. 

People are buying and flipping homes or buying a single-family, duplex or fourplex as a rental property or Airbnb. Some of The Honesdale National Bank’s borrowers have been customers of the bank for 20 or 30 years. 

“Continuing to mine our portfolio and get referrals from the people we’ve done business with for a long time really drives our lending,” says Sebastianelli. Those longstanding relationships also help the bank to reduce its lending risk, he adds.

Farm Operating Loans 2026 and Ag Lending Growth

Substantial growth in operating loans drove demand for farm lending at commercial banks in 2025. The volume of new farm operating loans increased nearly 20% last year, according to estimates from the National Survey of Terms of Lending to Farmers conducted by the Federal Reserve of Kansas City. Given the challenges farmers continue to face, demand for credit is expected to continue to rise this year.

Many farmers are in a tough spot due to higher input and equipment costs and lower commodity prices. Row crop farmers who are seeing stress on cash flows are looking to recapitalize their balance sheets through debt restructuring. Ranchers are faring much better in the current economy with healthy market prices, and where appropriate, ranchers are taking advantage of opportunities to grow their operations. 

“At Choice, we understand that agriculture economics are a bit of a roller coaster over time, and we need to handle the good with the bad,” says Tony Gudajtes, executive vice president and ag market president at $6 billion-asset Choice Bank in Fargo, North Dakota. Choice Bank is one of the largest ag lenders in the state of North Dakota, and the bank expects its overall ag lending volume to increase in 2026 due to a mix of land and equipment purchases and increased operating capital needs.

Choice Bank has also stepped into the emerging market of ag input financing by funding credit facilities originating through local co-ops and input suppliers. 

“Funding these short-term credit arrangements for products like seed, chemical and fertilizers is a market we’ve gained good traction in over the past few years,” says Gudajtes. “More growers are showing tendencies of preferring to use these house charge accounts at the place of purchase versus traditional bank credit lines.”

Single-Family Mortgage Originations and Residential Lending Trends

Despite persistent hurdles for first-time homebuyers, mortgage lenders are keeping busy with steady demand for new mortgages, construction loans and home equity lines of credit (HELOCs). 

“The year started out pretty strong, and we’re still seeing inquiries coming from new clients,” says Rustin Egner, executive vice president and chief residential lender at $1.4 billion-asset Community Financial Services Bank (CFSB) in Benton, Kentucky. Egner attributes that in part to the referrals produced by the relationships the community bank has built with real estate agents and builders in the market.

The latest Fannie Mae Housing Forecast predicts that single-family mortgage originations will jump 24% this year to $1.96 trillion, including both home purchases and refinancing. Underpinning that forecast is a prediction that average mortgage rates on a 30-year fixed-rate loan will fall from an average of 6.6% in 2025 to 5.8% this year.

“I’m really busy right now,” says Nathan Terry, a mortgage lender at CFSB, noting that demand has shifted away from first-time homebuyers, who are still struggling with affordability. Most of Terry’s clients are families who are growing into a larger home, empty nesters who are downsizing or buying a second home and existing homeowners taking out HELOCs for renovation projects. 

“Rate volatility has been a small challenge, but I don’t think it’s slowing people down too much,” adds Terry.

The ability to offer a variety of residential loan products has also helped drive new business for CFSB. In addition to standard variable and fixed-rate loans, the community bank offers mortgages available through the U.S. Department of Agriculture, Department of Veterans Affairs and Federal Housing Administration. The bank also offers a 100% loan option for new professionals in several fields, including the medical field. 

“We help borrowers find the product that best fits their situation,” says Egner. “A client may walk in thinking that something is what they need, but once they sit down with one of our lenders, we’re able to give them options that they didn’t know existed.”

Leveraging Local Relationships for Community Bank Lending Success

Along with loan growth, lenders remain focused on maintaining relationships and making good loans. 

Sebastianelli says loans could go delinquent for any number of reasons as loan volume increases, but asset quality remains the main driver for loan production, and community bank lenders are keeping a close eye on asset quality and delinquencies.

“Our lenders are very good relationship managers. They know their borrowers,” says Sebastianelli. “It’s easy for them to pick up the phone and ask, ‘How’s it going? What do you think about the higher prices of fuel, and how is that impacting you?’”

Community banks are also working with customers to make sure the loans they’re making are manageable, given what could be a prolonged higher cost and higher rate environment. Lenders are sitting down with their borrowers and talking through the numbers and the pros and cons of taking on new debt. Is this the right time to purchase a new building, invest in new equipment or buy a new boat? 

Whatever the economic environment, community bank lenders excel in having strong relationships with their borrowers and understanding what they need to succeed—which benefits the bank, too.

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