4 Trends Shaping Community Banking in 2026
GUEST POST By: Peter Stenehjem, CEO of First International Bank & Trust
As we navigate the opening weeks of 2026, the community banking sector is undergoing a steady and fundamental transition.
While our "community" roots remain an important asset, the practical requirements for staying independent and relevant among larger banks are changing.
We are currently seeing a visible separation in our industry – a widening gap between the institutions that have evolved and those that have not.
This year, success depends on recognizing how the traditional benchmarks for scale and primary relationships have moved.
Here are four trends I think will shape the community banking industry in 2026.
1. Bank Asset Thresholds are Increasing to Signal Strength
For years, the industry operated under the assumption that a $1 billion asset-size benchmark was a safe zone for a community bank to remain competitive. That’s becoming a benchmark relic of the past.
The rising costs of technology investment, the cumulative weight of regulation, and the necessity of attracting top-tier talent have pushed the competitive floor closer to the $5 billion range.
Smaller institutions are finding it increasingly difficult to sustain the speed of digital transformation expected by the modern consumer. Industry data reflects this challenge as 76% of financial institutions have increased their technology spending to stay relevant, yet 31% of community banks still rely on manual processing for core onboarding workflows – a friction point that causes 66% of consumers to abandon a digital application.
For banks under the $1 billion mark, the choice this year is becoming more urgent: find a specialized niche or prepare for the realities of consolidation.
To manage the daily swings of the modern economy and the heavy investment required to compete with national players, scale is no longer just an advantage, but it’s a requirement for long-term independence.
2. Banks Without a Specialty will Struggle to Survive
We are currently in a cycle where credit quality challenges and liquidity constraints are creating a clear distinction between the “haves and the have-nots” in the banking industry.
After a long period of relatively benign credit, 2026 will see a surge in M&A momentum. This is largely driven by smaller banks struggling with the need for deeper capital reserves, liquidity pressures, and difficult leadership transitions.
I think the banks moving toward consolidation this year will primarily be those that lack a distinct niche or specialty.
The market is shifting away from a one-size-fits-all model, as seen in the growth of specialized offerings such as Banking-as-a-Service (BaaS) and enterprise treasury solutions.
At our institution, mineral and land services is also an important niche given our geographic location in North and South Dakota. These ancillary resources are becoming critical for retaining relationships because they provide technical expertise that a standard loan-and-deposit model cannot replicate.
In 2026, banks operating without a specialized value proposition will be in a more vulnerable position. Those banks risk becoming a commodity in an environment that no longer rewards a generalist approach.
3. The Rise of Soft-Switching Will Redefine Customer Loyalty
Another persistent challenge we’ll face this year is the acceleration of soft-switching or the rise of customers slowly moving their day-to-day financial life elsewhere.
They might keep their mortgage or a legacy savings account with a community bank, but they use a large national bank or a fintech for their daily transactions because the user's experience and marketing win their attention.
To counter this, it’s important to recognize that while trust remains our foundation, the way that trust is earned has changed.
Customers now expect reliability not just in personal relationships, but in data protection, speed, and transparency. Research indicates that trust is now the leading driver of loyalty, with 61% of consumers ranking trustworthy information as the most important factor in their interactions.
Ultimately, success in this environment comes when digital efficiency and personal service work together.
By using technology to strengthen human connections rather than replace them, we can ensure our digital tools are so seamless, it removes every possible point of friction.
If you make it hard for people to transact, they will continue to soft-switch until you are no longer their primary bank.
4. Culture Will Be the Ultimate Competitive Edge
Despite the heavy focus on technology and scale, I think culture will emerge as a bank’s most significant competitive advantage this year.
While we must use technology to handle the mundane tasks and create efficiencies in underwriting, the human element is where community banks can truly shine.
At the end of the day, we are in the people management business. To stay independent and successful, we must create an environment where the best talent wants to stay, especially when those individuals have the option to go elsewhere.
There is deep value in relationship banking that no algorithm can replace.
Looking ahead, success will depend on balancing high-tech capabilities with high-touch relationships. Whether banks are navigating the $5 billion asset threshold, building specialized niches to reduce consolidation pressure, or addressing soft-switching by strengthening primary relationships, internal culture plays a central role in supporting each of these priorities.
Maintaining a best-in-class culture is a competitive necessity for any institution that refuses to settle for being second tier.
A drive for excellence must be embedded in the leadership and the team, pushing for milestones that might otherwise seem out of reach.
As we look at the landscape in 2026, this commitment to high standards is exactly what keeps an institution relevant for the next generation.
While we have to be efficient and digitally advanced to compete, the ultimate priority remains the same: being the primary, indispensable relationship for the people we serve.
About the author: Peter Stenehjem, a fourth-generation community banker, was born and raised in the heart of North Dakota’s badlands, where he grew up during the height of the region’s oil boom.
His journey in banking began in 2000 when he joined First International Bank & Trust (FIBT) as a teller, and quickly demonstrated his expertise in both business and personal banking. Peter quickly advanced in his career from lender to market president and ultimately was promoted to president of the entire organization.
Throughout his career, he has become well-versed in the unique challenges and opportunities facing the communities FIBT serves.
Peter graduated from the University of North Dakota in 2007 with a degree in Banking & Financial Economics. Peter furthered his education in 2014 by completing his graduate studies in Banking at the University of Wisconsin-Madison. He has also attained certification as a Commercial Lender with the Independent Community Bankers of America (ICBA) and completed the Fargo-Moorhead Chamber Leadership Program.
Peter serves as a director of Watford City Bancshares, Inc., and is a member of the FIBT Board of Directors and the Strategic Planning Committee. Beyond banking, Peter has pursued several entrepreneurial ventures. He is involved with businesses such as Alati Energy, Stenehjem Holdings, Stonehome Brew Pub and Stonehome Brewing Company, Outlaws Bar & Grill, and JL Beers, and he is the managing partner of Stenehjem Development.
While Peter currently resides in Minnesota, he remains connected to his roots, staying actively involved in both the Fargo-Moorhead and Watford City communities.