As the industry continues to evolve, community institutions find themselves at the intersection of innovation, regulation, and resilience. From navigating macroeconomic uncertainties and headwinds to adapting to the rise of digital assets like stablecoins, institutions are confronting both challenges and opportunities that will shape their future and competitive edge. At the same time, regulatory relief efforts and shifts in executive compensation strategies reflect a broader transformation in how community banks operate and compete. We highlight some of the key items influencing the sector in 2026.
Stablecoins: A growing force and a liquidity risk challenge
Stablecoins — digital assets pegged to fiat currencies like the U.S. dollar or gold — are rapidly gaining traction as a medium of exchange and store of value. As market capitalization and institutional interest continues to grow, so does the likelihood of stablecoins becoming a mainstream financial instrument.
At this point, legislation such as the GENIUS Act in the Senate and the STABLE Act in the House seek to set the framework for stablecoins. If legislation doesn’t require stablecoin reserves to be held in banks, community institutions risk losing deposits to unregulated entities. Allowing nonbank issuers to operate without equivalent oversight invites regulatory arbitrage and potential fraud.
Community institutions are encouraged to participate in shaping the infrastructure and policy to reduce the risk of being excluded from the digital financial future. Financial institutions will need to stay agile in adapting to this new digital paradigm as regulatory frameworks begin to take shape.
Community bank regulatory relief
As part of a broader, multiphase initiative to modernize regulatory thresholds in light of inflation, regulatory leaders proposed an update to the Federal Deposit Insurance Corporation Improvement Act (FDICIA) in July 2025. This move is designed to modernize the legislation and provide a more durable and equitable regulatory framework, especially for community banks and midsized institutions that may otherwise cross compliance thresholds due to inflation rather than operational growth. The proposed changes had a comment period that ended in September 2025, and the final rule was published in November 2025 with the following key components (among other things):
- Independent financial statement audits are only required for institutions with over $1 billion in assets (increase from $500 million).
- The establishment and composition of an audit committee.
- General composition requirements — the asset threshold for requiring an audit committee composed entirely of outside directors increased from $500 million to $1 billion.
- Independence requirements — for institutions with assets between $1 and $5 billion, the audit committee must comprise a majority of outside directors who are independent of management.
- Enhanced independence requirements — for institutions with assets over $5 billion, the audit committee must comprise only outside directors who are independent of management.
- Management assessment of internal control is required for institutions with over $1 billion in assets (an increase from $500 million).
- A financial statement auditor opinion on internal control over financial reporting (ICFR) is required for institutions with assets over $5 billion (an increase from $1 billion).
- The financial statement auditor would follow the more stringent independence standards of the Securities and Exchange Commission and Public Company Accounting Oversight Board when asset thresholds exceed $1 billion (an increase from $500 million).
The rule is effective Jan. 1, 2026, but also provides that banks don’t have to comply with applicable part 363 requirements as of Dec. 31, 2025, if they won’t be subject to those requirements based on the updated thresholds in place as of Jan. 1, 2026.
Executive compensation: A shift toward stock-based alternatives
Community banks have increasingly moved away from traditional stock options in favor of alternative equity compensation structures such as restricted stock, restricted stock units (RSUs), and stock appreciation rights (SARs). This shift reflects a broader trend toward aligning executive incentives with long-term shareholder value while managing risk and complexity.
RSUs have gained popularity due to their simplicity and guaranteed value upon vesting, unlike stock options, which can become worthless if the stock price falls below the strike price. SARs offer another flexible alternative, allowing executives to benefit from stock price appreciation without requiring upfront capital investment.
This evolution in compensation strategy also reflects a desire to attract and retain top talent in a competitive labor market while ensuring that executive rewards are tied to sustainable performance and risk management.
Community bank performance: Resilience amid headwinds
Despite macroeconomic pressures and uncertainties, community banks have demonstrated resilience. Capital ratios remain strong and, even though loan-to-deposit ratios have tightened due to the mix of loan demand and deposit competition, net interest income and net interest margin have improved throughout 2025 approaching pre-pandemic averages. Past-due and nonaccrual rates have trended downward while reserve coverage ratios remain strong. Overall, the outlook appears cautiously optimistic.
