For many community banks, the numbers are moving in a better direction. Net interest margins improved in the second quarter of 2026, deposit growth strengthened, and balance sheets remain generally healthy. For institutions between $100 million and $1 billion in assets, average net interest margin moved above 4%.
After several years of margin pressure, that is welcome news. It also gives management teams some breathing room to think about what comes next.
The question is whether the trends helping earnings today are sustainable. Community institutions continue to grow; larger deposit relationships are contributing more to that growth, and interest-rate uncertainty has not gone away. A stronger quarter is useful, but it does not necessarily make the decisions ahead any easier.
What Is Driving Community Bank Growth?
Community banks with less than $10 billion in assets have generally been growing at a measured pace, with annual asset growth settling around 4% to 6% in recent years.
Consolidation is an important part of that story. There are roughly 10% fewer institutions than there were five years ago, while the average institution under $10 billion has grown to approximately $850 million in assets.
For management teams and boards, the more useful question is what continued growth means for their own institution.
Over time, growth can put additional pressure on:
- Capital
- Staffing and leadership capacity
- Technology and systems
- Internal controls
- Risk management
- Governance
Many institutions remain well capitalized today. But sustained growth can eventually bring a bank to the point where internally generated capital may not support the same pace indefinitely.
That is why capital planning should not begin when capital becomes a constraint. A period of healthy earnings can be a good time to consider what the balance sheet may require several years from now.
What Is Behind Recent Deposit Growth?
Deposit growth has strengthened, but the composition of that growth deserves attention.
Uninsured deposits have been a significant contributor in 2025 and 2026. In the second quarter of 2026, uninsured deposits recorded their strongest growth rate since before the disruption of 2023. Brokered deposit utilization, meanwhile, has remained relatively consistent.
For community banks, the increase in uninsured deposits suggests that larger customers and larger relationships are playing an important role in recent balance sheet growth.
That can certainly be positive. It can also change the institution’s funding profile.
Management should understand:
- Which customers are driving recent deposit growth
- How concentrated larger relationships have become
- How sensitive those customers may be to rates
- What assumptions are being made about deposit stability
- How the institution would respond if some of those balances moved elsewhere
Deposit growth is good. Understanding the quality and durability of that growth is more useful than looking at the total alone.
What Do Improving Net Interest Margins Mean for Community Banks?
The improvement in net interest margins is one of the more encouraging recent trends.
Margins generally increased through much of 2025 before experiencing some compression late in the year. In the second quarter of 2026, asset yields increased while funding costs remained flat, helping margins move higher again. Institutions between $100 million and $1 billion in assets saw average net interest margin move above 4%, with other asset groups also moving closer to that level.
Better margins give institutions more room to absorb rising costs in areas such as technology, cybersecurity, talent, and compliance. They can also improve their ability to generate capital internally.
The important question is how much of that improvement management expects to continue. Rates can move. Deposit pricing can change. Assets and liabilities will continue repricing at different speeds. The conditions that helped margins in one quarter may not look the same several quarters from now.
Rather than assuming the recent improvement will continue, this may be a good time to revisit the assumptions behind the balance sheet.
What Should Management and the Board Be Asking Now?
A period of stronger earnings can be one of the better times to challenge assumptions because management has more flexibility to act before conditions force a decision.
Some questions worth considering include:
- How much of our recent deposit growth comes from larger relationships?
- Are we comfortable with the resulting deposit concentrations?
- How would those deposits behave under different rate scenarios?
- If our current growth continues, when could capital become a constraint?
- How does the balance sheet perform if rates move differently than we expect?
- Are there interest-rate risk management tools we should reconsider?
- Are stronger earnings masking any longer-term balance sheet issues?
None of these questions assume that margins are about to decline, or that current growth is a problem. They simply help management understand how well today’s balance sheet is positioned for a different environment.
Stronger margins are good news. Their greatest value, however, may be the flexibility they give an institution to prepare for whatever comes next.
If you are evaluating what recent balance sheet trends mean for your institution, talk with your YHB advisor. We can help you think through the implications for capital, funding, interest-rate risk, and the decisions that may deserve attention while conditions remain favorable.