Community banks are earning more and reserving thinner

The FDIC published its second quarter numbers on August 25. The headline was $90.1 billion in industry profit, up 12 percent in a quarter, and I used that figure 2 weeks ago.

This week I went 1 layer down, to the banks the FDIC classes as community banks. 2 of their lines moved in opposite directions.

Margins went up. The cushion under the loan book got thinner. Community banks are earning more on the money they lend and setting aside a little less against the loans that have already gone bad.

The margin side

For most of the last 3 years, community bank CFOs watched deposit costs climb and chewed through their margin to keep up. That pressure has eased.

In the second quarter, the FDIC says, community bank yields on earning assets rose while their cost of funds fell. Margin went from 3.71 percent in the first quarter to 3.81 percent in the second. A year ago it sat at 3.62.

And it's showing up in earnings. Community bank net income rose 8.2 percent from the first quarter, and pretax return on assets hit 1.53 percent, up 17 basis points from a year earlier.

Loans grew too: 1.6 percent in the quarter and 5.1 percent over the year, with nonfarm nonresidential commercial real estate out front. Those are relationship books. Somebody has to go find that business, and somebody has to underwrite it.

The reserve side

Reserve coverage is the allowance for credit losses divided by noncurrent loans (90 days or more past due, or on nonaccrual). It tells you how much cushion a bank has set aside for each dollar of paper that's already stopped paying.

For the industry as a whole, that ratio rose to 172.7 percent in the second quarter as noncurrent loans fell. At community banks it slipped for the 2nd straight quarter, to 145.6 percent from 146.6. The FDIC's explanation is short: noncurrent loans at community banks grew faster than their allowance.

The drop is only 1 point, and it came while the rest of the industry moved up by almost 6.

So where's the gap coming from? The FDIC reports that non-owner-occupied CRE past-due and nonaccrual rates at banks over $250 billion fell for the 7th quarter in a row, and it notes those banks hold less of that paper relative to their capital than smaller banks do. Noncurrent loans are coming down at the top of the industry and creeping up at community banks.

What I think it means for California hiring

Put the 2 lines side by side and you get a bank with money to spend and a reason to spend part of it on credit.

Wider margins make a new relationship manager easier to justify. A banker who brings in C&I loans and the operating deposits that come with them is worth more at a 3.81 percent margin than at 3.62.

Rising noncurrents make the other seat just as easy to justify. When problem loans grow faster than reserves, examiners start asking, and the chief credit officer needs people who can work a troubled credit on Tuesday and underwrite a new one on Wednesday. The same balance sheet that needs more producers needs more credit judgment.

My read for California community banks heading into year end: the production hire and the credit hire belong in the same budget conversation. I think the banks that fund only the first will probably be back looking for the second by spring.

What this data doesn't say

A few limits, stated plainly, so this doesn't get quoted further than it goes.

It's national. These are FDIC figures for community banks across the country. The FDIC's California state profile, the closest thing to a state cut, still showed first quarter 2026 when I checked this week. So I can't hand you a verified California second quarter number yet.

Community bank is the FDIC's own definition, and it uses more than asset size. It won't line up exactly with the list of banks you think of as community banks.

Reserve coverage is an aggregate. A decline across thousands of banks can come from a handful of big problem credits at a few institutions, and the FDIC statement doesn't say which loan types drove the rise in community bank noncurrents.

And 145.6 percent means the allowance still sits well above the noncurrent balance. My concern is the direction over 2 quarters, and the next report will show whether it holds.

What I'd watch next

California banks start reporting third quarter results in October. Read past net income to the provision and the nonaccrual total, and put both next to last quarter's.

If you run a California community bank, put your own coverage ratio next to 145.6 and 172.7 and ask which way yours moved this year.

If you're a credit officer with workout experience, this is a good year to have it on your resume (and a better year to have it written down in numbers).

If you're hiring for either seat in California, let's talk.

More Insights: Market Intelligence · Hiring & Retention · Career Moves