Loan growth improved at US community banks with assets below $10 billion in the second quarter of 2023 after slowing down since the third quarter of 2022.

Gross loans and leases for US community banks grew sequentially by 2.5% in the second quarter, up from a 1.3% quarterly increase in the first quarter, according to S&P Global Market Intelligence data. This uptrend is in contrast with the growth rates in the previous quarters.

Median sequential growth in gross loans declined from 3.8% in the 2022 second quarter to 3.4% in the 2022 third quarter and further 3% in the 2022 fourth quarter.

Total gross loans and leases for banks in the asset bucket amounted to $2.307 trillion as of June 30, the highest amount in several years since the end of the pandemic-era Paycheck Protection Program.

The 1.9% sequential increase in the commercial & industrial (C&I) segment was an improvement over the 0.8% quarterly growth in the previous quarter. The sequential growth rate in commercial real estate (CRE) and multifamily loans expanded to 1.2%, from 1.0% in the first quarter. Consumer loans also grew by 1.8% sequentially in the second quarter, up from a 0.1% quarterly decline reported in the first quarter.

Midwest leads with highest loan growth

Overall, the Midwest logged the highest quarterly growth at 2.7%, driven by a 2.9% sequential increase in its C&I loan segment — the highest growth in this category across the different regions. The region also posted the highest sequential increase in the consumer loan category, at 2.4%.

At 1.7%, commercial real estate and multifamily loans grew at the highest pace sequentially in the Southeast, followed by a 1.6% quarter-over-quarter increase in the Northeast. The Southeast also led in the total one- to four-family loans category at 2.8% quarterly growth.

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Banks continue to report tighter credit standards, weaker loan demand

Banks continue to report decreased lending appetite for all loan categories in response to the central bank's persistent interest rate hikes, according to the Federal Reserve's July 2023 Senior Loan Officer Opinion Survey (SLOOS) on Bank Lending Practices released July 31.

Results of the survey, which collected responses from executives at 66 domestic banks and 19 US branches and agencies of foreign banks, also showed that banks expect to further tighten lending standards in the second half of 2023, citing "less favorable or more uncertain economic outlook and expected deterioration in collateral values and the credit quality of loans."

According to the July survey, a net 50.8% of domestic banks reported tightened standards for C&I loans to large and medium firms, up from 46% in the previous survey. A net 49.2% of banks reported tighter credit terms for C&I lending to small firms, compared with 46.7% in the previous quarter. Further, the net percentage of banks reporting stronger demand for C&I loans in large and medium firms fell to 51.6% from 55.6% in the previous survey.

In the CRE loans category, major net shares of banks reported having tightened standards and lower demand across all loan types. However, some categories' conditions slightly improved since last quarter. For instance, a net 71.7% of banks reported tightened credit standards for CRE lending in the construction and land development segment, down from 73.8% in the previous survey. Similarly, 63.3% of banks reported tightened lending standards for the CRE multifamily category, down from 64.5% in the previous quarter.

Median loan growth highest in smaller community banks

Community banks with assets less than $100 million logged the highest sequential growth in gross loans at 2.6% in the second quarter with banks, whose assets are between $100 million and $3 billion, trailing behind at a slightly lower sequential growth of 2.5%.

Growth was mostly driven by the consumer loan category being the highest among banks with less than $100 million in total assets at 2%. In comparison, consumer lending was the weakest for banks with more than $10 billion in total assets, with a 0.2% increase from the previous quarter.

Sequential loan growth in the CRE segment remained muted across banks of all asset sizes in the second quarter. However, at 1.8%, CRE loans increased the most for banks with total assets between $3 billion and $10 billion, while a 0.9% decline in CRE lending was reported for banks with assets below $100 million.

Multifamily loans grew by 2.1% for banks with assets above $10 billion. Banks with total assets of up to $3 billion reported a decline in multifamily loans.

Loan growth sustained for large banks YOY

Nineteen of the 20 largest community banks reported increases in year-over-year loan balances, while 14 banks logged quarterly and sequential growth in loan balances.

Englewood Cliffs, NJ-based ConnectOne Bancorp Inc. banking unit ConnectOne Bank posted the highest loan balance for the fourth consecutive quarter. Gross loans for the bank amounted to $8.16 billion as of June 30, almost the same as $8.15 billion in the first quarter.

Amarillo, Texas-based Amarillo National Bank recorded the highest sequential growth in gross loans, with a 4.93% increase from the previous quarter.