U.S. community banks generally reported improved loan growth and net interest margin in the second quarter compared to a year earlier, according to data collected and analyzed by S&P Global Market Intelligence.

Positive trend

Publicly traded U.S. banks with assets of less than $10 billion reported a median net interest margin of 3.37%, up from 3.23% a year earlier. The sector reported a median 8.5% loan growth, against a 0.7% decline in loans last year, when consumers and businesses had enough cash to avoid borrowing, partly due to federal pandemic aid.

Smaller community banks, or those with assets of less than $3 billion, had a median NIM of 3.45% in the most recent quarter, up from 3.28% in the year-ago period. This subgroup saw a median 8.1% loan growth in the second quarter, jumping from a 0.4% uptick in the comparable 2021 period.

Those with assets of $3 billion to $10 billion had a median NIM of 3.32% in the second quarter, bigger than the year-ago quarter's 3.18%. They saw a median 10.0% loan growth in the past quarter, bouncing from a 1.7% compression in the same period last year.

All-time highs

Englewood Cliffs, N.J.-based ConnectOne Bancorp Inc. posted the widest net interest margin among the 20 largest community banks by total assets, at 3.90%. It was followed by Wilmington, N.C.-based Live Oak Bancshares Inc. at 3.88%, and Newark, Ohio-based Park National Corp. at 3.83%.

ConnectOne Bancorp President and CEO Frank Sorrentino noted during the bank's recent earnings call that much of ConnectOne's loan growth in the past quarter came from non-commercial real estate components, notably commercial and industrial.

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On Live Oak Bancshares' second-quarter earnings call, CEO James Mahan said the company's nationwide government-guaranteed lending platform has led to an all-time high pipeline.

Live Oak CFO William Losch said the company's NIM of 3.89% held up well during the quarter — at the beginning of the Federal Reserve's rate-increase cycle.

"We still expect some compression as the Fed continues to raise rates rapidly and funding costs move more quickly than loan pricing," Losch said.

Tough metrics

While loan growth and NIM were favorable in the second quarter, deposit growth slowed during the period. Overall, community banks had a much lower median deposit growth of 6.6% in the second quarter than in the year-ago quarter at 11.4%.

Those with assets of $3 billion to $10 billion had deposit growth of 6.9% in the most recent quarter, down from 10.5% in the year-ago quarter. Those with assets of less than $3 billion posted deposit growth of 6.6%, less than half of the 14.2% growth rate they had a year earlier.

Return on average assets was likewise tough for community banks in the second quarter, even though profitability was positive based on loan growth and NIM.

The entire sector posted a median return on average assets of 1.11% in the second quarter, down from 1.20% a year ago. Those with assets of $3 billion to $10 billion recorded a 1.15% return on average assets, down from 1.34% in the year-ago quarter.