Median loan growth for banks below $10 billion in assets continued to slow in the first quarter.

During the period, the sequential loan growth rate fell to 1.3%, from 3.0% in the previous quarter and 3.4% in the third quarter of 2022, for total gross loans and leases at US community banks, according to S&P Global Market Intelligence data. Growth slowed across all segment types.

The 1.4% sequential increase in the one- to four-family loans segment was down from a 3.0% sequential increase in the prior quarter, while the sequential growth rate in the commercial real estate (CRE) segment fell to 1.0% from 2.0% and the commercial and industrial (C&I) segment fell to 0.8% from 1.7% over the same period. The sequential change on consumer lending turned negative in the first quarter as it dropped 0.1% after remaining flat quarter over quarter in the previous period.

Southeast leads with the highest loan growth

The decline in the consumer loan category was highest in the Northeast, falling by 1.2% from the 2022 fourth quarter. Despite this drag, community banks in the region posted a 1.4% sequential increase in gross loans, due to a 1.5% quarterly increase in the CRE and multifamily segment.

Overall, the Southeast posted the highest sequential loan growth at 2.2%, buoyed by a 2.2% quarterly growth in its one- to four-family loans segment — the highest growth in this category across the different regions.

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Banks tighten lending standards in a complicated environment

More banks tightened their lending standards and reported weaker demands across several loan categories, per the Federal Reserve's Senior Loan Officer Opinion Survey (SLOOS) on Bank Lending Practices released May 8.

About 46% of domestic banks surveyed by the Fed reported tightening lending standards for C&I loans to large and middle-market firms, the highest since 71.2% in the second quarter of 2020. Demand for C&I loans fell 55.6% during the quarter. Further, 73.8% of domestic banks reported tightening lending standards for CRE and construction and land development loans, almost reaching levels last seen in the second quarter of 2020.

The survey data also revealed the tightest lending environment and weakest demand for nonfarm nonresidential and multifamily loan categories since the COVID-19 pandemic-era lows.

Survey respondents attributed the tightening to a "cloudy" economic outlook, reduced risk tolerance, deterioration in collateral values and concerns about liquidity positions, the report said.

Consumer lending declines across the board

The decline in consumer lending was highest in banks with more than $10 billion in assets at 1.7%.

Banks with assets between $3 billion and $10 billion posted a 0.7% decline in consumer loans, and those with assets between $100 million and $3 billion registered a 0.1% decline.

As per the Fed's April SLOOS, a significant net share of banks reported weaker demand for auto, while a moderate share of banks recorded shrinking demand for "other" consumer loans.

Sequential loan growth in the CRE and closed-end 1st lien one- to four-family loans segment were the highest for banks in the $3 billion to $10 billion asset category, at 1.5% and 1.8%, respectively.

Banks in the $100 million to $3 billion asset category posted a 0.8% quarterly increase in C&I loans. Smaller banks with less than $100 million in assets posted growth only in the C&I category, with the largest decline of 1.2% in the CRE loans segment.

ConnectOne Bank maintains lead in gross loan balance

Of the 20 largest US community banks, 15 posted increases in quarterly and yearly gross loans. Four banks logged declines in gross loans on a quarterly basis while posting growth compared to the same period a year ago.

Englewood Cliffs, NJ-based ConnectOne Bank had the highest loan balance in the group for the third consecutive quarter, with an increase of 0.4% quarter over quarter to $8.15 billion in gross loans and leases.

At 4.2%, the highest sequential loan growth was registered by Texas-based Woodforest National Bank, which recorded $6.45 billion in gross loans.

Fort Lee, NJ-based Cross River Bank was the only bank that reported both quarterly and yearly declines in the gross loan balance.

Subdued loan growth on the horizon

Respondents in the Fed's SLOOS disclosed their intentions to tighten lending standards across all categories for the rest of the year, irrespective of the economic situation.

"Tight historical correlations suggest slowing/declining loan growth and higher loss rates ahead only beginning to show in [first-quarter] results," Jefferies analysts wrote in a May 8 note.

Further, midsize banks that expect lower loan growth remain concerned about funding costs, deposit outflows and liquidity positions.

"During the first quarter, we significantly reduced our level of loan originations and continue to offer very competitive promotional price deposits, which allowed us to attract and retain deposits without immediately repricing our existing interest-bearing deposit base," said Mark Mason, president and CEO of HomeStreet Inc. during the first-quarter earnings call. "We are anticipating only a modest increase in our loan portfolio in 2023."