Community banks across the U.S. are seeing pressure on funding, with deposits either declining or growing at a slower rate as the Federal Reserve tightens monetary policy and consumers use some of the excess savings accumulated during the COVID-19 pandemic.

In every region of the country, median trends indicate that while year-end 2022 deposit balances at community banks were higher than year-ago levels, growth slowed considerably from the double-digit rates of 2021. The median deposit growth in each region did not exceed 4%, with the Midwest experiencing the largest uptick at 3.3%, according to an S&P Global Market Intelligence analysis of U.S. public banks with less than $10 billion in assets. Some banks have maintained deposit growth only because they added more higher-cost products, such as certificates of deposits.

Loan growth, on the other hand, accelerated during the same time frame. Each region saw community banks posting a median year-over-year loan growth of at least 13.4%, with the South Central region — consisting of Arkansas, Louisiana, Oklahoma and Texas — recording the largest increase at 15.4%.

Banks are offering higher rates on deposits to defend their funding. Louisiana-based Origin Bancorp Inc. and some other institutions are also offering compensation incentives to their employees to encourage deposit gathering.

At Seattle-based HomeStreet Inc., steps taken to reduce the pressure on the funding base included "significantly" lowering the level of loan originations and introducing promotional price deposit products, Chairman, President and CEO Mark Mason said during an earnings call held Jan. 30. In addition to organic deposit gathering, HomeStreet is acquiring three retail deposit branches in San Bernardino County, Calif., from MUFG Union Bank NA.

Other profitability metrics

Collectively, U.S. public banks under $10 billion in assets posted a higher return on average assets and net interest margin year over year, while efficiency ratios also improved, according to S&P Global Market Intelligence data.

Community banks in the West showed the largest improvements in the three metrics. Their median ROAA, NIM and efficiency ratio for the quarter stood at 1.28%, 4.08% and 50.67%, compared to the year-ago period's 1.17%, 3.36% and 59.89%, respectively.

* Download a template to compare a bank's financials to industry aggregate totals. * Read some of the day's top news and insights from S&P Global Market Intelligence.

California-based TriCo Bancshares, which topped the list of 20 largest U.S. public community banks that reported earnings as of Feb. 3, reported that its 2022 fourth-quarter ROAA rose 14 basis points year over year to 1.46% and NIM went up 85 bps to 4.38%. Its efficiency ratio was at 50.14%, compared to 51.51% in the fourth calendar quarter of 2021.

With regard to the annualized ratio of net charge-offs to average loans for the fourth calendar quarter of 2022, the median in each region remained below 5 basis points, although community banks in the Midwest, Northeast and Southeast saw upticks in this metric on a year-over-year basis.

Among the top 20 largest public community banks in the U.S., New Jersey-based ConnectOne Bancorp Inc. recorded the highest increase in the annualized ratio, as it climbed to 0.22% from 0.01% in the fourth calendar quarter of 2021.

However, CFO William Burns disclosed during an earnings call held Jan. 26 that the charge-offs in the most recent quarter relate to the "successful workout of nonaccrual loans identified in reserve for previous periods and therefore, did not materially impact the provision this quarter and certainly are not any indication of an upward trend in charge-offs."

"All indications at the present time point to solid asset quality metrics," Burns said.