Regional Bank Earnings Follow the Big Banks’ Lead

Regional banks are following the same earnings reporting pattern as major banks earlier this week: Largely meeting top and bottom-line Wall Street expectations, but with weakness in capital markets and trading that is weighing on earnings slightly.

Management teams so far do not expect that weakness to last through the rest of the fiscal year, but it is the one area of earnings reports where performance has clearly softened. This earnings season is also a little different for the regionals. PNC Financial Services (PNC), U.S. Bancorp (USB) and First Horizon Corporation (FHN), which all reported this morning, are each in the middle of integrating acquisitions or selling off parts of their businesses, so the reported numbers carry more one-time noise than usual.

Rates and Net Interest Margins: A Tailwind for Regional Banks

Higher interest rates have been a near-term tailwind for regional bank portfolios. Funding costs remain relatively low and regional banks are able to lend at higher rates, and that combination is widening margins. Net interest income has, for the most part, improved across the group. Capital markets, however, are starting to show cracks, or at the very least a clear slowdown. So far, the regional banks have not revealed any new problems that the larger banks had not already flagged.

PNC Earnings: NIM Up, Credit Quality Stable

PNC Financial Services is one example of the trend. The bank reported third-quarter adjusted earnings of $5.09 per share, ahead of the $4.92 analysts expected, while revenue of $6.56 billion came in just short of the $6.61 billion consensus. Net interest income rose 15% year over year to $4.21 billion, driven by strong new loan production and higher utilization of commercial credit lines. Non-interest income declined, mainly because of weaker capital markets and advisory revenue, which was enough to push total revenue lower from the prior quarter. Expenses helped make up the difference, as non-interest expense fell on lower compensation and continued cost discipline. Results included $36 million in integration costs tied to the FirstBank acquisition and a $25 million negative item related to Visa (V), which together reduced earnings by 12 cents per share.

US Bancorp Earnings: Revenue, NIM Rising

U.S. Bancorp offered a similarly confident outlook. The bank expects full-year total net revenue to rise 8% to 9%, with fourth-quarter net interest income up 6% to 7% and fourth-quarter fee revenue up 13% to 14%. Its BTIG acquisition is expected to add roughly $200 million in quarterly net revenue. Over the medium term, U.S. Bancorp sees mid-single-digit fee growth and is targeting a return on average assets (ROAA) of 1.15% to 1.35%. Management also addressed two areas investors have been watching. Exposure to business development companies is limited to about 1.9% of the bank’s total non-depository financial institution portfolio, and management said capital demands the bank experienced in the third quarter are not expected to recur.

As more regional banks report, there are a few areas investors can watch. Wednesday’s hot September CPI print increased the odds of another Fed hike by December. Higher rates help loan yields, but investors need to see whether deposit costs start rising faster than what banks earn on loans. Higher commercial credit line utilization also deserves a closer look, since it could reflect businesses expanding or companies borrowing to absorb rising fuel, freight and input costs. Provisions and charge-offs in transportation, logistics, agriculture, and other diesel-dependent sectors could give early warning of stress, as could consumer credit as gasoline prices continue to climb. Commercial real estate, particularly office, remains a longer-running concern.

The reported results so far show stronger net interest income and improved margins, though credit trends and funding costs remain key areas to monitor.

The risk is that the same energy-driven inflation pushing rates higher eventually begins to weaken borrowers heading into 2027. Margins are improving, but the question for the rest of this earnings season is whether any early signs of credit stress start to show up alongside those gains.

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