Regional and Community Banks — Q3 2023 Earnings Season Wrap-up
Earnings Tapestry: Weighing Pressures Against Performance
A Challenging Quarter Unfolds
The third quarter of 2023 has been a litmus test for US regional and community banks. An examination of the earnings season reveals a sector grappling with economic headwinds, evidenced by weaker sequential and year-over-year results. Among a group of 35 banks with assets ranging from $10 billion to $100 billion, a significant portion reported a drop in earnings per share (EPS), with 24 indicating lower EPS compared to the previous quarter and 26 marking year-over-year declines.
Credit Costs and Interest Rate Impacts
As rate hikes persisted, increased charge-offs and constricted net interest margins became commonplace. These factors collectively signposted an extended period of recalibration, with banks caught in the throes of escalating credit costs, impacting their profitability and margin dynamics.
Idiosyncratic Shocks
Not all challenges were systemic — some were idiosyncratic. Larger regional banks encountered specific adversities, with notable examples like First Horizon Corp. suffering from substantial charge-offs due to a syndicated credit to a now-bankrupt wholesale oil distributor. Such individual credit events have underscored the vulnerability of banks to single, impactful risks.
Small Banks, Big Hurdles
The smaller players, those with assets between $10 billion and $25 billion, faced their own set of trials, with marked declines in EPS. These were often attributed to singular issues like severance costs or losses on sales of securities, highlighting a trend toward operational optimization and asset strategy reassessment.
Defying the Downtrend
Despite the prevailing challenges, certain institutions like Hilltop Holdings Inc., First BanCorp, and OFG Bancorp stood out by posting increases in EPS on both a quarter-over-quarter and year-over-year basis. This defiance against the downtrend has been a testament to strategic agility and the potential advantages of regional economic conditions.
Anticipating Q4: The Forecast of Persistence and Precision
Rate Sensitivity and Strategy
Looking ahead, the Federal Reserve’s stance on interest rates is poised to continue as a pivotal driver for banks’ margins and lending frameworks. Whether the trajectory of rate hikes remains steadfast or shifts toward a pause will have substantial implications for banks’ interest income strategies and capital costs.
Credit Quality in the Spotlight
The approaching quarter calls for heightened vigilance on credit quality, with the previous charge-offs serving as a stark reminder of the need for rigorous risk assessment and proactive management, especially in sectors still under economic duress.
The Operational Equilibrium
The delicate balance of operational resilience will be at the fore, where banks will navigate the intricate dance of cost management. The experiences of smaller banks, particularly those involving severance and security sales losses, illustrate the imperative of finding equilibrium between judicious cost reductions and strategic investments in future-facing capabilities.
Asset and Deposit Management
Asset and deposit management will remain a critical focus, with the aim of meticulously managing the asset and deposit mix to safeguard net interest income and margins from the pressures of higher-cost deposit repricing.
Resilience and the Road Ahead
The narrative of Q3 has been one of resilience amidst adversity. The upcoming months are set to be a continuation of this narrative, where the true mettle of these financial institutions will be tested. The industry’s adeptness at negotiating complex currents of interest rates, credit quality, and operational strategy will be defining for their Q4 performance and beyond.
As we stand at the crossroads of an uncertain Q4, the industry’s capability to maintain this ‘sweet balance’ amidst fluctuating economic signals will distinguish the leaders from the laggards. Those who can effectively charter through these headwinds with strategic precision are likely to emerge not only unscathed but positioned for growth in the evolving banking landscape.
