Main street banking model is being squeezed

Profit at KeyBank parent KeyCorp fell by a third in the latest quarter.  (Bloomberg News)
Profit at KeyBank parent KeyCorp fell by a third in the latest quarter. (Bloomberg News)


First-quarter results at regional banks show the uneven toll of higher interest rates.

Higher-for-longer interest rates are continuing to weigh on Main Street banks.

Regional banks posted steep profit declines in the first quarter and predicted more pain ahead. The results underscore the uneven toll that two years of higher interest rates have taken on regional banks, which tend to have plain-vanilla businesses taking in deposits and making loans. That model has become less profitable because of the pressure to pay up on deposits.

Profit fell by more than a fifth from a year earlier at U.S. Bancorp, Truist Financial and M&T Bank and by around a third or more at Citizens Financial Group, KeyCorp and Huntington Bancshares. At Comerica, profit declined by more than half.

At the biggest banks this quarter, rate pressure began to emerge, but profits were down much less overall.

One bright spot for some regional banks: a rebound in fee businesses such as wealth management, treasury management and investment banking. Noninterest income rose 8% at U.S. Bancorp, 7% at Citizens and 6% at Key. Even select smaller banks enjoyed a boost. At the holding company for First National Bank of Pennsylvania, F.N.B., noninterest income rose 11%.

“The more diversified the revenue this quarter, the better the results," said RBC analyst Gerard Cassidy.

Significant fee businesses are few and far between across the nation’s more than 4,500 regional and community banks. And compared with the giant fee businesses of megabanks such as JPMorgan Chase, those that exist are tiny.

The Federal Reserve recently signaled that stubborn inflation may force it to keep rates at their current high levels for longer than expected, a particular problem for banks without much diversity and scale. In the first quarter, most of the larger regional banks forecast that net interest income, the difference between what they earn on loans and pay out on deposits, would fall for the full year.

Banks are still under scrutiny from regulators, customers and investors after three high-profile failures a year ago. Many have been in pullback mode in anticipation of potentially stricter capital rules. Some regional and community banks also hold high concentrations of commercial real estate, a sector where a decline in valuations has threatened to stick lenders with losses.

Bank shares have risen broadly this week. The KBW Nasdaq Bank Index and the SPDR S&P Regional Banking ETF are each around 3% higher. But many bank stocks have yet to fully recover from a year punctuated by selloffs.

“People are still on nervous footing," Zach Wasserman, chief financial officer at Huntington, said. “But I think now there is a recognition that some firms really weathered that and proved the resilience of their models."

Banks have in recent quarters piled away reserves for losses in commercial real estate books, especially for loans on offices that have emptied since the pandemic. Regulators, bankers and analysts have said those issues would play out over a number of quarters, without risks to the broader financial system.

“I’m sure there will be more surprises," U.S. Bancorp Chief Financial Officer John Stern said, referring to commercial real estate across the industry. “There may be one-off banks here and there, but there won’t be a sector-wide thing."

Commercial real estate losses in the fourth quarter at New York Community Bancorp had sparked a moment of panic earlier this year. But those losses were tied to a uniquely large portfolio of loans for rent-stabilized New York apartments. NYCB, which got a rescue infusion from investors in March, hasn’t said when it will report first-quarter results.

At PNC Financial Services, net charge-offs in commercial real estate rose to more than $50 million in the first quarter from around $10 million a year earlier. The bank expects more stress in that space, especially for office loans.

“The problem you have in office is, in many instances, there is no cash flow at all," PNC Chief Executive Bill Demchak said on a call with analysts. “It is really a unique animal at the moment."

Write to Gina Heeb at

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