U.S. Mid- and Small-Cap Banks 3Q26 Earnings Preview With Additional Fed Rate Hikes Likely, We Are Even More Cautious; Upgrade FRBT to OW & FHB to Neutral

Heading into 3Q26 earnings season for regional banks, we expect fundamental trends for the quarter to be highlighted by (1) loan and deposit growth each in the mid-single-digit annualized range, (2) NIMs to increase a couple bps q/q on average, and (3) credit trends remaining stable overall. While we are not surprised by the recent underperformance in regional banks with the sector (as measured by the KRX) declining by about 10% from its recent high and compares with just a 2% drop in the SPX, we continue to take a much more cautious approach on the sector. This is tied to our view that deposit cost competition will at a minimum remain at already elevated levels as (1) loan growth trends remain solid per recent management commentary with little to suggest a slowdown in 2H26 (despite the recent surge in rates) while (2) the forward curve calls for a few more rate hikes by mid-2027. Quantifying our cautiousness, on a scale of 1-10 with 10 being max bullish, we are about a 3 at this stage