Banking Sector Surge: Evaluating the Sustainability and Risks Behind Recent Share Price Strength

Despite mixed signals across broader markets, PennyMac Mortgage Investment Trust (PMT), Commerce Bancshares, and Bank of Hawaii have recently drawn investor attention with notable share price strength. Surface-level performance suggests underlying momentum worth examining.

PennyMac Mortgage Investment Trust reported a strong Q3 2025, posting net income of $47.8 million or $0.55 per share. The firm achieved a robust 14% annualized return on common equity while raising its dividend to $0.40 per share. Book value per share climbed to $15.16, underpinned by $4.6 billion in quarterly loan acquisitions and $195 million in gains from selling GSE credit risk transfer investments. Management credited aggressive loan growth, effective interest rate hedging, and substantial non-Agency securitizations for the results according to the company's Q3 2025 results. Commerce Bancshares delivered a beat in Q2 2025, reporting $84.4 million in revenue, slightly exceeding forecasts. The bank's stock surged pre-market following the release, with leadership attributing the positive reaction partly to momentum from an AI-driven rebranding initiative. Meanwhile, Bank of Hawaii demonstrated significant earnings acceleration, reporting $1.20 per share in Q3 2025 – a 29% increase compared to the prior year and a 13% jump quarter-over-quarter. Earnings growth stemmed from a 7 basis point expansion in net interest margin to 2.46% and disciplined cost control, resulting in a 13.6% return on equity according to the earnings call.

This initial performance snapshot highlights differing growth drivers: PMT's balance sheet expansion and asset sales, Commerce's strategic repositioning, and BOH's margin and efficiency gains. While each company presents compelling surface narratives, deeper scrutiny of the sustainability and underlying risks of these drivers remains warranted before drawing investment conclusions.

The market is celebrating strong earnings from PennyMac Mortgage Investment Trust and SouthState Corp, but this surface-level optimism overlooks critical vulnerabilities hidden beneath the numbers. Both companies report impressive returns and growth, yet their performance relies heavily on non-recurring gains and assumptions that could unravel if interest rates move against them. PennyMac's Q3 results show a 14% annualized return on equity and a 13% quarterly increase in loan acquisitions, but $195 million of its book value growth came from selling GSE CRT investments-a one-time windfall that won't recur. Meanwhile, SouthState's 30% earnings surge and 6.48% loan yields depend on an expectation of three 2025 rate cuts and a 27-30% deposit beta, yet the FDIC has explicitly warned banks against relying on generic rate assumptions given today's complex liquidity environment. This disconnect between reported performance and underlying risk is dangerous.

SouthState's Texas and Colorado loan expansion faces a poison pill: a 27-basis-point charge-off from a commercial credit issue and $5 million in provisions according to the Q3 earnings report. These losses are small in absolute terms but signal credit quality deterioration-especially as the bank's 380-390 basis point net interest margin assumes stable rates. If the Federal Reserve delays cuts or hikes instead, deposit costs could rise faster than loan yields, crushing margins. PennyMac's hedging and non-Agency securitizations ($1.5 billion in outstanding principal) provide short-term insulation, but their effectiveness hinges on prepayment speeds and interest rate volatility-variables the FDIC says banks routinely misjudge.

The real risk lies in complacency. PennyMac's CEO talks of "outstanding growth" and capital reinvestment, but book value expansion from CRT sales isn't sustainable cash flow. SouthState's 20% return on tangible equity looks stellar until you factor in regulatory capital strains and regional credit exposures. For both, the FDIC's red flags around interest rate risk and outdated beta assumptions demand urgent recalibration. Until they do, investors should treat these earnings reports as fragile constructs-propped up today, but vulnerable to rising rates, credit shocks, and regulatory scrutiny.

Lenders face mounting regulatory headwinds that directly threaten profitability and operational stability. Fannie Mae's August 2025 cybersecurity and business resiliency requirements impose significant new burdens, demanding lenders establish formal Information Security (InfoSec) programs aligned with NIST standards, report any cyber incidents within 36 hours, and implement dual recovery plans for critical operations. This represents a substantial compliance cost and operational friction, diverting resources from core lending activities. Adding to the complexity is the Homebuyers Privacy Protection Act (HPPA), set to take effect in March 2026. HPPA restricts lenders' ability to share credit reports for unsolicited mortgage marketing, creating ambiguity as implementation may vary across states, forcing lenders to navigate a patchwork of requirements. Looking beyond Fannie Mae and HPPA, the Consumer Financial Protection Bureau (CFPB) has signaled 2025 rulemaking on loan originator compensation, servicing standards, and consumer data rights, introducing further uncertainty that makes long-term planning and budgeting difficult. Meanwhile, ongoing mortgage litigation surrounding appraisal bias and broader compliance gaps highlights the persistent legal exposure lenders face, where even minor regulatory missteps can trigger costly lawsuits and reputational damage. These combined pressures – the immediate costs of new cybersecurity mandates, the looming restriction on marketing capabilities under HPPA, the unpredictable nature of CFPB agenda items, and the ever-present threat of litigation – create a complex compliance environment that strains balance sheets and diverts capital from revenue-generating activities.

Bank of Hawaii's impressive third-quarter results show a well-run regional bank capitalizing on its dominant market position. EPS jumped 29% year-over-year and 13% quarter-over-quarter, driven by a healthier net interest margin expanding to 2.46% and disciplined cost control, pushing return on equity to 13.6%. Deposits grew at a solid 7% annualized pace, and management sees potential for more NIM expansion, modest loan growth, and even share buybacks. This strength is underscored by a significant 40 basis point gain in Hawaii deposit market share, reinforcing its leading brand and perceived stability. However, a purely positive view ignores mounting headwinds. The Federal Deposit Insurance Corporation (FDIC) is demanding sharper focus on interest rate risk (IRR) modeling, warning that banks cannot rely on generic assumptions for deposit betas or prepayment speeds, especially in a rising rate environment. This is critical for BOH: if its NIM expansion stalls or reverses due to misjudged deposit sensitivity, the earnings growth could quickly fade. Furthermore, while peer SouthState Corp. expects three rate cuts this year, translating to a 27-30% deposit beta, BOH's own sensitivity remains a key uncertainty in the current higher-rate landscape. Simultaneously, BOH faces escalating compliance burdens. Fannie Mae's August 2025 cybersecurity mandate requires robust InfoSec programs and rapid incident reporting, while the Homebuyers Privacy Protection Act (HPPA), kicking in next March, imposes strict limits on credit report sharing for unsolicited marketing, adding complexity and cost. Navigating these regulatory shifts demands significant resources and operational vigilance. Consequently, our Risk Defense stance – prioritizing downside protection, cash flow reality, and strict compliance – means we are watching these specific triggers: any sign that BOH's deposit betas are mispriced in rising rates (per FDIC warnings), a failure to meet expectations for NIM sustainment or modest loan growth, and any indication of lagging compliance readiness for Fannie Mae's rules and HPPA. These are the thresholds where the current price strength could begin to unravel.