Rising yields can make for a tough lending environment. But regional banks are evolving into something more like their Wall Street peers.

Last week's jump in Treasury yields had investors worried that lending banks would be hit. Even before the sharp move, investors were concerned about the number of banks in second-quarter reports calling out a squeeze between depositors pressing for higher rates alongside a shift by borrowers to lower-yielding loans.

With the yield on 2-year Treasury notes hitting its highest level in over a year, clients will be sorely tempted to move cash out of bank accounts. That worry is especially acute for regional lenders lacking huge Wall Street trading desks.

Those desks have seen, and could continue to see, a surge of activity and fees as markets grapple with rapidly shifting expectations for rates. Last week, shares of Bank of America, Citigroup and JPMorgan Chase gained, while most of the KBW Nasdaq Bank Index's large regional banks declined.

But the Wall Street versus Main Street idea of banking is changing, and shares of regional banks might have positive surprises in store.

Although net interest margins at many banks might tighten, regional banks have been benefiting from some of the same forces lifting the megabanks. Companies of all sizes, for instance, are scrambling to adapt to the artificial-intelligence boom. As a result, the market could be missing Main Street lenders' potential to keep up with their glitzier peers.

Many regional banks have reported increases in their own fees from investment banking and related services. Plus, the largest regionals are already well on the road to adding more Wall Street-type activity to their businesses by acquiring midsize investment banks, for example.

Noninterest income, which includes those banking fees, at regional banks in the KBW index jumped 12% in the second quarter from the first quarter, according to Visible Alpha figures. That was about on par with megabanks' 13% jump.

Overall, noninterest revenue among those regional banks was roughly half of what they generated in net interest income in the second quarter. That ratio was closer to 40% early in 2023.

Still, it is never easy to compete with the largest banks. It can also be a challenge to persuade more budget-conscious, midsize clients to pay for more services. To bolster these efforts, many regionals are also shifting their lending.

They are moving out of some consumer loans that yield a lot but are risky and longer-term, and don't often generate much follow-up business. Instead, they are shifting into less-high-yielding loans to commercial clients. Their hope: capturing other business with them such as raising capital, merger advisory, payments and wealth management.

Stacking fees on the interest income generated by a loan is a way for banks to boost the return earned on the equity needed to back that loan. Regulations often allow banks to reserve less capital for some commercial loans since they are often secured by financial collateral.

In the second quarter, many regionals reported a dynamic of narrowing net interest margins but higher returns. In the second quarter, Charlotte, N.C.-based Truist Financial's net interest margin compressed by 0.04 percentage points from a year prior. But its return on tangible common equity rose to 15.4% from 12.3%. Aiding that was a 72% jump in investment-banking and trading income.

"We are reallocating capital from higher-yielding consumer loans into higher-quality but lower-yielding commercial loans, where we expect to drive attractive relationship returns over time," Michael Maguire, Truist's chief financial officer, told analysts this month.

Many other banks reported similar dynamics. Columbus, Ohio-based Huntington Bancshares Chief Financial Officer Zachary Wasserman told analysts last week, "We might be at the lower end or potentially just a touch below" the bank's outlook on net interest income, but "we're expected to be at the higher end or above on fees."

Cleveland-based KeyCorp Chief Executive Christopher Gorman said recently a "bifurcation" between investment-banking revenue trends at the biggest banks versus middle market focused banks such as Key exists because bigger banks' bigger clients move first. He said Key's pipeline of M&A deals was at a record level.

None of this is to say that regionals are going to become JPMorgan Chase clones. Higher rates could damp capital markets activity. And clients might take their financing but ultimately go elsewhere for other services.

The Wall Street megabanks themselves have been building out their own ability to serve smaller customers. That means more competition. But it also shows that these clients have business worth chasing.

Up to this point, the market hasn't given regionals nearly as much credit for their evolutionary efforts. Price-to-book ratios for banks in part reflect investors' expectations of future returns on equity.

Ratios of many large regional banks trail the levels of such Wall Street banks as Goldman Sachs or Morgan Stanley. Those trade at around 3 times book, and JPMorgan is over 2.5 times book. Those prices imply a lot of good times ahead for the megaclients of the megabanks.

It is far cheaper to bet that clients of midsize banks, often in less-glitzy industries such as construction, will also be among the beneficiaries of the AI boom and need investment-banking services of their own. Regionals such as Truist, Key, Huntington, M&T Bank and Zions Bancorp are all trading below 1.5 times book value.

Trading yield to chase those clients' business is certainly a gamble for Main Street banks. But the payoff could be big. Just look across the street.

Write to Telis Demos at Telis.Demos@wsj.com

(END) Dow Jones Newswires

July 27, 2026 05:30 ET (09:30 GMT)

Copyright (c) 2026 Dow Jones & Company, Inc.