What happened

Shares of several bank stocks are falling this week, along with the broader market, concerns over a recession, and investor concerns about compressing bank margins.

For the week, shares of the regional bank Webster Financial (WBS 1.21%) traded nearly 12% lower as of 1:02 p.m. ET Thursday, according to data provided by S&P Global Market Intelligence

Meanwhile, shares of Triumph Financial (TFIN -0.05%), which focuses on the freight industry, and shares of the Houston-based community bank Stellar Bancorp (STEL 0.91%) were both down close to 11%.

Person drawing a red squiggly line downward.

Image source: Getty Images.

So what

Heading into today, the market had fallen for five straight days as investors continue to worry about a looming recession next year or in 2024 -- and just how severe that recession might be.

Recently, the yields on longer-term U.S. Treasury bills have continued to dip below those on shorter-term U.S. Treasury bills, which is considered a flashing warning sign for a recession. Not only is there an inversion, but that inversion is the widest it's been in decades.

Bank stocks tend to be heavily impacted by the economy, whether on a local, regional, or national scale, because they tend to lend to a variety of sectors within their perspective economy. They also tend to not fare so well with an inverted yield curve because most of their business models focus on borrowing short-term money and lending it out long term.

Investors are also starting to grow increasingly concerned about compression on bank net interest margins (NIM), which essentially shows the spread between the yields of a bank's interest-earning assets and interest-bearing liabilities. NIM can be a big indicator of a bank's profitability. While rising interest rates have resulted in higher-yielding loans and securities, bank funding costs remained relatively stable in the third quarter. But that could soon change, because there is a lag in deposit pricing.

Despite the broader concerns, Morgan Stanley analyst Manan Gosalia earlier this week recently named Webster Financial as a midcap bank that he likes due to its resilient funding profile.

Gosalia noted that Webster, among a select few others, can "manage the headwinds from tightening liquidity conditions as rates rise." With the Federal Reserve unwinding its balance sheet, which effectively pulls liquidity out of the economy, and interest rates still rising, the deposit environment could become very competitive.

Webster is well positioned as one of the country's premier banks for health savings accounts, which brings in sticky, low-cost deposits. Earlier this year, Webster completed its acquisition of Sterling Bancorp, making it one of the largest commercial banks in the Northeast.

Now what

It's reasonable for investors to be concerned about compressing bank margins, because after the Fed's four consecutive 0.75-percentage point rate hikes, it's a bit difficult to know just how hard these will impact deposit betas. But many banks have also said that they still think they can continue to benefit from the rising interest rate environment as they exit 2022.

I definitely like Webster due to its strong deposit base. I also like Triumph, which has developed a payments network for the trucking industry that I expect to be a long-term winner.

Stellar Bancorp emerged as a result of the merger between CBTX and Allegiance Bancshares, which created scale for the combined entity, so I'm curious to see how this will play out but also somewhat optimistic.