The horsepower behind long-term bank profits is the institution's core earnings. That is most easily represented by a bank's net interest margin -- the spread between the interest it makes on loans and the interest it pays out to depositors.
Let's take a moment to compare and contrast this figure for three prominent U.S. regional banks: Huntington Bancshares (HBAN 0.46%), M&T Bank (MTB +0.97%), and Comerica (CMA +0.00%). These three insitutions are comparably sized between $60 and $90 billion in total assets, and each generates at least 60% of revenue from interest on loans.
We'll use the latest filings from each bank's regulatory call reports to break down the numbers into plenty of detail. We'll also use the FDIC's definition of net interest margin, which is the bank's total interest income minus total interest expense (annualized) as a percentage of average earning assets for the given period.
Huntington Bancshares
Huntington reported a net interest margin of 3.28% for the first quarter. The loan portfolio produced a yield of 3.51% and the bank's cost of funding was 0.22%.
Huntington Bancshares net interest margin trend. Source: BankRegData.com.
The rapid decline in Huntington's net interest margin since the third quarter of last year has been driven by a sharp reduction in yield in the loan portfolio. While the cost of funds has remained essentially constant, the yield on loans has decreased from 3.75% to today's 3.51%. As a result, total interest income is declining even as the loan portfolio grows by $500 million to $1 billion per quarter.
Huntington has four main portfolios that drive core earnings, combining mortgage-backed securities into the 1-4 Family Real Estate category. Yields for each of those portfolios are broken down in the table below.
Note: "Commercial & Industrial" refers to non-real estate business loans.
| Loan Category | % of Total Interest Income | Yield |
| 1-4 Family Residential | 28.7% | 3.90% |
| Mortgage-Backed Securities | 9.5% | 2.36% |
| All Other Real Estate | 15.5% | 3.68% |
| Commercial & Industrial | 22.2% | 3.48% |
| Auto & Other Individual | 16% | 4.22% |
Nonsignificant portfolios omitted. Percents do not add to 100%.
M&T Bank
M&T Bank sported a higher net interest margin at 3.59% for the quarter. M&T's margin was driven primarily by a higher yield on loans of 3.85%. Cost of funds was slightly higher at 0.26%. The bank's margins are also far more stable than Huntington's.
M&T Bank's net interest margin over time. Source: BankRegData.com.
M&T's yields were driven by heavy concentrations in the same categories as Huntington, but the relative importance of each varied significantly.
| Loan Category | % of Total Interest Income | Yield |
| 1-4 Family Residential | 20.8% | 4.02% |
| Mortgage-Backed Securities | 9.1% | 3.03% |
| All Other Real Estate | 39.5% | 4.38% |
| Commercial & Industrial | 17.3% | 3.25% |
| Auto & Other Individual | 7.1% | 5.27% |
Non significant portfolios omitted. Percents do not add to 100%.
Comerica
Comerica reported a comparatively weak net interest margin of 2.77% as of the first quarter. The yield on the bank's loan portfolio was 2.92%, minus yield on the bank's funding of 0.15%.
Comerica's net interest margin over time. Source: BankRegData.com.
The bank lacks a significant "Auto & Other" Individual portfolio, instead relying heavily on business lending.
| Loan Category | % of Total Interest Income | Yield |
| 1-4 Family Residential | 7.4% | 3.76% |
| Mortgage-Backed Securities | 12.4% | 2.40% |
| All Other Real Estate | 23.1% | 3.89% |
| Commercial & Industrial | 45.8% | 3.05% |
Non significant portfolios omitted. Percents do not add to 100%.
Foolish takeaway
Here's how the comparison breaks down, side by side:
M&T sports the best net interest margins among the three, followed by Huntington. The low yields in Comerica's portfolio prevent it from significantly competing either of the other banks.
If you went back just a few quarters, M&T and Huntington would have looked far more comparable. However, the volatility in Huntington's loan portfolio has created the gap we observe today.
Interest rates will rise in the future -- the question is not if, it's when. When that shift occurs, net interest margins should expand at most banks. Between these three, M&T is best positioned to take advantage of that change. Comerica has the most to gain, as it can reprice its loan portfolio over time to better take advantage of its remarkably low cost of funds. That is particularly so given the bank's reliance on business lending, which has been one of the most competitive lending markets over the past several years.
The volatility at Huntington is concerning, especially in light of the bank's well balanced loan portfolio across real estate, business, and consumer lending. Until that trend in the loan portfolio reverses, core earnings will follow the same volatile course.
