M&T Bank (MTB) and Comerica (CMA) are headed in opposite directions when it comes to yield.
Both are lending more, but only M&T is earning more. Why? Comerica has spent 2012 using cash it cannot lend out to buy the type of increasingly low-yielding mortgage bonds that M&T has been getting rid of.
M&T's timely retreat from investment securities helped the Buffalo company boost its net interest margin in the third quarter, while Comerica reported the dramatic margin compression seen at other banking companies such as Commerce Bancshares (CBSH), PNC Financial Services Group (PNC) and Wells Fargo (WFC).
M&T's securities declined 8% to $6.6 billion year over year, and they represent about 10% of earning assets. Comerica's securities rose 20% over the same period to $9.8 billion, and they make up about 17% of the Dallas company's earning assets.
M&T's chief financial officer, Rene Jones, says the $80 billion-asset company's pullback from securities has made it more profitable than its peers.
M&T decided last year to stop investing in securities and instead hold on to mortgages it originates rather than sell them to investors. It also sold off about $2 billion in securities last year to fund the purchase of Wilmington Trust in Delaware.
"We have a smaller book," Jones says. "If we had to replace those … as they run off now, we'd be adding securities at yields at 2.5%."
M&T and Comerica are each growing commercial and industrial and business mortgage loans at a steady clip, but having fewer securities is helping M&T translate those gains into substantially higher profits. Loans deliver a better return on investment because they accrue more interest.
Comerica's total loans of $43.6 billion rose 1% from the prior quarter and 9% from a year earlier. M&T's total loans of $63.5 billion increased 3% from the prior quarter and 9% from a year earlier. Comerica's return on assets of 0.7% declined from 0.9% in the prior quarter. M&T's return on assets rose to 1.5% from 1.2%.
Karen Parkhill, Comerica's vice chairman and chief financial officer, said in a conference call with investors that it would like to wind down its exposure to securities. But doing so will depend on steady, robust loan growth. That is not happening yet.
"Ultimately we do want loan growth, and we want to make sure that we are very positioned for loan growth," she said. "So ultimately that portfolio shrinking is a good sign because it would be a result of loan growth. In the meantime, we are comfortable with our securities portfolio where it sits today. We look at it all the time, taking into account our forecasts for where deposits are going to be going, where loan growth is going to be going."
M&T's margin in the quarter was 3.77%, up 3 basis points from the prior quarter and 9 basis points from a year earlier. Comerica's net interest margin was 2.96%, down 14 basis points from the prior quarter and down 22 basis points from a year earlier.
To be sure, the $63 billion-asset Comerica suffered other blows to its margin besides declining securities yields.
Interest collected from non-accruing loans declined. Total yields on earning assets were also hurt because its new commercial and industrial loans pay less interest than the commercial mortgages on its books that were either paid off entirely or refinanced at lower rates.