Commerce Bancorp. Lower Net Interest Margin

New Jersey based Commerce Bancorp. reported first quarter results this morning. The bank’s earnings met expectations but the stock traded down about 4.0% shortly after the market opened. From a house bubble perspective, one thing sticks out. On a year over year basis, the banks net interest margin declined from 4.39% in last year to 4.04% this year. What this means is that the difference between the average yield of its interest earnings assets and average interest bearing liabilities shrunk. Basically, Commerce’s strategy of borrowing short-term and lending long-term is not working as well as it used to. This is because short-term interest rates have risen, but long term rates have not. The yield-curve has flattened.

The implications for housing are important. If Commerce wants to widen the spread between its interest earning assets (loans and purchased mortgages) and its interest bearing liabilities (mostly deposits) it will have to do one of two things. It will either have to lower the rate it charges on deposits or increase the rate it charges on the loans it makes.

Given that deposits rates (which are at the short end of the curve) are moving higher – Emigrant is offering 3.25% - it seems unlikely that Commerce will be able to lower rates without risking losing depositor money to competitors. Therefore, in order to try to widen the net interest margin, the bank will have to try to raise rates on the loans it makes, including the commercial mortgages it originates and residential mortgages it purchases. As long as the Federal Reserve continues to raise short-term rates, banks, in-general, and over time will be pressured to raise the rates they charge on longer term loans in order to maintain profit margins.