Tuesday, December 13, 2005

Commerce Bancorp Cut Earnings Guidance Last Week

While I was away on vacation, New Jersey based Commerce Bancorp. cut there earnings guidance. The reduction in earnings at the bank is due to the continuing flatness of the yield curve. The implications of a flat yield curve for real estate are negative. Eventually, if banks hope to improve their margins, they will have to increase lending interest rates on longer term loans, which are mostly mortgages. As mortgage rates rise, so do monthly payments rise unless the price of the house trends down.


“Commerce is repositioning its balance sheet by selling $1.5 billion in fixed-rate securities with a yield of 4.6% and replacing them with higher yielding securities that carry a yield of 5.2%. In selling the low-yielding bonds -- most likely mortgage-backed securities -- Commerce will take an after-tax loss or $18 million.

The bank's earnings are falling short of expectations, in part, due to the continuing flattening of the yield curve, or the spread between short- and long-term interest rates. The narrowing spread is making it more difficult for banks to make money from the lending and deposit operations.

"The continued flattening of the yield curve over an extended period of time has produced an interest rate environment unlike that seen in many years,'' the company said in the filing. "The convergence of short-term rates and longer-term rates has reduced the company's net interest margin.''

The bank expects its net interest margin in the fourth quarter to range between 3.50% to 3.55%, down from 3.67% in the previous quarter.

Net interest margin is a measure of the profitability of a bank's lending and deposit operation.


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