Under Rate Pressure, Commerce Reports Drop in Profits

CEO said the “worst interest rate environment in recent years” challenged the bank.Commerce Bancorp (NYSE: CBH) today became the latest bank to point at the flat Treasury-bond yield curve to explain disappointing financial results. New Jersey’s largest bank announced that its fourth-quarter profit fell 38% as rising short-term interest rates worked to compress the spread between long- and short-term rates, which in turn put the squeeze on lending margins.

The bank said its net income dropped to $46.9 million, or 26 cents per share, from $75.1 million, or 44 cents a share, year-on-year. Although its revenue expanded to $397.5 million, a 6% rise, some Wall Street analysts had projected sales would top $400 million.

“2005, and particularly the fourth quarter of 2005, was both exciting and challenging for Commerce as we continued to dramatically expand the unique Commerce model while challenged by the worst interest rate environment in recent years,” said Commerce CEO Vernon Hill.

In a bid to shield itself from further margin erosion, the Cherry Hill-based bank said it incurred a $17 million charge to convert about $1.5 billion of investments to a floating-rate structure. Commerce shares fell $0.14 to $32.51 in noon trading.

Last week, TD Banknorth (NYSE: BNK) of Portland, Maine, also noted the challenges associated with the flat yield curve, as it announced a pretax charge of $45 million in Q4. The bank also said it sold some $2.6 billion in mortgage-backed securities, and planned to reinvest the proceeds in shorter-term assets in an effort to stem the effects of further interest rate risk. TD Banknorth expects to close its $1.9 billion acquisition of Mahwah-based Hudson United Bancorp this quarter.