Commerce Tosses a Curve

"I try to avoid financial institutions that have large securities portfolios,'' says Michael Stead, the manager for River Aire Investment, a hedge fund that mainly invests in financial stocks. "It's really an extent of how much of the assets are tied up in securities. And what is the average life of those securities.''

Stead doesn't own shares of Commerce and says he has shied away from the bank because its growth has been heavily tied to its investment strategy.

The flattening yield curve also has a negative impact on a bank's lending operation, because there's less of a spread between a bank's own borrowing costs and the interest rate it can charge borrowers. A small spread diminishes the profit opportunities for a bank.

Until now, the flattening yield curve has been more of a nuisance than a big problem for the nation's banks. In the second quarter, midwestern lender Fifth Third(FITB Quote) was one of the few large banks to report a decline in earnings due to the tricky interest rate environment.

However, Commerce's warning could be harbinger of more bad news to come.