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Banks Get Cozy

Not surprisingly, the deal was giving a lift to other regional banks, in particular those in the New York metro area. In early trading, shares of Astoria Financial (AF - Get Report) rose $1.43, or 5%, to $30.75. New Jersey-based Commerce Bancorp (CBH) rose 48 cents, or 1.4%, to $35.25. New York Community Bancorp (NYB) was up 30 cents, or 1.8%, to $17.25.

The Merrill Lynch Regional Bank Holdrs (RKH), an exchange-traded fund that tracks the performance of about two dozen bank stocks, including some oft-mentioned acquisition targets, rose half a percentage point.

The paucity of deals in the banking sector has baffled analysts and investors, especially since the cooling off in the housing market has made it more difficult for regional banks to generate outsized profits.

Thrifts and regional banks have been particularly hard hit by the so-called inversion of the yield curve, which is likely to haunt the bond market this year.The curve inversion is the unusual phenomenon in which the yield on short-term Treasury notes is higher than the yield on longer-term government bonds.

A flat or inverted yield curve makes it particularly difficult for banks, which generate much of their profits by investing customer deposits into interest-bearing securities, such as mortgage-backed bonds. The flattening yield curve has all but wiped out the ability of banks to borrow on the cheap and reinvest the money in longer-term mortgage-backed securities.

North Fork has not been immune to the effects of the narrowing of this spread. In the fourth quarter of 2005 the bank reported a 5% decline in earnings and fell short of analyst estimates by 4 cents. The bank also took a $5 million charge, stemming from a restructuring of its balance sheet in light of the tricky interest rate environment.

In buying North Fork, Capital One will inherit some of the bank's interest rate woes.

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