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North Fork -- a Sign of Things to Come?

The bank lowers guidance, saying low interest rates are hurting its lending margin.

On the eve of what's widely expected to be the

Federal Reserve's

13th-straight interest rate cut,

North Fork Bank


warned that its lending margin is being squeezed and that second-quarter earnings will fall short of expectations.

The Long Island, N.Y.-based regional bank warned Tuesday after the close of trading that it would earn between 60 cents and 62 cents a share in the second quarter. The Thomson First Call consensus estimate had called for the bank to earn 67 cents a share.

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North Fork said low interest rates in the second quarter made lending less profitable, as the interest it charged customers started to close in on what the bank itself pays for money.

Gary Townsend, a regional bank analyst with Friedman Billings Ramsey, said it appears that North Fork experienced more margin compression than he was expecting in the quarter.

Low interest rates also may be taking a bite out of the value of the bank's investments, which mostly are in U.S. Treasuries and mortgage-backed securities. And because of that, North Folk said it is taking steps to restructure its investment portfolio, a move that would result in an $11 million charge in the second quarter.

"The weak economic environment and

Fed actions over the past three years have resulted in historically low interest rates," the bank said in a press release. "Although this trend was initially positive, the sustained nature of low interest rates has and will continue to compress net interest margins for the banking industry."

In restructuring its investment holdings, the bank said it's trying to position itself for what it sees as an eventual return to rising interest rates, while reducing its current borrowing costs.

The bank said that if it doesn't sell some of its mortgage-backed securities, it could face losses in the portfolio if long-term interest rates begin to rise.

The bank plans to sell up to $3 billion in investments and use some of the proceeds to pay down its short-term debt. It's also restructuring $1 billion in longer-term debt. The bank contends that by reducing its borrowing costs, it would boost its net margin interest going forward, because its lending operation would become more profitable.