WASHINGTON — The heyday for Home Loan bank advances may be coming to an end.
While first-quarter earnings increased at eight of the 12 Federal Home Loan banks, the rate of growth for advances slowed to just 4.3%.
The Federal Home Loan Bank of San Francisco provides a good example.
While it continued to outpace its peers — net income grew 69% during the quarter, to $240 million — the San Francisco bank said three large members reduced their borrowings. The bank's overall advances fell 1%, to $248.4 billion.
The advance business has been booming since the credit crunch hit in August and many financial institutions turned to the Home Loan banks as sources of quick, cheap liquidity. The system's advance business grew 36.6% in 2007.
In interviews and in quarterly reports released this month, some of the banks cited the slowdown as a sign that the credit crunch is easing.
"It appears to be stabilizing," said Dave Fisher, the chief operating officer at the Federal Home Loan Bank of Topeka, whose advances dropped 4.8% during the quarter, to $30.5 billion. "We're seeing advances … plateauing a bit."
But during the first quarter, three banks' advances declined and five others had single-digit growth. Advance growth remained robust at the Cincinnati, Dallas, Des Moines, and Indianapolis banks.
The Federal Home Loan Bank of Atlanta said advances rose 6.5%, to $152.1 billion, during the three months that ended March 31, and in its quarterly report it said, "If credit market disruptions continue to settle, the bank does not expect that new advance activity will continue to increase at the 2007 rate."
Richard Dorfman, the Atlanta bank's chief executive, insisted in an interview that advances remain more attractive than other potential sources of liquidity.
"Price for value, this is a great deal," he said. "What you're buying is certainty of availability" of funds.
Though advance volumes may level off, Jim Vogel, the head of fixed-income research at First Horizon National Corp.'s FTN Financial Markets Corp., said demand among larger members will remain strong.
"We see the large banks still in sort of a scramble mode," he said. "They are not in a rebalancing mode just yet."
That seemed to be playing out at the Federal Home Loan Bank of Dallas, where Wachovia Corp. increased its borrowings by 23.2% from yearend, to $21.3 billion.
Overall the Home Loan banks' net income grew to $697 million in the quarter, and assets grew 4%, to $1.32 trillion. Total capital rose 4.2% from yearend, to $55.9 billion.
As expected, the Chicago bank showed significant weaknesses as it trudged forward as an independent institution. It attempted to merge with the Dallas Home Loan bank, but last month both parties walked away from negotiations. The Chicago bank said then that it would report a $78 million loss for the first quarter, and end purchases under its troubled Mortgage Partnership Finance program after July 31. The Chicago bank offered more details on the extent of its problems in its quarterly report.
"The size of our MPF assets is disproportionate relative to our overall balance sheet," the bank said in its filing. "Also, the process of funding 15- to 30-year fixed assets with voluntary capital stock and shorter-term consolidated obligations, in combination with hedging strategies, proved to be challenging and, ultimately expensive, especially from a risk management standpoint."
The MPF portfolio, which was $34.5 billion on March 31, is expected to decline roughly 7% to 9% during the year, according to the quarterly report.
Still, there were positive signs emerging from Chicago. The Home Loan bank said nearly 75% of its 831 members borrowed advances during the quarter, sending the business up 8.1% from yearend, to $32.7 billion.
The Federal Home Loan Bank of Cincinnati, typically one of the stronger banks, reported earnings fell 23.1% during the quarter, to $49.3 million, on a debt restructuring charge.
As interest rates declined in recent months, the Cincinnati bank elected to refinance $7 billion of debt into bonds with a lower rate, which resulted in a one-time cost of $7 million.
Advances were up 15.8% from yearend, to $61.7 billion. National City Corp., which has struggled to find liquidity in recent months, became the Cincinnati bank's second-largest borrower, with advances totaling $6.4 billion, up 36% from yearend.
Earnings at the Topeka bank fell 28% during the first quarter, to $23.6 million, but Mr. Fisher attributed that to accounting rules governing its derivative portfolio.
"I'd characterize it as more of an accounting issue than a true economic value issue," he said, noting that net interest income rose 10% in the quarter.
