Chicago FHLBFaces Weak '08

The Federal Home Loan Bank of Chicago posted a 50% drop in earnings in 2007 and the troubled bank expects to report a loss in the first quarter.

Earnings fell from $192 million in 2006 to $98 million in 2007 as the bank's $34.6 billion Mortgage Partnership Finance portfolio has become a serious drag on earnings.

"We expect to incur losses beginning in the first quarter of 2008 and that those losses will continue for some period of time," the Chicago FHLBank says in its 10-K filing with the Securities and Exchange Commission.

Net interest income fell 37%, or $155 million, due to several factors including the higher financing costs for the mortgage portfolio. As a business segment, the mortgage portfolio recorded a $29 million loss for the year after posting a $121 million profit in 2006.

The Chicago FHLBank has been operating under a supervisory order since June 2004 when the Federal Housing Finance Board intervened to stop the growth of its mortgage purchase program. In October, the Finance Board issued a consent cease-and-desist order so members of the Chicago bank could not redeem their stock.

As a way out of its problems, the Chicago FHLBank initiated merger talks with the Dallas FHLBank back in August. But after seven months, the Chicago bank said the "banks have not reached an agreement." Although it appears the talks are continuing and there has been "extensive" due diligence. The Dallas bank said it incurred $2.5 million in expenses related to the "potential merger."

Meanwhile, most Federal Home Loan Banks reported higher earnings for the 2007 as demand for advances spiked in the second half due to a liquidity crunch.

Member banks and thrifts increased advance borrowing by $134 billion and almost all of the increase occurred after June as the subprime meltdown roiled the credit markets.

At year-end, the 12 FHLBanks held $875 billion in advances, up 37% from 2006. Even the Chicago FHLBank reported a 15% increase in advances outstanding at the end of last year.

The 12 FHLBanks posted combined earnings of $2.8 billion in 2007, up 8.2% from the previous year.

The 2007 annual report also shows that FHLBanks held $143.5 billon in mortgage-backed securities as of Dec. 31.

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