In the aftermath of the financial crisis, the Federal Home Loan Banks should be entering a calmer period when it comes to earnings, but they haven't quite gotten there yet.
The 12 FHLBs reported combined earnings of $514 million in the second quarter, down 30% from a year ago.
All of the banks are profitable. But only the Pittsburgh and Des Moines banks reported a significant increase in second-quarter income on a year-over-year basis. Earnings at the Cincinnati and Topeka banks were flat year-over-year. The other eight FHLBs posted declines.
Several FHLBs are in the process of repurchasing excess stock, which is a healthy sign. And some FHLBs are paying high dividends again even with a drop in year-over-year income.
The San Francisco bank reported earnings of $39 million for the second quarter, down from $104 million a year ago.
The West Coast FHLB blamed the $65 million decrease in net income on the "impact of a fair value loss associated with derivatives, hedged items and financial instruments carried at fair value" and the expenses of derivative instruments used as economic hedges.
However, the San Francisco bank's board of directors declared a cash dividend with an annualized rate of 7.35%, according to a press release issued Wednesday.
The Boston FHLB reported $31.1 million in net income for the second quarter, down 12% from a year ago. In releasing its earnings Wednesday, the Boston bank noted that it is repurchasing $500 million in excess stock from its members.
Another sign of normalization is net interest income, which totaled $864 million in the second quarter, up $26 million from a year ago. However, the 12 FHLBs reported a $35 million loss in the second quarter when it came to non-interest income, compared to $156 million gain a year ago.
The FHLB System is definitely more profitable now that losses on pre-crisis investments in private-label mortgage-backed securities have diminished. The Boston bank reported a credit-related impairment charge of just $400,000 in the second quarter on its PLS holdings.
The FHLB Office of Finance noted in its press release that the FHLBs booked $21 million in second-quarter gains from litigation settlements. The Federal Housing Finance Agency sued Wall Street firms for selling bad PLS to Fannie Mae, Freddie Mac and the FHLBs.
After all the turmoil over the past few years, one would expect the FHLB earnings would stabilize soon. Earnings at the Indianapolis bank, for example, were like a roller coast last year. The bank posted $39 million in earnings for 1Q 2013, $70 million for 2Q, $29 million for 3Q and $80 million for 4Q.
This year, earnings have leveled out at $34 million in the first quarter and $33 million in the second quarter.
This could reflect a return to normal and that FHLB earnings going forward might be more stable.
The Chicago FHLB posted net income of $94 million for 2Q, down from $149 million a year ago. The Windy City bank attributed the decline to a one-time event last year. In the second quarter of 2013, the bank "recognized a $50 million gain from the reversal of the previous charge relative to its Community First Fund."
The Community First Fund is a revolving loan fund that is funded separately from the Chicago FHLB's traditional grant programs, such as its Affordable Housing Program.
The 12 district FHLBs held $536.6 billion in advances as of June 30, up from $458.5 billion a year ago. Some of the increases in advances are due to borrowings by large banks that are seeking to increase their liquidity to meet new regulatory standards, according to a recent report by the FHFA inspector general. Traditionally, advances are used to fund mortgage finance activities.
The Boston bank noted advances increased by $4.8 billion or 17% during the first half of this year. "This increase of advances during 2014 was concentrated primarily in short-term advances. We cannot predict whether this trend will continue."