WASHINGTON — Sluggish demand from community banks, credit unions and other members helped push advances by the Federal Home Loan Bank System even lower last year.
Total advances by the 12 banks fell 24%, to $478.6 billion, the system's Office of Finance said Wednesday. After peaking during the financial crisis, advances have declined to their lowest levels in 10 years as members continue to hold high levels of deposits and tap alternative funding sources.
Some observers said the decline remains a cause of concern.
"Advances are the Home Loan banks' key line of business," said Karen Shaw Petrou, managing partner at Federal Financial Analytics Inc. "When business is down, strategic pressure follows."
The Federal Home Loan Bank of Dallas and the Federal Home Loan Bank of Seattle suffered the steepest dropoffs; Dallas' advances fell 46%, to $25.5 billion, and Seattle's were off 40%, to $13.4 billion. Significant declines went across the board.
Advances by the San Francisco and Pittsburgh banks fell 28% each, to $95.6 billion and $29.7 billion, respectively; the Boston bank's advances dropped 25%, to $28 billion. System representatives said the declines were nothing to be concerned about.
"Increased amounts of liquidity among members and slow economic growth overall result in less use of advances," John von Seggern, the president and CEO of the Council of Federal Home Loan Banks, said in a press release. "The expansion and contraction of advances is a hallmark of the Federal Home Loan banks' ability to help institutions of all sizes use a variety of funding sources to compete and provide financial services to customers."
But Shaw Petrou disagreed.
"Business is down, and it's going to go down even further," she said. "Not only has it not bottomed out for, first, current market reasons, but, second, because an array of policy issues, such as punitive FDIC pricing for relying on Home Loan bank advances, have yet to be fully implemented."
The news was not all bad for the Home Loan banks. The Office of Finance noted a 16% increase in investments that helped partially offset the decline in advances. Fewer other-than-temporary impairment losses in the fourth quarter also helped boost net income, which rose 26%, to $698 million, from a year earlier.
But much as in the banking industry at large, which saw revenue growth stagnate and loan balances fall during the fourth quarter (see related story), the significant decline in advances cast doubt on the system's long-term earnings potential.
The decline in advances, for example, took a toll on net interest income, which fell to $988 million in the fourth quarter, from $1.4 billion a year earlier. For the full year, net interest income fell more than 50%, to $4.6 billion.
"The decrease in interest income was primarily the result of declines in advances, runoff of advances, runoff of higher-yielding investments and mortgage loans and lower yields on interest-earning assets in the current low-interest-rate environment," the Office of Finance said.
The banks also reported continued losses in 2010 on other-than-temporary impairment charges, though fewer than a year earlier.
In the quarter, the 12 banks reported aggregate losses of $165 million in OTTI charges, an improvement from the $436 million loss from such charges a year earlier. The Office of Finance said such losses were due to continued deterioration in the credit performance of loan collateral underlying certain private-label, mortgage-backed securities.
