SEATLE -- The financially troubled Federal Home Loan Bank of Seattle reported Tuesday that it shed its red ink in the second quarter, with earnings of $2.5 million for the period, compared to a loss of $15.7 million for the second quarter last year. However, the Seattle Bank, which has struggled with huge losses on its hedging portfolio, said net interest income remains under pressure, with net interest income for the second quarter down 36% to $14 million, compared to the second quarter last year, and by 30% from this year's first quarter. The reduction in net interest income over the past year is because of the Bank's investments in low-yielding consolidated obligations of other Home Loan Banks that were funded with a mix of long-term non-callable debt. The flattening yield curve has caused interest rates on the short-term bullet debt that funded these investments to re-price at a cost higher than the yield of the investments. Because of its financial difficulties, the Seattle Bank entered into a rare supervisory agreement with its regulator, the Federal Housing Finance Board, that entails elimination of its secondary mortgage market program, called Mortgage Purchase Program, and the suspension of all dividends to its 370 members (including 79 credit unions) for three years.
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The Cleveland-based bank is projecting steady growth in net interest income even as credit losses remain manageable. But Chairman and CEO Chris Gorman also said that he thinks a recession is likely.
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The first-quarter increase involved commercial real estate loans, including some problematic multifamily loans and an office credit, but none of the criticized loans were to consumers, officials at the Dallas company say. Further CRE deterioration is anticipated.
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The Detroit-based company is exploring ways to make more consumer auto loans without running afoul of stricter capital standards that are expected from the Federal Reserve. Possible approaches include more securitizations and the use of credit risk transfers.
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The House Financial Services Committee also sent to the full House two bipartisan bills, including one that would prevent large banks from opting out of having to recognize Accumulated Other Comprehensive Income in regulatory capital.
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Charge-offs and nonperforming loans rose at the Georgia bank in the first quarter. But it blamed the problem on one large client and said the matter has been resolved.
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Amid healthy first-quarter loan growth and improving credit quality, Discover Financial Services slashed its profits by $800 million to offset remediation costs from a 16-year period when it overcharged certain merchants.
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