SEATTLE - (07/26/06) -- The financially ailing Federal HomeLoan Bank of Seattle reported Tuesday that it shed its red ink inthe second quarter, with earnings of $2.5 million for the period,compared to a loss of $15.7 million for the second quarter lastyear. However, the Seattle Bank, which has struggled with hugelosses on its hedging portfolio, said net interest income remainsunder pressure, with net interest income for the second quarterdown 36% to $14 million, compared to the second quarter last year,and by 30% from this year's first quarter. The reduction in netinterest income over the past year was caused by the Bank'sinvestments in low-yielding consolidated obligations of other HomeLoan Banks that were funded with a mix of long-term non-callabledebt. The flattening yield curve caused interest rates on theshort-term bullet debt that funded these investments to re-price ata cost higher than the yield on the investments. Because of itsfinancial difficulties, the Seattle Bank entered into a raresupervisory agreement last year with its regulator, the FederalHousing Finance Board, which entails elimination of its secondarymortgage market program, called Mortgage Purchase Program, and thesuspension of all dividends to its 370 members (including 79 creditunions) 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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