More Bad News From FHLB System

Atlanta, Pittsburgh districts report losses attributed to accounting for derivatives

October 9, 2003

By PATRICK CROWLEY

The loss in Pittsburgh for the quarter ending Sept. 30 will be approximately $6.5 million, Pittsburgh FHLB President and CEO James D. Roy said in a letter to shareholders.

That compares to earnings of $3 million in the second quarter and net income of $19 million for the third quarter of last year.

The Atlanta FHLB loss is expected to come in at about $9 million, president and CEO Raymond B. Christman said in a letter to his shareholders. That compares to net income of $54 million in the second quarter and $94 million for the third quarter of 2002.

The bad earnings news follows revelations last week that the New York FHLB lost $190 million on investments that included a loss on bonds collateralized by manufactured housing receivables.

The FHLB bank system and individual banks acted quickly to squelch any speculation that the system may be in financial trouble.

“Notwithstanding these losses and the previously announced investment portfolio losses of the (FHLB) of New York, the (FHLB) Office of Finance expects that the 12 Federal Home Loan Banks will report positive combined net income for” the quarter, the FHLB Office of Finance said in a statement.

The Pittsburgh and Atlanta bank executives said the losses can largely be attributed to the Financial Accounting Standard Board’s rules, known as SFAS 133 and FAS 113, that dictate how derivatives are booked.

Christman told shareholders that while the Atlanta FHLB lost $9.1 million in the quarter “core economic income for the period was $42.6 million.”

“The difference is almost entirely due to the mark-to-market adjustments required by SFAS 133 with respect to the bank’s interest rate derivatives portfolio,” he said.

Christman said the bank uses “interest rate derivatives as an important tool to mitigate negative long run financial implications of potential interest rate movements and also to achieve reduced funding costs that result in lower advance rates.”

The loss “will have no effect on the bank’s core operating condition” or dividend, Christman said.

“All negative or positive SFAS 133 income adjustments caused by interest rate fluctuations will be offset fully as individual derivative contracts mature,” he said. “The bank’s core economic performance remains sound.”

In Pittsburgh, Roy said the bank “remains a safe and sound institution despite our recent earnings challenges.”

“We are deeply disappointed with the bank’s weak performance, but we are making progress in restoring stable earnings,” he said.

“We are systematically reducing the exposure of our earnings to FAS 133 and FAS 113 mark-to-market valuations,” Roy said.

The Pittsburgh FHLB is also revamping its methods of acquiring mortgage assets to “assure that new assets are immediately hedged within tight parameters,” Roy said.

Also, the bank has added staff and implementing new systems in mortgage finance management.

“Management, along with our board, is developing a program to build retained earnings in light of our changing and more complex business model,” Roy said.

Patrick Crowley is a political reporter and columnist and former business writer for The Cincinnati Enquirer. Email Patrick at: pcrowley@enquirer.com