With most banks still flush with deposits and reluctant to lend, the need for advances from the Federal Home Loan Banks continued to drop sharply during the third quarter, according to a report released Friday by the Office of Finance.

Overall advances have declined 13.2% since yearend, falling to $415.4 billion. Only 2 of the 12 Home Loan Banks saw an increase in advances during the third quarter, with the Federal Home Loan Bank of Cincinnati reporting a 0.5% uptick while the Indianapolis Home Loan Bank reported a 1.6% increase.

The steepest declines, meanwhile, were at the Federal Home Loan banks of Dallas and Chicago, which saw their advances fall 26.7% and 24.4%, respectively.

Home Loan Bank industry representatives said the declines were still due to the aftermath of the financial crisis. During the crisis, many member banks bulked up on advances for fear of liquidity problems. With deposits running high now, however, the need for advances has dwindled.

"During the current period of economic uncertainty, Federal Home Loan Bank members are experiencing low demand for business and consumer loans and a dramatic increase in deposits," said John von Seggern, president and CEO of the Council of Federal Home Loan Banks.

The Home Loan Banks are also experiencing a drop in net income and investments. Net income fell 40% to $469 million in the third quarter from yearend 2010, while investments fell 12% to $290.2 billion. The Office of Finance cited lower net interest income due to lower net interest margins and lower average balances on interest-earning assets for the decline in profits.

"The decline in interest income was driven by lower yields on interest-earning assets, reductions in average advance balances, run-off of higher yielding investments and mortgage loans, and lower pre-payment fees on advances," the Office of Finance said. "Interest expense also continued to decline, driven by lower interest rates on newer debt issuances, repurchases of higher cost consolidated bonds prior to maturity and lower average balances."

Total assets of the bank fell nearly 14% to $778.3 billion, a steep drop from the $904 billion in assets at the same point last year.

While investments also declined, they no longer surpassed the individual banks' advance business at most of the 12 banks. Only the Chicago and Seattle banks saw investments trump advances, a marked improvement from prior quarters where a number of banks were in such a situation.

Regulators have warned the Home Loan banks that this practice cannot be allowed to continue. Federal Housing Finance Agency Acting Director Edward DeMarco has previously said the role of the banks is to promote liquidity through advances for its member institutions, not grow its investment portfolio.

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