FHLBank Cincinnati Announces Third Quarter 2012 Results
CINCINNATI, Oct. 30, 2012 (GLOBE NEWSWIRE) -- The Federal Home Loan Bank of
Cincinnati (FHLBank) today released unaudited financial results for the third
quarter ended September 30, 2012. During the third quarter, the FHLBank's
financial condition remained strong. The FHLBank continued to fulfill its
mission by providing readily available and favorably priced wholesale funding
to its member financial institutions, supporting its commitment to affordable
housing, and paying stockholders a competitive dividend return on their
capital investment. Highlights include:
• For the third quarter, net income was $58 million and return on average
equity (ROE) was 6.05 percent. This compares to net income of $19 million and
ROE of 2.07 percent for the same period of 2011. For the first nine months of
2012, net income was $170 million and ROE was 6.19 percent, compared to net
income of $98 million and ROE of 3.70 percent for the same period of 2011.
• The most significant contributors to the increase in net income in the
third quarter of 2012 were: 1) a decrease in the net amortization of purchased
premiums on mortgage assets compared to the same period of 2011; and 2)
management actions that lowered funding costs relative to average portfolio
asset rates. For the year-to-date 2012 period, the largest contributors to the
increase in net income were: 1) the realized gains from the sales of certain
mortgage-backed securities; and 2) satisfaction of the FHLBank's REFCORP
obligation in June 2011.
• Total assets at September 30, 2012 were $67.2 billion, an increase of
$6.8 billion (11 percent) from year-end 2011. Total assets in the first nine
months of 2012 averaged $65.1 billion, a decrease of $3.4 billion (five
percent) from the same period of 2011.
• The balance of Mission Asset Activity – comprising major activities with
members including Advances, Letters of Credit, and the Mortgage Purchase
Program – was $47.3 billion at September 30, 2012, an increase of $6.5 billion
(16 percent) from year-end 2011. The growth was due to increased Advance
borrowings by a small number of large-asset members.
• Capital adequacy continued to substantially exceed all minimum regulatory
capital requirements. On September 30, 2012, GAAP capital, which included $513
million of total retained earnings, stood at $3.9 billion or 5.85 percent of
• Stockholders were paid a cash dividend on September 20, 2012 at a 4.25
percent annualized rate, which was 3.83 percentage points above the third
quarter average 3-month LIBOR. Total retained earnings increased in the third
quarter by $25 million.
• The FHLBank contributed $7 million during the third quarter of 2012 and
$20 million in the first nine months of 2012 to the Affordable Housing Program
pool of funds to be awarded to members in 2013. In more than 20 years of
partnering with members and housing organizations, the FHLBank has awarded
$460 million through this program for the creation of more than 60,000 housing
units for low and very-low income citizens. The FHLBank also continued to
offer its Carol M. Peterson Housing Fund and Disaster Reconstruction Program.
In the first nine months of 2012, the FHLBank awarded over $2 million to these
voluntary housing programs.
Advance balances have generally trended downward since 2008 due to the weak
economy, significant liquidity being provided to financial institutions by the
federal government, and substantial increase in the money supply. The growth
in 2012 has been largely limited to increased usage by a small number of
large-asset members. The FHLBank cannot predict if this trend will continue.
However, the FHLBank would expect to see a sustained increase in Advance
demand across its entire membership base when one or more of the following
occur: the economy experiences a sustained improvement; the Federal Reserve
System's monetary policy tightens; or the government's liquidity and expanded
deposit guarantee programs wind down.
Operating Results and Profitability
The spread between ROE and short-term interest rates, for which the FHLBank
uses a proxy of 3-month LIBOR, is a market benchmark the FHLBank believes
stockholders use to assess the competitiveness of return on their capital
Three Months Ended September Nine Months Ended September
2012 2011 2012 2011
ROE 6.05% 2.07% 6.19% 3.70%
ROE spread to average 5.63 1.77 5.72 3.41
The FHLBank continued to provide competitive returns to stockholders' capital
investment. Consistent with experience over the last several years, ROE was
significantly above 3-month LIBOR resulting in the spread to that index being
wider than the historical average.
The increase in operating results and profitability for the 2012 periods
compared to the 2011 periods resulted primarily from the following favorable
factors, which more than offset the combined effect of several unfavorable
• Net amortization expense of purchase premiums on mortgage assets and of
premium/discounts and concession costs on Consolidated Obligations decreased
$23 million and $1 million in the three- and nine-month comparisons,
respectively, mainly due to lower mortgage amortization.
Recognition of net amortization can be very sensitive to changes in actual and
projected prepayments as normally occurs when mortgage and interest rates
change. Although primary mortgage rates and long-term LIBOR did trend downward
in the first nine months of 2011 and 2012, the movement was larger in the 2011
periods, which resulted in greater amortization in 2011. In addition, the
FHLBank's actual and projected prepayment speeds have slowed moderately based
on observed trends and patterns in mortgage rates, benchmark LIBOR, and the
housing market and therefore resulted in favorable adjustments to net mortgage
• Portfolio funding costs were lower due to management's actions related to
asset liability management and increased market risk exposure particularly in
the third quarter of 2012. The FHLBank continued to call a significant amount
of high-cost debt (Consolidated Bonds) before their final maturities and
replaced them with new debt at substantially lower rates. In addition, the
amount of mortgages funded with short-term debt increased significantly in the
third quarter of 2012.
• The FHLBank uses Discount Notes to fund a substantial amount of
LIBOR-indexed assets, most of which reprice at one- or three-month intervals.
The average spread between three-month LIBOR assets (mostly Advances) and
short-term Discount Note debt was wider in the last quarter of 2011 and first
three quarters of 2012 because of, among other reasons, concerns over the
financial turmoil in Europe (one-month spreads were not affected). The amount
of such asset-funding relationship that earned this wider spread averaged
approximately $4 billion in the first nine months of 2012.
This factor was present, but less important, to the comparison of third
quarter operating results because the spread narrowed towards long-term
historical averages during the quarter and because the amount of such basis
funding declined in the third quarter.
• Realized gains from the clean-up sales of certain mortgage-backed
securities rose $20 million in the nine-month comparison. Each of the
securities sold had less than 15 percent of the original acquired principal
remaining and were sold under the FHLBank's periodic clean-up process.
• Changes in the unrealized market values of derivative and hedging
activities raised non-interest income by $7 million and $8 million in the
three- and nine-month comparisons, respectively.
• The FHLBank System's REFCORP obligation was satisfied at the end of the
second quarter of 2011. REFCORP, which had been recorded as a reduction to net
income, was replaced with an allocation of 20 percent of net income to a
separate restricted retained earnings account under the Joint Capital
Enhancement Agreement. This change had a favorable impact to net income of $19
million in the nine-month comparison.
Assets and Mission Asset Activity
The ending balance of Mission Asset Activity was $47.3 billion at September
30, 2012 compared to $40.9 billion at year-end 2011.
The principal balance of Advances increased $7.7 billion (28 percent) from
year-end 2011 to end the third quarter at $35.5 billion. Average Advance
principal balances in the first nine months of 2012 totaled $30.2 billion, an
increase of five percent from the same period of 2011. The increase in the
ending and average balances of Advances was primarily driven by the borrowings
of a small number of large-asset members, one of which became a member during
The principal balance of mortgage loans held for portfolio (the Mortgage
Purchase Program) was $7.7 billion at September 30, 2012, a decrease of $0.1
billion (one percent) from year-end 2011. In the first nine months of 2012,
the FHLBank purchased $1.9 billion of mortgage loans, while principal paydowns
totaled $2.0 billion.
The balance of investments at September 30, 2012 was $23.2 billion, an
increase of $1.2 billion (six percent), from year-end 2011. Average investment
balances in the first nine months of 2012 totaled $26.1 billion, a decrease of
16 percent from the same period of 2011. These changes reflected normal
periodic variation in holdings of investments. The investment balance at the
end of the quarter included $11.9 billion of mortgage-backed securities and
$11.3 billion of liquidity instruments. All of the FHLBank's mortgage-backed
securities currently held are issued and guaranteed by Fannie Mae, Freddie Mac
or a U.S. government agency. Short-term liquidity instruments include
investments secured with collateral, unsecured investments purchased from
highly rated counterparties, and investments with counterparties directly or
effectively guaranteed by the U.S. government.
The FHLBank believes that its net liquidity position remained strong in the
first nine months of 2012, as did its overall ability to fund operations
through Consolidated Obligation issuances at acceptable interest costs. The
System had uninterrupted access on favorable terms to the capital markets for
its debt issuances and funding needs.
Average market risk exposure was moderate in the first nine months of 2012,
well within the FHLBank's policy limits, and consistent with the normal
historical range. During the third quarter of 2012, market risk to higher
interest rates was moderately elevated compared to historical positioning.
Residual credit risk exposure from offering Advances, purchasing investments,
and executing derivative transactions was limited. Consistent with previous
years, the FHLBank required no loss reserve for Advances and considered no
investments to be other-than-temporarily impaired at September 30, 2012. The
FHLBank believes its policies and procedures related to credit underwriting,
Advance collateral management, and transactions with investment and derivative
counterparties continue to appropriately mitigate these risks.
Residual credit risk exposure in the mortgage loan portfolio continued to be
moderate and manageable. The allowance for credit losses in the Mortgage
Purchase Program was $18 million and $21 million at September 30, 2012 and
December 31, 2011, respectively. The lower allowance for credit losses was a
result of improvements in the housing market, partially offset by lower
estimated collectability on supplemental mortgage insurance policies held due
to potential non-performance of mortgage insurers.
Capital Stock and Retained Earnings
The GAAP capital-to-assets ratio at September 30, 2012 was 5.85 percent, while
the regulatory capital-to-assets ratio was 6.19 percent. Both ratios were well
above the regulatory required minimum of 4.00 percent. Regulatory capital
includes mandatorily redeemable capital stock accounted for as a liability
under GAAP. The dollar amounts of GAAP and regulatory capital increased ten
percent and eight percent, respectively, between year-end 2011 and September
30, 2012. The increases were due to capital stock purchases by members and
additional retained earnings.
Total retained earnings were $513 million at September 30, 2012, an increase
of $69 million (15 percent) from year-end 2011. Total retained earnings
comprised $467 million unrestricted and $46 million restricted. The FHLBank
believes that the amount of total retained earnings is sufficient to protect
against impairment risk of capital stock and to provide the opportunity for
The Federal Home Loan Bank of Cincinnati is a AA+ rated regional wholesale
cooperative bank. The FHLBank raises private-sector capital from
member-stockholders and, with 11 other FHLBanks in the FHLBank System, issues
high-quality debt in the worldwide capital markets in order to provide members
with competitive services (primarily Advances, a readily available, low-cost
source of funds) and a competitive return on their capital investment through
quarterly dividends. The FHLBank also funds community investment programs that
help its members create affordable housing and promote community economic
development. The FHLBank has 741 member-stockholders located in the Fifth
FHLBank District of Kentucky, Ohio and Tennessee. The FHLBank System was
chartered in 1932 by the U.S. Congress to promote housing finance. Each
FHLBank is wholly owned by its member institution stockholders.
This news release may contain forward-looking statements that are subject to
risks and uncertainties that could affect the FHLBank's financial condition
and results of operations. These include, but are not limited to, the effects
of economic and financial conditions, legislative or regulatory developments
concerning the FHLBank System, financial pressures affecting other FHLBanks,
competitive forces, and other risks detailed from time to time in the
FHLBank's annual report on Form 10-K and other filings with the Securities and
Exchange Commission. The forward-looking statements speak as of the date made
and are not guarantees of future performance. Actual results or developments
could differ materially from the expectations expressed or implied in the
forward-looking statements, and the FHLBank undertakes no obligation to update
any such statements.
The Federal Home Loan Bank of Cincinnati Financial Highlights (unaudited)
Dollars in millions
September 30, December 31, Percent
2012 2011 Change
Total assets $67,171 $60,397 11%
Advances (principal) 35,517 27,839 28
Mortgage loans held for portfolio 7,692 7,752 (1)
Total investments 23,170 21,941 6
Discount Notes 31,535 26,136 21
Bonds 29,828 28,855 3
Total Consolidated Obligations 61,363 54,991 12
Mandatorily redeemable capital 219 275 (20)
Capital stock 3,428 3,126 10
Total retained earnings 513 444 15
Total capital 3,932 3,559 10
Regulatory capital (1) 4,160 3,845 8
Capital-to-assets ratio (GAAP) 5.85% 5.89%
Capital-to-assets ratio 6.19 6.37
Three Months Ended September Nine Months Ended September
2012 2011 Percent Change 2012 2011 Percent
(2) Change (2)
Total Interest Income $ 231 $ 231 --% $ 690 $771 (11)%
Total interest 148 187 (20) 473 590 (20)
Net interest income 83 44 87 217 181 20
(Reversal) provision (1) 2 NM 1 6 (85)
for credit losses
Other (loss) income (4) (6) 36 17 (3) NM
Other expense 15 15 3 43 42 2
AHP and REFCORP 7 2 NM 20 32 (37)
Net income $58 $19 NM $ 170 $98 73
Return on average 6.05% 2.07% 6.19% 3.70%
Return on average 0.34 0.11 0.35 0.19
Net interest margin 0.49 0.27 0.45 0.36
Annualized dividend 4.25 4.00 4.33 4.33
Average 3-month LIBOR 0.42 0.30 0.47 0.29
(1) Regulatory capital includes capital stock, mandatorily redeemable
capital stock (classified as a liability) and retained earnings.
(2) Amounts used to calculate the change column are based on dollars in
thousands. Accordingly, recalculations based upon the disclosed amounts
(millions) may not produce the same results. Changes of 100% or greater are
shown as "NM" (not meaningful).
The Federal Home Loan Bank of Cincinnati logo is available at:
CONTACT: John Byczkowski
Federal Home Loan Bank of Cincinnati logo
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