www.cfasociety.org/dayton UPCOMING EVENTS SAVE THE DATE Friday, - - PowerPoint PPT Presentation

www.cfasociety.org/dayton

CFA Society Dayton

UPCOMING EVENTS – SAVE THE DATE

• Friday, March 23, 2018: LIFT Symposium at Wright State

University

• Tuesday, April 10, 2018: Karen Bowie, JD, CFP, CFA, Small

and Mid-Cap Portfolio Manager of Nuveen Asset Management

• Tuesday, May 8, 2018: TBD

Events are held at noon at the Schuster Center (unless indicated). RSVP by Friday before the meeting to: secretary@dayton.cfasociety.org

CFA Society Dayton

www.wright.edu/event/lift-symposium

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TOPICS:

Investing for Retirement Recruit, Train, Retain: Leveraging the NextGen Talent Everything you need to know about Social Security Tax Reform and Its Impact Bitcoin and Cryptocurrencies

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March 23, 2018 – 8:00a.m. to 6:00p.m.

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Early registration - $125

The Federal Home Loan Bank

• f Cincinnati

CFA Society Dayton March 13, 2018

The Federal Home Loan Bank System

FHLB issues consolidated debt to the financial markets

FHLB Debt held in investors’ portfolios

$ Proceeds from debt issuances receive slight markup, available to FHLB members as credit products FHLB funds available for:

• Liquidity needs
• Asset / liability management
• Match funding longer-term

assets

How We Fund Advances

6

A Brief History

• FHLB system established in 1932 during the Great Depression.

– Mission to support housing market through member financial institutions. – Joint and several liability among districts.

• Originally only for thrifts (savings and loans) and insurance

companies.

– FIRREA in 1989 opened access to commercial banks and credit unions.

• Cooperative ownership structure.

– Each member’s stock holdings grow in proportion to their borrowings. – The largest users are also the largest shareholders.

• During the financial crisis, served as lender of next-to-last resort

for depository members.

– Federal Reserve lender of last resort.

7

The FHLB Business Model

• Franchise Value

– As GSE, public policy mandate to support housing finance – Consistent ability to issue large amounts of debt worldwide – Cooperative ownership structure – Liquidity support

• Three Primary Business Activities

– Advances – Mortgage Purchase Program – Housing and Community Investment

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FHLB Cincinnati Fifth District Overview

Value Proposition to Members

Mission Statement

Provide our Members with financial services and a competitive return on their capital investment to help them facilitate and expand housing finance and community investment and achieve their objectives for liquidity and asset liability management.

• Consistent focus on mission and cooperative ownership
• Competitive Advance rates and Mortgage Purchase Program (MPP)

prices

• Stable, favorable, and sustainable financial performance
• Offer MPP as an attractive secondary market alternative for Members
• Capital Plan that supports cooperative business model
• Longstanding commitment to affordable housing including voluntary

programs

10

FHLB Cincinnati Members

FHLB Cincinnati membership composition as of year-end 2017:

Charter Type Ohio Kentucky Tennessee Total Assets ($Billions)* Commercial Banks 113 140 132 385 $1,053 Thrifts/Savings Banks 71 12 9 92 54 Credit Unions 81 24 27 132 55 Insurance Companies 34 6 6 46 364 CDFIs 3 2 5 0.3 TOTAL 302 184 174 660 $1,526

727 660 $1,235 $1,526 $- $500 $1,000 $1,500 $2,000 600 650 700 750 2013 2014 2015 2016 2017 Member Assets ($Billions)* # Member Stockholders at Year-End # Members Member Assets ($B)

While financial industry consolidation has reduced the number of Members, the asset base of our membership has grown:

* Excludes JPMorgan Chase

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Fifth District At A Glance

Population by State (2018 Est.): Kentucky:4.5 million Ohio:11.6 million Tennessee:6.7 million Depository Institution Assets*: Kentucky: $ 68 billion Ohio: $ 962 billion Tennessee: $ 137 billion FHLB Cincinnati Members represent 98.8% of total depository institution assets in the 5th District

* Excludes JPMorgan Chase, with assets of $2.1 trillion Red dots indicate location of FHLB Members

Rural Population: Kentucky: 2.4 million (#9 in U.S.) Ohio: 3.4 million (#3 in U.S.) Tennessee: 2.4 million (#10 in U.S.)

U.S. Census Bureau 2011-15 5 Year Estimates

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$65.1 $70.3 $73.2 $69.9 $70.0 $6.6 $6.8 $7.8 $8.9 $9.5 $22.4 $26.0 $37.3 $25.3 $27.0 $0 $20 $40 $60 $80 $100 $120 Y/E 2013 Y/E 2014 Y/E 2015 Y/E 2016 Y/E 2017

Balance Sheet Key Components ($Billions)

Outstanding Principal

Advances MPP Investments

Financial Overview

$240 $254 $254 $268 $314 $0 $50 $100 $150 $200 $250 $300 $350 $400 2013 2014 2015 2016 2017

Net Income ($Millions)

$578 $656 $737 $834 $940 $0 $200 $400 $600 $800 $1,000 $1,200 2013 2014 2015 2016 2017

Retained Earnings ($Millions)

75% 77% 79% 78% 81% 50% 60% 70% 80% 90% 100% 2013 2014 2015 2016 2017

Primary Mission Asset Ratio

(Advances and MPP as % of Consolidated Obligations)

70% or higher preferred 13

Historical Performance

Key Balance Sheet Components ($Billions) 2013 2014 2015 2016 2017 Total Assets $103.1 $106.6 $118.8 $104.6 $106.9 Advances (Outstanding Principal) $65.1 $70.3 $73.2 $69.9 $70.0 MPP (Outstanding Principal) $6.6 $6.8 $7.8 $8.9 $9.5 Capital ($Millions) Total Regulatory Capital $5,392 $4,986 $5,204 $5,026 $5,211 Regulatory Capital-to-Assets 5.23% 4.68% 4.38% 4.80% 4.88% Retained Earnings $578 $656 $737 $834 $940

Retained Earnings as % of Regulatory Capital 11% 13% 14% 17% 18%

Market Capitalization Ratio 105% 114% 109% 114% 121% Profitability ($Millions) Net Income $240 $254 $254 $268 $314 Return on Average Equity 4.72% 5.16% 5.04% 5.35% 6.15% Cash Dividends Paid $178 $176 $172 $171 $208 Dividend Rate (Weighted Average Annual Rate) 4.18% 4.00% 4.00% 4.00% 5.00% Operating Costs ($Millions) Operating Expenses $51 $54 $62 $68 $65 Operating Expenses to Average Assets .055% .054% .058% .064% .063% Employees (FTEs) 199 203 203 209 226

Year-End

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How Our Members Use the FHLB

Core Mission Activities

$69,978

$- $20,000 $40,000 $60,000 $80,000

2012 2013 2014 2015 2016 2017

Advances

Outstanding Principal

$14,691

$- $5,000 $10,000 $15,000 $20,000

2012 2013 2014 2015 2016 2017

Letters of Credit

Notional Principal

$9,454

$- $2,000 $4,000 $6,000 $8,000 $10,000

2013 2014 2015 2016 2017

Mortgage Purchase Program

Outstanding Principal

$35

$- $10 $20 $30 $40

2013 2014 2015 2016 2017

Affordable Housing Program*

Annual Accrual

Core Mission Activities

Year-End ($Millions)

*Excludes FHLB voluntary housing program disbursements

16

Advance Products

17

What is an Advance?

• An Advance is a collateralized debt obligation
• Advances are over-collateralized (collateral held > Advance principal) using a variety of

collateral types: – Mortgage loans; commercial real estate loans; investment securities (include MBS/CMOs) – Collateral haircuts set by each FHLB district

• Advances Types and Terms:

– Maturity from overnight to 30 years – Full, partial or no amortization of principal – Fixed rate or indexed to the most popular indices (LIBOR, Prime)

• No FHLB has ever experienced a credit loss on Advances
• FHLB’s follow certain procedures in lending to weaker institutions

– Increased collateral haircuts based upon financial condition – Downgrade in collateral status – Restricted Advance maturities – Halt lending at the request of primary regulators

Advance Products

“We have a liability to match any asset.”

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Mortgage Purchase Program (MPP)

How it Works

• Active secondary mortgage investor for Members
• Purchase high-quality loans and hold them in portfolio
• Helps achieve FHLB’s public policy mission of supporting housing finance
• Since inception, over $37 billion in UPB from over 248,000 loans purchased;
• utstanding balance at year-end 2017 is $9.5 billion
• MPP portfolio accounts for 8% of assets and 30% of dividend
• Over 90% of active Participating Financial Institutions are community financial

institutions with assets under $1 billion.

Benefits for Members

• Reduced fixed-rate lending risk
• Greater competition among mortgage investors
• Provides some smaller Members a mechanism to sell loans who wouldn’t otherwise

have access

• Alternative investor for medium banks
• Increased return to FHLB Member stockholders
• Members share credit risk with the FHLB; Lender Risk Account (LRA)

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MPP Products & Underwriting

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MPP Products

• Prime, Fixed-Rate, Fully Amortizing

– Max Loan Amount: $453,100 – Terms: 120 to 360 months – Single family, 2-4 family, condos and PUDs – Primary residence and second homes

• Servicing Retained or Servicing Released
• Servicing Retained offers several remittance options (Scheduled/Scheduled or

Actual/Actual).

MPP Underwriting

• LTV, FICO, and Debt Ratio criteria are MPP specific

– Up to 95% LTV – lower maximums for certain loan types – Minimum FICO score of 660 – higher minimums for certain loan types – Max Housing Ratio of 35% and Total Debt Ratio of 40% – Delegated Underwriting – Use of AUS acceptable with minimal overlays – AUS Max Housing Ratio of 38% and Total Debt Ratio of 43%

• Exceptions to underwriting guidelines considered

HCI Mission and Core Beliefs

The primary mission of the Housing and Community Investment Department is to support our Members’ community investment efforts through:

• The responsible investment of

available funds in sustainable affordable housing, and

• Economic development activities

benefiting low- and moderate- income households across the Fifth District

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Benefits of HCI Programs

• Investment in sustainable affordable housing and

economic development projects

• Improved standard of living for our fellow

citizens

• More stable communities
• Promotion of economic empowerment via job

creation/retention

• New business opportunities for FHLB Members
• Support of Member CRA activities (including

risk mitigation)

• Low-cost funding source for affordable housing

developers, etc.

22

Voluntary Programs

• Since 2001, the FHLB Cincinnati has offered 6 voluntary programs, disbursing

$37.5 million on behalf of 8,286 households.

• Programs have addressed needs including increasing minority homeownership,

Hurricane Katrina relief, and accessibility rehabilitation for special needs homeowners:

Carol M. Peterson Housing Fund

• Provides grants for accessibility rehab, weatherization and emergency

repair for low-income, special needs homeowners

• Since 2010, more than $7.5 million has been disbursed on behalf of

1,456 households

Disaster Reconstruction Program

• Provides grants up to $20,000 to households adversely

impacted by a natural disaster in Kentucky, Ohio, or Tennessee

• Used for the acquisition, new construction, or

rehabilitation of a single family home

• Since 2012, more than $3.6 million has been disbursed
• r committed on behalf of 219 households

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Market Factors Impacting Membership

Loans and Deposits

25 $490.1 $585.8 $429.1 $658.8

$350 $450 $550 $650 $750 $850 $950 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Loans Deposits $107.5 $63.0 ($61.7)

Compound Annual Growth Rates: Loans, 4.2% Deposits, 7.1% $ Billions 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Tot. Chg.

• Chg. Loan/Dep. Gap

(2) 67 15 34 5 14 1 3 28 1 178 Growth In Securities 5 27 15 15 10 20 26 17 20 156 Loan / Deposit Ratio 114% 99% 96% 91% 90% 89% 89% 89% 87% 86% (28%)

616 442 471 434 537 620 647 712 784 851 284 112 114 177 247 308 355 395 393 357

250 500 750 1,000 1,250 1,500 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Single-Family Multi-Family

Housing Starts

Source: Federal Reserve

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Annualized Starts 900 554 585 611 784 928 1,002 1,107 1,177 1,208 Year-over-Year % Change

• 33%
• 38%

6% 4% 28% 18% 8% 10% 6% 3%

Annualized (Thousands)

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4,259 2,870 3,020 2,964 3,671 4,498 4,567 5,285 5,915 6,246

1,250 2,500 3,750 5,000 6,250 7,500 250 500 750 1,000 1,250 1,500 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 National District

Housing Permits

Source: Federal Reserve * Annualized as of May 2016

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 * National (Thousands) 896 582 604 624 829 987 1053 1178 1207 1258 District (Units) 4259 2870 3020 2964 3671 4498 4567 5285 5915 6246

National (Thousands) District (Units)

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Case-Schiller: Prices Near Pre-Crisis Peak

206.7 137.1 204.6 123.4 97.1 117.8 80 100 120 140 160 180 200 220 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Total Index Cleveland Index

Source: Federal Reserve

Low:

• Jan. 2012

Year-over-Year Percent Change 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Nov. 2017 U.S. Index

• 3.8%
• 15.7%
• 13.3%

1.3%

• 3.9%

0.9% 12.0% 7.9% 5.0% 5.2% 6.4% Cleveland Index

• 3.8%
• 7.3%
• 4.8%

0.7%

• 4.3%

0.0% 4.4% 1.8% 2.0% 3.1% 4.1%

Peak:

• Jan. 2006

Low:

• Feb. 2012

Peak: April 2006

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A Shrinking Housing Inventory

2 4 6 8 10 12 14 # Months

U.S. Months’ Supply of Houses for Sale

Source: Federal Reserve of St. Louis

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Securities Composition

Treasuries, 0.4% Agencies, 9% MBS, 69% Other, 7% Municipals, 15%

Year-End 2008

Treasuries, 11% Agencies, 5% MBS, 73% Other, 3% Municipals, 9%

Year-End 2017

Change in Composition MBS +4% Agencies

• 4%

Treasuries +10.6% Municipals

• 6%

Other

• 4%

Fifth District Member Banks & Thrifts Source: SNL Financial

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Narrowing Yield Curve Spreads

1.13 1.01 0.93 0.93 0.96 0.79 0.86 0.78 0.64 0.51 0.56 0.63 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 Mar '17 Apr '17 May '17 Jun '17 Jul '17 Aug '17 Sep '17 Oct '17 Nov '17 Dec '17 Jan '18 Feb 23

Spread Between 2 Year and 10 Year Treasuries

Spread 10 Yr 2 Yr 3/15/17: Fed raises rates 25 bps 6/14/17: Fed raises rates 25 bps 12/13/17: Fed raises rates 25 bps

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Net Interest Spread

4.61% 4.33% 4.24% 4.18% 4.17% 4.24% 0.83% 0.67% 0.57% 0.52% 0.52% 0.55% 3.78% 3.66% 3.67% 3.65% 3.65% 3.69% 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 5.00% 2012 2013 2014 2015 2016 2017 Yield on Earning Assets Cost of Funds Net Interest Spread

Change in Basis Points 2012 2013 2014 2015 2016 2017 Yield on Earning Assets (33) (28) (9) (7) (1) 6 Cost of Funds (33) (16) (10) (5) 3

Note: Calculations based on simple-average

Fifth District Member Banks/Thrifts Source: SNL Financial

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Thank You!