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| 8-K - FEDERAL HOME LOAN BANK OF SEATTLE Q2 2012 PRELIMINARY EARNINGS RELEASE - Federal Home Loan Bank of Seattle | a8-k2012q2earningsrelease.htm |
EXHIBIT 99.1
News Release: | July 30, 2012 | |
Contact: | Connie Waks | |
206.340.2305 • cwaks@fhlbsea.com | ||
Federal Home Loan Bank of Seattle Announces
Second Quarter 2012 Unaudited Preliminary Financial Highlights
Seattle - Today, the Federal Home Loan Bank of Seattle (Seattle Bank) announced preliminary financial highlights for the three and six months ended June 30, 2012, reporting $22.9 million and $35.8 million of net income, compared to net losses of $28.1 million and $40.3 million for the same periods in 2011. The bank attributes the increases in its net income primarily to lower credit-related charges on private-label mortgage-backed securities (MBS) determined to be other-than-temporarily impaired and increased net interest income, partially offset by declines in other non-interest income and increases in operating expenses.
The Seattle Bank recorded $4.3 million and $5.6 million of additional credit losses on its private-label MBS for the three and six months ended June 30, 2012, compared to $65.2 million and $88.0 million of such credit losses for the same periods in 2011. The additional losses in both periods were due to changes in assumptions regarding future housing prices, foreclosure rates, loss severity rates, and other economic factors, and their adverse effects on the mortgages underlying these securities.
According to Seattle Bank President and CEO Michael L. Wilson, “In addition to the reduced charges on private-label MBS, our earnings have improved due to management actions that include rebalancing our debt portfolio and increasing our holdings of floating-rate agency MBS. Another contributing factor has been the relative stability in our advance balances. As we strive to return the bank to normal operations in what remains a challenging environment, we continue to focus on ensuring our members' ready access to liquidity and funding.”
Financial Highlights
The Seattle Bank reported net interest income of $29.7 million and $52.9 million for the three and six months ended June 30, 2012, compared to $23.9 million and $44.4 million for the same periods in 2011. The increases in net interest income were primarily due to lower funding costs, increased yields on investments resulting from changes in the bank's investment mix, and reduced premium amortization expense on mortgage loans held for portfolio. In addition, increased fee income from advance prepayments contributed to higher net interest income for the six months ended June 30, 2012, compared to the same period in 2011. The increases in net interest income were partially offset by the impact of lower average balances of advances, investments, and mortgage loans held for portfolio.
Including the effect of interest-rate swaps hedging certain of the bank's available-for-sale securities, adjusted net interest income (a non-GAAP measure) was $37.3 million and $73.8 million for the three and six months ended June 30, 2012, compared to $36.5 million and $69.9 million for the same periods in 2011.
Other non-interest income declined to $18.1 million and $28.6 million for the three and six months ended June 30, 2012, compared to $28.4 million and $36.4 million for the same periods in 2011. The declines were primarily due to reductions in net gains on derivatives and hedging activities, which were impacted by the
effect of the interest-rate swaps hedging the bank's available-for-sale securities, market value changes on the bank's fair value hedging transactions, and in second quarter 2011, the gain on sale of held-to-maturity securities. Other expense increased by $2.9 million and $3.1 million for the three and six months ended June 30, 2012, compared to the previous periods, due to increased headcount in the bank's credit and collateral management areas and legal expenses related to the bank's private-label MBS lawsuits.
Advances outstanding declined to $9.6 billion as of June 30, 2012, from $11.3 billion as of December 31, 2011, primarily due to reduced demand for wholesale funding and maturing advances. Although advances outstanding improved slightly from $9.3 billion as of March 31, 2012, demand for wholesale funding, including Federal Home Loan Bank advances, remained generally weak as many community financial institutions continued to experience high deposit levels and low loan demand.
Total assets declined to $36.4 billion as of June 30, 2012, from $40.2 billion as of December 31, 2011, due to declines in advance, investment, and mortgage loan balances.
Total capital increased to $1.4 billion as of June 30, 2012, from $1.3 billion as of December 31, 2011, primarily due to a $100.9 million improvement in the bank's accumulated other comprehensive loss (AOCL) and its increased net income. Improvement in the bank's AOCL was primarily due to increases in the fair values of available-for-sale securities determined to be other-than-temporarily impaired.
Total regulatory capital was $3.0 billion as of June 30, 2012 and December 31, 2011.
The Seattle Bank's risk-based capital requirement as of June 30, 2012 was $1.7 billion. The bank had $2.8 billion of capital to count toward that requirement, resulting in a risk-based capital surplus of $1.1 billion.
As of June 30, 2012, the Seattle Bank had a total regulatory capital-to-assets ratio of 8.24 percent and a regulatory leverage ratio of 12.15 percent, compared to 7.36 percent and 10.84 percent, as of December 31, 2011.
Key Metrics Update
In addition to a variety of other measures, the bank tracks its progress in achieving its business goals using the following key metrics:
• | Market value of equity (MVE) to par value of capital stock (PVCS) ratio. As of June 30, 2012, the bank's MVE to PVCS ratio increased to 79.5 percent from 74.4 percent as of December 31, 2011. |
• | Retained earnings. As of June 30, 2012, retained earnings increased to $193.3 million, from $157.4 million as of December 31, 2011. |
• | Return on PVCS vs. federal funds. The bank's return on PVCS for the six months ended June 30, 2012 was 2.57 percent, compared to (2.90) percent for the same period in 2011. The average federal funds effective rate for the six months ended June 30, 2012 was 0.13 percent, compared to 0.12 percent for the same period in 2011. |
Consent Arrangement
The Seattle Bank continues to address the requirements of the Consent Order issued by the Federal Housing Finance Agency (Finance Agency), effective October 25, 2010 (collectively, with related understandings with the Finance Agency, the Consent Arrangement). The Consent Arrangement clarifies the steps the bank must take to stabilize its business, improve its capital classification, and return to normal operations, including
repurchasing, redeeming, and paying dividends on its capital stock. As of June 30, 2012, the bank met all minimum financial requirements under the Consent Arrangement but remains classified as "undercapitalized" by the Finance Agency.
Unaudited Selected Financial Data ($ in thousands)
Selected Statements of Condition Data | As of June 30, 2012 | As of December 31, 2011 | ||||||
Investments (1) | $ | 25,440,654 | $ | 27,369,042 | ||||
Advances | 9,561,848 | 11,292,319 | ||||||
Mortgage loans held for portfolio, net | 1,203,480 | 1,356,878 | ||||||
Total assets | 36,369,579 | 40,184,467 | ||||||
Consolidated obligations, net | 33,048,747 | 37,255,103 | ||||||
Total capital stock | 1,680,674 | 1,739,677 | ||||||
Retained earnings | 193,268 | 157,438 | ||||||
Accumulated other comprehensive loss | (509,681 | ) | (610,612 | ) | ||||
Total capital (2) | 1,364,261 | 1,286,503 | ||||||
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
Selected Statements of Operations Data | 2012 | 2011 | 2012 | 2011 | ||||||||||||
Net interest income (3) | $ | 29,695 | $ | 23,882 | $ | 52,943 | $ | 44,386 | ||||||||
Net other-than-temporary impairment credit loss | (4,269 | ) | (65,244 | ) | (5,593 | ) | (87,984 | ) | ||||||||
Other non-interest income (4) | 18,124 | 28,421 | 28,621 | 36,435 | ||||||||||||
Total other expense | 18,101 | 15,203 | 36,160 | 33,109 | ||||||||||||
Total assessments | 2,545 | — | 3,981 | — | ||||||||||||
Net income (loss) | 22,904 | (28,144 | ) | 35,830 | (40,272 | ) | ||||||||||
(1) | Consists of securities purchased under agreements to resell, federal funds sold, available-for-sale securities, and held-to-maturity securities. |
(2) | Excludes mandatorily redeemable capital stock, which totaled $1.1 billion as of June 30, 2012 and December 31, 2011. Mandatorily redeemable capital stock is included in regulatory capital. |
(3) | Includes prepayment fees on advances, net. No provision for credit losses was recorded for the three and six months ended June 30, 2012 and 2011. |
(4) | Includes realized loss on available-for-sale securities, gain on sale of held-to-maturity securities, gain on financial instruments held under fair value option, gain on derivatives and hedging activities, loss on early extinguishments of consolidated obligations, service fees, and other non-interest income. |
Use of Non-GAAP Financial Measure: Reconciliation of Adjusted Net Interest Income to Net Interest Income
The Seattle Bank uses adjusted net interest income (a non-GAAP measure) in its internal analysis of results and the management of its business and believes that this metric may be helpful to investors in evaluating the bank's financial performance, identifying trends, and making meaningful period-to-period comparisons.
The Seattle Bank defines adjusted net interest income as net interest income determined in accordance with GAAP, adjusted for the effect of the change in fair value of interest-rate swaps hedging certain of the bank's available-for-sale securities. These investments were purchased at significant premiums and have been
designated in benchmark fair value hedging relationships with interest-rate swaps that included significant up-front fees.
Although the gains recorded on the periodic valuation of the interest-rate swaps substantially offset the premium amortization on the associated available-for-sale securities and both are recorded on the statements of operations, amortization of the premium is recorded in interest income and changes in fair value of the interest-rate swaps are recorded in other income (loss). We believe adjusting net interest income for the effect of the fair value adjustments on the interest-rate swaps allows for a consistent comparison of net interest income across reporting periods.
The following table presents a reconciliation of net interest income reported under GAAP to adjusted net interest income for the three and six months ended June 30, 2012 and 2011.
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(in thousands) | ||||||||||||||||
GAAP net interest income | $ | 29,695 | $ | 23,882 | $ | 52,943 | $ | 44,386 | ||||||||
Gain on derivatives and hedging activities on interest-rate swaps hedging certain available-for-sale securities * | 7,636 | 12,613 | 20,885 | 25,494 | ||||||||||||
Adjusted net interest income | $ | 37,331 | $ | 36,495 | $ | 73,828 | $ | 69,880 | ||||||||
* | Premium amortization on certain available-for-sale securities totaled $8.6 million and $20.6 million for the three and six months ended June 30, 2012 and $12.6 million and $25.2 million for the same periods in 2011. Gains on derivatives and hedging activity are recorded in other non-interest income, while premium amortization is recorded in interest income. |
Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Non-GAAP measures should not be considered in isolation or as a substitute for analyses of results reported under GAAP.
About the Seattle Bank
The Seattle Bank is a financial cooperative that provides liquidity, funding, and services to enhance the success of its members and support the availability of affordable homes and economic development in the communities they serve. The Seattle Bank's funding and financial services enable its 339 member institutions to provide their customers with greater access to mortgages, commercial loans, and funding for affordable housing and economic development.
The Seattle Bank serves Alaska, Hawaii, Idaho, Montana, Oregon, Utah, Washington, and Wyoming, as well as the U.S. territories of American Samoa and Guam, and the Commonwealth of the Northern Mariana Islands. Members include commercial banks, credit unions, thrifts, industrial loan corporations, and insurance companies.
The Seattle Bank is one of 12 Federal Home Loan Banks in the United States. The Federal Home Loan Banks commit 10 percent of their annual income to affordable housing and, together, represent one of the country's largest private sources of funding for affordable housing, as well as liquidity and funding for community financial institutions.
This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including preliminary highlights of financial statements as of and for the three and six months ended June 30, 2012. Forward-looking statements are subject to known and unknown risks and uncertainties. Actual financial performance and condition, as well as other actions, including those relating to the Consent Arrangement, may differ
materially from that expected or implied in forward-looking statements because of many factors. Such factors may include, but are not limited to, changes in general economic and market conditions (including effects on, among other things, U.S. debt obligations and mortgage-related securities), regulatory and legislative actions and approvals (including those of the Finance Agency), business and capital plan and policy adjustments and amendments, demand for advances, the Seattle Bank's ability to meet adequate capital levels, accounting adjustments or requirements (including changes in assumptions and estimates used in the bank's financial models), changes in the bank's management and Board of Directors, competitive pressure from other Federal Home Loan Banks and alternative funding sources, interest-rate volatility, shifts in demand for our products and consolidated obligations, changes in projected business volumes, the bank's ability to appropriately manage its cost of funds, the cost-effectiveness of the bank's funding, changes in the bank's membership profile or the withdrawal of one or more large members, and hedging and asset-liability management activities. Additional factors are discussed in the Seattle Bank's most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q. The Seattle Bank does not undertake to update any forward-looking statements made in this announcement.