WE ARE PLEASED TO REPORT that the Federal Home Loan Bank of Cincinnati (FHLB) achieved a successful financial and operating performance year in 2015. We dedicate our efforts to deliver value to our member stockholders through competitively priced services consistent with our housing finance mission, stable and solid dividend rates, and constructive affordable housing programs. We met all of those objectives in 2015. We attribute our performance to our strong partnership with our members, and our collective commitment to help meet the housing finance and economic development needs of the FHLB Fifth District communities.
Financial and Operating Performance
Earnings were strong and rose slightly in 2015. This steady performance reflected a stable business and interest rate environment, consistent demand for Advances, and a conservative approach to risk management. Net income in 2015 was $249 million compared to $244 million in 2014, a 2 percent increase. Our reliable financial performance enabled us to pay an average quarterly dividend rate of 4.00 percent and add $76 million to retained earnings.
Total assets at year-end were $118.8 billion, rising 11 percent compared to assets at year-end 2014 of $106.6 billion. Advances, our principal mission asset, rose 4 percent. Advances grew amid a shift by our members to short-term borrowing, and borrowing by new insurance company members. As always, we believe the key to the ongoing success of the FHLB is our diverse membership base, aided by favorable housing and economic conditions.
In September 2014 our regulator, the Federal Housing Finance Agency, proposed a rule that would have imposed an ongoing housing-asset test on all members to maintain their FHLB membership. It would also effectively ban captive insurance companies from membership. By January 2015 more than 1,300 comment letters had been submitted to the Finance Agency, overwhelmingly opposing every section of the proposal, and we concurred with that opposition. Discussions with the Agency continued through 2015, and the System sought to meet the regulator’s concern of preserving the System’s housing mission, while finding ways to strengthen the mission by adapting to the nation’s evolving housing finance market, which increasingly requires more private capital.
The Finance Agency issued its final rule that took effect February 2016. The Agency laudably heeded the concerns of FHLB members, and abandoned an ongoing asset test for membership. We are disappointed, however, that the Agency enacted the ban on captive insurance companies from membership. Current captive insurance members are required to leave the System by February 2017, one year after the rule took effect. We disagree with this determination. We believe captive insurance companies are important members that help deepen and diversify the flow of funds to the mortgage markets. It is possible this decision could be reconsidered through legislation or other means, and we will keep our members informed of any developments.
Mortgage Purchase Program
Our Mortgage Purchase Program (MPP) enjoyed another strong year. The mortgage portfolio grew by $1 billion to $7.8 billion, and the program achieved record participation by members, with 99 active sellers during 2015. As you’ll read later in this report, MPP is celebrating its 15-year anniversary. MPP offers our members a viable secondary market channel for their mortgage assets, as many of members attested at the Users Group meeting in Cincinnati last November. The program also helps the FHLB fulfill its mission of housing finance, and is a strong contributor to our earnings and dividend. We expect another strong performance for MPP in 2016, and are working to continue to grow the program.
Changes on the Board
For 2015, we added one new director and three directors were re-elected by the membership. Newly elected as an Ohio Member Director is Robert T. Lameier, President and CEO of Miami Savings Bank, Miamitown. Bob is a past chairman of the Ohio Bankers League and a respected community banker. That seat on the FHLB Board opened when Director Mark N. DuHamel, Executive Vice President and Deputy CFO of FirstMerit Bank in Akron, retired from the Board. Mark served the Board with distinction for eight years, and was a strong voice on the Audit Committee and for all members. We valued his expertise and thank him for his significant contributions to the FHLB.
Returning to the Board following the 2015 election is another Ohio Member Director, Michael R. Melvin, President and CEO of Perpetual Federal Savings Bank, Urbana. Also re-elected were two Independent Directors: our Chairman, Donald J. Mullineaux of Lexington, Ky., and Charles J. Ruma of Columbus, Ohio. All four directors elected last fall will serve four-year terms, through 2019. Additionally, Director William J. Small, who is Chairman of First Federal Bank of the Midwest in Defiance, Ohio, was re-elected as Vice Chairman by the Board, and will serve in that capacity through 2017.
In addition, the Board revised its committee structure, splitting the Financial and Risk Management Committee into two committees: Business & Operations and Risk. The Business & Operations Committee will work to ensure FHLB operations are effective, efficient and aligned with fulfilling the FHLB’s mission. The Risk Committee provides a forum for the Board to oversee the FHLB’s comprehensive risk management program.
We bid a fond farewell to Thomas J. Ciresi, Senior Vice President, Member Services, who retired in September after 34 years with the FHLB. Tom was the embodiment of one of FHLB Cincinnati’s core values: the personal attention and responsiveness to members’ needs within our cooperative. His leadership and commitment to the FHLB’s members has been instrumental in sustaining the long-term success of the FHLB.
The year ahead
Change is a constant, and it often takes steadfast resolve to resist impulsive reaction when shifting external forces create uncertainty. From dramatically falling commodity prices to marginally rising interest rates to an unpredictable presidential election, 2016 will most certainly promise more change domestically. Global events are no less volatile and will likewise have an impact on economic markets and consumer behavior.
The FHLB has thrived for more than 80 years, through economic expansion and turmoil, peace and war. We have been sustained by a belief in the validity of our mission – that every community, large or small, deserves vital financial institutions that can help them thrive, and that every citizen deserves a decent, safe place to live, and that we are here to help. In support of our mission we strive to run our FHLB conservatively so that it remains strong, with a focus on returning value to our members so that they remain vital in their communities. Our affordable housing programs help provide direct assistance to communities in need. We endeavor to confront the change around us in a steady and measured way, consistent with our mission. We are confident that we can meet our goals of delivering value to our members and provide a solid foundation for housing finance in the Fifth District.
Donald J. Mullineaux
Chair, Board of Directors
Andrew S. Howell
President and CEO