WE ARE PLEASED TO REPORT that the Federal Home Loan Bank of Cincinnati (FHLB) achieved another year of stable and consistent financial and operating performance in 2016. We devote our efforts to delivering membership value to stockholders through competitively priced services consistent with our housing finance mission, reliable dividend rates, and constructive affordable housing programs. We met all of those objectives in 2016.
We attribute our strong performance to our ongoing partnership with members, our public policy mission, and the collective commitment to help meet the housing finance and economic development needs of FHLB Fifth District communities.
Financial and operating performance
Earnings rose in 2016. This improved financial performance resulted from higher net interest income, the sale of certain mortgage-backed securities, and a conservative approach to risk management. Net income in 2016 was $268 million compared to $254 million in 2015, a 5 percent increase. We continued to pay a 4.00 percent annualized dividend rate in each quarter while also adding $97 million, or 13 percent, to retained earnings.
Total assets at year-end were $104.6 billion, down 12 percent compared to assets at year-end 2015 of $118.8 billion. Advances, our principal mission asset, declined by 5 percent, as a result of a reduction in borrowing by a few large-asset members, and also due to a regulatory action: The Federal Housing Finance Agency determined that captive insurance companies were not eligible for continued membership in the FHLBank System, and those entities were required to pay off more than $6 billion of Advances during the year. As always, we believe the key to ongoing success is our diverse membership base, aided by favorable housing and economic conditions.
Mortgage Purchase Program
We continue to promote the Mortgage Purchase Program (MPP) because of the value we believe it brings to members as a viable secondary market channel for the sale of their mortgage originations. The program enjoyed another solid year. For the first time, the number of members selling mortgages to MPP during the year topped 100 – 101 to be exact. The mortgage portfolio grew nearly $1.2 billion to end the year at more than $8.9 billion in principal balances. This program helps us fulfill our mission of housing finance, and is a strong contributor to earnings and resulting dividends. We expect another solid performance for MPP in 2017, and are working to continue to grow the program’s participation.
Community investment programs
With the help of our Advisory Council, we continuously monitor the affordable housing needs of the Fifth District to direct Housing & Community Investment programs for the greatest benefit. We are pleased that there is approximately $30 million available for the Affordable Housing Programs in 2017. In addition, our voluntary programs continue to play an important role. In 2016, the Board expanded the Carol M. Peterson Housing Program to $1.5 million. That increase made more funds available for accessibility rehab and other qualifying projects. Included in this year’s CMPHF was a $100,000 contribution from the FHLB that allowed several members and staff to participate in Habitat for Humanity International’s Jimmy & Rosalynn Carter Work Project in Memphis in August. During that build, 19 homes were constructed for deserving families. As you’ll read later in this report, everyone involved found this to be a rewarding experience, and we are grateful to have been able to participate.
In 2017, we expect that our regulator will propose new regulations for the Affordable Housing Program, the result of several years of study and consultation. Called the “modernization,” it is the first major revision of the AHP in its 28-year history. We hope this effort makes AHP easier to use and better aligns AHP funds with other funding sources in bringing more affordable housing to individuals in communities served by our members.
Improving the member experience
We continue to expand the use of technology tools to create a better experience for our members. In 2016 we kicked off a project to update our Members Only website portal – with one of the major goals of making member information more easily accessible. You will begin to see the results of that effort early in 2018. Behind the scenes, we are improving technology systems to bring together information in a more actionable way. One result of this is an expanded effort on analytics, helping provide clarity to your use of our products.
Changes on the Board
For 2017, the membership added two new Member Directors from Ohio, while one new Independent Director was elected and two Independent Directors were re-elected. Newly elected from Ohio are Brady T. Burt, Chief Financial Officer for Park National Bank of Newark, and James J. Vance, Senior Vice President & Treasurer for Western & Southern Financial Group of Cincinnati.
J. Lynn Anderson of Columbus, Ohio, was elected as an Independent Director. Ms. Anderson, who previously served on the Board as an Ohio Member Director since 2011, retired as Senior Vice President for Nationwide Mutual Insurance Co., and subsequently ran for the Board as an Independent Director. She is chair of the Audit Committee, and also serves on the Housing & Community Development and Risk committees.
Re-elected to the Board are two Independent Directors, Leslie D. Dunn of Cleveland, Ohio, and Alvin J. Nance of Knoxville, Tenn. Ms. Dunn has served on the Board since 2007, is chair of the Governance Committee, and also serves on the Audit and Personnel & Compensation committees. Mr. Nance has served on the Board since 2009, and serves on two Board committees: Housing & Community Investment and Business & Operations.
In addition, Donald J. Mullineaux of Lexington, Ky., was re-elected to a second term as chairman of the Board. An Independent Director since 2010, he also serves as chair of the Personnel & Compensation Committee.
Retiring from the Board in 2016 was Ohio Member Director Tom Moore, a director of First Federal Bank of Ohio in Galion. Mr. Moore served on the Board’s Audit Committee. We are grateful for his four years of service and his many contributions to the Board and Bank.
The year ahead
It appears 2017 will be marked by change. The economy is growing steadily and unemployment is low. The Federal Reserve is signaling higher interest rates, and the new administration in the White House promises a new approach. We remain engaged in discussions about legislative financial reform which may have an impact on the FHLBank System’s cooperative business model.
In this environment, being a strong partner is how we can best support our members. Just as you are focused on offering the best value proposition to your customers, we too work to offer a roster of products and services geared to help you expand service to your communities and the value of your companies. We continue to seek new ways to support our members – through Bank-sponsored seminars where we discuss industry best practices, and through better use of technology that saves you time and effort. The dividend you earn on your stock investment in the FHLB remains an important dimension of value to your membership. By focusing on the value we can deliver to our members, we strive for a vital partnership that helps to strengthen our members and Fifth District communities. We appreciate your confidence in us and the opportunity to serve as your Federal Home Loan Bank.
Donald J. Mullineaux
Chair, Board of Directors
Andrew S. Howell
President and CEO