We are pleased to report that the Federal Home Loan Bank of Cincinnati (FHLB) achieved record earnings as well as stable and consistent financial and operating performance in 2017. Our mission is to provide our member-stockholders with quality 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.
Through our ongoing partnership with our members, our public policy mission, and our collective commitment to help meet the housing finance and economic development needs of FHLB Fifth District communities, we fulfilled that mission in 2017.
Record financial and operating performance
Earnings rose to a record $314 million in 2017, from $268 million in 2016, an increase of 17 percent. This improved financial performance resulted from higher net interest income due to wider asset spreads to funding costs, growth in our Mortgage Purchase Program (MPP) portfolio, and a conservative approach to risk management.
Our members benefitted from increased earnings in the form of an increase in the dividend paid on FHLB stock. We believe that an attractive dividend is a key component of how we deliver value to members. We paid an average dividend of 5.00 percent for 2017, up from 4.00 percent in 2016, and the dividend in the fourth quarter was paid at an annual rate of 5.50 percent. We returned $208 million to members as dividends, a payout ratio of 66.3 percent.
We also added $106 million to retained earnings in 2017. Measured growth in retained earnings is consistent with a core value of your FHLB, and that is to maintain strong capital management practices.
Total assets at year-end were $106.9 billion, up 2 percent compared to assets at year-end 2016 of $104.6 billion. Advances to members ended 2017 at $69.9 billion, close to where they were at year-end 2016. The numbers belie the fact that our lending desk was very busy in 2017. Overall, members shortened the terms on their borrowing, leading to more frequent Advance renewals and daily volatility. There were seven months during the year where we executed 1,000 or more Advance transactions, compared to just one such month in 2016. The extraordinary efforts of our Credit, Treasury and Correspondent Services departments ensured funding was available to members at all times. The ability to quickly facilitate member funding and liquidity needs is a key benefit of membership.
The Mortgage Purchase Program helps us fulfill our mission of housing finance and is a strong contributor to earnings and resulting dividends. The program enjoyed another solid year. The mortgage portfolio grew $528 million to end the year at nearly $9.5 billion in principal balances. By utilizing MPP, members can increase their balance sheet liquidity and minimize the risks associated with holding fixed-rate mortgages in portfolio. We have made a number of improvements to MPP based on input from members.
Community investment programs
Record earnings in 2017 resulted in a $35 million set-aside for our Affordable Housing Program in 2018. Our Housing and Community Investment programs again provided a multitude of opportunities for our members to help their communities flourish. the competitive Affordable Housing Program,
$28.6 million was awarded in 2017 through 35 members to help create 2,396 units of affordable housing in the Fifth District and elsewhere. Also, through the Welcome Home program, $10.5 million was disbursed in 2017 to assist 2,126 homebuyers. In all, 222 members took part in one or more of our HCI programs.
Our voluntary programs continue to play an important role. Through the Carol M. Peterson Housing Fund, $1.4 million was disbursed in 2017 to help 218 households accommodate elderly and special needs residents. The Disaster Reconstruction Program helped 23 households in the Fifth District to rebuild following wildfires and storms. As you will read later in this report, our voluntary programs over the years have been shaped by input from our members to meet the needs of their communities.
Legislative and regulatory matters
In March 2018, our regulator published the long-awaited proposed new Affordable Housing Program regulation, the result of several years of study and consultation. It is the second major revision of the AHP in its 28-year history and the purpose of the proposed regulation is to make the AHP easier to use and better aligned with other funding sources. The proposed regulation has not yet been finalized.
The Ohio General Assembly recently passed, and the Gov. John Kasich signed into law, a bill to protect FHLB interests in posted or pledged collateral in the event of insurance company insolvency. The bill creates a new section of the Ohio Revised Code that aligns with collateral practices of regulated FHLB depository members. In Washington, there continues to be talk of GSE reform, as Fannie and Freddie have spent nearly 10 years in conservatorship. We remain engaged in discussions about legislative financial reform which may have an impact on the FHLBank System’s cooperative business model.
The Board and senior management
For 2018, the membership re-elected two Member Directors from Kentucky, brought back a former Member Director from Ohio, and re-elected an Independent Director. In the Kentucky Member Director election, incumbent Directors Greg W. Caudill, CEO, Farmers National Bank, Danville, and David E. Sartore, Executive Vice President and CFO, Field & Main Bank, Henderson, were the only candidates nominated to run for the two open Kentucky Member Director seats. In accordance with Federal Housing Finance Agency regulations, no election was required, and Mr. Caudill and Mr. Sartore were each declared re-elected.
In Ohio, members elected Mark N. DuHamel, Executive Vice President and Corporate Treasurer, Huntington National Bank, Columbus. Mr. DuHamel previously served on our Board from 2009 to 2015. Also re-elected was Public Interest Independent Director Grady P. Appleton, who recently retired as President and CEO of East Akron Neighborhood Development Corp., Akron, Ohio.
James A. England, Chairman of Decatur County Bank, Decaturville, Tenn., and a Board member since 2011, was elected to a two-year term as Vice Chair. He succeeds William J. Small, Chairman of First Federal Bank of the Midwest in Defiance, Ohio, who is retiring from the Board after 12 years of service, four of those as our Vice Chair. Bill was active in the industry both statewide and nationally, and also serves on the boards of many community organizations in the Defiance area. His wise guidance, based on the depth of this experience, was invaluable to the Board. His keen sense of humor will be much remembered and sorely missed. We are grateful for his service and wish Bill all the best.
We will also soon bid farewell to Donald R. Able, Executive Vice President and Chief Operating Officer, who is scheduled to retire at the end of June after more than 37 years with FHLB Cincinnati. Don joined the FHLB in 1981 as a co-op student, demonstrating a quick learning curve, hard work and dedication. Combining these qualities with ongoing education, including a CPA license and an MBA, he rose through a series of promotions, serving as head of Accounting, Controller, then Chief Operating Officer and Chief Financial Officer. Don greatly contributed to the FHLB’s efficient operations, corporate governance and steady financial performance, softening his direct style with warmth and humor, and always putting the interests of members first. Please join us in thanking Don for his many years of dedicated service.
Following Don’s decision to retire, we appointed Stephen J. Sponaugle to be Executive Vice President- Chief Financial Officer. Also, James G. Dooley Sr. was appointed Executive Vice President-Chief Risk and Compliance Officer.
FHLB Cincinnati enjoyed an excellent year financially, but a strong performance should not be mistaken for perfection. We are actively looking for ways to better serve our members. The theme of this year’s annual report is “Continuous Improvement,” and you’ll read how we think and act on this. As we look for better ways to connect with our members and the communities we serve, we do that with a focus on maximizing member value for your investment in and activity with our company. 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