We are pleased to report that in 2018 the Federal Home Loan Bank of Cincinnati (FHLB) achieved record earnings for the second year in a row, as well as stable and consistent financial and operating performance.
Our mission is to provide our member-stockholders 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. Through our ongoing partnership with our members, as well as our collective commitment to help meet the housing finance and economic development needs of FHLB Fifth District communities, we fulfilled that mission in 2018.
Record financial and operating performance
Earnings rose to a record $339 million in 2018, from $314 million in 2017, an increase of 8 percent. This improved financial performance resulted from the positioning of risk to benefit from rising interest rates, continued growth in our Mortgage Purchase Program portfolio, and higher net interest income due to wider asset spreads.
Our members benefitted from increased earnings in the form of an increase in the dividend paid on your stock. We believe that our dividend is a key component of how we deliver value to our members. We paid an average dividend of 5.88 percent for 2018, up from 5.00 percent in 2017.
Our retained earnings now stand above $1 billion for the first time, as we added $83 million in 2018.
Total assets at year-end were $99.2 billion, down 7 percent compared to assets at year-end 2017 of $106.9 billion. Advances to members ended 2018 at $54.8 billion, down from just under $70.0 billion at year-end 2017. While that year-end figure shows a decline in Advances, business remained brisk. Daily Advance balances averaged $65.5 billion, down just 3 percent from 2017. We executed 12,845 Advances during the year, providing members with $2.9 trillion in funding. Our ability to quickly facilitate member funding and liquidity needs is a key benefit of membership.
Our Mortgage Purchase Program (MPP) also achieved a record: $10.5 billion in mortgage loans held in portfolio, a net increase of $820 million, or 8 percent, from year-end 2017. MPP helps us fulfill our housing finance mission, and is an important contributor to earnings and resulting dividends. By utilizing MPP, members can increase their liquidity and minimize risks associated with holding mortgages in portfolio.
One ongoing strategic focus is our transition away from products linked to the London InterBank Offered Rate, or LIBOR. Regulators and others in the industry were concerned about the manipulation of LIBOR by market actors during the financial crisis, and have sought a more robust and liquid benchmark. In 2017, the Federal Reserve Board endorsed a rate called the Secured Overnight Financing Rate (SOFR), and the FHLBanks have begun adopting it as an additional benchmark for debt issuance. In November 2018, we introduced a SOFR Advance, and we are currently working to implement SOFR throughout our organization.
Community investment programs
Earnings in 2017 resulted in a $35 million set-aside for our Affordable Housing Program in 2018. Our Housing and Community Investment (HCI) programs again provided a multitude of opportunities for our members to help their communities flourish. Through our competitive Affordable Housing Program, $29.3 million was awarded in 2018 through 40 members, to help create 2,309 units of affordable housing in the Fifth District and elsewhere. In all, 234 members took part in one or more of our HCI programs.
The Board of Directors moved to strengthen our voluntary programs. In December, the Board approved $3.6 million to replenish our Disaster Reconstruction Program, bringing that program back to $5 million, which is available to Fifth District households to repair or replace their homes following natural disasters. The Board also approved $2.1 million for the Carol M. Peterson Housing Fund, which supports accessibility rehabilitation and emergency repairs for special needs and elderly low-income homeowners.
The Board and senior management
For 2019, the membership re-elected two Member Directors from Tennessee, elected a new Member Director from Ohio, re-elected an Independent Director and elected a new Independent Director. In the Tennessee Member Director election, incumbent Directors James A. England, Chairman of Decatur County Bank, Decaturville, Tenn., and William S. “Sammy” Stuard Jr., President, CEO and Chairman of the Board of F&M Bank, Clarksville, Tenn., were both re-elected to their third terms on the Board.
Newly elected as a Member Director from Ohio was Michael P. Pell, President and CEO of First State Bank in Winchester. Newly elected as Independent Director was April Miller Boise, resident of Cincinnati. Ms. Boise is Senior Vice President, Chief Legal Officer and Corporate Secretary of Meritor Inc. in Troy, Mich. Re-elected as Independent Director was Nancy E. Uridil, a retired global consumer products senior executive and a director at Flexsteel Industries Inc., Avon Lake, Ohio.
The FHLB Board also re-elected Dr. Donald J. Mullineaux to serve as Chair of the Board. He has served on the Board since 2010 and in the capacity of Chair since 2015.
We bid farewell to two long-serving directors. Charles J. “Bud” Koch, a veteran of savings & loans and banking, has retired after serving the Board for a total of 26 years, as a Member Director, an Independent Director, and in various leadership capacities including Chairman. Bud has forgotten more about banking than most of us know. Among other important contributions, he was instrumental in helping us develop a capital plan, and in launching our Mortgage Purchase Program. Bud has been a guiding force on corporate governance and a strong advocate for the FHLBank System.
James R. DeRoberts has retired after 11 years on the Board. We got to know Jim as our long-time insurance rep for directors & officers liability coverage. It appeared he knew every banker in Ohio and we grew to appreciate his intelligence, insight and good nature. He helped to found The Arlington Bank (later acquired by First Merchants Bank of Indiana) and was elected to the Board in 2008. We will miss the counsel of both Bud and Jim, and we wish them well.
FHLB Cincinnati welcomed one addition to our senior management team in 2018. Bridget C. Hoffman joined us as Senior Vice President, General Counsel. She comes to us from our long-standing outside counsel, the Cincinnati law firm Taft Stettinius & Hollister LLP, and is well acquainted with our business and our industry. She oversees legal affairs, public affairs and human resources. Also, Roger B. Batsel, who joined FHLB Cincinnati in 2014 as Chief Information Officer, was promoted to Senior Vice President, Chief Information and Operations Officer. In this role, Roger oversees the Information Technology, Correspondent Services and Administrative Services departments.
Our strong financial performance flows from our dedication to delivering member value, by helping members achieve their business goals and serve their communities. Our readiness to deliver liquidity, housing programs, correspondent services, a competitive dividend, and the opportunities for education and information are all key to how we deliver value to members. As part of our continuous improvement efforts, we initiated a survey and a series of conversations with members, to learn how we can better support them and help them grow. We will report what we learned at our Regional Stockholder Meetings and Financial Management Conference.
It is an important part of the vision and direction of FHLB Cincinnati that we strive to deliver high-quality, positive member experiences and engage with our members proactively. Our efforts on SOFR and the member survey are examples of how we actively look for ways to enhance products and deliver services. 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