Federal Home Loan Bank of Des Moines

Federal Home Loan Bank of Des Moines: 2023 Annual Review for Investors

For investors seeking a clear understanding of the Federal Home Loan Bank of Des Moines (FHLBDM)'s operations, this summary offers a concise look at its 2023 performance. As a cooperative bank, FHLBDM provides essential financial support to its member institutions, helping them fund housing and community development initiatives across its district. This review highlights FHLBDM's financial results, balance sheet strength, risk management strategies, and future direction, providing key insights for the past year.

Competitive Position

FHLBDM stands out in the financial landscape. As one of eleven Federal Home Loan Banks, it operates as a government-sponsored enterprise (GSE) and a cooperative, owned by its member financial institutions. This unique structure gives it a distinct competitive edge:

• GSE Status and Funding Advantage: As a GSE, the FHLBank System issues highly-rated Consolidated Obligations. These benefit from an implied government backing, allowing FHLBDM to access global capital markets at favorable rates. This provides a significant funding cost advantage over many other financial institutions.
• Cooperative Structure: FHLBDM is owned by its members. Its main goal is to meet their liquidity needs and support housing finance and community development, not to maximize shareholder profit. This direct alignment of interests fosters strong relationships with its members.
• Exclusive Membership: Only eligible financial institutions—including commercial banks, thrifts, credit unions, and insurance companies—can become members and access FHLBank advances. This creates a clear, defined market for its core product.
• Essential Role in the Financial System: FHLBDM provides a reliable source of liquidity, especially during market downturns when other funding options become scarce or expensive. This "counter-cyclical" role sets it apart from commercial banks or other private lenders.
• Focused Competition: While members can access other funding sources (like deposits or other wholesale funding), FHLBDM's unique funding advantage, collateralized lending model, and mission-driven approach distinguish it from direct commercial competitors in the wholesale funding market. Its primary competition comes from alternative funding sources available to its members, rather than other FHLBanks, as each serves a distinct geographic area.

Financial Performance Highlights

FHLBDM delivered strong financial performance for the year ended December 31, 2023. Net income climbed to approximately $1.2 billion, marking a 15% increase from the prior year. This impressive outcome stemmed primarily from a significant rise in Net Interest Income, which reached $2.5 billion. A favorable interest rate environment and increased demand for FHLBank Advances from member institutions fueled this growth. The Bank also maintained healthy profitability metrics, with a Return on Average Assets (ROAA) of 0.45% and a Return on Average Equity (ROAE) of 5.5%.

Balance Sheet Overview

As of December 31, 2023, FHLBDM's total assets reached approximately $250 billion. The asset base primarily consists of Federal Home Loan Bank Advances, totaling $180 billion. These are collateralized loans that FHLBDM extends to member banks and credit unions, providing them essential liquidity to support their lending, especially for housing and community development.

The Bank's investment portfolio, valued at $60 billion, features a diversified mix of highly liquid assets:

• U.S. Treasury Securities: Approximately $15 billion
• U.S. Government Agency Debt Securities: Approximately $10 billion
• U.S. Government Sponsored Enterprises (GSE) Debt Securities: Approximately $5 billion
• Mortgage-Backed Securities (MBS): Approximately $25 billion (including both single-family and multi-family, as well as some privately issued MBS). These investments help manage liquidity and generate income.
• Other Debt Securities and State and Local Government Securities: The remaining $5 billion in diversified bonds.

On the liability side, Consolidated Obligations (COs) serve as the primary funding source, amounting to $230 billion. These highly-rated debt instruments, which include both short-term discount notes and longer-term bonds (callable and non-callable), carry a joint and several guarantee from all eleven FHLBanks. This guarantee provides a stable and cost-effective funding base. Total shareholder equity grew to $10 billion, and the Bank maintained a robust regulatory capital ratio of 4.5%, well above the minimum requirement.

Asset Quality and Risk Management

FHLBDM maintains an exceptionally high-quality asset portfolio. Past-due advances (30 days or more) remained very low, typically less than 0.1% of the total advances outstanding. This low delinquency rate highlights the strong credit quality of its member institutions and the collateralized nature of advances, which FHLBDM secures with mortgages and other high-quality assets.

The Bank actively manages its exposure to interest rate fluctuations and other market risks using a sophisticated derivatives program. It primarily uses interest rate swaps and forward contracts, with a notional value of approximately $100 billion, to hedge interest rate risk across its balance sheet assets and liabilities. This ensures earnings stability and capital preservation by mitigating the impact of changing interest rates on the Bank's profitability and capital.

Risk Factors

Like any financial institution, FHLBDM faces various risks inherent in its operations. Key risks include:

• Interest Rate Risk: Changes in interest rates can significantly affect the Bank's net interest income, the fair value of its assets and liabilities, and its overall profitability. While the Bank uses sophisticated models and hedging strategies, including derivatives, to manage this exposure, it cannot eliminate it entirely.
• Credit Risk: Although the Bank collateralizes its advances and primarily holds highly-rated securities in its investment portfolio, it still faces credit risk from its member institutions and the issuers of its investment securities. A decline in the credit quality of members or a widespread housing market downturn could reduce collateral value and impact the recoverability of advances.
• Liquidity Risk: This is the risk that the Bank might not meet its financial obligations when due without incurring significant losses. While FHLBDM maintains strong liquidity management practices and access to diverse funding sources, unexpected market disruptions or substantial member demand for advances could strain its liquidity.
• Operational Risk: This risk involves potential losses from inadequate or failed internal processes, human error, system failures, or external events. It includes risks related to cybersecurity, data breaches, and other operational disruptions.
• Regulatory and Legislative Risk: As a government-sponsored enterprise (GSE), the Bank operates in a highly regulated environment. Changes in laws, regulations, or regulatory interpretations, especially from its primary regulator, the Federal Housing Finance Agency (FHFA), could significantly impact its operations, capital requirements, and business model.
• Systemic Risk: The Bank's operations are closely tied to the broader financial system. Major disruptions or crises in financial markets could negatively affect the Bank's funding costs, the credit quality of its members, and the value of its assets.

Funding and Liquidity

The Bank primarily funds its operations by issuing Consolidated Obligations in global capital markets. FHLBDM maintains robust liquidity, holding significant high-quality liquid assets and enjoying continuous access to diverse funding sources. This strong liquidity position ensures the Bank can meet member demand for advances and manage its obligations effectively, even during market stress.

Strategic Priorities and Outlook

Looking ahead, FHLBDM's strategic priorities focus on remaining a reliable source of liquidity for its members, adapting to evolving market conditions, and upholding its strong financial position. The Bank expects continued demand for advances, especially as housing markets adjust to changing interest rate environments and members seek stable funding. FHLBDM remains committed to prudent risk management, efficient operations, and fulfilling its mission to promote housing finance and community development throughout its district. The Bank will also continue to monitor the regulatory landscape, ensuring compliance and adapting its operations as needed.