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EXCEL - IDEA: XBRL DOCUMENT - Federal Home Loan Bank of TopekaFinancial_Report.xls
EX-32 - CERTIFICATION OF PEO AND PFO - Federal Home Loan Bank of Topekaex9301432.htm
EX-31.1 - CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER - Federal Home Loan Bank of Topekaex93014311.htm
EX-31.2 - CERTIFICATION OF SENIOR VICE PRESIDENT AND CHIEF ACCOUNTING OFFICER - Federal Home Loan Bank of Topekaex93014312.htm
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
 
OR
 
¨      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
 
Commission File Number 000-52004
 
FEDERAL HOME LOAN BANK OF TOPEKA
(Exact name of registrant as specified in its charter)
 
Federally chartered corporation
 
48-0561319
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
One Security Benefit Pl. Suite 100
Topeka, KS
 
 
66606
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code: 785.233.0507
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes  ¨ No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x  Yes  ¨  No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. ¨ Large accelerated filer  ¨ Accelerated filer  x Non-accelerated filer  ¨ Smaller reporting company
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  ¨ Yes  x No
 
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
 
 
Shares outstanding as of
November 5, 2014
Class A Stock, par value $100
1,884,269
Class B Stock, par value $100
9,201,143




.FEDERAL HOME LOAN BANK OF TOPEKA
TABLE OF CONTENTS
 
 
 
PART I 
Item 1. 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
Item 3.
Item 4.
Part II 
Item 1.
Item 1A. 
Item 2. 
Item 3. 
Item 4. 
Item 5. 
Item 6. 


2


Important Notice about Information in this Quarterly Report

In this quarterly report, unless the context suggests otherwise, references to the “FHLBank,” “FHLBank Topeka,” “we,” “us” and “our” mean the Federal Home Loan Bank of Topeka, and “FHLBanks” mean the 12 Federal Home Loan Banks, including the FHLBank Topeka.

The information contained in this quarterly report is accurate only as of the date of this quarterly report and as of the dates specified herein.

The product and service names used in this quarterly report are the property of the FHLBank, and in some cases, the other FHLBanks. Where the context suggests otherwise, the products, services and company names mentioned in this quarterly report are the property of their respective owners.

Special Cautionary Notice Regarding Forward-looking Statements

The information contained in this Form 10-Q contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include statements describing the objectives, projections, estimates or future predictions of the FHLBank’s operations. These statements may be identified by the use of forward-looking terminology such as “anticipates,” “believes,” “may,” “is likely,” “could,” “estimate,” “expect,” “will,” “intend,” “probable,” “project,” “should,” or their negatives or other variations of these terms. The FHLBank cautions that by their nature forward-looking statements involve risk or uncertainty and that actual results may differ materially from those expressed in any forward-looking statements as a result of such risks and uncertainties, including but not limited to:
Governmental actions, including legislative, regulatory, judicial or other developments that affect the FHLBank; its members, counterparties or investors; housing government sponsored enterprises (GSE); or the FHLBank System in general;
Regulatory actions and determinations, including those resulting from the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act);
Changes in the FHLBank’s capital structure;
Changes in economic and market conditions, including conditions in the mortgage, housing, and capital markets;
Changes in demand for advances or consolidated obligations of the FHLBank and/or of the FHLBank System;
Effects of derivative accounting treatment, other-than-temporary impairment (OTTI) accounting treatment, and other accounting rule requirements;
The effects of amortization/accretion;
Gains/losses on derivatives or on trading investments and the ability to enter into effective derivative instruments on acceptable terms;
Volatility of market prices, interest rates and indices and the timing and volume of market activity;
Membership changes, including changes resulting from member failures or mergers, changes in the principal place of business of members or changes in the Federal Housing Finance Agency (Finance Agency) regulations on membership standards;
Our ability to declare dividends or to pay dividends at rates consistent with past practices;
Soundness of other financial institutions, including FHLBank members, nonmember borrowers, and the other FHLBanks;
Changes in the value or liquidity of collateral underlying advances to FHLBank members or nonmember borrowers or collateral pledged by reverse repurchase and derivative counterparties;
Competitive forces, including competition for loan demand, purchases of mortgage loans and access to funding;
The ability of the FHLBank to introduce new products and services to meet market demand and to manage successfully the risks associated with new products and services;
Our ability to keep pace with technological changes and the ability of the FHLBank to develop and support technology and information systems, including the ability to access the internet and internet-based systems and services, sufficient to effectively manage the risks of the FHLBank’s business;
The ability of each of the other FHLBanks to repay the principal and interest on consolidated obligations for which it is the primary obligor and with respect to which the FHLBank has joint and several liability;
Changes in the U.S. government’s long-term debt rating and the long-term credit rating of the senior unsecured debt issues of the FHLBank System;
Changes in the fair value and economic value of, impairments of, and risks associated with, the FHLBank’s investments in mortgage loans and mortgage-backed securities (MBS) or other assets and related credit enhancement (CE) protections; and
The volume and quality of eligible mortgage loans originated and sold by participating members to the FHLBank through its various mortgage finance products (Mortgage Partnership Finance® (MPF®) Program1).

1 
"Mortgage Partnership Finance," "MPF" and "eMPF" are registered trademarks of the Federal Home Loan Bank of Chicago.
3



Readers of this report should not rely solely on the forward-looking statements and should consider all risks and uncertainties addressed throughout this report, as well as those discussed under Item 1A – “Risk Factors” in our annual report on Form 10-K for the fiscal year ended December 31, 2013, incorporated by reference herein.

All forward-looking statements contained in this Form 10-Q are expressly qualified in their entirety by this cautionary notice. The reader should not place undue reliance on such forward-looking statements, since the statements speak only as of the date that they are made and the FHLBank has no obligation and does not undertake publicly to update, revise or correct any forward-looking statement for any reason.


PART I

Item 1: Financial Statements


4


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
STATEMENTS OF CONDITION - Unaudited
 
 
(In thousands, except par value)
 
 
 
09/30/2014
12/31/2013
ASSETS
 
 
Cash and due from banks
$
2,571,350

$
1,713,940

Interest-bearing deposits
146

1,116

Securities purchased under agreements to resell (Note 11)
1,075,000


Federal funds sold
1,450,000

575,000

 
 
 
Investment securities:
 
 
Trading securities (Note 3)
1,476,212

2,704,777

Held-to-maturity securities1 (Note 3)
5,074,263

5,423,659

Total investment securities
6,550,475

8,128,436

 
 
 
Advances (Notes 4, 6)
20,574,600

17,425,487

 
 
 
Mortgage loans held for portfolio, net:
 
 
Mortgage loans held for portfolio (Notes 5, 6)
6,169,413

5,956,228

Less allowance for credit losses on mortgage loans (Note 6)
(4,591
)
(6,748
)
Mortgage loans held for portfolio, net
6,164,822

5,949,480

 
 
 
Accrued interest receivable
63,232

72,526

Premises, software and equipment, net
10,869

11,146

Derivative assets, net (Notes 7, 11)
26,098

27,957

Other assets
41,452

45,216

 
 
 
TOTAL ASSETS
$
38,528,044

$
33,950,304

 
 
 
LIABILITIES
 
 
Deposits (Notes 8)
$
677,069

$
961,888

 
 
 
Consolidated obligations, net:
 
 
Discount notes (Note 9)
15,947,588

10,889,565

Bonds (Note 9)
20,025,472

20,056,964

Total consolidated obligations, net
35,973,060

30,946,529

 
 
 
Mandatorily redeemable capital stock (Note 12)
4,371

4,764

Accrued interest payable
71,757

62,447

Affordable Housing Program payable (Note 10)
31,944

35,264

Derivative liabilities, net (Notes 7, 11)
51,417

108,353

Other liabilities
28,028

29,839

 
 
 
TOTAL LIABILITIES
36,837,646

32,149,084

 
 
 
Commitments and contingencies (Note 15)



1    Fair value: $5,085,070 and $5,415,205 as of September 30, 2014 and December 31, 2013, respectively.
The accompanying notes are an integral part of these financial statements.
5


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
STATEMENTS OF CONDITION - Unaudited
 
 
(In thousands, except par value)
 
 
 
09/30/2014
12/31/2013
 
 
 
CAPITAL
 
 
Capital stock outstanding - putable:
 
 
Class A ($100 par value; 1,515 and 4,300 shares issued and outstanding)
$
151,519

$
430,063

Class B ($100 par value; 9,388 and 8,222 shares issued and outstanding)
938,744

822,186

Total capital stock
1,090,263

1,252,249

 
 
 
Retained earnings:
 
 
Unrestricted
547,555

515,589

Restricted
67,637

51,743

Total retained earnings
615,192

567,332

 
 
 
Accumulated other comprehensive income (loss) (Note 13)
(15,057
)
(18,361
)
 
 
 
TOTAL CAPITAL
1,690,398

1,801,220

 
 
 
TOTAL LIABILITIES AND CAPITAL
$
38,528,044

$
33,950,304



The accompanying notes are an integral part of these financial statements.
6


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
 
 
STATEMENTS OF INCOME - Unaudited
 
 
 
 
(In thousands)
 
 
 
 
 
Three Months Ended
Nine Months Ended
 
09/30/2014
09/30/2013
09/30/2014
09/30/2013
INTEREST INCOME:
 
 
 
 
Interest-bearing deposits
$
40

$
56

$
120

$
257

Securities purchased under agreements to resell
96

42

138

821

Federal funds sold
358

285

840

989

Trading securities
12,330

14,285

37,972

42,483

Held-to-maturity securities
11,271

14,408

35,663

44,222

Advances
31,360

30,689

89,349

93,736

Prepayment fees on terminated advances
107

287

931

3,529

Mortgage loans held for portfolio
51,099

48,675

152,701

145,050

Other
374

409

1,149

1,252

Total interest income
107,035

109,136

318,863

332,339

 
 
 
 
 
INTEREST EXPENSE:
 
 
 
 
Deposits
166

179

604

768

Consolidated obligations:
 
 
 
 
Discount notes
2,688

2,041

6,250

6,746

Bonds
47,552

52,319

144,488

166,037

Mandatorily redeemable capital stock (Note 12)
13

6

29

19

Other
44

45

127

121

Total interest expense
50,463

54,590

151,498

173,691

 
 
 
 
 
NET INTEREST INCOME
56,572

54,546

167,365

158,648

Provision (reversal) for credit losses on mortgage loans (Note 6)
82

530

(1,732
)
2,061

NET INTEREST INCOME AFTER MORTGAGE LOAN LOSS PROVISION
56,490

54,016

169,097

156,587

 
 
 
 
 
OTHER INCOME (LOSS):
 
 
 
 
Total other-than-temporary impairment losses on held-to-maturity securities

(5
)

(19
)
Net amount of impairment losses on held-to-maturity securities reclassified to/(from) accumulated other comprehensive income (loss)
(20
)
(295
)
(443
)
(433
)
Net other-than-temporary impairment losses on held-to-maturity securities (Note 3)
(20
)
(300
)
(443
)
(452
)
Net gain (loss) on trading securities (Note 3)
(11,419
)
(6,768
)
(22,431
)
(37,687
)
Net gain (loss) on derivatives and hedging activities (Note 7)
(2,218
)
(5,592
)
(26,551
)
2,875

Standby bond purchase agreement commitment fees
1,594

1,408

4,711

3,774

Letters of credit fees
757

736

2,349

2,298

Other
501

685

1,734

1,613

Total other income (loss)
(10,805
)
(9,831
)
(40,631
)
(27,579
)
 
 
 
 
 

The accompanying notes are an integral part of these financial statements.
7


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
 
 
STATEMENTS OF INCOME - Unaudited
 
 
 
 
(In thousands)
 
 
 
 
 
Three Months Ended
Nine Months Ended
 
09/30/2014
09/30/2013
09/30/2014
09/30/2013
OTHER EXPENSES:
 
 
 
 
Compensation and benefits
$
8,779

$
6,879

$
22,973

$
20,208

Other operating
3,016

3,364

9,914

10,206

Federal Housing Finance Agency
564

481

1,854

1,698

Office of Finance
541

622

1,662

1,844

Other
980

1,084

3,759

3,872

Total other expenses
13,880

12,430

40,162

37,828

 
 
 
 
 
INCOME BEFORE ASSESSMENTS
31,805

31,755

88,304

91,180

 
 
 
 
 
Affordable Housing Program (Note 10)
3,181

3,176

8,833

9,120

 
 
 
 
 
NET INCOME
$
28,624

$
28,579

$
79,471

$
82,060



The accompanying notes are an integral part of these financial statements.
8


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
STATEMENTS OF COMPREHENSIVE INCOME - Unaudited
 
 
(In thousands)
 
 
 
 
Three Months Ended
Nine Months Ended
 
09/30/2014
09/30/2013
09/30/2014
09/30/2013
Net income
$
28,624

$
28,579

$
79,471

$
82,060

 
 
 
 
 
Other comprehensive income:
 
 
 
 
Net non-credit portion of other-than-temporary impairment losses on held-to-maturity securities:
 
 
 
 
Non-credit portion

(5
)

(19
)
Reclassification of non-credit portion included in net income
20

300

443

452

Accretion of non-credit portion
1,002

738

2,734

3,467

Total net non-credit portion of other-than-temporary impairment losses on held-to-maturity securities
1,022

1,033

3,177

3,900

 
 
 
 
 
Defined benefit pension plan:
 
 
 
 
Amortization of net loss
38

101

127

302

Total defined benefit pension plan
38

101

127

302

 
 
 
 
 
Total other comprehensive income
1,060

1,134

3,304

4,202

 
 
 
 
 
TOTAL COMPREHENSIVE INCOME
$
29,684

$
29,713

$
82,775

$
86,262

 


The accompanying notes are an integral part of these financial statements.
9


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
 
 
 
 
 
STATEMENTS OF CAPITAL - Unaudited
 
 
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
Capital Stock1
 
 
 
Other
 
 
Class A
Class B
Total
Retained Earnings
Comprehensive
Total
 
Shares
Par Value
Shares
Par Value
Shares
Par Value
Unrestricted
Restricted
Total
Income (Loss)
Capital
Balance at December 31, 2012
4,053

$
405,304

8,592

$
859,152

12,645

$
1,264,456

$
453,346

$
27,936

$
481,282

$
(25,257
)
$
1,720,481

Proceeds from issuance of capital stock
8

827

3,858

385,857

3,866

386,684

 
 
 
 
386,684

Repurchase/redemption of capital stock
(1,594
)
(159,414
)
(134
)
(13,385
)
(1,728
)
(172,799
)
 
 
 
 
(172,799
)
Comprehensive income
 
 
 
 
 
 
65,649

16,411

82,060

4,202

86,262

Net reclassification of shares to mandatorily redeemable capital stock
(290
)
(28,973
)
(1,782
)
(178,177
)
(2,072
)
(207,150
)
 
 
 
 
(207,150
)
Net transfer of shares between Class A and Class B
2,097

209,697

(2,097
)
(209,697
)


 
 
 
 

Dividends on capital stock (Class A - 0.3%, Class B - 3.5%):
 
 
 
 
 
 
 
 
 
 
 
Cash payment
 
 
 
 
 
 
(214
)
 
(214
)
 
(214
)
Stock issued
 
 
245

24,478

245

24,478

(24,478
)
 
(24,478
)
 

Balance at September 30, 2013
4,274

$
427,441

8,682

$
868,228

12,956

$
1,295,669

$
494,303

$
44,347

$
538,650

$
(21,055
)
$
1,813,264

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
Capital Stock1
 
 
 
Other
 
 
Class A
Class B
Total
Retained Earnings
Comprehensive
Total
 
Shares
Par Value
Shares
Par Value
Shares
Par Value
Unrestricted
Restricted
Total
Income (Loss)
Capital
Balance at December 31, 2013
4,300

$
430,063

8,222

$
822,186

12,522

$
1,252,249

$
515,589

$
51,743

$
567,332

$
(18,361
)
$
1,801,220

Proceeds from issuance of capital stock
12

1,161

6,279

627,890

6,291

629,051

 
 
 
 
629,051

Repurchase/redemption of capital stock
(5,850
)
(584,978
)
(93
)
(9,343
)
(5,943
)
(594,321
)
 
 
 
 
(594,321
)
Comprehensive income
 
 
 
 




63,577

15,894

79,471

3,304

82,775

Net reclassification of shares to mandatorily redeemable capital stock
(77
)
(7,711
)
(2,204
)
(220,391
)
(2,281
)
(228,102
)
 
 
 
 
(228,102
)
Net transfer of shares between Class A and Class B
3,130

312,984

(3,130
)
(312,984
)


 
 
 
 

Dividends on capital stock (Class A - 0.6%, Class B - 5.0%):
 
 
 
 




 
 
 
 
 

Cash payment
 
 
 
 




(225
)
 
(225
)
 
(225
)
Stock issued
 
 
314

31,386

314

31,386

(31,386
)
 
(31,386
)
 

Balance at September 30, 2014
1,515
$
151,519

9,388
$
938,744

10,903
$
1,090,263

$
547,555

$
67,637

$
615,192

$
(15,057
)
$
1,690,398

                   
1    Putable


The accompanying notes are an integral part of these financial statements.
10


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
STATEMENTS OF CASH FLOWS - Unaudited
 
 
(In thousands)
 
 
 
Nine Months Ended
 
09/30/2014
09/30/2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
Net income
$
79,471

$
82,060

Adjustments to reconcile income (loss) to net cash provided by (used in) operating activities:
 
 
Depreciation and amortization:
 
 
Premiums and discounts on consolidated obligations, net
(12,246
)
(22,913
)
Concessions on consolidated obligations
3,774

4,956

Premiums and discounts on investments, net
(232
)
(1,178
)
Premiums, discounts and commitment fees on advances, net
(9,306
)
(11,375
)
Premiums, discounts and deferred loan costs on mortgage loans, net
11,178

16,772

Fair value adjustments on hedged assets or liabilities
9,214

11,436

Premises, software and equipment
1,345

1,470

Other
127

302

Provision (reversal) for credit losses on mortgage loans
(1,732
)
2,061

Non-cash interest on mandatorily redeemable capital stock
27

18

Net other-than-temporary impairment losses on held-to-maturity securities
443

452

Net realized (gain) loss on sale of premises and equipment
6

(19
)
Other (gains) losses
105

114

Net (gain) loss on trading securities
22,431

37,687

(Gain) loss due to change in net fair value adjustment on derivative and hedging activities
47,674

11,963

(Increase) decrease in accrued interest receivable
9,331

13,766

Change in net accrued interest included in derivative assets
4,841

(213
)
(Increase) decrease in other assets
2,076

2,048

Increase (decrease) in accrued interest payable
9,308

(612
)
Change in net accrued interest included in derivative liabilities
(19,874
)
(16,832
)
Increase (decrease) in Affordable Housing Program liability
(3,320
)
2,031

Increase (decrease) in other liabilities
(2,306
)
(862
)
Total adjustments
72,864

51,072

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
152,335

133,132

 
 
 

The accompanying notes are an integral part of these financial statements.
11


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
STATEMENTS OF CASH FLOWS - Unaudited
 
 
(In thousands)
 
 
 
Nine Months Ended
 
09/30/2014
09/30/2013
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
Net (increase) decrease in interest-bearing deposits
$
61,924

$
99,746

Net (increase) decrease in securities purchased under resale agreements
(1,075,000
)
1,399,288

Net (increase) decrease in Federal funds sold
(875,000
)
305,000

Net (increase) decrease in short-term trading securities
260,000

(539,914
)
Proceeds from maturities of and principal repayments on long-term trading securities
946,134

264,772

Purchases of long-term trading securities

(500,279
)
Proceeds from maturities of and principal repayments on long-term held-to-maturity securities
693,339

1,185,321

Purchases of long-term held-to-maturity securities
(340,977
)
(1,645,872
)
Principal collected on advances
42,425,603

54,345,379

Advances made
(45,643,549
)
(56,722,373
)
Principal collected on mortgage loans
572,403

1,029,054

Purchase of mortgage loans
(799,769
)
(1,030,602
)
Proceeds from sale of foreclosed assets
4,009

3,556

Principal collected on other loans made
1,572

1,469

Proceeds from sale of premises, software and equipment
2

47

Purchases of premises, software and equipment
(1,076
)
(3,679
)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
(3,770,385
)
(1,809,087
)
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
Net increase (decrease) in deposits
(283,055
)
(419,122
)
Net proceeds from issuance of consolidated obligations:
 
 
Discount notes
41,055,791

72,658,386

Bonds
7,182,363

6,361,367

Payments for maturing and retired consolidated obligations:
 
 
Discount notes
(35,998,826
)
(69,141,787
)
Bonds
(7,237,500
)
(7,146,000
)
Proceeds from financing derivatives

170

Net interest payments received (paid) for financing derivatives
(49,296
)
(50,233
)
Proceeds from issuance of capital stock
629,051

386,684

Payments for repurchase/redemption of capital stock
(594,321
)
(172,799
)
Payments for repurchase of mandatorily redeemable capital stock
(228,522
)
(207,649
)
Cash dividends paid
(225
)
(214
)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
4,475,460

2,268,803

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
857,410

592,848

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
1,713,940

369,997

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
2,571,350

$
962,845

 
 
 
Supplemental disclosures:
 
 
Interest paid
$
150,276

$
182,984

 
 
 
Affordable Housing Program payments
$
12,372

$
7,298

 
 
 
Net transfers of mortgage loans to real estate owned
$
3,590

$
4,724


The accompanying notes are an integral part of these financial statements.
12


FEDERAL HOME LOAN BANK OF TOPEKA
Notes to Financial Statements - Unaudited
September 30, 2014


NOTE 1 – BASIS OF PRESENTATION

Basis of Presentation: The accompanying interim financial statements of the FHLBank are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instruction provided by Article 10, Rule 10-01 of Regulation S-X. The financial statements contain all adjustments which are, in the opinion of management, necessary for a fair statement of the FHLBank’s financial position, results of operations and cash flows for the interim periods presented. All such adjustments were of a normal recurring nature. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full fiscal year or any other interim period.

The FHLBank’s significant accounting policies and certain other disclosures are set forth in the notes to the audited financial statements for the year ended December 31, 2013. The interim financial statements presented herein should be read in conjunction with the FHLBank’s audited financial statements and notes thereto, which are included in the FHLBank’s annual report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 14, 2014 (annual report on Form 10-K). The notes to the interim financial statements highlight significant changes to the notes included in the annual report on Form 10-K.

Use of Estimates: The preparation of financial statements under GAAP requires management to make estimates and assumptions as of the date of the financial statements in determining the reported amounts of assets, liabilities and estimated fair values and in determining the disclosure of any contingent assets or liabilities. Estimates and assumptions by management also affect the reported amounts of income and expense during the reporting period. The most significant of these estimates include the fair value of trading securities, the fair value of derivatives, the determination of OTTI on investments and the allowance for credit losses. Many of the estimates and assumptions, including those used in financial models, are based on financial market conditions as of the date of the financial statements. Because of the volatility of the financial markets, as well as other factors that affect management estimates, actual results may vary from these estimates.

Reclassifications: Certain amounts in the financial statements and related footnotes have been reclassified to conform to current period presentations. These reclassifications have no impact on total assets, net income, total comprehensive income, total capital or cash flows.


NOTE 2 – RECENTLY ISSUED ACCOUNTING STANDARDS AND INTERPRETATIONS AND CHANGES IN AND ADOPTIONS OF ACCOUNTING PRINCIPLES

Classification of Certain Government-Guaranteed Mortgage Loans Upon Foreclosure. In August 2014, the Financial Accounting Standards Board (FASB) issued guidance to change the accounting for government-guaranteed mortgage loans, including Federal Housing Administration (FHA) and the U.S. Department of Veterans Affairs (VA) loans. The amendments require that a mortgage loan be derecognized and a separate receivable be recognized upon foreclosure if: (1) the loan has a government guarantee that is not separable from the loan before foreclosure; (2) at the time of foreclosure, the creditor has the intent to convey the property to the guarantor and make a claim on that guarantee and the ability to recover under that claim; and (3) at the time of foreclosure, any amount of the claim determined on the basis of fair value is fixed. This receivable should be based upon the principal and interested expected to be recovered from the guarantor. The amendments are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014, which is January 1, 2015 for the FHLBank. The adoption of this amendment is not expected to a have a material impact on the FHLBank's financial condition, results of operations, or cash flows.

Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. In June 2014, the FASB issued guidance to change the accounting for repurchase-to-maturity transactions and linked repurchase financings to that of secured borrowings, which is consistent with the accounting for repurchase agreements. The amendments also require two new disclosures:(1) information about transfers accounted for as sales in transactions that are economically similar to repurchase agreements; and (2) increased transparency about the types of collateral pledged for repurchase agreements and similar transactions accounted for as secured borrowings. The amendments are effective for the first interim or annual period beginning after December 15, 2014, which is January 1, 2015 for the FHLBank. The adoption of this amendment is not expected to a have a material impact on the FHLBank's financial condition, results of operations, or cash flows.


13


Revenue Recognition. In May 2014, the FASB issued guidance to introduce a new revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This standard is effective for fiscal years beginning after December 15, 2016 (January 1, 2017 for the FHLBank), including interim periods within that reporting period. The FHLBank is currently evaluating the new guidance to determine the impact it will have, if any, on its financial condition, results of operations, or cash flows.

Receivables - Troubled Debt Restructurings by Creditors. In January 2014, the FASB issued amendments intended to clarify when a creditor should be considered to have received physical possession of the residential real estate property collateralizing a consumer mortgage loan. These amendments clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, when either: (a) the creditor obtains legal title to the residential real estate property upon completion of a foreclosure; or (b) the borrower conveys all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The amendments are effective for interim and annual periods beginning after December 15, 2014 (January 1, 2015 for the FHLBank). Early adoption is permitted. The guidance may be adopted using a modified retrospective transition method or a prospective transition method. The adoption of this amendment is not expected to a have a material impact on the FHLBank's financial condition, results of operations, or cash flows.

Joint and Several Liability. In February 2013, the FASB issued guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date. This guidance requires an entity to measure these obligations as the sum of: (1) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors; and (2) any additional amount the reporting entity expects to pay on behalf of its co-obligors. In addition, this guidance requires an entity to disclose the nature and amount of the obligation as well as other information about these obligations. This guidance was effective for interim and annual periods beginning on or after December 15, 2013 (January 1, 2014 for the FHLBank) and was applied retrospectively to obligations with joint and several liabilities existing at the beginning of the current fiscal year. The adoption of this guidance did not have a material effect on the FHLBank’s financial condition, results of operations, or cash flows.



14


NOTE 3 – INVESTMENT SECURITIES

Major Security Types: Trading and held-to-maturity securities as of September 30, 2014 are summarized in Table 3.1 (in thousands):

Table 3.1
 
09/30/2014
 
Trading
Held-to-maturity
 
Fair
Value
Amortized
Cost
OTTI
Recognized
in OCI
Carrying Value
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Non-mortgage-backed securities:
 
 
 
 
 
 
 
U.S. Treasury obligations
$
25,031

$

$

$

$

$

$

Government-sponsored enterprise obligations1,2
1,306,245







State or local housing agency obligations

130,341


130,341

151

6,594

123,898

Non-mortgage-backed securities
1,331,276

130,341


130,341

151

6,594

123,898

Mortgage-backed securities:
 
 
 
 
 
 
 
U.S. obligation residential3
986

60,190


60,190

106


60,296

Government-sponsored enterprise residential4
143,950

4,630,825


4,630,825

29,706

17,181

4,643,350

Private-label mortgage-backed securities:
 
 
 
 
 
 
 
Residential loans

264,554

12,755

251,799

10,316

7,142

254,973

Home equity loans

1,179

71

1,108

1,445


2,553

Mortgage-backed securities
144,936

4,956,748

12,826

4,943,922

41,573

24,323

4,961,172

TOTAL
$
1,476,212

$
5,087,089

$
12,826

$
5,074,263

$
41,724

$
30,917

$
5,085,070

                   
1 
Represents debentures issued by other FHLBanks, Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac), Federal Farm Credit Bank (Farm Credit), and Federal Agricultural Mortgage Corporation (Farmer Mac). GSE securities are not guaranteed by the U.S. government. Fannie Mae and Freddie Mac were placed into conservatorship by the Finance Agency on September 7, 2008 with the Finance Agency named as conservator.
2 
See Note 17 for transactions with other FHLBanks.
3 
Represents MBS issued by Government National Mortgage Association (Ginnie Mae), which are guaranteed by the U.S. government.
4 
Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac.


15


Trading and held-to-maturity securities as of December 31, 2013 are summarized in Table 3.2 (in thousands):

Table 3.2
 
12/31/2013
 
Trading
Held-to-maturity
 
Fair
Value
Amortized
Cost
OTTI
Recognized
in OCI
Carrying Value
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Non-mortgage-backed securities:
 
 
 
 
 
 
 
Certificates of deposit
$
260,009

$

$

$

$

$

$

U.S. Treasury obligations
25,012







Government-sponsored enterprise obligations1,2
2,247,966







State or local housing agency obligations

63,472


63,472

19

8,619

54,872

Non-mortgage-backed securities
2,532,987

63,472


63,472

19

8,619

54,872

Mortgage-backed securities:
 
 
 
 
 
 
 
U.S obligation residential3
1,090

68,977


68,977

217

14

69,180

Government-sponsored enterprise residential4
170,700

4,974,649


4,974,649

21,744

27,108

4,969,285

Private-label mortgage-backed securities:
 

 

 

 
 

 

 
Residential loans

331,158

15,825

315,333

12,459

8,691

319,101

Home equity loans

1,406

178

1,228

1,539


2,767

Mortgage-backed securities
171,790

5,376,190

16,003

5,360,187

35,959

35,813

5,360,333

TOTAL
$
2,704,777

$
5,439,662

$
16,003

$
5,423,659

$
35,978

$
44,432

$
5,415,205

                    
1 
Represents debentures issued by other FHLBanks, Fannie Mae, Freddie Mac, Farm Credit, and Farmer Mac. GSE securities are not guaranteed by the U.S. government. Fannie Mae and Freddie Mac were placed into conservatorship by the Finance Agency on September 7, 2008 with the Finance Agency named as conservator.
2 
See Note 17 for transactions with other FHLBanks.
3 
Represents MBS issued by Ginnie Mae, which are guaranteed by the U.S. government.
4 
Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac.


16


Table 3.3 summarizes (in thousands) the held-to-maturity securities with unrealized losses as of September 30, 2014. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.

Table 3.3
 
09/30/2014
 
Less Than 12 Months
12 Months or More
Total
 
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Non-mortgage-backed securities:
 
 
 
 
 
 
State or local housing agency obligations
$
6,143

$
34

$
38,175

$
6,560

$
44,318

$
6,594

Non-mortgage-backed securities
6,143

34

38,175

6,560

44,318

6,594

Mortgage-backed securities:
 
 
 
 
 
 
Government-sponsored enterprise residential1
306,369

1,355

1,142,550

15,826

1,448,919

17,181

Private-label mortgage-backed securities:
 
 
 
 
 
 
Residential loans
19,133

88

144,439

11,513

163,572

11,601

Mortgage-backed securities
325,502

1,443

1,286,989

27,339

1,612,491

28,782

TOTAL TEMPORARILY IMPAIRED SECURITIES
$
331,645

$
1,477

$
1,325,164

$
33,899

$
1,656,809

$
35,376

                    
1 
Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac.

Table 3.4 summarizes (in thousands) the held-to-maturity securities with unrealized losses as of December 31, 2013. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.

Table 3.4
 
12/31/2013
 
Less Than 12 Months
12 Months or More
Total
 
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Non-mortgage-backed securities:
 
 
 
 
 
 
State or local housing agency obligations
$
6,660

$
367

$
38,743

$
8,252

$
45,403

$
8,619

Non-mortgage-backed securities
6,660

367

38,743

8,252

45,403

8,619

Mortgage-backed securities:
 
 
 
 
 
 
U.S obligation residential1
25,814

14



25,814

14

Government-sponsored enterprise residential2
2,099,923

16,699

384,530

10,409

2,484,453

27,108

Private-label mortgage-backed securities:
 
 
 
 
 
 
Residential loans
21,053

109

175,474

14,252

196,527

14,361

Mortgage-backed securities
2,146,790

16,822

560,004

24,661

2,706,794

41,483

TOTAL TEMPORARILY IMPAIRED SECURITIES
$
2,153,450

$
17,189

$
598,747

$
32,913

$
2,752,197

$
50,102

                    
1 
Represents MBS issued by Ginnie Mae, which are guaranteed by the U.S. government.
2 
Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac.


17


Redemption Terms: The amortized cost, carrying value and fair values of held-to-maturity securities by contractual maturity as of September 30, 2014 and December 31, 2013 are shown in Table 3.5 (in thousands). Expected maturities of certain securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

Table 3.5
 
09/30/2014
12/31/2013
 
Amortized
Cost
Carrying
Value
Fair
Value
Amortized
Cost
Carrying
Value
Fair
Value
Non-mortgage-backed securities:
 
 
 
 
 
 
Due in one year or less
$

$

$

$

$

$

Due after one year through five years






Due after five years through 10 years
18,625

18,625

18,436

21,240

21,240

19,582

Due after 10 years
111,716

111,716

105,462

42,232

42,232

35,290

Non-mortgage-backed securities
130,341

130,341

123,898

63,472

63,472

54,872

Mortgage-backed securities
4,956,748

4,943,922

4,961,172

5,376,190

5,360,187

5,360,333

TOTAL
$
5,087,089

$
5,074,263

$
5,085,070

$
5,439,662

$
5,423,659

$
5,415,205


Interest Rate Payment Terms: Table 3.6 details interest rate payment terms for the amortized cost of held-to-maturity securities as of September 30, 2014 and December 31, 2013 (in thousands):

Table 3.6
 
09/30/2014
12/31/2013
Non-mortgage-backed securities:
 
 
Fixed rate
$
10,751

$
12,232

Variable rate
119,590

51,240

Non-mortgage-backed securities
130,341

63,472

Mortgage-backed securities:
 
 
Pass-through securities:
 
 
Fixed rate
34

78

Variable rate
1,208,896

1,298,146

Collateralized mortgage obligations:
 
 
Fixed rate
454,322

541,126

Variable rate
3,293,496

3,536,840

Mortgage-backed securities
4,956,748

5,376,190

TOTAL
$
5,087,089

$
5,439,662


Gains and Losses: Net gains (losses) on trading securities during the three and nine months ended September 30, 2014 and 2013 are shown in Table 3.7 (in thousands):

Table 3.7
 
Three Months Ended
Nine Months Ended
 
09/30/2014
09/30/2013
09/30/2014
09/30/2013
Net gains (losses) on trading securities held as of September 30, 2014
$
(11,414
)
$
(5,296
)
$
(21,812
)
$
(33,925
)
Net gains (losses) on trading securities sold or matured prior to September 30, 2014
(5
)
(1,472
)
(619
)
(3,762
)
NET GAIN (LOSS) ON TRADING SECURITIES
$
(11,419
)
$
(6,768
)
$
(22,431
)
$
(37,687
)


18


Other-than-temporary Impairment: For those securities for which an OTTI was determined to have occurred as of September 30, 2014 (that is, securities for which the FHLBank determined that it was more likely than not that the amortized cost basis would not be recovered), Table 3.8 presents a summary of the significant inputs used to measure the amount of credit loss recognized in earnings during this period as well as related current credit enhancement. Credit enhancement is defined as the percentage of subordinated tranches and over-collateralization, if any, in a security structure that will generally absorb losses before the FHLBank will experience a loss on the security. The calculated averages represent the dollar-weighted averages of all the private-label MBS/asset-backed securities (ABS) investments in each category shown. Private-label MBS/ABS are classified as prime, Alt-A and subprime based on the originator’s classification at the time of origination or based on classification by a Nationally Recognized Statistical Rating Organization (NRSRO) upon issuance of the MBS/ABS.

Table 3.8
Private-label residential MBS
Year of Securitization
Significant Inputs
Current
Credit
Enhancements
Prepayment
Rates
Default
Rates
Loss
Severities
Prime:
 
 
 
 
2004 and prior
16.1
%
10.4
%
30.8
%
27.4
%
Alt-A:
 

 

 

 

2004 and prior
16.7

12.2

34.3

11.3

2005
15.9

9.5

34.4

4.1

Total Alt-A
16.2

10.3

34.4

6.4

TOTAL
16.2
%
10.3
%
34.4
%
6.6
%
 
 
 
 
 
Home Equity Loan ABS
Year of Securitization
Significant Inputs
Current
Credit
Enhancements
Prepayment
Rates
Default
Rates
Loss
Severities
Subprime:
 
 
 
 
2004 and prior
1.1
%
7.8
%
84.9
%
15.8
%

For the 26 outstanding private-label securities with OTTI during the lives of the securities, the FHLBank’s reported balances as of September 30, 2014 are presented in Table 3.9 (in thousands):

Table 3.9
 
09/30/2014
 
Unpaid
Principal
Balance
Amortized
Cost
Carrying
Value
Fair
Value
Private-label residential MBS:
 
 
 
 
Prime
$
14,092

$
13,221

$
12,106

$
13,295

Alt-A
60,625

54,809

43,169

51,120

Total private-label residential MBS
74,717

68,030

55,275

64,415

Home equity loans:
 

 

 

 

Subprime
2,977

1,179

1,108

2,553

TOTAL
$
77,694

$
69,209

$
56,383

$
66,968



19


Table 3.10 presents a roll-forward of OTTI activity for the three and nine months ended September 30, 2014 and 2013 related to credit losses recognized in earnings (in thousands):

Table 3.10
 
Three Months Ended
Nine Months Ended
 
09/30/2014
09/30/2013
09/30/2014
09/30/2013
Balance, beginning of period
$
9,560

$
10,698

$
9,917

$
11,291

Additional charge on securities for which OTTI was previously recognized1
20

300

443

452

Amortization of credit component of OTTI2
(89
)
(762
)
(869
)
(1,507
)
Balance, end of period
$
9,491

$
10,236

$
9,491

$
10,236

                    
1 
For the three months ended September 30, 2014 and 2013, securities previously impaired represent all securities that were impaired prior to July 1, 2014 and 2013, respectively. For the nine months ended September 30, 2014 and 2013, securities previously impaired represent all securities that were impaired prior to January 1, 2014 and 2013, respectively.
2 
The FHLBank amortizes the credit component based on estimated cash flows prospectively up to the amount of expected principal to be recovered. The discounted cash flows will move from the discounted loss value to the ultimate principal to be written off at the projected date of loss. If the expected cash flows improve, the amount of expected loss decreases which causes a corresponding decrease in the calculated amortization. Based on the level of improvement in the cash flows, the amortization could become a positive adjustment to income.

As of September 30, 2014, the fair value of a portion of the FHLBank’s held-to-maturity MBS portfolio was below the amortized cost of the securities due to interest rate volatility, illiquidity in the marketplace and credit deterioration in the U.S. mortgage markets that began in early 2008. However, the decline in fair value of these securities is considered temporary as the FHLBank expects to recover the entire amortized cost basis on the remaining held-to-maturity securities in unrecognized loss positions and neither intends to sell these securities nor is it more likely than not that the FHLBank will be required to sell these securities before its anticipated recovery of the remaining amortized cost basis. For state and local housing agency obligations, the FHLBank determined that all of the gross unrealized losses on these bonds were temporary because the strength of the underlying collateral and credit enhancements was sufficient to protect the FHLBank from losses based on current expectations.


NOTE 4 – ADVANCES

General Terms: The FHLBank offers a wide range of fixed and variable rate advance products with different maturities, interest rates, payment characteristics and optionality. As of September 30, 2014 and December 31, 2013, the FHLBank had advances outstanding at interest rates ranging from 0.12 percent to 8.01 percent and 0.11 percent to 8.01 percent, respectively. Table 4.1 presents advances summarized by year of contractual maturity as of September 30, 2014 and December 31, 2013 (in thousands): 

Table 4.1
 
09/30/2014
12/31/2013
Year of Contractual Maturity
Amount
Weighted Average Interest Rate
Amount
Weighted Average Interest Rate
Due in one year or less
$
9,502,514

0.57
%
$
5,431,364

0.77
%
Due after one year through two years
1,455,970

2.14

1,643,200

1.77

Due after two years through three years
1,692,486

2.59

1,650,222

1.98

Due after three years through four years
1,900,952

2.55

2,353,661

2.59

Due after four years through five years
1,071,416

1.39

1,302,199

2.42

Thereafter
4,788,697

1.23

4,812,973

1.09

Total par value
20,412,035

1.23
%
17,193,619

1.45
%
Discounts
(27,989
)
 
(36,782
)
 
Hedging adjustments
190,554

 
268,650

 
TOTAL
$
20,574,600

 
$
17,425,487

 



20


The FHLBank’s advances outstanding include advances that contain call options that may be exercised with or without prepayment fees at the borrower’s discretion on specific dates (call dates) before the stated advance maturities (callable advances). In exchange for receiving the right to call the advance on a predetermined call schedule, the borrower may pay a higher fixed rate for the advance relative to an equivalent maturity, non-callable, fixed rate advance. The borrower normally exercises its call options on these advances when interest rates decline (fixed rate advances) or spreads change (adjustable rate advances). The FHLBank’s advances as of September 30, 2014 and December 31, 2013 include callable advances totaling $4,592,551,000 and $5,056,133,000, respectively. Of these callable advances, there were $4,463,796,000 and $4,932,869,000 of variable rate advances as of September 30, 2014 and December 31, 2013, respectively.

Convertible advances allow the FHLBank to convert an advance from one interest payment term structure to another. When issuing convertible advances, the FHLBank may purchase put options from a member that allow the FHLBank to convert the fixed rate advance to a variable rate advance at the current market rate or another structure after an agreed-upon lockout period. A convertible advance carries a lower interest rate than a comparable-maturity fixed rate advance without the conversion feature. As of September 30, 2014 and December 31, 2013, the FHLBank had convertible advances outstanding totaling $1,656,242,000 and $1,685,242,000, respectively.

Table 4.2 presents advances summarized by contractual maturity or next call date (for callable advances) and by contractual maturity or next conversion date (for convertible advances) as of September 30, 2014 and December 31, 2013 (in thousands):

Table 4.2
 
Year of Contractual Maturity
or Next Call Date
Year of Contractual Maturity
or Next Conversion Date
Redemption Term
09/30/2014
12/31/2013
09/30/2014
12/31/2013
Due in one year or less
$
13,766,143

$
10,172,524

$
11,037,156

$
7,038,106

Due after one year through two years
1,256,402

1,392,527

1,325,720

1,555,100

Due after two years through three years
1,498,853

1,175,623

1,266,886

1,528,722

Due after three years through four years
1,533,311

1,856,012

1,051,660

1,381,719

Due after four years through five years
672,595

1,062,253

1,058,416

979,999

Thereafter
1,684,731

1,534,680

4,672,197

4,709,973

TOTAL PAR VALUE
$
20,412,035

$
17,193,619

$
20,412,035

$
17,193,619


Interest Rate Payment Terms:  Table 4.3 details additional interest rate payment terms for advances as of September 30, 2014 and December 31, 2013 (in thousands):

Table 4.3
 
09/30/2014
12/31/2013
Fixed rate:
 
 
Due in one year or less
$
1,885,334

$
1,733,559

Due after one year
6,621,162

6,923,555

Total fixed rate
8,506,496

8,657,114

Variable rate:
 

 

Due in one year or less
7,617,180

3,697,805

Due after one year
4,288,359

4,838,700

Total variable rate
11,905,539

8,536,505

TOTAL PAR VALUE
$
20,412,035

$
17,193,619


See Note 6 for information related to the FHLBank’s credit risk on advances and allowance for credit losses.



21


NOTE 5 – MORTGAGE LOANS

The MPF Program involves the FHLBank investing in mortgage loans, which have been funded by the FHLBank through or purchased from its participating members. These mortgage loans are government-insured or guaranteed (by the FHA, the VA, the Rural Housing Service of the Department of Agriculture (RHS) and/or the Department of Housing and Urban Development (HUD)) loans and conventional residential loans credit-enhanced by participating financial institutions (PFI). Depending upon a member’s product selection, the servicing rights can be retained or sold by the participating member. The FHLBank does not buy or own any mortgage servicing rights.

Mortgage Loans Held for Portfolio: Table 5.1 presents information as of September 30, 2014 and December 31, 2013 on mortgage loans held for portfolio (in thousands):

Table 5.1
 
09/30/2014
12/31/2013
Real estate:
 
 
Fixed rate, medium-term1, single-family mortgages
$
1,547,993

$
1,611,289

Fixed rate, long-term, single-family mortgages
4,516,799

4,245,351

Total unpaid principal balance
6,064,792

5,856,640

Premiums
99,213

95,755

Discounts
(3,180
)
(3,659
)
Deferred loan costs, net
879

1,087

Other deferred fees
(175
)
(212
)
Hedging adjustments
7,884

6,617

Total before Allowance for Credit Losses on Mortgage Loans
6,169,413

5,956,228

Allowance for Credit Losses on Mortgage Loans
(4,591
)
(6,748
)
MORTGAGE LOANS HELD FOR PORTFOLIO, NET
$
6,164,822

$
5,949,480

                   
1 
Medium-term defined as a term of 15 years or less at origination.


Table 5.2 presents information as of September 30, 2014 and December 31, 2013 on the outstanding unpaid principal balance (UPB) of mortgage loans held for portfolio (in thousands):

Table 5.2
 
09/30/2014
12/31/2013
Conventional loans
$
5,426,691

$
5,212,048

Government-guaranteed or insured loans
638,101

644,592

TOTAL UNPAID PRINCIPAL BALANCE
$
6,064,792

$
5,856,640


See Note 6 for information related to the FHLBank’s credit risk on mortgage loans and allowance for credit losses.


NOTE 6 – ALLOWANCE FOR CREDIT LOSSES

The FHLBank has established an allowance methodology for each of its portfolio segments: credit products (advances, letters of credit and other extensions of credit to borrowers); government mortgage loans held for portfolio; conventional mortgage loans held for portfolio; the direct financing lease receivable; term Federal funds sold; and term securities purchased under agreements to resell. Based on management’s analyses of each portfolio segment, the FHLBank has only established an allowance for credit losses on its conventional mortgage loans held for portfolio.


22


Roll-forward of Allowance for Credit Losses: As of September 30, 2014, the FHLBank determined that an allowance for credit losses was only necessary on conventional mortgage loans held for portfolio. Table 6.1 presents a roll-forward of the allowance for credit losses for the three and nine months ended September 30, 2014 as well as the method used to evaluate impairment relating to all portfolio segments regardless of whether or not an estimated credit loss has been recorded as of September 30, 2014 (in thousands):

Table 6.1
 
09/30/2014
 
Conventional
Loans
Government
Loans
Credit
Products1
Direct
Financing
Lease
Receivable
Total
Allowance for credit losses:
 
 
 
 
 
Balance, beginning of three-month period
$
4,658

$

$

$

$
4,658

Charge-offs
(149
)



(149
)
Provision (reversal) for credit losses
82




82

Balance, end of three-month period
$
4,591

$

$

$

$
4,591

 
 
 
 
 
 
Balance, beginning of nine-month period
$
6,748

$

$

$

$
6,748

Charge-offs
(425
)



(425
)
Provision (reversal) for credit losses
(1,732
)



(1,732
)
Balance, end of nine-month period
$
4,591

$

$

$

$
4,591

 
 
 
 
 
 
Allowance for credit losses, end of period:
 

 

 

 

 

Individually evaluated for impairment
$

$

$

$

$

Collectively evaluated for impairment
$
4,591

$

$

$

$
4,591

Recorded investment2, end of period:
 

 

 

 

 

Individually evaluated for impairment3
$

$

$
20,595,448

$
21,959

$
20,617,407

Collectively evaluated for impairment
$
5,543,946

$
655,541

$

$

$
6,199,487

                   
1 
The recorded investment for credit products includes only advances. The recorded investment for all other credit products is insignificant.
2 
The recorded investment in a financing receivable is the UPB, adjusted for accrued interest, net deferred loan fees or costs, unamortized premiums or discounts, fair value hedging adjustments and direct write-downs. The recorded investment is not net of any valuation allowance.
3 
No financing receivables individually evaluated for impairment were determined to be impaired.


23


Table 6.2 presents a roll-forward of the allowance for credit losses for the three and nine months ended September 30, 2013 as well as the method used to evaluate impairment relating to all portfolio segments regardless of whether or not an estimated credit loss has been recorded as of September 30, 2013 (in thousands):

Table 6.2
 
09/30/2013
 
Conventional
Loans
Government
Loans
Credit
Products1
Direct
Financing
Lease
Receivable
Total
Allowance for credit losses:
 
 
 
 
 
Balance, beginning of three-month period
$
6,590

$

$

$

$
6,590

Charge-offs
(229
)



(229
)
Provision (reversal) for credit losses
530




530

Balance, end of three-month period
$
6,891

$

$

$

$
6,891

 
 
 
 
 
 
Balance, beginning of nine-month period
$
5,416

$

$

$

$
5,416

Charge-offs
(586
)



(586
)
Provision (reversal) for credit losses
2,061




2,061

Balance, end of nine-month period
$
6,891

$

$

$

$
6,891

 
 
 
 
 
 
Allowance for credit losses, end of period:
 

 

 

 

 

Individually evaluated for impairment
$

$

$

$

$

Collectively evaluated for impairment
$
6,891

$

$

$

$
6,891

Recorded investment2, end of period:
 

 

 

 



Individually evaluated for impairment3
$

$

$
18,826,525

$
24,049

$
18,850,574

Collectively evaluated for impairment
$
5,280,393

$
667,431

$

$

$
5,947,824

                   
1 
The recorded investment for credit products includes only advances. The recorded investment for all other credit products is insignificant.
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