Federal Home Loan Bank of Topeka - FORM 10-Q

Attached files

file	filename
EX-31.2 - EXHIBIT 31.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - Federal Home Loan Bank of Topeka	ex93015312.htm
EX-31.1 - EXHIBIT 31.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - Federal Home Loan Bank of Topeka	ex93015311.htm
EX-32 - EXHIBIT 32 CERTIFICATION OF CEO AND CFO - Federal Home Loan Bank of Topeka	ex9301532.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, 2015

¨ 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 3, 2015
Class A Stock, par value $100 per share	1,883,121
Class B Stock, par value $100 per share	12,256,255

.FEDERAL HOME LOAN BANK OF TOPEKA

TABLE OF CONTENTS




PART I	FINANCIAL INFORMATION	4
Item 1.	Financial Statements	4
	Statements of Condition	5
	Statements of Income	7
	Statements of Comprehensive Income	9
	Statements of Capital	10
	Statements of Cash Flows	11
	Notes to Financial Statements	13
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	50
	Executive Level Overview	50
	Financial Market Trends	53
	Critical Accounting Policies and Estimates	54
	Results of Operations	55
	Financial Condition	67
	Liquidity and Capital Resources	85
	Risk Management	88
	Recently Issued Accounting Standards	92
	Legislative and Regulatory Developments	92
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	94
Item 4.	Controls and Procedures	99
Part II	OTHER INFORMATION	99
Item 1.	Legal Proceedings	99
Item 1A.	Risk Factors	99
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	99
Item 3.	Defaults Upon Senior Securities	99
Item 4.	Mine Safety Disclosures	99
Item 5.	Other Information	99
Item 6.	Exhibits	100

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 all the 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 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 risks or uncertainties 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;


•	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 FHLBank products and services or consolidated obligations of the FHLBank System;


•	Effects of derivative accounting treatment and other accounting rule requirements, or changes in such 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, non-member borrowers, counterparties, and the other FHLBanks;


•	Changes in the value or liquidity of collateral underlying advances to FHLBank members or non-member 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 all products and services;


•	The ability of the FHLBank to keep pace with technological changes and the ability to develop and support technology and information systems, including the ability to securely 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)/asset-backed securities (ABS) 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," "eMPF" and "MPF Xtra" are registered trademarks of the Federal Home Loan Bank of Chicago.

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, 2014, incorporated by reference herein.

All forward-looking statements contained in this Form 10-Q are expressly qualified in their entirety by reference to 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 to reflect events or circumstances after the date of this report.

PART I

Item 1: Financial Statements



FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF CONDITION - Unaudited
(In thousands, except par value)
	09/30/2015			12/31/2014
ASSETS
Cash and due from banks	$	672,155		$	2,545,311
Interest-bearing deposits	1,557			1,163
Securities purchased under agreements to resell (Note 10)	4,010,000			1,225,000
Federal funds sold	1,800,000			2,075,000

Investment securities:
Trading securities (Note 3)	2,339,291			1,462,049
Available-for-sale securities¹ (Note 3)	69,854			—
Held-to-maturity securities² (Note 3)	4,885,711			4,857,187
Total investment securities	7,294,856			6,319,236

Advances (Notes 4, 6)	25,482,433			18,302,950

Mortgage loans held for portfolio, net:
Mortgage loans held for portfolio (Notes 5, 6)	6,338,225			6,234,722
Less allowance for credit losses on mortgage loans (Note 6)	(1,897		)	(4,550		)
Mortgage loans held for portfolio, net	6,336,328			6,230,172

Accrued interest receivable	66,577			70,923
Premises, software and equipment, net	8,131			10,439
Derivative assets, net (Notes 7, 10)	64,060			32,983
Other assets	36,229			40,800

TOTAL ASSETS	$	45,772,326		$	36,853,977

LIABILITIES
Deposits (Note 8)	$	729,395		$	595,775

Consolidated obligations, net:
Discount notes (Note 9)	20,610,434			14,219,612
Bonds (Note 9)	22,225,254			20,221,002
Total consolidated obligations, net	42,835,688			34,440,614

Mandatorily redeemable capital stock (Note 11)	3,090			4,187
Accrued interest payable	68,072			58,243
Affordable Housing Program payable	29,143			30,863
Derivative liabilities, net (Notes 7, 10)	30,148			35,292
Other liabilities	95,940			103,736

TOTAL LIABILITIES	43,791,476			35,268,710

Commitments and contingencies (Note 14)

¹Amortized cost: $70,617 and $0 as of September 30, 2015 and December 31, 2014, respectively.

²Fair value: $4,894,732 and $4,869,042 as of September 30, 2015 and December 31, 2014, respectively.

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



FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF CONDITION - Unaudited
(In thousands, except par value)
	09/30/2015			12/31/2014
CAPITAL
Capital stock outstanding - putable:
Class A ($100 par value; 2,174 and 2,083 shares issued and outstanding) (Note 11)	$	217,457		$	208,273
Class B ($100 par value; 11,270 and 7,657 shares issued and outstanding) (Note 11)	1,126,957			765,768
Total capital stock	1,344,414			974,041

Retained earnings:
Unrestricted	562,548			554,189
Restricted	87,481			72,944
Total retained earnings	650,029			627,133

Accumulated other comprehensive income (loss) (Note 12)	(13,593		)	(15,907		)

TOTAL CAPITAL	1,980,850			1,585,267

TOTAL LIABILITIES AND CAPITAL	$	45,772,326		$	36,853,977

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



FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF INCOME - Unaudited
(In thousands)
	Three Months Ended						Nine Months Ended
	09/30/2015			09/30/2014			09/30/2015			09/30/2014
INTEREST INCOME:
Interest-bearing deposits	$	57		$	40		$	166		$	120
Securities purchased under agreements to resell	1,267			96			2,845			138
Federal funds sold	438			358			1,582			840
Trading securities	19,781			12,330			45,639			37,972
Available-for-sale securities	5			—			5			—
Held-to-maturity securities	9,878			11,271			30,158			35,663
Advances	36,644			31,360			102,213			89,349
Prepayment fees on terminated advances	236			107			1,324			931
Mortgage loans held for portfolio	50,552			51,099			153,023			152,701
Other	344			374			1,050			1,149
Total interest income	119,202			107,035			338,005			318,863

INTEREST EXPENSE:
Deposits	139			166			438			604
Consolidated obligations:
Discount notes	5,166			2,688			12,419			6,250
Bonds	52,103			47,552			149,449			144,488
Mandatorily redeemable capital stock (Note 11)	10			13			32			29
Other	64			44			183			127
Total interest expense	57,482			50,463			162,521			151,498

NET INTEREST INCOME	61,720			56,572			175,484			167,365
(Reversal) provision for credit losses on mortgage loans (Note 6)	(398		)	82			(2,192		)	(1,732		)
NET INTEREST INCOME AFTER LOAN LOSS (REVERSAL) PROVISION	62,118			56,490			177,676			169,097

OTHER INCOME (LOSS):
Total other-than-temporary impairment losses on held-to-maturity securities	(80		)	—			(265		)	—
Net amount of impairment losses on held-to-maturity securities reclassified to/(from) accumulated other comprehensive income (loss)	(132		)	(20		)	(386		)	(443		)
Net other-than-temporary impairment losses on held-to-maturity securities (Note 3)	(212		)	(20		)	(651		)	(443		)
Net gain (loss) on trading securities (Note 3)	16,820			(11,419		)	(9,395		)	(22,431		)
Net gain (loss) on derivatives and hedging activities (Note 7)	(49,721		)	(2,218		)	(51,367		)	(26,551		)
Standby bond purchase agreement commitment fees	1,398			1,594			4,236			4,711
Letters of credit fees	821			757			2,430			2,349
Other	638			501			1,738			1,734
Total other income (loss)	(30,256		)	(10,805		)	(53,009		)	(40,631		)

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



FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF INCOME - Unaudited
(In thousands)
	Three Months Ended				Nine Months Ended
	09/30/2015		09/30/2014		09/30/2015		09/30/2014
OTHER EXPENSES:
Compensation and benefits	$	9,881	$	8,779	$	26,007	$	22,973
Other operating	3,314		3,016		11,191		9,914
Federal Housing Finance Agency	493		564		1,601		1,854
Office of Finance	627		541		1,951		1,662
Other	872		980		3,150		3,759
Total other expenses	15,187		13,880		43,900		40,162

INCOME BEFORE ASSESSMENTS	16,675		31,805		80,767		88,304

Affordable Housing Program	1,669		3,181		8,080		8,833

NET INCOME	$	15,006	$	28,624	$	72,687	$	79,471

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



FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF COMPREHENSIVE INCOME - Unaudited
(In thousands)
	Three Months Ended					Nine Months Ended
	09/30/2015			09/30/2014		09/30/2015			09/30/2014
Net income	$	15,006		$	28,624	$	72,687		$	79,471

Other comprehensive income:
Net unrealized gain (loss) on available-for-sale securities:
Unrealized gain (loss)	(763		)	—		(763		)	—
Total net unrealized gains/losses on available-for-sale securities	(763		)	—		(763		)	—

Net non-credit portion of other-than-temporary impairment losses on held-to-maturity securities:
Non-credit portion	(24		)	—		(205		)	—
Reclassification of non-credit portion included in net income	156			20		591			443
Accretion of non-credit portion	653			1,002		2,394			2,734
Total net non-credit portion of other-than-temporary impairment losses on held-to-maturity securities	785			1,022		2,780			3,177

Defined benefit pension plan:
Amortization of net loss	99			38		297			127
Total defined benefit pension plan	99			38		297			127

Total other comprehensive income	121			1,060		2,314			3,304

TOTAL COMPREHENSIVE INCOME	$	15,127		$	29,684	$	75,001		$	82,775

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



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

	Capital Stock¹															Retained Earnings								Accumulated			Total Capital
																								Other
	Class A					Class B					Total													Comprehensive
	Shares		Par Value			Shares		Par Value			Shares		Par Value			Unrestricted			Restricted		Total			Income (Loss)
Balance at December 31, 2014	2,083		$	208,273		7,657		$	765,768		9,740		$	974,041		$	554,189		$	72,944	$	627,133		$	(15,907	)	$	1,585,267
Proceeds from issuance of capital stock	18		1,843			9,647		964,691			9,665		966,534														966,534
Repurchase/redemption of capital stock	(3,141	)	(314,124		)	(93	)	(9,367		)	(3,234	)	(323,491		)												(323,491		)
Comprehensive income																58,150			14,537		72,687			2,314			75,001
Net reclassification of shares to mandatorily redeemable capital stock	(23	)	(2,226		)	(3,200	)	(320,013		)	(3,223	)	(322,239		)												(322,239		)
Net transfer of shares between Class A and Class B	3,237		323,691			(3,237	)	(323,691		)	—		—														—
Dividends on capital stock (Class A - 1.0%, Class B - 6.0%):
Cash payment																(222		)			(222		)				(222		)
Stock issued						496		49,569			496		49,569			(49,569		)			(49,569		)				—
Balance at September 30, 2015	2,174		$	217,457		11,270		$	1,126,957		13,444		$	1,344,414		$	562,548		$	87,481	$	650,029		$	(13,593	)	$	1,980,850

¹Putable

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



FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF CASH FLOWS - Unaudited
(In thousands)
	Nine Months Ended
	09/30/2015			09/30/2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	72,687		$	79,471
Adjustments to reconcile income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization:
Premiums and discounts on consolidated obligations, net	(11,870		)	(12,246		)
Concessions on consolidated obligations	4,126			3,774
Premiums and discounts on investments, net	524			(232		)
Premiums, discounts and commitment fees on advances, net	(7,246		)	(9,306		)
Premiums, discounts and deferred loan costs on mortgage loans, net	14,774			11,178
Fair value adjustments on hedged assets or liabilities	7,757			9,214
Premises, software and equipment	1,635			1,345
Other	297			127
(Reversal) provision for credit losses on mortgage loans	(2,192		)	(1,732		)
Non-cash interest on mandatorily redeemable capital stock	27			27
Net other-than-temporary impairment losses on held-to-maturity securities	651			443
Net realized (gain) loss on sale of premises and equipment	(17		)	6
Other adjustments	(200		)	105
Net (gain) loss on trading securities	9,395			22,431
(Gain) loss due to change in net fair value adjustment on derivative and hedging activities	69,369			47,674
(Increase) decrease in accrued interest receivable	4,386			9,331
Change in net accrued interest included in derivative assets	(92		)	4,841
(Increase) decrease in other assets	1,821			2,076
Increase (decrease) in accrued interest payable	9,828			9,308
Change in net accrued interest included in derivative liabilities	(11,191		)	(19,874		)
Increase (decrease) in Affordable Housing Program liability	(1,720		)	(3,320		)
Increase (decrease) in other liabilities	(840		)	(2,306		)
Total adjustments	89,222			72,864
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES	161,909			152,335

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



FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF CASH FLOWS - Unaudited
(In thousands)
	Nine Months Ended
	09/30/2015			09/30/2014
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing deposits	$	(42,507	)	$	61,924
Net (increase) decrease in securities purchased under resale agreements	(2,785,000		)	(1,075,000		)
Net (increase) decrease in Federal funds sold	275,000			(875,000		)
Net (increase) decrease in short-term trading securities	(10		)	260,000
Proceeds from maturities of and principal repayments on long-term trading securities	315,533			946,134
Purchases of long-term trading securities	(1,202,159		)	—
Purchases of long-term available-for-sale securities	(45,435		)	—
Proceeds from maturities of and principal repayments on long-term held-to-maturity securities	1,031,834			693,339
Purchases of long-term held-to-maturity securities	(1,090,355		)	(340,977		)
Principal collected on advances	69,741,660			42,425,603
Advances made	(76,911,491		)	(45,643,549		)
Principal collected on mortgage loans	778,553			572,403
Purchases of mortgage loans	(901,310		)	(799,769		)
Proceeds from sale of foreclosed assets	4,370			4,009
Principal collected on other loans made	1,664			1,572
Proceeds from sale of premises, software and equipment	68			2
Purchases of premises, software and equipment	(393		)	(1,076		)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES	(10,829,978		)	(3,770,385		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits	130,405			(283,055		)
Net proceeds from issuance of consolidated obligations:
Discount notes	214,416,319			41,055,791
Bonds	11,088,056			7,182,363
Payments for maturing and retired consolidated obligations:
Discount notes	(208,027,097		)	(35,998,826		)
Bonds	(9,090,300		)	(7,237,500		)
Proceeds from financing derivatives	8,533			—
Net interest payments received (paid) for financing derivatives	(50,461		)	(49,296		)
Proceeds from issuance of capital stock	966,534			629,051
Payments for repurchase/redemption of capital stock	(323,491		)	(594,321		)
Payments for repurchase of mandatorily redeemable capital stock	(323,363		)	(228,522		)
Cash dividends paid	(222		)	(225		)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES	8,794,913			4,475,460
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	(1,873,156		)	857,410
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	2,545,311			1,713,940
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	672,155		$	2,571,350

Supplemental disclosures:
Interest paid	$	157,224		$	150,276

Affordable Housing Program payments	$	9,944		$	12,372

Net transfers of mortgage loans to real estate owned	$	3,034		$	3,590

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

FEDERAL HOME LOAN BANK OF TOPEKA

Notes to Financial Statements - Unaudited

September 30, 2015

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, 2014. 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 13, 2015 (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 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.

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

Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. In April 2015, the Financial Accounting Standards Board (FASB) issued amendments to clarify the accounting for cloud computing arrangements. The amendments provide guidance to customers about whether a cloud computing arrangement includes a software license and how to account for it. This guidance is effective for interim and annual periods, beginning after December 15, 2015, which is January 1, 2016 for the FHLBank, and early adoption is permitted. The FHLBank can elect to adopt the amendments either: (1) prospectively to all arrangements entered into or materially modified after the effective date; or (2) retrospectively. The FHLBank is in the process of evaluating this guidance and its effect on the FHLBank's financial condition, results of operations, and cash flows.

Simplifying the Presentation of Debt Issuance Costs. In April 2015, FASB issued guidance that requires a reclassification of debt issuance costs related to a recognized debt liability from other assets to a reduction of the carrying amount of the liability consistent with the presentation of debt discounts. The recognition and measurement guidance for debt issuance costs did not change as a result of this amendment. The amendments are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015, which is January 1, 2016 for the FHLBank. The period-specific effects as a result of applying this guidance are required to be adjusted retrospectively to each individual period presented on the statement of condition. The adoption of this amendment is not expected to have a material impact on the FHLBank's financial condition, results of operations, or cash flows.

Amendments to the Consolidation Analysis. In February 2015, FASB issued guidance that impacts reporting entities that are required to evaluate whether they must consolidate certain legal entities. Under the amended guidance, in a consolidation evaluation, more emphasis is placed on variable interests other than fee arrangements, such as principal investment risk or guarantees of the value of the assets or liabilities of the variable interest entity. The amendments emphasize risk of loss in the determination of a controlling financial interest and provide a scope exception for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investments Company Act of 1940 for registered money market funds. The amendments are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015, which is January 1, 2016 for the FHLBank. The adoption of this amendment is not expected to have a material impact on the FHLBank's financial condition, results of operations, or cash flows.

Classification of Certain Government-Guaranteed Mortgage Loans Upon Foreclosure. In August 2014, 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 interest expected to be recovered from the guarantor. The amendments were effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014, which was January 1, 2015 for the FHLBank. The adoption of this amendment did not 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, 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 were effective for the first interim or annual period beginning after December 15, 2014, which was January 1, 2015 for the FHLBank. The adoption of this amendment did not have a material impact on the FHLBank's financial condition, results of operations, or cash flows.

Revenue Recognition. In May 2014, 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. In July 2015, the FASB voted to defer the effective date of the new standard by one year, which makes the standard effective for fiscal years beginning after December 15, 2017 (January 1, 2018 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, 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 were effective for interim and annual periods beginning after December 15, 2014, which was January 1, 2015 for the FHLBank. The adoption of this amendment did not have a material impact on the FHLBank's financial condition, results of operations, or cash flows.

NOTE 3 – INVESTMENT SECURITIES

Trading Securities: Trading securities by major security type as of September 30, 2015 and December 31, 2014 are summarized in Table 3.1 (in thousands):

Table 3.1



	Fair Value
	9/30/2015		12/31/2014
Non-mortgage-backed securities:
U.S. Treasury obligations	$	—	$	25,016
GSE obligations¹	1,354,809		1,299,979
Non-mortgage-backed securities	1,354,809		1,324,995
Mortgage-backed securities:
U.S. obligation MBS²	835		963
GSE MBS³	983,647		136,091
Mortgage-backed securities	984,482		137,054
TOTAL	$	2,339,291	$	1,462,049


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.


²	Represents single-family MBS issued by Government National Mortgage Association (Ginnie Mae), which are guaranteed by the U.S. government.


³	Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac.

Net gains (losses) on trading securities during the three and nine months ended September 30, 2015 and 2014 are shown in Table 3.2 (in thousands):

Table 3.2



	Three Months Ended						Nine Months Ended
	09/30/2015			09/30/2014			09/30/2015			09/30/2014
Net gains (losses) on trading securities held as of September 30, 2015	$	16,830		$	(11,433	)	$	(9,354	)	$	(21,881	)
Net gains (losses) on trading securities sold or matured prior to September 30, 2015	(10		)	14			(41		)	(550		)
NET GAIN (LOSS) ON TRADING SECURITIES	$	16,820		$	(11,419	)	$	(9,395	)	$	(22,431	)

Available-for-sale Securities: Available-for-sale securities by major security type as of September 30, 2015 are summarized in Table 3.3 (in thousands). No available-for-sale securities were held as of December 31, 2014.

Table 3.3



	9/30/2015
	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
Mortgage-backed securities:
GSE MBS¹	$	70,617	$	—	$	763	$	69,854
TOTAL	$	70,617	$	—	$	763	$	69,854


¹	Represents fixed rate multi-family pass-through securities issued by Fannie Mae.

Table 3.4 summarizes (in thousands) the available-for-sale securities with unrealized losses as of September 30, 2015. 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



	09/30/2015
	Less Than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Mortgage-backed securities:
GSE MBS¹	$	69,854	$	763	$	—	$	—	$	69,854	$	763
TOTAL TEMPORARILY IMPAIRED SECURITIES	$	69,854	$	763	$	—	$	—	$	69,854	$	763


¹	Represents fixed rate multi-family pass-through securities issued by Fannie Mae.

All available-for-sale securities are GSE MBS and as such do not have a single maturity date. The expected maturities of these securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

Held-to-maturity Securities: Held-to-maturity securities by major security type as of September 30, 2015 are summarized in Table 3.5 (in thousands):

Table 3.5



	09/30/2015
	Amortized Cost		OTTI Recognized in OCI		Carrying Value		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
Non-mortgage-backed securities:
State or local housing agency obligations	$	114,030	$	—	$	114,030	$	133	$	5,267	$	108,896
Non-mortgage-backed securities	114,030		—		114,030		133		5,267		108,896
Mortgage-backed securities:
U.S. obligation MBS¹	49,414		—		49,414		129		—		49,543
GSE MBS²	4,538,501		—		4,538,501		23,318		11,713		4,550,106
Private-label residential MBS	192,059		8,910		183,149		7,408		6,413		184,144
Home equity loan ABS	701		84		617		1,426		—		2,043
Mortgage-backed securities	4,780,675		8,994		4,771,681		32,281		18,126		4,785,836
TOTAL	$	4,894,705	$	8,994	$	4,885,711	$	32,414	$	23,393	$	4,894,732


¹	Represents single-family 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.

Held-to-maturity securities by major security type as of December 31, 2014 are summarized in Table 3.6 (in thousands):

Table 3.6



	12/31/2014
	Amortized Cost		OTTI Recognized in OCI		Carrying Value		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
Non-mortgage-backed securities:
State or local housing agency obligations	$	126,105	$	—	$	126,105	$	148	$	6,083	$	120,170
Non-mortgage-backed securities	126,105		—		126,105		148		6,083		120,170
Mortgage-backed securities:
U.S obligation MBS¹	57,562		—		57,562		175		—		57,737
GSE MBS²	4,441,487		—		4,441,487		27,486		13,628		4,455,345
Private-label residential MBS	242,970		11,711		231,259		9,195		6,960		233,494
Home equity loan ABS	837		63		774		1,522		—		2,296
Mortgage-backed securities	4,742,856		11,774		4,731,082		38,378		20,588		4,748,872
TOTAL	$	4,868,961	$	11,774	$	4,857,187	$	38,526	$	26,671	$	4,869,042


¹	Represents single-family 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.

Table 3.7 summarizes (in thousands) the held-to-maturity securities with unrealized losses as of September 30, 2015. 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 3.7



	09/30/2015
	Less Than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses¹
Non-mortgage-backed securities:
State or local housing agency obligations	$	—	$	—	$	37,108	$	5,267	$	37,108	$	5,267
Non-mortgage-backed securities	—		—		37,108		5,267		37,108		5,267
Mortgage-backed securities:
GSE MBS²	1,212,028		3,079		839,774		8,634		2,051,802		11,713
Private-label residential MBS	2,823		32		129,379		10,300		132,202		10,332
Mortgage-backed securities	1,214,851		3,111		969,153		18,934		2,184,004		22,045
TOTAL TEMPORARILY IMPAIRED SECURITIES	$	1,214,851	$	3,111	$	1,006,261	$	24,201	$	2,221,112	$	27,312


¹	Total unrealized losses in Table 3.7 will not agree to total gross unrecognized losses in Table 3.5. Total unrealized losses in Table 3.7 include non-credit-related OTTI recognized in accumulated other comprehensive income (AOCI) and gross unrecognized gains on previously other-than-temporarily impaired securities.


²	Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac.

Table 3.8 summarizes (in thousands) the held-to-maturity securities with unrealized losses as of December 31, 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 3.8



	12/31/2014
	Less Than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses¹
Non-mortgage-backed securities:
State or local housing agency obligations	$	—	$	—	$	38,067	$	6,083	$	38,067	$	6,083
Non-mortgage-backed securities	—		—		38,067		6,083		38,067		6,083
Mortgage-backed securities:
GSE MBS²	232,884		112		1,038,522		13,516		1,271,406		13,628
Private-label residential MBS	23,060		137		137,306		11,187		160,366		11,324
Mortgage-backed securities	255,944		249		1,175,828		24,703		1,431,772		24,952
TOTAL TEMPORARILY IMPAIRED SECURITIES	$	255,944	$	249	$	1,213,895	$	30,786	$	1,469,839	$	31,035


¹	Total unrealized losses in Table 3.8 will not agree to total gross unrecognized losses in Table 3.6. Total unrealized losses in Table 3.8 include non-credit-related OTTI recognized in AOCI and gross unrecognized gains on previously other-than-temporarily impaired securities.


²	Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac.

The amortized cost, carrying value and fair values of held-to-maturity securities by contractual maturity as of September 30, 2015 and December 31, 2014 are shown in Table 3.9 (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 3.9



	09/30/2015						12/31/2014
	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	15,765		15,765		15,719		17,920		17,920		17,779
Due after 10 years	98,265		98,265		93,177		108,185		108,185		102,391
Non-mortgage-backed securities	114,030		114,030		108,896		126,105		126,105		120,170
Mortgage-backed securities	4,780,675		4,771,681		4,785,836		4,742,856		4,731,082		4,748,872
TOTAL	$	4,894,705	$	4,885,711	$	4,894,732	$	4,868,961	$	4,857,187	$	4,869,042

Table 3.10 details interest rate payment terms for the amortized cost of held-to-maturity securities as of September 30, 2015 and December 31, 2014 (in thousands):

Table 3.10



	09/30/2015		12/31/2014
Non-mortgage-backed securities:
Fixed rate	$	—	$	9,335
Variable rate	114,030		116,770
Non-mortgage-backed securities	114,030		126,105
Mortgage-backed securities:
Pass-through securities:
Fixed rate	—		23
Variable rate	1,499,041		1,175,918
Collateralized mortgage obligations:
Fixed rate	343,767		423,333
Variable rate	2,937,867		3,143,582
Mortgage-backed securities	4,780,675		4,742,856
TOTAL	$	4,894,705	$	4,868,961

Other-than-temporary Impairment: For those securities for which an OTTI was determined to have occurred during the quarter ended September 30, 2015 (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 3.11 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/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 3.11



Private-label Residential MBS
Year of Securitization	Significant Inputs						Current Credit Enhancements
Year of Securitization	Prepayment Rates		Default Rates		Loss Severities		Current Credit Enhancements
Prime:
2004 and prior	13.1	%	6.2	%	24.7	%	8.8	%
Total Prime	13.1		6.2		24.7		8.8
Alt-A:
2004 and prior	10.8		12.9		33.3		10.4
2005	14.7		10.2		36.8		0.6
Total Alt-A	13.6		10.9		35.8		3.4
TOTAL	13.5	%	9.9	%	33.4	%	4.5	%

Home Equity Loan ABS
Year of Securitization	Significant Inputs						Current Credit Enhancements
Year of Securitization	Prepayment Rates		Default Rates		Loss Severities		Current Credit Enhancements
Subprime:
2004 and prior	3.3	%	4.4	%	87.7	%	11.6	%

For the 26 outstanding private-label securities with OTTI during the lives of the securities, the FHLBank’s reported balances as of September 30, 2015 are presented in Table 3.12 (in thousands):

Table 3.12



	09/30/2015
	Unpaid Principal Balance		Amortized Cost		Carrying Value		Fair Value
Private-label residential MBS:
Prime	$	13,307	$	12,495	$	11,528	$	12,293
Alt-A	45,439		40,551		32,608		38,575
Total private-label residential MBS	58,746		53,046		44,136		50,868
Home equity loan ABS:
Subprime	2,399		701		617		2,043
TOTAL	$	61,145	$	53,747	$	44,753	$	52,911

Table 3.13 presents a roll-forward of OTTI activity for the three and nine months ended September 30, 2015 and 2014 related to credit losses recognized in earnings (in thousands):

Table 3.13



	Three Months Ended						Nine Months Ended
	09/30/2015			09/30/2014			09/30/2015			09/30/2014
Balance, beginning of period	$	9,425		$	9,560		$	9,406		$	9,917
Additional charge on securities for which OTTI was not previously recognized	—			—			1			—
Additional charge on securities for which OTTI was previously recognized¹	212			20			650			443
Amortization of credit component of OTTI²	(186		)	(89		)	(606		)	(869		)
Balance, end of period	$	9,451		$	9,491		$	9,451		$	9,491


¹	For the three months ended September 30, 2015 and 2014, securities previously impaired represent all securities that were impaired prior to July 1, 2015 and 2014, respectively. For the nine months ended September 30, 2015 and 2014, securities previously impaired represent all securities that were impaired prior to January 1, 2015 and 2014, respectively.

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, 2015, the fair value of a portion of the FHLBank's available-for-sale and held-to-maturity MBS were below the amortized cost of the securities due to interest rate volatility and/or illiquidity. 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 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, 2015 and December 31, 2014, the FHLBank had advances outstanding at interest rates ranging from 0.14 percent to 7.41 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, 2015 and December 31, 2014 (dollars in thousands):

Table 4.1



	09/30/2015					12/31/2014
Year of Contractual Maturity	Amount			Weighted Average Interest Rate		Amount			Weighted Average Interest Rate
Due in one year or less	$	12,775,801		0.45	%	$	6,996,975		0.59	%
Due after one year through two years	1,963,499			2.31		1,513,363			2.14
Due after two years through three years	2,148,412			2.27		2,345,877			2.58
Due after three years through four years	1,172,501			1.51		1,501,614			2.16
Due after four years through five years	709,166			1.93		843,465			1.48
Thereafter	6,545,034			1.05		4,939,587			1.21
Total par value	25,314,413			0.99	%	18,140,881			1.32	%
Discounts	(20,498		)			(24,043		)
Hedging adjustments	188,518					186,112
TOTAL	$	25,482,433				$	18,302,950

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, 2015 and December 31, 2014 include callable advances totaling $6,193,849,000 and $4,825,254,000, respectively. Of these callable advances, there were $6,080,293,000 and $4,697,045,000 of variable rate advances as of September 30, 2015 and December 31, 2014, 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, 2015 and December 31, 2014, the FHLBank had convertible advances outstanding totaling $1,501,642,000 and $1,586,242,000, 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, 2015 and December 31, 2014 (in thousands):

Table 4.2



	Year of Contractual Maturity or Next Call Date				Year of Contractual Maturity or Next Conversion Date
Redemption Term	09/30/2015		12/31/2014		09/30/2015		12/31/2014
Due in one year or less	$	18,564,493	$	11,526,757	$	14,053,093	$	8,411,617
Due after one year through two years	1,675,797		1,288,157		1,543,599		1,396,863
Due after two years through three years	1,683,468		1,898,273		1,419,520		1,415,935
Due after three years through four years	844,576		1,136,649		1,159,501		1,232,414
Due after four years through five years	583,301		587,884		742,766		905,965
Thereafter	1,962,778		1,703,161		6,395,934		4,778,087
TOTAL PAR VALUE	$	25,314,413	$	18,140,881	$	25,314,413	$	18,140,881

Interest Rate Payment Terms: Table 4.3 details additional interest rate payment terms for advances as of September 30, 2015 and December 31, 2014 (in thousands):

Table 4.3



	09/30/2015		12/31/2014
Fixed rate:
Due in one year or less	$	2,278,263	$	1,379,428
Due after one year	6,747,344		6,594,886
Total fixed rate	9,025,607		7,974,314
Variable rate:
Due in one year or less	10,497,538		5,617,547
Due after one year	5,791,268		4,549,020
Total variable rate	16,288,806		10,166,567
TOTAL PAR VALUE	$	25,314,413	$	18,140,881

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

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, 2015 and December 31, 2014 on mortgage loans held for portfolio (in thousands):

Table 5.1



	09/30/2015			12/31/2014
Real estate:
Fixed rate, medium-term¹, single-family mortgages	$	1,483,076		$	1,531,229
Fixed rate, long-term, single-family mortgages	4,748,907			4,596,914
Total unpaid principal balance	6,231,983			6,128,143
Premiums	100,546			100,353
Discounts	(2,530		)	(3,008		)
Deferred loan costs, net	638			830
Other deferred fees	(126		)	(168		)
Hedging adjustments	7,714			8,572
Total before Allowance for Credit Losses on Mortgage Loans	6,338,225			6,234,722
Allowance for Credit Losses on Mortgage Loans	(1,897		)	(4,550		)
MORTGAGE LOANS HELD FOR PORTFOLIO, NET	$	6,336,328		$	6,230,172


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

Table 5.2 presents information as of September 30, 2015 and December 31, 2014 on the outstanding unpaid principal balance (UPB) of mortgage loans held for portfolio (in thousands):

Table 5.2



	09/30/2015		12/31/2014
Conventional loans	$	5,623,853	$	5,497,001
Government-guaranteed or insured loans	608,130		631,142
TOTAL UNPAID PRINCIPAL BALANCE	$	6,231,983	$	6,128,143

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.

Credit products: The FHLBank manages its credit exposure to credit products through an integrated approach that generally includes establishing a credit limit for each member, includes an ongoing review of each member’s financial condition and is coupled with conservative collateral/lending policies to limit risk of loss while balancing members’ needs for a reliable source of funding. In addition, the FHLBank lends to its members in accordance with Federal statutes and Finance Agency regulations. Specifically, the FHLBank complies with the Federal Home Loan Bank Act of 1932, as amended (Bank Act), which requires the FHLBank to obtain sufficient collateral to fully secure credit products. The estimated value of the collateral required to secure each member’s credit products is calculated by applying collateral discounts, or haircuts, to the market value or UPB of the collateral, as applicable. The FHLBank accepts certain investment securities, residential mortgage loans, deposits, and other real estate related assets as collateral. In addition, community financial institutions are eligible to utilize expanded statutory collateral provisions for small business loans, agriculture loans and community development loans. The FHLBank’s capital stock owned by borrowing members is held by the FHLBank as further collateral security for all indebtedness of the member to the FHLBank. Collateral arrangements may vary depending upon member credit quality, financial condition and performance; borrowing capacity; and overall credit exposure to the member. The FHLBank can also require additional or substitute collateral to protect its security interest. FHLBank management believes that these policies are effectively applied to manage the FHLBank’s credit risk from credit products.

Based upon the financial condition of the member, the FHLBank either allows a member to retain physical possession of the collateral assigned to it, or requires the member to specifically assign or place physical possession of the collateral with the FHLBank or its safekeeping agent. The FHLBank perfects its security interest in all pledged collateral. The Bank Act affords any security interest granted to the FHLBank by a member priority over the claims or rights of any other party except for claims or rights of a third party that would be entitled to priority under otherwise applicable law and are held by a bona fide purchaser for value or by a secured party holding a prior perfected security interest.

Using a risk-based approach and taking into consideration each member’s financial strength, the FHLBank considers the type and level of collateral to be the primary indicator of credit quality on its credit products. As of September 30, 2015 and December 31, 2014, the FHLBank had rights to collateral on a member-by-member basis with an estimated value in excess of its outstanding extensions of credit.

The FHLBank continues to evaluate and make changes to its collateral guidelines, as necessary, based on current market conditions. As of September 30, 2015 and December 31, 2014, the FHLBank did not have any advances that were past due, on nonaccrual status or considered impaired. In addition, there have been no troubled debt restructurings related to credit products during 2015 and 2014.

Based upon the collateral held as security, management’s credit extension and collateral policies, management’s credit analysis and the repayment history on credit products, the FHLBank currently does not anticipate any credit losses on its credit products. Accordingly, as of September 30, 2015 and December 31, 2014, the FHLBank has not recorded any allowance for credit losses on credit products, nor has it recorded any liability to reflect an allowance for credit losses for off‑balance sheet credit exposures. For additional information on the FHLBank’s off-balance sheet credit exposure, see Note 14.

Government Mortgage Loans Held For Portfolio: The FHLBank invests in government-guaranteed or insured (by FHA, VA, RHA and/or HUD) fixed rate mortgage loans secured by one-to-four family residential properties. The servicer provides and maintains insurance or a guarantee from the applicable government agency. The servicer is responsible for compliance with all government agency requirements and for obtaining the benefit of the applicable insurance or guarantee with respect to defaulted government mortgage loans. Any losses on these loans that are not recovered from the issuer or guarantor are absorbed by the servicers. Therefore, the FHLBank only has credit risk for these loans if the servicer fails to pay for losses not covered by the insurance or guarantee. Based on the FHLBank’s assessment of its servicers, the FHLBank has not established an allowance for credit losses on government mortgage loans. Further, as of September 30, 2015 and December 31, 2014, none of these mortgage loans have been placed on non-accrual status or were considered impaired because of the U.S. government guarantee or insurance on these loans and the contractual obligation of the loan servicer to repurchase the loans when certain criteria are met.

Conventional Mortgage Loans Held For Portfolio: The allowance for conventional loans is determined by a formula analysis based upon loss factors predominantly calculated using a historical analysis of loan performance. Delinquent loan migration analysis is performed to determine default probability rates, and historical loss analysis is performed to determine loss severity rates, both of which are then utilized as loss factors within the formula analysis. These analyses include consideration of various data observations, such as past performance, current performance, loan portfolio characteristics, collateral-related characteristics, industry data, and prevailing economic conditions. The measurement of the allowance for conventional mortgage loan losses may consist of: (1) reviewing all residential mortgage loans at the individual master commitment level; (2) reviewing specifically identified collateral-dependent loans for impairment; (3) reviewing homogeneous pools of residential mortgage loans; and/or (4) estimating credit losses in the remaining portfolio. The formula analysis is consistently applied, but loss factors may be adjusted in response to changing conditions, as a result of management’s assessment of the adequacy of the allowance to absorb losses inherent in the portfolio.

During the first quarter of 2015, the FHLBank modified its technique for calculating the allowance for credit losses in connection with the adoption of Advisory Bulletin 2012-02 (AB 2012-02), Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention, effective January 1, 2015. The adoption of AB 2012-02 is considered a change in estimate; however, it did not have a material impact to our financial condition, results of operations or cash flows. AB 2012-02 establishes a standard methodology for classifying loans, other real estate owned, and certain other assets, excluding investment securities, and prescribes the timing of asset charge-offs based upon these classifications. Management charges off delinquent mortgage loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported. Additionally, the adoption of AB 2012-02 requires any outstanding loan balance in excess of the fair value of the property, less cost to sell, to be classified as "Loss" when the loan is no more than 180 days delinquent, and a charge-off taken during the period identified. Fraudulent loans or borrowers in bankruptcy are also subject to the charge-off provisions of AB 2012-02. In conjunction with the implementation of AB 2012-02, management determined that a life-to-date net gain/loss on a loan transferred to real estate owned (REO), which includes charge-offs on loans considered impaired in compliance with AB 2012-02, would provide a more precise loss severity rate than the previous method of only considering losses from sale of the REO property. Management believes this change in technique will improve the FHLBank’s estimate of inherent losses in the portfolio.

Collectively Evaluated Mortgage Loans: The credit risk analysis of conventional loans evaluated collectively for impairment considers loan pool specific attribute data, applies estimated loss severities, and incorporates the associated credit enhancements in order to determine the FHLBank’s best estimate of probable incurred losses. Migration analysis is a methodology for determining, through the FHLBank’s experience over a historical period, the rate of default on pools of similar loans. The FHLBank applies migration analysis to loans based on the following categories: (1) loans in foreclosure; (2) nonaccrual loans; (3) delinquent loans; and (4) all other remaining loans. The FHLBank then estimates how many loans in these categories may migrate to a realized loss position and applies a loss severity factor to estimate losses incurred as of the Statement of Condition date.

Individually Evaluated Mortgage Loans: Certain conventional mortgage loans, primarily impaired mortgage loans that are considered collateral-dependent, may be specifically identified for purposes of calculating the allowance for credit losses. A mortgage loan is considered collateral-dependent if repayment is only expected to be provided by the sale of the underlying property, that is, if it is considered likely that the borrower will default and there is not sufficient CE obligation from a PFI to offset all losses under the master commitment. The estimated credit losses on impaired collateral-dependent loans may be separately determined because sufficient information exists to make a reasonable estimate of the inherent loss for these loans on an individual loan basis. The FHLBank estimates the fair value of this collateral by applying an appropriate loss severity rate or using third party estimates or property valuation models. The resulting incurred loss is equal to the difference between the carrying value of the loan and the estimated fair value of the collateral less estimated selling costs.

Direct Financing Lease Receivable: The FHLBank has a recorded investment in a direct financing lease receivable with a member for a building complex and property. Under the office complex agreement, the FHLBank has all rights and remedies under the lease agreement as well as all rights and remedies available under the member’s Advance, Pledge and Security Agreement. Consequently, the FHLBank can apply any excess collateral securing credit products to any shortfall in the leasing arrangement. As of September 30, 2015 and December 31, 2014, the direct financing lease receivable was not past due, on nonaccrual status or considered impaired.

Term Federal Funds Sold: These investments are all short-term unsecured loans conducted with investment-grade counterparties and we only evaluate these investments for purposes of an allowance for credit losses if the investment is not paid when due. There were no investments in term Federal funds sold outstanding as of September 30, 2015 and December 31, 2014, and all such investments acquired during the periods ended September 30, 2015 and December 31, 2014 were repaid according to their contractual terms.

Term Securities Purchased Under Agreements to Resell: These investments are considered collateralized financing arrangements and effectively represent short-term loans to investment-grade counterparties. The terms of these loans are structured such that if the market value of the underlying securities decreases below the market value required as collateral, the counterparty must provide additional securities as collateral in an amount equal to the decrease or remit cash in such amount, or the FHLBank will decrease the dollar value of the agreement to resell accordingly. If the FHLBank determines that an agreement to resell is impaired, the difference between the fair value of the collateral and the amortized cost of the agreement is charged to earnings. There were no investments in term securities purchased under agreements to resell outstanding as of September 30, 2015 and December 31, 2014, and all such investments acquired during the periods ended September 30, 2015 and December 31, 2014 were repaid according to their contractual terms.

Roll-forward of Allowance for Credit Losses: Table 6.1 presents a roll-forward of the allowance for credit losses for the three and nine months ended September 30, 2015 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, 2015 (in thousands):

Table 6.1



	09/30/2015
	Conventional Loans			Government Loans		Credit Products¹		Direct Financing Lease Receivable		Total
Allowance for credit losses:
Balance, beginning of three-month period	$	2,390		$	—	$	—	$	—	$	2,390
Net charge-offs	(95		)	—		—		—		(95		)
(Reversal) provision for credit losses	(398		)	—		—		—		(398		)
Balance, end of three-month period	$	1,897		$	—	$	—	$	—	$	1,897

Balance, beginning of nine-month period	$	4,550		$	—	$	—	$	—	$	4,550
Net charge-offs	(461		)	—		—		—		(461		)
(Reversal) provision for credit losses	(2,192		)	—		—		—		(2,192		)
Balance, end of nine-month period	$	1,897		$	—	$	—	$	—	$	1,897

Allowance for credit losses, end of period:
Individually evaluated for impairment	$	—		$	—	$	—	$	—	$	—
Collectively evaluated for impairment	1,897			—		—		—		1,897

Recorded investment², end of period:
Individually evaluated for impairment	$	13,225		$	—	$	25,503,344	$	20,343	$	25,536,912
Collectively evaluated for impairment	5,731,113			624,519		—		—		6,355,632
Total	$	5,744,338		$	624,519	$	25,503,344	$	20,343	$	31,892,544

Federal Home Loan Bank of Topeka - FORM 10-Q - November 5, 2015

Attached files