Attached files
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
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 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 | ||
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 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. |
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, 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
4
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) | ||||||
1 Amortized cost: $70,617 and $0 as of September 30, 2015 and December 31, 2014, respectively.
2 Fair 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.
5
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.
6
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.
7
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.
8
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.
9
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 |
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 | ||||||
09/30/2015 | 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.
11
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.
12
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.
13
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.
14
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. |
15
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. |
16
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. |
17
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 |
18
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 | ||||||
Prepayment Rates | Default Rates | Loss Severities | ||||||
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 | ||||||
Prepayment Rates | Default Rates | Loss Severities | ||||||
Subprime: | ||||||||
2004 and prior | 3.3 | % | 4.4 | % | 87.7 | % | 11.6 | % |
19
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. |
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, 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.
20
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.
21
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.
22
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.
23
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.
24
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.
25
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 |
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. |
26
Table 6.2 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):