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


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.

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):

Table 6.2



	09/30/2014
	Conventional Loans			Government Loans		Credit Products¹		Direct Financing Lease Receivable		Total
Allowance for credit losses:
Balance, beginning of three-month period	$	4,658		$	—	$	—	$	—	$	4,658
Net charge-offs	(149		)	—		—		—		(149		)
(Reversal) provision for credit losses	82			—		—		—		82
Balance, end of three-month period	$	4,591		$	—	$	—	$	—	$	4,591

Balance, beginning of nine-month period	$	6,748		$	—	$	—	$	—	$	6,748
Net charge-offs	(425		)	—		—		—		(425		)
(Reversal) provision for credit losses	(1,732		)	—		—		—		(1,732		)
Balance, end of nine-month period	$	4,591		$	—	$	—	$	—	$	4,591

Allowance for credit losses, end of period:
Individually evaluated for impairment	$	—		$	—	$	—	$	—	$	—
Collectively evaluated for impairment	4,591			—		—		—		4,591

Recorded investment², end of period:
Individually evaluated for impairment	$	—		$	—	$	20,595,448	$	21,959	$	20,617,407
Collectively evaluated for impairment	5,543,946			655,541		—		—		6,199,487
Total	$	5,543,946		$	655,541	$	20,595,448	$	21,959	$	26,816,894


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.

Credit Quality Indicators: The FHLBank’s key credit quality indicators include the migration of: (1) past due loans; (2) non-accrual loans; (3) loans in process of foreclosure; and (4) impaired loans, all of which are used either on an individual or pool basis to determine the allowance for credit losses.

Table 6.3 summarizes the delinquency aging and key credit quality indicators for all of the FHLBank’s portfolio segments as of September 30, 2015 (dollar amounts in thousands):

Table 6.3



	09/30/2015
	Conventional Loans			Government Loans			Credit Products¹			Direct Financing Lease Receivable			Total
Recorded investment²:
Past due 30-59 days delinquent	$	29,575		$	20,228		$	—		$	—		$	49,803
Past due 60-89 days delinquent	8,953			5,913			—			—			14,866
Past due 90 days or more delinquent	11,939			6,683			—			—			18,622
Total past due	50,467			32,824			—			—			83,291
Total current loans	5,693,871			591,695			25,503,344			20,343			31,809,253
Total recorded investment	$	5,744,338		$	624,519		$	25,503,344		$	20,343		$	31,892,544

Other delinquency statistics:
In process of foreclosure, included above³	$	5,090		$	2,438		$	—		$	—		$	7,528
Serious delinquency rate⁴	0.2		%	1.1		%	—		%	—		%	0.1		%
Past due 90 days or more and still accruing interest	$	—		$	6,683		$	—		$	—		$	6,683
Loans on non-accrual status⁵	$	15,131		$	—		$	—		$	—		$	15,131


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


²	The recorded investment in a financing receivable is the UPB, adjusted for accrued interest, net deferred loan fees or costs, unamortized premiums or discounts, fair value hedging adjustments and direct write-downs. The recorded investment is not net of any valuation allowance.


³	Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported. Loans in process of foreclosure are included in past due or current loans dependent on their delinquency status.


⁴	Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total recorded investment for the portfolio class.


⁵	Loans on non-accrual status include $1,347,000 of troubled debt restructurings. Troubled debt restructurings are restructurings in which the FHLBank, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider.

Table 6.4 summarizes the key credit quality indicators for the FHLBank’s mortgage loans as of December 31, 2014 (dollar amounts in thousands):

Table 6.4



	12/31/2014
	Conventional Loans			Government Loans			Credit Products¹			Direct Financing Lease Receivable			Total
Recorded investment²:
Past due 30-59 days delinquent	$	36,985		$	22,762		$	—		$	—		$	59,747
Past due 60-89 days delinquent	8,191			6,383			—			—			14,574
Past due 90 days or more delinquent	15,921			6,723			—			—			22,644
Total past due	61,097			35,868			—			—			96,965
Total current loans	5,556,184			612,624			18,323,374			21,415			24,513,597
Total recorded investment	$	5,617,281		$	648,492		$	18,323,374		$	21,415		$	24,610,562

Other delinquency statistics:
In process of foreclosure, included above³	$	6,231		$	3,088		$	—		$	—		$	9,319
Serious delinquency rate⁴	0.3		%	1.0		%	—		%	—		%	0.1		%
Past due 90 days or more and still accruing interest	$	—		$	6,723		$	—		$	—		$	6,723
Loans on non-accrual status⁵	$	20,157		$	—		$	—		$	—		$	20,157


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


²	The recorded investment in a financing receivable is the UPB, adjusted for accrued interest, net deferred loan fees or costs, unamortized premiums or discounts, fair value hedging adjustments and direct write-downs. The recorded investment is not net of any valuation allowance.


³	Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported. Loans in process of foreclosure are included in past due or current loans dependent on their delinquency status.


⁴	Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total recorded investment for the portfolio class.


⁵	Loans on non-accrual status include $1,522,000 of troubled debt restructurings. Troubled debt restructurings are restructurings in which the FHLBank, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider.

Individually Evaluated Impaired Loans: Table 6.5 presents the recorded investment, UPB, and related allowance of impaired loans individually assessed for impairment as of September 30, 2015 (in thousands):

Table 6.5



	09/30/2015
	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance	$	13,225	$	13,170	$	—
With an allowance	—		—		—
TOTAL	$	13,225	$	13,170	$	—

Table 6.6 presents the average recorded investment and related interest income recognized on these individually evaluated impaired loans during the three and nine months ended September 30, 2015 (in thousands):

Table 6.6



	Three Months Ended				Nine Months Ended
	09/30/2015				09/30/2015
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance	$	13,415	$	97	$	13,842	$	278
With an allowance	—		—		121		—
TOTAL	$	13,415	$	97	$	13,963	$	278

The FHLBank had $3,983,000 and $4,628,000 classified as REO recorded in other assets as of September 30, 2015 and December 31, 2014, respectively.

NOTE 7 – DERIVATIVES AND HEDGING ACTIVITIES

Table 7.1 represents outstanding notional balances and fair values (includes net accrued interest receivable or payable on the derivatives) of the derivatives outstanding by type of derivative and by hedge designation as of September 30, 2015 and December 31, 2014 (in thousands):

Table 7.1



	09/30/2015								12/31/2014
	Notional Amount		Derivative Assets			Derivative Liabilities			Notional Amount		Derivative Assets			Derivative Liabilities
Derivatives designated as hedging instruments:
Interest rate swaps	$	11,163,286	$	81,359		$	186,028		$	11,605,502	$	89,100		$	198,181
Interest rate caps/floors	60,000		—			235			187,000		—			956
Total derivatives designated as hedging relationships	11,223,286		81,359			186,263			11,792,502		89,100			199,137
Derivatives not designated as hedging instruments:
Interest rate swaps	3,994,149		2,202			96,613			2,416,820		1,402			83,507
Interest rate caps/floors	3,005,800		7,693			9			4,090,800		9,984			36
Mortgage delivery commitments	96,717		471			—			53,004		146			8
Total derivatives not designated as hedging instruments	7,096,666		10,366			96,622			6,560,624		11,532			83,551
TOTAL	$	18,319,952	91,725			282,885			$	18,353,126	100,632			282,688
Netting adjustments and cash collateral¹			(27,665		)	(252,737		)			(67,649		)	(247,396		)
DERIVATIVE ASSETS AND LIABILITIES			$	64,060		$	30,148				$	32,983		$	35,292

Amounts represent the application of the netting requirements that allow the FHLBank to settle positive and negative positions and also cash collateral, including initial or variation margin, and related accrued interest held or placed with the same clearing agent and/or derivative counterparty. Cash collateral posted was $251,275,000 and $209,164,000 as of September 30, 2015 and December 31, 2014, respectively. Cash collateral received was $26,203,000 and $29,417,000 as of September 30, 2015 and December 31, 2014, respectively.

The following tables provide information regarding gains and losses on derivatives and hedging activities by type of hedge and type of derivative and gains and losses by hedged item for fair value hedges.

For the three and nine months ended September 30, 2015 and 2014, the FHLBank recorded net gain (loss) on derivatives and hedging activities as presented in Table 7.2 (in thousands):

Table 7.2



	Three Months Ended						Nine Months Ended
	09/30/2015			09/30/2014			09/30/2015			09/30/2014
Derivatives designated as hedging instruments:
Interest rate swaps	$	(1,179	)	$	141		$	(2,604	)	$	(708	)
Total net gain (loss) related to fair value hedge ineffectiveness	(1,179		)	141			(2,604		)	(708		)
Derivatives not designated as hedging instruments:
Economic hedges:
Interest rate swaps	(35,715		)	11,469			(14,689		)	26,332
Interest rate caps/floors	(923		)	(4,089		)	(2,264		)	(25,569		)
Net interest settlements	(13,503		)	(9,799		)	(32,933		)	(29,585		)
Mortgage delivery commitments	1,599			60			1,123			2,979
Total net gain (loss) related to derivatives not designated as hedging instruments	(48,542		)	(2,359		)	(48,763		)	(25,843		)
NET GAIN (LOSS) ON DERIVATIVES AND HEDGING ACTIVITIES	$	(49,721	)	$	(2,218	)	$	(51,367	)	$	(26,551	)

The FHLBank carries derivative instruments at fair value on its Statements of Condition. Any change in the fair value of derivatives designated under a fair value hedging relationship is recorded each period in current period earnings. Fair value hedge accounting allows for the offsetting fair value of the hedged risk in the hedged item to also be recorded in current period earnings. For the three months ended September 30, 2015 and 2014, the FHLBank recorded net gain (loss) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the FHLBank’s net interest income as presented in Table 7.3 (in thousands):

Table 7.3



	Three Months Ended
	09/30/2015												09/30/2014
	Gain (Loss) on Derivatives			Gain (Loss) on Hedged Items			Net Fair Value Hedge Ineffectiveness			Effect of Derivatives on Net Interest Income¹			Gain (Loss) on Derivatives			Gain (Loss) on Hedged Items			Net Fair Value Hedge Ineffectiveness			Effect of Derivatives on Net Interest Income¹
Advances	$	(36,356	)	$	35,581		$	(775	)	$	(30,884	)	$	47,481		$	(46,986	)	$	495		$	(35,539	)
Investments	(664		)	763			99			—			—			—			—			—
Consolidated obligation bonds	13,781			(14,436		)	(655		)	17,447			(21,925		)	21,571			(354		)	23,343
Consolidated obligation discount notes	47			105			152			84			—			—			—			—
TOTAL	$	(23,192	)	$	22,013		$	(1,179	)	$	(13,353	)	$	25,556		$	(25,415	)	$	141		$	(12,196	)


¹	The differentials between accruals of interest receivables and payables on derivatives designated as fair value hedges as well as the amortization/accretion of hedging activities are recognized as adjustments to the interest income or expense of the designated underlying hedged item.

For the nine months ended September 30, 2015 and 2014, the FHLBank recorded net gain (loss) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the FHLBank’s net interest income as presented in Table 7.4 (in thousands):

Table 7.4



	Nine Months Ended
	09/30/2015												09/30/2014
	Gain (Loss) on Derivatives			Gain (Loss) on Hedged Items			Net Fair Value Hedge Ineffectiveness			Effect of Derivatives on Net Interest Income¹			Gain (Loss) on Derivatives		Gain (Loss) on Hedged Items			Net Fair Value Hedge Ineffectiveness			Effect of Derivatives on Net Interest Income¹
Advances	$	(11,816	)	$	11,553		$	(263	)	$	(95,932	)	$	68,762	$	(67,956	)	$	806		$	(106,619	)
Investments	(664		)	763			99			—			—		—			—			—
Consolidated obligation bonds	14,570			(17,205		)	(2,635		)	56,416			32,233		(33,747		)	(1,514		)	69,123
Consolidated obligation discount notes	105			90			195			143			—		—			—			—
TOTAL	$	2,195		$	(4,799	)	$	(2,604	)	$	(39,373	)	$	100,995	$	(101,703	)	$	(708	)	$	(37,496	)


¹	The differentials between accruals of interest receivables and payables on derivatives designated as fair value hedges as well as the amortization/accretion of hedging activities are recognized as adjustments to the interest income or expense of the designated underlying hedged item.

Based on credit analyses and collateral requirements, FHLBank management does not anticipate any credit losses on its derivative agreements. The maximum credit risk applicable to a single counterparty was $28,729,000 and $31,332,000 as of September 30, 2015 and December 31, 2014, respectively. The counterparty was the same each period.

Certain of the FHLBank’s uncleared derivative instruments contain provisions that require the FHLBank to post additional collateral with its counterparties if there is deterioration in the FHLBank’s credit rating. If the FHLBank’s credit rating is lowered by an NRSRO, the FHLBank may be required to deliver additional collateral on uncleared derivative instruments in net liability positions. The aggregate fair value of all uncleared derivative instruments with derivative counterparties containing credit-risk-related contingent features that were in a net derivative liability position (before cash collateral and related accrued interest) as of September 30, 2015 and December 31, 2014 was $38,519,000 and $50,791,000, respectively, for which the FHLBank has posted collateral with a fair value of $10,321,000 and $16,422,000, respectively, in the normal course of business. If the FHLBank’s credit rating had been lowered one level (e.g., from double-A to single-A), the FHLBank would have been required to deliver an additional $18,700,000 and $21,700,000 of collateral to its uncleared derivative counterparties as of September 30, 2015 and December 31, 2014, respectively.

For cleared derivatives, the Clearinghouse determines initial margin requirements and generally, credit ratings are not factored into the initial margin. However, clearing agents may require additional initial margin to be posted based on credit considerations, including but not limited to credit rating downgrades. The FHLBank was not required to post additional initial margin by its clearing agents as of September 30, 2015 and December 31, 2014.

The FHLBank’s net exposure on derivative agreements is presented in Note 10.

NOTE 8 – DEPOSITS

The FHLBank offers demand, overnight and short-term deposit programs to its members and to other qualifying non-members. Table 8.1 details the types of deposits held by the FHLBank as of September 30, 2015 and December 31, 2014 (in thousands):

Table 8.1



	09/30/2015		12/31/2014
Interest-bearing:
Demand	$	285,452	$	188,886
Overnight	388,300		331,300
Term	11,500		29,400
Total interest-bearing	685,252		549,586
Non-interest-bearing:
Demand	44,143		46,189
Total non-interest-bearing	44,143		46,189
TOTAL DEPOSITS	$	729,395	$	595,775

NOTE 9 – CONSOLIDATED OBLIGATIONS

Consolidated Obligation Bonds: Table 9.1 presents the FHLBank’s participation in consolidated obligation bonds outstanding as of September 30, 2015 and December 31, 2014 (dollar amounts in thousands):

Table 9.1



	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	$	9,904,890		0.49	%	$	6,165,800		0.42	%
Due after one year through two years	2,799,180			1.16		3,167,750			1.08
Due after two years through three years	2,009,875			1.92		1,861,935			2.15
Due after three years through four years	1,064,750			1.53		1,578,940			1.74
Due after four years through five years	1,288,600			1.56		1,678,250			1.54
Thereafter	5,086,000			2.54		5,706,650			2.45
Total par value	22,153,295			1.29	%	20,159,325			1.45	%
Premiums	23,568					30,739
Discounts	(3,648		)			(3,889		)
Hedging adjustments	52,039					34,827
TOTAL	$	22,225,254				$	20,221,002

The FHLBank’s participation in consolidated obligation bonds outstanding as of September 30, 2015 and December 31, 2014 includes callable bonds totaling $8,692,500,000 and $9,726,000,000, respectively. The FHLBank uses the unswapped callable bonds for financing its callable fixed rate advances (Note 4), MBS (Note 3) and mortgage loans (Note 5). Contemporaneous with a portion of its fixed rate callable bond issuances, the FHLBank will also enter into interest rate swap agreements (in which the FHLBank generally pays a variable rate and receives a fixed rate) with call features that mirror the options in the callable bonds (a sold callable swap). The combined sold callable swap and callable debt transaction allows the FHLBank to obtain attractively priced variable rate financing. Table 9.2 summarizes the FHLBank’s participation in consolidated obligation bonds outstanding by year of maturity, or by the next call date for callable bonds as of September 30, 2015 and December 31, 2014 (in thousands):

Table 9.2



Year of Maturity or Next Call Date	09/30/2015		12/31/2014
Due in one year or less	$	17,932,390	$	15,271,800
Due after one year through two years	2,234,180		2,887,750
Due after two years through three years	1,037,875		1,040,935
Due after three years through four years	271,750		448,940
Due after four years through five years	128,600		155,250
Thereafter	548,500		354,650
TOTAL PAR VALUE	$	22,153,295	$	20,159,325

Table 9.3 summarizes interest rate payment terms for consolidated obligation bonds as of September 30, 2015 and December 31, 2014 (in thousands):

Table 9.3



	09/30/2015		12/31/2014
Fixed rate	$	12,808,295	$	11,847,325
Simple variable rate	7,275,000		5,185,000
Step up/step down	1,420,000		2,830,000
Fixed to variable rate	530,000		150,000
Range	120,000		122,000
Variable to fixed rate	—		25,000
TOTAL PAR VALUE	$	22,153,295	$	20,159,325

Consolidated Discount Notes: Consolidated discount notes are issued to raise short-term funds. Consolidated discount notes are consolidated obligations with original maturities of up to one year. These consolidated discount notes are generally issued at less than their face amount and redeemed at par value when they mature.

Table 9.4 summarizes the FHLBank’s participation in consolidated obligation discount notes, all of which are due within one year (dollar amounts in thousands):

Table 9.4



	Book Value		Par Value		Weighted Average Interest Rate¹
September 30, 2015	$	20,610,434	$	20,614,214	0.15	%

December 31, 2014	$	14,219,612	$	14,221,276	0.08	%


¹	Represents yield to maturity excluding concession fees.

NOTE 10 – ASSETS AND LIABILITIES SUBJECT TO OFFSETTING

The FHLBank presents certain financial instruments, including derivatives, repurchase agreements and securities purchased under agreements to resell, on a net basis by clearing agent by Clearinghouse, or by counterparty, when it has met the netting requirements. For these financial instruments, the FHLBank has elected to offset its asset and liability positions, as well as cash collateral, including initial and variation margin, received or pledged and associated accrued interest.

Tables 10.1 and 10.2 present the fair value of financial assets, including the related collateral received from or pledged to clearing agents or counterparties, based on the terms of the FHLBank’s master netting arrangements or similar agreements as of September 30, 2015 and December 31, 2014 (in thousands):

Table 10.1



09/30/2015
Description	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Statement of Condition			Net Amounts of Assets Presented in the Statement of Condition		Gross Amounts Not Offset in the Statement of Condition¹			Net Amount
Derivative assets:
Uncleared derivatives	$	87,898	$	(73,771	)	$	14,127	$	(471	)	$	13,656
Cleared derivatives	3,827		46,106			49,933		—			49,933
Total derivative assets	91,725		(27,665		)	64,060		(471		)	63,589
Securities purchased under agreements to resell	4,010,000		—			4,010,000		(4,010,000		)	—
TOTAL	$	4,101,725	$	(27,665	)	$	4,074,060	$	(4,010,471	)	$	63,589


¹	Represents noncash collateral received on financial instruments that: (1) do not qualify for netting on the Statement of Condition; or (2) are not subject to an enforceable netting agreement (e.g., mortgage delivery commitments).

Table 10.2



12/31/2014
Description	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Statement of Condition			Net Amounts of Assets Presented in the Statement of Condition		Gross Amounts Not Offset in the Statement of Condition¹			Net Amount
Derivative assets:
Uncleared derivatives	$	96,213	$	(86,130	)	$	10,083	$	(146	)	$	9,937
Cleared derivatives	4,419		18,481			22,900		—			22,900
Total derivative assets	100,632		(67,649		)	32,983		(146		)	32,837
Securities purchased under agreements to resell	1,225,000		—			1,225,000		(1,225,000		)	—
TOTAL	$	1,325,632	$	(67,649	)	$	1,257,983	$	(1,225,146	)	$	32,837


¹	Represents noncash collateral received on financial instruments that: (1) do not qualify for netting on the Statement of Condition; or (2) are not subject to an enforceable netting agreement (e.g., mortgage delivery commitments).

Tables 10.3 and 10.4 present the fair value of financial liabilities, including the related collateral received from or pledged to counterparties, based on the terms of the FHLBank’s master netting arrangements or similar agreements as of September 30, 2015 and December 31, 2014 (in thousands):

Table 10.3



09/30/2015
Description	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statement of Condition			Net Amounts of Liabilities Presented in the Statement of Condition		Gross Amounts Not Offset in the Statement of Condition¹			Net Amount
Derivative liabilities:
Uncleared derivatives	$	196,613	$	(166,465	)	$	30,148	$	(9	)	$	30,139
Cleared derivatives	86,272		(86,272		)	—		—			—
Total derivative liabilities	282,885		(252,737		)	30,148		(9		)	30,139
TOTAL	$	282,885	$	(252,737	)	$	30,148	$	(9	)	$	30,139


¹	Represents noncash collateral received on financial instruments that: (1) do not qualify for netting on the Statement of Condition; or (2) are not subject to an enforceable netting agreement (e.g., mortgage delivery commitments).

Table 10.4



12/31/2014
Description	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statement of Condition			Net Amounts of Liabilities Presented in the Statement of Condition		Gross Amounts Not Offset in the Statement of Condition¹			Net Amount
Derivative liabilities:
Uncleared derivatives	$	233,123	$	(197,831	)	$	35,292	$	(44	)	$	35,248
Cleared derivatives	49,565		(49,565		)	—		—			—
Total derivative liabilities	282,688		(247,396		)	35,292		(44		)	35,248
TOTAL	$	282,688	$	(247,396	)	$	35,292	$	(44	)	$	35,248


¹	Represents noncash collateral received on financial instruments that: (1) do not qualify for netting on the Statement of Condition; or (2) are not subject to an enforceable netting agreement (e.g., mortgage delivery commitments).

NOTE 11 – CAPITAL

The FHLBank is subject to three capital requirements under the provisions of the Gramm-Leach-Bliley Act (GLB Act) and the Finance Agency’s capital structure regulation. Regulatory capital does not include accumulated other comprehensive income (AOCI) but does include mandatorily redeemable capital stock.

•

Risk-based capital. The FHLBank must maintain at all times permanent capital in an amount at least equal to the sum of its credit risk, market risk and operations risk capital requirements. The risk-based capital requirements are all calculated in accordance with the rules and regulations of the Finance Agency. Only permanent capital, defined as Class B Common Stock and retained earnings, can be used by the FHLBank to satisfy its risk-based capital requirement. The Finance Agency may require the FHLBank to maintain a greater amount of permanent capital than is required by the risk-based capital requirement as defined, but the Finance Agency has not placed any such requirement on the FHLBank to date.

•

Total regulatory capital. The GLB Act requires the FHLBank to maintain at all times at least a 4.0 percent total capital-to-asset ratio. Total regulatory capital is defined as the sum of permanent capital, Class A Common Stock, any general loss allowance, if consistent with GAAP and not established for specific assets, and other amounts from sources determined by the Finance Agency as available to absorb losses.


•	Leverage capital. The FHLBank is required to maintain at all times a leverage capital-to-assets ratio of at least 5.0 percent, with the leverage capital ratio defined as the sum of permanent capital weighted 1.5 times and non-permanent capital (currently only Class A Common Stock) weighted 1.0 times, divided by total assets.

Table 11.1 illustrates that the FHLBank was in compliance with its regulatory capital requirements as of September 30, 2015 and December 31, 2014 (dollar amounts in thousands):

Table 11.1



	09/30/2015						12/31/2014
	Required			Actual			Required			Actual
Regulatory capital requirements:
Risk-based capital	$	291,680		$	1,776,993		$	334,484		$	1,392,962
Total regulatory capital-to-asset ratio	4.0		%	4.4		%	4.0		%	4.4		%
Total regulatory capital	$	1,830,893		$	1,997,533		$	1,474,159		$	1,605,361
Leverage capital ratio	5.0		%	6.3		%	5.0		%	6.2		%
Leverage capital	$	2,288,616		$	2,886,029		$	1,842,699		$	2,301,842

Mandatorily Redeemable Capital Stock: The FHLBank is a cooperative whose members and former members own all of the FHLBank’s capital stock. Member shares cannot be purchased or sold except between the FHLBank and its members at a price equal to the $100 per share par value. If a member cancels its written notice of redemption or notice of withdrawal, the FHLBank will reclassify mandatorily redeemable capital stock from a liability to equity. After the reclassification, dividends on the capital stock would no longer be classified as interest expense.

Table 11.2 provides the related dollar amounts for activities recorded in “Mandatorily redeemable capital stock” during the three and nine months ended September 30, 2015 and 2014 (in thousands):

Table 11.2



	Three Months Ended						Nine Months Ended
	09/30/2015			09/30/2014			09/30/2015			09/30/2014
Balance, beginning of period	$	4,200		$	4,519		$	4,187		$	4,764
Capital stock subject to mandatory redemption reclassified from equity during the period	139,280			58,794			322,239			228,102
Redemption or repurchase of mandatorily redeemable capital stock during the period	(140,397		)	(58,954		)	(323,363		)	(228,522		)
Stock dividend classified as mandatorily redeemable capital stock during the period	7			12			27			27
Balance, end of period	$	3,090		$	4,371		$	3,090		$	4,371

Table 11.3 shows the amount of mandatorily redeemable capital stock by contractual year of redemption as of September 30, 2015 and December 31, 2014 (in thousands). The year of redemption in Table 11.3 is the end of the redemption period in accordance with the FHLBank’s capital plan. The FHLBank is not required to redeem or repurchase membership stock until six months (for Class A Common Stock) or five years (for Class B Common Stock) after the FHLBank receives notice for withdrawal. Additionally, the FHLBank is not required to redeem or repurchase activity-based stock until any activity-based stock becomes excess stock as a result of an activity no longer remaining outstanding. However, the FHLBank intends to repurchase the excess activity-based stock of non-members to the extent that it can do so and still meet its regulatory capital requirements.

Table 11.3



Contractual Year of Repurchase	09/30/2015		12/31/2014
Year 1	$	341	$	53
Year 2	1		—
Year 3	1		1
Year 4	—		2
Year 5	1		—
Past contractual redemption date due to remaining activity¹	2,746		4,131
TOTAL	$	3,090	$	4,187


¹	Represents mandatorily redeemable capital stock that is past the end of the contractual redemption period because there is activity outstanding to which the mandatorily redeemable capital stock relates.

Excess Capital Stock: Excess capital stock is defined as the amount of stock held by a member (or former member) in excess of that institution’s minimum stock purchase requirement. Finance Agency rules limit the ability of the FHLBank to create excess member stock under certain circumstances. For example, the FHLBank may not pay dividends in the form of capital stock or issue new excess stock to members if the FHLBank’s excess stock exceeds one percent of its total assets or if the issuance of excess stock would cause the FHLBank’s excess stock to exceed one percent of its total assets. As of September 30, 2015, the FHLBank’s excess stock was less than one percent of total assets.

Capital Classification Determination: The Finance Agency implemented the prompt corrective action (PCA) provisions of the Housing and Economic Recovery Act of 2008. The rule established four capital classifications (i.e., adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized) for FHLBanks and implemented the PCA provisions that apply to FHLBanks that are not deemed to be adequately capitalized. The Finance Agency determines each FHLBank’s capital classification on at least a quarterly basis. If an FHLBank is determined to be other than adequately capitalized, the FHLBank becomes subject to additional supervisory authority by the Finance Agency. Before implementing a reclassification, the Director of the Finance Agency is required to provide the FHLBank with written notice of the proposed action and an opportunity to submit a response. As of the most recent review by the Finance Agency for the second quarter of 2015, the FHLBank has been classified as adequately capitalized.

NOTE 12 – ACCUMULATED OTHER COMPREHENSIVE INCOME

Table 12.1 summarizes the changes in AOCI for the three months ended September 30, 2015 and 2014 (in thousands):

Table 12.1



	Three Months Ended
	Net Unrealized Gain (Loss) on Available-for-Sale Securities			Net Non-credit Portion of OTTI Losses on Held-to-maturity Securities			Defined Benefit Pension Plan			Total AOCI
Balance at June 30, 2014	$	—		$	(13,848	)	$	(2,269	)	$	(16,117	)
Other comprehensive income (loss) before reclassification:
Accretion of non-credit loss				1,002						1,002
Reclassifications from other comprehensive income (loss) to net income:
Non-credit OTTI to credit OTTI¹				20						20
Amortization of net loss - defined benefit pension plan²							38			38
Net current period other comprehensive income (loss)	—			1,022			38			1,060
Balance at September 30, 2014	$	—		$	(12,826	)	$	(2,231	)	$	(15,057	)

Balance at June 30, 2015	$	—		$	(9,779	)	$	(3,935	)	$	(13,714	)
Other comprehensive income (loss) before reclassification:
Unrealized gain (loss)	(763		)							(763		)
Non-credit OTTI losses				(24		)				(24		)
Accretion of non-credit loss				653						653
Reclassifications from other comprehensive income (loss) to net income:
Non-credit OTTI to credit OTTI¹				156						156
Amortization of net loss - defined benefit pension plan²							99			99
Net current period other comprehensive income (loss)	(763		)	785			99			121
Balance at September 30, 2015	$	(763	)	$	(8,994	)	$	(3,836	)	$	(13,593	)


¹	Recorded in “Net other-than-temporary impairment losses on held-to-maturity securities” on the Statements of Income. Amount represents a debit (decrease to other income (loss)).


²	Recorded in “Compensation and benefits” on the Statements of Income. Amount represents a debit (increase to other expenses).

Table 12.2 summarizes the changes in AOCI for the nine months ended September 30, 2015 and 2014 (in thousands):

Table 12.2



	Nine Months Ended
	Net Unrealized Gain (Loss) on Available-for-Sale Securities			Net Non-credit Portion of OTTI Losses on Held-to-maturity Securities			Defined Benefit Pension Plan			Total AOCI
Balance at December 31, 2013	$	—		$	(16,003	)	$	(2,358	)	$	(18,361	)
Other comprehensive income (loss) before reclassification:
Accretion of non-credit loss				2,734						2,734
Reclassifications from other comprehensive income (loss) to net income:
Non-credit OTTI to credit OTTI¹				443						443
Amortization of net loss - defined benefit pension plan²							127			127
Net current period other comprehensive income (loss)	—			3,177			127			3,304
Balance at September 30, 2014	$	—		$	(12,826	)	$	(2,231	)	$	(15,057	)


Balance at December 31, 2014	$	—		$	(11,774	)	$	(4,133	)	$	(15,907	)
Other comprehensive income (loss) before reclassification:
Unrealized gain (loss)	(763		)							(763		)
Non-credit OTTI losses				(205		)				(205		)
Accretion of non-credit loss				2,394						2,394
Reclassifications from other comprehensive income (loss) to net income:
Non-credit OTTI to credit OTTI¹				591						591
Amortization of net loss - defined benefit pension plan²							297			297
Net current period other comprehensive income (loss)	(763		)	2,780			297			2,314
Balance at September 30, 2015	$	(763	)	$	(8,994	)	$	(3,836	)	$	(13,593	)


¹	Recorded in “Net other-than-temporary impairment losses on held-to-maturity securities” on the Statements of Income. Amount represents a debit (decrease to other income (loss)).


²	Recorded in “Compensation and benefits” on the Statements of Income. Amount represents a debit (increase to other expenses).

NOTE 13 – FAIR VALUES

The fair value amounts recorded on the Statements of Condition and presented in the note disclosures have been determined by the FHLBank using available market and other pertinent information and reflect the FHLBank’s best judgment of appropriate valuation methods. Although the FHLBank uses its best judgment in estimating the fair value of its financial instruments, there are inherent limitations in any valuation technique. Therefore, the fair values may not be indicative of the amounts that would have been realized in market transactions as of September 30, 2015 and December 31, 2014.

Subjectivity of Estimates: Estimates of the fair value of advances with options, mortgage instruments, derivatives with embedded options and consolidated obligation bonds with options are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows, prepayment speed assumptions, expected interest rate volatility, methods to determine possible distributions of future interest rates used to value options, and the selection of discount rates that appropriately reflect market and credit risks. The use of different assumptions could have a material effect on the fair value estimates.

Fair Value Hierarchy: The FHLBank records trading securities, available-for-sale securities, derivative assets and derivative liabilities at fair value on a recurring basis and on occasion, certain private-label MBS/ABS, impaired mortgage loans held for portfolio and non-financial assets on a non-recurring basis. The fair value hierarchy requires the FHLBank to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The inputs are evaluated and an overall level for the fair value measurement is determined. This overall level is an indication of the market observability of the fair value measurement for the asset or liability. The FHLBank must disclose the level within the fair value hierarchy in which the measurements are classified for all assets and liabilities.

The fair value hierarchy prioritizes the inputs used to measure fair value into three broad levels:


•	Level 1 Inputs – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the FHLBank can access on the measurement date.

•

Level 2 Inputs – Inputs other than quoted prices within Level 1 that are observable inputs for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: (1) quoted prices for similar assets and liabilities in active markets; (2) quoted prices for similar assets and liabilities in markets that are not active; (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals and implied volatilities); and (4) inputs that are derived principally from or corroborated by observable market data by correlation or other means.


•	Level 3 Inputs – Unobservable inputs for the asset or liability.

The FHLBank reviews its fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification of certain assets or liabilities. There were no reclassifications of assets or liabilities recorded at fair value on a recurring basis during the three and nine months ended September 30, 2015 and 2014.

The carrying value and fair value of the FHLBank’s financial assets and liabilities as of September 30, 2015 and December 31, 2014 are summarized in Tables 13.1 and 13.2 (in thousands). These values do not represent an estimate of the overall market value of the FHLBank as a going concern, which would take into account future business opportunities and the net profitability of assets and liabilities.

Table 13.1



	09/30/2015
	Carrying Value			Total Fair Value			Level 1		Level 2			Level 3		Netting Adjustment and Cash Collateral
Assets:
Cash and due from banks	$	672,155		$	672,155		$	672,155	$	—		$	—	$	—
Interest-bearing deposits	1,557			1,557			—		1,557			—		—
Securities purchased under agreements to resell	4,010,000			4,010,000			—		4,010,000			—		—
Federal funds sold	1,800,000			1,800,000			—		1,800,000			—		—
Trading securities	2,339,291			2,339,291			—		2,339,291			—		—
Available-for-sale securities	69,854			69,854			—		69,854			—		—
Held-to-maturity securities	4,885,711			4,894,732			—		4,599,649			295,083		—
Advances	25,482,433			25,544,160			—		25,544,160			—		—
Mortgage loans held for portfolio, net of allowance	6,336,328			6,577,217			—		6,575,532			1,685		—
Accrued interest receivable	66,577			66,577			—		66,577			—		—
Derivative assets	64,060			64,060			—		91,725			—		(27,665		)
Liabilities:
Deposits	729,395			729,395			—		729,395			—		—
Consolidated obligation discount notes	20,610,434			20,611,247			—		20,611,247			—		—
Consolidated obligation bonds	22,225,254			22,261,041			—		22,261,041			—		—
Mandatorily redeemable capital stock	3,090			3,090			3,090		—			—		—
Accrued interest payable	68,072			68,072			—		68,072			—		—
Derivative liabilities	30,148			30,148			—		282,885			—		(252,737		)
Other Asset (Liability):
Standby letters of credit	(859		)	(859		)	—		(859		)	—		—
Standby bond purchase agreements	101			7,118			—		7,118			—		—
Advance commitments	—			(43		)	—		(43		)	—		—

Table 13.2



	12/31/2014
	Carrying Value			Total Fair Value			Level 1		Level 2			Level 3		Netting Adjustment and Cash Collateral
Assets:
Cash and due from banks	$	2,545,311		$	2,545,311		$	2,545,311	$	—		$	—	$	—
Interest-bearing deposits	1,163			1,163			—		1,163			—		—
Securities purchased under agreements to resell	1,225,000			1,225,000			—		1,225,000			—		—
Federal funds sold	2,075,000			2,075,000			—		2,075,000			—		—
Trading securities	1,462,049			1,462,049			—		1,462,049			—		—
Held-to-maturity securities	4,857,187			4,869,042			—		4,513,082			355,960		—
Advances	18,302,950			18,366,465			—		18,366,465			—		—
Mortgage loans held for portfolio, net of allowance	6,230,172			6,475,740			—		6,475,740			—		—
Accrued interest receivable	70,923			70,923			—		70,923			—		—
Derivative assets	32,983			32,983			—		100,632			—		(67,649		)
Liabilities:
Deposits	595,775			595,775			—		595,775			—		—
Consolidated obligation discount notes	14,219,612			14,219,385			—		14,219,385			—		—
Consolidated obligation bonds	20,221,002			20,207,029			—		20,207,029			—		—
Mandatorily redeemable capital stock	4,187			4,187			4,187		—			—		—
Accrued interest payable	58,243			58,243			—		58,243			—		—
Derivative liabilities	35,292			35,292			—		282,688			—		(247,396		)
Other Asset (Liability):
Standby letters of credit	(926		)	(926		)	—		(926		)	—		—
Standby bond purchase agreements	222			4,738			—		4,738			—		—
Advance commitments	—			(257		)	—		(257		)	—		—

Fair Value Measurements: Tables 13.3 and 13.4 present, for each hierarchy level, the FHLBank’s assets and liabilities that are measured at fair value on a recurring or nonrecurring basis on the Statements of Condition as of or for the period ended September 30, 2015 and December 31, 2014 (in thousands). The FHLBank measures certain held-to-maturity securities at fair value on a nonrecurring basis due to the recognition of a credit loss. For held-to-maturity securities that had credit impairment recorded at period end for which no total impairment was recorded (the full amount of additional credit impairment was a reclassification from non-credit impairment previously recorded in AOCI), these securities were recorded at their carrying values and not fair value. The FHLBank measures certain impaired mortgage loans held for portfolio at fair value on a nonrecurring basis when, upon individual evaluation for impairment, the estimated fair value less costs to sell is lower than the carrying amount. For additional information on the valuation of impaired loans, see Note 6. REO is measured at fair value when the asset’s fair value less costs to sell is lower than its carrying amount.

Table 13.3



	09/30/2015
	Total		Level 1		Level 2		Level 3		Netting Adjustment and Cash Collateral¹
Recurring fair value measurements - Assets:
Trading securities:
GSE obligations²	$	1,354,809	$	—	$	1,354,809	$	—	$	—
U.S. obligation MBS³	835		—		835		—		—
GSE MBS⁴	983,647		—		983,647		—		—
Total trading securities	2,339,291		—		2,339,291		—		—
Available-for-sale securities:
GSE MBS⁵	69,854		—		69,854		—		—
Total available-for-sale securities	69,854		—		69,854		—		—
Derivative assets:
Interest-rate related	63,589		—		91,254		—		(27,665		)
Mortgage delivery commitments	471		—		471		—		—
Total derivative assets	64,060		—		91,725		—		(27,665		)
TOTAL RECURRING FAIR VALUE MEASUREMENTS - ASSETS	$	2,473,205	$	—	$	2,500,870	$	—	$	(27,665	)

Recurring fair value measurements - Liabilities:
Derivative liabilities:
Interest-rate related	$	30,148	$	—	$	282,885	$	—	$	(252,737	)
Total derivative liabilities	30,148		—		282,885		—		(252,737		)
TOTAL RECURRING FAIR VALUE MEASUREMENTS - LIABILITIES	$	30,148	$	—	$	282,885	$	—	$	(252,737	)

Nonrecurring fair value measurements - Assets⁶:
Held-to-maturity securities:
Private-label residential MBS	$	6,507	$	—	$	—	$	6,507	$	—
Impaired mortgage loans	1,693		—		—		1,693		—
Real estate owned	1,769		—		—		1,769		—
TOTAL NONRECURRING FAIR VALUE MEASUREMENTS - ASSETS	$	9,969	$	—	$	—	$	9,969	$	—


¹	Represents the effect of legally enforceable master netting agreements that allow the FHLBank to net settle positive and negative positions and also derivative cash collateral and related accrued interest held or placed with the same clearing agent or derivative counterparty.


²	Represents debentures issued by other FHLBanks, Fannie Mae, Freddie Mac, Farm Credit and Farmer Mac. GSE securities are not guaranteed by the U.S. government.


³	Represents single-family MBS issued by Ginnie Mae, which are guaranteed by the U.S. government.


⁴	Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac.


⁵	Represents multi-family MBS issued by Fannie Mae.


⁶	Includes assets adjusted to fair value during the nine months ended September 30, 2015 and still outstanding as of September 30, 2015.

Table 13.4



	12/31/2014
	Total		Level 1		Level 2		Level 3		Netting Adjustment and Cash Collateral¹
Recurring fair value measurements - Assets:
Trading securities:
U.S. Treasury obligations	$	25,016	$	—	$	25,016	$	—	$	—
GSE obligations²	1,299,979		—		1,299,979		—		—
U.S. obligation MBS³	963		—		963		—		—
GSE MBS⁴	136,091		—		136,091		—		—
Total trading securities	1,462,049		—		1,462,049		—		—
Derivative assets:
Interest-rate related	32,837		—		100,486		—		(67,649		)
Mortgage delivery commitments	146		—		146		—		—
Total derivative assets	32,983		—		100,632		—		(67,649		)
TOTAL RECURRING FAIR VALUE MEASUREMENTS - ASSETS	$	1,495,032	$	—	$	1,562,681	$	—	$	(67,649	)

Recurring fair value measurements - Liabilities:
Derivative liabilities:
Interest-rate related	$	35,284	$	—	$	282,680	$	—	$	(247,396	)
Mortgage delivery commitments	8		—		8		—		—
Total derivative liabilities	35,292		—		282,688		—		(247,396		)
TOTAL RECURRING FAIR VALUE MEASUREMENTS - LIABILITIES	$	35,292	$	—	$	282,688	$	—	$	(247,396	)

Nonrecurring fair value measurements - Assets:
Held-to-maturity securities⁵:
Private-label residential MBS	$	134	$	—	$	—	$	134	$	—
Real estate owned⁶	927		—		—		927		—
TOTAL NONRECURRING FAIR VALUE MEASUREMENTS - ASSETS	$	1,061	$	—	$	—	$	1,061	$	—


¹	Represents the effect of legally enforceable master netting agreements that allow the FHLBank to net settle positive and negative positions and also derivative cash collateral and related accrued interest held or placed with the same clearing agent or derivative counterparty.


²	Represents debentures issued by other FHLBanks, Fannie Mae, Freddie Mac and Farm Credit. GSE securities are not guaranteed by the U.S. government.


³	Represents single-family MBS issued by Ginnie Mae, which are guaranteed by the U.S. government.


⁴	Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac.


⁵	Excludes impaired securities with carrying values less than their fair values at date of impairment.


⁶	Includes REO written down to fair value during the quarter ended December 31, 2014 and still outstanding as of December 31, 2014.

NOTE 14 – COMMITMENTS AND CONTINGENCIES

Joint and Several Liability: As provided by the Bank Act or Finance Agency regulation and as described in Note 9, consolidated obligations are backed only by the financial resources of the FHLBanks. FHLBank Topeka is jointly and severally liable with the other FHLBanks for the payment of principal and interest on all of the consolidated obligations issued by the FHLBanks. The par amounts for which FHLBank Topeka is jointly and severally liable were approximately $813,743,460,000 and $812,794,196,000 as of September 30, 2015 and December 31, 2014, respectively. To the extent that an FHLBank makes any consolidated obligation payment on behalf of another FHLBank, the paying FHLBank is entitled to reimbursement from the FHLBank with primary liability. However, if the Finance Agency determines that the primary obligor is unable to satisfy its obligations, then the Finance Agency may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis that the Finance Agency may determine. No FHLBank has ever failed to make any payment on a consolidated obligation for which it was the primary obligor. As a result, the regulatory provisions for directing other FHLBanks to make payments on behalf of another FHLBank or allocating the liability among other FHLBanks have never been invoked.

The joint and several obligations are mandated by Finance Agency regulations and are not the result of arms-length transactions among the FHLBanks. As described above, the FHLBanks have no control over the amount of the guaranty or the determination of how each FHLBank would perform under the joint and several liability. Because the FHLBanks are subject to the authority of the Finance Agency as it relates to decisions involving the allocation of the joint and several liability for the FHLBank’s consolidated obligations, FHLBank Topeka regularly monitors the financial condition of the other FHLBanks to determine whether it should expect a loss to arise from its joint and several obligations. If the FHLBank were to determine that a loss was probable and the amount of the loss could be reasonably estimated, the FHLBank would charge to income the amount of the expected loss. Based upon the creditworthiness of the other FHLBanks as of September 30, 2015, FHLBank Topeka has concluded that a loss accrual is not necessary at this time.

Off-balance Sheet Commitments: As of September 30, 2015 and December 31, 2014, off-balance sheet commitments are presented in Table 14.1 (in thousands):

Table 14.1



	09/30/2015						12/31/2014
Notional Amount	Expire Within One Year		Expire After One Year		Total		Expire Within One Year		Expire After One Year		Total
Standby letters of credit outstanding	$	2,523,873	$	11,498	$	2,535,371	$	2,544,683	$	9,880	$	2,554,563
Advance commitments outstanding	37,923		15,600		53,523		—		32,796		32,796
Commitments for standby bond purchases	300,820		1,159,885		1,460,705		759,725		785,250		1,544,975
Commitments to fund or purchase mortgage loans	96,717		—		96,717		53,004		—		53,004
Commitments to issue consolidated bonds, at par	152,000		—		152,000		50,000		—		50,000

Commitments to Extend Credit: Standby letters of credit are executed for members for a fee. A standby letter of credit is a short-term financing arrangement between the FHLBank and its member or non-member housing associate. If the FHLBank is required to make payment for a beneficiary’s draw, these amounts are converted into a collateralized advance to the member. As of September 30, 2015, outstanding standby letters of credit had original terms of 6 days to 10 years with a final expiration in 2020. As of December 31, 2014, outstanding standby letters of credit had original terms of 2 days to 10 years with a final expiration in 2020. Unearned fees as well as the value of the guarantees related to standby letters of credit are recorded in other liabilities and amounted to $859,000 and $926,000 as of September 30, 2015 and December 31, 2014, respectively. Standby letters of credit are fully collateralized with assets allowed by the FHLBank’s Member Products Policy (MPP). Advance commitments legally bind and unconditionally obligate the FHLBank for additional advances up to 24 months in the future. Based upon management’s credit analysis of members and collateral requirements under the MPP, the FHLBank does not expect to incur any credit losses on the outstanding letters of credit or advance commitments.

Standby Bond-Purchase Agreements: The FHLBank has entered into standby bond purchase agreements with state housing authorities whereby the FHLBank, for a fee, agrees to purchase and hold the authorities’ bonds until the designated marketing agent can find a suitable investor or the housing authority repurchases the bond according to a schedule established by the standby agreement. Each standby agreement dictates the specific terms that would require the FHLBank to purchase the bond. The bond purchase commitments entered into by the FHLBank expire no later than 2018, though some are renewable at the option of the FHLBank. As of September 30, 2015 and December 31, 2014, the total commitments for bond purchases were with two in-district and one out-of-district state housing authorities as well as one participation interest in a standby bond purchase agreement between another FHLBank and a state housing authority in its district. The FHLBank was not required to purchase any bonds under any agreements during the three and nine months ended September 30, 2015 and 2014.

Commitments to Purchase Mortgage Loans: These commitments that unconditionally obligate the FHLBank to purchase mortgage loans from participating FHLBank Topeka members in the MPF Program are generally for periods not to exceed 60 calendar days. Certain commitments are recorded as derivatives at their fair values on the Statements of Condition. The FHLBank recorded mortgage delivery commitment net derivative asset (liability) balances of $471,000 and $138,000 as of September 30, 2015 and December 31, 2014, respectively.

Commitments to Issue Consolidated Obligations: The FHLBank enters into commitments to issue consolidated obligation bonds and discount notes outstanding in the normal course of its business. All settle within the shortest period possible and are considered regular way trades; thus, the commitments are appropriately not recorded as derivatives.

NOTE 15 – TRANSACTIONS WITH STOCKHOLDERS

The FHLBank is a cooperative whose members own the capital stock of the FHLBank and generally receive dividends on their investments. In addition, certain former members that still have outstanding transactions are also required to maintain their investments in FHLBank capital stock until the transactions mature or are paid off. Nearly all outstanding advances are with current members, and the majority of outstanding mortgage loans held for portfolio were purchased from current or former members. The FHLBank also maintains demand deposit accounts for members primarily to facilitate settlement activities that are directly related to advances and mortgage loan purchases.

Transactions with members are entered into in the ordinary course of business. In instances where members also have officers or directors who are directors of the FHLBank, transactions with those members are subject to the same eligibility and credit criteria, as well as the same terms and conditions, as other transactions with members. For financial reporting and disclosure purposes, the FHLBank defines related parties as FHLBank directors’ financial institutions and members with capital stock investments in excess of 10 percent of the FHLBank’s total regulatory capital stock outstanding, which includes mandatorily redeemable capital stock.

Activity with Members that Exceed a 10 Percent Ownership in FHLBank Capital Stock: Tables 15.1 and 15.2 present information as of September 30, 2015 and December 31, 2014 on members that owned more than 10 percent of outstanding FHLBank regulatory capital stock in 2015 or 2014 (dollar amounts in thousands). None of the officers or directors of these members currently serve on the FHLBank’s board of directors.

Table 15.1



09/30/2015
Member Name	State	Total Class A Stock Par Value		Percent of Total Class A		Total Class B Stock Par Value		Percent of Total Class B		Total Capital Stock Par Value		Percent of Total Capital Stock
Bank of Oklahoma, NA	OK	$	18,450	8.4	%	$	209,818	18.6	%	$	228,268	16.9	%
MidFirst Bank	OK	500		0.2		180,382		16.0		180,882		13.4
Capitol Federal Savings Bank	KS	500		0.2		150,043		13.3		150,543		11.2
TOTAL		$	19,450	8.8	%	$	540,243	47.9	%	$	559,693	41.5	%

Table 15.2



12/31/2014
Member Name	State	Total Class A Stock Par Value		Percent of Total Class A		Total Class B Stock Par Value		Percent of Total Class B		Total Capital Stock Par Value		Percent of Total Capital Stock
MidFirst Bank	OK	$	500	0.2	%	$	124,781	16.3	%	$	125,281	12.8	%
Capitol Federal Savings Bank	KS	2,700		1.3		118,606		15.5		121,306		12.4
Bank of Oklahoma, NA	OK	12,133		5.7		94,153		12.3		106,286		10.9
TOTAL		$	15,333	7.2	%	$	337,540	44.1	%	$	352,873	36.1	%

Advance and deposit balances with members that owned more than 10 percent of outstanding FHLBank regulatory capital stock as of September 30, 2015 and December 31, 2014 are summarized in Table 15.3 (dollar amounts in thousands).

Table 15.3



	09/30/2015				12/31/2014				09/30/2015				12/31/2014
Member Name	Outstanding Advances		Percent of Total		Outstanding Advances		Percent of Total		Outstanding Deposits		Percent of Total		Outstanding Deposits		Percent of Total
Bank of Oklahoma, NA	$	4,600,000	18.2	%	$	2,103,400	11.6	%	$	2,167	0.3	%	$	2,534	0.4	%
MidFirst Bank	3,953,000		15.6		2,736,500		15.1		866		0.1		567		0.1
Capitol Federal Savings Bank	3,275,000		12.9		2,575,000		14.2		469		0.1		1,737		0.3
TOTAL	$	11,828,000	46.7	%	$	7,414,900	40.9	%	$	3,502	0.5	%	$	4,838	0.8	%

Bank of Oklahoma, NA, MidFirst Bank and Capitol Federal Savings Bank did not sell any mortgage loans into the MPF Program during the three and nine months ended September 30, 2015 and 2014.

Transactions with FHLBank Directors’ Financial Institutions: Table 15.4 presents information as of September 30, 2015 and December 31, 2014 for members that had an officer or director serving on the FHLBank’s board of directors (dollar amounts in thousands). Information is only included for the period in which the officer or director served on the FHLBank’s board of directors. Capital stock listed is regulatory capital stock, which includes mandatorily redeemable capital stock.

Table 15.4



	09/30/2015				12/31/2014
	Outstanding Amount		Percent of Total		Outstanding Amount		Percent of Total
Advances	$	149,045	0.6	%	$	219,239	1.2	%

Deposits	$	8,862	1.2	%	$	8,524	1.4	%

Class A Common Stock	$	8,533	3.9	%	$	4,175	2.0	%
Class B Common Stock	16,152		1.4		7,419		1.0
TOTAL CAPITAL STOCK	$	24,685	1.8	%	$	11,594	1.2	%

Table 15.5 presents mortgage loans acquired during the three and nine months ended September 30, 2015 and 2014 for members that had an officer or director serving on the FHLBank’s board of directors in 2015 or 2014 (dollar amounts in thousands).

Table 15.5



	Three Months Ended								Nine Months Ended
	09/30/2015				09/30/2014				09/30/2015				09/30/2014
	Amount		Percent of Total		Amount		Percent of Total		Amount		Percent of Total		Amount		Percent of Total
Mortgage loans acquired	$	28,850	9.8	%	$	24,855	8.3	%	$	92,412	10.5	%	$	66,009	8.4	%

Direct Financing Lease: During 2002, the FHLBank entered into a 20-year direct financing lease with a member for a building complex and property. Either party has the option to terminate this lease after 15 years. The net investment in the direct financing lease with the member is recorded in other assets. The FHLBank’s $7,896,000 up-front payment for its portion of the building complex is recorded in premises, software and equipment. On October 31, 2005, the FHLBank amended its lease to occupy additional building space, thereby reducing the portion of the property previously leased back to the member and decreasing the member’s future lease payments. All other provisions of the original lease remained in effect. The net reduction in the lease receivable is recorded in premises, software and equipment. On March 31, 2015, the FHLBank provided a Notice of Termination of FHLBank Occupancy (Notice) to the member stating that the FHLBank plans to terminate its occupancy of the space currently occupied by the FHLBank as its headquarters. The Notice reflects the FHLBank’s intent to terminate its occupancy and initiate the sale of its space to the member on March 31, 2018. The 20-year direct financing lease will remain in place for the member's space being leased thereafter. Beginning April 1, 2018, the member's future lease payments will revert back to the initial amount prior to the October 31, 2005 amendment. The direct financing lease has been adjusted accordingly.

See Note 6 for additional information on the direct financing lease.

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to assist the reader in understanding our business and assessing our operations both historically and prospectively. This discussion should be read in conjunction with our interim financial statements and related notes presented under Part I Item 1 of this quarterly report on Form 10-Q and the annual report on Form 10-K for the year ended December 31, 2014, which includes audited financial statements and related notes for the year ended December 31, 2014. Our MD&A includes the following sections:


•	Executive Level Overview – a general description of our business and financial highlights;


•	Financial Market Trends – a discussion of current trends in the financial markets and overall economic environment, including the related impact on our operations;


•	Critical Accounting Policies and Estimates – a discussion of accounting policies that require critical estimates and assumptions;


•	Results of Operations – an analysis of our operating results, including disclosures about the sustainability of our earnings;


•	Financial Condition – an analysis of our financial position;


•	Liquidity and Capital Resources – an analysis of our cash flows and capital position;


•	Risk Management – a discussion of our risk management strategies;


•	Impact of Recently Issued Accounting Standards; and


•	Legislative and Regulatory Developments.

Executive Level Overview

We are a regional wholesale bank that makes advances (loans) to, purchases mortgages from, and provides limited other financial services to our member institutions. The FHLBanks, together with the Office of Finance, a joint office of the FHLBanks, make up the FHLBank System, which consists of 11 district FHLBanks. As independent, member-owned cooperatives, the FHLBanks seek to maintain a balance between their public purpose and their ability to provide adequate returns on the capital supplied by their members. The FHLBanks are supervised and regulated by the Finance Agency, an independent agency in the executive branch of the U.S. government. The Finance Agency’s mission is to ensure that the housing GSEs operate in a safe and sound manner so that they serve as a reliable source of liquidity and funding for housing finance and community investment.

On May 31, 2015, the FHLBank of Des Moines and the FHLBank of Seattle completed the merger that was announced on July 31, 2014. The completion of the merger concluded a lengthy process of merging the two FHLBanks, which included board approval, member ratification, and satisfaction of Finance Agency closing conditions. The continuing FHLBank is headquartered in Des Moines with a western regional office in Seattle, and is now the largest FHLBank in the FHLBank System in terms of membership and geography. As a result of this merger, there are now 11 district FHLBanks in the FHLBank System.

Our primary funding source is consolidated obligations issued through the FHLBanks’ Office of Finance. The Office of Finance is a joint office of the FHLBanks that facilitates the issuance and servicing of the consolidated obligations. The Finance Agency and the U.S. Secretary of the Treasury oversee the issuance of FHLBank debt through the Office of Finance. Consolidated obligations are debt instruments that constitute the joint and several obligations of all FHLBanks. Although consolidated obligations are not obligations of, nor guaranteed by, the U.S. government, the capital markets have traditionally considered the FHLBanks’ consolidated obligations as “Federal agency” debt. As a result, the FHLBanks have traditionally had ready access to funding at relatively favorable spreads to U.S. Treasuries. Additional funds are provided by deposits (received from both member and non-member financial institutions), other borrowings, and the issuance of capital stock.

We serve eligible financial institutions in Colorado, Kansas, Nebraska, and Oklahoma (collectively, the Tenth District of the FHLBank System). Initially, members are required to purchase shares of Class A Common Stock based on the member’s total assets. Each member may be required to purchase activity-based capital stock (Class B Common Stock) as it engages in certain business activities with the FHLBank, including advances and Acquired Member Assets (AMA), at levels determined by management with the Board of Director’s approval and within the ranges stipulated in the Capital Stock Plan. Currently, our capital increases when members are required to purchase additional capital stock in the form of Class B Common Stock to support an increase in advance borrowings. In the past, capital stock also increased when members sold additional mortgage loans to us; however, members are no longer required to purchase capital stock for AMA activity (former members previously required to purchase AMA activity-based stock are subject to the prior requirement as long as there are unpaid principal balances outstanding). At our discretion, we may repurchase excess Common Stock if there is a decline in a member’s advances. We believe it is important to manage our business and the associated risks so that we always strive to provide franchise value by maintaining a core mission asset focus and meeting the following objectives: (1) achieve our liquidity, housing finance and community development missions by meeting member credit needs by offering advances, supporting residential mortgage lending through the MPF Program and through other products; (2) repurchase excess capital stock in order to appropriately manage the size of our balance sheet; and (3) pay stable dividends.

Table 1 presents Selected Financial Data for the periods indicated (dollar amounts in thousands):

Table 1



	09/30/2015			06/30/2015			03/31/2015			12/31/2014			09/30/2014
Statement of Condition (as of period end):
Total assets	$	45,772,326		$	45,505,610		$	40,164,879		$	36,853,977		$	38,528,044
Investments¹	13,106,413			14,846,345			11,578,846			9,620,399			9,075,621
Advances	25,482,433			23,287,961			21,265,329			18,302,950			20,574,600
Mortgage loans, net²	6,336,328			6,314,269			6,284,365			6,230,172			6,164,822
Total liabilities	43,791,476			43,562,137			38,437,663			35,268,710			36,837,646
Deposits	729,395			594,922			744,616			595,775			677,069
Consolidated obligation bonds, net³	22,225,254			21,212,174			19,383,225			20,221,002			20,025,472
Consolidated obligation discount notes, net³	20,610,434			21,506,927			17,757,801			14,219,612			15,947,588
Total consolidated obligations, net³	42,835,688			42,719,101			37,141,026			34,440,614			35,973,060
Mandatorily redeemable capital stock	3,090			4,200			4,545			4,187			4,371
Total capital	1,980,850			1,943,473			1,727,216			1,585,267			1,690,398
Capital stock	1,344,414			1,303,570			1,098,319			974,041			1,090,263
Total retained earnings	650,029			653,617			643,567			627,133			615,192
Accumulated other comprehensive income (loss) (AOCI)	(13,593		)	(13,714		)	(14,670		)	(15,907		)	(15,057		)
Statement of Income (for the quarterly period ended):
Net interest income	61,720			57,150			56,614			57,800			56,572
(Reversal) provision for credit losses on mortgage loans	(398		)	(992		)	(802		)	117			82
Other income (loss)	(30,256		)	(13,537		)	(9,216		)	(15,219		)	(10,805		)
Other expenses	15,187			15,093			13,620			12,981			13,880
Income before assessments	16,675			29,512			34,580			29,483			31,805
AHP assessments	1,669			2,952			3,459			2,950			3,181
Net income	15,006			26,560			31,121			26,533			28,624
Selected Financial Ratios and Other Financial Data (for the quarterly period ended):
Dividends paid in cash⁴	74			74			74			74			75
Dividends paid in stock⁴	18,520			16,436			14,613			14,518			13,356
Weighted average dividend rate⁵	5.29		%	5.22		%	5.19		%	5.17		%	5.15		%
Dividend payout ratio⁶	123.91		%	62.16		%	47.19		%	55.00		%	46.92		%
Return on average equity	2.91		%	5.56		%	7.10		%	6.07		%	6.93		%
Return on average assets	0.13		%	0.25		%	0.32		%	0.27		%	0.32		%
Average equity to average assets	4.46		%	4.48		%	4.48		%	4.53		%	4.56		%
Net interest margin⁷	0.53		%	0.54		%	0.58		%	0.60		%	0.63		%
Total capital ratio⁸	4.33		%	4.27		%	4.30		%	4.30		%	4.39		%
Regulatory capital ratio⁹	4.36		%	4.31		%	4.35		%	4.36		%	4.44		%
Ratio of earnings to fixed charges¹⁰	1.29			1.56			1.67			1.57			1.63


¹	Includes trading securities, available-for-sale securities, held-to-maturity securities, interest-bearing deposits, securities purchased under agreements to resell and Federal funds sold.


²	The allowance for credit losses on mortgage loans was $1,897,000, $2,390,000, $3,337,000, $4,550,000 and $4,591,000 as of September 30, 2015, June 30, 2015, March 31, 2015, December 31, 2014 and September 30, 2014, respectively.


³	Consolidated obligations are bonds and discount notes that we are primarily liable to repay. See Note 14 to the financial statements for a description of the total consolidated obligations of all FHLBanks for which we are jointly and severally liable.


⁴	Dividends reclassified as interest expense on mandatorily redeemable capital stock and not included as dividends recorded in accordance with GAAP were $10,000, $11,000, $11,000, $11,000 and $13,000 for the quarters ended September 30, 2015, June 30, 2015, March 31, 2015, December 31, 2014 and September 30, 2014, respectively.


⁵	Dividends paid in cash and stock on both classes of stock as a percentage of average capital stock eligible for dividends.


⁶	Ratio disclosed represents dividends declared and paid during the period as a percentage of net income for the period presented, although the Finance Agency regulation requires dividends be paid out of known income prior to declaration date.


⁷	Net interest income as a percentage of average earning assets.


⁸	GAAP capital stock, which excludes mandatorily redeemable capital stock, plus retained earnings and AOCI as a percentage of total assets.


⁹	Regulatory capital (i.e., permanent capital and Class A Common Stock) as a percentage of total assets.


¹⁰	Total earnings divided by fixed charges (interest expense including amortization/accretion of premiums, discounts and capitalized expenses related to indebtedness).

Net income decreased $13.6 million, or 47.6 percent, to $15.0 million for the three months ended September 30, 2015 compared to $28.6 million for the same period in the prior year. This decrease in net income was driven by fair value fluctuations on derivatives and hedging activities partially offset by fair value fluctuations on trading securities, which resulted in a net decrease of $19.3 million in net income. A significant widening in mortgage rates relative to the interest rate swap curve led to large fair value losses on many of our economic derivatives when compared to the gains recorded on the swapped multi-family GSE MBS recorded as trading securities in three months ended September 30, 2015. Net interest income, our largest source of income, increased $5.1 million, or 9.1 percent, for the quarter ended September 30, 2015 compared to the quarter ended September 30, 2014, which partially offset the net losses on economic derivatives and swapped multi-family GSE MBS.

Net income decreased $6.8 million, or 8.5 percent, to $72.7 million for the nine months ended September 30, 2015 compared to $79.5 million for the nine months ended September 30, 2014. Net income for the nine months ended September 30, 2015 included an increase of $11.8 million in net fair value losses related to derivatives and trading securities compared to the same period of 2014. Net interest income increased for the nine months ended September 30, 2015 compared to the prior year period, by $8.1 million, or 4.9 percent, which partially offset the increase in net fair value losses related to derivatives and trading securities.

The increases in net interest income for the three- and nine-month periods were driven by significant increases in the average balance of advances; however, the majority of the increase was in our line of credit advances, our lowest yielding advance product. Line of credit advances are generally funded by our lowest costing debt, our discount notes, which reduced the average cost of borrowings for both periods. Increases in compensation and benefits and other operating expenses contributed to the decreases in net income for the three- and nine-month periods. Detailed discussion relating to the fluctuations in net interest income and the net gain (loss) on derivatives and hedging activities can be found under this Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations.”

Total assets increased $8.9 billion, or 24.2 percent, from December 31, 2014 to September 30, 2015. This increase was due primarily to a $7.2 billion, or 39.2 percent, increase in advances, a $2.8 billion, or 227.3 percent, increase in securities purchased under agreements to resell (reverse repurchase agreements) and a $1.0 billion, or 15.4 percent, increase in investment securities, partially offset by a $1.9 billion decrease in cash. The increase in advances was largely due to an increase in our line of credit advance product. This growth is attributed to the increase in dividend rates (discussed below), which effectively reduces the cost of our advances to the member and increases the member's ability to profitably deploy the funding. We have been actively promoting the impact of our Class B Common Stock dividend on the effective borrowing cost of advances to increase member awareness of the benefit of higher dividends. Changes in interest rates could reduce the benefit of these short-term advances to our members, which could cause a significant decline in advances . The composition of cash and other short-term investments changed between quarters due to our greater ability to invest cash in reverse repurchase agreements at the end of the current quarter as a result of participation in the Federal Reserve Bank of New York's overnight reverse repurchase agreement program and generally more options for utilizing reverse repurchase agreements for overnight investments. The increase in investment securities coincided with the increase in advances and mortgage loans, as growth in core mission assets allows for growth in non-mission assets while maintaining our desired core mission asset ratio (discussed below). Although our investment securities represent non-mission assets, they are utilized to provide liquidity and primary and secondary market support for the U.S. housing securities market.

Total liabilities increased $8.5 billion, or 24.2 percent, from December 31, 2014 to September 30, 2015. This increase was due to a $6.4 billion increase in consolidated obligation discount notes and a $2.0 billion increase in consolidated obligation bonds. Our funding mix generally is driven by asset composition; thus, the increase in discount notes for the current period reflects the increase in our line of credit and short-term advances, which are generally funded by discount notes. For additional information, see Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition.”

Return on equity (ROE) was 2.91 percent and 5.08 percent for the current three- and nine-month periods, respectively, compared to 6.93 percent and 6.36 percent for the prior year three- and nine-month periods, respectively. The decline in net income coupled with the growth in advances and associated capital was dilutive to ROE for both periods.

Dividends paid to members totaled $49.8 million for the nine months ended September 30, 2015 compared to $31.6 million for the same period in the prior year. The dividend rate for Class A Common Stock remained at 1.00 percent and the dividend rate for Class B Common Stock has remained at 6.00 percent since the third quarter of 2014. Changes in the weighted average dividend rates between the quarters ended September 30, 2015 (5.29 percent) and 2014 (5.15 percent) occurred primarily due to the difference in the mix of Class A and Class B Common Stock between those periods. Other factors impacting the stock class mix and, therefore, the average dividend rates include: (1) a reduction in our activity stock (Class B Common Stock) requirement for advances in the second quarter of 2014; (2) weekly exchanges of excess Class B Common Stock to Class A Common Stock; and (3) periodic repurchases of excess Class A Common Stock. We changed our management of capital levels during 2014, including a reduction in our activity-based stock purchase requirement (see “Liquidity and Capital Resources - Capital” under this Item 2), establishing periodic repurchases of excess Class A Common Stock, and increasing our dividend payout ratio among other practices, while maintaining sufficient levels of liquidity to fulfill our mission.

Finance Agency guidance requires that our strategic business plan describes how our business activities will achieve our mission consistent with the Finance Agency’s core mission asset guidance. We intend to manage our balance sheet with an emphasis towards maintaining a core mission assets ratio within the range of 70 to 80 percent during 2015. Our ratio of average advances and average mortgage loans to average consolidated obligations (core mission assets ratio) was 79 percent for the first nine months of 2015. However, because this ratio is dependent on several variables such as member demand for our advance and mortgage loan products, it is possible that we will be unable to maintain the ratio at this level indefinitely. Additional discussion of recent core mission asset guidance can be found under this Item 2 - "Management's Discussion and Analysis - Legislative and Regulatory Developments."

Financial Market Trends

The primary external factors that affect net interest income are market interest rates and the general state of the economy.

General discussion of the level of market interest rates:

Table 2 presents selected market interest rates as of the dates or for the periods shown.

Table 2



	09/30/2015		09/30/2014		09/30/2015		09/30/2014
Market Instrument	Three-month		Three-month		Nine-month		Nine-month		09/30/2015		12/31/2014	09/30/2014
Market Instrument	Average		Average		Average		Average		Ending Rate		Ending Rate	Ending Rate
Overnight Federal funds effective/target rate¹	0.14	%	0.09	%	0.13	%	0.08	%	0.0 to 0.25%		0.0 to 0.25%	0.0 to 0.25%
Federal Open Market Committee (FOMC) target rate for overnight Federal funds¹	0.0 to 0.25		0.0 to 0.25		0.0 to 0.25		0.0 to 0.25		0.0 to 0.25		0.0 to 0.25	0.0 to 0.25
3-month U.S. Treasury bill¹	0.03		0.02		0.02		0.03		(0.01	)	0.04	0.02
3-month LIBOR¹	0.31		0.23		0.28		0.23		0.33		0.26	0.24
2-year U.S. Treasury note¹	0.68		0.50		0.63		0.42		0.64		0.67	0.58
5-year U.S. Treasury note¹	1.55		1.69		1.51		1.64		1.38		1.65	1.76
10-year U.S. Treasury note¹	2.22		2.49		2.11		2.62		2.06		2.17	2.49
30-year residential mortgage note rate²	4.13		4.32		4.02		4.42		4.08		4.04	4.33


¹	Source is Bloomberg (overnight Federal funds rate is the effective rate for the averages and the target rate for the ending rates).


²	Mortgage Bankers Association weekly 30-year fixed rate mortgage contract rate obtained from Bloomberg.

During the third quarter of 2015, yields on U.S. Treasuries generally decreased relative to the yields at the end of the second quarter of 2015. The 10-year Treasury yield closed the third quarter at approximately 25 basis points lower than at the end of the second quarter. The cost of FHLBank consolidated obligations as measured by the spread to comparative U.S. Treasury rates has remained relatively stable, however, the spread to three-month LIBOR deteriorated in the third quarter as a result of actions taken by foreign central banks to support their currencies and due to heavy issuance of term corporate debt. This is expected to increase the cost of consolidated obligations swapped or indexed to LIBOR for the remainder of 2015. The market continues to wait for direction from the FOMC regarding the expected timing of increases in the Federal funds target rate. Economic data, other than employment, has been mixed, which has pushed expectations of a target rate increase to mid-2016. However, because the FOMC has largely eliminated forward guidance from its statements, the projected increase date and short-term rates in general will fluctuate with changes in economic data. The FOMC is monitoring the same broad range of economic indicators in its consideration of continued accommodative monetary policy. The FOMC concluded the asset purchase program in October 2014 but is maintaining its existing policy of reinvesting principal payments from its holdings of GSE debt and GSE MBS and of rolling over maturing U.S. Treasury securities at auction. The rates on U.S. Treasuries and GSE MBS are expected to increase once the Federal Reserve is no longer reinvesting those principal payments. We issue debt at a spread above U.S. Treasury securities, so higher interest rates increase the cost of issuing FHLBank consolidated obligations and increase the cost of advances to our members and housing associates. For further discussion see this Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Consolidated Obligations.”

Other factors impacting FHLBank consolidated obligations:

Investors continue to view FHLBank consolidated obligations as carrying a relatively strong credit profile. Historically our strong credit profile has resulted in steady investor demand for FHLBank discount notes and short-term bonds. This has allowed the overall cost to issue short-term consolidated obligations to remain relatively low throughout 2015. Several market events continue to have the potential to impact the demand for our consolidated obligations including political gridlock surrounding budget and debt limit deadlines; geopolitical events and/or disruptions, including recent concern over China's markets, economy, and currency; changes in interest rates and the shape of the yield curve as the FOMC contemplates increasing short-term interest rates; and a decline in dealer demand due to regulatory changes.

Critical Accounting Policies and Estimates

The preparation of our financial statements in accordance with GAAP requires management to make a number of judgments and assumptions that affect our reported results and disclosures. Several of our accounting policies are inherently subject to valuation assumptions and other subjective assessments and are more critical than others in terms of their importance to results. These assumptions and assessments include the following:


•	Accounting related to derivatives;


•	Fair value determinations;


•	Accounting for deferred premium/discount associated with MBS; and


•	Determining the adequacy of the allowance for credit losses.

Changes in any of the estimates and assumptions underlying critical accounting policies could have a material effect on our financial statements.

The accounting policies that management believes are the most critical to an understanding of our financial results and condition and require complex management judgment are described under Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in our annual report on Form 10-K, incorporated by reference herein. There were no material changes to our critical accounting policies and estimates during the quarter ended September 30, 2015.

Results of Operations

Earnings Analysis: Table 3 presents changes in the major components of our net income (dollar amounts in thousands):

Table 3



	Increase (Decrease) in Earnings Components
	Three Months Ended					Nine Months Ended
	09/30/2015 vs. 09/30/2014					9/30/2015 vs. 9/30/2014
	Dollar Change			Percentage Change		Dollar Change			Percentage Change
Total interest income	$	12,167		11.4	%	$	19,142		6.0	%
Total interest expense	7,019			13.9		11,023			7.3
Net interest income	5,148			9.1		8,119			4.9
(Reversal) provision for credit losses on mortgage loans	(480		)	(585.4	)	(460		)	(26.6	)
Net interest income after mortgage loan loss provision	5,628			10.0		8,579			5.1
Net gain (loss) on trading securities	28,239			247.3		13,036			58.1
Net gain (loss) on derivatives and hedging activities	(47,503		)	(2,141.7	)	(24,816		)	(93.5	)
Other non-interest income	(187		)	(6.6	)	(598		)	(7.2	)
Total other income (loss)	(19,451		)	(180.0	)	(12,378		)	(30.5	)
Operating expenses	1,400			11.9		4,311			13.1
Other non-interest expenses	(93		)	(4.5	)	(573		)	(7.9	)
Total other expenses	1,307			9.4		3,738			9.3
AHP assessments	(1,512		)	(47.5	)	(753		)	(8.5	)
NET INCOME	$	(13,618	)	(47.6	)%	$	(6,784	)	(8.5	)%

Table 4 presents the amounts contributed by our principal sources of interest income (dollar amounts in thousands):

Table 4



	Three Months Ended								Nine Months Ended
	09/30/2015				09/30/2014				09/30/2015				09/30/2014
	Interest Income		Percent of Total		Interest Income		Percent of Total		Interest Income		Percent of Total		Interest Income		Percent of Total
Investments¹	$	31,426	26.4	%	$	24,095	22.5	%	$	80,395	23.8	%	$	74,733	23.4	%
Advances	36,880		30.9		31,467		29.4		103,537		30.6		90,280		28.3
Mortgage loans held for portfolio	50,552		42.4		51,099		47.7		153,023		45.3		152,701		47.9
Other	344		0.3		374		0.4		1,050		0.3		1,149		0.4
TOTAL INTEREST INCOME	$	119,202	100.0	%	$	107,035	100.0	%	$	338,005	100.0	%	$	318,863	100.0	%


¹	Includes trading securities, available-for-sale securities, held-to-maturity securities, interest-bearing deposits, securities purchased under agreements to resell and Federal funds sold.

Net income for the three months ended September 30, 2015 was $15.0 million compared to $28.6 million for the three months ended September 30, 2014. This decrease in net income was driven by fair value losses on derivatives and hedging activities, partially offset by fair value gains on trading securities, which resulted in a net decrease of $19.3 million in net income. The fair value fluctuations were largely due to a significant widening in mortgage rates relative to the interest rate swap curve in the three months ended September 30, 2015, which impacted our economic interest rate swaps and the multi-family GSE MBS being hedged. Net interest income increased $5.1 million, or 9.1 percent, for the quarter ended September 30, 2015 compared to the quarter ended September 30, 2014 as a result of purchases of higher yielding investment securities, reverse repurchase agreements, and continued growth in advances.

Net income for the nine months ended September 30, 2015 was $72.7 million compared to $79.5 million for the nine months ended September 30, 2014. The decrease in net income was due primarily to fair value losses related to derivatives and hedging activities offset by lower fair value losses on trading securities, an increase in net interest income largely as a result of an increase in advances, and a decrease in the total cost of borrowing. The $24.8 million decrease in net income from derivatives and hedging activities was partially offset by an decrease in losses on trading securities of $13.0 million, resulting in a net decrease of $11.8 million to net income. As mentioned previously, the fair value losses were related to declines in the fair values on interest rate swaps economically hedging multi-family GSE MBS, partially offset by increases in the fair value of the swapped trading investments and other economic derivatives. Net interest income increased for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014, by $8.1 million, or 4.9 percent, which partially offset the previously discussed decrease in net income over the same period. Net income further declined because of a $3.0 million increase in compensation and benefits expense compared to the previous nine months.

ROE was 2.91 percent and 6.93 percent for the three months ended September 30, 2015 and September 30, 2014, respectively. ROE was 5.08 percent and 6.36 percent for the nine months ended September 30, 2015 and 2014, respectively. ROE declined in both the three and nine month periods as a result of the decline in net income coupled with the growth in advances and associated capital compared to lower average capital in the prior periods attributable to lower advances plus balance sheet management practices utilized in mid- to late 2014 to increase our core mission asset ratio.

Net Interest Income: Net interest income, which includes interest earned on advances, mortgage loans, and investments less interest paid on consolidated obligations, deposits, and other borrowings is the primary source of our earnings. Net interest income increased $5.1 million for the quarter ended September 30, 2015 and $8.1 million for the nine months ended September 30, 2015 compared to the prior year periods. The increase in net interest income for both periods was due primarily to a $7.4 billion and $6.7 billion increase in the average balance of advances for the three- and nine-month periods ended September 30, 2015, respectively, compared to the prior year periods (see Tables 5 and 7). The increase in net interest income for the same periods was also a result of recent purchases of higher yielding investment securities, although increases in the average balances of lower yielding short-term investments tempered the increase for the nine-month period ended September 30, 2015. The net interest spread and margin declined, however, driven by the growth in lower yielding advances and a decrease in the yield on mortgage loans, partially offset by an overall decrease in the cost of borrowing in both periods and also by an increase in the average yield on investments for the three months ended September 30, 2015, which is discussed in greater detail below.

The average yield on investments, which consists of interest-bearing deposits, Federal funds sold, reverse repurchase agreements, and investment securities increased two basis points, from 1.06 percent for the quarter ended September 30, 2014 to 1.08 percent for the quarter ended September 30, 2015. The average yield on investments decreased 13 basis points, from 1.09 percent for the nine months ended September 30, 2014 to 0.96 percent for the nine months ended September 30, 2015. The yields for the three-month period were positively impacted by increases in the average balance of higher yielding MBS due to purchases of multi-family GSE MBS at the end of the second quarter and into the third quarter 2015 but negatively impacted by increases in the average balance of lower yielding instruments. The yields for the nine-month period were impacted by compositional changes in the investment securities portfolio, most notably increases in the average balance of lower yielding instruments and decreases in the average balance of higher yielding MBS as prepayments increased. The average yield and average balance on short-term investments increased between periods due to increased reverse repurchase agreement activity. New counterparty relationships have provided us with more options for utilizing reverse repurchase agreements for overnight investments during 2015.

The average yield on advances decreased nine basis points, from 0.61 percent for the quarter ended September 30, 2014 to 0.52 percent for the current quarter. The average yield on advances decreased 10 basis points, from 0.65 percent for the nine months ended September 30, 2014 to 0.55 percent for the nine months ended September 30, 2015. The decrease in the average yield on advances was due to continued increases in our lowest yielding advance product, our line of credit advances, relative to total advances. The average balance of advances increased $7.4 billion, or 36.0 percent, from the third quarter of 2014 to the same quarter of 2015. Average advances have increased each quarter since the second quarter of 2014 due to our efforts to promote the impact of our Class B Common Stock dividend on the effective borrowing cost of short-term advances to increase member awareness of the benefit of higher dividends.

The average yield on mortgage loans decreased 13 basis points, from 3.30 percent for the quarter ended September 30, 2014 to 3.17 percent for the quarter ended September 30, 2015. The average yield on mortgage loans decreased 13 basis points, from 3.38 percent for the nine months ended September 30, 2014 to 3.25 percent for the nine months ended September 30, 2015. The decrease in yield was due to an increase in premium amortization as mortgage rates decreased towards the end of 2014 and during the first four months of 2015 and prepayments on higher coupon loans increased (yields on mortgage loans decline as premiums are amortized; amortization accelerates as prepayments increase). The decrease is also a result of purchases of mortgage loans at rates lower than the existing portfolio.

The average cost of consolidated obligation bonds decreased slightly between quarters, from 0.95 percent for the quarter ended September 30, 2014 to 0.94 percent for the current quarter. The average cost of consolidated obligation bonds remained steady at 0.97 percent for the nine months ended September 30, 2015 and 2014. The average cost of discount notes increased slightly, from 0.08 percent for the three-and nine-months ended September 30, 2014 to 0.10 percent and 0.09 percent for the three-and nine-months ended September 30, 2015, respectively. Despite these small increases in the average cost of discount notes, the average cost of total interest-bearing liabilities decreased for both periods presented due to the increased use of discount notes to fund the increase in short-term assets, while the average balance of higher costing bonds remained relatively flat. We expect the FOMC to begin raising interest rates in mid-2016, at which time our debt costs should correspondingly begin to increase. For further discussion of how we use discount notes and bonds, see Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Consolidated Obligations.”

Our net interest spread is also impacted by derivative and hedging activities, as the assets and liabilities hedged with derivative instruments designated under fair value hedging relationships are adjusted for changes in fair values, while other assets and liabilities are carried at historical cost. Further, net interest payments or receipts on interest rate swaps designated as fair value hedges and the amortization/accretion of hedging activities are recognized as adjustments to the interest income or expense of the hedged asset or liability. However, net interest payments or receipts on derivatives that do not qualify for hedge accounting (economic hedges) flow through net gain (loss) on derivatives and hedging activities instead of net interest income (net interest received/paid on economic derivatives is identified in Tables 9 through 12 under this Item 2), which distorts yields, especially for trading investments that are swapped to a variable rate.

Table 5 presents average balances and annualized yields of major earning asset categories and the sources funding those earning assets (dollar amounts in thousands):

Table 5



	Three Months Ended
	09/30/2015						09/30/2014
	Average Balance		Interest Income/ Expense		Yield		Average Balance		Interest Income/ Expense		Yield
Interest-earning assets:
Interest-bearing deposits	$	214,980	$	57	0.10	%	$	192,006	$	40	0.08	%
Securities purchased under agreements to resell	2,532,939		1,267		0.20		421,196		96		0.09
Federal funds sold	1,312,859		438		0.13		1,684,413		358		0.08
Investment securities^1,2	7,474,298		29,664		1.57		6,746,386		23,601		1.39
Advances^2,3	28,002,891		36,880		0.52		20,591,124		31,467		0.61
Mortgage loans^2,4,5	6,329,498		50,552		3.17		6,138,316		51,099		3.30
Other interest-earning assets	20,423		344		6.67		22,562		374		6.58
Total earning assets	45,887,888		119,202		1.03		35,796,003		107,035		1.19
Other non-interest-earning assets	44,029						95,201
Total assets	$	45,931,917					$	35,891,204

Interest-bearing liabilities:
Deposits	$	653,931	139		0.08		$	761,192	166		0.09
Consolidated obligations²:
Discount Notes	20,858,561		5,166		0.10		13,312,234		2,688		0.08
Bonds	22,056,063		52,103		0.94		19,807,397		47,552		0.95
Other borrowings	12,846		74		2.28		11,833		57		1.89
Total interest-bearing liabilities	43,581,401		57,482		0.52		33,892,656		50,463		0.59
Capital and other non-interest-bearing funds	2,350,516						1,998,548
Total funding	$	45,931,917					$	35,891,204

Net interest income and net interest spread⁶			$	61,720	0.51	%			$	56,572	0.60	%

Net interest margin⁷					0.53	%					0.63	%


¹	The non-credit portion of the OTTI discount on held-to-maturity securities and the fair value adjustment on available-for-sale securities are excluded from the average balance for calculations of yield since the changes are adjustments to equity.


²	Interest income/expense and average rates include the effect of associated derivatives.


³	Advance income includes prepayment fees on terminated advances.


⁴	CE fee payments are netted against interest earnings on the mortgage loans. The expense related to CE fee payments to PFIs was $1.3 million and $1.2 million for the three months ended September 30, 2015 and 2014,respectively.


⁵	Mortgage loans average balance includes outstanding principal for non-performing conventional loans. However, these loans no longer accrue interest.


⁶	Net interest spread is the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.


⁷	Net interest margin is net interest income as a percentage of average interest-earning assets.

Changes in the volume of interest-earning assets and the level of interest rates influence changes in net interest income, net interest spread and net interest margin. Table 6 summarizes changes in interest income and interest expense (in thousands):

Table 6



	Three Months Ended
	09/30/2015 vs. 09/30/2014
	Increase (Decrease) Due to
	Volume^1,2			Rate^1,2			Total
Interest Income:
Interest-bearing deposits	$	5		$	12		$	17
Securities purchased under agreements to resell	948			223			1,171
Federal funds sold	(91		)	171			80
Investment securities	2,698			3,365			6,063
Advances	10,195			(4,782		)	5,413
Mortgage loans	1,563			(2,110		)	(547		)
Other assets	(35		)	5			(30		)
Total earning assets	15,283			(3,116		)	12,167
Interest Expense:
Deposits	(23		)	(4		)	(27		)
Consolidated obligations:
Discount notes	1,770			708			2,478
Bonds	5,323			(772		)	4,551
Other borrowings	5			12			17
Total interest-bearing liabilities	7,075			(56		)	7,019
Change in net interest income	$	8,208		$	(3,060	)	$	5,148


¹	Changes in interest income and interest expense not identifiable as either volume-related or rate-related have been allocated to volume and rate based upon the proportion of the absolute value of the volume and rate changes.


²	Amounts used to calculate volume and rate changes are based on numbers in dollars. Accordingly, recalculations using the amounts in thousands as disclosed in this report may not produce the same results.

Table 7 presents average balances and yields of major earning asset categories and the sources funding those earning assets (dollar amounts in thousands):

Table 7



	Nine Months Ended
	09/30/2015						09/30/2014
	Average Balance		Interest Income/ Expense		Yield		Average Balance		Interest Income/ Expense		Yield
Interest-earning assets:
Interest-bearing deposits	$	218,536	$	166	0.10	%	$	202,361	$	120	0.08	%
Securities purchased under agreements to resell	2,108,676		2,845		0.18		212,271		138		0.09
Federal funds sold	1,750,070		1,582		0.12		1,438,974		840		0.08
Investment securities^1,2	7,074,362		75,802		1.43		7,283,099		73,635		1.35
Advances^2,3	25,323,712		103,537		0.55		18,580,837		90,280		0.65
Mortgage loans^2,4,5	6,296,067		153,023		3.25		6,048,213		152,701		3.38
Other interest-earning assets	22,689		1,050		6.18		23,719		1,149		6.48
Total earning assets	42,794,112		338,005		1.06		33,789,474		318,863		1.26
Other non-interest-earning assets	29,085						92,353
Total assets	$	42,823,197					$	33,881,827

Interest-bearing liabilities:
Deposits	$	684,284	438		0.09		$	918,443	604		0.09
Consolidated obligations²:
Discount Notes	19,202,098		12,419		0.09		10,949,484		6,250		0.08
Bonds	20,583,685		149,449		0.97		19,929,653		144,488		0.97
Other borrowings	13,526		215		2.12		9,288		156		2.24
Total interest-bearing liabilities	40,483,593		162,521		0.54		31,806,868		151,498		0.64
Capital and other non-interest-bearing funds	2,339,604						2,074,959
Total funding	$	42,823,197					$	33,881,827

Net interest income and net interest spread⁶			$	175,484	0.52	%			$	167,365	0.62	%

Net interest margin⁷					0.55	%					0.66	%


¹	The non-credit portion of the OTTI discount on held-to-maturity securities and the fair value adjustment on available-for-sale securities are excluded from the average balance for calculations of yield since the changes are adjustments to equity.


²	Interest income/expense and average rates include the effect of associated derivatives.


³	Advance income includes prepayment fees on terminated advances.


⁴	CE fee payments are netted against interest earnings on the mortgage loans. The expense related to CE fee payments to PFIs was $3.8 million and $3.6 million for the nine months ended September 30, 2015 and 2014, respectively.


⁵	Mortgage loans average balance includes outstanding principal for non-performing conventional loans. However, these loans no longer accrue interest.


⁶	Net interest spread is the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.


⁷	Net interest margin is net interest income as a percentage of average interest-earning assets.

Changes in the volume of interest-earning assets and the level of interest rates influence changes in net interest income, net interest spread and net interest margin. Table 8 summarizes changes in interest income and interest expense (in thousands):

Table 8



	Nine Months Ended
	09/30/2015 vs. 09/30/2014
	Increase (Decrease) Due to
	Volume^1,2			Rate^1,2			Total
Interest Income:
Interest-bearing deposits	$	10		$	36		$	46
Securities purchased under agreements to resell	2,418			289			2,707
Federal funds sold	210			532			742
Investment securities	(2,152		)	4,319			2,167
Advances	29,147			(15,890		)	13,257
Mortgage loans	6,136			(5,814		)	322
Other assets	(49		)	(50		)	(99		)
Total earning assets	35,720			(16,578		)	19,142
Interest Expense:
Deposits	(151		)	(15		)	(166		)
Consolidated obligations:
Discount notes	5,243			926			6,169
Bonds	4,748			213			4,961
Other borrowings	68			(9		)	59
Total interest-bearing liabilities	9,908			1,115			11,023
Change in net interest income	$	25,812		$	(17,693	)	$	8,119


¹	Changes in interest income and interest expense not identifiable as either volume-related or rate-related have been allocated to volume and rate based upon the proportion of the absolute value of the volume and rate changes.


²	Amounts used to calculate volume and rate changes are based on numbers in dollars. Accordingly, recalculations using the amounts in thousands as disclosed in this report may not produce the same results.

Net Gain (Loss) on Derivatives and Hedging Activities: The volatility in other income (loss) is driven predominantly by fair value fluctuations on derivative and hedging transactions, which include interest rate swaps, caps, and floors. Net gain (loss) from derivatives and hedging activities is sensitive to several factors, including: (1) the general level of interest rates; (2) the shape of the term structure of interest rates; and (3) implied volatilities of interest rates. The fair value of options, particularly interest rate caps and floors, are also impacted by the time value decay that occurs as the options approach maturity, but this factor represents the normal amortization of the cost of these options and flows through income irrespective of any changes in the other factors impacting the fair value of the options (level of rates, shape of curve, and implied volatility).

As demonstrated in Tables 9 through 12, the majority of the derivative net gains and losses are related to economic hedges, such as interest rate swaps matched to GSE debentures or MBS classified as trading securities and interest rate caps and floors, which do not qualify for hedge accounting treatment under GAAP. Net interest payments or receipts on these economic hedges flow through net gain (loss) on derivatives and hedging activities instead of net interest income, which distorts yields, especially for trading investments that are swapped to variable rates. Net interest received/paid on economic hedges is identified in Tables 9 through 12. Ineffectiveness on fair value hedges contributes to gains and losses on derivatives, but to a much lesser degree. In the past, we generally recorded net fair value gains on derivatives when the overall level of interest rates would rise over the period and record net fair value losses when the overall level of interest rates would fall over the period, due to the mix of the economic hedges. However, the mix of our economic hedges changed mid-2015, so the general level of interest rates will no longer be the only factor impacting the net fair value gains (losses) on derivatives. Net fair value gains or losses on derivatives will continue to be a function of the general level of LIBOR swap rates, but will also be affected by the spread between the LIBOR swap curve and: (1) the GSE interest rate curve (interest rates swaps that are economic hedges of GSE debentures held in trading); and (2) mortgage rates (interest rates swaps that are economic hedges of fixed rate GSE MBS held in trading).

For the three and nine months ended September 30, 2015, net gains and losses on derivatives and hedging activities decreased net income by $47.5 million and $24.8 million, respectively, compared to the same periods in 2014. As noted previously, the changes are primarily attributable to volatility in the fair value of our economic derivatives. For the three months ended September 30, 2015, unrealized losses of $33.0 million were attributable to fair value changes in interest rate swaps economically hedging multi-family GSE MBS recorded as trading securities. All of these interest rate swaps were entered into during the second and third quarters of 2015. These interest rate swaps along with the related multi-family GSE MBS trading securities are expected to create more income statement volatility than the interest rate swaps and related trading GSE debentures due to the relatively long length of the contracts and their relationship with mortgage rates, which tend to be more volatile than rates on GSE debentures. These decreases were partially offset by increases in the fair values of the swapped securities as a result of a decline in interest rates, which are recorded in net gain (loss) on trading securities. For the nine months ended September 30, 2015, we experienced increases in the fair value of our interest rate swaps matched to GSE debentures as a result of the passage of time, as several derivatives approached maturity (reducing the overall loss position of the derivatives) and changes in interest rates for their respective maturities (pay fixed rate swap), but these increases were offset by decreases in the fair values of the swapped GSE debentures, which are recorded in net gain (loss) on trading securities.

While the net interest received (paid) on the associated economic interest rate swap is recorded in net gain (loss) on derivatives and hedging activities, the interest on the underlying hedged items, the GSE debentures or MBS, is recorded in interest income, with any changes in fair value recognized in net gain (loss) on trading securities. See Tables 39 and 40 under Item 3 – “Quantitative and Qualitative Disclosures About Market Risk” for additional detail regarding notional and fair value amounts of derivative instruments.

Tables 9 through 12 categorize the earnings impact by product for hedging activities (in thousands):

Table 9



	Three Months Ended 09/30/2015
	Advances			Investments			Mortgage Loans			Consolidated Obligation Discount Notes		Consolidated Obligation Bonds			Total
Impact of derivatives and hedging activities in net interest income:
Net amortization/accretion of hedging activities	$	(1,890	)	$	—		$	(758	)	$	—	$	(3	)	$	(2,651	)
Net interest settlements	(28,994		)	—			—			84		17,450			(11,460		)
Subtotal	(30,884		)	—			(758		)	84		17,447			(14,111		)
Net gain (loss) on derivatives and hedging activities:
Fair value hedges:
Interest rate swaps	(775		)	99			—			152		(655		)	(1,179		)
Economic hedges – unrealized gain (loss) due to fair value changes:
Interest rate swaps	—			(39,003		)	—			—		3,288			(35,715		)
Interest rate caps	—			(923		)	—			—		—			(923		)
Mortgage delivery commitments	—			—			1,599			—		—			1,599
Economic hedges – net interest received (paid)	—			(16,477		)	—			—		2,974			(13,503		)
Subtotal	(775		)	(56,304		)	1,599			152		5,607			(49,721		)
Net impact of derivatives and hedging activities	(31,659		)	(56,304		)	841			236		23,054			(63,832		)
Net gain (loss) on trading securities hedged on an economic basis with derivatives	—			16,949			—			—		—			16,949
TOTAL	$	(31,659	)	$	(39,355	)	$	841		$	236	$	23,054		$	(46,883	)

Table 10



	Three Months Ended 09/30/2014
	Advances			Investments			Mortgage Loans			Consolidated Obligation Bonds			Total
Impact of derivatives and hedging activities in net interest income:
Net amortization/accretion of hedging activities	$	(2,457	)	$	—		$	(441	)	$	(16	)	$	(2,914	)
Net interest settlements	(33,082		)	—			—			23,359			(9,723		)
Subtotal	(35,539		)	—			(441		)	23,343			(12,637		)
Net gain (loss) on derivatives and hedging activities:
Fair value hedges:
Interest rate swaps	495			—			—			(354		)	141
Economic hedges – unrealized gain (loss) due to fair value changes:
Interest rate swaps	—			12,392			—			(923		)	11,469
Interest rate caps/floors	—			(4,089		)	—			—			(4,089		)
Mortgage delivery commitments	—			—			60			—			60
Economic hedges – net interest received (paid)	—			(11,148		)	—			1,349			(9,799		)
Subtotal	495			(2,845		)	60			72			(2,218		)
Net impact of derivatives and hedging activities	(35,044		)	(2,845		)	(381		)	23,415			(14,855		)
Net gain (loss) on trading securities hedged on an economic basis with derivatives	—			(11,651		)	—			—			(11,651		)
TOTAL	$	(35,044	)	$	(14,496	)	$	(381	)	$	23,415		$	(26,506	)

Table 11



	Nine Months Ended 09/30/2015
	Advances			Investments			Mortgage Loans			Consolidated Obligation Discount Notes		Consolidated Obligation Bonds			Total
Impact of derivatives and hedging activities in net interest income:
Net amortization/accretion of hedging activities	$	(6,071	)	$	—		$	(1,650	)	$	—	$	(7	)	$	(7,728	)
Net interest settlements	(89,861		)	—			—			143		56,423			(33,295		)
Subtotal	(95,932		)	—			(1,650		)	143		56,416			(41,023		)
Net gain (loss) on derivatives and hedging activities:
Fair value hedges:
Interest rate swaps	(263		)	99			—			195		(2,635		)	(2,604		)
Economic hedges – unrealized gain (loss) due to fair value changes:
Interest rate swaps	—			(15,771		)	—			—		1,082			(14,689		)
Interest rate caps	—			(2,264		)	—			—		—			(2,264		)
Mortgage delivery commitments	—			—			1,123			—		—			1,123
Economic hedges – net interest received (paid)	—			(39,579		)	—			—		6,646			(32,933		)
Subtotal	(263		)	(57,515		)	1,123			195		5,093			(51,367		)
Net impact of derivatives and hedging activities	(96,195		)	(57,515		)	(527		)	338		61,509			(92,390		)
Net gain (loss) on trading securities hedged on an economic basis with derivatives	—			(9,167		)	—			—		—			(9,167		)
TOTAL	$	(96,195	)	$	(66,682	)	$	(527	)	$	338	$	61,509		$	(101,557	)

Table 12



	Nine Months Ended 09/30/2014
	Advances			Investments			Mortgage Loans			Consolidated Obligation Bonds			Total
Impact of derivatives and hedging activities in net interest income:
Net amortization/accretion of hedging activities	$	(8,001	)	$	—		$	(1,414	)	$	214		$	(9,201	)
Net interest settlements	(98,618		)	—			—			68,909			(29,709		)
Subtotal	(106,619		)	—			(1,414		)	69,123			(38,910		)
Net gain (loss) on derivatives and hedging activities:
Fair value hedges:
Interest rate swaps	806			—			—			(1,514		)	(708		)
Economic hedges – unrealized gain (loss) due to fair value changes:
Interest rate swaps	—			24,878			—			1,454			26,332
Interest rate caps/floors	—			(25,569		)	—			—			(25,569		)
Mortgage delivery commitments	—			—			2,979			—			2,979
Economic hedges – net interest received (paid)	—			(33,116		)	—			3,531			(29,585		)
Subtotal	806			(33,807		)	2,979			3,471			(26,551		)
Net impact of derivatives and hedging activities	(105,813		)	(33,807		)	1,565			72,594			(65,461		)
Net gain (loss) on trading securities hedged on an economic basis with derivatives	—			(22,315		)	—			—			(22,315		)
TOTAL	$	(105,813	)	$	(56,122	)	$	1,565		$	72,594		$	(87,776	)

Net Gain (Loss) on Trading Securities: All gains and losses related to trading securities are recorded in other income (loss) as net gain (loss) on trading securities; however, only gains and losses relating to trading securities that are related to economic hedges are included in Tables 9 through 12. Unrealized gains (losses) fluctuate as the fair value of our trading portfolio fluctuates. There are a number of factors that can impact the fair value of a trading security including the movement in absolute interest rates, changes in credit spreads, the passage of time and changes in price volatility. Table 13 presents the major components of the net gain (loss) on trading securities (in thousands):

Table 13



	Three Months Ended						Nine Months Ended
	09/30/2015			09/30/2014			09/30/2015			09/30/2014
GSE debentures	$	(951	)	$	(11,637	)	$	(26,929	)	$	(22,721	)
U.S. Treasury note	—			—			(16		)	20
U.S. obligation and GSE MBS/Collateralized Mortgage Obligations (CMO)	17,781			218			17,560			279
Short-term money market securities	(10		)	—			(10		)	(9		)
TOTAL	$	16,820		$	(11,419	)	$	(9,395	)	$	(22,431	)

Our trading portfolio is comprised primarily of fixed rate GSE debentures and fixed and variable rate multi-family GSE MBS. In general, the fixed rate securities are related to economic hedges in the form of interest rate swaps that convert fixed rates to variable rates. The fair values of the GSE debentures are more affected by changes in intermediate interest rates (e.g., two-year to four-year rates) and are swapped to three-month LIBOR. The fair values of the multi-family GSE MBS are affected by changes in mortgage rates and the fixed rate securities are swapped to one-month LIBOR. During 2014, interest rates in the one- to three-year range continued to increase, resulting in additional losses on the GSE debentures, but the decrease in GSE credit spreads reduced the magnitude of those losses. A notable increase in intermediate interest rates at the end of the first half of 2015 resulted in additional fair value losses on the GSE debentures for 2015, but declines in mortgage interest rates and intermediate U.S. Treasury rates during the third quarter of 2015 resulted in gains on our fixed rate multi-family GSE MBS and reduced the magnitude of losses on our GSE debentures. In addition to interest rates and credit spreads, the value of these securities is affected by time decay. These fixed rate GSE debentures possess coupons which are well above current market rates for similar securities and, therefore, are currently valued at substantial premiums. As these securities approach maturity, their prices will converge to par resulting in a decrease in their current premium price (i.e., time decay). Given that the variable rate GSE debentures re-price monthly, they generally account for a very small portion of the net gain (loss) on trading securities unless current market spreads on these variable rate securities diverge from the spreads at the time of our acquisition of the securities.

Operating Expenses: Operating expenses include compensation and benefits and other operating expenses. The largest component of operating expenses, compensation and benefits, increased by $1.1 million, or 12.6 percent, and 3.0 million or 13.2 percent for the three and nine months ended September 30, 2015, respectively, compared to the prior year periods. The increases are due primarily to the hiring of additional employees and an increase in the base salaries of existing employees, with a corresponding increase in incentive compensation. We expect continued increases in this expense as we add positions over the next several years, but our pace of hiring is expected to slow.

Non-GAAP Measures: We fulfill our mission by: (1) providing liquidity to our members through the offering of advances to finance housing, economic development and community lending; (2) supporting residential mortgage lending through the MPF Program and purchases of MBS; and (3) providing regional affordable housing programs that create housing opportunities for low- and moderate-income families. In order to effectively accomplish our mission, we must obtain adequate funding amounts at acceptable interest rate levels. We use derivatives as tools to reduce our funding costs and manage interest rate risk and prepayment risk. We also acquire and classify certain investments as trading securities for liquidity and asset-liability management purposes. Although we manage the risks mentioned and utilize these transactions for asset-liability tools, we do not manage the fluctuations in the fair value of our derivatives or trading securities. We are essentially a “hold-to-maturity” investor and transact derivatives only for hedging purposes, even though some derivative hedging relationships do not qualify for hedge accounting under GAAP (referred to as economic hedges) and therefore can add significant volatility to our GAAP net income.

Adjusted income is a non-GAAP financial measure used by management to evaluate the quality of our ongoing earnings. We believe that the presentation of adjusted income as measured for management purposes enhances the understanding of our performance by highlighting our underlying results and profitability. By removing volatility created by fair value fluctuations and items such as prepayment fees, we can compare longer-term trends in earnings that might otherwise be indeterminable. Although we calculate our non-GAAP financial measures consistently from period to period using appropriate GAAP components, non-GAAP financial measures are not required to be uniformly applied and are not audited. These non-GAAP financial measures are frequently used by our stakeholders in the evaluation of our performance, but they have inherent limitations as analytical tools and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP.

Adjusted net income increased slightly for the three- and nine-month periods ended September 30, 2015 compared to the same periods in the prior year (see Table 14). The increase in both periods was due to increased adjusted net interest income, including net interest settlements on derivatives not qualifying for hedge accounting, that was mostly offset by higher compensation and benefits in the same periods. Table 14 presents a reconciliation of GAAP net income to adjusted income (in thousands):

Table 14



	Three Months Ended				Nine Months Ended
	09/30/2015		09/30/2014		09/30/2015		09/30/2014
Net income, as reported under GAAP	$	15,006	$	28,624	$	72,687	$	79,471
AHP assessments	1,669		3,181		8,080		8,833
Income before AHP assessments	16,675		31,805		80,767		88,304
Derivative-related and other excluded items¹	19,162		3,730		26,505		18,466
Adjusted income (a non-GAAP measure)	$	35,837	$	35,535	$	107,272	$	106,770


¹	Consists of fair value changes on derivatives and hedging activities (excludes net interest settlements on derivatives not qualifying for hedge accounting) and trading securities as well as prepayment fees on terminated advances.

Table 15 presents a comparison of adjusted ROE (a non-GAAP financial measure) to the average overnight Federal funds rate, which we use as a key measure of effective utilization and management of members’ capital. The decline in net income coupled with the growth in advances and associated capital was dilutive to ROE for both periods.. Adjusted ROE spread for the three and nine months ended September 30, 2015 and 2014 is calculated as follows (dollar amounts in thousands):

Table 15



	Three Months Ended						Nine Months Ended
	09/30/2015			09/30/2014			09/30/2015			09/30/2014
Average GAAP total capital for the period	$	2,048,665		$	1,637,802		$	1,914,919		$	1,669,445
ROE, based upon GAAP net income	2.91		%	6.93		%	5.08		%	6.36		%
Adjusted ROE, based upon adjusted income	6.94		%	8.61		%	7.49		%	8.55		%
Average overnight Federal funds effective rate	0.14		%	0.09		%	0.13		%	0.08		%
Adjusted ROE as a spread to average overnight Federal funds effective rate	6.80		%	8.52		%	7.36		%	8.47		%

Financial Condition

Overall: Total assets increased $8.9 billion, or 24.2 percent, from December 31, 2014 to September 30, 2015. This increase was due primarily to a $7.2 billion, or 39.2 percent, increase in advances, a $0.6 billion, or 10.9 percent, increase in short-term investments, net of cash, and a $1.0 billion, or 15.4 percent, increase in investment securities (investments classified as trading, available-for-sale, or held-to-maturity). The increase in advances was largely due to an increase in short-term advances, which can be attributed to the increase in dividend rates that effectively reduces the cost of our advances to our members and increases the members' ability to profitably deploy the funding. We have been actively promoting the impact of the dividend on the effective borrowing cost of our advances to increase member awareness of the benefit of higher dividends. Changes in interest rates could reduce the benefit of these short-term advances to our members, which could cause a significant decline in advances. Increases in the balances of total consolidated obligations and total capital between September 30, 2015 and December 31, 2014 also reflect increased advance utilization.

As a percentage of assets at September 30, 2015 compared to December 31, 2014, short-term investments and advances increased while cash, investment securities and mortgage loans decreased, despite a small increase in our mortgage loan portfolio. The composition change between cash and short-term investments reflects our participation in the Federal Reserve Bank of New York's overnight reverse repurchase agreement program that started in mid-2015, which provides more options to invest the influx of cash from advance repayments that usually occurs on the last business day of a reporting period. The increase in reverse repurchase agreements is also a result of new counterparty relationships that have provided us with more options for utilizing reverse repurchase agreements. The distribution between discount notes and consolidated obligation bonds is generally driven by asset composition; thus, the percentage increase in discount notes and the corresponding percentage decline in consolidated obligation bonds for the current period is the result of an increase in our line of credit advance product balance and short-term advances, which are generally funded by discount notes. Table 16 presents the percentage concentration of the major components of our Statements of Condition:

Table 16



	Component Concentration
	09/30/2015		12/31/2014
Assets:
Cash and due from banks	1.5	%	6.9	%
Interest-bearing deposits, securities purchased under agreements to resell and Federal funds sold	12.7		9.0
Investment securities	15.9		17.1
Advances	55.7		49.7
Mortgage loans, net	13.8		16.9
Other assets	0.4		0.4
Total assets	100.0	%	100.0	%

Liabilities:
Deposits	1.6	%	1.6	%
Consolidated obligation discount notes, net	45.0		38.6
Consolidated obligation bonds, net	48.6		54.9
Other liabilities	0.5		0.6
Total liabilities	95.7		95.7

Capital:
Capital stock outstanding	2.9		2.6
Retained earnings	1.4		1.7
Accumulated other comprehensive income (loss)	—		—
Total capital	4.3		4.3
Total liabilities and capital	100.0	%	100.0	%

Table 17 presents changes in the major components of our Statements of Condition (dollar amounts in thousands):

Table 17



	Increase (Decrease) in Components
	9/30/2015 vs. 12/31/2014
	Dollar Change			Percent Change
Assets:
Cash and due from banks	$	(1,873,156	)	(73.6	)%
Investments¹	3,486,014			36.2
Advances	7,179,483			39.2
Mortgage loans, net	106,156			1.7
Derivative assets, net	31,077			94.2
Other assets	(11,225		)	(9.2	)
Total assets	$	8,918,349		24.2	%

Liabilities:
Deposits	$	133,620		22.4	%
Consolidated obligations, net	8,395,074			24.4
Derivative liabilities, net	(5,144		)	(14.6	)
Other liabilities	(784		)	(0.4	)
Total liabilities	8,522,766			24.2

Capital:
Capital stock outstanding	370,373			38.0
Retained earnings	22,896			3.7
Accumulated other comprehensive income (loss)	2,314			14.5
Total capital	395,583			25.0
Total liabilities and capital	$	8,918,349		24.2	%

¹ Investments also include interest-bearing deposits, Federal funds sold and securities purchased under agreements to resell.

Advances: Our advance products are developed, as authorized in the Bank Act and in regulations established by the Finance Agency, to meet the specific liquidity and term funding needs of our members. As a wholesale provider of funds, we compete with brokered certificates of deposit and security repurchase agreements. We strive to price our advances relative to our marginal cost of funds while trying to remain competitive with the wholesale funding markets. While there is less competition in the long-term maturities, member demand for advances in these maturities has historically been lower than the demand for advances with short- and medium-term maturities. Nonetheless, long-term advances are also priced at relatively low spreads to our cost of funds.

Table 18 summarizes advances outstanding by product (dollar amounts in thousands):

Table 18



	09/30/2015				12/31/2014
	Dollar		Percent		Dollar		Percent
Adjustable rate:
Standard advance products:
Line of credit	$	10,138,513	40.1	%	$	5,349,579	29.5	%
Regular adjustable rate advances	40,000		0.2		22,943		0.1
Adjustable rate callable advances	5,992,760		23.7		4,615,227		25.4
Customized advances:
Adjustable rate advances with embedded caps or floors	30,000		0.1		97,000		0.5
Standard housing and community development advances:
Adjustable rate callable advances	87,533		0.3		81,818		0.5
Total adjustable rate advances	16,288,806		64.4		10,166,567		56.0
Fixed rate:
Standard advance products:
Short-term fixed rate advances	375,305		1.5		67,052		0.4
Regular fixed rate advances	5,790,905		22.9		4,954,635		27.3
Fixed rate callable advances	75,445		0.3		85,445		0.5
Standard housing and community development advances:
Regular fixed rate advances	368,441		1.5		327,015		1.8
Fixed rate callable advances	2,000		—		2,000		—
Total fixed rate advances	6,612,096		26.2		5,436,147		30.0
Convertible:
Standard advance products:
Fixed rate convertible advances	1,501,642		5.9		1,586,242		8.7
Amortizing:
Standard advance products:
Fixed rate amortizing advances	433,005		1.7		452,517		2.5
Fixed rate callable amortizing advances	29,308		0.1		33,651		0.2
Standard housing and community development advances:
Fixed rate amortizing advances	442,753		1.7		458,644		2.5
Fixed rate callable amortizing advances	6,803		0.0		7,113		0.1
Total amortizing advances	911,869		3.5		951,925		5.3
TOTAL PAR VALUE	$	25,314,413	100.0	%	$	18,140,881	100.0	%

Note that an individual advance may be reclassified to a different product type between periods due to the occurrence of a triggering event such as the passing of a call date (i.e., from fixed rate callable advance to regular fixed rate advance) or conversion of an advance (i.e., from fixed rate convertible advance to adjustable rate callable advance).

Advances are one of the primary ways we fulfill our mission of providing liquidity to our members and constituted the largest component of our balance sheet at September 30, 2015 and December 31, 2014. The 39.5 percent increase in advance par value (see Table 18) was due to a significant increase in our line of credit product as well as smaller increases in adjustable rate callable advances and short-term and regular fixed rate advances. The increase in our line of credit product was largely a result of efforts to promote the pricing advantages of advances when taking our dividend rates into consideration. Changes in interest rates could reduce the benefit of these short-term advances to our members, which could cause a significant decline in advances. We expect advances as a percent of total assets to continue to increase as part of our core mission asset focus and continued efforts to promote awareness of the benefits of higher dividends (see “Executive Level Overview ” under this Item 2), but we cannot predict member demand for our advance products.

As of September 30, 2015 and December 31, 2014, 69.2 percent and 65.0 percent, respectively, of our members carried outstanding advance balances. The overall demand for our advances can typically be attributed to the demand for loans that our depository members are experiencing in their communities and their ability to fund those loans with deposit growth. It is also influenced by our insurance company members’ need for operational liquidity and the ability of both depository and insurance company members to profitably invest advance funding. The growth in advances experienced in the latter half of 2014 and during 2015 is a result of a smaller number of large members increasing short-term advances, including line of credit advances, due to lower effective borrowing costs when considering the increase in the dividend rate. Advances with many members could decline or remain flat until greater levels of funding can be reallocated from short-term liquid assets into higher-yielding loans or assets. If members reduce the volume of their advances, we expect to continue our past practice of repurchasing excess capital stock, when and as requested. In addition, when, and if, member advance demand changes, a few larger members could have a significant impact on the amount of total outstanding advances, much like what occurred during the latter half of 2014 and during 2015.

Rather than match funding long-term, fixed rate, large dollar advances, we elect to swap a significant portion of large dollar advances with longer maturities to short-term indices (one‑ or three‑month LIBOR) to synthetically create adjustable rate advances. When coupled with the volume of our short-term advances, advances that effectively re-price at least every three months represent 84.9 percent and 84.1 percent of our total advance portfolio as of September 30, 2015 and December 31, 2014, respectively.

Table 19 presents information on our five largest borrowers (dollar amounts in thousands). If the borrower was not one of our top five borrowers for one of the periods presented, the applicable columns are left blank. We have rights to collateral with an estimated fair value in excess of the book value of these advances and, therefore, do not expect to incur any credit losses on these advances.

Table 19



	09/30/2015				12/31/2014
Borrower Name	Advance Par Value		Percent of Total Advance Par		Advance Par Value		Percent of Total Advance Par
Bank of Oklahoma, NA	$	4,600,000	18.2	%	$	2,103,400	11.6	%
MidFirst Bank	3,953,000		15.6		2,736,500		15.1
Capitol Federal Savings Bank	3,275,000		12.9		2,575,000		14.2
Security Benefit Life Insurance Co.	1,106,500		4.4
United of Omaha Life Insurance Co.	736,936		2.9		591,818		3.2
American Fidelity Assurance Co.					521,500		2.9
TOTAL	$	13,671,436	54.0	%	$	8,528,218	47.0	%

Table 20 presents the interest income associated with the five borrowers with the highest interest income for the periods presented (dollar amounts in thousands). If the borrower was not one of our five borrowers with the highest income for one of the periods presented, the applicable columns are left blank.

Table 20



	Three Months Ended
	09/30/2015				09/30/2014
Borrower Name	Advance Income		Percent of Total Advance Income¹		Advance Income		Percent of Total Advance Income¹
Capitol Federal Savings Bank	$	15,670	23.9	%	$	14,947	23.2	%
American Fidelity Assurance Co.	4,321		6.6		4,482		7.0
Bank of Oklahoma, NA	3,194		4.9
MidFirst Bank	3,041		4.6		1,977		3.1
United of Omaha Life Insurance Co.	1,603		2.4
Security Benefit Life Insurance Co.					2,337		3.6
Ent Federal Credit Union					1,628		2.5
TOTAL	$	27,829	42.4	%	$	25,371	39.4	%


¹	Total advance income by borrower excludes net interest settlements on derivatives hedging the advances. Total advance income for all borrowers is net of interest receipts/(payments) on derivatives hedging advances of $(29.0) million and $(33.1) million for the three months ended September 30, 2015 and 2014, respectively.

Table 21 presents the interest income associated with the five borrowers who paid the highest amount of interest income for the periods presented (dollar amounts in thousands). If the borrower was not one of our five borrowers who paid the highest amount of interest income for one of the periods presented, the applicable columns are left blank.

Table 21



	Nine Months Ended
	09/30/2015				09/30/2014
Borrower Name	Advance Income		Percent of Total Advance Income¹		Advance Income		Percent of Total Advance Income¹
Capitol Federal Savings Bank	$	47,920	25.0	%	$	42,279	22.5	%
American Fidelity Assurance Co.	12,966		6.8		13,434		7.2
MidFirst Bank	8,499		4.3		5,149		2.7
Bank of Oklahoma, NA	7,707		4.0
United of Omaha Life Insurance Co.	4,775		2.5		4,972		2.7
Security Benefit Life Insurance Co.					7,555		4.0
TOTAL	$	81,867	42.6	%	$	73,389	39.1	%


¹	Total advance income by borrower excludes net interest settlements on derivatives hedging the advances. Total advance income for all borrowers is net of interest receipts/(payments) on derivatives hedging advances of $(89.8) million and $(98.6) million for the nine months ended September 30, 2015 and 2014, respectively.

Table 4 presents the amount of interest income on advances as a percentage of total interest income for the three and nine months ended September 30, 2015 and 2014.

MPF Program: The MPF Program is considered an attractive secondary mortgage market alternative for our members, especially the smaller institutions in our district. We participate in the MPF Program through the MPF Provider, a division of FHLBank of Chicago. Under the MPF Program, participating members can sell us conventional and government fixed rate, size-conforming, single-family residential mortgage loans.

The principal amount of new mortgage loans acquired and held on balance sheet from our PFIs during the nine months ended September 30, 2015 was $0.9 billion. These new originations and acquisitions, net of loan payments received, resulted in an increase of 1.7 percent in the outstanding net balance of our mortgage loan portfolio from December 31, 2014 to September 30, 2015. Net mortgage loans as a percentage of total assets decreased from 16.9 percent as of December 31, 2014 to 13.8 percent as of September 30, 2015. Table 4 presents the amount of interest income on mortgage loans held for portfolio as a percentage of total interest income for the three and nine months ended September 30, 2015 and 2014.

The primary factors that may influence future growth in mortgage loans held for portfolio include: (1) the number of new and delivering PFIs; (2) the mortgage loan origination volume of current PFIs; (3) refinancing activity; (4) the level of interest rates and the shape of the yield curve; (5) the relative competitiveness of MPF pricing to the prices offered by other buyers of residential mortgage loans; and (6) a PFI's level of excess risk-based capital relative to the required risk-based capital charge associated with the PFI's CE obligations on MPF mortgage loans. In an effort to manage the level of mortgage loans on our books, management has researched and continues to review options that may help manage the overall level of our mortgage loan portfolio. Those options include participating loan volume or selling whole loans to other FHLBanks, members or other investors. As described below, we have pursued participations and, although we may determine to sell whole loans from time to time, we have not identified any specific loans to be sold as of September 30, 2015.

Historically, we have used the MPF Xtra product and mortgage loan participations with another FHLBank to effectively restrict the growth in mortgage loans held for portfolio and provide management with adequate means to control the amount of mortgage loan portfolio volume retained on our balance sheet to maintain our desired asset composition. The MPF Xtra product is a structure where our PFIs sell mortgage loans to FHLBank of Chicago and simultaneously to Fannie Mae. We receive a counterparty fee from FHLBank of Chicago (Fannie Mae seller-servicer) for our PFIs participating in the MPF Xtra product. We discontinued our mortgage loan participations with another FHLBank in the first quarter of 2014 because of lower origination volumes with PFIs, but we continue to consider and develop other options to manage the size of the mortgage loan portfolio while maintaining reliable support of our members’ residential lending programs. During the first quarter of 2015, we received approval from the Finance Agency to offer participation interests in risk-sharing MPF loan pools to member institutions. We are currently in the planning process for operational preparedness for this new activity, which may further enhance our ability to manage the size of our mortgage loan portfolio in the future.

The number of approved PFIs decreased from 281 as of December 31, 2014 to 279 as of September 30, 2015. During the nine months ended September 30, 2015, we purchased loans from 178 PFIs with no one PFI accounting for more than 5.7 percent of the total dollar volume purchased. Although there is no guarantee, we anticipate that the number of PFIs delivering loans will increase during 2015 as we continue to educate our members about the improved execution and relative ease of use associated with the MPF Program. Table 22 presents the outstanding balances of mortgage loans sold to us, net of participations, (dollar amounts in thousands) from our top five PFIs and the percentage of those loans to total mortgage loans outstanding. If the member was not one of our top five PFIs for one of the periods presented, the applicable columns are left blank.

Table 22



	09/30/2015				12/31/2014
	Mortgage Loan Balance		Percent of Total Mortgage Loans		Mortgage Loan Balance		Percent of Total Mortgage Loans
FirstBank of Colorado	$	237,000	3.8	%	$	209,593	3.4	%
Mutual of Omaha Bank	208,257		3.3		246,851		4.0
Tulsa Teachers Credit Union	198,027		3.2		167,449		2.7
SAC Federal Credit Union	145,382		2.3		135,909		2.2
Fidelity Bank	114,920		1.8
Farmers Bank & Trust N.A.					122,898		2.0
TOTAL	$	903,586	14.4	%	$	882,700	14.3	%

Two indications of credit quality are scores provided by Fair Isaac Corporation (FICO^®) and loan-to-value (LTV) ratios. FICO is a widely used credit industry indicator to assess borrower credit quality with scores typically ranging from 300 to 850 with the low end of the scale indicating greater credit risk. The MPF Program requires a minimum FICO score of 620 for all conventional loans. LTV is a primary variable in credit performance. Generally speaking, a higher LTV ratio means greater risk of loss in the event of a default and also means higher loss severity. The weighted average FICO score and LTV recorded at origination for conventional mortgage loans outstanding as of September 30, 2015 was 751 and 73.4 percent, respectively. See Note 6 of the Notes to Financial Statements under Item 1 for additional information regarding credit quality indicators.

Allowance for Credit Losses on Mortgage Loans Held for Portfolio – The allowance for credit losses on mortgage loans held for portfolio is based on our estimate of probable credit losses inherent in our portfolio as of the Statement of Condition date. The estimate is based on an analysis of our historical loss experience and observed trends in loan delinquencies. During the first quarter of 2015, we modified our 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. A delinquent mortgage loan is charged off when the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported. Additionally, under AB 2012-02, any outstanding loan balance in excess of the fair value of the property, less cost to sell, is 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 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. With the recent improvements in home prices and overall decrease in our delinquency rate, we believe that our refinement in technique better reflects economic conditions during the reporting period and maintains our allowance for credit losses at a level adequate to absorb probable and estimable credit losses inherent in our portfolio.

The additional decrease in the allowance for credit losses during the current quarter and the decrease in the allowance balance as a percent of UPB as of September 30, 2015 were primarily attributable to improvements in credit quality during the period, increases in property values, and a decline in the historical loss factor. The historical loss factor decreases as larger losses realized in older periods roll off or are offset by gains in more current periods in the historical average calculation. We believe that policies and procedures are in place to effectively manage the credit risk on mortgage loans held in portfolio. See Note 6 of the Notes to Financial Statements under Item 1 for a summary of the allowance for credit losses on mortgage loans, and delinquency aging and key credit quality indicators for our mortgage loan portfolio.

Investments: Investments are used to provide liquidity and primary and secondary market support for the U.S. housing securities market. Total investments increased 36.2 percent from December 31, 2014 to September 30, 2015 largely due to an increase in reverse repurchase agreements and an increase in MBS. Increases in reverse repurchase agreements were due to our participation in the Federal Reserve Bank of New York's overnight reverse repurchase agreement programs. New counterparty relationships have also provided us with more options for utilizing reverse repurchase agreements for overnight investments during 2015. Increases in MBS coincided with the increase in advances and mortgage loans, as growth in core mission assets allows for growth in non-mission assets while maintaining our desired core mission assets ratio. At times during 2014, we did not reinvest MBS portfolio prepayments in new MBS because of the focus on our core mission assets ratio as well as our inability to purchase MBS at prices that would generate what we consider to be acceptable spreads. With the increase in our core mission assets, we were able to reinvest MBS prepayments and increase that portfolio during 2015 at what we consider to be acceptable spreads. Investment securities are generally issued by GSEs and large financial institutions that we consider to be of investment quality. Consistent with Finance Agency guidance, we define investment quality as a security with adequate financial backings so that full and timely payment of principal and interest on such security is expected and there is minimal risk that the timely payment of principal and interest would not occur because of adverse changes in economic and financial conditions during the projected life of the security.

Short-term Investments – Short-term investments, which are used to provide funds to meet the credit needs of our members, maintain liquidity, and meet other financial obligations such as debt servicing, consist primarily of reverse repurchase agreements, interest-bearing deposits, overnight Federal funds sold, term Federal funds sold, certificates of deposit and commercial paper. The Bank Act and Finance Agency regulations and guidelines set liquidity requirements for us, and our board of directors has also adopted additional liquidity policies. In addition, we maintain a contingency liquidity plan in the event of financial market disruptions. See “Risk Management – Liquidity Risk Management” under this Item 2 for a discussion of our liquidity management.

Within our portfolio of short-term investments, we face credit risk from unsecured exposures. Our short-term unsecured credit investments have maturities generally ranging between overnight and three months and include the following types:


•	Interest-bearing deposits. Unsecured deposits that earn interest.


•	Federal funds sold. Unsecured loans of reserve balances at the Federal Reserve Banks between financial institutions that are made on either an overnight or term basis.


•	Commercial paper. Unsecured debt issued by corporations, typically for the financing of accounts receivable, inventories, and meeting short-term liabilities.


•	Certificates of deposit. Unsecured negotiable promissory notes issued by banks and payable to the bearer at maturity.

Table 23 presents the carrying value of our unsecured credit exposure with private counterparties by investment type (in thousands). The unsecured investment credit exposure presented may not reflect the average or maximum exposure during the period as the balances presented reflect the balances at period end.

Table 23



	09/30/2015		12/31/2014
Interest-bearing deposits	$	—	$	63
Federal funds sold	1,800,000		2,075,000
TOTAL UNSECURED INVESTMENT CREDIT EXPOSURE¹	$	1,800,000	$	2,075,063


¹	Excludes unsecured investment credit exposure to U.S. government, U.S. government agencies, instrumentalities, GSEs and supranational entities and does not include related accrued interest.

We actively monitor our credit exposures and the credit quality of our counterparties, including an assessment of each counterparty’s financial performance, capital adequacy, sovereign support and the current market perceptions of the counterparties. General macro-economic, political and market conditions may also be considered when deciding on unsecured exposure. As a result, we may further limit existing exposures.

Finance Agency regulations: (1) include limits on the amount of unsecured credit an individual FHLBank may extend to a counterparty or to a group of affiliated counterparties; (2) permit us to extend additional unsecured credit for overnight extensions of credit, subject to limitations; and (3) prohibit us from investing in financial instruments issued by non-U.S. entities other than those issued by U.S. branches and agency offices of foreign commercial banks. For additional information on our management of unsecured credit exposure, see Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Investments” in our Form 10-K. As of September 30, 2015, we were in compliance with all Finance Agency regulations relating to unsecured credit exposure.

We manage our credit risk by conducting pre-purchase credit due diligence and on-going surveillance described previously and generally investing in unsecured investments of highly-rated counterparties. From time to time, we extend unsecured credit to qualified members by investing in overnight Federal funds issued by them. In general, we treat members as any other market participant. However, since they are members and we have more access to specific financial information about our members, we have a lower capital requirement than for non-members, but members must still meet our credit ratings requirements. As of September 30, 2015, all unsecured term investments were rated as investment grade based on NRSROs (see Table 27).

Table 24 presents the amount of our unsecured investment credit exposure (in thousands) by remaining contractual maturity and by the domicile of the counterparty or the domicile of the counterparty’s parent for U.S. branches and agency offices of foreign commercial banks as of September 30, 2015. We also mitigate the credit risk on investments by generally investing in investments that have short-term maturities.

Table 24



Domicile of Counterparty	Overnight
Domestic	$	25,000
U.S. subsidiaries of foreign commercial banks	225,000
Total domestic and U.S. subsidiaries of foreign commercial banks	250,000
U.S. Branches and agency offices of foreign commercial banks:
Finland	500,000
Germany	350,000
Netherlands	350,000
Norway	350,000
Total U.S. Branches and agency offices of foreign commercial banks	1,550,000
TOTAL UNSECURED INVESTMENT CREDIT EXPOSURE¹	$	1,800,000


¹	Excludes unsecured investment credit exposure to U.S. government, U.S. government agencies, instrumentalities, GSEs and supranational entities and does not include related accrued interest.

Unsecured credit exposure continues to be cautiously placed, with exposure concentrated in the United States, Germany, The Netherlands, and the Nordic countries. In addition, we anticipate continued future investment in reverse repurchase agreements, which are secured investments, and limiting unsecured exposure, especially to foreign financial institutions, as long as the interest rates are comparable. To enhance our liquidity position, we classify our unsecured short-term investment securities in our trading portfolio, which allows us to sell these securities if necessary.

Long-term investments – Our long-term investment portfolio consists primarily of GSE debentures, MBS/ABS, and state housing finance agency securities. Our Risk Management Policy (RMP) restricts the acquisition of investments to highly rated long-term securities. The majority of these long-term securities are GSE MBS/CMOs, which provide an alternative means to promote liquidity in the mortgage finance markets while providing acceptable returns. GSE debentures are the other significant investment class that we hold in our long-term investment portfolio. The majority of our unsecured GSE debentures are fixed rate bonds, which are swapped from fixed to variable rates. They provide attractive returns, can serve as excellent collateral (e.g., repurchase agreements and net derivatives exposure), and are generally classified as trading securities and carried at fair value, either to enhance our liquidity position, for asset/liability management purposes, or to provide a fair value offset to the gains or losses on the interest rate swaps tied to these securities. The swaps do not qualify for hedge accounting, which results in the net interest payments or receipts on these economic hedges flowing through net gain (loss) on derivatives and hedging activities instead of net interest income.

According to Finance Agency regulation codified at 12 C.F.R. §1267.3, no additional MBS purchases can be made if the amortized cost of our mortgage securities exceeds 300 percent of our regulatory capital. Further, quarterly increases in holdings of mortgage securities are restricted to no more than 50 percent of regulatory capital. As of September 30, 2015, the amortized cost of our MBS/CMO portfolio represented 292 percent of our regulatory capital. As of September 30, 2015, we held $968.3 million of par value in MBS/CMOs in our trading portfolio and $69.4 million of par value in MBS/CMOs in our available-for-sale portfolio. The majority of the MBS/CMOs in the both portfolios are fixed rate GSE securities, which are swapped from fixed to variable rates.

Major Security Types – Securities for which we have the ability and intent to hold to maturity are classified as held-to-maturity securities and recorded at carrying value, which is the net total of par, premiums, discounts and credit and non-credit OTTI discounts. We classify certain investments as trading securities and carry them at fair value. Changes in the fair values of these investments are recorded through other income and original premiums/discounts on these investments are not amortized. We do not actively trade any of these securities with the intent of realizing gains; they are held indefinitely. Certain investments that we may sell before maturity are classified as available-for-sale and carried at fair value. Traditionally, if fixed rate securities were hedged with interest rate swaps, we would classify the securities as trading investments so that the changes in fair values of both the derivatives hedging the securities and the hedged securities are recorded in other income. However, during the third quarter of 2015, we began classifying our swapped fixed rate multi-family GSE MBS as available-for-sale and designating the corresponding interest rate swaps as fair value benchmark hedges. Securities acquired as asset/liability management tools to manage duration risk, which are likely to be sold when the duration risk is no longer present, are classified as available-for-sale or trading securities as well. See Note 3 of the Notes to Financial Statements under Item 1 to this report for additional information on our different investment classifications including what types of securities are held under each classification. The carrying value of our investments is summarized by security type in Table 25 (in thousands).

Table 25



	09/30/2015		12/31/2014
Trading securities:
U.S. Treasury obligations	$	—	$	25,016
GSE debentures	1,354,809		1,299,979
Mortgage-backed securities:
U.S. obligation MBS	835		963
GSE MBS	983,647		136,091
Total trading securities	2,339,291		1,462,049
Available-for-sale securities:
GSE MBS	69,854		—
Total available-for-sale securities	69,854		—
Held-to-maturity securities:
State or local housing agency obligations	114,030		126,105
Mortgage-backed or asset-backed securities:
U.S. obligation MBS	49,414		57,562
GSE MBS	4,538,501		4,441,487
Private-label residential MBS	183,149		231,259
Home equity loan ABS	617		774
Total held-to-maturity securities	4,885,711		4,857,187
Total securities	7,294,856		6,319,236

Interest-bearing deposits	1,557		1,163

Federal funds sold	1,800,000		2,075,000

Securities purchased under agreements to resell	4,010,000		1,225,000
TOTAL INVESTMENTS	$	13,106,413	$	9,620,399

The contractual maturities of our investments are summarized by security type in Table 26 (dollar amounts 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 26



	09/30/2015
	Due in one year or less			Due after one year through five years			Due after five years through 10 years			Due after 10 years			Carrying Value
Trading securities:
GSE debentures	$	669,943		$	273,283		$	411,583		$	—		$	1,354,809
Mortgage-backed securities:
U.S. obligation MBS	—			—			—			835			835
GSE MBS	—			—			645,681			337,966			983,647
Total trading securities	669,943			273,283			1,057,264			338,801			2,339,291
Yield on trading securities	5.14		%	4.37		%	2.91		%	2.78		%
Available-for-sale securities:
GSE MBS	—			—			69,854			—			69,854
Total available-for-sale securities	—			—			69,854			—			69,854
Yield on available-for-sale securities	—		%	—		%	2.61		%	—		%
Held-to-maturity securities:
State or local housing agency obligations	—			—			15,765			98,265			114,030
Mortgage-backed or asset-backed securities:
U.S. obligation MBS	—			—			—			49,414			49,414
GSE MBS	—			16,716			1,962,879			2,558,906			4,538,501
Private-label residential MBS	—			13,288			7,929			161,932			183,149
Home equity loans ABS	—			—			—			617			617
Total held-to-maturity securities	—			30,004			1,986,573			2,869,134			4,885,711
Yield on held-to-maturity securities	—		%	3.04		%	1.93		%	1.76		%

Total securities	669,943			303,287			3,113,691			3,207,935			7,294,856
Yield on total securities	5.14		%	4.23		%	2.27		%	1.86		%

Interest-bearing deposits	1,557			—			—			—			1,557

Federal funds sold	1,800,000			—			—			—			1,800,000

Securities purchased under agreements to resell	4,010,000			—			—			—			4,010,000
TOTAL INVESTMENTS	$	6,481,500		$	303,287		$	3,113,691		$	3,207,935		$	13,106,413

Securities Ratings – Tables 27 and 28 present the carrying value of our investments by rating as of September 30, 2015 and December 31, 2014 (in thousands). The ratings presented are the lowest ratings available for the security or the issuer based on NRSROs. We also utilize other credit quality factors when analyzing potential investments including, but not limited to, collateral performance, marketability, asset class or sector considerations, local and regional economic conditions, and/or the financial health of the underlying issuer.

Table 27



	09/30/2015
	Carrying Value¹
	Investment Grade								Below Triple-B		Unrated		Total
	Triple-A		Double-A		Single-A		Triple-B
Interest-bearing deposits²	$	—	$	1,557	$	—	$	—	$	—	$	—	$	1,557

Federal funds sold²	—		500,000		1,300,000		—		—		—		1,800,000

Securities purchased under agreements to resell³	—		1,400,000		—		—		—		2,610,000		4,010,000

Investment securities:
Non-mortgage-backed securities:
GSE debentures	—		1,354,809		—		—		—		—		1,354,809
State or local housing agency obligations	71,655		30,000		12,375		—		—		—		114,030
Total non-mortgage-backed securities	71,655		1,384,809		12,375		—		—		—		1,468,839
Mortgage-backed or asset-backed securities:
U.S. obligation MBS	—		50,249		—		—		—		—		50,249
GSE MBS	—		5,592,002		—		—		—		—		5,592,002
Private label residential MBS	—		2,857		9,495		60,368		110,374		55		183,149
Home equity loan ABS	—		—		—		—		407		210		617
Total mortgage-backed securities	—		5,645,108		9,495		60,368		110,781		265		5,826,017

TOTAL INVESTMENTS	$	71,655	$	8,931,474	$	1,321,870	$	60,368	$	110,781	$	2,610,265	$	13,106,413


¹	Investment amounts represent the carrying value and do not include related accrued interest receivable of $14.9 million at September 30, 2015.


²	Amounts include unsecured credit exposure with overnight original maturities.


³	Amounts represent collateralized overnight borrowings by counterparty rating.

Table 28



	12/31/2014
	Carrying Value¹
	Investment Grade								Below Triple-B		Unrated		Total
	Triple-A		Double-A		Single-A		Triple-B
Interest-bearing deposits²	$	63	$	1,100	$	—	$	—	$	—	$	—	$	1,163

Federal funds sold²	—		—		2,075,000		—		—		—		2,075,000

Securities purchased under agreements to resell³	—		—		—		—		—		1,225,000		1,225,000

Investment securities:
Non-mortgage-backed securities:
U.S. Treasury obligations	—		25,016		—		—		—		—		25,016
GSE debentures	—		1,299,979		—		—		—		—		1,299,979
State or local housing agency obligations	81,955		30,000		—		14,150		—		—		126,105
Total non-mortgage-backed securities	81,955		1,354,995		—		14,150		—		—		1,451,100
Mortgage-backed or asset-backed securities:
U.S. obligation MBS	—		58,525		—		—		—		—		58,525
GSE MBS	—		4,577,578		—		—		—		—		4,577,578
Private label residential MBS	—		6,161		6,879		84,013		134,141		65		231,259
Home equity loan ABS	—		—		—		—		534		240		774
Total mortgage-backed securities	—		4,642,264		6,879		84,013		134,675		305		4,868,136

TOTAL INVESTMENTS	$	82,018	$	5,998,359	$	2,081,879	$	98,163	$	134,675	$	1,225,305	$	9,620,399


¹	Investment amounts represent the carrying value and do not include related accrued interest receivable of $19.3 million at December 31, 2014.


²	Amounts include unsecured credit exposure with overnight original maturities.


³	Amounts represent collateralized overnight borrowings by counterparty rating.

Private-label Mortgage-backed and Asset-backed Securities – The carrying value of our portfolio of private-label MBS/ABS is less than one percent of total assets. We classify private-label MBS/ABS as prime, Alt-A and subprime based on the originator’s classification at the time of origination or based on classification by an NRSRO upon issuance of the MBS/ABS.

Table 29 presents a summary of the UPB of private-label MBS/ABS by interest rate type and by type of collateral (in thousands):

Table 29



	09/30/2015						12/31/2014
	Fixed Rate¹		Variable Rate¹		Total		Fixed Rate¹		Variable Rate¹		Total
Private-label residential MBS:
Prime	$	17,566	$	78,640	$	96,206	$	24,730	$	92,710	$	117,440
Alt-A	45,559		56,164		101,723		64,196		67,979		132,175
Total private-label residential MBS	63,125		134,804		197,929		88,926		160,689		249,615
Home equity loan ABS:
Subprime	—		2,399		2,399		—		2,707		2,707
TOTAL	$	63,125	$	137,203	$	200,328	$	88,926	$	163,396	$	252,322


¹	The determination of fixed or variable rate is based upon the contractual coupon type of the security.

Ninety-seven percent of our private-label MBS/ABS were securitized prior to 2006, and there are no securities in the portfolio issued after April 2006. As a result of this higher quality, well-seasoned portfolio, we have not experienced significant losses in our private-label MBS/ABS portfolio from OTTI. Table 30 presents statistical information for our private-label MBS/ABS by year of securitization and rating (dollar amounts in thousands):

Table 30



09/30/2015
Private-Label MBS/ABS By Year of Securitization
	Total			2006			2005			2004 and Prior
Private-label residential MBS:
UPB by credit rating:
Double-A	$	2,866		$	—		$	—		$	2,866
Single-A	9,498			—			—			9,498
Triple-B	60,586			—			2,070			58,516
Double-B	48,811			—			1,923			46,888
Single-B	21,027			3,001			—			18,026
Triple-C	23,660			—			13,797			9,863
Double-C	13,162			3,011			4,430			5,721
Single-D	20,019			115			19,904			—
Unrated	699			—			—			699
TOTAL	$	200,328		$	6,127		$	42,124		$	152,077

Amortized cost	$	192,760		$	5,706		$	37,432		$	149,622
Gross unrealized losses	(10,332		)	—			(2,897		)	(7,435		)
Fair value	186,187			5,878			36,169			144,140

OTTI:
Credit-related OTTI charge taken year-to-date	$	651		$	4		$	411		$	236
Non-credit-related OTTI charge taken year-to-date	(386		)	(4		)	(320		)	(62		)
TOTAL	$	265		$	—		$	91		$	174

Weighted average percentage of fair value to UPB	92.9		%	95.9		%	85.9		%	94.8		%
Original weighted average credit support¹	5.3			3.1			6.1			5.2
Weighted average credit support¹	11.3			9.8			4.2			13.3
Weighted average collateral delinquency²	10.8			15.4			12.9			10.0


¹	Credit support is defined as the percentage of subordinate tranches and over-collateralization, if any, in a security structure that will absorb losses before the holders of the security will incur losses.


²	Collateral delinquency is based on the sum of loans greater than 60 days delinquent plus loans in foreclosure plus loans in bankruptcy plus REO.

Other-than-temporary Impairment – Based upon our OTTI evaluation process that results in a conclusion as to whether a credit loss exists (present value of our best estimate of the cash flows expected to be collected is less than the amortized cost basis of each individual security), we have concluded that, except for 26 outstanding private-label MBS upon which we have recognized OTTI, there is no evidence of a likely credit loss in our other 89 private-label MBS/ABS; there is no intent to sell, nor is there any requirement to sell; and, thus, there is no OTTI for the remaining private-label MBS that have declined in value.

Table 31 presents a summary of the significant inputs used to evaluate all private-label MBS for OTTI 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 we will experience a loss on the security. The calculated averages represent the dollar-weighted averages of all the private-label MBS investments, except for those securities that are qualitatively evaluated, in each category shown. The classification (prime, Alt-A and subprime) is based on the classification at the time of origination.

Table 31



Private-label residential MBS
	Significant Inputs						Current Credit Enhancements
Year of Securitization	Prepayment Rates		Default Rates		Loss Severities		Current Credit Enhancements
Prime:
2004 and prior	12.7	%	6.3	%	22.7	%	13.0	%
2005	12.2		9.1		24.7		8.7
2006	12.8		12.1		27.3		9.8
Total Prime	12.7		6.7		23.1		12.7
Alt-A:
2004 and prior	13.3		9.9		31.9		14.1
2005	14.0		13.4		36.1		3.8
Total Alt-A	13.6		11.2		33.5		10.2
TOTAL	13.2	%	9.0	%	28.5	%	11.4	%

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	3.9	%	4.8	%	84.3	%	2.0	%

We also evaluate other non-mortgage related investment securities, primarily consisting of municipal bonds issued by housing finance authorities, for potential impairment. During the third quarter of 2015, we did not identify any non-MBS/ABS securities as having impairment.

In addition to evaluating all of our private-label MBS/ABS under a base case (or best estimate) scenario for generating expected cash flows, a cash flow analysis is also performed for each security under a more stressful housing price scenario. The stress case scenario is designed to provide an indication of the sensitivity of our private-label MBS/ABS to fluctuations in housing prices compared to our base case estimates. The stress test scenario and associated results do not represent our current expectations and therefore, should not be construed as a prediction of future results, market conditions or the actual performance of these securities. Rather, the results from the hypothetical stress test scenario provide a measure of the credit losses that we might incur if home price fluctuations are more adverse than those projected as our best estimate in our OTTI assessment. OTTI related to credit loss under the hypothetical stress test scenario for the quarter ended September 30, 2015 is $0.4 million compared to $0.2 million recorded under the base case scenario.

Deposits: Total deposits increased $133.6 million from December 31, 2014 to September 30, 2015. Deposit products offered primarily include demand and overnight deposits and short-term certificates of deposit. Demand deposit programs are offered primarily to facilitate customer transactions with us, such as cash flows associated with advances and mortgage loan transactions. Overnight deposits provide an alternative short-term investment option to members. The majority of deposits are in overnight or demand accounts that generally re-price daily based upon a market index such as overnight Federal funds. However, because of the extremely low interest rate environment, we have established a current floor of 5 bps on demand deposits and 10 bps on overnight deposits. The level of deposits is driven by member demand for deposit products, which in turn is a function of the liquidity position of members. Factors that influence deposit levels include turnover in member investment and loan portfolios, changes in members’ customer deposit balances, changes in members’ demand for liquidity and our deposit pricing as compared to other short-term market rates. Declines in the level of deposits could occur during the fourth quarter of 2015 if demand for loans at member institutions increases, if members choose to de-leverage their balance sheets, or if decreases in the general level of liquidity of members should occur. Fluctuations in deposits have little impact on our ability to obtain liquidity. We historically have had stable and ready access to the capital markets through consolidated obligations and can replace any reduction in deposits with similarly or even lower priced borrowings.

Consolidated Obligations: Consolidated obligations are the joint and several debt obligations of the FHLBanks and consist of bonds and discount notes. Consolidated obligations represent the primary source of liabilities we use to fund advances, mortgage loans and investments. As noted under Item 3 – “Quantitative and Qualitative Disclosures About Market Risk,” we use debt with a variety of maturities and option characteristics to manage our interest rate risk profile. We make extensive use of derivative transactions, executed in conjunction with specific consolidated obligation debt issues, to synthetically structure funding terms and costs.

Bonds are primarily used to fund longer-term (one year or greater) advances, mortgage loans and investments. To the extent that the bonds are funding variable rate assets, we typically either issue bonds that have variable rates matching the variable rate asset index or utilize an interest rate swap to change the bonds' characteristics in order to match the assets' index. Additionally, we sometimes use fixed rate, variable rate or complex consolidated obligation bonds that are swapped or indexed to LIBOR to fund short-term advances and money market investments or as a liquidity risk management tool.

Discount notes are primarily used to fund: (1) shorter-term advances or adjustable rate advances with indices and resets based on our short-term cost of funds; and (2) investments with maturities of three months or less. However, we sometimes use discount notes to fund longer-term assets, including fixed rate assets, variable rate assets, assets swapped to synthetically create variable rate assets, and short-term anticipated cash flows generated by longer-term fixed rate assets.

Total consolidated obligations increased 24.4 percent from December 31, 2014 to September 30, 2015. Discount notes increased from 41.3 percent of total outstanding consolidated obligations as of December 31, 2014 to 48.1 percent as of September 30, 2015 primarily as a result of the increase in our line of credit product and other short-term advance products, which are generally funded with discount notes (see this Item 2 – “Financial Condition – Advances”).

While we currently have stable access to funding markets, future developments could impact the cost of replacing outstanding debt. Some of these include, but are not limited to, a large increase in call volume, significant increases in advance demand, legislative and regulatory changes, geopolitical events, proposals addressing GSEs, derivative and financial market reform, a decline in investor demand for consolidated obligations, further rating agency downgrades of U.S. Treasury obligations that will in turn impact the rating on FHLBank consolidated obligations, and changes in Federal Reserve policies and outlooks.

Derivatives: All derivatives are marked to fair value with any associated accrued interest, and netted by clearing agent by Derivative Clearing Organization (Clearinghouse), or by counterparty and offset by the fair value of any swap cash collateral received or delivered where the legal right of offset has been determined, and included on the Statements of Condition as an asset when there is a net fair value gain or as a liability when there is a net fair value loss. Fair values of our derivatives primarily fluctuate as the Overnight Indexed Swap and LIBOR/Swap interest rate curves fluctuate. Other factors such as implied price/interest rate volatility, the shape of the above interest rate curves and time decay can also drive the market price for derivatives.

We use derivatives in three ways: (1) by designating them as either a fair value or cash flow hedge of an underlying financial instrument, firm commitment, or forecasted transaction; (2) by acting as an intermediary; and (3) in asset/liability management (i.e., economic hedge). Economic hedges are defined as derivatives hedging specific or non-specific underlying assets, liabilities, or firm commitments that either do not qualify for hedge accounting or for which we have not elected hedge accounting under GAAP, but are acceptable hedging strategies under our RMP. To meet the hedging needs of our members, we enter into offsetting derivatives, acting as an intermediary between members and other counterparties. This intermediation allows smaller members indirect access to the derivatives market. However, because of increased regulatory requirements with clearing intermediated derivatives we have placed an indefinite moratorium on these intermediated derivative transactions. The derivatives used in intermediary activities do not receive hedge accounting and are separately marked-to-market through earnings (classified as economic hedges).

Liquidity and Capital Resources

Liquidity: We maintain high levels of liquidity to achieve our mission of serving as an economical funding source for our members and housing associates. As part of fulfilling our mission, we also maintain minimum liquidity requirements in accordance with certain Finance Agency regulations and guidelines and in accordance with policies established by management and the Board of Directors. Our business model enables us to manage the levels of our assets, liabilities, and capital in response to member credit demand, membership composition, and market conditions. As such, assets and liabilities utilized for liquidity purposes can vary significantly in the normal course of business due to the amount and timing of cash flows as a result of these factors.

Sources and Uses of Liquidity – A primary source of our liquidity is the issuance of consolidated obligations. The capital markets traditionally have treated FHLBank obligations as U.S. government agency debt. As a result, even though the U.S. government does not guarantee FHLBank debt, we generally have comparatively stable access to funding at relatively favorable spreads to U.S. Treasury rates. We are primarily and directly liable for our portion of consolidated obligations (i.e., those obligations issued on our behalf). In addition, we are jointly and severally liable with the other FHLBanks for the payment of principal and interest on the consolidated obligations of all FHLBanks.

During the nine months ended September 30, 2015, proceeds (net of premiums and discounts) from the issuance of bonds and discount notes were $11.1 billion and $214.4 billion, respectively, compared to $7.2 billion and $41.1 billion for the same period in 2014. The large increase between periods reflects the cumulative effect of using shorter term discount notes, primarily overnight discount notes, during 2015. We use short-term discount notes to fund short-term advances and our short-term liquidity portfolio. The increase in overnight discount note issuance correlated with the increased activity in our overnight investment in Federal funds sold and overnight investment in reverse repurchase agreements. We continued to issue shorter-term discount notes as well as swapped step-up, callable, and term fixed and floating rate consolidated obligation bonds to capture attractive funding, match repricing structures on advances and investments, and provide additional liquidity. Our other sources of liquidity include deposit inflows, repayments of advances and mortgage loans, maturing investments, interest income, and proceeds from reverse repurchase agreements or the sale of unencumbered assets.

At September 30, 2015, our short-term liquidity portfolio, which consists of cash and investments with remaining maturities of one year or less and includes term and overnight Federal funds sold, certificates of deposit, commercial paper and reverse repurchase agreements, increased $1.1 billion, from $6.1 billion as of December 31, 2014 to $7.2 billion as of September 30, 2015. The increase was due to balance sheet growth, which impacts required levels of liquidity. The composition of cash and short-term investments changed between periods due to greater ability to invest cash in reverse repurchase agreements at the end of the current quarter as a result of participation in the Federal Reserve Bank of New York's overnight reverse repurchase agreement program beginning mid-2015. New counterparty relationships have also provided us with more options for utilizing reverse repurchase agreements for overnight investments during 2015. The maturities of our short-term investments are structured to provide periodic cash flows to support our ongoing liquidity needs. To enhance our liquidity position, short-term investment securities (i.e., commercial paper and marketable certificates of deposit) are also classified as trading so that they can be readily sold should liquidity be needed immediately. We also maintain a portfolio of GSE debentures that can be pledged as collateral for financing in the securities repurchase agreement market and are classified as trading to enhance our liquidity position. These debentures remained relatively flat at $1.3 billion in par value as of September 30, 2015 and December 31, 2014. In addition to the balance sheet sources of liquidity discussed previously, we have established lines of credit with numerous counterparties in the Federal funds market as well as with the other FHLBanks. Accordingly, we expect to maintain a sufficient level of liquidity for the foreseeable future.

We manage our average capital ratio to remain above our minimum regulatory and RMP requirements so that we have the ability to issue additional consolidated obligations should the need arise. Excess capital capacity ensures we are able to meet the liquidity needs of our members and/or repurchase excess stock either upon the submission of a redemption request by a member or at our discretion for balance sheet or capital management purposes.

Uses of liquidity primarily include issuing advances, purchasing investments, and repaying called and maturing consolidated obligations for which we are the primary obligor. We also use liquidity to purchase mortgage loans, repay member deposits, pledge collateral to derivative counterparties, redeem or repurchase capital stock, and pay dividends to members.

During the nine months ended September 30, 2015, advance disbursements totaled $76.9 billion compared to $45.6 billion for the same period in 2014. During the nine months ended September 30, 2015, investment purchases (excluding overnight investments) totaled $4.5 billion compared to $1.1 billion for the same period in 2014. During the nine months ended September 30, 2015, payments on consolidated obligation bonds and discount notes were $9.1 billion and $208.0 billion, respectively, compared to $7.2 billion and $36.0 billion for the same period in 2014, which includes bonds that were called during the period. The large increase in payments on discount notes between periods reflects the cumulative effect of using discount notes, including overnight discount notes, to fund the growth in short-term advances and our short-term liquidity portfolio.

Liquidity Requirements – We are subject to five metrics for measuring liquidity: statutory, operational, and contingency liquidity, and calendar day guidelines under different scenarios. Statutory liquidity requires us to have an amount equal to current deposits received from members invested in obligations of the United States, deposits in eligible banks or trust companies, and advances with a final maturity not exceeding five years. Operational liquidity requires that we maintain liquidity in an amount not less than 20 percent of the sum of our demand and overnight deposits and other overnight borrowings, plus 10 percent of the sum of our term deposits, consolidated obligations, and other borrowings that mature within one year. Contingency liquidity is an amount sufficient to meet our liquidity needs for five business days if we are unable to access the capital markets to issue consolidated obligations. Contingency plans are in place at the FHLBank and the Office of Finance that prioritize the allocation of liquidity resources in the event of financial market disruptions, as well as systemic Federal Reserve wire transfer system disruptions. Further, under the FHLBank Act, the Secretary of Treasury has the authority, at his discretion, to purchase consolidated obligations up to an aggregate amount of $4.0 billion. No borrowings under this authority have been outstanding since 1977. Our net liquidity in excess of contingency liquidity over a cumulative five-business-day period was $6.5 billion as of September 30, 2015.

In addition to the liquidity measures described above, we are required by the Finance Agency to meet two daily liquidity standards, each of which assumes that we are unable to access the market for consolidated obligations. The first standard requires us to maintain sufficient funds to meet our obligations for 15 days under a scenario in which it is assumed that members do not renew any maturing advances. The second standard requires us to maintain sufficient funds to meet our obligations for five days under a scenario in which it is assumed that members renew all maturing advances. We have remained in compliance with each of these liquidity requirements throughout 2015. See “Risk Management - Liquidity Risk Management” under this Item 2 for additional discussion on our liquidity requirements.

In order to ensure sufficient liquidity, we generally maintain a relatively longer weighted-average maturity on our consolidated obligation discount notes than the weighted average maturity of short-term investments. The weighted average remaining days to maturity of discount notes outstanding decreased to 38 days as of September 30, 2015 from 45 days as of December 31, 2014. A portion of this decrease was due to a transition in our liquidity ladder to using two-month discount notes instead of three-month discount notes. The use of shorter term discount notes correlates with the significant increase in our line of credit advance product, and was a strategic shift to reduce the amount and cost of liquidity. The weighted average remaining maturity of our money market investment portfolio (Federal funds sold, marketable certificates of deposit, commercial paper and reverse repurchase agreements) and non-earning cash left in our Federal Reserve Bank account was 1 day and 2 days as of September 30, 2015 and December 31, 2014, respectively, because we primarily held short-term investments with overnight maturities as of those dates. The mismatch of discount notes and our money market investment portfolio decreased from 43 days on December 31, 2014 to 37 days on September 30, 2015. Over time, especially as the yield curve steepens on the short end, maintaining the differential between the weighted average original maturity of discount notes and money market investments will marginally increase our cost of funds and reduce our net interest income.

Capital: Total capital consists of capital stock, retained earnings and AOCI.

Capital stock increased 38.0 percent from December 31, 2014 to September 30, 2015, primarily due to increased utilization of advances. Under our capital plan, members must purchase additional activity-based stock as they enter into advance transactions with us. The amount required is subject to change within ranges established under our capital plan. On May 5, 2014, the FHLBank reduced its activity-based stock purchase requirement for advances from 5.0 percent to 4.5 percent.

Excess stock represents the amount of stock held by a member in excess of that institution’s minimum stock requirement. Upon reducing the activity-based stock purchase requirement, through a mandated change or through a reduction of advance balances, excess stock is created since the member no longer needs the same level of activity-based capital stock. If our excess stock exceeds 1.0 percent of our assets before or after the payment of a dividend in the form of stock, we would be prohibited by Finance Agency regulation from paying dividends in the form of stock. To manage the amount of excess stock, we repurchase excess Class A Common Stock over FHLBank-established limits held by any individual member as of specific dates throughout the year. In April 2014, we began the practice of repurchasing all outstanding excess Class A Common Stock, generally on a monthly basis. Our current practice of regular weekly exchanges of all excess Class B Common Stock over $50,000 for Class A Common Stock remains in effect.

Under our cooperatively structured capital plan, our capital stock balances should fluctuate along with any growth (increased capital stock balances) or reduction (decreased capital stock balances) in advance balances in future periods. Any repurchase of excess capital stock is at our discretion and subject to statutory and regulatory limitations, including being in compliance with all of our regulatory capital requirements after any such discretionary repurchase.

Our activity-based stock purchase requirements are consistent with our cooperative structure; members’ stock ownership requirements and the dollar amount of dividends received generally increases as their activities with us increase. To the extent that a member’s asset-based stock purchase requirement is insufficient to cover the member’s activity-based stock purchase requirement and the member is required to purchase Class B Common Stock, we believe the value of our products and services is enhanced by dividend yields that exceed the return available from other investments with similar terms and credit quality. Factors that affect members’ willingness to enter into activity with us and purchase additional required activity-based stock include, but are not limited to, our dividend rates, the risk-based capital weighting of our capital stock and alternative investment opportunities available to our members. Based on anecdotal evidence (such as member advance activity and discussions with members), we believe that our activity-based stock purchase requirement for advances has not reduced advance activity with our members, although that may not hold true in the future. Table 32 provides a summary of member capital requirements under our current capital plan as of September 30, 2015 and December 31, 2014 (in thousands):

Table 32



Requirement	09/30/2015		12/31/2014
Asset-based (Class A only)	$	156,044	$	154,304
Activity-based (additional Class B)¹	1,038,699		723,450
Total Required Stock²	1,194,743		877,754
Excess Stock (Class A and B)	152,761		100,474
Total Stock²	$	1,347,504	$	978,228

Activity-based Requirements:
Advances³	$	1,136,074	$	813,778
AMA assets (mortgage loans)⁴	1,628		1,978
Total Activity-based Requirement	1,137,702		815,756
Asset-based Requirement (Class A Common Stock) not supporting member activity¹	57,041		61,998
Total Required Stock²	$	1,194,743	$	877,754


¹	Class A Common Stock, up to a member’s asset-based stock requirement, will be used to satisfy a member’s activity-based stock requirement before any Class B Common Stock is purchased by the member.


²	Includes mandatorily redeemable capital stock.


³	Advances to housing associates have no activity-based requirements because housing associates cannot own FHLBank stock.


⁴	Non-members are subject to the AMA activity-based stock requirement as long as there are UPBs outstanding, but the requirement is currently zero percent for members.

We are subject to three capital requirements under provisions of the GLB Act, the Finance Agency’s capital structure regulation and our current capital plan, which includes risk-based capital requirement, total capital requirement and leverage capital requirement. We have been in compliance with each of the aforementioned capital rules and requirements at all times since the implementation of our capital plan. See Note 11 of the Notes to Financial Statements under Item 1 for additional information and compliance as of September 30, 2015 and December 31, 2014.

Capital Distributions: Dividends may be paid in cash or capital stock as authorized by our Board of Directors. Quarterly dividends can be paid out of current and previous unrestricted retained earnings, subject to Finance Agency regulation and our capital plan.

Within our capital plan, we have the ability to pay different dividend rates to the holders of Class A Common Stock and Class B Common Stock. This differential is implemented through a mechanism referred to as the dividend parity threshold. Holders of Class A Common Stock and Class B Common Stock share in dividends equally up to the dividend parity threshold for a dividend period, then the dividend rate for holders of Class B Common Stock can exceed the rate for holders of Class A Common Stock, but the dividend rate on Class A Common Stock can never exceed the dividend rate on Class B Common Stock. In essence, the dividend parity threshold: (1) serves as a soft floor to holders of Class A Common Stock since we must pay holders of Class A Common Stock the dividend parity threshold rate before paying a higher rate to holders of Class B Common Stock; (2) indicates a potential dividend rate to holders of Class A Common Stock so that they can make decisions as to whether or not to hold excess Class A Common Stock; and (3) provides us with a tool to manage the amount of excess stock through higher or lower dividend rates by varying the desirability of holding excess shares of Class A Common Stock (i.e., the lower the dividend rate on Class A Common Stock, the less desirable it is to hold excess Class A Common Stock).

The current dividend parity threshold is equal to the average effective overnight Federal funds rate for a dividend period minus 100 bps. This dividend parity threshold was effective for dividends paid for all of 2014 and 2015 and will continue to be effective until such time as it may be changed by our Board of Directors. With the overnight Federal funds target rate range of 0.0 to 0.25 percent, the dividend parity threshold is effectively floored at zero percent at this time. Under the capital plan, all dividends paid in the form of capital stock must be paid in the form of Class B Common Stock. Table 33 presents the dividend rates per annum paid on capital stock under our capital plan for the periods indicated:

Table 33



Applicable Rate per Annum	09/30/2015		06/30/2015		03/31/2015		12/31/2014		09/30/2014
Class A Common Stock	1.00	%	1.00	%	1.00	%	1.00	%	1.00	%
Class B Common Stock	6.00		6.00		6.00		6.00		6.00
Weighted Average¹	5.29		5.22		5.19		5.17		5.15
Dividend Parity Threshold:
Average effective overnight Federal funds rate	0.14	%	0.13	%	0.11	%	0.10	%	0.09	%
Spread to index	(1.00	)	(1.00	)	(1.00	)	(1.00	)	(1.00	)
TOTAL (floored at zero percent)	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%


¹	Weighted average dividend rates are dividends paid in cash and stock on both classes of stock divided by the average of capital stock eligible for dividends.

We increased the dividend rate to 6.00 percent on Class B Common Stock in the third quarter of 2014, as a result of a change in our capital management practices intended to result in a higher percentage payout of quarterly earnings, slower growth in retained earnings, and increased advance utilization due in no small part to the extremely low all-in cost of advances once the dividend is factored in. We expect to recommend maintaining the current dividend rates on Class A Common Stock and Class B Common Stock for a considerable time in keeping with the desire to pay out a larger percentage of income than in the past. We caution, however, that market conditions can be unpredictable and adverse changes may result in lower dividend rates in future quarters. While there is no assurance that our Board of Directors will not change the dividend parity threshold in the future, the capital plan requires that we provide members with 90 days notice prior to the end of a dividend period in which a different dividend parity threshold is utilized in the payment of a dividend.

We expect to continue paying dividends primarily in the form of capital stock in 2015, but future dividends may be paid in cash. The payment of cash dividends instead of stock dividends should not have a significant impact from a liquidity perspective, as the subsequent redemption of excess stock created by stock dividends would utilize liquidity resources in the same manner as a cash dividend.

Risk Management

Active risk management continues to be an essential part of our operations and a key determinant of our ability to maintain earnings to return an acceptable dividend to our members and meet retained earnings thresholds. We maintain an enterprise risk management (ERM) program in an effort to enable the identification of all significant risks to the organization and institute the prompt and effective management of any major risk exposures. Our ERM program is a structured and disciplined approach that aligns strategy, processes, people, technology and knowledge with the purpose of identifying, evaluating and managing the uncertainties we face as we create value. It is a continuous process of identifying, prioritizing, assessing and managing inherent enterprise risks (i.e., business, compliance, credit, liquidity, market and operations) before they become realized risk events. See Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management” in our Form 10-K for more information on our ERM program. A separate discussion of market risk is included under Item 3 – “Quantitative and Qualitative Disclosures About Market Risk” of this Form 10-Q.

Credit Risk Management: Credit risk is defined as the risk that counterparties to our transactions will not meet their contractual obligations. We manage credit risk by following established policies, evaluating the creditworthiness of our counterparties, and utilizing collateral agreements and settlement netting for derivative transactions where enforceability of the legal right of offset has been determined. The most important step in the management of credit risk is the initial decision to extend credit. Continuous monitoring of counterparties is completed for all areas where we are exposed to credit risk, whether that is through lending, investing or derivative activities.

Lending and AMA Activities – Credit risk with members arises partly as a result of our lending and AMA activities (members’ CE obligations on conventional mortgage loans that we acquire through the MPF Program). We manage our exposure to credit risk on advances, letters of credit, derivatives, and members’ CE obligations on conventional mortgage loans through a combined approach that provides ongoing review of the financial condition of our members coupled with prudent collateralization.

As provided in the Bank Act, a member’s investment in our capital stock is held as additional collateral for the member’s advances and other credit obligations (letters of credit, CE obligations, etc.). In addition, we can call for additional collateral or substitute collateral during the life of an advance or other credit obligation to protect our security interest.

Credit risk arising from AMA activities under our MPF Program falls into three categories: (1) the risk of credit losses on the mortgage loans represented in our First Loss Account (FLA) and last loss positions; (2) the risk that a PFI will not perform as promised with respect to its loss position provided through its CE obligations on conventional mortgage loan pools, which are covered by the same collateral arrangements as those described for advances; and (3) the risk that a third-party insurer (obligated under primary mortgage insurance (PMI) or supplemental mortgage insurance (SMI) arrangements) will fail to perform as expected. Should a PMI third-party insurer fail to perform, it would increase our credit risk exposure because our FLA is the next layer to absorb credit losses on conventional mortgage loan pools. Likewise, if an SMI third-party insurer fails to perform, it would increase our credit risk exposure because it would reduce the participating member’s CE obligation loss layer since SMI is purchased by PFIs to cover all or a portion of their CE obligation exposure for mortgage pools. Credit risk exposure to third-party insurers to which we have PMI and/or SMI exposure is monitored on a monthly basis and regularly reported to the Board of Directors. We perform credit analysis of third-party PMI and SMI insurers on at least an annual basis. On a quarterly basis, we review trends that could identify risks with our mortgage loan portfolio, including low FICO scores and high LTV ratios. Based on the credit underwriting standards under the MPF Program and this quarterly review, we have concluded that the mortgage loans we hold would not be considered subprime.

Investments – Our RMP restricts the acquisition of investments to high-quality, short-term money market instruments and highly rated long-term securities. The short-term investment portfolio represents unsecured credit and reverse repurchase agreements. Therefore, counterparty ratings are monitored daily while performance and capital adequacy are monitored on a monthly basis in an effort to mitigate unsecured credit risk on our short-term investments. Collateral valuation and compliance with collateral eligibility and transaction margin requirements are monitored daily to limit secured credit risk on our reverse repurchase agreements. MBS represent the majority of our long-term investments. We hold MBS issued by Ginnie Mae and GSEs, CMOs securitized by GSEs, private-issue MBS/ABS rated triple-A at the time of purchase, and CMOs securitized by whole loans. Approximately 96 percent of our MBS/CMO portfolio is securitized by Fannie Mae or Federal Home Loan Mortgage Corporation (Freddie Mac). All of our private-label MBS/ABS have been downgraded below triple-A subsequent to purchase (see Table 30), but the downgraded securities have been and are currently paying according to contractual agreements with the exception of four securities that have experienced immaterial cash flow shortfalls. The securities we hold that are classified as being backed by subprime mortgage loans are private-label home equity ABS. We also have potential credit risk exposure to MBS/CMOs and ABS that are insured by two of the monoline mortgage insurance companies, one of which is in rehabilitation after having previously entered into bankruptcy proceedings. We analyze these securities quarterly as part of the OTTI determination and assume no coverage potential from this monoline insurance provider. Under the RMP in effect at the time of acquisition, the insurer had to be rated no lower than double-A. We monitor the credit ratings daily, financial performance at least annually and capital adequacy quarterly for all primary mortgage insurers, secondary mortgage insurers and master servicers to which we have potential credit risk exposure. Other long-term investments include unsecured GSE debentures and unsecured or collateralized state and local housing finance agency securities that were rated at least double-A at the time of purchase.

Derivatives – We transact most of our derivatives with large banks and major broker-dealers. Over-the-counter derivative transactions may be either executed with a counterparty (uncleared derivatives) or with an executing broker and cleared through a Futures Commission Merchant (i.e., clearing agent), with a Derivative Clearing Organization (cleared derivatives).

We are subject to credit risk due to the risk of nonperformance by counterparties to our derivative transactions. The amount of credit risk on derivatives depends on the extent to which netting procedures and collateral requirements are used and are effective in mitigating the risk. We manage this risk through credit analysis and collateral management. We are also required to follow the requirements set forth by applicable regulation.

Uncleared Derivatives. We are subject to non-performance by the counterparties to our uncleared derivative transactions. We generally require collateral on uncleared derivative transactions. For some counterparties, the amount of net unsecured credit exposure that is permissible with respect to the counterparty depends on the credit rating of that counterparty. For other counterparties, collateral is required on all net unsecured credit exposure. For a counterparty with credit rating thresholds, a counterparty generally must deliver collateral to us if the total market value of our exposure to that counterparty rises above a specific trigger point. Our credit risk exposure from derivative transactions with member institutions is fully collateralized under our Advance, Pledge and Security Agreement. As a result of these risk mitigation initiatives, we do not anticipate any credit losses on our uncleared derivative transactions as of September 30, 2015.

Cleared Derivatives. We are subject to nonperformance by the Clearinghouse(s) and clearing agent(s). The requirement that we post initial and variation margin, through the clearing agent, to the Clearinghouse, exposes us to institutional credit risk in the event that the clearing agent or the Clearinghouse fails to meet its obligations. The use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral is posted daily for changes in the value of cleared derivatives through a clearing agent. We do not anticipate any credit losses on our cleared derivatives as of September 30, 2015.

We regularly monitor the exposures on our derivative transactions by determining the market value of positions using internal pricing models. The market values generated by the pricing model used to value derivatives are compared to dealer model results on a monthly basis to ensure that our derivative pricing model is reasonably calibrated to actual market pricing methodologies utilized by the dealers. In addition, we have our internal pricing model validated annually by an independent consultant. As a result of these risk mitigation initiatives, management does not anticipate any credit losses on our derivative transactions. See Note 7 of the Notes to Financial Statements under Item 1 for additional information on managing credit risk on derivatives.

The contractual or notional amount of derivative transactions reflects our involvement in the various classes of financial instruments. The maximum credit risk with respect to derivative transactions is the estimated cost of replacing the derivative transactions if there is a default, minus the value of any related collateral posted to satisfy the initial margin (if required) and the variation margin. Our derivative transactions are subject to variation margin which is derived from the change in market value of the transaction and must be posted by the net debtor on demand. Cleared transactions are subject to initial margin as well as variation margin. The initial margin is intended to protect the Clearinghouse against default of a clearing agent and to protect the clearing agent against default of a customer. Initial margin is calculated to cover the potential price volatility of the derivative transaction between the time of the default and the assignment of the transaction to another clearing agent or termination of the transaction. Although the initial margin requirement should decrease over time as the duration and market volatility decrease, it remains outstanding for the life of the transaction; thus, it is possible that we could either have: (1) net credit exposure with a Clearinghouse even if our net creditor position has been fully satisfied by the receipt of variation margin; or (2) net credit exposure with a Clearinghouse despite being the net debtor (i.e., being in a liability position). In determining maximum credit risk, we consider accrued interest receivables and payables as well as the netting requirements to net assets and liabilities.

Tables 34 and 35 present derivative notional amounts and counterparty credit exposure, net of collateral, by whole-letter rating (in the event of a split rating, we use the lowest rating published by Moody's Investor Service or Standard & Poor's) for derivative positions with counterparties to which we had credit exposure (in thousands):

Table 34



09/30/2015
Credit Rating	Notional Amount		Net Derivatives Fair Value Before Collateral			Cash Collateral Pledged From (To) Counterparty			Net Credit Exposure to Counterparties
Asset positions with credit exposure:
Uncleared derivatives:
Double-A	$	250,000	$	1,262		$	—		$	1,262
Single-A	3,519,698		35,660			26,203			9,457
Liability positions with credit exposure:
Uncleared derivatives¹:
Single-A	3,698,012		(67,984		)	(70,921		)	2,937
Cleared derivatives²	5,542,368		(82,446		)	(132,379		)	49,933
TOTAL DERIVATIVE POSITIONS WITH CREDIT EXPOSURE	$	13,010,078	$	(113,508	)	$	(177,097	)	$	63,589


¹	Exposure can change on a daily basis; and thus, there is often a short lag time between the date the exposure is identified, collateral is requested and collateral is actually returned.


²	Represents derivative transactions cleared with Clearinghouses, which are not rated.

Table 35



12/31/2014
Credit Rating	Notional Amount		Net Derivatives Fair Value Before Collateral			Cash Collateral Pledged From (To) Counterparty			Net Credit Exposure to Counterparties
Asset positions with credit exposure:
Uncleared derivatives:
Single-A	$	3,949,300	$	36,459		$	29,417		$	7,042
Liability positions with credit exposure:
Uncleared derivatives¹:
Single-A	2,245,492		(38,018		)	(40,913		)	2,895
Cleared derivatives²	3,327,371		(45,146		)	(68,046		)	22,900
TOTAL DERIVATIVE POSITIONS WITH CREDIT EXPOSURE	$	9,522,163	$	(46,705	)	$	(79,542	)	$	32,837


¹	Exposure can change on a daily basis; and thus, there is often a short lag time between the date the exposure is identified, collateral is requested and collateral is actually returned.


²	Represents derivative transactions cleared with Clearinghouses, which are not rated.

Foreign Counterparty Risk – Loans, acceptances, interest-bearing deposits with other banks, other interest-bearing investments and any other monetary assets payable to us by entities of foreign countries, regardless of the currency in which the claim is denominated are referred to as "cross-border outstandings." Our cross-border outstandings consist primarily of short-term trading securities and Federal funds sold issued by banks and other financial institutions, which are non-sovereign entities, and derivative asset exposure with counterparties that are also non-sovereign entities. Secured reverse repurchase agreements outstanding are excluded from cross-border outstandings because they are fully collateralized.

In addition to credit risk, cross-border outstandings have the risk that, as a result of political or economic conditions in a country, borrowers may be unable to meet their contractual repayment obligations of principal and/or interest when due because of the unavailability of, or restrictions on, foreign exchange needed by borrowers to repay their obligations. Unsecured credit exposure continues to be cautiously placed, with non-derivatives exposure concentrated in the United States, Canada, Germany, Netherlands, and the Nordic countries.

Table 36 presents the fair value of cross-border outstandings to countries in which we do business that amounted to at least one percent of our total assets as of September 30, 2015 (dollar amounts in thousands):

Table 36



	Finland				Other¹					Total
	Amount		Percent of Total Assets		Amount			Percent of Total Assets		Amount			Percent of Total Assets
Federal funds sold²	$	500,000	1.1	%	$	1,050,000		2.3	%	$	1,550,000		3.4	%

Derivative assets:
Net exposure at fair value	—				(61,276		)			(61,276		)
Cash collateral held	—				70,921					70,921
Net exposure after cash collateral	—		—		9,645			—		9,645			—

TOTAL	$	500,000	1.1	%	$	1,059,645		2.3	%	$	1,559,645		3.4	%


¹	Represents other foreign countries where individual exposure is less than one percent of total assets. Total cross-border outstandings to countries that individually represented between 0.75 and 1.0 percent of our total assets as of September 30, 2015 were $1.1 billion (Germany, Netherlands and Norway).


²	Consists solely of overnight Federal funds sold.

Liquidity Risk Management: Maintaining the ability to meet our obligations as they come due and to meet the credit needs of our members and housing associates in a timely and cost-efficient manner is the primary objective of managing liquidity risk. We seek to be in a position to meet the credit needs of our members, as well as our debt service and liquidity needs, without maintaining excessive holdings of low-yielding liquid investments or being forced to incur unnecessarily high borrowing costs.

Operational liquidity, or the ability to meet operational requirements in the normal course of business, is currently defined in our RMP as sources of cash from both our ongoing access to the capital markets and our holding of liquid assets. We manage exposure to operational liquidity risk by maintaining appropriate daily liquidity levels above the thresholds established by our RMP. We are also required to manage liquidity in order to meet statutory and contingency liquidity requirements and Finance Agency liquidity guidelines by maintaining a daily liquidity level above certain thresholds also outlined in the RMP, federal statutes, Finance Agency regulations and other Finance Agency guidance not issued in the form of regulations. We remained in compliance with each of these liquidity requirements throughout the third quarter of 2015.

We generally maintained stable access to the capital markets for the quarter ended September 30, 2015. For additional discussion of the market for our consolidated obligations and the overall market affecting liquidity see “Financial Market Trends” under this Item 2.

Certain of our derivative instruments contain provisions that require us to post additional collateral with our counterparties if there is deterioration in our credit rating. See Note 7 of the Notes to Financial Statements under Item 1 for additional information on collateral posting requirements and credit-risk-related contingent features. We believe that our liquidity position as of September 30, 2015 was sufficient to satisfy the additional collateral that would be required in the event of a downgrade in our credit rating from double-A to single-A if the downgrade was effective at that time, and such amounts would not have a material impact to our financial condition or results of operations.

Impact of Recently Issued Accounting Standards

See Note 2 of the Notes to Financial Statements under Item 1 – "Financial Statements" for a discussion of recently issued accounting standards.

Legislative and Regulatory Developments

Joint Final Rule on Margin and Capital Requirements for Covered Swap Entities

In October 2015, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Farm Credit Administration, and the FHFA (each an Agency and, collectively, the Agencies) jointly adopted final rules to establish minimum margin and capital requirements for registered swap dealers, major swap participants, security-

based swap dealers, and major security-based swap participants (Swap Entities) that are subject to the jurisdiction of one of the Agencies (such entities, Covered Swap Entities, and the joint final rules, the Final Margin Rules).

When they take effect, the Final Margin Rules will subject non-cleared swaps and non-cleared security-based swaps between Covered Swap Entities and Swap Entities and between Covered Swap Entities and financial end users that have material swaps exposure (i.e., an average daily aggregate notional of $8.0 billion or more in non-cleared swaps), to a mandatory two-way initial margin requirement. The amount of the initial margin required to be posted or collected would be either the amount calculated by the Covered Swap Entity using a standardized schedule set forth as an appendix to the Final Margin Rules, which provides the gross initial margin (as a percentage of total notional exposure) for certain asset classes, or an internal margin model of the Covered Swap Entity conforming to the requirements of the Final Margin Rules that is approved by the Agency having jurisdiction over the particular Covered Swap Entity. The Final Margin Rules specify the types of collateral that may be posted or collected as initial margin (generally, cash, certain government securities, certain liquid debt, certain equity securities, certain eligible publicly traded debt, and gold); and sets forth haircuts for certain collateral asset classes. Initial margin must be segregated with an independent, third-party custodian and, generally, may not be rehypothecated, except that, cash funds may be placed with a custodian bank in return for a general deposit obligation under certain specified circumstances.

The Final Margin Rules will require variation margin to be exchanged daily for non-cleared swaps and non-cleared security-based swaps between Covered Swap Entities and Swap Entities and between Covered Swap Entities and all financial end-users (without regard to the swaps exposure of the particular financial end-user). The variation margin amount is the daily mark-to-market change in the value of the swap to the Covered Swap Entity, taking into account variation margin previously paid or collected. For non-cleared swaps and security-based swaps between Covered Swap Entities and financial end-users, variation margin may be paid or collected in cash or non-cash collateral that is considered eligible for initial margin purposes. Variation margin is not subject to segregation with an independent, third-party custodian, and may, if permitted by contract, be rehypothecated.

The variation margin requirement under the Final Margin Rules will become effective for the FHLBank on March 1, 2017, and the initial margin requirements under the Final Margin Rules are expected to become effective for the FHLBank on September 1, 2020.

The FHLBank is not a Covered Swap Entity under the Final Margin Rules. Rather, the FHLBank is a financial end-user under the Final Margin Rules, and would likely have material swaps exposure when the initial margin requirements under the Final Margin Rules become effective.

Since we are currently posting and collecting variation margin on non-cleared swaps, it is not anticipated that the variation margin requirement under the Final Margin Rules will have a material impact on our costs. However, when the initial margin requirements under the Final Margin Rules become effective, we anticipate that our cost of engaging in non-cleared swaps may increase.

The Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) are expected to adopt their own versions of the Final Margin Rules that generally mirror the Final Margin Rules. The CFTC’s and SEC’s rules will only apply to a limited number of registered swap dealers, security-based swap dealers, major swap participants, and major security-based swap participants that are not subject to the jurisdiction of one of the Agencies.

Finance Agency Core Mission Achievement Advisory Bulletin 2015-05. On July 14, 2015, the Finance Agency issued an advisory bulletin establishing a core mission asset ratio by which the Finance Agency will assess each FHLBank’s core mission achievement. Core mission achievement is determined using a ratio of primary mission assets, which includes advances and mortgage loans acquired from members (also referred to as AMA), to consolidated obligations. The core mission asset ratio will be determined at year-end and calculated using annual average par values.

The advisory bulletin provides the Finance Agency expectations for each FHLBank’s strategic plan based on its ratio, which are:


•	when the ratio is 70 percent or higher, the strategic plan should include an assessment of the FHLBank’s prospects for maintaining at least this level;


•	when the ratio is between 55 percent and 70 percent, the strategic plan should explain the FHLBank’s plan to increase its mission focus; and

•

when the ratio is below 55 percent, the strategic plan should include an explanation of the circumstances that caused the ratio to be at that level and detailed plans to increase the ratio. The advisory bulletin provides that if an FHLBank maintains a ratio below 55 percent over the course of several consecutive reviews, then the FHLBank’s board of directors should consider possible strategic alternatives.

Our core mission activities primarily include the issuance of advances. In addition, we acquire member mortgage loans through the MPF Program. We intend to manage our balance sheet with an emphasis towards maintaining a core mission assets ratio within the range of 70 to 80 percent during 2015. However, because this ratio is dependent on several variables such as member demand for our advance and mortgage loan products, it is possible that we will be unable to maintain this level throughout 2015.

Item 3: Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk Management

We measure interest rate risk exposure by various methods, including the calculation of duration of equity (DOE) and market value of equity (MVE) in different interest rate scenarios.

Duration of Equity: DOE aggregates the estimated sensitivity of market value for each of our financial assets and liabilities to changes in interest rates. In essence, DOE indicates the sensitivity of MVE to changes in interest rates. However, MVE should not be considered indicative of our market value as a going concern or our value in a liquidation scenario.

We manage DOE within ranges approved by our Board of Directors as described under Item 7A - "Quantitative and Qualitative Disclosures About Market Risk" in the annual report on Form 10-K, incorporated by reference herein. All of our DOE measurements were inside Board of Director established policy limits and operating ranges as of September 30, 2015. On an ongoing basis, we actively monitor portfolio relationships and overall DOE dynamics as a part of our evaluation processes for determining acceptable future asset/liability management actions. Table 37 presents the DOE in the base case and the up and down 200 basis point interest rate shock scenarios as of the periods noted:

Table 37



Duration of Equity
Date	Up 200 Basis Points	Base	Down 200 Basis Points
09/30/2015	1.9	1.2	0.9
06/30/2015	1.7	0.6	0.2
03/31/2015	1.6	-0.1	1.1
12/31/2014	1.8	-0.9	1.8
09/30/2014	1.3	-0.7	1.4

The DOE as of September 30, 2015 increased in all scenarios from June 30, 2015. The primary factors contributing to these changes in duration during the period were: (1) the decline in interest rates and the relative level of mortgage rates during the period; (2) the slight increase in the fixed rate mortgage loan portfolio during the period along with a slight decline in the weighting of the portfolio as a percent of total assets as advance balances continued to increase; and (3) asset/liability actions taken by management throughout the period, including the continued call and re-issuance of long-term, unswapped callable consolidated obligation bonds with short lock-out periods and the continued issuance of discount notes to fund the growth in advances.

The decline in interest rates during the third quarter of 2015 generally resulted in a shortening duration profile for both the fixed rate mortgage loan portfolio and the associated unswapped callable consolidated obligation bonds funding these assets. With the slight increase in our mortgage loan portfolio during the period, as discussed in Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – MPF Program,” the portfolio level duration profile changed as expected since a general decline in interest rates typically generates faster prepayments for both new production mortgage loans, as well as the outstanding fixed rate mortgage loan portfolio. Generally, lower interest rates indicate a relative increase in refinancing incentive for borrowers.

Even though the fixed rate mortgage loan portfolio increased slightly in net outstanding balance during the period, the portfolio actually decreased as an overall percentage of assets as the balance sheet expanded, decreasing from 13.9 percent of total assets as of June 30, 2015 to 13.8 percent as of September 30, 2015. Even with this weighting decrease, the mortgage loan portfolio continues to represent a sizable portion of the balance sheet, and changes occurring with this portfolio tend to be magnified in terms of DOE. Since the mortgage loan portfolio continues to comprise a considerable percentage of overall assets and has such a high duration relative to our other assets, its behavior is quite visible in the duration risk profile and changes in this portfolio are typically magnified as the composition of assets change. This magnification occurs when a portfolio market value weighting as a percent of the overall net market value of the balance sheet changes, causing the remaining portfolios to be a smaller or larger component of the total balance sheet composition. For example, during the third quarter of 2015, advance balances increased significantly causing the mortgage loan portfolio weighting to decrease as a total proportion of total assets. This relationship then causes the duration of the mortgage loan portfolio to have a smaller contribution impact to the overall DOE since DOE is a market value weighted measurement and as the capital level increased in response to the growth in advances, the contribution of the mortgage portfolio also declined slightly. Although there was an absolute growth in the mortgage loan portfolio during the period, the mortgage loan portfolio became a smaller percentage of the balance sheet, reducing the mortgage loan portfolio's overall contribution to DOE. However, as stated previously, the mortgage loan portfolio continues to remain a significant portion of the balance sheet and changes in the duration and weighting of the portfolio continues to be a large contributor to the overall DOE profile. With these balance sheet dynamics, we continue to actively manage and monitor the contributing factors of our risk profile, including DOE. As the relationship of the fixed rate mortgage loan assets and the associated callable liabilities vary based on market conditions, we evaluate and manage these market driven sensitivities as both portfolios change in balance level and overall proportion.

New loans were continually added to the mortgage loan portfolio to replace loans that were prepaid during the period and we continue to actively manage this ongoing growth to position the balance sheet sensitivity to perform within our expected risk tolerances. To effectively manage these changes in the mortgage loan portfolio (including new production loans) and related sensitivity to changes in market conditions, a continued issuance of unswapped callable consolidated obligation bonds with short lock-out periods (generally three months) positioned us to replace called bonds as the interest rate environment continued to remain at historically low levels. The call of higher rate callable bonds and reissuance of these bonds at lower interest rates in this manner generally extends the duration profile of this portfolio as bonds are called that are in-the-money (above market rates) and subsequently reissued at lower interest rates (at market rates). This liability extension corresponds with the expected longer duration profile of the new fixed rate mortgage loans, all else being equal.

As discussed above, as interest rates declined during the period and as we continued to experience prepayments of the fixed rate mortgage loan portfolio, the short lock-out periods of the callable bonds plus some maturities of non-callable bonds provided the opportunity to continue the refinancing of our liabilities. The decline in interest rates during the period also caused the duration profile of the existing portfolio of unswapped callable bonds to shorten slightly more than the fixed rate mortgage loan portfolio. This liability shortening demonstrates the specific duration sensitivity to changes in interest rates at certain shock scenarios where the unswapped callable bonds are more sensitive to certain levels of declining interest rates, causing the overall DOE to increase, similar to the factors causing the increase in DOE for all interest rate shock scenarios. This sensitivity, or convexity, is further described under Item 7A – "Quantitative and Qualitative Disclosures About Market Risk" in the annual report on Form 10-K. In addition, issuance of discount notes continued in order to provide adequate liquidity sources to appropriately address customer short-term advance growth and associated capital stock activity during the period. The combination of all these factors contributed to the net DOE increase in all interest rate shock scenarios. The down shock scenario continues to provide limited information since interest rates remain at historically low levels. This low interest rate environment essentially generates zero interest rates for the short- and mid-term interest rates along the down 200 shocked term structure of interest rates, causing valuation changes to be limited, generating DOE results with marginal information.

With respect to the GSE variable rate MBS/CMO portfolio, we generally purchase interest rate caps to offset the impact of embedded caps in this portfolio in rising interest rate scenarios. As expected, these interest rate caps are a satisfactory interest rate risk hedge to rising interest rates and provide an off-setting risk response to the risk profile changes in GSE variable rate MBS/CMOs with embedded caps. We periodically assess derivative strategies to ensure that overall balance sheet risk is appropriately hedged within established risk appetite and make adjustments to the derivative portfolio as needed. This evaluation is completed considering not only the par value of the variable rate MBS/CMO investments with embedded caps being hedged with purchased caps, but the composition of the purchased cap portfolio and expected prepayments of the variable rate MBS/CMO investments with embedded caps. This evaluation of the relative relationship between the variable rate investment portfolio and the purchased cap portfolio continues to indicate a sufficient hedging relationship. During the quarter ended September 30, 2015, we purchased $40.6 million of variable rate multi-family GSE MBS/CMO securities. However, we did not purchase additional interest rate caps during the third quarter of 2015 because the investments did not contain interest rate cap exposure. In addition, we purchased $304.0 million GSE fixed rate MBS/CMO securities during the current quarter. These fixed rate bonds were effectively swapped to LIBOR and impacted DOE only slightly since they are reflected as variable rate instruments and are further described in Item 2 – "Management's Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Net Gain (Loss) on Trading Securities."

In calculating DOE, we also calculate our duration gap, which is the difference between the duration of our assets and the duration of our liabilities. Our base duration gap was 0.7 month and 0.4 month for September 30, 2015 and June 30, 2015, respectively. As discussed previously, the relatively stable performance of the duration gap was primarily the result of the changes in the fixed rate mortgage loan portfolio and the associated funding decisions made by management in response to changes in the interest rate environment and balance sheet during the third quarter of 2015. All FHLBanks are required to submit this base duration gap number to the Office of Finance as part of the quarterly reporting process created by the Finance Agency.

Market Value of Equity: MVE is the net value of our assets and liabilities. Estimating sensitivity of MVE to changes in interest rates is another measure of interest rate risk. We generally maintain an MVE within limits specified by the Board of Directors in the RMP. The RMP measures our market value risk in terms of the MVE in relation to total regulatory capital stock outstanding (TRCS). TRCS includes all capital stock outstanding, including stock subject to mandatory redemption. As a cooperative, we believe using the TRCS results in an appropriate measure because it reflects our market value relative to the book value of our capital stock. Our RMP stipulates MVE shall not be less than: (1) 100 percent of TRCS under the base case scenario; or (2) 90 percent of TRCS under a ±200 basis point instantaneous parallel shock in interest rates. Table 38 presents MVE as a percent of TRCS. As of September 30, 2015, all scenarios are well above the specified limits and much of the relative level in the ratios during the periods covered by the table can be attributed to the relative level of the fixed rate mortgage loan market values as rates have continued to remain historically low, the general value impact of the refinancing activities of the associated unswapped callable consolidated obligation bonds and the relative level of outstanding capital.

The MVE to TRCS ratios can be greatly impacted by the level of capital outstanding based on our capital management approach. We lowered our activity-based capital stock requirements for: (1) AMA from 2.0 percent to zero during the third quarter of 2013; and (2) advances from 5.0 percent to 4.5 percent during the second quarter of 2014. After each of these changes, we exercised significant repurchases of excess capital stock and began purchasing excess capital stock on a monthly basis after the 2014 change. Each of these changes coupled with the excess capital stock repurchase inherently increased our ratio of MVE to TRCS as the capital level declined. However, during the third quarter of 2014, as advance balances increased and the associated capital levels increased in response, the ratio declined since the new advances were primarily short-term with market values at or near par. The impact of the changing capital levels continues to be a significant contributor of the recent changes in the ratios in all interest rate scenarios in the table below.

As members repaid advances late in the fourth quarter of 2014, there was a decrease in required capital stock due to the decrease in advances, which, along with the repurchase of excess capital stock, resulted in an increase in MVE/TRCS ratios in all scenarios at December 31, 2014. The current period of June 30, 2015 to September 30, 2015 experienced growth in advance balances and related capital stock purchases leading to a decline in the MVE/TRCS ratios.

Table 38



Market Value of Equity as a Percent of Total Regulatory Capital Stock
Date	Up 200 Basis Points	Base	Down 200 Basis Points
09/30/2015	165	168	172
06/30/2015	168	169	174
03/31/2015	188	186	190
12/31/2014	196	196	202
09/30/2014	181	180	188

Detail of Derivative Instruments by Type of Instrument by Type of Risk: Various types of derivative instruments are utilized to mitigate the interest rate risks described in the preceding sections as well as to better match the terms of assets and liabilities. We currently employ derivative instruments by designating them as either a fair value or cash flow hedge of an underlying financial instrument or a forecasted transaction; by acting as an intermediary; or in asset/liability management (i.e., an economic hedge). An economic hedge is defined as a derivative hedging specific or non-specific underlying assets, liabilities or firm commitments that either does not qualify for hedge accounting, or for which we have not elected hedge accounting, but is an acceptable hedging strategy under our RMP. For hedging relationships that are not designated for shortcut hedge accounting, we formally assess (both at the hedge’s inception and monthly on an ongoing basis) whether the derivatives used have been highly effective in offsetting changes in the fair values or cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. We typically use regression analyses or similar statistical analyses to assess the effectiveness of our long haul hedges. We determine the hedge accounting to be applied when the hedge is entered into by completing detailed documentation, which includes a checklist setting forth criteria that must be met to qualify for hedge accounting.

Tables 39 and 40 present the notional amount and fair value amount (fair value includes net accrued interest receivable or payable on the derivative) for derivative instruments by hedged item, hedging instrument, hedging objective and accounting designation (in thousands):

Table 39



09/30/2015
Hedged Item	Hedging Instrument	Hedging Objective	Accounting Designation	Notional Amount		Fair Value Amount
Advances
Fixed rate non-callable advances	Pay fixed, receive variable interest rate swap	Convert the advance’s fixed rate to a variable rate index	Fair Value Hedge	$	3,253,990	$	(101,972	)
Fixed rate callable advances	Pay fixed, receive variable interest rate swap	Convert the advance’s fixed rate to a variable rate index and offset option risk in the advance	Fair Value Hedge	66,000		(1,049		)
Fixed rate convertible advances	Pay fixed, receive variable interest rate swap	Convert the advance’s fixed rate to a variable rate index and offset option risk in the advance	Fair Value Hedge	1,499,642		(78,628		)
Clearly and closely related caps embedded in variable rate advances	Interest rate cap	Offset the interest rate cap embedded in a variable rate advance	Fair Value Hedge	60,000		(235		)
Firm commitment to issue a fixed rate advance	Forward settling interest rate swap	Protect against fair value risk	Fair Value Hedge	53,523		(2,337		)
Investments
Fixed rate non-MBS trading investments	Pay fixed, receive variable interest rate swap	Convert the investment’s fixed rate to a variable rate index	Economic Hedge	1,254,820		(64,649		)
Fixed rate MBS trading investments	Pay fixed, receive variable interest rate swap	Convert the investment’s fixed rate to a variable rate index	Economic Hedge	854,636		(31,875		)
Fixed rate MBS available-for-sale investments	Pay fixed, receive variable interest rate swap	Convert the investment’s fixed rate to a variable rate index	Fair Value Hedge	69,429		(1,092		)
Adjustable rate MBS with embedded caps	Interest rate cap	Offset the interest rate cap embedded in a variable rate investment	Economic Hedge	2,997,800		7,684
Mortgage Loans Held for Portfolio
Fixed rate mortgage purchase commitments	Mortgage purchase commitment	Protect against fair value risk	Economic Hedge	96,717		471
Consolidated Obligation Discount Notes
Fixed rate non-callable consolidated obligation discount notes	Receive fixed, pay variable interest rate swap	Convert the discount note's fixed rate to a variable rate	Fair Value Hedge	598,882		310
Fixed rate non-callable consolidated obligation discount notes	Receive fixed, pay variable interest rate swap	Convert the discount note's fixed rate to a variable rate	Economic Hedge	249,693		—
Consolidated Obligation Bonds
Fixed rate non-callable consolidated obligation bonds	Receive fixed, pay variable interest rate swap	Convert the bond’s fixed rate to a variable rate index	Fair Value Hedge	2,456,820		67,716
Fixed rate callable consolidated obligation bonds	Receive fixed, pay variable interest rate swap	Convert the bond’s fixed rate to a variable rate index and offset option risk in the bond	Fair Value Hedge	1,625,000		7,893
Complex consolidated obligation bonds	Receive variable with embedded features, pay variable interest rate swap	Reduce interest rate sensitivity and re-pricing gaps by converting the bond’s variable rate to a different variable rate index and/or to offset embedded options risk in the bond	Fair Value Hedge	120,000		111
Callable step-up/step-down consolidated obligation bonds	Receive variable interest rate with embedded features, pay variable interest rate swap	Reduce interest rate sensitivity and repricing gaps by converting the bond’s variable rate to a different variable rate index and/or to offset embedded options risk in the bond	Fair Value Hedge	1,420,000		4,379
Variable rate consolidated obligation bonds	Receive variable interest rate, pay variable interest rate swap	Reduce basis risk by converting an undesirable variable rate index in the bond to a more desirable variable rate index	Economic Hedge	1,635,000		2,113
Intermediary Derivatives
Interest rate caps executed with members	Interest rate cap	Offset interest rate caps executed with members by executing interest rate caps with derivatives counterparties	Economic Hedge	8,000		—
TOTAL				$	18,319,952	$	(191,160	)

Table 40



12/31/2014
Hedged Item	Hedging Instrument	Hedging Objective	Accounting Designation	Notional Amount		Fair Value Amount
Advances
Fixed rate non-callable advances	Pay fixed, receive variable interest rate swap	Convert the advance’s fixed rate to a variable rate index	Fair Value Hedge	$	3,364,464	$	(84,174	)
Fixed rate callable advances	Pay fixed, receive variable interest rate swap	Convert the advance’s fixed rate to a variable rate index and offset option risk in the advance	Fair Value Hedge	76,000		(393		)
Fixed rate convertible advances	Pay fixed, receive variable interest rate swap	Convert the advance’s fixed rate to a variable rate index and offset option risk in the advance	Fair Value Hedge	1,584,242		(92,887		)
Clearly and closely related caps embedded in variable rate advances	Interest rate cap	Offset the interest rate cap embedded in a variable rate advance	Fair Value Hedge	187,000		(956		)
Firm commitment to issue a fixed rate advance	Forward settling interest rate swap	Protect against fair value risk	Fair Value Hedge	32,796		(662		)
Investments
Fixed rate non-MBS trading investments	Pay fixed, receive variable interest rate swap	Convert the investment’s fixed rate to a variable rate index	Economic Hedge	961,820		(82,875		)
Adjustable rate MBS with embedded caps	Interest rate cap	Offset the interest rate cap embedded in a variable rate investment	Economic Hedge	4,044,800		9,948
Mortgage Loans Held for Portfolio
Fixed rate mortgage purchase commitments	Mortgage purchase commitment	Protect against fair value risk	Economic Hedge	53,004		138
Consolidated Obligation Bonds
Fixed rate non-callable consolidated obligation bonds	Receive fixed, pay variable interest rate swap	Convert the bond’s fixed rate to a variable rate index	Fair Value Hedge	2,166,000		73,628
Fixed rate callable consolidated obligation bonds	Receive fixed, pay variable interest rate swap	Convert the bond’s fixed rate to a variable rate index and offset option risk in the bond	Fair Value Hedge	1,430,000		7,501
Complex consolidated obligation bonds	Receive variable with embedded features, pay variable interest rate swap	Reduce interest rate sensitivity and re-pricing gaps by converting the bond’s variable rate to a different variable rate index and/or to offset embedded options risk in the bond	Fair Value Hedge	122,000		(1,878		)
Callable step-up/step-down consolidated obligation bonds	Receive variable interest rate with embedded features, pay variable interest rate swap	Reduce interest rate sensitivity and repricing gaps by converting the bond’s variable rate to a different variable rate index and/or to offset embedded options risk in the bond	Fair Value Hedge	2,830,000		(10,216		)
Variable rate consolidated obligation bonds	Receive variable interest rate, pay variable interest rate swap	Reduce basis risk by converting an undesirable variable rate index in the bond to a more desirable variable rate index	Economic Hedge	1,455,000		770
Intermediary Derivatives
Interest rate caps executed with members	Interest rate cap	Offset interest rate caps executed with members by executing interest rate caps with derivatives counterparties	Economic Hedge	46,000		—
TOTAL				$	18,353,126	$	(182,056	)

Item 4: Controls and Procedures

Disclosure Controls and Procedures

Senior management is responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934, as amended (Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide a reasonable level of assurance in achieving their desired objectives; however, in designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Management, with the participation of the President and Chief Executive Officer (CEO), our principal executive officer, and Chief Financial Officer (CFO), our principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-(e) under the Exchange Act) as of September 30, 2015. Based upon that evaluation, the CEO and CFO have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2015.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended September 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1: Legal Proceedings

We are subject to various pending legal proceedings arising in the normal course of business. After consultation with legal counsel, management does not anticipate that the ultimate liability, if any, arising out of these matters will have a material adverse effect on our financial condition or results of operations. Additionally, management does not believe that we are subject to any material pending legal proceedings outside of ordinary litigation incidental to our business.

Item 1A: Risk Factors

There have been no material changes to the risk factors previously disclosed in our annual report on Form 10-K filed on March 13, 2015, incorporated by reference herein.

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3: Defaults Upon Senior Securities

Not applicable.

Item 4: Mine Safety Disclosures

Not applicable.

Item 5: Other Information

None.

Item 6: Exhibits



Exhibit No.	Description
3.1	Exhibit 3.1 to the FHLBank’s registration statement on Form 10, filed May 15, 2006, and made effective on July 14, 2006 (File No. 000-52004) (the “Form 10 Registration Statement”), Federal Home Loan Bank of Topeka Articles and Organization Certificate, is incorporated herein by reference as Exhibit 3.1.
3.2	Exhibit 3.2 to the Current Report on Form 8-K, filed September 26, 2014, Amended and Restated Bylaws, is incorporated herein by reference as Exhibit 3.2.
10.1	Exhibit 10.1 to the Current Report on Form 8-K, filed July 20, 2015, Change in Control Plan, dated June 19, 2015, is incorporated herein by reference as Exhibit 10.1.
10.2	Exhibit 10.2 to the Current Report on Form 8-K, filed July 20, 2015, Named Executive Officer Severance Policy, dated June 19, 2015, is incorporated herein by reference as Exhibit 10.2.
10.3	Exhibit 10.1 to the Current Report on Form 8-K, filed July 20, 2015, 2012 Executive Incentive Compensation Plan Targets, revised June 19, 2015, is incorporated herein by reference as Exhibit 10.3.
10.4	Exhibit 10.2 to the Current Report on Form 8-K, filed July 20, 2015, 2013 Executive Incentive Compensation Plan Targets, revised June 19, 2015, is incorporated herein by reference as Exhibit 10.4.
10.5	Exhibit 10.3 to the Current Report on Form 8-K, filed July 20, 2015, 2014 Executive Incentive Compensation Plan Targets, revised June 19, 2015, is incorporated herein by reference as Exhibit 10.5.
10.6	Exhibit 10.4 to the Current Report on Form 8-K, filed July 20, 2015, 2015 Executive Incentive Compensation Plan Targets, revised June 19, 2015, is incorporated herein by reference as Exhibit 10.6.
4.1	Exhibit 99.2 to the Current Report on Form 8-K, filed August 5, 2011, Federal Home Loan Bank of Topeka Capital Plan, is incorporated herein by reference as Exhibit 4.1.
31.1	Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Senior Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification of President and Principal Executive Officer and Senior Vice President and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

100

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



	Federal Home Loan Bank of Topeka


November 5, 2015	By: /s/ Andrew J. Jetter
Date	Andrew J. Jetter
	President and Chief Executive Officer


November 5, 2015	By: /s/ William W. Osborn
Date	William W. Osborn
	Senior Vice President and Chief Financial Officer

101

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

Attached files

Federal Home Loan Bank of Topeka Reports