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EX-32 - EXHIBIT 32 - Federal Home Loan Bank of Topekaex6301632.htm
EX-31.2 - EXHIBIT 31.2 - Federal Home Loan Bank of Topekaex63016312.htm
EX-31.1 - EXHIBIT 31.1 - Federal Home Loan Bank of Topekaex63016311.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 June 30, 2016
 
OR
 
¨      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
 
Commission File Number 000-52004
 
FEDERAL HOME LOAN BANK OF TOPEKA
(Exact name of registrant as specified in its charter)
 
Federally chartered corporation
 
48-0561319
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
One Security Benefit Pl. Suite 100
Topeka, KS
 
 
66606
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code: 785.233.0507

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes  ¨ No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x  Yes  ¨  No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. ¨ Large accelerated filer  ¨ Accelerated filer  x Non-accelerated filer  ¨ Smaller reporting company
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  ¨ Yes  x No
 
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
 
 
Shares outstanding as of
August 2, 2016
Class A Stock, par value $100 per share
1,754,189
Class B Stock, par value $100 per share
13,250,776




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


2


Important Notice about Information in this Quarterly Report

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

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

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

Special Cautionary Notice Regarding Forward-looking Statements

The information in this Form 10-Q contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include statements describing the objectives, projections, estimates or future predictions of the FHLBank’s operations. These statements may be identified by the use of forward-looking terminology such as “anticipates,” “believes,” “may,” “is likely,” “could,” “estimate,” “expect,” “will,” “intend,” “probable,” “project,” “should,” or their negatives or other variations of these terms. The FHLBank cautions that by their nature forward-looking statements involve risks or uncertainties and that actual results may differ materially from those expressed in any forward-looking statements as a result of such risks and uncertainties, including but not limited to:
Governmental actions, including legislative, regulatory, judicial or other developments that affect the FHLBank; its members, counterparties or investors; housing government sponsored enterprises (GSE); or the FHLBank System in general;
Changes in the FHLBank’s capital structure;
Changes in economic and market conditions, including conditions in the U.S. and global economy as well as 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) 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®) Program). “Mortgage Partnership Finance,” “MPF,” and “MPF Xtra” are registered trademarks of the FHLBank of Chicago.


3


Readers of this report should not rely solely on the forward-looking statements and should consider all risks and uncertainties addressed throughout this report, as well as those discussed under Item 1A – Risk Factors in our annual report on Form 10-K for the fiscal year ended December 31, 2015, incorporated by reference herein.

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


PART I

Item 1: Financial Statements


4


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
STATEMENTS OF CONDITION - Unaudited
 
 
(In thousands, except par value)
 
 
 
06/30/2016
12/31/2015
ASSETS
 
 
Cash and due from banks
$
214,023

$
682,670

Interest-bearing deposits
371,834

100,594

Securities purchased under agreements to resell (Note 10)
2,993,427

3,945,000

Federal funds sold
1,823,000

2,000,000

 
 
 
Investment securities:
 
 
Trading securities (Note 3)
2,494,963

2,294,606

Available-for-sale securities1 (Note 3)
1,057,923

495,063

Held-to-maturity securities2 (Note 3)
4,703,442

4,770,817

Total investment securities
8,256,328

7,560,486

 
 
 
Advances (Notes 4, 6)
26,182,562

23,580,371

 
 
 
Mortgage loans held for portfolio, net:
 
 
Mortgage loans held for portfolio (Notes 5, 6)
6,473,897

6,392,680

Less allowance for credit losses on mortgage loans (Note 6)
(1,298
)
(1,972
)
Mortgage loans held for portfolio, net
6,472,599

6,390,708

 
 
 
Accrued interest receivable
77,918

79,233

Premises, software and equipment, net
10,489

8,306

Derivative assets, net (Notes 7, 10)
61,747

51,591

Other assets
27,209

27,174

 
 
 
TOTAL ASSETS
$
46,491,136

$
44,426,133

 
 
 
LIABILITIES
 
 
Deposits (Note 8)
$
661,355

$
759,366

 
 
 
Consolidated obligations, net:
 
 
Discount notes (Note 9)
26,887,678

21,813,446

Bonds (Note 9)
16,753,990

19,866,034

Total consolidated obligations, net
43,641,668

41,679,480

 
 
 
Mandatorily redeemable capital stock (Note 11)
4,356

2,739

Accrued interest payable
43,539

52,281

Affordable Housing Program payable
31,061

28,011

Derivative liabilities, net (Notes 7, 10)
47,963

31,492

Other liabilities
44,423

31,012

 
 
 
TOTAL LIABILITIES
44,474,365

42,584,381

 
 
 
Commitments and contingencies (Note 14)


 
 
 

1    Amortized cost: $1,064,198 and $503,640 as of June 30, 2016 and December 31, 2015, respectively.
2    Fair value: $4,695,449 and $4,765,095 as of June 30, 2016 and December 31, 2015, respectively.
The accompanying notes are an integral part of these financial statements.

5


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
STATEMENTS OF CONDITION - Unaudited
 
 
(In thousands, except par value)
 
 
 
06/30/2016
12/31/2015
CAPITAL
 
 
Capital stock outstanding - putable:
 
 
Class A ($100 par value; 1,879 and 1,797 shares issued and outstanding) (Note 11)
$
187,895

$
179,683

Class B ($100 par value; 11,594 and 10,293 shares issued and outstanding) (Note 11)
1,159,385

1,029,264

Total capital stock
1,347,280

1,208,947

 
 
 
Retained earnings:
 
 
Unrestricted
578,978

560,166

Restricted
106,051

91,616

Total retained earnings
685,029

651,782

 
 
 
Accumulated other comprehensive income (loss) (Note 12)
(15,538
)
(18,977
)
 
 
 
TOTAL CAPITAL
2,016,771

1,841,752

 
 
 
TOTAL LIABILITIES AND CAPITAL
$
46,491,136

$
44,426,133



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


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
 
 
STATEMENTS OF INCOME - Unaudited
 
 
 
 
(In thousands)
 
 
 
 
 
Three Months Ended
Six Months Ended
 
06/30/2016
06/30/2015
06/30/2016
06/30/2015
INTEREST INCOME:
 
 
 
 
Interest-bearing deposits
$
454

$
55

$
786

$
109

Securities purchased under agreements to resell
2,548

1,013

5,577

1,578

Federal funds sold
1,417

485

2,812

1,144

Trading securities
17,949

13,496

36,130

25,858

Available-for-sale securities
2,797


4,819


Held-to-maturity securities
11,799

10,221

23,331

20,280

Advances
56,722

33,818

109,921

65,569

Prepayment fees on terminated advances
120

332

609

1,088

Mortgage loans held for portfolio
50,992

50,455

103,293

102,471

Other
314

354

641

706

Total interest income
145,112

110,229

287,919

218,803

 
 
 
 
 
INTEREST EXPENSE:
 
 
 
 
Deposits
234

135

460

299

Consolidated obligations:
 
 
 
 
Discount notes
24,272

3,751

45,179

7,253

Bonds
56,318

49,121

113,047

97,346

Mandatorily redeemable capital stock (Note 11)
32

11

41

22

Other
74

61

140

119

Total interest expense
80,930

53,079

158,867

105,039

 
 
 
 
 
NET INTEREST INCOME
64,182

57,150

129,052

113,764

(Reversal) provision for credit losses on mortgage loans (Note 6)
(212
)
(992
)
(469
)
(1,794
)
NET INTEREST INCOME AFTER LOAN LOSS (REVERSAL) PROVISION
64,394

58,142

129,521

115,558

 
 
 
 
 
OTHER INCOME (LOSS):
 
 
 
 
Total other-than-temporary impairment losses on held-to-maturity securities
(1
)
(185
)
(65
)
(185
)
Net amount of impairment losses on held-to-maturity securities reclassified to/(from) accumulated other comprehensive income (loss)
(4
)
(67
)
33

(254
)
Net other-than-temporary impairment losses on held-to-maturity securities (Note 3)
(5
)
(252
)
(32
)
(439
)
Net gain (loss) on trading securities (Note 3)
18,526

(20,371
)
67,730

(26,215
)
Net gain (loss) on derivatives and hedging activities (Note 7)
(35,296
)
4,317

(93,782
)
(1,646
)
Standby bond purchase agreement commitment fees
1,332

1,357

2,712

2,838

Letters of credit fees
903

820

1,755

1,609

Other
653

592

1,214

1,100

Total other income (loss)
(13,887
)
(13,537
)
(20,403
)
(22,753
)
 
 
 
 
 

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


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
 
 
STATEMENTS OF INCOME - Unaudited
 
 
 
 
(In thousands)
 
 
 
 
 
Three Months Ended
Six Months Ended
 
06/30/2016
06/30/2015
06/30/2016
06/30/2015
OTHER EXPENSES:
 
 
 
 
Compensation and benefits
$
8,711

$
8,097

$
16,462

$
16,126

Other operating
4,289

4,266

7,630

7,877

Federal Housing Finance Agency
698

493

1,507

1,108

Office of Finance
640

746

1,352

1,324

Other
941

1,491

1,967

2,278

Total other expenses
15,279

15,093

28,918

28,713

 
 
 
 
 
INCOME BEFORE ASSESSMENTS
35,228

29,512

80,200

64,092

 
 
 
 
 
Affordable Housing Program
3,526

2,952

8,024

6,411

 
 
 
 
 
NET INCOME
$
31,702

$
26,560

$
72,176

$
57,681



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


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
STATEMENTS OF COMPREHENSIVE INCOME - Unaudited
 
 
 
 
(In thousands)
 
 
 
 
Three Months Ended
Six Months Ended
 
06/30/2016
06/30/2015
06/30/2016
06/30/2015
Net income
$
31,702

$
26,560

$
72,176

$
57,681

 
 
 
 
 
Other comprehensive income:
 
 
 
 
Net unrealized gain (loss) on available-for-sale securities:
 
 
 
 
Unrealized gain (loss)
(2,440
)

2,302


Total net unrealized gains/losses on available-for-sale securities
(2,440
)

2,302


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

(181
)
(62
)
(181
)
Reclassification of non-credit portion included in net income
4

248

29

435

Accretion of non-credit portion
525

789

1,075

1,741

Total net non-credit portion of other-than-temporary impairment losses on held-to-maturity securities
529

856

1,042

1,995

 
 
 
 
 
Defined benefit pension plan:
 
 
 
 
Amortization of net loss
48

100

95

198

Total defined benefit pension plan
48

100

95

198

 
 
 
 
 
Total other comprehensive income
(1,863
)
956

3,439

2,193

 
 
 
 
 
TOTAL COMPREHENSIVE INCOME
$
29,839

$
27,516

$
75,615

$
59,874

 


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


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

1,762

6,825

682,528

6,843

684,290

 
 
 
 
684,290

Repurchase/redemption of capital stock
(1,970
)
(196,999
)
(58
)
(5,852
)
(2,028
)
(202,851
)
 
 
 
 
(202,851
)
Comprehensive income
 
 
 
 
 
 
46,145

11,536

57,681

2,193

59,874

Net reclassification of shares to mandatorily redeemable capital stock
(17
)
(1,646
)
(1,813
)
(181,313
)
(1,830
)
(182,959
)
 
 
 
 
(182,959
)
Net transfer of shares between Class A and Class B
1,530

153,059

(1,530
)
(153,059
)


 
 
 
 

Dividends on capital stock (Class A - 1.0%, Class B - 6.0%):
 
 
 
 
 
 
 
 
 
 
 
Cash payment
 
 
 
 
 
 
(148
)
 
(148
)
 
(148
)
Stock issued
 
 
310

31,049

310

31,049

(31,049
)
 
(31,049
)
 

Balance at June 30, 2015
1,644

$
164,449

11,391

$
1,139,121

13,035

$
1,303,570

$
569,137

$
84,480

$
653,617

$
(13,714
)
$
1,943,473

 
 
 
 
 
 
 
 
 
 
 
 
 
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, 2015
1,797

$
179,683

10,293

$
1,029,264

12,090

$
1,208,947

$
560,166

$
91,616

$
651,782

$
(18,977
)
$
1,841,752

Proceeds from issuance of capital stock
25

2,520

6,673

667,293

6,698

669,813

 
 
 
 
669,813

Repurchase/redemption of capital stock
(2,166
)
(216,635
)
(14
)
(1,409
)
(2,180
)
(218,044
)
 
 
 
 
(218,044
)
Comprehensive income
 
 
 
 




57,741

14,435

72,176

3,439

75,615

Net reclassification of shares to mandatorily redeemable capital stock
(199
)
(19,858
)
(3,324
)
(332,362
)
(3,523
)
(352,220
)
 
 
 
 
(352,220
)
Net transfer of shares between Class A and Class B
2,422

242,185

(2,422
)
(242,185
)


 
 
 
 

Dividends on capital stock (Class A - 1.0%, Class B - 6.0%):
 
 
 
 




 
 
 
 
 

Cash payment
 
 
 
 




(145
)
 
(145
)
 
(145
)
Stock issued
 
 
388

38,784

388

38,784

(38,784
)
 
(38,784
)
 

Balance at June 30, 2016
1,879
$
187,895

11,594
$
1,159,385

13,473
$
1,347,280

$
578,978

$
106,051

$
685,029

$
(15,538
)
$
2,016,771

                   
1    Putable


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


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
STATEMENTS OF CASH FLOWS - Unaudited
 
 
(In thousands)
 
 
 
Six Months Ended
 
06/30/2016
06/30/2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
Net income
$
72,176

$
57,681

Adjustments to reconcile income (loss) to net cash provided by (used in) operating activities:
 
 
Depreciation and amortization:
 
 
Premiums and discounts on consolidated obligations, net
(279
)
(8,109
)
Concessions on consolidated obligations
6,550

3,081

Premiums and discounts on investments, net
1,039

364

Premiums, discounts and commitment fees on advances, net
(3,204
)
(4,981
)
Premiums, discounts and deferred loan costs on mortgage loans, net
9,171

9,589

Fair value adjustments on hedged assets or liabilities
2,838

5,103

Premises, software and equipment
1,032

1,097

Other
95

198

(Reversal) provision for credit losses on mortgage loans
(469
)
(1,794
)
Non-cash interest on mandatorily redeemable capital stock
37

20

Net other-than-temporary impairment losses on held-to-maturity securities
32

439

Net realized (gain) loss on sale of premises and equipment
(39
)
(17
)
Other adjustments
(386
)
(116
)
Net (gain) loss on trading securities
(67,730
)
26,215

(Gain) loss due to change in net fair value adjustment on derivative and hedging activities
101,902

9,326

(Increase) decrease in accrued interest receivable
1,295

(3,751
)
Change in net accrued interest included in derivative assets
(3,462
)
9,221

(Increase) decrease in other assets
(1,805
)
1,125

Increase (decrease) in accrued interest payable
(8,746
)
(5,683
)
Change in net accrued interest included in derivative liabilities
537

(4,436
)
Increase (decrease) in Affordable Housing Program liability
3,050

(577
)
Increase (decrease) in other liabilities
(2,912
)
(1,704
)
Total adjustments
38,546

34,610

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
110,722

92,291

 
 
 

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


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
STATEMENTS OF CASH FLOWS - Unaudited
 
 
(In thousands)
 
 
 
Six Months Ended
 
06/30/2016
06/30/2015
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
Net (increase) decrease in interest-bearing deposits
$
(438,106
)
$
10,030

Net (increase) decrease in securities purchased under resale agreements
951,573

(3,735,000
)
Net (increase) decrease in Federal funds sold
177,000

5,000

Net (increase) decrease in short-term trading securities

(595,010
)
Proceeds from maturities of and principal repayments on long-term trading securities
260,818

307,579

Purchases of long-term trading securities
(393,445
)
(850,830
)
Proceeds from maturities of and principal repayments on long-term available-for-sale securities
1,206


Purchases of long-term available-for-sale securities
(519,528
)

Proceeds from maturities of and principal repayments on long-term held-to-maturity securities
374,708

733,430

Purchases of long-term held-to-maturity securities
(291,225
)
(1,090,355
)
Principal collected on advances
62,092,887

43,289,405

Advances made
(64,622,951
)
(48,299,409
)
Principal collected on mortgage loans
468,194

505,390

Purchases of mortgage loans
(558,419
)
(600,645
)
Proceeds from sale of foreclosed assets
2,719

2,398

Principal collected on other loans made
1,167

1,104

Proceeds from sale of premises, software and equipment
1

44

Purchases of premises, software and equipment
(3,177
)
(186
)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
(2,496,578
)
(10,317,055
)
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
Net increase (decrease) in deposits
(119,812
)
(5,188
)
Net proceeds from issuance of consolidated obligations:
 
 
Discount notes
265,946,231

142,961,933

Bonds
8,111,112

7,108,089

Payments for maturing and retired consolidated obligations:
 
 
Discount notes
(260,877,617
)
(135,675,197
)
Bonds
(11,227,650
)
(6,113,000
)
Proceeds from financing derivatives
14,600

6,066

Net interest payments received (paid) for financing derivatives
(30,639
)
(26,996
)
Proceeds from issuance of capital stock
669,813

684,290

Payments for repurchase/redemption of capital stock
(218,044
)
(202,851
)
Payments for repurchase of mandatorily redeemable capital stock
(350,640
)
(182,966
)
Cash dividends paid
(145
)
(148
)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
1,917,209

8,554,032

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(468,647
)
(1,670,732
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
682,670

2,545,311

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
214,023

$
874,579

 
 
 
Supplemental disclosures:
 
 
Interest paid
$
157,187

$
107,377

Affordable Housing Program payments
$
5,352

$
7,062

Net transfers of mortgage loans to real estate owned
$
627

$
2,277

Traded but not yet settled investment security purchases
$
15,260

$
97,184


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



FEDERAL HOME LOAN BANK OF TOPEKA
Notes to Financial Statements - Unaudited
June 30, 2016


NOTE 1BASIS 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, 2015. 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 10, 2016 (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 and available-for-sale 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.

Reclassifications: Certain amounts in the financial statements and related footnotes have been reclassified to conform to current period presentations. On January 1, 2016, the FHLBank adopted the guidance, Simplifying the Presentation of Debt Issuance Costs, issued by Financial Accounting Standards Board (FASB) in April 2015. This guidance requires a retrospective 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. As a result, debt issuance costs of $9,221,000 and $300,000 on consolidated obligation bonds and discount notes, respectively, were reclassified from other assets to consolidated obligations as of December 31, 2015, resulting in a decrease in total assets and total liabilities. The adoption of this amendment did not have an impact on the FHLBank's results of operations or cash flows. See Note 2 - Recently Issued Accounting Standards and Interpretations and Changes in and Adoptions of Accounting Principles for discussion of this guidance.


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

Measurement of Credit Losses on Financial Instruments. In June 2016, FASB issued amended guidance for the accounting of credit losses on financial instruments. The amendments require entities to measure expected credit losses based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. Additionally, under the new guidance, a financial asset, or a group of financial assets, measured at amortized cost basis is required to be presented at the net amount expected to be collected.


13


The guidance also requires:
The statement of income to reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period;
The entities to determine the allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination that are measured at amortized cost basis in a similar manner to other financial assets measured at amortized cost basis. The initial allowance for credit losses is required to be added to the purchase price;
Credit losses relating to available-for-sale debt securities to be recorded through an allowance for credit losses. The amendments limit the allowance for credit losses to the amount by which fair value is below amortized cost; and
Public entities to further disaggregate the current disclosure of credit quality indicators in relation to the amortized cost of financing receivables by the year of origination (i.e., vintage).

The guidance is effective for the FHLBank for interim and annual periods beginning on January 1, 2020. Early application is permitted as of the interim and annual reporting periods beginning after December 15, 2018. The guidance should be applied using a modified-retrospective approach, through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. In addition, entities are required to use a prospective transition approach for debt securities for which an other-than-temporary impairment (OTTI) had been recognized before the effective date. The FHLBank is currently evaluating this guidance to determine the impact on the FHLBank's financial condition, results of operations and cash flows.
Contingent Put and Call Options in Debt Instruments. In March 2016, FASB issued amendments to resolve current diversity in practice by clarifying the steps required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. The amendments apply to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options. The amendments are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016, which is January 1, 2017 for the FHLBank. Early adoption is permitted. This guidance is not expected to affect the FHLBank's financial condition, results of operations or cash flows.

Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. In March 2016, FASB issued amendments to clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under GAAP does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The amendments are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016, and early adoption is permitted. The FHLBank elected to early adopt the guidance prospectively on January 1, 2016. The adoption of this guidance had no effect on the FHLBank’s financial condition, results of operations or cash flows.

Leases. In February 2016, FASB issued amendments to lease accounting guidance. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases in the statement of financial condition, which effectively removes a source of off-balance sheet financing for operating leases. A distinction remains between finance leases and operating leases, but the assets and liabilities arising from operating leases are now also required to be recognized in the statement of financial condition. Lessor accounting is largely unchanged. The amendments are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, which is January 1, 2019 for the FHLBank. The FHLBank is currently evaluating these amendments to determine the impact, if any, on the FHLBank's financial condition, results of operations or cash flows.

Recognition and Measurement of Financial Assets and Financial Liabilities. In January 2016, FASB issued amendments to improve the recognition, measurement, presentation and disclosure of financial instruments through changes to existing GAAP. The provisions impacting the FHLBank include the elimination of the requirement to disclose the method and significant assumptions used to estimate the fair value of financial instruments carried at amortized cost, the requirement to use the notion of exit price when measuring the fair value of financial instruments for disclosure purposes, and the separate presentation of financial assets and financial liabilities by measurement category and form of asset (i.e., securities or loans and receivables) on the statement of financial condition or in the notes to financial statements. The amendments are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, which is January 1, 2018 for the FHLBank. The FHLBank is currently evaluating these amendments to determine the impact, if any, on the FHLBank's financial condition, results of operations or cash flows.

Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. In April 2015, 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 was January 1, 2016 for the FHLBank. The FHLBank elected to adopt the amendments prospectively to all arrangements entered into or materially modified after the effective date. The adoption of this guidance did not have a material impact on the FHLBank's financial condition, results of operations or cash flows.


14


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 was 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 did not 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 was January 1, 2016 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, FASB voted to defer the effective date of the new standard by one year. In addition, in March 2016, FASB issued amendments to clarify the implementation guidance on principal versus agent considerations, in particular, relating to how an entity should determine whether the entity is a principal or an agent for each specified good or service promised to the customer and the nature of each specified good or services. The amendments do not change the core principle in the new revenue standard. The standard is 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, but any effect is not expected to be material.


NOTE 3INVESTMENT SECURITIES

Trading Securities: Trading securities by major security type as of June 30, 2016 and December 31, 2015 are summarized in Table 3.1 (in thousands):

Table 3.1
 
Fair Value
 
06/30/2016
12/31/2015
Non-mortgage-backed securities:
 
 
GSE obligations1
$
1,493,441

$
1,338,639

Non-mortgage-backed securities
1,493,441

1,338,639

Mortgage-backed securities:
 
 
U.S. obligation MBS2
744

801

GSE MBS3
1,000,778

955,166

Mortgage-backed securities
1,001,522

955,967

TOTAL
$
2,494,963

$
2,294,606

                   
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.


15


Net gains (losses) on trading securities during the three and six months ended June 30, 2016 and 2015 are shown in Table 3.2 (in thousands):

Table 3.2
 
Three Months Ended
Six Months Ended
 
06/30/2016
06/30/2015
06/30/2016
06/30/2015
Net gains (losses) on trading securities held as of June 30, 2016
$
18,526

$
(17,674
)
$
68,195

$
(21,001
)
Net gains (losses) on trading securities sold or matured prior to June 30, 2016

(2,697
)
(465
)
(5,214
)
NET GAIN (LOSS) ON TRADING SECURITIES
$
18,526

$
(20,371
)
$
67,730

$
(26,215
)

Available-for-sale Securities: Available-for-sale securities by major security type as of June 30, 2016 are summarized in Table 3.3 (in thousands):

Table 3.3
 
06/30/2016
 
Amortized
Cost
OTTI
Recognized
in OCI
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Mortgage-backed securities:
 
 
 
 
 
GSE MBS1
$
1,064,198

$

$
1,562

$
(7,837
)
$
1,057,923

TOTAL
$
1,064,198

$

$
1,562

$
(7,837
)
$
1,057,923

                   
1 
Represents fixed rate multi-family MBS issued by Fannie Mae.

Available-for-sale securities by major security type as of December 31, 2015 are summarized in Table 3.4 (in thousands):

Table 3.4
 
12/31/2015
 
Amortized
Cost
OTTI
Recognized
in OCI
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Mortgage-backed securities:
 
 
 
 
 
GSE MBS1
$
503,640

$

$

$
(8,577
)
$
495,063

TOTAL
$
503,640

$

$

$
(8,577
)
$
495,063

                   
1 
Represents fixed rate multi-family MBS issued by Fannie Mae.

Table 3.5 summarizes the available-for-sale securities with unrealized losses as of June 30, 2016 (in thousands). 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 3.5
 
06/30/2016
 
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
$
762,592

$
(7,837
)
$

$

$
762,592

$
(7,837
)
TOTAL TEMPORARILY IMPAIRED SECURITIES
$
762,592

$
(7,837
)
$

$

$
762,592

$
(7,837
)
                   
1 
Represents fixed rate multi-family MBS issued by Fannie Mae.


16


Table 3.6 summarizes the available-for-sale securities with unrealized losses as of December 31, 2015 (in thousands). 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 3.6
 
12/31/2015
 
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
$
495,063

$
(8,577
)
$

$

$
495,063

$
(8,577
)
TOTAL TEMPORARILY IMPAIRED SECURITIES
$
495,063

$
(8,577
)
$

$

$
495,063

$
(8,577
)
                   
1 
Represents fixed rate multi-family MBS 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 June 30, 2016 are summarized in Table 3.7 (in thousands):

Table 3.7
 
06/30/2016
 
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
$
109,590

$

$
109,590

$
129

$
(4,908
)
$
104,811

Non-mortgage-backed securities
109,590


109,590

129

(4,908
)
104,811

Mortgage-backed securities:
 
 
 
 
 
 
U.S. obligation MBS1
42,822


42,822

6

(70
)
42,758

GSE MBS2
4,412,962


4,412,962

14,578

(17,314
)
4,410,226

Private-label residential MBS
144,976

(6,908
)
138,068

5,071

(5,485
)
137,654

Mortgage-backed securities
4,600,760

(6,908
)
4,593,852

19,655

(22,869
)
4,590,638

TOTAL
$
4,710,350

$
(6,908
)
$
4,703,442

$
19,784

$
(27,777
)
$
4,695,449

                   
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.


17


Held-to-maturity securities by major security type as of December 31, 2015 are summarized in Table 3.8 (in thousands):

Table 3.8
 
12/31/2015
 
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
$
111,655

$

$
111,655

$
138

$
(5,164
)
$
106,629

Non-mortgage-backed securities
111,655


111,655

138

(5,164
)
106,629

Mortgage-backed securities:
 
 
 
 
 
 
U.S obligation MBS1
47,234


47,234

66

(23
)
47,277

GSE MBS2
4,452,533


4,452,533

19,740

(21,639
)
4,450,634

Private-label residential MBS
167,345

(7,950
)
159,395

6,665

(5,505
)
160,555

Mortgage-backed securities
4,667,112

(7,950
)
4,659,162

26,471

(27,167
)
4,658,466

TOTAL
$
4,778,767

$
(7,950
)
$
4,770,817

$
26,609

$
(32,331
)
$
4,765,095

                    
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 3.9 summarizes the held-to-maturity securities with unrealized losses as of June 30, 2016 (in thousands). 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 3.9
 
06/30/2016
 
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
$

$

$
36,297

$
(4,908
)
$
36,297

$
(4,908
)
Non-mortgage-backed securities


36,297

(4,908
)
36,297

(4,908
)
Mortgage-backed securities:
 
 
 
 
 
 
U.S. obligation MBS2
40,939

(70
)


40,939

(70
)
GSE MBS3
1,245,375

(4,778
)
1,633,953

(12,536
)
2,879,328

(17,314
)
Private-label residential MBS
4,557

(20
)
96,340

(8,723
)
100,897

(8,743
)
Mortgage-backed securities
1,290,871

(4,868
)
1,730,293

(21,259
)
3,021,164

(26,127
)
TOTAL TEMPORARILY IMPAIRED SECURITIES
$
1,290,871

$
(4,868
)
$
1,766,590

$
(26,167
)
$
3,057,461

$
(31,035
)
                    
1 
Total unrealized losses in Table 3.9 will not agree to total gross unrecognized losses in Table 3.7. Total unrealized losses in Table 3.9 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 MBS issued by 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.


18


Table 3.10 summarizes the held-to-maturity securities with unrealized losses as of December 31, 2015 (in thousands). 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 3.10
 
12/31/2015
 
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
$

$

$
37,211

$
(5,164
)
$
37,211

$
(5,164
)
Non-mortgage-backed securities


37,211

(5,164
)
37,211

(5,164
)
Mortgage-backed securities:
 
 
 
 
 
 
U.S obligation MBS2
19,189

(23
)


19,189

(23
)
GSE MBS3
1,697,226

(7,806
)
1,012,199

(13,833
)
2,709,425

(21,639
)
Private-label residential MBS
5,215

(28
)
110,744

(8,826
)
115,959

(8,854
)
Mortgage-backed securities
1,721,630

(7,857
)
1,122,943

(22,659
)
2,844,573

(30,516
)
TOTAL TEMPORARILY IMPAIRED SECURITIES
$
1,721,630

$
(7,857
)
$
1,160,154

$
(27,823
)
$
2,881,784

$
(35,680
)
                    
1 
Total unrealized losses in Table 3.10 will not agree to total gross unrecognized losses in Table 3.8. Total unrealized losses in Table 3.10 include non-credit-related OTTI recognized in AOCI and gross unrecognized gains on previously other-than-temporarily impaired securities.
2 
Represents single-family MBS issued by 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.

The amortized cost, carrying value and fair values of held-to-maturity securities by contractual maturity as of June 30, 2016 and December 31, 2015 are shown in Table 3.11 (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 3.11
 
06/30/2016
12/31/2015
 
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
2,990

2,990

2,990

3,260

3,260

3,260

Due after five years through 10 years
11,205

11,205

11,166

12,375

12,375

12,356

Due after 10 years
95,395

95,395

90,655

96,020

96,020

91,013

Non-mortgage-backed securities
109,590

109,590

104,811

111,655

111,655

106,629

Mortgage-backed securities
4,600,760

4,593,852

4,590,638

4,667,112

4,659,162

4,658,466

TOTAL
$
4,710,350

$
4,703,442

$
4,695,449

$
4,778,767

$
4,770,817

$
4,765,095



19


Table 3.12 details interest rate payment terms for the amortized cost of held-to-maturity securities as of June 30, 2016 and December 31, 2015 (in thousands):

Table 3.12
 
06/30/2016
12/31/2015
Non-mortgage-backed securities:
 
 
Variable rate
$
109,590

$
111,655

Non-mortgage-backed securities
109,590

111,655

Mortgage-backed securities:
 
 
Fixed rate
284,387

324,177

Variable rate
4,316,373

4,342,935

Mortgage-backed securities
4,600,760

4,667,112

TOTAL
$
4,710,350

$
4,778,767


Other-than-temporary Impairment: For the 21 outstanding private-label securities with OTTI during the lives of the securities, the FHLBank’s reported balances as of June 30, 2016 are presented in Table 3.13 (in thousands):

Table 3.13
 
06/30/2016
 
Unpaid
Principal
Balance
Amortized
Cost
Carrying
Value
Fair
Value
Private-label residential MBS:
 
 
 
 
Prime
$
11,671

$
10,711

$
9,977

$
10,647

Alt-A
32,927

29,456

23,282

27,329

TOTAL
$
44,598

$
40,167

$
33,259

$
37,976


Table 3.14 presents a roll-forward of OTTI activity for the three and six months ended June 30, 2016 and 2015 related to credit losses recognized in earnings (in thousands):

Table 3.14
 
Three Months Ended
Six Months Ended
 
06/30/2016
06/30/2015
06/30/2016
06/30/2015
Balance, beginning of period
$
7,776

$
9,367

$
7,785

$
9,406

Additional charge on securities for which OTTI was not previously recognized
1


1


Additional charge on securities for which OTTI was previously recognized1
4

252

31

439

Amortization of credit component of OTTI2
(185
)
(194
)
(221
)
(420
)
Balance, end of period
$
7,596

$
9,425

$
7,596

$
9,425

                    
1 
For the three months ended June 30, 2016 and 2015, securities previously impaired represent all securities that were impaired prior to April 1, 2016 and 2015, respectively. For the six months ended June 30, 2016 and 2015, securities previously impaired represent all securities that were impaired prior to January 1, 2016 and 2015, respectively.
2 
The FHLBank amortizes the credit component based on estimated cash flows prospectively up to the amount of expected principal to be recovered. The discounted cash flows will move from the discounted loss value to the ultimate principal to be written off at the projected date of loss. If the expected cash flows improve, the amount of expected loss decreases which causes a corresponding decrease in the calculated amortization. Based on the level of improvement in the cash flows, the amortization could become a positive adjustment to income.


20


As of June 30, 2016, 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 4ADVANCES

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 June 30, 2016 and December 31, 2015, the FHLBank had advances outstanding at interest rates ranging from 0.28 percent to 7.41 percent and 0.22 percent to 7.41 percent, respectively. Table 4.1 presents advances summarized by year of contractual maturity as of June 30, 2016 and December 31, 2015 (dollar amounts in thousands): 

Table 4.1
 
06/30/2016
12/31/2015
Year of Contractual Maturity
Amount
Weighted Average Interest Rate
Amount
Weighted Average Interest Rate
Due in one year or less
$
13,464,206

0.75
%
$
11,230,853

0.65
%
Due after one year through two years
2,549,990

2.28

2,465,866

2.49

Due after two years through three years
1,580,982

1.57

1,816,690

2.02

Due after three years through four years
775,011

1.98

970,726

1.43

Due after four years through five years
1,018,499

2.13

803,465

1.84

Thereafter
6,615,049

1.08

6,186,074

1.17

Total par value
26,003,737

1.13
%
23,473,674

1.16
%
Discounts
(14,661
)
 
(17,866
)
 
Hedging adjustments
193,486

 
124,563

 
TOTAL
$
26,182,562

 
$
23,580,371

 

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 June 30, 2016 and December 31, 2015 include callable advances totaling $6,631,427,000 and $6,326,747,000, respectively. Of these callable advances, there were $6,517,518,000 and $6,213,293,000 of variable rate advances as of June 30, 2016 and December 31, 2015, 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 June 30, 2016 and December 31, 2015, the FHLBank had convertible advances outstanding totaling $1,479,942,000 and $1,472,842,000, respectively.


21


Table 4.2 presents advances summarized by contractual maturity or next call date (for callable advances) and by contractual maturity or next conversion date (for convertible advances) as of June 30, 2016 and December 31, 2015 (in thousands):

Table 4.2
 
Year of Contractual Maturity
or Next Call Date
Year of Contractual Maturity
or Next Conversion Date
Redemption Term
06/30/2016
12/31/2015
06/30/2016
12/31/2015
Due in one year or less
$
19,720,504

$
16,894,032

$
14,500,399

$
12,454,894

Due after one year through two years
1,918,508

2,037,166

1,677,298

1,573,624

Due after two years through three years
1,163,293

1,464,854

1,543,982

1,577,890

Due after three years through four years
688,335

630,463

792,111

1,033,226

Due after four years through five years
921,049

622,489

1,124,549

830,265

Thereafter
1,592,048

1,824,670

6,365,398

6,003,775

TOTAL PAR VALUE
$
26,003,737

$
23,473,674

$
26,003,737

$
23,473,674


Interest Rate Payment Terms:  Table 4.3 details additional interest rate payment terms for advances as of June 30, 2016 and December 31, 2015 (in thousands):

Table 4.3
 
06/30/2016
12/31/2015
Fixed rate:
 
 
Due in one year or less
$
2,526,652

$
2,012,929

Due after one year
6,357,308

6,612,853

Total fixed rate
8,883,960

8,625,782

Variable rate:
 

 

Due in one year or less
10,937,554

9,217,924

Due after one year
6,182,223

5,629,968

Total variable rate
17,119,777

14,847,892

TOTAL PAR VALUE
$
26,003,737

$
23,473,674


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


NOTE 5MORTGAGE 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 loans (by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), the Rural Housing Service of the Department of Agriculture (RHS) and/or the Department of Housing and Urban Development (HUD)) and conventional residential loans credit-enhanced by participating financial institutions (PFIs). Depending upon a member’s product selection, the servicing rights can be retained or sold by the participating member. The FHLBank does not buy or own any mortgage servicing rights.


22


Mortgage Loans Held for Portfolio: Table 5.1 presents information as of June 30, 2016 and December 31, 2015 on mortgage loans held for portfolio (in thousands):

Table 5.1
 
06/30/2016
12/31/2015
Real estate:
 
 
Fixed rate, medium-term1, single-family mortgages
$
1,384,809

$
1,456,406

Fixed rate, long-term, single-family mortgages
4,980,942

4,830,091

Total unpaid principal balance
6,365,751

6,286,497

Premiums
101,268

100,502

Discounts
(2,188
)
(2,440
)
Deferred loan costs, net
492

596

Other deferred fees
(105
)
(118
)
Hedging adjustments
8,679

7,643

Total before Allowance for Credit Losses on Mortgage Loans
6,473,897

6,392,680

Allowance for Credit Losses on Mortgage Loans
(1,298
)
(1,972
)
MORTGAGE LOANS HELD FOR PORTFOLIO, NET
$
6,472,599

$
6,390,708

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

Table 5.2 presents information as of June 30, 2016 and December 31, 2015 on the outstanding unpaid principal balance (UPB) of mortgage loans held for portfolio (in thousands):

Table 5.2
 
06/30/2016
12/31/2015
Conventional loans
$
5,722,576

$
5,663,709

Government-guaranteed or insured loans
643,175

622,788

TOTAL UNPAID PRINCIPAL BALANCE
$
6,365,751

$
6,286,497


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


NOTE 6ALLOWANCE FOR CREDIT LOSSES

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


23


Roll-forward of Allowance for Credit Losses: Table 6.1 presents a roll-forward of the allowance for credit losses for the three and six months ended June 30, 2016 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 June 30, 2016 (in thousands):

Table 6.1
 
06/30/2016
 
Conventional
Loans
Government
Loans
Credit
Products1
Direct
Financing
Lease
Receivable
Total
Allowance for credit losses:
 
 
 
 
 
Balance, beginning of three-month period
$
1,607

$

$

$

$
1,607

Net charge-offs
(97
)



(97
)
(Reversal) provision for credit losses
(212
)



(212
)
Balance, end of three-month period
$
1,298

$

$

$

$
1,298

 
 
 
 
 
 
Balance, beginning of six-month period
$
1,972

$

$

$

$
1,972

Net charge-offs
(205
)



(205
)
(Reversal) provision for credit losses
(469
)



(469
)
Balance, end of six-month period
$
1,298

$

$

$

$
1,298

 
 
 
 
 
 
Allowance for credit losses, end of period:
 

 

 

 

 

Individually evaluated for impairment
$

$

$

$

$

Collectively evaluated for impairment
1,298




1,298

 
 
 
 
 
 
Recorded investment2, end of period:
 

 

 

 

 

Individually evaluated for impairment
$
12,722

$

$
26,208,296

$
18,598

$
26,239,616

Collectively evaluated for impairment
5,832,702

659,475



6,492,177

Total
$
5,845,424

$
659,475

$
26,208,296

$
18,598

$
32,731,793

                   
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.



24


Table 6.2 presents a roll-forward of the allowance for credit losses for the three and six months ended June 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 June 30, 2015 (in thousands):

Table 6.2
 
06/30/2015
 
Conventional
Loans
Government
Loans
Credit
Products1
Direct
Financing
Lease
Receivable
Total
Allowance for credit losses:
 
 
 
 
 
Balance, beginning of three-month period
$
3,337

$

$

$

$
3,337

Net (charge-offs) recoveries