Attached files

file filename
EX-32 - EXHIBIT 32 - Federal Home Loan Bank of Topekaex6301732.htm
EX-31.2 - EXHIBIT 31.2 - Federal Home Loan Bank of Topekaex63017312.htm
EX-31.1 - EXHIBIT 31.1 - Federal Home Loan Bank of Topekaex63017311.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, 2017
 
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, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨                            Accelerated filer ¨
Non-accelerated filer x (Do not check if a smaller reporting company)    Smaller reporting company ¨
Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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 4, 2017
Class A Stock, par value $100 per share
2,002,648
Class B Stock, par value $100 per share
14,206,491




.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 our district and 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 due to member eligibility, or changes in the principal place of business of members;
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, 2016, 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)
 
 
 
06/30/2017
12/31/2016
ASSETS
 
 
Cash and due from banks
$
492,290

$
207,254

Interest-bearing deposits
431,053

387,920

Securities purchased under agreements to resell (Note 10)
2,650,000

2,400,000

Federal funds sold
3,520,000

2,725,000

 
 
 
Investment securities:
 
 
Trading securities (Note 3)
2,999,289

2,502,788

Available-for-sale securities (Note 3)
1,227,036

1,091,721

Held-to-maturity securities1 (Note 3)
4,928,406

4,502,224

Total investment securities
9,154,731

8,096,733

 
 
 
Advances (Notes 4, 6)
26,443,416

23,985,835

 
 
 
Mortgage loans held for portfolio, net:
 
 
Mortgage loans held for portfolio (Notes 5, 6)
6,841,417

6,642,399

Less allowance for credit losses on mortgage loans (Note 6)
(1,525
)
(1,674
)
Mortgage loans held for portfolio, net
6,839,892

6,640,725

 
 
 
Overnight loans to other FHLBanks

600,000

Accrued interest receivable
77,308

68,400

Premises, software and equipment, net
28,715

16,205

Derivative assets, net (Notes 7, 10)
56,543

60,900

Other assets
47,590

27,777

 
 
 
TOTAL ASSETS
$
49,741,538

$
45,216,749

 
 
 
LIABILITIES
 
 
Deposits (Note 8)
$
496,015

$
598,931

 
 
 
Consolidated obligations, net:
 
 
Discount notes (Note 9)
23,955,782

21,775,341

Bonds (Note 9)
22,882,026

20,722,335

Total consolidated obligations, net
46,837,808

42,497,676

 
 
 
Mandatorily redeemable capital stock (Note 11)
6,186

2,670

Accrued interest payable
50,517

49,808

Affordable Housing Program payable
39,451

33,242

Derivative liabilities, net (Notes 7, 10)
4,055

7,171

Other liabilities
70,101

64,803

 
 
 
TOTAL LIABILITIES
47,504,133

43,254,301

 
 
 
Commitments and contingencies (Note 14)



1    Fair value: $4,927,860 and $4,487,252 as of June 30, 2017 and December 31, 2016, 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)
 
 
 
06/30/2017
12/31/2016
 
 
 
CAPITAL
 
 
Capital stock outstanding - putable:
 
 
Class A ($100 par value; 2,140 and 1,621 shares issued and outstanding) (Note 11)
$
213,972

$
162,143

Class B ($100 par value; 12,196 and 10,645 shares issued and outstanding) (Note 11)
1,219,648

1,064,532

Total capital stock
1,433,620

1,226,675

 
 
 
Retained earnings:
 
 
Unrestricted
646,569

611,226

Restricted
143,837

123,970

Total retained earnings
790,406

735,196

 
 
 
Accumulated other comprehensive income (loss) (Note 12)
13,379

577

 
 
 
TOTAL CAPITAL
2,237,405

1,962,448

 
 
 
TOTAL LIABILITIES AND CAPITAL
$
49,741,538

$
45,216,749



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
 
06/30/2017
06/30/2016
06/30/2017
06/30/2016
INTEREST INCOME:
 
 
 
 
Interest-bearing deposits
$
995

$
454

$
1,643

$
786

Securities purchased under agreements to resell
5,017

2,548

9,167

5,577

Federal funds sold
7,385

1,417

11,675

2,812

Trading securities
15,166

17,949

30,095

36,130

Available-for-sale securities
5,192

2,797

9,624

4,819

Held-to-maturity securities
17,546

11,799

32,398

23,331

Advances
95,246

56,722

168,133

109,921

Prepayment fees on terminated advances, net
300

120

1,170

609

Mortgage loans held for portfolio
49,948

50,992

102,526

103,293

Other
283

314

584

641

Total interest income
197,078

145,112

367,015

287,919

 
 
 
 
 
INTEREST EXPENSE:
 
 
 
 
Deposits
796

234

1,378

460

Consolidated obligations:
 
 
 
 
Discount notes
57,495

24,272

92,983

45,179

Bonds
73,379

56,318

140,482

113,047

Mandatorily redeemable capital stock (Note 11)
52

32

66

41

Other
79

74

157

140

Total interest expense
131,801

80,930

235,066

158,867

 
 
 
 
 
NET INTEREST INCOME
65,277

64,182

131,949

129,052

(Reversal) provision for credit losses on mortgage loans (Note 6)
20

(212
)
(25
)
(469
)
NET INTEREST INCOME AFTER LOAN LOSS (REVERSAL) PROVISION
65,257

64,394

131,974

129,521

 
 
 
 
 
OTHER INCOME (LOSS):
 
 
 
 
Total other-than-temporary impairment losses on held-to-maturity securities
(6
)
(1
)
(10
)
(65
)
Net amount of impairment losses on held-to-maturity securities reclassified to/(from) accumulated other comprehensive income (loss)
(81
)
(4
)
(114
)
33

Net other-than-temporary impairment losses on held-to-maturity securities (Note 3)
(87
)
(5
)
(124
)
(32
)
Net gain (loss) on trading securities (Note 3)
8,394

18,526

13,081

67,730

Net gain (loss) on derivatives and hedging activities (Note 7)
(9,962
)
(35,296
)
(9,359
)
(93,782
)
Standby bond purchase agreement commitment fees
1,181

1,332

2,341

2,712

Letters of credit fees
972

903

1,910

1,755

Other
650

653

1,184

1,214

Total other income (loss)
1,148

(13,887
)
9,033

(20,403
)
 
 
 
 
 

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
 
06/30/2017
06/30/2016
06/30/2017
06/30/2016
OTHER EXPENSES:
 
 
 
 
Compensation and benefits
$
8,937

$
8,711

$
17,366

$
16,462

Other operating
4,135

4,289

7,865

7,630

Federal Housing Finance Agency
696

698

1,448

1,507

Office of Finance
684

640

1,462

1,352

Other
1,261

941

2,488

1,967

Total other expenses
15,713

15,279

30,629

28,918

 
 
 
 
 
INCOME BEFORE ASSESSMENTS
50,692

35,228

110,378

80,200

 
 
 
 
 
Affordable Housing Program
5,074

3,526

11,044

8,024

 
 
 
 
 
NET INCOME
$
45,618

$
31,702

$
99,334

$
72,176



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
 
06/30/2017
06/30/2016
06/30/2017
06/30/2016
Net income
$
45,618

$
31,702

$
99,334

$
72,176

 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
Net unrealized gain (loss) on available-for-sale securities:
 
 
 
 
Unrealized gain (loss)
3,382

(2,440
)
11,867

2,302

Total net unrealized gain (loss) on available-for-sale securities
3,382

(2,440
)
11,867

2,302

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


(4
)
(62
)
Reclassification of non-credit portion included in net income
81

4

118

29

Accretion of non-credit portion
330

525

706

1,075

Total net non-credit portion of other-than-temporary impairment losses on held-to-maturity securities
411

529

820

1,042

 
 
 
 
 
Defined benefit pension plan:
 
 
 
 
Amortization of net loss
58

48

115

95

Total defined benefit pension plan
58

48

115

95

 
 
 
 
 
Total other comprehensive income (loss)
3,851

(1,863
)
12,802

3,439

 
 
 
 
 
TOTAL COMPREHENSIVE INCOME
$
49,469

$
29,839

$
112,136

$
75,615

 


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, 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

Comprehensive income
 
 
 
 
 
 
57,741

14,435

72,176

3,439

75,615

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
)
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

 
 
 
 
 
 
 
 
 
 
 
 
 
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, 2016
1,621

$
162,143

10,645

$
1,064,532

12,266

$
1,226,675

$
611,226

$
123,970

$
735,196

$
577

$
1,962,448

Comprehensive income
 
 
 
 
 
 
79,467

19,867

99,334

12,802

112,136

Proceeds from issuance of capital stock
7

678

8,541

854,070

8,548

854,748

 
 
 
 
854,748

Repurchase/redemption of capital stock
(2,672
)
(267,239
)
(7
)
(642
)
(2,679
)
(267,881
)
 
 
 
 
(267,881
)
Net reclassification of shares to mandatorily redeemable capital stock
(27
)
(2,758
)
(4,212
)
(421,155
)
(4,239
)
(423,913
)
 
 
 
 
(423,913
)
Net transfer of shares between Class A and Class B
3,211

321,148

(3,211
)
(321,148
)


 
 
 
 

Dividends on capital stock (Class A - 1.0%, Class B - 6.5%):
 
 
 
 




 
 
 
 
 

Cash payment
 
 
 
 




(133
)
 
(133
)
 
(133
)
Stock issued
 
 
440

43,991

440

43,991

(43,991
)
 
(43,991
)
 

Balance at June 30, 2017
2,140
$
213,972

12,196
$
1,219,648

14,336
$
1,433,620

$
646,569

$
143,837

$
790,406

$
13,379

$
2,237,405

                   
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
 
06/30/2017
06/30/2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
Net income
$
99,334

$
72,176

Adjustments to reconcile income (loss) to net cash provided by (used in) operating activities:
 
 
Depreciation and amortization:
 
 
Premiums and discounts on consolidated obligations, net
5,834

(279
)
Concessions on consolidated obligations
2,385

6,550

Premiums and discounts on investments, net
2,118

1,039

Premiums, discounts and commitment fees on advances, net
(2,985
)
(3,204
)
Premiums, discounts and deferred loan costs on mortgage loans, net
12,314

9,171

Fair value adjustments on hedged assets or liabilities
2,514

2,838

Premises, software and equipment
1,051

1,032

Other
115

95

(Reversal) provision for credit losses on mortgage loans
(25
)
(469
)
Non-cash interest on mandatorily redeemable capital stock
65

37

Net other-than-temporary impairment losses on held-to-maturity securities
124

32

Net realized (gain) loss on sale of premises and equipment
76

(39
)
Other adjustments
8

(386
)
Net (gain) loss on trading securities
(13,081
)
(67,730
)
(Gain) loss due to change in net fair value adjustment on derivative and hedging activities
5,521

101,902

(Increase) decrease in accrued interest receivable
(8,920
)
1,295

Change in net accrued interest included in derivative assets
(311
)
(3,462
)
(Increase) decrease in other assets
(4,778
)
(1,805
)
Increase (decrease) in accrued interest payable
711

(8,746
)
Change in net accrued interest included in derivative liabilities
(1,310
)
537

Increase (decrease) in Affordable Housing Program liability
6,209

3,050

Increase (decrease) in other liabilities
(4,669
)
(2,912
)
Total adjustments
2,966

38,546

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
102,300

110,722

 
 
 

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
 
06/30/2017
06/30/2016
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
Net (increase) decrease in interest-bearing deposits
$
(30,641
)
$
(438,106
)
Net (increase) decrease in securities purchased under resale agreements
(250,000
)
951,573

Net (increase) decrease in Federal funds sold
(795,000
)
177,000

Net (increase) decrease in short-term trading securities
(600,000
)

Proceeds from maturities of and principal repayments on long-term trading securities
116,580

260,818

Purchases of long-term trading securities

(393,445
)
Proceeds from maturities of and principal repayments on long-term available-for-sale securities
2,608

1,206

Purchases of long-term available-for-sale securities
(123,072
)
(519,528
)
Proceeds from maturities of and principal repayments on long-term held-to-maturity securities
590,656

374,708

Purchases of long-term held-to-maturity securities
(1,023,784
)
(291,225
)
Principal collected on advances
249,243,765

62,092,887

Advances made
(251,714,909
)
(64,622,951
)
Principal collected on mortgage loans
454,880

468,194

Purchases of mortgage loans
(667,033
)
(558,419
)
Proceeds from sale of foreclosed assets
894

2,719

Purchases of other long-term assets
(16,500
)

Principal collected on other loans made
1,248

1,167

Net (increase) decrease in loans to other FHLBanks
600,000


Proceeds from sale of premises, software and equipment
48

1

Purchases of premises, software and equipment
(12,690
)
(3,177
)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
(4,222,950
)
(2,496,578
)
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
Net increase (decrease) in deposits
(97,833
)
(119,812
)
Net proceeds from issuance of consolidated obligations:
 
 
Discount notes
470,882,328

265,946,231

Bonds
7,902,828

8,111,112

Payments for maturing and retired consolidated obligations:
 
 
Discount notes
(468,714,770
)
(260,877,617
)
Bonds
(5,737,680
)
(11,227,650
)
Net increase (decrease) in other borrowings
16,500


Proceeds from financing derivatives

14,600

Net interest payments received (paid) for financing derivatives
(11,959
)
(30,639
)
Proceeds from issuance of capital stock
854,748

669,813

Payments for repurchase/redemption of capital stock
(267,881
)
(218,044
)
Payments for repurchase of mandatorily redeemable capital stock
(420,462
)
(350,640
)
Cash dividends paid
(133
)
(145
)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
4,405,686

1,917,209

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
285,036

(468,647
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
207,254

682,670

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
492,290

$
214,023

 
 
 

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


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
STATEMENTS OF CASH FLOWS - Unaudited
 
 
(In thousands)
 
 
 
Six Months Ended
 
06/30/2017
06/30/2016
Supplemental disclosures:
 
 
Interest paid
$
222,676

$
157,187

Affordable Housing Program payments
$
5,010

$
5,352

Net transfers of mortgage loans to other assets
$
1,324

$
627

Change in capital expenditures incurred but reserved for construction holdback
$
995

$


The accompanying notes are an integral part of these financial statements.
13



FEDERAL HOME LOAN BANK OF TOPEKA
Notes to Financial Statements - Unaudited
June 30, 2017


NOTE 1BASIS OF PRESENTATION

Basis of Presentation: The accompanying interim financial statements of the Federal Home Loan Bank of Topeka (FHLBank or FHLBank Topeka) 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, 2016. 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 9, 2017 (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.

Derivatives: All derivatives are recognized on the Statements of Condition at their fair values (including net accrued interest receivable or payable on the derivatives) and are reported as either derivative assets or derivative liabilities, net of cash collateral, including initial and variation margin, and accrued interest received or pledged by clearing agents and/or counterparties. The fair values of derivatives are netted by clearing agent or counterparty when the netting requirements have been met. If these netted amounts are positive, they are classified as an asset and, if negative, they are classified as a liability. Cash flows associated with derivatives are reflected as cash flows from operating activities in the Statements of Cash Flows unless the derivative meets the criteria to be a financing derivative.

The FHLBank utilizes two Derivative Clearing Organizations (Clearinghouses) for all cleared derivative transactions, LCH.Clearnet LLC and CME Clearing. Effective January 3, 2017, CME Clearing made certain amendments to its rulebook changing the legal characterization of variation margin payments to be daily settlement payments rather than collateral. Variation margin payments related to LCH.Clearnet LLC contracts continue to be characterized as cash collateral. At both Clearinghouses, initial margin is considered cash collateral.



14


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

Premium Amortization on Purchased Callable Debt Securities. In March 2017, Financial Accounting Standards Board (FASB) issued an amendment to shorten the amortization period of any premium on callable debt securities to the first call date instead of over the contractual life of the instrument. The amendment does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The guidance is intended to reduce diversity in practice in the amortization of premiums and the consideration of how the potential of a security being called is factored into current impairment assessments. The amendment also intends to more closely align the amortization of premiums and discounts to the expectations incorporated into the market pricing of the instrument. The amendment will be effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, which is January 1, 2019 for the FHLBank, and early adoption is permitted. This guidance should be applied using a modified retrospective method through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The adoption of this guidance is not expected to have a material effect on the FHLBank's financial condition, results of operations or cash flows.

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. In March 2017, FASB issued an amendment to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendment requires that the employer disaggregate the service cost component and the other components of net benefit cost and allow only the service cost component of net benefit cost to be eligible for capitalization. The amendment is intended to provide transparency, consistency, and usefulness to users of financial statements. The amendment will be effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, which is January 1, 2018 for the FHLBank, and early adoption is permitted. This guidance should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The adoption of this guidance is not expected to have a material effect on the FHLBank's financial condition, results of operations or cash flows.

Classification of Certain Cash Receipts and Cash Payments. In August 2016, FASB issued amendments to clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. This guidance is intended to reduce existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance is effective for the FHLBank for interim and annual periods beginning on January 1, 2018, and early adoption is permitted. This guidance should be applied using a retrospective transition method to each period presented. This guidance is not expected to have an impact on the FHLBank's statement of cash flows.

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.

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) charge had been recognized before the effective date. The FHLBank has formed an internal working group that has begun its implementation efforts by identifying key interpretive issues and potential impacts to processes and systems that will eventually determine the magnitude of the impact on the FHLBank's financial condition, results of operations and cash flows.

15



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 became effective for annual periods, and interim periods within those annual periods, beginning on January 1, 2017. 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 has a limited number of lease agreements and is currently evaluating this guidance 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 has concluded that this guidance will impact disclosures related to the fair value of financial instruments. However, this guidance is not expected to have an 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 service. The amendments do not change the core principle in the new revenue standard. The standard is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2017, which is January 1, 2018 for the FHLBank. Because the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, the adoption of this guidance has limited potential for impact to the FHLBank. The FHLBank has completed an analysis of its sources of revenue that fall within the scope of the guidance and does not expect the new guidance to have a material impact on its financial condition, results of operations or cash flows.



16


NOTE 3INVESTMENT SECURITIES

Trading Securities: Trading securities by major security type as of June 30, 2017 and December 31, 2016 are summarized in Table 3.1 (in thousands):

Table 3.1
 
Fair Value
 
06/30/2017
12/31/2016
Non-mortgage-backed securities:
 
 
Certificates of deposit
$
599,959

$

GSE obligations1
1,458,009

1,563,351

Non-mortgage-backed securities
2,057,968

1,563,351

Mortgage-backed securities:
 
 
U.S. obligation MBS2
638

690

GSE MBS3
940,683

938,747

Mortgage-backed securities
941,321

939,437

TOTAL
$
2,999,289

$
2,502,788

                   
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 six months ended June 30, 2017 and 2016 are shown in Table 3.2 (in thousands):

Table 3.2
 
Three Months Ended
Six Months Ended
 
06/30/2017
06/30/2016
06/30/2017
06/30/2016
Net gains (losses) on trading securities held as of June 30, 2017
$
9,216

$
24,494

$
15,122

$
79,092

Net gains (losses) on trading securities sold or matured prior to June 30, 2017
(822
)
(5,968
)
(2,041
)
(11,362
)
NET GAIN (LOSS) ON TRADING SECURITIES
$
8,394

$
18,526

$
13,081

$
67,730


Available-for-sale Securities: Available-for-sale securities by major security type as of June 30, 2017 are summarized in Table 3.3 (in thousands):

Table 3.3
 
06/30/2017
 
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Mortgage-backed securities:
 
 
 
 
GSE MBS1
$
1,205,824

$
21,333

$
(121
)
$
1,227,036

TOTAL
$
1,205,824

$
21,333

$
(121
)
$
1,227,036

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


17


Available-for-sale securities by major security type as of December 31, 2016 are summarized in Table 3.4 (in thousands):

Table 3.4
 
12/31/2016
 
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Mortgage-backed securities:
 
 
 
 
GSE MBS1
$
1,082,376

$
9,396

$
(51
)
$
1,091,721

TOTAL
$
1,082,376

$
9,396

$
(51
)
$
1,091,721

                   
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, 2017 (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
 
06/30/2017
 
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
$
96,224

$
(121
)
$

$

$
96,224

$
(121
)
TOTAL TEMPORARILY IMPAIRED SECURITIES
$
96,224

$
(121
)
$

$

$
96,224

$
(121
)
                   
1 
Represents fixed rate multi-family MBS issued by Fannie Mae.

Table 3.6 summarizes the available-for-sale securities with unrealized losses as of December 31, 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 3.6
 
12/31/2016
 
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
$

$

$
33,509

$
(51
)
$
33,509

$
(51
)
TOTAL TEMPORARILY IMPAIRED SECURITIES
$

$

$
33,509

$
(51
)
$
33,509

$
(51
)
                   
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.


18


Held-to-maturity Securities: Held-to-maturity securities by major security type as of June 30, 2017 are summarized in Table 3.7 (in thousands):

Table 3.7
 
06/30/2017
 
Amortized
Cost
OTTI
Recognized
in AOCI
Carrying Value
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Non-mortgage-backed securities:
 
 
 
 
 
 
State or local housing agency obligations
$
94,775

$

$
94,775

$
95

$
(5,673
)
$
89,197

Non-mortgage-backed securities
94,775


94,775

95

(5,673
)
89,197

Mortgage-backed securities:
 
 
 
 
 
 
U.S. obligation MBS1
139,463


139,463

323

(108
)
139,678

GSE MBS2
4,604,767


4,604,767

16,836

(14,572
)
4,607,031

Private-label residential MBS
94,422

(5,021
)
89,401

5,198

(2,645
)
91,954

Mortgage-backed securities
4,838,652

(5,021
)
4,833,631

22,357

(17,325
)
4,838,663

TOTAL
$
4,933,427

$
(5,021
)
$
4,928,406

$
22,452

$
(22,998
)
$
4,927,860

                   
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, 2016 are summarized in Table 3.8 (in thousands):

Table 3.8
 
12/31/2016
 
Amortized
Cost
OTTI
Recognized
in AOCI
Carrying Value
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Non-mortgage-backed securities:
 
 
 
 
 
 
State or local housing agency obligations
$
105,780

$

$
105,780

$
98

$
(5,707
)
$
100,171

Non-mortgage-backed securities
105,780


105,780

98

(5,707
)
100,171

Mortgage-backed securities:
 
 
 
 
 
 
U.S obligation MBS1
36,331


36,331


(201
)
36,130

GSE MBS2
4,250,547


4,250,547

12,044

(22,071
)
4,240,520

Private-label residential MBS
115,407

(5,841
)
109,566

4,869

(4,004
)
110,431

Mortgage-backed securities
4,402,285

(5,841
)
4,396,444

16,913

(26,276
)
4,387,081

TOTAL
$
4,508,065

$
(5,841
)
$
4,502,224

$
17,011

$
(31,983
)
$
4,487,252

                    
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.


19


Table 3.9 summarizes the held-to-maturity securities with unrealized losses as of June 30, 2017 (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
 
06/30/2017
 
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
$

$

$
24,327

$
(5,673
)
$
24,327

$
(5,673
)
Non-mortgage-backed securities


24,327

(5,673
)
24,327

(5,673
)
Mortgage-backed securities:
 
 
 
 
 
 
U.S. obligation MBS2
43,558

(67
)
18,109

(41
)
61,667

(108
)
GSE MBS3
442,662

(695
)
1,653,297

(13,877
)
2,095,959

(14,572
)
Private-label residential MBS
54

(1
)
73,672

(3,905
)
73,726

(3,906
)
Mortgage-backed securities
486,274

(763
)
1,745,078

(17,823
)
2,231,352

(18,586
)
TOTAL TEMPORARILY IMPAIRED SECURITIES
$
486,274

$
(763
)
$
1,769,405

$
(23,496
)
$
2,255,679

$
(24,259
)
                    
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.

Table 3.10 summarizes the held-to-maturity securities with unrealized losses as of December 31, 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 3.10
 
12/31/2016
 
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
$

$

$
34,348

$
(5,707
)
$
34,348

$
(5,707
)
Non-mortgage-backed securities


34,348

(5,707
)
34,348

(5,707
)
Mortgage-backed securities:
 
 
 
 
 
 
U.S obligation MBS2


35,998

(201
)
35,998

(201
)
GSE MBS3
1,097,379

(2,612
)
2,025,394

(19,459
)
3,122,773

(22,071
)
Private-label residential MBS
1,903

(3
)
85,984

(6,263
)
87,887

(6,266
)
Mortgage-backed securities
1,099,282

(2,615
)
2,147,376

(25,923
)
3,246,658

(28,538
)
TOTAL TEMPORARILY IMPAIRED SECURITIES
$
1,099,282

$
(2,615
)
$
2,181,724

$
(31,630
)
$
3,281,006

$
(34,245
)
                    
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.


20


The amortized cost, carrying value and fair values of held-to-maturity securities by contractual maturity as of June 30, 2017 and December 31, 2016 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
 
06/30/2017
12/31/2016
 
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
2,420

2,420

2,420

2,710

2,710

2,710

Due after five years through 10 years



10,055

10,055

10,048

Due after 10 years
92,355

92,355

86,777

93,015

93,015

87,413

Non-mortgage-backed securities
94,775

94,775

89,197

105,780

105,780

100,171

Mortgage-backed securities
4,838,652

4,833,631

4,838,663

4,402,285

4,396,444

4,387,081

TOTAL
$
4,933,427

$
4,928,406

$
4,927,860

$
4,508,065

$
4,502,224

$
4,487,252


Other-than-temporary Impairment: For the 20 outstanding private-label securities with OTTI during the lives of the securities, the FHLBank’s reported balances as of June 30, 2017 are presented in Table 3.12 (in thousands):

Table 3.12
 
06/30/2017
 
Unpaid
Principal
Balance
Amortized
Cost
Carrying
Value
Fair
Value
Private-label residential MBS:
 
 
 
 
Prime
$
8,777

$
7,778

$
7,168

$
8,198

Alt-A
25,423

22,742

18,331

22,369

TOTAL
$
34,200

$
30,520

$
25,499

$
30,567


Table 3.13 presents a roll-forward of OTTI activity for the three and six months ended June 30, 2017 and 2016 related to credit losses recognized in earnings (in thousands):

Table 3.13
 
Three Months Ended
Six Months Ended
 
06/30/2017
06/30/2016
06/30/2017
06/30/2016
Balance, beginning of period
$
7,470

$
7,776

$
7,502

$
7,785

Additional charge on securities for which OTTI was not previously recognized
6

1

6

1

Additional charge on securities for which OTTI was previously recognized1
81

4

118

31

Amortization of credit component of OTTI2
(137
)
(185
)
(206
)
(221
)
Balance, end of period
$
7,420

$
7,596

$
7,420

$
7,596

                    
1 
For the three months ended June 30, 2017 and 2016, securities previously impaired represent all securities that were impaired prior to April 1, 2017 and 2016, respectively. For the six months ended June 30, 2017 and 2016, securities previously impaired represent all securities that were impaired prior to January 1, 2017 and 2016, 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.


21


As of June 30, 2017, 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, 2017 and December 31, 2016, the FHLBank had advances outstanding at interest rates ranging from 0.66 percent to 7.41 percent and 0.46 percent to 7.41 percent, respectively. Table 4.1 presents advances summarized by year of contractual maturity as of June 30, 2017 and December 31, 2016 (dollar amounts in thousands): 

Table 4.1
 
06/30/2017
12/31/2016
Year of Contractual Maturity
Amount
Weighted Average Interest Rate
Amount
Weighted Average Interest Rate
Due in one year or less
$
14,454,342

1.41
%
$
12,601,183

1.03
%
Due after one year through two years
1,818,036

1.69

2,019,260

1.96

Due after two years through three years
944,565

1.92

1,073,881

1.47

Due after three years through four years
1,105,677

2.12

781,339

1.96

Due after four years through five years
705,482

2.09

848,112

2.15

Thereafter
7,403,557

1.55

6,636,740

1.19

Total par value
26,431,659

1.53
%
23,960,515

1.24
%
Discounts
(10,993
)
 
(13,977
)
 
Hedging adjustments
22,750

 
39,297

 
TOTAL
$
26,443,416

 
$
23,985,835

 

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, 2017 and December 31, 2016 include callable advances totaling $6,998,828,000 and $6,336,280,000, respectively. Of these callable advances, there were $6,952,202,000 and $6,260,837,000 of variable rate advances as of June 30, 2017 and December 31, 2016, respectively.

Convertible advances allow the FHLBank to convert an advance from one interest payment term structure to another. When issuing convertible advances, the FHLBank purchases 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, 2017 and December 31, 2016, the FHLBank had convertible advances outstanding totaling $977,342,000 and $1,147,392,000, respectively.


22


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, 2017 and December 31, 2016 (in thousands):

Table 4.2
 
Year of Contractual Maturity
or Next Call Date
Year of Contractual Maturity
or Next Conversion Date
Redemption Term
06/30/2017
12/31/2016
06/30/2017
12/31/2016
Due in one year or less
$
20,974,042

$
18,411,727

$
14,597,842

$
12,897,983

Due after one year through two years
1,524,177

1,752,403

1,771,036

1,800,460

Due after two years through three years
792,016

750,126

1,002,665

1,168,381

Due after three years through four years
965,856

666,059

1,202,727

808,139

Due after four years through five years
534,933

755,753

901,782

945,462

Thereafter
1,640,635

1,624,447

6,955,607

6,340,090

TOTAL PAR VALUE
$
26,431,659

$
23,960,515

$
26,431,659

$
23,960,515


Interest Rate Payment Terms:  Table 4.3 details additional interest rate payment terms for advances as of June 30, 2017 and December 31, 2016 (in thousands):

Table 4.3
 
06/30/2017
12/31/2016
Fixed rate:
 
 
Due in one year or less
$
2,374,966

$
2,400,382

Due after one year
5,468,391

5,589,805

Total fixed rate
7,843,357

7,990,187

Variable rate:
 

 

Due in one year or less
12,079,376

10,200,801

Due after one year
6,508,926

5,769,527

Total variable rate
18,588,302

15,970,328

TOTAL PAR VALUE
$
26,431,659

$
23,960,515


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.


23


Mortgage Loans Held for Portfolio: Table 5.1 presents information as of June 30, 2017 and December 31, 2016 on mortgage loans held for portfolio (in thousands):

Table 5.1
 
06/30/2017
12/31/2016
Real estate:
 
 
Fixed rate, medium-term1, single-family mortgages
$
1,298,010

$
1,353,938

Fixed rate, long-term, single-family mortgages
5,437,906

5,182,103

Total unpaid principal balance
6,735,916

6,536,041

Premiums
102,523

103,665

Discounts
(2,584
)
(2,276
)
Deferred loan costs, net
319

387

Other deferred fees
(72
)
(85
)
Hedging adjustments
5,315

4,667

Total before Allowance for Credit Losses on Mortgage Loans
6,841,417

6,642,399

Allowance for Credit Losses on Mortgage Loans
(1,525
)
(1,674
)
MORTGAGE LOANS HELD FOR PORTFOLIO, NET
$
6,839,892

$
6,640,725

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

Table 5.2 presents information as of June 30, 2017 and December 31, 2016 on the outstanding unpaid principal balance (UPB) of mortgage loans held for portfolio (in thousands):

Table 5.2
 
06/30/2017
12/31/2016
Conventional loans
$
6,073,415

$
5,899,924

Government-guaranteed or insured loans
662,501

636,117

TOTAL UNPAID PRINCIPAL BALANCE
$
6,735,916

$
6,536,041


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.


24


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, 2017 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, 2017 (in thousands). 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 6.1
 
06/30/2017
 
Conventional
Loans
Government
Loans
Credit
Products1
Direct
Financing
Lease
Receivable
Total
Allowance for credit losses:
 
 
 
 
 
Balance, beginning of three-month period
$
1,617

$

$

$

$
1,617

Net (charge-offs) recoveries
(112
)



(112
)
(Reversal) provision for credit losses
20




20

Balance, end of three-month period
$
1,525

$

$

$

$
1,525

 
 
 
 
 
 
Balance, beginning of six-month period
$
1,674

$

$

$

$
1,674

Net (charge-offs) recoveries
(124
)



(124
)
(Reversal) provision for credit losses
(25
)



(25
)
Balance, end of six-month period
$
1,525

$

$

$

$
1,525

 
 
 
 
 
 
Allowance for credit losses, end of period:
 

 

 

 

 

Individually evaluated for impairment
$
33

$

$

$

$
33

Collectively evaluated for impairment
1,492




1,492

 
 
 
 
 
 
Recorded investment, end of period:
 

 

 

 

 

Individually evaluated for impairment
$
10,878

$

$
26,472,708

$
16,130

$
26,499,716

Collectively evaluated for impairment
6,186,559

676,480



6,863,039

Total
$
6,197,437

$
676,480

$
26,472,708

$
16,130

$
33,362,755

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


25


Table 6.2 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 6.2
 
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) recoveries
(97
)



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



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

$

$

$