Federal Home Loan Bank of Topeka - FORM 10-Q

Attached files

file	filename
EX-32 - EXHIBIT 32 - Federal Home Loan Bank of Topeka	ex6301732.htm
EX-31.2 - EXHIBIT 31.2 - Federal Home Loan Bank of Topeka	ex63017312.htm
EX-31.1 - EXHIBIT 31.1 - Federal Home Loan Bank of Topeka	ex63017311.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

¨ 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	FINANCIAL INFORMATION	4
Item 1.	Financial Statements	4
	Statements of Condition	5
	Statements of Income	7
	Statements of Comprehensive Income	9
	Statements of Capital	10
	Statements of Cash Flows	11
	Notes to Financial Statements	14
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	49
	Executive Level Overview	49
	Financial Market Trends	52
	Critical Accounting Policies and Estimates	53
	Results of Operations	53
	Financial Condition	68
	Liquidity and Capital Resources	83
	Risk Management	87
	Recently Issued Accounting Standards	91
	Legislative and Regulatory Developments	92
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	92
Item 4.	Controls and Procedures	98
Part II	OTHER INFORMATION	98
Item 1.	Legal Proceedings	98
Item 1A.	Risk Factors	98
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	98
Item 3.	Defaults Upon Senior Securities	98
Item 4.	Mine Safety Disclosures	98
Item 5.	Other Information	98
Item 6.	Exhibits	99

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.

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



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)

¹Fair 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.



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.



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.



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.



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.



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

¹Putable

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



FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF CASH FLOWS - Unaudited
(In thousands)
	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.



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.



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.

FEDERAL HOME LOAN BANK OF TOPEKA

Notes to Financial Statements - Unaudited

June 30, 2017

NOTE 1 – BASIS 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.

NOTE 2 – RECENTLY 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.

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.

NOTE 3 – INVESTMENT 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	$	—
GSEobligations¹	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.

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.

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.

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.

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.

The FHLBank amortizes the credit component based on estimated cash flows prospectively up to the amount of expected principal to be recovered. The discounted cash flows will move from the discounted loss value to the ultimate principal to be written off at the projected date of loss. If the expected cash flows improve, the amount of expected loss decreases which causes a corresponding decrease in the calculated amortization. Based on the level of improvement in the cash flows, the amortization could become a positive adjustment to income.

As of 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 4 – ADVANCES

General Terms: The FHLBank offers a wide range of fixed and variable rate advance products with different maturities, interest rates, payment characteristics and optionality. As of 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.

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 5 – MORTGAGE LOANS

The MPF Program involves the FHLBank investing in mortgage loans, which have been funded by the FHLBank through or purchased from its participating members. These mortgage loans are government-insured or guaranteed 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.

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 6 – ALLOWANCE FOR CREDIT LOSSES

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

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.

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		$	—	$	—	$	—

Federal Home Loan Bank of Topeka - FORM 10-Q - August 8, 2017

Attached files