Federal Home Loan Bank of Topeka - FORM 10-Q

Attached files

file	filename
EX-32 - EXHIBIT 32 - Federal Home Loan Bank of Topeka	ex930201832.htm
EX-31.2 - EXHIBIT 31.2 - Federal Home Loan Bank of Topeka	ex9302018312.htm
EX-31.1 - EXHIBIT 31.1 - Federal Home Loan Bank of Topeka	ex9302018311.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

¨ 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.)
500 SW Wanamaker Road 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 every Interactive Data File required to be submitted 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 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 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
	November 5, 2018
Class A Stock, par value $100 per share	2,974,967
Class B Stock, par value $100 per share	11,976,985

.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	50
	Executive Level Overview	50
	Financial Market Trends	53
	Critical Accounting Policies and Estimates	54
	Results of Operations	54
	Financial Condition	69
	Liquidity and Capital Resources	84
	Risk Management	88
	Recently Issued Accounting Standards	92
	Legislative and Regulatory Developments	93
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	94
Item 4.	Controls and Procedures	100
Part II	OTHER INFORMATION	100
Item 1.	Legal Proceedings	100
Item 1A.	Risk Factors	100
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	100
Item 3.	Defaults Upon Senior Securities	100
Item 4.	Mine Safety Disclosures	100
Item 5.	Other Information	100
Item 6.	Exhibits	101

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 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,” “MPF Xtra,” and “MPF Direct” 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, 2017, incorporated by reference herein.

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

PART I

Item 1: Financial Statements



FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF CONDITION - Unaudited
(In thousands, except par value)
	09/30/2018			12/31/2017
ASSETS
Cash and due from banks	$	20,500		$	268,050
Interest-bearing deposits	408,890			442,682
Securities purchased under agreements to resell (Note 10)	3,985,022			3,161,446
Federal funds sold	1,440,000			1,175,000

Investment securities:
Trading securities (Note 3)	2,211,321			2,869,415
Available-for-sale securities (Note 3)	1,694,039			1,493,231
Held-to-maturity securities¹ (Note 3)	4,700,737			4,856,825
Total investment securities	8,606,097			9,219,471

Advances (Notes 4, 6)	28,471,709			26,295,849

Mortgage loans held for portfolio, net:
Mortgage loans held for portfolio (Notes 5, 6)	8,114,876			7,287,605
Less allowance for credit losses on mortgage loans (Note 6)	(656		)	(1,208		)
Mortgage loans held for portfolio, net	8,114,220			7,286,397

Accrued interest receivable	101,334			85,547
Premises, software and equipment, net	47,637			47,670
Derivative assets, net (Notes 7, 10)	39,282			37,030
Other assets	62,659			57,463

TOTAL ASSETS	$	51,297,350		$	48,076,605

LIABILITIES
Deposits (Note 8)	$	446,282		$	461,769

Consolidated obligations, net:
Discount notes (Note 9)	22,417,330			20,420,651
Bonds (Note 9)	25,836,920			24,514,468
Total consolidated obligations, net	48,254,250			44,935,119

Mandatorily redeemable capital stock (Note 11)	4,536			5,312
Accrued interest payable	91,102			56,116
Affordable Housing Program payable	43,789			43,005
Derivative liabilities, net (Notes 7, 10)	1,553			2,417
Other liabilities	65,945			66,764

TOTAL LIABILITIES	48,907,457			45,570,502

Commitments and contingencies (Note 14)

¹Fair value: $4,696,704 and $4,856,996 as of September 30, 2018 and December 31, 2017, respectively.

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



FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF CONDITION - Unaudited
(In thousands, except par value)
	09/30/2018		12/31/2017
CAPITAL
Capital stock outstanding - putable:
Class A ($100 par value; 1,828 and 2,351 shares issued and outstanding) (Note 11)	$	182,824	$	235,134
Class B ($100 par value; 12,811 and 14,049 shares issued and outstanding) (Note 11)	1,281,099		1,404,905
Total capital stock	1,463,923		1,640,039

Retained earnings:
Unrestricted	705,235		676,993
Restricted	188,781		163,413
Total retained earnings	894,016		840,406

Accumulated other comprehensive income (loss) (Note 12)	31,954		25,658

TOTAL CAPITAL	2,389,893		2,506,103

TOTAL LIABILITIES AND CAPITAL	$	51,297,350	$	48,076,605

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



FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF INCOME - Unaudited
(In thousands)
	Three Months Ended						Nine Months Ended
	09/30/2018			09/30/2017			09/30/2018			09/30/2017
INTEREST INCOME:
Interest-bearing deposits	$	3,931		$	1,285		$	9,402		$	2,928
Securities purchased under agreements to resell	20,618			6,735			46,610			15,902
Federal funds sold	7,896			8,396			29,539			20,071
Trading securities	16,764			15,317			54,243			45,412
Available-for-sale securities	12,563			6,865			32,670			16,489
Held-to-maturity securities	30,602			20,684			85,538			53,082
Advances	158,790			113,673			460,497			281,806
Prepayment fees on terminated advances, net	153			161			254			1,331
Mortgage loans held for portfolio	65,424			54,548			186,709			157,074
Other	381			344			1,165			928
Total interest income	317,122			228,008			906,627			595,023

INTEREST EXPENSE:
Deposits	2,289			988			6,113			2,366
Consolidated obligations:
Discount notes	108,137			69,556			314,109			162,539
Bonds	138,668			88,306			382,442			228,788
Mandatorily redeemable capital stock (Note 11)	58			69			175			135
Other	311			162			766			319
Total interest expense	249,463			159,081			703,605			394,147

NET INTEREST INCOME	67,659			68,927			203,022			200,876
(Reversal) provision for credit losses on mortgage loans (Note 6)	(391		)	(171		)	(345		)	(196		)
NET INTEREST INCOME AFTER LOAN LOSS (REVERSAL) PROVISION	68,050			69,098			203,367			201,072

OTHER INCOME (LOSS):
Total other-than-temporary impairment losses on held-to-maturity securities	—			(84		)	(1		)	(94		)
Net amount of impairment losses on held-to-maturity securities reclassified to/(from) accumulated other comprehensive income (loss)	—			(256		)	(25		)	(370		)
Net other-than-temporary impairment losses on held-to-maturity securities (Note 3)	—			(340		)	(26		)	(464		)
Net gains (losses) on trading securities (Note 3)	(11,514		)	3,319			(50,495		)	16,400
Net gains (losses) on sale of held-to-maturity securities (Note 3)	1,529			—			1,591			—
Net gains (losses) on derivatives and hedging activities (Note 7)	6,032			(322		)	29,661			(9,681		)
Standby bond purchase agreement commitment fees	642			1,165			2,242			3,506
Letters of credit fees	1,086			979			3,300			2,889
Other	725			660			2,702			1,844
Total other income (loss)	(1,500		)	5,461			(11,025		)	14,494

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



FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF INCOME - Unaudited
(In thousands)
	Three Months Ended				Nine Months Ended
	09/30/2018		09/30/2017		09/30/2018		09/30/2017
OTHER EXPENSES:
Compensation and benefits	$	12,682	$	11,828	$	29,009	$	28,790
Other operating	4,763		4,612		13,419		12,477
Federal Housing Finance Agency	690		697		2,144		2,145
Office of Finance	812		717		2,313		2,179
Other	1,481		1,681		4,501		4,573
Total other expenses	20,428		19,535		51,386		50,164

INCOME BEFORE ASSESSMENTS	46,122		55,024		140,956		165,402

Affordable Housing Program	4,618		5,510		14,113		16,554

NET INCOME	$	41,504	$	49,514	$	126,843	$	148,848

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



FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF COMPREHENSIVE INCOME - Unaudited
(In thousands)
	Three Months Ended				Nine Months Ended
	09/30/2018		09/30/2017		09/30/2018		09/30/2017
Net income	$	41,504	$	49,514	$	126,843	$	148,848

Other comprehensive income (loss):
Net unrealized gains (losses) on available-for-sale securities	3,694		1,452		2,116		13,319
Net non-credit portion of other-than-temporary impairment losses on held-to-maturity securities	3,655		577		4,163		1,397
Defined benefit pension plan	5		58		17		173
Total other comprehensive income (loss)	7,354		2,087		6,296		14,889

TOTAL COMPREHENSIVE INCOME	$	48,858	$	51,601	$	133,139	$	163,737

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, 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																119,078			29,770		148,848			14,889		163,737
Proceeds from issuance of capital stock	9		852			13,268		1,326,782			13,277		1,327,634													1,327,634
Repurchase/redemption of capital stock	(5,270	)	(527,051		)	(15	)	(1,453		)	(5,285	)	(528,504		)											(528,504		)
Net reclassification of shares to mandatorily redeemable capital stock	(161	)	(16,075		)	(6,104	)	(610,433		)	(6,265	)	(626,508		)											(626,508		)
Net transfer of shares between Class A and Class B	5,531		553,127			(5,531	)	(553,127		)	—		—													—
Dividends on capital stock (Class A - 1.1%, Class B - 6.5%):
Cash payment																(199		)			(199		)			(199		)
Stock issued						677		67,704			677		67,704			(67,704		)			(67,704		)			—
Balance at September 30, 2017	1,730		$	172,996		12,940		$	1,294,005		14,670		$	1,467,001		$	662,401		$	153,740	$	816,141		$	15,466	$	2,298,608

	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, 2017	2,351		$	235,134		14,049		$	1,404,905		16,400		$	1,640,039		$	676,993		$	163,413	$	840,406		$	25,658	$	2,506,103
Comprehensive income																101,475			25,368		126,843			6,296		133,139
Proceeds from issuance of capital stock	11		1,154			12,939		1,293,853			12,950		1,295,007													1,295,007
Repurchase/redemption of capital stock	(6,457	)	(645,743		)	(48	)	(4,732		)	(6,505	)	(650,475		)											(650,475		)
Net reclassification of shares to mandatorily redeemable capital stock	(1,950	)	(195,026		)	(6,985	)	(698,519		)	(8,935	)	(893,545		)											(893,545		)
Net transfer of shares between Class A and Class B	7,873		787,305			(7,873	)	(787,305		)	—		—													—
Dividends on capital stock (Class A - 1.7%, Class B - 6.9%):
Cash payment																(336		)			(336		)			(336		)
Stock issued						729		72,897			729		72,897			(72,897		)			(72,897		)			—
Balance at September 30, 2018	1,828		$	182,824		12,811		$	1,281,099		14,639		$	1,463,923		$	705,235		$	188,781	$	894,016		$	31,954	$	2,389,893

¹Putable

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



FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF CASH FLOWS - Unaudited
(In thousands)
	Nine Months Ended
	09/30/2018			09/30/2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	126,843		$	148,848
Adjustments to reconcile income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization:
Premiums and discounts on consolidated obligations, net	(7,736		)	6,187
Concessions on consolidated obligations	4,050			4,194
Premiums and discounts on investments, net	2,676			3,087
Premiums, discounts and commitment fees on advances, net	(3,758		)	(4,389		)
Premiums, discounts and deferred loan costs on mortgage loans, net	13,786			17,082
Fair value adjustments on hedged assets or liabilities	1,249			3,664
Premises, software and equipment	2,226			1,732
Other	17			173
(Reversal) provision for credit losses on mortgage loans	(345		)	(196		)
Non-cash interest on mandatorily redeemable capital stock	173			133
Net realized (gains) losses on sale of held-to-maturity securities	(1,591		)	—
Net other-than-temporary impairment losses on held-to-maturity securities	26			464
Net realized (gains) losses on sale of premises and equipment	(880		)	71
Other adjustments	(238		)	166
Net (gains) losses on trading securities	50,495			(16,400		)
(Gains) losses due to change in net fair value adjustment on derivative and hedging activities	36,107			12,766
(Increase) decrease in accrued interest receivable	(15,814		)	(11,503		)
Change in net accrued interest included in derivative assets	(7,822		)	(3,627		)
(Increase) decrease in other assets	(854		)	(3,107		)
Increase (decrease) in accrued interest payable	35,166			11,811
Change in net accrued interest included in derivative liabilities	(456		)	(2,497		)
Increase (decrease) in Affordable Housing Program liability	784			9,291
Increase (decrease) in other liabilities	(3,691		)	(2,178		)
Total adjustments	103,570			26,924
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES	230,413			175,772

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



FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF CASH FLOWS - Unaudited
(In thousands)
	Nine Months Ended
	09/30/2018			09/30/2017
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing deposits	$	28,298		$	110,278
Net (increase) decrease in securities purchased under resale agreements	(823,576		)	(195,589		)
Net (increase) decrease in Federal funds sold	(265,000		)	1,033,000
Net (increase) decrease in short-term trading securities	500,000			(675,000		)
Proceeds from maturities of and principal repayments on long-term trading securities	355,566			220,806
Purchases of long-term trading securities	(247,969		)	—
Proceeds from maturities of and principal repayments on long-term available-for-sale securities	16,165			4,103
Purchases of long-term available-for-sale securities	(281,489		)	(361,295		)
Proceeds from sale of held-to-maturity securities	87,827			—
Proceeds from maturities of and principal repayments on long-term held-to-maturity securities	699,016			824,497
Purchases of long-term held-to-maturity securities	(625,170		)	(1,092,421		)
Advances repaid	300,011,912			387,903,973
Advances originated	(302,270,146		)	(392,261,039		)
Principal collected on mortgage loans	706,748			714,847
Purchases of mortgage loans	(1,553,027		)	(1,147,274		)
Proceeds from sale of foreclosed assets	3,728			1,888
Purchases of other long-term assets	(6,000		)	(16,500		)
Other investing activities	2,136			1,887
Net (increase) decrease in loans to other FHLBanks	—			600,000
Proceeds from sale of premises, software and equipment	2,416			48
Purchases of premises, software and equipment	(8,002		)	(20,655		)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES	(3,666,567		)	(4,354,446		)

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



FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF CASH FLOWS - Unaudited
(In thousands)
	Nine Months Ended
	09/30/2018			09/30/2017
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits	$	91,182		$	(42,291	)
Net proceeds from issuance of consolidated obligations:
Discount notes	765,464,193			701,800,511
Bonds	8,790,535			14,266,201
Payments for maturing and retired consolidated obligations:
Discount notes	(763,468,454		)	(702,310,944		)
Bonds	(7,440,940		)	(9,909,180		)
Net increase (decrease) in other borrowings	6,000			16,500
Proceeds from financing derivatives	—			1,921
Net interest payments received (paid) for financing derivatives	(3,614		)	(18,554		)
Proceeds from issuance of capital stock	1,295,007			1,327,634
Payments for repurchase/redemption of capital stock	(650,475		)	(528,504		)
Payments for repurchase of mandatorily redeemable capital stock	(894,494		)	(623,872		)
Cash dividends paid	(336		)	(199		)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES	3,188,604			3,979,223
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	(247,550		)	(199,451		)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	268,050			207,254
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	20,500		$	7,803

Supplemental disclosures:
Interest paid	$	672,944		$	372,036
Affordable Housing Program payments	$	13,468		$	7,749
Net transfers of mortgage loans to other assets	$	2,817		$	1,808

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

FEDERAL HOME LOAN BANK OF TOPEKA

Notes to Financial Statements - Unaudited

September 30, 2018

NOTE 1 – BASIS OF PRESENTATION

Basis of Presentation: The accompanying interim financial statements of the FHLBank are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instruction provided by Article 10, Rule 10-01 of Regulation S-X. The financial statements contain all adjustments which are, in the opinion of management, necessary for a fair statement of the FHLBank’s financial position, results of operations and cash flows for the interim periods presented. All such adjustments were of a normal recurring nature. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full fiscal year or any other interim period.

The FHLBank’s significant accounting policies and certain other disclosures are set forth in the notes to the audited financial statements for the year ended December 31, 2017. 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 15, 2018 (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 certain 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 Limited and CME Clearing. Effective January 16, 2018, LCH Limited made certain amendments to its rulebook changing the legal characterization of variation margin payments to be daily settlement payments rather than collateral, consistent with the amendment CME Clearing made effective January 3, 2017. At both Clearinghouses, initial margin is considered cash collateral.

Reclassifications: Certain immaterial amounts in the financial statements have been reclassified to conform to current period presentations.

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

Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes (Accounting Standards Update (ASU) 2018-16). In October 2018, the Financial Accounting Standards Board (FASB) issued an amendment that permits use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to the U.S. Treasury rate, the London Interbank Offered Rate (LIBOR) swap rate, the OIS rate based on the Fed Funds Effective Rate, and the Securities Industry and Financial Markets Association Municipal Swap Rate. The amendments apply to all entities that elect to apply hedge accounting of the benchmark interest rate. The amendments should be adopted on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after the date of adoption. The amendment will be effective concurrently with ASU 2017-12 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 in any interim period or fiscal year prior to the effective date. The FHLBank does not plan on early adoption. The guidance is not expected to materially affect the FHLBank's application of hedge accounting or utilization of hedging strategies.

Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (ASU 2018-15). In August 2018, the FASB issued an amendment to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Accordingly, the amendments in this ASU require an entity in a hosting arrangement that is a service contract to follow existing guidance relating to internal-use software to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. Costs to develop or obtain internal-use software that cannot be capitalized also cannot be capitalized for a hosting arrangement that is a service contract. Therefore, an entity in a hosting arrangement that is a service contract determines which project stage (that is, preliminary project stage, application development stage, or post-implementation stage) an implementation activity relates to. Costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post-implementation stages are expensed as the activities are performed. The amendments in this ASU also require the entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The amendments in this ASU will be effective for annual periods, and interim periods within those annual periods beginning after December 31, 2019, which is January 1, 2020 for the FHLBank. Early adoption of the amendments in this ASU is permitted, including adoption in any interim period, for all entities. 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.

Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14). In August 2018, the FASB issued an amendment modifying the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans to improve disclosure effectiveness. The amendments in the ASU remove disclosures that are no longer considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. The amendments in this ASU are effective for annual periods ending after December 15, 2020, which is December 31, 2020 for the FHLBank. Early adoption is permitted. The adoption of this guidance will impact the disclosures related to defined benefit plans but will not impact the FHLBank’s financial condition, results of operations or cash flows.

Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13). In August 2018, the FASB issued an amendment that modifies the disclosure requirements for fair value measurements. This ASU removes the requirement to disclose: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; and (3) the valuation processes for Level 3 fair value measurements. The ASU requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (OCI) for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this ASU will be effective for annual periods, and interim periods within those annual periods beginning after December 31, 2019, which is January 1, 2020 for the FHLBank. Early adoption is permitted. The adoption of this guidance will impact the disclosures related to fair value measurement but will not impact the FHLBank’s financial condition, results of operations or cash flows.

Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12). In August 2017, the FASB issued an amendment to simplify the application of hedge accounting guidance in current GAAP and to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. This guidance requires that, for fair value hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness be presented in the same income statement line that is used to present the earnings effect of the hedged item. For cash flow hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness must be recorded in OCI. In addition, the amendments include certain targeted improvements to the assessment of hedge effectiveness and permit, among other things, the following:


•	Measurement of the change in fair value of the hedged item on the basis of the benchmark rate component of the contractual coupon cash flows determined at hedge inception;


•	Measurement of the hedged item in a partial-term fair value hedge of interest rate risk by assuming the hedged item has a term that reflects only the designated cash flows being hedged;


•	Consideration only of how changes in the benchmark interest rate affect a decision to settle a prepayable instrument before its scheduled maturity in calculating the change in the fair value of the hedged item attributable to interest rate risk; and


•	For a cash flow hedge of interest rate risk of a variable rate financial instrument, an entity could designate the variability in cash flows attributable to the contractually specified interest rate as the hedged risk.

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 in any interim period or fiscal year prior to the effective date. The FHLBank does not plan on early adoption. The guidance is not expected to affect the FHLBank's application of hedge accounting for existing hedge strategies, with the exception of enhancing the ability to apply short-cut hedge accounting by allowing the designation of a fallback long-haul method. The guidance may also provide opportunities to enhance risk management through new hedge strategies. 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 beyond a prospective change in income statement presentation for fair value hedge relationships and new required disclosures.

Premium Amortization on Purchased Callable Debt Securities (ASU 2017-08). In March 2017, 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. 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 (ASU 2017-07). 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 became effective for annual periods, and interim periods within those annual periods, beginning on January 1, 2018 for the FHLBank. This guidance was 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 did not have a material effect on the FHLBank's financial condition, results of operations or cash flows.

Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15). 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 became effective for the FHLBank for interim and annual periods and applied retrospectively, beginning on January 1, 2018. The adoption of this guidance did not have an impact on the FHLBank's financial condition, results of operations or cash flows.

Measurement of Credit Losses on Financial Instruments (ASU 2016-13). 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 FHLBank does not plan on early adoption. 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; however, the FHLBank currently does not have any OTTI debt securities. 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.

Leases (ASU 2016-02). 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. In July 2018, the FASB issued amended guidance to add a method of adoption whereby an entity may elect to recognize a cumulative-effect adjustment to the beginning balance of retained earnings upon adoption. The FHLBank plans to utilize this transition method. The FHLBank has a limited number of lease agreements and has concluded that the impact of the guidance is not expected to have a material effect on the FHLBank's financial condition, results of operations or cash flows.

Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01). 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 became effective for annual periods, and interim periods within those annual periods, beginning on January 1, 2018 for the FHLBank. This guidance will impact disclosures related to the fair value of financial instruments. However, this guidance did not have an impact on the FHLBank's financial condition, results of operations or cash flows.

Revenue Recognition (ASU 2014-09). 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 became effective for fiscal years, including interim periods within those fiscal years, beginning on 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 did not have a material impact on the FHLBank's financial condition, results of operations or cash flows.

NOTE 3 – INVESTMENT SECURITIES

Trading Securities: Trading securities by major security type as of September 30, 2018 and December 31, 2017 are summarized in Table 3.1 (in thousands):

Table 3.1



	Fair Value
	09/30/2018		12/31/2017
Non-mortgage-backed securities:
Certificates of deposit	$	85,003	$	584,984
U.S. Treasury obligations	248,313		—
GSEobligations¹	993,030		1,353,083
Non-mortgage-backed securities	1,326,346		1,938,067
Mortgage-backed securities:
U.S. obligation MBS²	494		580
GSE MBS³	884,481		930,768
Mortgage-backed securities	884,975		931,348
TOTAL	$	2,211,321	$	2,869,415


¹	Represents debentures issued by other FHLBanks, Federal National Mortgage Association (Fannie Mae), 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 Federal Home Loan Mortgage Corporation (Freddie Mac).

Net gains (losses) on trading securities during the three and nine months ended September 30, 2018 and 2017 are shown in Table 3.2 (in thousands):

Table 3.2



	Three Months Ended						Nine Months Ended
	09/30/2018			09/30/2017			09/30/2018			09/30/2017
Net gains (losses) on trading securities held as of September 30, 2018	$	(11,201	)	$	3,984		$	(50,211	)	$	21,611
Net gains (losses) on trading securities sold or matured prior to September 30, 2018	(313		)	(665		)	(284		)	(5,211		)
NET GAINS (LOSSES) ON TRADING SECURITIES	$	(11,514	)	$	3,319		$	(50,495	)	$	16,400

Available-for-sale Securities: Available-for-sale securities by major security type as of September 30, 2018 are summarized in Table 3.3 (in thousands):

Table 3.3



	09/30/2018
	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value
Mortgage-backed securities:
GSE MBS¹	$	1,660,717	$	35,170	$	(1,848	)	$	1,694,039
TOTAL	$	1,660,717	$	35,170	$	(1,848	)	$	1,694,039


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

Available-for-sale securities by major security type as of December 31, 2017 are summarized in Table 3.4 (in thousands):

Table 3.4



	12/31/2017
	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value
Mortgage-backed securities:
GSE MBS¹	$	1,462,025	$	31,638	$	(432	)	$	1,493,231
TOTAL	$	1,462,025	$	31,638	$	(432	)	$	1,493,231


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 September 30, 2018 (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



	09/30/2018
	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	$	276,780	$	(1,783	)	$	42,042	$	(65	)	$	318,822	$	(1,848	)
TOTAL TEMPORARILY IMPAIRED SECURITIES	$	276,780	$	(1,783	)	$	42,042	$	(65	)	$	318,822	$	(1,848	)


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, 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 3.6



	12/31/2017
	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	$	84,937	$	(432	)	$	—	$	—	$	84,937	$	(432	)
TOTAL TEMPORARILY IMPAIRED SECURITIES	$	84,937	$	(432	)	$	—	$	—	$	84,937	$	(432	)


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 September 30, 2018 are summarized in Table 3.7 (in thousands):

Table 3.7



	09/30/2018
	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	$	89,120	$	—	$	89,120	$	1	$	(3,593	)	$	85,528
Non-mortgage-backed securities	89,120		—		89,120		1		(3,593		)	85,528
Mortgage-backed securities:
U.S. obligation MBS¹	113,789		—		113,789		505		(65		)	114,229
GSE MBS²	4,497,828		—		4,497,828		15,536		(16,417		)	4,496,947
Mortgage-backed securities	4,611,617		—		4,611,617		16,041		(16,482		)	4,611,176
TOTAL	$	4,700,737	$	—	$	4,700,737	$	16,042	$	(20,075	)	$	4,696,704


¹	Represents single-family MBS issued by Ginnie Mae.


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, 2017 are summarized in Table 3.8 (in thousands):

Table 3.8



	12/31/2017
	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	$	89,830	$	—		$	89,830	$	74	$	(4,896	)	$	85,008
Non-mortgage-backed securities	89,830		—			89,830		74		(4,896		)	85,008
Mortgage-backed securities:
U.S obligation MBS¹	127,588		—			127,588		435		(88		)	127,935
GSE MBS²	4,561,839		—			4,561,839		15,548		(14,740		)	4,562,647
Private-label residential MBS	81,731		(4,163		)	77,568		5,456		(1,618		)	81,406
Mortgage-backed securities	4,771,158		(4,163		)	4,766,995		21,439		(16,446		)	4,771,988
TOTAL	$	4,860,988	$	(4,163	)	$	4,856,825	$	21,513	$	(21,342	)	$	4,856,996


¹	Represents single-family MBS issued by Ginnie Mae.


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 September 30, 2018 (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



	09/30/2018
	Less Than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Non-mortgage-backed securities:
State or local housing agency obligations	$	—	$	—		$	26,408	$	(3,593	)	$	26,408	$	(3,593	)
Non-mortgage-backed securities	—		—			26,408		(3,593		)	26,408		(3,593		)
Mortgage-backed securities:
U.S. obligation MBS¹	—		—			32,156		(65		)	32,156		(65		)
GSE MBS²	1,328,685		(2,272		)	1,383,638		(14,145		)	2,712,323		(16,417		)
Mortgage-backed securities	1,328,685		(2,272		)	1,415,794		(14,210		)	2,744,479		(16,482		)
TOTAL TEMPORARILY IMPAIRED SECURITIES	$	1,328,685	$	(2,272	)	$	1,442,202	$	(17,803	)	$	2,770,887	$	(20,075	)


¹	Represents single-family MBS issued by Ginnie Mae.


²	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, 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 3.10



	12/31/2017
	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	$	—	$	—		$	25,104	$	(4,896	)	$	25,104	$	(4,896	)
Non-mortgage-backed securities	—		—			25,104		(4,896		)	25,104		(4,896		)
Mortgage-backed securities:
U.S obligation MBS²	37,944		(88		)	—		—			37,944		(88		)
GSE MBS³	796,378		(1,363		)	1,478,510		(13,377		)	2,274,888		(14,740		)
Private-label residential MBS	150		(1		)	64,477		(2,314		)	64,627		(2,315		)
Mortgage-backed securities	834,472		(1,452		)	1,542,987		(15,691		)	2,377,459		(17,143		)
TOTAL TEMPORARILY IMPAIRED SECURITIES	$	834,472	$	(1,452	)	$	1,568,091	$	(20,587	)	$	2,402,563	$	(22,039	)


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 accumulated OCI (AOCI) and gross unrecognized gains on previously other-than-temporarily impaired securities.


²	Represents single-family MBS issued by Ginnie Mae.


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 September 30, 2018 and December 31, 2017 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



	09/30/2018						12/31/2017
	Amortized Cost		Carrying Value		Fair Value		Amortized Cost		Carrying Value		Fair Value
Non-mortgage-backed securities:
Due in one year or less	$	—	$	—	$	—	$	—	$	—	$	—
Due after one year through five years	—		—		—		—		—		—
Due after five years through 10 years	—		—		—		—		—		—
Due after 10 years	89,120		89,120		85,528		89,830		89,830		85,008
Non-mortgage-backed securities	89,120		89,120		85,528		89,830		89,830		85,008
Mortgage-backed securities	4,611,617		4,611,617		4,611,176		4,771,158		4,766,995		4,771,988
TOTAL	$	4,700,737	$	4,700,737	$	4,696,704	$	4,860,988	$	4,856,825	$	4,856,996

Net gains (losses) were realized on the sale of long-term held-to-maturity securities during the three and nine months ended September 30, 2018 and are recorded as net gains (losses) on sale of held-to-maturity securities in other income (loss) on the Statements of Income. All securities sold had paid down below 15 percent of the principal outstanding at acquisition. Table 3.12 presents details of the sales (in thousands). No held-to-maturity securities were sold during the three and nine months ended September 30, 2017.

Table 3.12



	Three Months Ended			Nine Months Ended
	09/30/2018			09/30/2018
Proceeds from sale of held-to-maturity securities	$	67,566		$	87,827
Carrying value of held-to-maturity securities sold	(66,037		)	(86,236		)
NET REALIZED GAINS (LOSSES)	$	1,529		$	1,591

Other-than-temporary Impairment: Historically, the only investments recorded as other-than-temporarily impaired by the FHLBank were private-label residential MBS. The FHLBank's private-label residential MBS portfolio was sold in its entirety during the quarter ended September 30, 2018.

Table 3.13 presents a roll-forward of OTTI activity for the three and nine months ended September 30, 2018 and 2017 related to credit losses recognized in earnings (in thousands):

Table 3.13



	Three Months Ended						Nine Months Ended
	09/30/2018			09/30/2017			09/30/2018			09/30/2017
Balance, beginning of period	$	7,502		$	7,420		$	7,663		$	7,502
Additional charge on securities for which OTTI was not previously recognized	—			57			—			63
Additional charge on securities for which OTTI was previously recognized¹	—			283			26			401
Securities matured or sold during the period	(7,308		)	—			(7,308		)	—
Amortization of credit component of OTTI	(194		)	(38		)	(381		)	(244		)
Balance, end of period	$	—		$	7,722		$	—		$	7,722


¹	For the three months ended September 30, 2018 and 2017, securities previously impaired represent all securities that were impaired prior to July 1, 2018 and 2017, respectively. For the nine months ended September 30, 2018 and 2017, securities previously impaired represent all securities that were impaired prior to January 1, 2018 and 2017, respectively.

As of September 30, 2018, 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 held-to-maturity state and local housing agency obligations, the FHLBank determined that all of the gross unrealized losses on these bonds were temporary because the strength of the underlying collateral and credit enhancements was sufficient to protect the FHLBank from losses based on current expectations.

NOTE 4 – ADVANCES

General Terms: The FHLBank offers a wide range of fixed and variable rate advance products with different maturities, interest rates, payment characteristics and optionality. As of September 30, 2018 and December 31, 2017, the FHLBank had advances outstanding at interest rates ranging from 0.88 percent to 7.41 percent and 0.66 percent to 7.41 percent, respectively. Table 4.1 presents advances summarized by redemption term as of September 30, 2018 and December 31, 2017 (dollar amounts in thousands):

Table 4.1



	09/30/2018					12/31/2017
Redemption Term	Amount			Weighted Average Interest Rate		Amount			Weighted Average Interest Rate
Due in one year or less	$	15,487,855		2.30	%	$	14,374,744		1.55	%
Due after one year through two years	5,205,068			2.26		1,219,842			1.73
Due after two years through three years	1,603,064			2.36		1,075,287			2.01
Due after three years through four years	2,145,575			2.40		971,634			2.16
Due after four years through five years	1,447,631			2.41		918,277			1.96
Thereafter	2,694,264			2.47		7,765,440			1.74
Total par value	28,583,457			2.33	%	26,325,224			1.67	%
Discounts	(4,353		)			(8,111		)
Hedging adjustments	(107,395		)			(21,264		)
TOTAL	$	28,471,709				$	26,295,849

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).

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.

Table 4.2 presents advances summarized by redemption term or next call date (for callable advances) and by redemption term or next conversion date (for convertible advances) as of September 30, 2018 and December 31, 2017 (in thousands):

Table 4.2



	Redemption Term or Next Call Date				Redemption Term or Next Conversion Date
Redemption Term	09/30/2018		12/31/2017		09/30/2018		12/31/2017
Due in one year or less	$	23,290,093	$	21,375,728	$	15,673,755	$	14,450,744
Due after one year through two years	1,103,585		881,835		5,407,168		1,342,342
Due after two years through three years	1,223,360		897,151		1,789,664		1,186,087
Due after three years through four years	594,381		790,641		2,396,575		1,083,984
Due after four years through five years	469,990		522,768		1,593,881		1,174,277
Thereafter	1,902,048		1,857,101		1,722,414		7,087,790
TOTAL PAR VALUE	$	28,583,457	$	26,325,224	$	28,583,457	$	26,325,224

Interest Rate Payment Terms: Table 4.3 details additional interest rate payment terms for advances as of September 30, 2018 and December 31, 2017 (in thousands):

Table 4.3



	09/30/2018		12/31/2017
Fixed rate:
Due in one year or less	$	2,112,548	$	2,079,061
Due after one year	5,310,850		4,957,303
Total fixed rate	7,423,398		7,036,364
Variable rate:
Due in one year or less	13,375,307		12,295,683
Due after one year	7,784,752		6,993,177
Total variable rate	21,160,059		19,288,860
TOTAL PAR VALUE	$	28,583,457	$	26,325,224

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 participating financial institutions (PFIs). These mortgage loans are government-guaranteed or -insured loans (by the Federal Housing Administration, the Department of Veterans Affairs, the Rural Housing Service of the Department of Agriculture and/or the Department of Housing and Urban Development) and conventional residential loans credit-enhanced by 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 September 30, 2018 and December 31, 2017 on mortgage loans held for portfolio (in thousands):

Table 5.1



	09/30/2018			12/31/2017
Real estate:
Fixed rate, medium-term¹, single-family mortgages	$	1,197,658		$	1,273,893
Fixed rate, long-term, single-family mortgages	6,798,929			5,900,863
Total unpaid principal balance	7,996,587			7,174,756
Premiums	117,989			109,898
Discounts	(2,801		)	(2,380		)
Deferred loan costs, net	233			280
Other deferred fees	(51		)	(60		)
Hedging adjustments	2,919			5,111
Total before Allowance for Credit Losses on Mortgage Loans	8,114,876			7,287,605
Allowance for Credit Losses on Mortgage Loans	(656		)	(1,208		)
MORTGAGE LOANS HELD FOR PORTFOLIO, NET	$	8,114,220		$	7,286,397


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

Table 5.2 presents information as of September 30, 2018 and December 31, 2017 on the outstanding unpaid principal balance (UPB) of mortgage loans held for portfolio (in thousands):

Table 5.2



	09/30/2018		12/31/2017
Conventional loans	$	7,315,733	$	6,477,696
Government-guaranteed or -insured loans	680,854		697,060
TOTAL UNPAID PRINCIPAL BALANCE	$	7,996,587	$	7,174,756

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 nine months ended September 30, 2018 and 2017 (in thousands):

Table 6.1



	Three Months Ended						Nine Months Ended
	09/30/2018			09/30/2017			09/30/2018			09/30/2017
Balance, beginning of the period	$	1,029		$	1,525		$	1,208		$	1,674
Net (charge-offs) recoveries	18			54			(207		)	(70		)
(Reversal) provision for credit losses	(391		)	(171		)	(345		)	(196		)
Balance, end of the period	$	656		$	1,408		$	656		$	1,408

Table 6.2 presents the allowance for credit losses and the recorded investment as well as the method used to evaluate impairment relating to all portfolio segments regardless of whether or not an estimated credit loss has been recorded as of September 30, 2018 (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 6.2



	09/30/2018
	Conventional Loans		Government Loans		Credit Products¹		Direct Financing Lease Receivable		Total
Allowance for credit losses:
Individually evaluated for impairment	$	37	$	—	$	—	$	—	$	37
Collectively evaluated for impairment	619		—		—		—		619
TOTAL ALLOWANCE FOR CREDIT LOSSES	$	656	$	—	$	—	$	—	$	656
Recorded investment:
Individually evaluated for impairment	$	9,904	$	—	$	28,514,148	$	12,718	$	28,536,770
Collectively evaluated for impairment	7,450,722		693,567		—		—		8,144,289
TOTAL RECORDED INVESTMENT	$	7,460,626	$	693,567	$	28,514,148	$	12,718	$	36,681,059


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

Table 6.3 presents the allowance for credit losses and the recorded investment as well as the method used to evaluate impairment relating to all portfolio segments regardless of whether or not an estimated credit loss has been recorded as of September 30, 2017 (in thousands):

Table 6.3



	09/30/2017
	Conventional Loans		Government Loans		Credit Products¹		Direct Financing Lease Receivable		Total
Allowance for credit losses:
Individually evaluated for impairment	$	39	$	—	$	—	$	—	$	39
Collectively evaluated for impairment	1,369		—		—		—		1,369
TOTAL ALLOWANCE FOR CREDIT LOSSES	$	1,408	$	—	$	—	$	—	$	1,408
Recorded investment:
Individually evaluated for impairment	$	9,655	$	—	$	28,350,505	$	15,487	$	28,375,647
Collectively evaluated for impairment	6,388,094		692,447		—		—		7,080,541
TOTAL RECORDED INVESTMENT	$	6,397,749	$	692,447	$	28,350,505	$	15,487	$	35,456,188


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

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

Table 6.4 summarizes the delinquency aging and key credit quality indicators for all of the FHLBank’s portfolio segments as of September 30, 2018 (dollar amounts in thousands):

Table 6.4

09/30/2018

Conventional

Loans

Government

Loans

Credit

Products¹

Direct

Financing

Lease

Receivable

Total

Recorded investment:

Past due 30-59 days delinquent

34,199

16,340

Federal Home Loan Bank of Topeka - FORM 10-Q - November 7, 2018

Attached files