Federal Home Loan Bank of Topeka - FORM 10-K

Federal Home Loan Bank of Topeka - FORM 10-K - March 20, 2020

Attached files

Attached files

Federal Home Loan Bank of Topeka Reports

file	filename
EX-99.2 - EXHIBIT 99.2 - Federal Home Loan Bank of Topeka	ex12312019992.htm
EX-32 - EXHIBIT 32 - Federal Home Loan Bank of Topeka	ex1231201932.htm
EX-31.2 - EXHIBIT 31.2 - Federal Home Loan Bank of Topeka	ex12312019312.htm
EX-31.1 - EXHIBIT 31.1 - Federal Home Loan Bank of Topeka	ex12312019311.htm
EX-24.1 - EXHIBIT 24.1 - Federal Home Loan Bank of Topeka	ex12312019241.htm
EX-4.2 - EXHIBIT 4.2 - Federal Home Loan Bank of Topeka	ex1231201942.htm
EX-4.1 - EXHIBIT 4.1 - Federal Home Loan Bank of Topeka	ex1231201941.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2019

¨ 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

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None	N/A	N/A

Securities registered pursuant to Section 12(g) of the Act:

Class A Common Stock, $100 per share par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes x No

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, a 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

Registrant’s common stock is not publicly traded and is only issued to members of the registrant. Such stock is issued, redeemed and repurchased at par value, $100 per share, with all issuances, redemptions and repurchases subject to the registrant’s capital plan as well as certain statutory and regulatory requirements. As of June 28, 2019, the aggregate par value of stock held by current and former members of the registrant was $1,601,254,400, and 16,012,544 total shares were outstanding.

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
	March 13, 2020
Class A Stock, par value $100 per share	4,524,494
Class B Stock, par value $100 per share	13,099,122

Documents incorporated by reference: None

.FEDERAL HOME LOAN BANK OF TOPEKA

TABLE OF CONTENTS



PART I		5
Item 1.	Business	5
Item 1A.	Risk Factors	24
Item 1B.	Unresolved Staff Comments	31
Item 2.	Properties	31
Item 3.	Legal Proceedings	31
Item 4.	Mine Safety Disclosures	31
PART II		31
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	31
Item 6.	Selected Financial Data	32
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	83
Item 8.	Financial Statements and Supplementary Data	90
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	91
Item 9A.	Controls and Procedures	92
Item 9B.	Other Information	92
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	92
Item 11.	Executive Compensation	98
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	116
Item 13.	Certain Relationships and Related Transactions, and Director Independence	117
Item 14.	Principal Accounting Fees and Services	119
PART IV
Item 15.	Exhibits, Financial Statement Schedules	119
Item 16.	Form 10-K Summary	121

Important Notice about Information in this Annual Report

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

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

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

Special Cautionary Notice Regarding Forward-looking Statements

The information in this Form 10-K 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 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. 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:


•	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;


•	Governmental actions, including legislative, regulatory, judicial or other developments that affect FHLBank; its members, counterparties or investors; housing government-sponsored enterprises (GSE); or the FHLBank System in general;


•	Effects of derivative accounting treatment and other accounting rule requirements, or changes in such requirements;


•	Competitive forces, including competition for loan demand, purchases of mortgage loans and access to funding;


•	The ability of FHLBank to introduce new products and services to meet market demand and to manage successfully the risks associated with all products and services;


•	Changes in demand for FHLBank products and services or consolidated obligations of the FHLBank System;


•	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;


•	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;


•	Soundness of other financial institutions, including FHLBank members, non-member borrowers, counterparties, and the other FHLBanks;


•	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 FHLBank has joint and several liability;


•	The volume and quality of eligible mortgage loans originated and sold by participating members to 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 FHLBank Chicago.


•	Changes in the fair value and economic value of, impairments of, and risks associated with, FHLBank’s investments in mortgage loans and mortgage-backed securities (MBS) or other assets and related credit enhancement protections;


•	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;


•	Volatility of market prices, changes in interest rates and indices and the timing and volume of market activity;


•	Gains/losses on derivatives or on trading investments and the ability to enter into effective derivative instruments on acceptable terms;


•	The effects of amortization/accretion;


•	The upcoming discontinuance of the London Interbank Offered Rate (LIBOR) and the related effect on FHLBank's LIBOR-based financial products, investments, and contracts;


•	Changes in FHLBank’s capital structure;


•	Our ability to declare dividends or to pay dividends at rates consistent with past practices; and


•	The ability of 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 FHLBank’s business;

Readers of this annual report should not rely solely on the forward-looking statements and should consider all risks and uncertainties addressed throughout this annual report, as well as those discussed under Item 1A – “Risk Factors.”

All forward-looking statements contained in this Form 10-K 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 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 annual report.

PART I

Item 1: Business

General

One of 11 FHLBanks, FHLBank Topeka is a federally chartered corporation organized on October 13, 1932 under the authority of the Federal Home Loan Bank Act of 1932, as amended (Bank Act). Our primary business is making collateralized loans, purchasing mortgages, and providing other banking services to member institutions (members) and certain qualifying non-members (housing associates). We are a cooperative owned by our members and are generally limited to providing products and services only to those members. Each FHLBank operates as a separate corporate entity with its own management, employees, and board of directors. Section 1433 of the Bank Act provides that we and the other FHLBanks are exempt from federal, state, and local taxation, except for real property taxes. We do not have any wholly- or partially-owned subsidiaries and do not have an equity position in any partnerships, corporations, or off-balance sheet special purpose entities.

We are supervised and regulated by the Federal Housing Finance Agency (FHFA), an independent agency in the executive branch of the U.S. government. The FHFA’s mission is to ensure that the housing GSEs operate in a safe and sound manner so that they serve as a reliable source of liquidity and funding for housing finance and community investment.

Any federally insured depository institution, non-federally insured credit union, insurance company, or community development financial institution (CDFI) certified by the CDFI fund, whose principal place of business is located in Colorado, Kansas, Nebraska, or Oklahoma is eligible to become one of our members. (See Table 43 under Item 7 – "Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources" for counts and balances by member type.) Except for community financial institutions (CFIs), applicants for membership must demonstrate they are engaged in residential housing finance or otherwise support our housing mission, and have a significant business presence in our district. CFIs are defined in the Housing and Economic Recovery Act of 2008 (Recovery Act) as those institutions that have, as of the date of the transaction at issue, less than a specified amount of average total assets over the three years preceding that date (subject to annual adjustment by the FHFA director based on the consumer price index). For 2019, this specified amount was $1.2 billion.

Our members are required to purchase and hold our capital stock as a condition of membership, and only members are permitted to purchase capital stock. All capital stock transactions are governed by our capital plan, which was developed under, is subject to, and operates within specific regulatory and statutory requirements.

Member institutions own nearly all of our outstanding capital stock and may receive dividends on that stock. Former members own capital stock as long as they have outstanding business transactions with us. A member must own an amount of capital stock in FHLBank based on the member’s total assets, and each member may be required to purchase activity-based capital stock as it engages in certain business activities with FHLBank, including advances and Acquired Member Assets (AMA). As a result of these stock purchase requirements, we conduct business with related parties in the normal course of business. For disclosure purposes, we include in our definition of a related party any member institution (or successor) that is known to be the beneficial owner of more than five percent of any class of our voting stock and any person who is, or at any time since the beginning of our last fiscal year (January 1) was, one of our directors or executive officers, among others. Information on business activities with related parties is provided in Tables 84 and 85 under Item 12 – “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

Our business activities include providing collateralized loans, known as advances, to members and housing associates, and acquiring residential mortgage loans from members. By law, only certain general categories of collateral are eligible to secure FHLBank obligations. We also provide members and housing associates with letters of credit and certain correspondent services, such as safekeeping, wire transfers, and cash management.

FHFA regulations require that our strategic business plan describes how our business activities will achieve our mission, consistent with the FHFA’s core mission achievement guidance. Our strategic business plan includes a balance sheet management strategy consistent with this guidance, which includes emphasis on the issuance of advances and acquisition of member mortgage loans through the MPF Program. The Primary Mission Asset ratio, as defined by the FHFA, is calculated as average advances and average mortgage loans to average consolidated obligations less average U.S. Treasury securities classified as trading or available for sale with maturities of ten years or less utilizing par balances. As of December 31, 2019, our Primary Mission Asset ratio was 75 percent. We generally intend to maintain the Primary Mission Asset ratio within the range of 70 to 80 percent, which exceeds the FHFA's recommended minimum ratio of 70 percent. However, because this ratio is dependent on several variables, such as member demand for our advance and mortgage loan products, it is possible that we may be unable to maintain the ratio at this level indefinitely.

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

Standard & Poor’s (S&P) and Moody’s Investor Service (Moody’s) base their ratings of the FHLBanks and the debt issues of the FHLBank System in part on the FHLBanks’ relationship with the U.S. government and the implication of its support for the FHLBank System as GSEs. S&P currently rates the long-term credit ratings on the senior unsecured debt issues of the FHLBank System and all FHLBanks (including FHLBank Topeka) at AA+. S&P rates all FHLBanks and the FHLBank System’s short-term debt issues at A-1+. S&P’s rating outlook for the FHLBank System’s senior unsecured debt and all FHLBanks is stable. Moody’s has affirmed the long-term Aaa rating on the senior unsecured debt issues of the FHLBank System and the FHLBanks and a short-term issuer rating of P-1, with a rating outlook of stable for senior unsecured debt.

Advances

We make advances to members and housing associates based on the value of the security of their residential mortgages and other eligible collateral. Advances are required by FHFA regulation to be priced no lower than the cost of raising matching term and maturity funds in the marketplace plus the administrative and operating expenses associated with making such advances. A brief description of our standard advance product offerings is as follows:


▪	Line of credit advances are variable rate, non-amortizing, prepayable, revolving line products that provide an alternative to the purchase of Federal funds, brokered deposits or repurchase agreement borrowings;


▪	Short-term fixed rate advances are non-amortizing, non-prepayable loans with terms to maturity from 3 to 93 days;


▪	Regular fixed rate advances are non-amortizing loans, prepayable potentially with a fee, with terms to maturity from 94 days to 360 months;


▪	Symmetrical fixed rate advances are non-amortizing loans with terms to maturity from 94 days to 360 months, prepayable with a fee, but the borrower also has the contractual ability to realize a gain from the market movement of interest rates upon prepayment;

▪

Adjustable rate advances are non-amortizing loans with terms to maturity from 4 to 180 months, which are: (1) prepayable with a fee on interest rate reset dates, if the variable interest rate is tied to any one of a number of standard indices including LIBOR, Treasury bills, Federal funds, or U.S. Prime; or (2) prepayable without a fee if the variable interest rate is tied to one of our short-term fixed rate advance products;


▪	Callable advances can have a fixed or variable rate of interest for the term of the advance and contain an option(s) that allows for the prepayment of the advance without a fee on specified dates, with terms to maturity of 12 to 360 months for fixed rate loans or terms to maturity of 4 to 180 months for variable rate loans;


▪	Amortizing advances are fixed rate loans with terms to maturity of 12 to 360 months, prepayable with a fee, that contain a set of predetermined principal payments to be made during the life of the advance;

▪

Convertible advances are non-amortizing, fixed rate loans with terms to maturity of 12 to 180 months that contain an option(s) that allows us to convert the fixed rate advance to a prepayable, adjustable rate advance that re-prices monthly based upon our one-month short-term, fixed rate advance product. Once we exercise our option to convert the advance, it can be prepaid without a fee on the initial conversion date or on any interest rate reset date thereafter;


▪	Forward settling advance commitments lock in the rate and term of future funding of regular and amortizing fixed rate advances up to 24 months in advance;


▪	Member option advances are fixed rate advances with terms from 12 to 360 months that provide the member with an option to prepay without a fee at specific intervals throughout the life of the advance and are issued at a discount to reflect the cost of that option;


▪	Structured advances are other advance types (e.g., regular fixed rate, callable, amortizing or adjustable rate) with terms from 12 to 180 months with an embedded interest rate cap, floor, or collar; and


▪	Standby credit facilities are variable rate, non-amortizing, prepayable, revolving standby credit lines that provide the ability to draw advances after normal cutoff times.

Customized advances may be created on request, including advances with embedded interest rate floors and caps. All embedded derivatives in customized advances are evaluated to determine whether they are clearly and closely related to the advances. See Notes 1 and 8 in the Notes to Financial Statements under Item 8 for information on accounting for embedded derivatives. The types of derivatives used to hedge risks embedded in our advance products are indicated in Tables 62 and 63 under Item 7A – “Quantitative and Qualitative Disclosures About Market Risk.”

We also offer a variety of specialized advance products to address housing and community development needs. These advance products address needs for low-cost funding to create affordable rental and homeownership opportunities, and for commercial and economic development activities, including those that benefit low- and moderate-income neighborhoods. Refer to Item 1 – “Business – Other Mission-Related Activities” for more details.

In addition to members, we also make advances to housing associates. To qualify as a housing associate, the applicant must: (1) be approved under Title II of the National Housing Act of 1934; (2) be a chartered institution having succession; (3) be subject to the inspection and supervision of some governmental agency; (4) lend its own funds as its principal activity in the mortgage field; and (5) have a financial condition that demonstrates that advances may be safely made. Housing associates are not subject to certain provisions of the Bank Act that are applicable to members, such as the capital stock purchase requirements, but the same regulatory lending requirements generally apply to them as apply to members. Restrictive collateral provisions apply if the housing associate does not qualify as a state housing finance agency (HFA). We currently have three housing associates who are customers and all three are state HFAs.

At the time an advance is originated, we are required to obtain and then to maintain a security interest in sufficient collateral of the borrower, which is eligible in one or more of the following categories:


▪	Fully disbursed, whole first mortgages on 1-4 family residential property or securities representing a whole interest in such mortgages;


▪	Securities issued and guaranteed or insured by the U.S. government, U.S. government agencies and mortgage GSEs including, without limitation, MBS issued or guaranteed by Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) or Government National Mortgage Association (Ginnie Mae);


▪	Cash or deposits in an FHLBank;


▪	Other acceptable real estate-related collateral, provided such collateral has a readily ascertainable market value and we can perfect a security interest in such property (e.g., privately issued collateralized mortgage obligations (CMOs), mortgages on multifamily residential real property, second mortgages on 1-4 family residential property, mortgages on commercial real estate); or


▪	In the case of any CFI, secured loans to small business, small farm and small agri‑business or securities representing a whole interest in such secured loans.

As additional security for a member’s indebtedness, we have a statutory lien on that member’s FHLBank stock. Additional collateral may be required to secure a member’s or housing associate’s outstanding credit obligations at any time (whether or not such collateral would be eligible to originate an advance), at our discretion.

The Bank Act affords any security interest granted to us by any of our members, or any affiliate of any such member, priority over the claims and rights of any party, including any receiver, conservator, trustee, or similar party having rights of a lien creditor. The only exceptions are claims and rights held by actual bona fide purchasers for value or by parties that are secured by actual perfected security interests, and provided that such claims and rights would otherwise be entitled to priority under applicable law. In addition, our claims are given certain preferences pursuant to the receivership provisions in the Federal Deposit Insurance Act. Most members provide us a blanket lien covering substantially all of the member’s assets and their consent for us to file a financing statement evidencing the blanket lien. Based on the blanket lien, the financing statement and the statutory preferences, we normally do not take control of collateral, other than securities collateral, pledged by blanket lien borrowers. We take control of all securities collateral through delivery of the securities to us or to an approved third-party custodian. With respect to non-blanket lien borrowers (typically insurance companies, CDFIs, and housing associates), we take control of all collateral. If the financial condition of a blanket lien member warrants such action because of the deterioration of the member’s financial condition, regulatory concerns about the member or other factors, we will take control of sufficient collateral intended to fully collateralize the member’s indebtedness to us.

Table 10 under Item 7 – "Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations" presents the amount of total interest income contributed by our advance products. Tables 26 and 27 under Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition” present information on our five largest borrowers as of December 31, 2019 and 2018 and the accrued interest income associated with the five borrowers providing the highest amount of interest income for the years ended December 31, 2019 and 2018.

Mortgage Loans

We purchase various residential mortgage loan products from participating financial institutions (PFIs) under the MPF Program, a secondary mortgage market structure created and maintained by FHLBank Chicago. Under the MPF Program, we invest in qualifying 5- to 30-year conventional conforming and government-guaranteed or -insured (by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), the Rural Housing Service of the Department of Agriculture (RHS) and the Department of Housing and Urban Development (HUD)) fixed rate mortgage loans on 1-4 family residential properties. These portfolio mortgage products, along with residential loans sold under the MPF Xtra and MPF Government MBS products, where the PFI sells a loan under the MPF Program structure to Fannie Mae or FHLBank Chicago, respectively, for securitization, collectively provide our members an opportunity to further their cooperative partnership with us. We also offer the MPF Direct product, which provides the PFI the opportunity to sell to Redwood Trust (an entity that is not affiliated with us) for securitization mortgage loans exceeding the FHFA conforming loan limit under the MPF Program structure. These products are intended to further assist our members and their mortgage product needs while enhancing our ability to manage mortgage volumes and receive a counterparty fee from FHLBank Chicago based on mortgage volumes sold by our PFIs. We have the authority to offer participation interests in risk sharing MPF loan pools to member institutions, which we believe may further enhance our ability to manage the size of our mortgage loan portfolio in the future.

The MPF Program helps fulfill our housing mission and provides an additional source of liquidity to FHLBank members that choose to sell mortgage loans into the secondary market rather than holding them in their own portfolios. MPF Program portfolio mortgage loans are considered AMAs, a core mission activity of the FHLBanks, as defined by FHFA regulations.

Allocation of Risk: The MPF Program is designed to allocate risks associated with residential mortgage loans between the PFIs and us. PFIs have direct knowledge of their mortgage markets and have developed expertise in underwriting and servicing residential mortgage loans. By allowing PFIs to originate residential mortgage loans, whether through retail or wholesale operations, and to retain or sell servicing rights of residential mortgage loans, the MPF Program gives control of those functions that mostly impact credit quality to PFIs. We are responsible for managing the interest rate, prepayment and liquidity risks associated with holding residential mortgage loans in portfolio.

Under the FHFA’s AMA regulation, the PFI must “bear the economic consequences” of certain losses with respect to a master commitment based upon the MPF product and other criteria. To comply with these regulations, MPF purchases and fundings are structured so the credit risk associated with MPF loans is shared with PFIs (excluding the MPF Xtra, MPF Direct, and government-guaranteed loan products). In order to share the credit risk with our PFIs, we use a third-party model to determine the amount of credit enhancement obligation (CE obligation), needed to achieve credit quality that is permissible under the AMA regulation and consistent with our risk appetite. PFIs are required to have a CE obligation in an amount that provides FHLBank a high degree of confidence that the CE obligation will absorb losses in excess of the First Loss Account (FLA), even under reasonably likely adverse changes to expected economic conditions. The amount of the CE obligation is based on a documented analysis, including consideration of applicable insurance, credit enhancements, and other sources for repayment on the asset or pool . Effective January 1, 2020, all new and amended master commitments will have a set minimum CE obligation, which will be lower for products that offer performance-based credit enhancement fees (CE fees) (see Table 1).

The CE obligation methodology described above is applied to MPF portfolio products involving conventional mortgage loans. Subsequent to any private mortgage insurance (PMI), we share in the credit risk of the loans with the PFI. We assume the first layer of loss coverage as defined by the FLA. If losses beyond the FLA layer are incurred for a pool, the PFI assumes the loan losses up to the amount of the CE obligation, or supplemental mortgage insurance (SMI) policy purchased to replace a CE obligation or to reduce the amount of the CE obligation to some degree, as specified in a master commitment agreement for each pool of conventional mortgage loans purchased from the PFI. The CE obligation provided by the PFI ensures they retain a credit stake in the loans they sell and PFIs are compensated for managing this credit risk, either as a CE fee paid monthly or a one-time upfront fee paid at purchase. In some instances, depending on the MPF product type (see Table 1), all or a portion of the CE fee may be performance-based. Any losses in excess of our responsibility under the FLA and the member’s CE obligation or SMI policy for a pool of MPF loans are our responsibility. All loss allocations among us and our PFIs are based upon formulas specific to pools of loans covered by a specific MPF product and master commitment (see Table 2). PFIs’ CE obligations must be fully collateralized with assets considered eligible under our collateral policy. See Item 1 – “Business – Advances” for a discussion of eligible collateral.

There are three MPF portfolio products from which PFIs currently may choose (see Table 1). MPF Original, MPF 125, and MPF Government are closed loan products in which we purchase loans acquired or closed by the PFI. Under these MPF portfolio products, the PFI performs all traditional retail loan origination functions. As mentioned above, MPF Xtra essentially represents a loan sale from the PFI to an end buyer that is not FHLBank Topeka. The end buyer of the mortgages under the MPF Xtra product is Fannie Mae. MPF Government MBS is essentially a loan sale of government loans from the PFI to FHLBank Chicago for securitization into Ginnie Mae MBS. MPF Direct is a sale of jumbo loans to Redwood Trust for securitization. We receive a counterparty fee from our PFIs for facilitating their participation in the MPF Xtra, MPF Government MBS, and MPF Direct products.

The MPF portfolio products involving conventional mortgage loans are termed credit-enhanced products, because we share in the credit risk of the loans (as described above) with the PFIs. The MPF Government, MPF Government MBS, MPF Xtra, and MPF Direct products do not have a first loss and/or credit enhancement structure.

Table 10 under Item 7 – "Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations" presents the amount of total interest income contributed by our mortgage loan products. Table 28 under Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition” presents the outstanding balances of mortgage loans sold to us, net of participations, from our top five PFIs and the percentage of those loans to total mortgage loans outstanding.

PFI Eligibility: Members and housing associates may apply to become PFIs. We review the general eligibility of the member, its servicing qualifications, and its ability to supply documents, data, and reports required to be delivered by PFIs under the MPF Program. A Participating Financial Institution Agreement provides the terms and conditions for the sale or funding of MPF loans by PFIs, including required CE obligations, and establishes the terms and conditions for servicing MPF loans. All of the PFI’s CE obligations under this agreement are secured in the same manner as the other obligations of the PFI under its regular advances agreement with us. We have the right under the advances agreement to request additional collateral to secure the PFI’s MPF CE obligations and cover repurchase risk.

MPF Provider: FHLBank Chicago serves as the MPF Provider for the MPF Program. It maintains the structure of MPF residential loan products and the eligibility rules for MPF loans, including MPF Xtra loans, MPF Government MBS loans, and MPF Direct loans, which primarily fall under the rules and guidelines provided by Fannie Mae and Ginnie Mae. In addition, the MPF Provider manages the pricing and delivery mechanism for MPF loans and the back‑office processing of MPF loans in its role as master servicer and program custodian. The MPF Provider has engaged Wells Fargo Bank N.A. as the vendor for master servicing and as the primary custodian for the MPF Program. We utilize the capability under the individual FHLBank pricing option to change the pricing offered to our PFIs for applicable MPF products, but any pricing changes made affect all delivery commitment terms and loan note rates in the same amount for all PFIs.

The MPF Provider publishes and maintains documentation (referred to as Guides) that details the requirements PFIs must follow in originating, underwriting or selling and servicing MPF loans. The MPF Provider maintains the infrastructure through which we can fund or purchase MPF loans through our PFIs. In exchange for providing these services, we pay the MPF Provider a quarterly fixed service cost and a transaction services fee, which is based upon the unpaid principal balances (UPB) before any charge-offs of MPF loans.

MPF Servicing: PFIs selling residential mortgage loans under the MPF Program may either retain the servicing function or transfer it and the servicing rights to an approved PFI servicer. If a PFI chooses to retain the servicing function, it receives a servicing fee. PFIs may utilize approved subservicers to perform the servicing duties. If the PFI chooses to transfer servicing rights to an approved third-party provider, the servicing is transferred concurrently with the sale of the residential mortgage loan with the PFI receiving a servicing-released premium. The servicing fee is paid to the third-party servicer. All servicing-retained and servicing-released PFIs are subject to the rules and requirements set forth in the MPF Servicing Guide. Throughout the servicing process, the master servicer monitors PFI compliance with MPF Program requirements and makes periodic reports to the MPF Provider.

Mortgage Standards: The MPF Program has adopted ability-to-repay and safe harbor qualified mortgage requirements for all mortgages with loan application dates on or after January 10, 2014. PFIs are required to deliver residential mortgage loans that meet the eligibility requirements in the MPF Guides. The eligibility guidelines in the MPF Guides applicable to the conventional mortgage loans in our portfolio are broadly summarized as follows:


▪	Mortgage characteristics: MPF loans must be qualifying 5- to 30-year conforming conventional, fixed rate, fully amortizing mortgage loans, secured by first liens on owner-occupied 1- to 4-unit single-family residential properties and single-unit second homes.

▪

Loan-to-value (LTV) ratio and PMI: The maximum LTV for conventional MPF loans is 95 percent, though Affordable Housing Program (AHP) MPF mortgage loans may have LTVs up to 100 percent. Conventional MPF mortgage loans with LTVs greater than 80 percent are insured by PMI from a mortgage guaranty insurance company that has successfully passed an internal credit review and is approved under the MPF Program.


▪	Documentation and compliance: Mortgage documents and transactions are required to comply with all applicable laws. MPF mortgage loans are documented using standard Fannie Mae/Freddie Mac uniform instruments.


▪	Government loans: Government mortgage loans sold under the MPF Program have substantially the same parameters as conventional MPF mortgage loans except that their LTVs may not exceed the LTV limits set by the applicable government agency and they must meet all requirements to be insured or guaranteed by the applicable government agency.

▪

Ineligible mortgage loans: Loans not eligible for sale under the MPF Program include residential mortgage loans unable to be rated by S&P, loans not meeting eligibility requirements, loans classified as high cost, high rate, high risk, Home Ownership and Equity Protection Act loans or loans in similar categories defined under predatory or abusive lending laws, or subprime, non-traditional, or higher-priced mortgage loans.

Loss Calculations: Losses under the FLA for conventional mortgage loans are defined differently than losses for financial reporting purposes. The differences reside in the timing of the recognition of the loss and how the components of the loss are recognized. Under the FLA, a loss is the difference between the recorded loan value and the total proceeds received from the sale of a residential mortgage property after paying any associated expenses, not to exceed the amount of the FLA. The loss is recognized upon sale of the mortgaged property. For financial reporting purposes, when a mortgage loan is deemed a loss, the difference between the recorded loan value and the appraised value of the property securing the loan (fair market value) less the estimated costs to sell is recognized as a charge to the Allowance for Credit Losses on Mortgage Loans in the period the loss status is assigned to the loan. After foreclosure, any expenses associated with carrying the loan until sale are recognized as real estate owned (REO) expenses in the current period.

A majority of the states, and some municipalities, have enacted laws prohibiting mortgage loans considered predatory or abusive. Some of these laws impose liability for violations not only on the originator, but also upon purchasers and assignees of mortgage loans. We take measures that we consider reasonable and appropriate to reduce our exposure to potential liability under these laws and are not aware of any potential or pending claim, action, or proceeding asserting that we are liable under these laws. However, there can be no assurance that we will never have any liability under predatory or abusive lending laws.

Table 1 presents a comparison of the different characteristics for each of the MPF products either held on our balance sheet as of December 31, 2019 or currently offered as a loan sale from the PFI to FHLBank Chicago:

Table 1



Product Name	Size of FHLBank’s FLA	PFI CE Obligation Description	CE Fee Paid to PFI	CE Fee Offset¹	Servicing Fee to PFI²
MPF Original	4 basis points (bps) per year against unpaid balance, accrued monthly	Greater of aggregate sum of the loan level credit enhancements (LLCEs) or one percent of gross fundings	10 bps per year, paid monthly based on remaining UPB; guaranteed³	No	25 bps per year, paid monthly
MPF 100⁴	100 bps fixed based on gross fundings	Aggregate sum of the LLCEs less FLA	7 to 10 bps per year, paid monthly based on remaining UPB; performance-based after 3 years	Yes; after first 3 years, to the extent recoverable in future periods	25 bps per year, paid monthly
MPF 125	100 bps fixed based on gross fundings	Greater of aggregate sum of the LLCEs less FLA or 25 bps	7 to 10 bps per year, paid monthly based on remaining UPB; performance-based	Yes; to the extent recoverable in future periods	25 bps per year, paid monthly
MPF Plus⁵	Sized to equal expected losses	0 to 20 bps after FLA and SMI	7 bps per year plus 6 to 7 bps per year, performance-based (delayed for 1 year); all fees paid monthly based on remaining UPB	Yes; to the extent recoverable in future periods	25 bps per year, paid monthly
MPF Xtra	N/A	N/A	N/A	N/A	25 bps per year, paid monthly
MPF Government	N/A	N/A (unreimbursed servicing expenses only)	N/A⁶	N/A	44 bps per year, paid monthly
MPF Government MBS	N/A	N/A (unreimbursed servicing expenses only)	N/A	N/A	Based on note rate
MPF Direct	N/A	N/A	N/A	N/A	Servicing released only


¹	Future payouts of performance-based CE fees are reduced when losses are allocated to the FLA. The annual offset is limited to fees payable in a given year but could be reduced in subsequent years if losses exceed the annual CE fee. The overall reduction is limited to the FLA amount for the life of the pool of loans covered by a master commitment agreement.


²	The PFI has the option of retaining or selling the servicing on all MPF products except MPF Direct. If the servicing is sold (servicing released), the PFI will receive an upfront servicing released premium as opposed to receiving servicing fees over time.


³	The credit enhancement paid upfront when the mortgage loan is purchased is based upon the present value of the monthly CE fee payments, with consideration for expected prepayments.


⁴	The MPF 100 product is currently inactive due to regulatory requirements relating to loan originator compensation under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).


⁵	Due to higher costs associated with the acquisition of supplemental insurance policies, the MPF Plus product is currently not active.


⁶	Two government master commitments have been grandfathered and paid 2 bps per year. All other government master commitments are not paid a CE fee.

Table 2 presents an illustration of the FLA and CE obligation calculation for each conventional MPF product type listed as of December 31, 2019:

Table 2



Product Name	FLA	CE Obligation Calculation
MPF Original	4 bps x unpaid principal, annually¹	(LLCE² x PSF³) x Gross Fundings
MPF 100	100 bps x loan funded amount	((LLCE x PSF) - FLA) x Gross Fundings
MPF 125	100 bps x loan funded amount	((LLCE x PSF) - FLA) x Gross Fundings
MPF Plus	5 x variable CE Fee	(LLCE x PSF) - FLA - SMI⁴ = PCE⁵


¹	Starts at zero and increases monthly over the life of the master commitment.


²	LLCE represents the sum of the loan level credit enhancement amounts of the loans sold into the pool of loans covered by the master commitment agreement.


³	The S&P Level’s Pool Size Factor (PSF) is applied at the MPF FHLBank level against the total of loans in portfolio.

⁴

SMI represents the coverage obtained from the supplemental mortgage insurer. The initial premium for the insurance was determined based on a sample $100 million loan pool. The final premium determination was made during the 13^th month of the master commitment agreement, at which time any premium adjustment was determined based on actual characteristics of loans submitted. The SMI generally covers a portion of the PFI’s CE obligation, which typically ranges from 200 to 250 bps of the dollar amount of loans delivered into a mortgage pool, but the PFI may purchase an additional level of coverage to completely cover the PFI’s CE obligation. The CE fees paid to PFIs for this program are capped at a maximum of 14 bps, which is broken into two components, fixed and variable. The fixed portion of the CE fee is paid to the SMI insurer for the coverage discussed above and is a negotiated rate depending on the level of SMI coverage, ranging from 6 to 8 bps. The variable portion is paid to the PFI, and ranges from 6 to 8 bps, with payments commencing the 13^th month following initial loan purchase under the master commitment agreement.


⁵	PCE represents the CE obligation that the PFI elects to retain rather than covering with SMI. Under this MPF product, the retained amount can range from 0 to 20 bps.

Investments

A portfolio of investments is maintained for liquidity and asset/liability management purposes. We maintain a portfolio of short-term investments in highly-rated institutions, including overnight Federal funds, term Federal funds, interest-bearing certificates of deposit and demand deposits, commercial paper, and securities purchased under agreements to resell (i.e., reverse repurchase agreements). A longer-term investment portfolio is also maintained, which includes securities issued or guaranteed by the U.S. government, U.S. government agencies and GSEs, as well as MBS that are issued by U.S. government agencies and housing GSEs (GSE securities are not explicitly guaranteed by the U.S. government).

Under FHFA regulations, we are prohibited from investing in certain types of securities including:


▪	Instruments, such as common stock, that represent ownership in an entity, other than stock in small business investment companies or certain investments targeted to low-income persons or communities;


▪	Instruments issued by non-U.S. entities other than those issued by U.S. branches and agency offices of foreign commercial banks;


▪	Non-investment-grade debt instruments other than certain investments targeted to low-income persons or communities, and instruments that were downgraded after purchase;

▪

Whole mortgages or other whole loans other than: (1) those acquired under our MPF Program; (2) certain investments targeted to low-income persons or communities; (3) certain marketable direct obligations of state, local, or tribal government units or agencies, having at least the second highest credit rating from a Nationally Recognized Statistical Rating Organization (NRSRO); (4) MBS or asset-backed securities (ABS) backed by manufactured housing loans or home equity loans; and (5) certain foreign housing loans authorized under Section 12(b) of the Bank Act;


▪	Non-U.S. dollar denominated securities;


▪	Interest-only or principal-only stripped MBS, CMOs, real estate mortgage investment conduits (REMICs) and eligible ABS;


▪	Residual-interest or interest-accrual classes of CMOs, REMICs and eligible ABS; and


▪	Fixed rate MBS, CMOs, REMICs and eligible ABS, or floating rate MBS, CMOs, REMICs and eligible ABS that on the trade date are at rates equal to their contractual cap or that have average lives which vary by more than six years under an assumed instantaneous interest rate change of 300 bps.

In addition to the above limitations on allowable types of MBS investments, the FHFA limits our purchase of MBS by requiring that the aggregate value of MBS owned not exceed 300 percent of our month-end total regulatory capital, as most recently reported to the FHFA, on the day we purchase the securities. Aggregate value is calculated with the total amortized cost of available-for-sale and held-to-maturity MBS and the total fair value of trading MBS. Further, quarterly increases in holdings of MBS are restricted to no more than 50 percent of regulatory capital as of the beginning of such quarter. As of December 31, 2019, the amortized cost of our MBS/CMO portfolio represented 262 percent of our regulatory capital.

Debt Financing – Consolidated Obligations

Consolidated obligations, consisting of bonds and discount notes, are our primary liabilities and represent the principal source of funding for advances, traditional mortgage products, and investments. Consolidated obligations are the joint and several obligations of the FHLBanks, backed only by the financial resources of the FHLBanks. Consolidated obligations are not obligations of the U.S. government, and the U.S. government does not guarantee them; however, the capital markets have traditionally viewed the FHLBanks’ obligations as “Federal agency” debt. As such, the FHLBanks historically have had reasonably stable access to funding at relatively favorable spreads to U.S. Treasuries. Our ability to access the capital markets through the sale of consolidated obligations, across the maturity spectrum and through a variety of debt structures, assists us in managing our balance sheet effectively and efficiently. Moody’s currently rates the FHLBanks’ consolidated obligations Aaa/P-1, and S&P currently rates them AA+/A-1+. These ratings measure the likelihood of timely payment of principal and interest on consolidated obligations and also reflect the FHLBanks’ status as GSEs, which generally implies the expectation of a high degree of support by the U.S. government even though their obligations are not guaranteed by the U.S. government.

FHFA regulations govern the issuance of debt on behalf of the FHLBanks and related activities, and authorize the FHLBanks to issue consolidated obligations, through the Office of Finance as their agent, under the authority of Section 11(a) of the Bank Act. No FHLBank is permitted to issue individual debt under Section 11(a) without FHFA approval. We are primarily and directly liable for the portion of consolidated obligations issued on our behalf. In addition, we are jointly and severally liable with the other FHLBanks for the payment of principal and interest on the consolidated obligations of all FHLBanks under Section 11(a). The FHFA, at its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligations for which FHLBank is not the primary obligor. Although it has never occurred, to the extent that an FHLBank would be required to make a payment on a consolidated obligation on behalf of another FHLBank, the paying FHLBank would be entitled to reimbursement from the non-complying FHLBank. However, if the FHFA determines that the non-complying FHLBank is unable to satisfy its obligations, then the FHFA may allocate the non-complying FHLBank’s outstanding consolidated obligation debt among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis the FHFA may determine. If the principal or interest on any consolidated obligation issued on behalf of a specific FHLBank is not paid in full when due, that FHLBank may not pay dividends to, or redeem or repurchase shares of stock from, any member of that specific FHLBank.

Table 3 presents the par value of our consolidated obligations and the combined consolidated obligations of all the FHLBanks as of December 31, 2019 and 2018 (in millions):

Table 3

FHFA regulations provide that we must maintain aggregate assets of the following types, free from any lien or pledge, in an amount at least equal to the amount of our consolidated obligations outstanding:


▪	Cash;


▪	Obligations of, or fully guaranteed by, the U.S. government;


▪	Secured advances;


▪	Mortgages that have any guaranty, insurance or commitment from the U.S. government or any agency of the U.S. government; and


▪	Investments described in Section 16(a) of the Bank Act, which, among other items, includes securities that a fiduciary or trust fund may purchase under the laws of the state in which the FHLBank is located.

Table 4 illustrates our compliance with the FHFA’s regulations for maintaining aggregate assets at least equal to the amount of consolidated obligations outstanding as of December 31, 2019 and 2018 (dollar amounts in thousands):

Table 4



	12/31/2019		12/31/2018
Total non-pledged assets	$	63,017,801	$	47,568,214
Total carrying value of consolidated obligations	$	59,461,225	$	44,574,726
Ratio of non-pledged assets to consolidated obligations	1.06		1.07

The Office of Finance has responsibility for facilitating and executing the issuance of the consolidated obligations on behalf of the FHLBanks. It also prepares the FHLBanks’ Combined Quarterly and Annual Financial Reports, services all outstanding debt, serves as a source of information for the FHLBanks on capital market developments and manages the FHLBanks’ relationship with the NRSROs with respect to ratings on consolidated obligations. In addition, the Office of Finance administers two tax-exempt government corporations, the Resolution Funding Corporation and the Financing Corporation, which were established as a result of the savings and loan crisis of the 1980s.

Consolidated Obligation Bonds: Consolidated obligation bonds are primarily used to satisfy our term funding needs. Typically, the maturities of these bonds range from less than one year to 30 years, but the maturities are not subject to any statutory or regulatory limit. Consolidated obligation bonds can be issued and distributed through negotiated or competitively bid transactions with approved underwriters or selling group members.

Consolidated obligation bonds generally are issued with either fixed or variable rate payment terms that use a variety of standardized indices for interest rate resets including, but not limited to, LIBOR, Secured Overnight Financing Rate (SOFR), Constant Maturity Swap, U.S. Prime and Three-Month U.S. Treasury Bill Auction Yield. In addition, to meet the specific needs of certain investors in consolidated obligations, both fixed and variable rate bonds may also contain certain embedded features, which result in complex coupon payment terms and call features. Normally, when such a complex consolidated obligation bond is issued, we simultaneously enter into a derivative containing mirror or offsetting features to synthetically convert the terms of the complex bond to a simple variable rate callable bond tied to one of the standardized indices. We also simultaneously enter into derivatives containing offsetting features to synthetically convert the terms of some of our fixed rate callable and bullet bonds and floating rate bonds to a simple variable rate callable or bullet bond tied to one of the standardized indices.

Consolidated Obligation Discount Notes: The Office of Finance also sells consolidated obligation discount notes on behalf of the FHLBanks that generally are used to meet short-term funding needs. These securities have maturities up to one year and are offered daily through certain securities dealers in a discount note selling group. In addition to the daily offerings of discount notes, the FHLBanks auction discount notes with fixed maturity dates ranging from 4 to 26 weeks through competitive auctions held twice a week utilizing the discount note selling group. The amount of discount notes sold through the auctions varies based upon market conditions and/or on the funding needs of the FHLBanks. Discount notes are sold at a discount and mature at par.

Derivatives

FHLBank’s Risk Management Policy (RMP) establishes guidelines for our use of derivatives. Interest rate swaps, swaptions, interest rate cap and floor agreements, calls, puts, futures, forward contracts, and other derivatives can be used as part of our interest rate risk management and funding strategies. This policy, along with FHFA regulations, prohibits trading in, or the speculative use of, derivatives and limits credit risk to counterparties that arises from derivatives. In general, we have the ability to use derivatives to reduce funding costs for consolidated obligations and to manage other risk elements such as interest rate risk, mortgage prepayment risk, unsecured credit risk, and foreign currency risk.

We use derivatives in our overall interest rate risk management to adjust the interest rate sensitivity of consolidated obligations to approximate more closely the interest rate sensitivity of assets, including advances, investments and mortgage loans, and/or to adjust the interest rate sensitivity of advances, investments, and mortgage loans to approximate more closely the interest rate sensitivity of liabilities. We also use derivatives to manage embedded options in assets and liabilities, to hedge the market value of existing assets, liabilities, and anticipated transactions, to hedge the duration risk of prepayable instruments, to mitigate adverse impacts to earnings from the contraction or extension of certain assets (e.g., advances or mortgage assets) and liabilities, and to reduce funding costs as discussed below. Generally, we designate derivatives as a fair value hedge of an underlying financial instrument or firm commitment. Economic hedges are defined as derivatives hedging specific or non-specific underlying assets, liabilities, or firm commitments that do not qualify for hedge accounting, but are acceptable hedging strategies under our RMP for asset/liability management.

We often execute derivatives concurrently with the issuance of consolidated obligation bonds (collectively referred to as swapped consolidated obligation bond transactions) to reduce funding costs or to alter the characteristics of our liabilities to more closely match the characteristics of our assets. At times, we also execute derivatives concurrently with the issuance of consolidated obligation discount notes in order to create synthetic variable rate debt at a cost that is often lower than funding alternatives and comparable variable rate cash instruments issued directly by us. This strategy of issuing consolidated obligations while simultaneously entering into derivatives enables us to more effectively fund our variable rate and short-term fixed rate assets. It also allows us, in some instances, to offer a wider range of advances at more attractive terms than would otherwise be possible. Swapped consolidated obligation transactions depend on price relationships in both the FHLBank consolidated obligation market and the derivatives market, primarily the interest rate swap market. If conditions in these markets change, we may adjust the types or terms of the consolidated obligations issued and derivatives utilized to better match assets, meet customer needs, and/or improve our funding costs.

We purchase interest rate caps with various terms and strike rates to manage embedded interest rate cap risk associated with our variable rate MBS and CMO portfolios. Although these derivatives are valid economic hedges against the option risk of our portfolio of MBS and CMOs, they are not specifically linked to individual investment securities and therefore do not receive fair value hedge accounting. The derivatives are marked to fair value through earnings. We may also use interest rate caps and floors, swaptions, and callable swaps to manage and hedge prepayment and option risk on MBS, CMOs and mortgage loans.

See Item 7A – “Quantitative and Qualitative Disclosures About Market Risk” for further information on derivatives.

Deposits

The Bank Act allows us to accept deposits from our members, housing associates, any institution for which we are providing correspondent services, other FHLBanks, and other government instrumentalities. We offer several types of deposit programs, including demand, overnight, and term deposits.

Liquidity Requirements: To support deposits, FHFA regulations require us to have at least an amount equal to current deposits received from our members invested in obligations of the U.S. government, deposits in eligible banks or trust companies, or advances with remaining maturities not exceeding five years. In addition, we must meet the additional liquidity policies and guidelines outlined in our RMP. See Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Liquidity Risk Management” for further discussion of our liquidity requirements.

Capital, Capital Rules and Dividends

FHLBank Capital Adequacy and Form Rules: The Gramm-Leach-Bliley Act (GLB Act) allows us to have two classes of stock, and each class may have sub-classes. Class A Common Stock is conditionally redeemable on six months’ written notice from the member, and Class B Common Stock is conditionally redeemable on five years’ written notice from the member, subject in each case to certain conditions and limitations that may restrict our ability to effectuate such redemptions. Membership is voluntary. However, other than non-member housing associates (see Item 1 – “Business – Advances”), membership is required in order to utilize our credit and mortgage finance products. Members that withdraw may not reapply for membership for five years.

The GLB Act and the FHFA rules and regulations define total capital for regulatory capital adequacy purposes as the sum of an FHLBank’s permanent capital, plus the amounts paid in by its stockholders for Class A Common Stock; any general loss allowance, if consistent with U.S. generally accepted accounting principles (GAAP) and not established for specific assets; and other amounts from sources determined by the FHFA as available to absorb losses. The GLB Act and FHFA regulations define permanent capital for the FHLBanks as the amount paid in for Class B Common Stock plus the amount of an FHLBank’s retained earnings, as determined in accordance with GAAP.

Under the GLB Act and the FHFA rules and regulations, we are subject to risk-based capital rules. Only permanent capital can satisfy our risk-based capital requirement. In addition, the GLB Act specifies a five percent minimum leverage capital requirement based on total FHLBank capital, which includes a 1.5 weighting factor applicable to permanent capital, and a four percent minimum total capital requirement that does not include the 1.5 weighting factor applicable to permanent capital. We may not redeem or repurchase any of our capital stock without FHFA approval if the FHFA or our Board of Directors determines that we have incurred, or are likely to incur, losses that result in, or are likely to result in, charges against our capital, even if we are in compliance with our minimum regulatory capital requirements. Therefore, a member’s right to have its excess shares of capital stock redeemed is conditional on, among other factors, the FHLBank maintaining compliance with the three regulatory capital requirements: risk-based, leverage, and total capital.

Following are highlights from our capital plan:


▪	Two classes of authorized stock - Class A Common Stock and Class B Common Stock;


▪	Both classes have $100 par value per share and both are defined as common stock;


▪	Class A Common Stock is required for membership. The membership or asset-based stock requirement for each member is currently 0.1 percent of that member's total assets at the end of the prior calendar year, with a minimum requirement of 10 shares ($1,000) and a cap of 5,000 shares ($500,000);

▪

To the extent a member’s asset-based requirement in Class A Common Stock is insufficient to support its calculated activity-based requirement, Class B Common Stock must be purchased in order to support that member’s activities with us. The activity-based stock requirement is the sum of the stock requirements for each activity less the asset-based stock requirement in Class A Common Stock and is calculated whenever a member enters into a transaction, such as an advance (4.5 percent of outstanding advances (range = 4.0 to 6.0 percent));


▪	Excess stock is calculated daily. We may exchange excess Class B Common Stock for Class A Common Stock, but only if we continue to meet our regulatory capital requirements after the exchange;

▪

A member may hold excess Class A Common Stock or Class B Common Stock, subject to our right to repurchase excess stock or to exchange excess Class B Common Stock for Class A Common Stock, or may ask to redeem all or part of its excess Class A Common Stock or Class B Common Stock. A member may also ask to exchange all or part of its excess Class A Common Stock or Class B Common Stock for Class B Common Stock or Class A Common Stock, respectively, but all such exchanges are completed at our discretion;


▪	As a member increases its activities with us above the amount of activity supported by its asset-based requirement, excess Class A Common Stock is first exchanged for Class B Common Stock to meet the activity requirement prior to the purchase of additional Class B Common Stock;

▪

Under the plan, the Board of Directors establishes a dividend parity threshold that is a rate per annum expressed as a positive or negative spread relative to a published reference interest rate index (e.g., Federal funds) or an internally calculated reference interest rate based upon any of our assets or liabilities (e.g., average yield on advances, average cost of consolidated obligations, etc.);


▪	Class A Common Stock and Class B Common Stock share in dividends equally up to the dividend parity threshold, then the dividend rate for Class B Common Stock can exceed the rate for Class A Common Stock, but the Class A Common Stock dividend rate can never exceed the Class B Common Stock dividend rate;


▪	A member may submit a redemption request to us for any or all of its excess Class A Common Stock and/or Class B Common Stock;

▪

Within five business days of receipt of a redemption request for excess Class A Common Stock, we must notify the member if we decline to repurchase the excess Class A Common Stock, at which time the six-month waiting period will apply. Otherwise, we will repurchase any excess Class A Common Stock within five business days, though it is usually repurchased on the same date as the member’s redemption request;

▪

Within five business days of receipt of a redemption request for excess Class B Common Stock, we must notify the member if we decline to repurchase the excess Class B Common Stock, at which time the five-year waiting period will apply. Otherwise, we will repurchase any excess Class B Common Stock within five business days, though it is usually repurchased on the same date as the member’s redemption request;

▪

A member may cancel or revoke its written redemption request prior to the end of the redemption period (six months for Class A Common Stock and five years for Class B Common Stock) or its written notice of withdrawal from membership prior to the end of a six-month period starting on the date we received the member’s written notice of withdrawal from membership. Our capital plan provides that we will charge the member a cancellation fee in accordance with a schedule where the amount of the fee increases with the passage of time. There is no grace period after the submission of a redemption request during which the member may cancel its redemption request without being charged a cancellation fee; and


▪	Each required share of Class A Common Stock and Class B Common Stock is entitled to one vote subject to the statutorily imposed voting caps.

See Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources - Capital” for additional information regarding capital.

Dividends: We may pay dividends from unrestricted retained earnings and current income. (For a discussion regarding restricted retained earnings, please see Joint Capital Enhancement Agreement under this Item 1.) Our Board of Directors may declare and pay dividends in either cash or capital stock. Under our capital plan, all dividends that are payable in capital stock must be paid in the form of Class B Common Stock, regardless of the class of stock upon which the dividend is being paid.

Consistent with FHFA guidance in Advisory Bulletin (AB) 2003-AB-08, Capital Management and Retained Earnings, we adopted guidelines to establish a minimum or threshold level for our retained earnings in light of alternative possible future financial and economic scenarios, which are currently included under our RMP. Our minimum (threshold) level of retained earnings is calculated quarterly and re-evaluated by the Board of Directors as part of each quarterly dividend declaration. The retained earnings threshold includes detailed calculations of five components:

▪

Market risk, which is calculated using the percentage change method at a 99 percent confidence level for an 120-business day period (consistent with the market component of our regulatory risk‐based capital value-at-risk requirement). For periods prior to March 31, 2019, market risk was calculated using a Monte Carlo simulation where the 99 percent confidence level result over a 90-day simulation horizon represented the minimum market risk exposure level;


▪	Credit risk, which requires that retained earnings be sufficient to credit-enhance all of our assets from their actual rating levels to the equivalent of triple-A ratings (where advances are considered to be triple-A rated);


▪	Pre-settlement risk, which is based upon the pre-settlement risk exposure associated with recently issued and unsettled debt issuance and is based on the current daily potential maximum price risk exposure, based on the 99^th percentile of daily price risk calculated on the most recent 10 years of daily activity;

▪

Operations risk, which is calculated using a combination of: (1) the Basel II basic indicator approach; and (2) the Basel II standardized approach. For periods prior to September 30, 2019, operations risk was calculated using a combination of : (1) the Basel II standardized approach; and (2) our operational risk event loss history, taking into consideration operational loss events reported by the FHLBank System that could impact us in the future; and

▪

Net income volatility, which is calculated using: (1) the largest net loss on derivative hedging activities under 100-basis-point interest rate shock scenarios (maximum derivative hedging loss under up or down shocks); and (2) dividend payment risk, computed as four times the dollar amount of dividends paid at the average overnight Federal funds rate on average stock for the most recent calendar quarter. For periods prior to December 31, 2019, the dividend payment risk subcomponent was computed as four times the dollar amount of dividends paid on all stock (including mandatorily redeemable capital stock) for the most recently paid quarterly dividend.

The retained earnings threshold was considered by the Board of Directors when dividends were declared during the last two years, but the retained earnings threshold calculated in accordance with the RMP did not significantly affect the amount of dividends declared and paid. Tables 5 and 6 reflect the quarterly retained earnings threshold calculations utilized during 2019 and 2018 (in thousands), respectively, compared to the actual amount of retained earnings at the end of each quarter:

Table 5



Retained Earnings Component (based upon prior quarter end)	12/31/2019		09/30/2019		06/30/2019		03/31/2019
Market Risk	$	108,053	$	107,575	$	155,131	$	142,109
Credit Risk	50,732		64,756		50,933		55,035
Pre-settlement Risk	30,000		30,000		30,000		30,000
Operations Risk	44,296		44,296		34,003		31,230
Net Income Volatility	68,525		120,208		150,598		124,285
Total Retained Earnings Threshold	301,606		366,835		420,665		382,659
Actual Retained Earnings as of End of Quarter	999,809		972,948		950,276		942,840
Overage	$	698,203	$	606,113	$	529,611	$	560,181

Table 6




Retained Earnings Component (based upon prior quarter end)	12/31/2018		09/30/2018		06/30/2018		03/31/2018
Market Risk	$	123,960	$	134,678	$	135,894	$	82,048
Credit Risk	60,928		62,329		78,556		60,963
Pre-settlement Risk	30,000		30,000		30,000		30,000
Operations Risk	31,219		30,817		30,791		27,544
Net Income Volatility	123,440		131,568		144,184		127,517
Total Retained Earnings Threshold	369,547		389,392		419,425		328,072
Actual Retained Earnings as of End of Quarter	914,022		894,016		875,790		854,241
Overage	$	544,475	$	504,624	$	456,365	$	526,169

Under our retained earnings policy, any shortage of actual retained earnings with respect to the retained earnings threshold is to be met over a period generally not to exceed one year from the quarter-end calculation. The policy also provides that meeting the established retained earnings threshold has priority over the payment of dividends, but that the Board of Directors must balance dividends on capital stock against the period over which the retained earnings threshold is met. The retained earnings threshold level fluctuates from period to period because it is a function of the size and composition of our balance sheet and the risks contained therein at that point in time.

Joint Capital Enhancement Agreement (JCE Agreement) – We, along with the other FHLBanks, entered into a JCE Agreement intended to enhance the capital position of each FHLBank. More specifically, the intent of the JCE Agreement is to allocate a portion of each FHLBank’s earnings to a Separate Restricted Retained Earnings Account (RRE Account) at that FHLBank. Thus, in accordance with the JCE Agreement, each FHLBank allocates 20 percent of its net income to an RRE Account and will do so until the balance of the account equals at least one percent of that FHLBank’s average balance of outstanding consolidated obligations for the previous quarter.

Tax Status

Section 1433 of the Bank Act provides that we and the other FHLBanks are exempt from all federal, state and local taxation except for real property taxes.

Assessments

We are subject to a regulatory AHP assessment based on a percentage of our earnings. The FHLBanks are required to set aside annually the greater of an aggregate of $100 million or 10 percent of their current year’s income subject to assessment to be contributed to the following year's AHP. In accordance with FHFA guidance for the calculation of AHP expense, interest expense on mandatorily redeemable capital stock is added back to income before charges for AHP.

Other Mission-Related Activities

In addition to supporting residential mortgage lending, one of our core missions is to support related housing and community development. We administer and fund a number of targeted programs specifically designed to fulfill that mission. These programs provide housing opportunities for thousands of very low-, low- and moderate-income households and strengthen communities primarily in Colorado, Kansas, Nebraska, and Oklahoma.

Affordable Housing Program: Amounts specified by the AHP requirements described in Item 1 – “Business – Assessments” are reserved for this program. AHP provides cash grants to members to finance the purchase, construction, or rehabilitation of very low-, low-, and moderate-income owner occupied or rental housing. In addition to the competitive AHP program funds, a customized homeownership set-aside program called the Homeownership Set-aside Program (HSP) is offered under the AHP. The HSP provides down payment, closing cost, and purchase-related repair assistance to first-time homebuyers in Colorado, Kansas, Nebraska, and Oklahoma.

Community Investment Cash Advance (CICA) Program: CICA loans to members specifically target underserved markets in both rural and urban areas. CICA loans represented 2.8 percent, 3.0 percent and 3.5 percent of total advances outstanding as of December 31, 2019, 2018, and 2017, respectively. Programs offered during 2019 under the CICA Program, which is not funded through the AHP, include:

▪

Community Housing Program (CHP) – CHP makes loans available to members for financing the construction, acquisition, rehabilitation, and refinancing of owner-occupied housing for households whose incomes do not exceed 115 percent of the area’s median income and rental housing occupied by or affordable for households whose incomes do not exceed 115 percent of the area’s median income. For rental projects, at least 51 percent of the units must have tenants that meet the income guidelines, or at least 51 percent of the units must have rents affordable to tenants that meet the income guidelines. We provide advances for CHP-based loans to members at our estimated cost of funds for a comparable maturity plus a mark-up for administrative costs; and

▪

Community Development Program (CDP) – CDP provides advances to members to finance CDP-qualified member financing including loans to small businesses, small farms, small agri-business, public or private utilities, schools, medical and health facilities, churches, day care centers, or for other community development purposes that meet one of the following criteria: (1) loans to firms that meet the Small Business Administration’s definition of a qualified small business concern; (2) financing for businesses or projects located in an urban neighborhood, census tract or other area with a median income at or below 100 percent of the area median; (3) financing for businesses, farms, ranches, agri-businesses, or projects located in a rural community, neighborhood, census tract, or unincorporated area with a median income at or below 115 percent of the area median; (4) firms or projects located in a Native American Area, Federally Declared Disaster Area, or United States Department of Agriculture Drought Area; (5) businesses in urban areas in which at least 51 percent of the employees of the business earn at or below 100 percent of the area median; or (6) businesses in rural areas in which at least 51 percent of the employees of the business earn at or below 115 percent of the area median. We provide advances for CDP-based loans to members at our estimated cost of funds for a comparable maturity plus a mark-up for administrative costs.

Competition

Advances: Demand for advances is affected by, among other things, the cost of alternative sources of liquidity available to our members, including deposits from members’ customers and other sources of liquidity that are available to members. Members mostly access alternative funding other than advances through the brokered deposit market and through repurchase agreements with commercial customers. Large members may have broader access to funding through repurchase agreements with investment banks and commercial banks as well as access to the national and global credit markets. While the availability of alternative funding sources to members can influence member demand for advances, the cost of the alternative funding relative to advances is the primary consideration when accessing alternative funding. Other considerations include product availability through FHLBank, the member’s creditworthiness, ease of execution, level of diversification, and availability of member collateral for other types of borrowings.

Mortgage Loans: We are subject to competition in purchasing conventional, conforming fixed rate residential mortgage loans and government-guaranteed residential mortgage loans. We face competition in customer service, the prices paid for these assets, and in ancillary services such as automated underwriting. The most direct competition for purchasing residential mortgage loans comes from the other housing GSEs, which also purchase conventional, conforming fixed rate mortgage loans, specifically Fannie Mae and Freddie Mac. To a lesser extent, we also compete with regional and national financial institutions that buy and/or invest in mortgage loans. Depending on market conditions, these investors may seek to hold, securitize, or sell conventional, conforming fixed rate mortgage loans. We continuously reassess our potential for success in attracting and retaining members for our mortgage loan products and services, just as we do with our advance products. We compete for the purchase of mortgage loans primarily on the basis of price, products, and services offered.

Debt Issuance: We compete with the U.S. government (including debt programs explicitly guaranteed by the U.S. government), U.S. government agencies, Fannie Mae, Freddie Mac, and other GSEs, as well as corporate, sovereign, and supranational entities for funds raised through the issuance of unsecured debt in the national and global capital markets. Collectively, Fannie Mae, Freddie Mac, and the FHLBanks are generally referred to as the housing GSEs, and the cost of the debt of each can be positively or negatively affected by political, financial, or other news that reflects upon any of the three housing GSEs. If the supply of competing debt products increases without a corresponding increase in demand, our debt costs may increase, or less debt may be issued. We compete for the issuance of debt primarily on the basis of rate, term, structure of the debt, liquidity of the instrument, and perceived risk of the issuer.

Derivatives: The sale of callable debt and the simultaneous execution of callable interest rate swaps with options that mirror the options in the debt have been an important source of competitive funding for us. As such, the depth of the markets for callable debt and mirror-image derivatives is an important determinant of our relative cost of funds. There is considerable competition among high-credit-quality issuers, especially among the three housing GSEs, for callable debt and for derivatives. There can be no assurance that the current breadth and depth of these markets will be sustained.

Regulatory Oversight, Audits and Examinations

General: We are supervised and regulated by the FHFA, which is an independent agency in the executive branch of the U.S. government. The FHFA is responsible for providing supervision, regulation and housing mission oversight of the FHLBanks to promote their safety and soundness so they serve as a reliable source of liquidity and funding for housing finance and community investment. The FHFA is headed by a Director appointed by the President of the United States for a five-year term, with the advice and consent of the Senate. The Federal Housing Finance Oversight Board advises the Director with respect to overall strategies and policies in carrying out the duties of the Director. The Federal Housing Finance Oversight Board is comprised of the Secretary of the Treasury, Secretary of HUD, Chair of the Securities and Exchange Commission (SEC), and the Director, who serves as the Chairperson of the Federal Housing Finance Oversight Board. The FHFA is funded in part through assessments from the FHLBanks, with the remainder of its funding provided by Fannie Mae and Freddie Mac; no tax dollars or other appropriations support the operations of the FHFA or the FHLBanks. To assess our safety and soundness, the FHFA conducts annual, on-site examinations, as well as periodic on-site and off-site reviews. Additionally, we are required to submit monthly information on our financial condition and results of operations to the FHFA. This information is available to all FHLBanks.

Before a government corporation issues and offers obligations to the public, the Government Corporation Control Act provides that the Secretary of the Treasury will prescribe the form, denomination, maturity, interest rate, and conditions of the obligations; the manner and time issued; and the selling price. The Bank Act also authorizes the Secretary of the Treasury, at his or her discretion, to purchase consolidated obligations up to an aggregate principal amount of $4 billion. No borrowings under this authority have been outstanding since 1977. The U.S. Treasury receives the FHFA’s annual report to Congress, monthly reports reflecting securities transactions of the FHLBanks, and other reports reflecting the operations of the FHLBanks.

Audits and Examinations: We have an internal audit department and our Board of Directors has an audit committee. The Chief Audit Executive reports directly to the audit committee. In addition, an independent registered public accounting firm audits our annual financial statements and effectiveness of internal controls over financial reporting. The independent registered public accounting firm conducts these audits following standards of the Public Company Accounting Oversight Board (United States) and Government Auditing Standards issued by the Comptroller General of the United States. The FHLBanks, the FHFA, and Congress all receive the audit reports. We must submit annual management reports to Congress, the President of the United States, the Office of Management and Budget, and the Comptroller General. These reports include a statement of financial condition, a statement of operations, a statement of cash flows, a statement of internal accounting and administrative control systems, and the report of the independent public accounting firm on the financial statements.

The Comptroller General has authority under the Bank Act to audit or examine the FHFA and the individual FHLBanks and to decide the extent to which they fairly and effectively fulfill the purposes of the Bank Act. Furthermore, the Government Corporation Control Act provides that the Comptroller General may review any audit of the financial statements conducted by an independent registered public accounting firm. If the Comptroller General conducts such a review, then he or she must report the results and provide his or her recommendations to Congress, the Office of Management and Budget, and the applicable FHLBank. The Comptroller General may also conduct his or her own audit of any financial statements of any individual FHLBank.

Personnel

As of March 13, 2020, we had 233 employees. Our employees are not represented by a collective bargaining unit, and we have a good relationship with our employees.

Where to Find Additional Information

We file our annual, quarterly, and current reports and related information with the SEC. You can find our SEC filings at the SEC’s website at www.sec.gov. Additionally, on our website at www.fhlbtopeka.com, you can find a link to the SEC’s website which can be used to access free of charge our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 (Exchange Act), as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Except for the documents specifically incorporated by reference into this Annual Report on Form 10-K, information contained on our website or that can be accessed through our website is not incorporated by reference into this Annual Report on Form 10-K. Reference to our website is made as an inactive textual reference.

Legislative and Regulatory Developments

FHFA Advisory Bulletin 2020-01 - Acquired Member Assets Risk Management. On January 31, 2020, the FHFA issued an Advisory Bulletin on risk management of AMA (the AMA AB). The guidance communicates the FHFA’s expectations with respect to an FHLBank’s funding of its members through the purchase of eligible mortgage loans and includes expectations that an FHLBank will have board-established limits on AMA portfolios and management-established thresholds to serve as monitoring tools to manage AMA-related risk exposure. The AMA AB provides that the board of an FHLBank should ensure that the FHLBank serves as a liquidity source for members, and an FHLBank should ensure that its portfolio limits do not result in the FHLBank’s acquisition of mortgages from smaller members being “crowded out” by the acquisition of mortgages from larger members. The AMA AB contains the expectation that the board of an FHLBank should set limits on the size and growth of portfolios and on acquisitions from a single PFI. In addition, the guidance sets forth that the board of an FHLBank should consider concentration risk in the geographic area, high-balance loans, and third-party loan originations. The FHLBanks are expected to demonstrate their progress toward adherence to the AMA AB by September 30, 2020 and should have final limits in place by December 31, 2020.

We continue to evaluate the potential impact of the AMA AB on our financial condition and results of operations.

FHLBank Membership Request for Input. On February 24, 2020, the FHFA issued a Request for Input on FHLBank membership (the Membership RFI). The Membership RFI, as part of a holistic review of FHLBank membership, seeks public input on whether the FHFA's existing regulation on FHLBank membership, located at 12 CFR part 1263, remains adequate to ensure: (1) the FHLBank System remains safe and sound and able to provide liquidity to members in a variety of conditions; and (2) the advancement of the FHLBank's housing finance and community development mission. The FHFA is seeking input on several broad questions relating to FHLBank membership requirements, as well as on certain more specific questions related to the implementation of the current membership regulation. Responses are due no later than June 23, 2020.

Any rulemaking actions taken by the FHFA as a result of the Membership RFI to update the current FHLBank membership regulation may impact FHLBank membership eligibility or requirements, and ultimately our business, business opportunities, and results of operations.

FHFA Proposed Amendments to Stress Test Rule. On December 16, 2019, the FHFA published a proposed rule amending its stress testing rule, consistent with section 401 of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, to: (1) raise the minimum threshold to conduct periodic stress tests for entities regulated by the FHFA from those with consolidated assets of more than $10 billion to those with consolidated assets of more than $250 billion; (2) remove the requirements for FHLBanks to conduct stress tests; and (3) remove the adverse scenario from the list of required scenarios. The proposed rule maintains the FHFA’s discretion to require that an FHLBank with total consolidated assets below the $250 billion threshold conduct stress testing. The proposed amendments align the FHFA’s stress testing rules with rules adopted by other financial institution regulators that implement the Dodd-Frank Act stress testing requirements, as amended by the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018.

The results of our most recent annual severely adverse economic conditions stress test were published to our public website on November 15, 2019. If the proposed rule is adopted as proposed, it will eliminate these stress testing requirements for FHLBanks. We do not expect this rule, if adopted as proposed, to materially impact our financial condition or results of operations.

FDIC Brokered Deposits Restrictions. On December 12, 2019, the Federal Deposit Insurance Corporation (FDIC) issued a proposed rule to amend its brokered deposits restrictions that apply to less than well-capitalized insured depository institutions. The FDIC states that the proposed amendments are intended to modernize its brokered deposit regulations and would establish a new framework for analyzing whether deposits placed through deposit placement arrangements qualify as brokered deposits. These deposit placement arrangements include those between insured depository institutions and third parties, such as financial technology companies, for a variety of business purposes, including access to deposits. By creating a new framework for analyzing certain provisions of the “deposit broker” definition, including shortening the list of activities considered “facilitating” and expanding the scope of the “primary purpose” exception, the proposed rule would narrow the definition of “deposit broker” and exclude more deposits from treatment as “brokered deposits.” The proposed rule would also establish an application and reporting process with respect to the primary purpose exception.

If this rule is adopted as proposed, it may have an effect on member demand for advances, but we cannot predict the extent of the impact. We do not expect this rule, if adopted as proposed, to materially affect our financial condition or results of operations.

FHFA Supervisory Letter on Planning for LIBOR Phase-Out. On September 27, 2019, the FHFA issued a supervisory letter (the Supervisory Letter) to the FHLBanks that the FHFA stated is designed to ensure the FHLBanks will be able to identify and prudently manage the risks associated with the termination of LIBOR in a safe and sound manner. The Supervisory Letter provides that the FHLBanks should cease entering into new LIBOR referenced financial assets, liabilities, and derivatives with maturities beyond December 31, 2021 for all product types except investments. On March 16, 2020, in light of market volatility, the FHFA extended from March 31, 2020 to June 30, 2020 the FHLBanks’ ability to enter into instruments referencing LIBOR that mature after December 31, 2021, except for investments and option embedded products. With respect to investments, the FHLBanks should, by December 31, 2019, stop purchasing investments that reference LIBOR and mature after December 31, 2021. These phase-out dates do not apply to collateral accepted by the FHLBanks. The Supervisory Letter also directs the FHLBanks to update their pledged collateral certification reporting requirements by March 31, 2020 in an effort to encourage members to distinguish LIBOR-linked collateral maturing after December 31, 2021. The FHLBanks are expected to cease entering into LIBOR-indexed financial instruments maturing after December 31, 2021 by the deadlines specified in the Supervisory Letter, subject to limited exceptions granted by the FHFA under the Supervisory Letter for LIBOR-linked products serving compelling mission, risk mitigating, and/or hedging purposes that do not currently have readily available alternatives.

As a result of the Supervisory Letter and the extension, beginning July 1, 2020, we expect to suspend transactions in advances with terms directly linked to LIBOR that mature after December 31, 2021. In addition, beginning July 1, 2020, we expect to no longer enter into consolidated obligation bonds and derivatives with swaps, caps, or floors indexed to LIBOR that terminate after December 31, 2021. We have ceased purchasing investments that reference LIBOR and mature after December 31, 2021.

We continue to evaluate the potential impact of the Supervisory Letter on our financial condition and results of operations and LIBOR transition planning, but we may experience increased basis risk from our inability to fund LIBOR-indexed assets with LIBOR-indexed debt, reduced investment opportunities, and lower overall demand or increased costs for advances, which in turn may negatively impact the future composition of our balance sheet, capital stock levels, primary mission assets ratio, and net income.

For additional information on our LIBOR transition efforts and LIBOR exposure, see “Risk Management – Interest Rate Risk Management” under Item 7.

FHFA Advisory Bulletin 2019-03 - Capital Stock Management. On August 14, 2019, the FHFA issued an Advisory Bulletin (the Capital Stock Management AB) providing for each FHLBank to maintain a ratio of at least two percent of capital stock to total assets in order to help preserve the cooperative structure incentives that encourage members to remain fully engaged in the oversight of their investment in the FHLBank. In February 2020, the FHFA began to consider the proportion of capital stock to assets, measured on a daily average basis at month end, when assessing each FHLBank’s capital management practices.

We do not expect the Capital Stock Management AB to have a material impact on our capital management practices, financial condition, or results of operations.

SEC Final Rule on Auditor Independence with Respect to Certain Loans or Debtor-Creditor Relationships. On July 5, 2019, the SEC published a final rule, which became effective on October 3, 2019 (Final Rule), that adopts amendments to its auditor independence rules to modify the analysis that must be conducted to determine whether an auditor is independent when the auditor has a lending relationship with certain shareholders of an audit client at any time during an audit or professional engagement period. The Final Rule, among other things, focuses the analysis on beneficial ownership rather than on both record and beneficial ownership; replaces the existing ten percent bright-line shareholder ownership test with a “significant influence” test; and adds a “known through reasonable inquiry” standard with respect to identifying beneficial owners of the audit client’s equity securities.

Under the prior loan rule on debtor-creditor relationships, the independence of an accounting firm generally could be called into question if it or a covered person in the accounting firm received a loan from a lender that is a “record or beneficial owner of more than ten percent of the audit client’s equity securities.” A covered person in the firm includes personnel on the audit engagement team, personnel in the chain of command, partners and managers who provide ten or more hours of non-audit services to the audit client, and partners in the office where the lead engagement partner practices in connection with the client. The Final Rule replaced the existing ten percent bright-line test with a significant influence test similar to that referenced in other SEC rules and based on concepts applied in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 323.

Under the Final Rule, which is now in effect, with certain exceptions, the receipt of loans from the beneficial owners of an audit client’s equity securities where such beneficial owner has significant influence over the audit client would impair the independence of the auditor. The analysis under the Final Rule would be based on the facts and circumstances and would focus on whether the beneficial owners of an audit client’s equity securities have the ability to exercise significant influence over the operating and financial policies of an audit client.

There were no members with the ability to exercise significant influence over the operating and financial policies of FHLBank at December 31, 2019.

FHFA Advisory Bulletin 2019-01 Business Resiliency Management. On May 7, 2019, the FHFA issued an advisory bulletin on Business Resiliency Management for FHLBanks and other entities regulated by the FHFA (the Business Resiliency AB) that communicates the FHFA’s expectations with respect to minimizing the impact of disruptions in service from uncontrolled events and the maintenance of business operations at predefined levels. The Business Resiliency AB rescinds the FHFA’s 2002 disaster recovery guidance. The new guidance states that a business resiliency program should guide the regulated entity to respond appropriately to disruptions affecting business operations, personnel, equipment, facilities, information technology systems, and information assets. The Business Resiliency AB provides guidance on the elements of a safe and sound business resiliency program, which include governance, risk assessment and business impact analysis, risk mitigation and plan development, testing and analysis, and risk monitoring and program sustainability.

We do not expect the Business Resiliency AB to have a material effect on our financial condition or results of operations.

Final Rule on FHLBank Capital Requirements. On February 20, 2019, the FHFA published a final rule, effective January 1, 2020, that adopted, with amendments, the regulations of the Federal Housing Finance Board (FHFB, predecessor to the FHFA) pertaining to the capital requirements for the FHLBanks. This final rule carries over most of the prior FHFB regulations without material change but substantively revises the credit risk component of the risk-based capital requirement, as well as the limitations on extensions of unsecured credit. The main revisions remove requirements that we calculate credit risk capital charges and unsecured credit limits based on ratings issued by an NRSRO, and instead require that we establish and use our own internal rating methodology (which may include, but not solely rely on, NRSRO ratings). The rule imposes a new credit risk capital charge for cleared derivatives. This final rule also revises the percentages used in the regulation’s tables to calculate credit risk capital charges for advances and for non-mortgage assets. This final rule also rescinds certain contingency liquidity requirements that were part of the FHFB regulations, as these requirements are now addressed in an Advisory Bulletin on FHLBank Liquidity Guidance issued by the FHFA in 2018.

We do not expect this rule to materially affect our financial condition or results of operations.

FDIC Final Rule on Reciprocal Deposits. On February 4, 2019, the FDIC published a final rule, effective March 6, 2019, related to the treatment of “reciprocal deposits,” which implements Section 202 of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018. This final rule exempts, for certain insured depository institutions (depositories), certain reciprocal deposits (deposits acquired by a depository from a network of participating depositories that enables depositors to receive FDIC insurance coverage for the entire amount of their deposits) from being subject to FDIC restrictions on brokered deposits. Under the rule, well-capitalized and well-rated depositories are not required to treat reciprocal deposits as brokered deposits up to the lesser of twenty percent of their total liabilities or $5 billion. Reciprocal deposits held by depositories that are not well-capitalized and well-rated may also be excluded from brokered deposit treatment in certain circumstances.

We do not expect the rule to materially affect our financial condition or results of operations. The rule could, however, enhance depositories’ liquidity by increasing the attractiveness of deposits that exceed FDIC insurance limits. This could affect the demand for certain advance products.

Developments applicable to interest rate swaps:

Uncertainty Regarding Brexit. In June 2016, the United Kingdom (the UK) voted in favor of leaving the European Union (the EU), and in March 2017, Article 50 of the Lisbon Treaty was invoked, commencing a period of negotiations between the UK and the European Council for the UK’s withdrawal from the EU, which was subsequently extended by the European Council members in agreement with the UK. On January 31, 2020, the UK withdrew from the EU, with a transition period to last until December 31, 2020, which period may be extended for an additional two years. During this transition period, the UK and the EU will negotiate the details of their future relationship, including what conditions will apply to EU-based entities that want to do business with the UK, and vice versa, after the transition period.

We do not have material exposure to non-cleared swap counterparties based in the UK or the EU.

CFTC No-action Relief for LIBOR Amendments. On December 17, 2019, three divisions of the Commodity Futures Trading Commission (CFTC) issued no-action letters to provide relief with respect to the transition away from LIBOR and other interbank offered rates (IBORs). Among other forms of relief, the letters, subject to certain limitations:

•

permit registered swap dealers, major swap participants, security-based swap participants, and major security-based swap participants (covered swap entities) to amend an uncleared swap entered into before the compliance date of the CFTC’s uncleared swap margin requirements (such swap, a legacy swap, and such requirements, the CFTC margin rules) to include LIBOR or other IBOR fallbacks without the legacy swap becoming subject to the CFTC margin rules; and


•	provide time-limited relief, until December 31, 2021, for: (1) swaps that are not subject to the central clearing requirement because they were executed prior to the relevant compliance date; and (2) swaps that are subject to the trade execution requirement to be amended to include LIBOR or other IBOR fallbacks without becoming subject to such clearing or trade execution requirements.

We do not expect these no-action letters to have a material effect on our financial condition or results of operations.

Margin and Capital Requirements for Agency Covered Swap Entities. On November 7, 2019, the Office of the Comptroller of the Currency, the Federal Reserve Board, the FDIC, the Farm Credit Administration and the FHFA (collectively, the Agencies) jointly published a proposed rule that would amend the Agencies’ regulations that established minimum margin and capital requirements for uncleared swaps (the prudential margin rules) for covered swap entities under the jurisdiction of one of the Agencies (Agency covered swap entities). In addition to other changes, the proposed amendments would permit those uncleared swaps entered into by Agency covered swap entities before the compliance date of the prudential margin rules (Agency legacy swaps) to retain their legacy status and not become subject to the prudential margin rules in the event that they are amended to replace LIBOR or another rate that is reasonably expected to be discontinued or is reasonably determined to have lost its relevance as a reliable benchmark due to a significant impairment. Among other things, the proposed rule would also amend the prudential margin rules to: (1) extend the phase-in compliance date for initial margin requirements from September 1, 2020 to September 1, 2021 for Agency covered swap entity counterparties with an average daily aggregate notional amount of non-cleared swaps from $8 billion to $50 billion; (2) clarify that an Agency covered swap entity does not have to execute initial margin trading documentation with a counterparty prior to the time that the counterparty is required to collect or post initial margin; and (3) permit Agency legacy swaps to retain their legacy status and not become subject to the prudential margin rules in the event that they are amended due to certain life-cycle activities, such as reductions of notional amounts or portfolio compression exercises.

We do not expect this rule, if adopted as proposed, to have a material effect on our financial condition or results of operations.

CFTC Advisory on Initial Margin Documentation Requirements. On July 9, 2019, the CFTC issued an advisory (the Advisory) on the CFTC margin rules to clarify that documentation governing the posting, collection, and custody of initial margin is not required to be completed until such time as the aggregate unmargined exposure to a counterparty (and its margin affiliates) exceeds a threshold of $50 million. The CFTC margin rules provide that CFTC covered swap entities are required to post and collect initial margin with counterparties that are swap dealers or financial end users with material swaps exposure, as defined under the rule. The CFTC margin rules, however, contain an initial margin threshold amount of $50 million between a covered swap entity (and its margin affiliates) on the one hand, and its counterparty (and its margin affiliates) on the other. The Advisory clarifies that no initial margin documentation is required until the amount of initial margin exchangeable between a covered swap entity (and its margin affiliates) and its counterparty (and its margin affiliates) exceeds the initial margin threshold amount of $50 million. The Advisory, however, does instruct CFTC covered swap entities to closely monitor initial margin amounts if they are approaching the $50 million initial margin threshold with a counterparty and to take appropriate steps to ensure that the required documentation is in place at such time as the threshold is reached.

We are monitoring the initial margin thresholds and do not currently expect our documentation requirements to change based on the clarification to the CFTC margin rules provided by the Advisory.

Item 1A: Risk Factors

Business Risk - General

Changes in economic conditions, or federal fiscal and monetary policy could impact our business. Our net income is sensitive to changes in market conditions that can impact the interest we earn and pay and introduce volatility in other income (loss). These conditions include, but are not limited to, the following: (1) changes in interest rates; (2) fluctuations in both debt and equity capital markets; (3) conditions in the financial, credit, mortgage, and housing markets; (4) the willingness and ability of financial institutions to expand lending; and (5) and the strength of the U.S. economy and the local economies in which we conduct business. Our financial condition, results of operations, and ability to pay dividends could be negatively affected by changes in one or more of these conditions. Additionally, our business and results of operations may be affected by the fiscal and monetary policies of the federal government and its agencies, including the Federal Reserve, which regulates the supply of money and credit in the U.S. The Federal Reserve’s policies directly and indirectly influence the yield on interest-earning assets and the cost of interest-bearing liabilities, which could adversely affect our financial condition, results of operations, and ability to pay dividends.

An economic downturn, natural disaster, or pandemic in the FHLBank’s region could adversely affect our profitability and financial condition. Economic recession over a prolonged period or other unfavorable economic conditions in our region (including on a state or local level) could have an adverse effect on our business, including the demand for our products and services, and the value of the collateral securing advances, investments, and mortgage loans held in portfolio. Portions of our region also are subject to risks from tornadoes, floods, or other natural disasters, and all are subject to pandemic risk. These natural disasters, including those resulting from significant climate changes, could damage or dislocate the facilities of our members, may damage or destroy collateral that members have pledged to secure advances or mortgages, or the livelihood of borrowers of members, or otherwise could cause significant economic dislocation in the affected areas of our region.

Additionally, the impact of widespread health emergencies may adversely impact our financial condition and results of operations, such as the potential impact from the recent outbreak of the coronavirus, which was first detected in Wuhan, Hubei Province, China but has now spread to other countries, including the United States. If our members are adversely affected, or if the virus leads to a widespread health emergency that impacts our employees or vendors, or the borrowers of our members, or economic growth generally, our financial condition and results of operations could be adversely affected.

Business Risk - Legislative and Regulatory

Our business has been, and may continue to be, adversely impacted by legislation and other ongoing actions by the U. S. government in response to periodic disruptions in the financial markets. To the extent that any actions by the U.S. government in response to an economic downturn, recession, inflation or other macro-level events or conditions cause a significant decrease in the aggregate amount of advances or increase our operating costs, our financial condition and results of operations may be adversely affected. Our primary regulator, the FHFA, also continues to issue proposed and final regulatory and other requirements as a result of the Recovery Act, the Dodd-Frank Act and other significant legislation. We cannot predict the effect of any new regulations or other regulatory guidance on our operations. Changes in regulatory requirements could result in, among other things, an increase in our cost of funding or overall cost of doing business, or a decrease in the size, scope or nature of our membership base, or our lending, investment, or mortgage loan activity, which could negatively affect our financial condition and results of operations. See Item 1 – “Business – Legislative and Regulatory Developments” for more information on potential future legislation and other regulatory activity affecting us.

We are subject to a complex body of laws and regulatory and other requirements that could change in a manner detrimental to our operations. The FHLBanks are GSEs organized under the authority of the Bank Act, and, as such, are governed by federal laws, regulations and other guidance adopted and applied by the FHFA, which serves as the federal regulator of the FHLBanks and the Office of Finance, Fannie Mae, and Freddie Mac. There is a risk that actions by the FHFA toward Fannie Mae and Freddie Mac may have an unfavorable impact on the FHLBanks’ operations and/or financial condition because of the significant difference in their business models compared to ours. In addition, Congress may amend the Bank Act or pass other legislation that significantly affects the rights, obligations, and permissible activities of the FHLBanks and the manner in which the FHLBanks carry out their housing-finance and liquidity missions and business operations. The U.S. Congress is considering broad legislation for reform of GSEs as a result of the disruptions in the financial and housing markets and the conservatorships of Fannie Mae and Freddie Mac. We do not know how, when, or to what extent GSE reform legislation will be adopted, and if adopted, how it would impact the business or operations of FHLBank or the FHLBank System. We are, or may also become, subject to further regulations promulgated by the SEC, CFTC, Federal Reserve Bank, Financial Crimes Enforcement Network, or other regulatory agencies. In addition, there is a risk that our funding costs and access to funds could be adversely affected by changes in investors’ perception of the systemic risks associated with Fannie Mae and Freddie Mac.

We cannot predict whether new regulatory or other requirements will be promulgated by the FHFA or other regulatory agencies, or whether Congress will enact new legislation, and we cannot predict the effect of any new regulatory requirements or legislation on our operations. Changes in regulatory, statutory or other requirements could result in, among other things, an increase in our cost of funding and the cost of operating our business, a change in our permissible business activities, or a decrease in the size, scope or nature of our membership or our lending, investment or mortgage loan activities, which could negatively affect our financial condition and results of operations.

Business Risk - Strategic

We face competition for loan demand, purchases of mortgage loans and access to funding, which could adversely affect our earnings. Our primary business is making advances to our members. We compete with other suppliers of wholesale funding, both secured and unsecured, including investment banks, commercial banks, and, in certain circumstances, other FHLBanks. Our members have access to alternative funding sources that may offer more favorable terms than we offer on our advances, including more flexible credit or collateral standards. In addition, many of our competitors are not subject to the same regulations that are applicable to us. This enables those competitors to offer products and terms that we are not able to offer.

The availability of alternative funding sources to our members may significantly decrease the demand for our advances. Any change we might make in pricing our advances, in order to compete more effectively with competitive funding sources, may decrease our profitability on advances. A decrease in the demand for our advances or a decrease in our profitability on advances, would negatively affect our financial condition and results of operations.

Likewise, our acquisition of mortgage loans is subject to competition. The most direct competition for purchases of mortgage loans comes from other buyers of conventional, conforming, fixed rate mortgage loans, such as Fannie Mae and Freddie Mac. Increased competition can result in the acquisition of a smaller market share of the mortgage loans available for purchase and, therefore, lower income from this business activity.

We also compete in the capital markets with Fannie Mae, Freddie Mac, and other GSEs, as well as corporate, sovereign, and supranational entities for funds raised through the issuance of consolidated obligations and other debt instruments. Our ability to obtain funds through the issuance of debt depends in part on prevailing market conditions in the capital markets (including investor demand), such as effects on the reduction in liquidity in financial markets, which are beyond our control. Accordingly, we may not be able to obtain funding on terms that are acceptable to us. Increases in the supply of competing debt products in the capital markets may, in the absence of increases in demand, result in higher debt costs to us or lesser amounts of debt issued at the same cost than otherwise would be the case. Although our supply of funds through issuance of consolidated obligations has always kept pace with our funding needs, we cannot guarantee that this will continue in the future, especially in the case of financial market disruptions when the demand for advances by our members typically increases.

Member mergers or consolidations, failures, or other changes in member business with us may adversely affect our financial condition and results of operations. The financial services industry periodically experiences consolidation, which may occur as a result of various factors including adjustments in business strategies and increasing expense and compliance burdens. If future consolidation occurs within our district, it may reduce the number of current and potential members in our district, resulting in a loss of business to us and a potential reduction in our profitability. Member failures and out-of-district consolidations also can reduce the number of current and potential members in our district. The resulting loss of business could negatively impact our financial condition and the results of operations, as well as our operations generally. If our advances are concentrated in a smaller number of members, our risk of loss resulting from a single event (such as the loss of a member’s business due to the member’s acquisition by a non-member) would become proportionately greater.

Further, while member failures may cause us to liquidate pledged collateral if the outstanding advances are not repaid, historically, failures have been resolved either through repayment directly from the FDIC or through the purchase and assumption of the advances by another surviving financial institution. Liquidation of pledged collateral by us may cause financial statement losses. Additionally, if members become financially distressed, we may, at the request of their regulators, decrease lending limits or, in certain circumstances, cease lending activities to certain members if they do not have adequate eligible collateral to support additional borrowings. If members are unable to obtain sufficient liquidity from us, that member's financial position may continue to deteriorate. This may negatively impact our reputation and, therefore, negatively impact our financial condition and results of operations.

A high proportion of advances and capital is concentrated with a few members, and a loss of, or change in business activities with, such institutions could adversely affect us. We have a concentration of advances (see Table 26) and capital with a few institutions. A reduction in advances by such institutions, or the loss of membership by such institutions, whether through merger, consolidation, withdrawal, or other action, may result in a reduction in our total assets and a possible reduction of capital as a result of the repurchase or redemption of capital stock. The reduction in assets and capital may also reduce our net income.

Changes in our credit ratings may adversely affect our business operations. As of March 13, 2020, we are rated Aaa with a stable outlook by Moody’s and AA+ with a stable outlook by S&P. Adverse revisions to or the withdrawal of our credit ratings could adversely affect us in a number of ways. It might influence counterparties to limit the types of transactions they would be willing to enter into with us or cause counterparties to cease doing business with us. We have issued letters of credit to support deposits of public unit funds with our members. In some circumstances, loss of or reduction in any of our current ratings could result in our letters of credit no longer being acceptable to collateralize public unit deposits or other transactions. We have also executed various standby bond purchase agreements (SBPA) in which we provide a liquidity facility for bonds issued by the HFAs by agreeing to purchase the bonds in the event they are tendered and cannot be remarketed in accordance with specified terms and conditions. If our current short-term ratings are reduced, suspended, or withdrawn, the issuers will have the right to terminate these SBPAs, resulting in the loss of future fees that would be payable to us under these agreements.

Changes in the credit standing of the U.S. Government or other FHLBanks, including the credit ratings assigned to the U.S. Government or those FHLBanks, could adversely affect us. Pursuant to criteria used by S&P and Moody’s, the FHLBank System’s debt is linked closely to the U.S. sovereign rating because of the FHLBanks’ status as GSEs and the public perception that the FHLBank System would be likely to receive U.S. government support in the event of a crisis. The U.S. government’s fiscal challenges could impact the credit standing or credit rating of the U.S. government, which could in turn result in a revision of the rating assigned to us or the consolidated obligations of the FHLBank System.

The FHLBanks issue consolidated obligations that are the joint and several liability of all FHLBanks. Significant developments affecting the credit standing of one or more of the other FHLBanks, including revisions in the credit ratings of one or more of the other FHLBanks, could adversely affect the cost of consolidated obligations. An increase in the cost of consolidated obligations would adversely affect our cost of funds and negatively affect our financial condition. As of March 13, 2020, the consolidated obligations of the FHLBanks are rated Aaa/P-1 by Moody’s and AA+/A-1+ by S&P. All of the FHLBanks are rated Aaa with a stable outlook by Moody’s and AA+ with a stable outlook by S&P. Changes in the credit standing or credit ratings of one or more of the other FHLBanks could result in a revision or withdrawal of the ratings of the consolidated obligations by the rating agencies at any time, which may negatively affect our cost of funds and our ability to issue consolidated obligations for our benefit.

We may become liable for all or a portion of the consolidated obligations of one or more of the other FHLBanks. We are jointly and severally liable with the other FHLBanks for all consolidated obligations issued on behalf of all FHLBanks through the Office of Finance. We cannot pay any dividends to members or redeem or repurchase any shares of our capital stock unless the principal and interest due on all our consolidated obligations have been paid in full. If another FHLBank were to default on its obligation to pay principal or interest on any consolidated obligation, the FHFA may allocate the outstanding liability among one or more of the remaining FHLBanks on a pro rata basis or on any other basis the FHFA may determine. As a result, our ability to pay dividends to our members or to redeem or repurchase shares of our capital stock could be affected not only by our own financial condition, but also by the financial condition of one or more of the other FHLBanks.

Credit Risk

Declines in U.S. home prices or in activity in the U.S. housing market or rising delinquency or default rates on mortgage loans could result in credit losses and adversely impact our business operations and/or financial condition. A deterioration of the U.S. housing market and national decline in home prices could adversely impact the financial condition of a number of our borrowers, particularly those whose businesses are concentrated in the mortgage industry. One or more of our borrowers may default on their obligations to us for a number of reasons, such as changes in financial condition, a reduction in liquidity, operational failures, or insolvency. In addition, the value of residential mortgage loans pledged to us as collateral may decrease. If a borrower defaults, and we are unable to obtain additional collateral to make up for the reduced value of such residential mortgage loan collateral, we could incur losses. A default by a borrower lacking sufficient collateral to cover its obligations to us could result in significant financial losses, which would adversely impact our results of operations and financial condition.

Defaults by one or more of our institutional counterparties on its obligations to us could adversely affect our results of operations or financial condition. We have a high concentration of credit risk exposure to financial institutions as counterparties, the majority of which are located within the United States, Canada, Australia, and Europe. Our primary exposures to institutional counterparty risk are with: (1) obligations of mortgage servicers that service the loans we have as collateral on our credit obligations; (2) third-party providers of credit enhancements on the MBS that we hold in our investment portfolio, including mortgage insurers, bond insurers, and financial guarantors; (3) third-party providers of PMI and SMI for mortgage loans purchased under the MPF Program; (4) uncleared derivative counterparties; (5) third-party custodians and futures commission merchants associated with cleared derivatives; and (6) unsecured money market and Federal funds investment transactions. A default by a counterparty with significant obligations to us could adversely affect our ability to conduct operations efficiently and at cost-effective rates, which in turn could adversely affect our results of operations and financial condition.

A default by a derivatives clearinghouse on its obligations could adversely affect our results of operations or financial condition. The Dodd-Frank Act and implementing CFTC regulations require all clearable derivatives transactions to be cleared through a derivatives clearinghouse. As a result of such statutes and regulations, we are required to centralize our risk with the derivatives clearinghouses as opposed to the pre-Dodd-Frank Act methods of entering into derivatives transactions that allowed us to distribute our risk among various counterparties. A default by a derivatives clearinghouse could: (1) adversely affect our financial condition in the event the derivatives clearinghouse is unable to make payments owed to us or return our posted initial margin; (2) jeopardize the effectiveness of derivatives hedging transactions; and (3) adversely affect our operations as we may be unable to enter into certain derivatives transactions or do so at cost-effective rates.

Securities or loans pledged as collateral by our members or collateral securing mortgage loans or MBS investments could be adversely affected by the devaluation of, or inability to liquidate, the collateral in the event of a default. Although we seek to obtain sufficient collateral on our credit obligations to protect ourselves from credit losses, changes in market conditions, uninsured or underinsured natural disasters, or other factors may cause the collateral to deteriorate in value, which could lead to a credit loss in the event of a default by a member or a borrower and adversely affect our financial condition and results of operations. A reduction in liquidity in the financial markets or otherwise could have the same effect.

Our funding depends on our ability to access the capital markets. Our primary source of funds is the sale of consolidated obligations in the capital markets, including the short-term discount note market. Our ability to obtain funds through the sale of consolidated obligations depends in part on prevailing conditions in the capital markets (including investor demand) at the time. Our counterparties in the capital markets are also subject to additional regulation following the financial crisis that ended in 2010. These regulations could alter the balance sheet composition, market activities, and behavior of our counterparties in a way that could be detrimental to our access to the capital markets and overall financial market liquidity, which could have a negative impact on our funding costs and results of operations. Further, we rely on the Office of Finance for the issuance of consolidated obligations, and a failure or interruption of services provided by the Office of Finance could hinder our ability to access the capital markets. Accordingly, we cannot make any assurance that we will be able to obtain funding on terms acceptable to us in the future, if we are able to obtain funding at all in the case of another severe financial, economic, or other disruption. If we cannot access funding when needed, our ability to support and continue our operations would be adversely affected, negatively affecting our financial condition and results of operations.

Market Risk

Our profitability may be adversely affected if we are not successful in managing our interest rate risk. Like most financial institutions, our results of operations are significantly affected by our ability to manage interest rate risk. We use a number of tools to monitor and manage interest rate risk, including income simulations and duration/market value sensitivity analyses. Given the unpredictability of the financial markets, capturing all potential outcomes in these analyses is extremely difficult. Key assumptions used in our market value sensitivity analyses include interest rate volatility, mortgage prepayment projections and the future direction of interest rates, among other factors. Key assumptions used in our income simulations include projections of advances volumes and pricing, MPF volumes and pricing, market conditions for our debt, prepayment speeds and cash flows on mortgage-related assets, the level of short-term interest rates, and other factors. These assumptions are inherently uncertain and, as a result, the measures cannot precisely estimate net interest income or the market value of our equity nor can they precisely predict the effect of higher or lower interest rates or changes in other market factors on net interest income or the market value of our equity. Actual results will most likely differ from simulated results due to the timing, magnitude, and frequency of interest rate changes and changes in market conditions and management strategies, among other factors. Our ability to maintain a positive spread between the interest earned on our earning assets and the interest paid on our interest-bearing liabilities may be affected by the unpredictability of changes in interest rates.

There is substantial uncertainty regarding the replacement of the LIBOR benchmark interest rate, which could adversely affect our business, results of operations, and financial condition. In July 2017, the United Kingdom's Financial Conduct Authority (FCA) announced that it plans to phase out the regulatory oversight of LIBOR interest rate indices by 2021. The FCA and the submitting LIBOR banks have indicated they will support the LIBOR indices through 2021 to allow for an orderly transition to an alternative reference rate. While we currently expect LIBOR to be viable benchmark until the end of 2021, it is possible that LIBOR will become unavailable prior to the end of 2021. We are unable to predict when LIBOR will cease to be available and market participants have not agreed on a cessation trigger. The Alternative Reference Rates Committee (ARRC) in the United States has identified SOFR as the rate that represents best practice for use in new US Dollar (USD) derivatives and other financial contracts as its recommended alternative to USD LIBOR in the United States. SOFR is intended to be a broad measure of the average cost of borrowing cash overnight collateralized by Treasury securities. The Federal Reserve Bank of New York began publishing SOFR rates in April 2018. As noted throughout this annual report, many of our assets and liabilities, including derivative assets and derivative liabilities, are indexed to USD LIBOR. A portion of these assets and liabilities and related collateral have maturity dates that extend beyond 2021.

We are evaluating the potential impact of the replacement of the LIBOR benchmark interest rate, including the likelihood of SOFR prevailing as the most widely adopted replacement reference rate. The market transition away from LIBOR is expected to be gradual and complicated, including the development of term and credit adjustments to accommodate differences between LIBOR, an unsecured rate, and SOFR, a secured rate. Introduction of an alternative reference rate also may introduce additional basis risk for market participants as an alternative index is utilized along with LIBOR. There can be no guarantee that SOFR will become widely used and that other alternative reference rates may or may not be developed with additional complications. We are not able to predict whether LIBOR will cease to be available after 2021, whether SOFR will become a widely accepted reference rate in place of LIBOR, or what the precise impact of a possible transition to SOFR or another alternate replacement reference rate will have on our business, financial condition, or results of operations. The upcoming discontinuance of LIBOR and transition to SOFR or an alternative reference rate could adversely impact existing financial assets and liabilities indexed to LIBOR, including the effectiveness of existing hedging transactions, which could have an adverse impact on our business, financial condition, and results of operations.

For additional information on our LIBOR transition efforts and LIBOR exposure, see “Risk Management – Interest Rate Risk Management” under Item 7.

We rely on derivatives to lower our cost of funds and reduce our interest rate, option and prepayment risk, and we may not be able to enter into effective derivative instruments on acceptable terms; thus, these derivatives may adversely affect our results of operations. We use derivatives to: (1) obtain funding at more favorable rates; and (2) reduce our interest rate risk, option risk and mortgage prepayment risk. Management determines the nature and quantity of hedging transactions using derivatives based on various factors, including market conditions and the expected volume and terms of advances or other transactions. As a result, our effective use of derivatives depends on management’s ability to determine the appropriate hedging positions considering: (1) our assets and liabilities; and (2) prevailing and anticipated market conditions. In addition, the effectiveness of our hedging strategies depends on our ability to enter into derivatives with acceptable counterparties, or through derivative clearinghouses, on terms desirable to us and in the quantities necessary to hedge our corresponding obligations, interest rate risk or other risks. The cost of entering into derivative instruments has increased as a result of: (1) consolidations, mergers and bankruptcy or insolvency of financial institutions, which have led to fewer counterparties, resulting in less liquidity in the derivatives market; and (2) increased uncertainty related to the potential changes in legislation and regulations regarding over-the-counter derivatives including increased margin and capital requirements, and increased regulatory costs and transaction fees associated with clearing and custodial arrangements. If we are unable to manage our hedging positions properly, or are unable to enter into derivative hedging instruments on desirable terms or at all, we may incur higher funding costs, be required to limit certain advance product offerings, and be unable to effectively manage our interest rate risk and other risks, which could negatively affect our financial condition and results of operations.

The use of derivatives also subjects us to earnings volatility caused primarily by the changes in the fair values of derivatives that do not qualify for hedge accounting and, to a lesser extent, by hedge ineffectiveness, which is the difference in the amounts recognized in our earnings for the changes in fair value of a derivative and the related hedged item. If we are unable to apply hedge accounting due to changes in accounting guidance or other changes in circumstances that impact our ability to utilize hedge accounting, the result could be an increase in the volatility of our earnings from period to period. Such increases in earnings volatility could affect our ability to pay dividends, our ability to meet our retained earnings threshold, and our members’ willingness to hold the capital stock necessary for membership and/or lending activities with us.

Liquidity and Capital Risk

We may not be able to meet our obligations as they come due or meet the credit and liquidity needs of our members in a timely and cost-effective manner. We seek to be in a position to meet our members’ credit and liquidity needs and to pay our obligations without maintaining excessive holdings of low-yielding liquid investments or being forced to incur unnecessarily high borrowing costs. In addition, we are subject to various regulatory liquidity requirements, including a contingency funding plan designed to protect against temporary disruptions in access to the FHLBank debt markets in response to a rise in capital market volatility. Our efforts to manage our liquidity position, including carrying out our contingency funding plan and the related costs, may not enable us to meet our obligations and the credit and liquidity needs of our members, which could have an adverse effect on our net interest income, and thereby, our financial condition and results of operations.

An increase in required AHP contributions could adversely affect our results of operations, our ability to pay dividends, or our ability to redeem or repurchase capital stock. The Bank Act requires each FHLBank to contribute to its AHP the greater of: (1) 10 percent of that FHLBank’s net earnings for the previous year; or (2) that FHLBank’s pro rata share of an aggregate of $100 million, the proration of which is based on the net earnings of the FHLBanks for the previous year. A failure of the FHLBanks to make the minimum $100 million annual AHP contribution in a given year could result in an increase in our required AHP contribution, which could adversely affect our results of operations, our ability to pay dividends, or our ability to redeem or repurchase capital stock.

We may not be able to pay dividends at rates consistent with past practices. Our Board of Directors may only declare dividends on our capital stock, payable to members, from our unrestricted retained earnings and current net income. Our ability to pay dividends also is subject to statutory and regulatory requirements, including meeting all regulatory capital requirements. The potential promulgation of regulations or other requirements by the FHFA that would require higher levels of required or restricted retained earnings could lead to higher levels of retained earnings, and thus, lower amounts of unrestricted retained earnings available to be paid out to our members as dividends. Failure to meet any of our regulatory capital requirements would prevent us from paying any dividend.

Events such as changes in our market risk profile, credit quality of assets held, and increased volatility of net income caused by the application of certain GAAP may affect the adequacy of our retained earnings and may require us to increase our threshold level of retained earnings and correspondingly reduce our dividends from historical payout ratios to achieve and maintain the threshold amounts of retained earnings under our RMP. Additionally, FHFA regulations on capital classifications could restrict our ability to pay dividends. Further, our ability to pay dividends at historical rates is impacted directly by our net income, so a decline in net income could result in a decline in dividend rates. A decline in dividend rates may diminish members’ interest in holding FHLBank capital stock and could decrease demand for advances.

Lack of a public market and restrictions on transferring our stock could result in an illiquid investment for the holder. Under the GLB Act, FHFA regulations and our capital plan, our Class A Common Stock may be redeemed upon the expiration of a six-month redemption period and our Class B Common Stock after a five-year redemption period following our receipt of a redemption request. Only capital stock in excess of a member’s minimum investment requirement, capital stock held by a member that has submitted a notice to withdraw from membership, or capital stock held by a member whose membership has been terminated may be redeemed at the end of the redemption period. Further, we may elect to repurchase excess capital stock of a member at any time at our sole discretion.

We cannot guarantee, however, that we will be able to redeem capital stock even at the end of the redemption periods. The redemption or repurchase of our capital stock is prohibited by FHFA regulations and our capital plan if the redemption or repurchase of the capital stock would cause us to fail to meet our minimum regulatory capital requirements. Likewise, under such regulations and the terms of our capital plan, we could not honor a member’s capital stock redemption request if the redemption would cause the member to fail to maintain its minimum capital stock investment requirement. Moreover, since our capital stock may only be owned by our members (or, under certain circumstances, former members and certain successor institutions), and our capital plan requires our approval before a member may transfer any of its capital stock to another member, we can provide no assurance that a member would be allowed to sell or transfer any excess capital stock to another member at any point in time.

We may also suspend the redemption of capital stock if we reasonably believe that the redemption would prevent us from maintaining adequate capital against a potential risk, or would otherwise prevent us from operating in a safe and sound manner. In addition, approval from the FHFA for redemptions or repurchases is required if the FHFA or our Board of Directors were to determine that we have incurred, or are likely to incur, losses that result in, or are likely to result in, charges against our capital. Under such circumstances, we cannot guarantee that the FHFA would grant such approval or, if it did, upon what terms it might do so. We may also be prohibited from repurchasing or redeeming our capital stock if the principal and interest due on any consolidated obligations that we issued through the Office of Finance has not been paid in full or if we become unable to comply with regulatory liquidity requirements to satisfy our current obligations.

Accordingly, there are a variety of circumstances that would preclude us from redeeming or repurchasing our capital stock that is held by a member. Since there is no public market for our capital stock and transfers require our approval, we cannot guarantee that a member’s purchase of our capital stock would not effectively become an illiquid investment.

Operational Risk

We rely on financial models to manage our market and credit risk, to make business decisions, and for financial accounting and reporting purposes. The impact of financial models and the underlying assumptions used to value financial instruments may have an adverse impact on our financial condition and results of operations. We make significant use of financial models for managing risk. For example, we use models to measure and monitor exposures to interest rate and other market risks, including prepayment risk and credit risk. We also use models in determining the fair value of financial instruments for which independent price quotations are not available or reliable. The degree of management judgment in determining the fair value of a financial instrument is dependent on the availability of quoted market prices or observable market parameters. For financial instruments that are actively traded and have quoted market prices or parameters readily available, there is little to no subjectivity in determining fair value. If market quotes are not available, fair values are based on discounted cash flows using market estimates of interest rates and volatility or on dealer prices or prices of similar instruments. Pricing models and their underlying assumptions are based on management's best estimates for discount rates, prepayments, market volatility, and other factors. These assumptions may have a significant effect on the reported fair values of assets and liabilities, including derivatives, the related income and expense, and the expected future behavior of assets and liabilities. While the models we use to value instruments and measure risk exposures are subject to regular validation by independent parties, rapid changes in market conditions could impact the value of our instruments. The use of different models and assumptions, as well as changes in market conditions, could impact our financial condition and results of operations.

The information provided by these models is also used in making business decisions relating to strategies, initiatives, transactions, and products, and in financial statement reporting. We have adopted policies, procedures, and controls to monitor and manage assumptions used in these models. However, models are inherently imperfect predictors of actual results because they are based on assumptions about future performance. Changes in any models or in any of the assumptions, judgments, or estimates used in the models may cause the results generated by the model to be materially different. If the results are not reliable due to inaccurate assumptions, judgments, or estimates, we could make poor business decisions, including asset and liability management, or other decisions, which could result in an adverse financial impact. Furthermore, any strategies that we employ to attempt to manage the risks associated with the use of models may not be effective.

We rely heavily on information systems and other technology. We rely heavily on information systems and other technology to conduct and manage our business. If key technology platforms become obsolete, or if we experience disruptions, including difficulties in our ability to process transactions, our revenue and results of operations could be materially adversely affected. To the extent that we experience a failure or interruption in any of these systems or other technology, we may be unable to conduct and manage our business effectively, including, without limitation, our funding, hedging, and advance activities. Additionally, a failure in or breach of our operational or security systems or infrastructure, or those of third parties with which we do business, including as a result of cyber-attacks, could disrupt our systems or data necessary for the operation of our business and/or result in the disclosure or misuse of confidential or proprietary information, or the unavailability of systems or data that are necessary for the operation of our business. While we have implemented disaster recovery, business continuity, and legacy software reduction plans, we can make no assurance that these plans will be able to prevent, timely and adequately address, or mitigate the negative effects of any such failure or interruption. A failure to maintain current technology, systems, and facilities or an operational failure or interruption could significantly harm our customer relations, risk management, and profitability, which could negatively affect our financial condition and results of operations.

For additional information on information system and security threats, see “Risk Management – Operations Risk Management” under Item 7.

Our controls and procedures may fail or be circumvented, and risk management policies and procedures may be inadequate. We may fail to identify and manage risks related to a variety of aspects of our business, including without limitation, operational risk, legal and compliance risk, human capital risk, liquidity risk, market risk, and credit risk. We have adopted controls, procedures, policies, and systems to monitor and manage these risks. Our management cannot provide complete assurance that such controls, procedures, policies, and systems are adequate to identify and manage the risks inherent in our business and because our business continues to evolve, we may fail to fully understand the implications of changes in our business, and therefore, we may fail to enhance our risk governance framework to timely or adequately address those changes. Failed or inadequate controls and risk management practices could have an adverse effect on our financial condition, results of operations or reputation.

For additional information on internal controls, see “Risk Management – Operations Risk Management” under Item 7.

We may be unable to attract and retain a highly qualified and diverse workforce, including key management. Our success depends on the talents and efforts of our employees, and particularly our management. We may be unable to retain key management or to attract other highly qualified employees, particularly if we do not offer employment terms that are competitive with the rest of the market. Failure to attract and retain highly qualified and diverse employees, or failure to develop and implement an adequate succession plan for key members of management, could adversely affect our financial condition and results of operations.

Reliance on FHLBank Chicago as MPF Provider could have a negative impact on our business if FHLBank Chicago were to default on its contractual obligations owed to us. As part of our business, we participate in the MPF Program with FHLBank Chicago. In its role as MPF Provider, FHLBank Chicago provides the infrastructure, operational support, and maintenance of investor relations for the MPF Program and is also responsible for publishing and maintaining the MPF Guides, which include the requirements PFIs must follow in originating or selling and servicing MPF mortgage loans. If FHLBank Chicago changes its MPF Provider role, ceases to operate the MPF Program, or experiences a failure or interruption in its information systems and other technology, our mortgage loan assets could be adversely affected, and we could experience a related decrease in our net interest margin and profitability. In the same way, we could be adversely affected if any of FHLBank Chicago's third-party vendors engaged in the operation of the MPF Program, or investors that purchase mortgages under the MPF Program, were to experience operational or other difficulties that prevent the fulfillment of their contractual obligations.

Item 1B: Unresolved Staff Comments

Not applicable.

Item 2: Properties

We own our primary facility located at 500 SW Wanamaker Road, Topeka, Kansas.

Item 3: Legal Proceedings

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

Item 4: Mine Safety Disclosures

Not applicable.

PART II

Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

As a cooperative, members own almost all of our Class A Common Stock and Class B Common Stock with the remainder of the capital stock held by former members that are required to retain capital stock ownership to support outstanding advance and mortgage loan activity the former members executed while they were members. However, the portion of our capital stock subject to mandatory redemption is treated as a liability and not as capital, including the capital stock of former members. There is no public trading market for our capital stock.

All of our member directors are elected by and from the membership, and we conduct our business in advances and mortgage loan acquisitions almost exclusively with our members. Depending on the class of capital stock, it may be redeemed at par value either six months (Class A Common Stock) or five years (Class B Common Stock) after we receive a written request by a member, subject to regulatory limits and to the satisfaction of any ongoing stock investment requirements applying to the member under our capital plan. We may repurchase shares held by members in excess of the members’ required stock holdings at our discretion at any time at par value. Par value of all common stock is $100 per share. As of March 13, 2020, we had 706 stockholders of record and 4,524,494 shares of Class A Common Stock and 13,099,122 shares of Class B Common Stock outstanding, including 15,214 shares of Class A Common Stock and 8,500 shares of Class B Common Stock subject to mandatory redemption by members or former members. "Classes" of stock are not registered under the Securities Act of 1933, as amended. The Recovery Act amended the Exchange Act to require the registration of a class of common stock of each FHLBank under Section 12(g) of the Exchange Act and for each FHLBank to maintain such registration and to be treated as an “issuer” under the Exchange Act, regardless of the number of members holding such a class of stock at any given time. Pursuant to an FHFA regulation, we voluntarily registered one of our classes of stock pursuant to Section 12(g)(1) of the Exchange Act.

Dividends may be paid in cash or shares of Class B Common Stock as authorized under our capital plan and approved by our Board of Directors. FHFA regulation prohibits any FHLBank from paying a stock dividend if excess stock outstanding will exceed one percent of its total assets after payment of the stock dividend. We were able to manage our excess capital stock position in the past two years in order to pay stock dividends.

Due to the decline in interest rates in recent periods, stock dividends on Class A Common Stock and Class B Common Stock will likely be lower in 2020 than what was paid in 2019. Historically, dividend levels have been influenced by several factors, including the following objectives: (1) moving dividend rates gradually over time; (2) having dividends reflective of the level of current short‑term interest rates; and (3) managing the balance of retained earnings to appropriate levels as set forth in the retained earnings policy. See Item 1 – “Business – Capital, Capital Rules and Dividends” for more information regarding our retained earnings policy, and also see Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources - Capital” for a discussion of restrictions on dividend payments in the form of capital stock.

Item 6: Selected Financial Data

Table 7 presents Selected Financial Data for the periods indicated (dollar amounts in thousands):

Table 7



	12/31/2019			12/31/2018			12/31/2017			12/31/2016			12/31/2015
Statement of Condition (as of period end):
Total assets	$	63,276,654		$	47,715,256		$	48,076,605		$	45,216,749		$	44,426,133
Investments¹	20,086,473			10,305,382			13,998,599			13,609,653			13,606,080
Advances	30,241,315			28,730,113			26,295,849			23,985,835			23,580,371
Mortgage loans, net²	10,633,009			8,410,462			7,286,397			6,640,725			6,390,708
Total liabilities	60,485,603			45,261,004			45,570,502			43,254,301			42,584,381
Deposits	790,640			473,820			461,769			598,931			759,366
Consolidated obligation discount notes, net³	27,447,911			20,608,332			20,420,651			21,775,341			21,813,446
Consolidated obligation bonds, net³	32,013,314			23,966,394			24,514,468			20,722,335			19,866,034
Total consolidated obligations, net³	59,461,225			44,574,726			44,935,119			42,497,676			41,679,480
Mandatorily redeemable capital stock	2,415			3,597			5,312			2,670			2,739
Total capital	2,791,051			2,454,252			2,506,103			1,962,448			1,841,752
Capital stock	1,766,456			1,524,537			1,640,039			1,226,675			1,208,947
Total retained earnings	999,809			914,022			840,406			735,196			651,782
Accumulated other comprehensive income (loss) (AOCI)	24,786			15,693			25,658			577			(18,977		)
Statement of Income (for the year ended):
Net interest income	256,064			271,197			270,008			257,184			239,680
Provision (reversal) for credit losses on mortgage loans	387			27			(186		)	(109		)	(1,909		)
Other income (loss)	22,973			(12,847		)	15,987			(13,830		)	(80,089		)
Other expenses	72,816			69,108			67,036			63,706			57,762
Income before assessments	205,834			189,215			219,145			179,757			103,738
AHP	20,597			18,944			21,934			17,984			10,378
Net income	185,237			170,271			197,211			161,773			93,360
Selected Financial Ratios and Other Financial Data (for the year ended):
Dividends paid in cash⁴	281			399			267			291			296
Dividends paid in stock⁴	99,169			96,256			91,734			78,068			68,415
Weighted average dividend rate⁵	6.46		%	6.13		%	5.77		%	5.29		%	5.26		%
Dividend payout ratio⁶	53.69		%	56.77		%	46.65		%	48.44		%	73.60		%
Return on average equity	7.32		%	6.82		%	8.18		%	7.45		%	4.78		%
Return on average assets	0.33		%	0.31		%	0.37		%	0.33		%	0.21		%
Average equity to average assets	4.45		%	4.62		%	4.55		%	4.47		%	4.45		%
Net interest margin⁷	0.45		%	0.50		%	0.51		%	0.53		%	0.55		%
Total capital ratio⁸	4.41		%	5.14		%	5.21		%	4.34		%	4.14		%
Regulatory capital ratio⁹	4.38		%	5.12		%	5.17		%	4.34		%	4.19		%


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


²	The allowance for credit losses on mortgage loans was $985,000, $812,000, $1,208,000, $1,674,000, and $1,972,000 as of December 31, 2019, 2018, 2017, 2016, and 2015, respectively.


³	Consolidated obligations are bonds and discount notes that we are primarily liable to repay. See Note 17 to the financial statements for a description of the total consolidated obligations of all FHLBanks for which we are jointly and severally liable.


⁴	Dividends reclassified as interest expense on mandatorily redeemable capital stock and not included as dividends recorded in accordance with GAAP were $139,000, $229,000, $195,000, $79,000, and $39,000 for the years ended December 31, 2019, 2018, 2017, 2016, and 2015, respectively.


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


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


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


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


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

Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to assist the reader in understanding our business and assessing our operations both historically and prospectively. This discussion should be read in conjunction with our audited financial statements and related notes presented under Item 8 of this report. Our MD&A includes the following sections:


▪	Executive Level Overview - a general description of our business and financial highlights;


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


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


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


▪	Financial Condition - an analysis of our financial position;


▪	Liquidity and Capital Resources - an analysis of our cash flows and capital position;


▪	Risk Management - a discussion of our risk management strategies; and


▪	Recently Issued Accounting Standards.

Additionally, refer to Item 7 – "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our 2018 Annual Report on Form 10-K for our MD&A for the fiscal year 2018 compared to fiscal year 2017.

Executive Level Overview

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

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

We serve eligible financial institutions in Colorado, Kansas, Nebraska, and Oklahoma (collectively, the Tenth District of the FHLBank System), who are also the member-owners of FHLBank. Initially, a member is required to purchase shares of Class A Common Stock based on the member’s total assets subject to a per member cap of $500 thousand. Each member may be required to purchase activity-based capital stock (Class B Common Stock) as it engages in certain business activities with FHLBank, including advances, standby letters of credit, and AMA, at levels determined by management with the Board of Director’s approval and within the ranges stipulated in our Capital Plan. Currently, our capital increases when members are required to purchase additional capital stock in the form of Class B Common Stock to support an increase in their advance borrowings. In the past, capital stock also increased when members sold additional mortgage loans to us; however, members are no longer required to purchase capital stock for AMA activity, as the mortgage loans are supported by the retained earnings of FHLBank (former members previously required to purchase AMA activity-based stock are subject to the prior requirement as long as there are UPBs outstanding). At our discretion, we may repurchase excess stock resulting from a decline in a member’s advances. We believe it is important to manage our business and the associated risks so that we strive to provide franchise value by maintaining a core mission asset focus and meeting the following objectives: (1) achieve our liquidity, housing finance and community development missions by meeting member credit needs by offering advances, supporting residential mortgage lending through the MPF Program and through other products; (2) periodically repurchase excess capital stock in order to appropriately manage the size of our balance sheet; and (3) pay acceptable dividends.

For the year ended December 31, 2019, net interest income was $256.1 million compared to $271.2 million for the same period in the prior year. The volume of interest-earning assets increased for the year ended December 31, 2019 compared to the prior year, but an increase in premium amortization and tightening spreads caused a $15.1 million, or 5.6 percent, decline in net interest income. Premium amortization on mortgage-related assets increased due to the decline in long-term market interest rates during 2019. This decline resulted in an increase in prepayment speeds on mortgage-related assets which accelerates premium amortization, thereby reducing net interest income. However, this decrease in long-term market interest rates also allowed us to replace some callable debt at a lower cost, which will provide a greater benefit in future periods. The accelerated amortization of concessions (i.e., broker fees) on the called debt further reduced net interest income for the year ended December 31, 2019. Changes in regulatory liquidity requirements effective March 31, 2019 changed the level and composition of assets held for liquidity purposes and the structure of the related funding, which has resulted in spread compression.

The change in net interest income for the year ended December 31, 2019 was also impacted by the adoption of a new hedge accounting standard on January 1, 2019 that requires fair value fluctuations on designated fair value hedges to be presented in the income statement line item related to the hedged item, which is interest income/expense for us. The guidance was adopted prospectively, so the fair value fluctuations on fair value hedges in the prior year are presented in other income, which creates a lack of comparability between periods. Fair value fluctuations on designated fair value hedges decreased net interest income by $2.4 million for the year ended December 31, 2019.

Total assets increased $15.6 billion, or 32.6 percent, from December 31, 2018 to December 31, 2019. Although we experienced growth in mortgage loans and advances, the majority of the increase was in short- and long-term investments in response to changes to regulatory liquidity requirements that became effective March 31, 2019, including the purchase of $5.7 billion in U.S. Treasury obligations since the third quarter of 2018. We believe the MPF Program continues to meet the needs of members by providing a reliable option for mortgage sales, as indicated by mortgage deliveries of over $1.0 billion for each of the last two quarters of 2019.

Total liabilities increased $15.2 billion, or 33.6 percent, from December 31, 2018 to December 31, 2019, which corresponded with the increase in assets, but the funding mix remained consistent between periods. Our funding mix generally is driven by asset composition, but we may also shift our debt composition as a result of market conditions that impact the cost of consolidated obligations swapped or indexed to LIBOR, SOFR, Prime, Treasury bills, or the overnight index swap (OIS) rate. For additional information on market trends impacting the cost of issuing debt, including discussion of the transition from LIBOR to an alternate reference rate, see "Market Trends" and "Financial Condition" under this MD&A.

Total capital increased $336.8 million, or 13.7 percent, between periods primarily due to an increase in capital stock held in excess of activity requirements, capital stock related to advance utilization, and growth in retained earnings.

An increase in average assets and average equity combined with the increase in net income resulted in a return on average equity (ROE) of 7.32 percent for the year ended December 31, 2019 compared to 6.82 percent for the prior year. Dividends paid to members totaled $99.5 million for the year ended December 31, 2019 compared to $96.7 million for the prior year. From December 31, 2018 to December 31, 2019, the dividend rate for Class A Common Stock increased to 2.50 percent from 2.00 percent and the dividend rate for Class B Common Stock increased to 7.50 percent from 7.25 percent. The weighted average dividend rate for the year ended December 31, 2019 was 6.46 percent, which represented a dividend payout ratio of 53.7 percent, compared to a weighted average dividend rate of 6.13 percent and a payout ratio of 56.8 percent for the same period in 2018. Differences in the weighted average dividend rates between periods are due to the difference in the mix of outstanding Class A Common Stock and Class B Common Stock between those periods and the increases in the dividend rates. Other factors impacting the outstanding stock class mix during 2019 and, therefore, the average dividend rates, include regular exchanges of excess Class B Common Stock to Class A Common Stock and periodic repurchases of excess Class A Common Stock (see “Liquidity and Capital Resources - Capital” under this Item 7).

Our strategic business plan is structured in such a way that our business activities are intended to achieve our mission consistent with the FHFA’s core mission achievement guidance. The Primary Mission Asset ratio is calculated as average advances and average mortgage loans to average consolidated obligations less average U.S. Treasury securities classified as trading or available-for-sale with maturities of ten years or less, utilizing par balances. Our Primary Mission Asset ratio was 75 percent for 2019. We intend to manage our balance sheet with the goal of maintaining a Primary Mission Asset ratio within a range of 70 to 80 percent. However, this ratio is dependent on several variables such as member demand for our advance and mortgage loan products, so it is possible that we will be unable to maintain this level indefinitely.

Financial Market Trends

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

General discussion of the level of market interest rates:

Table 8 presents selected market interest rates as of the dates or for the periods shown.

Table 8



Market Instrument	Average Rate		Average Rate		12/31/2019		12/31/2018
Market Instrument	2019		2018		Ending Rate		Ending Rate
Secured Overnight Financing Rate^1,2	2.21	%	N/A		1.55	%	3.00	%
Federal funds effective rate¹	2.16		1.83	%	1.55		2.40
Federal Reserve interest rate on excess reserves¹	2.13		1.88		1.55		2.40
3-month U.S. Treasury bill¹	2.09		1.96		1.55		2.36
3-month LIBOR¹	2.33		2.31		1.91		2.81
2-year U.S. Treasury note¹	1.97		2.53		1.57		2.51
5-year U.S. Treasury note¹	1.95		2.75		1.69		2.53
10-year U.S. Treasury note¹	2.14		2.91		1.92		2.70
30-year residential mortgage note rate^1,3	4.22		4.80		3.95		4.84


¹	Source is Bloomberg.


²	SOFR was first published on April 3, 2018.


³	Mortgage Bankers Association weekly 30-year fixed rate mortgage contract rate.

During 2019, the cost of FHLBank consolidated obligations as measured by the spread to comparative U.S. Treasury rates remained relatively stable, although the yield curve flattened, which made shorter-term debt more expensive relative to longer-term structures. However, in March 2020, the Federal Open Market Committee (FOMC) announced two emergency decreases to the Federal funds rate, bringing the target range to zero to 0.25 percent due to the anticipated negative impact of coronavirus on the U.S. economy. The FOMC expects to maintain this target range until it is confident that the economy has recovered from the downturn related to the coronavirus outbreak and is on track to achieve its maximum employment and price stability goals. The FOMC also announced an increase in bond purchases as part of quantitative easing. We issue debt at a spread above U.S. Treasury securities; as a result, the level of interest rates impacts the cost of issuing FHLBank consolidated obligations and the cost of advances to our members and housing associates. For further discussion, see this Item 7 – “Financial Condition – Consolidated Obligations.”

In July 2017, the FCA announced that it planned to phase out the regulatory oversight of LIBOR interest rate indices by 2021. The FCA and the submitting LIBOR banks have indicated they will support the LIBOR indices through 2021 to allow for an orderly transition to an alternative reference rate. The ARRC in the United States has proposed SOFR as its recommended alternative to USD LIBOR in the United States. SOFR is intended to be a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities. The Federal Reserve Bank of New York began publishing SOFR rates in April 2018. As noted throughout this annual report, many of our assets and liabilities, including derivative assets and derivative liabilities, are indexed to USD LIBOR. A portion of these assets and liabilities and related collateral have maturity dates that extend beyond 2021. For additional information on our LIBOR transition efforts and LIBOR exposure, see “Risk Management – Interest Rate Risk Management” under this Item 7.

Other factors impacting FHLBank consolidated obligations:

We believe investors continue to view FHLBank consolidated obligations as carrying a relatively strong credit profile. Historically, our strong credit profile has resulted in steady investor demand for FHLBank discount notes and short-term bonds. We believe several market events continue to have the potential to impact the demand for our consolidated obligations including geopolitical events and/or disruptions; potential policy changes under the current administration; recent regulatory changes in liquidity requirements; changes in interest rates and the shape of the yield curve as the FOMC contemplates changes to monetary policy; and the replacement of LIBOR with another index as previously discussed.

Critical Accounting Policies and Estimates

The preparation of our financial statements in accordance with GAAP requires management to make a number of judgments and assumptions that affect our reported results and disclosures. Several of our accounting policies are inherently subject to valuation assumptions and other subjective assessments and are more critical than others in terms of their importance to results. These assumptions and assessments include: (1) the accounting related to derivatives and hedging activities; and (2) fair value determinations.

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

The accounting policies that management believes are the most critical to an understanding of our financial condition and results of operations and require complex management judgment are described below.

Accounting for Derivatives and Hedging Activities: Derivative instruments are carried at fair value on the Statements of Condition. Any change in the fair value of a derivative is recorded each period in current period earnings or other comprehensive income (OCI), depending upon whether the derivative is designated as part of a hedging relationship and, if it is, the type of hedging relationship. A majority of our derivatives are structured to offset some or all of the risk exposure inherent in our lending, mortgage purchase, investment, and funding activities. We are required to recognize unrealized gains or losses on derivative positions, regardless of whether offsetting gains or losses on the hedged assets or liabilities are recognized simultaneously. Therefore, the accounting framework introduces the potential for considerable income variability from period to period. Specifically, a mismatch can exist between the timing of income and expense recognition from assets or liabilities and the income effects of derivative instruments positioned to mitigate market risk and cash flow variability. Therefore, during periods of significant changes in interest rates and other market factors, reported earnings may exhibit considerable variability. We seek to utilize hedging techniques that are effective under the hedge accounting requirements; however, in some cases, we have elected to enter into derivatives that are economically effective at reducing risk but do not meet hedge accounting requirements, either because it was more cost effective to use a derivative hedge compared to a non-derivative hedging alternative, or because a non-derivative hedging alternative was not available. As required by FHFA regulation and our RMP, derivative instruments that do not qualify as hedging instruments may be used only if we document a non-speculative purpose at the inception of the derivative transaction.

A hedging relationship is created from the designation of a derivative financial instrument as hedging our exposure to changes in the fair value of a financial instrument. Fair value hedge accounting allows for the offsetting fair value of the hedged risk in the hedged item to also be recorded in current period earnings. Highly effective hedges that use interest rate swaps as the hedging instrument and that meet certain stringent criteria can qualify for “shortcut” fair value hedge accounting. Shortcut hedge accounting allows for the assumption of no ineffectiveness, which means that the change in fair value of the hedged item can be assumed to be equal to the change in fair value of the derivative. If the hedge is not designated for shortcut hedge accounting, it is treated as a “long haul” fair value hedge, where the change in fair value of the hedged item must be measured separately from the derivative, and for which quantitative effectiveness testing must be performed regularly with results falling within established tolerances. If the hedge fails effectiveness testing, the hedge no longer qualifies for hedge accounting and the derivative is marked to estimated fair value through current period earnings without any offsetting change in estimated fair value related to the hedged item.

For derivative transactions that potentially qualify for long haul fair value hedge accounting treatment, management must assess how effective the derivatives have been, and are expected to be, in hedging offsetting changes in the estimated fair values attributable to the risks being hedged in the hedged items. Quantitative hedge effectiveness testing is performed at the inception of the hedging relationship and on an ongoing basis for long haul fair value hedges. We perform testing at hedge inception based on regression analysis of the hypothetical performance of the hedging relationship using historical market data. We then perform regression testing on an ongoing basis using accumulated actual values in conjunction with hypothetical values. Specifically, each month we use a consistently applied statistical methodology that employs the most recent 30 historical interest rate environments and includes an R-squared test (commonly used statistic to measure correlation of the data), a slope test, and an F-statistic test (commonly used statistic to measure how well the regression model describes the collection of data). These tests measure the degree of correlation of movements in estimated fair values between the derivative and the related hedged item. For the hedging relationship to be considered effective, results must fall within established tolerances.

Given that a derivative qualifies for long haul fair value hedge accounting treatment, the most important element of effectiveness testing is the price sensitivity of the derivative and the hedged item in response to changes in interest rates and volatility as expressed by their effective durations. The effective duration will be influenced mostly by the final maturity and any option characteristics. In general, the shorter the effective duration, the more likely it is that effectiveness testing would fail because of the impact of the short-term index side of the interest rate swap. In this circumstance, the slope criterion is the more likely factor to cause the effectiveness test to fail.

The estimated fair values of the derivatives and hedged items do not have any cumulative economic effect if the derivative and the hedged item are held to maturity, or contain mutual optional termination provisions at par. Since these fair values fluctuate throughout the hedge period and eventually return to zero (derivative) or par value (hedged item) on the maturity or option exercise date, the earnings impact of fair value changes is only a timing issue for hedging relationships that remain outstanding to maturity or the call termination date.

For derivative instruments and hedged items that meet the requirements as described above and are designated as fair value hedges, we do not anticipate any significant impact on our financial condition or operating performance. For derivative instruments not qualifying for hedge accounting or with no identified hedged item, changes in the market value of the derivative are reflected in income without any offset. As of December 31, 2019 and 2018, we held a portfolio of derivatives that are marked to market with no offsetting qualifying hedged item. This portfolio of economic derivatives consisted primarily of: (1) interest rate swaps hedging fixed rate MBS and non-MBS trading investments; (2) interest rate caps hedging adjustable rate MBS with embedded caps; and (3) interest rate swaps hedging variable rate consolidated obligation bonds. While the fair value of derivative instruments with no offsetting qualifying hedged item will fluctuate with changes in interest rates and the impact on our earnings can be material, the change in fair value of trading securities being hedged by economic hedges is expected to partially offset that impact. The change in fair value of the derivatives classified as economic hedges is only partially offset by the change in the fair value of trading securities being hedged by economic hedges because the amount of economic hedges exceeds the amount of swapped trading securities and because of the relationship between mortgage rates relative to the interest rate swap curve for the swapped MBS trading securities. See Tables 62 and 63 under Item 7A – "Quantitative and Qualitative Disclosures About Market Risk," which present the notional amount and fair value amount for derivative instruments by hedged item, hedging instrument, hedging objective and accounting designation. The total par value of non-MBS and MBS classified as trading securities related to economic hedges was $1.9 billion and $0.8 billion, respectively, as of December 31, 2019, which matches the notional amount of interest rate swaps hedging the GSE debentures and MBS in trading securities on that date. For asset/liability management purposes, our fixed rate GSE debentures and MBS currently classified as trading are matched to interest rate swaps that effectively convert the securities from fixed rate investments to variable rate instruments. See Tables 15 through 18 under this Item 7, which show the relationship of gains/losses on economic hedges and gains/losses on the trading securities being hedged by economic derivatives. Our projections of changes in fair value of the derivatives have been consistent with actual results.

Fair Value: As of December 31, 2019 and 2018, certain assets and liabilities, including investments classified as trading or available-for-sale, and all derivatives, were presented in the Statements of Condition at fair value. Under GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair values play an important role in the valuation of certain assets, liabilities and derivative transactions. The fair values we generate directly impact the Statements of Condition, Statements of Income, Statements of Comprehensive Income, Statements of Capital, and Statements of Cash Flows as well as risk-based capital, duration of equity (DOE), and market value of equity (MVE) disclosures. Management also estimates the fair value of collateral that borrowers pledge against advance borrowings and other credit obligations to confirm that we have sufficient collateral to meet regulatory requirements and to protect ourselves from a credit loss.

Fair value measurement under GAAP uses a three-level fair value hierarchy to reflect the level of judgment involved in estimating fair value. Fair values are based on market prices when they are available (generally considered a Level 1 or Level 2 valuation under GAAP). If market quotes are not available, fair values are based on discounted cash flows using market estimates of interest rates and volatility, or on prices of similar instruments (generally considered a Level 3 valuation under GAAP). Pricing models and their underlying assumptions are based on our best estimates for discount rates, prepayment speeds, market volatility and other factors. We validate our financial models at least annually and the models are calibrated to values from outside sources on a monthly basis. We validate modeled values to outside valuation services routinely to determine if the values generated from discounted cash flows are reasonable. Additionally, due diligence procedures are completed for third-party pricing vendors. The assumptions used by third-party pricing vendors or within our models may have a significant effect on the reported fair values of assets and liabilities, including derivatives, and the related income and expense. See Note 16 of the Notes to Financial Statements under Part II, Item 8 – “Financial Statements and Supplementary Data” for a detailed discussion of the assumptions used to calculate fair values and the due diligence procedures completed. The use of different assumptions as well as changes in market conditions could result in materially different net income and retained earnings.

As of December 31, 2019, we had no fair values that were classified as Level 3 valuations for financial instruments that are measured on a recurring basis at fair value. However, we have impaired mortgage loans and REO, which were written down to their fair values and considered Level 3 valuations as of year-end. Based on the validation of our inputs and assumptions with other market participant data, we have concluded that the pricing derived should be considered Level 3 valuations.

Results of Operations

Earnings Analysis: Table 9 presents changes in the major components of our net income (dollar amounts in thousands):

Table 9



	Increase (Decrease) in Earnings Components
	2019 vs. 2018
	Dollar Change			Percentage Change
Total interest income	$	231,743		18.4	%
Total interest expense	246,876			25.0
Net interest income	(15,133		)	(5.6	)
Provision (reversal) for credit losses on mortgage loans	360			1,333.3
Net interest income after mortgage loan loss provision	(15,493		)	(5.7	)
Net gains (losses) on trading securities	92,171			420.7
Net gains (losses) on derivatives and hedging activities	(54,432		)	(1,705.8	)
Other non-interest income	(1,919		)	(15.7	)
Total other income (loss)	35,820			278.8
Operating expenses	965			1.7
Other non-interest expenses	2,743			21.6
Total other expenses	3,708			5.4
AHP assessments	1,653			8.7
NET INCOME	$	14,966		8.8	%

Table 10 presents the amounts contributed by our principal sources of interest income (dollar amounts in thousands):

Table 10



	Year Ended December 31,
	2019				2018				2017
	Interest Income		Percent of Total		Interest Income		Percent of Total		Interest Income		Percent of Total
Investments¹	$	466,531	31.3	%	$	361,563	28.8	%	$	214,239	25.7	%
Advances	716,199		48.1		637,203		50.7		402,071		48.3
Mortgage loans held for portfolio	304,582		20.5		256,698		20.4		214,388		25.8
Other	1,440		0.1		1,545		0.1		1,280		0.2
TOTAL INTEREST INCOME	$	1,488,752	100.0	%	$	1,257,009	100.0	%	$	831,978	100.0	%


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

Net income for the year ended December 31, 2019 was $185.2 million compared to $170.3 million for the year ended December 31, 2018. The $14.9 million, or 8.8 percent, increase in net income for the year ended December 31, 2019 compared to the prior year was due largely to a $37.7 million increase in net unrealized gains on trading securities and derivatives. The net unrealized gains on trading securities were due mostly to decreases in mortgage and U.S. Treasury interest rates during 2019, which were partially offset by the negative fair value fluctuations on some interest rate swaps caused by the decrease in LIBOR between periods. Detailed discussion relating to the fluctuations in net gains (losses) on derivatives and hedging activities and net gains (losses) on trading securities can be found in this section under the heading "Net Gains (Losses) on Derivatives and Hedging Activities" and "Net Gains (Losses) On Trading Securities." Net interest income decreased by $15.1 million for the year ended December 31, 2019 compared to the same period in the prior year due primarily to increased premium amortization, discussed in greater detail below. Other expenses increased by $3.7 million from December 31, 2018 to December 31, 2019 primarily due to an increase in mortgage loan transaction fees due to the growth in the mortgage loan portfolio and FHLBank System-related expenses. An increase in average assets and average equity combined with the increase in net income resulted in an ROE of 7.32 percent for the year ended December 31, 2019 compared to 6.82 percent for the prior year. Dividends paid to members totaled $99.5 million for the year ended December 31, 2019 compared to $96.7 million for the prior year.

Net Interest Income: Net interest income was $256.1 million for the year ended December 31,2019 compared to $271.2 million for the same period in the prior year. The volume of interest-earning assets increased for the year ended December 31, 2019 compared to the prior year, but an increase in premium amortization and tightening spreads caused a $15.1 million, or 5.6 percent, decline in net interest income. Premium amortization on mortgage-related assets increased due to the decline in long-term market interest rates during 2019. This decline resulted in an increase in prepayment speeds on mortgage-related assets which accelerates premium amortization, thereby reducing net interest income. However, this decrease in long-term market interest rates also allowed us to replace some callable debt at a lower cost, which will provide a greater benefit in future periods. The accelerated amortization of concessions (i.e., broker fees) on the called debt further reduced net interest income.

Yields: Market interest rates and trends affect yields and net interest margin on earning assets, including advances, mortgage loans, and investments. The average yield on total interest-earning assets for the year ended December 31, 2019 was 2.62 percent compared to 2.34 percent for the year ended December 31, 2018. The average cost of interest-bearing liabilities for the year ended December 31, 2019 was 2.28 percent, compared to 1.92 percent for the year ended December 31, 2018. Net interest margin declined by 5 basis points to 45 basis points for the year ended December 31, 2019 compared to 50 basis points in the prior year due largely to an increase in average funding cost driven largely by the changes in short-term interest rates and the accelerated amortization of concessions. These same factors also caused net interest spread to decline by 8 basis points for the same period, to 34 basis points for the year ended December 31, 2019 compared to 42 basis points for the same period in the prior year (see Table 13). Recent changes in regulatory liquidity requirements changed the level and composition of assets held for liquidity purposes and the structure of the related funding. The change in liquidity requirements has resulted in margin and spread compression, specifically as it relates to overnight assets funded with term debt, as the average cost of discount notes increased 39 basis points during 2019 compared to 2018 and the average yield on short-term investments increased 35 basis points over the same period. The increase in premium amortization on mortgage loans and the accelerated concession amortization on consolidated obligations decreased net interest spread by four basis points and decreased net interest margin by four basis points. For further discussion of how we use bonds and discount notes, see Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Consolidated Obligations.

Average Balances: The average balance of interest-earning assets increased $3.0 billion, or 5.5 percent, for the year ended December 31, 2019 compared to the same period in the prior year. This increase was due to a $3.0 billion, or 19.1 percent, increase in the average balance of investments, which consist of interest-bearing deposits, Federal funds sold, reverse repurchase agreements, and investment securities, largely in response to changes in regulatory liquidity requirements. The average balance of advances decreased $1.6 billion, or 5.3 percent, during 2019 compared to 2018, almost entirely as a result of a decrease in the average balance of line of credit advances. A portion of the growth in average advances over the past few years has resulted from our members’ ability to invest advances in excess reserves at the Federal Reserve and receive a profitable risk adjusted return largely because of the dividend paid on the capital stock supporting the advances. During 2018 and 2019, the short-term advance rates became less attractive relative to the yield on excess reserves at the Federal Reserve. The average balance of mortgage loans increased $1.5 billion, or 19.3 percent, despite prepayment activity associated with the decline in mortgage interest rates during 2019. The increase in mortgage loans was attributed in large part to continued production from our top five PFIs and utilization of recent program enhancements that provide PFIs with additional funding opportunities.

Our net interest spread is impacted by derivative and hedging activities, as the assets and liabilities hedged with derivative instruments designated under fair value hedging relationships are adjusted for changes in fair values, while other assets and liabilities are carried at historical cost. Net interest payments or receipts on interest rate swaps designated as fair value hedges and the amortization/accretion of hedging activities are recognized as adjustments to the interest income or expense of the hedged asset or liability. However, net interest payments or receipts on derivatives that do not qualify for hedge accounting (economic hedges) flow through net gains (losses) on derivatives and hedging activities instead of net interest income (net interest received/paid on economic derivatives is identified in Tables 15 and 16 under this Item 7), which does not reflect the full economic impact of the swaps on yields, especially for trading investments that are swapped to a variable rate. For 2019, net interest income is also impacted by unrealized gains (losses) on hedged items and derivatives in qualifying hedge relationships as a result of new hedge accounting guidance adopted January 1, 2019. Tables 11 and 12 present the impact of derivatives and hedging activities recorded in net interest income (in thousands):

Table 11



	2019
	Advances			Investments			Mortgage Loans			Consolidated Obligation Discount Notes		Consolidated Obligation Bonds			Total
Unrealized gains (losses) due to fair value changes	$	47		$	(2,274	)	$	—		$	193	$	(363	)	$	(2,397	)
Net amortization/accretion of hedging activities	(1,356		)	—			(2,029		)	—		—			(3,385		)
Net interest received (paid)	19,860			1,281			—			20		(5,312		)	15,849
TOTAL	$	18,551		$	(993	)	$	(2,029	)	$	213	$	(5,675	)	$	10,067

Table 12



	2018
	Advances			Investments		Mortgage Loans			Consolidated Obligation Discount Notes		Consolidated Obligation Bonds			Total
Net amortization/accretion of hedging activities	$	(3,881	)	$	—	$	(403	)	$	—	$	—		$	(4,284	)
Net interest received (paid)	9,653			474		—			12		(5,178		)	4,961
TOTAL	$	5,772		$	474	$	(403	)	$	12	$	(5,178	)	$	677

Table 13 presents average balances and yields of major earning asset categories and the sources funding those earning assets (dollar amounts in thousands):

Table 13



	2019						2018						2017
	Average Balance		Interest Income/ Expense		Yield		Average Balance		Interest Income/ Expense		Yield		Average Balance		Interest Income/Expense		Yield
Interest-earning assets:
Interest-bearing deposits	$	888,890	$	19,801	2.23	%	$	762,346	$	14,957	1.96	%	$	417,175	$	4,204	1.01	%
Securities purchased under agreements to resell	4,521,312		104,397		2.31		3,571,355		71,298		2.00		2,323,216		23,937		1.03
Federal funds sold	1,476,595		32,834		2.22		2,229,989		40,306		1.81		2,716,688		27,994		1.03
Investment securities^1,2	12,121,452		309,499		2.55		9,401,909		235,002		2.50		8,864,480		158,104		1.78
Advances^2,3	28,322,033		716,199		2.53		29,899,634		637,203		2.13		31,605,448		402,071		1.27
Mortgage loans^4,5	9,326,732		304,582		3.27		7,816,191		256,698		3.28		6,891,057		214,388		3.11
Other interest-earning assets	47,752		1,440		3.02		46,113		1,545		3.35		29,530		1,280		4.33
Total earning assets	56,704,766		1,488,752		2.62		53,727,537		1,257,009		2.34		52,847,594		831,978		1.57
Other non-interest-earning assets	241,586						357,122						204,665
Total assets	$	56,946,352					$	54,084,659					$	53,052,259

Interest-bearing liabilities:
Deposits	$	544,001	9,820		1.81		$	560,819	8,912		1.59		$	486,747	3,371		0.69
Consolidated obligations²:
Discount Notes	23,972,736		532,155		2.22		24,713,789		451,380		1.83		26,811,378		237,019		0.88
Bonds	29,441,519		689,275		2.34		25,988,893		524,255		2.02		23,038,357		320,895		1.39
Other borrowings	51,854		1,438		2.78		44,565		1,265		2.84		19,257		685		3.56
Total interest-bearing liabilities	54,010,110		1,232,688		2.28		51,308,066		985,812		1.92		50,355,739		561,970		1.11
Capital and other non-interest-bearing funds	2,936,242						2,776,593						2,696,520
Total funding	$	56,946,352					$	54,084,659					$	53,052,259

Net interest income and net interest spread⁶			$	256,064	0.34	%			$	271,197	0.42	%			$	270,008	0.46	%

Net interest margin⁷					0.45	%					0.50	%					0.51	%


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

Interest income/expense and average rates include the effect of associated derivatives that qualify for hedge accounting treatment. For 2019, interest amounts reported for advances, investment securities, consolidated obligation discount notes, and consolidated obligation bonds include realized and unrealized gains (losses) on hedged items and derivatives in qualifying hedge relationships. Prior period interest amounts do not conform to new hedge accounting guidance adopted January 1, 2019.


³	Advance income includes prepayment fees on terminated advances.


⁴	CE fee payments are netted against interest earnings on the mortgage loans. The expense related to CE fee payments to PFIs was $6.9 million, $6.1 million and $5.7 million for the years ended December 31, 2019, 2018, and 2017, respectively.


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


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


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

Changes in the volume of interest-earning assets and the level of interest rates influence changes in net interest income, net interest spread and net interest margin. Table 14 summarizes changes in interest income and interest expense (in thousands):

Table 14



	2019 vs. 2018									2018 vs. 2017
	Increase (Decrease) Due to									Increase (Decrease) Due to
	Volume^1,2			Rate^1,2			Total			Volume^1,2			Rate^1,2			Total
Interest Income³:
Interest-bearing deposits	$	2,668		$	2,176		$	4,844		$	5,014		$	5,739		$	10,753
Securities purchased under agreements to resell	20,834			12,265			33,099			17,253			30,108			47,361
Federal funds sold	(15,481		)	8,009			(7,472		)	(5,741		)	18,053			12,312
Investment securities	69,338			5,159			74,497			10,090			66,808			76,898
Advances	(35,004		)	114,000			78,996			(22,785		)	257,917			235,132
Mortgage loans	49,338			(1,454		)	47,884			29,914			12,396			42,310
Other assets	51			(156		)	(105		)	602			(337		)	265
Total earning assets	91,744			139,999			231,743			34,347			390,684			425,031
Interest Expense³:
Deposits	(274		)	1,182			908			583			4,958			5,541
Consolidated obligations:
Discount notes	(13,891		)	94,666			80,775			(19,895		)	234,256			214,361
Bonds	74,711			90,309			165,020			45,191			158,169			203,360
Other borrowings	202			(29		)	173			743			(163		)	580
Total interest-bearing liabilities	60,748			186,128			246,876			26,622			397,220			423,842
Change in net interest income	$	30,996		$	(46,129	)	$	(15,133	)	$	7,725		$	(6,536	)	$	1,189


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


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

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

As reflected in Tables 15 and 16, the majority of the net unrealized gains and losses on derivatives are related to changes in the fair values of economic derivatives, which do not qualify for hedge accounting treatment under GAAP. Net interest payments or receipts on these economic derivatives flow through net gains (losses) on derivatives and hedging activities instead of net interest income, which does not reflect the full economic impact of the swaps on yields, especially for trading investments that are swapped to variable rates. For periods prior to January 1, 2019, ineffectiveness on fair value hedges contributed to unrealized gains and losses on derivatives, but to a lesser degree. Beginning January 1, 2019, fair value fluctuations on fair value hedges are recorded in the financial statement line item related to the hedged item (i.e., interest income or expense) in accordance with the prospective adoption of new hedge accounting guidance. In the past, we generally recorded net unrealized gains on derivatives when the overall level of interest rates would rise over the period and recorded net unrealized losses when the overall level of interest rates would fall over the period, due to the mix of the economic hedges. Net unrealized gains or losses on derivatives will continue to be a function of the general level of swap rates but also a function of the spreads in relationship to the relevant index rate. Tables 15 and 16 present the earnings impact of derivatives and hedging activities by financial instrument as recorded in other non-interest income (in thousands):

Table 15



	2019
	Advances			Investments			Mortgage Loans		Consolidated Obligation Discount Notes			Consolidated Obligation Bonds			Total
Derivatives not designated as hedging instruments:
Economic hedges – unrealized gains (losses) due to fair value changes	$	(1,379	)	$	(71,468	)	$	—	$	(1	)	$	14,960		$	(57,888	)
Mortgage delivery commitments	—			—			4,309		—			—			4,309
Discount note commitments	—			—			—		(70		)	—			(70		)
Economic hedges – net interest received (paid)	(21		)	(2,263		)	—		(3		)	(1,687		)	(3,974		)
Net gains (losses) on derivatives and hedging activities	(1,400		)	(73,731		)	4,309		(74		)	13,273			(57,623		)
Net gains (losses) on trading securities hedged on an economic basis with derivatives	—			70,950			—		—			—			70,950
TOTAL	$	(1,400	)	$	(2,781	)	$	4,309	$	(74	)	$	13,273		$	13,327

Table 16



	2018
	Advances			Investments			Mortgage Loans			Consolidated Obligation Discount Notes		Consolidated Obligation Bonds			Other			Total
Net gains (losses) on derivatives and hedging activities:
Fair value hedges - unrealized gains (losses) due to fair value changes	$	(4,450	)	$	(2,091	)	$	—		$	—	$	251		$	—		$	(6,290	)
Economic hedges – unrealized gains (losses) due to fair value changes	(333		)	15,880			—			—		(4,061		)	—			11,486
Mortgage delivery commitments	—			—			(1,642		)	—		—			—			(1,642		)
Discount note commitments	—			—			—			70		—			—			70
Economic hedges – net interest received (paid)	(2		)	(4,172		)	—			—		(1,302		)	—			(5,476		)
Price alignment amount on derivatives for which variation margin is daily settled	—			—			—			—		—			(1,339		)	(1,339		)
Net gains (losses) on derivatives and hedging activities	(4,785		)	9,617			(1,642		)	70		(5,112		)	(1,339		)	(3,191		)
Net gains (losses) on trading securities hedged on an economic basis with derivatives	—			(20,082		)	—			—		—			—			(20,082		)
TOTAL	$	(4,785	)	$	(10,465	)	$	(1,642	)	$	70	$	(5,112	)	$	(1,339	)	$	(23,273	)

For the years ended December 31, 2019 and 2018, net unrealized losses on derivatives decreased net income by $57.6 million and $3.2 million, respectively. For 2019, the majority of the losses were economic interest rate swaps associated with trading securities, and declines in LIBOR and OIS (the index rates on these swaps) between 2018 and 2019 resulted in fair value losses that were largely offset by fair value gains on the trading securities (see Table 17). We experienced unrealized fair value gains on basis swaps economically hedging consolidated obligations primarily caused by the decline in one-month LIBOR. We experienced unrealized fair value losses on interest rate swaps indexed to OIS and hedging U.S. Treasury obligations held in our trading portfolio as OIS declined towards the end of the year relative to the rates at inception. These fluctuations were offset by unrealized gains for the year ended December 31, 2019 attributable to the swapped U.S. Treasury obligations, which are recorded in net gains (losses) on trading securities. Unrealized losses on our interest rate swaps matched to GSE debentures for the year ended December 31, 2019 were a result of the passage of time, as several derivatives approached maturity (reducing the overall loss position of the derivatives), changes in interest rates for their respective maturities (pay fixed rate swap), and decreases in three-month LIBOR (receive variable rate swap). These fluctuations were offset by unrealized gains for the years ended December 31, 2019 attributable to the swapped GSE debentures, which are recorded in net gains (losses) on trading securities.

For 2018, the majority of economic interest rate swaps associated with trading securities were in an unrealized gain position due to increases in LIBOR from the prior period, but we experienced unrealized fair value losses on basis swaps economically hedging consolidated obligations caused by widening between one- and three-month LIBOR in early 2018. We experienced unrealized fair value losses on the interest rate swaps indexed to OIS and hedging U.S. Treasury obligations held in our trading portfolio, as OIS declined towards the end of the year relative to the rates at inception. These fluctuations were offset by unrealized gains for the year ended December 31, 2018 attributable to the swapped U.S. Treasury obligations, which are recorded in net gains (losses) on trading securities. The unrealized gains on our interest rate swaps matched to GSE debentures were a result of the passage of time, changes in interest rates for their respective maturities (pay fixed rate swap), and increases in three-month LIBOR (receive variable rate swap). These fluctuations were offset by unrealized losses for the years ended December 31, 2018 attributable to the swapped GSE debentures, which are recorded in net gains (losses) on trading securities. Changes in the LIBOR swap curve over the respective periods resulted in positive fair value fluctuations on interest rate swaps hedging multi-family GSE MBS recorded as trading securities. We experienced unrealized losses on our fixed rate multi-family GSE MBS investments for the year ended December 31, 2018 compared to unrealized gains in the prior year due to an increase in mortgage-related interest rates between 2017 and 2018.

Table 17 presents the relationship between the swapped trading securities and the associated interest rate swaps that do not qualify for hedge accounting treatment, by investment type (in thousands):

Table 17



	2019								2018
	Gains (Losses) on Derivatives			Gains (Losses) on Trading Securities		Net			Gains (Losses) on Derivatives			Gains (Losses) on Trading Securities			Net
U.S. Treasury obligations	$	(18,745	)	$	18,766	$	21		$	(4,552	)	$	4,408		$	(144	)
GSE debentures	(14,951		)	16,026		1,075			6,718			(7,356		)	(638		)
GSE MBS	(37,421		)	36,158		(1,263		)	13,681			(17,134		)	(3,453		)
TOTAL	$	(71,117	)	$	70,950	$	(167	)	$	15,847		$	(20,082	)	$	(4,235	)

For additional detail regarding gains and losses on trading securities, see Table 18 and related discussion under this Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations.”

See Tables 62 and 63 under Item 7A – “Quantitative and Qualitative Disclosures About Market Risk” for additional detail regarding notional and fair value amounts of derivative instruments.

Net Gains (Losses) on Trading Securities: All unrealized gains and losses related to trading securities are recorded in other income (loss) as net gains (losses) on trading securities; however, only gains and losses relating to trading securities that are related to economic hedges are included in Tables 15 and 16. Unrealized gains (losses) fluctuate as the fair value of our trading portfolio fluctuates. There are a number of factors that can impact the fair value of a trading security including the movement in interest rates, changes in credit spreads, the passage of time, and changes in price volatility. Table 18 presents the major components of the net gains (losses) on trading securities (in thousands):

Table 18



	2019			2018
Trading securities not hedged:
GSE debentures	$	(496	)	$	(1,731	)
U.S. obligation MBS and GSE MBS	(193		)	(113		)
Short-term securities	—			16
Total trading securities not hedged	(689		)	(1,828		)
Trading securities hedged on an economic basis with derivatives:
U.S. Treasury obligations	18,766			4,408
GSE debentures	16,026			(7,356		)
GSE MBS	36,158			(17,134		)
Total trading securities hedged on an economic basis with derivatives	70,950			(20,082		)
TOTAL	$	70,261		$	(21,910	)

Our trading portfolio is comprised primarily of fixed rate U.S. Treasury obligations, GSE debentures, and multi-family GSE MBS, with smaller percentages of variable rate GSE debentures and GSE MBS. Periodically, we also invest in short-term securities classified as trading for liquidity purposes. In general, the fixed rate securities are related to economic hedges in the form of interest rate swaps that convert fixed rates to variable rates (see Table 17 for the association between the gains (losses) on the fixed rate securities and the related economic hedges). The fair values of the fixed rate GSE debentures are affected by changes in intermediate interest rates and credit spreads, and are swapped on an economic basis to three-month LIBOR. The fair values of the fixed rate multi-family GSE MBS are affected by changes in mortgage rates and credit spreads, and these securities are swapped on an economic basis to one-month LIBOR. The fair values of the U.S. Treasury obligations are affected by changes in intermediate Treasury rates and swapped on an economic basis to OIS. We experienced unrealized gains on our fixed rate multi-family GSE MBS investments for the year ended December 31, 2019 compared to unrealized losses for the year ended December 31, 2018 due to a decrease in mortgage-related interest rates between periods. The decrease in intermediate interest rates between periods resulted in unrealized gains on the fixed rate GSE debentures and U.S. Treasury obligations for the year ended December 31, 2019. In addition to interest rates and credit spreads, the value of these securities is affected by time decay. The fixed rate GSE debentures possess coupons that are well above current market rates for similar securities and, therefore, are currently valued at substantial premiums. As these securities approach maturity, their prices will converge to par resulting in a decrease in their current premium price (i.e., time decay). Given that the variable rate GSE debentures re-price monthly, they generally account for a small portion of the net gains (losses) on trading securities unless current market spreads on these variable rate securities diverge from the spreads at the time of our acquisition of the securities.

See Tables 62 and 63 under Item 7A – “Quantitative and Qualitative Disclosures About Market Risk” for additional detail regarding notional and fair value amounts of derivative instruments.

Operating Expenses: Operating expenses include compensation and benefits and other operating expenses as presented in the Statements of Income included under Item 8 – “Financial Statements and Supplementary Data.” Approximately two-thirds of our operating expenses consist of compensation and benefits expense. Compensation and benefits expense remained relatively flat for 2019 compared to 2018 despite an increase in salary expense as a result of higher goal achievement as it relates to incentive compensation, hiring for new positions, and increases in market salaries in the industry. These increases were offset by a decrease in employee benefit expense resulting from favorable investment returns on our pension fund investment; thus, no additional contributions were required in 2019. We expect modest increases in compensation and benefits expense for 2020 in anticipation of hiring for new positions. We expect to remain at or near current levels of other operating expenses for 2020.

Other Expenses: We pay FHLBank Chicago for administering the MPF Program and maintaining the infrastructure through which we fund or purchase MPF loans from our PFIs. The increase in other expenses for the year ended December 31, 2019 compared to the prior year was due primarily to an increase in mortgage loan transaction fees due to the growth in the mortgage loan portfolio.

We, together with the other FHLBanks, are charged for the cost of operating the FHFA and the Office of Finance. The FHFA’s operating costs are also shared by Fannie Mae and Freddie Mac, and the Recovery Act prohibits assessments on the FHLBanks for operating costs in excess of the costs and expenses related to the FHLBanks. These expenses increased during 2019 and are expected to increase in 2020.

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

We believe that certain non-GAAP financial measures are helpful in understanding our operating results and provide meaningful period-to-period comparison of our long-term economic value in contrast to GAAP results, which can be impacted by fair value changes driven by market volatility, gains/losses on instrument sales, or transactions that are considered unpredictable or not routine. Our business model is primarily one of holding assets and liabilities to maturity. However, we utilize some assets and liabilities for liquidity purposes, which may involve periodic instrument sales. We report the following non-GAAP financial measures that we believe are useful to stakeholders as key measures of our operating performance: (1) adjusted income, (2) adjusted net interest margin, and (3) adjusted ROE. Reconciliations of these non-GAAP financial measures to the most comparable GAAP measure are included below. Although we calculate our non-GAAP financial measures consistently from period to period using appropriate GAAP components, non-GAAP financial measures are not required to be uniformly applied and are not audited. Another material limitation associated with the use of non-GAAP financial measures is that they have no standardized measurement prescribed by GAAP and may not be comparable to similar non-GAAP financial measures used by other companies. While we believe the non-GAAP measures contained in this annual report are frequently used by our stakeholders in the evaluation of our performance, such non-GAAP measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analyses of financial information prepared in accordance with GAAP.

As part of evaluating our financial performance, we adjust net income reported in accordance with GAAP for the impact of: (1) AHP assessments (equivalent to an effective minimum income tax rate of 10 percent); (2) fair value changes on derivatives and hedging activities (excludes net interest settlements); and (3) other items excluded because they are not considered a part of our routine operations or ongoing business model, such as prepayment fees, gains/losses on retirement of debt, gains/losses on mortgage loans held for sale, and gains/losses on securities. The result is referred to as “adjusted income,” which is a non-GAAP measure of income. Adjusted income is used to compute an adjusted ROE that is then compared to the average overnight Federal funds effective rate, with the difference referred to as adjusted ROE spread. Components of adjusted income and adjusted ROE spread are used: (1) to measure performance under our incentive compensation plans; (2) as a measure in determining the level of quarterly dividends; and (3) in strategic planning. While we utilize adjusted income as a key measure in determining the level of dividends, we consider GAAP net income volatility caused by gains (losses) on derivatives and hedging activities and trading securities in determining the adequacy of our retained earnings as determined under GAAP. Because the adequacy of GAAP retained earnings is considered in setting the level of our quarterly dividends, gains (losses) on derivatives and hedging activities and trading securities can come into consideration when setting the level of our quarterly dividends. Because we are primarily a “hold-to-maturity” investor and do not trade derivatives, we believe that adjusted income, adjusted ROE and adjusted ROE spread are helpful in understanding our operating results and provide a meaningful period-to-period comparison. In contrast, GAAP net income, ROE based on GAAP net income and ROE spread based on GAAP net income can vary significantly from period to period because of fair value changes on derivatives and certain other items that management excludes when evaluating operational performance. Management believes such volatility hinders a consistent measurement analysis.

Derivative and hedge accounting affects the timing of income or expense from derivatives. However, when the derivatives are held to maturity or call dates, there is no economic income or expense impact from these derivatives. For example, interest rate caps are purchased with an upfront fixed cost to provide protection against the risk of rising interest rates. Under derivative accounting guidance, these instruments are then marked to fair value each month, which can result in having to recognize significant fair value gains and losses from year to year, producing volatility in our GAAP net income. However, if held to maturity, the sum of such gains and losses over the term of a derivative will equal its original purchase price.

In addition to impacting the timing of income and expense from derivatives, derivative accounting also impacts the presentation of net interest settlements on derivatives and hedging activities. This presentation differs under GAAP for economic hedges when compared to hedges that qualify for hedge accounting. Net interest settlements on economic hedges are included with the economic derivative fair value changes and are recorded in net gains (losses) on derivatives and hedging activities while the net interest settlements on qualifying fair value hedges are included in net interest margin. Therefore, only the economic derivative fair value changes and the ineffectiveness for qualifying hedges included in the net gains (losses) on derivatives and hedging activities are removed to arrive at adjusted income (i.e., net interest settlements, which represent actual cash inflows or outflows and do not create fair value volatility, are not removed).

Table 19 presents a reconciliation of GAAP net income to adjusted income (in thousands):

Table 19



	2019			2018
Net income, as reported under GAAP	$	185,237		$	170,271
AHP assessments	20,597			18,944
Income before AHP assessments	205,834			189,215
Derivative (gains) losses¹	56,046			(2,285		)
Trading (gains) losses	(70,261		)	21,910
Prepayment fees on terminated advances	(763		)	(277		)
Net (gains) losses on sale of held-to-maturity securities	46			(1,591		)
Total excluded items	(14,932		)	17,757
Adjusted income (a non-GAAP measure)	$	190,902		$	206,972


¹	Consists of fair value changes on all derivatives and hedging activities excluding net interest settlements (see next table) on economic hedges.

Adjusted income decreased $16.1 million for the year ended December 31, 2019 compared to the prior year as a result of a $11.7 million decrease in adjusted net interest income and a $3.7 million increase in other expenses. The decrease in adjusted net interest income for the year was a result of accelerated amortization of concessions on called bonds and accelerated amortization of premiums on mortgage-related assets (see Table 20). The increase in other expenses for the year ended December 31, 2019 was due primarily to an increase in mortgage loan transaction fees due to the growth in the mortgage loan portfolio and FHLBank System-related expenses.

Table 20 presents a reconciliation of GAAP net interest income to adjusted net interest income (in thousands):

Table 20



	2019			2018
Net interest income, as reported under GAAP	$	256,064		$	271,197
(Gains) losses on derivatives qualifying for hedge accounting recorded in net interest income¹	2,397			—
Net interest settlements on derivatives not qualifying for hedge accounting	(3,974		)	(5,476		)
Prepayment fees on terminated advances	(763		)	(277		)
Adjusted net interest income (a non-GAAP measure)	$	253,724		$	265,444

Net interest margin, as calculated under GAAP	0.45		%	0.50		%
Adjusted net interest margin (a non-GAAP measure)	0.45		%	0.49		%

_________


¹	Beginning January 1, 2019, fair value gains and losses on fair value hedges are required to be presented in the income statement line item related to the hedged item, which impacts net interest income prospectively.

Management uses adjusted income to evaluate the quality of our earnings. FHLBank management believes that the presentation of adjusted income as measured for management purposes enhances the understanding of our performance by highlighting its underlying results and profitability. Management uses adjusted net interest income to evaluate the earnings impact of economic hedges. Under GAAP, the net interest amount that converts economically swapped fixed rate investments or liabilities to a variable rate is recorded as part of net gains (losses) on derivatives and hedging activities rather than net interest income. Presenting fixed rate investments with the corresponding net interest amount in adjusted net interest income reflects the widening of the spread between the variable rate assets created by the economic hedge and the variable rate liabilities funding them as a result of the change in average LIBOR, SOFR, or OIS between periods. Further, beginning January 1, 2019, fair value gains and losses on fair value hedges are required to be presented in the income statement line item related to the hedged item, which impacts net interest income. These fluctuations are excluded from the calculation of adjusted net income and adjusted net interest income.

Table 21 presents a comparison of adjusted ROE (a non-GAAP financial measure) to the average overnight Federal funds rate, which we use as a key measure of effective utilization and management of members’ capital. The decrease in adjusted ROE for the year ended December 31, 2019 compared to the prior year reflects the decrease in adjusted net income and the increase in average capital; however, the increase in average assets and average capital positively impacted ROE and partially offset the decrease in adjusted net income. Adjusted ROE spread is calculated as follows (dollar amounts in thousands):

Table 21



	2019			2018
Average GAAP total capital	$	2,531,504		$	2,496,609
ROE, based upon GAAP net income	7.32		%	6.82		%
Adjusted ROE, based upon adjusted income	7.54		%	8.29		%
Average overnight Federal funds effective rate	2.16		%	1.83		%
Adjusted ROE as a spread to average overnight Federal funds effective rate	5.38		%	6.46		%

Financial Condition

Overall: Total assets increased $15.6 billion, or 32.6 percent, from December 31, 2018 to December 31, 2019 Although we experienced growth in mortgage loans and advances, the majority of the increase was in short- and long-term investments in response to changes to regulatory liquidity requirements that became effective March 31, 2019, including the purchase of $5.7 billion in U.S. Treasury obligations since the third quarter of 2018. The MPF Program continues to meet the needs of members by providing a reliable option for mortgage sales, as indicated by mortgage deliveries of over $1.0 billion for each of the last two quarters of 2019. Total capital increased $336.8 million, or 13.7 percent, between periods primarily due to an increase in capital stock held in excess of activity requirements, capital stock related to advance utilization, and growth in retained earnings.

Total liabilities increased $15.2 billion, or 33.6 percent, from December 31, 2018 to December 31, 2019. This increase was primarily due to an $8.0 billion increase in consolidated obligation bonds and a $6.8 billion increase in consolidated obligation discount notes, which corresponded with the increase in assets, but the funding mix remained consistent between periods. Our funding mix generally is driven by asset composition, but we may also shift our debt composition as a result of market conditions that impact the cost of consolidated obligations swapped or indexed to LIBOR, SOFR, Prime, Treasury bills, or OIS. We replaced some discount note funding with bonds indexed to SOFR during 2019 in part to reduce our exposure to LIBOR as the market prepares to transition away from LIBOR as a reference rate. For additional information on our LIBOR transition efforts and LIBOR exposure, see “Risk Management – Interest Rate Risk Management” under this Item 7.

Dividends paid to members totaled $99.5 million for the year ended December 31, 2019 compared to $96.7 million for the same period in the prior year. The weighted average dividend rate for the year ended December 31, 2019 was 6.46 percent, which represented a dividend payout ratio of 53.7 percent, compared to a weighted average dividend rate of 6.13 percent and a payout ratio of 56.8 percent for the same period in 2018.

Short-term money market investments and investment securities increased notably as a percentage of assets at December 31, 2019 compared to December 31, 2018. The increase in money market investments was driven by attractive yields and spreads on reverse repurchase agreements while maintaining targeted leverage. The increase in investment securities was largely due to purchases of U.S. Treasury obligations in response to regulatory liquidity requirements that became effective March 31, 2019. We continue to fund our short-term advances and overnight investments with term and overnight discount notes, but we also began to fund overnight investments with floating rate bonds to achieve certain liquidity targets. The decrease in the percentage of advances and mortgage loans to total assets was a direct result of the increase in short-term investments and investment securities at December 31, 2019 compared to December 31, 2018. Table 22 presents the percentage concentration of the major components of our Statements of Condition:

Table 22



	Component Concentration
	12/31/2019		12/31/2018
Assets:
Cash and due from banks	3.0	%	—	%
Interest-bearing deposits, securities purchased under agreements to resell and Federal funds sold	10.3		4.1
Investment securities	21.4		17.5
Advances	47.8		60.2
Mortgage loans, net	16.8		17.6
Other assets	0.7		0.6
Total assets	100.0	%	100.0	%

Liabilities:
Deposits	1.2	%	1.0	%
Consolidated obligation discount notes, net	43.4		43.2
Consolidated obligation bonds, net	50.6		50.2
Other liabilities	0.4		0.5
Total liabilities	95.6		94.9

Capital:
Capital stock outstanding	2.8		3.2
Retained earnings	1.6		1.9
Total capital	4.4		5.1
Total liabilities and capital	100.0	%	100.0	%

Table 23 presents changes in the major components of our Statements of Condition (dollar amounts in thousands):

Table 23



	Increase (Decrease) in Components
	12/31/2019 vs. 12/31/2018
	Dollar Change		Percent Change
Assets:
Cash and due from banks	$	1,902,106	12,630.2	%
Interest-bearing deposits, securities purchased under agreements to resell and Federal funds sold	4,549,697		230.7
Investment securities	5,231,394		62.8
Advances	1,511,202		5.3
Mortgage loans, net	2,222,547		26.4
Other assets	144,452		56.8
Total assets	$	15,561,398	32.6	%

Liabilities:
Deposits	$	316,820	66.9	%
Consolidated obligation discount notes, net	6,839,579		33.2
Consolidated obligation bonds, net	8,046,920		33.6
Other liabilities	21,280		10.0
Total liabilities	15,224,599		33.6

Capital:
Capital stock outstanding	241,919		15.9
Retained earnings	85,787		9.4
Accumulated other comprehensive income (loss)	9,093		57.9
Total capital	336,799		13.7
Total liabilities and capital	$	15,561,398	32.6	%

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

Table 24 summarizes advances outstanding by product (dollar amounts in thousands):

Table 24



	12/31/2019				12/31/2018
	Dollar		Percent		Dollar		Percent
Adjustable rate:
Standard advance products:
Line of credit	$	9,421,491	31.2	%	$	11,989,165	41.7	%
Regular adjustable rate advances	665,000		2.2		655,000		2.3
Adjustable rate callable advances	11,444,700		38.0		9,003,675		31.3
Standard housing and community development advances:
Adjustable rate callable advances	37,212		0.1		39,252		0.1
Total adjustable rate advances	21,568,403		71.5		21,687,092		75.4
Fixed rate:
Standard advance products:
Short-term fixed rate advances	1,111,007		3.7		370,838		1.3
Regular fixed rate advances	4,717,025		15.6		4,310,003		15.0
Fixed rate callable advances	17,241		0.1		16,785		0.1
Standard housing and community development advances:
Regular fixed rate advances	470,925		1.6		461,431		1.6
Fixed rate callable advances	2,831		—		4,831		—
Total fixed rate advances	6,319,029		21.0		5,163,888		18.0
Convertible:
Standard advance products:
Fixed rate convertible advances	1,607,500		5.3		1,150,850		4.0
Amortizing:
Standard advance products:
Fixed rate amortizing advances	331,551		1.1		389,523		1.3
Fixed rate callable amortizing advances	10,807		—		15,028		0.1
Standard housing and community development advances:
Fixed rate amortizing advances	324,477		1.1		359,949		1.2
Fixed rate callable amortizing advances	10,288		—		11,419		—
Total amortizing advances	677,123		2.2		775,919		2.6
TOTAL PAR VALUE	$	30,172,055	100.0	%	$	28,777,749	100.0	%

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

Advances are one of the primary ways we fulfill our mission of providing liquidity to our members and constituted the largest asset on our balance sheet at December 31, 2019 and 2018. Advance par value increased by 4.8 percent from December 31, 2018 to December 31, 2019 (see Table 24) and the composition shifted between advances that either reprice or mature on a relatively short-term basis as members sought pricing efficiency in a declining interest rate environment. As of December 31, 2019 and 2018, 57.6 percent and 63.0 percent, respectively, of our members carried outstanding advance balances. The overall demand for our advances is typically influenced by our members’ ability to profitably invest the funds in loans and investments as well as their need for liquidity, which is influenced by changes in loan demand and their ability to efficiently grow deposits proportionately. The attractiveness of our advances is also influenced by the impact our dividends have on the effective cost of advances. In recent periods, a portion of the growth in average advances resulted from our members’ ability to invest advances in excess reserves at the Federal Reserve and receive a profitable risk adjusted return largely because of the dividend paid on the capital stock supporting the advances. During 2018 and 2019, the short-term advance rates became less attractive relative to the yield on excess reserves at the Federal Reserve. When, and if, member advance demand changes, a few larger members could have a significant impact on the amount of total outstanding advances. If our members reduce the volume of their advances, we expect to continue our past practice of repurchasing excess capital stock.

Rather than match-funding long-term, fixed rate, large dollar advances, we elect to swap a significant portion of large dollar advances with longer maturities to short-term indices (e.g., one- or three-month LIBOR, OIS beginning in late 2018, and SOFR beginning in 2019) to synthetically create adjustable rate advances. When coupled with the volume of our short-term advances, advances that effectively re-price at least every three months represent 91.0 percent and 89.8 percent of our total advance portfolio as of December 31, 2019 and 2018, respectively. We anticipate continuing the practice of swapping large dollar advances with longer maturities to short-term indices. In the first quarter of 2019, we began swapping fixed rate non-callable advances to SOFR as part of our plan to transition away from LIBOR as a reference rate. For additional information on our LIBOR transition efforts and LIBOR exposure, see “Risk Management – Interest Rate Risk Management” under this Item 7.

Our potential credit risk from advances is concentrated in commercial banks and savings institutions in our four-state district, but also includes potential credit risk exposure to insurance companies, credit unions, housing associates and a small number of non-members. Table 25 presents advances outstanding by borrower type (in thousands):

Table 25



	12/31/2019		12/31/2018
Member advances:
Commercial banks	$	12,524,921	$	14,070,667
Savings institutions	11,376,368		10,023,201
Insurance companies	3,817,982		2,676,745
Credit unions	2,284,657		1,723,630
CDFI	8,751		10,204
Total member advances	30,012,679		28,504,447

Non-member advances:
Housing associates	120,800		212,500
Non-member borrowers¹	38,576		60,802
Total non-member advances	159,376		273,302

TOTAL PAR VALUE	$	30,172,055	$	28,777,749


¹	Includes former members that have merged into or were acquired by non-members.

Table 26 presents information on our five largest borrowers (dollar amounts in thousands). If the borrower was not one of our top five borrowers for one of the periods presented, the applicable columns are left blank. Based on no historical loss experience on advances since the inception of FHLBank, along with our rights to collateral with an estimated fair value in excess of the book value of these advances, we do not expect to incur any credit losses on these advances.

Table 26



	12/31/2019				12/31/2018
Borrower Name	Advance Par Value		Percent of Total Advance Par		Advance Par Value		Percent of Total Advance Par
MidFirst Bank	$	8,585,000	28.5	%	$	6,560,000	22.8	%
BOKF, N.A.	4,500,000		14.9		6,100,000		21.2
Capitol Federal Savings Bank	2,090,000		6.9		2,175,000		7.6
United of Omaha Life Insurance Co.	1,205,761		4.0		813,182		2.8
Security Life of Denver Insurance Co.	925,000		3.1
Colorado Federal Savings					625,000		2.2
TOTAL	$	17,305,761	57.4	%	$	16,273,182	56.6	%

Table 27 presents the five borrowers providing the highest amount of interest income earned for the periods presented (dollar amounts in thousands). If the borrower was not one of our top five borrowers for whom we accrued the highest amount of interest income for one of the periods presented, the applicable columns are left blank.

Table 27



	2019				2018
Borrower Name	Advance Income		Percent of Total Advance Income¹		Advance Income		Percent of Total Advance Income¹
BOKF, N.A.	$	174,240	25.1	%	$	127,835	20.4	%
MidFirst Bank	157,654		22.7		100,445		16.0
Capitol Federal Savings Bank	52,267		7.5		61,626		9.8
United of Omaha Life Insurance Co.	24,411		3.5		17,276		2.8
Security Life of Denver Insurance Co.	17,076		2.5
Bellco Credit Union					14,090		2.2
TOTAL	$	425,648	61.3	%	$	321,272	51.2	%


¹	Total advance income by borrower excludes: (1) changes in unrealized gains (losses) from qualifying fair value hedging relationships; (2) net interest settlements on derivatives hedging the advances; and (3) prepayment fees received.

See Table 10 for information on the amount of interest income on advances as a percentage of total interest income for the years ended December 31, 2019, 2018, and 2017.

Prepayment Fees - Advances are priced based on our marginal cost of issuing matched-maturity funding while considering our related administrative and operating costs, pricing on other funding alternatives available to members, and desired profitability targets. Advances with a maturity or repricing period greater than three months that do not include call features that can be exercised at the option of the member generally incorporate a fee sufficient to make us financially indifferent should the borrower decide to prepay the advance.

Letters of Credit - We also issue letters of credit for members. Members must collateralize letters of credit in accordance with the same requirements as for advances. Letters of credit are generally issued or confirmed on behalf of a member to: (1) collateralize public unit deposits: (2) facilitate residential housing finance; (3) facilitate community lending;(4) manage assets/liabilities; or (5) provide liquidity or other funding . Outstanding letters of credit balances totaled $4.8 billion and $3.9 billion as of December 31, 2019 and 2018, respectively.

Housing Associates - We are permitted under the Bank Act to make advances to housing associates, which are non-members that are approved mortgagees under Title II of the National Housing Act. All outstanding advances to housing associates are to state housing finance authorities. Totals as of December 31, 2019 and 2018, which are noted in Table 25, represent less than one percent of total advance par values for each period presented.

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

The principal amount of new mortgage loans acquired and held on our balance sheet from our PFIs during the year ended December 31, 2019 was $3.9 billion. These new originations and acquisitions, net of loan payments received, resulted in an increase of 26.4 percent in the outstanding net balance of our mortgage loan portfolio from December 31, 2018 to December 31, 2019. Despite the increase, net mortgage loans as a percentage of total assets decreased, from 17.6 percent as of December 31, 2018 to 16.8 percent as of December 31, 2019 because of an increase in the percentage of investments held to meet new regulatory liquidity requirements. This has also caused the percentage of mortgage loan interest income to total interest income to remain flat year-over-year despite the growth in the mortgage portfolio, as the increase in the average balance and yield of investment securities has increased investment interest income. Table 10 presents the amount of interest income on mortgage loans held for portfolio as a percentage of total interest income for the years ended December 31, 2019, 2018, and 2017.

Recent growth in mortgage loans held for portfolio is attributed primarily to continued strong production from our top five PFIs, supported by enhancements to the pricing options available to PFIs, which has increased demand for the MPF Program. The primary factors that may influence future growth in our mortgage loans held for portfolio include: (1) the number of new and delivering PFIs; (2) the mortgage loan origination volume of current PFIs; (3) refinancing activity; (4) the level of interest rates and the shape of the yield curve; (5) the relative competitiveness of MPF pricing to the prices offered by other buyers of residential mortgage loans; and (6) a PFI's level of excess risk-based capital relative to the required risk-based capital charge associated with the PFI's CE obligations on MPF mortgage loans. In an effort to manage the level of mortgage loans on our books, management has researched and continues to review options including participating loan volume (as described below) or selling whole loans to other FHLBanks, members or other investors if needed. Although we may determine to sell whole loans from time to time, we have not identified any specific loans to be sold as of December 31, 2019.

The MPF Xtra product is a structure where our PFIs sell mortgage loans to FHLBank Chicago and simultaneously to Fannie Mae. During 2019 and 2018, we had MPF Xtra loan volume of $119.7 million and $100.1 million, respectively. The MPF Government MBS product is a structure where our PFIs sell government loans to FHLBank Chicago that are aggregated and pooled into securities guaranteed by Ginnie Mae. We had volume of $106.8 million and $75.1 million in the MPF Government MBS product during 2019 and 2018, respectively. During 2018, we began offering the MPF Direct product, which provides the PFI the opportunity to sell to Redwood Trust (an entity that is not affiliated with us) for securitization mortgage loans exceeding the FHFA conforming loan limit under the MPF Program structure. We had volume of $13.7 million and $1.9 million in MPF Direct during 2019 and 2018, respectively. We receive a counterparty fee from our PFIs for facilitating their participation in these products.

Table 28 presents the outstanding balances of mortgage loans sold to us, net of participations, from our top five PFIs and the percentage of those loans to total mortgage loans outstanding (dollar amounts in thousands). If the member was not one of our top five PFIs for one of the periods presented, the applicable columns are left blank.

Table 28



	12/31/2019				12/31/2018
	Mortgage Loan Balance		Percent of Total Mortgage Loans		Mortgage Loan Balance		Percent of Total Mortgage Loans
NBKC Bank	$	925,748	8.8	%	$	570,440	6.9	%
FirstBank of Colorado	424,437		4.1		372,533		4.5
Mutual of Omaha Bank	396,389		3.8
Fidelity Bank	393,205		3.8		253,413		3.1
Sunflower Bank	383,226		3.7
Tulsa Teachers Credit Union					291,691		3.5
ENT Federal Credit Union					203,048		2.4
TOTAL	$	2,523,005	24.2	%	$	1,691,125	20.4	%

Table 29 presents information regarding the asset quality of our mortgage loan portfolio (in thousands):

Table 29



	2019			2018			2017			2016			2015
Nonaccrual, past due and restructured loans:
Nonaccrual loans, UPB¹	$	14,905		$	11,198		$	16,456		$	14,897		$	15,878
Loans past due 90 days or more and still accruing interest, UPB	8,505			7,631			6,031			4,962			7,637

Allowance for credit losses on mortgage loans:
Beginning balance	$	812		$	1,208		$	1,674		$	1,972		$	4,550
Charge-offs/recoveries²	(214		)	(423		)	(280		)	(189		)	(669		)
Provision (reversal) for mortgage loan losses	387			27			(186		)	(109		)	(1,909		)
Ending balance	$	985		$	812		$	1,208		$	1,674		$	1,972

Interest income shortfall for nonaccrual loans:
Gross amount of interest income that would have been recorded based on original terms	$	723		$	636		$	894		$	859		$	1,017
Interest recognized in income during the period	(566		)	(493		)	(661		)	(687		)	(813		)
Shortfall	$	157		$	143		$	233		$	172		$	204

Conventional residential mortgage loans are classified as nonaccrual when they are contractually past due 90 days or more at which time interest is no longer accrued. Interest continues to accrue on government-insured residential mortgage loans (e.g., FHA, VA, HUD and RHS loans) that are contractually past due 90 days or more. Nonaccrual loans include troubled debt restructurings of $1.4 million, $1.3 million, $1.5 million, $1.4 million, and $1.4 million as of December 31, 2019, 2018, 2017, 2016, and 2015, respectively. Troubled debt restructurings are restructurings in which we, for economic or legal reasons related to the debtor’s financial difficulties, grant a concession to the debtor that we would not otherwise consider.


²	The ratio of net charge-offs/recoveries to average loans outstanding was approximately one basis point or less for the periods ending December 31, 2019, 2018, 2017, 2016, and 2015.

The serious delinquency rate of the mortgage loan portfolio did not change from December 31, 2018 to December 31, 2019 (see Table 30). According to the December 31, 2019 Mortgage Bankers Association (MBA) National Delinquency Survey, the weighted average of all conventional residential mortgage loans 90 days or more past due using third quarter MBA data (data is published with a one-quarter lag) was 1.2 percent. This is approximately twelve times the level of seriously delinquent loans in our mortgage loan portfolio. Table 30 presents delinquency information for the unpaid principal of conventional mortgage loans in our traditional MPF products (dollar amounts in thousands):

Table 30



	12/31/2019			12/31/2018
30 to 59 days delinquent and not in foreclosure	$	57,758		$	33,190
60 to 89 days delinquent and not in foreclosure	7,249			6,453
90 days or more delinquent and not in foreclosure¹	9,836			6,054
In process of foreclosure²	3,300			2,878
Total conventional mortgage loans delinquent or in process of foreclosure	$	78,143		$	48,575

Real estate owned (carrying value)	$	874		$	2,183

Serious delinquency rate³	0.1		%	0.1		%


¹	Includes all troubled debt restructurings regardless of delinquency status not classified as in process of foreclosure. Troubled debt restructurings are restructurings in which we, for economic or legal reasons related to the debtor's financial difficulties, grant a concession to the debtor that we would not otherwise consider.


²	Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported.


³	Conventional loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total conventional loan portfolio principal balance. Only fixed rate prime conventional mortgage loans are held in the MPF portfolio.

Two indications of credit quality are Fair Isaac Corporation (FICO^®) scores and LTV ratios. FICO is a widely used credit industry indicator to assess borrower credit quality with scores typically ranging from 300 to 850 with the low end of the scale indicating greater credit risk. In February 2010, the MPF Program instituted a minimum FICO score of 620 for all conventional loans. Table 31 provides the percentage distribution of FICO scores at origination for conventional mortgage loans outstanding in our traditional MPF products:

Table 31



FICO Score¹	12/31/2019		12/31/2018
< 620	0.5	%	0.5	%
620 to < 660	4.0		4.0
660 to < 700	11.6		11.9
700 to < 740	19.9		19.8
>= 740	64.0		63.8
	100.0	%	100.0	%

Weighted average	750		750


¹	Represents the original FICO score of the lowest-scoring borrower for the related loan.

LTV is a primary variable in credit performance. Generally, a higher LTV ratio means greater risk of loss in the event of a default and higher loss severity. As noted previously, the maximum LTV for conventional MPF loans is 95 percent, though AHP MPF mortgage loans may have LTVs up to 100 percent. Table 32 provides LTV ratios at origination for conventional mortgage loans outstanding in our traditional MPF products:

Table 32



LTV	12/31/2019		12/31/2018
<= 60%	14.5	%	14.3	%
> 60% to 70%	14.6		13.9
> 70% to 80%	51.9		53.2
> 80% to 90%	10.1		9.7
> 90% to < 100%	8.9		8.9
	100.0	%	100.0	%

Weighted average	74.6	%	74.7	%

Our mortgage loans held in portfolio were dispersed across all 50 states and the District of Columbia as of December 31, 2019 and 2018. Table 33 is a summary of the geographic concentration percentage of our conventional mortgage loan portfolio by state, highlighting the top five states with the highest concentration.

Table 33



	12/31/2019		12/31/2018
Kansas	30.2	%	34.2	%
Nebraska	22.0		20.7
Colorado	16.1		16.1
Oklahoma	10.9		13.4
California	4.0		3.1
All other	16.8		12.5
TOTAL	100.0	%	100.0	%

The credit risk of conventional mortgage loans sold under the traditional MPF products is managed by structuring potential credit losses into certain layers. As is customary for conventional mortgage loans, PMI is required for MPF loans with LTVs greater than 80 percent. Losses beyond the PMI layer are absorbed by an FLA established for each pool of mortgage loans sold by a PFI up to the maximum amount of the remaining FLA net of credit losses.

Allowance for Credit Losses on Mortgage Loans Held for Portfolio – The allowance for credit losses increased slightly from December 31, 2018 to December 31, 2019. Delinquencies of conventional loans trended higher but remained at low levels relative to the portfolio, at 0.8 percent and 0.6 percent of total conventional loans at December 31, 2019 and December 31, 2018, respectively. We believe that policies and procedures are in place to effectively manage the credit risk on mortgage loans held in portfolio. See Note 7 of the Notes to Financial Statements under Part II, Item 8 for a summary of the allowance for credit losses on mortgage loans as well as payment status and other delinquency statistics for our mortgage loan portfolio.

Investments: Investments are used to enhance income and provide liquidity and primary and secondary market support for the U.S. housing securities market. Total investments increased from December 31, 2018 to December 31, 2019, predominantly due to increases in the balances of short-term investments and purchases of U.S. Treasury obligations. The majority of the increase and change in composition of long-term investments was in response to changes to regulatory liquidity requirements that became effective March 31, 2019, including the purchase of $5.7 billion in U.S. Treasury obligations since the third quarter of 2018. The U.S. Treasury obligations satisfy changes to regulatory liquidity requirements and were swapped to OIS or SOFR. The $4.5 billion increase in overnight investments was intended to supplement earnings and offset upcoming maturities while market conditions were favorable.

Short-term Investments – Short-term investments, which are used to provide funds to meet the credit needs of our members, maintain liquidity, meet other financial obligations such as debt servicing, and enhance income, consist primarily of reverse repurchase agreements, interest-bearing deposits, overnight Federal funds sold, term Federal funds sold, and certificates of deposit. The Bank Act and FHFA regulations and guidelines set liquidity requirements for us, and our Board of Directors has adopted additional liquidity policies. In addition, we maintain a contingency liquidity plan in the event of financial market disruptions. See “Risk Management – Liquidity Risk Management” under this Item 7 for a discussion of our liquidity management.

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


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


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


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

Table 34 presents the carrying value of our unsecured credit exposure with private counterparties by investment type (in thousands). The unsecured investment credit exposure presented may not reflect the average or maximum exposure during the period as the balances presented reflect the balances at period end.

Table 34



	12/31/2019		12/31/2018
Interest-bearing deposits	$	919,693	$	669,653
Federal funds sold	850,000		50,000
TOTAL UNSECURED INVESTMENT CREDIT EXPOSURE¹	$	1,769,693	$	719,653


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

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

FHFA regulations include limits on the amount of unsecured credit an individual FHLBank may extend to a counterparty or to a group of affiliated counterparties. This limit is based on a percentage of eligible regulatory capital and the counterparty’s overall credit rating. Under these regulations, the level of eligible regulatory capital is determined as the lesser of an individual FHLBank’s total regulatory capital or the eligible amount of regulatory capital of the counterparty. The eligible amount of regulatory capital is then multiplied by a stated percentage. The percentage that an FHLBank may offer for term extensions of unsecured credit ranges from 1 percent to 15 percent based on the counterparty’s long-term credit rating. The calculation of term extensions of unsecured credit includes on-balance sheet transactions, off-balance sheet commitments and derivative transactions. See “Risk Management – Credit Risk Management” under this Item 7 for additional information related to derivative exposure.

FHFA regulation also permits us to extend additional unsecured credit for overnight extensions of credit. Our total overnight unsecured exposure to a counterparty may not exceed twice the regulatory limit for term exposures, or a total of 2 percent to 30 percent of the eligible amount of regulatory capital, based on the counterparty’s credit rating. We, however, generally limit our unsecured exposure to any private counterparty to no more than the balance of our retained earnings, even if the counterparty limit under the previously discussed calculation would be higher. As of December 31, 2019, we were in compliance with the regulatory limits established for unsecured credit, and our unsecured credit exposure to any individual non-member private counterparty (excluding GSEs) did not exceed the balance of our retained earnings on that date.

We are prohibited by FHFA regulation from investing in financial instruments issued by non-U.S. entities other than those issued by U.S. branches and agency offices of foreign commercial banks. Our unsecured credit exposures to U.S. branches and agency offices of foreign commercial banks include the risk that, as a result of political or economic conditions in a country, the counterparty may be unable to meet its contractual repayment obligations. Our unsecured credit exposures to domestic counterparties and U.S. subsidiaries of foreign commercial banks include the risk that these counterparties have extended credit to foreign counterparties. Throughout 2019, we were in compliance with the regulation and did not own any financial instruments issued by foreign sovereign governments, including those countries that are members of the European Union.

We manage our credit risk by conducting pre-purchase credit due diligence and on-going surveillance described previously and generally investing in unsecured investments of highly-rated counterparties. From time to time, we extend unsecured credit to qualified members by investing in overnight Federal funds issued by them. As of December 31, 2019, all unsecured investments were rated as investment grade based on NRSROs (see Table 38).

Table 35 presents the amount of our unsecured investment credit exposure by remaining contractual maturity and by the domicile of the counterparty or the domicile of the counterparty’s parent for U.S. branches and agency offices of foreign commercial banks as of December 31, 2019 (in thousands). We also mitigate the credit risk on investments by generally investing in investments that have short-term maturities.

Table 35



Domicile of Counterparty	Overnight
Domestic	$	1,319,693
U.S. Branches and agency offices of foreign commercial banks:
Canada	450,000
TOTAL UNSECURED INVESTMENT CREDIT EXPOSURE¹	$	1,769,693


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

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

Long-term investments – Our long-term investment portfolio consists primarily of GSE MBS and U.S. Treasury obligations. Our RMP restricts the acquisition of investments to highly rated long-term securities. During the last half of 2018, we began acquiring fixed rate U.S. Treasury obligations and swapping these securities from fixed to variable rates, as either trading securities that are economically swapped or, beginning in 2019, available-for-sale securities that are swapped in qualifying fair value hedging relationships. In addition to serving as excellent collateral, U.S. Treasuries also satisfy recent changes to regulatory liquidity requirements. Currently, the vast majority of our variable rate investment securities are indexed to LIBOR. For additional information on our LIBOR transition efforts and LIBOR exposure, see “Risk Management – Interest Rate Risk Management” under this Item 7.

According to FHFA regulation, no additional MBS purchases can be made if the amortized cost of our mortgage securities exceeds 300 percent of our regulatory capital. Further, quarterly increases in holdings of mortgage securities are restricted to no more than 50 percent of regulatory capital. As of December 31, 2019, the amortized cost of our MBS portfolio represented 262 percent of our regulatory capital. At times we may exceed the required threshold due to decreases in regulatory capital; however, we were in compliance with the regulatory limit at the time of each purchase during the year ended December 31, 2019.

As of December 31, 2019, we held $3.5 billion of par value in MBS in our held-to-maturity portfolio, $2.8 billion of par value in MBS in our available-for-sale portfolio, and $0.8 billion of par value in MBS in our trading portfolio. The majority of the MBS in the held-to-maturity portfolio are variable rate GSE securities. The majority of the MBS in the trading and available-for-sale portfolios are fixed rate GSE securities, which are swapped from fixed to variable rates.

We provide SBPAs to two state HFAs within the Tenth District. For a predetermined fee, we accept an obligation to purchase the authorities’ bonds if the remarketing agent is unable to resell the bonds to suitable investors, and to hold the bonds until: (1) the designated remarketing agent can find a suitable investor; (2) we successfully exercise our right to sell the bonds; or (3) the HFA repurchases the bonds according to a schedule established by the SBPA. The standby bond purchase commitments executed and outstanding as of December 31, 2019 expire no later than 2022 though they are renewable upon request of the HFA and at our option. Total commitments for bond purchases under the SBPAs were $0.7 billion and $0.8 billion as of December 31, 2019 and 2018, respectively. We were not required to purchase any bonds under these agreements during 2019 or 2018. We plan to continue to support the state HFAs in our district by continuing to execute SBPAs where appropriate and when allowed by our RMP. In the future, we may acquire participation interests in SBPAs with other FHLBanks and/or directly enter into SBPAs with out-of-district HFAs with the permission of the in-district FHLBank.

Major Security Types – Securities for which we have the ability and intent to hold to maturity are classified as held-to-maturity securities and recorded at carrying value, which is the net total of par, premiums, and discounts. We classify certain investments as trading or available-for-sale securities and carry them at fair value, generally for liquidity purposes, to provide a fair value offset to the gains (losses) on the interest rate swaps tied to swapped securities, and for asset/liability management purposes. Liquidity or other asset/liability management strategies may require periodic sale of these securities but they are not actively traded with the intent of realizing gains; most often, they are held until maturity or call date. Securities acquired as asset/liability management tools to manage duration risk, which are likely to be sold when the duration risk is no longer present, are classified as trading or available-for-sale securities. Changes in the fair values of investments classified as trading are recorded through other income and original premiums/discounts on these investments are not amortized.

See Note 4 of the Notes to Financial Statements under Part II, Item 8 of this annual report for additional information on our different investment classifications including the types of securities held under each classification. The carrying value of our investments is summarized by security type in Table 36 (in thousands).

Table 36



	12/31/2019		12/31/2018		12/31/2017
Trading securities:
Certificates of deposit	$	—	$	—	$	584,984
U.S. Treasury obligations	1,530,518		252,377		—
GSE debentures	416,025		1,000,495		1,353,083
Mortgage-backed securities:
U.S. obligation MBS	—		467		580
GSE MBS	866,019		897,774		930,768
Total trading securities	2,812,562		2,151,113		2,869,415
Available-for-sale securities:
U.S. Treasury obligations	4,261,791		—		—
GSE MBS	2,920,709		1,725,640		1,493,231
Total available-for-sale securities	7,182,500		1,725,640		1,493,231
Held-to-maturity securities:
State or local housing agency obligations	82,805		86,430		89,830
Mortgage-backed securities:
U.S. obligation MBS	93,375		109,866		127,588
GSE MBS	3,393,778		4,260,577		4,561,839
Private-label residential MBS	—		—		77,568
Total held-to-maturity securities	3,569,958		4,456,873		4,856,825
Total securities	13,565,020		8,333,626		9,219,471

Interest-bearing deposits	921,453		670,660		442,682

Federal funds sold	850,000		50,000		1,175,000

Securities purchased under agreements to resell	4,750,000		1,251,096		3,161,446
TOTAL INVESTMENTS	$	20,086,473	$	10,305,382	$	13,998,599

The carrying values by contractual maturities of our investments are summarized by security type in Table 37 (dollar amounts in thousands). Expected maturities of certain securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

Table 37



	12/31/2019
	Due in one year or less			Due after one year through five years			Due after five years through 10 years			Due after 10 years			Carrying Value
Trading securities:
U.S. Treasury obligations	$	252,079		$	1,278,439		$	—		$	—		$	1,530,518
GSE debentures	—			397,016			19,009			—			416,025
Mortgage-backed securities:
GSE MBS	—			107,902			710,964			47,153			866,019
Total trading securities	252,079			1,783,357			729,973			47,153			2,812,562
Yield on trading securities	2.50		%	2.60		%	2.89		%	1.99		%
Available-for-sale securities:
U.S. Treasury obligations	753,891			3,507,900			—			—			4,261,791
GSE MBS	—			313,694			2,607,015			—			2,920,709
Total available-for-sale securities	753,891			3,821,594			2,607,015			—			7,182,500
Yield on available-for-sale securities	2.53		%	1.96		%	2.76		%	—		%
Held-to-maturity securities:
State or local housing agency obligations	—			—			—			82,805			82,805
Mortgage-backed securities:
U.S. obligation MBS	—			—			—			93,375			93,375
GSE MBS	—			435,255			912,208			2,046,315			3,393,778
Total held-to-maturity securities	—			435,255			912,208			2,222,495			3,569,958
Yield on held-to-maturity securities	—		%	1.50		%	1.67		%	1.76		%

Total securities	1,005,970			6,040,206			4,249,196			2,269,648			13,565,020
Yield on total securities	2.53		%	2.11		%	2.54		%	1.77		%

Interest-bearing deposits	921,453			—			—			—			921,453

Federal funds sold	850,000			—			—			—			850,000

Securities purchased under agreements to resell	4,750,000			—			—			—			4,750,000
TOTAL INVESTMENTS	$	7,527,423		$	6,040,206		$	4,249,196		$	2,269,648		$	20,086,473

Securities Ratings – Tables 38 and 39 present the carrying value of our investments by rating as of December 31, 2019 and 2018 (in thousands). The ratings presented are the lowest ratings available for the security, issuer, or counterparty based on NRSROs, where available. Some counterparties for collateralized overnight borrowing are not rated by an NRSRO because they are not issuers of debt or are otherwise not required to be rated by an NRSRO. We also utilize other credit quality factors when analyzing potential investments including, but not limited to, collateral performance, marketability, asset class or sector considerations, local and regional economic conditions, and/or the financial health of the underlying issuer.

Table 38



	12/31/2019
	Carrying Value¹
	Investment Grade						Unrated		Total
	Triple-A		Double-A		Single-A
Interest-bearing deposits²	$	255	$	1,761	$	919,437	$	—	$	921,453

Federal funds sold²	—		—		850,000		—		850,000

Securities purchased under agreements to resell³	—		—		—		4,750,000		4,750,000

Investment securities:
Non-mortgage-backed securities:
U.S. Treasury obligations	—		5,792,309		—		—		5,792,309
GSE debentures	—		416,025		—		—		416,025
State or local housing agency obligations	52,805		30,000		—		—		82,805
Total non-mortgage-backed securities	52,805		6,238,334		—		—		6,291,139
Mortgage-backed securities:
U.S. obligation MBS	—		93,375		—		—		93,375
GSE MBS	—		7,180,506		—		—		7,180,506
Total mortgage-backed securities	—		7,273,881		—		—		7,273,881

TOTAL INVESTMENTS	$	53,060	$	13,513,976	$	1,769,437	$	4,750,000	$	20,086,473


¹	Investment amounts represent the carrying value and do not include related accrued interest receivable of $45.7 million at December 31, 2019.


²	Amounts include unsecured credit exposure with overnight maturities.


³	Amounts represent collateralized overnight borrowings.

Table 39



	12/31/2018
	Carrying Value¹
	Investment Grade						Unrated		Total
	Triple-A		Double-A		Single-A
Interest-bearing deposits²	$	435	$	1,007	$	669,218	$	—	$	670,660

Federal funds sold²	—		—		50,000		—		50,000

Securities purchased under agreements to resell³	—		—		—		1,251,096		1,251,096

Investment securities:
Non-mortgage-backed securities:
U.S. Treasury obligations	—		252,377		—		—		252,377
GSE debentures	—		1,000,495		—		—		1,000,495
State or local housing agency obligations	56,430		30,000		—		—		86,430
Total non-mortgage-backed securities	56,430		1,282,872		—		—		1,339,302
Mortgage-backed securities:
U.S. obligation MBS	—		110,333		—		—		110,333
GSE MBS	—		6,883,991		—		—		6,883,991
Total mortgage-backed securities	—		6,994,324		—		—		6,994,324

TOTAL INVESTMENTS	$	56,865	$	8,278,203	$	719,218	$	1,251,096	$	10,305,382


¹	Investment amounts represent the carrying value and do not include related accrued interest receivable of $19.9 million at December 31, 2018.


²	Amounts include unsecured credit exposure with overnight maturities.


³	Amounts represent collateralized overnight borrowings.

Table 40 details interest rate payment terms for the carrying value of our investment securities as of December 31, 2019 and 2018 (in thousands). We manage the interest rate risk associated with our fixed rate trading and available-for-sale securities by entering into interest rate swaps that convert the investment's fixed rate to a variable rate index (see Tables 62 and 63 under Item 7A – “Quantitative and Qualitative Disclosures About Market Risk)."

Table 40



	12/31/2019		12/31/2018
Trading securities:
Non-mortgage-backed securities:
Fixed rate	$	1,946,543	$	652,376
Variable rate	—		600,496
Non-mortgage-backed securities	1,946,543		1,252,872
Mortgage-backed securities:
Fixed rate	817,568		839,726
Variable rate	48,451		58,515
Mortgage-backed securities	866,019		898,241
Total trading securities	2,812,562		2,151,113
Available-for-sale securities:
Non-mortgage-backed securities:
Fixed rate	4,261,791		—
Non-mortgage-backed securities	4,261,791		—
Mortgage-backed securities:
Fixed rate	2,920,709		1,725,640
Mortgage-backed securities	2,920,709		1,725,640
Total available-for-sale securities	7,182,500		1,725,640
Held-to-maturity securities:
Non-mortgage-backed securities:
Variable rate	82,805		86,430
Non-mortgage-backed securities	82,805		86,430
Mortgage-backed securities:
Fixed rate	104,359		133,498
Variable rate	3,382,794		4,236,945
Mortgage-backed securities	3,487,153		4,370,443
Total held-to-maturity securities	3,569,958		4,456,873
TOTAL	$	13,565,020	$	8,333,626

Securities Concentrations - We did not hold securities from any issuers, excluding securities issued or guaranteed by U.S. government agencies or GSEs, with aggregate book values greater than ten percent of our capital as of December 31, 2019.

Deposits: Total deposits increased 66.9 percent from December 31, 2018 to December 31, 2019. Deposit programs are offered primarily to facilitate customer transactions with us. Deposit products offered include demand and overnight deposits and short-term certificates of deposit. Deposits are typically in overnight or demand accounts that generally re-price daily based upon a market index such as the overnight Federal funds rate. The level of deposits is driven by member demand for deposit products, which in turn is a function of the liquidity position of members. Factors that influence deposit levels include turnover in member investment and loan portfolios, changes in members’ customer deposit balances, changes in members’ demand for liquidity, and our deposit pricing as compared to other short-term market rates. Declines in the level of deposits could occur during 2020 if the level of member liquidity should decrease due to loan demand outpacing deposit funding growth at member institutions, or if depositor investment options improve as interest rates rise. Fluctuations in deposits have little impact on our ability to obtain liquidity. We historically have had stable and ready access to the capital markets through consolidated obligations and can replace any reduction in deposits with similarly or even lower priced borrowings. There were no time deposits outstanding as of December 31, 2019, 2018 or 2017.

Table 41 presents the average amount of and the annual rate paid on deposit types that exceed 10 percent of average deposits (dollar amounts in thousands). Deposit types are included only in the year(s) that the 10 percent threshold is met.

Table 41



	2019				2018				2017
	Amount		Rate		Amount		Rate		Amount		Rate
Overnight deposits	$	233,467	1.97	%	$	202,147	1.65	%	$	234,934	0.83	%
Demand deposits	290,913		1.64		239,314		1.39		232,296		0.53
Derivative counterparty collateral deposits					119,358		1.90

Consolidated Obligations: Consolidated obligations are the joint and several debt obligations of the FHLBanks and consist of bonds and discount notes. Consolidated obligations represent the primary source of liabilities we use to fund advances, mortgage loans and investments. As noted under Item 7A – “Quantitative and Qualitative Disclosures About Market Risk,” we use debt with a variety of maturities and option characteristics to manage our interest rate risk profile. We make extensive use of derivative transactions, executed in conjunction with specific consolidated obligation debt issues, to synthetically structure funding terms and costs.

Bonds are primarily used to fund longer-term (one year or greater) advances, mortgage loans, and investments. To the extent that the bond is funding variable rate assets, we typically either issue a bond that has variable rates matching the asset index or utilize an interest rate swap to change the bond’s characteristics in order to match the asset’s index. Additionally, we sometimes use fixed rate, variable rate or complex consolidated obligation bonds that are swapped or indexed to LIBOR, Prime, Treasury bills, SOFR, or OIS to fund short-term advances and money market investments, adjustable rate advances with indices and resets based on our short-term cost of funds, or as a liquidity risk management tool. We began issuing consolidated obligation bonds indexed to SOFR in the fourth quarter of 2018 in anticipation of a market transition to SOFR as a potential replacement for LIBOR.

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

Total consolidated obligations increased 33.4 percent from December 31, 2018 to December 31, 2019. The distribution between discount notes and bonds remained unchanged between periods, with discount notes at 46.2 percent and bonds at 53.8 percent of total outstanding consolidated obligations as of both December 31, 2018 and December 31, 2019. During 2019, we issued unswapped callable bonds with three-month to one-year lockouts primarily to fund the purchase of mortgage loans from our members. During 2018, we issued floating rate bonds indexed to the U.S. Treasury bill rate rather than issuing floating rate bonds issued to LIBOR or swapping fixed-rate callable bonds to LIBOR, in part to reduce exposure to LIBOR in general as the market prepares to transition away from LIBOR as a reference rate. While we currently have stable access to funding markets, future developments could impact the cost of replacing outstanding debt. Some of these include, but are not limited to, a large increase in call volume, significant increases in advance demand, legislative and regulatory changes, geopolitical events, regulatory proposals addressing GSEs, derivative and financial market reform, a decline in investor demand for consolidated obligations, rating agency downgrades of U.S. Treasury obligations that will in turn impact the rating on FHLBank consolidated obligations, and changes in Federal Reserve interest policies and economic outlooks. For a discussion on yields and spreads, see Table 13 under this Item 7 - “Results of Operations.” For further discussion of how our portfolio of unswapped callable bonds impacted interest rate risk, see Item 7A – “Quantitative and Qualitative Disclosures About Market Risk.”

Several recent developments have the potential to impact the demand for FHLBank consolidated obligations in 2020 and perhaps beyond. For a discussion of the impact of these recent developments, U.S. government programs, governmental regulation of commercial banks, and the financial markets on the cost of FHLBank consolidated obligations, see “Financial Market Trends” under this Item 7.

Borrowings with original maturities of one year or less are considered short-term. Table 42 summarizes short-term borrowings (dollar amounts in thousands):

Table 42



	Consolidated Obligation Discount Notes									Consolidated Obligation Bonds with Original Maturities of One Year or Less
	2019			2018			2017			2019			2018			2017
Outstanding at end of the period¹	$	27,510,042		$	20,649,098		$	20,445,225		$	4,976,050		$	1,265,000		$	5,250,000
Weighted average rate at end of the period²	1.54		%	2.35		%	1.23		%	1.66		%	2.39		%	1.31		%
Daily average outstanding for the period¹	$	24,020,763		$	24,746,689		$	26,833,050		$	4,344,953		$	1,532,082		$	6,364,589
Weighted average rate for the period²	2.21		%	1.81		%	0.87		%	2.15		%	1.68		%	0.96		%
Highest outstanding at any month-end¹	$	27,510,042		$	26,952,174		$	27,980,015		$	6,484,500		$	2,450,000		$	7,900,000


¹	Par Value


²	Computed based on par value and coupon/interest rate

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

The notional amount of total derivatives outstanding increased by $8.4 billion, from $12.5 billion at December 31, 2018 to $20.9 billion at December 31, 2019, primarily due to increases in interest rate swaps hedging U.S. Treasuries, GSE MBS, fixed rate consolidated obligation discount notes, and fixed rate non-callable consolidated obligation bonds. For additional information regarding the types of derivative instruments and risks hedged, see Tables 62 and 63 under Item 7A – “Quantitative and Qualitative Disclosures About Market Risk.”

Liquidity and Capital Resources

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

Capital stock outstanding increased 15.9 percent from December 31, 2018 to December 31, 2019 due to an increase in capital stock in excess of activity requirements and capital stock related to advance utilization (see Table 44).

Excess stock represents the amount of stock held by a member in excess of that institution’s minimum stock requirement. Upon reducing the activity-based stock purchase requirement, through a mandated change or through a reduction of advance balances, excess stock is created since the member is no longer required under our capital plan to hold the same amount of activity-based capital stock. If our excess stock exceeds one percent of our assets before or after the payment of a dividend in the form of stock, we would be prohibited by FHFA regulation from paying dividends in the form of stock. To manage the amount of excess stock, we repurchase excess Class A Common Stock over FHLBank-established limits held by any individual member periodically throughout the year. Our current practices include periodically repurchasing all outstanding excess Class A Common Stock and exchanging all excess Class B Common Stock over $50 thousand per member for Class A Common Stock on a regular basis. Such exchanges occurred on a weekly basis until February 2019, when we began to conduct such exchanges on a daily basis.

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

The increase in retained earnings from December 31, 2018 to December 31, 2019 is attributed to the net income for the year of $185.2 million, exceeding the $99.5 million payment of dividends in 2019. Dividends increased $2.8 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 as a result of increases in capital stock outstanding and dividend rates paid on both Class A Common Stock and Class B Common Stock as discussed previously. The JCE Agreement provides that, on a quarterly basis, we allocate at least 20 percent of our net income to a separate RRE Account until the balance of that account equals at least one percent of our average balance of outstanding consolidated obligations for the previous quarter. As of December 31, 2019, our level of restricted retained earnings represented approximately 0.43 percent of average outstanding consolidated obligations for the previous quarter. These restricted retained earnings are not available to pay dividends (see the discussion of our JCE Agreement and the amendment to our capital plan under Item 1 – “Business – Capital, Capital Rules and Dividends”).

Our capital stock is not publicly traded. Members may request that we redeem any capital stock in excess of the minimum stock purchase requirements, but any repurchase of excess capital stock prior to the end of the redemption period is entirely at our discretion (see Item 1 – “Business – Capital, Capital Rules and Dividends”). All redemptions (at member request at the end of the redemption period) or repurchases (at our discretion, prior to the end of any applicable redemption period if made at a member’s request) are made at the par value of $100 per share. Stock redemption periods are six months for Class A Common Stock and five years for Class B Common Stock, although we can, at our discretion, repurchase amounts over a member’s minimum stock purchase requirements at any time prior to the end of the redemption periods as long as we will remain in compliance with our regulatory capital requirements after such repurchase. Ownership of our capital stock is concentrated within the financial services industry, and is stratified across various institutional entities as reflected in Table 43 as of December 31, 2019 and 2018 (dollar amounts in thousands):

Table 43



	2019			2018
	Count	Amount		Count	Amount
Commercial banks	572	$	915,378	586	$	809,211
Savings institutions	23	530,623		25	466,424
Credit unions	88	136,589		87	113,844
Insurance companies	23	183,307		21	134,565
CDFIs	4	559		2	493
Total GAAP capital stock	710	1,766,456		721	1,524,537
Mandatorily redeemable capital stock	7	2,415		7	3,597
TOTAL REGULATORY CAPITAL STOCK	717	$	1,768,871	728	$	1,528,134

Our activity-based stock purchase requirements are consistent with our cooperative structure; members’ stock ownership requirements and the dollar amount of dividends paid to members generally increases as their activities with us increase. To the extent that a member’s asset-based stock purchase requirement is insufficient to cover the member’s activity-based stock purchase requirement, the member is required to purchase Class B Common Stock. We believe the value of our products and services is enhanced by dividend yields that exceed the return available from other investments with similar terms and credit quality. Factors that affect members’ willingness to enter into activity with us and purchase additional required activity-based stock include, but are not limited to, our dividend rates, the risk-based capital weighting of our capital stock, and alternative investment or borrowing opportunities available to our members.

Table 44 provides a summary of member capital requirements under our current capital plan as of December 31, 2019 and 2018 (in thousands):

Table 44



Requirement	12/31/2019		12/31/2018
Asset-based (Class A Common Stock only)	$	158,758	$	157,406
Activity-based (additional Class B Common Stock)¹	1,264,160		1,192,807
Total Required Stock²	1,422,918		1,350,213
Excess Stock (Class A and B Common Stock)	345,953		177,921
Total Regulatory Capital Stock²	$	1,768,871	$	1,528,134

Activity-based Requirements:
Advances³	$	1,352,339	$	1,285,470
AMA assets (mortgage loans)⁴	621		772
Total Activity-based Requirement	1,352,960		1,286,242
Asset-based Requirement (Class A Common Stock) not supporting member activity¹	69,958		63,971
Total Required Stock²	$	1,422,918	$	1,350,213


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


²	Includes mandatorily redeemable capital stock.


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


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

We are subject to three capital requirements under provisions of the GLB Act, the FHFA’s capital structure regulation and our current capital plan, which includes risk-based capital requirement, total capital requirement and leverage capital requirement. We have been in compliance with each of the aforementioned capital rules and requirements at all times since the implementation of our capital plan. See Note 13 of the Notes to Financial Statements under Part II, Item 8 for additional information and compliance as of December 31, 2019 and 2018.

Capital Distributions: Dividends may be paid in cash or capital stock as authorized by our Board of Directors. Quarterly dividends can be paid out of current and previous unrestricted retained earnings, subject to FHFA regulation and our capital plan (see the discussion of our JCE Agreement and the amendment to our capital plan under Item 1 – “Business – Capital, Capital Rules and Dividends”). The dividend payout ratio represents the percentage of net income paid out as dividends. The fluctuations in the dividend payout ratios for recent year-ends (see Table 7 under Item 6 – “Selected Financial Data”) are primarily attributable to the changes in net income due to the volatility of net gains (losses) on derivatives and hedging activities and net gains (losses) on trading securities (see this Item 7 – “Results of Operations” for additional discussion).

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

The current dividend parity threshold is equal to the average effective overnight Federal funds rate for a dividend period minus 100 basis points and was effective for all dividends paid in 2018 and 2019. The dividend parity threshold is effectively floored at zero percent when the current overnight Federal funds target rate is less than one percent. Under the capital plan, all dividends paid in the form of capital stock must be paid in the form of Class B Common Stock. Table 45 presents the dividend rates per annum paid on capital stock under our capital plan for the quarterly periods of 2019:

Table 45



Applicable Rate per Annum	12/31/2019		09/30/2019		06/30/2019		03/31/2019
Class A Common Stock	2.50	%	2.50	%	2.50	%	2.25	%
Class B Common Stock	7.50		7.50		7.50		7.50
Weighted Average¹	6.14		6.61		6.56		6.56
Dividend Parity Threshold:
Average effective overnight Federal funds rate	1.65	%	2.20	%	2.40	%	2.40	%
Spread to index	(1.00	)	(1.00	)	(1.00	)	(1.00	)
TOTAL (floored at zero percent)	0.65	%	1.20	%	1.40	%	1.40	%


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

Table 46 presents the dividend rates per annum paid on capital stock under our capital plan for the quarterly periods of 2018:

Table 46



Applicable Rate per Annum	12/31/2018		09/30/2018		06/30/2018		03/31/2018
Class A Common Stock	2.00	%	2.00	%	1.50	%	1.50	%
Class B Common Stock	7.25		7.25		6.75		6.75
Weighted Average¹	6.24		6.32		5.99		6.01
Dividend Parity Threshold:
Average effective overnight Federal funds rate	2.22	%	1.92	%	1.74	%	1.45	%
Spread to index	(1.00	)	(1.00	)	(1.00	)	(1.00	)
TOTAL (floored at zero percent)	1.22	%	0.92	%	0.74	%	0.45	%


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

We paid dividend rates of 2.50 percent on Class A Common Stock and 7.50 percent on Class B Common Stock for the fourth quarter of 2019. Adverse changes in market conditions may result in lower dividend rates in future quarters. While there is no assurance that our Board of Directors will not change the dividend parity threshold in the future, the capital plan requires that we provide members with 90 days' notice prior to the end of a dividend period in which a different dividend parity threshold is utilized in the payment of a dividend.

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

As of December 31, 2019, 63.3 percent of our capital was capital stock, and 36.7 percent was retained earnings and AOCI. As of December 31, 2018, 62.1 percent of our capital was capital stock, and 37.9 percent was retained earnings and AOCI. As mentioned previously, we were in compliance with our minimum regulatory capital requirements as of December 31, 2019. Additionally, within our RMP we have an internal minimum total capital-to-asset ratio requirement of 4.04 percent, which is in excess of the 4.00 percent regulatory requirement. All regulatory and internal capital ratios include mandatorily redeemable capital stock as capital, which we treat as a liability under GAAP. We expect to maintain a regulatory capital-to-asset percentage greater than the regulatory minimum of 4.0 percent and greater than our RMP minimum of 4.04 percent. However, our GAAP total capital percentage could drop below these levels because mandatorily redeemable capital stock is considered a liability under GAAP. See Table 7 under Item 6 – “Selected Financial Data” for reported percentages for total capital ratio and regulatory capital ratio.

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

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

During the year ended December 31, 2019, proceeds (net of premiums and discounts) from the issuance of bonds and discount notes were $24.7 billion and $818.1 billion, respectively, compared to $10.8 billion and $1,036.7 billion for the year ended December 31, 2018. The large difference between the proceeds from bonds and discount notes reflects the cumulative effect of using short-term discount notes to fund short-term advances and our short-term liquidity portfolio. Our other sources of liquidity include deposit inflows, repayments of advances and mortgage loans, maturing investments, interest income, maturing Federal funds sold, and proceeds from maturing reverse repurchase agreements or the sale of unencumbered assets.

Our short-term liquidity portfolio, which consists of cash and investments with remaining maturities of one year or less and includes Federal funds sold, interest-bearing demand deposits, certificates of deposit, commercial paper, and reverse repurchase agreements, increased between periods, from $2.6 billion as of December 31, 2018 to $9.4 billion as of December 31, 2019. The increase between periods was relative to the decrease in targeted leverage at the end of 2018 combined with accumulation of liquidity in anticipation of potential advance demand at the end of 2019. The maturities of our short-term investments are structured to provide periodic cash flows to support our ongoing liquidity needs. To enhance our liquidity position, short-term investment securities (i.e., commercial paper and marketable certificates of deposit) are also classified as trading so that they can be readily sold should liquidity be needed immediately.

We also maintain a portfolio of GSE debentures, U.S. Treasury obligations, and GSE MBS that can be pledged as collateral for financing in the securities repurchase agreement market and are classified as trading to enhance our liquidity position. The par value of these debentures and U.S. Treasury obligations was $1.9 billion and $1.2 billion as of December 31, 2019 and December 31, 2018, respectively. The par value of these MBS was $0.8 billion and $0.9 billion as of December 31, 2019 and December 31, 2018, respectively. We also hold $4.2 billion in par value of U.S. Treasury obligations classified as available-for-sale to satisfy regulatory liquidity requirements that went into effect March 31, 2019. In addition to the balance sheet sources of liquidity discussed previously, we have established lines of credit with numerous counterparties in the Federal funds market as well as with the other FHLBanks. Accordingly, we expect to maintain a sufficient level of liquidity for the foreseeable future.

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

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

During the year ended December 31, 2019, advance disbursements totaled $323.5 billion compared to $394.8 billion for the prior year period. During the year ended December 31, 2019, investment purchases (excluding overnight investments) totaled $9.2 billion compared to $4.4 billion for the same period in the prior year. The increase in investment purchases was primarily U.S. Treasury obligations purchased in response to new regulatory liquidity requirements. During the year ended December 31, 2019, payments on consolidated obligation bonds and discount notes were $16.7 billion and $811.3 billion, respectively, compared to $11.4 billion and $1,036.5 billion for the prior year period.

Liquidity Requirements – We are subject to funding gap and cash balance guidelines for measuring required liquidity. Funding gaps are defined as the difference between our assets and liabilities scheduled to mature during a specific period stated as a percentage of total assets. FHFA liquidity guidelines require that we manage our funding gap to a minimum ratio for the three-month and one-year horizons calculated with data as of the calendar month-end using the average ratio for the three most recent month-ends. FHFA guidelines require us to maintain a minimum number of days of positive cash balances without access to the capital markets for the issuance of consolidated obligations.

FHFA guidelines allow High Quality Liquid Assets (HQLA) to be included in liquidity metrics. The FHFA defines HQLA as uncommitted and unencumbered U.S. Treasury securities that have a remaining maturity of no greater than 10 years designated as trading and available-for-sale. We are also allowed to include some legacy GSE debentures as HQLA. We calculate our liquidity under the funding gap guidelines monthly and are required to submit applicable data in a report to the FHFA monthly. We calculate our liquidity under the cash balance guidelines daily and are required to submit applicable data in a report to the FHFA weekly. Statutory liquidity requires us to have an amount equal to current deposits received from members invested in obligations of the United States, deposits in eligible banks or trust companies, and advances with a remaining maturity not exceeding five years. Statutory liquidity is calculated daily. See “Risk Management - Liquidity Risk Management” under this Item 2 for additional discussion on our liquidity requirements. We remained in compliance with all liquidity requirements in effect during 2019.

Contingency plans are in place at FHLBank and the Office of Finance that prioritize the allocation of liquidity resources in the event of financial market disruptions, as well as systemic Federal Reserve wire transfer system disruptions. Further, under the Bank Act, the Secretary of Treasury has the authority, at his discretion, to purchase consolidated obligations up to an aggregate amount of $4.0 billion. No borrowings under this authority have been outstanding since 1977.

Generally, our liquid assets are funded with discount notes or floating rate bonds of a shorter tenor. In order to help ensure sufficient liquidity, we generally maintain a relatively longer weighted-average maturity on our consolidated obligation discount notes and floating rate bonds than the weighted average maturity of short-term liquid investment and short-term advance balances. Over time, especially as the yield curve steepens on the short end, maintaining the differential between the weighted average original maturity of discount notes and short-term liquid investments will increase our cost of funds and reduce our net interest income.

Off-Balance Sheet Arrangements: In the ordinary course of business, we engage in financial transactions that, in accordance with GAAP, are not recorded on the Statements of Condition or may be recorded on the Statements of Condition in amounts that are different from the full contract or notional amount of the transactions. See Note 17 of the Notes to Financial Statements under Part II, Item 8 – “Financial Statements and Supplementary Data” for more information on our off-balance sheet arrangements.

Contractual Obligations: Table 47 represents the payment due dates or expiration terms under the specified contractual obligation type, excluding derivatives, by period as of December 31, 2019 (in thousands). Consolidated obligations listed exclude discount notes, which have maturities of one year or less, and are based on contractual maturities. Actual distributions could be influenced by factors affecting potential early redemptions.

Table 47



Contractual Obligations	Total		Payments due by period
Contractual Obligations	Total		1 Year or Less		After 1 Through 3 Years		After 3 Through 5 Years		After 5 Years
Consolidated obligation bonds	$	31,970,700	$	15,991,800	$	7,693,350	$	2,509,250	$	5,776,300
Financing obligation	35,000		—		—		—		35,000
Commitments to fund mortgage loans	221,800		221,800		—		—		—
Advance commitments	79,975		64,282		15,693		—		—
Expected future pension benefit payments	13,372		1,198		2,417		1,626		8,131
Mandatorily redeemable capital stock	2,415		1,545		870		—		—
TOTAL	$	32,323,262	$	16,280,625	$	7,712,330	$	2,510,876	$	5,819,431

Risk Management

Active risk management continues to be an essential part of our operations and a key determinant of our ability to: (1) provide liquidity to our members at reasonable costs to them; (2) maintain the par value of members’ capital stock; (3) repurchase or redeem members’ capital stock; and (4) maintain earnings to return an acceptable dividend to our members and meet retained earnings thresholds. Proper identification, assessment and management of risks, complemented by adequate internal controls, enable our stakeholders to have confidence in our ability to meet our housing finance mission, serve our stockholders, earn a profit, compete in the industry, and sustain and prosper over the long term. We maintain comprehensive risk management processes to facilitate, control and monitor risk taking. Periodic reviews by internal and external auditors, FHFA examiners and independent consultants subject our practices to additional scrutiny, further strengthening the process.

We maintain an enterprise risk management (ERM) program in an effort to enable the identification of all inherent significant risks to the organization and institute the prompt and effective management of any major risk exposures. Under this program, we perform annual risk assessments designed to identify and evaluate all material risks that could adversely affect the achievement of our performance objectives and compliance requirements. ERM is a process, effected by our Board of Directors, management and other personnel, applied in strategy setting and across FHLBank. It is designed to: (1) identify and evaluate potential risks or events that may affect FHLBank; (2) manage these risks to desired residual risk levels consistent with our Risk Appetite Statement; and (3) provide reasonable assurance regarding the achievement of FHLBank's strategic, operations, reporting and compliance objectives. Our ERM program is a structured and disciplined approach that aligns strategy, processes, people, technology and knowledge with the purpose of identifying, evaluating and managing the uncertainties we face as we create value. It is a continuous process of identifying, prioritizing, assessing and managing inherent enterprise risks (i.e., business, compliance, credit, liquidity, market and operations) before they become realized risk events.

Our Risk Philosophy Statement, approved by our Board of Directors, establishes the broad parameters we consider in executing our business strategy and represents a set of shared attitudes and beliefs that characterize how we consider risk in everything we do. Our Risk Appetite Statement, also approved by our Board of Directors, defines the level of risk exposure we are willing to accept or retain in pursuit of stakeholder value. We accept a measured and managed amount of market risk while seeking to manage our risk exposure to business, compliance, credit, liquidity and operations risk to a low residual risk level. While we consider our risk appetite first in evaluating strategic alternatives, defining and managing to a specific risk appetite does not ensure we will not incur greater than expected losses or be faced with an unexpected, catastrophic loss. By defining and managing to a specific risk appetite, our Board of Directors and senior management strive to ensure that there is a common understanding of our desired risk profile, which enhances the ability of both to make improved strategic and tactical decisions. Our monthly Risk Dashboard provides a holistic view of our risk profile and the means for reporting our key risk metrics as defined within our Risk Appetite Metrics document, which is also approved by our Board of Directors. The Risk Dashboard is intended to demonstrate, at an entity level, whether our enterprise risks are well controlled and normal operations are expected with standard Board of Directors involvement.

As part of our ERM program, entity level risk assessment workshops are conducted with our management committees to identify and reach a general consensus on the primary risks that must be managed to help ensure achievement of our strategic objectives and allow for future success for the organization. By using this type of top-down assessment, we seek to: (1) gain an understanding of our current risk universe; (2) obtain management’s input on new and/or increasing areas of exposure; (3) determine the impact our primary risks might have on achieving our strategic business plan objectives; (4) discuss and validate our current risk management approach; (5) identify other risk management strategies that might be implemented to better ensure alignment with our desired residual risk profile; and (6) prioritize the allocation of resources to address those areas where current risk management strategies may be falling short relative to the overall level of perceived residual risk. The results of these activities, including any risk strategies and action plans for enhancing risk management practices, are summarized in an annual risk assessment report, which is reviewed by the Strategic Risk Management Committee and approved by the Risk Oversight Committee of the Board of Directors.

Business units also play key roles in our risk management program. We utilize a customized business unit risk assessment approach to ensure that: (1) risk assessments are completed annually for all of our business units; (2) effective internal controls and strategies are in place for managing the identified risks within the key processes throughout FHLBank; and (3) risk management or internal control weaknesses are properly identified with necessary corrective actions taken. As a result of our efforts, 22 business unit risk assessments were completed in 2019 addressing 134 key processes throughout FHLBank. The number of business unit risk assessments and key processes will necessarily fluctuate over time as organizational changes occur, responsibilities shift and new products and services are developed. The results of all risk assessments are reviewed by senior management and presented to the Risk Oversight Committee of the Board of Directors on a scheduled basis in order to keep our Board of Directors apprised of any weaknesses in the current risk management process of each business unit and the steps undertaken by management to address any identified weaknesses. Each process level risk is associated with one or more entity level risks to establish a relationship or connection between the top down or entity level risks and the risks managed at the business unit level.

Effective risk management programs include not only conformance to risk management best practices by management but also incorporate Board of Director oversight. As previously noted, our Board of Directors plays an active role in the ERM process by regularly reviewing risk management policies and approving aggregate levels of risk. Involvement by the Board of Directors in establishing risk tolerance levels, including oversight of the development and maintenance of programs to manage it, is substantial and reflects a high level of director fiduciary responsibility and accountability. In addition to establishing the formal Risk Philosophy Statement, Risk Appetite Statement, Risk Appetite Metrics and reviewing the annual and business unit risk assessment results, our Board of Directors reviews both the RMP and Member Products Policy at least annually. Various management committees, including the Executive Team, the Strategic Risk Management Committee, the Asset/Liability Committee, the Credit Underwriting Committee, the Market Risk Analysis Committee, the Operations Risk Committee, the Disclosure Committee, and the Technology Committee oversee our risk management process. The following discussion highlights our different strategies to diversify and manage risk. See Item 7A – “Quantitative and Qualitative Disclosures About Market Risk” for a separate discussion of market risk.

Interest Rate Risk Management: Interest rate risk is the risk that relative and absolute changes in interest rates may adversely affect an institution's financial condition and performance. The goal of an interest rate risk management strategy is not necessarily to eliminate interest rate risk, but to manage it by setting, and operating within, an appropriate framework and limits. We generally manage interest rate risk by acquiring and maintaining a portfolio of assets and liabilities and entering into related derivative transactions to limit the expected mismatches in duration and market value of equity sensitivity. See Item 7A - "Quantitative and Qualitative Disclosures About Market Risk" for additional information on interest rate risk measurement.

Transition from LIBOR to an Alternative Reference Rate – Many of our assets and liabilities are indexed to LIBOR, so we continue to evaluate the potential impact of the replacement of the LIBOR benchmark interest rate, including the likelihood of SOFR prevailing as the most widely adopted replacement reference rate. We have assessed our current LIBOR exposure, which included evaluating the fallback language of derivative and investment contracts indexed to LIBOR, and have developed a transition plan that includes strategies to manage and reduce exposure in addition to operational readiness. Our swap agreements are governed by the International Swap Dealers Association (ISDA). ISDA is in the process of developing a protocol to modify legacy trades to include fallback language. The market transition away from LIBOR is expected to be gradual and complex, including the development of term and credit adjustments to accommodate differences between LIBOR, an unsecured rate, and SOFR, a secured rate. SOFR is based on a broad segment of the overnight U.S. Treasuries repurchase market and is intended to be a measure of the average cost of borrowing cash overnight collateralized by U.S. Treasury securities. We started participating in SOFR-indexed debt issuances in November 2018 and swapping certain financial instruments to SOFR in January 2019 in an effort to manage our exposure to LIBOR assets and liabilities with maturities beyond 2021. Derivative and investment exposure will also be impacted by the actions of industry groups and standard setters, which are still under deliberation.

In September 2019, the FHFA issued a supervisory letter to the FHLBanks providing LIBOR transition guidance. The supervisory letter states that by March 31, 2020, the FHLBanks should no longer enter into new financial assets, liabilities, and derivatives that reference LIBOR and mature after December 31, 2021, for all product types except investments. On March 16, 2020, in light of market volatility, the FHFA extended from March 31, 2020 to June 30, 2020 the FHLBanks’ ability to enter into instruments referencing LIBOR that mature after December 31, 2021, except for investments and option embedded products. With respect to investments, the FHLBanks should, by December 31, 2019, stop purchasing investments that reference LIBOR and mature after December 31, 2021. For additional information, see "Legislative and Regulatory Developments" under Item 1.

The principal balance of variable rate advances indexed to LIBOR as of December 31, 2019 was $665 million, which represents 3.08 percent of total variable rate advances. The contractual maturities of these LIBOR-indexed advances are all due in 2020; thus, at December 31, 2019, we have no LIBOR exposure after 2021. We have no advances indexed to SOFR as of December 31, 2019.

Table 48 presents the par value of variable rate investment securities by the related interest rate index as of December 31, 2019 (dollar amounts in thousands):

Table 48



12/31/2019
Index	Amount		Percent
Non-mortgage-backed securities:
LIBOR	$	82,805	2.4	%
Non-mortgage-backed securities	82,805		2.4
Mortgage-backed securities:
LIBOR	3,430,554		97.6
Other	23		—
Mortgage-backed securities	3,430,577		97.6
TOTAL	$	3,513,382	100.0	%

Table 49 presents the par value of investment securities indexed to LIBOR outstanding by year of contractual maturity as of December 31, 2019 (in thousands):

Table 49



12/31/2019
Year of Contractual Maturity	Amount
Non-mortgage-backed securities:
2020	$	—
2021	—
Thereafter	82,805
Non-mortgage-backed securities	82,805
Mortgage-backed securities:
2020	—
2021	2,291
Thereafter	3,428,263
Mortgage-backed securities	3,430,554
TOTAL	$	3,513,359

Table 50 presents the notional amount of interest rate swaps (excludes interest rate caps and mortgage delivery commitments) by related interest rate index as of December 31, 2019 (amounts in thousands):

Table 50



12/31/2019
Index	Pay Side		Receive Side
Fixed rate	$	14,555,853	$	4,622,282
LIBOR	1,310,000		7,049,661
SOFR	1,743,781		5,371,203
OIS	1,938,500		2,404,988
Other	—		100,000
TOTAL	$	19,548,134	$	19,548,134

Table 51 presents the notional amount of interest rate swaps (excludes interest rate caps and mortgage delivery commitments) indexed to LIBOR outstanding by termination date as of December 31, 2019 (in thousands). Actual terminations of certain derivatives will differ from contractual termination dates because derivative counterparties may have call options within the derivative contracts. Likewise, if the financial instrument being hedged by the derivative (either as a qualifying fair value hedge or as an economic hedge) is called or paid off prior to contractual maturity, we could potentially call or terminate the corresponding derivative prior to the termination date.

Table 51



12/31/2019
Year	Pay Side				Receive Side
Year	Cleared		Bilateral		Cleared		Bilateral
2020	$	235,000	$	130,000	$	239,223	$	158,000
2021	—		635,000		630,481		15,000
Thereafter	—		310,000		1,615,412		4,391,545
TOTAL	$	235,000	$	1,075,000	$	2,485,116	$	4,564,545

Table 52 presents the par value of variable rate consolidated obligation bonds by the related interest rate index as of December 31, 2019 (dollar amounts in thousands):

Table 52



12/31/2019
Index	Amount		Percent
SOFR	$	7,227,000	44.4	%
LIBOR	6,510,000		39.9
U.S. Treasury	2,550,000		15.7
TOTAL	$	16,287,000	100.0	%

Table 53 presents the par value of consolidated obligation bonds indexed to LIBOR outstanding by year of maturity and by year of maturity or next call date for callable bonds as of December 31, 2019 (in thousands):

Table 53



12/31/2019
Year	Maturity Date		Maturity or Next Call Date
2020	$	5,490,000	$	5,760,000
2021	750,000		750,000
Thereafter	270,000		—
TOTAL	$	6,510,000	$	6,510,000

Credit Risk Management: Credit risk is defined as the potential that a borrower or counterparty will fail to meet its financial obligations in accordance with agreed terms. We manage credit risk by following established policies, evaluating the creditworthiness of our counterparties, and utilizing collateral agreements and settlement netting for derivative transactions where enforceability of the legal right of offset has been determined. The most important step in the management of credit risk is the initial decision to extend credit. Continuous monitoring of counterparties is completed for all areas where we are exposed to credit risk, whether that is through lending, investing or derivative activities.

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

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

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

Investments – Our RMP restricts the acquisition of investments to high-quality, short-term money market instruments and highly rated long-term securities. The short-term investment portfolio represents unsecured credit and reverse repurchase agreements. Counterparty ratings are monitored daily while performance and capital adequacy are monitored on a monthly basis in an effort to mitigate unsecured credit risk on our short-term investments. Collateral eligibility and transaction margin requirements on our reverse repurchase agreements are monitored daily. U.S. Treasury obligations and MBS securitized by Fannie Mae or Freddie Mac represent the majority of our long-term investments. Other long-term investments include MBS issued by Ginnie Mae, unsecured GSE debentures and collateralized state and local housing finance agency securities.

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

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

Uncleared Derivatives. We are subject to non-performance by the counterparties to our uncleared derivative transactions. All bilateral security agreements with our non-member counterparties include bilateral-collateral-exchange provisions that require all credit exposures be collateralized, subject to a minimum transfer amount. As a result of these risk mitigation practices, we do not anticipate any credit losses on our uncleared derivative transactions as of December 31, 2019.

Cleared Derivatives. We are subject to nonperformance by the Clearinghouse(s) and clearing agent(s). The requirement that we post initial and variation margin, through the clearing agent, to the Clearinghouse, exposes us to institutional credit risk if the clearing agent or the Clearinghouse fails to meet its obligations. The use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral and/or payments are posted daily for changes in the value of cleared derivatives through a clearing agent. We do not anticipate any credit losses on our cleared derivatives as of December 31, 2019.

We regularly monitor the exposures on our derivative transactions by determining the market value of positions using internal pricing models. The market values generated by the pricing model used to value derivatives are compared to dealer model results on a monthly basis to ensure that our derivative pricing model is reasonably calibrated to actual market pricing methodologies utilized by the dealers. In addition, we have our internal pricing model validated annually by an independent consultant. As a result of these risk mitigation initiatives, management does not anticipate any credit losses on our derivative transactions. See Note 8 of the Notes to Financial Statements under Part II, Item 8 for additional information on managing credit risk on derivatives.

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

Tables 54 and 55 present derivative notional amounts and counterparty credit exposure by whole-letter rating (in the event of a split rating, we use the lowest rating published by Moody's or S&P) for derivative positions with counterparties to which we had credit exposure (in thousands):

Table 54



12/31/2019
Credit Rating	Notional Amount		Net Derivatives Fair Value Before Collateral			Cash Collateral Pledged From (To) Counterparty			Net Credit Exposure to Counterparties
Asset positions with credit exposure:
Uncleared derivatives:
Single-A	$	63,500	$	257		$	—		$	257
Cleared derivatives¹	14,150,148		1,821			(145,658		)	147,479
Liability positions with credit exposure:
Uncleared derivatives²:
Single-A	6,123,478		(78,575		)	(84,633		)	6,058
Triple-B	286,008		(5,894		)	(6,409		)	515
TOTAL DERIVATIVE POSITIONS WITH CREDIT EXPOSURE	$	20,623,134	$	(82,391	)	$	(236,700	)	$	154,309

Represents derivative transactions cleared with LCH Limited and CME Clearing. LCH Limited was rated AA- by S&P; LCH Limited's parent company, LCH Group Holdings Limited, was not rated; and London Stock Exchange Group, LCH Group Holdings Limited's ultimate parent, was rated A3 by Moody's and A by S&P as of December 31, 2019. CME Clearing is not rated; however, CME Clearing's parent company, CME Group, Inc., was rated Aa3 by Moody's and AA- by S&P as of December 31, 2019.


²	Exposure can change on a daily basis; thus, there is often a short lag time between the date the exposure is identified, collateral is requested and collateral is returned.

Table 55



12/31/2018
Credit Rating	Notional Amount		Net Derivatives Fair Value Before Collateral			Cash Collateral Pledged From (To) Counterparty			Net Credit Exposure to Counterparties
Asset positions with credit exposure:
Uncleared derivatives:
Single-A	$	36,000	$	14		$	—		$	14
Liability positions with credit exposure:
Uncleared derivatives¹:
Single-A	1,225,774		(18,975		)	(22,261		)	3,286
Cleared derivatives²	4,623,289		(4,963		)	(36,140		)	31,177
TOTAL DERIVATIVE POSITIONS WITH CREDIT EXPOSURE	$	5,885,063	$	(23,924	)	$	(58,401	)	$	34,477


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

Represents derivative transactions cleared with LCH Limited and CME Clearing. LCH Limited was rated A+ by S&P; LCH Limited's parent company, LCH Group Holdings Limited, was not rated; and London Stock Exchange Group, LCH Group Holdings Limited's ultimate parent, was rated A3 by Moody's and A- by S&P as of December 31, 2018. CME Clearing is not rated; however, CME Clearing's parent company, CME Group, Inc., was rated Aa3 by Moody's and AA- by S&P as of December 31, 2018.

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

In addition to credit risk, cross-border outstandings have the risk that, as a result of political or economic conditions in a country, borrowers may be unable to meet their contractual repayment obligations of principal and/or interest when due because of the unavailability of, or restrictions on, foreign exchange needed by borrowers to repay their obligations. We continue to cautiously place unsecured cross-border outstandings.

Table 56 presents the fair value of cross-border outstandings as of December 31, 2019 (dollar amounts in thousands):

Table 56



	Total¹
	Amount			Percent of Total Assets
Federal funds sold²	$	450,000		0.7	%

Derivative assets:
Net exposure at fair value	(12,235		)
Cash collateral held	12,869
Net exposure after cash collateral	634			—

TOTAL	$	450,634		0.7	%


¹	Represents foreign countries where individual exposure is less than one percent of total assets.


²	Consists solely of overnight Federal funds sold.

Table 57 presents the fair value of cross-border outstandings to countries in which we do business as of December 31, 2018 (dollar amounts in thousands).

Table 57



	Total¹
	Amount			Percent of Total Assets
Federal funds sold²	$	50,000		0.1	%

Derivative assets:
Net exposure at fair value	(18,961		)
Cash collateral held	22,261
Net exposure after cash collateral	3,300			—

TOTAL	$	53,300		0.1	%

__________


¹	Represents foreign countries where individual exposure is less than one percent of total assets.


²	Consists solely of overnight Federal funds sold.

Table 58 presents the fair value of cross-border outstandings to countries in which we do business as of December 31, 2017 (dollar amounts in thousands).

Table 58



	Canada					Other¹					Total
	Amount			Percent of Total Assets		Amount			Percent of Total Assets		Amount			Percent of Total Assets
Federal funds sold²	$	400,000		0.8	%	$	775,000		1.6	%	$	1,175,000		2.4	%

Trading securities³	400,017			0.8		184,967			0.4		584,984			1.2

Derivative assets:
Net exposure at fair value	1,420					(9,883		)			(8,463		)
Cash collateral held	(1,402		)			11,626					10,224
Net exposure after cash collateral	18			—		1,743			—		1,761			—

TOTAL	$	800,035		1.6	%	$	961,710		2.0	%	$	1,761,745		3.6	%

__________


¹	Represents other foreign countries where individual exposure is less than one percent of total assets. Total cross-border outstandings to countries that individually represented between 0.75 and 1.0 percent of our total assets as of December 31, 2017 were $0.4 billion (Netherlands).


²	Consists solely of overnight Federal funds sold.


³	Consists of certificates of deposit with remaining maturities of less than three months.

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

FHFA regulations require us to always have at least an amount equal to our current deposits received from our members invested in obligations of the United States, deposits in eligible banks or trust companies, or advances with remaining maturities not exceeding five years. Table 59 summarizes our compliance with the Bank Act liquidity requirements as of December 31, 2019 and 2018 (in thousands):

Table 59



	12/31/2019		12/31/2018
Liquid assets¹	$	3,688,874	$	735,702
Total qualifying deposits	790,640		473,820
Excess liquid assets over requirement	$	2,898,234	$	261,882


¹	Although we have other assets that qualify as eligible investments under the liquidity requirements, only interest-earning deposits, Federal funds sold, and deposits with the Federal Reserve are listed because these exceed the liquidity requirements without the consideration of any other eligible investments.

We generally maintained stable access to the capital markets throughout 2019. For additional discussion of the market for our consolidated obligations and the overall market affecting liquidity see “Financial Market Trends” under this Item 7.

An entity’s liquidity position is vulnerable to any rating, event, performance or ratio trigger (collectively called triggers) that would lead to the termination of the entity’s credit availability or the acceleration of repayment of credit obligations owed by the entity. We have reviewed documents concerning our vulnerability to transactions that contain triggers to gain an understanding of the manner in which risks can arise from such triggers. Triggers adverse to us currently exist in agreements for uncleared derivative transactions and SBPAs. Our staff monitors triggers in order to properly manage any type of potential risks from triggers. For additional information regarding our credit exposure relating to derivative contracts, see Note 8 of the Notes to Financial Statements under Part II, Item 8 – “Financial Statements and Supplementary Data.”

With respect to advances, letters of credit, standby credit facility commitments, and SBPAs, credit practices are impacted by certain triggers based on the member’s or housing associate’s financial performance (or the ratings of bonds underlying SBPAs) as defined in detail in our policies and/or the appropriate agreements. See Notes 1 and 7 in Item 8 – “Financial Statements and Supplementary Data – Notes to Financial Statements” for collateral requirements designed for our credit products.

We have executed SBPAs with multiple state housing finance authorities. All of the SBPAs contain rating triggers beneficial to us providing that if the housing finance authority bonds covered by the SBPA are rated below investment grade (triple-B), we would not be obligated to purchase the bonds even though we were otherwise required to do so under the terms of the SBPA contract. In addition, some transactions also contain a provision that allows us to terminate our obligation to purchase these bonds under the SBPA upon 30 days prior written notice if the long-term rating on the underlying bonds were to be withdrawn, suspended or reduced below single-A. As of December 31, 2019 and 2018, we were a party to, or participated in, 23 and 24 SBPAs, respectively, in which our aggregate principal and interest commitments were $0.7 billion and $0.8 billion, respectively.

Business Risk Management: Business risk is the risk of an adverse impact on our profitability resulting from external factors that may occur in both the short and long run. We manage business risk, in part, through a commitment to strategic planning and by having a strategic business plan in effect at all times that describes how the business activities will achieve our mission and also details the operating goals and strategic objectives for each major business activity. The Strategic Business Plan is intended to make transparent our strategic plans as well as the strategic planning process that helps formulate that plan. The Strategic Business Plan is augmented from time-to-time, at least annually, with appropriate research and analysis. The Strategic Business Plan provides a mechanism for management and the Board of Directors to be fully engaged in fulfilling their responsibilities for establishing our long-term strategic direction. Directors’ knowledge of the external environment through their positions with member institutions in the financial services industry as well as a variety of other professions provides a strong experience base to complement the capabilities and competencies of management. Full development of the Strategic Business Plan, including tactical strategies and implementation, is delegated to management and facilitated by the Strategic Planning and Member Solutions department. We use planning scenarios to develop the Strategic Business Plan and we continue to refine and enhance the scenario planning process each year. We believe this process results in the development of robust and effective future scenarios, thereby enhancing the overall effectiveness of our strategic planning process and the development of risk strategies for each scenario. The Board of Directors plays a key role in the development of the Strategic Business Plan and regularly monitors progress in the achievement of business objectives. Two Board of Directors’ meetings are set aside each year for strategic planning purposes.

To manage business and strategic risk, earnings simulations are conducted annually with estimated base-, best- and worst-case scenarios. These earnings simulations are based upon a set of assumptions developed for each of the three scenarios that consider factors such as: the effects of changes in interest rates and spreads, the balances of advances, mortgage loans, and investments, operating expenses, and dividends. The worst-case scenario assumptions typically include a pessimistic interest rate assumption, an overall decline in advance balances of approximately 20 percent due to either a declining economy, the loss of a large borrowing member due to merger or acquisition, or changes in mortgage flow as a result of the declining economy. The Strategic Planning and Member Solutions department monitors key indicators tied to the various scenario assumptions and provides a monthly report to the Executive Committee and the Board of Directors. This key indicator report includes advance balance monitoring for our largest eight members and our overall membership. See Table 26 under this Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Advances” for advance concentration to the top five borrowers.

Business risk also includes political, reputation, and regulatory risk. Congress occasionally considers legislation that could have an impact on the housing GSEs, including the FHLBanks. Legislation has the power to impact our cost of funds and our cost of doing business. It could also limit or expand existing authorities or change the competitive balance among the FHLBanks and other housing GSEs. Consequently, we seek to: (1) positively influence legislative outcomes; (2) support, oppose, or comment on regulatory proposals; and (3) continually educate all stakeholders about our positive impact on the communities we serve. To manage these types of business risks, we maintain a Government Relations Officer position and work with lobbying firms in Washington, D.C. Additionally, we, along with the other 10 FHLBanks, partner with our Washington, D.C.-based trade association, the Council of FHLBanks, to ensure that the FHLBank System's common legislative and regulatory interests are served. More specifically, we promote the enactment of laws and regulations that are beneficial to FHLBank Topeka and our members, and we oppose detrimental laws and regulations. We also work to enhance awareness and understanding of the FHLBanks among Washington leaders, including members of Congress and their staff, Executive departments, regulators, trade associations, and the financial media.

For additional discussions of general business risk, legislative and regulatory business risk and strategic business risk, see Item 1A - "Risk Factors."

Joint and Several Liability - Although we are primarily liable for our portion of consolidated obligations (i.e., those issued on our behalf), we are also jointly and severally liable with the other FHLBanks for the payment of principal and interest on consolidated obligations of all the FHLBanks. See Item 1 – “Business – Debt Financing – Consolidated Obligations” and Note 10 of the Notes to Financial Statements under Part II, Item 8 for additional information regarding FHLBank’s joint and several liability.

Operations Risk Management: Operations risk is defined as the risk of loss resulting from inadequate or failed internal processes, people, or systems, or from external events. This category of risk is inherent in our daily business activities and involves people, information technology (IT) systems, processes, and external events (including fraud, information security incidents, and business disruptions). A number of strategies are used to manage and mitigate operations risk, including systems and procedures to monitor transactions and financial positions, segregation of duties, documentation of transactions, secondary reviews, comprehensive risk assessments conducted at the entity and business unit level, and periodic reviews by our Internal Audit department. The Operations Risk Committee serves as the primary venue for overseeing all of our operations risk management initiatives and activities.

Human Error and Circumvention or Failure of Internal Controls and Procedures - Employees play a vital role in implementing our risk management practices and strategies. We look to recruit, develop, promote, and retain high-quality employees by offering a fair and competitive compensation package and by providing a comfortable, secure and professional work environment in a cost-effective manner. To ensure our employees understand the importance of establishing and maintaining an effective internal control system, we maintain an Internal Control Policy which, in addition to defining internal control and describing the five interrelated components and underlying principles of FHLBank’s internal control framework, outlines the objectives for our internal controls, establishes and delineates management’s responsibilities for implementing and maintaining internal controls, and establishes the Internal Audit department as the business unit responsible for reviewing the adequacy of our internal controls. We have established and maintain an effective internal control system, guided by the Internal Control Policy, that addresses: (1) the establishment of strategies aligned with our mission and vision; (2) the efficiency and effectiveness of our activities; (3) the safeguarding of our assets: (4) the reliability, completeness and timely reporting of financial and management information (and the transparency of that information) to the Board of Directors and outside parties, including the Office of Finance, the SEC and the FHFA; and (5) compliance with applicable laws, regulations, policies, supervisory determinations and directives. The annual business unit risk assessment program serves to reinforce our focus on maintaining strong internal controls by identifying significant inherent risks and the internal controls and strategies used to mitigate those risks to acceptable residual risk levels. The business unit risk assessment program provides management and the Board of Directors with a thorough understanding of our risk management and internal control structure.

Systems Malfunctions and Information Security Threats - We rely heavily on IT systems and other technology to conduct our business. To manage operations risk as it relates to IT systems, we devote significant management attention and resources to technology. Our Technology Committee assists executive management in overseeing the development and implementation of significant technology strategies. The Technology Committee is also charged with providing strategic oversight of all technology-related activities, monitoring the strategic alignment and synchronization of IT services with our Strategic Business Plan (as well as our immediate and long-term goals and objectives), reviewing the operational health of IT systems, and reviewing new and/or anticipated projects related to our strategic initiatives. Protection of our information assets is also necessary to establish and maintain trust between us and our customers, maintain compliance with applicable laws and regulations, and protect our reputation. Consequently, we maintain an enterprise-wide information security program. The goal of our enterprise information security program is to maintain an information security framework such that: (1) information assets are protected from unauthorized access, modification, disclosure and destruction; (2) integrity and confidentiality of information is maintained; (3) information assets and information systems are available when needed; and (4) cyber security threats and/or other information security risks are identified, monitored, assessed, and appropriately managed or mitigated through our enterprise information security program.

Man-made or Natural Disasters - Business disruption and systems failure due to man-made or natural disasters are managed by having in place at all times a disaster recovery plan, the purpose of which is to provide contingency plans for situations where operations cannot be carried out in their normal manner. We maintain contingency plans which deal with business interruptions lasting for a prolonged period of time. An off-site recovery operations center is also maintained which is an important component of our overall disaster recovery planning effort. The recovery center is maintained on a different power grid and is serviced by another telephone central office than our main headquarters. An on-site power generator supports the site in case of total power failure. The off-site recovery center is also used to store computer equipment, information, supplies, and other resources specifically acquired for business continuity purposes. Comprehensive testing is conducted utilizing the off-site recovery location at least once each year with additional limited tests conducted on a quarterly basis. The disaster recovery plans are reviewed and updated semi-annually with employee emergency contact information updated weekly through our human resource information system. We also have a reciprocal back-up agreement in place with FHLBank Boston to provide short-term advances to our members on our behalf in the event that our facilities are inoperable. In the event that FHLBank Boston’s facilities are inoperable, we have agreed to provide short-term liquidity advances to FHLBank Boston’s members. We complete an annual test of this agreement with FHLBank Boston to ensure the process and related systems are functioning properly. We also maintained a funds transfer contingency agreement with the FHLBank Boston that is tested annually, which authorizes either FHLBank Topeka or FHLBank Boston to process wire transfers for the other during a contingency situation.

Internal or External Fraud - Our Anti-Fraud Policy, which includes our Whistleblower Procedures, along with our Anti-Money Laundering Policy, forms the foundation of our Fraud Awareness Program. Our Fraud Awareness Program establishes our methodology or framework for preventing, detecting, deterring, reporting, remediating, and punishing suspicious activities, money laundering activities, dishonest activities, violations of the Code of Ethics and other fraudulent activities that could create risks for us or undermine the public’s confidence in the integrity of our activities. Employees may submit good faith complaints or concerns regarding accounting or auditing matters, fraud concerns, potential wrongdoing or violations of applicable securities laws and regulations, or violations of the Commodity Exchange Act and relevant implementing regulations to management or our anonymous reporting service without fear of dismissal or retaliation of any kind. We are committed to achieving compliance with all applicable securities laws and regulations, the Commodity Exchange Act and relevant implementing regulations, accounting standards, accounting controls and audit practices. Decisions to prosecute or refer fraud investigation results to the appropriate law enforcement and/or regulatory agencies for independent investigation shall be made in conjunction with legal counsel and appropriate senior management, as will final decisions on disposition of the case.

Recently Issued Accounting Standards

See Note 2 of the Notes to Financial Statements under Part II, Item 8 – "Financial Statements and Supplementary Data" for a discussion of recently issued accounting standards.

Item 7A: Quantitative and Qualitative Disclosures About Market Risk

We measure interest rate risk exposure by various methods, including the calculation of DOE and MVE in different interest rate scenarios.

Duration of Equity: DOE aggregates the estimated sensitivity of market value for each of our financial assets and liabilities to changes in interest rates. In essence, DOE indicates the sensitivity of theoretical MVE to changes in interest rates. However, MVE should not be considered indicative of our market value as a going concern or our value in a liquidation scenario. A positive DOE results when the duration of assets and designated derivatives is greater than the duration of liabilities and designated derivatives. A positive DOE generally indicates a degree of interest rate risk exposure in a rising interest rate environment. A negative DOE indicates a degree of interest rate risk exposure in a declining interest rate environment. Higher DOE numbers, whether positive or negative, indicate greater volatility of MVE in response to changing interest rates. That is, if we have a DOE of 3.0, a 100 basis point (one percent) increase in interest rates would cause our MVE to decline by approximately three percent whereas a 100 basis point decrease in interest rates would cause our MVE to increase by approximately three percent. It should be noted that a decline in MVE does not necessarily translate directly into a decline in near-term income, especially for entities that do not trade financial instruments. Changes in market value may indicate trends in income over longer periods, and knowing the sensitivity of our market value to changes in interest rates provides a measure of the interest rate risk we take.

Under the RMP approved by our Board of Directors, our DOE is generally limited to a range of ±5.0 assuming current interest rates. In addition, our DOE is generally limited to a range of ±7.0 assuming an instantaneous parallel increase or decrease in interest rates of 200 basis points. During periods of extremely low interest rates, the FHFA requires that FHLBanks employ a constrained down shock analysis to limit the evolution of forward interest rates to positive non-zero values. Since our market risk model imposes a positive non-zero boundary on post-shock interest rates, no additional calculations are necessary in order to meet this FHFA requirement when applicable.

The DOE parameters established by our Board of Directors represent one way to establish general limits on the amount of interest rate risk that we find acceptable. If our DOE exceeds the policy limits established by the Board of Directors, we either: (1) take asset/liability actions to bring the DOE back within the ranges established in our RMP; or (2) review and discuss potential asset/liability management actions with the Board of Directors at the next regularly scheduled meeting that could bring the DOE back within the ranges established in the RMP and ascertain a course of action, which can include a determination that no asset/liability management actions are necessary. A determination that no asset/liability management actions are necessary can be made only if the Board of Directors agrees with management’s recommendations. All of our DOE measurements were inside Board of Director established policy limits (discussed in previous paragraph) and operating ranges (discussed in next paragraph) as of December 31, 2019. On an ongoing basis, we actively monitor portfolio relationships and overall DOE dynamics as a part of our evaluation processes for determining acceptable future asset/liability management actions.

We typically maintain DOE within the above ranges through management of the durations of our assets, liabilities and derivatives. Significant resources in terms of staffing, software and equipment are continuously devoted to assuring that the level of interest rate risk existing in our balance sheet is properly measured and limited to prudent and reasonable levels. The DOE that management and the Board of Directors consider prudent and reasonable is somewhat lower than the RMP limits mentioned above and can change depending upon market conditions and other factors. As set forth in our Risk Appetite Metrics approved by the Board of Directors, we typically manage our DOE in the current base scenario to remain in the range of ±2.5 and in the ±200 basis point interest rate shock scenarios to remain in the range of ±4.0. When DOE exceeds either the limits established by the RMP or the more narrowly-defined ranges to which we manage DOE, corrective actions taken may include: (1) the purchase of interest rate caps, interest rate floors, swaptions or other derivatives; (2) the sale of assets; and/or (3) the addition to the balance sheet of assets or liabilities having characteristics that are such that they counterbalance the excessive duration observed. For example, if our DOE has become more positive than desired due to variable rate MBS that have reached interest rate cap limits, we may purchase interest rate caps that have the effect of removing those MBS cap limits. We would be short caps in the MBS investments and long caps in the offsetting derivative positions, thus reducing our DOE. Further, if an increase in our DOE were due to the extension of mortgage loans, MBS or new advances to members, the more appropriate action would be to add new long-term liabilities, whether callable or non-callable, to the balance sheet to offset the lengthening asset position.

Table 60 presents our DOE in the base and the up and down 200 basis point interest rate shock scenarios:

Table 60



Duration of Equity
Date	Up 200 Basis Points	Base	Down 200 Basis Points
12/31/2019	0.8	-0.9	2.4
09/30/2019	1.0	-0.7	2.0
06/30/2019	1.4	-0.4	2.6
03/31/2019	1.6	0.0	3.8
12/31/2018	2.3	1.3	2.8
09/30/2018	2.9	1.2	1.9
06/30/2018	3.0	0.7	1.9
03/31/2018	3.4	0.5	2.2

All DOE results continue to remain inside our operating range of ±2.5 in the base scenario and ±4.0 in the ±200 basis point interest rate shock scenarios. Our DOE as of December 31, 2019 decreased in all scenarios from December 31, 2018. The primary factors contributing to these net changes in duration during the period were: (1) the decrease in long-term interest rates and the relative level of mortgage rates during the period; (2) the increase in the fixed rate mortgage loan portfolio during the period; and (3) asset/liability actions taken by management throughout the period, including replacing either called or matured long-term unswapped callable consolidated obligation bonds with newly issued bonds with relatively short lock-out periods as conditions permitted and the continued issuance of discount notes funding the growth in short-term advances.

The decrease in longer-term interest rates from December 31, 2018 generally shortens the duration profile for both the fixed rate mortgage loan portfolio and the associated unswapped callable consolidated obligation bonds funding these assets. With the increase in our mortgage loan portfolio during this period, as discussed in Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – MPF Program,” the duration profile changed as expected since a general decrease in long-term interest rates typically generates faster prepayments for both new production mortgage loans, as well as the outstanding fixed rate mortgage loan portfolio. Generally, lower interest rates indicate a relative increase in refinancing incentive for borrowers.

The fixed rate mortgage loan portfolio increased in net outstanding balance, but decreased as an overall percentage of total assets with the increase in total assets during the period, decreasing from 17.6 percent of total assets as of December 31, 2018 to 16.8 percent as of December 31, 2019. Even with this slight weighting decrease, the mortgage loan portfolio remains a sizable portion of our balance sheet and changes occurring with this portfolio tend to be magnified in terms of DOE. Since the DOE calculation is a market value based measurement and as portfolio market values increase or decrease, they become larger or smaller contributors to the overall market value of total assets. With the mortgage loan portfolio continuing to comprise a significant percentage of overall assets, its behavior is quite visible in the duration risk profile and changes in this portfolio are typically magnified as interest rates change.

This magnification occurs when a portfolio market value weighting as a percent of the overall net market value of the balance sheet changes, causing the remaining portfolios to be a smaller or larger component of the total balance sheet composition. For example, when our advance balances increase, our mortgage loan portfolio effectively decreases as a proportion of our total assets, assuming all other asset portfolios and interest rates remain constant. This relationship then causes the duration of the mortgage loan portfolio to have a somewhat smaller contribution impact to the overall DOE since DOE is a market value weighted measurement. With the absolute growth in the mortgage loan portfolio during the period, the mortgage loan portfolio increased as a percentage of the market value of the net balance sheet, causing the DOE profile to have a marginally larger impact from the mortgage loan duration profile. With these balance sheet dynamics, we continue to actively manage and monitor the contributing factors of our market risk profile, including DOE. As the relationship of the fixed rate mortgage loan assets and the associated callable liabilities vary based on market conditions, we evaluate and manage these market driven sensitivities as both portfolios change in balance level and overall proportion.

New mortgage loans were continually added to the mortgage loan portfolio to replace mortgage loans that were prepaid during the period and we continue to actively manage this ongoing growth to position the balance sheet sensitivity to perform within our established risk tolerances. To effectively manage these changes in the mortgage loan portfolio (including new production and prepaid loans) and related sensitivity to changes in market conditions, unswapped callable consolidated obligation bonds that either matured or were called were replaced with reissuance of unswapped callable consolidated obligation bonds with relatively short lock-out periods (generally three months to one year). This reissuance continues to favorably position us for potential declines in the interest rate environment. Generally, the maturity or the call of higher rate callable bonds and reissuance of these bonds generally extends the duration profile of this portfolio. This liability extension corresponds with the expected longer duration profile of the new fixed rate mortgage loans, all else being equal.

As long-term interest rates decreased during 2019, we experienced prepayments of the fixed rate mortgage loan portfolio. As interest rates fluctuated during 2019, the shorter lock-out periods of the callable bonds plus maturities of non-callable bonds provided the opportunity to refinance a measured amount of our liabilities during this period. The overall decrease in long-term interest rates caused the duration profile of the existing portfolio of unswapped callable bonds to shorten as expected. In addition, the unswapped callable bond portfolio became a slightly larger percentage of the balance sheet as the portfolio expanded during the period and based on the elevated issuance of discount notes in response to the growth in short-term advances and associated capital stock activity. The discount note portfolio level naturally diluted the percentage of outstanding unswapped callable bonds and impacts the weighting of this portfolio as an overall percentage of liabilities. As discussed previously, a portfolio weighting change can alter the impact of a portfolio's overall contribution to net DOE. While the unswapped callable bonds relative weighting led to a slightly smaller contribution to DOE, the overall shortening of the absolute portfolio duration served to lessen the impact of the weighting change. This liability behavior includes the inherent convexity (discussed below) profile of these portfolios and demonstrates the specific duration sensitivity to changes in interest rates in certain shock scenarios. Further discussion of the unswapped callable bond calls, maturities on non-callable bonds and reissuance of callable bonds in relation to the mortgage portfolios is discussed in Item 7 – "Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Consolidated Obligations.” The combination of these factors contributed to the net DOE decrease in all scenarios.

We purchased $1.1 billion of fixed rate multi-family GSE MBS during the period. These fixed rate securities were effectively swapped to LIBOR and impact DOE only slightly since they are reflected as variable rate instruments and are further described in Item 7 – "Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Net Gains (Losses) on Trading Securities." As mentioned previously, the addition of mortgage securities, whether fixed or variable rate, typically lengthens the duration profile of the respective portfolios and generally lengthens our DOE. The relationship of the variable rate GSE MBS/CMOs and the purchased interest rate cap portfolio provides a measured impact on the positively shocked duration results as well. We did not purchase additional interest rate caps during 2019.

We generally purchase interest rate caps to offset the impact of embedded caps in variable rate GSE MBS/CMOs in rising interest rate scenarios. As expected, these interest rate caps are a satisfactory interest rate risk hedge to rising interest rates and provide an offsetting risk response to the risk profile changes in variable rate GSE CMOs with embedded caps. We periodically assess derivative strategies to ensure that overall balance sheet risk is appropriately hedged within our established risk appetite and make adjustments to the derivative portfolio as needed. This evaluation is completed considering not only the par value of the variable rate MBS/CMO investments with embedded caps being hedged with purchased interest rate caps, but also the composition of the purchased cap portfolio and expected prepayments of the variable rate MBS/CMO investments with embedded caps. This evaluation of the relative relationship between the variable rate investment portfolio and the purchased cap portfolio continues to indicate a sufficient hedging relationship, including a convexity profile that continues to perform well within our expectations. Our purchases of interest rate caps tend to partially offset the negative convexity of our mortgage assets and the effects of any interest rate caps embedded in the variable rate MBS/CMOs.

Convexity is the measure of the exponential change in prices for a given change in interest rates; or more simply stated, it measures the rate of change in duration as interest rates change. When an instrument is negatively convex, price generally increases at a slower pace as interest rates decline. When an instrument’s convexity profile approaches zero, it simply demonstrates that the duration profile is flattening or that the duration is changing at an increasingly slower rate. When an instrument’s convexity profile moves further from zero, the duration profile is steepening and is changing in price at an increasingly faster rate. Duration is a measure of the relative risk of a financial instrument, and the more rapidly duration changes as interest rates change, the riskier the instrument. The variable rate MBS/CMOs have negative convexity as a result of the embedded caps and prepayment options. Additionally, all of our mortgage loans are fixed rate, so they have negative convexity as a result of the prepayment options. We seek to mitigate this negative convexity with purchased options that have positive convexity (interest rate caps) and callable liabilities that have negative convexity (unswapped callable bonds), which offset some or all of the negative convexity risk in our assets. With the changes in current capital market conditions, the relatively low level of interest rates and the general shape of the yield curve, all of which make it challenging to manage our market risk position, we continue to take measured asset/liability actions to stay within established policy limits.

With respect to the down instantaneous shock scenarios, the sensitivities of both the assets and liabilities are impacted to a large extent by the absolute level of rates and the positive non-zero boundary methodology as discussed previously. Since the term structure of interest rates is at or near historically low levels, an instantaneous parallel shock of down 100 basis points or 200 basis points will effectively produce a flattened term structure of interest rates near zero for much of the interest rate term structure. This flattened term structure will produce slight, if any, variations in valuations, which generate near zero duration results since the duration measurement captures the sensitivity of valuations to changes in rates. These near zero duration results should be viewed in the context of the broader risk profile of the base and positive interest rate shock scenarios to establish a sufficient vantage point for helping discern the overall sensitivity of our balance sheet and of DOE. The net DOE decrease in the down 200 basis point interest rate shock scenario during the period is generally a function of related factors noted previously, including the impact of the changing term structure of interest rates. As with all scenario changes that occurred during the period, the impact from various sensitivities was expected and discussed during our regular interest-rate risk profile review process.

As noted previously, if at any point a risk measurement nears or exceeds an operating range or policy limit established by the Board of Directors, certain actions may be implemented both by management and the Board of Directors. We typically manage a DOE measurement that exceeds the established limits with various asset/liability management actions. Whenever an established limit is exceeded, the Board of Directors is advised by management and the issue is discussed at the next regularly scheduled Board of Directors’ meeting. If after discussion, the Board of Directors determines that asset/liability management action is required, management implements the Board-approved approach to address the situation. Even though all of our DOE measurements are inside management’s operating range as of December 31, 2019, active monitoring of portfolio relationships and overall DOE dynamics continues as do evaluation processes for acceptable future asset/liability management actions.

In calculating DOE, we also calculate our duration gap, which is the difference between the duration of our assets and the duration of our liabilities. Our base duration gap was -0.5 months and 0.8 months for December 31, 2019 and 2018, respectively. Again, as discussed previously, the relative performance of the duration gap was primarily the result of the changes in the fixed rate mortgage loan portfolio and the associated funding decisions made by management in response to the interest rate environment. All FHLBanks are required to submit this base duration gap number to the Office of Finance as part of the quarterly reporting process created by the FHFA.

Matching the duration of assets with the duration of liabilities funding those assets is accomplished through the use of different debt maturities and embedded option characteristics, as well as the use of derivatives, primarily interest rate swaps, caps, floors and swaptions as discussed previously. Interest rate swaps increase the flexibility of our funding alternatives by providing desirable cash flows or characteristics that might not be as readily available or cost-effective if obtained in the standard GSE debt market. FHFA regulation prohibits the speculative use of derivatives, and we do not engage in derivatives trading for short-term profit. Because we do not engage in the speculative use of derivatives through trading or other activities, the primary risk posed by derivative transactions is credit risk in that a counterparty may fail to meet its contractual obligations on a transaction and thereby force us to replace the derivative at market price (see Item 7 – “Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Management – Credit Risk Management” for additional information).

As discussed earlier, the funding of mortgage loans and prepayable assets with liabilities that have similar duration or average cash flow patterns over time is our primary strategy for and means of managing the interest rate risk for these assets. To achieve the desired liability durations, we issue debt across a broad spectrum of final maturities. Because the durations of mortgage loans and other prepayable assets change as interest rates change, callable consolidated obligation bonds with similar duration characteristics, on average, are frequently issued. The duration of callable bonds shortens when interest rates decrease and lengthens when interest rates increase, allowing the duration of the debt to better match the typical duration of mortgage loans and other prepayable assets as interest rates change. In addition to actively monitoring this relationship, the funding and hedging profile and process are continually measured and reevaluated. We may also use purchased interest rate caps, floors and swaptions to manage the duration of our assets and liabilities. For example, in order to manage our interest-rate risk in rising interest rate environments, we may purchase out-of-the-money interest rate caps to help manage the duration extension of mortgage assets, especially variable rate MBS/CMOs with periodic and lifetime embedded interest rate caps. We may also purchase receive-fixed or pay-fixed swaptions (options to enter into receive-fixed rate or pay-fixed rate interest rate swaps) to manage our overall DOE in falling or rising interest rate environments, respectively. During times of falling interest rates, when mortgage assets are prepaying quickly and shortening in duration, we may also synthetically convert fixed rate debt to variable rate using interest rate swaps in order to shorten the duration of our liabilities to more closely match the shortening duration of mortgage assets. As we need to lengthen the liability duration, we terminate selected interest rate swaps to effectively extend the duration of the previously swapped debt.

Market Value of Equity

MVE is the net value of our assets and liabilities. Estimating sensitivity of MVE to changes in interest rates is another measure of interest rate risk. We generally maintain an MVE within limits specified by the Board of Directors in the RMP. The RMP measures our market value risk in terms of the MVE in relation to total regulatory capital stock outstanding (TRCS). TRCS includes all capital stock outstanding, including stock subject to mandatory redemption. As a cooperative, we believe using the TRCS results is an appropriate measure because it reflects our market value relative to the book value of our capital stock. Our RMP stipulates MVE shall not be less than: (1) 100 percent of TRCS under the base case scenario; or (2) 90 percent of TRCS under a ±200 basis point instantaneous parallel shock in interest rates. Table 61 presents MVE as a percent of TRCS. As of December 31, 2019, all scenarios are well above the specified limits and much of the relative level in the ratios during the periods covered by the table can be attributed to the relative level of the fixed rate mortgage loan market values as rates have continued to remain historically low along with the relative level of outstanding capital.

The MVE to TRCS ratios can be greatly impacted by the level of capital outstanding based on our capital management approach. Typically, as advances increase and the associated capital level increases, the ratio will generally decline since the new advances are primarily short-term with market values at or near par. Conversely, as advance balances decrease and the capital level decreases as capital stock is repurchased, the ratio will generally increase. However, if excess capital stock is not repurchased, the capital level remains higher thereby causing a decrease in the ratio. The relative level of advance balances, required stock and excess stock as of December 31, 2019 (see Table 44 under Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources - Capital”) contributed to the MVE levels as of December 31, 2019. These relationships primarily generate the changes in the MVE/TRCS levels and produce the changes in the ratios in all interest rate scenarios in the table below.

Table 61



Market Value of Equity as a Percent of Total Regulatory Capital Stock
Date	Up 200 Basis Points	Base	Down 200 Basis Points
12/31/2019	175	174	176
09/30/2019	174	174	179
06/30/2019	171	174	176
03/31/2019	172	176	176
12/31/2018	167	173	174
09/30/2018	167	174	175
06/30/2018	168	175	174
03/31/2018	164	171	170

Detail of Derivative Instruments by Type of Instrument by Type of Risk

Various types of derivative instruments are utilized to mitigate the interest rate risks described in the preceding sections as well as to better match the terms of assets and liabilities. Generally, we designate derivative instruments as either: (1) a fair value hedge of an underlying financial instrument; or (2) an economic hedge used in asset/liability management. An economic hedge is defined as a derivative hedging specific or non-specific underlying assets, liabilities or firm commitments that either does not qualify for hedge accounting, or for which we have not elected hedge accounting, but is an acceptable hedging strategy under our RMP. For hedging relationships that are not designated for shortcut hedge accounting, we formally assess (both at the hedge’s inception and monthly on an ongoing basis) whether the derivatives used have been highly effective in offsetting changes in the fair values of hedged items and whether those derivatives may be expected to remain highly effective in future periods. We typically use regression analyses or similar statistical analyses to assess the quantitative effectiveness of our long haul hedges. We determine the hedge accounting to be applied when the hedge is entered into by completing detailed documentation, which includes a checklist setting forth criteria that must be met to qualify for hedge accounting.

Tables 62 and 63 present the notional amount and fair value amount (fair value includes net accrued interest receivable or payable on the derivative) for derivative instruments by hedged item, hedging instrument, hedging objective and accounting designation (in thousands):

Table 62



12/31/2019
Hedged Item	Hedging Instrument	Hedging Objective	Accounting Designation	Notional Amount		Fair Value Amount
Advances
Fixed rate non-callable advances	Pay fixed, receive variable interest rate swap	Convert the advance’s fixed rate to a variable rate index	Fair Value Hedge	$	3,160,580	$	953
Fixed rate convertible advances	Pay fixed, receive variable interest rate swap	Convert the advance’s fixed rate to a variable rate index and offset option risk in the advance	Fair Value Hedge	1,607,500		(24,784		)
Firm commitment to issue a fixed rate advance	Forward settling interest rate swap	Protect against fair value risk	Fair Value Hedge	35,504		28
Firm commitment to issue a fixed rate advance	Forward settling interest rate swap	Protect against fair value risk	Economic Hedge	35,077		(532		)
Fixed rate non-callable advances	Pay fixed, receive variable interest rate swap	Convert the advance’s fixed rate to a variable rate index	Economic Hedge	6,000		(62		)
Investments
Fixed rate non-MBS available-for-sale investments	Pay fixed, receive variable interest rate swap	Convert the investment’s fixed rate to a variable rate index	Fair Value Hedge	4,200,000		(352		)
Fixed rate MBS available-for-sale investments	Pay fixed, receive variable interest rate swap	Convert the investment’s fixed rate to a variable rate index	Fair Value Hedge	2,822,646		(49,571		)
Fixed rate non-MBS trading investments	Pay fixed, receive variable interest rate swap	Convert the investment’s fixed rate to a variable rate index	Economic Hedge	1,898,500		248
Adjustable rate MBS with embedded caps	Interest rate cap	Offset the interest rate cap embedded in a variable rate investment	Economic Hedge	1,130,000		117
Fixed rate MBS trading investments	Pay fixed, receive variable interest rate swap	Convert the investment’s fixed rate to a variable rate index	Economic Hedge	790,045		(24,861		)
Mortgage Loans Held for Portfolio
Fixed rate mortgage purchase commitments	Mortgage purchase commitment	Protect against fair value risk	Economic Hedge	221,800		470
Consolidated Obligation Discount Notes
Fixed rate non-callable consolidated obligation discount notes with tenors of 6 to 12 months	Receive fixed, pay variable interest rate swap	Convert the discount note's fixed rate to a variable rate	Fair Value Hedge	1,383,782		47
Consolidated Obligation Bonds
Fixed rate non-callable consolidated obligation bonds	Receive fixed, pay variable interest rate swap	Convert the bond’s fixed rate to a variable rate index	Fair Value Hedge	2,628,500		14,013
Fixed rate callable consolidated obligation bonds	Receive fixed, pay variable interest rate swap	Convert the bond’s fixed rate to a variable rate index and offset option risk in the bond	Fair Value Hedge	500,000		2,635
Variable rate consolidated obligation bonds	Receive variable interest rate, pay variable interest rate swap	Reduce basis risk by converting an undesirable variable rate index in the bond to a more desirable variable rate index	Economic Hedge	370,000		(342		)
Callable step-up/step-down consolidated obligation bonds	Receive variable interest rate with embedded features, pay variable interest rate swap	Reduce interest rate sensitivity and repricing gaps by converting the bond’s variable rate to a different variable rate index and/or to offset embedded options risk in the bond	Fair Value Hedge	110,000		95
TOTAL				$	20,899,934	$	(81,898	)

Table 63



12/31/2018
Hedged Item	Hedging Instrument	Hedging Objective	Accounting Designation	Notional Amount		Fair Value Amount
Advances
Fixed rate non-callable advances	Pay fixed, receive variable interest rate swap	Convert the advance’s fixed rate to a variable rate index	Fair Value Hedge	$	2,647,704	$	(1,102	)
Fixed rate convertible advances	Pay fixed, receive variable interest rate swap	Convert the advance’s fixed rate to a variable rate index and offset option risk in the advance	Fair Value Hedge	1,150,850		10,028
Firm commitment to issue a fixed rate advance	Forward settling interest rate swap	Protect against fair value risk	Fair Value Hedge	140,475		(670		)
Firm commitment to issue a fixed rate advance	Forward settling interest rate swap	Protect against fair value risk	Economic Hedge	9,136		(38		)
Fixed rate non-callable advances	Pay fixed, receive variable interest rate swap	Convert the advance’s fixed rate to a variable rate index	Economic Hedge	2,000		(10		)
Investments
Fixed rate MBS available-for-sale investments	Pay fixed, receive variable interest rate swap	Convert the investment’s fixed rate to a variable rate index	Fair Value Hedge	1,752,493		40,197
Adjustable rate MBS with embedded caps	Interest rate cap	Offset the interest rate cap embedded in a variable rate investment	Economic Hedge	1,373,200		1,044
Fixed rate MBS trading investments	Pay fixed, receive variable interest rate swap	Convert the investment’s fixed rate to a variable rate index	Economic Hedge	847,284		12,238
Fixed rate non-MBS trading investments	Pay fixed, receive variable interest rate swap	Convert the investment’s fixed rate to a variable rate index	Economic Hedge	648,500		(1,199		)
Mortgage Loans Held for Portfolio
Fixed rate mortgage purchase commitments	Mortgage purchase commitment	Protect against fair value risk	Economic Hedge	101,551		549
Consolidated Obligation Discount Notes
Firm commitments to issue discount notes	Discount note commitment	Protect against fair value risk	Economic Hedge	525,000		—
Fixed rate non-callable consolidated obligation discount notes with tenors of 6 to 12 months	Receive fixed, pay variable interest rate swap	Convert the discount note's fixed rate to a variable rate	Fair Value Hedge	49,403		—
Consolidated Obligation Bonds
Fixed rate non-callable consolidated obligation bonds	Receive fixed, pay variable interest rate swap	Convert the bond’s fixed rate to a variable rate index	Fair Value Hedge	1,440,000		9,443
Fixed rate callable consolidated obligation bonds	Receive fixed, pay variable interest rate swap	Convert the bond’s fixed rate to a variable rate index and offset option risk in the bond	Fair Value Hedge	680,000		(2,729		)
Variable rate consolidated obligation bonds	Receive variable interest rate, pay variable interest rate swap	Reduce basis risk by converting an undesirable variable rate index in the bond to a more desirable variable rate index	Economic Hedge	645,000		(15,406		)
Callable step-up/step-down consolidated obligation bonds	Receive variable interest rate with embedded features, pay variable interest rate swap	Reduce interest rate sensitivity and repricing gaps by converting the bond’s variable rate to a different variable rate index and/or to offset embedded options risk in the bond	Fair Value Hedge	470,000		(4,325		)
Complex consolidated obligation bonds	Receive variable with embedded features, pay variable interest rate swap	Reduce interest rate sensitivity and re-pricing gaps by converting the bond’s variable rate to a different variable rate index and/or to offset embedded options risk in the bond	Fair Value Hedge	15,000		(1,050		)
TOTAL				$	12,497,596	$	46,970

Item 8: Financial Statements and Supplementary Data

The following financial statements and accompanying notes, including the Report of Independent Registered Public Accounting Firm, are set forth on pages F-1 to F-64 of this Form 10‑K.

Audited Financial Statements




Description	Page Number
Management's Report on Internal Control over Financial Reporting	F-1
Report of Independent Registered Public Accounting Firm - PricewaterhouseCoopers LLP	F-2
Statements of Condition as of December 31, 2019 and 2018	F-4
Statements of Income for the Years Ended December 31, 2019, 2018, and 2017	F-6
Statements of Comprehensive Income for the Years Ended December 31, 2019, 2018, and 2017	F-8
Statements of Capital for the Years Ended December 31, 2019, 2018, and 2017	F-9
Statements of Cash Flows for the Years Ended December 31, 2019, 2018, and 2017	F-10
Notes to Financial Statements	F-13

Tables 64 and 65 present supplementary quarterly financial information (unaudited) for the years ended December 31, 2019 and 2018 (in thousands):

Table 64



	2019
	4th Quarter			3rd Quarter			2nd Quarter		1st Quarter
Interest income	$	339,822		$	396,060		$	379,556	$	373,314
Interest expense	270,418			321,645			330,326		310,299
Net interest income	69,404			74,415			49,230		63,015
Provision (reversal) for credit losses on mortgage loans	(122		)	393			38		78
Net interest income after mortgage loan loss provision	69,526			74,022			49,192		62,937
Other non-interest income (loss)	7,438			(1,507		)	4,368		12,674
Other non-interest expense	18,880			18,633			18,313		16,990
Assessments	5,811			5,391			3,529		5,866
NET INCOME	$	52,273		$	48,491		$	31,718	$	52,755

Table 65



	2018
	4th Quarter			3rd Quarter			2nd Quarter			1st Quarter
Interest income	$	350,382		$	317,122		$	313,712		$	275,793
Interest expense	282,207			249,463			244,828			209,314
Net interest income	68,175			67,659			68,884			66,479
Provision (reversal) for credit losses on mortgage loans	372			(391		)	16			30
Net interest income after mortgage loan loss provision	67,803			68,050			68,868			66,449
Other non-interest income (loss)	(1,822		)	(1,500		)	(2,538		)	(6,987		)
Other non-interest expense	17,722			20,428			15,493			15,465
Assessments	4,831			4,618			5,089			4,406
NET INCOME	$	43,428		$	41,504		$	45,748		$	39,591

The significant fluctuations that have occurred in non-interest income (loss) are primarily the result of the recognition of net gains/losses on derivatives and hedging activities as well as the recording of fair value changes on our trading securities. See Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations” for additional information.

Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

There were no changes in or disagreements with our accountants on accounting and financial disclosure during the two most recent fiscal years.

Item 9A: Controls and Procedures

Disclosure Controls and Procedures

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

Management, with the participation of the President and CEO, our principal executive officer, and Chief Financial Officer (CFO), our principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December 31, 2019. Based upon that evaluation, the CEO and CFO have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2019.

Management’s Report on Internal Control Over Financial Reporting

Management’s Report on Internal Control over Financial Reporting and the Report of Independent Registered Public Accounting Firm with respect to FHLBank’s internal control over financial reporting are included under Item 8 – “Financial Statements and Supplementary Data.”

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the fourth quarter of the year for which this annual report on Form 10-K is filed that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B: Other Information

None.

Item 10: Directors, Executive Officers and Corporate Governance

Information About Our Executive Officers

Table 66 sets forth certain information about each of our executive officers as of the date of this annual report on Form 10-K.

Table 66



Executive Officer	Age	Position Held
Mark E. Yardley	64	President and Chief Executive Officer
Patrick C. Doran	59	EVP/Chief Compliance and Ethics Officer and General Counsel
Sonia R. Betsworth	58	SVP/Chief Administrative Officer
Denise L. Cauthon	56	SVP/Chief Accounting Officer
Joe B. Edwards	63	SVP/Chief Information Officer
Dan J. Hess	54	SVP/Chief Business Officer
Thomas E. Millburn	49	SVP/Chief Audit Executive
William W. Osborn	54	SVP/Chief Financial Officer
Martin L. Schlossman, Jr.	51	SVP/Chief Risk Officer

No executive officer has any family relationship with any other executive officer or director. All executive officers, other than the Chief Compliance and Ethics Officer (CCEO) and General Counsel, the Chief Audit Executive, and the Chief Risk Officer (CRO), may be removed from office or discharged by the Board of Directors or the President and CEO with or without cause. The Chief Audit Executive may be removed from office, with or without cause, only with the approval of the Audit Committee. The CCEO and General Counsel and the CRO may be removed from office, with or without cause, only with the approval of the Risk Oversight Committee.

There are no arrangements or understandings between any executive officer and any other person pursuant to which the executive officer was or is to be selected as an officer of FHLBank, including no employment agreement between any executive officer and FHLBank.

Except as otherwise indicated below, each officer has been engaged in the principal occupation listed above for at least five years:

Mark E. Yardley became President and CEO in March 2017, after serving as Interim President and CEO starting in January 2017. From May 2010 through December 2016, he was Executive Vice President and CRO. Mr. Yardley previously served as Executive Vice President and CFO from February 2005 to May 2010, First Senior Vice President and CFO from December 1999 through February 2005 and as First Senior Vice President, Director of Finance, from January 1999 to December 1999. Mr. Yardley joined FHLBank in 1984 as Director of Internal Audit and was promoted to Assistant Vice President in 1990 and Vice President in 1991.

Patrick C. Doran became Executive Vice President, CCEO and General Counsel in December 2017. From March 2016 to December 2017, he served as Executive Vice President, Chief Compliance Officer and General Counsel, and from December 2015 to March 2016, he was Senior Vice President, General Counsel, Chief Compliance Officer and Corporate Secretary. He served as Senior Vice President, General Counsel and Corporate Secretary from May 2004 to December 2015.

Sonia R. Betsworth became Chief Administrative Officer (CAO) in March 2017, after serving as Interim CAO starting in January 2017. From March 2013 through December 2016, she was Senior Vice President and Chief Credit Officer. She served as Senior Vice President, Director of Credit from July 2009 to March 2013; Senior Vice President, Director of Member Products from April 2006 through June 2009; Director of Sales, Lending and Collateral from 2002 to April 2006; and Director of Credit and Collateral from 1999 to 2002. She joined FHLBank in 1983. Ms. Betsworth was named Assistant Vice President in 1994 and Vice President in 1998.

Denise L. Cauthon became Senior Vice President and Chief Accounting Officer in December 2010. Ms. Cauthon served as First Vice President and Chief Accounting Officer from May to December 2010, First Vice President and Controller from March 2007 to April 2010, and Vice President and Controller from January 2005 to March 2007. Ms. Cauthon joined FHLBank in 1989 as a staff internal auditor and was promoted to Assistant Liability Manager and then Financial Reporting Accountant in 1998. Ms. Cauthon was promoted to Financial Reporting and Operations Manager in 1999 and was named Assistant Vice President in 2000. She was promoted to Assistant Controller-Financial Reporting in 2002 and became Vice President in 2004.

Joe B. Edwards became Senior Vice President and Chief Information Officer (CIO) in July 2013. Prior to joining FHLBank in 2013, Mr. Edwards was Senior Vice President and CIO at ACE Cash Express, Inc., a multi-unit retailer of financial services, where he was responsible for IT development, operations, business intelligence and call center operations from January 1998 through his retirement in December 2012.

Dan J. Hess became Senior Vice President and Chief Business Officer in March 2013. Mr. Hess previously served as Senior Vice President, Director of Member Products from July 2009 to March 2013; First Vice President, Director of Sales from April 2002 to May 2009; and Senior Vice President, Director of Sales from May 2009 to July 2009. Mr. Hess joined FHLBank in 1995 as a Correspondent Banking Account Manager for Kansas. He was promoted to Lending Officer in 1997, to Assistant Vice President and Lending Manager in 1999, and to Vice President in 2000.

Thomas E. Millburn became Senior Vice President, Chief Audit Executive in March 2016. Mr. Millburn previously served as Senior Vice President, Chief Internal Audit Officer from March 2011 to March 2016 and Senior Vice President, Director of Internal Audit from December 2010 to March 2011. Mr. Millburn joined FHLBank in 1994 as a staff internal auditor and was promoted to Assistant Vice President, Director of Internal Audit in 1999, Vice President in 2000 and then to First Vice President in March 2004.

William W. Osborn became Senior Vice President and CFO in June 2010. Mr. Osborn joined FHLBank in May 2006 as Director of Product Profitability and Pricing. He was promoted to Director of Banking Strategies in January 2008, to First Vice President in April 2008 and to Senior Vice President in April 2009.

Martin L. Schlossman, Jr. became CRO in March 2017, after serving as Interim CRO starting in January 2017. Mr. Schlossman previously served as Senior Vice President, Associate CRO from March 2012 through December 2016. He joined FHLBank in November 2000 as an Enterprise Risk Analyst and was promoted to Planning Officer in December 2001, Assistant Vice President in March 2004, Vice President in June 2005, and First Vice President in March 2009. He was named Associate CRO in June 2010 and was promoted to Senior Vice President in March 2012.

Directors

The Bank Act (as amended by the Recovery Act) and FHFA regulations mandate that our Board of Directors consist of 13 directors or such other number as may be provided by the FHFA, a majority of whom are to be member directors and at least two-fifths of whom are to be independent directors. Due to the interplay of the “method of equal proportions,” which the FHFA uses to allocate member directorships to each state in our four-state district, the requirement that at least two-fifths of the directorate must be comprised of independent directors, and the requirement that the number of member directorships allocated to each of those four states must be at least equal to the number allocated to each state on December 31, 1960, the FHFA may require from time to time the allocation of additional member director seats. As of the date of this annual report on Form 10-K, our Board of Directors consists of 17 directors, 10 of whom are member directors and 7 of whom are independent directors. In addition, FHLBank currently has one vacant independent directorship, which when filled will bring FHLBank’s board to 18 directors, including 8 independent directors. Under the FHFA regulations, new and re‑elected directors serve four-year terms, subject to adjustment by the FHFA to establish staggering of the board. Directors cannot be elected to serve more than three consecutive full terms. A director who was term-limited may be re‑elected to a directorship for a term that commences no earlier than two years after the expiration of the third full term. Each director must be: (1) a citizen of the United States; and (2) either a bona fide resident in our district or serve as an officer or director of a member located in our district. Additionally, at least two of the independent directors must qualify as public interest directors. To qualify as a public interest director, an individual must have more than four years of experience in representing consumer or community interests in banking services, credit needs, housing, or consumer financial protections.

Member directorships are designated to each of the four states in our district and each of our members is entitled to nominate and vote for candidates representing the state in which the member’s principal place of business is located. To qualify as a nominee for a member directorship, a nominee must be an officer or director of a member located in the state to which the director of the FHFA has allocated the directorship, and such member must meet all minimum capital requirements established by its appropriate Federal banking agency or appropriate state regulator. Member directors are nominated by members located in the state to which the member directorship is assigned, based on a determination by the nominating institution that the nominee possesses the applicable experience, qualifications, attributes and skills to qualify the nominee to serve as an FHLBank director, without any participation from our Board of Directors. Following the nomination process, a member is entitled to cast, for each applicable member directorship, one vote for each share of capital stock that the member is required to hold, subject to a statutory limitation. Under this limitation, the total number of votes that each member may cast is limited to the average number of shares of capital stock that were required to be held by all members in that state as of the record date for voting.

Each of our member directors meets the required qualifications and, as such, each is an officer or director of a member in the respective state from which they were nominated and elected.

Independent directors are elected by ballot from among those eligible persons nominated by the Board of Directors after consultation with the Affordable Housing Advisory Council and after the nominee has been submitted to the FHFA for review. In nominating independent directors, our Board of Directors may consider an individual’s current and prior experience on the Board of Directors, the qualifications of the nominee, and the skills and experience most likely to add strength to the Board of Directors, among other skills, qualifications and attributes. FHFA regulations require us to encourage the consideration of diversity in nominating or soliciting nominees for positions on our Board of Directors. Pursuant to our Procedures for Identifying and Evaluating Candidates for Independent Directorships and Filling Vacant Directorships, our Board of Directors will consider diversity in nominating independent directors and in electing member directors when the Board of Directors is permitted to elect or appoint member directors in the event of a vacancy, and in evaluating potential director candidates, the Board of Directors may also identify appropriate criteria that will promote appropriate diversity on the Board of Directors and help meet FHLBank’s strategic needs, including desired skill sets, experience, residence, ability to devote sufficient time to service on the Board of Directors, ethnicity and/or gender. If our Board of Directors nominates only one individual for each independent directorship, then each nominee must receive at least 20 percent of the number of votes eligible to be cast in the election to be elected. If our Board of Directors nominates more persons for the type of independent directorship to be filled than there are directorships of that type to be filled in the election, then the nominee receiving the highest number of votes will be elected. Each member voting in the independent director election is entitled to cast one vote for each share of capital stock that the member is required to hold, subject to the statutory limitation discussed above. Our Board of Directors has adopted procedures for the nomination and election of independent directors, consistent with the requirements of the Bank Act and FHFA regulations.

There are no arrangements or understandings between any director and any other person pursuant to which the director was or is to be selected as a director or nominee. No director has any family relationship with any other director or executive officer. No director or executive officer of FHLBank has been involved in any legal proceeding during the past ten years that would affect the integrity or ability of such director or nominee to serve in such capacity, including any proceedings identified in Item 401(f) of Regulation S-K.

On November 15, 2019, Craig A. Meader from the state of Kansas and G. Bridger Cox and Donald R. Abernathy from the state of Oklahoma were each declared elected as member directors and Holly Johnson was declared elected as an independent director of FHLBank’s Board of Directors. Each of the directors elected in 2019 will serve four-year terms expiring December 31, 2023.

Table 67 sets forth certain information regarding each of our directors as of the date of this annual report on Form 10-K.

Table 67



Director	Age	Type of Directorship	Director Since	Current Term Expiration	Board Committee Membership¹
Donald R. Abernathy, Jr.	61	Member	January 2020	December 2023	(a), (d)
Milroy A. Alexander	70	Independent	January 2015	December 2020	(a), (b), (c), (e) Chair
Robert E. Caldwell, II	49	Independent	January 2004	December 2022	(b), (c) Vice Chair, (d)
G. Bridger Cox	67	Member	January 2011	December 2023	(b), (c) Chair
Holly Johnson	56	Independent	January 2016	December 2023	(a), (b)
Lynn Katzfey	56	Independent	July 2019	December 2020	(a), (e)
Jane C. Knight	76	Independent	January 2004	December 2022	(d), (e)
Barry Lockard	54	Member	January 2019	December 2022	(e), (f)
Richard S. Masinton	78	Independent	April 2007	December 2021	(b) Chair, (c), (d)
Neil F. M. McKay	79	Independent	April 2007	December 2020	(d), (f)
Craig A. Meader	62	Member	January 2020	December 2023	(e), (f)
L. Kent Needham	66	Member	January 2013	December 2020	(a), (c), (d) Chair, (f)
Mark J. O’Connor	55	Member	May 2011	December 2021	(c), (d), (f) Chair
Thomas H. Olson, Jr.	54	Member	January 2013	December 2020	(a), (b), (e)
Mark W. Schifferdecker	55	Member	January 2011	December 2022	(a) Chair, (b), (c), (d)
Douglas E. Tippens	65	Member	January 2015	December 2022	(b), (e), (f)
Gregg L. Vandaveer	67	Member	January 2018	December 2021	(e), (f)


¹	Board of Director committees are as follows: (a) Audit; (b) Compensation, Human Resources and Inclusion; (c) Executive; (d) Risk Oversight; (e) Housing and Governance; and (f) Operations.

The following describes the principal occupation, business experience, qualifications and skills, among other matters, of the 17 directors who currently serve on the Board of Directors. Except as otherwise indicated, each director has been engaged in the principal occupation described below for at least five years:

Donald R. Abernathy, Jr. has served as the President and CEO of The Bankers Bank, Oklahoma City, Oklahoma, since 1993, and has served on the board of directors of Bankers Banc Investment Services, Inc., since December 2006. Although the Board of Directors did not participate in Mr. Abernathy's nomination since he is a member director, Mr. Abernathy possesses a bachelor's degree of business administration, has more than 40 years of banking experience, including 25 as President and CEO, and served on the board of directors of the Independent Community Bankers of America, that assists in his service as a director. Prior to his current term, Mr. Abernathy served as a member director of FHLBank from January 2017 through December 2018.

Milroy A. Alexander has been a housing, financial and business consultant since 2010, serving nonprofit housing organizations, local housing authorities and the City of Denver Housing and Neighborhood Redevelopment department. He completed his final term as a director of the Municipal Securities Rulemaking Board in September 2013. He was also a member of the board of trustees of Rose Community Foundation for 10 years ending in December 2017, and is currently board chair of the Lowry Redevelopment Authority and Northeast Denver Housing Center. Mr. Alexander previously served as Executive Director and CEO of the Colorado Housing and Finance Authority in Denver, Colorado. The Board of Directors considered Mr. Alexander’s qualifications, skills and attributes, including his more than 22 years of service at a state HFA, including nine years as Executive Director and CEO and 12 years as CFO, his certification as a CPA, his more than 10 years as an auditor with Touche Ross & Co. (now Deloitte), his past service on the audit committees of many organizations and his ability to enhance the diversity of viewpoints among the directors serving on the Board of Directors by providing the Board of Directors with racial diversity, when making his nomination.

Robert E. Caldwell, II is the Vice Chair of our Board of Directors. Mr. Caldwell is currently Executive Vice President and Chief Administrative Officer for Nebco, Inc., a supplier of materials to the construction industry to construct buildings, streets and highways, which he began in August 2014. Prior to his service at Nebco, Inc., Mr. Caldwell was the President and Chief Operating Officer of WRK Real Estate, LLC, which he began in January 2014. He previously served as President and CEO of Hampton Enterprises, Inc., a commercial real estate development, general contracting, construction management and property management firm, since 2006, and General Counsel for Linweld, Inc., a large independent manufacturer and distributor of industrial/medical gases and welding supplies. The Board of Directors considered Mr. Caldwell’s qualifications, skills and attributes, including his B.S. in business administration, his J.D. and MBA, his experience as General Counsel for Linweld, Inc., a subsidiary of a Japanese public company, his service as President and CEO of a commercial real estate and construction company, and his prior service as an FHLBank director, when making his nomination.

G. Bridger Cox is the Chair of our Board of Directors. Mr. Cox has been Chairman and President of Citizens Bank & Trust Company, Ardmore, Oklahoma, since 1996. Although the Board of Directors did not participate in Mr. Cox’s nomination since he is a member director, Mr. Cox is a graduate of the Stonier Graduate School of Banking at Rutgers University, possesses more than 30 years of banking management experience, has served on the board of directors of the Oklahoma Industrial Finance Authority and the Oklahoma Development Finance Authority, and has prior experience as an FHLBank director, that assists in his service as a director. Prior to his current term, Mr. Cox served as a member director of FHLBank from January 1998 through December 2006.

Holly Johnson, a Chickasaw citizen and certified public accountant, owns a tribal consulting company providing services to the Chickasaw Nation in the area of administrative support and policy development. She served as Secretary of the Department of Treasury for the Chickasaw Nation from October 2012 to December 2019, where she was responsible for all finance and accounting functions. From October 2010 to September 2012, she served as the Administrator of Planning and Organizational Development for the Chickasaw Nation. From August 2003 to October 2010, she served as an Elected Tribal Legislator for the Pontotoc District. Ms. Johnson serves as a trustee of the Chickasaw Foundation and is a past trustee of the Ada City Schools Foundation and the Chickasaw Nation's 401(k) plans, a past board member of the Ada Chamber of Commerce, a member of the Oklahoma State University School of Accounting Executive Advisory Board, and a current appointed commissioner of the Oklahoma Ethics Commission. The Board of Directors considered Ms. Johnson's qualifications, skills and attributes, including her role as Secretary for the Department of Treasury for the Chickasaw Nation, her experience as a CPA and at public accounting firms, her experience in and knowledge of auditing and accounting, financial management, organizational management, project development and risk management practices, and her ability to enhance the diversity of viewpoints among the directors serving on the Board of Directors by providing the Board of Directors with gender and racial diversity, when making her nomination.

Lynn Katzfey has been a partner at LJ Strategies since January 2019. Ms. Katzfey worked as a certified public accountant for 16 years before launching a career in public service. Ms. Katzfey served as Treasurer of the State of Kansas and was subsequently elected to serve five terms in the U.S. House of Representatives. She currently serves on the boards of directors for American Century Investments Mutual Funds and MGP Ingredients, Inc. The Board of Directors considered Ms. Katzfey's qualifications, skills and attributes, including her role as a member of the U.S. House of Representatives, including service in leadership roles and on the House Financial Services Committee and the House Ways and Means Committee, her role as the Treasurer of the State of Kansas, her experience as a certified public accountant and at public accounting firms, her experience in and knowledge of auditing and accounting, financial management, organizational management, project development, and the law, and her ability to enhance the diversity of viewpoints among the directors serving on the Board of Directors by providing the Board of Directors with gender diversity, when making her nomination.

Jane C. Knight, now retired, served as Vice President of Site-based Strategies for Kansas Big Brothers Big Sisters from 2002 through 2005. Prior to that, she directed the Wichita office for Kansas Governor Bill Graves and was in charge of addressing constituent concerns, including housing issues. The Board of Directors considered Ms. Knight’s qualifications, skills and attributes, including her prior management skills, her service as Director of the Kansas Governor’s regional office, her experience with housing issues through the Governor’s office and Habitat for Humanity, her experience with not-for-profit organizations, her ability to enhance the diversity of viewpoints among the Board of Directors by providing the Board of Directors with gender diversity, and her prior service as an FHLBank director, when making her nomination.

Barry J. Lockard has served as President and CEO of Cornhusker Bank, Lincoln, Nebraska, since 2007. Mr. Lockard previously held senior leadership roles at Black and Decker, Cincinnati Bell, and First National Bank of Omaha. He also served eight years in the Nebraska Army National Guard. He has served on the boards of directors of the Nebraska Bankers Association, the American Bankers Association Community Bankers Council, and is a trustee for the Graduate School of Banking at Colorado, where he has also served as a member of the faculty. Although the Board of Directors did not participate in Mr. Lockard’s nomination since he is a member director, Mr. Lockard possesses a bachelor’s degree in business administration, is a graduate of the Colorado Graduate School of Banking, and has more than 11 years as a bank CEO, that assists in his service as a director.

Richard S. Masinton, now retired, was Executive Vice President of Quinn Capital, LLC, a private equity company in Leawood, Kansas from January 2009 through 2014. Mr. Masinton previously served as CFO, then Executive Vice President of Russell Stover Candies in Kansas City, Missouri, from 1996 until 2008. Mr. Masinton has served on the board of directors of No More Homeless Pets Kansas City, an animal welfare charity. He also sat on the boards of directors of Eco-Choice Springwater, LLC and CRB Biosoft, LLC. Mr. Masinton retired from the boards of directors of OneNeck IT Services Corp in 2008 and Enterprise Financial Services Corporation, a publicly owned bank holding company, in 2007. He has also served on the board of advisors of the University of Kansas School of Business and on an advisory board at the University of Oklahoma School of Business. The Board of Directors considered Mr. Masinton’s qualifications, skills and attributes, including his Master's Degree in Accounting, Finance and Economics, his certification as a CPA, his experience on the board of a publicly owned bank holding company, including his 7 years of experience as Chairman of the audit committee of such bank holding company, his 40 years of experience as a corporate executive, and his prior service as an FHLBank director, when making his nomination.

Neil F. M. McKay was CFO and Treasurer of Capitol Federal Savings in Topeka, Kansas, from 1994 through March 2006. Mr. McKay, now retired, has held significant executive positions in various financial institutions including Heartland Federal Savings in Ponca City, Oklahoma, and First Nationwide Bank (now part of Citibank) in San Francisco, California. He was also a CPA in public practice for 12 years. The Board of Directors considered Mr. McKay’s qualifications, skills and attributes, including his certification as a CPA, his 12 years of service as an audit manager of large, publicly traded banks, his experience as Controller of a $30 billion publicly traded bank, his experience as CFO of an $8 billion publicly traded bank, and his prior service as an FHLBank director, when making his nomination.

Craig A. Meader has served as Chairman and CEO of First National Bank of Kansas since 1988. Mr. Meader has served as Chairman of the Kansas Bankers Association and the Bankers Bank of Kansas. Mr. Meader is a former member of the ABA Community Bankers Council, Government Relations Council and the ABA Board of Directors. Although the Board of Directors did not participate in Mr. Meader’s nomination since he is a member director, Mr. Meader possesses a bachelor’s degree in business administration and finance, is a graduate of the Madison Wisconsin Graduate School of Banking, served on the board of directors of Bankers’ Bank of Kansas, N.A. for seven years, including one year as Chairman, and has more than 30 years as a bank CEO, that assists in his service as a director.

L. Kent Needham has served as Chairman, President and CEO of The First Security Bank, Overbrook, Kansas, since 2007. Although the Board of Directors did not participate in Mr. Needham’s nomination since he is a member director, Mr. Needham possesses an MBA, is a graduate of the Colorado Graduate School of Banking, and has over 41 years of banking experience, including more than 21 years as CEO, that assists in his service as a director.

Mark J. O’Connor currently serves as President of Investments of FirstBank Holding Company, Lakewood, Colorado, and has served as Vice President of FirstBank since 2002. Although the Board of Directors did not participate in Mr. O’Connor’s most recent nomination since he is a member director, Mr. O’Connor has more than 31 years of banking experience. He is a graduate of the Pacific Coast Banking School, currently serves as the President of Investments and Chairs the ALCO Committee of a large bank holding company and has over 17 years of investment portfolio management experience. Mr. O’Connor serves on the Foundation Board of a local university and chairs its Investment Committee. His experience on the board of a state housing finance authority, including service as chairman, and his prior experience as an FHLBank director assist in his service as a director.

Thomas H. Olson, Jr. has been CEO of Points West Community Bank, Windsor, Colorado, since 1998. Mr. Olson is currently also the chairman of Points West Community Bank, Windsor, Colorado, Chairman of First Nebraska Bancs, Inc., Chairman of Bank of Estes Park, Chairman of First National Financial, Director of Nebraska State Bank, Chairman of Woodstock Land and Cattle, and Director of Rush Creek Land and Livestock. Although the Board of Directors did not participate in Mr. Olson's nomination since he is a member director, Mr. Olson has a B.S. in Finance and Accounting, is a graduate of the Colorado Graduate School of Banking, and has over 26 years of banking experience, including more than 21 years as CEO, that assists in his service as a director.

Mark W. Schifferdecker has been President and CEO of The GNBank, N.A., Girard, Kansas, since 2003. Although the Board of Directors did not participate in Mr. Schifferdecker’s nomination since he is a member director, Mr. Schifferdecker has experience as a CPA, possesses more than 16 years of experience as the CEO of a community bank, served more than 10 years as an auditor with KPMG, served six years on the board of directors of the Federal Reserve Bank of Kansas City, including two years as Chairman of the Audit Committee, and served on the board of directors of Bankers’ Bank of Kansas, N.A., including one year as Chairman, that assists in his service as a director.

Douglas E. Tippens has served as Executive Vice President of BancFirst, Oklahoma City, Oklahoma, since December 2017. He served as Market President of BancFirst from November 2015 to December 2017. Before his service at BancFirst, Mr. Tippens served as President and CEO of Bank of Commerce, Yukon, Oklahoma, since 2006, and served on the board of directors of Bank of Commerce, Chelsea, Oklahoma, since 2013. Although the Board of Directors did not participate in Mr. Tippens’ nomination since he is a member director, Mr. Tippens possesses a B.S. in agriculture economics, an MBA, is a graduate of the Graduate School of Banking at the University of Wisconsin, has more than 40 years of banking experience, including 10 years as president and CEO, and served on the board of directors of the Federal Reserve Bank of Kansas City, Oklahoma City Branch, that assists in his service as a director.

Gregg L. Vandaveer has served as President and CEO of Sooner State Bank, Tuttle, Oklahoma, since April 2001. Although the Board of Directors did not participate in Mr. Vandaveer's nomination since he is a member director, Mr. Vandaveer possesses a B.S. in journalism, is a graduate of the Southwest Graduate School of Banking at SMU, and has more than 37 years of banking experience, including 21 years as President and CEO, that assists in his service as a director.

Code of Ethics

We have adopted a Code of Ethics that applies to our directors, officers (including our principal executive officer, principal financial officer, principal accounting officer or controller and persons performing similar functions) and employees. Our Code of Ethics is filed as an exhibit to reports we file with the SEC and has been posted on our website at www.fhlbtopeka.com in the "Board Governance" page. We will also post on our website any amendments to, or waivers from, a provision of our Code of Ethics that applies to the principal executive officer, principal financial officer, principal accounting officer, or persons performing similar functions as required by applicable rules and regulations. Except for the documents specifically incorporated by reference into this annual report on Form 10-K, information contained on our website or that can be accessed through our website is not incorporated by reference into this annual report on Form 10-K. Reference to our website is made as an inactive textual reference. The Code of Ethics is available, in print, free of charge, upon request. Written requests may be made to the CCEO and General Counsel of FHLBank at 500 SW Wanamaker, Topeka, Kansas, 66606.

Audit Committee Financial Expert

We have a separately-designated, standing audit committee, which consists of Mark W. Schifferdecker (chair), Donald R. Abernathy, Jr., Milroy A. Alexander, Holly Johnson, Lynn Katzfey, L. Kent Needham, and Thomas H. Olson, Jr.

The Board of Directors has determined that Mark W. Schifferdecker is an “audit committee financial expert” as that term is defined under SEC regulations. Mr. Schifferdecker is “independent” in accordance with the Nasdaq Independence Standards (defined under Item 13 below) for audit committee members, as those standards were applied by our Board of Directors.

The Compensation, Human Resources and Inclusion Committee Report is included following the Compensation Discussion and Analysis in Item 11 - “Executive Compensation.”

Item 11. Executive Compensation

Compensation Discussion and Analysis

Overview of Previous Year Performance and Compensation: Our overall executive compensation philosophy is to attract, retain, and motivate highly-qualified executive officers who will advance: (1) our business objectives to promote our long-term growth and profitability in accordance with achievement of our long-term strategic objectives; and (2) our mission of supporting our members’ efforts to build strong communities.

During 2019, we experienced strong performance overall against our long-term objectives. These objectives were designed to drive performance in key areas that align our incentive compensation with our members’ view of our performance and with our ongoing long-term financial stability.

The named executive officers in 2019 were comprised of the President and CEO, the Executive Vice President and CCEO and General Counsel, the Senior Vice President and CFO, the Senior Vice President and CAO, and the Senior Vice President and CIO (collectively, the Named Executive Officers).

In determining the appropriate total compensation package for our Named Executive Officers for 2019, we considered the principal objectives of our compensation program as: (1) attracting and retaining highly-qualified and talented individuals; and (2) motivating these individuals to achieve short- and long-term FHLBank-wide performance goals through incentive compensation.

In 2019, we provided competitive compensation opportunities for our Named Executive Officers based in part on adjustments to base salary in line with our Executive Pay Philosophy and on incentive compensation achievable through our Executive Incentive Compensation Plan (EICP). The EICP provides cash-based annual incentives and deferred incentive awards, which promote the achievement of short- and long-term objectives. The achievement of both short- and long-term goals translated to incentive awards earned by our Named Executive Officers in recognition of their contribution to our overall performance and success.

Framework for Compensation Decisions: The Compensation, Human Resources and Inclusion Committee of the Board of Directors (Compensation Committee) oversees the compensation of the Named Executive Officers. The Compensation Committee’s responsibilities in 2019 included:


▪	Advising the Board of Directors on the establishment of appropriate compensation, incentive and benefits programs, including the recommendation of performance goals for the EICP;


▪	Approving the base salaries and salary adjustments of the CCEO and General Counsel, CFO, CAO, and CIO, as recommended by the CEO; and


▪	Recommending to the Board of Directors the base salary, including any salary adjustments, of the CEO.

Elements of Executive Compensation in 2019: To implement our compensation objectives, the elements of our 2019 compensation program for the Named Executive Officers included: (1) annual base salary; (2) annual and deferred cash incentive award opportunities under our EICP; (3) retirement and other benefits; (4) limited perquisites; and (5) potential payments upon termination or change in control.

Use of Benchmarks - We believe a key to attracting and retaining highly-qualified executive officers is the identification of the appropriate peer groups within which we compete for executive talent. We have historically recruited nationally, both within and outside of the FHLBank System, in our efforts to attract highly-qualified candidates for the Named Executive Officer positions. To ensure that we are offering and paying competitive compensation to retain our Named Executive Officers, the Board of Directors (and/or Compensation Committee) periodically retains compensation consultants to assist with comparative analyses of the Named Executive Officers’ total compensation through a review of survey data reflecting potential comparator benchmarks for total compensation. Our Compensation Committee has used the survey data as guideposts in considering and determining competitive levels of base salary and total compensation for our Named Executive Officers among other factors as described above.

For 2019 compensation, the Compensation Committee considered the competitiveness of the total compensation paid to our Named Executive Officers by reviewing comparative survey data obtained from the compensation consultant, McLagan Partners, Inc. (McLagan).

The Compensation Committee generally considers a market composite benchmark when making pay decisions regarding the Named Executive Officers. The market composite benchmark is created by McLagan pulled from a proprietary survey database and is calculated by considering three peer groups: (1) commercial banks with $20 billion or more in assets, including Federal Reserve Banks (excluding former "bulge bracket" investment banks); (2) other FHLBanks; and (3) publicly available proxy data for regional and community banks with assets between $10 billion and $20 billion. Additionally, in calculating the market composite benchmark, for the commercial banks' peer group, Divisional Heads are used as the relevant comparison at the median. For the other FHLBanks' peer group, overall Functional Heads are used at the median. For the third peer group, salary rank is used except for the CEO and CFO where the actual position is used; in addition, the low quartile is used.

In addition to the FHLBanks, the following is a list of survey participants that were included by McLagan in the 2019 FHLBank Custom Compensation Survey:



AIB	ICBC Financial Services
Ally Financial Inc.	ING
Associated Bank	Intesa Sanpaolo
Australia & New Zealand Banking Group	Investors Bancorp, Inc
Banco Bilbao Vizcaya Argentaria	JP Morgan Chase
Banco ltau Unibanco	KBC Bank
Bank Hapoalim	KeyCorp
Bank of America Merrill Lynch	Landesbank Baden-Wuerttemberg
Bank of New York Mellon	Lloyds Banking Group
Bank of Nova Scotia	M&T Bank Corporation
Bank of the West	Macquarie Bank
Bayerische Landesbank	MB Financial Bank



BBVA Compass	MUFG Bank, Ltd.
BMO Financial Group	MUFG Securities
BNP Paribas	National Australia Bank
BOK Financial Corporation	Natixis
Branch Banking & Trust Co.	New York Community Bank
Brown Brothers Harriman	Nord/LB
Capital One	Nordea Bank
Charles Schwab & Co.	Norinchukin Bank, New York Branch
China Construction Bank	Northern Trust Corporation
CIBC World Markets	PacWest Bancorp
CIT Group	People's United Bank, National Assoc
Citigroup	PNC Bank
Citizens Financial Group	Popular Community Bank
City National Bank	Rabobank
Comerica	Regions Financial Corporation
Commerce Bank	Royal Bank of Canada
Commerzbank	Royal Bank of Scotland Group
Commonwealth Bank of Australia	Santander Bank, NA
Credit Agricole CIB	Signature Bank - NY
Credit lndustriel et Commercial - N.Y.	Societe Generale
Cullen Frost Bankers, Inc.	Standard Chartered Bank
DBS Bank	State Street Corporation
DZ Bank	Sterling National Bank
East West Bancorp	Sumitomo Mitsui Banking Corporation
Fannie Mae	Sumitomo Mitsui Trust Bank
Federal Reserve Bank of Atlanta	SunTrust Banks
Federal Reserve Bank of Boston	SVB Financial Group
Federal Reserve Bank of Cleveland	Synchrony Financial
Federal Reserve Bank of New York	Synovus
Federal Reserve Bank of Richmond	TD Ameritrade
Federal Reserve Bank of San Francisco	TD Securities
Federal Reserve Bank of St Louis	Texas Capital Bank
Fifth Third Bank	The PrivateBank
First Citizens Bank	U.S. Bancorp
First Republic Bank	UMB Financial Corporation
First Tennessee Bank/ First Horizon	Umpqua Holding Corporation
FNB Omaha	UniCredit Bank AG
Freddie Mac	Valley National Bank
GE Capital	Webster Bank
Hancock Bank	Wells Fargo Bank
HSBC	Westpac Banking Corporation
Huntington Bancshares, Inc.	Zions Bancorporation

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The following is a list of regional and community banks with $10 billion to $20 billion in assets, which is the peer group used for the 2019 compensation benchmarks:



Arvest	FirstBank Holding Company
Bank of Hawaii	Flagstar Bank
Berkshire Bank	Golden 1 Credit Union
Boeing Employees Credit Union	Great Western Bank
Bremer Financial Corporation	MidFirst Bank
Cathay General Bancorp	SchoolsFirst Federal Credit Union
Chemical Financial Corporation	Simmons First National Corporation
City National Bank of Florida	South State Bank
Community Bank System Inc.	Trustmark Corporation
Eastern Bank	United Bank - VA
First Interstate BancSystem Inc	United Community Banks, Inc
First Midwest Bank

The intent to remain competitive primarily with the other FHLBanks and to also consider the broader labor market of a limited group of financial services institutions reflects our belief that the knowledge and skills necessary to effectively perform our Named Executive Officers’ duties may be developed as a result of experience not only at other FHLBanks, but also at a variety of other financial services institutions. We recognize that Topeka’s geographic location may be a disadvantage in attracting executives, but generally is a positive factor in retaining executives.

Of the FHLBank-based survey data and the broader survey data utilized, the Compensation Committee considered the 25^th percentile, 50^th percentile (median) and 75^th percentile compensation ranges for analyzing executive positions similar to those of our Named Executive Officers in assessing the competitiveness of our total compensation for the Named Executive Officers. The Compensation Committee generally strives to establish annual base salary and incentive compensation opportunities for our Named Executive Officers in the median range of the survey data reviewed assuming target level performance would be achieved. The ultimate compensation determined appropriate in any given year, however, will depend on the scope of a Named Executive Officer’s responsibilities as compared to similar positions within our identified peer group(s), the experience and performance of the individual Named Executive Officer, and our overall performance. Generally, the Compensation Committee and CEO recommend below median pay for poor performance and above median pay for superior performance. While survey information is one factor in setting compensation for our Named Executive Officers, we believe that surveys are not the sole governing factor and independent decisions by the Compensation Committee are necessary to make compensation consistent with our financial condition and future prospects.

Annual Base Salary - A significant element of each Named Executive Officer’s total compensation is annual base salary, which is designed to reward our Named Executive Officers for past performance and their commitment to future performance and to serve as the foundation for competitive total compensation. Adjustments to annual base salaries for the Named Executive Officers are considered annually and were made effective January 1st, following an analysis of our total compensation practices and FHLBank’s performance.

For 2019, the Compensation Committee determined that appropriate annual base salaries for each Named Executive Officer should be competitive with the salaries of comparable executive positions within financial institutions that are regarded as peers for purposes of providing guideposts for a competitive compensation analysis, as discussed in more detail previously under “Use of Benchmarks.” Adjustments to annual base salaries of the Named Executive Officers for 2019 were based on: (1) each Named Executive Officer’s scope of responsibility and accountability; (2) analysis of our comparator peer groups; (3) performance of FHLBank based on achievement levels of FHLBank-wide goals in the prior year; (4) the perceived performance of each Named Executive Officer, as a subjective matter; and (5) other factors such as experience, time in position, general economic conditions, and labor supply and demand conditions.

A final factor that the Compensation Committee generally considers in determining base salary increases in its effort to retain our Named Executive Officers is the relative difference in compensation between the executive officers as well as the pay relationship between executive officers and other employees at FHLBank. The Compensation Committee believes that internal pay equity provides an additional perspective to that of peer group survey compensation information. While comparisons to compensation levels of executive positions within our peer groups are the primary basis used to assess the overall competitiveness of our compensation program, we also believe that our executive compensation practices should be internally consistent and equitable.

The Compensation Committee also considered guidance and communications from FHLBank's regulator, the FHFA, in determining total compensation for the Named Executive Officers as more specifically addressed below under “FHFA Oversight.”

101

In 2019, the Compensation Committee and the CEO determined that, with respect to competitive pay positioning for purposes of retaining our Named Executive Officers, it was appropriate to increase the base salaries of the Named Executive Officers to maintain competitive base and total compensation. Consideration was also given to each Named Executive Officer’s scope of responsibility, market comparators, individual and FHLBank performance, and other factors as described above. Table 68 presents the total base salary and the percentage of salary increase for the Named Executive Officers, effective January 1, 2019:

Table 68



Named Executive Officer	Percentage Increase		Salary
Mark E. Yardley, President & CEO¹	5.0	%	$	682,500
Patrick C. Doran, EVP, CCEO & General Counsel²	3.5		402,100
William W. Osborn, SVP & CFO²	3.5		373,000
Sonia R. Betsworth, SVP & CAO²	3.5		324,200
Joe B. Edwards, SVP & CIO²	5.5		306,750


¹	Salary increase recommended by the Compensation Committee and approved by the Board of Directors.


²	Salary increase recommended by the CEO and approved by the Compensation Committee.

Annual and Deferred Cash Incentive Awards - Our EICP is a cash-based annual incentive plan with a long-term deferral component that establishes individual incentive compensation award opportunities related to achievement of performance objectives during the performance periods. The EICP establishes two performance periods: (1) a Base Performance Period aligned with the calendar year; and (2) a Deferral Performance Period (or the long-term performance period), which is a three-year period commencing the calendar year following the Base Performance Period. Named Executive Officers may earn an annual cash incentive during a Base Performance Period and a deferred cash incentive during a Deferral Performance Period. For each Base Performance Period, the Board of Directors will establish a Total Base Opportunity for Named Executive Officers. The Total Base Opportunity is equal to a percentage of each Named Executive Officer’s annual base salary at the beginning of the Base Performance Period, and is composed of the Cash Incentive and the Deferred Incentive.

We believe that well-designed incentive compensation plans provide important opportunities to motivate our Named Executive Officers to accomplish financial, risk, and operational goals that promote our mission. Thus, motivating our Named Executive Officers to accomplish business and financial short- and long-term goals that promote a high level of performance for our members is a key objective of our total compensation program. Consequently, our compensation and benefits programs are designed to motivate our Named Executive Officers to engage in the behaviors and performance necessary to deliver our desired results.

To effectively motivate the Named Executive Officers to accomplish both short- and long-term goals that promote our performance, we believe that incentive awards must represent pay at risk. In other words, the administration of our incentive compensation plans must be such that awards are distributed only in exchange for accomplishing pre-established goals, recommended by the Compensation Committee and approved by the Board of Directors, and are distributed only in accordance with such achievement. In 2019, generally we achieved the pre-established goal targets. Goal attainment varied between the threshold, target, and optimum pre-established levels.

Beginning in the fourth quarter of 2018, goal metrics, metric performance ranges and metric weights for award opportunities under the 2019 EICP were developed. The proposed performance objectives reflected the drivers of our business and mission and were based upon the Compensation Committee’s and management’s discussions with respect to our primary mission and stockholder perceptions of success. The Compensation Committee and management took steps intended to align the performance objectives to the Strategic Business Plan. The Compensation Committee reviewed and analyzed the proposed 2019 performance objectives, as appropriate, before submitting the objectives to the Board of Directors for approval.

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For the Base Performance Period of January 1, 2019 to December 31, 2019, the Board of Directors approved a Total Base Opportunity equal to a percentage of each Named Executive Officer’s annual base salary at the beginning of the Base Performance Period. Certain Named Executive Officers have a greater and more direct impact than others on the success of FHLBank; therefore, these differences are recognized by varying the Total Base Opportunity for each Named Executive Officer. The Total Base Opportunity is the amount that may be earned for achieving performance levels under established Performance Measures and is comprised of the Cash Incentive and the Deferred Incentive. In the event FHLBank’s performance during the Base Performance Period results in the achievement of a Total Base Opportunity that exceeds 100 percent of a Participant’s base salary at the start of the Base Performance Period, the Target Document provides that the Total Base Opportunity shall be capped at 100 percent of the Participant’s base salary in accordance with regulatory restrictions. The Deferred Incentive is 50 percent of the Total Base Opportunity, which shall be deferred for the Deferral Performance Period, which is the three-year period from January 1, 2020 to December 31, 2022, over which FHLBank applies a six percent compounding interest rate per year, as further described below, and becomes payable after the end of the Deferral Performance Period, subject to review by the Director of the FHFA. The Cash Incentive is the portion of the Total Base Opportunity that is not the Deferred Incentive and becomes payable after the end of the Base Performance Period upon achievement of established Performance Measures, subject to review by the Director of the FHFA.

Awards under the EICP may be granted for achievement of Performance Measures corresponding to achievement levels, from threshold, to target, to optimum performance for each goal metric. Threshold represents the minimum achievement level; target represents the expected achievement level; and optimum represents the achievement level that substantially exceeds the target level. Awards may be earned for performance attainment within these achievement levels as a percentage of base salary that corresponds to actual performance. For performance that falls between any two levels of achievement, linear interpolation is used to ensure that the award is consistent with the level of performance achieved. Named Executive Officers may earn annual awards expressed as a percent of their base salary at the beginning of the Performance Period. Table 69 presents the Total Base Opportunity for each Named Executive Officer for each achievement level for the Base Performance Period:

Table 69



Position	Total Base Opportunity
Position	Threshold		Target		Optimum
CEO	37.5	%	75.0	%	112.5	%
CCEO & General Counsel, CFO and CAO	27.5		55.0		82.5
CIO	25.0		50.0		75.0

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The Total Base Opportunity Goal Metrics for 2019 are described in Table 70:

Table 70



Total Base Opportunity Goal Metric	Definition
Adjusted Return Spread on Total Regulatory Capital¹	The spread between: (a) adjusted net income divided by the daily average total regulatory capital and (b) the average daily Overnight Federal funds effective rate (Fed Effective).
GAAP Return Spread on Total Regulatory Capital	The spread between: (a) GAAP net income divided by the daily average total regulatory capital; and (b) the Fed Effective rate.
Adjusted Net Income after Capital Charge	The dollar amount of adjusted net income as defined in the above metric that exceeds the cost of the required return on capital.
GAAP Net Income after Capital Charge	The dollar amount of GAAP net income that exceeds the cost of the required return on capital.
Member Product Utilization	Member product utilization is defined as the weighted average 2019 attainment in member utilization in each of three product categories: (1) Line of Credit or advances; (2) MPF Program; and (3) Letters of Credit.
Diversity and Inclusion	FHLBank’s Diversity and Inclusion (D&I) initiative is defined as the advancement of D&I, to the maximum extent possible in balance with financially safe and sound business practices, through inclusion and utilization of diverse-owned business and individuals within its workforce, as defined in the D&I Policy, in all business activities of FHLBank. One point is awarded for achievement of each of the following (5 total points possible): (1) attain a workforce ratio of at least 11.0 percent business partners of color as of 12/31/2019; (2) increase the number of viable diverse suppliers registered to do business with FHLBank in Supplier Gateway by 3 percent; (3) 80 percent of business partners attend one D&I Awareness Activity; (4) 80 percent of business partners complete one D&I Training; and (5) participate in 15 outreach opportunities with potential diverse directors and/or in Workforce, Vendors, Capital Markets and/or with members.
Risk Management – Market, Credit and Liquidity Risks	Management of FHLBank risks as determined by the weighted average rating by the board of directors in an annual evaluation of the Risk Appetite metrics in this area using a 1 (lowest) to 5 (highest) point scale. General risk categories are market, credit and liquidity risks.
Risk Management – Compliance, Business and Operations Risks	Management of FHLBank risks as determined by the weighted average rating by the board of directors in an annual evaluation of the Risk Appetite metrics in this area using a 1 (lowest) to 5 (highest) point scale. General risk categories are compliance, business and operations risks.

As part of evaluating our financial performance and measuring EICP performance, we begin with the components of “adjusted income” and “adjusted ROE,” non-GAAP financial measures defined in Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations.” We adjust net income reported in accordance with GAAP for the impact of: (1) AHP assessments (equivalent to an effective minimum income tax rate of 10 percent); (2) fair value changes on derivatives and hedging activities (excludes net interest settlements related to derivatives not qualifying for hedge accounting); (3) prepayment fees on terminated advances; and (4) other items excluded because they are not considered a part of our routine operations, such as gains/losses on retirement of debt, gains/losses on mortgage loans held for sale, and gains/losses on securities. For measuring our EICP performance, we further adjust for other items excluded because they are not considered a part of our routine operations or ongoing business model, such as interest expense on mandatorily redeemable capital stock, amortization of derivative option costs and amortization/accretion of premium/discount on unswapped MBS classified as trading. This resulting EICP adjusted income, also a non-GAAP financial measure of income, is used to compute an EICP adjusted ROE that is then compared to the average overnight Federal funds effective rate with the difference referred to as EICP adjusted ROE spread.

The profit-oriented objectives of “Adjusted Return Spread on Total Regulatory Capital” and “Adjusted Net Income after Capital Charge” (non-GAAP financial measures) and "GAAP Return Spread on Total Regulatory Capital" and "GAAP Net Income after Capital Charge" were based on the belief that profitability is critical to the long-term viability of the organization. The "Member Product Utilization" objective reflects our desire to be our members preferred source of liquidity and funding for housing finance, community lending and financial management activities. We divided the member product objective to focus on Line of Credit or advances, the MPF Program, and Letters of Credit. The performance objective for “Diversity and Inclusion” establishes our commitment to the advancement of D&I awareness. Finally, the “Risk Management” objectives were included in recognition of the impact that the Named Executive Officers have on management of business, compliance, credit, liquidity, market and operations risks and an effort to reward positive risk management performance as determined by the Board of Directors. We divided the risk management objectives to provide balance and focus in the amount of risk exposure we are willing to accept/retain in pursuit of stakeholder value.

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Award levels were set at Threshold, Target and Optimum percentages of annual base salary. Table 71 sets forth the specific annual goal performance ranges, the actual achievement levels, and the incentive payout for each of our Total Base Opportunity Goal Metrics in 2019:

Table 71



Total Base Opportunity Goal Metrics	Annual Performance Range									Actual Achievement			Incentive Payout
	Threshold			Target			Optimum
Adjusted Return Spread on Total Regulatory Capital	3.91		%	4.73		%	5.54		%	4.47		%	84.15	%
GAAP Return Spread on Total Regulatory Capital	3.51		%	4.73		%	5.94		%	5.21		%	119.83	%
Adjusted Net Income after Capital Charge	$	77,588,000		$	96,985,000		$	116,382,000		$	95,753,535		96.83	%
GAAP Net Income after Capital Charge	$	67,889,000		$	96,895,000		$	126,080,000		$	114,454,568		130.02	%
Member Product Utilization - Line of Credit or advances	66.00		%	70.50		%	75.00		%	61.69		%	66.38	%
Member Product Utilization - MPF Program	23.50		%	25.00		%	26.50		%	25.49		%
Member Product Utilization - Letters of Credit	28.00		%	30.50		%	33.00		%	32.96		%
Diversity and Inclusion	Achieve 3 of 5			Achieve 4 of 5			Achieve 5 of 5			5			150.00	%
Risk Management – Market, Credit and Liquidity Risks (5.0 point scoring scale)	4.00			4.50			5.00			4.73			123.00	%
Risk Management – Compliance, Business and Operations Risks (5.0 point scoring scale)	3.00			4.00			5.00			4.09			104.50	%
TOTAL WEIGHTED AVERAGE INCENTIVE PAYOUT													106.78	%

We believe the goals incorporated into the EICP are indicative of FHLBank's balanced approach to profitability and risk management. As reflected in Table 71, we exceeded Threshold for the profitability goals and, further, exceeded Target for the two GAAP profitability goals. We exceeded Target for the MPF Program and Letters of Credit components of the Member Product Utilization goal but were below Threshold for the Line of Credit or advances component. We exceeded Target performance for each of the Risk Management goals and achieved Optimum for the Diversity and Inclusion goal in 2019.

Table 72 provides the metric weight for each Total Base Opportunity Goal Metric as a percent of the Total Base Opportunity for each Named Executive Officer in 2019:

Table 72



Performance Objective	Metric Weight
Adjusted Return Spread on Total Regulatory Capital	15	%
GAAP Return Spread on Total Regulatory Capital	5
Adjusted Net Income after Capital Charge	15
GAAP Net Income after Capital Charge	5
Member Product Utilization	10
Diversity and Inclusion	10
Risk Management - Market, Credit, and Liquidity	20
Risk Management - Compliance, Business, and Operations	20
TOTAL	100	%

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Table 73 presents the base salary, aggregate goal achievement, Total Base Opportunity, Cash Incentive and Deferred Incentive for each Named Executive Officer as calculated under the EICP for the Base Performance Period of January 1, 2019 to December 31, 2019 and the Deferral Performance Period, which is the three-year period from January 1, 2020 to December 31, 2022:

Table 73



Named Executive Officer	Base Salary		Incentive Percent of Base Salary		Total Base Opportunity		Cash Incentive¹		Deferred Incentive
Mark E. Yardley, President & CEO	$	682,500	80.08	%	$	546,568	$	273,284	$	273,284
Patrick C. Doran, EVP, CCEO & General Counsel	402,100		58.73		236,144		118,072		118,072
William W. Osborn, SVP & CFO	373,000		58.73		219,055		109,528		109,527
Sonia R. Betsworth, SVP & CAO	324,200		58.73		190,395		95,198		95,197
Joe B. Edwards, SVP & CIO	306,750		53.39		163,770		81,885		81,885


¹	Cash Incentive is included as non-equity incentive plan compensation in Table 78 for all Named Executive Officers.

The final value of the Deferred Incentive portion of the Total Base Opportunity for the calendar year 2020 to calendar year 2022 is measured by applying a six percent interest credit, compounded annually, to the Deferred Incentive presented in Table 73, as long as FHLBank has an MVE of not less than 100 percent of TRCS outstanding, as of the last day of the Deferral Performance Period. We believe our long-term goals effectively motivate our Named Executive Officers to develop strategies and policies to achieve long-term growth and provide increased value to members while taking future risk into account.

For any Performance Period, an award will not be payable if we fail to achieve performance at or above the Performance Measure(s) set by the Compensation Committee. The Compensation Committee may, in its discretion, reduce or eliminate an award payable under the EICP under any of the following circumstances: (1) we receive a composite “4” or “5” rating in our FHFA examination in any single year in any single Base Performance Period or Deferral Performance Period; (2) the Board of Directors finds a serious, material safety or soundness problem or a serious, material risk management deficiency exists, or if: (a) operational errors or omissions result in material revisions to the financial results, information submitted to the FHFA, or to data used to determine incentive payouts; (b) submission of material information to the SEC, Office of Finance, and/or FHFA is significantly past due; or (c) we fail to make sufficient progress, as determined by the Board of Directors, in the timely remediation of significant examination, monitoring or other supervisory findings; (3) during the most recent FHFA examination, the FHFA identified an unsafe or unsound practice or condition that is material to the financial operation of FHLBank within a Named Executive Officer’s area(s) of responsibility and such unsafe or unsound practice or condition is not subsequently resolved in favor of FHLBank by the last day of the Base Performance Period or Deferral Performance Period; or (4) a given participant does not achieve satisfactory individual achievement levels (as determined in the sole discretion of the Compensation Committee) during the Deferral Performance Period. Additionally, Deferred Incentive awards shall be reduced by one-third for each year during the Deferral Performance Period in which we have negative net income, as defined and in accordance with GAAP. As noted above, for Participants to be eligible to receive a Final Deferred Incentive Award, FHLBank must have an MVE of not less than 100 percent of FHLBank’s TRCS outstanding, as of the last day of the Deferral Performance Period.

Under the EICP Targets for the 2017-2019 Deferral Performance Period, the achievement of base award opportunities is measured over a three-year performance period. The metric weight for the 2017-2019 performance goals as a percent of the total EICP award opportunity for all Named Executive Officers and the 2017-2019 goal achievement percentage is included in Table 74:

Table 74



Objective	Metric Weight		2017-2019
Objective	Metric Weight		Goal Achievement Percentage
Total Return	50.0	%	125.00	%
MVE/Total Regulatory Capital	50.0		125.00
Overall Payout Percentage	100.0	%	125.00	%

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Based on the performance results, Table 75 presents the Final Deferred Incentive Award for the 2017-2019 Deferral Performance Period for each Named Executive Officer:

Table 75



Named Executive Officer	Deferred Incentive		Goal Achievement Percentage		Final Deferred Incentive Award¹
Mark E. Yardley, President & CEO	$	127,749	125.00	%	$	159,687
Patrick C. Doran, EVP, CCEO & General Counsel	109,758		125.00		137,198
William W. Osborn, SVP & CFO	103,500		125.00		129,375
Sonia R. Betsworth, SVP & CAO	71,769		125.00		89,712
Joe B. Edwards, SVP & CIO	85,808		125.00		107,260


¹	Final Deferred Incentive Award is included as non-equity incentive plan compensation in Table 78 for all Named Executive Officers.

A Named Executive Officer, in the discretion of the Compensation Committee, shall be required to forfeit an award earned under the EICP if the Named Executive Officer is: (1) terminated from employment with FHLBank for Cause as defined under the EICP; (2) engages in competition with FHLBank or interferes with the business relationships of FHLBank during his or her employment or for a period of one year following his or her termination; or (3) discloses confidential information of FHLBank.

Bonuses - On occasion, the Compensation Committee may elect to award a Named Executive Officer additional compensation in the form of a bonus in recognition of that Named Executive Officer's performance. There were no such bonuses awarded to a Named Executive Officer in 2019.

Retirement and Other Benefits - In 2019, we maintained a comprehensive retirement program for our eligible employees comprised of two qualified retirement plans: (1) the Pentegra Defined Benefit Plan for Financial Institutions, a tax-qualified multiple-employer defined-benefit plan (DB Plan); and (2) the Pentegra Financial Institutions Thrift Plan, a defined contribution retirement savings plan qualified under the Internal Revenue Code (IRC) for employees of FHLBank (DC Plan). In response to federal legislation, which imposed restrictions on the pension benefits payable to our executives, we subsequently established a third retirement plan, the Benefit Equalization Plan (BEP) in order to maintain the competitive level of our total compensation for executive officers, including the Named Executive Officers. Generally, the BEP is characterized as a non-qualified “excess benefit” plan, which restores those retirement benefits that exceed the IRC limits applicable to the qualified DB Plan and DC Plan. In this respect, the BEP is an extension of our retirement commitment to our Named Executive Officers and other eligible highly compensated employees that preserves and restores the full pension and thrift benefits that, due to IRC limitations, are not payable from the qualified pension plans.

DB Plan - Our DB Plan covers all full-time employees of FHLBank as of January 1, 2009 who have met the eligibility requirements of: (1) attainment of age 21; (2) completion of twelve months of employment; and (3) employed by FHLBank as of December 31, 2008, including the Named Executive Officers. Employees are not fully vested until they have completed five years of employment. The regular form of retirement benefits provides a single life annuity; a lump-sum payment or other additional payment options are also available to a limited degree for those Named Executive Officers who were employed prior to a plan change in 2003. The benefits are not subject to offset for social security or any other retirement benefits received. In 2019, four of the Named Executive Officers (the CEO, CCEO and General Counsel, CFO, and CAO) participated in the DB Plan, which required no contribution from those four Named Executive Officers.

The DB Plan provides a normal retirement benefit at or after age 65 where a Named Executive Officer participant has met the vesting requirement of completing five years of employment equal to 2.0 percent of his/her highest three-year average salary multiplied by his/her years of benefit service, up to 30 years. Two Named Executive Officer participants (Mr. Yardley and Ms. Betsworth) are eligible to receive benefits in excess of 2.0 percent because of a plan change in 2003. The amount in excess of 2.0 percent is a calculated “frozen add-on” determined at the time of the plan change. The formula for this “frozen add-on” is the old benefit formula as of August 31, 2003 minus the new benefit formula as of September 1, 2003. Earnings are defined as base salary plus overtime and bonuses, subject to an annual IRC Section 401(a)(17) limit of $280,000 on earnings for 2019. Annual benefits provided under the DB Plan also are subject to IRC limits, which vary by age and benefit option selected. The annual IRC Section 415(b)(1)(A) benefit limit is $225,000 for 2019. Benefits are payable in the event of retirement, death, disability, or termination of employment if vested. Only the portion of the benefit accrued before September 1, 2003 is payable as a lump sum to employees who have attained age 50; otherwise, benefits are paid in installments.

107

Early retirement benefits are payable at a reduced rate. Upon termination of employment prior to age 65, Named Executive Officer participants meeting the 5-year vesting and age 45 early retirement eligibility criteria are entitled to an early retirement benefit. Each of the Named Executive Officers participating in the DB Plan is eligible for early retirement. The early retirement benefit amount is calculated by taking the normal retirement benefit amount and reducing it by 3.0 percent times the difference between the age of the early retiree and age 65. If the Named Executive Officer was employed prior to September 1, 2003 and his/her age and benefit service added together totaled 70 (Rule of 70), the normal retirement benefit amount would be reduced by 1.5 percent for each year between the age of the early retiree and age 65 for the portion of the normal retirement benefit accrued prior to September 1, 2003.

The measurement date used to determine the current year’s benefit obligation was December 31, 2019. The present value of the accrued benefit of the DB Plan, calculated through September 1, 2003, was valued at 50 percent of benefit value using the 2000 RP Mortality table (generational table for annuities) and 50 percent of benefit value using the 2000 RP Mortality table (statistical mortality table for lump sums), discounted to the current age of each Named Executive Officer at 3.22 percent interest. The present value of benefits accrued after September 1, 2003 is multiplied by a present value factor which uses the 2000 RP Mortality table (generational table for annuities) discounted to the current age of each Named Executive Officer at 3.22 percent. As of December 31, 2019, the actuary’s calculations utilized: (1) the projected unit credit valuation method; (2) the PRI-2012 white collar worker annuitant tables (with Scale MP-2019); and (3) a 3.00 percent discount rate as the primary assumptions attributable to valuation of benefits under the DB portion of the BEP (see "BEP" below).

The Board of Directors decided to hard freeze the DB Plan effective as of year-end 2019. Accordingly, benefits under the DB Plan cease accruing thereafter. Additionally, the Board of Directors decided to revise the BEP to cease any further accrual of pension benefit as provided in the BEP, and described further below, as of the same date.

DC Plan - The DC Plan is a tax-qualified, defined contribution pension plan. Substantially all officers and employees of FHLBank are covered by the plan. FHLBank contributes a matching amount equal to a percentage of voluntary employee contributions, subject to certain limitations (see "BEP" below).

All employees who have met the eligibility requirements can choose to participate in the DC Plan. We match employee contributions based on the length of service and the amount of an employee’s contribution. These employer contributions are immediately 100 percent vested. During 2019, matching ratios for all employees, including the Named Executive Officers, under the DC Plan were as follows:




Year 1	No match
Years 2 through 3	100 percent match up to 3 percent of employee’s eligible compensation
Years 4 through 5	150 percent match up to 3 percent of employee’s eligible compensation
After 5 years	200 percent match up to 3 percent of employee’s eligible compensation

For an employee hired on or after January 1, 2009, we also make a monthly basic contribution in an amount equal to two percent of that employee's monthly eligible compensation.

Beginning January 1, 2020, we match up to four percent of an employee's eligible compensation using the previously mentioned matching ratios based on years of service. Additionally, beginning January 1, 2020, in conjunction with the DB Plan hard freeze, all employees receive a monthly basic contribution equal to two percent of eligible compensation.

BEP - The BEP is an unfunded, nonqualified supplemental executive retirement plan that permits Named Executive Officers and certain other participants in the BEP to defer compensation and to receive matching contributions and pension accruals that would otherwise have been made or accrued under FHLBank’s DC Plan or DB Plan, as appropriate, but for the limitations imposed by the IRC. Each of the Named Executive Officers are participants in the BEP.

The BEP allows the Named Executive Officers to receive a rate of return based on our return on equity calculated for EICP purposes for the previous year. For 2019, the rate of return earned on the defined contribution portion of the BEP was 7.18 percent, which was our return on equity calculated for EICP purposes for 2018.

Named Executive Officers are at all times 100 percent vested in their defined contribution account balances of the BEP. In the event of unforeseen emergencies, they may request withdrawals equal to the lesser of the amounts necessary to meet their financial hardships or the amount of their account balances. As of December 31, 2019, each of the Named Executive Officers would be entitled to receive his or her respective balance of compensation deferred through participation under the BEP within ninety days of any such Named Executive Officer’s termination of employment due to death, disability or retirement and upon a change in control as defined in the BEP and in accordance with IRC Section 409A and applicable regulations. For each Named Executive Officer, these amounts are listed in Table 82 under the column titled “Aggregate Balance at Last FYE.”

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As indicated above, the pension accrual benefit of the BEP ceases further accruals as of year-end 2019.

Other benefits - We are also committed to providing competitive benefits designed to promote health and welfare for all employees (including their families), including the Named Executive Officers. We offer all employees a variety of benefits including insurance (medical, dental, vision, prescription drug, life, long-term disability and travel accident), short-term disability salary continuation, flexible spending accounts, an employee assistance program and education benefits. The Named Executive Officers participate in these benefit programs on the same basis as all other eligible employees.

Perquisites - The Board of Directors views limited perquisites afforded to the Named Executive Officers as an element of the total compensation program. Any perquisites provided, however, are not intended to materially add to any Named Executive Officer’s compensation package and, as such, are provided to them primarily as a convenience associated with their respective duties and responsibilities. Examples of perquisites that were provided to the Named Executive Officers in 2019 include cell phone reimbursement, limited spousal travel and limited club dues. Total perquisites to any single Named Executive Officer did not exceed $10,000.

Potential payments upon termination or change in control

Severance Benefits - We provide severance benefits to the Named Executive Officers pursuant to our Executive Officer Severance Policy. The policy’s primary objective is to provide a level of protection to officers from loss of income during a period of unemployment. These officers are eligible to receive severance pay under the policy if we terminate the officer’s employment with or without cause, subject to certain limitations. These limitations include: (1) the officer voluntarily terminates employment, including disability or death; or (2) the officer’s employment is terminated by us for misconduct.

Provided the requirements of the policy are met and the Named Executive Officer provides us an enforceable release, Table 76 presents the term and amounts that would have been payable to the Named Executive Officer under the Executive Officer Severance Policy as of December 31, 2019, or other effective policy, absent a qualifying event that would result in payments under the Change in Control Plan (see "Change in Control Plan" below):

Table 76



Officer	Months	Severance Amount¹		COBRA²		Severance Total
Mark E. Yardley	12	$	682,500	$	13,255	$	695,755
Patrick C. Doran	9	301,575		14,450		316,025
William W. Osborn	6	186,500		9,497		195,997
Sonia R. Betsworth	6	162,100		6,570		168,670
Joe B. Edwards	6	153,375		6,628		160,003


¹	Severance Amount equals the number of months of base salary as described under the Executive Officer Severance Policy.


²	COBRA equals the number of months of medical, dental and vision coverage cost as described under the Executive Officer Severance Policy.

The amounts above do not include accrued incentive plan payments as presented in the Summary Compensation Table; the aggregate balance of the DC Plan as presented in the Nonqualified Deferred Compensation Table; or the present value of accumulated benefits of the BEP as presented in the Pension Benefits Table.

Change in Control Plan - The Change in Control Plan provides that, upon both a change in control and the termination of a participant that qualifies as a Change in Control Termination, a participant will be entitled to a cash lump sum payment. A Change in Control means the occurrence of any of the following events, provided it shall not include any reorganization that is mandated by any Federal statute, rule, regulations or directive: (1) the merger, reorganization, or consolidation of FHLBank Topeka with or into another FHLBank or other entity; (2) the sale or transfer of all or substantially all of the business or assets of FHLBank Topeka to another FHLBank or other entity; (3) the purchase by FHLBank Topeka or transfer to FHLBank Topeka of substantially all of the business or assets of another FHLBank; (4) a change in the composition of the Board of Directors, as a result of one or a series of related transactions, that causes the combined number of member directors from the states of Colorado, Kansas, Nebraska and Oklahoma to cease to constitute a majority of the directors of FHLBank Topeka; or (5) the liquidation or dissolution of FHLBank Topeka. We provide for payments under a Change in Control to: (1) promote key employee loyalty and to assure continued dedication to FHLBank Topeka, notwithstanding the possibility, threat or occurrence of a Change in Control; and (2) to reduce the personal uncertainties to key employees who are vital to FHLBank Topeka's future success associated with a pending or possible Change in Control, and to encourage those key employees' continued dedication to FHLBank Topeka.

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A Participant in the Change in Control Plan will receive in a cash lump sum, an amount that, when combined with any amount payable under an FHLBank severance policy, equals a compensation multiplier times the sum of: (1) the Participant’s then annualized base salary; and (2) an amount equal to the target Total Base Opportunity as reflected in FHLBank’s EICP Targets document for the year in which the change in control occurs. Participants at Tier 1 are subject to a compensation multiplier of 2.99, participants at Tier 2 are subject to a compensation multiplier of 2.0, and participants at Tier 3 are subject to a compensation multiplier of 1.0. A Participant is also eligible to receive the continuation of certain group health care benefits for a period of years equal to his or her compensation multiplier. The Compensation Committee approved the following Participants in the Change in Control Plan and their effective Tiers: CEO, at Tier 1; CCEO and General Counsel, at Tier 2; and CFO and CAO at Tier 3.

Table 77 represents the elements of potential payments upon a Change in Control and the total amount that would be payable to the participating Named Executive Officers as of December 31, 2019 subject to FHLBank’s Change in Control Plan, as currently in effect:

Table 77



Officer	Severance Amount¹		Incentive²		COBRA³		Change in Control Total
Mark E. Yardley	$	2,040,675	$	1,530,506	$	39,766	$	3,610,947
Patrick C. Doran	804,200		442,310		38,532		1,285,042
William W. Osborn	373,000		205,150		18,995		597,145
Sonia R. Betsworth	324,200		178,310		13,140		515,650


¹	Compensation multiplier times the annual base salary at year end as described under the Change in Control Plan.


²	Compensation multiplier times target Total Base Opportunity reflected in the 2019 EICP Targets as described in under the Change in Control Plan.


³	COBRA equals the number of months of medical, dental and vision coverage cost as described under the Change in Control Plan.

Why We Choose to Pay These Elements: We believe the Compensation Committee’s analyses described above provided an appropriate process to determine 2019 compensation levels for each Named Executive Officer that reasonably positions us to competitively manage our operations for success and to accomplish our mission.

The mix of compensation elements that comprised the total compensation of our Named Executive Officers in 2019 particularly allowed us to provide total compensation that we believe appropriately balanced reasonable guaranteed pay through carefully considered base salary determinations with additional at-risk cash compensation opportunities for the Named Executive Officers. This means that while we strived to match an appropriate level of compensation comparable to that reflected by our perceived peer groups and internal pay analysis through annual base salary and retirement benefits components, we also strived to provide a component of compensation that is at-risk in both the shorter term and the longer term. These at-risk awards represent an opportunity to reward our Named Executive Officers based on the achievement of both our annual and long-term performance goals and the discretion vested in our Compensation Committee.

FHFA Oversight: Section 1113 of the Recovery Act requires that the Director of the FHFA prevent an FHLBank from paying compensation to its executive officers that is not reasonable and comparable to that paid for employment in similar businesses involving similar duties and responsibilities. In 2009, the FHFA issued an advisory bulletin establishing certain principles for executive compensation at the FHLBanks and the Office of Finance that include: (1) such compensation must be reasonable and comparable to that offered to executives in similar positions at comparable financial institutions; (2) such compensation should be consistent with sound risk management and preservation of the par value of FHLBank capital stock; (3) a significant percentage of an executive’s incentive based compensation should be tied to longer-term performance and outcome-indicators and be deferred and made contingent upon performance over several years; and (4) the Board of Directors should promote accountability and transparency in the process of setting compensation. On January 28, 2014, the FHFA issued a final rule on executive compensation, which defines “reasonable” and “comparable” compensation and establishes the review and approval process for certain compensation payments and agreements.

The FHLBanks have been directed to provide all compensation actions affecting their Named Executive Officers to the FHFA for review.

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Compensation, Human Resources and Inclusion Committee Report: The Compensation, Human Resources and Inclusion Committee of our Board of Directors has reviewed and discussed the Compensation Discussion and Analysis with management. Based on its review and discussions with management, the Compensation, Human Resources and Inclusion Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in our annual report on Form 10-K.

The Compensation, Human Resources and Inclusion Committee

of the Board of Directors

Richard S. Masinton, Chair

Milroy A. Alexander

Robert E. Caldwell, II

G. Bridger Cox

Holly Johnson

Thomas H. Olson, Jr.

Mark W. Schifferdecker

Douglas E. Tippens

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Table 78 presents the Summary Compensation Table for the Named Executive Officers.

Table 78



Name and Principal Position	Year	Salary		Bonus		Non-Equity Incentive Plan Compensation¹		Change in Pension Value and Nonqualified Deferred Compensation Earnings²		All Other Compensation³		Total
Mark E. Yardley⁴	2019	$	682,500	$	—	$	437,126	$	2,360,858	$	62,290	$	3,542,774
President & CEO	2018	650,000		—		306,822		1,044,036		60,175		2,061,033
	2017	550,000		—		355,720		1,297,561		58,773		2,262,054
Patrick C. Doran⁵	2019	402,100		—		258,903		513,675		35,881		1,210,559
EVP, CCEO & General	2018	388,500		—		202,515		129,384		33,855		754,254
Counsel	2017	357,500		50,000		213,443		324,590		36,455		981,988
William W. Osborn⁶	2019	373,000		—		241,950		409,268		29,047		1,053,265
SVP & CFO	2018	360,400		—		175,583		77,427		29,163		642,573
	2017	330,500		—		188,557		251,542		28,521		799,120
Sonia R. Betsworth⁷	2019	324,200		—		187,491		889,388		25,588		1,426,667
SVP & CAO	2018	313,200		—		155,810		78,397		25,752		573,159
	2017	286,250		1,450		159,570		525,768		24,036		997,074
Joe B. Edwards⁸	2019	306,750		—		192,368		2,346		25,207		526,671
SVP & CIO	2018	290,745		—		158,241		161		25,847		474,994
	2017	274,875		—		175,554		—		20,447		470,876


¹	All compensation reported under “non-equity incentive plan compensation” represents performance awards earned pursuant to achievement of performance objectives under FHLBank’s EICP.

The change in pension value will fluctuate with changes in discount rates used to calculate the present value of accumulated benefits and can result in decreases. However, per SEC rules, any net actuarial decreases in pension plan values have been excluded from this column. Nonqualified deferred compensation earnings include above market earnings attributable to the BEP, which are calculated by multiplying the nonqualified deferred compensation average balance of the applicable year by the average rate of return in excess of the long-term applicable Federal rate (120 percent compounded quarterly) published by the IRS.


³	The 2019 components of All Other Compensation are provided in Table 79.

⁴

Above market earnings attributable to the BEP for Mr. Yardley were $48,858, $51,036, and $36,561 for 2019, 2018, and 2017, respectively. The aggregate change in the value of Mr. Yardley’s accumulated benefit under FHLBank’s DB Plan was $406,000, $(44,000), and $264,000 for 2019, 2018, and 2017, respectively. The aggregate change in the value of his accumulated benefit under the defined benefit portion of the BEP was $1,906,000, $1,037,000, and $997,000 for 2019, 2018, and 2017, respectively.

⁵

Above market earnings attributable to the BEP for Mr. Doran were $10,675, $10,384, and $6,590 for 2019, 2018, and 2017, respectively. The aggregate change in the value of Mr. Doran’s accumulated benefit under FHLBank’s DB Plan was $259,000, $12,000, and $157,000 for 2019, 2018, and 2017, respectively. The aggregate change in the value of his accumulated benefit under the defined benefit portion of the BEP was $244,000, $107,000, and $161,000 in 2019, 2018, and 2017, respectively.

⁶

Above market earnings attributable to the BEP for Mr. Osborn were $3,268, $2,427, and $542 for 2019, 2018, and 2017, respectively. The aggregate change in the value of Mr. Osborn's accumulated benefit under FHLBank’s DB Plan was $227,000, $2,000 and $132,000 for 2019, 2018, and 2017, respectively. The aggregate change in the value of his accumulated benefit under the defined benefit portion of the BEP was $179,000, $73,000 and $119,000 for 2019, 2018, and 2017, respectively.

⁷

Above market earnings attributable to the BEP for Ms. Betsworth were $13,388, $13,397, and $7,768 for 2019, 2018, and 2017, respectively. The aggregate change in the value of Ms. Betsworth's accumulated benefit under FHLBank’s DB Plan was $470,000, $(119,000), and $280,000 for 2019, 2018, and 2017, respectively. The aggregate change in the value of her accumulated benefit under the defined benefit portion of the BEP was $406,000, $184,000, and $238,000 for 2019, 2018, and 2017, respectively.


⁸	Above market earnings attributable to the BEP for Mr. Edwards were $2,346 and $161 in 2019 and 2018, respectively.

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Table 79 presents the components of “All Other Compensation” for 2019 as summarized in Table 78.

Table 79



Named Executive Officer	Life Insurance Premiums		Long Term and Individual Disability Premiums		FHLBank Contribution to DC Plan		FHLBank Contribution to Defined Contribution Portion of BEP		Other Miscellaneous		Total All Other Compensation
Mark E. Yardley	$	855	$	8,281	$	16,403	$	36,256	$	495	$	62,290
Patrick C. Doran	681		4,758		16,800		13,430		212		35,881
William W. Osborn	631		762		15,531		12,123		—		29,047
Sonia R. Betsworth	549		667		8,973		15,399		—		25,588
Joe B. Edwards	516		627		24,064		—		—		25,207

Table 80 presents the Grants of Plan Based Awards Table for the Named Executive Officers.

Table 80



Name	Plan	Estimated Future Payouts Under Non‑Equity Incentive Plan Awards¹
		Threshold		Target		Optimum
Mark E. Yardley	EICP-Cash Incentive	$	127,969	$	255,938	$	383,907
President & CEO	EICP-Deferred Incentive Opportunity	127,969		255,937		383,906
Patrick C. Doran	EICP-Cash Incentive	55,289		110,578		165,867
EVP, CCEO & General Counsel	EICP-Deferred Incentive Opportunity	55,289		110,577		165,866
William W. Osborn	EICP-Cash Incentive	51,288		102,575		153,863
SVP & CFO	EICP-Deferred Incentive Opportunity	51,287		102,575		153,862
Sonia R. Betsworth	EICP-Cash Incentive	44,578		89,155		133,733
SVP & CAO	EICP-Deferred Incentive Opportunity	44,577		89,155		133,732
Joe B. Edwards	EICP-Cash Incentive	38,344		76,688		115,032
SVP & CIO	EICP-Deferred Incentive Opportunity	38,344		76,687		115,031

Amounts reflected for the EICP represent the applicable range of estimated future payouts and do not represent amounts actually earned or awarded for the fiscal year ended December 31, 2019. Award amounts are calculated using the base salaries in effect on January 1 at the beginning of the performance period. The EICP-Cash Incentive, if any, are earned and vested at year end. Awards, if any, under the EICP-Deferred Incentive Opportunity are payable in the year following the end of the three-year performance period. See discussion under Annual and Deferred Cash Incentive Awards under this Item 11 for a description of the terms of the EICP and potential future payouts.

Pension Benefits: Table 81 presents the 2019 Pension Benefits Table for the participating Named Executive Officers.

Table 81



Name	Plan Name	Number of Years of Credited Services	Present Value of Accumulated Benefit		Payments During Last Fiscal Year
Mark E. Yardley	Pentegra Defined Benefit Plan for Financial Institutions	30.000	$	2,807,000	$	—
President & CEO	FHLBank Benefit Equalization Plan	30.000	5,618,000		—
Patrick C. Doran	Pentegra Defined Benefit Plan for Financial Institutions	14.667	1,045,000		—
EVP, CCEO & General Counsel	FHLBank Benefit Equalization Plan	14.667	860,000		—
William W. Osborn	Pentegra Defined Benefit Plan for Financial Institutions	12.583	792,000		—
SVP & CFO	FHLBank Benefit Equalization Plan	12.583	542,000		—
Sonia R. Betsworth	Pentegra Defined Benefit Plan for Financial Institutions	30.000	2,338,000		—
SVP & CAO	FHLBank Benefit Equalization Plan	30.000	992,000		—

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Deferred Compensation: Table 82 presents the 2019 Nonqualified Deferred Compensation Table for the participating Named Executive Officers. Our fiscal year (FY) is 2019, with a fiscal year end (FYE) of December 31, 2019.

Table 82



Name	Executive Contributions in Last FY¹		Registrant Contributions in Last FY		Aggregate Earnings in Last FY		Aggregate Withdrawals / Distributions		Aggregate Balance at Last FYE²
Mark E. Yardley, President & CEO	$	18,128	$	36,256	$	99,589	$	—	$	1,469,147
Patrick C. Doran, EVP, CCEO & General Counsel	18,864		13,430		21,758		—		336,606
William W. Osborn, SVP & CFO	21,090		12,123		6,660		—		120,894
Sonia R. Betsworth, SVP & CAO	15,987		15,399		27,290		—		410,165
Joe B. Edwards, SVP & CIO	57,685		—		4,782		—		81,073


¹	All amounts are also included in the salary column of Table 78.

The total amount reported as preferential (above market) earnings in the aggregate balance at last FYE reported as compensation to each Named Executive Officer in the Executive Group in our Summary Compensation Tables for previous years (2006-2018) was $215,601 for Mr. Yardley, $34,006 for Mr. Doran, $3,210 for Mr. Osborn, $22,462 for Ms. Betsworth, and $161 for Mr. Edwards. The amounts reported as preferential (above market) earnings for the current year are presented in Table 78.

CEO Pay Ratio: As required by Section 953(b) of the Dodd-Frank Act and Item 402(u) of Regulation S-K, we are providing the following information about the relationship of the median of the annual Total Compensation of all our employees except our CEO (the "Median Employee"), and the annual total compensation of Mr. Yardley, our CEO who is our principal executive officer. We identified the Median Employee in 2017 (see methodology below), and the identified Median Employee was used in the last two years’ disclosures. The identified Median Employee terminated employment during 2019. We used the original calculation from 2017 to identify a new Median Employee because we believe there have been no changes to our employee population or our employee compensation arrangements that would significantly affect our pay ratio disclosure. As a result, the new Median Employee presented herein has substantially similar compensation to the previously identified Median Employee.

Methodology used to determine the Median Employee

We identified the Median Employee by comparing the 2017 compensation (i.e., 2017 annual salary and incentive earned for 2016 paid in 2017) for each of the employees who were employed by FHLBank on October 1, 2017, and ranking all 235 employees by that consistently applied compensation measure from lowest to highest, excluding the CEO. We next identified the initial median employee based on that calculation, and identified the five employees with 2017 compensation higher than that initial median employee and the five employees with 2017 compensation lower than that initial median employee, constituting a total pool of 11 employees (the "Identified Pool"). We then calculated the 2017 Total Compensation for each employee in the Identified Pool for 2017 in the same manner. “Total Compensation” for 2017 is shown for our CEO in the Summary Compensation Table (see Table 78), which includes among other things, amounts attributable to the change in pension value, which will vary among employees based upon their tenure at FHLBank. We ranked the 2017 Total Compensation for each employee in the Identified Pool from lowest to highest, and the median employee from the Identified Pool based on 2017 Total Compensation was identified as our Median Employee. The employees in the calculation included all full-time and part-time employees, and we annualized all such employees who were not employed by us for all of 2017. As indicated above, this analysis was reviewed to identify the Median Employee reflected herein.

Methodology used to determine the CEO Pay Ratio for 2019

For the year ended December 31, 2019, the ratio of our CEO’s Total Compensation to the Total Compensation of our Median Employee was approximately 31:1. For the year ended December 31, 2019, the Total Compensation of the CEO, as reported in the Summary Compensation Table, was $3,542,774, and the Total Compensation of the Median Employee for the same year ended December 31, 2019 was $114,973. As a result of our methodology for determining the pay ratio, the estimated pay ratio reported above may not be comparable to the pay ratio of other companies in our industry or in other industries because other companies may rely on different methodologies or assumptions to determine an estimate of their pay ratio, or may make adjustments that we do not make. In addition, no two companies have identical employee populations or compensation programs. As such, our pay ratio should not be used as a basis for comparison between companies.

114

Director Compensation: Table 83 presents the Director Compensation Table for the persons who served on our Board of Directors during 2019.

Table 83



Name	Fees Earned or Paid in Cash		Nonqualified Deferred Compensation Earnings¹		Total
Milroy A. Alexander	$	117,500	$	680	$	118,180
Robert E. Caldwell, II	117,500				117,500
G. Bridger Cox	137,500		3,408		140,908
Andrew C. Hove, Jr.	67,740				67,740
Michael B. Jacobson	117,500				117,500
Holly Johnson	107,500				107,500
Lynn Katzfey	54,192				54,192
Jane C. Knight	107,500		1,328		108,828
Barry J. Lockard	107,500				107,500
Richard S. Masinton	117,500		5,804		123,304
Neil F. M. McKay	80,625				80,625
L. Kent Needham	107,500		1,925		109,425
Mark J. O’Connor	107,500				107,500
Thomas H. Olson, Jr.	107,500				107,500
Donde L. Plowman	53,308				53,308
Mark W. Schifferdecker	117,500				117,500
Bruce A. Schriefer	117,500				117,500
Douglas E. Tippens	107,500		5,298		112,798
Gregg Vandaveer	107,500		1,414		108,914


¹	Nonqualified deferred compensation earnings represents above market earnings attributable to the BEP, which are calculated by multiplying the nonqualified deferred compensation average balance of the applicable year by the average rate of return in excess of the long-term applicable Federal rate (120 percent compounded quarterly) published by the IRS.

Director Fees - The Board of Directors establishes on an annual basis a Board of Directors Compensation Policy governing compensation for Board meeting attendance. Our 2019 Board of Directors Compensation Policy (2019 Policy) was adopted June 22, 2018 and became effective January 1, 2019. This policy was established in accordance with the Bank Act and FHFA regulations that were amended in 2008 to remove the statutory cap on director compensation. The applicable statutes and regulations allow each FHLBank to pay its directors reasonable compensation and expenses, subject to the authority of the Director of the FHFA to object to, and to prohibit prospectively, compensation and/or expenses that the Director of the FHFA determines are not reasonable. In order to compensate them for their time while serving as directors, our 2019 Policy provided that each director shall be paid one-fourth of his or her maximum annual compensation provided for in the policy following the end of each calendar quarter. The quarterly payment can be reduced for reasons specified in the policy.

In determining reasonable compensation for our directors, we participated in an FHLBank System review of director compensation, which included a study prepared by McLagan. FHLBank director compensation that was established by the Board under the 2019 Policy reflected this analysis. The 2019 Policy established annual compensation limits of $137,500 for the Chair, $117,500 for the Vice-Chair and Committee Chairs and $107,500 for all other directors. Additionally, an individual serving as a Vice Chair of the Board was also entitled to an increase of $5,000 in his or her maximum annual compensation in the event the individual served as both Vice Chair of the Board and a Committee Chair.

115

The Board of Directors adopted a 2020 Board of Directors Compensation Policy (2020 Policy) governing compensation for board meeting attendance on September 20, 2019. The 2020 Policy is similar to the 2019 Policy, except that the 2020 Policy reflects increases in the established annual compensation limits to $142,500 for the Chair, $122,500 for the Vice-Chair and Committee Chairs and $112,500 for all other directors. Additionally, an individual serving as a Vice Chair of the Board shall be entitled to an increase of $5,000 in his or her Maximum Annual Compensation in the event the individual serves as both Vice Chair of the Board and a Committee Chair. In addition to the Maximum Annual Compensation reflected in the policy, a director may also realize the benefit of reasonable spousal or guest travel expenses that qualify as perquisites as set forth in the Directors and Executive Officers Travel Policy, for one meeting per calendar year, as designated by the Chair of the Board of Directors. The Board of Directors also adopted revisions to the BEP effective January 1, 2018, discussed above and as disclosed in the Form 8-K filed on February 5, 2018, which allows Directors the opportunity to defer Director compensation, up to 100 percent.

Director Expenses - Directors are also reimbursed for all necessary and reasonable travel, subsistence and other related expenses incurred in connection with the performance of their duties. For expense reimbursement purposes, directors’ official duties can include:


▪	Meetings of the Board and Board Committees;


▪	Meetings requested by the FHFA;


▪	Meetings of FHLBank System committees;


▪	FHLBank System director meetings;


▪	Meetings of the Council of Federal Home Loan Banks and Council committees; and


▪	Attendance at other events on behalf of FHLBank.

Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

We are a cooperative. Our members or former members own all of our outstanding capital stock. A majority of our directors are elected from our membership. One of the voting rights of members is for the election of member and independent directors. Each member is eligible to vote for those open member director seats in the state in which its principal place of business is located and for all open independent director seats, which are elected by members of the entire FHLBank district. Membership is voluntary; however, members must give notice of their intent to withdraw from membership. A member that withdraws from membership may not be readmitted to membership for five years after the date upon which its required membership stock (Class A Common Stock) is redeemed by us.

Management cannot legally and, therefore, does not, own our capital stock. We do not offer any compensation plan to our employees under which equity securities of FHLBank are authorized for issuance.

Table 84 presents information on member institutions holding five percent or more of the total outstanding capital stock, which includes mandatorily redeemable capital stock, of FHLBank as of March 13, 2020. No affiliated officer or director of these stockholders currently serves on our Board of Directors.

Table 84



Member Institutions Holding 5 Percent or More Capital Stock
Borrower Name	Address	City	State	Number of Shares	Percent of Total
MidFirst Bank	501 NW Grand Blvd	Oklahoma City	OK	3,885,750	22.0	%
BOKF, NA	1 Williams Center-BOK Tower 16 SW	Tulsa	OK	3,600,000	20.4
Capitol Federal Savings Bank	700 S Kansas Ave	Topeka	KS	998,605	5.7
TOTAL				8,484,355	48.1	%

116

Additionally, because of the fact that a majority of our Board of Directors is nominated and elected from our membership (“member directors”), these member directors are officers or directors of member institutions that own our capital stock. Table 85 presents total outstanding capital stock, which includes mandatorily redeemable capital stock, held as of March 13, 2020, for member institutions whose affiliated officers or directors served as our directors as of March 13, 2020:

Table 85



Total Capital Stock Outstanding to Member Institutions whose Officers or Directors Serve as a Director
Borrower Name	Address	City	State	Number of Shares	Percent of Total
Cornhusker Bank	8310 O Street	Lincoln	NE	24,217	0.1	%
Points West Community Bank	1291 Main Street	Windsor	CO	17,915	0.1
GNBank, NA	100 E Forest	Girard	KS	15,341	0.1
Citizens Bank & Trust Co of Ardmore	1100 N Commerce Street	Ardmore	OK	9,237	0.1
FirstBank	10403 W Colfax Ave	Lakewood	CO	7,207	0.1
BancFirst	101 N Broadway Ste 200	Oklahoma City	OK	5,500	—
First National Bank of Kansas	600 N 4th Street	Burlington	KS	4,153	—
Sooner State Bank	2 SE 4th Street	Tuttle	OK	3,199	—
The Bankers Bank	9020 N May Ave Ste 200	Oklahoma City	OK	3,025	—
First Security Bank	312 Maple Street	Overbrook	KS	2,520	—
Bank of Estes Park	255 Park Lane	Estes Park	CO	1,313	—
Nebraska State Bank	218 Main Street	Oshkosh	NE	1,044	—
TOTAL				94,671	0.5	%

Item 13: Certain Relationships and Related Transactions, and Director Independence

Certain Relationships and Related Transactions

Since we are a cooperative, ownership of our capital stock is a prerequisite for our members to transact business with us. In recognition of this organizational structure, the SEC granted us an accommodation pursuant to a “no action letter,” dated May 23, 2006, which relieves us from the requirement to make disclosures under Item 404(a) of Regulation S-K for transactions with related persons, such as our members and directors, which occur in the ordinary course of business. Further, the Recovery Act codified this accommodation.

Members with beneficial ownership of more than five percent of our total outstanding capital stock and all our directors are classified as related persons under SEC regulations. Transactions with members deemed related persons of FHLBank occur in the ordinary course of our business since we conduct our advance and mortgage loan business almost exclusively with our members. Our member directors are officers or directors of members that own our capital stock and conduct business with us.

Information with respect to the directors who are officers or directors of our members is set forth under Item 10 ‑ “Directors, Executive Officers and Corporate Governance ‑ Directors.” Additional information regarding members that are beneficial owners of more than five percent of our total outstanding capital stock is provided in Item 12 ‑ “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

See Item 11 - "Executive Compensation" for a discussion of the compensation of our Named Executive Officers and directors.

We have a written “Related Person Transactions Policy” (Policy) that provides for the review and approval or ratification by our Audit Committee of any transaction with a related person that is outside the ordinary course of business. Under the Policy, transactions with related persons that are in the ordinary course of business are deemed pre-approved.

A “Related Person” under the Policy is:


▪	Any person who is, or at any time since the beginning of our last fiscal year was, a director or an executive officer of FHLBank;


▪	Any immediate family member of any of the foregoing persons and any person (other than a tenant or employee) sharing the household of such director or executive officer;


▪	Any firm, corporation, or other entity in which any of the foregoing persons is an executive officer, a general partner or principal or in a similar position; or


▪	Any member institution (or successor) of FHLBank that is known to be the beneficial owner of more than five percent of our voting securities.

117

“Ordinary course of business” is defined in the Policy as activities conducted with members, including but not limited to providing our products and services to the extent such product and service transactions are conducted on terms no more favorable than the terms of comparable transactions with similarly situated members or housing associates, as applicable, or transactions between FHLBank and a Related Person where the rates and charges involved in the transactions are subject to competitive bidding. Our products and services include: (1) credit products (i.e., line of credit, advances, forward settling advance commitments, letters of credit, standby credit facility and derivative transactions); (2) MPF Program mortgage loan products; (3) housing and CDP products; and (4) other services (i.e., deposit accounts, wire transfer services, safekeeping services and unsecured credit transactions permissible under the RMP).

Transactions outside the ordinary course of business, with Related Persons that have a direct or indirect material interest, and exceed $120,000 are subject to Audit Committee review and approval under the Policy and include situations in which: (1) we obtain products or services from a Related Person of a nature, quantity or quality, or on terms that are not readily available from alternative sources; (2) we provide products or services to a Related Person on terms not comparable to those provided to unrelated parties; or (3) the rates or charges involved in the transactions are not subject to competitive bidding.

Director Independence

Board Operating Guidelines and Nasdaq Standards: The Board Operating Guidelines of FHLBank (Guidelines), available at www.fhlbtopeka.com, require that the Board of Directors make an annual affirmative determination as to the independence of each director, as that term is defined by Rule 5605(a)(2) of the Nasdaq Marketplace Rules (the “Nasdaq Independence Standards”).

The Board of Directors has affirmatively determined that each one of its directors, both independent and member directors (each of whom is listed in Item 10 of this Form 10-K), is independent in accordance with the Nasdaq Independence Standards.

In order to assist the Board of Directors in making an affirmative determination of each director’s independence under the Nasdaq Independence Standards, the Board of Directors: (1) applied categorical standards for independence contained in the Guidelines and under the Nasdaq Independence Standards; (2) determined subjectively the independence of each director; and (3) considered the recommendation of the Audit Committee following its assessment of the independence of each director. The Board of Directors’ determination of independence under the Nasdaq Independence Standards rested upon a finding that each director has no relationship which, in the opinion of the Board of Directors, would interfere with that director’s exercise of independent judgment in carrying out the responsibilities of the director. Since under FHFA regulations, each independent director must be a bona fide resident of our district, and each member director must be an officer or director of one of our members, the Board of Directors included in its consideration whether any of these relationships would interfere with the exercise of independent judgment of a particular director.

Committee Independence

Audit Committee: In addition to the Nasdaq Independence Standards for committee members, our Audit Committee members are subject to the independence standards of the FHFA. FHFA regulations state that a director will be considered sufficiently independent to serve as an Audit Committee member if that director does not have a disqualifying relationship with FHLBank or its management that would interfere with the exercise of that director’s independent judgment. Disqualifying relationships include but are not limited to:


▪	Being employed by FHLBank in the current year or any of the past five years;


▪	Accepting compensation from FHLBank other than compensation for service as a director;


▪	Serving or having served in any of the past five years as a consultant, advisor, promoter, underwriter, or legal counsel of FHLBank; or


▪	Being an immediate family member of an individual who is, or has been in any of the past five years, employed by FHLBank as an executive officer.

In addition to the independence standards for Audit Committee members required under the FHFA regulations, Section 10A(m) of the Exchange Act sets forth the independence requirements of directors serving on the Audit Committee of a listed company under the Exchange Act. Under Section 10A(m), in order to be considered independent, a member of the Audit Committee may not, other than in his or her capacity as a member of the Board of Directors or any other Board Committee: (1) accept any consulting, advisory, or other compensation from FHLBank; or (2) be an affiliated person of FHLBank.

All members of our Audit Committee were independent under the FHFA’s audit committee independence criteria and under the independence criteria of Section 10A(m) of the Exchange Act throughout the period covered by this annual report.

The FHFA’s criteria for audit committee independence are posted on the corporate governance page of our website at www.fhlbtopeka.com. Except for the documents specifically incorporated by reference into this Annual Report on Form 10-K, information contained on our website or that can be accessed through our website is not incorporated by reference into this Annual Report on Form 10-K. Reference to our website is made as an inactive textual reference.

118

Compensation, Human Resources and Inclusion Committee: FHLBank’s Board of Directors has established a Compensation Committee. Under NASDAQ rules, in order to be considered an independent compensation committee member, the Board of Directors must affirmatively determine the independence of each director on the Compensation Committee and must consider all factors specifically relevant to determine whether a director has a relationship to FHLBank which is material to that director’s ability to be independent from management in connection with the duties of a Compensation Committee member, including the source of the compensation of the director and whether the director is affiliated with FHLBank. The Board of Directors has affirmatively determined that each member of the Compensation Committee is independent in accordance with the NASDAQ Independence Standards for compensation committee members.

Item 14: Principal Accounting Fees and Services

Prior to approving PricewaterhouseCoopers LLP as our independent accountants for 2019, the Audit Committee considered whether PricewaterhouseCoopers LLP’s provision of services other than audit services is compatible with maintaining the accountants’ independence. The Audit Committee’s policy is to pre-approve all audit, audit-related, and permissible non-audit services provided by our independent accountants. The Audit Committee pre-approved all such services provided by the independent accountants during 2019 and 2018. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent accountants and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent accountants in accordance with its pre-approval and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis.

Table 86 sets forth the aggregate fees we were billed for the years ended December 31, 2019 and 2018 by our external accounting firm, PricewaterhouseCoopers LLP (in thousands):

Table 86



	2019		2018
Audit fees	$	936	$	841
Audit-related fees	70		54
Tax fees	—		—
All other fees	1		1
TOTAL	$	1,007	$	896

Audit fees during the years ended December 31, 2019 and 2018 were for professional services rendered for the audits of our annual financial statements and review of financial statements included in our annual reports on Form 10-K and quarterly reports on Form 10‑Q.

Audit-related fees during the years ended December 31, 2019 and 2018 were for discussions regarding miscellaneous accounting-related matters.

We are assessed our proportionate share of the costs of operating the Office of Finance, which includes the expenses associated with the annual audits of the combined financial statements of the 11 FHLBanks. The audit fees for the combined financial statements are billed directly by PricewaterhouseCoopers LLP to the Office of Finance and we are assessed our proportionate share of these expenses. In 2019 and 2018, we were assessed $38,000 and $31,000, respectively, for the costs associated with PricewaterhouseCoopers LLP’s audits of the combined financial statements for those years. These assessments are not included in the table above.

Section 1433 of the Bank Act provides that we and the other FHLBanks are exempt from all federal, state and local taxation, with the exception of real property tax. Therefore, no tax consultation fees were paid during the years ended December 31, 2019 and 2018.

All other fees during the years ended December 31, 2019 and 2018 were for a license fee for an electronic disclosure checklist application.

PART IV

Item 15: Exhibits, Financial Statement Schedules


a)	The financial statements included as part of this Form 10-K are identified in the index to Audited Financial Statements appearing in Item 8 of this Form 10-K and which index is incorporated in this Item 15 by reference.


b)	Exhibits.

We have incorporated by reference certain exhibits as specified below pursuant to Rule 12b-32 under the Exchange Act.

119



Exhibit No.	Description
3.1	Exhibit 3.1 to the FHLBank’s registration statement on Form 10, filed May 15, 2006, and made effective on July 14, 2006 (File No. 000-52004) (the “Form 10 Registration Statement”), Federal Home Loan Bank of Topeka Articles and Organization Certificate, is incorporated herein by reference as Exhibit 3.1.
3.2	Exhibit 3.1 to the Current Report on Form 8-K, filed December 18, 2018, Federal Home Loan Bank of Topeka Amended and Restated Bylaws, is incorporated herein by reference as Exhibit 3.2.
4.1	Federal Home Loan Bank of Topeka Capital Plan.
4.2	Description of Securities - Supplement to the Federal Home Loan Bank of Topeka Capital Plan.
10.1^*	Exhibit 10.1 to the Current Report on Form 8-K, filed October 30, 2019, Federal Home Loan Bank of Topeka Benefit Equalization Plan, is incorporated herein by reference as Exhibit 10.1.
10.2	Exhibit 10.4 to the Form 10 Registration Statement, Federal Home Loan Bank of Topeka Office Complex Lease Agreement, is incorporated herein by reference as Exhibit 10.2.
10.2.1	Exhibit 10.4.1 to the Form 10 Registration Statement, Federal Home Loan Bank of Topeka Office Complex Lease Amendment, is incorporated herein by reference as Exhibit 10.2.1.
10.2.2	Exhibit 10.4.2 to the Form 10 Registration Statement, Federal Home Loan Bank of Topeka Office Complex Second Lease Amendment, is incorporated herein by reference as Exhibit 10.2.2.
10.2.3	Exhibit 10.2.3 to the 2013 Annual Report on Form 10-K, filed March 14, 2014, Federal Home Loan Bank of Topeka Office Complex Third Lease Amendment, is incorporated herein by reference as Exhibit 10.2.3
10.2.4	Exhibit 10.2.4 to the 2017 Annual Report on Form 10-K, filed March 15, 2018, Federal Home Loan Bank of Topeka Office Complex Fourth Lease Amendment, is incorporated herein by reference as Exhibit 10.2.4.
10.2.5	Exhibit 10.1 to the Current Report on Form 8-K, filed January 31, 2018, Federal Home Loan Bank of Topeka Office Complex Fifth Lease Amendment, is incorporated herein by reference as Exhibit 10.2.5.
10.3	Exhibit 10.3 to the 2016 Annual Report on Form 10-K, filed March 9, 2017, Federal Home Loan Bank of Topeka Form of Advance, Pledge and Security Agreement (Specific Pledge), is incorporated herein by reference as Exhibit 10.3.
10.4	Exhibit 10.4 to the 2016 Annual Report on Form 10-K, filed March 9, 2017, Federal Home Loan Bank of Topeka Form of Advance, Pledge and Security Agreement (Blanket Pledge), is incorporated herein by reference as Exhibit 10.4.
10.5	Exhibit 10.6 to the 2013 Annual Report on Form 10-K, filed March 14, 2014, Federal Home Loan Bank of Topeka Form of Confirmation of Advance, is incorporated herein by reference as Exhibit 10.5.
10.6	Exhibit 10.1 to the Current Report on Form 8-K, filed June 23, 2017, Bond Trust Indenture dated as of June 1, 2017, between Shawnee County, Kansas and BOKF, N.A., is incorporated herein by reference as Exhibit 10.6.
10.7	Exhibit 10.2 to the Current Report on Form 8-K, filed June 23, 2017, Lease Agreement dated as of June 1, 2017, between Shawnee County, Kansas and Federal Home Loan Bank of Topeka, is incorporated herein by reference as Exhibit 10.7.
10.8	Exhibit 10.3 to the Current Report on Form 8-K, filed June 23, 2017, Base Lease Agreement dated as of June 1, 2017, between Shawnee County, Kansas and Federal Home Loan Bank of Topeka, is incorporated herein by reference as Exhibit 10.8.
10.9	Exhibit 10.26 to the 2016 Annual Report on Form 10-K, filed March 9, 2017, Amended and Restated Federal Home Loan Banks P&I Funding and Contingency Plan Agreement, is incorporated herein by reference as Exhibit 10.9.
10.10^*	Exhibit 10.1 to the Current Report on Form 8-K, filed January 8, 2019, Executive Incentive Compensation Plan, is incorporated herein by reference as Exhibit 10.10.
10.11^*	Exhibit 10.2 to the Current Report on Form 8-K, filed January 21, 2016, Federal Home Loan Bank of Topeka 2015 Executive Incentive Compensation Plan Targets, is incorporated herein by reference as Exhibit 10.11.
10.12^*	Exhibit 10.16 to the 2015 Annual Report on Form 10-K, filed March 10, 2016, Federal Home Loan Bank of Topeka 2016 Executive Incentive Compensation Plan Targets, is incorporated herein by reference as Exhibit 10.12.
10.13^*	Exhibit 10.1 to the Current Report on Form 8-K, filed February 15, 2017, Federal Home Loan Bank of Topeka 2017 Executive Incentive Compensation Plan Targets, is incorporated herein by reference as Exhibit 10.13.
10.14^*	Exhibit 10.1 to the Current Report on Form 8-K, filed January 22, 2018, Federal Home Loan Bank of Topeka 2018 Executive Incentive Compensation Plan Targets, is incorporated herein by reference as Exhibit 10.14.
10.15^*	Exhibit 10.2 to the Current Report on Form 8-K, filed January 8, 2019, Federal Home Loan Bank of Topeka 2019 Executive Incentive Compensation Plan Targets, is incorporated herein by reference as Exhibit 10.15.
10.16^*	Exhibit 10.1 to the Current Report on Form 8-K, filed February 6, 2020, Federal Home Loan Bank of Topeka 2020 Executive Incentive Compensation Plan Targets, is incorporated herein by reference as Exhibit 10.16.
10.17^*	Exhibit 10.1 to the Current Report on Form 8-K, filed July 20, 2015, Federal Home Loan Bank of Topeka Change in Control Plan, is incorporated herein by reference as Exhibit 10.17.
10.18^*	Exhibit 10.1 to the Current Report on Form 8-K, filed August 1, 2018, Federal Home Loan Bank of Topeka Executive Officer Severance Policy, is incorporated herein by reference as Exhibit 10.18.

120



Exhibit No.	Description
10.19^*	Exhibit 10.1 to the Current Report on Form 8-K, filed October 4, 2018 Federal Home Loan Bank of Topeka 2019 Board of Directors Compensation Policy, is incorporated herein by reference as Exhibit 10.19.
10.20^*	Exhibit 10.1 to the Current Report on Form 8-K, filed November 19, 2019 Federal Home Loan Bank of Topeka 2020 Board of Directors Compensation Policy, is incorporated herein by reference as Exhibit 10.20.
10.21^*	Exhibit 10.1 to the Current Report on Form 8-K, filed June 30, 2016, Form of Director Indemnification Agreement, is incorporated herein by reference as Exhibit 10.21.
10.22^*	Exhibit 10.2 to the Current Report on Form 8-K, filed June 30, 2016, Form of Officer Indemnification Agreement, is incorporated herein by reference as Exhibit 10.22.
10.23^***	Exhibit 10.24 to the 2017 Annual Report on Form 10-K, filed March 15, 2018, Federal Home Loan Bank of Topeka 2015 Non-NEO Executive Incentive Compensation Plan Targets, is incorporated herein by reference as Exhibit 10.23.
10.24^***	Exhibit 10.25 to the 2017 Annual Report on Form 10-K, filed March 15, 2018, Federal Home Loan Bank of Topeka 2016 Non-NEO Executive Incentive Compensation Plan Targets, is incorporated herein by reference as Exhibit 10.24.
14.1	Exhibit 14.1 to the 2017 Annual Report on Form 10-K, filed March 15, 2018, Federal Home Loan Bank of Topeka Code of Ethics, is incorporated herein by reference as Exhibit 14.1.
24.1	Power of Attorney.
31.1	Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Senior Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification of President and Principal Executive Officer and Senior Vice President and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1	Exhibit 99.1 to the 2018 Annual Report on Form 10-K, filed March 18, 2019, Federal Home Loan Bank of Topeka Audit Committee Charter, is incorporated herein by reference as Exhibit 99.1.
99.2	Federal Home Loan Bank of Topeka Audit Committee Report.
101.INS^**	XBRL Instance Document
101.SCH^**	XBRL Taxonomy Extension Schema Document
101.CAL^**	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB^**	XBRL Taxonomy Extension Label Linkbase Document
101.PRE^**	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF^**	XBRL Taxonomy Extension Definition Linkbase Document


^*	Represents a management contract or a compensatory plan or arrangement.


^**	The financial information contained in these XBRL documents is unaudited.


^***	FHLBank has requested confidential treatment of the redacted portions of this exhibit pursuant to Rule 246-2 under the Exchange Act.

Item 16: Form 10-K Summary

None.

121

SIGNATURES

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



	Federal Home Loan Bank of Topeka


March 20, 2020	By: /s/ Mark E. Yardley
Date	Mark E. Yardley
	President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the dates indicated.



Signature	Title	Date

/s/Mark E. Yardley	President and Chief Executive Officer	March 20, 2020
Mark E. Yardley	(principal executive officer)

/s/William W. Osborn	Senior Vice President and Chief Financial Officer	March 20, 2020
William W. Osborn	(principal financial officer)

/s/Denise L. Cauthon	Senior Vice President and Chief Accounting Officer	March 20, 2020
Denise L. Cauthon	(principal accounting officer)

/s/G. Bridger Cox¹	Chair of the Board of Directors	March 20, 2020
G. Bridger Cox

/s/Robert E. Caldwell, II¹	Vice Chair of the Board of Directors	March 20, 2020
Robert E. Caldwell, II

/s/ Donald R. Abernathy, Jr.¹	Director	March 20, 2020
Donald R. Abernathy, Jr.

/s/Milroy A. Alexander¹	Director	March 20, 2020
Milroy A. Alexander

/s/Holly Johnson¹	Director	March 20, 2020
Holly Johnson

/s/Lynn Katzfey¹	Director	March 20, 2020
Lynn Katzfey

/s/Jane C. Knight¹	Director	March 20, 2020
Jane C. Knight

/s/Barry Lockard¹	Director	March 20, 2020
Barry Lockard

122



/s/Richard S. Masinton¹	Director	March 20, 2020
Richard S. Masinton

/s/Neil F. M. McKay¹	Director	March 20, 2020
Neil F. M. McKay

/s/Craig A. Meader¹	Director	March 20, 2020
Craig A. Meader

/s/L. Kent Needham¹	Director	March 20, 2020
L. Kent Needham

/s/Mark J. O’Connor¹	Director	March 20, 2020
Mark J. O’Connor

/s/Thomas H. Olson, Jr.¹	Director	March 20, 2020
Thomas H. Olson, Jr.

/s/Mark W. Schifferdecker¹	Director	March 20, 2020
Mark W. Schifferdecker

/s/Douglas E. Tippens¹	Director	March 20, 2020
Douglas E. Tippens

/s/Gregg L. Vandaveer¹	Director	March 20, 2020
Gregg L. Vandaveer


¹	Pursuant to Power of Attorney

123

Management’s Report on Internal Control over Financial Reporting

Management of the Federal Home Loan Bank of Topeka (FHLBank) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. The FHLBank’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the FHLBank’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the FHLBank are being made only in accordance with authorizations of the FHLBank’s management and board of directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the FHLBank’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management of the FHLBank assessed the effectiveness of the FHLBank’s internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). Based on this evaluation under the COSO framework, management has concluded that the FHLBank’s internal control over financial reporting was effective as of December 31, 2019.

The effectiveness of the FHLBank’s internal control over financial reporting as of December 31, 2019 has been audited by PricewaterhouseCoopers LLP, the FHLBank’s independent registered public accounting firm, as stated in their accompanying report.

/s/Mark E. Yardley

Mark E. Yardley

President and Chief Executive Officer

/s/William W. Osborn

William W. Osborn

Senior Vice President and Chief Financial Officer

F-1

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of the

Federal Home Loan Bank of Topeka

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying statements of condition of the Federal Home Loan Bank of Topeka (the “FHLBank”) as of December 31, 2019 and 2018, and the related statements of income, of comprehensive income, of capital and of cash flows for each of the three years in the period ended December 31, 2019, including the related notes (collectively referred to as the “financial statements”). We also have audited the FHLBank's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the FHLBank as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the FHLBank maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The FHLBank's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the FHLBank’s financial statements and on the FHLBank's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the FHLBank in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

F-2

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Kansas City, Missouri

March 20, 2020

We have served as the FHLBank’s auditor since 1990.

F-3



FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF CONDITION
(In thousands, except par value)
	12/31/2019		12/31/2018
ASSETS
Cash and due from banks (Note 3)	$	1,917,166	$	15,060
Interest-bearing deposits	921,453		670,660
Securities purchased under agreements to resell (Note 12)	4,750,000		1,251,096
Federal funds sold	850,000		50,000

Investment securities:
Trading securities (Note 4)	2,812,562		2,151,113
Available-for-sale securities (Note 4)	7,182,500		1,725,640
Held-to-maturity securities¹ (Note 4)	3,569,958		4,456,873
Total investment securities	13,565,020		8,333,626

Advances (Notes 5, 7, 18)	30,241,315		28,730,113
Mortgage loans held for portfolio, net of allowance for credit losses of $985 and $812 (Notes 6, 7, 18)	10,633,009		8,410,462
Accrued interest receivable	143,765		109,366
Derivative assets, net (Notes 8, 12)	154,804		36,095
Other assets (Note 17)	100,122		108,778

TOTAL ASSETS	$	63,276,654	$	47,715,256

LIABILITIES
Deposits (Notes 9, 18)	$	790,640	$	473,820

Consolidated obligations, net:
Discount notes (Notes 10, 17)	27,447,911		20,608,332
Bonds (Notes 10, 17)	32,013,314		23,966,394
Total consolidated obligations, net	59,461,225		44,574,726

Mandatorily redeemable capital stock (Note 13)	2,415		3,597
Accrued interest payable	117,580		87,903
Affordable Housing Program payable (Note 11)	43,027		43,081
Derivative liabilities, net (Notes 8, 12)	202		7,884
Other liabilities (Notes 15, 17)	70,514		69,993

TOTAL LIABILITIES	60,485,603		45,261,004

Commitments and contingencies (Note 17)

¹Fair value: $3,556,938 and $4,447,078 as of December 31, 2019 and 2018, respectively.

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

F-4



FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF CONDITION
(In thousands, except par value)
	12/31/2019		12/31/2018
CAPITAL
Capital stock outstanding - putable:
Class A ($100 par value; 4,476 and 2,473 shares issued and outstanding) (Notes 13, 18)	$	447,610	$	247,361
Class B ($100 par value; 13,188 and 12,772 shares issued and outstanding) (Notes 13, 18)	1,318,846		1,277,176
Total capital stock	1,766,456		1,524,537

Retained earnings:
Unrestricted	765,295		716,555
Restricted (Note 13)	234,514		197,467
Total retained earnings	999,809		914,022

Accumulated other comprehensive income (loss) (Note 14)	24,786		15,693

TOTAL CAPITAL	2,791,051		2,454,252

TOTAL LIABILITIES AND CAPITAL	$	63,276,654	$	47,715,256

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

F-5



FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF INCOME
(In thousands)
	Year Ended December 31,
	2019			2018			2017
INTEREST INCOME:
Interest-bearing deposits	$	19,801		$	14,957		$	4,204
Securities purchased under agreements to resell	104,397			71,298			23,937
Federal funds sold	32,834			40,306			27,994
Trading securities (Note 4)	87,534			72,659			60,048
Available-for-sale securities (Note 4)	116,866			46,154			24,364
Held-to-maturity securities (Note 4)	105,099			116,189			73,692
Advances (Note 5)	716,199			637,203			402,071
Mortgage loans held for portfolio (Note 6)	304,582			256,698			214,388
Other	1,440			1,545			1,280
Total interest income	1,488,752			1,257,009			831,978

INTEREST EXPENSE:
Deposits (Note 9)	9,820			8,912			3,371
Consolidated obligations:
Discount notes (Note 10)	532,155			451,380			237,019
Bonds (Note 10)	689,275			524,255			320,895
Mandatorily redeemable capital stock (Note 13)	139			229			195
Other	1,299			1,036			490
Total interest expense	1,232,688			985,812			561,970

NET INTEREST INCOME	256,064			271,197			270,008
Provision (reversal) for credit losses on mortgage loans (Note 7)	387			27			(186		)
NET INTEREST INCOME AFTER LOAN LOSS PROVISION (REVERSAL)	255,677			271,170			270,194

OTHER INCOME (LOSS):
Net gains (losses) on trading securities (Note 4)	70,261			(21,910		)	6,914
Net gains (losses) on sale of held-to-maturity securities (Note 4)	(46		)	1,591			—
Net gains (losses) on derivatives and hedging activities (Note 8)	(57,623		)	(3,191		)	(1,245		)
Standby bond purchase agreement commitment fees	2,283			2,864			4,492
Letters of credit fees	4,832			4,384			3,820
Other	3,266			3,415			2,006
Total other income (loss)	22,973			(12,847		)	15,987

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

F-6



FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF INCOME
(In thousands)
	Year Ended December 31,
	2019		2018		2017
OTHER EXPENSES:
Compensation and benefits (Note 15)	$	37,848	$	37,673	$	37,889
Other operating (Note 17)	19,519		18,729		17,019
Federal Housing Finance Agency	3,460		2,956		2,909
Office of Finance	3,700		3,207		3,052
Other	8,289		6,543		6,167
Total other expenses	72,816		69,108		67,036

INCOME BEFORE ASSESSMENTS	205,834		189,215		219,145

Affordable Housing Program (Note 11)	20,597		18,944		21,934

NET INCOME	$	185,237	$	170,271	$	197,211

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

F-7



FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
	Year Ended December 31,
	2019		2018			2017
Net income	$	185,237	$	170,271		$	197,211

Other comprehensive income (loss):
Net unrealized gains (losses) on available-for-sale securities	7,720		(12,138		)	21,861
Net non-credit portion of other-than-temporary impairment losses on held-to-maturity securities	—		4,163			1,678
Defined benefit pension plan	1,373		(1,990		)	1,542
Total other comprehensive income (loss)	9,093		(9,965		)	25,081

TOTAL COMPREHENSIVE INCOME	$	194,330	$	160,306		$	222,292

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

F-8



FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF CAPITAL
(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																157,768			39,443		197,211			25,081			222,292
Proceeds from issuance of capital stock	19		1,882			18,154		1,815,441			18,173		1,817,323														1,817,323
Repurchase/redemption of capital stock	(7,137	)	(713,680		)	(20	)	(2,034		)	(7,157	)	(715,714		)												(715,714		)
Net reclassification of shares to mandatorily redeemable capital stock	(1,396	)	(139,632		)	(6,403	)	(640,347		)	(7,799	)	(779,979		)												(779,979		)
Net transfer of shares between Class A and Class B	9,244		924,421			(9,244	)	(924,421		)	—		—														—
Dividends on capital stock (Class A - 1.1%, Class B - 6.5%):
Cash payment																(267		)			(267		)				(267		)
Stock issued						917		91,734			917		91,734			(91,734		)			(91,734		)				—
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																136,217			34,054		170,271			(9,965		)	160,306
Proceeds from issuance of capital stock	16		1,541			16,537		1,653,706			16,553		1,655,247														1,655,247
Repurchase/redemption of capital stock	(8,176	)	(817,568		)	(91	)	(9,121		)	(8,267	)	(826,689		)												(826,689		)
Net reclassification of shares to mandatorily redeemable capital stock	(2,045	)	(204,456		)	(8,359	)	(835,860		)	(10,404	)	(1,040,316		)												(1,040,316		)
Net transfer of shares between Class A and Class B	10,327		1,032,710			(10,327	)	(1,032,710		)	—		—														—
Dividends on capital stock (Class A - 1.8%, Class B - 7.0%):
Cash payment																(399		)			(399		)				(399		)
Stock issued						963		96,256			963		96,256			(96,256		)			(96,256		)				—
Balance at December 31, 2018	2,473		$	247,361		12,772		$	1,277,176		15,245		$	1,524,537		$	716,555		$	197,467	$	914,022		$	15,693		$	2,454,252
Comprehensive income																148,190			37,047		185,237			9,093			194,330
Proceeds from issuance of capital stock	18		1,804			14,039		1,403,916			14,057		1,405,720														1,405,720
Repurchase/redemption of capital stock	(7,130	)	(713,027		)	(2,661	)	(266,112		)	(9,791	)	(979,139		)												(979,139		)
Net reclassification of shares to mandatorily redeemable capital stock	(1,387	)	(138,681		)	(1,452	)	(145,150		)	(2,839	)	(283,831		)												(283,831		)
Net transfer of shares between Class A and Class B	10,502		1,050,153			(10,502	)	(1,050,153		)	—		—														—
Dividends on capital stock (Class A - 2.4%, Class B - 7.5%):
Cash payment																(281		)			(281		)				(281		)
Stock issued						992		99,169			992		99,169			(99,169		)			(99,169		)				—
Balance at December 31, 2019	4,476		$	447,610		13,188		$	1,318,846		17,664		$	1,766,456		$	765,295		$	234,514	$	999,809		$	24,786		$	2,791,051

¹Putable

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

F-9



FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF CASH FLOWS
(In thousands)
	Year Ended December 31,
	2019			2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	185,237		$	170,271		$	197,211
Adjustments to reconcile income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization:
Premiums and discounts on consolidated obligations, net	(10,559		)	2,467			9,475
Concessions on consolidated obligations	12,376			5,448			5,406
Premiums and discounts on investments, net	10,567			3,644			3,869
Premiums, discounts and commitment fees on advances, net	(1,606		)	(4,698		)	(6,002		)
Premiums, discounts and deferred loan costs on mortgage loans, net	29,566			18,116			21,626
Fair value adjustments on hedged assets or liabilities	3,385			1,453			4,464
Premises, software and equipment	3,127			2,975			2,282
Other	334			399			657
Provision (reversal) for credit losses on mortgage loans	387			27			(186		)
Non-cash interest on mandatorily redeemable capital stock	137			227			193
Net realized (gains) losses on sale of held-to-maturity securities	46			(1,591		)	—
Net other-than-temporary impairment losses on held-to-maturity securities	—			26			468
Net realized (gains) losses on sale of premises and equipment	(2		)	(880		)	82
Other adjustments	(188		)	(382		)	(212		)
Net (gains) losses on trading securities	(70,261		)	21,910			(6,914		)
Net change in derivatives and hedging activities	(107,537		)	13,961			16,670
(Increase) decrease in accrued interest receivable	(34,587		)	(23,913		)	(17,175		)
Change in net accrued interest included in derivative assets	(1,247		)	(6,616		)	(131		)
(Increase) decrease in other assets	3,135			590			(3,200		)
Increase (decrease) in accrued interest payable	29,475			31,949			6,341
Change in net accrued interest included in derivative liabilities	4,700			(4,272		)	(1,944		)
Increase (decrease) in Affordable Housing Program liability	(54		)	76			9,763
Increase (decrease) in other liabilities	933			(2,388		)	(284		)
Total adjustments	(127,873		)	58,528			45,248
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES	57,364			228,799			242,459

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

F-10



FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF CASH FLOWS
(In thousands)
	Year Ended December 31,
	2019			2018			2017
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing deposits	$	(428,403	)	$	(227,101	)	$	(8,879	)
Net (increase) decrease in securities purchased under resale agreements	(3,498,904		)	1,910,350			(761,446		)
Net (increase) decrease in Federal funds sold	(800,000		)	1,125,000			1,550,000
Proceeds from sale of trading securities	19,184			—			—
Proceeds from maturities of and principal repayments on trading securities	3,269,002			4,179,361			2,000,288
Purchases of trading securities	(3,879,375		)	(3,482,969		)	(2,360,000		)
Proceeds from maturities of and principal repayments on available-for-sale securities	11,846			18,793			6,027
Purchases of available-for-sale securities	(5,329,326		)	(281,489		)	(399,437		)
Proceeds from sale of held-to-maturity securities	9,442			87,827			—
Proceeds from maturities of and principal repayments on held-to-maturity securities	875,027			942,637			1,099,083
Purchases of held-to-maturity securities	—			(625,170		)	(1,483,101		)
Advances repaid	322,056,867			392,375,489			522,851,282
Advances originated	(323,451,173		)	(394,828,014		)	(525,215,855		)
Principal collected on mortgage loans	1,676,691			922,423			947,143
Purchases of mortgage loans	(3,927,543		)	(2,070,971		)	(1,616,044		)
Proceeds from sale of foreclosed assets	2,378			5,038			2,455
Purchases of other long-term assets	—			(6,000		)	(29,000		)
Other investing activities	3,120			2,884			2,538
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	(1,576		)	(9,282		)	(30,119		)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES	(13,392,743		)	41,222			(2,845,017		)

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

F-11



FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF CASH FLOWS
(In thousands)
	Year Ended December 31,
	2019			2018			2017
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits	$	239,562		$	48,856		$	(107,106	)
Net proceeds from issuance of consolidated obligations:
Discount notes	818,115,910			1,036,653,023			937,784,053
Bonds	24,700,487			10,832,505			18,002,624
Payments for maturing and retired consolidated obligations:
Discount notes	(811,278,050		)	(1,036,479,071		)	(939,161,380		)
Bonds	(16,686,500		)	(11,368,440		)	(14,191,615		)
Net increase (decrease) in other borrowings	—			6,000			29,000
Proceeds from financing derivatives	3,329			—			3,227
Net interest payments received (paid) for financing derivatives	1,597			(1,785		)	(19,261		)
Proceeds from issuance of capital stock	1,405,720			1,655,247			1,817,323
Payments for repurchase/redemption of capital stock	(979,139		)	(826,689		)	(715,714		)
Payments for repurchase of mandatorily redeemable capital stock	(285,150		)	(1,042,258		)	(777,530		)
Cash dividends paid	(281		)	(399		)	(267		)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES	15,237,485			(523,011		)	2,663,354
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	1,902,106			(252,990		)	60,796
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	15,060			268,050			207,254
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	1,917,166		$	15,060		$	268,050

Supplemental disclosures:
Interest paid	$	1,202,135		$	948,392		$	535,268
Affordable Housing Program payments	$	20,973		$	19,027		$	12,752
Net transfers of mortgage loans to other assets	$	771		$	3,768		$	2,218

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

F-12

FEDERAL HOME LOAN BANK OF TOPEKA

Notes to Financial Statements

For the years ended December 31, 2019, 2018 and 2017

BACKGROUND INFORMATION

The Federal Home Loan Bank of Topeka (FHLBank or FHLBank Topeka), a federally chartered corporation, is one of 11 district Federal Home Loan Banks (FHLBanks). The FHLBanks are government-sponsored enterprises (GSE) that were organized under the Federal Home Loan Bank Act of 1932, as amended (Bank Act), to serve the public by enhancing the availability of credit for residential mortgages and targeted community development and provide a readily available, competitively-priced source of funds to their members. The FHLBank is a cooperative whose member institutions own substantially all of the outstanding capital stock of the FHLBank and generally receive dividends on their stock investments. Regulated financial depositories, insurance companies and community development financial institutions engaged in residential housing finance whose principal place of business is located in Colorado, Kansas, Nebraska or Oklahoma are eligible to apply for membership. State and local housing authorities that meet certain statutory requirements may become housing associates of the FHLBank and also be eligible to borrow from the FHLBank. While eligible to borrow, housing associates are not members of the FHLBank and therefore are not permitted or required to hold capital stock.

All members are required to purchase stock in the FHLBank located in their district in accordance with the capital plan of that particular FHLBank. Under FHLBank Topeka’s capital plan, members must own capital stock in the FHLBank based on the amount of their total assets. Each member is also required to purchase activity-based capital stock as it engages in certain business activities with the FHLBank, including advances. Former members that still have outstanding business transactions with the FHLBank are also required to maintain their investments in FHLBank capital stock until the transactions mature or are paid off. As a result of these requirements, the FHLBank conducts business with members in the ordinary course of its business. For financial reporting purposes, the FHLBank defines related parties as those members: (1) with investments in excess of 10 percent of the FHLBank’s total regulatory capital stock outstanding, which includes mandatorily redeemable capital stock; or (2) with an officer or director serving on the FHLBank’s board of directors. See Note 18 for more information on related party transactions.

The FHLBanks are supervised and regulated by the Federal Housing Finance Agency (FHFA), an independent agency in the executive branch of the U.S. government. The FHFA’s stated mission is to ensure that the housing GSEs operate in a safe and sound manner so that they serve as a reliable source of liquidity and funding for housing finance and community investment. Each FHLBank is operated as a separate entity and has its own management, employees and board of directors. The FHLBanks do not have any special purpose entities or any other type of off-balance sheet conduits.

The FHLBanks have established a joint office called the Office of Finance to facilitate the issuance and servicing of the debt instruments of the FHLBanks, known as consolidated obligation bonds and consolidated obligation discount notes (collectively referred to as consolidated obligations) and to prepare the combined quarterly and annual financial reports of the FHLBanks. As provided by the Bank Act and applicable regulations, consolidated obligations are backed only by the financial resources of the FHLBanks. Consolidated obligations are the primary source of funds for the FHLBanks in addition to deposits, other borrowings and capital stock issued to members. The FHLBank primarily uses these funds to provide advances to members and to acquire mortgage loans from members through the Mortgage Partnership Finance^® (MPF^®) Program. "Mortgage Partnership Finance" and "MPF" are registered trademarks of the FHLBank of Chicago. In addition, the FHLBank also offers correspondent services such as wire transfer, security safekeeping and settlement services.

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation: The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).

Reclassifications: Presentation of cash flow amounts in the prior period have been reclassified to reflect short-term trading securities purchases and proceeds on a gross, rather than net, basis. Certain other immaterial amounts in the financial statements have been reclassified to conform to current period presentations.

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Use of Estimates: The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (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 and the fair value of derivatives. 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.

Fair Values: The fair value amounts, recorded on the Statements of Condition and presented in the note disclosures for the periods presented, have been determined by the FHLBank using available market and other pertinent information and reflect the FHLBank’s best judgment of appropriate valuation methods. Although the FHLBank uses its best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any valuation technique. Therefore, these fair values may not be indicative of the amounts that would have been realized in market transactions at the reporting dates. See Note 16 for more information.

Financial Instruments Meeting Netting Requirements: The FHLBank presents certain financial instruments, including derivatives, repurchase agreements and securities purchased under agreements to resell, on a net basis when it has a legal right of offset and all other requirements for netting are met (collectively referred to as the netting requirements). For these financial instruments, the FHLBank has elected to offset its asset and liability positions, as well as cash collateral received or pledged, when it has met the netting requirements. The net exposure for these financial instruments can change on a daily basis; therefore, there may be a delay between the time this exposure change is identified and additional collateral is requested and the time when this collateral is received or pledged. Likewise, there may be a delay for excess collateral to be returned. For derivative instruments that meet the netting requirements, any excess cash collateral received or pledged is recognized as a derivative liability or derivative asset. See Notes 8 and 12 for additional information.

Cash Flows: For purposes of the Statements of Cash Flows, the FHLBank considers cash on hand and non-interest-bearing deposits in banks as cash and cash equivalents.

Interest-bearing Deposits, Securities Purchased Under Agreements to Resell and Federal Funds Sold: Interest-bearing deposits, securities purchased under agreements to resell and Federal funds sold provide short-term liquidity and are carried at cost. The FHLBank treats securities purchased under agreements to resell as short-term collateralized loans, which are classified as assets on the Statements of Condition. If the fair value of the underlying securities decreases below the fair value required as collateral, the counterparty has the option to: (1) place an equivalent amount of additional securities in safekeeping in the FHLBank’s name; or (2) remit an equivalent amount of cash; otherwise, the dollar value of the resale agreement will be decreased accordingly. Federal funds sold consist of short-term unsecured loans generally transacted with counterparties that are considered by the FHLBank to be of investment quality.

Investment Securities: The FHLBank classifies investments as trading, available-for-sale and held-to-maturity at the date of acquisition. Purchases and sales of securities are recorded on a trade date basis.

Trading: Securities classified as trading are either: (1) held for liquidity purposes; (2) economically swapped and classified as trading to provide a fair value offset to the gains (losses) on the interest rate swaps tied to the securities; or (3) acquired as asset/liability management tools and carried at fair value. The FHLBank records changes in the fair value of these securities through other income (loss) as net gains (losses) on trading securities. FHFA regulation and the FHLBank’s Risk Management Policy (RMP) prohibit trading in or the speculative use of these instruments and limits credit risk arising from these instruments. While the FHLBank classifies certain securities as trading for financial reporting purposes, it does not actively trade any of these securities with the intent of realizing gains and holds these investments indefinitely as management periodically evaluates its asset/liability and liquidity needs. Short-term money market investments with maturities of three months or less are acquired and classified as trading securities primarily for liquidity purposes. These short-term money market investments are periodically sold to meet the FHLBank’s cash flow needs. The FHLBank might also sell mortgage-backed securities (MBS) held in its trading portfolio to reduce its London Interbank Offered Rate (LIBOR) exposure.

Available-for-Sale: Securities that are not classified as trading or held-to-maturity are classified as available-for-sale and are carried at fair value. The change in fair value of available-for-sale securities is recorded in other comprehensive income (loss) (OCI) as net unrealized gains (losses) on available-for-sale securities. Beginning January 1, 2019, the FHLBank adopted new hedge accounting guidance, which, among other things, impacts the presentation of gains (losses) on derivatives and hedging activities for qualifying hedges, including fair value hedges of available-for-sale securities. For available-for-sale securities in hedge relationships that qualify as fair value hedges, the FHLBank records the portion of the change in the fair value of the investment related to the risk being hedged in available-for-sale interest income together with the related change in the fair value of the derivative, and records the remainder of the change in the fair value of the investment in OCI as net unrealized gains (losses) on available-for-sale securities.

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Prior to January 1, 2019, for available-for-sale securities in hedge relationships that qualified as fair value hedges, the FHLBank recorded the portion of the change in the fair value of the investment related to the risk being hedged in non-interest income as net gains (losses) on derivatives and hedging activities together with the related change in the fair value of the derivative, and recorded the remainder of the change in the fair value of the investment in OCI as net unrealized gains (losses) on available-for-sale securities.

Held-to-Maturity: Securities that the FHLBank has both the ability and intent to hold to maturity are classified as held-to-maturity and are carried at cost, adjusted for periodic principal repayments, amortization of premiums, and accretion of discounts.

Certain changes in circumstances may cause the FHLBank to change its intent to hold a security to maturity without calling into question its intent to hold other debt securities to maturity in the future, including: (1) evidence of a significant deterioration in the issuer’s creditworthiness; (2) a change in statutory or regulatory requirements significantly modifying either what constitutes a permissible investment or the maximum level of investments in certain kinds of investments, thereby causing the FHLBank to dispose of a held-to-maturity investment; (3) a significant increase by a regulator in the FHLBank’s capital requirements that causes the FHLBank to downsize by selling held-to-maturity investments; or (4) a significant increase in the risk weights of debt securities used for regulatory risk-based capital purposes. The FHLBank considers the following situations to be a maturity for purposes of assessing ability and intent to hold to maturity:


▪	The sale of the security is near enough to maturity (for example, within three months of maturity), or call date if exercise of the call is probable that interest rate risk is substantially eliminated as a pricing factor and the changes in market interest rates would not have a significant effect on the security’s fair value; or


▪	The sale of a security occurs after the FHLBank has already collected a substantial portion (at least 85 percent) of the principal outstanding at acquisition either due to prepayments on the debt security or to scheduled payments on a debt security payable in equal installments (both principal and interest) over its term.

Premiums and Discounts: The FHLBank computes the amortization of purchased premiums and accretion of purchased discounts on MBS using the level-yield method over the estimated cash flows of the securities. This method requires a retrospective adjustment of the effective yield each time the FHLBank receives a principal repayment or changes the estimated remaining cash flows as if the actual principal repayments and new estimated cash flows had been known since the original acquisition dates of the securities. The FHLBank computes the amortization of premiums and accretion of discounts on other investments using the level-yield method to the contractual maturities of the securities.

Gains and Losses on Sales: Gains and losses on the sales of investment securities are computed using the specific identification method and are included in other income (loss).

Advances: The FHLBank presents advances (secured loans to members, former members or housing associates) net of unearned commitment fees, premiums, discounts and fair value basis adjustments. The FHLBank amortizes the premiums and accretes the discounts on advances to interest income using the level-yield method. The FHLBank records interest on advances to interest income as earned.

Advance Modifications: In cases in which the FHLBank funds a new advance concurrently with or within a short period of time before or after the prepayment of an existing advance, the FHLBank evaluates whether the new advance meets the accounting criteria to qualify as a modification of an existing advance or whether it constitutes a new advance. The FHLBank compares the present value of cash flows on the new advance to the present value of cash flows remaining on the existing advance. If there is at least a 10 percent difference in the cash flows or if the FHLBank concludes the differences between the advances are more than minor based on qualitative factors, the advance is accounted for as a new advance. In all other instances, the new advance is accounted for as a modification.

Prepayment Fees: The FHLBank charges a borrower a prepayment fee when the borrower prepays certain advances before the original maturity. The FHLBank records prepayment fees net of basis adjustments related to hedging activities included in the carrying value of the advance as advance interest income in the Statements of Income.

If a new advance does not qualify as a modification of an existing advance, the existing advance is treated as an advance termination and any prepayment fee, net of hedging adjustments, is recorded to advance interest income in the Statements of Income.

If a new advance qualifies as a modification of an existing advance, any prepayment fee, net of hedging adjustments, is deferred, recorded in the basis of the modified advance, and amortized using a level-yield methodology over the life of the modified advance to advance interest income. If the modified advance is hedged and meets hedge accounting requirements, the modified advance is marked to benchmark or full fair value, depending on the risk being hedged, and subsequent fair value changes that are attributable to the hedged risk are recorded in advance interest income effective January 1, 2019. Prior to January 1, 2019, subsequent fair value changes were recorded in non-interest income as net gains (losses) on derivatives and hedging activities.

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Mortgage Loans Held for Portfolio: The FHLBank carries mortgage loans classified as held for investment at their principal amount outstanding, net of unamortized premiums, unaccreted discounts, deferred loan fees associated with table funded loans, hedging adjustments, unrealized gains and losses from mortgage purchase commitments, charge-offs, and other fees. The FHLBank has the intent and ability to hold these mortgage loans to maturity.

Premiums and Discounts: The FHLBank defers and amortizes/accretes mortgage loan origination fees (agent fees) and premiums and discounts paid to and received from participating financial institutions (PFI) as interest income using the level-yield method over the contractual lives of the loans. This method uses the cash flows required by the loan contracts, as adjusted for actual prepayments, to apply the interest method. The contractual method does not utilize estimates of future prepayments of principal.

Credit Enhancement Fees: The credit enhancement obligation (CE obligation) is an obligation on the part of the PFI that ensures the retention of credit risk on loans it originates on behalf of or sells to the FHLBank. The amount of the CE obligation is determined at the time of purchase so that any losses in excess of the CE obligation for each pool of mortgage loans purchased approximate those experienced by an investor in either a double-A or triple-B rated MBS. As a part of the methodology used to determine the amount of credit enhancement necessary, the FHLBank analyzes the risk characteristics of each mortgage loan using a model licensed from a Nationally Recognized Statistical Rating Organization (NRSRO). The FHLBank uses the model to evaluate loan data provided by the PFI as well as other relevant information.

The FHLBank pays the PFI a credit enhancement fee (CE fee) for managing this portion of the credit risk in the pool of loans. CE fees are paid monthly based on the remaining unpaid principal balance (UPB) of the loans in a master commitment, or a one-time upfront CE fee is paid at purchase. The upfront CE fee is based upon the present value of the monthly CE fee payments, with consideration for expected prepayments, and amortized as interest income using the level-yield method over the contractual lives of the loans. The required CE obligation amount may vary depending on the various product alternatives selected by the PFI. CE fees are recorded as an offset to mortgage loan interest income. To the extent the FHLBank experiences a loss in a master commitment, the FHLBank may be able to recapture future performance-based CE fees paid to the PFIs to offset these losses.

Other Fees: The FHLBank may receive other non-origination fees, such as delivery commitment extension fees and pair-off fees as part of the mark-to-market on derivatives to which they are related or as part of the loan basis, as applicable. Delivery commitment extension fees are received when a PFI requires an extension of the delivery commitment period beyond the original stated expiration. These fees compensate the FHLBank for lost interest as a result of late funding and represent the member purchasing a derivative from the FHLBank. Pair-off fees are received from the PFI when the amount funded is more than or less than a specific percentage range of the delivery commitment amount. These fees compensate the FHLBank for hedge costs associated with the under-delivery or over-delivery. To the extent that pair off fees relate to under-deliveries of loans, they are included in the mark-to-market of the related delivery commitment derivative. If they relate to over-deliveries, they represent purchase price adjustments to the related loans acquired and are recorded as a part of the carrying value of the loan.

Allowance for Credit Losses: An allowance for credit losses is a valuation allowance separately established for each identified portfolio segment, if necessary, to provide for probable losses inherent in the FHLBank’s portfolios as of the Statement of Condition date. A mortgage loan is considered impaired when, based on current information and events, it is probable that the FHLBank will be unable to collect all amounts due according to the contractual terms of the mortgage loan agreement. To the extent necessary, an allowance for credit losses for off-balance sheet credit exposures is recorded as a liability. See Note 7 for details on each allowance methodology.

Portfolio Segments: A portfolio segment is defined as the level at which an entity develops and documents a systematic methodology for determining its allowance for credit losses. The FHLBank has developed and documented a systematic methodology for determining an allowance for credit losses, where applicable, for: (1) credit products (advances, letters of credit and other extensions of credit to members); (2) government-guaranteed or -insured mortgage loans held for portfolio; (3) conventional mortgage loans held for portfolio; (4) the direct financing lease receivable; (5) term Federal funds sold; and (6) term securities purchased under agreements to resell.

Classes of Financing Receivables: Classes of financing receivables generally are a disaggregation of a portfolio segment to the extent that it is needed to understand the exposure to credit risk arising from these financing receivables. The FHLBank has determined that no further disaggregation of portfolio segments identified previously is needed as the credit risk arising from these financing receivables is assessed and measured at the portfolio segment level.

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Non-accrual Loans: The FHLBank places a conventional mortgage loan on non-accrual status if it is determined that either: (1) the collection of interest or principal is doubtful; or (2) interest or principal is past due for 90 days or more, except when the loan is well-secured (e.g., through credit enhancements) and in the process of collection. The FHLBank does not place government-guaranteed or -insured mortgage loans on non-accrual status due to the U.S. government guarantee or insurance on these loans and the contractual obligation of the loan servicer to repurchase the loans when certain criteria are met. For those mortgage loans placed on non-accrual status, accrued but uncollected interest is reversed against interest income. The FHLBank records cash payments received on non-accrual loans first as interest income and then as a reduction of principal as specified in the contractual agreement, unless the collection of the remaining principal amount due is considered doubtful. If the collection of the remaining principal amount due is considered doubtful then cash payments received would be applied first solely to principal until the remaining principal amount due is expected to be collected and then as a recovery of any charge-off, if applicable, followed by recording interest income. A loan on non-accrual status may be restored to accrual status when: (1) none of its contractual principal and interest is due and unpaid, and the FHLBank expects repayment of the remaining contractual principal and interest; or (2) it otherwise becomes well secured and in the process of collection.

Troubled Debt Restructuring: The FHLBank considers a troubled debt restructuring to have occurred when a concession is granted to a borrower for economic or legal reasons related to the borrower’s financial difficulties and that concession would not have been considered otherwise. Loans that are discharged in Chapter 7 bankruptcy and have not been reaffirmed by the borrowers are also considered to be troubled debt restructurings, except in certain cases where supplemental mortgage insurance (SMI) policies are held or where all contractual amounts due are still expected to be collected as a result of certain credit enhancements or government guarantees.

Collateral-dependent Loans: An impaired loan is considered collateral dependent if repayment is expected to be provided solely by sale of the underlying property; that is, there is no other available and reliable source of repayment. A loan that is considered collateral-dependent is measured for impairment based on the fair value of the underlying property less estimated selling costs, with any shortfall recognized as an allowance for loan loss or charged off. Interest income on impaired loans is recognized in the same manner as non-accrual loans.

Charge-off Policy: A charge-off is recorded if it is estimated that the recorded investment in a loan will not be recovered. The FHLBank evaluates whether to record a charge-off on a conventional mortgage loan upon the occurrence of a confirming event. Confirming events include, but are not limited to, the occurrence of foreclosure or notification of a claim against any of the credit enhancements. The FHLBank charges off the portion of outstanding conventional mortgage loan balances in excess of fair value of the underlying property, less estimated cost to sell, for loans that are 180 days or more delinquent and certain loans for which the borrower has filed for bankruptcy.

Real Estate Owned: Real estate owned (REO) includes assets that have been received in satisfaction of debt through foreclosures. REO is initially recorded at fair value less estimated selling costs and is subsequently carried at the lower of that amount or current fair value less estimated selling costs. The FHLBank recognizes a charge-off to the allowance for credit losses if the fair value of the REO less estimated selling costs is less than the recorded investment in the loan at the date of transfer from loans to REO. Any subsequent gains, losses and carrying costs are included in other expense in the Statements of Income. REO is recorded in other assets on the Statements of Condition.

Derivatives: All derivatives are recognized on the Statements of Condition at their fair values and are reported as either derivative assets or derivative liabilities, net of cash collateral, and accrued interest receivable from 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 Ltd and CME Clearing. At both Clearinghouses, variation margin is characterized as daily settlement payments and initial margin is considered cash collateral.

Derivative Designations: Each derivative is designated as one of the following:


▪	a qualifying fair value hedge of the change in fair value of: (1) a recognized asset or liability, or (2) an unrecognized firm commitment; or


▪	a non-qualifying hedge of an asset or liability (an economic hedge) for asset/liability management purposes.

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Accounting for Qualifying Hedges: If hedging relationships meet certain criteria, including, but not limited to, formal documentation of the hedging relationship and an expectation to be highly effective, they qualify for hedge accounting. Two approaches to hedge accounting include:

▪

Long haul hedge accounting - The application of long haul hedge accounting requires the FHLBank to assess (both at the hedge's inception and at least quarterly) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the fair value of hedged items attributable to the hedged risk and whether those derivatives may be expected to remain highly effective in future periods; and

▪

Shortcut hedge accounting - Interest rate swap transactions that meet more stringent criteria qualify for the shortcut method of hedge accounting in which an assumption can be made that the change in fair value of a hedged item, due to changes in the benchmark rate, exactly offsets the change in fair value of the related derivative. Under the shortcut method, the entire change in fair value of the interest rate swap is considered to be highly effective at achieving offsetting changes in fair values of the hedged asset or liability.

Derivatives are typically executed at the same time as the hedged item, and the FHLBank designates the hedged item in a qualifying hedge relationship at the trade date. In many hedging relationships, the FHLBank may designate the hedging relationship upon its commitment to disburse an advance or trade a consolidated obligation in which settlement occurs within the shortest period of time possible for the type of instrument based on market settlement conventions. The FHLBank defines market settlement conventions for advances and consolidated obligation discount notes to be five business days or less and for consolidated obligation bonds to be thirty calendar days or less, using a next business day convention. The FHLBank then records the changes in fair value of the derivative and the hedged item beginning on the trade date.

Beginning January 1, 2019, the FHLBank adopted new hedge accounting guidance, which, among other things, impacts the presentation of gains (losses) on derivatives and hedging activities for qualifying hedges. Changes in the fair value of a derivative that is designated and qualifies as a fair value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk, are recorded in net interest income in the same line as the earnings effect of the hedged item. Net gains (losses) on derivatives and hedging activities for qualifying hedges recorded in net interest income include unrealized and realized gains (losses), which include net interest settlements.

Prior to January 1, 2019, fair value hedge ineffectiveness (which represented the amount by which the change in the fair value of the derivative differed from the change in the fair value of the hedged item) was recorded in non-interest income as net gains (losses) on derivatives and hedging activities.

Accounting for Non-Qualifying Hedges: An economic hedge is defined as a derivative hedging underlying assets, liabilities or firm commitments that does not qualify for hedge accounting or where management did not elect hedge accounting treatment at inception but is an acceptable hedging strategy under the FHLBank’s RMP. These economic hedging strategies also comply with FHFA regulatory requirements prohibiting speculative derivative transactions. An economic hedge introduces the potential for earnings variability caused by changes in fair value on the derivatives that are recorded in the FHLBank’s income but not offset by corresponding changes in the fair value of the economically hedged assets, liabilities or firm commitments being recorded simultaneously in income. As a result, the FHLBank recognizes only the net interest and the change in fair value of these derivatives in other income (loss) as net gains (losses) on derivatives and hedging activities with no offsetting fair value adjustments for the assets, liabilities or firm commitments.

Accrued Interest Receivables and Payables: The net settlements of interest receivables and payables on derivatives designated as fair value hedges are recognized as adjustments to the interest income or expense of the designated underlying investment securities, advances, consolidated obligations or other financial instruments, thereby affecting the reported amount of net interest income on the Statements of Income. The net settlements of interest receivables and payables on economic hedges are recognized in other income (loss) as net gains (losses) on derivatives and hedging activities.

Discontinuance of Hedge Accounting: The FHLBank discontinues hedge accounting prospectively when: (1) it determines that the derivative is no longer effective in offsetting changes in the fair value of a hedged item attributable to the hedged risk (including hedged items such as firm commitments); (2) the derivative and/or the hedged item expires or is sold, terminated or exercised; (3) a hedged firm commitment no longer meets the definition of a firm commitment; or (4) management determines that designating the derivative as a hedging instrument is no longer appropriate.

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When hedge accounting is discontinued because the FHLBank determines that the derivative no longer qualifies as an effective fair value hedge of an existing hedged item, the FHLBank continues to carry the derivative on its Statements of Condition at fair value, ceases to adjust the hedged asset or liability for changes in fair value, and begins amortizing the cumulative basis adjustment on the hedged item into earnings over the remaining life of the hedged item using the level-yield method. When hedge accounting is discontinued and the derivative remains outstanding, the FHLBank carries the derivative at fair value on its Statements of Condition, recognizing changes in the fair value of the derivative in other income (loss) as net gains (losses) on derivatives and hedging activities. When hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, the FHLBank continues to carry the derivative on its Statements of Condition at fair value, removing any asset or liability that was recorded to recognize the firm commitment and recording it as a gain or loss in current period earnings.

Embedded Derivatives: The FHLBank may issue debt, make advances, or purchase financial instruments in which a derivative instrument is embedded. Upon execution of these transactions, the FHLBank assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the advance, debt or purchased financial instrument (the host contract) and whether a separate, non-embedded instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When the FHLBank determines that: (1) the embedded derivative has economic characteristics that are not clearly and closely related to the economic characteristics of the host contract; and (2) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract, carried at fair value, and designated as a stand-alone derivative instrument pursuant to an economic hedge. However, if the entire contract (the host contract and the embedded derivative) is to be measured at fair value, with changes in fair value reported in current period earnings (such as an investment security classified as trading), or if the FHLBank cannot reliably identify and measure the embedded derivative for purposes of separating that derivative from its host contract, the entire contract is carried on the Statements of Condition at fair value and no portion of the contract is designated as a hedging instrument.

Premises, Software and Equipment: Premises, software, and equipment are included in other assets on the Statements of Condition. The FHLBank records premises, software, and equipment at cost less accumulated depreciation and amortization. Depreciation is computed on the straight-line method over the estimated useful lives of the assets ranging from 3 to 40 years. Leasehold improvements are amortized on the straight-line basis over the shorter of the estimated useful life of the improvement or the remaining term of the lease. Improvements and major renewals are capitalized, and ordinary maintenance and repairs are expensed as incurred. The cost of purchased software and certain costs incurred in developing computer software for internal use are capitalized and amortized over future periods. Gains and losses on disposals are included in other income (loss) on the Statements of Income.

As of December 31, 2019 and 2018, premises, software, and equipment were $46,619,000 and $48,167,000, which was net of the accumulated depreciation and amortization of $24,202,000 and $21,106,000, respectively. For the years ended December 31, 2019, 2018, and 2017, the depreciation and amortization expense for premises, software and equipment was $3,127,000, $2,975,000 and $2,282,000, respectively.

Consolidated Obligations: Consolidated obligations are recorded at amortized cost, which represents the funded amount, adjusted for premiums, discounts, concessions, and fair value hedging adjustments.

Discounts and Premiums: Consolidated obligation discounts are accreted and premiums are amortized to interest expense using the level-yield method over the contractual maturities of the corresponding debt.

Concessions: Amounts paid to dealers in connection with sales of consolidated obligations are deferred and amortized using the level-yield method over the contractual terms of the consolidated obligations. Concession amounts are prorated to the FHLBank by the Office of Finance based on the percentage of each consolidated obligation issued by the Office of Finance on behalf of the FHLBank. The FHLBank records concessions paid on consolidated obligations as a direct deduction from their carrying amounts, consistent with the presentation of discounts on consolidated obligations. The amortization of those concessions is included in consolidated obligation interest expense.

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Mandatorily Redeemable Capital Stock: The FHLBank reclassifies all stock subject to redemption from capital to liability once a member submits a written redemption request, gives notice of intent to withdraw from membership, or attains non-member status by merger or acquisition, charter termination or involuntary termination from membership, since the member shares will then meet the definition of a mandatorily redeemable financial instrument. There is no distinction as to treatment for reclassification from capital to liability between in-district redemption requests and those redemption requests triggered by out-of-district acquisitions. The FHLBank does not take into consideration its members’ right to cancel a redemption request in determining when shares of capital stock should be classified as a liability because the cancellation would be subject to a substantial cancellation fee. Member and non-member shares of capital stock meeting the definition of mandatorily redeemable capital stock are reclassified to a liability at fair value, which has been determined to be par value plus any estimated accrued but unpaid dividends. The FHLBank’s dividends are declared and paid at each quarter-end; therefore, the fair value reclassified equals par value. Dividends declared on a member's shares of capital stock for the time after classification as a liability are accrued at the expected dividend rate and reflected as interest expense in the Statements of Income. The repurchase of these mandatorily redeemable financial instruments by the FHLBank are reflected as financing cash outflows in the Statements of Cash Flows once settled.

If a member submits a written request to cancel a previously submitted written redemption request, the capital stock covered by the written cancellation request is reclassified from a liability to capital at fair value. After the reclassification, dividends on the capital stock are no longer classified as interest expense.

Restricted Retained Earnings: Under the Joint Capital Enhancement Agreement, as amended, the FHLBank allocates 20 percent of its quarterly net income to a separate restricted retained earnings account until the account balance equals at least 1 percent of its average balance of outstanding consolidated obligations for the previous quarter. These restricted retained earnings are not available to pay dividends and are presented separately on the Statements of Condition.

FHFA Expenses: A portion of the FHFA’s expenses and working capital fund are allocated among the FHLBanks based on the pro rata share of the annual assessments, which are based on the ratio between each FHLBank’s minimum required regulatory capital and the aggregate minimum required regulatory capital of every FHLBank.

Office of Finance Expenses: Each FHLBank’s proportionate share of Office of Finance operating and capital expenditures is calculated using a formula that is based upon the following components: (1) two-thirds based upon each FHLBank’s share of total consolidated obligations outstanding; and (2) one-third based upon an equal pro rata allocation.

Affordable Housing Program (AHP) Assessments: The FHLBank is required to establish, fund and administer an AHP. The AHP funds provide subsidies to members to assist in the purchase, construction or rehabilitation of housing for very low-, low- and moderate-income households. The required annual AHP funding is charged to earnings, and an offsetting liability is established.

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

Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In March 2020, the Financial Accounting Standards Board (FASB) issued temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met. The transactions primarily include: (1) contract modifications; (2) hedging relationships; and (3) sale or transfer of debt securities classified as held-to-maturity. This guidance is effective immediately for the FHLBank, and the amendments may be applied prospectively through December 31, 2022. The FHLBank is in the process of evaluating the guidance, and its effect on the FHLBank's financial condition, results of operations and cash flows has not yet been determined.

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 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 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 were adopted on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after the date of adoption. The amendment was effective concurrently with ASU 2017-12 (see below) beginning January 1, 2019. The adoption of this guidance did not materially impact the FHLBank's application of hedge accounting or utilization of hedging strategies.

F-20

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 to which project stage (that is, preliminary project stage, application development stage, or post-implementation stage) an implementation activity relates. 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 were effective January 1, 2020 for the FHLBank. The adoption of this guidance did not materially impact 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 the year ending December 31, 2020 for the FHLBank, and will be applied retrospectively for all comparative periods presented. Early adoption is permitted. The FHLBank does not plan on early adoption. The adoption of this guidance will not have a material impact on the disclosures related to defined benefit plans and 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 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 were effective January 1, 2020 for the FHLBank. The adoption of this guidance will not have a material impact on the disclosures related to fair value measurements and did not impact the FHLBank’s financial condition, results of operations or cash flows.

Targeted Improvements to Accounting for Hedging Activities, as amended (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. 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;


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


•	If an entity that applies the shortcut method determines that use of that method was not or is no longer appropriate, the entity may apply a long-haul method for assessing hedge effectiveness as long as the hedge is highly effective and the entity documents at inception, or at the adoption date for existing shortcut hedging relationships, which long-haul methodology it will use.

The amendment became effective January 1, 2019 for the FHLBank. The guidance did not impact the FHLBank's application of hedge accounting for existing hedge strategies. For all short-cut hedge accounting trades, the FHLBank updated existing documentation to designate a long-haul method to be utilized in the event a hedge ceases to qualify for the short-cut method. The guidance also provided opportunities to enhance risk management through new hedge strategies, including partial term hedges. The adoption of this guidance did not have a material impact 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.

F-21

Premium Amortization on Purchased Callable Debt Securities (ASU 2017-08). In March 2017, the 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 became effective January 1, 2019 for the FHLBank. 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, as amended (ASU 2016-13). In June 2016, the 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 became effective for the FHLBank on January 1, 2020 and was applied using a modified-retrospective approach, through a cumulative-effect adjustment to retained earnings. Adoption of this guidance did not have a material impact on the FHLBank’s financial condition, results of operations, or cash flows.

Leases (ASU 2016-02). In February 2016, FASB issued amendments to lease accounting guidance. Under the new guidance, lessees are 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 became effective January 1, 2019 for the FHLBank. 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 - CASH AND DUE FROM BANKS

Cash and due from banks represents non-interest-bearing deposits in banks.

Pass-through Deposit Reserves: The FHLBank acts as a pass-through correspondent for members required to deposit reserves with the Federal Reserve Banks (FRB). The amount shown as cash and due from banks includes pass-through reserves deposited with the FRB of $3,820,000 and $2,044,000 as of December 31, 2019 and 2018, respectively.

F-22

NOTE 4 – INVESTMENT SECURITIES

The FHLBank's investment securities include the following major security types, which are based on the issuer and the risk characteristics of the security:


▪	U.S. Treasury obligations - sovereign debt of the United States;


▪	GSE obligations - debentures issued by other FHLBanks, Federal National Mortgage Association (Fannie Mae), Federal Farm Credit Bank and Federal Agricultural Mortgage Corporation. GSE securities are not guaranteed by the U.S. government;


▪	State or local housing agency obligations - municipal bonds issued by housing finance agencies;


▪	U.S. obligation MBS - single-family MBS issued by Government National Mortgage Association (Ginnie Mae), which are guaranteed by the U.S. government; and


▪	GSE MBS - single-family and multi-family MBS issued by Fannie Mae and Federal Home Loan Mortgage Corporation (Freddie Mac).

Trading Securities: Trading securities by major security type as of December 31, 2019 and 2018 are summarized in Table 4.1 (in thousands):

Table 4.1



	Fair Value
	12/31/2019		12/31/2018
Non-mortgage-backed securities:
U.S. Treasury obligations	$	1,530,518	$	252,377
GSEobligations	416,025		1,000,495
Non-mortgage-backed securities	1,946,543		1,252,872
Mortgage-backed securities:
U.S. obligation MBS	—		467
GSE MBS	866,019		897,774
Mortgage-backed securities	866,019		898,241
TOTAL	$	2,812,562	$	2,151,113

Net gains (losses) on trading securities during the years ended December 31, 2019, 2018, and 2017 are shown in Table 4.2 (in thousands):

Table 4.2



	2019		2018			2017
Net gains (losses) on trading securities held as of December 31, 2019	$	69,865	$	(19,186	)	$	10,657
Net gains (losses) on trading securities sold or matured prior to December 31, 2019	396		(2,724		)	(3,743		)
NET GAINS (LOSSES) ON TRADING SECURITIES	$	70,261	$	(21,910	)	$	6,914

F-23

Available-for-sale Securities: Available-for-sale securities by major security type as of December 31, 2019 are summarized in Table 4.3 (in thousands):

Table 4.3



	12/31/2019
	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value
Non-mortgage-backed securities:
U.S. Treasury obligations	$	4,258,608	$	3,580	$	(397	)	$	4,261,791
Non-mortgage-backed securities	4,258,608		3,580		(397		)	4,261,791
Mortgage-backed securities:
GSE MBS	2,897,104		28,353		(4,748		)	2,920,709
Mortgage-backed securities	2,897,104		28,353		(4,748		)	2,920,709
TOTAL	$	7,155,712	$	31,933	$	(5,145	)	$	7,182,500

Available-for-sale securities by major security type as of December 31, 2018 are summarized in Table 4.4 (in thousands):

Table 4.4



	12/31/2018
	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value
Mortgage-backed securities:
GSE MBS	$	1,706,572	$	25,815	$	(6,747	)	$	1,725,640
TOTAL	$	1,706,572	$	25,815	$	(6,747	)	$	1,725,640

Table 4.5 summarizes the available-for-sale securities with unrealized losses as of December 31, 2019 (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 4.5



	12/31/2019
	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:
U.S. Treasury obligations	$	1,579,004	$	(397	)	$	—	$	—		$	1,579,004	$	(397	)
Non-mortgage-backed securities	1,579,004		(397		)	—		—			1,579,004		(397		)
Mortgage-backed securities:
GSE MBS	787,809		(932		)	301,161		(3,816		)	1,088,970		(4,748		)
Mortgage-backed securities	787,809		(932		)	301,161		(3,816		)	1,088,970		(4,748		)
TOTAL TEMPORARILY IMPAIRED SECURITIES	$	2,366,813	$	(1,329	)	$	301,161	$	(3,816	)	$	2,667,974	$	(5,145	)

F-24

Table 4.6 summarizes the available-for-sale securities with unrealized losses as of December 31, 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 4.6



	12/31/2018
	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 MBS	$	570,042	$	(6,747	)	$	—	$	—	$	570,042	$	(6,747	)
TOTAL TEMPORARILY IMPAIRED SECURITIES	$	570,042	$	(6,747	)	$	—	$	—	$	570,042	$	(6,747	)

The amortized cost and fair values of available-for-sale securities by contractual maturity as of December 31, 2019 and 2018 are shown in Table 4.7 (in thousands). Expected maturities of MBS will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

Table 4.7



	12/31/2019				12/31/2018
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Non-mortgage-backed securities:
Due in one year or less	$	754,003	$	753,891	$	—	$	—
Due after one year through five years	3,504,605		3,507,900		—		—
Due after five years through ten years	—		—		—		—
Due after ten years	—		—		—		—
Non-mortgage-backed securities	4,258,608		4,261,791		—		—
Mortgage-backed securities	2,897,104		2,920,709		1,706,572		1,725,640
TOTAL	$	7,155,712	$	7,182,500	$	1,706,572	$	1,725,640

F-25

Held-to-maturity Securities: Held-to-maturity securities by major security type as of December 31, 2019 are summarized in Table 4.8 (in thousands):

Table 4.8



	12/31/2019
	Amortized Cost		Carrying Value		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value
Non-mortgage-backed securities:
State or local housing agency obligations	$	82,805	$	82,805	$	5	$	(1,956	)	$	80,854
Non-mortgage-backed securities	82,805		82,805		5		(1,956		)	80,854
Mortgage-backed securities:
U.S. obligation MBS	93,375		93,375		—		(496		)	92,879
GSE MBS	3,393,778		3,393,778		6,558		(17,131		)	3,383,205
Mortgage-backed securities	3,487,153		3,487,153		6,558		(17,627		)	3,476,084
TOTAL	$	3,569,958	$	3,569,958	$	6,563	$	(19,583	)	$	3,556,938

Held-to-maturity securities by major security type as of December 31, 2018 are summarized in Table 4.9 (in thousands):

Table 4.9



	12/31/2018
	Amortized Cost		Carrying Value		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value
Non-mortgage-backed securities:
State or local housing agency obligations	$	86,430	$	86,430	$	1	$	(3,480	)	$	82,951
Non-mortgage-backed securities	86,430		86,430		1		(3,480		)	82,951
Mortgage-backed securities:
U.S. obligation MBS	109,866		109,866		125		(99		)	109,892
GSE MBS	4,260,577		4,260,577		12,164		(18,506		)	4,254,235
Mortgage-backed securities	4,370,443		4,370,443		12,289		(18,605		)	4,364,127
TOTAL	$	4,456,873	$	4,456,873	$	12,290	$	(22,085	)	$	4,447,078

F-26

Table 4.10 summarizes the held-to-maturity securities with unrealized losses as of December 31, 2019 (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 4.10



	12/31/2019
	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	$	—	$	—		$	28,044	$	(1,956	)	$	28,044	$	(1,956	)
Non-mortgage-backed securities	—		—			28,044		(1,956		)	28,044		(1,956		)
Mortgage-backed securities:
U.S. obligation MBS	68,433		(293		)	24,446		(203		)	92,879		(496		)
GSE MBS	383,910		(1,457		)	2,422,598		(15,674		)	2,806,508		(17,131		)
Mortgage-backed securities	452,343		(1,750		)	2,447,044		(15,877		)	2,899,387		(17,627		)
TOTAL TEMPORARILY IMPAIRED SECURITIES	$	452,343	$	(1,750	)	$	2,475,088	$	(17,833	)	$	2,927,431	$	(19,583	)

Table 4.11 summarizes the held-to-maturity securities with unrealized losses as of December 31, 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 4.11



	12/31/2018
	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	$	—	$	—		$	26,520	$	(3,480	)	$	26,520	$	(3,480	)
Non-mortgage-backed securities	—		—			26,520		(3,480		)	26,520		(3,480		)
Mortgage-backed securities:
U.S. obligation MBS	—		—			30,702		(99		)	30,702		(99		)
GSE MBS	1,655,048		(4,769		)	1,567,728		(13,737		)	3,222,776		(18,506		)
Mortgage-backed securities	1,655,048		(4,769		)	1,598,430		(13,836		)	3,253,478		(18,605		)
TOTAL TEMPORARILY IMPAIRED SECURITIES	$	1,655,048	$	(4,769	)	$	1,624,950	$	(17,316	)	$	3,279,998	$	(22,085	)

F-27

The amortized cost, carrying value and fair values of held-to-maturity securities by contractual maturity as of December 31, 2019 and 2018 are shown in Table 4.12 (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 4.12



	12/31/2019						12/31/2018
	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 ten years	—		—		—		—		—		—
Due after ten years	82,805		82,805		80,854		86,430		86,430		82,951
Non-mortgage-backed securities	82,805		82,805		80,854		86,430		86,430		82,951
Mortgage-backed securities	3,487,153		3,487,153		3,476,084		4,370,443		4,370,443		4,364,127
TOTAL	$	3,569,958	$	3,569,958	$	3,556,938	$	4,456,873	$	4,456,873	$	4,447,078

Net gains (losses) were realized on the sale of held-to-maturity securities as presented below 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 and were therefore considered maturities under GAAP. Table 4.13 presents details of the sales (in thousands). No held-to-maturity securities were sold during the year ended December 31, 2017.

Table 4.13



	2019			2018
Proceeds from sale of held-to-maturity securities	$	9,442		$	87,827
Carrying value of held-to-maturity securities sold	(9,488		)	(86,236		)
NET REALIZED GAINS (LOSSES)	$	(46	)	$	1,591

Other-than-temporary Impairment: As of December 31, 2019, the fair value of a portion of the FHLBank's available-for-sale and held-to-maturity securities were below the amortized cost of the securities. However, the decline in fair value of these securities is considered temporary and not attributable to credit quality as the FHLBank expects to recover the 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. The FHLBank determined that all of the gross unrealized losses were temporary because the strength of the underlying collateral and credit enhancements was sufficient to protect the FHLBank from losses based on current expectations.

F-28

NOTE 5 – 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 December 31, 2019 and 2018, the FHLBank had advances outstanding at interest rates ranging from 0.96 percent to 7.41 percent and 0.88 percent to 7.41 percent, respectively. Table 5.1 presents advances summarized by redemption term as of December 31, 2019 and 2018 (dollar amounts in thousands):

Table 5.1



	12/31/2019					12/31/2018
Redemption Term	Amount			Weighted Average Interest Rate		Amount			Weighted Average Interest Rate
Due in one year or less	$	13,188,118		1.88	%	$	14,844,804		2.60	%
Due after one year through two years	10,448,433			1.96		1,482,844			2.40
Due after two years through three years	1,254,153			2.27		1,442,333			2.53
Due after three years through four years	1,067,662			2.42		7,496,058			2.66
Due after four years through five years	1,208,854			2.22		816,702			2.68
Thereafter	3,004,835			2.25		2,695,008			2.58
Total par value	30,172,055			1.99	%	28,777,749			2.60	%
Discounts	(1,807		)			(3,413		)
Hedging adjustments	71,067					(44,223		)
TOTAL	$	30,241,315				$	28,730,113

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.

F-29

Table 5.2 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 December 31, 2019 and 2018 (in thousands):

Table 5.2



	Redemption Term or Next Call Date				Redemption Term or Next Conversion Date
Redemption Term	12/31/2019		12/31/2018		12/31/2019		12/31/2018
Due in one year or less	$	24,271,238	$	23,343,939	$	14,053,068	$	15,133,204
Due after one year through two years	1,133,077		1,271,660		10,637,833		1,683,644
Due after two years through three years	728,429		1,021,189		1,524,153		1,629,233
Due after three years through four years	764,990		555,901		1,215,412		7,752,058
Due after four years through five years	686,594		598,282		1,304,254		954,452
Thereafter	2,587,727		1,986,778		1,437,335		1,625,158
TOTAL PAR VALUE	$	30,172,055	$	28,777,749	$	30,172,055	$	28,777,749

Interest Rate Payment Terms: Table 5.3 details additional interest rate payment terms for advances as of December 31, 2019 and 2018 (in thousands):

Table 5.3



Redemption Term	12/31/2019		12/31/2018
Fixed rate:
Due in one year or less	$	2,691,528	$	1,635,464
Due after one year	5,912,124		5,455,193
Total fixed rate	8,603,652		7,090,657
Variable rate:
Due in one year or less	10,496,590		13,209,340
Due after one year	11,071,813		8,477,752
Total variable rate	21,568,403		21,687,092
TOTAL PAR VALUE	$	30,172,055	$	28,777,749

Credit Risk Exposure and Security Terms: The FHLBank’s potential credit risk from advances is concentrated in commercial banks and savings institutions. As of December 31, 2019 and 2018, the FHLBank had outstanding advances of $13,085,000,000 and $12,660,000,000, respectively, to two members that individually held 10 percent or more of the FHLBank’s advances, which represents 43.4 percent and 44.0 percent, respectively, of total outstanding advances. The members were the same each year.

See Note 7 for information related to the FHLBank’s credit risk on advances and allowance for credit losses.

See Note 16 for information about the fair value of advances.

See Note 18 for detailed information on transactions with related parties.

NOTE 6 – MORTGAGE LOANS

The MPF Program involves the FHLBank investing in mortgage loans, which have been funded by the FHLBank through or purchased from 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 PFI. The FHLBank does not buy or own any mortgage servicing rights.

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Mortgage Loans Held for Portfolio: Table 6.1 presents information as of December 31, 2019 and 2018 on mortgage loans held for portfolio (in thousands):

Table 6.1



	12/31/2019			12/31/2018
Real estate:
Fixed rate, medium-term¹, single-family mortgages	$	1,347,385		$	1,179,087
Fixed rate, long-term, single-family mortgages	9,128,268			7,111,856
Total unpaid principal balance	10,475,653			8,290,943
Premiums	155,793			120,548
Discounts	(2,503		)	(2,936		)
Deferred loan costs, net	184			223
Other deferred fees	(38		)	(50		)
Hedging adjustments	4,905			2,546
Total before Allowance for Credit Losses on Mortgage Loans	10,633,994			8,411,274
Allowance for Credit Losses on Mortgage Loans	(985		)	(812		)
MORTGAGE LOANS HELD FOR PORTFOLIO, NET	$	10,633,009		$	8,410,462


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

Table 6.2 presents information as of December 31, 2019 and 2018 on the outstanding UPB of mortgage loans held for portfolio (in thousands):

Table 6.2



	12/31/2019		12/31/2018
Conventional loans	$	9,849,542	$	7,619,498
Government-guaranteed or -insured loans	626,111		671,445
TOTAL UNPAID PRINCIPAL BALANCE	$	10,475,653	$	8,290,943

See Note 7 for information related to the FHLBank’s credit risk on mortgage loans and allowance for credit losses.

See Note 16 for information about the fair value of mortgage loans held for portfolio.

See Note 18 for detailed information on transactions with related parties.

NOTE 7 – 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.

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Credit Products: The FHLBank manages its credit exposure to credit products through an integrated approach that generally includes establishing a credit limit for each member. This approach includes an ongoing review of each member’s financial condition, in conjunction with conservative collateral/lending policies to limit risk of loss, while balancing members’ needs for a reliable source of funding. In addition, the FHLBank lends to its members in accordance with federal law and FHFA regulations. Specifically, the FHLBank is required to obtain sufficient collateral to fully secure credit products. The estimated value of the collateral required to secure each member’s credit products is calculated by applying collateral discounts, or haircuts, to the market value or UPB of the collateral, as applicable. The FHLBank accepts certain investment securities, residential mortgage loans, deposits, and other real estate related assets as collateral. In addition, community financial institutions are eligible to utilize expanded statutory collateral provisions for small business loans, small farm loans, small agri-business loans and community development loans. The FHLBank’s capital stock owned by borrowing members is held by the FHLBank as further collateral security for all indebtedness of the member to the FHLBank. Collateral arrangements may vary depending upon member credit quality, financial condition and performance; borrowing capacity; and overall credit exposure to the member. The FHLBank can also require additional or substitute collateral to protect its security interest.

The FHLBank either allows a member to retain physical possession of the collateral assigned to an advance, or requires the member to specifically assign or place physical possession of the collateral with the FHLBank or its safekeeping agent. The FHLBank perfects its security interest in all pledged collateral. The Bank Act affords any security interest granted to the FHLBank by a member priority over the claims or rights of any other party except for claims or rights of a third party that would be entitled to priority under otherwise applicable law and are held by a bona fide purchaser for value or by a secured party holding a prior perfected security interest.

Using a risk-based approach and taking into consideration each member’s financial strength, the FHLBank considers the type of collateral to be the primary indicator of credit quality on its credit products. As of December 31, 2019 and 2018, the FHLBank had rights to collateral on a member-by-member basis with an estimated value in excess of its outstanding extensions of credit. The FHLBank continues to evaluate and make changes to its collateral guidelines, as necessary, based on current market conditions. Based upon the collateral held as security, management’s credit extension and collateral policies, management’s credit analysis and the repayment history on credit products, the FHLBank currently does not anticipate any credit losses on its credit products.

Government Mortgage Loans Held for Portfolio: The FHLBank invests in government-guaranteed or -insured (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) fixed rate mortgage loans secured by one-to-four family residential properties. The servicer provides and maintains insurance or a guarantee from the applicable government agency. The servicer is responsible for compliance with all government agency requirements and for obtaining the benefit of the applicable insurance or guarantee with respect to defaulted government mortgage loans. Any losses on these loans that are not recovered from the issuer or guarantor are absorbed by the servicers. Therefore, the FHLBank only has credit risk for these loans if the servicer fails to pay for losses not covered by the insurance or guarantee so the FHLBank has not established an allowance for credit losses on government mortgage loans.

Conventional Mortgage Loans Held for Portfolio: The allowance for conventional loans is determined by a formula analysis based upon loss factors predominantly calculated using a historical analysis of loan performance. Delinquent loan migration analysis is performed to determine default probability rates, and historical loss analysis is performed to determine loss severity rates, both of which are then utilized as loss factors within the formula analysis. These analyses include consideration of various data observations, such as past performance, current performance, loan portfolio characteristics, collateral-related characteristics, industry data, and prevailing economic conditions. The allowance for conventional mortgage loan losses may consist of losses from: (1) individually evaluated mortgage loans, including collateral-dependent loans; (2) collectively evaluated homogeneous pools of residential mortgage loans; and/or (3) estimated additional credit losses in the portfolio. The formula analysis is consistently applied, but loss factors may be adjusted in response to changing conditions, as a result of management’s assessment of the adequacy of the allowance to absorb losses inherent in the portfolio.

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The FHLBank’s management of credit risk in the MPF Program involves several layers of loss protection that are defined in agreements among the FHLBank and its PFIs. The availability of loss protection may differ slightly among MPF products. The FHLBank’s loss protection consists of the following loss layers, in order of priority:


▪	Homeowner Equity.


▪	Private Mortgage Insurance (PMI). PMI is required on all conventional loans with homeowner equity of less than 20 percent of the original purchase price or appraised value.

▪

First Loss Account (FLA). The FLA functions as a tracking mechanism for determining the FHLBank’s potential loss exposure under each master commitment prior to the PFI’s CE obligation. If the FHLBank experiences losses in a master commitment, these losses will be: (1) absorbed by the FHLBank's FLA; and (2) recovered through the withholding of future performance-based CE fees from the PFI, if applicable.

▪

CE Obligation. PFIs are required to have a CE obligation in an amount based on a documented analysis, including consideration of applicable insurance, credit enhancements, and/or other sources for repayment on the asset or pool, that FHLBank has a high degree of confidence that it will absorb losses in excess of the FLA, even under reasonably likely adverse changes to expected economic conditions. The credit risk analysis of all conventional loans is performed at the individual master commitment level to properly determine the credit enhancements available to recover losses on mortgage loans under each individual master commitment. PFIs must either fully collateralize their CE obligation with assets considered acceptable by the FHLBank’s Member Products Policy (MPP) or purchase SMI from mortgage insurers, as applicable. Any incurred losses that would be absorbed by the CE obligation are not reserved as part of the FHLBank’s allowance for loan losses.

The FHLBank pays the PFI a fee, a portion of which may be based on the credit performance of the mortgage loans, in exchange for absorbing the CE obligation loss layer up to an agreed-upon amount. For some products, losses incurred under the FLA may be recovered by withholding future performance-based CE fees otherwise paid to our PFIs. The FHLBank records CE fees paid to PFIs as a reduction to mortgage interest income. Table 7.1 presents net CE fees paid to PFIs for the years ended December 31, 2019, 2018, and 2017 (in thousands):

Table 7.1



	2019			2018			2017
CE fees paid to PFIs¹	$	7,019		$	6,196		$	5,767
Performance-based CE fees recovered from PFIs	(125		)	(107		)	(103		)
NET CE FEES PAID	$	6,894		$	6,089		$	5,664


¹	CE fees paid to PFIs excludes the amortization of CE fees paid up front, which is included with premium amortization as a reduction to mortgage interest income.

Collectively Evaluated Mortgage Loans: The credit risk analysis of conventional loans evaluated collectively for impairment considers loan pool specific attribute data, including historical delinquency migration, applies estimated loss severities, and incorporates the associated credit enhancements in order to determine the FHLBank’s best estimate of probable incurred losses. Migration analysis is a methodology for determining, through the FHLBank’s experience over a historical period, the rate of default on pools of similar loans. The FHLBank applies migration analysis to loans based on the following categories: (1) loans in foreclosure; (2) nonaccrual loans; (3) delinquent loans; and (4) all other remaining loans. The FHLBank then estimates how many loans in these categories may migrate to a realized loss position and applies a loss severity factor to estimate losses incurred as of the Statement of Condition date.

Individually Evaluated Mortgage Loans: Certain conventional mortgage loans, primarily impaired mortgage loans that are considered collateral-dependent, may be specifically identified for purposes of calculating the allowance for credit losses. A mortgage loan is considered collateral-dependent if repayment is expected to be provided by the sale of the underlying property, that is, if it is considered likely that the borrower will default. The estimated credit losses on impaired collateral-dependent loans may be separately determined because sufficient information exists to make a reasonable estimate of the inherent loss for these loans on an individual loan basis. The FHLBank estimates the fair value of this collateral by applying an appropriate loss severity rate or using third party estimates or property valuation models. The incurred loss of an individually evaluated mortgage loan is equal to the difference between the carrying value of the loan and the estimated fair value of the collateral, less estimated selling costs, and may include expected proceeds from PMI and other applicable credit enhancements.

Direct Financing Lease Receivable: The FHLBank has a recorded investment in a direct financing lease receivable with a member for a building complex and property. Under the office complex agreement, the FHLBank has all rights and remedies under the lease agreement as well as all rights and remedies available under the member’s Advance, Pledge and Security Agreement. Consequently, the FHLBank can apply any excess collateral securing credit products to any shortfall in the leasing arrangement.

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Allowance for Credit Losses: Table 7.2 presents a roll-forward of the allowance for credit losses for the years ended December 31, 2019, 2018, and 2017 (in thousands):

Table 7.2



Conventional Loans	2019			2018			2017
Balance, beginning of the period	$	812		$	1,208		$	1,674
Net (charge-offs) recoveries	(214		)	(423		)	(280		)
Provision (reversal) for credit losses	387			27			(186		)
Balance, end of the period	$	985		$	812		$	1,208

Table 7.3 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 December 31, 2019 (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 7.3



	12/31/2019
	Conventional Loans		Government Loans		Credit Products¹		Direct Financing Lease Receivable		Total
Allowance for credit losses:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment	985		—		—		—		985
TOTAL ALLOWANCE FOR CREDIT LOSSES	$	985	$	—	$	—	$	—	$	985
Recorded investment:
Individually evaluated for impairment	$	12,068	$	—	$	30,286,952	$	8,829	$	30,307,849
Collectively evaluated for impairment	10,036,462		637,821		—		—		10,674,283
TOTAL RECORDED INVESTMENT	$	10,048,530	$	637,821	$	30,286,952	$	8,829	$	40,982,132


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

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Table 7.4 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 December 31, 2018 (in thousands):

Table 7.4



	12/31/2018
	Conventional Loans		Government Loans		Credit Products¹		Direct Financing Lease Receivable		Total
Allowance for credit losses:
Individually evaluated for impairment	$	50	$	—	$	—	$	—	$	50
Collectively evaluated for impairment	762		—		—		—		762
TOTAL ALLOWANCE FOR CREDIT LOSSES	$	812	$	—	$	—	$	—	$	812
Recorded investment:
Individually evaluated for impairment	$	8,679	$	—	$	28,777,274	$	11,966	$	28,797,919
Collectively evaluated for impairment	7,760,900		683,856		—		—		8,444,756
TOTAL RECORDED INVESTMENT	$	7,769,579	$	683,856	$	28,777,274	$	11,966	$	37,242,675


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

Credit Quality Indicator and Other Delinquency Statistics: The FHLBank’s key credit quality indicator is payment status.

Table 7.5 presents the payment status based on recorded investment as well as other delinquency statistics for all of the FHLBank’s portfolio segments as of December 31, 2019 (dollar amounts in thousands):

Table 7.5



	12/31/2019
	Conventional Loans			Government Loans			Credit Products¹			Direct Financing Lease Receivable			Total
Recorded investment:
Past due 30-59 days delinquent	$	59,226		$	15,515		$	—		$	—		$	74,741
Past due 60-89 days delinquent	7,561			6,128			—			—			13,689
Past due 90 days or more delinquent	11,813			8,778			—			—			20,591
Total past due	78,600			30,421			—			—			109,021
Total current loans	9,969,930			607,400			30,286,952			8,829			40,873,111
Total recorded investment	$	10,048,530		$	637,821		$	30,286,952		$	8,829		$	40,982,132

Other delinquency statistics:
In process of foreclosure, included above²	$	3,352		$	2,730		$	—		$	—		$	6,082
Serious delinquency rate³	0.1		%	1.4		%	—		%	—		%	0.1		%
Past due 90 days or more and still accruing interest	$	—		$	8,778		$	—		$	—		$	8,778
Loans on non-accrual status⁴	$	14,923		$	—		$	—		$	—		$	14,923


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


²	Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported. Loans in process of foreclosure are included in past due or current loans dependent on their delinquency status.


³	Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total recorded investment for the portfolio class.


⁴	Loans on non-accrual status include $1,219,000 of troubled debt restructurings. Troubled debt restructurings are restructurings in which the FHLBank, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider.

F-35

Table 7.6 presents the payment status based on recorded investment as well as other delinquency statistics for all of the FHLBank’s portfolio segments as of December 31, 2018 (dollar amounts in thousands):

Table 7.6



	12/31/2018
	Conventional Loans			Government Loans			Credit Products¹			Direct Financing Lease Receivable			Total
Recorded investment:
Past due 30-59 days delinquent	$	34,020		$	14,790		$	—		$	—		$	48,810
Past due 60-89 days delinquent	6,750			6,114			—			—			12,864
Past due 90 days or more delinquent	8,169			7,898			—			—			16,067
Total past due	48,939			28,802			—			—			77,741
Total current loans	7,720,640			655,054			28,777,274			11,966			37,164,934
Total recorded investment	$	7,769,579		$	683,856		$	28,777,274		$	11,966		$	37,242,675

Other delinquency statistics:
In process of foreclosure, included above²	$	2,922		$	2,398		$	—		$	—		$	5,320
Serious delinquency rate³	0.1		%	1.2		%	—		%	—		%	—		%
Past due 90 days or more and still accruing interest	$	—		$	7,898		$	—		$	—		$	7,898
Loans on non-accrual status⁴	$	11,301		$	—		$	—		$	—		$	11,301


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


²	Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported. Loans in process of foreclosure are included in past due or current loans dependent on their delinquency status.


³	Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total recorded investment for the portfolio class.


⁴	Loans on non-accrual status include $1,265,000 of troubled debt restructurings. Troubled debt restructurings are restructurings in which the FHLBank, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider.

The FHLBank had $874,000 and $2,183,000 classified as REO recorded in other assets as of December 31, 2019 and 2018, respectively.

NOTE 8 – DERIVATIVES AND HEDGING ACTIVITIES

Nature of Business Activity: The FHLBank is exposed to interest rate risk primarily from the effect of interest rate changes on its interest-earning assets and its interest-bearing liabilities that finance these assets. The goal of the FHLBank’s interest-rate risk management strategy is not to eliminate interest rate risk, but to manage it within appropriate limits. To mitigate the risk of loss, the FHLBank has established policies and procedures, which include guidelines on the amount of exposure to interest rate changes it is willing to accept. In addition, the FHLBank monitors the risk to its interest income, net interest margin and average maturity of interest-earning assets and interest-bearing liabilities.

Consistent with FHFA regulation, the FHLBank enters into derivatives to: (1) reduce the interest rate risk exposures inherent in otherwise unhedged assets and funding positions; and (2) achieve risk management objectives. FHFA regulation and the FHLBank’s RMP prohibit trading in or the speculative use of these derivative instruments and limit credit risk arising from these instruments. The use of derivatives is an integral part of the FHLBank’s financial and risk management strategy.

F-36

The FHLBank reevaluates its hedging strategies periodically and may change the hedging techniques it uses or may adopt new strategies. The most common ways in which the FHLBank uses derivatives are to:


▪	Reduce funding costs by combining an interest rate swap with a consolidated obligation because the cost of a combined funding structure can be lower than the cost of a comparable consolidated obligation;


▪	Reduce the interest rate sensitivity and repricing gaps of assets and liabilities;

▪

Preserve a favorable interest rate spread between the yield of an asset (e.g., an advance) and the cost of the related liability (e.g., the consolidated obligation used to fund the advance). Without the use of derivatives, this interest rate spread could be reduced or eliminated when a change in the interest rate on the advance does not match a change in the interest rate on the consolidated obligation;


▪	Mitigate the adverse earnings effects of the shortening or extension of certain assets (e.g., advances or mortgage assets) and liabilities;


▪	Manage embedded options in assets and liabilities; and


▪	Manage its overall asset/liability portfolio.

Application of Derivatives: At the inception of every hedge transaction, the FHLBank documents all hedging relationships between derivatives designated as hedging instruments and the hedged items, its risk management objectives and strategies for undertaking various hedge transactions, and its method of assessing effectiveness. This process includes linking all derivatives that are designated as fair value hedges to assets and/or liabilities on the Statements of Condition or firm commitments.

Derivative instruments are designated by the FHLBank as:


▪	A qualifying fair value hedge of an associated financial instrument or a firm commitment; or

▪

A non-qualifying economic hedge to manage certain defined risks in the Statements of Condition. These hedges are primarily used to: (1) manage mismatches between the coupon features of assets and liabilities; (2) offset prepayment risks in certain assets; (3) mitigate the income statement volatility that occurs when financial instruments are recorded at fair value and hedge accounting is not permitted; or (4) reduce exposure to reset risk.

The FHLBank transacts most of its derivatives with large banks and major broker/dealers. Some of these banks and broker/dealers or their affiliates buy, sell and distribute consolidated obligations. Over-the-counter derivative transactions may be either executed through a bilateral agreement with a counterparty (uncleared derivatives) or cleared through a Futures Commission Merchant (i.e., clearing agent) with a Clearinghouse (cleared derivatives). Once a derivative transaction has been accepted for clearing by a Clearinghouse the executing counterparty is replaced with that Clearinghouse. The FHLBank is not a derivatives dealer, and thus does not trade derivatives for short-term profit.

Types of Derivatives: The FHLBank primarily uses the following derivative instruments:

Interest Rate Swaps - An interest rate swap is an agreement between two entities to exchange cash flows in the future. The agreement sets the dates on which the cash flows will be exchanged and the manner in which the cash flows will be calculated. One of the simplest forms of an interest rate swap involves the promise by one party to pay cash flows equivalent to the interest on a notional principal amount at a predetermined fixed rate for a given period of time. In return for this promise, this party receives cash flows equivalent to the interest on the same notional principal amount at a variable interest rate index for the same period of time.

Swaptions - A swaption is an option that gives the buyer the right to enter into a specified interest rate swap at a certain time in the future. When used as a hedge, a swaption can protect the FHLBank against future interest rate changes. The FHLBank may enter into both payer swaptions and receiver swaptions to decrease its interest rate risk exposure related to the prepayment of certain assets. A payer swaption is the option to make fixed interest payments at a later date and a receiver swaption is the option to receive fixed interest payments at a later date.

Interest Rate Caps and Floors - In an interest rate cap agreement, a cash flow is generated if the price or interest rate of an underlying variable rises above a certain threshold (or cap) price or interest rate. In an interest rate floor agreement, a cash flow is generated if the price or interest rate of an underlying variable falls below a certain threshold (or floor) price or interest rate. Interest rate caps and floors are designed as protection against the interest rate on a variable rate asset or liability rising or falling below a certain level. The FHLBank purchases interest rate caps and floors to hedge option risk on variable rate MBS held in the FHLBank’s trading and held-to-maturity portfolios and to hedge embedded caps or floors in the FHLBank’s advances.

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Types of Hedged Items: The FHLBank may have the following types of hedged items:

Investments - The FHLBank invests in U.S. Treasury securities, U.S. Agency securities, GSE securities, MBS and state or local housing finance agency securities. The interest rate and prepayment risk associated with these investment securities is managed through a combination of debt issuance and derivatives. The FHLBank may manage the prepayment and interest rate risk by funding investment securities with consolidated obligations that have call features or by economically hedging the prepayment risk with interest rate caps or floors, callable swaps or swaptions. The FHLBank may manage against prepayment and duration risks by funding investment securities with consolidated obligations that have call features. The FHLBank may also manage the risk arising from changing market prices and volatility of investment securities by entering into economic derivatives that generally offset the changes in fair value of the securities. The FHLBank’s derivatives associated with trading and held-to-maturity securities are designated as economic hedges, and the FHLBank's derivatives associated with available-for-sale securities are designated and qualify as fair value hedges.

Interest rate caps and floors, swaptions and callable swaps may also be used to hedge prepayment and option risk on the MBS held in the FHLBank’s trading, available-for-sale and held-to-maturity portfolios. Many of these derivatives are purchased interest rate caps that hedge interest rate caps embedded in the FHLBank’s trading and held-to-maturity variable rate Agency MBS. Although these derivatives are valid economic hedges against the prepayment and option risk of the portfolio of MBS, they are not specifically linked to individual investment securities and, therefore, do not receive fair value hedge accounting. The derivatives are marked-to-market through earnings.

Advances - With the issuance of a convertible advance, the FHLBank purchases from the member an option that enables the FHLBank to convert an advance from a fixed rate to a variable rate if interest rates increase. Once the FHLBank exercises its option to convert an advance to an at-the-market variable rate, the member then owns the option to terminate the converted advance without fee or penalty on the conversion date and each interest rate reset date thereafter. The FHLBank hedges a convertible advance by entering into a cancelable derivative with a non-member counterparty where the FHLBank pays a fixed rate and receives a variable rate. The derivative counterparty may cancel the derivative on a put date. This type of hedge is designated as a fair value hedge. The counterparty’s decision to cancel the derivative would normally occur in a rising rate environment. If the option is in-the-money, the derivative is cancelled by the derivative counterparty at par (i.e., without any premium or other payment to the FHLBank). When the derivative is cancelled, the FHLBank exercises its option to convert the advance to a variable rate. If a convertible advance is not prepaid by the member upon conversion to an at-the-market variable rate advance (i.e., callable variable rate advance), any hedge-related unamortized basis adjustment is amortized as a yield adjustment.

When fixed rate advances are issued to one or more borrowers, the FHLBank can either fund the advances with fixed rate consolidated obligations with the same tenor or simultaneously enter into a matching derivative in which the clearing agent or derivative counterparty receives fixed cash flows from the FHLBank designed to mirror in timing and amount the cash inflows the FHLBank receives on the advance. These transactions are designated as fair value hedges. In this type of transaction, the FHLBank typically receives from the clearing agent or derivative counterparty a variable cash flow that closely matches the interest payments on short-term discount notes or swapped consolidated obligation bonds.

The repricing characteristics and optionality embedded in certain financial instruments held by the FHLBank can create interest rate risk. For example, when a member prepays an advance, the FHLBank could suffer lower future income if the principal portion of the prepaid advance were invested in lower-yielding assets that continue to be funded by higher-cost debt. To protect against this risk, the FHLBank generally charges a prepayment fee on an advance that makes it financially indifferent to a member’s decision to prepay the advance. When the FHLBank offers advances (other than short-term advances) that a member may prepay without a prepayment fee, it usually finances these advances with callable debt or otherwise hedges the option being sold to the member.

Mortgage Loans - The FHLBank invests in fixed rate mortgage loans through the MPF Program. The prepayment options embedded in mortgage loans can result in extensions or contractions in the expected lives of these investments, depending on changes in estimated future cash flows, which usually occur as a result of interest rate changes. The FHLBank may manage the interest rate and prepayment risk associated with mortgage loans through a combination of debt issuance and derivatives. The FHLBank issues both callable and non-callable debt to achieve cash flow patterns and liability durations similar to those expected on the mortgage loans. The FHLBank may use derivatives in conjunction with debt issuance to better match the expected prepayment characteristics of its mortgage loan portfolio.

Interest rate caps and floors, swaptions and callable swaps may also be used to hedge prepayment risk on the mortgage loans. Although these derivatives are valid economic hedges against the prepayment risk of the portfolio of mortgage loans, they are not specifically linked to individual loans and, therefore, do not receive fair value hedge accounting. The derivatives are marked-to-market through earnings.

Consolidated Obligations - The FHLBank may enter into derivatives to hedge the interest rate risk associated with its debt issuances. The FHLBank manages the risk arising from changing market prices and volatility of a consolidated obligation by matching the cash inflow on the derivative with the cash outflow on the consolidated obligation.

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For instance, the FHLBank may issue a fixed rate consolidated obligation and simultaneously enter into a matching derivative in which the FHLBank received a fixed cash flow designed to mirror in timing and amount the cash outflows the FHLBank pays on the consolidated obligation. In this type of transaction, the FHLBank typically pays a variable cash flow that closely matches the interest payments it receives on short-term or variable rate advances. These transactions are designated as fair value hedges. The FHLBank may issue variable rate consolidated obligations indexed to the SOFR, Federal funds effective rate, LIBOR or other rates and generally simultaneously execute interest rate swaps to hedge the basis risk of the variable rate debt. This type of hedge is treated as an economic hedge and is marked-to-market through earnings.

This strategy of issuing consolidated obligations while simultaneously entering into derivatives is intended to enable the FHLBank to offer a wider range of attractively priced advances to its members and may allow the FHLBank to reduce its funding costs. The continued attractiveness of this debt depends on yield relationships between the consolidated obligations and the derivative markets. If conditions change, the FHLBank may alter the types or terms of the consolidated obligations that it issues.

Firm Commitments - Commitments that obligate the FHLBank to purchase closed fixed rate mortgage loans from its members are considered derivatives. Accordingly, each mortgage loan purchase commitment is recorded as a derivative asset or derivative liability at fair value, with changes in fair value recognized in current period earnings. When a mortgage loan purchase commitment derivative settles, the current market value of the commitment is included with the basis of the mortgage loan and amortized accordingly.

Commitments that obligate the FHLBank to issue consolidated obligations that settle outside of normal market settlement conventions (5 business days for consolidated obligation discount notes and 30 calendar days for consolidated obligation bonds) are considered derivatives. Accordingly, each consolidated obligation commitment is recorded as a derivative asset or derivative liability at fair value, with changes in fair value recognized in current period earnings. When the consolidated obligation commitment derivative settles, the current market value of the commitment is included with the basis of the consolidated obligation and amortized accordingly.

The FHLBank may also hedge a firm commitment for a forward starting advance or consolidated obligation bond through the use of an interest rate swap. In this case, the swap functions as the hedging instrument for both the hedging relationship involving the firm commitment and the subsequent hedging relationship involving the advance or bond and is treated as a fair value hedge. If the hedge relationship is de-designated when the commitment is terminated and the advance or bond is issued, the fair value change associated with the firm commitment is recorded as a basis adjustment of the advance or bond at the time of de-designation. The basis adjustment is then amortized into interest income or expense over the life of the advance or bond. In addition, if a hedged firm commitment no longer qualifies as a fair value hedge, the hedge would be terminated and net gains and losses would be recognized in current period earnings. There were no gains or losses recognized due to disqualification of firm commitment hedges during the years ended December 31, 2019, 2018, and 2017.

Financial Statement Impact and Additional Financial Information: Derivative instruments are recorded at fair value and reported in derivative assets or derivative liabilities on the Statements of Condition. Premiums paid at acquisition are accounted for as the basis of the derivative at inception of the hedge. The notional amount in derivative contracts serves as a factor in determining periodic interest payments or cash flows received and paid. However, the notional amount of derivatives reflects the FHLBank’s involvement in the various classes of financial instruments and represents neither the actual amounts exchanged nor the overall exposure of the FHLBank to credit and market risk; the overall risk is much smaller. The risks of derivatives can be measured meaningfully on a portfolio basis that takes into account the clearing agents, counterparties, the types of derivatives, the items being hedged and any offsets between the derivatives and the items being hedged.

The FHLBank considers accrued interest receivables and payables and the legal right to offset derivative assets and liabilities by clearing agent or derivative counterparty. Consequently, derivative assets and liabilities reported on the Statements of Condition generally include the net cash collateral, including initial margin, and accrued interest received or pledged by clearing agents and/or derivative counterparties. Therefore, an individual derivative may be in an asset position (clearing agent or derivative counterparty would owe the FHLBank the current fair value, which includes net accrued interest receivable or payable on the derivative, if the derivative was settled as of the Statement of Condition date) but when the derivative fair value and cash collateral fair value (includes accrued interest on the collateral) are netted by clearing agent by Clearinghouse, or by derivative counterparty, the derivative may be recorded on the Statements of Condition as a derivative liability. Conversely, a derivative may be in a liability position (FHLBank would owe the clearing agent or derivative counterparty the fair value if settled as of the Statement of Condition date) but may be recorded on the Statements of Condition as a derivative asset after netting.

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Table 8.1 presents outstanding notional amounts and fair values of the derivatives outstanding by type of derivative and by hedge designation as of December 31, 2019 and 2018 (in thousands). Total derivative assets and liabilities include the effect of netting adjustments and cash collateral.

Table 8.1



	12/31/2019							12/31/2018
	Notional Amount		Derivative Assets		Derivative Liabilities			Notional Amount		Derivative Assets			Derivative Liabilities
Derivatives designated as hedging instruments:
Interest rate swaps	$	16,448,512	$	23,462	$	80,398		$	8,345,925	$	73,969		$	24,177
Total derivatives designated as hedging relationships	16,448,512		23,462		80,398			8,345,925		73,969			24,177
Derivatives not designated as hedging instruments:
Interest rate swaps	3,099,622		736		26,285			2,151,920		12,907			17,322
Interest rate caps/floors	1,130,000		117		—			1,373,200		1,044			—
Mortgage delivery commitments	221,800		495		25			101,551		552			3
Consolidated obligation discount note commitments	—		—		—			525,000		—			—
Total derivatives not designated as hedging instruments	4,451,422		1,348		26,310			4,151,671		14,503			17,325
TOTAL	$	20,899,934	24,810		106,708			$	12,497,596	88,472			41,502
Netting adjustments and cash collateral¹			129,994		(106,506		)			(52,377		)	(33,618		)
DERIVATIVE ASSETS AND LIABILITIES			$	154,804	$	202				$	36,095		$	7,884

Amounts represent the application of the netting requirements that allow the FHLBank to settle positive and negative positions, cash collateral, and related accrued interest held or placed with the same clearing agent and/or derivative counterparty. Cash collateral posted was $236,700,000 and $58,902,000 as of December 31, 2019 and 2018, respectively. Cash collateral received was $200,000 and $77,661,000 as of December 31, 2019 and 2018, respectively.

The FHLBank carries derivative instruments at fair value on its Statements of Condition. Any change in the fair value of derivatives designated under a fair value hedging relationship is recorded each period in current period earnings. Fair value hedge accounting allows for the offsetting fair value of the hedged risk in the hedged item to also be recorded in current period earnings.

Beginning on January 1, 2019, changes in fair value of the derivative hedging instrument and the hedged item attributable to the hedged risk for designated fair value hedges are recorded in net interest income in the same line as the earnings effect of the hedged item. Prior to January 1, 2019, for fair value hedges, any hedge ineffectiveness (which represented the amount by which the change in the fair value of the derivative differed from the change in the fair value of the hedge item) was recorded in non-interest income as net gains (losses) on derivatives and hedging activities.

Interest settlements on derivatives designated as fair value hedges were recorded in net interest income or expense prior to, and continue to be recorded in net interest income or expense after January 1, 2019. However, beginning on January 1, 2019, gains (losses) on fair value derivatives include unrealized changes in fair value as well as net interest settlements.

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For the years ended December 31, 2019, 2018, and 2017, the FHLBank recorded net gains (losses) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the FHLBank’s net interest income and net gains (losses) on derivatives and hedging activities, if applicable, as presented in Table 8.2 (in thousands):

Table 8.2



	2019
	Interest Income/Expense
	Advances			Available-for-sale Securities			Consolidated Obligation Discount Notes		Consolidated Obligation Bonds
Total amounts presented in the Statements of Income	$	716,199		$	116,866		$	532,155	$	689,275
Gains (losses) on fair value hedging relationships:
Interest rate contracts:
Derivatives¹	$	(96,772	)	$	(140,821	)	$	75	$	27,229
Hedged items²	115,323			139,828			138		(32,904		)
NET GAINS (LOSSES) ON FAIR VALUE HEDGING RELATIONSHIPS	$	18,551		$	(993	)	$	213	$	(5,675	)



	2018³
	Interest Income/Expense												Non-interest Income
	Advances			Available-for-sale Securities			Consolidated Obligation Discount Notes			Consolidated Obligation Bonds			Net gains (losses) on derivatives and hedging activities
Gains (losses) on fair value hedging relationships:
Interest rate contracts:
Derivatives¹	$	9,653		$	474		$	12		$	(5,178	)	$	21,360
Hedged items²	(3,881		)	—			—			—			(27,650		)
NET GAINS (LOSSES) ON FAIR VALUE HEDGING RELATIONSHIPS	$	5,772		$	474		$	12		$	(5,178	)	$	(6,290	)

	2017³
	Interest Income/Expense												Non-interest Income
	Advances			Available-for-sale Securities			Consolidated Obligation Discount Notes			Consolidated Obligation Bonds			Net gains (losses) on derivatives and hedging activities
Gains (losses) on fair value hedging relationships:
Interest rate contracts:
Derivatives¹	$	(43,547	)	$	(9,271	)	$	(15	)	$	14,514		$	50,916
Hedged items²	(5,381		)	—			—			—			(54,768		)
NET GAINS (LOSSES) ON FAIR VALUE HEDGING RELATIONSHIPS	$	(48,928	)	$	(9,271	)	$	(15	)	$	14,514		$	(3,852	)


¹	Includes net interest settlements in interest income/expense.


²	Includes amortization/accretion on closed fair value relationships in interest income.


³	Prior period amounts were not conformed to new hedge accounting guidance adopted January 1, 2019.

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Table 8.3 presents the cumulative basis adjustments on hedged items designated as fair value hedges and the related amortized cost of the hedged items as of December 31, 2019 (in thousands):

Table 8.3



12/31/2019
Line Item in Statement of Condition of Hedged Item	Carrying Value of Hedged Asset/(Liability)¹			Basis Adjustments for Active Hedging Relationships²			Basis Adjustments for Discontinued Hedging Relationships²		Cumulative Amount of Fair Value Hedging Basis Adjustments²
Advances	$	4,951,445		$	69,643		$	1,424	$	71,067
Available-for-sale securities	7,155,712			79,141			—		79,141
Consolidated obligation bonds	(3,270,635		)	(26,389		)	—		(26,389		)


¹	Includes only the portion of carrying value representing the hedged items in fair value hedging relationships. For available-for-sale securities, amortized cost is considered to be carrying value (i.e., the fair value adjustment recorded in accumulated OCI (AOCI) is excluded).


²	Included in amortized cost of the hedged asset/liability.

Table 8.4 provides information regarding gains and losses on derivatives and hedging activities recorded in non-interest income (in thousands). For fair value hedging relationships, the portion of net gains (losses) representing hedge ineffectiveness are recorded in non-interest income for periods prior to January 1, 2019.

Table 8.4



	2019			2018			2017
Derivatives designated as hedging instruments:
Interest rate swaps				$	(6,290	)	$	(3,852	)
Total net gains (losses) related to fair value hedge ineffectiveness				(6,290		)	(3,852		)
Derivatives not designated as hedging instruments:
Economic hedges:
Interest rate swaps	$	(56,961	)	10,114			19,391
Interest rate caps/floors	(927		)	33			(3,848		)
Net interest settlements	(3,974		)	(5,476		)	(15,143		)
Mortgage delivery commitments	4,309			(1,642		)	2,207
Consolidated obligation discount note commitments	(70		)	70			—
Total net gains (losses) related to derivatives not designated as hedging instruments	(57,623		)	3,099			2,607
NET GAINS (LOSSES) ON DERIVATIVES AND HEDGING ACTIVITIES	$	(57,623	)	$	(3,191	)	$	(1,245	)

Managing Credit Risk on Derivatives: The FHLBank is subject to credit risk due to the risk of nonperformance by counterparties to its derivative transactions and manages credit risk through credit analyses, collateral requirements and adherence to the requirements set forth in its RMP, U.S. Commodity Futures Trading Commission regulations and FHFA regulations.

Uncleared derivatives. For uncleared derivatives, the degree of credit risk depends on the extent to which master netting arrangements are included in these contracts to mitigate the risk. The FHLBank requires collateral agreements with collateral delivery thresholds on all uncleared derivatives. All bilateral security agreements include bilateral-collateral-exchange provisions that require all credit exposures be collateralized, subject to minimum transfer amounts. Additionally, collateral related to derivatives with member institutions includes collateral assigned to the FHLBank, as evidenced by a written security agreement.

Based on credit analyses and collateral requirements, FHLBank management does not anticipate any credit losses on its derivative agreements. The maximum credit risk applicable to a single counterparty was $211,000 and $25,799,000 as of December 31, 2019 and 2018, respectively. The counterparty was different for each period.

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Cleared derivatives. For cleared derivatives, a Clearinghouse is the FHLBank’s counterparty. The applicable Clearinghouse notifies the clearing agent of the required initial and variation margin, and the clearing agent in turn notifies the FHLBank. The FHLBank utilizes two Clearinghouses for all cleared derivative transactions, LCH Ltd and CME Clearing. At both Clearinghouses, variation margin is characterized as daily settlement payments, and initial margin is considered cash collateral. The requirement that the FHLBank posts initial and variation margin through the clearing agent, to the Clearinghouse, exposes the FHLBank to institutional credit risk if the clearing agent or the Clearinghouse fails to meet its obligations. The use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral/payments for changes in the value of cleared derivatives is posted daily through a clearing agent.

The Clearinghouse determines initial margin requirements and generally, credit ratings are not factored into the initial margin. However, clearing agents may require additional initial margin to be posted based on credit considerations, including but not limited to credit rating downgrades. The FHLBank was not required to post additional initial margin by its clearing agents as of December 31, 2019 and 2018.

The FHLBank’s net exposure on derivative agreements is presented in Note 12.

NOTE 9 – DEPOSITS

The FHLBank offers demand, overnight and short-term deposit programs to its members and to other qualifying non-members. Table 9.1 details the types of deposits held by the FHLBank as of December 31, 2019 and 2018 (in thousands):

Table 9.1



	12/31/2019		12/31/2018
Interest-bearing:
Demand	$	383,197	$	265,021
Overnight	280,300		158,300
Total interest-bearing	663,497		423,321
Non-interest-bearing:
Other	127,143		50,499
Total non-interest-bearing	127,143		50,499
TOTAL DEPOSITS	$	790,640	$	473,820

Deposits classified as demand and overnight pay interest based on a daily interest rate. Term deposits pay interest based on a fixed rate determined at the issuance of the deposit. There were no term deposits as of December 31, 2019 and 2018.

NOTE 10 – CONSOLIDATED OBLIGATIONS

Consolidated obligations consist of consolidated bonds and discount notes and, as provided by the Bank Act or FHFA regulation, are backed only by the financial resources of the FHLBanks. The FHLBanks jointly issue consolidated obligations with the Office of Finance acting as their agent. The Office of Finance tracks the amounts of debt issued on behalf of each FHLBank. In addition, the FHLBank records as a liability its specific portion of consolidated obligations for which it is the primary obligor. The FHLBank utilizes a debt issuance process to provide a scheduled monthly issuance of global bullet consolidated obligation bonds. As part of this process, management from each of the FHLBanks determines and communicates a firm commitment to the Office of Finance for an amount of scheduled global debt to be issued on its behalf. If the FHLBanks’ commitments do not meet the minimum debt issue size, the proceeds are allocated to all FHLBanks based on the larger of the FHLBank’s commitment or allocated proceeds based on the individual FHLBank’s regulatory capital to total system regulatory capital. If the FHLBanks’ commitments exceed the minimum debt issue size, the proceeds are allocated based on relative regulatory capital of the FHLBanks with the allocation limited to the lesser of the allocation amount or actual commitment amount.

The FHFA and the U.S. Secretary of the Treasury oversee the issuance of FHLBank debt through the Office of Finance. The FHLBanks can, however, pass on any scheduled calendar slot and not issue any global bullet consolidated obligation bonds upon agreement of 8 of the 11 FHLBanks. Consolidated obligation bonds may be issued to raise short-, intermediate-, and long-term funds for the FHLBanks and are not subject to any statutory or regulatory limits as to maturities. Consolidated obligation discount notes, which are issued to raise short-term funds, are generally issued at less than their face amounts and redeemed at par when they mature.

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Although the FHLBank is primarily liable for its portion of consolidated obligations, the FHLBank is also jointly and severally liable with the other 10 FHLBanks for the payment of principal and interest on all consolidated obligations of each of the FHLBanks. The FHFA, at its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligations for which the FHLBank is not the primary obligor. Although it has never occurred, to the extent that an FHLBank would be required to make a payment on a consolidated obligation on behalf of another FHLBank, the paying FHLBank would be entitled to reimbursement from the non-complying FHLBank. However, if the FHFA determines that the non-complying FHLBank is unable to satisfy its obligations, then the FHFA may allocate the non-complying FHLBank’s outstanding consolidated obligation debt among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis the FHFA may determine to ensure that the FHLBanks operate in a safe and sound manner.

The par value of outstanding consolidated obligations of all FHLBanks, including outstanding consolidated obligations issued on behalf of the FHLBank, was $1,025,894,666,000 and $1,031,617,463,000 as of December 31, 2019 and 2018, respectively. See Note 19 for FHLBank obligations acquired by FHLBank Topeka as investments. FHFA regulations require that each FHLBank maintain unpledged qualifying assets equal to its participation in the total consolidated obligations outstanding. Qualifying assets are defined as cash; secured advances; obligations of or fully guaranteed by the United States; obligations, participations or other instruments of or issued by Fannie Mae or Ginnie Mae; mortgages, obligations or other securities, which are or have ever been sold by Freddie Mac under the Bank Act; and such securities as fiduciary and trust funds may invest in under the laws of the state in which the FHLBank is located.

Consolidated Obligation Bonds: Table 10.1 presents the FHLBank’s participation in consolidated obligation bonds outstanding as of December 31, 2019 and 2018 (dollar amounts in thousands):

Table 10.1



	12/31/2019					12/31/2018
Year of Contractual Maturity	Amount			Weighted Average Interest Rate		Amount			Weighted Average Interest Rate
Due in one year or less	$	15,991,800		1.79	%	$	8,960,500		2.17	%
Due after one year through two years	6,318,350			1.90		5,625,750			2.28
Due after two years through three years	1,375,000			2.11		2,285,100			2.11
Due after three years through four years	1,285,900			2.39		1,134,750			2.21
Due after four years through five years	1,223,350			2.40		1,087,900			2.58
Thereafter	5,776,300			2.78		4,879,850			3.01
Total par value	31,970,700			2.05	%	23,973,850			2.38	%
Premiums	34,789					15,591
Discounts	(3,357		)			(4,088		)
Concession fees	(15,207		)			(12,445		)
Hedging adjustments	26,389					(6,514		)
TOTAL	$	32,013,314				$	23,966,394

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The FHLBank issues optional principal redemption bonds (callable bonds) that may be redeemed in whole or in part at the discretion of the FHLBank on predetermined call dates in accordance with terms of bond offerings. The FHLBank’s participation in consolidated obligation bonds outstanding as of December 31, 2019 and 2018 includes callable bonds totaling $8,891,500,000 and $8,559,000,000, respectively. The FHLBank uses the unswapped callable bonds for financing its callable fixed rate advances (Note 5), MBS (Note 4) and mortgage loans (Note 6). Contemporaneous with a portion of its fixed rate callable bond issuances, the FHLBank also enters into interest rate swap agreements (in which the FHLBank generally pays a variable rate and receives a fixed rate) with call features that mirror the options in the callable bonds (a sold callable swap). The combined sold callable swap and callable debt transaction allows the FHLBank to obtain attractively priced variable rate financing. Table 10.2 summarizes the FHLBank’s participation in consolidated obligation bonds outstanding by year of maturity, or by the next call date for callable bonds as of December 31, 2019 and 2018 (in thousands):

Table 10.2



Year of Maturity or Next Call Date	12/31/2019		12/31/2018
Due in one year or less	$	24,583,300	$	16,971,500
Due after one year through two years	5,148,350		5,270,750
Due after two years through three years	615,000		655,100
Due after three years through four years	682,400		319,750
Due after four years through five years	356,850		275,150
Thereafter	584,800		481,600
TOTAL PAR VALUE	$	31,970,700	$	23,973,850

In addition to having fixed rate or simple variable rate coupon payment terms, consolidated obligation bonds may also have the following broad terms, regarding the coupon payment:


▪	Range bonds that have coupon rates at fixed or variable rates and pay the fixed or variable rate as long as the index rate is within the established range, but generally pay zero percent or a minimal interest rate if the specified index rate is outside the established range;


▪	Conversion bonds that have coupon rates that convert from fixed to variable, or variable to fixed, rates or from one index to another, on predetermined dates according to the terms of the bond offerings; and


▪	Step bonds that have coupon rates at fixed or variable rates for specified intervals over the lives of the bonds. At the end of each specified interval, the coupon rate or variable rate spread increases (decreases) or steps up (steps down). These bond issues generally contain call provisions enabling the bonds to be called at the FHLBank’s discretion on the step dates.

Table 10.3 summarizes interest rate payment terms for consolidated obligation bonds as of December 31, 2019 and 2018 (in thousands):

Table 10.3



	12/31/2019		12/31/2018
Simple variable rate	$	16,017,000	$	10,095,000
Fixed rate	15,573,700		12,858,850
Variable rate with cap	220,000		20,000
Step	110,000		470,000
Fixed to variable rate	50,000		515,000
Range	—		15,000
TOTAL PAR VALUE	$	31,970,700	$	23,973,850

F-45

Consolidated Discount Notes: Table 10.4 summarizes the FHLBank’s participation in consolidated obligation discount notes, all of which are due within one year (dollar amounts in thousands):

Table 10.4



	Book Value		Par Value		Weighted Average Interest Rate¹
December 31, 2019	$	27,447,911	$	27,510,042	1.54	%

December 31, 2018	$	20,608,332	$	20,649,098	2.35	%


¹	Represents yield to maturity excluding concession fees.

Information about the fair value of the consolidated obligations is included in Note 16.

NOTE 11 – AFFORDABLE HOUSING PROGRAM

The Bank Act requires each FHLBank to establish an AHP. As a part of its AHP, the FHLBank provides subsidies in the form of direct grants or below-market interest rate advances to members that use the funds to assist in the purchase, construction or rehabilitation of housing for very low-, low- and moderate-income households. Each FHLBank is required to contribute to its AHP the greater of: (a) 10 percent of its previous year's income subject to assessment; or (b) the prorated sum required to ensure the aggregate contribution by the FHLBanks is no less than $100,000,000 each year. For purposes of the AHP calculation, the term “income subject to assessment” is defined as income before interest expense related to mandatorily redeemable capital stock and the assessment for AHP. The FHLBank accrues this expense monthly based on its income subject to assessment.

The amount set aside for AHP is charged to expense and recognized as a liability. As subsidies are provided through the disbursement of grants or issuance of subsidized advances, the AHP liability is reduced accordingly. If the FHLBank’s income subject to assessment would ever be zero or less, the amount of AHP liability would generally be equal to zero. However, if the result of the aggregate 10 percent calculation described above is less than the $100,000,000 minimum for all FHLBanks as a group, then the Bank Act requires the shortfall to be allocated among the FHLBanks based on the ratio of each FHLBank’s income for the previous year. If an FHLBank determines that its required AHP contributions are exacerbating any financial instability of that FHLBank, it may apply to the FHFA for a temporary suspension of its AHP contributions. The FHLBank has never applied to the FHFA for a temporary suspension of its AHP contributions.

Table 11.1 details the change in the AHP liability for the years ended December 31, 2019, 2018, and 2017 (in thousands):

Table 11.1



	2019			2018			2017
Appropriated and reserved AHP funds as of the beginning of the period	$	43,081		$	43,005		$	33,242
AHP set aside based on current year income	20,597			18,944			21,934
Direct grants disbursed	(20,973		)	(19,027		)	(12,752		)
Recaptured funds¹	322			159			581
Appropriated and reserved AHP funds as of the end of the period	$	43,027		$	43,081		$	43,005

Recaptured funds are direct grants returned to the FHLBank in those instances where the commitments associated with the approved use of funds are not met and repayment to the FHLBank is required by regulation. Recaptured funds are returned as a result of: (1) AHP-assisted homeowner’s transfer or sale of property within the five-year retention period that the assisted homeowner is required to occupy the property; (2) homeowner’s failure to acquire sufficient loan funding (funds previously approved and disbursed cannot be used); (3) over-subsidized projects; or (4) previously disbursed but unused grants.

As of December 31, 2019, the FHLBank’s AHP accrual on its Statements of Condition consisted of $20,814,000 for the 2020 AHP (uncommitted, including amounts recaptured and reallocated from prior years) and $22,213,000 for prior years’ AHP (committed but undisbursed).

F-46

NOTE 12 – ASSETS AND LIABILITIES SUBJECT TO OFFSETTING

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

The FHLBank has analyzed the enforceability of offsetting rights incorporated in its cleared derivative transactions and determined that the exercise of those offsetting rights by a non-defaulting party under these transactions should be upheld under applicable law upon an event of default including a bankruptcy, insolvency, or similar proceeding involving the Clearinghouse or clearing agent, or both. Based on this analysis, the FHLBank presents a net derivative receivable or payable for all of its transactions through a particular clearing agent with a particular Clearinghouse.

Tables 12.1 and 12.2 present the fair value of financial assets, including the related collateral received from or pledged to clearing agents or counterparties, based on the terms of the FHLBank’s master netting arrangements or similar agreements as of December 31, 2019 and 2018 (in thousands):

Table 12.1



12/31/2019
Description	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Statement of Condition			Net Amounts of Assets Presented in the Statement of Condition		Gross Amounts Not Offset in the Statement of Condition¹			Net Amount
Derivative assets:
Uncleared derivatives	$	21,749	$	(14,424	)	$	7,325	$	(495	)	$	6,830
Cleared derivatives	3,061		144,418			147,479		—			147,479
Total derivative assets	24,810		129,994			154,804		(495		)	154,309
Securities purchased under agreements to resell	4,750,000		—			4,750,000		(4,750,000		)	—
TOTAL	$	4,774,810	$	129,994		$	4,904,804	$	(4,750,495	)	$	154,309


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

Table 12.2



12/31/2018
Description	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Statement of Condition			Net Amounts of Assets Presented in the Statement of Condition		Gross Amounts Not Offset in the Statement of Condition¹			Net Amount
Derivative assets:
Uncleared derivatives	$	88,296	$	(83,378	)	$	4,918	$	(1,618	)	$	3,300
Cleared derivatives	176		31,001			31,177		—			31,177
Total derivative assets	88,472		(52,377		)	36,095		(1,618		)	34,477
Securities purchased under agreements to resell	1,251,096		—			1,251,096		(1,251,096		)	—
TOTAL	$	1,339,568	$	(52,377	)	$	1,287,191	$	(1,252,714	)	$	34,477


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

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Tables 12.3 and 12.4 present the fair value of financial liabilities, including the related collateral received from or pledged to counterparties, based on the terms of the FHLBank’s master netting arrangements or similar agreements as of December 31, 2019 and 2018 (in thousands):

Table 12.3



12/31/2019
Description	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statement of Condition			Net Amounts of Liabilities Presented in the Statement of Condition		Gross Amounts Not Offset in the Statement of Condition¹			Net Amount
Derivative liabilities:
Uncleared derivatives	$	105,468	$	(105,266	)	$	202	$	(25	)	$	177
Cleared derivatives	1,240		(1,240		)	—		—			—
Total derivative liabilities	106,708		(106,506		)	202		(25		)	177
TOTAL	$	106,708	$	(106,506	)	$	202	$	(25	)	$	177


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

Table 12.4



12/31/2018
Description	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statement of Condition			Net Amounts of Liabilities Presented in the Statement of Condition		Gross Amounts Not Offset in the Statement of Condition¹			Net Amount
Derivative liabilities:
Uncleared derivatives	$	36,363	$	(28,479	)	$	7,884	$	(3	)	$	7,881
Cleared derivatives	5,139		(5,139		)	—		—			—
Total derivative liabilities	41,502		(33,618		)	7,884		(3		)	7,881
TOTAL	$	41,502	$	(33,618	)	$	7,884	$	(3	)	$	7,881


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

NOTE 13 – CAPITAL

Capital Requirements: The FHLBank is subject to three capital requirements under the provisions of the Gramm-Leach-Bliley Act (GLB Act) and the FHFA's capital structure regulation. Regulatory capital does not include AOCI but does include mandatorily redeemable capital stock.

•

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

•

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


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

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Table 13.1 illustrates that the FHLBank was in compliance with its regulatory capital requirements as of December 31, 2019 and 2018 (dollar amounts in thousands):

Table 13.1



	12/31/2019						12/31/2018
	Required			Actual			Required			Actual
Regulatory capital requirements:
Risk-based capital	$	486,650		$	2,319,531		$	387,729		$	2,193,001
Total regulatory capital-to-asset ratio	4.0		%	4.4		%	4.0		%	5.1		%
Total regulatory capital	$	2,531,066		$	2,768,680		$	1,908,610		$	2,442,156
Leverage capital ratio	5.0		%	6.2		%	5.0		%	7.4		%
Leverage capital	$	3,163,833		$	3,928,446		$	2,385,763		$	3,538,656

Capital Stock: The FHLBank offers two classes of stock, Class A Common Stock and Class B Common Stock. Each member is required to hold capital stock to become and remain a member of the FHLBank (Asset-based Stock Purchase Requirement; Class A Common Stock) and enter into specified activities with the FHLBank including, but not limited to, access to the FHLBank’s credit products and selling Acquired Member Assets (AMA) to the FHLBank (Activity-based Stock Purchase Requirement; Class A Common Stock to the extent of a member’s Asset-based Stock Purchase Requirement, then Class B Common Stock for the remainder). The amount of Class A Common Stock a member must acquire and maintain is the Asset-based Stock Purchase Requirement, which is currently equal to 0.1 percent of a member’s total assets as of December 31 of the preceding calendar year, with a minimum requirement of $1,000, and a maximum requirement of $500,000. The amount of Class B Common Stock a member must acquire and maintain is the Activity-based Stock Purchase Requirement, which is currently equal to 4.5 percent of the principal amount of advances outstanding to the member less the member’s Asset-based Stock Purchase Requirement. There are currently no Activity-based Stock Purchase Requirements for AMA, letters of credit or derivatives.

The percentages listed above are subject to change by the FHLBank within ranges established in its capital plan. Changes to the percentages outside of the capital plan percentages require the FHLBank to request FHFA approval of an amended capital plan. See Note 18 for detailed information on transactions with related parties.

Any member may make a written request not in connection with a notice of withdrawal or attaining non-member status for the redemption of a part of its Class A Common Stock or all or part of its Class B Common Stock (i.e., excess stock redemption request). Within five business days of receipt of a member’s written redemption request, the FHLBank may notify the member that it declines to repurchase the excess stock before the end of that five business day period, at which time the applicable redemption period shall commence. Otherwise, the FHLBank will repurchase any excess stock within the five business day period. The redemption periods are six months for Class A Common Stock and five years for Class B Common Stock. Subject to certain limitations, the FHLBank may choose to repurchase a member’s excess stock on or before the end of the applicable redemption period.

Under FHFA regulations, members that withdraw from membership may not be readmitted to membership, or acquire any capital stock of any FHLBank, for a period of five years from the date on which the institution's membership terminated and it divested all of its shares of FHLBank stock.

Stock Dividends: The FHLBank’s board of directors may declare and pay non-cumulative dividends, expressed as a percentage rate per annum based upon the par value of capital stock on shares of Class A Common Stock outstanding and on shares of Class B Common Stock outstanding, out of previously unrestricted retained earnings and current earnings in either cash or Class B Common Stock. There is no dividend preference between Class A Common Stockholders and Class B Common Stockholders up to the Dividend Parity Threshold (DPT). Dividend rates in excess of the DPT may be paid on Class A Common Stock or Class B Common Stock at the discretion of the board of directors, provided, however, that the dividend rate paid per annum on the Class B Common Stock equals or exceeds the dividend rate per annum paid on the Class A Common Stock for any dividend period. The DPT can be changed at any time by the board of directors but will only be effective for dividends paid at least 90 days after the date members are notified by the FHLBank. The DPT effective for dividends paid during 2019, 2018, and 2017 was equal to the average overnight Federal funds effective rate minus 100 basis points. This DPT will continue to be effective until such time as it may be changed by the FHLBank’s board of directors. When the overnight Federal funds effective rate is below 1.00 percent, the DPT is zero percent for that dividend period (DPT is floored at zero).

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The board of directors cannot declare a dividend if: (1) the FHLBank’s capital position is below its minimum regulatory capital requirements; (2) the FHLBank’s capital position will be below its minimum regulatory capital requirements after paying the dividend; (3) the principal or interest due on any consolidated obligation of the FHLBank has not been paid in full; (4) the FHLBank fails to provide the FHFA the quarterly certification prior to declaring or paying dividends for a quarter; or (5) the FHLBank fails to provide notification upon its inability to provide such certification or upon a projection that it will fail to comply with statutory or regulatory liquidity requirements or will be unable to timely and fully meet all of its current obligations.

Mandatorily Redeemable Capital Stock: The FHLBank is a cooperative whose members own most of the FHLBank’s capital stock. Former members (including certain non-members that own FHLBank capital stock as a result of merger or acquisition, relocation, charter termination, or involuntary termination of an FHLBank member) own the remaining capital stock to support business transactions still carried on the FHLBank's Statements of Condition. Shares cannot be purchased or sold except between the FHLBank and its members at a price equal to the $100 per share par value. If a member cancels its written notice of redemption or notice of withdrawal, the FHLBank will reclassify mandatorily redeemable capital stock from a liability to equity. After the reclassification, dividends on the capital stock would no longer be classified as interest expense.

Table 13.2 presents a roll-forward of mandatorily redeemable capital stock for the years ended December 31, 2019, 2018, and 2017 (in thousands):

Table 13.2



	2019			2018			2017
Balance, beginning of period	$	3,597		$	5,312		$	2,670
Capital stock subject to mandatory redemption reclassified from equity during the period	283,831			1,040,316			779,979
Redemption or repurchase of mandatorily redeemable capital stock during the period	(285,150		)	(1,042,258		)	(777,530		)
Stock dividend classified as mandatorily redeemable capital stock during the period	137			227			193
Balance, end of period	$	2,415		$	3,597		$	5,312

Table 13.3 shows the amount of mandatorily redeemable capital stock by contractual year of redemption as of December 31, 2019 and 2018 (in thousands). The year of redemption in Table 13.3 is the end of the redemption period in accordance with the FHLBank’s capital plan. The FHLBank is not required to redeem or repurchase membership stock until six months (for Class A Common Stock) or five years (for Class B Common Stock) after the FHLBank receives notice for withdrawal from the member. Additionally, the FHLBank is not required to redeem or repurchase activity-based stock until any activity-based stock becomes excess stock as a result of an activity no longer remaining outstanding. However, the FHLBank intends to repurchase the excess activity-based stock of non-members to the extent that it can do so and still meet its regulatory capital requirements.

Table 13.3



Contractual Year of Repurchase	12/31/2019		12/31/2018
Year 1	$	—	$	—
Year 2	1		—
Year 3	869		1
Year 4	—		1,798
Year 5	—		—
Past contractual redemption date due to remaining activity¹	1,545		1,798
TOTAL	$	2,415	$	3,597


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

F-50

Assuming the FHLBank did not elect to redeem a member's Class A Common Stock or Class B Common Stock within five business days of its receipt of a redemption request, a member may cancel or revoke its written redemption request prior to the end of the redemption period (six months for Class A Common Stock and five years for Class B Common Stock) or its written notice of withdrawal from membership prior to the end of a six-month period starting on the date the FHLBank received the member’s written notice of withdrawal from membership. At the end of the six-month period, the member’s membership is terminated and the Class A Common Stock held to meet its Asset-based Stock Purchase Requirement will be redeemed by the FHLBank, as long as the FHLBank will continue to meet its regulatory capital requirements and as long as the Class A Common Stock is not needed to meet the former member’s Activity-based Stock Purchase Requirements. The FHLBank’s capital plan provides that the FHLBank will charge the member a cancellation fee in accordance with a schedule where the amount of the fee increases with the passage of time, the fee being 1.0 percent for any Class A Common Stock cancellation and starting at 1.0 percent in year one for Class B Common Stock and increasing by 1.0 percent each year to a maximum of 5.0 percent for cancellations in the fifth year for Class B Common Stock.

The FHFA issued a regulatory interpretation confirming that the mandatorily redeemable capital stock accounting treatment for certain shares of FHLBank capital stock does not affect the definition of regulatory capital for purposes of determining the FHLBank’s compliance with its regulatory capital requirements, calculating its mortgage securities investment authority (various percentages of total FHLBank capital depending on the date acquired), calculating its unsecured credit exposure to other GSEs (100 percent of total FHLBank capital) or calculating its unsecured credit limits to other counterparties (various percentages of total FHLBank capital depending on the rating of the counterparty).

Excess Capital Stock: Excess capital stock is defined as the amount of stock held by a member (or former member) in excess of that institution’s minimum stock purchase requirement. FHFA rules limit the ability of the FHLBank to create excess member stock under certain circumstances. For example, the FHLBank may not pay dividends in the form of capital stock or issue new excess stock to members if the FHLBank’s excess stock exceeds one percent of its total assets or if the issuance of excess stock would cause the FHLBank’s excess stock to exceed one percent of its total assets. As of December 31, 2019, the FHLBank’s excess stock was less than one percent of total assets.

Capital Classification Determination: The FHFA determines each FHLBank’s capital classification on at least a quarterly basis. If an FHLBank is determined to be other than adequately capitalized, the FHLBank becomes subject to additional supervisory authority by the FHFA. Before implementing a reclassification, the Director of the FHFA is required to provide the FHLBank with written notice of the proposed action and an opportunity to submit a response. As of the most recent review by the FHFA, the FHLBank was classified as adequately capitalized.

F-51

NOTE 14 – ACCUMULATED OTHER COMPREHENSIVE INCOME

Table 14.1 summarizes the changes in AOCI for the years ended December 31, 2019, 2018, and 2017 (in thousands):

Table 14.1



	Net Unrealized Gains (Losses) on Available-for-Sale Securities (Note 4)			Net Non-Credit Portion of Other-than-temporary Impairment Gains (Losses) on Held-to-maturity Securities (Note 4)			Defined Benefit Pension Plan (Note 15)			Total AOCI
Balance at December 31, 2016	$	9,345		$	(5,841	)	$	(2,927	)	$	577
Other comprehensive income (loss) before reclassification:
Unrealized gains (losses)	21,861									21,861
Non-credit other-than-temporary impairment losses				(61		)				(61		)
Accretion of non-credit other-than-temporary impairment loss				1,337						1,337
Net gains (losses) - defined benefit pension plan							885			885
Settlement charges - defined benefit pension plan							279			279
Reclassifications from other comprehensive income (loss) to net income:
Non-credit other-than-temporary impairment to credit other-than-temporary impairment¹				402						402
Amortization of net losses - defined benefit pension plan²							378			378
Net current period other comprehensive income (loss)	21,861			1,678			1,542			25,081
Balance at December 31, 2017	$	31,206		$	(4,163	)	$	(1,385	)	$	25,658
Other comprehensive income (loss) before reclassification:
Unrealized gains (losses)	(12,138		)							(12,138		)
Accretion of non-credit other-than-temporary impairment loss				513						513
Non-credit other-than-temporary impairment losses included in basis of securities sold				3,625						3,625
Net gains (losses) - defined benefit pension plan							(2,389		)	(2,389		)
Reclassifications from other comprehensive income (loss) to net income:
Non-credit other-than-temporary impairment to credit other-than-temporary impairment¹				25						25
Amortization of net losses - defined benefit pension plan²							399			399
Net current period other comprehensive income (loss)	(12,138		)	4,163			(1,990		)	(9,965		)
Balance at December 31, 2018	$	19,068		$	—		$	(3,375	)	$	15,693
Other comprehensive income (loss) before reclassification:
Unrealized gains (losses)	7,720									7,720
Net gains (losses) - defined benefit pension plan							(1,806		)	(1,806		)
Curtailment gains (losses) - defined benefit pension plan							2,845			2,845
Reclassifications from other comprehensive income (loss) to net income:
Amortization of net losses - defined benefit pension plan²							334			334
Net current period other comprehensive income (loss)	7,720			—			1,373			9,093
Balance at December 31, 2019	$	26,788		$	—		$	(2,002	)	$	24,786


¹	Recorded in “Other” non-interest income on the Statements of Income. Amount represents a debit (decrease to other income (loss)).


²	Recorded in “Other” non-interest expense on the Statements of Income. Amount represents a debit (increase to other expenses).

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NOTE 15 - PENSION AND POSTRETIREMENT BENEFIT PLANS

Qualified Defined Benefit Multiemployer Plan: The FHLBank participates in the Pentegra Defined Benefit Plan for Financial Institutions (Pentegra Defined Benefit Plan), a tax-qualified defined benefit pension plan. The Pentegra Defined Benefit Plan is treated as a multiemployer plan for accounting purposes but operates as a multiple-employer plan under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code. As a result, certain multiemployer plan disclosures are not applicable to the Pentegra Defined Benefit Plan. Under the Pentegra Defined Benefit Plan, contributions made by a participating employer may be used to provide benefits to employees of other participating employers because assets contributed by an employer are not segregated in a separate account or restricted to provide benefits only to employees of that employer. Also, in the event a participating employer is unable to meet its contribution requirements, the required contributions for the other participating employers could increase proportionately.

In September 2019, the FHLBank's board of directors elected to freeze the Pentegra Defined Benefit Plan on December 31, 2019, thereby discontinuing the future accrual of new benefits. Prior to the plan freeze, employees of the FHLBank who began employment prior to January 1, 2009 were eligible to participate.

The Pentegra Defined Benefit Plan operates on a fiscal year from July 1 through June 30 and files one Form 5500 on behalf of all employers who participate in the plan. The Employer Identification Number is 135645888 and the three-digit plan number is 333. There are no collective bargaining agreements in place at the FHLBank.

The Pentegra Defined Benefit Plan’s annual valuation process includes calculating the plan’s funded status and separately calculating the funded status of each participating employer. The funded status is defined as the market value of assets divided by the funding target (100 percent of the present value of all benefit liabilities accrued at that date). As permitted by ERISA, the Pentegra Defined Benefit Plan accepts contributions for the prior plan year up to eight and a half months after the asset valuation date. As a result, the market value of assets at the valuation date (July 1) will increase by any subsequent contributions designated for the immediately preceding plan year ended June 30.

The most recent Form 5500 available for the Pentegra Defined Benefit Plan is for the year ended June 30, 2018. For the Pentegra Defined Benefit Plan years ended June 30, 2018 and 2017, the FHLBank’s contributions did not represent more than five percent of the total contributions to the Pentegra Defined Benefit Plan. Table 15.1 presents the net pension cost and funded status of the FHLBank relating to the Pentegra Defined Benefit Plan (dollar amounts in thousands):

Table 15.1



	2019			2018			2017
Net pension cost charged to compensation and benefits expense	$	688		$	3,528		$	3,510
Pentegra Defined Benefit Plan funded status as of July 1¹	108.6		%	111.0		%	111.8		%
FHLBank's funded status as of July 1	104.6		%	111.1		%	110.9		%

The funded status as of July 1, 2019 is preliminary and may increase because the plan’s participants are permitted to make contributions for the plan year ended June 30, 2019 through March 15, 2020. Contributions made on or before March 15, 2020, and designated for the plan year ended June 30, 2019, will be included in the final valuation as of July 1, 2019. The final funded status as of July 1, 2019 will not be available until the Form 5500 for the plan year July 1, 2019 through June 30, 2020 is filed (this Form 5500 is due to be filed no later than April 2021). The funded status as of July 1, 2018 is preliminary and may increase because the plan’s participants were permitted to make contributions for the plan year ended June 30, 2018 through March 15, 2019. Contributions made on or before March 15, 2019, and designated for the plan year ended June 30, 2018, will be included in the final valuation as of July 1, 2018. The final funded status as of July 1, 2018 will not be available until the Form 5500 for the plan year July 1, 2018 through June 30, 2019 is filed (this Form 5500 is due to be filed no later than April 2020).

Qualified Defined Contribution Plans: The FHLBank also participated in the Pentegra Defined Contribution Plan for Financial Institutions, a tax-qualified, defined contribution pension plan. Substantially all officers and employees of the FHLBank were covered by the plan. The FHLBank contributed a matching amount equal to a percentage of voluntary employee contributions, subject to certain limitations. The FHLBank’s contributions of $1,513,000, $1,474,000 and $1,343,000 to the Pentegra Defined Contribution Plan in 2019, 2018, and 2017, respectively, were charged to compensation and benefits expense. Effective January 1, 2020, the FHLBank adopted the Federal Home Loan Bank of Topeka 401(k) Plan, thereby no longer participating in the Pentegra Defined Contribution Plan.

Nonqualified Supplemental Retirement Plan: The FHLBank maintains a benefit equalization plan (BEP) covering certain senior officers and members of the board of directors. This non-qualified plan contains provisions for a deferred compensation component and a defined benefit pension component. In September 2019, the FHLBank's board of directors elected to freeze the defined benefit component of the BEP on December 31, 2019, thereby discontinuing the future accrual of new benefits.

F-53

There are no funded plan assets that have been designated to provide for the deferred compensation component or defined benefit pension component of the BEP. The obligations of the deferred compensation component of the BEP were $6,065,000 and $5,129,000 as of December 31, 2019 and 2018, respectively. The obligations and funding status of the defined benefit portion of the FHLBank’s BEP as of December 31, 2019 and 2018 are presented in Table 15.2 (in thousands):

Table 15.2



	2019			2018
Change in benefit obligation:
Projected benefit obligation at beginning of year	$	14,519		$	12,313
Service cost	236			222
Interest cost	566			506
Net (gains) losses	1,806			2,389
Benefits paid	(910		)	(911		)
Curtailment	(2,845		)	—
Projected benefit obligation at end of year	13,372			14,519
Change in plan assets:
Fair value of plan assets at beginning of year	—			—
Employer contributions	910			911
Benefits paid	(910		)	(911		)
Fair value of plan assets at end of year	—			—
FUNDED STATUS	$	(13,372	)	$	(14,519	)

Table 15.3 presents the components of the net periodic pension cost for the defined benefit portion of the FHLBank’s BEP for the years ended December 31, 2019, 2018, and 2017 (in thousands):

Table 15.3



	2019		2018		2017
Service cost	$	236	$	222	$	331
Interest cost	566		506		558
Amortization of net losses	334		399		378
Settlement charges	—		—		279
NET PERIODIC POSTRETIREMENT BENEFIT COST	$	1,136	$	1,127	$	1,546

The estimated actuarial (gain) loss that will be amortized from AOCI into net periodic pension cost over the next fiscal year is $109,000.

The measurement date used to determine the current year’s benefit obligation was December 31, 2019.

Table 15.4 presents the key assumptions and other information for the actuarial calculations for the defined benefit portion of the FHLBank’s BEP for the years ended December 31, 2019, 2018, and 2017 (dollar amounts in thousands):

Table 15.4



	2019			2018			2017
Discount rate - benefit obligation	3.00		%	4.00		%	3.50		%
Discount rate - net periodic benefit cost	4.00		%	3.50		%	4.00		%
Salary increases - benefit obligation	—		%	4.89		%	4.90		%
Amortization period (years) - net periodic benefit cost	6			6			6
Accumulated benefit obligation	$	13,372		$	11,105		$	9,473

F-54

The FHLBank estimates that its required contributions to the defined benefit portion of the FHLBank’s BEP for the year ended December 31, 2020 will be $1,198,000.

The FHLBank’s estimated future benefit payments are presented in Table 15.5 (in thousands):

Table 15.5



Year ending December 31,	Estimated Benefit Payments
2020	$	1,198
2021	1,211
2022	1,206
2023	1,223
2024	403
2025 through 2029	2,312

NOTE 16 – FAIR VALUES

The fair value amounts recorded on the Statements of Condition and presented in the note disclosures have been determined by the FHLBank using available market and other pertinent information and reflect the FHLBank’s best judgment of appropriate valuation methods. GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). Although the FHLBank uses its best judgment in estimating the fair value of its financial instruments, there are inherent limitations in any valuation technique. Therefore, the fair values may not be indicative of the amounts that would have been realized in market transactions as of December 31, 2019 and 2018. Additionally, these values do not represent an estimate of the overall market value of the FHLBank as a going concern, which would take into account future business opportunities and the net profitability of assets and liabilities.

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

Fair Value Hierarchy: The fair value hierarchy requires the FHLBank to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The inputs are evaluated and an overall level for the fair value measurement is determined. This overall level is an indication of the market observability of the fair value measurement for the asset or liability. The FHLBank must disclose the level within the fair value hierarchy in which the measurements are classified for all assets and liabilities.

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


•	Level 1 Inputs – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the FHLBank can access on the measurement date. An active market for the asset or liability is a market in which the transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

•

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


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

The FHLBank reviews its fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification of certain assets or liabilities. There were no transfers of assets or liabilities between fair value levels during the years ended December 31, 2019 and 2018.

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Tables 16.1 and 16.2 present the carrying value, fair value and fair value hierarchy of financial assets and liabilities as of December 31, 2019 and 2018. The FHLBank records trading securities, available-for-sale securities, derivative assets, and derivative liabilities at fair value on a recurring basis, and on occasion certain mortgage loans held for portfolio and certain other assets at fair value on a nonrecurring basis. The FHLBank measures all other financial assets and liabilities at amortized cost. Further details about the financial assets and liabilities held at fair value on either a recurring or non-recurring basis are presented in Tables 16.3 and 16.4.

The carrying value, fair value and fair value hierarchy of the FHLBank’s financial assets and liabilities as of December 31, 2019 and 2018 are summarized in Tables 16.1 and 16.2 (in thousands):

Table 16.1



	12/31/2019
	Carrying Value			Total Fair Value			Level 1		Level 2			Level 3		Netting Adjustment and Cash Collateral¹
Assets:
Cash and due from banks	$	1,917,166		$	1,917,166		$	1,917,166	$	—		$	—	$	—
Interest-bearing deposits	921,453			921,453			—		921,453			—		—
Securities purchased under agreements to resell	4,750,000			4,750,000			—		4,750,000			—		—
Federal funds sold	850,000			850,000			—		850,000			—		—
Trading securities	2,812,562			2,812,562			—		2,812,562			—		—
Available-for-sale securities	7,182,500			7,182,500			—		7,182,500			—		—
Held-to-maturity securities	3,569,958			3,556,938			—		3,476,084			80,854		—
Advances	30,241,315			30,295,813			—		30,295,813			—		—
Mortgage loans held for portfolio, net of allowance	10,633,009			10,983,356			—		10,981,458			1,898		—
Accrued interest receivable	143,765			143,765			—		143,765			—		—
Derivative assets	154,804			154,804			—		24,810			—		129,994
Liabilities:
Deposits	790,640			790,640			—		790,640			—		—
Consolidated obligation discount notes	27,447,911			27,448,021			—		27,448,021			—		—
Consolidated obligation bonds	32,013,314			32,103,154			—		32,103,154			—		—
Mandatorily redeemable capital stock	2,415			2,415			2,415		—			—		—
Accrued interest payable	117,580			117,580			—		117,580			—		—
Derivative liabilities	202			202			—		106,708			—		(106,506		)
Other Asset (Liability):
Industrial revenue bonds	35,000			34,850			—		34,850			—		—
Financing obligation payable	(35,000		)	(34,850		)	—		(34,850		)	—		—


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

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Table 16.2



	12/31/2018
	Carrying Value			Total Fair Value			Level 1		Level 2			Level 3		Netting Adjustment and Cash Collateral¹
Assets:
Cash and due from banks	$	15,060		$	15,060		$	15,060	$	—		$	—	$	—
Interest-bearing deposits	670,660			670,660			—		670,660			—		—
Securities purchased under agreements to resell	1,251,096			1,251,096			—		1,251,096			—		—
Federal funds sold	50,000			50,000			—		50,000			—		—
Trading securities	2,151,113			2,151,113			—		2,151,113			—		—
Available-for-sale securities	1,725,640			1,725,640			—		1,725,640			—		—
Held-to-maturity securities	4,456,873			4,447,078			—		4,364,127			82,951		—
Advances	28,730,113			28,728,201			—		28,728,201			—		—
Mortgage loans held for portfolio, net of allowance	8,410,462			8,388,885			—		8,387,425			1,460		—
Accrued interest receivable	109,366			109,366			—		109,366			—		—
Derivative assets	36,095			36,095			—		88,472			—		(52,377		)
Liabilities:
Deposits	473,820			473,820			—		473,820			—		—
Consolidated obligation discount notes	20,608,332			20,606,743			—		20,606,743			—		—
Consolidated obligation bonds	23,966,394			23,727,705			—		23,727,705			—		—
Mandatorily redeemable capital stock	3,597			3,597			3,597		—			—		—
Accrued interest payable	87,903			87,903			—		87,903			—		—
Derivative liabilities	7,884			7,884			—		41,502			—		(33,618		)
Other Asset (Liability):
Industrial revenue bonds	35,000			32,154			—		32,154			—		—
Financing obligation payable	(35,000		)	(32,154		)	—		(32,154		)	—		—


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

Fair Value Methodologies and Techniques and Significant Inputs:

The valuation methodologies and primary inputs used to develop the measurement of fair value for assets and liabilities that are measured at fair value on a recurring or nonrecurring basis in the Statements of Condition are listed below. The fair values and level within the fair value hierarchy of these assets and liabilities are reported in Tables 16.3 and 16.4.

Investment Securities: For long-term (as determined by original issuance date) investment securities, the FHLBank obtains prices from multiple designated third-party pricing vendors when available. The pricing vendors use various proprietary models to price investments. The inputs to those models are derived from various sources including, but not limited to: benchmark yields, reported trades, dealer estimates, issuer spreads, benchmark securities, bids, offers and other market‑related data. Since many MBS are not traded daily, the pricing vendors use available information as applicable such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to determine the prices for individual securities. Each pricing vendor has an established challenge process in place for all valuations, which facilitates resolution of potentially erroneous prices identified by the FHLBank. The use of multiple pricing vendors provides the FHLBank with additional data points regarding levels of inputs and final prices that are used to validate final pricing of investment securities. The utilization of the average of available vendor prices within a cluster tolerance and the evaluation of reasonableness of outlier prices described below does not discard available information.

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Annually, the FHLBank conducts reviews of the multiple pricing vendors to confirm and further augment its understanding of the vendors’ pricing processes, methodologies and control procedures. The FHLBank’s review process includes obtaining available vendors’ independent auditors’ reports regarding the internal controls over their valuation process, although the availability of pertinent reports varies by vendor.

The FHLBank utilizes a valuation technique for estimating the fair values of long-term investment securities as follows:


▪	The FHLBank’s valuation technique first requires the establishment of a median price for each security. If three prices are received, the middle price is used; if two prices are received, the average of the two prices is used; and if one price is received, it is used subject to validation.


▪	All prices that are within a specified tolerance threshold of the median price are included in the cluster of prices that are averaged to compute a default price.


▪	Prices that are outside the threshold (outliers) are subject to further analysis (including, but not limited to, comparison to prices provided by an additional third-party valuation service, prices for similar securities, and/or non‑binding dealer estimates) to determine if an outlier is a better estimate of fair value.


▪	If an outlier (or some other price identified in the analysis) is determined to be a better estimate of fair value, then the outlier (or the other price as appropriate) is used as the final price rather than the default price.


▪	If, on the other hand, the analysis confirms that an outlier (or outliers) is (are) in fact not representative of fair value and the default price is the best estimate, then the default price is used as the final price. In all cases, the final price is used to determine the fair value of the security.


▪	If all prices received for a security are outside the tolerance threshold level of the median price, then there is no default price, and the final price is determined by an evaluation of all outlier prices as described above.

As of December 31, 2019, multiple prices were received for all of the FHLBank’s long-term investment securities with all vendor prices falling within the tolerances so the final prices for those securities were computed by averaging the prices received. Based on the FHLBank’s reviews of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices, the FHLBank has concluded that its final prices result in reasonable estimates of fair value and that the fair value measurements are classified appropriately in the fair value hierarchy.

Impaired Mortgage Loans Held for Portfolio and Real Estate Owned: The estimated fair values of impaired mortgage loans held for portfolio and REO on a nonrecurring basis are generally based on broker prices or property values obtained from a third-party pricing vendor. All estimated fair values of impaired mortgage loans held for portfolio and REO are net of any estimated selling costs.

Derivative Assets/Liabilities: The FHLBank bases the fair values of derivatives on instruments with similar terms or market prices, when available. However, active markets do not exist for many of the FHLBank’s derivatives. Consequently, fair values for these instruments are generally estimated using standard valuation techniques such as discounted cash flow analysis and comparisons to similar instruments. The FHLBank is subject to credit risk due to the risk of nonperformance by counterparties to its derivative transactions. For uncleared derivatives, the degree of credit risk depends on the extent to which master netting arrangements are included in these contracts to mitigate the risk. In addition, the FHLBank requires collateral agreements with collateral delivery thresholds on all of its uncleared derivatives. The use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral is posted daily through a clearing agent for changes in the value of cleared derivatives. The FHLBank has evaluated the potential for the fair value of the instruments to be impacted by counterparty credit risk and its own credit risk and has determined that no adjustments were significant or necessary to the overall fair value measurements of derivatives.

The fair values of the FHLBank’s derivative assets and liabilities include accrued interest receivable/payable and cash collateral. The estimated fair values of the accrued interest receivable/payable and cash collateral approximate their carrying values due to their short-term nature. Derivatives are presented on a net basis by clearing agent by Clearinghouse or by counterparty when it has met the netting requirements. If these netted amounts are positive, they are classified as an asset and, if negative, a liability.

The discounted cash flow model uses market-observable inputs. Inputs by class of derivative are as follows:


▪	Interest-rate related:


•	Discount rate assumption - OIS curve;


•	Forward interest rate assumption for rate resets - swap curve of index rate of the instrument (e.g., LIBOR, SOFR or Fed Funds Effective Rate);


•	Volatility assumptions - market-based expectations of future interest rate volatility implied from current market prices for similar options; and


•	Prepayment assumptions.


▪	Mortgage delivery commitments:


•	To be announced (TBA) price - market-based prices of TBAs by coupon class and expected term until settlement.

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Fair Value Measurements: Tables 16.3 and 16.4 present, for each hierarchy level, the FHLBank’s assets and liabilities that are measured at fair value on a recurring or nonrecurring basis on the Statements of Condition as of or for the periods ended December 31, 2019 and 2018 (in thousands).

Table 16.3



	12/31/2019
	Total		Level 1		Level 2		Level 3		Netting Adjustment and Cash Collateral¹
Recurring fair value measurements - Assets:
Trading securities:
U.S. Treasury obligations	$	1,530,518	$	—	$	1,530,518	$	—	$	—
GSE obligations	416,025		—		416,025		—		—
GSE MBS	866,019		—		866,019		—		—
Total trading securities	2,812,562		—		2,812,562		—		—
Available-for-sale securities:
U.S. Treasury obligations	4,261,791		—		4,261,791		—		—
GSE MBS	2,920,709		—		2,920,709		—		—
Total available-for-sale securities	7,182,500		—		7,182,500		—		—
Derivative assets:
Interest-rate related	154,309		—		24,315		—		129,994
Mortgage delivery commitments	495		—		495		—		—
Total derivative assets	154,804		—		24,810		—		129,994
TOTAL RECURRING FAIR VALUE MEASUREMENTS - ASSETS	$	10,149,866	$	—	$	10,019,872	$	—	$	129,994

Recurring fair value measurements - Liabilities:
Derivative liabilities:
Interest-rate related	$	177	$	—	$	106,683	$	—	$	(106,506	)
Mortgage delivery commitments	25		—		25		—		—
Total derivative liabilities	202		—		106,708		—		(106,506		)
TOTAL RECURRING FAIR VALUE MEASUREMENTS - LIABILITIES	$	202	$	—	$	106,708	$	—	$	(106,506	)

Nonrecurring fair value measurements - Assets²:
Impaired mortgage loans	$	1,909	$	—	$	—	$	1,909	$	—
Real estate owned	144		—		—		144		—
TOTAL NONRECURRING FAIR VALUE MEASUREMENTS - ASSETS	$	2,053	$	—	$	—	$	2,053	$	—


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


²	Includes assets adjusted to fair value during the year ended December 31, 2019 and still outstanding as of December 31, 2019.

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Table 16.4



	12/31/2018
	Total		Level 1		Level 2		Level 3		Netting Adjustment and Cash Collateral¹
Recurring fair value measurements - Assets:
Trading securities:
U.S. Treasury obligations	$	252,377	$	—	$	252,377	$	—	$	—
GSE obligations	1,000,495		—		1,000,495		—		—
U.S. obligation MBS	467		—		467		—		—
GSE MBS	897,774		—		897,774		—		—
Total trading securities	2,151,113		—		2,151,113		—		—
Available-for-sale securities:
GSE MBS	1,725,640		—		1,725,640		—		—
Total available-for-sale securities	1,725,640		—		1,725,640		—		—
Derivative assets:
Interest-rate related	35,543		—		87,920		—		(52,377		)
Mortgage delivery commitments	552		—		552		—		—
Total derivative assets	36,095		—		88,472		—		(52,377		)
TOTAL RECURRING FAIR VALUE MEASUREMENTS - ASSETS	$	3,912,848	$	—	$	3,965,225	$	—	$	(52,377	)

Recurring fair value measurements - Liabilities:
Derivative liabilities:
Interest-rate related	$	7,881	$	—	$	41,499	$	—	$	(33,618	)
Mortgage delivery commitments	3		—		3		—		—
Total derivative liabilities	7,884		—		41,502		—		(33,618		)
TOTAL RECURRING FAIR VALUE MEASUREMENTS - LIABILITIES	$	7,884	$	—	$	41,502	$	—	$	(33,618	)

Nonrecurring fair value measurements - Assets²:
Impaired mortgage loans	$	1,463	$	—	$	—	$	1,463	$	—
Real estate owned	1,028		—		—		1,028		—
TOTAL NONRECURRING FAIR VALUE MEASUREMENTS - ASSETS	$	2,491	$	—	$	—	$	2,491	$	—


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


²	Includes assets adjusted to fair value during the year ended December 31, 2018 and still outstanding as of December 31, 2018.

NOTE 17 – COMMITMENTS AND CONTINGENCIES

Joint and Several Liability: As provided in the Bank Act or in FHFA regulations, consolidated obligations are backed only by the financial resources of the FHLBanks. FHLBank Topeka is jointly and severally liable with the other FHLBanks for the payment of principal and interest on all of the consolidated obligations issued by the FHLBanks. The par amounts for which FHLBank Topeka is jointly and severally liable were approximately $966,413,924,000 and $986,994,515,000 as of December 31, 2019 and 2018, respectively.

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The joint and several obligations are mandated by FHFA regulations and are not the result of arms-length transactions among the FHLBanks. As described above, the FHLBanks have no control over the amount of the guaranty or the determination of how each FHLBank would perform under the joint and several liability. Because the FHLBanks are subject to the authority of the FHFA as it relates to decisions involving the allocation of the joint and several liability for all FHLBanks' consolidated obligations, FHLBank Topeka regularly monitors the financial condition of the other FHLBanks to determine whether it should expect a loss to arise from its joint and several obligations. If the FHLBank were to determine that a loss was probable and the amount of the loss could be reasonably estimated, the FHLBank would charge to income the amount of the expected loss. Based upon the creditworthiness of the other FHLBanks as of December 31, 2019, FHLBank Topeka has concluded that a loss accrual is not necessary at this time.

Off-balance Sheet Commitments: As of December 31, 2019 and 2018, off-balance sheet commitments are presented in Table 17.1 (in thousands):

Table 17.1



	12/31/2019						12/31/2018
Notional Amount	Expire Within One Year		Expire After One Year		Total		Expire Within One Year		Expire After One Year		Total
Standby letters of credit outstanding	$	4,764,724	$	4,335	$	4,769,059	$	3,824,497	$	37,933	$	3,862,430
Advance commitments outstanding	64,282		15,693		79,975		116,475		43,782		160,257
Commitments for standby bond purchases	—		701,392		701,392		69,277		686,602		755,879
Commitments to fund or purchase mortgage loans	221,800		—		221,800		101,551		—		101,551
Commitments to issue consolidated discount notes, at par	411,161		—		411,161		1,825,000		—		1,825,000

Commitments to Extend Credit: The FHLBank issues standby letters of credit on behalf of its members to support certain obligations of the members to third-party beneficiaries. These standby letters of credit are subject to the same collateralization and borrowing limits that are applicable to advances and are fully collateralized with assets allowed by the FHLBank’s MPP. Standby letters of credit may be offered to assist members in facilitating residential housing finance, community lending, and asset-liability management, and to provide liquidity. In particular, members often use standby letters of credit as collateral for deposits from federal and state government agencies. Standby letters of credit are executed for members for a fee. If the FHLBank is required to make payment for a beneficiary's draw, the member either reimburses the FHLBank for the amount drawn or, subject to the FHLBank's discretion, the amount drawn may be converted into a collateralized advance to the member. However, standby letters of credit usually expire without being drawn upon. Outstanding standby letters of credit have original or extended expiration periods of up to 6 years. The FHLBank's current outstanding standby letters of credit expire no later than 2024. Unearned fees as well as the value of the guarantees related to standby letters of credit are recorded in other liabilities and amounted to $1,470,000 and $1,296,000 as of December 31, 2019 and 2018, respectively. Advance commitments legally bind and unconditionally obligate the FHLBank for additional advances up to 24 months in the future. Based upon management’s credit analysis of members and collateral requirements under the MPP, the FHLBank does not expect to incur any credit losses on the outstanding letters of credit or advance commitments.

Standby Bond-Purchase Agreements: The FHLBank has entered into standby bond purchase agreements with state housing authorities whereby the FHLBank, for a fee, agrees to purchase and hold the authorities’ bonds until the designated marketing agent can find a suitable investor or the housing authority repurchases the bond according to a schedule established by the standby agreement. Each standby agreement dictates the specific terms that would require the FHLBank to purchase the bond. The bond purchase commitments entered into by the FHLBank expire no later than 2022, though some are renewable at the option of the FHLBank. As of December 31, 2019 and 2018, the total commitments for bond purchases included agreements with two in-district state housing authorities. The FHLBank was not required to purchase any bonds under any agreements during the years ended December 31, 2019 and 2018.

Commitments to Purchase Mortgage Loans: These commitments that unconditionally obligate the FHLBank to purchase mortgage loans from participating FHLBank Topeka members in the MPF Program are generally for periods not to exceed 60 calendar days. Certain commitments are recorded as derivatives at their fair values on the Statements of Condition. The FHLBank recorded mortgage delivery commitment net derivative asset (liability) balances of $470,000 and $549,000 as of December 31, 2019 and 2018, respectively.

Commitments to Issue Consolidated Obligations: The FHLBank enters into commitments to issue consolidated obligation bonds and discount notes outstanding in the normal course of its business. Most settle within the shortest period possible and are considered regular way trades; however, certain commitments are recorded as derivatives at their fair values on the Statements of Condition.

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Other Commitments: On June 28, 2017, the FHLBank completed an industrial revenue bond financing transaction with Shawnee County, Kansas (County) that will provide property tax savings for 10 years on the FHLBank's new headquarters. In the transaction, the County acquired an interest in the land, improvements, building and equipment (collectively, the Project) by issuing up to $36,000,000 of industrial revenue bonds due December 31, 2027 (IRBs) and leased the Project to the FHLBank for an identical 127-month term under a financing lease. The IRBs are collateralized by the Project and the lease revenues for the related leasing transaction with the County. The IRBs were purchased by the FHLBank. The County assigned the lease to the bond trustee for the FHLBank's benefit as the sole holder of the IRBs. The FHLBank can prepay the IRBs at any time, but would forfeit its property tax benefit in the event the IRBs were to be prepaid. As a result, the land and building will remain a component of the property, plant and equipment in the FHLBank's statement of financial condition. The IRBs and the equivalent liability are included in the FHLBank's statement of financial condition in other assets and other liabilities, respectively. The FHLBank, as holder of the IRBs, is due interest at 2.0 percent per annum with interest payable annually in arrears on December 1, beginning December 1, 2018. This interest income is directly offset by the financing interest expense payments on the land and building, which are due at the same time and in the same amount as the interest income. As of December 31, 2019 and 2018, $35,000,000 of the IRBs were issued and outstanding.

Safekeeping Custodial Arrangements: The FHLBank acts as a securities safekeeping custodian on behalf of participating members. Actual securities are held by a third-party custodian acting as agent for the FHLBank. As of December 31, 2019, the total original par value of customer securities held by the FHLBank under this arrangement was $53,657,170,000.

Other commitments and contingencies are discussed in Notes 1, 5, 6, 7, 8, 10, 11, 13 and 15.

NOTE 18 – TRANSACTIONS WITH STOCKHOLDERS

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

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

Activity with Members that Exceed a 10 Percent Ownership in FHLBank Capital Stock: Tables 18.1 and 18.2 present information on members that owned more than 10 percent of outstanding FHLBank regulatory capital stock as of December 31, 2019 and 2018 (dollar amounts in thousands). None of the officers or directors of these members currently serve on the FHLBank’s board of directors.

Table 18.1



12/31/2019
Member Name	State	Total Class A Stock Par Value		Percent of Total Class A		Total Class B Stock Par Value		Percent of Total Class B		Total Capital Stock Par Value		Percent of Total Capital Stock
MidFirst Bank	OK	$	500	0.1	%	$	385,825	29.2	%	$	386,325	21.8	%
BOKF, N.A.	OK	184,282		41.0		202,000		15.3		386,282		21.8
TOTAL		$	184,782	41.1	%	$	587,825	44.5	%	$	772,607	43.6	%

Table 18.2



12/31/2018
Member Name	State	Total Class A Stock Par Value		Percent of Total Class A		Total Class B Stock Par Value		Percent of Total Class B		Total Capital Stock Par Value		Percent of Total Capital Stock
BOKF, N.A.	OK	$	24,006	9.6	%	$	274,000	21.4	%	$	298,006	19.5	%
MidFirst Bank	OK	500		0.2		294,700		23.0		295,200		19.3
TOTAL		$	24,506	9.8	%	$	568,700	44.4	%	$	593,206	38.8	%

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Advance and deposit balances with members that owned more than 10 percent of outstanding FHLBank regulatory capital stock as of December 31, 2019 and 2018 are summarized in Table 18.3 (dollar amounts in thousands).

Table 18.3



	12/31/2019				12/31/2018				12/31/2019				12/31/2018
Member Name	Outstanding Advances		Percent of Total		Outstanding Advances		Percent of Total		Outstanding Deposits		Percent of Total		Outstanding Deposits		Percent of Total
MidFirst Bank	$	8,585,000	28.5	%	$	6,560,000	22.8	%	$	1,030	0.1	%	$	331	0.1	%
BOKF, N.A.	4,500,000		14.9		6,100,000		21.2		22,457		2.9		29,288		6.2
TOTAL	$	13,085,000	43.4	%	$	12,660,000	44.0	%	$	23,487	3.0	%	$	29,619	6.3	%

For the year ended December 31, 2019, BOKF, N.A. sold $6,748,000 of mortgage loans into the MPF Program. BOKF, N.A. did not sell any mortgage loans into the MPF Program during the year ended December 31, 2018. MidFirst Bank did not sell any mortgage loans into the MPF Program during the years ended December 31, 2019 and 2018.

Transactions with FHLBank Directors’ Financial Institutions: Table 18.4 presents information as of December 31, 2019 and 2018 for members that had an officer or director serving on the FHLBank’s board of directors (dollar amounts in thousands). Information is only included for the period in which the officer or director served on the FHLBank’s board of directors. Capital stock listed is regulatory capital stock, which includes mandatorily redeemable capital stock.

Table 18.4



	12/31/2019				12/31/2018
	Outstanding Amount		Percent of Total		Outstanding Amount		Percent of Total
Advances	$	178,945	0.6	%	$	157,012	0.5	%

Deposits	$	15,748	2.0	%	$	9,679	2.1	%

Class A Common Stock	$	6,467	1.4	%	$	4,179	1.7	%
Class B Common Stock	5,571		0.4		4,924		0.4
TOTAL CAPITAL STOCK	$	12,038	0.7	%	$	9,103	0.6	%

Table 18.5 presents mortgage loans acquired during the years ended December 31, 2019 and 2018 for members that had an officer or director serving on the FHLBank’s board of directors in 2019 or 2018 (dollar amounts in thousands). Information is only included for the period in which the officer or director served on the FHLBank’s board of directors.

Table 18.5



	2019				2018
	Amount		Percent of Total		Amount		Percent of Total
Mortgage loans acquired	$	189,724	4.9	%	$	104,360	5.1	%

F-63

NOTE 19 – TRANSACTIONS WITH OTHER FHLBANKS

FHLBank Topeka had the following business transactions with other FHLBanks during the years ended December 31, 2019, 2018, and 2017 as presented in Table 19.1 (in thousands). All transactions occurred at market prices.

Table 19.1



Business Activity	2019		2018		2017
Average overnight interbank loan balances to other FHLBanks¹	$	2,529	$	1,466	$	4,534
Average overnight interbank loan balances from other FHLBanks¹	8,082		3,562		1,247
Average deposit balances with FHLBank of Chicago for interbank transactions²	1,361		1,256		1,429
Transaction charges paid to FHLBank of Chicago for transaction service fees³	6,938		5,687		4,854
Par amount of purchases of consolidated obligations issued on behalf of other FHLBanks⁴	—		—		—

_________


¹	Occasionally, the FHLBank loans (or borrows) short-term funds to (from) other FHLBanks. Interest income on loans to other FHLBanks is included in Other Interest Income and interest expense on borrowings from other FHLBanks is included in Other Interest Expense on the Statements of Income.


²	Balances are interest bearing and are classified on the Statements of Condition as interest-bearing deposits.


³	Fees are calculated monthly based on outstanding loans at the per annum rate in effect at origination.

⁴

Purchases of consolidated obligations issued on behalf of one FHLBank and purchased by the FHLBank occur at market prices with third parties and are accounted for in the same manner as similarly classified investments. Outstanding fair value balances totaling $111,173,000 and $108,242,000 as of December 31, 2019 and 2018, respectively, are included in the non-MBS GSE obligations totals presented in Note 4. Interest income earned on these securities totaled $3,429,000, $3,429,000, and $5,817,000 for the years ended December 31, 2019, 2018, and 2017, respectively.

F-64

Par value of consolidated obligations of FHLBank Topeka

Par value of consolidated obligations of all FHLBanks