10-Q 1 combined.htm 06/30/2011 FORM 10Q combined.htm
 
 

 



 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
 
FORM 10-Q
 
 
x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
 
 
OR
 
 
¨  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
 
 
Commission File Number 000-52004
 
 
FEDERAL HOME LOAN BANK OF TOPEKA
(Exact name of registrant as specified in its charter)
 
 
Federally chartered corporation
 
48-0561319
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
One Security Benefit Pl. Suite 100
Topeka, KS
 
 
66606
(Address of principal executive offices)
 
(Zip Code)
 
 
Registrant’s telephone number, including area code: 785.233.0507
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes  ¨ No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x  Yes  o  No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. ¨ Large accelerated filer  ¨ Accelerated filer  x Non-accelerated filer  ¨ Smaller reporting company
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  ¨ Yes  x No
 
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
 
 
 
Shares outstanding
as of 08/10/2011
Class A Stock, par value $100
6,274,239
Class B Stock, par value $100
  7,965,205




 
 

 
FEDERAL HOME LOAN BANK OF TOPEKA
 
 
TABLE OF CONTENTS
 
 
PART I
FINANCIAL INFORMATION
  4
Item 1.
  4
    4
    6
  7
  9
  11
Item 2.
49
  49
  52
  54
  54
  64
  81
  83
  87
  87
Item 3.
89
Item 4.
94
PART II
94
Item 1.
94
Item 1A.
94
Item 2.
94
Item 3.
94
Item 4.
94
Item 5.
94
Item 6.
95
Exhibit 31.1
 
Exhibit 31.2
 
Exhibit 32
 
Exhibit 101
XBRL Documents
 


 
2

 
Important Notice about Information in this Quarterly Report
 
 
In this quarterly report, unless the context suggests otherwise, references to the “FHLBank,” “FHLBank Topeka,” “we,” “us” and “our” mean the Federal Home Loan Bank of Topeka, and “FHLBanks” mean the 12 Federal Home Loan Banks, including the FHLBank Topeka.
 
The information contained in this quarterly report is accurate only as of the date of this quarterly report and as of the dates specified herein.
 
The product and service names used in this quarterly report are the property of the FHLBank, and in some cases, the other FHLBanks. Where the context suggests otherwise, the products, services and company names mentioned in this quarterly report are the property of their respective owners.
 
 
Special Cautionary Notice Regarding Forward-looking Statements
 
 
The information contained in this Form 10-Q contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include statements describing the objectives, projections, estimates or future predictions of the FHLBank’s operations. These statements may be identified by the use of forward-looking terminology such as “anticipates,” “believes,” “may,” “is likely,” “could,” “estimate,” “expect,” “will,” “intend,” “probable,” “project,” “should,” or their negatives or other variations of these terms. The FHLBank cautions that by their nature forward-looking statements involve risk or uncertainty and that actual results may differ materially from those expressed in any forward-looking statements as a result of such risks and uncertainties, including but not limited to:
§  
Governmental actions, including legislative, regulatory or other developments that affect the FHLBank, its members, counterparties, or investors, including those resulting from the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act);
§  
Changes in economic and market conditions, including conditions in the mortgage, housing and capital markets;
§  
Changes in demand for advances or consolidated obligations of the FHLBank and/or of the FHLBank System;
§  
Effects of derivative accounting treatment, other-than-temporary impairment (OTTI) accounting treatment and other accounting rule requirements;
§  
The effects of amortization/accretion;
§  
Gains/losses on derivatives or on trading investments and the ability to enter into effective derivative instruments on acceptable terms;
§  
Volatility of market prices, rates and indices and the timing and volume of market activity;
§  
Membership changes, including changes resulting from member failures, mergers or changes in the principal place of business of members;
§  
Our ability to declare dividends or to pay dividends at rates consistent with past practices;
§  
Soundness of other financial institutions, including FHLBank members, nonmember borrowers, and the other FHLBanks;
§  
Changes in the value or liquidity of collateral underlying advances to FHLBank members or nonmember borrowers or collateral pledged by derivative counterparties;
§  
Competitive forces, including competition for loan demand, purchases of mortgage loans and access to funding;
§  
The ability of the FHLBank to introduce new products and services to meet market demand and to manage successfully the risks associated with new products and services;
§  
The ability of each of the other FHLBanks to repay the principal and interest on consolidated obligations for which it is the primary obligor and with respect to which the FHLBank has joint and several liability;
§  
Changes in the credit standing of the United States government, the FHLBank and the other FHLBanks, including the credit ratings assigned to each;
§  
Changes in the fair value and economic value of, impairments of, and risks associated with, the FHLBank’s investments in mortgage loans and mortgage-backed securities (MBS) or other assets and related credit enhancement (CE) protections;
§  
The volume of eligible mortgage loans originated and sold by participating members to the FHLBank through its various mortgage finance products (Mortgage Partnership Finance® (MPF®) Program1); and
§  
Adverse developments or events, including but not limited to legislative and regulatory developments, affecting or involving other FHLBanks, housing government sponsored enterprises (GSE) or the FHLBank System in general.
 
 
Readers of this report should not rely solely on the forward-looking statements and should consider all risks and uncertainties addressed throughout this report, as well as those discussed under Item 1A – “Risk Factors” in our annual report on Form 10-K, incorporated by reference herein.
 
All forward-looking statements contained in this Form 10-Q are expressly qualified in their entirety by this cautionary notice. The reader should not place undue reliance on such forward-looking statements, since the statements speak only as of the date that they are made and the FHLBank has no obligation and does not undertake publicly to update, revise or correct any forward-looking statement for any reason.
 
 1  "Mortgage Partnership Finance," "MPF" and "eMPF" are registered trademarks of the Federal Home Loan Bank of Chicago.
 
 
3

 
PART I. FINANCIAL INFORMATION
 

FEDERAL HOME LOAN BANK OF TOPEKA
(In thousands, except par value)
   
June 30,
2011
   
December 31,
2010
 
ASSETS
           
Cash and due from banks
  $ 337,105     $ 260  
Interest-bearing deposits
    85       24  
Federal funds sold
    1,115,000       1,755,000  
                 
Investment securities:
               
Trading securities (Note 3)
    6,192,854       6,334,939  
Held-to-maturity securities1 (Note 3)
    5,792,280       6,755,978  
Total investment securities
    11,985,134       13,090,917  
                 
Advances (Notes 4 and 6)
    17,632,682       19,368,329  
Mortgage loans held for sale (Notes 5 and 6)
    0       120,525  
                 
Mortgage loans held for portfolio (Notes 5 and 6):
               
Mortgage loans held for portfolio
    4,574,535       4,175,817  
Less allowance for credit losses on mortgage loans
    (3,420 )     (2,911 )
Mortgage loans held for portfolio, net
    4,571,115       4,172,906  
                 
Accrued interest receivable
    87,432       93,341  
Premises, software and equipment, net
    11,706       12,609  
Derivative assets (Note 7)
    26,145       26,065  
Other assets
    59,286       66,091  
                 
TOTAL ASSETS
  $ 35,825,690     $ 38,706,067  
                 
LIABILITIES AND CAPITAL
               
Liabilities:
               
Deposits (Note 8):
               
Interest-bearing
  $ 1,726,960     $ 1,177,104  
Non-interest-bearing
    20,620       32,848  
Total deposits
    1,747,580       1,209,952  
                 
Consolidated obligations, net (Note 9):
               
Discount notes
    9,785,708       13,704,542  
Bonds
    22,105,848       21,521,435  
Total consolidated obligations, net
    31,891,556       35,225,977  
                 
Mandatorily redeemable capital stock (Note 12)
    13,535       19,550  
Accrued interest payable
    122,402       128,551  
Affordable Housing Program (Note 10)
    35,976       39,226  
Payable to Resolution Funding Corp. (REFCORP) (Note 11)
    5,792       8,014  
Derivative liabilities (Note 7)
    232,910       255,707  
Other liabilities
    33,974       35,612  
                 
TOTAL LIABILITIES
    34,083,725       36,922,589  
                 
Commitments and contingencies (Note 15)
               

The accompanying notes are an integral part of these financial statements.
4

 
FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF CONDITION - Unaudited (continued)
(In thousands, except par value)
   
June 30,
2011
     December 31,
2010
 
Capital (Note 12):
           
Capital stock outstanding – putable:
           
Class A ($100 par value; 5,921 and 5,934 shares issued and outstanding)
    592,119       593,386  
Class B ($100 par value; 7,855 and 8,610 shares issued and outstanding)
    785,496       861,010  
Total capital stock
    1,377,615       1,454,396  
                 
Retained earnings
    386,529       351,754  
                 
Accumulated other comprehensive income (loss):
               
Net non-credit portion of other-than-temporary impairment losses on held-to-maturity securities (Note 3)
    (18,976 )     (19,291 )
Defined benefit pension plan – net loss
    (3,203 )     (3,381 )
Total accumulated other comprehensive income (loss)
    (22,179 )     (22,672 )
                 
TOTAL CAPITAL
    1,741,965       1,783,478  
                 
TOTAL LIABILITIES AND CAPITAL
  $ 35,825,690     $ 38,706,067  
                    
1
Fair value: $5,791,136 and $6,744,289 as of June 30, 2011 and December 31, 2010, respectively.

The accompanying notes are an integral part of these financial statements.
5

 
FEDERAL HOME LOAN BANK OF TOPEKA
(In thousands)
   
For the Three Months Ended
June 30,
   
For the Six Months Ended
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
INTEREST INCOME:
                       
Interest-bearing deposits
  $ 27     $ 39     $ 61     $ 70  
Federal funds sold
    560       1,155       1,619       2,172  
Trading securities
    19,461       23,324       41,670       46,361  
Held-to-maturity securities
    25,418       42,652       54,364       83,655  
Advances
    38,585       49,672       80,449       99,082  
Prepayment fees on terminated advances
    1,157       7,586       1,945       7,955  
Mortgage loans held for sale
    595       0       2,142       0  
Mortgage loans held for portfolio
    48,694       42,529       95,052       84,173  
Overnight loans to other Federal Home Loan Banks
    0       0       1       1  
Other
    551       652       1,157       1,357  
Total interest income
    135,048       167,609       278,460       324,826  
                                 
INTEREST EXPENSE:
                               
Deposits
    630       728       1,243       1,272  
Consolidated obligations:
                               
Discount notes
    2,479       6,436       7,053       10,070  
Bonds
    76,892       88,862       155,488       178,660  
Overnight loans from other Federal Home Loan Banks
    2       3       3       3  
Mandatorily redeemable capital stock (Note 12)
    50       59       104       121  
Other
    96       185       239       417  
Total interest expense
    80,149       96,273       164,130       190,543  
                                 
NET INTEREST INCOME
    54,899       71,336       114,330       134,283  
Provision for credit losses on mortgage loans (Note 6)
    344       197       909       956  
NET INTEREST INCOME AFTER MORTGAGE LOAN LOSS PROVISION
    54,555       71,139       113,421       133,327  
                                 
OTHER INCOME (LOSS):
                               
Total other-than-temporary impairment losses on held-to-maturity securities (Note 3)
    (2,924 )     (1,394 )     (4,227 )     (17,482 )
Portion of other-than-temporary impairment losses on held-to-maturity securities recognized in other comprehensive income (loss)
    2,203       (559 )     1,773       14,097  
Net other-than-temporary impairment losses on held-to-maturity securities
    (721 )     (1,953 )     (2,454 )     (3,385 )
Net gain (loss) on trading securities (Note 3)
    19,936       44,794       3,567       48,119  
Net gain (loss) on derivatives and hedging activities (Note 7)
    (33,223 )     (94,157 )     (30,246 )     (179,540 )
Net realized gain (loss) on sale of mortgage loans held for sale (Note 5 and 6)
    4,425       0       4,425       0  
Service fees
    1,209       1,371       2,482       2,697  
Other
    1,184       1,266       2,351       2,111  
Total other income (loss)
    (7,190 )     (48,679 )     (19,875 )     (129,998 )
                                 
OTHER EXPENSES:
                               
Compensation and benefits
    8,527       6,482       15,426       12,486  
Other operating
    3,453       3,510       6,992       6,552  
Finance Agency
    823       358       2,312       779  
Office of Finance
    443       369       1,190       960  
Other
    1,835       1,683       2,504       2,084  
Total other expenses
    15,081       12,402       28,424       22,861  
                                 
INCOME (LOSS) BEFORE ASSESSMENTS
    32,284       10,058       65,122       (19,532 )
                                 
Affordable Housing Program (Note 10)
    2,655       0       5,341       0  
REFCORP (Note 11)
    5,792       0       11,822       0  
Total assessments
    8,447       0       17,163       0  
                                 
NET INCOME (LOSS)
  $ 23,837     $ 10,058     $ 47,959     $ (19,532 )


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

 
FEDERAL HOME LOAN BANK OF TOPEKA
(In thousands)
                     
Accumulated
       
                     
Other
       
   
Capital Stock Class A1
   
Capital Stock Class B1
   
Retained
   
Comprehensive
   
Total
 
   
Shares
   
Par Value
   
Shares
   
Par Value
   
Earnings
   
Income (Loss)
   
Capital
 
                                           
BALANCE – DECEMBER 31, 2009
    2,936     $ 293,554       13,091     $ 1,309,142     $ 355,075     $ (11,861 )   $ 1,945,910  
Proceeds from issuance of capital stock
    32       3,229       540       53,990                       57,219  
Comprehensive income (loss):
                                                       
Net income (loss)
                                    (19,532 )                
Other comprehensive income (loss):
                                                       
Net non-credit portion of other-than-temporary impairment losses on held-to-maturity securities:
                                                       
Non-credit portion
                                            (16,398 )        
Reclassification of non-credit portion included in net income
                                            2,301          
Accretion of non-credit portion
                                            1,572          
Defined benefit pension plan:
                                                       
Amortization of prior service cost
                                            (3 )        
Amortization of net loss
                                            91          
Total comprehensive income (loss)
                                                    (31,969 )
Net reclassification of shares to mandatorily redeemable capital stock
    (10 )     (1,025 )     (941 )     (94,104 )                     (95,129 )
Net transfer of shares between Class A and Class B
    116       11,633       (116 )     (11,633 )                     0  
Dividends on capital stock (Class A – 0.8%, Class B – 3.0%):
                                                       
Cash payment
                                    (166 )             (166 )
Stock issued
                    206       20,607       (20,607 )             0  
BALANCE – JUNE 30, 2010
    3,074     $ 307,391       12,780     $ 1,278,002     $ 314,770     $ (24,298 )   $ 1,875,865  
__________
1    Putable


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

 
FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF CAPITAL FOR PERIODS ENDED JUNE 30, 2011 AND 2010 – Unaudited (continued)
(In thousands)
                     
Accumulated
       
                     
Other
       
   
Capital Stock Class A1
   
Capital Stock Class B1
   
Retained
   
Comprehensive
   
Total
 
   
Shares
   
Par Value
   
Shares
   
Par Value
   
Earnings
   
Income (Loss)
   
Capital
 
                                           
BALANCE – DECEMBER 31, 2010
    5,934     $ 593,386       8,610     $ 861,010     $ 351,754     $ (22,672 )   $ 1,783,478  
Proceeds from issuance of capital stock
    46       4,657       412       41,238                       45,895  
Repurchase/redemption of capital stock
                    (25 )     (2,545 )                     (2,545 )
Comprehensive income (loss):
                                                       
Net income (loss)
                                    47,959                  
Other comprehensive income (loss):
                                                       
Net non-credit potion of other-than-temporary impairment losses on held-to-maturity securities:
                                                       
Non-credit portion
                                            (3,488 )        
Reclassification of non-credit portion included in net income
                                            1,715          
Accretion of non-credit portion
                                            2,088          
Defined benefit pension plan:
                                                       
Amortization of net loss
                                            178          
Total comprehensive income (loss)
                                                    48,452  
Net reclassification of shares to mandatorily redeemable capital stock
    (1,144 )     (114,435 )     (187 )     (18,674 )                     (133,109 )
Net transfer of shares between Class A and Class B
    1,085       108,511       (1,085 )     (108,511 )                     0  
Dividends on capital stock (Class A – 0.4%, Class B –3.0%):
                                                       
Cash payment
                                    (206 )             (206 )
Stock issued
                    130       12,978       (12,978 )             0  
BALANCE – JUNE 30, 2011
    5,921     $ 592,119       7,855     $ 785,496     $ 386,529     $ (22,179 )   $ 1,741,965  
__________
1    Putable
The accompanying notes are an integral part of these financial statements.
8

 
FEDERAL HOME LOAN BANK OF TOPEKA
(In thousands)
   
For the Six Months Ended
June 30,
 
   
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income (loss)
  $ 47,959     $ (19,532 )
                 
Adjustments to reconcile income (loss) to net cash provided by (used in) operating activities:
               
Depreciation and amortization:
               
Premiums and discounts on consolidated obligations, net
    (20,182 )     (7,703 )
Concessions on consolidated obligation bonds
    3,100       7,876  
Premiums and discounts on investments, net
    (1,406 )     (1,633 )
Premiums and discounts on advances, net
    (14,909 )     (7,998 )
Premiums, discounts and deferred loan costs on mortgage loans, net
    2,943       946  
Fair value adjustments on hedged assets or liabilities
    14,131       8,089  
Premises, software and equipment
    1,438       2,090  
Other
    178       88  
Provision for credit losses on mortgage loans
    909       956  
Non-cash interest on mandatorily redeemable capital stock
    100       119  
Net other-than-temporary impairment losses on held-to-maturity securities
    2,454       3,385  
Net realized (gain) loss on sale of mortgage loans held for sale
    (4,425 )     0  
Net realized (gain) loss on disposals of premises, software and equipment
    (6 )     20  
Other (gains) losses
    69       (67 )
Net (gain) loss on trading securities
    (3,567 )     (48,119 )
(Gain) loss due to change in net fair value adjustment on derivative and hedging activities
    37,406       72,411  
(Increase) decrease in accrued interest receivable
    5,921       6,293  
Change in net accrued interest included in derivative assets
    1,302       (2,091 )
(Increase) decrease in other assets
    (869 )     (1,513 )
Increase (decrease) in accrued interest payable
    (6,155 )     (7,800 )
Change in net accrued interest included in derivative liabilities
    (1,795 )     (2,100 )
Increase (decrease) in Affordable Housing Program liability
    (3,250 )     (3,780 )
Increase (decrease) in REFCORP liability
    (2,222 )     (11,556 )
Increase (decrease) in other liabilities
    3,031       3,042  
Total adjustments
    14,196       10,955  
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
    62,155       (8,577 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Net (increase) decrease in interest-bearing deposits
    (33,411 )     (12,090 )
Net (increase) decrease in Federal funds sold
    640,000       (2,039,000 )
Net (increase) decrease in short-term trading securities
    (340,460 )     510,884  
Proceeds from sale of long-term trading securities
    284,445       152,435  
Proceeds from maturities of and principal repayments on long-term trading securities
    201,376       84,990  
Proceeds from maturities of and principal repayments on long-term held-to-maturity securities
    968,256       1,659,704  
Purchases of long-term held-to-maturity securities
    0       (2,375,111 )
Principal collected on advances
    15,646,928       22,990,689  
Advances made
    (13,909,090 )     (21,639,456 )
Proceeds from sale of mortgage loans held for sale
    111,444       0  
Principal collected on mortgage loans
    347,287       246,141  
Purchase or origination of mortgage loans
    (736,497 )     (482,212 )
Proceeds from sale of foreclosed assets
    3,341       3,754  
Principal collected on other loans made
    850       795  
Proceeds from sale of premises, software and equipment
    24       55  
Purchases of premises, software and equipment
    (553 )     (763 )
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
    3,183,940       (899,185 )
 

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

 
FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF CASH FLOWS – Unaudited (continued)
(In thousands)
   
For the Six Months Ended
June 30,
 
   
2011
   
2010
 
CASH FLOWS FROM FINANCING ACTIVITIES:
           
Net increase (decrease) in deposits
  $ 525,827     $ 947,981  
Net proceeds from issuance of consolidated obligations:
               
Discount notes
    38,461,153       57,112,589  
Bonds
    4,618,498       9,686,390  
Payments for maturing and retired consolidated obligations:
               
Discount notes
    (42,375,720 )     (53,092,837 )
Bonds
    (4,001,900 )     (14,122,577 )
Net increase (decrease) in other borrowings
    (5,000 )     (5,000 )
Proceeds from financing derivatives
    0       142  
Net interest payments received (paid) for financing derivatives
    (36,028 )     (52,646 )
Proceeds from issuance of capital stock
    45,895       57,219  
Payments for repurchase/redemption of capital stock
    (2,545 )     0  
Payments for repurchase of mandatorily redeemable capital stock
    (139,224 )     (89,458 )
Cash dividends paid
    (206 )     (166 )
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
    (2,909,250 )     441,637  
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    336,845       (466,125 )
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    260       494,553  
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 337,105     $ 28,428  
                 
                 
Supplemental disclosures:
               
Interest paid
  $ 179,146     $ 197,172  
                 
Affordable Housing Program payments
  $ 8,685     $ 3,895  
                 
REFCORP payments
  $ 14,044     $ 11,556  
                 
Net transfers of mortgage loans to real estate owned
  $ 1,783     $ 3,599  
 

 

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

 
Notes to Financial Statements (Unaudited)
June 30, 2011

NOTE 1 – FINANCIAL STATEMENT PRESENTATION

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

The FHLBank’s significant accounting policies and certain other disclosures are set forth in the notes to the audited financial statements for the year ended December 31, 2010. The interim financial statements presented herein should be read in conjunction with the FHLBank’s audited financial statements and notes thereto, which are included in the FHLBank’s annual report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 24, 2011 (annual report on Form 10-K). The notes to the interim financial statements highlight significant changes to the notes included in the annual report on Form 10-K.

Use of Estimates: The preparation of financial statements under GAAP requires management to make estimates and assumptions as of the date of the financial statements in determining the reported amounts of assets, liabilities and estimated fair values and in determining the disclosure of any contingent assets or liabilities. Estimates and assumptions by management also affect the reported amounts of income and expense during the reporting period. Many of the estimates and assumptions, including those used in financial models, are based on financial market conditions as of the date of the financial statements. Because of the volatility of the financial markets, as well as other factors that affect management estimates, actual results may vary from these estimates.

Reclassifications: Certain amounts in the financial statements have been reclassified to conform to current period presentations. Such reclassifications have no impact on total assets, net income or capital.


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

ReceivablesDisclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses: In July 2010, the Financial Accounting Standards Board (FASB) issued guidance expanding the disclosure requirements associated with receivables. In addition, the guidance introduced the concepts of financing receivables, portfolio segment and class of financing receivable.
§  
Financing receivables, as defined by this guidance, are financing arrangements that represent a contractual right to receive money on demand or on fixed or determinable dates and is recognized as an asset in the FHLBank’s Statements of Condition excluding: (1) receivables measured at fair value with changes in fair value reported in earnings; (2) receivables measured at lower of cost or fair value; (3) trade accounts receivable that have a contractual maturity of one year or less and that have arose from the sale of goods or services; (4) debt securities within the scope of the guidance for Investments-Debt and Equity Securities; or (5) a transferor’s interests in securitization transactions that are accounted for as sales and purchased beneficial interests in securitized financial assets within the scope of the guidance for Investments-Other.
§  
Portfolio segment represents the level at which the FHLBank develops and documents a systematic method for determining the allowance for credit losses. This guidance requires the FHLBank to expand its disclosures by portfolio segment to include: (1) a description of the FHLBank’s accounting policies and methodology used to estimate the allowance for credit loss and charging off of uncollectible financing receivables; (2) a roll-forward of the allowance for credit losses; (3) disclosures quantifying the effects of changes in the method of estimating the allowance for credit loss; (4) disclosure of the amount of significant purchases and sales of financing receivables during each reporting period; (5) disclosure of the balance of the allowance for credit loss by impairment method at the end of each period; and (6) the recorded investment in financing receivables at the end of each period related to each balance in the allowance for credit loss disaggregated on the basis of impairment method.
§  
Class of financing receivable represents a subset of the portfolio segment that is determined on the basis of initial measurement attribute, risk characteristics and the FHLBank’s method of monitoring and assessing credit risk. In addition to the portfolio disclosures, the guidance requires the FHLBank to provide disclosures by class of financing receivable that include: (1) the recorded investment in impaired loans and the amount of recorded investment in which there is a related allowance for credit losses determined on an individual loan impairment basis; (2) the recorded investment in impaired loans for which there is no related allowance for credit losses determined on an individual loan impairment basis; (3) the total unpaid principal balance (UPB) of the impaired loans along with the FHLBank’s policy for determining which loans are assessed for impairment on an individual loan basis; (4) the factors considered in determining if a loan is impaired; (5) qualitative and quantitative information about troubled debt restructurings; and (6) qualitative and quantitative information related to modified loans that have defaulted within 12 months of the modification.
 
 
11

 
The disclosure guidance that is applicable to activity that occurs during a reporting period was effective for the first interim or annual period beginning on or after December 15, 2010 (January 1, 2011 for the FHLBank) and the remaining disclosures were effective for the first interim or annual period ending on or after December 15, 2010 (December 31, 2010 for the FHLBank). In January 2011, the FASB issued an amendment to this accounting guidance which deferred the effective date of disclosures about troubled debt restructurings. The deferral in this amendment was effective upon issuance. In April 2011, the FASB issued an additional amendment to this guidance that eliminated the deferral of the disclosures related to troubled debt restructurings and provided expanded guidance of what constitutes a troubled debt restructuring. This amendment is effective for public companies for the first interim or annual period beginning on or after June 15, 2011 (July 1, 2011 for the FHLBank), and will be applied retroactively to the beginning of the annual period of adoption. Measuring impairment on receivables considered impaired under the new guidance will occur prospectively for the first interim or annual period beginning on or after June 15, 2011 (July 1, 2011 for the FHLBank). Receivables considered impaired based on the new guidance that were previously impaired using a pool level assessment will require disclosure in periods after the adoption of this amendment. Comparative disclosures are not required in the period of initial adoption for any previous period presented. The adoption of this guidance resulted in increased financial statement disclosures, but did not affect the FHLBank’s financial condition, results of operations or cash flows.

Transfers and ServicingReconsideration of Effective Control for Repurchase Agreements: In April 2011, the FASB issued guidance that removed the criterion which required the transferor of financial assets to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee to preclude sales accounting for the transfer. In addition, the new guidance removed the collateral maintenance implementation guidance from the determination of maintaining effective control over the transferred financial assets. This amendment is effective for the first interim or annual period beginning on or after December 15, 2011 (January 1, 2012 for the FHLBank). The guidance will be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date and early adoption is not permitted. The adoption of this guidance is not expected to have a material impact on the FHLBank’s financial condition, results of operations or cash flows.

Fair Value Measurement – Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs: In May 2011, the FASB issued guidance which represents the converged guidance of FASB and the International Accounting Standards Board (IASB) on fair value measurement and disclosures. In particular, the new guidance: (1) requires the disclosure of the level within the fair value hierarchy level for financial instruments that are not measured at fair value but for which the fair value is required to be disclosed; (2) expands level 3 fair value disclosures about valuation process and sensitivity of the fair value measurement to changes in unobservable inputs; (3) permits an exception to measure fair value of a net position for financial assets and financial liabilities managed on a net position basis; and (4) clarifies that the highest and best use measurement is only applicable to nonfinancial assets. This amendment is effective for interim and annual periods beginning after December 15, 2011 (January 1, 2012 for the FHLBank) with early application not permitted. The adoption of this guidance will result in increased financial statement disclosures, but is not expected to impact the FHLBank’s financial condition, results of operations or cash flows.

Comprehensive Income – Presentation of Comprehensive Income: In June 2011, the FASB issued guidance which requires all non-owner changes in stockholders’ equity to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity has been eliminated by this new guidance. The FHLBank has preliminarily decided to present non-owner changes using the two-statement approach. The two-statement approach requires the first statement to present total net income and its components followed, consecutively, by a second statement that presents total other comprehensive income, the components of other comprehensive income, and total comprehensive income. The guidance will be applied retrospectively for interim and annual periods beginning after December 15, 2011 (January 1, 2012 for the FHLBank) with early adoption permitted. The adoption of this guidance will result in new presentation within the Statements of Income and the Statements of Capital, but will not impact the FHLBank’s financial condition, overall results of operations or cash flows.


 
12

 
NOTE 3 – INVESTMENT SECURITIES

Major Security Types: Trading and held-to-maturity securities as of June 30, 2011 are summarized in the following table (in thousands):

   
Trading
   
Held-to-maturity
 
   
Fair
Value
   
Carrying
Value
   
OTTI
Recognized
in OCI
   
Amortized
Cost
   
Gross
Unrecognized
Gains
   
Gross
Unrecognized
Losses
   
Fair
Value
 
Commercial paper
  $ 2,064,650     $ 0     $ 0     $ 0     $ 0     $ 0     $ 0  
Certificates of deposit
    2,379,972       0       0       0       0       0       0  
FHLBank1 obligations
    122,414       0       0       0       0       0       0  
Fannie Mae2 obligations
    348,430       0       0       0       0       0       0  
Freddie Mac2 obligations
    887,415       0       0       0       0       0       0  
State or local housing agency obligations
    0       92,488       0       92,488       9       12,472       80,025  
Subtotal
    5,802,881       92,488       0       92,488       9       12,472       80,025  
Mortgage-backed securities:
                                                       
Fannie Mae residential2
    228,951       2,264,210       0       2,264,210       24,439       1,789       2,286,860  
Freddie Mac residential2
    159,572       2,416,373       0       2,416,373       24,035       1,268       2,439,140  
Ginnie Mae residential3
    1,450       20,275       0       20,275       1,397       1       21,671  
Private-label mortgage-backed securities:
                                                       
Residential loans
    0       957,407       18,429       975,836       6,360       62,319       919,877  
Commercial loans
    0       39,976       0       39,976       1,286       0       41,262  
Home equity loans
    0       1,551       547       2,098       373       170       2,301  
Mortgage-backed securities
    389,973       5,699,792       18,976       5,718,768       57,890       65,547       5,711,111  
TOTAL
  $ 6,192,854     $ 5,792,280     $ 18,976     $ 5,811,256     $ 57,899     $ 78,019     $ 5,791,136  
                    
1
See Note 17 for transactions with other FHLBanks.
2
Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) are government sponsored enterprises (GSEs). Both entities were placed into conservatorship by the Federal Housing Finance Agency (Finance Agency) on September 7, 2008 with the Finance Agency named as conservator.
3
Government National Mortgage Association (Ginnie Mae) securities are guaranteed by the U.S. government.

 
13

 
Trading and held-to-maturity securities as of December 31, 2010 are summarized in the following table (in thousands):

   
Trading
   
Held-to-maturity
 
   
Fair
Value
   
Carrying
Value
   
OTTI
Recognized
in OCI
   
Amortized
Cost
   
Gross
Unrecognized
Gains
   
Gross
Unrecognized
Losses
   
Fair
Value
 
Commercial paper
  $ 2,349,565     $ 0     $ 0     $ 0     $ 0     $ 0     $ 0  
Certificates of deposit
    1,755,013       0       0       0       0       0       0  
U.S. Treasuries
    282,996       0       0       0       0       0       0  
FHLBank1 obligations
    120,876       0       0       0       0       0       0  
Fannie Mae2 obligations
    396,750       0       0       0       0       0       0  
Freddie Mac2 obligations
    988,097       0       0       0       0       0       0  
State or local housing agency obligations
    0       99,012       0       99,012       10       12,754       86,268  
Subtotal
    5,893,297       99,012       0       99,012       10       12,754       86,268  
Mortgage-backed securities:
                                                       
Fannie Mae residential2
    259,678       2,635,277       0       2,635,277       26,831       1,256       2,660,852  
Freddie Mac residential2
    180,430       2,738,943       0       2,738,943       27,799       898       2,765,844  
Ginnie Mae residential3
    1,534       23,048       0       23,048       1,279       1       24,326  
Private-label mortgage-backed securities:
                                                       
Residential loans
    0       1,217,904       18,606       1,236,510       7,881       81,681       1,162,710  
Commercial loans
    0       40,022       0       40,022       1,800       0       41,822  
Home equity loans
    0       1,684       685       2,369       289       278       2,380  
Manufactured housing loans
    0       88       0       88       0       1       87  
Mortgage-backed securities
    441,642       6,656,966       19,291       6,676,257       65,879       84,115       6,658,021  
TOTAL
  $ 6,334,939     $ 6,755,978     $ 19,291     $ 6,775,269     $ 65,889     $ 96,869     $ 6,744,289  
                    
1
See Note 17 for transactions with other FHLBanks.
2
Fannie Mae and Freddie Mac are GSEs. Both entities were placed into conservatorship by the Finance Agency on September 7, 2008.
3
Ginnie Mae securities are guaranteed by the U.S. government.

The following table summarizes (in thousands) the held-to-maturity securities with unrecognized losses as of June 30, 2011. The unrecognized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrecognized loss position.

   
Less Than 12 Months
   
12 Months or More
   
Total
 
   
Fair
Value
   
Unrecognized
Losses
   
Fair
Value
   
Unrecognized
Losses
   
Fair
Value
   
Unrecognized
Losses
 
State or local housing agency obligations
  $ 42,670     $ 5,874     $ 25,413     $ 6,598     $ 68,083     $ 12,472  
Subtotal
    42,670       5,874       25,413       6,598       68,083       12,472  
Mortgage-backed securities:
                                               
Fannie Mae residential1
    120,055       357       330,550       1,432       450,605       1,789  
Freddie Mac residential1
    108,624       144       296,399       1,124       405,023       1,268  
Ginnie Mae residential2
    702       1       0       0       702       1  
Private-label mortgage-backed securities:
                                               
Residential loans
    21,831       198       449,772       62,121       471,603       62,319  
Home equity loans
    806       42       446       128       1,252       170  
Mortgage-backed securities
    252,018       742       1,077,167       64,805       1,329,185       65,547  
TOTAL TEMPORARILY IMPAIRED SECURITIES
  $ 294,688     $ 6,616     $ 1,102,580     $ 71,403     $ 1,397,268     $ 78,019  
__________
1
Fannie Mae and Freddie Mac are GSEs. Both entities were placed into conservatorship by the Finance Agency on September 7, 2008.
2
Ginnie Mae securities are guaranteed by the U.S. government.

 
14

 
The following table summarizes (in thousands) the held-to-maturity securities with unrecognized losses as of December 31, 2010. The unrecognized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrecognized loss position.

   
Less Than 12 Months
   
12 Months or More
   
Total
 
   
Fair
Value
   
Unrecognized
Losses
   
Fair
Value
   
Unrecognized
Losses
   
Fair
Value
   
Unrecognized
Losses
 
State or local housing agency obligations
  $ 41,203     $ 12,467     $ 1,968     $ 287     $ 43,171     $ 12,754  
Subtotal
    41,203       12,467       1,968       287       43,171       12,754  
Mortgage-backed securities:
                                               
Fannie Mae residential1
    79,562       55       395,329       1,201       474,891       1,256  
Freddie Mac residential1
    51,402       57       343,999       841       395,401       898  
Ginnie Mae residential2
    466       1       0       0       466       1  
Private-label mortgage-backed securities:
                                               
Residential loans
    35,722       334       619,611       81,347       655,333       81,681  
Home equity loans
    0       0       1,219       278       1,219       278  
Manufactured housing loans
    0       0       87       1       87       1  
Mortgage-backed securities
    167,152       447       1,360,245       83,668       1,527,397       84,115  
TOTAL TEMPORARILY IMPAIRED SECURITIES
  $ 208,355     $ 12,914     $ 1,362,213     $ 83,955     $ 1,570,568     $ 96,869  
                    
1
Fannie Mae and Freddie Mac are GSEs. GSE securities are not guaranteed by the U.S. government.
2
Ginnie Mae securities are guaranteed by the U.S. government.

Redemption Terms: The fair values of trading securities and the amortized cost, carrying value and fair values of held-to-maturity securities by contractual maturity as of June 30, 2011 and December 31, 2010 are shown in the following table (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.

   
Trading
   
Held-to-maturity
 
   
06/30/2011
   
12/31/2010
   
06/30/2011
   
12/31/2010
 
   
Fair
Value
   
Fair
Value
   
Amortized
Cost
   
Carrying
Value
   
Fair
Value
   
Amortized
Cost
   
Carrying
Value
   
Fair
Value
 
Due in one year or less
  $ 4,648,730     $ 4,360,368     $ 0     $ 0     $ 0     $ 0     $ 0     $ 0  
Due after one year through five years
    450,081       274,798       0       0       0       0       0       0  
Due after five years through 10 years
    704,070       1,258,131       5,545       5,545       5,547       5,740       5,740       5,742  
Due after 10 years
    0       0       86,943       86,943       74,478       93,272       93,272       80,526  
Subtotal
    5,802,881       5,893,297