10-Q 1 combined.htm FHLBANK TOPEKA Q1_2012 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 March 31, 2012
 
 
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 05/03/2012
Class A Stock, par value $100
5,758,171
Class B Stock, par value $100
8,037,292
 

 


 
 

 

FEDERAL HOME LOAN BANK OF TOPEKA
 
 
TABLE OF CONTENTS
 
 
PART I
FINANCIAL INFORMATION
 
Item 1.
 4
   4
   6
   7
    8
    10
    12
Item 2.
  44
    44
    46
    49
    49
    56
    70
    72
    77
    77
Item 3.
  78
Item 4.
PART II
  83
Item 1.
  83
Item 1A.
  83
Item 2.
  83
Item 3.
  83
Item 4.
  83
Item 5.
  83
Item 6.
  83
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, judicial or other developments that affect the FHLBank; its members, counterparties or investors; housing government sponsored enterprises (GSE); or the FHLBank System in general;
§  
Regulatory actions and determinations, including those resulting from the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act);
§  
Changes in the FHLBank’s capital structure;
§  
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, interest rates and indices and the timing and volume of market activity;
§  
Membership changes, including changes resulting from member failures or mergers, changes in the principal place of business of members or changes in the Federal Housing Finance Agency (Finance Agency) regulations on membership standards;
§  
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 reverse repurchase and derivative counterparties;
§  
Competitive forces, including competition for loan demand, purchases of mortgage loans and access to funding;
§  
The ability of the FHLBank to introduce new products and services to meet market demand and to manage successfully the risks associated with new products and services;
§  
Our ability to keep pace with technological changes and the ability of the FHLBank to develop and support technology and information systems, including the ability to access the internet and internet-based systems and services, sufficient to effectively manage the risks of the FHLBank’s business;
§  
The ability of each of the other FHLBanks to repay the principal and interest on consolidated obligations for which it is the primary obligor and with respect to which the FHLBank has joint and several liability;
§  
Changes in the U.S. government’s long-term debt rating and the long-term credit rating of the senior unsecured debt issues of the FHLBank System;
§  
Changes in the fair value and economic value of, impairments of, and risks associated with, the FHLBank’s investments in mortgage loans and mortgage-backed securities (MBS) or other assets and related credit enhancement (CE) protections; and
§  
The volume of eligible mortgage loans originated and sold by participating members to the FHLBank through its various mortgage finance products (Mortgage Partnership Finance® (MPF®) Program1).

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
 
 
 
STATEMENTS OF CONDITION – Unaudited
(In thousands, except par value)
   
March 31,
2012
   
December 31,
2011
 
ASSETS
           
Cash and due from banks
  $ 499,486     $ 116,041  
Interest-bearing deposits
    169       42  
Federal funds sold and securities purchased under agreements to resell
    2,315,000       1,040,000  
                 
Investment securities:
               
Trading securities (Note 3)
    3,651,675       4,559,163  
Held-to-maturity securities1 (Note 3)
    4,890,324       4,977,332  
Total investment securities
    8,541,999       9,536,495  
                 
Advances (Notes 4, 6)
    16,938,296       17,394,399  
                 
Mortgage loans held for portfolio:
               
Mortgage loans held for portfolio (Note 5)
    5,249,692       4,936,805  
Less allowance for credit losses on mortgage loans (Note 6)
    (4,203 )     (3,473 )
Mortgage loans held for portfolio, net
    5,245,489       4,933,332  
                 
Accrued interest receivable
    75,600       85,666  
Premises, software and equipment, net
    11,149       11,379  
Derivative assets (Note 7)
    13,332       14,038  
Other assets
    52,748       58,790  
                 
TOTAL ASSETS
  $ 33,693,268     $ 33,190,182  
                 
LIABILITIES AND CAPITAL
               
Liabilities:
               
Deposits:
               
Interest-bearing (Note 8)
  $ 1,838,881     $ 958,445  
Non-interest-bearing (Note 8)
    51,027       38,926  
Total deposits
    1,889,908       997,371  
                 
Consolidated obligations, net:
               
Discount notes (Note 9)
    10,187,856       10,251,108  
Bonds (Note 9)
    19,598,109       19,894,483  
Total consolidated obligations, net
    29,785,965       30,145,591  
                 
Overnight loans from other FHLBanks
    0       35,000  
Mandatorily redeemable capital stock (Note 12)
    8,021       8,369  
Accrued interest payable
    99,078       96,237  
Affordable Housing Program (Note 10)
    29,605       31,392  
Derivative liabilities (Note 7)
    119,875       140,213  
Other liabilities
    27,923       34,562  
                 
TOTAL LIABILITIES
    31,960,375       31,488,735  
                 
Commitments and contingencies (Note 16)
               
                    
1
Fair value: $4,895,020 and $4,967,585 as of March 31, 2012 and December 31, 2011, respectively.
 
 
The accompanying notes are an intergal part of these financial statements.
 

 
4

 


 
FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF CONDITION – Unaudited (continued)
(In thousands, except par value)
   
March 31,
2012
   
December 31,
2011
 
Capital:
           
Capital stock outstanding – putable:
           
Class A ($100 par value; 5,653 and 5,373 shares issued and outstanding) (Note 12)
    565,345       537,304  
Class B ($100 par value; 7,719 and 7,905 shares issued and outstanding) (Note 12)
    771,897       790,523  
Total capital stock
    1,337,242       1,327,827  
                 
Retained earnings:
               
Unrestricted
    413,698       395,588  
Restricted (Note 12)
    12,174       5,873  
Total retained earnings
    425,872       401,461  
                 
Accumulated other comprehensive income (loss) (Note 13)
    (30,221 )     (27,841 )
                 
TOTAL CAPITAL
    1,732,893       1,701,447  
                 
TOTAL LIABILITIES AND CAPITAL
  $ 33,693,268     $ 33,190,182  

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


 
5

 


FEDERAL HOME LOAN BANK OF TOPEKA
(In thousands)
   
For the Three Months
Ended March 31,
 
   
2012
   
2011
 
INTEREST INCOME:
           
Interest-bearing deposits
  $ 99     $ 34  
Federal funds sold and securities purchased under agreements to resell
    434       1,059  
Trading securities
    18,789       22,209  
Held-to-maturity securities
    19,547       28,946  
Advances
    38,208       41,864  
Prepayment fees on terminated advances
    1,379       788  
Mortgage loans held for sale
    0       1,547  
Mortgage loans held for portfolio
    49,101       46,358  
Overnight loans to other Federal Home Loan Banks
    1       1  
Other
    505       606  
Total interest income
    128,063       143,412  
                 
INTEREST EXPENSE:
               
Deposits
    383       613  
Consolidated obligations:
               
Discount notes
    1,052       4,574  
Bonds
    68,197       78,596  
Overnight loans from other Federal Home Loan Banks
    1       1  
Mandatorily redeemable capital stock (Note 12)
    14       54  
Other
    78       143  
Total interest expense
    69,725       83,981  
                 
NET INTEREST INCOME
    58,338       59,431  
Provision for credit losses on mortgage loans (Note 6)
    1,039       565  
NET INTEREST INCOME AFTER MORTGAGE LOAN LOSS PROVISION
    57,299       58,866  
                 
OTHER INCOME (LOSS):
               
Total other-than-temporary impairment losses on held-to-maturity securities (Note 3)
    (4,513 )     (1,303 )
Portion of other-than-temporary impairment losses on held-to-maturity securities recognized in other comprehensive income (loss)
    3,924       (430 )
Net other-than-temporary impairment losses on held-to-maturity securities
    (589 )     (1,733 )
Net gain (loss) on trading securities (Note 3)
    (10,766 )     (16,369 )
Net gain (loss) on derivatives and hedging activities (Note 7)
    65       2,977  
Service fees
    1,231       1,273  
Standby bond purchase agreement commitment fees
    1,069       997  
Other
    146       170  
Total other income (loss)
    (8,844 )     (12,685 )
                 
OTHER EXPENSES:
               
Compensation and benefits
    7,787       6,899  
Other operating
    3,467       3,539  
Finance Agency
    905       1,489  
Office of Finance
    576       747  
Other
    715       669  
Total other expenses
    13,450       13,343  
                 
INCOME (LOSS) BEFORE ASSESSMENTS
    35,005       32,838  
                 
Affordable Housing Program (Note 10)
    3,502       2,686  
REFCORP (Note 11)
    0       6,030  
Total assessments
    3,502       8,716  
                 
NET INCOME (LOSS)
  $ 31,503     $ 24,122  

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


 
6

 


 
FEDERAL HOME LOAN BANK OF TOPEKA
(In thousands)
   
For the Three Months Ended
March 31,
 
   
2012
   
2011
 
Net income (loss)
  $ 31,503     $ 24,122  
                 
Other comprehensive income (loss):
               
Net non-credit portion of other-than-temporary impairment losses on held-to-maturity securities:
               
Non-credit portion
    (4,052 )     (877 )
Reclassification of non-credit portion included in net income
    128       1,307  
Accretion of non-credit portion
    1,418       1,222  
Total net non-credit potion of other-than-temporary impairment losses on held-to-maturity securities
    (2,506 )     1,652  
                 
Defined benefit pension plan:
               
Amortization of net loss
    126       89  
                 
Total other comprehensive income (loss)
    (2,380 )     1,741  
                 
Total comprehensive income (loss)
  $ 29,123     $ 25,863  

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

 
 

 
7

 

FEDERAL HOME LOAN BANK OF TOPEKA
(In thousands)
                                             
Accumulated
       
   
Capital Stock
         
Other
       
   
Class A1
   
Class B1
   
Total
   
Retained Earnings
   
Comprehensive
   
Total
 
   
Shares
   
Par Value
   
Shares
   
Par Value
   
Shares
   
Par Value
   
Unrestricted
   
Restricted
   
Total
   
Income (Loss)
   
Capital
 
                                                                   
BALANCE - DECEMBER 31, 2010
    5,934     $ 593,386       8,610     $ 861,010       14,544     $ 1,454,396     $ 351,754     $ 0     $ 351,754     $ (22,672 )   $ 1,783,478  
Proceeds from issuance of capital stock
    6       567       105       10,475       111       11,042                                       11,042  
Repurchase/redemption of capital stock
    0       0       (19 )     (1,875 )     (19 )     (1,875 )                                     (1,875 )
Comprehensive income (loss)
                                                    24,122       0       24,122       1,741       25,863  
Net reclassification of shares to mandatorily redeemable capital stock
    (683 )     (68,302 )     (98 )     (9,816 )     (781 )     (78,118 )                                     (78,118 )
Net transfer of shares between Class A and Class B
    755       75,526       (755 )     (75,526 )     0       0                                       0  
Dividends on capital stock (Class A – 0.4%, Class B – 3.0%):
                                                                                       
Cash payment
                                                    (138 )             (138 )             (138 )
Stock issued
                    65       6,526       65       6,526       (6,526 )             (6,526 )             0  
BALANCE - MARCH 31, 2011
    6,012     $ 601,177       7,908     $ 790,794       13,920     $ 1,391,971     $ 369,212     $ 0     $ 369,212     $ (20,931 )   $ 1,740,252  
 
The accompanying notes are an intergal part of these financial statements.

 
8

 
FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF CAPITAL FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011 – Unaudited
(In thousands)
 
                                             
Accumulated
       
   
Capital Stock
         
Other
       
   
Class A1
   
Class B1
   
Total
   
Retained Earnings
   
Comprehensive
   
Total
 
   
Shares
   
Par Value
   
Shares
   
Par Value
   
Shares
   
Par Value
   
Unrestricted
   
Restricted
   
Total
   
Income (Loss)
   
Capital
 
                                                                   
BALANCE - DECEMBER 31, 2011
    5,373     $ 537,304       7,905     $ 790,523       13,278     $ 1,327,827     $ 395,588     $ 5,873     $ 401,461     $ (27,841 )   $ 1,701,447  
Proceeds from issuance of capital stock
    0       61       807       80,651       807       80,712                                       80,712  
Repurchase/redemption of capital stock
    0       0       (87 )     (8,693 )     (87 )     (8,693 )                                     (8,693 )
Comprehensive income (loss)
                                                    25,202       6,301       31,503       (2,380 )     29,123  
Net reclassification of shares to mandatorily redeemable capital stock
    (186 )     (18,655 )     (510 )     (50,971 )     (696 )     (69,626 )                                     (69,626 )
Net transfer of shares between Class A and Class B
    466       46,635       (466 )     (46,635 )     0       0                                       0  
Dividends on capital stock (Class A – 0.3%, Class B – 3.5%):
                                                                                       
Cash payment
                                                    (70 )             (70 )             (70 )
Stock issued
                    70       7,022       70       7,022       (7,022 )             (7,022 )             0  
BALANCE - MARCH 31, 2012
    5,653     $ 565,345       7,719     $ 771,897       13,372     $ 1,337,242     $ 413,698     $ 12,174     $ 425,872     $ (30,221 )   $ 1,732,893  
                    
1
Putable
The accompanying notes are an intergal part of these financial statements.
 
 
9

 

FEDERAL HOME LOAN BANK OF TOPEKA
(In thousands)
   
For the Three Months Ended
March 31,
 
   
2012
   
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income (loss)
  $ 31,503     $ 24,122  
Adjustments to reconcile income (loss) to net cash provided by (used in) operating activities:
               
Depreciation and amortization:
               
Premiums and discounts on consolidated obligations, net
    (5,486 )     (9,362 )
Concessions on consolidated obligations
    5,043       1,183  
Premiums and discounts on investments, net
    (431 )     (791 )
Premiums and discounts on advances, net
    (3,017 )     (12,445 )
Premiums, discounts and deferred loan costs on mortgage loans, net
    3,596       1,624  
Fair value adjustments on hedged assets or liabilities
    3,291       11,603  
Premises, software and equipment
    576       720  
Other
    126       89  
Provision for credit losses on mortgage loans
    1,039       565  
Non-cash interest on mandatorily redeemable capital stock
    13       52  
Net other-than-temporary impairment losses on held-to-maturity securities
    589       1,733  
Net realized (gain) loss on disposals of premises, software and equipment
    0       (4 )
Other (gains) losses
    35       21  
Net (gain) loss on trading securities
    10,766       16,369  
(Gain) loss due to change in net fair value adjustment on derivative and hedging activities
    2,402       8,580  
(Increase) decrease in accrued interest receivable
    10,054       13,821  
Change in net accrued interest included in derivative assets
    (25,408 )     (13,809 )
(Increase) decrease in other assets
    1,899       (940 )
Increase (decrease) in accrued interest payable
    2,844       (7,351 )
Change in net accrued interest included in derivative liabilities
    1,236       (1,869 )
Increase (decrease) in Affordable Housing Program liability
    (1,787 )     (1,501 )
Increase (decrease) in REFCORP liability
    0       (1,984 )
Increase (decrease) in other liabilities
    (1,734 )     456  
Total adjustments
    5,646       6,760  
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
    37,149       30,882  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Net (increase) decrease in interest-bearing deposits
    20,373       24,997  
Net (increase) decrease in Federal funds sold
    375,000       (1,189,000 )
Net (increase) decrease in securities purchased under resale agreements
    (1,650,000 )     0  
Net (increase) decrease in short-term trading securities
    824,790       (410,238 )
Proceeds from sale of long-term trading securities
    0       187,555  
Proceeds from maturities of and principal repayments on long-term trading securities
    121,941       130,221  
Purchases of long-term trading securities
    (50,000 )     0  
Proceeds from maturities of and principal repayments on long-term held-to-maturity securities
    405,066       572,970  
Purchases of long-term held-to-maturity securities
    (315,731 )     0  
Principal collected on advances
    7,553,601       8,072,881  
Advances made
    (7,134,752 )     (6,559,337 )
Principal collected on mortgage loans
    314,784       214,064  
Purchase or origination of mortgage loans
    (634,143 )     (406,805 )
Proceeds from sale of foreclosed assets
    1,551       2,760  
Principal collected on other loans made
    450       421  
Proceeds from sale of premises, software and equipment
    0       11  
Purchases of premises, software and equipment
    (346 )     (198 )
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
    (167,416 )     640,302  
 
The accompanying notes are an intergal part of these financial statements.

 
10

 

FEDERAL HOME LOAN BANK OF TOPEKA
STATEMENTS OF CASH FLOWS – Unaudited (continued)
(In thousands)
   
For the Three Months Ended
 March 31,
 
   
2012
   
2011
 
CASH FLOWS FROM FINANCING ACTIVITIES:
           
Net increase (decrease) in deposits
  $ 906,487     $ 761,275  
Net proceeds from issuance of consolidated obligations:
               
Discount notes
    12,025,471       22,960,017  
Bonds
    4,806,680       1,474,912  
Payments for maturing and retired consolidated obligations:
               
Discount notes
    (12,088,964 )     (24,105,030 )
Bonds
    (5,073,000 )     (1,628,700 )
Net increase (decrease) in overnight loans from other FHLBanks
    (35,000 )     0  
Net increase (decrease) in other borrowings
    (5,000 )     (5,000 )
Net interest payments received (paid) for financing derivatives
    (24,924 )     (25,760 )
Proceeds from issuance of capital stock
    80,712       11,042  
Payments for repurchase/redemption of capital stock
    (8,693 )     (1,875 )
Payments for repurchase of mandatorily redeemable capital stock
    (69,987 )     (80,854 )
Cash dividends paid
    (70 )     (138 )
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
    513,712       (640,111 )
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    383,445       31,073  
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    116,041       260  
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 499,486     $ 31,333  
                 
                 
Supplemental disclosures:
               
Interest paid
  $ 73,707     $ 96,819  
                 
Affordable Housing Program payments
  $ 5,328     $ 4,237  
                 
REFCORP payments
  $ 0     $ 8,014  
                 
Net transfers of mortgage loans to real estate owned
  $ 2,390     $ 1,343  

The accompanying notes are an intergal part of these financial statements


 

 
11

 

FEDERAL HOME LOAN BANK OF TOPEKA
March 31, 2012

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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, 2011. 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 19, 2012 (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 and related footnotes 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

Offsetting Assets and Liabilities: In December 2011, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued common disclosure requirements intended to help investors and other financial statement users better assess the effect or potential effect of offsetting arrangements on an entity’s financial position, regardless of whether an entity’s financial statements are prepared on the basis of GAAP or International Financial Reporting Standards (IFRS). This guidance will require the FHLBank to disclose both gross and net information about financial instruments, including derivative instruments, which are either offset on its Statements of Condition or subject to an enforceable master netting arrangement or similar agreement. This guidance will be effective for the FHLBank for interim and annual periods beginning on January 1, 2013 and will be applied retrospectively for all comparative periods presented. The adoption of this guidance will result in increased interim and annual financial statement disclosures, but will not affect the FHLBank’s financial condition, results of operations or cash flows.

Comprehensive Income – Presentation of Comprehensive Income: In June 2011, 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 (OCI) as part of the statement of changes in stockholders’ equity has been eliminated by this new guidance. The FHLBank 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 OCI, the components of OCI, and total comprehensive income. The guidance was effective for interim and annual periods beginning after December 15, 2011, including retrospective application for all periods presented. The FHLBank adopted this guidance as of January 1, 2012. The adoption of this guidance resulted in new presentation within the Statements of Income and the Statements of Capital, but did not impact the FHLBank’s financial condition, results of operations or cash flows.

In December 2011, the FASB issued guidance to defer the effective date of the new requirement to present reclassifications of items out of accumulated OCI (AOCI) in the income statement. This guidance became effective for the FHLBank for interim and annual periods beginning on January 1, 2012 and did not affect the FHLBank’s adoption of the remaining guidance contained in the new accounting standard for the presentation of comprehensive income.

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 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. The guidance was effective for interim and annual periods beginning after December 15, 2011 with early application not permitted. The FHLBank adopted this guidance as of January 1, 2012. The adoption of this guidance resulted in increased financial statement disclosures, but did not impact the FHLBank’s financial condition, results of operations or cash flows.

Transfers and Servicing – Reconsideration 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 guidance became effective for interim and annual periods beginning on or after December 15, 2011 and was required to be applied prospectively to transactions or modifications occurring on or after the effective date. The FHLBank adopted this guidance as of January 1, 2012. The adoption of this guidance did not have a material impact on the FHLBank’s financial condition, results of operations or cash flows.

 
12

 

NOTE 3 – INVESTMENT SECURITIES

Major Security Types: Trading and held-to-maturity securities as of March 31, 2012 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
 
Non-mortgage-backed securities:
                                         
Commercial paper
  $ 199,978     $ 0     $ 0     $ 0     $ 0     $ 0     $ 0  
Certificates of deposit
    594,802       0       0       0       0       0       0  
TLGP1 obligations
    491,894       0       0       0       0       0       0  
Government-sponsored enterprise obligations2,3
    2,039,774       0       0       0       0       0       0  
State or local housing agency obligations
    0       81,011       0       81,011       73       8,739       72,345  
Non-mortgage-backed securities
    3,326,448       81,011       0       81,011       73       8,739       72,345  
Mortgage-backed securities:
                                                       
U.S obligation residential4
    1,352       16,593       0       16,593       679       0       17,272  
Government-sponsored enterprise residential5
    323,875       4,079,440       0       4,079,440       40,241       1,930       4,117,751  
Private-label mortgage-backed securities:
                                                       
Residential
    0       682,491       25,949       708,440       4,056       56,849       655,647  
Commercial
    0       29,559       0       29,559       354       0       29,913  
Home equity
    0       1,230       316       1,546       634       88       2,092  
Mortgage-backed securities
    325,227       4,809,313       26,265       4,835,578       45,964       58,867       4,822,675  
TOTAL
  $ 3,651,675     $ 4,890,324     $ 26,265     $ 4,916,589     $ 46,037     $ 67,606     $ 4,895,020  
                    
1
Represents corporate debentures guaranteed by the Federal Deposit Insurance Corporation (FDIC) under the Temporary Liquidity Guarantee Program (TLGP).
2
Represents debentures issued by other FHLBanks, Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac), Federal Farm Credit Bank (Farm Credit), and Federal Agricultural Mortgage Corporation (Farmer Mac). GSE securities are not guaranteed by the U.S. government. Fannie Mae and Freddie Mac were placed into conservatorship by the Federal Housing Finance Agency (Finance Agency) on September 7, 2008 with the Finance Agency named as conservator.
3
See Note 18 for transactions with other FHLBanks.
4
Represents mortgage-backed securities (MBS) issued by Government National Mortgage Association (Ginnie Mae), which are guaranteed by the U.S. government.
5
Represents MBS issued by Fannie Mae and Freddie Mac.

 
13

 
Trading and held-to-maturity securities as of December 31, 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
 
Non-mortgage-backed securities:
                                         
Commercial paper
  $ 599,482     $ 0     $ 0     $ 0     $ 0     $ 0     $ 0  
Certificates of deposit
    1,019,520       0       0       0       0       0       0  
TLGP1 obligations
    494,236       0       0       0       0       0       0  
Government-sponsored enterprise obligations2,3
    2,098,844       0       0       0       0       0       0  
State or local housing agency obligations
    0       84,548       0       84,548       78       10,121       74,505  
Non-mortgage-backed securities
    4,212,082       84,548       0       84,548       78       10,121       74,505  
Mortgage-backed securities:
                                                       
U.S obligation residential4
    1,380       18,167       0       18,167       760       0       18,927  
Government-sponsored enterprise residential5
    345,701       4,064,679       0       4,064,679       39,197       1,976       4,101,900  
Private-label mortgage-backed securities:
                                                       
Residential
    0       771,478       23,402       794,880       4,585       67,023       732,442  
Commercial
    0       37,077       0       37,077       573       0       37,650  
Home equity
    0       1,383       357       1,740       503       82       2,161  
Mortgage-backed securities
    347,081       4,892,784       23,759       4,916,543       45,618       69,081       4,893,080  
TOTAL
  $ 4,559,163     $ 4,977,332     $ 23,759     $ 5,001,091     $ 45,696     $ 79,202     $ 4,967,585  
                    
1
Represents corporate debentures guaranteed by the FDIC under the TLGP.
2
Represents debentures issued by other FHLBanks, Fannie Mae, Freddie Mac, Farm Credit, and Farmer Mac. GSE securities are not guaranteed by the U.S. government. Fannie Mae and Freddie Mac were placed into conservatorship by the Finance Agency on September 7, 2008 with the Finance Agency named as conservator.
3
See Note 18 for transactions with other FHLBanks.
4
Represents MBS issued by Ginnie Mae, which are guaranteed by the U.S. government.
5
Represents MBS issued by Fannie Mae and Freddie Mac.

As of March 31, 2012 and December 31, 2011, 42.8 percent and 34.8 percent, respectively, of the FHLBank’s fixed rate trading securities were swapped to a floating rate. All of the swapped securities are non-MBS GSE obligations. Additionally, the FHLBank’s variable rate MBS/collateralized mortgage obligations (CMO), which have embedded caps, are hedged using interest rate caps.

The amortized cost of the FHLBank’s MBS/asset-backed securities (ABS) included credit losses, OTTI-related accretion adjustments and purchase premiums and discounts totaling $13,348,000 and $13,134,000 as of March 31, 2012 and December 31, 2011, respectively.

 
14

 
The following table summarizes (in thousands) the held-to-maturity securities with unrecognized losses as of March 31, 2012. 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
 
Non-mortgage-backed securities:
                                   
State or local housing agency obligations
  $ 28,208     $ 2,793     $ 25,569     $ 5,946     $ 53,777     $ 8,739  
Non-mortgage-backed securities
    28,208       2,793       25,569       5,946       53,777       8,739  
Mortgage-backed securities:
                                               
Government-sponsored enterprise residential1
    194,951       213       522,518       1,717       717,469       1,930  
Private-label mortgage-backed securities:
                                               
Residential
    40,743       296       352,435       56,553       393,178       56,849  
Home equity
    0       0       423       88       423       88  
Mortgage-backed securities
    235,694       509       875,376       58,358       1,111,070       58,867  
TOTAL TEMPORARILY IMPAIRED SECURITIES
  $ 263,902     $ 3,302     $ 900,945     $ 64,304     $ 1,164,847     $ 67,606  
__________
1
Represents MBS issued by Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac were placed into conservatorship by the Finance Agency on September 7, 2008 with the Finance Agency named as conservator.

The following table summarizes (in thousands) the held-to-maturity securities with unrecognized losses as of December 31, 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
 
Non-mortgage-backed securities:
                                   
State or local housing agency obligations
  $ 29,215     $ 2,970     $ 24,610     $ 7,151     $ 53,825     $ 10,121  
Non-mortgage-backed securities
    29,215       2,970       24,610       7,151       53,825       10,121  
Mortgage-backed securities:
                                               
Government-sponsored enterprise residential1
    122,180       96       579,599       1,880       701,779       1,976  
Private-label mortgage-backed securities:
                                               
Residential
    77,231       507       373,008       66,516       450,239       67,023  
Home equity
    0       0       442       82       442       82  
Mortgage-backed securities
    199,411       603       953,049       68,478       1,152,460       69,081  
TOTAL TEMPORARILY IMPAIRED SECURITIES
  $ 228,626     $ 3,573     $ 977,659     $ 75,629     $ 1,206,285     $ 79,202  
__________
1
Represents MBS issued by Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac were placed into conservatorship by the Finance Agency on September 7, 2008 with the Finance Agency named as conservator.

 
15

 
Redemption Terms: The amortized cost, carrying value and fair values of held-to-maturity securities by contractual maturity as of March 31, 2012 and December 31, 2011 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.

   
03/31/2012
   
12/31/2011
 
   
Amortized
Cost
   
Carrying
Value
   
Fair
Value
   
Amortized
Cost
   
Carrying
Value
   
Fair
Value
 
Non-mortgage-backed securities:
                                   
Due in one year or less
  $ 0     $ 0     $ 0     $ 0     $ 0     $ 0  
Due after one year through five years
    0       0       0       0       0       0  
Due after five years through 10 years
    25,250       25,250       22,556       5,095       5,095       5,095  
Due after 10 years
    55,761       55,761       49,789       79,453       79,453       69,410  
Non-mortgage-backed securities
    81,011       81,011       72,345       84,548       84,548       74,505  
Mortgage-backed securities
    4,835,578       4,809,313       4,822,675       4,916,543       4,892,784       4,893,080  
TOTAL
  $ 4,916,589     $ 4,890,324     $ 4,895,020     $ 5,001,091     $ 4,977,332     $ 4,967,585  

Interest Rate Payment Terms: The following table details interest rate payment terms for the amortized cost of held-to-maturity securities as of March 31, 2012 and December 31, 2011 (in thousands):

   
03/31/2012
   
12/31/2011
 
Non-mortgage-backed securities:
           
Fixed rate
  $ 20,321     $ 21,088  
Variable rate
    60,690       63,460  
Non-mortgage-backed securities
    81,011       84,548  
                 
Mortgage-backed securities:
               
Pass-through securities:
               
Fixed rate
    244       290  
Variable rate
    4,756       4,841  
Collateralized mortgage obligations:
               
Fixed rate
    580,401       684,040  
Variable rate
    4,250,177       4,227,372  
Mortgage-backed securities
    4,835,578       4,916,543  
TOTAL
  $ 4,916,589     $ 5,001,091  

Gains and Losses: Net gains (losses) on trading securities during the three-month periods ended March 31, 2012 and 2011 were as follows (in thousands):

   
For the Three-month
Period Ended
 
   
03/31/2012
   
03/31/2011
 
Net unrealized gains (losses) on trading securities held as of March 31, 2012
  $ (11,333 )   $ (9,956 )
Net unrealized and realized gains (losses) on trading securities sold or matured prior to March 31, 2012
    567       (6,413 )
NET GAIN (LOSS) ON TRADING SECURITIES
  $ (10,766 )   $ (16,369 )

Other-than-temporary Impairment: The FHLBank evaluates its individual held-to-maturity investment securities holdings in an unrealized loss position for other-than-temporary impairment (OTTI) at least quarterly, or more frequently if events or changes in circumstances indicate that these investments may be other-than-temporarily impaired. As part of this process, if the fair value of a security is less than its amortized cost basis, the FHLBank considers its intent to sell the debt security and whether it is more likely than not that it will be required to sell the debt security before its anticipated recovery. If either of these conditions is met, the FHLBank recognizes an OTTI charge in earnings equal to the entire difference between the debt security’s amortized cost and its fair value as of the balance sheet date. For securities in unrealized loss positions that meet neither of these conditions, the FHLBank performs an analysis to determine if any of these securities are other-than-temporarily impaired.

For state and local housing agency obligations, the FHLBank has determined that, as of March 31, 2012, all of the gross unrealized losses on these bonds are temporary because the strength of the underlying collateral and credit enhancements was sufficient to protect the FHLBank from losses based on current expectations.

For Agency MBS, the FHLBank determined that the strength of the issuers’ guarantees through direct obligations or support from the U.S. government is sufficient to protect the FHLBank from losses based on current expectations. As a result, the FHLBank has determined that, as of March 31, 2012, all of the gross unrealized losses on its Agency MBS are temporary.

The FHLBanks’ OTTI Governance Committee, which is comprised of representation from all 12 FHLBanks, has responsibility for reviewing and approving the key modeling assumptions, inputs and methodologies to be used by the FHLBanks to generate cash flow projections used in analyzing credit losses and determining OTTI for private-label MBS/ABS. To support consistency among the FHLBanks, FHLBank Topeka completed its OTTI analysis primarily based upon cash flow analysis prepared by FHLBank of San Francisco on behalf of FHLBank Topeka using key modeling assumptions provided by the FHLBanks’ OTTI Governance Committee for the majority of its private-label residential MBS and home equity loan ABS. Certain private-label MBS backed by multi-family and commercial real estate loans, home equity lines of credit and manufactured housing loans were outside of the scope of the OTTI Governance Committee and were analyzed for OTTI by the FHLBank utilizing other methodologies.

 
16

 
For private-label commercial MBS, consistent with the other FHLBanks, the FHLBank assesses the creditworthiness of the issuer, the credit ratings assigned by the Nationally Recognized Statistical Rating Organizations (NRSRO), the performance of the underlying loans and the credit support provided by the subordinate securities to make a conclusion as to whether the commercial MBS will be settled at an amount less than the amortized cost basis. The FHLBank had only one private-label commercial MBS as of March 31, 2012, and its fair value was higher than its amortized cost, so it was not reviewed for impairment.

An OTTI cash flow analysis is run by FHLBank of San Francisco for each of the FHLBank’s remaining private-label MBS/ABS using the FHLBank System’s common platform and agreed-upon assumptions. For certain private-label MBS/ABS where underlying collateral data is not available, alternative procedures as determined by each FHLBank are used to assess these securities for OTTI.

The evaluation includes estimating projected cash flows that are likely to be collected based on assessments of all available information about each individual security, including the structure of the security and certain assumptions as determined by the FHLBanks’ OTTI Governance Committee such as the remaining payment terms for the security, prepayment speeds, default rates, loss severity on the collateral supporting the FHLBank’s security based on underlying loan-level borrower and loan characteristics, expected housing price changes, and interest rate assumptions, to determine whether the FHLBank will recover the entire amortized cost basis of the security. In performing a detailed cash flow analysis, the FHLBank identifies the best estimate of the cash flows expected to be collected. If this estimate results in a present value of expected cash flows (discounted at the security’s effective yield) that is less than the amortized cost basis of a security (that is, a credit loss exists), an OTTI is considered to have occurred.

To assess whether the entire amortized cost basis of securities will be recovered, the FHLBank of San Francisco, on behalf of the FHLBank, performed a cash flow analysis using two third-party models. The first third-party model considers borrower characteristics and the particular attributes of the loans underlying the FHLBank’s securities, in conjunction with assumptions about future changes in home prices and interest rates, to project prepayments, defaults and loss severities. A significant input to the first model is the forecast of future housing price changes for the relevant states and core based statistical areas (CBSAs), which are based upon an assessment of the individual housing markets. CBSA refers collectively to metropolitan and micropolitan statistical areas as defined by the United States Office of Management and Budget; as currently defined, a CBSA must contain at least one urban area of 10,000 or more people. The FHLBank’s housing price forecast assumed current-to-trough home price declines ranging from 0 percent (for those housing markets that are believed to have reached the trough) to 8 percent. For those markets where further home price declines are anticipated, the declines were projected to occur over the three- to nine-month period beginning January 1, 2012. From the trough, home prices were projected to recover using one of five different recovery paths that vary by housing market. The following table presents projected home price recovery by months as of March 31, 2012:

Months
   
Recovery Range of Annualized Rates
 
1 – 6       0.0 – 2.8 %
7 – 18       0.0 – 3.0  
19 – 24       1.0 – 4.0  
25 – 30       2.0 – 4.0  
31 – 42       2.0 – 5.0  
43 – 66       2.0 – 6.0  
Thereafter
      2.3 – 5.6  

The month-by-month projections of future loan performance derived from the first model, which reflect projected prepayments, defaults and loss severities, are then input into a second model that allocates the projected loan level cash flows and losses to the various security classes in the securitization structure in accordance with its prescribed cash flow and loss allocation rules. In a securitization in which the credit enhancement for the senior securities is derived from the presence of subordinate securities, losses are generally allocated first to the subordinate securities until their principal balances are reduced to zero. The projected cash flows are based on a number of assumptions and expectations, and the results of these models can vary significantly with changes in assumptions and expectations. The scenario of cash flows determined based on model approach reflects a best estimate scenario and includes a base case current-to-trough housing price forecast and a base case housing price recovery path.

As a result of these security-level evaluations, the projected cash flows as of March 31, 2012 on 18 private-label MBS/ABS indicated that the FHLBank would not receive all principal and interest payments throughout the remaining lives of these securities. On two additional securities, the evaluation resulted in additional credit losses recognized in earnings because the present value of the expected cash flows was less than the amortized cost. An additional ten securities that had been previously identified as other-than-temporarily impaired have had improvements in their cash flows such that neither principal nor interest shortfalls are currently projected. Consequently, the FHLBank expects to recover the entire amortized cost of these securities and to amortize the entire OTTI balance through to maturity. The OTTI amount related to non-credit losses represents the difference between the current fair value of the security and the present value of the FHLBank’s best estimate of the cash flows expected to be collected, which is calculated as described previously. The OTTI amount recognized in OCI is accreted to the carrying value of the security on a prospective basis over the remaining life of the security. That accretion increases the carrying value of the security and continues until the security is sold or matures, or there is an additional OTTI that is recognized in earnings. The FHLBank does not intend to sell any of 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 of each OTTI security.

 
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For those securities for which an OTTI was determined to have occurred as of March 31, 2012 (that is, securities for which the FHLBank determined that it was more likely than not that the amortized cost basis would not be recovered), the following tables present a summary of the significant inputs used to measure the amount of credit loss recognized in earnings during this period as well as related current credit enhancement. Credit enhancement is defined as the percentage of subordinated tranches and over-collateralization, if any, in a security structure that will generally absorb losses before the FHLBank will experience a loss on the security. The calculated averages represent the dollar-weighted averages of all the private-label MBS/ABS investments in each category shown. Private-label MBS/ABS are classified as prime, Alt-A and subprime based on the originator’s classification at the time of origination or based on classification by an NRSRO upon issuance of the MBS.

Private-label residential MBS
 
Year of
Securitization
 
Significant Inputs
   
Current Credit
Enhancement
 
 
Prepayment Rates
   
Default Rates
   
Loss Severities
 
 
Weighted
Average
   
Rates/
Range
   
Weighted
Average
   
Rates/
Range
   
Weighted
Average
   
Rates/
Range
   
Weighted
Average
   
Rates/
Range
 
Prime: