10-Q 1 combined.htm FHLBANK TOPEKA Q3_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 September 30, 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 issuer’s classes of common stock, as of the latest practicable date.
 
 
 
Shares outstanding
as of 11/07/2012
Class A Stock, par value $100
  5,182,429
Class B Stock, par value $100
  8,641,124

 

 
 
 


 

FEDERAL HOME LOAN BANK OF TOPEKA
 
 
TABLE OF CONTENTS
 
 
PART I
FINANCIAL INFORMATION
 
 
    4
    6
    7
    8
    9
    11
Item 2.
  43
    43
    46
    48
    48
    58
    75
    76
    81
    81
Item 3.
  83
Item 4.
  89
PART II
  89
Item 1.
  89
Item 1A.
  89
Item 2.
  89
Item 3.
  89
Item 4.
  89
Item 5.
  89
Item 6.
  89
 
 
 
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,” “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 and quality of eligible mortgage loans 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
 
             
FEDERAL HOME LOAN BANK OF TOPEKA
           
           
(In thousands, except par value)
           
 
September 30,
December 31,
 
2012
2011
ASSETS
           
Cash and due from banks
$
 214,082
 
$
 116,041
 
Interest-bearing deposits
 
 856
   
 42
 
Federal funds sold and securities purchased under agreements to resell
 
 2,794,125
   
 1,040,000
 
             
Investment securities:
           
Trading securities (Note 3)
 
 3,427,364
   
 4,559,163
 
Held-to-maturity securities1 (Note 3)
 
 5,033,493
   
 4,977,332
 
Total investment securities
 
 8,460,857
   
 9,536,495
 
             
Advances (Notes 4, 6)
 
 17,915,350
   
 17,394,399
 
             
Mortgage loans held for portfolio:
           
Mortgage loans held for portfolio (Note 5)
 
 5,842,055
   
 4,936,805
 
Less allowance for credit losses on mortgage loans (Note 6)
 
 (5,435)
   
 (3,473)
 
Mortgage loans held for portfolio, net
 
 5,836,620
   
 4,933,332
 
             
Accrued interest receivable
 
 72,088
   
 85,666
 
Premises, software and equipment, net
 
 9,963
   
 11,379
 
Derivative assets (Note 7)
 
 13,635
   
 14,038
 
Other assets
 
 49,881
   
 58,790
 
             
TOTAL ASSETS
$
 35,367,457
 
$
 33,190,182
 
             
             
LIABILITIES AND CAPITAL
           
Liabilities:
           
Deposits:
           
Interest-bearing (Note 8)
$
 1,285,789
 
$
 958,445
 
Non-interest-bearing (Note 8)
 
 55,809
   
 38,926
 
Total deposits
 
 1,341,598
   
 997,371
 
             
Consolidated obligations, net:
           
Discount notes (Note 9)
 
 10,574,200
   
 10,251,108
 
Bonds (Note 9)
 
 21,372,807
   
 19,894,483
 
Total consolidated obligations, net
 
 31,947,007
   
 30,145,591
 
             
Overnight loans from other FHLBanks
 
 -
   
 35,000
 
Mandatorily redeemable capital stock (Note 12)
 
 6,318
   
 8,369
 
Accrued interest payable
 
 90,082
   
 96,237
 
Affordable Housing Program (Note 10)
 
 30,322
   
 31,392
 
Derivative liabilities (Note 7)
 
 120,056
   
 140,213
 
Other liabilities
 
 52,455
   
 34,562
 
             
TOTAL LIABILITIES
 
 33,587,838
   
 31,488,735
 
             
Commitments and contingencies (Note 16)
           
                    
1
Fair value: $5,067,286 and $4,967,585 as of September 30, 2012 and December 31, 2011, respectively.

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)
           
 
September 30,
December 31,
 
2012
2011
Capital:
           
Capital stock outstanding - putable:
           
Class A ($100 par value; 4,329 and 5,373 shares issued and outstanding) (Note 12)
$
 432,907
 
$
 537,304
 
Class B ($100 par value; 9,125 and 7,905 shares issued and outstanding) (Note 12)
 
 912,514
   
 790,523
 
Total capital stock
 
 1,345,421
   
 1,327,827
 
             
Retained earnings:
           
Unrestricted
 
 438,498
   
 395,588
 
Restricted (Note 12)
 
 22,217
   
 5,873
 
Total retained earnings
 
 460,715
   
 401,461
 
             
Accumulated other comprehensive income (loss) (Note 13)
 
 (26,517)
   
 (27,841)
 
             
TOTAL CAPITAL
 
 1,779,619
   
 1,701,447
 
             
TOTAL LIABILITIES AND CAPITAL
$
 35,367,457
 
$
 33,190,182
 
 
The accompanying notes are an integral part of these financial statements.

 
5

 
 
FEDERAL HOME LOAN BANK OF TOPEKA
                       
                       
(In thousands)
                       
 
Three-month Period Ended
September 30,
Nine-month Period Ended September 30,
 
2012
2011
2012
2011
INTEREST INCOME:
                       
Interest-bearing deposits
$
 135
 
$
 65
 
$
 367
 
$
 126
 
Federal funds sold and securities purchased under agreements to resell
 
 1,045
   
 412
   
 2,455
   
 2,031
 
Trading securities
 
 16,980
   
 19,205
   
 53,590
   
 60,875
 
Held-to-maturity securities
 
 17,101
   
 23,212
   
 54,862
   
 77,576
 
Advances
 
 37,170
   
 37,064
   
 113,344
   
 117,513
 
Prepayment fees on terminated advances
 
 693
   
 7,042
   
 3,933
   
 8,987
 
Mortgage loans held for sale
 
 -
   
 -
   
 -
   
 2,142
 
Mortgage loans held for portfolio
 
 49,572
   
 50,082
   
 145,633
   
 145,134
 
Other
 
 443
   
 545
   
 1,397
   
 1,703
 
Total interest income
 
 123,139
   
 137,627
   
 375,581
   
 416,087
 
                         
INTEREST EXPENSE:
                       
Deposits
 
 331
   
 804
   
 1,162
   
 2,047
 
Consolidated obligations:
                       
Discount notes
 
 2,859
   
 1,589
   
 6,261
   
 8,642
 
Bonds
 
 66,843
   
 74,647
   
 201,493
   
 230,135
 
Mandatorily redeemable capital stock (Note 12)
 
 8
   
 48
   
 35
   
 152
 
Other
 
 34
   
 97
   
 145
   
 339
 
Total interest expense
 
 70,075
   
 77,185
   
 209,096
   
 241,315
 
                         
NET INTEREST INCOME
 
 53,064
   
 60,442
   
 166,485
   
 174,772
 
Provision for credit losses on mortgage loans (Note 6)
 
 1,062
   
 327
   
 2,518
   
 1,236
 
NET INTEREST INCOME AFTER MORTGAGE LOAN LOSS PROVISION
 
 52,002
   
 60,115
   
 163,967
   
 173,536
 
                         
OTHER INCOME (LOSS):
                       
Total other-than-temporary impairment losses on held-to-maturity securities (Note 3)
 
 (13)
   
 (5,847)
   
 (5,105)
   
 (10,074)
 
Portion of other-than-temporary impairment losses on held-to-maturity securities recognized in other comprehensive income (loss)
 
 (189)
   
 3,824
   
 3,682
   
 5,597
 
Net other-than-temporary impairment losses on held-to-maturity securities
 
 (202)
   
 (2,023)
   
 (1,423)
   
 (4,477)
 
Net gain (loss) on trading securities (Note 3)
 
 (4,447)
   
 24,732
   
 (15,894)
   
 28,299
 
Net gain (loss) on derivatives and hedging activities (Note 7)
 
 (6,122)
   
 (74,778)
   
 (24,228)
   
 (105,024)
 
Net gain (loss) on mortgage loans held for sale (Note 5)
 
 -
   
 -
   
 -
   
 4,425
 
Standby bond purchase agreement commitment fees
 
 1,211
   
 1,022
   
 3,474
   
 3,029
 
Letters of credit fees
 
 715
   
 816
   
 2,394
   
 2,528
 
Other
 
 71
   
 728
   
 1,338
   
 1,914
 
Total other income (loss)
 
 (8,774)
   
 (49,503)
   
 (34,339)
   
 (69,306)
 
                         
OTHER EXPENSES:
                       
Compensation and benefits
 
 7,286
   
 6,472
   
 22,190
   
 21,898
 
Other operating
 
 2,817
   
 3,556
   
 9,046
   
 10,548
 
Finance Agency
 
 738
   
 822
   
 2,380
   
 3,134
 
Office of Finance
 
 466
   
 551
   
 1,661
   
 1,741
 
Other
 
 897
   
 1,762
   
 3,548
   
 4,338
 
Total other expenses
 
 12,204
   
 13,163
   
 38,825
   
 41,659
 
                         
INCOME (LOSS) BEFORE ASSESSMENTS
 
 31,024
   
 (2,551)
   
 90,803
   
 62,571
 
                         
Affordable Housing Program (Note 10)
 
 3,103
   
 (250)
   
 9,084
   
 5,091
 
REFCORP (Note 11)
 
 -
   
 -
   
 -
   
 11,822
 
Total assessments
 
 3,103
   
 (250)
   
 9,084
   
 16,913
 
                         
NET INCOME (LOSS)
$
 27,921
 
$
 (2,301)
 
$
 81,719
 
$
 45,658
 

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

 
6

 

                         
FEDERAL HOME LOAN BANK OF TOPEKA
                       
                       
(In thousands)
                       
 
Three-month Period Ended
 September 30,
Nine-month Period Ended
 September 30,
 
2012
2011
2012
2011
Net income (loss)
$
 27,921
 
$
 (2,301)
 
$
 81,719
 
$
 45,658 
 
                         
Other comprehensive income (loss):
                       
Net non-credit portion of other-than-temporary impairment losses on held-to-maturity securities:
                       
Non-credit portion
 
 (13)
   
 (5,246) 
   
 (4,634)
   
 (8,734) 
 
Reclassification of non-credit portion included in net income
 
 202
   
 1,422 
   
 952
   
 3,137 
 
Accretion of non-credit portion
 
 1,449
   
 1,079 
   
 4,628
   
 3,167 
 
Total net non-credit portion of other-than-temporary impairment losses on held-to-maturity securities
 
 1,638
   
 (2,745) 
   
 946 
   
 (2,430)
 
                         
Defined benefit pension plan:
                       
Amortization of net loss
 
 126
   
 79 
   
 378
   
 257 
 
                         
Total other comprehensive income (loss)
 
 1,764
   
 (2,666) 
   
 1,324 
   
 (2,173)
 
                         
TOTAL COMPREHENSIVE INCOME (LOSS)
$
 29,685
 
$
 (4,967)
 
$
 83,043
 
$
 43,485 
 
 
The accompanying notes are an integral part of these financial statements.
 
7

 

FEDERAL HOME LOAN BANK OF TOPEKA
 
 
(In thousands)
                                                                 
                                                       
Accumulated
     
 
Capital Stock1
                 
Other
     
 
Class A
Class B
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
 
$
 -
 
$
 351,754
 
$
 (22,672)
 
$
 1,783,478
 
Proceeds from issuance of capital stock
 
 59
   
 5,923
   
 1,000
   
 99,959
   
 1,059
   
 105,882
                           
 105,882
 
Repurchase/redemption of capital stock
 
 -
   
 -
   
 (35)
   
 (3,354)
   
 (35)
   
 (3,354)
                           
 (3,354)
 
Comprehensive income (loss)
                                     
 45,658
   
 -
   
 45,658
   
 (2,173)
   
 43,485
 
Net reclassification of shares to mandatorily redeemable capital stock
 
 (1,384)
   
 (138,386)
   
 (797)
   
 (79,743)
   
 (2,181)
   
 (218,129)
                           
 (218,129)
 
Net transfer of shares between Class A and Class B
 
 1,325
   
 132,521
   
 (1,325)
   
 (132,521)
   
 -
   
 -
                           
 -
 
Dividends on capital stock (Class A - 0.4%, Class B - 3.2%):
                                                                 
Cash payment
                                     
 (293)
         
 (293)
         
 (293)
 
Stock issued
             
 203
   
 20,256
   
 203
   
 20,256
   
 (20,256)
         
 (20,256)
         
 -
 
BALANCE SEPTEMBER 30, 2011
 
 5,934
 
$
 593,444
   
 7,656
 
$
 765,607
   
 13,590
 
$
 1,359,051
 
$
 376,863
 
$
 -
 
$
 376,863
 
$
 (24,845)
 
$
 1,711,069
 
                                                                   
                                                       
Accumulated
     
 
Capital Stock1
                 
Other
     
 
Class A
Class B
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
 
 38
   
 3,790
   
 3,164
   
 316,455
   
 3,202
   
 320,245
                           
 320,245
 
Repurchase/redemption of capital stock
 
 (680)
   
 (68,021)
   
 (159)
   
 (15,890)
   
 (839)
   
 (83,911)
                           
 (83,911)
 
Comprehensive income (loss)
                                     
 65,375
   
 16,344
   
 81,719
   
 1,324 
   
 83,043
 
Net reclassification of shares to mandatorily redeemable capital stock
 
 (558)
   
 (55,790)
   
 (1,852)
   
 (185,200)
   
 (2,410)
   
 (240,990)
                           
 (240,990)
 
Net transfer of shares between Class A and Class B
 
 156
   
 15,624
   
 (156)
   
 (15,624)
   
 -
   
 -
                           
 -
 
Dividends on capital stock (Class A - 0.3%, Class B - 3.5%):
                                                                 
Cash payment
                                     
 (215)
         
 (215)
         
 (215)
 
Stock issued
             
 223
   
 22,250
   
 223
   
 22,250
   
 (22,250)
         
 (22,250)
         
 -
 
BALANCE SEPTEMBER 30, 2012
 
 4,329
 
$
 432,907
   
 9,125
 
$
 912,514
   
 13,454
 
$
 1,345,421
 
$
 438,498
 
$
 22,217
 
$
 460,715
 
$
 (26,517)
 
$
 1,779,619
 
                    
1
Putable

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

 
8

 
             
             
FEDERAL HOME LOAN BANK OF TOPEKA
           
           
(In thousands)
           
 
Nine-month Period Ended
 September 30,
 
2012
2011
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income (loss)
$
 81,719
 
$
 45,658
 
Adjustments to reconcile income (loss) to net cash provided by (used in) operating activities:
           
Depreciation and amortization:
           
Premiums and discounts on consolidated obligations, net
 
 (19,207)
   
 (28,603)
 
Concessions on consolidated obligations
 
 14,235
   
 8,258
 
Premiums and discounts on investments, net
 
 (1,568)
   
 (1,985)
 
Premiums and discounts on advance, net
 
 (9,627)
   
 (17,399)
 
Premiums, discounts and deferred loan costs on mortgage loans, net
 
 13,834
   
 4,511
 
Fair value adjustments on hedged assets or liabilities
 
 13,759
   
 16,786
 
Premises, software and equipment
 
 1,640
   
 2,157
 
Other
 
 378
   
 257
 
Provision for credit losses on mortgage loans
 
 2,518
   
 1,236
 
Non-cash interest on mandatorily redeemable capital stock
 
 33
   
 147
 
Net other-than-temporary impairment losses on held-to-maturity securities
 
 1,423
   
 4,477
 
Net realized (gain) loss on sale of mortgage loans held for sale
 
 -
   
 (4,425)
 
Net realized (gain) loss on disposals of premises, software and equipment
 
 614
   
 (6)
 
Other (gains) losses
 
 238
   
 163
 
Net (gain) loss on trading securities
 
 15,894
   
 (28,299)
 
(Gain) loss due to change in net fair value adjustment on derivative and hedging activities
 
 43,333
   
 126,221
 
(Increase) decrease in accrued interest receivable
 
 13,565
   
 13,761
 
Change in net accrued interest included in derivative assets
 
 (23,053)
   
 (17,518)
 
(Increase) decrease in other assets
 
 3,667
   
 1,138 
 
Increase (decrease) in accrued interest payable
 
 (6,154)
   
 (25,135)
 
Change in net accrued interest included in derivative liabilities
 
 5,517
   
 6,326 
 
Increase (decrease) in Affordable Housing Program liability
 
 (1,070)
   
 (9,711)
 
Increase (decrease) in REFCORP liability
 
 -
   
 (8,014)
 
Increase (decrease) in other liabilities
 
 230 
   
 2,586
 
Total adjustments
 
 70,199
   
 46,929
 
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
 
 151,918
   
 92,587
 
             
CASH FLOWS FROM INVESTING ACTIVITIES:
           
Net (increase) decrease in interest-bearing deposits
 
 (19,834)
   
 (274,761)
 
Net (increase) decrease in Federal funds sold
 
 (5,000)
   
 1,055,000
 
Net (increase) decrease in securities purchased under resale agreements
 
 (1,749,125)
   
 -
 
Net (increase) decrease in short-term trading securities
 
 1,057,829
   
 346,813 
 
Proceeds from sale of long-term trading securities
 
 -
   
 284,445
 
Proceeds from maturities of and principal repayments on long-term trading securities
 
 458,045
   
 571,237
 
Purchases of long-term trading securities
 
 (399,975)
   
 (1,032,403)
 
Proceeds from maturities of and principal repayments on long-term held-to-maturity securities
 
 1,289,419
   
 1,347,384
 
Purchases of long-term held-to-maturity securities
 
 (1,317,566)
   
 -
 
Principal collected on advances
 
 26,052,711
   
 23,868,006
 
Advances made
 
 (26,572,683)
   
 (21,386,449)
 
Proceeds from sale of mortgage loans held for sale
 
 -
   
 111,444
 
Principal collected on mortgage loans
 
 1,091,003
   
 523,594
 
Purchase or origination of mortgage loans
 
 (2,013,700)
   
 (1,136,161)
 
Proceeds from sale of foreclosed assets
 
 6,722
   
 4,766
 
Principal collected on other loans made
 
 1,374
   
 1,285
 
Proceeds from sale of premises, software and equipment
 
 24
   
 24
 
Purchases of premises, software and equipment
 
 (862)
   
 (1,057)
 
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
 
 (2,121,618)
   
 4,283,167
 
 
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)
           
 
Nine-month Period Ended
 September 30,
 
2012
2011
CASH FLOWS FROM FINANCING ACTIVITIES:
           
Net increase (decrease) in deposits
$
 331,646
 
$
 986,761
 
Net proceeds from issuance of consolidated obligations:
           
Discount notes
 
 53,760,905
   
 52,166,029
 
Bonds
 
 15,924,786
   
 10,071,191
 
Payments for maturing and retired consolidated obligations:
           
Discount notes
 
 (53,438,855)
   
 (54,360,111)
 
Bonds
 
 (14,406,300)
   
 (11,250,900)
 
Net increase (decrease) in overnight loans from other FHLBanks
 
 (35,000)
   
 -
 
Net increase (decrease) in other borrowings
 
 (5,000)
   
 (5,000)
 
Net interest payments received (paid) for financing derivatives
 
 (57,486)
   
 (61,654)
 
Proceeds from issuance of capital stock
 
 320,245
   
 105,882
 
Payments for repurchase/redemption of capital stock
 
 (83,911)
   
 (3,354)
 
Payments for repurchase of mandatorily redeemable capital stock
 
 (243,074)
   
 (227,058)
 
Cash dividends paid
 
 (215)
   
 (293)
 
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
 
 2,067,741
   
 (2,578,507)
 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
 
 98,041
   
 1,797,247
 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
 
 116,041
   
 260
 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
 214,082
 
$
 1,797,507
 
             
Supplemental disclosures:
           
Interest paid
$
 210,765
 
$
 273,775
 
             
Affordable Housing Program payments
$
 10,400
 
$
 14,992
 
             
REFCORP payments
$
 -
 
$
 19,836
 
             
Net transfers of mortgage loans to real estate owned
$
 5,770
 
$
 4,691
 

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

 
FEDERAL HOME LOAN BANK OF TOPEKA
Notes to Financial Statements – Unaudited
September 30, 2012

NOTE 1 – BASIS OF 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, 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.

 
11

 

NOTE 3 – INVESTMENT SECURITIES

Major Security Types: Trading and held-to-maturity securities as of September 30, 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
$
 112,987
 
$
 -
 
$
 -
 
$
 -
 
$
 -
 
$
 -
 
$
 -
 
Certificates of deposit
 
 448,898
   
 -
   
 -
   
 -
   
 -
   
 -
   
 -
 
TLGP obligations1
 
 201,922
   
 -
   
 -
   
 -
   
 -
   
 -
   
 -
 
Government-sponsored enterprise obligations2,3
 
 2,386,135
   
 -
   
 -
   
 -
   
 -
   
 -
   
 -
 
State or local housing agency obligations
 
 -
   
 71,361
   
 -
   
 71,361
   
 221
   
 8,130
   
 63,452
 
Non-mortgage-backed securities
 
 3,149,942
   
 71,361
   
 -
   
 71,361
   
 221
   
 8,130
   
 63,452
 
Mortgage-backed securities:
                                         
U.S. obligation residential4
 
 1,311
   
 89,685
   
 -
   
 89,685
   
 632
   
 -
   
 90,317
 
Government-sponsored enterprise residential5
 
 276,111
   
 4,325,426
   
 -
   
 4,325,426
   
 44,391
   
 366
   
 4,369,451
 
Private-label mortgage-backed securities:
                                         
Residential loans
 
 -
   
 545,958
   
 22,570
   
 568,528
   
 5,978
   
 32,766
   
 541,740
 
Home equity loans
 
 -
   
 1,063
   
 243
   
 1,306
   
 1,036
   
 16
   
 2,326
 
Mortgage-backed securities
 
 277,422
   
 4,962,132
   
 22,813
   
 4,984,945
   
 52,037
   
 33,148
   
 5,003,834
 
TOTAL
$
 3,427,364
 
$
 5,033,493
 
$
 22,813
 
$
 5,056,306
 
$
 52,258
 
$
 41,278
 
$
 5,067,286
 
                    
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.

 
12

 
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
 
$
 -
 
$
 -
 
$
 -
 
$
 -
 
$
 -
 
$
 -
 
Certificates of deposit
 
 1,019,520
   
 -
   
 -
   
 -
   
 -
   
 -
   
 -
 
TLGP obligations1
 
 494,236
   
 -
   
 -
   
 -
   
 -
   
 -
   
 -
 
Government-sponsored enterprise obligations2,3
 
 2,098,844
   
 -
   
 -
   
 -
   
 -
   
 -
   
 -
 
State or local housing agency obligations
 
 -
   
 84,548
   
 -
   
 84,548
   
 78
   
 10,121
   
 74,505
 
Non-mortgage-backed securities
 
 4,212,082
   
 84,548
   
 -
   
 84,548
   
 78
   
 10,121
   
 74,505
 
Mortgage-backed securities:
                                         
U.S. obligation residential4
 
 1,380
   
 18,167
   
 -
   
 18,167
   
 760
   
 -
   
 18,927
 
Government-sponsored enterprise residential5
 
 345,701
   
 4,064,679
   
 -
   
 4,064,679
   
 39,197
   
 1,976
   
 4,101,900
 
Private-label mortgage-backed securities:
                                         
Residential loans
 
 -
   
 771,478
   
 23,402
   
 794,880
   
 4,585
   
 67,023
   
 732,442
 
Commercial loans
 
 -
   
 37,077
   
 -
   
 37,077
   
 573
   
 -
   
 37,650
 
Home equity loans
 
 -
   
 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.
 
 
13

 
As of September 30, 2012 and December 31, 2011, 52.8 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 netting to discount amounts of $11,609,000 and $13,134,000 as of September 30, 2012 and December 31, 2011, respectively.

The following table summarizes (in thousands) the held-to-maturity securities with unrecognized losses as of September 30, 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
$
 -
 
$
 -
 
$
 41,446
 
$
 8,130
 
$
 41,446
 
$
 8,130
 
Non-mortgage-backed securities
 
 -
   
 -
   
 41,446
   
 8,130
   
 41,446
   
 8,130
 
Mortgage-backed securities:
                                   
Government-sponsored enterprise residential1
 
 101,035 
   
 166 
   
 152,900 
   
 200 
   
 253,935 
   
 366 
 
Private-label mortgage-backed securities:
                                   
Residential loans
 
 6,690
   
 49
   
 255,079
   
 32,717
   
 261,769
   
 32,766
 
Home equity loans
 
 -
   
 -
   
 464
   
 16
   
 464
   
 16
 
Mortgage-backed securities
 
 107,725
   
 215
   
 408,443
   
 32,933
   
 516,168
   
 33,148
 
TOTAL TEMPORARILY IMPAIRED SECURITIES
$
 107,725
 
$
 215
 
$
 449,889
 
$
 41,063
 
$
 557,614
 
$
 41,278
 
__________
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 loans
 
 77,231
   
 507
   
 373,008
   
 66,516
   
 450,239
   
 67,023
 
Home equity loans
 
 -
   
 -
   
 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.

 
14

 
Redemption Terms: The amortized cost, carrying value and fair values of held-to-maturity securities by contractual maturity as of September 30, 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.

                                     
 
09/30/2012
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
$
 -
 
$
 -
 
$
 -
 
$
 -
 
$
 -
 
$
 -
 
Due after one year through five years
 
 -
   
 -
   
 -
   
 -
   
 -
   
 -
 
Due after five years through 10 years
 
 23,055
   
 23,055
   
 20,863
   
 5,095
   
 5,095
   
 5,095
 
Due after 10 years
 
 48,306
   
 48,306
   
 42,589
   
 79,453
   
 79,453
   
 69,410
 
Non-mortgage-backed securities
 
 71,361
   
 71,361
   
 63,452
   
 84,548
   
 84,548
   
 74,505
 
Mortgage-backed securities
 
 4,984,945
   
 4,962,132
   
 5,003,834
   
 4,916,543
   
 4,892,784
   
 4,893,080
 
TOTAL
$
 5,056,306
 
$
 5,033,493
 
$
 5,067,286
 
$
 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 September 30, 2012 and December 31, 2011 (in thousands):

             
 
09/30/2012
12/31/2011
Non-mortgage-backed securities:
           
Fixed rate
$
 18,306
 
$
 21,088
 
Variable rate
 
 53,055
   
 63,460
 
Non-mortgage-backed securities
 
 71,361
   
 84,548
 
             
Mortgage-backed securities:
           
Pass-through securities:
           
Fixed rate
 
 190
   
 290
 
Variable rate
 
 490,781
   
 4,841
 
Collateralized mortgage obligations:
           
Fixed rate
 
 400,973
   
 684,040
 
Variable rate
 
 4,093,001
   
 4,227,372
 
Mortgage-backed securities
 
 4,984,945
   
 4,916,543
 
TOTAL
$
 5,056,306
 
$
 5,001,091
 

Gains and Losses: Net gains (losses) on trading securities during the three- and nine-month periods ended September 30, 2012 and 2011 were as follows (in thousands):

                         
                         
 
Three-month Period Ended
Nine-month Period Ended
 
09/30/2012
09/30/2011
09/30/2012
09/30/2011
Net unrealized gains (losses) on trading securities held as of September 30, 2012
$
 (4,301)
 
$
 37,196 
 
$
 (13,724)
 
$
 46,633
 
Net unrealized and realized gains (losses) on trading securities sold or matured prior to September 30, 2012
 
 (146) 
   
 (12,464)
   
 (2,170)
   
 (18,334)
 
NET GAIN (LOSS) ON TRADING SECURITIES
$
 (4,447) 
 
$
 24,732 
 
$
 (15,894)
 
$
 28,299
 

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 September 30, 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 September 30, 2012, all of the gross unrealized losses on its Agency MBS are temporary.

 
15

 
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.

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 4 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 July 1, 2012. For the vast majority of markets where further home price declines are anticipated, the declines were projected to range from 1 percent to 2 percent over the 3-month period beginning July 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 September 30, 2012:

             
 
Recovery Range of Annualized
 Rates
Months
Low
High
             
1 - 6
 
 -
%
 
 2.8
%
7 - 18
 
 -
   
 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 September 30, 2012 on 16 private-label MBS/ABS indicated that the FHLBank would not receive all principal and interest payments throughout the remaining lives of these securities. On seven 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 nine 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.

 
16

 
For those securities for which an OTTI was determined to have occurred as of September 30, 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 a Nationally Recognized Statistical Rating Organization (NRSRO) upon issuance of the MBS.

                                                                         
Private-label residential MBS
 
Significant Inputs
Current Credit
 
Prepayment Rates
Default Rates
Loss Severities
Enhancements
 
%
Rates/
%
Rates/
%
Rates/
%
Rates/
Year of
Weighted
Range
Weighted
Range
Weighted
Range
Weighted
Range
Securitization
Average
Low
High
Average
Low
High
Average
Low
High
Average
Low
High
Prime:
                                                                       
2004 and prior
 
 7.0
%
 
 4.3
%
 
 11.3
%
 
 13.3
%
 
 6.9
%
 
 18.2
%
 
 26.8
%
 
 14.9
%
 
 34.8
%
 
 8.9
%
 
 3.8
%
 
 22.0
%
2005
 
 15.0
   
 14.5
   
 16.9
   
 11.1
   
 8.1
   
 12.7
   
 37.7
   
 36.7
   
 38.3
   
 4.1
   
 3.4
   
 5.1
 
Total Prime
 
 11.5
   
 4.3
   
 16.9
   
 12.1
   
 6.9
   
 18.2
   
 32.9
   
 14.9
   
 38.3
   
 6.2
   
 3.4
   
 22.0
 
                                                                         
Alt-A:
                                                                       
2004 and prior
 
 7.6
   
 6.7
   
 10.8
   
 20.4
   
 18.8
   
 20.8
   
 34.6
   
 31.0
   
 35.7
   
 15.9
   
 14.6
   
 20.3
 
2005
 
 11.5
   
 11.2
   
 11.5
   
 17.1
   
 16.3
   
 20.8
   
 42.0
   
 41.1
   
 42.2
   
 1.7
   
 0.7
   
 5.9
 
Total Alt-A
 
 10.6
   
 6.7