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 March 31, 2013
 
 
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 05/07/2013
Class A Stock, par value $100
  4,335,434
Class B Stock, par value $100
  9,825,174
 
Registrant’s common stock is not publicly traded and is only issued to members of the registrant. Such stock is issued, redeemed and repurchased at par value, $100 per share, with all issuances, redemptions and repurchases subject to the registrant’s capital plan as well as certain statutory and regulatory requirements.
 



 
 
 

FEDERAL HOME LOAN BANK OF TOPEKA
 
TABLE OF CONTENTS
 
4
4
  4
  6
  7
  8
  9
  11
39
  39
  42
  43
  44
  51
  67
  69
  73
  73
74
79
80
80
80
80
80
80
80
80
 
 

 
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 and quality of eligible mortgage loans originated and sold by participating members to the FHLBank through its various mortgage finance products (Mortgage Partnership Finance® (MPF®) 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

 
 
 
FEDERAL HOME LOAN BANK OF TOPEKA
           
           
(In thousands, except par value)
           
 
March 31,
December 31,
 
2013
2012
ASSETS
           
Cash and due from banks
$
 93,642
 
$
 369,997
 
Interest-bearing deposits
 
 149
   
 455
 
Securities purchased under agreements to resell
 
 698,980
   
 1,999,288
 
Federal funds sold
 
 1,050,000
   
 850,000
 
             
Investment securities:
           
Trading securities (Note 3)
 
 3,359,123
   
 2,764,918
 
Held-to-maturity securities1 (Note 3)
 
 5,117,188
   
 5,159,750
 
Total investment securities
 
 8,476,311
   
 7,924,668
 
             
Advances (Notes 4, 6)
 
 17,581,906
   
 16,573,348
 
             
Mortgage loans held for portfolio:
           
Mortgage loans held for portfolio (Note 5)
 
 5,930,997
   
 5,945,933
 
Less allowance for credit losses on mortgage loans (Note 6)
 
 (7,086)
   
 (5,416)
 
Mortgage loans held for portfolio, net
 
 5,923,911
   
 5,940,517
 
             
Accrued interest receivable
 
 66,276
   
 77,445
 
Premises, software and equipment, net
 
 8,899
   
 8,874
 
Derivative assets (Note 7)
 
 10,192
   
 25,166
 
Other assets
 
 47,868
   
 48,869
 
             
TOTAL ASSETS
$
 33,958,134
 
$
 33,818,627
 
             
             
LIABILITIES AND CAPITAL
           
Liabilities:
           
Deposits:
           
Interest-bearing (Note 8)
$
 1,296,879
 
$
 1,117,627
 
Non-interest-bearing (Note 8)
 
 49,656
   
 64,330
 
Total deposits
 
 1,346,535
   
 1,181,957
 
             
Consolidated obligations, net:
           
Discount notes (Note 9)
 
 9,204,351
   
 8,669,059
 
Bonds (Note 9)
 
 21,319,639
   
 21,973,902
 
Total consolidated obligations, net
 
 30,523,990
   
 30,642,961
 
             
Mandatorily redeemable capital stock (Note 11)
 
 4,979
   
 5,665
 
Accrued interest payable
 
 86,619
   
 81,801
 
Affordable Housing Program (Note 10)
 
 32,544
   
 31,198
 
Derivative liabilities (Note 7)
 
 117,399
   
 123,414
 
Other liabilities
 
 27,115
   
 31,150
 
             
TOTAL LIABILITIES
 
 32,139,181
   
 32,098,146
 
             
Commitments and contingencies (Note 15)
           
                    
1       Fair value: $5,147,854 and $5,192,330 as of March 31, 2013 and December 31, 2012, respectively.

The accompaning 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)
           
 
March 31,
December 31,
 
2013
2012
Capital:
           
Capital stock outstanding - putable:
           
Class A ($100 par value; 4,318 and 4,053 shares issued and outstanding) (Note 11)
 
 431,797
   
 405,304
 
Class B ($100 par value; 9,127 and 8,592 shares issued and outstanding) (Note 11)
 
 912,659
   
 859,152
 
Total capital stock
 
 1,344,456
   
 1,264,456
 
             
Retained earnings:
           
Unrestricted
 
 465,307
   
 453,346
 
Restricted (Note 11)
 
 32,865
   
 27,936
 
Total retained earnings
 
 498,172
   
 481,282
 
             
Accumulated other comprehensive income (loss) (Note 12)
 
 (23,675)
   
 (25,257)
 
             
TOTAL CAPITAL
 
 1,818,953
   
 1,720,481
 
             
TOTAL LIABILITIES AND CAPITAL
$
 33,958,134
 
$
 33,818,627
 

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

 
5

 
 
FEDERAL HOME LOAN BANK OF TOPEKA
           
           
(In thousands)
           
 
Three-month Period Ended
March 31,
 
2013
2012
INTEREST INCOME:
           
Interest-bearing deposits
$
 113
 
$
 99
 
Securities purchased under agreements to resell
 
 527
   
 296
 
Federal funds sold
 
 421
   
 138
 
Trading securities
 
 14,371
   
 18,789
 
Held-to-maturity securities
 
 15,402
   
 19,547
 
Advances
 
 32,249
   
 38,208
 
Prepayment fees on terminated advances
 
 1,163
   
 1,379
 
Mortgage loans held for portfolio
 
 48,102
   
 49,101
 
Other
 
 426
   
 506
 
Total interest income
 
 112,774
   
 128,063
 
             
INTEREST EXPENSE:
           
Deposits
 
 313
   
 383
 
Consolidated obligations:
           
Discount notes
 
 2,437
   
 1,052
 
Bonds
 
 57,898
   
 68,197
 
Mandatorily redeemable capital stock (Note 11)
 
 6
   
 14
 
Other
 
 36
   
 79
 
Total interest expense
 
 60,690
   
 69,725
 
             
NET INTEREST INCOME
 
 52,084
   
 58,338
 
Provision for credit losses on mortgage loans (Note 6)
 
 1,947
   
 1,039
 
NET INTEREST INCOME AFTER MORTGAGE LOAN LOSS PROVISION
 
 50,137
   
 57,299
 
             
OTHER INCOME (LOSS):
           
Total other-than-temporary impairment losses on held-to-maturity securities
 
 (14)
   
 (4,513)
 
Portion of other-than-temporary impairment losses on held-to-maturity securities recognized in other comprehensive income (loss)
 
 (65)
   
 3,924
 
Net other-than-temporary impairment losses on held-to-maturity securities (Note 3)
 
 (79)
   
 (589)
 
Net gain (loss) on trading securities (Note 3)
 
 (9,696)
   
 (10,766)
 
Net gain (loss) on derivatives and hedging activities (Note 7)
 
 (3,058)
   
 65
 
Standby bond purchase agreement commitment fees
 
 1,168
   
 1,069
 
Letters of credit fees
 
 785
   
 877
 
Other
 
 406
   
 529
 
Total other income (loss)
 
 (10,474)
   
 (8,815)
 
             
OTHER EXPENSES:
           
Compensation and benefits
 
 6,520
   
 7,787
 
Other operating
 
 3,391
   
 3,467
 
Finance Agency
 
 736
   
 905
 
Office of Finance
 
 654
   
 576
 
Other
 
 974
   
 744
 
Total other expenses
 
 12,275
   
 13,479
 
             
INCOME (LOSS) BEFORE ASSESSMENTS
 
 27,388
   
 35,005
 
             
Affordable Housing Program assessments (Note 10)
 
 2,740
   
 3,502
 
             
NET INCOME
$
 24,648
 
$
 31,503
 
 
The accompaning notes are an integral part of these financial statements.
 
 
6

 
 
FEDERAL HOME LOAN BANK OF TOPEKA
           
           
(In thousands)
           
 
Three-month Period Ended
March 31,
 
2013
2012
Net income
$
 24,648
 
$
 31,503
 
             
Other comprehensive income (loss):
           
Net non-credit portion of other-than-temporary impairment losses on held-to-maturity securities:
           
Non-credit portion
 
 (14)
   
 (4,052)
 
Reclassification of non-credit portion included in net income
 
 79
   
 128
 
Accretion of non-credit portion
 
 1,416
   
 1,418
 
Total net non-credit portion of other-than-temporary impairment losses on held-to-maturity securities
 
 1,481
   
 (2,506)
 
             
Defined benefit pension plan:
           
Amortization of net loss
 
 101
   
 126
 
             
Total other comprehensive income (loss)
 
 1,582
   
 (2,380)
 
             
TOTAL COMPREHENSIVE INCOME
$
 26,230
 
$
 29,123
 
 
The accompaning 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, 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
 
 -
   
 61
   
 807
   
 80,651
   
 807
   
 80,712
                           
 80,712
 
Repurchase/redemption of capital stock
 
 -
   
 -
   
 (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)
   
 -
   
 -
                           
 -
 
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)
         
 -
 
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
 
                                                                   
                                                       
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, 2012
 
 4,053
 
$
 405,304
   
 8,592
 
$
 859,152
   
 12,645
 
$
 1,264,456
 
$
 453,346
 
$
 27,936
 
$
 481,282
 
$
 (25,257)
 
$
 1,720,481
 
Proceeds from issuance of capital stock
 
 -
   
 -
   
 1,584
   
 158,432
   
 1,584
   
 158,432
                           
 158,432
 
Repurchase/redemption of capital stock
 
 (456)
   
 (45,556)
   
 (23)
   
 (2,299)
   
 (479)
   
 (47,855)
                           
 (47,855)
 
Comprehensive income (loss)
                                     
 19,719
   
 4,929
   
 24,648
   
 1,582
   
 26,230
 
Net reclassification of shares to mandatorily redeemable capital stock
 
 (86)
   
 (8,635)
   
 (296)
   
 (29,632)
   
 (382)
   
 (38,267)
                           
 (38,267)
 
Net transfer of shares between Class A and Class B
 
 807
   
 80,684
   
 (807)
   
 (80,684)
   
 -
   
 -
                           
 -
 
Dividends on capital stock (Class A - 0.3%, Class B - 3.5%):
                                                                 
Cash payment
                                     
 (68)
         
 (68)
         
 (68)
 
Stock issued
             
 77
   
 7,690
   
 77
   
 7,690
   
 (7,690)
         
 (7,690)
         
 -
 
BALANCE MARCH 31, 2013
 
 4,318
 
$
 431,797
   
 9,127
 
$
 912,659
   
 13,445
 
$
 1,344,456
 
$
 465,307
 
$
 32,865
 
$
 498,172
 
$
 (23,675)
 
$
 1,818,953
 
                    
1
Putable

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

 
8

 

FEDERAL HOME LOAN BANK OF TOPEKA
           
           
(In thousands)
           
 
Three-month Period Ended
March 31,
 
2013
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
$
 24,648
 
$
 31,503
 
Adjustments to reconcile income (loss) to net cash provided by (used in) operating activities:
           
Depreciation and amortization:
           
Premiums and discounts on consolidated obligations, net
 
 (11,493)
   
 (5,486)
 
Concessions on consolidated obligations
 
 1,795
   
 5,043
 
Premiums and discounts on investments, net
 
 (323)
   
 (431)
 
Premiums and discounts on advances, net
 
 (4,146)
   
 (3,017)
 
Premiums, discounts and deferred loan costs on mortgage loans, net
 
 6,445
   
 3,596
 
Fair value adjustments on hedged assets or liabilities
 
 3,475
   
 3,291
 
Premises, software and equipment
 
 516
   
 576
 
Other
 
 101
   
 126
 
Provision for credit losses on mortgage loans
 
 1,947
   
 1,039
 
Non-cash interest on mandatorily redeemable capital stock
 
 5
   
 13
 
Net other-than-temporary impairment losses on held-to-maturity securities
 
 79
   
 589
 
Other (gains) losses
 
 33
   
 35
 
Net (gain) loss on trading securities
 
 9,696
   
 10,766
 
(Gain) loss due to change in net fair value adjustment on derivative and hedging activities
 
 8,118
   
 2,402
 
(Increase) decrease in accrued interest receivable
 
 11,181
   
 10,054
 
Change in net accrued interest included in derivative assets
 
 (14,962)
   
 (25,408)
 
(Increase) decrease in other assets
 
 1,033
   
 1,899
 
Increase (decrease) in accrued interest payable
 
 4,819
   
 2,844
 
Change in net accrued interest included in derivative liabilities
 
 (4,286)
   
 1,236
 
Increase (decrease) in Affordable Housing Program liability
 
 1,346
   
 (1,787)
 
Increase (decrease) in other liabilities
 
 (3,833)
   
 (1,734)
 
Total adjustments
 
 11,546
   
 5,646
 
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
 
 36,194
   
 37,149
 
             
CASH FLOWS FROM INVESTING ACTIVITIES:
           
Net (increase) decrease in interest-bearing deposits
 
 45,206
   
 20,373
 
Net (increase) decrease in securities purchased under resale agreements
 
 1,300,308
   
 (1,650,000)
 
Net (increase) decrease in Federal funds sold
 
 (200,000)
   
 375,000
 
Net (increase) decrease in short-term trading securities
 
 (414,838)
   
 824,790
 
Proceeds from maturities of and principal repayments on long-term trading securities
 
 179,506
   
 121,941
 
Purchases of long-term trading securities
 
 (368,455)
   
 (50,000)
 
Proceeds from maturities of and principal repayments on long-term held-to-maturity securities
 
 404,885
   
 405,066
 
Purchases of long-term held-to-maturity securities
 
 (360,713)
   
 (315,731)
 
Principal collected on advances
 
 12,034,399
   
 7,553,601
 
Advances made
 
(13,082,626)
   
 (7,134,752)
 
Principal collected on mortgage loans
 
 404,166
   
 314,784
 
Purchase or origination of mortgage loans
 
 (398,701)
   
 (634,143)
 
Proceeds from sale of foreclosed assets
 
 444
   
 1,551
 
Principal collected on other loans made
 
 481
   
 450
 
Purchases of premises, software and equipment
 
 (541)
   
 (346)
 
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
 
 (456,479)
   
 (167,416)
 
 
The accompaning notes are an integral part of these financial statements.
 
 
9

 
 
FEDERAL HOME LOAN BANK OF TOPEKA
           
STATEMENTS OF CASH FLOWS - Unaudited (continued)
           
(In thousands)
           
 
Three-month Period Ended
 March 31,
 
2013
2012
CASH FLOWS FROM FINANCING ACTIVITIES:
           
Net increase (decrease) in deposits
$
 182,067
 
$
 906,487
 
Net proceeds from issuance of consolidated obligations:
           
Discount notes
 
 21,019,755
   
 12,025,471
 
Bonds
 
 1,814,371
   
 4,806,680
 
Payments for maturing and retired consolidated obligations:
           
Discount notes
 
(20,484,245)
   
(12,088,964)
 
Bonds
 
 (2,437,000)
   
 (5,073,000)
 
Net increase (decrease) in overnight loans from other FHLBanks
 
 -
   
 (35,000)
 
Net increase (decrease) in other borrowings
 
 -
   
 (5,000)
 
Proceeds from financing element derivatives
 
 44
   
 -
 
Net interest payments received (paid) for financing derivatives
 
 (22,613)
   
 (24,924)
 
Proceeds from issuance of capital stock
 
 158,432
   
 80,712
 
Payments for repurchase/redemption of capital stock
 
 (47,855)
   
 (8,693)
 
Payments for repurchase of mandatorily redeemable capital stock
 
 (38,958)
   
 (69,987)
 
Cash dividends paid
 
 (68)
   
 (70)
 
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
 
 143,930
   
 513,712
 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
 
 (276,355)
   
 383,445
 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
 
 369,997
   
 116,041
 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
 93,642
 
$
 499,486
 
             
Supplemental disclosures:
           
Interest paid
$
 64,833
 
$
 73,707
 
             
Affordable Housing Program payments
$
 1,440
 
$
 5,328
 
             
Net transfers of mortgage loans to real estate owned
$
 1,289
 
$
 2,390
 

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

 
FEDERAL HOME LOAN BANK OF TOPEKA
Notes to Financial Statements – Unaudited
March 31, 2013
 


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 instruction provided by Article 10, Rule 10-01 of Regulation S-X. The financial statements contain all adjustments which are, in the opinion of management, necessary for a fair statement of the FHLBank’s financial position, results of operation 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 of 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, 2012. The interim financial statements presented herein should be read in conjunction with the FHLBank’s audited financial statements and notes thereto, which are included in the FHLBank’s annual report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 15, 2013 (annual report on Form 10-K). The notes to the interim financial statements highlight significant changes to the notes included in the annual report on Form 10-K.

Use of Estimates: The preparation of financial statements under GAAP requires management to make estimates and assumptions as of the date of the financial statements in determining the reported amounts of assets, liabilities and estimated fair values and in determining the disclosure of any contingent assets or liabilities. Estimates and assumptions by management also affect the reported amounts of income and expense during the reporting period. The most significant of these estimates include the fair value of derivatives, the determination of other-than-temporary impairment (OTTI) on investments and the allowance for credit losses. Many of the estimates and assumptions, including those used in financial models, are based on financial market conditions as of the date of the financial statements. Because of the volatility of the financial markets, as well as other factors that affect management estimates, actual results may vary from these estimates.

Financial Instruments with Legal Right of Offset: The FHLBank has certain financial instruments, including derivative instruments and securities purchased under agreements to resell, that are subject to enforceable master netting arrangements or similar agreements. The FHLBank has elected to offset its derivative asset and liability positions, as well as cash collateral received or pledged, when it has the legal right of offset under these master agreements. The FHLBank did not have any offsetting liabilities related to its securities purchased under agreements to resell for the periods presented.

The net exposure for these financial instruments can change on a daily basis; therefore, there may be a delay between the time this exposure change is identified and additional collateral is requested, and the time when this collateral is received or pledged. Likewise, there may be a delay for excess collateral to be returned. For derivative instruments, any excess cash collateral received or pledged is recognized as a derivative liability or derivative asset based on the terms of these agreements is provided in Note 7. Based on the fair value of the related collateral held, the securities purchased under agreements to resell were fully collateralized for the periods presented. Additional information about the FHLBank’s investments in securities purchased under agreements to resell is disclosed in Note 1 of the annual report on Form 10-K.
 
 
NOTE 2 – RECENTLY ISSUED ACCOUNTING STANDARDS AND INTERPRETATIONS AND CHANGES IN AND ADOPTIONS OF ACCOUNTING PRINCIPLES

Joint and Several Liability: In February 2013, the Financial Accounting Standards Board (FASB) issued guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date. This guidance requires an entity to measure these obligations as the sum of: (1) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors; and (2) any additional amount the reporting entity expects to pay on behalf of its co-obligors. In addition, this guidance requires an entity to disclose the nature and amount of the obligation as well as other information about these obligations. This guidance is effective for interim and annual periods beginning on or after December 15, 2013 and should be applied retrospectively to obligations with joint and several liabilities existing at the beginning of an entity’s fiscal year of adoption. The FHLBank does not expect this new guidance to have a material effect on its financial condition, results of operations or cash flows.

Comprehensive Income – Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income: In February 2013, the FASB issued guidance which requires entities to provide information about significant reclassifications of items out of accumulated other comprehensive income (AOCI) by component. Entities are required to report the effect of significant reclassifications out of AOCI on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety. For other amounts not required to be reclassified in their entirety, the entity is required to cross-reference to other disclosures that provide additional detail about these amounts. This guidance was effective prospectively for the FHLBank for interim and annual periods beginning on January 1, 2013. 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.

Offsetting Assets and Liabilities: In December 2011, the 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 requires 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 was effective for the FHLBank for interim and annual periods beginning on January 1, 2013 and was applied retrospectively for all comparative periods presented. The FHLBank adopted the guidance as of January 1, 2013. The adoption of this guidance resulted in increased financial statement disclosures, but did not affect the FHLBank’s financial condition, results of operations or cash flows.
 
 
11

 
NOTE 3 – INVESTMENT SECURITIES

Major Security Types: Trading and held-to-maturity securities as of March 31, 2013 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
$
 424,954
 
$
 -
 
$
 -
 
$
 -
 
$
 -
 
$
 -
 
$
 -
 
Certificates of deposit
 
 374,994
   
 -
   
 -
   
 -
   
 -
   
 -
   
 -
 
Government-sponsored enterprise obligations1.2
 
 2,330,101
   
 -
   
 -
   
 -
   
 -
   
 -
   
 -
 
State or local housing agency obligations
 
 -
   
 69,031
   
 -
   
 69,031
   
 138
   
 8,350
   
 60,819
 
Non-mortgage-backed securities
 
 3,130,049
   
 69,031
   
 -
   
 69,031
   
 138
   
 8,350
   
 60,819
 
Mortgage-backed securities:
                                         
U.S. obligation residential3
 
 1,233
   
 80,953
   
 -
   
 80,953
   
 370
   
 -
   
 81,323
 
Government-sponsored enterprise residential4
 
 227,841
   
 4,526,628
   
 -
   
 4,526,628
   
 36,054
   
 2,959
   
 4,559,723
 
Private-label mortgage-backed securities:
                                         
Residential loans
 
 -
   
 439,468
   
 19,153
   
 458,621
   
 4,891
   
 20,264
   
 443,248
 
Home equity loans
 
 -
   
 1,108
   
 212
   
 1,320
   
 1,421
   
 -
   
 2,741
 
Mortgage-backed securities
 
 229,074
   
 5,048,157
   
 19,365
   
 5,067,522
   
 42,736
   
 23,223
   
 5,087,035
 
TOTAL
$
 3,359,123
 
$
 5,117,188
 
$
 19,365
 
$
 5,136,553
 
$
 42,874
 
$
 31,573
 
$
 5,147,854
 
                    
1
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 Finance Agency on September 7, 2008 with the Finance Agency named as conservator.
2
See Note 17 for transactions with other FHLBanks.
3
Represents mortgage-backed securities (MBS) issued by Government National Mortgage Association (Ginnie Mae), which are guaranteed by the U.S. government.
4
Represents MBS issued by Fannie Mae and Freddie Mac.

Trading and held-to-maturity securities as of December 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
$
 59,996
 
$
 -
 
$
 -
 
$
 -
 
$
 -
 
$
 -
 
$
 -
 
Certificates of deposit
 
 325,006
   
 -
   
 -
   
 -
   
 -
   
 -
   
 -
 
Government-sponsored enterprise obligations1,2
 
 2,126,327
   
 -
   
 -
   
 -
   
 -
   
 -
   
 -
 
State or local housing agency obligations
 
 -
   
 69,442
   
 -
   
 69,442
   
 170
   
 8,686
   
 60,926
 
Non-mortgage-backed securities
 
 2,511,329
   
 69,442
   
 -
   
 69,442
   
 170
   
 8,686
   
 60,926
 
Mortgage-backed securities:
                                         
U.S obligation residential3
 
 1,277
   
 85,484
   
 -
   
 85,484
   
 650
   
 -
   
 86,134
 
Government-sponsored enterprise residential4
 
 252,312
   
 4,509,121
   
 -
   
 4,509,121
   
 39,571
   
 1,034
   
 4,547,658
 
Private-label mortgage-backed securities:
                                         
Residential loans
 
 -
   
 494,631
   
 20,649
   
 515,280
   
 5,433
   
 25,522
   
 495,191
 
Home equity loans
 
 -
   
 1,072
   
 197
   
 1,269
   
 1,155
   
 3
   
 2,421
 
Mortgage-backed securities
 
 253,589
   
 5,090,308
   
 20,846
   
 5,111,154
   
 46,809
   
 26,559
   
 5,131,404
 
TOTAL
$
 2,764,918
 
$
 5,159,750
 
$
 20,846
 
$
 5,180,596
 
$
 46,979
 
$
 35,245
 
$
 5,192,330
 
                    
1
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.
2
See Note 17 for transactions with other FHLBanks.
3
Represents MBS issued by Ginnie Mae, which are guaranteed by the U.S. government.
4
Represents MBS issued by Fannie Mae and Freddie Mac.

 
12

 
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 $5,697,000 and $6,547,000 as of March 31, 2013 and December 31, 2012, respectively.

The following table summarizes (in thousands) the held-to-maturity securities with unrecognized losses as of March 31, 2013. 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
$
 -
 
$
 -
 
$
 40,750
 
$
 8,350
 
$
 40,750
 
$
 8,350
 
Non-mortgage-backed securities
 
 -
   
 -
   
 40,750
   
 8,350
   
 40,750
   
 8,350
 
Mortgage-backed securities:
                                   
Government-sponsored enterprise residential1
 
 805,524
   
 2,783
   
 111,659
   
 176
   
 917,183
   
 2,959
 
Private-label mortgage-backed securities:
                                   
Residential loans
 
 7,528
   
 7
   
 216,926
   
 20,257
   
 224,454
   
 20,264
 
Mortgage-backed securities
 
 813,052
   
 2,790
   
 328,585
   
 20,433
   
 1,141,637
   
 23,223
 
TOTAL TEMPORARILY IMPAIRED SECURITIES
$
 813,052
 
$
 2,790
 
$
 369,335
 
$
 28,783
 
$
 1,182,387
 
$
 31,573
 
__________
1
Represents MBS issued by Fannie Mae and Freddie Mac.

The following table summarizes (in thousands) the held-to-maturity securities with unrecognized losses as of December 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
$
 -
 
$
 -
 
$
 40,719
 
$
 8,686
 
$
 40,719
 
$
 8,686
 
Non-mortgage-backed securities
 
 -
   
 -
   
 40,719
   
 8,686
   
 40,719
   
 8,686
 
Mortgage-backed securities:
                                   
Government-sponsored enterprise residential1
 
 338,126
   
 829
   
 126,814
   
 205
   
 464,940
   
 1,034
 
Private-label mortgage-backed securities:
                                   
Residential loans
 
 5,830
   
 8
   
 246,641
   
 25,514
   
 252,471
   
 25,522
 
Home equity loans
 
 -
   
 -
   
 53
   
 3
   
 53
   
 3
 
Mortgage-backed securities
 
 343,956
   
 837
   
 373,508
   
 25,722
   
 717,464
   
 26,559
 
TOTAL TEMPORARILY IMPAIRED SECURITIES
$
 343,956
 
$
 837
 
$
 414,227
 
$
 34,408
 
$
 758,183
 
$
 35,245
 
__________
1
Represents MBS issued by Fannie Mae and Freddie Mac.

Redemption Terms: The amortized cost, carrying value and fair values of held-to-maturity securities by contractual maturity as of March 31, 2013 and December 31, 2012 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.
                                     
 
03/31/2013
12/31/2012
 
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
 
 22,540
   
 22,540
   
 20,619
   
 22,780
   
 22,780
   
 20,741
 
Due after 10 years
 
 46,491
   
 46,491
   
 40,200
   
 46,662
   
 46,662
   
 40,185
 
Non-mortgage-backed securities
 
 69,031
   
 69,031
   
 60,819
   
 69,442
   
 69,442
   
 60,926
 
Mortgage-backed securities
 
 5,067,522
   
 5,048,157
   
 5,087,035
   
 5,111,154
   
 5,090,308
   
 5,131,404
 
TOTAL
$
 5,136,553
 
$
 5,117,188
 
$
 5,147,854
 
$
 5,180,596
 
$
 5,159,750
 
$
 5,192,330
 

 
13

 
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, 2013 and December 31, 2012 (in thousands):
             
 
03/31/2013
12/31/2012
Non-mortgage-backed securities:
           
Fixed rate
$
 16,491
 
$
 16,662
 
Variable rate
 
 52,540
   
 52,780
 
Non-mortgage-backed securities
 
 69,031
   
 69,442
 
             
Mortgage-backed securities:
           
Pass-through securities:
           
Fixed rate
 
 151
   
 170
 
Variable rate
 
 605,711
   
 595,078
 
Collateralized mortgage obligations:
           
Fixed rate
 
 704,461
   
 687,770
 
Variable rate
 
 3,757,199
   
 3,828,136
 
Mortgage-backed securities
 
 5,067,522
   
 5,111,154
 
TOTAL
$
 5,136,553
 
$
 5,180,596
 

Gains and Losses: Net gains (losses) on trading securities during the three-month periods ended March 31, 2013 and 2012 were as follows (in thousands):
             
 
Three-month Period Ended
 
03/31/2013
03/31/2012
Net gains (losses) on trading securities held as of March 31, 2013
$
 (9,326)
 
$
 (7,195)
 
Net gains (losses) on trading securities sold or matured prior to March 31, 2013
 
 (370)
   
 (3,571)
 
NET GAIN (LOSS) ON TRADING SECURITIES
$
 (9,696)
 
$
 (10,766)
 

Other-than-temporary Impairment: The FHLBank has established processes for evaluating its individual held-to-maturity investment securities holdings in an unrealized loss position for OTTI. 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: (1) the remaining payment terms for the security; (2) prepayment speeds; (3) default rates; (4) loss severity on the collateral supporting the FHLBank’s security based on underlying loan-level borrower and loan characteristics; (5) expected housing price changes; and (6) interest rate assumptions. 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.

 
14

 
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 OTTI Governance Committee developed a housing price forecast with seven short-term projections with changes ranging from (4.0) percent to 4.0 percent over the twelve-month period beginning January 1, 2013. For the vast majority of markets, the short-term forecast has changes from (1.0) percent to 1.0 percent. Thereafter, home prices were projected to recover using one of five different recovery paths. The following table presents projected home price recovery by months as of March 31, 2013:
             
 
Recovery Range of Annualized Rates
Months
Low
High
             
1 - 6
 
 -
%
 
 3.0
%
7 - 12
 
 1.0
   
 4.0
 
13 - 18
 
 2.0
   
 4.0
 
19 - 30
 
 2.0
   
 5.0
 
31 - 42
 
 2.0
   
 6.0
 
43 - 54
 
 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.

For those securities for which an OTTI was determined to have occurred as of March 31, 2013 (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/ABS.
                         
Private-label residential MBS
Year of
Significant Inputs
Current Credit
Securitization
Prepayment Rates
Default Rates
Loss Severities
Enhancements
Prime:
                       
2004 and prior
 
 9.1
%
 
 13.8
%
 
 38.8
%
 
 12.1
%
2005
 
 13.0
   
 15.3
   
 35.0
   
 4.0
 
Total Prime
 
 10.2
   
 14.2
   
 37.7
   
 9.8
 
                         
Alt-A:
                       
2004 and prior
 
 11.3
   
 21.2
   
 41.2
   
 9.2
 
2005
 
 10.5
   
 19.4
   
 43.2
   
 4.7
 
Total Alt-A
 
 11.0
   
 20.4
   
 42.1
   
 7.2
 
                         
TOTAL
 
 10.8
%
 
 18.9
%
 
 41.0
%
 
 7.9
%
                         
Home Equity Loan ABS
Year of
Significant Inputs
Current Credit
Securitization
Prepayment Rates
Default Rates
Loss Severities
Enhancements
Subprime:
                       
2004 and prior
 
 1.1
%
 
 5.4
%
 
 94.1
%
 
 12.4
%

 
15

 
For the 32 private-label securities with OTTI during the lives of the securities, the FHLBank’s reported balances as of March 31, 2013 are as follows (in thousands):
                         
 
Unpaid Principal Balance
Amortized
Cost
Carrying Value
Fair
Value
Private-label residential MBS:
                       
Prime
$
 33,355
 
$
 32,253
 
$
 30,335
 
$
 32,160
 
Alt-A
 
 87,690
   
 80,426
   
 63,191
   
 74,243
 
Total private-label residential MBS
 
 121,045
   
 112,679
   
 93,526
   
 106,403
 
                         
Home equity loans:
                       
Subprime
 
 3,622
   
 1,320
   
 1,108
   
 2,742
 
TOTAL
$
 124,667
 
$
 113,999
 
$
 94,634
 
$
 109,145
 

The following table presents a roll-forward of OTTI activity for the three-month periods ended March 31, 2013 and 2012 related to credit losses recognized in earnings (in thousands):
             
 
Three-month Period Ended
 
03/31/2013
03/31/2012
Balance, beginning of period
$
 10,968
 
$
 10,342
 
Additional charge on securities for which OTTI was not previously recognized1
 
 -
   
 229
 
Additional charge on securities for which OTTI was previously recognized1
 
 79
   
 360
 
Realized principal losses on securities paid down during the period
 
 (100)
   
 -
 
Amortization of credit component of OTTI2
 
 (420)
   
 10
 
Balance, end of period
$
 10,527
 
$
 10,941
 
                   
1
For the three-month periods ended March 31, 2013 and 2012, securities previously impaired represent all securities that were impaired prior to January 1, 2013 and 2012, respectively.
2
The FHLBank amortizes the credit component based on estimated cash flows prospectively up to the amount of expected principal to be recovered. The discounted cash flows will move from the discounted loss value to the ultimate principal to be written off at the projected date of loss. If the expected cash flows improve, the amount of expected loss decreases which causes a corresponding decrease in the calculated amortization. Based on the level of improvement in the cash flows, the amortization could become a positive adjustment to income.

As of March 31, 2013, the fair value of a portion of the FHLBank’s held-to-maturity securities portfolio was below the amortized cost of the securities due to interest rate volatility, illiquidity in the marketplace and credit deterioration in the U.S. mortgage markets that began in early 2008. However, the decline in fair value of these securities is considered temporary as the FHLBank expects to recover the entire amortized cost basis on the remaining held-to-maturity securities in unrecognized loss positions and neither intends to sell these securities nor is it more likely than not that the FHLBank will be required to sell these securities before its anticipated recovery of the remaining amortized cost basis.


NOTE 4 – ADVANCES

General Terms: The FHLBank offers a wide range of fixed and variable rate advance products with different maturities, interest rates, payment characteristics and optionality. Fixed rate advances generally have maturities ranging from 3 days to 15 years. Variable rate advances generally have maturities ranging from overnight to 15 years, where the interest rates reset periodically at a fixed spread to the London Interbank Offered Rate (LIBOR) or other specified index. As of March 31, 2013 and December 31, 2012, the FHLBank had advances outstanding at interest rates ranging from 0.14 percent to 8.01 percent and 0.12 percent to 8.01 percent, respectively. The following table presents advances summarized by year of contractual maturity as of March 31, 2013 and December 31, 2012 (in thousands):
                         
 
03/31/2013
12/31/2012
Year of Contractual Maturity
Amount
Weighted Average Interest Rate
Amount
Weighted Average Interest Rate
Due in one year or less
$
 4,293,848
   
 0.94
%
$
 3,433,058
   
 1.11
%
Due after one year through two years
 
 1,627,977
   
 2.00
   
 1,454,725
   
 2.39
 
Due after two years through three years
 
 1,609,889
   
 2.17
   
 1,691,471
   
 1.88
 
Due after three years through four years
 
 1,651,656
   
 1.70
   
 1,757,905
   
 1.99
 
Due after four years through five years
 
 2,562,696
   
 2.94
   
 2,529,511
   
 2.84
 
Thereafter
 
 5,428,062
   
 1.04
   
 5,241,927
   
 1.36
 
Total par value
 
 17,174,128
   
 1.56
%
 
 16,108,597
   
 1.76
%
Discounts
 
 (42,924)
         
 (29,767)
       
Hedging adjustments1
 
 450,702
         
 494,518
       
TOTAL
$
 17,581,906
       
$
 16,573,348
       
                   
1
See Note 7 for a discussion of: (1) the FHLBank’s objectives for using derivatives; (2) the types of assets and liabilities hedged; and (3) the accounting for derivatives and the related assets and liabilities hedged.

 
16

 
The FHLBank’s advances outstanding include advances that contain call options that may be exercised with or without prepayment fees at the borrower’s discretion on specific dates (call dates) before the stated advance maturities (callable advances). In exchange for receiving the right to call the advance on a predetermined call schedule, the borrower may pay a higher fixed rate for the advance relative to an equivalent maturity, non-callable, fixed rate advance. The borrower normally exercises its call options on these advances when interest rates decline (fixed rate advances) or spreads change (adjustable rate advances). The FHLBank’s advances as of March 31, 2013 and December 31, 2012 include callable advances totaling $5,961,612,000 and $5,429,171,000, respectively. Of these callable advances, there were $5,832,043,000 and $5,300,793,000 of variable rate advances as of March 31, 2013 and December 31, 2012, respectively.

Convertible advances allow the FHLBank to convert an advance from one interest payment term structure to another. When issuing convertible advances, the FHLBank may purchase put options from a member that allow the FHLBank to convert the fixed rate advance to a variable rate advance at the current market rate or another structure after an agreed-upon lockout period. A convertible advance carries a lower interest rate than a comparable-maturity fixed rate advance without the conversion feature. As of March 31, 2013 and December 31, 2012, the FHLBank had convertible advances outstanding totaling $1,925,517,000 and $2,079,092,000, respectively.

The following table presents advances summarized by contractual maturity or next call date (for callable advances) and by contractual maturity or next conversion date (for convertible advances) as of March 31, 2013 and December 31, 2012 (in thousands):
                         
 
Year of Contractual Maturity or Next Call Date
Year of Contractual Maturity or Next Conversion Date
Redemption Term
03/31/2013
12/31/2012
03/31/2013
12/31/2012
Due in one year or less
$
 9,921,993
 
$
 8,483,653
 
$
 6,148,990
 
$
 5,430,875
 
Due after one year through two years
 
 1,412,661
   
 1,335,481
   
 1,594,477
   
 1,412,850
 
Due after two years through three years
 
 1,255,137
   
 1,346,362
   
 1,486,789
   
 1,593,371
 
Due after three years through four years
 
 957,188
   
 1,094,410
   
 1,449,356
   
 1,606,405
 
Due after four years through five years
 
 2,195,292
   
 2,033,422
   
 1,428,854
   
 1,534,569
 
Thereafter
 
 1,431,857
   
 1,815,269
   
 5,065,662
   
 4,530,527
 
TOTAL PAR VALUE
$
 17,174,128
 
$
 16,108,597
 
$
 17,174,128
 
$
 16,108,597
 

Interest Rate Payment Terms: The following table details additional interest rate payment terms for advances as of March 31, 2013 and December 31, 2012 (in thousands):
             
 
03/31/2013
12/31/2012
Fixed rate:
           
Due in one year or less
$
 3,494,760
 
$
 1,301,041
 
Due after one year
 
 7,122,637
   
 7,495,446
 
Total fixed rate
 
 10,617,397
   
 8,796,487
 
Variable rate:
           
Due in one year or less
 
 799,088
   
 2,132,017
 
Due after one year
 
 5,757,643
   
 5,180,093
 
Total variable rate
 
 6,556,731
   
 7,312,110
 
TOTAL PAR VALUE
$
 17,174,128
 
$
 16,108,597
 
 
 
17

 
NOTE 5 MORTGAGE LOANS

The MPF Program involves the FHLBank investing in mortgage loans, which have been funded by the FHLBank through or purchased from its participating members. These mortgage loans are government-insured or guaranteed (by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), the Rural Housing Service of the Department of Agriculture (RHS) and/or the Department of Housing and Urban Development (HUD)) loans and conventional residential loans credit-enhanced by participating financial institutions (PFI). Depending upon a member’s product selection, the servicing rights can be retained or sold by the participating member. The FHLBank does not buy or own any mortgage servicing rights.

Mortgage Loans Held for Portfolio: The following table presents information as of March 31, 2013 and December 31, 2012 on mortgage loans held for portfolio (in thousands):
             
 
03/31/2013
12/31/2012
Real estate:
           
Fixed rate, medium-term1, single-family mortgages
$
 1,691,522
 
$
 1,711,275
 
Fixed rate, long-term, single-family mortgages
 
 4,133,486
   
 4,126,471
 
Total unpaid principal balance
 
 5,825,008
   
 5,837,746
 
Premiums
 
 97,807
   
 98,887
 
Discounts
 
 (3,997)
   
 (4,483)
 
Deferred loan costs, net
 
 1,353
   
 1,549
 
Other deferred fees
 
 (276)
   
 (312)
 
Hedging adjustments2
 
 11,102
   
 12,546
 
Total before Allowance for Credit Losses on Mortgage Loans
 
 5,930,997
   
 5,945,933
 
Allowance for Credit Losses on Mortgage Loans
 
 (7,086)
   
 (5,416)
 
MORTGAGE LOANS HELD FOR PORTFOLIO, NET
$
 5,923,911
 
$
 5,940,517
 
                   
1
Medium-term defined as a term of 15 years or less.
2
See Note 7 for a discussion of: (1) the FHLBank’s objectives for using derivatives; (2) the types of assets and liabilities hedged; and (3) the accounting for derivatives and the related assets and liabilities hedged.

The following table presents information as of March 31, 2013 and December 31, 2012 on the outstanding unpaid principal balance (UPB) of mortgage loans held for portfolio (in thousands):
             
 
03/31/2013
12/31/2012
Conventional loans
$
 5,154,453
 
$
 5,152,461
 
Government-guaranteed or insured loans
  </