10-Q 1 form10q.htm FHLB TOPEKA FORM 10-Q form10q.htm


 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 08/07/2013
Class A Stock, par value $100
5,628,575
Class B Stock, par value $100
8,676,543
 
 


 
 
 

 
.FEDERAL HOME LOAN BANK OF TOPEKA

TABLE OF CONTENTS

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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 for the fiscal year ended December 31, 2012, incorporated by reference herein.
 

1   "Mortgage Partnership Finance," "MPF" and "eMPF" are registered trademarks of the Federal Home Loan Bank of Chicago.
3

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.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 
 
FEDERAL HOME LOAN BANK OF TOPEKA
           
STATEMENTS OF CONDITION - Unaudited
           
(In thousands, except par value)
           
 
June 30,
December 31,
 
2013
2012
ASSETS
           
Cash and due from banks
$
 71,862
 
$
 369,997
 
Interest-bearing deposits
 
 4,011
   
 455
 
Securities purchased under agreements to resell (Note 11)
 
 463,435
   
 1,999,288
 
Federal funds sold
 
 1,430,000
   
 850,000
 
             
Investment securities:
           
Trading securities (Note 3)
 
 3,445,562
   
 2,764,918
 
Held-to-maturity securities1 (Note 3)
 
 5,377,926
   
 5,159,750
 
Total investment securities
 
 8,823,488
   
 7,924,668
 
             
Advances (Notes 4, 6)
 
 18,817,468
   
 16,573,348
 
             
Mortgage loans held for portfolio:
           
Mortgage loans held for portfolio (Note 5)
 
 5,965,574
   
 5,945,933
 
Less allowance for credit losses on mortgage loans (Note 6)
 
 (6,590)
   
 (5,416)
 
Mortgage loans held for portfolio, net
 
 5,958,984
   
 5,940,517
 
             
Accrued interest receivable
 
 72,689
   
 77,445
 
Premises, software and equipment, net
 
 11,052
   
 8,874
 
Derivative assets (Notes 7, 11)
 
 8,287
   
 25,166
 
Other assets
 
 47,490
   
 48,869
 
             
TOTAL ASSETS
$
 35,708,766
 
$
 33,818,627
 
             
             
LIABILITIES AND CAPITAL
           
Liabilities:
           
Deposits:
           
Interest-bearing (Note 8)
$
 865,695
 
$
 1,117,627
 
Non-interest-bearing (Note 8)
 
 52,665
   
 64,330
 
Total deposits
 
 918,360
   
 1,181,957
 
             
Securities sold under agreements to repurchase (Note 11)
 
 19,950
   
 -
 
             
Consolidated obligations, net:
           
Discount notes (Note 9)
 
 11,621,564
   
 8,669,059
 
Bonds (Note 9)
 
 20,866,135
   
 21,973,902
 
Total consolidated obligations, net
 
 32,487,699
   
 30,642,961
 
             
Mandatorily redeemable capital stock (Note 12)
 
 5,410
   
 5,665
 
Accrued interest payable
 
 74,075
   
 81,801
 
Affordable Housing Program (Note 10)
 
 32,501
   
 31,198
 
Derivative liabilities (Notes 7, 11)
 
 134,620
   
 123,414
 
Other liabilities
 
 135,533
   
 31,150
 
             
TOTAL LIABILITIES
 
 33,808,148
   
 32,098,146
 
             
Commitments and contingencies (Note 16)
           
                    
1   Fair value: $5,388,910 and $5,192,330 as of June 30, 2013 and December 31, 2012, respectively.


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

 
FEDERAL HOME LOAN BANK OF TOPEKA
           
STATEMENTS OF CONDITION - Unaudited (continued)
           
(In thousands, except par value)
           
 
June 30,
December 31,
 
2013
2012
Capital:
           
Capital stock outstanding - putable:
           
Class A ($100 par value; 4,226 and 4,053 shares issued and outstanding) (Note 12)
$
 422,564
 
$
 405,304
 
Class B ($100 par value; 9,819 and 8,592 shares issued and outstanding) (Note 12)
 
 981,937
   
 859,152
 
Total capital stock
 
 1,404,501
   
 1,264,456
 
             
Retained earnings:
           
Unrestricted
 
 479,674
   
 453,346
 
Restricted
 
 38,632
   
 27,936
 
Total retained earnings
 
 518,306
   
 481,282
 
             
Accumulated other comprehensive income (loss) (Note 13)
 
 (22,189)
   
 (25,257)
 
             
TOTAL CAPITAL
 
 1,900,618
   
 1,720,481
 
             
TOTAL LIABILITIES AND CAPITAL
$
 35,708,766
 
$
 33,818,627
 
 

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

 
FEDERAL HOME LOAN BANK OF TOPEKA
                       
STATEMENTS OF INCOME - Unaudited
                       
(In thousands)
                       
 
Three-month Period Ended
June 30,
Six-month Period Ended
June 30,
 
2013
2012
2013
2012
INTEREST INCOME:
                       
Interest-bearing deposits
$
 88
 
$
 133
 
$
 201
 
$
 232
 
Securities purchased under agreements to resell
 
 252
   
 617
   
 779
   
 913
 
Federal funds sold
 
 283
   
 359
   
 704
   
 497
 
Trading securities
 
 13,827
   
 17,821
   
 28,198
   
 36,610
 
Held-to-maturity securities
 
 14,412
   
 18,214
   
 29,814
   
 37,761
 
Advances
 
 30,798
   
 37,966
   
 63,047
   
 76,174
 
Prepayment fees on terminated advances
 
 2,079
   
 1,861
   
 3,242
   
 3,240
 
Mortgage loans held for portfolio
 
 48,273
   
 46,960
   
 96,375
   
 96,061
 
Other
 
 417
   
 448
   
 843
   
 954
 
Total interest income
 
 110,429
   
 124,379
   
 223,203
   
 252,442
 
                         
INTEREST EXPENSE:
                       
Deposits
 
 276
   
 448
   
 589
   
 831
 
Consolidated obligations:
                       
Discount notes
 
 2,268
   
 2,350
   
 4,705
   
 3,402
 
Bonds
 
 55,820
   
 66,453
   
 113,718
   
 134,650
 
Mandatorily redeemable capital stock (Note 12)
 
 7
   
 13
   
 13
   
 27
 
Other
 
 40
   
 32
   
 76
   
 111
 
Total interest expense
 
 58,411
   
 69,296
   
 119,101
   
 139,021
 
                         
NET INTEREST INCOME
 
 52,018
   
 55,083
   
 104,102
   
 113,421
 
Provision (reversal) for credit losses on mortgage loans (Note 6)
 
 (416)
   
 417
   
 1,531
   
 1,456
 
NET INTEREST INCOME AFTER MORTGAGE LOAN LOSS PROVISION
 
 52,434
   
 54,666
   
 102,571
   
 111,965
 
                         
OTHER INCOME (LOSS):
                       
Total other-than-temporary impairment losses on held-to-maturity securities
 
 -
   
 (579)
   
 (14)
   
 (5,092)
 
Portion of other-than-temporary impairment losses on held-to-maturity securities recognized in other comprehensive income (loss)
 
 (73)
   
 (53)
   
 (138)
   
 3,871
 
Net other-than-temporary impairment losses on held-to-maturity securities (Note 3)
 
 (73)
   
 (632)
   
 (152)
   
 (1,221)
 
Net gain (loss) on trading securities (Note 3)
 
 (21,223)
   
 (681)
   
 (30,919)
   
 (11,447)
 
Net gain (loss) on derivatives and hedging activities (Note 7)
 
 11,525
   
 (18,171)
   
 8,467
   
 (18,106)
 
Standby bond purchase agreement commitment fees
 
 1,198
   
 1,194
   
 2,366
   
 2,263
 
Letters of credit fees
 
 777
   
 801
   
 1,562
   
 1,678
 
Other
 
 522
   
 738
   
 928
   
 1,267
 
Total other income (loss)
 
 (7,274)
   
 (16,751)
   
 (17,748)
   
 (25,566)
 
                         
OTHER EXPENSES:
                       
Compensation and benefits
 
 6,809
   
 7,117
   
 13,329
   
 14,904
 
Other operating
 
 3,451
   
 2,762
   
 6,842
   
 6,229
 
Finance Agency
 
 481
   
 737
   
 1,217
   
 1,642
 
Office of Finance
 
 568
   
 619
   
 1,222
   
 1,195
 
Other
 
 1,814
   
 1,906
   
 2,788
   
 2,650
 
Total other expenses
 
 13,123
   
 13,141
   
 25,398
   
 26,620
 
                         
INCOME (LOSS) BEFORE ASSESSMENTS
 
 32,037
   
 24,774
   
 59,425
   
 59,779
 
                         
Affordable Housing Program assessments (Note 10)
 
 3,204
   
 2,479
   
 5,944
   
 5,981
 
                         
NET INCOME
$
 28,833
 
$
 22,295
 
$
 53,481
 
$
 53,798
 

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

 
FEDERAL HOME LOAN BANK OF TOPEKA
                       
STATEMENTS OF COMPREHENSIVE INCOME - Unaudited
                   
(In thousands)
                       
 
Three-month Period Ended
June 30,
Six-month Period Ended
June 30,
 
2013
2012
2013
2012
Net income
$
 28,833
 
$
 22,295
 
$
 53,481
 
$
 53,798
 
                         
Other comprehensive income (loss):
                       
Net non-credit portion of other-than-temporary impairment losses on held-to-maturity securities:
                       
Non-credit portion
 
 -
   
 (569)
   
 (14)
   
 (4,621)
 
Reclassification of non-credit portion included in net income
 
 73
   
 622
   
 152
   
 750
 
Accretion of non-credit portion
 
 1,313
   
 1,761
   
 2,729
   
 3,179
 
Total net non-credit portion of other-than-temporary impairment losses on held-to-maturity securities
 
 1,386
   
 1,814
   
 2,867
   
 (692)
 
                         
Defined benefit pension plan:
                       
Amortization of net loss
 
 100
   
 126
   
 201
   
 252
 
                         
Total other comprehensive income (loss)
 
 1,486
   
 1,940
   
 3,068
   
 (440)
 
                         
TOTAL COMPREHENSIVE INCOME
$
 30,319
 
$
 24,235
 
$
 56,549
 
$
 53,358
 
 
 
The accompanying notes are an integral part of these financial statements.
8


FEDERAL HOME LOAN BANK OF TOPEKA
                                                       
STATEMENTS OF CAPITAL - Unaudited
                                                       
(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
 
 33
   
 3,319
   
 1,916
   
 191,606
   
 1,949
   
 194,925
                           
 194,925
 
Repurchase/redemption of capital stock
 
 (472)
   
 (47,157)
   
 (123)
   
 (12,355)
   
 (595)
   
 (59,512)
                           
 (59,512)
 
Comprehensive income (loss)
                                     
 43,038
   
 10,760
   
 53,798
   
 (440)
   
 53,358
 
Net reclassification of shares to mandatorily redeemable capital stock
 
 (324)
   
 (32,473)
   
 (1,071)
   
 (107,082)
   
 (1,395)
   
 (139,555)
                           
 (139,555)
 
Net transfer of shares between Class A and Class B
 
 144
   
 14,390
   
 (144)
   
 (14,390)
   
 -
   
 -
                           
 -
 
Dividends on capital stock (Class A - 0.3%, Class B - 3.5%):
                                                                 
Cash payment
                                     
 (142)
         
 (142)
         
 (142)
 
Stock issued
             
 144
   
 14,435
   
 144
   
 14,435
   
 (14,435)
         
 (14,435)
         
 -
 
BALANCE JUNE 30, 2012
 
 4,754
 
$
 475,383
   
 8,627
 
$
 862,737
   
 13,381
 
$
 1,338,120
 
$
 424,049
 
$
 16,633
 
$
 440,682
 
$
 (28,281)
 
$
 1,750,521
 
                                                                   
                                                       
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
 
 6
   
 593
   
 2,802
   
 280,257
   
 2,808
   
 280,850
                           
 280,850
 
Repurchase/redemption of capital stock
 
 (455)
   
 (45,556)
   
 (39)
   
 (3,870)
   
 (494)
   
 (49,426)
                           
 (49,426)
 
Comprehensive income (loss)
                                     
 42,785
   
 10,696
   
 53,481
   
 3,068
   
 56,549
 
Net reclassification of shares to mandatorily redeemable capital stock
 
 (127)
   
 (12,704)
   
 (950)
   
 (94,991)
   
 (1,077)
   
 (107,695)
                           
 (107,695)
 
Net transfer of shares between Class A and Class B
 
 749
   
 74,927
   
 (749)
   
 (74,927)
   
 -
   
 -
                           
 -
 
Dividends on capital stock (Class A - 0.3%, Class B - 3.5%):
                                                                 
Cash payment
                                     
 (141)
         
 (141)
         
 (141)
 
Stock issued
             
 163
   
 16,316
   
 163
   
 16,316
   
 (16,316)
         
 (16,316)
         
 -
 
BALANCE JUNE 30, 2013
 
 4,226
 
$
 422,564
   
 9,819
 
$
 981,937
   
 14,045
 
$
 1,404,501
 
$
 479,674
 
$
 38,632
 
$
 518,306
 
$
 (22,189)
 
$
 1,900,618
 
                    
1
Putable
 
 
The accompanying notes are an integral part of these financial statements.
 
9

 
FEDERAL HOME LOAN BANK OF TOPEKA
           
STATEMENTS OF CASH FLOWS - Unaudited
           
(In thousands)
           
 
Six-month Period Ended
June 30,
 
2013
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
$
 53,481
 
$
 53,798
 
Adjustments to reconcile income (loss) to net cash provided by (used in) operating activities:
           
Depreciation and amortization:
           
Premiums and discounts on consolidated obligations, net
 
 (17,890)
   
 (11,560)
 
Concessions on consolidated obligations
 
 3,477
   
 8,784
 
Premiums and discounts on investments, net
 
 (426)
   
 (1,079)
 
Premiums and discounts on advances, net
 
 (7,755)
   
 (6,284)
 
Premiums, discounts and deferred loan costs on mortgage loans, net
 
 12,002
   
 8,090
 
Fair value adjustments on hedged assets or liabilities
 
 7,622
   
 9,762
 
Premises, software and equipment
 
 990
   
 1,129
 
Other
 
 201
   
 252
 
Provision for credit losses on mortgage loans
 
 1,531
   
 1,456
 
Non-cash interest on mandatorily redeemable capital stock
 
 12
   
 26
 
Net other-than-temporary impairment losses on held-to-maturity securities
 
 152
   
 1,221
 
Net realized (gain) loss on disposals of premises, software and equipment
 
 (5)
   
 -
 
Other (gains) losses
 
 13
   
 154
 
Net (gain) loss on trading securities
 
 30,919
   
 11,447
 
(Gain) loss due to change in net fair value adjustment on derivative and hedging activities
 
 (8,541)
   
 19,058
 
(Increase) decrease in accrued interest receivable
 
 4,804
   
 4,741
 
Change in net accrued interest included in derivative assets
 
 839
   
 (8,510)
 
(Increase) decrease in other assets
 
 940
   
 2,232
 
Increase (decrease) in accrued interest payable
 
 (7,727)
   
 (2,643)
 
Change in net accrued interest included in derivative liabilities
 
 627
   
 2,934
 
Increase (decrease) in Affordable Housing Program liability
 
 1,303
   
 (2,240)
 
Increase (decrease) in other liabilities
 
 (43)
   
 (1,590)
 
Total adjustments
 
 23,045
   
 37,380
 
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
 
 76,526
   
 91,178
 
             
CASH FLOWS FROM INVESTING ACTIVITIES:
           
Net (increase) decrease in interest-bearing deposits
 
 86,019
   
 (9,883)
 
Net (increase) decrease in securities purchased under resale agreements
 
 1,535,853
   
 (1,248,205)
 
Net (increase) decrease in Federal funds sold
 
 (580,000)
   
 175,000
 
Net (increase) decrease in short-term trading securities
 
 (553,126)
   
 536,017
 
Proceeds from maturities of and principal repayments on long-term trading securities
 
 235,075
   
 399,283
 
Purchases of long-term trading securities
 
 (393,424)
   
 (299,975)
 
Proceeds from maturities of and principal repayments on long-term held-to-maturity securities
 
 812,994
   
 851,814
 
Purchases of long-term held-to-maturity securities
 
 (923,935)
   
 (878,614)
 
Principal collected on advances
 
 41,391,407
   
 16,199,053
 
Advances made
 
 (43,770,224)
   
 (16,541,844)
 
Principal collected on mortgage loans
 
 736,739
   
 696,132
 
Purchase or origination of mortgage loans
 
 (776,717)
   
 (1,324,407)
 
Proceeds from sale of foreclosed assets
 
 2,536
   
 4,918
 
Principal collected on other loans made
 
 971
   
 908
 
Proceeds from sale of premises, software and equipment
 
 10
   
 -
 
Purchases of premises, software and equipment
 
 (3,173)
   
 (695)
 
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
 
 (2,198,995)
   
 (1,440,498)
 
 
 
The accompanying notes are an integral part of these financial statements.
 
10

 
FEDERAL HOME LOAN BANK OF TOPEKA
           
STATEMENTS OF CASH FLOWS - Unaudited (continued)
           
(In thousands)
           
 
Six-month Period Ended
June 30,
 
2013
2012
CASH FLOWS FROM FINANCING ACTIVITIES:
           
Net increase (decrease) in deposits
$
 (259,252)
 
$
 707,869
 
Net proceeds from issuance of consolidated obligations:
           
Discount notes
 
 46,446,969
   
 30,781,981
 
Bonds
 
 3,729,408
   
 10,911,969
 
Payments for maturing and retired consolidated obligations:
           
Discount notes
 
 (43,494,122)
   
 (31,428,318)
 
Bonds
 
 (4,714,000)
   
 (9,135,000)
 
Net increase (decrease) in overnight loans from other FHLBanks
 
 -
   
 (35,000)
 
Net increase (decrease) in securities sold under agreements to repurchase
 
 19,950
   
 -
 
Net increase (decrease) in other borrowings
 
 -
   
 (5,000)
 
Proceeds from financing element derivatives
 
 82
   
 -
 
Net interest payments received (paid) for financing derivatives
 
 (28,022)
   
 (32,800)
 
Proceeds from issuance of capital stock
 
 280,850
   
 194,925
 
Payments for repurchase/redemption of capital stock
 
 (49,426)
   
 (59,512)
 
Payments for repurchase of mandatorily redeemable capital stock
 
 (107,962)
   
 (139,889)
 
Cash dividends paid
 
 (141)
   
 (142)
 
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
 
 1,824,334
   
 1,761,083
 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
 
 (298,135)
   
 411,763
 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
 
 369,997
   
 116,041
 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
 71,862
 
$
 527,804
 
             
Supplemental disclosures:
           
Interest paid
$
 125,394
 
$
 137,575
 
             
Affordable Housing Program payments
$
 4,751
 
$
 8,339
 
             
Net transfers of mortgage loans to real estate owned
$
 3,062
 
$
 4,181
 
 

The accompanying notes are an integral part of these financial statements.
 
11

FEDERAL HOME LOAN BANK OF TOPEKA
Notes to Financial Statements – Unaudited
June 30, 2013


NOTE 1 – BASIS OF PRESENTATION

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.

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


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

Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. In July 2013, the Financial Accounting Standards Board (FASB) issued an amendment which allows the overnight Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark rate for hedge accounting purposes.  Previously, only U.S. treasury rates (UST) and the London Interbank Offered Rate (LIBOR) swap rate were allowable benchmark rates. The amended guidance also removes the restriction on using different benchmark rates for similar hedges. The amendments apply to all entities that elect to apply hedge accounting of the benchmark interest rate. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The FHLBank does not expect the adoption of this guidance to materially impact its financial condition, results of operations or cash flows.

Joint and Several Liability: In February 2013, the 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.


NOTE 3 – INVESTMENT SECURITIES

Major Security Types: Trading and held-to-maturity securities as of June 30, 2013 are summarized in the following table (in thousands):
                                           
 
06/30/2013
 
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
$
 418,216
 
$
 -
 
$
 -
 
$
 -
 
$
 -
 
$
 -
 
$
 -
 
Certificates of deposit
 
 519,969
   
 -
   
 -
   
 -
   
 -
   
 -
   
 -
 
U.S. Treasury obligations
 
 24,956
   
 -
   
 -
   
 -
   
 -
   
 -
   
 -
 
Government-sponsored enterprise obligations1,2
 
 2,277,020
   
 -
   
 -
   
 -
   
 -
   
 -
   
 -
 
State or local housing agency obligations
 
 -
   
 67,019
   
 -
   
 67,019
   
 36
   
 8,662
   
 58,393
 
Non-mortgage-backed securities
 
 3,240,161
   
 67,019
   
 -
   
 67,019
   
 36
   
 8,662
   
 58,393
 
Mortgage-backed securities:
                                         
U.S. obligation residential3
 
 1,191
   
 76,414
   
 -
   
 76,414
   
 246
   
 69
   
 76,591
 
Government-sponsored enterprise residential4
 
 204,210
   
 4,846,062
   
 -
   
 4,846,062
   
 32,202
   
 15,655
   
 4,862,609
 
Private-label mortgage-backed securities:
                                         
Residential loans
 
 -
   
 387,292
   
 17,787
   
 405,079
   
 3,103
   
 19,832
   
 388,350
 
Home equity loans
 
 -
   
 1,139
   
 192
   
 1,331
   
 1,636
   
 -
   
 2,967
 
Mortgage-backed securities
 
 205,401
   
 5,310,907
   
 17,979
   
 5,328,886
   
 37,187
   
 35,556
   
 5,330,517
 
TOTAL
$
 3,445,562
 
$
 5,377,926
 
$
 17,979
 
$
 5,395,905
 
$
 37,223
 
$
 44,218
 
$
 5,388,910
 
                    
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 Federal Housing Finance Agency (Finance Agency) on September 7, 2008 with the Finance Agency named as conservator.
2
See Note 18 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):
                                           
 
12/31/2012
 
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 18 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.

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 $3,928,000 and $6,547,000 as of June 30, 2013 and December 31, 2012, respectively.

The following table summarizes (in thousands) the held-to-maturity securities with unrecognized losses as of June 30, 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.
                                     
 
06/30/2013
 
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
$
 7,762
 
$
 142
 
$
 40,270
 
$
 8,520
 
$
 48,032
 
$
 8,662
 
Non-mortgage-backed securities
 
 7,762
   
 142
   
 40,270
   
 8,520
   
 48,032
   
 8,662
 
Mortgage-backed securities:
                                   
U.S. obligation residential1
 
 67,341
   
 69
   
 -
   
 -
   
 67,341
   
 69
 
Government-sponsored enterprise residential2
 
 1,309,124
   
 15,359
   
 152,693
   
 296
   
 1,461,817
   
 15,655
 
Private-label mortgage-backed securities:
                                   
Residential loans
 
 37,138
   
 289
   
 196,512
   
 19,543
   
 233,650
   
 19,832
 
Mortgage-backed securities
 
 1,413,603
   
 15,717
   
 349,205
   
 19,839
   
 1,762,808
   
 35,556
 
TOTAL TEMPORARILY IMPAIRED SECURITIES
$
 1,421,365
 
$
 15,859
 
$
 389,475
 
$
 28,359
 
$
 1,810,840
 
$
 44,218
 
                    
1
Represents MBS issued by Ginnie Mae, which are guaranteed by the U.S. government.
2
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.
                                     
 
12/31/2012
 
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 June 30, 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.
                                     
 
06/30/2013
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
 
 22,120
   
 22,120
   
 20,311
   
 22,780
   
 22,780
   
 20,741
 
Due after 10 years
 
 44,899
   
 44,899
   
 38,082
   
 46,662
   
 46,662
   
 40,185
 
Non-mortgage-backed securities
 
 67,019
   
 67,019
   
 58,393
   
 69,442
   
 69,442
   
 60,926
 
Mortgage-backed securities
 
 5,328,886
   
 5,310,907
   
 5,330,517
   
 5,111,154
   
 5,090,308
   
 5,131,404
 
TOTAL
$
 5,395,905
 
$
 5,377,926
 
$
 5,388,910
 
$
 5,180,596
 
$
 5,159,750
 
$
 5,192,330
 

 
Interest Rate Payment Terms: The following table details interest rate payment terms for the amortized cost of held-to-maturity securities as of June 30, 2013 and December 31, 2012 (in thousands):
             
 
06/30/2013
12/31/2012
Non-mortgage-backed securities:
           
Fixed rate
$
 14,899
 
$
 16,662
 
Variable rate
 
 52,120
   
 52,780
 
Non-mortgage-backed securities
 
 67,019
   
 69,442
 
             
Mortgage-backed securities:
           
Pass-through securities:
           
Fixed rate
 
 126
   
 170
 
Variable rate
 
 1,098,601
   
 595,078
 
Collateralized mortgage obligations:
           
Fixed rate
 
 633,464
   
 687,770
 
Variable rate
 
 3,596,695
   
 3,828,136
 
Mortgage-backed securities
 
 5,328,886
   
 5,111,154
 
TOTAL
$
 5,395,905
 
$
 5,180,596
 

Gains and Losses: Net gains (losses) on trading securities during the three- and six-month periods ended June 30, 2013 and 2012 were as follows (in thousands):
                         
 
Three-month Period Ended
Six-month Period Ended
 
06/30/2013
06/30/2012
06/30/2013
06/30/2012
Net gains (losses) on trading securities held as of June 30, 2013
$
 (21,206)
 
$
 2,675
 
$
 (30,485)
 
$
 (4,452)
 
Net gains (losses) on trading securities sold or matured prior to June 30, 2013
 
 (17)
   
 (3,356)
   
 (434)
   
 (6,995)
 
NET GAIN (LOSS) ON TRADING SECURITIES
$
 (21,223)
 
$
 (681)
 
$
 (30,919)
 
$
 (11,447)
 

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.

 
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 short-term housing price forecast using whole percentages, with projected changes ranging from (5.0) percent to 7.0 percent over the twelve-month period beginning April 1, 2013. For the vast majority of markets, the short-term forecast has changes ranging from (3.0) percent to 5.0 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 June 30, 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 - 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 June 30, 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
 
Significant Inputs
 
Year of Securitization
Prepayment Rates
Default Rates
Loss Severities
Current Credit Enhancements
Prime:
                       
2004 and prior
 
 12.3
%
 
 12.2
%
 
 28.8
%
 
 25.2
%
2005
 
 12.8
   
 12.7
   
 33.2
   
 3.4
 
Total Prime
 
 12.8
   
 12.6
   
 33.1
   
 4.2
 
                         
Alt-A:
                       
2004 and prior
 
 7.3
   
 13.9
   
 34.2
   
 14.8
 
2005
 
 10.1
   
 17.0
   
 38.8
   
 4.3
 
Total Alt-A
 
 9.2
   
 16.0
   
 37.3
   
 7.7
 
                         
TOTAL
 
 10.0
%
 
 15.3
%
 
 36.4
%
 
 7.0
%
                         
Home Equity Loan ABS
 
Significant Inputs
 
Year of Securitization
Prepayment Rates
Default Rates
Loss Severities
Current Credit Enhancements
Subprime:
                       
2004 and prior
 
 3.1
%
 
 7.3
%
 
 93.3
%
 
 4.4
%

For the 30 outstanding private-label securities with OTTI during the lives of the securities, the FHLBank’s reported balances as of June 30, 2013 are as follows (in thousands):
                         
 
06/30/2013
 
Unpaid Principal
Balance
Amortized
Cost
Carrying
Value
Fair
Value
Private-label residential MBS:
                       
Prime
$
 26,314
 
$
 25,344
 
$
 23,618
 
$
 25,153
 
Alt-A
 
 81,743
   
 74,623
   
 58,562
   
 68,214
 
Total private-label residential MBS
 
 108,057
   
 99,967
   
 82,180
   
 93,367
 
                         
Home equity loans:
                       
Subprime
 
 3,527
   
 1,331
   
 1,139
   
 2,967
 
TOTAL
$
 111,584
 
$
 101,298
 
$
 83,319
 
$
 96,334
 

The following table presents a roll-forward of OTTI activity for the three- and six-month periods ended June 30, 2013 and 2012 related to credit losses recognized in earnings (in thousands):
                         
 
Three-month Period Ended
Six-month Period Ended
 
06/30/2013
06/30/2012
06/30/2013
06/30/2012
Balance, beginning of period
$
 10,527
 
$
 10,941
 
$
 10,968
 
$
 10,342
 
Additional charge on securities for which OTTI was not previously recognized1
 
 -
   
 7
   
 -
   
 267
 
Additional charge on securities for which OTTI was previously recognized1
 
 73
   
 625
   
 152
   
 954
 
Realized principal losses on securities paid down during the period
 
 (106)
   
 -
   
 (206)
   
 -
 
Amortization of credit component of OTTI2
 
 (325)
   
 (375)
   
 (745)
   
 (365)
 
Balance, end of period
$
 10,169
 
$
 11,198
 
$
 10,169
 
$
 11,198
 
                   
1
For the three-month periods ended June 30, 2013 and 2012, securities previously impaired represent all securities that were impaired prior to April 1, 2013 and 2012, respectively. For the six-month periods ended June 30, 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.