10-Q 1 fhlbt9301510q.htm FORM 10-Q 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
 
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  ¨  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
November 3, 2015
Class A Stock, par value $100 per share
1,883,121
Class B Stock, par value $100 per share
12,256,255




.FEDERAL HOME LOAN BANK OF TOPEKA
TABLE OF CONTENTS
 
 
 
PART I 
Item 1. 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
Item 3.
Item 4.
Part II 
Item 1.
Item 1A. 
Item 2. 
Item 3. 
Item 4. 
Item 5. 
Item 6. 


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 all the 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 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 risks or uncertainties 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;
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 FHLBank products and services or consolidated obligations of the FHLBank System;
Effects of derivative accounting treatment and other accounting rule requirements, or changes in such 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, non-member borrowers, counterparties, and the other FHLBanks;
Changes in the value or liquidity of collateral underlying advances to FHLBank members or non-member 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 all products and services;
The ability of the FHLBank to keep pace with technological changes and the ability to develop and support technology and information systems, including the ability to securely 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)/asset-backed securities (ABS) 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).



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


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, 2014, incorporated by reference herein.

All forward-looking statements contained in this Form 10-Q are expressly qualified in their entirety by reference to 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 to reflect events or circumstances after the date of this report.


PART I

Item 1: Financial Statements


4


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
STATEMENTS OF CONDITION - Unaudited
 
 
(In thousands, except par value)
 
 
 
09/30/2015
12/31/2014
ASSETS
 
 
Cash and due from banks
$
672,155

$
2,545,311

Interest-bearing deposits
1,557

1,163

Securities purchased under agreements to resell (Note 10)
4,010,000

1,225,000

Federal funds sold
1,800,000

2,075,000

 
 
 
Investment securities:
 
 
Trading securities (Note 3)
2,339,291

1,462,049

Available-for-sale securities1 (Note 3)
69,854


Held-to-maturity securities2 (Note 3)
4,885,711

4,857,187

Total investment securities
7,294,856

6,319,236

 
 
 
Advances (Notes 4, 6)
25,482,433

18,302,950

 
 
 
Mortgage loans held for portfolio, net:
 
 
Mortgage loans held for portfolio (Notes 5, 6)
6,338,225

6,234,722

Less allowance for credit losses on mortgage loans (Note 6)
(1,897
)
(4,550
)
Mortgage loans held for portfolio, net
6,336,328

6,230,172

 
 
 
Accrued interest receivable
66,577

70,923

Premises, software and equipment, net
8,131

10,439

Derivative assets, net (Notes 7, 10)
64,060

32,983

Other assets
36,229

40,800

 
 
 
TOTAL ASSETS
$
45,772,326

$
36,853,977

 
 
 
LIABILITIES
 
 
Deposits (Note 8)
$
729,395

$
595,775

 
 
 
Consolidated obligations, net:
 
 
Discount notes (Note 9)
20,610,434

14,219,612

Bonds (Note 9)
22,225,254

20,221,002

Total consolidated obligations, net
42,835,688

34,440,614

 
 
 
Mandatorily redeemable capital stock (Note 11)
3,090

4,187

Accrued interest payable
68,072

58,243

Affordable Housing Program payable
29,143

30,863

Derivative liabilities, net (Notes 7, 10)
30,148

35,292

Other liabilities
95,940

103,736

 
 
 
TOTAL LIABILITIES
43,791,476

35,268,710

 
 
 
Commitments and contingencies (Note 14)


 
 
 

1    Amortized cost: $70,617 and $0 as of September 30, 2015 and December 31, 2014, respectively.
2    Fair value: $4,894,732 and $4,869,042 as of September 30, 2015 and December 31, 2014, respectively.
The accompanying notes are an integral part of these financial statements.
5


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
STATEMENTS OF CONDITION - Unaudited
 
 
(In thousands, except par value)
 
 
 
09/30/2015
12/31/2014
CAPITAL
 
 
Capital stock outstanding - putable:
 
 
Class A ($100 par value; 2,174 and 2,083 shares issued and outstanding) (Note 11)
$
217,457

$
208,273

Class B ($100 par value; 11,270 and 7,657 shares issued and outstanding) (Note 11)
1,126,957

765,768

Total capital stock
1,344,414

974,041

 
 
 
Retained earnings:
 
 
Unrestricted
562,548

554,189

Restricted
87,481

72,944

Total retained earnings
650,029

627,133

 
 
 
Accumulated other comprehensive income (loss) (Note 12)
(13,593
)
(15,907
)
 
 
 
TOTAL CAPITAL
1,980,850

1,585,267

 
 
 
TOTAL LIABILITIES AND CAPITAL
$
45,772,326

$
36,853,977



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 Months Ended
Nine Months Ended
 
09/30/2015
09/30/2014
09/30/2015
09/30/2014
INTEREST INCOME:
 
 
 
 
Interest-bearing deposits
$
57

$
40

$
166

$
120

Securities purchased under agreements to resell
1,267

96

2,845

138

Federal funds sold
438

358

1,582

840

Trading securities
19,781

12,330

45,639

37,972

Available-for-sale securities
5


5


Held-to-maturity securities
9,878

11,271

30,158

35,663

Advances
36,644

31,360

102,213

89,349

Prepayment fees on terminated advances
236

107

1,324

931

Mortgage loans held for portfolio
50,552

51,099

153,023

152,701

Other
344

374

1,050

1,149

Total interest income
119,202

107,035

338,005

318,863

 
 
 
 
 
INTEREST EXPENSE:
 
 
 
 
Deposits
139

166

438

604

Consolidated obligations:
 
 
 
 
Discount notes
5,166

2,688

12,419

6,250

Bonds
52,103

47,552

149,449

144,488

Mandatorily redeemable capital stock (Note 11)
10

13

32

29

Other
64

44

183

127

Total interest expense
57,482

50,463

162,521

151,498

 
 
 
 
 
NET INTEREST INCOME
61,720

56,572

175,484

167,365

(Reversal) provision for credit losses on mortgage loans (Note 6)
(398
)
82

(2,192
)
(1,732
)
NET INTEREST INCOME AFTER LOAN LOSS (REVERSAL) PROVISION
62,118

56,490

177,676

169,097

 
 
 
 
 
OTHER INCOME (LOSS):
 
 
 
 
Total other-than-temporary impairment losses on held-to-maturity securities
(80
)

(265
)

Net amount of impairment losses on held-to-maturity securities reclassified to/(from) accumulated other comprehensive income (loss)
(132
)
(20
)
(386
)
(443
)
Net other-than-temporary impairment losses on held-to-maturity securities (Note 3)
(212
)
(20
)
(651
)
(443
)
Net gain (loss) on trading securities (Note 3)
16,820

(11,419
)
(9,395
)
(22,431
)
Net gain (loss) on derivatives and hedging activities (Note 7)
(49,721
)
(2,218
)
(51,367
)
(26,551
)
Standby bond purchase agreement commitment fees
1,398

1,594

4,236

4,711

Letters of credit fees
821

757

2,430

2,349

Other
638

501

1,738

1,734

Total other income (loss)
(30,256
)
(10,805
)
(53,009
)
(40,631
)
 
 
 
 
 

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


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
 
 
STATEMENTS OF INCOME - Unaudited
 
 
 
 
(In thousands)
 
 
 
 
 
Three Months Ended
Nine Months Ended
 
09/30/2015
09/30/2014
09/30/2015
09/30/2014
OTHER EXPENSES:
 
 
 
 
Compensation and benefits
$
9,881

$
8,779

$
26,007

$
22,973

Other operating
3,314

3,016

11,191

9,914

Federal Housing Finance Agency
493

564

1,601

1,854

Office of Finance
627

541

1,951

1,662

Other
872

980

3,150

3,759

Total other expenses
15,187

13,880

43,900

40,162

 
 
 
 
 
INCOME BEFORE ASSESSMENTS
16,675

31,805

80,767

88,304

 
 
 
 
 
Affordable Housing Program
1,669

3,181

8,080

8,833

 
 
 
 
 
NET INCOME
$
15,006

$
28,624

$
72,687

$
79,471



The accompanying notes are an integral part of these financial statements.
8


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
STATEMENTS OF COMPREHENSIVE INCOME - Unaudited
 
 
 
 
(In thousands)
 
 
 
 
Three Months Ended
Nine Months Ended
 
09/30/2015
09/30/2014
09/30/2015
09/30/2014
Net income
$
15,006

$
28,624

$
72,687

$
79,471

 
 
 
 
 
Other comprehensive income:
 
 
 
 
Net unrealized gain (loss) on available-for-sale securities:
 
 
 
 
Unrealized gain (loss)
(763
)

(763
)

Total net unrealized gains/losses on available-for-sale securities
(763
)

(763
)

 
 
 
 
 
Net non-credit portion of other-than-temporary impairment losses on held-to-maturity securities:
 
 
 
 
Non-credit portion
(24
)

(205
)

Reclassification of non-credit portion included in net income
156

20

591

443

Accretion of non-credit portion
653

1,002

2,394

2,734

Total net non-credit portion of other-than-temporary impairment losses on held-to-maturity securities
785

1,022

2,780

3,177

 
 
 
 
 
Defined benefit pension plan:
 
 
 
 
Amortization of net loss
99

38

297

127

Total defined benefit pension plan
99

38

297

127

 
 
 
 
 
Total other comprehensive income
121

1,060

2,314

3,304

 
 
 
 
 
TOTAL COMPREHENSIVE INCOME
$
15,127

$
29,684

$
75,001

$
82,775

 


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


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
 
 
 
 
 
STATEMENTS OF CAPITAL - Unaudited
 
 
 
 
 
 
 
(In thousands)
 
 
 
 
 
 
 
 
Capital Stock1
Retained Earnings
Accumulated
Total Capital
 
Other
 
Class A
Class B
Total
Comprehensive
 
Shares
Par Value
Shares
Par Value
Shares
Par Value
Unrestricted
Restricted
Total
Income (Loss)
Balance at December 31, 2013
4,300

$
430,063

8,222

$
822,186

12,522

$
1,252,249

$
515,589

$
51,743

$
567,332

$
(18,361
)
$
1,801,220

Proceeds from issuance of capital stock
12

1,161

6,279

627,890

6,291

629,051

 
 
 
 
629,051

Repurchase/redemption of capital stock
(5,850
)
(584,978
)
(93
)
(9,343
)
(5,943
)
(594,321
)
 
 
 
 
(594,321
)
Comprehensive income
 
 
 
 
 
 
63,577

15,894

79,471

3,304

82,775

Net reclassification of shares to mandatorily redeemable capital stock
(77
)
(7,711
)
(2,204
)
(220,391
)
(2,281
)
(228,102
)
 
 
 
 
(228,102
)
Net transfer of shares between Class A and Class B
3,130

312,984

(3,130
)
(312,984
)


 
 
 
 

Dividends on capital stock (Class A - 0.6%, Class B - 5.0%):
 
 
 
 
 
 
 
 
 
 
 
Cash payment
 
 
 
 
 
 
(225
)
 
(225
)
 
(225
)
Stock issued
 
 
314

31,386

314

31,386

(31,386
)
 
(31,386
)
 

Balance at September 30, 2014
1,515

$
151,519

9,388

$
938,744

10,903

$
1,090,263

$
547,555

$
67,637

$
615,192

$
(15,057
)
$
1,690,398

 
 
 
 
 
 
 
 
 
 
 
 
 
Capital Stock1
Retained Earnings
Accumulated
Total Capital
 
Other
 
Class A
Class B
Total
Comprehensive
 
Shares
Par Value
Shares
Par Value
Shares
Par Value
Unrestricted
Restricted
Total
Income (Loss)
Balance at December 31, 2014
2,083

$
208,273

7,657

$
765,768

9,740

$
974,041

$
554,189

$
72,944

$
627,133

$
(15,907
)
$
1,585,267

Proceeds from issuance of capital stock
18

1,843

9,647

964,691

9,665

966,534

 
 
 
 
966,534

Repurchase/redemption of capital stock
(3,141
)
(314,124
)
(93
)
(9,367
)
(3,234
)
(323,491
)
 
 
 
 
(323,491
)
Comprehensive income
 
 
 
 




58,150

14,537

72,687

2,314

75,001

Net reclassification of shares to mandatorily redeemable capital stock
(23
)
(2,226
)
(3,200
)
(320,013
)
(3,223
)
(322,239
)
 
 
 
 
(322,239
)
Net transfer of shares between Class A and Class B
3,237

323,691

(3,237
)
(323,691
)


 
 
 
 

Dividends on capital stock (Class A - 1.0%, Class B - 6.0%):
 
 
 
 




 
 
 
 
 

Cash payment
 
 
 
 




(222
)
 
(222
)
 
(222
)
Stock issued
 
 
496

49,569

496

49,569

(49,569
)
 
(49,569
)
 

Balance at September 30, 2015
2,174
$
217,457

11,270
$
1,126,957

13,444
$
1,344,414

$
562,548

$
87,481

$
650,029

$
(13,593
)
$
1,980,850

                   
1    Putable


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


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
STATEMENTS OF CASH FLOWS - Unaudited
 
 
(In thousands)
 
 
 
Nine Months Ended
 
09/30/2015
09/30/2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
Net income
$
72,687

$
79,471

Adjustments to reconcile income (loss) to net cash provided by (used in) operating activities:
 
 
Depreciation and amortization:
 
 
Premiums and discounts on consolidated obligations, net
(11,870
)
(12,246
)
Concessions on consolidated obligations
4,126

3,774

Premiums and discounts on investments, net
524

(232
)
Premiums, discounts and commitment fees on advances, net
(7,246
)
(9,306
)
Premiums, discounts and deferred loan costs on mortgage loans, net
14,774

11,178

Fair value adjustments on hedged assets or liabilities
7,757

9,214

Premises, software and equipment
1,635

1,345

Other
297

127

(Reversal) provision for credit losses on mortgage loans
(2,192
)
(1,732
)
Non-cash interest on mandatorily redeemable capital stock
27

27

Net other-than-temporary impairment losses on held-to-maturity securities
651

443

Net realized (gain) loss on sale of premises and equipment
(17
)
6

Other adjustments
(200
)
105

Net (gain) loss on trading securities
9,395

22,431

(Gain) loss due to change in net fair value adjustment on derivative and hedging activities
69,369

47,674

(Increase) decrease in accrued interest receivable
4,386

9,331

Change in net accrued interest included in derivative assets
(92
)
4,841

(Increase) decrease in other assets
1,821

2,076

Increase (decrease) in accrued interest payable
9,828

9,308

Change in net accrued interest included in derivative liabilities
(11,191
)
(19,874
)
Increase (decrease) in Affordable Housing Program liability
(1,720
)
(3,320
)
Increase (decrease) in other liabilities
(840
)
(2,306
)
Total adjustments
89,222

72,864

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
161,909

152,335

 
 
 

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


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
STATEMENTS OF CASH FLOWS - Unaudited
 
 
(In thousands)
 
 
 
Nine Months Ended
 
09/30/2015
09/30/2014
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
Net (increase) decrease in interest-bearing deposits
$
(42,507
)
$
61,924

Net (increase) decrease in securities purchased under resale agreements
(2,785,000
)
(1,075,000
)
Net (increase) decrease in Federal funds sold
275,000

(875,000
)
Net (increase) decrease in short-term trading securities
(10
)
260,000

Proceeds from maturities of and principal repayments on long-term trading securities
315,533

946,134

Purchases of long-term trading securities
(1,202,159
)

Purchases of long-term available-for-sale securities
(45,435
)

Proceeds from maturities of and principal repayments on long-term held-to-maturity securities
1,031,834

693,339

Purchases of long-term held-to-maturity securities
(1,090,355
)
(340,977
)
Principal collected on advances
69,741,660

42,425,603

Advances made
(76,911,491
)
(45,643,549
)
Principal collected on mortgage loans
778,553

572,403

Purchases of mortgage loans
(901,310
)
(799,769
)
Proceeds from sale of foreclosed assets
4,370

4,009

Principal collected on other loans made
1,664

1,572

Proceeds from sale of premises, software and equipment
68

2

Purchases of premises, software and equipment
(393
)
(1,076
)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
(10,829,978
)
(3,770,385
)
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
Net increase (decrease) in deposits
130,405

(283,055
)
Net proceeds from issuance of consolidated obligations:
 
 
Discount notes
214,416,319

41,055,791

Bonds
11,088,056

7,182,363

Payments for maturing and retired consolidated obligations:
 
 
Discount notes
(208,027,097
)
(35,998,826
)
Bonds
(9,090,300
)
(7,237,500
)
Proceeds from financing derivatives
8,533


Net interest payments received (paid) for financing derivatives
(50,461
)
(49,296
)
Proceeds from issuance of capital stock
966,534

629,051

Payments for repurchase/redemption of capital stock
(323,491
)
(594,321
)
Payments for repurchase of mandatorily redeemable capital stock
(323,363
)
(228,522
)
Cash dividends paid
(222
)
(225
)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
8,794,913

4,475,460

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(1,873,156
)
857,410

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
2,545,311

1,713,940

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
672,155

$
2,571,350

 
 
 
Supplemental disclosures:
 
 
Interest paid
$
157,224

$
150,276

 
 
 
Affordable Housing Program payments
$
9,944

$
12,372

 
 
 
Net transfers of mortgage loans to real estate owned
$
3,034

$
3,590


The accompanying notes are an integral part of these financial statements.
12



FEDERAL HOME LOAN BANK OF TOPEKA
Notes to Financial Statements - Unaudited
September 30, 2015


NOTE 1BASIS OF PRESENTATION

Basis of Presentation: The accompanying interim financial statements of the 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 operations and cash flows for the interim periods presented. All such adjustments were of a normal recurring nature. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full fiscal year or any other interim period.

The FHLBank’s significant accounting policies and certain other disclosures are set forth in the notes to the audited financial statements for the year ended December 31, 2014. 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 13, 2015 (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 trading securities, the fair value of derivatives 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.


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

Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. In April 2015, the Financial Accounting Standards Board (FASB) issued amendments to clarify the accounting for cloud computing arrangements. The amendments provide guidance to customers about whether a cloud computing arrangement includes a software license and how to account for it. This guidance is effective for interim and annual periods, beginning after December 15, 2015, which is January 1, 2016 for the FHLBank, and early adoption is permitted.  The FHLBank can elect to adopt the amendments either: (1) prospectively to all arrangements entered into or materially modified after the effective date; or (2) retrospectively. The FHLBank is in the process of evaluating this guidance and its effect on the FHLBank's financial condition, results of operations, and cash flows.

Simplifying the Presentation of Debt Issuance Costs. In April 2015, FASB issued guidance that requires a reclassification of debt issuance costs related to a recognized debt liability from other assets to a reduction of the carrying amount of the liability consistent with the presentation of debt discounts. The recognition and measurement guidance for debt issuance costs did not change as a result of this amendment. The amendments are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015, which is January 1, 2016 for the FHLBank. The period-specific effects as a result of applying this guidance are required to be adjusted retrospectively to each individual period presented on the statement of condition. The adoption of this amendment is not expected to have a material impact on the FHLBank's financial condition, results of operations, or cash flows.

Amendments to the Consolidation Analysis. In February 2015, FASB issued guidance that impacts reporting entities that are required to evaluate whether they must consolidate certain legal entities. Under the amended guidance, in a consolidation evaluation, more emphasis is placed on variable interests other than fee arrangements, such as principal investment risk or guarantees of the value of the assets or liabilities of the variable interest entity. The amendments emphasize risk of loss in the determination of a controlling financial interest and provide a scope exception for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investments Company Act of 1940 for registered money market funds. The amendments are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015, which is January 1, 2016 for the FHLBank. The adoption of this amendment is not expected to have a material impact on the FHLBank's financial condition, results of operations, or cash flows.

13



Classification of Certain Government-Guaranteed Mortgage Loans Upon Foreclosure. In August 2014, FASB issued guidance to change the accounting for government-guaranteed mortgage loans, including Federal Housing Administration (FHA) and the U.S. Department of Veterans Affairs (VA) loans. The amendments require that a mortgage loan be derecognized and a separate receivable be recognized upon foreclosure if: (1) the loan has a government guarantee that is not separable from the loan before foreclosure; (2) at the time of foreclosure, the creditor has the intent to convey the property to the guarantor and make a claim on that guarantee and the ability to recover under that claim; and (3) at the time of foreclosure, any amount of the claim determined on the basis of fair value is fixed. This receivable should be based upon the principal and interest expected to be recovered from the guarantor. The amendments were effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014, which was January 1, 2015 for the FHLBank. The adoption of this amendment did not have a material impact on the FHLBank's financial condition, results of operations, or cash flows.

Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. In June 2014, FASB issued guidance to change the accounting for repurchase-to-maturity transactions and linked repurchase financings to that of secured borrowings, which is consistent with the accounting for repurchase agreements. The amendments also require two new disclosures: (1) information about transfers accounted for as sales in transactions that are economically similar to repurchase agreements; and (2) increased transparency about the types of collateral pledged for repurchase agreements and similar transactions accounted for as secured borrowings. The amendments were effective for the first interim or annual period beginning after December 15, 2014, which was January 1, 2015 for the FHLBank. The adoption of this amendment did not have a material impact on the FHLBank's financial condition, results of operations, or cash flows.

Revenue Recognition. In May 2014, FASB issued guidance to introduce a new revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. In July 2015, the FASB voted to defer the effective date of the new standard by one year, which makes the standard effective for fiscal years beginning after December 15, 2017 (January 1, 2018 for the FHLBank), including interim periods within that reporting period. The FHLBank is currently evaluating the new guidance to determine the impact it will have, if any, on its financial condition, results of operations, or cash flows.

Receivables - Troubled Debt Restructurings by Creditors. In January 2014, FASB issued amendments intended to clarify when a creditor should be considered to have received physical possession of the residential real estate property collateralizing a consumer mortgage loan. These amendments clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, when either: (a) the creditor obtains legal title to the residential real estate property upon completion of a foreclosure; or (b) the borrower conveys all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The amendments were effective for interim and annual periods beginning after December 15, 2014, which was January 1, 2015 for the FHLBank. The adoption of this amendment did not have a material impact on the FHLBank's financial condition, results of operations, or cash flows.



14


NOTE 3INVESTMENT SECURITIES

Trading Securities: Trading securities by major security type as of September 30, 2015 and December 31, 2014 are summarized in Table 3.1 (in thousands):

Table 3.1
 
Fair Value
 
9/30/2015
12/31/2014
Non-mortgage-backed securities:
 
 
U.S. Treasury obligations
$

$
25,016

GSE obligations1
1,354,809

1,299,979

Non-mortgage-backed securities
1,354,809

1,324,995

Mortgage-backed securities:
 
 
U.S. obligation MBS2
835

963

GSE MBS3
983,647

136,091

Mortgage-backed securities
984,482

137,054

TOTAL
$
2,339,291

$
1,462,049

                   
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.
2 
Represents single-family MBS issued by Government National Mortgage Association (Ginnie Mae), which are guaranteed by the U.S. government.
3 
Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac.

Net gains (losses) on trading securities during the three and nine months ended September 30, 2015 and 2014 are shown in Table 3.2 (in thousands):

Table 3.2
 
Three Months Ended
Nine Months Ended
 
09/30/2015
09/30/2014
09/30/2015
09/30/2014
Net gains (losses) on trading securities held as of September 30, 2015
$
16,830

$
(11,433
)
$
(9,354
)
$
(21,881
)
Net gains (losses) on trading securities sold or matured prior to September 30, 2015
(10
)
14

(41
)
(550
)
NET GAIN (LOSS) ON TRADING SECURITIES
$
16,820

$
(11,419
)
$
(9,395
)
$
(22,431
)

Available-for-sale Securities: Available-for-sale securities by major security type as of September 30, 2015 are summarized in Table 3.3 (in thousands). No available-for-sale securities were held as of December 31, 2014.

Table 3.3
 
9/30/2015
 
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Mortgage-backed securities:
 
 
 
 
GSE MBS1
$
70,617

$

$
763

$
69,854

TOTAL
$
70,617

$

$
763

$
69,854

                   
1 
Represents fixed rate multi-family pass-through securities issued by Fannie Mae.


15


Table 3.4 summarizes (in thousands) the available-for-sale securities with unrealized losses as of September 30, 2015. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.

Table 3.4
 
09/30/2015
 
Less Than 12 Months
12 Months or More
Total
 
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Mortgage-backed securities:
 
 
 
 
 
 
GSE MBS1
$
69,854

$
763

$

$

$
69,854

$
763

TOTAL TEMPORARILY IMPAIRED SECURITIES
$
69,854

$
763

$

$

$
69,854

$
763

                   
1 
Represents fixed rate multi-family pass-through securities issued by Fannie Mae.

All available-for-sale securities are GSE MBS and as such do not have a single maturity date. The expected maturities of these securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

Held-to-maturity Securities: Held-to-maturity securities by major security type as of September 30, 2015 are summarized in Table 3.5 (in thousands):

Table 3.5
 
09/30/2015
 
Amortized
Cost
OTTI
Recognized
in OCI
Carrying Value
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Non-mortgage-backed securities:
 
 
 
 
 
 
State or local housing agency obligations
$
114,030

$

$
114,030

$
133

$
5,267

$
108,896

Non-mortgage-backed securities
114,030


114,030

133

5,267

108,896

Mortgage-backed securities:
 
 
 
 
 
 
U.S. obligation MBS1
49,414


49,414

129


49,543

GSE MBS2
4,538,501


4,538,501

23,318

11,713

4,550,106

Private-label residential MBS
192,059

8,910

183,149

7,408

6,413

184,144

Home equity loan ABS
701

84

617

1,426


2,043

Mortgage-backed securities
4,780,675

8,994

4,771,681

32,281

18,126

4,785,836

TOTAL
$
4,894,705

$
8,994

$
4,885,711

$
32,414

$
23,393

$
4,894,732

                   
1 
Represents single-family MBS issued by Ginnie Mae, which are guaranteed by the U.S. government.
2 
Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac.


16


Held-to-maturity securities by major security type as of December 31, 2014 are summarized in Table 3.6 (in thousands):

Table 3.6
 
12/31/2014
 
Amortized
Cost
OTTI
Recognized
in OCI
Carrying Value
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Non-mortgage-backed securities:
 
 
 
 
 
 
State or local housing agency obligations
$
126,105

$

$
126,105

$
148

$
6,083

$
120,170

Non-mortgage-backed securities
126,105


126,105

148

6,083

120,170

Mortgage-backed securities:
 
 
 
 
 
 
U.S obligation MBS1
57,562


57,562

175


57,737

GSE MBS2
4,441,487


4,441,487

27,486

13,628

4,455,345

Private-label residential MBS
242,970

11,711

231,259

9,195

6,960

233,494

Home equity loan ABS
837

63

774

1,522


2,296

Mortgage-backed securities
4,742,856

11,774

4,731,082

38,378

20,588

4,748,872

TOTAL
$
4,868,961

$
11,774

$
4,857,187

$
38,526

$
26,671

$
4,869,042

                    
1 
Represents single-family MBS issued by Ginnie Mae, which are guaranteed by the U.S. government.
2 
Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac.

Table 3.7 summarizes (in thousands) the held-to-maturity securities with unrealized losses as of September 30, 2015. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.

Table 3.7
 
09/30/2015
 
Less Than 12 Months
12 Months or More
Total
 
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses1
Non-mortgage-backed securities:
 
 
 
 
 
 
State or local housing agency obligations
$

$

$
37,108

$
5,267

$
37,108

$
5,267

Non-mortgage-backed securities


37,108

5,267

37,108

5,267

Mortgage-backed securities:
 
 
 
 
 
 
GSE MBS2
1,212,028

3,079

839,774

8,634

2,051,802

11,713

Private-label residential MBS
2,823

32

129,379

10,300

132,202

10,332

Mortgage-backed securities
1,214,851

3,111

969,153

18,934

2,184,004

22,045

TOTAL TEMPORARILY IMPAIRED SECURITIES
$
1,214,851

$
3,111

$
1,006,261

$
24,201

$
2,221,112

$
27,312

                    
1 
Total unrealized losses in Table 3.7 will not agree to total gross unrecognized losses in Table 3.5. Total unrealized losses in Table 3.7 include non-credit-related OTTI recognized in accumulated other comprehensive income (AOCI) and gross unrecognized gains on previously other-than-temporarily impaired securities.
2 
Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac.


17


Table 3.8 summarizes (in thousands) the held-to-maturity securities with unrealized losses as of December 31, 2014. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.

Table 3.8
 
12/31/2014
 
Less Than 12 Months
12 Months or More
Total
 
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses1
Non-mortgage-backed securities:
 
 
 
 
 
 
State or local housing agency obligations
$

$

$
38,067

$
6,083

$
38,067

$
6,083

Non-mortgage-backed securities


38,067

6,083

38,067

6,083

Mortgage-backed securities:
 
 
 
 
 
 
GSE MBS2
232,884

112

1,038,522

13,516

1,271,406

13,628

Private-label residential MBS
23,060

137

137,306

11,187

160,366

11,324

Mortgage-backed securities
255,944

249

1,175,828

24,703

1,431,772

24,952

TOTAL TEMPORARILY IMPAIRED SECURITIES
$
255,944

$
249

$
1,213,895

$
30,786

$
1,469,839

$
31,035

                    
1 
Total unrealized losses in Table 3.8 will not agree to total gross unrecognized losses in Table 3.6. Total unrealized losses in Table 3.8 include non-credit-related OTTI recognized in AOCI and gross unrecognized gains on previously other-than-temporarily impaired securities.
2 
Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac.

The amortized cost, carrying value and fair values of held-to-maturity securities by contractual maturity as of September 30, 2015 and December 31, 2014 are shown in Table 3.9 (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.

Table 3.9
 
09/30/2015
12/31/2014
 
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
15,765

15,765

15,719

17,920

17,920

17,779

Due after 10 years
98,265

98,265

93,177

108,185

108,185

102,391

Non-mortgage-backed securities
114,030

114,030

108,896

126,105

126,105

120,170

Mortgage-backed securities
4,780,675

4,771,681

4,785,836

4,742,856

4,731,082

4,748,872

TOTAL
$
4,894,705

$
4,885,711

$
4,894,732

$
4,868,961

$
4,857,187

$
4,869,042



18


Table 3.10 details interest rate payment terms for the amortized cost of held-to-maturity securities as of September 30, 2015 and December 31, 2014 (in thousands):

Table 3.10
 
09/30/2015
12/31/2014
Non-mortgage-backed securities:
 
 
Fixed rate
$

$
9,335

Variable rate
114,030

116,770

Non-mortgage-backed securities
114,030

126,105

Mortgage-backed securities:
 
 
Pass-through securities:
 
 
Fixed rate

23

Variable rate
1,499,041

1,175,918

Collateralized mortgage obligations:
 
 
Fixed rate
343,767

423,333

Variable rate
2,937,867

3,143,582

Mortgage-backed securities
4,780,675

4,742,856

TOTAL
$
4,894,705

$
4,868,961


Other-than-temporary Impairment: For those securities for which an OTTI was determined to have occurred during the quarter ended September 30, 2015 (that is, securities for which the FHLBank determined that it was more likely than not that the amortized cost basis would not be recovered), Table 3.11 presents 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.

Table 3.11
Private-label Residential MBS
Year of Securitization
Significant Inputs
Current
Credit
Enhancements
Prepayment
Rates
Default
Rates
Loss
Severities
Prime:
 
 
 
 
2004 and prior
13.1
%
6.2
%
24.7
%
8.8
%
Total Prime
13.1

6.2

24.7

8.8

Alt-A:
 
 
 
 
2004 and prior
10.8

12.9

33.3

10.4

2005
14.7

10.2

36.8

0.6

Total Alt-A
13.6

10.9

35.8

3.4

TOTAL
13.5
%
9.9
%
33.4
%
4.5
%
 
 
 
 
 
Home Equity Loan ABS
Year of Securitization
Significant Inputs
Current
Credit
Enhancements
Prepayment
Rates
Default
Rates
Loss
Severities
Subprime:
 
 
 
 
2004 and prior
3.3
%
4.4
%
87.7
%
11.6
%

19



For the 26 outstanding private-label securities with OTTI during the lives of the securities, the FHLBank’s reported balances as of September 30, 2015 are presented in Table 3.12 (in thousands):

Table 3.12
 
09/30/2015
 
Unpaid
Principal
Balance
Amortized
Cost
Carrying
Value
Fair
Value
Private-label residential MBS:
 
 
 
 
Prime
$
13,307

$
12,495

$
11,528

$
12,293

Alt-A
45,439

40,551

32,608

38,575

Total private-label residential MBS
58,746

53,046

44,136

50,868

Home equity loan ABS:
 
 
 
 
Subprime
2,399

701

617

2,043

TOTAL
$
61,145

$
53,747

$
44,753

$
52,911


Table 3.13 presents a roll-forward of OTTI activity for the three and nine months ended September 30, 2015 and 2014 related to credit losses recognized in earnings (in thousands):

Table 3.13
 
Three Months Ended
Nine Months Ended
 
09/30/2015
09/30/2014
09/30/2015
09/30/2014
Balance, beginning of period
$
9,425

$
9,560

$
9,406

$
9,917

Additional charge on securities for which OTTI was not previously recognized


1


Additional charge on securities for which OTTI was previously recognized1
212

20

650

443

Amortization of credit component of OTTI2
(186
)
(89
)
(606
)
(869
)
Balance, end of period
$
9,451

$
9,491

$
9,451

$
9,491

                    
1 
For the three months ended September 30, 2015 and 2014, securities previously impaired represent all securities that were impaired prior to July 1, 2015 and 2014, respectively. For the nine months ended September 30, 2015 and 2014, securities previously impaired represent all securities that were impaired prior to January 1, 2015 and 2014, 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 September 30, 2015, the fair value of a portion of the FHLBank's available-for-sale and held-to-maturity MBS were below the amortized cost of the securities due to interest rate volatility and/or illiquidity. 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 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. For state and local housing agency obligations, the FHLBank determined that all of the gross unrealized losses on these bonds were temporary because the strength of the underlying collateral and credit enhancements was sufficient to protect the FHLBank from losses based on current expectations.



20


NOTE 4ADVANCES

General Terms: The FHLBank offers a wide range of fixed and variable rate advance products with different maturities, interest rates, payment characteristics and optionality. As of September 30, 2015 and December 31, 2014, the FHLBank had advances outstanding at interest rates ranging from 0.14 percent to 7.41 percent and 0.11 percent to 8.01 percent, respectively. Table 4.1 presents advances summarized by year of contractual maturity as of September 30, 2015 and December 31, 2014 (dollars in thousands): 

Table 4.1
 
09/30/2015
12/31/2014
Year of Contractual Maturity
Amount
Weighted Average Interest Rate
Amount
Weighted Average Interest Rate
Due in one year or less
$
12,775,801

0.45
%
$
6,996,975

0.59
%
Due after one year through two years
1,963,499

2.31

1,513,363

2.14

Due after two years through three years
2,148,412

2.27

2,345,877

2.58

Due after three years through four years
1,172,501

1.51

1,501,614

2.16

Due after four years through five years
709,166

1.93

843,465

1.48

Thereafter
6,545,034

1.05

4,939,587

1.21

Total par value
25,314,413

0.99
%
18,140,881

1.32
%
Discounts
(20,498
)
 
(24,043
)
 
Hedging adjustments
188,518

 
186,112

 
TOTAL
$
25,482,433

 
$
18,302,950

 

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 September 30, 2015 and December 31, 2014 include callable advances totaling $6,193,849,000 and $4,825,254,000, respectively. Of these callable advances, there were $6,080,293,000 and $4,697,045,000 of variable rate advances as of September 30, 2015 and December 31, 2014, 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 September 30, 2015 and December 31, 2014, the FHLBank had convertible advances outstanding totaling $1,501,642,000 and $1,586,242,000, respectively.


21


Table 4.2 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 September 30, 2015 and December 31, 2014 (in thousands):

Table 4.2
 
Year of Contractual Maturity
or Next Call Date
Year of Contractual Maturity
or Next Conversion Date
Redemption Term
09/30/2015
12/31/2014
09/30/2015
12/31/2014
Due in one year or less
$
18,564,493

$
11,526,757

$
14,053,093

$
8,411,617

Due after one year through two years
1,675,797

1,288,157

1,543,599

1,396,863

Due after two years through three years
1,683,468

1,898,273

1,419,520

1,415,935

Due after three years through four years
844,576

1,136,649

1,159,501

1,232,414

Due after four years through five years
583,301

587,884

742,766

905,965

Thereafter
1,962,778

1,703,161

6,395,934

4,778,087

TOTAL PAR VALUE
$
25,314,413

$
18,140,881

$
25,314,413

$
18,140,881


Interest Rate Payment Terms:  Table 4.3 details additional interest rate payment terms for advances as of September 30, 2015 and December 31, 2014 (in thousands):

Table 4.3
 
09/30/2015
12/31/2014
Fixed rate:
 
 
Due in one year or less
$
2,278,263

$
1,379,428

Due after one year
6,747,344

6,594,886

Total fixed rate
9,025,607

7,974,314

Variable rate:
 

 

Due in one year or less
10,497,538

5,617,547

Due after one year
5,791,268

4,549,020

Total variable rate
16,288,806

10,166,567

TOTAL PAR VALUE
$
25,314,413

$
18,140,881


See Note 6 for information related to the FHLBank’s credit risk on advances and allowance for credit losses.


NOTE 5MORTGAGE 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 FHA, the 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.


22


Mortgage Loans Held for Portfolio: Table 5.1 presents information as of September 30, 2015 and December 31, 2014 on mortgage loans held for portfolio (in thousands):

Table 5.1
 
09/30/2015
12/31/2014
Real estate:
 
 
Fixed rate, medium-term1, single-family mortgages
$
1,483,076

$
1,531,229

Fixed rate, long-term, single-family mortgages
4,748,907

4,596,914

Total unpaid principal balance
6,231,983

6,128,143

Premiums
100,546

100,353

Discounts
(2,530
)
(3,008
)
Deferred loan costs, net
638

830

Other deferred fees
(126
)
(168
)
Hedging adjustments
7,714

8,572

Total before Allowance for Credit Losses on Mortgage Loans
6,338,225

6,234,722

Allowance for Credit Losses on Mortgage Loans
(1,897
)
(4,550
)
MORTGAGE LOANS HELD FOR PORTFOLIO, NET
$
6,336,328

$
6,230,172

                   
1 
Medium-term defined as a term of 15 years or less at origination.

Table 5.2 presents information as of September 30, 2015 and December 31, 2014 on the outstanding unpaid principal balance (UPB) of mortgage loans held for portfolio (in thousands):

Table 5.2
 
09/30/2015
12/31/2014
Conventional loans
$
5,623,853

$
5,497,001

Government-guaranteed or insured loans
608,130

631,142

TOTAL UNPAID PRINCIPAL BALANCE
$
6,231,983

$
6,128,143


See Note 6 for information related to the FHLBank’s credit risk on mortgage loans and allowance for credit losses.


NOTE 6ALLOWANCE FOR CREDIT LOSSES

The FHLBank has established an allowance methodology for each of its portfolio segments: credit products (advances, letters of credit and other extensions of credit to borrowers); government mortgage loans held for portfolio; conventional mortgage loans held for portfolio; the direct financing lease receivable; term Federal funds sold; and term securities purchased under agreements to resell.

Credit products: The FHLBank manages its credit exposure to credit products through an integrated approach that generally includes establishing a credit limit for each member, includes an ongoing review of each member’s financial condition and is coupled with conservative collateral/lending policies to limit risk of loss while balancing members’ needs for a reliable source of funding. In addition, the FHLBank lends to its members in accordance with Federal statutes and Finance Agency regulations. Specifically, the FHLBank complies with the Federal Home Loan Bank Act of 1932, as amended (Bank Act), which requires the FHLBank to obtain sufficient collateral to fully secure credit products. The estimated value of the collateral required to secure each member’s credit products is calculated by applying collateral discounts, or haircuts, to the market value or UPB of the collateral, as applicable. The FHLBank accepts certain investment securities, residential mortgage loans, deposits, and other real estate related assets as collateral. In addition, community financial institutions are eligible to utilize expanded statutory collateral provisions for small business loans, agriculture loans and community development loans. The FHLBank’s capital stock owned by borrowing members is held by the FHLBank as further collateral security for all indebtedness of the member to the FHLBank. Collateral arrangements may vary depending upon member credit quality, financial condition and performance; borrowing capacity; and overall credit exposure to the member. The FHLBank can also require additional or substitute collateral to protect its security interest. FHLBank management believes that these policies are effectively applied to manage the FHLBank’s credit risk from credit products.


23


Based upon the financial condition of the member, the FHLBank either allows a member to retain physical possession of the collateral assigned to it, or requires the member to specifically assign or place physical possession of the collateral with the FHLBank or its safekeeping agent. The FHLBank perfects its security interest in all pledged collateral. The Bank Act affords any security interest granted to the FHLBank by a member priority over the claims or rights of any other party except for claims or rights of a third party that would be entitled to priority under otherwise applicable law and are held by a bona fide purchaser for value or by a secured party holding a prior perfected security interest.

Using a risk-based approach and taking into consideration each member’s financial strength, the FHLBank considers the type and level of collateral to be the primary indicator of credit quality on its credit products. As of September 30, 2015 and December 31, 2014, the FHLBank had rights to collateral on a member-by-member basis with an estimated value in excess of its outstanding extensions of credit.

The FHLBank continues to evaluate and make changes to its collateral guidelines, as necessary, based on current market conditions. As of September 30, 2015 and December 31, 2014, the FHLBank did not have any advances that were past due, on nonaccrual status or considered impaired. In addition, there have been no troubled debt restructurings related to credit products during 2015 and 2014.

Based upon the collateral held as security, management’s credit extension and collateral policies, management’s credit analysis and the repayment history on credit products, the FHLBank currently does not anticipate any credit losses on its credit products. Accordingly, as of September 30, 2015 and December 31, 2014, the FHLBank has not recorded any allowance for credit losses on credit products, nor has it recorded any liability to reflect an allowance for credit losses for off‑balance sheet credit exposures. For additional information on the FHLBank’s off-balance sheet credit exposure, see Note 14.

Government Mortgage Loans Held For Portfolio: The FHLBank invests in government-guaranteed or insured (by FHA, VA, RHA and/or HUD) fixed rate mortgage loans secured by one-to-four family residential properties. The servicer provides and maintains insurance or a guarantee from the applicable government agency. The servicer is responsible for compliance with all government agency requirements and for obtaining the benefit of the applicable insurance or guarantee with respect to defaulted government mortgage loans. Any losses on these loans that are not recovered from the issuer or guarantor are absorbed by the servicers. Therefore, the FHLBank only has credit risk for these loans if the servicer fails to pay for losses not covered by the insurance or guarantee. Based on the FHLBank’s assessment of its servicers, the FHLBank has not established an allowance for credit losses on government mortgage loans. Further, as of September 30, 2015 and December 31, 2014, none of these mortgage loans have been placed on non-accrual status or were considered impaired because of the U.S. government guarantee or insurance on these loans and the contractual obligation of the loan servicer to repurchase the loans when certain criteria are met.

Conventional Mortgage Loans Held For Portfolio: The allowance for conventional loans is determined by a formula analysis based upon loss factors predominantly calculated using a historical analysis of loan performance. Delinquent loan migration analysis is performed to determine default probability rates, and historical loss analysis is performed to determine loss severity rates, both of which are then utilized as loss factors within the formula analysis. These analyses include consideration of various data observations, such as past performance, current performance, loan portfolio characteristics, collateral-related characteristics, industry data, and prevailing economic conditions. The measurement of the allowance for conventional mortgage loan losses may consist of: (1) reviewing all residential mortgage loans at the individual master commitment level; (2) reviewing specifically identified collateral-dependent loans for impairment; (3) reviewing homogeneous pools of residential mortgage loans; and/or (4) estimating credit losses in the remaining portfolio. The formula analysis is consistently applied, but loss factors may be adjusted in response to changing conditions, as a result of management’s assessment of the adequacy of the allowance to absorb losses inherent in the portfolio.

During the first quarter of 2015, the FHLBank modified its technique for calculating the allowance for credit losses in connection with the adoption of Advisory Bulletin 2012-02 (AB 2012-02), Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention, effective January 1, 2015. The adoption of AB 2012-02 is considered a change in estimate; however, it did not have a material impact to our financial condition, results of operations or cash flows. AB 2012-02 establishes a standard methodology for classifying loans, other real estate owned, and certain other assets, excluding investment securities, and prescribes the timing of asset charge-offs based upon these classifications. Management charges off delinquent mortgage loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported. Additionally, the adoption of AB 2012-02 requires any outstanding loan balance in excess of the fair value of the property, less cost to sell, to be classified as "Loss" when the loan is no more than 180 days delinquent, and a charge-off taken during the period identified. Fraudulent loans or borrowers in bankruptcy are also subject to the charge-off provisions of AB 2012-02. In conjunction with the implementation of AB 2012-02, management determined that a life-to-date net gain/loss on a loan transferred to real estate owned (REO), which includes charge-offs on loans considered impaired in compliance with AB 2012-02, would provide a more precise loss severity rate than the previous method of only considering losses from sale of the REO property. Management believes this change in technique will improve the FHLBank’s estimate of inherent losses in the portfolio.


24


Collectively Evaluated Mortgage Loans: The credit risk analysis of conventional loans evaluated collectively for impairment considers loan pool specific attribute data, applies estimated loss severities, and incorporates the associated credit enhancements in order to determine the FHLBank’s best estimate of probable incurred losses. Migration analysis is a methodology for determining, through the FHLBank’s experience over a historical period, the rate of default on pools of similar loans. The FHLBank applies migration analysis to loans based on the following categories: (1) loans in foreclosure; (2) nonaccrual loans; (3) delinquent loans; and (4) all other remaining loans. The FHLBank then estimates how many loans in these categories may migrate to a realized loss position and applies a loss severity factor to estimate losses incurred as of the Statement of Condition date.

Individually Evaluated Mortgage Loans: Certain conventional mortgage loans, primarily impaired mortgage loans that are considered collateral-dependent, may be specifically identified for purposes of calculating the allowance for credit losses. A mortgage loan is considered collateral-dependent if repayment is only expected to be provided by the sale of the underlying property, that is, if it is considered likely that the borrower will default and there is not sufficient CE obligation from a PFI to offset all losses under the master commitment. The estimated credit losses on impaired collateral-dependent loans may be separately determined because sufficient information exists to make a reasonable estimate of the inherent loss for these loans on an individual loan basis. The FHLBank estimates the fair value of this collateral by applying an appropriate loss severity rate or using third party estimates or property valuation models. The resulting incurred loss is equal to the difference between the carrying value of the loan and the estimated fair value of the collateral less estimated selling costs.

Direct Financing Lease Receivable: The FHLBank has a recorded investment in a direct financing lease receivable with a member for a building complex and property. Under the office complex agreement, the FHLBank has all rights and remedies under the lease agreement as well as all rights and remedies available under the member’s Advance, Pledge and Security Agreement. Consequently, the FHLBank can apply any excess collateral securing credit products to any shortfall in the leasing arrangement. As of September 30, 2015 and December 31, 2014, the direct financing lease receivable was not past due, on nonaccrual status or considered impaired.

Term Federal Funds Sold: These investments are all short-term unsecured loans conducted with investment-grade counterparties and we only evaluate these investments for purposes of an allowance for credit losses if the investment is not paid when due. There were no investments in term Federal funds sold outstanding as of September 30, 2015 and December 31, 2014, and all such investments acquired during the periods ended September 30, 2015 and December 31, 2014 were repaid according to their contractual terms.

Term Securities Purchased Under Agreements to Resell: These investments are considered collateralized financing arrangements and effectively represent short-term loans to investment-grade counterparties. The terms of these loans are structured such that if the market value of the underlying securities decreases below the market value required as collateral, the counterparty must provide additional securities as collateral in an amount equal to the decrease or remit cash in such amount, or the FHLBank will decrease the dollar value of the agreement to resell accordingly. If the FHLBank determines that an agreement to resell is impaired, the difference between the fair value of the collateral and the amortized cost of the agreement is charged to earnings. There were no investments in term securities purchased under agreements to resell outstanding as of September 30, 2015 and December 31, 2014, and all such investments acquired during the periods ended September 30, 2015 and December 31, 2014 were repaid according to their contractual terms.


25


Roll-forward of Allowance for Credit Losses: Table 6.1 presents a roll-forward of the allowance for credit losses for the three and nine months ended September 30, 2015 as well as the method used to evaluate impairment relating to all portfolio segments regardless of whether or not an estimated credit loss has been recorded as of September 30, 2015 (in thousands):

Table 6.1
 
09/30/2015
 
Conventional
Loans
Government
Loans
Credit
Products1
Direct
Financing
Lease
Receivable
Total
Allowance for credit losses:
 
 
 
 
 
Balance, beginning of three-month period
$
2,390

$

$

$

$
2,390

Net charge-offs
(95
)



(95
)
(Reversal) provision for credit losses
(398
)



(398
)
Balance, end of three-month period
$
1,897

$

$

$

$
1,897

 
 
 
 
 
 
Balance, beginning of nine-month period
$
4,550

$

$

$

$
4,550

Net charge-offs
(461
)



(461
)
(Reversal) provision for credit losses
(2,192
)



(2,192
)
Balance, end of nine-month period
$
1,897

$

$

$

$
1,897

 
 
 
 
 
 
Allowance for credit losses, end of period:
 

 

 

 

 

Individually evaluated for impairment
$

$

$

$

$

Collectively evaluated for impairment
1,897




1,897

 
 
 
 
 
 
Recorded investment2, end of period:
 

 

 

 

 

Individually evaluated for impairment
$
13,225

$

$
25,503,344

$
20,343

$
25,536,912

Collectively evaluated for impairment
5,731,113

624,519



6,355,632

Total
$
5,744,338

$
624,519

$
25,503,344

$
20,343

$
31,892,544

                   
1 
The recorded investment for credit products includes only advances. The recorded investment for all other credit products is insignificant.
2 
The recorded investment in a financing receivable is the UPB, adjusted for accrued interest, net deferred loan fees or costs, unamortized premiums or discounts, fair value hedging adjustments and direct write-downs. The recorded investment is not net of any valuation allowance.



26


Table 6.2 presents a roll-forward of the allowance for credit losses for the three and nine months ended September 30, 2014 as well as the method used to evaluate impairment relating to all portfolio segments regardless of whether or not an estimated credit loss has been recorded as of September 30, 2014 (in thousands):

Table 6.2
 
09/30/2014
 
Conventional
Loans
Government
Loans
Credit
Products1
Direct
Financing
Lease
Receivable
Total
Allowance for credit losses:
 
 
 
 
 
Balance, beginning of three-month period
$
4,658

$

$

$

$
4,658

Net charge-offs
(149
)



(149
)
(Reversal) provision for credit losses
82




82

Balance, end of three-month period
$
4,591

$

$

$

$
4,591

 
 
 
 
 
 
Balance, beginning of nine-month period
$
6,748

$

$

$

$
6,748

Net charge-offs
(425
)



(425
)
(Reversal) provision for credit losses
(1,732
)



(1,732
)
Balance, end of nine-month period
$
4,591

$

$

$

$
4,591

 
 
 
 
 
 
Allowance for credit losses, end of period:
 

 

 

 

 

Individually evaluated for impairment
$

$