10-Q 1 fhlbt9301810q.htm 10-Q Document
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, 2018
 
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.)
 
500 SW Wanamaker Road
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 every Interactive Data File required to be submitted 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 such files).  x  Yes  ¨  No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨                    Accelerated filer ¨
Non-accelerated filer x                    Smaller reporting company ¨
Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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 5, 2018
Class A Stock, par value $100 per share
2,974,967
Class B Stock, par value $100 per share
11,976,985




.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 our district and the U.S. and global economy, as well as 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 due to member eligibility, or changes in the principal place of business of members;
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) or other assets and related credit enhancement 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®) Program). “Mortgage Partnership Finance,” “MPF,” “MPF Xtra,” and “MPF Direct” are registered trademarks of the FHLBank 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, 2017, 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)
 
 
 
09/30/2018
12/31/2017
ASSETS
 
 
Cash and due from banks
$
20,500

$
268,050

Interest-bearing deposits
408,890

442,682

Securities purchased under agreements to resell (Note 10)
3,985,022

3,161,446

Federal funds sold
1,440,000

1,175,000

 
 
 
Investment securities:
 
 
Trading securities (Note 3)
2,211,321

2,869,415

Available-for-sale securities (Note 3)
1,694,039

1,493,231

Held-to-maturity securities1 (Note 3)
4,700,737

4,856,825

Total investment securities
8,606,097

9,219,471

 
 
 
Advances (Notes 4, 6)
28,471,709

26,295,849

 
 
 
Mortgage loans held for portfolio, net:
 
 
Mortgage loans held for portfolio (Notes 5, 6)
8,114,876

7,287,605

Less allowance for credit losses on mortgage loans (Note 6)
(656
)
(1,208
)
Mortgage loans held for portfolio, net
8,114,220

7,286,397

 
 
 
Accrued interest receivable
101,334

85,547

Premises, software and equipment, net
47,637

47,670

Derivative assets, net (Notes 7, 10)
39,282

37,030

Other assets
62,659

57,463

 
 
 
TOTAL ASSETS
$
51,297,350

$
48,076,605

 
 
 
LIABILITIES
 
 
Deposits (Note 8)
$
446,282

$
461,769

 
 
 
Consolidated obligations, net:
 
 
Discount notes (Note 9)
22,417,330

20,420,651

Bonds (Note 9)
25,836,920

24,514,468

Total consolidated obligations, net
48,254,250

44,935,119

 
 
 
Mandatorily redeemable capital stock (Note 11)
4,536

5,312

Accrued interest payable
91,102

56,116

Affordable Housing Program payable
43,789

43,005

Derivative liabilities, net (Notes 7, 10)
1,553

2,417

Other liabilities
65,945

66,764

 
 
 
TOTAL LIABILITIES
48,907,457

45,570,502

 
 
 
Commitments and contingencies (Note 14)


 
 
 

1    Fair value: $4,696,704 and $4,856,996 as of September 30, 2018 and December 31, 2017, respectively.
The accompanying notes are an integral part of these financial statements.

5




5


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
STATEMENTS OF CONDITION - Unaudited
 
 
(In thousands, except par value)
 
 
 
09/30/2018
12/31/2017
CAPITAL
 
 
Capital stock outstanding - putable:
 
 
Class A ($100 par value; 1,828 and 2,351 shares issued and outstanding) (Note 11)
$
182,824

$
235,134

Class B ($100 par value; 12,811 and 14,049 shares issued and outstanding) (Note 11)
1,281,099

1,404,905

Total capital stock
1,463,923

1,640,039

 
 
 
Retained earnings:
 
 
Unrestricted
705,235

676,993

Restricted
188,781

163,413

Total retained earnings
894,016

840,406

 
 
 
Accumulated other comprehensive income (loss) (Note 12)
31,954

25,658

 
 
 
TOTAL CAPITAL
2,389,893

2,506,103

 
 
 
TOTAL LIABILITIES AND CAPITAL
$
51,297,350

$
48,076,605



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
 
09/30/2018
09/30/2017
09/30/2018
09/30/2017
INTEREST INCOME:
 
 
 
 
Interest-bearing deposits
$
3,931

$
1,285

$
9,402

$
2,928

Securities purchased under agreements to resell
20,618

6,735

46,610

15,902

Federal funds sold
7,896

8,396

29,539

20,071

Trading securities
16,764

15,317

54,243

45,412

Available-for-sale securities
12,563

6,865

32,670

16,489

Held-to-maturity securities
30,602

20,684

85,538

53,082

Advances
158,790

113,673

460,497

281,806

Prepayment fees on terminated advances, net
153

161

254

1,331

Mortgage loans held for portfolio
65,424

54,548

186,709

157,074

Other
381

344

1,165

928

Total interest income
317,122

228,008

906,627

595,023

 
 
 
 
 
INTEREST EXPENSE:
 
 
 
 
Deposits
2,289

988

6,113

2,366

Consolidated obligations:
 
 
 
 
Discount notes
108,137

69,556

314,109

162,539

Bonds
138,668

88,306

382,442

228,788

Mandatorily redeemable capital stock (Note 11)
58

69

175

135

Other
311

162

766

319

Total interest expense
249,463

159,081

703,605

394,147

 
 
 
 
 
NET INTEREST INCOME
67,659

68,927

203,022

200,876

(Reversal) provision for credit losses on mortgage loans (Note 6)
(391
)
(171
)
(345
)
(196
)
NET INTEREST INCOME AFTER LOAN LOSS (REVERSAL) PROVISION
68,050

69,098

203,367

201,072

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

(84
)
(1
)
(94
)
Net amount of impairment losses on held-to-maturity securities reclassified to/(from) accumulated other comprehensive income (loss)

(256
)
(25
)
(370
)
Net other-than-temporary impairment losses on held-to-maturity securities (Note 3)

(340
)
(26
)
(464
)
Net gains (losses) on trading securities (Note 3)
(11,514
)
3,319

(50,495
)
16,400

Net gains (losses) on sale of held-to-maturity securities (Note 3)
1,529


1,591


Net gains (losses) on derivatives and hedging activities (Note 7)
6,032

(322
)
29,661

(9,681
)
Standby bond purchase agreement commitment fees
642

1,165

2,242

3,506

Letters of credit fees
1,086

979

3,300

2,889

Other
725

660

2,702

1,844

Total other income (loss)
(1,500
)
5,461

(11,025
)
14,494

 
 
 
 
 

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
 
09/30/2018
09/30/2017
09/30/2018
09/30/2017
OTHER EXPENSES:
 
 
 
 
Compensation and benefits
$
12,682

$
11,828

$
29,009

$
28,790

Other operating
4,763

4,612

13,419

12,477

Federal Housing Finance Agency
690

697

2,144

2,145

Office of Finance
812

717

2,313

2,179

Other
1,481

1,681

4,501

4,573

Total other expenses
20,428

19,535

51,386

50,164

 
 
 
 
 
INCOME BEFORE ASSESSMENTS
46,122

55,024

140,956

165,402

 
 
 
 
 
Affordable Housing Program
4,618

5,510

14,113

16,554

 
 
 
 
 
NET INCOME
$
41,504

$
49,514

$
126,843

$
148,848



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
 
09/30/2018
09/30/2017
09/30/2018
09/30/2017
Net income
$
41,504

$
49,514

$
126,843

$
148,848

 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
Net unrealized gains (losses) on available-for-sale securities
3,694

1,452

2,116

13,319

Net non-credit portion of other-than-temporary impairment losses on held-to-maturity securities
3,655

577

4,163

1,397

Defined benefit pension plan
5

58

17

173

Total other comprehensive income (loss)
7,354

2,087

6,296

14,889

 
 
 
 
 
TOTAL COMPREHENSIVE INCOME
$
48,858

$
51,601

$
133,139

$
163,737

 


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, 2016
1,621

$
162,143

10,645

$
1,064,532

12,266

$
1,226,675

$
611,226

$
123,970

$
735,196

$
577

$
1,962,448

Comprehensive income
 
 
 
 
 
 
119,078

29,770

148,848

14,889

163,737

Proceeds from issuance of capital stock
9

852

13,268

1,326,782

13,277

1,327,634

 
 
 
 
1,327,634

Repurchase/redemption of capital stock
(5,270
)
(527,051
)
(15
)
(1,453
)
(5,285
)
(528,504
)
 
 
 
 
(528,504
)
Net reclassification of shares to mandatorily redeemable capital stock
(161
)
(16,075
)
(6,104
)
(610,433
)
(6,265
)
(626,508
)
 
 
 
 
(626,508
)
Net transfer of shares between Class A and Class B
5,531

553,127

(5,531
)
(553,127
)


 
 
 
 

Dividends on capital stock (Class A - 1.1%, Class B - 6.5%):
 
 
 
 
 
 
 
 
 
 
 
Cash payment
 
 
 
 
 
 
(199
)
 
(199
)
 
(199
)
Stock issued
 
 
677

67,704

677

67,704

(67,704
)
 
(67,704
)
 

Balance at September 30, 2017
1,730

$
172,996

12,940

$
1,294,005

14,670

$
1,467,001

$
662,401

$
153,740

$
816,141

$
15,466

$
2,298,608

 
 
 
 
 
 
 
 
 
 
 
 
 
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, 2017
2,351

$
235,134

14,049

$
1,404,905

16,400

$
1,640,039

$
676,993

$
163,413

$
840,406

$
25,658

$
2,506,103

Comprehensive income
 
 
 
 
 
 
101,475

25,368

126,843

6,296

133,139

Proceeds from issuance of capital stock
11

1,154

12,939

1,293,853

12,950

1,295,007

 
 
 
 
1,295,007

Repurchase/redemption of capital stock
(6,457
)
(645,743
)
(48
)
(4,732
)
(6,505
)
(650,475
)
 
 
 
 
(650,475
)
Net reclassification of shares to mandatorily redeemable capital stock
(1,950
)
(195,026
)
(6,985
)
(698,519
)
(8,935
)
(893,545
)
 
 
 
 
(893,545
)
Net transfer of shares between Class A and Class B
7,873

787,305

(7,873
)
(787,305
)


 
 
 
 

Dividends on capital stock (Class A - 1.7%, Class B - 6.9%):
 
 
 
 




 
 
 
 
 

Cash payment
 
 
 
 




(336
)
 
(336
)
 
(336
)
Stock issued
 
 
729

72,897

729

72,897

(72,897
)
 
(72,897
)
 

Balance at September 30, 2018
1,828
$
182,824

12,811
$
1,281,099

14,639
$
1,463,923

$
705,235

$
188,781

$
894,016

$
31,954

$
2,389,893

                   
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
 
09/30/2018
09/30/2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
Net income
$
126,843

$
148,848

Adjustments to reconcile income (loss) to net cash provided by (used in) operating activities:
 
 
Depreciation and amortization:
 
 
Premiums and discounts on consolidated obligations, net
(7,736
)
6,187

Concessions on consolidated obligations
4,050

4,194

Premiums and discounts on investments, net
2,676

3,087

Premiums, discounts and commitment fees on advances, net
(3,758
)
(4,389
)
Premiums, discounts and deferred loan costs on mortgage loans, net
13,786

17,082

Fair value adjustments on hedged assets or liabilities
1,249

3,664

Premises, software and equipment
2,226

1,732

Other
17

173

(Reversal) provision for credit losses on mortgage loans
(345
)
(196
)
Non-cash interest on mandatorily redeemable capital stock
173

133

Net realized (gains) losses on sale of held-to-maturity securities
(1,591
)

Net other-than-temporary impairment losses on held-to-maturity securities
26

464

Net realized (gains) losses on sale of premises and equipment
(880
)
71

Other adjustments
(238
)
166

Net (gains) losses on trading securities
50,495

(16,400
)
(Gains) losses due to change in net fair value adjustment on derivative and hedging activities
36,107

12,766

(Increase) decrease in accrued interest receivable
(15,814
)
(11,503
)
Change in net accrued interest included in derivative assets
(7,822
)
(3,627
)
(Increase) decrease in other assets
(854
)
(3,107
)
Increase (decrease) in accrued interest payable
35,166

11,811

Change in net accrued interest included in derivative liabilities
(456
)
(2,497
)
Increase (decrease) in Affordable Housing Program liability
784

9,291

Increase (decrease) in other liabilities
(3,691
)
(2,178
)
Total adjustments
103,570

26,924

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
230,413

175,772

 
 
 

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
 
09/30/2018
09/30/2017
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
Net (increase) decrease in interest-bearing deposits
$
28,298

$
110,278

Net (increase) decrease in securities purchased under resale agreements
(823,576
)
(195,589
)
Net (increase) decrease in Federal funds sold
(265,000
)
1,033,000

Net (increase) decrease in short-term trading securities
500,000

(675,000
)
Proceeds from maturities of and principal repayments on long-term trading securities
355,566

220,806

Purchases of long-term trading securities
(247,969
)

Proceeds from maturities of and principal repayments on long-term available-for-sale securities
16,165

4,103

Purchases of long-term available-for-sale securities
(281,489
)
(361,295
)
Proceeds from sale of held-to-maturity securities
87,827


Proceeds from maturities of and principal repayments on long-term held-to-maturity securities
699,016

824,497

Purchases of long-term held-to-maturity securities
(625,170
)
(1,092,421
)
Advances repaid
300,011,912

387,903,973

Advances originated
(302,270,146
)
(392,261,039
)
Principal collected on mortgage loans
706,748

714,847

Purchases of mortgage loans
(1,553,027
)
(1,147,274
)
Proceeds from sale of foreclosed assets
3,728

1,888

Purchases of other long-term assets
(6,000
)
(16,500
)
Other investing activities
2,136

1,887

Net (increase) decrease in loans to other FHLBanks

600,000

Proceeds from sale of premises, software and equipment
2,416

48

Purchases of premises, software and equipment
(8,002
)
(20,655
)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
(3,666,567
)
(4,354,446
)
 
 
 

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


FEDERAL HOME LOAN BANK OF TOPEKA
 
 
STATEMENTS OF CASH FLOWS - Unaudited
 
 
(In thousands)
 
 
 
Nine Months Ended
 
09/30/2018
09/30/2017
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
Net increase (decrease) in deposits
$
91,182

$
(42,291
)
Net proceeds from issuance of consolidated obligations:
 
 
Discount notes
765,464,193

701,800,511

Bonds
8,790,535

14,266,201

Payments for maturing and retired consolidated obligations:
 
 
Discount notes
(763,468,454
)
(702,310,944
)
Bonds
(7,440,940
)
(9,909,180
)
Net increase (decrease) in other borrowings
6,000

16,500

Proceeds from financing derivatives

1,921

Net interest payments received (paid) for financing derivatives
(3,614
)
(18,554
)
Proceeds from issuance of capital stock
1,295,007

1,327,634

Payments for repurchase/redemption of capital stock
(650,475
)
(528,504
)
Payments for repurchase of mandatorily redeemable capital stock
(894,494
)
(623,872
)
Cash dividends paid
(336
)
(199
)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
3,188,604

3,979,223

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(247,550
)
(199,451
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
268,050

207,254

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
20,500

$
7,803

 
 
 
Supplemental disclosures:
 
 
Interest paid
$
672,944

$
372,036

Affordable Housing Program payments
$
13,468

$
7,749

Net transfers of mortgage loans to other assets
$
2,817

$
1,808


The accompanying notes are an integral part of these financial statements.
13



FEDERAL HOME LOAN BANK OF TOPEKA
Notes to Financial Statements - Unaudited
September 30, 2018


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, 2017. 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, 2018 (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 and available-for-sale 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.

Derivatives: All derivatives are recognized on the Statements of Condition at their fair values (including net accrued interest receivable or payable on the derivatives) and are reported as either derivative assets or derivative liabilities, net of cash collateral, including initial and certain variation margin, and accrued interest received or pledged by clearing agents and/or counterparties. The fair values of derivatives are netted by clearing agent or counterparty when the netting requirements have been met. If these netted amounts are positive, they are classified as an asset and, if negative, they are classified as a liability. Cash flows associated with derivatives are reflected as cash flows from operating activities in the Statements of Cash Flows unless the derivative meets the criteria to be a financing derivative.

The FHLBank utilizes two Derivative Clearing Organizations (Clearinghouses) for all cleared derivative transactions, LCH Limited and CME Clearing. Effective January 16, 2018, LCH Limited made certain amendments to its rulebook changing the legal characterization of variation margin payments to be daily settlement payments rather than collateral, consistent with the amendment CME Clearing made effective January 3, 2017. At both Clearinghouses, initial margin is considered cash collateral.

Reclassifications: Certain immaterial amounts in the financial statements have been reclassified to conform to current period presentations.


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

Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes (Accounting Standards Update (ASU) 2018-16). In October 2018, the Financial Accounting Standards Board (FASB) issued an amendment that permits use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to the U.S. Treasury rate, the London Interbank Offered Rate (LIBOR) swap rate, the OIS rate based on the Fed Funds Effective Rate, and the Securities Industry and Financial Markets Association Municipal Swap Rate. The amendments apply to all entities that elect to apply hedge accounting of the benchmark interest rate. The amendments should be adopted on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after the date of adoption. The amendment will be effective concurrently with ASU 2017-12 for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, which is January 1, 2019 for the FHLBank, and early adoption is permitted in any interim period or fiscal year prior to the effective date. The FHLBank does not plan on early adoption. The guidance is not expected to materially affect the FHLBank's application of hedge accounting or utilization of hedging strategies.

14



Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (ASU 2018-15). In August 2018, the FASB issued an amendment to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Accordingly, the amendments in this ASU require an entity in a hosting arrangement that is a service contract to follow existing guidance relating to internal-use software to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. Costs to develop or obtain internal-use software that cannot be capitalized also cannot be capitalized for a hosting arrangement that is a service contract. Therefore, an entity in a hosting arrangement that is a service contract determines which project stage (that is, preliminary project stage, application development stage, or post-implementation stage) an implementation activity relates to. Costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post-implementation stages are expensed as the activities are performed. The amendments in this ASU also require the entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The amendments in this ASU will be effective for annual periods, and interim periods within those annual periods beginning after December 31, 2019, which is January 1, 2020 for the FHLBank. Early adoption of the amendments in this ASU is permitted, including adoption in any interim period, for all entities. The adoption of this guidance is not expected to have a material effect on the FHLBank's financial condition, results of operations or cash flows.

Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14). In August 2018, the FASB issued an amendment modifying the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans to improve disclosure effectiveness. The amendments in the ASU remove disclosures that are no longer considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. The amendments in this ASU are effective for annual periods ending after December 15, 2020, which is December 31, 2020 for the FHLBank. Early adoption is permitted. The adoption of this guidance will impact the disclosures related to defined benefit plans but will not impact the FHLBank’s financial condition, results of operations or cash flows.

Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13). In August 2018, the FASB issued an amendment that modifies the disclosure requirements for fair value measurements. This ASU removes the requirement to disclose: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; and (3) the valuation processes for Level 3 fair value measurements. The ASU requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (OCI) for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this ASU will be effective for annual periods, and interim periods within those annual periods beginning after December 31, 2019, which is January 1, 2020 for the FHLBank. Early adoption is permitted. The adoption of this guidance will impact the disclosures related to fair value measurement but will not impact the FHLBank’s financial condition, results of operations or cash flows.

Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12). In August 2017, the FASB issued an amendment to simplify the application of hedge accounting guidance in current GAAP and to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. This guidance requires that, for fair value hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness be presented in the same income statement line that is used to present the earnings effect of the hedged item. For cash flow hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness must be recorded in OCI. In addition, the amendments include certain targeted improvements to the assessment of hedge effectiveness and permit, among other things, the following:
Measurement of the change in fair value of the hedged item on the basis of the benchmark rate component of the contractual coupon cash flows determined at hedge inception;
Measurement of the hedged item in a partial-term fair value hedge of interest rate risk by assuming the hedged item has a term that reflects only the designated cash flows being hedged;
Consideration only of how changes in the benchmark interest rate affect a decision to settle a prepayable instrument before its scheduled maturity in calculating the change in the fair value of the hedged item attributable to interest rate risk; and
For a cash flow hedge of interest rate risk of a variable rate financial instrument, an entity could designate the variability in cash flows attributable to the contractually specified interest rate as the hedged risk.


15


The amendment will be effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, which is January 1, 2019 for the FHLBank, and early adoption is permitted in any interim period or fiscal year prior to the effective date. The FHLBank does not plan on early adoption. The guidance is not expected to affect the FHLBank's application of hedge accounting for existing hedge strategies, with the exception of enhancing the ability to apply short-cut hedge accounting by allowing the designation of a fallback long-haul method. The guidance may also provide opportunities to enhance risk management through new hedge strategies. The adoption of this guidance is not expected to have a material effect on the FHLBank's financial condition, results of operations or cash flows beyond a prospective change in income statement presentation for fair value hedge relationships and new required disclosures.

Premium Amortization on Purchased Callable Debt Securities (ASU 2017-08). In March 2017, FASB issued an amendment to shorten the amortization period of any premium on callable debt securities to the first call date instead of over the contractual life of the instrument. The amendment does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The guidance is intended to reduce diversity in practice in the amortization of premiums and the consideration of how the potential of a security being called is factored into current impairment assessments. The amendment also intends to more closely align the amortization of premiums and discounts to the expectations incorporated into the market pricing of the instrument. The amendment will be effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, which is January 1, 2019 for the FHLBank. This guidance should be applied using a modified retrospective method through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The adoption of this guidance is not expected to have a material effect on the FHLBank's financial condition, results of operations or cash flows.

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07). In March 2017, FASB issued an amendment to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendment requires that the employer disaggregate the service cost component and the other components of net benefit cost and allow only the service cost component of net benefit cost to be eligible for capitalization. The amendment is intended to provide transparency, consistency, and usefulness to users of financial statements. The amendment became effective for annual periods, and interim periods within those annual periods, beginning on January 1, 2018 for the FHLBank. This guidance was applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. The adoption of this guidance did not have a material effect on the FHLBank's financial condition, results of operations or cash flows.

Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15). In August 2016, FASB issued amendments to clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. This guidance is intended to reduce existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance became effective for the FHLBank for interim and annual periods and applied retrospectively, beginning on January 1, 2018. The adoption of this guidance did not have an impact on the FHLBank's financial condition, results of operations or cash flows.

Measurement of Credit Losses on Financial Instruments (ASU 2016-13). In June 2016, FASB issued amended guidance for the accounting of credit losses on financial instruments. The amendments require entities to measure expected credit losses based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. Additionally, under the new guidance, a financial asset, or a group of financial assets, measured at amortized cost basis is required to be presented at the net amount expected to be collected.

The guidance also requires:
The statement of income to reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period;
The entities to determine the allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination that are measured at amortized cost basis in a similar manner to other financial assets measured at amortized cost basis. The initial allowance for credit losses is required to be added to the purchase price;
Credit losses relating to available-for-sale debt securities to be recorded through an allowance for credit losses. The amendments limit the allowance for credit losses to the amount by which fair value is below amortized cost; and
Public entities to further disaggregate the current disclosure of credit quality indicators in relation to the amortized cost of financing receivables by the year of origination (i.e., vintage).


16


The guidance is effective for the FHLBank for interim and annual periods beginning on January 1, 2020. Early application is permitted as of the interim and annual reporting periods beginning after December 15, 2018. The FHLBank does not plan on early adoption. The guidance should be applied using a modified-retrospective approach, through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. In addition, entities are required to use a prospective transition approach for debt securities for which an other-than-temporary impairment (OTTI) charge had been recognized before the effective date; however, the FHLBank currently does not have any OTTI debt securities. The FHLBank has formed an internal working group that has begun its implementation efforts by identifying key interpretive issues and potential impacts to processes and systems that will eventually determine the magnitude of the impact on the FHLBank's financial condition, results of operations and cash flows.

Leases (ASU 2016-02). In February 2016, FASB issued amendments to lease accounting guidance. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases in the statement of financial condition, which effectively removes a source of off-balance sheet financing for operating leases. A distinction remains between finance leases and operating leases, but the assets and liabilities arising from operating leases are now also required to be recognized in the statement of financial condition. Lessor accounting is largely unchanged. The amendments are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, which is January 1, 2019 for the FHLBank. In July 2018, the FASB issued amended guidance to add a method of adoption whereby an entity may elect to recognize a cumulative-effect adjustment to the beginning balance of retained earnings upon adoption. The FHLBank plans to utilize this transition method. The FHLBank has a limited number of lease agreements and has concluded that the impact of the guidance is not expected to have a material effect on the FHLBank's financial condition, results of operations or cash flows.

Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01). In January 2016, FASB issued amendments to improve the recognition, measurement, presentation and disclosure of financial instruments through changes to existing GAAP. The provisions impacting the FHLBank include the elimination of the requirement to disclose the method and significant assumptions used to estimate the fair value of financial instruments carried at amortized cost, the requirement to use the notion of exit price when measuring the fair value of financial instruments for disclosure purposes, and the separate presentation of financial assets and financial liabilities by measurement category and form of asset (i.e., securities or loans and receivables) on the statement of financial condition or in the notes to financial statements. The amendments became effective for annual periods, and interim periods within those annual periods, beginning on January 1, 2018 for the FHLBank. This guidance will impact disclosures related to the fair value of financial instruments. However, this guidance did not have an impact on the FHLBank's financial condition, results of operations or cash flows.

Revenue Recognition (ASU 2014-09). 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, FASB voted to defer the effective date of the new standard by one year. In addition, in March 2016, FASB issued amendments to clarify the implementation guidance on principal versus agent considerations, in particular, relating to how an entity should determine whether the entity is a principal or an agent for each specified good or service promised to the customer and the nature of each specified good or service. The amendments do not change the core principle in the new revenue standard. The standard became effective for fiscal years, including interim periods within those fiscal years, beginning on January 1, 2018 for the FHLBank. Because the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, the adoption of this guidance did not have a material impact on the FHLBank's financial condition, results of operations or cash flows.



17


NOTE 3INVESTMENT SECURITIES

Trading Securities: Trading securities by major security type as of September 30, 2018 and December 31, 2017 are summarized in Table 3.1 (in thousands):

Table 3.1
 
Fair Value
 
09/30/2018
12/31/2017
Non-mortgage-backed securities:
 
 
Certificates of deposit
$
85,003

$
584,984

U.S. Treasury obligations
248,313


GSE obligations1
993,030

1,353,083

Non-mortgage-backed securities
1,326,346

1,938,067

Mortgage-backed securities:
 
 
U.S. obligation MBS2
494

580

GSE MBS3
884,481

930,768

Mortgage-backed securities
884,975

931,348

TOTAL
$
2,211,321

$
2,869,415

                   
1 
Represents debentures issued by other FHLBanks, Federal National Mortgage Association (Fannie Mae), 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 Federal Home Loan Mortgage Corporation (Freddie Mac).

Net gains (losses) on trading securities during the three and nine months ended September 30, 2018 and 2017 are shown in Table 3.2 (in thousands):

Table 3.2
 
Three Months Ended
Nine Months Ended
 
09/30/2018
09/30/2017
09/30/2018
09/30/2017
Net gains (losses) on trading securities held as of September 30, 2018
$
(11,201
)
$
3,984

$
(50,211
)
$
21,611

Net gains (losses) on trading securities sold or matured prior to September 30, 2018
(313
)
(665
)
(284
)
(5,211
)
NET GAINS (LOSSES) ON TRADING SECURITIES
$
(11,514
)
$
3,319

$
(50,495
)
$
16,400


Available-for-sale Securities: Available-for-sale securities by major security type as of September 30, 2018 are summarized in Table 3.3 (in thousands):

Table 3.3
 
09/30/2018
 
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Mortgage-backed securities:
 
 
 
 
GSE MBS1
$
1,660,717

$
35,170

$
(1,848
)
$
1,694,039

TOTAL
$
1,660,717

$
35,170

$
(1,848
)
$
1,694,039

                   
1 
Represents fixed rate multi-family MBS issued by Fannie Mae.


18


Available-for-sale securities by major security type as of December 31, 2017 are summarized in Table 3.4 (in thousands):

Table 3.4
 
12/31/2017
 
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Mortgage-backed securities:
 
 
 
 
GSE MBS1
$
1,462,025

$
31,638

$
(432
)
$
1,493,231

TOTAL
$
1,462,025

$
31,638

$
(432
)
$
1,493,231

                   
1 
Represents fixed rate multi-family MBS issued by Fannie Mae.

Table 3.5 summarizes the available-for-sale securities with unrealized losses as of September 30, 2018 (in thousands). 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 3.5
 
09/30/2018
 
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
$
276,780

$
(1,783
)
$
42,042

$
(65
)
$
318,822

$
(1,848
)
TOTAL TEMPORARILY IMPAIRED SECURITIES
$
276,780

$
(1,783
)
$
42,042

$
(65
)
$
318,822

$
(1,848
)
                   
1 
Represents fixed rate multi-family MBS issued by Fannie Mae.

Table 3.6 summarizes the available-for-sale securities with unrealized losses as of December 31, 2017 (in thousands). 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 3.6
 
12/31/2017
 
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
$
84,937

$
(432
)
$

$

$
84,937

$
(432
)
TOTAL TEMPORARILY IMPAIRED SECURITIES
$
84,937

$
(432
)
$

$

$
84,937

$
(432
)
                   
1 
Represents fixed rate multi-family MBS 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.


19


Held-to-maturity Securities: Held-to-maturity securities by major security type as of September 30, 2018 are summarized in Table 3.7 (in thousands):

Table 3.7
 
09/30/2018
 
Amortized
Cost
OTTI
Recognized
in AOCI
Carrying Value
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Non-mortgage-backed securities:
 
 
 
 
 
 
State or local housing agency obligations
$
89,120

$

$
89,120

$
1

$
(3,593
)
$
85,528

Non-mortgage-backed securities
89,120


89,120

1

(3,593
)
85,528

Mortgage-backed securities:
 
 
 
 
 
 
U.S. obligation MBS1
113,789


113,789

505

(65
)
114,229

GSE MBS2
4,497,828


4,497,828

15,536

(16,417
)
4,496,947

Mortgage-backed securities
4,611,617


4,611,617

16,041

(16,482
)
4,611,176

TOTAL
$
4,700,737

$

$
4,700,737

$
16,042

$
(20,075
)
$
4,696,704

                   
1 
Represents single-family MBS issued by Ginnie Mae.
2 
Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac.

Held-to-maturity securities by major security type as of December 31, 2017 are summarized in Table 3.8 (in thousands):

Table 3.8
 
12/31/2017
 
Amortized
Cost
OTTI
Recognized
in AOCI
Carrying Value
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Non-mortgage-backed securities:
 
 
 
 
 
 
State or local housing agency obligations
$
89,830

$

$
89,830

$
74

$
(4,896
)
$
85,008

Non-mortgage-backed securities
89,830


89,830

74

(4,896
)
85,008

Mortgage-backed securities:
 
 
 
 
 
 
U.S obligation MBS1
127,588


127,588

435

(88
)
127,935

GSE MBS2
4,561,839


4,561,839

15,548

(14,740
)
4,562,647

Private-label residential MBS
81,731

(4,163
)
77,568

5,456

(1,618
)
81,406

Mortgage-backed securities
4,771,158

(4,163
)
4,766,995

21,439

(16,446
)
4,771,988

TOTAL
$
4,860,988

$
(4,163
)
$
4,856,825

$
21,513

$
(21,342
)
$
4,856,996

                    
1 
Represents single-family MBS issued by Ginnie Mae.
2 
Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac.


20


Table 3.9 summarizes the held-to-maturity securities with unrealized losses as of September 30, 2018 (in thousands). 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 3.9
 
09/30/2018
 
Less Than 12 Months
12 Months or More
Total
 
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Non-mortgage-backed securities:
 
 
 
 
 
 
State or local housing agency obligations
$

$

$
26,408

$
(3,593
)
$
26,408

$
(3,593
)
Non-mortgage-backed securities


26,408

(3,593
)
26,408

(3,593
)
Mortgage-backed securities:
 
 
 
 
 
 
U.S. obligation MBS1


32,156

(65
)
32,156

(65
)
GSE MBS2
1,328,685

(2,272
)
1,383,638

(14,145
)
2,712,323

(16,417
)
Mortgage-backed securities
1,328,685

(2,272
)
1,415,794

(14,210
)
2,744,479

(16,482
)
TOTAL TEMPORARILY IMPAIRED SECURITIES
$
1,328,685

$
(2,272
)
$
1,442,202

$
(17,803
)
$
2,770,887

$
(20,075
)
                    
1 
Represents single-family MBS issued by Ginnie Mae.
2 
Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac.

Table 3.10 summarizes the held-to-maturity securities with unrealized losses as of December 31, 2017 (in thousands). 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 3.10
 
12/31/2017
 
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
$

$

$
25,104

$
(4,896
)
$
25,104

$
(4,896
)
Non-mortgage-backed securities


25,104

(4,896
)
25,104

(4,896
)
Mortgage-backed securities:
 
 
 
 
 
 
U.S obligation MBS2
37,944

(88
)


37,944

(88
)
GSE MBS3
796,378

(1,363
)
1,478,510

(13,377
)
2,274,888

(14,740
)
Private-label residential MBS
150

(1
)
64,477

(2,314
)
64,627

(2,315
)
Mortgage-backed securities
834,472

(1,452
)
1,542,987

(15,691
)
2,377,459

(17,143
)
TOTAL TEMPORARILY IMPAIRED SECURITIES
$
834,472

$
(1,452
)
$
1,568,091

$
(20,587
)
$
2,402,563

$
(22,039
)
                    
1 
Total unrealized losses in Table 3.10 will not agree to total gross unrecognized losses in Table 3.8. Total unrealized losses in Table 3.10 include non-credit-related OTTI recognized in accumulated OCI (AOCI) and gross unrecognized gains on previously other-than-temporarily impaired securities.
2 
Represents single-family MBS issued by Ginnie Mae.
3 
Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac.


21


The amortized cost, carrying value and fair values of held-to-maturity securities by contractual maturity as of September 30, 2018 and December 31, 2017 are shown in Table 3.11 (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 3.11
 
09/30/2018
12/31/2017
 
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






Due after 10 years
89,120

89,120

85,528

89,830

89,830

85,008

Non-mortgage-backed securities
89,120

89,120

85,528

89,830

89,830

85,008

Mortgage-backed securities
4,611,617

4,611,617

4,611,176

4,771,158

4,766,995

4,771,988

TOTAL
$
4,700,737

$
4,700,737

$
4,696,704

$
4,860,988

$
4,856,825

$
4,856,996


Net gains (losses) were realized on the sale of long-term held-to-maturity securities during the three and nine months ended September 30, 2018 and are recorded as net gains (losses) on sale of held-to-maturity securities in other income (loss) on the Statements of Income. All securities sold had paid down below 15 percent of the principal outstanding at acquisition. Table 3.12 presents details of the sales (in thousands). No held-to-maturity securities were sold during the three and nine months ended September 30, 2017.

Table 3.12
 
Three Months Ended
Nine Months Ended
 
09/30/2018
09/30/2018
Proceeds from sale of held-to-maturity securities
$
67,566

$
87,827

Carrying value of held-to-maturity securities sold
(66,037
)
(86,236
)
NET REALIZED GAINS (LOSSES)
$
1,529

$
1,591


Other-than-temporary Impairment: Historically, the only investments recorded as other-than-temporarily impaired by the FHLBank were private-label residential MBS. The FHLBank's private-label residential MBS portfolio was sold in its entirety during the quarter ended September 30, 2018.


22


Table 3.13 presents a roll-forward of OTTI activity for the three and nine months ended September 30, 2018 and 2017 related to credit losses recognized in earnings (in thousands):

Table 3.13
 
Three Months Ended
Nine Months Ended
 
09/30/2018
09/30/2017
09/30/2018
09/30/2017
Balance, beginning of period
$
7,502

$
7,420

$
7,663

$
7,502

Additional charge on securities for which OTTI was not previously recognized

57


63

Additional charge on securities for which OTTI was previously recognized1

283

26

401

Securities matured or sold during the period
(7,308
)

(7,308
)

Amortization of credit component of OTTI
(194
)
(38
)
(381
)
(244
)
Balance, end of period
$

$
7,722

$

$
7,722

                    
1 
For the three months ended September 30, 2018 and 2017, securities previously impaired represent all securities that were impaired prior to July 1, 2018 and 2017, respectively. For the nine months ended September 30, 2018 and 2017, securities previously impaired represent all securities that were impaired prior to January 1, 2018 and 2017, respectively.
     
As of September 30, 2018, 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 held-to-maturity 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.


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, 2018 and December 31, 2017, the FHLBank had advances outstanding at interest rates ranging from 0.88 percent to 7.41 percent and 0.66 percent to 7.41 percent, respectively. Table 4.1 presents advances summarized by redemption term as of September 30, 2018 and December 31, 2017 (dollar amounts in thousands): 

Table 4.1
 
09/30/2018
12/31/2017
Redemption Term
Amount
Weighted Average Interest Rate
Amount
Weighted Average Interest Rate
Due in one year or less
$
15,487,855

2.30
%
$
14,374,744

1.55
%
Due after one year through two years
5,205,068

2.26

1,219,842

1.73

Due after two years through three years
1,603,064

2.36

1,075,287

2.01

Due after three years through four years
2,145,575

2.40

971,634

2.16

Due after four years through five years
1,447,631

2.41

918,277

1.96

Thereafter
2,694,264

2.47

7,765,440

1.74

Total par value
28,583,457

2.33
%
26,325,224

1.67
%
Discounts
(4,353
)
 
(8,111
)
 
Hedging adjustments
(107,395
)
 
(21,264
)
 
TOTAL
$
28,471,709

 
$
26,295,849

 


23


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).

Convertible advances allow the FHLBank to convert an advance from one interest payment term structure to another. When issuing convertible advances, the FHLBank purchases 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.

Table 4.2 presents advances summarized by redemption term or next call date (for callable advances) and by redemption term or next conversion date (for convertible advances) as of September 30, 2018 and December 31, 2017 (in thousands):

Table 4.2
 
Redemption Term
or Next Call Date
Redemption Term
or Next Conversion Date
Redemption Term
09/30/2018
12/31/2017
09/30/2018
12/31/2017
Due in one year or less
$
23,290,093

$
21,375,728

$
15,673,755

$
14,450,744

Due after one year through two years
1,103,585

881,835

5,407,168

1,342,342

Due after two years through three years
1,223,360

897,151

1,789,664

1,186,087

Due after three years through four years
594,381

790,641

2,396,575

1,083,984

Due after four years through five years
469,990

522,768

1,593,881

1,174,277

Thereafter
1,902,048

1,857,101

1,722,414

7,087,790

TOTAL PAR VALUE
$
28,583,457

$
26,325,224

$
28,583,457

$
26,325,224

Interest Rate Payment Terms:  Table 4.3 details additional interest rate payment terms for advances as of September 30, 2018 and December 31, 2017 (in thousands):

Table 4.3
 
09/30/2018
12/31/2017
Fixed rate:
 
 
Due in one year or less
$
2,112,548

$
2,079,061

Due after one year
5,310,850

4,957,303

Total fixed rate
7,423,398

7,036,364

Variable rate:
 

 

Due in one year or less
13,375,307

12,295,683

Due after one year
7,784,752

6,993,177

Total variable rate
21,160,059

19,288,860

TOTAL PAR VALUE
$
28,583,457

$
26,325,224


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 participating financial institutions (PFIs). These mortgage loans are government-guaranteed or -insured loans (by the Federal Housing Administration, the Department of Veterans Affairs, the Rural Housing Service of the Department of Agriculture and/or the Department of Housing and Urban Development) and conventional residential loans credit-enhanced by PFIs. 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.


24


Mortgage Loans Held for Portfolio: Table 5.1 presents information as of September 30, 2018 and December 31, 2017 on mortgage loans held for portfolio (in thousands):

Table 5.1
 
09/30/2018
12/31/2017
Real estate:
 
 
Fixed rate, medium-term1, single-family mortgages
$
1,197,658

$
1,273,893

Fixed rate, long-term, single-family mortgages
6,798,929

5,900,863

Total unpaid principal balance
7,996,587

7,174,756

Premiums
117,989

109,898

Discounts
(2,801
)
(2,380
)
Deferred loan costs, net
233

280

Other deferred fees
(51
)
(60
)
Hedging adjustments
2,919

5,111

Total before Allowance for Credit Losses on Mortgage Loans
8,114,876

7,287,605

Allowance for Credit Losses on Mortgage Loans
(656
)
(1,208
)
MORTGAGE LOANS HELD FOR PORTFOLIO, NET
$
8,114,220

$
7,286,397

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

Table 5.2 presents information as of September 30, 2018 and December 31, 2017 on the outstanding unpaid principal balance (UPB) of mortgage loans held for portfolio (in thousands):

Table 5.2
 
09/30/2018
12/31/2017
Conventional loans
$
7,315,733

$
6,477,696

Government-guaranteed or -insured loans
680,854

697,060

TOTAL UNPAID PRINCIPAL BALANCE
$
7,996,587

$
7,174,756


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. Based on management's analyses of each portfolio segment, the FHLBank has only established an allowance for credit losses on its conventional mortgage loans held for portfolio.


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, 2018 and 2017 (in thousands):

Table 6.1
 
Three Months Ended
Nine Months Ended
 
09/30/2018
09/30/2017
09/30/2018
09/30/2017
Balance, beginning of the period
$
1,029

$
1,525

$
1,208

$
1,674

Net (charge-offs) recoveries
18

54

(207
)
(70
)
(Reversal) provision for credit losses
(391
)
(171
)
(345
)
(196
)
Balance, end of the period
$
656

$
1,408

$
656

$
1,408


Table 6.2 presents the allowance for credit losses and the recorded investment 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, 2018 (in thousands). 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.

Table 6.2
 
09/30/2018
 
Conventional
Loans
Government
Loans
Credit
Products1
Direct
Financing
Lease
Receivable
Total
Allowance for credit losses:
 

 

 

 

 

Individually evaluated for impairment
$
37

$

$

$

$
37

Collectively evaluated for impairment
619




619

TOTAL ALLOWANCE FOR CREDIT LOSSES
$
656

$

$

$

$
656

Recorded investment:
 

 

 

 

 

Individually evaluated for impairment
$
9,904

$

$
28,514,148

$
12,718

$
28,536,770

Collectively evaluated for impairment
7,450,722

693,567



8,144,289

TOTAL RECORDED INVESTMENT
$
7,460,626

$
693,567

$
28,514,148

$
12,718

$
36,681,059

                   
1 
The recorded investment for credit products includes only advances. The recorded investment for all other credit products is insignificant.


26


Table 6.3 presents the allowance for credit losses and the recorded investment 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, 2017 (in thousands):

Table 6.3

 
09/30/2017
 
Conventional
Loans
Government
Loans
Credit
Products
1
Direct
Financing
Lease
Receivable
Total
Allowance for credit losses:
 

 

 

 

 

Individually evaluated for impairment
$
39

$

$

$

$
39

Collectively evaluated for impairment
1,369




1,369

TOTAL ALLOWANCE FOR CREDIT LOSSES
$
1,408

$

$

$

$
1,408

Recorded investment:
 

 

 

 

 
Individually evaluated for impairment
$
9,655

$

$
28,350,505

$
15,487

$
28,375,647

Collectively evaluated for impairment
6,388,094

692,447



7,080,541

TOTAL RECORDED INVESTMENT
$
6,397,749

$
692,447

$
28,350,505

$
15,487

$
35,456,188

                   
1 
The recorded investment for credit products includes only advances. The recorded investment for all other credit products is insignificant.

Credit Quality Indicators: The FHLBank’s key credit quality indicators include the migration of: (1) past due loans; (2) non-accrual loans; (3) loans in process of foreclosure; and (4) impaired loans, all of which are used either on an individual or pool basis to determine the allowance for credit losses.


27


Table 6.4 summarizes the delinquency aging and key credit quality indicators for all of the FHLBank’s portfolio segments as of September 30, 2018 (dollar amounts in thousands):

Table 6.4
 
09/30/2018
 
Conventional
Loans
Government
Loans
Credit
Products1
Direct
Financing
Lease
Receivable
Total
Recorded investment:
 
 
 
 
 
Past due 30-59 days delinquent
$
34,199

$
16,340

$

$

$
50,539

Past due 60-89 days delinquent
7,950

5,183



13,133

Past due 90 days or more delinquent
9,958

5,820



15,778

Total past due
52,107

27,343



79,450

Total current loans
7,408,519

666,224

28,514,148

12,718

36,601,609

Total recorded investment
$
7,460,626

$
693,567

$
28,514,148

$
12,718

$
36,681,059

 
 
 
 
 
 
Other delinquency statistics:
 

 

 

 

 

In process of foreclosure, included above2
$
4,150

$
2,396

$

$

$
6,546

Serious delinquency rate3
0.1
%
0.8
%
%
%
%
Past due 90 days or more and still accruing interest
$

$
5,820

$

$

$
5,820

Loans on non-accrual status4
$
13,417

$

$

$

$
13,417

                   
1 
The recorded investment for credit products includes only advances. The recorded investment for all other credit products is insignificant.
2 
Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported. Loans in process of foreclosure are included in past due or current loans dependent on their delinquency status.
3 
Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total recorded investment for the portfolio class.
4 
Loans on non-accrual status include $1,306,000 of troubled debt restructurings. Troubled debt restructurings are restructurings in which the FHLBank, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider.


28


Table 6.5 summarizes the key credit quality indicators for all of the FHLBank’s portfolio segments as of December 31, 2017 (dollar amounts in thousands):

Table 6.5
 
12/31/2017
 
Conventional
Loans
Government
Loans
Credit
Products1
Direct
Financing
Lease
Receivable
Total