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EX-32 - EXHIBIT 32 - Federal Home Loan Bank of Topekaex3311532.htm
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EXCEL - IDEA: XBRL DOCUMENT - Federal Home Loan Bank of TopekaFinancial_Report.xls
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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
May 5, 2015
Class A Stock, par value $100 per share
1,909,455
Class B Stock, par value $100 per share
10,927,914




.FEDERAL HOME LOAN BANK OF TOPEKA
TABLE OF CONTENTS
 
 
 
PART I 
Item 1. 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
Legislative and Regulatory Developments
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 the 12 Federal Home Loan Banks, including the FHLBank Topeka.

The information contained in this quarterly report is accurate only as of the date of this quarterly report and as of the dates specified herein.

The product and service names used in this quarterly report are the property of the FHLBank, and in some cases, the other FHLBanks. Where the context suggests otherwise, the products, services and company names mentioned in this quarterly report are the property of their respective owners.

Special Cautionary Notice Regarding Forward-looking Statements

The information contained in this Form 10-Q contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include statements describing the objectives, projections, estimates or future predictions of the FHLBank’s operations. These statements may be identified by the use of forward-looking terminology such as “anticipates,” “believes,” “may,” “is likely,” “could,” “estimate,” “expect,” “will,” “intend,” “probable,” “project,” “should,” or their negatives or other variations of these terms. The FHLBank cautions that by their nature forward-looking statements involve 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 new 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)
 
 
 
03/31/2015
12/31/2014
ASSETS
 
 
Cash and due from banks
$
878,484

$
2,545,311

Interest-bearing deposits
1,660

1,163

Securities purchased under agreements to resell (Note 10)
2,350,000

1,225,000

Federal funds sold
2,130,000

2,075,000

 
 
 
Investment securities:
 
 
Trading securities (Note 3)
1,806,094

1,462,049

Held-to-maturity securities1 (Note 3)
5,291,092

4,857,187

Total investment securities
7,097,186

6,319,236

 
 
 
Advances (Notes 4, 6)
21,265,329

18,302,950

 
 
 
Mortgage loans held for portfolio, net:
 
 
Mortgage loans held for portfolio (Notes 5, 6)
6,287,702

6,234,722

Less allowance for credit losses on mortgage loans (Note 6)
(3,337
)
(4,550
)
Mortgage loans held for portfolio, net
6,284,365

6,230,172

 
 
 
Accrued interest receivable
64,042

70,923

Premises, software and equipment, net
8,929

10,439

Derivative assets, net (Notes 7, 10)
46,037

32,983

Other assets
38,847

40,800

 
 
 
TOTAL ASSETS
$
40,164,879

$
36,853,977

 
 
 
LIABILITIES
 
 
Deposits (Note 8)
$
744,616

$
595,775

 
 
 
Consolidated obligations, net:
 
 
Discount notes (Note 9)
17,757,801

14,219,612

Bonds (Note 9)
19,383,225

20,221,002

Total consolidated obligations, net
37,141,026

34,440,614

 
 
 
Mandatorily redeemable capital stock (Note 11)
4,545

4,187

Accrued interest payable
68,486

58,243

Affordable Housing Program payable
31,544

30,863

Derivative liabilities, net (Notes 7, 10)
22,498

35,292

Other liabilities
424,948

103,736

 
 
 
TOTAL LIABILITIES
38,437,663

35,268,710

 
 
 
Commitments and contingencies (Note 14)


 
 
 

1    Fair value: $5,301,332 and $4,869,042 as of March 31, 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)
 
 
 
03/31/2015
12/31/2014
CAPITAL
 
 
Capital stock outstanding - putable:
 
 
Class A ($100 par value; 1,742 and 2,083 shares issued and outstanding) (Note 11)
$
174,223

$
208,273

Class B ($100 par value; 9,241 and 7,657 shares issued and outstanding) (Note 11)
924,096

765,768

Total capital stock
1,098,319

974,041

 
 
 
Retained earnings:
 
 
Unrestricted
564,399

554,189

Restricted
79,168

72,944

Total retained earnings
643,567

627,133

 
 
 
Accumulated other comprehensive income (loss) (Note 12)
(14,670
)
(15,907
)
 
 
 
TOTAL CAPITAL
1,727,216

1,585,267

 
 
 
TOTAL LIABILITIES AND CAPITAL
$
40,164,879

$
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
 
03/31/2015
03/31/2014
INTEREST INCOME:
 
 
Interest-bearing deposits
$
54

$
37

Securities purchased under agreements to resell
565

14

Federal funds sold
659

249

Trading securities
12,362

13,036

Held-to-maturity securities
10,059

12,311

Advances
31,751

28,788

Prepayment fees on terminated advances
756

275

Mortgage loans held for portfolio
52,016

50,761

Other
352

390

Total interest income
108,574

105,861

 
 
 
INTEREST EXPENSE:
 
 
Deposits
164

238

Consolidated obligations:
 
 
Discount notes
3,502

1,844

Bonds
48,225

49,240

Mandatorily redeemable capital stock (Note 11)
11

4

Other
58

41

Total interest expense
51,960

51,367

 
 
 
NET INTEREST INCOME
56,614

54,494

(Reversal) provision for credit losses on mortgage loans (Note 6)
(802
)
295

NET INTEREST INCOME AFTER LOAN LOSS (REVERSAL) PROVISION
57,416

54,199

 
 
 
OTHER INCOME (LOSS):
 
 
Net amount of impairment losses on held-to-maturity securities reclassified to/(from) accumulated other comprehensive income (loss)
(187
)
(361
)
Net other-than-temporary impairment losses on held-to-maturity securities (Note 3)
(187
)
(361
)
Net gain (loss) on trading securities (Note 3)
(5,844
)
(5,334
)
Net gain (loss) on derivatives and hedging activities (Note 7)
(5,963
)
(13,979
)
Standby bond purchase agreement commitment fees
1,481

1,556

Letters of credit fees
789

785

Other
508

660

Total other income (loss)
(9,216
)
(16,673
)
 
 
 

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
 
03/31/2015
03/31/2014
OTHER EXPENSES:
 
 
Compensation and benefits
$
8,029

$
7,141

Other operating
3,611

3,479

Federal Housing Finance Agency
615

727

Office of Finance
578

539

Other
787

898

Total other expenses
13,620

12,784

 
 
 
INCOME BEFORE ASSESSMENTS
34,580

24,742

 
 
 
Affordable Housing Program
3,459

2,475

 
 
 
NET INCOME
$
31,121

$
22,267



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
 
03/31/2015
03/31/2014
Net income
$
31,121

$
22,267

 
 
 
Other comprehensive income:
 
 
Net non-credit portion of other-than-temporary impairment losses on held-to-maturity securities:
 
 
Reclassification of non-credit portion included in net income
187

361

Accretion of non-credit portion
952

805

Total net non-credit portion of other-than-temporary impairment losses on held-to-maturity securities
1,139

1,166

 
 
 
Defined benefit pension plan:
 
 
Amortization of net loss
98

45

Total defined benefit pension plan
98

45

 
 
 
Total other comprehensive income
1,237

1,211

 
 
 
TOTAL COMPREHENSIVE INCOME
$
32,358

$
23,478

 


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
2

237

609

60,868

611

61,105

 
 
 
 
61,105

Repurchase/redemption of capital stock
(817
)
(81,746
)
(24
)
(2,353
)
(841
)
(84,099
)
 
 
 
 
(84,099
)
Comprehensive income
 
 
 
 
 
 
17,813

4,454

22,267

1,211

23,478

Net reclassification of shares to mandatorily redeemable capital stock
(44
)
(4,412
)
(671
)
(67,129
)
(715
)
(71,541
)
 
 
 
 
(71,541
)
Net transfer of shares between Class A and Class B
665

66,447

(665
)
(66,447
)


 
 
 
 

Dividends on capital stock (Class A - 0.3%, Class B - 4.0%):
 
 
 
 
 
 
 
 
 
 
 
Cash payment
 
 
 
 
 
 
(79
)
 
(79
)
 
(79
)
Stock issued
 
 
81

8,095

81

8,095

(8,095
)
 
(8,095
)
 

Balance at March 31, 2014
4,106

$
410,589

7,552

$
755,220

11,658

$
1,165,809

$
525,228

$
56,197

$
581,425

$
(17,150
)
$
1,730,084

 
 
 
 
 
 
 
 
 
 
 
 
 
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


3,356

335,643

3,356

335,643

 
 
 
 
335,643

Repurchase/redemption of capital stock
(1,164
)
(116,437
)
(15
)
(1,518
)
(1,179
)
(117,955
)
 
 
 
 
(117,955
)
Comprehensive income
 
 
 
 




24,897

6,224

31,121

1,237

32,358

Net reclassification of shares to mandatorily redeemable capital stock
(16
)
(1,574
)
(1,064
)
(106,449
)
(1,080
)
(108,023
)
 
 
 
 
(108,023
)
Net transfer of shares between Class A and Class B
839

83,961

(839
)
(83,961
)


 
 
 
 

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




 
 
 
 
 

Cash payment
 
 
 
 




(74
)
 
(74
)
 
(74
)
Stock issued
 
 
146

14,613

146

14,613

(14,613
)
 
(14,613
)
 

Balance at March 31, 2015
1,742
$
174,223

9,241
$
924,096

10,983
$
1,098,319

$
564,399

$
79,168

$
643,567

$
(14,670
)
$
1,727,216

                   
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)
 
 
 
Three Months Ended
 
03/31/2015
03/31/2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
Net income
$
31,121

$
22,267

Adjustments to reconcile income (loss) to net cash provided by (used in) operating activities:
 
 
Depreciation and amortization:
 
 
Premiums and discounts on consolidated obligations, net
(3,810
)
(6,332
)
Concessions on consolidated obligations
1,831

1,627

Premiums and discounts on investments, net
75

(195
)
Premiums, discounts and commitment fees on advances, net
(2,687
)
(3,507
)
Premiums, discounts and deferred loan costs on mortgage loans, net
4,207

3,219

Fair value adjustments on hedged assets or liabilities
2,558

3,296

Premises, software and equipment
550

466

Other
98

45

(Reversal) provision for credit losses on mortgage loans
(802
)
295

Non-cash interest on mandatorily redeemable capital stock
10

4

Net other-than-temporary impairment losses on held-to-maturity securities
187

361

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

Other adjustments
344

(2
)
Net (gain) loss on trading securities
5,844

5,334

(Gain) loss due to change in net fair value adjustment on derivative and hedging activities
19,493

28,366

(Increase) decrease in accrued interest receivable
6,983

10,146

Change in net accrued interest included in derivative assets
(2,512
)
(1,745
)
(Increase) decrease in other assets
811

1,087

Increase (decrease) in accrued interest payable
10,243

8,882

Change in net accrued interest included in derivative liabilities
(12,797
)
(13,926
)
Increase (decrease) in Affordable Housing Program liability
681

1,202

Increase (decrease) in other liabilities
(3,852
)
(4,493
)
Total adjustments
27,449

34,130

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
58,570

56,397

 
 
 

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)
 
 
 
Three Months Ended
 
03/31/2015
03/31/2014
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
Net (increase) decrease in interest-bearing deposits
$
(12,471
)
$
39,290

Net (increase) decrease in securities purchased under resale agreements
(1,125,000
)
(1,000,000
)
Net (increase) decrease in Federal funds sold
(55,000
)
(640,000
)
Net (increase) decrease in short-term trading securities
(475,000
)
60,017

Proceeds from maturities of and principal repayments on long-term trading securities
125,111

528,725

Proceeds from maturities of and principal repayments on long-term held-to-maturity securities
348,981

226,484

Purchases of long-term held-to-maturity securities
(457,100
)

Principal collected on advances
21,244,909

11,157,299

Advances made
(24,189,916
)
(9,863,570
)
Principal collected on mortgage loans
216,541

158,825

Purchase of mortgage loans
(275,240
)
(198,858
)
Proceeds from sale of foreclosed assets
1,524

929

Principal collected on other loans made
551

515

Proceeds from sale of premises, software and equipment
22


Purchases of premises, software and equipment
(71
)
(396
)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
(4,652,159
)
469,260

 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
Net increase (decrease) in deposits
151,930

61,802

Net proceeds from issuance of consolidated obligations:
 
 
Discount notes
75,744,493

10,692,650

Bonds
2,863,629

2,448,995

Payments for maturing and retired consolidated obligations:
 
 
Discount notes
(72,206,340
)
(12,224,918
)
Bonds
(3,715,000
)
(2,764,000
)
Proceeds from financing derivatives
11


Net interest payments received (paid) for financing derivatives
(21,900
)
(21,807
)
Proceeds from issuance of capital stock
335,643

61,105

Payments for repurchase/redemption of capital stock
(117,955
)
(84,099
)
Payments for repurchase of mandatorily redeemable capital stock
(107,675
)
(71,668
)
Cash dividends paid
(74
)
(79
)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
2,926,762

(1,902,019
)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(1,666,827
)
(1,376,362
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
2,545,311

1,713,940

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
878,484

$
337,578

 
 
 
Supplemental disclosures:
 
 
Interest paid
$
49,747

$
82,755

 
 
 
Affordable Housing Program payments
$
2,815

$
1,360

 
 
 
Net transfers of mortgage loans to real estate owned
$
1,054

$
1,722


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



FEDERAL HOME LOAN BANK OF TOPEKA
Notes to Financial Statements - Unaudited
March 31, 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.

Reclassifications: The FHLBank identified a classification error in its previously reported Statements of Cash Flows for the three-month period ended March 31, 2014, contained in the previously filed Quarterly Report on Form 10-Q. The error overstated the Net Cash Provided by (Used in) Operating Activities and understated the Net Cash Provided by (Used in) Financing Activities by $13,734,000. The FHLBank determined that the error was not material to the previously issued Statements of Cash Flows. Accordingly, the classification error has been corrected in this Quarterly Report on Form 10-Q. The correction had no impact on the FHLBank’s financial condition or results of operations for any period.


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.


13


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.

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. This standard is effective for fiscal years beginning after December 15, 2016 (January 1, 2017 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 (January 1, 2015 for the FHLBank), with early adoption permitted. The guidance could be adopted using a modified retrospective transition method or a prospective transition method. The adoption of this amendment was prospective and did not have a material impact on the FHLBank's financial condition, results of operations, or cash flows.



14


NOTE 3INVESTMENT SECURITIES

Major Security Types: Trading and held-to-maturity securities as of March 31, 2015 are summarized in Table 3.1 (in thousands):

Table 3.1
 
03/31/2015
 
Trading
Held-to-maturity
 
Fair
Value
Amortized
Cost
OTTI
Recognized
in OCI
Carrying Value
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Non-mortgage-backed securities:
 
 
 
 
 
 
 
Certificates of deposit
$
474,999

$

$

$

$

$

$

U.S. Treasury obligations
25,006







GSE obligations1
1,176,703







State or local housing agency obligations

125,395


125,395

141

5,984

119,552

Non-mortgage-backed securities
1,676,708

125,395


125,395

141

5,984

119,552

Mortgage-backed securities:
 
 
 
 
 
 
 
U.S. obligation MBS2
911

54,965


54,965

109


55,074

GSE MBS3
128,475

4,892,457


4,892,457

23,035

10,544

4,904,948

Private-label residential MBS

228,099

10,571

217,528

8,874

6,897

219,505

Home equity loan ABS

811

64

747

1,506


2,253

Mortgage-backed securities
129,386

5,176,332

10,635

5,165,697

33,524

17,441

5,181,780

TOTAL
$
1,806,094

$
5,301,727

$
10,635

$
5,291,092

$
33,665

$
23,425

$
5,301,332

                   
1 
Represents debentures issued by other FHLBanks, Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal Farm Credit Bank (Farm Credit). GSE securities are not guaranteed by the U.S. government. Fannie Mae and Freddie Mac were placed into conservatorship by the Finance Agency on September 7, 2008 with the Finance Agency named as conservator.
2 
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.


15


Trading and held-to-maturity securities as of December 31, 2014 are summarized in Table 3.2 (in thousands):

Table 3.2
 
12/31/2014
 
Trading
Held-to-maturity
 
Fair
Value
Amortized
Cost
OTTI
Recognized
in OCI
Carrying Value
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Non-mortgage-backed securities:
 
 
 
 
 
 
 
U.S. Treasury obligations
$
25,016

$

$

$

$

$

$

GSE obligations1
1,299,979







State or local housing agency obligations

126,105


126,105

148

6,083

120,170

Non-mortgage-backed securities
1,324,995

126,105


126,105

148

6,083

120,170

Mortgage-backed securities:
 
 
 
 
 
 
 
U.S obligation MBS2
963

57,562


57,562

175


57,737

GSE MBS3
136,091

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
137,054

4,742,856

11,774

4,731,082

38,378

20,588

4,748,872

TOTAL
$
1,462,049

$
4,868,961

$
11,774

$
4,857,187

$
38,526

$
26,671

$
4,869,042

                    
1 
Represents debentures issued by other FHLBanks, Fannie Mae, Freddie Mac and Farm Credit. GSE securities are not guaranteed by the U.S. government. Fannie Mae and Freddie Mac were placed into conservatorship by the Finance Agency on September 7, 2008 with the Finance Agency named as conservator.
2 
Represents single-family MBS issued by 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.

Table 3.3 summarizes (in thousands) the held-to-maturity securities with unrealized losses as of March 31, 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 3.3
 
03/31/2015
 
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
$

$

$
37,581

$
5,984

$
37,581

$
5,984

Non-mortgage-backed securities


37,581

5,984

37,581

5,984

Mortgage-backed securities:
 
 
 
 
 
 
GSE MBS2
806,289

816

1,038,594

9,728

1,844,883

10,544

Private-label residential MBS
18,404

205

130,248

11,000

148,652

11,205

Mortgage-backed securities
824,693

1,021

1,168,842

20,728

1,993,535

21,749

TOTAL TEMPORARILY IMPAIRED SECURITIES
$
824,693

$
1,021

$
1,206,423

$
26,712

$
2,031,116

$
27,733

                    
1 
Total unrealized losses in Table 3.3 will not agree to total gross unrecognized losses in Table 3.1. Total unrealized losses in Table 3.3 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.


16


Table 3.4 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 3.4
 
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 3.4 will not agree to total gross unrecognized losses in Table 3.2. Total unrealized losses in Table 3.4 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.

Redemption Terms: The amortized cost, carrying value and fair values of held-to-maturity securities by contractual maturity as of March 31, 2015 and December 31, 2014 are shown in Table 3.5 (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 3.5
 
03/31/2015
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
17,210

17,210

17,092

17,920

17,920

17,779

Due after 10 years
108,185

108,185

102,460

108,185

108,185

102,391

Non-mortgage-backed securities
125,395

125,395

119,552

126,105

126,105

120,170

Mortgage-backed securities
5,176,332

5,165,697

5,181,780

4,742,856

4,731,082

4,748,872

TOTAL
$
5,301,727

$
5,291,092

$
5,301,332

$
4,868,961

$
4,857,187

$
4,869,042



17


Interest Rate Payment Terms: Table 3.6 details interest rate payment terms for the amortized cost of held-to-maturity securities as of March 31, 2015 and December 31, 2014 (in thousands):

Table 3.6
 
03/31/2015
12/31/2014
Non-mortgage-backed securities:
 
 
Fixed rate
$
9,335

$
9,335

Variable rate
116,060

116,770

Non-mortgage-backed securities
125,395

126,105

Mortgage-backed securities:
 
 
Pass-through securities:
 
 
Fixed rate
12

23

Variable rate
1,732,139

1,175,918

Collateralized mortgage obligations:
 
 
Fixed rate
401,642

423,333

Variable rate
3,042,539

3,143,582

Mortgage-backed securities
5,176,332

4,742,856

TOTAL
$
5,301,727

$
4,868,961


Gains and Losses: Net gains (losses) on trading securities during the three months ended March 31, 2015 and 2014 are shown in Table 3.7 (in thousands):

Table 3.7
 
Three Months Ended
 
03/31/2015
03/31/2014
Net gains (losses) on trading securities held as of March 31, 2015
$
(5,831
)
$
(4,873
)
Net gains (losses) on trading securities sold or matured prior to March 31, 2015
(13
)
(461
)
NET GAIN (LOSS) ON TRADING SECURITIES
$
(5,844
)
$
(5,334
)


18


Other-than-temporary Impairment: For those securities for which an OTTI was determined to have occurred during the three months ended March 31, 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 3.8 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 3.8
Private-label Residential MBS
Year of Securitization
Significant Inputs
Current
Credit
Enhancements
Prepayment
Rates
Default
Rates
Loss
Severities
Prime:
 
 
 
 
2004 and prior
17.3
%
11.0
%
30.6
%
29.6
%
Total Prime
17.3

11.0

30.6

29.6

Alt-A:
 
 
 
 
2004 and prior
14.9

14.2

34.3

9.3

2005
16.0

12.9

38.7

1.6

Total Alt-A
15.8

13.1

37.8

3.1

TOTAL
15.8
%
13.1
%
37.8
%
3.2
%
 
 
 
 
 
Home Equity Loan ABS
Year of Securitization
Significant Inputs
Current
Credit
Enhancements
Prepayment
Rates
Default
Rates
Loss
Severities
Subprime:
 
 
 
 
2004 and prior
3.7
%
5.4
%
82.7
%
4.8
%

For the 26 outstanding private-label securities with OTTI during the lives of the securities, the FHLBank’s reported balances as of March 31, 2015 are presented in Table 3.9 (in thousands):

Table 3.9
 
03/31/2015
 
Unpaid
Principal
Balance
Amortized
Cost
Carrying
Value
Fair
Value
Private-label residential MBS:
 
 
 
 
Prime
$
12,092

$
11,347

$
10,344

$
11,365

Alt-A
53,769

48,261

38,693

45,509

Total private-label residential MBS
65,861

59,608

49,037

56,874

Home equity loan ABS:
 

 

 

 

Subprime
2,642

811

747

2,253

TOTAL
$
68,503

$
60,419

$
49,784

$
59,127



19


Table 3.10 presents a roll-forward of OTTI activity for the three months ended March 31, 2015 and 2014 related to credit losses recognized in earnings (in thousands):

Table 3.10
 
Three Months Ended
 
03/31/2015
03/31/2014
Balance, beginning of period
$
9,406

$
9,917

Additional charge on securities for which OTTI was previously recognized1
187

361

Amortization of credit component of OTTI2
(226
)
(383
)
Balance, end of period
$
9,367

$
9,895

                    
1 
For the three months ended March 31, 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 March 31, 2015, the fair value of a portion of the FHLBank's held-to-maturity MBS portfolio was 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 held-to-maturity securities in unrecognized loss positions and neither intends to sell these securities nor is it more likely than not that the FHLBank will be required to sell these securities before its anticipated recovery of the remaining amortized cost basis. 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.


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 March 31, 2015 and December 31, 2014, the FHLBank had advances outstanding at interest rates ranging from 0.15 percent to 8.01 percent and 0.11 percent to 8.01 percent, respectively. Table 4.1 presents advances summarized by year of contractual maturity as of March 31, 2015 and December 31, 2014 (in thousands): 

Table 4.1
 
03/31/2015
12/31/2014
Year of Contractual Maturity
Amount
Weighted Average Interest Rate
Amount
Weighted Average Interest Rate
Due in one year or less
$
9,500,829

0.54
%
$
6,996,975

0.59
%
Due after one year through two years
1,311,509

1.95

1,513,363

2.14

Due after two years through three years
2,527,074

2.56

2,345,877

2.58

Due after three years through four years
1,347,952

1.77

1,501,614

2.16

Due after four years through five years
681,220

2.01

843,465

1.48

Thereafter
5,717,702

1.14

4,939,587

1.21

Total par value
21,086,286

1.16
%
18,140,881

1.32
%
Discounts
(21,755
)
 
(24,043
)
 
Hedging adjustments
200,798

 
186,112

 
TOTAL
$
21,265,329

 
$
18,302,950

 


20


The FHLBank’s advances outstanding include advances that contain call options that may be exercised with or without prepayment fees at the borrower’s discretion on specific dates (call dates) before the stated advance maturities (callable advances). In exchange for receiving the right to call the advance on a predetermined call schedule, the borrower may pay a higher fixed rate for the advance relative to an equivalent maturity, non-callable, fixed rate advance. The borrower normally exercises its call options on these advances when interest rates decline (fixed rate advances) or spreads change (adjustable rate advances). The FHLBank’s advances as of March 31, 2015 and December 31, 2014 include callable advances totaling $5,298,463,000 and $4,825,254,000, respectively. Of these callable advances, there were $5,181,078,000 and $4,697,045,000 of variable rate advances as of March 31, 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 March 31, 2015 and December 31, 2014, the FHLBank had convertible advances outstanding totaling $1,554,542,000 and $1,586,242,000, respectively.

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 March 31, 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
03/31/2015
12/31/2014
03/31/2015
12/31/2014
Due in one year or less
$
14,451,299

$
11,526,757

$
10,879,371

$
8,411,617

Due after one year through two years
1,159,997

1,288,157

1,144,209

1,396,863

Due after two years through three years
2,024,859

1,898,273

1,530,332

1,415,935

Due after three years through four years
870,822

1,136,649

1,244,952

1,232,414

Due after four years through five years
653,937

587,884

698,220

905,965

Thereafter
1,925,372

1,703,161

5,589,202

4,778,087

TOTAL PAR VALUE
$
21,086,286

$
18,140,881

$
21,086,286

$
18,140,881


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

Table 4.3
 
03/31/2015
12/31/2014
Fixed rate:
 
 
Due in one year or less
$
1,587,728

$
1,379,428

Due after one year
6,635,404

6,594,886

Total fixed rate
8,223,132

7,974,314

Variable rate:
 

 

Due in one year or less
7,913,101

5,617,547

Due after one year
4,950,053

4,549,020

Total variable rate
12,863,154

10,166,567

TOTAL PAR VALUE
$
21,086,286

$
18,140,881


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



21


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.

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

Table 5.1
 
03/31/2015
12/31/2014
Real estate:
 
 
Fixed rate, medium-term1, single-family mortgages
$
1,526,966

$
1,531,229

Fixed rate, long-term, single-family mortgages
4,653,343

4,596,914

Total unpaid principal balance
6,180,309

6,128,143

Premiums
101,040

100,353

Discounts
(2,873
)
(3,008
)
Deferred loan costs, net
776

830

Other deferred fees
(156
)
(168
)
Hedging adjustments
8,606

8,572

Total before Allowance for Credit Losses on Mortgage Loans
6,287,702

6,234,722

Allowance for Credit Losses on Mortgage Loans
(3,337
)
(4,550
)
MORTGAGE LOANS HELD FOR PORTFOLIO, NET
$
6,284,365

$
6,230,172

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

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

Table 5.2
 
03/31/2015
12/31/2014
Conventional loans
$
5,555,320

$
5,497,001

Government-guaranteed or insured loans
624,989

631,142

TOTAL UNPAID PRINCIPAL BALANCE
$
6,180,309

$
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.


22


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. The FHLBank’s management believes that these policies effectively manage the FHLBank’s credit risk from credit products.

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 March 31, 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 March 31, 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 March 31, 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, none of these mortgage loans have been placed on non-accrual status 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.


23


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.

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.

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 March 31, 2015 and December 31, 2014, and all such investments acquired during the years ended March 31, 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 March 31, 2015 and December 31, 2014, and all such investments acquired during the years ended March 31, 2015 and December 31, 2014 were repaid according to their contractual terms.


24


Roll-forward of Allowance for Credit Losses: Table 6.1 presents a roll-forward of the allowance for credit losses for the three months ended March 31, 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 March 31, 2015 (in thousands):

Table 6.1
 
03/31/2015
 
Conventional
Loans
Government
Loans
Credit
Products1
Direct
Financing
Lease
Receivable
Total
Allowance for credit losses:
 
 
 
 
 
Balance, beginning of three-month period
$
4,550

$

$

$

$
4,550

Net charge-offs
(411
)



(411
)
(Reversal) provision for credit losses
(802
)



(802
)
Balance, end of three-month period
$
3,337

$

$

$

$
3,337

 
 
 
 
 
 
Allowance for credit losses, end of period:
 

 

 

 

 

Individually evaluated for impairment
$
23

$

$

$

$
23

Collectively evaluated for impairment
$
3,314

$

$

$

$
3,314

 
 
 
 
 
 
Recorded investment2, end of period:
 

 

 

 

 

Individually evaluated for impairment:
 
 
 
 


Impaired with or without a related allowance
$
15,124

$

$

$

$
15,124

Not impaired, no related allowance


21,286,420

21,459

21,307,879

Total individually evaluated for impairment
15,124


21,286,420

21,459

21,323,003

Collectively evaluated for impairment
5,661,184

642,079



6,303,263

Total
$
5,676,308

$
642,079

$
21,286,420

$
21,459

$
27,626,266

                   
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.



25


Table 6.2 presents a roll-forward of the allowance for credit losses for the year ended March 31, 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 March 31, 2014 (in thousands):

Table 6.2
 
03/31/2014
 
Conventional
Loans
Government
Loans
Credit
Products1
Direct
Financing
Lease
Receivable
Total
Allowance for credit losses:
 
 
 
 
 
Balance, beginning of three-month period
$
6,748

$

$

$

$
6,748

Net charge-offs
(166
)



(166
)
Provision for credit losses
295




295

Balance, end of three-month period
$
6,877

$

$

$

$
6,877

 
 
 
 
 
 
Allowance for credit losses, end of period:
 

 

 

 

 

Individually evaluated for impairment
$

$

$

$

$

Collectively evaluated for impairment
$
6,877

$

$

$

$
6,877

 
 
 
 
 
 
Recorded investment2, end of period:
 

 

 

 



Individually evaluated for impairment3
$

$

$
16,133,586

$
23,022

$
16,156,608

Collectively evaluated for impairment
5,358,439

662,237



6,020,676

Total
$
5,358,439

$
662,237

$
16,133,586

$
23,022

$
22,177,284

                   
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.
3 
No financing receivables individually evaluated for impairment were determined to be impaired.


26


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.

Table 6.3 summarizes the delinquency aging and key credit quality indicators for all of the FHLBank’s portfolio segments as of March 31, 2015 (dollar amounts in thousands):

Table 6.3
 
03/31/2015
 
Conventional
Loans
Government
Loans
Credit
Products1
Direct
Financing
Lease
Receivable
Total
Recorded investment2:
 
 
 
 
 
Past due 30-59 days delinquent
$
31,174

$
18,877

$

$

$
50,051

Past due 60-89 days delinquent
8,252

4,441



12,693

Past due 90 days or more delinquent
15,298

6,455



21,753

Total past due
54,724

29,773



84,497

Total current loans
5,621,584

612,306

21,286,420

21,459

27,541,769

Total recorded investment
$
5,676,308

$
642,079

$
21,286,420

$
21,459

$
27,626,266

 
 
 
 
 
 
Other delinquency statistics:
 

 

 

 

 

In process of foreclosure, included above3
$
5,498

$
3,493

$

$

$
8,991

Serious delinquency rate4
0.3
%
1.0
%
%
%
0.1
%
Past due 90 days or more and still accruing interest
$

$
6,455

$

$

$
6,455

Loans on non-accrual status5
$
19,558

$

$

$

$
19,558

                   
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.
3 
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.
4 
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.
5 
Loans on non-accrual status include $1,547,000 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.


27


Table 6.4 summarizes the key credit quality indicators for the FHLBank’s mortgage loans as of December 31, 2014 (dollar amounts in thousands):

Table 6.4
 
12/31/2014
 
Conventional
Loans
Government
Loans
Credit
Products1
Direct
Financing
Lease
Receivable
Total
Recorded investment2:
 
 
 
 
 
Past due 30-59 days delinquent
$
36,985

$
22,762

$

$

$
59,747

Past due 60-89 days delinquent
8,191

6,383



14,574

Past due 90 days or more delinquent
15,921

6,723



22,644

Total past due
61,097

35,868



96,965

Total current loans
5,556,184

612,624

18,323,374

21,415

24,513,597

Total recorded investment
$
5,617,281

$
648,492

$
18,323,374

$
21,415

$
24,610,562

 
 
 
 
 
 
Other delinquency statistics:
 

 

 

 

 

In process of foreclosure, included above3
$
6,231

$
3,088

$

$

$
9,319

Serious delinquency rate4
0.3
%
1.0
%
%
%
0.1
%
Past due 90 days or more and still accruing interest
$

$
6,723

$

$

$
6,723

Loans on non-accrual status5
$
20,157

$

$

$

$
20,157

                   
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.
3 
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.
4 
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.
5 
Loans on non-accrual status include $1,522,000 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.

Individually Evaluated Impaired Loans: Table 6.5 presents the recorded investment, UPB, and related allowance of impaired loans individually assessed for impairment as of March 31, 2015 (dollar amounts in thousands):

Table 6.5
 
03/31/15
 
Recorded Investment
Unpaid Principal Balance
Related Allowance
With no related allowance
$
14,942

$
14,879

$

With an allowance
182

179

23

TOTAL
$
15,124

$
15,058

$
23



28


Table 6.6 presents the average recorded investment and related interest income recognized on these individually evaluated impaired loans during the three months ended March 31, 2015 (dollar amounts in thousands):

Table 6.6
 
Three months ended March 31,
 
2015
 
Average Recorded Investment
Interest Income Recognized
With no related allowance
$
14,946

$
88

With an allowance
183


TOTAL
$
15,129

$
88


The FHLBank had $4,437,000 and $4,628,000 classified as REO recorded in other assets as of March 31, 2015 and December 31, 2014, respectively.


NOTE 7DERIVATIVES AND HEDGING ACTIVITIES

Table 7.1 represents outstanding notional balances and fair values (includes net accrued interest receivable or payable on the derivatives) of the derivatives outstanding by type of derivative and by hedge designation as of March 31, 2015 and December 31, 2014 (in thousands):

Table 7.1
 
03/31/2015
12/31/2014
 
Notional
Amount
Derivative
Assets
Derivative
Liabilities
Notional
Amount
Derivative
Assets
Derivative
Liabilities
Derivatives designated as hedging instruments:
 

 

 

 

 

 

Interest rate swaps
$
11,080,107

$
96,022

$
200,223

$
11,605,502

$
89,100

$
198,181

Interest rate caps/floors
137,000


640

187,000


956

Total derivatives designated as hedging relationships
11,217,107

96,022

200,863

11,792,502

89,100

199,137

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Interest rate swaps
2,431,820

1,116

69,961

2,416,820

1,402

83,507

Interest rate caps/floors
3,759,800

8,114

25

4,090,800

9,984

36

Mortgage delivery commitments
108,829

524

17

53,004

146

8

Total derivatives not designated as hedging instruments
6,300,449

9,754

70,003

6,560,624

11,532

83,551

TOTAL
$
17,517,556

105,776

270,866

$
18,353,126

100,632

282,688

Netting adjustments and cash collateral1
 
(59,739
)
(248,368
)
 
(67,649
)
(247,396
)
DERIVATIVE ASSETS AND LIABILITIES
 
$
46,037

$
22,498

 
$
32,983

$
35,292

                   
1 
Amounts represent the application of the netting requirements that allow the FHLBank to settle positive and negative positions and also cash collateral, including initial or variation margin, and related accrued interest held or placed with the same clearing agent and/or derivative counterparty. Cash collateral posted was $221,135,000 and $209,164,000 as of March 31, 2015 and December 31, 2014, respectively. Cash collateral received was $32,506,000 and $29,417,000 as of March 31, 2015 and December 31, 2014, respectively.

The following tables provide information regarding gains and losses on derivatives and hedging activities by type of hedge and type of derivative and gains and losses by hedged item for fair value hedges.


29


For the three months ended March 31, 2015 and 2014, the FHLBank recorded net gain (loss) on derivatives and hedging activities as presented in Table 7.2 (in thousands):

Table 7.2
 
Three Months Ended
 
03/31/2015
03/31/2014
Derivatives designated as hedging instruments:
 
 
Interest rate swaps
$
(833
)
$
(1,255
)
Total net gain (loss) related to fair value hedge ineffectiveness
(833
)
(1,255
)
Derivatives not designated as hedging instruments:
 
 
Economic hedges:
 
 
Interest rate swaps
5,556

8,495

Interest rate caps/floors
(1,859
)
(12,126
)
Net interest settlements
(9,551
)
(9,903
)
Mortgage delivery commitments
724

810

Total net gain (loss) related to derivatives not designated as hedging instruments
(5,130
)
(12,724
)
NET GAIN (LOSS) ON DERIVATIVES AND HEDGING ACTIVITIES
$
(5,963
)
$
(13,979
)


The FHLBank carries derivative instruments at fair value on its Statements of Condition. Any change in the fair value of derivatives designated under a fair value hedging relationship is recorded each period in current period earnings. Fair value hedge accounting allows for the offsetting fair value of the hedged risk in the hedged item to also be recorded in current period earnings. For the three months ended March 31, 2015 and 2014, the FHLBank recorded net gain (loss) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the FHLBank’s net interest income as presented in Table 7.3 (in thousands):

Table 7.3
 
Three Months Ended
 
03/31/2015
03/31/2014
 
Gain (Loss) on Derivatives
Gain (Loss) on Hedged Items
Net Fair Value Hedge Ineffectiveness
Effect of Derivatives on Net Interest Income1
Gain (Loss) on Derivatives
Gain (Loss) on Hedged Items
Net Fair Value Hedge Ineffectiveness
Effect of Derivatives on Net Interest Income1
Advances
$
(17,985
)
$
17,654

$
(331
)
$
(32,918
)
$
18,917

$
(18,589
)
$
328

$
(35,869
)
Consolidated obligation bonds
15,985

(16,623
)
(638
)
21,149

27,060

(28,643
)
$
(1,583
)
21,450

Consolidated obligation discount notes
49

87

136

9





TOTAL
$
(1,951
)
$
1,118

$
(833
)
$
(11,760
)
$
45,977

$
(47,232
)
$
(1,255
)
$
(14,419
)
                   
1 
The differentials between accruals of interest receivables and payables on derivatives designated as fair value hedges as well as the amortization/accretion of hedging activities are recognized as adjustments to the interest income or expense of the designated underlying hedged item.


Based on credit analyses and collateral requirements, FHLBank management does not anticipate any credit losses on its derivative agreements. The maximum credit risk applicable to a single counterparty was $36,095,000 and $31,332,000 as of March 31, 2015 and December 31, 2014, respectively. The counterparty was the same each period.


30


Certain of the FHLBank’s bilateral derivative instruments contain provisions that require the FHLBank to post additional collateral with its counterparties if there is deterioration in the FHLBank’s credit rating. If the FHLBank’s credit rating is lowered by an NRSRO, the FHLBank may be required to deliver additional collateral on bilateral derivative instruments in net liability positions. The aggregate fair value of all bilateral derivative instruments with derivative counterparties containing credit-risk-related contingent features that were in a net derivative liability position (before cash collateral and related accrued interest) as of March 31, 2015 and December 31, 2014 was $33,995,000 and $50,791,000, respectively, for which the FHLBank has posted collateral with a fair value of $11,721,000 and $16,422,000, respectively, in the normal course of business. If the FHLBank’s credit rating had been lowered one level (e.g., from double-A to single-A), the FHLBank would have been required to deliver an additional $14,700,000 and $21,700,000 of collateral to its bilateral derivative counterparties as of March 31, 2015 and December 31, 2014, respectively.

For cleared derivatives, the Clearinghouse determines initial margin requirements and generally, credit ratings are not factored into the initial margin. However, clearing agents may require additional initial margin to be posted based on credit considerations, including but not limited to credit rating downgrades. The FHLBank was not required to post additional initial margin by its clearing agents as of March 31, 2015 and December 31, 2014.

The FHLBank’s net exposure on derivative agreements is presented in Note 10.



NOTE 8DEPOSITS

The FHLBank offers demand, overnight and short-term deposit programs to its members and to other qualifying non-members. Table 8.1 details the types of deposits held by the FHLBank as of March 31, 2015 and December 31, 2014 (in thousands):

Table 8.1
 
03/31/2015
12/31/2014
Interest-bearing:
 
 
Demand
$
230,102

$
188,886

Overnight
426,300

331,300

Term
30,100

29,400

Total interest-bearing
686,502

549,586

Non-interest-bearing:
 
 
Demand
58,114

46,189

Total non-interest-bearing
58,114

46,189

TOTAL DEPOSITS
$
744,616

$
595,775



NOTE 9 – CONSOLIDATED OBLIGATIONS



31


Consolidated Obligation Bonds: Table 9.1 presents the FHLBank’s participation in consolidated obligation bonds outstanding as of March 31, 2015 and December 31, 2014 (dollar amounts in thousands):

Table 9.1
 
03/31/2015
12/31/2014
Year of Contractual Maturity
Amount
Weighted
Average
Interest
Rate
Amount
Weighted
Average
Interest
Rate
Due in one year or less
$
6,488,550

0.37
%
$
6,165,800

0.42
%
Due after one year through two years
2,530,750

1.50

3,167,750

1.08

Due after two years through three years
1,744,635

2.07

1,861,935

2.15

Due after three years through four years
1,458,690

1.71

1,578,940

1.74

Due after four years through five years
1,660,800

1.50

1,678,250

1.54

Thereafter
5,420,950

2.48

5,706,650

2.45

Total par value
19,304,375

1.46
%
20,159,325

1.45
%
Premiums
31,259

 
30,739

 
Discounts
(3,862
)
 
(3,889
)
 
Hedging adjustments
51,453

 
34,827

 
TOTAL
$
19,383,225

 
$
20,221,002

 

Consolidated obligation bonds are issued with either fixed rate coupon or variable rate coupon payment terms. Variable rate coupon bonds use a variety of indices for interest rate resets including LIBOR, U.S. Treasury bills, Prime and Constant Maturity Treasuries. In addition, to meet the specific needs of certain investors in consolidated obligation bonds, fixed rate and variable rate bonds may contain certain features that may result in complex coupon payment terms and call features. When the FHLBank issues structured bonds that present interest rate or other risks that are unacceptable to the FHLBank, it will simultaneously enter into derivatives containing offsetting features that effectively alter the terms of the complex bonds to the equivalent of simple fixed rate coupon bonds or variable rate coupon bonds tied to indices such as those detailed above.

The FHLBank’s participation in consolidated obligation bonds outstanding as of March 31, 2015 and December 31, 2014 includes callable bonds totaling $9,276,500,000 and $9,726,000,000, respectively. The FHLBank uses the unswapped callable bonds for financing its callable fixed rate advances (Note 4), MBS (Note 3) and mortgage loans (Note 5). Contemporaneous with a portion of its fixed rate callable bond issuances, the FHLBank will also enter into interest rate swap agreements (in which the FHLBank generally pays a variable rate and receives a fixed rate) with call features that mirror the options in the callable bonds (a sold callable swap). The combined sold callable swap and callable debt transaction allows the FHLBank to obtain attractively priced variable rate financing. Table 9.2 summarizes the FHLBank’s participation in consolidated obligation bonds outstanding by year of maturity, or by the next call date for callable bonds as of March 31, 2015 and December 31, 2014 (in thousands):

Table 9.2
Year of Maturity or Next Call Date
03/31/2015
12/31/2014
Due in one year or less
$
14,880,050

$
15,271,800

Due after one year through two years
2,318,750

2,887,750

Due after two years through three years
872,635

1,040,935

Due after three years through four years
548,690

448,940

Due after four years through five years
182,800

155,250

Thereafter
501,450

354,650

TOTAL PAR VALUE
$
19,304,375

$
20,159,325




32


Table 9.3 summarizes interest rate payment terms for consolidated obligation bonds as of March 31, 2015 and December 31, 2014 (in thousands):

Table 9.3
 
03/31/2015
12/31/2014
Fixed rate
$
11,317,375

$
11,847,325

Simple variable rate
5,245,000

5,185,000

Step up/step down
2,400,000

2,830,000

Fixed to variable rate
220,000

150,000

Range
122,000

122,000

Variable to fixed rate

25,000

TOTAL PAR VALUE
$
19,304,375

$
20,159,325


Consolidated Discount Notes: Consolidated discount notes are issued to raise short-term funds. Consolidated discount notes are consolidated obligations with original maturities of up to one year. These consolidated discount notes are generally issued at less than their face amount and redeemed at par value when they mature.

Table 9.4 summarizes the FHLBank’s participation in consolidated obligation discount notes, all of which are due within one year (dollar amounts in thousands):

Table 9.4
 
Book Value
Par Value
Weighted
Average
Interest
Rate1
March 31, 2015
$
17,757,801

$
17,759,249

0.07
%
 
 
 
 
December 31, 2014
$
14,219,612

$
14,221,276

0.08
%
                   
1 
Represents yield to maturity excluding concession fees.


NOTE 10ASSETS AND LIABILITIES SUBJECT TO OFFSETTING

The FHLBank presents certain financial instruments, including derivatives, repurchase agreements and securities purchased under agreements to resell, on a net basis by clearing agent by Clearinghouse, or by counterparty, when it has met the netting requirements. For these financial instruments, the FHLBank has elected to offset its asset and liability positions, as well as cash collateral, including initial and variation margin, received or pledged and associated accrued interest.


33


Tables 10.1 and 10.2 present the fair value of financial assets, including the related collateral received from or pledged to clearing agents or counterparties, based on the terms of the FHLBank’s master netting arrangements or similar agreements as of March 31, 2015 and December 31, 2014 (in thousands):

Table 10.1
03/31/2015
Description
Gross Amounts
of Recognized
Assets
Gross Amounts
Offset
in the
Statement of
Condition
Net Amounts
of Assets
Presented
in the
Statement of
Condition
Gross Amounts
Not Offset
in the
Statement of
Condition1
Net
Amount
Derivative assets:
 
 
 
 
 
Bilateral derivatives
$
102,771

$
(89,545
)
$
13,226

$
(524
)
$
12,702

Cleared derivatives
3,005

29,806

32,811


32,811

Total derivative assets
105,776

(59,739
)
46,037

(524
)
45,513

Securities purchased under agreements to resell
2,350,000


2,350,000

(2,350,000
)

TOTAL
$
2,455,776

$
(59,739
)
$
2,396,037

$
(2,350,524
)
$
45,513

                   
1 
Represents noncash collateral received on financial instruments that: (1) do not qualify for netting on the Statement of Condition; or (2) are not subject to an enforceable netting agreement (e.g., mortgage delivery commitments).

Table 10.2
12/31/2014
Description
Gross Amounts
of Recognized
Assets
Gross Amounts
Offset
in the
Statement of
Condition
Net Amounts
of Assets
Presented
in the
Statement of
Condition
Gross Amounts
Not Offset
in the
Statement of
Condition1
Net
Amount
Derivative assets:
 
 
 
 
 
Bilateral derivatives
$
96,213

$
(86,130
)
$
10,083

$
(146
)
$
9,937

Cleared derivatives
4,419

18,481

22,900


22,900

Total derivative assets
100,632

(67,649
)
32,983

(146
)
32,837

Securities purchased under agreements to resell
$
1,225,000

$

$
1,225,000

$
(1,225,000
)
$

TOTAL
$
1,325,632

$
(67,649
)
$
1,257,983

$
(1,225,146
)
$
32,837

                   
1 
Represents noncash collateral received on financial instruments that: (1) do not qualify for netting on the Statement of Condition; or (2) are not subject to an enforceable netting agreement (e.g., mortgage delivery commitments).


34


Tables 10.3 and 10.4 present the fair value of financial liabilities, including the related collateral received from or pledged to counterparties, based on the terms of the FHLBank’s master netting arrangements or similar agreements as of March 31, 2015 and December 31, 2014 (in thousands):

Table 10.3
03/31/2015
Description
Gross Amounts
of Recognized
Liabilities
Gross Amounts
Offset
in the
Statement of
Condition
Net Amounts
of Liabilities
Presented
in the
Statement of
Condition
Gross Amounts
Not Offset
in the
Statement of
Condition1
Net
Amount
Derivative liabilities:
 
 
 
 
 
Bilateral derivatives
$
206,003

$
(183,505
)
$
22,498

$
(42
)
$
22,456

Cleared derivatives
64,863

(64,863
)



Total derivative liabilities
270,866

(248,368
)
22,498

(42
)
22,456

TOTAL
$
270,866

$
(248,368
)
$
22,498

$
(42
)
$
22,456

                   
1 
Represents noncash collateral received on financial instruments that: (1) do not qualify for netting on the Statement of Condition; or (2) are not subject to an enforceable netting agreement (e.g., mortgage delivery commitments).

Table 10.4
12/31/2014
Description
Gross Amounts
of Recognized
Liabilities
Gross Amounts
Offset
in the
Statement of
Condition
Net Amounts
of Liabilities
Presented
in the
Statement of
Condition
Gross Amounts
Not Offset
in the
Statement of
Condition1
Net
Amount
Derivative liabilities:
 
 
 
 
 
Bilateral derivatives
$
233,123

$
(197,831
)
$
35,292

$
(44
)
$
35,248

Cleared derivatives
49,565

(49,565
)



Total derivative liabilities
282,688

(247,396
)
35,292

(44
)
35,248

TOTAL
$
282,688

$
(247,396
)
$
35,292

$
(44
)
$
35,248

                   
1 
Represents noncash collateral received on financial instruments that: (1) do not qualify for netting on the Statement of Condition; or (2) are not subject to an enforceable netting agreement (e.g., mortgage delivery commitments).



35


NOTE 11CAPITAL

The FHLBank is subject to three capital requirements under the provisions of the Gramm-Leach-Bliley Act (GLB Act) and the Finance Agency’s capital structure regulation. Regulatory capital does not include accumulated other comprehensive income (AOCI) but does include mandatorily redeemable capital stock.
Risk-based capital. The FHLBank must maintain at all times permanent capital in an amount at least equal to the sum of its credit risk, market risk and operations risk capital requirements. The risk-based capital requirements are all calculated in accordance with the rules and regulations of the Finance Agency. Only permanent capital, defined as Class B Common Stock and retained earnings, can be used by the FHLBank to satisfy its risk-based capital requirement. The Finance Agency may require the FHLBank to maintain a greater amount of permanent capital than is required by the risk-based capital requirement as defined, but the Finance Agency has not placed any such requirement on the FHLBank to date.
Total regulatory capital. The GLB Act requires the FHLBank to maintain at all times at least a 4.0 percent total capital-to-asset ratio. Total regulatory capital is defined as the sum of permanent capital, Class A Common Stock, any general loss allowance, if consistent with GAAP and not established for specific assets, and other amounts from sources determined by the Finance Agency as available to absorb losses.
Leverage capital. The FHLBank is required to maintain at all times a leverage capital-to-assets ratio of at least 5.0 percent, with the leverage capital ratio defined as the sum of permanent capital weighted 1.5 times and non-permanent capital (currently only Class A Common Stock) weighted 1.0 times, divided by total assets.

Table 11.1 illustrates that the FHLBank was in compliance with its regulatory capital requirements as of March 31, 2015 and December 31, 2014 (dollar amounts in thousands):

Table 11.1
 
03/31/2015
12/31/2014
 
Required
Actual
Required
Actual
Regulatory capital requirements:
 
 
 
 
Risk-based capital
$
291,825

$
1,567,725

$
334,484

$
1,392,962

Total regulatory capital-to-asset ratio
4.0
%
4.3
%
4.0
%
4.4
%
Total regulatory capital
$
1,606,595

$
1,746,431

$
1,474,159

$
1,605,361

Leverage capital ratio
5.0
%
6.3
%
5.0
%
6.2
%
Leverage capital
$
2,008,244

$
2,530,293

$
1,842,699

$
2,301,842



Mandatorily Redeemable Capital Stock: The FHLBank is a cooperative whose members and former members own all of the FHLBank’s capital stock. Member shares cannot be purchased or sold except between the FHLBank and its members at a price equal to the $100 per share par value. If a member cancels its written notice of redemption or notice of withdrawal, the FHLBank will reclassify mandatorily redeemable capital stock from a liability to equity. After the reclassification, dividends on the capital stock would no longer be classified as interest expense.

Table 11.2 provides the related dollar amounts for activities recorded in “Mandatorily redeemable capital stock” during the three months ended March 31, 2015 and 2014 (in thousands):

Table 11.2
 
Three Months Ended
 
03/31/2015
03/31/2014
Balance at beginning of period
$
4,187

$
4,764

Capital stock subject to mandatory redemption reclassified from equity during the period
108,023

71,541

Redemption or repurchase of mandatorily redeemable capital stock during the period
(107,675
)
(71,668
)
Stock dividend classified as mandatorily redeemable capital stock during the period
10

4

Balance at end of period
$
4,545

$
4,641



36


Table 11.3 shows the amount of mandatorily redeemable capital stock by contractual year of redemption as of March 31, 2015 and December 31, 2014 (in thousands). The year of redemption in Table 11.3 is the end of the redemption period in accordance with the FHLBank’s capital plan. The FHLBank is not required to redeem or repurchase membership stock until six months (for Class A Common Stock) or five years (for Class B Common Stock) after the FHLBank receives notice for withdrawal. Additionally, the FHLBank is not required to redeem or repurchase activity-based stock until any activity-based stock becomes excess stock as a result of an activity no longer remaining outstanding. However, the FHLBank intends to repurchase the excess activity-based stock of non-members to the extent that it can do so and still meet its regulatory capital requirements.

Table 11.3
Contractual Year of Repurchase
03/31/2015
12/31/2014
Year 1
$
553

$
53

Year 2


Year 3
1

1

Year 4
2

2

Year 5
1


Past contractual redemption date due to remaining activity1
3,988

4,131

TOTAL
$
4,545

$
4,187

                   
1 
Represents mandatorily redeemable capital stock that is past the end of the contractual redemption period because there is activity outstanding to which the mandatorily redeemable capital stock relates.

Excess Capital Stock: Excess capital stock is defined as the amount of stock held by a member (or former member) in excess of that institution’s minimum stock purchase requirement. Finance Agency rules limit the ability of the FHLBank to create excess member stock under certain circumstances. For example, the FHLBank may not pay dividends in the form of capital stock or issue new excess stock to members if the FHLBank’s excess stock exceeds one percent of its total assets or if the issuance of excess stock would cause the FHLBank’s excess stock to exceed one percent of its total assets. As of March 31, 2015, the FHLBank’s excess stock was less than one percent of total assets.

Capital Classification Determination: The Finance Agency implemented the prompt corrective action (PCA) provisions of the Housing and Economic Recovery Act of 2008. The rule established four capital classifications (i.e., adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized) for FHLBanks and implemented the PCA provisions that apply to FHLBanks that are not deemed to be adequately capitalized. The Finance Agency determines each FHLBank’s capital classification on at least a quarterly basis. If an FHLBank is determined to be other than adequately capitalized, the FHLBank becomes subject to additional supervisory authority by the Finance Agency. Before implementing a reclassification, the Director of the Finance Agency is required to provide the FHLBank with written notice of the proposed action and an opportunity to submit a response. As of the most recent review by the Finance Agency, the FHLBank has been classified as adequately capitalized.


NOTE 12ACCUMULATED OTHER COMPREHENSIVE INCOME


37


Table 12.1 summarizes the changes in AOCI for the three months ended March 31, 2015 and 2014 (in thousands):

Table 12.1
 
Three Months Ended
 
Net Non-credit Portion of OTTI Losses on
Held-to-maturity Securities
Defined Benefit Pension Plan
Total AOCI
Balance at December 31, 2013
$
(16,003
)
$
(2,358
)
$
(18,361
)
Other comprehensive income (loss) before reclassification:
 
 
 
Accretion of non-credit loss
805

 
805

Reclassifications from other comprehensive income (loss) to net income:
 
 


Non-credit OTTI to credit OTTI1
361

 
361

Amortization of net loss - defined benefit pension plan2
 
45

45

Net current period other comprehensive income (loss)
1,166

45

1,211

Balance at March 31, 2014
$
(14,837
)
$
(2,313
)
$
(17,150
)
 
 
 
 
Balance at December 31, 2014
$
(11,774
)
$
(4,133
)
$
(15,907
)
Other comprehensive income (loss) before reclassification:
 
 
 
Accretion of non-credit loss
952

 
952

Reclassifications from other comprehensive income (loss) to net income:
 
 
 
Non-credit OTTI to credit OTTI1
187

 
187

Amortization of net loss - defined benefit pension plan2
 
98

98

Net current period other comprehensive income (loss)
1,139

98

1,237

Balance at March 31, 2015
$
(10,635
)
$
(4,035
)
$
(14,670
)
                   
1 
Recorded in “Net other-than-temporary impairment losses on held-to-maturity securities” on the Statements of Income. Amount represents a debit (decrease to other income (loss)).
2 
Recorded in “Compensation and benefits” on the Statements of Income. Amount represents a debit (increase to other expenses).


NOTE 13FAIR VALUES

The fair value amounts recorded on the Statements of Condition and presented in the note disclosures have been determined by the FHLBank using available market and other pertinent information and reflect the FHLBank’s best judgment of appropriate valuation methods. Although the FHLBank uses its best judgment in estimating the fair value of its financial instruments, there are inherent limitations in any valuation technique. Therefore, the fair values may not be indicative of the amounts that would have been realized in market transactions as of March 31, 2015 and December 31, 2014.

Subjectivity of Estimates: Estimates of the fair value of advances with options, mortgage instruments, derivatives with embedded options and consolidated obligation bonds with options are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows, prepayment speed assumptions, expected interest rate volatility, methods to determine possible distributions of future interest rates used to value options, and the selection of discount rates that appropriately reflect market and credit risks. The use of different assumptions could have a material effect on the fair value estimates.

Fair Value Hierarchy: The FHLBank records trading securities, derivative assets and derivative liabilities at fair value on a recurring basis and on occasion, certain private-label MBS/ABS, impaired mortgage loans held for portfolio and non-financial assets on a non-recurring basis. The fair value hierarchy requires the FHLBank to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The inputs are evaluated and an overall level for the fair value measurement is determined. This overall level is an indication of the market observability of the fair value measurement for the asset or liability. The FHLBank must disclose the level within the fair value hierarchy in which the measurements are classified for all assets and liabilities.


38


The fair value hierarchy prioritizes the inputs used to measure fair value into three broad levels:
Level 1 Inputs –  Quoted prices (unadjusted) for identical assets or liabilities in active markets that the FHLBank can access on the measurement date.
Level 2 Inputs –  Inputs other than quoted prices within Level 1 that are observable inputs for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: (1) quoted prices for similar assets and liabilities in active markets; (2) quoted prices for similar assets and liabilities in markets that are not active; (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals and implied volatilities); and (4) inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 Inputs –  Unobservable inputs for the asset or liability.

The FHLBank reviews its fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification of certain assets or liabilities. There were no reclassifications of assets or liabilities recorded at fair value on a recurring basis during the three months ended March 31, 2015 and 2014.

The carrying value and fair value of the FHLBank’s financial assets and liabilities as of March 31, 2015 and December 31, 2014 are summarized in Tables 13.1 and 13.2 (in thousands). These values do not represent an estimate of the overall market value of the FHLBank as a going concern, which would take into account future business opportunities and the net profitability of assets and liabilities.

Table 13.1
 
03/31/2015
 
Carrying
Value
Total
Fair
Value
Level 1
Level 2
Level 3
Netting
Adjustment
and Cash
Collateral
Assets:
 
 
 
 
 
 
Cash and due from banks
$
878,484

$
878,484

$
878,484

$

$

$

Interest-bearing deposits
1,660

1,660


1,660



Securities purchased under agreements to resell
2,350,000

2,350,000


2,350,000



Federal funds sold
2,130,000

2,130,000


2,130,000



Trading securities
1,806,094

1,806,094


1,806,094



Held-to-maturity securities
5,291,092

5,301,332


4,960,022

341,310


Advances
21,265,329

21,347,731


21,347,731



Mortgage loans held for portfolio, net of allowance
6,284,365

6,571,536


6,569,631

1,905


Accrued interest receivable
64,042

64,042


64,042



Derivative assets
46,037

46,037


105,776


(59,739
)
Liabilities:
 
 
 
 
 
 
Deposits
744,616

744,616


744,616



Consolidated obligation discount notes
17,757,801

17,757,654


17,757,654



Consolidated obligation bonds
19,383,225

19,431,281


19,431,281



Mandatorily redeemable capital stock
4,545

4,545

4,545




Accrued interest payable
68,486

68,486


68,486



Derivative liabilities
22,498

22,498


270,866


(248,368
)
Other Asset (Liability):
 
 
 
 
 
 
Standby letters of credit
(794
)
(794
)

(794
)


Standby bond purchase agreements
173

6,081


6,081



Advance commitments

735


735





39


Table 13.2
 
12/31/2014
 
Carrying
Value
Total
Fair
Value
Level 1
Level 2
Level 3
Netting
Adjustment
and Cash
Collateral
Assets:
 
 
 
 
 
 
Cash and due from banks
$
2,545,311

$
2,545,311

$
2,545,311

$

$

$

Interest-bearing deposits
1,163

1,163


1,163



Securities purchased under agreements to resell
1,225,000

1,225,000


1,225,000



Federal funds sold
2,075,000

2,075,000


2,075,000



Trading securities
1,462,049

1,462,049


1,462,049



Held-to-maturity securities
4,857,187

4,869,042


4,513,082

355,960


Advances
18,302,950

18,366,465


18,366,465



Mortgage loans held for portfolio, net of allowance
6,230,172

6,475,740


6,475,740



Accrued interest receivable
70,923

70,923


70,923



Derivative assets
32,983

32,983


100,632


(67,649
)
Liabilities:
 


 
 
 
 
Deposits
595,775

595,775


595,775



Consolidated obligation discount notes
14,219,612

14,219,385


14,219,385



Consolidated obligation bonds
20,221,002

20,207,029


20,207,029



Mandatorily redeemable capital stock
4,187

4,187

4,187




Accrued interest payable
58,243

58,243


58,243



Derivative liabilities
35,292

35,292


282,688


(247,396
)
Other Asset (Liability):
 
 
 
 
 
 
Standby letters of credit
(926
)
(926
)

(926
)


Standby bond purchase agreements
222

4,738


4,738



Advance commitments

(257
)

(257
)


 
Fair Value Measurements: Tables 13.3 and 13.4 present, for each hierarchy level, the FHLBank’s assets and liabilities that are measured at fair value on a recurring or nonrecurring basis on the Statements of Condition as of March 31, 2015 and December 31, 2014 (in thousands). The FHLBank measures certain held-to-maturity securities at fair value on a nonrecurring basis due to the recognition of a credit loss. For held-to-maturity securities that had credit impairment recorded at period end for which no total impairment was recorded (the full amount of additional credit impairment was a reclassification from non-credit impairment previously recorded in AOCI), these securities were recorded at their carrying values and not fair value. The FHLBank measures certain impaired mortgage loans held for portfolio at fair value on a nonrecurring basis when, upon individual evaluation for impairment, the estimated fair value less costs to sell is lower than the carrying amount. For additional information on the valuation of impaired loans, see Note 6. Real estate owned is measured at fair value when the asset’s fair value less costs to sell is lower than its carrying amount.


40


Table 13.3
 
03/31/2015
 
Total
Level 1
Level 2
Level 3
Netting
Adjustment
and Cash
Collateral1
Recurring fair value measurements - Assets:
 
 
 
 
 
Trading securities:
 
 
 
 
 
Certificates of deposit
$
474,999

$

$
474,999

$

$

U.S. Treasury obligations
25,006


25,006



GSE obligations2
1,176,703


1,176,703



U.S. obligation MBS3
911


911



GSE MBS4
128,475


128,475



Total trading securities
1,806,094


1,806,094



Derivative assets:
 
 
 
 
 
Interest-rate related
45,513


105,252


(59,739
)
Mortgage delivery commitments
524


524



Total derivative assets
46,037


105,776


(59,739
)
TOTAL RECURRING FAIR VALUE MEASUREMENTS - ASSETS
$
1,852,131

$

$
1,911,870

$

$
(59,739
)
 
 
 
 
 
 
Recurring fair value measurements - Liabilities:
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
Interest-rate related
$
22,481

$

$
270,849

$

$
(248,368
)
Mortgage delivery commitments
17


17



Total derivative liabilities
22,498


270,866


(248,368
)
TOTAL RECURRING FAIR VALUE MEASUREMENTS - LIABILITIES
$
22,498

$

$
270,866

$

$
(248,368
)
 
 
 
 
 
 
Nonrecurring fair value measurements - Assets:
 
 
 
 
 
Mortgage loans held for portfolio5
$
1,905

$

$

$
1,905

$

Real estate owned6
795



795


TOTAL NONRECURRING FAIR VALUE MEASUREMENTS - ASSETS
$
2,700

$

$

$
2,700

$

                   
1 
Represents the effect of legally enforceable master netting agreements that allow the FHLBank to net settle positive and negative positions and also derivative cash collateral and related accrued interest held or placed with the same clearing agent or derivative counterparty.
2 
Represents debentures issued by other FHLBanks, Fannie Mae, Freddie Mac and Farm Credit. GSE securities are not guaranteed by the U.S. government. Fannie Mae and Freddie Mac were placed into conservatorship by the Finance Agency on September 7, 2008 with the Finance Agency named as conservator.
3 
Represents single-family MBS issued by Ginnie Mae, which are guaranteed by the U.S. government.
4 
Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac.
5 
Includes mortgage loans held for portfolio adjusted to fair value during the quarter ended March 31, 2015 and still outstanding as of March 31, 2015.
6 
Includes real estate owned adjusted to fair value during the quarter ended March 31, 2015 and still outstanding as of March 31, 2015.


41


Table 13.4
 
12/31/2014
 
Total
Level 1
Level 2
Level 3
Netting
Adjustment
and Cash
Collateral1
Recurring fair value measurements - Assets:
 
 
 
 
 
Trading securities:
 
 
 
 
 
U.S. Treasury obligations
$
25,016

$

$
25,016

$

$

GSE obligations2
1,299,979


1,299,979



U.S. obligation MBS3
963


963



GSE MBS4
136,091


136,091



Total trading securities
1,462,049


1,462,049



Derivative assets:
 
 
 
 
 
Interest-rate related
32,837


100,486


(67,649
)
Mortgage delivery commitments
146


146



Total derivative assets
32,983


100,632


(67,649
)
TOTAL RECURRING FAIR VALUE MEASUREMENTS - ASSETS
$
1,495,032

$

$
1,562,681

$

$
(67,649
)
 
 
 
 
 
 
Recurring fair value measurements - Liabilities:
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
Interest-rate related
$
35,284

$

$
282,680

$

$
(247,396
)
Mortgage delivery commitments
8


8



Total derivative liabilities
35,292


282,688


(247,396
)
TOTAL RECURRING FAIR VALUE MEASUREMENTS - LIABILITIES
$
35,292

$

$
282,688

$

$
(247,396
)
 
 
 
 
 
 
Nonrecurring fair value measurements - Assets:
 
 
 
 
 
Held-to-maturity securities5:
 
 
 
 
 
Private-label residential MBS
$
134

$

$

$
134

$

Real estate owned6
927



927


TOTAL NONRECURRING FAIR VALUE MEASUREMENTS - ASSETS
$
1,061

$

$

$
1,061

$

                   
1 
Represents the effect of legally enforceable master netting agreements that allow the FHLBank to net settle positive and negative positions and also derivative cash collateral and related accrued interest held or placed with the same clearing agent or derivative counterparty.
2 
Represents debentures issued by other FHLBanks, Fannie Mae, Freddie Mac and Farm Credit. GSE securities are not guaranteed by the U.S. government. Fannie Mae and Freddie Mac were placed into conservatorship by the Finance Agency on September 7, 2008 with the Finance Agency named as conservator.
3 
Represents single-family MBS issued by Ginnie Mae, which are guaranteed by the U.S. government.
4 
Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac.
5 
Excludes impaired securities with carrying values less than their fair values at date of impairment.
6 
Includes real estate owned written down to fair value during the quarter ended December 31, 2014 and still outstanding as of December 31, 2014.



42


NOTE 14COMMITMENTS AND CONTINGENCIES

Joint and Several Liability: As provided by the Bank Act or Finance Agency regulation and as described in Note 9, consolidated obligations are backed only by the financial resources of the FHLBanks. FHLBank Topeka is jointly and severally liable with the other FHLBanks for the payment of principal and interest on all of the consolidated obligations issued by the FHLBanks. The par amounts for which FHLBank Topeka is jointly and severally liable were approximately $775,132,886,000 and $812,794,196,000 as of March 31, 2015 and December 31, 2014, respectively. To the extent that an FHLBank makes any consolidated obligation payment on behalf of another FHLBank, the paying FHLBank is entitled to reimbursement from the FHLBank with primary liability. However, if the Finance Agency determines that the primary obligor is unable to satisfy its obligations, then the Finance Agency may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis that the Finance Agency may determine. No FHLBank has ever failed to make any payment on a consolidated obligation for which it was the primary obligor. As a result, the regulatory provisions for directing other FHLBanks to make payments on behalf of another FHLBank or allocating the liability among other FHLBanks have never been invoked.

The joint and several obligations are mandated by Finance Agency regulations and are not the result of arms-length transactions among the FHLBanks. As described above, the FHLBanks have no control over the amount of the guaranty or the determination of how each FHLBank would perform under the joint and several liability. Because the FHLBanks are subject to the authority of the Finance Agency as it relates to decisions involving the allocation of the joint and several liability for the FHLBank’s consolidated obligations, FHLBank Topeka regularly monitors the financial condition of the other FHLBanks to determine whether it should expect a loss to arise from its joint and several obligations. If the FHLBank were to determine that a loss was probable and the amount of the loss could be reasonably estimated, the FHLBank would charge to income the amount of the expected loss. Based upon the creditworthiness of the other FHLBanks as of March 31, 2015, FHLBank Topeka has concluded that a loss accrual is not necessary at this time.

Off-balance Sheet Commitments: As of March 31, 2015 and December 31, 2014, off-balance sheet commitments are presented in Table 14.1 (in thousands):

Table 14.1
 
03/31/2015
12/31/2014
Notional Amount
Expire
Within
One Year
Expire
After
One Year
Total
Expire
Within
One Year
Expire
After
One Year
Total
Standby letters of credit outstanding
$
2,592,456

$
13,797

$
2,606,253

$
2,544,683

$
9,880

$
2,554,563

Advance commitments outstanding
5,627

32,796

38,423


32,796

32,796

Commitments for standby bond purchases
812,719

640,278

1,452,997

759,725

785,250

1,544,975

Commitments to fund or purchase mortgage loans
108,829


108,829

53,004


53,004

Commitments to issue consolidated bonds, at par
353,025


353,025

50,000


50,000


Commitments to Extend Credit: Standby letters of credit are executed for members for a fee. A standby letter of credit is a short-term financing arrangement between the FHLBank and its member or non-member housing associate. If the FHLBank is required to make payment for a beneficiary’s draw, these amounts are converted into a collateralized advance to the member. As of March 31, 2015, outstanding standby letters of credit had original terms of 2 days to 10 years with a final expiration in 2020. As of December 31, 2014, outstanding standby letters of credit had original terms of 2 days to 10 years with a final expiration in 2020. Unearned fees as well as the value of the guarantees related to standby letters of credit are recorded in other liabilities and amounted to $794,000 and $926,000 as of March 31, 2015 and December 31, 2014, respectively. Standby letters of credit are fully collateralized with assets allowed by the FHLBank’s Member Products Policy (MPP). Advance commitments legally bind and unconditionally obligate the FHLBank for additional advances up to 24 months in the future. Based upon management’s credit analysis of members and collateral requirements under the MPP, the FHLBank does not expect to incur any credit losses on the outstanding letters of credit or advance commitments.


43


Standby Bond-Purchase Agreements: The FHLBank has entered into standby bond purchase agreements with state housing authorities whereby the FHLBank, for a fee, agrees to purchase and hold the authorities’ bonds until the designated marketing agent can find a suitable investor or the housing authority repurchases the bond according to a schedule established by the standby agreement. Each standby agreement dictates the specific terms that would require the FHLBank to purchase the bond. The bond purchase commitments entered into by the FHLBank expire no later than 2018, though some are renewable at the option of the FHLBank. As of March 31, 2015 and December 31, 2014, the total commitments for bond purchases were with two in-district and one out-of-district state housing authorities as well as one participation interest in a standby bond purchase agreement between another FHLBank and a state housing authority in its district. The FHLBank was not required to purchase any bonds under any agreements during the three months ended March 31, 2015 and 2014.

Commitments to Purchase Mortgage Loans: These commitments that unconditionally obligate the FHLBank to purchase mortgage loans from participating FHLBank Topeka members in the MPF Program are generally for periods not to exceed 60 calendar days. Certain commitments are recorded as derivatives at their fair values on the Statements of Condition. The FHLBank recorded mortgage delivery commitment net derivative asset (liability) balances of $507,000 and $138,000 as of March 31, 2015 and December 31, 2014, respectively.

Commitments to Issue Consolidated Obligations: The FHLBank enters into commitments to issue consolidated obligation bonds and discount notes outstanding in the normal course of its business. All settle within the shortest period possible and are considered regular way trades; thus, the commitments are appropriately not recorded as derivatives.


NOTE 15TRANSACTIONS WITH STOCKHOLDERS

The FHLBank is a cooperative whose members own the capital stock of the FHLBank and generally receive dividends on their investments. In addition, certain former members that still have outstanding transactions are also required to maintain their investments in FHLBank capital stock until the transactions mature or are paid off. Nearly all outstanding advances are with current members, and the majority of outstanding mortgage loans held for portfolio were purchased from current or former members. The FHLBank also maintains demand deposit accounts for members primarily to facilitate settlement activities that are directly related to advances and mortgage loan purchases.

Transactions with members are entered into in the ordinary course of business. In instances where members also have officers or directors who are directors of the FHLBank, transactions with those members are subject to the same eligibility and credit criteria, as well as the same terms and conditions, as other transactions with members. For financial reporting and disclosure purposes, the FHLBank defines related parties as FHLBank directors’ financial institutions and members with capital stock investments in excess of 10 percent of the FHLBank’s total regulatory capital stock outstanding, which includes mandatorily redeemable capital stock.

Activity with Members that Exceed a 10 Percent Ownership in FHLBank Capital Stock: Tables 15.1 and 15.2 present information as of March 31, 2015 and December 31, 2014 on members that owned more than 10 percent of outstanding FHLBank regulatory capital stock in 2015 or 2014 (dollar amounts in thousands). None of the officers or directors of these members currently serve on the FHLBank’s board of directors.

Table 15.1
03/31/2015
Member Name
State
Total Class A Stock Par Value
Percent of Total Class A
Total Class B Stock Par Value
Percent of Total Class B
Total Capital Stock Par Value
Percent of Total Capital Stock
Bank of Oklahoma, NA
OK
$
9,450

5.3
%
$
168,126

18.2
%
$
177,576

16.1
%
Capitol Federal Savings Bank
KS
500

0.3

154,451

16.7

154,951

14.0

MidFirst Bank
OK
500

0.3

146,194

15.8

146,694

13.3

TOTAL
 
$
10,450

5.9
%
$
468,771

50.7
%
$
479,221

43.4
%

Table 15.2
12/31/2014
Member Name
State
Total Class A Stock Par Value
Percent of Total Class A
Total Class B Stock Par Value
Percent of Total Class B
Total Capital Stock Par Value
Percent of Total Capital Stock
MidFirst Bank
OK
$
500

0.2
%
$
124,781

16.3
%
$
125,281

12.8
%
Capitol Federal Savings Bank
KS
2,700

1.3

118,606

15.5

121,306

12.4

Bank of Oklahoma, NA
OK
12,133

5.7

94,153

12.3

106,286

10.9

TOTAL
 
$
15,333

7.2
%
$
337,540

44.1
%
$
352,873

36.1
%

44



Advance and deposit balances with members that owned more than 10 percent of outstanding FHLBank regulatory capital stock as of March 31, 2015 and December 31, 2014 are summarized in Table 15.3 (dollar amounts in thousands).

Table 15.3
 
03/31/2015
12/31/2014
03/31/2015
12/31/2014
Member Name
Outstanding Advances
Percent of Total
Outstanding Advances
Percent of Total
Outstanding Deposits
Percent of Total
Outstanding Deposits
Percent of Total
Bank of Oklahoma, NA
$
3,700,000

17.5
%
$
2,103,400

11.6
%
$
2,113

0.3
%
$
2,534

0.4
%
Capitol Federal Savings Bank
3,375,000

16.0

2,575,000

14.2

550

0.1

1,737

0.3

MidFirst Bank
3,203,000

15.2

2,736,500

15.1

291


567

0.1

TOTAL
$
10,278,000

48.7
%
$
7,414,900

40.9
%
$
2,954

0.4
%
$
4,838

0.8
%

Bank of Oklahoma, NA, MidFirst Bank and Capitol Federal Savings Bank did not sell any mortgage loans into the MPF Program during the three months ended March 31, 2015 and 2014.

Transactions with FHLBank Directors’ Financial Institutions: Table 15.4 presents information as of March 31, 2015 and December 31, 2014 for members that had an officer or director serving on the FHLBank’s board of directors in 2015 or 2014 (dollar amounts in thousands). Information is only included for the period in which the officer or director served on the FHLBank’s board of directors. Capital stock listed is regulatory capital stock, which includes mandatorily redeemable capital stock.

Table 15.4
 
03/31/2015
12/31/2014
 
Outstanding Amount
Percent of Total
Outstanding Amount
Percent of Total
Advances
$
192,976

0.9
%
$
219,239

1.2
%
 
 
 
 
 
Deposits
$
10,939

1.5
%
$
8,524

1.4
%
 
 
 
 
 
Class A Common Stock
$
4,350

2.4
%
$
4,175

2.0
%
Class B Common Stock
8,333

0.9

7,419

1.0

TOTAL CAPITAL STOCK
$
12,683

1.1
%
$
11,594

1.2
%

Table 15.5 presents mortgage loans acquired during the three months ended March 31, 2015 and 2014 for members that had an officer or director serving on the FHLBank’s board of directors in 2015 or 2014 (dollar amounts in thousands).

Table 15.5
 
Three Months Ended
 
03/31/2015
03/31/2014
 
Amount
Percent of Total
Amount
Percent of Total
Mortgage loans acquired
$
26,791

9.9
%
$
13,167

6.7
%



45


Direct Financing Lease: During 2002, the FHLBank entered into a 20-year direct financing lease with a member for a building complex and property. Either party has the option to terminate this lease after 15 years. The net investment in the direct financing lease with the member is recorded in other assets. The FHLBank’s $7,896,000 up-front payment for its portion of the building complex is recorded in premises, software and equipment. On October 31, 2005, the FHLBank amended its lease to occupy additional building space, thereby reducing the portion of the property previously leased back to the member and decreasing the member’s future lease payments. All other provisions of the original lease remained in effect. The net reduction in the lease receivable is recorded in premises, software and equipment. On March 31, 2015, the FHLBank provided a Notice of Termination of FHLBank Occupancy (Notice) to the member stating that the FHLBank plans to terminate its occupancy of the space currently occupied by the FHLBank as its headquarters. The Notice reflects the FHLBank’s intent to terminate its occupancy and initiate the sale of its space to the member on March 31, 2018. The 20-year direct financing lease will remain in place for the member's space being leased thereafter. Beginning April 1, 2018, the member's future lease payments will revert back to the initial amount prior to the October 31, 2005 amendment. The direct financing lease has been adjusted accordingly.

See Note 6 for additional information on the direct financing lease.



46


Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to assist the reader in understanding our business and assessing our operations both historically and prospectively. This discussion should be read in conjunction with our interim financial statements and related notes presented under Part I Item 1 of this quarterly report on Form 10-Q and the annual report on Form 10-K for the year ended December 31, 2014, which includes audited financial statements and related notes for the year ended December 31, 2014. Our MD&A includes the following sections:
Executive Level Overview – a general description of our business and financial highlights;
Financial Market Trends – a discussion of current trends in the financial markets and overall economic environment, including the related impact on our operations;
Critical Accounting Policies and Estimates – a discussion of accounting policies that require critical estimates and assumptions;
Results of Operations – an analysis of our operating results, including disclosures about the sustainability of our earnings;
Financial Condition – an analysis of our financial position;
Liquidity and Capital Resources – an analysis of our cash flows and capital position;
Risk Management – a discussion of our risk management strategies;
Impact of Recently Issued Accounting Standards; and
Legislative and Regulatory Developments.

Executive Level Overview
We are a regional wholesale bank that makes advances (loans) to, purchases mortgages from, and provides limited other financial services to our member institutions. We are currently one of 12 district FHLBanks which, together with the Office of Finance, a joint office of the FHLBanks, make up the FHLBank System. As independent, member-owned cooperatives, the FHLBanks seek to maintain a balance between their public purpose and their ability to provide adequate returns on the capital supplied by their members. The FHLBanks are supervised and regulated by the Finance Agency, an independent agency in the executive branch of the U.S. government. The Finance Agency’s mission is to ensure that the housing GSEs operate in a safe and sound manner so that they serve as a reliable source of liquidity and funding for housing finance and community investment.

In the fourth quarter of 2014, the boards of directors of the FHLBank of Des Moines and the FHLBank of Seattle executed a definitive merger agreement after receiving unanimous approval from their boards of directors. The Finance Agency approved the merger application, subject to the satisfaction of specific closing conditions set forth in the Finance Agency's approval letter. Assuming the Finance Agency’s conditions are satisfied, the merger is expected to be effective on May 31, 2015. The continuing FHLBank would be headquartered in Des Moines. 

Our primary funding source is consolidated obligations issued through the FHLBanks’ Office of Finance. The Office of Finance is a joint office of the FHLBanks that facilitates the issuance and servicing of the consolidated obligations. The Finance Agency and the U.S. Secretary of the Treasury oversee the issuance of FHLBank debt through the Office of Finance. Consolidated obligations are debt instruments that constitute the joint and several obligations of all FHLBanks. Although consolidated obligations are not obligations of, nor guaranteed by, the U.S. government, the capital markets have traditionally considered the FHLBanks’ consolidated obligations as “Federal agency” debt. As a result, the FHLBanks have traditionally had ready access to funding at relatively favorable spreads to U.S. Treasuries. Additional funds are provided by deposits (received from both member and non-member financial institutions), other borrowings, and the issuance of capital stock.

We serve eligible financial institutions in Colorado, Kansas, Nebraska, and Oklahoma (collectively, the Tenth District of the FHLBank System). Initially, members are required to purchase shares of Class A Common Stock based on the member’s total assets. Each member may be required to purchase activity-based capital stock (Class B Common Stock) as it engages in certain business activities with the FHLBank, including advances and Acquired Member Assets (AMA), at levels determined by management with the Board of Director’s approval and within the ranges stipulated in the Capital Stock Plan. Currently, our capital increases when members are required to purchase additional capital stock in the form of Class B Common Stock to support an increase in advance borrowings. In the past, capital stock also increased when members sold additional mortgage loans to us; however, members are no longer required to purchase capital stock for AMA activity (former members previously required to purchase AMA activity-based stock are subject to the prior requirement as long as there are unpaid principal balances outstanding). At our discretion, we may repurchase excess Common Stock if there is a decline in a member’s advances. We believe it is important to manage our business and the associated risks so that we always strive to provide franchise value by maintaining a core mission asset focus and meeting the following objectives: (1) achieve our liquidity, housing finance and community development missions by meeting member credit needs by offering advances, supporting residential mortgage lending through the MPF Program and through other products; (2) repurchase excess capital stock in order to appropriately manage the size of our balance sheet; and (3) pay stable dividends.

Table 1 presents Selected Financial Data for the periods indicated (dollar amounts in thousands):


47


Table 1
 
03/31/2015
12/31/2014
09/30/2014
06/30/2014
03/31/2014
Statement of Condition (as of period end):
 
 
 
 
 
Total assets
$
40,164,879

$
36,853,977

$
38,528,044

$
33,320,873

$
32,099,092

Investments1
11,578,846

9,620,399

9,075,621

8,774,310

9,524,184

Advances
21,265,329

18,302,950

20,574,600

17,449,516

16,112,925

Mortgage loans, net2
6,284,365

6,230,172

6,164,822

6,090,846

5,984,655

Total liabilities
38,437,663

35,268,710

36,837,646

31,859,399

30,369,008

Deposits
744,616

595,775

677,069

776,902

1,020,230

Consolidated obligation bonds, net3
19,383,225

20,221,002

20,025,472

19,405,969

19,765,733

Consolidated obligation discount notes, net3
17,757,801

14,219,612

15,947,588

11,462,971

9,356,707

Total consolidated obligations, net3
37,141,026

34,440,614

35,973,060

30,868,940

29,122,440

Mandatorily redeemable capital stock
4,545

4,187

4,371

4,519

4,641

Total capital
1,727,216

1,585,267

1,690,398

1,461,474

1,730,084

Capital stock
1,098,319

974,041

1,090,263

877,592

1,165,809

Total retained earnings
643,567

627,133

615,192

599,999

581,425

Accumulated other comprehensive income (loss) (AOCI)
(14,670
)
(15,907
)
(15,057
)
(16,117
)
(17,150
)
Statement of Income (for the quarterly period ended):
 
 
 
 
 
Net interest income
56,614

57,800

56,572

56,299

54,494

(Reversal) provision for credit losses on mortgage loans
(802
)
117

82

(2,109
)
295

Other income (loss)
(9,216
)
(15,219
)
(10,805
)
(13,153
)
(16,673
)
Other expenses
13,620

12,981

13,880

13,498

12,784

Income before assessments
34,580

29,483

31,805

31,757

24,742

AHP assessments
3,459

2,950

3,181

3,177

2,475

Net income
31,121

26,533

28,624

28,580

22,267

Selected Financial Ratios and Other Financial Data (for the quarterly period ended):
 
 
 
 
 
Dividends paid in cash4
74

74

75

71

79

Dividends paid in stock4
14,613

14,518

13,356

9,935

8,095

Weighted average dividend rate5
5.19
%
5.17
%
5.15
%
4.22
%
2.60
%
Dividend payout ratio6
47.19
%
55.00
%
46.92
%
35.01
%
36.71
%
Return on average equity
7.10
%
6.07
%
6.93
%
7.48
%
4.91
%
Return on average assets
0.32
%
0.27
%
0.32
%
0.35
%
0.27
%
Average equity to average assets
4.48
%
4.53
%
4.56
%
4.69
%
5.57
%
Net interest margin7
0.58
%
0.60
%
0.63
%
0.69
%
0.67
%
Total capital ratio8
4.30
%
4.30
%
4.39
%
4.39
%
5.39
%
Regulatory capital ratio9
4.35
%
4.36
%
4.44
%
4.45
%
5.46
%
Ratio of earnings to fixed charges10
1.67

1.57

1.63

1.64

1.48

                   
1 
Includes trading securities, held-to-maturity securities, interest-bearing deposits, securities purchased under agreements to resell and Federal funds sold.
2 
The allowance for credit losses on mortgage loans was $3,337,000, $4,550,000, $4,591,000, $4,658,000 and $6,877,000 as of March 31, 2015, December 31, 2014, September 30, 2014, June 30, 2014 and March 31, 2014, respectively.
3 
Consolidated obligations are bonds and discount notes that we are primarily liable to repay. See Note 14 to the financial statements for a description of the total consolidated obligations of all FHLBanks for which we are jointly and severally liable.
4 
Dividends reclassified as interest expense on mandatorily redeemable capital stock and not included as dividends recorded in accordance with GAAP were $11,000, $11,000, $13,000, $12,000 and $4,000 for the quarters ended March 31, 2015, December 31, 2014, September 30, 2014, June 30, 2014 and March 31, 2014, respectively.
5 
Dividends paid in cash and stock on both classes of stock as a percentage of average capital stock eligible for dividends.
6 
Ratio disclosed represents dividends declared and paid during the year as a percentage of net income for the period presented, although the Finance Agency regulation requires dividends be paid out of known income prior to declaration date.
7 
Net interest income as a percentage of average earning assets.
8 
GAAP capital stock, which excludes mandatorily redeemable capital stock, plus retained earnings and AOCI as a percentage of total assets.
9 
Regulatory capital (i.e., permanent capital and Class A Common Stock) as a percentage of total assets.
10 
Total earnings divided by fixed charges (interest expense including amortization/accretion of premiums, discounts and capitalized expenses related to indebtedness).

48



Net income increased $8.8 million, or 39.8 percent, to $31.1 million for the three months ended March 31, 2015 compared to $22.3 million for the three months ended March 31, 2014. The increase in net income was due primarily to fair value fluctuations related to derivatives and hedging activities, a small increase in net interest income, and a decrease in the provision/reversal for credit losses on mortgage loans. The $8.0 million increase in net income from derivatives and hedging activities was due primarily to less pronounced fair value declines on interest rate caps during the current period compared to the prior year period. The decline in interest rates that impacted the caps during the current quarter was of a lesser magnitude than the decline in the prior year period. The FHLBank's largest source of revenue, net interest income, increased $2.1 million, or 3.9 percent, in the first quarter of 2015 compared to the same period of 2014 due to an increase in the average balance of advances and mortgage loans, partially offset by a decrease in yield on both instruments. The $1.1 million decrease in the provision for credit losses on mortgage loans was a result of an improvement in credit quality along with adjustments to loss factors used in calculating the allowance for credit losses on mortgage loans during the first quarter of 2015. Detailed discussion relating to the fluctuations in net interest income, the net gain (loss) on derivatives and hedging activities, and the allowance for credit losses on mortgage loans can be found under this Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations.”

Total assets increased $3.3 billion, or 9.0 percent, from December 31, 2014 to March 31, 2015. This increase was due primarily to a $3.0 billion, or 16.2 percent, increase in advances, and a $0.8 billion, or 12.3 percent, increase in investment securities. The increase in advances was largely due to an increase in our lowest yielding line of credit advance product, which was attributed to the increase in dividend rates (discussed below), which effectively reduces the cost of our advances to the member and increases the member's ability to profitably deploy the funding. We have been actively promoting the impact of our Class B Common Stock dividend on the effective borrowing cost of advances to increase member awareness of the benefit of higher dividends. The increase in investment securities corresponded to the increase in advances and mortgage loans, as growth in core mission assets allows for growth in non-mission assets while maintaining our desired core mission asset ratio (discussed below).

Total liabilities increased $3.2 billion, or 9.0 percent, from December 31, 2014 to March 31, 2015. This increase was primarily due to a $3.5 billion increase in consolidated obligation discount notes, partially offset by a $0.8 billion decrease in consolidated obligation bonds. Our funding mix generally is driven by asset composition, so the increase in discount notes and the corresponding decline in consolidated obligation bonds for the current period is the result of an increase in our line of credit product balance and short-term advances, which are generally funded by discount notes. For additional information, see Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition.”

Return on equity (ROE) was 7.10 percent and 4.91 percent for the three months ended March 31, 2015 and 2014, respectively. The improvement in ROE was due in part to a decrease in average capital as a result of capital management changes that began in the second quarter of 2014 along with the general increase in net income. The income volatility related to fair value changes in derivative and hedging activities was also a significant factor in the year over year change in ROE.

Dividends paid to members totaled $14.7 million for the three months ended March 31, 2015 compared to $8.2 million for the same period in the prior year. The dividend rate for Class A Common Stock remained at 1.00 percent and the dividend rate for Class B Common Stock remained at 6.00 percent for the first quarter of 2015 compared to the previous quarter. Changes in the weighted average dividend rates between the quarters ended March 31, 2015 (5.19 percent) and 2014 (2.60 percent) occurred primarily due to the dividend rate increases during 2014 and a reduction in Class A Common Stock due to excess stock repurchases under our current capital management practices. Other factors impacting the stock class mix and average dividend rates include: (1) a reduction in our activity stock (Class B Common Stock) requirement for advances in the second quarter of 2014; (2) weekly exchanges of excess Class B Common Stock to Class A Common Stock; and (3) periodic repurchases of excess Class A Common Stock. We changed our management of capital levels during 2014, including a reduction in our activity-based stock purchase requirement (see “Liquidity and Capital Resources - Capital under this Item 2), establishing periodic repurchases of excess Class A Common Stock, and increasing our dividend payout ratio among other practices, while maintaining sufficient levels of liquidity to fulfill our mission. 

Finance Agency guidance requires that our strategic business plan describes how our business activities will achieve our mission consistent with the Finance Agency’s core mission asset guidance. We intend to manage our balance sheet with an emphasis towards maintaining a core mission assets ratio within the range of 70 to 80 percent during 2015. Our ratio of average advances and average mortgage loans to average consolidated obligations (core mission assets ratio) was 79 percent for the first quarter of 2015. However, because this ratio is dependent on several variables such as member demand for our advance and mortgage loan products, it is possible that we will be unable to maintain this level throughout 2015.


49


Financial Market Trends
The primary external factors that affect net interest income are market interest rates and the general state of the economy.

General discussion of the level of market interest rates:
Table 2 presents selected market interest rates as of the dates or for the periods shown.

Table 2
 
03/31/2015
03/31/2014
 
 
 
Market Instrument
Three-month
Three-month
03/31/2015
12/31/2014
03/31/2014
Average
Average
Ending Rate
Ending Rate
Ending Rate
Overnight Federal funds effective/target rate1
0.11
%
0.07
%
0.0 to 0.25%
0.0 to 0.25%
0.0 to 0.25%
Federal Open Market Committee (FOMC) target rate for overnight Federal funds1
0.0 to 0.25

0.0 to 0.25

0.0 to 0.25
0.0 to 0.25
0.0 to 0.25
3-month U.S. Treasury bill1
0.02

0.04

0.03
0.04
0.03
3-month LIBOR1
0.26

0.24

0.27
0.26
0.23
2-year U.S. Treasury note1
0.59

0.36

0.55
0.67
0.43
5-year U.S. Treasury note1
1.45

1.59

1.38
1.65
1.74
10-year U.S. Treasury note1
1.96

2.76

1.93
2.17
2.73
30-year residential mortgage note rate2
3.91

4.54

3.89
4.04
4.56
                   
1 
Source is Bloomberg (overnight Federal funds rate is the effective rate for the averages and the target rate for the ending rates).
2 
Mortgage Bankers Association weekly 30-year fixed rate mortgage contract rate obtained from Bloomberg.

Funding rates have stabilized over the last several months as the market waits for direction on when the FOMC will begin increasing the Federal funds target rate. Weak economic data has pushed expectations of a target rate increase from June 2015 to fall or winter of 2015. However, because the FOMC has largely eliminated forward guidance from its statements, the projected increase date and short-term rates in general will fluctuate with changes in economic data. The FOMC is considering the same broad range of economic indicators in their consideration of continued accommodative monetary policy. The FOMC concluded the asset purchase program in October 2014 but is maintaining its existing policy of reinvesting principal payments from its holdings of Agency debt and Agency MBS and of rolling over maturing U.S. Treasury securities at auction. The rates on U.S. Treasuries and Agency MBS are expected to increase once the Federal Reserve is no longer reinvesting those principal payments. We issue debt at a spread above U.S. Treasury securities, so higher interest rates increase the cost of issuing FHLBank consolidated obligations and increase the cost of advances to our members and housing associates. During the first quarter of 2015, U.S. Treasury rates declined from the year ended December 31, 2014 across all maturities, which has resulted in a generally stable and favorable funding environment. For further discussion see this Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Consolidated Obligations.”

Other factors impacting FHLBank consolidated obligations:
Investors continue to view FHLBank consolidated obligations as carrying a relatively strong credit profile. Historically our strong credit profile has resulted in steady investor demand for FHLBank discount notes and short-term bonds, which allowed the overall cost to issue short-term consolidated obligations to remain relatively low throughout the first quarter of 2015, despite a slight increase in cost towards the end of the quarter due to reluctance by dealers to hold our debt in inventory on the last day of a quarter. The U.S. Treasury Department announced a new federal debt limit during the first quarter of 2015, which is expected to meet federal obligations until at least the fall of 2015, so concerns over the federal debt ceiling are not currently a factor in our ability to secure funding.

Critical Accounting Policies and Estimates
The preparation of our financial statements in accordance with GAAP requires management to make a number of judgments and assumptions that affect our reported results and disclosures. Several of our accounting policies are inherently subject to valuation assumptions and other subjective assessments and are more critical than others in terms of their importance to results. These assumptions and assessments include the following:
Accounting related to derivatives;
Fair value determinations;
Accounting for deferred premium/discount associated with MBS; and
Determining the adequacy of the allowance for credit losses.


50


Changes in any of the estimates and assumptions underlying critical accounting policies could have a material effect on our financial statements.

The accounting policies that management believes are the most critical to an understanding of our financial results and condition and require complex management judgment are described under Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in our annual report on Form 10-K, incorporated by reference herein. There were no material changes to our critical accounting policies and estimates during the quarter ended March 31, 2015.

Results of Operations
Earnings Analysis: Table 3 presents changes in the major components of our net income (dollar amounts in thousands):

Table 3
 
Increase (Decrease) in Earnings Components
 
Three Months Ended
 
3/31/2015 vs. 3/31/2014
 
Dollar Change
Percentage Change
Total interest income
$
2,713

2.6
 %
Total interest expense
593

1.2

Net interest income
2,120

3.9

Provision (reversal) for credit losses on mortgage loans
(1,097
)
(371.9
)
Net interest income after mortgage loan loss provision
3,217

5.9

Net gain (loss) on trading securities
(510
)
(9.6
)
Net gain (loss) on derivatives and hedging activities
8,016

57.3

Other non-interest income
(49
)
(1.9
)
Total other income (loss)
7,457

44.7

Operating expenses
1,020

9.6

Other non-interest expenses
(184
)
(8.5
)
Total other expenses
836

6.5

AHP assessments
984

39.8

NET INCOME
$
8,854

39.8
 %

Table 4 presents the amounts contributed by our principal sources of interest income (dollar amounts in thousands):

Table 4
 
Three Months Ended
 
03/31/2015
03/31/2014
 
Interest Income
Percent of Total
Interest Income
Percent of Total
Investments1
$
23,699

21.8
%
$
25,647

24.2
%
Advances
32,507

30.0

29,063

27.5

Mortgage loans held for portfolio
52,016

47.9

50,761

47.9

Other
352

0.3

390

0.4

TOTAL INTEREST INCOME
$
108,574

100.0
%
$
105,861

100.0
%
                   
1 
Includes trading securities, held-to-maturity securities, interest-bearing deposits, securities purchased under agreements to resell and Federal funds sold.


51


Net income for the three months ended March 31, 2015 was $31.1 million compared to $22.3 million for the three months ended March 31, 2014. The $8.8 million increase was due primarily to fair value fluctuations related to derivatives and hedging activities, an increase in net interest income, and a decrease in the provision/reversal for credit losses on mortgage loans. The $2.1 million increase in net interest income was due to an increase in the average balance of advances and mortgage loans, partially offset by a decrease in yield on both instruments. The $1.1 million decrease in the provision/reversal for credit losses on mortgage loans was a result of improvement in credit quality, along with adjustments to loss factors used in calculating the allowance for credit losses during the first quarter of 2015.
 
Net Interest Income: Net interest income, which includes interest earned on advances, mortgage loans and investments less interest paid on consolidated obligations, deposits and other borrowings is the primary source of our earnings. The increase in net interest income for the three months ended March 31, 2015 compared to March 31, 2014 was due primarily to a $5.3 billion increase in the average balance of advances and $0.3 billion increase in the average balance of mortgage loans, which helped offset the 19 basis point decrease in the average yield on interest-earning assets. Net interest margin decreased by nine basis points and net interest spread decreased by seven basis points between the current quarter and the prior year quarter (see Table 5). The decreases in net interest spread and margin in the first quarter of 2015 also were driven by the decrease in the average yields on advances and mortgage loans, but were partially offset by a 12 basis point decrease in the average rate on borrowings, all of which are discussed in greater detail below.

The average yield on investments, which consist of interest-bearing deposits, Federal funds sold, securities purchased under agreement to resell (reverse repurchase agreements), and investment securities, decreased 19 basis points, from 1.09 percent for the quarter ended March 31, 2014 to 0.90 percent for the quarter ended March 31, 2015, resulting from compositional changes in the portfolio, despite increasing yields on individual portfolios. The decrease in the average yield on investments between the three months ended March 31, 2015 and 2014 was largely due to prepayments of higher rate MBS/CMOs that were reinvested into lower rate or variable rate MBS/CMOs or other lower-yielding instruments (Federal funds sold and reverse repurchase agreements). At times during 2014, we did not reinvest MBS portfolio prepayments in new MBS because of the focus on our core mission assets ratio as well as our inability to purchase MBS at prices that would generate what we consider to be acceptable spreads. While we plan to maintain our focus on our core mission assets ratio during 2015, we anticipate that we will purchase MBS as long as we can do so at prices that will generate what we consider to be acceptable spreads.

The average yield on advances decreased 10 basis points, from 0.68 percent for the three months ended March 31, 2014 to 0.58 percent for the three months ended March 31, 2015. The decrease in the average yield on advances was due to a continued shift in composition that began in 2012 and accelerated in 2014 and into the first quarter of 2015, which has resulted in an increase in our lowest yielding advance product, our line of credit advances. The average balance of advances increased 30.8 percent, between the first quarter of 2014 and the first quarter of 2015, with the majority of the increase occurring in our line of credit advances. The FHLBank has been actively promoting the impact of our Class B Common Stock dividend on the effective borrowing cost of short-term advances to increase member awareness of the benefit of higher dividends.

The average yield on mortgage loans decreased eight basis points, from 3.45 percent for the three months ended March 31, 2014 to 3.37 percent for the three months ended March 31, 2015. The decrease in yield was due to an increase in premium amortization as mortgage rates decreased towards the end of 2014 and during the first quarter of 2015 and prepayments on higher coupon loans increased (yields on mortgage loans decline as premiums are amortized; amortization accelerates as prepayments increase). The decrease is also a result of purchases of mortgage loans at rates lower than the existing portfolio. We expect to see an increase in prepayments and a related acceleration in premium amortization in 2015, resulting from the decline in mortgage rates, which will reduce our average yield on mortgage loans.

The average cost of consolidated obligation bonds remained unchanged at 0.99 percent for the three months ended March 31, 2015 and 2014, and the average cost of discount notes also remained unchanged at 0.08 percent between periods. The average balance of discount notes increased by $7.5 billion, or 79.4 percent, while average bond balances have declined slightly, which has reduced the total cost of our interest-bearing liabilities by 12 basis points. We expect short-term interest rates to remain low for much of 2015, so we expect our total interest bearing liability cost to remain relatively stable over the next few quarters. However, we do not expect to be able to call and replace debt at lower rates to the same extent during 2015 as we did in 2014. When we call and replace callable debt, it generally increases interest costs in the short term due to the acceleration of the unamortized concessions on the debt when it is called because concession costs are amortized to contractual maturity using the level-yield method. However, this increase is offset by the lower rate on the new debt and the funding benefit due to the timing differences between the date the debt is called and the forward settlement date of the new debt (conventionally not exceeding 30 days). For further discussion of how we use callable bonds, see Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Consolidated Obligations.”


52


Our net interest spread is impacted by derivative and hedging activities, as the assets and liabilities hedged with derivative instruments designated under fair value hedging relationships are adjusted for changes in fair values, while other assets and liabilities are carried at historical cost. Further, net interest payments or receipts on interest rate swaps designated as fair value hedges and the amortization/accretion of hedging activities are recognized as adjustments to the interest income or expense of the hedged asset or liability. However, net interest payments or receipts on derivatives that do not qualify for hedge accounting (economic hedges) flow through net gain (loss) on derivatives and hedging activities instead of net interest income (net interest received/paid on economic derivatives is identified in Tables 7 and 8 under this Item 2), which distorts yields, especially for trading investments that are swapped to a variable rate.


53


Table 5 presents average balances and annualized yields of major earning asset categories and the sources funding those earning assets (dollar amounts in thousands):

Table 5
 
Three Months Ended
 
03/31/2015
03/31/2014
 
Average
Balance
Interest
Income/
Expense
Yield
Average
Balance
Interest
Income/
Expense
Yield
Interest-earning assets:
 

 

 

 

 

 

Interest-bearing deposits
$
223,292

$
54

0.10
%
$
210,800

$
37

0.07
%
Securities purchased under agreements to resell
1,511,944

565

0.15

86,111

14

0.06

Federal funds sold
2,349,122

659

0.11

1,472,222

249

0.07

Investment securities1
6,594,240

22,421

1.38

7,814,066

25,347

1.32

Advances2,3
22,690,545

32,507

0.58

17,348,274

29,063

0.68

Mortgage loans2,4,5
6,251,528

52,016

3.37

5,963,407

50,761

3.45

Other interest-earning assets
21,886

352

6.53

23,753

390

6.69

Total earning assets
39,642,557

108,574

1.11

32,918,633

105,861

1.30

Other non-interest-earning assets
29,656

 

 

109,332

 

 

Total assets
$
39,672,213

 

 

$
33,027,965

 

 

 
 
 
 
 
 
 
Interest-bearing liabilities:
 

 

 

 

 

 

Deposits
$
754,279

$
164

0.09
%
$
1,072,934

$
238

0.09
%
Consolidated obligations2:
 

 

 

 

 

 

Discount Notes
16,927,623

3,502

0.08

9,433,498

1,844

0.08

Bonds
19,712,189

48,225

0.99

20,262,917

49,240

0.99

Other borrowings
10,604

69

2.62

7,280

45

2.45

Total interest-bearing liabilities
37,404,695

51,960

0.56

30,776,629

51,367

0.68

Capital and other non-interest-bearing funds
2,267,518

 

 

2,251,336

 

 

Total funding
$
39,672,213

 

 

$
33,027,965

 

 

 
 
 
 
 
 
 
Net interest income and net interest spread6
 

$
56,614

0.55
%
 

$
54,494

0.62
%
 
 
 
 
 
 
 
Net interest margin7
 

 

0.58
%
 

 

0.67
%
                   
1 
The non-credit portion of the OTTI discount on held-to-maturity securities is excluded from the average balance for calculations of yield since the change runs through equity.
2 
Interest income/expense and average rates include the effect of associated derivatives.
3 
Advance income includes prepayment fees on terminated advances.
4 
CE fee payments are netted against interest earnings on the mortgage loans. The expense related to CE fee payments to PFIs was $1.3 million and $1.2 million for the three months ended March 31, 2015 and 2014, respectively.
5 
Mortgage loans average balance includes outstanding principal for non-performing conventional loans. However, these loans no longer accrue interest.
6 
Net interest spread is the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
7 
Net interest margin is net interest income as a percentage of average interest-earning assets.


54


Changes in the volume of interest-earning assets and the level of interest rates influence changes in net interest income, net interest spread and net interest margin. Table 6 summarizes changes in interest income and interest expense (in thousands):

Table 6
 
Three Months Ended
 
3/31/2015 vs. 3/31/2014
 
Increase (Decrease) Due to
 
Volume1,2
Rate1,2
Total
Interest Income:
 

 

 

Interest-bearing deposits
$
2

$
15

$
17

Securities purchased under agreements to resell
509

42

551

Federal funds sold
195

215

410

Investment securities
(4,102
)
1,176

(2,926
)
Advances
8,067

(4,623
)
3,444

Mortgage loans
2,414

(1,159
)
1,255

Other assets
(29
)
(9
)
(38
)
Total earning assets
7,056

(4,343
)
2,713

Interest Expense:
 

 

 

Deposits
(69
)
(5
)
(74
)
Consolidated obligations:
 

 

 

Discount notes
1,545

113

1,658

Bonds
(1,345
)
330

(1,015
)
Other borrowings
21

3

24

Total interest-bearing liabilities
152

441

593

Change in net interest income
$
6,904

$
(4,784
)
$
2,120

                   
1 
Changes in interest income and interest expense not identifiable as either volume-related or rate-related have been allocated to volume and rate based upon the proportion of the absolute value of the volume and rate changes.
2 
Amounts used to calculate volume and rate changes are based on numbers in dollars. Accordingly, recalculations using the amounts in thousands as disclosed in this report may not produce the same results.

Net Gain (Loss) on Derivatives and Hedging Activities: The volatility in other income (loss) is driven predominantly by fair value fluctuations on derivative and hedging transactions, which include interest rate swaps, caps, and floors. Net gain (loss) from derivatives and hedging activities is sensitive to several factors, including: (1) the general level of interest rates; (2) the shape of the term structure of interest rates; and (3) implied volatilities of interest rates. The fair value of options, particularly interest rate caps and floors, are also impacted by the time value decay that occurs as the options approach maturity, but this factor represents the normal amortization of the cost of these options and flows through income irrespective of any changes in the other factors impacting the fair value of the options (level of rates, shape of curve, and implied volatility).

As demonstrated in Tables 7 and 8, the majority of the derivative net gains and losses are related to economic hedges, such as interest rate swaps matched to GSE debentures classified as trading securities and interest rate caps and floors, which do not qualify for hedge accounting treatment under GAAP. Net interest payments or receipts on these economic hedges flow through net gain (loss) on derivatives and hedging activities instead of net interest income, which distorts yields, especially for trading investments that are swapped to variable rates. Net interest received/paid on economic hedges is identified in Tables 7 and 8. Ineffectiveness on fair value hedges contributes to gains and losses on derivatives, but to a much lesser degree. We generally record net fair value gains on derivatives when the overall level of interest rates rises over the period and record net fair value losses when the overall level of interest rates falls over the period, due to the mix of the economic hedges.


55


In the first quarter of 2015, net gains and losses on derivatives and hedging activities resulted in a decrease to net income of $6.0 million, compared to a decrease in net income of $14.0 million in the first quarter of 2014. As noted previously, the changes are primarily attributable to volatility in the fair value of our economic derivatives. The net income increase of $8.0 million between periods includes losses on our interest rate cap portfolio as fair values declined due to lower interest rates, although the decrease for the current period was far less pronounced, as the prior period had more significant losses due to gains recognized during 2013 as fair values increased due to an increase and steepening of the general level of the interest rate swap curve. In both quarters, we experienced increases in the fair value of our interest rate swaps matched to GSE debentures as a result of the passage of time as several derivatives approached maturity (reducing the overall loss position of the derivatives) and changes in interest rates for their respective maturities (pay fixed rate swap), but these increases were offset by decreases in the fair values of the swapped GSE debentures, which are recorded in net gain (loss) on trading securities.

While the net interest received (paid) on the associated economic interest rate swap is recorded in net gain (loss) on derivatives and hedging activities, the interest on the underlying hedged items, the GSE debentures, is recorded in interest income, with any changes in fair value recognized in net gain (loss) on trading securities. See Tables 34 and 35 under Item 3 – “Quantitative and Qualitative Disclosures About Market Risk” for additional detail regarding notional and fair value amounts of derivative instruments.

Tables 7 and 8 categorize the earnings impact by product for hedging activities (in thousands):

Table 7
 
Three Months Ended 03/31/2015
 
Advances
Investments
Mortgage Loans
Consolidated Obligation Discount Notes
Consolidated Obligation Bonds
Total
Impact of derivatives and hedging activities in net interest income:
 
 
 
 
 
 
Net amortization/accretion of hedging activities
$
(2,212
)
$

$
(322
)
$

$
(2
)
$
(2,536
)
Net interest settlements
(30,706
)


9

21,151

(9,546
)
Subtotal
(32,918
)

(322
)
9

21,149

(12,082
)
Net gain (loss) on derivatives and hedging activities:
 

 

 

 
 

 

Fair value hedges:
 
 
 
 
 
 
Interest rate swaps
(331
)


136

(638
)
(833
)
Economic hedges – unrealized gain (loss) due to fair value changes:
 
 
 
 
 
 
Interest rate swaps

5,460



96

5,556

Interest rate caps

(1,859
)



(1,859
)
Mortgage delivery commitments


724



724

Economic hedges – net interest received (paid)

(11,127
)


1,576

(9,551
)
Subtotal
(331
)
(7,526
)
724

136

1,034

(5,963
)
Net impact of derivatives and hedging activities
(33,249
)
(7,526
)
402

145

22,183

(18,045
)
Net gain (loss) on trading securities hedged on an economic basis with derivatives

(5,769
)



(5,769
)
TOTAL
$
(33,249
)
$
(13,295
)
$
402

$
145

$
22,183

$
(23,814
)


56


Table 8
 
Three Months Ended 03/31/2014
 
Advances
Investments
Mortgage Loans
Consolidated
Obligation Bonds
Total
Impact of derivatives and hedging activities in net interest income:
 

 

 

 

 

Net amortization/accretion of hedging activities
$
(3,048
)
$

$
(369
)
$
125

$
(3,292
)
Net interest settlements
(32,821
)


21,325

(11,496
)
Subtotal
(35,869
)

(369
)
21,450

(14,788
)
Net gain (loss) on derivatives and hedging activities:
 

 

 

 

 

Fair value hedges:
 

 

 

 

 

Interest rate swaps
328



(1,583
)
(1,255
)
Economic hedges – unrealized gain (loss) due to fair value changes:
 

 

 

 

 
Interest rate swaps

7,236


1,259

8,495

Interest rate caps/floors

(12,126
)


(12,126
)
Mortgage delivery commitments


810


810

Economic hedges – net interest received (paid)

(11,043
)

1,140

(9,903
)
Subtotal
328

(15,933
)
810

816

(13,979
)
Net impact of derivatives and hedging activities
(35,541
)
(15,933
)
441

22,266

(28,767
)
Net gain (loss) on trading securities hedged on an economic basis with derivatives

(5,027
)


(5,027
)
TOTAL
$
(35,541
)
$
(20,960
)
$
441

$
22,266

$
(33,794
)

Net Gain (Loss) on Trading Securities: All gains and losses related to trading securities are recorded in other income (loss) as net gain (loss) on trading securities; however, only gains and losses relating to trading securities that are related to economic hedges are included in Tables 7 and 8. Unrealized gains (losses) fluctuate as the fair value of our trading portfolio fluctuates. There are a number of factors that can impact the fair value of a trading security including the movement in absolute interest rates, changes in credit spreads, the passage of time and changes in price volatility. Table 9 presents the major components of the net gain (loss) on trading securities (in thousands):

Table 9
 
Three Months Ended
 
03/31/2015
03/31/2014
GSE debentures
$
(5,780
)
$
(5,298
)
U.S. Treasury note
(10
)
15

Agency MBS/CMO
(53
)
(43
)
Short-term money market securities
(1
)
(8
)
TOTAL
$
(5,844
)
$
(5,334
)


57


The majority of the volatility in the net gain (loss) of our trading portfolio can be attributed to fair value changes on GSE debentures. The largest component of our trading portfolio is comprised of fixed rate GSE debentures, and generally most of the securities are related to economic hedges. The fair values of these GSE debentures are more affected by changes in intermediate interest rates (e.g., two-year to four-year rates) and are swapped to three-month LIBOR. An increase in interest rates and GSE credit spreads resulted in fair value losses on the GSE debentures for the first quarter of 2014. During 2014, interest rates in the one- to three- year range continued to increase, resulting in additional losses on the GSE debentures for the first quarter of 2015, but the decrease in GSE credit spreads reduced the magnitude of those losses. In addition to interest rates and credit spreads, the value of these securities is affected by time decay. These fixed rate GSE debentures possess coupons which are well above current market rates for similar securities and, therefore, are currently valued at substantial premiums. As these securities approach maturity, their prices will converge to par resulting in a decrease in their current premium price (i.e., time decay). Given that the variable rate GSE debentures re-price monthly, they generally account for a very small portion of the net gain (loss) on trading securities unless current market spreads on these variable rate securities diverge from the spreads at the time of our acquisition of the securities.

Operating Expenses: Operating expenses include compensation and benefits and other operating expenses. The largest component of operating expenses, compensation and benefits, increased by $0.9 million, or 12.4 percent, for the quarter ended March 31, 2015 compared to the prior year quarter. The increase is due to the hiring of additional employees and an increase in the base salaries of existing employees, with a corresponding increase in incentive compensation.

Non-GAAP Measures: We fulfill our mission by: (1) providing liquidity to our members through the offering of advances to finance housing, economic development and community lending; (2) supporting residential mortgage lending through the MPF Program and purchases of MBS; and (3) providing regional affordable housing programs that create housing opportunities for low- and moderate-income families. In order to effectively accomplish our mission, we must obtain adequate funding amounts at acceptable interest rate levels. We use derivatives as tools to reduce our funding costs and manage interest rate risk and prepayment risk. We also acquire and classify certain investments as trading securities for liquidity and asset-liability management purposes. Although we manage the risks mentioned and utilize these transactions for asset-liability tools, we do not manage the fluctuations in the fair value of our derivatives or trading securities. We are essentially a “hold-to-maturity” investor and transact derivatives only for hedging purposes, even though some derivative hedging relationships do not qualify for hedge accounting under GAAP (referred to as economic hedges) and therefore can add significant volatility to our GAAP net income.

Adjusted income is a non-GAAP financial measure used by management to evaluate the quality of our ongoing earnings. We believe that the presentation of income as measured for management purposes enhances the understanding of our performance by highlighting our underlying results and profitability. By removing volatility created by fair value fluctuations and items such as prepayment fees, we can compare longer-term trends in earnings that might otherwise be indeterminable. Although we calculate our non-GAAP financial measures consistently from period to period using appropriate GAAP components, non-GAAP financial measures are not required to be uniformly applied and are not audited. These non-GAAP financial measures are frequently used by our stakeholders in the evaluation of our performance, but they have inherent limitations as analytical tools and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP.

For the three months ended March 31, 2015, adjusted net income increased by $2.2 million compared to the three months ended March 31, 2014 (see Table 10). This increase parallels the increase in GAAP net interest income before provision/reversal for credit losses on mortgage loans. This increase, when compared to the more dramatic increase in net income computed in accordance with GAAP, illustrates the impact of the volatility of fair value fluctuations in derivatives and hedging activities and trading securities. Table 10 presents a reconciliation of GAAP net income to adjusted income (in thousands):

Table 10
 
Three Months Ended
 
03/31/2015
03/31/2014
Net income, as reported under GAAP
$
31,121

$
22,267

AHP assessments
3,459

2,475

Income before AHP assessments
34,580

24,742

Derivative-related and other excluded items1
1,500

9,135

Adjusted income (a non-GAAP measure)
$
36,080

$
33,877

                   
1 
Consists of fair value changes on derivatives and hedging activities (excludes net interest settlements on derivatives not qualifying for hedge accounting) and trading securities as well as prepayment fees on terminated advances.


58


Table 11 presents a comparison of adjusted ROE (a non-GAAP financial measure) to the average overnight Federal funds rate, which we use as a key measure of effective utilization and management of members’ capital (dollar amounts in thousands). Adjusted ROE spread (a non-GAAP financial measure) increased by 73 basis points, or by 9.9 percent, for the three months ended March 31, 2015 compared to the prior year quarter. The increase in adjusted ROE spread is a result of the change in capital stock activity requirements for advances and capital management practices that went into effect during the second quarter of 2014 (see additional discussion under this Item 2 – "Liquidity and Capital Resources - Capital"). Likewise, the decrease in our capital stock activity requirement for advances coupled with the repurchase of a significant amount of excess stock after the first quarter of 2014 is the primary cause of the decrease in average GAAP total capital of 3.4 percent for the three months ended March 31, 2015.

Table 11
 
Three Months Ended
 
03/31/2015
03/31/2014
Average GAAP total capital for the period
$
1,776,764

$
1,839,379

ROE, based upon GAAP net income
7.10
%
4.91
%
Adjusted ROE, based upon adjusted income
8.24
%
7.47
%
Average overnight Federal funds effective rate
0.11
%
0.07
%
Adjusted ROE as a spread to average overnight Federal funds effective rate
8.13
%
7.40
%

Financial Condition

Overall: Total assets increased $3.3 billion, or 9.0 percent, from December 31, 2014 to March 31, 2015. This increase was due primarily to a $3.0 billion, or 16.2 percent, increase in advances, and a $0.8 billion, or 12.3 percent, increase in investment securities (investments classified as trading or held-to-maturity). The increase in advances was largely due to an increase in short-term advances, which was attributed to the increase in dividend rates that effectively reduces the cost of our advances to the member and increases the member's ability to profitably deploy the funding. We have been actively promoting the impact of the dividend on the effective borrowing cost of our advances to increase member awareness of the benefit of higher dividends. Increases in the balances of total consolidated obligations and total capital between March 31, 2015 and December 31, 2014 also reflect increased advance utilization.

As a percentage of assets at March 31, 2015 compared to December 31, 2014, short-term investments, advances and investment securities increased while cash and mortgage loans decreased, despite a small increase in the mortgage loan portfolio. The concentrations of discount notes and consolidated obligation bonds are generally driven by asset composition, so the increase in discount notes and the corresponding decline in consolidated obligation bonds for the current period is the result of an increase in our line of credit product balance and short-term advances, which are generally funded by discount notes. Table 12 presents the percentage concentration of the major components of our Statements of Condition:


59


Table 12
 
Component Concentration
 
03/31/2015
12/31/2014
Assets:
 
 
Cash and due from banks
2.2
%
6.9
%
Interest-bearing deposits, securities purchased under agreements to resell and Federal funds sold
11.2

9.0

Investment securities
17.7

17.1

Advances
52.9

49.7

Mortgage loans, net
15.6

16.9

Other assets
0.4

0.4

Total assets
100.0
%
100.0
%
 
 
 
Liabilities:
 
 
Deposits
1.9
%
1.6
%
Consolidated obligation discount notes, net
44.2

38.6

Consolidated obligation bonds, net
48.3

54.9

Other liabilities
1.3

0.6

Total liabilities
95.7

95.7

 
 
 
Capital:
 
 
Capital stock outstanding
2.7

2.6

Retained earnings
1.6

1.7

Accumulated other comprehensive income (loss)


Total capital
4.3

4.3

Total liabilities and capital
100.0
%
100.0
%


60


Table 13 presents changes in the major components of our Statements of Condition (dollar amounts in thousands):

Table 13
 
Increase (Decrease)
in Components
 
3/31/2015 vs. 12/31/2014
 
Dollar
Change
Percent
Change
Assets:
 
 
Cash and due from banks
$
(1,666,827
)
(65.5
)%
Investments1
1,958,447

20.4

Advances
2,962,379

16.2

Mortgage loans, net
54,193

0.9

Derivative assets, net
13,054

39.6

Other assets
(10,344
)
(8.5
)
Total assets
$
3,310,902

9.0
 %
 
 
 
Liabilities:
 

 

Deposits
$
148,841

25.0
 %
Consolidated obligations, net
2,700,412

7.8

Derivative liabilities, net
(12,794
)
(36.3
)
Other liabilities
332,494

168.8

Total liabilities
3,168,953

9.0

 
 
 
Capital:
 
 
Capital stock outstanding
124,278

12.8

Retained earnings
16,434

2.6

Accumulated other comprehensive income (loss)
1,237

7.8

Total capital
141,949

9.0

Total liabilities and capital
$
3,310,902

9.0
 %
                   
1    Investments also include interest-bearing deposits, Federal funds sold and securities purchased under agreements to resell.


61


Advances: Our advance products are developed, as authorized in the Bank Act and in regulations established by the Finance Agency, to meet the specific liquidity and term funding needs of our members. As a wholesale provider of funds, we compete with brokered certificates of deposit and security repurchase agreements. We strive to price our advances relative to our marginal cost of funds while trying to remain competitive with the wholesale funding markets. While there is less competition in the long-term maturities, member demand for advances in these maturities has historically been lower than the demand for advances with short- and medium-term maturities. Nonetheless, long-term advances are also priced at relatively low spreads to our cost of funds.

Table 14 summarizes advances outstanding by product (dollar amounts in thousands):
 
Table 14
 
03/31/2015
12/31/2014
 
Dollar
Percent
Dollar
Percent
Adjustable rate:
 

 

 

 

Standard advance products:
 

 

 

 

Line of credit
$
7,540,076

35.8
%
$
5,349,579

29.5
%
Regular adjustable rate advances
70,000

0.3

22,943

0.1

Adjustable rate callable advances
5,099,260

24.2

4,615,227

25.4

Customized advances:
 

 

 

 

Adjustable rate advances with embedded caps or floors
72,000

0.3

97,000

0.5

Standard housing and community development advances:
 

 

 

 

Adjustable rate callable advances
81,818

0.4

81,818

0.5

Total adjustable rate advances
12,863,154

61.0

10,166,567

56.0

Fixed rate:
 

 

 

 

Standard advance products:
 

 

 

 

Short-term fixed rate advances
377,305

1.8

67,052

0.4

Regular fixed rate advances
4,934,420

23.4

4,954,635

27.3

Fixed rate callable advances
75,445

0.3

85,445

0.5

Standard housing and community development advances:
 

 

 

 
Regular fixed rate advances
349,548

1.7

327,015

1.8

Fixed rate callable advances
2,000


2,000


Total fixed rate advances
5,738,718

27.2

5,436,147

30.0

Convertible:
 

 

 

 

Standard advance products:
 

 

 

 

Fixed rate convertible advances
1,554,542

7.4

1,586,242

8.7

Amortizing:
 

 

 

 

Standard advance products:
 

 

 

 

Fixed rate amortizing advances
443,650

2.1

452,517

2.5

Fixed rate callable amortizing advances
32,942

0.2

33,651

0.2

Standard housing and community development advances:
 

 

 

 
Fixed rate amortizing advances
446,282

2.1

458,644

2.5

Fixed rate callable amortizing advances
6,998

0.0

7,113

0.1

Total amortizing advances
929,872

4.4

951,925

5.3

TOTAL PAR VALUE
$
21,086,286

100.0
%
$
18,140,881

100.0
%
                   
Note that an individual advance may be reclassified to a different product type between periods due to the occurrence of a triggering event such as the passing of a call date (i.e., from fixed rate callable advance to regular fixed rate advance) or conversion of an advance (i.e., from fixed rate convertible advance to adjustable rate callable advance).


62


Advances are one of the primary ways we fulfill our mission of providing liquidity to our members and constituted the largest component of our balance sheet at March 31, 2015 and December 31, 2014. The 16.2 percent increase in advance par value (see Table 14) was due to a significant increase in our line of credit product as well as smaller increases in adjustable rate callable advances and short-term fixed rate advances. The increase in our line of credit product was largely a result of efforts to promote the pricing advantages of advances when taking our dividend payment rates into consideration. We expect advances as a percent of total assets to increase as part of our core mission asset focus (see “Executive Level Overview  under this Item 2) but we cannot predict member demand for our advance products.

As of March 31, 2015 and December 31, 2014, 61.7 percent and 65.0 percent, respectively, of our members carried outstanding advance balances. The overall demand for our advances can typically be attributed to the demand for loans that our depository members are experiencing in their communities and their ability to fund those loans with deposit growth. It is also influenced by our insurance company members’ need for operational liquidity and the ability of both depository and insurance company members to profitably invest advance funding. The growth in advances experienced in the latter half of 2014 and the first quarter of 2015 is a result of a smaller number of large members increasing short-term advances, including line of credit advances, due to lower effective borrowing costs when considering the increase in the dividend rate. Advances with many members could decline or remain flat until greater levels of funding can be reallocated from short-term liquid assets into higher-yielding loans or assets. If members reduce the volume of their advances, we expect to continue our past practice of repurchasing excess capital stock, when and as requested. In addition, when, and if, member advance demand changes, a few larger members could have a significant impact on the amount of total outstanding advances, much like what occurred during the latter half of 2014 and the first quarter of 2015.

Rather than match funding long-term, large dollar advances, we elect to swap a significant portion of large dollar advances with longer maturities to short-term indices (one‑ or three‑month LIBOR) to synthetically create adjustable rate advances. When coupled with the volume of our short-term advances, advances that effectively re-price at least every three months represent 86.5 percent and 84.1 percent of our total advance portfolio as of March 31, 2015 and December 31, 2014, respectively.

Table 15 presents information on our five largest borrowers (dollar amounts in thousands). If the borrower was not one of our top five borrowers for one of the periods presented, the applicable columns are left blank. We have rights to collateral with an estimated fair value in excess of the book value of these advances and, therefore, do not expect to incur any credit losses on these advances.

Table 15
 
03/31/2015
12/31/2014
Borrower Name
Advance
Par Value
Percent of Total
Advance Par
Advance
Par Value
Percent of Total
Advance Par
Bank of Oklahoma, NA
$
3,700,000

17.5
%
$
2,103,400

11.6
%
Capitol Federal Savings Bank
3,375,000

16.0

2,575,000

14.2

MidFirst Bank
3,203,000

15.2

2,736,500

15.1

United of Omaha Life Insurance Co.
740,091

3.5

591,818

3.2

Bellco Credit Union
536,325

2.6





American Fidelity Assurance Co.




521,500

2.9

TOTAL
$
11,554,416

54.8
%
$
8,528,218

47.0
%


63


Table 16 presents the interest income associated with the five borrowers with the highest interest income for the periods presented (dollar amounts in thousands). If the borrower was not one of our five borrowers with the highest income for one of the periods presented, the applicable columns are left blank.

Table 16
 
Three Months Ended
 
03/31/2015
03/31/2014
Borrower Name
Advance Income
Percent of Total
Advance Income1
Advance Income
Percent of Total
Advance Income1
Capitol Federal Savings Bank
$
16,125

26.0
%
$
13,768

22.3
%
American Fidelity Assurance Co.
4,278

6.9

4,458

7.2

MidFirst Bank
2,589

4.2





Bank of Oklahoma, NA
1,923

3.1





United of Omaha Life Insurance Co.
1,562

2.5

1,714

2.8

Security Benefit Life Insurance Co.
 
 
2,691

4.4

Ent Federal Credit Union
 
 
1,593

2.6

TOTAL
$
26,477

42.7
%
$
24,224

39.3
%
                   
1 
Total advance income by borrower excludes net interest settlements on derivatives hedging the advances. Total advance income for all borrowers is net of interest receipts/(payments) on derivatives hedging advances of $(30.7) million and $(32.8) million for the three months ended March 31, 2015 and 2014, respectively.

Table 4 presents the amount of interest income on advances as a percentage of total interest income for the three months ended March 31, 2015 and 2014.

MPF Program: The MPF Program is considered an attractive secondary mortgage market alternative for our members, especially the smaller institutions in our district. We participate in the MPF Program through the MPF Provider, a division of FHLBank of Chicago. Under the MPF Program, participating members can sell us conventional and government fixed rate, size-conforming, single-family residential mortgage loans.

The principal amount of new mortgage loans acquired and held on balance sheet from in-district PFIs during the three months ended March 31, 2015 was $0.3 billion. These new originations and acquisitions, net of loan payments received and excluding amounts participated to other FHLBanks, resulted in an increase of 0.9 percent in the outstanding net balance of our mortgage loan portfolio from December 31, 2014 to March 31, 2015. Net mortgage loans as a percentage of total assets decreased from 16.9 percent as of December 31, 2014 to 15.6 percent as of March 31, 2015. Table 4 presents the amount of interest income on mortgage loans held for portfolio as a percentage of total interest income for the three months ended March 31, 2015 and 2014.

The primary factors that may influence future growth in mortgage loans held for portfolio include: (1) the number of new and delivering PFIs; (2) the mortgage loan origination volume of current PFIs; (3) refinancing activity; (4) the level of interest rates and the shape of the yield curve; (5) the relative competitiveness of MPF pricing to the prices offered by other buyers of residential mortgage loans; and (6) a PFIs' level of excess risk-based capital relative to the required risk-based capital charge associated with the PFI's CE obligations on MPF mortgage loans. In an effort to manage the level of mortgage loans on our books, management has researched and continues to review options that may help manage the overall level of our mortgage loan portfolio. Those options include participating loan volume or selling whole loans to other FHLBanks, members or other investors. As described below, we have pursued participations and, although we may determine to sell whole loans from time to time, we have not identified any specific loans to be sold as of March 31, 2015.


64


Historically, we have used the MPF Xtra product and mortgage loan participations with another FHLBank to effectively restrict the growth in mortgage loans held for portfolio and provide management with adequate means to control the amount of mortgage loan portfolio volume retained on our balance sheet to maintain our desired asset composition. The MPF Xtra product is a structure where our PFIs sell mortgage loans to FHLBank of Chicago and simultaneously to Fannie Mae. We receive a counterparty fee from FHLBank of Chicago (Fannie Mae seller-servicer) for our PFI participating in the MPF Xtra product. We discontinued our mortgage loan participations with another FHLBank in the first quarter of 2014 because of lower origination volumes with PFIs, but we continue to consider and develop other options to manage the size of the mortgage loan portfolio while maintaining reliable support of our members’ residential lending programs. During the first quarter of 2015, we received approval from the Finance Agency to offer participation interests in risk-sharing MPF loan pools to member institutions. We are currently in the planning process for operational preparedness for this new activity, which may further enhance our ability to manage the size of our MPF portfolio in the future.

The number of approved PFIs decreased from 281 as of December 31, 2014 to 278 as of March 31, 2015. During the three months ended March 31, 2015, we purchased loans from 155 PFIs with no one PFI accounting for more than 5.4 percent of the total volume purchased. Although there is no guarantee, we anticipate that the number of PFIs delivering loans will increase during 2015 as other secondary mortgage outlets become less competitive or less available to many of our members. Table 17 presents the outstanding balances of mortgage loans sold to us, net of participations, (dollar amounts in thousands) from our top five PFIs and the percentage of those loans to total mortgage loans outstanding.

Table 17
 
03/31/2015
12/31/2014
 
Mortgage
Loan Balance
Percent of Total
Mortgage Loans
Mortgage
Loan Balance
Percent of Total
Mortgage Loans
Mutual of Omaha Bank
$
237,576

3.8
%
$
246,851

4.0
%
FirstBank of Colorado
215,944

3.5

209,593

3.4

Tulsa Teachers Credit Union
177,931

2.9

167,449

2.7

SAC Federal Credit Union
140,840

2.3

135,909

2.2

Farmers Bank & Trust N.A.
121,358

2.0

122,898

2.0

TOTAL
$
893,649

14.5
%
$
882,700

14.3
%

Two indications of credit quality are scores provided by Fair Isaac Corporation (FICO®) and loan-to-value (LTV) ratios. FICO is a widely used credit industry indicator to assess borrower credit quality with scores typically ranging from 300 to 850 with the low end of the scale indicating greater credit risk. The MPF Program requires a minimum FICO score of 620 for all conventional loans. LTV is a primary variable in credit performance. Generally speaking, a higher LTV ratio means greater risk of loss in the event of a default and also means higher loss severity. The weighted average FICO score and LTV recorded at origination for conventional mortgage loans outstanding as of March 31, 2015 was 751 and 73.1 percent, respectively. See Note 6 of the Notes to Financial Statements under Item 1 for additional information regarding credit quality indicators.

Allowance for Credit Losses on Mortgage Loans Held for Portfolio – The allowance for credit losses on mortgage loans held for portfolio is based on our estimate of probable credit losses inherent in our portfolio as of the Statement of Condition date. The estimate is based on an analysis of our historical loss experience and observed trends in loan delinquencies. During the first quarter of 2015, we modified our 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. A delinquent mortgage loan is charged off when the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported. Additionally, under AB 2012-02, any outstanding loan balance in excess of the fair value of the property, less cost to sell, is 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 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. With the recent improvements in home prices and overall decrease in our delinquency rate, we believe that our refinement in technique better reflects economic conditions during the reporting period and maintains our allowance for credit losses at a level adequate to absorb probable and estimable credit losses inherent in our portfolio.


65


The decrease in the provision for credit losses during the current quarter and decrease in the allowance balance as a percent of UPB as of March 31, 2015 were primarily attributable to improvements in credit quality during the period and the implementation of AB 2012-02 with the change in technique contributing to the decrease to a smaller degree. We believe that policies and procedures are in place to effectively manage the credit risk on mortgage loans held in portfolio. See Note 6 of the Notes to Financial Statements under Item 1 for a summary of the allowance for credit losses on mortgage loans, and delinquency aging and key credit quality indicators for our mortgage loan portfolio.

Investments: Investments are used to provide liquidity and to provide primary and secondary market support for the U.S. housing securities market. Total investments increased 20.4 percent from December 31, 2014 to March 31, 2015 primarily due to an increase in MBS and certificates of deposit, which corresponded to the increase in advances and mortgage loans, as growth in core mission assets allows for growth in non-mission assets while maintaining our desired core mission assets ratio. These investments are generally transacted with government agencies and large financial institutions that we consider to be of investment quality. The Finance Agency defines investment quality as a security with adequate financial backings so that full and timely payment of principal and interest on such security is expected and there is minimal risk that the timely payment of principal and interest would not occur because of adverse changes in economic and financial conditions during the projected life of the security.

Short-term Investments – Short-term investments, which are used to provide funds to meet the credit needs of our members, maintain liquidity, and meet other financial obligations such as debt servicing, consist primarily of reverse repurchase agreements, interest-bearing deposits, overnight Federal funds sold, term Federal funds sold, certificates of deposit and commercial paper. The Bank Act and Finance Agency regulations and guidelines set liquidity requirements for us, and our board of directors has also adopted additional liquidity policies. In addition, we maintain a contingency liquidity plan in the event of operational disruptions. See “Risk Management – Liquidity Risk Management” under this Item 2 for a discussion of our liquidity management.

Within our portfolio of short-term investments, we face credit risk from unsecured exposures. Our short-term unsecured credit investments have maturities generally ranging between overnight and three months and include the following types:
Interest-bearing deposits. Unsecured deposits that earn interest.
Federal funds sold. Unsecured loans of reserve balances at the Federal Reserve Banks between financial institutions that are made on either an overnight or term basis.
Commercial paper. Unsecured debt issued by corporations, typically for the financing of accounts receivable, inventories, and meeting short-term liabilities.
Certificates of deposit. Unsecured negotiable promissory notes issued by banks and payable to the bearer at maturity.

Table 18 presents the carrying value of our unsecured credit exposure with private counterparties by investment type (in thousands). The unsecured investment credit exposure presented may not reflect the average or maximum exposure during the period as the balances presented reflect the balances at period end.

Table 18
 
03/31/2015
12/31/2014
Interest-bearing deposits
$

$
63

Federal funds sold
2,130,000

2,075,000

Certificates of deposit
474,999


TOTAL UNSECURED INVESTMENT CREDIT EXPOSURE1
$
2,604,999

$
2,075,063

                   
1 
Excludes unsecured investment credit exposure to U.S. government, U.S. government agencies, instrumentalities, GSEs and supranational entities and does not include related accrued interest.
 
We actively monitor our credit exposures and the credit quality of our counterparties, including an assessment of each counterparty’s financial performance, capital adequacy, sovereign support and the current market perceptions of the counterparties. General macro-economic, political and market conditions may also be considered when deciding on unsecured exposure. As a result, we may further limit existing exposures.


66


Finance Agency regulations: (1) include limits on the amount of unsecured credit an individual FHLBank may extend to a counterparty or to a group of affiliated counterparties; (2) permit us to extend additional unsecured credit for overnight extensions of credit, subject to limitations; and (3) prohibit us from investing in financial instruments issued by non-U.S. entities other than those issued by U.S. branches and agency offices of foreign commercial banks. For additional information on our management of unsecured credit exposure, see Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Investments” in our Form 10-K. As of March 31, 2015, we were in compliance with all Finance Agency regulations relating to unsecured credit exposure.

We manage our credit risk by conducting pre-purchase credit due diligence and on-going surveillance described previously and generally investing in unsecured investments of highly-rated counterparties. From time to time, we extend unsecured credit to qualified members by investing in overnight Federal funds issued by them. In general, we treat members as any other market participant. However, since they are members and we have more access to specific financial information about our members, we have a lower capital requirement than for non-members, but members must still meet our credit ratings requirements. As of March 31, 2015, all unsecured term investments were rated as investment grade based on NRSROs (see Table 22).

Table 19 presents the amount of our unsecured investment credit exposure (in thousands) by remaining contractual maturity and by the domicile of the counterparty or the domicile of the counterparty’s parent for U.S. branches and agency offices of foreign commercial banks as of March 31, 2015. We also mitigate the credit risk on investments by generally investing in investments that have short-term maturities.

Table 19
Domicile of Counterparty
Overnight
Due 2 – 30
days
Due 31 – 90
days
Total
Domestic
$

$
50,000

$

$
50,000

U.S. subsidiaries of foreign commercial banks
70,000



70,000

Total domestic and U.S. subsidiaries of foreign commercial banks
70,000

50,000


120,000

U.S. Branches and agency offices of foreign commercial banks:
 

 

 

 

Sweden
615,000

100,000


715,000

Canada
300,000

99,999

125,000

524,999

Finland
315,000



315,000

Germany
315,000



315,000

Norway
315,000



315,000

Netherlands
300,000



300,000

Total U.S. Branches and agency offices of foreign commercial banks
2,160,000

199,999

125,000

2,484,999

TOTAL UNSECURED INVESTMENT CREDIT EXPOSURE1
$
2,230,000

$
249,999

$
125,000

$
2,604,999

                   
1 
Excludes unsecured investment credit exposure to U.S. government, U.S. government agencies, instrumentalities, GSEs and supranational entities and does not include related accrued interest.

Unsecured credit exposure continues to be cautiously placed, with exposure concentrated in the United States, Canada, Germany, Netherlands, and the Nordic countries. In addition, we anticipate continued future investment in reverse repurchase agreements, which are secured investments, and limiting unsecured exposure, especially to foreign financial institutions, as long as the interest rates are comparable. To enhance our liquidity position, we classify our unsecured short-term investment securities in our trading portfolio, which allows us to sell these securities if necessary.

Long-term investments – Our long-term investment portfolio consists primarily of Agency debentures, MBS/ABS, and state housing finance agency securities. Our Risk Management Policy (RMP) restricts the acquisition of investments to highly rated long-term securities. The majority of these long-term securities are Agency MBS/CMOs, which provide an alternative means to promote liquidity in the mortgage finance markets while providing attractive returns. Agency debentures are the other significant investment class that we hold in our long-term investment portfolio. They provide attractive returns, can serve as excellent collateral (e.g., repurchase agreements and net derivatives exposure), and are classified as trading securities to enhance our liquidity position. The majority of our unsecured Agency debentures are fixed rate bonds, which are swapped from fixed to variable rates. The swaps do not qualify for hedge accounting, which results in the net interest payments or receipts on these economic hedges flowing through net gain (loss) on derivatives and hedging activities instead of net interest income. All swapped Agency debentures are classified as trading securities.


67


According to Finance Agency regulation codified at 12 C.F.R. §1267.3, no additional MBS purchases can be made if the amortized cost of our mortgage securities exceeds 300 percent of our regulatory capital. Further, quarterly increases in holdings of mortgage securities are restricted to no more than 50 percent of regulatory capital. As of March 31, 2015, the amortized cost of our MBS/CMO portfolio represented 304 percent of our regulatory capital due to some capital repurchases that occurred prior to quarter end. As of March 31, 2015, we held $128.9 million of par value in MBS/CMOs in our trading portfolio for liquidity purposes and to provide additional balance sheet flexibility. All of the MBS/CMOs in the trading portfolio are variable rate Agency securities.

Major Security Types – Securities for which we have the ability and intent to hold to maturity are classified as held-to-maturity securities and recorded at carrying value, which is the net total of par, premiums, discounts and credit and non-credit OTTI discounts. We classify certain investments as trading securities and carry them at fair value. Changes in the fair values of these investments are recorded through other income and original premiums/discounts on these investments are not amortized. We do not practice active trading, but hold trading securities for asset/liability management purposes, including liquidity. Certain investments that we may sell before maturity are classified as available-for-sale and carried at fair value, although we had no available-for-sale securities as of March 31, 2015 or December 31, 2014. If fixed rate securities are hedged with interest rate swaps, we classify the securities as trading securities so that the changes in fair values of both the derivatives hedging the securities and the trading securities are recorded in other income. Securities acquired as asset/liability management tools to manage duration risk, which are likely to be sold when the duration risk is no longer present, are classified as available-for-sale or trading securities. See Note 3 of the Notes to Financial Statements under Item 1 to this report for additional information on our different investment classifications including what types of securities are held under each classification. The carrying value of our investments is summarized by security type in Table 20 (in thousands).

Table 20
 
03/31/2015
12/31/2014
Trading securities:
 
 
Certificates of deposit
$
474,999

$

U.S. Treasury obligations
25,006

25,016

GSE debentures
1,176,703

1,299,979

Mortgage-backed securities:
 
 
U.S. obligation MBS
911

963

GSE MBS
128,475

136,091

Total trading securities
1,806,094

1,462,049

Held-to-maturity securities:
 
 
State or local housing agency obligations
125,395

126,105

Mortgage-backed or asset-backed securities:
 
 
U.S. obligation MBS
54,965

57,562

GSE MBS
4,892,457

4,441,487

Private-label residential MBS
217,528

231,259

Home equity loan ABS
747

774

Total held-to-maturity securities
5,291,092

4,857,187

Total securities
7,097,186

6,319,236

 
 
 
Interest-bearing deposits
1,660

1,163

 
 
 
Federal funds sold
2,130,000

2,075,000

 
 
 
Securities purchased under agreements to resell
2,350,000

1,225,000

TOTAL INVESTMENTS
$
11,578,846

$
9,620,399



68


The contractual maturities of our investments are summarized by security type in Table 21 (dollar amounts 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 21
 
03/31/2015
 
Due in
one year
or less
Due after
one year
through five years
Due after
five years
through 10 years
Due after
10 years
Carrying
Value
Trading securities:
 

 

 

 

 

Certificates of deposit
$
474,999

$

$

$

$
474,999

U.S. Treasury obligations
25,006




25,006

GSE debentures
408,916

653,874

113,913


1,176,703

Mortgage-backed securities:
 
 
 
 
 

U.S. obligation MBS



911

911

GSE MBS



128,475

128,475

Total trading securities
908,921

653,874

113,913

129,386

1,806,094

Yield on trading securities
1.43
%
5.38
%
3.25
%
2.03
%
 

Held-to-maturity securities:
 

 

 

 

 

State or local housing agency obligations


17,210

108,185

125,395

Mortgage-backed or asset-backed securities:
 

 

 

 

 

U.S. obligation MBS
12



54,953

54,965

GSE MBS

62,680

1,731,869

3,097,908

4,892,457

Private-label residential MBS

17,842

9,187

190,499

217,528

Home equity loans ABS



747

747

Total held-to-maturity securities
12

80,522

1,758,266

3,452,292

5,291,092

Yield on held-to-maturity securities
6.97
%
2.28
%
1.57
%
1.65
%
 

 
 
 
 
 
 
Total securities
908,933

734,396

1,872,179

3,581,678

7,097,186

Yield on total securities
1.43
%
5.02
%
1.66
%
1.66
%
 

 
 
 
 
 
 
Interest-bearing deposits
1,660




1,660

 
 
 
 
 
 
Federal funds sold
2,130,000




2,130,000

 
 
 
 
 
 
Securities purchased under agreements to resell
2,350,000




2,350,000

TOTAL INVESTMENTS
$
5,390,593

$
734,396

$
1,872,179

$
3,581,678

$
11,578,846



69


Securities Ratings – Tables 22 and 23 present the carrying value of our investments by rating as of March 31, 2015 and December 31, 2014 (in thousands). The ratings presented are the lowest ratings available for each security based on NRSROs. We also utilize other credit quality factors when analyzing potential investments including, but not limited to, collateral performance, marketability, asset class or sector considerations, local and regional economic conditions, and/or the financial health of the underlying issuer.

Table 22
 
03/31/2015
 
Carrying Value1
 
Investment Grade
Below Triple-B
Unrated
Total
 
Triple-A
Double-A
Single-A
Triple-B
Interest-bearing deposits2
$

$
1,660

$

$

$

$

$
1,660

 
 
 
 
 
 
 
 
Federal funds sold2

315,000

1,815,000




2,130,000

 
 
 
 
 
 
 
 
Securities purchased under agreements to resell3





2,350,000

2,350,000

 
 
 
 
 
 
 
 
Investment securities:
 

 

 

 

 

 

 

Non-mortgage-backed securities:
 

 

 

 

 

 

 

Certificates of deposit2

324,999

150,000




474,999

U.S. Treasury obligations

25,006





25,006

GSE debentures

1,176,703





1,176,703

State or local housing agency obligations
81,830

30,000

13,565




125,395

Total non-mortgage-backed securities
81,830

1,556,708

163,565




1,802,103

Mortgage-backed or asset-backed securities:
 

 

 

 

 

 

 

U.S. obligation MBS

55,876





55,876

GSE MBS

5,020,932





5,020,932

Private label residential MBS

5,420

6,062

77,024

128,960

62

217,528

Home equity loan ABS




486

261

747

Total mortgage-backed securities

5,082,228

6,062

77,024

129,446

323

5,295,083

 
 
 
 
 
 
 
 
TOTAL INVESTMENTS
$
81,830

$
6,955,596

$
1,984,627

$
77,024

$
129,446

$
2,350,323

$
11,578,846

                   
1 
Investment amounts represent the carrying value and do not include related accrued interest receivable of $12.1 million at March 31, 2015.
2 
Amounts include unsecured credit exposure with original maturities ranging between overnight and 35 days.
3 
Amounts represent collateralized overnight borrowings by counterparty rating.



70


Table 23
 
12/31/2014
 
Carrying Value1
 
Investment Grade
Below Triple-B
Unrated
Total
 
Triple-A
Double-A
Single-A
Triple-B
Interest-bearing deposits2
$
63

$
1,100

$

$

$

$

$
1,163

 
 
 
 
 
 
 
 
Federal funds sold2


2,075,000




2,075,000

 
 
 
 
 
 
 
 
Securities purchased under agreements to resell3





1,225,000

1,225,000

 
 
 
 
 
 
 
 
Investment securities:
 

 

 

 

 

 

 

Non-mortgage-backed securities:
 

 

 

 

 

 

 

U.S. Treasury obligations

25,016





25,016

GSE debentures

1,299,979





1,299,979

State or local housing agency obligations
81,955

30,000


14,150



126,105

Total non-mortgage-backed securities
81,955

1,354,995


14,150



1,451,100

Mortgage-backed or asset-backed securities:
 

 

 

 

 

 

 

U.S. obligation MBS

58,525





58,525

GSE MBS

4,577,578





4,577,578

Private label residential MBS

6,161

6,879

84,013

134,141

65

231,259

Home equity loan ABS




534

240

774

Total mortgage-backed securities

4,642,264

6,879

84,013

134,675

305

4,868,136

 
 
 
 
 
 
 
 
TOTAL INVESTMENTS
$
82,018

$
5,998,359

$
2,081,879

$
98,163

$
134,675

$
1,225,305

$
9,620,399

                   
1 
Investment amounts represent the carrying value and do not include related accrued interest receivable of $19.3 million at December 31, 2014.
2 
Amounts include unsecured credit exposure with original maturities ranging between overnight and 2 days.
3 
Amounts represent collateralized overnight borrowings by counterparty rating.

Private-label Mortgage-backed and Asset-backed Securities – The carrying value of our portfolio of private-label MBS/ABS is less than one percent of total assets. We classify private-label MBS/ABS as prime, Alt-A and subprime based on the originator’s classification at the time of origination or based on classification by an NRSRO upon issuance of the MBS/ABS.


71


Table 24 presents a summary of the UPB of private-label MBS/ABS by interest rate type and by type of collateral (in thousands):

Table 24
 
03/31/2015
12/31/2014
 
Fixed
Rate1
Variable
Rate1
Total
Fixed
Rate1
Variable
Rate1
Total
Private-label residential MBS:
 

 

 

 

 

 

Prime
$
22,342

$
88,231

$
110,573

$
24,730

$
92,710

$
117,440

Alt-A
59,372

64,625

123,997

64,196

67,979

132,175

Total private-label residential MBS
81,714

152,856

234,570

88,926

160,689

249,615

Home equity loan ABS:
 

 

 

 

 

 

Subprime

2,642

2,642


2,707

2,707

TOTAL
$
81,714

$
155,498

$
237,212

$
88,926

$
163,396

$
252,322

                   
1 
The determination of fixed or variable rate is based upon the contractual coupon type of the security.


72


Ninety-seven percent of our private-label MBS/ABS were securitized prior to 2006, and there are no securities in the portfolio issued after April 2006. As a result of this higher quality, well-seasoned portfolio, we have not experienced significant losses in our private-label MBS/ABS portfolio from OTTI. Table 25 presents statistical information for our private-label MBS/ABS by year of securitization and rating (dollar amounts in thousands):

Table 25
03/31/2015
Private-Label MBS/ABS By Year of Securitization
 
Total
2006
2005
2004 and Prior
Private-label residential MBS:
 
 
 
 
UPB by credit rating:
 
 
 
 
Double-A
$
5,433

$

$

$
5,433

Single-A
6,064



6,064

Triple-B
77,101


2,438

74,663

Double-B
55,679


2,164

53,515

Single-B
26,306

3,224


23,082

Triple-C
32,963


18,619

14,344

Double-C
15,470

3,142

9,413

2,915

Single-D
17,415

176

17,239


Unrated
781



781

TOTAL
$
237,212

$
6,542

$
49,873

$
180,797

 
 
 
 
 
Amortized cost
$
228,910

$
6,175

$
44,532

$
178,203

Gross unrealized losses
(11,205
)

(3,337
)
(7,868
)
Fair value
221,758

6,404

42,609

172,745

 
 
 
 
 
OTTI:
 
 
 
 
Credit-related OTTI charge taken year-to-date
$
187

$

$
89

$
98

Non-credit-related OTTI charge taken year-to-date
(187
)

(89
)
(98
)
TOTAL
$

$

$

$

 
 
 
 
 
Weighted average percentage of fair value to UPB
93.5
%
97.9
%
85.4
%
95.5
%
Original weighted average credit support1
5.2

3.1

6.0

5.0

Weighted average credit support1
11.1

10.4

4.3

13.0

Weighted average collateral delinquency2
11.5

16.2

14.2

10.5

                   
1 
Credit support is defined as the percentage of subordinate tranches and over-collateralization, if any, in a security structure that will absorb losses before the holders of the security will incur losses.
2 
Collateral delinquency is based on the sum of loans greater than 60 days delinquent plus loans in foreclosure plus loans in bankruptcy plus REO.

Other-than-temporary Impairment – Based upon our OTTI evaluation process that results in a conclusion as to whether a credit loss exists (present value of our best estimate of the cash flows expected to be collected is less than the amortized cost basis of each individual security), we have concluded that, except for 26 outstanding private-label MBS upon which we have recognized OTTI, there is no evidence of a likely credit loss in our other 93 private-label MBS/ABS; there is no intent to sell, nor is there any requirement to sell; and, thus, there is no OTTI for the remaining private-label MBS that have declined in value.


73


Table 26 presents a summary of the significant inputs used to evaluate all non-Agency MBS for OTTI 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 we will experience a loss on the security. The calculated averages represent the dollar-weighted averages of all the private-label MBS investments, except for those securities that are qualitatively evaluated, in each category shown. The classification (prime, Alt-A and subprime) is based on the classification at the time of origination.

Table 26
Private-label residential MBS
 
Significant Inputs
Current
Credit
Enhancements
Year of Securitization
Prepayment
Rates
Default
Rates
Loss
Severities
Prime:
 
 
 
 
2004 and prior
15.0
%
5.7
%
22.3
%
12.6
%
2005
14.6

7.7

23.6

8.4

2006
15.4

9.9

26.6

10.4

Total Prime
15.0

6.0

22.6

12.3

Alt-A:
 

 

 

 

2004 and prior
15.1

8.9

32.3

13.9

2005
16.0

13.0

37.7

3.9

Total Alt-A
15.4

10.4

34.3

10.2

TOTAL
15.2
%
8.3
%
28.8
%
11.2
%
 
 
 
 
 
Home Equity Loan ABS
Year of Securitization
Significant Inputs
Current
Credit
Enhancements
Prepayment
Rates
Default
Rates
Loss
Severities
Subprime:
 
 
 
 
2004 and prior
2.4
%
5.6
%
82.7
%
1.9
%

We also evaluate other non-mortgage related investment securities, primarily consisting of municipal bonds issued by housing finance authorities, for potential impairment. During the first quarter of 2015, we did not identify any non-MBS/ABS securities as having impairment.

In addition to evaluating all of our private-label MBS/ABS under a base case (or best estimate) scenario for generating expected cash flows, a cash flow analysis is also performed for each security under a more stressful housing price scenario. The more stressful scenario is designed to provide an indication of the sensitivity of our private-label MBS/ABS to the deterioration in housing prices beyond our base case estimates. The stress test scenario and associated results do not represent our current expectations and therefore, should not be construed as a prediction of future results, market conditions or the actual performance of these securities. Rather, the results from the hypothetical stress test scenario provide a measure of the credit losses that we might incur if home price declines (and subsequent recoveries) are more adverse than those projected as our best estimate in our OTTI assessment. OTTI related to credit loss under the hypothetical stress test scenario for the quarter ended March 31, 2015 is $384 thousand compared to $187 thousand recorded under the base case scenario.



74


Deposits: Total deposits increased 25.0 percent from December 31, 2014 to March 31, 2015, marked most significantly by an increase in overnight balances. Deposit products offered primarily include demand and overnight deposits and short-term certificates of deposit. Demand deposit programs are offered primarily to facilitate customer transactions with us, such as cash flows associated with advances and mortgage loan transactions. Overnight deposits provide an alternative short-term investment option to members. The majority of deposits are in overnight or demand accounts that generally re-price daily based upon a market index such as overnight Federal funds. However, because of the extremely low interest rate environment, we have established a current floor of 5 bps on demand deposits and 10 bps on overnight deposits. The level of deposits is driven by member demand for deposit products, which in turn is a function of the liquidity position of members. Factors that influence deposit levels include turnover in member investment and loan portfolios, changes in members’ customer deposit balances, changes in members’ demand for liquidity and our deposit pricing as compared to other short-term market rates. Declines in the level of deposits could occur during 2015 if demand for loans at member institutions increases, if members choose to de-leverage their balance sheets or if decreases in the general level of liquidity of members should occur. Fluctuations in deposits have little impact on our ability to obtain liquidity. We historically have had stable and ready access to the capital markets through consolidated obligations and can replace any reduction in deposits with similarly or even lower priced borrowings.
 
Consolidated Obligations: Consolidated obligations are the joint and several debt obligations of the FHLBanks and consist of bonds and discount notes. Consolidated obligations represent the primary source of liabilities we use to fund advances, mortgage loans and investments. As noted under Item 3 – “Quantitative and Qualitative Disclosures About Market Risk,” we use debt with a variety of maturities and option characteristics to manage our interest rate risk profile. We make extensive use of derivative transactions, executed in conjunction with specific consolidated obligation debt issues, to synthetically structure funding terms and costs.
 
Bonds are primarily used to fund longer-term (one year or greater) advances, mortgage loans and investments. To the extent that the bond is funding variable rate assets, we typically either issue a bond that has variable rates matching the asset index or utilize an interest rate swap to change the bond’s characteristics in order to match the asset’s index. Additionally, we sometimes use fixed rate, variable rate or complex consolidated obligation bonds that are swapped or indexed to LIBOR to fund short-term advances and money market investments or as a liquidity risk management tool.
 
Discount notes are primarily used to fund: (1) shorter-term advances or adjustable rate advances with indices and resets based on our short-term cost of funds; and (2) investments with maturities of three months or less. However, we sometimes use discount notes to fund longer-term assets, including fixed rate assets, variable rate assets, assets swapped to synthetically create variable rate assets, and short-term anticipated cash flows generated by longer-term fixed rate assets.
 
Total consolidated obligations increased 7.8 percent from December 31, 2014 to March 31, 2015. Discount notes increased from 41.3 percent of total outstanding consolidated obligations as of December 31, 2014 to 47.8 percent as of March 31, 2015 primarily as a result of the increase in our line of credit product and other short-term advance products, which are generally funded with discount notes (see this Item 2 – “Financial Condition – Advances”).

While we currently have stable access to funding markets, future developments could impact the cost of replacing outstanding debt. Some of these include, but are not limited to, a large increase in call volume, significant increases in advance demand, legislative and regulatory changes, geopolitical events, proposals addressing GSEs, derivative and financial market reform, a decline in investor demand for consolidated obligations, further rating agency downgrades of U.S. Treasury obligations that will in turn impact the rating on FHLBank consolidated obligations and changes in Federal Reserve policies and outlooks.

Derivatives: All derivatives are marked to fair value with any associated accrued interest, and netted by clearing agent by Derivative Clearing Organization (Clearinghouse), or by counterparty and offset by the fair value of any swap cash collateral received or delivered where the legal right of offset has been determined, and included on the Statements of Condition as an asset when there is a net fair value gain or as a liability when there is a net fair value loss. Fair values of our derivatives primarily fluctuate as the Overnight Indexed Swap and LIBOR/Swap interest rate curves fluctuate. Other factors such as implied price/interest rate volatility, the shape of the above interest rate curves and time decay can also drive the market price for derivatives.
 
We use derivatives in three ways: (1) by designating them as either a fair value or cash flow hedge of an underlying financial instrument, firm commitment or a forecasted transaction; (2) by acting as an intermediary; and (3) in asset/liability management (i.e., economic hedge). Economic hedges are defined as derivatives hedging specific or non-specific underlying assets, liabilities or firm commitments that either do not qualify for hedge accounting or for which we have not elected hedge accounting under GAAP, but are acceptable hedging strategies under our RMP. To meet the hedging needs of our members, we enter into offsetting derivatives, acting as an intermediary between members and other counterparties. This intermediation allows smaller members indirect access to the derivatives market. However, because of increased regulatory requirements with clearing intermediated derivatives we have placed an indefinite moratorium on these intermediated derivative transactions. The derivatives used in intermediary activities do not receive hedge accounting and are separately marked-to-market through earnings (classified as economic hedges).


75


Liquidity and Capital Resources
Liquidity: To meet our mission of serving as an economical funding source for our members and housing associates, we must maintain high levels of liquidity. We are required to maintain liquidity in accordance with certain Finance Agency regulations and guidelines and with policies established by management and the Board of Directors. We need liquidity to repay maturing consolidated obligations and other borrowings, to meet advance needs of our members, to make payments of dividends to our members and to repurchase excess capital stock at our discretion, whether upon the request of a member or at our own initiative (mandatory stock repurchases).

A primary source of our liquidity is the issuance of consolidated obligations. The capital markets traditionally have treated FHLBank obligations as U.S. government agency debt. As a result, even though the U.S. government does not guarantee FHLBank debt, we generally have comparatively stable access to funding at relatively favorable spreads to U.S. Treasury rates. We are primarily and directly liable for our portion of consolidated obligations (i.e., those obligations issued on our behalf). In addition, we are jointly and severally liable with the other FHLBanks for the payment of principal and interest on the consolidated obligations of all FHLBanks.

Our other sources of liquidity include deposit inflows, repayments of advances or mortgage loans, maturing investments, interest income, and proceeds from reverse repurchase agreements or the sale of unencumbered assets. Uses of liquidity include issuing advances, purchasing mortgage loans, purchasing investments, deposit withdrawals, capital repurchases, maturing or called consolidated obligations, interest expense, dividend payments to members, other contractual payments, and contingent funding or purchase obligations including letters of credit and any required purchases of securities under standby bond purchase agreements.

Total cash and short-term investments with remaining maturities of one year or less, which include term and overnight Federal funds sold, certificates of deposit, commercial paper and reverse repurchase agreements, increased slightly, from $6.1 billion as of December 31, 2014 to $6.3 billion as of March 31, 2015. The composition of cash and short-term investments changed between periods due to our ability to invest cash in reverse repurchase agreements at the end of the current quarter. The maturities of our short-term investments are structured to provide periodic cash flows to support our ongoing liquidity needs. To enhance our liquidity position, short-term investment securities (i.e., commercial paper and marketable certificates of deposit) are also classified as trading so that they can be readily sold should liquidity be needed immediately. We also maintain a portfolio of GSE debentures and U.S. Treasury obligations that can be pledged as collateral for financing in the securities repurchase agreement market and are classified as trading to enhance our liquidity position. These debentures decreased to $1.1 billion in par value as of March 31, 2015 from $1.3 billion in par value as of December 31, 2014, reflecting maturities of these debentures during 2015.

In order to assure that we can take advantage of those sources of liquidity that will affect our leverage capital requirements, we manage our average capital ratio to stay sufficiently above our minimum regulatory and RMP requirements so that we can utilize the excess capital capacity should the need arise. Managing our average capital ratio sufficiently above minimum regulatory and RMP requirements helps ensure our ability to meet the liquidity needs of our members and to increase our ability to repurchase excess stock either: (1) initiated at our discretion to adjust our balance sheet size or manage the amount of excess capital stock; or (2) upon the submission of a redemption request by a member.

We are subject to five metrics for measuring liquidity, and have remained in compliance with each of these liquidity requirements throughout 2015 (see “Risk Management – Liquidity Risk Management” under this Item 2 for additional discussion on our liquidity requirements). In order to ensure a sufficient liquidity cushion, we generally maintain a relatively longer weighted-average maturity on our consolidated obligation discount notes than the weighted average maturity of short-term investments. The weighted average remaining days to maturity of discount notes outstanding decreased to 33 days as of March 31, 2015 from 45 days as of December 31, 2014. A portion of this decrease was due to a transition in our liquidity ladder by using two-month discount notes instead of three-month discount notes and was also decreased by an increase in our issuance of overnight discount notes in an effort to reduce funding costs. The use of shorter term discount notes correlates with the significant increase in our line of credit advance product. The weighted average remaining maturity of our money market investment portfolio (Federal funds sold, marketable certificates of deposit, commercial paper and reverse repurchase agreements) and non-earning cash left in our Federal Reserve Bank account remained unchanged at 2 days as of March 31, 2015 and December 31, 2014 because we primarily held short-term investments with overnight maturities as of those dates. The mismatch of discount notes and our money market investment portfolio decreased from 43 days on December 31, 2014 to 31 days on March 31, 2015. Over time, especially as the yield curve steepens on the short end, maintaining the differential between the weighted average original maturity of discount notes and money market investments will marginally increase our cost of funds and reduce our net interest income.

We sometimes leave cash in our non-earning Federal Reserve Bank account at the end of the day for several reasons including: (1) advance payoffs that occur late in the day; (2) insufficient returns in the Federal funds market to compensate us for the associated credit risk; (3) general shortage of liquid investments in the market; and (4) the desire not to increase our balance sheet allocation to other investment categories. The balance in our Federal Reserve Bank account was $0.9 billion at March 31, 2015 compared to $2.5 billion at December 31, 2014 primarily due to an influx of cash on the last day of the year and insufficient returns and a general shortage of liquid investments in the market at that time.


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In addition to the balance sheet sources of liquidity discussed previously, we have established lines of credit with numerous counterparties in the Federal funds market as well as with the other FHLBanks. Accordingly, we expect to maintain a sufficient level of liquidity for the foreseeable future.

Capital: Total capital consists of capital stock, retained earnings and AOCI.

Capital stock increased 12.8 percent from December 31, 2014 to March 31, 2015, primarily due to increased utilization of advances. Under our capital plan, members must purchase additional activity-based stock as they enter into advance transactions with us. The amount required is subject to change within ranges established under our capital plan. Beginning May 5, 2014, the activity-based stock purchase requirement for advances was reduced from 5.0 percent to 4.5 percent. Excess stock represents the amount of stock held by a member in excess of that institution’s minimum stock requirement. Upon reducing the activity-based stock purchase requirement, excess stock is created since the member no longer needs the same level of activity-based capital stock. If our excess stock exceeds 1.0 percent of our assets before or after the payment of a dividend in the form of stock, we would be prohibited by Finance Agency regulation from paying dividends in the form of stock. To manage the amount of excess stock, we repurchase excess Class A Common Stock over maximum amounts held by any individual member as of specific dates throughout the year. In April 2014, we began the practice of repurchasing all outstanding excess Class A Common Stock, generally on a monthly basis. The current practice of regular weekly exchanges of all excess Class B Common Stock over $50,000 for Class A Common Stock is still in effect. As reflected in Table 27, the amount of excess stock held by members decreased. This decrease is at least partially attributable to: (1) our capital management changes initiated in the second quarter of 2014; (2) a common practice by some of our members to request redemptions of excess stock; and (3) our subsequent discretionary repurchase of member requests.

Under our cooperatively structured capital plan, our capital stock balances should fluctuate along with any growth (increased capital stock balances) or reduction (decreased capital stock balances) in advance balances in future periods. Any repurchase of excess capital stock is at our discretion and subject to statutory and regulatory limitations, including being in compliance with all of our regulatory capital requirements after any such discretionary repurchase.


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Our activity-based stock purchase requirements are consistent with our cooperative structure; members’ stock ownership requirements and the dollar amount of dividends received generally increases as their activities with us increase. To the extent that a member’s asset-based stock purchase requirement is insufficient to cover the member’s activity-based stock purchase requirement and the member is required to purchase Class B Common Stock, we believe the value of our products and services is enhanced by dividend yields that exceed the return available from other investments with similar terms and credit quality. Factors that affect members’ willingness to enter into activity with us and purchase additional required activity-based stock include, but are not limited to, our dividend rates, the risk-based capital weighting of our capital stock and alternative investment opportunities available to the members. Based on anecdotal evidence (such as member advance activity and discussions with members), we believe that our activity-based stock purchase requirement for advances has not reduced advance activity with our members, although that may not hold true in the future. Table 27 provides a summary of member capital requirements under our current capital plan as of March 31, 2015 and December 31, 2014 (in thousands):

Table 27
Requirement
03/31/2015
12/31/2014
Asset-based (Class A only)
$
152,339

$
154,304

Activity-based (additional Class B)1
861,846

723,450

Total Required Stock2
1,014,185

877,754

Excess Stock (Class A and B)
88,679

100,474

Total Stock2
$
1,102,864

$
978,228

Activity-based Requirements:
 

 

Advances3
$
946,319

$
813,778

AMA assets (mortgage loans)4
1,861

1,978

Total Activity-based Requirement
948,180

815,756

Asset-based Requirement (Class A Common Stock) not supporting member activity1
66,005

61,998

Total Required Stock2
$
1,014,185

$
877,754

                   
1 
Class A Common Stock, up to a member’s asset-based stock requirement, will be used to satisfy a member’s activity-based stock requirement before any Class B Common Stock is purchased by the member.
2 
Includes mandatorily redeemable capital stock.
3 
Advances to housing associates have no activity-based requirements because housing associates cannot own FHLBank stock.
4 
Non-members are subject to the AMA activity-based stock requirement as long as there are UPBs outstanding, but the requirement is currently zero percent for members.

We are subject to three capital requirements under provisions of the GLB Act, the Finance Agency’s capital structure regulation and our current capital plan: risk-based capital requirement, total capital requirement and leverage capital requirement. We have been in compliance with each of the aforementioned capital rules and requirements at all times since the implementation of our capital plan. See Note 11 of the Notes to Financial Statements under Item 1 for additional information and compliance as of March 31, 2015 and December 31, 2014.


Capital Distributions: Dividends may be paid in cash or capital stock as authorized by our Board of Directors. Quarterly dividends can be paid out of current and previous unrestricted retained earnings, subject to Finance Agency regulation and our capital plan.

Within our capital plan, we have the ability to pay different dividend rates to the holders of Class A Common Stock and Class B Common Stock. This differential is implemented through a mechanism referred to as the dividend parity threshold. Holders of Class A Common Stock and Class B Common Stock share in dividends equally up to the dividend parity threshold for a dividend period, then the dividend rate for holders of Class B Common Stock can exceed the rate for holders of Class A Common Stock, but the dividend rate on Class A Common Stock can never exceed the dividend rate on Class B Common Stock. In essence, the dividend parity threshold: (1) serves as a soft floor to holders of Class A Common Stock since we must pay holders of Class A Common Stock the dividend parity threshold rate before paying a higher rate to holders of Class B Common Stock; (2) indicates a potential dividend rate to holders of Class A Common Stock so that they can make decisions as to whether or not to hold excess Class A Common Stock; and (3) provides us with a tool to manage the amount of excess stock through higher or lower dividend rates by varying the desirability of holding excess shares of Class A Common Stock (i.e., the lower the dividend rate on Class A Common Stock, the less desirable it is to hold excess Class A Common Stock).


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The current dividend parity threshold is equal to the average effective overnight Federal funds rate for a dividend period minus 100 bps. This dividend parity threshold was effective for dividends paid for all of 2014 and 2015 and will continue to be effective until such time as it may be changed by our Board of Directors. With the overnight Federal funds target rate range of 0.0 to 0.25 percent, the dividend parity threshold is effectively floored at zero percent at this time. Under the capital plan, all dividends paid in the form of capital stock must be paid in the form of Class B Common Stock. Table 28 presents the dividend rates per annum paid on capital stock under our capital plan for the periods indicated:

Table 28
Applicable Rate per Annum
03/31/2015
12/31/2014
09/30/2014
06/30/2014
03/31/2014
Class A Common Stock
1.00
 %
1.00
 %
1.00
 %
1.00
 %
0.25
 %
Class B Common Stock
6.00

6.00

6.00

5.00

4.00

Weighted Average1
5.19

5.17

5.15

4.22

2.60

Dividend Parity Threshold:
 
 
 
 
 
Average effective overnight Federal funds rate
0.11
 %
0.10
 %
0.09
 %
0.09
 %
0.07
 %
Spread to index
(1.00
)
(1.00
)
(1.00
)
(1.00
)
(1.00
)
TOTAL (floored at zero percent)
0.00
 %
0.00
 %
0.00
 %
0.00
 %
0.00
 %
                   
1 
Weighted average dividend rates are dividends paid in cash and stock on both classes of stock divided by the average of capital stock eligible for dividends.

We increased the dividend rate to 6.00 percent on Class B Common Stock for the third quarter of 2014, as a result of a change in our capital management practices intended to result in a higher percentage payout of quarterly earnings, slower growth in retained earnings, and increased advance utilization due in no small part to the extremely low all-in cost of advances once the dividend is factored in. We expect to recommend maintaining the current dividend rates on Class A Common Stock and Class B Common Stock for a considerable time in keeping with the desire to pay out a larger percentage of income than in the past. We caution, however, that market conditions can be unpredictable and adverse changes may result in lower dividends rates in future quarters. While there is no assurance that our Board of Directors will not change the dividend parity threshold in the future, the capital plan requires that we provide members with 90 days notice prior to the end of a dividend period in which a different dividend parity threshold is utilized in the payment of a dividend.

We expect to continue paying dividends primarily in the form of capital stock in 2015, but future dividends may be paid in cash. The payment of cash dividends instead of stock dividends should not have a significant impact from a liquidity perspective, as the subsequent redemption of excess stock created by stock dividends would utilize liquidity resources in the same manner as a cash dividend.

Risk Management
Active risk management continues to be an essential part of our operations and a key determinant of our ability to maintain earnings to return an acceptable dividend to our members and meet retained earnings thresholds. We maintain an enterprise risk management (ERM) program in an effort to enable the identification of all significant risks to the organization and institute the prompt and effective management of any major risk exposures. Our ERM program is a structured and disciplined approach that aligns strategy, processes, people, technology and knowledge with the purpose of identifying, evaluating and managing the uncertainties we face as we create value. It is a continuous process of identifying, prioritizing, assessing and managing inherent enterprise risks (i.e., business, compliance, credit, liquidity, market and operations) before they become realized risk events. See Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management” in our Form 10-K for more information on our ERM program. A separate discussion of market risk is included under Item 3 – “Quantitative and Qualitative Disclosures About Market Risk” of this Form 10-Q.

Credit Risk Management: Credit risk is defined as the risk that counterparties to our transactions will not meet their contractual obligations. We manage credit risk by following established policies, evaluating the creditworthiness of our counterparties, and utilizing collateral agreements and settlement netting for derivative transactions where enforceability of the legal right of offset has been determined. The most important step in the management of credit risk is the initial decision to extend credit. Continuous monitoring of counterparties is completed for all areas where we are exposed to credit risk, whether that is through lending, investing or derivative activities.

Lending and AMA Activities – Credit risk with members arises partly as a result of our lending and AMA activities (members’ CE obligations on conventional mortgage loans that we acquire through the MPF Program). We manage our exposure to credit risk on advances, letters of credit, derivatives, and members’ CE obligations on conventional mortgage loans through a combined approach that provides ongoing review of the financial condition of our members coupled with prudent collateralization.


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As provided in the Bank Act, a member’s investment in our capital stock is held as additional collateral for the member’s advances and other credit obligations (letters of credit, CE obligations, etc.). In addition, we can call for additional collateral or substitute collateral during the life of an advance or other credit obligation to protect our security interest.

Credit risk arising from AMA activities under our MPF Program falls into three categories: (1) the risk of credit losses on the mortgage loans represented in our First Loss Account (FLA) and last loss positions; (2) the risk that a PFI will not perform as promised with respect to its loss position provided through its CE obligations on conventional mortgage loan pools, which are covered by the same collateral arrangements as those described for advances; and (3) the risk that a third-party insurer (obligated under primary mortgage insurance (PMI) or supplemental mortgage insurance (SMI) arrangements) will fail to perform as expected. Should a PMI third-party insurer fail to perform, it would increase our credit risk exposure because our FLA is the next layer to absorb credit losses on conventional mortgage loan pools. Likewise, if an SMI third-party insurer fails to perform, it would increase our credit risk exposure because it would reduce the participating member’s CE obligation loss layer since SMI is purchased by PFIs to cover all or a portion of their CE obligation exposure for mortgage pools. Credit risk exposure to third-party insurers to which we have PMI and/or SMI exposure is monitored on a monthly basis and regularly reported to the Board of Directors. We perform credit analysis of third-party PMI and SMI insurers on at least an annual basis. On a quarterly basis, we review trends that could identify risks with our mortgage loan portfolio, including low FICO scores and high LTV ratios. Based on the credit underwriting standards under the MPF Program and this quarterly review, we have concluded that the mortgage loans we hold would not be considered subprime.

Investments – Our RMP restricts the acquisition of investments to high-quality, short-term money market instruments and highly rated long-term securities. The short-term investment portfolio represents unsecured credit and reverse repurchase agreements. Therefore, counterparty ratings are monitored daily while performance and capital adequacy are monitored on a monthly basis in an effort to mitigate unsecured credit risk on our short-term investments. Collateral valuation and compliance with collateral eligibility and transaction margin requirements are monitored daily to limit secured credit risk on our reverse repurchase agreements. MBS represent the majority of our long-term investments. We hold MBS issued by agencies and GSEs, CMOs securitized by GSEs, private-issue MBS/ABS rated triple-A at the time of purchase, and CMOs securitized by whole loans. Approximately 95 percent of our MBS/CMO portfolio is securitized by Fannie Mae or Federal Home Loan Mortgage Corporation (Freddie Mac). All of our private-label MBS/ABS have been downgraded below triple-A subsequent to purchase (see Table 25), but the downgraded securities have been and are currently paying according to contractual agreements with the exception of four securities that experienced immaterial cash flow shortfalls. The securities we hold that are classified as being backed by subprime mortgage loans are private-label home equity ABS. We also have potential credit risk exposure to MBS/CMOs and ABS that are insured by two of the monoline mortgage insurance companies, one of which is in rehabilitation after having previously entered into bankruptcy proceedings. We analyze these securities quarterly as part of the OTTI determination and assume no coverage potential from this monoline insurance provider. Under the RMP in effect at the time of acquisition, the insurer had to be rated no lower than double-A. We monitor the credit ratings daily, financial performance at least annually and capital adequacy quarterly for all primary mortgage insurers, secondary mortgage insurers and master servicers to which we have potential credit risk exposure. Other long-term investments include unsecured GSE debentures and unsecured or collateralized state and local housing finance agency securities that were rated at least double-A at the time of purchase.

Derivatives – We transact most of our derivatives with large banks and major broker-dealers. Over-the-counter derivative transactions may be either executed with a counterparty (bilateral derivatives) or with an executing broker and cleared through a Futures Commission Merchant (i.e., clearing agent), with a Derivative Clearing Organization (cleared derivatives).

We are subject to credit risk due to the risk of nonperformance by counterparties to our derivative transactions. The amount of credit risk on derivatives depends on the extent to which netting procedures and collateral requirements are used and are effective in mitigating the risk. We manage this risk through credit analysis and collateral management. We are also required to follow the requirements set forth by applicable regulation.

Bilateral Derivatives. We are subject to non-performance by the counterparties to our bilateral derivative transactions. We generally require collateral on bilateral derivative transactions. For some counterparties, the amount of net unsecured credit exposure that is permissible with respect to the counterparty depends on the credit rating of that counterparty. For other counterparties, collateral is required on all net unsecured credit exposure. For a counterparty with credit rating thresholds, a counterparty generally must deliver collateral to us if the total market value of our exposure to that counterparty rises above a specific trigger point. Our credit risk exposure from derivative transactions with member institutions is fully collateralized under our Advance, Pledge and Security Agreement. As a result of these risk mitigation initiatives, we do not anticipate any credit losses on our bilateral derivative transactions as of March 31, 2015.


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Cleared Derivatives. We are subject to nonperformance by the Clearinghouse(s) and clearing agent(s). The requirement that we post initial and variation margin, through the clearing agent, to the Clearinghouse, exposes us to institutional credit risk in the event that the clearing agent or the Clearinghouse fails to meet its obligations. The use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral is posted daily for changes in the value of cleared derivatives through a clearing agent. We do not anticipate any credit losses on our cleared derivatives as of March 31, 2015.

We regularly monitor the exposures on our derivative transactions by determining the market value of positions using internal pricing models. The market values generated by the pricing model used to value derivatives are compared to dealer model results on a monthly basis to ensure that our derivative pricing model is reasonably calibrated to actual market pricing methodologies utilized by the dealers. In addition, we have our internal pricing model validated annually by an independent consultant. As a result of these risk mitigation initiatives, management does not anticipate any credit losses on our derivative transactions. See Note 7 of the Notes to Financial Statements under Item 1 for additional information on managing credit risk on derivatives.

The contractual or notional amount of derivative transactions reflects our involvement in the various classes of financial instruments. The maximum credit risk with respect to derivative transactions is the estimated cost of replacing the derivative transactions if there is a default, minus the value of any related collateral posted to satisfy the initial margin (if required) and the variation margin. Our derivative transactions are subject to variation margin which is derived from the change in market value of the transaction and must be posted by the net debtor on demand. Cleared transactions are subject to initial margin as well as variation margin. The initial margin is intended to protect the Clearinghouse against default of a clearing agent and to protect the clearing agent against default of a customer. Initial margin is calculated to cover the potential price volatility of the derivative transaction between the time of the default and the assignment of the transaction to another clearing agent or termination of the transaction. Although the initial margin requirement should decrease over time as the duration and market volatility decrease, it remains outstanding for the life of the transaction; thus, it is possible that we could either have: (1) net credit exposure with a Clearinghouse even if our net creditor position has been fully satisfied by the receipt of variation margin; or (2) net credit exposure with a Clearinghouse despite being the net debtor (i.e., being in a liability position). In determining maximum credit risk, we consider accrued interest receivables and payables as well as the netting requirements to net assets and liabilities.

Tables 29 and 30 present derivative notional amounts and counterparty credit exposure, net of collateral, by whole-letter rating (in the event of a split rating, we use the lowest rating published by Moody's Investor Service or Standard & Poor's) for derivative positions with counterparties to which we had credit exposure (in thousands):

Table 29
03/31/2015
Credit Rating
Notional Amount
Net Derivatives Fair Value Before Collateral
Cash Collateral Pledged From (To) Counterparty
Net Credit Exposure to Counterparties
Asset positions with credit exposure:
 
 
 
 
Bilateral derivatives:
 
 
 
 
Single-A
$
5,049,900

$
43,841

$
32,506

$
11,335

Cleared derivatives1
1,000

3

(67
)
70

Liability positions with credit exposure:
 
 
 
 
Bilateral derivatives2:
 
 
 
 
Single-A
3,188,620

(69,921
)
(70,530
)
609

Triple-B
728,200

(21,193
)
(21,951
)
758

Cleared derivatives1
3,280,376

(61,861
)
(94,602
)
32,741

TOTAL DERIVATIVE POSITIONS WITH CREDIT EXPOSURE
$
12,248,096

$
(109,131
)
$
(154,644
)
$
45,513

                   
1 
Represents derivative transactions cleared with Clearinghouses, which are not rated.
2 
Exposure can change on a daily basis; and thus, there is often a short lag time between the date the exposure is identified, collateral is requested and collateral is actually returned.


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Table 30
12/31/2014
Credit Rating
Notional Amount
Net Derivatives Fair Value Before Collateral
Cash Collateral Pledged From (To) Counterparty
Net Credit Exposure to Counterparties
Asset positions with credit exposure:
 
 
 
 
Bilateral derivatives:
 
 
 
 
Single-A
3,949,300

36,459

29,417

7,042

Liability positions with credit exposure:
 
 
 
 
Bilateral derivatives2:
 
 
 
 
Single-A
2,245,492

(38,018
)
(40,913
)
2,895

Cleared derivatives1
3,327,371

(45,146
)
(68,046
)
22,900

TOTAL DERIVATIVE POSITIONS WITH CREDIT EXPOSURE
$
9,522,163

$
(46,705
)
$
(79,542
)
$
32,837

                   
1 
Represents derivative transactions cleared with Clearinghouses, which are not rated.
2 
Exposure can change on a daily basis; and thus, there is often a short lag time between the date the exposure is identified, collateral is requested and collateral is actually returned.

Foreign Counterparty Risk  Loans, acceptances, interest-bearing deposits with other banks, other interest-bearing investments and any other monetary assets payable to us by entities of foreign countries, regardless of the currency in which the claim is denominated are referred to as "cross-border outstandings." Our cross-border outstandings consist primarily of short-term trading securities and Federal funds sold issued by banks and other financial institutions, which are non-sovereign entities, and derivative asset exposure with counterparties that are also non-sovereign entities. Secured reverse repurchase agreements outstanding are excluded from cross-border outstandings because they are fully collateralized.

In addition to credit risk, cross-border outstandings have the risk that, as a result of political or economic conditions in a country, borrowers may be unable to meet their contractual repayment obligations of principal and/or interest when due because of the unavailability of, or restrictions on, foreign exchange needed by borrowers to repay their obligations. Unsecured credit exposure continues to be cautiously placed, with non-derivatives exposure concentrated in the United States, Canada, Germany, Netherlands, and the Nordic countries.


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Table 31 presents the fair value of cross-border outstandings to countries in which we do business that amounted to at least one percent of our total assets as of March 31, 2015 (dollar amounts in thousands):

Table 31
 
Sweden
Canada
Other1
Total
 
Amount
Percent of
Total Assets
Amount
Percent of
Total Assets
Amount
Percent of
Total Assets
Amount
Percent of
Total Assets
Federal funds sold2
$
515,000

1.3
%
$
300,000

0.7
%
$
1,245,000

3.1
%
$
2,060,000

5.1
%
 
 
 
 
 
 
 
 
 
Trading securities3
200,000

0.5

224,999

0.6



424,999

1.1

 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 

 

 
 
 
 
Net exposure at fair value

 

 
(63,483
)
 
(63,483
)
 
Cash collateral held

 

 
69,727

 
69,727

 
Net exposure after cash collateral




6,244


6,244


 
 
 
 
 
 
 
 
 
TOTAL
$
715,000

1.8
%
$
524,999

1.3
%
$
1,251,244

3.1
%
$
2,491,243

6.2
%
                   
1 
Represents other foreign countries where individual exposure is less than one percent of total assets. Total cross-border outstandings to countries that individually represented between 0.75 and 1.0 percent of our total assets as of March 31, 2015 were $0.9 billion (Finland, Norway, and Germany).
2 
Consists solely of overnight Federal funds sold.
3 
Consists solely of certificates of deposit with remaining maturities of less than three months.

Liquidity Risk Management: Maintaining the ability to meet our obligations as they come due and to meet the credit needs of our members and housing associates in a timely and cost-efficient manner is the primary objective of managing liquidity risk. We seek to be in a position to meet the credit needs of our members, as well as our debt service and liquidity needs, without maintaining excessive holdings of low-yielding liquid investments or being forced to incur unnecessarily high borrowing costs.

Operational liquidity, or the ability to meet operational requirements in the normal course of business, is currently defined in our RMP as sources of cash from both our ongoing access to the capital markets and our holding of liquid assets. We manage exposure to operational liquidity risk by maintaining appropriate daily liquidity levels above the thresholds established by our RMP. We are also required to manage liquidity in order to meet statutory and contingency liquidity requirements and Finance Agency liquidity guidelines by maintaining a daily liquidity level above certain thresholds also outlined in the RMP, federal statutes, Finance Agency regulations and other Finance Agency guidance not issued in the form of regulations. We remained in compliance with each of these liquidity requirements throughout the first quarter of 2015.

We generally maintained stable access to the capital markets for the quarter ended March 31, 2015. For additional discussion of the market for our consolidated obligations and the overall market affecting liquidity see “Financial Market Trends” under this Item 2.

Certain of our derivative instruments contain provisions that require us to post additional collateral with our counterparties if there is deterioration in our credit rating. See Note 7 of the Notes to Financial Statements under Item 1 for additional information on collateral posting requirements and credit-risk-related contingent features. We believe that our liquidity position as of March 31, 2015 was sufficient to satisfy the additional collateral that would be required in the event of a downgrade in our credit rating from double-A to single-A if the downgrade was effective at that time, and such amounts would not have a material impact to our financial condition or results of operations.

Impact of Recently Issued Accounting Standards
See Note 2 of the Notes to Financial Statements under Item 1 – "Financial Statements" for a discussion of recently issued accounting standards.


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Legislative and Regulatory Developments
There have been no legislative or regulatory developments during the quarter ended March 31, 2015 that warrant disclosure. A discussion of recent legislative and regulatory developments can be found under Item 1 - Business in our annual report on Form 10-K for the fiscal year ended December 31, 2014, incorporated by reference herein.

Item 3: Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk Management
We measure interest rate risk exposure by various methods, including the calculation of duration of equity (DOE) and market value of equity (MVE) in different interest rate scenarios.

Duration of Equity: DOE aggregates the estimated sensitivity of market value for each of our financial assets and liabilities to changes in interest rates. In essence, DOE indicates the sensitivity of MVE to changes in interest rates. However, MVE should not be considered indicative of our market value as a going concern or our value in a liquidation scenario.

We manage DOE within ranges approved by our Board of Directors as described under Item 7A - "Quantitative and Qualitative Disclosures About Market Risk" in the annual report on Form 10-K, incorporated by reference herein. All of our DOE measurements were inside Board of Director established policy limits and operating ranges as of March 31, 2015. On an ongoing basis, we actively monitor portfolio relationships and overall DOE dynamics as a part of our evaluation processes for determining acceptable future asset/liability management actions. Table 32 presents the DOE in the base case and the up and down 200 basis point interest rate shock scenarios:

Table 32
Duration of Equity
Date
Up 200 Basis Points
Base
Down 200 Basis Points
03/31/2015
1.6
-0.1
1.1
12/31/2014
1.8
-0.9
1.8
09/30/2014
1.3
-0.7
1.4
06/30/2014
2.3
-0.2
1.3
03/31/2014
2.7
0.1
0.4

The DOE as of March 31, 2015 decreased in the base (less negative) and the up 200 and down 200 basis point shock scenarios from December 31, 2014. The primary factors contributing to these changes in duration during the period were: (1) the general decline of longer term interest rates and the relative level of mortgage rates during the period; (2) the increase in the fixed rate mortgage loan portfolio during the period along with the reduced weighting of the portfolio as a percent of total assets with the growth in the balance sheet and overall increase in capital levels as advance balances increased significantly; and (3) asset/liability actions taken by management throughout the period, including the continued call and re-issuance of long-term, unswapped callable consolidated obligation bonds with short lock-out periods and the issuance of discount notes funding the growth in advances.

The decrease in longer-term interest rates during the first quarter of 2015 generally resulted in a shortening duration profile for both the fixed rate mortgage loan portfolio and the associated unswapped callable consolidated obligation bonds funding these assets. With the increase in our mortgage loan portfolio during the period, as discussed in Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – MPF Program,” the portfolio level duration profile changed as expected since a general decrease in interest rates typically generates faster prepayments for both new production mortgage loans, as well as the outstanding fixed rate mortgage loan portfolio. Generally, lower interest rates indicate a relative increase in refinancing incentive for borrowers.


84


Even though the fixed rate mortgage loan portfolio increased in net outstanding balance during the period, the portfolio actually decreased as an overall percentage of assets as the balance sheet expanded, decreasing from 16.9 percent of total assets as of December 31, 2014 to 15.6 percent as of March 31, 2015. Even with this weighting decrease, the mortgage loan portfolio continues to represent a sizable portion of the balance sheet and changes occurring with this portfolio tend to be magnified in terms of DOE. Since the mortgage loan portfolio continues to comprise a considerable percentage of overall assets and has such a high duration relative to other FHLBank assets, its behavior is quite visible in the duration risk profile and changes in this portfolio are typically magnified as the composition of assets change. This magnification occurs when a portfolio market value weighting as a percent of the overall net market value of the balance sheet changes, causing the remaining portfolios to be a smaller or larger component of the total balance sheet composition. For example, during the first quarter of 2015, advance balances increased significantly causing the mortgage loan portfolio weighting to decrease as a total proportion of total assets. This relationship then causes the duration of the mortgage loan portfolio to have a smaller contribution impact to the overall DOE since DOE is a market value weighted measurement and as the capital level increased in response to the growth in advances, the contribution of the mortgage portfolio also declined. Although there was an absolute growth in the mortgage loan portfolio during the period, the mortgage loan portfolio became a smaller percentage of the balance sheet, reducing the mortgage loan portfolio's overall contribution to DOE. However, as stated previously, the mortgage loan portfolio continues to remain a significant portion of the balance sheet and changes in the duration and weighting of the portfolio continues to be a large contributor to the overall DOE profile. With these balance sheet dynamics, we continue to actively manage and monitor the contributing factors of our risk profile, including DOE. As the relationship of the fixed rate mortgage loan assets and the associated callable liabilities vary based on market conditions, we evaluate and manage these market driven sensitivities as both portfolios change in balance level and overall proportion.

New loans were continually added to the mortgage loan portfolio to replace loans that were prepaid during the period and we continue to actively manage this ongoing growth to position the balance sheet sensitivity to perform within our expected risk tolerances. To effectively manage these changes in the mortgage loan portfolio (including new production loans) and related sensitivity to changes in market conditions, a continued issuance of unswapped callable consolidated obligation bonds with short lock-out periods (generally three months) positioned us to replace called bonds as the interest rate environment continued to remain at historically low levels. The call of higher rate callable bonds and reissuance of these bonds at lower interest rates in this manner generally extends the duration profile of this portfolio as bonds are called that are in-the-money (above market rates) and subsequently reissued at lower interest rates (at market rates). This liability extension corresponds with the expected longer duration profile of the new fixed rate mortgage loans, all else being equal.

As discussed above, as longer term interest rates decreased during the period and as we continued to experience measured prepayments of the fixed rate mortgage loan portfolio, the short lock-out periods of the callable bonds plus some maturities of non-callable bonds provided the opportunity to continue the refinancing of our liabilities. The decrease in longer term interest rates during the period also caused the duration profile of the existing portfolio of unswapped callable bonds to shorten. This liability shortening demonstrates the specific duration sensitivity to changes in interest rates at certain shock scenarios. In addition, issuance of discount notes continued, and actually increased, in order to provide adequate liquidity sources to appropriately address customer short-term advance growth and associated capital stock activity during the period. During the first quarter of 2015 we also began replacing a limited amount of called bonds with term bullet issuances and this limited activity generated only a slight impact on the sensitivity of the down interest rate shock scenarios. The combination of all these factors contributed to the net DOE decrease in all interest rate scenarios.

With respect to the Agency variable rate MBS/CMO portfolio, we generally purchase interest rate caps to offset the impact of embedded caps in this portfolio in rising interest rate scenarios. As expected, these interest rate caps are a satisfactory interest rate risk hedge to rising interest rates and provide an off-setting risk response to the risk profile changes in Agency variable rate MBS/CMOs with embedded caps. We periodically assess derivative strategies to ensure that overall balance sheet risk is appropriately hedged within established risk appetite and make adjustments to the derivative portfolio as needed. This evaluation is completed considering not only the par value of the variable rate MBS/CMO investments with embedded caps being hedged with purchased caps, but the composition of the purchased cap portfolio and expected prepayments of the variable rate MBS/CMO investments with embedded caps. This evaluation of the relative relationship between the variable rate investment portfolio and the purchased cap portfolio continues to indicate a sufficient hedging relationship. We purchased $781.5 million of Agency variable rate MBS/CMO securities that consisted primarily of Fannie Mae Delegated Underwriting and Servicing structures. We did not purchase additional interest rate caps during the first quarter of 2015 because the investments did not hold interest rate cap exposure.

In calculating DOE, we also calculate our duration gap, which is the difference between the duration of our assets and the duration of our liabilities. Our base duration gap was -0.1 month and -0.6 month for March 31, 2015 and December 31, 2014, respectively. As discussed previously, the relatively stable performance of the duration gap was primarily the result of the changes in the fixed rate mortgage loan portfolio and the associated funding decisions made by management in response to changes in the interest rate environment and balance sheet during the first quarter of 2015. All FHLBanks are required to submit this base duration gap number to the Office of Finance as part of the quarterly reporting process created by the Finance Agency.



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Market Value of Equity: MVE is the net value of our assets and liabilities. Estimating sensitivity of MVE to changes in interest rates is another measure of interest rate risk. We generally maintain a MVE within limits specified by the Board of Directors in the RMP. The RMP measures our market value risk in terms of the MVE in relation to total regulatory capital stock outstanding (TRCS). TRCS includes all capital stock outstanding, including stock subject to mandatory redemption. As a cooperative, we believe using the TRCS results in an appropriate measure because it reflects our market value relative to the book value of our capital stock. Our RMP stipulates MVE shall not be less than: (1) 100 percent of TRCS under the base case scenario; or (2) 90 percent of TRCS under a ±200 basis point instantaneous parallel shock in interest rates. Table 33 presents MVE as a percent of TRCS. As of March 31, 2015, all scenarios are well above the specified limits and much of the relative level in the ratios during the periods covered by the table can be attributed to the relative level of the fixed rate mortgage loan market values as rates have continued to remain historically low, the general value impact of the refinancing activities of the associated unswapped callable consolidated obligation bonds and the relative level of outstanding capital.

The MVE to TRCS ratios can be greatly impacted by the level of capital outstanding based on our capital management approach. We lowered our activity-based capital stock requirements for: (1) AMA from 2.0 percent to zero during the third quarter of 2013; and (2) advances from 5.0 percent to 4.5 percent during the second quarter of 2014. After each of these changes, we exercised significant repurchases of excess capital stock and began purchasing excess capital stock on a monthly basis after the 2014 change. Each of these changes coupled with the excess capital stock repurchase inherently increased our ratio of MVE to TRCS as the capital level declined. However, during the third quarter of 2014, as advance balances increased and the associated capital levels increased in response, the ratio declined since the new advances were primarily short-term with market values at or near par. The impact of the changing capital levels continues to be a significant contributor of the recent changes in the ratios in all interest rate scenarios in the table below.

The increase in the ratios from March 31, 2014 to June 30, 2014 was attributable primarily to a decrease in capital stock from the reduction in the advance activity based stock requirement combined with the purchase of excess capital stock. The decrease in the ratios from June 30, 2014 to September 30, 2014 was attributable primarily to an increase in capital stock due to our advance growth during the third quarter and the related capital stock purchase requirement. As members repaid advances late in the fourth quarter of 2014, there was a decrease in required capital stock due to the decrease in advances, which, along with the repurchase of excess capital stock, resulted in an increase in MVE/TRCS ratios in all scenarios at December 31, 2014. Similar to the June 30, 2014 to September 30, 2014 period, the current period of December 31, 2014 to March 31, 2015 experienced growth in advance balances and related capital stock purchases leading to a decline in the MVE/TRCS ratios.

Table 33
Market Value of Equity as a Percent of Total Regulatory Capital Stock
Date
Up 200 Basis Points
Base
Down 200 Basis Points
03/31/2015
188
186
190
12/31/2014
196
196
202
09/30/2014
181
180
188
06/30/2014
200
199
210
03/31/2014
166
171
178

Detail of Derivative Instruments by Type of Instrument by Type of Risk: Various types of derivative instruments are utilized to mitigate the interest rate risks described in the preceding sections as well as to better match the terms of assets and liabilities. We currently employ derivative instruments by designating them as either a fair value or cash flow hedge of an underlying financial instrument or a forecasted transaction; by acting as an intermediary; or in asset/liability management (i.e., an economic hedge). An economic hedge is defined as a derivative hedging specific or non-specific underlying assets, liabilities or firm commitments that either does not qualify for hedge accounting, or for which we have not elected hedge accounting, but is an acceptable hedging strategy under our RMP. For hedging relationships that are not designated for shortcut hedge accounting, we formally assess (both at the hedge’s inception and monthly on an ongoing basis) whether the derivatives used have been highly effective in offsetting changes in the fair values or cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. We typically use regression analyses or similar statistical analyses to assess the effectiveness of our long haul hedges. We determine the hedge accounting to be applied when the hedge is entered into by completing detailed documentation, which includes a checklist setting forth criteria that must be met to qualify for hedge accounting.

Tables 34 and 35 present the notional amount and fair value amount (fair value includes net accrued interest receivable or payable on the derivative) for derivative instruments by hedged item, hedging instrument, hedging objective and accounting designation (in thousands):


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Table 34
03/31/2015
Hedged Item
Hedging Instrument
Hedging Objective
Accounting Designation
Notional Amount
Fair Value Amount
Advances
 
 
 
 
 
Fixed rate non-callable advances
Pay fixed, receive variable interest rate swap
Convert the advance’s fixed rate to a variable rate index
Fair Value Hedge 
$
3,385,764

$
(100,794
)
Fixed rate callable advances
Pay fixed, receive variable interest rate swap
Convert the advance’s fixed rate to a variable rate index and offset option risk in the advance
Fair Value Hedge 
66,000

(927
)
Fixed rate convertible advances
Pay fixed, receive variable interest rate swap
Convert the advance’s fixed rate to a variable rate index and offset option risk in the advance
Fair Value Hedge 
1,552,542

(92,104
)
Clearly and closely related caps embedded in variable rate advances
Interest rate cap
Offset the interest rate cap embedded in a variable rate advance
Fair Value Hedge 
137,000

(640
)
Firm commitment to issue a fixed rate advance
Forward settling interest rate swap
Protect against fair value risk
Fair Value Hedge
38,423

(1,497
)
Investments
 
 
 
 
 
Fixed rate non-MBS trading investments
Pay fixed, receive variable interest rate swap
Convert the investment’s fixed rate to a variable rate index
Economic Hedge 
961,820

(69,869
)
Adjustable rate MBS with embedded caps
Interest rate cap
Offset the interest rate cap embedded in a variable rate investment
Economic Hedge 
3,723,800

8,089

Mortgage Loans Held for Portfolio
 
 
 
 
 
Fixed rate mortgage purchase commitments
Mortgage purchase commitment
Protect against fair value risk
Economic Hedge 
108,829

507

Consolidated Obligation Discount Notes
 
 
 
 
 
Fixed rate non-callable consolidated obligation discount notes
Receive fixed, pay variable interest rate swap
Convert the discount note's fixed rate to a variable rate
Fair Value Hedge 
99,678

58

Consolidated Obligation Bonds
 
 
 
 
 
Fixed rate non-callable consolidated obligation bonds
Receive fixed, pay variable interest rate swap
Convert the bond’s fixed rate to a variable rate index
Fair Value Hedge 
1,730,700

78,465

Fixed rate callable consolidated obligation bonds
Receive fixed, pay variable interest rate swap
Convert the bond’s fixed rate to a variable rate index and offset option risk in the bond
Fair Value Hedge 
1,685,000

9,841

Complex consolidated obligation bonds
Receive variable with embedded features, pay variable interest rate swap
Reduce interest rate sensitivity and re-pricing gaps by converting the bond’s variable rate to a different variable rate index and/or to offset embedded options risk in the bond
Fair Value Hedge
122,000

(471
)
Callable step-up/step-down consolidated obligation bonds
Receive variable interest rate with embedded features, pay variable interest rate swap
Reduce interest rate sensitivity and repricing gaps by converting the bond’s variable rate to a different variable rate index and/or to offset embedded options risk in the bond
Fair Value Hedge 
2,400,000

3,228

Variable rate consolidated obligation bonds
Receive variable interest rate, pay variable interest rate swap
Reduce basis risk by converting an undesirable variable rate index in the bond to a more desirable variable rate index
Economic Hedge 
1,470,000

1,024

Intermediary Derivatives
 
 
 
 
 
Interest rate caps executed with members
Interest rate cap
Offset interest rate caps executed with members by executing interest rate caps with derivatives counterparties
Economic Hedge 
36,000


TOTAL
 
 
 
$
17,517,556

$
(165,090
)


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Table 35
12/31/2014
Hedged Item
Hedging Instrument
Hedging Objective
Accounting Designation
Notional Amount
Fair Value Amount
Advances
 
 
 
 
 
Fixed rate non-callable advances
Pay fixed, receive variable interest rate swap
Convert the advance’s fixed rate to a variable rate index
Fair Value Hedge 
$
3,364,464

$
(84,174
)
Fixed rate callable advances
Pay fixed, receive variable interest rate swap
Convert the advance’s fixed rate to a variable rate index and offset option risk in the advance
Fair Value Hedge 
76,000

(393
)
Fixed rate convertible advances
Pay fixed, receive variable interest rate swap
Convert the advance’s fixed rate to a variable rate index and offset option risk in the advance
Fair Value Hedge 
1,584,242

(92,887
)
Clearly and closely related caps embedded in variable rate advances
Interest rate cap
Offset the interest rate cap embedded in a variable rate advance
Fair Value Hedge 
187,000

(956
)
Firm commitment to issue a fixed rate advance
Forward settling interest rate swap
Protect against fair value risk
Fair Value Hedge
32,796

(662
)
Investments
 
 
 
 
 
Fixed rate non-MBS trading investments
Pay fixed, receive variable interest rate swap
Convert the investment’s fixed rate to a variable rate index
Economic Hedge 
961,820

(82,875
)
Adjustable rate MBS with embedded caps
Interest rate cap
Offset the interest rate cap embedded in a variable rate investment
Economic Hedge 
4,044,800

9,948

Mortgage Loans Held for Portfolio
 
 
 
 
 
Fixed rate mortgage purchase commitments
Mortgage purchase commitment
Protect against fair value risk
Economic Hedge 
53,004

138

Consolidated Obligation Bonds
 
 
 
 
 
Fixed rate non-callable consolidated obligation bonds
Receive fixed, pay variable interest rate swap
Convert the bond’s fixed rate to a variable rate index
Fair Value Hedge 
2,166,000

73,628

Fixed rate callable consolidated obligation bonds
Receive fixed, pay variable interest rate swap
Convert the bond’s fixed rate to a variable rate index and offset option risk in the bond
Fair Value Hedge 
1,430,000

7,501

Complex consolidated obligation bonds
Receive variable with embedded features, pay variable interest rate swap
Reduce interest rate sensitivity and re-pricing gaps by converting the bond’s variable rate to a different variable rate index and/or to offset embedded options risk in the bond
Fair Value Hedge
122,000

(1,878
)
Callable step-up/step-down consolidated obligation bonds
Receive variable interest rate with embedded features, pay variable interest rate swap
Reduce interest rate sensitivity and repricing gaps by converting the bond’s variable rate to a different variable rate index and/or to offset embedded options risk in the bond
Fair Value Hedge 
2,830,000

(10,216
)
Variable rate consolidated obligation bonds
Receive variable interest rate, pay variable interest rate swap
Reduce basis risk by converting an undesirable variable rate index in the bond to a more desirable variable rate index
Economic Hedge 
1,455,000

770

Intermediary Derivatives
 
 
 
 
 
Interest rate caps executed with members
Interest rate cap
Offset interest rate caps executed with members by executing interest rate caps with derivatives counterparties
Economic Hedge 
46,000


TOTAL
 
 
 
$
18,353,126

$
(182,056
)


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Item 4: Controls and Procedures

Disclosure Controls and Procedures
Senior management is responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934, as amended (Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide a reasonable level of assurance in achieving their desired objectives; however, in designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Management evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-(e) under the Exchange Act) with the participation of the President and Chief Executive Officer (CEO), our principal executive officer, and Chief Accounting Officer (CAO), our principal financial officer, as of March 31, 2015. Based upon that evaluation, the CEO and CAO have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2015.

Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended March 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


Part II. OTHER INFORMATION

Item 1: Legal Proceedings
We are subject to various pending legal proceedings arising in the normal course of business. After consultation with legal counsel, management does not anticipate that the ultimate liability, if any, arising out of these matters will have a material adverse effect on our financial condition or results of operations. Additionally, management does not believe that we are subject to any material pending legal proceedings outside of ordinary litigation incidental to our business.

Item 1A: Risk Factors
There have been no material changes to the risk factors previously disclosed in our annual report on Form 10-K filed on March 13, 2015, incorporated by reference herein.

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.

Item 3: Defaults Upon Senior Securities
Not applicable.

Item 4: Mine Safety Disclosures
Not applicable.

Item 5: Other Information
None.



89


Item 6: Exhibits
Exhibit
No.
Description
3.1
Exhibit 3.1 to the FHLBank’s registration statement on Form 10, filed May 15, 2006, and made effective on July 14, 2006 (File No. 000-52004) (the “Form 10 Registration Statement”), Federal Home Loan Bank of Topeka Articles and Organization Certificate, is incorporated herein by reference as Exhibit 3.1.
3.2
Exhibit 3.2 to the Current Report on Form 8-K, filed September 26, 2014, Amended and Restated Bylaws, is incorporated herein by reference as Exhibit 3.2.
4.1
Exhibit 99.2 to the Current Report on Form 8-K, filed August 5, 2011, Federal Home Loan Bank of Topeka Capital Plan, is incorporated herein by reference as Exhibit 4.1.
31.1
Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Senior Vice President and Chief Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32
Certification of President and Principal Executive Officer and Senior Vice President and Principal Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document


90


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
Federal Home Loan Bank of Topeka
 
 
 
 
May 7, 2015
By: /s/ Andrew J. Jetter
Date
Andrew J. Jetter
 
President and Chief Executive Officer
 
 
May 7, 2015
By: /s/ Denise L. Cauthon
Date
Denise L. Cauthon
 
Senior Vice President and Chief Accounting Officer
 
(Principal Financial Officer and Principal Accounting Officer)


91